UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


FORM 20-F

 


 

¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20042005

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

OR

¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

Commission file numbers: 1-14696; 333-12222number: 1-14696

 


China Mobile (Hong Kong) Limited

(Exact Name of Registrant as Specified in Its Charter)

N/A

(Translation of Registrant’s Name into English)

 


Hong Kong, China

(Jurisdiction of Incorporation or Organization)

60th Floor, The Center

99 Queen’s Road Central

Hong Kong, China

(Address of Principal Executive Offices)

 


Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class


 

Name of Each Exchange on Which Registered


Ordinary shares, par value HK$0.10 per share The New York Stock Exchange, Inc.*

 

*Not for trading, but only in connection with the listing on the New York Stock Exchange, Inc. of American depositary shares representing the ordinary shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

(Title of Class)

 


Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of December 31, 2004, 19,673,185,2362005, 19,835,160,399 ordinary shares, par value HK$0.10 per share, were issued and outstanding.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or (15)(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨    Item 18  x

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 



TABLE OF CONTENTS

China Mobile (Hong Kong) Limited

 

      Page

Forward-lookingForward-Looking Statements

  1

Special Note on Our Financial Information and Certain Statistical Information presentedPresented in thisThis Annual Report

  2
PART I
PART I

Item 1.

  Identity of Directors, Senior Management and Advisers.  43

Item 2.

  Offer Statistics and Expected Timetable.  43

Item 3.

  Key Information.  4

Item 4.

  Information on the Company.  1714

Item 4A.Unresolved Staff Comments.29
Item 5.

  Operating and Financial Review and Prospects.  3329

Item 6.

  Directors, Senior Management and Employees.  4743

Item 7.

  Major Shareholders and Related Party Transactions.  5550

Item 8.

  Financial Information.  6256

Item 9.

  The Offer and Listing.  6256

Item 10.

  Additional Information.  6357

Item 11.

  Quantitative and Qualitative Disclosures aboutAbout Market Risk.  7063

Item 12.

  Description of Securities Other than Equity Securities.  7264
PART II
PART II

Item 13.

  Defaults, Dividend Arrearages and Delinquencies.  7364

Item 14.

  Material Modifications to the RightRights of Security Holders and Use of Proceeds.  7364

Item 15.

  Controls and Procedures.  7365

Item 16A.

  Audit Committee Financial ExpertExpert.  7365

Item 16B.

  Code of EthicsEthics.  7365

Item 16C.

  Principal Accountant Fees and ServicesServices.  7365

Item 16D.

  Exemptions from the Listing Standards for Audit CommitteesCommittees.  7465

Item 16E.

  Purchases of Equity Securities by the Issuer and Affiliated PurchasersPurchasers.  7465
PART III
PART III

Item 17.

  Financial Statements.  7565

Item 18.

  Financial Statements.  7566

Item 19.

  Exhibits.  7566

-i-


Forward-Looking Statements

This annual report on Form 20-F contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are, by their nature, subject to significant risks and uncertainties, anduncertainties. These forward-looking statements include, without limitation, statements relating to:

 

our business strategies;

 

our operations and business prospects;

 

our network expansion plans and related capital expenditure plans, including, among others, those relating to third generation mobile telecommunications technology, or 3G, network constructions;

 

the planned development of new mobile technologies and other technologies and related applications;

 

the expected impact of tariff changes on our business, financial condition and results of operations;

 

the expected impact of new services on our business, financial condition and results of operations; and

 

future developments in the telecommunications industry in Mainland China, including the restructuring of the industry and changes in government policies and the industry regulatory environment.China.

The words “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “seek”, “will” and similar expressions, as they relate to us, are intended to identify certain of suchthese forward-looking statements. We do not intend to update these forward-looking statements.

These forward-looking statements are subject to risks, uncertainties and assumptions, some of which are beyond our control. In addition, these forward-looking statements reflect our current views with respect to future events and are not a guarantee of future performance. Actual results may differ materially from information contained in the forward-looking statements as a result of a number of factors, including, without limitation:limitation, the risk factors set forth in “Item 3. Key Information – Risk Factors” and the following:

 

any changes in the regulatory policies of the PRC Ministry of Information Industry andor other relevant government authorities, which could affect, among other things, the granting of requisite government approvals, licenses and permits, interconnection and transmission line arrangements, tariff policies, capital investment priorities, the provision of telephone services in rural areas of the People’s Republic of China, or the PRC, and spectrum and numbering resources allocation;

 

the effect of competition on the demand for and price of our services;

 

changes in mobile telephony and related technologies, which could affect the viability and competitiveness of our mobile telecommunications networks; and

 

changes in political, economic, legal and social conditions in Mainland China, including, without limitation, the ChinesePRC government’s policies with respect to new entrants in the telecommunications industry, the entry of foreign companies into Mainland China’s telecommunications market and Mainland China’s continued economic growth.

In addition, our future network expansion and other capital expenditure and development plans are dependent on numerous factors, including, among others:

 

our ability to obtain adequate financing on acceptable terms;

 

the adequacy of currently available spectrum or the availability of additional spectrum;

 

-1-


the availability of transmission lines and equipment, and the availability of the requisite number of sites for locating network equipment, on reasonable commercial terms;

 

our ability to develop or obtain new technology and related applications; and

 

the availability of qualified management and technical personnel.


Special noteNote on our financial informationOur Financial Information and

certain statistical information presentedCertain Statistical Information Presented in thisThis Annual Report

As required under generally accepted accounting principles in Hong Kong, or Hong Kong GAAP, we adopted the purchase accounting method to account for our acquisitions of various regional mobile telecommunications companies and other telecommunications assets, as described in “Item 4. Information on the Company — The History and Development of the Company”. Accordingly, our consolidated financial statements and, except as otherwise noted, all other Hong Kong GAAP financial information presented in this annual report on Form 20-F, include the results of these companies only from the respective dates of acquisition.

In prior years,For acquisitions before January 1, 2001, positive goodwill arising from acquisitions was eliminated against reserves, and negative goodwill arising from acquisitions was credited to a capital reserve. Effective January 1, 2001, in order to comply with Statement of Standard Accounting Practice, or SSAP, 30 “Business combinations”, issued by the Hong Kong Society of Accountants, we adopted a new accounting policy for goodwill. For acquisitions on or after January 1, 2001, positive goodwill arising from acquisitions is amortized to the consolidated statements of income on a straight-line basis over its estimated useful life, which shall not exceed 20 years. Positive goodwill is stated in the consolidated balance sheetsheets at cost less any accumulated amortization and any impairment losses. DespiteEffective January 1, 2005, in order to comply with Hong Kong Financial Reporting Standard 3, ���Business Combinations”, or HKFRS 3, and Hong Kong Accounting Standard 36, “Impairment of Assets”, or HKAS 36, issued by the Hong Kong Institute of Certified Public Accountants, or HKICPA, we adopted a change innew accounting policy for goodwill, goodwill arising from acquisitions prior to January 2001goodwill. The new policy has not been adjusted as we have taken advantage ofapplied prospectively in accordance with the transitional provisions as set out in paragraph 88 of SSAP 30HKFRS 3 to the effect that we no longer amortize goodwill, but test goodwill at least annually for impairment. In addition, the new accounting policycumulative amount of amortization as of January 1, 2005 has been adopted prospectively only from January 1, 2001 onwards.

offset against the cost of the goodwill and comparative amounts have not been restated.

Under generally accepted accounting principles in the United States, or U.S. GAAP, as a result of our being under common control with each of these companies prior to the acquisitions, each of the acquisitions was considered to be a “combination of entities under common control”. Under U.S. GAAP, combinations of entities under common control are accounted for under the “as if pooling-of-interests” method, whereby assets and liabilities are accounted for at historical cost and the financial statements of previously separate companies for periods prior to the combination generally are restated on a combined basis. See “Item 5. Operating and Financial Review and Prospects”.

Prior to 2003, deferred tax liabilities were provided using the liability method in respect of the taxation effect arising from all material timing differences between the accounting and tax treatment of income and expenditure, which were expected with reasonable probability to crystallize in the foreseeable future. Deferred tax assets were not recognized unless their realization was assured beyond reasonable doubt. With effect from January 1, 2003, in order to comply with Statement of Standard Accounting Practice (“SSAP 12 (revised)”) issued by the Hong Kong Society of Accountants,HKICPA, we adopted a new accounting policy for deferred tax. Under our current accounting policy, deferred tax liabilities are provided in full on taxable temporary differences, while deferred tax assets are recognized to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences can be utilized. As a result, goodwill, deferred tax assets, deferred tax liabilities and reserves in the consolidated balance sheets have been restated. In addition, deferred tax assets and deferred tax liabilities have been reclassified into non-current assets and liabilities, respectively. Income tax in the consolidated statements of income havehas also been revised.

Prior to 2005, minority interests were presented in the consolidated balance sheets separately from liabilities and as a deduction from net assets, and minority interests in our results for the year were also separately presented in the consolidated statements of income as a deduction before arriving at the profit attributable to equity shareholders. Effective January 1, 2005, in order to comply with HKAS 1, “Presentation of Financial Statements”, and HKAS 27, “Consolidated and Separate Financial Statements”, issued by the HKICPA, we adopted a new accounting policy for minority interests. In particular, minority interests are presented in the consolidated balance sheets and consolidated statements of equity separately from capital and reserves attributable to equity shareholders, and minority interests in our results are presented on the face of the consolidated statements of income as an allocation of the total profit or loss for the year between minority interests and equity shareholders. These changes in presentation have been applied retrospectively and comparative amounts have been restated.

-2-Prior to 2005, land use rights and buildings held for our own use were stated at cost less accumulated depreciation and impairment losses. Depreciation was calculated to write off the cost of these assets on a straight-line basis over their estimated useful lives to residual value. Effective January 1, 2005, in order to comply with HKAS 17, “Leases”, issued by the HKICPA, we adopted a new accounting policy for land use rights and buildings held for own use by reclassifying land use rights and buildings held for our own use as being held under an operating lease. The corresponding amortization charges relating to land use rights and buildings held for our own use were reclassified from depreciation to other operating expenses. The new accounting policy has been adopted retrospectively and comparative amounts have been restated. There is no impact on our net assets as of the year end and on our profit attributable to equity shareholders for the periods presented.


Prior to 2005, no employee benefit cost or obligation was recognized when we granted employees (which term includes directors) share options on our shares. When the share options were exercised, capital and reserves attributable to equity shareholders were increased by the amount of the proceeds received. Effective January 1, 2005, in order to comply with HKFRS 2, “Share-Based Payments”, or HKFRS 2, issued by the HKICPA, we adopted a new accounting policy for the employee share option scheme where the fair value (measured at grant date using the binomial lattice model) of share options granted to employees is recognized as an employee cost with a corresponding increase in capital and reserves attributable to equity shareholders. The new accounting policy has been applied retrospectively and comparative amounts have been restated in accordance with HKFRS 2, except that we have adopted the transitional provisions set out in paragraph 53 of HKFRS 2, under which the new recognition and measurement policies have not been applied to: (i) all share options granted to employees on or before November 7, 2002; and (ii) all share options granted to employees after November 7, 2002 but which had vested before January 1, 2005.

Under U.S. GAAP, the compensation expense of share options granted was historically determined based on the excess, if any, of the quoted market price of the shares on the date of grant over the exercise price of the share options. The excess amount was charged to the consolidated statements of income over the vesting period of the share options. As a result, any expenses recognized based on the fair value of share options under Hong Kong GAAP were reversed under U.S. GAAP. In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123 (revised 2004), “Share-Based Payment”, or SFAS No. 123R, which requires companies to measure and recognize compensation expense for all share-based payment at fair value. SFAS No. 123R is effective for all interim and annual periods beginning after June 15, 2005. We have adopted SFAS No. 123R for accounting periods commencing on January 1, 2006. We will use the modified-prospective transition method and will not restate prior periods for the adoption of SFAS No. 123R. Since we will recognize the fair value of share options granted to employees as an employee cost in order to comply with HKFRS 2, we believe the impact on us as a result of the adoption of SFAS No. 123R is not significant.

Prior to 2005, convertible notes and bonds were stated in the consolidated balance sheets at face value, less unamortized discount arising upon issuance. The discount was amortized on a straight-line basis over the period from the date of issuance to the date of maturity. Effective January 1, 2005, in order to comply with HKAS 32, “Financial Instruments: Disclosure and Presentation”, and HKAS 39, “Financial Instruments: Recognition and Measurement”, or HKAS 39, issued by the HKICPA, we adopted new accounting policies for financial instruments. Under our new accounting policies, the liability component of the convertible notes and bonds are recognized initially at fair value less attributable transaction costs and the equity component (representing the excess proceeds over the amount initially recognized as the liability component) is recognized in the capital reserve until the notes are converted or redeemed. The liability component of convertible notes and bonds are subsequently carried at amortized cost and the corresponding interest expenses recognized in the consolidated statements of income are calculated using the effective interest method. The new accounting policies have been adopted by way of an opening balance adjustment to retained earnings as of January 1, 2005. Comparative amounts have not been restated as this is prohibited by the transitional arrangements in HKAS 39.

The statistical information set forth in this annual report on Form 20-F relating to Mainland China is taken or derived from various publicly available government publications that have not been prepared or independently verified by us. This statistical information may not be consistent with other statistical information from other sources within or outside Mainland China.

-3-


PART I

Item 1. Identity of Directors, Senior Management and Advisers.

Not applicable.

Item 2. Offer Statistics and Expected Timetable.

Not applicable.

Item 3. Key Information.

Selected Financial Data

The following tables present selected historical financial data of our company as of and for each of the years in the five-year period ended December 31, 2004.2005. The selected historical income statement data for the years ended December 31, 2002, 2003, 2004 and 20042005 and the selected historical balance sheet data as of December 31, 20032004 and 20042005 set forth below are derived from, and should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements, including the related notes, included elsewhere in this annual report.report on Form 20-F. The selected historical Hong Kong GAAP income statement data for the yearyears ended December 31, 20002001 and 20012002 and the selected historical Hong Kong GAAP balance sheet data as of December 31, 2000, 2001, 2002 and 20022003 are derived from our audited financial statements that are not included in this annual report.

report on Form 20-F. Certain historical income statement data for the years ended December 31, 2001, 2002, 2003 and 2004 and certain historical balance sheet data as of December 31, 2001, 2002, 2003 and 2004 have been restated to conform to current year’s presentation.

Our consolidated financial statements are prepared and presented in accordance with Hong Kong GAAP. As required under Hong Kong GAAP, we adopted the purchase accounting method to account for our acquisitions of the various regional mobile telecommunications companies and other telecommunications assets, as described in “Item 4. Information on the Company — The History and Development of the Company”. Accordingly, our consolidated financial statements and, except as otherwise noted, all other Hong Kong GAAP financial information presented in this annual report on Form 20-F, include the results of these companies only from the respective dates of acquisition. In contrast, under U.S. GAAP, our acquisitions of these companies are each considered a combination of entities under common control which would be accounted for under the “as if pooling-of-interests” method, whereby assets and liabilities are accounted for at historical cost and the accountsfinancial statements of previously separate companies for periods prior to the combination generally are restated on a combined basis. For information regarding significant differences between Hong Kong GAAP and U.S. GAAP as they relate to us, and the effects of such differences on net profit attributable to equity shareholders for the years ended December 31, 2002, 2003, 2004 and 20042005 and shareholders’ equity as of December 31, 20032004 and 2004,2005, see note 3238 to our consolidated financial statements. In addition, our condensed consolidated financial statements prepared and presented in accordance with U.S. GAAP for the relevant periods are set forth in note 3238 to our consolidated financial statements.

-4-

   As of or for the year ended December 31,
   2001(1)
RMB
  2002(1)
RMB
  2003(1)
RMB
  2004(1)
RMB
  2005
RMB
  2005
US$
   (in millions, except share, per share and per ADS information)

Income Statement Data:

            

Hong Kong GAAP

            

Operating revenue

  100,331  128,561  158,604  192,381  243,041  30,116

Operating expenses

  59,319  79,765  105,401  132,902  169,355  20,985

Profit from operations

  41,012  48,796  53,203  59,479  73,686  9,131

Profit before tax

  41,717  48,978  52,959  60,951  78,264  9,698

Income tax

  13,763  16,375  17,412  19,180  24,675  3,058

Profit for the year attributable to equity shareholders

  27,955  32,601  35,556  41,749  53,549  6,635

Basic net income per share(2)

  1.50  1.70  1.81  2.12  2.71  0.34

Diluted net income per share(2)

  1.50  1.70  1.81  2.12  2.70  0.33

Basic net income per ADS(2)

  7.51  8.51  9.04  10.61  13.57  1.68

Diluted net income per ADS(2)

  7.51  8.50  9.03  10.59  13.49  1.67

Shares utilized in basic calculation (in thousands)

  18,605,371  19,151,322  19,671,654  19,673,185  19,738,229  19,738,229

Shares utilized in diluted calculation (in thousands)

  18,698,023  19,243,050  19,762,812  19,774,093  19,892,163  19,892,163

U.S. GAAP(3)

            

Operating revenue

  148,229  167,640  186,060  210,637  249,576  30,925

Operating expenses

  93,743  108,622  126,714  146,033  171,855  21,294

Profit from operations

  54,486  59,018  59,346  64,604  77,721  9,631

Profit before tax

  53,714  58,404  58,520  64,847  78,489  9,726

Income tax

  16,886  18,986  19,009  19,764  23,945  2,967

Profit for the year attributable to equity shareholders

  36,829  39,416  39,520  45,061  54,504  6,754

Basic net income per share(2)

  1.90  2.01  2.01  2.29  2.76  0.34

Diluted net income per share(2)

  1.89  2.01  2.01  2.29  2.75  0.34

Basic net income per ADS(2)

  9.48  10.07  10.05  11.45  13.81  1.71

Diluted net income per ADS(2)

  9.46  10.06  10.03  11.43  13.73  1.70

Share utilized in basic calculation (in thousands)

  19,432,886  19,561,679  19,671,654  19,673,185  19,738,229  19,738,229

Share utilized in diluted calculation (in thousands)

  19,525,538  19,653,406  19,762,812  19,774,093  19,892,163  19,892,163

Balance Sheet Data:

            

Hong Kong GAAP

            

Current assets

            

Cash and cash equivalents

  21,821  32,575  39,129  45,149  64,461  7,988

Deposits with banks

  14,970  11,069  17,227  20,264  41,925  5,195

Accounts receivable

  5,728  6,066  6,116  6,553  6,603  818

Property, plant and equipment

  103,076  161,355  167,177  212,459  216,505  26,827

Total assets

  174,953  286,021  307,303  368,752  421,027  52,171

Total short-term debt(4)

  5,439  8,200  8,174  2,523  68  8

Total long-term debt(5)

  6,739  12,676  672  —    —    —  

Fixed rate notes(6)

  4,956  4,961  4,984  —    —    —  

Convertible notes(7)

  5,708  5,711  5,735  5,725  —    —  

Bonds

  5,000  13,000  13,000  13,000  12,912  1,600

Deferred payable(8)

  —    15,176  9,976  23,633  23,633  2,929

Total liabilities

  61,938  112,565  108,318  135,348  147,920  18,330

Share capital

  1,986  2,099  2,099  2,102  2,116  262

Shareholders’ equity

  112,983  173,265  198,803  233,161  272,824  33,806


   As of or for the year ended December 31,

   

2000

RMB


  

2001

RMB


  

2002

RMB


  

2003

RMB


  

2004

RMB


  

2004

US$


   (in millions, except share, per share and per ADS information)

Income Statement Data:

                  

Hong Kong GAAP

                  

Operating revenue

  64,984  100,331  128,561  158,604  192,381  23,244

Operating expenses

  38,158  59,319  79,765  105,401  132,647  16,027

Operating profit

  26,826  41,012  48,796  53,203  59,734  7,217

Write-down and write-off of analog network equipment

  1,525  —    —    —    —    —  

Profit before tax and minority interest

  26,393  41,717  48,978  52,959  61,206  7,395

Income tax

  8,153  13,763  16,375  17,412  19,180  2,317

Net profit

  18,240  27,955  32,601  35,556  42,004  5,075

Basic net profit per share(1)

  1.27  1.50  1.70  1.81  2.14  0.26

Diluted net profit per share(1)

  1.27  1.50  1.70  1.81  2.13  0.26

Basic net profit per ADS(1)

  6.34  7.51  8.51  9.04  10.68  1.29

Diluted net profit per ADS(1)

  6.33  7.51  8.50  9.03  10.65  1.29

Shares utilized in basic calculation (in thousands)

  14,394,313  18,605,371  19,151,322  19,671,654  19,673,185  19,673,185

Shares utilized in diluted calculation (in thousands)

  14,409,503  18,698,023  19,243,050  19,762,812  19,774,093  19,774,093

U.S. GAAP(2)

                  

Operating revenue

  126,235  143,347  162,959  180,281  204,264  24,680

Operating expenses

  89,516  90,939  105,991  123,602  143,003  17,278

Operating profit

  36,719  52,408  56,968  56,679  61,261  7,402

Profit before tax and minority interest

  36,582  53,714  58,404  58,520  64,847  7,835

Income tax

  11,928  16,886  18,986  19,009  19,764  2,388

Net profit

  24,653  36,829  39,416  39,520  45,061  5,444

Basic net profit per share(1)

  1.33  1.90  2.01  2.01  2.29  0.28

Diluted net profit per share(1)

  1.33  1.89  2.01  2.01  2.29  0.28

Basic net profit per ADS(1)

  6.67  9.48  10.07  10.05  11.45  1.38

Diluted net profit per ADS(1)

  6.66  9.46  10.06  10.03  11.43  1.38

Share utilized in basic calculation (in thousands)

  18,493,862  19,432,886  19,561,679  19,671,654  19,673,185  19,673,185

Share utilized in diluted calculation (in thousands)

  18,509,052  19,525,538  19,653,406  19,762,812  19,774,093  19,774,093

Balance Sheet Data:

                  

Hong Kong GAAP

                  

Current assets

                  

Cash and cash equivalents

  27,702  21,821  32,575  39,129  45,149  5,455

Deposits with banks

  12,204  14,970  11,069  17,227  20,264  2,448

Accounts receivable

  7,252  5,728  6,066  6,116  6,553  792

Fixed assets

  87,465  105,208  165,409  171,604  218,063  26,347

Total assets

  157,702  174,953  286,021  307,303  368,752  44,553

Total short-term debt(3)

  12,095  5,439  8,200  8,174  2,523  304

Total long-term debt(4)

  13,708  6,739  12,676  672  —    —  

Fixed rate notes(5)

  4,953  4,956  4,961  4,984  —    —  

Convertible notes

  5,708  5,708  5,711  5,735  5,725  692

Bonds

  —    5,000  13,000  13,000  13,000  1,571

Deferred payable(6)

  —    —    15,176  9,976  23,633  2,855

Total liabilities(7)

  72,661  61,938  112,565  108,318  135,348  16,353

Share capital

  1,986  1,986  2,099  2,099  2,102  254

Shareholders’ equity

  85,024  112,983  173,265  198,803  233,161  28,171

-5-


  As of or for the year ended December 31,

   As of or for the year ended December 31, 
  

2000

RMB


 

2001

RMB


 

2002

RMB


 

2003

RMB


 

2004

RMB


 

2004

US$


   2001(1)
RMB
 2002(1)
RMB
 2003(1)
RMB
 2004(1)
RMB
 2005
RMB
 2005
US$
 
  (in millions, except share, per share and per ADS information)   (in millions, except share, per share and per ADS information) 

U.S. GAAP(2)

   

Fixed assets

  126,833  166,195  197,933  206,635  218,602  26,412 

U.S. GAAP(3)

       

Property, plant and equipment

  163,825  195,100  203,486  215,240  218,362  27,058 

Total assets

  226,513  274,880  293,768  316,898  334,003  40,355   274,880  293,768  316,898  334,003  385,618  47,783 

Total long-term debt(4)(5)

  29,465  11,803  12,687  672  —    —     11,803  12,687  672  —    —    —   

Fixed rate notes(5)(6)

  4,953  4,956  4,961  4,984  —    —     4,956  4,961  4,984  —    —    —   

Convertible notes(7)

  5,708  5,708  5,711  5,735  5,725  692   5,708  5,711  5,735  5,725  —    —   

Bonds

  —    5,000  13,000  13,000  13,000  1,571   5,000  13,000  13,000  13,000  12,912  1,600 

Deferred payable(6)(8)

  —    —    15,176  9,976  23,633  2,855   —    15,176  9,976  23,633  23,633  2,929 

Shareholders’ equity

  101,877  153,572  159,936  190,828  198,119  23,937   153,572  159,936  190,828  198,119  237,252  29,398 

Other Financial Data:

          

Hong Kong GAAP

          

Capital expenditures(8)

  21,964  39,500  41,000  43,871  59,143  7,146 

Capital expenditures and land lease prepayments(9)

  39,500  41,000  43,871  59,143  67,106  8,316 

Net cash from operating activities

  35,449  50,971  69,422  85,534  103,779  12,538   50,971  69,422  85,534  103,779  131,709  16,321 

Net cash used in investing activities

  (91,869) (45,248) (64,117) (54,292) (73,302) (8,857)  (45,248) (64,117) (54,292) (73,302) (87,116) (10,796)

Net cash from/(used in) financing activities

  64,773  (11,604) 5,449  (24,688) (24,457) (2,954)

Net cash (used in)/from financing activities

  (11,604) 5,449  (24,688) (24,457) (25,173) (3,119)

Dividend declared or proposed

  —    —    6,678  7,517  13,789  1,666   —    6,678  7,517  13,789  21,026  2,605 

U.S. GAAP(2)

   

U.S. GAAP(3)

       

Net cash flow from operating activities

  62,624  67,903  88,429  93,131  111,112  13,425   67,903  88,429  93,131  111,112  131,593  16,306 

Dividend declared or proposed

  —    —    6,678  7,517  13,789  1,666   —    6,678  7,517  13,789  21,026  2,605 

(1)As described in Note 3 and Note 38 to our consolidated financial statements, certain restatements to periods prior to 2005 have been made to comply with the new and revised Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards and Interpretations issued by the HKICPA that were adopted in 2005 and certain comparative data under U.S. GAAP have been reclassified to conform to current year’s presentation.
(2)The basic net profitincome per share and per ADS amounts under Hong Kong GAAP for the years ended December 31, 2000, 2001, 2002, 2003, 2004 and 20042005 have been computed by dividing net profit attributable to our equity shareholders by the weighted average number of shares and the weighted average number of ADSs, respectively, outstanding during 2000, 2001, 2002, 2003, 2004 and 2004.2005. The calculation of diluted net profitincome per share under Hong Kong GAAP for the years ended December 31, 2000, 2001, 2002, 2003, 2004 and 2004 have2005 has been compiledcomputed after adjusting for the effects of all dilutive potential ordinary shares, respectively.

The basic net profitincome per share and per ADS amounts under U.S. GAAP for the years ended December 31, 2000, 2001 and 2002 have been computed by dividing net profit attributable to equity shareholders by the weighted average number of shares and the weighted average number of ADSs, respectively, as if 3,779,407,375 ordinary shares representing 755,881,475 ADSs issued to China Mobile Hong Kong (BVI) Limited as part of the consideration in the acquisition of Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi Mobile, 827,514,446 ordinary shares representing 165,502,889 ADSs issued to China Mobile Hong Kong (BVI) Limited as part of the consideration in the acquisition of Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi Mobile were outstanding during these periods (in addition to shares actually issued during these years). The basic net profitincome per share and per ADS amountamounts under U.S. GAAP for the yearyears ended December 31, 2003, 2004 and 2004 has2005 have been computed by dividing net profit attributable to equity shareholders by the weighted average number of shares and weighted average number of ADSs, respectively, outstanding during 2003, 2004 and 2004.2005. The calculation of diluted net profitincome per share under U.S. GAAP for the years ended December 31, 2000, 2001, 2002, 2003, 2004 and 2004 have2005 has been compiledcomputed after adjusting for the effects of all dilutive potential ordinary shares, respectively. For the years ended December 31, 2000, 2001, 2002, 2003, 2004 and 20042005 all dilutive potential ordinary shares resulting from the share options granted to the directors and employees under the share option scheme would decrease profit attributable to equity shareholders per share. In 2000, since all potential ordinary shares resulting from the convertible notes would increase profit attributable to shareholders per share as a result of savings on interest payable on the convertible notes, the anti-dilutive effects of potential ordinary shares were not taken into account in calculating diluted earnings per share. For the years ended December 31, 2001, 2002, 2003, 2004 and 20042005 all dilutive potential ordinary shares resulting from convertible notes would decrease profit attributable to equity shareholders per share.

 

(2)(3)The amounts for the years ended December 31, 2000, 2001, 2002, 2003, 2004 and 20042005 are presented to reflect our acquisitions of the various regional mobile telecommunications companies and other telecommunications assets under the “as if pooling-of-interests” method, as well as the effects of other differences between Hong Kong GAAP and U.S. GAAP.
(3)(4)Includes short-term bank and other loans, current portion of long-term bank and other loans and current portion of capital lease obligations.
(4)(5)Includes long-term bank and other loans and obligations under capital leases, net of current portion.

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(5)(6)The fixed rate notes issued on November 2, 1999 with aan aggregate principal amount of US$600 million were fully redeemed on November 2, 2004.
(6)(7)The convertible notes issued on November 3, 2000 with an aggregate principal amount of US$690 million were fully redeemed on November 3, 2005.
(8)Represents the balance of the purchase consideration payable to China Mobile Hong Kong (BVI) Limited for our acquisition of the eight regional mobile telecommunications companies in 2002 and for our acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in 2004, as applicable. See “Item 4. Information on the Company”.
(7)Excludes minority interest.
(8)(9)Represents payments made for capital expenditures and land lease prepayments during the year.

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Exchange Rate Information

We publish our consolidated financial statements in Renminbi. Solely for the convenience of the reader, this annual report on Form 20-F contains translations of certain Renminbi and Hong Kong dollar amounts into U.S. dollars and vice versa at RMB8.2765RMB8.0702 = US$1.00 and HK$7.77237.7533 = US$1.00, the noon buying rates in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2004.2005. These translations should not be construed as representations that the Renminbi or Hong Kong dollar amounts could actually be converted into U.S. dollars at such rates or at all.

The noon buying rates in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York were RMB8.2765RMB8.0120 = US$1.00 and HK$7.77817.7596 = US$1.00, respectively, on June 10, 2005.6, 2006. The following table sets forth the high and low noon buying rates between Renminbi and U.S. dollars and between Hong Kong dollars and U.S. dollars for each month during the previous six months:

Noon Buying Rate

 

   RMB per US$1.00

       HK$ per US$1.00

   High

  Low

       High

  Low

December 2004

  8.2767  8.2765    December 2004  7.7821  7.7698

January 2005

  8.2765  8.2765    January 2005  7.7994  7.7775

February 2005

  8.2765  8.2765    February 2005  7.7999  7.7984

March 2005

  8.2765  8.2765    March 2005  7.7998  7.7987

April 2005

  8.2765  8.2765    April 2005  7.7995  7.7946

May 2005

  8.2765  8.2765    May 2005  7.7995  7.7767

June 2005 (as of June10)

  8.2765  8.2765    June 2005 (as of June10)  7.7842  7.7781

   RMB per US$1.00       HK$ per US$1.00
   High  Low       High  Low

December 2005

  8.0808  8.0702            December 2005  7.7548  7.7516

January 2006

  8.0596  8.0702            January 2006  7.7571  7.7506

February 2006

  8.0616  8.0415            February 2006  7.7618  7.7564

March 2006

  8.0505  8.0167            March 2006  7.7620  7.7570

April 2006

  8.0248  8.0040            April 2006  7.7598  7.7529

May 2006

  8.0300  8.0005            May 2006  7.7575  7.7510

June 2006 (up to June 6, 2006)

  8.0225  8.0057            June 2006 (up to June 6, 2006)  7.7596  7.7578

The following table sets forth the average noon buying rates between Renminbi and U.S. dollars and between Hong Kong dollars and U.S. dollars for each of 2000, 2001, 2002, 2003, 2004 and 2004,2005, calculated by averaging the noon buying rates on the last day of each month during the relevant year.

Average Noon Buying Rate

 

   RMB per US$1.00

  HK$ per US$1.00

2000

  8.2784  7.7936

2001

  8.2772  7.7997

2002

  8.2772  7.7996

2003

  8.2771  7.7864

2004

  8.2768  7.7899

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   RMB per US$1.00  HK$ per US$1.00

2001

  8.2772  7.7997

2002

  8.2772  7.7996

2003

  8.2771  7.7864

2004

  8.2768  7.7899

2005

  8.1826  7.7755

Risk Factors

We wish to caution readers that the following important factors, and those important factors described in other reports submitted to, or filed with, the Securities and Exchange Commission, among other factors, could affect our actual results and could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf and that such factors may adversely affect our business and financial status and therefore the value of your investment:

Risks Relating to Our Business

Extensive government regulation may limit our flexibility to respond to market conditions, competition or changes in our cost structure.

The PRC Ministry of Information Industry regulates, among other things, the following areas of the telecommunications industry under the leadership of the State Council of China:the PRC, or the State Council:

 

formulating and enforcing industry policy, standards and regulations;

 

granting telecommunications licenses and permits;

 

formulating interconnection and settlement standards for implementation between telecommunications networks;

together with other relevant regulatory authorities, formulating tariff and service charge standards for certain telecommunications services;

 

supervising the operations of telecommunications services providers;

 

promoting fair and orderly market competition among operators; and

 

allocating and administering public telecommunications resources, such as radio frequencies, numbernumbering resources, domain names and addresses of telecommunications networks.

Other ChinesePRC government authorities also take part in regulating the telecommunications industry in the areas such as tariff policies and foreign investment in the telecommunications industry.investment. The regulatory framework within which we operate may limit our flexibility to respond to market conditions, competition or changes in our cost structure. Moreover, we cannot predict when or if changes in tariff policies or rates may occur, including, for example, the possible implementation of a calling-party-pays tariff scheme. Although we and other telecommunications services providers have, on a limited basis, offered certain localized or promotional calling packages which incorporate some of the calling-party-pays features, the Chinese government has not yet implemented regulations to adopt the calling-party-pays concept, and we cannot predict whether such regulations may be forthcoming or, if passed, what requirements the new regulations might entail.occur. Future adverse changes in tariff policies and rates could decrease our revenues and reduce our profitability.

