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2 1 Corporate Information DIRECTORS Non-Executive Directors Si Xian Min (Chairman) Wang Quan Hua Yuan Xin An Yang Li Hua (Appointed on 24 January 2013) Executive Directors Tan Wan Geng (Vice Chairman and President) Zhang Zi Fang (Executive Vice President) Xu Jie Bo (Executive Vice President and Chief Financial Officer) Li Shao Bin (Appointed on 24 January 2013) Independent Non-Executive Directors Gong Hua Zhang Wei Jin Cai Ning Xiang Dong Liu Chang Le SUPERVISORS Pan Fu (Chairman of the Supervisory Committee) Li Jia Shi Zhang Wei Yang Yi Hua Liang Zhong Gao JOINT COMPANY SECRETARIES Xie Bing Liu Wei AUTHORISED REPRESENTATIVES Xu Jie Bo Liu Wei PRINCIPAL BANKERS China Development Bank Bank of China China Construction Bank The Export-Import Bank of China Industrial & Commercial Bank of China Agricultural Bank of China LEGAL ADVISERS TO THE COMPANY DLA Piper Hong Kong Z&T Law Firm

3 2 China Southern Airlines Company Limited Interim Report 2013 Corporate Information SHARE REGISTRAR Hong Kong Registrars Limited 17M Floor Hopewell Centre 183 Queen s Road East Wanchai, Hong Kong BNY Mellon Depositary Receipts P.O. Box Providence, RI U.S.A. China Securities Depository and Clearing Corporation Limited Shanghai Branch Floor 36, China Insurance Building 166 Lu Jia Zui East Road Shanghai PRC CORPORATE HEADQUARTERS 278 Ji Chang Road Guangzhou PRC Website: PLACE OF BUSINESS IN HONG KONG Unit B1, 9th Floor United Centre 95 Queensway Hong Kong INTERNATIONAL AUDITORS PricewaterhouseCoopers 22/F Prince s Building Central 10 Chater Road Hong Kong PRC AUDITORS PricewaterhouseCoopers Zhong Tian LLP 11/F PricewaterhouseCoopers Center 2 Corporate Avenue 202 Hu Bin Road Huangpu District Shanghai PRC M BNY Mellon Depositary Receipts P.O. Box Providence, RI U.S.A B

4 3 Review and Prospects During the reporting period, international economic conditions were still complicated, and the growth of major economies was diversified. While the global economy slowly recovered, driving force was limited resulting in a continuous economic downturn. There has been greater downward pressure for domestic economy with a slightly dropping economic growth rate as compared with the same period last year, but major economic indicators were still within our range of expectation. Generally speaking, the domestic economy is experiencing a transition period in economic growth rate, structural adjustment and preliminary adaptation stage of stimulating policies and thus, China Southern Airlines Company Limited (the Company ) is facing increasingly complicated and ever-changing external economic conditions. Having been influenced by domestic and international economic conditions and with the emerging unfavourable factors, including slowing-down market demand, rapidly increasing capacity of airline industry and continuous operation commencement of high-speed rail, the domestic aviation market faced a fiercer competition, which put the Company s operation under a greater pressure. Under the complicated and severe economic and industrial environments, the Company focused on strengthening its safety management and improving the quality of revenue. Through continuous strategic transformation and active implementation of comprehensive budget management, the Company advanced cost control measures and achieved a satisfactory result under such challenging operation conditions. During the reporting period, the Company strove to ensure safety operation through certain measures such as safety rectification and check and holding safety technical seminars to keep strengthening the aviation safety management. By the end of the reporting period, the Company achieved records of 164 consecutive months of aviation safety and 228 consecutive months of aviation security. During the reporting period, total traffic volume achieved by the Company and its subsidiaries (the Group ) amounted to 8,273 million RTKs, representing an increase of 8.1% from the same period last year; passengers carried was million, representing an increase of 6.3% from the same period last year; cargo and mail traffic volume amounted to 590,000 tonnes, representing an increase of 2.3% from the same period last year. During the reporting period, the Company continued to promote strategic transformation, and the operation quality for international flights kept improving. Passenger load factor for international flights increased by 3.0 percentage points as compared with the same period last year, while revenue from transit and the number of transit passengers of international flights maintained a rapid growth. The sixth freedom traffic connection maintained its rapid growing momentum. The Company continuously strengthened the construction of transit hub and network establishment, thereby enhanced the concentration and support capability of the hub as well as network sales, which further extended the influence of Canton Route % 4, % % 3.0

