case 1:05-cv-02018-rpp document1 filed 02/10/2005 page 1...

Case 1:05-cv-02018-RPP Document 1 Filed 02/10/2005 of 58

UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK

LEONG YAN THIANG, Individually and OnBehalf of All Others Similarly Situated, CIVIL ACTION NO.

Plaintiff,

vs.

CHINA AVIATION OIL (SINGAPORE)CORPORATION LTD., JIA CHANGBIN andCHEN JIULIN,

CLASS ACTION COMPLAINT

JURY TRIAL DEMANDED

Defendants.

Plaintiff, Leong Yan Thiang ("Plaintiff ), individually and on behalf of all other persons

similarly situated , by his undersigned attorneys, for his complaint against defendants , alleges the

following based upon personal knowledge as to himselfand his own acts, and information and belief

as to all other matters, based upon, inter alia, the investigation conducted by and through his

attorneys, which included, among other things, a review of the defendants' public documents,

conference calls and announcements made by defendants, United States Securities and Exchange

Commission ("SEC ) filings, wire and press releases published by and regarding China Aviation

Oil (Singapore) Corporation Ltd. ("China Aviation or the "Company ) securities analysts' reports

and advisories about the Company, and information readily obtainable on the Internet. Plaintiff

believes that substantial evidentiary support will exist for the allegations set forth herein after a

reasonable opportunity for discovery.

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NATURE OF THE ACTION

1. This is a federal class action on behalf of purchasers of the securities of China

Aviation between March 27, 2003 and November 30, 2004, inclusive (the "Class Period ), seeking

to pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act ).

JURISDICTION AND VENUE

2. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of

the Exchange Act, (15 U.S.C. §§ 78j(b) and 78t(a)), and Rule lOb-5 promulgated thereunder (17

C.F.R. §240.10b-5).

3. This Court has jurisdiction over the subject matter of this action pursuant to §27 of

the Exchange Act (15 U.S.C. §78aa) and 28 U.S.C. § 1331.

4. Venue is proper in this Judicial District pursuant to §27 of the Exchange Act, 15

U.S.C. § 78aa and 28 U.S.C. § 1391(b).

5. In connection with the acts, conduct and other wrongs alleged in this complaint,

defendants, directly or indirectly, used the means and instrumentalities of interstate commerce,

including but not limited to, the United States mails, interstate telephone communications and the

facilities of the national securities exchange.

PARTIES

6. Plaintiff, Leong Yan Thiang, as set forth in the accompanying certification,

incorporated by reference herein, purchased China Aviation securities at artificially inflated prices

during the Class Period and has been damaged thereby.

7. Defendant China Aviation is a Singapore corporation with its principal executive

offices located at 8 Temasek Blvd #31-02, Suntec Tower Three, Singapore 038988.

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8. Defendant Jia Changbin ("Jia ) was, at all relevant times , the Company's Chairman

and President of the Company's controlling shareholder, China Aviation Oil Holding Company,

herein after "controlling shareholder.

9. Defendant Chen Juilin ("Chen ) was, at all relevant times, the Company's Managing

Director and Chief Executive Officer.

10. Defendants Jia and Chen are collectively referred to hereinafter as the "Individual

Defendants. During the Class Period, each of the Individual Defendants, as senior executive

officers and/or directors of China Aviation were privy to non-public information concerning its

business, finances, products, markets and present and future business prospects via access to internal

corporate documents, conversations and connections with other corporate officers and employees,

attendance at management and Board of Directors meetings and committees thereof and via reports

and other information provided to them in connection therewith. Because oftheir possession ofsuch

information, the Individual Defendants knew or recklessly disregarded the fact that adverse facts

specified herein had not been disclosed to, and were being concealed from, the investing public.

11. Because of the Individual Defendants' positions with the Company, they had access

to the adverse undisclosed information about the Company's business , operations, operational trends,

financial statements , markets and present and future business prospects via access to internal

corporate documents (including the Company's operating plans, budgets and forecasts and reports

ofactual operations compared thereto), conversations and connections with other corporate officers

and employees, attendance at management and Board ofDirectors meetings and committees thereof

and via reports and other information provided to them in connection therewith.


12. It is appropriate to treat the Individual Defendants as a group for pleading purposes

and to presume that the false, misleading and incomplete information conveyed in the Company's

public filings, press releases and other publications as alleged herein are the collective actions ofthe

narrowly defined group of defendants identified above. Each of the above officers of China

Aviation, by virtue of their high-level positions with the Company, directly participated in the

management of the Company, was directly involved in the day-to-day operations of the Company

at the highest levels and was privy to confidential proprietary information concerning the Company

and its business, operations, growth, financial statements, and financial condition, as alleged herein.

Said defendants were involved in drafting, producing, reviewing and/or disseminating the false and

misleading statements and information alleged herein, were aware, or recklessly disregarded, that

the false and misleading statements were being issued regarding the Company, and approved or

ratified these statements , in violation of the federal securities laws.

13. As officers and controlling persons of a publicly-held company whose securities

were, and are, registered with the SEC pursuant to the Exchange Act, and was traded Over The

Counter ("OTC ) and governed by the provisions of the federal securities laws, the Individual

Defendants each had a duty to disseminate promptly, accurate and truthful information with respect

to the Company's financial condition and performance, growth, operations, financial statements,

business, markets, management, earnings and present and future business prospects, and to correct

any previously-issued statements that had become materially misleading or untrue, so that the

market price ofthe Company's publicly-traded securities would be based upon truthful and accurate

information. The Individual Defendants' misrepresentations and omissions during the Class Period

violated these specific requirements and obligations.

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14. The Individual Defendants participated in the drafting, preparation, and/or approval

of the various public and shareholder and investor reports and other communications complained

of herein and were aware of, or recklessly disregarded, the misstatements contained therein and

omissions therefrom, and were aware of their materially false and misleading nature. Because of

their Board membership and/or executive and managerial positions with China Aviation, each ofthe

Individual Defendants had access to the adverse undisclosed information about China Aviation

financial condition and performance as particularized herein and knew (or recklessly disregarded)

that these adverse facts rendered the positive representations made by or about China Aviation and

its business issued or adopted by the Company materially false and misleading.

15. The Individual Defendants, because of their positions of control and authority as

officers and/or directors of the Company, were able to and did control the content of the various

SEC filings, press releases and other public statements pertaining to the Company during the Class

Period. Each Individual Defendant was provided with copies ofthe documents alleged herein to be

misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent

their issuance or cause them to be corrected. Accordingly, each of the Individual Defendants is

responsible for the accuracy of the public reports and releases detailed herein and is therefore

primarily liable for the representations contained therein.

16. Each of the defendants is liable as a participant in a fraudulent scheme and course

of business that operated as a fraud or deceit on purchasers of China Aviation securities by

disseminating materially false and misleading statements and/or concealing material adverse facts.

The scheme: (I) deceived the investing public regarding China Aviation business, operations,


management and the intrinsic value ofChina Aviation securities; and (ii) caused Plaintiff and other

members of the Class to purchase China Aviation securities at artificially inflated prices.

PLAINTIFF'S CLASS ACTION ALLEGATIONS

17. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or otherwise

acquired the securities of China Aviation between March 27, 2003 and November 30, 2004,

inclusive (the "Class Period") and who were damaged thereby. Excluded from the Class are defen-

dants, the officers and directors of the Company, at all relevant times, members of their immediate

families and their legal representatives, heirs, successors or assigns and any entity in which

defendants have or had a controlling interest.

18. The members of the Class are so numerous that joinder of all members is imprac-

ticable. Throughout the Class Period, China Aviation' securities were actively traded on the OTC.

While the exact number of Class members is unknown to Plaintiff at this time and can only be

ascertained through appropriate discovery, Plaintiff believes that there are hundreds or thousands

ofmembers in the proposed Class. Record owners and other members ofthe Class may be identified

from records maintained by China Aviation or its transfer agent and may be notified ofthe pendency

of this action by mail, using the form of notice similar to that customarily used in securities class

actions.

19. Plaintiffs claims are typical ofthe claims ofthe members ofthe Class as all members

of the Class are similarly affected by defendants' wrongful conduct in violation of federal law that

is complained of herein.

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20. Plaintiff will fairly and adequately protect the interests of the members of the Class

and has retained counsel competent and experienced in class and securities litigation.

21. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by defendants' acts as alleged

herein;

(b) whether statements made by defendants to the investing public during the Class

Period misrepresented material facts about the business, operations and management of China

Aviation; and

(c) to what extent the members of the Class have sustained damages and the proper

measure of damages.

22. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the

damages suffered by individual Class members may be relatively small, the expense and burden of

individual litigation make it impossible for members ofthe Class to individually redress the wrongs

done to them. There will be no difficulty in the management of this action as a class action

SUBSTANTIVE ALLEGATIONS

Background

23. China Aviation is a Singapore-headquartered, multinational investment and oil

infrastructure company. Through its investments, it commands a dominant market presence in

China's jet fuel distribution sector. It also supplies nearly 100% of China's jet fuel imports, and

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supplements its procurement activities with international oil trading in a number of products in

Singapore ' s open oil trading environment . CAO strives to become China's first and largest integrated

oil company with significant overseas assets . The controlling shareholder ofCAO is China Aviation

Oil Holding Company, a large state -owned aviation transportation logistics group , directly

supervised by the Central Government of China. CAOHC owns aviation oil supply infrastructure

at over 100 airports throughout China. It is the eighth-largest jet fuel provider in the world,

supplying jet fuel to more than a hundred foreign and Chinese airlines.

Press Class Statements

24. On November 26, 2001, China Aviation launched its initial public offer ("IPO ) of

144 million shares. Beginning December 6, 2001, the Company would be listed on the Main Board

ofthe Singapore Exchange Securities Trading Limited (SGX-ST). Defendant Chen announced that

at a price of 0.56 Singapore dollars (about 0.31 U. S. dollars) per share , 10 million shares would be

offered to the public with 134 million shares by way ofplacement . Chen also said the CAO plans

to use the estimated 76.6 million Singapore dollars (about 42.8 million dollars) of net proceeds

raised from its IPO for future expansion in China's interior and Hong Kong, for acquisition in the

U. S. and Europe and for company's working capital.

25. Additionally, on November 26, 2001, China Aviation published a prospectus. With

respect to internal controls and risk management, the Company, in its prospectus , stated:

Risk Management

On 1 October 2000, we established a Risk Management Committeeto monitor and control our risk exposure arising from physical andderivative trades at all times, and have adopted a set of riskmanagement procedures that govern our physical and derivativestrades.

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***

On July 2001, we implemented a stop loss limit of US$500,000 foreach Paper Trader for his trades in paper swaps and oil futures tominimize risk exposure to our Company. As we currently have threePaper Traders, the aggregate loss limit for our Company is US$1.5million. Moreover, when the total mark-to-market unrealized loss fora Paper Trader has reached US$200,000 at the end of a trading day,the Managing Director, Mr. Chen and the Risk ManagementCommittee and the trader will be put on alert by our Risk Controller.In the event that the loss reaches the US$500,000 limit, all openpositions must be closed unless approval from the ManagingDirector, Mr. Chen is obtained. Only upon his approval can thepositions in excess ofthe limit be carried out. These positions will bemonitored closely by the Paper Trader and the Risk Controller.

Risk Management Procedure for Hedging with Paper Swaps

When a trader is engaged in a physical trade, he will identify andquantify the expected underlying risk exposure and communicate theexposure to another trader who trades in paper swaps ("PaperTrader ).

***

Risk Management Procedure for Opportunistic Trading in PaperSwaps

Our Paper Traders are authorized by our Managing Director to tradein paper swaps. Our traders may take open positions when they areof the view that their open positions would likely allow profit fromthe market trend based on their market experience. The Paper Traderwill have to strictly adhere to the trading strategy and observe thestop loss limit. Once the open position is created, the Paper Traderwill monitor the market and his open position on a 24-hour basisthrough his oil broker. As in the case for hedging, the Paper Traderwill submit the trade details to the Risk Controller who will check thedetails before recording them into the centralized database.

