Leong Yan Thiang, Et Al. V. China Aviation Oil (Singapore

Case 1:05-cv-02018-RPP Document 1 Filed 02/10/2005 Page 1 of 58

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

LEONG YAN THIANG, Individually and On Behalf of All Others Similarly Situated, CIVIL ACTION NO.

Plaintiff,

vs. CLASS ACTION COMPLAINT

CHINA AVIATION OIL (SINGAPORE) CORPORATION LTD., JIA CHANGBIN and CHEN JIULIN, JURY TRIAL DEMANDED

Defendants.

Plaintiff, Leong Yan Thiang ("Plaintiff ), individually and on behalf of all other persons similarly situated, by his undersigned attorneys, for his complaint against defendants , alleges the following based upon personal knowledge as to himselfand his own acts, and information and belief as to all other matters, based upon, inter alia, the investigation conducted by and through his attorneys, which included, among other things, a review of the defendants' public documents, conference calls and announcements made by defendants, United States Securities and Exchange

Commission ("SEC ) filings, wire and press releases published by and regarding China Aviation

Oil (Singapore) Corporation Ltd. ("China Aviation or the "Company ) securities analysts' reports and advisories about the Company, and information readily obtainable on the Internet. Plaintiff believes that substantial evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery.

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NATURE OF THE ACTION

1. This is a federal class action on behalf of purchasers of the securities of China

Aviation between March 27, 2003 and November 30, 2004, inclusive (the "Class Period ), seeking to pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act ).

JURISDICTION AND VENUE

2. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the Exchange Act, (15 U.S.C. §§ 78j(b) and 78t(a)), and Rule lOb-5 promulgated thereunder (17

C.F.R. §240.10b-5).

3. This Court has jurisdiction over the subject matter of this action pursuant to §27 of the Exchange Act (15 U.S.C. §78aa) and 28 U.S.C. § 1331.

4. Venue is proper in this Judicial District pursuant to §27 of the Exchange Act, 15

U.S.C. § 78aa and 28 U.S.C. § 1391(b).

5. In connection with the acts, conduct and other wrongs alleged in this complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including but not limited to, the United States mails, interstate telephone communications and the facilities of the national securities exchange.

PARTIES

6. Plaintiff, Leong Yan Thiang, as set forth in the accompanying certification, incorporated by reference herein, purchased China Aviation securities at artificially inflated prices during the Class Period and has been damaged thereby.

7. Defendant China Aviation is a Singapore corporation with its principal executive offices located at 8 Temasek Blvd #31-02, Suntec Tower Three, Singapore 038988.

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8. Defendant Jia Changbin ("Jia ) was, at all relevant times, the Company's Chairman and President of the Company's controlling shareholder, China Aviation Oil Holding Company, herein after "controlling shareholder.

9. Defendant Chen Juilin ("Chen ) was, at all relevant times, the Company's Managing

Director and Chief Executive Officer.

10. Defendants Jia and Chen are collectively referred to hereinafter as the "Individual

Defendants. During the Class Period, each of the Individual Defendants, as senior executive officers and/or directors of China Aviation were privy to non-public information concerning its business, finances, products, markets and present and future business prospects via access to internal corporate documents, conversations and connections with other corporate officers and employees, attendance at management and Board of Directors meetings and committees thereof and via reports and other information provided to them in connection therewith. Because oftheir possession ofsuch information, the Individual Defendants knew or recklessly disregarded the fact that adverse facts specified herein had not been disclosed to, and were being concealed from, the investing public.

11. Because of the Individual Defendants' positions with the Company, they had access to the adverse undisclosed information about the Company's business , operations, operational trends, financial statements , markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports ofactual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board ofDirectors meetings and committees thereof and via reports and other information provided to them in connection therewith. Case 1:05-cv-02018-RPP Document 1 Filed 02/10/2005 Page 4 of 58

12. It is appropriate to treat the Individual Defendants as a group for pleading purposes and to presume that the false, misleading and incomplete information conveyed in the Company's public filings, press releases and other publications as alleged herein are the collective actions ofthe narrowly defined group of defendants identified above. Each of the above officers of China

Aviation, by virtue of their high-level positions with the Company, directly participated in the management of the Company, was directly involved in the day-to-day operations of the Company at the highest levels and was privy to confidential proprietary information concerning the Company and its business, operations, growth, financial statements, and financial condition, as alleged herein.

Said defendants were involved in drafting, producing, reviewing and/or disseminating the false and misleading statements and information alleged herein, were aware, or recklessly disregarded, that the false and misleading statements were being issued regarding the Company, and approved or ratified these statements , in violation of the federal securities laws.

13. As officers and controlling persons of a publicly-held company whose securities were, and are, registered with the SEC pursuant to the Exchange Act, and was traded Over The

Counter ("OTC ) and governed by the provisions of the federal securities laws, the Individual

Defendants each had a duty to disseminate promptly, accurate and truthful information with respect to the Company's financial condition and performance, growth, operations, financial statements, business, markets, management, earnings and present and future business prospects, and to correct any previously-issued statements that had become materially misleading or untrue, so that the market price ofthe Company's publicly-traded securities would be based upon truthful and accurate information. The Individual Defendants' misrepresentations and omissions during the Class Period violated these specific requirements and obligations.

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14. The Individual Defendants participated in the drafting, preparation, and/or approval of the various public and shareholder and investor reports and other communications complained of herein and were aware of, or recklessly disregarded, the misstatements contained therein and omissions therefrom, and were aware of their materially false and misleading nature. Because of their Board membership and/or executive and managerial positions with China Aviation, each ofthe

Individual Defendants had access to the adverse undisclosed information about China Aviation financial condition and performance as particularized herein and knew (or recklessly disregarded) that these adverse facts rendered the positive representations made by or about China Aviation and its business issued or adopted by the Company materially false and misleading.

15. The Individual Defendants, because of their positions of control and authority as officers and/or directors of the Company, were able to and did control the content of the various

SEC filings, press releases and other public statements pertaining to the Company during the Class

Period. Each Individual Defendant was provided with copies ofthe documents alleged herein to be misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the Individual Defendants is responsible for the accuracy of the public reports and releases detailed herein and is therefore primarily liable for the representations contained therein.

16. Each of the defendants is liable as a participant in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of China Aviation securities by disseminating materially false and misleading statements and/or concealing material adverse facts.

The scheme: (I) deceived the investing public regarding China Aviation business, operations, Case 1:05-cv-02018-RPP Document 1 Filed 02/10/2005 Page 6 of 58

management and the intrinsic value of China Aviation securities; and (ii) caused Plaintiff and other members of the Class to purchase China Aviation securities at artificially inflated prices.

PLAINTIFF'S CLASS ACTION ALLEGATIONS

17. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or otherwise acquired the securities of China Aviation between March 27, 2003 and November 30, 2004, inclusive (the "Class Period") and who were damaged thereby. Excluded from the Class are defendants, the officers and directors of the Company, at all relevant times, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest.

18. The members of the Class are so numerous that joinder of all members is impracticable. Throughout the Class Period, China Aviation' securities were actively traded on the OTC.

While the exact number of Class members is unknown to Plaintiff at this time and can only be ascertained through appropriate discovery, Plaintiff believes that there are hundreds or thousands ofmembers in the proposed Class. Record owners and other members ofthe Class may be identified from records maintained by China Aviation or its transfer agent and may be notified ofthe pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions.

19. Plaintiffs claims are typical ofthe claims ofthe members ofthe Class as all members of the Class are similarly affected by defendants' wrongful conduct in violation of federal law that is complained of herein.

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20. Plaintiff will fairly and adequately protect the interests of the members of the Class and has retained counsel competent and experienced in class and securities litigation.

21. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by defendants' acts as alleged herein;

(b) whether statements made by defendants to the investing public during the Class

Period misrepresented material facts about the business, operations and management of China

Aviation; and

22. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for members ofthe Class to individually redress the wrongs done to them. There will be no difficulty in the management of this action as a class action

SUBSTANTIVE ALLEGATIONS

Background

23. China Aviation is a Singapore-headquartered, multinational investment and oil infrastructure company. Through its investments, it commands a dominant market presence in

China's jet fuel distribution sector. It also supplies nearly 100% of China's jet fuel imports, and

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supplements its procurement activities with international oil trading in a number of products in

Singapore's open oil trading environment . CAO strives to become China's first and largest integrated oil company with significant overseas assets. The controlling shareholder ofCAO is China Aviation

Oil Holding Company, a large state-owned aviation transportation logistics group, directly supervised by the Central Government of China. CAOHC owns aviation oil supply infrastructure at over 100 airports throughout China. It is the eighth-largest jet fuel provider in the world, supplying jet fuel to more than a hundred foreign and Chinese airlines.

Press Class Statements

24. On November 26, 2001, China Aviation launched its initial public offer ("IPO ) of

144 million shares. Beginning December 6, 2001, the Company would be listed on the Main Board ofthe Singapore Exchange Securities Trading Limited (SGX-ST). Defendant Chen announced that at a price of 0.56 Singapore dollars (about 0.31 U. S. dollars) per share, 10 million shares would be offered to the public with 134 million shares by way of placement. Chen also said the CAO plans to use the estimated 76.6 million Singapore dollars (about 42.8 million dollars) of net proceeds raised from its IPO for future expansion in China's interior and Hong Kong, for acquisition in the

U. S. and Europe and for company's working capital.

25. Additionally, on November 26, 2001, China Aviation published a prospectus. With respect to internal controls and risk management, the Company, in its prospectus , stated:

Risk Management

On 1 October 2000, we established a Risk Management Committee to monitor and control our risk exposure arising from physical and derivative trades at all times, and have adopted a set of risk management procedures that govern our physical and derivatives trades.

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***

On July 2001, we implemented a stop loss limit of US$500,000 for each Paper Trader for his trades in paper swaps and oil futures to minimize risk exposure to our Company. As we currently have three Paper Traders, the aggregate loss limit for our Company is US$1.5 million. Moreover, when the total mark-to-market unrealized loss for a Paper Trader has reached US$200,000 at the end of a trading day, the Managing Director, Mr. Chen and the Risk Management Committee and the trader will be put on alert by our Risk Controller. In the event that the loss reaches the US$500,000 limit, all open positions must be closed unless approval from the Managing Director, Mr. Chen is obtained. Only upon his approval can the positions in excess ofthe limit be carried out. These positions will be monitored closely by the Paper Trader and the Risk Controller.

Risk Management Procedure for Hedging with Paper Swaps

When a trader is engaged in a physical trade, he will identify and quantify the expected underlying risk exposure and communicate the exposure to another trader who trades in paper swaps ("Paper Trader ). ***

Risk Management Procedure for Opportunistic Trading in Paper Swaps

Our Paper Traders are authorized by our Managing Director to trade in paper swaps. Our traders may take open positions when they are of the view that their open positions would likely allow profit from the market trend based on their market experience. The Paper Trader will have to strictly adhere to the trading strategy and observe the stop loss limit. Once the open position is created, the Paper Trader will monitor the market and his open position on a 24-hour basis through his oil broker. As in the case for hedging, the Paper Trader will submit the trade details to the Risk Controller who will check the details before recording them into the centralized database.

