TravelSky Technology Limited - Proxy Solicitation & Information Statement 2008

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

This circular appears for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for the shares of TravelSky Technology Limited.

If you are in doubt as to any aspect of this circular, you should consult an exchange participant or other licensed securities dealer, a bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in TravelSky Technology Limited, you should at once hand this circular to the purchaser or transferee or to the bank, exchange participant or other agent through whom the sale was effected for transmission to the purchaser or transferee.

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

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(Stock Code: 0696)

MAJOR AND CONNECTED TRANSACTION AND CONTINUING CONNECTED TRANSACTIONS AND SPECIAL MANDATE TO ISSUE SHARES AND AMENDMENTS TO ARTICLES OF ASSOCIATION AND NOTICE OF EGM

Financial Adviser

Independent financial adviser to the Independent Board Committee and the Independent Shareholders

A letter from the Board is set out on pages 1 to 30 of this circular. A letter from the Independent Board Committee (as defined in this circular) containing its advice to the Independent Shareholders (as defined in this circular) is set out on pages 31 to 32 of this circular. A letter from China Merchants, the independent financial adviser, setting out its advice and recommendation to the Independent Board Committee and the Independent Shareholders is set out on pages 33 to 72 of this circular.

A notice convening the extraordinary general meeting (the “EGM”) of the Company to be held at the conference room of the Company at Floor 19, South Wing, Park C, Raycom InfoTech Park, No. 2 Ke Xue Yuan South Road, Haidian District, Beijing, the PRC on 31 July 2008 at 10:00 a.m. is set out on pages 230 to 233 of this circular. A form of proxy for use at the EGM is also enclosed with this circular. Whether or not you intend to attend and vote at the EGM, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon to the branch share registrar of the Company in Hong Kong, Hong Kong Registrars Ltd. at Shops 1712-1716, 17/F, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, as soon as possible but in any event by not later than 24 hours before the time appointed for holding of the EGM or any adjournment thereof. Completion and return of the form of proxy shall not preclude you from attending and voting in person at the EGM or any adjourned meeting should you so wish.

16 June 2008

	Page
Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	ii
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	31
Letter from China Merchants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	33
Appendix I — Financial Information of the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	73
Appendix II — Accountant’s Report of ACCA Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	146
Appendix III — Unaudited Pro Forma Financial Information of the Enlarged Group . . . . . .	205
Appendix IV — Property Valuation Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	210
Appendix V — General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	217
Notice of EGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	230

— i —

DEFINITIONS

In this circular, the following expressions have the meanings set out below unless the context requires otherwise:

“ACCA”	Accounting Centre of China Aviation Limited Company (中國航空
	結算有限責任公司), a wholly-owned subsidiary of CTHC
“ACCA Continuing	means the ongoing agreements and trading arrangements and the
Connected Transactions”	transactions contemplated thereunder between ACCA and Ya Ka and
	the Connected Airlines respectively, details of which are set out in
	the paragraphs headed “ACCA Continuing Connected Transactions”
	under the section headed “Letter from the Board” in this circular
“ACCA Group”	ACCA and its subsidiaries
“Acquisition”	the acquisition of (i) the entire registered capital in ACCA and (ii)
	the Property pursuant to the Sale and Purchase Agreement
“Aggregated Continuing	the aggregated continuing connected transactions of the Enlarged
Connected Transaction”	Group as a result of the Acquisition
“Air China”	Air China Limited (中國國際航空股份有限公司), a subsidiary of
	China Holding
“Announcement”	the announcement of the Company dated 26 May 2008
“Annual Caps”	the maximum aggregate annual value of each continuing connected
	transaction, as required by Rule 14A.35(2) of the Listing Rules
“Annual Report 2007”	the annual report of the Company for the year ended 31 December
	2007
“Articles”	articles of association of the Company
“associate(s)”	has the meaning ascribed thereto under the Listing Rules
“Board”	the board of Directors
“BSP Services”	provision of sales data processing and settlement service
“Business Day”	a day on which banks are open for business in Hong Kong (excluding
	Saturday)
“CAAC”	Civil Aviation Administration of China

— ii —

DEFINITIONS

“China Holding” China National Aviation Holding Company (中國航空集團公司), a Shareholder and a promoter of the Company, and its subsidiaries
“China Merchants” China Merchants Securities (HK) Co., Ltd., the independent financial adviser to the Independent Board Committee and the Independent Shareholders in relation to the Acquisition and the Non-exempt Continuing Connected Transactions (and the applicable Annual Caps) and a corporation licensed to carry on type 1 (dealings in securities), type 2 (dealings in futures contracts), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities under the SFO
“Company” TravelSky Technology Limited (中國民航信息網絡股份有限公司), a company established in the PRC, whose H Shares are listed on the Stock Exchange and whose American depositary shares are traded on the over-the-counter market in the United States
“Completion” completion of the Acquisition
“Connected Airlines” Southern Airlines, Eastern Airlines, Air China, Macau Airlines, Xiamen Airlines, Hainan Airlines, Shenzhen Airlines, Shanghai Airlines, Shandong Airlines and Sichuan Airlines, all being connected persons of the Company
“connected person(s)” has the meaning ascribed thereto under the Listing Rules
“Consideration Shares” 174,491,393 new Domestic Shares to be issued at the issue price of HK$6.39 per Share for the settlement of the consideration payable for the Acquisition pursuant to the Sale and Purchase Agreement
“Continuing Connected means the existing continuing connected transactions between the Transactions” Group and CTHC and certain Connected Airlines respectively before Completion of the Acquisition, details of which are set out in the paragraphs headed “Continuing Connected Transactions of the Company” under the section headed “Letter from the Board” in this circular
“CTHC” China TravelSky Holding Company (中國民航信息集團公司), a company incorporated in the PRC, holding approximately 22.35% of the entire issued share capital of the Company as at the Latest Practicable Date, and a promoter and a substantial Shareholder of the Company
“Director(s)” the director(s) of the Company

— iii —

DEFINITIONS

“Domestic Mail Revenue an agreement dated 30 July 1997 between ACCA as the service Accounting and provider and certain domestic airline companies in the PRC in relation Settlement Agreement” to the provision of the Domestic Mail Revenue Accounting and Settlement Services
“Domestic Shareholders” holders of the Domestic Shares, comprising CTHC, Southern Holding, Xiamen Airlines, Sichuan Air Group, Eastern Holding, Eastern Airlines, China Eastern Air Wuhan Company Limited (中國東方航空武漢有限責任公司), China Holding, Shenzhen Airlines, Shandong Airlines, Hainan Airlines, China Xinhua Airlines Limited (中國新華航空有限責任公司), Changan Airlines Limited (長安航空有限責任公司), Shanxi Aviation Industry Company (山西航空實業公司) and Shanghai Airlines
“Domestic Shares” domestic shares of book value of RMB1.00 each in the share capital of the Company
“Eastern Airlines”
China Eastern Airlines Corporation Limited (中國東方航空股份有限公司), a subsidiary of Eastern Holding
“Eastern Holding” China Eastern Air Holding Company (中國東方航空集團公司), a Shareholder and a promoter of the Company
“EGM” an extraordinary general meeting of the Company to be convened for the purpose of considering, among others, by the Independent Shareholders the Sale and Purchase Agreement and the Non-exempt Continuing Connected Transactions (including the applicable Annual Caps), notice of which is set out in this circular
“Enlarged Group” the Company and its subsidiaries after Completion
“Financial Adviser” BOCI Asia Limited, the financial adviser to the Company in respect of the Acquisition and the Non-exempt Continuing Connected Transactions and a corporation licensed to conduct type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO
“Group” the Company and its subsidiaries
“H Shares” Hong Kong listed shares of RMB1.00 each in the share capital of the Company
“Hainan Airlines” Hainan Airlines Company Limited (海南航空股份有限公司), a Shareholder and a promoter of the Company, and its subsidiaries
“HK$” Hong Kong dollars, the lawful currency of Hong Kong

— iv —

DEFINITIONS

“Hong Kong” the Hong Kong Special Administrative Region of the PRC
“IATA” The International Air Transport Association, an association incorporated in Canada
“IATA Agreement” an agreement dated 27 March 2008 entered into between ACCA as the service supplier and IATA as authorised by, among other airlines, the Connected Airlines, in relation to the provision of the BSP Services to IATA
“Independent Board Committee”
the independent committee of the Board established by the Company as required by Rule 14A.21 of the Listing Rules, comprising Mr. Yick Wing Fat, Simon, Mr. Yuan Yaohui and Mr. Chua Keng Kim, all being independent non-executive Directors, to consider the Acquisition and the Non-exempt Continuing Connected Transactions (including the applicable Annual Caps) and to opine among others, as to whether the terms of the Acquisition and the Non-exempt Continuing Connected Transactions (including the applicable Annual Caps) are fair and reasonable and in the interests of the Company and its Shareholders as a whole
“Independent Shareholders” means (a) in relation to the Acquisition, Shareholders other than (i) CTHC and its associates, and (ii) the Domestic Shareholders (except CTHC and Shanxi Aviation Industry Company), all being the Connected Airlines or their respective associates, and (b) in relation to each of the Non-exempt Continuing Connected Transaction, Shareholders other than the related Connected Airline who is a party to the transaction, and its associates, details of which are set out on page 2 and pages 28 to 29 respectively
“Independent Third Party/(ies)”
independent third party or parties and its/their ultimate beneficial owner(s) who is/are independent of the Company and is/are not the connected person(s) of the Company
“Latest Practicable Date”
12 June 2008, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information in this circular
“Listing Rules”
the Rules Governing the Listing of Securities on the Stock Exchange
“Macau Airlines”
Air Macau Company Limited (澳門航空股份有限公司), a subsidiary of Air China
“Non-exempt Continuing Connected Transactions”
means the ACCA Continuing Connected Transactions which require the approval of the Independent Shareholders at the EGM

— v —

DEFINITIONS

“PRC”	the People’s Republic of China
“Property”	a state-owned land use right with site area of 5,332.54 sq.m. and 8
	buildings erected thereon with a total gross floor area of 12,003.74
	sq.m. located in No. 11 Dongxing Li, Chaoyang District, Beijing, the
	PRC
“Property Management Agreement”	the agreement between Ya Ka and ACCA dated 3 February 2008 in
	relation to the provision of office building property management
	services
“RMB”	Renminbi, the lawful currency of the PRC
“Sale and Purchase Agreement”	the sale and purchase agreement dated 5 May 2008 entered into
	between CTHC and the Company in relation to the Acquisition
“SFO”	the Securities and Futures Ordinance (Chapter 571 of the Laws of
	Hong Kong)
“Shandong Airlines”	Shandong Airlines Company Limited (山東航空股份有限公司), a
	Shareholder and a promoter of the Company, and its subsidiaries
“Shanghai Airlines”	Shanghai Airlines Company Limited (上海航空股份有限公司), a
	Shareholder and a promoter of the Company, and its subsidiaries
“Share(s)”	the ordinary share(s) in the share capital of the Company, with a
	nominal value of RMB1.00 each
“Shareholder(s)”	the shareholders of the Company
“Shenzhen Airlines”	Shenzhen Airlines Company Limited (深圳航空有限責任公司), a
	Shareholder and a promoter of the Company, and its subsidiaries
“Sichuan Air Group”	Sichuan Air Group Company (四川航空集團公司), a Shareholder
	and a promoter of the Company, and its subsidiaries
“Sichuan Airlines”	Sichuan Airlines Company Limited (四川航空股份有限公司), a
	subsidiary of Sichuan Air Group
“SITA”	Société Internationale de Télécommunications Aeronautiques
“Southern Airlines”	China Southern Airlines Company Limited (中國南方航空股份有
	限公司), a subsidiary of Southern Holding

— vi —

DEFINITIONS

“Southern Holding”	China Southern Air Holding Company (中國南方航空集團公司),
	a Shareholder and a promoter of the Company, and its subsidiaries
“sq.m.”	square meter(s)
“Stock Exchange”	the Stock Exchange of Hong Kong Limited
“substantial shareholder”	has the meaning ascribed thereto under the Listing Rules
“Xiamen Airlines”	Xiamen Airlines Company Limited (廈門航空有限公司), a
	Shareholder and a promoter of the Company, and its subsidiaries
“Ya Ka”	Beijing Ya Ka Jing Cheng Property Management Company (北京亞
	卡精誠物業管理中心), a wholly-owned subsidiary of CTHC
“%”	per cent.

In this circular, certain amounts quoted in RMB should be translated into Hong Kong dollars at the reference rate of RMB1.00 to HK$1.115 for information purpose only. Such translation should not be construed as a representation that the relevant amounts have been, could have been or could be, converted at that or any other rate or at all.

For reference purposes only, the Chinese names of the PRC entities, authorities or facilities have been translated into English in this circular. In the event of any discrepancies between the Chinese names of these PRC entities, authorities or facilities and their respective English translations, the Chinese version shall prevail.

— vii —

LETTER FROM THE BOARD

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(Stock Code: 0696)

Executive Directors: Mr. Xu Qiang (Chairman) Mr. Zhu Xiaoxing Mr. Ding Weiping Mr. Song Jinxiang

Non-executive Directors:

Registered office: 18th-20th Floors South Wing, Park C Raycom InfoTech Park No. 2, Ke Xue Yuan South Road Haidian District Beijing 100190, PRC

Mr. Wang Quanhua Mr. Luo Chaogeng Mr. Gong Guokui Mr. Rong Gang Mr. Sun Yongtao Mr. Liu Dejun Mr. Xia Yi Mr. Song Jian

Independent non-executive Directors:

Mr. Yick Wing Fat, Simon Mr. Yuan Yaohui Mr. Chua Keng Kim

16 June 2008

To the Shareholders

Dear Sir/Madam,

MAJOR AND CONNECTED TRANSACTION AND CONTINUING CONNECTED TRANSACTIONS AND SPECIAL MANDATE TO ISSUE SHARES AND AMENDMENTS TO ARTICLES OF ASSOCIATION

INTRODUCTION

Acquisition

On 5 May 2008, the Company entered into the Sale and Purchase Agreement with CTHC pursuant to which, CTHC agreed to sell and the Company agreed to purchase (i) the entire registered capital of ACCA for a consideration of RMB788 million (equivalent to approximately HK$878.62 million) and (ii) the Property for

— 1 —

LETTER FROM THE BOARD

a consideration of RMB212 million (equivalent to approximately HK$236.38 million), amounting to an aggregate consideration of RMB1 billion (equivalent to approximately HK$1.115 billion). The aggregate consideration will be satisfied by way of the Company issuing and allotting to CTHC or its nominees 174,491,393 new Domestic Shares at a price of HK$6.39 (equivalent to approximately RMB5.73) per Consideration Share upon the Completion. The Consideration Shares represent approximately 9.82% of the existing total issued share capital of the Company and approximately 8.94% of the total issued share capital of the Company as enlarged by the issue of the Consideration Shares. The issue of the Consideration Shares is subject to an approval of a specific mandate to be sought from the Independent Shareholders at the EGM. If the specific mandate is granted at the EGM, the registered share capital of the Company will need to be increased upon Completion and the Articles will also need to be amended accordingly. The respective resolutions to approve the amendments to the Articles and the Acquisition at the EGM are inter-conditional upon each other.

CTHC is a substantial Shareholder of the Company and holds approximately 22.35% of the entire equity interest of the Company as at the date of the Sale and Purchase Agreement and is therefore a connected person of the Company under the Listing Rules. As the applicable percentage ratios of the Acquisition exceed 25% but is less than 100% as defined under Rule 14.07 of the Listing Rules, the Acquisition constitutes a major and connected transaction for the Company under the Listing Rules and is subject to the requirements of reporting, announcement and approval of the Independent Shareholders at the EGM which shall be taken on poll as required under the Listing Rules. The Company will convene an EGM for the purpose of considering and, if it thought fit, approving, among others, the Sale and Purchase Agreement and the Acquisition as well as authorising the Directors to issue the Consideration Shares. Under Rule 14A.18 of the Listing Rule, any connected person of the Company with a material interest in the connected transaction is required to abstain from voting at the EGM. Accordingly, (a) CTHC and its associates, and (b) the Domestic Shareholders (except CTHC and Shanxi Aviation Industry Company), all being the Connected Airlines or their respective associates and who are considered to be interested in the Acquisition by virtue of their business relationship with ACCA, will abstain from voting at the EGM on the resolutions approving the Acquisition and the issue of the Consideration Shares.

Amendment to Articles

Based on 1,776,315,000 Shares in issue as at the Latest Practicable Date, comprising of 1,154,607,000 Domestic Shares and 621,708,000 H Shares, and on the assumptions that no new Shares will be allotted or issued and no exiting Shares will be repurchased prior to the Latest Practicable Date, upon satisfaction of the conditions set out in the paragraph headed “Conditions Precedent” below and Completion, the total number of Domestic Shares to be issued pursuant to the Completion will be 174,491,393 of book value of RMB1.00 each amounting to RMB1 billion (equivalent to approximately HK$1.115 billion). If the Acquisition is approved by the Independent Shareholders at the EGM, the registered share capital of the Company will need to be increased upon Completion and the Articles will be required to be amended accordingly.

— 2 —

LETTER FROM THE BOARD

Continuing Connected Transactions

Upon Completion, ACCA will become a wholly-owned subsidiary of the Company. The ACCA Continuing Connected Transactions will form part of the Continuing Connected Transactions of the Group, which include (a) the Property Management Agreement, (b) the agreements in relation to the Revenue Accounting Systems Development and Support Services, and the Passenger and Cargo Revenue Accounting and Settlement Services, (c) Domestic Mail Revenue Accounting and Settlement Agreement and (d) IATA Agreement. Certain ACCA Continuing Connected Transactions and the Continuing Connected Transactions have been, and will continue to be, entered into on a recurring basis and on normal commercial terms and in the ordinary course of business of the Group. Details of which are set out under Part B of the section headed “ACCA Continuing Connected Transactions” and Part C of the section headed “Continuing Connected Transactions of the Company” of this letter.

The section heading “Aggregated Continuing Connected Transactions of the Enlarged Group” under Part D of this letter sets out the Annual Caps in respect of each category of the Aggregated Continuing Connected Transactions . As one or more of the relevant percentage ratios set out in Rule 14.07 of the Listing Rules in respect of the aggregate fees payable or receivable by the Group for the Non-exempt Continuing Connected Transactions will, on an annual basis, exceed 2.5%, each of the Non-exempt Continuing Connected Transactions is conditional on prior approval by the Independent Shareholders at the EGM which shall be taken by poll in accordance with the requirements of the Listing Rules. Under Rule 14A.18 of the Listing Rule, any connected person of the Company with a material interest in the Non-exempt Continuing Connected Transactions is required to abstain from voting at the EGM. Please refer to Part D of the section headed “Aggregated Continuing Connected Transactions of the Enlarged Group” of this letter for the parties who will abstain from voting at the EGM in respect of the Non-exempt Continuing Connected Transactions.

The purpose of this circular is:

to provide you with the details of the Sale and Purchase Agreement and the transactions contemplated thereunder;
to set out the advice of China Merchants, the independent financial adviser to the Independent Board Committee and the Independent Shareholders, in respect of (a) the Acquisition; (b) the terms of the Non-exempt Continuing Connected Transactions; and (c) the respective Annual Caps for each of the Non-exempt Continuing Connected Transactions;
to set out the recommendation of the Independent Board Committee in respect of items 2(a) to 2(c) above; and
to give you notice of the EGM at which (i) a special resolution will be proposed for the Independent Shareholders to consider, and if thought fit, to approve, among others, the Acquisition; (ii) a special resolution will be proposed for the Independent Shareholders to consider, and if thought fit, to approve the issue of the Consideration Shares; (iii) an ordinary resolution will be proposed for the Independent Shareholders to consider, and if thought fit, to approve each of the Non-exempt Continuing Connected Transactions and the applicable Annual Caps; and (iv) a special resolution will be proposed for the Shareholders to consider, and if thought fit, to approve the proposed amendments to the Articles.

— 3 —

LETTER FROM THE BOARD

PART A

SALE AND PURCHASE AGREEMENT

Date

5 May 2008

Purchaser

The Company

Vendor

CTHC

Assets to be acquired

(i) the entire registered capital of ACCA; and
(ii) the Property

Consideration

The considerations of the entire registered capital of ACCA and the Property are RMB788 million (equivalent to approximately HK$878.62 million) and RMB212 million (equivalent to approximately HK$236.38 million) respectively, amounting to an aggregate consideration of RMB1 billion (equivalent to approximately HK$1.115 billion).

The aggregate consideration shall be settled upon the Completion by way of the Company issuing and allotting to CTHC or its nominees 174,491,393 new Domestic Shares at a price of HK$6.39 (equivalent to approximately RMB5.73) per Consideration Share. The Company considered that the payment of consideration of the Acquisition was more appropriate by way of the Company issuing the Consideration Shares as opposed to payment by cash, because based on the related regulations by the State-owned Assets Supervision and Administration Commission of the State Council and the legal opinion provided by the PRC lawyer of the Company, cash payment made by the Company for this transaction would trigger the requirement for an open tender under the applicable PRC laws. The Directors confirmed that all necessary approvals from the relevant PRC authorities for the issue of Consideration Shares by the Company have been obtained under the applicable PRC laws. The consideration of ACCA was determined based on arm’s length negotiations between CTHC and the Company with reference to the consolidated net assets value of ACCA as at 31 December 2007 which amounted to RMB699.4 million (equivalent to approximately HK$779.83 million) and price earning multiples of comparable companies. The consideration of the Property was determined based on arm’s length negotiations between CTHC and the Company with reference to the recent available appraisal value of the Property. The Property is valued by Jones Lang LaSalle Sallmanns Limited, an Independent Third Party, at approximately RMB208.3 million (approximately HK$232.25 million) as at 31 March 2008 which is valued by the direct comparison approach assuming sale of the property interests in their existing state with the benefit of immediate vacant possession and by making reference to comparable sale transactions as available in the relevant market.

— 4 —

LETTER FROM THE BOARD

The issue price of HK$6.39 per Consideration Share to be issued by the Company was determined after arm’s length negotiations between the Company and CTHC and was equal to the average closing price of HK$6.39 per H Share as quoted on the Stock Exchange for the last twenty full trading days of the H Shares immediately before the date of the Sale and Purchase Agreement.

The issue price represents:

(i) a discount of approximately 4.48% to the closing price of HK$6.69 per H Share as quoted on the Stock Exchange on the last full trading day of the H Shares immediately before the date of the Sale and Purchase Agreement;
(ii) a discount of approximately 3.33% to the average closing price of HK$6.61 per H Share as quoted on the Stock Exchange for the last ten full trading days of the H Shares immediately before the date of the Sale and Purchase Agreement;
(iii) a premium of approximately 2.90% over the average closing price of HK$6.21 per H Share as quoted on the Stock Exchange for the last thirty full trading days of the H Shares immediately before the date of the Sale and Purchase Agreement; and
(iv) a premium of approximately 2.57% over the closing price of HK$6.23 per H Share as quoted on the Stock Exchange as at the Latest Practicable Date.

The Consideration Shares represent approximately 9.82% of the existing total issued share capital of the Company and approximately 8.94% of the total issued share capital of the Company as enlarged by the issue of the Consideration Shares. The Consideration Shares are proposed to be issued pursuant to a specific mandate to be sought from the Independent Shareholders at the EGM.

The Consideration Shares will be credited as fully-paid and rank pari passu in all respects with the Shares in issue as at the date of issue and allotment of the Consideration Shares. There is no special restriction applied to the subsequent sale of the Consideration Shares compared with the Domestic Shares in issue as at the date of this letter. The issue of the Consideration Shares for the Acquisition will not result in any change of control of the Company.

Conditions precedent

The Completion of the Acquisition shall be conditional upon, among other things, the following conditions precedent being fulfilled or waived:

(a) approval of the Sale and Purchase Agreement and the transactions contemplated thereunder by the Independent Shareholders at the EGM;
(b) approval from all relevant PRC government authorities for the transactions contemplated under the Sale and Purchase Agreement and compliance with the all PRC laws and requirements for the Acquisition;
(c) the representations and warranties in the Sale and Purchase Agreement being true and correct and not misleading in any material respects;

— 5 —

LETTER FROM THE BOARD

(d) the Company being satisfied with the results of the due diligence investigation in respect of ACCA and the Property; and
(e) the Company having obtained a legal opinion issued by a PRC law firm of lawyers in respect of the legality and enforceability of the Acquisition.

The Company has the right to waive whole or part of the conditions (c) to (e) above.

Save for condition (a) above, which requires approval from to be approved by the Independent Shareholder at the EGM, the Company confirmed that all of the other conditions have been fulfiled as at the Latest Practicable Date.

INFORMATION ON THE COMPANY, CTHC, ACCA AND THE PROPERTY

The Company

The Company is principally engaged in provision of aviation information technology services in the PRC.

CTHC

CTHC is principally engaged in the management of state-owned assets and stated owned equity interests resulting from investment of the States in the group companies and its invested entities. To the best of knowledge and belief having made all reasonable enquiries by the Directors, none of Southern Holding, Eastern Holding and China Holding are party(ies) acting in concert with CTHC.

ACCA

ACCA is principally engaged in the provision of accounting, settlement and clearing services and information system development and support services to commercial airlines and other aviation companies. The accounting, settlement and clearing services and system development and support services mainly include (i) passenger and cargo revenue, mail revenue and airport miscellaneous charges accounting and settlement services; (ii) BSP Services and (iii) Revenue Accounting Systems Development and support services to the aviation industry in the PRC. ACCA is a major service provider in these areas in the PRC.

ACCA is the BSP service provider of IATA BSP data processing service (“BSP DPC”), which is one of three big recognised BSP DPCs in the world and has become the largest provider of outsourced services and system products in revenue accounting and settlement in the airline industry of PRC. Its major customers include 20 domestic passenger and cargo airlines, 3 regional and overseas commercial airlines, 47 local airports, government organisations and IATA.

ACCA has a registered capital of RMB759,785,200 as at the Latest Practicable Date. The audited consolidated net assets value of ACCA as at 31 December 2007 was approximately RMB699.4 million (equivalent to approximately HK$779.83 million), which was prepared in accordance with the International Financial Reporting Standards. The following table sets out the audited consolidated turnover, profit before and after taxation for each of the two financial years ended 31 December 2007 prepared under the International Financial Reporting Standards.

— 6 —

LETTER FROM THE BOARD

	For the financial	For the	financial
	year ended	year	ended
	31 December 2006	31 December 2007
	Equivalent to		Equivalent to
	RMB’000 HK$’000	RMB’000	HK$’000
Revenues	255,926 285,357	273,485	304,936
Profit before taxation	96,440 107,531	102,854	114,682
Profit after taxation	65,223 72,724	63,898	71,246

Management Discussion and Analysis of the Financial Information of ACCA Group

Investors should read the following discussion and analysis in conjunction with the financial information of ACCA Group, including notes thereto, as set forth in Appendix II “Accountant’s Report of ACCA Group” to the circular, which has been prepared in accordance with the International Financial Reporting Standards (“IFRS”).

(i) Performance analysis for the year ended 31 December 2007 compared to year ended 31 December 2006 and year ended 31 December 2006 compared to year ended 31 December 2005

Revenues of ACCA Group primarily comprise the service fees earned for the provision of accounting settlement and clearing services, and information system development and support services to commercial airlines and other aviation companies. ACCA Group’s consolidated revenues for the year ended 31 December 2007 amounted to approximately RMB273.5 million, representing an increase of approximately 6.86% over the prior year. The consolidated revenues for the year ended 31 December 2006 amounted to approximately RMB255.9 million, representing an increase of approximately 4.16% over the consolidated revenues for the year ended 31 December 2005 of approximately RMB245.7 million. The steady increase in revenues was mainly due to the development of new markets and enrolling of new customers by ACCA. Moreover, expansion of the aviation industry in the PRC also contributed a positive impact on ACCA’s business.

ACCA Group’s consolidated profit attributable to equity owner for the year ended 31 December 2007 amounted to approximately RMB63.9 million, representing a decrease of approximately 2.03% over the prior year. The decrease was mainly due to the reduction of deferred tax assets in the year ended 31 December 2007 as a result of the reduction in corporate income tax rate to which ACCA is subject from 33% to 25% from 2008 onwards. The consolidated profit attributable to equity owner for the year ended 31 December 2006 amounted to approximately RMB65.2 million, representing a substantial decrease of approximately 47.05% over the consolidated profit attributable to equity owner for the year ended 31 December 2005 of approximately RMB123.2 million, which includes a one-off reversal of financial guarantee obligation of approximately RMB67.7 million (please refer to note 12 to the financial information as set out in the section headed “Accountant’s Report of ACCA” for details). After elimination of this one-off item, the consolidated profit attributable to equity owner for the year ended 31 December 2005 reduces to RMB55.5 million. In general, the net profit margin of ACCA (excluding the one-off item of reversal of financial guarantee obligation in 2005 as mentioned above) maintained at a relatively steady level ranging between approximately 23% and 25% during the three financial years ended 31 December 2005, 2006 and 2007.

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LETTER FROM THE BOARD

(ii) Liquidity and capital resources

The financial position of ACCA Group is summarized a follows:

	As at 31 December 2005	As at 31 December 2006	As at 31 December 2007
	(RMB’000)	(RMB’000)	(RMB’000)
Current assets_(a)_	1,082,171	893,708	982,426
Total assets_(b)_	1,204,225	1,034,439	1,114,470
Current liabilities_(c)_	844,363	605,026	415,096
Total liabilities_(d)_	855,773	618,386	415,096
Current ratio_(a/c)_	1.28	1.48	2.37
Gearing ratio_(d/b)_	71.1%	59.8%	37.2%

As at 31 December 2007, ACCA Group had net current assets of approximately RMB567.3 million. The current assets were mainly comprised of accounts receivable of approximately of RMB10.8 million, amounts due from holding company and fellow subsidiaries of approximately RMB20.8 million, other receivables and other current assets of approximately RMB423.3 million and cash equivalents of approximately RMB527.6 million. The current liabilities were mainly comprised of accounts payables of approximately RMB3.0 million, other payables and other current liabilities of approximately RMB346.2 million and income tax payable of approximately RMB65.9 million. Current ratio has improved from approximately 1.28 to approximately 2.37 and it was mainly due to the decrease in other payables as a result of that ACCA Group shortened the payment period for the settlement and clearing services.

The gearing ratio of ACCA Group has greatly improved from approximately 71.7% as at 31 December 2005 to approximately 37.2% as at 31 December 2007 and it was mainly due to the substantial reduction in other payables from approximately RMB697.6 million as at 31 December 2005 to approximately RMB302.8 million as at 31 December 2007 as a result of ACCA Group shortened the payment period for the settlement and clearing services.

ACCA Group had no short-term and long-term bank loans as at 31 December 2005, 2006 and 2007, and ACCA Group did not use any financial instruments for hedging purposes.

As at 31 December 2005, 2006 and 2007, cash and cash equivalents held by ACCA Group amounted to RMB17.9 million, RMB28.2 million and RMB527.6 million respectively of which all of them were denominated in RMB.

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LETTER FROM THE BOARD

(iii) Cash Flows

	Year ended 31	Year ended 31	Year ended 31
	December 2005	December 2006	December 2007
	(RMB’000)	(RMB’000)	(RMB’000)
Net cash generated from/(used in) operating activities	(24,396)	37,608	481,095
Net cash generated from/(used in) investing activities	3,299	(29,706)	(4,252)
Net cash generated from financing activities	26,780	2,378	22,590
Net increase in cash and cash equivalents	5,683	10,280	499,433

Net cash generated from/(used in) operating activities

Net cash used in operating activities of approximately RMB24.4 million for the year ended 31 December 2005, and net cash generated from operating activities of approximately RMB37.6 million for the year ended 31 December 2006. It is mainly attributable to the increase in working capital in 2006. The net cash generated from operating activities has increased significantly to approximately RMB481.1 million for the year ended 31 December 2007 and it was mainly due to the termination of the centralized management of the group’s treasury function by CTHC since October 2007 and all bank balances maintained at CTHC were transferred back to ACCA Group.

Net cash generated from/(used in) investing activities

ACCA Group recorded net cash generated from investing activities of approximately RMB3.3 million for the year ended 31 December 2005, and net cash used in investing activities of approximately RMB29.7 million for the year ended 31 December 2006. It is mainly attributable to more office equipment, electronic equipment, computer software and land use rights were acquired in 2006. As comparatively less fixed assets were acquired in 2007, the net cash used in investing activities reduced to approximately RMB4.3 million.

Net cash generated from financing activities

The net cash generated from financing activities were approximately RMB26.8 million, RMB2.4 million and RMB22.6 million respectively for the three years ended 31 December 2005, 2006 and 2007. The balances represented cash received from the non-core operations of ACCA Group which were retained by CTHC throughout the three financial years pursuant to the reorganisation of ACCA Group in October 2007. Since CTHC had waived the obligation of ACCA Group to repay the amount back, it was classified by ACCA Group as contributions from equity owner.

(iv) Charge on Assets

As at 31 December 2005, 2006 and 2007, ACCA Group had no charge on its assets.

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LETTER FROM THE BOARD

(v) Investments

ACCA Group had no significant investments during the three years ended 31 December 2005, 2006 and 2007. ACCA Group currently has no plan for material investments or capital assets.

(vi) Acquisitions and disposals

ACCA Group had no acquisition and disposal activities during the three years ended 31 December 2005, 2006 and 2007.

(vii) Foreign currency risk

ACCA Group’s exposure to foreign exchange risk mainly arises from its accounting settlement and clearing services as the ACCA Group made payments or collections in foreign currencies on behalf of its customers.

(viii) Employees and Remuneration Policies

The total number of employees of ACCA Group as at 31 December 2005, 2006 and 2007 was 772, 761 and 775 respectively. The total amount of salaries, allowances and retirement benefits for the employees of ACCA Group during the three years ended 31 December 2005, 2006 and 2007 was RMB108.2 million, RMB97.6 million and RMB109.2 million respectively.

(ix) Contingent Liabilities

As at 31 December 2005, 2006 and 2007, ACCA Group had no material contingent liabilities.

The Property

The Property is located at No. 11 Dongxing Li, Chaoyang District, Beijing, the PRC and comprises of a stateowned land use right with a site area of approximately 5,332.54 sq.m. and 8 buildings erected thereon with a total gross floor area of approximately 12,003.74 sq.m.. The Property has obtained the relevant licenses and land use approvals from the PRC authorities. The expiry date of the land use right is 29 June 2049. The Property is conveniently located at the hub of the central commercial district of Beijing which is one of the best sought after locations for many large corporations in the area. The Property has been used as a data centre by the Company and the Company has been paying a total rental and usage fees amounting to approximately RMB16.6 million (equivalent to approximately HK$18.51 million) for the year ended 31 December 2007 for renting the Property. The original acquisition cost of the Property by CTHC was approximately RMB189 million (equivalent to approximately HK$211 million).

Set out below is the unaudited profit and loss statements on the identifiable net income stream (the “Unaudited Financial Information”) in relation to the Property for the three years ended 31 December 2007, which are compiled and derived from the underlying books and records of CTHC, and are prepared using accounting policies materially consistent with those of the Group.

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LETTER FROM THE BOARD

Rental income_(Note)_ Depreciation charges Real estate tax and other tax charges Other expenses Identifiable net income stream	Year ended December 31, 2005 2006 2007 RMB’000 RMB’000 RMB’000 16,649 16,649 16,649 (6,114) (6,114) (6,114) (2,548) (2,548) (2,633) (2,604) (3,036) (2,939) 5,383 4,951 4,963

Note: For the three years ended December 31, 2007, the rental income under operating leases net of any incentives is recognized on a straight line basis.

The Company’s auditor has carried out the factual finding procedures on the Unaudited Financial Information in accordance with Hong Kong Standard on Related Services 4400 “Engagements to Perform Agreed-Upon Procedures Regarding Financial Information” issued by Hong Kong Institute of Certified Public Accountants, as follows:

Obtained the Unaudited Financial Information from CTHC; and
Agreed the Unaudited Financial Information to the underlying books and records of the Property which have taken into consideration of adjustments required in conformity with the principal accounting policy of the Group, where appropriate.

As the information based on which the Unaudited Financial Information has been prepared is limited, the Company’s auditor made no representations on the completeness and accuracy of the information and have emphasised that the Unaudited Financial Information cannot give a true and fair view of the financial results attributable to the Property.

As confirmed by the Directors, the Group will continue to occupy the Property for its own use after the Acquisition and therefore no additional income will be generated upon Completion.

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LETTER FROM THE BOARD

SHAREHOLDING STRUCTURE

The following is the shareholding structure of the Company immediately before and after the Completion of the Acquisition:

		Current Shareholding		Shareholding upon Completion	Shareholding upon Completion	Shareholding upon Completion
		% of			% of
		respective			respective
		class of	% of total		class of	%	of total
		share	share		share		share
Shareholders	Shares	capital	capital	Shares	capital		capital
CTHC	396,993,000	34.38%	22.35%	571,484,393	43.00%		29.29%
	Domestic shares			Domestic shares
	of RMB1 each			of RMB1 each
Southern Holding	232,921,000	20.17%	13.11%	232,921,000	17.52%		11.94%
	Domestic shares			Domestic shares
	of RMB1 each			of RMB1 each
Eastern Holding	218,829,000	18.95%	12.32%	218,829,000	16.46%		11.22%
	Domestic shares			Domestic shares
	of RMB1 each			of RMB1 each
China Holding	178,867,000	15.49%	10.07%	178,867,000	13.46%		9.17%
	Domestic shares			Domestic shares
	of RMB1 each			of RMB1 each
Other domestics	126,997,000	11.01%	7.15%	126,997,000	9.56%		6.51%
Shareholders	Domestic shares			Domestic shares
	of RMB1 each			of RMB1 each
Public	621,708,000	100%	35%	621,708,000	100%		31.87%
	H Shares			H Shares
	of RMB1 each			of RMB1 each
Total			100%				100%

REASONS FOR AND BENEFITS OF THE SALE AND PURCHASE AGREEMENT

As the operation structure of the Company and ACCA are similar, the Directors believe that the acquisition of ACCA can provide cost synergies by integrating the research and development resources, data centers, and market resources of the Company and ACCA, and thus reducing the aggregate operational cost and general expenditure. On the other hand, as the Company’s principal activities focus on the travel distribution and sales area while ACCA provides mainly accounting and settlement services, the two businesses cover both upstream and downstream aviation and strengthen the production line of travel distribution information technology. Furthermore, since the Company and ACCA are the leading service providers in the respective areas, the acquisition of ACCA, can enrich the Company’s product and services portfolios to the airlines, travel agencies, airports and other industry participants, and also enhance the competitiveness of the Company’s existing core businesses and new businesses to be developed. The Board believes that the acquisition of ACCA will enhance the Company’s profitability and market position, and is in the interest of the Shareholders.

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LETTER FROM THE BOARD

At present, the renting of the Property by the Company from CTHC resulted in the Company constituting a continuing connected transaction and is thereby subject to certain compliance requirements under the Listing Rule. The acquisition of the Property will not only reduce the rental expenses of the Company, it will also reduce the administrative costs required to be spent on the compliance matters of connected transaction. In addition, the entire Property has been occupied by the Company as data centre. The acquisition of the Property would result in a more standardised, scientific and effective data centre management.

The Directors (excluding the independent non-executive Directors) are of the view that the Sale and Purchase Agreement which is on normal commercial terms, was entered into in the ordinary and usual course of business of the Group. The terms, which are arrived at after arm’s length negotiations, are fair and reasonable and the entering into of the Sale and Purchase Agreement is in the interest of the Company and the Shareholders as a whole. The recommendations of the Independent Board Committee and the letter from the independent financial adviser to the Independent Board Committee and the Independent Shareholders is included in the sections headed “Letter from the Independent Board Committee” and “Letter from China Merchants” respectively of this circular.

FINANCIAL EFFECTS TO THE GROUP ARISING FROM THE ACQUISITION

Immediately upon Completion, ACCA will become a wholly-owned subsidiary of the Group. The Acquisition would bring the following financial effects to the Group:

Assets and Liabilities

Based on the unaudited pro forma financial information on the Enlarged Group set out in Appendix III to this circular, the unaudited pro forma total assets and liabilities would be approximately RMB6,264.2 million and RMB948.7 million, representing an increase of approximately 26.5% and 78.2% over the Group’s audited total assets and liabilities as at 31 December 2007 of approximately RMB4,951.3 million and RMB532.5 million respectively.

Earnings

Assuming the Acquisition had been completed on 1 January 2007, the Group’s consolidated profit attributable to the equity holders of the Company would be increased to approximately RMB696.8 million (representing the Group’s profit attributable to the Company’s equity holders of RMB631.0 million, as adjusted by inclusion of profit attributable to ACCA Group’s equity holders of RMB63.9 million, and net saving resulting (i.e. the identifiable net income stream) from the acquisition of the Property of RMB5.0 million after taking into account of adjustments of increase in depreciation and reduction in taxes totalling RMB3.1 million), representing an increase of approximately 10.4% over the Group’s audited consolidated profit attributable to equity holders of the Company for the year ended 31 December 2007 of approximately RMB631.0 million.

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LETTER FROM THE BOARD

Gearing

As referred to Annual Report 2007, the gearing ratio of the Group was approximately 10.8%. Based on the unaudited proforma statement of assets and liabilities of the Enlarged Group as set out in Appendix III to the circular, the gearing ratio of the Enlarged Group (being total liabilities of approximately RMB948.7 million divided by total assets of approximately RMB6,264.2 million) will slightly increase to approximately 15.1%.

Working capital

Since the consideration of the Acquisition will be satisfied by the issue of Consideration Shares, it is expected that there will be no effect on the working capital of the Group immediately after Completion.

BUSINESS PROSPECT OF THE ENLARGED GROUP

The Group is principally engaged in provision of aviation information technology services in the PRC.

After the Acquisition, the Enlarged Group will focus on travel distribution and sales areas in the PRC and provision of accounting, settlement and clearing services and information system development and support services to domestic and worldwide airline companies. Estimating the continuous expansion of the aviation industry in the PRC, the Directors believe that the business of the Enlarged Group will be further enhanced and the Enlarged Group will continue to maintain its leading position in the provision of aviation information technology as well as accounting and settlement services in the PRC aviation industry. As at the Latest Practicable Date, the Company has not identified any investment or business opportunities.

Going forward, the Enlarged Group will continue to look for and capture investment or business opportunities that have good potential to improve the Group’s profitability and to enhance the Shareholders’ value.

PROPOSED AMENDMENTS TO THE ARTICLES CONSEQUENTIAL TO THE COMPLETION OF THE ACQUISITION

Based on 1,776,315,000 Shares in issue as at the Latest Practicable Date, comprising 1,154,607,000 Domestic Shares and 621,708,000 H Shares, and on the assumptions that no new Shares are allotted or issued and no existing Shares are repurchased prior to the Latest Practicable Date, upon satisfaction of the conditions set out in the paragraph headed “Conditions Precedent” above and Completion, the total number of Domestic Shares of book value of RMB1.00 each to be issued pursuant to the Completion will be 174,491,393 amounting to RMB1 billion of paid-in capital. If the Acquisition is approved by the Independent Shareholders at the EGM, the registered share capital of the Company will need to be increased to RMB1,950,806,393 upon Completion and the Articles will be required to be amended accordingly.

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LETTER FROM THE BOARD

PART B

ACCA CONTINUING CONNECTED TRANSACTIONS

Provisions of property management services

At present, Ya Ka is providing certain property management services to ACCA. It is expected that these property management services will continue following Completion in accordance with the property management agreement dated 3 February 2008 signed between ACCA and Ya Ka. Given that Ya Ka is a wholly-owned subsidiary of CTHC, the transaction contemplated under this agreement will constitute a continuing connected transaction of the Company under the Listing Rules after Completion. Details of the Property Management Agreement are as follows:

Date: 3 February 2008

Service: Provision of office building property management services by Ya Ka to ACCA

Duration: 1 January 2008 to 31 December 2008

Payment: The service fee is calculated on an agreed rate per square metre between two parties and is settled monthly based on total square metres occupied by ACCA.

The Directors consider that the basis of determination of the service fee above is fair and reasonable.

Provisions of airline services

Prior to the Acquisition, ACCA had entered into various trading arrangements with a number of Connected Airlines. It is expected that these arrangements will continue after Completion in accordance with market demands for relevant products and services. Upon Completion, the ongoing arrangements between ACCA and these Connected Airlines will constitute continuing connected transactions for the Company under the Listing Rules.

The nature of each of the ongoing transactions between ACCA and these Connected Airlines can be classified into four categories namely, (i) Systems Development and Support Services; (ii) Passenger and Cargo Revenue Accounting and Settlement Services; (iii) Domestic Mail Revenue Accounting and Settlement Services and (iv) BSP Services, all as defined below.

Listed below is the summary of each of the services provided by ACCA to various airline companies:

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LETTER FROM THE BOARD

Type 1 — Systems Development and Support Services

(i) Revenue Accounting Systems Development and Support Services

Service: Provision of computer system application development and support services to various airline companies (“Revenue Accounting Systems Development and Support Services”). The main services provided by ACCA include self-developed computer application systems in respect of both international and domestic passengers revenue accounting system, international and domestic cargo revenue accounting system, mail revenue accounting system, airport miscellaneous charges accounting system, data service system, international and domestic clearing and settlement system etc. Such system services mainly include application and operation support, customized development, system implementation, business research and system development.

