RNS Number : 3909K

Air China Ld

31 October 2024

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

中國國際航空股份有限公司

AIR CHINA LIMITED

(a joint stock limited company incorporated in the People's Republic of China with limited liability)

(Stock Code: 00753)

CONTINUING CONNECTED TRANSACTIONS

(1) CNAHC TRANSACTIONS

Reference is made to the 2021 Circular in relation to, among other things, the continuing connected transactions of the Company. The Company expects that certain continuing connected transactions set out in the 2021 Circular will continue to be conducted after 31 December 2024, therefore, the Company will continue to comply with Chapter 14A of the Hong Kong Listing Rules for such continuing connected transactions to be conducted in the next three years (i.e. from 1 January 2025 to 31 December 2027) in accordance with the Hong Kong Listing Rules.

(2) ACC TRANSACTIONS

Reference is made to the announcement of the Company dated 20 September 2022 and the circular of the Company dated 28 September 2022 in relation to, among other things, the ACC Transactions. The current term of the ACC Framework Agreement will expire on 31 December 2024. As the Company expects that the ACC Transactions will continue to be conduced after 31 December 2024, on 30 October 2024, the Board resolved to renew the ACC Framework Agreement for a term of three years commencing from 1 January 2025 to 31 December 2027, subject to Independent Shareholders' approval at the EGM.

HONG KONG LISTING RULES IMPLICATIONS

(1) CNAHC TRANSACTIONS

CNAHC is the controlling Shareholder of the Company. CNAMC is a wholly-owned subsidiary of CNAHC. Therefore, each of CNAHC and CNAMC is a connected person of the Company as defined under the Hong Kong Listing Rules. The CNAHC Transactions constitute continuing connected transactions of the Company.

As each of the applicable percentage ratios (other than the profits ratio) of the continuing connected transactions (excluding the de minims continuing connected transactions) contemplated under the Government Charter Flights Service Framework Agreement, the New Comprehensive Services Framework Agreement, the New Properties Leasing Framework Agreement and the Media Services Framework Agreement, on an annual basis, is higher than 0.1% but less than 5%, they therefore fall under Rule 14A.76(2)(a) of the Hong Kong Listing Rules. Accordingly, these continuing connected transactions are subject to the reporting, announcement and annual review requirements under Chapter 14A of the Hong Kong Listing Rules, but are exempted from the Independent Shareholders' approval requirement. Pursuant to the Shanghai Listing Rules, the Government Charter Flight Service Framework Agreement, the New Comprehensive Services Framework Agreement, the New Properties Leasing Framework Agreement and the Media Services Framework Agreement shall be approved by the Independent Shareholders at the EGM.

(2) ACC TRANSACTIONS

As a non-wholly owned subsidiary of CNAHC, the Company's controlling Shareholder, Air China Cargo is a connected person of the Company as defined under the Hong Kong Listing Rules, and accordingly the ACC Transactions constitute continuing connected transactions of the Company under Chapter 14A of the Hong Kong Listing Rules. As the highest applicable percentage ratio in respect of the proposed annual caps of the transportation service fees of the Passenger Aircraft Cargo Business payable by the ACC Group under the ACC Transactions is, on an annual basis, higher than 5%, such transactions are therefore subject to the announcement, annual review, circular (including advice of independent financial adviser) and Independent Shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules.

In respect of ground support services and other services provided by the Group, as the highest applicable percentage ratio in respect of the proposed annual caps of amounts payable by the ACC Group is, on an annual basis, higher than 0.1% but less than 5%, these transactions are therefore subject to the announcement and annual review requirements under Chapter 14A of the Hong Kong Listing Rules but are exempt from the Independent Shareholders' approval requirement.

In respect of ground support services and other services provided by the ACC Group, as the highest applicable percentage ratio in respect of the proposed annual caps of amounts payable by the Group is, on an annual basis, higher than 0.1% but less than 5%, these transactions are therefore subject to the announcement and annual review requirements under Chapter 14A of the Hong Kong Listing Rules but are exempt from the Independent Shareholders' approval requirement.

In respect of properties leasing services provided by the Group, as the highest applicable percentage ratio in respect of the proposed annual caps of amounts payable by the ACC Group is, on an annual basis, higher than 0.1% but less than 5%, these transactions are therefore subject to the announcement and annual review requirements under Chapter 14A of the Hong Kong Listing Rules but are exempt from the Independent Shareholders' approval requirement.

In respect of properties leasing services provided by the ACC Group, it is expected that the total amounts payable by the Group for each of the years 2025, 2026 and 2027 are below the de minimis threshold as stipulated under Rule 14A.76(1)(a) of the Hong Kong Listing Rules, and therefore the transaction will be exempted from announcement, annual review and the Independent Shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules.

Pursuant to the Shanghai Listing Rules, the ACC Transactions shall be approved by the Independent Shareholders at the EGM.

The Company will convene the EGM for the consideration and approval of Independent Shareholders on the CNAHC Framework Agreements, the CNAHC Transactions and the proposed annual caps for each of the CNAHC Transaction, and the ACC Framework Agreement, the ACC Transactions and the proposed annual caps for the ACC Transactions. A circular containing, among others, (i) details regarding the CNAHC Transactions and the ACC Transactions; (ii) a letter from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders regarding its advice on the Non-exempt Transactions; and (iii) the recommendation from the Independent Board Committee regarding the Non-exempt Transactions, will be despatched to Shareholders on or before 20 November 2024 in accordance with the Hong Kong Listing Rules.

I. CNAHC TRANSACTIONS

1. Parties and the relationship between the parties

The Company is principally engaged in providing air passenger, air cargo and related services, conducts continuing connected transactions with the following parties:

• CNAHC

CNAHC directly holds 39.57% of the Company's shares and holds 11.75% of the Company's shares through its wholly-owned subsidiary CNACG, and is the controlling Shareholder of the Company as at the date of this announcement. As at the date of this announcement, the State-owned Assets Supervision and Administration Commission of the State Council is a controlling shareholder and de facto controller of CNAHC. CNAHC primarily operates all the state-owned assets and state-owned equity interests invested by the State in CNAHC and its invested entities, aircraft leasing and aviation equipment and facilities maintenance businesses.

• CNAMC

CNAMC is a wholly-owned subsidiary of CNAHC and is therefore a connected person of the Company as defined under the Hong Kong Listing Rules. CNAMC is primarily engaged in media and advertising business.

2. Continuing Connected Transactions with the CNAHC Group

2.1 Government Charter Flight Services

The Company (as the carrier) and CNAHC (as the charterer) entered into the Government Charter Flight Service Framework Agreement on 29 October 2021. At the 2021 EGM, the Independent Shareholders approved, among other things, the continuing connected transactions contemplated under the Government Charter Flight Service Framework Agreement and the relevant annual caps for the three years ended/ending 31 December 2022, 2023 and 2024, which are required to be approved by the Independent Shareholders under the Shanghai Listing Rules.

The current term of the Government Charter Flight Service Framework Agreement will expire on 31 December 2024. As the Company expects that the transactions contemplated under the Government Charter Flight Service Framework Agreement will continue to be conducted after 31 December 2024, on 30 October 2024, the Board resolved to renew the Government Charter Flight Service Framework Agreement for a term of three years commencing from 1 January 2025 to 31 December 2027, subject to the Independent Shareholders' approval at the EGM.

Description of the transaction:

Pursuant to the Government Charter Flight Service Framework Agreement, CNAHC shall use the charter flight services of the Company (the "Government Charter Flight Services") for fulfilling its government charter flight assignments.

The parties agreed that the parties will determine the price for the Government Charter Flight Services through arm's length negotiations between the parties based on the cost incurred by the carrier in providing the Government Charter Flight Services adding a reasonable profit (by referring to the historical data, the reasonable profit margin generally ranges from 5% to 10%). The costs include direct costs and indirect costs. The Company considers the profit margin to be fair and reasonable as it aligns with historical data.

The renewal of the Government Charter Flight Service Framework Agreement is subject to the approval by the Independent Shareholders at the EGM. If approved by the Independent Shareholders, the term of the Government Charter Flight Service Framework Agreement shall be renewed for three years commencing from 1 January 2025 and ending on 31 December 2027, and may be renewed automatically for successive terms of three years each, subject to the compliance with the requirements of the Hong Kong Listing Rules/the Shanghai Listing Rules and the approval procedures required under the Hong Kong Listing Rules/the Shanghai Listing Rules. During the term of the Government Charter Flight Service Framework Agreement, either party may terminate the Government Charter Flight Service Framework Agreement on any 31 December by giving the other party at least three months' prior written notice.

Reasons for the transaction:

As the national flag carrier in China, the Company has historically provided government related charter flight services to government delegates, national sports teams and cultural envoys. As the designated government charter flight carrier, the Company has gained significant brand recognition. Pursuant to the Government Charter Flight Service Framework Agreement, the Company may generate revenue from such transactions based upon the cost-plus charging method.

Historical amounts and proposed caps:

Set forth below is a summary of the historical annual caps, the actual amounts and the proposed annual caps for the amounts payable by CNAHC for the Company's provision of the Government Charter Flights Services:

Unit: RMB Million

Historical Annual Cap

Historical Actual Amounts

Proposed Annual Caps

Annual cap for the year

ended 31 December

2022

Annual cap for the year

ended 31 December

2023

Annual cap for the year

ending 31 December

2024

Actual annual amount for the year ended

31 December

2022

Actual annual amount for the year ended

31 December

2023

Unaudited historical amount for the period

from 1 January

2024 to

30 June

2024

Estimated annual amount for the year ending

31 December

2024

Annual cap for the year

ending 31 December

2025

Annual cap for the year

ending 31 December

2026

Annual cap for the year

ending 31 December

2027

Amount payable by CNAHC for the Company's provision of the Government Charter Flight

Services

900

252

383

560

900

Due to the irregular and unpredictable demand for government charter flights, the international charter flight services has decreased in 2022 and 2023, resulting in lower-than-expected revenue from the Company's charter flight in 2022 and 2023. The estimated annual amount for the Government Charter Flight Services for the year ending 31 December 2024 is derived from the highest historical payment made by CNAHC for the Company's provision of the Government Charter Flight Services. Furthermore, with the gradual resumption of government delegations' travel activities, this will result in an increase in the estimated amount for the year ending 31 December 2024.

Basis for the annual caps for the next three years:

In arriving at the above annual caps, the Directors have considered the historical and expected transaction amount for the same type of transactions as set out in the table above. Although international charter flight business has decreased in 2022 and 2023, it is expected that government delegations' travel activities will gradually resume and continuously increase. Therefore, it is proposed to maintain the annual caps for the Government Charter Flight Services at RMB900 million from 2025 to 2027, which is consistent with the historical annual caps for the Government Charter Flight Services for the three years ending 2024.

2.2 Property Leasing

The Company and CNAHC entered into the Properties Leasing Framework Agreement on 29 October 2021. At the 2021 EGM, the Independent Shareholders approved, among other things, the continuing connected transactions contemplated under the Properties Leasing Framework Agreement and the relevant annual caps for the three years ended/ending 31 December 2022, 2023 and 2024 which are required to be approved by the Independent Shareholders under the Shanghai Listing Rules.

The current term of the Properties Leasing Framework Agreement will expire on 31 December 2024. As the Company expects that the transactions contemplated under the Properties Leasing Framework Agreement will continue to be conducted after 31 December 2024, on 30 October 2024, the Company and CNAHC entered into the New Properties Leasing Framework Agreement. ACC Group was excluded from the definition of CNAHC Group under the New Properties Leasing Framework Agreement.

Description of the transaction:

Pursuant to the New Properties Leasing Framework Agreement, the Group and the CNAHC Group agreed to continue to lease from each other certain properties (including ancillary facilities) and land use rights owned by each other for their respective production and operation, office and storage use. The properties (including ancillary facilities) and land use rights leased between the Group and the CNAHC Group are differentiated by their locations. Both the Group and the CNAHC Group select specific properties and land use rights to lease from each other based on their respective needs at different locations.

• The Group (as lessor) may rent out its own properties (including properties constructed by the Group or customized upon the request of the CNAHC Group) or land with legal use rights to the CNAHC Group for its production and operation, office and storage use. The pricing principles and conducting of the transaction shall be as follows:

First, the Group shall provide quotation for the leased properties or land to the CNAHC Group after taking into account the factors including the relevant costs, tax and reasonable profit margin relating to the properties or land. The related costs include, among others, construction costs, depreciation costs, funding costs and maintenance costs. The reasonable profit margin is usually around 10%, mainly with reference to the historical average price for similar services (where possible) in the property leasing industry and/or the profit margin of comparable services disclosed by other listed companies.

