Air China Limited

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares of Air China Limited, you should at once hand this circular to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser or the transferee.

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

AIR CHINA LIMITED (a joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 753)

CONNECTED TRANSACTION AND DISCLOSEABLE TRANSACTION: PURCHASE OF EQUITY INTEREST IN AIR CHINA CARGO FROM CITIC PACIFIC LIMITED

Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders

A letter from the Board is set out on pages 4 to 8 of this circular and a letter from the Independent Board Committee is set out on pages 9 to 10 of this circular. A letter of advice from BOCOM International, the Independent Financial Adviser, containing its advice to the Independent Board Committee and the independent Shareholders of the Company is set out on pages 11 to 18 of this circular.

24 January 2008 CONTENTS

Page

Definitions ...... 1

Letter from the Board ...... 4

Letter from the Independent Board Committee ...... 9

Letter from the Independent Financial Adviser ...... 11

Appendix – General Information ...... 19

–i– DEFINITIONS

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

“A Shares” ordinary shares in the share capital of the Company with a nominal value of RMB1.00 each, which are subscribed for and traded in RMB on the Shanghai Stock Exchange

“Air China Cargo” Air China Cargo Co., Ltd., a company with limited liability incorporated in the PRC, the registered share capital of which was owned by the Company, CITIC Pacific (through Fine Star) and Capital Airport Holding Company by 51%, 25% and 24%, respectively, immediately prior to the completion of the Transaction and is owned by the Company and Capital Airport Holding Company by 76% and 24% upon completion of the Transaction

“Air Macau” Air Macau Company Limited, a company with limited liability incorporated under the laws of Macau and with 51% of its share capital owned by CNAC (Macau) as at the date of this circular

“Ameco” Aircraft Maintenance and Engineering Corporation, Beijing ( ), a company with limited liability incorporated under the laws of the People’s Republic of China and with 60% of its registered capital owned by the Company as at the date of this circular

“Associate(s)” has the meaning ascribed hereto under the Listing Rules

“BOCOM International” or BOCOM International (Asia) Limited, a corporation licensed “Independent Financial to carry on type 1 (dealing in securities) and type 6 Adviser” (advising on corporate finance) of the regulated activities under the SFO, the independent financial adviser to the Independent Board Committee and independent Shareholders of the Company in respect of the Transaction

“Board” the board of directors of the Company

“Cathay Pacific” Cathay Pacific Airways

–1– DEFINITIONS

“CITIC Pacific” CITIC Pacific Limited, a company incorporated in Hong Kong

“CNAC” China National Aviation Company Limited, a company incorporated under the laws of Hong Kong with limited liability

“CNAC (Macau)” China National Aviation Corporation (Macau) Company limited, a company with limited liability incorporated under the laws of Macau and a wholly-owned subsidiary of CNAC as at the date of this circular

“CNACG” China National Aviation Corporation (Group) Limited, a company incorporated under the laws of Hong Kong and a wholly-owned subsidiary of CNAHC as at the date of this circular

“CNAHC” China National Aviation Holding Company, a company incorporated under the laws of the People’s Republic of China

“Company” Air China Limited, a company incorporated in the People’s Republic of China, whose H Shares are listed on the Stock Exchange as its primary listing venue and on the Official List of the UK Listing Authority as its secondary listing venue, and whose A Shares are listed on the Shanghai Stock Exchange

“Director(s)” the director(s) of the Company

“Fine Star” Fine Star Enterprises Corp., a company incorporated in the British Virgin Islands, which held 25% equity interest in the registered capital of Air China Cargo immediately prior to the completion of the Transaction

“Gold Leaf” Gold Leaf Enterprises Holdings Ltd., a company incorporated in the British Virgin Islands

“Group” the Company and its subsidiaries and joint ventures

“H Shares” overseas listed foreign shares of RMB1.00 each in the share capital of the Company

–2– DEFINITIONS

“Independent Board Committee” the independent board committee of the Company comprising Hu Hung Lick, Henry, Wu Zhipan, Zhang Ke and Jia Kang, all being independent non-executive Directors

“Latest Practicable Date” 18 January 2008, being the latest practicable date prior to the printing of this circular

“Listing Rules” The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited

“PRC” the People’s Republic of China, excluding, for the purpose of this circular only, Hong Kong, Macau and Taiwan

“Sale and Purchase Agreement” an agreement relating to the sale and purchase of the share in and the shareholder’s loan to Fine Star dated 3 January 2008 entered into among CNAC, Gold Leaf and CITIC Pacific pursuant to which, among other things, CNAC has agreed to purchase and Gold Leaf has agreed to sell the entire issued share capital of Fine Star

“SFO” the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as amended, supplemented or otherwise modified from time to time

“Shareholder(s)” registered holder(s) of the shares of the Company

“Shareholder Loan” all the loans made by CITIC Pacific to Fine Star as at the close of business on the completion date for the Transaction, of which the amount as at 30 September 2007 was HK$ 518,213,209, and Gold Leaf undertakes in the Sale and Purchase Agreement to keep the responsibility of Fine Star regarding to the shareholder loan unchanged in any and all aspects until the completion date

“Stock Exchange” The Stock Exchange of Hong Kong Limited

“Supervisor(s)” the supervisor(s) of the Company

“Transaction” the transactions contemplated under the Sale and Purchase Agreement

–3– LETTER FROM THE BOARD

AIR CHINA LIMITED (a joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 753)