We operate our businesses with approvals granted by the State Council and under licenses granted by the Ministry of Information Industry. If these approvals or licenses are revoked or suspended, or if the conditions or other obligations relating to these approvals or licenses are amended in any material respect, our business and operations will be materially and adversely affected. Moreover, while we are actively preparing for 3G business, we cannot assure you that we will be granted the requisite approvals and licenses by the ChinesePRC government in a timely manner, or at all.

We may be affected by future regulatory changes.

To provide a uniform regulatory framework for the orderly development of the telecommunications industry, the Ministry of Information Industry, under the direction of the State Council, ishas been preparing a draft

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telecommunications law. According to the 2006 legislation agenda announced by the National People’s Congress, the draft telecommunications law is scheduled to be submitted to the Standing Committee of the National People’s Congress for initial review in August 2006. If and when the telecommunications law is adopted by the National People’s Congress, it is expected to become the fundamental telecommunications statute and the legal basis for telecommunications regulations in Mainland China. In 2000, the State Council promulgated a set of telecommunications regulations, or the Telecommunications Regulations, that apply in the interim period prior to the adoption of the telecommunications law. Although we expect that the telecommunications law will positively affect the overall development of the telecommunications industry in Mainland China, we do not fully know what the nature and scope of the telecommunications law will be. The telecommunications law and other new telecommunications regulations or rules may contain provisions that could materially and adversely affect our business, financial condition and results of operations.

The PRC government may require major operators, including us, to provide universal services with specified obligations, and we may not be compensated adequately for providing such services.

Under the Telecommunications Regulations, telecommunications operators in Mainland China are required to fulfill universal service obligations in accordance with relevant regulations to be promulgated by the PRC government, and the Ministry of Information Industry has the authority to delineate the scope of universal service obligations. The Ministry of Information Industry, together with other PRC governmental authorities, is also responsible for formulating administrative rules relating to the establishment of a universal service fund and compensation schemes for universal services. These rules have not yet been promulgated, and there are currently no specific regulatory requirements relating to the provision of universal services in Mainland China.

While the scope of specific universal services obligations is not yet clear, we believe that such services may include mandatory provision of basic mobile telecommunications services in less economically developed areas in Mainland China and mandatory contribution to a universal service fund. In addition, as part of the transitional measures prior to the formalization of a universal service obligation framework, the Ministry of Information Industry has recently required major telecommunication servicetelecommunications services providers in Mainland China, including China Mobile Communications Corporation, or CMCC, to participate in a project to provide telephonebasic telecommunications services in a number of remote villages in Mainland China. However, it is currently uncertain as to

We cannot predict whether we will be required byto provide universal services in the Ministry of Information Industry to maintain network facilitiesfuture and, provide telephone services as part of the transitional measures. Furthermore, to the extent we are required to maintain such network facilities and provide such telephone services, it is currently uncertainif so, whether we will be adequately compensated by the government, or be able to realize an adequate return on investments for expanding networks to, and providing telecommunications services in, those less economically developed areas due to potentially higher capital expenditure requirements, lower usage by customers and lack of flexibility in setting our tariffs.the universal service fund. We also cannot predictassure you whether we will be required to make contribution to the universal service fund. EitherAny of these events may adversely affect our financial condition.condition and results of operations.

Competition from other telecommunications services providers may affect our subscriber growth and profitability by causing the rate of our subscriber growth to decline and bringing about decreases in tariff rates and increases in selling and promotional expenses.

We compete with other telecommunications services providers in all of the thirty-one provinces, autonomous regions and directly-administered municipalities in Mainland China. The ChinesePRC government encourages orderly competition in the telecommunications industry in Mainland China. In particular, the ChinesePRC government has extended favorable regulatory policies to some of our competitors, such as China United Telecommunications Corporation, or China Unicom, in order to help them become more viable competitors. For example, the ChinesePRC government has permitted China Unicom to lower its mobile telecommunications services tariffs by up to 10% below the government standard rates. We believe this policy has helped China Unicom capture a significant number of price-sensitive mobile telecommunications services subscribers. As a result, China Unicom’s market share has increased over the past few years.

In addition, China Telecommunications Corporation, or China Telecom, and China Netcom Communications Group Corporation, or China Netcom, provide Xiaolingtong services to their customers. Xiaolingtong is a local area wireless telephone service with limited mobility and limited coverage. Xiaolingtong offers lower-priced services. As a result, Xiaolingtong services have, to a certain extent, attracted customers principally in the low-end markets. Increased competition from Xiaolingtong or other wireless telecommunications services could materially affect our business and prospects.

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Increased competition from other telecommunications services providers, including China Unicom, China Telecom and China Netcom, and any introduction of new competitors, throughor the issuance of additional mobile telecommunications services licenses, including 3G licenses, could adversely affect our business by, among other factors, causing the rate of our subscriber growth to decline and bringing about decreases in tariff rates and increases in selling and promotional costs and expenses. This could in turn have a material adverse effect on our financial condition and results of operations, as well as prospects.

New entrants in and further restructuring of the telecommunications industry in Mainland China may further intensify competition and adversely affect our business and prospects.

Current ChineseThe current prevailing PRC government policy concerning the telecommunications sector is to encourage orderly competition. In November 2001, the State Council formally approved the restructuring of the formerparticular, we face competition from other telecommunications services providers, including China Telecommunications Corporation, China Netcom Corporation Limited and Jitong Network Communications Company Limited. Under the restructuring plan, China Netcom was formed in May 2002 and consists of ten regional telecommunications companies originally owned by the former China Telecommunications Corporation in Beijing, Tianjin, seven provinces and one autonomous region, China Netcom Corporation Limited and Jitong Network Communications Company Limited.Unicom, China Telecom retained the telecommunications companies originally owned by the formerand China Telecommunications Corporation in the remaining provinces, autonomous regions and directly-administered municipalities.Netcom. See “Item 4. Information on the Company — The History and Development of the Company — Industry Restructuring and Changes in Our Shareholding Structure”. Moreover, the PRC telecommunications industry may be subject to further restructuring which might change the competitive landscape of the PRC telecommunications industry. We cannot assure you that the State Council will not approve additional telecommunications services providers in the future, including providers of mobile telecommunications services that may compete against us. Increased competition from new entrants in Mainland China’s telecommunications industry could materially and adversely affect our financial condition and results of operations as a result of, among others, decreases in the rate of subscriber growth or tariff rates or increases in selling and promotional expenses.

In addition, the rapid development of new technologies and other factors might cause the PRC government to make further adjustments of the existing structure of the PRC telecommunications industry, which might change the competitive landscape of the industry. Such further industry restructuring may affect the operations of all telecommunications operators in China, including us. We may be subject to competition from new providers of telecommunicationtelecommunications services as a result of technological developments and the convergence of various telecommunications services. These new entrants and the industry restructuring may also cause the existing competition in the telecommunications industry in Mainland China to intensify, which may materially and adversely affect our business, financial condition, results of operations and prospects.

In addition to any potential intensified competition, any further industry restructuring, whether or not directly involving us, may also result in changes that could materially and adversely affect our business, financial condition, results of operations and prospects.

We are controlled by CMCC, which may not always act in our best interest.

As of May 31, 2005,2006, CMCC indirectly owned an aggregate of approximately 75.5%74.9% of our shares. Accordingly, CMCC is, and will be, able to:

 

nominate substantially all of the members of our board of directors and, in turn, indirectly influence the selection of our senior management;

 

determine the timing and amount of our dividend payments; and

 

otherwise control or influence actions that require approvals of our shareholders.

The interests of CMCC as our ultimate controlling person may conflict with the interests of our minority shareholders.

In addition, CMCC also provides our operating subsidiaries with services that are necessary for our business activities, including:

 

international services arrangements including, among others, international roaming arrangements, international interconnection arrangements and international transmission lines leasing arrangements;

 

-11-


the coordination of the provision of inter-provincial transmission leased lines from the relevant transmission line providers in Mainland China to us; and

 

certain property leasing and telecommunications services arrangements.

The interests of CMCC as the provider of these services to our operating subsidiaries may conflict with our interests.

Furthermore, the State-Owned Assets Supervision and Administration Commission, or the SASAC, an agency of the State Council established in 2003, has responsibilities as an investor of state-owned assets on behalf of the PRC government and promulgates rules, regulations and policies from time to time that govern, among other things, the supervision, reform and management of state-owned enterprises, including CMCC. Actions taken by the SASAC may indirectly adversely affect our business, financial condition and results of operations and may conflict with the interests of our minority shareholders.

The limited spectrum allocated to us may constrain our future network capacity growth.

A mobile telecommunications network’s capacity is to a certain extent limited by the amount of frequency spectrum available for its use. Since the Ministry of Information Industry allocates frequency spectrum to mobile telecommunications operators in Mainland China, the capacity of our mobile telecommunications network is limited by the amount of spectrum that the Ministry of Information Industry allocates to our parent company, CMCC. The Ministry of Information Industry has allocated a total of 3439 MHz of spectrum, used for transmission and reception nationwide, respectively, in the 900 MHz frequency band and the 1800 MHz frequency band to our parent company, CMCC. Under the existing agreement between CMCC and us, we have the exclusive rights to use the allocated frequency spectrum in Mainland China.

We believe that our current spectrum allocation is sufficient for anticipated subscriber growth in the near term. However, we may need additional spectrum to accommodate future subscriber growth or to develop mobile telecommunications services using new wireless telecommunications technologies. Moreover, we may not be able to obtain additional spectrum from the Ministry of Information Industry. Our network expansion plans may be affected if we are unable to obtain additional spectrum. This could in turn constrain our future network capacity growth and materially and adversely affect our business and prospects, as well as our financial condition and results of operations.

Changes to our interconnection and leased line arrangements may increase our operating expenses and adversely affect our profitability.

Our mobile telecommunications services depend, in large part, upon our interconnection arrangements and access to other networks. Interconnection is necessary in the case of all local calls between our subscribers and subscribers of other networks. Interconnection and leased line arrangements are also necessary for international and certain domestic calls. We have entered into interconnection and transmission line leasing agreements with other operators. We cannot assure you that increasing usage of the other networks would not result in additional strain on its switching capacity, or that the existing quality of the other networks will remain adequate.

The terms of our interconnection arrangements and leased line arrangements have a material effect on our operating revenue and expenses. In addition, our business and operations may be materially and adversely affected if we cannot enter into future interconnection and leased line agreements on acceptable terms or on a timely basis.

We may be unable to obtain sufficient financing to fund our substantial capital requirements, which could limit our growth potential and future prospects.

We estimate that we will require approximately RMB164RMB237.3 billion (approximately US$2029.4 billion) for capital expenditures from 20052006 through the end of 20072008 for a range of projects and other expenditures, including among others, the construction of GSM networks, support systems, transmission and structural facilities, and the development of new technologies and new businesses. However, these capital expenditures do not include construction of 3G networks.

We believe that cash from operations, together with any necessary borrowings, will provide sufficient financial resources to meet our projected capital and other expenditure requirements. We may require additional funds to the extent we have underestimated our capital requirements or overestimated our future cash flows from operations. In addition, a significant feature of our business strategy is to continue exploring opportunities in developing new technologies and new businesses in the telecommunications industry, which may require additional capital resources.

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The cost of implementing new technologies including, among others, 3G, and upgrading our networks or expanding network capacity may also be significant. In particular, in order for us to effectively respond to technological changes, we may be required to make substantial capital expenditures in the near future.

In particular, to the extent we are granted any 3G license by the Ministry of Information Industry, we may need to make substantial capital expenditures and other investments in order to effectively implement new 3G-based technologies. However, the timing and magnitude of these capital expenditures and other investments involve many uncertainties that are beyond our control, and depend in part on when we may be granted such a license, how many licenses the Ministry of Information Industry may issue and which 3G-based technology standard we will be required to adopt. If we are required to make substantial capital expenditures and other investments in order to effectively implement new 3G-based technologies, our financial condition, results of operations and cash flow may be materially and adversely affected in one or more given periods.

Financing may not be available to us on acceptable terms or on a timely basis. In addition, any future issuance of equity securities, including securities convertible or exchangeable into or that represent the right to receive equity securities, may require approval from the relevant government authorities. If adequate capital is not available, our growth potential and future prospects could be adversely affected. Our ability to obtain additional financing on favorable commercial terms will depend on a number of factors, including:

 

our future financial condition, results of operations and cash flows;

 

general market conditions for financing activities by telecommunications companies; and

 

economic, political and other conditions in the markets where we operate.

Changes in technology may render our current technologies obsolete and thus affect our business and market position.

The telecommunications industry is dependent upon rapidly changing and increasingly complex technologies. Accordingly, although we strive to keep our technologies up to international standards, the mobile telecommunications technologies that we currently employ may become obsolete or subject to competition from new technologies in the future, including new wireless telecommunications technologies. In addition, the development and application of new technologies involves time, substantial costs and risks, and the new technologies we may implement, such as 3G, may not generate an acceptable rate of return.

Failure to capitalize on new business opportunities may have an adverse effect on our growth potential.

We intend to pursue new growth opportunities in the broader telecommunications industry. Our success will depend in large part on our ability to offer services that address the market demand arising from these opportunities. In addition, our ability to deploy and deliver these services depends, in many instances, on new and unproven technologies. Our wireless telecommunications technologies may not perform as expected. We may not be able to successfully develop or obtain new technologies to effectively and economically deliver these services. Furthermore, we may not be able to compete successfully in the delivery of telecommunications services based on new technologies. Any failure to capitalize on new business opportunities may materially and adversely affect our competitive position and future profitability.

Actual or perceived health risks associated with the use of mobile devices could impair our ability to retain and attract customers, reduce wireless telecommunications usage or result in litigation.

There has been public speculation about possible health risks to individuals from exposure to electromagnetic fields from base stations and from the use of wireless telephone handsets. While a substantial amount of scientific research conducted to date by various independent research bodies has shown that radio signals, at levels within the limits prescribed by public health authority safety standards and recommendations, present no adverse effect to human health, we cannot be certain that future studies, irrespective of their relative reliability or trustworthiness, will not impute a link between electromagnetic fields and adverse health effects. Research into these issues is ongoing by government agencies, international health organizations and other scientific bodies in order to develop a better scientific understanding and public awareness of these issues. In addition, several wireless industry participants were the targets of lawsuits alleging various health consequences as a result of wireless phone usage or seeking protective measures. While we are not aware of any scientific studies or objective evidence which substantiates such alleged health risks, we cannot assure you that the actual, or perceived, risks associated with radio wave transmission will not impair our ability to retain customers and attract new customers, reduce wireless telecommunications usage or result in litigation.

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Investor confidence and the market prices of our shares may be adversely impacted if we or our independent registered public accounting firm is unable to conclude that our internal control over financial reporting is effective as of December 31, 2006 as required by Section 404 of the Sarbanes-Oxley Act of 2002.

We are subject to the SEC’s reporting obligations. The SEC, as directed bySarbanes-Oxley Act of 2002. In particular, Section 404 of the Sarbanes-Oxley Act of 2002 adopted rules requiringrequires that each public company to include a report of management on the company’s internal control over financial reporting in its Annual Report on Form 10-K or Form 20-F, as the case may be, that contains an assessment by management of the effectiveness of the company’s internal control over financial reporting. In addition, the company’s independent registered public accounting firm must attest to and report on management’s assessment of the effectiveness of the company’s internal control over financial reporting. These requirements will first apply to our Annual Report on Form 20-F for the fiscal year ending December 31, 2006. Our

We have commenced a Section 404 compliance project since June 2005, including the formulation of an overall work plan, the establishment of a project management committee and a systematic evaluation and inspection of our internal control systems in an effort to further improve our internal controls. However, during the course of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404, we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act of 2002 for compliance with the requirements of Section 404. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, our management may not be able to conclude on an ongoing basis that ourwe have effective internal controls are effective.control over financial reporting in accordance with Section 404. Moreover, even if our management concludes that our internal control over our financial reporting is effective, our independent registered public accounting firm may disagree. If our independent registered public accounting firm is not satisfied with our internal control over our financial reporting or the level at which our controls are documented, designed, operated or reviewed, or if the independent registered public accounting firm interprets the requirements, rules or regulations differently from us, then it may decline to attest to our management’s assessment or may issue an adverse opinion. Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our consolidated financial statements, which ultimately could negatively impact the market prices of our common shares.

securities. In addition, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the New York Stock Exchange, regulatory investigations and civil or criminal sanctions.

Risks Relating to the Telecommunications Industry in Mainland China

China’s accession into the World Trade Organization will gradually ease current restrictions on foreign ownership in the telecommunications industry and may increase competition in the mobile telecommunications services sector.

On December 11, 2001, China officially joined the World Trade Organization, or WTO. On January 1, 2002, the Administration of Foreign-Funded Telecommunications Enterprises Provisions was also adopted, thereby implementing China’s commitments to the WTO. Those commitments include the gradual reduction of foreign ownership restrictions in the telecommunications industry and the opening of the telecommunications market in Mainland China to foreign investors. See “Item 4. Information on the Company — Business Overview — Competition”. This could lead to increased foreign investment in the telecommunications market in Mainland China, which may in turn increase competition and foreign participation in the mobile telecommunications services sector in Mainland China. Increased competition and foreign participation may have a material adverse effect on our financial conditions and results of operations, as well as our business and prospects.

Our share price has been and may continue to be volatile in response to conditions in the global securities markets generally and in the telecommunications and technology sectors in particular.

Our share price has been subject to significant volatility, in part due to highly volatile securities markets, particularly for telecommunications companies’ shares, as well as developments in our sales and operating profit.profit from operations. Factors other than our results of operations that may affect our share price include, among other things, overall market conditions and performance, market expectations of our performance, projected growth in the mobile telecommunications market in Mainland China and adverse changes in our brand value. In addition, our share price may be affected by factors such as the level of business activity or perceived growth (or the lack thereof) in the telecommunications market in general, the performance of other telecommunications companies, announcements by or the results of operations of our competitors, customers and suppliers, the success of third generation mobile networks and new technologies, products and services, as well as general market volatility. See “Item 9. The Offer and Listing” for information regarding the trading price history of our ordinary shares and ADSs.

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Risks Relating to Mainland China

We cannot assure you that the economy of Mainland China will continue to expand in the future or that an economic slowdown in Mainland China will not materially and adversely affect our financial condition and results of operations, as well as our future prospects.

We conduct most of our business and generate substantially all our revenues in Mainland China. As a result, economic, conditionspolitical and legal developments in Mainland China have a significant effect on our financial condition and results of operations, as well as our future prospects. In recent years, Mainland China has been one of the world’s fastest growing economies in terms of GDP growth. We cannot assure you, however, that such growth will be sustained in the future. Moreover, the slowdown in other major economies of the world, such as the United States, the European Union and certain Asian countries may adversely affect economic growth in Mainland China. We cannot assure you that our financial condition and results of operations, as well as our future prospects, will not be materially and adversely affected by an economic downturn in Mainland China.

Adverse changes in the economic policies of the ChinesePRC government could have a material adverse effect on the overall economic growth of Mainland China, which could reduce the demand for our services and adversely affect our business, financial condition and results of operations.

Since the late 1970s, the ChinesePRC government has been reforming the Chinese economic system. These reforms have resulted in significant economic growth and social progress. Although we believe that economic reform and macroeconomic policies and measures adopted by the ChinesePRC government may continue to have a positive effect on the economic development of Mainland China and that we may continue to benefit from such policies and measures, these policies and measures may from time to time be modified or revised. Adverse changes in economic and social conditions in Mainland China, in the policies of the ChinesePRC government or in the laws and regulations in Mainland China, if any, could have a material adverse effect on the overall economic growth of Mainland China and investment in the telecommunications industry in Mainland China. These developments could adversely affect our business, such as reducing the demand for our services, as well as our financial condition and results of operations.

The Renminbi is not a freely convertible currency, which could limit the ability of our subsidiaries in Mainland China to obtain sufficient foreign currency to satisfy their foreign currency requirements or pay dividends to us.

Substantially all of our revenues and operating expenses are denominated in Renminbi, while a portion of our capital expenditures and indebtedness is denominated in U.S. dollars and other foreign currencies. The Renminbi is currently freely convertible under the “current account”, which includes dividends, trade and service-related foreign currency transactions, but not under the “capital account”, which includes foreign direct investment, unless the prior approval of the State Administration forof Foreign Exchange is obtained.

Our operating subsidiaries are foreign invested enterprises. Currently, they may purchase foreign currency without the approval of the State Administration forof Foreign Exchange for settlement of “current account transactions”, including payment of dividends, by providing commercial documents evidencing these transactions. They may also retain foreign exchange in their current accounts (subject to a cap approved by the State Administration forof Foreign Exchange) to satisfy foreign currency liabilities or to pay dividends. However, the relevant ChinesePRC government authorities may limit or eliminate our operating subsidiaries’ ability to purchase and retain foreign currencies in the future. Also, our subsidiaries incorporated in Mainland China may not be able to obtain sufficient foreign currency to satisfy their foreign currency requirements or pay dividends to us for our use in making any future dividend payments or to satisfy other foreign currency payment requirements. Foreign currency transactions under the capital account are still subject to limitations and require approvals from the State Administration forof Foreign Exchange. This could affect our subsidiaries’ ability to obtain foreign currency through debt or equity financing, including by means of loans or capital contributions from us.

Fluctuations in exchange rates could adversely affect our financial results.

Substantially all of our operating revenue is denominated in Renminbi, while a portion of our capital expenditures and some of our financing expenses are denominated in foreign currencies, such as U.S. dollars and Hong Kong dollars. Future devaluations or movements inThe value of the exchange rate of Renminbi against the U.S. dollar and other currencies couldmay fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The conversion of the Renminbi into U.S. dollars and other foreign currencies has been based on the rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi solely to the U.S. dollar. Instead, the value of the Renminbi is now pegged against a basket of currencies, determined by the People’s Bank of China, against which it is permitted to fluctuate within a managed band. The value of the Renminbi may fluctuate significantly against the U.S. dollar in the future, depending on, among other things, the fluctuation of the basket of currencies against which the Renminbi is currently valued. In addition, the Renminbi may in the future be permitted to enter into a full float, which may also result in a significant fluctuation of the Renminbi against the U.S. dollar. Fluctuations in exchange rates, primarily those involving the U.S. dollar, may have a material adverse effect on our financial condition and results of operations.

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The ChinesePRC legal system embodies uncertainties which could limit the legal protections available to our shareholders.

The ChinesePRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. Since the late 1970s, the ChinesePRC government has been promulgating a comprehensive system of laws and regulations governing economic matters in general. Legislation since then has significantly enhanced the protection afforded to foreign investment in Mainland China. Our existing subsidiaries are “wholly foreign-owned enterprises,” which are enterprises incorporated in Mainland China and wholly-owned by Hong Kong, Macau, Taiwan or foreign investors, and subject to the laws and regulations applicable to foreign investment in Mainland China. However, the interpretation and enforcement of some of these laws, regulations and other legal requirements involve uncertainties that could limit the legal protection available to our shareholders. Moreover, China’s entry into the WTO has resulted and may in the future result in the abolition or substantial amendment of the existing laws, regulations and other legal requirements. See “Item 4. Information on the Company — Business Overview — World Trade Organization”.

Any future outbreak of severe acute respiratory syndrome or similar adverse public health developments in Mainland China may have a material adverse effect on our financial condition and results of operations.

In late 2002 and the first half of 2003, Mainland China and certain other countries and regions experienced an outbreak of severe acute respiratory syndrome, or SARS. On July 5, 2003, the World Health Organization declared that the SARS outbreak had been contained. However, new individual cases of SARS were reported after that in Mainland China and otherMoreover, certain countries and regions, in Asia. Anyincluding China, have recently encountered incidents of the H5N1 strain of bird flu, or avian flu. We are unable to predict the effect, if any, that avian flu may have on our business. In particular, any future outbreak of SARS, avian flu or similar adverse public health developments may, among other things, significantly disrupt our ability to adequately staff our business, and may generally disrupt our operations. Furthermore, an outbreak may severely restrict the level of economic activity in affected areas, which may in turn materially and adversely affect our business and prospects. As a result, we cannot assure you that any future outbreak of SARS, avian flu or similar adverse public health developments would not have a material adverse effect on our financial condition and results of operations.

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Item 4. Information on the Company.

We provide a full range of mobile telecommunications services in all thirty-one provinces, autonomous regions and directly-administered municipalities in Mainland China. As of December 31, 2004,2005, the total population residing in Mainland China is approximately 1.3 billion. Based on publicly available information, we are the leading provider of mobile telecommunications services in Mainland China and the largest provider of mobile telecommunications services in the world as measured by total number of subscribers as of December 31, 2004.2005. As of December 31, 2004,2005, our total number of subscribers was approximately 204246.7 million, representing approximately 64.3%65.6% of all mobile telecommunications services subscribers in Mainland China. As of April 30, 2005,2006, our total number of subscribers reached approximately 217.1265.0 million.

On November 10, 2005, we made a voluntary conditional cash offer to acquire all the issued shares of China Resources Peoples Telephone Company Limited (currently known as China Mobile Peoples Telephone Company Limited, or Peoples Telephone), a mobile telecommunications services provider based in Hong Kong with its shares listed on The Stock Exchange of Hong Kong Limited, or the Hong Kong Stock Exchange. The offer became unconditional in all respects on December 29, 2005. On March 28, 2006, we completed the compulsory acquisition of all the issued and outstanding shares of Peoples Telephone. The listing of the shares of Peoples Telephone on the Hong Kong Stock Exchange was withdrawn with effect from March 29, 2006.

The History and Development of the Company

We were incorporated under the laws of Hong Kong on September 3, 1997 as a limited liability company under the name “China Telecom (Hong Kong) Limited”. We changed our name to “China Mobile (Hong Kong) Limited” on June 28, 2000 and to “China Mobile Limited” on May 29, 2006 after obtaining the approval of our shareholders.

We completed our initial public offering in October 1997. Our ordinary shares are listed on the Hong Kong Stock Exchange, and our American Depositary Shares, or ADSs, each currently representing the right to receive five ordinary shares, are listed on the New York Stock Exchange. Our agent for service of process in the United States is CT Corporation System, and theirits address is 111 Eighth Avenue, 13th Floor, New York, New York 10011.

Expansion Through Acquisitions

Our initial mobile telecommunications operations included those in Guangdong provinceProvince conducted by Guangdong Mobile Communication Company Limited, or Guangdong Mobile, and in Zhejiang provinceProvince conducted by Zhejiang Mobile Communication Company Limited, or Zhejiang Mobile. As part of the restructuring in preparation for our initial public offering in 1997, the former Ministry of Posts and Telecommunications transferred to us a 100% equity interest in Guangdong Mobile and a 99.63% equity interest in Zhejiang Mobile. Since then, we have significantly expanded the geographical coverage of our operations through a series of acquisitions from CMCC, our indirect controlling shareholder, of mobile telecommunications operations conducted by its regional subsidiaries. In particular:

 

We acquired the entire equity interest in Jiangsu Mobile Communication Company Limited, or Jiangsu Mobile, on June 4, 1998 for a cash consideration of HK$22.5 billion.

 

We acquired the entire equity interest in each of Fujian Mobile Communication Company Limited, or Fujian Mobile, Henan Mobile Communication Company Limited, or Henan Mobile, and Hainan Mobile Communication Company Limited, or Hainan Mobile, on November 12, 1999 for a total purchase price of HK$49.7 billion, consisting of HK$19.0 billion in cash and the remaining HK$30.7 billion in the form of 1,273,195,021 new shares. In addition, we acquired the remaining 0.37% equity interest in Zhejiang Mobile in June 1999.

 

We acquired the entire equity interest in each of Beijing Mobile Communication Company Limited, or Beijing Mobile, Shanghai Mobile Communication Company Limited, or Shanghai Mobile, Tianjin Mobile Communication Company Limited, or Tianjin Mobile, Hebei Mobile Communication Company Limited, or Hebei Mobile, Liaoning Mobile Communication Company Limited, or Liaoning Mobile, Shandong Mobile Communication Company Limited, or Shandong Mobile, and Guangxi Mobile Communication Company Limited, or Guangxi Mobile, on November 13, 2000 for a total purchase price of HK$256.0 billion, consisting of HK$74.6 billion in cash and the remaining HK$181.4 billion in the form of 3,779,407,375 new shares.

 

We acquired the entire equity interest in each of Anhui Mobile Communication Company Limited, or Anhui Mobile, Jiangxi Mobile Communication Company Limited, or Jiangxi Mobile, Chongqing Mobile Communication Company Limited, or Chongqing Mobile, Sichuan Mobile Communication

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Company Limited, or Sichuan Mobile, Hubei Mobile Communication Company Limited, or Hubei Mobile, Hunan Mobile Communication Company Limited, or Hunan Mobile, Shaanxi Mobile Communication Company Limited, or Shaanxi Mobile, and Shanxi Mobile Communication Company Limited, or Shanxi Mobile, on July 1, 2002 for a total purchase price of US$8,573 million, consisting of an initial consideration of US$5,773 million and a deferred consideration of US$2,800 million. The initial consideration of US$5,773 million consistsconsisted of a cash payment of US$3,150 million and the issuance of new shares for the remaining US$2,623 million to China Mobile Hong Kong (BVI) Limited on the completion of acquisition. We financed the cash portion of the initial consideration by applying a portion of our existing internal cash resources, in the amount of US$2,400 million, combined with proceeds from the issuance of new shares in the amount of HK$5.85 billion (equivalent to approximately US$750 million) to Vodafone Holdings (Jersey) Limited, or Vodafone Jersey, a wholly owned subsidiary of Vodafone Group Plc., or Vodafone. After the share placement, Vodafone’s share holding in us increased from 2.18% to approximately 3.27%. The deferred consideration of US$2,800 million is payable by the fifteenth anniversary of the date of the completion of acquisition, and we may make an early payment of all or part of the deferred consideration at any time. We used the entire proceeds from the RMB3 billion guaranteed bonds due 2007 and RMB5 billion guaranteed bonds due 2017, both issued on October 28, 2002 by Guangdong Mobile, our wholly-owned subsidiary, to satisfy part of the US$2,800 million deferred consideration.

 

We acquired the entire equity interest in each of Neimenggu Mobile Communication Company Limited, or Neimenggu Mobile, Jilin Mobile Communication Company Limited, or Jilin Mobile, Heilongjiang Mobile Communication Company Limited, or Heilongjiang Mobile, Guizhou Mobile Communication Company Limited, or Guizhou Mobile, Yunnan Mobile Communication Company Limited, or Yunnan Mobile, Xizang Mobile Communication Company Limited, or Xizang Mobile, Gansu Mobile Communication Company Limited, or Gansu Mobile, Qinghai Mobile Communication Company Limited, or Qinghai Mobile, Ningxia Mobile Communication Company Limited, or Ningxia Mobile, Xinjiang Mobile Communication Company Limited, or Xinjiang Mobile, Beijing P&T Consulting & Design Institute Company Limited, or Jingyi, and China Mobile Communication Company Limited, or CMC, on July 1, 2004 for a total purchase price of US$3,650 million, consisting of an initial consideration of US$2,000 million and a deferred consideration of US$1,650 million. The deferred consideration of US$1,650 million which is interest bearing and payable by the fifteenth anniversary of the date of the completion of acquisition, and we may make an early payment of all or part of the deferred consideration at any time.

In addition, the Company acquired all the issued and outstanding shares of Peoples Telephone on March 28, 2006 for a total purchase price of approximately HK$3,384 million (US$436 million). As a result, Peoples Telephone became our indirect wholly-owned subsidiary and its shares were withdrawn from listing on the Hong Kong Stock Exchange with effect from March 29, 2006.

These acquisitions have significantly enlarged our subscriber base, expanded the geographical coverage of our business and enhanced the economy of scale of our operations. In addition, the integration of these acquired operations has enabled us to realize synergies and economies of scale. A discussion of the financial impact of these acquisitions is set forth in “Item 5. Operating and Financial Review and Prospects”.

Industry Restructuring and Changes in Our Shareholding Structure

Prior to 1993, all public telecommunications networks and services in Mainland China were controlled and operated by the former Ministry of Posts and Telecommunications through the former Directorate General of Telecommunications, provincial telecommunications administrations and their city and county level bureaus.

As part of the ChinesePRC government’s restructuring of the telecommunications industry, the Ministry of Information Industry was formed in March 1998 to assume, among others, the responsibilities of the former Ministry of Posts and Telecommunications. One of the principal objectives of the restructuring was to separate the government’s regulatory function from its business management functions in respect of state-owned enterprises. In the first half of 2000, the ChinesePRC government substantially completed the industry restructuring. As a result, the Ministry of Information Industry ceased to have an indirect controlling interest in us, and no longer exercises control over telecommunications operations, but continues in its capacity as industry regulator providing industry policy guidance as well as exercising regulatory authority over all telecommunications services providers in Mainland China.

In addition, as part of the restructuring, the telecommunications operations previously controlled by the former Ministry of Posts and Telecommunications were separated along four business lines: fixed-line telecommunications, mobile telecommunications, paging and satellite telecommunications. CMCC was established

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in July 1999 as a state-owned company to hold and operate the mobile telecommunications business nationwide resulting from the separation. As part of this separation, in July 1999 CMCC obtained the approximately 57% holding of voting shares and economic interest in China Mobile (Hong Kong) Group Limited, our indirect controlling shareholder, previously held by Telpo Communications (Group) Limited, an entity 100% controlled by the former Ministry of Posts and Telecommunications. In addition, in May 2000, the remaining 43% interest in China Mobile (Hong Kong) Group Limited previously held by the Directorate General of Telecommunications was transferred to CMCC. As a result, CMCC has become the owner of all voting shares and economic interest in China Mobile (Hong Kong) Group Limited and thus all of the ChinesePRC government’s interest in us. In addition, following the completion of the acquisition of the ten regional mobile telecommunications companies and other telecommunications assets by our Companyus in July 2004, CMCC ceased to operate mobile telecommunications businesses in Mainland China other than through us. As of May 31, 2005,2006, CMCC indirectly owned approximately 75.5%74.9% of all our outstanding shares, including shares represented by ADSs.