Payment: The system service fee is charged on a monthly basis and is based on the agreement signed between the provider and the users. There are several levels of charge rates based on transaction volume which are specified in the relevant agreement. The charge amount is determined by reference to the price and size of the relevant services provided. Charge rate depends on transaction volume level — the higher the transaction volume, the lower the rates to be charged by the provider.

The Directors consider that the basis of determination of the service fee above is fair and reasonable.

(ii) Oracle financial products support services
Services: Provision of financial products support services, including function solution support and maintenance of Oracle financial products, customised program revision and program maintenance, database maintenance services.

Payment: Fixed amount of maintenance fee is charged annually.

The Directors consider that the basis of determination of the service fee above is fair and reasonable.

(iii) Interline Data Exchange Services

Service: Mainly include receiving interline outward billing data from various airline companies, identifying the airlines to be charged for receipt of such services (“Billed Airlines”), consolidating the data from all of the airline companies on behalf of the Billed Airlines and delivering the data to such Billed Airlines.

Payment: Apart from the one-off membership entrance fee, a fixed annual service fee is also charged.

The Directors consider that the basis of determination of the service fee above is fair and reasonable.

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LETTER FROM THE BOARD

Type 2 — Passenger and Cargo Revenue Accounting and Settlement Services

Service: Provision of data capturing, sales reporting control, sales auditing, prorating, uplift processing, outward and inward billing, accounting, coupon matching, account management and management information reporting services for passenger and cargo (as the case may be) revenue accounting and settlement services (“Passenger and Cargo Revenue Accounting and Settlement Services”).
Payment: The fees are charged by reference to the rate and rules prescribed in the relevant document issued by the industry regulatory authorities. The prices of the provision of the services are specified in the relevant agreement which is based on the calculation of (i) the percentage rate of the total accounting amount and (ii) the transaction volume times unit price.

The Directors consider that the basis of determination of the service fee above is fair and reasonable.

Type 3 — Domestic Mail Revenue Accounting and Settlement Services

Service: Provision of stock control, sales control, sales audit, uplift revenue pro-ration, accounting processing, sales and uplift matching, clearing and settlement services (“Domestic Mail Revenue Accounting and Settlement Services”).
Payment: The service fee is based on the rate as set out in the agreement in which ACCA receives payment of 1.5% handling charges from the Connected Airlines, and such fee is charged by reference to the relevant documents issued by the industry regulatory authorities.

The Directors consider that the basis of determination of the service fee above is fair and reasonable.

Type 4 — BSP Services

Service: Provision of BSP Services to IATA in the PRC, Hong Kong, Macau and Chinese Taipei. BSP is a system designed to facilitate and simplify the selling, reporting and remitting procedures of IATA Accredited Passenger Sales Agents, as well as to improve financial control and cash flow for the airline companies. ACCA has contracted with IATA to supply such services for additional territories which is expected to be commenced in January 2010, such services will include supply of software application support, development and maintenance services.

Payment: Fees are charged on the basis of a “Standard Charging Unit” (as defined in the IATA Agreement) per processing transaction. The Standard Charging Unit payable by IATA is defined in Renminbi for transactions in the PRC, in Hong Kong Dollars for Hong Kong, Macau and in United Stated Dollars for other territories, subject to exchange rate fluctuation which will be adjusted in accordance with the terms of the IATA Agreement.

The Directors consider that the basis of determination of the service fee above is fair and reasonable.

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LETTER FROM THE BOARD

Summary of transactions between ACCA and the Connected Airlines in respect of various airline services

The table below summarises the major terms of each of the ongoing transactions between ACCA and the Connected Airlines:

			Date of
Airline company	Description of transactions	Agreement with ACCA	agreement	Duration
Southern Airlines	1. Revenue Accounting	Revenue accounting	15.11.2007	01.01.2007 to
	Systems Development	systems and		31.12.2008
	and Support Services	settlement agreement
	2. Passenger and Cargo
	Revenue Accounting
	and Settlement Services
	3. Oracle financial	Oracle financial products	01.06.2007	01.07.2006 to
	products support services	support services agreement		30.06.2008
Eastern Airlines	1. Revenue Accounting	Revenue accounting	22.02.2008	01.01.2008 to
	Systems Development	systems and		31.12.2009
	and Support Services	settlement agreement
	2. Passenger and Cargo
	Revenue Accounting
	and Settlement Services
Air China	1. Revenue Accounting	Revenue accounting	28.02.2008	01.01.2008 to
	Systems Development	systems and		31.12.2009
	and Support Services	settlement agreement
	2. Passenger and Cargo
	Revenue Accounting
	and Settlement Services
Macau Airlines	1. Passenger and Cargo	Revenue accounting and	31.12.2006	01.01.2007 to
	Revenue Accounting	settlement agreement		31.12.2009
	and Settlement Services
	2. Oracle financial	Oracle financial products	15.05.2007	28.02.2007 to
	products support services	support services agreement		28.02.2008

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LETTER FROM THE BOARD

Xiamen Airlines	1. Interline Data	Interline data exchange	26.09.2006	01.10.2006 to
	Exchange Services	agreement		31.12.2009
	2. Passenger and Cargo	Revenue accounting and	21.12.2007	01.01.2008 to
	Revenue Accounting	settlement agreement		31.12.2010
	and Settlement Services
Hainan Airlines	1. Interline Data	Interline data exchange	18.09.2006	01.10.2006 to
	Exchange Services	services agreement		31.12.2009
	2. Passenger and Cargo	Revenue accounting and	04.12.2006	01.12.2006 to
	Revenue Accounting	settlement agreement		30.11.2009
	and Settlement Services
Shenzhen Airlines	1. Revenue Accounting	Revenue accounting	29.01.2008	01.01.2008 to
	Systems Development	systems and		31.12.2010
	and Support Services	settlement agreement
	2. Passenger and Cargo
	Revenue Accounting
	and Settlement Services
Shanghai Airlines	1. Interline Data	Interline data exchange	22.03.2007	01.01.2007 to
	Exchange Services	agreement		31.12.2009
	2. Passenger and Cargo	Revenue accounting and	19.12.2007	01.01.2008 to
	Revenue Accounting	settlement agreement		31.12.2008
	and Settlement Services
Shandong Airlines	1. Revenue Accounting	Revenue accounting	01.12.2007	01.01.2007 to
	Systems Development	systems and		31.12.2009
	and Support Services	settlement agreement
	2. Passenger and Cargo
	Revenue Accounting
	and Settlement Services
Sichuan Airlines	1. Revenue Accounting	Revenue accounting	01.12.2007	01.01.2008 to
	Systems Development	systems and		31.12.2009
	and Support Services	settlement agreement
	2. Passenger and Cargo
	Revenue Accounting
	and Settlement Services

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LETTER FROM THE BOARD

The Connected Airlines	Domestic Mail Revenue Accounting	Domestic Mail Revenue	30.07.1997	Effective from
(other than	and Settlement Services	Accounting and		01.09.1997
Macau Airlines)		Settlement Agreement		with no
				fixed term
IATA as authorised by the	BSP Services	IATA Agreement	27.03.2008	27.03.2008 to
Connected Airlines				31.12.2017

It is noted that the duration of the interline data exchange agreements entered into between ACCA and Xiamen Airlines and Hainan Airlines respectively, as well as the IATA Agreement are longer than 3 years. Please refer to the section headed “Letter from the China Merchants” of the circular for the advice of China Merchants as to whether such transactions are fair and reasonable and whether it is normal business practice for agreements of this type of such duration.

It is also noted that there are no fixed terms in relation to the Domestic Mail Revenue Accounting and Settlement Services provided by ACCA to the Connected Airlines. In order to comply with Rules 14A.35(1) of the Listing Rules requirement, ACCA will enter into a separate supplemental agreement with each of the Connected Airlines pursuant to which a fixed term will be agreed. The Company will issue a separate announcement (and/or the opinion of the independent financial adviser if the period for such supplemental agreement(s) is more than 3 years) to disclose, amongst other, the fixed term of the supplemental agreements between ACCA and the Connected Airlines when such agreements have been entered into.

Proposed Annual Caps for the ACCA Continuing Connected Transactions

Apart from the transactions under the Domestic Mail Revenue Accounting and Settlement Agreement and the IATA Agreement, the Company considers that the ongoing transactions between ACCA and each of the Connected Airlines among themselves are each, a series of related connected transactions and therefore is appropriate to aggregate the relevant transactions together and treat them as if they were one transaction for each of the Connected Airline for the purpose of calculating the proposed caps pursuant to Rule 14A.25 of the Listing Rules. Set out below are the historical transaction amounts for the three financial years ended 31 December 2007 and the proposed Annual Caps for the three financial years ending 31 December 2010 in respect of each of the ACCA Continuing Connected transactions:

			Historical transaction amount	Historical transaction amount
		(by	reference to each connected person)
	for the	year ended	for the	year ended	for the	year ended
	31 December 2005		31 December 2006		31 December 2007
		Equivalent to		Equivalent to		Equivalent to
	RMB’000	HK$’000	RMB’000	HK$’000	RMB’000	HK$’000
Ya Ka	8,408	9,375	8,256	9,205	8,343	9,302
Southern Airlines	23,701	26,427	24,263	27,053	24,804	27,656
Eastern Airlines	46,790	52,171	51,268	57,164	53,506	59,659

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LETTER FROM THE BOARD

Air China	42,563	47,458	44,496	49,613	48,032	53,556
Macau Airlines	8,923	9,949	10,137	11,303	9,834	10,965
Xiamen Airlines	1,778	1,982	1,997	2,227	1,811	2,019
Hainan Airlines	2,324	2,591	1,895	2,113	1,575	1,756
Shenzhen Airlines	2,155	2,403	2,482	2,767	3,771	4,205
Shanghai Airlines	9,524	10,619	9,557	10,656	8,830	9,845
Shandong Airlines	2,371	2,644	4,177	4,657	2,886	3,218
Sichuan Airlines	755	842	2,185	2,436	2,732	3,046
Transactions under the
Domestic Mail Revenue
Accounting and
Settlement Agreement	5,729	6,388	6,617	7,378	7,602	8,476
Transactions under
IATA Agreement	29,781	33,206	35,983	40,121	44,653	49,788

Proposed Annual Caps

(by reference to each connected person)

	for the	year ending	for the	year ending	for the	year ending
	31 December 2008		31 December 2009		31 December 2010
		Equivalent to		Equivalent to		Equivalent to
	RMB’000	HK$’000	RMB’000	HK$’000	RMB’000	HK$’000
Ya Ka	4,990	5,564	5,739	6,399	6,599	7,358
Southern Airlines	29,735	33,155	35,652	39,752	42,752	47,668
Eastern Airlines	64,207	71,591	77,048	85,909	92,458	103,091
Air China	57,639	64,267	69,166	77,120	83,000	92,545
Macau Airlines	11,766	13,119	14,089	15,709	16,877	18,818
Xiamen Airlines	2,149	2,396	2,555	2,849	3,042	3,392
Hainan Airlines	1,866	2,081	2,215	2,470	2,634	2,937
Shenzhen Airlines	4,526	5,046	5,430	6,054	6,517	7,266
Shanghai Airlines	10,572	11,788	12,662	14,118	15,171	16,916

— 21 —

LETTER FROM THE BOARD

Shandong Airlines	3,463	3,861	4,156	4,634	4,987	5,561
Sichuan Airlines	3,279	3,656	3,934	4,386	4,721	5,264
Transactions under the
Domestic Mail Revenue
Accounting and
Settlement Agreement	9,503	10,596	11,878	13,244	14,847	16,554
Transactions under
IATA Agreement	58,048	64,724	75,464	84,142	98,103	109,385

Given the applicable percentage ratios for each of the ACCA Continuing Connected Transactions (except transactions in respect of Eastern Airlines, Air China and IATA Agreement) on an annual basis is less than 2.5%, all of the ACCA Continuing Connected Transactions are only subject to the reporting, announcement requirements set out in Rule 14A.45 to Rule 14A.47 and are exempted from the Independent Shareholders’ approval requirements under the Listing Rules.

The applicable percentage ratios for each of the ACCA Continuing Connected Transactions in respect of Eastern Airlines, Air China and IATA Agreement, on an annual basis exceeds 2.5%, all of such ACCA Continuing Connected Transactions are subject to the reporting, announcement and Independent Shareholders’ approval requirements under the Listing Rules.

Historical transaction amount

		(by	reference to each category of	reference to each category of	service)
	for the	year ended	for the	year ended	for the	year ended
	31 December 2005		31 December 2006		31 December 2007
		Equivalent to		Equivalent to		Equivalent to
	RMB’000	HK$’000	RMB’000	HK$’000	RMB’000	HK$’000
Property Management Services	8,408	9,375	8,256	9,205	8,343	9,302
Type 1 — Systems Development
and Support Services	77,589	86,512	82,284	91,747	88,173	98,313
Type 2 — Passenger and
Cargo Revenue Accounting
and Settlement Services	63,295	70,574	70,173	78,243	69,608	77,613
Type 3 — Domestic Mail Revenue
Accounting and Settlement Services	5,729	6,388	6,617	7,378	7,602	8,476
Type 4 — BSP Services	29,781	33,206	35,983	40,121	44,653	49,788

— 22 —

LETTER FROM THE BOARD

Proposed Annual Caps (by reference to each category of service)

	for the	year ending	for the	year ending	for the	year ending
	31 December 2008		31 December 2009		31 December 2010
		Equivalent to		Equivalent to		Equivalent to
	RMB’000	HK$’000	RMB’000	HK$’000	RMB’000	HK$’000
Property Management Services	4,990	5,564	5,739	6,399	6,599	7,358
Type 1 — Systems Development
and Support Services	105,808	117,976	126,968	141,569	152,364	169,886
Type 2 — Passenger and
Cargo Revenue Accounting
and Settlement Services	83,394	92,984	99,939	111,432	119,795	133,571
Type 3 — Domestic Mail Revenue
Accounting and Settlement Services	9,503	10,596	11,878	13,244	14,847	16,554
Type 4 — BSP Services	58,048	64,724	75,464	84,142	98,103	109,385

The Directors (excluding the independent non-executive Directors) believe that the Annual Caps are fair and reasonable in so far as the Company and the Shareholders are concerned. The recommendation of the Independent Board Committee, after taking into account the advice of the independent financial adviser, has been set out in its letter to the Independent Shareholders in this circular.

In the event that the aggregate amounts in respect of the ACCA Continuing Connected Transactions exceed the proposed Annual Caps in the relevant year as set out above, the ACCA Continuing Connected Transaction(s) and the Annual Caps would be subject to further review and the Company shall comply with the relevant provisions of the Listing Rules (where applicable).

The Company noted there were some typographical errors made to the figures as referred to the tables on page 21 and page 22 of the Announcement. The Company will issue a separate clarification announcement explaining the discrepancy between the Announcement and this circular in due course.

Basis of the Annual Caps for the ACCA Continuing Connected Transactions

The Board believes that the above proposed Annual Caps are the aggregate values in respect of the transactions contemplated under each of the ACCA Continuing Connected Transactions over the three financial years ending 31 December 2010. The amounts of the proposed Annual Caps are determined by reference to the following:

Continuing connected transactions of ACCA Basis of determination of the Annual Caps

Provision of the property By reference to the average growing rate of the domestic management services from Ya Ka Consumer Price Index and the estimated annual growth rate for the property management fee is expected to be 15% per annum for the period from 2008 to 2010. Taking into account the reduction of the scope of services to be provided to Ya Ka, the Annual Caps for the provision of the property management services for the year 2008 to 2010 are expected to be slightly smaller than the historical transaction amount for the period 2005 to 2007.

— 23 —

LETTER FROM THE BOARD

Revenue Accounting Systems Development and Support Services

By reference to CAAC’s “Eleventh five-year plan”, the passenger volume is expected to have a steady growth rate of 14% annually. ACCA will continue to develop new products and services, including but not limited to setting up data exchange platform, providing data service products and data value-added services. With the number of passengers expected to increase, the estimated level of service and scope of services provided by the Group is estimated to increase by 20% annually based on the future growth rate of aviation industry and the historical growth of airline’s business in the recent years.

Oracle Financial Products Support Services

As fixed amount of annual maintenance fee is charged under the relevant agreements. It is expected that there will be no major changes in the level service fee for the period from 2008 to 2010.

Interline Data Exchange Services

As fixed amount of annual service fee is charged under the relevant agreement. It is expected that there will be no major changes in the level of service fee for the period from 2008 to 2010.

Passenger and Cargo Revenue Accounting and Settlement Services

According to CAAC’s “Eleventh Five-year Plan”, civil aviation transportation volume in the PRC has an average annual growth rate of 14%. Going forward, ACCA aims to expand its businesses to domestic interline accounting; develop sales audit business and outsourcing business; as well as expand the potential customer group in settlement market. By reference to the historical transaction amounts and the estimated market pricing for the similar services, it is expected that the annual transportation volume and revenue accounting amount will increase by approximately 20%.

Domestic Mail Revenue Accounting and Settlement Services

An annual increment of approximately 20% annually was recorded from 2005 to 2007. It is estimated that the steady growth of the air mail business, couple with the expansion of domestic mail sales system and international mail revenue accounting service to be carried by ACCA, will result in an increase in services volume provided by the Group. On the assumption that no material change in the fee rate and the market conditions, the estimated level of services provided by the Group will maintain an annual growth of approximately 25%.

BSP Services

BSP business in the PRC has recorded a growth of over 21-25% per annum for the period from 2005 to 2007. According to CAAC’s “Eleventh Five-year Plan”, civil aviation passenger volume in the PRC is estimated to have an average annual growth of 14%. By reference to the market demand for the BSP business and the increasing growth rate of the civil aviation passenger volume in the PRC, ACCA is expected to increase the annual growth rate of BSP services by 30% in the near future.

— 24 —

LETTER FROM THE BOARD

PART C

CONTINUING CONNECTED TRANSACTIONS OF THE COMPANY

During the financial year ended 31 December 2007, the Group has continued to carry out various transactions which constitute continuing connected transactions as defined in the Listing Rules and are required to be disclosed in accordance with Chapter 14A of the Listing Rules, details of which have been set out in the Annual Report 2007. The Company has fully complied with the relevant reporting, announcement and/or independent shareholders’ approval requirements under Chapter 14A with respect to each of the Continuing Connected Transactions herein described.

Shareholders should also refer to the circulars dated 10 December 2007, 10 October 2007, 7 March 2007 and 7 April 2006 issued by the Company for details in relation to, among others, certain annual caps of the continuing connected transactions of the Company as described therein, summary of which are set out below:

Continuing Connected Transactions Date of the respective announcement and/or circular for the year ended 31 December 2007

transactions between Eastern Holding and the Company
• transaction between certain airlines and the Company in relation to the provision of various aviation information technology services and ancillary support provided

I — Announcement: 19 September 2007 Circular: 10 October 2007 II — Announcement: 16 March 2006 Circular: 7 April 2006

renewal of Shandong Airlines Services Agreement and the Sichuan Airline Services Agreement
provision of data network services usage fees and membership fees by the Company to SITA (as defined in the respective announcement and circular)
III — Announcement: 19 November 2007 Circular: 10 December 2007
IV — Announcement: 13 February 2007 Circular: 7 March 2007

— 25 —

LETTER FROM THE BOARD

Annual Caps of the Continuing Connected Transactions of the Company

Set out below are the annual caps of the Continuing Connected Transactions of the Company for the three financial years ending 31 December 2010:

							Respective
							announcement/
							circular with
	For the year ending		For the year	ending	For the year ending		reference
	31 December 2008		31 December 2009		31 December 2010		to the
	Equivalent to			Equivalent to		Equivalent to	table above
	RMB’000	HK$’000	RMB’000	HK$’000	RMB’000	HK$’000
CTHC	40,000	44,600	40,000	44,600	—	—	IV
Southern Airlines
(including
Xiamen Airlines)	633,000	705,795	—	—	—	—	II
Eastern Airlines	386,604	431,063	502,585	560,382	653,360	728,496	I, II
Air China	388,700_(Note)_	433,401	—	—	—	—	II, IV
Hainan Airlines	265,860	296,434	—	—	—	—	II
Shenzhen Airlines	135,200_(Note)_	150,748	175,760	195,972	—	—	II, IV
Shanghai Airlines	189,900	211,739	—	—	—	—	II
Shandong Airlines	45,647	50,896	—	—	—	—	II, III
Sichuan Airlines	102,673	114,480	—	—	—	—	II, III

Note: A combined annual caps of Air China and Shenzhen Airlines of RMB523.9 million for the year ended 31 December 2008 was shown on the circular of the Company dated 7 March 2007. The breakdown of the proposed annual caps for each of Air China and Shenzhen Airlines are based on the actual services historically provided by the Company to (amongst others) Air China and Shenzhen Airlines details of which please refer to the Company’s circular dated 7 March 2007.

— 26 —

LETTER FROM THE BOARD

PART D

AGGREGATED CONTINUING CONNECTED TRANSACTIONS OF THE ENLARGED

GROUP

Following the Completion, ACCA will become a wholly-owned subsidiary of the Company. The ACCA Continuing Connected Transactions will become part of the Aggregated Continuing Connected Transactions of the Enlarged Group. As such, the Annual Caps in respect of the ACCA Continuing Connected Transactions will be aggregated with those of the existing Continuing Connected Transactions to determine whether an Independent Shareholders’ approval is required.

The table below sets out the total Annual Caps in respect of the Aggregated Continuing Connected Transactions for the three financial years ending 31 December 2010.

							Whether
							Independent
							Shareholders’
							approval
	For the year	ending	For the year	ending	For the year ending		is required
	31 December 2008		31 December 2009		31 December 2010		(Yes/No)
		Equivalent to		Equivalent to		Equivalent to	(Note)
	RMB’000	HK$’000	RMB’000	HK$’000	RMB’000	HK$’000
CTHC	40,000	44,600	40,000	44,600	—	—	NO
Ya Ka	4,990	5,564	5,739	6,399	6,599	7,358	NO
Southern Airlines	662,735	738,950	35,652	39,752	42,752	47,668	NO
Eastern Airlines	450,811	502,654	579,633	646,291	745,818	831,587	YES
Air China	446,339	497,668	69,166	77,120	83,000	92,545	YES
Macau Airlines	11,766	13,119	14,089	15,709	16,877	18,818	NO
Xiamen Airlines	2,149	2,396	2,555	2,849	3,042	3,392	NO
Hainan Airlines	267,726	298,514	2,215	2,470	2,634	2,937	NO
Shenzhen Airlines	139,726	155,794	181,190	202,027	6,517	7,266	NO
Shanghai Airlines	200,472	223,526	12,662	14,118	15,171	16,916	NO
Shandong Airlines	49,110	54,758	4,156	4,634	4,987	5,561	NO
Sichuan Airlines	105,952	118,136	3,934	4,386	4,721	5,264	NO
Transactions under the
Domestic Mail Revenue
Accounting and
Settlement Services	9,503	10,596	11,878	13,244	14,847	16,554	NO
Transactions under
IATA Agreement	58,048	64,724	75,464	84,142	98,103	109,385	YES

Note: The above transactions which require Independent Shareholders’ approval are collectively referred to as the “Nonexempt Continuing Connected Transactions” for the purpose of this circular.

— 27 —

LETTER FROM THE BOARD

Given the applicable percentage ratios for each of the Aggregated Continuing Connected Transactions (except the transactions carried by Eastern Airlines, Air China and the IATA Agreement) as stated above in the table marked “No”, on an annual basis are either (i) less than 2.5% or (ii) more than 2.5% but such relevant Continuing Connected Transactions of the Company (together with their respective annual caps) have already complied with the independent shareholders’ approval requirement described in Rule 14A.48 and the applicable percentage ratios for the respective ongoing transactions of ACCA on its own, are less than 2.5%, accordingly, all the Aggregated Continuing Connected Transactions (except transactions carried by Eastern Airline, Air China and the IATA Agreement) are only subject to reporting and announcement requirements under Rules 14A.45 to Rule 14A.47 of the Listing Rules.

With reference to the applicable percentage ratios for each of the ACCA Continuing Connected Transactions as stated under Part B of this letter, the applicable percentage ratios for each of the Aggregated Continuing Connected Transactions in respect of Eastern Airlines, Air China and the IATA Agreement, as stated above in the table marked “Yes”, and their transactions contemplated thereunder, on an annual basis is more than 2.5%, such ACCA Continuing Connected Transactions are subject to reporting, announcement requirements and Independent Shareholders’ approval requirement under Rules 14A.48 of the Listing Rules.

Independent Shareholders’ Approval

As the relevant percentage ratios (as defined in the Listing Rules) applicable to the proposed Annual Caps in respect of each the Aggregated Continuing Connected Transactions (excepted that of Eastern Airlines, Air China and the IATA Agreement) listed in Part D of this letter on an annual basis are either (i) less than 2.5% or (ii) more than 2.5% but such relevant Continuing Connected Transactions of the Company (together with their respective annual caps) have already complied with the independent shareholders’ approval requirement described in Rule 14A.48 and the applicable percentage ratios for the respective ongoing transactions of ACCA on its own, are less than 2.5%, accordingly, all the ACCA Continuing Connected Transactions (except transactions carried by Eastern Airlines, Air China and the IATA Agreement) are only subject to reporting and announcement requirements under Rules 14A.45 to Rule 14A.47 of the Listing Rules.

As the relevant percentage ratios (as defined in the Listing Rules) applicable to the proposed Annual Caps in respect of each of the transactions carried out by Eastern Airlines and Air China as well as the IATA Agreement, and their transactions contemplated thereunder, on an annual basis is more than 2.5%, such ACCA Continuing Connected Transactions are subject to reporting, announcement requirements and Independent Shareholders’ approval requirement under Rules 14A.48 of the Listing Rules.

Save for Eastern Airlines, being the party to the relevant agreement, no other parties have material interests in the relevant Non-exempt Continuing Connected Transaction carried out by Eastern Airlines. Accordingly, Eastern Airlines and its associates will abstain from voting at the EGM on the resolution approving the relevant Non-exempt Continuing Connected Transaction and the applicable Annual Caps.

Save for Air China, being the party to the relevant agreement, no other parties have material interests in the relevant Non-exempt Continuing Connected Transaction carried out by Air China. Accordingly, Air China and its associates will abstain from voting at the EGM on the resolution approving the relevant Non-exempt Continuing Connected Transaction and the applicable Annual Caps.

— 28 —

LETTER FROM THE BOARD

Save for IATA, being the party to the IATA agreement, and each of the Connected Airlines, being the parties receiving the services under the IATA Agreement, no other parties have material interests in the relevant Nonexempt Continuing Connected Transaction carried under the IATA Agreement. Accordingly, each of the Connected Airlines and their respective associates will abstain from voting at the EGM on the resolution approving the relevant Non-exempt Continuing Connected Transaction and the applicable Annual Caps.

REASONS FOR, BENEFITS AND ADVANTAGES OF THE CONTINUING CONNECTED TRANSACTIONS

After the Acquisition, the Enlarged Group will be principally engaged in provision of aviation information technology services in the PRC as well as provision of accounting, settlement and clearing services and information system development and support services to domestic and worldwide airline companies.

The entering into the various continuing connected transactions by the Enlarged Group as mentioned in “Part B — ACCA Continuing Connected Transactions” of this letter is in the ordinary and usual course of business of the Enlarged Group. The ACCA Continuing Connected Transactions have been and will be conducted in the ordinary and usual course of business of the Enlarged Group.

The Directors (including the independent non-executive Directors) are of the view that the ACCA Continuing Connected Transactions and the respective underlying agreements are entered into in the ordinary course of business, on normal commercial terms, which were arrived at after arm’s length negotiations and are fair and reasonable and in the best interests of the Company and the Shareholders as a whole.

INDEPENDENT BOARD COMMITTEE AND INDEPENDENT FINANCIAL ADVISER

The Company has established the Independent Board Committee, consisting of all the independent nonexecutive Directors, to advise the Independent Shareholders as to whether the terms of the Acquisition and the Non-exempt Continuing Connected Transactions (including the applicable Annual Caps) are fair and reasonable, whether such transactions are in the interests of the Company and its Shareholders as a whole and to advise Independent Shareholders how to vote at the EGM convened to consider, amongst other, the proposed Acquisition and the Non-exempt Continuing Connected Transactions.

The Company has appointed China Merchants as the independent financial adviser pursuant to Rule 14A.21 of the Listing Rules, to make recommendations to the Independent Board Committee and the Independent Shareholders as to whether the Acquisition and the Non-exempt Continuing Connected Transactions (including the applicable Annual Caps) are fair and reasonable, whether those transactions contemplated thereunder are in the interests of the Company and its Shareholders as a whole and to advise Independent Shareholders how to vote at the EGM.

— 29 —

LETTER FROM THE BOARD

GENERAL

Your attention is drawn to the letter from the Independent Board Committee as set out on pages 31 to 32 of this circular which contains its recommendation to the Independent Shareholders as to voting at the EGM.

Your attention is also drawn to the letter from China Merchants, the independent financial adviser to the Independent Board Committee and the Independent Shareholders, set out on pages 33 to 72 of this circular, which contains its advice to the Independent Board Committee and the Independent Shareholders in relation to the Acquisition and the Non-exempt Continuing Connected Transactions (including the applicable Annual Caps).

RECOMMENDATION

The Independent Board Committee, having taken into account the advice and recommendation of China Merchants, is of the view that the Acquisition and the Non-exempt Continuing Connected Transactions (including the applicable Annual Caps) are in the interests of the Company and the Shareholders as a whole and the terms of the Acquisition and the Non-exempt Continuing Connected Transactions (including the applicable Annual Caps) are fair and reasonable so far as the interests of the Independent Shareholders are concerned. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the resolutions to be proposed at the EGM to approve the Acquisition and the Non-exempt Continuing Connected Transactions (including the applicable Annual Caps).

ADDITIONAL INFORMATION

Your attention is drawn to the additional information set out in the appendices to this circular.

Yours faithfully, For and on behalf of the Board of TravelSky Technology Limited Xu Qiang Chairman

— 30 —

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [416 x 62] intentionally omitted <==

(Stock Code: 0696)

16 June 2008

To the Independent Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION AND CONTINUING CONNECTED TRANSACTIONS AND SPECIAL MANDATE TO ISSUE SHARES AND AMENDMENTS TO ARTICLES OF ASSOCIATION

INTRODUCTION

We refer to the circular dated 16 June 2008 issued by the Company (the “Circular”), of which this letter forms part. Terms defined in the Circular shall have the same meanings when used herein unless the context otherwise requires.

The Independent Board Committee has been established for the purpose of advising the Independent Shareholders in connection with the Acquisition and the Non-exempt Continuing Connected Transactions (and the applicable Annual Caps), details of which are set out in the “Letter from the Board” in the Circular. The Independent Board Committee comprises all independent non-executive Directors. China Merchants has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders regarding the Acquisition and the Non-exempt Continuing Connected Transactions (and the applicable Annual Caps). Details of the advice from China Merchants together with the principal factors and reasons taken into consideration in arriving at such advice, are set out on pages 33 to 72 of the Circular.

— 31 —

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

RECOMMENDATION

Having taken into account the advice and recommendation of China Merchants, we are of the view that the Acquisition and the Non-exempt Continuing Connected Transactions (and the applicable Annual Caps) are in the interests of the Company and the Shareholders as a whole and the Acquisition and the Non-exempt Continuing Connected Transactions (including the applicable Annual Caps) are fair and reasonable so far as the interests of the Independent Shareholders are concerned. Accordingly, we recommend the Independent Shareholders to vote in favour of the resolutions to be proposed at the EGM to approve the Acquisition and the Non-exempt Continuing Connected Transactions (including the applicable Annual Caps).

Yours faithfully, For and on behalf of

the Independent Board Committee of TravelSky Technology Limited Yick Wing Fat, Simon Yuan Yaohui

Chua Keng Kim Independent non-executive Directors

— 32 —

LETTER FROM CHINA MERCHANTS

The following is the text of the letter of advice from China Merchants to the Independent Board Committee and the Independent Shareholders, which has been prepared for the purpose of inclusion in this circular.

48th Floor, One Exchange Square, Central, Hong Kong

16 June 2008

TravelSky Technology Limited 18th-20th Floors, South Wing, Park C, Raycom InfoTech Park, No. 2, Ke Xue Yuan South Road, Haidian District, Beijing 100190, the PRC

To: the Independent Board Committee and the Independent Shareholders of TravelSky Technology Limited

Dear Sirs,

MAJOR AND CONNECTED TRANSACTIONS AND CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our appointment as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the Acquisition, the Non-exempt Continuing Connected Transactions and the applicable Annual Caps, details of which are contained in the letter from the Board (the “ Letter from the Board ”) of the circular dated 16 June 2008 (the “ Circular ”) issued by the Company to the Shareholders, of which this letter forms part. Terms used in this letter shall have the same meanings as those defined in the Circular unless the context otherwise requires.

As referred to in the Letter from the Board, the Acquisition constitutes a major transaction for the Company under Chapter 14 of the Listing Rules. As at the date of the Sale and Purchase Agreement, CTHC held approximately 22.35% of the equity interest of the Company. As such, the Acquisition also constitutes a connected transaction for the Company under the Listing Rules. Accordingly, the Acquisition and the issue of Consideration Shares are subject to the approval of the Independent Shareholders by way of poll at the EGM. CTHC and its associates, as well as the Domestic Shareholders (except CTHC and Shanxi Aviation Industry Company), all being the Connected Airlines or their respective associates and who are considered to be interested in the Acquisition by virtue of their business relationship with ACCA, will abstain from voting at the EGM on the resolutions approving the Acquisition and the issue of the Consideration Shares.

— 33 —

LETTER FROM CHINA MERCHANTS

As the relevant percentage ratios applicable to the proposed Annual Caps in respect of each of the transactions carried out by Eastern Airlines and Air China as well as the IATA Agreement, and the transactions contemplated thereunder, exceed 2.5% on an annual basis, such ACCA Continuing Connected Transactions are subject to approval by the Independent Shareholders by way of poll at the EGM.

It is also noted that the duration of the interline data exchange agreements entered into between ACCA and Xiamen Airlines and Hainan Airlines respectively, as well as the IATA Agreement are longer than three years. Pursuant to Rule 14A.35(1) of the Listing Rules, we have to explain to the Independent Board Committee and the Independent Shareholders as to whether such transactions are fair and reasonable and whether it is normal business practice for agreements of this type to be of such duration.

In our capacity as the independent financial adviser to the Independent Board Committee and the Independent Shareholders, our role is to provide you with an independent opinion and recommendation as to (1) whether the Acquisition is fair and reasonable so far as the Independent Shareholders are concerned, and in the interests of the Group and the Shareholders as a whole; (2) whether the Non-exempt Continuing Connected Transactions are (i) in the ordinary and usual course of business of the Group; (ii) on normal commercial terms; and (iii) fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Group and the Shareholders as a whole; and (3) whether the applicable Annual Caps are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Group and the Shareholders as a whole. In addition, we will explain why longer periods for the interline data exchange agreements entered into between ACCA and Xiamen Airlines and Hainan Airlines respectively, as well as the IATA Agreement are required, and advise whether it is normal business practice for agreements of such type to be of such duration.

BASIS OF OUR OPINION

In formulating our advice and recommendation, we have relied on the accuracy of the information and facts supplied, and the opinions expressed by the Group, the Directors and the Group’s management to us. We have assumed that all statements of belief and intention made by the Directors in the Circular were made after due enquiry. We have also assumed that all information, representations and opinion made or referred to in the Circular were true, accurate and complete at the time they were made and will continue to be true at the date of the EGM. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Group, the Directors and the Group’s management, and have been advised by the Directors that no material facts have been omitted from the information provided by or referred to in the Circular.

— 34 —

LETTER FROM CHINA MERCHANTS

In rendering our opinion, we have researched, analyzed and relied on information in relation to the Group, the Acquisition, the Non-exempt Continuing Connected Transactions and the applicable Annual Caps as set out below:

(i) the Sale and Purchase Agreement;
(ii) the annual report of the Company for the year ended 31 December 2006 (the “ Annual Report 2006 ”);
(iii) the Annual Report 2007;
(iv) the official website of the Company;
(v) the circular dated 7 April 2006 issued by the Company;
(vi) the circular dated 10 October 2007 issued by the Company; and
(vii) the Circular.

We have also researched, analyzed and relied on information as set out below:

(i) the report headed “Property Times - Office, Beijing, Q1 2008” published by DTZ, an independent property valuer, in April 2008 (the “ DTZ Report ”);
(ii) China Statistical Yearbook 2007 (《中國統計年鑑－2007年》) published by the National Bureau of Statistics of China (中華人民共和國國家統計局);
(iii) the report headed “Production statistics report for civil aviation airports in 2006” (《2006年民航機場生產統計公報》) published on the official website of CAAC on 21 March 2007;
(iv) the report headed “Production statistics report for civil aviation airports in 2007” (《2007年民航機場生產統計公報》) published on the official website of CAAC on 6 March 2008; and
(v) the statistics published on the official websites of Air China and Eastern Airlines.

We have assumed such information to be accurate and reliable and have not carried out any independent verification on the accuracy of such information. Such relevant information provides us with a basis on which we have been able to formulate our independent opinion.

We consider that we have reviewed sufficient information to reach an informed view, to justify our reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our recommendation. We also consider that we have performed all reasonable steps as required under the Rule 13.80 of the Listing Rules (including the notes thereto) to formulate our opinion and recommendation. We have not, however, conducted any form of in-depth investigations into the business affairs, financial position and future prospects of the Group and the parties to the Sale and Purchase Agreement or the Non-exempt Continuing Connected Transactions, nor carried out any independent verification of the information supplied, representations made or opinions expressed by the Group, the Directors and the Group’s management.

— 35 —

LETTER FROM CHINA MERCHANTS

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion and recommendation regarding the Acquisition, the Non-exempt Continuing Connected Transactions and the applicable Annual Caps, we have taken into account the following principal factors and reasons:

I. BACKGROUND

1. Information on the Group

The Group is principally engaged in provision of aviation information technology services in the PRC. As referred to in the Annual Report 2007, being a leading provider of information technology solutions for the China’s aviation and travel industry, the Group is at a core position along the value chain of China’s aviation and travel service distribution. While the Group provides advanced aviation information technology and extended services to the Chinese commercial airlines, it also distributes commercial airlines products and services to travel agents, travel service distributors, ticketing offices, corporate clients and individual consumers.

The Group’s turnover for each of the three years ended 31 December 2007 is set out below:

	Year	ended 31 December	ended 31 December
	2005	2006	2007
	(RMB’000)	(RMB’000)	(RMB’000)
	(Audited)	(Audited)	(Audited)
The Group’s turnover	1,496,784	1,711,705	2,001,903

Source: the Annual Report 2006 and the Annual Report 2007

The Group’s information in respect of bookings of seats of commercial airlines of the PRC for each of the four years ended 31 December 2007 is set out below:

Bookings of seats of commercial airlines of the PRC

==> picture [41 x 10] intentionally omitted <==

----- Start of picture text -----

Bookings
----- End of picture text -----

==> picture [241 x 7] intentionally omitted <==

----- Start of picture text -----

2004 2005 2006 2007 Year
----- End of picture text -----

Source: the official website of the Company

— 36 —

LETTER FROM CHINA MERCHANTS

From the year ended 31 December 2005 to the year ended 31 December 2007, (i) the Group’s audited turnover achieved a compound average growth rate (“ CAGR ”) of approximately 15.6% per annum; and (ii) the Group’s total bookings on seats of flights of commercial airlines of the PRC achieved a CAGR of approximately 16.0% per annum. As advised by the Directors, the growth in the Group’s turnover and total bookings of seats of flights of commercial airlines of the PRC were attributable to: (i) the rapid economic growth in the PRC; (ii) the increase of international trade between the PRC and other countries; and (iii) the growing aviation and tourist industries in the PRC.

2. Information on CTHC, ACCA and the Property

CTHC

As referred to in the Letter from the Board, CTHC is principally engaged in the management of state-owned assets and state-owned equity interests resulting from investment of the State in the group companies and its invested entities.

ACCA

As referred to in the Letter from the Board, ACCA is principally engaged in the provision of accounting, settlement and clearing services and information system and support services to commercial airlines and other aviation companies. The accounting, settlement and clearing services and system development and support services mainly include: (i) passenger and cargo revenue, mail revenue and airport miscellaneous charges accounting and settlement services; (ii) BSP services; and (iii) revenue accounting systems development and support services to the aviation industry in the PRC. ACCA is a major service provider in these areas in the PRC.

ACCA is also the BSP service provider of IATA BSP data processing service (“ BSP DPC ”), which is one of three big recognised BSP DPCs in the world and has become the largest provider of outsourced services and system products in revenue accounting and settlement in the airline industry of the PRC. Its major customers include 20 domestic passenger and cargo airlines, three regional and overseas commercial airlines, 47 local airports, government organisations and IATA.

— 37 —

LETTER FROM CHINA MERCHANTS

ACCA has a registered capital of RMB759,785,200 as at the Latest Practicable Date. The following table sets out the summary of results of the ACCA Group for each of the three years ended 31 December 2007:

	For the	year ended 31	December
	2005	2006	2007
	(RMB’000)	(RMB’000)	(RMB’000)
Revenue	245,707	255,926	273,485
Operating profit	63,003	71,362	91,205
Operating profit margin	25.6%	27.9%	33.3%
Financial income	20,775	25,078	11,649
Reversal of provision for
financial guarantee obligation	67,676	—	—
Profit before taxation	151,454	96,440	102,854
Taxation	(28,264)	(31,217)	(38,956)
Profit after taxation and attributable
to equity holder of ACCA	123,190	65,223	63,898
Net profit margin	50.1%	25.5%	23.4%

Source: Appendix II to the Circular

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LETTER FROM CHINA MERCHANTS

The following table sets out the financial position of the ACCA Group as at 31 December 2005, 2006 and 2007:

		As at 31 December
	2005	2006	2007
	(RMB’000)	(RMB’000)	(RMB’000)
ASSETS
Non-current assets
Property, plant and equipment	116,799	108,845	104,775
Other non-current assets	5,255	31,886	27,269
Sub-total	122,054	140,731	132,044
Current assets
Accounts receivables	12,264	8,081	10,765
Due from holding company and
fellow subsidiaries	588,965	540,675	20,803
Other receivables and
other current assets	463,049	316,779	423,252
Cash and cash equivalents	17,893	28,173	527,606
Sub-total	1,082,171	893,708	982,426
TOTAL ASSETS	1,204,225	1,034,439	1,114,470
LIABILITIES
Current liabilities	844,363	605,026	415,096
Non-current liabilities	11,410	13,360	—
TOTAL LIABILITIES	855,773	618,386	415,096
EQUITY	348,452	416,053	699,374

Source: Appendix II to the Circular

— 39 —

LETTER FROM CHINA MERCHANTS

From the year ended 31 December 2005 to the year ended 31 December 2007, (i) the turnover of ACCA increased from approximately RMB245.7 million to approximately RMB273.5 million; (ii) the consolidated operating profit of ACCA increased from approximately RMB63.0 million to approximately RMB91.2 million; and (iii) the consolidated net profit of ACCA decreased from approximately RMB123.2 million to approximately RMB63.9 million. The operating profit margin of ACCA widened from approximately 25.6% for the year ended 31 December 2005 to approximately 33.3% for the year ended 31 December 2007, which demonstrated ACCA’s stringent cost control during the three years ended 31 December 2007.

As referred to in the Letter from the Board, the steady increase in ACCA’s revenue was mainly attributable to the development of new markets and enrollment of new customers, as well as the expansion of the aviation industry in the PRC. However, as advised by the Group’s management, the decrease in net profit of ACCA during the year ended 31 December 2007 (as compared with that for the year ended 31 December 2006) was mainly attributable to (i) the write-down of deferred tax assets in the year ended 31 December 2007 as a result of the reduction in corporate income tax rate to which ACCA is subject from 33% to 25% from 2008 onwards; and (ii) the decrease of financial income from approximately RMB25.1 million for the year ended 31 December 2006 to approximately RMB11.6 million for the year ended 31 December 2007.

The current ratio of ACCA increased from approximately 1.28 as at 31 December 2005 to approximately 2.37 as at 31 December 2007. As advised by the Directors, the improvement of liquidity of ACCA was mainly attributable to decrease in other payables as the payment period for the settlement and clearing services of ACCA became shorter.

However, ACCA had other receivables of approximately RMB423 million as at 31 December 2007, which was significant as compared with its turnover for the year ended 31 December 2007 of approximately RMB273 million. As advised by the Directors, such receivables were incurred as a result of payments made by ACCA on behalf of customer airlines in the settlement and clearing process. We wish to draw the attention of the Independent Board Committee and the Independent Shareholders that ACCA had other payables of approximately RMB303 million as at 31 December 2007, being the amounts collected on behalf of customer airlines in the course of ACCA’s settlement and clearing services. As advised by the Directors, under the business model of ACCA, it is not uncommon for ACCA to incur significant amounts of other receivables and other payables over the course of its operation of the settlement and clearing services.