Materially False And Misleading Statements Issued During The Class Period

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26. The Class Period commences on or about March 27, 2003. At that time, the

Company issued a press release, entitled "Full Year Financial Statement And Dividend

Announcement, therein the Company stated:

Review Of Performance

Turnover increased by 60.8% from S$1,051.0 million to S$1,689.6 million. The Group has actively built up its international trading activities through the recruitment of experienced traders. This doubling of the oil trading team to 10 traders has resulted in a large increase in the revenue base of international trading, especially in the black petroleum and crude oil segments. Black petroleum products and crude oil together accounted for about 50% (S$851,531) of the turnover in 2002, compared to only 27.6% in 2001.

Gross profit, excluding that in the area of strategic investment, slipped 14.5% to S$38.3 million from S$44.8 million, due mainly to two factors. More customers have requested for floating price contracts, instead ofthe fixed contracts in the past, to better track the prevailing market conditions. The Parent Group had negotiated for reduced commissions to which CAO had agreed to in view of continuing long-term benefits. In return, upon representation by CAO, the Parent Group had agreed to drop its request for management fees which was provided for previously in 2000. In addition, the Group also started trading in new products whose margins are traditionally thin. To establish its market presence, the Group was aggressive in its pricing to build up the base for future trades.

In July 2002, the Group finalised and signed two agreements pertaining to its strategic investments in a 33%-equity stake in Shanghai Pudong International Airport Aviation Fuel Supply Corporation Ltd ("SPIA/AFSC ) and a 5%-equity stake in Spanish oil giant Compania Logistica de Hidrocaburos S.A. ("CLH ). The respective agreements provided for the Group ' s share of SPIA/AFSC's profits and share of dividends from CLH to accrue from 1 January 2002.

SPIA/AFSC is the sole supplier of jet fuel at the Shanghai Pudong International Airport (SPIA) and the owner of a 42 km pipeline directly connecting SPIA to Shanghai Wai Gaoqiao port. CLH owns the largest network of oil pipelines and storage facilities throughout

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Spain and has an 83% market share of its gasoline and gas oil distribution, and 100% market share of its jet fuel distribution. CLH offers the Group a solid base in Europe from which to extend its jet fuel business in the European market.

27. Also on March 27, 2003, the Company issued a press release entitled "China Aviation

Oil Reports Significant Gains in 2002 From Its Successful 3-Pronged Strategy, therein the

Company stated:

Mainboard-listed China Aviation Oil (Singapore) Corporation Limited ("CAO ) released its results for the financial year ended 31 December 2002 ("FY 2002 ) and said its strategy to strengthen the Group's revenues and profitability through downstream investments in oil and gas-related infrastructure to complement its jet fuel procurement and international oil trading businesses has paid off handsomely.

CAO said that based on the agreements it had signed for two major investments in FY 2002 which had provided for CAO's share of profits and dividend distribution to accrue from January 2002, the Group had recorded pro-forma profit before tax of S$66.5 million and net profit after tax of S$57.9 million, thus registering pro-forma year-on-year growth of 49.5% and 42.9%, respectively. Of the total interim dividends from CLH for 2002, 2.5 million Euros (S$4.6 million) were received in March 2003, and will be reflected in the FY 2003 results.

However, in adopting the accounting treatments of offsetting against the respective costs of investments for both CAO's share of profits from SPIA/AFSC for the period 1 January to 30 June 2002, as well as the first dividend payment by CLH in July 2002 for 1.4 million Euros (S$2.4 million), the Group recorded a profit before tax of S$54.6 million for FY 2002 (22.8% increase over FY 2001) and a net profit after tax of S$48.2 million (18.9% increase over FY 2001's S$40.6 million).

In July 2002, the Group invested in a 33%-equity stake in SPIA/AFSC , the sole supplier of aviation fuel at the Shanghai-Pudong airport, and a 5%-equity stake in CLH, Spain's leading company in the petroleum transportation and storage market and the owner of an exclusive network of oil pipelines and storage facilities in the country.

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The two investments comprised the third prong of CAO's long-term strategy to reduce dependence on jet fuel procurement for the civil aviation industry in China, and to position the Group to emerge as an international player in downstream oil and gas-related infrastructure and logistics and also as a major international oil trading company.

Group revenue jumped 60.8% to S$1.69 billion from FY2001's S$1.05 billion. The higher revenue in FY 2002 was attributed to CAO's doubling of its trading team to 10 experienced traders. This resulted in a significant increase in the revenue base of international oil trading, in particular a 97%-rise in revenue to S$527.7 million from Black Petroleum Products, which include fuel oil used as fuel for power stations and marine boilers, and also contributions from crude oil trading.

Said Mr. Chen Jiulin, CAO's Managing Director and CEO, "The uncertainties in the global market worsened by the then-imminent U. S. military strike against Iraq made 2002 a challenging year. Against this difficult operating environment, our strategy ofpursuing downstream integration into oil and gasrelated infrastructure and industrial businesses and expanding our international oil trading has stabilised the Group's performance.

We are also optimistic offorging strategic alliances with international players in the near future. Going forward, the Group is fundamentally in a much stronger position now and able to capitalise on more opportunities that will springboard the Group towards our vision of becoming a global player in the oil industry.

28. On August 29, 2003, the Company issued a press release, entitled "1H/2Q Financial

Statement Ended 30 June 2003, therein the Company stated:

Review Of Performance

The Group achieved net profit after tax of S$11.3 million for the second quarter of 2003 compared to S$7.9 million for the corresponding period of 2002, an increase of 41.9%.

Revenue increased 15.7% to S$465.8 million from S$402.6 million in second quarter 2002, a result of the Group increasing the number of professional traders employed. The 41.9% increase in net profit is attributed to the Group's three-prong strategy - investing in oil-related assets, expanding

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international oil trading and jet fuel procurement which was fully realised from July 2002 with the acquisition of equity stakes in Spanish oil giant Compania Logistica de Hidrocarburos ("CLH ) and Shanghai Pudong International Airport Aviation Fuel Company ("Pudong ).

The increase in Other Income of 15.6% is substantially due to the receipts ofthese dividends from CLH for FY 2002, equivalent to S2.3 million in the second quarter of 2003. Share of results of associate company Pudong amounted to S$8.7 million. Thus, CAO's two strategic investments contributed 77% of the Group's pretax profits.

The outbreak ofthe SARS epidemic during the second quarter further underscored the effectiveness of the Group's three-pronged strategy in stabilising profits. The short-term negative effect of SARS on the Group's jet fuel procurement business and Pudong's operations as outlined in the Group's announcement on 7 May 2003 did not extensively affect the Group as anticipated. As the authorities in China were able to contain the virus from spreading further, demand ofjet fuel imports have since rebounded in July 2003 in line with the increasing reinstatement of flights back to pre-SARS levels.

Gross profit decreased to S$6.5 million compared to S$10.9 million, a decrease of40.6%. This was due to the reduction ofcommission for jet fuel procurement beginning from the second halfof2002. Another contributing factor was that the margins for new products traded from the second half of 2002 are traditionally low. These factors, coupled with the fact that the Group has to trade margin to establish its presence in the international oil market, reduced the gross profit of the Group.

Commentary On Prospects

***

Strategic investments, international oil trading and jet fuel procurement are all on track for growth in the current quarter. Further normalization of procurement volumes should be seen in the fourth quarter as well.

In July 2003, the company signed a syndicated loan agreement with 10 banks for a transferable term credit facility of US$160 million. The proceeds of the loan would be used for working capital and to finance any investment opportunities that may arise. Whether the

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loan is ultimately drawn down and how much of it would be drawn down depends on the investment opportunities that the company has been considering, including possibilities in the US, China and ASEAN. The impact on earnings ifthe loan is utilized depends on the amount of draw down and the use of the loans.

29. On or about November 15, 2003, the Company issued a press release , entitled "3Q

Financial Statement Ended 30 September 2003, therein the Company stated:

Review Of Performance

The Group achieved net profit after tax of S$10.4 million for the third quarter of 2003 compared to S$8.0 million for the corresponding period of 2002, an increase of 29.2%. Turnover increased by S$10.0 million or 2.0% to S$511.8 million from S$501.8 million in third quarter of 2002.

Gross profit increased to S$13.4 million compared to S$6.6 million, an increase of 101.4%. Record sales ofjet fuel procurement volume posted in the third quarter of2003 coupled with healthy international oil trading profitability contributed to the strong growth in the gross profit.

Operating expenses increase by S$3.4 million due to the increased number of staff that the Group employed for its expansion in international oil trading, including traders and the necessary support staff. In addition, the Group incurred S$2.8 million arrangement fee for its syndicated loans, which were expensed in 3Q 2003.

The Group's share of profits before tax from associated companies decreased from S$9.1 million in 3Q 2002 to S$6.6 million in 3Q 2003, a decrease of 27.7%. The decrease was due to an increase in international oil prices without any corresponding increase in selling price, which is set by the Chinese Government, and the mix between imports and domestic supply that the Pudong associate provided. In 3Q 2003, the Company received from Pudong a distribution of retained earnings of RMB 39.6 million (S$8.3 million) accrued in years prior to 2002. This was offset against the purchase price for Pudong. In addition, the company received from Pudong a dividend of RMB 105.6 million (S$22.4 million), which was paid out of the

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financial year 2002 profit. The distribution of the retained earnings and the dividend from financial year 2002 profit have no effect on the results of the Group.

In July 2003, the Group signed a syndicated loan agreement with 10 banks for a transferable term credit facility of US$160 million. The proceeds of the loan would be used for working capital and to finance any investment opportunities that are successfully negotiated by the Group. As of the date of this announcement, the loan facility has not been drawn down.

Commentary On Prospects

There has been a steady increase in jet fuel procurement volume for China since the ending of the SARS epidemic. The 3rd quarter jet fuel procurement volume was the highest to-date, and the Group expects the 4th quarter procurement volume to be the highest for the year 2003.

The Group is currently engaged in negotiations to invest in assets in China, USA and ASEAN. The conclusion of any deal depends on the Group being satisfied that the investments meet or exceed the investment criteria laid down by the Group must be oil related; may involve infrastructure; must offer opportunity for synergy with our existing business lines, and more broadly with the Group three-pronged strategy; and must be available at a fair price.

The Group expects that the current soft interest rate environment may change in the near term. The US economy is expected to grow, and though pronouncements have been made to the effect that the US Federal Reserve is not expected to adjust rates in the near term, the Group has had discussions with banks on the possibility of hedging interest rate exposure on the syndicated loan in the event that the syndicated loan is drawn down. The reduction in Shanghai Pudong's gross margin is expected to carry forward to the 4th quarter of 2003. As in the 3rd quarter, the effect will carry through to the net profit of Shanghai Pudong and ultimately the Group's share of Pudong's net profit. However, the effect on the Group's performance may be offset by contributions from the volume increase in jet fuel procurement.

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30. On February 5, 2004, China Oil announced that it had purchased a 24.5% stake in

South China Bluesky Aviation Oil Co. Ltd ("Bluesky") from Fortune Oil Plc of the UK. More specifically, the Company, in its press release, stated:

Bluesky is 51 %-owned by CAO's sister company, China Aviation Oil Supply Corporation ("CAOSC"); oil major BP holds 24. 5%. Bluesky owns all of the jet fuel supply infrastructure in the 15 airports in Central and Southern China, and is the sole jet fuel supplier to all domestic Chinese and foreign airlines in that region. Among these airports are those in the five provincial capitals, i.e., Guangzhou in Guangdong Province , Nanning in Guangxi Autonomous Region, Wuhan in Hubei Province, Changsha in Hunan Province, and Zhengzhou in Henan Province. In addition, Bluesky serves the four tourism airports of Guilin and Beihai in Guangxi Autonomous Region, Zhangjiajie in Hunan Province, and Yichang in the Three Gorges area of Hubei Province.