Directors: Registered address: Non-executive Directors: 9th Floor, Blue Sky Mansion Kong Dong (Vice Chairman) 28 Tianzhu Road, Zone A Wang Shixiang (Vice Chairman) Tianzhu Airport Industrial Zone Yao Weiting Shunyi District Ma Xulun Beijing, PRC Christopher Dale Pratt Chen Nan Lok Philip Principal place of business in Hong Kong: Executive Directors: 5th Floor, CNAC House Cai Jianjiang 12 Tung Fai Road Fan Cheng Hong Kong International Airport Hong Kong Independent Non-Executive Directors: Hu Hung Lick, Henry Wu Zhi Pan Zhang Ke Jia Kang

24 January 2008

To the Shareholders

Dear Sir or Madam,

CONNECTED TRANSACTION AND DISCLOSEABLE TRANSACTION

1. INTRODUCTION

On 3 January 2008, CNAC, a wholly-owned subsidiary of the Company entered into the Sale and Purchase Agreement with Gold Leaf and CITIC PACIFIC, pursuant to which CNAC has agreed to purchase from Gold Leaf the entire issued share capital of Fine Star, which in turn holds 25% equity interest in the registered capital of Air China Cargo. The Transaction has been completed on 3 January 2008 as well.

–4– LETTER FROM THE BOARD

The Transaction constitutes a connected transaction and a discloseable transaction of the Company under the Listing Rules.

The Independent Board Committee has been established to consider and advise the independent Shareholders of the Company in respect of the Transaction contemplated under the Sale and Purchase Agreement. BOCOM International has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the independent Shareholders of the Company as to whether or not the terms of the Sale and Purchase Agreement contemplated thereunder are fair and reasonable so far as the independent Shareholders of the Company are concerned and are in the interests of the Company and the Shareholders as a whole.

The purposes of this circular are:

(i) to set out further details of the Transaction;

(ii) to set out the views from the Directors and the Independent Board Committee with regard to the Transaction; and

(iii) to set out the letter of advice from BOCOM International to the Independent Board Committee and the Independent Shareholders of the Company in relation to the terms of the Transaction.

2. THE SALE AND PURCHASE AGREEMENT

(1) Date of the Transaction

3 January 2008

(2) Parties to the Transaction

(i) CNAC, a wholly-owned subsidiary of the Company, as the purchaser, the principal business activity of which is investment holding;

(ii) Gold Leaf, a wholly-owned subsidiary of CITIC Pacific, as the vendor, the principal business activity of which is investing holding; and

(iii) CITIC PACIFIC, which is engaged in a diversified range of businesses, including manufacturing of special steel, iron ore mining, property development and investment, infrastructure, marketing and distribution.

–5– LETTER FROM THE BOARD

Immediately prior to the completion of the Transaction, Gold Leaf wholly owned Fine Star, which in turn owns 25% equity interest in Air China Cargo. As Air China Cargo is a subsidiary of the Company within the meaning of the Listing Rules, Fine Star, Gold Leaf, and CITIC Pacific are therefore regarded as connected persons of the Company within the meaning of the Listing Rules. Accordingly, the Transaction between CNAC and Gold Leaf and CITIC Pacific constitutes a connected transaction of the Company within the meaning of the Listing Rules.

(3) Asset to be acquired by the Company under the Transaction

Pursuant to the Sale and Purchase Agreement, one share, being all the issued share capital, of Fine Star shall be transferred from Gold Leaf to CNAC. Fine Star is an investment holding company, which holds 25% equity interest in Air China Cargo. Consequently, upon completion of the Transaction the 25% equity interest of the registered capital of Air China Cargo held by Fine Star is indirectly transferred to CNAC and the Company’s interest in Air China Cargo (including indirect interest through CNAC) increases from 51% to 76%.

Air China Cargo operates general cargo services, special cargo services for goods and materials that require special handling, and mail and express services, through scheduled and unscheduled cargo flights and rented bellyhold space of the Company’s passenger aircraft.

(4) Consideration

Upon the incorporation of Air China Cargo, CITIC Pacific made a capital contribution in aggregate of RMB550,000,000 equivalent, which represents 25% of the total share capital of Air China Cargo. CITIC Pacific subsequently transferred its shareholding of the 25% equity interest in Air China Cargo to its wholly-owned subsidiary Fine Star in November 2004.

Pursuant to the Sale and Purchase Agreement, the aggregate consideration payable by CNAC for the Transaction is equal to approximately RMB857 million and has been settled by cash upon the completion of the Transaction.

The aggregate consideration comprises (i) HK$518,213,209 being the purchase price of the Shareholder Loan, and (ii) the purchase price of the one share, being the entire issued share capital, of Fine Star, which is equal to the aggregate consideration less the purchase price of the Shareholder Loan.

The consideration for the Transaction is determined through arm’s length negotiation and reflects the mutually agreed valuation of Fine Star. The consideration for the Transaction also represents a multiple of Air China Cargo’s net assets amount and that multiple represents a discount to prevailing multiples for airline company acquisition deals in developed markets of Asia Pacific region.

–6– LETTER FROM THE BOARD

(5) Reasons for and benefits of the Transaction

The Directors expect further growth in China’s air cargo business and plan to increase the Company’s investment in that sector as a strategic move with a view to bringing into Air China Cargo more aviation industry related expertise possessed by the Company. Upon the completion of the Transaction, the Company’s interest in Air China Cargo (including indirect interest through CNAC) increases from 51% to 76% and the Company expects to account Air China Cargo as a consolidated subsidiary of the Company for accounting purpose while Air China Cargo was treated as a joint venture of the Company for accounting purpose prior to the completion of the Transaction.

