Table of Contents

As filed with the Securities and Exchange Commission on June 30, 2004

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SECURITIES AND EXCHANGE COMMISSION

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FORM 20-F

o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR
x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		Commission file number: 1-14660

CHINA SOUTHERN AIRLINES COMPANY LIMITED

THE PEOPLE’S REPUBLIC OF CHINA
(Jurisdiction of incorporation or organization)

BAIYUN INTERNATIONAL AIRPORT
GUANGZHOU
PEOPLE’S REPUBLIC OF CHINA

(Address of principal executive offices)

     Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class:		Name of each exchange on which registered:
Ordinary H Shares of par value RMB1.00 per share		New York Stock Exchange, Inc.
represented by American Depositary Shares

          Securities registered or to be registered pursuant to Section 12(g) of the Act: None

          Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

          Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 2,200,000,000 ordinary Domestic Shares of par value RMB1.00 per share, 1,174,178,000 ordinary H Shares of par value RMB1.00 per share and 1,000,000,000 ordinary A Shares of par value RMB1.00 per share were issued and outstanding as of December 31, 2003.

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes   x  No   o

          Indicate by check mark which financial statement item the Registrant has elected to follow.

Item 17   o  Item 18   x

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FORWARD-LOOKING STATEMENTS
INTRODUCTORY NOTE
GLOSSARY OF AIRLINE INDUSTRY TERMS
PART I
	ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
	ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
	ITEM 3. KEY INFORMATION
		Selected Financial Data
		Capitalization and Indebtedness
		Reasons for the Offer and Use of Proceeds
		Risk Factors
	ITEM 4. INFORMATION ON THE COMPANY
		History and Development of the Company
		Business Overview
		Organizational Structure
		Property, Plant and Equipment
	ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
		Critical Accounting Policies
		Overview
		Certain Financial Information and Operating Data by Geographic Region
		Operating Results
		Liquidity and Capital Resources
		Contractual Obligations and Commercial Commitments
	ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
		Directors and Senior Management
		Compensation
		Board Practices
		Employees
		Share Ownership
	ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
		Major Shareholders
		Related Party Transactions
	ITEM 8. FINANCIAL INFORMATION
		Consolidated Statements and Other Financial Information
		Significant Changes
	ITEM 9. THE OFFER AND LISTING
		Offer and Listing details
		Plan of Distribution
		Markets
		Selling Shareholders
		Dilution
		Expenses of the Issue
	ITEM 10. ADDITIONAL INFORMATION
		Share Capital
		Memorandum and Articles of Association
		Material Contracts
		Exchange Controls
		Taxation
		Dividends and paying Agents
		Statement by Experts
		Documents on Display
		Subsidiary Information
	ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II
	ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
	ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
PART III
	ITEM 15. CONTROLS AND PROCEDURES
	ITEM 16.
	ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
	ITEM 16B. CODE OF ETHICS
	ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES
	ITEM 16D. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
PART IV
	ITEM 17. FINANCIAL STATEMENTS
	ITEM 18. FINANCIAL STATEMENTS
	ITEM 19. EXHIBITS
EX-1 ARTICLES OF ASSOCIATION
EX-4.1 FORM OF DIRECTOR'S SERVICE AGREEMENT
EX-4.2 NON-EXECUTIVE DIRECTOR'S SERVICE AGREEMENT
EX-8 SUBSIDIARIES OF THE COMPANY
EX-12.1 CERT CHAIRMAN OF THE BOARD OF DIRECTORS
EX-12.2 CERTIFICATION FROM THE PRESIDENT
EX-12.3 CERTIFICATION FROM THE CFO
EX-13.1 SECTION 906 CERT FROM THE CHAIRMAN
EX-13.2 SECTION 906 CERT FROM THE PRESIDENT
EX-13.3 SECTION 906 CERT FROM THE CFO

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TABLE OF CONTENTS

China Southern Airlines Company Limited

			Page
Forward-Looking Statements				1
Introductory Note				1
Glossary of Airline Industry Terms				2
PART I
Item 1.     Identity of Directors, Senior Management and Advisers				3
Item 2.     Offer Statistics and Expected Timetable				3
Item 3.     Key Information				3
	Selected Financial Data			3
	Capitalization and Indebtedness			7
	Reasons for the Offer and Use of Proceeds			7
	Risk Factors			7
Item 4.     Information on the Company				11
	History and Development of the Company			11
	Business Overview			12
	Organizational Structure			28
	Property, Plant and Equipment			30
Item 5.     Operating and Financial Review and Prospects				31
	Critical Accounting Policies			31
	Overview			31
	Certain Financial Information and Operating Data by Geographic Region			32
	Operating Results			34
	Liquidity and Capital Resources			38
	Contractual Obligations and Commercial Commitments			41
Item 6.     Directors, Senior Management and Employees				41
	Directors and Senior Management			41
	Compensation			43

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			Page
	Board Practices			43
	Employees			44
	Share Ownership			45
Item 7.     Major Shareholders and Related Party Transactions				45
	Major Shareholders			45
	Related Party Transactions			46
	Interest of Experts and Counsel			48
Item 8.     Financial Information				48
	Consolidated Statements and Other Financial Information			48
	Significant Changes			49
Item 9.     The Offer and Listing				49
	Offer and Listing Details			50
	Plan of Distribution			50
	Markets			50
	Selling Shareholders			50
	Dilution			50
	Expenses of the Issue			50
Item 10.     Additional Information				50
	Share Capital			50
	Memorandum and Articles of Association			50
	Material Contracts			55
	Exchange Controls			55
	Taxation			55
	Dividends and Paying Agents			56
	Statement by Experts			56
	Documents on Display			56
	Subsidiary Information			57
Item 11.     Quantitative and Qualitative Disclosures About Market Risk				57
Item 12.     Description of Securities other than Equity Securities				58
PART II

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			Page
Item 13.     Defaults, Dividend Arrearages and Delinquencies				58
Item 14.     Material Modifications to the Rights of Security Holders and Use of Proceeds				58
PART III
Item 15.     Control and Procedures				60
Item 16.				60
Item 16A.  Audit Committee Financial Expert				60
Item 16B.   Code of Ethics				60
Item 16C.   Principal Accountant Fees and Services				60
Item 16D.  Audit Committee Exemption				60
PART IV
Item 17.     Financial Statements				60
Item 18.     Financial Statements				60
Item 19.     Exhibits				60
Signatures				62

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FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements. These statements appear in a number of different places in this Annual Report. A forward looking statement is usually identified by the use in this Annual Report of certain terminology such as “estimates”, “projects”, “expects”, “intends”, “believes”, “plans”, “anticipates”, or their negatives or other comparable words. Also look for discussions of strategy that involve risks and uncertainties. Forward-looking statements include statements regarding the outlook for the Company’s future operations, forecasts of future costs and expenditures, evaluation of market conditions, the outcome of legal proceedings (if any), the adequacy of reserves, or other business plans. You are cautioned that such forward-looking statements are not guarantees and involve risks, assumptions and uncertainties. The Company’s actual results may differ materially from those in the forward-looking statements due to risks facing the Company or due to actual facts differing from the assumptions underlying those forward-looking statements.

Some of these risks and assumptions, in addition to those identified under Item 3, “Key Information – Risk Factors,” include:

	-		general economic and business conditions, including changes in interest rates;
	-		prices and other economic conditions;
	-		natural phenomena;
	-		actions by government authorities, including changes in government regulation;
	-		the Company’s relationship with CSAHC;
	-		uncertainties associated with legal proceedings;
	-		technological development;
	-		future decisions by management in response to changing conditions;
	-		the Company’s ability to execute prospective business plans; and
	-		misjudgments in the course of preparing forward-looking statements.

The Company advises you that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to the Company, the Group, and persons acting on their behalf.

INTRODUCTORY NOTE

In this Annual Report, unless the context indicates otherwise, the “Company” means China Southern Airlines Company Limited, a joint stock company incorporated in China on March 25, 1995, the “Group” means the Company and its consolidated subsidiaries, and CSAHC means China Southern Air Holding Company, the Company’s parent company which holds a 50.3% controlling interest in the Company.

References to “China” or the “PRC” are to the People’s Republic of China, excluding Hong Kong, Macau and Taiwan. References to “Renminbi” or “RMB” are to the currency of China, references to “U.S. dollars”, “$” or “US$” are to the currency of the United States of America (the “U.S.” or “United States”), and reference to “HK$” is to the currency of Hong Kong. Reference to the “Chinese Government” is to the national government of China. References to “Hong Kong” or “Hong Kong SAR” are to the Hong Kong Special Administrative Region of the People’s Republic of China. References to “Macau” or “Macau SAR” are to the Macau Special Administrative Region of the People’s Republic of China.

The Company presents its consolidated financial statements in Renminbi. The consolidated financial statements of the Company as of December 31, 2002 and 2003 (the “Financial Statements”) have been prepared in accordance with International Financial Reporting Standards (“IFRS”) promulgated by the International Accounting Standards Board. IFRS includes International Accounting Standards (“IAS”) and related interpretations. IFRS differs in certain significant respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). Information relating to the nature and effect of such differences is presented in Note 33 to the Financial Statements.

Solely for the convenience of the readers, this Annual Report contains translations of certain Renminbi amounts into U.S. dollars at the rate of US$1.00 = RMB8.2767, which is the average of the buying and selling rates as quoted by the People’s Bank of China at the close of business on December 31, 2003. No representation is made that the Renminbi amounts or U.S. dollar amounts included in this Annual Report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. Any discrepancies in the tables included herein between the amounts listed and the totals are due to rounding.

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GLOSSARY OF AIRLINE INDUSTRY TERMS

In this Annual Report, unless the context indicates otherwise, the following terms shall have the respective meanings set forth below.

Capacity Measurements
“available seat kilometers” or “ASKs”		the number of seats made available for sale multiplied by the kilometers flown
“available ton kilometers” or “ATKs”		the number of tons of capacity available for the transportation of revenue load (passengers and cargo) multiplied by the kilometers flown
Traffic Measurements
“revenue passenger kilometers” or “RPKs”		the number of revenue passengers carried multiplied by the kilometers flown
“cargo ton kilometers”		the cargo load in tons multiplied by the kilometers flown
“revenue ton kilometers” or “RTKs”		the load (passenger and cargo) in tons multiplied by the kilometers flown
Yield Measurements
“passenger yield”		revenue from passenger operations divided by RPKs
“cargo yield”		revenue from cargo operations divided by cargo ton kilometers
“average yield”		revenue from airline operations (passenger and cargo) divided by RTKs
“ton”		a metric ton, equivalent to 2,204.6 pounds
Load Factors
“passenger load factor”		RPKs expressed as a percentage of ASKs
“overall load factor”		RTKs expressed as a percentage of ATKs
“breakeven load factor”		the load factor required to equate scheduled traffic revenue with operating costs assuming that total operating surplus is attributable to scheduled traffic operations
Utilization
“utilization rate”		the actual number of flight hours per aircraft per operating day
Equipment
“rotables”		aircraft parts that are ordinarily repaired and reused
“expendables”		aircraft parts that are ordinarily used up and replaced with new parts

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PART I

ITEM 1.          IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.

     Not applicable.

ITEM 2.          OFFER STATISTICS AND EXPECTED TIMETABLE.

     Not applicable.

ITEM 3.          KEY INFORMATION.

Selected Financial Data

     The following selected data of consolidated statements of operations for each of the years in the five-year period ended December 31, 2003 and consolidated balance sheets for five years ended December 31, 2003 have been derived from the consolidated financial statements of the Company. Such consolidated financial statements have been audited by KPMG, Independent Registered Public Accounting Firm, and prepared in accordance with IFRS. IFRS differs in certain significant respects from U.S. GAAP. See Note 33 to the Financial Statements for the nature and effect of such differences related to the Group between IFRS and U.S. GAAP as of December 31, 2002 and 2003 and for each of the years in the three-year period ended December 31, 2003. The following information should be read in conjunction with, and is qualified in its entirety by, the Financial Statements of the Group.

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Capitalization and Indebtedness

     Not applicable.

Reasons for the Offer and Use of Proceeds

     Not applicable.

Risk Factors

     Risks relating to the Company

     Government ownership and control of the Company

     All Chinese airlines are wholly- or majority-owned either by the Chinese Government or by provincial or municipal governments in China. CSAHC, an entity wholly-owned by the Chinese Government, holds and exercises the rights of ownership of all of the Domestic Shares or 50.3% of the equity of the Company. The interests of the Chinese Government in the Company and in other Chinese airlines may conflict with the interests of the holders of the ADSs, H Shares and A Shares. The public policy considerations of the Chinese Government in regulating the Chinese commercial aviation industry may also conflict with its indirect ownership interest in the Company.

     High operating leverage and foreign exchange exposure

     The airline industry is generally characterized by a high degree of operating leverage. In addition, due to high fixed costs, the expenses relating to the operation of any flight do not vary proportionately with the number of passengers carried, while revenues generated from a flight are directly related to the number of passengers carried and the fare structure of such flight. Accordingly, a decrease in revenues could result in a proportionately higher decrease in net income. Moreover, as the Group has substantial obligations denominated in foreign currencies, its results of operations are significantly affected by fluctuations in foreign exchange rates, particularly for the US dollar and the Japanese Yen. The Company incurred a net exchange loss of RMB175 million and RMB164 million for 2002 and 2003, respectively, mainly as a result of yen fluctuations. A majority of these exchange losses were unrealized in nature.

     Potential conflicts of interest

     CSAHC will continue to be the controlling shareholder of the Company and CSAHC and certain of its affiliated companies will continue to provide certain important services to the Company, including the import and export of aircraft spare parts and other flight equipment, housing services and financial services. In addition, Mr. Yan Zhi Qing, the Chairman of the Board of Directors, also serves as the President of CSAHC. The interests of CSAHC may conflict with those of the Company. In addition, any disruption of the provision of services by CSAHC’s affiliated companies or a default by CSAHC of its obligations owed to the Company could affect the Company’s operations and financial condition. In particular, as part of its cash management system, the Company periodically places significant amount of demand deposits to Southern Airlines Group Finance Company Limited (“SA Finance”), a PRC authorized financial institution controlled by CSAHC and an affiliated company of the Company. As a result, the Company’s deposits with SA Finance are subject to the risks associated with the business of SA Finance over which the Company does not exercise control. As of December 31, 2002 and 2003, the Group had short-term deposits of RMB901 million and RMB366 million, respectively, with SA Finance.

     Certain transactions between the Company and CSAHC or its affiliates (as defined in the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Hong Kong Listing Rules”)) will constitute connected transactions of the Company under the Hong Kong Listing Rules and, unless exemptions are applicable or waivers are granted, will be subject to disclosure requirements and/or independent shareholders’ approval in a general meeting.

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     Risks relating to certain real property

     Although systems for registration and transfer of land use rights and related real property interests in China have been implemented, such systems do not yet comprehensively account for all land and related property interests. The land in Guangzhou on which the Company’s headquarters buildings and related aircraft maintenance and other facilities are located and the buildings that the Company uses at its route base in Wuhan, Haikou and Zhengzhou are leased by the Company from CSAHC. However, CSAHC lacks adequate documentation evidencing CSAHC’s rights to such land and buildings, and, as a consequence, the lease agreements between CSAHC and the Company for such land have not been registered with the relevant authorities. As a result, such lease agreements may not be enforceable. Lack of adequate documentation for land use rights and ownership of buildings subjects the Company to challenges and claims by third parties with respect to the Company’s use of such land and buildings.

     The Company has been occupying all of the land and buildings described above without challenge. CSAHC has received written assurance from the CAAC to the effect that CSAHC is entitled to continued use and occupancy of the land in Guangzhou and certain related buildings and facilities. However, such assurance does not constitute formal evidence of CSAHC’s right to occupy such lands, buildings and facilities, or the right to transfer, mortgage or lease such real property interests. The Company cannot predict the magnitude of the adverse effect on its operations if its use of any one or more of these parcels of land or buildings were successfully challenged. CSAHC has agreed to indemnify the Company and Guangzhou Aircraft Maintenance Engineering Company Limited (“GAMECO”), the Company’s jointly controlled entity, against any loss or damage caused by any challenge of, or interference with, the use by the Company and GAMECO of any of their respective land and buildings.

     Risks associated with Hong Kong regional routes

     The Company’s Hong Kong regional routes benefit from traffic originating in Taiwan. The Company’s Hong Kong regional routes may be materially adversely affected if direct flights between Taiwan and Mainland China were permitted in the future. In such event, Xiamen Airlines Company Limited (“Xiamen Airlines”), the Company’s subsidiary, may apply for route rights for direct flights between Taiwan and mainland China, due partly to the proximity to Taiwan of Fujian province, where Xiamen Airlines is based. However, there can be no assurance that sufficient routes and flights between destinations in Taiwan and mainland China could be obtained by Xiamen Airlines, if at all, or as to the yields on these routes and flights.

     Risks Relating to the Chinese Commercial Aviation Industry

     Government regulation

     The Company’s ability to implement its business strategy will continue to be affected by regulations and policies issued or implemented by the CAAC, which encompasses substantially all aspects of the Chinese commercial aviation industry, including the approval of domestic, Hong Kong regional and international route allocation, air fares, aircraft acquisition, jet fuel prices and standards for aircraft maintenance, airport operations and air traffic control. Such regulations and policies limit the flexibility of the Company to respond to market conditions, competition or changes in the Company’s cost structure. The implementation of specific CAAC policies could from time to time adversely affect the Company’s operations. The CAAC has confirmed in writing that the Company will be treated equally with other Chinese airlines with respect to certain matters regulated by the CAAC. Nevertheless, there can be no assurance that the CAAC will, in all circumstances, apply its regulations and policies in a manner that results in equal treatment of all airlines that are similarly situated.

     Jet fuel supply and costs

     The availability and cost of jet fuel have a significant impact on the Group’s results of operations. The Group’s jet fuel costs for 2003 accounted for 22.7% of its operating expenses. All of the domestic jet fuel requirements of Chinese airlines (other than at the Shenzhen, Zhuhai and Sanya airports) must be purchased from the exclusive providers, China Aviation Oil Supplies Company (the “CAOSC”) and Bluesky Oil Supplies Company, companies controlled and supervised by the CAAC. Chinese airlines may also purchase their jet fuel requirements at the Shenzhen, Zhuhai and Sanya airports from joint ventures in which the CAOSC is a partner. Jet fuel obtained from the CAOSC’s regional branches is purchased at uniform prices throughout China that are determined and adjusted by the CAOSC from time to time with the approval of the CAAC and the pricing department of the State Planning Commission based on market conditions and other factors. As a result, the costs of transportation and storage of jet fuel in all regions of China are spread among all domestic airlines. Prior to 1994, domestic jet fuel prices were generally below international jet fuel prices. Since then, however, domestic jet fuel price from CAOSC has always been higher than international jet fuel prices, sometimes creating tension in fuel supply. In addition, jet fuel shortages have occurred in China and, on limited occasions before 1993, required the Company to delay or cancel flights. Although such shortages have not materially affected the Company’s results of operations since 1993, there can be no assurance that such shortage will not occur in the future. If such shortage occurs in the future and the Company is forced to delay or cancel flights due to fuel shortage, its operational reputation among passengers and results of operations may suffer.