Materially False And MisleadingStatements Issued During The Class Period

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26. The Class Period commences on or about March 27, 2003. At that time, the

Company issued a press release , entitled "Full Year Financial Statement And Dividend

Announcement, therein the Company stated:

Review Of Performance

Turnover increased by 60.8% from S$1,051.0 million to S$1,689.6million. The Group has actively built up its international tradingactivities through the recruitment of experienced traders. Thisdoubling of the oil trading team to 10 traders has resulted in a largeincrease in the revenue base of international trading, especially in theblack petroleum and crude oil segments. Black petroleum productsand crude oil together accounted for about 50% (S$851,531) of theturnover in 2002, compared to only 27.6% in 2001.

Gross profit, excluding that in the area of strategic investment,slipped 14.5% to S$38.3 million from S$44.8 million, due mainly totwo factors. More customers have requested for floating pricecontracts, instead ofthe fixed contracts in the past, to better track theprevailing market conditions. The Parent Group had negotiated forreduced commissions to which CAO had agreed to in view ofcontinuing long-term benefits. In return, upon representation byCAO, the Parent Group had agreed to drop its request formanagement fees which was provided for previously in 2000. Inaddition, the Group also started trading in new products whosemargins are traditionally thin. To establish its market presence, theGroup was aggressive in its pricing to build up the base for futuretrades.

In July 2002 , the Group finalised and signed two agreementspertaining to its strategic investments in a 33%-equity stake inShanghai Pudong International Airport Aviation Fuel SupplyCorporation Ltd ("SPIA/AFSC ) and a 5%-equity stake in Spanishoil giant Compania Logistica de Hidrocaburos S.A. ("CLH ). Therespective agreements provided for the Group ' s share ofSPIA/AFSC's profits and share of dividends from CLH to accruefrom 1 January 2002.

SPIA/AFSC is the sole supplier of jet fuel at the Shanghai PudongInternational Airport (SPIA) and the owner of a 42 km pipelinedirectly connecting SPIA to Shanghai Wai Gaoqiao port. CLH ownsthe largest network of oil pipelines and storage facilities throughout

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Spain and has an 83% market share of its gasoline and gas oildistribution, and 100% market share of its jet fuel distribution. CLHoffers the Group a solid base in Europe from which to extend its jetfuel business in the European market.

27. Also on March 27, 2003, the Company issued a press release entitled "China Aviation

Oil Reports Significant Gains in 2002 From Its Successful 3-Pronged Strategy, therein the

Company stated:

Mainboard-listed China Aviation Oil (Singapore) CorporationLimited ("CAO ) released its results for the financial year ended 31December 2002 ("FY 2002 ) and said its strategy to strengthen theGroup's revenues and profitability through downstream investmentsin oil and gas-related infrastructure to complement its jet fuelprocurement and international oil trading businesses has paid offhandsomely.

CAO said that based on the agreements it had signed for two majorinvestments in FY 2002 which had provided for CAO's share ofprofits and dividend distribution to accrue from January 2002, theGroup had recorded pro-forma profit before tax of S$66.5 million andnet profit after tax of S$57.9 million, thus registering pro-formayear-on-year growth of 49.5% and 42.9%, respectively. Of the totalinterim dividends from CLH for 2002, 2.5 million Euros (S$4.6million) were received in March 2003, and will be reflected in the FY2003 results.

However, in adopting the accounting treatments of offsetting againstthe respective costs of investments for both CAO's share of profitsfrom SPIA/AFSC for the period 1 January to 30 June 2002, as wellas the first dividend payment by CLH in July 2002 for 1.4 millionEuros (S$2.4 million), the Group recorded a profit before tax ofS$54.6 million for FY 2002 (22.8% increase over FY 2001) and a netprofit after tax of S$48.2 million (18.9% increase over FY 2001'sS$40.6 million).

In July 2002, the Group invested in a 33%-equity stake inSPIA/AFSC , the sole supplier of aviation fuel at theShanghai-Pudong airport, and a 5%-equity stake in CLH, Spain'sleading company in the petroleum transportation and storage marketand the owner of an exclusive network of oil pipelines and storagefacilities in the country.

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The two investments comprised the third prong ofCAO's long-termstrategy to reduce dependence on jet fuel procurement for the civilaviation industry in China, and to position the Group to emerge as aninternational player in downstream oil and gas-related infrastructureand logistics and also as a major international oil trading company.

Group revenue jumped 60.8% to S$1.69 billion from FY2001'sS$1.05 billion. The higher revenue in FY 2002 was attributed toCAO's doubling of its trading team to 10 experienced traders. Thisresulted in a significant increase in the revenue base of internationaloil trading, in particular a 97%-rise in revenue to S$527.7 millionfrom Black Petroleum Products, which include fuel oil used as fuelfor power stations and marine boilers, and also contributions fromcrude oil trading.

Said Mr. Chen Jiulin, CAO's Managing Director and CEO, "Theuncertainties in the global market worsened by the then-imminentU. S. military strike against Iraq made 2002 a challenging year.Against this difficult operating environment, our strategy ofpursuingdownstream integration into oil and gasrelated infrastructure andindustrial businesses and expanding our international oil trading hasstabilised the Group's performance.

We are also optimistic offorging strategic alliances with internationalplayers in the near future. Going forward, the Group is fundamentallyin a much stronger position now and able to capitalise on moreopportunities that will springboard the Group towards our vision ofbecoming a global player in the oil industry.

28. On August 29, 2003, the Company issued a press release , entitled "1H/2Q Financial

Statement Ended 30 June 2003, therein the Company stated:


The Group achieved net profit after tax of S$11.3 million for thesecond quarter of 2003 compared to S$7.9 million for thecorresponding period of 2002, an increase of 41.9%.

Revenue increased 15.7% to S$465.8 million from S$402.6 millionin second quarter 2002, a result of the Group increasing the numberof professional traders employed.The 41.9% increase in net profit is attributed to the Group'sthree-prong strategy - investing in oil-related assets , expanding

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international oil trading and jet fuel procurement which was fullyrealised from July 2002 with the acquisition of equity stakes inSpanish oil giant Compania Logistica de Hidrocarburos ("CLH ) andShanghai Pudong International Airport Aviation Fuel Company("Pudong ).

The increase in Other Income of 15.6% is substantially due to thereceipts ofthese dividends from CLH for FY 2002, equivalent to S2.3million in the second quarter of 2003. Share of results of associatecompany Pudong amounted to S$8.7 million. Thus, CAO's twostrategic investments contributed 77% ofthe Group's pretax profits.

The outbreak ofthe SARS epidemic during the second quarter furtherunderscored the effectiveness of the Group's three-pronged strategyin stabilising profits. The short-term negative effect of SARS on theGroup's jet fuel procurement business and Pudong's operations asoutlined in the Group's announcement on 7 May 2003 did notextensively affect the Group as anticipated. As the authorities inChina were able to contain the virus from spreading further, demandofjet fuel imports have since rebounded in July 2003 in line with theincreasing reinstatement of flights back to pre-SARS levels.

Gross profit decreased to S$6.5 million compared to S$10.9 million,a decrease of40.6%. This was due to the reduction ofcommission forjet fuel procurement beginning from the second halfof2002. Anothercontributing factor was that the margins for new products traded fromthe second half of 2002 are traditionally low. These factors, coupledwith the fact that the Group has to trade margin to establish itspresence in the international oil market, reduced the gross profit ofthe Group.

Commentary On Prospects

***

Strategic investments, international oil trading and jet fuelprocurement are all on track for growth in the current quarter. Furthernormalization of procurement volumes should be seen in the fourthquarter as well.

In July 2003, the company signed a syndicated loan agreement with10 banks for a transferable term credit facility of US$160 million.The proceeds of the loan would be used for working capital and tofinance any investment opportunities that may arise. Whether the

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Case 1 : 05-cv-02018-RPP Document 1 Filed 02/10/2005 of 58

loan is ultimately drawn down and how much of it would be drawndown depends on the investment opportunities that the company hasbeen considering , including possibilities in the US , China andASEAN. The impact on earnings ifthe loan is utilized depends on theamount of draw down and the use of the loans.

29. On or about November 15, 2003, the Company issued a press release , entitled "3Q

Financial Statement Ended 30 September 2003, therein the Company stated:


The Group achieved net profit after tax of S$10.4 million for the

third quarter of 2003 compared to S$8.0 million for the

corresponding period of 2002, an increase of 29.2%. Turnover

increased by S$10.0 million or 2.0% to S$511.8 million from

S$501.8 million in third quarter of 2002.

Gross profit increased to S$13.4 million compared to S$6.6 million,

an increase of 101.4%. Record sales ofjet fuel procurement volume

posted in the third quarter of2003 coupled with healthy international

oil trading profitability contributed to the strong growth in the gross

profit.

Operating expenses increase by S$3.4 million due to the increased

number of staff that the Group employed for its expansion in

international oil trading, including traders and the necessary support

staff. In addition, the Group incurred S$2.8 million arrangement fee

for its syndicated loans, which were expensed in 3Q 2003.

The Group's share of profits before tax from associated companies

decreased from S$9.1 million in 3Q 2002 to S$6.6 million in 3Q

2003, a decrease of 27.7%. The decrease was due to an increase in

international oil prices without any corresponding increase in selling

price, which is set by the Chinese Government, and the mix between

imports and domestic supply that the Pudong associate provided.

In 3Q 2003, the Company received from Pudong a distribution of

retained earnings of RMB 39.6 million (S$8.3 million) accrued in

years prior to 2002. This was offset against the purchase price for

Pudong. In addition, the company received from Pudong a dividend

ofRMB 105.6 million (S$22.4 million), which was paid out of the

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financial year 2002 profit. The distribution of the retained earnings

and the dividend from financial year 2002 profit have no effect on

the results of the Group.

In July 2003, the Group signed a syndicated loan agreement with 10

banks for a transferable term credit facility of US$160 million. The

proceeds of the loan would be used for working capital and to

finance any investment opportunities that are successfully negotiated

by the Group. As of the date of this announcement, the loan facility

has not been drawn down.

Commentary On Prospects

There has been a steady increase in jet fuel procurement volume for

China since the ending of the SARS epidemic. The 3rd quarter jet

fuel procurement volume was the highest to-date, and the Group

expects the 4th quarter procurement volume to be the highest for the

year 2003.

The Group is currently engaged in negotiations to invest in assets in

China, USA and ASEAN. The conclusion of any deal depends on

the Group being satisfied that the investments meet or exceed the

investment criteria laid down by the Group must be oil related; may

involve infrastructure; must offer opportunity for synergy with our

existing business lines, and more broadly with the Group

three-pronged strategy; and must be available at a fair price.

The Group expects that the current soft interest rate environment

may change in the near term. The US economy is expected to grow,

and though pronouncements have been made to the effect that the

US Federal Reserve is not expected to adjust rates in the near term,

the Group has had discussions with banks on the possibility of

hedging interest rate exposure on the syndicated loan in the event

that the syndicated loan is drawn down.

The reduction in Shanghai Pudong's gross margin is expected to

carry forward to the 4th quarter of 2003. As in the 3rd quarter, the

effect will carry through to the net profit of Shanghai Pudong and

ultimately the Group's share of Pudong's net profit. However, the

effect on the Group's performance may be offset by contributions

from the volume increase in jet fuel procurement.

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30. On February 5, 2004, China Oil announced that it had purchased a 24.5% stake in

South China Bluesky Aviation Oil Co. Ltd ("Bluesky") from Fortune Oil Plc of the UK. More

specifically, the Company, in its press release , stated:

Bluesky is 51 %-ownedby CAO's sister company, China Aviation OilSupply Corporation ("CAOSC"); oil major BP holds 24 . 5%. Blueskyowns all of the jet fuel supply infrastructure in the 15 airports inCentral and Southern China, and is the sole jet fuel supplier to alldomestic Chinese and foreign airlines in that region. Among theseairports are those in the five provincial capitals , i.e., Guangzhou inGuangdong Province , Nanning in Guangxi Autonomous Region,Wuhan in Hubei Province, Changsha in Hunan Province, andZhengzhou in Henan Province. In addition , Bluesky serves the fourtourism airports of Guilin and Beihai in Guangxi AutonomousRegion, Zhangjiajie in Hunan Province, and Yichang in the ThreeGorges area of Hubei Province.