The Directors believe that the terms of the Transaction are fair and reasonable and in the interests of the shareholders of the Company as a whole.

(6) Financial information on Air China Cargo

Based on the audited consolidated financial statements of Air China Cargo prepared under PRC accounting standards and regulations for the years ended 31 December 2005 and 2006, the net profits of Air China Cargo before taxation and extraordinary items for those years were RMB180.31 million and RMB8.89 million respectively, and the net profits of Air China Cargo after taxation and extraordinary items for those years were RMB180.31 million and RMB2.62 million, respectively.

(7) Written approval by independent Shareholders

As the relevant percentage ratios under Rule 14.07 of the Listing Rules for the Transaction are above 2.5%, the Transaction constitutes a connected transaction of the Company subject to independent Shareholders’ approval. Currently, CNAHC directly owns approximately 40.40% of the total issued share capital of the Company and CNAHC through its wholly-owned subsidiary CNACG indirectly owns approximately 11.26% of the total issued share capital of the Company. Each of CNAHC and its Associates (including CNACG) does not have any interest in the Transaction other than as a shareholder of the Company (where applicable). To the best knowledge of the Directors of the Company, no shareholder of the Company is required to abstain from voting if the Company were to convene a general meeting for the approval of the Transaction. Pursuant to Rule 14A.43 of the Listing Rules, the Transaction has been approved by CNAHC and CNACG by way of a written approval in lieu of a shareholders meeting of the Company.

3. EFFECTS ON THE TRANSACTION

The Transaction was agreed on normal and commercial terms and that the purchase of 25% equity interest in the registered capital of Air China Cargo is fair and reasonable so far as the Company and its Shareholders are concerned and is in the interest of the Company and its Shareholders as a whole. The Company expects the transaction to have (i) a negligible impact on the net asset value of the Group, (ii) an insignificant impact on the earnings of the Group, and (iii) a negligible impact on the gearing position of the Group.

–7– LETTER FROM THE BOARD

4. VIEWS OF THE DIRECTORS AND THE INDEPENDENT BOARD COMMITTEE

The Directors believe that the transaction is in the interests of the Company and the Shareholders as a whole. In particular, the Board, including the Independent Board Committee, considers that terms of the Sale and Purchase Agreement fair and reasonable and are in the interests of the Company and the Shareholders (including the independent Shareholders of the Company) as a whole.

5. INDEPENDENT BOARD COMMITTEE

Your attention is drawn to the letter from the Independent Board Committee set out on pages 9 to 10 of this circular and the letter of advice from BOCOM International to the Independent Board Committee and the independent Shareholders of the Company in relation to the Sale and Purchase Agreement and the Transaction contemplated thereunder, and the principal factors and reasons considered by it in concluding its advice set out on pages 11 to 18 of this circular.

6. ADDITIONAL INFORMATION

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

By Order of the Board Kong Dong Vice Chairman

Beijing, the PRC

–8– LETTER FROM THE INDEPENDENT BOARD COMMITTEE

AIR CHINA LIMITED (a joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 753)

Independent Board Committee Hu Hung Lick, Henry Wu Zhipan Zhang Ke Jia Kang

17 January 2008

To the independent Shareholders of the Company

Dear Sirs or Madams,

CONNECTED TRANSACTION

We refer to the circular dated 24 January 2008 issued by the Company to its Shareholders (the “Circular”) of which this letter forms part. Terms defined in the Circular shall have the same meanings when used in this letter, unless the context otherwise requires.

We have been appointed by the Board as members of the Independent Board Committee to advise the independent Shareholders of the Company on whether the terms of the Sale and Purchase Agreement are fair and reasonable so far as the independent Shareholders of the Company are concerned and are in the interests of the Company and the Shareholders as a whole.

BOCOM International has been appointed as independent financial adviser to advise the Independent Board Committee and the independent Shareholders of the Company on the terms, the fairness and reasonableness of the Sale and Purchase Agreement and the Transaction contemplated thereunder. The text of the letter of advice from BOCOM International, which contains details of its advice, together with the principal factors taken into consideration in arriving at such advice, is set out on pages 11 to 18 of the Circular.

–9– LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Having discussed with the management of the Company the reasons and the terms of the Transaction contemplated under the Sale and Purchase Agreement and taken into account the advice of BOCOM International, we are of the view that the terms of the Sale and Purchase Agreement are fair and reasonable and are in the interests of the Company and the Shareholders as a whole. Our view related to fairness and reasonableness is necessarily based on information, facts and circumstances currently prevailing.

Yours faithfully, The Independent Board Committee Hu Hung Lick, Henry Wu Zhipan Zhang Ke Jia Kang Independent non-executive Directors

–10– LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following is the text of a letter from BOCOM International (Asia) Limited to the independent Shareholders and the Independent Board Committee prepared for the purpose of incorporation in this circular:

24 January 2008

To the Independent Board Committee and the independent Shareholders of Air China Limited

Dear Sirs,

CONNECTED AND DISCLOSEABLE TRANSACTION PURCHASE OF EQUITY INTEREST IN AIR CHINA CARGO FROM CITIC PACIFIC LIMITED

INTRODUCTION

We refer to our appointment as the independent financial adviser to advise the Independent Board Committee and the independent Shareholders in respect of the purchase of the entire issued share capital of Fine Star (which holds 25% equity interest in the registered capital of Air China Cargo) from Gold Leaf (which was a wholly owned subsidiary of CITIC Pacific), particulars of which are set out in a circular to the Shareholders dated 24 January 2008 (the “Circular”) and in which this letter is reproduced. Unless the context requires otherwise, terms used in this letter shall have the same meanings as given to them under the definitions section of the Circular.