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     Infrastructure limitations

     The rapid increase in air traffic volume in China in recent years has put pressure on many components of the Chinese commercial aviation industry, including China’s air traffic control system, the availability of qualified flight personnel and airport facilities. Airlines, such as the Company, which have route networks that emphasize short- to medium-haul routes are generally more affected by insufficient aviation infrastructure in terms of on-time performance and high operating costs due to fuel inefficiencies resulting from the relatively short segments flown, as well as the relatively high proportion of time on the ground during turnaround. All of these factors may adversely affect the perception of the service provided by an airline and, consequently, the airline’s operating results. In recent years, the CAAC has placed increasing emphasis on the safety of Chinese airline operations and has implemented measures aimed at improving the safety record of the industry. The ability of the Company to increase utilization rates and to provide safe and efficient air transportation in the future will depend in part on factors such as the improvement of national air traffic control and navigation systems and ground control operations at Chinese airports, which factors are beyond the control of the Company.

     Competition

     The CAAC’s extensive regulation of the Chinese commercial aviation industry has had the effect of managing competition among Chinese airlines. Nevertheless, competition has become increasingly intense in recent years due to a number of factors, including relaxation of certain regulations by the CAAC, and an increase in the capacity, routes and flights of Chinese airlines. Competition in the Chinese commercial aviation industry has led to widespread price-cutting practices that do not in all respects comply with applicable regulations. Until the interpretation of these CAAC regulations has been finalized and strictly enforced, discounted tickets from competitors will continue to have an adverse effect on the Company’s sales.

     The Company faces varying degrees of competition on its Hong Kong regional routes from certain Chinese airlines and Dragon Air and on its international routes, primarily from non-Chinese airlines, most of which have significantly longer operating histories, substantially greater financial and technological resources and greater name recognition than the Company. In addition, the public’s perception of the safety and service records of Chinese airlines could adversely affect the Company’s ability to compete against its Hong Kong regional and international competitors. Many of the Company’s international competitors have larger sales networks and participate in reservation systems that are more comprehensive and convenient than those of the Company, or engage in promotional activities, such as International Alliance programs, that may enhance their ability to attract international passengers.

     Limitation on foreign ownership

     Chinese Government policies limit foreign ownership in Chinese airlines. Under these policies, the percentage ownership of the Company’s total outstanding ordinary shares held by investors in Hong Kong and any country outside China (“Foreign Investors”) may not in the aggregate exceed 49%. Currently, 26.8% of the total outstanding ordinary shares of the Company is held by Foreign Investors. As a result of this limitation on foreign ownership, the Company will have no meaningful access to the international equity capital markets unless the restriction on foreign ownership is lifted.

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     Consolidation and Restructuring

     In 2000, the CAAC announced a restructuring plan with respect to the PRC aviation industry. Pursuant to such restructuring plan, domestic airlines are directed to consolidate, on a voluntary basis, into three major airline groups in China: CSAHC, China National Aviation Holding Company and China Eastern Air Holding Group. The Company announced that it will also participate in such consolidation and restructuring pursuant to the CAAC directives. The Company has taken steps towards the purchase of the airline business of China Northern Airlines Company and Xinjiang Airlines Company, two wholly owned subsidiaries of CSAHC. These proposed acquisitions pursuant to the CAAC restructuring plan may involve uncertainties and risks over a long period of time, including the following:

	-		failure to achieve the anticipated synergies, cost savings or revenue enhancing opportunities resulting from the restructuring activities;
	-		diversion of management’s attention from existing business concerns and other business opportunities of the Group;
	-		difficulty in integrating the assets and business of other airlines, including its employees, corporate culture, managerial systems and processes, business information systems and services;
	-		difficulty in exercising control and supervision over various new operations within the Group;
	-		failure to retain key personnel; and
	-		increase in financial pressure due to assumption of recorded/unrecorded liabilities of the acquired businesses.

     The inability to manage additional businesses or integrate successfully the acquired businesses without substantial expense, delay or other operational or financial problems, or the occurrence of one or more of the events enumerated above, could materially adversely affect the Group’s financial condition and results of operations.

     Risks relating to the PRC

     Foreign exchange risks

     Renminbi is not a freely convertible currency, and the Company’s ability to obtain or retain foreign currencies is subject to regulation in China. Limitations on the availability of foreign exchange could have a material adverse effect on the Company’s operations and financial condition, particularly in light of the Company’s substantial foreign currency obligations.

     The value of Renminbi is subject to changes in Chinese Government policies and depends to a large extent on China’s domestic and international economic and political developments, as well as supply and demand in the local market. Since 1994, the official exchange rates for the conversion of Renminbi to US dollars have been stable. There can be no assurance, however, that such rates will not be volatile or that there will be no further devaluation of the Renminbi against the foreign currencies in which the Company’s obligations are denominated, principally the US dollar and the Japanese Yen. Based on the Company’s foreign currency denominated obligations as of December 31, 2003, a 1% change in the exchange rate between the Renminbi and the US dollar, or between the Renminbi and Japanese Yen, would have resulted in an unrealized gain or loss of RMB152 million (US$18 million). As the Company is not able to hedge effectively against the devaluation of the Renminbi other than by retaining its foreign exchange-denominated earnings and receipts to the extent permitted by applicable law, any future devaluation in the Renminbi could adversely affect the Company’s results of operations and financial condition. The Company’s results of operations and financial condition may also be affected by changes in the value of currencies other than the Renminbi in which the Company’s earnings and obligations are denominated.

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     Developing legal system

     The Chinese legal system is based on written statutes and is a system, unlike common law systems, in which decided legal cases have little precedential value. In 1979, China began to promulgate a more comprehensive system of laws. On December 29, 1993, the Chinese National People’s Congress promulgated the Company Law, which became effective on July 1, 1994. In August 1994, pursuant to the Company Law, the PRC State Council issued the PRC Special Regulations on Overseas Offering and Listing of Shares by Companies Limited by Shares to regulate joint stock companies that offer and list their shares overseas. These laws, regulations and legal requirements are relatively recent, and, like other laws, regulations and legal requirements applicable in China (including with respect to the commercial aviation industry), their interpretation and enforcement involve significant uncertainties.

     Taxation of holders of H Shares or ADS by China

     Chinese tax law generally provides for the imposition of a withholding tax on dividends paid by a Chinese company to a non-Chinese shareholder at a rate of 20%. In a notice issued by the State Taxation Bureau of the PRC and a letter issued by the State Taxation Bureau, however, the Chinese tax authorities confirmed that the imposition of this withholding tax on dividends paid by joint stock companies, such as the Company, had been suspended. Accordingly, any future dividends to be paid by the Company to holders of H Shares or ADS who are foreign individuals not resident in China or which are foreign enterprises with no permanent establishment in China will not be subject to a Chinese withholding tax. In the event that the suspension of the withholding tax is lifted, such payments will be subject to withholding tax at the 20% rate unless the holder is entitled to a tax waiver or a lower tax rate under an applicable double-taxation treaty. See Item 10 “Additional Information – Taxation”.

ITEM 4.         INFORMATION ON THE COMPANY.

History and Development of the Company

     The Company is a joint stock company incorporated in China on March 25, 1995, and is 50.3% owned by CSAHC. The registered address of the Company is Guangzhou Economic & Technology Development Zone, People’s Republic of China (telephone no: (86)20-8612-4738, website: www.cs-air.com).

     During 2001, the Company established a new 50%: 50% joint venture, namely MTU Maintenance Zhuhai Co. Ltd, with MTU Maintenance Gmbh, a subsidiary of Daimler-Benz Aerospace Group, to provide repair and maintenance services to aircraft engines. The registered capital is US$63.1 million.

     During 2002, the Company entered into an Interest Transfer and Capital Injection Agreement with China State Post Bureau, Shanghai Municipal Post Office, Post Office of the Inner Mongolian Autonomous Region and China Philately Corporation, pursuant to which the Company injected RMB150 million (equivalent to approximately US$18.12 million) in cash to acquire 49% interest in China Postal Airlines, Ltd. The China State Post Bureau holds the remaining 51%. In addition, the Company paid RMB136.5 million (equivalent to approximately US$16.5 million) to acquire 39% interest in Sichuan Airlines Corporation Limited to further expand its market shares in South-western China. The Group also jointly established a new 51%: 49% joint venture, namely Zhuhai Xiang Yi Aviation Technology Company Limited, the first sino-foreign joint venture company engaging in aviation training services in the PRC, with CAE. The registered capital is US$29.8 million.

     On March 13, 2003, the Company obtained an approval certificate from the Ministry of Commerce to change to a permanent limited company with foreign investments and obtained the business license on October 17, 2003 issued by the State Administration of Industry and Commerce of the People’s Republic of China.

     Pursuant to an extraordinary general meeting of shareholders held on May 21, 2002, a resolution was passed authorizing the Company to issue not more than 1,000,000,000 A shares of par value of RMB1.00 each. The Company issued and listed its 1,000,000,000 A shares with a par value of RMB1.00 each on the Shanghai Stock Exchange in July 2003.

     On October 17, 2003, the Company’s registered address was moved to Guangzhou Economic & Technology Development Zone. In accordance with the Rules and Regulations for Implementation of Income Tax for Foreign Investment Enterprises and Foreign Enterprises of the PRC and a taxation approval document “Guangzhou Municipal State Tax Bureau Suo De Shui Zi Que 020043”, the Company is entitled to enjoy the preferential tax policy implemented in the Guangzhou Economic & Technology Development Zone effective October 1, 2003. As a result, the Company’s income tax rate has been changed to 15% from 33% beginning from that date.

     The Group had RMB1,492 million, RMB6,351 million and RMB4,707 capital expenditures in 2001, 2002 and 2003 respectively. Of such capital expenditures in 2003, RMB2,818 million were financed by bank borrowings while the remaining RMB1,889 million were financed by internal resources. The capital expenditures were primarily incurred on the additional investments in aircraft and flight equipment under the Group’s fleet expansion plans and Guangzhou new airport, and, to a small extent, additional investments in other facilities and building for operations.

     The Chinese Government has approved a new Guangzhou airport project, which commenced construction in 2000, with completion targeted in August 2004. Upon completion, the new airport will replace the Baiyun International Airport as the main hub of the Group’s route network. With the approval of the Chinese Government, the Group began construction of its facilities at the new Guangzhou airport in 2000. The Group’s total investment will be RMB3,540 million, of which RMB2,620 million will be financed by bank loans. Several major banks in the PRC have committed to finance the project. The balance of RMB920 million will be financed by internal resources. As of December 31, 2003, the Group invested a total of RMB1,445.8 million for this new airport project. The Group believes that the completion of the new airport will substantially enhance the Group’s operations in the Southern China region.

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Business Overview

     General

     The Group provides commercial airline services throughout China, Hong Kong and Macau regions, Southeast Asia and other parts of the world. The Group is one of the three largest Chinese airlines and, as of year end 2003, ranked first in terms of passengers carried, number of scheduled flights per week, number of hours flown and size of route network and aircraft fleet. During the three years ended December 31, 2003, the Group’s RPKs increased at a compound annual rate of 2.6%, from 25,057 million in 2001 to 26,387 million in 2003, while its capacity, measured in terms of ASKs, increased at a compound annual rate of 1.0%, from 40,064 million in 2001 to 40,867 million in 2003. In 2003, the Group carried 20.47 million passengers and had passenger revenue of RMB15,010 million (US$1,814 million). Net loss for 2003 was RMB358 million (US$43 million).

     The Group conducts a portion of its airline operations through its airline subsidiaries namely Xiamen Airlines, Southern Airlines Group Shantou Airlines Company Limited (“Shantou Airlines”), Guangxi Airlines Company Limited (“Guangxi Airlines”), Zhuhai Airlines Company Limited (“Zhuhai Airlines”) and Guizhou Airlines Company Limited (“Guizhou Airlines”) (collectively, the “Airline Subsidiaries”). In 2003, the Airline Subsidiaries carried 7.62 million passengers and had operating revenue of RMB5,368 million (US$608 million) and accounted for 37.2% and 30.7% of the Group’s passengers carried and operating revenue, respectively.

     The Group also provides air cargo and mail services. The cargo and mail revenue of the Group increased by 9.5% to RMB1,955 million (US$236 million) in 2003 as compared with 2002. The Group’s airline operations are fully integrated with its airline-related businesses, including aircraft and engine maintenance, flight simulation and air catering operations.

     The Group operates the most extensive route network among Chinese airlines with a total of 334 routes as of December 31, 2003, including 274 domestic routes, 18 Hong Kong regional routes (which include Hong Kong routes and Macau routes), and 42 international routes. In 2003, the Group operated an average of 4,118 landing and take-offs per week serving 94 destinations, including major cities in China, such as Beijing, Shanghai, Tianjin, Guangzhou, Shenzhen, Wuhan, Changsha, Zhengzhou, Xiamen, Xian and Chengdu. Most of the cities served by the Group are located in commercial centers or rapidly developing economic regions in China.

     The Group’s corporate headquarters and principal base of operations are located in Guangzhou, which is the capital of Guangdong Province and the largest city in southern China. Located in the rapidly developing Pearl River Delta region, Guangzhou is also the transportation hub of southern China and one of China’s major gateway cities. Guangzhou’s significance has increased as the transportation infrastructure of Guangdong Province has developed through the construction and development of expressways, an extensive rail network and the port cities of Yantian, Shekou, Chiwan, Mawan, Huangpu and Zhuhai.

     In addition to its main route base in Guangzhou, the Group also maintains twelve regional route bases in Zhengzhou, Wuhan, Changsha, Shenzhen, Zhuhai, Xiamen, Fuzhou, Haikou, Guilin, Beihai, Shantou and Guiyang. All of these regional route bases are located in provincial capitals or major commercial centers in China.

     The Group’s operations primarily focus on the domestic market. In addition, the Group also operates Hong Kong regional and international flights. As of year end of 2003, the Group had 18 Hong Kong regional routes and 42 international routes. The Group’s Hong Kong regional operations include flights between destinations in China and Hong Kong and Macau. The Group’s international operations include scheduled services to Tokyo, Osaka, Amsterdam, Sharjah, Los Angeles, Fukuoka, Seoul, Sydney and ten Southeast Asian destinations. The Group operates the most extensive Southeast Asian route network among Chinese airlines.

     As of year end 2003, the Group operated a fleet of 132 aircraft, consisting primarily of Boeing 737-300, 737-500, 737-700, 737-800, 747-400, 757-200 and 777-200 aircraft, and Airbus 319-100 and 320-200 aircraft. Significant portions of these aircraft are held under capital and operating leases. The average age of the Group’s aircraft was 7.82 years at year end 2003.

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     Restructuring and Initial Public Offering

     As part of China’s economic reforms in the 1980’s, the PRC State Council directed the CAAC to separate its governmental, administrative and regulatory role from the commercial airline operations that were being conducted by the CAAC and its regional administrators. As a result, CSAHC was established on January 26, 1991 for the purpose of assuming the airline and airline-related commercial operations of the Guangzhou Civil Aviation Administration, one of the six regional bureaus of the CAAC. CSAHC was one of the 55 large-scale enterprises designated by the Chinese Government to play a leading role in their respective industries.

     CSAHC was restructured in 1994 and 1995 in anticipation of the initial public offering of the Company. The restructuring was effected through the establishment of the Company and the execution of the Demerger Agreement, dated as of March 25, 1995, as amended (the “Demerger Agreement”), between CSAHC and the Company. Upon the restructuring, the Company assumed substantially all of the airline and airline-related businesses, assets and liabilities of CSAHC, and CSAHC retained its non-airline and non-airline-related businesses, assets and liabilities, and the non-business assets and liabilities. Upon this separation, all interests, rights, duties and obligations of CSAHC, whenever created or accrued, were divided between the Company and CSAHC based on the businesses, assets and liabilities assumed by each of them under the Demerger Agreement. Under the Demerger Agreement, CSAHC agreed not to conduct or participate or hold any interest in, either directly or indirectly, any business, activity or entity in or outside China that competes or is likely to compete with the commercial interests of the Group, although CSAHC may continue to hold and control the affiliates of CSAHC existing on the date of the Demerger Agreement and may continue to operate the businesses of such affiliates.

     In July 1997, the Company completed a private placement of 32,200,000 H Shares to certain limited partnership investment funds affiliated with Goldman Sachs & Co. and an initial public offering of 1,141,978,000 H Shares, par value RMB 1.00 per share, and listing of the H Shares on the Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”) and American Depositary Shares (“ADSs”, each ADS representing 50 H Shares) on the New York Stock Exchange. Prior to the private placement and the initial public offering, all of the issued and outstanding shares of capital stock of the Company, consisting of 2,200,000,000 Domestic Shares, par value RMB 1.00 per share, were owned by CSAHC, which owns and exercises, on behalf of the Chinese Government and under the supervision of the CAAC, the rights of ownership of the Domestic Shares held by CSAHC. After giving effect to the private placement and the initial public offering, CSAHC continues to own the 2,200,000,000 Domestic Shares, representing approximately 65.2% of the total share capital of the Company, and will be entitled to elect all the directors of the Company and to control the management and policies of the Group. Domestic Shares and H Shares are both ordinary shares of the Company.

     Pursuant to an extraordinary general meeting of shareholders held on May 21, 2002, a resolution was passed authorizing the Company to issue not more than 1,000,000,000 A shares of par value of RMB1.00 each. The Company issued and listed its 1,000,000,000 A shares with a par value of RMB1.00 each on the Shanghai Stock Exchange in July 2003. Subsequent to A share issue, the shareholding of CSAHC on the Company was reduced to 50.3% from 65.2%.

     Traffic

     The following table sets forth certain statistical information with respect to the Group’s passenger and cargo and mail traffic for the years indicated.

										Cargo and Mail Carried								Total Traffic
Passengers Carried										(tons)								(ton kilometers)
						Increase								Increase								Increase
						(decrease)								(decrease)								(decrease)
						over								over								over
Year		Total				previous year				Total				previous year				Total				previous year
		(in million)				(%)				(in thousand)				(%)				(in million)				(%)
1999			15.11				0.4				390.8				12.3				2,003.0				4.6
2000			16.85				11.5				353.0				(9.7	)			2,613.0				30.5
2001			19.12				13.5				398.0				12.7				3,034.0				16.1
2002			21.49				12.4				470.0				18.1				3,614.0				19.1
2003			20.47				(4.7	)			464.0				(1.3	)			3,561.0				(1.5	)

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     Route Network

     Overview

     The Group operates the most extensive route network among Chinese airlines. As of year end 2003, the Group operated 334 routes consisting of 274 domestic routes, 18 Hong Kong regional routes and 42 international routes. At such date, the Group’s route network served 71 destinations within China and 23 destinations outside of China.