Mr. Chen Jiulin, CAO's Managing Director and CEO, said, "So far,this is the largest investment project we have entered. It willsignificantly add to our comprehensive network of businesses inChina. The acquisition will not only bring us an immediate positivecontribution to earnings, but more importantly, this investment willoffer significant synergies with our Strategic Investments,International Oil Trading and Jet Fuel Procurement businesses."

Multiple Synergies With Current Operations

With the stake in Bluesky, CAO will directly reap a return on itsinvestment, and enhance the existing imported jet fuel supply to thiscompany. CAO will recognise as associate income 24.5% ofBluesky's profits in the financial year ending 31 December 2004.Moreover, CAO's current volumes of imported jet fuel supplied toBluesky will increase. CAO gains direct participation in Bluesky'smanagement with the appointment of 2 of 8 directors on the Boardand assigning a deputy General Manager and other executives toBluesky. CAO and its sister company will jointly hold 75.5% ofBluesky's shares outstanding.

In addition, this acquisition can create other synergies, as follows:

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Currently CAO has a 33% stake in the Aviation Oil Company atShanghai Pudong Airport and an 80% stake in the Shuidong oilstorage tank farm located adjacent to the Maoming refinery, China'ssecond-largest refining facility. The combination of Bluesky, thePudong associate and the Shuidong subsidiary creates acomprehensive network, providing significant presence in theChinese market, and solidifies CAO's growth strategy. For example,Shuidong tank farm can directly supply jet fuel to Bluesky so as toensure it an uninterrupted and possibly cheaper supply. Meanwhile,Bluesky's direct purchase of jet fuel from Shuidong will increaseShuidong's utilisation rates and CAO's return on the Shuidonginvestment, thus creating a smooth supply chain and enhancingCAO's value added. The same scenario can be applied among thePudong, Bluesky and Shuidong operations.

The Bluesky stake expands CAO's presence in southern SouthernChina, one of the country's fastest-growing regions, giving itpresence in more than half of the country and enhanced control of itsmarkets . It also opens up new opportunities for CAO's fuel oil andcrude oil trading in the South . According to experts , nationwide oildemand is expected to grow at an average annual rate of 12% overthe next two decades . By 2020, total oil demand will reach 450million metric tonnes a year . Dependence on supply sources outsideof China will rise to 60%, compared with 30% currently . Of totalimports , 60% will be consumed in southern China. Following theacquisition, CAO will have the further opportunity ofusing Bluesky'ssurplus tank capacity and networks to expand its International OilTrading business in South China.

"Significant Long Term Growth Potential

The new Guangzhou Baiyun International Airport will becameChina's largest, measured by throughput capacity, with the openingof the first phase in July 2004, as major construction was completedin August 2003. In 2005 the new airport will record its first full yearofoperations. Longer term, a second phase ofconstruction, slated for2010 completion, is expected to more than double the size of theterminal complex and, according to media reports, may attract up to80 million passengers a year.

In that context, international courier company FedEx will relocate itsregional hub from the Philippines to Guangzhou following theopening ofthe new facility, with 21 aircraft using Guangzhou airportservices in the first stage. Chinese domestic and international airlines

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already have plans to add flights: Air France and Lufthansa haveplans to fly to Guangzhou, while China Southern Airlines is planningflights to Paris and Frankfurt. These new routes should encourageother airlines to use Guangzhou as a hub, given China Southern'sextensive domestic route network, particularly in central and southernChina. China Southern Airlines, which has its headquarters and mainhub at Guangzhou, is already gearing up for significant growth, withits announced purchase of21 Airbus A320 aircraft in January and sixHafei Embraer ERJ-145LR aircraft in early February.

This is expected to contribute to the increase in jet fuel consumption

and expand Bluesky's business. Together with an increase ininternational flights at the other provincial capitals' airports (whichcontribute approximately half of Bluesky's volume), it is anticipatedthat Bluesky's volumes will rise 25% in 2004 and a further 20% in2005, with estimated growth of 15-20% each year through 2008.

However, despite such high growth, Bluesky's operating costs shouldreap efficiencies, for several reasons:

--The five capital and four tourism airports are brand new. There are

unlikely to be any large maintenance-related investments in the near

term.

--The total headcount has been reduced from over 1,000 in 1998 to600 currently, as a result of efficiency and productivity initiatives.This has resulted in labour efficiency higher than the average forChinese airport fuel supply companies.

--As such, unit operating costs in the Bluesky network are lower thanthe average for Chinese airport fuel supply companies.

It is anticipated that the high growth and low costs at Bluesky willyield a significantly positive impact to CAO even in the first yearfollowing its investment.

Attractive Acquisition Terms

The terms of CAO's acquisition are attractive, given the growthpotential and synergies. CAO will pay to Fortune Oil PLC cashamounting to US$21.7 million or RMB180 million, will issue to it37.76 million new shares, or 5.2% of CAO's enlarged sharesoutstanding, and will issue options to buy 26 million new shares at

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S$1.60 per share. This transaction involves no debt. Cash on hand issufficient to meet the cash portion of the purchase, while the issue ofshares and options will dilute earnings by less than the amount whichthe Bluesky stake enhances profitability. The issuance ofnew sharesand options is designed not to increase CAO's gearing and to leavesufficient available funds for CAO's further investment plans. Thearrangement also reflects Fortune Oil Holding's great confidence inCAO's potential growth. Barring unforeseen circumstances, there isexpected to be a positive impact on CAO's 2004 aggregate earningsand earnings per share as a result of this deal.

Commenting on the agreement, CAO's Chairman, Mr Jia Changbin,added; "The advantages conferred by this deal are many. First,Bluesky is profitable in its own right, and offers opportunities forsynergy with our existing businesses. Second, the pricing is attractiveand will enhance earnings per share. Third, it may be possible toforge an even closer relationship with BP, currently our only otherpartner in Bluesky besides our sister company. In combination, theseadvantages show the good fortune CAO has had in securing such alucrative opportunity

31. On February 16, 2004, China Oil announced additional off-spot cargoes and a deal

with a new customer in Hong Kong, and said the Company's jet fuel procurement and international

oil trading division was on track to achieve record growth in the financial year ending December 31,

2004 ("FY 2004"). Commenting on these results , defendant Chen stated:

We are pleased that CAO has kicked off 2004 with a superb start inall three ofour business lines - strategic investments, international oiltrading, and jet fuel procurement. Our international oil tradingdivision has made inroads into new markets. In 2003, our trading incrude and naphtha for Korea and Japan alone accounted for at least700,000 MT; for 2004, transaction volume secured to date amount to500,000 MT. From 2004 onward, this division will be able to reap thebenefits ofnew synergies and trading opportunities arising from ourrecent investments in Bluesky and Shuidong oil tank farm. Withgrowing economic prosperity, more people in China are willing tospend more on air travel. This is leading to higher jet fuelconsumption and, in turn, better potential returns from our integratedinvestments in Pudong, Shuidong and Bluesky.

19


32. On February 29, 2004, China Oil announced robust year-on-year growth in profits

for the financial year ended December 31, 2003 ("FY03 "). The Company's three-pronged business

strategy proved resilient in the face of adverse conditions - the Iraq war, the outbreak of SARS, and

the ongoing threat ofterrorism - and enabled the company to post growth in all business lines. More


Normalised profits growth of 60%

The Group recorded net profit after tax ("NPAT") of S$54.3 millionfor FY03, a 12.5% increase over FY02's S$48.2 million. Profit beforetax ('PBT") was S$67.1 million, a 22.8% gain on the financial yearended 31 December 2002 ("FY02"). However, the FY02 resultsincluded exceptional items amounting to S$12.7 million, arising fromthe write-back ofunutilised provisions for management fees and staffbonuses in prior years. These exceptional items were included inFY02's fourth quarter (Q4 FY02). Excluding these exceptional items,pre-tax profit for FY03 rose 60.0% over FY02.

For Q4 FY03, CAO's PBT and NPAT were S$20.6 million andS$14.5 million , respectively. Stripping out the exceptional items fromQ4 FY02 earnings , Q4 FY03's PBT thus was up 62 . 9% over Q4FY02.

Meeting the challenges of a difficult year

Commenting on the above results, Managing Director and CEO Mr.Chen Jiulin said, "We are pleased that our diversification strategy hasprevailed through the toughest trading conditions to date during thegreater part of2003. Market conditions were buffeted by the outbreakof war in Iraq, continued terrorist threats, and the SARS epidemic.Such circumstances were unprecedented andbeyond our control, withspecial challenges for oil- and China-related companies.

Oil prices fluctuated substantially over the year.; SARS decimatedChinese domestic air travel and flights were dramatically curtailed in2Q. Our good results that quarter attest to the efficacy of ourrisk-management systems and to the acumen of our experiencedtraders. The subsequent strong rebound in jet fuel demand in 3Q &4Q more than offset the earlier fall. Meanwhile, as expected, strategicinvestments were the main contributor to our bottom line. Profits

20


from our investments , Compania Logistica de Hidrocarburos("CLH") of Spain and Shanghai Pudong International AirportAviation Fuel Supply Company ("Pudong"), accounted for 68% ofFY03's PBT. International oil trading and jet fuel procurementaccounted for 14% and 18% respectively, owing largely to theexceptionally strong growth in procurement volumes we saw in thesecond half of the year."

Investments support growth

The total contribution by Strategic Investments for the year, net ofgoodwill amortisation, was S$45.3 million at the pre-tax level,compared with S$19.2 million in FY02, for a 137% gain.

Associate profits, contributed by 33%-owned Pudong increased68.9% to S$34.5 million. FY03 was the first year CAOequity-accounted Pudong's full -year results, and the contribution wasless than expected. As previously reported, this was due to theChinese authorities holding the resale price of jet fuel constantdespite increases in international oil prices, in order to help thedomestic aviation industry through the SARS crisis. AlthoughPudong's gross margin saw a gradual reduction during 2003, it isexpected to stabilise in 2004. In addition, three dividends werereceived from 5%-owned CLH of Spain in FY03, achieving goodreturns on the investment.

Trading and procurement have a great year

Group revenue from CAO's international oil trading and jet fuelprocurement businesses rose 43.5% to S$2.43 billion, ofwhich salesin clean petroleum products accounted for 60%. Trading gross profitincreased 20.3% to S$46.1 million. In Q4 FY03 alone, the Companyrecorded a 14.35% increase in revenue to S$654 million compared toQ4 FY02, while gross profit for the quarter rose 80.8% over theyear-earlier period to S$12.7 million.

Operating expenses increased by S$9.1 million, due to variousfactors: the Company's increased headcount, including skilled traderson the back of expansions in the international oil trading division; afull year's amortization of goodwill for Pudong acquisition; and theUS$1.6 million arranger fee for the US$160 million syndicated termcredit facility signed in July 2003. As of 29 February 2004, thisfacility has not been drawn down, as cash on hand was sufficient tofulfil the cash component in the recent transaction to acquire Fortune

21


Aviation Holding, whose sole asset is 24.5% of the sharesoutstanding of South China Bluesky Aviation Oil Co., Ltd("Bluesky").

Financial standing remains strong

During 2003, CAO received from Pudong a dividend ofRMB 105.6million, paid out of Pudong's FY02 profit. It also received adistribution of retained earnings of RMB 39.6 million accrued inyears prior to 2002, which was offset against the purchase price.Neither transaction had an effect on the Company's profits.

During the year, CAO was awarded an extension ofits Global TraderProgram membership for an additional five years. The Companycontinues to pay a concessionary tax rate of 10% for qualifyingtransactions.

Positive outlook in place

Looking ahead, Mr. Chen added, "Currently, plans are progressingsmoothly for CAO, but we must be prepared for any shocks in theexternal environment . With our new investments , Bluesky and theShuidong oil tank farm, boosting our oil-related infrastructureportfolio, the Group is now in a much stronger position to meetchallenges as they arise.