Mr. Chen Jiulin, CAO's Managing Director and CEO, said, "So far, this is the largest investment project we have entered. It will significantly add to our comprehensive network of businesses in China. The acquisition will not only bring us an immediate positive contribution to earnings, but more importantly, this investment will offer significant synergies with our Strategic Investments, International Oil Trading and Jet Fuel Procurement businesses."

Multiple Synergies With Current Operations

With the stake in Bluesky, CAO will directly reap a return on its investment, and enhance the existing imported jet fuel supply to this company. CAO will recognise as associate income 24.5% of Bluesky's profits in the financial year ending 31 December 2004. Moreover, CAO's current volumes of imported jet fuel supplied to Bluesky will increase. CAO gains direct participation in Bluesky's management with the appointment of 2 of 8 directors on the Board and assigning a deputy General Manager and other executives to Bluesky. CAO and its sister company will jointly hold 75.5% of Bluesky's shares outstanding.

In addition, this acquisition can create other synergies, as follows:

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Currently CAO has a 33% stake in the Aviation Oil Company at Shanghai Pudong Airport and an 80% stake in the Shuidong oil storage tank farm located adjacent to the Maoming refinery, China's second-largest refining facility. The combination of Bluesky, the Pudong associate and the Shuidong subsidiary creates a comprehensive network, providing significant presence in the Chinese market, and solidifies CAO's growth strategy. For example, Shuidong tank farm can directly supply jet fuel to Bluesky so as to ensure it an uninterrupted and possibly cheaper supply. Meanwhile, Bluesky's direct purchase of jet fuel from Shuidong will increase Shuidong's utilisation rates and CAO's return on the Shuidong investment, thus creating a smooth supply chain and enhancing CAO's value added. The same scenario can be applied among the Pudong, Bluesky and Shuidong operations.

The Bluesky stake expands CAO's presence in southern Southern China, one of the country's fastest-growing regions, giving it presence in more than half of the country and enhanced control of its markets . It also opens up new opportunities for CAO's fuel oil and crude oil trading in the South. According to experts, nationwide oil demand is expected to grow at an average annual rate of 12% over the next two decades . By 2020, total oil demand will reach 450 million metric tonnes a year. Dependence on supply sources outside of China will rise to 60%, compared with 30% currently. Of total imports, 60% will be consumed in southern China. Following the acquisition, CAO will have the further opportunity ofusing Bluesky's surplus tank capacity and networks to expand its International Oil Trading business in South China.

"Significant Long Term Growth Potential

The new Guangzhou Baiyun International Airport will became China's largest, measured by throughput capacity, with the opening of the first phase in July 2004, as major construction was completed in August 2003. In 2005 the new airport will record its first full year ofoperations. Longer term, a second phase ofconstruction, slated for 2010 completion, is expected to more than double the size of the terminal complex and, according to media reports, may attract up to 80 million passengers a year.

In that context, international courier company FedEx will relocate its regional hub from the Philippines to Guangzhou following the opening ofthe new facility, with 21 aircraft using Guangzhou airport services in the first stage. Chinese domestic and international airlines

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already have plans to add flights: Air France and Lufthansa have plans to fly to Guangzhou, while China Southern Airlines is planning flights to Paris and Frankfurt. These new routes should encourage other airlines to use Guangzhou as a hub, given China Southern's extensive domestic route network, particularly in central and southern China. China Southern Airlines, which has its headquarters and main hub at Guangzhou, is already gearing up for significant growth, with its announced purchase of 21 Airbus A320 aircraft in January and six Hafei Embraer ERJ-145LR aircraft in early February.

This is expected to contribute to the increase in jet fuel consumption and expand Bluesky's business. Together with an increase in international flights at the other provincial capitals' airports (which contribute approximately half of Bluesky's volume), it is anticipated that Bluesky's volumes will rise 25% in 2004 and a further 20% in 2005, with estimated growth of 15-20% each year through 2008.

However, despite such high growth, Bluesky's operating costs should reap efficiencies, for several reasons:

--The five capital and four tourism airports are brand new. There are unlikely to be any large maintenance-related investments in the near term.

--The total headcount has been reduced from over 1,000 in 1998 to 600 currently, as a result of efficiency and productivity initiatives. This has resulted in labour efficiency higher than the average for Chinese airport fuel supply companies.

--As such, unit operating costs in the Bluesky network are lower than the average for Chinese airport fuel supply companies.

It is anticipated that the high growth and low costs at Bluesky will yield a significantly positive impact to CAO even in the first year following its investment.

Attractive Acquisition Terms

The terms of CAO's acquisition are attractive, given the growth potential and synergies. CAO will pay to Fortune Oil PLC cash amounting to US$21.7 million or RMB180 million, will issue to it 37.76 million new shares, or 5.2% of CAO's enlarged shares outstanding, and will issue options to buy 26 million new shares at

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S$1.60 per share. This transaction involves no debt. Cash on hand is sufficient to meet the cash portion of the purchase, while the issue of shares and options will dilute earnings by less than the amount which the Bluesky stake enhances profitability. The issuance of new shares and options is designed not to increase CAO's gearing and to leave sufficient available funds for CAO's further investment plans. The arrangement also reflects Fortune Oil Holding's great confidence in CAO's potential growth. Barring unforeseen circumstances, there is expected to be a positive impact on CAO's 2004 aggregate earnings and earnings per share as a result of this deal.

Commenting on the agreement, CAO's Chairman, Mr Jia Changbin, added; "The advantages conferred by this deal are many. First, Bluesky is profitable in its own right, and offers opportunities for synergy with our existing businesses. Second, the pricing is attractive and will enhance earnings per share. Third, it may be possible to forge an even closer relationship with BP, currently our only other partner in Bluesky besides our sister company. In combination, these advantages show the good fortune CAO has had in securing such a lucrative opportunity

31. On February 16, 2004, China Oil announced additional off-spot cargoes and a deal with a new customer in Hong Kong, and said the Company's jet fuel procurement and international oil trading division was on track to achieve record growth in the financial year ending December 31,

2004 ("FY 2004"). Commenting on these results, defendant Chen stated:

We are pleased that CAO has kicked off 2004 with a superb start in all three ofour business lines - strategic investments, international oil trading, and jet fuel procurement. Our international oil trading division has made inroads into new markets. In 2003, our trading in crude and naphtha for Korea and Japan alone accounted for at least 700,000 MT; for 2004, transaction volume secured to date amount to 500,000 MT. From 2004 onward, this division will be able to reap the benefits of new synergies and trading opportunities arising from our recent investments in Bluesky and Shuidong oil tank farm. With growing economic prosperity, more people in China are willing to spend more on air travel. This is leading to higher jet fuel consumption and, in turn, better potential returns from our integrated investments in Pudong, Shuidong and Bluesky.

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32. On February 29, 2004, China Oil announced robust year-on-year growth in profits for the financial year ended December 31, 2003 ("FY03 "). The Company's three-pronged business strategy proved resilient in the face of adverse conditions - the Iraq war, the outbreak of SARS, and the ongoing threat ofterrorism - and enabled the company to post growth in all business lines. More specifically, the Company, in its press release, stated:

Normalised profits growth of 60%

The Group recorded net profit after tax ("NPAT") of S$54.3 million for FY03, a 12.5% increase over FY02's S$48.2 million. Profit before tax ('PBT") was S$67.1 million, a 22.8% gain on the financial year ended 31 December 2002 ("FY02"). However, the FY02 results included exceptional items amounting to S$12.7 million, arising from the write-back ofunutilised provisions for management fees and staff bonuses in prior years. These exceptional items were included in FY02's fourth quarter (Q4 FY02). Excluding these exceptional items, pre-tax profit for FY03 rose 60.0% over FY02.

For Q4 FY03, CAO's PBT and NPAT were S$20.6 million and S$14.5 million, respectively. Stripping out the exceptional items from Q4 FY02 earnings, Q4 FY03's PBT thus was up 62 . 9% over Q4 FY02.

Meeting the challenges of a difficult year

Commenting on the above results, Managing Director and CEO Mr. Chen Jiulin said, "We are pleased that our diversification strategy has prevailed through the toughest trading conditions to date during the greater part of2003. Market conditions were buffeted by the outbreak of war in Iraq, continued terrorist threats, and the SARS epidemic. Such circumstances were unprecedented and beyond our control, with special challenges for oil- and China-related companies.

Oil prices fluctuated substantially over the year.; SARS decimated Chinese domestic air travel and flights were dramatically curtailed in 2Q. Our good results that quarter attest to the efficacy of our risk-management systems and to the acumen of our experienced traders. The subsequent strong rebound in jet fuel demand in 3Q & 4Q more than offset the earlier fall. Meanwhile, as expected, strategic investments were the main contributor to our bottom line. Profits

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from our investments , Compania Logistica de Hidrocarburos ("CLH") of Spain and Shanghai Pudong International Airport Aviation Fuel Supply Company ("Pudong"), accounted for 68% of FY03's PBT. International oil trading and jet fuel procurement accounted for 14% and 18% respectively, owing largely to the exceptionally strong growth in procurement volumes we saw in the second half of the year."

Investments support growth

The total contribution by Strategic Investments for the year, net of goodwill amortisation, was S$45.3 million at the pre-tax level, compared with S$19.2 million in FY02, for a 137% gain.

Associate profits, contributed by 33%-owned Pudong increased 68.9% to S$34.5 million. FY03 was the first year CAO equity-accounted Pudong's full -year results, and the contribution was less than expected. As previously reported, this was due to the Chinese authorities holding the resale price of jet fuel constant despite increases in international oil prices, in order to help the domestic aviation industry through the SARS crisis. Although Pudong's gross margin saw a gradual reduction during 2003, it is expected to stabilise in 2004. In addition, three dividends were received from 5%-owned CLH of Spain in FY03, achieving good returns on the investment.

Trading and procurement have a great year

Group revenue from CAO's international oil trading and jet fuel procurement businesses rose 43.5% to S$2.43 billion, ofwhich sales in clean petroleum products accounted for 60%. Trading gross profit increased 20.3% to S$46.1 million. In Q4 FY03 alone, the Company recorded a 14.35% increase in revenue to S$654 million compared to Q4 FY02, while gross profit for the quarter rose 80.8% over the year-earlier period to S$12.7 million.

Operating expenses increased by S$9.1 million, due to various factors: the Company's increased headcount, including skilled traders on the back of expansions in the international oil trading division; a full year's amortization of goodwill for Pudong acquisition; and the US$1.6 million arranger fee for the US$160 million syndicated term credit facility signed in July 2003. As of 29 February 2004, this facility has not been drawn down, as cash on hand was sufficient to fulfil the cash component in the recent transaction to acquire Fortune

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Aviation Holding, whose sole asset is 24.5% of the shares outstanding of South China Bluesky Aviation Oil Co., Ltd ("Bluesky").

Financial standing remains strong

During 2003, CAO received from Pudong a dividend of RMB 105.6 million, paid out of Pudong's FY02 profit. It also received a distribution of retained earnings of RMB 39.6 million accrued in years prior to 2002, which was offset against the purchase price. Neither transaction had an effect on the Company's profits.