Then, the rent payable for the leased properties or land shall be determined through arm's length negotiations between the Group and the CNAHC Group after the CNAHC Group takes into account the factors such as the location of the leased properties or land and the service quality. Such rent shall not be lower than the rent offered by the Group to an independent third party (if any) in comparable circumstances.

• The Group (as lessee) may lease properties owned by the CNAHC Group and land with legal use right from the CNAHC Group based on its production and operation, office and storage needs. The pricing principles and conducting of the transaction shall be as follows:

First, the Group shall conduct market research and collect, consolidate and analyze information in respect of provision of leasing services by independent third parties for the same type of properties or land (if any) in close proximity to the required leasehold properties or land. Generally, the Group shall assign a department or an officer to verify the price and terms available from at least two independent third parties (if any) by email, fax or telephone.

Then, (i) if a comparable market for the same type of transaction is identified through market research, the parties shall determine the rental prices for the leased properties or land through arm's length negotiations with reference to the market price for the same type of services available from at least two independent third parties and take into account certain factors. The relevant factors include, among others, the location, function and layout, furnishing, ancillary facilities and property management of the property or land as well as the specific needs of the lessee; (ii) if there is no comparable market for the same type of transaction is identified in the neighboring areas through market research, the price shall be determined by adopting the cost-plus approach: the rental price of the leased properties or land shall be determined through arm's length negotiations between the parties based on the relevant costs, tax and reasonable profit margin of the properties or land offered by the CNAHC Group. The relevant costs include, among others, construction costs, depreciation costs, funding costs and maintenance costs. The reasonable profit margin shall be determined mainly with reference to the historical average price of similar services (where possible) in the property leasing industry and/or the profit margin of comparable services disclosed by other listed companies, and the reasonable profit margin of the CNAHC Group shall not exceed 10%. The abovementioned rental prices shall not be higher than those offered by the CNAHC Group to the independent third parties (if any) in comparable circumstances.

When leasing each other's properties or land, the parties may determine the price for leasing their respective properties or land based on the above pricing principles, and then exchange the lease of properties or land use right in accordance with the principle of equivalent exchange.

Pursuant to the New Properties Leasing Framework Agreement, in general, the leasing term of properties or land for both parties shall not exceed three years. However, (i) if there are specific government and/or industry requirements, the leasing term of properties or land shall comply with such requirements; or (ii) if the property(ies) is/are custom built by the Group according to the requirements of the CNAHC Group, the leasing term of the property(ies), in principle, shall not exceed the useful life of the leased property(ies).

Pursuant to the New Properties Leasing Framework Agreement, the New Properties Leasing Framework Agreement shall take effect upon the approval by the Shareholders at the general meeting of the Company, and shall be valid from 1 January 2025 to 31 December 2027 (the "Initial Term"). Upon expiration of the Initial Term, the New Properties Leasing Framework Agreement may be automatically renewed for successive terms of three years each, subject to the compliance with requirements under the Hong Kong Listing Rules/Shanghai Listing Rules and the approval procedures required under the Hong Kong Listing Rules/ Shanghai Listing Rules. During the term of the New Properties Leasing Framework Agreement, either party may terminate the New Properties Leasing Framework Agreement on any 31 December by giving the other party at least three months'prior written notice.

Reasons for the transaction:

In the ordinary course of business, the Group has entered into similar property leasing transactions with various parties including both connected persons and independent third parties.

Historical amounts and proposed caps:

Set forth below is a summary of the historical annual caps for and actual rent paid and received by the Group to and from CNAHC Group under the Properties Leasing Framework Agreement, and the proposed annual caps for the rent payable and receivable by the Group to and from CNAHC Group under the New Properties Leasing Framework Agreement:

Unit: RMB Million

Historical Annual Cap

Historical Actual Amounts

Proposed Annual Caps

Annual cap for the year

ended 31 December

2022

Annual cap for the year

ended 31 December

2023

Annual cap for the year

ending 31 December

2024

Actual annual amount for the year ended

31 December

2022

Actual annual amount for the year ended

31 December

2023

Unaudited historical amount for the period

from 1 January

2024 to 30

June 2024

Estimated annual amount for the year ending

31 December

2024

Annual cap for the year

ending 31 December

2025

Annual cap for the year

ending 31 December

2026

Annual cap for the year

ending 31 December

2027

Total value of right-of-use assets relating to the leases entered into by the Group as the lessee

Note

350

370

390

111

200

250

260

270

Total annual rent receivable by the Group as the lessor (excluding the below mentioned

Single Rent)

150

166

176

120

130

140

Single Rent recorded by the Group in relation to the leasing of

Customized Properties

230

330

N/A

260

270

Note: As International Financial Reporting Standard 16 "Lease" took effect from 1 January 2019 and became applicable to financial years starting on or after 1 January 2019, pursuant to the requirements of the Hong Kong Stock Exchange, the annual caps for the continuing connected transactions of property leasing with the Group as the lessee for 2025, 2026 and 2027 are set based on the total value of right-of-use assets relating to the leases entered into by the Group.

As the construction of the relevant project has not yet started, there were no historical actual amount recorded in relation to the leasing of Customized Properties under the Properties Leasing Framework Agreement.

Basis for the annual caps for the next three years:

In arriving at the above annual caps for the total value of right-of-use assets relating to the leases that the Group will enter into as a lessee under the New Properties Leasing Framework Agreement, the Directors have considered (i) the historical transaction amounts, which were RMB111 million and RMB63 million for the years ended 31 December 2022 and 2023, respectively, and RMB14 million for the six months ended 30 June 2024; and (ii) the future growth of rent payable by the Group to the CNAHC Group (estimated at approximately 5% per year. The estimated annual growth rate of 5% is referencing forecasts of China's GDP growth made by relevant institutions) and the increasing demand for leasing driven by the Group's business development. Therefore, it is expected that the total future annual rent to be paid by the Group to the CNAHC Group from 2025 to 2027 will not exceed RMB120 million, RMB130 million and RMB140 million, respectively. On such basis, the value of right-of-use assets, calculated by discounting the total estimated future rent with a discount rate ranging 3% to 5% applicable to the Company's leasing business (which is determined by reference to the market borrowing interest rate level), is expected to be no more than RMB250 million, RMB260 million and RMB270 million for the years 2025 to 2027.

In arriving at the above annual caps for the annual total rent payable by the CNAHC Group to the Group under the New Properties Leasing Framework Agreement, the Directors have considered (i) the historical transaction amounts, which were RMB4 million and RMB51 million for the years ended 31 December 2022 and 2023, respectively, and RMB12 million for the six months ended 30 June 2024; and (ii) the anticipated future growth in rent payable by the CNAHC Group to the Group (estimated to be approximately 5% per year. The estimated annual growth rate of 5% is referencing forecasts of China's GDP growth made by relevant institutions) and the increasing demand for leasing driven by CNAHC Group's business development. Currently, the CNAHC Group mainly leases from the Company. Considering that the Company's subsidiaries may also lease to the CNAHC Group under the New Properties Leasing Framework Agreement in the future, this could lead to an increase in the rent payable by the CNAHC Group to the Group under the New Properties Leasing Framework Agreement. Therefore, it is expected that the total future annual rent to be paid by the CNAHC Group to the Group from 2025 to 2027 will not exceed RMB120 million, RMB130 million and RMB140 million, respectively.

In addition, the Group expects to enter into customized leasing transactions with CNAHC Group in accordance with the New Properties Leasing Framework Agreement in the next three years. That is, the Group will build property(ies) ("Customized Property(ies)") upon CNAHC Group's request on the land to which the Group has the right of use, and lease out the Customized Property(ies) to CNAHC Group and commence the leasing terms thereof following the completion of the construction. The rent of such leasing transactions comprises of the single rent to be charged prior to the commencement of the leasing term and accounted for as a finance lease from the inception of the leasing term (which generally equals to the construction costs of the property(ies)) (the "Single Rent") and the annual rent to be paid upon the commencement of the leasing term (the "Annual Rent"). The Annual Rent has been included in the annual caps for the total rent payable by CNAHC Group to the Group under the New Properties Leasing Framework Agreement. In respect of the Single Rent, since the Single Rent will be accounted for as a finance lease at the inception of the leasing term, the Company will therefore set the annual transaction cap for the Single Rent with reference to the mechanism of setting a cap for finance lease transactions. Based on the current estimation, the potential Customized Property(ies) transactions to be entered into between the Group and CNAHC Group in the next three years include the Zhejiang Zhongyu catering building. Considering that the construction of Zhejiang Zhongyu catering building is expected to commence in 2025 and be completed and put into operation by the end of 2026, or possibly extended to 2027, along with an estimated project investment in the amount of RMB220 million, as well as the potential increase in costs due to construction delays, such as increased labor costs, it is expected that the Single Rent to be recorded by the Group for leasing the Customized Property(ies) under the New Properties Leasing Framework Agreement for 2026 and 2027 will not exceed RMB260 million and RMB270 million, respectively.

Independent Financial Adviser's opinion on the leasing term of properties under the New Properties Leasing Framework Agreement

As mentioned above, under the New Properties Leasing Framework Agreement, the leasing term of the properties or land should not exceed three years with the exception that (i) there are special government and/or industry requirements on the duration of the tenure of the leased property(ies) or land; and (ii) custom built by the Group according to the requirements of the CNAHC Group, where the duration of the tenure shall not exceed to useful life of the leased property(ies) (collectively the "Property(ies)").

According to Rule 14A.52 of the Hong Kong Listing Rules, the period for the agreement for a continuing connected transaction must not exceed three years except in special circumstances where the nature of the transaction requires a longer period. In this case, the listed issuer must appoint an independent financial adviser to explain why the agreement requires a longer period and to confirm that it is normal business practice for agreements of this type to be of such duration. Accordingly, the Company has engaged BaoQiao Partners as the Independent Financial Adviser. BaoQiao Partners has formulated its opinion based on its researches and analysis and its discussion with the management of the Company in respect of the lease terms of the Property(ies) as follows:

As both the Group and the CNAHC Group are operated in related business sectors, both groups have similar demands on certain type of properties and/or properties in specific areas (for example, properties within or adjacent to airports) owned by each other for their general and /or business operation purposes.

Based on BaoQiao Partners' discussion with the management of the Company, the Properties include (i) properties that may be subject to the oversight and administration of specific government or industrial authorities and the requirements of the corresponding government or industrial authorities with specific regulations/requirements on the duration of the tenure, which may exceed three years when leased from time to time and it is normal business practice for the Group with regards to the compliance with applicable government/industrial regulations or requirements for leasing of Properties; (ii) properties that, if upon request of CNAHC Group, will be custom-built by the Group on the land to which the Group has the rights of use, and then lease out such Properties to CNAHC Group and commence the lease terms thereof following the completion of the construction of such Properties. As the design and construction costs of the such Properties will be borne by CNAHC Group, CNAHC Group (as the lessee) will be incurring substantial capital expenditure for building and construction of the Properties, it would be commercially justifiable for CNAHC Group to request for longer lease terms (which would be reference to the useful life of such Properties) to ensure stable and smooth operations and justifiable costs for building the Properties.

As advised by the management of the Company, although there is currently no leasing arrangement between the Group and CNAHC Group that is subject to special government and/or industry requirements, BaoQiao Partners has obtained and reviewed the relevant contracts on the existing leasing transactions of the Properties governed by the General Administration of Customs of the PRC ("GAC") and entered into between the Group and the ACC Group in January 2017 with an initial term of 6 years and renewed in 2023 for an additional 3 years ("Existing Regulated Property Transactions"). BaoQiao Partners understands that the initial lease term of 6 years was agreed between parties in compliance with the Rules of the General Administration of Customs of the People's Republic of China on Administration of Customs Control Premises 《( 中華人民共和國海關監管場所管理辦法》, the "GAC Rules") issued by the GAC on 30 January 2008, which required, among others, the lease term of property for the use of loading, unloading, storage, delivery and shipping of import and export goods in the areas that are subject to the oversight and supervision of GAC to be at least five years.