Jet fuel procurement volumes for Q1 FY04 will be the highest everfor the quarter, marking a third consecutive quarterly record. Judgingby current trends , we expect to maintain or exceed 2003 levels. Wealso still have a substantial 'war-chest ' to enhance our bargainingpower as we consider various investment opportunities , and we willcontinue to pursue more strategic investments according to our owntimeline , as well as our strict investment criteria."

CAO Chairman Mr. Jia Changbin said, "CAO has managed to growshareholder value in 2003 despite challenging external events. Inview of the results and continuing positive outlook, the Board hasproposed to reward shareholders with a dividend of 3.5 Singaporecents per share, and two bonus shares for every five shares held,which translates to a dividend yield of 1.8%, will further increase ourshares' liquidity, and will express our gratitude to our shareholdersfor their loyalty through a challenging but ultimately rewarding year.

22


The Group's 'growth triangle' is now firmly in place, comprising ourhead office in Singapore, the world's 3rd largest oil trading hub;Pudong in Shanghai, China's economic power-house, and FortuneAviation/Bluesky and Shuidong in the heart of China's southerneconomic region. Additionally, CAO has top-level access to globaloil majors through our investment in CLH. Thus, we are optimisticCAO is on track to achieving record profitability in 2004."

33. On March 9, 2004, China Oil announced details of its jet-fuel procurement

requirements for the April-June 2004 quarter. Total volume for the quarter was expected to grow

at least 84% compared with the April-June 2003 quarter, and 33% compared with the April-June

2002 period. More specifically, the Company, in its press release , stated:

Mr. Chen Jiulin, CAO's Managing Director and CEO, said, "Thisfigure represents only the initial bulk purchase, and there may beadditional spot tenders later in the quarter. The high volumes weexpect in the upcoming period follow on from the strength we saw inJanuary through March, as recently demonstrated with our additionalspot orders, announced only a few weeks ago. While April to June isusually a relatively quiet period forjet fuel procurement, this year theperiod will see the fourth consecutive quarterly record in requiredvolumes. "

Growth at major airports

Requirements for the quarter include 210,000 metric tonnes fordelivery to Beijing Capital International Airport, 210,000 metrictonnes for delivery to Pudong International Airport, and 90,000metric tonnes for delivery to Guangzhou Airport. The total thusamounts to 510,000 metric tonnes, compared with 277,400 metrictonnes in April-June 2003.

Pudong demand is the most significant driver of growth. As shownin the table below, Pudong requirements have grown steadily, and thePudong International Airport now comprises a major part of totaldemand. (2003 numbers were slightly distorted by SARS, whichdisproportionately affected Beijing air travel demand.) CAO benefitsin this regard not merely through its procurement activity, but alsothrough its 33% stake in the Pudong airport jet fuel supply company.(The Beijing airport jet fuel supply company currently is 100%owned by CAO's parent company.)

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Case 1:05-cv-02018-RPP Document 1

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Filed 02/10/2005 of 58

Bluesky growth will not be significant in April-June, but is expectedto grow dramatically in subsequent quarters . This is because in 2004,the new Guangzhou Baiyun International Airport is expected to open,at significantly higher capacity than the existing airport . It is expectedthat in addition to this growth in overall jet fuel consumption byBluesky, the percentage of demand served by imports - that is,provided by CAO - will rise . The new airport will be connected toHuangpu port by a jet fuel pipeline that has specifically been built inorder to allow greater access by imported fuel.

Optimal timing

Mr Chen continued: "This year, CAO expects to see a string ofpositive developments. Procurement is obviously having a strong firsthalf. Investment contributions should rise dramatically. First there isthe maiden contribution of our recent acquisition of the FortuneAviation Holding stake, which owns 24.5% ofBluesky. Furthermore,there is the opening of the new Guangzhou Baiyun InternationalAirport during the course of this year, an event likely to boostBluesky's profitability significantly. In addition, several of thelonger-term trades that we concluded in 2003 will bear their greatestfruit in 2004. Overall, therefore, all three of our business arms aregrowing, and we are extremely bullish on our prospects for thecoming year."

34. On August 31, 2004, the Company issued a press release entitled "China Aviation

Oil's Jet Fuel Procurement Volume Hits Record Of 2.59 million Metric Tonnes In 2004, Up 30.2%

From 2003." The press release, in relevant part, stated:

SGX Main Board-listed China Aviation Oil (Singapore) CorporationLtd ("CAO") announced that its initial tender for j et fuel procurementvolumes during the October-December quarter was some 43.8%higher than the initial tender for the comparative period a year earlier.It also announced that full -year procurement volumes would be atleast 30% higher than those recorded in 2003 , reaching a record 2.59million metric tonnes.

Mr. Chen Jiulin, CAO's Managing Director and CEO, said, "Thelarge size of the upcoming quarter's fuel requirements is strongevidence that the commercial aviation sector in China remains robust.

24


As the substitution ofimportedj et fuel for domestic production beganin the latter part of 2003, the effect of such substitution onyear-on-year comparisons has now been eliminated. Despite this, thenumbers still definitively point to an upward trend. "A record year isclinched.

CAO, on 24 August, issued an invitation to tender for 630,000 metrictonnes of jet fuel, to be delivered during the October-Decemberquarter. The tender closed 30 August and negotiations are underwaywith suppliers, including (among several others) Singapore PetroleumCompany, in which CAO recently acquired a 20.6% stake. Thistender is 43.8% higher than the initial tender made for theOctober-December 2003 quarter, and in line with the 630,000-tonneorder placed for the July-September 2004 quarter. It is the fifthconsecutive quarter in which volumes have exceeded 600,000 metrictonnes. In fact, the current fiscal year is the first in which volumeshave exceeded 600,000 metric tonnes in all four quarters.

It should additionally be borne in mind that in most quarters, theinitial bulk purchase proves insufficient to meet total quarterlydemand, and additional spot tenders are required. In theOctober-December 2003 quarter, for instance, the initial438,000-tonne order grew to 662,000 metric tonnes. It is thusreasonable to expect additional spot tenders in the upcoming quarteras well, and these will result in even higher growth.

For the full year 2004, the initial tender puts total procurementvolume at 2,588,000 metric tonnes. This is 30.2% higher than the1,988,000 metric tonnes recorded in 2003. If additional spot tenderstake place between now and the end of the year, the total growth willnaturally be higher still.

CAO's Chairman, Mr. Jia Changbin added: "On top of all the otherpositive news we have so far reported this year, it is gratifying to seethat jet fuel procurement, one of our core businesses , remains sobuoyant. As we have been saying over the past several months, CAOis clearly on track to report record earnings in the current fiscal year."

35. On April 26, 2004, China Oil announced that following additional spot contracts

secured since the Company's last update on 9 March 2004, the latest total jet fuel procurement

volume for the April-June 2004 quarter ("2Q2004") had grown 127% y-o-y compared to the total

25


277,400 metric tonnes achieved for the corresponding second quarter in 2003 ("2Q 2003") and a

64.5% increase over 2Q 2002's total of 383,000 metric tonnes . More specifically, the Company, in

its press release, stated:

Together with previously announced tenders of 510,000 metrictonnes on 9 March 2004, the total anticipated volume for 2Q2004now stand at 630,000 metric tonnes, a 4.5%-increase over theJanuary-March 2004 quarter, despite a seasonally weaker quarter.

The latest spot contracts for an additional 120,000 metric tonnes areslated for delivery to CAO's 24.5%-owned associate company inGuangzhou, South China Bluesky Aviation Oil Co. Ltd ("Bluesky")and 33.3%-associate company, Shanghai Pudong InternationalAirport Aviation Fuel Supply Company Ltd ("Pudong") in fourseparate cargoes. Three cargoes of 90,000 metric tonnes are boundfor Pudong.

Demand for jet fuel is expected to remain strong despite recentreports on initial cases of Severe Acute Respiratory Syndrome("SARS") in China. Commenting on the above, Mr. Chen Jiulin,Managing Director and CEO of CAO, said: "We believe theadditional spot orders CAO has recently received are strong signalsthat China's aviation industry is confident of continual performancedespite the initial cases of SARS reported in China. Unlike last yearwhen the authorities and industry players were caught off-guard bya disease that no one knew about until much later, since then allrelevant parties have monitoring and alert systems in place foradvance warning and adequate pre-emptive actions will beprogressively taken at the onset of new SARS cases that can nip thedisease in the bud."

36. On May 13, 2004, China Oil reported strong earnings for the period January-March

2004 ("IQ FY04"), thanks in particular to a strong recovery by the Company's 33%-owned associate

company Shanghai Pudong International Airport Aviation Fuel Supply Company ("Pudong"). More


Managing Director and CEO Mr Chen Jiulin said "In 2004 we areseeing our three-pronged business strategy come to full fruition.Strategic investments are driving our profit growth and with market

26


conditions remaining broadly favourable, our results should continueto improve throughout the year."

Fundamentals intact

Net profit in IQ FY04 was S$16.2 million, compared with S$18.1million for the year-earlier period ("IQ FY03"). This decline isattributable to the fact that in 2003, a dividend received fromCompania Logistica de Hidrocarburos ("CLH") in which CAO holdsa 5 percent stake, amounting to S$4.7 million with respect to 2002interim earnings, was recorded during the January-March period. Bycontrast, the equivalent dividend for 2003 interim earnings wasbooked by CAO in its October-December period ("4Q FY03 ").

Allowing for this timing difference, normalised after-tax profits rose12.6 percent in IQ FY04 compared with IQ FY03.

However, even this relatively robust growth understates the actualstrength of the Company's results, owing to a higher-than-usualpercentage of fixed-price procurement contracts during the 2003period. Typically, the Company does the vast majority of itsprocurement business on a floating-price basis, which minimises riskbut sustains margins at lower levels. In the run-up to the Iraq war inearly 2003, opportunities to enhance procurement margins wereplentiful, and the Company took advantage ofthese by booking morefixed-price contracts. This had the effect of making growth inprocurement business in 1 Q FY04 appear less significant than it was.In fact, total procurement volumes inclusive of spot orders in IQFY04 were 603,000 metric tonnes, some 34 percent higher than 1QFY03, and a record for the quarter.

Total turnover was S$583.4 million, down 8.8 percent from 1QFY03. This decline was due to a cautious stance on trading activities,as difficult conditions persisted in international oil markets,discouraging large-scale positions. The Company's measuredapproach had the desired effect, however, boosting the overallprofitability ofthe procurement and trading businesses. Gross profitswere S$15.2 million, up 11 percent compared with the S$13.6 millionbooked in IQ FY03.

Pudong rallies

The real star for the quarter was CAO's associate company Pudong.After two quarters in which margins were squeezed by domestic

27


jet-fuel pricing policies , Pudong returned to growth with acontribution of S$11 .2 million , up 19 percent compared with IQFY03 . Quarterly volumes at Pudong gained 20 percent year-on-year,reaching 309,000 metric tonnes - a quarterly record . Meanwhile,domestic resale prices have also substantially recovered, enablingPudong to post year-on-year growth in profitability as well.

This is a significant event in that January-March 2004 was the firstquarter in which the Pudong contribution grew on a truly'apples-to-apples' basis - that is, no one-time changes distorted thecomparison. Regulations shifting international flights to PudongAirport from Shanghai's Hongqiao Airport in the second halfof2002,following soon after CAO's acquisition of the Pudong stake, hadobscured the pattern of organic growth that is now visible in thecurrent quarterly figures.

Outlook grows brighter

The coming quarters offer good reasons for optimism. In theApril-June period ("2Q FY04"), procurement volumes will reachanother all-time high - not merely relative to 2Q FY03, but for anyquarter. Despite April-June traditionally being a relatively slowseason, in 2004 procurement volumes booked so far for thethree-month period stand at an estimated 690,000 metric tonnes, thehighest quarterly volume ever. (Estimates will vary from actual as notall loadings have been made as of this writing, and the possibilityremains of additional spot cargoes being required.)

