REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Title of each class |
Name of each exchange on which registered | |
Ordinary H Shares of par value RMB1.00 per share represented by American Depositary Shares |
N/A* |
* | On January 23, 2023, the Company filed a Form 25 to delist its American Depositary Shares from the New York Stock Exchange. The delisting became effective on February 3, 2023, and the American Depositary Receipt program was terminated o n March 6, 2023. |
☒ |
Accelerated filer |
☐ |
Non-accelerated filer |
☐ |
Emerging growth company |
U.S. GAAP ☐ |
|
Other ☐ | ||||||
by the International Accounting Standards Board ☒ |
TABLE OF CONTENTS
i
ii
FORWARD-LOOKING STATEMENTS
This Annual Report includes forward-looking statements for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. These statements appear in a number of different places in this Annual Report. A forward-looking statement is usually identified by the use in this Annual Report of certain terminology such as “estimate”, “project”, “expect”, “intend”, “believe”, “plan”, “anticipate”, “may”, or their negatives or other comparable words. Also look for discussions of strategy that involve risks and uncertainties. Forward-looking statements include statements regarding the outlook for our future operations, forecasts of future costs and expenditures, evaluation of market conditions, the outcome of legal proceedings (if any), the adequacy of reserves, and other business plans. Forward-looking statements are, by their nature, subject to inherent risks and uncertainties, some of which are beyond our control, and are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in particular circumstances. We caution you that a number of risks and assumptions could cause actual outcomes to differ, or differ materially, from those expressed in any forward-looking statements.
These risks and assumptions, in addition to those identified under Item 3. “Key Information-Risk Factors,” include:
• | general economic and business conditions in markets where our Company operates, including changes in interest rates; |
• | the effects of competition on the demand for and price of our services; |
• | natural phenomena; |
• | the impact of unusual events on our business and operations, including COVID-19 and other pandemics, and the effect of governmental actions taken in response; |
• | actions by government authorities, including changes in government regulations, and changes in CAAC’s regulatory policies; |
• | our relationship with China Southern Air Holding Company Limited; |
• | uncertainties associated with potential legal proceedings; |
• | technological development; |
• | our ability to attract key personnel and attract new talent; |
• | future decisions by management in response to changing conditions; |
• | the Company’s ability to execute prospective business plans; |
• | the availability of qualified flight personnel and airport facilities; and |
• | misjudgments in the course of preparing forward-looking statements. |
Our Company advises you that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to our Company, our Group and persons acting on their behalf.
1
INTRODUCTORY NOTE
In this Annual Report, unless the context indicates otherwise, “we”, “us”, “our”, “the Company” and “our Company” refer to China Southern Airlines Company Limited, a joint stock company incorporated in China on March 25, 1995, our “Group” means our Company and our consolidated subsidiaries, and “CSAH” means China Southern Air Holding Company Limited, our Company’s parent company which directly and indirectly held 66.52% interest in our Company as of March 31, 2023.
References to “China” or the “PRC” are to the People’s Republic of China, excluding, for purpose of this Annual Report, Hong Kong, Macau and Taiwan. References to “Renminbi” or “RMB” are to the currency of China, references to “U.S. dollars”, “USD”, “$” or “US$” are to the currency of the United States of America (the “U.S.” or “United States”), and references to “HK$” are to the currency of Hong Kong. References to the “Chinese government” are to the national government of China. References to “Hong Kong” or “Hong Kong SAR” are to the Hong Kong Special Administrative Region of the PRC. References to “Macau” or “Macau SAR” are to the Macau Special Administrative Region of the PRC.
Our Group presents our consolidated financial statements in Renminbi. The consolidated financial statements of our Group have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRSs”), which collective term include all applicable individual IFRSs, International Accounting Standards (“IASs”) and Interpretations issued by the International Accounting Standards Board (the “IASB”).
Solely for the convenience of the readers, this Annual Report contains conversions of certain Renminbi into U.S. dollars at the rate of US$1.00 = RMB6.9646, which was the average of the buying and selling rates as quoted by the People’s Bank of China at the close of business on December 30, 2022. No representation is made that the Renminbi amounts or U.S. dollar amounts included in this Annual Report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all.
Any discrepancies in the tables included herein between the amounts listed and the totals are due to rounding.