As set out in the letter from the Board contained in the Circular, since Air China Cargo was directly owned as to 51% by the Company and 25% by Fine Star (which is a wholly owned subsidiary of Gold Leaf) before completion of the Transaction. Gold Leaf was a direct wholly owned subsidiary of CITIC Pacific before completion of the Transaction. As such, each of Fine Star, Gold Leaf and CITIC Pacific is a connected person of the Company under the Listing Rules. The Transaction amongst CNAC (a wholly-owned subsidiary of the Company), Gold Leaf and CITIC Pacific constitute a connected transaction of the Company. As the relevant percentage ratio under Rule 14.07 of the Listing Rules for the Transaction is above 2.5%, the Transaction constitutes a non-exempt connected transaction of the Company subject to independent Shareholders approval. Currently, CNAHC directly owns approximately 40.40% of the total issued share capital of the Company and CNAHC through its wholly owned subsidiary CNACG indirectly owns approximately 11.26% of the total issued share capital of the Company. Each of CNAHC and its associates (as defined in the Listing Rules, including CNACG) does not have any interest in the Transaction other than as a shareholder of the Company (where applicable). To the best knowledge of the Directors of the Company, no

–11– LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Shareholder of the Company is required to abstain from voting if the Company were to convene a general meeting for the approval of the Transaction. Pursuant to Rule 14A.43 of the Listing Rules, the Transaction was approved by CNAHC and CNACG by way of a written approval in lieu of a shareholders’ meeting of the Company. Accordingly, no general meeting will be required for the approval of the Transaction.

The Transaction also constitutes a discloseable transaction for the Company under the Listing Rules.

In this connection, the Circular containing, inter-alia, the information relating to the Transaction, the recommendation from the Independent Board Committee and this letter, is despatched to the Shareholders. In particular, this letter will set out our recommendation to the Independent Board Committee as to whether the terms of the Transaction is fair and reasonable and whether the Transaction is in the interest of the Company and its Shareholders as a whole.

BASIS OF OUR OPINION

In formulating our opinion and recommendation, we have relied on the accuracy of the information and representations contained in the Circular and have assumed that all information and representations made or referred to in the Circular were true at the time they were made and continue to be true as at the date of the Circular. We have also assumed that all statements of belief, opinion and intention made by the Directors in the Circular were reasonably made after due enquiry. We consider that we have reviewed sufficient information to reach an informed view, to justify relying on the accuracy of the information contained in the Circular and to provide a reasonable basis for our opinion. We have no reason to suspect that any material facts have been omitted or withheld from the information contained or opinions expressed in the Circular nor to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors. We have not, however, conducted an independent in-depth investigation into the affairs and the business of the Group, Fine Star and Air China Cargo.

PRINCIPAL FACTORS CONSIDERED

In arriving at our opinion and recommendation in respect of the Transaction, we have considered the following principal factors:

A. Background

The Company is one of the largest airline companies in the PRC. As at 30 June 2007, the Company together with its subsidiaries and joint venture entities had a total of 271 routes which included 190 domestic routes, 75 international routes, and 6 regional routes. Before completion of the Transaction, the Company directly owned 51% equity interest in the registered capital of Air China Cargo which operates general cargo services, special cargo services for goods and materials that require special handling, and mail and express services, through scheduled and unscheduled cargo flights and rented belly hold space of the Company’s passenger aircraft.

–12– LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

On 3 January 2008, CNAC (a wholly-owned subsidiary of the Company) entered into the Sale and Purchase Agreement with Gold Leaf and CITIC Pacific, pursuant to which CNAC agreed to purchase from Gold Leaf the entire issued share capital of Fine Star, which in turn hold 25% equity interest in the registered capital of Air China Cargo. After completion of the Transaction, the Company together with CNAC increased the equity interest in the registered capital of Air China Cargo from 51% to 76%. The Company will consolidate the results of Air China Cargo as a non-wholly owned subsidiary for accounting purpose after completion of the Transaction. In fact, Air China Cargo was treated as a joint venture of the Company for accounting purpose before completion of the Transaction.

Set out below is a summary of Air China Cargo’s financial information for the two years ended 31 December 2006 and the nine months ended 30 September 2007:

Nine months ended 30 Year ended 31 December September 2005 2006 2007 Approximately Approximately Approximately (RMB million) (RMB million) (RMB million) (unaudited)

Turnover 5,677.7 6,460.7 5,008.9 Profit/(loss) before tax 180.3 8.9 (382.3) Profit/(loss) after tax 180.3 2.6 (382.3)

As at 30 As at 31 December September 2005 2006 2007 Approximately Approximately Approximately (RMB million) (RMB million) (RMB million) (unaudited)

Total assets 4,704.4 5,155.4 4,826.2 Total liabilities 2,252.9 2,730.3 2,783.4 Net assets 2,451.5 2,425.1 2,042.8

The Directors attributed that the underperformance in terms of the overall operations of Air China Cargo for the year ended 31 December 2006 and the nine months ended 30 September 2007 was mainly due to:

(i) the substantially increase in loading capacity of Air China Cargo by approximately 80% in 2006 as Air China Cargo increased the number of cargo aircrafts from 4 in December 2005 to 9 in October 2006. In addition, the utilization rate of Air China Cargo decreased from approximately 58% in December 2005 (being the period to operate 4 cargo aircrafts) to approximately 55.4% in June 2007 (being the interim result of the Company). Accordingly, Air China Cargo needs time to take up the sudden increase in the loading capacity; and

–13– LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(ii) the management of Air China Cargo which could not successfully accommodate the sudden increase in the loading capacity and the uprising market challenge.