     The Group continually evaluates its network of domestic, Hong Kong regional and international routes in light of its operating profitability and efficiency. The Group seeks to coordinate flight schedules with the Airline Subsidiaries on shared routes to maximize load factors and utilization rates. The acquisition of domestic, Hong Kong regional and international routes is subject to approval of the CAAC, and the acquisition of Hong Kong regional and international routes is also subject to the existence and the terms of agreements between the Chinese Government and the government of the Hong Kong SAR, the government of Macau Special Administrative Region of the People’s Republic of China (“Macau SAR”) and the government of the proposed foreign destination.

     In order to expand the Group’s international route network, the Group has entered into code-sharing agreements with several international airlines such as Delta Airlines, Asiana Airlines, Japan Air System, Vietnam Airlines, Royal Dutch Airlines and Garuda Indonesian, etc. Under the code sharing agreements, the airlines are permitted to sell tickets on certain international routes for the Group to passengers using their codes. Similarly, the Group is permitted to sell tickets for these airlines using its “CZ” code. The code sharing agreements help increase the number of the Group’s international sales outlets.

     Route Bases

     The Group’s main route base is in Guangzhou. The Group maintains twelve regional route bases in Zhengzhou, Wuhan, Changsha, Shenzhen, Zhuhai, Xiamen, Fuzhou, Haikou, Guilin, Beihai, Shantou and Guiyang. All of these regional route bases are located in provincial capitals or major commercial centers in China. The Group’s network of route bases provides the Group with routes covering all of China, except for Inner Mongolia, Tibet and Ningxia.

     The Group believes that its extensive network of route bases enables it to coordinate flights and deploy its aircraft more effectively and to provide more convenient connecting flight schedules and access service and maintenance facilities for its aircraft. The Group believes that the number and location of these route bases may enhance the Group’s ability to obtain the CAAC’s approval of requests by the Group to open new routes and provide additional flights between these bases and other destinations in China. Under current regulations of the CAAC, airlines are generally expected to operate mainly from their route bases.

     The Chinese Government has approved a new Guangzhou airport project, which commenced construction in 2000, with completion targeted in August 2004. Upon completion, the new airport will replace the Baiyun International Airport as the main hub of the Group’s route network. With the approval of the Chinese Government, the Group began construction of its facilities at the new Guangzhou airport in 2000. The Group’s total investment will be RMB3,540 million, of which RMB2,620 million will be financed by bank loans. Several major banks in the PRC have committed to finance the project. The balance of RMB920 million will be financed by internal resources. As of December 31, 2003, the Group invested a total of RMB1,445.8 million for this new airport project. The Group believes that the completion of the new airport will substantially enhance the Group’s operations in the Southern China region.

     Domestic Routes

     The Group’s domestic route network serves substantially all provinces and autonomous regions in China, including Guangdong, Fujian, Hubei, Hunan, Hainan, Guangxi, Jiangsu, Zhejiang, Henan and Anhui, and serves all four centrally-administered municipalities in China, namely, Beijing, Shanghai, Tianjin, and Chongqing. In 2003, the Group’s most profitable domestic routes were the routes between Guangzhou and Beijing, Guangzhou and Shanghai, Shenzhen and Shanghai, Beijing and Guangzhou, Shenzhen and Beijing, Shanghai and Guangzhou, Beijing and Shenzhen, Guangzhou and Zhengzhou, Zhengzhou and Guangzhou and between Guangzhou, Dalian and Harbin.

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     Hong Kong Regional Routes

     The Group offers scheduled service between Hong Kong and Guangzhou, Kunming, Xiamen, Shantou, Beijing, Guilin, Meixian, Haikou, Wuhan, Zhengzhou, Nanning, Changsha and Sanya; between Macau and Fuzhou, Hangzhou and Xiamen. The Group’s Hong Kong regional routes also include routes between Hong Kong or Macau and other destinations in China, including Zhang Jia Jie and Wu Yi Shan, which the Group operates on a “charter” flight basis, as explained below. The Group believes that the routes on which it operates these “charter” flights are among its highest yielding routes, primarily because the Group faces limited competition on such routes and is consequently less subject to downward pricing pressures. In 2003, the most profitable Hong Kong regional routes were those between Guangzhou and Hong Kong, Hong Kong and Guangzhou, Hong Kong and Wuhan, Wuhan and Hong Kong, Kunming and Hong Kong, Hong Kong and Xiamen, Hong Kong and Zhengzhou, Hong Kong and Kunming, Zhengzhou and Hong Kong, Hong Kong and Changsha.

     The Group’s “charter” flights are essentially regularly scheduled flights, but in theory permission to operate these “charter” flights is subject to monthly review by the CAAC and the Civil Aviation Department of the Hong Kong SAR. The CAAC has informally indicated that it primarily considers market demand and airline capability in granting permission for such flights. The Group has been able to maintain all of its Hong Kong regional routes on which it operates on a “charter” flight basis and believes that demand on such routes will continue. In 2003, the Group operated a total of 11,395 flights on its Hong Kong regional routes, accounting for approximately 29.8% of all passengers carried by Chinese airlines on routes between Hong Kong or Macau and destinations in China.

     International Routes

     The Group is the principal Chinese airline connecting the rapidly developing Pearl River Delta region of China to Southeast Asia, with 24 routes serving ten Southeast Asian destinations, including Singapore and major cities in Indonesia, Thailand, Malaysia, Philippines, Vietnam and Laos. In 2003, the Group’s most profitable Southeast Asian routes were those between Manila, Xiamen and Beijing; Beijing, Xiamen and Manila; Guangzhou and Singapore, and Guangzhou and Bankok. The Group believes that, among Chinese airlines, it is well-positioned to benefit from the business opportunities arising out of increased air traffic and the growing economic relationships between China and Southeast Asian countries.

     In addition to the 24 routes serving ten Southeast Asian destinations, the Group also operates 18 other international routes providing scheduled service to Amsterdam, Sharjah, Osaka, Tokyo, Fukuoka, Seoul, Los Angeles, Sydney and Melbourne.

     Aircraft Fleet

     The Group’s fleet plan in recent years has emphasized expansion and modernization through the acquisition of new aircraft and the retirement of less efficient older aircraft. As of year end 2003, the Group operated a fleet of 132 aircraft with an average age of 7.82 years. All aircraft of the Group are Boeing and Airbus aircraft. The Group has the largest fleet among Chinese airline companies. Most of the aircraft operated by the Group are leased pursuant to various types of leasing arrangements.

     The following table sets forth certain information regarding the Group’s fleet of 132 aircraft as of December 31, 2003.

										Average
		Number of				Average Age				Passenger
Model		Aircraft				(years)				Capacity
Boeing 777-200			4				7.51				380
Boeing 777-21B			5				6.27				292
Boeing 757-200			25				11.48				200
Boeing 747F			2				1.42				n/a
Boeing 737-800			12				0.78				167
Boeing 737-700			10				3.39				138
Boeing 737-500			18				11.10				132
Boeing 737-300			32				10.16				145
Airbus 319-100			4				0.42				128
Airbus 320-200			20				5.64				158
			132

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     During 2003, the Group continued to expand and modernize its aircraft fleet. In 2003, the Group’s major aircraft transactions included:

	(i)		The acquisition of seven Boeing 737-800 aircraft financed by a combination of internal funds and long term bank loans;
	(ii)		The addition of four Airbus 319-100 aircraft and three Boeing 737-700 aircraft under operating leases;
	(iii)		The early retirement of two Boeing 737-200 aircraft;
	(iv)		The expiry of two Boeing 747 cargo freighters under short-term wet leases; and
	(v)		The extension of four Boeing 737-300 under operating leases for another 2 to 5 years.

     In addition, on April 8, 2004, the Company entered into an agreement with Airbus SNC for the acquisition of fifteen Airbus 320-200 aircraft and six Airbus 319-100 aircraft, scheduled for deliveries in 2005 and 2006.

     Aircraft Financing Arrangements

     Overview

     A significant portion of the Group’s aircraft is acquired under long-term capital or operating leases or long-term mortgage loans with remaining terms to maturity ranging from one to nine years. As of December 31, 2003, 29 of the Group’s 132 aircraft were operated under

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capital leases, 54 were operated under operating leases, 27 were financed by long-term mortgage loans, while the remaining were acquired either with cash proceeds or acquired by exercising the purchase options upon expiry of the respective capital leases. The Group’s planned acquisition of aircraft in the foreseeable future will generally be made pursuant to operating leases or financed by long-term mortgaged loans. The Group’s determination as to its acquisition strategy depends on the Group’s evaluation at the time of its capacity requirements, anticipated deliveries of aircraft, the Group’s capital structure and cash flow, prevailing interest rates and other general market conditions.

     The following table sets forth, as of December 31, 2003, the number of Boeing and Airbus aircraft operated by the Group pursuant to capital and operating leases and the remaining terms, expressed in years, of such leases.

										Average
		Capital				Operating				Remaining
Model		Lease				Lease				Lease Term
Boeing 777-200 and 777-21B			5				3				7.66
Boeing 757-200			1				10				4.78
Boeing 737-700			—				4				6.13
Boeing 737-500			—				18				2.28
Boeing 737-300			5				13				3.24
Airbus 320-200			18				2				4.60
Airbus 319-100			—				4				9.57
			29				54

     Capital Leases

     As of December 31, 2003, the Group’s aggregate future minimum lease payments (including future finance charges) required under its capital leases were RMB7,961 million (US$962 million). As of year end 2003, a majority of the Group’s capital leases had original terms ranging from ten to fifteen years from the date of delivery of the relevant aircraft, and the remaining terms of these leases ranged from one to six years. The Group’s capital leases typically cover a significant portion of the relevant aircraft’s useful life and transfer the benefits and risks of ownership to the Group. Under its capital leases, the Group generally has an option to purchase the aircraft at or near the end of the lease term. As is customary in the case of capital leases, the Group’s obligations are secured by the related aircraft, as well as other collateral.

     Operating Leases

     As of December 31, 2003, the Group’s aggregate future minimum lease payments required under its operating leases were RMB8,120 million (US$981 million). As of year end 2003, the Group’s operating leases had original terms generally ranging from eight to ten years from the date of delivery of the relevant aircraft, and the remaining terms of these leases generally ranged from one to nine years. Pursuant to the terms of the operating leases, the Group is obligated to make rental payments based on the lease term, with no termination payment obligations or purchase option, and the lessor bears the economic benefits and risks of ownership. Under its operating leases, the Group has no option to purchase the aircraft and is required to return the aircraft in the agreed condition at the end of the lease term. Although title to the aircraft remains with the lessor, the Group is responsible during the lease term for the maintenance, servicing, insurance, repair and overhaul of the aircraft.

     Pursuant to capital or operating leases, the Group is obligated to indemnify the lessors against any withholding or similar taxes that may be imposed on the lessors by taxing authorities in China with regard to payments made pursuant to such leases. In accordance with relevant PRC tax regulations, a PRC lessee is liable to pay PRC withholding tax in respect of any lease payments regularly made to an overseas lessor. Depending on the circumstances, this tax is generally imposed at a fixed rate ranging from 10% to 20% of the lease payments, or in certain cases, the interest components of such payments. Pursuant to an approval document from the State Taxation Bureau, lease arrangements executed prior to September 1, 1999 are exempt from PRC withholding tax. The PRC withholding tax payable in respect of the operating leases executed after September 1, 1999 of RMB12 million, RMB14 million and RMB8 million during 2001, 2002 and 2003 respectively, have been included as part of the operating lease charges.

     Aircraft Flight Equipment

     The jet engines used in the Group’s aircraft fleet are manufactured by General Electric Corporation, Rolls-Royce plc, United Technologies International, Inc., CFM International, Inc. and International Aviation Engines Corporation. As of year end 2003, the Group had 34 spare jet engines for its fleet. The Group determines its requirements for jet engines based on all relevant considerations, including manufacturers’ recommendations, the performance history of the jet engines and the planned utilization of its aircraft.

     Rotables and certain of the expendables for the Group’s aircraft are generally purchased by Southern Airlines (Group) Import & Export Trading Corporation (“SAIETC”), a subsidiary of CSAHC acting as agent for the Group, in consideration of an agency fee. The Group arranges the ordering of aircraft, jet engines and other flight equipment for the Airline Subsidiaries and keeps an inventory of rotables and expendables for the Airline Subsidiaries.

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     Aircraft Maintenance

     A major part of the maintenance for the Group’s fleet other than overhauls of jet engines is performed by GAMECO, a joint venture established by the Company and Hutchison Whampoa (“Hutchison”), consistent with the Group’s strategy to achieve fully integrated airline operations and to assure continued access to a stable source of high quality maintenance services. The remaining part of the maintenance for the Group’s fleet other than overhauls of jet engines is performed by service providers in China and overseas. GAMECO performs all types of maintenance services, ranging from maintenance inspections performed on aircraft before, after and between flights (“line maintenance services”) to major overhaul performed at specified intervals. GAMECO was the first of three aircraft maintenance facilities in China having been certified as a repair station by both the CAAC and the FAA. In March 1998, GAMECO received an approval certificate from the United Kingdom Civil Aviation Authority for the repair and maintenance of aircraft and aircraft engines.

     The Group believes that GAMECO performs major maintenance checks on the Group’s aircraft within time periods generally consistent with those of large international airline maintenance centers. GAMECO’s repair and maintenance capabilities include overhaul of more than 90% of the Group’s aircraft. Although rotables for the Group’s aircraft are generally imported through SAIETC, a portion of expendables and other maintenance materials are directly imported by GAMECO. GAMECO also provides line maintenance services to 12 other Chinese airlines and 11 international airlines. GAMECO provides heavy maintenance services to 11 other Chinese airlines and seven international airlines.

     Under the Aircraft Maintenance and Engineering Agreement entered into between GAMECO and the Company (the “Aircraft Maintenance Agreement”), GAMECO charges the Group for expendables on a cost plus basis, and for labor based on a formula that takes into account projected flight hours, costs and other relevant factors. Fees under the Aircraft Maintenance Agreement are payable 50% in Renminbi and 50% in U.S. dollars. Each year, the Company and GAMECO determine the components of the pricing formula. For the year ended December 31, 2003, GAMECO’s revenue (excluding Value Added Tax) totaled RMB569 million, approximately 88.2% of which was derived from services provided to the Group.

     Overhauls of jet engines are performed by overseas qualified service providers in Germany, Malaysia, Canada and England. Starting from 2003, MTU Maintenance Zhuhai Co., Ltd., (“MTU Zhuhai”) a jointly controlled entity of the Company and MTU Aero Engines Gmbh., also performed overhauls of certain jet engines for the Group. For the year ended December 31, 2003, a total of eleven jet engines were major overhauled by MTU Zhuhai with total repair costs of RMB106 million.

     Safety

     The Group endeavors to maintain strict compliance with all laws and regulations applicable to flight safety. In addition, the Group has adopted measures to eliminate or minimize factors that may impair flight safety, including specialized training programs and safety manuals. The Air Safety Management Department of the Company implements safety-related training programs on an ongoing basis in all of the Group’s operations to raise the safety awareness of all employees. As a result, overall flight safety has gradually improved. There was no serious incidents involving casualty or flight damage throughout the three years ended December 31, 2003. For minor “incidents” which include various events and conditions prescribed by the CAAC which do not involve serious personal injury or material damage to flight equipment, the Group has kept the number consistently below the standard prescribed by the CAAC. For example, the Company’s “flight incident” ratio was 0.19, 0.42 and 0.13 in 2001, 2002 and 2003, respectively. In comparison, CAAC’s published maximum acceptable flight incident ratio was 1.6 in 2001 and 1.5 in 2002 and 1.3 in 2003. This ratio is defined as the occurrence of one incident for every 10,000 hours of flight time.

     Jet Fuel

     Jet fuel costs typically represent a major component of an airline’s operating expenses. The Group’s jet fuel costs for 2003 accounted for 22.7% of the Group’s operating expenses. Like all Chinese airlines, the Group is generally required by the Chinese Government to purchase its jet fuel requirements from regional branches of CAOSC and Bluesky Oil Supplies Company, except at the Shenzhen, Zhuhai and Sanya airports which are supplied by Sino-foreign joint ventures in which CAOSC is a joint venture partner. CAOSC is a State-owned organization controlled and supervised by the CAAC that controls the importation and distribution of jet fuel throughout China.

     Jet fuel obtained from CAOSC’s regional branches is purchased at uniform prices throughout China that are determined and adjusted by CAOSC from time to time with the approval of the CAAC and the pricing department of the National Development and Reform Commission (“NDRC”) based on market conditions and other factors. As a result, the costs of transportation and storage of jet fuel in all regions of China are spread among all domestic airlines. Jet fuel costs in China are influenced by costs at State-owned oil refineries and limitations in the transportation infrastructure, as well as by insufficient storage facilities for jet fuel in certain regions of China.

     Prior to 1994, domestic jet fuel prices were generally below international jet fuel prices. The Chinese Government had gradually increased domestic jet fuel prices in order to reflect more accurately the costs of supplying jet fuel in China. As a result, domestic jet fuel prices have become higher than those in the international market since the beginning of 1994. With the WTO entry, the jet fuel price in China will probably be trimmed by the market force to be in line with the international market.

     CAOSC’s maximum fuel price in 2003 was RMB3,500 per ton. The average price paid by the Group in 2003 was RMB3,074 per ton, which represents a 13.2% increase from that of 2002.

     To address the problem of high jet fuel prices since 2000, CAAC has announced a policy permitting airlines to impose a fuel surcharge on passengers carried by their domestic and Hong Kong regional flights for the purpose of offsetting the effect of rising jet fuel prices. Such surcharges have been imposed by the Group since November 1, 2000 at the prescribed rates set by the CAAC.

     In addition to purchases of jet fuel from CAOSC, the Group is also permitted by the Chinese Government to purchase a portion of its jet fuel requirements for its international flights from foreign fuel suppliers located outside China at prevailing international market prices. Jet fuel purchased from such sources outside China accounted for approximately 10.0% of the Group’s total jet fuel consumption in 2003.

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     As of December 31, 2003, Zhuhai Airlines operated under the “CZ” code 4 aircraft on 34 domestic routes. In 2003, Zhuhai Airlines carried a total of about 602,000 passengers, or approximately 2.9% of the total number of passengers carried by the Group in that year. Total operating revenue of Zhuhai Airlines for the year ended December 31, 2003 was RMB436 million.

     As of December 31, 2003, Guizhou Airlines operated under the “CZ” code 6 aircraft on 19 domestic routes. In 2003, Guizhou Airlines carried a total of about 691,000 passengers, or approximately 3.4% of the total number of passengers carried by the Group in 2003. Total operating revenue of Guizhou Airlines was approximately RMB469 million for the year ended December 31, 2003.

     Insurance

     The CAAC maintains fleet and legal liability insurance on behalf of the Group and all other Chinese airlines with the People’s Insurance Company of China (“PICC”) under the PICC master policy. The Group maintains aviation hull all risks, spares and airline liability insurance, aircraft hull all risks and spare engines deductible insurance, aviation hull war and allied perils policy of the type and in the amount customary in the Chinese aviation industry.