As a state-owned company, the former China Telecommunications Corporation owns and operates fixed-line telephone and data telecommunications networks. In November 2001, the State Council formally approved the restructuring of the former China Telecommunications Corporation, China Netcom Corporation Limited and Jitong Network Communications Company Limited. Under the restructuring plan, China Netcom was formed in May 2002. China Netcom consists of ten regional telecommunications companies that were originally owned by the former China Telecommunications Corporation in Beijing, Tianjin, seven provinces and one autonomous region, China Netcom Corporation Limited and Jitong Network Communications Company Limited. China Telecom retained the telecommunications companies originally owned by the former China Telecommunications Corporation in the remaining provinces, autonomous regions and directly-administered municipalities. As a result, apart from us, principal participants in the telecommunications industry in Mainland China also include China Telecom, China Netcom, China Unicom, China Railway Communications Corporation Limited and China Satellite Communications Corporation. Among these six participants, China Unicom and uswe are the two operators that are licensed to provide mobile telecommunications services in Mainland China.

Organizational Structure

As of May 31, 2005,2006, CMCC, a company incorporated in China, owned 75.5%74.9% equity interest in us through intermediate holding companies. As of May 31, 2005,2006, we owned 100% equity interests in Guangdong Mobile, Zhejiang Mobile, Jiangsu Mobile, Fujian Mobile, Henan Mobile, Hainan Mobile, Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile, Guangxi Mobile, Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile, Shanxi Mobile, Neimenggu Mobile, Jilin Mobile, Heilongjiang Mobile, Guizhou Mobile, Yunnan Mobile, Xizang Mobile, Gansu Mobile, Qinghai Mobile, Ningxia Mobile, Xijiang Mobile, Jingyi, CMC and CMCPeoples Telephone through intermediate holding companies, and a 66.4% equity interest in Aspire Holdings Limited, or Aspire, a company incorporated in the Cayman Islands. We operate in all thirty-one provinces, autonomous regions and directly-administered municipalities throughout Mainland China and Hong Kong. CMCC no longer operates mobile telecommunications businesses in Mainland China, other than through us.

General Information

Our principal executive offices are located at 60th Floor, The Center, 99 Queen’s Road Central, Hong Kong, China; telephone: 852-3121-8888. We also maintain a regional headquarters in each of our regional mobile telecommunications companies in Mainland China.China and Hong Kong. Our web site address is www.chinamobilehk.com.www.ChinaMobileLtd.com. The information on our web site is not a part of this annual report.

report on Form 20-F.

Business Overview

We offer mobile telecommunications services principally using the Global System for Mobile Communications, or GSM, standard. GSM is a pan-European mobile telephone system based on digital transmission and mobile telecommunications network architecture with roaming capabilities. Our GSM networks currently reach virtually all cities and counties and major roads and highways throughout Mainland China.China and, through the network of Peoples Telephone, reach a substantial part of Hong Kong.

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Our Strategy

As a pioneer and the market leader in the world’s largest mobile telecommunications market, we intend to focus on our core mobile telecommunications business, enhance our core competitiveness through economies of scale, continue to implement a differentiated sales strategy, develop new businesses, enhance our network management, establish a world class telecommunications and IT supporting network, and further consolidate our position as the market leaderleading position in the mobile telecommunications industrymarket by innovatively developing new customers, new voice usage and new businesses. We intend to continue to develop our brand, enhance our proprietary sales channel capabilities, strengthen the establishment and integration of our online sales channels, continually improve our basic customer service and strengthen our ability to innovate in Mainland China.

terms of businesses, technologies, management and business model. Moreover, we will pay particular attention to developing our corporate customer base, developing a new competitive advantage in terms of our network and support systems, committing ourselves fully to servicing the 2008 Beijing Olympics and carrying out planning and operational preparation for the development of 3G.

We believe the mobile telecommunications market in Mainland China will continue to expand, and we have designed our business strategy to achieve sustainable growth. Our business strategy includes the following key elements:

 

implement a differentiateddevelop new customers, particularly new corporate customers;

enhance our brand and improve our customer services;

enhance our proprietary sales channels;

strengthen our online sales and marketing strategy;

continue to improve our customer services and satisfaction;channels;

 

refine and optimize our telecommunications and ITinformation technology supporting networks;

 

continue to emphasize innovation in developing our new businesses;businesses, technologies and customers as well as management and business models;

commit to serving the 2008 Beijing Olympics; and

 

continue to utilize our existing competitive advantages in terms of network, technologyplan actively and resources, markets experience and market leading position to actively prepare operationally for the construction and developmentoperation of 3G.

Subscribers and Usage

Our subscriber base has grown substantially from approximately 117.7141.6 million at the end of 20022003 to approximately 204.3246.7 million at the end of 2004.2005. As of December 31, 2004,2005, we had a market share of approximately 64.3%65.6% in Mainland China. As of April 30, 2005,2006, our total number of subscribers reached approximately 217.1 million.265.0 million, which include subscribers of Peoples Telephone which we acquired in March 2006. Our acquisition of a total of 29 regional mobile telecommunications companies in Mainland China between June 1998 and July 2004 and our acquisition of Peoples Telephone completed in March 2006 has substantially expanded our subscriber base. In addition to our acquisitions, our subscriber growth is also attributable to a number of other factors, including:

 

significant economic growth in our markets;markets, including the modernization of rural areas;

the PRC government’s promotion of “informationalization”;

relatively low mobile penetration rates in the central and western regions as well as small and medium-sized cities and rural areas;

 

decreased cost of initiating services due to a decline in handset prices as well as the decrease in other tariffs for our services;

 

our increased marketing and sales efforts and improved distribution channels; and

 

our new business initiatives.initiatives; and

 

our brand advantage.

In addition, as of December 31, 2005, the aggregate subscriber usage volume reached 903.1 billion minutes, representing an increase of approximately 36.6% from December 31, 2004, the number of mobile data services users reached 206.7 million, representing an increase of approximately 31.8% from December 31, 2004, and the SMS usage volume reached 249.6 billion messages, representing an increase of approximately 44.6% from December 31, 2004.

The following table sets forth selected historical information about our subscriber base and subscriber usage for the periods indicated.

 

  As of or for the year ended December 31,

  As of or for the year
ended December 31,
  2002

  2003

  2004

  2003  2004  2005

Subscribers (in millions)

               

Contract subscribers(1)

  49.0  51.1  59.9  51.1  59.9  61.3

Prepaid subscribers(1)

  68.7  90.5  144.4  90.5  144.4  185.4
  
  
  
         

Total

  117.7  141.6  204.3  141.6  204.3  246.7
  
  
  
         

Minutes of Usage (in billions)(2)

               

Contract subscribers(1)

  192.6  250.8  366.0  250.8  366.0  428.1

Prepaid subscribers(1)

  67.5  122.4  294.9  122.4  294.9  475.0
  
  
  
         

Total

  260.1  373.2  660.9  373.2  660.9  903.1
  
  
  
         

Average Minutes of Usage Per Subscriber Per Month(3)

         

Average Minutes of Usage Per Subscriber Per Month (minutes)(3)

      

Contract subscribers(1)

  334  417  517  417  517  589

Prepaid subscribers(1)

  99  129  194  129  194  241

Blended

  207  240  297  240  297  335

Average Revenue Per Subscriber Per Month (RMB)(4)

               

Contract subscribers(1)

  176  171  167  171  167  185

Prepaid subscribers(1)

  63  58  56  58  56  55

Blended

  115  102  92  102  92  90

Average Monthly Churn Rate (%)(5)

  0.69  1.05  1.31  1.05  1.31  1.87

(1)For management reference purposes, contract subscribers are classified to include “GoTone” subscribers and subscribers who have signed service contracts with us, while prepaid subscribers are classified to include subscribers of “Shenzhouxing”, “M-Zone” and other brands or packages targeting low usage volume users.

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(2)The total minutes of usage in 2002 and 2004 include the full year minutes of usages of the ten regional mobile telecommunications companies we acquired in that year2004 as if the respective acquisition occurred at the beginning of that year2004 and are presented for ease of comparison.

(3)Calculated by (A) dividing the total minutes of usage (calculated in the manner as set forth in note (2) above) during the relevant year by the average number of subscribers during the year (calculated as the average of the numbers of subscribers at the end of each of the thirteen calendar months from the end of the previous year to the end of the current year) and (B) dividing the result by 12.

(4)Calculated by (A) dividing the operating revenue during the relevant year by the average number of subscribers during the year (calculated in the same manner as in note (3) above) and (B) dividing the result by 12. For purposes of this note (4) only, both operating revenues and average numbers of subscribers in 2002 and 2004 take into account the full year effect of the ten regional mobile telecommunications companies we acquired in that year2004 as if the respective acquisition occurred at the beginning of that year.2004.

(5)Measures the monthly rate of subscriber disconnections from mobile telecommunications services, determined by dividing: (A) the result obtained by dividing (i) the sum of voluntary and involuntary terminations from our network (excluding internal transfer) during the relevant year by (ii) the average number of subscribers during the year (calculated in the same manner as in note (3) above) by (B) 12. On this basis, our calculated average monthly churn rate will be affected by the number of voluntary and involuntary terminations and the significant growth in our subscriber base. The average monthly churn ratesrate in 2002 and 2004 areis calculated based on the full year information pertaining to the relevant regional mobile telecommunications companies we acquired in 2002 and 2004, respectively, as if the acquisition occurred at the beginning of 20022004, and 2004, respectively, and areis presented for ease of comparison.

The size and composition of our subscriber base and subscribers’ usage patterns have changed. In particular, the cost of initiating services has decreased due to a decline in handset prices, the connection fees have been eliminated, other tariffs for our services have been adjusted, and mobile telecommunications technologies have improved over time. As a result, mobile telecommunications services have become increasingly popular for both business and social uses. In general, the highest usage subscribers with the greatest telecommunications needs have tended to be the early subscribers of mobile telecommunications services. As penetration increases, newer subscribers on average incur lower monthly usage, and are generally more price-sensitive. Accordingly, as is typical in many countries with developing mobile telecommunications markets, the average revenue per subscriber per month generally has declined over the last few years as our mobile penetration has increased.

Businesses

Our businesses can be primarily divided intoconsist of voice business and new businesses.

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Voice Business. Our voice business refers to the business where our subscribers make and receive calls with a mobile phone at any point within the coverage area of our mobile telecommunications networks. The services include local calls, domestic long distance calls, international long distance calls, intra-provincial roaming, inter-provincial roaming and international roaming. In 2004,2005, our voice business continued to grow significantly.significantly, and total voice usage volume increased approximately 36.6% in 2005 compared to 2004.

New Businesses. Our new businesses include voice value-added services and data businesses.

Our voice value-added services mainly include caller identity display, caller restrictions, call waiting, call forwarding, call holding, voice mail, personalized ringing tones, conference calls and others.

Our data businesses mainly include short message services, or SMS, “Color Ring”, wireless application protocol, or WAP, Color Ring, multimedia messaging service, or MMS, and “Java Applications” services. We have also developed other data products, such as M-commerce, “Mobile Mailbox”services, instant messaging, or IM, “Push Mail”, “12586 mobile chat services”, “Mobile Secretary”BlackBerryTM wireless services and “12590 voice-SMS information”“Location-Based Services”. We believe that data businesses will continue to be one of the fastest growing segments of the telecommunications market in Mainland China over the next several years. In 2004,2005, we increased the promotion of our data businesses by providing customers with diversified and personalized data services. Revenue from our data businesses significantly increased to RMB37,122 million in 2005, an increase of approximately 60.7% from 2004. As of December 31, 2004,2005, our data businesses customers reached 156.8206.7 million, which represented a 55.8%31.8% increase compared to 100.6156.8 million subscribers as of December 31, 2003,2004, and accounted for 76.8%83.8% of our total subscribers. We continued to maintain a leading position in data businesses in Mainland China.

We conduct various dataplan to continue developing new applications and functions for SMS to further stimulate the growth of the SMS business. Focusing on businesses undersuch as “Color Ring” and WAP, we intend to further strengthen business sales and promotion as well as product optimization to drive the “Monternet” platform. Asgrowth in revenue. Regarding businesses such as MMS and IM, we plan to nurture customers’ consumption habits and expand subscriber base, with a carrierview to achieving the rapid growth of these businesses. At the same time, we expect to enhance the preparation for new products and new applications such as Mobile Search, Mobile Music, Push Mail, Location-Based Services. We also plan to focus on the promotion of industry-specific applications of data businesses “Monternet” enables service providers to realize their creativecorporate customers to further enhance the penetration and competitive advantages, and to commercially launch their products quickly and efficiently. Asutilization of the end of 2004, we have entered into broad co-operation arrangements with over 1,000 service providers. In addition, over 100,000 SMS applications, over 10,000 MMS applications, over 10,000 WAP applications and over 2,000 JAVA applications were supported by the “Monternet” platform as of the end of 2004.data businesses.

SMS.SMS. SMS refers to services which employ the existing resources of GSM telecommunications networks and the corresponding functions of mobile telecommunications terminals to deliver and receive text messages, including subscriber-to-subscriber messages, “Monternet”-based short messages and others. SMS offers convenience and multi-functionality to our subscribers, and this business has grown rapidly in recent years. In particular, short message usage volume reached 172.6 billion249,609 million in 2005 from 172,573 million in 2004, (taking into account the full year effect of the ten regional mobile telecommunications companies we acquired in July 2004)and revenue generated from 93.5 billion in 2003. Our SMS business grewreached RMB24,671 million in 2005. Furthermore, the SMS penetration rate (SMS subscribers as we standardized and increased our administrationa percentage of our cooperation arrangements with service providers.total subscribers) reached approximately 83.8% in 2005. As of the end of 2004,December 31, 2005, our customers were able to send or receive short messages to or from the subscribers of 214 mobile telecommunications operators in 106 countries and regions around the world.

“Color Ring”. Color Ring refers to the service where subscribers can customize the answer ring tone from a wide selection of songs, melodies, sound effects or voice recordings to replace the monotonous ring connecting tone that the caller would hear. We plancontinued to continue utilizingexperience significant growth in our GSM network to provide data services based onColor Ring business in 2005. Revenue generated from our mobile information service platform where consumer demands can be more economically served by SMS.Color Ring business reached RMB3,423 million in 2005.

WAP services. WAP is a technology that allows users to access information instantly via handheld wireless devices such as mobile phones. Subscribers of our WAP services are able to access the Internet via the micro-browsers on their handheld wireless devices. We experiencedcontinued to experience significant growth in our WAP-based businesses in 2004, and our2005. Revenue generated from WAP services subscribers reached 12.8 million in 2004.RMB3,570 million.

Color Ring. “Color Ring” refers to the service where subscribers can customize the answer ring tone from a wide selection of songs, melodies, sound effects, or voice recordings to replace the monotonous ring connecting tone that the caller would hear. We experienced significant growth in our “Color Ring” business in 2004, and our “Color Ring” user reached 27.2 million in 2004.

MMS. MMS is a technology that allows userusers to exchange multimedia communications, such as graphics, animated color pictures, sound files and short text messages, over wireless networks. We experienced significant growth in our MMS businesses in 2004, and our MMS2005.

Instant Messaging. IM enables mobile services subscribers reached 12.3 million 2004.to communicate instantly through various means, including SMS, for chatting, dating or interactive entertainment. Our IM business showed significant growth potential in 2005.

Our new businesses also include Mobile Music, a business that provides music services to subscribers through mobile telecommunications networks. In 2005 we increased our efforts in business model innovation and strengthened our cooperation with the music media to stimulate and direct customers to try out, use and get accustomed to mobile music products based on “Color Ring”, “IVR for Mobile Music” and “Ringtone Download”. As a result, our Mobile Music business grew significantly in 2005.

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Wireless Internet Access. WeIn addition, we provide wireless Internet access by utilizing general packet radio service, or GPRS, and wireless local area network, or WLAN, technologies to access WAP websites and Internet websites. GPRS supports a higher transmission rate than the traditional GSM cellular technology and enables network operators to provide more information and applications via a wireless connection. The usage of WAP-based services has grown significantly as the transmission speed and reliability has improved in recent years. WLAN is a wireless data transmission network which enables users to easily access local area networks via terminals with electromagnetic transmission, and is a complement to, and an extension of, wired local area networks access. We have begunbeen providing WLAN services at “hot spots”, such as airports, hotels, conference and exhibition centers and office buildings, within certain major cities.

cities in Mainland China.

Tariffs

The tariffs payable by our subscribers include primarily usage charges, monthly fees and service fees for voice value-added services and data services. Usage charges for both our contract and prepaid subscribers include base usage charges plus, where applicable, an additional component reflecting domestic and international long distance tariffs. When using roaming services, subscribers incur a roaming charge instead of the base usage charges, plus applicable domestic and international long distance charges.

We have flexible long distance tariff plans distinguishing between day time and night time, and offer tailored service plans based upon customer requirements as well as our network resources.

Our tariffs are subject to regulation by various government authorities, including the Ministry of Information Industry, the National Development and Reform Commission (the successor to the former State Development and Planning Commission) and the relevant price regulatory authorities in Mainland China. The actual price range in each service area is proposed by a network operator in that service area and must generally be approved by the relevant price regulatory authorities in that service area. In general, base usage charges, monthly fees, maximum domestic roaming charges and maximum applicable long distance tariffs (other than tariffs for Internet Protocol phone calls) are also determined by the Ministry of Information Industry in consultation with the National Development and Reform Commission. In August 2005, the Ministry of Information Industry amended its tariff regulations relating to some telecommunications services, pursuant to which network operators have more flexibility in setting their domestic and international long distance tariffs and domestic roaming charges, among others, provided that these tariffs set by network operators do not exceed the respective maximum tariffs determined by the Ministry of Information Industry in consultation with the National Development and Reform Commission and that the tariff plans are filed with the Ministry of Information Industry and the National Development and Reform Commission or, in some cases, the relevant price regulatory authorities at the provincial level.

We offer our subscribers a variety of tariff packages which have different monthly fees, levels of basic usage and charges for usage exceeding the covered basic usage, voice value-added services, data services or other features. In general, the higher the monthly fee of a tariff package, the greater the price concession we offer. The tariff packages often incorporate different complimentary voice value-added services and data services packages.

Given the rapid growth in mobile penetration rates and increased competition, in order to remain competitive in terms of price and performance with other mobile telecommunications operators, we provide certain discounts and promotional offers in and during corresponding service areas and call periods targeting different customers. These discounts and promotional offers mainly include rewards for the pre-payment of fees, free trials of voice value-added services or data services, tariff discounts during off-peak hours and in low-traffic areas, and tariff discounts for specified call recipients.

Interconnection

Interconnection refers to various arrangements that permit the connection of our networks to other networks such as the fixed-line networks. These agreements provide for the sharing and settlement of revenues from the base usage charges and, if applicable, roaming charges and domestic and international long distance charges.

Our networks interconnect with the networks of other operators, allowing our subscribers to communicate with the subscribers of these operators and to make and receive local, domestic and international long distance calls. Each of our operating subsidiaries has interconnection agreements with those operators in its service area. The economic terms of these agreements are standardized from province to province.

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Roaming

We provide roaming services to our subscribers, which allow them to access our mobile telecommunications services while they are physically outside of their registered service area or in the coverage areas of other mobile telecommunications networks in other countries and regions with which we have roaming arrangements.

As of December 31, 2004,2005, our GSM global roaming services covered 184203 countries and regions, while our GPRS global roaming services coverage was extended to 7398 countries and regions.

A mobile telecommunications services subscriber using roaming services is charged at our per-minute roaming charge (instead of the base usage charge) for both incoming and outgoing calls, plus applicable long distance charges.

Revenue Sharing and Settlement of Long Distance Charge When Roaming.In addition to the base roaming charge, long distance charges may be assessed when a subscriber is roaming. Where a mobile telecommunications services subscriber makes a call while roaming, the home network operator collects all long distance charges incurred and pays all such charges to the operator of the visited network. Where a mobile telecommunications services subscriber receives a call while roaming, the home network operator receives and keeps all long distance charges incurred by that subscriber.

Research and Development

Our research and development efforts, undertaken jointly by our research institute and other relevant departments and business units, primarily focus on:

 

developing advanced data application solutions suitable for the particulars of the consumer markets in Mainland China; and

 

monitoring technological trends, including advancement in 3G, which may have an impact on the development of our current business and the implementation of our wireless data strategy.

In light of the increasingly competitive and rapidly evolving telecommunications market in Mainland China, we expect to continue to devote resources to the research and development of new products, services and technology applications.

The principal business focuses of Aspire, our majority-owned subsidiary with operations based in Shenzhen, China, include systems integration, product development, and technical support for mobile data systems and related applications in Mainland China. Aspire also operates our wireless data research and development center in Shenzhen, China. Aspire is an important part of our overall strategy to capture the fast growing wireless data sector in Mainland China.

Aspire currently has a business alliance with each of Hewlett-Packard Company and Vodafone Americas Asia Inc., a subsidiary of Vodafone, to develop wireless data and Internet and related applications. As of May 31, 2005, Hanover Asia-Pacific Investments Limited, an indirectly wholly-owned subsidiary of Hewlett-Packard, and Vodafone Holdings (Jersey) Limited, a subsidiary of Vodafone, hold a 7% and a 9.99% equity interest in Aspire, respectively.

Aspire has also entered into a master agreement with us for the development of our mobile information service center platform. Under this master agreements, Aspire provides system and gateway integration services, hardware, software and system development, technical support and major overhaul services of data centers to us.

Sales and Customer Services

Sales Channels. We offer our services through an extensive network of proprietary sales outlets and retail outlets. In addition to providing retail sales and network connection services, most of our proprietary sales outlets also offer differentiated services to subscribers under different service brands, including, for example, billing information and payment collection, services consultation, handset repair and other customer services. Furthermore,

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most of our proprietary sales outlets provide training and service demonstrations to retail outlets. The retail outlets offer our services according to agency agreements with us. In connection with these sales, all applicable fees payable after initial connection are paid to us. In addition, we offer certain online services to our customers, including, among others, subscription of voice value-added services, change of tariff plans, credit loading for “Shenzhouxing” pre-paid services and certain wireless data services, and redemption of “GoTone” points. We also conductFurthermore, we have enhanced our service capabilities in 2005 through the expansion and optimization of our proprietary sales channels, the expansion of online sales and marketing activities.channels and the integration of the resources relating to sales and marketing channels in the community. Moreover, we established sales and service networks at low cost by utilizing existing resources in rural areas to serve and expand our customer base in these areas.

We also establish concept stores in major cities within Mainland China to showcase our services and products, particularly our wireless data services, and to facilitate certain sales and marketing activities.

Market Segmentation Strategy. As subscribers’ demands for mobile telecommunications become more varied and complex, we have conducted research on market segmentation and have launched brands and products which cater to the specific needs of different subscriber groups.

We mainly promote three brands, each with a different focus. “GoTone” targets high to middle-end subscribers, “Shenzhouxing” targets the mass market and the “M-Zone” brand targets the young user group through the integration of voice and data services.

We alsoMoreover, we provide virtual private mobile network, or VPMN,differentiated applications and services to our corporate customers. VPMN offers a “virtual” private telecommunications network tocustomers under customized service contracts. As of December 31, 2005, we had signed service contracts with approximately 1.11 million corporate subscribers as an overlay upon the basiccustomers, and individual customers served under these service contracts with corporate accounts accounted for approximately 27% of our total subscribers. In addition, we have developed and integrated industry-specific products and applications in more than 20 industries and sectors, including urban administration, education, public telecommunications network, which enables corporate internal telecommunications functions such as speed dialingsecurity, agriculture, meteorology and information broadcasting. VPMN has been implemented in certain targeted market segments.banking. As of December 31, 2005, we have developed and launched nearly 300 industry-specific products and applications. We believe our VPMN servicesthat these industry-specific products and applications will not only enhance the loyalty of our corporate customers, but will also stimulate usage as well as attract potential new subscribers. AsFurthermore, we developed customized products and service packages in response to the unique consumption characteristics of December 31, 2004, corporate customersrural areas, such as small denomination top-up and over-the-air recharging. We have also encouraged handset producers to introduce inexpensive handsets with specific service agreements with us reached 1.11 million.

moderate functions to lower the barrier of using mobile phones in the rural areas.

Customer Services.Our customer support service centers offer 24-hour staff-answering and automatic-answering service hotlines in Mainland China, dealing with customer enquiries regarding services and billing, as well as handling customer complaints. In order to retain high-value and corporate customers and enhance customer satisfaction, we offer a series of personalized and differentiated services targeted at high-value and corporate customers, including dedicated account executives, on-site visits and systems for collecting comments and handling complaints.

In 2004,2005, we continued to focus onoptimize our initiativescustomer service processes to remove service bottlenecks, resulting in sustained improvement in customer services and achieving a steady improvement in customer satisfaction levels. Overall customer satisfaction rate reached 75% in 2005, representing an increase of “Striving for Customer Satisfaction”, and endeavored to provide quality service to our customers.

0.86 percentage points from 2004.

Customer Retention. As a result of intensified competition, we place great emphasis on customer retention. Our strategy is to attract and retain high-value customers by providing high quality services. We have implemented a “Customer Point Reward Program”, which is a bonus point based scheme that rewards customers according to their service consumption, loyalty and payment history. This represents an important measure by us to retain high-value customers. Customers are identified and grouped as “GoTone Diamond”, “GoTone Gold” and “GoTone Silver” card members according to their respective value contribution and points accrued. Different levels of membership entitle members to different privileges. Customers in these four classifications are eligible to receive targeted rewards, including some of our own products and services, as well as those of our business partners. In 2004,2005, we further differentiated our “GoTone” service and enhanced customer loyalty of our “GoTone” service through the targeted allocation of marketing resources. In addition, we offer special services to our “GoTone” members, including cross-region services, airport VIP services, hospital VIP services, golf clubs and handset repairs in roaming locations, and special airport services in home network and in roaming locations.service clubs.

In developing our “M-Zone” brand, we focused on expanding the subscriber base, offering new services and gaining recognition as representative of youth culture. We enhanced the brand image and the number of customers as a result of our increased advertising efforts and expansion of new businesses.businesses, including the launch of brand alliances and the implementation of product and service upgrades.

In addition, we further enhanced customer loyalty through a series of efforts in 20042005 including, among others, developing our portfolio of products, increasing services and industry penetration, allocating more resources in the fast-growing new businesses and optimizing management systems and procedures.

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Churn Management. We have devised internal monitoring systems to detect subscribers who are prone to discontinue their subscriptions. In particular, our churn alert system prompts customer service representatives to proactively approach those subscribers, and customers who have recently discontinued their service, to improve customer relations and minimize churn.

Credit Control. We have implemented subscriber registration procedures, such as identity checks for individual contract-based customers and information checks for corporate customers, to assist in credit control. In certain situations, we require contract subscribers to pay an advance deposit representing a pre-determined amount of usage charges before certain telecommunications services are activated. The actual usage charges incurred are verified against the balance of the amount deposited at regular intervals on a daily basis, and if there are unusual circumstances, control measures will be implemented. Direct debit services are available in each geographical area. The accounts of contract subscribers are required to be settled on a monthly basis, and a late payment fee is imposed on each subscriber whose account balance is not settled by the monthly due date. If the subscriber’s account remains overdue, the subscriber’s services will be deactivated and such subscriber must pay all overdue amounts, including applicable late payment fees, to reactivate services. To further control credit risk, we have expanded the sphere of service offerings that require subscribers to pre-pay for services.

We make provisionan allowance for doubtful accounts based on our assessment of the recoverability of accounts receivable on maturity. In particular, we make full provision for any accounts receivable older than three months.months, we make an allowance for the full amount of such receivable. The total amount of the provisionour allowance for doubtful accounts for each of 2002, 2003, 2004 and 20042005 was RMB1,749 million, RMB2,006 million, RMB2,273 million and RMB2,273RMB2,968 million, respectively, or 1.4%1.3%, 1.3%1.2% and 1.2% of total operating revenue, respectively.

Promotions Relating to the 2008 Beijing Olympics. In 2005, as the only mobile telecommunications services partner for the 2008 Beijing Olympics, we actively participated in various promotional activities sponsored by the Beijing Olympic Games Preparatory Committee to further enhance our brand. These include providing the mobile telecommunications transmission on a real time basis for the release of the Olympic slogan, the Olympic song and the Olympic mascots of the 2008 Beijing Olympics via SMS, “Color Ring” and MMS.

Mobile telecommunications services in remote areas. We are committed to fulfilling our responsibility to the community. In an effort to promote the social and economic development in remote areas in Mainland China, CMCC has invested in and constructed the necessary network facilities in these areas as part of the project directed by the Ministry of Information Industry to provide basic mobile telecommunications services to villages in these areas. We have assisted CMCC in providing mobile telecommunications services to villages in these areas as part of the project, including providing related operating and maintenance services.

Information Systems

Our information systems primarily consist of a network management system, a business operation support system and a management information system. The network management system collects and processes the operating data from each network, and manages, supervises and controls our networks for safe and efficient operation. The business operation support system provides day-to-day operational support to each business unit, and is a unified and comprehensive system that enables the sharing of information resources. This system standardizes and integrates each of our sales, billing, settlement, customer service and network failure handling databases in a centralized and orderly manner. The management information system collects and processes our management information and provides support to our management personnel. In addition, this system has computerized and automated our management in finance, inventory, procurement and projects. Furthermore, we have an internal communications network, which consists of our office automation system, our internal computer network, video conference system, telephone system and others, the combination of which supports our internal communications. In 2004,2005, we upgraded and expanded these systems to improve our management and operations.

Trademark. We market our services under the “CHINA MOBILE” trademark, which is the trademark we use throughout Mainland China. “CHINA MOBILE” is a registered trademark in Mainland China owned by our parent company, CMCC. In July 2002, we entered into a non-exclusive licensing agreement with CMCC for the use of the “CHINA MOBILE” name and logo by us and our operating subsidiaries. Under this agreement, no license fee is payable by us for the first five years from the effective date of the trademark registration in China and any fees payable after that will be no less favorable than fees paid by other affiliates of CMCC. In addition, each of the companies that we acquired in July 2004, other than Jingyi, has entered into a licensing agreement with CMCC for the use of the “CHINA MOBILE” name and logo. Under these agreements, no license fee is payable until December 31, 2007.

In addition, the “CHINA MOBILE” name has been registered as a trademark by CMCC in Australia, Canada, Hong Kong, Macau, Taiwan, Brunei, Cambodia, Indonesia, New Zealand, South Korea, Thailand, Switzerland and the United States. Furthermore, CMCC has filed applications to register the “CHINA MOBILE” name and logo as a trademark in Bangladesh, Canada, India, Malaysia and Philippines. CMCC has also filed applications for trademark registration under the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks.

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We have registered the “MONTERNET” name as a trademark in Hong Kong, Mainland China and the European Union. In addition, we have filed applications in Canada and the United States to register the “MONTERNET” name and logo as a trademark.

Mobile Telecommunications Networks

We offer mobile telecommunications services using the GSM standard. Each of our GSM networks consists of:

 

base stations, which are transmitters and receivers that serve as a bridge between all mobile users in a cell and connect mobile calls to the mobile switching center;

 

base station controllers, which connect to, and monitor and control, the base station within each cell, performing the functions of message exchange and frequency administration;

 

mobile switching centers, which are central switching points to which each call is connected, and which control the base station controllers and the routing of calls;

 

transmission lines, which link the mobile switching centers, base station controllers, base stations and other telecommunications networks; and

 

software applications that drive the mobile telecommunications infrastructure.

GSM Network Capacity Expansion and Optimization Plans. All of our subscribers currently use digital GSM services. We intend to continue our network expansion and optimization with an emphasis on improving network utilization and operating efficiency as well as expanding the coverage and capacity of our GSM networks. Our network expansion and optimization plans depend to a large extent upon the availability of sufficient spectrum. In addition, in order to improve the capacity of our mobile telecommunications networks in certain major urban centers, we introduced the GSM-compatible 1800 MHz Digital Cellular System.

Spectrum. A mobile telecommunications network’s capacity is to a certain extent limited by the amount of frequency spectrum available. The Ministry of Information Industry allocated a total of 3439 MHz of spectrum, used for transmission and reception nationwide, respectively, in the 900 MHz frequency band and the 1800 MHz frequency band to our parent company, CMCC. Under the existing agreement between CMCC and us, we have the exclusive right to use such frequency spectrum in Mainland China.

Transmission Infrastructure. The physical infrastructure linking our base stations, base station controllers and mobile switching centers and interconnecting our networks to other networks consists of transmissions lines, which provide the backbone infrastructure by which mobile call traffic is carried.

Intra-Provincial Transmission Lines. In addition to our own transmission lines, we also lease intra-provincial and local transmission lines from other operators and pay them fees based on tariff schedules stipulated by the relevant regulatory authorities after adjusting for the discounts that we have negotiated.

Inter-Provincial Transmission Lines. Following the completion of our acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in July 2004, we no longer lease any inter-provincial transmission lines from CMCC, and for the inter-provincial transmission lines we leased from other providers through CMCC, CMCC collects leasing fees from us and pays the same to the relevant transmission line providers.

Network Operations and Maintenance. We believe that we have considerable network operation and maintenance experience and technical expertise. Day-to-day traffic management, troubleshooting, system maintenance and network optimization are conducted by our experienced team of engineers and technicians. Technical staffs are available for emergency repair work 24 hours a day and we employ specialist teams for central maintenance of the networks. Currently, most technical difficulties relating to the networks are resolved by our staff, although our equipment suppliers also provide back-up maintenance and technical support.

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Base Station Sites. In urban areas, our base station sites are located mostly on existing structures, typically at the top of tall buildings. In rural areas, masts are often constructed for locating base stations. Typically, base station sites are of limited size, as base station equipment does not generally require significant space. Generally, depending on the length of time required for negotiation with respect to use of the land or buildings, construction of a base station takes approximately one to three months in an urban area and approximately three to six months in a rural area. We anticipate that we will need a significant number of new sites in connection with the expansion of our mobile telecommunications networks. There can be no assurance that we will be able to obtain the requisite number of sites on reasonable commercial terms.