According to the Third Quarterly Report 2007 of the Company, the Company and Air China Cargo have involved in the litigation which involved the issuance of summons by the Eastern District Court of New York of Federal Judiciary of the United States to the Company and Air China Cargo on 26 February 2007 in connection with the antitrust civil case relating to the air cargo services. Pursuant to such summons, over 30 airlines (including the Company and Air China Cargo) were sued for their breach of the US Antitrust Law on the ground that these airlines were acting in concert in imposing excessive surcharges so as to impede the offering of discounts that would be made available for the prices charged for air cargo services and that these airlines had reached an agreement on the allocation of revenues and consumers so as to achieve such purposes as setting, increasing, maintaining or stabilizing the air cargo prices. As the status of the proceedings is still in the preliminary stage, the Directors consider that it is not possible to estimate the eventual outcome with reasonably certainty and, therefore, no provisions have been made for this allegation.

As the Company already owned 51% equity interest in the registered capital of Air China Cargo before completion of the Transaction, the Directors consider that the increase in 25% equity interest in the registered capital of Air China Cargo should not have significant adverse impact on the Group on the assumption that Air China Cargo was to make any provisions for this claim in the future. Furthermore, as Air China Cargo’s business covers domestic and international air cargo services, the Directors consider that the contingent liability arising from lawsuits on competition (e.g. this claim) is not exceptional to Air China Cargo.

B. Reasons for the Transaction

The Directors expect that the air cargo business in the PRC will continue to expand due to sustainable economic growth in the PRC over the past few years. Between 2001 and 2006, the PRC achieved an average GDP growth rate of approximately 9.8%. In fact, between 2001 and 2006, the compound annual growth rates for the domestic and international cargo volume in the PRC were approximately 13.5% and 29.5% respectively.

Although the PRC air cargo market has continued to expand, Air China Cargo still recorded a net loss of approximately RMB382.3 million for the nine months ended 30 September 2007. As the Group has sound track records in the aviation and air cargo businesses, the Directors considered that the Group is able to improve the performance of Air China Cargo when the Company has absolute majority control over the management of Air China Cargo.

As part of the restructuring plan for Air China Cargo, the Company intends to integrate the operations of Air China Cargo into the Group’s air cargo business with a view to improving the operation of Air China Cargo after completion of the Transaction. The Group will also devote more experience and management in the field of air cargo operation management to strengthen the marketing channels and the management of Air China Cargo. Should the restructuring plan for Air China Cargo be implemented successfully, the Directors further expect that the operation performance of Air China Cargo will be turnaround in the medium term.

–14– LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The Directors are of the view that the terms of the Transaction are fair and reasonable and in the interest of the Company and the Shareholders of the Company as a whole.

C. Consideration

Pursuant to the Sale and Purchase Agreement, the aggregate consideration paid by CNAC for the Transaction was RMB857 million (the “Consideration”) and was settled on 3 January 2008. The Directors confirmed that the Consideration for the Transaction was determined after arm’s length negotiation and reflected the mutually agreed valuation of Fine Star.

To ascertain the fairness and reasonableness of the Consideration, we have carried out market comparison for our analysis and considered to apply the price to book ratio (“PBR”) and price to earnings ratio to make comparisons for the Consideration. As Air China Cargo was loss-making for the nine months ended 30 September 2007, the application of the price to earnings ratio may not be appropriate in this case.

As Air China Cargo’s business mainly involves the provisions of air cargo services, we are not able to identify listed companies whose business is perfectly comparable with Air China Cargo. To implement our PBR analysis, we have selected 5 listed airline companies (the “Comparables”) in Hong Kong and the PRC which have aircraft assets and whose principal business also includes the provision of air cargo services.

Set out below is the summary for the Comparables as at 3 January 2008.

PBR as at 3 Jan 2008 Appr. Stock Code Name of Comparables Principal businesses (times)

1055 China Southern Airlines Airlines operator 3.35 Company Limited and air cargo (H shares)

670 China Eastern Airlines Airlines operator 7.87 Corporation Limited and air cargo (H shares)

293 Cathay Pacific Airlines operator, air 1.65 Airways Ltd cargo and related services

600221 Hainan Airlines Co Ltd Airlines operator 6.32 (A shares) (Note) and air cargo

–15– LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

PBR as at 3 Jan 2008 Appr. Stock Code Name of Comparables Principal businesses (times)

753 The Company (H shares) Airlines operator 3.76 and air cargo

Average 4.59

Air China Cargo 1.68

Source: The third quarterly report 2007 of each companies and the interim report 2007 of Cathay Pacific Airlines Limited, and their respective share prices were based on the closing prices, being the date of the Sales and Purchase Agreement

Note: The A shares of Hainan Airlines Co Ltd are listed on the Shanghai Stock Exchange.

From the above table, the average PBR of the Comparables is approximately 4.59 times with a range from approximately 1.65 times to 7.87 times. In addition, the calculated PBR of the Transaction is in the range of the Comparables and is slightly above the lower end of the range of the PBR of the Comparables. In light of the above, we are of the view that the Consideration is fair and reasonable and in the interest of the Company and its Shareholders as a whole.

