CEA China Eastern Airlines Corp Ltd

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Certain statements contained in this announcement may be regarded as "forward-looking statements" within the meaning of the U.S. Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual performance, financial condition or results of operations of the Company to be materially different from any future performance, financial condition or results of operations implied by such forward-looking statements. Further information regarding these risks, uncertainties and other factors is included in the Company's filings with the U.S. Securities and Exchange Commission. The forward-looking statements included in this announcement represent the Company's views as of the date of this announcement. While the Company anticipates that subsequent events and developments may cause the Company's views to change, the Company specifically disclaims any obligation to update these forward-looking statements, unless required by applicable laws. These forward-looking statements should not be relied upon as representing the Company's views as of any date subsequent to the date of this announcement.

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

If you have sold or transferred all your shares in China Eastern Airlines Corporation Limited, you should at once hand this circular to the purchaser or the transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

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

DISCLOSEABLE AND CONNECTED TRANSACTION

DISPOSAL OF THE ENTIRE EQUITY INTEREST IN

EASTERN LOGISTICS

Independent Financial Adviser

to the Independent Board Committee and the Independent Shareholders

Capitalised terms used in this cover page shall have the same meanings as those defined in the section headed “Definitions” of this circular.

The Company will convene the EGM at Four Seasons Hall, 2/F, Shanghai International Airport Hotel (上海國際機場賓館二樓四季廳) at 9:00 a.m. on Tuesday, 17 January 2017. Notice of the EGM dated 30 November 2016 setting out the resolution to be approved at the EGM, the proxy form and the attendance slip have been despatched on 30 November 2016 and are also published on the websites of the Hong Kong Stock Exchange (http://www.hkexnews.hk) and the Company (http://www.ceair.com).

If you are not able to attend and/or vote at the EGM, you are strongly urged to complete and return the proxy form in accordance with the instructions thereon and return it to Hong Kong Registrars Limited at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, as soon as possible and in any event not later than 24 hours before the time scheduled for holding the EGM or any adjournment thereof.

Completion and return of the proxy form will not preclude you from attending and voting at the EGM or at any adjourned meeting should you so wish.

19 December 2016

To the shareholders of the Company

Dear Sir or Madam,

DISCLOSEABLE AND CONNECTED TRANSACTION

DISPOSAL OF THE ENTIRE EQUITY INTEREST IN

EASTERN LOGISTICS

Reference is made to the announcement of the Company dated 29 November 2016 (the “ Announcement ”) in relation to the discloseable and connected transaction of the Company and the further announcement of the Company dated 19 December 2016 (the “ Further Announcement ”) in relation to the Relevant Valuation. The Company hereby issues this circular to the Shareholders containing further information of the discloseable and connected transaction contemplated under the Disposal Agreement and to convene the EGM to seek approval from Independent Shareholders in respect of the Disposal Agreement and the transactions contemplated thereunder.

Letter from the Independent Board Committee to the Independent Shareholders has been included in this circular. Octal Capital has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders on whether the terms of the Disposal Agreement and the transactions contemplated thereunder are on normal commercial terms and are fair and reasonable and whether the Disposal is in the interests of the Company and its Shareholders as a whole and is conducted in the ordinary and usual course of business of the Group. The letter of advice from Octal Capital to the Independent Board Committee and the Independent Shareholders is also included in this circular.

The purposes of this circular are:

On 29 November 2016, the Company entered into the Disposal Agreement with the Purchaser, pursuant to which, the Company conditionally agreed to sell, and the Purchaser conditionally agreed to purchase, the entire equity interest in Eastern Logistics at a consideration of RMB2,432,544,211.50. There is no security or pledge over or any other limitations on the transfer of the equity interests in Eastern Logistics, nor is there any litigation, arbitration or judicial measures such as seizure or freezing involved, nor is there any other situation that would otherwise impede the transfer of title. Upon completion of the Disposal, Eastern Logistics will cease to be a subsidiary of the Company.

The principal terms of the Disposal Agreement are set out as follows:

Consideration

The Consideration is RMB2,432,544,211.50, determined with reference to the Valuation Report.

According to the Valuation Report, the asset-based approach has been adopted by the Valuer to appraise the value of the Disposal Group. In appraising the value of a number of subsidiaries of Eastern Logistics, including Shanghai Eastern Transport, Eastern Express and China Cargo Airlines, the income approach has been adopted by the Valuer.

According to the Valuation Report, the book value (based on the financial statements of Eastern Logistics) and appraised value of the net assets of Eastern Logistics as at 30 June 2016, being the market value of the entire shareholders’ equity of Eastern Logistics as at 30 June 2016, were approximately RMB837.5763 million and RMB2,432.5442 million, respectively. In particular, Shanghai Eastern Transport, Eastern Express and China Cargo Airlines have been covered under the scope of appraisal of long-term equity investments. As of 30 June 2016, the book value (based on the financial statements of Eastern Logistics) and appraised value of long-term equity investments were approximately RMB61.0537 million and RMB307.0401 million, respectively. As at 30 June 2016, the entire shareholders’ equity in China Cargo Airlines was appraised, using the income approach, at RMB-399,033,042.08. According to the Company Law of the PRC, “the Shareholders’ equity of a limited liability company is limited to zero.” Accordingly, the appraised value of China Cargo Airlines under long-term equity investments is zero. The respective appraised value of Shanghai Eastern Transport and Eastern Express, based on the free net cashflow of the respective entities in certain future years, are RMB204,705,361.76 and RMB102,334,704.53, respectively.

Conditions precedent to the Disposal

The Disposal Agreement shall become effective on the date of satisfaction of all of the conditions below:

Completion and payment of consideration

Upon the Disposal Agreement becoming effective, the parties to the Disposal Agreement will proceed with completion as soon as practicable.

The Consideration will be payable by the Purchaser in cash by way of transfer into the bank account as designated by the Company within five working days from the date on which the Disposal Agreement becomes effective. Where the Purchaser fails to pay the Consideration as stipulated under the Disposal Agreement, the Company shall be entitled to a penalty from the Purchaser, which is to be calculated based on the interest rate applicable to bank borrowings during the same period.

The Company and the Purchaser will, as soon as practicable after the completion of the Disposal, complete the necessary filing and registration in relation to the change of shareholder of Eastern Logistics with the relevant authority under the State Administration for Industry and Commerce (工商行政管理部門). The completion of the Disposal Agreement will take place upon completion of the registration of change of shareholders of Eastern Logistics at the relevant authority under the State Administration for Industry and Commerce.

For the period from 30 June 2016 to the date of completion of registration of change of industrial and commercial matters, profit and loss related to the Disposal Group shall be enjoyed and assumed by the Purchaser. The Company is obliged to manage, in good faith, the entire equity interest and shareholders’ equity in Eastern Logistics and the corporate assets of Eastern Logistics under the Disposal Agreement.

Arrangements in relation to the outstanding account receivables and account payables

As of 30 June 2016, Eastern Logistics and China Cargo Airlines owed to the Company and its subsidiaries (excluding the Disposal Group) the outstanding non-operational account payables in an amount of RMB267 million and outstanding operational account payables (after offsetting the outstanding operational account payables owed by the Company and its subsidiaries (excluding the Disposal Group) to Eastern Logistics and China Cargo Airlines) in an amount of RMB1,105 million. The Company expects that the account receivables and the account payables will continue to accrue from 30 June 2016 to 31 December 2016.

The parties to the Disposal Agreement have agreed to the following repayment arrangements in respect of the outstanding non-operational account payables and operational account payables:

In the event that Eastern Logistics and China Cargo Airlines fail to perform certain obligations under the Disposal Agreement, and the Purchaser fails to repay such amounts to the Company on behalf of Eastern Logistics and China Cargo Airlines as stipulated under relevant terms of the Disposal Agreement, the Company shall be entitled to a penalty from the Purchaser, which is to be calculated based on the interest rate applicable to bank borrowings during the same period.