During the year, CAO was awarded an extension ofits Global Trader Program membership for an additional five years. The Company continues to pay a concessionary tax rate of 10% for qualifying transactions.

Positive outlook in place

Looking ahead, Mr. Chen added, "Currently, plans are progressing smoothly for CAO, but we must be prepared for any shocks in the external environment . With our new investments , Bluesky and the Shuidong oil tank farm, boosting our oil-related infrastructure portfolio, the Group is now in a much stronger position to meet challenges as they arise.

Jet fuel procurement volumes for Q1 FY04 will be the highest ever for the quarter, marking a third consecutive quarterly record. Judging by current trends , we expect to maintain or exceed 2003 levels. We also still have a substantial 'war-chest' to enhance our bargaining power as we consider various investment opportunities , and we will continue to pursue more strategic investments according to our own timeline, as well as our strict investment criteria."

CAO Chairman Mr. Jia Changbin said, "CAO has managed to grow shareholder value in 2003 despite challenging external events. In view of the results and continuing positive outlook, the Board has proposed to reward shareholders with a dividend of 3.5 Singapore cents per share, and two bonus shares for every five shares held, which translates to a dividend yield of 1.8%, will further increase our shares' liquidity, and will express our gratitude to our shareholders for their loyalty through a challenging but ultimately rewarding year.

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The Group's 'growth triangle' is now firmly in place, comprising our head office in Singapore, the world's 3rd largest oil trading hub; Pudong in Shanghai, China's economic power-house, and Fortune Aviation/Bluesky and Shuidong in the heart of China's southern economic region. Additionally, CAO has top-level access to global oil majors through our investment in CLH. Thus, we are optimistic CAO is on track to achieving record profitability in 2004."

33. On March 9, 2004, China Oil announced details of its jet-fuel procurement requirements for the April-June 2004 quarter. Total volume for the quarter was expected to grow at least 84% compared with the April-June 2003 quarter, and 33% compared with the April-June

2002 period. More specifically, the Company, in its press release, stated:

Mr. Chen Jiulin, CAO's Managing Director and CEO, said, "This figure represents only the initial bulk purchase, and there may be additional spot tenders later in the quarter. The high volumes we expect in the upcoming period follow on from the strength we saw in January through March, as recently demonstrated with our additional spot orders, announced only a few weeks ago. While April to June is usually a relatively quiet period forjet fuel procurement, this year the period will see the fourth consecutive quarterly record in required volumes. "

Growth at major airports

Requirements for the quarter include 210,000 metric tonnes for delivery to Beijing Capital International Airport, 210,000 metric tonnes for delivery to Pudong International Airport, and 90,000 metric tonnes for delivery to Guangzhou Airport. The total thus amounts to 510,000 metric tonnes, compared with 277,400 metric tonnes in April-June 2003.

Pudong demand is the most significant driver of growth. As shown in the table below, Pudong requirements have grown steadily, and the Pudong International Airport now comprises a major part of total demand. (2003 numbers were slightly distorted by SARS, which disproportionately affected Beijing air travel demand.) CAO benefits in this regard not merely through its procurement activity, but also through its 33% stake in the Pudong airport jet fuel supply company. (The Beijing airport jet fuel supply company currently is 100% owned by CAO's parent company.)

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***

Bluesky growth will not be significant in April-June, but is expected to grow dramatically in subsequent quarters . This is because in 2004, the new Guangzhou Baiyun International Airport is expected to open, at significantly higher capacity than the existing airport. It is expected that in addition to this growth in overall jet fuel consumption by Bluesky, the percentage of demand served by imports - that is, provided by CAO - will rise. The new airport will be connected to Huangpu port by a jet fuel pipeline that has specifically been built in order to allow greater access by imported fuel.

Optimal timing

Mr Chen continued: "This year, CAO expects to see a string of positive developments. Procurement is obviously having a strong first half. Investment contributions should rise dramatically. First there is the maiden contribution of our recent acquisition of the Fortune Aviation Holding stake, which owns 24.5% ofBluesky. Furthermore, there is the opening of the new Guangzhou Baiyun International Airport during the course of this year, an event likely to boost Bluesky's profitability significantly. In addition, several of the longer-term trades that we concluded in 2003 will bear their greatest fruit in 2004. Overall, therefore, all three of our business arms are growing, and we are extremely bullish on our prospects for the coming year."

34. On August 31, 2004, the Company issued a press release entitled "China Aviation

Oil's Jet Fuel Procurement Volume Hits Record Of 2.59 million Metric Tonnes In 2004, Up 30.2%

From 2003." The press release, in relevant part, stated:

SGX Main Board-listed China Aviation Oil (Singapore) Corporation Ltd ("CAO") announced that its initial tender forj et fuel procurement volumes during the October-December quarter was some 43.8% higher than the initial tender for the comparative period a year earlier. It also announced that full-year procurement volumes would be at least 30% higher than those recorded in 2003 , reaching a record 2.59 million metric tonnes.

Mr. Chen Jiulin, CAO's Managing Director and CEO, said, "The large size of the upcoming quarter's fuel requirements is strong evidence that the commercial aviation sector in China remains robust.

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As the substitution ofimportedj et fuel for domestic production began in the latter part of 2003, the effect of such substitution on year-on-year comparisons has now been eliminated. Despite this, the numbers still definitively point to an upward trend. "A record year is clinched.

CAO, on 24 August, issued an invitation to tender for 630,000 metric tonnes of jet fuel, to be delivered during the October-December quarter. The tender closed 30 August and negotiations are underway with suppliers, including (among several others) Singapore Petroleum Company, in which CAO recently acquired a 20.6% stake. This tender is 43.8% higher than the initial tender made for the October-December 2003 quarter, and in line with the 630,000-tonne order placed for the July-September 2004 quarter. It is the fifth consecutive quarter in which volumes have exceeded 600,000 metric tonnes. In fact, the current fiscal year is the first in which volumes have exceeded 600,000 metric tonnes in all four quarters.

It should additionally be borne in mind that in most quarters, the initial bulk purchase proves insufficient to meet total quarterly demand, and additional spot tenders are required. In the October-December 2003 quarter, for instance, the initial 438,000-tonne order grew to 662,000 metric tonnes. It is thus reasonable to expect additional spot tenders in the upcoming quarter as well, and these will result in even higher growth.

For the full year 2004, the initial tender puts total procurement volume at 2,588,000 metric tonnes. This is 30.2% higher than the 1,988,000 metric tonnes recorded in 2003. If additional spot tenders take place between now and the end of the year, the total growth will naturally be higher still.

CAO's Chairman, Mr. Jia Changbin added: "On top of all the other positive news we have so far reported this year, it is gratifying to see that jet fuel procurement, one of our core businesses , remains so buoyant. As we have been saying over the past several months, CAO is clearly on track to report record earnings in the current fiscal year."

35. On April 26, 2004, China Oil announced that following additional spot contracts secured since the Company's last update on 9 March 2004, the latest total jet fuel procurement volume for the April-June 2004 quarter ("2Q2004") had grown 127% y-o-y compared to the total

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277,400 metric tonnes achieved for the corresponding second quarter in 2003 ("2Q 2003") and a

64.5% increase over 2Q 2002's total of 383,000 metric tonnes. More specifically, the Company, in its press release, stated:

Together with previously announced tenders of 510,000 metric tonnes on 9 March 2004, the total anticipated volume for 2Q2004 now stand at 630,000 metric tonnes, a 4.5%-increase over the January-March 2004 quarter, despite a seasonally weaker quarter.

The latest spot contracts for an additional 120,000 metric tonnes are slated for delivery to CAO's 24.5%-owned associate company in Guangzhou, South China Bluesky Aviation Oil Co. Ltd ("Bluesky") and 33.3%-associate company, Shanghai Pudong International Airport Aviation Fuel Supply Company Ltd ("Pudong") in four separate cargoes. Three cargoes of 90,000 metric tonnes are bound for Pudong.

Demand for jet fuel is expected to remain strong despite recent reports on initial cases of Severe Acute Respiratory Syndrome ("SARS") in China. Commenting on the above, Mr. Chen Jiulin, Managing Director and CEO of CAO, said: "We believe the additional spot orders CAO has recently received are strong signals that China's aviation industry is confident of continual performance despite the initial cases of SARS reported in China. Unlike last year when the authorities and industry players were caught off-guard by a disease that no one knew about until much later, since then all relevant parties have monitoring and alert systems in place for advance warning and adequate pre-emptive actions will be progressively taken at the onset of new SARS cases that can nip the disease in the bud."

36. On May 13, 2004, China Oil reported strong earnings for the period January-March

2004 ("IQ FY04"), thanks in particular to a strong recovery by the Company's 33%-owned associate company Shanghai Pudong International Airport Aviation Fuel Supply Company ("Pudong"). More specifically, the Company, in its press release, stated:

Managing Director and CEO Mr Chen Jiulin said "In 2004 we are seeing our three-pronged business strategy come to full fruition. Strategic investments are driving our profit growth and with market

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conditions remaining broadly favourable, our results should continue to improve throughout the year."

Fundamentals intact

Net profit in IQ FY04 was S$16.2 million, compared with S$18.1 million for the year-earlier period ("IQ FY03"). This decline is attributable to the fact that in 2003, a dividend received from Compania Logistica de Hidrocarburos ("CLH") in which CAO holds a 5 percent stake, amounting to S$4.7 million with respect to 2002 interim earnings, was recorded during the January-March period. By contrast, the equivalent dividend for 2003 interim earnings was booked by CAO in its October-December period ("4Q FY03 ").

Allowing for this timing difference, normalised after-tax profits rose 12.6 percent in IQ FY04 compared with IQ FY03.

However, even this relatively robust growth understates the actual strength of the Company's results, owing to a higher-than-usual percentage of fixed-price procurement contracts during the 2003 period. Typically, the Company does the vast majority of its procurement business on a floating-price basis, which minimises risk but sustains margins at lower levels. In the run-up to the Iraq war in early 2003, opportunities to enhance procurement margins were plentiful, and the Company took advantage ofthese by booking more fixed-price contracts. This had the effect of making growth in procurement business in 1 Q FY04 appear less significant than it was. In fact, total procurement volumes inclusive of spot orders in IQ FY04 were 603,000 metric tonnes, some 34 percent higher than 1Q FY03, and a record for the quarter.

Total turnover was S$583.4 million, down 8.8 percent from 1Q FY03. This decline was due to a cautious stance on trading activities, as difficult conditions persisted in international oil markets, discouraging large-scale positions. The Company's measured approach had the desired effect, however, boosting the overall profitability ofthe procurement and trading businesses. Gross profits were S$15.2 million, up 11 percent compared with the S$13.6 million booked in IQ FY03.

Pudong rallies

The real star for the quarter was CAO's associate company Pudong. After two quarters in which margins were squeezed by domestic

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jet-fuel pricing policies, Pudong returned to growth with a contribution of S$11 .2 million, up 19 percent compared with IQ FY03 . Quarterly volumes at Pudong gained 20 percent year-on-year, reaching 309,000 metric tonnes - a quarterly record. Meanwhile, domestic resale prices have also substantially recovered, enabling Pudong to post year-on-year growth in profitability as well.

This is a significant event in that January-March 2004 was the first quarter in which the Pudong contribution grew on a truly 'apples-to-apples' basis - that is, no one-time changes distorted the comparison. Regulations shifting international flights to Pudong Airport from Shanghai's Hongqiao Airport in the second halfof2002, following soon after CAO's acquisition of the Pudong stake, had obscured the pattern of organic growth that is now visible in the current quarterly figures.