Margins will not suffer by comparison with the 2003 period like theydid in 1 Q FY04, as the Company had reverted to normal,floating-price contracts during 2Q FY03. In addition, newinvestments should make maiden contributions in the quarters tofollow. CAO's newly-acquired Shuidong oil storage tank farm and its24.5-percent stake in South China Bluesky Aviation Oil Co Ltd("Bluesky") should add to operating and associate profits,respectively. There may also be an initial contribution from a20-percent stake that CAO plans to take in Horizon Terminals Ltd("HTL"), the tank-terminal subsidiary of the Emirates National OilCompany ("ENOC").

A breed apart

Due to its bright prospects, CAO stands apart in a potentially adverseset of market conditions. At present the danger posed by SARS

28


remains limited in scope. It is believed that cases recently reported inChina will be successfully contained, although market sentiment maysuffer temporarily. As well, CAO should not be impacted by fiscalrestraints imposed by the government in an effort to cool down therapid growth in China's economy, as these restraints are focused noton oil product demand but rather on runaway prices for certainspecific asset classes , such as property. Indeed, all indications are foroil demand to remain robust throughout the year.

CAO should maintain profitability and growth, and at the same timesolidify its place along the Chinese energy supply chain through itsdeepening relations with ENOC and HTL.

CAO Chairman Mr Jia Changbin said, "Under the circumstances, weare quite pleased with these results for IQ FY04. The rest of the yearshould prove even more satisfying. Our business model is beingwell-implemented, with the effect that future gains from newinvestments should come with regularity and speed. All in all, weremain confident in our ability to create value for our shareholders."

37. On August 12, 2004, China Oil reported strong, 48.6% year-on-year growth in

earnings for the April-June 2004 quarter , led by contributions from the Company' s strategic

investments, record volumes in its procurement operations and a still lower concessionary tax rate

under Singapore's Global Trader Programme . More specifically, the Company, in its press release,

stated:

For the April-June quarter, CAO reported net profits of S$16.7million, representing 48.6% growth over the April-June 2003 quarterand 3.3% growth over the January-March 2004 quarter. Turnover forthe April-June 2004 quarter was S$741.9 million, a gain of 30.6%over April-June 2003 and growth of 27.0% over January-March2004.

Cumulative net profits for January-June 2004 reached S$32.9 million,representing growth of 12.0% over the January-June 2003 financialhalf-year and growth of 32.4% over the July-December 2003 halfyear. Turnover was S$1.3 billion, a 9.7% rise over the equivalentfigure in the January-June 2003 and 9.0% growth over the turnoverfigure for July-December 2003.

29


Mr. Chen Jiulin, CAO's Managing Director and CEO, said, "Despitethe serious challenges in oil markets worldwide in the first twoquarters of the current financial year, CAO has performed well andturned in strong earnings growth. The coming quarters should seefurther growth with the addition of contributions by our newinvestments undertaken in 1H 2004, as well as continued strength inChinese aviation-related demand."

Strong performance by Pudong associate , dividend from CLH

The 33%-owned Pudong associate contributed 67% of CAO's pretaxprofits in the April-June quarter, or S$12.9 million beforeamortisation of goodwill. This contribution was 48.2% higher thanthat provided in the April-June 2003 quarter, and 15.2% higher thanthe contribution in January-March 2004. Pudong made significantlyhigher volume deliveries in the quarter relative to those provided inthe year-earlier period, during which aviation demand was adverselyimpacted by the SARS epidemic.

In addition, the Company received a dividend from its 5%investment, Compania Logistics de Hidrocarburos ("CLH"). Thepayment, amounting to the Euro equivalent of S$2.2 million, wasreceived during the April-June quarter, compared with S$2.3 millionin April-June 2003. Data for the half-year, in which the S$2.2 millionreceived in 2004 compares with S$ 7.0 million last year, is distortedby the fact that in 2003, an unusually-timed dividend was recognisedin the January-March quarter with no corresponding paymentreceived this year. Historically, CLH has paid dividends twice a year.

A move to an even lower tax rate

Owing to its scale, profitability and contribution to the localeconomy, CAO has been granted new status under Singapore'sGlobal Trader Programme ("GTP"). This new status allows theCompany to enjoy a 5% concessionary tax rate on qualifying income,namely, income relating specifically to oil trading - in CAO's case,that provided by its international oil trading andjet fuel procurementbusiness units. CAO previously had enjoyed a 10% tax rate on asmaller income base. The new tax rate applies retroactively to incomeaccruing from 1 January 2004 for the next five years. As a result, taxprovisions in April-June 2004 fall 27.3% compared with theApril-June 2003 figure, despite 45.3% growth in pretax profitsbetween the two periods.

30


This means that CAO's international oil trading and jet fuelprocurement businesses should operate at higher levels ofprofitability , all other factors held constant, than in previous financialyears . To give a sense of the scale of this change in tax rate, CAOnotes that if the lower rate had been applied to 2003 full-yearearnings , the Company would have paid S$ 1.9 million less in totaltaxes.

Record volumes by procurement division

CAO's procurement business saw its highest volumes ever during theApril-June quarter. Despite the typical pattern involving slowerdemand during this particular quarter, CAO procured approximately695,000 - 700,000 metric tonnes during April-June 2004, or 132%higher volumes than in April-June 2003. Semi-annual procurementvolumes were also at record levels. In January-June 2004,procurement was 1.3 million metric tonnes, up 65.8% compared withJanuary-June 2003 and 7.7% higher than the volumes ofJuly-December 2003, a period traditionally considered the highseason.

Outlook includes additional contributions from 2004 investments,continued procurement strength

Current business and market conditions give CAO many reasons foroptimism over the next few quarters. First, in the past several monthsthe Company has made a number of investments that, owing totransaction timing, have not added their contributions . It is expectedthat such investments will shortly have positive contribution. Forinstance , during the April-June 2004 quarter , CAO established a newsubsidiary, China Aviation Oil Holding Xinyuan Petroleum Corp.,with the purpose of owning and operating CAO's business at theShuidong tank farm in Southern China . As this company wasestablished only in June 2004 , there was no contribution during thequarter under discussion.

CAO's agreement with Fortune Oil Plc to acquire its interests inSouth China Bluesky Aviation Oil Company ("Bluesky") and FortuneAviation Holding Ltd awaits approval by China's State Council,buyer and seller having completed all transaction details. It isexpected the contribution from this 24.5% stake in Bluesky willbegin shortly.

31


The New Guangzhou Baiyun International Airport commencedoperations on 5 Aug 2004 and has become the largest airport inChina. Its passenger capacity is expected to reach 25 million in 2005,five years ahead of the original plan.

According to an article in Lianhe Zaobao dated 11 August 2004 onthe new airport "Beyond White Cloud is Bluesky", the total jet fuelconsumption at Guangzhou Baiyun airport is expected to increase46% compared to 2003, to reach 650,000 metric tonnes in 2004 and850,000 metric tonnes in 2005. Bluesky, the exclusive supplier ofaviation fuel to 15 airports in Southern China including theGuangzhou Baiyun airport, is expected to benefit directly from theswitch to the new airport, with profits for 2004 and 2005 fromBluesky's operations at this airport alone projected to grow by 22%and 23% to RMB121 million and RMB149 million respectively. Inaddition to future contribution from associated company Bluesky, thesignificant increases in demand for jet fuel at the new Guangzhouairport will also boost CAO's jet fuel procurement operations.

Meanwhile, jet fuel procurement remains at high levels . The initialbulk tender for the current, July-September quarter , called for630,000 metric tonnes ofjet fuel , CAO's largest initial tender ever.Signals coming from China indicate that jet fuel demand remainsvery robust.

CAO's Chairman, Mr Jia Changbin added : "2004 is a landmark yearfor CAO, in which strategic investments become a prime focus ofattention . However, the Company's businesses in international oiltrading andjet fuel procurement also are contributing - despite someharsh trading conditions and uncertain markets . It is thus fair to saythat CAO is actively and successfully pursuing its objective ofbecoming the first overseas Chinese integrated oil company."

38. On August 31, 2004, China Oil announced that its initial tender for jet fuel

procurement volumes during the October-December quarter was some 43.8% higher than the initial

tender for the comparative period a year earlier. It also announced that full-year procurement

volumes would be at least 30% higher than those recorded in 2003, reaching a record 2.59 million

metric tonnes . More specifically, the Company, in its press release , stated:

32


"The large size of the upcoming quarter's fuel requirements is strongevidence that the commercial aviation sector in China remains robust.As the substitution ofimportedjet fuel for domestic production beganin the latter part of 2003, the effect of such substitution onyear-on-year comparisons has now been eliminated. Despite this, thenumbers still definitively point to an upward trend."

A record year is clinched

CAO, on 24 August, issued an invitation to tender for 630,000 metrictonnes of jet fuel , to be delivered during the October-Decemberquarter . The tender closed 30 August and negotiations are underwaywith suppliers, including (among several others) Singapore PetroleumCompany, in which CAO recently acquired a 20.6% stake. Thistender is 43.8% higher than the initial tender made for theOctober-December 2003 quarter, and in line with the 630,000-tonneorder placed for the July-September 2004 quarter. It is the fifthconsecutive quarter in which volumes have exceeded 600,000 metrictonnes . In fact, the current fiscal year is the first in which volumeshave exceeded 600,000 metric tonnes in all four quarters.

It should additionally be borne in mind that in most quarters, theinitial bulk purchase proves insufficient to meet total quarterlydemand, and additional spot tenders are required. In theOctober-December 2003 quarter, for instance, the initial438,000-tonne order grew to 662,000 metric tonnes. It is thusreasonable to expect additional spot tenders in the upcoming quarteras well, and these will result in even higher growth.

For the full year 2004, the initial tender puts total procurementvolume at 2,588,000 metric tonnes. This is 30.2% higher than the1,988,000 metric tonnes recorded in 2003. If additional spot tenderstake place between now and the end ofthe year, the total growth willnaturally be higher still.

CAO's Chairman, Mr Jia Changbin added: "On top of all the otherpositive news we have so far reported this year, it is gratifying to seethat jet fuel procurement, one of our core businesses, remains sobuoyant. As we have been saying over the past several months, CAOis clearly on track to report record earnings in the current fiscal year."

33


39. On September 17, 2004, the Company wrote a letter to Singapore Exchange

Securities Trading Limited in response to a query regarding trading activity. The letter stated in

part:

Ms. Elsie ChuaSingapore Exchange Securities Trading Limited2 Shenton Way#19-00 SGX Centre 1Singapore 068809

Dear Ms. Chua

We refer to your letter dated 17 September 2004 in relation to asubstantial increase in the price and trading volume of our sharestoday. Our replies to your questions are as follows:

Question 1: Are you aware of any information not previouslyannounced concerning you (the issuer), your subsidiaries orassociated companies which, if known, might explain the trading?

The Company is not aware of any information not previouslyannounced that might have led to the substantial increase in the priceand trading volume of our shares today.

Question 2: Are you aware of any other possible explanation for thetrading?

The Company is not aware of any other possible explanation for thetrading.

Question 3: Can you confirm your compliance with the listing rulesand, in particular, Listing Rule 703?

The Company confirms that it is in compliance with the listing rulesof the SGX-ST, in particular Rule 703.

40. On October 21, 2004, China Oil announced that it had been informed that the Parent

Company, China Avaition Oil Holding Company has sold approximately 15% of their share in the

34


Company through a share placement. Deutsche Bank AG, Singapore Branch, acted as sole sole

bookrunner on the share placement. The shares were placed to institutional investors.

41. On October 28, 2004, China Oil added the following supplementary information to

the announcement on October 21, 2004, relating to the Share Placement by our Parent Company,

China Aviation Oil Holding Company:

First, this transaction was made by our parent company. Our parentis just like any other substantial shareholder, and is entitled to makeits investment decisions as it sees fit. To date it has been remarkablysolid as a shareholder, maintaining its 75% stake for almost threeyears following our listing . Its independent decision to divest a stakewas one in which CAO's role was limited by the nature of thetransaction.