2
GLOSSARY OF AIRLINE INDUSTRY TERMS
In this Annual Report, unless the context indicates otherwise, the following terms have the respective meanings set forth below.
Capacity | ||
“available seat kilometers” or “ASK” | the number of seats made available for sale multiplied by the kilometers flown | |
“available ton kilometers” or “ATK” | the tons of capacity available for the transportation of revenue load (passengers and cargo) multiplied by the kilometers flown | |
Traffic | ||
“revenue passenger kilometers” or “RPK” | i.e. passenger traffic volume, the number of passengers carried multiplied by the kilometers flown | |
“revenue ton kilometers” or “RTK” | i.e. total traffic volume, the load (passenger and cargo) in tons multiplied by the kilometers flown | |
“revenue ton kilometers-cargo” or “RFTK” | i.e. cargo and mail traffic volume, the load for cargo and mail in tonnes multiplied by the kilometers flown | |
“revenue ton kilometers-passenger” | the load for passenger in tons multiplied by the kilometers flown | |
“ton” | a metric ton, equivalent to 1,000 kilograms | |
Yield | ||
“yield per RFTK” | revenue from cargo operations divided by RFTK | |
“yield per RPK” | revenue from passenger operations divided by RPK | |
“yield per RTK” | revenue from airline operations (passenger and cargo) divided by RTK | |
Cost | ||
“operating cost per ATK” | operating expenses divided by ATK | |
Load Factors | ||
“overall load factor” | RTK expressed as a percentage of ATK | |
“passenger load factor” | RPK expressed as a percentage of ASK | |
Utilization | ||
“utilization rates” | flight hours that aircraft can service during specified time | |
Equipment | ||
“expendables” | aircraft parts that are ordinarily used up and replaced with new parts |
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“rotables” | aircraft parts that are ordinarily repaired and reused | |
Others | ||
“ADS” | American Depositary Share | |
“A Shares” | Shares issued by our Company to investors in the PRC for subscription in RMB, with par value of RMB1.00 each | |
“Board” | board of directors of the Company | |
“CAAC” | Civil Aviation Administration of China | |
“CAOSC” | China Aviation Oil Supplies Company | |
“CSAH” | China Southern Air Holding Company Limited | |
“CSRC” | China Securities Regulatory Commission | |
“Hong Kong Stock Exchange” | The Stock Exchange of Hong Kong Limited | |
“Hong Kong Listing Rules” | The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited | |
“H Shares” | Shares issued by our Company, listed on The Stock Exchange of Hong Kong Limited and subscribed for and traded in Hong Kong dollars, with par value of RMB1.00 each | |
“Nan Lung” | Nan Lung Holding Limited (a wholly-owned subsidiary of CSAH) | |
“NDRC” | National Development and Reform Commission of China | |
“SAFE” | State Administration of Foreign Exchange of China | |
“Finance Company” | China Southern Airlines Group Finance Company Limited | |
“SASAC” | State-owned Assets Supervision and Administration Commission of the State Council | |
“SEC” | United States Securities and Exchange Commission | |
“SPVs” | special purpose vehicles exclusively set up by the Company and its subsidiaries for leased aircraft |
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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The following tables present selected financial data for the five-year period ended December 31, 2022. The selected consolidated income statement data (other than ADS data) for the three-year period ended December 31, 2020, 2021 and 2022 and selected consolidated statement of financial position data as of December 31, 2021 and 2022 are derived from the audited consolidated financial statements of us, included elsewhere in this Annual Report. The selected consolidated income statement data (other than ADS data) for the years ended December 31, 2018 and 2019 and selected consolidated statement of financial position data as of December 31, 2018, 2019 and 2020 are derived from our audited consolidated financial statements that are not included in this Annual Report.
Moreover, the selected financial data should be read in conjunction with the rest of the Annual Report, including our audited consolidated financial statements together with accompanying notes and “Item 5. Operating and Financial Review and Prospects” which are included elsewhere in this Annual Report. Our consolidated financial statements are prepared and presented in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, or IFRSs.
We have initially applied IFRS 16 on January 1, 2019 and IFRS 15 and IFRS 9 on January 1, 2018. According to the adopted transition plan, the comparative data has not been restated.