Outlook grows brighter

The coming quarters offer good reasons for optimism. In the April-June period ("2Q FY04"), procurement volumes will reach another all-time high - not merely relative to 2Q FY03, but for any quarter. Despite April-June traditionally being a relatively slow season, in 2004 procurement volumes booked so far for the three-month period stand at an estimated 690,000 metric tonnes, the highest quarterly volume ever. (Estimates will vary from actual as not all loadings have been made as of this writing, and the possibility remains of additional spot cargoes being required.)

Margins will not suffer by comparison with the 2003 period like they did in 1 Q FY04, as the Company had reverted to normal, floating-price contracts during 2Q FY03. In addition, new investments should make maiden contributions in the quarters to follow. CAO's newly-acquired Shuidong oil storage tank farm and its 24.5-percent stake in South China Bluesky Aviation Oil Co Ltd ("Bluesky") should add to operating and associate profits, respectively. There may also be an initial contribution from a 20-percent stake that CAO plans to take in Horizon Terminals Ltd ("HTL"), the tank-terminal subsidiary of the Emirates National Oil Company ("ENOC").

A breed apart

Due to its bright prospects, CAO stands apart in a potentially adverse set of market conditions. At present the danger posed by SARS

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remains limited in scope. It is believed that cases recently reported in China will be successfully contained, although market sentiment may suffer temporarily. As well, CAO should not be impacted by fiscal restraints imposed by the government in an effort to cool down the rapid growth in China's economy, as these restraints are focused not on oil product demand but rather on runaway prices for certain specific asset classes , such as property. Indeed, all indications are for oil demand to remain robust throughout the year.

CAO should maintain profitability and growth, and at the same time solidify its place along the Chinese energy supply chain through its deepening relations with ENOC and HTL.

CAO Chairman Mr Jia Changbin said, "Under the circumstances, we are quite pleased with these results for IQ FY04. The rest of the year should prove even more satisfying. Our business model is being well-implemented, with the effect that future gains from new investments should come with regularity and speed. All in all, we remain confident in our ability to create value for our shareholders."

37. On August 12, 2004, China Oil reported strong, 48.6% year-on-year growth in earnings for the April-June 2004 quarter, led by contributions from the Company' s strategic investments, record volumes in its procurement operations and a still lower concessionary tax rate under Singapore's Global Trader Programme. More specifically, the Company, in its press release, stated:

For the April-June quarter, CAO reported net profits of S$16.7 million, representing 48.6% growth over the April-June 2003 quarter and 3.3% growth over the January-March 2004 quarter. Turnover for the April-June 2004 quarter was S$741.9 million, a gain of 30.6% over April-June 2003 and growth of 27.0% over January-March 2004.

Cumulative net profits for January-June 2004 reached S$32.9 million, representing growth of 12.0% over the January-June 2003 financial half-year and growth of 32.4% over the July-December 2003 half year. Turnover was S$1.3 billion, a 9.7% rise over the equivalent figure in the January-June 2003 and 9.0% growth over the turnover figure for July-December 2003.

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Mr. Chen Jiulin, CAO's Managing Director and CEO, said, "Despite the serious challenges in oil markets worldwide in the first two quarters of the current financial year, CAO has performed well and turned in strong earnings growth. The coming quarters should see further growth with the addition of contributions by our new investments undertaken in 1H 2004, as well as continued strength in Chinese aviation-related demand."

Strong performance by Pudong associate, dividend from CLH

The 33%-owned Pudong associate contributed 67% of CAO's pretax profits in the April-June quarter, or S$12.9 million before amortisation of goodwill. This contribution was 48.2% higher than that provided in the April-June 2003 quarter, and 15.2% higher than the contribution in January-March 2004. Pudong made significantly higher volume deliveries in the quarter relative to those provided in the year-earlier period, during which aviation demand was adversely impacted by the SARS epidemic.

In addition, the Company received a dividend from its 5% investment, Compania Logistics de Hidrocarburos ("CLH"). The payment, amounting to the Euro equivalent of S$2.2 million, was received during the April-June quarter, compared with S$2.3 million in April-June 2003. Data for the half-year, in which the S$2.2 million received in 2004 compares with S$ 7.0 million last year, is distorted by the fact that in 2003, an unusually-timed dividend was recognised in the January-March quarter with no corresponding payment received this year. Historically, CLH has paid dividends twice a year.

A move to an even lower tax rate

Owing to its scale, profitability and contribution to the local economy, CAO has been granted new status under Singapore's Global Trader Programme ("GTP"). This new status allows the Company to enjoy a 5% concessionary tax rate on qualifying income, namely, income relating specifically to oil trading - in CAO's case, that provided by its international oil trading and jet fuel procurement business units. CAO previously had enjoyed a 10% tax rate on a smaller income base. The new tax rate applies retroactively to income accruing from 1 January 2004 for the next five years. As a result, tax provisions in April-June 2004 fall 27.3% compared with the April-June 2003 figure, despite 45.3% growth in pretax profits between the two periods.

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This means that CAO's international oil trading and jet fuel procurement businesses should operate at higher levels of profitability , all other factors held constant, than in previous financial years . To give a sense of the scale of this change in tax rate, CAO notes that if the lower rate had been applied to 2003 full-year earnings , the Company would have paid S$ 1.9 million less in total taxes.

Record volumes by procurement division

CAO's procurement business saw its highest volumes ever during the April-June quarter. Despite the typical pattern involving slower demand during this particular quarter, CAO procured approximately 695,000 - 700,000 metric tonnes during April-June 2004, or 132% higher volumes than in April-June 2003. Semi-annual procurement volumes were also at record levels. In January-June 2004, procurement was 1.3 million metric tonnes, up 65.8% compared with January-June 2003 and 7.7% higher than the volumes of July-December 2003, a period traditionally considered the high season.

Outlook includes additional contributions from 2004 investments, continued procurement strength

Current business and market conditions give CAO many reasons for optimism over the next few quarters. First, in the past several months the Company has made a number of investments that, owing to transaction timing, have not added their contributions. It is expected that such investments will shortly have positive contribution. For instance, during the April-June 2004 quarter, CAO established a new subsidiary, China Aviation Oil Holding Xinyuan Petroleum Corp., with the purpose of owning and operating CAO's business at the Shuidong tank farm in Southern China. As this company was established only in June 2004, there was no contribution during the quarter under discussion.

CAO's agreement with Fortune Oil Plc to acquire its interests in South China Bluesky Aviation Oil Company ("Bluesky") and Fortune Aviation Holding Ltd awaits approval by China's State Council, buyer and seller having completed all transaction details. It is expected the contribution from this 24.5% stake in Bluesky will begin shortly.

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The New Guangzhou Baiyun International Airport commenced operations on 5 Aug 2004 and has become the largest airport in China. Its passenger capacity is expected to reach 25 million in 2005, five years ahead of the original plan.

According to an article in Lianhe Zaobao dated 11 August 2004 on the new airport "Beyond White Cloud is Bluesky", the total jet fuel consumption at Guangzhou Baiyun airport is expected to increase 46% compared to 2003, to reach 650,000 metric tonnes in 2004 and 850,000 metric tonnes in 2005. Bluesky, the exclusive supplier of aviation fuel to 15 airports in Southern China including the Guangzhou Baiyun airport, is expected to benefit directly from the switch to the new airport, with profits for 2004 and 2005 from Bluesky's operations at this airport alone projected to grow by 22% and 23% to RMB121 million and RMB149 million respectively. In addition to future contribution from associated company Bluesky, the significant increases in demand for jet fuel at the new Guangzhou airport will also boost CAO's jet fuel procurement operations.

Meanwhile, jet fuel procurement remains at high levels . The initial bulk tender for the current, July-September quarter, called for 630,000 metric tonnes ofjet fuel, CAO's largest initial tender ever. Signals coming from China indicate that jet fuel demand remains very robust.

CAO's Chairman, Mr Jia Changbin added: "2004 is a landmark year for CAO, in which strategic investments become a prime focus of attention. However, the Company's businesses in international oil trading and jet fuel procurement also are contributing - despite some harsh trading conditions and uncertain markets . It is thus fair to say that CAO is actively and successfully pursuing its objective of becoming the first overseas Chinese integrated oil company."

38. On August 31, 2004, China Oil announced that its initial tender for jet fuel procurement volumes during the October-December quarter was some 43.8% higher than the initial tender for the comparative period a year earlier. It also announced that full-year procurement volumes would be at least 30% higher than those recorded in 2003, reaching a record 2.59 million metric tonnes . More specifically, the Company, in its press release, stated:

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"The large size of the upcoming quarter's fuel requirements is strong evidence that the commercial aviation sector in China remains robust. As the substitution ofimportedjet fuel for domestic production began in the latter part of 2003, the effect of such substitution on year-on-year comparisons has now been eliminated. Despite this, the numbers still definitively point to an upward trend."

A record year is clinched

For the full year 2004, the initial tender puts total procurement volume at 2,588,000 metric tonnes. This is 30.2% higher than the 1,988,000 metric tonnes recorded in 2003. If additional spot tenders take place between now and the end ofthe year, the total growth will naturally be higher still.

CAO's Chairman, Mr Jia Changbin added: "On top of all the other positive news we have so far reported this year, it is gratifying to see that jet fuel procurement, one of our core businesses, remains so buoyant. As we have been saying over the past several months, CAO is clearly on track to report record earnings in the current fiscal year."

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39. On September 17, 2004, the Company wrote a letter to Singapore Exchange

Securities Trading Limited in response to a query regarding trading activity. The letter stated in part:

Ms. Elsie Chua Singapore Exchange Securities Trading Limited 2 Shenton Way #19-00 SGX Centre 1 Singapore 068809

Dear Ms. Chua

We refer to your letter dated 17 September 2004 in relation to a substantial increase in the price and trading volume of our shares today. Our replies to your questions are as follows:

Question 1: Are you aware of any information not previously announced concerning you (the issuer), your subsidiaries or associated companies which, if known, might explain the trading?

The Company is not aware of any information not previously announced that might have led to the substantial increase in the price and trading volume of our shares today.

Question 2: Are you aware of any other possible explanation for the trading?

The Company is not aware of any other possible explanation for the trading.

Question 3: Can you confirm your compliance with the listing rules and, in particular, Listing Rule 703?

The Company confirms that it is in compliance with the listing rules of the SGX-ST, in particular Rule 703.

40. On October 21, 2004, China Oil announced that it had been informed that the Parent

Company, China Avaition Oil Holding Company has sold approximately 15% of their share in the

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Company through a share placement. Deutsche Bank AG, Singapore Branch, acted as sole sole bookrunner on the share placement. The shares were placed to institutional investors.

41. On October 28, 2004, China Oil added the following supplementary information to the announcement on October 21, 2004, relating to the Share Placement by our Parent Company,

China Aviation Oil Holding Company:

First, this transaction was made by our parent company. Our parent is just like any other substantial shareholder, and is entitled to make its investment decisions as it sees fit. To date it has been remarkably solid as a shareholder, maintaining its 75% stake for almost three years following our listing. Its independent decision to divest a stake was one in which CAO's role was limited by the nature of the transaction.