5 4 China Southern Airlines Company Limited Interim Report 2013 Review and Prospects During the reporting period, the Company actively advanced its comprehensive budget management and preliminarily established a comprehensive budget management system and raised the cost control awareness throughout the Group. The Company strove to encourage all staff to participate in comprehensive budget management and make it cover all procedures and to realise a thorough tracking system. In addition, by virtue of comprehensive checking on budget management, the Company improved the controls on budget implementation and made recommendation and rectification plan for numerous specific cost items, which further improved its cost control standard. During the reporting period, the Group s total traffic revenue was RMB44,495 million, representing a decrease of RMB874 million or 1.9% from the same period last year, mainly due to the VAT reform which leads to the decrease of domestic revenue of RMB2,658 million. Meanwhile, the Group s total traffic volume increased by 8.1% to 8,273 million RTKs. Passenger load factor was 80.1%, representing an increase of 0.6 percentage point from the same period last year. Passengers carried were million, representing an increase of 6.3% from the same period last year. The average utilisation rate of the Group s aircraft was 9.60 hours per day during the reporting period, representing a decrease of 0.19 hour or 1.9% from the same period last year. Passenger revenue during the reporting period was RMB41,565 million, down 1.6% from the same period last year, representing 93.4% of the Group s total traffic revenue. Passenger traffic volume increased by 10.2% to 70,720 million RPKs. The overall passenger yield per RPK decreased by 10.6% from RMB0.66 to RMB0.59. Domestic passenger revenue was RMB33,674 million, down 3.5% from the same period last year. Domestic passenger revenue accounted for 81.0% of overall passenger revenue. Passenger capacity, in terms of ASKs, increased by 9.2% while passenger traffic volume, in terms of RPKs, increased by 9.3% from the same period last year, resulting in a increase in passenger load factor of 0.1 percentage point to 81.3%. During the reporting period, the passenger yield per RPK decreased by 11.8% from RMB0.68 to RMB0.60. For Hong Kong, Macau and Taiwan routes, the Group recorded a passenger revenue of RMB1,031 million, representing a decrease of 1.3% from the same period last year. Hong Kong, Macau and Taiwan passenger revenue accounted for 2.5% of total passenger revenue. Passenger capacity, in terms of ASKs, decreased by 2.7% while passenger traffic volume, in terms of RPKs, decreased by 3.2% from the same period last year, resulting in a decrease in passenger load factor of 0.4 percentage point to 71.0%. The passenger yield per RPK increased by 1.2% from RMB0.84 to RMB0.85. Passenger revenue for the Group s international routes amounted to RMB6,860 million, representing an increase of 8.5% from the same period last year. International passenger revenue accounted for 16.5% of the total passenger revenue. Passenger capacity, in terms of ASKs, increased by 10.9% while passenger traffic volume, in terms of RPKs, increased by 15.4% from the same period last year, resulting in an increase in passenger load factor of 3.0 percentage points to 76.6%. The passenger yield per RPK decreased by 5.7% from RMB0.53 to RMB % % % 0.64, % % % 93.4% % % %81.0% 9.2% 9.3% % % %2.5% 2.7% 3.2% % % % 16.5% 10.9% 15.4% % %0.50

6 5 Review and Prospects Cargo and mail revenue was RMB2,930 million, a decrease of 6.0% from the same period last year. Cargo and mail revenue accounted for 6.6% of the total traffic revenue. Cargo and mail carried increased by 2.3% to 590,000 tonnes from the same period last year. The cargo and mail yield per tonne kilometre decreased by 8.1% from RMB1.60 to RMB1.47. Total operating expenses increased by 1.7% to RMB46,621 million from the same period last year, primarily due to the combined effect of increase in landing and navigation fees, sales commission fees and other operating costs. Flight operations expenses decreased by 2.9% to RMB26,012 million from the same period last year. Maintenance expenses increased by 1.7% to RMB3,754 million from the same period last year. It is mainly due to increased routine maintenance as a result of fleet expansion during the reporting period. Aircraft and traffic servicing expenses increased by 9.9% to RMB6,819 million. Promotion and sales expenses increased by 14.8% to RMB3,665 million from the same period last year, mainly due to the increase in sales commission. General and administrative expenses increased by 2.1% to RMB1,437 million from the same period last year, mainly due to the business expansion. Depreciation and amortization expenses increased by 9.2% to RMB4,324 million from the same period last year, mainly due to the increased number of owned and finance-leased aircraft during the second half of 2012 and the first half of Interest expense increased by 19.0% to RMB753 million from the same period last year, mainly due to the increase in average effective interest rate and weighted average balance of bank and other loans and obligations under finance leases during the reporting period. Net exchange gain of RMB1,516 million was recorded during the reporting period, mainly due to Renminbi appreciated against US dollars. For the same period last year, net exchange loss of RMB314 million was recorded, mainly due to the depreciation of Renminbi against US dollars. Income tax expense increased by 65.8% to RMB242 million from the same period last year, mainly due to the permanent differences in the annual corporate tax final settlement in As a result of the aforementioned factors, for the six months ended 30 June 2013, the Group recorded a net profit after tax of RMB642 million, as compared to a net profit after tax of RMB956 million for the same period last year %6.6% 2.3% % % % % % % % % % %