Second, the placement was made to institutional investors. This hadthe effect of broadening our institutional shareholder base. This ispositive in itself, in that institutions in general tend to apply morerigorous analysis to their investments compared with retail investors.The greater presence of institutional investors in our roster will serveto ensure corporate best practices on our part, and so should beconsidered a net positive by all investors.

Third, this stake reduction by our Parent in CAO, from 75% toapproximately 60%, will improve the liquidity of our shares, as 40%of our shares outstanding are now in public hands.

Fourth, on Thursday, 21 October 2004, CAO issued a Masnetannouncement advising of the Share Placement . CAO also made asubsequent announcement on 22 October 2004 with regards to thenotice of substantial shareholder' s interest , in line with SGX-ST'slisting requirements.

42. OnNovember 12, 2004, China Oil announced results for the January-September 2004

period and the July-September quarter. For the nine-month period, profits rose 4.9% year-onyear

to S$41.7 million. However, for the July-September quarter, net profits were S$8.8 million, down

35


15.4% compared with a year earlier , due to weak contributions by the Company 's international oil

trading division. More specifically, the Company, in its press release, stated:

On a pro-forma basis, pretax profits for the company exclusive oftrading and changes in amortisation, as discussed below, would havebeen up 121% year-on-year for the July- September quarter and 36%year-on-year for the nine-month period.

Mr. Chen Jiulin, CAO's Managing Director and CEO, said, "Despitethe difficult trading environment, the quarter just ended has shown usyet again the wisdom of the Company's three-pronged businessstrategy. With strong contributions by our strategic investments andjet fuel procurement, we have again been able to diversify againstweakness in one segment.

Review: Pudong has a remarkable quarter

CAO's 33%-owned Pudong affiliate had an exceptionally goodquarter, growing its contribution by 148% year-on-year in thequarter, supported by strong deliveries and steadily improvingmargins. Pudong supplied a record 389 thousand metric tonnes("MT ) ofjet fuel to airlines during the July-September quarter, some60% higher than the volumes delivered in July-September 2003 and11% higher than volumes in the April-June 2004 quarter. At the sametime, the margin also rose as deliveries to international flightscontinued to rise as a percentage of total. International flightsaccounted for 42.8% oftotal deliveries during the quarter, the highestlevel on record.

Procurement, meanwhile, also remained robust as expected. CAOsupplied 660 thousand MT in the three months, representing a 22%rise over year-earlier figures. This was easily the highestJuly-September quarterly figure ever, as travel demand at PudongInternational Airport and elsewhere surged on healthy consumptiongrowth in China.

The company's international oil trading division, however, had somesetbacks in the form ofadverse market movements. In a continuationof a pattern seen in oil market since mid-year 2003, choppy marketsmade profitable trading extremely difficult, and the companysustained an operating loss.

36


Mr Chen said, "The direction of prices has been extremely hard topredict in the past several quarters, with market conditions unlikeanything we have seen in nearly 25 years. CAO remains committedto stringent risk-management policies, and our main goal in tradingis to support our jet fuel procurement and other operations.Nonetheless, markets do occasionally throw up conditions such asthose we have seen recently, and their adverse effects cannot becompletely hedged against. In order to ensure that this businessremains a positive contributor to our bottom line, we're currentlyreviewing our risk-management criteria and may tighten them evenfurther.

In other developments, CLH, in which CAO holds a 5% stake, paidno dividend during the quarter as expected. Financial expenses weredown by 18.6% from the year-earlier period, due to the payment in2003 ofan arranger fee in connection with the US$160 million creditfacility. Accounting changes regarding the amortisation of goodwillon the Pudong investment have eliminated the amortisation burdenin 2004. Finally, the effective tax rate the company paid was up, asthe majority of profits were contributed by Pudong, which operatesin a higher tax regime than do the company's trading andprocurement operations.

Proforma pretax profits up 121% year-on-year in July-SeptemberThus, except for the international oil trading division, earnings werenot merely healthy but quite strong. A proforma adjustment, foranalytical purposes, to remove the effects of trading losses, and tostandardise the treatment of amortisation expense, shows that pretaxprofits grew 121% year-on-year in the July-September quarter, aswell as 36% year-on-year for the entire nine-month period.

Outlook: Still highly positiveThe full-year outlook is still quite positive. January-Septemberearnings illustrate this point well. Even with the third-quarteroperating loss, net profit year-to-date is S$41.7 million, up 5% overyear-earlier figures. Turnover, at S$2,208 million, is up 24%year-on-year. Pudong's nine-month contribution is S$40.5 million,some 64% above year-earlier figures and indeed 17% more than theentire associate contribution for all of2003 (exclusive ofamortisationexpense, which would make the growth even larger).

In addition, 2004 procurement volumes so far in hand total 2.65million MT, compared with 1.88 million MT in 2003. The Oct-Decquarter may see a dividend declared by CLH; such was the case in

37


2003, and January-June 2004 net earnings , the most recent figuresavailable, were up 36% year-on-year. In sum, it remains a safeassumption that 2004 full-year earnings will exceed those of 2003,and thus will be at record levels.

In 2005, there should be major increases in earnings on the back offirst-time contributions by new strategic investments. Two of thesein particular - Bluesky and SPC - will likely contribute significantly.Other investments, including Xinyuan (Shuidong) and some not yetannounced, should make smaller contributions.

Bluesky earnings will be driven by the opening, in August 2004, ofthe new Baiyun International Airport in Guangzhou. ForJanuary-September, Guangzhou passenger volumes were 14.9million, and estimates now are for 20 million for the full year. InSeptember alone, 1.9 million passengers used the Baiyun airport.International air passengers travelling to, from or through theGuangzhou airport have grown 80% in number in the first ninemonths of 2004, to 1.76 million. On the cargo side, volumes handledyear-to-date have grown at a 23% pace. Fedex and UPS are currentlyin negotiations to establish operations at Baiyun; hub facilities by oneor both of these companies should significantly boost volumes.

SPC continues to be a beneficiary of historically high gross refinermargins ("GRM ). CAO will begin recording associates ' contributionfrom its 20.6% stake in SPC following shareholder approval at theupcoming Extraordinary General Meeting. For reference, the currentmean I/B/E/S estimate for 2005 is S$197 million, implying acontribution to CAO associate profits of S$40.6 million.

43. The statements contained in 1125-38 were materially false and misleading when

made because defendants failed to disclose or indicate the following: (1) that the Company lacked

adequate internal controls and risk management procedures; (2) that as a consequence the Company

engaged in speculative derivative trading, forcing controlling shareholders to raise funds to cover

margin calls on massive derivative losses ; and (3) that the Company kept $550 million in derivative

trading losses of the books, thereby artificially inflating its financial results.

The Truth Begins To Emerge

38


44. On November 16, 2004, China Oil announced that in order to respond proactively

to conditions arising in the international oil trading business , it has revised its trading policy. The

Company would, by the end of November, exit all speculative derivative trading positions and

would focus solely on physical trading business. The only derivatives trading would be for the

hedging ofphysical cargoes . The effect would be a significant reduction in the risk exposure of the

Company amidst ongoing volatility in markets.

45. On November 30, 2004, China Oil announced that the Company had suffered

significant losses from speculative oil derivative trading. As ofNovember 29, 2004, the Company

estimated that the total cumulative losses (both realised and unrealised) incurred by the Company

were approximately US$550 million. To address the debt that had arisen from the Company's

trading losses , the Company would be proposing a scheme of arrangement with its creditors for the

settlement of all existing debts and liabilities. Accordingly, the Company had, on November 29,

2004, applied for and obtained, an order from the High Court of Singapore (the "Court ) pursuant

to Section 210 of the Companies Act of Singapore for the Court to fix a date for the hearing of an

application by the Company to convene a meeting ofits creditors for the purpose ofconsidering and

ifthought fit, approving with or without modification a scheme ofarrangement proposed to be made

between the Company and its creditors. More specifically, the Company, in its press release, stated:

Background to Losses From Derivative Trading

The Company commenced trading in oil derivatives on its ownaccount from 2003. Whilst part of the derivative trading was forhedging purposes, the Company also engaged in speculativederivative trading.

In October 2004, international oil prices rose steeply leading to theCompany having to face significant margin calls on its openderivative positions. The Company was unable to meet some of the

39


margin calls arising from its speculative derivative trades, resultingin the Company being forced to close the positions with some of thecounter-parties. From 26 October 2004 to date, the accumulatedlosses from these closed positions amounts to approximately US$390million. The Company is in the process of closing the remainingoutstanding positions and estimates the losses from the closure ofthese positions to be approximately US$160 million.

Action Taken by The Company

Since the advent of the above liquidity issues by the Company, theCompany has taken the following steps:

1. Shareholder's Loan from China Aviation Oil Holdings Company("CAOHC )

The Company has requested, and CAOHC granted to the Company,a shareholder's loan of approximately US$100 million for theCompany to meet its liquidity requirements. The loan has been fullydisbursed and applied to meet the margin calls and to satisfy part ofthe realised losses suffered by the Company.

2. Immediate termination ofthe Company's speculative oil derivativetrading activities

To check the mounting losses suffered by the Company from theincreasing oil prices, the Company has halted all its speculative oilderivative trading activities with the exception of the closing at theremaining open positions.

3. Suspension of duties of Mr Chen Jiulin

The Board ofDirectors further wishes to announce the suspension ofduties of Mr Chen Jiulin, the Chief Executive Officer of theCompany, with immediate effect pending the release of the report ofthe Special Investigation refered to below.

4. Special Investi gt`

The Exchange, pursuant to Rule 704(12) of the Listing Manual, hasrequired the Company to instruct PricewaterhouseCoopers as specialinvestigative accountant to review and investigate the Company'saffairs relating to the incurrence of the loss and its surrounding

40


circumstance and report its findings to the Exchange ("SpecialInvestigation ).

Pending the release of the Special Investigation report byPricewaterhouseCoopers, the Company believes it is inappropriate tomake any further comments on the circumstances relating to theincurrence of the derivative trading losses by the Company.

5. Appointment of a Special Task Force

The Board of Directors, with the support of CAOHC, has appointeda special task force ("Special Task Force ) led by Ms Gu Yanfei,General Manager, Investment Department of CAOHC and directorof the Company, with the authority of the Board to lead therestructuring, investigation and rehabilitation process as well as tosupervise the day-today operations ofthe Company on its behalf. TheSpecial Task Force shall continue to manage the critical affairs oftheCompany until further announcement.

6. Negotiation with creditors

The Company has commenced negotiations with some ofits creditorsto structure a settlement and allow the Company more time to workout a rescue package to maintain the Company's financial position.While some of the Company's creditors have been cooperative,certain of the creditors have issued demand letters and havethreatened immediate legal action against the Company. TheCompany hopes that it will have the time to put together a settlementproposal acceptable to all its creditors.

7. The proposed scheme of arranement

Due to the pressing payment demands from the counter-parties to theCompany's derivative contracts, the Company believes that there islittle or no reasonable prospect of the Company having sufficientcash-flow to meet its immediate current liabilities in the short termwith its current resources and continue with its core business of jetfuel procurement without a stay in the proceedings and claims facedby the Company. Accordingly, the Company intends to propose arestructuring of the Company's debt by way of a scheme ofarrangement. The Company undertakes that any cash that it receivesfrom its receivables and assets as at 30 November 2004 shall beutilised solely for continuance of the Company's core business anddaily operations in order to preserve shareholder value until a

41


settlement is reached. Ifthe cash from its receivables and assets is notsufficient for the above purposes, CAOHC will provide shareholder'sloans or credit support to the Company. The Company will be inactive discussions with its creditors to restructure its debt obligationsand will keep shareholders informed of the progress.

8. Support from CAOHC

The Company has received a statement of support from CAOHCexpressing its continued interest and support and that it will assist theCompany in restructuring of its outstanding debts.

9. Participation in proposed restructuring efforts of the Company byCAOHC and TemasekHoldings (Private) Limited ("Temasek ) In addition , the Companyhas been informed that CAOHC has approached Temasek to seekTemasek's participation in the proposed restructuring ofthe Companythat would be needed for the Company to remain viable in the future.Temasek currently has a deemed indirect stake of less than 2% in theCompany, and is not aware of any other material interests in theCompany, nor is it aware of any existing material contracts orbusiness arrangements with the Company or CAOHC. Temasek doesnot have any stake in CAOHC.