Second, the placement was made to institutional investors. This had the effect of broadening our institutional shareholder base. This is positive in itself, in that institutions in general tend to apply more rigorous analysis to their investments compared with retail investors. The greater presence of institutional investors in our roster will serve to ensure corporate best practices on our part, and so should be considered a net positive by all investors.

Third, this stake reduction by our Parent in CAO, from 75% to approximately 60%, will improve the liquidity of our shares, as 40% of our shares outstanding are now in public hands.

Fourth, on Thursday, 21 October 2004, CAO issued a Masnet announcement advising of the Share Placement. CAO also made a subsequent announcement on 22 October 2004 with regards to the notice of substantial shareholder's interest, in line with SGX-ST's listing requirements.

42. On November 12, 2004, China Oil announced results for the January-September 2004 period and the July-September quarter. For the nine-month period, profits rose 4.9% year-onyear to S$41.7 million. However, for the July-September quarter, net profits were S$8.8 million, down

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15.4% compared with a year earlier, due to weak contributions by the Company 's international oil trading division. More specifically, the Company, in its press release, stated:

On a pro-forma basis, pretax profits for the company exclusive of trading and changes in amortisation, as discussed below, would have been up 121 % year-on-year for the July- September quarter and 3 6% year-on-year for the nine-month period.

Mr. Chen Jiulin, CAO's Managing Director and CEO, said, "Despite the difficult trading environment, the quarter just ended has shown us yet again the wisdom of the Company's three-pronged business strategy. With strong contributions by our strategic investments and jet fuel procurement, we have again been able to diversify against weakness in one segment.

Review: Pudong has a remarkable quarter

CAO's 33%-owned Pudong affiliate had an exceptionally good quarter, growing its contribution by 148% year-on-year in the quarter, supported by strong deliveries and steadily improving margins. Pudong supplied a record 389 thousand metric tonnes ("MT ) ofjet fuel to airlines during the July-September quarter, some 60% higher than the volumes delivered in July-September 2003 and 11 % higher than volumes in the April-June 2004 quarter. At the same time, the margin also rose as deliveries to international flights continued to rise as a percentage of total. International flights accounted for 42.8% oftotal deliveries during the quarter, the highest level on record.

Procurement, meanwhile, also remained robust as expected. CAO supplied 660 thousand MT in the three months, representing a 22% rise over year-earlier figures. This was easily the highest July-September quarterly figure ever, as travel demand at Pudong International Airport and elsewhere surged on healthy consumption growth in China.

The company's international oil trading division, however, had some setbacks in the form of adverse market movements. In a continuation of a pattern seen in oil market since mid-year 2003, choppy markets made profitable trading extremely difficult, and the company sustained an operating loss.

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Mr Chen said, "The direction of prices has been extremely hard to predict in the past several quarters, with market conditions unlike anything we have seen in nearly 25 years. CAO remains committed to stringent risk-management policies, and our main goal in trading is to support our jet fuel procurement and other operations. Nonetheless, markets do occasionally throw up conditions such as those we have seen recently, and their adverse effects cannot be completely hedged against. In order to ensure that this business remains a positive contributor to our bottom line, we're currently reviewing our risk-management criteria and may tighten them even further.

In other developments, CLH, in which CAO holds a 5% stake, paid no dividend during the quarter as expected. Financial expenses were down by 18.6% from the year-earlier period, due to the payment in 2003 of an arranger fee in connection with the US$160 million credit facility. Accounting changes regarding the amortisation of goodwill on the Pudong investment have eliminated the amortisation burden in 2004. Finally, the effective tax rate the company paid was up, as the majority of profits were contributed by Pudong, which operates in a higher tax regime than do the company's trading and procurement operations.

Proforma pretax profits up 121% year-on-year in July-September Thus, except for the international oil trading division, earnings were not merely healthy but quite strong. A proforma adjustment, for analytical purposes, to remove the effects of trading losses, and to standardise the treatment of amortisation expense, shows that pretax profits grew 121% year-on-year in the July-September quarter, as well as 36% year-on-year for the entire nine-month period.

Outlook: Still highly positive The full-year outlook is still quite positive. January-September earnings illustrate this point well. Even with the third-quarter operating loss, net profit year-to-date is S$41.7 million, up 5% over year-earlier figures. Turnover, at S$2,208 million, is up 24% year-on-year. Pudong's nine-month contribution is S$40.5 million, some 64% above year-earlier figures and indeed 17% more than the entire associate contribution for all of2003 (exclusive ofamortisation expense, which would make the growth even larger).

In addition, 2004 procurement volumes so far in hand total 2.65 million MT, compared with 1.88 million MT in 2003. The Oct-Dec quarter may see a dividend declared by CLH; such was the case in

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2003, and January-June 2004 net earnings , the most recent figures available, were up 36% year-on-year. In sum, it remains a safe assumption that 2004 full-year earnings will exceed those of 2003, and thus will be at record levels.

In 2005, there should be major increases in earnings on the back of first-time contributions by new strategic investments. Two of these in particular - Bluesky and SPC - will likely contribute significantly. Other investments, including Xinyuan (Shuidong) and some not yet announced, should make smaller contributions.

Bluesky earnings will be driven by the opening, in August 2004, of the new Baiyun International Airport in Guangzhou. For January-September, Guangzhou passenger volumes were 14.9 million, and estimates now are for 20 million for the full year. In September alone, 1.9 million passengers used the Baiyun airport. International air passengers travelling to, from or through the Guangzhou airport have grown 80% in number in the first nine months of 2004, to 1.76 million. On the cargo side, volumes handled year-to-date have grown at a 23% pace. Fedex and UPS are currently in negotiations to establish operations at Baiyun; hub facilities by one or both of these companies should significantly boost volumes.

SPC continues to be a beneficiary of historically high gross refiner margins ("GRM ). CAO will begin recording associates ' contribution from its 20.6% stake in SPC following shareholder approval at the upcoming Extraordinary General Meeting. For reference, the current mean I/B/E/S estimate for 2005 is S$197 million, implying a contribution to CAO associate profits of S$40.6 million.

43. The statements contained in 1125-38 were materially false and misleading when made because defendants failed to disclose or indicate the following: (1) that the Company lacked adequate internal controls and risk management procedures; (2) that as a consequence the Company engaged in speculative derivative trading, forcing controlling shareholders to raise funds to cover margin calls on massive derivative losses ; and (3) that the Company kept $550 million in derivative trading losses of the books, thereby artificially inflating its financial results.

The Truth Begins To Emerge

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44. On November 16, 2004, China Oil announced that in order to respond proactively to conditions arising in the international oil trading business, it has revised its trading policy. The

Company would, by the end of November, exit all speculative derivative trading positions and would focus solely on physical trading business. The only derivatives trading would be for the hedging ofphysical cargoes . The effect would be a significant reduction in the risk exposure of the

Company amidst ongoing volatility in markets.

45. On November 30, 2004, China Oil announced that the Company had suffered significant losses from speculative oil derivative trading. As of November 29, 2004, the Company estimated that the total cumulative losses (both realised and unrealised) incurred by the Company were approximately US$550 million. To address the debt that had arisen from the Company's trading losses, the Company would be proposing a scheme of arrangement with its creditors for the settlement of all existing debts and liabilities. Accordingly, the Company had, on November 29,

2004, applied for and obtained, an order from the High Court of Singapore (the "Court ) pursuant to Section 210 of the Companies Act of Singapore for the Court to fix a date for the hearing of an application by the Company to convene a meeting ofits creditors for the purpose ofconsidering and ifthought fit, approving with or without modification a scheme ofarrangement proposed to be made between the Company and its creditors. More specifically, the Company, in its press release, stated:

Background to Losses From Derivative Trading

The Company commenced trading in oil derivatives on its own account from 2003. Whilst part of the derivative trading was for hedging purposes, the Company also engaged in speculative derivative trading.

In October 2004, international oil prices rose steeply leading to the Company having to face significant margin calls on its open derivative positions. The Company was unable to meet some of the

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margin calls arising from its speculative derivative trades, resulting in the Company being forced to close the positions with some of the counter-parties. From 26 October 2004 to date, the accumulated losses from these closed positions amounts to approximately US$390 million. The Company is in the process of closing the remaining outstanding positions and estimates the losses from the closure of these positions to be approximately US$160 million.

Action Taken by The Company

Since the advent of the above liquidity issues by the Company, the Company has taken the following steps:

1. Shareholder's Loan from China Aviation Oil Holdings Company ("CAOHC )

The Company has requested, and CAOHC granted to the Company, a shareholder's loan of approximately US$100 million for the Company to meet its liquidity requirements. The loan has been fully disbursed and applied to meet the margin calls and to satisfy part of the realised losses suffered by the Company.

2. Immediate termination ofthe Company's speculative oil derivative trading activities

To check the mounting losses suffered by the Company from the increasing oil prices, the Company has halted all its speculative oil derivative trading activities with the exception of the closing at the remaining open positions.

3. Suspension of duties of Mr Chen Jiulin

The Board ofDirectors further wishes to announce the suspension of duties of Mr Chen Jiulin, the Chief Executive Officer of the Company, with immediate effect pending the release of the report of the Special Investigation refered to below.

4. Special Investi gt`

The Exchange, pursuant to Rule 704(12) of the Listing Manual, has required the Company to instruct PricewaterhouseCoopers as special investigative accountant to review and investigate the Company's affairs relating to the incurrence of the loss and its surrounding

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circumstance and report its findings to the Exchange ("Special Investigation ).

Pending the release of the Special Investigation report by PricewaterhouseCoopers, the Company believes it is inappropriate to make any further comments on the circumstances relating to the incurrence of the derivative trading losses by the Company.

5. Appointment of a Special Task Force

The Board of Directors, with the support of CAOHC, has appointed a special task force ("Special Task Force ) led by Ms Gu Yanfei, General Manager, Investment Department of CAOHC and director of the Company, with the authority of the Board to lead the restructuring, investigation and rehabilitation process as well as to supervise the day-today operations ofthe Company on its behalf. The Special Task Force shall continue to manage the critical affairs ofthe Company until further announcement.

6. Negotiation with creditors

The Company has commenced negotiations with some ofits creditors to structure a settlement and allow the Company more time to work out a rescue package to maintain the Company's financial position. While some of the Company's creditors have been cooperative, certain of the creditors have issued demand letters and have threatened immediate legal action against the Company. The Company hopes that it will have the time to put together a settlement proposal acceptable to all its creditors.

7. The proposed scheme of arranement

Due to the pressing payment demands from the counter-parties to the Company's derivative contracts, the Company believes that there is little or no reasonable prospect of the Company having sufficient cash-flow to meet its immediate current liabilities in the short term with its current resources and continue with its core business of jet fuel procurement without a stay in the proceedings and claims faced by the Company. Accordingly, the Company intends to propose a restructuring of the Company's debt by way of a scheme of arrangement. The Company undertakes that any cash that it receives from its receivables and assets as at 30 November 2004 shall be utilised solely for continuance of the Company's core business and daily operations in order to preserve shareholder value until a

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settlement is reached. Ifthe cash from its receivables and assets is not sufficient for the above purposes, CAOHC will provide shareholder's loans or credit support to the Company. The Company will be in active discussions with its creditors to restructure its debt obligations and will keep shareholders informed of the progress.

8. Support from CAOHC

The Company has received a statement of support from CAOHC expressing its continued interest and support and that it will assist the Company in restructuring of its outstanding debts.