     Under Chinese law, civil liability of Chinese airlines for injuries suffered by passengers on domestic flights is limited to RMB70,000 (approximately US$8,455) per passenger. Under the Convention for the Unification of Certain Rules Relating to International Transportation by Air of 1929 (as amended by the protocol of 1955, the “Warsaw Convention”), unless a separate agreement has been entered into between China and a specific country, civil liability for injuries suffered by passengers on international flights is limited to US$20,000 per passenger. The Group believes that it maintains adequate insurance coverage for the maximum civil liability that can be imposed in respect of injuries to passengers under Chinese law, the Warsaw Convention or any separate agreement applicable to the Group.

     The CAAC allocates insurance premiums payable in respect of the PICC master policy to each participating airline based on the value of the airline’s insured aircraft or, in the case of leased aircraft, based on the amount required by the terms of the lease. Insurance claims made by any participating airline may cause the premiums paid by the Group under the PICC master policy to increase. PICC’s practice has been to reinsure a substantial portion of its aircraft insurance business through reinsurance brokers on the London reinsurance market.

     Intellectual Property

     The Group’s businesses and operations, other than the businesses and operations of Xiamen Airlines, are conducted under the names “China Southern” and “China Southern Airlines” in both English and Chinese. The Group uses as its logo a stylized rendition of a kapok plant. Xiamen Airlines conducts its businesses and operations under the name of “Xiamen Airlines” in English and Chinese and uses its own logo depicting a stylized rendition of an egret.

     The names “China Southern” and “China Southern Airlines” contain Chinese words of common usage and are therefore not eligible for registration as tradenames under current Chinese law. The kapok logo is a trademark registered in China and recorded with the International Air Transport Association (“IATA”), the rights to which are owned by CSAHC. The Company and CSAHC have entered into a trademark license agreement (the “Trademark License Agreement”), pursuant to which CSAHC has licensed to the Group the right to use the names “China Southern” and “China Southern Airlines” in both English and Chinese and granted the Company a 10-year renewable license from 1997 to use the kapok logo on a world-wide basis. CSAHC has retained the right to use the kapok logo in connection with its non-airline related businesses conducted as of the date of the Trademark License Agreement and to permit its affiliates that do not compete, directly or indirectly, with the Group to use the kapok logo. Xiamen Airlines owns all rights to its egret logo, which is a trademark registered in China, and recorded with the IATA.

     The Company owns all rights to three trademarks, being SKY PEARL CLUB, the logo relating to Easy Cargo 5000 and “SKY PEARL CARD” which are registered in China, and recorded with Trademark Office of the State Administration for Industry and Commerce. Zhuhai Airlines Company Limited owns all rights to the airline logo which is registered with the Trademark Office of the State Administration for Industry and Commerce.

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Organizational Structure

     The following chart illustrates the corporate structure of the Group as of year end 2003 and the aggregate effective equity interest of the Company in each of its principal subsidiaries, affiliated companies and jointly controlled entities.

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     The particulars of the Company’s principal subsidiaries as of December 31, 2003 are as follows:

Attributable equity

Place and date of

interest to the

Name of company

establishment/operation

Company

Direct

Indirect

%

%

Guangxi Airlines Company Limited

PRC

60

—

April 28, 1994

Southern Airlines Group Shantou

PRC

60

Airlines Company Limited

July 20, 1993

Zhuhai Airlines Company Limited

PRC

60

May 8, 1995

Xiamen Airlines Company Limited

PRC

60

—

August 11, 1984

Guizhou Airlines Company Limited

PRC

60

—

November 12, 1991

Guangzhou Nanland Air Catering

PRC

51

—

Company Limited

November 21, 1989

China Southern West Australian

Australia

65

—

Flying College Pty Ltd.

January 26, 1971

China Southern Airlines (Group)

PRC

100

—

Zhuhai Helicopter Company Limited

August 31, 1993

Guangzhou Baiyun International

PRC

61

—

Logistic Company Ltd

July 23, 2002

     Affiliated Companies and Jointly Controlled Entities

     The particulars of the Group’s principal affiliated companies and jointly controlled entity as of December 31, 2003 are as follows:

Place and date of

Attributable equity interest

Name of company

establishment/operation

to the company

Direct

Indirect

%

%

Guangzhou Aircraft Maintenance

PRC

50

—

Engineering Company Limited

October 28, 1989

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Place and date of

Attributable equity interest

Name of company

establishment/operation

to the company

Direct

Indirect

%

%

Southern Airlines Group

PRC

32

15.42

Finance Company Limited

June 28, 1995

Sichuan Airlines Corporation

PRC

39

—

Limited

August 28, 2002

China Postal Airlines Limited

PRC

49

—

November 25, 1996

MTU Maintenance Zhuhai

PRC

50

—

Co. Ltd.

April 6, 2001

Zhuhai Xiang Yi Aviation

PRC

51

—

Technology Company Limited

July 10, 2002

     Certain of the Company’s subsidiaries, affiliated companies and jointly controlled entities are PRC joint ventures which have limited duration pursuant to PRC law.

Property, Plant and Equipment

     For a discussion of the Group’s aircraft, see Item 4, “Information on the Company — History and development of the Company -Aircraft Fleet.”

     The Group’s headquarters in Guangzhou occupy an area of approximately 149,000 square meters of land and a total gross floor area of approximately 149,000 square meters. The Group leases from CSAHC the land in Guangzhou on which the Group’s headquarters and other facilities are located. The Group also leases from CSAHC certain buildings at the Wuhan, Haikou and Zhengzhou airports.

     The Company’s principal properties are located at its headquarters site and at its route bases. The following table sets forth certain information with respect to the Company’s properties at its headquarters in Guangzhou and certain route bases as of the date hereof.

		Land																Buildings
		(in square meters)																(in square meters)
		Owned								Leased								Owned				Leased
Guangzhou			—								80,909								103,957				1,755
Shenzhen			208,740								—								35,174				—
Zhuhai			170,062								—								18,791				—
Changsha			138,949								—								47,190				—
Zhengzhou			290,841								—								60,582				—
Haikou			5,265								—								59,543				19,633
Wuhan			—								31,061								435				26,061
Nanyang			—								—								12,156				—

     The following table sets forth certain information with respect to the properties of the Airline Subsidiaries as of the date hereof.

		Land								Buildings
		(in square meters)								(in square meters)
		Owned				Leased				Owned				Leased
Xiamen			211,632				—				29,292				1,564
Shantou			20,292				—				27,810				3,127
Zhuhai			53,797				—				29,697				1,513
Guilin			—				—				14,594				349

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Land

Buildings

(in square meters)

(in square meters)

Owned

Leased

Owned

Leased

Guizhou

270,001

—

10,466

—

     As systems for registration and transfer of land use rights and related real property interests in China have been implemented relatively recently, such systems do not yet comprehensively account for all land and related property interests. The land in Guangzhou on which the Group’s headquarters and other facilities are located and the buildings that the Group uses at its route base in Wuhan, Haikou and Zhengzhou are leased by the Company from CSAHC. However, CSAHC lacks adequate documentation evidencing CSAHC’s rights to such land and buildings, and, as a consequence, the lease agreements between CSAHC and the Company for such land may not be registered with the relevant authorities. Lack of registration may affect the validity of such lease agreements. There are certain other parcels of land and buildings owned or used by the Group that lack adequate documentation. Lack of adequate documentation for land use rights and ownership of buildings may impair the ability of the Group to dispose of or mortgage such land use rights and buildings.

     The Group has been occupying all of the land and buildings described above without challenge. CSAHC has received written assurance from the CAAC to the effect that CSAHC is entitled to continued use and occupancy of the land in Guangzhou. The Group understands that the CAAC is basing its conclusion on an agreement among certain governmental authorities relating to such land. CSAHC has agreed to indemnify the Group against any loss or damage caused by any challenge of, or interference with, the use by the Group of any of their respective land and buildings.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.

     The following discussion and analysis should be read in conjunction with the Financial Statements of the Group contained elsewhere in this Annual Report. The Group maintains its books and accounts in accordance with PRC Accounting Rules and Regulations (“PRC GAAP”) and prepares its financial statements in accordance with both PRC GAAP and IFRS. The Financial Statements contained elsewhere in this Annual Report have been prepared in accordance with IFRS. IFRS differs in certain significant respects from U.S. GAAP. Information relating to the nature and effect of such differences is presented in Note 33 to the Financial Statements.

Critical Accounting Policies

     The discussion and analysis of the Group’s financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with IFRS. The preparation of such consolidated financial statements requires the Group to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.

     Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Group believes that its critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies, see Note 2 to the Financial Statements.

     Revenue Recognition

     The Group records sales of passenger, cargo and mail tickets as “Sales in advance of carriage”, a current liability, on the consolidated balance sheet. Passenger, cargo and mail revenues are recognized and the related current liability is reduced when the transportation is provided. Sales in advance of carriage therefore represents ticket sold for future travel dates and estimated future refunds and exchanges of tickets sold for past travel dates. The Group’s balance of sales in advance of carriage as of December 31, 2003 was RMB466 million.

     Estimating the amount of tickets that will be refunded, exchanged, or expired involves some level of subjectivity and judgment. According to the relevant rules in the PRC in relation to air transportation, the valid period for tickets sold is up to a year from the date of sale. Sales in advance of carriage, therefore, includes an estimate of the amount of future refunds and exchanges, and expired tickets. These estimates are based on historical experience over many years. The Group and members of the airline industry have consistently applied this accounting method to estimate revenue from expired tickets. Estimated future refunds and exchanges included in sales in advance of carriage account are constantly evaluated based on subsequent refund and exchange activity to validate the accuracy of the Group’s estimates with respect to expired tickets.

     Events and circumstances outside of historical fare sale activity or historical customer travel patterns, as noted above, can result in actual refunds, exchanges, or expired tickets differing significantly from estimates. The Group evaluates its estimates within a narrow range of acceptable amounts. If actual refunds, exchanges, or expiry experience results in an amount outside of this range, estimates and assumptions are reviewed and adjustments to “Sales in advance of carriage” and to “Passenger revenue” are recorded as necessary. The Group’s estimation techniques have been consistently applied from year to year; however, as with any estimates, actual refund and exchange activity may vary from estimated amounts. Furthermore, the Group believes it is unlikely that materially different estimates for future refunds, exchanges, and forfeited tickets would be reported based on other reasonable assumptions or conditions suggested by actual historical experience and other data available at the time estimates were made.

     Up to date, the Group has not experienced any material fluctuations in estimated refunds and exchanges, and correspondingly, expired tickets, due to many of the factors described above.

     Fixed assets

     The Group have approximately RMB28,536 million fixed assets as of December 31, 2003. In addition to the original cost of these assets, their recorded value is impacted by a number of policy elections, including the estimation of useful lives and residual values and when necessary, impairment charges.

     The Group records aircraft at acquisition cost. Depreciable life is determined through economic analysis, reviewing existing fleet plans, recommendations from manufacturers and comparing estimated lives to other airlines that operate similar fleets. Residual values are estimated based on our historical experience with regards to the sale of aircraft and are established in conjunction with the estimated useful lives of the aircraft. Residual values are based on current dollars when the aircraft are acquired and typically reflect asset values that have not reached the end of their physical life. Both depreciable lives and residual values are reviewed periodically to recognize changes in our fleet plan and changes in conditions.

     In addition, the Group evaluates fixed assets used in operations for impairment. If circumstances indicate that the net book value of an asset may not be recoverable, this asset may be considered “impaired”, and an impairment loss may be recognized in accordance with IAS 36 “Impairment of Assets”. The amount of impairment loss is the difference between the carrying amount of the asset and its recoverable amount. The recoverable amount is the greater of the net selling price and the value in use. In determining the value in use, the Group utilizes certain assumptions, including, but not limited to: (i) estimated fair market value of the assets, and (ii) estimated future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service the asset will be used in the Group’s operations and estimated residual values. The Group will use all readily available information in determining an amount that is a reasonable approximation of recoverable amounts, including estimates based on industry trends and reference to market rates and transactions. Changes to the above estimates may have a material effect on the Group’s Financial Statements. As of December 31, 2003, based on the result of evaluation, the Group considered that no impairment is required.

Overview

     In 2003, the Group encountered the most unprecedented challenges and difficulties. The outbreak of the Severe Acute Respiratory Syndrome (“SARS”) earlier 2003 severely hit the PRC aviation industry. From April to June 2003, the Group’s passenger volume and passenger load factor dropped which caused the revenue passenger kilometers (“RPK”) for April, May and June of 2003 to fall by 40%, 83.5% and 61.5% respectively, as compared to same period in 2002. In order to minimize the negative impact of SARS, the Group implemented various measures to adjust its operating capacity, for example by reducing the number of flights and suspending certain routes, in response to the reduced air traffic demand caused by the negative impact of SARS. The SARS was effectively under control in the PRC in July 2003 and the domestic market started to recover in the third quarter of 2003. The Group gradually resumed all its suspended flights since July 2003.

     In order to alleviate the financial pressure suffered by the PRC civil aviation industry as a result of the SARS epidemic, the PRC government waived the levies of the CAAC Infrastructure Development Fund, sales tax and related supplementary taxes on passenger revenue payable by the PRC airlines, during the period from May 1, 2003 to December 31, 2003.

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     In addition, the political tension in the Middle East, in particular the Iraq war in March 2003, led to a surge in oil prices which in turn caused an increase in the Group’s jet fuel cost.

     The Group conducts a portion of its airline operations through the Airline Subsidiaries. Operating results for the Airline Subsidiaries are included in each of the years presented in the Financial Statements. The Airline Subsidiaries, which derive substantially all of their operating revenue from passenger traffic, accounted for 26.8% and 30.7% of the Group’s total operating revenue, and 34.5% and 37.2% of the Group’s total passengers carried, in 2002 and 2003, respectively. Xiamen Airlines is the largest member of the Airline Subsidiaries, with operating revenue of RMB3,278 million and RMB3,460 million in 2002 and 2003, respectively, or 18.2% and 19.8% of the Group’s total operating revenue.

     The Group’s operating revenue is substantially dependent on the passenger and cargo traffic volume carried, which is subject to seasonal and other changes in traffic patterns, the availability of appropriate time slots for the Group’s flights and alternative routes, the degree of competition from other airlines and alternate means of transportation, as well as other factors that may influence passenger travel demand and cargo and mail volume. In particular, the Group’s airline revenue is generally higher in the second and third quarters than in the first and fourth quarters.

     Like most airlines, the Group is subject to a high degree of financial and operating leverage. A significant percentage of the Group’s operating expenses is fixed costs that do not vary proportionally based on the Group’s yields or the load factors. These fixed costs include depreciation expense, jet fuel costs, landing and navigation fees, financing costs, operating lease payments, aircraft maintenance costs and labor for flight crew, cabin crew and ground personnel. Thus, a minor change in the Group’s yields or load factors would have a material effect on the Group’s results of operations. In addition, certain of these expenses, primarily financing costs and operating lease payments, labor costs and depreciation do not vary based on the number of flights flown. Thus, the Group’s operating results can also be substantially affected by minor changes in aircraft utilization rates. The Group is and will continue to be highly leveraged with substantial obligations denominated in foreign currencies and, accordingly, the results of its operations are significantly affected by fluctuations in foreign exchange rates, particularly for the U.S. dollar and the Japanese yen. The Group recognized a net exchange loss of RMB175 million and RMB164 million in 2002 and 2003, respectively. These amounts represented mainly unrealized exchange differences resulting from the retranslation of the foreign currency borrowings.

     A number of other external variables, including political and economic conditions in China, tend to have a major impact on the Group’s performance. The Group’s financial performance is also significantly affected by factors arising from operating in a regulated industry. As substantially all aspects of the Group’s airline operations are regulated by the PRC government, the Group’s operating revenues and expenses are directly affected by the PRC government’s policies with respect to domestic airfares, jet fuel prices and landing and navigation fees, among others. The nature and extent of airline competition and the ability of Chinese airlines to expand are also affected by CAAC’s control over route allocations. Any changes in the PRC government’s regulatory policies, or any implementation of such policies could have a significant impact on the Group’s future operations and its ability to implement its operating strategy.

Certain Financial Information and Operating Data by Geographic Region

     The following table sets forth certain financial information and operating data by geographic region for the years ended December 31, 2002 and 2003:

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Operating Results

     The historical results of operations discussed below may not be indicative of the Group’s future operating performance. In addition to the factors discussed under “Overview” above, the Group’s future operations will be affected by, among other things, changes in the aviation market, the cost of jet fuel, aircraft acquisition and leasing costs, aircraft maintenance expenses, take-off and landing charges, wages, salaries and benefits and other operating expenses, foreign exchange rates and the rates of income taxes paid.

     2003 Compared with 2002

     The Group recorded a net loss of RMB358 million for 2003, as compared to a net income of RMB576 million for 2002. The Group’s operating revenue decreased by RMB549 million or 3.0% from RMB18,019 million in 2002 to RMB17,470 million in 2003. Passenger load factor decreased by 0.8 percentage point from 65.4% in 2002 to 64.6% in 2003. Passenger yield (in passenger revenue per RPK) increased by 5.6% from RMB0.54 in 2002 to RMB0.57 in 2003. Average yield (in traffic revenue per RTK) decreased by 1.7% from RMB4.84 in 2002 to RMB4.76 in 2003. Operating expenses increased by RMB1,021 million or 6.4% from RMB15,993 million in 2002 to RMB17,014 million in 2003. As operating revenue decreased while operating expenses increased, operating profit decreased by 77.5% from RMB2,026 million in 2002 to RMB456 million in 2003. The Group’s net non-operating expenses increased by 9.1%, from RMB887 million in 2002 to RMB967 million in 2003, mainly due to a decrease in gain on disposal of fixed assets of RMB193 million, partly offset by a decrease in interest expense of RMB135 million. Overall, the Group recorded a net loss of RMB358 million in 2003, as compared to a net profit of RMB576 million in 2002.

     Operating Revenue

     Substantially all of the Group’s operating revenue is attributable to airline operations. Traffic revenue in 2003 and 2002 accounted for 97.1% and 97.0% respectively of total operating revenue. Passenger revenue and, cargo and mail revenue accounted for 88.5% and 11.5% respectively of total traffic revenue in 2003. The balance of the Group’s operating revenue is derived from commission income, income from general aviation operations, fees charged for ground services and for air catering services and net income from lease arrangements.

     Operating revenue decreased by 3.0% from RMB18,019 million in 2002 to RMB17,470 million in 2003. This decrease was primarily due to a 4.4% fall in passenger revenue from RMB15,696 million in 2002 to RMB15,010 million in 2003 resulting from lower traffic volume caused by SARS. The total number of passengers carried decreased by 4.8% to 20.5 million passengers in 2003. RPKs decreased by 8.8% from 28,940 million in 2002 to 26,387 million in 2003, primarily as a result of a decrease in passengers carried. However, passenger yield increased by 5.6% from RMB0.54 in 2002 to RMB0.57 in 2003, mainly as the result of the exemption of CAAC Infrastructure Development Fund and sales tax during the period from May 1, 2003 to December 31, 2003.