Despite the GAC Rules were superseded by the new rules issued by GAC on 1 November 2017 and there is no specific lease term requirement under the new rules, as advised by the management of the Company, the Company cannot rule out the possibility that the government or industrial authorities (including GAC) will require the lease term of such Properties to be more than 3 years during the term of the New Properties Leasing Framework Agreement. From the perspective of the Company, the entering into the New Properties Leasing Framework Agreement with flexibility on the leasing period to satisfy the regulatory compliance and industry requirements for the leasing of the Properties will not only allow the Group (as the lessee) to obtain the right of use of the Properties owned by CNAHC Group for the Group's operation, while also providing the flexibility for the Group (as the lessor) to lease out its vacant Properties for rental income, which aligns with the Group's long-term strategies and signifies the lasting cooperation commitment between the Group and the CNAHC Group.

In respect of the custom-built Properties by the Group under the New Properties Leasing Framework Agreement, BaoQiao Partners notes from the information provided by the Company that the Company intends to cooperate with an indirect wholly-owned subsidiary of CNAHC in relation to the construction of the Zhejiang Zhongyu catering building, a Property for the provision of catering service. The construction of the Zhejiang Zhongyu catering building will commence in 2025, and the lease term of which is expected to be 10 to 20 years. From the perspective of the Company as the lessor, such leasing arrangement will allow the Company to obtain the property rights of the Properties and thus, enhance the value of the idle land(s) and the asset base of the Company. In addition, it would be commercially reasonable to have the longer lease tenure (which would be reference to the useful life of such Properties) for such properties taking into account (i) the time of construction of the Properties (i.e. 1-2 years as advised by the management of the Company); and (ii) it would be difficult to lease the idle lands or such custom-built buildings to other external parties given the business nature of the Company and CNAHC Group.

Review of comparable transactions

In considering whether it is a normal business practice for the lease of the Properties under the New Properties Leasing Framework Agreement to have a duration longer than three years, BaoQiao Partners has identified and selected 18 comparable transactions (the "Comparable Transactions") based on the following selection criteria, (a) continuing connected transactions announcements related to leasing arrangements of land and properties for general and/or business operation purposes published by companies listed on the Hong Kong Stock Exchange since 2021; (b) the transactions with lease term longer than three years.

Based on BaoQiao Partners' review of the Comparable Transactions, it is not uncommon to enter into long-term leases for properties leasing in the PRC and 17 out of 18 of the Comparable Transactions were related to leasing arrangements for PRC land/properties. BaoQiao Partners also notes that the lease terms of these Comparable Transactions ranged from 5 years to 50 years, with an average of approximately 13 years. In addition, 3 out of 18 Comparable Transactions were similar with that of custom-built arrangements. Two of them involved properties for airline operations entered into by China Eastern Airlines Corporation Limited ("CEA"), a peer company within the Chinese aviation industry with lease term of 6 years in 2021 and 2022 and the other was leasing of land for construction of factory buildings/facilities with lease term of 20 years. The use of properties under these 18 Comparable Transactions included industrial production, commercial operation, hospital operation and offices for general and/or business operations purposes. Although there was no Comparable Transaction that involved leasing of regulated properties as the Company, BaoQiao Partners considers the Comparable Transactions can represent the general market practices of the property leasing arrangements for general and/or business operation purposes in the PRC, regardless the types of properties involved.

As such, based on BaoQiao Partners' review of the Comparable Transactions with lease terms ranged from 5 years to 50 years and the Existing Regulated Property Transactions with initial tenure of 6 years, BaoQiao Partners considers that the lease term of the Properties under the New Properties Leasing Framework Agreement, which requires lease term of more than 3 years, (i) if subject to special government and/or industry regulations/requirements, and (ii) will up to 10 to 20 years for purpose-built Properties, fall within the range of the Comparable Transactions and/or the Existing Regulated Property Transactions.

Having considered the principal factors discussed above, BaoQiao Partners is of the view that it is normal business practice for the Group and CNAHC Group to enter into leases for the Properties under the New Properties Leasing Framework Agreement with terms of more than three years and to be of such duration for agreements of this type.

2.3 Media Services

The Company and CNAMC entered into the Media Services Framework Agreement on 29 October 2021. At the 2021 EGM, the Independent Shareholders approved, among other things, the continuing connected transactions contemplated under the Media Services Framework Agreement and the relevant annual caps for the three years ended/ending 31 December 2022, 2023 and 2024 which are required to be approved by the Independent Shareholders under the Shanghai Listing Rules.

The current term of the Media Services Framework Agreement will expire on 31 December 2024. As the Company expects that the transactions contemplated under the Media Service Framework Agreement will continue to be conducted after 31 December 2024, on 30 October 2024, the Board resolved to renew the Media Services Framework Agreement for a term of three years commencing from 1 January 2025 to 31 December 2027, subject to the Independent Shareholders' approval at the EGM.

Description of the transaction:

Pursuant to the Media Services Framework Agreement,

• CNAMC has agreed to provide Media Services to the Group. Of which, the Company grants CNAMC an exclusive right to distribute in-flight reading materials, movies, TV series, music, sound track and other cultural contents.

• the Company has commissioned CNAMC as the general service provider with respect to the Media Services of the Company which CNAMC shall provide the Company with the following Media Services (the "Entrusted Services"):

(1) in-flight entertainment system business and in-flight network platform business;

(2) brand communication and product marketing business: including but not limited to brand research, consultation and planning, design and copywriting planning, print film and television production, public relation activities, media advertising, promotion materials and IP image production and management, social media operation and maintenance and intelligent property management;

(3) news and publicity business, including but not limited to external media operation and maintenance and internal newspaper production;

(4) advertisement management business and media cooperation and management business;

(5) other Media Services entrusted by the Company.

For abovementioned businesses, the Group will make reference to the service items and specific requirements, and (1) the parties shall determine the final transaction price through arm's length negotiations based on the quotations provided by CNAMC with reference to the market price (if any) for the same type of services available from at least two independent third parties after taking into account factors including the service standard, service scope, business volume and specific needs of the parties; and/or (2) the service fees shall be determined after arm's length negotiations between the parties based on the costs of CNAMC adding a reasonable service fee, and offering rewards or imposing penalty depending on the management of CNAMC, the final settlement of which shall be made on the basis of the actual transaction amount. CNAMC shall provide information including but not limited to costs, external procurement conditions and actual settlement conditions, and the service fee received by CNAMC shall not exceed 10% of the costs and shall be determined mainly with reference to the historical average prices in the relevant industries for similar products or services (where possible) and/ or profit margin of the comparable products and services.

• In respect of the media products or services other than the Entrusted Services that are purchased by the Company from CNAMC, the Group shall determine and pay the relevant services fees in accordance with the following principles and the arm's length negotiations with CNAMC:

(1) if government-set or guided price is available, government-set or guided price shall be adopted;

(2) in the absence of government-set or guided price, the final transaction price shall be determined after arm's length negotiations between the parties based on the quotation provided by CNAMC with reference to the market price (if any) for the same type of services available from at least two independent third parties in the market after taking into account certain factors including the service standard, service scope, business volume and specific needs of the parties;

(3) if open market price is not available or there are no identical or similar business activities in the market, the parties shall settle the actual transaction amount based on the costs of CNAMC adding a reasonable service fee, and offering rewards or imposing penalties depending on the management of CNAMC. CNAMC shall provide information including but not limited to costs, external procurement and actual settlement conditions, and the service fee received by CNAMC shall not exceed 10% of the costs and shall be determined mainly with reference to the historical average prices in the relevant industry for similar products or services (where possible) and/or profit margin of the comparable products and services.

• In respect of the Company's media used by CNAMC in operating the Media Services, CNAMC shall pay the Company an annual media resource fee of RMB13.8915 million for each of the three years of 2025, 2026 and 2027.

The Company will enter into relevant business agreements with CNAMC in accordance with its business requirements. The Company is responsible for business implementation standards, business requirements, budgeting and evaluation, and CNAMC is responsible for the overall business implementation. If CNAMC provides the Media Services to subsidiaries of the Company, the parties shall enter into relevant business implementation agreements in accordance with the principles contemplated under the Media Services Framework Agreement.

The renewal of the Media Services Framework Agreement is subject to the approval by the Independent Shareholders at the EGM. If approved by the Independent Shareholders, the term of the Media Services Framework Agreement shall be renewed for three years commencing from 1 January 2025 and ending on 31 December 2027, and may be renewed automatically for successive terms of three years each, subject to the compliance with the requirements of the Hong Kong Listing Rules/the Shanghai Listing Rules and the approval procedures required under the Hong Kong Listing Rules/the Shanghai Listing Rules. During the term of the Media Services Framework Agreement, either party may terminate the Media Services Framework Agreement on any 31 December by giving the other party at least three months' prior written notice.

Reasons for the transaction:

CNAMC has extensive experience in in-flight advertising operations and has a wide range of advertising sponsorship channels. As a longstanding company having engaged in the aviation media business, CNAMC possesses professional qualifications and teams and has a profound understanding of the corporate culture and brand of the Company as well as extensive experience in aviation media business sectors such as entertainment programmes production and advertising agency, and has proven channels of advertising sponsors to draw upon, which has certain advantage.

Historical amounts and proposed caps:

Set forth below is a summary of the historical annual caps for and the actual amounts paid by the Group to CNAMC under the Media Services Framework Agreement, and the proposed annual caps for the amount payable by the Group to CNAMC under the Media Services Framework Agreement:

Unit: RMB million

Historical Annual Cap

Historical Actual Amounts

Proposed Annual Caps

Annual cap for the year

ended 31 December

2022

Annual cap for the year

ended 31 December

2023

Annual cap for the year

ending 31 December

2024

Actual annual amount for the year ended

31 December

2022

Actual annual amount for the year ended

31 December

2023

Unaudited historical amount for the period

from 1 January

2024 to 30

June 2024

Estimated annual amount for the year ending

31 December

2024

Annual cap for the year

ending 31 December

2025

Annual cap for the year

ending 31 December

2026

Annual cap for the year

ending 31 December

2027

Amount payable by the Group

400

500

600

115

109

195

400

500

600

The actual amount paid by the Group to CNAMC in the years from 2022 to 2024 in respect of receiving the Media Services was lower as compared to the annual caps of the respective years which was mainly attributable to the combined effect of the following factors: (i) the significant decrease in the procurement of aviation media business such as in-flight video and audio programmes and advertising agency by the Group as the scale of the international transport capacity has not yet recovered to pre-pandemic level (as of the end of 2023, the number of international and regional weekly flights was recovered to 74% of that in the same period of 2019); and (ii) the refined management strengthened by the Company in respect of costs and fees against the impact of the pandemic.

Basis for the annual caps for the next three years:

In arriving at the annual caps of the amounts to be paid by the Group to CNAMC under the Media Services Framework Agreement, the Directors have considered the historical transaction amounts, which were RMB115 million and RMB109 million for the years ended 31 December 2022 and 2023, respectively, and RMB64 million for the six months ended 30 June 2024, for the same type of transactions as set out in the table above, along with the following factors: (i) considering the transaction amounts for the first half of 2024 and the possibility of upgrading the in-flight entertainment system in the second half of 2024, as well as the addition of media services due to the introduction of new aircraft, the Group anticipates that the transaction amount payable to CNAMC in 2024 will be around RMB195 million; (ii) it is expected that the transport capacity of the Group will gradually return to the pre-pandemic level over the next three years, leading to an increased demand for aviation media services such as in-flight video and audio programs, as well as advertising agency services; and (iii) the Company's service development strategy emphasizes the continuous improvement of service quality, necessitating increased investment in the purchase, production, promotion and dissemination of aviation media material, which will result in a greater engagement of CNAMC for more Media Services. As a result of the above factors, it is expected that the transaction amounts from 2025 to 2027 will increase as compared to the historical actual transaction amounts. Based on the estimated transaction amount to be paid by the Group to CNAMC for 2024 and the expected business growth described above, it is expected that the transaction amount will not exceed RMB400 million, RMB500 million and RMB600 million for 2025 to 2027, respectively.

For each of the three years ending 31 December 2025, 2026 and 2027, the aggregate annual amount payable by CNAMC to the Group under the Media Services Framework Agreement is expected to fall below the de minimis threshold as stipulated under Rule 14A.76(1)(a) of the Hong Kong Listing Rules. Therefore, the above transaction will be exempt from the reporting, annual review, announcement and independent shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules for continuing connected transactions.