Equipment Suppliers. We select our principal suppliers from among leading international and domestic manufacturers of mobile telecommunications equipment and in accordance with technical standards set by the Ministry of Information Industry. In 2004,2005, we purchased our GSM networks equipment primarily from Ericsson, Nokia, Huawei Technologies, Nokia, Motorola and Alcatel.

Strategic Alliance with Vodafone

We have a strategic alliance agreement with Vodafone, which provides for a number of cooperation arrangements between us and Vodafone, including:

 

the exchange and sharing of corporate management, technical and operational expertise and resources;

 

joint research and development;

 

the introduction of global products and services for the mobile community; and

 

the development and implementation of standards and protocols relevant to mobile telecommunications.

Under the agreement, Vodafone is our preferred partner in the above mentioned areas, and we are Vodafone’s sole strategic partner in China for all areas of potential cooperation within the scope of the strategic alliance. As part of the alliance, Dr. J. Brian Clark, Chief Executive in the Asia Pacific Region of Vodafone, served as a non-executive directorNon-Executive Director of our company from August 2003 until March 2005. Sir Julian Michael Horn-Smith, Deputy Chief Executive Officer and Executive Director of Vodafone, served as a Non-Executive Director of our company from March 2005 until June 2006. Mr. Paul Michael Donovan, Chief Executive Officer for Central Europe, Middle East, Asia-Pacific and Affiliates of Vodafone, joined our board of directors as a non-executive directorNon-Executive Director in March 2005.June 2006. See “Item 6. Directors, Senior Management and Employees”. In addition, as of

May 31, 2005,2006, Vodafone held approximately 3.26%3.23% of our outstanding shares. See “— The History and Development of Company — Expansion Through Acquisitions”.

We believe that the strategic alliance with Vodafone has enhanced our strengths in the telecommunications market in Mainland China and will better position us to pursue further expansion opportunities globally. In particular, this alliance has enabled us to have frequent and broad exchanges of expertise and market information. Moreover, this strategic alliance will enable Vodafone and us to share information and establish benchmarks to better assess and enhance each other’s performance, thereby better positioning both parties in the global telecommunications market. See “— Research

Strategic Alliance Agreement with Phoenix and Development”.Memorandum ofUnderstanding with News Corporation and STAR Group Limited

On June 8, 2006 we entered into a strategic alliance agreement with Phoenix Satellite Television Holdings Limited, or Phoenix, a leading satellite television operator broadcasting into mainland China, pursuant to which we and Phoenix will cooperate in the joint development, marketing and delivery of innovative wireless content, products, services and applications, among others. The strategic alliance agreement is conditional upon the completion of the purchase by China Mobile (Hong Kong) Group Limited, our indirect holding company, of a 19.9% interest in Phoenix from Xing Kong Chuan Mei Group Co., Ltd., a subsidiary of STAR Group Limited and an indirect subsidiary of News Corporation, subject to the obtaining of relevant regulatory approvals and other customary closing conditions.

In addition, on the same day, we entered into a memorandum of understanding with News Corporation and STAR Group Limited in connection with the intention of the parties to build a long-term wireless media strategic partnership and to explore various areas of cooperation, which may include the aggregation, development and marketing of multimedia content and other wireless value-added services, by combining the strength and experience of one of the largest media companies in the world and one of the largest mobile telecommunications companies in the world.

Competition

We compete with other telecommunications services providers. We are one of the two licensed mobile telecommunications services providers in Mainland China. The ChinesePRC government encourages orderly and fair competition in the telecommunications industry in Mainland China. In particular, the ChinesePRC government has extended favorable regulatory policies to some of our competitors, such as China Unicom, in order to help them become more viable competitors to us. For example, the ChinesePRC government has permitted China Unicom to apply mobile service tariffs as much as 10% below the governmental standard rates. We believe this policy has helped China Unicom’s market share by capturing a significant number of price-sensitive mobile telecommunications services subscribers.

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In accordance with the ChinesePRC government policy of encouraging competition in the ChinesePRC telecommunications industry, the government has previously authorized new entrants to offer IP-based long distance call services, data and Internet services. In 2001, the State Council formally approved the restructuring of the former China Telecommunications Corporation, China Netcom Corporation Limited and Jitong Network Communications Company Limited, which created two large telecommunications companies, China Telecom and China Netcom. Increased competition from new entrants in China’s telecommunications industry could adversely affect our financial condition and results of operations. See “Item 3. Key Information — Risk Factors — New entrants in the telecommunications industry in Mainland China may further intensify competition and adversely affect our business and prospects”.

We are facing intensified competition from other operators. China Unicom provides mobile telecommunications services through GSM and CDMA networks throughout Mainland China. In addition, China Telecom and China Netcom offer local wireless access services, such as Xiaolingtong services, throughout Mainland China.XiaolingtongChina. Xiaolingtong services are local telecommunications services based on the Personal Access System technology, which provide subscribers with wireless access in a low-mobility environment through radio base stations with short-distance coverage. In addition, China Unicom, China Telecom and China Netcom launch from time to time promotional offers, such as handset subsidies and tariff packages, to attract customers. China Telecom and China Netcom also offer Xiaolingtong services together with fixed-line services as a package. Despite intensified competition, we believe that we have significant competitive advantages due to:

 

economies of scale;

our superior mobile telecommunications networks;

our advanced and flexible support systems;

 

our widely-recognized brand name and logo that are closely identified with us by consumers;

 

our broad distribution networks and our focus on customer services;

 

our extensive range of new businesses;

 

our experienced management team and seasoned employees; and

 

our financial resources.

We believe these advantages have contributed to our superior subscriber quality compared to that of our competitors, as measured by average usage levels, average revenues per subscriber and doubtful accounts levels.

The State Council and the Ministry of Information Industry may approve additional mobile service providers in the future that may compete with us. We may also be subject to competition from providers of new telecommunications services based on existing or new technologies, such as 3G. Nonetheless, given the relatively low mobile penetration rates in Mainland China in general and, in particular, in the central and western regions as well as small and medium-sized cities and rural areas, we believe there is substantial growth potential for our mobile telecommunications business. We believe that the restructuring of the telecommunications industry in Mainland China has helped to create a fair, orderly, transparent and healthy telecommunications market.

World Trade Organization

China officially joined the WTO on December 11, 2001. Under the Protocol on the Accession of the People’s Republic of China, dated as of November 11, 2001, China agreed to gradually open various segments and regions of its telecommunications market to foreign investment. Pursuant to this accession protocol, both the percentage of ownership of Sino-foreign joint ventures offering telecommunicationtelecommunications services in China and the regions where those joint ventures are permitted to offer telecommunications services will be gradually expanded over a period of six years. Under the accession protocol, the telecommunication market is divided into fixed-line services, mobile voice and data services, paging services and value added services. Value added services include electronic mail, voice mail and online information and database retrieval. By December 11, 2004, foreign investors are

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were permitted to own up to 49% of joint ventures that offer mobile voice and data services in 17 cities in China. By December 11, 2006, such joint ventures will be permitted to offer mobile voice and data services in China without any geographic restrictions.

The table below summarizes the foreign ownership restrictions for telecommunications joint ventures in China as well as applicable geographic restrictions:

Foreign Ownership Percentage and Geographic Restrictions

for Foreign-Funded Telecommunications Enterprises

 

As of December 31,
   As of December 31,

Sector

  2001 2002 2003 2004 2005  2006 2007

Mobile

  25%
(3 cities)(1)
 35%
(17 cities)(2)
  49%
(17 cities)(2)
   49%
(nationwide)
 

Fixed-line

  N/A N/A N/A 25%
(3 cities)(1)
   35%
(17 cities)(2)
 49%
(nationwide)

Value added

  30%
(3 cities)(1)
 49%
(17 cities)(2)
 50%
(nationwide)
     

Paging

  30%
(3 cities)(1)
 49%
(17 cities)(2)
 50%
(nationwide)
     


Source: the official website of the PRC Ministry of Information Industry.


Sector


2001


2002


2003


2004


2005


2006


2007


Mobile

25%

(3 cities)(1)

35%

(17 cities)(2)

49%

(17 cities)(2)

49%

(nationwide)

Fixed-line

N/AN/AN/A

25%

(3 cities)(1)

35%

(17 cities)(2)

49%

(nationwide)

Value added

30%

(3 cities)(1)

49%

(17 cities)(2)

50%

(nationwide)

Paging

30%

(3 cities)(1)

49%

(17 cities)(2)

50%

(nationwide)


(1)The initial three cities are Beijing, Shanghai and Guangzhou.
(2)The 17 cities include Beijing, Chengdu, Chongqing, Dalian, Fuzhou, Guangzhou, Hangzhou, Nanjing, Ningbo, Qingdao, Shenyang, Shanghai, Shenzhen, Xiamen, Xi’an, Taiyuan and Wuhan.

Regulation

The mobile telecommunications industry in Mainland China is subject to a high degree of regulation by the Chinese government.highly regulated. Regulations issued or implemented by the State Council, the Ministry of Information Industry and other relevant government authorities including the National Development and Reform Commission and the Ministry of Commerce, which consolidated the functions of the former Ministry of Foreign Trade and Economic Cooperation, encompass all key aspects of mobile telecommunications network operations, including entry into the telecommunications industry, scope of permissible business, interconnection and transmission line arrangements, technology and equipment standards, tariff standards, capital investment priorities, foreign investment policies and spectrum and numbernumbering resources allocation.

The Ministry of Information Industry, under the leadership of the State Council, is responsible for, among other things:

 

formulating and enforcing industry policy, standards and regulations;

 

granting telecommunications licenses and permits;

 

formulating interconnection and settlement standards for implementation between telecommunications networks;

 

together with other relevant regulatory authorities, formulating tariff and service charge standards for telecommunications services;

 

supervising the operations of telecommunications services providers;

 

promoting fair and orderly market competition among operators; and

 

allocating and administering public telecommunications resources, such as radio frequencies, numbernumbering resources, domain names and addresses of telecommunications networks.

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In order to provide a uniform regulatory framework to encourage the orderly development of the telecommunications industry, the Ministry of Information Industry, under the direction of the State Council, is currentlyhas been preparing a draft telecommunications law. According to the 2006 legislation agenda announced by the National People’s Congress, the draft telecommunications law is scheduled to be submitted to the Standing Committee of the National People’s Congress for initial review in August 2006. We expect that, if and when the telecommunications law is adopted by the National People’s Congress, it will become the basic telecommunications statute and the legal source of telecommunications regulations in Mainland China. In addition, the State Council promulgated a set of telecommunications regulations on September 25, 2000. These regulations apply in the interim period prior to the adoption of the telecommunications law. Although we expect that the telecommunications law will have a positive effect on the overall development of the telecommunications industry in Mainland China, we cannot predict what the ultimate nature and scope of the telecommunications law will be.

Entry into the Industry. Under the current regulations, operators of mobile telecommunications networks, providers of other basic telecommunications services such as local and long distance fixed-line telephone services, and value added service providers whose telecommunications services cover two or more provinces, directly-administered municipalities or autonomous regions in China must apply for specific permits from the Ministry of Information Industry in order to provide such services. Granting of permits for providing basic telecommunications services will be through a tendering process. Currently, in addition to us, China Unicom is also authorized to provide mobile telecommunications services in all provinces, directly-administered municipalities and autonomous regions in China.

On December 11, 2001, China officially joined the WTO. To implement China’s commitments under the WTO, the Administration of Foreign-Funded Telecommunications Enterprises Provisions became effective on January 1, 2002, permitting foreign investment in joint ventures that provide telecommunications services in China. However, such investments will presumably bear no direct relation to the issuance of licenses to providers of telecommunications services in Mainland China, as the issuance of new licenses by the relevant authority is governed by a separate set of rules and regulations. Pursuant to the Administration of Foreign-Funded Telecommunications Enterprises Provisions, foreign ownership in a telecommunications enterprise may be gradually increased to 49% if such enterprise provides basic telecommunicationtelecommunications services and 50% if such enterprise provides value added telecommunications services (including radio paging services).

Spectrum Usage. In coordination with the relevant provincial authorities, the Ministry of Information Industry regulates the allocation of radio frequency. The frequency assigned to an entity is not allowed to be leased or, without approval of the Ministry of Information Industry, transferred by the entity to any other third party. In accordance with a joint circular from the National Development and Reform Commission and the Ministry of Finance, CMCC entered into an agreement with us that specifies the amount of fees to be paid to the Ministry of Information Industry for spectrum usage by each mobile telecommunications network operator based on the bandwidth of the frequency used and the number of base stations within the relevant operator’s networks.

On May 2, 2002, the relevant regulatory authorities in China informed us that the standard spectrum usage fees for GSM networks will be adjusted progressively over a period of three years, and that the adjustments will be effective for a period of five years from July 1, 2002. For the first year, spectrum usage fees for GSM networks will be charged at the annual rate of RMB7.5 million per MHz frequency. For the second year, the annual fee will be RMB11.25 million per MHz frequency and from the third year onward, the annual fee will be RMB15 million per MHz frequency. All adjusted annual fees are charged on the basis that upward and downward frequencies are separately charged.

NumberNumbering Resources. The Ministry of Information Industry is responsible for the administration of the telecommunications numbernumbering resources within Mainland China, including the telecommunications network numbers and subscriber numbers. The use of numbernumbering resources by any telecommunications operator is subject to the approval by the Ministry of Information Industry. In January 2003, the Ministry of Information Industry issued Measures on Administration of Telecommunications Network NumberNumbering Resources. In accordance with these measures, the telecommunications network numbernumbering resources are owned by the state, and the user of numbernumbering resources is required to pay a usage fee to the state starting March 1, 2003. The new measures also provide for procedures for application for the use, upgrade and adjustment of numbernumbering resources by telecommunications operators. In December 2004, the

-31-


Ministry of Information Industry, the Ministry of Finance and the National Development and Reform Commission jointly issued the Provisional Administrative Measures with respect to the Collection of the Usage Fee of Telecommunications Network NumberNumbering Resources, under which telecommunications companies are required to pay a usage fee to the PRC government by the 10th day of the first month of each quarter. Moreover, under these provisional measures, mobile telecommunications companies are required to pay an annual usage fee of RMB12 million for each network number. We are required to start paying usage fees in 2005.

Tariff Setting. The levels and categories of our tariffs are subject to regulation by various government authorities, including the Ministry of Information Industry, the National Development and Reform Commission and, at the local level, the relevant provincial price regulatory authorities. Under the current telecommunications regulations, telecommunications tariffs are categorized into market based tariffs, government guidance tariffs and government standard tariffs. In general, base usage charges, monthly fees, maximum domestic roaming usage charges and maximum tariffs for all domestic long distance calls and international calls (other than Internet Protocol phone calls) are fixed jointly by the Ministry of Information Industry and the National Development and Reform Commission. In August 2005, the Ministry of Information Industry amended its tariff regulations relating to some telecommunications services, pursuant to which network operators have, among other things, more flexibility in setting their domestic and international long distance tariffs and domestic roaming charges, provided that these tariffs set by network operators do not exceed the respective maximum tariffs determined by the Ministry of Information Industry in consultation with the National Development and Reform Commission and that the tariff plans are filed with the Ministry of Information Industry and the National Development and Reform Commission or, in some cases, the relevant price regulatory authorities at the provincial level. Our international roaming charges are set in accordance with agreements between CMCC and the relevant foreign mobile operators. Under the current telecommunications regulations, tariffs for those telecommunications businesses that are considered fully competitive may be set by the service providers as market based tariffs.

Interconnection Arrangements and Lease Line Arrangements. Under the current telecommunications regulations, parties seeking interconnection must enter into an interconnection agreement and file such interconnection agreement with the Ministry of Information Industry. Major telecommunications services providers that have control over essential telecommunications infrastructure and possess significant market share must allow interconnection to their networks by other operators. They must establish interconnection rules and procedures based on the principles of non-discrimination and transparency and submit such rules and procedures to the Ministry of Information Industry for approval. Such rules and procedures will be binding upon those major telecommunications services providers. The termination of any interconnection arrangements will require prior approval by the Ministry of Information Industry.

The applicable regulations provide that interconnection related equipment must conform to the technical standards approved by the Ministry of Information Industry. See “—Technical Standards” below. The Ministry of Information Industry also determines the standard lease tariffs to be paid by telecommunications operators with respect to the leasing of transmission lines that facilitate interconnection between telecommunications networks.

Technical Standards. Certain regulatory authorities in Mainland China, including the Ministry of Information Industry, set technical standards and control the type and quality of mobile telecommunications equipment used in or connected to public networks, all radio telecommunications equipment and all interconnection related equipment.

The establishment of base stations requires the approval of the relevant provincial regulatory authorities. A number of these approvals with respect to the base stations of our operating subsidiaries are currently pending. We have not experienced and do not expect to experience material difficulty in obtaining permission to establish additional sites.

Capital Investment. Some of our major investment projects, including mobile telecommunications network development projects, may be required to obtain approvals from relevant regulatory authorities in Mainland China.

Employees

The total number of our employees increased from 63,859 as of December 31, 2003 to 88,127 as of December 31, 2004 mainlyto 99,104 as a result of our acquisitions of ten regional mobile telecommunications companies and other telecommunications assets in Mainland China in July 2004.December 31, 2005. Substantially all of our employees are located in Mainland China. The employees are classified in the following table. Approximately 69.2%73.5% of our permanent employees have college or graduate degrees.

 

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Management

  19,36218,711

Technical and engineering

  24,05028,859

Sales and marketing

  40,97946,262

Financial and accounting

  3,7365,272
   

Total

  88,12799,104
   

We provide benefits to certain employees, including housing, retirement benefits and hospital, maternity, disability and dependent medical care benefits. Most of our employees are members of a labor association. We have not experienced any strikes, slowdowns or labor disputes that have interfered with our operations to date, and we believe that our relations with our employees are good.

Property,Properties, Plants and Equipment

We own, lease or have usage rights in various properties which consist of land and buildings for offices, administrative centers, staff quarters, retail outlets and technical facilities. For some of our properties under construction, we have not obtained land use right certificates or property title certificates. However, such deficiencies do not affect our use of these properties. We believe that all of our owned and leased properties are well maintained and are suitable and adequate for their present use.

Item 4A. Unresolved Staff Comments.

Not applicable.

Item 5. Operating and Financial Review and Prospects.

You should read the following discussion and analysis in conjunction with our consolidated financial statements, together with the related notes, included elsewhere in this annual report.report on Form 20-F. Our consolidated financial statements have been prepared in accordance with Hong Kong GAAP, which differ in certain significant respects from U.S. GAAP. Note 3238 to our consolidated financial statements summarizes the significant differences between Hong Kong GAAP and U.S. GAAP as they relate to us and provides a reconciliation to U.S. GAAP of net profit attributable to equity shareholders and shareholders’ equity. In addition, note 3238 to our consolidated financial statements includes our condensed consolidated financial statements prepared and presented in accordance with U.S. GAAP for the relevant periods. Our consolidated financial statements present, and the discussion and analysis in this section pertain to, our consolidated financial position and results of operations as of and for the years ended December 31, 2002, 2003, 2004 and 2004.2005. Our consolidated financial statements reflect the results of Neimenggu Mobile, Jilin Mobile, Heilongjiang Mobile, Guizhou Mobile, Yunnan Mobile, Xizang Mobile, Gansu Mobile, Qinghai Mobile, Ningxia Mobile, Xinjiang Mobile, Jingyi and CMC from July 1, 2004, the date of the acquisition.

Overview of Our Operations

During 2002, 2003, 2004 and 2004,2005, our network capacity, subscriber base and usage and operations continued to experience significant growth. We believe that with the ongoing market-oriented restructuring of the telecommunications industry, as well as the continued development of the Chinese economy and increase in per capita income in Mainland China, the telecommunications industry will continue to grow rapidly. Given the relatively low penetration rates in our Mainland China in general and, in particular, in the central and western regions, we believe that there is substantial potential for continued future subscriber growth.

We operate in an extensively regulated environment and our operations and financial performance are significantly affected by the ChinesePRC government’s regulation of the telecommunications industry. These regulations and policies may affect, among other things, our interconnection and transmission line leasing arrangements, technology and equipment standards and capital investment, as described in more detail under “Item 3. Key Information — Risk Factors — Adverse changes in the economic policies of the ChinesePRC government could have a material adverse effect on the overall economic growth of Mainland China, which could reduce the demand for our services and adversely affect our business, financial condition and results of operations” and “Item 4. Information on the Company — Business Overview — Regulation”. Our financial performance is also subject to the economic and social conditions in Mainland China and foreign currency exchange rate fluctuations.

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Our Previous Acquisitions of Regional Mobile Telecommunications Companies and Other Telecommunications Assets in the Past Five YearsMainland China Have Materially Impacted Our Financial Results

We acquired Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi Mobile on November 13, 2000, Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi Mobile on July 1, 2002 andFollowing our acquisition of Neimenggu Mobile, Jilin Mobile, Heilongjiang Mobile, Guizhou Mobile, Yunnan Mobile, Xizang Mobile, Gansu Mobile, Qinghai Mobile, Ningxia Mobile, Xinjiang Mobile, Jingyi and CMC on July 1, 2004.2004, we began to provide a full range of mobile telecommunications services in all thirty-one provinces, autonomous regions and directly-administered municipalities in Mainland China. Moreover, we acquired all of the issued and outstanding shares of Peoples Telephone on March 28, 2006. See “Item 4. Information on the Company — The History and Development of Company — Expansion Through Acquisitions.” We have adopted the purchase accounting method to account for these acquisitions under Hong Kong GAAP. Accordingly, our consolidated financial statements include the results of these companies from the respective dates of the acquisitions. Under U.S. GAAP, our acquisitions of these companies are considered a combination of entities under common control which would be accounted for under the “as if pooling-of-interests” method, whereby assets and liabilities are accounted for at historical cost and the accountsfinancial statements of previously separate companies for periods prior to the combination generally are restated on a combined basis.

These acquisitions have had a material impact on our overall results of operations. In particular, our financial results in 2004 and 2005 were significantly affected by the inclusion of the results of operations for the ten regional mobile telecommunications companies and other telecommunications assets we acquired in July 2004. By comparison, our financial results in 2003 did not include the results of operations of these companies. See “— Results of Operations — Year Ended December 31, 2004 Compared to Year Ended December 31, 2003”. These acquisitions have, among other things, significantly expanded the size of the mobile telecommunications markets we serve and increased the number of our subscribers and usage of our services. As a result, our operating revenue and operating expenses have also increased significantly.

Operating Arrangements We Entered Into Over the Last Several Years Have Materially Impacted Our Financial Results

Our current organizational structure was established pursuant to the restructuring completed in September 1997 in preparation for our initial public offering and our subsequent acquisitions of regional mobile telecommunications companies and other telecommunications assets in Mainland China. In connection with these transactions, we entered into various operating arrangements to facilitate the transfer of the operations to us, to integrate these operations within our operating structure and to improve our overall operational efficiency. These arrangements included:

 

interconnection revenue sharing and settlement arrangements with other operators;

 

intra-provincial transmission line leasing agreements with other operators;

 

service agreement with CMCC and certain other operators with respect to various telecommunications services and support;

a change in the tax treatment of connection fees and certain surcharge revenue for our services; and

 

the revaluation of fixed assetsproperty, plant and equipment and land lease prepayments of the companies we acquired as of the respective dates set forth in the financial statements included in this annual report.report on Form 20-F.

The original terms of our agreements relating to interconnection, leased lines and roaming have been revised as a result of tariff adjustments by the government and/or commercial negotiation with the relevant parties.

Our financial results reflect the impact of the above arrangements as of the dates they became effective. These arrangements and changes have had a material impact on our overall results of operations.

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Our Operating Arrangements with CMCC Have Affected and May Continue to Affect Our Financial Results

Following the completion of our acquisition of the telecommunicationtelecommunications assets from CMCC in July 2004, CMCC no longer provides mobile telecommunications services in Mainland China other than through us. Therefore, from July 1, 2004, the domestic roaming arrangements between CMCC and us were terminated and we no longer lease any inter-provincial transmission lines from CMCC. Moreover, we entered into an agreement with CMCC on July 1, 2004 with respect to, among other things, inter-provincial interconnection and roaming, international interconnection and roaming, and inter-provincial and international transmission lines leasing. Pursuant to this agreement, for the inter-provincial transmission lines we leased from other providers through CMCC, CMCC maintains the existing inter-provincial transmission line leasing arrangements with the relevant transmission line providers, and collects leasing fees from us and pays the same to the relevant transmission line providers. Moreover, under this agreement, CMCC (a) maintains the existing settlement arrangements with respect to international interconnection and roaming with the relevant telecommunication servicetelecommunications services providers in foreign countries and regions, and (b) collects the relevant usage fees and other fees from us or the relevant telecommunications services providers in foreign countries and regions and pays the same to the relevant mobile telecommunication servicetelecommunications services providers in foreign countries and regions.regions or us, as the case may be. In addition, under this agreement, with respect to the inter-provincial interconnection with the relevant telecommunication servicetelecommunications services providers in Mainland China, CMCC maintains the existing inter-provincial interconnection arrangements with the relevant telecommunication servicetelecommunications services providers in Mainland China, and collects the relevant usage fees and other fees from us and pays the same to the relevant telecommunication servicetelecommunications services providers in Mainland China.

Tariff Adjustments

The ChinesePRC government introduced a wide range of tariff adjustments effective from early 2001, which include, among others,other things, the shortening of the billing unit for long distance charges (other than for IP-based long distance call services), from one minute to six seconds, the general reduction in domestic and international long distance call rates, the elimination of various surcharges, and connection fees charged to new contract subscribers and, a general reduction in leased line tariffs.

Moreover, we are allowed to offer our subscribers a variety of tariff packages which have different monthly fees, levels of basic usage and charges for usage exceeding the covered basic usage, voice value-added services, data services or other features. In general, the higher the monthly fee of a tariff package, the greater the price concession we offer. The tariff packages often incorporate different complimentary voice value-added services and data services packages.

Renminbi Bond Offerings

Following the approval by the relevant ChinesePRC regulatory authorities, on June 18, 2001 our wholly-owned subsidiary, Guangdong Mobile, issued RMB5 billionRMB5,000 million of guaranteed bonds due in 2011 at a floating interest rate, payable annually. These bonds are listed on the Shanghai Stock Exchange.

We have issued an irrevocable guarantee for the performance of these bonds, and CMCC has issued a further guarantee in relation to the performance by us of our guarantee. The bonds are rated “AAA” by China Chengxin International Credit Rating Company Limited, an affiliate of Fitch International Limited.

The net proceeds from the offering were applied solely to repay part of the RMB12.5 billionRMB12,500 million syndicated loans we raised through our wholly-owned subsidiary, China Mobile (Shenzhen) Limited, in 2000 for our acquisition of the seven regional mobile telecommunications companies.

Following the approval by the relevant ChinesePRC regulatory authorities, Guangdong Mobile issued RMB3 billionRMB3,000 million guaranteed bonds due 2007 and RMB5 billionRMB5,000 million guaranteed bonds due 2017 on October 28, 2002. These bonds commenced trading on the Shanghai Stock Exchange on January 22, 2003. The RMB3 billionRMB3,000 million guaranteed bonds and RMB5 billionRMB5,000 million guaranteed bonds bear fixed interest of 3.5% and 4.5%, respectively, payable annually.

We issued a joint and irrevocable guarantee for the performance of these bonds, and CMCC has issued a further guarantee in relation to the performance by us of our guarantee obligation. These bonds received a consolidated credit rating of “AAA” by China Chengxin International Credit Rating Company Limited, an affiliate of Fitch International Limited, and a consolidated credit rating of “AAA” by Dagong Global Credit Rating Co. Ltd.

The entire net proceeds from the offering were applied solely to satisfy part of the US$2,800 million deferred consideration for the acquisition by the Company of the entire interest in Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi Mobile in 2002.

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Critical Accounting Policies and Estimates

The following discussion and analysis is based on our consolidated financial statements, which have been prepared in accordance with Hong Kong GAAP. The preparation of financial statements in conformity with Hong Kong GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the years reported. Actual results could differ from those estimates. Estimates are used when accounting for certain items such as unbilled usage fees,provision for customer point reward program, allowance for doubtful accounts, depreciation and amortization period, and impairment of long lived assets including fixed assetsproperty, plant and equipment and goodwill arising from acquisitions (including that taken initially to reserves). and fair value of share options granted. Actual results may differ from those estimates under different assumptions or conditions.

We believe that the following critical accounting policies have a more significant impact on our consolidated financial statements, either because of the significance of the financial statement elements to which they relate, or because they require judgment and estimation.

Provision for Customer Point Reward Program

We invite our subscribers to participate in a customer point reward program, or the Reward Program, which provides subscribers the option of electing to receive free telecommunications services or other non-cash gifts. The level of bonus points earned under the Reward Program varyvaries depending on the subscribers’ service consumption, loyalty and payment history. The estimated incremental costs of providing these free rewards are expensed in the consolidated statements of income and are accrued as a current liability on the consolidated balance sheetsheets based on (i) the number of subscribers who are qualified to exercise their redemption right at period/year end and the estimated rate of redemptions based on past experience; (ii) the estimated number of subscribers who have no right to redeem the incentives at period/year end, but who will ultimately earn and claim awards under the Reward Program; and (iii) type of incentives that subscribers will select for redemption based on past experience. We recognized the maximum potential liability in the past. Our assumptions remained unchanged in 2004.2005. As subscribers redeem rewards or their entitlements expire, the provision is reduced accordingly.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts based upon evaluation of the recoverability of the accounts receivablesreceivable and other receivables at each balance sheet date. We base our estimates on the agingageing of our accounts receivable and other receivable balances and our historical write-off experience, net of recoveries. If the financial condition of our customers were to deteriorate, additional allowances may be required.

Depreciation

Depreciation is based on the estimated useful lives of items of property, plant and equipment, less their estimated residual value, if any, to write off the cost of these items over their estimated useful lives. We review the estimated useful lives and residual values of our assets annually in order to determine the amount of depreciation expense to be recorded during any reporting period. In 2005, there were no changes in assets’ estimated useful lives. The useful lives and residual values are based on our historical experience with similar assets, taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates. Estimates and assumptions used in setting depreciable lives require both judgment and estimation. Our policies regarding accounting for these assets are included in note 2(f) to our consolidated financial statements.

Impairment of Fixed AssetsProperty, Plant and Equipment and Goodwill

Our fixed assets,property, plant and equipment, consisting primarily of telecommunicationtelecommunications transceivers, switching centers, transmission and other network equipment, comprise a significant portion of our total assets. Changes in technology or industry conditions may cause the estimated period of use or the value of these assets to change. We perform periodic reviews to confirm the appropriateness of estimated economic useful lives for each class of fixed assets. For the three years ended December 31, 2004, no changes of assets useful lives have occurred. In addition, long-livedLong-lived assets, including fixed assetsproperty, plant and equipment, are reviewed for impairment at least annually or whenever events or changes in circumstances have indicated that their carrying amounts may not be recoverable. If any such indication exists, the asset’s recoverable amount is estimated. An impairment lossIn addition, for goodwill, the recoverable amount is recognized whenever the carrying amountestimated annually whether or not there is any indication of an asset exceeds its recoverable amount. impairment.

The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Whereasset, which requires significant judgment relating to level of revenue and amount of operating costs. We use all readily available information in determining an asset does not generate cash inflows largely independentamount that is a reasonable approximation of those from other assets, the recoverable amount, is determined forincluding estimates based on reasonable and supportable assumptions and projections of revenue and operating costs. Changes in these estimates could have a significant impact on the smallest group of assets that generates cash inflows independently (i.e., a cash-generating unit).

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Goodwill is reviewed for impairment at least annually or whenever events or changes in circumstances have indicated that it might be impaired. Recoverability of goodwill is measured by comparing the carrying amount of the cash-generating unit to which goodwill belongs. If the carrying amount of the cash-generating unit to which goodwill belongs exceeds its fair value, goodwill is considered impaired and a second test is performed which compares the implied fair value of goodwill to the book value of goodwill. The implied fair value of goodwill is calculated as the fair value of the cash-generating unit to which goodwill belongs. Anassets and could result in additional impairment loss is recognized whenever the carrying amountcharge or reversal of the cash-generating unit to which goodwill belongs exceeds its recoverable amount.

impairment in future periods.

Estimates and assumptions used in setting depreciable lives and testing for recoverability require both judgment and estimation. Our policies regarding accounting for these assets and assessing their recoverability are included in note 3(f) and note 3(h)2(h) to our consolidated financial statements.

Fair Value of Share Options Granted

The fair value of share options granted to our employees is recognized as an employee cost with a corresponding increase in a capital reserve within equity and is measured based on a binomial lattice model. In applying the model, we estimate the expected volatility based on the historical volatility of our share price (calculated based on the weighted average remaining life of the share option), adjusted for any expected changes (based on publicly available information) to future volatility. We also estimate expected dividends based on our historical dividends and planned dividend payout ratio, if any. Changes in the subjective input assumptions could materially affect the fair value estimate of share options.

Results of Operations

As a result of our acquisitions, our results of operations are not directly comparable with those in prior years.