     Domestic passenger revenue, which accounted for 81.6% of the total passenger revenue in 2003, increased slightly by 0.1% from RMB12,234 million in 2002 to RMB12,242 million in 2003. Domestic passenger traffic in RPKs decreased by 3.6%, mainly due to a decrease in passengers carried. Passenger yield, however, increased from RMB0.55 in 2002 to RMB0.57 in 2003, mainly as the result of the aforesaid exemption of CAAC Infrastructure Development Fund and sales tax.

     Hong Kong passenger revenue, which accounted for 5.0% of total passenger revenue, decreased by 28.9% from RMB1,055 million in 2002 to RMB750 million in 2003. For Hong Kong flights, passenger traffic in RPKs decreased by 28.0%, while passenger capacity in ASKs decreased by 22.9%, resulting in a 4.1 percentage point decrease in passenger load factor from 2002. Passenger yield decreased from RMB0.98 in 2002 to RMB0.96 in 2003 mainly due to slack in traffic volume.

     International passenger revenue, which accounted for 13.4% of total passenger revenue, decreased by 16.2% from RMB2,407 million in 2002 to RMB2,018 million in 2003. For international flights, passenger traffic in RPKs decreased by 25.2%, while passenger capacity in ASKs decreased by 20.8%, resulting in a 3.6 percentage point fall in passenger load factor from 2002. Passenger yield increased by 11.9% from RMB0.42 in 2002 to RMB0.47 in 2003 mainly as the result of the aforesaid exemption of CAAC Infrastructure Development Fund and sales tax.

     Cargo and mail revenue, which accounted for 11.5% of the Group’s total traffic revenue and 11.1% of total operating revenue, increased by 9.5% from RMB1,786 million in 2002 to RMB1,955 million in 2003. The increase was primarily due to the full year effect of the opening of two international cargo routes to Los Angeles of the United States of America and Leige of Belgium in late 2002.

     Other operating revenue decreased by 6.0% from RMB537 million in 2002 to RMB505 million in 2003. The decrease was primarily due to a decrease in aircraft short-term lease income of RMB46 million.

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     Operating Expenses

     Substantially all of the Group’s operating expenses result from its airline operations. The vast majority of such expenses relate directly to flight operations, aircraft and traffic servicing, aircraft repair and maintenance and to depreciation and amortisation in respect of aircraft and flight equipment. Expenses associated directly with the Group’s flight operations (collectively, “flight operations expenses”) include fuel costs, operating lease payments, catering expenses, aircraft insurance, flight personnel payroll and welfare and training expenses. Expenses associated directly with repairs and maintenance in respect of the Group’s aircraft (collectively, “repairs and maintenance expenses”) include repairs and maintenance and overhaul charges, the costs of consumables and other maintenance materials and labour costs for maintenance personnel. Expenses associated directly with the Group’s aircraft and traffic servicing operations (collectively “aircraft and traffic servicing expenses”) include landing and navigation fees, rental payments and charges in respect of terminal and other ground facilities and labour costs for ground personnel. The balance of the Group’s operating expenses result from promotional and marketing activities (collectively, “promotional and marketing expenses”) such as sales commissions, fees for use of the CAAC’s reservation system, ticket-printing and sales office expenses, advertising and promotional expenses, and from general and administrative expenses, such as administrative salaries and welfare and other personnel benefits and office expenses.

     Total operating expenses in 2003 amounted to RMB17,014 million, representing an increase of 6.4% or RMB1,021 million over 2002, primarily due to the combined effect of increases in jet fuel costs, maintenance expenses and aircraft and traffic servicing expenses. Total operating expenses as a percentage of total operating revenue increased from 88.8% in 2002 to 97.4% in 2003.

     Flight operations expenses, which accounted for 41.6% of total operating expenses, increased by 5.0% from RMB6,733 million in 2002 to RMB7,070 million in 2003, primarily as a result of increases in jet fuel costs and operating lease payments, partly offset by a decrease in catering expenses. Jet fuel costs, which accounted for 54.7% of flight operations expenses, increased by 9.9% from RMB3,519 million in 2002 to RMB3,867 million in 2003 mainly as a result of increased jet fuel prices. Operating lease payments increased by 8.4% from RMB1,417 million in 2002 to RMB1,536 million in 2003, primarily due to the full year effect of the addition of new operating leases in respect of four Boeing 757-200 aircraft in late 2002 and four Airbus 319-100 aircraft and three Boeing 737-700 aircraft during 2003. Catering expenses decreased by 18.4% from RMB625 million in 2002 to RMB510 million in 2003, primarily reflecting a tighter cost controls exercised by the Group. Aircraft insurance costs decreased by 23.4% from RMB256 million in 2002 to RMB196 million in 2003, primarily because of a reduction in the rate of aircraft insurance premiums prescribed by the PRC insurance company. Labor costs for flight personnel decreased by 6.8% from RMB781 million in 2002 to RMB728 million in 2003, largely due to a decrease in flight hours.

     Maintenance expenses which accounted for 15.2% of total operating expenses, increased by 11.0% from RMB2,333 million in 2002 to RMB2,589 million in 2003. The increase was primarily attributable to an 11.3% increase in aircraft maintenance and repair charges from RMB2,135 million in 2002 to RMB2,377 million in 2003, mainly as the result of the effect of fleet expansion in recent years.

     Aircraft and traffic servicing expenses, which accounted for 16.3% of total operating expenses, increased by 10.2% from RMB2,511 million in 2002 to RMB2,767 million in 2003. The increase primarily resulted from an 8.9% rise in landing and navigation fees from RMB2,354 million in 2002 to RMB2,563 million in 2003, due to an increase in the charge rate for domestic landing and navigation fees effective September 2002.

     Promotional and marketing expenses, which accounted for 8.7% of total operating expenses, decreased by 1.3% from RMB1,500 million in 2002 to RMB1,480 million in 2003. The decrease was due to 9.3% decrease in labor costs from RMB248 million in 2002 to RMB225 million in 2003, as fewer bonuses were given because of reduced sales volume in 2003.

     General and administrative expenses, which accounted for 6.2% of the total operating expenses, decreased slightly by 0.7% from RMB1,060 million in 2002 to RMB1,053 million in 2003. This was mainly due to a decrease in scale of operations during SARS period.

     Depreciation and amortization, which accounted for 12.0% of total operating expenses, increased by 10.8% from RMB1,840 million in 2002 to RMB2,038 million in 2003. This increase was primarily as a result of the addition of aircraft during 2003.

     Operating Income

     Operating income decreased by 77.5% from RMB2,026 million in 2002 to RMB456 million in 2003. This was mainly because operating revenue decreased by RMB549 million or 3.0% from 2002 while operating expenses increased by RMB1,021 million or 6.4% over the same period.

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     Non-operating Income/(Expenses)

     Interest expense decreased by 14.1% from RMB959 million in 2002 to RMB824 million in 2003, mainly reflecting the combined effect of scheduled debt repayments and the replacement of certain RMB denominated bank loans with US$ denominated bank loans with lower interest rates.

     Interest income decreased by 75.2% from RMB53 million in 2002 to RMB13 million in 2003. This was mainly attributable to a decrease in average cash balances.

     The Group recorded a net loss on sale of fixed assets of RMB22 million in 2003, mainly resulting from retirement of two old Boeing 737-200 aircraft.

     During 2003, the Group recorded a net exchange loss of RMB164 million predominantly due to its Japanese yen denominated borrowings as a result of the Japanese yen appreciation. Such amount comprised mostly unrealized translation loss.

     Taxation

     On October 17, 2003, the Company’s registered address was moved to Guangzhou Economic & Technology Development Zone. In accordance with the Rules and Regulations for Implementation of Income Tax for Foreign Investment Enterprises and Foreign Enterprises of the PRC and a taxation approval document “Guangzhou Municipal State Tax Bureau Suo De Shui Zi Que 020043”, the Company is entitled to enjoy the preferential tax policy implemented in the Guangzhou Economic & Technology Development Zone effective from October 1, 2003. As a result, the Company’s income tax rate has been changed to 15% from 33% beginning from that date.

     The Group recorded an income tax credit of RMB324 million for 2003 compared to an income tax expense of RMB398 million for 2002. As a result of the reduction in income tax rate, the Company’s net deferred taxation liability balance brought forward from December 31, 2002 of RMB507 million was reduced by RMB392 million and a net deferred tax credit of RMB392 million was recognized in 2003 for such reduction in income tax rate accordingly.

     Minority Interests

     Minority interests increased by 3.6% from RMB165 million in 2002 to RMB171 million in 2003, primarily reflecting the net income earned by certain of the Group’s airline subsidiaries for the year.

     2002 Compared with 2001

     The Group recorded a net income of RMB576 million for 2002, as compared to a net income of RMB340 million for 2001. The Group’s operating revenue increased by RMB1,139 million or 6.7% from RMB16,880 million in 2001 to RMB18,019 million in 2002. Passenger load factor increased by 2.9 percentage points from 62.5% in 2001 to 65.4% in 2002. Passenger yield (in passenger revenue per RPK) decreased by 10.0% from RMB0.60 in 2001 to RMB0.54 in 2002. Average yield (in traffic revenue per RTK) decreased by 10.9% from RMB5.43 in 2001 to RMB4.84 in 2002. Operating expenses increased by RMB514 million or 3.3% from RMB15,479 million in 2001 to RMB15,993 million in 2002. As operating revenue increased more than operating expenses, operating profit increased by 44.7% from RMB1,401 million in 2001 to RMB2,026 million in 2002. The Group’s net non-operating expenses increased by 46.5%, from RMB605 million in 2001 to RMB887 million in 2002, mainly due to an unfavorable movement in exchange differences of RMB472 million, partly offset by a gain on disposal of four Boeing 757-200 aircraft of RMB199 million. Overall, the Group’s net income increased by 69.2%, from RMB340 million in 2001 to RMB576 million in 2002.

     Operating Revenue

     Substantially all of the Group’s operating revenue is attributable to its airline operations. Traffic revenue in 2002 and 2001 accounted for 97.0% and 97.5% respectively of total operating revenue. Passenger revenue and, cargo and mail revenue accounted for 89.8% and 10.2% respectively of total traffic revenue in 2002. The balance of the Group’s operating revenue is derived from commission income, income from general aviation operations, fees charged for ground services rendered to other Chinese airlines that operate flights in and out of airports in Southern China (including the airports in Guangzhou, Shenzhen, Xiamen and Wuhan), air catering services and aircraft lease income.

     Operating revenue increased by 6.7% from RMB16,880 million in 2001 to RMB18,019 million in 2002. This increase was primarily due to a 4.3% rise in passenger revenue from RMB15,055 million in 2001 to RMB15,696 million in 2002 due to higher traffic volume. The total number of passengers carried increased by 12.4% to 21.49 million passengers in 2002. RPKs increased by 15.5% from 25,057 million in

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2001 to 28,940 million in 2002, primarily as a result of an increase in passengers carried. However, passenger yield decreased by 10.0% from RMB0.60 in 2001 to RMB0.54 in 2002, mainly as a result of a fall in the average fares resulting from increased competition.

     Domestic passenger revenue, which accounted for 78.0% of total passenger revenue in 2002, increased by 1.4% from RMB12,068 million in 2001 to RMB12,234 million in 2002. For the Group’s domestic routes, passenger traffic in RPKs increased by 13.6%, while passenger capacity in ASKs increased by 7.5%, resulting in 3.6 percentage points increase in passenger load factor, or an increase of 5.8% from 2001. Passenger yield, however, decreased from RMB0.62 in 2001 to RMB0.55 in 2002 mainly as a result of increased competition among the PRC airlines.

     Hong Kong passenger revenue, which accounted for 6.7% of total passenger revenue, decreased by 6.5% from RMB1,128 million in 2001 to RMB1,055 million in 2002. For Hong Kong flights, passenger traffic in RPKs increased by 2.0%, while passenger capacity in ASKs increased by 3.3%, resulting in 0.8 percentage point decrease in passenger load factor, or a decrease of 1.3% from 2001. Passenger yield decreased from RMB1.06 in 2001 to RMB0.98 in 2002 mainly due to slack in traffic volume.

     International passenger revenue, which accounted for 15.3% of total passenger revenue, increased by 29.4% from RMB1,860 million in 2001 to RMB2,407 million in 2002. For international flights, passenger traffic in RPKs increased by 26.7%, while passenger capacity in ASKs increased by 25.3%, resulting in a 0.7 percentage point gain in passenger load factor, or an increase of 1.1% from 2001. Passenger yield increased slightly by 2.4% from RMB0.41 in 2001 to RMB0.42 in 2002.

     Cargo and mail revenue, which accounted for 10.2% of the Group’s total traffic revenue and 9.9% of total operating revenue, increased by 27.0% from RMB1,406 million in 2001 to RMB1,786 million in 2002. The increase was primarily due to the opening of two international cargo routes in 2002.

     Other operating revenue increased by 28.4% from RMB418 million in 2001 to RMB537 million in 2002. The increase was primarily due to increase in fees charged for ground services rendered to other Chinese airlines as the traffic volume increased as well as an income from a lease arrangement effected during the year.

     Operating Expenses

     Substantially all of the Group’s operating expenses result from its airline operations. The vast majority of such expenses relate directly to flight operations, aircraft and traffic servicing, aircraft repairs and maintenance and to depreciation and amortization in respect of aircraft and flight equipment. Expenses associated directly with the Group’s flight operations (collectively, “flight operations expenses”) include fuel costs, operating lease payments, catering expenses, aircraft insurance, flight personnel payroll and welfare and training expenses. Expenses associated directly with repairs and maintenance in respect of the Group’s aircraft (collectively, “maintenance expenses”) include repairs and maintenance and overhaul charges, the costs of consumables and other maintenance materials and labor costs for maintenance personnel. Expenses associated directly with the Group’s aircraft and traffic servicing operations (collectively “aircraft and traffic servicing expenses”) include landing and navigation fees, rental payments and charges in respect of terminal and other ground facilities and labor costs for ground personnel. The balance of the Group’s operating expenses result from promotional and marketing activities (collectively, “promotion and sales expenses”) such as sales commissions, fees for use of the CAAC’s reservation system, ticket-printing and sales office expenses, advertising and promotional expenses, and from general and administrative expenses, such as administrative salaries and welfare and other personnel benefits and office expenses.

     Total operating expenses in 2002 amounted to RMB15,993 million, representing an increase of 3.3% or RMB514 million over 2001, primarily due to the combined effect of the growth in operations and increase in maintenance expenses. Total operating expenses as a percentage of total operating revenue decreased from 91.7% in 2001 to 88.76% in 2002 as the increase in operating revenue exceeded the increase in operating expenses.

     Flight operations expenses, which accounted for 42.1% of total operating expenses, decreased by 2.5% from RMB6,906 million in 2001 to RMB6,733 million in 2002, mainly due to a decrease in operating lease rentals. Fuel costs, which accounted for 52.3% of flight operations expenses decreased by 0.8% from RMB3,549 million in 2001 to RMB3,519 million in 2002 mainly resulting from decreased fuel prices. Operating lease rentals decreased by 25.9% from RMB1,913 million in 2001 to RMB1,417 million in 2002, primarily due to the termination of wet leases of five Boeing 737-300/37K aircraft from Zhongyuan Airlines in January 2002. Catering expenses increased by 12.8% from RMB554 million in 2001 to RMB625 million in 2002, reflecting primarily an increase in number of passengers carried. Aircraft insurance costs increased by 108.1% from RMB123 million in 2001 in the rates of aircraft insurance premiums subsequent to the 911 incident of the United States. Labor costs for flight personnel increased by 18.9% from RMB657 million in 2001 to RMB781 million in 2002, largely due to an increase in flight hours as well as an increase in bonuses for flight personnel.

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     Maintenance expenses which accounted for 14.6% of total operating expenses, increased by 15.8% from RMB2,015 million in 2001 to RMB2,333 million in 2002. The increase was primarily attributable to a 15.7% increase in aircraft maintenance and repair charges from RMB1,845 million in 2001 to RMB2,135 million in 2002, mainly as a result of the effect of fleet expansion in recent years and the growth in operations.

     Aircraft and traffic servicing expenses, which accounted for 15.7% of total operating expenses, increased by 9.3% from RMB2,298 million in 2001 to RMB2,511 million in 2002. The increase primarily resulted from 9.1% rise in landing and navigation fees from RMB2,157 million in 2001 to RMB2,353 million in 2002, as the number of flights increased.

     Promotional and sales expenses, which accounted for 9.4% of total operating expenses, decreased by 2.7% from RMB1,541 million in 2001 to RMB1,500 million in 2002. The decrease was due to 15.9% decrease in sale commissions and bonuses paid to sales agents because of tighter cost controls exercised by the Group.

     General and administrative expenses, which accounted for 6.6% of total operating expenses, increased by 18.8% from RMB892 million in 2001 to RMB1,060 million in 2002. This was mainly due to an increase in staff salaries and welfare benefits of 27.8% from RMB439 million in 2001 to RMB561 million in 2002 and increased scale of operations.

     Depreciation and amortization, which accounted for 11.5% of total operating expenses, increased by 1.4% from RMB1,815 million in 2001 to RMB1,840 million in 2002. This was primarily as a result of the additions of aircraft during 2002.

     Operating Income

     Operating income increased by 44.7% from RMB1,401 million in 2001 to RMB2,026 million in 2002, as operating revenue increased by RMB1,139 million or 6.7% from 2001, while operating expenses increased by RMB514 million or 3.3% over the same period.

     Non-operating Income/(Expenses)

     Interest expense increased by 2.7% from RMB934 million in 2001 to RMB959 million in 2002, mainly reflecting the additional bank loans borrowed to finance the acquisitions of aircraft, partly offset by scheduled debt repayments during the year.

     Interest income increased by 5.5% from RMB50 million in 2001 to RMB53 million in 2002. This was mainly due to an increase in cash balances.

     The Group recognized a net gain on sale of fixed assets of RMB171 million in 2002, mainly resulting from disposal of four Boeing 757-200 aircraft.

     During 2002, the Group recorded a net exchange loss of RMB175 million predominantly due to its Japanese yen denominated borrowings as a result of the Japanese yen appreciation. Such amount comprised mostly unrealized translation loss.

     Taxation

     The Group is subject to PRC income tax at a rate of 33%.

     Taxation expense increased by 24.2% from RMB321 million in 2001 to RMB398 million in 2002, reflecting primarily an increase in profit before taxation. A deferred tax asset of RMB149 million was recognized at December 31, 2002 in respect of the unrelieved PRC tax losses brought forward from prior years. Such tax losses are available for carry-forward to offset against future PRC taxable profits for a maximum period of 5 years.

     Minority Interests

     Minority interests increased by 22.7% from RMB135 million in 2001 to RMB165 million in 2002, primarily as a result of an increase in net profits of the Group’s Airline Subsidiaries.