Year ended December 31, | ||||||||||||||||||||||||
2022 US$ |
2022 RMB |
2021 RMB |
2020 RMB |
2019 RMB |
2018 RMB |
|||||||||||||||||||
(in million, except per share and per ADS data) | ||||||||||||||||||||||||
Consolidated Income Statement Data |
||||||||||||||||||||||||
Operating revenue |
12,500 | 87,059 | 101,644 | 92,561 | 154,322 | 143,623 | ||||||||||||||||||
Operating expenses |
(16,550 | ) | (115,262 | ) | (116,340 | ) | (109,111 | ) | (148,608 | ) | (140,242 | ) | ||||||||||||
Operating (loss)/profit |
(3,237 | ) | (22,542 | ) | (9,929 | ) | (11,864 | ) | 10,838 | 8,819 | ||||||||||||||
(Loss)/profit before income tax |
(4,530 | ) | (31,550 | ) | (13,910 | ) | (15,195 | ) | 4,055 | 4,364 | ||||||||||||||
(Loss)/profit for the year |
(4,841 | ) | (33,716 | ) | (11,016 | ) | (11,827 | ) | 3,084 | 3,364 |
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(Loss)/profit attributable to: |
||||||||||||||||||||||||
Equity shareholders of our Company |
(4,695 | ) | (32,699 | ) | (12,106 | ) | (10,847 | ) | 2,640 | 2,895 | ||||||||||||||
Non-controlling interests |
(146 | ) | (1,017 | ) | 1,090 | (980 | ) | 444 | 469 | |||||||||||||||
Basic and diluted (loss)/earnings per share |
(0.27 | ) | (1.90 | ) | (0.75 | ) | (0.77 | ) | 0.22 | 0.27 | ||||||||||||||
Basic and diluted (loss)/earnings per ADS (1) |
(13.64 | ) | (95.03 | ) | (37.36 | ) | (38.58 | ) | 10.76 | 13.50 | ||||||||||||||
Other Financial Data |
||||||||||||||||||||||||
Cash dividends declared per share |
— | — | — | — | — | 0.05 |
(1) | Basic and diluted earnings per share have been computed by dividing profit attributable to our equity shareholders by the weighted average number of shares in issue. Basic and diluted earnings per ADS have been computed as if all of our issued or potential ordinary shares, including A Shares and H Shares, are represented by ADSs during each of the years presented. Each ADS represents 50 H Shares. |
As of December 31, | ||||||||||||||||||||||||
2022 US$ |
2022 RMB |
2021 RMB |
2020 RMB |
2019 RMB |
2018 RMB |
|||||||||||||||||||
(in million, except per share and per ADS data) | ||||||||||||||||||||||||
Consolidated Statement of Financial Position Data: |
||||||||||||||||||||||||
Cash and cash equivalents |
2,856 | 19,889 | 21,456 | 25,419 | 1,849 | 6,928 | ||||||||||||||||||
Total current assets, excluding cash and cash equivalents |
1,948 | 13,565 | 16,410 | 13,566 | 14,889 | 17,144 | ||||||||||||||||||
Property, plant and equipment, net |
12,997 | 90,517 | 91,186 | 86,146 | 84,788 | 170,692 | ||||||||||||||||||
Right-of-use assets |
18,946 | 131,954 | 138,439 | 151,065 | 153,211 | — | ||||||||||||||||||
Total assets |
44,833 | 312,246 | 323,211 | 326,383 | 306,928 | 246,949 | ||||||||||||||||||
Current borrowings |
12,253 | 85,336 | 57,913 | 40,099 | 37,543 | 38,741 | ||||||||||||||||||
Current portion of obligations under finance leases |
— | — | — | — | — | 9,555 | ||||||||||||||||||
Non-current borrowings |
4,946 | 34,444 | 38,354 | 38,134 | 13,637 | 15,676 | ||||||||||||||||||
Obligations under finance leases, excluding current portion |
— | — | — | — | — | 62,666 | ||||||||||||||||||
Lease liabilities |
13,606 | 94,762 | 102,749 | 121,213 | 134,074 | — | ||||||||||||||||||
Total equity |
7,949 | 55,359 | 84,508 | 85,131 | 77,329 | 78,469 | ||||||||||||||||||
Number of shares (in million) |
18,121 | 18,121 | 16,948 | 15,329 | 12,267 | 12,267 |
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Selected Operating Data
The operating data and comparison below is calculated and disclosed in accordance with the statistical standards, which have been implemented by our Group since January 1, 2001. See “Glossary of Airline Industry Terms” at the front of this Annual Report for definitions of certain terms used herein.