7 6 China Southern Airlines Company Limited Interim Report 2013 Review and Prospects In the second half of the year, the Company will continue to ensure the aviation safety and gradually to establish the long-term mechanism of safety management. The Company will pay close attention to the market change in order to firmly grasp business opportunity during the peak season, make timely adjustment on market strategy and improve the operational quality. The Company will increase the sense of crisis, strengthen the transit sales, accelerate the service transformation while maintain the strategic transformation. The Company shall intensify its effort to promote an effective and comprehensive budget management. In summary, facing with the severe and complicated operating environment, the Company will strive to achieve the targeted business objectives in 2013 in the second half of the year. LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE As at 30 June 2013, the Group s current liabilities exceeded its current assets by RMB30,893 million, which included bank and other loans, and obligations under finance leases repayable within one year totaling RMB25,902 million. The liquidity of the Group is primarily dependent on its ability to maintain adequate cash inflow from operations to meet its debt obligations as they fall due, and on its ability to obtain adequate external financing to meet its committed future capital expenditures. In preparing the interim financial report, the directors of the Company (the Directors ) had considered the Group s sources of liquidity and believed that adequate funding was available to fulfill the Group s short term obligations and capital expenditure requirements. As at 30 June 2013, the Group s borrowings totaled RMB82,203 million, representing an increase of RMB8,243 million from RMB73,960 million as at 31 December The borrowings were mainly denominated in US dollars, with 6.37% of the total balance being fixed interest rate borrowings. Of such borrowings, RMB25,902 million, RMB8,072 million, RMB15,459 million, RMB7,740 million and RMB25,030 million will be repayable in the twelve months ending 30 June 2014, 2015, 2016, 2017, 2018 and thereafter, respectively. As at 30 June 2013, cash and cash equivalents and pledged bank deposits of the Group totaled RMB9,412 million, representing a decrease of RMB670 million from RMB10,082 million as at 31 December Of the total balance, 13.20% was denominated in foreign currencies % %

8 7 Review and Prospects As at 30 June 2013, net debts (aggregate of borrowings, obligations under finance leases, trade payables, sales in advance of carriage, amounts due to related companies, accrued expenses and other payables less cash and cash equivalents and pledged bank deposits) increased by 10.4% to RMB95,672 million, compared to RMB86,669 million as at 31 December As at 30 June 2013, total equity attributable to equity shareholders of the Company amounted to RMB32,687 million, a decrease of RMB152 million from RMB32,839 million as at 31 December 2012, mainly due to the declaration of cash dividend during the reporting period. Total equity as at 30 June 2013 amounted to RMB39,880 million (31 December 2012: RMB39,734 million). Ratio of net debt to total equity of the Group as at 30 June 2013 was 240%, as compared to 218% as at 31 December FINANCIAL RISK MANAGEMENT POLICY Foreign currency risk Renminbi is not freely convertible into foreign currencies. All foreign exchange transactions involving Renminbi must take place either through the People s Bank of China ( PBOC ) or other institutions authorised to buy and sell foreign exchange or at a swap centre. The Group has a significant exposure to foreign currency risk as substantially all of the Group s obligations under finance leases, bank and other loans and operating lease commitments are denominated in foreign currencies, principally US dollars, Singapore dollars and Japanese Yen. Depreciation or appreciation of Renminbi against foreign currencies affects the Group s results significantly because the Group s foreign currency liabilities generally exceed its foreign currency assets. Jet fuel price risk The Group is required to procure a majority of its jet fuel domestically at PRC spot market prices. There are currently no effective means available to manage the Group s exposure to the fluctuations in domestic jet fuel prices. However, according to a pricing mechanism that was jointly introduced by the National Development and Reform Commission and the Civil Aviation Administration of China in 2009, such mechanism allows certain flexible levy of fuel surcharge linked to the jet fuel price, airline companies may, within a prescribed scope, make its own decision as to fuel surcharges for domestic routes and the pricing structure. The pricing mechanism, to a certain extent, reduces the Group s exposure to the fluctuation in jet fuel price. MAJOR CHARGES ON ASSETS As at 30 June 2013, certain aircraft of the Group with an aggregate carrying value of approximately RMB69,199 million (as at 31 December 2012: RMB60,538 million) were mortgaged under certain loans or certain lease agreements % ( (

9 8 China Southern Airlines Company Limited Interim Report 2013 Review and Prospects COMMITMENTS As at 30 June 2013, the Group had capital commitments of approximately RMB63,624 million (as at 31 December 2012: RMB75,129 million). Of such amounts, RMB59,730 million was related to the acquisition of aircraft and related flight equipment and RMB3,894 million for other projects. CONTINGENT LIABILITIES Details of contingent liabilities of the Group are set out in note 25 to the interim financial report prepared under the International Accounting Standard 34 Interim Financial Reporting ( IAS 34 ). DIVIDENDS The board of Directors (the Board ) does not recommend to declare an interim dividend for the six months ended 30 June CHANGES OF INFORMATION OF DIRECTORS AND SUPERVISORS UNDER RULE 13.51B(1) OF THE LISTING RULES There is no information relating to the changes of Directors and supervisors of the Company (the Supervisors ) required to be disclosed pursuant to Rule 13.51B(1) of the Rules (the Listing Rules ) Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the Stock Exchange ) since the date of the 2012 Annual Report. STRUCTURE OF SHARE CAPITAL As at 30 June 2013, the share capital of the Company comprised the following: ( B (1) B(1) Number of Percentage to the total Category of Shares Shares held share capital (%) (%) A Shares with selling restrictions A 123,900, % H Shares H 2,794,917, % A Shares without selling restrictions A 6,898,750, % Total issued Shares 9,817,567, %