Temasek has expressed an indicative interest in exploring aparticipation as an investor in the Company's restructuring efforts,and which participation currently contemplates the following:-

(a) CAOHC and Temasek would, in aggregate , inject funds of up toUS$100 million (currently expected to be in equal proportions, thatis to say, US$50 million each) into the Company as part of itsrestructuring. It is the intention that CAOHC and Temasek will hold(in the aggregate) a majority equity stake in the restructuredCompany; and

(b) the injection of funds would be on the basis of (i) satisfactoryresolution of all issues relating to the Company , (ii) the scheme ofarrangement (including the settlement of outstanding and/orcontingent claims against the Company) being approved, sanctionedand implemented in accordance with section 210 of the SingaporeCompanies Act, and (iii) the other terms and conditions (includingthe obtaining of relevant approvals/waivers) in connection with theinjection , all being commercially acceptable to Temasek . It should benoted that pending the finalisation of discussions between the

42


Company, CAOHC and Temasek, and the entry into formal legaldocumentation relating to the proposed restructuring , CAOHC andTemasek would have no binding obligation to proceed with therestructuring of and investment in the Company . The Company iscontinuing to pursue active discussions with CAOHC and Temasekin relation to the terms of the proposed restructuring and investment,and will make the appropriate announcements as developments takeplace.

Restructuring Proposal

CAOHC will continue to assist the Company to put together andpropose a restructuring proposal for all the Company's creditors inthe near future. The Company hopes to put together a restructuringproposal acceptable to all the interested parties and allow theCompany to continue its business operations. Suspension of tradingin the Company's shares In the meantime, the Directors deem itnecessary to request for suspension of trading in the Company'sshares until a satisfactory arrangement has been agreed with thecreditors of the Company or a scheme of arrangement of theCompany's debts has been sanctioned by the Court. Subject to theconfirmation of the Exchange, the trading of the shares of theCompany will remain suspended until further notice.

Responsibilities of the Board of Directors

The Directors of the Company (including those who have delegated

detailed supervision ofthis announcement) have taken all reasonable

care to ensure that the facts stated in this announcement are fair and

accurate and that no material facts have been omitted from this

announcement, and they jointly and severally accept responsibility

accordingly. Where any information has been extracted from

published or publicly available sources, the sole responsibility of the

Directors of the Company has been to ensure through reasonable

enquiries that such information has been accurately extracted from

such sources or, as the case may be, reflected or reproduced in this

announcement.

46. On this news , trading in the Company's shares was suspended after the shares

dropped to below S$1.00 per share, compared to prices as high as S$1.70 per share, at which the

shares traded during the Class Period.

43


Post Class Statements

47. On December 1, 2004, a press statement was issued by Securities Investors

Association (Singapore) entitled "China Aviation Oil's US$550 Million Derivatives Disaster." The

press release stated in part:

Retail investors of CAO are in a daze . This is because only recentlythe parent company of CAO sold a sizeable block of shares tounsuspecting fund managers at $ 1.35 per share . Retail investorsnaturally took the position that if the smart money finds the stockattractive at $1.3 5, then at prices below that the stock must be a goodprospect . Quite clearly they got it wrong . CAO had in the pastrepeatedly given assurances to investors that they had a good riskmanagement system in place.

When the third quarter results were announced , CAO should havedisclosed its open positions and potential losses , which was materialinformation to investors. This is a failure in transparency.

The immediate questions that arise in the minds ofthe troubled retailinvestors are:

1. How did the company chalk up such a big loss within such a short

time?

2. Were the independent directors aware of the developments and ifso what actions did they take?

3. Did the auditors check the company to ensure that the risk controlmechanisms put in place was [sic] in operation? Were they ignoredby the Management?

4. Having a proper audit control and the necessary managementcontrols internally, why was this allowed to happen?

5. What recourse do the retail investors have? Is it time to considerhow the retail investors should be compensated or how theirpredicament can be addressed?

It is totally unacceptable for the Management to have allowed lossesto run to $900m which is more than 3 times the net worth of the

44


company ($225 m as of 31 Dec 2003) and more than 20 times theannual operating profit of the company.

48. On December 2, 2004, Financial Times published an article entitled "'Model of

corporate governance ' fights for survival : CHINA AVIATION OIL: Investigators must establish

whether CAO or its parent were aware of the size of their losses ," The article read:

China Aviation Oil was the poster boy for the Chinese companies thathave flocked to Singapore for a prestige listing.

It was feted by the local press as a model of corporate governanceand investors eagerly bought its shares, which climbed by 215 percent from the start of 2003 until last Monday when trading wassuspended.

Speculation that CAO was in financial difficulties began inmid-November when it reported an unexpected fall in third-quarterearnings on undisclosed trading losses. Last week, it suddenlydropped a USDollars 221m bid to take a 20 per cent in refinerSingapore Petroleum after its parent blocked the deal withoutexplanation. On Friday, Societe Generale cancelled a SDollars 300m(USDollars 184m) loan facility.

The question now confronting an investigation led by auditor PwC iswhen CAO and CAOHC, its parent, knew of the size of the losses,which exceed CAO's market value of SDollars 225m, and whetherthey engaged in insider trading when a 15 per cent stake ofCAO wassold to institutional investors in late October.

On Tuesday CAO said it asked its parent for help when it hadinsufficient funds to cover its margin calls in October, although it didnot state when the request was made . CAOHC provided anemergency loan of USDollars 100m.

CAO admitted it did not immediately reveal the losses, explainingthat "while the company is aware of the obligations to disclose thetrading losses , the company's primary concern is to ensure thesurvivability of the company in the face of the crisis".

It argued that a rescue plan for the company might have beenthreatened by an immediate disclosure.

45


The losses occurred in spite of a risk control system policing its 10traders that was meant to prevent sizeable trading losses, includingautomatically shutting down deals when a trader assumed losses ofmore than USDollars 500,000. There are suggestions that the systemwas somehow bypassed.

The underlying value of CAO's derivatives contracts was SDollars2.lbn last year, compared with total sales of SDollars 2.4bn,according to the latest company report.

While CAO was struggling with mounting derivative losses inOctober, on October 20 CAOHC sold shares through a SDollars196m placement arranged by Deutsche Bank. The offer was pricedat SDollars 1.35 a share, a 14 per cent discount to its then share price.The deal cut CAOHC's stake to 60 per cent.

The share placement came five days before oil prices climbed to arecord USDollars 55.65 on October 25 before falling back toUSDollars 51.76 by the end of the month.

Deutsche Bank said it would answer any questions from regulatorsover its role in a sale. "The transaction was conducted entirely inaccordance with normal market practice," Deutsche Bank saidyesterday.

CAOHC, which is sending a team to Singapore to investigate,

declined to comment on when problems at CAO became apparent.

Asked if the parent company had been aware of difficulties at CAO

when it made the share offer, a COAHC official said : " I cannot

answer that question at this time."

COAHC said it would support CAO, but did not rule out thepossibility of allowing the venture to fail.

Corporate governance is weak in China and state-controlledcompanies have often had particular problems controlling overseasunits or those with capital market operations.

Neil Torpey, a partner in the Hong Kong office of law firm PaulHastings, said there was no single model for how China handledfailures of state-linked companies, with some being wound up withthe consent of creditors, but forced liquidation by foreign-ledinvestors also now a possibility.

46


In the case ofCAO, which has a near-monopoly ofaviation fuel salesin China, Beijing might decide that it was in the national interest tokeep the company afloat, Mr Torpey said. However, if the companywent into bankruptcy, pursuing claims in mainland courts would alsobe a viable option for foreign creditors or investors, he said.Additional reporting by Joseph Leahy in Hong Kong.

49. On December 6, 2004, an Associated Press article entitled "China Aviation's

Ex-Chief to Face Probe," read:

The suspended head of a major supplier of jet fuel to China, underinvestigation for overseeing hundreds of millions of dollars inderivatives trading losses , has agreed to return to Singapore to faceinvestigators, the company said Monday.

China Aviation Oil (Singapore) Corp. CEO Chen Jiulin left for Chinaaround the time the company acknowledged racking up huge lossesafter speculative bets on energy markets turned sour. The SingaporeExchange, where the company is listed, had asked China Aviation Oilto persuade Chen to return to Singapore.

"Mr. Chen has informed the company that he will return to Singaporesometime this week," the company said, adding that he went to Chinaon Nov. 30 "to attend to family matters."

He has apologized to investors, according to a local media report.

50. On December 8, 2004, China Oil issued the following corporate update:

1) Cessation of All Oil Derivatives Trading Activities

Since its announcement on 30 November 2004, the Company hasceased all oil derivative trading activities. There are no openpositions in respect of futures and options oil trading activities as at7th December 2004, except for back to back oil option trades withthree counterparties.

With regard to swap derivative trading activities, as of7th December2004, 25 counterparties have unilaterally terminated their trades withthe Company based on their contractual rights. There are 35counterparties where their respective trades are still subject to marketfluctuations. The Company has informed all the counterparties for theremaining back to back option trades and swap derivatives that the

47


Company intends to terminate these trades immediately. TheCompany is monitoring the situation very closely to find a solutionto close out these open positions with the respective counterparties.

2) On-going Discussions with Creditors

Members of the Special Task Force together with the Company'sfinancial and legal advisers have been meeting with several of theCompany's creditors to explain the Company's financial situationand to garner support for the Company's proposed Scheme ofArrangement. The support for the restructuring exercise by theCompany's parent company, China Aviation Oil Holdings Company("CAOHC"), has been reassuring for the creditors. The creditors thatthe Company have met so far expressed support to give the Companya reasonable time to restructure itself. These creditors understand thatwinding up or judicial management proceedings would underminethe restructuring exercise and scuttle the negotiations for supportfrom CAOHC.

3) Co-Signing of Bank Account

The Special Task Force has put in place appropriate controlmechanism and a daily reporting structure. As part of these controlmechanisms, the Company has taken steps to appoint 2 authorisedrepresentatives from Deloitte & Touche Financial Advisory ServicesPte Ltd to be co-signatories to the Company's bank accounts tocontrol the outflow of cash.

4) Continuation of Core Business

The Special Task Force recognises that it is in the interest of theCompany to carry on the core business of jet fuel procurement.Having considered the options available, the Company has takensteps to set up a new subsidiary company wholly owned by theCompany to carry on the jet fuel procurement business.

The new subsidiary will receive financial support from CAOHC byway of injection of new funding into a trust account to enable thesubsidiary to continue its jet fuel procurement business on an agencybasis . The subsidiary company will receive income from the agencycommissions to be chargeable on the sale ofthe jet fuel to the Buyers.

48


The subsidiary company will also receive support from the Companyby way ofuse of the Company's equipment, premises and personnelfor an agreed fee.

5) Involvement of Independent Directors

The Independent Directors who are also members of the Company'saudit committee have been monitoring closely and are continuing tomonitor closely developments in the Company. Several measures,forming part of the control mechanism put in place by the SpecialTask Force, had been recommended by them. They have been and arein constant interaction with the Special Task Force and theCompany's advisers. They have also asked for and are being givendaily briefings by the Special Task Force and the Company's adviserson developments in relation to the affairs of the Company (includingthe proposed scheme of arrangement).

6) Claim against the Company by Satya Capital Limited

The Company has on 8th December 2004 received a Writ ofSummons in which Satya Capital Limited (" Satya" ) has commenceda legal suit against the Company and its Holding Company, ChinaAviation Oil Holding Company ("CAOHC").

The claim against the Company is for an alleged breach of a SharePurchase Agreement dated 18 August 2004 between Satya and theCompany in which the Company had agreed to acquire 88 millionshares in Singapore Petroleum Company Ltd ("SPC"). The claimagainst CAOHC is for alleged conspiracy with the Company to breakthe Share Purchase Agreement.