— 40 —

LETTER FROM CHINA MERCHANTS

The Property

As referred to in the Letter from the Board, the Property located at No. 11 Dongxing Li, Chaoyang District, Beijing, the PRC and comprises a parcel of land with a site area of approximately 5,332.54 sq.m. and eight buildings erected thereon with a total gross floor area of approximately 12,003.74 sq.m.. The Property has obtained the relevant licenses and land use approvals from the PRC authorities. The expiry date of the land use right is 29 June 2049.

As advised by the Directors, the Property is conveniently located at the hub of the central commercial district of Beijing which is one of the best sought after locations for many large corporations in the area. The Property has been used as a data centre by the Group and the Group has been paying a total rental and usage fees of approximately RMB16.6 million for the year ended 31 December 2007 for the leasing of the Property.

3. Information on Air China, Eastern Airlines, Hainan Airlines, Xiamen Airlines and the Connected Airlines

Set our below is the relationship of each of Air China, Eastern Airlines, Hainan Airlines, Xiamen Airlines as well as the Connected Airlines with the Group:

Entities Relationship with the Group Air China Air China is a subsidiary of China Holding, which in turn is a Shareholder and a promoter of the Company. Eastern Airlines Eastern Airlines is a subsidiary of Eastern Holding, which in turn is a Shareholder and a promoter of the Company.

Hainan Airlines Hainan Airlines is a Shareholder and a promoter of the Company. Xiamen Airlines Xiamen Airlines is a Shareholder and a promoter of the Company.

Connected Airlines Southern Airlines, Eastern Airlines, Air China, Macau Airlines, Xiamen Airlines, Hainan Airlines, Shenzhen Airlines, Shanghai Airlines, Shandong Airlines and Sichuan Airlines, all being connected persons of the Company.

— 41 —

LETTER FROM CHINA MERCHANTS

Set out below is the information on the number of passengers carried by each of Air China and Eastern Airlines from 2004 to 2007:

		Year	ended 31 December	ended 31 December
Airlines	2004	2005	2006	2007	CAGR
	(in	(in	(in	(in
	approximate	approximate	approximate	approximate
	million)	million)	million)	million)
Air China	24.50	27.69	31.50	34.83	12.4%
Eastern Airlines	17.70	24.29	35.02	39.16	30.3%

Source: The official websites of Air China and Eastern Airlines.

Set out below is the information on the revenue passenger kilometers (the “ RPK ”, being a measure of passengers, which is expressed as the product of number of paying passengers and kilometers flown) by each of Air China and Eastern Airlines from 2004 to 2007:

		Year	ended 31 December	ended 31 December
Airlines	2004	2005	2006	2007	CAGR
	(in	(in	(in	(in
	approximate	approximate	approximate	approximate
	million)	million)	million)	million)
Air China	46,644.50	52,404.80	60,322.10	66,986.10	12.8%
Eastern Airlines	27,572.30	36,371.02	50,243.05	57,182.56	27.5%

Source: The official websites of Air China and Eastern Airlines.

Based on the above, we noted that, from the year ended 31 December 2004 to the year ended 31 December 2007, (i) the CAGR of the number of passengers carried by each of Air China and Eastern Airlines ranged between approximately 12.4% per annum and 30.3% per annum; and (ii) the CAGR of the RPK of each of the Air China and Eastern Airlines ranged between approximately 12.8% per annum and 27.5% per annum. We consider that the aforesaid increases in the number of passengers carried by and RPK of the Air China and Eastern Airlines demonstrated the growth of the business of these two airlines.

— 42 —

LETTER FROM CHINA MERCHANTS

4. Economy and aviation industry in the PRC

Based on (i) the report headed “Production statistics report for civil aviation airports in 2007” 《( 2007年民航機場生產統計公報》) published on the official website of CAAC on 6 March 2008; and (ii) the report headed “Production statistics report for civil aviation airports in 2006” 《( 2006年民航機場生產統計公報》) published on the official website of CAAC on 21 March 2007, the number of passenger traffic of the PRC airports (measured by number of passengers) in the PRC increased from approximately 284.4 million for the year ended 31 December 2005 to approximately 387.6 million for the year ended 31 December 2007, representing a CAGR of approximately 16.7% per annum.

Based on China Statistical Yearbook 2007 (《中國統計年鑑－2007年》) published by the National Bureau of Statistics of China (中華人民共和國國家統計局), from 2000 to 2006, the PRC’s Gross Domestic Product increased from approximately RMB9,921 billion to approximately RMB21,087 billion, representing a CAGR of approximately 13.4% per annum.

Taking into account (i) the robust growth in the passenger traffic of the aviation industry in the PRC; (ii) the steady growth of the Gross Domestic Product in the PRC; and (iii) the CAGR of the Group’s turnover of approximately 15.6% per annum from the year ended 31 December 2005 to the year ended 31 December 2007, the Directors expect that the Group’s turnover will continue to achieve a stable growth in the coming years.

5. Status of Beijing office property market

Based on the DTZ Report, there was no significant change in market average rental of Beijing office market as compared with the fourth quarter of 2007. The overall market average sales price slightly increased by approximately 1.9% in the first quarter of 2008 to approximately RMB24,111 per sq. m..

In addition, based on the DTZ Report, it is forecasted that new supply of office of 104,000 sq. m. will enter into the Beijing market. We believe that such supply would be able to meet part of the demand for Beijing office in the second half of 2008.

— 43 —

LETTER FROM CHINA MERCHANTS

II. THE ACQUISITION

1. Reasons for and benefits of the entering into of the Sale and Purchase Agreement

As advised by the Directors, the earnings growth of the Group are affected by, among other things, (i) the growth in the civil aviation industry in the PRC; (ii) the business scale of the Group; and (iii) the cost control of the Group. We consider that the Acquisition would bring the following benefits to the Group after Completion:

(a) Profitability of ACCA

For the three years ended 31 December 2007, the ACCA Group made net profit after taxation of approximately RMB123.2 million, RMB65.2 million and RMB63.9 million respectively. The Directors consider that, given ACCA’s profitability in the three years ended 31 December 2007, the Acquisition would enable the Group to achieve accretion in earnings in the future.

(b) Vertical integration

As referred to in the Letter from the Board, the Group’s principal business activities focus on travel distribution and sales area, whilst ACCA provides mainly accounting and settlement services. The two businesses cover both upstream and downstream aviation and the production line of travel distribution information technology. The Directors consider that the Acquisition would facilitate the Group’s vertical integration, which in turn would improve the Group’s operational efficiency and cost control in the years to come.

(c) Business expansion with minimum execution and operational risk

The Directors believe that the Acquisition will complement the Group’s existing businesses by providing its customers with accounting, settlement and clearing services and information system and support services. As such, with its comprehensive and integrated services, the Group will be in a better position to serve its customers and broaden its revenue base. As the business model and mode of operations of the Group and ACCA are alike, and ACCA is wholly owned by CTHC, a substantial shareholder of the Company, it seems easier for the Group’s management to understand the mode of operations of ACCA. Thus, the Directors believe that the Group would not face much difficulty in running the operations of ACCA. Based on the foregoing, the Directors believe that, through the Acquisition, the Group would be able to achieve business expansion with minimum execution and operational risk.

The Directors believe that the above benefits, which are expected to be brought by the Acquisition, would enable the Group to achieve business expansion and accretion in earnings in the years to come.

— 44 —

LETTER FROM CHINA MERCHANTS

However, we wish to draw the attention of the Independent Board Committee and the Independent Shareholders of the following matters:

(a) Services agreement with ACCA vs. acquisition of ACCA

The Group could have made use of the processing capacity and other functions of ACCA by the entering into of ongoing services agreements/transactions between the Group and ACCA, instead of proceeding with the Acquisition. Notwithstanding that such ongoing services agreements/transactions would constitute continuing connected transactions for the Company under Chapter 14A of the Listing Rules, we believe that the relevant costs to be incurred in connection with the continuing compliance with Chapter 14A of the Listing Rules, together with the payments to be made by the Group to ACCA under the ongoing services agreements/transactions, are likely to be smaller than the aggregate amount of the consideration for ACCA and the possible capital expenditure to be incurred by ACCA in the years to come.

(b) Continuation of the leasing of the Property vs. acquisition of the Property

As referred to in the Letter from the Board, the Property has been used as a data centre by the Group and the Group has been paying a total rental and usage fees of approximately RMB16.6 million for the year ended 31 December 2007 for the leasing of the Property. The Group could have made use of the Property by the continuation of the leasing of it, instead of proceeding with the Acquisition.

The Group could have made use of the functions of ACCA (and the Property) by ways other than the Acquisition. However, we consider that the entering into of the Sale and Purchase Agreement is in the ordinary and usual course of business of the Group, and is in the interests of the Group and the Independent Shareholders as a whole, after taking into account: (i) the profitability of ACCA, which would enable the Group to achieve accretion in earnings in the future; (ii) the benefits which are expected to be brought by the vertical integration of the Group after Completion; and (iii) the minimum execution and operational risk in connection with the Acquisition.

2. The basis of the consideration for ACCA

Pursuant to the Sale and Purchase Agreement, the consideration for the entire registered capital of ACCA and the Property are RMB788 million (equivalent to approximately HK$878.62 million) and RMB212 million (equivalent to approximately HK$236.38 million) respectively, resulting in an aggregate consideration of RMB1 billion (equivalent to approximately HK$1.115 billion).

— 45 —

LETTER FROM CHINA MERCHANTS

(a) Comparable companies

We have assessed the consideration for ACCA against comparable companies in the sector in which ACCA is situated (the “ Comparable Companies ”). We have identified the following companies listed all over the world which are principally engaged in transaction processing, technology solutions or marketing of travel, transportation or leisure related service that are broadly comparable to ACCA. However, we have to point out that although the analysis of Comparable Companies can reflect current market conditions in the industry and provide a guideline for valuation, it does not include differences in accounting policies and standards as well as differences in local regulations, operating environment, business model, taxation and other unique characteristics of different companies. Although no adjustment has been made in respect of the above differences, we believe that following analysis of Comparable Companies still provides a meaningful benchmark to assess the consideration for ACCA given that the business nature of the Comparable Companies are broadly comparable to that of ACCA.

				Price to earnings	Price to book
				multiple (“PE”)	ratio (“PB”) as
				as at the Latest	at the Latest
Company name	Stock exchange	Ticker	Principle business	Practicable Date	Practicable Date
WNS (Holdings)	New York	WNS US	Being a shared services	41.22	3.46
Limited	Stock Exchange	Equity	center for airlines, its
			travel service portfolio
			includes processes which
			support air, car, hotel,
			marine and packaged
			travel services offered
			by its clients.
Kale Consultants	Bombay	KALE IN	Being a technology	3.06	0.88
Limited	Stock Exchange	Equity	solutions provider
			to the travel &
			transportation industry.
Viad Corp	New York	VVI US	It provides travel and	15.96	1.60
	Stock Exchange	Equity	recreation services in the
			United States and Canada.
SYKES Enterprises,	NASDAQ	SYKE US	It provides customer contact	20.98	2.37
Incorporated		Equity	management solutions to
			communications, financial
			services, healthcare,
			technology as well as
			transportation and
			leisure industries.

— 46 —

LETTER FROM CHINA MERCHANTS

ExlService	NASDAQ	EXLS US	It provides integrated	15.40	2.48
Holdings, Inc.		Equity	outsourcing solutions
			and management of
			complex transaction
			processing operations.
Brady PLC	London	BRY LN	It provides integrated	25.28	1.98
	Stock Exchange	Equity	solutions support to
			trading operations.
Average				20.32	2.13
Maximum				41.22	3.46
Minimum				3.06	0.88

Source: Bloomberg and the official websites of the Comparable Companies

We noted that the PE of the Comparable Companies range from approximately 3.06 to approximately 41.22 with an average of approximately 20.32 and the PB of the Comparable Companies range from approximately 0.88 to approximately 3.46, with an average of approximately 2.13.

Set out below are (i) the net profits after taxation of ACCA; (ii) net asset values of ACCA; and (iii) the relevant ratios as compared to the consideration for ACCA:

	Amount
Consideration for ACCA	RMB788,000,000	(a)
Net profit after taxation of ACCA
for the year ended 31 December 2007	RMB63,898,000	(b)
Net asset value of ACCA as at 31 December 2007	RMB699,374,000	(c)
Target PE	12.3	(a)/(b)
Target PB	1.1	(a)/(c)

From the above table, we noted that the ratio of the consideration for ACCA to the net profit after taxation of ACCA for the year ended 31 December 2007 (the “ Target PE ”) amounts to approximately 12.3. The ratio of the consideration for ACCA to the net asset value of ACCA as at 31 December 2007 (the “ Target PB ”) amounts to approximately 1.1.

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LETTER FROM CHINA MERCHANTS

(i) PE comparison

We noted that the Target PE of approximately 12.3 is lower than the average PE of the Comparable Companies of approximately 20.32. As such, we are of the view that the Target PE is favourable as compared with the PE of the Comparable Companies.

(ii) PB comparison

The Target PB of approximately 1.1 is lower than the average PB of the Comparable Companies of approximately 2.13. As such, we are of the view that the Target PB is favourable as compared with the average PB of the Comparable Companies.

Based on the above, we consider that the consideration for ACCA is fair and reasonable so far as the Independent Shareholders are concerned.

3. The basis of the consideration for the Property

As referred to in the Letter from the Board, the consideration of RMB212 million was arrived at after arm’s length negotiations between the parties to the Sale and Purchase Agreement, and was determined with reference to the latest appraised value of the Property as set out in the valuation report (the “ Valuation Report ”) in Appendix IV to the Circular.

Set out below is the comparison of the consideration for the Property of RMB212 million and the capital value of the Property as set out in the Valuation Report:

Amount

(A)	Capital value of the Property
	as set out in the Valuation Report	RMB208,325,000
(B)	Consideration for the Property	RMB212,000,000

Premium of the consideration for the Property RMB3,675,000 as compared with the valuation amount: (B) - (A) (or approximately 1.8%)

In assessing the fairness and reasonableness of the valuation of the Property, we have reviewed the Valuation Report as set out in Appendix IV to the Circular. We have also discussed with the independent valuer on the methodology adopted and assumptions used in arriving at its valuation of the Property in the Valuation Report. The independent valuer has valued the Property by the direct comparison approach assuming sale of the property interests in their existing state with the benefit of immediate vacant possession and by making reference to comparable sales transactions as available in the relevant market. As advised by the independent valuer, the above approach is in accordance with the HKIS Valuation Standards on Properties (1st Edition 2005) published by the Hong Kong Institute of Surveyors. In light of the above, we are of the opinion that the valuation methodology adopted by the independent valuer is in line with normal market practice.

— 48 —

LETTER FROM CHINA MERCHANTS

Based on the foregoing and the fact that the consideration for the Property is based on its capital value as set out in the Valuation Report, we concur with the Directors that the consideration for the Property is fair and reasonable so far as the Independent Shareholders are concerned.

4. The terms of the issue of the Consideration Shares

As advised by the Directors, they have considered other alternatives of payment for the consideration other than the issue of the Consideration Shares. However, the Directors consider that issue of new Domestic Shares is an acceptable means for satisfying the payment of the consideration, given that (i) debt financing such as bank borrowings or issue of debt securities would increase the gearing and finance costs of the Group, which may adversely affect the earnings of the Group; and (ii) the making of cash payment would reduce the Group’s cash and bank balances.

As referred to in the paragraph headed “Capital expenditure” of the section headed “Financial review” of the Annual Report 2007, the Board estimated that the Group’s planned capital expenditure for 2008 will amount to approximately RMB1,372 million, which will be mainly for the construction of a new operating center in Beijing, as well as development and gradual implementation of a new generation of aviation passenger service system and other new businesses. The sources of funding for the aforesaid capital expenditure will include internal cash flow generated from the Group’s operations. As such, the Directors consider that it is beneficial to the Group to minimize the cash outflow in connection with the Acquisition, including the payment of the consideration for ACCA and the Property.

Since the consideration will be satisfied by way other than cash payment, the Acquisition will have no impact on the cash and bank position of the Group immediately after Completion. On the other hand, the issue of the Consideration Shares will strengthen the capital base and financial position of the Group. In light of the above, we are of the view that it is in the interests of the Group and the Independent Shareholders as a whole to settle the consideration by the issue of the Consideration Shares.

(a) Issue Price of the Consideration Shares

As referred to in the Letter from the Board, the consideration shall be satisfied by issue of the Consideration Shares at the issue price (the “ Issue Price ”) of HK$6.39 per Consideration Share, which was determined after arm’s length negotiation between the Company and CTHC, with reference to the average closing price for the last 20 full trading days of the H Shares up to and including 2 May 2008, the last full trading day of the H Shares on the Stock Exchange prior to the entering into of the Sale and Purchase Agreement (the “ Last Full Trading Day ”). The Issue Price represents:

(i) a premium of approximately 2.57% over the closing price of HK$6.23 per H Share as quoted on the Stock Exchange on the Latest Practicable Date;
(ii) a discount of approximately 4.48 % to the closing price of HK$6.69 per H Share as quoted on the Stock Exchange on the Last Full Trading Day;

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LETTER FROM CHINA MERCHANTS

(iii) a discount of approximately 5.47% to the average closing price of HK$6.76 per H Share as quoted on the Stock Exchange for the last 5 trading days up to and including the Last Full Trading Day;
(iv) a discount of approximately 3.33% to the average closing price of HK$6.61 per H Share as quoted on the Stock Exchange for the last 10 trading days up to and including the Last Full Trading Day; and
(v) a premium of approximately 2.90% over the average closing price of HK$6.21 per H Share as quoted on the Stock Exchange for the last 30 trading days up to and including the Last Full Trading Day.

The chart below shows the daily closing prices of the H Shares traded on the Stock Exchange from 3 May 2007 (being one year immediately prior to the Last Full Trading Day) up to and including 2 May 2008, the Last Full Trading Day (the “ Review Period ”):

==> picture [355 x 178] intentionally omitted <==

----- Start of picture text -----

Price
(HK$) Issue Price = HK$6.39
----- End of picture text -----

Source: Bloomberg

During the Review Period, the Shares were traded with closing prices in the range of HK$9.35 per Share to HK$5.50 per Share, with an average of closing prices of approximately HK$7.315 per Share for the Review Period. As indicated from the chart above, the Issue Price, which was determined by reference to the average closing price of the H Shares for the last 20 full trading days up to and including the Last Full Trading Day, is within the range of the closing prices of the Shares traded during the Review Period.

— 50 —

LETTER FROM CHINA MERCHANTS

(b) Comparable of the Issue Price with comparable issues

In assessing the fairness and reasonableness of the Issue Price, we have compared the Issue Price with other issues of H shares or domestic shares, which have been announced by companies whose H shares are listed on the main board of the Stock Exchange from 1 June 2007 up to and including the Latest Practicable Date (the “ Comparable Issues ”), irrespective of whether such issues proceeded or has proceeded to completion or not. In this connection, we have, to the best of our knowledge, identified a total of ten Comparable Issues, details of which are set out as follows:

						(Discount)/	(Discount)/
						premium	premium
						of the issue	of the issue
						price (to)/over	price (to)/over
						the average	the average
					(Discount)/	closing price	closing price
					premium	for the last	for the last
					of the issue	5 consecutive	10 consecutive
					price (to)/over	trading days	trading days
					the closing	up to and	up to and
					price on the	including the	including the
					last full	last full	last full
					trading day	trading day	trading day
					before the	before the	before the
Date of		Stock	Nature of issue	Issue	respective	respective	respective
announcement	Name of issuer	code	of H shares	price	announcement	announcement	announcement
				(HK$)
9 August 2007	China National	3323	Placing of new	17.80	(1.98)%	(1.98)%	2.36%
	Building Material		H shares
	Company Limited
5 September 2007	Shandong Molong	568	Placing of new	1.70	(5.56)%	(2.30)%	(2.86)%
	Petroleum Machinery		H shares
	Company Limited
20 September 2007	Zhejiang Yonglong	8211	Placing of new	0.55	(9.84)%	(7.72)%	(8.49)%
	Enterprises Co., Ltd.		H shares
10 October 2007	First Tractor	38	Placing of new	3.95	(3.89)%	(4.36)%	(7.28)%
	Company Limited		H shares
9 November 2007	China Eastern Airlines	670	Subscription for	3.80	(50.59)%	(53.20)%	(53.03)%
	Corporation Limited		new H shares

— 51 —

LETTER FROM CHINA MERCHANTS

18	December 2007	CATIC Shenzhen	161	Placing of new	6.00	(6.98)%	(6.69)%	(5.21)%
		Holdings Limited		H shares
29	February 2008	Tianjin Tianlian	8290	Placing of new	1.90	(7.77)%	(4.71)%	(4.52)%
		Public Utilities		H shares
		Company Limited
28	March 2008	China Communications	552	Placing of new	5.25	(0.57)%	(0.19)%	(5.91)%
		Services Corporation		H shares
		Limited
22	May 2008	Zhejiang Glass	739	Placing of new	6.05	(14.18)%	(13.79)%	(14.35)%
		Company Limited		H shares
30	May 2008	Beijing Capital	694	Placing of new	7.45	(6.88)%	(6.76)%	(8.70)%
		International		H shares
		Airport Co., Ltd.
		Highest				(0.57)%	(0.19)%	2.36%
		Lowest				(50.59)%	(53.20)%	(53.03)%
		Average				(10.82)%	(10.17)%	(10.80)%
		Highest (excluding China	Eastern Airlines Corporation		Limited)	(0.57)%	(0.19)%	2.36%
		Lowest (excluding China Eastern Airlines Corporation Limited)				(14.18)%	(13.79)%	(14.35)%
		Average (excluding China	Eastern Airlines Corporation		Limited)	(6.41)%	(5.39)%	(6.11)%
		The issue of the Consideration Shares				(4.48)%	(5.47)%	(3.33)%

Source: the website of the Stock Exchange

As shown in the above table, the issue prices of the Comparable Issues were set at discounts to their respective closing prices on the last full trading day immediately prior to the release of the relevant announcements, with an average of discount of approximately 10.82%. We note that the Issue Price was at a discount of approximately 4.48% to the closing price of the Shares as at the Last Full Trading Day, which is favourable as compared with the aforesaid average.

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LETTER FROM CHINA MERCHANTS

In addition, as shown in the above table, (i) the issue prices of the Comparable Issues ranged between a discount of approximately 0.19% and a discount of approximately 53.20% (the “ Five-Day Range ”), as compared with the average closing price per share on the last five trading days up to and including the last trading day before the respective announcements; and (ii) the issue prices of the Comparable Issues ranged between a premium of approximately 2.36% and a discount of approximately 53.03% (the “ 10-Day Range ”), as compared with the average closing price per share on the last 10 trading days up to and including the last trading day before the respective announcements.

We noted that (i) the discount of the Issue Price to the average closing price for the five trading days up to and including the Last Full Trading Day of approximately 5.47% was within the Five-Day Range; and (ii) the discount of the Issue Price to the average closing price for the 10 trading days up to and including the Last Full Trading Day of approximately 3.33% was also within the 10-Day Range.

We wish to draw the attention of the Independent Board Committee and the Independent Shareholders that the issue price of H shares of Eastern Airlines (being a connected person of the Company) was at significant discounts of more than 50% to each of (i) the closing price on the last full trading day immediately prior to the release of the relevant announcement; (ii) the average closing price per share on the last five trading days up to and including the last trading day before the relevant announcement; and (iii) the average closing price per share on the last 10 trading days up to and including the last trading day before the relevant announcement. Thus, we consider that the H share issue of Eastern Airlines, which is in sharp contrast as compared with other cases of the Comparable Issues, may be an exceptional case for the purpose of assessing the fairness and reasonableness of the Issue Price.

Should we exclude the H share issue of Eastern Airlines, we noted that:

(i) the average discount of the issue prices of the Comparable Issues (save for Eastern Airlines) to their respective closing prices on the last full trading day immediately prior to the release of the relevant announcements was approximately 6.41% (the “ Revised Last Day Average ”) ;
(ii) the average discount of the issue prices of the Comparable Issues (save for Eastern Airlines) to the average closing price per share on the last five trading days up to and including the last trading day before the respective announcements was approximately 5.39% (the “ Revised Five-Day Average ”); and
(iii) the average discount of the issue prices of the Comparable Issues (save for Eastern Airlines) to the average closing price per share on the last 10 trading days up to and including the last trading day before the respective announcements was approximately 6.11% (the “ Revised 10-Day Average ”).

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LETTER FROM CHINA MERCHANTS

As illustrated above, we noted that:

(1) the Issue Price was at a discount of approximately 4.48% to the closing price of the Shares as at the Last Full Trading Day, which is favourable as compared with the Revised Last Day Average;
(2) the Issue Price was at a discount of approximately 5.47% to the average closing price for the five trading days up to and including the Last Full Trading Day, which is unfavourable as compared with the Revised Five-Day Average; and
(3) the Issue Price was at a discount of approximately 3.33% to the average closing price for the 10 trading days up to and including the Last Full Trading Day, which is favourable as compared with the Revised 10-Day Average.

Notwithstanding the unfavourable comparison as illustrated in (2) above, we wish to draw the attention of the Independent Board Committee and the Independent Shareholders that:

(a) the Issue Price was at a discount of approximately 4.48% to the closing price of the Shares as at the Last Full Trading Day, which was within the range of discounts of the issue prices of the Comparable Issues (save for Eastern Airlines) to their respective closing prices on the last full trading day immediately prior to the release of the relevant announcements, which ranged between a discount of approximately 0.57% and a discount of approximately 14.18%; and
(b) the Issue Price was at a discount of approximately 5.47% to the average closing price for the five trading days up to and including the Last Full Trading Day, which was within the range of discounts of the issue prices of the Comparable Issues (save for Eastern Airlines) to the average closing price per share on the last five trading days up to and including the last trading day before the respective announcements, which ranged between a discount of approximately of 0.19% and a discount of approximately 13.79%.

Based on the foregoing, we are of the opinion that the Issue Price is fair and reasonable and in-line with other issues of H shares in the securities market of Hong Kong as announced by issuers since 1 June 2007.

Having considered the principle factors and reasons above, we consider the Issue Price is fair and reasonable so far as the Independent Shareholders are concerned.

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LETTER FROM CHINA MERCHANTS

5. Conditions precedent to the Sale and Purchase Agreement

Completion shall be conditional upon, among other things, the following conditions precedent being fulfilled or waived:

(i) approval of the Sale and Purchase Agreement and the transactions contemplated thereunder by the Independent Shareholders at the EGM;
(ii) approval from all relevant PRC government authorities for the transactions contemplated under the Sale and Purchase Agreement and compliance with all PRC laws and regulations for the Acquisition;
(iii) the representations and warranties in the Sale and Purchase Agreement being true and correct and not misleading in any material respects;
(iv) the Company being satisfied with the results of the due diligence investigation in respect of ACCA and the Property; and
(v) the Company having obtained a legal opinion issued by a PRC law firm of lawyers in respect of the legality and enforceability of the Acquisition.

The Company has the right to waive whole or part of the conditions (iii) to (v) above. As referred to in the Letter from the Board, save for condition (i) above, all the other conditions have been fulfilled as at the Latest Practicable Date.

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LETTER FROM CHINA MERCHANTS

6. Potential dilution effect on the shareholding interests of the Independent Shareholders upon Completion

The issue of the Consideration Shares would dilute the interest of the Independent Shareholders in the issued share capital of the Company. Set out below is the shareholding structure of the Company as at the Latest Practicable Date and immediately after Completion (assuming that there is no other change in the issued share capital of the Company save for the issue of the Consideration Shares between the Latest Practicable Date and the date of Completion):

Name of Shareholder Class of Shares CTHC Domestic shares Southern Holding Domestic shares Eastern Holding Domestic shares China Holding Domestic shares Other domestic Shareholders Domestic shares Public H shares Total	As at the Latest Practicable Date Percentage of Number total issued of Shares share capital 396,993,000 22.35% 232,921,000 13.11% 218,829,000 12.32% 178,867,000 10.07% 126,997,000 7.15% 621,708,000 35.00% 1,776,315,000 100.00%	Immediately after Completion Percentage of Number total issued of Shares share capital 571,484,393 29.29% 232,921,000 11.94% 218,829,000 11.22% 178,867,000 9.17% 126,997,000 6.51% 621,708,000 31.87% 1,950,806,393 100.00%	Immediately after Completion Percentage of Number total issued of Shares share capital 571,484,393 29.29% 232,921,000 11.94% 218,829,000 11.22% 178,867,000 9.17% 126,997,000 6.51% 621,708,000 31.87% 1,950,806,393 100.00%
			100.00%

Based on the above, the shareholding interest of the existing Independent Shareholders (as represented by the public Shareholders) will be diluted from approximately 35.00% to approximately 31.87% as a result of the issue of the Consideration Shares. As advised by the Directors, although the aggregate percentage shareholding of the Independent Shareholders will be diluted as a result of the Acquisition, it should be noted that there would be favorable impact on the financial performance of the Group as ACCA is expected to generate new income stream to the Group.

However, we wish to draw the attention of the Independent Board Committee and the Independent Shareholders that, as referred to in the Annual Report 2007, the cash and bank balances of the Group amounted to approximately RMB3 billion as at 31 December 2007, whilst the Group had no bank borrowings as at 31 December 2007. The Group could have considered the alternative of financing the payment of the consideration by cash, instead of the issue of the Consideration Shares.

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LETTER FROM CHINA MERCHANTS

As referred to in the Letter from the Board, the Company considered that the payment of consideration for the Acquisition was more appropriate by way of issuing the Consideration Shares as opposed to payment by cash, because based on the related regulations by the Stateowned Assets Supervision and Administration Commission of the State Council and the legal opinion provided by the PRC lawyer of the Company, cash payment made by the Company for this transaction would trigger the requirement for an open tender under the applicable PRC laws. The Directors confirmed that all necessary approvals from the relevant PRC authorities for the issue of Consideration Shares by the Company have been obtained under the applicable PRC laws. Based on the aforesaid, we consider that the issue of the Consideration Shares is acceptable so far as the interest of the Independent Shareholders is concerned.

7. Financial impacts on the Group

As referred to in the Letter from the Board, immediately after Completion, ACCA will become a wholly-owned subsidiary of the Company. As advised by the Directors, the Acquisition would bring the following financial effects on the Group:

(a) Earnings

As referred to in the Annual Report 2007, the Group recorded an audited consolidated net profit attributable to the Shareholders of approximately RMB631.0 million for the year ended 31 December 2007. Immediately after Completion, the results of ACCA will be consolidated into the accounts of the Group.

As referred to in the Letter from the Board, assuming the Acquisition had been completed on 1 January 2007, the Group’s consolidated profit attributable to the Shareholders would be increased to approximately RMB696.8 million, representing an increase of approximately 10.4% as compared with the Group’s audited consolidated profit attributable to the Shareholders for the year ended 31 December 2007 of approximately RMB631.0 million.

(b) Net assets value

As referred to in the Annual Report 2007, the audited consolidated net asset value of the Group as at 31 December 2007 were approximately RMB4,418.7 million, or approximately RMB2.49 per Share (based on 1,776,315,000 Shares in issue as at 31 December 2007).

Based on the unaudited proforma consolidated statement of assets and liabilities of the Enlarged Group as set out in Appendix III to the Circular, the consolidated net asset value of the Group would increase to approximately RMB5,315.6 million immediately after Completion, or approximately RMB2.72 per Share (based on 1,950,806,393 Shares in issue as a result of the issue of 174,491,393 Consideration Shares).

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LETTER FROM CHINA MERCHANTS

(c) Gearing

As referred to in the Annual Report 2007, (i) the Group’s aggregate cash and bank balance (which comprised cash and cash equivalents and short-term bank deposits) amounted to approximately RMB3,053.1 million as at 31 December 2007, whilst its bank borrowings was nil as at 31 December 2007. Based on the aforesaid, the Group’s net borrowings to equity ratio (being bank borrowings less cash and bank balance, expressed as a percentage of net assets value) was nil as at 31 December 2007.

Based on the unaudited proforma consolidated statement of assets and liabilities of the Enlarged Group as set out in Appendix III to the Circular, the Group’s bank borrowings would remain nil immediately after Completion. Based on the aforesaid, the Group’s net borrowings to equity ratio would remain nil after Completion.

(d) Working capital

Since the Consideration will only be satisfied by the issue of the Consideration Shares, the Directors expect that there will be no material adverse impact on the Group’s working capital position immediately after Completion.

Based on the above, the Directors expect that the Acquisition would not bring any material adverse impact on the Group’s financial position.

8. Other factors in connection with the Acquisition

In assessing the Acquisition as a whole, we have also considered other factors as set out below:

(a) Requirement for capital expenditure in respect of the continued improvement of information technology systems of ACCA

The business of ACCA is highly dependent on the ability of its information technology (“ IT ”) systems to process a large number of transactions across numerous institutions and airlines in a timely manner. ACCA’s ability to remain competitive will depend in part on its ability to upgrade its IT systems in a timely and cost-effective manner. As advised by the Directors, ACCA is making, and intend to continue to make, investments to improve or upgrade its IT systems. The Group is required to incur additional capital expenditure in respect of the continued improvement of IT systems of ACCA.

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LETTER FROM CHINA MERCHANTS

(b) Realization of objectives in connection with the Acquisition

Through the Acquisition, it is the Group’s intention to achieve a number of objectives, including but without limitation to achievement of cost savings, improvement of customer service, improvement of internal process efficiency, enhancement of existing infrastructure of the Group as well as increase in utilisation of infrastructure assets of the Group. However, there is no assurance that the Group will be able to achieve the aforesaid objectives after Completion.

Notwithstanding the above, we consider that the Acquisition is fair and reasonable so far as the Independent Shareholders are concerned, taking into account the benefits which are expected to be brought by the Acquisition as detailed in section II.1 above. Overall, we are of the view that the Acquisition (including the issue of the Consideration Shares) is on normal commercial terms, is fair and reasonable so far as the Independent Shareholders are concerned and is in the interests of the Group and the Shareholders as a whole.

III. THE ACCA CONTINUING CONNECTED TRANSACTIONS

1. Background of the Non-exempt Continuing Connected Transactions

As referred to in the Letter from the Board, prior to the Acquisition, ACCA had entered into various arrangements with a number of connected persons of the Company, including provision of property management services, systems development and support services, passenger and cargo revenue accounting and settlement services, domestic mail revenue accounting and settlement services and BSP services.

As referred to in the Letter from the Board, the ACCA Continuing Connected Transactions in respect of Eastern Airlines and Air China, as well as the IATA Agreement are subject to the approval by Independent Shareholders at the EGM by way of poll. Based on the information in the Letter from the Board, set out below are the details on the Non-exempt Continuing Connected Transactions:

Other party Date Duration Details

Type 1 — System development and support services

Revenue accounting systems development and support services

Eastern Airlines 22 February 2008 1 January 2008 to Provision of computer system 31 December 2009 application development and support services to various airline companies.

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LETTER FROM CHINA MERCHANTS

Air China 28 February 2008 1 January 2008 to The main products provided by 31 December 2009 ACCA include self-developed computer application systems in respect of both international and domestic passengers revenue accounting system, international and domestic cargo revenue accounting system, mail revenue accounting system, airport miscellaneous charges accounting system, data service system, international and domestic clearing and settlement system etc. Such system services mainly include application and operation support, customized development, system implementation, business research and system development.

Type 2 — Passenger and cargo revenue accounting and settlement services

Eastern Airlines	22 February 2008	1 January 2008 to	Provision of data capturing, sales
		31 December 2009	reporting control, sales auditing,
			prorating, uplift processing,
Air China	28 February 2008	1 January 2008 to	outward and inward billing,
		31 December 2009	accounting, coupon matching,
			account management and
			management information reporting
			services for passenger and cargo
			(as the case may be) revenue
			accounting and settlement
			services.

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LETTER FROM CHINA MERCHANTS

Type 4 — BSP services

IATA as authorised 27 March 2008 27 March 2008 to Provision of BSP Services to IATA by the Connected 31 March 2017 in the PRC, Hong Kong, Macau Airlines and Chinese Taipei. BSP is a system designed to facilitate and simplify the selling, reporting and remitting procedures of IATA Accredited Passenger Sales Agents, as well as to improve financial control and cash flow for the airline companies. ACCA has contracted with IATA to supply such services for additional territories which is expected to be commenced in January 2010, such services will include supply of software application support, development and maintenance services.

2. Background of the interline data exchange agreements entered into between ACCA and Xiamen Airlines and Hainan Airlines respectively

It is also noted that the duration of the interline data exchange agreements entered into between ACCA and Xiamen Airlines and Hainan Airlines respectively, as well as the IATA Agreement (together, the “ Longer Duration Transactions ’) are longer than three years. Pursuant to Rule 14A.35(1) of the Listing Rules, we have to explain to the Independent Board Committee and the Independent Shareholders as to whether such transactions are fair and reasonable and whether it is normal business practice for agreements of this type to be of such duration.

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LETTER FROM CHINA MERCHANTS

Based on the information in the Letter from the Board, set out below are the details on the interline data exchange agreements entered into between ACCA and Xiamen Airlines and Hainan Airlines respectively:

Other party Date Duration Details Xiamen Airlines 26 September 2006 1 October 2006 to Mainly include receiving 31 December 2009 interline outward billing data from various airline companies, Hainan Airlines 18 September 2006 1 October 2006 to identifying the airlines to be 31 December 2009 charged for receipt of such services (“ Billed Airlines ”), consolidating the data from all of the airline companies on behalf of the Billed Airlines and delivering the data to such Billed Airlines.

3. The terms of the Non-exempt Continuing Connected Transactions

Set out below is a summary of the pricing bases for the Non-exempt Continuing Connected Transactions:

Type Pricing basis Revenue accounting The system service fee is charged on a monthly basis and is systems development based on the agreement signed between the provider and the and support services users. There are several levels of charge rates based on transaction volume which are specified in the relevant agreement. The charge amount is determined by reference to the price and size of the relevant services provided. Charge rate depends on transaction volume level - the higher the transaction volume, the lower the rates to be charged by the provider.

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LETTER FROM CHINA MERCHANTS

Passenger and cargo revenue accounting and settlement services

The fees are charged by reference to the rate and rules prescribed in the relevant document issued by the industry regulatory authorities. The prices of the provision of the services are specified in the relevant agreement which is based on the calculation of (i) the percentage rate of the total accounting amount; and (ii) the transaction volume times unit price.

BSP services

Fees are charged base on the basis of a “Standard Charging Unit” (as defined in the IATA Agreement) per processing transaction. The Standard Charging Unit payable by IATA is defined in Renminbi for transactions in the PRC, in Hong Kong Dollars for Hong Kong, Macau and in United Stated Dollars for other territories, subject to exchange rate fluctuation which will be adjusted in accordance with the terms of the IATA Agreement.

To the best knowledge, information and belief of the Directors, ACCA is currently the only provider in the PRC in respect of accounting, settlement and clearing services and information system and support services to commercial airlines and other aviation companies. In addition, the Directors advised that:

(i) the other customers of ACCA for revenue accounting systems development and support services, as well as passenger and cargo revenue accounting and settlement services include other domestic airlines in the PRC, being Southern Airlines, Macau Airlines, Xiamen Airlines, Hainan Airlines, Shenzhen Airlines, Shanghai Airlines, Shandong Airlines and Sichuan Airlines, all of which are also connected persons of the Company;
(ii) ACCA also provides other airlines (being independent third parties) with services (the “ Similar Services ”) which are similar to the revenue accounting systems development and support services as well as passenger and cargo revenue accounting and settlement services; and
(iii) ACCA provided BSP services to the members of BSP services, including but not limited to the Connected Airlines.

In light of the above, save for the Similar Services as mentioned in (ii) above, the Directors are not aware of any other comparable agreements in the PRC market entered into by third parties (being parties other than ACCA or the Connected Airlines) to which reference can be made regarding the pricing bases for the revenue accounting systems development and support services, as well as the passenger and cargo revenue accounting and settlement services.

We have reviewed the agreements in respect of the Similar Services, and we noted that pricing bases for the revenue accounting systems development and support services, as well as passenger and cargo revenue accounting and settlement services, were comparable to the Similar Services. Accordingly, we consider that the pricing bases of the revenue accounting systems development and support services, as well as the passenger and cargo revenue accounting and settlement services, are acceptable.

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LETTER FROM CHINA MERCHANTS

In respect of the BSP services, based on the information provided by the Group’s management to us, the pricing bases for the BSP services charged by IATA to the Connected Airlines are the same as those charged by IATA to other members of the BSP services, being airlines which are independent third parties. As such, we consider that the terms of the BSP services are fair and reasonable so far as the Independent Shareholders are concerned.

Overall, we consider that the terms of the Non-exempt Continuing Connected Transactions are (i) in the ordinary and usual course of business of the Group; (ii) on normal commercial terms; and (iii) fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Group and the Independent Shareholders as a whole.

4. The period of the Longer Duration Transactions

As referred to in the Letter from the Board, (i) the durations of the interline data exchange agreements entered into between ACCA and Xiamen Airlines and Hainan Airlines respectively are 39 months, which is longer than three years; and (ii) the IATA Agreement is from 27 March 2008 to 31 March 2017, which is slightly more than nine years.

As advised by the Directors, the Company has entered into certain airline services agreements with Hainan Airlines, China Eastern Air Wuhan Company Limited, Shanghai Airlines, Southern Airlines and Eastern Airlines of more than three years, details of which were set out in the circulars dated 7 April 2006 and 10 October 2007 issued by the Company (the “ Promoters Airline Services Transactions ”). As advised by the Directors, the nature of the services provided in such transactions related with IT for civil aviation companies, which is comparable to those of the transactions contemplated under Longer Duration Transactions. As such, we consider that the aforesaid transactions, being IT services provide by the Group to other airlines in the PRC, are broadly comparable to the Longer Duration Transactions, and the period of such transactions are suitable for our assessment of the fairness and reasonableness of the period of the Longer Duration Transactions.

Set out below is a summary of the terms of the airline services agreement entered between the Company and the airline services promoters:

Name of airline	Date of agreement/	Number of years
services promoter	renewal agreement	of term of agreement
Hainan Airlines	25 October 2004	Five
China Eastern Air Wuhan
Company Limited	1 November 2004	Five
Shanghai Airlines	5 November 2004	Five
Southern Airlines	23 January 2006	Four
Eastern Airlines	30 June 2007	Four and a half
		(counting from the
		date of agreement to
		31 December 2011)

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LETTER FROM CHINA MERCHANTS

As illustrated above, each of Hainan Airlines, China Eastern Air Wuhan Company Limited, Shanghai Airlines, Southern Airlines and Eastern Airlines has entered into similar arrangements with the Group of more than three years. As such, we consider that it is not uncommon for the Group to enter into agreements with airlines in the PRC in relation to provision of IT services for a period of more than three years.

As advised by the Directors, the Group is currently the only provider in the PRC in respect of the aviation information technology for PRC domestic airlines so far as the Directors are aware. As such, the Directors are not aware of any other comparable agreements in the PRC market entered into by independent third parties, to which reference can be made regarding whether or not duration in excess of three years is within the normal business practice of the industry in the PRC. In light of the above, we conducted a research of international IT services providers which have provided IT services to airlines, so that we would be able to assess the fairness and reasonableness of the period of the Longer Duration Transactions, and formulate our opinion with regard to whether a term in excess of three years is in line with the normal business practice.

Through our searches via the Internet and Bloomberg, we have, to the best of our knowledge and information, identified seven international IT service providers which are also engaged in the business of the Group, i.e. provision of IT services to airline operators. Out of the identified international IT service providers, we noted that Electronic Data Services Corporation, International Business Machines Corporation and Satyam Computer Services Limited have provided IT services to airlines for a term of more than three years (together, the “ International IT Transactions ”). We consider that the International IT Transactions are broadly comparable to the Longer Duration Transactions, and the period of the International IT Transactions are suitable for our assessment of the fairness and reasonableness of the period of the Longer Duration Transactions. Set out below is a summary of the terms of the International IT Transactions:

		Year of		Term of
IT service provider	Principal business activities	agreement	Airline	agreement
				(years)
Electronic Data	A global technology services	2006	United Airlines	10
Systems Corporation	company and is listed on the
(Note 1)	New York Stock Exchange.
	It delivers a broad portfolio
	of information technology
	services to clients in many
	different industries.
International Business	A global integrated information	2006	Delta Air	Seven
Machines Corporation	technology provider, with		Lines, Inc.
(Note 2)	expertise in hardware,
	software and services. It is
	listed on the New York
	Stock Exchange.

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LETTER FROM CHINA MERCHANTS

Satyam Computer A global consulting and IT 2006 Qantas Airways Seven Services Limited services company, and is Limited (Note 3) listed on the New York Stock Exchange. It provides a range of expertise, such as IT outsourcing and systems integration.