10 9 Review and Prospects SUBSTANTIAL SHAREHOLDERS As at 30 June 2013, to the best knowledge of the Directors, chief executive and Supervisors of the Company, the following persons (other than the Directors, chief executive or Supervisors of the Company) had interests and short positions in the shares and underlying shares of the Company which are required to be recorded in the register of the Company required to be kept under section 336 of the Securities and Futures Ordinance (the SFO ): % of the % of the % of the total total issued total issued issued share A Shares H Shares capital of the of the of the Company Name of Types of Number of Company Company shareholders Capacity Shares Shares held A H China Southern Air Holding Beneficial owner A Shares 4,150,050,000 (L) 59.10% 42.27% Company ( CSAHC ) (Note 1) A Interest of controlled H Shares 1,064,770,000 (L) 38.10% 10.85% 1 corporations H Sub-total 5,214,820,000 (L) 53.12% Nan Lung Holding Limited Beneficial owner H Shares 1,064,770,000 (L) 38.10% 10.85% ( Nan Lung ) (Note 1) H 1 Interest of controlled corporations FIL Limited (Note 2) Investment Manager H Share 165,648,000 (L) 5.93% 1.69% FIL Limited 2 H Note: 1. CSAHC was deemed to be interested in an aggregate of 1,064,770,000 H Shares through its direct and indirect wholly-owned subsidiaries in Hong Kong, of which 31,120,000 H Shares were directly held by Yazhou Travel Investment Company Limited (representing approximately 1.11% of its then total issued H Shares) and 1,033,650,000 H Shares were directly held by Nan Lung (representing approximately 36.98% of its then total issued H Shares). As Yazhou Travel Investment Company Limited is also an indirect wholly-owned subsidiary of Nan Lung, Nan Lung was also deemed to be interested in the 31,120,000 H Shares held by Yazhou Travel Investment Company Limited. 2. According to the disclosure of interests form filed by FIL Limited, it was interested in an aggregate of 136,638,000 H Shares in the capacity as an investment manager since 11 July 2013, representing approximately 4.89% of the then total issued H Shares of the Company. 1 1,064,770,000 H 31,120,000 H H 1.11%1,033,650,000 H H36.98% 31,120,000 H 2 FIL Limited ,638,000 H H4.89% Save as disclosed above, as at 30 June 2013, so far as was known to the Directors, chief executive and Supervisors of the Company, no other person (other than the Directors, chief executive or Supervisors of the Company) had an interest or a short position in the shares or underlying shares of the Company recorded in the register of the Company required to be kept under section 336 of the SFO

11 10 China Southern Airlines Company Limited Interim Report 2013 Review and Prospects PURCHASE, SALE OR REDEMPTION OF SHARES Neither the Company nor any of its subsidiaries purchased, sold or redeemed any Shares during the first half of INTERESTS OF THE DIRECTORS AND SUPERVISORS IN THE EQUITY OF THE COMPANY As at 30 June 2013, none of the Directors, chief executive or Supervisors of the Company had interests or short positions in the shares, underlying shares and/or debentures (as the case may be) of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to the SFO (including interests or short positions which are taken or deemed to have under such provisions of the SFO), or which were required to be recorded in the register maintained by the Company pursuant to section 352 of the SFO, or which were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of the Listed Companies (the Model Code ) as set out in Appendix 10 of the Listing Rules. HUMAN RESOURCES As at 30 June 2013, the Group had an aggregate of 75,154 employees. The wages of the Group s employees consist of basic salaries and bonuses. DESIGNATED DEPOSITS AND OVERDUE TIME DEPOSITS As at 30 June 2013, the Group s deposits placed with financial institutions or other parties did not include any designated deposits or overdue time deposits against which the Group failed to receive repayments. COMPLIANCE WITH THE MODEL CODE Having made specific enquiries with all the Directors, the Directors have for the six months ended 30 June 2013 complied with the Model Code as set out in Appendix 10 of the Listing Rules. The Company has adopted a code of conduct, which is no less stringent than the Model Code regarding securities transactions of the Directors. COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE In the opinion of the Board, the Group has complied with the code provisions of the Corporate Governance Code as set out in Appendix 14 of the Listing Rules for the period from 1 January 2013 to 30 June XV ,

12 11 Review and Prospects AUDIT COMMITTEE The audit committee of the Company has reviewed with the management and the external auditors the accounting principles and practices adopted by the Group and discussed the financial reporting matters including the review of the unaudited interim financial report prepared in accordance with the International Accounting Standard 34. MATERIAL LITIGATION Save as disclosed in note 25 to the interim financial report, during the reporting period, the Company was not involved in any material litigation. By order of the Board Si Xian Min Chairman of the Board Guangzhou, the PRC 26 August