Year ended December 31, | ||||||||||||||||||||
2022 | 2021 | 2020 | 2019 | 2018 | ||||||||||||||||
Capacity |
||||||||||||||||||||
ASK (million) |
153,845 | 213,922 | 214,722 | 344,062 | 314,421 | |||||||||||||||
ATK (million) |
26,222 | 33,518 | 33,892 | 46,434 | 42,728 | |||||||||||||||
Kilometers flown (thousand) |
994,380 | 1,317,850 | 1,304,667 | 1,875,520 | 1,762,920 | |||||||||||||||
Hours flown (thousand) |
1,557 | 2,110 | 2,077 | 2,951 | 2,773 | |||||||||||||||
Number of landing and take-offs |
601,540 | 843,320 | 822,459 | 1,117,880 | 1,069,430 | |||||||||||||||
Traffic |
||||||||||||||||||||
RPK (million) |
102,078 | 152,426 | 153,440 | 284,921 | 259,194 | |||||||||||||||
RTK (million) |
16,384 | 21,209 | 20,805 | 32,625 | 30,334 | |||||||||||||||
Passengers carried (thousand) |
62,636 | 98,505 | 96,856 | 151,632 | 139,885 | |||||||||||||||
Cargo and mail carried (tons) |
1,326,640 | 1,141,950 | 1,460,825 | 1,763,560 | 1,732,280 | |||||||||||||||
Load Factors |
||||||||||||||||||||
Passenger load factor (RPK/ASK) (%) |
66.4 | 71.3 | 71.5 | 82.8 | 82.4 | |||||||||||||||
Overall load factor (RTK/ATK) (%) |
62.5 | 63.3 | 61.4 | 70.3 | 71.0 | |||||||||||||||
Yield |
||||||||||||||||||||
Yield per RPK (RMB) |
0.59 | 0.49 | 0.46 | 0.49 | 0.49 | |||||||||||||||
Yield per RFTK (RMB) |
2.83 | 2.58 | 2.27 | 1.27 | 1.33 | |||||||||||||||
Yield per RTK (RMB) |
4.94 | 4.49 | 4.18 | 4.54 | 4.55 | |||||||||||||||
Fleet |
||||||||||||||||||||
- Boeing |
466 | 469 | 469 | 467 | 460 | |||||||||||||||
- Airbus |
402 | 391 | 383 | 375 | 354 | |||||||||||||||
- Others |
26 | 18 | 15 | 20 | 26 | |||||||||||||||
Total aircraft in service at period end |
894 | 878 | 867 | 862 | 840 | |||||||||||||||
Average daily utilization rate (hours per day) |
5.04 | 6.96 | 7.02 | 9.96 | 9.73 |
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
Summary of Risk Factors
Below please find a summary of the principal risks we face, organized under relevant headings.
Risks Relating to the PRC
• | The enactment of the Holding Foreign Companies Accountable Act and identification of the Company by the SEC will result in enhanced disclosure requirements for us. |
• | We have significant exposure to foreign currency risk as part of our lease liabilities are denominated in foreign currencies. Due to rigid foreign exchange control by Chinese government, we may face difficulties in obtaining sufficient foreign exchange to pay dividends or satisfy our foreign exchange liabilities. |
7
• | Uncertainties with respect to the PRC legal system may cause significant uncertainties to our operations. |
• | Any actions by the Chinese government may cause us to make material changes to our operations and could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. |
Risks Relating to our Business
• | The outbreak and global spread of the COVID-19 pandemic have had a material adverse effect on our business. The duration and severity of the pandemic, and similar public health threats or a large-scale natural disaster we may face in the future, could result in additional adverse effects on our business. |
• | We are indirectly majority owned by the Chinese government, which may exert influence in a manner that may conflict with the interests of holders of ADSs, H Shares and A Shares. |
• | Any disruption of the provision of services by CSAH or its affiliates could affect our operations and financial condition. |
• | Due to a high degree of operating leverage and high fixed costs, a decrease in our revenue could result in a disproportionately higher decrease in our profit. |
• | The results of our operations are also significantly exposed to fluctuations in foreign exchange rates. |
• | We have significant committed capital expenditures in the next three years, and may face challenges and difficulties in maintaining our liquidity. |
• | Unfavorable economic conditions, in China and globally, could affect the demand for air travel. |
• | Lack of adequate documentation for land use rights and ownership of buildings may subject us to challenges and claims by third parties. |
• | The travel industry continues to face on-going security concerns and cost burdens. |
• | We may suffer losses in the event of an accident involving our aircraft or the aircraft of any other airline. |
• | The mandatory grounding of our Boeing 737 Max fleet may have a material adverse effect on our business, operating results and financial condition. |