The following table sets forth selected income statement data for the periods indicated:

 

   Year Ended December 31,

 
   2002

  2003

  2004

 
   (in millions of RMB) 

Operating revenue:

          

Usage fees

  93,272  111,027  128,534 

Monthly fees

  16,901  20,666  24,760 

Other operating revenue

  18,388  26,911  39,087 
   

 

 

Total operating revenue

  128,561  158,604  192,381 

Operating expenses:

          

Leased lines

  5,287  4,914  3,861 

Interconnection

  12,975  12,868  12,072 

Depreciation

  26,827  36,611  44,320 

Personnel

  6,757  7,700  9,717 

Other operating expenses

  27,919  43,308  62,677 
   

 

 

Total operating expenses

  79,765  105,401  132,647 

Operating profit

  48,796  53,203  59,734 

Amortization of goodwill

  (936) (1,850) (1,930)

Other net income

  1,686  2,464  3,167 

Non-operating net income

  571  434  900 

Interest income

  713  807  1,014 

Finance costs

  (1,852) (2,099) (1,679)
   

 

 

Profit before tax

  48,978  52,959  61,206 

Income tax

  (16,375) (17,412) (19,180)
   

 

 

Profit after tax

  32,603  35,547  42,026 

Minority interest

  (2) 9  (22)
   

 

 

Profit attributable to shareholders

  32,601  35,556  42,004 
   

 

 

   Year Ended December 31, 
   2003  2004  2005 
   (in millions of RMB) 

Operating revenue:

    

Usage fees

  111,027  128,534  156,710 

Monthly fees

  20,666  24,760  25,055 

Other operating revenue

  26,911  39,087  61,276 
          

Total operating revenue

  158,604  192,381  243,041 

Operating expenses:

    

Leased lines

  4,914  3,861  3,224 

Interconnection

  12,868  12,072  15,309 

Depreciation

  36,488  44,186  56,368 

Personnel

  7,700  9,972  14,200 

Other operating expenses

  43,431  62,811  80,254 
          

Total operating expenses

  105,401  132,902  169,355 

Profit from operations

  53,203  59,479  73,686 

Amortization of goodwill

  (1,850) (1,930) —   

Other net income

  2,464  3,167  3,284 

Non-operating net income

  434  900  1,025 

Interest income

  807  1,014  1,615 

Finance costs

  (2,099) (1,679) (1,346)
          

Profit before tax

  52,959  60,951  78,264 

Income tax

  (17,412) (19,180) (24,675)
          

Profit after tax

  35,547  41,771  53,589 
          

Attributable to:

    

Equity shareholders

  35,556  41,749  53,549 

Minority interests

  (9) 22  40 
          

Profit for the year

  35,547  41,771  53,589 
          

Year Ended December 31, 20042005 Compared to Year Ended December 31, 20032004

Operating Revenue. We derive operating revenue principally from usage fees and monthly fees. Usage fees include standard local usage fees for airtime and applicable domestic and international long distance charges receivable from subscribers for the use of our mobile telecommunications networks and facilities, and fees in respect of roaming out calls made by our subscribers outside their registered service areas. Other operating revenue includes charges for data and value-added services, interconnection revenue and roaming in fees.

Operating revenue increased 26.3% from RMB192,381 million in 2004 to RMB243,041 million (US$30,115.9 million) in 2005. This increase was primarily due to the continued expansion in our subscriber base, the continued growth in voice usage volume, the rapid expansion of our new businesses and the full-year effect of our acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in July 2004. Our total number of subscribers was approximately 246.7 million as of December 31, 2005, compared to approximately 204.3 million as of December 31, 2004.

-37-Revenue from usage fees increased 21.9% from RMB128,534 million in 2004 to RMB156,710 million (US$19,418.4 million) in 2005. This increase was principally due to our organic subscriber growth, the organic increase in voice usage volume and the full-year effect of our acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in July 2004. As a percentage of operating revenue, usage fees decreased from 66.8% in 2004 to 64.5% in 2005.

Revenue from monthly fees increased 1.2% from RMB24,760 million in 2004 to RMB25,055 million (US$3,104.6 million) in 2005. This increase was mainly due to the continued increase in contract subscribers and the full-year effect of our acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in July 2004. As a percentage of operating revenue, monthly fees decreased from 12.9% in 2004 to 10.3% in 2005.

Other operating revenue increased 56.7% from RMB39,087 million in 2004 to RMB61,276 million (US$7,592.9 million) in 2005. This increase resulted principally from increased revenue from wireless data and value added services as well as the full-year effect of our acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in July 2004.


Operating Expenses. Operating expenses include leased line expenses, interconnection expenses, depreciation expenses relating to our mobile telecommunications network and other property, plant and equipment, personnel expenses and other operating expenses. Other operating expenses primarily consist of selling and promotion expenses, allowance for doubtful accounts, operating lease charges, maintenance charges, debt collection fees, spectrum charges and numbering resources charges, write-off of property, plant and equipment and other miscellaneous expenses.

Operating expenses increased 27.4% from RMB132,902 million in 2004 to RMB169,355 million (US$20,985.2 million) in 2005. This increase was primarily due to the increase in depreciation expenses, personnel expenses and other operating expenses, as well as the full-year effect of our acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in July 2004.

Total leased line payments decreased 16.5% from RMB3,861 million in 2004 to RMB3,224 million (US$399.5 million) in 2005. This decrease was largely a result of the termination of surplus leased lines as we continued to use more self-constructed transmission lines and also augmented our networks to increase their efficiency. As a percentage of operating expenses, total leased line payments decreased from 2.9% in 2004 to 1.9% in 2005.

Interconnection expenses increased 26.8% from RMB12,072 million in 2004 to RMB15,309 million (US$1,897.0 million) in 2005. This increase was mainly due to the increase of subscriber base and voice usage volume and the full-year effect of our acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in July 2004. Interconnection expenses as a percentage of operating expenses decreased from 9.1% in 2004 to 9.0% in 2005.

Depreciation expense increased 27.6% from RMB44,186 million in 2004 to RMB56,368 million (US$6,984.7 million) in 2005. This increase was mainly due to the expansion of our network capacity, the construction of various support networks and the full-year effect of our acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in July 2004. As a percentage of operating expenses, depreciation expense slightly increased from 33.2% in 2004 to 33.3% in 2005.

Personnel expenses increased 42.4% from RMB9,972 million in 2004 to RMB14,200 million (US$1,759.6 million) in 2005. This increase was primarily due to the recognition of the compensation expenses of share options granted in the aggregate amount of RMB1,553 million as a result of our adoption of HKFRS 2 during the year and the full-year effect of our acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in July 2004. As a percentage of operating expenses, personnel expenses increased from 7.5% in 2004 to 8.4% in 2005.

Other operating expenses increased 27.8% from RMB62,811 million in 2004 to RMB80,254 million (US$9,944.5 million) in 2005. This increase was primarily due to the increase in selling and promotion expenses and the full year effect of our acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in July 2004. As a percentage of operating expenses, other operating expenses increased from 47.3% in 2004 to 47.4% in 2005.

Profit from operations. As a result of the foregoing, profit from operations increased 23.9% from RMB59,479 million in 2004 to RMB73,686 million (US$9,130.6 million) in 2005, and operating margin (profit from operations as a percentage of operating revenue) decreased from 30.9% in 2004 to 30.3% in 2005.

Amortization of goodwill. The amount in 2004 represented the amortization of goodwill arising from acquisitions of regional mobile telecommunications companies and other telecommunications assets on or after January 1, 2001. Effective January 1, 2005, in order to comply with HKFRS 3 and HKAS 36, we adopted a new accounting policy for goodwill. The new policy has been applied prospectively in accordance with the transitional provisions as set out in HKFRS 3, whereby we no longer amortize goodwill over its estimated useful life but test it at least annually for impairment.

Other Net Income. Other net income represents primarily gross profit from sales of SIM cards, handsets and accessories. Other net income increased 3.7% from RMB3,167 million in 2004 to RMB3,284 million (US$406.9 million) in 2005. This increase was principally due to the increase in sales of SIM cards.

Non-Operating Net Income. Non-operating net income increased 13.8% from RMB900 million in 2004 to RMB1,025 million (US$127.0 million) in 2005. This increase was primarily due to the increase of amortization of deferred tax credits in the amount of RMB174 million from RMB352 million in 2004 to RMB526 million in 2005. The increase in amortization of deferred tax credit was primarily due to the increase in the tax credits we received as a result of our purchase of domestic telecommunications equipment.

Interest Income. Interest income increased 59.3% from RMB1,014 million in 2004 to RMB1,615 million (US$200.1 million) in 2005. The higher interest income in 2005 was primarily due to our larger cash balances as a result of the increase of our net cash from operating activities.

Finance Costs. Finance costs decreased 19.8% from RMB1,679 million in 2004 to RMB1,346 million (US$166.8 million) in 2005. This decrease was primarily due to the decrease in short-term borrowings and the repayment of US$690 million convertible notes due on November 3, 2005. In 2005, the average interest rate that we paid on our outstanding borrowings was approximately 3.3%.

Profit before Tax. As a result of the foregoing, profit before tax increased 28.4% from RMB60,951 million in 2004 to RMB78,264 million (US$9,697.9 million) in 2005.

Taxation. Our income tax expense increased 28.7% from RMB19,180 million in 2004 to RMB24,675 million (US$3,057.5 million) in 2005. This increase was primarily due to an increase in our profit before tax. Our effective tax rate was 31.3% in 2004 and 31.5% in 2005, respectively.

Profit attributable to equity shareholders. As a result of the foregoing and after taking into account minority interests, profit attributable to equity shareholders increased 28.3% from RMB41,749 million in 2004 to RMB53,549 million (US$6,635.4 million) in 2005. This increase was primarily due to our organic growth and the full-year effect of our acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in July 2004. Net profit margin (profit attributable to equity shareholders as a percentage of operating revenue) increased from 21.7% in 2004 to 22.0% in 2005.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Operating Revenue.Operating revenue increased 21.3% from RMB158,604 million in 2003 to RMB192,381 million (US$23,244 million) in 2004. This increase was primarily due to the continued expansion in our subscriber base, the continued growth in voice usage volume, and the rapid expansion of our new businesses. In addition, our acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in July 2004 also contributed significantly to the increase in our operating revenue. Our total number of subscribers was approximately 204.3 million as of December 31, 2004, compared to approximately 141.6 million as of December 31, 2003. Our July 2004 acquisition contributed to the increase of subscribers by 28.9 million as of December 31, 2004.

Revenue from usage fees increased 15.8% from RMB111,027 million in 2003 to RMB128,534 million (US$15,530 million) in 2004. This increase was principally due to our organic subscriber growth, the organic increase in voice usage volume and an increase of subscribers as a result of our acquisition of the ten regional mobile telecommunications companies in July 2004. As a percentage of operating revenue, usage fees decreased from 70.0% in 2003 to 66.8% in 2004.

Revenue from monthly fees increased 19.8% from RMB20,666 million in 2003 to RMB24,760 million (US$2,992 million) in 2004. This increase was mainly due to the continued increase in total subscribers, the introduction of new service packages and our acquisition of the entire equity interest in ten regional mobile telecommunications companies in July 2004. As a percentage of operating revenue, monthly fees decreased from 13.0% in 2003 to 12.9% in 2004.

Other operating revenue increased 45.2% from RMB26,911 million in 2003 to RMB39,087 million (US$4,722 million) in 2004. This increase resulted principally from increased revenue from wireless data and value added services, as well as our acquisition of the entire equity interest in ten regional mobile telecommunications companies and other telecommunications assets in July 2004.

Operating Expenses. Operating expenses include leased line expenses, interconnection expenses, depreciation expenses relating to our mobile telecommunications network and other fixed assets, personnel expenses and other operating expenses. Other operating expenses primarily consist of sales and marketing expenses, maintenance expenses, administrative expenses and other general expenses.

Operating expenses increased 25.8%26.1% from RMB105,401 million in 2003 to RMB132,647RMB132,902 million (US$16,027 million) in 2004. This increase was primarily due to the increase in depreciation expenses and other operating expenses and the increase in operating expenses attributable to the entire equity interest in ten regional mobile telecommunications companies and other telecommunications assets we acquired in July 2004.

Total leased line payments decreased 21.4% from RMB4,914 million in 2003 to RMB3,861 million (US$466 million) in 2004. This decrease was largely a result of the termination of surplus leased lines as we continued to use more self-constructed transmission lines constructed by ourselves and also augmented our networks to increase their efficiency. As a percentage of operating expenses, total leased line payments decreased from 4.7% in 2003 to 2.9% in 2004.

Interconnection expenses decreased 6.2% from RMB12,868 million in 2003 to RMB12,072 million (US$1,459 million) in 2004. This decrease was mainly due to the optimization of our network structure and traffic routing. Interconnection expenses as a percentage of operating expenses decreased from 12.2% in 2003 to 9.1% in 2004.

Depreciation expense increased 21.1% from RMB36,611RMB36,488 million in 2003 to RMB44,320RMB44,186 million (US$5,355 million) in 2004. This increase was mainly due to the expansion of our network capacity, the construction of various support networks and the effect of including depreciation expenses attributable to the ten regional mobile telecommunications companies and other telecommunications assets we acquired in July 2004. As a percentage of operating expenses, depreciation expense decreased from 34.7%34.6% in 2003 to 33.4%33.2% in 2004.

Personnel expenses increased 26.2%29.5% from RMB7,700 million in 2003 to RMB9,717RMB9,972 million (US$1,174 million) in 2004. This increase was primarily due to the inclusion of the recognition of the compensation expenses of share options granted in the aggregate amount of RMB255 million as a result of our adoption of HKFRS 2 retrospectively and personnel expenses of the ten regional mobile telecommunications companies and other telecommunications assets we acquired in July 2004. As a percentage of operating expenses, personnel expenses increased from 7.3% in 2004 remained the same with 2003 at 7.3%.to 7.5% in 2004.

-38-


Other operating expenses increased 44.7%44.6% from RMB43,308RMB43,431 million in 2003 to RMB62,677RMB62,811 million (US$7,573 million) in 2004. This increase was primarily due to the increase in selling and markingpromotion expenses as well as the operating expenses attributable to the ten regional mobile telecommunications companies and other telecommunications assets we acquired in July 2004. As a percentage of operating expenses, other operating expenses increased from 41.1%41.2% in 2003 to 47.3% in 2004.

Operating Profit.Profit from operations. As a result of the foregoing, operating profit from operations increased 12.3%11.8% from RMB53,203 million in 2003 to RMB59,734RMB59,479 million (US$7,217 million) in 2004, and operating margin (operating profit as a percentage of operating revenue) decreased from 33.5% in 2003 to 31.0%30.9% in 2004.

Amortization of goodwill. Amortization of goodwill increased 4.3% from RMB1,850 million in 2003 to RMB1,930 million (US$233 million) in 2004. This increase was due to the effect of including the amortization of goodwill in the amount of RMB72 million that was attributable to our acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in July 2004.

Other Net Income. Other net income represents primarily gross profit from sales of SIM cards, handsets and accessories. Other net income increased 28.5% from RMB2,464 million in 2003 to RMB3,167 million (US$383 million) in 2004. This increase was principally due to the increase in sales of SIM cards and the effect of including the other net income attributable to the ten regional mobile telecommunications companies and other telecommunications assets we acquired from our direct parent company in July 2004.

Non-Operating Net Income. Non-operating net income increased 107.4% from RMB434 million in 2003 to RMB900 million (US$109 million) in 2004. This increase was primarily due to the increase of amortization of deferred tax credits in the amount of RMB164 million from RMB188 million in 2003 to RMB352 million in 2004. The increase in amortization of deferred tax credit was primarily due to the increase in the tax credits we received as a result of our purchase of domestic telecommunications equipment.

Interest Income. Interest income increased 25.7% from RMB807 million in 2003 to RMB1,014 million (US$122 million) in 2004. The higher interest income in 2004 was primarily due to our larger cash balances as a result of the increase of our net cash from operating activities, as well as the effect of including the interest income attributable to the ten regional mobile telecommunications companies and other telecommunications assets we acquired from our direct parent company in July 2004.

Finance Costs. Finance costs decreased 20.0% from RMB2,099 million in 2003 to RMB1,679 million (US$203 million) in 2004. This decrease was primarily due to the decrease in short-term borrowings and the repayment of US$600 million fixed rate notes due on November 2, 2004, which was partially offset by the effect of including deferred consideration and finance costs attributable to the ten regional mobile telecommunications companies and other telecommunications assets we acquired from our direct parent company in July 2004. In 2004, the average interest rate that we paid on our outstanding borrowings was approximately 3.7%.

Profit before Tax and Minority Interests.Tax. As a result of the foregoing, profit before tax and minority interests increased 15.6%15.1% from RMB52,959 million in 2003 to RMB61,206RMB60,951 million (US$7,395 million) in 2004.

Taxation. Our income tax expense increased 10.2% from RMB17,412 million in 2003 to RMB19,180 million (US$2,317 million) in 2004. This increase was primarily due to an increase in our profit.profit before tax. Our effective tax rate was 32.9% in 2003 and 31.3%31.5% in 2004, respectively. The decrease of our effective tax rate in 2004 was primarily due to our tax planning efforts and our receipt of the approval from the PRC State Administration of Taxation at the end of 2004, as a result of which our certain expenses became tax deductible.

Profit attributable to equity shareholders. As a result of the foregoing and after taking into account minority interests, profit attributable to equity shareholders increased 18.1%17.4% from RMB35,556 million in 2003 to RMB42,004RMB41,749 million (US$5,075 million) in 2004. This increase was primarily due to our organic growth and the inclusion of the net profit attributable to equity shareholders of the ten regional mobile telecommunications companies and other telecommunications assets we acquired in July 2004. Net profit margin (profit attributable to shareholders as a percentage of operating revenue) decreased from 22.4% in 2003 to 21.8%21.7% in 2004.

-39-


Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Operating Revenue. We derive operating revenue principally from usage fees and monthly fees. Usage fees include standard local usage fees for airtime and applicable domestic and international long distance charges receivable from subscribers for the use of our mobile telecommunications networks and facilities, and fees in respect of roaming out calls made by our subscribers outside their registered service areas. Other operating revenue includes charges for data and value-added services, interconnection revenue and roaming in fees.

Operating revenue increased 23.4% from RMB128,561 million in 2002 to RMB158,604 million (US$19,163 million) in 2003. This increase was primarily due to the continued expansion in our subscriber base, the continued growth in voice usage volume and the rapid expansion of our new businesses, as well as the full year effect of including revenues attributable to the eight regional mobile telecommunications companies we acquired in July 2002. Our total number of subscribers was approximately 141.6 million as of December 31, 2003, compared to approximately 117.7 million as of December 31, 2002.

Revenue from usage fees increased 19.0% from RMB93,272 million in 2002 to RMB111,027 million (US$13,414 million) in 2003. This increase was principally a result of the continued increase in total subscriber numbers as a result of organic subscriber growth and the increase in voice usage volume, as well as the full year effect of including usage fees from subscribers attributable to the eight regional mobile telecommunications companies we acquired in July 2002. As a percentage of operating revenue, usage fees decreased from 72.6% in 2002 to 70.0% in 2003.

Revenue from monthly fees increased 22.3% from RMB16,901 million in 2002 to RMB20,666 million (US$2,497 million) in 2003. This increase was mainly due to the full year effect of including monthly fees from subscribers attributable to the eight regional mobile telecommunications companies we acquired in July 2002, as well as the continued increase in total subscribers and the introduction of new service packages. As a percentage of operating revenue, monthly fees decreased from 13.1% in 2002 to 13.0% in 2003.

There were no revenues from connection fees in 2002 and 2003, as connection fees charged to new contract subscribers were eliminated since July 2001.

Other operating revenue increased 46.4% from RMB18,388 million in 2002 to RMB26,911 million (US$3,252 million) in 2003. This increase resulted principally from increased revenue from wireless data and value added services, as well as the full year effect of our acquisition of the eight regional mobile telecommunications companies in July 2002.

Operating Expenses. Operating expenses include leased line expenses, interconnection expenses, depreciation expenses relating to our mobile telecommunications network and other fixed assets, personnel expenses and other operating expenses. Other operating expenses primarily consist of sales and marketing expenses, maintenance expenses, administrative expenses and other general expenses.

Operating expenses increased 32.1% from RMB79,765 million in 2002 to RMB105,401 million (US$12,735 million) in 2003. This increase was primarily a result of the increase in depreciation expenses and other operating expenses.

Total leased line payments decreased 7.1% from RMB5,287 million in 2002 to RMB4,914 million (US$594 million) in 2003. This decrease was largely a result of the termination of surplus leased lines as we continued to use more transmission lines constructed by ourselves and also augmented our networks to increase their efficiency, which was partially offset by the full year effect of including leased line payments for transmission lines made by the eight regional mobile telecommunications companies we acquired in July 2002. As a percentage of operating expenses, total leased line payments decreased from 6.6% in 2002 to 4.7% in 2003.

-40-


Interconnection expenses decreased 0.8% from RMB12,975 million in 2002 to RMB12,868 million (US$1,555 million) in 2003. This decrease was mainly due to the optimization of our network structure and traffic routing, which was partially offset by the full year effect of including interconnection expenses made by the eight regional mobile telecommunications companies we acquired in July 2002. Interconnection expenses as a percentage of operating expenses decreased from 16.3% in 2002 to 12.2% in 2003.

Depreciation expense increased 36.5% from RMB26,827 million in 2002 to RMB36,611 million (US$4,423 million) in 2003. This increase was mainly due to the expansion of our network capacity, the construction of various support networks and the full year effect of including depreciation expenses attributable to the eight regional mobile telecommunications companies we acquired in July 2002, as well as the increased investment in transmission facilities and new businesses. As a percentage of operating expenses, depreciation expense increased from 33.6% in 2002 to 34.7% in 2003.

Personnel expenses increased 14.0% from RMB6,757 million in 2002 to RMB7,700 million (US$930 million) in 2003. This increase was primarily due to the full year effect of including personnel expenses of the eight regional mobile telecommunications companies we acquired in July 2002. As a percentage of operating expenses, personnel expenses decreased from 8.5% in 2002 to 7.3% in 2003.

Other operating expenses increased 55.1% from RMB27,919 million in 2002 to RMB43,308 million (US$5,233 million) in 2003. This increase was primarily due to the increase in selling and marketing expenses. The increase in selling and marketing expenses was due to our conducting differentiated promotional campaigns to maintain customer loyalty and increase subscribers, as well as the full year effect of including the operating expenses attributable to the eight regional mobile telecommunications companies we acquired in July 2002. As a percentage of operating expenses, other operating expenses increased from 35.0% in 2002 to 41.1% in 2003.

Operating Profit. As a result of the foregoing, operating profit increased 9.0% from RMB48,796 million in 2002 to RMB53,203 million (US$6,428 million) in 2003, and operating margin (operating profit as a percentage of operating revenue) decreased from 38.0% in 2002 to 33.5% in 2003.

Amortization of goodwill. Amortization of goodwill increased 97.6% from RMB936 million in 2002 to RMB1,850 million (US$223 million) in 2003. This increase was due to the full year effect of including the amortization of goodwill attributable to our acquisition of the eight regional mobile telecommunications companies in July 2002.

Other Net Income. Other net income represents primarily gross profit from sales of SIM cards, handsets and accessories. Other net income increased 46.1% from RMB1,686 million in 2002 to RMB2,464 million (US$298 million) in 2003. This increase was principally due to the increase in sales of SIM cards and the full year effect of including the other net income attributable to the eight regional mobile telecommunications companies we acquired in July 2002.

Non-Operating Net Income. Non-operating net income decreased 24.0% from RMB571 million in 2002 to RMB434 million (US$52 million) in 2003. This decrease was primarily due to a gain on deemed disposal arising from the percentage change of our shareholding in Aspire in 2002.

Interest Income. Interest income increased 13.2% from RMB713 million in 2002 to RMB807 million (US$97 million) in 2003. The higher interest income in 2003 was primarily due to our larger cash balances as a result of the increase of our net cash from operating activities, as well as the full year effect of including the interest income attributable to the eight regional mobile telecommunications companies we acquired in July 2002.

Finance Costs. Finance costs increased 13.3% from RMB1,852 million in 2002 to RMB2,099 million (US$253 million) in 2003. This increase was primarily due to inclusion of the full year financing costs of the RMB8 billion bonds issued by one of our subsidiaries in 2002 and the full year effect of including deferred consideration and finance costs attributable to the eight regional mobile telecommunications companies we acquired in July 2002. In 2003, the average interest rate that we paid on our outstanding borrowings was approximately 4.3%.

-41-


Profit before Tax and Minority Interests. As a result of the foregoing, profit before tax and minority interests increased 8.1% from RMB48,978 million in 2002 to RMB52,959 million (US$6,399 million) in 2003.

Taxation. Our income tax expense increased 6.3% from RMB16,375 million in 2002 to RMB17,412 million (US$2,104 million) in 2003. This increase was primarily due to an increase in our profit. Our effective tax rate was 33.4% in 2002 to 32.9% in 2003, respectively.

Profit attributable to shareholders. As a result of the foregoing and after taking into account minority interests, profit attributable to shareholders increased 9.1% from RMB32,601 million in 2002 to RMB35,556 million (US$4,296 million) in 2003. Net profit margin (profit attributable to shareholders as a percentage of operating revenue) decreased from 25.4% in 2002 to 22.4% in 2003.

Liquidity and Capital Resources

Liquidity

Our principal source of liquidity is cash generated from our operations. As of December 31, 2004,2005, we had a working capital (current assets minus current liabilities) surplus of RMB11,122 million (US$1,377 million) compared to a working capital deficit of RMB17,757 million (US$2,146 million) compared toas of December 31, 2004 and a working capital deficit of RMB8,693 million as of December 31, 2003, and working capital of RMB4,012 million as of 2002, respectively. The significant increase in working capital deficit as of December 31, 20032005 was primarily due to the reclassification of fixed rate notes from long-term loans to short-term loans.increase in cash balance and deposits with banks. The Significantsignificant increase in working capital deficit as of December 31, 2004 was primarily due to the increase in accounts payable, accrued expenses, other payable and deferred revenue, all of which increased partially as a result of the inclusion of the accounts payable, accrued expenses, other payable and deferred revenue of the ten regional mobile telecommunications companies and other telecommunications assets we acquired in July 2004. As of December 31, 2002, 2003, 2004 and 2004,2005, accounts receivable totaled RMB6,066 million, RMB6,116 million, RMB6,553 million and RMB,6,553RMB6,603 million (US$792818 million), respectively. Short-term bank and other loans (including the current portion of long-term loans, fixed rate notes, convertible notes and capital leases obligations) as of December 31, 2003, 2004 and 2005 totaled RMB8,200 million, RMB13,158 million, and RMB8,248 million (US$996 million) as at December 31, 2002, 2003 and 2004,RMB68 million (US$8 million), respectively.

The following table summarizes certain cash flow information for the periods indicated.

 

   Year ended December 31,

 
   2002

  2003

  2004

 
   (in millions of RMB) 

Net cash from operating activities

  69,422  85,534  103,779 

Net cash used in investing activities

  (64,117) (54,292) (73,302)

Net cash from/(used in) financing activities

  5,449  (24,688) (24,457)
   

 

 

Net increase in cash and cash equivalents

  10,754  6,554  6,020 
   

 

 

   Year ended December 31, 
   2003  2004  2005 
   (in millions of RMB) 

Net cash from operating activities

  85,534  103,779  131,709 

Net cash used in investing activities

  (54,292) (73,302) (87,116)

Net cash used in financing activities

  (24,688) (24,457) (25,173)
          

Net increase in cash and cash equivalents

  6,554  6,020  19,420 
          

Net cash from operating activities increased from 20022004 to 2003,2005, reflecting the growth in operating revenue due to organic growththe increase in our subscriber base as well asthrough the continued organic growth, economies of scale and the full year effect of the inclusionour acquisition of the results of operations of the eightten regional mobile telecommunications companies we acquiredand other telecommunications assets in July 2002.2004. Net cash from operating activities increased from 2003 to 2004, reflecting the growth in operating revenue due to the increase in our subscriber base through the continued organic growth and the acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in July 2004.

Net cash used in investing activities decreasedincreased from 20022004 to 2003.2005. This decreaseincrease was primarily due to the fact that we acquired eight regional mobile telecommunications companiesincreases in July 2002deposits with banks and did not conduct any acquisitions in 2003.capital expenditures. Net cash used in investing activities increased significantly from 2003 to 2004. This increase was principally a result of the payment of the consideration for our acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in July 2004.

Net cash fromused in financing activities decreased significantlyslightly increased from 20022004 to 2003 as we paid RMB10,018 million in dividends in 2003 and did not issue any additional shares or bonds in 2003.2005. Net cash used in financing activities remained approximately the same in 2004 and 2003.

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Capital Expenditures

Capital expenditures incurred during 2002, 2003, 2004 and 20042005 were RMB40,083 million, RMB50,005 million, RMB61,398 million and RMB 61,398RMB71,453 million (US$7,4188,854 million), respectively. We incurred capital expenditures principally for the construction of our GSM networks, support systems, transmission facilities infrastructure buildingsand structural facilities and the development of new technologies and new businesses. The increase in our capital expenditures was primarily due to the inclusion of capital expenditures of the eight regional mobile telecommunications companies we acquired in July 2002 and the ten regional mobile telecommunications companies and other telecommunications assets we acquired in July 2004 as well as as a result of the organic growth of our business.

We estimate that we will spend approximately RMB64.6RMB83.3 billion (US$7.8 billion) in 2005, RMB53.8 billion (US$6.510.3 billion) in 2006, and RMB45.5RMB78.0 billion (US$5.59.7 billion) in 2007 and RMB76.0 billion (US$9.4 billion) in 2008 in capital expenditures. Such capital expenditure plan currently does not include investment of 3G construction. The required funding will be sourced largely from cash generated from our operating activities. We expect to incur these expenditures primarily for the purpose of:

 

further expanding our GSM network capacity and coverage;

increasing our efforts in improving our support systems;

 

building our own transmission facilities where economically advantageous; and

 

developing and providing new technologies and new businesses.

Following our initial public offering, we have funded our capital requirements primarily with cash generated from operations, proceeds from equity and debt offerings and, to the extent necessary, short- term and long-term borrowings. We believe our available cash and cash generated from future operations will be sufficient to fund most of the capital expenditures and working capital necessary for the planned network expansion and continued growth of our mobile telecommunications operations through the end of 2006.2007.

Moreover, we believe that to the extent we are granted any 3G license by the Ministry of Information Industry and our 3G networks are constructed, GSM and 3G will co-exist in our networks over an extended period of time. In that case, the capital expenditures for our existing GSM networks are expected to be reduced, and the extent of such reduction depends primarily on when we will be granted a 3G license and what 3G-based technology standard we will be required to adopt.

We may seek to obtain additional sources of financing to fund our network expansion and possible future acquisitions, to the extent necessary.

Contractual Obligations and Commitments

Indebtedness

As of December 31, 2002, 2003, 2004 and 2004,2005, our aggregate long-term bank and other loans and obligation under capital leases (excluding current portions) totaled RMB12,676RMB672 million, RMB672RMB0 million and RMB0 million (US$0 million), respectively, and our short-term bank and other loans (including the current portion of long-term loans, fixed rate notes, convertible notes and capital lease obligations) totaled RMB8,200 million, RMB13,158 million, and RMB8,248 million and RMB68 million (US$9968 million), respectively. Our short-term loans and long-term loans decreased in 2005 primarily due to our redemption of convertible notes with an aggregate principal amount of US$690 million on November 3, 2005. Our short term loans and long-term loans significantly decreased in 2004 primarily due to our paymentrepayment of fixed rate notes with aan aggregate principal amount of US$600 million inon November 2, 2004. Our long-term loans significantly decreased in 2003 primarily due to the repayment of our long-term loans. Our short-term loans increased in 2003 primarily due to the inclusion of the fixed rate notes that are due within a year. Capital lease obligations totaled RMB68 million and RMB68 million (US$8 million) as of December 31, 20032004 and 2004,2005, respectively.

On November 2, 1999, we issued unsecured fixed rate notes with a principal amount of US$600 million due on November 2, 2004. The notes bear interest at the rate of 7.875% per annum and such interest is payable semi-annually on May 2 and November 2 of each year, commencing May 2, 2000. We fully redeemed such unsecured fixed rate notes on November 2, 2004.

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On November 3, 2000, we issued unsecured convertible notes with a principal amount of US$690 million due on November 3, 2005. The notes bear interest at the rate of 2.25% per annum and such interest is payable semi-annually on May 3 and November 3 of each year, commencing May 3, 2001.

We fully redeemed these unsecured convertible notes on November 3, 2005.

Pursuant to agreements entered into on October 7, 2000 between our wholly-owned subsidiary, China Mobile (Shenzhen) Limited, and a syndicate of international and domestic Chinese commercial banks, we borrowed an aggregate of RMB12.5 billionRMB12,500 million in bank loans, which was fully repaid by the end of 2003 with our internal cash resources and proceeds from the RMB5 billionRMB5,000 million floating rate guaranteed bonds Guangdong Mobile issued in 2001, as described above under “ — Overview of Our Operations — Renminbi Bond Offerings”.

On June 18, 2001, Guangdong Mobile, one of our wholly-owned subsidiaries, issued bonds with a principal amount RMB5 billionRMB5,000 million at a floating rate due June 18, 2011. Guangdong Mobile’s payment obligations under the bonds are guaranteed in full by us, and our guarantee is further guaranteed by CMCC.

On October 28, 2002, Guangdong Mobile, one of our wholly-owned subsidiaries, issued RMB3 billionRMB3,000 million five-year guaranteed bonds and RMB5 billionRMB5,000 million fifteen-year guaranteed bonds. Guangdong Mobile’s payment obligations under these two bonds are guaranteed in full by us, and our guarantee obligation is further guaranteed by CMCC.

The deferred consideration of US$2,800 million for our acquisition of the eight regional mobile telecommunications companies in 2002 and the deferred consideration of US$1,650 million for our acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in 2004 are subordinated to other senior debt owed by us from time to time, including but not limited to, the US$600 million fixed rate notes and US$690 million convertible notes issued in 1999 and 2000, respectively.time. In addition, these deferred considerations are payable by the fifteenth anniversary of the date of the completion of the respective acquisitions, and we may make an early payment of all or part of these deferred considerations at any time without penalty. We are required to pay interest semi-annually on the actual amount of these deferred considerations unpaid from the date of completion of the respective acquisitions. Interest is calculated at the two-year US dollar London Inter-Bank Offered Rate, or LIBOR, swap rate at 11:00 a.m. (New York City time) on the second business day next preceding the date of the respective acquisition agreements for the first two years after completion of the respective acquisitions. Thereafter, the interest rate will be adjusted every two years to equal the two-year US dollar LIBOR swap rate prevailing at 11:00 a.m. (New York City time) on the relevant interest determination dates. The payment of the deferred considerations and the interest payments can be made in Hong Kong dollars, RMB or US dollars (or other agreed currencies). Any payment made in currencies other than US dollars will be accounted for based on the exchange rates between US dollars and such currencies prevailing at 12:00 noon (New York City time) on the day which is two business days next preceding the date of the respective acquisition agreements. We used the entire proceeds from the RMB3 billionRMB3,000 million guaranteed bonds due 2007 and RMB5 billionRMB5,000 million guaranteed bonds due 2017, both issued on October 28, 2002 by Guangdong Mobile, our wholly-owned subsidiary, to pay a portion of the US$2,800 million deferred consideration for our acquisition of the eight regional mobile telecommunications companies in 2002.