2.4 Comprehensive Services

The Company and CNAHC entered into the Comprehensive Services Framework Agreement on 29 October 2021. At the 2021 EGM, the Independent Shareholders approved, among other things, the continuing connected transactions contemplated under the Comprehensive Services Framework Agreement and the relevant caps for the three years ended/ending 31 December 2022, 2023 and 2024 which are required to be approved by the Independent Shareholders under the Shanghai Listing Rules.

The current term of the Comprehensive Services Framework Agreement will expire on 31 December 2024. As the Company expects that the transactions contemplated under the Comprehensive Services Framework Agreement will continue to be conducted after 31 December 2024, on 30 October 2024, the Company and CNAHC entered into the New Comprehensive Services Framework Agreement. ACC Group was excluded from the definition of CNAHC Group under the New Comprehensive Services Framework Agreement, and the service scope under the New Comprehensive Services Framework Agreement was expanded. The types of services differ, as the expertise of each of the Group and the CNAHC Group aligns with the needs of the other party.

Description of the transaction:

Pursuant to the New Comprehensive Services Framework Agreement,

• The Group accepts CNAHC Group's appointment to provide CNAHC Group with products or services including but not limited to retiree management services, human resources services (which refer to the provision of archival information management, social insurance management services etc. provided

by the Group to the CNAHC Group), information technology services (mainly include information technology system maintenance), procurement services, training services, air passenger transportation and sales services, the comprehensive support services (mainly include support services for staff refectories and ground transportation services provided by the Group to CNAHC Group), entrusted operational management and provision of in-flight supplies.

For the relevant products or services provided by the Group to CNAHC Group, except as otherwise agreed in the agreement, the price to be charged by the Group will be determined after arm's length negotiations between the parties on the basis of the costs of the Group adding a reasonable service fee (generally ranging from 3% to 10% of the costs) and/or with reference to the price for the same type of products or services provided by the Group to other parties under non-related (non-connected) transactions, or as a percentage of the revenue/income of CNAHC Group for the relevant products or services. For the relevant products or services sold or provided through the Group's platform, the price to be charged by the Group will be determined as a percentage of the revenue/income of CNAHC Group for such products or services. The Group can obtain the revenue/income of CNAHC Group for the relevant products or services because these products or services are sold or provided through the Group's platform, granting the Group access to the necessary data.

• CNAHC Group was appointed by the Group as the provider of ancillary production services or the administrator of supply services of the Group for which CNAHC Group shall provide the following products or services to the Group including but not limited to (provided that the provider has obtained the relevant qualifications):

(1) on-board catering and food supply management services on global flights;

(2) catering and meal support and cleaning services (including but not limited to catering and meal support services for passengers and employees both board and on the ground and cleaning services for areas such as Air China lounges);

(3) services for the delivery, placement and laundering of various in-flight supplies;

(4) operation and management services of aircrew hotel;

(5) property management services in office buildings and the regions at which the office buildings are located including but not limited to Beijing, Chengdu, Chongqing, Shanghai, Hangzhou, Guangzhou, Wuhan and Hohhot; and the services of which include but not limited to cleaning services, plantation services, laundry services, parking management services, procurement and repair services, energy management services;

(6) support services for resident group, support services for delayed flights passengers and venue usage services;

(7) information technology services (mainly include information technology system development);

(8) in-flight supplies and scenario mileage payment products; and

(9) labor services (which refer to temporary worker services provided by CNAHC Group according to the Group's needs), entrusted operational management and other commissioned services.

For the above mentioned products or services to be provided by CNAHC Group to the Group, the parties shall, except as otherwise agreed in the agreement, according to the service items and specific needs, determine the relevant service fees through arm's length negotiations in accordance with the following principles: (i) the final transaction price shall be determined after arm's length negotiations between the parties based on the quotations provided by CNAHC Group, with reference to the market price (if any) for the same type of services available from at least two independent third parties in the market and take into account factors including the service standard, service scope, business volume and specific needs of the parties; and/or (ii) the service fee shall be determined after arm's length negotiations between the parties based on the costs of CNAHC Group adding a reasonable service fee, and offering rewards or imposing penalties depending on the management of CNAHC Group, the final settlement of which shall be made on the basis of the actual transaction amount. In the case of item (ii), CNAHC Group shall provide information including but not limited to its own costs, external procurement and actual settlement conditions. The service fee received by CNAHC Group shall not exceed 10% of the costs, and shall be determined mainly by reference to the historical average prices in the relevant industry for similar products or services (where possible), and/or the profit margin of the comparable products or services disclosed by other listed companies.

• CNAHC Group was engaged by the Group as one of the providers of ancillary production or supply services of the Group, which CNAHC Group shall provide the Group with the following products or services including but not limited to (provided that the provider has obtained the relevant qualifications):

(1) Hotel accommodation and staff recuperation services; and

(2) Air ticket printing services and other printed materials.

For the above mentioned products or services to be provided by CNAHC Group to the Group, the Group will determine the relevant service fees through arm's length negotiations with CNAHC Group in accordance with the following principles:

(1) if government-set or guided price is available, government-set or guided price shall be adopted;

(2) in the absence of government-set or guided price, the final transaction price shall be determined after arm's length negotiations between the parties with reference to the market price (if any) for the same type of products or services available from at least two independent third parties in the market, by taking into account certain factors including the service standard, service scope, business volume and specific needs of the parties. If the service demand of the service recipient changes, the transaction price shall be adjusted appropriately through negotiations between the parties based on the extent of changes in relevant costs, service quality or other factors;

(3) if open market price is not available or there are no identical or similar business activities in the market, the parties shall settle the actual transaction amount based on the costs of CNAHC Group adding a reasonable service fee, and offering rewards or imposing penalties depending on the management of CNAHC Group. CNAHC Group shall provide information including but not limited to its own cost, external procurement and actual settlement conditions. The service fee received by CNAHC Group shall not exceed 10% of the costs, and shall be determined mainly by reference to the historical average prices in the relevant industry for similar products or services (where possible) and/or the profit margin of the comparable products or services disclosed by other listed companies.

• The Group and CNAHC Group commission each other for the human resources sharing business within the two groups. In principle, the transaction price shall be determined through arm's length negotiations between the parties based on the labor costs incurred, and the transaction price shall be fully borne by the worksite employer.

• CNACD Group is regarded by the Group as the primary service provider for its property management projects. In principle, the Company shall entrust the CNACD Group with project management work for all of its new construction and expansion projects (except for projects with a total investment of RMB5 million (inclusive) or less in certain regions), the construction and renovation of properties such as Air China lounges, and repair projects with a total cost of more than RMB5 million (inclusive) (excluding deductible value-added tax). The subsidiaries of the Company may choose to entrust the CNACD Group with project management work.

For the above mentioned services to be provided by CNACD Group, the service fees charged by CNACD Group will be determined based on the engineering and financial audit amounts of the specific entrusted projects in accordance with the entrusted management contracts. The fees will be calculated as follows: (i) 3% of the financial audit amount of the investment relating to the management entrusted by the Company (the 3% rate was determined based on historical data. On the basis upon the historical data, the 3% rate is considered fair and reasonable, as it aligns with established expectations of the Company), with penalties or bonuses applied based on project management progress and remaining funds as agreed by both parties in the specific project management contract; or/and (ii) based on the scale or investment of the project, the fees will be determined according to the labor input of CNACD Group verified by the Company, including the actual full labor cost and any associated penalties or bonuses (such as rewards for labor cost savings, rewards and penalties relating to project timeline management and rewards and penalties relating to investment control balance), with specific terms outlined in the relevant agreements. Subsidiaries of the Company may refer to these pricing principles and determine the service fees for entrusted management services with CNACD Group after arm's length negotiations.

• For the entrusted operational management services provided by the Group or CNAHC Group to the other party, both parties will (1) determine the service fees after arm's length negotiation and based on the service projects and specific requirements, considering the service provider's costs and reasonable service fee rates, with rewards given based on the entrusted management performance. The service fee rates mentioned above are primarily determined with reference to the historical average prices published for similar products or services in the relevant industry (where possible) and/or the profit margins for comparable products or services disclosed by other listed companies, with the service fee rate adopted by CNAHC Group not exceeding 10%; or (2) determine the relevant financial/business indicators (including but not limited to sales revenue, net profit, return on equity, etc.) based on the service projects and specific requirements, and determine the service fees using a fixed management fee plus a variable management fee approach through arm's length negotiation. The fixed management fee is calculated considering the overall scope of services and the resources allocated. The variable management fee, on the other hand, is determined based on variables which would be resulted from the entrusted operational management services provided. The circumstances under which the respective indicators will be used to adjust pricing will be agreed upon through arm's length negotiations between the parties. The Company has referenced several listed companies with comparable businesses, and the selection of indicators is tailored to the specific projects and requirements. For example, in entrusted sales operations, indicators may be based on sales revenue, whereas for entrusted enterprise management, indicators could be defined according to profit or equity metrics.

The New Comprehensive Services Framework Agreement shall take effect upon the approval by the Shareholders at the general meeting of the Company, and its initial term is from 1 January 2025 to 31 December 2027. Upon expiration of the initial term, the New Comprehensive Services Framework Agreement may be renewed automatically for successive terms of three years each, subject to the compliance with the requirements of the Hong Kong Listing Rules/the Shanghai Listing Rules and the approval procedures required under the Hong Kong Listing Rules/the Shanghai Listing Rules. During the term of the New Comprehensive Services Framework Agreement, either party may terminate the New Comprehensive Services Framework Agreement on any 31 December by giving the other party at least three months' prior written notice.

Reasons for the transaction:

As the Group possesses service qualification and excellent professional capabilities in professional fields such as retiree management and human resources services, CNAHC Group is willing to continue to cooperate with the Company in relevant businesses.

For the services to be provided by CNAHC Group, the Directors believe that CNAHC Group has strengths that independent third parties in the market do not possess, including (1) qualifications and specialized knowledge in the aviation industry, particularly in the areas of catering management and provisioning, in-flight supplies management and property management; and (2) a proven track record of quality and timely service provided in the past. In light of the aforementioned factors, the Directors believe that it is in the best interest of the Group to enter into the above transactions with CNAHC.

Historical amounts and proposed caps:

Set forth below is a summary of the historical annual caps for the total of and the actual amounts paid and received by the Group to and from CNAHC Group in accordance with the comprehensive services framework agreement and the proposed annual caps for the total amount payable and receivable by the Group to and from CNAHC Group in accordance with the New Comprehensive Services Framework Agreement:

Unit: RMB Million

Historical Annual Cap

Historical Actual Amounts

Proposed Annual Caps

Annual cap for the year

ended 31 December

2022

Annual cap for the year

ended 31 December

2023

Annual cap for the year

ending 31 December

2024

Actual annual amount for the year ended

31 December

2022

Actual annual amount for the year ended

31 December

2023

Unaudited historical amount for the period

from 1 January

2024 to 30

June 2024

Estimated annual amount for the year ending

31 December

2024

Annual cap for the year

ending 31 December

2025

Annual cap for the year

ending 31 December

2026

Annual cap for the year

ending 31 December

2027

Amount payable by the Group

2,650

2,750

2,780

825

1,920

1,052

2,571

3,200

3,300

3,400

Amount receivable by the Group

100

110

121

150

160

170

As the international transport capacity has not yet recovered to pre-pandemic level, and hence the supply of in-flight meals and amenities correspondingly decreased by a large extent. Furthermore, facing the impact of the pandemic, the Company enhanced refined management on rigid costs and controllable expenses. The interplay of the above factors has caused the actual amounts paid by the Group to CNAHC Group were lower than the annual caps.