Notes:

The transaction was disclosed on the website of Electronic Data Systems Corporation (www.eds.com) in the article headed “EDS signs contract with United Airlines to upgrade computer systems and service to reduce IT costs” dated 17 January 2006.
The transaction was disclosed on Bloomberg in the article headed “IBM wins 7-year agreement to run Delta’s reservations system” dated 21 August 2006.
The transaction was disclosed on the website of Satyam Computer Services Limited (www.satyam.com) in the article headed “Satyam wins multi-million dollar Qantas deal” dated 9 November 2006.

As illustrated above, each of Electronic Data Services Corporation, International Business Machines Corporation and Satyam Computer Services Limited has entered into similar arrangements with airlines of more than three years. In addition, the longest period of the Longer Duration Transactions, being the period of the IATA Agreement which would be from 27 March 2008 to 31 December 2017, is shorter than the longest period of the International IT Transactions (being 10 years).

We noted that the period of the IATA Agreement, being slightly more than nine years, is longer than the periods of the Promoters Airline Services Transactions, which ranges between four years and five years. Notwithstanding the fact that only three international IT service providers have provided IT services to airlines for a term of more than three years, we consider that the relatively long duration of the IATA Agreement is acceptable, as the period of the IATA Agreement, being slightly more than nine years, is shorter than the longest period of the International IT Transactions (being 10 years).

We also noted that the duration of the interline data exchange agreement entered into between ACCA and Shanghai Airlines is three years, which is shorter than the durations of the interline data exchange agreements entered into between ACCA and Xiamen Airlines and Hainan Airlines respectively (being 39 months) by three months. We consider that such difference between the durations of the interline data exchange agreements is acceptable because:

(i) the difference in duration is only three months, which is relatively short as compared with three years;
(ii) the interline data exchange agreement entered into between ACCA and Shanghai Airlines, as well as the interline data exchange agreements entered into between ACCA and Xiamen Airlines and Hainan Airlines respectively, will all expire on the same date, i.e. 31 December 2009; and
(iii) the durations of the interline data exchange agreements entered into between ACCA and Xiamen Airlines and Hainan Airlines respectively (being 39 months) is shorter than the periods of the Promoters Airline Services Transactions, which ranged between four years and five years.

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LETTER FROM CHINA MERCHANTS

Based on the aforesaid, we consider that (i) the longer period for the Longer Duration Transactions is required and it is normal business practice for contracts of IT services provided to airlines to be of such duration; and (ii) the term of the Longer Duration Transactions of more than three years, which would enable the Group to derive revenue over a longer period, is acceptable.

IV. THE ANNUAL CAPS

1. The applicable Annual Caps for the Non-exempt Continuing Connected Transactions

For the easier reference of the Independent Shareholders, set out below is a summary of the applicable Annual Caps for the Non-exempt Continuing Connected Transactions for the three years ending 31 December 2010, as classified by the nature of transactions:

	Applicable Annual	Applicable Annual	Caps
	2008	2009	2010
	(RMB’000)	(RMB’000)	(RMB’000)
Revenue Accounting Systems
Development and Support
Services to be entered into
by Eastern Airlines	45,931	55,117	66,141
Revenue Accounting Systems
Development and Support
Services to be entered into
by Air China	29,314	35,176	42,212
Passenger and Cargo Revenue
Accounting and Settlement
Services to be entered into
by Eastern Airlines	18,276	21,931	26,317
Passenger and Cargo Revenue
Accounting and Settlement
Services to be entered
into by Air China	28,325	33,990	40,788
BSP services	58,048	75,464	98,103

Source: information provided by the Group’s management

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LETTER FROM CHINA MERCHANTS

2. The historical transaction amounts of the Non-exempt Continuing Connected Transactions

For the easier reference of the Independent Shareholders, set out below is a summary of the historical transaction amounts for the Non-exempt Continuing Connected Transactions for the three years ended 31 December 2007, as classified by the nature of transactions:

	Historical transaction amount	Historical transaction amount	Historical transaction amount
	for the year ended 31 December
	2005	2006	2007
	(RMB’000)	(RMB’000)	(RMB’000)
Revenue Accounting Systems
Development and Support Services
entered into by Eastern Airlines	34,169	35,671	38,276
Revenue Accounting Systems
Development and Support Services
entered into by Air China	21,272	21,625	24,428
Passenger and Cargo Revenue
Accounting and Settlement Services
entered into by Eastern Airlines	12,621	15,597	15,230
Passenger and Cargo Revenue
Accounting and Settlement Services
entered into by Air China	21,291	22,871	23,604
BSP services	29,781	35,983	44,653

Source: information provided by the Group’s management

3. The comparison of historical amount of the Non-exempt Continuing Connected Transactions for the year ended 31 December 2007 and the applicable Annual Caps for the year ending 31 December 2008

Based on the above, we noted that:

(i) the annual cap for the revenue accounting systems development and support services to be entered into by each of Eastern Airlines and Air China for the year ending 31 December 2008 is higher than the historical transaction amount of the same services for the year ended 31 December 2007 by 20%;
(ii) the annual cap for the passenger and cargo revenue accounting and settlement services to be entered into by each of Eastern Airlines and Air China for the year ending 31 December 2008 is higher than the historical transaction amount of the same services for the year ended 31 December 2007 by 20%; and
(iii) the annual cap for the BSP services for the year ending 31 December 2008 is higher than the historical transaction amount of the same services for the year ended 31 December 2007 by 30%.

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LETTER FROM CHINA MERCHANTS

4. The growth in the Annual Caps

Set out below is a summary of the growth in the Annual Caps, as classified by the nature of transactions:

Type

Basis for the growth in caps

Revenue accounting systems development and support services
By reference to CAAC’s “Eleventh five-year plan”, the passenger volume is expected to have a steady growth rate of 14% annually. ACCA will continue to develop new products and services, including but not limited to setting up data exchange platform, providing data service products and data value-added services. With the number of passengers expected to increase, the estimated level of service and scope of services provided by the Group is estimated to increase by 20% annually based on the future growth rate of aviation industry and the historical growth of airline’s business in the recent years.
Passenger and cargo revenue accounting and settlement services
According to CAAC’s “Eleventh Five-year Plan”, civil aviation transportation volume in the PRC has an average annual growth rate of 14%. ACCA aims to expand its businesses to domestic interline accounting; develop sales audit business and outsourcing business; as well as expand the potential customer group in settlement market. By reference to the historical transaction amounts and the estimated market pricing for the similar services, it is expected that the annual transportation volume and revenue accounting amount will increase by approximately 20%.
BSP services

BSP business in the PRC has recorded a growth of over 2125% per annum for the period from 2005 to 2007. According to CAAC’s “Eleventh Five-year Plan”, civil aviation passenger volume in the PRC is estimated to have an average annual growth of 14%. By reference to the market demand for the BSP business and the increasing growth rate of the civil aviation passenger volume in the PRC, ACCA is expected to increase the annual growth rate of IATA services by 30% in the near future.

— 69 —

LETTER FROM CHINA MERCHANTS

We consider that the applicable Annual Caps for the Non-exempt Continuing Connected Transactions for the three years ending 31 December 2010 are fair and reasonable so far as the Independent Shareholders are concerned, taking into account:

(i) the applicable Annual Caps for the Non-exempt Continuing Connected Transactions for the year ending 31 December 2008 are based on the historical transaction amounts for the year ended 31 December 2007, and the relevant expected growth rates in the year ending 31 December 2008;
(ii) the positive outlook of the aviation industry in the PRC;
(iii) the historical growth in the Group’s turnover and bookings of seats of commercial airlines in the PRC; and
(iv) the applicable Annual Caps for the Non-exempt Continuing Connected Transactions would provide adequate buffer for Group, in case unanticipated revenue is derived from the Non-exempt Continuing Connected Transactions. Such, in turn, would facilitate the Group’s business growth for the three years ending 31 December 2010.

Based on the aforesaid, we consider that the applicable Annual Caps are fair and reasonable so far as the Independent Shareholders are concerned, and are in the interests of the Group and the Shareholders as a whole.

RECOMMENDATIONS

The Acquisition

Before reaching our conclusion and recommendation, we would like to draw your attention to the following factors in connection with the business operations of ACCA as detailed in sub-section II.8 of this letter, the impacts of which on the Group’s business operations could not be ascertained as at the Latest Practicable Date:

(i) requirement for capital expenditure in respect of the continued improvement on the information technology system of ACCA; and
(ii) realization of objectives in connection with the Acquisition.

We also wish to draw the attention of the Independent Board Committee and the Independent Shareholders that the shareholding interest of the existing Independent Shareholders will be diluted from approximately 35.00% to approximately 31.87% as a result of the issue of the Consideration Shares.

— 70 —

LETTER FROM CHINA MERCHANTS

However, we also noted:

(i) the Sale and Purchase Agreement was negotiated and entered into on normal commercial terms;
(ii) certain benefits are expected to be brought by the Acquisition as detailed in sub-section II.1 of this letter, which the Directors believe would enable the Group to achieve business expansion and accretion in earnings in the years to come;
(iii) the Acquisition is in the ordinary and usual course of business of the Group;
(iv) the consideration is fair and reasonable so far as the Independent Shareholders are concerned;
(v) the profitability of ACCA in the past; and
(vi) the Acquisition will expand the Group’s capabilities in transaction processing, which in turn would enable the Group to be better-positioned to capitalise on the business opportunities arising and to be arisen from the growth in civil aviation industry in the PRC.

In addition, we also wish to draw the attention of the Independent Board Committee and the Independent Shareholders that:

(i) it is beneficial to the Group to minimize the cash outflow in connection with the Acquisition, including the payment of the consideration for ACCA and the Property, for the reasons as detailed in sub-section II.4 of this letter; and
(ii) as detailed in section II.6 of this letter, cash payment made by the Company for this transaction would trigger the requirement for an open tender under the applicable PRC laws Accordingly, it is essential for the Group to proceed with the acquisition of ACCA and the Property by the issue of the Consideration Shares.

Notwithstanding the other factors in connection with the business operations of ACCA as detailed in subsection II.8 of this letter, as well as the dilution in the shareholding interest of the existing Independent Shareholders as a result of the Acquisition, we are of the view that the advantages which are expected to be brought by the Acquisition would be instrumental in the achievement of the Group’s business growth. In addition, we consider that the Acquisition is (i) in the ordinary and usual course of business of the Group; (ii) on normal commercial terms; and (iii) fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Group and the Independent Shareholders as a whole.

Accordingly, we advise the Independent Board Committee to recommend the Independent Shareholders to (i) vote in favour of the proposed resolutions to approve the Acquisition and the issue of the Consideration Shares. We also advise the Independent Shareholders to vote in favour of the proposed resolutions to approve the Acquisition and the issue of the Consideration Shares at the EGM.

— 71 —

LETTER FROM CHINA MERCHANTS

The Non-exempt Continuing Connected Transactions

Having considered the above principal factors and reasons, we consider that the Non-exempt Continuing Connected Transactions are (i) in the ordinary and usual course of business of the Group; (ii) on normal commercial terms; and (iii) fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Group and the Shareholders as a whole, and the applicable Annual Caps for the Non-exempt Continuing Connected Transactions are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Group and the Shareholders as a whole. In addition, we consider that the longer periods for the interline data exchange agreements entered into between ACCA and Xiamen Airlines and Hainan Airlines respectively, as well as the IATA Agreement are required, and it is normal business practice for contracts of such type to be of such duration.

Accordingly, we advise the Independent Board Committee to recommend the Independent Shareholders to (i) vote in favour of the proposed resolutions to approve the Non-exempt Continuing Connected Transactions and the applicable Annual Caps for the Non-exempt Continuing Connected Transactions at the EGM. We also advise the Independent Shareholders to vote in favour of the proposed resolutions to approve the Nonexempt Continuing Connected Transactions and the applicable Annual Caps for the Non-exempt Continuing Connected Transactions at the EGM.

For and on behalf of China Merchants Securities (HK) Co., Ltd. Tony Wu Executive Director

— 72 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(A) FINANCIAL SUMMARY

The following is a summary of the audited consolidated income statements of the Company for the three years ended December 31, 2007 and the consolidated balance sheets of the Company as at December 31, 2005, 2006 and 2007 with unqualified opinion, as extracted from the relevant annual reports of the Company.

Consolidated Income Statements

Revenues Operating expenses Operating profit Financial income, net Share of results of associated companies Profit before taxation Taxation Profit after tax Attributable to: Equity holder of the Company Minority interests Basic earnings per share (RMB)(Note 1) Cash dividends	Year 2007 RMB’000 2,001,903 (1,344,999) 656,904 48,696 12,991 718,591 (69,941) 648,650 630,989 17,661 648,650 0.36 230,921	ended December 2006 RMB’000 1,711,705 (1,147,896) 563,809 52,406 11,727 627,942 (98,421) 529,521 515,587 13,934 529,521 0.29 195,395	31, 2005 RMB’000 1,496,784 (951,780) 545,004 38,441 11,312 594,757 (51,063) 543,694 529,647 14,047 543,694 0.30 204,276

— 73 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Note 1:

Due to the bonus issue of 888,157,500 new ordinary shares at par value of RMB1 per share to the equity holders of the Company on basis of one bonus share for one existing share by conversion of reserve amounting to RMB 888,157,500 into paid in capital in 2007, the number of ordinary shares increased from 888,157,500 to 1,776,315,000. As a result, the number of ordinary shares for the years ended December 31, 2006 and 2005 for the purpose of calculating earnings per share has been adjusted retrospectively for the increase of ordinary shares.

Earnings per share for the years ended December 31, 2007, 2006 and 2005 have been computed by dividing the profit attributable to the equity holders of the Company, of RMB 630,989,000, RMB 515,587,000, and RMB 529,647,000 respectively, by 1,776,315,000 ordinary shares issued and outstanding.

There were no potential dilutive ordinary shares outstanding during the years ended December 31, 2007, 2006 and 2005.

— 74 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Balance Sheets

ASSETS Non-current assets Property, plant and equipment, net Intangible assets, net Investments in associated companies Held-to-maturity financial assets Other long-term assets Deferred income tax assets Current assets Inventories Accounts receivable, net Due from associated companies Due from related parties, net Prepayments and other current assets Held-to-maturity financial assets Short-term bank deposits Cash and cash equivalents Total assets EQUITY Capital and reserves attributable to equity holders of the Company Paid-In capital Reserves Retained earnings — Proposed final cash dividend — Others Minority interest Total equity	As 2007 RMB’000 1,033,148 11,824 85,996 — 8,881 9,229 1,149,078 9,241 141,565 6,308 389,561 102,399 100,000 1,843,949 1,209,152 3,802,175 4,951,253 1,776,315 1,296,834 230,921 1,028,659 4,332,729 85,997 4,418,726	at December 31, 2006 2005 RMB’000 RMB’000 661,149 728,325 9,969 13,232 68,343 53,854 100,000 100,000 17,000 20,906 — — 856,461 916,317 4,498 3,390 84,882 61,516 273 1,227 300,070 272,991 62,064 48,072 — — 1,884,604 1,947,277 1,233,166 856,811 3,569,557 3,191,284 4,426,018 4,107,601 888,158 888,158 2,066,112 1,911,454 195,395 204,276 749,137 584,304 3,898,802 3,588,192 72,523 61,296 3,971,325 3,649,488	at December 31, 2006 2005 RMB’000 RMB’000 661,149 728,325 9,969 13,232 68,343 53,854 100,000 100,000 17,000 20,906 — — 856,461 916,317 4,498 3,390 84,882 61,516 273 1,227 300,070 272,991 62,064 48,072 — — 1,884,604 1,947,277 1,233,166 856,811 3,569,557 3,191,284 4,426,018 4,107,601 888,158 888,158 2,066,112 1,911,454 195,395 204,276 749,137 584,304 3,898,802 3,588,192 72,523 61,296 3,971,325 3,649,488
			916,317
			3,390 61,516 1,227 272,991 48,072 — 1,947,277 856,811
			3,191,284
			4,107,601

			888,158 1,911,454 204,276 584,304
			3,588,192 61,296
			3,649,488

— 75 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

LIABILITIES

Non-Current liabilities

Deferred income tax liabilities Current liabilities Accounts payable and accrued liabilities Due to related parties Income tax payable Deferred revenue Total liabilities Total equity and liabilities Net current assets Total assets less current liabilities	129 470,212 39,960 17,054 5,172 532,398 532,527 4,951,253 3,269,777 4,418,855	— 359,200 85,442 7,605 2,446 454,693 454,693 4,426,018 3,114,864 3,971,325	— 345,000 93,981 17,159 1,973 458,113 458,113 4,107,601 2,733,171 3,649,488

(B) AUDITED FINANCIAL INFORMATION OF THE GROUP

Set out below is the audited financial statements together with relevant notes to the financial statements of the Group as extracted from Annual Report 2007 of the Company.

Consolidated Income Statement

(Amounts expressed in thousands of Renminbi (“RMB”), except per share data)

Note Revenues Aviation information technology service Data network and others Total revenues 5 Operating expenses Business taxes and other surcharges Depreciation and amortisation Network usage fees Personnel expenses Operating lease payments	Year ended December 31, 2007 2006 1,601,160 1,395,172 400,743 316,533 2,001,903 1,711,705 (65,795) (56,358) (243,111) (229,178) (83,562) (76,529) (271,689) (239,743) (68,607) (63,658)

— 76 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Technical support and maintenance fees Commission and promotion expenses Other operating expenses Total operating expenses Operating profit Financial income, net Share of results of associated companies Profit before taxation 6 Taxation 10 Profit after taxation Attributable to: Equity holders of the Company Minority interest Earnings per share for profit attributable to the equity holders of the Company Basic and diluted_(RMB)_ 12 Cash Dividends 11	(154,459) (248,075) (209,701) (1,344,999) 656,904 48,696 12,991 718,591 (69,941) 648,650 630,989 17,661 648,650 0.36 230,921	(99,801) (194,095) (188,534) (1,147,896) 563,809 52,406 11,727 627,942 (98,421) 529,521 515,587 13,934 529,521 0.29 195,395

— 77 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Balance Sheet

(Amounts expressed in thousands of Renminbi (“RMB”))

Note ASSETS Non-current assets Property, plant and equipment, net 13 Intangible assets, net 14 Investments in associated companies 16 Held-to-maturity financial assets 19 Other long-term assets 20 Deferred income tax assets 18 Current assets Inventories 21 Accounts receivable, net 22 Due from associated companies 25 Due from related parties, net 23, 38(3) Prepayments and other current assets 26 Held-to-maturity financial assets 19 Short-term bank deposits 27 Cash and cash equivalents 28 Total assets EQUITY Capital and reserves attributable to equity holders of the Company Paid-In capital 31 Reserves 32 Retained earnings 33 — Proposed final cash dividend 11 — Others Minority interest Total equity	As at December 31, 2007 2006 1,033,148 661,149 11,824 9,969 85,996 68,343 — 100,000 8,881 17,000 9,229 — 1,149,078 856,461 9,241 4,498 141,565 84,882 6,308 273 389,561 300,070 102,399 62,064 100,000 — 1,843,949 1,884,604 1,209,152 1,233,166 3,802,175 3,569,557 4,951,253 4,426,018 1,776,315 888,158 1,296,834 2,066,112 230,921 195,395 1,028,659 749,137 4,332,729 3,898,802 85,997 72,523 4,418,726 3,971,325	As at December 31, 2007 2006 1,033,148 661,149 11,824 9,969 85,996 68,343 — 100,000 8,881 17,000 9,229 — 1,149,078 856,461 9,241 4,498 141,565 84,882 6,308 273 389,561 300,070 102,399 62,064 100,000 — 1,843,949 1,884,604 1,209,152 1,233,166 3,802,175 3,569,557 4,951,253 4,426,018 1,776,315 888,158 1,296,834 2,066,112 230,921 195,395 1,028,659 749,137 4,332,729 3,898,802 85,997 72,523 4,418,726 3,971,325
		856,461
		4,498 84,882 273 300,070 62,064 — 1,884,604 1,233,166
		3,569,557
		4,426,018

		888,158 2,066,112 195,395 749,137
		3,898,802 72,523
		3,971,325

— 78 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

LIABILITIES Non-Current liabilities Deferred income tax liabilities 18 Current liabilities Accounts payable and accrued liabilities 29 Due to related parties 30 Income tax payable Deferred revenue Total liabilities Total equity and liabilities Net current assets Total assets less current liabilities	129 470,212 39,960 17,054 5,172 532,398 532,527 4,951,253 3,269,777 4,418,855	—
		359,200 85,442 7,605 2,446
		454,693
		454,693

		4,426,018

		3,114,864

		3,971,325

— 79 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Balance Sheet

(Amounts expressed in thousands of Renminbi (“RMB”))

Note ASSETS Non-current assets Property, plant and equipment, net 13 Intangible assets, net 14 Investments in subsidiaries 15 Investments in associated companies 16 Held-to-maturity financial assets 19 Other long-term assets 20 Deferred income tax assets 18 Current assets Inventories 21 Accounts receivable, net 22 Due from subsidiaries, net 24 Due from associated companies 25 Due from related parties, net 23, 38(3) Prepayments and other current assets 26 Held-to-maturity financial assets 19 Short-term bank deposits 27 Cash and cash equivalents 28 Total assets	As at December 31, 2007 2006 980,578 622,904 10,016 7,908 37,507 37,507 27,290 21,790 — 100,000 8,881 16,968 8,062 — 1,072,334 807,077 2,632 2,632 110,242 58,125 24,982 22,227 6,308 273 381,573 289,751 88,640 47,788 100,000 — 1,757,949 1,813,504 1,111,519 1,147,017 3,583,845 3,381,317 4,656,179 4,188,394	As at December 31, 2007 2006 980,578 622,904 10,016 7,908 37,507 37,507 27,290 21,790 — 100,000 8,881 16,968 8,062 — 1,072,334 807,077 2,632 2,632 110,242 58,125 24,982 22,227 6,308 273 381,573 289,751 88,640 47,788 100,000 — 1,757,949 1,813,504 1,111,519 1,147,017 3,583,845 3,381,317 4,656,179 4,188,394
		807,077
		2,632 58,125 22,227 273 289,751 47,788 — 1,813,504 1,147,017
		3,381,317
		4,188,394

— 80 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

EQUITY Capital and reserves attributable to equity holders of the Company Paid-In capital 31 Reserves 32 Retained earnings 33 — Proposed final cash dividend 11 — Others Total equity LIABILITIES Current liabilities Accounts payable and accrued liabilities 29 Due to related parties 30 Due to subsidiaries Income tax payable Total equity and liabilities Net current assets Total assets less current liabilities	1,776,315 1,299,652 230,921 852,988 4,159,876 442,499 30,533 10,789 12,482 496,303 4,656,179 3,087,542 4,159,876	888,158 2,062,223 195,395 617,713
		3,763,489
		343,753 74,107 2,390 4,655
		424,905
		4,188,394

		2,956,412

		3,763,489

— 81 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Statement of Changes in Shareholders’ Equity

(Amounts expressed in thousands of Renminbi (“RMB”))

Note Balance at January 1, 2006 Profit for the year Dividend relating to year 2005 Dividends payable to minority shareholders of subsidiaries Currency translation differences 32 Appropriation to reserves 32, 33 Balance at December 31, 2006 Note Balance at January 1, 2007 Transfer from reserves 31 Profit for the year Dividend relating to year 2006 11 Dividends payable to minority shareholders of subsidiaries Currency translation differences 32 Appropriation to reserves 32, 33 Balance at December 31, 2007	Attributable to equity holders of the Company Paid-In Retained capital Reserves earnings 888,158 1,911,454 788,580 — — 515,587 — — (204,276) — — — — (701) — — 155,359 (155,359) 888,158 2,066,112 944,532 Attributable to equity holders of the Company Paid-In Retained capital Reserves earnings 888,158 2,066,112 944,532 888,157 (888,157) — — — 630,989 — — (195,395) — — — — (1,667) — — 120,546 (120,546) 1,776,315 1,296,834 1,259,580	Attributable to equity holders of the Company Paid-In Retained capital Reserves earnings 888,158 1,911,454 788,580 — — 515,587 — — (204,276) — — — — (701) — — 155,359 (155,359) 888,158 2,066,112 944,532 Attributable to equity holders of the Company Paid-In Retained capital Reserves earnings 888,158 2,066,112 944,532 888,157 (888,157) — — — 630,989 — — (195,395) — — — — (1,667) — — 120,546 (120,546) 1,776,315 1,296,834 1,259,580	Minority Interest 61,296 13,934 — (2,707) — — 72,523 Minority Interest 72,523 — 17,661 — (4,187) — — 85,997	Total 3,649,488 529,521 (204,276) (2,707) (701) — 3,971,325 Total 3,971,325 — 648,650 (195,395) (4,187) (1,667) — 4,418,726
	Paid-In capital 888,158 888,157 — — — — — 1,776,315	Reserves 2,066,112 (888,157) — — — (1,667) 120,546 1,296,834

— 82 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Cash Flow Statement

(Amounts expressed in thousands of Renminbi (“RMB”))

Note
Cash flows from operating activities
Cash generated from operations
34
Refund of enterprise income tax
Enterprise income tax paid
Net cash generated from operating activities
Cash flows from investing activities
Purchases of property, plant,
equipment and intangible assets
Maturities of short-term bank deposits
Placements of short-term bank deposits
Interest received
Dividends received from associated companies
Proceeds from disposal of property,
plant and equipment
Investments in associated companies
Net cash used in investing activities
Cash flows from financing activities
Dividend paid to group shareholders
Dividend paid to minority shareholders
of subsidiaries
Net cash used in financing activities
Effect of foreign exchange rate changes
on cash and cash equivalents
Net increase (decrease) in cash and
cash equivalents
Cash and cash equivalents at beginning
of the year
Cash and cash equivalents at end of the year
28

Year ended December 31,
2007
2006
790,232
758,911
30,180
—
(99,772)
(107,975)
720,640
650,936
(568,074)
(167,947)
1,743,036
1,859,041
(1,702,381)
(1,796,368)
64,359
64,570
838
7,970
661
526
(5,500)
(9,900)
(467,061)
(42,108)
(252,813)
(214,443)
(3,964)
(2,812)
(256,777)
(217,255)
(20,816)
(15,218)
(24,014)
376,355
1,233,166
856,811
1,209,152
1,233,166

— 83 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes to the Consolidated Financial Statements

(Amounts expressed in thousands of Renminbi (“RMB”))

1. COMPANY ORGANISATION AND PRINCIPAL ACTIVITIES

TravelSky Technology Limited (the “Company”) was incorporated in the People’s Republic of China (the “PRC”) on October 18, 2000 to engage in the provision of aviation information technology service and related services in the PRC.

The Company was listed on The Stock Exchange of Hong Kong Limited on February 7, 2001. The address of its registered office is Floor 18-20, South Wing, Park C, Raycom InfoTech Park, No. 2, Ke Xue Yuan South Road, Haidian District, Beijing 100190, PRC.

As at December 31, 2007, the Company had direct or indirect interests in the following subsidiaries and associated companies. All of these subsidiaries and associated companies are limited liability companies incorporated and operated in the PRC except for TravelSky Technology (Hong Kong) Limited, TravelSky Technology (Singapore) Limited, TravelSky Technology (Korea) Limited and TravelSky Technology (Japan) Limited, which are limited liability companies incorporated and operated in Hong Kong, Singapore, Korea and Japan respectively.

		Percentage	Percentage	Issued
	Date of	of equity		and fully
Name	incorporation	interest held		paid capital	Principal activities
		Direct	Indirect	RMB
Subsidiaries
Hainan Civil Aviation	March 2, 1994	64.78%	—	6,615,000	Provision of electronic
Cares Co., Ltd.					travel distribution and
(“Hainan Cares”)					cargo management
					services; and sale and
					installation of the related
					information systems
Cares Shenzhen	April 14, 1995	61.47%	—	11,000,000	Provision of electronic
Co., Ltd.					travel distribution and
(“Shenzhen Cares”)					cargo management
					services; and sale and
					installation of the related
					information systems

— 84 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Cares Hubei Co., Ltd.	July 25, 1997	50%	12.5%	5,000,000	Provision of electronic
(“Hubei Cares”)					travel distribution,
					airport passenger
					processing and cargo
					management services;
					and sale and installation
					of the related information
					systems
Cares Chongqing	December 1, 1998	51%	—	9,800,000	Provision of electronic
Information					travel distribution,
Technology Co., Ltd.					airport passenger
(“Chongqing Cares”)					processing and cargo
					management services;
					and sale and installation
					of the related information
					systems
Aviation Cares of	June 15, 2000	51%	—	2,000,000	Computer hardware and
Yunnan Information					software development
Co., Ltd.					and data network services
(“Yunnan Cares”)
InfoSky Technology	September 20, 2000	51%	—	23,149,285	Provision of cargo
Co., Ltd. (“InfoSky”)					management services
					and related software
					and technology
					development; and
					provision of technical
					support, training and
					consulting services
TravelSky	December 13, 2000	100%	—	3,182,873	Commercial services
Technology (Hong
Kong) Limited
(“Hong Kong
Company”)
Civil Aviation Cares	September 14, 2001	51%	—	4,000,000	Computer hardware and
of Xiamen Ltd.					software development
(“Xiamen Cares”)					and data network services
Civil Aviation Cares	January 11, 2002	51%	—	2,000,000	Computer hardware and
of Qingdao Ltd.					software development
(“Qingdao Cares”)					and data network services

— 85 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Civil Aviation Cares	July 9, 2002	51%	—	5,000,000	Computer hardware and
Technology of					software development
Xi’an Ltd.					and data network services
(“Xi’an Cares”)
Civil Aviation Cares	August 16, 2002	51%	—	5,000,000	Computer hardware and
Technology of					software development
Xinjiang Ltd.					and data network services
(“Xinjiang Cares”)
TravelSky	October 21, 2005	100%	—	481,568	Computer hardware and
Technology					system consulting services
(Singapore) Limited
(“Singapore Company”)
TravelSky Technology	December 28, 2005	100%	—	403,677	Computer hardware and
(Korea) Limited					software development
(“Korea Company”)					and data network services
TravelSky Technology	December 16, 2005	100%	—	670,121	Software development and
(Japan) Limited					computer equipment
(“Japan Company”)					maintenance services

The Company and its subsidiaries are hereinafter collectively referred to as the “Group”.

		Percentage	Percentage	Issued
	Date of	of equity		and fully
Name	incorporation	interest held		paid capital	Principal activities
		Direct	Indirect	RMB
Associated Companies
Shanghai Civil Aviation	May 21, 1999	41%	—	10,000,000	Computer hardware and
East China Cares					software development
System Integration					and data network services
Co., Ltd. (“Huadong
Cares”)
Shenyang Civil	November 2, 1999	46%	—	2,000,000	Computer hardware and
Aviation Cares of					software development
Northeast China, Ltd.					and data network services
(“Dongbei Cares”)

— 86 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Aviation Cares of	November 28, 1999	44%	—	2,000,000	Computer hardware and
Southwest Chengdu,					software development
Ltd. (“Xinan Cares”)					and data network services
Yunnan TravelSky	April 1, 2003	40%	—	6,000,000	Computer hardware and
Airport Technology					software development
Limited (“Yunnan					and technical consulting
Cares”)					services
Heilongjiang TravelSky	April 30, 2003	50%	—	6,000,000	Computer hardware and
Airport Technology					software development
Limited					and technical consulting
(“Heilongjiang Cares”)					services
Shanghai Dongmei	September 28, 2003	50%	—	24,800,000	E-commerce, Sales of
Aviation Tourism					computers and related
Online Co., Limited					parts and provision of
(“Shanghai Cares”)					network, technical
					services and economic
					consulting services
Dalian TravelSky	January 28, 2005	50%	—	6,000,000	Computer hardware and
Airport Technology					software development
Limited (“Dalian Cares”)					and technical consulting
					services
Hebei TravelSky	April 5, 2007	50%	—	3,000,000	Computer hardware and
Airport Technology					software development
Limited (“Hebei Cares”)					and technical consulting
					services
Guangzhou Airport	December 24, 2007	20%	—	20,000,000	Computer hardware and
AirSpan Information					software development
Technology Co. Ltd.					and technical consulting
(“Guangzhou Cares”)					services

During the year, the Company and Hebei Airport Administration Group jointly incorporated Hebei TravelSky Airport Technology Limited (“Hebei Cares”) that provides computer hardware and software development and technical consulting services. The Company had invested RMB 1,500,000 in cash for a 50% equity interest of Hebei Cares.

In addition, the Company, Guangdong Airport Administration Group and China Southern Airlines Company Limited jointly incorporated Guangzhou Airport AirSpan Information Technology Limited (“Guangzhou Cares”) that provides computer hardware and software development and technical consulting services. The Company had invested RMB 4,000,000 in cash for a 20% equity interest of Guangzhou Cares.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. BASIS OF PRESENTATION

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities at fair value through profit or loss.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.

(a) Standards, amendments and interpretations effective in 2007

The following standards, amendments and interpretations are mandatory for accounting periods beginning on or after January 1, 2007:

IFRS 7, ‘Financial instruments: Disclosures’, and the complementary amendment to IAS 1, ‘Presentation of financial statements — Capital disclosures’, introduces new disclosures relating to financial instruments and does not have any impact on the classification and valuation of the Group’s financial instruments, or the disclosures relating to taxation and trade and other payables; and
IFRIC — Int 10, ‘Interim financial reporting and impairment’, prohibits the impairment losses recognised in an interim period on goodwill and investments in equity instruments and in financial assets carried at cost to be reversed at a subsequent balance sheet date. This standard does not have any impact on the Group’s financial statements.
(b) Standards, amendments and interpretations effective in 2007 but not relevant for the Group’s operation in 2007

The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Group’s accounting periods beginning on or after January 1, 2007 but are not relevant for the Group’s operations in 2007:

IFRIC — Int 7, ‘Applying the restatement approach under IAS 29, Financial reporting in hyper-inflationary economies’;
IFRIC — Int 8, ‘Scope of IFRS 2’; and
IFRIC — Int 9, ‘Re-assessment of embedded derivatives’.

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APPENDIX I

(c) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group

The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Group’s accounting periods beginning on or after January 1, 2008 or later periods and have not been early adopted by the Group:

IFRS 8, ‘Operating segments’ (effective from January 1, 2009). IFRS 8 replaces IAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131, ‘Disclosures about segments of an enterprise and related information’. The new standard requires a ‘management approach’, under which segment information is presented on the same basis as that used for internal reporting purposes. The Group will apply IFRS 8 from January 1, 2009;
IAS 1 (Revised), ‘Presentation and Financial Statements’ (effective from January 1, 2009). IAS 1 (Revised) requires all owner changes in equity to be presented in a statement of changes in equity. All comprehensive income is presented in one statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income). It requires presenting a statement of financial position as at the beginning of the earliest comparative period in a complete set of financial statements when there are retrospective adjustments or reclassification adjustments. However, it does not change the recognition, measurement or disclosure of specific transactions and other events required by other IFRSs. The Group will apply IAS 1 (Revised) from January 1, 2009; and
IAS 27 (Revised), ‘Consolidated and separate financial statements’ (effective for the first annual reporting period beginning on or after July 1, 2009). The amendment requires non-controlling interests (i.e. minority interests) to be presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent. Total comprehensive income must be attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. Changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control are accounted for within equity. When control of a subsidiary is lost, the assets and liabilities and related equity components of the former subsidiary are derecognised. Any gain or loss is recognised in profit or loss. Any investment retained in the former subsidiary is measured at its fair value at the date when control is lost. The Group will apply IAS 27 (Revised) from January 1, 2010.

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APPENDIX I

(d) Standards, amendments and Interpretations to existing standards that are not yet effective and not relevant for the Group’s operations in 2007
IAS 23 (Amendment), ‘Borrowing costs’ (effective from January 1, 2009);
IAS 32 and IAS 1 Amendments, ‘Puttable Financial Instruments and Obligations Arising on Liquidation’ (effective from January 1, 2009);
IFRIC — Int 12, ‘Service concession arrangements’ (effective from January 1, 2008);
IFRIC — Int 11, ‘IFRS 2, Group and treasury share transactions’ (effective from March 1, 2007, but not yet effective for IFRS financial statements for the year ended December 31, 2007);
IFRIC — Int 13, ‘Customer loyalty programmes’ (effective from July 1, 2008);
IFRS 3 (Revised), ‘Business Combination’ (effective for business combinations with acquisition date on or after the beginning of the first annual reporting period beginning on or after July 1, 2009); and
IFRIC — Int 14, ‘IAS 19, the limit on a defined benefit asset, minimum funding requirements and their interaction’ (effective from January 1, 2008).

3. PRINCIPAL ACCOUNTING POLICIES

The principal accounting policies adopted in preparing the financial statements of the Company and its subsidiaries are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

(a) Consolidation

The consolidated financial statements include the financial statements of the Company and all its subsidiaries made up to December 31.

(i) Subsidiaries

Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The purchase method of accounting is used for acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement.

Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

In the Company’s balance sheet, the investments in subsidiaries are stated at cost less provision for impairment losses (Note 3(f)). The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivables.

(ii) Transactions and minority interests

The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests result in gains and losses for the Group that are recorded in the consolidated income statement. Purchases from minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary.

(iii) Associated companies

Associated companies are entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. In the consolidated financial statements, investments in associates are accounted for using the equity method of accounting and are initially recognized at cost. The Group’s investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition.

When the Group’s share of losses equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate.

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APPENDIX I

Unrealised gains on transactions between the Group and its associated companies are eliminated to the extent of the Group’s interest in the associated companies. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associated companies have been changed where necessary to ensure consistency with the policies adopted by the Group.

Dilution gains and losses arising in investments in companies are recognized in the consolidated income statement.

In the Company’s balance sheet, the investments in associated companies are stated at cost less provision for impairment losses (Note 3(f)). The results of associated companies are accounted for by the Company on the basis of dividends received and receivables.

(b) Foreign currencies

(i) Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Renminbi, which is the Company’s functional and presentation currency.

(ii) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges or qualifying net investment hedges.

Changes in the fair value of monetary securities denominated in foreign currency classified as available for sale are analysed between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortised cost are recognised in profit or loss, and other changes in the carrying amount are recognised in equity.

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APPENDIX I

(iii) Group companies

The results and financial position of all the group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and
All resulting exchange differences are recognised as a separate component of equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale.

(c) Property, plant and equipment

Property, plant and equipment is stated at historical cost less accumulated depreciation and accumulated impairment loss. Historical cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditures incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance and overhaul costs, are normally charged to expense in the year in which they are incurred. When the expenditure results in increase in the future economic benefits expected to be obtained from the use of the asset and the cost of the asset can be measured reliably, the expenditure is capitalized.

Depreciation of property, plant and equipment is provided using the straight-line method over their estimated useful lives, after taking into consideration their estimated residual value. The estimated useful lives of property, plant and equipment are as follows:

Buildings	20 years
Computer systems and software	3-11 years
Motor vehicles	6 years
Furniture, fixtures and other equipment	5-9 years
Leasehold improvements	Over the lease term

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The asset’s residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 3(f)).

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in the income statement.

Assets under construction are stated at cost. Costs include construction and acquisition costs, and interest charges arising from borrowings used to finance the assets during the period of construction or installation and testing. No provision for depreciation is made on assets under construction until such time as the relevant assets are completed and ready for use.

(d) Intangible assets

Intangible assets mainly represent purchased computer software.

Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortized on a straightline basis over 3 years.

Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred.

(e) Research and development costs

Expenditures for research and development are charged against income in the period incurred except for software development costs which comply strictly with the following criteria:

It is technically feasible to complete the intangible asset so that it will be available for use or sale;
Management intends to complete the intangible asset and use or sell it;
There is an ability to use or sell the intangible asset;
It can be demonstrated how the intangible asset will generate probable future economic benefits;
Adequate technical, financial and other resources to complete the development and to use or sell the intangible asset are available; and
The expenditure attributable to the intangible asset during its development can be reliably measured.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Capitalized development costs are amortized on a straight-line basis over their expected useful lives. The period of amortization does not normally exceed 5 years. During the year ended December 31, 2007, no development costs were capitalized as they did not meet all the criteria listed above (2006: nil).

(f) Impairment of investments in subsidiaries, associates and non-financial assets

Assets that have an indefinite useful life or have not yet available for use are not subject to amortisation and are tested annually for impairment. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

(g) Financial assets

The group classifies its financial assets in the following categories: at fair value through profit or loss, held-to-maturity financial assets, loans and receivables, and available-forsale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at their initial recognition.

(i) Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term. Assets in this category are classified as current assets.

(ii) Held-to-maturity financial assets

Held-to-maturity financial assets are non-derivative financial assets with fixed or determinable payments and fixed maturities that management has the positive intention and ability to hold to maturity. If the Group were to sell other than an insignificant amount of held-to-maturity financial assets, the whole category would be tainted for two full annual reporting periods and reclassified as available-forsale. Held-to-maturity financial assets are included in non-current assets, except for those with maturities less than 12 months from the balance sheet date, which are classified as current assets. Held-to-maturity investments are carried at amortised cost using the effective interest rate method.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(iii) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and receivables are carried at amortised cost using the effective interest method.

(iv) Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date.

Regular purchases and sales of financial assets are recognised on the trade-date — the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the income statements. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value.

Gains or losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are presented in the income statements in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the income statements when the Group’s right to receive payments is established.

Changes in the fair value of monetary securities denominated in a foreign currency and classified as available-for-sale are analysed between translation differences resulting from changes in amortised cost of the security and other changes in the carrying amount of the security. The translation differences on monetary securities are recognised in profit or loss, while translation differences on non-monetary securities are recognised in equity. Changes in the fair value of monetary and non-monetary securities classified as availablefor-sale are recognised in equity.

When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in income statements.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Interest on available-for-sale securities calculated using the effective interest method is recognised in the income statements as part of other income. Dividends on available-forsale equity instruments are recognised in the income statements as part of other income when the Group’s right to receive payments is established.

The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models making maximum use of market inputs and relying as little as possible on entity-specific inputs.

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss — measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in income statements — is removed from equity and recognised in the income statements. Impairment losses recognised in the income statements on equity instruments are not reversed through the income statements. Impairment testing of accounts receivable is described in Note 3(j).

(h) Operating leases (as the lessee)

Leases where substantially all the rewards and risks of ownership of the assets remain with the lessor are accounted for as operating leases. Rental payments under operating leases (net of any incentives received from the lessor) are charged to expense based on the straight-line method over the period of the leases.

(i) Inventories

Inventories, which principally comprise equipment for sale, spare parts and consumable items, are carried at the lower of cost or net realizable value. Cost is determined based on the first-in, first-out (“FIFO”) method and comprises all costs of purchase and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(j) Accounts receivable

Accounts receivable is recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of accounts receivable is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the accounts receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The carrying amount of the assets is reduced through the use of an allowance account, and the amount of the provision is recognized in the income statement. When an accounts receivable is uncollectible, it is written off against the allowance account for account receivables. Subsequent recoveries of amounts previously written off are credited against expense in the income statement.

(k) Cash and cash equivalents

Cash and cash equivalents are carried in the balance sheet at cost. Cash represents cash in hand and deposits with banks or other financial institutions which are repayable on demand. Cash equivalents represent short-term, highly liquid investments which are readily convertible into known amounts of cash with original maturities of three months or less and that are subject to an insignificant risk of change in value.

(l) Accounts payables

Accounts payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.

(m) Taxation

(i) Current income tax

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(ii) Deferred income taxation

Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases of an asset or liability and its carrying amount in the consolidated financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which the deductible temporary differences can be utilized. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

(iii) Other tax

Other tax liabilities are provided in accordance with the regulations issued by the PRC government authorities.

(n) Employee benefits

(i) Pension

The full-time employees of the Group are covered by government-sponsored pension plan under which the employees are entitled to a monthly pension based on certain formulas. The relevant government agencies are responsible for the pension liability to these retired employees. The Group contributes on a monthly basis to these pension plans.

Starting from January 1, 2007, the Company implemented an additional supplementary pension scheme, which is funded through an insurance company.

Under these plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expense when they are due.

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APPENDIX I

(ii) Other Employee benefit

All Chinese employees of the Group participate in employee social security plans, including medical, housing and other welfare benefits, organized and administered by the government authorities. Other than the welfare benefits provided by these social security plans as disclosed, the Group has no material commitments to employees.

According to the relevant regulations, the premiums and welfare benefit contributions that should be borne by the Group are calculated based on percentages of the total salary of employees, subject to a certain ceiling, and are paid to the labor and social welfare authorities. Contributions to the plans are expensed as incurred.

(o) Provisions

A provision is recognized when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimation can be made for the amount of the obligation. Provisions are not recognized for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using an estimated current market interest rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in provision reflecting the passage of time is recognized as interest expense.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(p) Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the rendering of services in the ordinary course of the Group’s activities. Revenue is shown net of value-added tax, sales discounts and after eliminating sales within the Group.

