Xinhua Far East Assigns A- Issuer Credit Rating to Air China Limited

Xinhua Far East Assigns A- Issuer Credit Rating to Air China Limited

March 07, 2007

    HONG KONG, March 7 /Xinhua-PRNewswire/ -- Xinhua Far
East China Ratings ("Xinhua Far East") today
assigned an A- issuer credit rating to Air China Limited
("Air China" or "the Company", SH
601111, HK 753, LSE AIRC). The company's rating outlook is
stable. 

    (Logo:
http://www.xprn.com.cn/xprn/sa/200611140926.gif)

    The rating reflects the company's overall leading
position in China's domestic airline industry, as well as
its strengths in terms of aircraft usage and geographic
balance of air routes.  The rating also considers its
economy-driven growth potential, its relatively stable cash
flow generating capacity, its comparatively conservative
balance sheet, and the likely benefit arising from RMB
appreciation and future strategic cooperation with Cathay
Pacific Airways Limited.  At the same time, the Chinese
aviation market is capital intensive in nature and highly
competitive, with profits being squeezed by high jet fuel
costs.  The inherent market risks, as well as the liquidity
risks arising from the company's short-term debt levels,
prevent it from obtaining a higher rating.

    Air China ranked number one in terms of total air
traffic throughput among domestic airlines from 2003 to
2005.  This was a result of the company's leading market
position at the hub in Beijing, as well as its
well-balanced and complementary route network.

    China's soaring economy has considerably stimulated the
aviation market, with our forecasts indicating that the
Chinese aviation market is set to see a compound annual
growth rate ("CAGR") of around 13% over the 2006
to 2010 period. This growth is set to benefit Air China,
even if its market share remains about the same moving
forward.

    The rating also takes into consideration the company's
sound financial profile. Air China's EBIT margin is
relatively stable compared to its peers, a fact that held
true in 2003 during the SARS crisis, a reflection of Air
China's ability to weather storms.  The company's capital
structure improved due to its completed IPO in Shanghai and
its healthy operating cash flow stream. Future RMB
appreciation is expected to benefit the airline further.
Our projections suggest Air China will be able to maintain
its current healthy capital structure, despite the heavy
capital expenditure required to expand its fleet. 

    The rating also considers Air China's strategic
cooperation with Cathay Pacific, with a cooperative
agreement expected to benefit the company through higher
sales in the overseas market, especially Hong Kong, Macau
and Taiwan. The agreement should also enhance its
management skills.

    However, present competition in China's airline
industry is relatively fierce and centered on airfares due
to a lack of product differentiation.  With more foreign
airlines and domestic private airlines entering the market,
competition is expected to intensify in the future.

    We also note that jet fuel costs represented 34% of Air
China's total operating costs in 2005, attributable to
rising jet fuel prices and the expansion of its operating
fleet. In our view, the company needs to place greater
emphasis on further enhancing its operating efficiency to
improve its ability to transfer jet fuel costs. We also
note that Air China's gross debt in 2005 comprised 37.8% of
short-term debt, a situation which heightens the company's
liquidity risks.

    As of June 30, 2006, Air China was the largest domestic
airline and operated a fleet of 192 aircraft, serving 72
domestic and 34 international and regional destinations.
China National Aviation Holding Company is the company's
controlling shareholder, holding a 56.06% stake after Air
China's A-share IPO on the Shanghai Stock Exchange in
August 2006.

    Air China is also a constituent of the Xinhua/FTSE
China A50 Index. As of market close on March 6, 2007, its
total A-share market capitalization and investable
capitalization were RMB55.7 billion and RMB11.1 billion
respectively. 

    For the rating report summary, please contact us via
[e-mail] 

    Note to Editors:

    About FTSE/Xinhua China A50 Index 

    The FTSE/Xinhua China A50 Index is a real-time tradable
index comprising the largest 50 A Share companies by full
market capitalization.  Designed to meet the needs of
QFIIs, it can be used as a basis for both on-exchange and
OTC derivative products, mutual funds and ETFs.  For daily
data and further information, see http://www.xinhuaftse.com
.

    About Xinhua Far East China Ratings

    Xinhua Far East China Ratings (Xinhua Far East) is a
pioneering venture in China that aims to rank credit risks
among corporations in China. It is a strategic alliance
between Xinhua Finance (TSE Mothers: 9399), and Shanghai
Far East Credit Rating Co., Ltd. Shanghai Far East became a
Xinhua Finance partner company in 2003 and the first China
member of The Association of Credit Rating Agencies in Asia
in December 2003.

    Capitalizing on the synergy between Xinhua Finance and
Shanghai Far East, Xinhua Far East's rating methodology and
process blend unique local market knowledge with
international rating standards.  Xinhua Far East is
committed to provide investors with independent, objective,
timely and forward-looking credit opinions on Chinese
companies. It aims to help investors differentiate the
credit risks among the corporations in China, thereby,
cultivating their awareness and promoting information
disclosures and transparency in China market. For more
information, see http://www.xfn.com/creditrating .

    About Xinhua Finance Limited

    Xinhua Finance Limited is China's unchallenged leader
in financial information and media, and is listed on the
Mothers board of the Tokyo Stock Exchange (symbol: 9399)
(OTC ADRs: XHFNY).  Bridging China's financial markets and
the world, Xinhua Finance serves financial institutions,
corporations and re-distributors through four focused and
complementary service lines: Indices, Ratings, Financial
News and Investor Relations.  Founded in November 1999, the
Company is headquartered in Shanghai with 20 news bureaus
and offices in 19 locations across Asia, Australia, North
America and Europe. For more information, please visit
http://www.xinhuafinance.com . 

    About Shanghai Far East Credit Rating Co., Ltd

    Shanghai Far East Credit Rating Co., Ltd. is the first
and leading professional credit rating company with
comprehensive business coverage in China. It is an
independent agency established by the Shanghai Academy of
Social Sciences with the mission to develop internationally
accepted standards for capital market in China. The company
is a pioneer in conducting bond-rating business in China.
For years, it has been authorized by the Shanghai branch of
the PBOC to undertake loan certificate credit rating.

    Since establishment, it has rated over 1,000 corporate
long-term bonds and commercial papers, based on the
principles of objectivity, fairness and independence. The
company has also maintained over 50% market share in the
loan certificate-rating sector in Shanghai for three
consecutive years. With its strong local presence and
knowledge, it provides investors with unique and the most
insightful credit opinion. For more information, see
http://www.fareast-cr.com .

    More Information: 

    Hong Kong
     Joy Tsang, Corporate & Investor Communications
Director, Xinhua Finance
     Tel:   [phone],
[phone]
     Email: [e-mail]

    US
     Taylor Rafferty (IR/PR Contact in US)
     Ms. Ishviene Arora
     Tel:   [phone]
     Email: [e-mail]


SOURCE  Xinhua Far East China Ratings