Details of the principal assumptions (including assumptions upon which the Relevant Valuation is based) are set out as follows:

General assumptions

Assumptions of income approach

As disclosed herein, in appraising the value of a number of subsidiaries of Eastern Logistics, including Shanghai Eastern Transport, Eastern Express and China Cargo Airlines, the income approach has been adopted by the Valuer. In the Valuation Report, discounted cash flow method was adopted for the valuation of Shanghai Eastern Transport, Eastern Express and China Cargo Airlines and free net cashflow has been selected for the calculation. Accordingly, the requirements under Rules 14.60A and 14.62 of the Listing Rules are applicable.

The Company issued the Further Announcement on 19 December 2016 in compliance with the requirements under Rule 14.60A and 14.62 of the Listing Rules.

In accordance with Rule 14.62(2) of the Listing Rules, the Company’s reporting accountants, Ernst & Young, has reviewed the calculations upon which the Relevant Valuation set out in the Valuation Report is based. The letter issued by Ernst & Young in respect of the calculations upon which the Relevant Valuation is based is set out in Appendix II of this circular.

In accordance with Rule 14.62(3) of the Listing Rules, the Board has reviewed the Relevant Valuation and confirms that the Relevant Valuation in the Valuation Report has been made by the Board after due and careful enquiry. The letter from the Board is set out in Appendix III of this circular.

The following diagram shows the relationship between the Company and the Disposal Group as well as the simplified shareholding and corporate structure of the Disposal Group as at the Latest Practicable Date:

The following diagram shows the relationship between the Company and the Disposal Group and the simplified shareholding and corporate structure of the Disposal Group upon completion of the Disposal:

As of the Latest Practicable Date, the details of the principal subsidiaries of Eastern Logistics are as follows:

The key financial data of the Disposal Group for the three years ended 31 December 2015 (based on the consolidated financial statements of the Disposal Group), which were prepared according to the Accounting Standards for Business Enterprises, were as follows:

The key financial data of the Disposal Group for the six months ended 30 June 2016, which were prepared according to the Accounting Standards for Business Enterprises, were as follows:

The Disposal Group’s net profit for 2015 (based on the consolidated financial statements of the Disposal Group) included a one-off subsidy revenue in the amount of RMB251 million. Net profit for the first half of 2016 (based on the consolidated financial statements of the Disposal Group) included a one-off subsidy revenue in the amount of RMB215 million.

As at 30 June 2016, the audited consolidated net asset value of the Disposal Group, prepared according to the Accounting Standards for Business Enterprises, was approximately RMB483 million. Based on the Valuation Report prepared by the Valuer, as of 30 June 2016, the appraised value of the Disposal Group was approximately RMB2,432.5442 million.

The net profits (both before and after taxation) of the Disposal Group for the two years ended 31 December 2015 and six months ended 30 June 2016, which were prepared according to the Accounting Standards for Business Enterprises, were as follows:

Assuming that the Company sets 30 June 2016 as record date for completion of the Disposal, it is expected that the financial statements prepared according to the Accounting Standards for Business Enterprises of the Company will record a gain before taxation of approximately RMB1,949.5 million as a result of the Disposal, which represents the difference between the Consideration and the audited net asset value of the Disposal Group as at 30 June 2016 based on the consolidated financial statements of the Disposal Group.

The Disposal will be put forward to the EGM to be convened by the Company on 17 January 2017 for consideration and approval. The transfer of equity interest under the Disposal shall be subject to approval from the competent authorities in charge of state-owned assets and approval from the Shareholders at the EGM. Accordingly, the Disposal will have no effect on the operating results for the year 2016 of the Company and is expected to affect the operating results for the year 2017 of the Company.

The actual gain or loss in connection with the Disposal will be assessed after the completion of the Disposal and is subject to audit. Upon completion of the Disposal, each of the entities in the Disposal Group will cease to be a subsidiary of the Company and the financial results of the Disposal Group will no longer be consolidated into the financial statements of the Group.

The proceeds from the Disposal in the total sum of RMB2,432,544,211.50 will be used as the general working capital of the Group.

Since the financial crisis in 2008, global economic growth has slowed down. The global cargo and mail traffic volume has maintained only a modest growth and there has been a decrease in the income generated from freight transportation. At the same time, the transporting capacity of international and domestic air cargo market has grown at substantially faster pace than the market demand, resulting in a continuous downturn of market rate of freight transportation and there is unlikely to be a substantial growth of the market in the short term. Traditional air cargo enterprises encounter difficulties in their operations as they only offer airport-to-airport transportation services.

Eastern Logistics has endeavoured to change its business model in recent years. However, due to the relatively low competitiveness and risk resistance, its market share in the freight market has been shrinking and its operational prospect is unclear. As a result, Eastern Logistics has not fully accomplished the goal of its transformation. In particular, China Cargo Airlines, a subsidiary of Eastern Logistics, suffered large amount of cumulative losses during the period from 2011 to 2015, translating to a relatively high debt ratio that affected the overall operating performance of the Company.

Therefore, the implementation of the Disposal is a specific measure and reasonable option for the Company to cope with the poor conditions of the air freight market and is beneficial in improving the overall operational performance of the Company.

Since it commenced the operation of freight logistics business, the Company has always been upholding the strategy of “balancing the development of cargo and passenger services”, hoping to drive the growth of freight transportation business by its passenger transport business, and eventually achieve balanced development of both businesses. The Company has invested considerable funds and resources into the freight logistics business sector which, however, failed to meet the expected development goal eventually. The revenue from freight logistics business of Eastern Logistics contributed to a relatively small portion of the Company’s overall operating revenue and is showing a decreasing trend. Major international airlines have been withdrawing or reducing their all-cargo flight business gradually in view of the slackening global cargo market.

Therefore, the implementation of the Disposal will be beneficial to the Company in focusing relevant resources on operating its air passenger transportation business in the future and further build up the Company’s brand image and competitiveness in the air passenger transportation sector.

As at 30 June 2016, the aggregate amount of non-operational and operational payables of China Cargo Airlines and Eastern Logistics due to the Company was relatively large. Since China Cargo Airlines is in a state of loss-making, it is not capable of repaying the aforementioned payables to the Company in the short term. The share transfer contemplated under the Disposal obliges Eastern Logistics and China Cargo Airlines to repay the aforementioned amount to the Company, which will be favorable to the Company in accelerating the collection of receivables and lowering capital risks.

After considering the abovementioned factors, while the implementation of the Disposal will not have adverse impacts on the Company’s overall business development, it is also in line with the overall trend of major international airlines withdrawing from the all- cargo flight business. Upon the completion of the Disposal, the Company will focus on air passenger transportation business, further foster its reform and transformation, improve the operating and management ability of the Company in respect of its air passenger transportation business and strive to create better investment returns for the Shareholders.

The terms of the Disposal Agreement have been agreed on an arm’s length negotiations between the parties. The Directors (including the independent non-executive Directors) are of the view that the terms of the Disposal Agreement are on normal commercial terms, fair and reasonable and in the interest of the Company and its Shareholders as a whole.

As at the Latest Practicable Date, the Purchaser is a wholly-owned subsidiary of CEA Holding, the controlling shareholder of the Company. Therefore, the Disposal constitutes a connected transaction of the Company under Chapter 14A of the Listing Rules.

As one or more of the relevant applicable percentage ratios set out in the Listing Rules in respect of the Disposal exceed 5% but are less than 25%, the Disposal will constitute a discloseable and connected transaction of the Company under the Listing Rules. Therefore, the Disposal is subject to the reporting, announcement and Independent Shareholders’ approval requirements under Chapter 14 and Chapter 14A of the Listing Rules.