The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Group’s activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

Revenue for aviation information technology services is recognized when the services are rendered;
Revenue for data network services is recognized when the services are rendered;
Sale of equipment is recognized when the significant risks and rewards of ownership of the goods have been transferred to the buyer;
Revenue for equipment installation project is recognized by reference to the stage of completion when this can be measured reliably. The stage of completion is determined in the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs. When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue is recognized only to the extent of expenses recognized that are recoverable. In the period in which it is determined that a loss will result from the performance of the contract, the entire amount of the estimated ultimate loss is charged against income;
Interest income is recognized on a time-proportion basis, taking into account the principal amounts outstanding and the applicable interest rates; and
Dividend income is recognized when the right to receive payment is established.

(q) Dividend distribution

Dividend distribution to the Company’s equity holders is recognized as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(r) Share Capital

Ordinary shares are classified as equity. Mandatory redeemable preference shares are classified as liabilities.

Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

Where any Group company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes,) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received (net of any directly attributable incremental transaction costs and the related income tax effects) is included in equity attributable to the Company’s equity holders.

4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

The preparation of financial statements in conformity with IFRS requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an on-going basis, the Company evaluates its estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

(a) Sales discount

Revenues derived from aviation information technology services and data network services are recognized net of sales discount. The amount of sales discount is subject to negotiation with customers. In certain cases, in situation where final agreement has not been reached, management makes an estimate of the discounts with reference to the status of negotiation and taking into accounts of historical experiences and industry performance.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Depreciation of property, plant and equipment

The property, plant and equipment of the Group are depreciated at rates sufficient to write off their costs less accumulated impairment losses and estimated residual values over their estimated useful lives on a straight-line basis. The Group reviewed the useful lives periodically to ensure that the method and rates of depreciation are consistent with the expected pattern of economic benefits from the property, plant and equipment. The Group estimates the useful lives of the property, plant and equipment as set out in Note 3(c) based on the historical experience with similar assets, taking into account anticipated technological changes. The depreciation expenses in the future periods will change if there are significant changes to these estimates.

(c) Impairment of assets

At each balance sheet date, the Group considers both internal and external sources of information to assess whether there is any indication that assets are impaired. If any such indication exists, the recoverable amount of the asset is estimated and an impairment loss is recognized to reduce the carrying amount of the asset to its recoverable amount. Accordingly, there will be an impact to the future results if there is a significant change in the recoverable amounts of the assets.

(d) Fair value

The Group estimates the fair value of its financial assets and financial liabilities including accounts receivable, prepayments, other current assets, accounts payable, accrued liabilities and other current liabilities by discounting its future contractual cash flows at the estimated current market interest rate that is available to the Group for similar financial instruments. The future values will change if there are changes in the estimated market interest rate.

(e) Income taxes

The Group is subject to income taxes in both PRC and other jurisdictions. Significant judgment is required in determining the provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

5. REVENUES

Revenues primarily comprise the service fees earned by the Group for the provision of the Group’s aviation information technology services and related data network services. A substantial portion of these revenues was generated from the shareholders of the Company.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

6. PROFIT BEFORE TAXATION

Profit before taxation is arrived at after charging (crediting) the following:

After charging: Depreciation Amortization of intangible assets Amortization of leasehold improvements Loss on disposal of property, plant and equipment Provision for impairment of receivables Provision for impairment of inventory Cost of equipment sold Contributions to defined contribution pension scheme Auditors’ remuneration Exchange loss Contribution to housing fund Research and development expenses After crediting: Interest income	2007 RMB’000 229,510 7,427 6,174 6,039 1,747 — 53,093 40,963 2,616 20,816 12,439 264,024 (69,512)	2006 RMB’000 218,097 8,409 2,672 83 10,608 106 25,229 17,921 2,520 15,218 12,591 234,050 (67,624)

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

7. DIRECTORS’, SUPERVISORS’ AND SENIOR MANAGEMENT’S EMOLUMENTS

(1) Directors’ and supervisors’ emoluments

The following table sets out the emoluments paid to the Company’s directors and supervisors during the year ended December 31, 2007 (tax inclusive):

Name of Director Remuneration and Supervisor for Director RMB’000 Chairman of the Board Zhu Yong — Executive Directors Zhu Xiaoxing — Ding Weiping — Song Jinxiang — Non-Executive Directors Wang Quanhua — Cao Jianxiong(i) — Luo Chaogeng(ii) — Gong Guokui — Rong Gang — Sun Yongtao(iv) — Liu Dejun(iv) — Xia Yi(iv) — Song Jian —	Year ended December 31, 2007 Salary of employee, Allowances and Benefits Employer’s (employer’s Employees’ contribution to Bonus for contribution Discretionary pension scheme Director inclusive) bonuses for employee RMB’000 RMB’000 RMB’000 RMB’000 — — — — — 210 277 21 — 96 385 21 — 96 385 21 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —	Total RMB’000 —
		508 502 502
		— — — — — — — — —

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APPENDIX I

Independent Non-Executive Directors Yick Wing Fat, Simon 120 Chow Kwok Wah, James_(i) 50 Chua Keng Kim(ii) 70 Yuan Yaohui(iv) 120 Supervisors Li Xiaojun — Du Hongying — Jing Gongbin(iv) — Zhang Yakun — Yu Yanbin*(iv) — Gao Jingping (Staff Representative Supervisor)(iv) — Wang Xiaomin (Staff Representative Supervisor)(iv)_ — Zhang Xin (Staff Representative Supervisor) — Rao Geping (Independent Supervisor) 50	— — — — — — — — — — — — —	— — — — — — — — — 188 88 72 —	— — — — — — — — — 244 333 182 —	— — — — — — — — — 21 21 21 —	120 50 70 120
					— — — — — 453 442 275 50

The following table sets out the emoluments paid to the Company’s directors and supervisors during the year ended December 31, 2006 (tax inclusive):

Name of Director Remuneration and Supervisor for Director RMB’000 Chairman of the Board Zhu Yong — Executive Directors* Zhu Xiaoxing — Ding Weiping — Song Jinxiang —	Year ended December 31, 2006 Salary of employee, Allowances and Benefits Employer’s (employer’s Employees’ contribution to Bonus for contribution Discretionary pension scheme Director inclusive) bonuses for employee RMB’000 RMB’000 RMB’000 RMB’000 — — — — — 190 307 19 — 105 391 19 — 105 391 19	Total RMB’000 —
		516 515 515

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APPENDIX I

Non-Executive Directors Wang Quanhua Cao Jianxiong(i) Gong Guokui Rong Gang Yang Yatie(iii) Li Xiaoguang(iii) Si Yupei(iii) Song Jian Independent Non-Executive Directors Yick Wing Fat, Simon Chow Kwok Wah, James_(i) Wu Jiapei(iii) Supervisors Li Xiaojun Du Hongying Zhang Yakun Wang Yongqiang(iii) Chen Lihong*(iii) Tan Xiaoxu (Staff Representative Supervisor)(iii)_ Zhang Xin (Staff Representative Supervisor) Rao Geping (Independent Supervisor)	— — — — — — — — 90 90 90 — — — — — — — —	— — — — — — — — — — — — — — — — — — —	— — — — — — — — — — — — — — — — 99 72 —	— — — — — — — — — — — — — — — — 343 165 —	— — — — — — — — — — — — — — — — 19 19 —	— — — — — — — —
						90 90 90
						— — — — — 461 256 —

These directors and supervisors are employees of the shareholders of the Company or their subsidiaries, and obtain emoluments from them. No appropriation has been made as the directors of the Company considered it is impracticable to apportion this amount between their services to the Group and the parent of the Company or their subsidiaries.
(i) Resigned on June 5, 2007
(ii) Appointed on June 5, 2007
(iii) Resigned on January 9, 2007
(iv) Appointed on January 9, 2007

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APPENDIX I

During the year ended December 31, 2007, no director had waived or agreed to waive any emolument (2006: nil). No emolument was paid to any of the directors as an inducement to join or upon joining the Company or as compensation for loss of office (2006: nil).

(2) Five highest paid individuals

The five individuals whose emoluments were the highest in the Group for the year include three (2006: three) directors whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining two (2006: two) individuals during the year are as follows:

Basic salaries and allowances Bonus Retirement benefits	2007 RMB’000 281 629 42 952	2006 RMB’000 277 666 38
		981

The annual emoluments paid during the year ended December 31, 2007 to each of the directors (included in the five highest paid employees) fell within the band from RMB nil to RMB 1 million (2006: from RMB nil to RMB 1 million).

8. RETIREMENT BENEFITS

All the full time employees of the Group are covered by state-sponsored pension scheme under which the employees are entitled to an annual pension equal to their basic salaries at their retirement dates. The PRC government is responsible for the pension liability to these retired employees. The Group was required to make specified contributions to the state-sponsored pension scheme at the rate of 20% of the employees’ basic salaries for the year ended December 31, 2007 (2006: 20%). The contributions to the pension scheme made by the Group for the year ended December 31, 2007 amounted to approximately RMB 21,173,000 (2006: RMB 17,921,000). This amount was recorded in personnel expenses.

In addition, starting from January 1, 2007, a supplementary defined contribution pension plan managed by an insurance company was established. The one time entrance contribution and the annual contributions to this plan made by the Group for the year ended December 31, 2007 amounted to approximately RMB 14,000,000 and RMB 5,790,000 respectively. These amount were recorded in personnel expenses.

Under these schemes, the Group has no obligation for post-retirement benefits beyond the annual contributions made.

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APPENDIX I

9. HOUSING FUND

All the full-time employees of the Group are entitled to participate in a state-sponsored housing fund. The fund can be used by the employees for housing purchases, or may be withdrawn upon their retirement. The Group is required to make annual contributions to a state-sponsored housing fund equivalent to a certain percentage of each employee’s salary. The contributions by the Group to the housing fund for the year ended December 31, 2007 amounted to approximately RMB 12,439,000 (2006: RMB 12,591,000). This amount was recorded in personnel expenses.

The average number of employees in 2007 was 2,629 (2006: 2,388).

10. TAXATION

Income Tax

Current tax: PRC enterprise income tax expenses Overseas taxation Deferred tax	2007 RMB’000 77,692 1,349 (9,100) 69,941	2006 RMB’000 98,484 (63) — 98,421

Taxation of the Group except for Hong Kong Company, Singapore Company, Japan Company, and Korea Company is provided based on the tax laws and regulations applicable to PRC enterprises. The Group provides for PRC enterprise income tax on the basis of its income for statutory financial reporting purposes, adjusted for income and expense items that are not assessable or deductible for tax purposes.

Under the prevailing PRC income tax law, the Company is subject to enterprise income tax (“EIT”) at a rate of 33% on the taxable income as reported in its statutory accounts which are prepared based on the accounting principles and financial regulations applicable to PRC enterprises. The Company was registered as a new technology enterprise in October 2000 in Zhongguancun Haidian Science Park and has been approved by the Haidian State Tax Bureau for an EIT preferential rate of 15%, effective from January 1, 2006.

The Company’s subsidiaries are entitled to different preferential tax rates, ranging from 15% to 33%. These subsidiaries are located in special economic zones for which the applicable tax rate is 15%, or designated as “New Technology Enterprise” for which the applicable tax rate is 15%. In addition, these subsidiaries are entitled to certain reductions in tax rates in their initial years of operations.

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APPENDIX I

The above mentioned EIT preferential rates or status currently enjoyed by the Company and its subsidiaries will be subject to re-assessment in 2008 by the respective local tax bureau in view of the Corporate Income Tax Law of the People’s Republic of China (“new CIT Law”) that has became effective on January 1, 2008 as approved by the National People’s Congress on March 16, 2007. Under the new CIT Law, the statutory corporate income tax rate applicable to the Company starting from January 1, 2008 will be 25%, replacing the currently applicable tax rate of 33%.

The reconciliation between the Group’s actual tax charge and the amount which is calculated based on the weighted average statutory tax rate is as follows:

Profit before taxation Weighted average statutory tax rate Tax calculated at domestic tax rates applicable to profits in the respective countries Non-taxable income Tax refund_(i)_ Non-deductible expense Effect of preferential tax rates Tax charge	2007 RMB’000 718,591 33% 237,135 (450) (30,180) 2,830 (139,394) 69,941	2006 RMB’000 627,942 33% 207,221 (450) — 5,444 (113,794) 98,421

(i) Tax refund

The relevant authorities issued a notice dated January 9, 2007 recognising the Company as an “Important Software Enterprise” in 2006 under the National Planning Layout. According to the relevant regulations, the Company is entitled to a preferential tax rate of 10% in the year of recognition. The Company had already paid EIT at a rate of 15% for the financial year ended December 31, 2006. The difference between the EIT paid by the Company over the preferential tax rate of 10% amounting to approximately RMB 30,180,000 had been refunded to the Company in June 2007. The tax refund was offset against income tax expense in the consolidated financial statements for the year ended December 31, 2007.

The relevant authorities issued a notice dated February 26, 2008 recognising the Company as an “Important Software Enterprise” in 2007 under the National Planning Layout. According to the relevant regulations, the Company is entitled to a preferential tax rate of 10% in the year of recognition. The Company had already paid EIT at a rate of 15% for the financial year ended December 31, 2007. According to the related regulation, the EIT paid by the Company for the financial year ended December 31, 2007 over the preferential tax rate of 10% will be refunded to the Company in the subsequent year. Its impact will be accounted for in 2008 financial statements accordingly.

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APPENDIX I

Business Taxes

The Group is subject to business taxes on its service revenues:

Aviation information technology service and data network 3% Training, technical support service, rental and others 5%

Value — Added Tax (“VAT”)

The Group’s sales of equipment are subject to Value Added Tax (VAT). The Company and one of its subsidiaries, InfoSky are certified by the tax authorities as general tax payers, and other subsidiaries of the Company are small-scale VAT tax payers. The applicable tax rate is 17% for general tax payers, and 4%-6% for small-scale VAT tax payers.

For general tax payers, input VAT from purchase of equipment for sale can be netted off against output VAT from sales.

VAT payable or receivable is the net difference between periodic output and deductible input VAT.

11. DIVIDENDS AND OTHER DISTRIBUTION

At the annual general meeting and class meetings of the Company held on June 5, 2007, a resolution was passed for the bonus issue of 888,157,500 new ordinary shares at par value of RMB1 per share to the equity holders of the Company on basis of one bonus share for one existing share (“Bonus Issue”), by conversion of reserve amounting to RMB 888,157,500 into paid in capital. As a result, the number of ordinary shares increased from 888,157,500 to 1,776,315,000. The new shares rank pari passu in all respect with the existing shares.

The shareholders in the annual general meeting on June 5, 2007 approved the final dividend in respect of 2006 of RMB 0.22 per share (RMB 0.11 per adjusted ordinary share after the Bonus Issue as mentioned in above) amounting to a total of RMB 195,394,650. The amount was accounted for in shareholders’ equity as an appropriation of retained earnings.

The Board of Directors proposed a cash dividend of RMB 0.13 per share for the year ended December 31, 2007, amounting to approximately RMB 230,920,950. The proposed cash dividend distribution is subject to shareholders’ approval in their next general meeting and will be recorded in the Group’s financial statements for the year ending December 31, 2008.

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APPENDIX I

12. EARNINGS PER SHARE

Due to the Bonus Issue as described in note 11, the number of ordinary shares for the year ended December 31, 2006 for the purpose of calculating earnings per share has been adjusted retrospectively for the increase of ordinary shares.

Earnings per share for the year ended December 31, 2007 and December 31, 2006 have been computed by dividing the profit attributable to the equity holders of the Company, of RMB 630,989,000 and RMB 515,587,000, by 1,776,315,000 ordinary shares issued and outstanding.

There were no potential dilutive ordinary shares outstanding during the years ended December 31, 2007 and 2006.

13. PROPERTY, PLANT AND EQUIPMENT, NET

At December 31, property, plant and equipment comprised:

The Group:

Cost As at January 1, 2006 Purchases Transfer upon completion Disposals/write off As at December 31, 2006 Purchases Disposals/write off As at December 31, 2007	Computer systems and Buildings software RMB’000 RMB’000 58,496 1,524,605 2,710 119,662 — 484 — (6,114) 61,206 1,638,637 49,989 545,872 — (167,023) 111,195 2,017,486	Motor vehicles RMB’000 34,242 5,077 — (1,664) 37,655 7,876 (491) 45,040	Furniture, fixtures Assets and other under Leasehold equipment construction improvement RMB’000 RMB’000 RMB’000 29,850 181 — 9,245 3,464 14,044 — (484) — (610) — — 38,485 3,161 14,044 5,201 — 5,605 (542) (161) — 43,144 3,000 19,649	Total RMB’000 1,647,374 154,202 — (8,388) 1,793,188 614,543 (168,217) 2,239,514

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Accumulated depreciation As at January 1, 2006 Charge for the year Disposals/write off As at December 31, 2006 Charge for the year Disposals/write off As at December 31, 2007 Net book value As at December 31, 2006 As at December 31, 2007 The Company: Cost As at January 1, 2006 Purchases Disposals/write off As at December 31, 2006 Purchases Disposals/write off As at December 31, 2007	(9,334) (2,892) — (12,226) (3,162) — (15,388) 48,980 95,807 Buildings RMB’000 32,893 — — 32,893 33,590 — 66,483	(873,870) (18,558) (17,287) — — (206,368) (4,427) (4,410) — (2,672) 5,711 1,525 543 — — (1,074,527) (21,460) (21,154) — (2,672) (212,761) (4,725) (8,862) — (6,174) 160,474 433 450 — — (1,126,814) (25,752) (29,566) — (8,846) 564,110 16,195 17,331 3,161 11,372 890,672 19,288 13,578 3,000 10,803 Furniture, Computer fixtures systems and Motor and other Leasehold software vehicles equipment improvement RMB’000 RMB’000 RMB’000 RMB’000 1,512,721 20,285 21,228 — 118,428 3,849 7,553 12,443 (5,711) (923) (453) — 1,625,438 23,211 28,328 12,443 544,509 6,758 2,912 5,140 (164,442) — — — 2,005,505 29,969 31,240 17,583	(919,049) (220,769) 7,779 (1,132,039) (235,684) 161,357 (1,206,366) 661,149 1,033,148 Total RMB’000 1,587,127 142,273 (7,087) 1,722,313 592,909 (164,442) 2,150,780

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APPENDIX I

Accumulated depreciation As at January 1, 2006 Charge for the year Disposals/write off As at December 31, 2006 Charge for the year Disposals/write off As at December 31, 2007 Net book value As at December 31, 2006 As at December 31, 2007	(3,716) (1,595) — (5,311) (1,595) — (6,906) 27,582 59,577	(864,558) (205,345) 5,474 (1,064,429) (211,812) 157,978 (1,118,263) 561,009 887,242	(11,044) (2,502) 895 (12,651) (2,814) — (15,465) 10,560 14,504	(12,555) (2,857) 439 (14,973) (7,284) — (22,257) 13,355 8,983	— (2,045) — (2,045) (5,266) — (7,311) 10,398 10,272	(891,873) (214,344) 6,808 (1,099,409) (228,771) 157,978 (1,170,202) 622,904 980,578

14. INTANGIBLE ASSETS, NET

Cost As at January 1 Additions As at December 31 Accumulated amortization As at January 1 Amortization for the year As at December 31 Net book value As at December 31	The 2007 RMB’000 53,414 9,282 62,696 (43,445) (7,427) (50,872) 11,824	Group 2006 RMB’000 48,268 5,146 53,414 (35,036) (8,409) (43,445) 9,969	The Company 2007 2006 RMB’000 RMB’000 47,586 44,222 8,855 3,364 56,441 47,586 (39,678) (31,772) (6,747) (7,906) (46,425) (39,678) 10,016 7,908

The intangible assets of the Group and the Company represent computer software acquired.

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APPENDIX I

15. INVESTMENTS IN SUBSIDIARIES

	The	Group	The	Company
	2007	2006	2007	2006
	RMB’000	RMB’000	RMB’000	RMB’000
Investments, at cost:	—	—	37,507	37,507

A listing of the Company’s subsidiaries is shown in Note 1.

16. INVESTMENTS IN ASSOCIATED COMPANIES

Beginning of the year Share of profit Dividend received from associated companies Additional capital contribution End of the year	The 2007 RMB’000 68,343 12,991 (838) 5,500 85,996	Group 2006 RMB’000 53,854 11,727 (7,138) 9,900 68,343	The Company 2007 2006 RMB’000 RMB’000 21,790 11,890 — — — — 5,500 9,900 27,290 21,790	The Company 2007 2006 RMB’000 RMB’000 21,790 11,890 — — — — 5,500 9,900 27,290 21,790
				21,790

A listing of the Group’s associates is shown in Note 1.

The Group’s interest in its principal associates, all of which are unlisted, were as follows:

2006 2007	Total assets RMB’000 84,679 111,321	Total liabilities RMB’000 16,336 25,325	Revenues RMB’000 303,950 346,305	Profit attributable to equity holders RMB’000 11,727

				12,991

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APPENDIX I

17. FINANCIAL INSTRUMENTS BY CATEGORY

The accounting policies for financial instruments have been applied to the line items below:

The 2007 RMB’000 Assets as per balance sheet: Accounts receivable (Note 22) 141,565 Due from related parties (Note 23) 389,561 Due from subsidiaries, net_(Note 24) — Due from associated companies(Note 25) 6,308 Short-term bank deposits(Note 27) 1,843,949 Cash and cash equivalents (Note 28) 1,209,152 Loans and receivables 3,590,535 Held-to-maturity financial assets(Note 19)_ 100,000 Total 3,690,535	Group 2006 RMB’000 84,882 300,070 — 273 1,884,604 1,233,166 3,502,995 100,000 3,602,995	The Company 2007 2006 RMB’000 RMB’000 110,242 58,125 381,573 289,751 24,982 22,227 6,308 273 1,757,949 1,813,504 1,111,519 1,147,017 3,392,573 3,330,947 100,000 100,000 3,492,573 3,430,947	The Company 2007 2006 RMB’000 RMB’000 110,242 58,125 381,573 289,751 24,982 22,227 6,308 273 1,757,949 1,813,504 1,111,519 1,147,017 3,392,573 3,330,947 100,000 100,000 3,492,573 3,430,947
			3,330,947 100,000
			3,430,947

— 116 —

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APPENDIX I

18. DEFERRED INCOME TAX

Deferred tax assets: — Deferred tax assets to be recovered after more than 12 months — Deferred tax assets to be recovered within 12 months Deferred tax liabilities: — Deferred tax liabilities to be settled within 12 months	The 2007 RMB’000 6,539 2,690 9,229 (129) (129)	Group 2006 RMB’000 — — — — —	The Company 2007 2006 RMB’000 RMB’000 6,539 — 1,523 — 8,062 — — — — —	The Company 2007 2006 RMB’000 RMB’000 6,539 — 1,523 — 8,062 — — — — —
				—

				—
				—

The gross movement on the deferred income tax accounts is as follow:

The Group:

Depreciation and Amortization RMB’000 As at January 1, 2006 and December 31, 2006 — Charged/(credited) to the income statement 7,647 As at December 31, 2007 7,647	Provision and Others RMB’000 — 1,453 1,453	Total RMB’000 — 9,100
		9,100

— 117 —

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APPENDIX I

The Company:

Depreciation and Amortization RMB’000 As at January 1, 2006 and December 31, 2006 — Charged/(credited) to the income statement 7,614 As at December 31, 2007 7,614	Provision and Others RMB’000 — 448 448	Total RMB’000 — 8,062
		8,062

19. HELD-TO-MATURITY FINANCIAL ASSETS

At December 31, the Company and the Group had the following held-to-maturity financial assets:

	Interest rate and maturity	2007	2006
		RMB’000	RMB’000
Treasury bonds	3% per annum with maturity
	in December 2008	100,000	100,000

As at December 31, 2007, the held-to-maturity financial asset was classified as current assets as it will be matured within twelve months.

20. OTHER LONG-TERM ASSETS

At December 31, other long-term assets of the Company and the Group mainly comprised longterm rental deposits.

— 118 —

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APPENDIX I

21. INVENTORIES

Equipment for sale Spare parts Others Total Provision for impairment of inventories	The 2007 RMB’000 9,009 77 261 9,347 (106) 9,241	Group 2006 RMB’000 4,359 83 162 4,604 (106) 4,498	The Company 2007 2006 RMB’000 RMB’000 2,632 2,632 — — — — 2,632 2,632 — — 2,632 2,632

No inventories have been pledged as security for borrowings with the Group and the Company.

22. ACCOUNTS RECEIVABLE, NET

Accounts receivable Provision for impairment of receivables Accounts receivable, net	The 2007 RMB’000 146,390 (4,825) 141,565	Group 2006 RMB’000 87,960 (3,078) 84,882	The Company 2007 2006 RMB’000 RMB’000 113,797 60,997 (3,555) (2,872) 110,242 58,125

The payment period is normally within six months after the services are rendered.

The carrying amounts of the Group’s accounts receivable approximated its fair value as at December 31, 2007 because of the short-term maturities of these receivables.

The maximum exposure to credit risk at the reporting date is the fair value of accounts receivable. The Group does not hold any collateral as security.

— 119 —

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APPENDIX I

As at December 31, 2007 and 2006, the ageing analysis of the accounts receivable was as follows:

Within 6 months Over 6 months but within 1 year Over 1 year but within 2 years Over 2 years but within 3 years Over 3 years Accounts receivable Provision for impairment of receivables Accounts receivable, net	The 2007 RMB’000 126,837 6,390 4,578 1,247 7,338 146,390 (4,825) 141,565	Group 2006 RMB’000 73,294 4,859 2,083 6,598 1,126 87,960 (3,078) 84,882	The Company 2007 2006 RMB’000 RMB’000 108,850 56,190 1,490 2,196 1,008 1,224 1,062 265 1,387 1,122 113,797 60,997 (3,555) (2,872) 110,242 58,125

As of December 31, 2007, accounts receivable of RMB 8,656,000 (2006: RMB 3,524,000) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. The aging analysis of these accounts receivable is as follows:

Over 6 months but within 1 year Over 1 year but within 2 years Over 2 years but within 3 years	The 2007 RMB’000 4,900 3,571 185 8,656	Group 2006 RMB’000 2,664 860 — 3,524	The Company 2007 2006 RMB’000 RMB’000 — — — — — — — —

— 120 —

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APPENDIX I

As of December 31, 2007, accounts receivable of RMB 10,897,000 (2006: RMB 11,142,000) were impaired. The amount of the provision was RMB 4,825,000 as of December 31, 2007 (2006: RMB 3,078,000). It was assessed that a portion of the receivables is expected to be recovered. The ageing of these receivables is as follows:

Over 6 months but within 1 year Over 1 year but within 2 years Over 2 years but within 3 years Over 3 years	The 2007 RMB’000 1,490 1,007 1,062 7,338 10,897	Group 2006 RMB’000 2,195 1,223 6,598 1,126 11,142	The Company 2007 2006 RMB’000 RMB’000 1,490 2,196 1,008 1,224 1,062 265 1,387 1,122 4,947 4,807	The Company 2007 2006 RMB’000 RMB’000 1,490 2,196 1,008 1,224 1,062 265 1,387 1,122 4,947 4,807
				4,807

The movement of provision for impairment of receivables is as follows:

Balance at beginning of year Provision Balance at end of year	The 2007 RMB’000 3,078 1,747 4,825	Group 2006 RMB’000 1,755 1,323 3,078	The Company 2007 2006 RMB’000 RMB’000 2,872 1,557 683 1,315 3,555 2,872	The Company 2007 2006 RMB’000 RMB’000 2,872 1,557 683 1,315 3,555 2,872
				2,872

The carrying amounts of the accounts receivable are denominated in the following currencies:

RMB HKD denominated USD denominated Others	The 2007 RMB’000 47,353 7,430 87,502 4,105 146,390	Group 2006 RMB’000 27,587 4,112 56,213 48 87,960	The Company 2007 2006 RMB’000 RMB’000 26,946 16,722 4,629 2,077 78,159 42,198 4,063 — 113,797 60,997	The Company 2007 2006 RMB’000 RMB’000 26,946 16,722 4,629 2,077 78,159 42,198 4,063 — 113,797 60,997
				60,997

— 121 —

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APPENDIX I

23. DUE FROM RELATED PARTIES, NET

Within 6 months Over 6 months but within 1 year Over 1 year but within 2 years Over 2 years but within 3 years Over 3 years Due from related parties Provision for impairment of receivables Due from related parties, net	The 2007 RMB’000 377,452 10,796 7,055 1,895 7,028 404,226 (14,665) 389,561	Group 2006 RMB’000 289,133 10,889 7,685 5,148 1,880 314,735 (14,665) 300,070	The Company 2007 2006 RMB’000 RMB’000 370,852 279,376 10,721 10,855 5,779 7,157 1,858 5,148 7,028 1,880 396,238 304,416 (14,665) (14,665) 381,573 289,751

These balances are trade related, interest free, unsecured and generally repayable within six months.

As of December 31, 2007, due from related parties of RMB 12,109,000 (2006: RMB 10,937,000) were past due but not impaired. These relate to a number of customers for whom there is no recent history of default. The aging analysis of these receivables are as follows:

Over 6 months but within 1 year Over 1 year but within 2 years Over 2 years but within 3 years	The 2007 RMB’000 10,796 1,276 37 12,109	Group 2006 RMB’000 5,110 5,827 — 10,937	The Company 2007 2006 RMB’000 RMB’000 10,721 5,076 — 5,299 — — 10,721 10,375

— 122 —

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APPENDIX I

As of December 31, 2007, due from related parties of RMB 14,665,000 (2006: RMB 14,665,000) were impaired. The amount of the provision was RMB 14,665,000 as of December 31, 2007 (2006: RMB 14,665,000) for the estimated losses resulting from the disagreement on services and payments. The ageing of the receivable is as follows:

Over 6 months but within 1 year Over 1 year but within 2 years Over 2 years but within 3 years Over 3 years	The 2007 RMB’000 — 5,779 1,858 7,028 14,665	Group 2006 RMB’000 5,779 1,858 5,148 1,880 14,665	The Company 2007 2006 RMB’000 RMB’000 — 5,779 5,779 1,858 1,858 5,148 7,028 1,880 14,665 14,665

24. DUE FROM SUBSIDIARIES, NET

Within 6 months Over 6 months but within 1 year Over 1 year but within 2 years Over 2 years but within 3 years Over 3 years Total Provision for impairment of receivables Due from subsidiaries, net	The 2007 RMB’000 — — — — — — — —	Group 2006 RMB’000 — — — — — — — —	The Company 2007 2006 RMB’000 RMB’000 7,111 8,540 3,210 2,287 5,751 3,783 2,293 4,813 14,428 10,615 32,793 30,038 (7,811) (7,811) 24,982 22,227

These balances are trade related, interest free and unsecured.

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APPENDIX I

25. DUE FROM ASSOCIATED COMPANIES

These balances are trade related, interest free, unsecured and generally repayable within one year.

26. PREPAYMENTS AND OTHER CURRENT ASSETS

Advance payments Interest receivable Prepaid expenses Other current assets Total	The 2007 RMB’000 35,822 34,046 18,661 13,870 102,399	Group 2006 RMB’000 13,578 28,894 13,045 6,547 62,064	The Company 2007 2006 RMB’000 RMB’000 32,460 5,050 34,046 28,894 18,661 12,775 3,473 1,069 88,640 47,788	The Company 2007 2006 RMB’000 RMB’000 32,460 5,050 34,046 28,894 18,661 12,775 3,473 1,069 88,640 47,788
				47,788

27. SHORT-TERM BANK DEPOSITS

RMB HKD denominated USD denominated	The 2007 RMB’000 1,666,000 177,949 — 1,843,949	Group 2006 RMB’000 1,601,100 221,034 62,470 1,884,604	The Company 2007 2006 RMB’000 RMB’000 1,580,000 1,530,000 177,949 221,034 — 62,470 1,757,949 1,813,504	The Company 2007 2006 RMB’000 RMB’000 1,580,000 1,530,000 177,949 221,034 — 62,470 1,757,949 1,813,504
				1,813,504

The annual interest rate on short-term bank deposits ranges from 2.52% to 4.80% (2006: 1.71% to 4.89%) and these deposits have a maturity period ranging from 6 to 24 months (2006: 6 to 36 months).

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APPENDIX I

28. CASH AND CASH EQUIVALENTS

Cash RMB HKD denominated USD denominated Others Demand deposits RMB USD denominated HKD denominated Others Total cash and cash equivalents	The 2007 RMB’000 60 34 — 5 99 1,094,216 78,280 31,640 4,917 1,209,053 1,209,152	Group 2006 RMB’000 300 30 1 8 339 1,064,720 109,976 55,921 2,210 1,232,827 1,233,166	The Company 2007 2006 RMB’000 RMB’000 20 110 — — — — — — 20 110 1,051,485 1,022,124 45,797 79,295 14,217 45,488 — — 1,111,499 1,146,907 1,111,519 1,147,017	The Company 2007 2006 RMB’000 RMB’000 20 110 — — — — — — 20 110 1,051,485 1,022,124 45,797 79,295 14,217 45,488 — — 1,111,499 1,146,907 1,111,519 1,147,017
				110
				1,022,124 79,295 45,488 —
				1,146,907
				1,147,017

29. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

The 2007 RMB’000 Accounts payable 180,255 Accrued departure technology support fee 100,443 Accrued technical support fee 17,245 Accrued network usage fees 45,113 Accrued bonus and employee benefit to employees 49,189 Other taxes payable_(i)_ 30,459 Other liabilities 47,508 Total 470,212	Group 2006 RMB’000 110,142 55,476 27,548 45,565 50,557 24,282 45,630 359,200	The Company 2007 2006 RMB’000 RMB’000 163,835 96,457 100,442 62,494 15,902 25,742 45,113 45,565 46,060 47,652 29,935 22,992 41,212 42,851 442,499 343,753	The Company 2007 2006 RMB’000 RMB’000 163,835 96,457 100,442 62,494 15,902 25,742 45,113 45,565 46,060 47,652 29,935 22,992 41,212 42,851 442,499 343,753
			343,753

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At December 31, 2007, approximately RMB 141,607,000 of the above balances were denominated in US dollars (2006: RMB 123,664,000).

The aging analysis of accounts payable and accrued liabilities are as follows:

Within 6 months Over 6 months but within 1 year Over 1 year but within 2 years Over 2 years but within 3 years Over 3 years Total accounts payable Accrued liabilities and other liabilities Total	The 2007 RMB’000 133,228 13,078 7,884 17,481 8,584 180,255 289,957 470,212	Group 2006 RMB’000 25,238 8,773 55,809 754 19,568 110,142 249,058 359,200	The Company 2007 2006 RMB’000 RMB’000 124,746 16,059 11,231 6,758 4,630 53,531 14,644 541 8,584 19,568 163,835 96,457 278,664 247,296 442,499 343,753

(i) Other taxes payables

Business tax payable VAT payable Other Total	The 2007 RMB’000 24,959 (977) 6,477 30,459	Group 2006 RMB’000 17,640 167 6,475 24,282	The Company 2007 2006 RMB’000 RMB’000 24,034 16,977 (73) (126) 5,974 6,141 29,935 22,992

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30. DUE TO RELATED PARTIES

Within 6 months Over 6 months but within 1 year Over 1 year but within 2 years Over 2 years but within 3 years Over 3 years Total	The 2007 RMB’000 14,069 — — 5,424 20,467 39,960	Group 2006 RMB’000 1,153 50,945 11,366 3,116 18,862 85,442	The Company 2007 2006 RMB’000 RMB’000 14,069 152 — 50,850 — 10,794 4,934 2,787 11,530 9,524 30,533 74,107	The Company 2007 2006 RMB’000 RMB’000 14,069 152 — 50,850 — 10,794 4,934 2,787 11,530 9,524 30,533 74,107
				74,107

These balances comprised mainly dividend payables and service fee payable.

31. PAID-IN CAPITAL

The Paid-In capital as at December 31, 2007 represented 577,303,500 Domestic Shares that were issued by the Company upon incorporation, 310,854,000 H Shares that were issued by the Company in February, 2001, and 888,157,500 new ordinary shares due to the Bonus Issue in June, 2007 as described in Note 11.

2007 Number of shares ’000 Authorized: Domestic Shares of RMB 1 each 1,154,607 H Shares of RMB 1 each 621,708 Total shares of RMB 1 each 1,776,315 Issued and fully paid: Domestic Shares of RMB 1 each 1,154,607 H Shares of RMB 1 each 621,708 Total shares of RMB 1 each 1,776,315	2007 Amount RMB’000 1,154,607 621,708
	1,776,315

	1,154,607 621,708
	1,776,315

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32. RESERVES

The Group Balance as at January 1, 2006 Transfer from Statutory Public Welfare Fund Transfer from retained earnings Currency translation differences Balance as at December 31, 2006 Transfer to Paid-In capital_(Note 31)_ Transfer from retained earnings Currency translation differences Balance as at December 31, 2007	Capital Surplus RMB’000 1,194,956 — — — 1,194,956 (888,157) — — 306,799	Statutory Surplus Reserve Fund RMB’000 218,004 207,330 52,248 — 477,582 — 36,847 — 514,429	Statutory Discretionary Public Surplus Welfare Reserve Fund Fund RMB’000 RMB’000 207,330 291,614 (207,330) — — 103,111 — — — 394,725 — — — 83,699 — — — 478,424	Currency translation differences RMB’000 (450) — — (701) (1,151) — — (1,667) (2,818)	Total RMB’000 1,911,454 — 155,359 (701) 2,066,112 (888,157) 120,546 (1,667) 1,296,834

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The Company Balance as at January 1, 2006 Transfer from Statutory Public Welfare Fund Transfer from retained earnings Balance as at December 31, 2006 Transfer to Paid-In capital_(Note 31)_ Transfer from retained earnings Balance as at December 31, 2007	Capital Surplus RMB’000 1,194,956 — — 1,194,956 (888,157) — 306,799	Statutory Surplus Reserve Fund RMB’000 215,928 205,554 51,478 472,960 — 41,469 514,429	Statutory Discretionary Public Surplus Welfare Reserve Fund Fund RMB’000 RMB’000 205,554 291,528 (205,554) — — 102,779 — 394,307 — — — 84,117 — 478,424	Currency translation differences RMB’000 — — — — — — —	Total RMB’000 1,907,966 — 154,257 2,062,223 (888,157) 125,586 1,299,652

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APPENDIX I

33. APPROPRIATIONS AND DISTRIBUTION OF PROFIT

In accordance with the Company Law of PRC, which was revised on October 27, 2005 and became effective on January 1, 2006, and the Articles of Association of the Company, the Company would not make any appropriations to the statutory public welfare fund commencing from 2006. According to the Circular on corporate accounting treatment following the implementation of Company Law issued by the Ministry of Finance on March 15, 2006, the balance of the statutory public welfare fund at December 31, 2005 was transferred into the statutory surplus reserve fund.

In the year ended December 31, 2007, according to the Company Law of PRC, related regulations, and the Articles of Association of the Company, the distributable net profit after taxation and minority interest is distributed in order as follow:

(i) making up cumulative prior years’ losses, if any;
(ii) appropriation to the statutory surplus reserve fund;
(iii) appropriation to the discretionary surplus reserve fund;
(iv) appropriation to the distribution of dividends for ordinary shares.

For the year ended December 31, 2007, the Board’s proposed appropriations to the statutory surplus reserve fund and discretionary surplus reserve fund were adjusted for the impact of the new PRC Accounting Standards that became effective on January 1, 2007.

The appropriation to the discretionary surplus reserve fund for the year ended December 31, 2006 was approved in the annual general meeting held on June 5, 2007. The amount was accounted for in shareholder’s equity as a distribution of retained earnings in the year ended December 31, 2007.

The proposed appropriation of RMB 118,357,000 to the discretionary surplus reserve fund for the year ended December 31, 2007 is subject to shareholders’ approval at the next general meeting. Therefore, the amount will be recorded in the Group’s financial statements for year ending December 31, 2008.

After the appropriations mentioned above, the retained earnings available for distribution as at December 31, 2007 was approximately RMB 959,553,000 (2006: RMB 787,939,000).

The profit attributable to equity holders of the Company is dealt with in the financial statements of the Company to the extent of RMB 591,783,000 (2006: RMB 495,029,000) for the year ended December 31, 2007.

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34. CASH GENERATED FROM OPERATING ACTIVITIES

Profit before taxation Adjustments for: Depreciation and amortization Loss on disposal of property, plant and equipment Interest income Provision for impairment of receivables Provision for impairment of inventories Share of results from associated companies Foreign exchange loss Decrease (increase) in current assets: Accounts receivable Inventories Prepayments and other current assets Due from related parties/associated companies Increase (decrease) in current liabilities: Accounts payable and accrued liabilities Deferred revenue Due to related parties Cash generated from operations	2007 RMB’000 718,591 243,111 6,039 (69,512) 1,747 — (12,991) 19,149 (58,430) (4,743) (5,370) (95,526) 33,728 2,726 11,713 790,232	2006 RMB’000 627,942 229,178 83 (67,624) 10,608 106 (11,727) 14,517 (24,689) (1,214) (4,391) (36,237) 20,153 473 1,733 758,911

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APPENDIX I

35. FINANCIAL RISK MANAGEMENT

Financial risk factors

The Group’s activities expose it to a variety of financial risks: market risk (including currency risk and interest rate risk), credit risk, and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance.

Financial risk management is carried out by the Group’s finance department, following the overall directions determined by the Board of Directors. The Group’s finance department identifies and evaluates financial risks in close co-operation with the Group’s operating units.

(i) Foreign currency risk

The Group’s functional currency is RMB. Majority of transactions are conducted in RMB except certain commercial transactions with foreign airlines and purchases of machinery and equipment from overseas suppliers The Group manages the foreign exchange risks by performing regular reviews of the Group’s net foreign exchange exposure.

The Group’s exposure to foreign exchange risk relates principally to its accounts receivables, cash and cash equivalents, short-term bank deposits and accounts payables denominated in foreign currencies. Analysis of these assets and liabilities by currency are disclosed in Notes 22, 28, 27, and 29 respectively.

As at December 31, 2007, if RMB had strengthened/weakened by 5% against US$ and HK$ with all other variables held constant, which were considered reasonably possible at each of the dates by management, the profit for the years ended December 31, 2007 would have been approximately RMB 11,651,000 lower/higher, mainly as a result of foreign exchange losses on translation of US$ and HK$ denominated accounts receivables, cash and cash equivalents, short-term bank deposits and accounts payables.

(ii) Interest rate risk

The Group’s interest-bearing assets are mainly represented by cash and cash equivalents, bank deposits and treasury bonds. Interest income is approximately RMB 69,512,000 (2006: RMB 67,624,000). Apart from this, the Group’s income and operating cash flows are substantially independent of changes in market interest rates. The interest rates and maturities of the Group’s short-term bank deposits and treasury bonds are disclosed in Note 27 and Note 19.

The Group has no significant borrowing and non-current liabilities at December 31, 2007 and do not has significant exposure to changes in interest rates.

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(iii) Credit risk

Credit risk is managed on a group basis. Credit risk arises from cash and cash equivalents, short-term deposits, accounts receivables, and due from related parties. The carrying amounts of these current assets represent the Group’s maximum exposure to credit risk in relation to financial assets.

As a substantial portion of these revenues was generated from the shareholders of the Company, the amount due from related parties balances are trade related, and the counterparties mainly comprise the domestic airlines. Most of these domestic airlines are stated-owned enterprises with good repayment history. Based on historical record, the repayment period is normally within 6 months and there was no material default of the balances in the past. Approximately 62% (2006: 60%) of the total amount due from related parties was due from the top 3 customers of the Group: China Southern Air Company Limited, China Eastern Air Company Limited, and Air China Limited.

The Group has policies to ensure that the bank balances are placed with the banks with good reputation and credit quality. The Group also performs evaluation of credit quality of the banks periodically. Approximately 67% (2006: 66%) of the total bank balances were concentrated with 4 stated-owned banks as at December 31, 2007.

(iv) Liquidity risk

The Group maintains cash and bank deposits to hedge its liquidity risks. Approximately 62% of the total assets are cash and cash equivalents, or short-term deposits as at December 31, 2007 (2006: 70%), which is adequate to meet its daily operations requirements. Directors believe the Group has sufficient cash balances as at December 31, 2007 and has no significant exposure to liquidity risk.

Capital risk management

The Group’s objective is to maintain an optimal capital structure and reduce the cost of capital.

The Group reviews and manages its capital structure actively and regularly to ensure optimal capital structure and shareholder returns, taking into account the future capital requirements of the Group and capital efficiency, prevailing and projected profitability, projected operating cash flows, projected capital expenditures and projected strategic investment opportunities.

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APPENDIX I

Fair value estimation

The Group’s financial instruments mainly consist of cash and cash equivalents, short-term bank deposits, accounts receivables, prepayments, due from associated and related parties, treasury bonds, accounts payables, and due to related parties.

The carrying amounts of the Group’s financial instruments except for treasury bonds approximated their fair values as at December 31, 2007 because of the short-term maturities of these instruments.

The treasury bonds that are held to maturity are carried at amortized cost. At December 31, 2007, the market value of the treasury bonds was approximately RMB 100,560,000 (2006: RMB 100,430,000).