13 12 China Southern Airlines Company Limited Interim Report 2013 Operating Data Summary Six months 2013vs 2012 ended 30 June Increase/ (decrease) %/ (%) Capaciy Available seat kilometres(asks) (million) (ASKs) Domestic 68,522 62,748 5, Hong Kong, Macau and Taiwan 1,703 1,751 (48) (2.7) International 18,056 16,281 1, Total 88,281 80,780 7, Available tonne kilometres(atks) (million) (ATKs) Domestic 7,809 7, Hong Kong, Macau and Taiwan (7) (3.5) International 3,774 3, Total 11,777 11, Kilometres flown (thousand) 543, ,654 41, Hours flown (thousand) Number of landing and takeoff (thousand) Traffic Revenue passenger kilometres(rpks) (million) (RPKs) Domestic 55,678 50,946 4, Hong Kong, Macau and Taiwan 1,210 1,250 (40) (3.2) International 13,832 11,986 1, Total 70,720 64,182 6, Revenue tonne kilometres(rtks) (million) (RTKs) Domestic 5,616 5, Hong Kong, Macau and Taiwan (5) (4.2) International 2,543 2, Total 8,273 7, Passengers carried (thousand) Domestic 39,334 36,942 2, Hong Kong, Macau and Taiwan (11) (1.2) International 3,522 3, Total 43,800 41,206 2, Cargo and mail carried (thousand tonne) Domestic Hong Kong, Macau and Taiwan 7 8 (1) (12.5) International Total

14 13 Operating Data Summary (continued) Six months 2013 vs 2012 ended 30 June Increase/ (decrease) %/ (%) Load factors Passenger load factor (RPK/ASK) (%) (RPK/ASK)(%) Domestic Hong Kong, Macau and Taiwan (0.4) (0.6) International Overall Overall load factor (RTK/ATK) (%) (RTK/ATK)(%) Domestic Hong Kong, Macau and Taiwan (0.5) (0.8) International Overall Yield Yield per RPK (RMB) Domestic (0.08) (11.8) Hong Kong, Macau and Taiwan International (0.03) (5.7) Overall (0.07) (10.6) Yield per cargo and mail tonne kilometre (RMB) (0.13) (8.1) Yield per RTK (RMB) Domestic (0.77) (11.1) Hong Kong, Macau and Taiwan International (0.09) (2.5) Overall (0.55) (9.3) Fleet Total number of aircraft at period end Boeing Airbus Others Total Aircraft utilisation rate (hours per day) (0.19) (1.9)

15 14 China Southern Airlines Company Limited Interim Report 2013 Review Report TO THE BOARD OF DIRECTORS OF CHINA SOUTHERN AIRLINES COMPANY LIMITED (incorporated in the People s Republic of China with limited liability) Introduction We have reviewed the condensed interim consolidated financial information set out on pages 15 to 45, which comprise the condensed interim consolidated balance sheet of China Southern Airlines Company Limited (the Company ) and its subsidiaries (together, the Group ) as at 30 June 2013 and the related condensed interim consolidated statements of income, comprehensive income, changes in equity and cash flows for the sixmonth period then ended, and a summary of significant accounting policies and other explanatory notes. The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited require the preparation of a report on interim financial information to be in compliance with the relevant provisions thereof and International Accounting Standard 34 Interim Financial Reporting ( IAS 34 ). The Board of the Company are responsible for the preparation and presentation of the interim financial information in accordance with International Financial Reporting Standards. Our responsibility is to express a conclusion on the interim financial information based on our review and to report our conclusion solely to you, as a body, in accordance with our agreed terms of engagement and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Scope of Review We conducted our review in accordance with International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the condensed interim financial information is not prepared in all material respects, in accordance with IAS PricewaterhouseCoopers Certified Public Accountants Hong Kong, 26 August 2013

16 15 Condensed Interim Consolidated Statement of Income For the six months ended 30 June 2013 (Unaudited) Six months ended 30 June Note RMB million RMB million Operating revenue Traffic revenue 44,495 45,369 Other operating revenue 1,710 1,578 Total operating revenue 6 46,205 46,947 Operating expenses Flight operations 26,012 26,777 Maintenance 3,754 3,690 Aircraft and transportation service expenses 6,819 6,206 Promotion and selling expenses 3,665 3,193 General and administrative 1,437 1,408 Depreciation and amortisation 4,324 3,958 Others Total operating expenses 46,621 45,841 Other net income Operating (loss)/profit 12 (114) 1,772 Interest income Interest expense 9 (753) (633) Share of associates results Share of jointly controlled entities results Exchange gain/(loss),net 1,516 (314) Dividend income Gain on disposal of a subsidiary 54 Profit before income tax 884 1,102 Income tax 11 (242) (146) Profit for the period Profit attributable to: Equity shareholders of the Company Non-controlling interests Earnings per share attributable to the equity shareholders of the Company during the period Basic and diluted 13 RMB 0.04 RMB 0.04 Dividends 22