The resolutions regarding the Disposal have been passed at the third ordinary meeting of the eighth session of the Board. As Mr. Liu Shaoyong (a Director and the chairman of the Company), Mr. Xu Zhao (a Director) and Mr. Gu Jiadan (a Director) are members of the senior management of CEA Holding and Mr. Tian Liuwen (a Director and a Vice President of the Company) is a member of the senior management of Eastern Logistics, they may be regarded as having a material interest in the Disposal. As such, they have abstained from voting at the meeting of the Board convened for the purpose of approving, among others, the Disposal. Save as aforesaid, none of the Directors has any material interests in the Disposal.

Information relating to the Group

The Company is principally engaged in the business of civil aviation.

Information relating to the Purchaser and CEA Holding

CEA Holding is a wholly PRC state-owned enterprise. It is principally engaged in managing all the state-owned assets and equity interest formed and invested by the state in CEA Holding and its invested enterprises.

The Purchaser was incorporated in November 2016, with a registered capital of RMB3 billion and is principally engaged in industrial investment, asset management and entrusted management of assets etc.

As mentioned above, as CEA Holding is the controlling shareholder of the Company, each member of CEA Holding, including the Purchaser, is therefore a connected person of the Company.

CEA Holding and its associates will abstain from voting on the ordinary resolution approving the Disposal Agreement and the transactions contemplated thereunder at the EGM to be convened for the purpose of approving the Disposal Agreement and the transactions contemplated thereunder.

Notice of EGM

The Company will convene the EGM at Four Seasons Hall, 2/F, Shanghai International Airport Hotel (上海國際機場賓館二樓四季廳) at 9:00 a.m. on Tuesday, 17 January 2017 to approve, or any adjournment thereof, the ordinary resolution in respect of the Disposal Agreement and the transactions contemplated thereunder, with CEA Holding and its associate(s), if any, abstaining from voting. The notice of EGM, the proxy form and the attendance slip have been despatched on 30 November 2016 and are also published on the websites of the Hong Kong Stock Exchange (http://www.hkexnews.hk) and the Company (http://www.ceair.com).

As at the Latest Practicable Date, CEA Holding directly and indirectly held 5,530,240,000 A shares and 2,626,240,000 H shares of the Company, representing in aggregate approximately 56.38% of the issued share capital of the Company. CEA Holding and its associate(s), if any, will at the EGM abstain from voting on the ordinary resolution approving the Disposal Agreement and the transactions contemplated thereunder which will be taken on a poll as required under Rule 14A.36 of the Listing Rules.

Closure of books

The H share register of members of the Company will be closed from Sunday, 18 December 2016 to Tuesday, 17 January 2017, both days inclusive, during which period no transfer of the H shares of the Company will be effected. Where applicable, holders of the H shares of the Company intending to attend the EGM were therefore required to lodge their respective instrument(s) of transfer and the relevant share certificate(s) to the Company’s H share registrar, Hong Kong Registrars Limited, by 4:30 p.m. on Friday, 16 December 2016.

The address and contact details of Hong Kong Registrars Limited are as follows:

Hong Kong Registrars Limited

Rooms 1712–1716, 17th Floor, Hopewell Centre

183 Queen’s Road East

Wanchai

Hong Kong

Telephone: +852 2862 8628

Fax: +852 2865 0990

Registration procedures for attending the EGM

Appointing proxies

Based on the relevant information disclosed herein, the Directors are of the opinion that the terms of the Disposal Agreement and the transactions contemplated thereunder are on normal commercial terms or on terms no less favourable to the Company than those available from independent third parties, in the ordinary course of business of the Company, fair and reasonable and in the interests of the Company and its Shareholders as a whole. Accordingly, the Directors recommend the Independent Shareholders to vote in favour of the relevant resolution to be proposed at the EGM.

Your attention is drawn to the letter from the Independent Board Committee set out on pages 22 to 23 of this circular which contains its recommendation to the Independent Shareholders regarding the Disposal Agreement and the transactions contemplated thereunder, and the letter of advice from the Independent Financial Adviser set out on pages 24 to 38 of this circular containing its advice to the Independent Board Committee and the Independent Shareholders on the same. The Independent Shareholders are advised to read the aforesaid letters before deciding as to how to vote on the resolution approving the Disposal Agreement and the transactions contemplated thereunder.

As CEA Holding is the controlling shareholder of the Company holding directly and indirectly approximately 56.38% of the Company’s issued share capital as at the Latest Practicable Date, each member of the CEA Holding Group (including the Purchaser) is therefore a connected person of the Company. As such, CEA Holding and its associate(s), if any, will at the EGM abstain from voting on the ordinary resolution approving Disposal Agreement and the transactions contemplated thereunder, which will be taken on a poll as required under the Listing Rules. To the extent that the Company is aware having made all reasonable enquiries, as at the Latest Practicable Date:

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

19 December 2016

To the Independent Shareholders

Dear Sir or Madam,

DISCLOSEABLE AND CONNECTED TRANSACTION
DISPOSAL OF THE ENTIRE EQUITY INTEREST IN

EASTERN LOGISTICS

We refer to the circular dated 19 December 2016 (the “ Circular ”) to the Shareholders of which this letter forms part. Unless otherwise specified, capitalised terms used herein shall have the same meaning as defined in the Circular.

We have been appointed as members of the Independent Board Committee, which has been established to advise you in respect of the transactions relating to the disposal of the entire equity interest in Eastern Logistics under the Disposal Agreement (the “ Proposed Transaction ”), details of which are set out in the Letter from the Board contained in the Circular. None of us has any material interest in the Proposed Transaction.

Since CEA Holding is the controlling shareholder of the Company, the Purchaser, being a wholly-owned subsidiary of CEA Holding, is a connected person of the Company. As the relevant applicable percentage ratios set out in the Listing Rules in respect of the Disposal exceed 5% but are less than 25%, the Proposed Transaction will constitute a discloseable and connected transaction of the Company under Chapter 14 and Chapter

14A of the Listing Rules. Therefore, the Proposed Transaction is subject to the reporting, announcement and Independent Shareholders’ approval requirements under the Listing Rules.

Octal Capital has been appointed as the Independent Financial Adviser to advise us and you on the fairness and reasonableness of the Proposed Transaction. We wish to draw your attention to the letter from Octal Capital set out on pages 24 to 38 of the Circular.

We have discussed with the management of the Company in relation to the Proposed Transaction. We have also taken into account the principal factors and reasons considered by the Independent Financial Adviser in forming its opinion in relation to the Proposed Transaction.

On the basis of the above, we consider, and agree with the view of the Independent Financial Adviser, that the Proposed Transaction is on normal commercial terms or on terms no less favourable to the Company than those available from independent third parties, and are entered into in the ordinary course of business of the Company, and are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Accordingly, we recommend you to vote in favour of the ordinary resolution to be proposed at the EGM in respect of the Proposed Transaction.

	802-805, 8/F, Nan Fung Tower,
	88 Connaught Road Central,
	Hong Kong

19 December 2016

To the Independent Board Committee and the Independent Shareholders

Dear Sirs,

DISCLOSEABLE AND CONNECTED TRANSACTION
DISPOSAL OF THE ENTIRE EQUITY INTEREST

I N EASTERN LOGISTICS

INTRODUCTION

We refer to our engagement to advise the Independent Board Committee and the Independent Shareholders in respect of the Disposal and terms thereof, particulars of which are set out in the letter from the Board (the “ Letter from the Board ”) of the circular to the Shareholders dated 19 December 2016 (the “ Circular ”) and in which this letter is reproduced. Unless the context requires otherwise, capitalised terms used in this letter shall have the same meanings as given to them under the definitions section of the Circular.

As set out in the Letter from the Board, on 29 November 2016, the Company entered into the Disposal Agreement with the Purchaser, pursuant to which the Company has conditionally agreed to sell, and the Purchaser has conditionally agreed to purchase, the entire equity interest in Eastern Logistics at a cash consideration of RMB2,432,544,211.50. Upon completion of the Disposal, the Company will cease to hold any equity interest in Eastern Logistics, and Eastern Logistics will cease to be a subsidiary of the Company.