Basis for the annual caps for the next three years:

In arriving at the annual caps for the amounts payable by the Group to the CNAHC Group under the New Comprehensive Services Framework Agreement, the Directors have considered the historical transaction amounts for the same type of transactions, which were RMB825 million and RMB1,920 million for the years ended 31 December 2022 and 2023, respectively, and RMB1,052 million for the six months ended 30 June 2024, as well as the expected growth of the Group's air passenger services in the next few years. Considering that (i) the transaction amount for the year 2023 was RMB1,920 million, and it is expected that the Group's transport capacity will gradually return to the pre-pandemic level over the next three years (as of the end of 2023, the number of international and regional weekly flights was recovered to 74% of that in the same period of 2019), leading to a corresponding increase in demand for ancillary production and supply services, such as in-flight supplies services, airline catering services and aviation ground services. Consequently, the transaction amount payable to the CNAHC Group is expected to increase, leading an estimated transaction amount of RMB2,571 million for the year 2024; and (ii) the expected increase in labour cost over the next three years will contribute to an increase in transaction amount. Additionally, the inclusion of entrusted property management services in the New Comprehensive Services Framework Agreement and the provision of services such as information technology services by the CNAHC Group will lead to an increase of transaction amount. Based on the above and considering a reasonable buffer to accommodate potential fluctuations, the growth rate from 2024 to 2025 is expected to be around 20%, resulting in an increase in the amount payable by the Group to the CNAHC Group to no more than RMB3,200 million in 2025. Thereafter, it is expected that the amount will increase by 3% per year from 2025 onwards (the 3% rate is derived with reference to the forecast of China's GDP growth by relevant institutions and also reflects effective cost management). As a result, the amounts payable by the Group to the CNAHC Group under the New Comprehensive Services Framework Agreement are expected to not exceed RMB3,300 million and RMB3,400 million in 2026 and 2027, respectively.

In arriving at the annual caps for the amount payable by CNAHC Group to the Group under the New Comprehensive Services Framework Agreement, the Directors have considered (i) the historical actual transaction amount was RMB57 million for the year 2023. It is expected that the Group will continue to provide services such as human resources management, which will result in a corresponding rise in the expenditure of transaction amount of the CNAHC Group under the New Comprehensive Services Framework Agreement, leading to an estimated transaction amount of RMB73 million for the year 2024; (ii) the expected increase in labour costs in the next three years, which will also result in an increase in the transaction amount of approximately RMB60 million. Taking into account the abovementioned factors, it is expected that the amount receivable by the Group from the CNAHC Group in 2024 under the New Comprehensive Services Framework Agreement will not exceed RMB150 million, and thereafter, the amount is expected to increase by 6.5% per year (such rate is determined with reference to the forecast of China's GDP growth by relevant institutions, and taking into consideration a reasonable growth in income), so that the amount receivable by the Group from the CNAHC Group will not exceed RMB160 million and RMB170 million in 2026 and 2027, respectively.

3. Internal Control

The Company has adopted the following measures to ensure that the above continuing connected transactions will be conducted on normal commercial terms and in accordance with their respective framework agreements and the pricing policies of the Company:

• Before entering into the above connected transactions, the Finance Department, the Legal Department, the Asset Management Department (which has a dedicated subdivision responsible for managing the connected transactions) and if applicable, certain other relevant departments of the Company will review the proposed terms for the individual transactions and discuss with the relevant business department of the Group to ensure that such transactions are conducted on normal commercial terms and the terms of applicable framework agreements and in compliance with the pricing policies of the Group before these relevant departments approve the finalized transaction agreements according to their authority within the Group.

• The Asset Management Department of the Company is responsible for supervising connected transactions. The Asset Management Department will regularly monitor and collect detailed information on relevant continuing connected transactions (including but not limited to the implementation of the pricing policies, duration of the agreement and the actual transaction amounts of the above continuing connected transactions) to ensure that such transactions are conducted in accordance with applicable framework agreements for continuing connected transactions. In addition, the Asset Management Department will be responsible for reviewing and evaluating the actual transaction amount and cap balance of the above continuing connected transactions on a monthly basis. If the relevant cap is expected to be exceeded, the Asset Management Department will report to the management of the Company and take appropriate measures in accordance with the relevant requirements of the Hong Kong Listing Rules and/or the Shanghai Listing Rules.

• The Internal Audit Department of the Company is responsible for carrying out annual assessment on the internal control procedures of the Group, including but not limited to information relating to the management of continuing connected transactions. In addition, the Internal Audit Department is responsible for preparing the annual assessment report on internal control and will submit the same to the Board for review and approval.

• The independent auditor and the independent non-executive Directors will conduct annual review on the non-exempt continuing connected transactions.

4. Hong Kong Listing Rules Implications

As each of the applicable percentage ratios (other than the profits ratio) of the continuing connected transactions (excluding the de minims continuing connected transactions) set out above, on an annual basis, is higher than 0.1% but less than 5%, they therefore fall under Rule 14A.76(2)(a) of the Hong Kong Listing Rules. Accordingly, these continuing connected transactions are subject to the reporting, announcement and annual review requirements under Chapter 14A of the Hong Kong Listing Rules, but are exempted from the Independent Shareholders' approval requirement.

Mr. Ma Chongxian, Mr. Wang Mingyuan, Mr. Cui Xiaofeng and Mr. Xiao Peng are considered to have material interests in each of the continuing connected transactions set out above and therefore have abstained from voting in the relevant Board resolutions in respect of the continuing connected transactions. Save as disclosed above, none of the Directors have a material interest in any of the continuing connected transactions and hence no other Director is required to abstain from voting in the relevant Board resolutions.

The Board (including the independent non-executive Directors) considers that the terms and conditions of the above-mentioned continuing connected transactions are fair and reasonable. Such continuing connected transactions are on normal commercial terms or better and in the ordinary and usual course of business of the Company, and are in the interests of the Company and its Shareholders as a whole. The Board also considers that the annual caps for each of the three years ending 31 December 2025, 2026 and 2027 for the abovementioned continuing connected transactions are fair and reasonable.

5. Shanghai Listing Rules Implications

Pursuant to the Shanghai Listing Rules, the following agreements shall be approved by the Independent Shareholders at the EGM:

(1) the Government Charter Flight Service Framework Agreement;

(2) the New Comprehensive Services Framework Agreement;

(3) the New Properties Leasing Framework Agreement; and

(4) the Media Services Framework Agreement.

II. ACC TRANSACTIONS

Reference is made to the announcement of the Company dated 20 September 2022 and the circular of the Company dated 28 September 2022 in relation to, among other things, the ACC Transactions. The current term of the ACC Framework Agreement will expire on 31 December 2024. As the Company expects that the ACC Transactions will continue to be conducted after 31 December 2024, on 30 October 2024, the Board resolved to renew the ACC Framework Agreement for a term of three years commencing from 1 January 2025 to 31 December 2027, subject to Independent Shareholders' approval at the EGM.

1. Parties and the Relationship between the Parties

Air China Cargo is indirectly owned as to approximately 45.00% by CNAHC, the controlling Shareholder of the Company, and is therefore a connected person of the Company under the Hong Kong Listing Rules. Air China Cargo is a joint stock company incorporated under the laws of the PRC with limited liability and is principally engaged in air cargo and mail transportation business.

2. Description of the ACC Transactions

The ACC Transactions contemplated under the ACC Framework Agreement are as follows:

• Exclusive operation of the Passenger Aircraft Cargo Business: After arm's length negotiations between both parties, the Group and the ACC Group have determined to carry out a long-term collaboration for the Passenger Aircraft Cargo Business under an exclusive operating model. The entire Passenger Aircraft Cargo Business of the Group will be operated exclusively by the ACC Group, and the ACC Group shall undertake the overall responsibilities for transporting the cargos to the consignors with respect to the cargos which are transported through the passenger aircraft.

As the term of the exclusive operation of the Passenger Aircraft Cargo Business between the Company and the ACC Group commences from the effective date of the ACC Framework Agreement (i.e. 14 October 2022) and ends on 31 December 2034 pursuant to the ACC Framework Agreement, pursuant to Rule 14A.52 of the Hong Kong Listing Rules, the Company had engaged an independent financial adviser, Somerley Capital Limited ("Somerley"), to explain why a period exceeding three years for such agreements is required and the independent financial adviser had confirmed that it is in the normal business practice for contracts of these types to be of such duration. For details of the independent financial adviser's opinions, please refer to the circular of the Company dated 28 September 2022 (the "2022 Circular"). As disclosed in the 2022 Circular, "Somerley is of the view that a term of longer than three years is required for the effective operation of the transactions relating to the Passenger Aircraft Cargo Business (the "Cargo Transactions") and is a normal business practice in the industry after having considered the factors (i) Air China Cargo intends to apply for the listing of A shares and to comply with the applicable guidelines on initial public offering and listing of shares issued by CSRC, the Cargo Transactions having a term more than three years is necessary for facilitating te potential listing of Air China Cargo; (ii) entering into of the Cargo Transactions could provide a clear delineation of business and thereby eliminating concerns associated with competition between the Company and Air China Cargo;

(iii) Air China Cargo is the sole service provider for the Passenger Aircraft Cargo Business and is view of the shareholding structure of both the Group and Air China Cargo, it is not practical or commercially sensible for the Company to entrust such services with another party in the PRC as such counterparty would have to have a reasonable business scale to handle the Group's Passenger Aircraft Cargo Business and possible candidates with such business scale would normally be under control of an industry competitor; and (iv) Somerley considers the practice of having a term of longer than three years is not uncommon in the industry because Somerley noted that the similar exclusive passenger aircraft bellyhold space contractual operation arrangement of China Eastern Airlines Corporation Limited is also for a long term of 12 years".

• Ground support services and other services: The ground support services and other services provided by the Group to the ACC Group include but are not limited to operation support services, IT sharing services, comprehensive support services (mainly include crew accommodation and meal support, ground transportation services and medical and health services provided by the Group to the ACC Group), engine and aircraft-related materials sharing services, retiree management services, training services, human resources services (including general, servicing and information services in respect of personnel employment, archival information, salaries and benefits, social insurance and employee services), and procurement and maintenance services. The ground support and other services provided by the ACC Group to the Group include but are not limited to ground support services (cargo terminal services and airport apron services), container and pallet management services, engine and aircraft-related materials sharing services.

In respect of the engine and aircraft-related materials sharing services between the Group and the ACC Group, they mainly involve the provision of common engine and aircraft-related materials by the other party when one party's own engine and aircraft-related materials could not be able to meet its respective needs (mainly involving high-priced reusable components on the aircraft), for the purpose of reducing the procurement costs and timeliness in the event of temporary needs of the parties, while, on the other hand, improve each of their inventory utilization efficiency, hence bringing certain source of revenue.

The difference between ground support services and other services provided by the Group and the ACC Group under the ACC Framework Agreement lies in the specific nature and expertise required for each type of service. As described above, the types of services differ, and based on expertise, the Group requires the specialised capabilities that the ACC Group offers. The mutual provision of services allows both parties to leverage their strengths and meet their needs effectively.

• Property leasing: The Group may rent out its own properties or land with legal right of use to ACC Group for its production and operation, office and storage use, and the Group may lease self-owned properties and land from the ACC Group in the event that its own properties could not be able to meet its business needs such as production and operation, office and storage.

The properties leased to each other between the Group and the ACC Group differ in terms of aspects such as geographical location, area and purpose. Currently, the properties rent out by the Group to the ACC Group are mainly properties invested and built by the Group in the vicinity of the Beijing Capital International Airport for warehouse purpose, and the properties leased by the Group from the ACC Group at present are mainly properties owned by the ACC Group which are adjacent to the Group and were leased to the Group for its use under the circumstances that the Group's own properties could not be able to meet its office and operation needs.

Generally, the leasing term of properties or land shall not exceed three years. If there are specific government and/or industry requirements, the leasing term of properties or land shall comply with such requirements. When the terms expired, the leasing terms could be extended with unanimous consent after negotiation between both parties. The Company will comply with Chapter 14A of the Hong Kong Listing Rules by then.

3. Pricing Policies for the ACC Transactions

The consideration of any specific ACC Transactions shall be determined after arm's length negotiations between the Group and the ACC Group and on normal commercial terms, and shall be determined in accordance with the pricing policies set forth below on a case-by-case basis.

• Exclusive operation of the Passenger Aircraft Cargo Business:

During the exclusive operation term, the Group shall charge the ACC Group the transportation service fee regularly in each year. Such transportation service fee shall be determined based on the ACC Group's actual cargo revenue generated from the exclusive operation of the Group's Passenger Aircraft Cargo Business after deducting certain operating fee rate. The specific formulas are as follows:

Transportation service fee = actual revenue from the Passenger Aircraft Cargo Business × (1 - operating fee rate)

Operating fee rate = operation expense rate + reward/punishment rate

Reward/punishment rate = (growth rate of yield level of the Passenger Aircraft Cargo Business of the current year - growth rate of yield level of the cargo business in the industry of the current year) × 50%

Of which:

(1) The actual revenue of the Passenger Aircraft Cargo Business represents the actual cargo revenue generated by ACC Group's exclusive operation of the Group's Passenger Aircraft Cargo Business.