The amount of the claim against the Company and CAOHC isS$47,160,000 and damages. The amount ofS$47,160,000 is allegedlycomputed on the basis of the difference between the contract priceand the best price that might have been obtained if the SPC shareshad been sold on the open market on 29 November 2004.

The Company is presently seeking legal advice on the matter.

7) Return of Suspended CEO, Mr Chen Jiulin

The Company wishes to inform shareholders that Mr Chen Jiulin hasreturned to Singapore today. He has been placed under arrest and iscurrently assisting the Commercial Affairs Department in their

49


investigations. The Company understands that Mr Chen is currentlyout on bail.

UNDISCLOSED ADVERSE FACTS

51. The market for China Aviation' securities was open, well-developed and efficient at

all relevant times. As a result of these materially false and misleading statements and failures to

disclose, China Aviation' securities traded at artificially inflated prices during the Class Period.

Plaintiffs and other members ofthe Class purchased or otherwise acquired China Aviation securities

relying upon the integrity of the market price of China Aviation' securities and market information

relating to China Aviation, and have been damaged thereby.

52. During the Class Period, defendants materially misled the investing public, thereby

inflating the price ofChina Aviation' securities , by publicly issuing false and misleading statements

and omitting to disclose material facts necessary to make defendants' statements, as set forth herein,

not false and misleading. Said statements and omissions were materially false and misleading in that

they failed to disclose material adverse information and misrepresented the truth about the

Company, its business and operations , as alleged herein.

53. At all relevant times , the material misrepresentations and omissions particularized

in this Complaint directly or proximately caused or were a substantial contributing cause of the

damages sustained by Plaintiffs and other members of the Class. As described herein, during the

Class Period, defendants made or caused to be made a series of materially false or misleading

statements about China Aviation' business , prospects and operations . These material misstatements

and omissions had the cause and effect of creating in the market an unrealistically positive

assessment of China Aviation and its business , prospects and operations, thus causing the

Company's securities to be overvalued and artificially inflated at all relevant times . Defendants'

50


materially false and misleading statements during the Class Period resulted in Plaintiffs and other

members ofthe Class purchasing the Company 's securities at artificially inflated prices, thus causing

the damages complained of herein.

ADDITIONAL SCIENTER ALLEGATIONS

54. As alleged herein, defendants acted with scienter in that defendants knew that the

public documents and statements issued or disseminated in the name of the Company were

materially false and misleading; knew that such statements or documents would be issued or

disseminated to the investing public; and knowingly and substantially participated or acquiesced in

the issuance or dissemination of such statements or documents as primary violations of the federal

securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their receipt of

information reflecting the true facts regarding China Aviation, their control over, and/or receipt

and/or modification of China Aviation allegedly materially misleading misstatements and/or their

associations with the Company which made them privy to confidential proprietary information

concerning China Aviation, participated in the fraudulent scheme alleged herein.

55. Defendants knew and/or recklessly disregarded the falsity and misleading nature of

the information which they caused to be disseminated to the investing public. The ongoing

fraudulent scheme described in this complaint could not have been perpetrated over a substantial

period of time, as has occurred, without the knowledge and complicity of the personnel at the

highest level of the Company, including the Individual Defendants.

Applicability Of Presumption Of Reliance:Fraud-On-The-Market Doctrine

56. At all relevant times, the market for China Aviation securities was an efficient market

for the following reasons , among others:

51


(a) China Aviation stock met the requirements for listing, and was listed and actively

traded on the OTC, a highly efficient and automated market;

(b) As a regulated issuer , China Aviation filed periodic public reports with the SEC

and the OTC;

(c) China Aviation regularly communicated with public investors via established

market communication mechanisms, including through regular disseminations ofpress releases on

the national circuits ofmajor newswire services and through other wide-ranging public disclosures,

such as communications with the financial press and other similar reporting services; and

(d) China Aviation was followed by several securities analysts employed by major

brokerage firms who wrote reports which were distributed to the sales force and certain customers

of their respective brokerage firms. Each of these reports was publicly available and entered the

public marketplace.

57. As a result of the foregoing, the market for China Aviation securities promptly

digested current information regarding China Aviation from all publicly-available sources and

reflected such information in China Aviation' stock price. Under these circumstances, all purchasers

of China Aviation securities during the Class Period suffered similar injury through their purchase

of China Aviation securities at artificially inflated prices and a presumption of reliance applies.

NO SAFE HARBOR

58. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

Many ofthe specific statements pleaded herein were not identified as "forward-looking statements

when made. To the extent there were any forward-looking statements, there were no meaningful

52


cautionary statements identifying important factors that could cause actual results to differ materially

from those in the purportedly forward-looking statements. Alternatively, to the extent that the

statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are

liable for those false forward-looking statements because at the time each ofthose forward-looking

statements was made, the particular speaker knew that the particular forward-looking statement was

false, and/or the forward-looking statement was authorized and/or approved by an executive officer

of China Aviation who knew that those statements were false when made.

FIRST CLAIMViolation Of Section 10(b) Of

The Exchange Act Against And Rule 10b-5Promulgated Thereunder Against All Defendants

59. Plaintiff repeats and realleges each and every allegation contained above as if fully

set forth herein.

60. During the Class Period, defendants carried out a plan, scheme and course ofconduct

which was intended to and, throughout the Class Period, did: (i) deceive the investing public,

including Plaintiffs and other Class members , as alleged herein ; and (ii) cause Plaintiffs and other

members of the Class to purchase China Aviation securities at artificially inflated prices. In

furtherance ofthis unlawful scheme, plan and course ofconduct, defendants, and each ofthem, took

the actions set forth herein.

61. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made untrue

statements of material fact and/or omitted to state material facts necessary to make the statements

not misleading; and (c) engaged in acts, practices, and a course ofbusiness which operated as a fraud

and deceit upon the purchasers of the Company' s securities in an effort to maintain artificially high

market prices for China Aviation securities in violation of Section 10(b) of the Exchange Act and

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Rule lOb-5. All defendants are sued either as primary participants in the wrongful and illegal

conduct charged herein or as controlling persons as alleged below.

62. Defendants, individually and in concert, directly and indirectly, by the use, means

or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a

continuous course ofconduct to conceal adverse material information about the business, operations

and future prospects of China Aviation as specified herein.

63. These defendants employed devices, schemes, and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a course

ofconduct as alleged herein in an effort to assure investors ofChina Aviation value andperformance

and continued substantial growth, which included the making of, or the participation in the making

of, untrue statements ofmaterial facts and omitting to state material facts necessary in order to make

the statements made about China Aviation and its business operations and future prospects in the

light of the circumstances under which they were made, not misleading , as set forth more

particularly herein, and engaged in transactions, practices and a course of business which operated

as a fraud and deceit upon the purchasers of China Aviation securities during the Class Period.

64. Each ofthe Individual Defendants' primary liability, and controlling person liability,

arises from the following facts: (i) the Individual Defendants were high-level executives and/or

directors at the Company during the Class Period and members ofthe Company's management team

or had control thereof; (ii) each of these defendants, by virtue of his responsibilities and activities

as a senior officer and/or director of the Company was privy to and participated in the creation,

development and reporting of the Company's internal budgets, plans, projections and/or reports;

(iii) each of these defendants enjoyed significant personal contact and familiarity with the other

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defendants and was advised of and had access to other members of the Company' s management

team, internal reports and other data and information about the Company's finances, operations, and

sales at all relevant times; and (iv) each of these defendants was aware of the Company's

dissemination ofinformation to the investing public which they knew or recklessly disregarded was

materially false and misleading.

65. The defendants had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

ascertain and to disclose such facts, even though such facts were available to them. Such

defendants' material misrepresentations and/or omissions were done knowingly or recklessly and

for the purpose and effect of concealing China Aviation operating condition and future business

prospects from the investing public and supporting the artificially inflated price of its securities. As

demonstrated by defendants' overstatements and misstatements of the Company's business,

operations and earnings throughout the Class Period, defendants , if they did not have actual

knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain such

knowledge by deliberately refraining from taking those steps necessary to discover whether those

statements were false or misleading.

66. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market price of China Aviation

securities was artificially inflated during the Class Period. In ignorance ofthe fact that market prices

of China Aviation publicly-traded securities were artificially inflated, and relying directly or

indirectly on the false and misleading statements made by defendants, or upon the integrity of the

market in which the securities trades, and/or on the absence ofmaterial adverse information that was

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known to or recklessly disregarded by defendants but not disclosed in public statements by

defendants during the Class Period, Plaintiffs and the other members of the Class acquired China

Aviation securities during the Class Period at artificially high prices and were damaged thereby.

67. At the time of said misrepresentations and omissions , Plaintiffs and other members

ofthe Class were ignorant oftheir falsity, and believed them to be true. Had Plaintiffs and the other

members of the Class and the marketplace known the truth regarding the problems that China

Aviation was experiencing , which were not disclosed by defendants, Plaintiffs and other members

of the Class would not have purchased or otherwise acquired their China Aviation securities, or, if

they had acquired such securities during the Class Period, they would not have done so at the

artificially inflated prices which they paid.

68. By virtue of the foregoing, defendants have violated Section 10(b) of the Exchange

Act, and Rule I Ob-5 promulgated thereunder.

69. As a direct and proximate result of defendants' wrongful conduct, Plaintiffs and the

other members ofthe Class suffered damages in connection with their respective purchases and sales

of the Company' s securities during the Class Period.

SECOND CLAIMViolation Of Section 20(a) Of

The Exchange Act Against the Individual Defendants

70. Plaintiff repeats and realleges each and every allegation contained above as if fully

set forth herein.

71. The Individual Defendants acted as controlling persons ofChina Aviation within the

meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level

positions, and their ownership and contractual rights, participation in and/or awareness of the

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Company's operations and/or intimate knowledge of the false financial statements filed by the

Company with the SEC and disseminated to the investing public, the Individual Defendants had the

power to influence and control and did influence and control, directly or indirectly, the decision-

making of the Company, including the content and dissemination of the various statements which

Plaintiffs contend are false and misleading. The Individual Defendants were provided with or had

unlimited access to copies of the Company's reports , press releases , public filings and other

statements alleged by Plaintiffs to be misleading prior to and/or shortly after these statements were

issued and had the ability to prevent the issuance of the statements or cause the statements to be

corrected.

72. In particular, each ofthese defendants had direct and supervisory involvement in the

day-to-day operations of the Company and, therefore, is presumed to have had the power to control

or influence the particular transactions giving rise to the securities violations as alleged herein, and

exercised the same.

73. As set forth above, China Aviation and the Individual Defendants each violated

Section 10(b) and Rule 1 Ob-5 by their acts and omissions as alleged in this Complaint. By virtue

of their positions as controlling persons , the Individual Defendants are liable pursuant to Section

20(a) of the Exchange Act. As a direct and proximate result of defendants' wrongful conduct,

Plaintiffs and other members of the Class suffered damages in connection with their purchases of

the Company's securities during the Class Period.

WHEREFORE, Plaintiffs pray for relief and judgment, as follows:

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(a) Determining that this action is a proper class action, designating Plaintiffs as

Lead Plaintiff and certifying Plaintiffs as a class representative under Rule 23 of the Federal Rules

of Civil Procedure and Plaintiffs' counsel as Lead Counsel;

(b) Awarding compensatory damages in favor of Plaintiffs and the other Class

members against all defendants, jointly and severally, for all damages sustained as a result of

defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;

(c) Awarding Plaintiffs and the Class their reasonable costs and expenses incurred

in this action, including counsel fees and expert fees; and

(d) Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

Dated: February 3, 2005 BRODSKY & SMITH, LLC

By: /s/Evan J. Smith (3254)Evan J. Smith, Esquire240 Mineola BoulevardMineola, NY 11501516.741.4977

SCHIFFRIN & BARROWAY, LLPMarc A. Topaz, EsquireRichard A. Maniskas, EsquireTamara Skvirsky, EsquireThree Bala Plaza EastSuite 400Bala Cynwyd, PA 19004(610) 667-7706

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case 1:05-cv-02018-rpp document1 filed 02/10/2005 page 1...

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