17 16 China Southern Airlines Company Limited Interim Report 2013 Condensed Interim Consolidated Statement of Comprehensive Income For the six months ended 30 June 2013 (Unaudited) Six months ended 30 June Note RMB million RMB million Profit for the period Other comprehensive income/(loss) for the period Items that may be reclassified subsequently to profit or loss: Fair value movement of available-for-sale financial assets (12) 4 Share of other comprehensive income of an associate 1 2 Deferred income tax relating to above items 3 (1) Total comprehensive income for the period Total comprehensive income attributable to: Equity shareholders of the Company Non-controlling interests Total comprehensive income for the period The notes on pages 21 to 45 form part of this interim financial information

18 17 Condensed Interim Consolidated Balance Sheet At 30 June 2013 (Unaudited) (Audited) 30 June 31 December Note RMB million RMB million Non-current assets Property, plant and equipment, net , ,040 Construction in progress 15 16,706 18,689 Lease prepayments 16 2,163 2,198 Interest in associates 1,042 1,033 Interest in jointly controlled entities 1,148 1,103 Other investments in equity securities Lease deposits Available-for-sale financial assets Deferred tax assets 1,029 1,223 Other assets , ,667 Current assets Inventories 1,698 1,708 Trade receivables 17 2,484 1,853 Other receivables 18 3,197 2,139 Prepaid expenses and other current assets Amounts due from related companies 24(c) Cash and cash equivalents 9,412 10,082 17,978 16,787 Current liabilities Borrowings 19 23,094 21,899 Current portion of obligations under finance leases 21 2,808 2,494 Trade payables 20 2,737 1,825 Sales in advance of carriage 4,529 4,854 Current income tax Amounts due to related companies 24(c) Accrued expenses 10,959 11,800 Other payables 4,304 4,004 48,871 47,530 Net current liabilities (30,893) (30,743) Total assets less current liabilities 102,031 (94,924)

19 18 China Southern Airlines Company Limited Interim Report 2013 Condensed Interim Consolidated Balance Sheet (continued) At 30 June 2013 (Unaudited) (Audited) 30 June 31 December Note RMB million RMB million Non-current liabilities Borrowings 19 31,806 30,196 Obligations under finance leases 21 24,495 19,371 Deferred revenue 3,092 2,850 Provision for major overhauls 1, Provision for early retirement benefits Deferred benefits and gains 917 1,011 Deferred tax liabilities ,151 55,190 Net assets 39,880 39,734 Capital and reserves Share capital 9,818 9,818 Reserves 22(b) 22,869 23,021 Total equity attributable to equity shareholders of the Company 32,687 32,839 Non-controlling interests 7,193 6,895 Total equity 39,880 39,734 The interim financial information have been approved for issue by the Board of Directors on 26 August 2013 and signed on its behalf Si Xian Min Tan Wan Geng Xu Jie Bo Director Director Director The notes on pages 21 to 45 form part of this interim financial information

20 19 Condensed Interim Consolidated Statement of Changes in Equity For the six months ended 30 June 2013 Attributable to equity shareholders of the Company Fair value Non- Share Share reserves Other Retained controlling Total capital premium reserves earnings Sub-total interests equity RMB million RMB million RMB million RMB million RMB million RMB million RMB million RMB million (Note (a)) (a) Six months ended June 2012 (Unaudited) 6 Balance at 1 January ,818 14, ,082 7,123 32,175 5,602 37,777 Profit for the period Other comprehensive income Total comprehensive income for the period Dividends paid (1,964) (1,964) (1,964) Acquisition of non-controlling interests in a subsidiary (6) (6) (11) (17) Distributions to non-controlling shareholders of subsidiaries (1) (1) Balance at 30 June ,818 14, ,082 5,577 30,634 6,122 36,756 Six months ended June 2013 (Unaudited) 6 Balance at 1 January ,818 14, ,226 7,640 32,839 6,895 39,734 Profit for the period Other comprehensive loss (5) (5) (3) (8) Total comprehensive income /(loss) for the period (5) Dividends paid(note 22(a)) 22(a) (491) (491) (491) Capital injection from the non-controlling interest of a subsidiary Distributions to non-controlling shareholders of subsidiaries (77) (77) Balance at 30 June ,818 14, ,226 7,493 32,687 7,193 39,880 Note (a): Other reserves represent statutory surplus reserve, discretionary surplus reserve and others (Note 22(b)). The notes on pages 21 to 45 form part of this interim financial information. (a) 22(b) 21 45

21 20 China Southern Airlines Company Limited Interim Report 2013 Condensed Interim Consolidated Cash Flow For the six months ended 30 June 2013 (Unaudited) Six months ended 30 June Note RMB million RMB million Net cash generated from operating activities 1,891 2,978 Net cash used in investing activities (6,113) (2,610) Net cash from financing activities 3,586 1,909 Net (decrease)/increase in cash and cash equivalents (636) 2,277 Cash and cash equivalents at 1 January ,082 9,863 Exchange adjustment (34) Cash and cash equivalents at 30 June ,412 12,140 The notes on pages 21 to 45 form part of this interim financial information