As at the Latest Practicable Date, the Purchaser is a wholly-owned subsidiary of CEA Holding, the controlling shareholder of the Company. Therefore, the Disposal constitutes a connected transaction of the Company under Chapter 14A of the Listing Rules.

We, Octal Capital Limited, have been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders on the Disposal in this regard. We are not connected with the Directors, chief executive and substantial shareholders of the Company or the Purchaser or CEA Holding or any of their respective subsidiaries or associates and are therefore considered suitable to give independent advice to the Independent Board Committee and the Independent Shareholders. During the last two years, we were engaged by the Company as an independent financial adviser to the Company (the “ Previous Engagements ”) in respect of (i) a continuing connected transaction in relation to financial services (details can be referred to the circular of the Company dated 21 September 2016); (ii) a continuing connected transaction in relation to aircraft finance lease (details can be referred to the circular of the Company dated 20 May 2016); and (iii) a major and connected transaction in relation to aircraft finance lease (details can be referred to the circular of the Company dated 26 May 2015). Under the Previous Engagements, we were required to express our opinion on and give recommendations to the Independent Board Committee and independent Shareholders in respect of the relevant transactions. Apart from normal professional fees payable to us in connection with this appointment, no arrangement exists whereby we will receive any fees or benefits from the Group or the directors, chief executive and substantial shareholders of the Company or the Purchaser or CEA Holding or any of its subsidiaries or their respective associates.

In formulating our opinion, we have relied on the accuracy of the information and representations contained in the Circular and have assumed that all information and representations made or referred to in the Circular were true at the time they were made and continue to be true as at the Latest Practicable Date. We have also relied on our discussion with the Directors and management of the Company regarding the Group and Eastern Logistics, including the information and representations contained in the Circular. We have also assumed that all statements of belief, opinion and intention made by the Directors and management of the Company in the Circular were reasonably made after due enquiry. We consider that we have reviewed sufficient information to reach an informed view, to justify our reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our advice. We have no reason to suspect that any material facts have been omitted or withheld from the information contained or opinions expressed in the Circular nor to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and management of the Company. We have not, however, conducted an independent in-depth investigation into the business and affairs of the Group, Eastern Logistics, the Purchaser, CEA Holding and their respective subsidiaries or associates nor have we carried out any independent verification of the information supplied.

PRINCIPLE FACTORS AND REASONS CONSIDERED IN RELATION TO THE DISPOSAL

In arriving at our opinion regarding the terms of the Disposal, we have considered the following principal factors and reasons:

1.       Principal activities and financial information of the Group

The Company and its subsidiaries (together, the “ Group ”) are principally engaged in the operation of civil aviation, including the provision of passenger, cargo, mail delivery, tour operations and other extended transportation services.

Set out below is a summary of the consolidated financial information and the breakdown of revenues of the Group for the years ended 31 December 2014 and 2015, and the six months ended 30 June 2015 and 2016, which were prepared in accordance with the International Financial Reporting Standards (Source: Annual report of the Company for the year ended 31 December 2015 and interim report of the Company for the six months ended 30 June 2016):

The Company recorded total revenue of approximately RMB93,969 million during the year ended 31 December 2015, representing an increase of approximately 4.2% as compared to that of approximately RMB90,185 million for the year ended 31 December 2014, whilst the total revenue of the Company for the six months ended 30 June 2016 of approximately RMB46,335 million is 4.4% higher than that of the total revenue for the corresponding reporting period as in 2015. The rise of revenue was mainly due to the increase in passenger traffic volume.

The Company recorded profit attributable to owners of the Company of approximately RMB4,537 million for the year ended 31 December 2015, representing an increase of approximately 33.1% as compared to that of approximately RMB3,410 million for the year ended 31 December 2014. According to the annual report of the Group for the year ended 31 December 2015, such increase was mainly due to the drop in oil price which led to the decrease of aircraft fuel expense. The profit attributable to owners of the Company for the six months ended 30 June 2016 of approximately RMB3,230 million is 9.32% lower than that of the same reporting period as in 2015. The decrease in profit attributable to owners of the Company for such period was mainly due to the increase in the exchange losses which led to a higher finance cost.

According to the revenue breakdown as set out above, we note that all segments, except cargo and mail segment, recorded increases in revenue. Revenue generated by cargo and mail segment (which is substantially contributed by Eastern Logistics) decreased from approximately RMB7,328 million recorded for the year ended 31 December 2014 to RMB6,491 million recorded for the year ended 31 December 2015, representing a decrease of 11.4% and revenue generated by cargo and mail segment decreased from RMB3,217 million for the six months ended 30 June 2015 to RMB2,690 million for the six months ended 30 June 2016, representing a decrease of 16.4%.

The total assets of the Group increased by approximately RMB16,038 million (representing an increase of approximately 8.1%) from approximately RMB197,992 million as at 31 December 2015 to approximately RMB214,030 million as at 30 June 2016, mainly attributable to the increase in property, plant and equipment by approximately RMB10,419 million. Total liabilities of the Group increased by approximately RMB4,145 million from approximately RMB158,061 million as at 31 December 2015 to approximately RMB162,206 million as at 30 June 2016 which was mainly due to the increase in the obligations under finance lease of approximately RMB2,825 million arising from the aircraft leasing and the increase in borrowings of approximately RMB1,750 million. As a result, the net assets of the Group increased by approximately RMB11,893 million from approximately RMB39,931 million as at 31 December 2015 to approximately RMB51,824 million as at 30 June 2016.

2.       Principal activities and financial information of the Disposal Group

Eastern Logistics is a direct wholly-owned subsidiary of the Company principally engaged in the provision of cargo and mail delivery. Eastern Logistics is a controlling shareholder holding as to:

Se t ou t belo w i s a summar y o f th e consolidate d financia l informatio n of Easter n Logistic s extracte d f r o m th e audite d consolidate d financia l statement s o f Easter n Logistic s p r ovide d b y th e managemen t o f th e Company fo r th e year s ende d 3 1 Decembe r 2013 , 201 4 an d 201 5 an d th e si x months ende d 3 0 Jun e 2016:

As set out in the above table, the Disposal Group recorded operating revenue of approximately RMB6,356 million during the year ended 31 December 2015, representing a decrease of approximately 10.9% as compared to that of approximately RMB7,135 million for the year ended 31 December

2014.

The Disposal Group’s net profit for the year ended 31 December 2015 included a one-off subsidy revenue in the amount of RMB251 million and net profit for the first half of 2016 included a one-off subsidy revenue in the amount of RMB215 million. Excluding the effect of the one-off subsidy revenue alone, the Disposal Group would have recorded a net profit of approximately RMB27.3 million for the year ended 31 December 2014 and a net loss of approximately RMB15.8 million for the year ended 31 December

2015.

As at 30 June 2016, the total assets and total liabilities of the Disposal Group were approximately RMB4,896 million and RMB4,413 million respectively. The net assets of the Disposal Group amounted to approximately RMB483 million as at 30 June 2016, representing an increase of approximately RMB267 million as compared to that as at 31 December 2015, mainly attributable to the increase in net profit of the Disposal Group.

Set out below is the domestic cargo and mail carried volume in the PRC for the years from 2011 to 2015, according to the annual civil aviation industry reports published by Civil Aviation Administration of China.

Source: Annual civil aviation industry development reports of Civil Aviation Administration of China

We noted that the growth in the domestic cargo and mail carried volume in 2011 and 2012 was moderate at 2.4% for both years. The volume in 2013 was 4.1 million tonnes, representing a moderate increase of 4.7% compared to the same period of 2012. The growth rate remained the same at 4.7% in 2014 but it dropped to 3.9% in 2015. The growth of air cargo traffic showed a slowdown trend as a result of the slowdown of the PRC economy.