(2) The operation expense rate represents the ratio of operating expenses to actual revenue from the Passenger Aircraft Cargo Business. Operation expenses are determined by the parties through arm's length negotiation primarily based on the operation expenses in the historical years, with reference to factors such as the price level in the similar market and industry and its variation trend.

(3) In order to enhance the operating results of the exclusive operation of the Passenger Aircraft Cargo Business, the both parties decide to apply the reward/ punishment rate after negotiation. The basic index of reward/punishment rate represents 50% of the difference between the yield level growth rate of the Passenger Aircraft Cargo Business and the yield level growth rate of the cargo business in the industry of the current year. The parties may make reasonable adjustments according to the changes in the market environment and the operation direction of the Passenger Aircraft Cargo Business with unanimous consent after negotiation. The rate of 50% is determined by the Company and Air China Cargo through arm's length negotiation with reference to industry practice. The rate of 50% is the same as the relevant ratios of similar transactions of comparable companies in the industry, which will encourage the ACC Group to enhance its capacity of the Passenger Aircraft Cargo Business, thereby boosting the operating efficiency of the Group's Passenger Aircraft Cargo Business, and hence the rate is fair and reasonable.

(4) The growth rate of yield level of the Passenger Aircraft Cargo Business of the current year represents the growth rate of the yield level of the Passenger Aircraft Cargo Business of the current year generated by ACC Group's exclusive operation of the Group's Passenger Aircraft Cargo Business as compared with that of the previous year.

(5) The growth rate of yield level of the cargo business in the industry of the current year represents the growth rate of the revenue of the cargo business in the industry of the current year as compared with that of the previous year.

(6) The yield level of the cargo business represents the revenue of cargo business divided by the investment amount for the cargo business. The investment amount for the cargo business represents the total available cargo and mail traffic measured by the capacity available for the carriage of the cargo and mail for every route, and the calculation formula of which is Σ (capacity available for the carriage of the cargo and mail of the route multiplied by the distance of the route).

• Ground support services and other services:

Both parties shall, according to the service items and specific needs, determine the relevant service fees of the ground support services and other service provided to or by the Group through arm's length negotiations in accordance with the following principles:

(1) Follow the government and industry pricing or guide price if it is available, including but not limited to the guidance from CAAC and the International Air Transport Association on the prices of ground support services and other terms, and the requirements on the pricing of navigation information stipulated by CAAC and Air Traffic Management Bureau (ATMB), and the transaction price shall be determined by the parties through arm's length negotiation with reference to factors such as comparable prices (if any) in the market, relevant laws and tax policies. Generally, CAAC and the International Air Transport Association will publish the guidance on their official websites from time to time (for the International Air Transport Association, the guidance may also be provided by selling to customers).

(2) If no government and industry pricing or guide price is available, the final transaction price shall be determined through arm's length negotiations between the parties with firstly making reference to the market prices offered by at least two independent third parties on the market for the same type of service, and then taking certain factors into account such as the service standard, service scope, business volume and specific needs of the parties. If any service needs of the service recipient change, appropriate adjustment will be made to the transaction price after negotiation between both parties based on the extent of variation in relevant costs, service quality or other factors.

(3) If none of the above prices are applicable, the service price shall be determined by both parties on the basis of cost plus reasonable profit. The costs are mainly based on the costs and expenses of the service provider, including costs of human resources and costs of facility, equipment and materials. Reasonable profit margin will be determined with mainly making reference to the historical average prices on similar products or services (where possible) published regarding the relevant industry, and/or the profit margin of the comparable products and services disclosed by other listed companies. The reasonable profit margin of ACC Group shall not exceed 10%. The final transaction prices shall be determined on terms that to the Group are no less favourable than those provided by independent third parties to the Group or those provided by ACC Group to independent third parties. The Group generally obtains historical average prices of the reasonable profit margin of similar products or services of the relevant industry through official websites of other listed companies. Besides, prior to entering into transactions of various ground support services and other services, the Group will request the ACC Group to provide and hence obtain the terms of similar and comparable transactions between the ACC Group and independent third parties whenever possible as its reference for determining the transaction price. While making reference to the profit margin of comparable products and services disclosed by other listed companies, the Group will try to acquire comparable data as more as possible, and generally by referring to at least two listed companies' relevant data where practicable.

• Property leasing services:

The parties shall, according to the service items and specific needs, determine the relevant service fees of the property leasing services through arm's length negotiations in accordance with the following principles:

(1) The Group as lessor: First, the Group shall provide quotation of the leased properties or land to ACC Group after taking into account the factors including the relevant costs, tax and reasonable profit margin relating to the properties or land. The relevant costs include construction costs, depreciation costs, funding costs and maintenance costs. Reasonable profit margin will be determined with mainly making reference to the historical average prices on similar services (where possible) published regarding the property leasing industry, and/or the profit margin of the comparable services disclosed by other listed companies. Then, the rental prices for the leased properties or land shall be determined through arm's length negotiations between the Group and ACC Group after ACC Group takes into account the factors such as the location of the leased properties or land and the service quality. Such rental prices shall not be lower than the rent offered by the Group to an independent third party (if any) in comparable circumstances.

(2) The Group as lessee: First, the Group shall conduct market research and collect, consolidate and analyze information in respect of provision of leasing services by independent third parties for the same type of properties or land (if any) in close proximity to the properties or land to be leased. Generally, the Group shall assign a department or an officer to verify the price and terms available from at least two independent third parties (if any) by email, fax or telephone. Then, (a) if there is comparable market of the same type identified through market research, the parties shall determine the rental prices for the leased properties or land through arm's length negotiations with reference to the market price for the same type of services available from at least two independent third parties after taking into account the relevant factors. The relevant factors include the geographical location, function and layout, furnishing, ancillary facilities and property services of the property or land as well as the specific needs of the lessee; and (b) if there is no comparable market of the same type found in the neighboring areas through market research, the price shall be determined by adopting the cost-plus approach: the rental price of the leased properties or land shall be determined through arm's length negotiations between the parties based on the relevant costs, tax and reasonable profit margin of the properties or land offered by ACC Group. The relevant costs include construction costs, depreciation costs, funding costs and maintenance costs. Reasonable profit margin will be determined with mainly making reference to the historical average prices on similar services (where possible) published regarding the property leasing industry and/or the profit margin of the comparable services disclosed by other listed companies, and the reasonable profit margin of ACC Group shall not exceed 10%. The abovementioned rental prices shall not be higher than those offered by ACC Group to the independent third parties (if any) in comparable circumstances.

The Group generally obtains historical average prices of the reasonable profit margin of similar products or services of the relevant industry through the official websites of other listed companies. Besides, prior to entering into transactions of various ground support services and other services, the Group will request the ACC Group to provide and hence obtain the terms of similar and comparable transactions between the ACC Group and independent third parties whenever possible as its reference for determining the transaction price. While making reference to the profit margin of comparable products and services disclosed by other listed companies, the Group will try to acquire comparable data as more as possible, and generally by referring to at least two listed companies' relevant data where practicable.

(3) The Group as lessee and lessor: When leasing each other's properties or land, as a separate matter, the parties may determine the quotation for the rental prices of their respective properties or land based on the above pricing principles, and then exchange the lease of properties and land use right in accordance with the principle of equivalent exchange.

(4) The payment method of rental fee shall be subject to specific agreement.

4. Term of the ACC Framework Agreement

The renewal of the ACC Framework Agreement is subject to the approval of Independent Shareholders at the EGM. If the approval of Independent Shareholders is obtained, the ACC Framework Agreement will be renewed for a term of three years commencing from 1 January 2025 to 31 December 2027, and may be renewed automatically for successive terms of three years each, subject to the compliance with the requirements of the Hong Kong Listing Rules/the Shanghai Listing Rules and the approval procedures required under the Hong Kong Listing Rules/the Shanghai Listing Rules. During the term of the ACC Framework Agreement, the agreement can be terminated upon the expiry on any 31 December by either party thereto by serving the other party a prior written notice of not less than three months. However, the exclusive operation term of the Passenger Aircraft Cargo Business between the Group and ACC Group under the ACC Framework Agreement shall not be terminated upon the termination of the ACC Framework Agreement, provided that the requirements (including but not limited to obtaining approval and fulfilling disclosure procedures for the annual caps) under the Hong Kong Listing Rules/Shanghai Listing Rules shall then be complied with.

5. Independent Financial Adviser's opinion on the leasing term of properties under the ACC Framework Agreement

As mentioned above, under the ACC Framework Agreement, the term of the leases of properties or land should not exceed three years with the exception where there are special government and/or industry requirements on the duration of the tenure of the leased property(ies) or land (the "ACC Property(ties)").

According to Rule 14A.52 of the Hong Kong Listing Rules, the term for the agreement for a continuing connected transaction shall not exceed three years except in special circumstances where the nature of the transaction requires a longer term. In this case, the listed issuer shall appoint an independent financial adviser to explain why the agreement requires a longer term and to confirm that it is normal business practice for the agreements of this type to be of such duration.

Accordingly, the Company has engaged BaoQiao Partners as the Independent Financial Adviser, and BaoQiao Partners has formulated its opinion as follows:

As both the Group and ACC Group are engaged in related business sectors, both groups have similar demands on certain type of properties and/or properties in specific areas (for example, properties within or adjacent to airports) owned by each other for their general and/or business operation purposes.

Based on BaoQiao Partners' discussion with the management of the Company, the ACC Properties represents properties (including properties that are custom-built by the Group, based on industry requirements and at the request of ACC Group) that may be subject to oversight and administration of government or industrial authorities with specific regulations/requirements on the duration of the tenure, which may exceed three years, when leased from time to time. As such, it is normal business practice for the Group with regards to the compliance with applicable government/industrial regulations or observe the industry requirements for leasing of ACC Properties.

As advised by the management of the Company, there are existing leasing transactions of the ACC Properties entered into between the Group and the ACC Group (the "Existing Transactions") in January 2017 and BaoQiao Partners has obtained and reviewed the agreements of these Existing Transactions, which were governed by the GAC. The initial lease terms of these Existing Transactions were 6 years, which were renewed in 2023 for an additional 3 years to 2026. BaoQiao Partners understands that the initial lease terms of 6 years of the Existing Transactions were in compliance with the GAC Rules issued by the GAC on 30 January 2008, which required, among others, the lease term of property for the use of loading, unloading, storage, delivery and shipping of import and export goods in the areas that are subject to the oversight and supervision of GAC to be at least five years.

Despite the GAC Rules were superseded by the new rules issued by GAC on 1 November 2017 and there is no specific lease term requirement under the new rules, as advised by the management of the Company, the Company cannot rule out the possibility that any government or industrial authorities (including GAC) will require the lease term of the ACC Properties to be more than 3 years during the period of the ACC Framework Agreement. Based on BaoQiao Partners' discussion with the management of the Company, in order to maintain stable and smooth airline operation needs, both the Company and the ACC Group intend to continue the leasing arrangement of the Existing Transactions upon expiry in 2026 and there may be other new ACC Properties leasing arrangements between the Group and the ACC Group under the ACC Framework Agreement, which from the perspective of the Company, the entering into leases of ACC Properties will allow the Group (as the lessee) to obtain the right of use of ACC Properties owned by ACC Group for the Group's operation, while also providing the flexibility for the Group (as the lessor) to lease out its vacant ACC Properties for rental income. As such, the property leasing services with flexibility on leasing period to satisfy the regulatory compliance and industry requirements for the ACC Properties under the ACC Framework Agreement also align with the Group's long-term strategies and signifies the lasting cooperation commitment between the Group and the ACC Group.

Review of comparable transactions

In considering whether it is a normal business practice for the lease of the ACC Properties under the ACC Framework Agreement to have a duration longer than three years, BaoQiao Partners has identified and selected 18 Comparable Transactions based on the following selection criteria, (a) continuing connected transactions announcements related to leasing arrangements of land and properties for general and/or business operation purposes published by companies listed on the Hong Kong Stock Exchange since 2021;

(b) the transactions with lease term longer than three years. Based on BaoQiao Partners' review of the Comparable Transactions, it is not uncommon to enter into long-term leases for properties leasing in the PRC and 17 out of 18 of the Comparable Transactions were related to leasing arrangements for PRC land/properties. BaoQiao Partners also notes that the lease terms of these Comparable Transactions ranged from 5 years to 50 years, with an average of approximately 13 years. In addition, 3 out of 18 Comparable Transactions were similar with that of custom-built arrangements. Two of them involved properties for airline operations entered into by CEA, a peer company within the Chinese aviation industry with lease term of 6 years in 2021 and 2022 and the other was leasing of land for construction of factory buildings/facilities with lease term of 20 years. The use of properties under these 18 Comparable Transactions included industrial production, commercial operation, hospital operation and offices. Although there was no Comparable Transaction that involved leasing of regulated properties as the Company, BaoQiao Partners considers the Comparable Transactions can represent the general market practices of the property leasing arrangements for general and/or business operation purposes in the PRC, regardless the types of properties involved.