22 21 1 Corporate information 1 China Southern Airlines Company Limited (the Company ), a joint stock company limited by shares, was incorporated in the People s Republic of China (the PRC ) on 25 March The Company and its subsidiaries (the Group ) are principally engaged in the operation of civil aviation, including the provision of passenger, cargo, mail delivery and other extended transportation services. The Company s majority interest is owned by China Southern Air Holding Company ( CSAHC ), a state-owned enterprise incorporated in the PRC. The Company s shares are traded on Shanghai Stock Exchange, The Stock Exchange of Hong Kong Limited and The New York Stock Exchange. This condensed consolidated interim financial information is presented in RMB, unless otherwise stated. This condensed consolidated interim financial information was approved for issue by the Company s Board on 26 August This condensed consolidated interim financial information has not been audited. 2 Basis of preparation This unaudited condensed consolidated interim financial information for the six months ended 30 June 2013 has been prepared in accordance with International Accounting Standard ( IAS ) 34 Interim Financial Reporting. It should be read in conjunction with the annual financial statements for the year ended 31 December 2012, which has been prepared in accordance with IFRS as issued by the International Accounting Standard Board ( IASB )

23 22 China Southern Airlines Company Limited Interim Report Basis of preparation (continued) As at 30 June 2013, the Group s current liabilities exceeded its current assets by RMB30,893 million. In preparing the interim financial information, the Board have given careful consideration to the going concern status of the Group in the context of the Group s current working capital deficit and believe that adequate funding is available to fulfil the Group s short-term obligations and capital expenditure requirements. As at 30 June 2013, the Group had banking facilities with several PRC banks and financial institutions for providing bank financing up to approximately RMB184 billion (2012: RMB173 billion), of which approximately RMB145 billion (2012: RMB113 billion) was unutilised. The Board believes that, based on experience to date, it is likely that these facilities will be rolled over in future years if required. Accordingly, the Directors believes that it is appropriate to prepare the interim condensed consolidated financial information on a going concern basis without including any adjustments that would be required should the Company and the Group fail to continue as a going concern. 3 Accounting policies Except as described below, the accounting policies applied are consistent with those of the annual financial statements for the year ended 31 December 2012, as described therein. The Group has adopted the following new standards and amendments to existing standards and interpretations which are relevant for the Group s existed business and mandatory for the first time for the financial year beginning 1 January IFRS 10- Consolidated financial statements. Under IFRS 10, subsidiaries are all entities (including structured entities) over which the group has control. The group controls an entity when the group has power over an entity, is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect these returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are deconsolidated from the date that control ceases. IFRS 10 has no impact on the Group. IFRS 11- Joint arrangements. Under IFRS 11, investments in joint arrangements are classified either as joint operations or joint ventures, depending on the contractual rights and obligations each investor has rather than the legal structure of the joint arrangement. IFRS 11 does not have impact on the Group. IFRS 12- Disclosure of interests in other entities. IFRS 12 includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. The Group will disclose required disclosure in 2013 annual report , ,730 1, ,

24 23 3 Accounting policies (continued) IFRS 13- Fair value measurements. IFRS 13 aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements, which are largely aligned between IFRSs and US GAAP, do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs or US GAAP. The Group has made the disclosures accordingly where applicable. IAS 1 (Amendment)- Presentation of financial statements. The main change resulting from the amendments is a requirement for entities to group items presented in other comprehensive income (OCI) on the basis of whether they are potentially reclassifiable to profit or loss subsequently (reclassification adjustments). The amendments do not address which items are presented in OCI. The Group has presented the required disclosure in the interim condensed consolidated statement of comprehensive income. The following new standards and amendments to standards are mandatory for the first time for the financial year beginning 1 January 2013 and have no material impact for the Group: The improvement related to IAS 27 Separate financial statements The improvement related to IAS 28 (revised 2011) Associates and joint ventures The improvement related to IFRS 7 (amendment) Financial instruments: Disclosures Offsetting financial assets and financial liabilities The improvement related to amendment to IFRS 1 First time adoption of IFRS The improvement related to amendment to IAS 32 Financial instruments: Presentation The Group has not adopted any new accounting and financial reporting standard, amendments to existing standards and interpretations which have been issued but are not yet effective for the financial year beginning 1 January The Group is still in the process of assessing the impact of these new amendments

25 24 China Southern Airlines Company Limited Interim Report Estimates The preparation of interim financial information requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. In preparing these condensed consolidated interim financial information, the significant judgements made by management in applying the Group s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December Financial risk management and financial instruments The Group s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and fuel price risk), credit risk and liquidity risk. The condensed interim consolidated financial information do not include all financial risk management information and disclosures required in the annual financial statements, and should be read in conjunction with the Group s annual financial statements as at 31 December There have been no changes in the risk management department since year end or in any risk management policies since the year end. (a) Liquidity risk As at 30 June 2013, the Group s current liabilities exceeded its current assets by RMB30,893 million. For the six months ended 30 June 2013, the Group recorded a net cash inflow from operating activities of RMB1,891 million, a net cash outflow from investing activities of RMB6,113 million and a net cash inflow from financing activities of RMB3,586 million, which resulted in a net decrease in cash and cash equivalents of RMB670 million. As at 30 June 2013, the Group had banking facilities with several PRC banks and financial institutions for providing bank financing up to approximately RMB184 billion (31 December 2012: RMB173 billion), of which approximately RMB145 billion (31 December 2012: RMB113 billion) was unutilised (a) , ,730 1, ,130