According to Boeing Current Market Outlook (2016-2035) (the “ CMO Report ”), the world passenger traffic is predicted to grow by 4.8% per annum and world air cargo traffic by 4.2% per annum over the next 20 years respectively. The CMO Report also forecasts that the airline passenger traffic in the Asia Pacific region and China is expected to record an annual growth rate of 6.1% per annum and 6.2% per annum respectively from 2016 to 2035.

Set out below is the revenue attributable to (i) passenger and (ii) cargo and mail from the year ended 31 December 2011 to the year ended 31 December 2015 of the Group and the major competitors extracted from the respective companies’ annual reports and their websites:  

As we noted from the above table, cargo and mail revenue of the Group and its major competitors in 2015 recorded decreases compared to 2014, reflecting a decreasing trend of the cargo performance among the major operators in the industry. Passenger revenue of the Group and its major competitors in the year 2015 recorded increases compared to that of the year 2014.

Set out below is the volume of domestic cargo and mail carried in the PRC for the year ended 31 December 2014 and 2015 of the Group and the major competitors extracted from the respective companies’ annual reports and their websites:

From the above table, we noted that the volume of domestic cargo and mail carried remained relatively stable, which shows a slight increase by 3.9% in 2015 as compared to the volume in the corresponding period in 2014. The percentage of the Group’s volume of domestic cargo and mail carried to the total volume of domestic cargo and mail carried remains smaller than its major competitors while the revenue of the Group in the cargo transporting industry has been shrinking.

As set out in the Letter from the Board, Eastern Logistics has endeavoured to change its business model in recent years. However, due to the relatively low competitiveness and risk resistance, its market share in the freight market has been shrinking and its operational prospect is unclear. As a result, Eastern Logistics has not fully accomplished the goal of its transformation. Therefore, the implementation of the Disposal is a specific measure and reasonable option for the Company to:

The Group, including the Disposal Company, is principally engaged in the operation of civil aviation, including the provision of passenger, cargo, mail delivery, tour operations and other extended transportation services. Based on the financial information provided by the management of the Group, Eastern Logistics recorded a net profit of RMB149 million and RMB213 million for the years ended 31 December 2014 and 2015 which accounted for approximately 1.4% and 4.7% of the Company’s net profit of RMB3,410 million and RMB4,537 million for the same period, respectively.

As set out in the previous section headed “Principal activities and financial information of the Disposal Group”, we noticed that the Disposal Group received one-off subsidy of approximately RMB251 million during the year ended 31 December 2015. The one-off subsidy of approximately RMB251 million in the year ended 31 December 2015 has been substantial as compared to that of approximately RMB22 million in the year ended 31 December 2014. Excluding the effect of the one-off subsidy, the Disposal Group recorded a net loss of approximately RMB38 million for the year ended 31 December 2015 and a net profit of approximately RMB27 million for the year ended 31 December 2014, displaying a deteriorating financial performance of the Disposal Group in the year ended 31 December 2015. This shows that the financial results of the Disposal Group in the recent years relies on the one-off subsidy while the availability of such grants is not guaranteed in the future thereby suggesting an uncertainty of the financial results of the Disposal Group. Moreover, as mentioned in the previous section headed “Industry Overview”, we noted that the Group and its major competitors all recorded a negative growth rate in revenue in cargo transportation business in the financial year ended 31 December 2013 as compared with that in the year ended 31 December 2012. Although the growth rate in revenue in cargo transportation business showed a moderate growth in 2014, such growth was not persistent and the revenue of the major operators of cargo transportation in the PRC recorded a negative growth in 2015, reflecting the revenue growth is not persistent. This shows that there is a certain degree of downturn in the industry and the market rate of freight transportation and the business prospect of the industry is unclear and the growth in the market is relatively short-termed.

The implementation of the Disposal will also be beneficial to the Company in focusing relevant resources on operating its air passenger transportation business in the future and further build up the Company’s brand image and competitiveness in the air passenger transportation sector.

On the other hand, we noticed that the passenger transportation segment accounted for around 93% of the revenue of the Group during the year ended 31 December 2015 and the Company’s profit was mainly contributed by the passenger transporting business. The passenger traffic is expected to result in a higher growth rate than air cargo traffic. As mentioned in the previous section headed “Industry Overview”, the airline passenger traffic in the Asia Pacific region and China is expected to record an annual growth rate of 6.1% per annum and 6.2% per annum respectively from the year 2016 to the year 2035.

With the proceeds of RMB2,432 million from the Disposal, we agree with the view of the Board that the Group could better reallocate its financial resources on operating its air passenger transportation business in the future by expanding its passenger aircraft fleet and further build up the Company’s brand image and competitiveness in the air passenger transportation sector.

Furthermore, the Directors believe that the share transfer obliges Eastern Logistics and China Cargo Airlines to repay the aggregate amount of non-operational and operational payable to the Company, which will be favorable to the Company in accelerating the collection of receivables and lowering capital risks.

As set out in the Disposal Agreement, in the event that Eastern Logistics and China Cargo Airlines fail to pay the Company the abovementioned operational payables in full by 31 December 2017, the Purchaser shall pay the outstanding amount in full to the Company. The Purchaser is a wholly-owned subsidiary of CEA Holding which is a state-owned enterprise established in the PRC and is also a controlling shareholder of the Company. We believe that with the financial resources and support from CEA Holding, the Purchaser is capable of repaying the outstanding balance owed to the Company on behalf of Eastern Logistics and China Cargo Airlines.

Based on the above reasons and benefits, we concurred with the view of the Directors that the Disposal represents an opportunity for the Group to divest the cargo and mail transporting business and to focus the relevant resources in the passenger transporting business. Further, in view that the Disposal would off-load the non-core businesses of the Group and thus improving its financial performance, we are of the view that the Disposal is in the interests of the Company and the Shareholders as a whole.

Pursuant to the Disposal Agreement, the Company has conditionally agreed to sell, and the Purchaser has conditionally agreed to purchase, the entire equity interest in Eastern Logistics at a consideration of RMB2,432,544,211.50. There is no security or pledge over or any other limitations on the transfer of the equity interests in Eastern Logistics, nor is there any litigation, arbitration or judicial measures such as seizure or freezing involved, nor is there any other situation that would otherwise impede the transfer of title.

The Consideration of RMB2,432,544,211.50 was determined with reference to the appraised value of Eastern Logistics as at 30 June 2016 as set out in the Valuation Report prepared by the Valuer. According to the Valuation Report, the asset-based approach has been adopted by the Valuer to appraise the value of the Disposal Group. In appraising the value of a number of subsidiaries of Eastern Logistics, including Shanghai Eastern Transport, Eastern Express and China Cargo Airlines, the income approach has been adopted by the Valuer.

In compliance with the requirements of Rule 13.80 of the Listing Rules, we have reviewed and enquired the qualification and experience of the Valuer in charge of the valuation of the Disposal Group. We have checked to the website of the State-owned Assets Supervision and Administration Commission of the State Council of the PRC (the “ SASAC ”) and noted that the Valuer is on the SASAC’s recognized list of valuation companies. Meanwhile, we understand from our enquiry with the Valuer that it is a third party independent of the Group and/or and the connected persons of the Group and/or the Disposal Group and/or the Purchaser and/or CEA Holdings. We have also reviewed the scope of services provided under the engagement of the Valuer by the Company and we note that the scope of work is appropriate to the opinion given and there were no limitations on the scope of work. Thus, we consider that the Valuer is qualified and possesses sufficient relevant experience in performing the valuation of the Disposal Group.