As such, based on BaoQiao Partners' review of the Comparable Transactions with lease terms ranged from 5 years to 50 years and the Existing Transactions with initial tenure of 6 years, BaoQiao Partners considers the lease terms of the Properties under the ACC Framework Agreement, which based on the representation given by the management of the Company will not be over 20 years, fall within the range of the Comparable Transactions.

Having considered the principal factors discussed above, BaoQiao Partners is of the view that it is normal business practice for the Group and the ACC Group to enter into leases for the Properties under the ACC Framework Agreement with terms of more than three years and to be of such duration for agreements of this type.

6. Reasons for and Benefits of the ACC Transactions

The Directors believe that it is in the best interest of the Group to continue the ACC Transactions with the ACC Group having taken into account the following factors:

• In respect of the exclusive contracting operation of the Passenger Aircraft Cargo Business, by placing the Passenger Aircraft Cargo Transactions of the Group exclusively with the ACC Group, the Group is able to better focus its resources on its core passenger transport business, which will result in a more efficient utilization of resources and enhance the management and operation capabilities of the passenger transport business. The collaboration between the Group and the ACC Group allows Air China Cargo to utilize its expertise in the cargo industry, providing the Group with a steady income from contracted cargo business. The aforesaid collaboration maximizes the economies of scale for the Group and the ACC Group, while the Group's increased focus on the core passenger transport business will further strengthen the Group's brand image and competitiveness in the passenger transport market, thereby enhancing returns to the Shareholders.

• In respect of ground support services and other services, the long established successful cooperative relationship between the Company and Air China Cargo is able to provide streamlined and efficient cooperation and transaction between the Group and the ACC Group.

• In respect of properties leasing services, the Group has entered into similar property leasing transactions with various parties including both connected persons and independent third parties in the ordinary course of business. The leasing of the Group's properties to the ACC Group is beneficial to the Group in improving the efficiency of asset utilization and obtaining rental income. The properties leased by the ACC Group to the Group are generally located in the vicinity of the Group's office, and therefore can meet the Group's relevant needs in a more efficient and convenient way.

7. Historical Amounts and Proposed Caps

The table below sets out (i) the historical annual caps of the ACC Group or the Group for each of the three years ended/ending 31 December 2022, 2023 and 2024, respectively; (ii) the actual amounts for each of the two years ended 31 December 2022 and 2023 and for the six months ended 30 June 2024, and the estimated amounts payable for the year ending 31 December 2024; and (iii) the proposed annual caps for the next three years:

Unit: RMB Million

Historical Annual Caps

Actual Historical Amounts

Estimated amounts

for the year

ending 31 December

2024

Proposed Annual Caps

For the year

ended 31 December

2022

For the year

ended 31 December

2023

For the year

ending December

2024

For the year

ended 31 December

2022

For the year

ended 31 December

2023

For the six

months ended 30 June

2024

For the year

ending 31 December

2025

For the year

ending 31 December

2026

For the year

ending 31 December

2027

Amounts Payable by the ACC Group to the Group

In terms of the transportation service under the Passenger Aircraft Cargo Business

15,500

17,000

18,000

9,666

3,412

3,009

8,100

11,000

12,000

13,000

In terms of ground support services and other services

1,500

2,500

2,700

1,046

887

326

1,242

2,100

2,300

2,500

In terms of properties leasing services

250

137

134

149

250

Amounts payable by the Group to the ACC Group

In terms of ground support services and other services

1,400

1,500

1,600

598

681

420

1,116

1,500

In respect of the passenger aircraft cargo services provided by the Group to the ACC Group, given that the transport capacity of passenger aircraft on the international routes of the Group has not yet recovered to pre-pandemic levels, the revenue of the Passenger Aircraft Cargo Business was lower than expected, resulting in a decrease in the amount of actual revenue from the transportation services under the Passenger Aircraft Cargo Business from 2022 to 2024 as compared with the annual cap for each of the respective year.

In respect of the ground support services and other services provided by the Group to the ACC Group, given that the ACC Group delayed its purchase of maintenance services from the Group based on the arrangement under the aircraft introduction plan, the corresponding revenue of the Group has decreased, resulting in a decrease in the amount of actual revenue from ground support services and other services from 2022 to 2024 as compared with the annual cap for each of the respective year.

In respect of the ground support services and other services provided by the ACC Group to the Group, given that the transport capacity of the passenger aircraft of the Group has not yet recovered to pre-pandemic levels, and that the business volumes of flight-related warehouse and airport apron operations both decreased accordingly, there was a corresponding decrease in the relevant fees paid by the Group to the ACC Group, resulting in a decrease in the amount of actual expenditure incurred for ground support services and other services from 2022 to 2024 as compared with the annual cap for each of the respective year.

8. Basis for the Annual Caps for the Next Three Years

Accounts Payable by the ACC Group to the Group

In arriving at the annual caps for the transportation service fees of the Passenger Aircraft Cargo Business payable by the ACC Group to the Group for each of the three years ending 31 December 2025, 2026 and 2027, the Company has considered, among other things, the historical transaction amounts, which were RMB9,666 million and 3,412 million for the years ended 31 December 2022 and 2023, respectively, and RMB3,009 million for the six months ended 30 June 2024, and the estimated transaction amounts for 2025 to 2027 along with the following factors:

(i) In 2023, the Group operated at 74% of its pre-pandemic capacity on international routes. It is expected that international flight operations may return to pre-pandemic levels by 2025. Based on the estimated revenue in the amount of RMB8,100 million from the Passenger Aircraft Cargo Business for the year 2024, assuming no reduction in pricing levels and a 30% increase in passenger aircraft deployment (mainly due to the recovery of international routes), the revenue from the Passenger Aircraft Cargo Business is expected to reach RMB11,000 million for the year 2025. For the year 2026 and 2027, an estimated growth rate of 7% has been adopted, with reference to the target growth rate of 6.5% of the guaranteed number of takeoff and landing as set out in the "14th Five-Year Plan" issued by CAAC. As a result, the revenue for the year 2026 and 2027 is estimated to be RMB11,700 million and RMB12,600 million, respectively;

(ii) The operating fee rate is estimated to be between 7% and 8%. In determining the estimated operating fee rate, the Company has taken into account the actual operating fee rates from the past years. It was observed that the actual operating fee rates were between 7% and 8% in 2018 and 2019 and ranged from 4% to 9.5% from 2020 to 2023, with an average of 6.3% during those years. Given the expectation that the Group's international flights will return to pre-pandemic levels in 2025, along with the anticipated growth in estimated revenue from the Passenger Aircraft Cargo Business in the coming years, the operating fee rate of 7% to 8% is considered fair and reasonable;

(iii) The maximum transportation service fee is calculated based on the formula contemplated under the ACC Framework Agreement (i.e. Transportation service fee = actual revenue from the Passenger Aircraft Cargo Business × (1 - operating fee rate)), and a reasonable buffer is included; and

(iv) Based on the above, it is estimated that the transportation service fees of the Passenger Aircraft Cargo Business payable by the ACC Group to the Group for year 2025 to 2027 will not exceed RMB11,000 million, RMB12,000 million and RMB13,000 million, respectively.

In arriving at the annual caps for the amounts payable by the ACC Group to the Group in connection with the ground support services and other services provided by the Group for each of the three years ending 31 December 2027, the Company has considered, among other things, (i) the historical transaction amounts which were RMB1,046 million and RMB887 million for the years ended 31 December 2022 and 2023, respectively, and RMB326 million for the six months ended 30 June 2024. The Group expects the transaction amount to be paid to the ACC Group in 2024 will be around RMB1,242 million, among which, the amounts payable by the ACC Group to the Group for the maintenance services provided by the Group to the ACC Group are expected to be around RMB600 million to RMB700 million; (ii) the estimated transaction amounts for 2025 to 2027 (especially taking into account the possible increase in demand of the ACC Group for pilots and aircraft and engines maintenance services, for which the Company can provide the corresponding personnel and services); and (iii) a reasonable buffer has been included. Based on the above and considering the peak historical annual cap was in the amount of RMB2,700 million, it is estimated that the amounts payable by the ACC Group to the Group in connection with the ground support services and other services provided by the Group for each of the three years ending 31 December 2027 will not exceed RMB2,100 million, RMB2,300 million and RMB2,500 million, respectively.

In arriving at the annual caps for the amounts payable by the ACC Group to the Group in connection with the properties leasing services provided by the Group for each of the three years ending 31 December 2027, the Company has considered, among other things, (i) the annual rentals of the properties currently leased by the Group to the ACC Group, and the peak historical transaction amount of which was RMB137 million over the past two years;

(ii) the potential additional rentals from the possible new property lease projects from 2025 to 2027 are estimated to be approximately RMB50 million; and (iii) the peak historical annual cap proposed amounted to RMB250 million. Accordingly, it is estimated that the annual transaction amounts for 2025 to 2027 will not exceed RMB250 million.

Amounts payable by the Group to the ACC Group

In arriving at the annual caps for the amounts payable by the Group to the ACC Group in connection with the ground support services and other services provided by the ACC Group for each of the three years ending 31 December 2027, the Company has considered

(i) the historical transaction amounts, which were RMB598 million and RMB681 million for the years ended 31 December 2022 and 2023, respectively, and RMB420 million for the six months ended 30 June 2024, (ii) the Group expects the amounts payable by the Group to the ACC Group in connection with the ground support services and other services provided by the ACC Group for 2024 will be around RMB1,116 million; and (iii) the estimated transaction amounts for 2025 to 2027 (including the corresponding increase in the scale of ground support services as the number of flights increase after the end of the pandemic), and has included a reasonable buffer. Based on the above, it is estimated that the amounts payable by the Group to the ACC Group in connection with the ground support services and other services provided by the ACC Group for each of the three years ending 31 December 2027 will not exceed RMB1,500 million.

9. Internal Control Procedures

The Group has adopted the following internal control procedures to ensure that the ACC Transactions will be conducted on normal commercial terms, and in accordance with the ACC Framework Agreement and the pricing policies of the Group:

• Before entering into individual ACC Transactions, the Finance Department, Legal Department, Asset Management Department (which has a dedicated sub-division responsible for the management of connected transactions) and if applicable, certain other relevant departments of the Company will review the proposed terms for the individual ACC Transactions and discuss with the relevant departments of the Group to ensure that such transactions are conducted on normal commercial terms and in compliance with the pricing policies of the Group before these relevant departments approve the finalized transaction agreements according to their authority within the Group.

• The Asset Management Department of the Company is responsible for overseeing the connected transactions of the Company. The Asset Management Department will monitor and collect detailed information on the ACC Transactions on a regular basis, including but not limited to the implementation of pricing policies, the terms of the agreement and actual transaction amount to ensure that the transactions are conducted in accordance with the framework agreement. In addition, the Asset Management Department is responsible for monitoring and reviewing the balance amount of the annual cap for the ACC Transactions on a monthly basis and if the annual cap for the ACC Transactions is expected to be exceeded for a particular year, it will report to the management and take appropriate measures in accordance with the relevant requirements of the Hong Kong Listing Rules and/or the Shanghai Listing Rules.

• The Company's Internal Audit Department is responsible for performing annual assessment on the internal control procedures of the Group, including but not limited to the relevant information on the management of continuing connected transactions. In addition, the Internal Audit Department is responsible for compiling the annual internal control assessment report and submitting the report to the Board for examination and approval.

• The independent auditor of the Company and the independent non-executive Directors will conduct an annual review on the continuing connected transactions of the Group.

The Company considers that the above internal control procedures could function as effective measures to regulate continuing connected transactions. The Company also provides accurate materials in relation to continuing connected transactions as always to facilitate the annual review conducted by the independent non-executive Directors and the independent auditor. Therefore, the Directors consider that the above internal control procedures could ensure the continuing connected transactions will be conducted on normal commercial terms and not prejudicial to the interests of the Company and its minority Shareholders.