36. SEGMENT REPORTING

The Group conducts its business within one business segment — the business of providing aviation information technology and related services in the PRC. The Group’s chief decision maker for operation is considered to be the Group’s general manager. The information reviewed by the general manager is identical to the information presented in the consolidated income statement. No segment income statement has been prepared by the Group for the year ended December 31, 2007 and 2006. The Group also operates within one geographical segment because its revenues are primarily generated in the PRC and its assets are located in the PRC. Accordingly, no geographical segment data is presented.

37. COMMITMENTS

(a) Capital commitments

At December 31, the Group had the following capital commitments:

Authorized and contracted for — Computer System — Building Authorized but not contracted for — Computer System — Land use right and Building Total	2007 RMB’000 55,720 63,437 661,692 628,962 1,409,811	2006 RMB’000 7,923 — 494,680 —
		502,603

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The above capital commitments primarily relate to the development of the new generation aviation passenger service system and the construction of new operating centre in Beijing.

At December 31, 2007, less than RMB 1 million of the above balance were denominated in US dollars (2006: Nil).

(b) Operating lease commitments

As at December 31, the Group had the following commitments under operating leases:

Within one year Later than one year but not later than five years Total	2007 RMB’000 58,581 68,264 126,845	2006 RMB’000 17,521 46,530
		64,051

(c) Equipment maintenance fee commitments

As at December 31, 2007, the Group had equipment maintenance fee commitments as of RMB 14,417,000 (2006: Nil).

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APPENDIX I

38. RELATED PARTY TRANSACTIONS

Entities are considered to be related if one has the ability to control the other, directly or indirectly, or has the ability to exercise significant influence over the financial and operating decisions of the other. Entities are also considered to be related if they are subject to common control or common significant influence.

Management believes that meaningful information relative to related party disclosures has been adequately disclosed.

(1) Related parties

The major related parties of the Company and the Group are as follows:

Name

Relationship with the Company

China TravelSky Holding Company (“CTHC”) China Southern Air Holding Company China Southern Airlines Company Limited China Eastern Air Holding Company China Eastern Airlines Company Limited China National Aviation Holding Company Air China Limited Xiamen Airlines Company Limited China Eastern Airlines Wuhan Company Limited Hainan Airlines Company Limited Shenzhen Airlines Company Limited Shanghai Airlines Company Limited Sichuan Airlines Holding Company Sichuan Airlines Company Limited Asia Technology Development Company Limited (“Asia Technology”)

Shareholder of the Company Shareholder of the Company Subsidiary of a shareholder of the Company Shareholder of the Company Subsidiary of a shareholder of the Company Shareholder of the Company Subsidiary of a shareholder of the Company Shareholder of the Company Shareholder of the Company

Shareholder of the Company Shareholder of the Company Shareholder of the Company Shareholder of the Company Subsidiary of a shareholder of the Company Indirect wholly owned subsidiary of a shareholder of the Company

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(2) Related party transactions

The following is a summary of significant recurring transactions carried out with the Group’s related parties.

(i) Revenue for aviation information technology and data network services, the pricing of which was based on either contractual arrangements or negotiated prices with these related parties with reference to the pricing standards prescribed by Civil Aviation Administration of China (“CAAC”) where applicable.

Name China Southern Airlines Company Limited_(a) China Eastern Airlines Company Limited(b)_ Air China Limited Hainan Airlines Company Limited Shanghai Airlines Company Limited Shenzhen Airlines Company Limited	2007 RMB’000 347,507 273,339 241,469 146,464 99,295 101,128	2006 RMB’000 300,552 246,545 226,965 123,533 79,347 78,464

(a) Included the transaction amount of its subsidiary, Xiamen Airlines Company Limited.
(b) Included the transaction amount of its subsidiary, China Eastern Airlines Wuhan Company Limited.

In the Directors’ opinion, these transactions were carried out with related parties in the ordinary course of business and on normal commercial terms.

(ii) Lease of properties from CTHC

For the year ended December 31, 2007, operating lease rentals for lease of properties from CTHC amounted to RMB 38,608,608 (2006: RMB 38,608,608). The pricing of operating lease rentals for buildings is based on agreed rates with CTHC.

(iii) Computer software development services provided by Asia Technology.

For the year ended December 31, 2007, computer software development services provided by Asia Technology amounted to RMB 18,800,000 (2006: RMB 18,800,000). Asia Technology is an indirect wholly owned subsidiary of CTHC. The pricing of computer software development service fee is based on contractual arrangement with Asia Technology.

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APPENDIX I

(3) Balances with related parties

Balances due from the related parties mainly comprised:

Name China Southern Airlines Company Limited_(a) China Eastern Airlines Company Limited(b)_ Air China Limited Hainan Airlines Company Limited Sichuan Airlines Company Limited Shenzhen Airlines Company Limited	The Group 2007 2006 RMB’000 RMB’000 129,108 18,215 67,843 93,685 52,680 77,188 45,009 39,847 45,487 3,190 25,482 45,204	The Company 2007 2006 RMB’000 RMB’000 126,854 16,516 64,684 92,932 52,667 77,180 44,973 39,796 45,587 2,640 23,314 45,126

(a) Included the transaction balance of its subsidiary, Xiamen Airlines Company Limited.
(b) Included the transaction balance of its subsidiary, China Eastern Airlines Wuhan Company Limited.

The balances with related parties were unsecured, non-interest bearing and generally repayable within six months.

The balances with related parties primarily arose from the above related party transactions.

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APPENDIX I

(4) Amounts due from other major state-owned enterprises

The balances with other major state-owned banks are as follows:

	The	Group	The	Company
Name	2007	2006	2007	2006
	RMB’000	RMB’000	RMB’000	RMB’000
Bank balances	2,058,932	2,064,720	1,880,290	1,912,320

The Group is a state-owned enterprise. In accordance with the revised IAS 24, “Related Party Disclosures”, state-owned enterprises and their subsidiaries, other than entities under the Group, directly or indirectly controlled by the PRC government are also defined as related parties of the Company and its subsidiaries.

The majority of the business activities of the Company and its subsidiaries are conducted with state — owned enterprises. For the purpose of the related party transactions disclosure in accordance with IAS 24, the Company and its subsidiaries have established procedures to determine, to the extent possible, the identification of the ownership structure of its customers and suppliers as to whether they are state-owned enterprises. However, many state-owned enterprises have a multi-layered corporate structure and the ownership structures change over time as a result of transfers and privatization programs. Nevertheless, management believes that all material related party balances and transactions have been adequately disclosed.

39. ULTIMATE HOLDING COMPANY

The Directors regard China TravelSky Holding Company established in the PRC as being the ultimate holding company.

40. RECLASSIFICATION

Certain comparative figures have been reclassified to conform to the current year presentation.

41. APPROVAL OF FINANCIAL STATEMENTS

The financial statements were approved by the Board of Directors on March 28, 2008.

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APPENDIX I

(C) MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE GROUP

The following discussion and analysis is extracted from the annual report of the Company for the year ended December 31, 2007. The financial statements have been prepared in accordance with International Financial Reporting Standards. The following discussions on the synopsis of historical results do not represent a prediction as to the future business operations of the Group.

Overview

For the year ended December 31, 2007 (“Year 2007”), profit before taxation of the Group was approximately RMB718.6 million, representing an increase of approximately 14.4% over that in the year ended December 31, 2006 (“Year 2006”). Earnings before interests, tax, depreciation and amortization (EBITDA) reached approximately RMB892.2 million, representing an increase of approximately 13.0% over that in Year 2006. Profit attributable to equity holders of the Company was approximately RMB631.0 million, an increase of approximately 22.4% over that in Year 2006 was mainly due to the increase of operating profit and the refund of income tax.

The basic and diluted earnings per share of the Group in Year 2007 was RMB0.36.

Revenue

The total revenue of the Group in Year 2007 amounted to approximately RMB2,001.9 million, representing an increase of approximately RMB290.2 million, or 17.0% from approximately RMB1,711.7 million in Year 2006. Such increase was mainly due to the rapid increase in the business volume of the Company’s aviation information technology services (“AIT services”) and the increase of revenue from other business such as the distribution of travel products and information technology integration in 2007. The increase in total revenue is reflected as follows:

AIT service revenue represented 80.0% of the total revenue of the Group in Year 2007 as compared to 81.5% in Year 2006. AIT service revenue increased by approximately 14.8% to approximately RMB1,601.2 million in Year 2007 from approximately RMB1,395.2 million in Year 2006.
Data network and other revenue represented 20.0% of the total revenue of the Group in Year 2007 as compared to 18.5% in Year 2006. Data network and other revenue increased by approximately 26.6% to approximately RMB400.7 million in Year 2007 from approximately RMB316.5 million in Year 2006.

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Operating Expenses

Operating expenses for Year 2007 amounted to RMB1,345.0 million, representing an increase of RMB197.1 million, or 17.2%, from RMB1,147.9 million in Year 2006. The increase in operating expenses reflected the following:

Depreciation and amortization expenses increased from RMB229.2 million in Year 2006 by 6.1% to RMB243.1 million in Year 2007, mainly due to that the increase in the capital expenditure for Year 2007 led the increase of the depreciation and amortization;
Staff costs increased by 13.3%, primarily due to an increase in the number of employees in order to support the development of the Group’s business;
Technical support and maintenance fees increased by 54.8%, mainly due to the addition of a large-scale mainframe and network facilities into the Company, which led to corresponding increase of technical support and maintenance fees;
Commission and promotion expenses increased by 27.8%, primarily because of business development such as APP and hotel reservation and the successful execution of marketing plans; and
Network usage increased from RMB76.5 million in Year 2006 by 9.2% to RMB83.6 million in Year 2007 mainly due to the expansion of aviation information technology services.

As a result of the above changes in revenue and operating expenses, the operating profit of the Group increased by RMB93.1 million, or 16.5%, to RMB656.9 million in Year 2007 from RMB563.8 million in Year 2006.

Enterprise Income Tax

The Company, registered as a new technology enterprise in October 2000 in Zhongguancun Haidian Science Park, has been approved by the Haidian State Tax Bureau an enterprise income tax rate of 15% was effective from January 1, 2006.

As stated in the Company’s announcement issued on January 31, 2007, the Company was recognized as one of the “Important Software Enterprises under the National Planning Layout” (“Important Software Enterprises”) in 2006. According to relevant regulations, recognized Important Software Enterprises which are not in their tax holiday period are entitled to an EIT preferential tax rate of 10% in the relevant year. Accordingly, the Company, recognized as one of 2006 Important Software Enterprises is entitled to enjoy the above EIT preferential tax rate in the financial year ended December 31, 2006. The Company has already paid EIT at the rate of 15% for the financial year ended December 31, 2006. According to the related regulations, the EIT paid by the Company for the financial year ended December 31, 2006 over the preferential tax rate of 10% will be refunded to the Company in the subsequent year. Its impact was accounted for in 2007 financial statements accordingly.

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APPENDIX I

In Year 2007, the Company had paid the enterprise income tax for the financial year ended December, 31 2007 at a rate of 15%. As mentioned in the Company’s announcement published on March,13 2008, the Company was once again recognized as one of the “Important Software Enterprises” in 2007. According to the related regulations, the difference between the enterprise income taxes levied at the rate of 15% and that at the rate of 10% in 2007 will be refunded to the Company in 2008. The refund will be accounted for in subsequent financial statements when the refund occurs.

Profit attributable to equity holders of the Company

As a result of the above factors, the profit attributable to equity holders of the Company increased by approximately 22.4% to approximately RMB631.0 million in Year 2007 from approximately RMB515.6 million in Year 2006.

Dividend

On March 28, 2008, the Board recommended a final cash dividend of RMB0.13 per share for Year 2007, amounting to RMB230,920,950. After the distribution of the above dividend declared, the retained earnings available for distribution as at December 31, 2007 would be approximately RMB728.6 million (2006: RMB592.5 million).

Liquidity and Capital Structure

The following table summarizes the cash flows of the Group for the years presented:

	For the year ended December 31,	For the year ended December 31,
	2007	2006
	(RMB in million)	(RMB in million)
Net cash generated from operating activities	720.6	650.9
Net cash used in investing activities	(467.1)	(42.1)
Net cash used in financing activities	(256.8)	(217.3)
Effect of foreign exchange rate changes on
cash and cash equivalents	(20.8)	(15.2)
Net increase (decrease) in cash and cash equivalents	(24.0)	376.3

The Group’s working capital for Year 2007 mainly came from operating activities. Net cash inflow from operating activities amounted to RMB720.6 million.

In Year 2007, the Group had no short-term and long-term bank loans, and the Group did not use any financial instruments for hedging purposes.

As at December 31, 2007, cash and cash equivalents of the Group amounted to RMB1,209.2 million, of which approximately 90.5%, 6.5% and 2.6% were denominated in Renminbi, U.S. dollars and Hong Kong dollars, respectively.

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APPENDIX I

Held-to-maturity Financial Assets

As at December 31, 2007, the Group held RMB100 million treasury bonds of China with an interest rate of 3% per annum. The maturity date of the treasury bonds is on December 18, 2008.

Charge on Assets

As at December 31, 2007, the Group had no charge on its assets.

Capital Expenditure

The capital expenditure of the Group amounted to approximately RMB623.8 million in Year 2007, representing an increase of approximately RMB464.5 million as compared to that of approximately RMB159.3 million in Year 2006. The capital expenditure of the Group in Year 2007 consisted principally of purchase of hardware, software and infrastructure in accordance with the Group’s business strategies.

The Board estimates that the Group’s planned capital expenditure for year 2008 will amount to approximately RMB1,372.0 million, which is mainly for construction of new operating centre in Beijing and development and gradual implementation of the new generation aviation passenger service system and other new businesses. The sources of funding for the capital expenditure commitments will include internal cash flow generated from operations. The Board estimates that the sources of funding of the Group in year 2008 will be sufficient for its capital expenditure commitments, daily operations and other purposes.

Exchange Risks

The Group’s foreign exchange risk arises from commercial transactions and recognised assets and liabilities. Fluctuation of the exchange rates of Renminbi against foreign currencies could affect the Group’s results of operations.

Gearing Ratio

As at December 31, 2007, the gearing ratio of the Group was approximately 10.8% (2006: 10.3%), which was computed by dividing the total amount of liabilities by the total assets of the Group as at December 31, 2007.

Contingent Liabilities

As at December 31, 2007, the Group had no material contingent liabilities.

— 143 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Employees

As at December 31, 2007, the total number of employees of the Group was 2,629. Staff costs amounted to approximately RMB271.7 million for Year 2007, representing approximately 20.2% of the total operating cost of the Group for Year 2007.

The remuneration of the employees of the Group (including Executive Directors and Staff Representative Supervisors) includes salaries, bonuses and other fringe benefits. The Group has different rates of remuneration for different employees (including Executive Directors and Staff Representative Supervisors), according to their performance, experience, position and other factors in compliance with the relevant PRC laws and regulations. Currently, none of the Non-executive Directors receive any remuneration. Nevertheless, any reasonable expenses incurred by the Non-executive Directors during their service period will be borne by the Company. Independent Non-executive Directors do receive remuneration from the Company, which is determined by reference to the prevailing market price, and that any reasonable expenses incurred by Independent Non-executive Directors during their service period will be borne by the Company.

In Year 2007, the Group continued to provide its employees with opportunities to acquire skills in relation to the aviation and travel industry, computer technologies and business administration and provide training on the latest development in areas such as computer technologies, personal development, laws, regulations and economics.

Basic Medical Insurance Regulation

On February 20, 2001, the People’s Government of the Municipality of Beijing in the PRC promulgated the “Basic Medical Insurance Regulation for the Municipality of Beijing” (the “Regulation”). Given the fact that relevant regulations concerning employees’ medical insurance must be applied according to the policies applicable to the place in which a company is located, the head office of the Company in Beijing implemented the Regulation from September 1, 2002 onwards. For Year 2007, the Company incurred a total amount of RMB8,972,092 (a total amount of RMB7,162,909 was incurred in Year 2006) pursuant to the Regulation. The Board believes that by implementing the Regulation, the financial position of the Company has not been materially affected.

— 144 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(D) INDEBTEDNESS STATEMENT

Borrowings

As at the close of business on April 30, 2008, being the latest practicable date for the purpose of ascertaining certain information relating to this indebtedness statement prior to the printing of this circular, the Enlarged Group did not have any outstanding bank loans.

Disclaimer

Save as otherwise disclosed herein, and apart from intra-group liabilities, the Enlarged Group did not, at the close of business on April 30, 2008, have any loans capital issued and outstanding or agreed to be issued, bank overdrafts, charges or debentures, mortgages, loans, or other similar indebtedness or any finance lease commitment, hire purchase commitment, liabilities under acceptance (other than normal trade bills and payables), acceptance credits or any guarantees or other material contingent liabilities.

(E) WORKING CAPITAL SUFFICIENCY

Taking into account the expected completion of the Acquisition and the internal resources available to the Enlarged Group, the directors of the Company are of the opinion that the Enlarged Group has sufficient working capital for its present requirements, that is for at least the next 12 months from the date of this circular.

(F) MATERIAL ADVERSE CHANGES

The Directors confirm that there has been no material adverse change in the financial or trading position of the Group since 31 December 2007, the date to which the latest published audited annual financial statements of the Group were made up.

— 145 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

The following is the full text of a report, prepared for the purpose of inclusion in this circular, received from the independent reporting accountants, PricewaterhouseCoopers, Certified Public Accountants.

==> picture [105 x 32] intentionally omitted <==

June 16, 2008

The Directors TravelSky Technology Limited

Dear Sirs,

We set out below our report on the financial information (the “Financial Information”) of Accounting Centre of China Aviation Limited Company 中國航空結算有限責任公司 (the “Target Company”) and its subsidiaries (together, the “Target Group”) set out in Sections I to III below, for inclusion in the circular of TravelSky Technology Limited (the “Company” or “TravelSky”) dated June 16, 2008 (the “Circular”) in connection with the proposed acquisition of the Target Group by the Company (the “Proposed Acquisition”). The Financial Information comprises the consolidated balance sheets of the Target Group and the balance sheets of the Target Company as at December 31, 2005, 2006 and 2007, and the consolidated income statements, the consolidated statements of changes in owner’s equity and the consolidated cash flow statements of the Target Group for each of the years ended December 31, 2005, 2006 and 2007 (the “Relevant Periods”), and a summary of significant accounting policies and other explanatory notes.

The Target Company was established in the People’s Republic of China (the “PRC”) on October 26, 2007 as a company with limited liability under the Company Law of the PRC. Pursuant to a group reorganisation (the “Reorganisation”) as described in the Note 1 of Section II below, the Target Company became the holding company of the subsidiaries as set out in Note 1(a) of Section II below.

At the date of this report, the Target Company has direct interests in the subsidiaries as set out in Note 1 of Section II below. All companies now comprising the Target Group have adopted December 31 as their financial year end date for statutory reporting and/or management reporting purpose.

— 146 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

For the purpose of the Proposed Acquisition, the directors of the Target Company have prepared the consolidated financial statements of the Target Group for the years ended December 31, 2004, 2005, 2006 and the ten months ended October 31, 2007 in accordance with the PRC Accounting Standards for Business Enterprises (the “PRC GAAP”) which were audited by PricewaterhouseCoopers Zhong Tian CPAs Limited Company普華永道中天會計師事務所有限公司. The consolidated financial statements of the Target Group for the year ended December 31, 2007 prepared in accordance with PRC GAAP were audited by Zhongrui Yuehua CPAs Co., Ltd. 中瑞岳華會計師事務所.

The Financial Information has been prepared based on the audited consolidated financial statements of the Target Group prepared in accordance with PRC GAAP, after making such adjustments as are appropriate.

RESPONSIBILITY OF DIRECTORS AND MANAGEMENT

The directors and management of the Target Company during the Relevant Periods are responsible for the preparation and the true and fair presentation of the consolidated financial statements of the Target Company in accordance with PRC GAAP. The directors of the Company and the Target Company are responsible for the preparation and the true and fair presentation of the Financial Information in accordance with International Financial Reporting Standards (“IFRS”). This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of the consolidated financial statements and the preparation and the true and fair presentation of Financial Information that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

RESPONSIBILITY OF REPORTING ACCOUNTANT

Our responsibility is to express an opinion on the Financial Information based on our examination and to report our opinion to you. We have examined the audited consolidated financial statement prepared in accordance with PRC GAAP of the Target Company and its subsidiaries for the Relevant Periods and the related adjustments in preparing the Financial Information, and carried out such additional procedures as we considered necessary in accordance with Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

OPINION

In our opinion, the Financial Information for the purpose of this report and prepared on the basis set out in Note 2 of Section II below, gives a true and fair view of the state of affairs of the Target Company and of the Target Group as at December 31, 2005, 2006 and 2007 and of the Target Group’s results and cash flows for the Relevant Periods.

— 147 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

I. FINANCIAL INFORMATION OF THE TARGET GROUP

CONSOLIDATED INCOME STATEMENTS

Note Revenues 6 Personnel expenses 9 Business taxes and other surcharges Depreciation and amortisation Technical support and maintenance fees Property management fees Other income Other operating expenses Operating profit Financial income Reversal of provision for financial guarantee obligation 12 Profit before taxation 7 Taxation 11 Profit after taxation and attributable to equity holder of the Target Company	Year 2005 RMB’000 245,707 (108,187) (13,262) (25,068) (8,579) (9,197) 3,236 (21,647) 63,003 20,775 67,676 151,454 (28,264) 123,190	ended December 2006 RMB’000 255,926 (97,612) (13,536) (24,785) (9,919) (9,974) — (28,738) 71,362 25,078 — 96,440 (31,217) 65,223	31, 2007 RMB’000 273,485 (109,212) (14,216) (16,661) (9,043) (10,530) — (22,618) 91,205 11,649 — 102,854 (38,956) 63,898

— 148 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

CONSOLIDATED BALANCE SHEETS

Note
ASSETS
Non-current assets
Property, plant and equipment, net
13
Intangible assets, net
14
Lease prepayments for
land use rights, net
15
Deferred tax assets
17
Total non-current assets
Current assets
Accounts receivable, net
18
Due from holding company and
fellow subsidiaries
19
Other receivables and
other current assets, net
21
Cash and cash equivalents
22
Total current assets
Total assets
EQUITY
Capital and reserves
attributable to equity holders of
the Target Company
Paid-in capital
23
Reserves
Retained earnings
Owner’s equity before Reorganisation
Total equity
24

As at December 31,
2005
2006
2007
RMB’000
RMB’000
RMB’000
116,799
108,845
104,775
1,311
3,675
4,604
—
20,122
19,718
3,944
8,089
2,947
122,054
140,731
132,044
12,264
8,081
10,765
588,965
540,675
20,803
463,049
316,779
423,252
17,893
28,173
527,606
1,082,171
893,708
982,426
1,204,225
1,034,439
1,114,470
—
—
759,785
—
—
(62,289)
—
—
1,878
348,452
416,053
—
348,452
416,053
699,374

— 149 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

Note LIABILITIES Non-current liabilities Supplemental retirement benefits obligations 10 Total non-current liabilities Current liabilities Accounts payable 25 Other payables and other current liabilities 26 Supplemental retirement benefits obligations 10 Income tax payable Total current liabilities Total liabilities Total equity and liabilities Net current assets Total assets less current liabilities	As at December 31, 2005 2006 2007 RMB’000 RMB’000 RMB’000 11,410 13,360 — 11,410 13,360 — 250 1,513 2,957 767,447 544,849 346,213 540 560 — 76,126 58,104 65,926 844,363 605,026 415,096 855,773 618,386 415,096 1,204,225 1,034,439 1,114,470 237,808 288,682 567,330 359,862 429,413 699,374	As at December 31, 2005 2006 2007 RMB’000 RMB’000 RMB’000 11,410 13,360 — 11,410 13,360 — 250 1,513 2,957 767,447 544,849 346,213 540 560 — 76,126 58,104 65,926 844,363 605,026 415,096 855,773 618,386 415,096 1,204,225 1,034,439 1,114,470 237,808 288,682 567,330 359,862 429,413 699,374
		—
		2,957 346,213 — 65,926
		415,096
		415,096
		1,114,470

		567,330

		699,374

— 150 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

BALANCE SHEETS

Note
ASSETS
Non-current assets
Property, plant and equipment, net
13
Intangible assets, net
14
Lease prepayments for land use rights, net
15
Investments in subsidiaries
16
Deferred tax assets
17
Total non-current assets
Current assets
Accounts receivable, net
18
Due from holding company and
fellow subsidiaries
19
Due from subsidiary
20
Other receivables and
other current assets, net
21
Cash and cash equivalents
22
Total current assets
Total assets
EQUITY
Capital and reserves attributable to
equity holders of the Target Company
Paid-in capital
23
Reserves
Retained earnings
Owner’s equity before Reorganisation
Total equity
24

As at December 31,
2005
2006
2007
RMB’000
RMB’000
RMB’000
113,783
106,522
103,370
1,232
3,675
4,604
—
20,122
19,718
6,500
6,500
7,728
3,944
8,089
2,947
125,459
144,908
138,367
9,074
5,842
9,404
580,347
530,795
11,003
5,441
1,768
—
462,949
316,366
423,068
12,786
18,120
521,585
1,070,597
872,891
965,060
1,196,056
1,017,799
1,103,427
—
—
759,785
—
—
(73,104)
—
—
4,816
340,390
409,295
—
340,390
409,295
691,497

— 151 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

Note LIABILITIES Non-current liabilities Supplemental retirement benefits obligations 10 Total non-current liabilities Current liabilities Accounts payable 25 Due to subsidiary Other payables and other current liabilities 26 Supplemental retirement benefits obligations 10 Income tax payable Total current liabilities Total liabilities Total equity and liabilities Net current assets Total assets less current liabilities	As at December 31, 2005 2006 2007 RMB’000 RMB’000 RMB’000 11,410 13,360 — 11,410 13,360 — 80 577 2,756 10,715 — 4,008 761,867 538,154 339,799 540 560 — 71,054 55,853 65,367 844,256 595,144 411,930 855,666 608,504 411,930 1,196,056 1,017,799 1,103,427 226,341 277,747 553,130 351,800 422,655 691,497	As at December 31, 2005 2006 2007 RMB’000 RMB’000 RMB’000 11,410 13,360 — 11,410 13,360 — 80 577 2,756 10,715 — 4,008 761,867 538,154 339,799 540 560 — 71,054 55,853 65,367 844,256 595,144 411,930 855,666 608,504 411,930 1,196,056 1,017,799 1,103,427 226,341 277,747 553,130 351,800 422,655 691,497
		—
		2,756 4,008 339,799 — 65,367
		411,930
		411,930
		1,103,427

		553,130

		691,497

— 152 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

CONSOLIDATED STATEMENTS OF CHANGES IN OWNER’S EQUITY

Owner’s equity after Reorganisation

Note Balance at January 1, 2005 Profit for the year Contributions from equity holder of the Target Company 24 (c) Balance at December 31, 2005 Balance at January 1, 2006 Profit for the year Contributions from equity holder of the Target Company 24 (c) Balance at December 31, 2006 Balance at January 1, 2007 Profit for the year Contributions from equity holder of the Target Company 24 (c) Transfer to paid-in capital upon establishment of the Target Company Balance at December 31, 2007	Paid-in capital (Note 24) RMB’000 — — — — — — — — — — — 759,785 759,785	Reserves (Note 24) RMB’000 — — — — — — — — — — — (62,289) (62,289)	Owner’s Retained equity before earnings Reorganisation (Note 24) RMB’000 RMB’000 — 198,482 — 123,190 — 26,780 — 348,452 — 348,452 — 65,223 — 2,378 — 416,053 — 416,053 1,878 62,020 — 219,423 — (697,496) 1,878 —	Total equity RMB’000 198,482 123,190 26,780
				348,452
				348,452 65,223 2,378
				416,053
				416,053 63,898 219,423 —
				699,374

— 153 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

CONSOLIDATED CASH FLOW STATEMENTS

Note Cash flows from operating activities Cash generated from operations 27 Income tax paid Net cash generated from/(used in) operating activities Cash flows from investing activities Purchases of property, plant, equipment, intangible assets and lease prepayments for land use rights Interest received Proceeds from disposal of property, plant and equipment Net cash provided/(used) in investing activities Cash flows from financing activities Contributions from equity holder of the Target Company 24(c) Net cash provided in investing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year	Year 2005 RMB’000 241 (24,637) (24,396) (6,551) 9,824 26 3,299 26,780 26,780 5,683 12,210 17,893	ended December 2006 RMB’000 90,992 (53,384) 37,608 (38,655) 8,780 169 (29,706) 2,378 2,378 10,280 17,893 28,173	31, 2007 RMB’000 510,803 (29,708) 481,095 (12,287) 8,035 — (4,252) 22,590 22,590 499,433 28,173 527,606

— 154 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

II. NOTES TO THE FINANCIAL INFORMATION

1 The Target Group, its reorganisation and principal activities

(a) Background of the Target Group

The Target Company was established in the PRC on October 26, 2007 as a limited liability company under the Company Law of the PRC pursuant to the Reorganisation as set out in Note 1(b) below. The Target Group is engaged in the provision of accounting, settlement and clearing services, and related information system development and support services to commercial airlines and other aviation companies (the “Core Operations”). The Directors of the Target Company regard China TravelSky Holding Company 中國民航信息集團公司 (“CTHC”), a state-owned enterprise established in the PRC as its parent company and ultimate holding company. The address of the Target Company’s registered office is Building 12 Xibahe Beili, Chaoyang District, Beijing, the People’s Republic of China.

As at December 31, 2007, the Target Company has direct interests in the following subsidiaries that were also established in the PRC as limited liability companies under the Company Law of PRC:

		Place of	Percentage
	Date of	establishment/	of equity	Paid-In
Name	establishment	operation	interest held	capital	Principal activities	Auditor
				RMB
Directly held:
Beijing Asia Technology	October 30, 2007	Beijing, PRC	100%	16,121,600	Provision of	Zhongrui Yuehua
Development					information system	CPAs Co., Ltd.
Company Limited					development and	中瑞岳華會計師
(“ATDC”,北京亞科技術					related services	事務所
開發有限責任公司)
Beijing HangYuan Air	October 31, 2007	Beijing, PRC	100%	1,500,000	Provision of	Zhongrui Yuehua
Service Limited Company					booking services	CPAs Co., Ltd.
(“BHYC”,北京航遠航空					for travellings	中瑞岳華會計師
服務有限責任公司)					and hotels	事務所

Note: As part of the Reorganisation, ATDC and BHYC were established on October 30, 2007 and October 31, 2007, respectively as limited liability companies under the Company Law of the PRC.

The Target Group operates mainly in the PRC.

— 155 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

(b) Reorganisation of the Target Group

Prior to the Reorganisation, the Core Operations were carried out by the Accounting Centre of China Aviation 中國航空結算中心 (the “Accounting Centre”), Beijing Asia Technology Development Centre 北京亞科技術開發中心 (the “Development Centre”), and Beijing Hang Yuan Air Service Centre 北京航遠航空服務中心 (the “Service Centre”) (collectively the “Precedent Entities”), all of them being state-owned enterprises owned and are controlled by CTHC under the supervision and regulation of State-owned Assets Supervision and Administration Commission of the State Council.

Pursuant to the Reorganisation, the Target Company and its subsidiaries were established and continue to engage in the Core Operations.

As part of the Reorganisation, CTHC or its subsidiary retained the following assets that were unrelated to the Core Operations:

(i) The ownership of certain properties, including car parks and residential properties; and
(ii) Equity investments and marketable securities.

In additions, the following liabilities arising from the Core Operations were assumed by the CTHC upon the completion of the Reorganisation:

(i) Certain long outstanding other payables of approximately RMB174,115,000; and
(ii) The supplemental retirement benefits obligations for retired employees of approximately RMB15,550,000 net of the related tax effect of approximately RMB3,888,000.

After excluding certain assets and liabilities as set out above, the net assets of the Precedent Entities are undertaken by the respective entities of the Target Group.

The Reorganisation was completed on October 31, 2007. Accordingly, the Target Company became the holding company of the companies now comprising the Target Group.

— 156 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

2 Basis of presentation

Following the Reorganisation, the Core Operations that had been carried out by the Accounting Centre, the Development Centre and the Service Centre are carried out by the Target Company and its respective subsidiaries. As the Core Operations and all of these entities comprising the Target Group are wholly-owned and controlled by CTHC, the Reorganisation has been accounted for as a reorganisation of businesses under common control in a manner similar to a uniting of interests.

The Financial Information of the Target Group for the Relevant Periods, have been prepared on the merger basis as if the Target Company had been the holding company of those companies comprising the Target Group throughout the Relevant Periods.

The financial information of those assets and liabilities unrelated to the Core Operations as set out in Note 1(b) above, has not been included in the Financial Information throughout the Relevant Periods, as they have distinct and separate management responsible for these assets and their daily operations, maintained separate accounting records or have been financed historically as if they were autonomous and they were in dissimilar business and operations as compared with the Core Operations, and were retained by CTHC or its subsidiaries pursuant to the Reorganisation.

The Financial Information includes certain other payables and supplemental retirement benefits obligations as set out in Note 1(b) above, which were historically associated with the Core Operations. These liabilities were assumed by CTHC and were not transferred to the Target Company. As these liabilities are directly related to the Core Operations, they were included in Financial Information during the Relevant Periods and were reflected as a contribution from equity holder upon the completion of the Reorganisation.

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ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

3 Summary of principal accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

3.1 Basis of preparation

The Financial Information of the Target Group has been prepared in accordance with disclosure requirement for the first time adoption of IFRS. The Financial Information has been prepared under the historical cost convention. IFRS 1, “First-time Adoption of International Financial Reporting Standards”, has been applied in preparing this Financial Information. The Financial Information is the first set of the Target Group’s financial statements in accordance with IFRS.

The directors of the Target Company have prepared the consolidated financial statements of the Target Company for the year ended December 31, 2007 in accordance with PRC GAAP. PRC GAAP differs in certain aspects from IFRS. Reconciliations and descriptions of the effect of the conversion from PRC GAAP to IFRS on the Target Group’s equity and its profit after tax are as following:

		Profit
	Total equity	after tax for
	as at	the year ended
	December 31,	December 31,
	2007	2007
Amounts per PRC GAAP	767,347	60,741
GAAP Adjustments:
Reversal of revaluation of nun-current assets	(63,569)	2,468
Recognition of supplemental
retirement benefit obligations	—	(2,336)
Others	—	601
Revenue and expenses cut-off adjustment and
related tax impact	(4,404)	2,424
Amounts per IFRS	699,374	63,898

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Target Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.

— 158 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

At the date of this report, the International Accounting Standards Board (“IASB”) has issued the following new/revised standards or interpretations that are not yet effective. The Target Group has not early adopted these standards or interpretations.

(a) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Target Group

The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Target Group’s accounting periods beginning on or after January 1, 2008 or later periods and have not been early adopted by the Target Group:

IFRS 8, ‘Operating segments’ (effective from January 1, 2009). IFRS 8 replaces IAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131, ‘Disclosures about segments of an enterprise and related information’. The new standard requires a ‘management approach’, under which segment information is presented on the same basis as that used for internal reporting purposes. The Target Group will apply IFRS 8 beginning January 1, 2009; and
IAS 1 (Revised), ‘Presentation of Financial Statements’ (effective from January 1, 2009). IAS 1 (Revised) requires all owner changes in equity to be presented in a statement of changes in equity. All comprehensive income is presented in one statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income). It requires presenting a statement of financial position as at the beginning of the earliest comparative period in a complete set of financial statements when there are retrospective adjustments or reclassification adjustments. However, it does not change the recognition, measurement or disclosure of specific transactions and other events required by other IFRSs. The Target Group will apply IAS 1 (Revised) beginning January 1, 2009.
(b) Standards, amendments and Interpretations to existing standards that are not yet effective and not relevant for the Target Group’s operations in 2007
IAS 23 (Amendment), ‘Borrowing costs’ (effective from January 1, 2009);
IAS 27 (Revised), ‘Consolidated and separate financial statements’ (effective for the first annual reporting period beginning on or after July 1, 2009);
IAS 32 and IAS 1 Amendments, ‘Puttable Financial Instruments and Obligations Arising on Liquidation’ (effective from January 1, 2009);

— 159 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

IFRIC 11, ‘IFRS 2, Group and treasury share transactions’ (effective from March 1, 2007);
IFRIC 12, ‘Service concession arrangements’ (effective from January 1, 2008);
IFRIC 13, ‘Customer loyalty programmes’ (effective from July 1, 2008);
IFRS 3 (Revised), ‘Business Combination’ (effective for business combinations with acquisition date on or after the beginning of the first annual reporting period beginning on or after July 1, 2009);
IFRIC 14, ‘IAS 19, The limit on a defined benefit asset, minimum funding requirements and their interaction’ (effective from January 1, 2008); and
IFRS 2 (Amendment), ‘Share-based payment vesting condition and cancelations’ (effective from January 1, 2009).

3.2 Consolidation

The consolidated financial statements include the financial statements of the Target Company and all its subsidiaries made up to the same year end.

Subsidiaries are all entities over which the Target Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Target Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Target Group. They are de-consolidated from the date that control ceases.

Except for the Reorganisation which is regarded as common control transaction and is accounted for in accordance with the basis set out in Note 2, the purchase method of accounting is used to account for the acquisition of subsidiaries by the Target Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Target Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statements.

— 160 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

Intra-group transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Target Group.

In the Target Company’s balance sheets, the investments in subsidiaries are stated at cost less provision for impairment losses. The results of subsidiaries are accounted for by the Target Company on the basis of dividends received and receivables.

3.3 Segment reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those segments operating in other economic environments.

3.4 Foreign currency translation

(a) Functional and presentation currency

Items included in the financial statements of each of the Target Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Renminbi, which is the Target Company’s functional and presentation currency.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statements, except when deferred in equity as qualifying cash flow hedges or qualifying net investment hedges.

Changes in the fair value of monetary securities denominated in foreign currency classified as available for sale are analysed between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortised cost are recognised in income statements, and other changes in the carrying amount are recognised in equity.

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Translation differences on non-monetary financial assets and liabilities are reported as part of the fair value gain or loss. Translation difference on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognised in income statements as part of the fair value gain or loss. Translation differences on non-monetary financial assets such as equities classified as available for sale are included in the available-for-sale reserve in equity.

3.5 Property, plant and equipment

Property, plant and equipment are stated at historical cost less accumulated depreciation and accumulated impairment loss. Historical cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Target Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the income statements during the financial period in which they are incurred.

Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:

Buildings	30 years
Motor vehicles	6 years
Office equipment	4-8 years
Electronic equipment	4-5 years

The asset’s residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 3.8).

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in the income statements.

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3.6 Intangible assets

Intangible assets mainly represent purchased computer software.

Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Software is amortized on a straight line basis over 5 years.

Costs incurred in order to restore or maintain the future economic benefits that an enterprise can expect from the originally assessed standard of performance of existing software systems are recognised as an expense when the restoration or maintenance work is carried out.

3.7 Lease prepayments for land use rights

Lease prepayments for land use rights represent purchase cost of land use rights in the PRC and are stated at cost less accumulated amortisation and impairment losses. Cost represents consideration paid for the rights to use the land in the PRC. Amortisation of lease prepayments for land use rights is calculated on a straight-line basis over the period of the lease.

3.8 Impairment of non-financial assets

Assets that have an indefinite useful life or have not yet available for use are not subject to amortisation and are tested annually for impairment. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

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3.9 Financial assets

The Target Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss, held-to-maturity financial assets, loans and receivables, and available-for-sale financial assets. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition date.

(a) Financial assets at fair value through profit or loss

(b) Held-to-maturity financial assets

Held-to-maturity financial assets are non-derivative financial assets with fixed or determinable payments and fixed maturities that management has the positive intention and ability to hold to maturity. If the Target Group were to sell other than an insignificant amount of held-to-maturity financial assets, the whole category would be reclassified as available-for-sale. Held-to-maturity financial assets are included in non-current assets, except for those with maturities less than 12 months from the balance sheet date, which are classified as current assets. Held-tomaturity investments are carried at amortised cost using the effective interest rate method.

(c) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date, which are classified as non-current assets. Loans and receivables are carried at amortised cost using the effective interest method.

(d) Available-for-sale financial assets

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Regular purchases and sales of financial assets are recognised on the trade-date-the date on which the Target Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the income statements. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Target Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value.

Gains or losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are presented in the income statements in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the income statements as part of other income when the Target Group’s right to receive payments is established.

Changes in the fair value of monetary securities denominated in a foreign currency and classified as available-for-sale are analysed between translation differences resulting from changes in amortised cost of the security and other changes in the carrying amount of the security. The translation differences on monetary securities are recognised in profit or loss; translation differences on non-monetary securities are recognised in equity.

Changes in the fair value of monetary and non-monetary securities classified as availablefor-sale are recognised in equity.

When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the income statements as ‘gains and losses from investment securities’.

Interest on available-for-sale securities calculated using the effective interest method is recognised in the income statements as part of other income. Dividends on available-forsale equity instruments are recognised in the income statements as part of other income when the Target Group’s right to receive payments is established.

The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Target Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models making maximum use of market inputs and relying as little as possible on entity-specific inputs.

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The Target Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in income statements - is removed from equity and recognised in the income statements. Impairment losses recognised in the income statements on equity instruments are not reversed through the income statements. Impairment testing of accounts receivable is described in Note 3.10.

3.10 Accounts receivable and other receivables

Accounts receivable and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of accounts receivables or other receivables is established when there is objective evidence that the Target Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the accounts receivable or other receivables is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statements. When an accounts receivable or other receivables is uncollectible, it is written off against the allowance account for accounts receivable or other receivables. Subsequent recoveries of amounts previously written off are credited in the income statements.

3.11 Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call.

3.12 Accounts payables and other payables

Accounts payables and other payables are recognised initially at fair value and subsequently measured at amortized cost using the effective interest method.

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3.13 Current and deferred income tax

The current income tax charge is calculated on the basis of the tax laws enacted or substantially enacted at the balance sheet date in the countries where the Target Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognision of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Target Group and it is probable that the temporary difference will not reverse in the foreseeable future.

3.14 Employee benefits

(i) Retirement benefits

(a) Defined contribution plan

The full-time employees of the Target Group are covered by governmentsponsored pension plan and supplementary pension scheme managed by insurance company under which the employees are entitled to a monthly pension based on certain formulas. The relevant government agencies and insurance company are responsible for the pension liability to these retired employees. The Target Group contributes on a monthly basis to these pension plans.

Under these plans, the Target Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Target Group has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expense when they are due.

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(b) Defined benefit plan

Prior to October 31, 2007, the Target Group had at its own discretion offered certain supplemental retirement benefits to employees who had retired between 1994 and 2007. These discretionary supplemental benefits were only considered and offered to these employees at the point of their retirement. These supplemental retirement benefits that an employee would receive on retirement were usually dependent on one or more factors such as age, year of services and compensation. These supplemental retirement benefits were accounted for as a defined benefit pension plan.

The net present value of the future payment regarding these benefits were fully provided for when the Target Group committed such benefits to its retiring employees upon their retirement.

The liability recognised in the balance sheet in respect of these supplemental retirement benefits was the present value of the defined benefit obligations at each balance sheet date together with adjustments for unrecognised pastservice costs and unrecognised actuarial gains/losses. The defined benefit obligations are calculated by independent actuaries using the projected unit credit method. The present value of the defined benefit obligations are determined by discounting the estimated future cash outflows using interest rates of government securities which have maturity approximating to the terms of the related pension liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of 10% of the defined benefit obligations are charged to the income statements immediately. Past-service costs are recognised immediately in the income statement.

These supplemental retirement benefits obligations were assumed by CTHC upon the completion of the Reorganisation (Note 1(b)). The Target Group will no longer consider and offer any discretionary supplemental retirement benefits to its employees after October 31, 2007.

(ii) Housing funds

Full-time employees of the Target Group are entitled to participate in governmentsponsored housing funds in China. The Target Group contributes on a monthly basis to these funds based on certain percentages of the salaries of the employees. The Target Group’s liability in respect of this fund is limited to the contributions payable in each period.

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3.15 Provisions

Provisions for legal claims are recognised when: the Target Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax interest rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in provision reflecting the passage of time is recognised as interest expense.

3.16 Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the rendering of services in the ordinary course of the Target Group’s activities. Revenue is shown net of value-added tax, sales discounts and after eliminating sales within the Target Group.

The Target Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Target Group’s activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies have been resolved. The Target Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

Revenue from the provision of accounting supports, settlement and clearing services is recognised when the services are rendered;
Non-proprietary customer’s information system development project revenue is recognised by reference to the stage of completion when this can be measured reliably. The stage of completion is determined in the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs. When the outcome of the transaction involving the rendering of these services cannot be estimated reliably, revenue is recognised only to the extent of expenses recognised that are recoverable. In the period in which it is determined that a loss will result from the performance of the contract, the entire amount of the estimated ultimate loss is recognised in the income statements;

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Interest income is recognised on a time-proportion basis, taking into account the principal amounts outstanding and the applicable interest rates; and
Dividend income is recognised when the right to receive payment is established.

3.17 Government grants

Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Target Group will comply with all attached conditions. Government grants relating to specific costs are deferred and recognised in the income statements over the period necessary to match them with the costs that they are intended to compensate.