• | We are subject to stringent laws and contractual obligations related to data privacy and cybersecurity, and we may be exposed to risks related to our management of personal information and other data. |
• | Evolving data security and cybersecurity requirements could increase our costs, and any significant data security incident could disrupt our operations, harm our reputation, expose us to legal risks and otherwise materially adversely affect our business, results of operations and financial condition. |
8
• | We may be unable to retain our senior management team or other key employees. |
• | Our results of operations may be negatively impacted by any jet fuel shortages or any fluctuation in domestic prices for jet fuel. |
• | Our profit for the year may suffer from unexpected volatility caused by any fluctuation in the level of fuel surcharges. |
Risks Relating to the Chinese Commercial Aviation Industry
• | Our business is subject to extensive government regulations. |
• | Our results of operations tend to be volatile and fluctuate due to seasonality. |
• | Our operations may be adversely affected by insufficient aviation infrastructure in the Chinese commercial aviation industry. |
• | We face increasingly intense competition in both domestic and international markets. |
• | We expect to face substantial competition from alternative means of transportation, especially as a result of the rapid development of the Chinese rail network. |
• | Limitations on foreign ownership of Chinese airlines may affect our access to funding in the international equity capital markets. |
• | The commercial aviation industry is subject to risks associated with climate change, including the increasingly stringent environmental regulation to protest against emissions. Failure to comply with existing or future environmental regulations or to otherwise manage the risks of climate change effectively could have a material adverse effect on our business. |
• | We may utilize fuel hedging arrangements which may result in losses. |
Risks Relating to the PRC
The enactment of the Holding Foreign Companies Accountable Act and identification of the Company by the SEC will result in enhanced disclosure requirements for us.
On December 18, 2020, the Holding Foreign Companies Accountable Act, or HFCAA, was signed into law. The HFCAA requires the SEC to identify each issuer required to file reports under section 13 or 15(d) of the Exchange Act that has retained a registered public accounting firm to issue an audit report where the firm has a branch or office located in a foreign jurisdiction, and the Public Company Accounting Oversight Board, or the PCAOB, has determined that it is unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction. Registrants so identified, or Commission-Identified Issuers, are required to submit documentation to the SEC that establishes that they are not owned or controlled by a governmental entity in that foreign jurisdiction. In addition, if the registrant is determined to be a Commission-Identified Issuer for three consecutive “non-inspection” years, it will be delisted from U.S. exchanges and its securities will be prohibited from trading in the United States. Commission-Identified Issuers that are foreign issuers will also be subject to enhanced disclosure requirements, including disclosure on government ownership or control of the issuer, the name of each official of the Chinese Communist Party who is a member of the issuer’s board of directors, and whether the issuer’s articles of incorporation contain any charter of the Chinese Communist Party.
9
On March 24, 2021, the SEC adopted interim final amendments to implement the disclosure and submission requirements of the HFCAA. On December 2, 2021, the SEC adopted amendments to finalize its rules implementing the HFCAA.
On December 16, 2021, the PCAOB issued a report on its determinations that it was unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and Hong Kong because of positions taken by PRC authorities in those jurisdictions (“PCAOB-Identified Firm”).
Our auditor is an independent public accounting firm registered with the PCAOB that is headquartered in mainland China, and was therefore a PCAOB-Identified Firm under the PCAOB 2021 determinations. On May 26, 2022, we were identified in the conclusive list of issuers under the HFCAA as our auditor was a PCAOB-Identified Firm, and we will be required to comply with the submission and disclosure requirements in the annual report for each year in which we are identified.