26 25 5 Financial risk management and financial instruments (continued) (a) Liquidity risk (continued) The Directors of the Company believe that cash from operations and borrowings will be sufficient to meet the Group s operating cash flow. Due to the dynamic nature of the underlying businesses, the Group s treasury policy aims at maintaining flexibility in funding by keeping credit lines available. The Board believes that the Group has obtained sufficient facilities from PRC banks for financing future capital commitments and for working capital purposes. As at 30 June 2013, the contractual maturities of the Group s borrowings and obligations under finance leases are disclosed in Notes 19 and 21 respectively. (b) Fair value estimation For the six months ended 30 June 2013, there were no significant changes in the business or economic circumstances that affect the fair value estimation of the Group s financial assets and financial liabilities. For the six months ended 30 June 2013, there was no reclassification of financial assets. 6 Operating Revenues The Group is principally engaged in the operation of civil aviation, including the provision of passenger, cargo, mail delivery, and other extended transportation services. 5 (a) (b) (Unaudited) Six months ended 30 June RMB million RMB million Traffic revenue Passenger 41,565 42,252 Cargo and mail 2,930 3,117 Commission income Hotel and tour operation income Ground services income Cargo handling income Others ,205 46,947

27 26 China Southern Airlines Company Limited Interim Report Operating Revenues (continued) Note: Before 1 November 2012, pursuant to the then sales tax rules and regulations, the Group was required to pay Business Tax ( BT ) to national and local tax authorities at the rate of approximately 3% of the traffic revenues in respect of domestic flights. Pursuant to the Notice of exemption of BT on international traffic revenue issued jointly by the PRC Ministry of Finance ( MoF ) and the State Administration of Taxation ( SAT ) in 2010, the Group is exempted from BT on traffic revenues from international, including Hong Kong, Macau and Taiwan from 1 January Pursuant to Cai Shui [2012] No. 71 jointly issued by the MoF and the SAT on 31 July 2012, the pilot program regarding the transition from BT to Value Added Tax ( VAT ) was launched in certain provinces since 1 November 2012, which is applicable to the Company and its related subsidiaries. Under this pilot program, all traffic revenues and the other revenues, including ground service income, cargo handling income and others, generated in locations that fall into the scope of this pilot program are mainly subjected to VAT levied at applicable tax rates of 17%, 11% or 6% from 1 November 2012; while the other revenues generated in other locations continue to be subject to BT at applicable tax rates. The VAT input, generated from purchase of aircraft fuel, aircraft and transportation servicing, property, plant and equipment, and certain BT paid by the branches and subsidiaries outside above Cai Shui [2012] No.71 can be used to deduct the VAT payable relating to taxable revenues. BT and related surcharge incurred by the Group during the six months ended 30 June 2013, which were net off against revenue, amounted to RMB129 million (six months ended 30 June 2012: RMB1,322 million). 7 Segment reporting (a) Business segments The Group s passenger and cargo operations are managed as a single business unit. The Group s chief operating decision maker ( CODM ) makes resource allocation decisions based on route profitability, which considers aircraft type and route economics. The objective in making resource allocation decisions is to optimise financial results. Therefore, based on the way the Group manages the passenger and cargo operations, and the manner in which resource allocation decisions are made, the Group has a major reportable operating segment for financial reporting purposes, reported as the airline transportation operations. Financial results from other operating segments are below the quantitative threshold for determining reportable operating segments and consist primarily of business segments of hotel and tour operation, ground services, cargo handling and other miscellaneous services. These other operating segments are combined and reported as other segments. Inter-segment sales are based on prices set on an arm s length basis % [2012] % 11% 6% [2012] (a)

28 27 7 Segment reporting (continued) (a) Business segments (continued) For the purposes of assessing segment performance and allocating resources between segments, the Group s CODM monitors the results, assets and liabilities attributable to each reportable segment based on financial results prepared under the People s Republic of China Accounting Standards for Business Enterprises ( PRC GAAP ). As such, the amount of each material reconciling item from the Group s reportable segment revenue, profit or loss, assets and liabilities arising from different accounting policies are set out in Note 7(c). Information regarding the Group s reportable segments as provided to the Group s CODM for the purposes of resource allocation and assessment of segment performance is set out below. The segment results for the six months ended 30 June 2013 are as follows: 7 (a) 7(c) (Unaudited) Airline transportation Other operations segments Elimination Unallocated* Total RMB million RMB million RMB million RMB million RMB million Revenue from external customers 45, ,004 Inter-segment sales 573 (573) Reportable segment revenue 45, (573) 46,004 Reportable segment profit before taxation Other segment information Interest income Interest expense Depreciation and amortisation 4, ,333 Non-current assets additions during the period 11, ,945