9. Participation in proposed restructuring efforts of the Company by CAOHC and Temasek Holdings (Private) Limited ("Temasek ) In addition, the Company has been informed that CAOHC has approached Temasek to seek Temasek's participation in the proposed restructuring ofthe Company that would be needed for the Company to remain viable in the future. Temasek currently has a deemed indirect stake of less than 2% in the Company, and is not aware of any other material interests in the Company, nor is it aware of any existing material contracts or business arrangements with the Company or CAOHC. Temasek does not have any stake in CAOHC.

Temasek has expressed an indicative interest in exploring a participation as an investor in the Company's restructuring efforts, and which participation currently contemplates the following:-

(a) CAOHC and Temasek would, in aggregate, inject funds of up to US$100 million (currently expected to be in equal proportions, that is to say, US$50 million each) into the Company as part of its restructuring. It is the intention that CAOHC and Temasek will hold (in the aggregate) a majority equity stake in the restructured Company; and

(b) the injection of funds would be on the basis of (i) satisfactory resolution of all issues relating to the Company, (ii) the scheme of arrangement (including the settlement of outstanding and/or contingent claims against the Company) being approved, sanctioned and implemented in accordance with section 210 of the Singapore Companies Act, and (iii) the other terms and conditions (including the obtaining of relevant approvals/waivers) in connection with the injection, all being commercially acceptable to Temasek. It should be noted that pending the finalisation of discussions between the

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Company, CAOHC and Temasek, and the entry into formal legal documentation relating to the proposed restructuring, CAOHC and Temasek would have no binding obligation to proceed with the restructuring of and investment in the Company. The Company is continuing to pursue active discussions with CAOHC and Temasek in relation to the terms of the proposed restructuring and investment, and will make the appropriate announcements as developments take place.

Restructuring Proposal

CAOHC will continue to assist the Company to put together and propose a restructuring proposal for all the Company's creditors in the near future. The Company hopes to put together a restructuring proposal acceptable to all the interested parties and allow the Company to continue its business operations. Suspension of trading in the Company's shares In the meantime, the Directors deem it necessary to request for suspension of trading in the Company's shares until a satisfactory arrangement has been agreed with the creditors of the Company or a scheme of arrangement of the Company's debts has been sanctioned by the Court. Subject to the confirmation of the Exchange, the trading of the shares of the Company will remain suspended until further notice.

Responsibilities of the Board of Directors

The Directors of the Company (including those who have delegated detailed supervision ofthis announcement) have taken all reasonable care to ensure that the facts stated in this announcement are fair and accurate and that no material facts have been omitted from this announcement, and they jointly and severally accept responsibility accordingly. Where any information has been extracted from published or publicly available sources, the sole responsibility of the Directors of the Company has been to ensure through reasonable enquiries that such information has been accurately extracted from such sources or, as the case may be, reflected or reproduced in this announcement.

46. On this news , trading in the Company's shares was suspended after the shares dropped to below S$1.00 per share, compared to prices as high as S$1.70 per share, at which the shares traded during the Class Period.

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Post Class Statements

47. On December 1, 2004, a press statement was issued by Securities Investors

Association (Singapore) entitled "China Aviation Oil's US$550 Million Derivatives Disaster." The press release stated in part:

Retail investors of CAO are in a daze . This is because only recently the parent company of CAO sold a sizeable block of shares to unsuspecting fund managers at $ 1.35 per share. Retail investors naturally took the position that if the smart money finds the stock attractive at $1.3 5, then at prices below that the stock must be a good prospect. Quite clearly they got it wrong. CAO had in the past repeatedly given assurances to investors that they had a good risk management system in place.

When the third quarter results were announced, CAO should have disclosed its open positions and potential losses, which was material information to investors. This is a failure in transparency.

The immediate questions that arise in the minds ofthe troubled retail investors are:

1. How did the company chalk up such a big loss within such a short time?

2. Were the independent directors aware of the developments and if so what actions did they take?

3. Did the auditors check the company to ensure that the risk control mechanisms put in place was [sic] in operation? Were they ignored by the Management?

4. Having a proper audit control and the necessary management controls internally, why was this allowed to happen?

5. What recourse do the retail investors have? Is it time to consider how the retail investors should be compensated or how their predicament can be addressed?

It is totally unacceptable for the Management to have allowed losses to run to $900m which is more than 3 times the net worth of the

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company ($225 m as of 31 Dec 2003) and more than 20 times the annual operating profit of the company.

48. On December 2, 2004, Financial Times published an article entitled "'Model of corporate governance ' fights for survival : CHINA AVIATION OIL: Investigators must establish whether CAO or its parent were aware of the size of their losses," The article read:

China Aviation Oil was the poster boy for the Chinese companies that have flocked to Singapore for a prestige listing.

It was feted by the local press as a model of corporate governance and investors eagerly bought its shares, which climbed by 215 per cent from the start of 2003 until last Monday when trading was suspended.

Speculation that CAO was in financial difficulties began in mid-November when it reported an unexpected fall in third-quarter earnings on undisclosed trading losses. Last week, it suddenly dropped a USDollars 221m bid to take a 20 per cent in refiner Singapore Petroleum after its parent blocked the deal without explanation. On Friday, Societe Generale cancelled a SDollars 300m (USDollars 184m) loan facility.

The question now confronting an investigation led by auditor PwC is when CAO and CAOHC, its parent, knew of the size of the losses, which exceed CAO's market value of SDollars 225m, and whether they engaged in insider trading when a 15 per cent stake of CAO was sold to institutional investors in late October.

On Tuesday CAO said it asked its parent for help when it had insufficient funds to cover its margin calls in October, although it did not state when the request was made . CAOHC provided an emergency loan of USDollars 100m.

CAO admitted it did not immediately reveal the losses, explaining that "while the company is aware of the obligations to disclose the trading losses, the company's primary concern is to ensure the survivability of the company in the face of the crisis".

It argued that a rescue plan for the company might have been threatened by an immediate disclosure.

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The losses occurred in spite of a risk control system policing its 10 traders that was meant to prevent sizeable trading losses, including automatically shutting down deals when a trader assumed losses of more than USDollars 500,000. There are suggestions that the system was somehow bypassed.

The underlying value of CAO's derivatives contracts was SDollars 2.lbn last year, compared with total sales of SDollars 2.4bn, according to the latest company report.

While CAO was struggling with mounting derivative losses in October, on October 20 CAOHC sold shares through a SDollars 196m placement arranged by Deutsche Bank. The offer was priced at SDollars 1.35 a share, a 14 per cent discount to its then share price. The deal cut CAOHC's stake to 60 per cent.

The share placement came five days before oil prices climbed to a record USDollars 55.65 on October 25 before falling back to USDollars 51.76 by the end of the month.

Deutsche Bank said it would answer any questions from regulators over its role in a sale. "The transaction was conducted entirely in accordance with normal market practice," Deutsche Bank said yesterday.

CAOHC, which is sending a team to Singapore to investigate, declined to comment on when problems at CAO became apparent. Asked if the parent company had been aware of difficulties at CAO when it made the share offer, a COAHC official said: "I cannot answer that question at this time."

COAHC said it would support CAO, but did not rule out the possibility of allowing the venture to fail.

Corporate governance is weak in China and state-controlled companies have often had particular problems controlling overseas units or those with capital market operations.

Neil Torpey, a partner in the Hong Kong office of law firm Paul Hastings, said there was no single model for how China handled failures of state-linked companies, with some being wound up with the consent of creditors, but forced liquidation by foreign-led investors also now a possibility.

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In the case ofCAO, which has a near-monopoly ofaviation fuel sales in China, Beijing might decide that it was in the national interest to keep the company afloat, Mr Torpey said. However, if the company went into bankruptcy, pursuing claims in mainland courts would also be a viable option for foreign creditors or investors, he said. Additional reporting by Joseph Leahy in Hong Kong.

49. On December 6, 2004, an Associated Press article entitled "China Aviation's

Ex-Chief to Face Probe," read:

The suspended head of a major supplier of jet fuel to China, under investigation for overseeing hundreds of millions of dollars in derivatives trading losses, has agreed to return to Singapore to face investigators, the company said Monday.

China Aviation Oil (Singapore) Corp. CEO Chen Jiulin left for China around the time the company acknowledged racking up huge losses after speculative bets on energy markets turned sour. The Singapore Exchange, where the company is listed, had asked China Aviation Oil to persuade Chen to return to Singapore.

"Mr. Chen has informed the company that he will return to Singapore sometime this week," the company said, adding that he went to China on Nov. 30 "to attend to family matters."

He has apologized to investors, according to a local media report.

50. On December 8, 2004, China Oil issued the following corporate update:

1) Cessation of All Oil Derivatives Trading Activities

Since its announcement on 30 November 2004, the Company has ceased all oil derivative trading activities. There are no open positions in respect of futures and options oil trading activities as at 7th December 2004, except for back to back oil option trades with three counterparties.

With regard to swap derivative trading activities, as of7th December 2004, 25 counterparties have unilaterally terminated their trades with the Company based on their contractual rights. There are 35 counterparties where their respective trades are still subject to market fluctuations. The Company has informed all the counterparties for the remaining back to back option trades and swap derivatives that the

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Company intends to terminate these trades immediately. The Company is monitoring the situation very closely to find a solution to close out these open positions with the respective counterparties.

2) On-going Discussions with Creditors

Members of the Special Task Force together with the Company's financial and legal advisers have been meeting with several of the Company's creditors to explain the Company's financial situation and to garner support for the Company's proposed Scheme of Arrangement. The support for the restructuring exercise by the Company's parent company, China Aviation Oil Holdings Company ("CAOHC"), has been reassuring for the creditors. The creditors that the Company have met so far expressed support to give the Company a reasonable time to restructure itself. These creditors understand that winding up or judicial management proceedings would undermine the restructuring exercise and scuttle the negotiations for support from CAOHC.

3) Co-Signing of Bank Account

The Special Task Force has put in place appropriate control mechanism and a daily reporting structure. As part of these control mechanisms, the Company has taken steps to appoint 2 authorised representatives from Deloitte & Touche Financial Advisory Services Pte Ltd to be co-signatories to the Company's bank accounts to control the outflow of cash.

4) Continuation of Core Business

The Special Task Force recognises that it is in the interest of the Company to carry on the core business of jet fuel procurement. Having considered the options available, the Company has taken steps to set up a new subsidiary company wholly owned by the Company to carry on the jet fuel procurement business.

The new subsidiary will receive financial support from CAOHC by way of injection of new funding into a trust account to enable the subsidiary to continue its jet fuel procurement business on an agency basis . The subsidiary company will receive income from the agency commissions to be chargeable on the sale ofthe jet fuel to the Buyers.

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The subsidiary company will also receive support from the Company by way of use of the Company's equipment, premises and personnel for an agreed fee.

5) Involvement of Independent Directors

The Independent Directors who are also members of the Company's audit committee have been monitoring closely and are continuing to monitor closely developments in the Company. Several measures, forming part of the control mechanism put in place by the Special Task Force, had been recommended by them. They have been and are in constant interaction with the Special Task Force and the Company's advisers. They have also asked for and are being given daily briefings by the Special Task Force and the Company's advisers on developments in relation to the affairs of the Company (including the proposed scheme of arrangement).

6) Claim against the Company by Satya Capital Limited

The Company has on 8th December 2004 received a Writ of Summons in which Satya Capital Limited (" Satya") has commenced a legal suit against the Company and its Holding Company, China Aviation Oil Holding Company ("CAOHC").