Our corporate credit rating was raised to A3/PositiveA2/Outlook Stable by Moody’s and to BBB+A-/Positive Outlook by Standard & Poor’s in 2004,2005, which is equivalent to China’s sovereign credit rating. Any downgrade in our credit rating will not trigger any events on our outstanding bonds or loans or our existing credit facilities. Our management currently believes that a downgrade below A3/A2/ Outlook Stable or A-/Positive or BBB+/PositiveOutlook is not likely. However, under the terms of our US$690 million convertible notes, we are obligated to ensure that the aggregate debt of our subsidiaries does not exceed 120% of our consolidated adjusted earnings before interest, tax, depreciation and amortization and write-down and write-off of fixed assets, or EBITDA, for the most recently completed twelve-month period. We have complied with this covenant in the most recently completed twelve-month period. In addition, we currently do not foresee any event that would cause us to violate any of these covenants.

For a discussion of our interest rate risk, please see “Item 11. Quantitative and Qualitative Disclosures aboutAbout Market Risk”.

Other Contractual Obligations and Commitments

As of December 31, 2004,2005, we had various contractual obligations and commitments which are more fully disclosed in the notes to our consolidated financial statements. The principal components of these obligations and commitments include:

 

our short-term and long-term debts (in addition to the bonds and notes described under “ — Indebtedness” above), which includes capital leases;

 

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operating leases; and

 

capital commitments.

In the ordinary course of our business, we routinely enter into commercial commitments for various aspects of our operations, such as repair and maintenance. However, we believe that those commitments will not have a material effect on our financial condition, results of operations or cash flows.

For further disclosure regarding leases and other commitments, please see notes 2124 and 2425 to our consolidated financial statements included elsewhere in this annual report.report on Form 20-F.

The following table sets forth certain information regarding our contractual obligations to make future payments (excluding(including relevant estimated interest expense)payment) as of December 31, 2004:2005:

 

   Payments Due by Period

Contractual Obligations


  Total

  Less than
1 year


  Over
1 year but
less than
3 years


  Over
3 years but
less than
5 years


  After
5 years


   (in millions of RMB)

Short-Term Debt

  2,140  2,140  —    —    —  

Bills Payable

  1,676  1,676  —    —    —  

Deferred Payable

  23,633  —    —    —    23,633

Long-Term Debt(1)

  19,040  6,040  3,000  —    10,000

Capital Lease Obligations

  68  68  —    —    —  

Trade Payable

  35,036  35,036  —    —    —  
   
  
  
  
  

Total Contractual Cash Obligations

  81,593  44,960  3,000  —    33,633
   
  
  
  
  

(1)Including the current portion of long-term debt and the convertible notes due on November 3, 2005.

   Payments Due by Period

Contractual Obligations

  Total  

Less Than

1 year

  

Over

1 year but

less than

3 years

  

Over

3 year but

less than

5 years

  

After

5 years

   (in millions of RMB)

Bills Payable

  1,359  1,359  —    —    —  

Deferred Payable

  39,819  1,279  2,558  2,558  33,424

Long-Term Debt

  16,955  530  3,938  850  11,637

Capital Lease Obligations

  68  68  —    —    —  

Trade Payable

  41,931  41,931  —    —    —  
               

Total Contractual Obligations

  100,132  45,167  6,496  3,408  45,061
               

The following table sets forth certain information regarding our other commercial commitments as of December 31, 2004:2005:

 

   

Amount of Commitment

Expiration Per Period


Other Commercial Commitments


  Total
Amounts
Committed


  Less than
1 year


  Over 1 year
but less than
3 years


  Over 3 years
but less than
5 years


  Over
5 years


   (in millions of RMB)

Operating Leases Commitments

  10,083  3,619  3,121  1,879  1,464

Capital Commitments

  11,619  11,619  —    —    —  
   
  
  
  
  

Total Commercial Commitments

  21,702  15,238  3,121  1,879  1,464
   
  
  
  
  

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Amount of Commitment

Expiration Per Period

Other Commercial Commitments

  

Total

Amount

Committed

  

Less Than

1 year

  

Over

1 year but

less than

3 years

  

Over

3 year but

less than

5 years

  

After

5 years

   (in millions of RMB)

Operating Lease Commitments

  10,559  3,529  3,643  1,932  1,455

Capital Commitments

  59,341  59,341  —    —    —  
               

Total Commercial Commitments

  69,900  62,870  3,643  1,932  1,455
               

Off-balanceOff-Balance Sheet Arrangements

As of December 31, 2004,2005, we did not have any off-balance sheet arrangements or any written options on non-financial assets.

Foreign Exchange

We maintain our accounts in Renminbi and substantially all of our revenue and expenses are denominated in Renminbi. Our capital expenditures totaled the equivalent of RMB40,083 million, RMB50,005 million, and RMB61,398 million and RMB71,453 million (US$7,4188,854 million) for 2002,in 2003, 2004 and 2004,2005, respectively. U.S. dollar denominated debt totaled the equivalent of RMB20,902RMB29,420 million and RMB29,420RMB23,633 million (US$3,5552,929 million) as atof December 31, 20032004 and 2004,2005, respectively, constituting 46.9%63.2% and 63.2%62.2% of our total debt as of those dates, respectively.

All of our current operating subsidiaries are incorporated in Mainland China.China, except for Peoples Telephone which became our wholly-owned operating subsidiary as of March 28, 2006. Under the current foreign exchange system in Mainland China, our subsidiaries may not be able to hedge effectively against currency risk, including any possible future Renminbi devaluation. See “Item 3. Key Information — Risk Factors — Fluctuations in exchange rates could adversely affect our financial results” and “Item 10. Additional Information — Exchange Controls”.

Each of our operating subsidiaries is able to purchase foreign exchange for settlement of current account transactions, as defined in applicable regulations, in order to satisfy its foreign exchange requirements.

U.S. GAAP Reconciliation

Our consolidated financial statements are prepared in accordance with Hong Kong GAAP, which differ in certain significant respects from U.S. GAAP. The following table sets forth a comparison of our net profit attributable to equity shareholders and shareholders’ equity in accordance with Hong Kong GAAP and U.S. GAAP.

As of or for the year ended December 31

2002

2003

2004

2004

(in millions)

Net profit in accordance with:

Hong Kong GAAP

RMB32,601RMB35,556RMB42,004US$5,075

U.S. GAAP

RMB39,416RMB39,520RMB45,061US$5,444

Shareholders’ equity in accordance with:

Hong Kong GAAP

RMB173,265RMB198,803RMB233,161US$28,171

U.S. GAAP

RMB159,936RMB190,828RMB198,119US$23,937

   As of or for the year ended December 31
   2003  2004  2005  2005
   (in millions)

Profit for the year attributable to equity shareholders in accordance with:

        

Hong Kong GAAP

  RMB35,556  RMB41,749  RMB53,549  USD6,635

U.S. GAAP

  RMB39,520  RMB45,061  RMB54,504  USD6,754

Shareholders’ equity in accordance with:

        

Hong Kong GAAP

  RMB198,803  RMB233,161  RMB272,824  USD33,806

U.S. GAAP

  RMB190,828  RMB198,119  RMB237,252  USD29,398

Under Hong Kong GAAP, we adopted the purchase accounting method to account for our acquisitions of the eight regional mobile telecommunications companies in July 2002 and our acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in July 2004. Under the purchase accounting method, the acquired results of these companies were included in the results of operations from the respective dates of acquisition. Goodwill is the excess of the cost over the fair value of our share of the identifiable assets and liabilities acquired. Due to the adoption of SSAP 30, which took effect in 2001,In prior years, goodwill arising on the acquisition date of our acquisition of the eight regional mobile telecommunications companies in July 2002 and our acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in July 2004 is amortized to the consolidated statements of income on a straight line of twenty years. Effective January 1, 2005, we no longer amortize goodwill due to the adoption of HKFRS 3. See “Special Note on ourOur Financial Information and Certain Statistical Information Presented in thisThis Annual Report”.

Under U.S. GAAP, because we and the acquired companies were deemed to be under common control prior to the acquisitions, the acquisitions were considered a “combination of entities under common control”. Under U.S. GAAP, combinations of entities under common control are accounted for under the “as if pooling-of-interests” method, whereby assets and liabilities are accounted for at historical cost and the financial statements of previously separate companies for periods prior to the combination are restated on a combined basis. The consideration we paid

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or payable in each acquisition was treated as an equity transaction in the respective years of each acquisition, and goodwill amortization recognized under Hong Kong GAAP in 2002 and 2004 was reversed for U.S. GAAP purposes respectively.

purposes.

In addition, there are other differences between Hong Kong GAAP and U.S. GAAP for the periods presented, which relate primarily to:

 

the computation of capitalized interest;

 

the revaluation of fixed assetsproperty, plant and equipment and land lease prepayments of the acquired companies under Hong Kong GAAP;

 

the recognition of deferred income taxes;

 

the non-recognition under Hong Kong GAAP of certain of our employee housing scheme costs;

 

the treatment of share options we grant to directors and employees;

 

the recognition as revenue of connection fees and telephone number selection fees; and

 

the net savings arising from interconnection, roaming and leased line agreements.

Disclosure relating to these differences can be found in note 3238 to our consolidated financial statements. In addition, our condensed consolidated balance sheets as of December 31, 20032004 and 20042005 and our condensed consolidated statements of income, total shareholders’ equity and cash flows for the years ended December 31, 2002, 2003, 2004 and 20042005 prepared and presented under U.S. GAAP have been included in note 3238 to our consolidated financial statements to reflect the impact of the significant differences between Hong Kong GAAP and U.S. GAAP.

Item 6. Directors, Senior Management and Employees.

Directors and Senior Management

The following table sets forth certain information concerning our directors and senior management as of May 31, 2005.2006.

 

Name


  Age

  

Position


Mr. WANG Jianzhou

  5657  Executive Director, Chairman and Chief Executive Officer

Mr. LI Yue

  4647  Executive Director and Vice President

Mr. LU Xiangdong

  4546  Executive Director and Vice President

Mr. XUE Taohai

  4950  Executive Director, Vice President and Chief Financial Officer

Mr. ZHANG Chenshuang

  5354Executive Director and Vice President

Mr. SHA Yuejia

48Executive Director and Vice President

Mr. LIU Aili

42  Executive Director and Vice President

Madam LI MofangXIN Fanfei

  59Executive Director, Vice President and Chief Engineer

Mr. HE Ning

4349  Executive Director and Vice President

Mr. LI Gang

48Executive Director

Mr. XU Long

  4849  Executive Director

Sir Julian Michael HORN-SMITHHORN-SMITH*

  5657  Non-Executive Director

Dr. LO Ka Shui

  5859  Independent Non-Executive Director

Mr. Frank K. S. WONG

  5758  Independent Non-Executive Director

Mr. Moses M. C. CHENG

  5556  Independent Non-Executive Director

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*Sir Julian Michael Horn-Smith resigned from our board of directors effective as of June 7, 2006.

Mr. Wang Jianzhou has served as our Chairman and Chief Executive Officer since November 2004. Mr. Wang is in charge of our overall management. He is also the President of CMCC, the ultimate controlling shareholder of the Company, and the Chairman of CMC. Prior to joining us, Mr. Wang served as Deputy Director General and Director General of the Posts and Telecommunications Bureau of Hangzhou City, Deputy Director General of the Posts and Telecommunications Administration of Zhejiang Province, Director General of the Department of Planning and Construction of the Ministry of Posts and Telecommunications, Director General of the Department of General Planning of the Ministry of Information Industry, and Director, Executive Vice President, President and Chairman of China United Telecommunications Corporation, Executive Director, President, Chairman and Chief Executive Officer of China Unicom Limited, and Chairman and President of China United Telecommunications Corporation Limited. Mr. Wang now a professor-level senior engineer, graduated in 1985 from the Department of Management Engineering of Zhejiang University with a master’s degree. Mr. Wang is a professor-level senior engineer and has over 2728 years of management experience in the telecommunications industry.

Mr. Li Yue has served as our Executive Director and Vice President since March 2003. Mr. Li assists the Chief Executive Officer in relation to theour network, planning, development strategy and planning activities of the Company.management information systems. He has been serving as Vice President of CMCC since April 2000. Mr. Li is also a director of CMC. Mr. Li previously served as the Deputy Director General of the Tianjin Posts and Telecommunications Administration and the President of Tianjin Mobile Communications Company. Mr. Li graduated from Tianjin University with a Master’s Degree and has over 2930 years of management experience in the telecommunications industry.

Mr. Lu Xiangdong has served as our Executive Director and Vice President since March 2003. Mr. Lu assists the Chief Executive Officer mainly inprincipally with respect to our marketing, wireless data services, billing and settlement and corporate co-operation matters of the Company.customer matters. He has been serving as Vice President of CMCC since April 2000. Mr. Lu is also a director of CMC and Chairman of Aspire Holdings Limited. He previously served as the Director General of Fujian Wireless Telecommunications Administration and the Deputy Director General of the Mobile Telecommunications Bureau of the Ministry of Posts and Telecommunications. Mr. Lu graduated from the Academy of Posts and Telecommunications of the Ministry of Posts and Telecommunications with a Master’s Degree and has nearly 2324 years of management experience in the telecommunications industry.

Mr. Xue Taohai has served as our Executive Director, Vice President and Chief Financial Officer since July 2002. Mr. Xue assists the Chief Executive Officer in relation to theour corporate financial management of the Company.and human resources management. Mr. Xue is also Vice President of CMCC and a director of CMC. Mr. Xue previously served as the Deputy Director General of the Finance Department of the former Ministry of Posts and Telecommunications, Deputy Director General of the Department of Financial Adjustment and Clearance of the Ministry of Information Industry and Deputy Director General of the former Directorate General of Telecommunications. He graduated from Henan University and received an EMBA degree from Peking University. He has over 2526 years of experience in the telecommunications industry and financial management.

Mr. Zhang Chenshuang has served as our Executive Director and Vice President since July 2004. Mr. Zhang assists the Chief Executive Officer in the areas ofrelation to our corporate affairs and development strategy of the Company.affairs. Mr. Zhang has been serving as Vice President of CMCC since April 2001. Mr. Zhang is also a director of CMC. Mr. Zhang previously served as the Deputy Director General of the Office of the Ministry of Posts and Telecommunications, the Director General of the Neimenggu Posts and Telecommunications Administration, and the Assistant to the President of CMCC. He graduated from the Party School of the CPC and has over 2526 years of management experience in the telecommunications industry.

Madam Li MofangMr. SHA Yuejia has served as our Executive Director and Vice President and Chief Engineer since July 2004. Madam LiMarch 2006. Mr. Sha assists the Chief Executive Officer in the areas ofrelation to our business support, technology and research and development of the Company. She has also held the post of Chief Engineer of CMCC since April 2000. Madam Li is also a director of CMC and Aspire Holdings Limited. Madam Li previously served as the Leading Engineer of the Wireless Research Division of the Telecommunications Transmission Research Institute of the Ministry of Posts and Telecommunications, and the Chief Engineer of the Mobile Telecommunications Bureau of the Ministry of Posts and Telecommunications. She graduated from Xidian University and received an EMBA degree from Peking University. She has over 34 years of management experience in the telecommunications industry.

Mr. He Ning has served as our Executive Director since August 1998. Mr.& development. He is also a Vice President of the Company, assisting the Chief Executive Officer in the general administration and investor and media relations of

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the Company.CMCC since May 2005. He previously served as Director of the Engineering Construction Department IV Division of Beijing Telecommunications Administration, President of Beijing Telecommunications Planning Design Institute, Deputy Director General of the Zhenjiang PostsBeijing Telecommunications Administration, Vice President of Beijing Mobile Communications Company, and Telecommunications Bureau, the Director and Deputy Director of the Jiangsu Mobile Communications Administration, the Deputy Director General of the Posts and Telecommunications Administration in Jiangsu Province and theVice President, Chairman and President of JiangsuBeijing Mobile. HeMr. Sha graduated from NanjingBeijing University of Posts and Telecommunications, and received a Master’s Degree from Maastricht Schoolthe Academy of ManagementPosts and Telecommunications of Netherland.the Ministry of Posts and Telecommunications and a doctoral degree in business administration from Hong Kong Polytechnic University. He has 21over 23 years of management experience in the telecommunications industry.

Mr. LIU Aili has served as our Executive Director and Vice President since March 2006. Mr. Liu assists the Chief Executive Officer in relation to our business expansion. He is also a Vice President of CMCC since March 2006. He previously served as Deputy Director General of Shandong Mobile Telecommunications Administration, Director General of Shandong Mobile Telecommunications Administration and General Manager of Shandong Mobile Communications Enterprises, Vice President of Shandong Mobile Communications Company, Director-General of Network Department of China Mobile Communications Corporation, and Chairman and President of Shandong Mobile and Zhejiang Mobile. Mr. Liu graduated from Heilongjiang Posts and Telecommunications School and received a doctoral degree in business administration from Hong Kong Polytechnic University. He has over 23 years of management experience in the telecommunications industry.

Madam XIN Fanfei has served as our Executive Director and Vice President since January 2006. Madam Xin assists the Chief Executive Officer in relation to our general administration and investor and media relations. She is also Chairwoman of Peoples Telephone. She previously served as Deputy Director of the Foreign Affairs Division, Director of the Planning Division, Director of the Department of Planning and Construction of Tianjin Posts and Telecommunications Administration, Assistant to the Director General and Director of the Department of Planning and Construction of Tianjin Mobile Telecommunications Administration, Vice President of Tianjin Mobile Communications Company, Vice President of Tianjin Mobile, President of Heilongjiang Mobile Communications Company, and Chairman and President of Heilongjiang Mobile. Madam Xin graduated from Xidian University and received an Executive Master’s of Business Administration degree from Peking University. She is currently pursuing a doctoral degree in business administration from Hong Kong Polytechnic University. Madam Xin is a professor-level senior engineer with many years of experience in the telecommunications industry.

Mr. Li GangXu Long has served as our Executive Director since August 1999. He is also the Chairman and President of Guangdong Mobile, responsible for the mobile telecommunications operations in Guangdong Province. He previously served as Director of the Network Maintenance Division and a Deputy Director of the Telecommunications Division of the Posts and Telecommunications Administration in Guangdong Province and the Vice Chairman and President of Guangdong Mobile. He graduated from Beijing University of Posts and Telecommunications in 1985, and has 31 years of experience in the telecommunications industry.

Mr. Xu Long has served as our Executive Director since August 1999. He is also the Chairman and President of Zhejiang Mobile, responsible for the mobile telecommunications operations in Zhejiang Province. He previously served as Deputy Director of Shaoxing Posts and Telecommunications Bureau, the President of Zhejiang Nantian Posts and Telecommunications Group Company, and Director of the General Office and Deputy Director General of the Posts and Telecommunications Administration in Zhejiang Province.Province, and Chairman and President of Zhejiang Mobile. He graduated from Zhejiang Radio and Television University in 1985, and has 2728 years of experience in the telecommunications industry.

Sir Julian Michael Horn-Smith has served as our Non-Executive Officer sinceDirector from March 2005.2005 until June 2006. Sir Julian Michael Horn-Smith is the Deputy Chief Executive Officer and an Executive Directora member of the board of directors of Vodafone Group Plc. He is also Chairman of the Supervisory Board of Vodafone Deutschland,Holding GmbH, a member of the Verizon Wireless Board of Representatives, a Non-Executive Director of Smiths Group Plc. and Lloyds TSB Bank, a member of the Deutsch-Englische Gesellschaft e.V.Group Plc., and serves on the board of the Prince of Wales International Business Leaders Forum (IBLF).Forum. Since he joinedjoining Vodafone in 1984, Sir Julian Michael Horn-Smith has served as Marketing Executive, Managing Director of Vodapage Ltd., Vodafone Group International Ltd. and Vodafone Airtouch International Ltd., Chief Executive Officer for Europe and Chairman of the Management Board of Mannesmann AG, andheld various senior management positions including Vodafone’s Group Chief Operating Officer. Sir Julian Michael Horn-Smith holdsOfficer and was a numbermember of other directorships. His directorships held in listed public companies in the last three years include Vodafone, Smiths Group Plc., Lloyds TSB Group Plc. and Lloyds TSB Bank Plc.Vodafone’s founding team. He obtained an MSca Master’s degree in Business Administration from Bath University, and a BSc (Econ)Bachelor of Science degree in Economics from London University. Sir Julian Michael Horn-Smith has many years of management experiencewas recognized in the telecommunications industry worldwide.

HM The Queen’s Birthday Honours 2004, with a Knighthood for services to international mobile telecommunications.

Dr. Lo Ka Shui has served as our independent Non-Executive Director since April 2001. Dr. Lo is the Deputy Chairman and Managing Director of Great Eagle Holdings Limited. He is also a non-executive Director of The Hongkong and Shanghai Banking Corporation Limited, Shanghai Industrial Holdings Limited, and Phoenix Satellite Television Holdings Limited, City e-Solutions Limited, Melco International Development Limited, The HSBC China Fund Limited, Tom Online Inc. and Winsor Properties Holdings Limited. He is also a Director of Hong Kong Exchanges and Clearing Limited and a past chairman of the Listing Committees of the Main Board and the Growth Enterprise Market, in Hong Kong, a Vice President of the Real Estate Developers Association of Hong Kong, a Trustee of the Hong Kong Centre for Economic Research a Member of the Council of Advisors on Innovation and Technology and a Member of the Airport Authority in Hong Kong. He was previously the Chairmana past chairman of the Hospital Authority in Hong Kong. A number of other directorships he has been holding in listed public companies in the last three years include City e-Solutions Limited, Melco International Development Limited, The HSBC China Fund Limited, Tom Online Inc. and Winsor Properties Holdings Limited. Dr. Lo graduated with a Bachelor of Science Degreedegree from McGill University in Canada and a Doctorate Degreedegree in medicine from Cornell University in the United States. He is board certified in cardiology. He has more than 2526 years of experience in property and hotel development and investment both in Hong Kong and overseas.

Mr. Frank K. S. Wong has served as our independent Non-Executive Director since August 2002. Mr. Wong is currently a Board member and theVice Chairman of DBS Bank, Chief Operating Officer and a board member of DBS Bank and DBS Group Holdings, Ltd, a listed public company, the Vice Chairman and the Chief Operating Officer of DBS Bank Ltd and Chairman of DBS Bank (Hong Kong) Limited. During March 2004 to January 2005,. Mr. Wong served asis also a non-executive director of SNP Leefung Holdings Limited,the Singapore Tourism Board and a company listed onmember of the Stock ExchangeUniversity Court of The University of Hong Kong Limited.Kong. He previously served as the Designated Chief Executive for National Westminster Bank’s Hong Kong branchheld a series of senior management positions with regional responsibility at Citibank, JP Morgan and also held various senior positions in J.P. Morgan’s Hong Kong and London operations, and in Citibank-North Asia Region.NatWest from 1967 to 1999. Mr. Wong has also served in various positions with Hong Kong’s government bodies including as the Chairman of the Hong Kong Futures Exchange. Mr. Wong has many years of finance and commercial management experience.

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Mr. Moses M.C. Cheng has served as our independent Non-Executive Director since March 2003. Mr. Cheng is a practicing solicitor and athe senior partner of Messrs. P. C.P.C. Woo & Co. Mr. Cheng was a member of the Legislative Council of Hong Kong between 1991 and 1995. He wasis the Founder Chairman of the Hong Kong Institute of Directors of which he currently is the Honorary President and Chairman Emeritus. A number ofHis other directorships he has been holdingheld in listed public companies in the last three years include Beijing Capital International Airport Company Limited, City Telecom (HK) Limited, China COSCO Holdings Company Limited, China Resources Enterprises Limited, Guangdong Investment Limited, Kader Holdings Company Limited, Galaxy Entertainment Group Limited (formerly known as K. Wah Construction Materials Limited,Limited), Liu Chong Hing Investment Limited, Shui On Construction and Materials Limited and Tian An China Investments Company Limited.

In addition, Mr. ChengPaul Michael Donovan, age 47, Chief Executive Officer for Central Europe, Middle East, Asia-Pacific and Affiliates (EMAPA) of Vodafone, joined our board of directors as a Non-Executive Director effective as of June 7, 2006. Mr. Donovan is also a member of the Executive Committee of Vodafone, a director of Vodafone’s operating companies located in Greece, Hungary, Australia, Ireland, New Zealand, Portugal, Egypt, the Netherlands, Czech Republic and Romania and a director of certain other subsidiaries of Vodafone. Prior to his appointment as the Chief Executive Officer of the EMAPA division, Mr. Donovan was Chief Executive Officer of the Other Vodafone Subsidiaries, which included 14 of Vodafone’s operating subsidiaries. Mr. Donovan joined Vodafone UK in 1999 as Managing Director — Commercial, and in 2001 was appointed the Chief Executive Officer of Vodafone Ireland. In 2004 he assumed the additional role of Global Director of Business Integration, leading One Vodafone, Vodafone’s business transformation program. Mr. Donovan began his career in FMCG sales and marketing at the Mars Group, before becoming Marketing Director at Coca-Cola and Schweppes Beverages in 1989. He holds a Bachelor of Arts Degree in Scandinavian Studies from University College London and a Master’s Degree in Business Administration from Bradford University Management Centre, and has alsoover 15 years experience in the telecommunications and information technology industries, gained at Apple Computer, BT and Cable and Wireless subsidiary One2One as Commercial Director, and as Chief Commercial Officer at Australian telecommunications provider Optus Communications. His other directorships held a number of past directorships in listed public companies in the last three years including Quality HealthCare Asia Limited, StockMartnet Holdings Ltd.include Vodafone Libertel NV, Vodafone Egypt Telecommunications S.A.E., China Online (Bermuda) Limited, Pokfulam DevelopmentVodafone-Panafon Hellenic Telecommunications Company LimitedS.A. and Kingway Brewery HoldingsBharti Tele-Ventures Limited.

Compensation

The aggregate amount of compensation that we paid to our directors and executive officers in 20042005 for services performed as directors, officers or employees was approximately RMB18HK$40.0 million (US$2.25.2 million).

We adopted a share option scheme on October 8, 1997, or the Old Scheme, pursuant to which our directors may, at their discretion, invite our employees, including executive directors, or employees of our subsidiaries, to take up options to subscribe for ordinary shares up to a maximum aggregate number of ordinary shares equal to 10% of our total issued share capital.

Pursuant to a resolution passed at the annual general meeting held on June 24, 2002, the Old Scheme was terminated and a new share option scheme, or the New Scheme, was adopted. The purpose of the New Scheme is to provide the Company with a flexible and effective means of remunerating and providing benefits to the employees, the executive directors and the non-executive directors of the Company, any of its holdings companies and their respective subsidiaries and any entity in which the Company or any of its subsidiaries holds any equity interest, thereby providing incentives to these participants. Under the New Scheme, the directors of the Company may, at their discretion, invite the plan participants to take up options to subscribe for the ordinary shares of the Company.

The maximum aggregate number of ordinary shares which can be subscribed pursuant to options that are or may be granted under the above schemes equals to 10% of the total issued share capital of the Company as at the date of adoption of the New Scheme. Options lapsed or cancelled in accordance with the terms of the Old Scheme or the New Scheme will not be counted for the purpose of calculating this 10% limit.

As the Old Scheme was terminated with effect on June 24, 2002, no further options were granted under the Old Scheme thereafter. As at December 31, 2004,2005, the total number of ordinary shares which may be issued on the exercise of the outstanding options granted under the Old Scheme is 102,859,000.82,141,250. As at the same date, the total number of ordinary shares which may be issued on the exercise of the outstanding options granted or to be granted under the New Scheme is 1,738,692,445. 290,176,0001,624,889,195. 289,777,500 share options were granted under the New Scheme during the year ended December 31, 2004.

2005.

The consideration payable for the grant of each option under each of the Old Scheme and the New Scheme is HK$1.00. For options granted before September 1, 2001 under the Old Scheme, the exercise price of the options was determined by the directors of the Company at their discretion provided that such price may not be set below a minimum price which is the higher of:

 

 (i)the nominal value of a share; and

 

 (ii)80% of the average of the closing price of the ordinary share on The Stock Exchange of Hong Kong Limited, or the Hong Kong Stock Exchange on the five trading days immediately preceding the date on which the option was granted.

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For options granted under the New Scheme, the exercise price of the options are determined by the directors of the Company at their discretion provided that such price may not be set below a minimum price which is the highest of:

 

 (i)the nominal value of an ordinary share;

 

 (ii)the closing price of the ordinary shares on the Hong Kong Stock Exchange on the date on which the option was granted; and

 

 (iii)the average closing price of the ordinary shares on the Hong Kong Stock Exchange for the five trading days immediately preceding the date on which the option was granted.

Under both the Old Scheme and the New Scheme, the term of the option is determined by the directors at their discretion, provided that all options shall be exercised within 10 years after the adoption of the scheme (in the case of the Old Scheme) and within 10 years after the date on which the option is granted (in the case of the New Scheme).

As atof December 31, 2004,2005, the directors and employees of the Company had options to subscribe for the ordinary shares of the Company granted under both the Old Scheme and, from June 24, 2002 onwards, the New Scheme. In 2004, 28,985,5002005, 134,521,000 of these options had been exercised. See “— Share Ownership” below for details on options granted to our directors.

Board Practices

To enhance our corporate governance, we have three principal board committees, the audit committee, the remuneration committee and the nomination committee. The audit committee, the remuneration committee and the nomination committee are all comprised solely of independent non-executive directors.

Audit Committee

The members of our audit committee are Dr. Lo Ka Shui, as chairman of the committee, Mr. Frank K.S. Wong and Mr. Moses M.C. Cheng. The audit committee’s major responsibilities include:

 

to review the financial reports, the related report of independent registered public accounting firm and management’s responses to the reports;

 

to discuss the audit procedures with the independent registered public accounting firm as well as any issues arising out of such procedures;

 

to review the appointment of the independent registered public accounting firm, the audit and non-audit fees and any matters relating to the termination or resignation of the independent registered public accounting firm; and

 

to examine the effectiveness of our internal controls, to review our internal audit plan and to submit relevant reports and recommendations to our Board on a regular basis.

The audit committee usually meets four times each year.

Remuneration Committee

The members of our remuneration committee are Dr. Lo Ka Shui, as chairman of the committee, Mr. Frank K.S. Wong and Mr. Moses M.C. Cheng. The remuneration committee’s major responsibilities include:

 

to advise the Board in relation to the remuneration structure and payments of our executive directors and executives; and

 

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to represent the Board in confirming the individual remuneration packages and employment terms of executive directors and approving their related employment contracts.

Meetings of the remuneration committee are held when necessary.

at least once a year.

Nomination Committee

The members of our nomination committee are Dr. Lo Ka Shui, as chairman of the committee, Mr. Frank K.S. Wong and Mr. Moses M.C. Cheng. The primary responsibilities of the nomination committee include:

 

to review, advise and make recommendations to the board on the matters in relation to the appointment and re-appointment of board members; and

 

to ensure the proper and transparent procedures for the appointment and re-appointment of directors.

Meetings of the nomination committee are held when necessary.

at least once a year.

Employees

See “Item 4. Information on the Company — Business Overview — Employees”.

Share Ownership

As of December 31, 2004,2005, the following former and current directors and those members of our senior management named in the section entitled “Directors and Senior Management” had interests in our share capital:

Under our Memorandum and Articles of Association, our directors and senior management do not have different voting rights when compared to other holders of shares in the same class.

As of December 31, 2004,2005, options exercisable for an aggregate of 7,601,00013,941,500 shares had been granted to the following former and current directors and those members of our senior management named in the section “Directors and Senior Management” under our share option scheme and were outstanding. As of the same date, none of these options had been exercised.

The following options are exercisable at a price of HK$33.91 per share through October 7, 2007.

 

Director


  

Number of shares

covered by options


He Ning

  1,000,000

Li Gang

  1,000,000

The following options are exercisable at a price of HK$45.04 per share through October 7, 2007.

 

Director


  

Number of shares

covered by options


He Ning

  83,000166,000

Li Gang

  90,000180,000

Xu Long

  585,000  1,170,000

The following options are exercisable at a price of HK$45.04 per share from April 25, 2005 through October 7, 2007.

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Director


Number of shares covered by options

He Ning

83,000

Li Gang

90,000

Xu Long

585,000  

The following options are exercisable at a price of HK$32.10 per share through October 7, 2007.

Director


Number of shares covered by options

He Ning

45,000

Li Gang

50,000

Xu Long

47,500

The following options are exercisable at a price of HK$32.10 per share from June 22, 2006 through October 7, 2007.

 

Director


  

Number of shares

covered by options


He Ning

  45,000

Li Gang

  50,000

Xu Long

  47,500

The following options are exercisable at a price of HK$22.85 per share through July 2, 2012.

Director


Number of shares covered by options

Xue Taohai

100,000  

He Ning

90,000

Li Gang

95,000

Xu Long

90,000

The following options are exercisable at a price of HK$22.85 per share from July 3, 2007 through July 2, 2012.