Liquidity and Capital Resources

     Prior to the initial public offering of the Company, the Group met its working capital and capital expenditure requirements through cash from its operations, the proceeds of certain long-term and short-term bank loans, capital lease financing and rebates available under certain of the Group’s aircraft leases. In July 1997, the Company received net proceeds of RMB5,459 million from its initial public offering.

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     A majority part of these net proceeds was utilized to finance the Group’s working capital and capital expenditure requirements. In July 2003, the Company issued 1,000,000,000 A shares with a par value of RMB1.00 each at issue price of RMB2.70 by way of a public offering to natural persons and institutional investors in the PRC. The proceeds received by the Company, net of the issuance costs of RMB59,233, amounted to RMB2,641 million and have been used for the purchase of Boeing 737-800 aircraft in accordance with the disclosure in the Prospectus for Offering of the A Shares.

     As of December 31, 2003, the Group had loan facilities from several PRC commercial banks for providing loan finance up to an approximate amount of RMB9,860 million to the Group. As of December 31, 2003, an approximate amount of RMB4,412 million was utilized. As of December 31, 2002 and 2003, the Group’s cash and cash equivalents totaled RMB3,771 million and RMB2,080 million, respectively.

     Net cash inflows from operating activities in 2001, 2002 and 2003 were RMB2,224 million, RMB3,698 million and RMB2,129 million, respectively.

     Net cash used in investing activities in 2001, 2002 and 2003 was RMB3,036 million, RMB5,895 million and RMB5,434 million, respectively. Cash capital expenditures in 2001, 2002 and 2003 were RMB1,492 million, RMB6,351 million and RMB4,707 million, respectively, reflecting predominantly additional investments in aircraft and flight equipment under the Group’s fleet expansion plans and Guangzhou new airport, and, to a small extent, additional investments in other facilities and buildings for operations.

     Financing activities resulted in net cash (outflows)/inflows of RMB(568) million, RMB3,150 million and RMB1,614 million in 2001, 2002 and 2003, respectively. The net cash outflows of 2001 were primarily as a result of making scheduled repayments of bank borrowings and capital lease obligations in excess of proceeds from new bank borrowings.

     As of December 31, 2003, the Group’s aggregate long-term debt and obligations under capital leases totaled RMB12,051 million. Based on such amount, in 2004, 2005, 2006, 2007, 2008 and thereafter, amounts payable under such debt and obligations will be RMB1,986 million, RMB1,716 million, RMB1,601 million, RMB1,660 million, RMB1,872 million and RMB3,216 million. Such borrowings were denominated, to a larger extent, in United States dollars and, to a smaller extent, in Japanese yen, with a significant portion being fixed interest rate borrowings. In the normal course of business, the Group is exposed to fluctuations in foreign currencies. The Group’s exposure to foreign currencies was primarily as a result of its foreign currency debts. Depreciation or appreciation of the Renminbi against foreign currencies affects the Group’s results significantly because the Group’s foreign currency payments generally exceed its foreign currency receipts. The Group is not able to hedge its foreign currency exposure effectively other than by retaining its foreign currency denominated earnings and receipts to the extent permitted by the State Administration of Foreign Exchange, or subject to certain restrictive conditions, entering into forward foreign exchange contracts with authorised PRC banks.

     As of December 31, 2003, the Group’s short term bank debt was RMB6,409 million with interest rates ranging from 1.48% to 5.31%. The Group’s weighted average interest rate on short-term bank notes payable was 1.76% as of December 31, 2003. The primary use of the proceeds of the Group’s short-term debt is to finance working capital needs. The Group has generally been able to arrange short-term bank loans with domestic banks in China as necessary and believes it can continue to obtain them based on its well-established relationships with various lenders.

     As of December 31, 2003, the Group had obligations under operating leases totaling RMB8,120 million, predominately for aircraft. Of such amount, RMB1,483 million, RMB1,412 million, RMB1,144 million, RMB921 million, RMB771 million and RMB2,389 million respectively was due in 2004, 2005, 2006, 2007, 2008 and thereafter.

     As of December 31, 2003, the Group had a working capital deficit of RMB10,792 million, as compared to a working capital deficit of RMB7,016 million as of December 31, 2002. Historically, the Group operated in a negative working capital position, relying on cash inflow from operating activities and short-term bank debt refinancings to meet its short-term liquidity and working capital needs. The increase in the Group’s working capital deficit from 2002 to 2003 was mainly because the Group sought increased short term debts to finance its aircraft acquisitions. Upon deliveries of the aircraft, the Group continued to seek renewal of its short-term debts instead of replacing such debts with long-term debts, as the interest rates for short-term debts are lower. The liquidity of the Group in the future will primarily be dependent on its ability to maintain adequate cash inflow from operations to meet its debt obligations as they become due and, on its ability to obtain adequate external financing to meet its committed future capital expenditures. With regard to its short-term debt outstanding as of December 31, 2003, the Group has obtained firm commitments from its principal banker to renew relevant debts as they fall due during 2004. With regard to its future capital commitments and other financing requirements, the Group has already entered into loan financing agreements with several PRC banks to provide loan finance up to an appropriate amount of RMB8,450 million during 2004 and thereafter. As the Group is subject to a high degree of operating leverage, a minor decrease in the Group’s yield and/or load factor could result in a significant decrease in its operating revenue and hence its operating cashflows. This could arise in such circumstances as where competition between Chinese airlines increases or

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where PRC aviation demand decreases. Similarly, a minor increase in the jet fuel prices, particularly those in domestic market, could result in a significant increase in the Group’s operating expenses and hence a significant decrease in its operating cashflows. This could be caused by fluctuations in supply and demand in international oil market. Currently, the Group’s existing debt and lease facilities do not contain any financial covenants. Nevertheless, as the Group is subject to a high degree of financial leverage, an adverse change in the Group’s operating cashflows could adversely affect its financial health and hence weaken its ability to obtain additional debt and lease facilities and to renew its short-term debt facilities as they fall due.

     As of December 31, 2003, the Group had capital commitments in 2004 and 2005 of approximately RMB6,243 million and RMB7,385 million, respectively. Of such amounts, RMB4,585 million in 2004 and RMB6,030 million in 2005 are related to the acquisition of aircraft and related flight equipment, and RMB1,000 million in 2004 and RMB1,072 million in 2005 are related to the Group’s facilities and equipment to be constructed and installed at the Guangzhou new airport. This new airport is expected to commence operations in August 2004 to replace the Guangzhou Baiyun International Airport as the Group’s main route base. The remaining amounts of RMB658 million in 2004 and RMB283 million in 2005 are related to the Group’s other airport and office facilities and equipment, overhaul and maintenance bases and training facilities.

     As of December 31, 2003, the Group undertook to make a capital contribution of approximately RMB446 million to jointly controlled entities.

     As of December 31, 2003, the cash and cash equivalents of the Group totaled RMB2,080 million. Of such balance, 22.2% was denominated in foreign currencies.

     No interim dividend was paid during the year ended December 31, 2003. The Board of Directors does not recommend the payment of a final dividend in respect of the year ended December 31, 2003.

     The Group expects that the Group’s cash from operations and short-term and long-term bank borrowings will be sufficient to meet its cash requirements in the foreseeable future.

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Contractual Obligations and Commercial Commitments

     The following table sets forth the Group’s obligations and commitments to make future payments under contracts and under contingent commitments as of December 31, 2003.

     Note 1 Amounts shown are net of previously paid purchase deposits.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.

Directors and Senior Management

     The following table sets forth certain information concerning directors (“Directors”), senior management (“Senior Management”) and supervisors (“Supervisors”) of the Company in 2003. There were certain changes in the Company’s Directors, Senior Management and Supervisors subsequent to December 31, 2003, details of which are set forth below.

Name		Age				Position
Yan Zhi Qing			62			Chairman of the Board of Directors
Liu Ming Qi			60			Vice Chairman of the Board of Directors
Wang Chang Shun			47			Vice Chairman of the Board of Directors; President
Peng An Fa			56			Director
Wang Quan Hua			50			Director
Zhao Liu An			56			Director
Zhou Yong Qian			59			Director
Zhou Yong Jin			61			Director
Xu Jie Bo			39			Director; Chief Financial Officer; Vice President
Wu Rong Nan			62			Director
Simon To			53			Independent Non-Executive Director
Peter Lok			68			Independent Non-Executive Director
Wei Ming Hai			40			Independent Non-Executive Director
Wang Zhi			62			Independent Non-Executive Director
Sui Guang Jun			43			Independent Non-Executive Director
Liang Hua Fu			62			Chairman of the Supervisory Committee
Gan Yu Hua			76			Supervisor
Li Qi Hong			56			Supervisor
Jiang Ping			54			Vice President
Li Kun			44			Vice President

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Name		Age				Position
Yuan Xin An			47			Vice President
Zheng En Ren			59			Vice President
Hao Jian Hua			54			Vice President
Su Liang			42			Company Secretary

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     The audit committee is appointed by the Board of Directors and consists of five independent non-executive Directors. The current members of the audit committee are Mr. Simon To, Mr. Peter Lok, Mr. Wei Ming Hai, Mr. Wang Zhi and Mr. Sui Guang Jun. At least once a year, the committee is required to meet with the external auditors without any executive members of the Board in attendance. The quorum necessary for the transaction of any business is two committee members. The committee will normally meet four times a year. The external auditors or the Chief Financial Officer of the Company may request a meeting of the audit committee.

     The audit committee selects and engages, on behalf of the Company, external auditors to audit the Company’s annual financial statements and considers questions regarding the audit fees and the resignation or dismissal of the external auditors. The audit committee also reviews and approves the planned scope of the Company’s annual audit. In addition, the audit committee reviews the annual and interim financial statements, the preliminary announcement of results and any other announcement regarding the Company’s results or other financial information to be made public, before submission to the Board of Directors. Moreover, the committee discusses problems arising from the audit and reviews the external auditors’ management letter and management’s response. Furthermore, the audit committee reviews the effectiveness of the system of internal financial controls from information provided by the Executive Directorate and management of the Company and ensures adherence to the Company’s control policies so that the Company’s assets are safeguarded and that the financial records are complete and accurate. The audit committee meets regularly with the Company’s senior financial, internal audit and the external auditors to consider the Company’s financial reporting, the nature and scope of audit review and the effectiveness of the systems of internal control. The audit committee also reviews any significant transactions that are not in the ordinary course of business.

     The Company has an internal audit department which reviews procedures in all major financial and operational activities. This department is led by the head of internal audit who is directly responsible to the Chairman of the Board and submits regular reports to the audit committee.

     The Company does not have a Remuneration Committee. The executive compensation program of the Company is administered by the Board of Directors.

Employees

     As of December 31, 2003, the Group had 17,569 employees, including 1,943 pilots, 2,984 flight attendants, 2,317 maintenance personnel, 4,146 sales and marketing personnel and 3,873 administrative personnel. All of the Group’s pilots, flight attendants, technical personnel, management personnel and sales and marketing personnel are contract employees, and most of the Group’s ancillary service workers are temporary employees. Contract employees are hired by the Group pursuant to renewable employment contracts with terms ranging from three to five years. Temporary employees generally are hired by the Group pursuant to at-will employment contracts or employment contracts with a term of one year.

     The Company’s employees are members of a trade union organized under the auspices of the All-China’s Federation of Trade Unions, which is established in accordance with the Trade Union Law of China. A representative of the Company labor union currently serves on the Supervisory Committee of the Company. Each of the Company’s subsidiaries has its own trade union. The Group has not experienced any strikes, slowdowns or labor disputes that have interfered with its operations, and the Group believes that its relations with its employees are good.

     All employees of the Group receive cash remuneration and certain non-cash benefits. Cash remuneration consists of salaries, bonuses and cash subsidies provided by the Group. Salaries are determined in accordance with the national basic wage standards. The total amount of wages payable by the Group to its employees is subject to a maximum limit based on the profitability of the Group and other factors. Bonuses are based on the profitability of the Group. Cash subsidies are intended as a form of cost-of-living adjustment. In addition to cash compensation, the Group’s contract employees receive certain non-cash benefits, including housing, education and health services, and the Group’s temporary employees receive limited health services, but not housing or education. CSAHC provides certain services in respect of these benefits to the Group’s employees in consideration of certain fees and other charges.

     Pension Programs

     Historically, the Group participated in an industry-wide pension scheme managed by the CAAC. With effect from January 1, 1998, the pension scheme of the CAAC was replaced by several new retirement schemes operated under the auspices of various municipal governments. Employees of the Group are currently covered by such schemes. Under such schemes, the Group is required to pay quarterly premiums to the relevant municipal governments. The premiums range from 14% to 19% of the total monthly salary, bonuses and other benefits paid by the Group to its employees.

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     In addition, the Group was selected as one of the pilot enterprises to establish a supplementary defined contribution retirement scheme for the benefit of employees. In this connection, employees of the Group participate in a supplementary defined contribution retirement scheme whereby the Group is required to make defined contributions at the rate of 4.5% of total salaries. The Group has no obligation for the payment of pension benefits beyond the contributions described above. Contributions to the retirement schemes are charged to consolidated statement of operations as and when incurred.

     Workers’ Compensation

     There is no workers’ compensation or other similar compensation scheme under the Chinese labor and employment system. As required by Chinese law, however, the Group, subject to certain conditions and limitations, pays for the medical expenses of any contract employee who suffers a work-related illness, injury or disability and continues to pay the full salary of, and provides all standard cash subsidies to, such employee during the term of such illness, injury or disability. The Group also pays for certain medical expenses of its temporary employees.

     At no time during 2003 had any Director, Supervisor or member of the Senior Management or any of their spouses or minor children, been granted or exercised or subscribed for shares or debentures or options of the Company.

Share Ownership

     Except as disclosed herein, as of the date of this Annual Report, no Director, Senior Management or Supervisor of the Company is a beneficial owner of any shares of the Company’s capital stock. As of the date of this Annual Report, no arrangement has been put in place involving issue or grant of options or shares or securities of the Company to any of the Director, Senior Management, Supervisor or employees of the Company.

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Note 1:

The spouse of Mr. Simon To is the owner of these 100,000 H Shares of the Company and accordingly, Mr. Simon To, is taken to be interested in these 100,000 H Shares by virtue of the SFO.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.

Major Shareholders

     Share Capital Structure

     As of December 31, 2003, the total share capital of the Company was 4,374,178,000 shares, of which approximately 50.3% (2,200,000,000 domestic shares) is held by CSAHC, approximately 26.84% (1,174,178,000 H shares) is held by Hong Kong and overseas shareholders and approximately 22.86% (1,000,000,000 A shares) is held by domestic shareholders.

     Substantial Shareholders

     As of December 31, 2003, the following shareholders had an interest of 5% or more in the Company’s shares:

				Approximate Percentage
Name		Number of Shares		of the Total Number of Shares
CSAHC		2,200,000,000 domestic shares			50.30	%
HKSCC Nominees Limited		1,149,955,998 H shares			26.29	%

     The table below sets forth, as of December 31, 2003, the following entities hold 5% or more of the total number of H shares issued by the Company.

						Approximate Percentage of
Name		Number of H Shares				the Total Number of H Shares
HKSCC Nominees Limited			1,149,955,998				97.94	%

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     Domestic shares and H shares have identical voting rights.

Related Party Transactions

     The Company enters into transactions from time to time with CSAHC and its affiliates. For a description of such transactions, see Note 25 to the Financial Statements. In particular, the following arrangements, which the Company believes are material to its operations, have been made between the Company and CSAHC and its affiliates. The Company believes that these arrangements are effected in the prevailing market rates and are commercially reasonable and on terms no less favorable than terms available from third parties.

     Arrangements with CSAHC

     Trademark License Agreement

     The Company and CSAHC have entered into the Trademark License Agreement dated May 22, 1997, pursuant to which CSAHC has acknowledged that the Group has the right to use the name “China Southern” and “China Southern Airlines” in both Chinese and English, and has granted to the Company a 10-year renewable license to use the kapok logo on a world-wide basis in connection with its airline-related businesses. CSAHC has retained the right to use the kapok logo in connection with its non-airline related businesses conducted as of the date of the Trademark License Agreement and to permit its affiliates that do not compete, directly or indirectly, with the Group to use the kapok logo. Unless CSAHC gives written notice of termination three months before the expiration of the 10-year term of the agreement, the agreement will be automatically extended for another 10-year term.

     Leases

     The Company as lessee and CSAHC as lessor have entered into the following lease agreements:

     The Company and CSAHC have entered into a land lease agreement dated May 22, 1997, in respect of the land used by the Company within Baiyun International Airport. The total rental payment is RMB2.7 million per year. The term of the lease is five years commencing April 1, 1997, and is renewable by the Company thereafter.

     The Company and CSAHC have separately entered into four lease agreements dated May 22, 1997, in respect of office premises located at the east wing of the Guangzhou Railway Station on Guangzhou Huanshi Dong Road, office premises at Haikou Airport, office premises in Haikou City, and office premises at Tianhe Airport in Wuhan, Hubei Province. The aggregate rental payment under the four leases is RMB12.6 million per year. The original term of each lease is one year and is renewable annually by the Company thereafter.

     The Company and CSAHC have entered into an indemnification agreement dated May 22, 1997, in which CSAHC has agreed to indemnify the Company against any loss or damage caused by or arising from any challenge of, or interference with, the Company’s right to use certain land and buildings.

     Comprehensive Services and Employee Benefits

     The Company and CSAHC have entered into a comprehensive services agreement dated May 22, 1997, pursuant to which CSAHC agrees to provide adequate quarters to eligible employees of the Group as and when required. In return, the Group agrees to pay a fixed annual fee of RMB85 million to CSAHC for a ten-year period effective January 1, 1995.

     Arrangements with CSAHC’s Affiliates

     Southern Airlines (Group) Import and Export Trading Company (“SAIETC”), a wholly-owned subsidiary of CSAHC

     The Company and SAIETC have entered into an agreement dated May 22, 1997, for the import and export of aircraft, flight equipment, special vehicles for airline use, communication and navigation facilities, and training facilities for a term extending from May 22, 1997 to May 22, 2000 which was subsequently extended to May 22, 2006 by mutual agreement between the parties. The parties have mutually agreed that the agreement can be extended automatically.

     For the year ended December 31, 2003, the amount incurred by the Group for the import and export of the above equipment was RMB1,155 million, inclusive of agency commission of 1.5% above the contract prices paid to SAIETC.

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     Southern Airlines Advertising Company (“SAAC”), which is 90% owned by the Group and 10% owned by CSAHC

     In August 2002, the Group entered into a takeover agreement with CSAHC. As a result, the Group owns 90% and CSAHC owns 10% of SAAC.

     The Company and SAAC have entered into an agreement dated May 22, 1997, for the provision of advertising services for a term extending from May 22, 1997 to May 22, 2000. The agreement has been extended to May 22, 2006.

     For the year ended December 31, 2003, the amount incurred by the Group to SAAC for advertising services was RMB1.3 million.