On August 26, 2022, the PCAOB, the CSRC and the Ministry of Finance of the PRC signed a Statement of Protocol governing inspections and investigations of audit firms based in mainland China and Hong Kong, which established a framework to make possible complete inspections and investigations by the PCAOB of audit firms headquartered in mainland China and Hong Kong.
On December 15, 2022, the PCAOB determined that it was able to inspect and investigate completely registered public accounting firms headquartered in mainland China and Hong Kong in 2022, and vacated its previous 2021 determinations to the contrary. However, whether the PCAOB will continue to be able to conduct complete inspections and investigations of registered public accounting firms headquartered in mainland China and Hong Kong is subject to uncertainties and depends on a number of factors out of our control. The PCAOB has indicated that it will act immediately to issue new determinations pursuant to the HFCAA if needed.
On December 29, 2022, the President signed the Consolidated Appropriations Act, 2023, which, among other things, amended the HFCAA to reduce the number of consecutive years, from three years to two years, an issuer can be identified as a Commission-Identified Issuer before the SEC must impose an initial trading prohibition on the issuer’s securities. Therefore, once an issuer is identified as a Commission-Identified Issuer for two consecutive years, the SEC is required under the HFCAA to prohibit the trading of the issuer’s securities on a national securities exchange and in the over-the-counter market.
Based on the latest PCAOB determination in 2022, our auditor is no longer a PCAOB-Identified Firm and we do not expect to be identified by the SEC under the HFCAA in 2023 after filing of this annual report. In addition, we have voluntarily delisted our ADSs from the NYSE, which has become effective from February 3, 2023, and have terminated our ADS program, which has become effective from March 6, 2023. We also intend to file Form 15F to deregister our ADSs and the underlying H Shares and terminate our reporting obligations under the Exchange Act once the criteria for deregistration have been satisfied. Therefore, we do not expect to be subject to the submission and disclosure requirements in the annual report for the year of 2023, even if we have not filed a Form 15F before April 30, 2024 and are still required to file the annual report for the year of 2023, or to be subject to the trading prohibitions under the HFCAA as our ADSs are already no longer traded in U.S. from March 6, 2023. However, we cannot guarantee you that the SEC will not continue to identify us under the HFCAA or that Form 15F to be filed will not be delayed, withdrawn or denied. If, before the deregistration of our ADS and underlying H Shares become effective, the PCAOB issues new determination to re-identify our auditor as the PCAOB-Identified Firm or the SEC continues to identify us under the HFCAA in the future, we may still be subject to the submission and disclosure requirements for the annual report for each year in which we are so identified.
Whether our investors in the U.S. who rely on our auditor’s audit reports will have the benefit of PCAOB oversight in the future is subject to uncertainty.
Auditors of companies that are registered with the SEC and traded publicly in the United States, including our independent registered public accounting firm, must be registered with the PCAOB, and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards. The PCAOB has at times identified deficiencies in the audit procedures and quality control procedures of accounting firms during its inspections of these firms. Such deficiencies may be addressed in those accounting firms’ future inspection process to improve their audit quality. However, in the past, the PCAOB was unable to inspect a registered public accounting firm’s audit work relating to a company’s operations in China where the documentation of such audit work was located in China. Accordingly, our independent registered public accounting firm’s audit of our operations in China was not subject to PCAOB inspection.
10
On August 26, 2022, the PCAOB, the CSRC and the Ministry of Finance of the PRC signed a Statement of Protocol governing inspections and investigations of audit firms based in mainland China and Hong Kong, which established a framework to make possible complete inspections and investigations by the PCAOB of audit firms headquartered in mainland China and Hong Kong.
On December 15, 2022, the PCAOB determined that it was able to inspect and investigate completely registered public accounting firms headquartered in mainland China and Hong Kong in 2022, and vacated its previous 2021 determinations to the contrary. However, whether the PCAOB will continue to be able to conduct complete inspections and investigations of registered public accounting firms headquartered in mainland China and Hong Kong is subject to uncertainties and depends on a number of factors out of our control. The PCAOB has indicated that it will act immediately to issue new determinations pursuant to the HFCAA if needed. Therefore it remains unclear whether our investors will continue to have the benefit of PCAOB oversight.
If additional remedial measures are imposed against four PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC, it could result in our financial statements being determined to not be in compliance with the requirements of the Securities Exchange Act of 1934.