 

Director


  

Number of shares

covered by options


Xue Taohai

  100,000

He Ning

  90,000

Li Gang

  95,000

Xu Long

  90,000

The following options are exercisable at a price of HK$22.75 per share from October 28, 2005 through October 27, 2014:

 

Director


  

Number of shares

covered by options


Li Yue

  128,000

Lu Xiangdong

128,000

Xue Taohai

128,00048,000

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Director


Number of shares covered by options

Zhang Chengshuang

128,000

Li Mofang

128,000

He Ning

128,000

Li Gang

108,000

Xu Long

104,000

The following options are exercisable at a price of HK$22.75 per share from October 28, 2006 through October 27, 2014:

 

Director


  

Number of shares

covered by options


Li Yue

  96,000

Lu Xiangdong

  96,000

Xue Taohai

  96,000

Zhang Chengshuang

  96,000

Li Mofang

  96,000

He Ning

  96,000

Li Gang

  81,000

Xu Long

  78,000

The following options are exercisable at a price of HK$22.75 per share from October 28, 2007 through October 27, 2014:

 

Director


  

Number of shares

covered by options


Li Yue

  96,000

Lu Xiangdong

  96,000

Xue Taohai

  96,000

Zhang Chengshuang

  96,000

Li Mofang

  96,000

He Ning

  96,000

Li Gang

  81,000

Xu Long

  78,000

The following options are exercisable at a price of HK$26.75 per share from December 21, 2005 through December 20, 2014:

 

Director


  

Number of shares

covered by options


Wang Jianzhou

  240,000

The following options are exercisable at a price of HK$26.75 per share from December 21, 2006 through December 20, 2014:

 

Director


  

Number of shares

covered by options


Wang Jianzhou

  180,000

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The following options are exercisable at a price of HK$26.75 per share from December 21, 2007 through December 20, 2014:

 

Director


  

Number of shares

covered by options


Wang Jianzhou

  180,000

The following options are exercisable at a price of HK$34.87 per share from November 8, 2006 through November 7, 2015:

 

Director

Number of shares

covered by options

Wang Jianzhou

388,000

Li Yue

312,000

Lu Xiangdong

312,000

Xue Taohai

312,000

Zhang Chenshuang

312,000

Li Mofang

312,000

He Ning

312,000

Li Gang

108,000

Xu Long

108,000

Julian Michael Horn-Smith

160,000

Lo Ka Shui

160,000

Frank Wong Kwong Shing

160,000

Moses Cheng Mo Chi

160,000

The following options are exercisable at a price of HK$34.87 per share from November 8, 2007 through November 7, 2015:

Director

Number of shares

covered by options

Wang Jianzhou

291,000

Li Yue

234,000

Lu Xiangdong

234,000

Xue Taohai

234,000

Zhang Chenshuang

234,000

Li Mofang

234,000

He Ning

234,000

Li Gang

81,000

Xu Long

81,000

Julian Michael Horn-Smith

120,000

Lo Ka Shui

120,000

Frank Wong Kwong Shing

120,000

Moses Cheng Mo Chi

120,000

The following options are exercisable at a price of HK$34.87 per share from November 8, 2008 through November 7, 2015:

Director

Number of shares

covered by options

Wang Jianzhou

291,000

Li Yue

234,000

Lu Xiangdong

234,000

Xue Taohai

234,000

Zhang Chenshuang

234,000

Li Mofang

234,000

He Ning

234,000

Li Gang

81,000

Xu Long

81,000

Julian Michael Horn-Smith

120,000

Lo Ka Shui

120,000

Frank Wong Kwong Shing

120,000

Moses Cheng Mo Chi

120,000

Item 7. Major Shareholders and Related Party Transactions.

Major Shareholders

As of May 31, 2005,2006, approximately 75.5%74.9% of our outstanding shares were held by China Mobile Hong Kong (BVI) Limited, a wholly-owned subsidiary of China Mobile (Hong Kong) Group Limited. CMCC, a state-owned company, holds all of the voting shares and economic interest in China Mobile (Hong Kong) Group Limited. No other persons own 5% or more of our ordinary shares. Between our initial public offering and May 31, 2005,2006, our majority shareholders held, directly or indirectly, between approximately 75%74.9% and 76.5% of equity interest in us, except for brief periods following our equity offerings in 1999 and 2000 but before the issuance of consideration shares to our direct shareholder, China Mobile Hong Kong (BVI) Limited, for the related acquisitions, during which periods the shareholding was temporarily lower. See “Item 4. Information on the Company — Industry Restructuring and Changes in Our Shareholding Structure” for changes during the past three years with respect to our majority shareholders. Under our Memorandum and Articles of Association, our major shareholders do not have different voting rights when compared to other holders of shares in the same class.

We are not aware of any arrangement which may at a subsequent date result in a change of control over us.

Related Party Transactions

As of May 31, 2005,2006, CMCC indirectly ownsowned an aggregate of approximately 75.5%74.9% of our issued and outstanding share capital.

We and each of our subsidiaries have entered into various related party transactions. The principal terms of the agreements for these related party transactions are described below.

Certain charges for the services under these agreements are based on tariffs set by the ChinesePRC regulatory authorities. Those transactions where the charges are not set by ChinesePRC regulatory authorities are based on commercial negotiation between the parties, in each case on an arm’s length basis.

International Roaming Arrangements

Prior to July 1, 2004, international roaming and international long distance calling charges incurred by an international mobile telecommunications services subscriber making or receiving a call while roaming in Mainland China were collected for us and credited to us by CMCC, and we would make the necessary settlement with the relevant telecommunications operators in Mainland China. CMCC also collected a 15% handling charge on the roaming and international long distance calling charges from the international mobile telecommunications operators and shared such handling charge equally with us. When our subscribers roamed internationally, we would collect the roaming and international long distance calling charges together with a 15% handling charge from our subscribers and would pay the roaming and international long distance calling charges together with half of the handling charge collected to CMCC, which would make the necessary settlement with the international mobile telecommunications operators concerned. Where long distance charges could not be distinguished from base roaming charges, such long distance charges were grouped under roaming charges.

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Following the completion of our acquisition of the telecommunication assets from our parent company in July 2004, CMCC no longer provides mobile telecommunications services in Mainland China other than through us. As a result, we no longer have inter-provincial roaming and interconnection arrangement with CMCC and the handling charge with respect to roaming and international long distance calling charges are no longer shared between CMCC and us. In addition, pursuant to the agreement we entered into with CMCC on July 1, 2004, CMCC maintains the existing settlement arrangements with respect to international interconnection and roaming with the relevant telecommunication servicetelecommunications services providers in foreign countries and regions, and collects the relevant usage fees and other fees from us and pays the same to the relevant mobile telecommunication service providers in foreign countries and regions.

Licensing of Trademark

CMCC is the owner of the “CHINA MOBILE” name and logo, a registered trademark in Mainland China, Hong Kong, Macau, Taiwan, Brunei, Cambodia, Indonesia, New Zealand, South Korea, Thailand and the United States. In addition, it has filed applications in Bangladesh, Canada, India, Malaysia and Philippines to register the “CHINA MOBILE” name and logo as a trademark for certain goods and services. In July 2002, we entered into a licensing agreement with CMCC for, among other things, the use of the “CHINA MOBILE” name and logo by us and our operating subsidiaries. This licensing agreement replaces the previous licensing agreements entered into with CMCC in October 1999 and the supplemental licensing agreement entered into in September 2000. In addition, each of the companies that we acquired in July 2004, other than Jingyi, has entered into a licensing agreement with CMCC for the use of the “CHINA MOBILE” name and logo. Under these agreements, no license fee is payable until December 31, 2007.

Spectrum Fees and Numbering Resources

The Ministry of Information Industry and the Ministry of Finance jointly determine the standardized spectrum fees payable to the Ministry of Information Industry by all mobile telecommunications operators in Mainland China, including us. In accordance with a joint circular from the National Development and Reform Commission and the Ministry of Finance, CMCC entered into an agreement with us that specifies the amount of fees to be paid to the Ministry of Information Industry for spectrum usage by each mobile telecommunications network operator based on the bandwidth of the frequency used and the number of base stations within the relevant operator’s networks. In October 1999, we entered into an agreement with CMCC (as supplemented by two supplemental agreements entered into in September 2000 and April 2002), under which we have been granted the exclusive right to use the frequency spectrum and telephone numbers allocated to usCMCC in Mainland China. For the usage of the 800/900 MHz and the 1800 MHz frequency bands, the charges will be shared between our operating subsidiaries and CMCC’s operating subsidiaries. Sixty percent of the charges will be shared on the basis of the number of base stations at the end of the previous year and 40% of the charges will be shared on the basis of the bandwidth of the spectrum used. The agreement is valid for one year and will be automatically renewed on an annual basis unless either party notifies the other of its intention to terminate at least three months prior to the expiration of the term.

On May 2, 2002, the relevant regulatory authorities in China informed us that the standard spectrum usage fees for GSM networks will be adjusted progressively over a period of three years, and the adjustments will be effective from July 1, 2002 for a period of five years. For the first year, spectrum usage fees for GSM networks will be charged at the annual rate of RMB7.5 million per MHz frequency. For the second year, the annual fee will be RMB11.25 million per MHz frequency and from the third year onward, the annual fee will be RMB15 million per MHz frequency. All adjusted annual fees are charged on the basis that upward and downward frequencies are separately charged. The allocation of spectrum usage fees between CMCC and us remains the same under our existing agreement.

Following the completion of our acquisition of the telecommunicationtelecommunications assets from our direct parent company in July 2004, we entered into an agreement with CMCC on July 1, 2004, pursuant to which CMCC will collect spectrum usage fees from us relating to spectrum frequency and numbering resources and make payment to the Ministry of Information Industry. In addition to transferring to us all existing frequency spectrum and numbering resources allocated to it by the Ministry of Information Industry, CMCC has also agreed to apply for new frequency spectrum and numbering resources upon our request or notice from time to time and transfer the relevant new frequency spectrum and numbering resources to us.

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Sharing of Inter-Provincial Transmission Line Leasing Fees

Following the completion of our acquisition of the telecommunicationtelecommunications assets from our direct parent company in July 2004, we entered into an agreement with CMCC on July 1, 2004, pursuant to which CMCC maintains the existing settlement arrangements with respect to inter-provincial transmission line leasing with the relevant transmission line providers in Mainland China, and collects inter-provincial transmission line leasing fees from us and pay the same to the transmission line providers in respect of the inter-provincial transmission lines we lease from such providers.

Platform Development

Aspire is 66.4% owned by us, and it is a joint venture with Vodafone and Hewlett-Packard Company. It entered into a platform development master agreement with us on January 10, 2001. Under the platform development master agreement, Aspire (or its subsidiaries) provides technology platform development and maintenance services to us and our subsidiaries. These services include system and gateway integration services, hardware, software and system development (including development of applications), technical support and major overhaul services for a standardized, nation-wide platform for wireless data.

Under the platform development master agreements, we will pay Aspire equipment charges, systems integration fees, software licensing fees, technical support fees and/or major overhaul charges, which will be determined according to standards laid down by the relevant governmental departments and/or by reference to market rates.

Property Leasing and Management Services

We lease from other subsidiaries of CMCC various properties that are used as office space and for locating our cell sites and switching equipment. In relation to leased properties, the rental payments are determined with reference to market rates. In relation to properties sub-leased by such subsidiaries to the companies that we acquired in November 2000 (which were in turn leased to such subsidiaries by third parties), the rental is equal to the rental payable to such third parties, and such subsidiaries do not make any gains as the intermediate lessors. Some of such subsidiaries of CMCC also provide property management services in relation to the properties leased or subleased (other than for Tianjin Mobile and Guangxi Mobile). Property management fees are determined with reference to market rates.

The initial terms of such leases and sub-leases range from six months to ten years. The initial terms of such leases and sub-leases to Guangxi Mobile are renewable on an annual basis if Guangxi Mobile gives six months’ notice of its intention to renew. Guangxi Mobile is entitled to terminate such leases and sub-leases by giving three months’ notice at any time. The initial terms of such leases and sub-leases to Tianjin Mobile are automatically renewable on an annual basis unless terminated by Tianjin Mobile by three months’ notice given at any time or by the relevant lessor by giving notice of its intention to terminate three months prior to expiration of the relevant term. The initial terms of such leases and sub-leases to Shanghai Mobile are automatically renewed on an annual basis unless terminated by Shanghai Mobile by three months’ notice given at any time or in relation to sub-leases terminated by the relevant lessor by giving three months’ notice prior to the expiration of the relevant term. In relation to our other subsidiaries, the relevant lease terms and (subject to the relevant head lease being valid or renewable for the extended term) sub-lease terms will be automatically renewed on an annual basis unless terminated by the relevant companies with three months’ notice given at any time and, in relation to sub-leased properties, the relevant lessor may also terminate by giving three months’ notice prior to the expiration of the relevant term. Beijing Mobile also leases certain properties and provides property management services to a subsidiary of CMCC for an initial term of one year and on terms substantially similar to those set out above in this paragraph.

In addition, each of the companies that we acquired in July 2004 has entered into property leasing and management agreements with CMCC with terms similar to the agreements for our existing subsidiaries.

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Construction and Related Services

Beijing Mobile, Shanghai Mobile, Liaoning Mobile and Shandong Mobile entered into agreements with certain subsidiaries of CMCC under which such subsidiaries provide services such as construction, design, equipment installation, testing and/or maintenance services and/or act as general contractors in relation to construction and other projects of our subsidiaries. Such agreements are for terms of between 6 months and 16 months, which will be automatically renewed on an annual basis unless either party (in the case of Shandong Mobile, Shanghai Mobile and Beijing Mobile) or Liaoning Mobile (in the case of Liaoning Mobile) notifies the other in writing at least three months prior to the expiration of the term of its intention to terminate the arrangement. Beijing Mobile had also previously entered into other agreements for the provision of certain construction and related services which have continued to be performed according to their terms after Beijing Mobile was acquired by us in November 2000. The charges payable for services rendered under such agreements are determined according to standards laid down by relevant governmental departments and/or by reference to market rates.

Equipment Maintenance and Related Services

Beijing Mobile, Shanghai Mobile and Liaoning Mobile entered into agreements with certain subsidiaries of CMCC under which such subsidiaries provide equipment maintenance and related services to such companies. Such agreements are for terms of between 6 months and 15 months, which will be automatically renewed on an annual basis unless either party (in the case of Beijing Mobile) or Shanghai Mobile or Liaoning Mobile (in the case of Shanghai Mobile and Liaoning Mobile, respectively) notifies the other of its intention to terminate in writing at least three months prior to the expiration of the term. Beijing Mobile had also previously entered into another agreement for the provision of certain equipment maintenance services which continued to be performed according to its terms after Beijing Mobile was acquired by us in November 2000. The charges payable for services rendered under such agreements are determined according to standards laid down by relevant governmental departments and/or by reference to market rates.

Transmission Tower Production, Sales and Other Services and Antenna Maintenance Services

Hebei Mobile entered into an agreement with a subsidiary of CMCC under which such subsidiary provides transmission tower design, production, installation and maintenance services and antenna maintenance services to Hebei Mobile, and sells transmission towers and spare parts to Hebei Mobile. The initial term of this agreement is for one year from August 1, 2000 to July 30, 2001. This agreement will be automatically renewed on an annual basis unless either party notifies the other of its intention to terminate in writing at least three months prior to the expiration of the term. The price of such transmission towers and spare parts and the charges payable for services rendered under this agreement are determined according to standards laid down by relevant governmental departments and/or by reference to market rates.

TelecommunicationTelecommunications Services

In April 2002, each of Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi Mobile has, respectively, entered into an agreement with the respective subsidiary of CMCC for the provision of certain telecommunications services. These services include:

 

 (i)telecommunications projects planning, design and constructions services and telecommunications lines and pipelines construction services (as the case may be);

 

 (ii)telecommunications lines maintenance services provided to Anhui Mobile, Jiangxi Mobile, Shaanxi Mobile and Shanxi Mobile; and

 

 (iii)property leasing and property management services.

For the services described in (i) and (ii) above, the charges payable are generally determined with reference to and cannot exceed relevant standards set by and revised from time to time by relevant governmental authorities in Mainland China. Where there are no such standards, the charges are determined with reference to market rates.

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In April 2004, each of our Company, Neimenggu Mobile, Jilin Mobile, Heilongjiang Mobile, Guizhou Mobile, Yunnan Mobile, Xizang Mobile, Gansu Mobile, Qinghai Mobile, Ningxia Mobile, Xinjiang Mobile, Jingyi Design Institute and China Mobile Communication Company Limited has entered into agreements with CMCC and its respective subsidiaries in respect of the provision of the following services by CMCC or its subsidiaries:

 

 (i)property leasing and property management services;

 

 (ii)telecommunications project planning, design and construction services;

 

 (iii)telecommunications line and pipeline construction services; and

 

 (iv)telecommunications line maintenance services.

For the services described in (ii), (iii) and (iv) above, the charges payable are generally determined with reference to and cannot exceed relevant standards set by and revised from time to time by relevant governmental authorities in Mainland China. Where there are no such standards, the charges are determined with reference to market rates.

Transmission Tower Sales, Installation and Maintenance

On May 8, 2002, we entered into an agreement with Hubei Communication Services Company, a wholly-owned subsidiary of CMCC, under which Hubei Communication Services Company provided transmission towers and spare parts and related installation and maintenance services to our operating subsidiaries. The price of such transmission towers and spare parts and the charges payable for the services rendered under the agreement are determined either according to standards set by relevant governmental authorities in Mainland China or by reference to market rates.

Miscellaneous

These transactions entered into by us (including our subsidiaries) have been entered into in the ordinary course of business and on normal commercial terms. Under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Hong Kong Listing Rules”), these transactions are considered to be “connected transactions” and (other than the licensing of trademarks and the arrangements entered into by the subsidiaries we acquired in 2004) would normally require full disclosure and, in certain circumstances, prior independent shareholders’ approval on each occasion they arise. As the transactions are expected to be continued in the normal course of business, our directors consider that such disclosure and approval would be impractical. Accordingly, our directors have requested Thethe Hong Kong Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”) to grant, and the Hong Kong Stock Exchange has granted, waivers from compliance with the normal approval and disclosure requirements related to connected transactions under the Hong Kong Listing Rules (except for the licensing of trademarks and the arrangements entered into by the subsidiaries we acquired in 2004), which will bewere effective until December 31, 2004, except that the waivers for transactions relating to platform development will be effective until December 31, 2006, upon the following conditions as applicable:

 

 (1)the transactions as well as the respective agreements governing such transactions will be (a) entered into in the ordinary and usual course of business on terms that are fair and reasonable so far as our independent shareholders are concerned, and (b) on normal commercial terms and in accordance with the terms of the agreements governing such transactions;

 (2)details of the transactions, as required by rule 14.25(1)(A) to (D) of the Listing Rules, shall be disclosed in our Hong Kong annual report;

 

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 (3)our independent non-executive directors shall review annually the transactions and confirm in our Hong Kong annual report and accountsfinancial statements for the relevant year that the transactions have been conducted in the manner stated in paragraph (1) above and within the upper limits stated below;

 

 (4)our auditors shall review annually the transactions and provide our directors with a letter, details of which will be set out in our Hong Kong annual accounts,report, stating that the transactions:

 

received the approval of our board of directors;

 

are in accordance with the pricing policies as stated in our annual report;

 

have been conducted in the manner as stated in (1)(b) above; and

 

have not exceeded the upper limits as set forth in paragraph (7) below;

 

 (5)details of the transactions are disclosed to our independent shareholders who shall have voted in favor of an ordinary resolution to approve the connected transactions and the upper limits set out below at our extraordinary general meeting;

 

 (6)CMCC has undertaken to us that our auditors will be granted access to such of its and its associates’ accounting records for the purposes of reviewing the transactions mentioned above; and

 

 (7)with respect to the following types of transactions entered into and to be entered into by us, waivers were applied for and granted under the additional condition that they shall not exceed the relevant upper limits set out below in each of our fiscal years to which the relevant waivers relate:

 

payments payable by us (other than the eight regional mobile telecommunications companies we acquired in 2002 and the ten regional mobile telecommunications companies we acquired in 2004), to subsidiaries of CMCC for collection service charges in any fiscal year shall not exceed 0.1% of our consolidated operating revenue in such year, and payment payable by us (other than the eight regional mobile telecommunications companies we acquired in 2002 and the ten regional mobile telecommunications companies we acquired in 2004) to subsidiaries of CMCC for sales service charges in any fiscal year shall not exceed 0.3% of our consolidated operating revenue in such year;

 

payments payable by us (other than the eight regional mobile telecommunications companies we acquired in 2002 and the ten regional mobile telecommunications companies we acquired in 2004), to subsidiaries of CMCC for rental and property management fees in any fiscal year shall not exceed 0.56% of our consolidated operating revenue in such year;

 

payments payable by us (other than the eight regional mobile telecommunications companies we acquired in 2002 and the ten regional mobile telecommunications companies we acquired in 2004), to subsidiaries of CMCC for construction and related services in any fiscal year shall not exceed 0.25% of our consolidated operating revenue in such year;

 

payments payable by us (other than the eight regional mobile telecommunications companies we acquired in 2002 and the ten regional mobile telecommunications companies we acquired in 2004), to subsidiaries of CMCC for equipment maintenance and related services in any fiscal year shall not exceed 0.05% of our consolidated operating revenue in such year;

 

payments payable by Hebei Mobile to the relevant subsidiaries of CMCC for purchase of transmission towers, transmission tower-related services and antenna maintenance services in any fiscal year shall not exceed 0.06% of our consolidated operating revenue in such year;

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handling charges received by us (other than the eight regional mobile telecommunications companies we acquired in 2002 and the ten regional mobile telecommunications companies we acquired in 2004), from subsidiaries of CMCC in respect of prepaid services for our fiscal years from January 1, 2004 to December 31, 2006 shall not exceed 1% of our consolidated operating revenue for such year, and handling charges paid by us to subsidiaries of CMCC in respect of prepaid services for our fiscal years from January 1, 2004 to December 31, 2006 shall not exceed 1% of our consolidated operating revenue for such year;

 

handling charges received by the eight regional mobile telecommunications companies we acquired in 2002 from the subsidiaries of CMCC in respect of prepaid services in any fiscal year shall not exceed 1% of our consolidated operating revenue in such year, and handling charges paid by the eight regional mobile telecommunications companies we acquired in 2002 to subsidiaries of CMCC in respect of prepaid services in any fiscal year shall not exceed 1% of our consolidated operating revenue in such year;

 

payments payable by us and CMCC to Aspire or its subsidiaries in respect of platform development charges in any fiscal year shall not exceed 3% of our consolidated net tangible assets as of the end of such year;

 

payments in respect of telecommunications projects planning, design and construction services and telecommunications lines and pipelines construction services payable by the eight regional mobile telecommunications companies we acquired in 2002 to the subsidiaries of CMCC in any fiscal year shall not exceed 0.25% of our consolidated operating revenue in such year;

 

telecommunications lines maintenance services payments payable by the eight regional mobile telecommunications companies we acquired in 2002 to the subsidiaries of CMCC in any fiscal year shall not exceed 0.04% of our consolidated operating revenue in such year;

 

property leasing and property management services payments payable by the eight regional mobile telecommunications companies we acquired in 2002 to the subsidiaries of CMCC in any fiscal year shall not exceed 0.25% of our consolidated operating revenue in such year; and

 

payments to Hubei Communication Services Company, a subsidiary of CMCC, by us in respect of the purchase of transmission towers and related services in any fiscal year shall not exceed 0.5% of our consolidated operating revenue in such year.

Our independent shareholders approved the connected transactions and the related upper limits at our extraordinary general meeting held on June 24, 2002 and May 15, 2003, respectively.

Following the completion of our acquisition of the telecommunicationtelecommunications assets from CMCC in July 2004, CMCC no longer provides mobile telecommunications services in Mainland China other than through us. Therefore, the transactions previously entered into between our subsidiaries and prior subsidiaries of CMCC which have been acquired by us no longer constitute connected transactions under the Hong Kong Listing Rules beginning on July 1, 2004 since such prior subsidiaries of CMCC became part of us on July 1, 2004, and the waivers granted by the Hong Kong Stock Exchange as mentioned in sub-paragraph (7) above that are related to the transactions between our subsidiaries and such prior subsidiaries of CMCC became obsolete on July 1, 2004. Only those transactions between us and CMCC or its subsidiaries (which have not been acquired by us) remain as connected transactions under the Hong Kong Listing Rules. In December 2004, in order to streamline the management of the connected transactions, we consolidated the agreements between us and CMCC into two agreements:

 

 (i)the Property Leasing Agreement pursuant to which we rent from CMCC various properties for use as business premises and offices, retail outlets and warehouses and CMCC and its subsidiaries provide to us property management services; underservices. Under this agreement, for properties owned by CMCC or its subsidiaries, the charges are determined with reference to market rates. For properties leased by CMCC or its subsidiaries from third parties and sublet to us, the charges are determined according to the actual rent payable are based on market rates an theby CMCC or its subsidiaries together with any tax payable. The payments payable by us to CMCC and its subsidiaries shall not exceed RMB800 million, RMB900 million and RMB1,000 million for the fiscal years ending December 31, 2005, 2006 and 2007, respectively; and

 

 (ii)the Telecommunications Services Agreement pursuant to which our subsidiaries obtain telecommunications project planning, design and construction services, telecommunications line

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and pipeline construction services and telecommunications line maintenance services from CMCC and its subsidiaries. Pursuant to the Telecommunications Services Agreement, subsidiaries of CMCC sell transmission towers and spare parts and provide related installation and maintenance services to our subsidiaries. Under this agreement, the charges and prices payable are generally determined with reference to and cannot exceed relevant standards set by and revised from time to time by relevant governmental authorities in Mainland China. Where there are no such standards, the charges and prices are determined with reference to market rates. The payments payable to CMCC and its subsidiaries by us shall not exceed RMB2,500 million for each of the three fiscal years ending December 31, 2007.

The transactions relating to platform development between CMCC and its subsidiaries. Under this agreement,Aspire remain as connected transactions under the Hong Kong Listing Rules, and the charges paid by CMCC to Aspire or its subsidiaries have not exceeded 3% of our consolidated net tangible assets as of December 31, 2005. The platform development charges payable are generallywere determined with referenceaccording to and cannot exceedstandards laid down by the relevant standards setgovernment departments and/or by and revised from time to time by relevant governmental authorities in Mainland China. Where there are no such standards, the charges are determined with reference to market rates. The payments payablerates, and the waiver granted by the Hong Kong Stock Exchange as mentioned in sub-paragraph (7) above that is related to us by CMCC and its subsidiaries shall not exceed RMB2,500 million for each of the three fiscal years endingsuch transactions will be effective until December 31, 2007.

2006.

Item 8. Financial Information.

Consolidated Financial Statements

Our audited consolidated financial statements are set forth beginning on page F-1. Other than as disclosed elsewhere in this annual report on Form 20-F, no significant change has occurred since the date of the annual financial statements.

Legal Proceedings

We are not involved in any material litigation, arbitration or administrative proceedings, and, so far as we are aware, we do not have any pending or threatened litigation, arbitration or administrative proceeding that is expected to have a material effect on our financial conditions and results of operation.

Policy on Dividend Distributions

We hold in the highest regard the interests of and the returns achieved for our shareholders, especially minority shareholders. Having taken into account such factors as our financial position, cash flow position and requirements to ensure the sustainable future growth of our business, our board of directors recommended payment of a final dividend of HK$0.460.57 per share for the financial year ended December 31, 2004.2005. This, together with the interim dividend of HK$0.200.45 per share already paid during 2004,2005, amounted to an aggregate dividend payment of HK$0.661.02 per share for the full financial year, representing an increase of 83.3%54.5% over the annual dividend of HK$0.360.66 per share for the financial year 20032004 and a dividend payout ratio of 32.7%39%. Our board of directors is of the view that our strong free cash flow will be capable of supporting the investments required to sustain steady growth and generate a good cash return to our shareholders. We will endeavor to achieve a long-term sustainable, steadily increasing dividend, with a view to generating the best possible return for our shareholders.

Item 9. The Offer and Listing.

In connection with our initial public offering, our American depositary shares, or ADSs, each representing twenty ordinary shares, were listed and commenced trading on the New York Stock Exchange on October 22, 1997 under the symbol “CHL”. Effective from July 5, 2000, our ADS-to-share ratio has been changed to one-to-five. Our shares were listed and commenced trading on the Hong Kong Stock Exchange on October 23, 1997. Prior to these listings, there was no public market for our equity securities. The New York Stock Exchange and the Hong Kong Stock Exchange are the principal trading markets for our ADSs and ordinary shares, which are not listed on any other exchanges in or outside the United States.

As of December 31, 20042005 and May 31, 2005,2006, there were 19,700,639,39919,835,160,399 and 19,723,660,899,19,880,551,599, respectively, ordinary shares issued and outstanding. As of December 31, 20042005 and May 31, 2005,2006, there were, respectively, 258259 and 255119 registered holders of American depositary receipts evidencing 43,535,35551,748,835 and 41,939,80163,892,152 ADSs. Since certain of the ADSs are held by nominees, the above number may not be representative of the actual number of U.S. beneficial holders of ADSs or the number of ADSs beneficially held by U.S. persons. The depositary for the ADSs is The Bank of New York.

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The high and low closing sale prices of the shares on the Hong Kong Stock Exchange and of the ADSs on the NYSE for the periods indicated are as follows. The information for periods prior to July 2000 has been restated to reflect the change in our ADS-to-share ratio from one-to-twenty to one-to-five, which became effective on July 5, 2000.

     Price per Share (HK$)

    Price per ADS (US$)

     High

    Low

    High

    Low

2000

    79.00    40.30    50.73    25.94

2001

    50.50    19.40    33.00    13.19

2002

    28.40    17.80    17.87    11.30

2003

    23.90    14.85    15.54    9.30

First Quarter

    20.10    15.45    12.88    9.85

Second Quarter

    19.75    14.85    12.56    9.30

Third Quarter

    21.55    18.70    13.64    11.80

Fourth Quarter

    23.90    20.80    15.54    13.21

2004

    27.85    19.25    18.07    12.31

First Quarter

    27.85    22.35    18.07    14.01

Second Quarter

    23.75    19.25    15.16    12.31

Third Quarter

    24.60    21.15    15.90    13.63

Fourth Quarter

    26.90    22.15    17.32    14.39

December

    26.90    25.70    17.32    16.53

2005

                    

January

    26.65    23.45    17.10    14.91

February

    26.15    23.75    16.50    15.22

March

    26.45    24.30    17.08    15.70

April

    27.00    25.05    17.80    16.20

May

    28.45    26.30    18.26    17.10

   Price per Share (HK$)  Price per ADS (US$)
   High  Low  High  Low

2001

  50.50  19.40  33.00  13.19

2002

  28.40  17.80  17.87  11.30

2003

  23.90  14.85  15.54  9.30

2004

  27.85  19.25  18.07  12.31

First Quarter

  27.85  22.35  18.07  14.01

Second Quarter

  23.75  19.25  15.16  12.31

Third Quarter

  24.60  21.15  15.90  13.63

Fourth Quarter

  26.90  22.15  17.32  14.39

2005

  39.80  23.45  25.66  14.91

First Quarter

  26.65  23.45  17.10  14.91

Second Quarter

  29.70  25.10  19.17  16.20

Third Quarter

  38.25  27.55  24.86  17.93

Fourth Quarter

  39.80  33.80  25.66  21.70

December

  39.80  36.70  25.66  24.00

2006

        

January

  39.10  36.95  25.24  24.01

February

  38.05  35.85  24.66  22.82

March

  41.65  35.60  26.91  23.12

April

  46.75  42.05  30.27  27.35

May

  46.60  40.05  30.93  25.51

Item 10. Additional Information.

Memorandum and Articles of Association

Under Section 3 of our Memorandum of Association, we have the capacity and the rights, powers and privileges of a natural person and, in addition and without limit, we may do anything which it is permitted or required to do by any enactment or rule of law.

Directors

Material Interests. A director who is in any way directly or indirectly interested in a contract or proposed contract with us shall declare the nature of his interest in accordance with the provisions of the Companies Ordinance (Chapter 32) of Hong Kong and the Articles of Association. A director shall not vote, or be counted in the quorum, on any resolution of the board in respect of any contract or arrangement or proposal in which he or any of his Associates (as such term is defined in the Listing Rules of the Hong Kong Stock Exchange), is to his knowledge, materially interested, and if he shall do so his vote shall not be counted or counted in the quorum for that resolution. The above prohibition shall not apply to any contract, arrangement or proposal:

 

for the giving by us of any security or indemnity to the director or his Associates in respect of money lent or obligations incurred or undertaken by him or any of them at the request of, or for, our or any of our subsidiaries’ benefit;

 

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for the giving by us of any security to a third party in respect of our or any of our subsidiaries’ debt or obligation for which the director or his Associates has himself or themselves assumed responsibility or guaranteed or secured in whole or in part whether alone or jointly;

 

concerning an offer of the shares or debentures or other securities of or by us or any other company which we may promote or be interested in for subscription or purchase where the director or his Associates are, or are to be, interested as a participant in the underwriting or sub-underwriting of the offer;

in which the director isor his Associates are interested in the same manner as other holders of our shares or debentures or other securities by virtue only of his or their interest in our shares or debentures or other securities;

 

concerning any other company in which the director or his Associates are interested, directly or indirectly, as an officer or a shareholder or in which the director or his Associates are beneficially interested in shares of that company other than a company in which the director and any of his Associates, are beneficially interested in five percent or more of the issued shares of any class of the equity share capital of such company (or of any third company through which his interest or that of his Associates is derived) or of the voting rights (excluding for the purpose of calculating such five percent interest any indirect interest of such director or his Associates by virtue of our interest in such company);

 

for the benefit of our or any of our subsidiaries’ employees, including the adoption, modification or operation of a pension fund or retirement, death or disability benefit scheme which relates to both our, or any of our subsidiaries’, directors and employees and such directors’ Associates and does not give the director or his Associates any privilege not generally accorded to the class of persons to whom such scheme or fund relates; and

 

concerning the adoption, modification or operation of any employees’ share scheme involving the issue or grant of options over shares or other securities by us to, or for the benefit of, our or any of our subsidiaries’ employees under which the director or his Associates may benefit.

Compensation and Pension. The directors are entitled to receive by way of remuneration for their services such sum as we may determine from time to time in general meeting. The directors are also entitled to be repaid their reasonable traveling, hotel and other expenses incurred by them in or about the performance of their duties as directors. The directors may award special remuneration out of our funds, by way of salary, commission or otherwise as the directors may determine, to any director who performs services which, in the opinion of the directors, are outside the scope of the ordinary duties of a director.

The board may establish and maintain any contributory or non-contributory pension or superannuation funds for the benefit of, or give donations, gratuities, pensions, allowances or emoluments to any persons (1) who are or were at any time in employment or service of our company (or any of our subsidiaries) or are allied or associated with us or any of our subsidiaries, or (2) who are or were at any time our (or any of our subsidiaries’) directors or officers, and who are holding or have held any salaried employment or office in our company or any of our subsidiaries, and the wives, widows, families and dependants of any of these persons. Any director holding any such employment or office is entitled to participate in, and retain for his own benefit, any such donation, gratuity, pension, allowance or emolument.