     Southern Airlines Group Finance Company Limited (“SA Finance”), which is 42% owned by CSAHC, 32% owned by the Company, 26% owned by five subsidiaries of the Company

     The Company has entered into a financial agreement dated May 22, 1997, with SA Finance for the provision of financial services such as deposit and loan facilities, credit facilities, financial guarantees and credit references for a term extending from May 22, 1997 to May 22, 2000. As agreed by the parties, the agreement has been extended for six years to May 22, 2006.

     Under such agreement, (a) all funds that the Company deposits with SA Finance will be deposited by SA Finance with the Commercial and Industrial Bank of China, Bank of Communications, Bank of Agriculture, China Construction Bank, or other banks of similar creditworthiness; and (b) SA Finance will not at any time have outstanding loans in excess of the amount representing the aggregate of (i) deposits received from entities other than the Company, (ii) SA Finance’s shareholders’ equity and (iii) capital reserves.

     As of December 31, 2003, the Group had short-term deposits placed with SA Finance amounting to RMB365.9 million, which earned interest at the rate of 1.98% — 3.00% per annum.

     Shenzhen Air Catering Company Limited, which is 33% owned by CSAHC, and 67% owned by two independent third parties

     The Company and Shenzhen Air Catering Company Limited have entered into an agreement dated May 23, 1997 for the sale and purchase of in-flight meals for flights originating or stopping at the airport in Shenzhen. Pursuant to such agreement, Shenzhen Air Catering Company Limited would supply in-flight meals to the Group from time to time during the term from May 23, 1997 to May 23, 1998. The parties have agreed that the agreement can be extended automatically.

     For the year ended December 31, 2003, the amount paid by the Group to Shenzhen Air Catering Company Limited for the provision of in-flight meals was approximately RMB28.2 million.

     GAMECO, which is 50% owned by the Company and 50% owned by an independent third party

     The Company and GAMECO have entered into an Aircraft Maintenance and Engineering Agreement for the provision of aircraft repair and maintenance services. On May 17, 1996, the Company and GAMECO entered into an agreement regarding the fee arrangement for the provision of such repair and maintenance services (the “Fee Agreement”). Pursuant to the Fee Agreement and subsequent agreements, GAMECO charged the Company for expendables at cost plus 15%, and labor costs at US$30.0 per hour during 2003.

     For the year ended December 31, 2003, the amount incurred by the Company for such repair and maintenance services was RMB587.3 million.

     The China Southern West Australian Flying College Pty Ltd (the “Australian Pilot College”), which is 65% owned by the Company and 35% owned by CSAHC.

     CSAHC and the Australian Pilot College entered into an agreement dated October 7, 1993, for the provision of pilot training in Australia to the cadet pilots of CSAHC (the “Training Agreement”). The Training Agreement will remain in force unless terminated by either party upon 90 days’ prior written notice to the other party. Pursuant to the Demerger Agreement, the Company has assumed all the interests, rights and obligations of CSAHC under the Training Agreement.

     For the year ended December 31, 2003, the amount paid by the Group to the Australian Pilot College for training services was RMB82.4 million.

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

     The Company and SAGEDC have entered into an agreement dated May 22, 1997, for the provision of drinks, snacks, liquor, souvenirs and other products for a term extending from May 22, 1997, to May 22, 2007.

     For the year ended December 31, 2003, the amount paid by the Group to Southern Airlines (Group) Economic Development Company for the provision of drinks, snacks, liquor, souvenirs and other products was RMB42.8 million.

     Ticket sales arrangements

     The Company has entered into ticket agency agreements for the sale of the Group’s air tickets with several subsidiaries of CSAHC (the “Agents”). The Agents charge a commission, at a rate prescribed by the CAAC and the International Air Transport Association, for each air ticket sold in the amount of 3% of the ticket price for domestic tickets and 5% — 12% of the ticket price for Hong Kong regional/international tickets, respectively. In addition to the Agents, the Company has other air ticket sales agents in China who charge commission at the same rates. The Agents also act as air ticket sales agents for other Chinese airlines and charge the same rates of commission to such other airlines as those charged to the Company.

     For the year ended December 31, 2003, the aggregate amount of ticket sales of the Group conducted through the Agents was RMB143.0 million.

Interests of Experts and Counsel

     Not applicable.

ITEM 8. FINANCIAL INFORMATION.

Consolidated Statements and Other Financial Information

     See “Item 18. Financial Statements” for financial statements filed as part of this Annual Report.

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Significant Changes

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

Legal Proceedings

     The Company is currently involved in a civil litigation (Hong Kong High Court Action No. 515 of 2001) (“Litigation”). According to the writ of summons for the Litigation, New Link Consultants Limited, the plaintiff, claimed against the Company (as one of the defendants to the Litigation) on the basis of certain evidence proving that United Aero-Supplies System of China, Limited (“UASSC”) entered into an agreement with the defendants for exclusive purchase of aviation equipment consigned to UASSC for sale and, that as the defendants failed to perform the agreement, UASSC has the right to compensation. Since UASSC is in the course of its winding up proceedings, all the rights and benefits of UASSC in connection with the claim have been transferred to the plaintiff. The Company, as one of the defendants to the Litigation, has been claimed for unspecified damages for breach of the agreement. Given that the Litigation is still at its preliminary stage, it is pre-matured to predict the result of the court judgment. Based on the opinion given by its instructing solicitors, the Company’s directors consider that the Company has a reasonable chance of success in its defense to the claim. At present, the Company has filed an objection in respect of the jurisdiction of the court, and has requested the court to transfer the case to the PRC for trial. Accordingly, the Directors of the Company consider that a provision for such claim and/or the associated legal costs is not required.

     Other than the above legal proceeding, the Company is not party to any material legal proceedings.

Dividend Information

     No interim dividend was paid during the year ended December 31, 2003. The Board of Directors does not recommend the payment of a final dividend in respect of the year ended December 31, 2003.

ITEM 9. THE OFFER AND LISTING.

     The principal trading market for the Company’s H Shares is the Hong Kong Stock Exchange, and the Company’s trading code is “1055”. The ADSs, each representing 50 H Shares, are evidenced by ADRs issued by The Bank of New York as the Depositary for the ADRs, and are listed on the New York Stock Exchange under the symbol “ZNH.” As of May 31, 2004, approximately 104,740,000 of the Company’s H Shares in the form of 2,094,800 ADSs were held in the U.S. by approximately 42 record holders in the U.S., including the Depository Trust Company.

     In July 2003, the Company issued and listed 1,000,000,000 A shares on the Shanghai Stock Exchange with trading code of “600029”. The 2,200,000,000 Domestic Shares held by CSAHC are not listed on any stock exchange and are essentially not transferrable by CSAHC.

     Set forth below for the periods indicated are the high and low sales prices of H Shares on the Hong Kong Stock Exchange, ADSs on the New York Stock Exchange and A Shares on the Shanghai Stock Exchange.

			The Stock Exchange								The New York								The Shanghai
			of Hong Kong								Stock Exchange								Stock Exchange
			Price per H Share								Price per ADS								Price per A Share
			(HK$)								(US$)								(RMB)
			High				Low				High				Low				High				Low
Annual Market Prices
	Fiscal Year ended December 31, 1998			2.40				0.50				14.75				3.06				N/A				N/A
	Fiscal Year ended December 31, 1999			2.25				0.61				13.94				3.88				N/A				N/A
	Fiscal Year ended December 31, 2000			2.93				1.02				18.38				6.06				N/A				N/A
	Fiscal Year ended December 31, 2001			2.95				1.35				18.10				8.00				N/A				N/A
	Fiscal Year ended December 31, 2002			3.60				1.50				22.25				10.35				N/A				N/A
	Fiscal Year ended December 31, 2003			3.50				1.46				22.78				9.53				5.34				3.75
Quarterly Market Prices
	Fiscal Year ended December 31, 2000
	First Quarter			1.86				1.02				11.19				6.88				N/A				N/A
	Second Quarter			2.05				1.06				12.44				6.06				N/A				N/A
	Third Quarter			2.93				1.63				18.38				10.19				N/A				N/A
	Fourth Quarter			2.40				1.46				15.06				9.56				N/A				N/A
	Fiscal Year ended December 31, 2001
	First Quarter			2.70				1.83				17.38				12.22				N/A				N/A
	Second Quarter			2.95				1.89				18.10				12.00				N/A				N/A
	Third Quarter			2.53				1.35				16.50				8.00				N/A				N/A
	Fourth Quarter			2.42				1.66				15.25				9.8				N/A				N/A
	Fiscal Year ended December 31, 2002

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			The Stock Exchange								The New York								The Shanghai
			of Hong Kong								Stock Exchange								Stock Exchange
			Price per H Share								Price per ADS								Price per A Share
			(HK$)								(US$)								(RMB)
			High				Low				High				Low				High				Low
	First Quarter			2.83				2.22				17.63				14.80				NA				NA
	Second Quarter			3.42				2.33				21.74				14.95				NA				NA
	Third Quarter			3.60				1.89				22.25				12.00				NA				NA
	Fourth Quarter			2.42				1.50				15.00				10.35				NA				NA
Fiscal Year ended December 31, 2003
	First Quarter			2.62				1.71				16.50				11.75				N/A				N/A
	Second Quarter			2.40				1.46				14.85				9.53				N/A				N/A
	Third Quarter			2.88				2.03				18.59				13.25				4.15				3.75
	Fourth Quarter			3.50				2.50				22.78				16.76				5.34				3.86
Monthly Market Prices
	December 2003			3.50				2.92				22.78				19.00				5.34				4.46
	January 2004			3.95				3.35				25.18				21.94				6.30				4.95
	February 2004			4.68				3.20				29.73				20.91				6.73				5.70
	March 2004			4.47				3.30				28.60				21.00				6.57				5.77
	April 2004			3.90				3.20				24.89				21.07				6.24				5.49
	May 2004			3.53				2.47				22.62				15.95				6.10				4.82

Offer and Listing details

     Not applicable.

Plan of Distribution

     Not applicable.

Markets

     Not applicable.

Selling Shareholders

     Not applicable.

Dilution

     Not applicable.

Expenses of the Issue

     Not applicable.

ITEM 10. ADDITIONAL INFORMATION.

Share Capital

     Not applicable.

Memorandum and Articles of Association

     The Company is registered with and has obtained a business license from the State Administration Bureau of Industry and Commerce of the People’s Republic of China on March 25, 1995. The Company’s business license number is 1000001001760.

     On March 13, 2003, the Company obtained an approval certificate from the Ministry of Commerce to change to a permanent limited company with foreign investments and obtained the business license (Qi Gu Guo Zi Di No. 000995) on October 17, 2003 issued by the State Administration of Industry and Commerce of the People’s Republic of China.

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     Director

     Pursuant to Article 13 of the Articles of Association, the business purposes of the Company are: (i) to absorb domestic and foreign capital; (ii) to assist in developing the aviation industry of China; (iii) to promote the development of the national economy of China; (iv) to utilize corporate incentive mechanisms of privatization; (v) to draw on the advanced management expertise of other domestic and foreign companies; (vi) to continuously improve the management of the Company; (vii) to enhance the market competitiveness of the Company; (viii) to generate economic and social benefits for the Company; and (ix) to generate steady income for the Company’s shareholders. Pursuant to Article 14 of the Articles of Association, the scope of business of the Company shall be consistent with and subject to the scope of business approved by the relevant supervisory department of the State. The scope of business of the Company includes: (i) provision of scheduled and non-scheduled domestic, regional and international air transportation services for passengers, cargo, mail and luggage; (ii) undertaking general aviation services; (iii) provision of aircraft repair and maintenance services; (iv) acting as agent for other domestic and international airlines; (v) provision of air catering services and (vi) engaging in other airline or airline-related business, including advertising for such services.

     Pursuant to Article 154 of the Articles of Association, where a director of the Company is in any way, directly or indirectly, materially interested in a contract, transaction or arrangement or proposed contract, transaction or arrangement with the Company, (other than his contract of service with the Company), he shall declare the nature and extent of his interests to the board of directors at the earliest opportunity, whether or not the contract, transaction or arrangement or proposal therefor is otherwise subject to the approval of the board of directors.

     Pursuant to Article 108 of the Articles of Association, where a director is interested in any resolution proposed at a board meeting, such director shall not be present and shall not have a right to vote. Such director shall not be counted in the quorum of the relevant meeting.

     Pursuant to Article 162 of the Articles of Association, the Company shall, with the prior approval of shareholders in general meeting, enter into a contract in writing with a director wherein his emoluments are stipulated. The aforesaid emoluments include, emoluments in respect of his service as director, supervisor or senior administrative officer of the Company or any subsidiary of the Company; emoluments in respect of the provision of other services in connection with the management of the affairs of the Company and any of its subsidiaries; and payment by way of compensation for loss of office, or as consideration for or in connection with his retirement from office.

     Pursuant to Article 102(6) of the Articles of Association, the board of directors has the power to formulate proposals for increases or reductions in the Company’s registered capital and the issue of debentures of the Company; such resolutions must be passed by more than two-thirds of all the directors.

     There is no mandatory retirement age for the directors of the Company. The directors of the Company are not required to hold shares of the Company.

     Ordinary Shares

     Pursuant to Article 19 of the Articles of Association, subject to the approval of the securities authority of the State Council, the Company may issue and offer shares to domestic investors or foreign investors for subscription. Foreign investors are those investors of foreign countries and regions of Hong Kong, Macau and Taiwan who subscribe for shares issued by the Company. Domestic investors are those investors within the territory of the PRC (excluding investors of the regions referred to in the preceding sentence) who subscribe for shares issued by the Company.

     Pursuant to Article 20 of the Articles of Association, Shares issued by the Company to domestic investors for subscription in Renminbi shall be referred to as “Domestic-Invested Shares”. Shares issued by the Company to foreign investors for subscription in foreign currencies shall be referred to as “Foreign-Invested Shares”. Foreign-Invested Shares which are listed overseas are called “Overseas-Listed Foreign-Invested Shares”. The foreign currencies mean the legal currencies (apart from Renminbi) of other countries or districts which are recognized by the foreign exchange control authority of the State and can be used to pay the Company for the share price.

     Pursuant to Article 21 of the Articles of Association, Domestic-Invested Shares issued by the Company shall be called “A Shares”. Overseas-Listed Foreign-Invested Shares issued by the Company and listed in Hong Kong shall be called “H Shares”. H Shares are shares which have been admitted for listing on The Stock Exchange of Hong Kong Limited, the par value of which is denominated in Renminbi and which are subscribed for and traded in Hong Kong dollars. H Shares can also be listed on a stock exchange in the United States of America in the form of American depositary receipts.

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     The Company has issued a total of 4,374,178,000 ordinary shares, of which (a) 2,200,000,000 domestic shares are held by CSAHC, (b) 1,174,178,000 H shares are held by Hong Kong and overseas shareholders and (c) 1,000,000,000 A shares are held by the PRC shareholders.

     Pursuant to Article 54 of the Articles of Association, the ordinary shareholders of the Company shall enjoy the following rights:

(1)		the right to attend or appoint a proxy to attend shareholders’ general meetings and to vote thereat;
(2)		the right to dividends and other distributions in proportion to the number of shares held;
(3)		the right of supervisory management over the Company’s business operations, and the right to present proposals or enquiries;
(4)		the right to transfer, donate or pledge his shares in accordance with laws, administrative regulations and provisions of these articles of association;
(5)		the right of knowledge and decision making power with respect to important matters of the Company in accordance with laws, administrative regulations and these articles of association;
(6)		the right to obtain relevant information in accordance with the provisions of these articles of association, including:

	(i)		the right to obtain a copy of these articles of association, subject to payment of the cost of such copy;
	(ii)		the right to inspect and copy, subject to payment of a reasonable charge:
			(a)     all parts of the register of shareholders;
			(b)     personal particulars of each of the Company’s directors, supervisors, president and other senior administrative officers, including:
			(aa)          present name and alias and any former name or alias;
			(bb)          principal address (residence);
			(cc)          nationality;
			(dd)          primary and all other part-time occupations and duties;
			(ee)          identification documents and their relevant numbers;
			(c)     state of the Company’s share capital;
			(d)     reports showing the aggregate par value, quantity, highest and lowest price paid in respect of each class of shares repurchased by the Company since the end of last accounting year and the aggregate amount paid by the Company for this purpose;
			(e)     minutes of shareholders’ general meetings;
			(f)     interim and annual reports of the Company.

(7)		in the event of the termination or liquidation of the Company, to participate in the distribution of surplus assets of the Company in accordance with the number of shares held;
(8)		other rights conferred by laws, administrative regulations and these articles of association.

     Pursuant to Article 55 of the Articles of Association, the ordinary shareholders of the Company shall assume the following obligations:

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(1)		to abide by these articles of association;
(2)		to pay subscription monies according to the number of shares subscribed and the method of subscription;
(3)		no right to return shares to the Company unless laws and regulations provide otherwise;
(4)		other obligations imposed by laws, administrative regulations and these articles of association.

     Shareholders are not liable to make any further contribution to the share capital other than as agreed by the subscriber of the relevant shares on subscription.

     Action necessary to change rights of shareholders

     Pursuant to Article 92 of the Articles of Association, those shareholders who hold different classes of shares are shareholders of different classes.

     The holders of the Domestic-Invested shares and holders of Overseas-Listed Foreign-Invested Shares shall be deemed to be shareholders of different classes.

     Pursuant to Article 93 of the Articles of Association, rights conferred on any class of shareholders in the capacity of shareholders (“class rights”) may not be varied or abrogated unless approved by a special resolution of shareholders in general meeting and by holders of shares of that class at a separate meeting conducted in accordance with Articles 95 to 99.

     Pursuant to Article 95 of the Articles of Association, shareholders of the affected class, whether or not otherwise having the right to vote at shareholders’ general meetings, shall nevertheless have the right to vote at class meetings in respect of matters concerning sub-paragraphs (2) to (8), (11) and (12) of Article 94, but interested shareholder(s) shall not be entitled to vote at class meetings. “Interested shareholder(s)” is:

(1)		in the case of a repurchase of shares by offers to all shareholders or public dealing on a stock exchange under Article 31, a “controlling shareholder” within the meaning of Article 57;
(2)		in the case of a repurchase of share by an off-market contract under Article 31, a holder of the shares to which the proposed contract relates;
(3)		in the case of a restructuring of the Company, a shareholder within a class who bears less than a proportionate obligation imposed on that class under the proposed restructuring or who has an interest in the proposed restructuring different from the interest of shareholders of that class.

     Pursuant to Article 96 of the Articles of Association, resolutions of a class of shareholders shall be passed by votes representing more than two-thirds of the voting rights of shareholders of that class represented at the relevant meeting who, according to Article 95, are entitled to vote at class meetings.

     Pursuant to Article 97 of the Articles of Association, written notice of a class meeting shall be given forty-five (45) days before the date of the class meeting to notify all of the shareholders in the share register of the class of the matters to be considered, the date and the place of the class meeting. A shareholder who intends to attend the class meeting shall deliver his written reply concerning attendance at the class meeting to the Company twenty (20) days before the date of the class meeting.