D. Possible financial effects of the Transaction on the Group

After completion of the Transaction, the Company’s equity interest (including indirect interest through CNAC) in the registered capital of Air China Cargo increased from 51% to 76%. As a result, the Company will consolidate the results of Air China Cargo as a non-wholly owned subsidiary into the Group’s financial statement.

Net asset value

According to the Company’s Third Quarterly Report 2007, the Group’s unaudited consolidated net asset value was approximately RMB31,260.6 million as at 30 September 2007. As at 30 September 2007, Air China Cargo recorded unaudited net asset value of approximately RMB2,042.8 million. Based on the unaudited net asset value of approximately RMB2,042.8 million, the additional attributable 25% equity interest in the registered capital of Air China Cargo would be approximately RMB510.7 million. Assuming that the Transaction was completed on 30 September 2007, and based on the unaudited net asset value of Air China Cargo as at 30 September 2007, the net asset value of the Group would reduce by approximately 1.1% as the additional net asset value attributable to the 25% equity interest in the registered capital of Air China Cargo was less than the Consideration paid by CNAC for the Transaction.

–16– LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Earnings

According to the Company’s Third Quarterly Report 2007, the unaudited consolidated net profit of the Group was approximately RMB3,487.7 million for nine months ended 30 September 2007. For the nine months ended 30 September 2007, Air China Cargo recorded unaudited net loss of approximately RMB382.3 million. Based on the unaudited net loss of RMB382.3 million, the 25% attributable unaudited net loss in Air China Cargo was approximately RMB95.6 million. Assuming that the Transaction was completed on 30 September 2007, and based on the additional unaudited net loss attributable to the 25% equity interest in the registered capital of Air China Cargo for the nine months ended 30 September 2007, the Group’s net profit attributable to Shareholders would slightly decline by approximately 2.7%.

However, the effects of the Transaction on the future earnings of the Group will depend on the Group’s existing businesses and the business operations of Air China Cargo.

Cash position and working capital position

According to the Company’s Third Quarterly Report 2007, as at 30 September 2007 the Group recorded a cash and cash equivalents of approximately RMB2,967.9 million and a net debt position of approximately RMB21,471.4 million (after deduction of bank loans, other loans and debentures payables of approximately RMB24,439.3 million). As at 30 September 2007, the Group obtained the aggregate banking facilities of approximately RMB79,000 million from several banks in the PRC. As the Consideration for the Transaction was settled in cash, the Group’s total cash and cash equivalents position was reduced by RMB857 million after completion of the Transaction.

Given that the above banking facilities and the cash position of the Group, the Directors are satisfied that the Group will continue to have sufficient working capital after completion of the Transaction.

The Consideration for the Transaction was financed by internal resources of the Group and the Group’ net asset value was slightly decreased after completion of the Transaction. In addition, the effect on the gearing ratio (i.e. total liabilities divided by total assets) would have a negligible impact to Air China assuming that the Transaction was completed on 30 September 2007.

Based on the above analysis, in particular that, (i) there would have a negligible impact to the net asset value of the Group; (ii) there might have an insignificant impact to the earnings of the Group; and (iii) there would have negligible impact to the gearing position of the Group, we are of the view that the Transaction was agreed on normal and commercial terms and that the purchase of 25% equity interest in the registered capital of Air China Cargo is fair and reasonable so far as the Company and its Shareholders are concerned and is in the interest of the Company and its Shareholders as a whole.

–17– LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

RECOMMENDATION

Taking into account the above factors, in particular, the background (including, but not limited to, the performance of Air China Cargo for the year ended 31 December 2006 and the nine months ended 30 September 2007) of and the reasons for the Transaction, the Consideration for the Transaction and the possible financial effects of the Transaction on the Group, we consider that the Transaction is fair and reasonable so far as the Company and its Shareholders are concerned and entered into in the ordinary and usual course of business with normal commercial terms, and are in the interest of the Company and its Shareholders as a whole.

Yours faithfully, For and on behalf of BOCOM International (Asia) Limited Liu Qiang Deputy Chief Executive Officer

–18– APPENDIX GENERAL INFORMATION

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief there are no other facts the omission of which would make any statement herein misleading.

2. DISCLOSURE OF INTERESTS OF DIRECTORS AND SUPERVISORS

As at the Latest Practicable Date, none of the Directors, Supervisors or chief executive of the Company has interests or short positions in the shares, underlying shares and/or debentures (as the case may be) of the Company or its associated corporations (within the meaning of Part XV of the SFO) which were notified to the Company and the Stock Exchange pursuant to SFO (including interests or short positions which he is taken or deemed to have under such provisions of the SFO), or recorded in the register maintained by the Company pursuant to Section 352 of the SFO, or which were notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of the Listed Companies.

Mr. Christopher Dale Pratt is a non-executive director of the Company and is concurrently the chairman and executive director of Cathay Pacific, which is a substantial shareholder of the Company and wholly owns Hong Kong Dragon Airlines Limited (Dragonair). Cathay Pacific and Dragonair compete or are likely to compete either directly or indirectly with some aspects of the business of the Company as they operate airline services to certain destinations, which are also served by the Company.

Save as above, none of the Directors or Supervisors of the Company and their respective Associates has any competing interests which would be required to be disclosed under Rule 8.10 of the Listing Rules if each of them were a controlling shareholder of the Company.