In December 2012, the SEC instituted administrative proceedings against four PRC-based accounting firms, including our independent registered public accounting firm, alleging that they had refused to produce audit work papers related to their audit of certain PRC-based companies that are publicly traded in the United States. On January 22, 2014, an initial administrative law decision was issued, which determined that the four PRC-based accounting firms should be censured and barred from practicing before the SEC for a period of six months. The four PRC-based accounting firms appealed the initial administrative law decision to the SEC. The initial law decision is neither final nor legally effective unless and until it is endorsed by the full SEC. In February 2015, each of the four PRC-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The settlement requires the firms to follow detailed procedures to provide the SEC with access to PRC-based firms’ audit documents via the CSRC.
We were not and are not the subject of any SEC investigations nor are we involved in the proceedings brought by the SEC against the accounting firms. If the firms do not follow these procedures or if there is a failure in the process between the SEC and the CSRC, the SEC could impose penalties such as suspensions, or it could restart the administrative proceedings. If the accounting firms including our independent registered public accounting firm were denied, temporarily or permanently, the ability to practice before the SEC, and we were unable to find another registered public accounting firm in a timely manner to audit and issue a report on our financial statements, our financial statements could be determined to not be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to our deregistration from the SEC.
We have significant exposure to foreign currency risk as part of our lease liabilities are denominated in foreign currencies. Due to rigid foreign exchange control by Chinese government, we may face difficulties in obtaining sufficient foreign exchange to pay dividends or satisfy our foreign exchange liabilities.
Under current Chinese foreign exchange regulations, the Renminbi is fully convertible for current account transactions, but is not freely convertible for capital account transactions. All foreign exchange transactions involving Renminbi must take place either through the People’s Bank of China or other institutions authorized to buy and sell foreign exchange or at a swap center.
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We have significant exposure to foreign currency risk as the majority of our lease liabilities and certain bank and other loans are denominated in foreign currencies, principally U.S. dollars, Euros and Japanese Yen. Depreciation or appreciation of the Renminbi against foreign currencies affects our results significantly because our foreign currency liabilities generally exceed our foreign currency assets. We are not able to hedge our foreign currency exposure effectively other than by retaining our foreign currency denominated earnings and receipts to the extent permitted by SAFE, or subject to certain restrictive conditions, entering into foreign exchange forward option contracts with authorized banks. However, SAFE may limit or eliminate our ability to purchase and retain foreign currencies in the future. In addition, foreign currency transactions under the capital account are still subject to limitations and require approvals from SAFE. This may affect our ability to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions. No assurance can be given that we will be able to obtain sufficient foreign exchange to pay dividends or satisfy our foreign exchange liabilities.
Uncertainties with respect to the PRC legal system may cause significant uncertainties to our operations.
Our Company and our major subsidiaries are organized under the laws of China. The Chinese legal system is based on written statutes and is a system, unlike common law systems, in which decided legal cases have little precedential value. Since 1979, the Chinese government has been developing a comprehensive system of commercial laws and considerable progress has been made in the promulgation of laws and regulations dealing with economic matters, such as corporate organization and governance, foreign investments, commerce, taxation and trade. As these laws, regulations and legal requirements are relatively recent and the PRC legal system continues to evolve quickly, these laws, regulations and legal requirements, like other laws, regulations and legal requirements in China (including with respect to the commercial aviation industry), can change quickly and their interpretation and enforcement involve significant uncertainties.
Any actions by the Chinese government, including any decision to influence our operations or to exert more oversight and control over any offering of securities conducted overseas and/or foreign investment in China-based issuers, may cause us to make material changes to our operations and could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.
The Chinese government has exercised and continues to exercise significant oversight and regulation over almost every sector of the Chinese economy, including the commercial aviation industry, and has discretion over many aspects in which it exercises such authority. Our operations are subject to various regulatory requirements. The Chinese government, including various political and regulatory entities, may also impose new and stricter regulations or impose new interpretations of existing regulations and take other actions that may influence our operations, and may seek to exert more oversight and control over any offering of securities conducted overseas and/or foreign investment in China-based issuers such as ourselves. These government actions, including changes in laws and regulations, particularly those relating to aviation, overseas listing, taxation, land use rights and foreign investment, may result in a material change in our operations and the value of our securities. See also Item 5. “- Key Factors Affecting Results of Operations — Political and economic conditions and regulations”.