10. Hong Kong Listing Rules Implications

The Board (including the independent non-executive Directors) considers that the ACC Transactions are on normal commercial terms or better, and are entered into in the ordinary and usual course of business of the Group, and the terms and conditions contained therein and the proposed annual caps are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Mr. Ma Chongxian, Mr. Wang Mingyuan, Mr. Cui Xiaofeng, Mr. Patrick Healy and Mr. Xiao Peng are considered to have material interests in the ACC Transactions and therefore have abstained from voting in the relevant Board resolutions in respect of the continuing connected transactions.

Save as disclosed above, none of the Directors have a material interest in ACC Transactions and hence no other Director is required to abstain from voting in the relevant Board resolutions.

11. Shanghai Listing Rules Implications

Pursuant to the Shanghai Listing Rules, the renewal of ACC Framework Agreement and the propose annual caps thereunder shall be approved by the Independent Shareholders.

V. GENERAL INFORMATION

The Company will convene the EGM for the Independent Shareholders to consider and approve the CNAHC Framework Agreements, the CNAHC Transactions and the proposed annual caps for each of the CNAHC Transactions, and the ACC Framework Agreement, the ACC Transactions and the proposed annual caps for the ACC Transactions.

In respect of the CNAHC Transactions, pursuant to Rule 14A.36 of the Hong Kong Listing Rules, any Shareholder with a material interest in the CNAHC Transactions is required to abstain from voting on the relevant resolutions at the EGM. As at the date of this announcement, CNACG is a wholly-owned subsidiary of CNAHC. Therefore, CNAHC and CNACG are required to abstain from voting on the resolutions in respect of the CNAHC Transactions at the EGM.

In respect of the ACC Transactions, pursuant to Rule 14A.36 of the Hong Kong Listing Rules, any Shareholder with a material interest in the ACC Transactions is required to abstain from voting on the relevant resolution at the EGM. As at the date of this announcement, CNAHC, the controlling Shareholder of the Company, indirectly held approximately 45.00% equity interest in Air China Cargo. CNACG, a substantial shareholder of the Company, is a wholly-owned subsidiary of CNAHC. In addition, Cathay Pacific is a substantial shareholder of the Company and Air China Cargo. Therefore, CNAHC, CNACG, Cathay Pacific and their respective associates are required to abstain from voting on the resolution in respect of the ACC Transactions.

The Independent Board Committee comprising all the independent non-executive Directors has been established to advise the Independent Shareholders on the Non-exempt Transactions. BaoQiao Partners has been appointed as the Independent Financial Adviser of the Company to advise the Independent Board Committee and the Independent Shareholders in this regard.

A circular containing, among others, (i) details regarding the CNAHC Transactions and the ACC Transactions; (ii) a letter from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders regarding its advice on the Non-exempt Transactions; and (iii) the recommendation from the Independent Board Committee regarding the Non-exempt Transactions, will be despatched to Shareholders on or before 20 November 2024.

DEFINITIONS

In this announcement, unless the context otherwise requires, the following terms shall have the meanings as set out below:

"2021 Circular"	the circular issued by the Company on 12 November 2021 to the Shareholders in respect of, among other things, certain continuing connected transactions
"2021 EGM"	the extraordinary general meeting of the Company held on 30 December 2021
"ACC Framework Agreement"	the framework agreement dated 20 September 2022 entered into between the Company and Air China Cargo in respect of the ACC Transactions
"ACC Group"	Air China Cargo and the corporations or other entities in which Air China Cargo holds 30% or more equity interests or voting rights at the general meeting or the majority directors of which are controlled, directly or indirectly, by Air China Cargo
"ACC Transactions"	the continuing connected transactions contemplated under the ACC Framework Agreement between any member of the Group on the one hand, and any member of the ACC Group on the other hand
"Air China Cargo"	Air China Cargo Co., Ltd., a joint stock company incorporated under the laws of the PRC with limited liability
"associate(s)"	has the meaning ascribed to it by the Hong Kong Listing Rules
"Board"	the board of Directors
"CAAC"	the Civil Aviation Administration of China
"Cathay Pacific"	Cathay Pacific Airways Limited
"CNACD"	China National Aviation Construction and Development Company, a wholly-owned subsidiary of CNAHC and is primarily engaged in businesses such as entrusted asset management, real estate development and construction project implementation and supervision

"CNACD Group"	CNACD and the corporation or other entities in which CNACD holds 30% or more equity interests or voting rights at the general meeting or the majority directors of which are controlled, directly or indirectly, by CNACD
"CNACG"	China National Aviation Corporation (Group) Limited, a company incorporated under the laws of Hong Kong and a wholly-owned subsidiary of CNAHC and a substantial shareholder of the Company, which directly holds approximately 11.75% of the Company's issued share capital as at the date of this announcement
"CNAHC"	China National Aviation Holding Corporation Limited, a PRC state-owned enterprise and the controlling Shareholder of the Company, directly and through its wholly-owned subsidiary CNACG, holding approximately 51.32% of the issued share capital of the Company in aggregate as at the date of this announcement
" C N A H C F r a m e w o r k Agreements"	the Government Charter Flight Services Framework Agreement, the New Properties Leasing Framework Agreement, the Media Services Framework Agreement and the New Comprehensive Services Framework Agreement
"CNAHC Group"	CNAHC and the corporation or other entities in which CNAHC holds 30% or more equity interests or voting rights at the general meeting or the majority directors of which are controlled, directly or indirectly, by CNAHC (excluding the Group, Air China Cargo and the corporations or other entities in which Air China Cargo holds 30% or more equity interests or voting powers or the majority of the directors of which are controlled, directly or indirectly, by Air China Cargo)
"CNAHC Transactions"	the continuing connected transactions contemplated under the Government Charter Flight Services Framework Agreement, the New Properties Leasing Framework Agreement, the Media Services Framework Agreement and the New Comprehensive Services Framework Agreement for the three years ending 31 December 2027
"CNAMC"	China National Aviation Media Co., Ltd., a wholly-owned subsidiary of CNAHC

"Company" or "Air China"	Air China Limited, a company incorporated in the PRC, whose H Shares are listed on the Hong Kong Stock Exchange as its primary listing venue and on the Official List of the UK Listing Authority as its secondary listing venue, and whose A Shares are listed on the Shanghai Stock Exchange
"Comprehensive Services Framework Agreement"	the framework agreement for the continuing related (connected) transactions of comprehensive services entered into between the Company and CNAHC on 29 October 2021
"connected person(s)"	has the meaning ascribed thereto under the Hong Kong Listing Rules
"Director(s)"	the director(s) of the Company
"EGM"	the extraordinary general meeting of the Company to be held to consider and approve the continuing connected transactions set out in this announcement
"Government Charter Flight Service Framework Agreement"	the framework agreement for the continuing related (connected) transactions of government charter flight service entered into between the Company and CNAHC on 29 October 2021
"Group"	the Company and its subsidiaries
"HK$"	Hong Kong dollar, the lawful currency of Hong Kong
"Hong Kong"	Hong Kong Special Administrative Region of the PRC
"Hong Kong Listing Rules"	The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited
"Hong Kong Stock Exchange"	The Stock Exchange of Hong Kong Limited
"H Share(s)"	ordinary share(s) in the share capital of the Company, with a nominal value of RMB1.00 each, which are listed on the Hong Kong Stock Exchange as primary listing venue and have been admitted into the Official List of the UK Listing Authority as secondary listing venue
"H Shareholder(s)"	holders of the H Shares

"Independent Board Committee"	a board committee comprising Mr. He Yun, Mr. Xu Junxin and Ms. Winnie Tam Wan-chi, all being the independent non- executive Directors, to advise the Independent Shareholders on the Non-exempt Transactions
"Independent Financial Adviser" or "BaoQiao Partners"	BaoQiao Partners Capital Limited, a corporation licensed to carry out Type 6 (advising on corporate finance) regulated activities under the SFO, being the independent financial adviser to the Independent Board Committee and the Independent Shareholders to advise on the Non-exempt Transactions, and also being the independent financial adviser to give opinion on the leasing term of properties under the New Properties Leasing Framework Agreement and the ACC Framework Agreement
"Independent Shareholders"	In respect of the CNAHC Transactions, the Shareholders of the Company other than CNAHC and its associate(s); in respect of the ACC Transactions, the Shareholders of the Company other than CNAHC, CNACG, Cathay Pacific and their respective associates
"Media Services"	including but not limited to the operation, design, creation, planning, production, promotion and dissemination in relation to aviation-related all-media business sectors such as in-flight entertainment system, in-flight network platform, brand management, media publicity management, advertisement management, all-media platform management, media cooperation management and copyright management
"Media Services Framework Agreement"	the framework agreement for the continuing related (connected) transactions of media services entered into between the Company and CNAMC on 29 October 2021
"New Comprehensive Services Framework Agreement"	the framework agreement for the continuing related (connected) transactions of comprehensive services entered into between the Company and CNAHC on 30 October 2024
"New Properties Leasing Framework Agreement"	the framework agreement for the continuing related (connected) transactions of properties leasing entered into between the Company and CNAHC on 30 October 2024
"Non-exempt Transactions"	the relevant transactions of the Passenger Aircraft Cargo Business under the ACC Framework Agreement and the relevant annual caps for the three years ending 31 December 2027

"Passenger Aircraft Cargo Business"	all passenger aircraft cargo businesses and a series of relevant business operation activities (including but not limited to sales, pricing and settlement of aircraft cargo space) operated by the Group (including all airlines controlled by the Group)
"Properties Leasing Framework Agreement"	the framework agreement for the continuing related (connected) transactions of properties leasing entered into between the Company and CNAHC on 29 October 2021
"RMB"	Renminbi, the lawful currency of the PRC
"Shanghai Listing Rules"	The Rules Governing the Listing of Stocks on the Shanghai Stock Exchange
"Shareholder(s)"	holder(s) of the shares of the Company
"substantial shareholder(s)"	has the meaning ascribed thereto under the Hong Kong Listing Rules
"Supervisor(s)"	the supervisor(s) of the Company
"Zhejiang Zhongyu"	Zhejiang Zhongyu Aviation Development Co., Ltd. (浙江中宇航空發展有限公司)
"%"	per cent

By Order of the Board

Air China Limited

Xiao Feng Huen Ho Yin

Joint Company Secretaries

Beijing, the PRC, 30 October 2024

As at the date of this announcement, the directors of the Company are Mr. Ma Chongxian, Mr. Wang Mingyuan, Mr. Cui Xiaofeng, Mr. Patrick Healy, Mr. Xiao Peng, Mr. He Yun*, Mr. Xu Junxin* and Ms. Winnie Tam Wan-chi*.

* Independent non-executive director of the Company

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

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END

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AIRC Air China Ld

CONTINUING CONNECTED TRANSACTIONS

(1) CNAHC TRANSACTIONS

(2) ACC TRANSACTIONS

HONG KONG LISTING RULES IMPLICATIONS

(1) CNAHC TRANSACTIONS

(2) ACC TRANSACTIONS

I. CNAHC TRANSACTIONS

1. Parties and the relationship between the parties

• CNAHC

• CNAMC

2. Continuing Connected Transactions with the CNAHC Group

2.1 Government Charter Flight Services

2.2 Property Leasing

2.3 Media Services

2.4 Comprehensive Services

3. Internal Control

4. Hong Kong Listing Rules Implications

5. Shanghai Listing Rules Implications

II. ACC TRANSACTIONS

1. Parties and the Relationship between the Parties

2. Description of the ACC Transactions

3. Pricing Policies for the ACC Transactions

• Exclusive operation of the Passenger Aircraft Cargo Business:

• Ground support services and other services:

• Property leasing services:

4. Term of the ACC Framework Agreement

5. Independent Financial Adviser's opinion on the leasing term of properties under the ACC Framework Agreement

Review of comparable transactions

6. Reasons for and Benefits of the ACC Transactions

7. Historical Amounts and Proposed Caps

8. Basis for the Annual Caps for the Next Three Years

Accounts Payable by the ACC Group to the Group

Amounts payable by the Group to the ACC Group

9. Internal Control Procedures

10. Hong Kong Listing Rules Implications

11. Shanghai Listing Rules Implications

V. GENERAL INFORMATION

DEFINITIONS

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