None of the Directors or Supervisors of the Company has any direct or indirect interest in any assets which have been, since 31 December 2006 (the date to which the latest published audited financial statements of the Group were made up), acquired or disposed of by or leased to any member of the Group or are proposed to be acquired or disposed of by or leased to, to any member of the Group.

None of the Directors or Supervisors of the Company is materially interested in any contract or arrangement subsisting at the date of this circular and which is significant in relation to the business of the Group.

–19– APPENDIX GENERAL INFORMATION

3. SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, to the knowledge of the Directors, Supervisors and chief executive of the Company, the interests and short positions of the following persons (other than a Director, Supervisor or chief executive of the Company) who have an interest or short position in the shares and underlying shares of the Company which would fall to be disclosed to the Company pursuant to the SFO, or who are, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any members of the Group are as follows:

(a) Substantial interests in the Company

Percentage Percentage Percentage Type and of the of the of the number of total total total shares of issued issued A issued H the shares shares shares Type of Company of the of the of the Short Name interests concerned Company Company Company position

CNAHC Beneficial 4,949,066,567 40.40% 63.08% – – owner A shares

CNAHC (1) Attributable 1,380,482,920 11.26% 17.60% – – interests A shares

China National Aviation Beneficial 1,380,482,920 11.26% 17.60% – – Corporation (Group) owner A shares Limited

Cathay Pacific Beneficial 2,161,052,455 17.64% – 49.05% – owner H shares

Swire Pacific Limited (2) Attributable 2,161,052,455 17.64% – 49.05% – interests H shares

John Swire & Sons Attributable 2,161,052,455 17.64% – 49.05% – Limited (2) interests H shares

John Swire & Sons Attributable 2,161,052,455 17.64% – 49.05% – (H.K.) Limited (2) interests H shares

Mirae Asset Global Investment 221,958,000 1.81% – 5.04% – Investments (Hong Manager H Shares Kong) Limited

Morgan Stanley (3) Investment 218,213,614 1.78% – 4.95% – Manager H shares

–20– APPENDIX GENERAL INFORMATION

61,300,215 0.50% – 1.39% 61,300,215 H shares H shares (Short position)

JPMorgan Chase & Co. Investment 204,635,760 1.67% – 4.64% – manager H shares

69,125,475 0.56% – 1.57% 69,125,475 H shares H shares (Short position)

53,174,760 0.43% – 1.21% – H shares (Lending Pool)

Note:

Based on the information available to the Directors, chief executive and Supervisors of the Company (including such information as was available on the website of the Stock Exchange) and so far as the Directors, chief executive and Supervisors are aware, as at the Latest Practicable Date:

(1) By virtue of CNAHC’s 100% interest in China National Aviation Corporation (Group) Limited, CNAHC is deemed to be interested in the 1,380,482,920 A Shares of the Company directly held by China National Aviation Corporation (Group) Limited.

(2) By virtue of John Swire & Sons Limited’s 100% interest in John Swire & Sons (H.K.) Limited and their approximately 35.74% equity interest and 55.43% voting rights in Swire Pacific Limited, and Swire Pacific Limited’s approximately 39.91% interest in Cathay Pacific at 31 December 2007, John Swire & Sons Limited, John Swire & Sons (H.K.) Limited and Swire Pacific Limited are deemed to be interested in the 2,161,052,455 H shares of the Company directly held by Cathay Pacific.

(3) Morgan Stanley, through its controlled entities, had an attributable interest in 218,213,614 H shares of the Company and maintained a short position of 61,300,215 H shares of the Company, out of which Morgan Stanley Investment Management Company directly held 140,818,000 H shares, Morgan Stanley & Co International plc. directly held 32,509,159 H shares and maintained a short position of 27,094,277 H shares, Morgan Stanley Hong Kong Securities Limited directly held 71,327 H shares and maintained a short position of 134,000 H shares, Morgan Stanley Asset & Investment Trust Management Co., Limited directly held 8,642,000 H shares, MSDW Equity Finance Services I (Cayman) Limited directly held 10,609,916 H shares and maintained a short position of 10,609,916 H shares, Morgan Stanley Swiss Holdings GmbH directly held 45 H Shares, Morgan Stanley Capital (Cayman Islands) Limited maintained a short position of 882,000 H shares, Morgan Stanley Capital Services Inc. directly held 1,683,720 H shares, Morgan Stanley Capital (Luxembourg) S.A. directly 947,940 H shares, Morgan Stanley & Co. Inc. directly held 22,931,507 H shares and maintained a short position of 22,568,822 H shares, and Morgan Stanley Uruguay Ltda. maintained a short position of 11,200 H shares.

–21– APPENDIX GENERAL INFORMATION

(b) Substantial interests in other members of the Group

Approximate % of Member of the Group Name share capital

Air Macau CNAC 51%

Air Macau Sociedale de Turismo e 14% Diversaes de Macau

Air Macau Servico, Administracao e 20% Participacoes, Lda.

Ameco Deutsche Lufthansa AG 40%

Air China Cargo Capital Airport Holding 24% Company

Save as disclosed above, as at the Latest Practicable Date, to the knowledge of the Directors, chief executive and Supervisors of the Company, no other person (other than a Director, Supervisor or chief executive of the Company) had an interest or short position in the shares and underlying shares of the Company which would fall to be disclosed to the Company pursuant to the SFO, or otherwise was, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any members of the Group.