3.18 Dividend distribution

Dividend distribution to the Target Company’s equity holders is recognised as a liability in the Target Group’s financial statements in the period in which the dividends are approved by the Target Company’s directors.

4 Critical accounting estimates and judgements

The Target Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

(a) Depreciation of property, plant and equipment

The property, plant and equipment of the Target Group are depreciated at rates sufficient to write off their costs less accumulated impairment losses and estimated residual values over their estimated useful lives on a straight-line basis. The Target Group reviewed the useful lives periodically to ensure that the method and rates of depreciation are consistent with the expected pattern of economic benefits from the property, plant and equipment. The Target Group estimates the useful lives of the property, plant and equipment as set out in Note 3.5 based on the historical experience with similar assets, taking into account anticipated technological changes. The depreciation expenses in the future periods will change if there are significant changes to these estimates.

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(b) Impairment of assets

At each balance sheet date, the Target Group considers both internal and external sources of information to assess whether there is any indication that assets are impaired. If any such indication exists, the recoverable amount of the asset is estimated and an impairment loss is recognised to reduce the carrying amount of the asset to its recoverable amount. Accordingly, there will be an impact to the future results if there is a significant change in the recoverable amounts of the assets.

(c) Fair value

The Target Group estimates the fair value of its financial assets and financial liabilities including accounts receivable, due from parent company and fellow subsidiaries, other receivables and other current assets, accounts payable, other payables and other current liabilities by discounting its future contractual cash flows at the estimated current market interest rate that is available to the Target Group for similar financial instruments. The future values will change if there are material changes in the estimated market interest rate.

(d) Income taxes and deferred tax

The Target Group is subject to income taxes in PRC jurisdictions. Significant judgment is required in determining the provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Target Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

(e) Pension benefits

The present value of the pension obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost (income) for pensions include the discount rate. Any changes in these assumptions will impact the carrying amount of pension obligations.

The Target Group determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. In determining the appropriate discount rate, the Target Group considers the interest rates of Chinese government bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of related pension liabilities.

Other key assumptions for pension obligations are based in part on current market conditions. Additional information is disclosed in Note 10.

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5 Segmental reporting

The Target Group conducts its businesses within one business segment - the business of providing accounting, settlement and clearing services, and related information system development and support services to commercial airlines and other aviation companies in the PRC. The Target Group’s chief decision maker for operation is the Chairman to the Board. The information reviewed by the Chairman to the Board is identical to the information presented in the consolidated financial statements. Therefore, no business segment information has been prepared by the Target Group for the years ended December 31, 2005, 2006 and 2007. The Target Group also operates within one geographical segment because its revenues are primarily generated in the PRC and its assets are located in the PRC. Accordingly, no geographical segment data is presented.

6 Revenues

Revenues primarily comprise the service fees earned by the Target Group for the provision of accounting, settlement and clearing services, and related information system development and support services to commercial airlines and other aviation companies.

7 Profit before taxation

Profit before taxation of the Target Group is arrived at after charging/(crediting) the following:

After charging:
Depreciation
Amortisation of intangible assets
Amortisation of lease prepayments
for land use rights
Loss on disposal of property,
plant and equipment
Personnel expenses_(Note 9)
Auditors’ remuneration
After crediting:
Interest income
Exchange gain, net
Reversal for impairment of
accounts receivable, other receivables
and other current assets
Reversal of financial
guarantee obligation(Note 12)_

Year ended December 31,
2005
2006
2007
RMB’000
RMB’000
RMB’000
23,095
23,671
15,062
1,079
1,047
1,195
894
67
404
56
205
204
108,187
97,612
109,212
112
112
112
(9,824)
(8,780)
(8,035)
(10,951)
(16,298)
(3,614)
(3,937)
(929)
(2,606)
(67,676)
—
—

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8 Directors’, supervisors’ and senior management’s emoluments

(1) Directors’ and supervisors’ emoluments

The following tables set out the emoluments paid to the Target Company’s directors and supervisors during the years ended December 31, 2005, 2006 and 2007 (tax inclusive):

Name of Director Remuneration and Supervisor for Director RMB’000 Chairman of the Board Yongtao Sun — Executive directors Guohong Du — Xiaochun Yu — Changyuan Huang — Qian Li — Supervisors Jinsong Li — Shensheng Xu — Qian Liu* — Jinsheng Yu — Yanzhou Hu —		Year ended December 31, 2005	Year ended December 31, 2005	Year ended December 31, 2005
		Bonus for Director RMB’000 — — — — — — — — — —	Salary of employee, Allowances and Benefits (employer’s contribution inclusive) RMB’000 — 145 — — 57 — 145 — 131 60	Employees’ Discretionary bonuses RMB’000 — 221 — — 194 — 221 — 199 188	Employer’s contribution to pension scheme for employee RMB’000 — 15 — — 14 — 15 — 15 15	Total RMB’000 — 381 — — 265 — 381 — 345 263

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Name of Director Remuneration and Supervisor for Director RMB’000 Chairman of the Board Yongtao Sun — Executive directors Guohong Du — Xiaochun Yu — Changyuan Huang — Qian Li — Supervisors Jinsong Li — Shensheng Xu — Qian Liu* — Jinsheng Yu — Yanzhou Hu —		Year ended December 31, 2006	Year ended December 31, 2006	Year ended December 31, 2006
		Bonus for Director RMB’000 — — — — — — — — — —	Salary of employee, Allowances and Benefits (employer’s contribution inclusive) RMB’000 — 184 — — 57 — 184 — 162 61	Employees’ Discretionary bonuses RMB’000 — 344 — — 215 — 344 — 303 204	Employer’s contribution to pension scheme for employee RMB’000 — 19 — — 19 — 19 — 19 19	Total RMB’000 — 547 — — 291 — 547 — 484 284

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Name of Director Remuneration and Supervisor for Director RMB’000 Chairman of the Board Yongtao Sun — Executive directors Guohong Du(i) — Xiaochun Yu — Changyuan Huang — Qian Li — Supervisors Jinsong Li — Shensheng Xu(i) — Qian Liu* — Jinsheng Yu(i) — Yanzhou Hu —		Year ended December 31, 2007	Year ended December 31, 2007	Year ended December 31, 2007
		Bonus for Director RMB’000 — — — — — — — — — —	Salary of employee, Allowances and Benefits (employer’s contribution inclusive) RMB’000 — 184 — — 55 — 184 — 162 59	Employees’ Discretionary bonuses RMB’000 — 266 — — 227 — 266 — 234 217	Employer’s contribution to pension scheme for employee RMB’000 — 21 — — 21 — 21 — 21 21	Total RMB’000 — 471 — — 303 — 471 — 417 297

These directors and supervisors are employees of CTHC and receive emoluments from CTHC. No appropriation has been made as the directors of the Target Company considered it is impracticable to apportion this amount between their services to the Target Group and CTHC.
(i) The employee’s discretionary bonus to these directors and supervisors for year ended December 31, 2007 are subject to the relevant authority’s final approval.

During the Relevant Periods, no director had waived or agreed to waive any emolument. No director received any compensation for loss of office during the Relevant Periods.

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(2) Five highest paid individuals

The emoluments for three, three and three of the Directors and supervisors listed in Note 8(1) above were included in the emoluments paid to the five highest paid individuals for the years ended December 31, 2005, 2006 and 2007, respectively. The amounts paid to the remaining two, two and two individuals whose emoluments were the highest in the Target Group during the Relevant Periods are as follows:

Basic salaries and allowances Retirement benefits	Year ended December 31, 2005 2006 2007 RMB’000 RMB’000 RMB’000 660 930 792 28 38 42 688 968 834	Year ended December 31, 2005 2006 2007 RMB’000 RMB’000 RMB’000 660 930 792 28 38 42 688 968 834
		834

The annual emoluments paid during the Relevant Periods to each director (included in the five highest paid employees) fell within the band from HKD nil to HKD 1 million (approximately RMB nil to RMB0.9 million).

During the Relevant Periods, no emolument was paid to the five highest paid individuals (including directors and employees) as an inducement to join or upon joining the Target Company or as compensation for loss of office.

9 Personnel expenses

Wages, salaries and welfare Pension costs — defined contribution plans Supplemental retirement benefit obligations_(Note 10)_ Contribution to housing fund Number of employees	Year 2005 RMB’000 90,213 8,523 3,650 5,801 108,187 772	ended December 31, 2006 2007 RMB’000 RMB’000 79,912 86,495 9,551 15,201 2,510 1,940 5,639 5,576 97,612 109,212 761 775	ended December 31, 2006 2007 RMB’000 RMB’000 79,912 86,495 9,551 15,201 2,510 1,940 5,639 5,576 97,612 109,212 761 775
			109,212

			775

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APPENDIX II

10 Supplemental retirement benefits obligations

Prior to October 31, 2007, the Target Group paid, at its management discretion, supplemental pension and medical benefits to its employees who retired between 1994 and 2007. On October 31, 2007, CTHC, the holding company of the Target Company has assumed the aforementioned supplemental retirement benefits obligation. The assumption of the retirement benefits obligations and the related tax effect was recognised as contribution from equity owner. The Target Group will no longer consider and offer any discretionary supplemental retirement benefits to its employees after October 31, 2007.

The amounts of supplemental retirement benefits obligations recognised in the balance sheets are determined as follows:

Present value of defined benefit obligations Unrecognised actuarial loss Liability on the balance sheet Less: current portion	As 2005 RMB’000 13,280 (1,330) 11,950 (540) 11,410	at December 31, 2006 2007 RMB’000 RMB’000 15,470 — (1,550) — 13,920 — (560) — 13,360 —

The movements of supplemental retirement benefits obligations for the years ended December 31, 2005, 2006 and 2007 are as follows:

At beginning of the year For the year — Past service cost — Interest cost — Payment — Actuarial loss/(gain) — Assumed by CTHC_(Note 24(c))_ At end of the year	As 2005 RMB’000 8,840 2,830 380 (540) 440 — 11,950	at December 31, 2006 2007 RMB’000 RMB’000 11,950 13,920 1,660 1,560 460 420 (540) (310) 390 (40) — (15,550) 13,920 —

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The amounts of supplemental retirement benefits recognised in income statements are as follows:

Past service cost Interest cost Actuarial loss/(gain) Total expenses, included in personnel expenses_(Note 9)_	Year 2005 RMB’000 2,830 380 440 3,650	ended December 31, 2006 2007 RMB’000 RMB’000 1,660 1,560 460 420 390 (40) 2,510 1,940

The above obligations were determined based on actuarial valuations performed by an independent actuary, using the projected unit credit method.

The material actuarial assumptions used in valuing these obligations are as follows:

(a) Discount rates adopted (per annum):

	Year	ended December	31,
	2005	2006		2007
Discount rates adopted	3.50%	3.25%		4.50%

(b) Retirees’ supplemental pension benefit inflation rate: 0%. The amount of the supplemental pension benefits were determined and offered to the retired employees at the point of retirement.

Retirees’ supplemental medical benefit inflation rate: 8%. This estimated inflation rate took into account estimated future changes in the cost of medical services.

(c) Average life expectancy of residents in the PRC: 24.6 years after the retirement age which is between 50-60 years old.
(d) These supplemental pension benefit and medical benefit paid to retirees are assumed to continue until the death of the retirees.

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11 Taxation

Current income tax expenses (“EIT”) Deferred taxation_(Note 17)_ Taxation charge	Year 2005 RMB’000 27,993 271 28,264	ended December 31, 2006 2007 RMB’000 RMB’000 35,362 37,702 (4,145) 1,254 31,217 38,956	ended December 31, 2006 2007 RMB’000 RMB’000 35,362 37,702 (4,145) 1,254 31,217 38,956
			38,956

The Target Group is subject to PRC enterprise income tax rate of 33%. The Target Group provides PRC enterprise income tax based on tax law and regulations applicable to PRC enterprises.

Effective from January 1, 2008, the Target Company and its subsidiaries located in the PRC shall determine and pay the corporate income tax in accordance with the Corporate Income Tax Law of the People’s Congress on China (the new “CIT Law”) as approved by the National People’s Congress on March 16, 2007. Under the new CIT Law, the corporate income tax rate applicable to the Target Company and its subsidiaries will be 25%.

The reconciliation between the Target Group’s actual tax charge and the amount which is calculated based on the statutory tax rate is as follows:

Profit before taxation Statutory tax rate Tax calculated at domestic tax rates applicable to profits Effect of change in tax rate Income not subject to tax Expenses not deductible for tax purpose Tax charge	Year 2005 RMB’000 151,454 33% 49,980 — (22,333) 617 28,264	ended December 31, 2006 2007 RMB’000 RMB’000 96,440 102,854 33% 33% 31,825 33,942 — 2,187 (1,194) — 586 2,827 31,217 38,956	ended December 31, 2006 2007 RMB’000 RMB’000 96,440 102,854 33% 33% 31,825 33,942 — 2,187 (1,194) — 586 2,827 31,217 38,956
			33,942 2,187 — 2,827
			38,956

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APPENDIX II

12 Reversal for financial guarantee obligation

In 1993, the Accounting Centre provided a guarantee to Shandong International Trustee Investment Company (“SDITIC”) for the borrowings of China Kai Li Industrial Limited Company (“CKLC”) amounted to approximately RMB72,681,000. In 1995, SDITIC commenced legal proceedings against CKLC and the Target Company after CKLC has defaulted on its loan repayments. In 2002, the court in the PRC ruled in favour of SDITIC and that the Target Company was liable for the outstanding loan balance and the related interest and penalty charges. In connection with the court order, the following assets of the Target Company were frozen:

An office building located in Xibahe Beili in Beijing in the PRC, with carrying value of approximately RMB85,350,000 as at December 31, 2004.
19 vehicles with carrying value of approximately RMB1,371,000 as at December 31, 2004.
The equity investment in Beijing Vantong Real Estate Co., Ltd. with carrying value of RMB15,000,000 as at December 31, 2004.
The equity investment in Beijing Jingrui Real Estate Co., Ltd, with carrying value of RMB49,600,000 as at December 31, 2004.
The lease prepayment for a piece of land in Guangdong province, with net book value of approximately RMB44,816,000 as at December 31, 2004.

At December 31, 2004, the Target Company’s liability arising from this guarantee was approximately RMB177,423,000 representing the outstanding loan balance of CKLC and the related interest and penalty charges.

In 2005, SDITIC, CKLC and the Target Company entered into a settlement agreement to settle the above liability at RMB60,000,000 which resulted in a reduction of the provision for guarantee loss of approximately RMB117,423,000. The Target Company had subsequently settled the agreed settlement amount by transferring (i) the equity investments in Beijing Vantong Real Estate Co., Ltd. and Beijing Jingrui Real Estate Co., Ltd (ii) the land use right in Guangdong in 2005, and a cash payment of RMB1,225,000. The settlement was subsequently approved by State-owned Assets Supervision and Administration Commission.

The net impact of the settlement of this guarantee obligation of approximately Rmb 67,676,000 was charged to the consolidated income statement for the year ended December 31, 2005, representing the net impact of the reduction of the provision for guarantee loss and the transfer of assets as set out above.

In 2007, court issued an order to release the remaining frozen assets of the Target Company upon the settlement and closure of the litigation case.

— 180 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

13 Property, plant and equipment, net

The Target Group:

Cost As at January 1, 2005 Purchases Disposals/write off As at December 31, 2005 Purchases Disposals/write off As at December 31, 2006 Purchases Disposals/write off As at December 31, 2007 Accumulated depreciation As at January 1, 2005 Charge for the year Disposals/write off As at December 31, 2005 Charge for the year Disposals/write off As at December 31, 2006 Charge for the year Disposals/write off As at December 31, 2007 Net book value As at December 31, 2005 As at December 31, 2006 As at December 31, 2007	Building RMB’000 115,418 — — 115,418 — — 115,418 — — 115,418 (30,094) (3,915) — (34,009) (3,915) — (37,924) (3,915) — (41,839) 81,409 77,494 73,579	Motor vehicles RMB’000 11,444 595 (1,350) 10,689 1,086 — 11,775 464 (2,165) 10,074 (9,646) (353) 1,310 (8,689) (428) — (9,117) (493) 2,178 (7,432) 2,000 2,658 2,642	Office equipment RMB’000 28,221 2,146 (311) 30,056 3,123 (3,530) 29,649 838 (994) 29,493 (20,596) (3,525) 269 (23,852) (3,719) 3,332 (24,239) (2,729) 841 (26,127) 6,204 5,410 3,366	Electronic equipment RMB’000 101,279 3,184 — 104,463 11,882 (4,209) 112,136 9,832 (46) 121,922 (61,975) (15,302) — (77,277) (15,609) 4,033 (88,853) (7,925) 44 (96,734) 27,186 23,283 25,188	Total RMB’000 256,362 5,925 (1,661) 260,626 16,091 (7,739) 268,978 11,134 (3,205) 276,907 (122,311) (23,095) 1,579 (143,827) (23,671) 7,365 (160,133) (15,062) 3,063 (172,132) 116,799 108,845 104,775

— 181 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

The Target Company:

Cost As at January 1, 2005 Purchases Disposals/write off As at December 31, 2005 Purchases Disposals/write off As at December 31, 2006 Purchases Disposals/write off As at December 31, 2007 Accumulated depreciation As at January 1, 2005 Charge for the year Disposals/write off As at December 31, 2005 Charge for the year Disposals/write off As at December 31, 2006 Charge for the year Disposals/write off As at December 31, 2007 Net book value As at December 31, 2005 As at December 31, 2006 As at December 31, 2007	Building RMB’000 115,418 — — 115,418 — — 115,418 — — 115,418 (30,094) (3,915) — (34,009) (3,915) — (37,924) (3,915) — (41,839) 81,409 77,494 73,579	Motor Office Electronic vehicles equipment equipment RMB’000 RMB’000 RMB’000 10,558 23,783 101,103 595 1,680 3,144 (1,282) (224) — 9,871 25,239 104,247 831 3,123 11,879 — (3,530) (4,209) 10,702 24,832 111,917 472 838 9,826 (2,305) (566) (46) 8,869 25,104 121,697 (9,316) (19,050) (61,806) (262) (2,711) (15,300) 1,245 217 — (8,333) (21,544) (77,106) (337) (2,863) (15,605) — 3,332 4,033 (8,670) (21,075) (88,678) (315) (1,999) (7,910) 2,178 546 44 (6,807) (22,528) (96,544) 1,538 3,695 27,141 2,032 3,757 23,239 2,062 2,576 25,153	Total RMB’000 250,862 5,419 (1,506) 254,775 15,833 (7,739) 262,869 11,136 (2,917) 271,088 (120,266) (22,188) 1,462 (140,992) (22,720) 7,365 (156,347) (14,139) 2,768 (167,718) 113,783 106,522 103,370

— 182 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

At December 31, 2005, the building and certain motor vehicles of the Target Company at a carrying value of approximately RMB81,419,000 and RMB1,028,000 respectively were frozen by the court in the PRC. The restriction on these assets was subsequently removed in 2007 in accordance with the order issued by the court upon the settlement and closure of the related litigation case. Please refer to Note 12 for more details.

14 Intangible assets, net

The intangible assets of the Target Group and the Target Company represent the cost of computer software acquired. The movements are as follows:

The Target Group:

Cost At beginning of the year Additions Disposals/write off At end of the year Accumulated amortisation At beginning of the year Amortisation for the year Disposals/write off At end of the year Net book value At beginning of the year At end of the year	As 2005 RMB’000 45,799 555 — 46,354 (43,964) (1,079) — (45,043) 1,835 1,311	at December 31, 2006 2007 RMB’000 RMB’000 46,354 49,765 3,411 2,221 — (2,522) 49,765 49,464 (45,043) (46,090) (1,047) (1,195) — 2,425 (46,090) (44,860) 1,311 3,675 3,675 4,604

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ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

The Target Company:

Cost At beginning of the year Additions Disposals/write off At end of the year Accumulated amortisation At beginning of the year Amortisation for the year Disposals/write off At end of the year Net book value At beginning of the year At end of the year	As 2005 RMB’000 45,799 436 — 46,235 (43,964) (1,039) — (45,003) 1,835 1,232	at December 31, 2006 2007 RMB’000 RMB’000 46,235 49,646 3,411 2,221 — (2,522) 49,646 49,345 (45,003) (45,971) (968) (1,195) — 2,425 (45,971) (44,741) 1,232 3,675 3,675 4,604

— 184 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

15 Lease prepayments for land use rights, net

The Target Group and the Target Company:

Cost At beginning of the year Additions Disposals/write off At end of the year Accumulated amortisation At beginning of the year Amortisation for the year Disposals/write off At end of the year Net book value At beginning of the year At end of the year	As 2005 RMB’000 52,070 — (52,070) — (7,254) (894) 8,148 — 44,816 —	at December 31, 2006 2007 RMB’000 RMB’000 — 20,189 20,189 — — — 20,189 20,189 — (67) (67) (404) — — (67) (471) — 20,122 20,122 19,718

Land in the PRC mainland is state-owned or collectively-owned and no individual land ownership right exists. Lease prepayments for land use rights represent the Target Group’s interests in land which is held on lease with a term of 50 years.

In 2005, the Target Company transferred its land use right to SDITIC. Please refer to Note 12 for more details.

As at the date of this report, the Target Group is in the process of changing registration of the title certificates for its land use right. The carrying value of the land use right of the Target Group as at December 31, 2007 was approximately RMB19,718,000. Management of the Target Group are of the opinion that the Target Group is entitled to lawfully and validly use the land.

— 185 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

16 Investments in subsidiaries

The Target Company

		As at December
	2005	2006	2007
	RMB’000	RMB’000	RMB’000
Investments, at cost:	6,500	6,500	7,728

The Target Company made an additional capital investment in cash of RMB1,228,000 in its subsidiary BHYC (Note 1(a)) on October 26, 2007.

Details of the subsidiaries are set out in Note 1 of this section.

17 Deferred tax assets

The Target Group and the Target Company

Deferred tax assets: — Deferred tax assets to be recovered within 12 months — Deferred tax assets to be recovered over 12 months	As 2005 RMB’000 178 3,766 3,944	at December 31, 2006 2007 RMB’000 RMB’000 3,680 2,947 4,409 — 8,089 2,947	at December 31, 2006 2007 RMB’000 RMB’000 3,680 2,947 4,409 — 8,089 2,947
			2,947

— 186 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

The movement of deferred tax assets is as follows:

Balance as at January 1, 2005 Charged/(credited) to the income statement Balance as at December 31, 2005 Charged/(credited) to the income statement Balance as at December 31, 2006 Charged/(credited) to the income statement Charged/(credited) to equity_(Note 24(c))_ Balance as at December 31, 2007	Retirement benefits Impairment obligations of receivables RMB’000 RMB’000 2,917 1,298 1,027 (1,298) 3,944 — 650 — 4,594 — (706) — (3,888) — — —	Accrued expense RMB’000 — — — 3,495 3,495 (548) — 2,947	Total RMB’000 4,215 (271) 3,944 4,145 8,089 (1,254) (3,888) 2,947

18 Accounts receivable, net

The Target Group

Within 6 months Over 6 months but within 1 year Accounts receivable Provision for impairment Accounts receivable, net	As 2005 RMB’000 12,434 — 12,434 (170) 12,264	at December 31, 2006 2007 RMB’000 RMB’000 8,176 10,453 — 366 8,176 10,819 (95) (54) 8,081 10,765

— 187 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

The Target Company

Within 6 months Over 6 months but within 1 year Accounts receivable Provision for impairment Accounts receivable, net	As 2005 RMB’000 9,140 — 9,140 (66) 9,074	at December 31, 2006 2007 RMB’000 RMB’000 5,871 9,085 — 366 5,871 9,451 (29) (47) 5,842 9,404

The payment period is normally within six months after the services are rendered.

The carrying amounts of the Target Group’s accounts receivable approximated its fair value at each balance sheet date because of the short-term maturities of these receivables.

The maximum exposure of accounts receivable to credit risk at the reporting date is the carrying amounts of the accounts receivable. The Target Group does not hold any collateral as security.

At each balance sheet date, the accounts receivable were mainly denominated in RMB.

The movement of provision for impairment of receivables was as follows:

The Target Group

At beginning of the year Provision/(reversal) At end of the year	As 2005 RMB’000 136 34 170	at December 31, 2006 2007 RMB’000 RMB’000 170 95 (75) (41) 95 54

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ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

The Target Company

At beginning of the year Provision/(reversal) At end of the year	As 2005 RMB’000 56 10 66	at December 31, 2006 2007 RMB’000 RMB’000 66 29 (37) 18 29 47	at December 31, 2006 2007 RMB’000 RMB’000 66 29 (37) 18 29 47
			47

19 Due from holding company and fellow subsidiaries

The Target Group

Due from holding company (a) Due from fellow subsidiaries (b) The Target Company Due from holding company (a) Due from fellow subsidiaries (b)	As 2005 RMB’000 579,559 9,406 588,965 As 2005 RMB’000 579,559 788 580,347	at December 31, 2006 2007 RMB’000 RMB’000 530,206 11,002 10,469 9,801 540,675 20,803 at December 31, 2006 2007 RMB’000 RMB’000 530,206 11,002 589 1 530,795 11,003	at December 31, 2006 2007 RMB’000 RMB’000 530,206 11,002 10,469 9,801 540,675 20,803 at December 31, 2006 2007 RMB’000 RMB’000 530,206 11,002 589 1 530,795 11,003
			11,003

(a) Due from holding company comprises mainly bank balances transferred from the Target Group to CTHC for the purpose of a centralised management of the group’s treasury function by CTHC. These balances were interest bearing at the prevailing bank rate. This centralised management of the treasury function was subsequently terminated in October 2007.

(b) Due from fellow subsidiaries represents trade balances arising from provision of services. These balances are unsecured, interest free and generally repayable within six months.

— 189 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

At each balance sheet date, these balances were denominated in RMB.

These balances approximated its fair value at each balance sheet date because of their shortterm maturities. The maximum exposure to credit risk at the reporting date is the carrying amount of the receivables. The Target Group does not hold any collateral as security.

20 Due from subsidiary

These balances mainly comprised dividends receivable from a subsidiary.

21 Other receivables and other current assets, net

The Target Group

Other receivables (a) Other current assets Other receivables and other current assets Provision for impairment (b) Other receivables and other current assets, net The Target Company Other receivables (a) Other current assets Other receivables and other current assets Provision for impairment (b) Other receivables and other current assets, net	As 2005 RMB’000 464,870 3,244 468,114 (5,065) 463,049 As 2005 RMB’000 464,870 3,142 468,012 (5,063) 462,949	at December 31, 2006 2007 RMB’000 RMB’000 300,278 422,929 20,712 1,969 320,990 424,898 (4,211) (1,646) 316,779 423,252 at December 31, 2006 2007 RMB’000 RMB’000 300,278 422,929 20,297 1,783 320,575 424,712 (4,209) (1,644) 316,366 423,068

— 190 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

(a) Other receivables

Other receivables represent the payments made on behalf of the customer airlines which are part of the Target Company’s settlement and clearing services.

i) At each balance sheet date, the aging analysis of other receivables was as follows:

The Target Group and the Target Company

Within 6 months Over 6 months but within 1 year Over 1 year but within 2 years Over 2 years Other receivables	As 2005 RMB’000 463,212 1,581 77 — 464,870	at December 31, 2006 2007 RMB’000 RMB’000 296,843 420,450 1,720 1,825 1,692 349 23 305 300,278 422,929	at December 31, 2006 2007 RMB’000 RMB’000 296,843 420,450 1,720 1,825 1,692 349 23 305 300,278 422,929
			422,929

ii) Other receivables were denominated in the following currencies:

The Target Group and the Target Company

RMB USD Others	As 2005 RMB’000 257,164 205,707 1,999 464,870	at December 31, 2006 2007 RMB’000 RMB’000 208,088 294,020 90,235 127,216 1,955 1,693 300,278 422,929	at December 31, 2006 2007 RMB’000 RMB’000 208,088 294,020 90,235 127,216 1,955 1,693 300,278 422,929
			422,929

These balances are trade related, interest free, unsecured and generally repayable within six months.

The carrying amounts of other receivables approximated its fair value at each balance sheet date because of the short-term maturities of these receivables. The maximum exposure of other receivables to credit risk at the reporting date is the carrying amount of the receivables. The Target Group does not hold any collateral as security.

— 191 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

(b) Provision for impairment

The Target Group

At beginning of the year Reversal At end of the year The Target Company At beginning of the year Reversal At end of the year	As 2005 RMB’000 5,103 (38) 5,065 As 2005 RMB’000 5,072 (9) 5,063	at December 31, 2006 2007 RMB’000 RMB’000 5,065 4,211 (854) (2,565) 4,211 1,646 at December 31, 2006 2007 RMB’000 RMB’000 5,063 4,209 (854) (2,565) 4,209 1,644

22 Cash and cash equivalents

The Target Group

Cash on hand Cash at bank Cash and cash equivalents	As 2005 RMB’000 25 17,868 17,893	at December 31, 2006 2007 RMB’000 RMB’000 7 1 28,166 527,605 28,173 527,606

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ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

The Target Company

Cash on hand Cash at bank Cash and cash equivalents	As 2005 RMB’000 1 12,785 12,786	at December 31, 2006 2007 RMB’000 RMB’000 1 1 18,119 521,584 18,120 521,585	at December 31, 2006 2007 RMB’000 RMB’000 1 1 18,119 521,584 18,120 521,585
			521,585

At each balance sheet date, all cash and cash equivalents were denominated in RMB.

The annual interest rate on current deposits ranged from 0.72% to 1.71% during the Relevant Periods.

23 Paid-In capital

On October 26, 2007, the Target Company was registered as a limited liability company under the Company Law of the PRC with a registered and fully paid capital of RMB759,785,200.

No dividend was declared by the Target Group during the Relevant Periods.

24 Owner’s equity

(a) As detailed in Note 1(b), upon the establishment of the Target Company on October 26, 2007, the Core Operations and relevant assets and liabilities originally owned by the Accounting Centre were transferred into the Target Company at a value of RMB759,785,200 as paid-in capital. Pursuant to the Reorganisation, all the then existing capital and reserves of the Accounting Centre were capitalised and the resulting difference was charged to capital reserve. In view of the above changes in form and nature of the capital reserves of the Accounting Centre, separate classes of reserves, including retained profits, statutory surplus reserve and statutory public welfare fund of the Accounting Centre prior to the establishment of the Target Company have not been separately disclosed in the Financial Information.
(b) As described in Note 2, the Financial Information has been prepared as if the current group structure had been in existence throughout the Relevant Periods. Owner’s equity during the Relevant Periods represents the combined equities of the Core Operation owned and operated by the companies now comprising the Target Group, after elimination of the effect of unrealised profit on inter-company transactions.

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ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

(c) During the Relevant Periods, the contributions from/distribution to equity owner mainly comprise the followings:
(i) As detailed in the Note 2, the Non-core Operations were not injected into the Target Company and have not been included in the Financial Information throughout the Relevant Periods.

During the Relevant Periods, cash received from the Non-core Operations was reflected as contributions from equity owner because such cash received formed an integral part of the working capital of the Core Operations, and the Target Company has no obligation to repay the amount back to the Non-core Operations. The transactions with the Non-core Operations have ceased upon the completion of Reorganisation.

(ii) As detailed in Note 1(b), the assumption of the other payables of approximately RMB174,115,000 by CTHC was recognised as a contribution from equity owner.
(iii) As detailed in Note 1(b) and Note 10, the assumption of the supplemental retirement benefits obligations of approximately RMB15,550,000 net of related tax effect of approximately RMB3,880,000 by CTHC was recognised as a contribution from equity owner.

25 Accounts payable

At each balance sheet date, the aging of the accounts payable balance was within one year and all the accounts payable were denominated in Renminbi.

— 194 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

26 Other payables and other current liabilities

The Target Group

Other payables (a) Accrued payroll Others The Target Company Other payables (a) Accrued payroll Others	As 2005 RMB’000 697,579 27,338 42,530 767,447 As 2005 RMB’000 697,579 24,595 39,693 761,867	at December 31, 2006 2007 RMB’000 RMB’000 507,353 302,817 31,422 37,319 6,074 6,077 544,849 346,213 at December 31, 2006 2007 RMB’000 RMB’000 507,353 302,817 27,018 31,778 3,783 5,204 538,154 339,799	at December 31, 2006 2007 RMB’000 RMB’000 507,353 302,817 31,422 37,319 6,074 6,077 544,849 346,213 at December 31, 2006 2007 RMB’000 RMB’000 507,353 302,817 27,018 31,778 3,783 5,204 538,154 339,799
			339,799

— 195 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

(a) Other payables represent the amounts collected on behalf of the customer airlines which are part of the Target Company’s settlement and clearing services.
i) At each balance sheet date, the aging analysis of other payables is as follows:

The Target Group and the Target Company

Within 6 months Over 6 months but within 1 year Over 1 year but within 2 years Over 2 years but within 3 years Over 3 years	As 2005 RMB’000 355,215 14,929 24,381 11,817 291,237 697,579	at December 31, 2006 2007 RMB’000 RMB’000 143,561 183,047 16,920 10,908 19,443 11,108 24,378 13,957 303,051 83,797 507,353 302,817	at December 31, 2006 2007 RMB’000 RMB’000 143,561 183,047 16,920 10,908 19,443 11,108 24,378 13,957 303,051 83,797 507,353 302,817
			302,817

ii) Other payables were denominated in the following currencies:

The Target Group and the Target Company

RMB USD Others	As 2005 RMB’000 654,129 43,416 34 697,579	at December 31, 2006 2007 RMB’000 RMB’000 422,530 173,677 84,773 105,242 50 23,898 507,353 302,817	at December 31, 2006 2007 RMB’000 RMB’000 422,530 173,677 84,773 105,242 50 23,898 507,353 302,817
			302,817

— 196 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

27 Cash generated from operations

Profit before taxation
Adjustments for:
Depreciation and amortisation
Net loss on disposal of property,
plant and equipment
Interest income
Exchange gain
Reversal for impairment of receivables
Reversal for financial guarantee
obligation, net
Decrease/(increase) in current assets:
Accounts receivable
Due from holding company and
fellow subsidiaries
Other receivables and other
current assets
Increase/(decrease) in liabilities:
Other payables and other liabilities
Supplemental retirement benefits
Cash generated from operations

Year ended December 31,
2005
2006
2007
RMB’000
RMB’000
RMB’000
151,454
96,440
102,854
25,068
24,785
16,661
56
205
204
(9,824)
(8,780)
(8,035)
(10,951)
(16,298)
(3,614)
(3,937)
(929)
(2,606)
(67,676)
—
—
6,873
4,258
(2,643)
811
48,290
530,872
(42,610)
147,124
(103,908)
(52,133)
(206,073)
(20,612)
3,110
1,970
1,630
241
90,992
510,803

28 Earnings per share

No earnings per share is presented as the Target Company is not a company registered with share capital and the calculation of earnings per share is not applicable.

— 197 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

29 Financial risk management

Financial risk factors

The Target Group’s activities expose it to a variety of financial risks: market risk (including currency risk and interest rate risk), credit risk, and liquidity risk. The Target Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Target Group’s financial performance.

Financial risk management is carried out by the Target Group’s finance department, following the overall directions determined by the Board of Directors. The Target Group’s finance department identifies and evaluates financial risks in close co-operation with the Target Group’s operating departments.

Credit risk

The credit risk of the Target Group arises mainly from the collectability of its accounts and other receivables, and cash and cash equivalents. The carrying amounts of these balances represent the Target Group’s maximum exposure to credit risk.

The counterparties of these accounts and other receivables are mainly domestic airlines, other aviation related companies and foreign airlines. During the Relevant Periods, the top 3 customers namely Air China Limited, China Southern Airlines Company Limited and China Eastern Airlines Corporation Limited accounted for approximately 66%, 50% and 51% of the total other receivables balances at December 31, 2005, 2006 and 2007 respectively. These other receivables balances arise mainly from the accounting, settlement and clearing services whereby the Target Company made payments on behalf of these airlines customers. These domestic airlines are state-owned enterprises and there was no recent history of defaults by them that have resulted into material bad debts expenses.

The Target Group has policies to ensure that the bank balances are placed with banks with good reputation and credit quality. During the Relevant Periods, approximately 97%, 98% and 99% of the Target Group’s bank balances at December 31, 2005, 2006 and 2007 respectively were placed with the 4 state-owned banks, and other local banks including China CITIC Bank and Shanghai Pudong Development Bank.

— 198 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

Foreign currency risk

The Target Group’s exposure to foreign exchange risk mainly arises from its settlement and clearing services whereby the Target Company made payments or collections in foreign currencies on behalf of its customers. An analysis of the assets and liabilities by currency are disclosed in Note 18, 21 and 26 respectively.

At December 31, 2007, December 31, 2006 and December 31 2005, if RMB had weakened/ strengthened by 5% against the USD with all other variable held constant, profit before tax for the year would have been RMB 8.1 million, RMB 0.2 million and RMB 1.1 million higher/ lower respectively, mainly as a result of foreign exchange gains/losses on translation of USD denominated other receivables and other payables.

The Target Group performs regular review of its foreign exchange exposure.

Liquidity risk

The Target Group maintains cash and bank balances that are adequate to meet its daily operations requirements. During the Relevant Periods, the cash and bank balances together with bank balances managed by CTHC represented approximately 50%, 54% and 47% of its total assets at December 31, 2005, 2006 and 2007 respectively. The management of the Target Group believe that the Target Group has sufficient cash and balances during Relevant Periods to meet its operations requirement and has no significant exposure to liquidity risk.

Interest rate risk

The Target Group’s interest-bearing assets are mainly represented by cash and cash equivalents and bank balances managed by CTHC. Interest income for the years ended December 31, 2005, 2006 and 2007 was approximately RMB9,825,000, RMB8,780,000 and RMB8,035,000. Apart from this, the Target Group’s income and operating cash flows are substantially independent of changes in market interest rates. The interest rates of the Target Group’s interest-bearing assets are disclosed in Notes 19 and 22.

— 199 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

Capital risk management

The Target Group defines owner’s equity as the Capital.

The Target Group reviews its capital structure regularly to ensure acceptable returns to its equity owner and assesses its future capital requirements, if necessary.

Fair value estimation

The Target Group’s financial instruments mainly consist of cash and cash equivalents, accounts receivables, other receivables, due from holding company and fellow subsidiaries, accounts payable, and other payables.

The carrying amounts of financial instruments approximated their fair values at December 31, 2005, 2006 and 2007 because of the short-term maturities of these financial assets and financial liabilities.

30 Commitments

(a) Capital commitments

At each balance sheet date, the Target Group had the following capital commitments:

Computer system and others Contracted but not provided for	As at December 31, 2005 2006 2007 RMB’000 RMB’000 RMB’000 1,019 2,492 1,383

At each balance sheet date, none of the above commitment balance was dominated in foreign currencies.

(b) Operating lease commitments

At each balance sheet date, the Target Group had the following commitments under operating lease:

Less than 1 year	As at December 31, 2005 2006 2007 RMB’000 RMB’000 RMB’000 — — 3,225

— 200 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

31 Related party transactions

Management believes that meaningful information relative to related party disclosures has been adequately disclosed.

(a) Related parties

The major related parties of the Target Company and the Target Group are as follows:

Name Relationship with the Target Company CTHC Parent of the Target Company TravelSky Subsidiary of CTHC, parent of the Target Company Beijing Yaka Jingcheng Subsidiary of CTHC, parent of the Target Company Property Management Centre (“Yaka”)

(b) Related party transactions

The following is a summary of significant recurring transactions carried out with the Target Group’s related parties.

(i) Property management service received from Yaka:

	Year	ended December	31,
	2005	2006	2007
	RMB’000	RMB’000	RMB’000
Yaka	8,408	8,256	8,343

(ii) Rendering computer software development and maintenance service to TravelSky:

	Year	ended December	31,
	2005	2006		2007
	RMB’000	RMB’000	RMB’000
TravelSky	15,900	18,800		18,800

The service fees are based on contracted agreements with related parties.

— 201 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

(c) Balances with related parties

Balances with related parties mainly comprised:

Receivables from related parties_(Note 19): — TravelSky(a) — CTHC(b)_	As 2005 RMB’000 8,815 579,559 588,374	at December 31, 2006 2007 RMB’000 RMB’000 9,917 9,801 530,206 11,002 540,123 20,803

(a) The balances with related parties primarily arose from the above related party transactions.
(b) The details of the balance are set out in Note 19.

(d) Key management compensations

The key management personnel are the Directors of the Target Company. Their compensations and remunerations are set out in Note 8.

(e) Balances and transactions with other major state-owned enterprises

i) The balances with other major state-owned enterprises comprising mainly stateowned banks and state-owned aviation companies and airports are as follows:

Bank balances Accounts receivable Other receivables Other payables	As at December 31, 2005 2006 2007 RMB’000 RMB’000 RMB’000 17,248 27,719 331,492 8,140 4,750 3,462 384,752 207,588 270,210 (372,126) (277,779) (85,630)

— 202 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

ii) The transactions carried out with other major stated-owned enterprises:

		As at December 31,
	2005	2006	2007
	RMB’000	RMB’000	RMB’000
Services provided to
state-owned aviation
companies and airports	200,589	208,886	228,152

iii) The Target Company provided a guarantee to SDITIC, a state-owned enterprise in 1993. Please refer to Note 12 for details

The Target Group is a state-owned enterprise. In accordance with the revised IAS 24, “Related Party Disclosures”, state-owned enterprises and their subsidiaries, other than entities under the Target Group, directly or indirectly controlled by the PRC government are also defined as related parties of the Target Company and its subsidiaries.

The majority of the business activities of the Target Company and its subsidiaries are conducted with state-owned enterprises. For the purpose of the related party transactions disclosure in accordance with IAS 24, the Target Company and its subsidiaries have established procedures to determine, to the extent possible, the identification of the ownership structure of its customers and suppliers as to whether they are state-owned enterprises. However, many state-owned enterprises have a multi-layered corporate structure and the ownership structures change over time as a result of transfers and privatization programs. Nevertheless, management believes that all material related party balances and transactions have been adequately disclosed.

— 203 —

ACCOUNTANT’S REPORT OF ACCA GROUP

APPENDIX II

III. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared for the Target Company or any of the companies now comprising the Target Group in respect of any period subsequent to December 31, 2007. Save as disclosed in this report, no dividend or distribution has been declared, made or paid by the Target Company or any of the companies now comprising the Target Group in respect of any periods subsequent to December 31, 2007.

Yours faithfully,

PricewaterhouseCoopers

Certified Public Accountants Hong Kong

— 204 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

A. UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

The following is an illustrative and unaudited pro forma statement of assets and liabilities of the Enlarged Group, which have been prepared on the basis of the notes set out below for the purpose of illustrating the effect of the proposed acquisition of the entire equity interest in Accounting Center of China Aviation Limited Company and a piece of land and a building situated on No. 11 Dongxing Li, Chaoyang District, Beijing, the PRC, (the “Property”) (collectively, the “Proposed Acquisition”) as if it had taken place on December 31, 2007. This unaudited pro forma statement of assets and liabilities has been prepared for illustrative purpose only and because of its hypothetical nature, it may not give a true picture of the financial positions of the Group had the Proposed Acquisition been completed as at December 31, 2007 or any future dates.