The claim against the Company is for an alleged breach of a Share Purchase Agreement dated 18 August 2004 between Satya and the Company in which the Company had agreed to acquire 88 million shares in Singapore Petroleum Company Ltd ("SPC"). The claim against CAOHC is for alleged conspiracy with the Company to break the Share Purchase Agreement.

The amount of the claim against the Company and CAOHC is S$47,160,000 and damages. The amount of S$47,160,000 is allegedly computed on the basis of the difference between the contract price and the best price that might have been obtained if the SPC shares had been sold on the open market on 29 November 2004.

The Company is presently seeking legal advice on the matter.

7) Return of Suspended CEO, Mr Chen Jiulin

The Company wishes to inform shareholders that Mr Chen Jiulin has returned to Singapore today. He has been placed under arrest and is currently assisting the Commercial Affairs Department in their

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investigations. The Company understands that Mr Chen is currently out on bail.

UNDISCLOSED ADVERSE FACTS

51. The market for China Aviation' securities was open, well-developed and efficient at all relevant times. As a result of these materially false and misleading statements and failures to disclose, China Aviation' securities traded at artificially inflated prices during the Class Period.

Plaintiffs and other members ofthe Class purchased or otherwise acquired China Aviation securities relying upon the integrity of the market price of China Aviation' securities and market information relating to China Aviation, and have been damaged thereby.

52. During the Class Period, defendants materially misled the investing public, thereby inflating the price ofChina Aviation' securities, by publicly issuing false and misleading statements and omitting to disclose material facts necessary to make defendants' statements, as set forth herein, not false and misleading. Said statements and omissions were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the

Company, its business and operations , as alleged herein.

53. At all relevant times, the material misrepresentations and omissions particularized in this Complaint directly or proximately caused or were a substantial contributing cause of the damages sustained by Plaintiffs and other members of the Class. As described herein, during the

Class Period, defendants made or caused to be made a series of materially false or misleading statements about China Aviation' business, prospects and operations . These material misstatements and omissions had the cause and effect of creating in the market an unrealistically positive assessment of China Aviation and its business, prospects and operations, thus causing the

Company's securities to be overvalued and artificially inflated at all relevant times. Defendants'

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materially false and misleading statements during the Class Period resulted in Plaintiffs and other members ofthe Class purchasing the Company 's securities at artificially inflated prices, thus causing the damages complained of herein.

ADDITIONAL SCIENTER ALLEGATIONS

54. As alleged herein, defendants acted with scienter in that defendants knew that the public documents and statements issued or disseminated in the name of the Company were materially false and misleading; knew that such statements or documents would be issued or disseminated to the investing public; and knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violations of the federal securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their receipt of information reflecting the true facts regarding China Aviation, their control over, and/or receipt and/or modification of China Aviation allegedly materially misleading misstatements and/or their associations with the Company which made them privy to confidential proprietary information concerning China Aviation, participated in the fraudulent scheme alleged herein.

55. Defendants knew and/or recklessly disregarded the falsity and misleading nature of the information which they caused to be disseminated to the investing public. The ongoing fraudulent scheme described in this complaint could not have been perpetrated over a substantial period of time, as has occurred, without the knowledge and complicity of the personnel at the highest level of the Company, including the Individual Defendants.

Applicability Of Presumption Of Reliance: Fraud-On-The-Market Doctrine

56. At all relevant times, the market for China Aviation securities was an efficient market for the following reasons, among others:

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(a) China Aviation stock met the requirements for listing, and was listed and actively traded on the OTC, a highly efficient and automated market;

(b) As a regulated issuer, China Aviation filed periodic public reports with the SEC and the OTC;

(c) China Aviation regularly communicated with public investors via established market communication mechanisms, including through regular disseminations ofpress releases on the national circuits ofmajor newswire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services; and

(d) China Aviation was followed by several securities analysts employed by major brokerage firms who wrote reports which were distributed to the sales force and certain customers of their respective brokerage firms. Each of these reports was publicly available and entered the public marketplace.

57. As a result of the foregoing, the market for China Aviation securities promptly digested current information regarding China Aviation from all publicly-available sources and reflected such information in China Aviation' stock price. Under these circumstances, all purchasers of China Aviation securities during the Class Period suffered similar injury through their purchase of China Aviation securities at artificially inflated prices and a presumption of reliance applies.

NO SAFE HARBOR

58. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

Many ofthe specific statements pleaded herein were not identified as "forward-looking statements when made. To the extent there were any forward-looking statements, there were no meaningful

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cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are liable for those false forward-looking statements because at the time each ofthose forward-looking statements was made, the particular speaker knew that the particular forward-looking statement was false, and/or the forward-looking statement was authorized and/or approved by an executive officer of China Aviation who knew that those statements were false when made.

FIRST CLAIM Violation Of Section 10(b) Of The Exchange Act Against And Rule 10b-5 Promulgated Thereunder Against All Defendants

59. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein.

60. During the Class Period, defendants carried out a plan, scheme and course ofconduct which was intended to and, throughout the Class Period, did: (i) deceive the investing public, including Plaintiffs and other Class members, as alleged herein; and (ii) cause Plaintiffs and other members of the Class to purchase China Aviation securities at artificially inflated prices. In furtherance ofthis unlawful scheme, plan and course ofconduct, defendants, and each ofthem, took the actions set forth herein.

61. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements not misleading; and (c) engaged in acts, practices, and a course ofbusiness which operated as a fraud and deceit upon the purchasers of the Company' s securities in an effort to maintain artificially high market prices for China Aviation securities in violation of Section 10(b) of the Exchange Act and

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Rule lOb-5. All defendants are sued either as primary participants in the wrongful and illegal conduct charged herein or as controlling persons as alleged below.

62. Defendants, individually and in concert, directly and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course ofconduct to conceal adverse material information about the business, operations and future prospects of China Aviation as specified herein.

63. These defendants employed devices, schemes, and artifices to defraud, while in possession of material adverse non-public information and engaged in acts, practices, and a course ofconduct as alleged herein in an effort to assure investors ofChina Aviation value andperformance and continued substantial growth, which included the making of, or the participation in the making of, untrue statements ofmaterial facts and omitting to state material facts necessary in order to make the statements made about China Aviation and its business operations and future prospects in the light of the circumstances under which they were made, not misleading, as set forth more particularly herein, and engaged in transactions, practices and a course of business which operated as a fraud and deceit upon the purchasers of China Aviation securities during the Class Period.

64. Each ofthe Individual Defendants' primary liability, and controlling person liability, arises from the following facts: (i) the Individual Defendants were high-level executives and/or directors at the Company during the Class Period and members ofthe Company's management team or had control thereof; (ii) each of these defendants, by virtue of his responsibilities and activities as a senior officer and/or director of the Company was privy to and participated in the creation, development and reporting of the Company's internal budgets, plans, projections and/or reports;

(iii) each of these defendants enjoyed significant personal contact and familiarity with the other

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defendants and was advised of and had access to other members of the Company' s management team, internal reports and other data and information about the Company's finances, operations, and sales at all relevant times; and (iv) each of these defendants was aware of the Company's dissemination ofinformation to the investing public which they knew or recklessly disregarded was materially false and misleading.

65. The defendants had actual knowledge of the misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them. Such defendants' material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and effect of concealing China Aviation operating condition and future business prospects from the investing public and supporting the artificially inflated price ofits securities. As demonstrated by defendants' overstatements and misstatements of the Company's business, operations and earnings throughout the Class Period, defendants, if they did not have actual knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining from taking those steps necessary to discover whether those statements were false or misleading.

66. As a result of the dissemination of the materially false and misleading information and failure to disclose material facts, as set forth above, the market price of China Aviation securities was artificially inflated during the Class Period. In ignorance ofthe fact that market prices of China Aviation publicly-traded securities were artificially inflated, and relying directly or indirectly on the false and misleading statements made by defendants, or upon the integrity of the market in which the securities trades, and/or on the absence ofmaterial adverse information that was

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known to or recklessly disregarded by defendants but not disclosed in public statements by defendants during the Class Period, Plaintiffs and the other members of the Class acquired China

Aviation securities during the Class Period at artificially high prices and were damaged thereby.

67. At the time of said misrepresentations and omissions, Plaintiffs and other members ofthe Class were ignorant oftheir falsity, and believed them to be true. Had Plaintiffs and the other members of the Class and the marketplace known the truth regarding the problems that China

Aviation was experiencing, which were not disclosed by defendants, Plaintiffs and other members of the Class would not have purchased or otherwise acquired their China Aviation securities, or, if they had acquired such securities during the Class Period, they would not have done so at the artificially inflated prices which they paid.

68. By virtue of the foregoing, defendants have violated Section 10(b) of the Exchange

Act, and Rule I Ob-5 promulgated thereunder.

69. As a direct and proximate result of defendants' wrongful conduct, Plaintiffs and the other members ofthe Class suffered damages in connection with their respective purchases and sales of the Company' s securities during the Class Period.

SECOND CLAIM Violation Of Section 20(a) Of The Exchange Act Against the Individual Defendants

70. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein.

71. The Individual Defendants acted as controlling persons ofChina Aviation within the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions, and their ownership and contractual rights, participation in and/or awareness of the

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Company's operations and/or intimate knowledge of the false financial statements filed by the

Company with the SEC and disseminated to the investing public, the Individual Defendants had the power to influence and control and did influence and control, directly or indirectly, the decision- making of the Company, including the content and dissemination of the various statements which

Plaintiffs contend are false and misleading. The Individual Defendants were provided with or had unlimited access to copies of the Company's reports, press releases, public filings and other statements alleged by Plaintiffs to be misleading prior to and/or shortly after these statements were issued and had the ability to prevent the issuance of the statements or cause the statements to be corrected.

72. In particular, each ofthese defendants had direct and supervisory involvement in the day-to-day operations of the Company and, therefore, is presumed to have had the power to control or influence the particular transactions giving rise to the securities violations as alleged herein, and exercised the same.

73. As set forth above, China Aviation and the Individual Defendants each violated

Section 10(b) and Rule 1 Ob-5 by their acts and omissions as alleged in this Complaint. By virtue of their positions as controlling persons, the Individual Defendants are liable pursuant to Section

20(a) of the Exchange Act. As a direct and proximate result of defendants' wrongful conduct,

Plaintiffs and other members of the Class suffered damages in connection with their purchases of the Company's securities during the Class Period.

WHEREFORE, Plaintiffs pray for relief and judgment, as follows:

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(a) Determining that this action is a proper class action, designating Plaintiffs as

Lead Plaintiff and certifying Plaintiffs as a class representative under Rule 23 of the Federal Rules of Civil Procedure and Plaintiffs' counsel as Lead Counsel;

(b) Awarding compensatory damages in favor of Plaintiffs and the other Class members against all defendants, jointly and severally, for all damages sustained as a result of defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;

(c) Awarding Plaintiffs and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and

(d) Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

Dated: February 3, 2005 BRODSKY & SMITH, LLC

By: /s/Evan J. Smith (3254) Evan J. Smith, Esquire 240 Mineola Boulevard Mineola, NY 11501 516.741.4977

SCHIFFRIN & BARROWAY, LLP Marc A. Topaz, Esquire Richard A. Maniskas, Esquire Tamara Skvirsky, Esquire Three Bala Plaza East Suite 400 Bala Cynwyd, PA 19004 (610) 667-7706