We have reviewed the Valuation Report prepared by the Valuer and we have also discussed with the Valuer regarding the methodology and the principal basis and assumptions adopted for the valuation of the Disposal Group. We understand the common valuation approaches are market approach, income approach and asset-based approach. We further understand from the Valuer that the adoption of market approach may not be appropriate because the Disposal Group is not a publicly listed company and the transactions of companies with comparable characteristics are limited. On the other hand, we understand from the Valuer that the asset-based approach primarily involves the assessment of assets and liabilities to appraise their values. Eastern Logistics was able to provide, and the Valuer was able to obtain, the required information for the asset-based approach. Therefore, the asset-based approach was adopted for the valuation of Eastern Logistics. The asset of the Eastern Logistics contains long-term investments, which includes Eastern Logistics’ investment in the three subsidiaries, namely Shanghai Eastern Transport, Eastern Express and China Cargo Airlines. The Valuer has further assessed the valuation of the three subsidiaries of the Disposal Group based on income approach as the future risks and return from the operation of the three subsidiaries. Thus, a mixed methodology of asset-based approach and income approach was adopted by the Valuer for the Valuation Report.

Based on the Valuation Report, we consider that the valuation approaches adopted are common valuation methodologies in appraising such company and the basis and assumptions adopted by the Valuer for the Disposal Group are fair and reasonable. We have considered using market approach to compare the valuation of the Disposal Group in the Valuation Report by applying price-to-earnings ratios to comparable companies. However, having considered that the Disposal Group has recorded net loss for the year ended 31 December 2015 after excluding the one-off subsidy and the Disposal Group is not a publicly listed company while the transactions of companies with comparable characteristics are limited, we are of the view that the adoption of market approach in valuing the Disposal Group may not be appropriate. On the other hand, we have considered using the income approach only to compare the valuation of the Disposal Group. The adoption of income approach normally requires numerous assumptions including the revenue estimate of the Disposal Group and the discount factor. Having considered the uncertainty of the future development of the cargo transportation business and that the contracts deriving the revenue estimate are usually short-term in nature, we are of the view that the valuation of the Disposal Group using income approach alone may not result in the best estimate and therefore we did not apply income approach in comparing the valuation results of the Disposal Group.

Therefore, we consider the level of the Consideration of approximately RMB2,432,544,211.50, which was determined based on the appraised value of the Disposal Group as at 30 June 2016 as set out in the Valuation Report using a mixed methodology of asset-based approach and income approach as adopted by the Valuer, is fair and reasonable.

Pursuant to the Disposal Agreement, the Consideration will be payable by the Purchaser in cash by way of transfer into the bank account as designated by the Company within five working days from the date on which the Disposal Agreement becomes effective. Where the Purchaser fails to pay the Consideration as stipulated under the Disposal Agreement, the Company shall be entitled to a penalty from the Purchaser, which is to be calculated based on the interest rate applicable to bank borrowings during the same period. We consider that the mode of payment by cash is a common market practice which can provide a cash inflow to the Group thereby increasing the cash level and the working capital of the Group for future investments. As such, we are of the view that the mode of payment is in the interests of the Company and the Shareholders as a whole.

Based on the above analysis, we consider that the Consideration, which was determined based on the appraised value of the Disposal Group as at 30 June 2016 as set out in the Valuation Report, is fair and reasonable so far as the Independent Shareholders are concerned and is no less favourable than that offered by an independent third party. Moreover, the mode of payment of the Consideration by cash is in the interests of the Company and the Shareholders as a whole.

Upon completion of the disposal of the Eastern Logistics, it is estimated that the Group will record a gain before taxation of approximately RMB1,949.5 million (being the amount equal to the Consideration of approximately RMB2,432.5 million minus: (i) the net asset value of the Eastern Logistics as at 30 June 2016 of approximately RMB483 million and (ii) the estimated expenses in relation to the Disposal).

As at 30 June 2016, the unaudited net assets of the Group attributable to the Shareholders were approximately RMB49,058 million. It is expected that the net assets of the Group attributable to the Shareholders will increase by the potential gain on Disposal of approximately RMB1,949.5 million.

As at 30 June 2016, the gearing ratio of the Group was approximately 75.79%, representing the total liabilities of approximately RMB162,206 million divided by total assets of approximately RMB214,030 million. Assuming completion of the Disposal took place on 30 June 2016, it is expected that the total assets of the Group would increase by approximately RMB1,949.5 million, thus the Disposal will not cause a significant impact on the gearing of the Group.

The Group had consolidated unaudited bank balances and cash of approximately RMB13,214 million as at 30 June 2016. Upon completion of the Disposal, the Group’s bank balances and cash will increase by the amount of net proceeds received. As set out in the Letter from the Board, the Company intends to use such proceeds as the general working capital of the Group, whilst focusing relevant resources on operating its air passenger transportation business in the future and further build up the Company’s brand image and competitiveness in the air passenger transportation sector.

The aforementioned analyses are for illustrative purpose only and do not purport to represent how the financial position of the Group will be after completion of the Disposal.

RECOMMENDATION

Having considered the principal factors and reasons as discussed above and in particular the following (which should be read in conjunction with and interpreted in the full context of this letter):

we consider that the Disposal is conducted in the ordinary and usual course of business and on normal commer cial terms and the terms of the Disposal contemplated thereunder are fair and reasonable so far as the Independent Shareholders are concerned and are in the interest of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders, and we recommend the Independent Shareholders, to vote in favour of the ordinary resolutions to be proposed at the EGM to approve the Disposal contemplated thereunder.

Note:      Mr. Alan Fung has been a responsible officer of Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities since 2003. Mr. Fung has more than 23 years of experience in corporate finance and investment banking and has participated in and completed various advisory transactions in respect of connected transactions of listed companies in Hong Kong. Mr. Louis Chan has been a responsible officer of Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities since 2008. Mr. Chan has more than 15 years of experience in corporate finance and investment banking and has participated in and completed various advisory transactions in respect of connected transactions of listed companies in Hong Kong.

The following is the summary of the Valuation Report dated 6 October 2016 from the Valuer, for, amongst other purposes, inclusion in this Circular.

TRANSFER BY CHINA EASTERN AIRLINES CORPORATION LIMITED OF

EQUITY INTERESTS IN

EASTERN AIR LOGISTICS CO., LTD.

ASSET VALUATION REPORT (SUMMARY)

TXPB ZI (2016) No. 1025

(VOLUME ONE OF ONE)

6 October 2016

ASSET VALUATION REPORT (SUMMARY)

CONTENTS

STATEMENT OF THE ASSET VALUER

SUMMARY OF VALUATION REPORT

STATEMENT OF THE ASSET VALUER

SUMMARY OF VALUATION REPORT

TXPB ZI (2016) No. 1025

Pursuant to the engagement by China Eastern Airlines Corporation Limited, and in accordance with the relevant PRC laws and regulations and asset valuation standards and generally-accepted principles on asset valuation, Beijing Pan-China Assets Appraisal Co., Ltd conducted a valuation on the entire shareholders’ equity of Eastern Air Logistics Co., Ltd. in relation to the proposed transfer by China Eastern Airlines Corporation Limited of equity interests in Eastern Air Logistics Co., Ltd. In accordance with the necessary procedures, a fair presentation of the market value of such assets as of 30 June 2016 is provided. The asset valuation is reported as follows:

Basic approaches for assessing enterprise value include the asset-based approach, income approach and market approach.

The asset-based approach, a method used in assessing enterprise value, is also called the cost approach. It refers to the valuation method by which the value of the appraisal target is determined by reasonably assessing the values of assets and liabilities, both on and off balance sheet, on the basis of the balance sheet of the appraisal target as of the valuation reference date.

The income approach, a method used in assessing enterprise value, refers to the valuation method by which the value of the appraisal target is determined by capitalizing or discounting the expected income. The income approach usually comes in as the dividend discounting method and the cashflow discounting method. The income approach is the assessment of the value of an enterprise by the profitability of an enterprise, and it is based on the theory of expected utility in economics.