4. LITIGATION

The litigation or claims of material importance pending or threatened against a member of the Group are as followed:

(a) On 15 April 2002, Flight CA129 crashed on approach to Gimhae International Airport, South Korea. There were 129 fatalities including 121 passengers and 8 crew members aboard the crashed aircraft. An investigation was conducted by the Chinese and the Korean civil aviation authorities, but the investigation has yet to be finished. Certain injured passengers and families of the deceased passengers and crew members have commenced proceedings in Korean courts seeking damages against Air China International Corporation, the predecessor of the Company. The Group cannot predict the timing of the courts’ judgements or the possible outcome of the lawsuits or any possible appeal actions. Up to 30 June 2007, the Company, Air China International Corporation and the Company’s insurer had paid an aggregate amount of approximately RMB233 million in respect of the passenger liability and other auxiliary costs. Included in the RMB233 million is an amount of approximately RMB213 million borne by the Company’s insurer. As part of the above-mentioned restructuring, CNAHC has agreed to indemnify the Group for any liabilities relating to the crash of Flight CA129, excluding the compensation already paid up to 30

–22– APPENDIX GENERAL INFORMATION

September 2004 (being the date of incorporation of the Company). The Directors of the Company believe that there would not be any material adverse impact on the Group’s financial position.

(b) On 26 February 2007, the Eastern District Court of New York of the Federal Judiciary of the United States filed a civil summon against the Company and Air China Cargo, claiming that they, together with a number of other airlines, have violated certain anti-trust regulations in respect of their air cargo operations in the United States by acting in concert in imposing excessive surcharges to impede the offering of discounts and allocating revenue and customers so as to achieve increasing, maintaining and stabilising air cargo prices. The status of the proceedings is still in the preliminary stage and therefore the Directors of the Company are of the view that it is not possible to estimate the eventual outcome of the claim with reasonable certainty and therefore no provision for this claim has been made at this stage.

Except as disclosed above, there was no litigation or claims of material importance pending or threatened against any member of the Group as at the Latest Practicable Date.

5. SERVICE CONTRACTS

None of the Directors has any existing or proposed service contract with any member of the Group which is not expiring or terminable by the Group within one year without payment of compensation (other than statutory compensation).

6. NO MATERIAL ADVERSE CHANGE

The Directors confirm that there has been no material adverse change in the Group’s financial or trading position since 31 December 2006, being the date to which the latest published audited accounts of the Group have been made up.

7. PROCEDURE FOR DEMANDING A POLL BY SHAREHOLDERS

Pursuant to Article 84 of the Articles of Association of the Company, at any general meeting of shareholders of the Company a resolution shall be decided on a show of hands unless a poll is (before or after any vote by show of hands) demanded:

• by the chairman of the meeting;

• by at least two shareholders entitled to vote present in person or by proxy; or

• by one or more shareholders present in person or by proxy and representing 10% or more of all shares carrying the right to vote at the meeting.

–23– APPENDIX GENERAL INFORMATION

The demand for a poll may be withdrawn by the person who makes such demand. Further details of the procedure for demanding a poll were set out in the articles of association of the Company available for inspection during normal business hours at the principal place of business of the Company in Hong Kong as set out in the section headed “Document available for Inspection” of this appendix.

8. MISCELLANEOUS

(a) The joint company secretaries of the Company are Huang Bin and Li Man Kit. Mr. Li is an associate member of the Institute of Chartered Secretaries and Administrators, UK and the Hong Kong Institute of Company Secretaries.

(b) The qualified accountant of the Company is David Tze-kin Ng. Mr. Ng is a member of the Hong Kong Institute of Certified Public Accountants.

(c) The registered address of the Company is at 9/F, Blue Sky Mansion, 28 Tianzhu Road, Zone A, Tianzhu Airport Industrial Zone, Shunyi District, Beijing, China. The head office of the Company is at South Terminal, Beijing Capital International Airport, Chaoyang District, Beijing, China.

(d) The Hong Kong branch share registrar and transfer office of the Company is Computershare Hong Kong Investor Services Limited, Rooms 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.

9. EXPERT AND CONSENT

BOCOM International, the Independent Financial Adviser to the Independent Board Committee and independent Shareholders of the Company in respect of the connected transaction, is a corporation licensed to carry on type 1 (dealing in securities) and type 6 (advising on corporate finance) of the regulated activities under the SFO.

As at the Latest Practicable Date, BOCOM International was not beneficially interested in the share capital of any member of the Group and did not have any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in any member of the Group and did not have any interest, direct or indirect, in any assets which had been, since 31 December 2006 (the date to which the latest published audited financial statements of the Group were made up), acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group.

BOCOM International issued a letter dated 24 January 2008 for the purpose of incorporation in this circular, in connection with its advice to the Independent Board Committee and the independent Shareholders in relation to the terms of Sale and Purchase Agreement. BOCOM International has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and the reference to its name included herein in the form and context in which it appears.

–24– APPENDIX GENERAL INFORMATION

10. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at the principal place of business of the Company in Hong Kong at 5th Floor, CNAC House 12 Tung Fai Road, Hong Kong International Airport, Hong Kong up to and including 25 February 2008:

(a) the articles of association of the Company;

(b) the Sale and Purchase Agreement;

(c) the letter from the Independent Board Committee to the independent Shareholders of the Company, the text of which is set out on pages 9 to 10 of this circular;

(d) the letter from the Independent Financial Adviser to the Independent Board Committee and the independent Shareholders of the Company, the text of which is set out on pages 11 to 18 of this circular; and

(e) the letter of consent referred to under the paragraph headed “Experts and consents” of this appendix.

–25–