     If the number of shares carrying voting rights at the meeting represented by the shareholders who intend to attend the class meeting reaches more than one half of the voting shares at the class meeting, the Company may hold the class meeting; if not, the Company shall within five (5) days notify the shareholders again by public notice of the matters to be considered, the date and the place for the class meeting. The Company may then hold the class meeting after such publication of notice.

     Pursuant to Article 98 of the Articles of Association, notice of class meetings need only be served on shareholders entitled to vote thereat.

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     Meeting of any class of shareholders shall be conducted in a manner as similar as possible to that of general meetings of shareholders. The provisions of these articles of association relating to the manner to conduct any shareholders’ general meeting shall apply to any meeting of a class of shareholders.

     Pursuant to Article 99 of the Articles of Association, the special procedures for voting at any meeting of a class of shareholders shall not apply to the following circumstances:

(1)		where the Company issues, upon the approval by special resolution of its shareholders in general meeting, either separately or concurrently once every twelve months, not more than 20 per cent of each of its existing issued Domestic-Invested Shares and Overseas-Listed Foreign-Invested Shares;
(2)		where the Company’s plan to issue Domestic-Invested Shares and Overseas-Listed Foreign-Invested Shares at the time of its establishment is carried out within fifteen (15) months from the date of approval of the Securities Committee of the State Council.

     Meetings of shareholders

     Shareholders’ general meetings is the organ of authority of the Company and shall exercise its functions and powers, among other things, to decide on the Company’s operational policies and investment plans, to elect and replace directors and decide on matters relating to the remuneration of directors, to examine and approve reports of the board of directors, etc.

     There are two types of shareholders’ general meetings: annual general meetings and extraordinary general meetings. Shareholders’ general meetings shall be convened by the board of directors. Annual general meetings are held once every year and within six (6) months from the end of the preceding financial year.

     Under any of the following circumstances, the board of directors shall convene an extraordinary general meeting within two (2) months:

(1)		when the number of directors is less than the number of directors required by the Company Law or two thirds of the number of directors specified in the Articles of Association;
(2)		when the unrecovered losses of the Company amount to one third of the total amount of its share capital;
(3)		when shareholder(s) holding 10 per cent or more of the Company’s issued and outstanding shares carrying voting rights request(s) in writing the convening of an extraordinary general meeting;
(4)		when deemed necessary by the board of directors or as requested by the supervisory committee.

     When the Company convenes a shareholders’ general meeting, written notice of the meeting shall be given forty five (45) days before the date of the meeting to notify all of the shareholders in the share register of the matters to be considered and the date and the place of the meeting. A shareholder who intends to attend the meeting shall deliver his written reply concerning the attendance of the meeting to the Company twenty (20) days before the date of the meeting.

     The Company shall, based on the written replies received twenty (20) days before the date of the shareholders’ general meeting from the shareholders, calculate the number of voting shares represented by the shareholders who intend to attend the meeting. If the number of voting shares represented by the shareholders who intend to attend the meeting reaches one half or more of the Company’s total voting shares, the Company may hold the meeting; if not, then the Company shall within five (5) days notify the shareholders again by public notice of the matters to be considered, the place and date for, the meeting. The Company may then hold the meeting after such publication of notice.

     Limitation on right to own securities

     The PRC Special Regulations on Overseas Offering and the Listing of Shares by Companies Limited by Share (the “Special Regulations”) and the Mandatory Provisions for Articles of Association of Companies to be Listed Overseas (the “Mandatory Provisions”) provide for different classes of shares to be subscribed for and traded by local and overseas investors respectively. Shares which can be traded by overseas investors must be in registered form and while denominated in Renminbi, they are traded in foreign currency with dividends payable in foreign currency. Local investors are prohibited from dealing in such shares.

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     Merger, acquisition or corporate restructuring

     Pursuant to Article 193 of the Articles of Association, in the event of the merger or division of the Company, a plan shall be presented by the Company’s board of directors and shall be approved in shareholders’ general meeting and the relevant examining and approving formalities shall be processed as required by law. A shareholder who objects to the plan of merger or division shall have the right to demand the Company or the shareholders who consent to the plan of merger or division to acquire that dissenting shareholder’s shareholding at a fair price. The contents of the resolution of merger or division of the Company shall be made into special documents for shareholders’ inspection. Such special documents shall be sent by mail to holders of Overseas-Listed Foreign-Invested Shares.

     The Articles of Association do not contain any provisions governing the ownership threshold above which shareholder ownership must be disclosed.

Material Contracts

     The Company has not entered into any material contracts, other than in the ordinary course of business, during the preceding two years.

Exchange Controls

     Under current Chinese foreign exchange regulations, Renminbi is fully convertible for current account transactions, but is not freely convertible for capital account transactions. Conversion from Renminbi into a foreign currency or vice versa for purposes of capital account transactions requires prior approvals of relevant Chinese Government agencies.

     The Company is generally required by law to sell all its foreign exchange revenues to Chinese banks at the exchange rates published by Chinese banks on each business day, which rates may deviate only within a very narrow range from the official rate published daily by the People’s Bank of China, China’s central bank.

     The Company may purchase foreign exchange directly from Chinese banks for any current account transactions, such as trade transactions in its normal course of business, including acquisition of aircraft and flight equipment (such acquisition requires approvals from relevant Chinese Government agencies).

     Payment of dividends by the Company to holders of the Company’s H Shares and ADSs is considered a current account transaction under Chinese law. Therefore, there is no legal restriction on the conversion of Renminbi into foreign exchange for the purpose of paying dividends to such holders of H Shares and ADSs. In addition, the Company’s Articles of Association require the Company to pay dividends to holders of the Company’s H Shares and ADSs in foreign exchange.

     Other Limitations

     There are no limitations on the right of non-resident or foreign owners to hold or vote H Shares or ADSs imposed by Chinese law or by the Articles of Association or other constituent documents of the Company. However, under current Chinese law, foreign ownership of the Company may not exceed 49%.

Taxation

     The following is a general summary of certain Chinese tax consequences of the acquisition, ownership and disposition of H Shares and ADSs. This summary is based upon tax laws of China as in effect on the date of this Annual Report, including the income tax treaty between the United States and China (the “U.S.-PRC Tax Treaty”), all of which are subject to change or different interpretation.

     In general, for Chinese tax purposes, holders of ADSs will be treated as the owners of the H Shares represented by those ADSs, and exchanges of H Shares for ADSs, and ADSs for H Shares, will not be subject to taxation under the laws of China.

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     This summary does not purport to address all material tax consequences for holders or prospective purchasers of H Shares or ADSs, and does not take into account the specific circumstances of such investors. Investors should consult their own tax advisors as to Chinese or other tax consequences of the acquisition, ownership and disposition of H Shares or ADSs.

     Dividends

     Chinese tax law generally provides for the imposition of a withholding tax on dividends paid by a Chinese company to a non-Chinese shareholder at a rate of 20%. However, the Chinese tax authorities have temporarily suspended imposition of this withholding tax. Accordingly, dividends paid by the Company to holders of H Shares or ADSs who are foreign individuals not resident in China or which are foreign enterprises with no permanent establishment in China will currently not be subject to Chinese withholding tax. In the event that the suspension of the withholding tax is lifted, such payments will be subject to withholding tax at the 20% rate unless the holder is entitled to a tax waiver or a lower tax rate under an applicable double-taxation treaty.

     China currently has double-taxation treaties with a number of countries, including Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands, Singapore, the United Kingdom and the United States. Under the U.S.-PRC Tax Treaty, China may tax a dividend paid by the Company to a U.S. holder up to a maximum of 10% of the gross amount of such dividend.

     Capital Gains from Transfer or Disposition of Shares

     Chinese tax law generally provides that an individual who transfers or otherwise disposes of a company’s shares of capital stock is subject to a 20% capital gains tax. Currently, foreign enterprises and all individuals are temporarily exempt from capital gains tax on transfers of shares of capital stock of joint stock companies, such as the Company. Should such temporary exemption be discontinued, such holders may be subject to a 20% capital gains tax unless reduced by an applicable double-taxation treaty. Under the U.S.-PRC Tax Treaty, for example, China may only impose a 20% capital gains tax from the sale or other disposition by a U.S. holder of H Shares or ADSs representing an interest in the Company of 25% or more.

     Stamp Duty

     Transfers of shares of capital stock of a company are not subject to Chinese stamp duty if the transfer does not take place within China (excluding Hong Kong, Macau and Taiwan).

Dividends and paying Agents

     Not applicable.

Statement by Experts

     Not applicable.

Documents on Display

     The Company has filed this Annual Report on Form 20-F with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Statements made in this annual report as to the contents of any document referred to are not necessarily complete. With respect to each such document filed as an exhibit to this annual report, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.

     The Company is subject to the informational requirements of the Exchange Act and file reports and other information with the Securities and Exchange Commission. Reports and other information which the Company filed with the Securities and Exchange Commission, including this Annual Report on Form 20-F, may be inspected and copied at the public reference room of the Securities and Exchange Commission at

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

     You can also obtain copies of this material by mail from the Public Reference Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. Additionally, copies of this material may be obtained from the Securities and Exchange Commission’s Internet site at http://www.sec.gov. The Commission’s telephone number is 1-800-SEC-0330.

Subsidiary Information

     Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     The Group is subject to market risks due to fluctuations in interest rates. The majority of the Group’s borrowings is in the form of long-term fixed- and variable-rate debts with original maturities ranging from two to 12 years. Fluctuations in interest rates can lead to significant fluctuations in the fair value of such debt instruments. From time to time, the Group may enter into interest rate swaps designed to mitigate exposure relating to interest rate risks. No such contract was outstanding as of December 31, 2003.

     The Group is also exposed to foreign currency risk as a result of its aircraft and flight equipment being sourced from overseas suppliers. Specifically, the Group’s foreign currency exposure relates primarily to its foreign currency long-term debts used to finance such capital expenditures and its capital commitments. Subject to certain restrictive conditions imposed by the State Administration of Foreign Exchange, the Group may, from time to time, enter into forward foreign exchange contracts to mitigate its foreign currency exposures. No such contract was outstanding as of December 31, 2003.

     As of December 31, 2003, the Group operated a total of 83 aircraft under operating and capital leases at rates that are substantially fixed. Such leases expose the Group to market risks; however, in accordance with Item 305 of Regulation S-K, such leases have been excluded from the following market risk tables. Commitments under operating and capital leases are disclosed in Note 17 to the Financial Statements.

     The following table provides information regarding the Group’s material interest rate sensitive financial instruments as of December 31, 2003 and 2002:

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(1)		These interest rates are calculated based on the year end indices.
(2)		Fair value of debt instruments was estimated based on the interest rates applicable to similar debt instruments as of December 31, 2003 and 2002.

     The following table provides information regarding the Group’s material foreign currency sensitive financial instruments and capital commitments as of December 31, 2003 and 2002:

(1)		These interest rates are calculated based on the year end indices.
(2)		Fair value of debt instruments was estimated based on the floating interest rates applicable to similar debt instruments as of December 31, 2002 and 2003.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.

     Not applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.

     None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.

     There were no material modifications affecting the rights of securities holders made during the fiscal year ended December 31, 2003.

Use of Proceeds

(1)

Effective date of the Securities Act registration statement for which the use of proceeds information is being disclosed:

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		July 23, 1997.
		SEC file number assigned to such registration statement: 333-7114.
(2)		The offering commenced on July 23, 1997.
(3)		The offering was not terminated prior to the sale of any securities registered under the registration statement.
(4)		(i)     The offering was not terminated prior to the sale of all securities registered under the registration statement.

		(ii)	Name of the managing underwriter:
			Goldman Sachs (Asia) L.L.C. (global coordinator).
		(iii) and (iv)

Aggregate

Aggregate

price of

offering

Title of each

offering

price of

class of

Amount

amount

Amount

amount

securities registered

registered(1)

registered(2)

sold(3)

sold(4)

Ordinary H Shares of par value RMB 1.00 per share represented by American Depositary Shares

861,823,000 shares

US$528,469,864

851,501,000 shares

US$522,140,413

Notes:

(1)     The amount does not include 322,677,000 H Shares (some of which in the form of ADSs) which have not been registered with the SEC, of which 290,477,000 H Shares were sold to certain corporate investors in Hong Kong as part of the global offering of the Company in July 1997 and 32,200,000 H Shares were sold to certain limited partnership investment funds affiliated with Goldman, Sachs & Co. in a private placement in June 1997 prior to the Company’s global offering.

(2)     Assumes that all H Shares were sold in the form of ADSs. The price to public for each ADS is US$30.66. Each ADS represents 50 H Shares.

(3)     The amount does not include 322,677,000 H Shares referred to in note (1) above.

(4)       The amount does not include US$197,865,536 which represents the proceeds from the sale of 322,677,000 H Shares referred to in note (1) above. If the latter amount is included, the aggregate amount of proceeds to the Company would be US$720,005,950. In addition, the aggregate amount is calculated on the assumption that all H Shares were sold in the form of ADSs. Based on the actual sale of H Shares and ADSs, the aggregate amount of proceeds to the Company was US$719,494,700. The issue price per H Share was HK$4.70.

(v)

Underwriting discounts and commissions		US$36,593,000
Finder’s fees			—
Expenses paid to or for underwriters		US$2,958,000
Other expenses		US$21,411,000
Total expenses		US$60,962,000

Note:     No direct or indirect payments were made to directors, officers, general partners of the Company or their associates, or to persons owning ten percent or more of any class of equity securities of the Company, or to affiliates of the Company. All payments were made to third parties.

(vi)		Net offering proceeds to the Company after deducting the total expenses in item (4)(v) above:
		US$658,532,700

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Note:     The amount is calculated on the basis of the actual aggregate amount of proceeds to the Company, and includes the proceeds from the sale of 322,677,000 H Shares referred to in note (1) of item (4)(iv) above.

(vii)

As of December 31, 2003, the net offering proceeds to the Company was used up as follows:

Construction of plant, building and facilities		US$41.9 million
Purchase and installation of machinery and equipment		US$394.6 million
Purchase of real estate		—
Acquisition of other business(es)		—
Repayment of indebtedness		US$192.4 million
Working Capital		US$29.6 million

Note:     No direct or indirect payments were made to directors, officers, general partners of the Company or their associates, or to persons owning ten percent or more of any class of equity securities of the Company, or to affiliates of the Company. All payments were made to third parties.

(viii)

The uses of proceeds do not represent a material change in the use of proceeds described in the prospectus.

PART III

ITEM 15. CONTROLS AND PROCEDURES

     Our president and chief financial officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) or 15d-15(e), and concluded that, based on their evaluation, our disclosure controls and procedures are effective as of the end of the period covered by this Annual Report to ensure that material information required to be included in this Annual Report would be made known to them by others on a timely basis.

     There has been no significant change in our internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date.

ITEM 16.

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

     The Board of Directors has determined that Mr. Wei Ming Hai qualifies as an audit committee financial expert in accordance with the terms of Item 16.A of Form 20-F. See “Item 6 Directors, Senior Management and Employees — Directors and Senior Management”

ITEM 16B. CODE OF ETHICS

     As of the date of this Annual Report, the Company does not have, in form, a code of ethics that applies to the president, chief financial officer and principal accounting officer, or collectively, the senior corporate officers. The senior executive officers, all of whom currently serve as our directors, are subject to the director service contracts that they have with the Company. Under the director service contracts, the directors, including the senior corporate officers, agree that each director owes a fiduciary and diligence obligation to the Company and that no such director shall engage in any activities in competition with the Company’s business or carry any activities detrimental to the interests of the Company. Each of the directors, including the senior corporate officers, also agreed to perform their respective duties as directors and senior officers in accordance with the Company Law of the PRC, relevant rules and regulations promulgated by China Securities Regulatory Commission and the Mandatory Provisions of Articles of Association of Overseas Listed Companies.

ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES

     The following table sets forth the aggregate audit fees, audit-related fees, tax fees of the Company’s principal accountants and all other fees billed for products and services provided by the Company’s principal accountants other than the audit fees, audit-related fees and tax fees for each of the fiscal years 2002 and 2003:

Audit-related fees

     Services provided primarily consist of the following:

a)

Review of the Group’s 2003 interim financial report prepared under IFRS;

b)		Audits of the Group’s financial statements prepared under PRC Accounting Rules and Regulations in connection with the Company’s listing of its A shares in the PRC; and
c)		Audits of the financial statements of China Northern Airlines Company and Xinjiang Airlines Company in connection with the Company’s proposed acquisition of these airlines.

Tax fees

     Services provided primarily consist of tax compliance services.

Others

     Services provided primarily consist of services to assist the Group in documenting its internal controls over financial reporting and provide observations and recommendations.

     Before our principal accountants were engaged by the Company to render audit or non-audit services, the engagement has been approved by our audit committee.

Exemptions from the Listing Standards for Audit Committee

     Not applicable.

ITEM 16D. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     The Company and its affiliated companies have not purchased any issued common shares of the Company during 2003 and up to the date of this Annual Report.

PART IV

ITEM 17. FINANCIAL STATEMENTS.

     Not applicable.

ITEM 18. FINANCIAL STATEMENTS.

Index to Financial Statements

		Page
CONSOLIDATED FINANCIAL STATEMENTS OF CHINA SOUTHERN AIRLINES COMPANY LIMITED
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Statements of Operations for the years ended December 31, 2001, 2002 and 2003		F-2
Consolidated Balance Sheets as of December 31, 2002 and 2003		F-3
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002 and 2003		F-4
Consolidated Statements of Changes in Shareholders’ Equity for the years
ended December 31, 2001, 2002 and 2003		F-5
Notes to Consolidated Financial Statements		F-6

ITEM 19. EXHIBITS.

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Exhibit No.		Description of Exhibit
1		Articles of Association
4.1		Form of Director’s Service Agreement is incorporated by reference in Exhibit 4(c).1 of Form 20-F for the year of 2003.
4.2		Form of Non-Executive Director’s Service Agreement is incorporated by reference in Exhibit 4(c).2 of Form 20-F for the year of 2003.
8		Subsidiaries of the Company
12.1		Section 302 Certification of Chairman
12.2		Section 302 Certification of President
12.3		Section 302 Certification of Chief Financial Officer
13.1		Section 906 Certification of Chairman
13.2		Section 906 Certification of President
13.3		Section 906 Certification of Chief Financial Officer

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SIGNATURES

     The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

	CHINA SOUTHERN AIRLINES COMPANY LIMITED (Registrant)
	/s/ Yan Zhi Qing                     Name: Yan Zhi Qing                     Title:   Chairman of the Board of Directors

Date: June 30, 2004

 

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EXHIBIT INDEX

Exhibit No.		Description of Exhibit
1		Articles of Association
4.1		Form of Director’s Service Agreement
4.2		Form of Non-Executive Director’s Service Agreement
8		Subsidiaries of the Company
12.1		Section 302 Certification of Chairman
12.2		Section 302 Certification of President
12.3		Section 302 Certification of Chief Financial Officer
13.1		Section 906 Certification of Chairman
13.2		Section 906 Certification of President
13.3		Section 906 Certification of Chief Financial Officer