The market approach, a method used in assessing enterprise value, refers to the valuation method by which the value of the appraisal target is determined by comparing the appraisal target with the comparable listed companies or comparable transaction cases. The market approach usually comes in as the listed companies comparison approach and the transaction cases comparison approach.

The asset-based approach is the valuation method by which the value of the appraisal target is determined by reasonably assessing the values of assets and liabilities, both on and off balance sheet, on the basis of the balance sheet. Taking into account the circumstances of this valuation, the appraised entity can provide and the valuer can collect externally those information required by the asset-based approach, so that thorough investigation and valuation can be conducted on the assets and liabilities of the appraised entity. Therefore the asset-based approach is applicable to this valuation.

The income approach is based on the expected utility theory of economics. In other words, from the perspective of the investors, the enterprise value lies in the future income expected to be generated for the enterprise. Despite the absence of the direct use of comparable in the actual market for stating the prevailing market fair value of the appraisal target, the income approach assesses the value of an asset by its expected profitability, which is the essential basis for determining the prevailing market fair value of the asset. As such, it can completely reflect the overall value of an enterprise and its valuation conclusion is more reliable and convincing. From the perspective of application conditions, since the enterprise is profitable in its own right and the management of the appraised entity has provided the profit estimate for the future years, according to the historical operating data of the enterprise, the internal and external operating environment can reasonably forecast the future level of profit of the enterprise. In addition, the risk of future income can be reasonably quantified. Therefore, the income approach has been adopted in this valuation.

The market approach determines the prevailing market fair value of the appraisal target by referring to comparables in the market. This approach is direct in terms of valuation perspective and valuation methods, and the valuation process is intuitive. The data for the valuation is from market, making the result very convincing. Reason one: In the lack of a fully-developed and active capital market in China, it is difficult to accurately quantify and rectify the similarity between the comparable listed companies and the transaction cases with the appraisal target. As such, the accuracy of the result of valuation under the market approach is difficult to be measured in a precise manner. Further, valuation under the market approach is based on one point of time on the valuation reference date in the capital market, without regard to the cyclical fluctuation of the market. As such, the market approach is not adopted for this valuation. Reason two: There are few listed comparables for this valuation and the appraised entity, and transaction cases are difficult to find. Therefore, the market approach is not adopted for this valuation. Reason three: The asset-based approach and the income approach adopted in this valuation can better reflect the value of the enterprise. Therefore the market approach is no longer adopted for conducting the valuation.

Accordingly, the asset-based approach and the income approach have been selected for this valuation.

The asset-based approach, which is a method for appraising enterprise values, refers to the method for determining the value of the appraisal target based on the reasonable evaluation of the value of assets and liabilities of an enterprise on the basis of the balance sheet of the appraisal target as of the valuation date. The process of evaluation of the assets and liabilities is as follows:

Current assets of the appraised entity include monetary capital, accounts receivable, prepayments, other receivables, inventories, and other current assets; while liabilities include accounts payable, receipts in advance, staff remuneration payable, tax payable, interest payable, other payables, non-current liabilities due within one year, and accrued expenses.

Long-term equity investments are primarily the long-term equity investments in the subsidiaries, three in total, comprising two wholly-owned subsidiaries and one controlled subsidiary. The names of the invested entities and evaluation approaches adopted therefor are shown in the following table:

 For the long-term investments in wholly-owned and controlled subsidiaries, the method for enterprise value evaluation is adopted for an overall evaluation to the invested entities, and then the valuation of the long-term investments is calculated based on the percentage of shareholding of the appraised entity.

For buildings and structures, the cost method was mainly adopted for appraisal purpose.

Appraised value= full replacement price × integrated residue ratio

Full replacement price = comprehensive construction and installation price + Upfront and other expenses + cost of capital

For large-scale, high-value and important buildings (structures), their comprehensive construction and installation price was determined after computing their respective civil construction costs and installation charges according to the quota standards and relevant charging documents implemented locally.

For low-value and simple structured buildings (structures), their comprehensive construction and installation price was determined by using the unilateral cost method.

Upfront and other expenses were determined according to industry standards and relevant local requirements on administrative and institutional fees. The full replacement price was determined after calculating the capital cost based on the lending interest rate on the valuation reference date and the normal construction period of the type of buildings.

According to Cai Shui (2016) No. 36 document (財稅 (2016) 36號文 件) issued by the Ministry of Finance and the State Administration of Taxation and “Notice on the Adjustment of the Basis of Computing Construction Prices in Shanghai under the Implementation of Value-added Tax to Replace Business Tax in the Construction Industry, Hu Jian Shi Guan (2016) No. 42 (關於實施建築業營業稅改增值稅調整本市 建設工程計價依據的通知滬建市管 (2016)42 號 ) from Shanghai Market Management Station for the Construction and Construction Materials Industries (上海市建築建材業市場管理總站)”, the simplified calculation method is adopted for “Old projects of construction (projects constructed before 1 May 2016)”.

Integrated residue ratio = surveyed residue ratio × 60% + theoretic residue ratio × 40%

in which:

Theoretic residue ratio (%) = remaining useful life/(used life + remaining useful life) × 100%

In determining the on-site surveyed residue ratio, construction completion documents of major buildings shall be inspected to learn about the maintenance and management history, while onsite survey shall be conducted to evaluate the structure, decoration and equipment of the buildings and complete the on-site surveyed for residue ratio.

Residual value rate = (useful life – used life)/useful life × 100%.

The equipment assets within the scope of valuation include machinery equipment, transportation equipment and electronic equipment.

Based on the purpose of this valuation, in accordance with the ongoing concern principle, using the market price as the basis, combining the features of the equipment to be appraised and the information collected, the cost approach shall mainly be used to carry out the appraisal.

Appraised value = Full replacement price × integrated residue ratio

The machinery equipment in this valuation included both domestic equipment and imported equipment.

Full replacement price = purchase price of the equipment + freight and miscellaneous expenses + installation engineering expenses – value-added tax

The purchase price of a domestic equipment was mainly determined based on the quotation of manufacturers or trading companies and with reference to the “ Price Quotation Manual for Mechanical and Electrical Products ”, and with reference to the recent contractual price of similar equipment. For certain equipment the quotation of which were not available, the price index method was adopted in assessing the purchase price.

The purchase price of an imported equipment was mainly determined based on the domestic distributors of the relevant equipment.

The freight and miscellaneous expenses were based on the purchase price of the equipment. Based on factors including different distances between the manufacturers as well as the weight and size of the equipment, different freight and miscellaneous expenses shall be charged. The prices quoted by some manufacturers include freight and miscellaneous expenses.

It was determined by different installation expense rates based on the equipment purchase price according to the characteristics and weight of equipment as well as the level of difficulty of installation.

For smaller equipment requiring no installation, installation engineering expenses and debugging fee should not be considered.

Determination of deductible amount of value-added tax: according to Cai Shui [2008] No. 170 (財稅[2008]170號), starting from 1 January 2009, the input value-added tax incurred on acquisition or self-preparing of fixed assets by general taxpayers of value-added tax can be set off with the amount of output value-added tax with the designated invoice for value-added tax, the designated payment note of value-added tax on imports and settlement notes of transportation expenses pursuant to the relevant requirements in Provisional Regulations on Value-added Tax of the People’s Republic of China (Order No. 538 of the State Council) 《(中華人民共和國增值稅暫行條例 》( 國務院令第 538 號 )) and Detailed Rules for the Implementation of the Provisional Regulations on Value-added Tax of the People’s Republic of China (Order No.50 of the Ministry of Finance and the State Administration of Taxation) 《(中華人民共和國增值稅暫行條例實施細則》(財政部國家稅務總局令第50號)).

Integrated residue ratio = surveyed residue ratio × 0.6 + theoretic residue ratio × 0.4

The surveyed residue ratio was mainly determined according to the actual situation of the equipment. The components of the equipment were scored one by one according to the on-site survey of the technical status, work environment and maintenance of the equipment to determine the surveyed residue ratio.