Unaudited Pro Forma Statement of Assets and Liabilities of the Enlarged Group

ASSETS Non-current assets Property, plant and equipment, net Intangible assets, net Lease prepayments for land use rights, net Investments in associated companies Deferred income tax asset Other long-term assets Total non-current assets	Statement of assets and liabilities of the Group as at December 31, 2007 Note (2) RMB’000 1,033,148 11,824 — 85,996 9,229 8,881 1,149,078	Pro forma adjustments Statement of assets and liabilities of the Target Group as at Other December 31, pro forma 2007 adjustments Note (3) Note RMB’000 RMB’000 104,775 114,579 (4) 4,604 — 19,718 93,746 (4) — — 2,947 — — —	Unaudited pro forma statement of assets and liabilities of the Enlarged Group RMB’000 1,252,502 16,428 113,464 85,996 12,176 8,881
			1,489,447

— 205 —

OF THE ENLARGED GROUP

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION

Current assets Inventories Accounts receivable, net Due from associated companies Due from related parties, net Due from holding companies and fellow subsidiaries Prepayments and other current assets Held-to-maturity financial assets Short-term bank deposits Cash and cash equivalents Total current assets Total assets LIABILITIES Non-current liabilities Deferred income tax liabilities Total non-current liabilities Current liabilities Accounts payable and accrued liabilities Due to related parties Income tax payable Deferred revenue Total current liabilities Total liabilities Net current assets Total assets less current liabilities	Statement of assets and liabilities of the Group as at December 31, 2007 Note (2) RMB’000 9,241 141,565 6,308 389,561 — 102,399 100,000 1,843,949 1,209,152 3,802,175 4,951,253 129 129 470,212 39,960 17,054 5,172 532,398 532,527 3,269,777 4,418,855	Pro forma adjustments Statement of assets and liabilities of the Target Group as at Other December 31, pro forma 2007 adjustments Note (3) Note RMB’000 RMB’000 — — 10,765 — — — — — 20,803 (9,800) (5) 423,252 — — — — — 527,606 — — — 349,170 10,855 (6) — (9,800) (5) 65,926 — — —	Unaudited pro forma statement of assets and liabilities of the Enlarged Group RMB’000 9,241 152,330 6,308 389,561 11,003 525,651 100,000 1,843,949 1,736,758
			4,774,801
			6,264,248

			129
			129
			830,237 30,160 82,980 5,172
			948,549
			948,678

			3,826,252

			5,315,699

— 206 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF ASSETS AND

LIABILITIES

(1) Prior to the Proposed Acquisition, the Target Company was wholly-owned and controlled by China TravelSky Holding Company (“CTHC”) under the supervision and regulation of Stated-owned Assets Supervision and Administration Commission of the State Council. The directors of the Company also regard CTHC as its ultimately holding company. As the Target Company and the Company are ultimate controlled by CTHC before and after the Proposed Acquisition, for accounting purposes, the proposed acquisition of the entire equity interests in the Target Company by the Group will be treated as “combination of entities under common control” and has been accounted for on the basis of uniting of interest method which is in consistent with the Group’s accounting policy. The consideration for the Proposed Acquisition will be satisfied by the issue of 174,491,393 new domestic shares of the Company at a price of HK$6.39 (RMB5.73) per share, totalling approximately RMB1 billion.
(2) The statement of assets and liabilities of the Group is prepared based on the audited consolidated balance sheet of the Group as at December 31, 2007 extracted from the published annual report of the Company.
(3) The adjustment represents the inclusion of the assets and liabilities of the Target Group as at December 31, 2007 extracted from accountant’s report as set out in the Appendix II to the Circular.
(4) The adjustment represents acquisition of the Property from CTHC at an aggregate consideration of RMB208,325,000. The consideration is allocated into building element and land element with amount of RMB114,579,000 and RMB93,746,000 respectively, by the directors of the Company with reference to their relative fair values according to the valuation reports issued by Jones Lang LaSalle Sallmanns Limited. The building element is recognised as a property, plant and equipment and the land element is recognised as lease prepayment for land use right.
(5) The adjustment represents elimination of the inter-company balances between the Group and the Target Group as at December 31, 2007.
(6) The adjustment represents accrual of estimated transaction costs of approximately RMB10,855,000. The transaction costs, including lawyer fees, cost of furnishing information to shareholders, other professional fees, and related tax charges, are directly attributable to the Proposed Acquisition.
(7) Other than those adjustments mentioned above, no other adjustment has been made to reflect any trading position or other transactions of the Group and the Target Group entered into subsequent to December 31, 2007.

— 207 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

B. REPORT ON UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

The following is the text of a report received from PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this circular.

REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION TO THE DIRECTORS OF TRAVELSKY TECHNOLOGY LIMITED

We report on the unaudited pro forma financial information set out on pages 205 to 207 under the heading of “Unaudited Pro Forma Financial Information” (the “Unaudited Pro Forma Financial Information”) in Appendix III to the circular dated June 16, 2008 (the “Circular”) of TravelSky Technology Limited (the “Company”), in connection with the proposed acquisition of Accounting Centre of China Aviation Limited Company (中國航空結算有限責任公司) and its subsidiaries and a piece of land and a building situated on No.11 Dongxing Li, Chaoyang District, Beijing, the PRC (the “Proposed Acquisition”) by the Company. The Unaudited Pro Forma Financial Information has been prepared by the directors of the Company, for illustrative purposes only, to provide information about how the Proposed Acquisition might have affected the relevant financial information of the Company and its subsidiaries (hereinafter collectively referred to as the “Group”). The basis of preparation of the Unaudited Pro Forma Financial Information is set out on pages 205 to 207 of the Circular.

Respective Responsibilities of Directors of the Company and the Reporting Accountant

It is the responsibility solely of the directors of the Company to prepare the Unaudited Pro Forma Financial Information in accordance with rule 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

It is our responsibility to form an opinion, as required by rule 4.29(7) of the Listing Rules, on the Unaudited Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Unaudited Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

— 208 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Basis of Opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the statement of assets and liabilities as at December 31, 2007 of the Group with the audited consolidated balance sheet of the Group as at December 31, 2007, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the directors of the Company.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to rule 4.29(1) of the Listing Rules.

The Unaudited Pro Forma Financial Information is for illustrative purposes only, based on the judgements and assumptions of the directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position of the Group as at December 31, 2007 or any future dates.

Opinion

In our opinion:

(a) the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to rule 4.29(1) of the Listing Rules.

PricewaterhouseCoopers Certified Public Accountants

Hong Kong, June 16, 2008

— 209 —

PROPERTY VALUATION REPORT

APPENDIX IV

The following is the text of a letter, summary of values and valuation certificates, prepared for the purpose of incorporation in this circular received from Jones Lang LaSalle Sallmanns Limited, an independent valuer, in connection with its valuation as at 31 March 2008 of the property interests in respect of the Acquisition.

Jones Lang LaSalle Sallmanns Limited 22nd Floor Siu On Centre 188 Lockhart Road Wanchai Hong Kong tel +852 2169 6000 fax +852 2169 6001

16 June 2008

The Board of Directors TravelSky Technology Limited 18-20/F., South Wing, Park C Raycom InfoTech Park No. 2, Ke Xue Yuan South Road Haidian District Beijing The People’s Republic of China

Dear Sirs,

In accordance with your instructions to value the properties held by China TravelSky Holding Company (“ CTHC ”) and Accounting Centre of China Aviation Limited Company (“ ACCA ”), a wholly-owned subsidiary of CTHC, in the People’s Republic of China (the “ PRC ”), we confirm that we have carried out inspections, made relevant enquiries and searches and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the capital values of the property interests as at 31 March 2008 (the “ date of valuation ”). Pursuant to the Sale and Purchase Agreement dated 5 May 2008 entered into between CTHC and TravelSky Technology Limited (the “ Company ”), the Company intends to acquire the property held by CTHC and entire registered capital of ACCA.

Our valuation of the property interests represents the market value which we would define as intended to mean “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion”.

We have valued the properties by the direct comparison approach assuming sale of the property interests in their existing state with the benefit of immediate vacant possession and by making reference to comparable sale transactions as available in the relevant market.

Our valuation has been made on the assumption that the seller sells the property interest in the market without the benefit of a deferred term contract, leaseback, joint venture, management agreement or any similar arrangement, which could serve to affect the value of the property interest.

No allowance has been made in our report for any charges, mortgages or amounts owing on any of the property interest valued nor for any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the property is free from encumbrances, restrictions and outgoings of an onerous nature, which could affect its value.

— 210 —

PROPERTY VALUATION REPORT

APPENDIX IV

In valuing the property interests, we have complied with all the requirements contained in Chapter 5 and Practice Note 12 to the Rules Governing the Listing of Securities issued by The Stock Exchange of Hong Kong Limited; the RICS Valuation Standards (6th Edition) published by the Royal Institution of Chartered Surveyors; and the HKIS Valuation Standards on Properties (1st Edition 2005) published by the Hong Kong Institute of Surveyors.

We have relied to a very considerable extent on the information given by the Company and have accepted advice given to us on such matters as tenure, planning approvals, statutory notices, easements, and particulars of occupancy, lettings, and all other relevant matters.

We have been shown copies of various title documents including State-owned Land Use Rights Certificates, Building Ownership Certificates and other title documents relating to the property interests in the PRC and have made relevant enquiries. Where possible, we have examined the original documents to verify the existing titles to the property interests and any material encumbrances that might be attached to the property interests or any lease amendments. We have relied considerably on the advice given by the Company’s PRC legal advisers — Jingtian & Gongcheng Attorneys at Law, concerning the validity of titles to the property interests.

We have not carried out detailed measurements to verify the correctness of the areas in respect of the properties but have assumed that the areas shown on the documents and official site plans handed to us are correct. All documents and contracts have been used as reference only and all dimensions, measurements and areas are approximations. No on-site measurement has been taken.

We have inspected the exterior and, where possible, the interior of the properties. However, no structural survey has been made, but in the course of our inspection, we did not note any serious defects. We are not, however, able to report whether the properties are free of rot, infestation or any other structural defects. No tests were carried out on any of the services.

We have had no reason to doubt the truth and accuracy of the information provided to us by the Company. We have also sought confirmation from the Company that no material factors have been omitted from the information supplied. We consider that we have been provided with sufficient information to reach an informed view, and we have no reason to suspect that any material information has been withheld.

Unless otherwise stated, all monetary figures stated in this report are in Renminbi (RMB).

Our valuation is summarized below and the valuation certificates are attached.

Yours faithfully, for and on behalf of

Jones Lang LaSalle Sallmanns Limited Paul L. Brown B.Sc. FRICS FHKIS Director

Note: Paul L. Brown is a Chartered Surveyor who has 25 years’ experience in the valuation of properties in the PRC and 28 years of property valuation experience in Hong Kong, the United Kingdom and the Asia-Pacific region.

— 211 —

PROPERTY VALUATION REPORT

APPENDIX IV

SUMMARY OF VALUES

Group I — Property interest held by CTHC in the PRC

		Capital value
		in existing state as at
No.	Property	31 March 2008
		RMB
1.	A parcel of land and 8 buildings located at	208,325,000
	No. 11, Dongxing Li
	Chaoyang District
	Beijing
	The PRC
Group	II—Property interest held and occupied by ACCA in the PRC
2.	A parcel of land and a 15-storey office building located	223,988,000
	at Xibahe Beili
	Chaoyang District
	Beijing
	The PRC
	Total:	432,313,000

— 212 —

PROPERTY VALUATION REPORT

APPENDIX IV

VALUATION CERTIFICATE

Group I — Property interest held by CTHC in the PRC

Capital value in existing state Particulars of as at No. Property Description and tenure occupancy 31 March 2008 RMB 1. A parcel of land and The property comprises a parcel The property is 208,325,000 8 buildings located at of land with a site area of currently leased to the No. 11, Dongxing Li approximately 5,332.54 sq.m. and Company for office Chaoyang District 8 buildings erected thereon which and ancillary Beijing were completed in 2001. production purposes. The PRC The buildings have a total gross floor area of approximately 12,003.74 sq.m. The buildings mainly include 2 office buildings, a transformer kiosk, a communication room, a guard house and 3 warehouses. The land use rights of the property have been granted for a term of 50 years expiring on 29 June 2049 for office use.

— 213 —

PROPERTY VALUATION REPORT

APPENDIX IV

Notes:

Pursuant to a State-owned Land Use Rights Certificate — Jing Chao Guo Yong (1999 Chu) Zi Di No. 00032, the land use rights of a parcel of land with a site area of approximately 5,332.54 sq.m. have been granted to Civil Aviation Computer Information Center, the former name of CTHC, for a term of 50 years expiring on 29 June 2049 for office use.
Pursuant to a Building Ownership Certificate — Fang Quan Zheng Chao Guo 07 Zi Di No. 00123, 8 buildings with a total gross floor area of approximately 12,003.74 sq.m. are held by CTHC.
Pursuant to a Tenancy Agreement entered into between CTHC and the Company, the buildings with a total gross floor area of approximately 12,003.74 sq.m. are leased to the Company for a term of 3 years expiring on 31 December 2009 at a total annual rental of RMB16,649,145.77.
We have been provided with a legal opinion regarding the property interests by Jingtian & Gongcheng Attorneys at Law, which contains, inter alia, the following:
(a) CTHC has legally obtained the land use rights of the property and has the legal rights to transfer, mortgage and lease the land use rights of the property;
(b) CTHC is entitled to transfer, mortgage and lease the buildings without any additional payment save for taxation; and
(c) The property is not subject to any mortgage and other encumbrances.

— 214 —

PROPERTY VALUATION REPORT

APPENDIX IV

VALUATION CERTIFICATE

Group II — Property interest held and occupied by ACCA in the PRC

Capital value in existing state Particulars of as at No. Property Description and tenure occupancy 31 March 2008 RMB 2. A parcel of land and a The property comprises a parcel The property is 223,988,000 15-storey office of land with a site area of currently occupied by building located at approximately 4,212.56 sq.m. on CTHC and its Xibahe Beili which is constructed a 15-storey subsidiary for office Chaoyang District office building with a one level purpose except for Beijing underground carport which portions of the The PRC completed in 1996. property which are leased to 2 The building has a gross floor independent third area of approximately 15,509.5 parties. (see note 3)

The building has a gross floor area of approximately 15,509.5 sq.m.

The land use right of the property has been granted for a term of 50 years expiring on 22 November 2056 for office use.

— 215 —

PROPERTY VALUATION REPORT

APPENDIX IV

Notes:

Pursuant to a State-owned Land Use Rights Certificate — Jing Chao Guo Yong (2007 Chu) No. 0031, the land use rights of a parcel of land with a site area of approximately 4,212.56 sq.m. have been granted to Accounting Centre of China Aviation (“ACCA”), a wholly-owned subsidiary of CTHC, for a term of 50 years expiring on 22 November 2056 for office use.
Pursuant to a Building Ownership Certificate — X Jing Fang Quan Zheng Chao Qi Zi Di No. 559946, a building with a gross floor area of approximately 15,509.5 sq.m. is held by ACCA.
Pursuant to 2 Tenancy Agreements entered into between ACCA and 2 independent third parties, Level 12 and Level 13 of the property with a total gross floor area of approximately 1,948.86 sq.m. are both leased for the same term of 3 years commencing from 1 June 2005 and expiring on 31 May 2008 at a total annual rental of RMB2,781,095.20.
We have been provided with a legal opinion regarding the property interests by Jingtian & Gongcheng Attorneys at Law, which contains, inter alia, the following:
(a) ACCA has legally obtained the land use rights of the property and has the legal rights to transfer, mortgage and lease the property;
(b) ACCA is entitled to transfer, mortgage and lease the buildings without any additional payment save for taxation; and
(c) The property is not subject to any mortgage and other encumbrances.

— 216 —

GENERAL INFORMATION

APPENDIX V

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm that, having made all reasonable enquiries, to the best of their knowledge and belief:

(a) the information contained in this circular is accurate and complete in all material respects and not misleading;
(b) there are no other matters the omission of which would make any statement in this circular misleading; and
(c) all opinions expressed in this circular have been arrived at after due and careful consideration and are founded on bases and assumptions that are fair and reasonable.

2. INTERESTS AND SHORT POSITIONS OF DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVE IN THE SHARE CAPITAL OF THE COMPANY

As at the Latest Practicable Date, the interest or short position in the shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) held by the Directors, supervisor or chief executive of the Company which is required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO), or any interests required to be entered in the register maintained in accordance with Section 352 of the SFO, or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers set out in Appendix 10 to the Listing Rules are as follow:

	Number		Percentage to the	Percentage
	and class	Capacity of	corresponding	to the total
Name of Director	of shares	Holder	share capital	share capital
	(Note 1)			(Note 2)
Chua Keng Kim	417,000 H shares	Interest of	0.07%	0.02%
	of RMB1 each (L)	spouse

Notes:

(1) (L) — Long position
(2) The percentage to the total share capital is calculated based on the total number of 1,776,315,000 shares in issue of the Company as at 30 June 2007.

— 217 —

GENERAL INFORMATION

APPENDIX V

Save as disclosed above, as at the Latest Practicable Date, the Directors, supervisor or chief executive of the Company had any interest or short position in any shares, underlying shares and debentures of the Company or any of its associated corporations (as defined in Part XV of the Ordinance) which is required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO), or any interests required to be entered in the register maintained in accordance with Section 352 of the SFO, or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers set out in Appendix 10 to the Listing Rules.

3. SUBSTANTIAL SHAREHOLDERS

(a) As at the Latest Practicable Date, as far as it was known to any Directors, supervisors or chief executive of the Company, the following entities (other than the Directors, supervisors or chief executive of the Company disclosed under the paragraph headed “Interests and short positions of Directors, supervisors and chief executive in the share capital of the Company” above) had an interest or short position in the respective class of Shares and underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was directly or indirectly interested in 10% or more of the nominal value of the respective class of share capital carrying rights to vote in all circumstances at general meetings of the Company:

			Approximate
			percentage	Approximate
	Class and		of respective	percentage of
	no. of		class of share	total share
Name of Shareholder	securities	Capacity	capital	capital
	(Note 1)			(Note 2)
Platinum Investment	24,686,152	Investment	3.97%	1.39%
Management Limited	H shares of	Manager
	RMB1 each (L)
	56,608,700	Trustee	9.11%	3.19%
	H shares of	(other than a
	RMB1 each (L)	bare trustee)
Oppenheimer	42,467,220	Investment	9.65%	2.39%
International Small	H shares of	Manager	(Note 3
Company Fund	RMB1 each (L)		and 4)
Matthews	28,239,000	Investment	9.08%	1.59%
International Capital	H shares of	Manager	(Note 3
Management, LLC	RMB1 each (L)		and 5)

— 218 —

GENERAL INFORMATION

APPENDIX V

J.P. Morgan Fleming	22,199,000	Investment	7.14%	1.25%
Asset Management	H shares of	Manager	(Note 3
(Asia) Inc.	RMB1 each (L)		and 6)
J.P. Morgan Fleming	22,199,000	Investment	7.14%	1.25%
Asset Management	H shares of	Manager	(Note 3
Holdings Inc.	RMB1 each (L)		and 6)
JF Asset Management	22,199,000	Investment	7.14%	1.25%
Limited	H shares of	Manager	(Note 3
	RMB1 each (L)		and 6)
Plantinum	44,309,100	Beneficial	7.13%	2.49%
International Fund	H shares of	owner
	RMB1 each (L)
Prudential PLC	31,810,000	Interest of	5.12%	1.79%
	H shares of	controlled
	RMB1 each (L)	corporation
China TravelSky	396,993,000	Beneficial	34.38%	22.35%
Holding Company	Domestic shares	owner
	of RMB1 each (L)
China Southern Air	232,921,000	Beneficial	20.17%	13.11%
Holding Company	Domestic shares	owner
	of RMB1 each (L)
	43,849,000	Interest of	3.80%	2.47%
	Domestic shares	controlled
	of RMB1 each (L)	corporation
	(Note 7)

— 219 —

GENERAL INFORMATION

APPENDIX V

Eastern Holding	218,829,000	Beneficial	18.95%	12.32%
	Domestic shares	owner
	of RMB1 each (L)
	5,317,000	Interest of	0.46%	0.30%
	Domestic shares	controlled
	of RMB1 each (L)	corporation
	(Note 8)
	2,600,000	Interest of	0.23%	0.15%
	Domestic shares	controlled
	of RMB1 each (L)	corporation
	(Note 9)
China National	178,867,000	Beneficial	15.49%	10.07%
Aviation Holding	Domestic shares	owner
Company	of RMB1 each (L)
	8,697,000	Interest of	0.75%	0.49%
	Domestic shares	controlled
	of RMB1 each (L)	corporation
	(Note 10)

Notes:

(1) (L) — Long position.
(2) Percentage of total share capital is based on 1,776,315,000 shares of the total issued share capital of the Company as at the Latest Practicable Date.
(3) The Directors are unable to confirm the shareholding of the relevant substantial shareholders because those substantial shareholders have not filed any corporate substantial shareholder notice after the Bonus Issue. Theoretically, the number of Shares held by those substantial shareholders should increase after the Bonus Issue (with the shareholding percentage remains unchanged). However, the Directors cannot exclude the possibility that those substantial shareholders have disposed of any Shares after the Bonus Issue, so that the number of Shares held by those substantial shareholders before and after the Bonus Issue and as at the Latest Practicable Date remain the same. The Directors are also unable to ascertain the shareholding of those substantial shareholders from the register of holders of H Shares of the Company as the information contained therein may not reflect the actual beneficial shareholding of the shareholders (i.e. the registered shareholders may be bare trustee or holding some Shares on behalf of the others and this kind of interest is not required to be disclosed under the SFO).

— 220 —

GENERAL INFORMATION

APPENDIX V

(4) Such percentage is shown in the corporate substantial shareholder notice of Oppenheimer International Small Company Funds, filed on December 6, 2007. However, the number of H shares held by Oppenheimer International Small Company Funds, stated in such notice was 42,467,220, which, if correct, represents 13.66% of total H shares of the Company based on the total 310,854,000 issued H shares of the Company. As to the knowledge, the information collected and belief of the Directors, they are unable to confirm whether such ratio represents the shareholding ratio of the shareholder after the Bonus Issue. Please also refer to note (3) above.
(5) Such percentage is shown in the corporate substantial shareholder notice of Matthews International Capital Management declared and filed on 5 August 2005 at the latest. As to the knowledge, the information collected and belief of the Directors, they are unable to confirm whether such ratio represents the shareholding ratio of the shareholder after the Bonus Issue. Please also refer to note (3) above.
(6) Such percentage is shown in the corporate substantial shareholder notice of this shareholder declared and filed on 1 April 2003 at the latest. As to the knowledge, the information collected and belief of the Directors, they are unable to confirm whether such ratio represents the shareholding ratio of the shareholder after the Bonus Issue. Please also refer to note (3) above.
(7) These shares are held by Xiamen Airlines Company Limited. China Southern Air Holding Company was deemed to be interested in the shares held by Xiamen Airlines Company Limited by virtue of the Ordinance.
(8) These shares are held by Eastern Airlines, a subsidiary of Eastern Holding. Eastern Holding is deemed to be interested in the shares held by Eastern Airlines by virtue of the SFO.
(9) These shares are held by China Eastern Airlines Wuhan Limited, a subsidiary of Eastern Holding. Eastern Holding is deemed to be interested in the shares held by China Eastern Airlines Wuhan Limited by virtue of the SFO.
(10) These shares are held by Shandong Airlines Company Limited. China National Aviation Holding Company was deemed to be interested in the shares held by Shandong Airlines Company Limited by virtue of the Ordinance.

— 221 —

GENERAL INFORMATION

APPENDIX V

Save as disclosed herein, there was no person or other entity known to the Directors, supervisors or chief executive of the Company, who, as at the Latest Practicable Date, had an interest or short position in the respective class of Shares and underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was directly or indirectly interested in 10% or more of the nominal value of the respective class of shares capital carrying rights to vote in all circumstances at general meetings of the Company.

(b) So far as is known to the Directors, supervisors or chief executive of the Company, as at the Latest Practicable Date, the following entities (other than the Directors, supervisors or chief executive of the Company disclosed under the paragraph headed “Interests and short positions of Directors, supervisors and chief executive in the share capital of the Company” above) were directly or indirectly interested in 10% or more of the nominal value of the registered capital carrying the rights to vote in all circumstances at the general meetings of the subsidiaries of the Company:

		Registered	Approximate
		Capital held by	percentage
Name of subsidiary	Name of shareholder	the shareholder	of interest
Hainan Civil Aviation	China Southern Air	RMB1,505,000	22.74%
Cares Co., Ltd.	Holding Company
(海南民航凱亞	(中國南方航空
有限公司)	集團公司)
Cares Hubei Co., Ltd	Wuhan Tinhe	RMB625,000	12.50%
(湖北民航凱亞	Airport Limited
有限公司)	(武漢天河機場
	有限責任公司)
Cares Hubei Co., Ltd	Committee of labour	RMB625,000	12.50%
(湖北民航凱亞	union of Wubei
有限公司)	Branch of China
	Southern Airlines
	Company Limited
	(中國南方航空股份
	有限公司湖北分公司
	工會委員會)
Cares Hubei Co., Ltd	China Eastern Air	RMB625,000	12.50%
(湖北民航凱亞	Wuhan Limited
有限公司)	(中國東方航空武漢
	有限責任公司)

— 222 —

GENERAL INFORMATION

APPENDIX V

Cares Hubei Co., Ltd	Cares Shenzhen Co., Ltd.	RMB625,000	12.50%
(湖北民航凱亞	(深圳民航凱亞
有限公司)	有限公司)
Cares Chongqing	Air China Limited	RMB2,401,000	24.50%
Information Co., Ltd.	(中國國際航空股份
(重慶民航凱亞信息	有限公司)
技術有限公司)
Cares Chongqing	Chongqing Airport	RMB2,401,000	24.50%
Information Co., Ltd.	(Group) Limited
(重慶民航凱亞信息	(重慶機場（集團）
技術有限公司)	有限公司)
Aviation Cares of	China Eastern Airlines	RMB980,000	49.00%
Yunnan Information	— Yunnan Company
Co., Ltd.	(中國東方航空
(雲南民航凱亞信息	雲南公司)
有限公司)
InfoSky Technology	Société Internationale de	US$1,225,000	49.00%
Company Limited	Télécommunications
	Aeronautiques Greater
	China Holdings Limited
Civil Aviation Cares	Xiamen Airlines	RMB1,140,000	28.50%
of Xiamen Ltd.	Company Limited
(廈門民航凱亞	(廈門航空有限公司)
有限公司)
Civil Aviation Cares	Xiamen International	RMB820,000	20.50%
of Xiamen Ltd.	Aviation Company Limited
(廈門民航凱亞	(廈門國際航空港股份
有限公司)	有限公司)
Civil Aviation Cares	Qingdao International	RMB720,000	36%
of Qingdao Limited	Airport Company Limited
(青島民航凱亞	(青島國際機場集團
有限公司)	有限公司)
Civil Aviation Cares	Shanghai Civil Aviation East	RMB260,000	13%
of Qingdao Limited	China Cares System
(青島民航凱亞	Integration Co., Ltd
有限公司)	(上海民航華東凱亞系統
	集成有限公司)

— 223 —

GENERAL INFORMATION

APPENDIX V

Civil Aviation Cares	Shaanxi Airport Management	RMB850,000	17%
of Xi’an Ltd.	Group Company
(西安民航凱亞科技	(陝西省機場管理
有限公司)	集團公司)
Civil Aviation Cares	China Eastern Airlines	RMB1,600,000	32%
of Xi’an Ltd.	Northwest Company
(西安民航凱亞科技	(中國東方航空西北公司)
有限公司)
Civil Aviation Cares	China Southern Air	RMB735,000	24.50%
Technology of	Holding Company
Xinjiang Ltd.	(中國南方航空集團公司)
(新疆民航凱亞信息
網絡有限責任公司)
Civil Aviation Cares	Xinjiang Airport Group	RMB735,000	24.50%
Technology of	Company Limited
Xinjiang Ltd.	(新疆機場集團
(新疆民航凱亞信息	有限責任公司)
網絡有限責任公司)

Save as disclosed above, as at the Latest Practicable Date and so far as is known to the Directors, supervisors or chief executive of the Company, there was no other entity (other than the Directors, supervisors or chief executive of the Company disclosed under the paragraph headed “Interests and short positions of Directors, supervisors and chief executive in the share capital of the Company” above) who was directly or indirectly, interested in 10% or more of the nominal value of the registered capital carrying rights to vote in all circumstances at the general meetings of any subsidiary of the Company.

4. LITIGATION

As at the Latest Practicable Date, neither the Company nor any member of the Group was engaged in any litigation or arbitration of material importance and no litigation or claim of material importance was known to the Directors to be pending or threatened by or against the Company or any member of the Group.

5. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had entered or was proposing to enter into a service contract with any member of the Group which is not determinable by the Group within one year without payment of compensation, other than statutory compensation.

— 224 —

GENERAL INFORMATION

APPENDIX V

6. MATERIAL CONTRACTS

Except for the Sale and Purchase Agreement, there were no material contracts (not being contracts in the ordinary course of business) entered into by the Group during the period of two years prior to the Latest Practicable Date:

7. COMPETING INTERESTS

None of the Directors and their respective associates (as defined in Listing Rules) has an interest in a business, which competes or may compete with the businesses of the Company and any other conflicts of interest which any such person has or may have with the Company.

8. DIRECTORS INTERESTS IN ASSETS

Save as disclosed, as at the Latest Practicable Date, none of the Directors had any direct or indirect interest in any assets which had been acquired or disposed of by or leased to any member of the Group or proposed to be so acquired, disposed of or leased since 31 December 2007, being the date to which the latest published audited accounts of the Company were made up.

9. DIRECTORS INTERESTS IN CONTRACTS

Save as the Sale and Purchase Agreement as disclosed herein, there is no other contract or arrangement subsisting at the Latest Practicable Date in which any of the Directors is materially interested in and which is significant in relation to the business of the Group.

— 225 —

GENERAL INFORMATION

APPENDIX V

10. QUALIFICATIONS OF EXPERTS AND CONSENTS

The following is the qualification of the expert or professional adviser who has given opinion or advice contained in this circular:

Name Qualifications

China Merchants Licensed corporation to carry out type 1 (dealings in securities), type 2 (dealings in futures contracts), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities under the SFO PricewaterhouseCoopers Certified Public Accountants Jones Lang LaSalle Sallmanns Ltd. Professional valuers

China Merchants, PricewaterhouseCoopers and Jones Lang LaSalle Sallmanns Ltd. have given and have not withdrawn their respective written consents to the issue of this circular with the inclusion herein of their respective letters and reports (as the case may be) and references to their respective names, in the form and context in which they respectively appear.

11. INTERESTS OF EXPERTS

As at the Latest Practicable Date, each of China Merchants, PricewaterhouseCoopers and Jones Lang LaSalle Sallmanns Ltd.:

(a) did not have any shareholding in any member of the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group; and
(b) was not interested, directly or indirectly, in any assets which have been acquired or disposed of by or leased to the Company since December 31, 2007, being the date to which the latest published audited accounts of the Company were made up.

12. GENERAL

The English text of this circular shall prevail over the Chinese text in case of inconsistency, but in relation to the amendments to the Articles, Chinese text shall prevail in case of inconsistency.

— 226 —

GENERAL INFORMATION

APPENDIX V

13. PROCEDURE FOR DEMANDING POLL

Pursuant to Article 73 of the Articles, a resolution put to the vote at a meeting shall be decided on a show of hands unless (before or after the voting on show of hands) a poll is demanded:

(i) by the chairman of such meeting;
(ii) by at least two Shareholders present in person or by proxy for the time being entitled to vote at the meeting; or
(iii) by shareholder(s) of the Company present in person or by proxy(ies) and holding 10% or more shares conferring a right to vote at the meeting on his/her own or in aggregate.

14. MISCELLANEOUS

(a) The registered office of the Company is located at 18-20th Floors, South Wing, Park C, Raycom InfoTech Park, No. 2, Ke Xue Yuan South Road, Haidian District, Beijing 100190, PRC and the place of business of the Company in Hong Kong is located at Rooms 3005-3007, 30th Floor, Great Eagle Centre, 23 Harbour Road, Wanchai, Hong Kong.
(b) The branch share registrar and transfer office of the Company in Hong Kong is Hong Kong Registrars Limited, Rooms 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.
(c) The company secretary is Mr. Ding Weiping. As at the Latest Practicable Date, the Company has not yet appointed a qualified accountant. The Company has not identified a suitable candidate and the Company will issue a separate announcement upon appointment of the qualified accountant.

— 227 —

GENERAL INFORMATION

APPENDIX V

15. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during normal business hours at the offices of Mallesons Stephen Jaques located on 37th Floor, Two International Financial Centre, Central, Hong Kong up to and including 30 June 2008:

(a) the memorandum of association and articles of the Company;
(b) the annual reports of the Company for the two financial years ended 31 December 2006 and 31 December 2007 respectively;
(c) the material contracts referred to in the section headed “Material Contracts” in this appendix and the contracts referred to in this circular including:
(1) Sale and Purchase Agreement dated 5 May 2008;
(2) Property Management Agreement dated 3 February 2008 between ACCA and Ya Ka;
(3) Revenue Accounting Systems and Settlement Agreement between ACCA and Southern Airlines dated 15 November 2007;
(4) Oracle Financial Products Support Services Agreement between ACCA and Southern Airlines dated 1 June 2007;
(5) Revenue Accounting Systems and Settlement Agreement between ACCA and Eastern Airlines dated 22 February 2008;
(6) Revenue Accounting Systems and Settlement Agreement between ACCA and Air China dated 28 February 2008;
(7) Revenue Accounting and Settlement Agreement between ACCA and Macau Airlines dated 31 December 2006;
(8) Oracle Financial Products Support Services Agreement between ACCA and Macau Airlines dated 15 May 2007;
(9) Interline Data Exchange Agreement between ACCA and Xiamen Airlines dated 26 September 2006;
(10) Revenue Accounting and Settlement Agreement between ACCA and Xiamen Airlines dated 21 December 2007;

— 228 —

GENERAL INFORMATION

APPENDIX V

(11) Interline Data Exchange Agreement between ACCA and Hainan Airlines dated 18 September 2006;
(12) Revenue Accounting and Settlement Agreement between ACCA and Hainan Airlines dated 4 December 2006;
(13) Revenue Accounting Systems and Settlement Agreement between ACCA and Shenzhen Airlines dated 29 January 2008;
(14) Interline Data Exchange Agreement between ACCA and Shanghai Airlines dated 22 March 2007;
(15) Revenue Accounting and Settlement Agreement between ACCA and Shanghai Airlines dated 19 December 2007;
(16) Revenue Accounting Systems and Settlement Agreement between ACCA and Shandong Airlines dated 1 December 2007;
(17) Revenue Accounting Systems and Settlement Agreement between ACCA and Sichuan Airlines dated 1 December 2007;
(18) Domestic Mail Revenue Accounting and Settlement Agreement dated 30 July 1997; and
(19) IATA Agreement dated 27 March 2008;
(d) the written consents referred to under the section headed “Qualifications of Experts and Consents” in this appendix;
(e) an accountant’s report of ACCA Group, the text of which is set out in Appendix II to this circular;
(f) the report on unaudited pro forma financial information of the Enlarged Group, the text of which is set out in Appendix III to this circular;
(g) a copy of the valuation report of the Property the text of which is set out in Appendix IV to this circular;
(h) a copy of this circular;
(i) the letter of recommendation from the Independent Board Committee, the text of which is set out on pages 31 to 32 of this circular; and
(j) the letter from China Merchants, the text of which is set out on pages 33 to 72 of this circular.

— 229 —

NOTICE OF EGM

==> picture [416 x 62] intentionally omitted <==

(Stock Code: 0696)

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN THAT the extraordinary general meeting (the “EGM”) of TravelSky Technology Limited (the “Company”) will be held at the conference room of the Company at Floor 19, South Wing, Park C, Raycom InfoTech Park, No. 2 Ke Xue Yuan South Road, Haidian District, Beijing, the People’s Republic of China on 31 July 2008 at 10:00 a.m. to consider and, if thought fit, to pass, with or without modifications, the following resolutions as ordinary or special resolutions of the Company:

SPECIAL RESOLUTIONS

“ THAT subject to the passing of resolution number 3 below:
(a) the sale and purchase agreement dated 5 May 2008 (the “Sale and Purchase Agreement”) entered into between China TravelSky Holding Company (“CTHC”) and the Company, a copy of which has been initialled by the chairman of this meeting for the purpose of identification marked “A”, pursuant to which CTHC agreed to sell and the Company agreed to purchase (i) the entire registered capital of ACCA for a consideration of RMB788 million (equivalent to approximately HK$878.62 million); and (ii) a state-owned land use right with a site area of 5,332.54 sq.m. and 8 buildings erected thereon with a total gross floor area of 12,003.74 sq.m. located in No. 11 Dongxing Li, Chaoyang District, Beijing, the People’s Republic of China, for a consideration of RMB212 million (equivalent to approximately HK$236.38 million), amounting to an aggregate consideration of RMB1 billion (equivalent to approximately HK$1.115 billion) (the “Acquisition”), and all transactions contemplated thereunder be and are hereby generally and unconditionally approved; and
(b) the directors of the Company (“Directors”) be and are hereby authorised to do all such acts and things, to sign and execute all such further documents and to take such steps as the Directors may in their absolute discretion consider necessary, appropriate, desirable or expedient to give effect to or in connection with the Sale and Purchase Agreement and all other matters incidental thereto.”
“ THAT subject to the passing of resolution number 1 above, the Directors be and are hereby generally and specifically authorised to allot and issue an aggregate of up to 174,491,393 new domestic shares of book value of RMB1.00 each in the share capital of the Company at a price of HK$6.39 each to CTHC or its nominee (the “Special Mandate”) as full settlement of the consideration for the Acquisition upon and subject to the terms and conditions of the Sale and Purchase Agreement being fulfilled. The Special Mandate is in addition to, and shall not prejudice nor revoke any existing general mandate granted to the Directors by the shareholders of the Company or such other general or special mandates which may from time to time be granted to the Directors prior to the passing of this resolution.”

— 230 —

NOTICE OF EGM

“ THAT subject to the passing of resolution number 1 above, the Articles of Association of the Company be altered in the following manner:
(a) in Article 20, by adding the following new sub-article 3:

“Following the allotment and issuance of 174,491,393 domestic shares as approved by the shareholders of the Company at the EGM convened on 31 July 2008, the Company has a total issued share capital of 1,950,806,393 shares, of which 1,329,098,393 were domestic shares, representing 68.13% of the issued share capital of the Company.”

(b) in Article 21, by adding the following new sub-article 4:

“Following the allotment and issuance of 174,491,393 domestic shares as approved by the shareholders of the Company at the EGM convened on 31 July 2008, the Company has a total issued share capital of 1,950,806,393 shares, of which 621,708,000 shares were issued to holders of H shares of the Company, representing 31.87% of the issued share capital of the Company.”

(The above is the English Translation of the Chinese version of the above proposed amendments to the Articles of Association. Should there be any in consistencies between the English version and the Chinese version, the Chinese version shall prevail. The amended Articles of Association will be effective upon registration with the State Administration for Industry and Commerce, the PRC.)”

ORDINARY RESOLUTIONS

“ THAT subject to the passing of resolution number 1 above:
(a) the revenue accounting system and settlement agreement dated 22 February 2008 entered into between Accounting Centre of China Aviation Limited Company (“ACCA”) as the service provider and China Eastern Airlines Corporation Limited as the recipient of the service (“Eastern Airlines Agreement”) in respect of the provision of revenue accounting systems development and support services and passenger and cargo revenue accounting and settlement services, and all transactions contemplated thereunder; and
(b) the Annual Caps (as defined in the circular of the Company dated 16 June 2008 (“Circular”)) for the transactions under the Eastern Airlines Agreement for the three years ending 31 December 2010 as shown in the Circular,

be and are hereby approved and that the Directors be and are hereby authorised to take any step as they consider necessary, desirable or expedient in connection with the Eastern Airlines Agreement and the transactions contemplated thereby.”

— 231 —

NOTICE OF EGM

“ THAT subject to the passing of resolution number 1 above:
(a) the revenue accounting system and settlement agreement dated 28 February 2008 entered into between ACCA as the service provider and Air China Limited as the recipient of the service (“Air China Agreement”) in respect of the provision of revenue accounting systems development and support services and passenger and cargo revenue accounting and settlement services, and all transactions contemplated thereunder; and
(b) the Annual Caps for the transactions under the Air China Agreement for the three years ending 31 December 2010 as shown in the Circular,

be and are hereby approved and that the Directors be and are hereby authorised to take any step as they consider necessary, desirable or expedient in connection with the Air China Agreement and the transactions contemplated thereby.”

“ THAT subject to the passing of resolution number 1 above;
(a) the agreement dated 27 March 2008 entered into between ACCA as the service provider and The International Air Transport Association, as authorised by, among others, Southern Airlines, Eastern Airlines, Air China, Macau Airlines, Xiamen Airlines, Hainan Airlines, Shenzhen Airlines, Shanghai Airlines, Shandong Airlines, and Sichuan Airlines (all as defined in the Circular) (“IATA Agreement”) in respect of the provision of sales data processing and settlement service, and all transactions contemplated thereunder; and
(b) the Annual Caps for the transactions under the IATA Agreement for the three years ending 31 December 2010 as shown in the Circular,

be and are hereby approved and that the Directors be and are hereby authorised to take any step as they consider necessary, desirable or expedient in connection with the IATA Agreement and the transactions contemplated thereby.”

Yours faithfully,

For and on behalf of the Board of

TravelSky Technology Limited Xu Qiang Chairman

Beijing, the PRC 16 June 2008

Registered office:

18th-20th Floor, South Wing, Park C Raymon InfoTech Park No. 2 Ke Xue Yuan South Road Haidian District, Beijing 100190 the People’s Republic of China

— 232 —

NOTICE OF EGM

Notes:

The register of members of the Company will be closed from 1 July 2008 to 31 July 2008 (both days inclusive), during which no share transfers will be effected. Holders of the Company’s H shares and domestic shares whose names appear on the register of members of the Company at the close of business on 30 June 2008 are entitled to attend the EGM. Transfer documents of the Company’s H shares must be lodged with the Company’s branch share registrar in Hong Kong at or before 4:00 p.m. on 30 June 2008 to entitle the transferee to attend the EGM.
A member entitled to attend and vote at the EGM is entitled to appoint one or more than one proxy to attend and vote instead of him. A proxy need not be a member of the Company.
To be valid, the form of proxy must be duly completed and signed in accordance with the instructions printed thereon and together with a power of attorney or other authority, if any, under which it is signed or a notarially certified copy thereof, must be deposited at the branch share registrar of the Company in Hong Kong, Hong Kong Registrars Ltd. at Shops 1712-1716, 17/F, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong not less than 24 hours before the time for scheduled for holding the EGM or adjournment thereof.
Completion and return of the form of proxy will not preclude a member from attending and voting in person at the EGM or any adjournment thereof. If such member attends the EGM, his form of proxy will be deemed to have been revoked.
Shareholders who intend to attend the EGM in person or by proxy should return the reply slip for attending the EGM to the registered address of the Company on or before 11 July 2008 personally or by mail or fax.

As at the date of this notice, the Board comprises:

Executive Directors

: Mr. Xu Qiang (Chairman), Mr. Zhu Xiaoxing, Mr. Ding Weiping and Mr. Song Jinxiang;

Non-executive Directors

: Mr. Wang Quanhua, Mr. Luo Chaogeng, Mr. Gong Guokui, Mr. Rong Gang, Mr. Sun Yongtao, Mr. Liu Dejun, Mr. Xia Yi and Mr. Song Jian;

Independent non-executive Directors

: Mr. Yick Wing Fat, Simon, Mr. Yuan Yaohui and Mr. Chua Keng Kim.

— 233 —

AI assistant

TravelSky Technology Limited — Proxy Solicitation & Information Statement 2008

49402_rns_2008-06-15_4f6b6963-fb41-45e7-90e8-fd93fe63331b.pdf

Financial Adviser

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

INTRODUCTION

Acquisition

LETTER FROM THE BOARD

Amendment to Articles

LETTER FROM THE BOARD

Continuing Connected Transactions

PART A

SALE AND PURCHASE AGREEMENT

Date

Purchaser

Vendor

Assets to be acquired

Consideration

Conditions precedent

INFORMATION ON THE COMPANY, CTHC, ACCA AND THE PROPERTY

The Company

CTHC

ACCA

LETTER FROM THE BOARD

Management Discussion and Analysis of the Financial Information of ACCA Group

(i) Performance analysis for the year ended 31 December 2007 compared to year ended 31 December 2006 and year ended 31 December 2006 compared to year ended 31 December 2005

(ii) Liquidity and capital resources

LETTER FROM THE BOARD

(iii) Cash Flows

(iv) Charge on Assets

(v) Investments

(vi) Acquisitions and disposals

(vii) Foreign currency risk

(viii) Employees and Remuneration Policies

(ix) Contingent Liabilities

The Property

LETTER FROM THE BOARD

LETTER FROM THE BOARD

SHAREHOLDING STRUCTURE

REASONS FOR AND BENEFITS OF THE SALE AND PURCHASE AGREEMENT

LETTER FROM THE BOARD

FINANCIAL EFFECTS TO THE GROUP ARISING FROM THE ACQUISITION

Assets and Liabilities

Earnings

Gearing

Working capital

BUSINESS PROSPECT OF THE ENLARGED GROUP

PROPOSED AMENDMENTS TO THE ARTICLES CONSEQUENTIAL TO THE COMPLETION OF THE ACQUISITION

PART B

ACCA CONTINUING CONNECTED TRANSACTIONS

Provisions of property management services

Provisions of airline services

Type 1 — Systems Development and Support Services

Type 2 — Passenger and Cargo Revenue Accounting and Settlement Services

Type 3 — Domestic Mail Revenue Accounting and Settlement Services

Type 4 — BSP Services

Summary of transactions between ACCA and the Connected Airlines in respect of various airline services

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Proposed Annual Caps for the ACCA Continuing Connected Transactions

LETTER FROM THE BOARD

Proposed Annual Caps

LETTER FROM THE BOARD

Historical transaction amount

LETTER FROM THE BOARD

Basis of the Annual Caps for the ACCA Continuing Connected Transactions

Continuing connected transactions of ACCA Basis of determination of the Annual Caps

LETTER FROM THE BOARD

PART C

CONTINUING CONNECTED TRANSACTIONS OF THE COMPANY

Continuing Connected Transactions Date of the respective announcement and/or circular for the year ended 31 December 2007

LETTER FROM THE BOARD

Annual Caps of the Continuing Connected Transactions of the Company

PART D

AGGREGATED CONTINUING CONNECTED TRANSACTIONS OF THE ENLARGED

TravelSky Technology Limited Proxy Solicitation & Information Statement 2008