Theoretic residue ratio was determined based on the economic service life (or remaining useful life) and the used life.

Theoretic residue ratio = (economic service life – used life)/economic service life × 100%

For equipment whose serviced life were longer than the economic service life, the following formula was applied:

Theoretic residue ratio = remaining useful life/(used life + remaining useful life) × 100%

For equipment of lower value with light and simple structure and normal use, the residue ratio was determined at service life method based on the time of use with consideration of its maintenance condition.

Appraised value of machinery equipment = full replacement price × integrated residue ratio

The full replacement price of vehicles was made up of the purchase price (VAT exclusive), the purchase tax and other expenses (such as the vehicle validation fee, license fee and handling fee). The purchase price was determined with reference mainly to the market price of the same type of vehicle in the recent transactions.

Pursuant to the current standard for mandatory vehicles scrappage, the depreciation rate was determined by two methods, namely the mileage driven by the vehicle and the used life. Then, the integrated residue ratio was determined by combining the above with the depreciation rate obtained through technical evaluation by on-site surveying.

Appraised value = full replacement price of the vehicle × integrated residue ratio

Electronic equipment mainly comprise computers, printers and air conditioners for office use, which shall be delivered, installed and debugged by the distributor. The replacement price shall be determined at the tax-exclusive market purchase price.

For small equipment such as electronic equipment and air conditioners, the integrated residue ratio was determined mainly based on the economic service life; while reference shall also be made to the work environment and the operation condition of the equipment for determining the integrated residue ratio of large electronic equipment.

Appraised value = full replacement price of the electronic equipment × residue ratio

For vehicles and electronic equipment purchased earlier which have been suspended from production without relevant models available in the market, the appraised prices were determined based on market approach with reference to the prices quoted in the second-hand market.

Cost approach was applied in valuation of construction in progress. In order to avoid duplications or omissions of asset measurements, the following valuation methods are adopted in light of the characteristics of construction in progress, the type and specific conditions of each construction in progress:

The construction in progress covered by the scope of this evaluation is uncompleted project under normal construction. For such projects, the verified carrying value will be taken as the appraised value, according to reported amount of construction in progress, after verification of its account and confirmation that no duplications exist in price calculation of asset items connected to it, and no unreasonable expenses exist in the carrying value.

The valuation method adopted for land valuation shall comply with the requirements and conditions of the Regulations for Valuation on Urban Land and meet the valuation purpose. The valuation method in this evaluation was adopted according to the requirements of the Regulations for Valuation on Urban Land, the development conditions of local property market, combing with the specific characteristics and specific valuation purposes. The common valuation methods included the market comparison approach, income equity approach, cost approach method, residual method, coefficient-revising of benchmark land price method. After on-site investigations and discussion and analysis by valuers, the market comparison approach and the coefficient-revising of benchmark land price method were selected for the valuation.

Based on the inspection of accounts and original evidences and providing for amortisation, the price available to appraisers through enquiry to dealers is taken as the appraised value.

The appraised value was determined based on the value of assets and entitlements of the appraised entities after the valuation reference date, and the appraised value was directly determined as nil for the items that have no corresponding interest, value or were considered in other assets. For deferred expenses items that have corresponding interest or value after the valuation reference date, the appraised value thereof was determined based on initial amount and the proportion of the residual useful life into the total period for amortisation.

Based on the inspection of accounts and original evidences, the appraised value thereof was determined based on the value of assets and entitlements of the appraised entities after the Valuation Reference Date.

The discounted cash flow (DCF) approach has been adopted for this income approach evaluation, while free cashflow of the respective entities has been selected. The value of total shareholders’ equity is obtained indirectly through the evaluation of the overall value of the entity.

This evaluation is based on free net cashflow of the respective entities of certain years in the future. The value of overall operating assets of the entity, calculated through adding up the discounted values with the adoption of an appropriate discount rate, is added to surplus assets and non-operating assets less interest-bearing liabilities in order to derive the appraised value.

In the above formula:

E : Value of total shareholders’ equity;

V : Overall value of entity;

D : Appraised value of interest-bearing liabilities;

P : Appraised value of operating assets;

C ₁ : Appraised value of surplus assets;

C ₂ : Appraised value of non-operating assets;

E’ : Appraised value of long-term equity investment (not considered in cashflow).

In which, P , the appraised value of operating assets in formula 2, is calculated with the formula as follows:

Formula 3

The first half of the above formula is the value of explicit forecast period while the other half is the value of perpetual period (final value)

In formula 3:

Rt : Free cashflow of entity of the t-th explicit forecast period;

t : Number of explicit forecast period 1, 2, 3, ... , n;

r : Discount rate;

Rn+1 : Free cashflow of entity in perpetual period;

g : Growth rate of perpetual period, g = 0 in this evaluation;

n : The last year of explicit forecast period.

Free cashflow of entity is taken as the quantitative indicator of the expected income of the entity.

Free cashflow of entity refers to the total of all cashflow after payments of operation expenses and income tax and before cash payments to those who claim against the Company. Its calculation formula is as follows:

Free cash flow of entity = net profit after tax + depreciation and amortization. + interest expense × (1-tax rate T) – Capital expenditure – working capital movement.

Income period in appraising enterprise value normally refers to the number of years in the future in which the enterprise can obtain income. To derive a reasonable forecast of future income, income period of enterprise can be categorised as limited period and unlimited period according to the characteristics of production and operation of enterprise and relevant laws, regulations, contracts and agreements.

Perpetual period is adopted as the income period in this evaluation. Of which, the first phase is the period from 30 June 2016 to 31 December 2021, during which the income is changing based on the status and plans of operation of the appraised enterprise; the second phase starting from 1 January 2022 is the phase of perpetual operation, during which the level of profit of the appraised entity will remain stable.

There are various methods and ways to determine discount rate. Based on the principle of consistency between income amount and discount rate, the income amount is evaluated using the free cashflow of entity, and thus weighted average cost of capital (WACC) is selected to determine the discount rate.

The liabilities include long-term and short-term borrowings of the enterprise and are determined using market value.

Surplus assets refer to assets that are not directly related to the income of the enterprise and in excess of the amount needed to operate the enterprise, which generally refer to excess monetary capital and financial assets held for trading etc. Non-operating assets refer to assets that are not directly related to the income of the enterprise and not profit-generating. Separate evaluation is carried out for such assets.

For long-term equity investment, separate evaluation is carried out, using the asset-based approach and income approach for evaluation.

In this evaluation, the valuer adopted both asset-based approach and income approach when assessing the appraisal target. After some analysis, the result of the asset-based approach was adopted as the evaluation conclusion eventually.

The book value of total assets of Eastern Air Logistics Co., Ltd. arrived at using asset-based approach amounts to RMB2,218,892,100 and the appraised value amounts to RMB3,813,860,000, representing an appreciation of RMB1,594,967,900 or an appreciation rate of 71.88%; Book value of total liabilities amounts to RMB1,381,315,800 and the appraised value amounts to RMB1,381,315,800, without appreciation or depreciation; Book value of net assets amounts to RMB837,576,300 and the appraised value amounts to RMB2,432,544,200, representing an appreciation of RMB1,594,967,900 or an appreciation rate of 190.43%.

Details of the overall assets evaluation are set out in the table below:

When using the evaluation conclusion, the users of the report should pay attention to the impact of the “Explanation of Special Matters” mentioned under Clause 11 in the text herein on the evaluation conclusion, as well as the evaluation assumptions and prerequisite conditions upon which the evaluation conclusion has been reached.

In respect of the following events that might have an impact on the evaluation conclusion as mentioned in “Explanation of Special Matters” under Clause 11 of the text herein, and the assessment of which is beyond the professional scope and competence of the asset valuer, users of this report are reminded to pay special attention to the following items:

Details of properties without ownership certificates are set out in the table below:

Unit: in RMB