Borrowing Powers. The directors may exercise all the powers of our company to borrow money and to mortgage or charge all or any part of our undertaking, property and assets (present and future) and uncalled capital and to issue debentures, debenture stocks, bonds and other securities, whether outright or as collateral security for the debt, liability or obligation of our company or any third party.

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Qualification; Retirement. A director need not hold any of our shares to qualify as a director. There is no age limit requirement for a director’s retirement or non-retirement.

Each director is subject to retirement by rotation at least once every three years. The directors to retire in every year shall be those who have been longest in office since their last election, but as between persons who became directors on the same day shall be determined by lot unless they otherwise agree between themselves. The retiring directors shall be eligible for re-election.

Rights Attaching to Ordinary Shares

The section entitled “Description of Share Capital” in our Registration Statement on Form F-3 (File No. 333-47256), as filed with the Securities and Exchange Commission on October 30, 2000, is incorporated by reference into this annual report.

report on Form 20-F.

Pursuant to ordinary resolutions passed at our extraordinary general meeting held on November 10, 2000, our authorized share capital was increased, by the creation of an additional 14,000,000,000 ordinary shares of HK$0.10 each, which rank pari passu with the existing ordinary shares, to a total of HK$3,000,000,000 divided into 30,000,000,000 ordinary shares.

Annual General Meetings and Extraordinary General Meetings

We must hold, in each year, a general meeting as our annual general meeting in addition to any other meetings in that year. The annual general meeting must be held at such time (which shall be within a period of not more than 15 months, or such longer period as the Registrar of Companies may authorize in writing, after the holding of the last preceding annual general meeting) and place as may be determined by the directors. All other general meetings are extraordinary meetings. The directors may proceed to convene an extraordinary general meeting whenever they think fit, in accordance with the Companies Ordinance.

In general, an annual general meeting and a meeting called for the passing of a special resolution shall be called by not less than 21 days’ notice in writing, and any other general meeting shall be called by not less than 14 days’ notice in writing. The notice must specify the place, date and time of the meeting and, in the case of special business, the general nature of that business.

Miscellaneous

We keep our share register with our share registrar, which is Hong Kong Registrars Limited, Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong. In addition, we also file certain documents with the Registrar of Companies, Hong Kong, China, in accordance with the requirements of the Companies Ordinance. Our company number is 622909.

Material Contracts

See “Item 7. Major Shareholders and Related Party Transactions — Related Party Transactions” for certain arrangements we have entered into with CMCC.

Interconnection Arrangements

Each of our operating subsidiaries has entered into interconnection agreements with other operators in its network area. The economic terms of the interconnection arrangements are described under “Item 4. Information on the Company — Business Overview — Interconnection”.

Aspire Business Alliance with Vodafone

On January 9, 2002, Vodafone Americas Asia Inc., a subsidiary of Vodafone, and Aspire entered into a business alliance agreement under which Aspire will engage Vodafone Global Platform and Internet Services, a unit

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of Vodafone Americas Asia Inc., as a preferred provider of wireless data applications software in relation to the Aspire Mobile Information Service Center Platform, provided that software supplied to Aspire has at least equivalent technical specifications on the same or better commercial terms. Aspire and Vodafone Global Platform and Internet Services also agreed to use their reasonable efforts to coordinate the development of their respective wireless data platforms with the intention of providing a seamless delivery of wireless data services for their respective customers and enabling content and application providers to use a single application programming interface.

Exchange Controls

The Renminbi currently is not a freely convertible currency. The Renminbi is currently freely convertible under the “current account”, which includes dividends, trade and service-related foreign currency transactions, but not under the “capital account”, which includes foreign direct investment, unless the prior approval of the State Administration of Foreign Exchange is obtained. The State Administration of Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of Renminbi into foreign currency. In addition, under a unitary foreign exchange system, People’s Bank of China sets daily exchange rates for conversion of Renminbi into U.S. dollars and other currencies based on the China Foreign Exchange Trading System interbank market rates. In the event of shortages of foreign currencies, we may be unable to convert sufficient Renminbi into a foreign currency to meet itsour foreign currency obligations or to pay dividends in a foreign currency.

The value of the Renminbi is subject to changes in ChinesePRC government policies and to international economic and political developments. Since 1994, the conversion of the Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China, which are set daily based on the previous business day’s inter-bank foreign exchange market rates and current exchange rates on the world financial markets. From 1994 to July 20, 2005, the official exchange rate for the conversion of the Renminbi to U.S. dollars has beenforeign currencies was generally stable. Any devaluationOn July 21, 2005, the PRC government introduced a managed floating exchange rate system to allow the value of the Renminbi would increase our effective costto fluctuate within a regulated band based on market supply and demand and by reference to a basket of foreign manufactured equipment or components,currencies. The PRC government has since made and of satisfying any other foreign currency denominated liabilities. In addition, any such devaluation would reducein the U.S. dollar value of any dividends declared in Renminbi. During 2002, 2003 and 2004,future may make further adjustments to the Renminbi has remained stable against the U.S. dollar.exchange rate system.

There are no limitations on the right of non-resident or foreign owners to remit dividends or to hold or vote the ordinary shares or the ADSs imposed by Hong Kong law or by our memorandum and articles of association or other constituent documents.

Taxation — Hong Kong

The taxation of income and capital gains of holders of ordinary shares or ADSs is subject to the laws and practices of Hong Kong and of jurisdictions in which holders of ordinary shares or ADSs are resident or otherwise subject to tax. The following summary of certain relevant taxation provisions under Hong Kong law is based on current law and practice, is subject to changes therein and does not constitute legal or tax advice. The discussion does not deal with all possible tax consequences relating to an investment in the ordinary shares or ADSs. Accordingly, each prospective investor (particularly those subject to special tax rules, such as banks, dealers, insurance companies, tax-exempt entities and holders of 10% or more of our voting capital stock) should consult its own tax advisor regarding the tax consequences of an investment in the ordinary shares and ADSs. The discussion is based upon laws and relevant interpretations thereof in effect as of the date of this annual report on Form 20-F, all of which are subject to change. There is no reciprocal tax treaty in effect between Hong Kong and the United States.

Tax on Dividends

Under the current practices of the Hong Kong Inland Revenue Department, no tax is payable in Hong Kong in respect of dividends paid by us unless such dividends are attributable to a trade, profession or business carried on in Hong Kong.

Profits Tax

No tax is imposed in Hong Kong in respect of capital gains from the sale of property (such as the ordinary shares and ADSs). Trading gains from the sale of property by persons carrying on a trade, profession or business in Hong Kong where such gains are derived from or arise in Hong Kong from such trade, profession or business will be chargeable to Hong Kong profits tax, which is currently imposed at the rate of 17.5% on corporations and at a maximum rate of 16% on individuals. Gains from sales of the ordinary shares effected on the Hong Kong Stock Exchange may be considered to be derived from or arise in Hong Kong. Liability for Hong Kong profits tax may thus arise in respect of trading gains from sales of ordinary shares or ADSs realized by persons carrying on a business or trading or dealing in securities in Hong Kong.

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Stamp Duty

Hong Kong stamp duty, currently charged at the rate of HK$1 per HK$1,000 or part thereof on the higher of the consideration for or the value of the ordinary shares, will be payable by the purchaser on every purchase and by the seller on every sale of ordinary shares (i.e., a total of HK$2 per HK$1,000 or part thereof is currently payable on a typical sale and purchase transaction involving ordinary shares). In addition, a fixed duty of HK$5 is currently payable on any instrument of transfer of ordinary shares. The withdrawal of ordinary shares upon the surrender of ADSs, and the issuance of ADSs upon the deposit of ordinary shares, will also attract stamp duty at the rate described above for sale and purchase transactions unless the withdrawal or deposit does not result in a change in the beneficial ownership of the ordinary shares under Hong Kong law, in which case only a fixed duty of HK$5 is payable on the transfer. The issuance of the ADSs upon the deposit of ordinary shares issued directly to the depositary or for the account of the depositary does not attract stamp duty. No Hong Kong stamp duty is payable upon the transfer of ADSs outside Hong Kong.

Estate Duty

The ordinary shares areRevenue (Abolition of Estate Duty) Ordinance 2005 came into effect on February 11, 2006 in Hong Kong property under Hong Kong law, and accordingly such ordinary shares may be subject to estate duty on the death of the beneficial owner of the ordinary shares (regardless of the place of the owner’s residence, citizenship or domicile).Kong. No Hong Kong estate duty is currently imposed on a progressive scale from 5% to 15%. Nopayable and no estate duty is payable when the aggregate valueclearance papers are needed for an application for a grant of the dutiable estate does not exceed HK$7.5 million, and the maximum raterepresentation in respect of dutyholders of 15% applies when the aggregate value of the dutiable estate exceeds HK$10.5 million.

On March 16, 2005, the Financial Secretary of the Hong Kong Special Administrative Region announced in his 2005/06 budget speech that the Hong Kong Government would propose for the abolition of estate duty. However, as of the date of this annual report, the relevant law has not been passed and estate duty has not been abolished.

ordinary shares whose death occurs on or after February 11, 2006.

Taxation — United States Federal Income Taxation

This section describes the material United States federal income tax consequences of the ownership and disposition of our shares or ADSs. This section applies to you only if you are a U.S. holder, as defined below, and you hold your shares or ADSs as capital assets for United States federal income tax purposes. This section does not apply to you if you are a member of a special class of holders subject to special rules, including:

 

a dealer in securities;

a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings;

 

a tax-exempt organization;

 

a life insurance company;

 

a person liable for alternative minimum tax;

 

a person that actually or constructively owns 10% or more of our voting stock;

 

a person that holds shares or ADSs as part of a straddle or a hedging or conversion transaction; or

 

a person whose functional currency is not the U.S. dollar.

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This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. In addition, this section is based in part upon the representations of the Depositary and the assumption that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms.

You are a U.S. holder if you are a beneficial owner of shares or ADSs and you are:

 

a citizen or resident of the United States;

 

a domestic corporation;

 

an estate whose income is subject to United States federal income tax regardless of its source; or

 

a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust.

You should consult your own tax advisor regarding the United States federal, state and local and other tax consequences of owning and disposing of shares or ADSs in your particular circumstances.

In general, and taking into account the earlier assumptions, for United States federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the shares represented by those ADRs. Exchanges of shares for ADRs, and ADRs for shares, generally will not be subject to the United States federal income tax.

Taxation of Dividends

Under the United States federal income tax laws, and subject to the passive foreign investment company, or PFIC, rules discussed below, if you are a U.S. holder, the gross amount of any dividend we pay out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes) is subject to United States federal taxation. If you are a noncorporate U.S. holder, dividends paid to you after December 31, 2002 andin taxable years beginning before January 1, 20092011 that constitute qualified dividend income will be taxable to you at a maximum tax rate of 15% provided that you hold the shares or ADSs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements.

The dividend is taxable to you when you, in the case of shares, or the Depositary, in the case of ADSs, receive the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. The amount of the dividend distribution that you must include in your income will be the U.S. dollar value of the Hong Kong dollar payments made, determined at the spot Hong Kong dollar/U.S. dollar rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. This gain or loss generally will be from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits (as determined for United States federal income tax purposes) will be treated as a non-taxable return of capital to the extent of your basis in the shares or ADSs and thereafter as capital gain. Dividends will be income from sources outside the United States, but dividends paid in taxable years beginning before January 1, 2007 generally will be “passive income”“passive” or “financial services income”,services” income, and dividends paid in taxable years beginning after December 31, 2006 will, depending on your circumstances, be “passive” or “general” income which, in either case, is treated separately from other types of income for purposes of computing the foreign tax credit allowable to you.

Taxation of Capital Gains

Subject to the PFIC rules discussed below, if you are a U.S. holder and you sell or otherwise dispose of your shares or ADSs, you will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars,

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in your shares or ADSs. Capital gain of a noncorporate U.S. holder that is recognized on or after May 6, 2003 andin taxable years beginning before January 1, 20092011 is generally taxed at a maximum rate of 15% where the property is held more than one year. The deductibility of capital losses is subject to limitations. The gain or loss will generally be from sources within the United States for foreign tax credit limitation purposes.

PFIC Rules

We believe that shares or ADSs should not be treated as stock of a PFIC for United States federal income tax purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change. In general, if you are a U.S. holder, we will be a PFIC with respect to you if for any taxable year in which you held our shares or ADSs:

 

at least 75% of our gross income for the taxable year is passive income; or

 

at least 50% of the value, determined on the basis of a quarterly average, of our assets is attributable to assets that produce or are held for the production of passive income.

Passive income generally includes dividends, interest, royalties, rents (other than certain rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. If a foreign corporation owns at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation, and as receiving directly its proportionate share of the other corporation’s income.

If we are treated as a PFIC, and you are a U.S. holder that did not make a mark-to-market election, as described below, you will be subject to special rules with respect to:

 

any gain you realize on the sale or other disposition of your shares or ADSs; and

 

any excess distribution that we make to you (generally, any distributions to you during a single taxable year that are greater than 125% of the average annual distributions received by you in respect of the shares or ADSs during the three preceding taxable years or, if shorter, your holding period for the shares or ADSs).

Under these rules:

 

the gain or excess distribution will be allocated ratably over your holding period for the shares or ADSs;

 

the amount allocated to the taxable year in which you realized the gain or excess distribution will be taxed as ordinary income;

 

the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year; and

 

the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year.

If you own shares or ADSs in a PFIC that are treated as marketable stock, you may make a mark-to-market election. If you make this election, you will not be subject to the PFIC rules described above. Instead, in general, you will include as ordinary income each year the excess, if any, of the fair market value of your shares or ADSs at the end of the taxable year over your adjusted basis in your shares or ADSs. These amounts of ordinary income will not be eligible for the favorable tax rates applicable to qualified dividend income on long-term capital gains. You will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of your shares or ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). Your basis in the shares or ADSs will be adjusted to reflect any such income or loss amounts.

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In addition, notwithstanding any election you make with regard to the shares or ADSs, dividends that you receive from us will not constitute qualified dividend income to you if we are a PFIC either in the taxable year of the distribution or the preceding taxable year. Moreover, your shares or ADSs will be treated as stock in a PFIC if we were a PFIC at any time during your holding period in your shares or ADSs, even if we are not currently a PFIC. For purposes of this rule, if you make a mark-to-market election with respect to your shares or ADSs, you will be treated as having a new holding period in your shares or ADSs beginning on the first day of the first taxable year beginning after the last taxable year for which the mark-to-market election applies. Dividends that you receive that do not constitute qualified dividend income are not eligible for taxation at the 15% maximum rate applicable to qualified dividend income. Instead, you must include the gross amount of any such dividend paid by us out of our accumulated earnings and profits (as determined for Untied States federal income tax purposes) in your gross income, and it will be subject to tax at rates applicable to ordinary income.

If you own shares or ADSs during any year that we are a PFIC, you must file Internal Revenue Service Form 8621.

Documents on Display

You may read and copy documents referred to in this annual report on Form 20-F that have been filed with the U.S. Securities and Exchange Commission at the SEC’s public reference room located at 450 FifthMS 0102, 100 F Street, NW,N.E., Room 1580, Washington, D.C. 20549.20549-2521. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. The SEC also maintains a web site at http://www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC.

The SEC allows us to “incorporate by reference” the information we file with the SEC. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this annual report on Form 20-F.

Item 11. Quantitative and Qualitative Disclosures aboutAbout Market Risk.

We are subject to market rate risks due to fluctuations in interest rates. The majority of our debt is in the form of long-term fixed- and variable-rate bank and other loans with original maturities ranging from one to fifteen years. Accordingly, fluctuations in interest rates can lead to significant fluctuations in the fair value of these debt instruments. From time to time, we may enter into interest rate swap agreements designed to mitigate our exposure to interest rate risks, although we did not consider it necessary to do so in 2004.

2005.

We are also exposed to foreign currency risk as a result of our telecommunications equipment being sourced substantially from overseas suppliers. Specifically, our foreign currency exposure relates primarily to our foreign currency-denominated short-term and long-term debt, our firm purchase commitments and, to a limited extent, cash and cash equivalents denominated in foreign currencies. We have entered into foreign exchange forward contracts designed to mitigate our exposure to foreign currency risks. As of December 31, 2004,2005, we had no foreign exchange forward contracts outstanding.Ouroutstanding. Our foreign currency hedging activity generally is expected to be limited to hedging of specific future commitments and long-term debt denominated in foreign currencies.

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The following table provides information regarding our interest rate-sensitive financial instruments, which consist of fixed and variable rate short-term and long-term debt obligations, as of December 31, 20042005 and 2003.2004.

 

  Expected Maturity Date

 As of December 31,
2004


  As of December 31,
2003


  Expected Maturity Date 

As of December 31,

2005

  

As of December 31,

2004

  2005

 2006

  2007

 2008

  2009

  Thereafter

 Total
Recorded
Amount


 Fair
value


  Total
Recorded
Amount


 Fair
Value


  2006 2007 2008  2009  2010  Thereafter Total
Recorded
Amount
 

Fair

Value

  Total
Recorded
Amount
 Fair Value
  (RMB equivalent in millions, except interest rates)  (RMB equivalent in millions, except interest rates)

Debt:

                              

Obligations under capital lease

  68  —    —    —    —    —    68  68  68  68

Obligations under capital leases

  68  —    —    —    —    —    68  68  68  68

Average interest rate

  4.96% —    —    —    —    —    4.96% —    4.96% —    4.96% —    —    —    —    —    4.96% —    4.96% —  

Fixed rate bank and other loans

  1,432  —    —    —    —    —    1,432  1,408  1,659  1,668  —    —    —    —    —    —    —    —    1,432  1,408

Average interest rate

  3.53% —    —    —    —    —    3.53% —    1.77% —    —    —    —    —    —    —    —    —    3.53% —  

Variable rate bank and other loans

  1,023  —    —    —    —    —    1,023  1,023  7,119  7,119  —    —    —    —    —    —    —    —    1,023  1,023

Average interest rate

  3.82% —    —    —    —    —    3.82% —    3.98% —  

Fixed rate notes

  —    —    —    —    —    —    —    —    4,984  5,209

Average interest rate

  —    —    —    —    —    —    —    —    7.88% —    —    —    —    —    —    —    —    —    3.82% —  

Convertible notes

  5,725  —    —    —    —    —    5,725  5,666  5,735  5,713  —    —    —    —    —    —    —    —    5,725  5,666

Average interest rate

  2.25% —    —    —    —    —    2.25% —    2.25% —    —    —    —    —    —    —    —    —    2.25% —  

Bonds

  —    —    3,000  —    —    10,000  13,000  12,119  13,000  13,054  —    2,988  —    —    —    9,924  12,912  13,685  13,000  12,119

Average interest rate

  —    —    3.50% —    —    4.18% 4.03% —    4.03% —    —    3.50% —    —    —    4.12% 3.97% —    4.03% —  

Deferred payable

  —    —    —    —    —    23,633  23,633  23,633  9,976  9,976  —    —    —    —    —    23,633  23,633  23,633  23,633  23,633

Average interest rate

  —    —    —    —    —    3.10% 3.10%   3.80% —    —    —    —    —    —    2.74% 2.74% —    3.10% —  


*The interest rates for variable rate bank and other loans are calculated based on the year-end indices.

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The following table provides information regarding our foreign currency-sensitive financial instruments and transactions, which consist of deposits with banks, cash and cash equivalents, short and long-term debt obligations and capital commitments as of December 31, 20042005 and 2003.2004.

 

  Expected Maturity Date

 As of December 31,
2004


  As of December 31,
2003


  Expected Maturity Date 

As of December 31,

2005

  

As of December 31,

2004

  2005

 2006

  2007

  2008

  2009

  Thereafter

 Total
Recorded
Amount


 Fair
value


  Total
Recorded
Amount


 Fair
Value


  2006  2007  2008  2009  2010  Thereafter Total
Recorded
Amount
 

Fair

Value

  Total
Recorded
Amount
 

Fair

Value

  (RMB equivalent in millions, except interest rates)  (RMB equivalent in millions, except interest rates)

On-balance sheet financial instruments:

                  

On-balance sheet financial instruments

                 

Deposits with banks:

                                   

in U.S. dollars

  900  —    —    —    —    —    900  900  421  421  17  —    —    —    —    —    17  17  900  900

in Hong Kong dollars

  135  —    —    —    —    —    135  135  135  135  134  —    —    —    —    —    134  134  135  135

Cash and cash equivalents:

                                   

in U.S. dollars

  1,280  —    —    —    —    —    1,280  1,280  2,535  2,535  567  —    —    —    —    —    567  567  1,280  1,280

in Hong Kong dollars

  1,243  —    —    —    —    —    1,243  1,243  321  321  4,266  —    —    —    —    —    4,266  4,266  1,243  1,243

Debts:

                                   

Fixed rate bank and other loans (U.S. dollar)

  63  —    —    —    —    —    63  63  207  211

Fixed rate bank and other loans (U.S. dollars)

  —    —    —    —    —    —    —    —    63  63

Average interest rate

  5.29% —    —    —    —    —    5.29% —    6.16% —    —    —    —    —    —    —    —    —    5.29% —  

Fixed rate notes (U.S. dollar)

  —    —    —    —    —    —    —    —    4,984  5,209

Average interest rate

  —    —    —    —    —    —    —    —    7.88% —  

Convertible notes (U.S. dollar)

  5,725  —    —    —    —    —    5,725  5,666  5,735  5,713

Convertible notes (U.S. dollars)

  —    —    —    —    —    —    —    —    5,725  5,666

Average interest rate

  2.25% —    —    —    —    —    2.25% —    2.25% —    —    —    —    —    —    —    —    —    2.25% —  

Deferred payable(1)

  —    —    —    —    —    23,633  23,633  23,633  9,976  9,976  —    —    —    —    —    23,633  23,633  23,633  23,633  23,633

Average interest rate

  —    —    —    —    —    3.10% 3.10%   3.80% —    —    —    —    —    —    2.74% 2.74% —    3.10% —  

Capital commitments authorized and

contracted for in U.S. dollar

  —    —    —    —    —    —    —    —    —    —  

(1)Pursuant to our agreements with CMCC and China Mobile Hong Kong (BVI) Limited for our acquisition of the eight regional mobile telecommunications companies in July 2002 and the ten regional mobile telecommunications companies and other telecommunications assets in July 2004, respectively, we have the option to pay the deferred payable in either U.S. dollars, Hong Kong dollars or Renminbi.

Item 12. Description of Securities Other than Equity Securities.

Not Applicable.

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PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies.

Not applicable.

Item 14. Material Modifications to the RightRights of Security Holders and Use of Proceeds.

None.

None.

Item 15. Controls and Procedures.

OurAs of the end of the period covered by this annual report on Form 20-F, an evaluation was carried out by our management, with the participation of our Chief Executive Officer and Chief Financial Officer, after evaluatingof the effectiveness of the Company’sour disclosure controls and procedures (as defined in Rule 13a-14(c) of13a-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this annual report have concluded that, as of such date, the Company’son Form 20-F, our disclosure controls and procedures were effective to ensure that material information relating to the Companyour company was made known to them by others within the Company.

our company.

Item 16A. Audit Committee Financial Expert.

All members of our audit committee have extensive management experience. In particular, one of the members has many years of finance and commercial management experience and expertise. However, members of our audit committee do not possess direct experience or expertise in respect of the reconciliation of financial statements with U.S. GAAP and the evaluation of reports filed with the U.S. Securities and Exchange CommissionSEC by SEC-reporting issuers. Our board of directors has determined that we do not currently have an audit committee financial expert, as defined in Item 16A(b) of Form 20-F, serving on our audit committee. Our audit committee is in the process of consideringmay consider appointing, from time to time, an external financial expert as a consultant.

Item 16B. Code of Ethics.

We have adopted a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, Deputy Chief Financial Officer, Assistant Chief Financial Officer and our other designated senior officers of the Company.officers. A copy of our Code of Ethics for Covered Officers was filed as Exhibit 11.1 to our annual report on Form 20-F for the fiscal year ended December 31, 2003, and may also be downloaded from our website at http://www.chinamobilehk.com/investor_relations/www.ChinaMobileLtd.com/images/pdf/CMHK_2003_20f_en.pdf.terms/CodeofEthics_eng.pdf. Information contained on that website is not a part of this annual report on Form 20-F. Copies of our Code of Ethics for Covered Officers may also be obtained at no charge by writing to our investor relations department at 60/F.,F, The Center, 99 Queen’s Road Central, Hong Kong.

Item 16C. Principal Accountant Fees and Services.

The following table sets forth the aggregate audit fees, audit-related fees, tax fees of our principal accountants and all other fees billed for products and services provided by our principal accountants other than the audit fees, audit-related fees and tax fees for each of the two years ended December 31, 2004:2004 and 2005:

 

  Audit Fees

 Audit-Related Fees

  Tax Fees

  Other Fees

  Audit Fees Audit-Related Fees  Tax Fees  Other Fees

2003

  US$    5,064,000  —    —    US$    500,000

2004

  US$    16,591,0001 —    —    US$    772,000  US$16,591,0001 —     —    US$772,000

2005

  US$7,606,000 —    US$3,000  US$77,000

(1)Including the audits fees in the amount of US$9,000,000 we paid in connection with our acquisition of the ten regional mobile telecommunications companies and other telecommunications assets in July 2004.

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Before our principal accountants were engaged by our companyus or our subsidiaries to render audit or

non-audit services, the engagement was approved by our audit committee as required by applicable rules and regulations of the U.S. Securities and Exchange Commission.

SEC.

Item 16D. Exemptions from the Listing Standards for Audit Committees.

Not applicable.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

Not applicable.

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PART III

Item 17. Financial Statements.

The Company has elected to provide the financial statements and related information specified in Item 18 in lieu of Item 17.

Item 18. Financial Statements.

The following financial statements are filed as part of this annual report.report on Form 20-F.

 

China Mobile Limited (formerly known as China Mobile (Hong Kong) Limited:Limited):

  

Index to consolidated financial statements

  F-1

Report of Independent Registered Public Accounting Firm

  F-2

Consolidated statements of income for each of the three years ended December 31, 2002, 2003, 2004 and 2004

2005
   F-3F-4

Consolidated balance sheets for eachas of December 31, 20032004 and 2004

2005
   F-5F-6

Consolidated statements of cash flows for each of the three years ended December 31, 2002, 2003, 2004 and 2004

2005
   F-7F-8

Consolidated statements of shareholders’ equity for each of the three years ended December 31, 2002, 2003, 2004 and 2004

2005
  F-11

Notes to consolidated financial statements

  F-12

Item 19. Exhibits.

(a) See Item 18 for a list of the financial statements filed as part of this annual report on Form 20-F.

(a)See Item 18 for a list of the financial statements filed as part of this annual report.

(b) Exhibits to this annual report on Form 20-F:

(b)Exhibits to this annual report:

 

Exhibit

Number


 

Description of Exhibit


1.1 Memorandum and Articles of Association (as amended).(1)
2.1 We agree to provide the Securities and Exchange Commission,SEC, upon request, copies of instruments defining the rights of holders of our long-term debt.
2.2 Guarantee from China Mobile Communications Corporation for the RMB5 billionRMB5,000 million guaranteed bonds due 2011 issued by Guangdong Mobile.(2)(1)
2.3 Letter of Guarantee from China Mobile Communications Corporation for the RMB3 billionRMB3,000 million guaranteed bonds due 2007 and RMB5 billionRMB5,000 million guaranteed bonds due 2017, both issued by Guangdong Mobile in 2002 (with English translation).(3)(2)
4.1 Agreement regarding Settlement of Interconnection and Roaming, Transmission Line Leasing, Usage of Spectrum Frequency and Numbering Resources, dated July 1, 2004, between China Mobile (Hong Kong) Limited and China Mobile Communications Corporation (with English translation).(3)
4.2 Tax Indemnity, dated July 1, 2004, among China Mobile Hong Kong (BVI) Limited, China Mobile (Hong Kong) Limited and China Mobile Communications Corporation.(3)
4.3 Agreement on Use of Premises and Related Management Services, dated December 30, 2004, between China Mobile (Hong Kong) Limited and China Mobile Communications Corporation (with English translation).

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Exhibit(3)

Number


Description of Exhibit


4.4 Telecommunications Services Agreement, dated December 30, 2004, between China Mobile (Hong Kong) Limited and China Mobile Communications Corporation (with English translation).(3)
4.5 Conditional Sale and Purchase Agreement, dated April 28, 2004 between China Mobile (Hong Kong) Limited, China Mobile Hong Kong (BVI) Limited and China Mobile Communications Corporation. (1)(4)
4.6 Asset Injection Agreement, dated April 9, 2004, between China Mobile Communications Corporation, Neimenggu Mobile Communication Company Limited and Neimenggu Communication Service Company (with English translation and schedule). (1)(4)
4.7 Asset Injection Agreement, dated April 9, 2004, between China Mobile Communications Corporation, Beijing P&T Consulting & Design Institute Company Limited and Beijing P&T Consulting & Design Institute (with English translation). (1)(4)
4.8 Asset Injection Agreement, dated April 9, 2004, between China Mobile Communications Corporation and China Mobile Communication Company Limited (with English translation). (1)(4)

Exhibit

Number

Description of Exhibit

4.9 Agreement on the Confirmation of Rights and Obligations, dated April 9, 2004, between China Mobile Communications Corporation, Neimenggu Mobile Communication Company Limited and Neimenggu Communication Service Company (with English translation and schedule). (1)(4)
4.10 Agreement on the Confirmation of Rights and Obligations, dated April 9, 2004, between China Mobile Communications Corporation, Beijing P&T Consulting & Design Institute Company Limited and Beijing P&T Consulting & Design Institute (with English translation). (1)(4)
4.11 Agreement on Use of Premises and Related Management Services, dated April 23, 2004, between Xinjiang Mobile Communication Company Limited and Xinjiang Communication Service Company (with English translation and schedule). (1)(4)
4.12 Agreement on Use of Premises and Related Management Services, dated April 27, 2004, between Beijing P&T Consulting & Design Institute Company Limited and Beijing P&T Consulting & Design Institute (with English translation). (1)(4)
4.13 Agreement on Use of Premises and Related Management Services, dated April 23, 2004, between China Mobile Communication Co., Ltd. and China Mobile Communications Corporation (with English translation). (1)(4)
4.14 Agreement on Use of Premises and Related Management Services, dated April 23, 2004, between China Mobile Communications Corporation and China Mobile Communication Co., Ltd (with English translation). (1)(4)
4.15 Consent Letter to the Substitution of Borrowers under the Consigned Loan Agreement, dated February 13, 2004, between China Mobile Communications Corporation, Neimenggu Mobile Communication Company Limited, Neimenggu Communication Service Company and Beijing Chang’an Sub-branch of Industrial and Commercial Bank of China (with English translation and schedule). (1)(4)
4.16 Agreement on Sharing of Administrative Services and Administrative Costs, dated April 27, 2004, between China Mobile Communication Co., Ltd. and China Mobile Communications Corporation (with English translation). (1)(4)
4.17 Trademark Licensing Agreement, dated April 23, 2004, between China Mobile Communications Corporation and China Mobile Communication Co., Ltd (with English translation). (1)(4)
4.18 

Trademark License Agreement, dated July 18, 2002, between China Mobile Communications

Corporation and China Mobile (Hong Kong) Limited (with English translation).(3)(2)

4.19 Tax Indemnity dated July 1, 2002 between China Mobile Hong Kong (BVI) Limited, China Mobile (Hong Kong) Limited and China Mobile Communications Corporation.(3)(2)

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Exhibit
Number


Description of Exhibit


4.20 Telecommunications Services Agreement dated April 10, 2002 between Anhui Mobile Communication Company Limited and Anhui Communication Service Company (with English translation).(3)(2)
4.21 Telecommunications Services Agreement dated April 10, 2002 between Jiangxi Mobile Communication Company Limited and Jiangxi Communication Service Company (with English translation).(3)(2)
4.22 Telecommunications Services Agreement dated April 10, 2002 between Chongqing Mobile Communication Company Limited and Chongqing Communication Service Company (with English translation).(3)(2)
4.23 Telecommunications Services Agreement dated April 27, 2002 between Sichuan Mobile Communication Company Limited and Sichuan Communication Service Company (with English translation).(3)(2)
4.24 Telecommunications Services Agreement dated April 10, 2002 between Hubei Mobile Communication Company Limited and Hubei Communication Service Company (with English translation).(3)(2)
4.25 Telecommunications Services Agreement dated April 10, 2002 between Hunan Mobile Communication Company Limited and Hunan Communication Service Company (with English translation).(3)(2)
4.26 Telecommunications Services Agreement dated April 10, 2002 between Shaanxi Mobile Communication Company Limited and Shaanxi Communication Service Company (with English translation).(3)(2)
4.27 Telecommunications Services Agreement dated April 10, 2002 between Shanxi Mobile Communication Company Limited and Shanxi Communication Service Company (with English translation).(3)(2)

Exhibit

Number

Description of Exhibit

4.28 Service Agreement for Supply Installation and Maintenance of Steel Towers dated May 8, 2002 between China Mobile (Hong Kong) Limited and Hubei Communication Services Company (with English translation).(3)(2)
4.29 Co-operation Framework Agreement in respect of Indirect Loan dated May 10, 2002 between China Mobile Communications Corporation and China Mobile (Hong Kong) Limited (with English translation).(3)(2)
4.30 Building Leasing and Property Management Agreement, dated September 18, 2000, between Beijing Mobile and Beijing Communications Service Company (“Beijing Service”).(4)(5)
4.31 Building Leasing and Property Management Agreement, dated September 18, 2000, between Beijing Mobile and Beijing Service.(4)(5)
4.32 Agreement on Mobile Communications Equipment Maintenance and Modulation, dated September 18, 2000, between Beijing Mobile and Beijing Huarui Wireless Communications Equipment Installation Company (“Beijing Huarui”).(4)(5)
4.33 Agreement on Communications Projects Design and Construction, dated September 18, 2000, between Beijing Mobile and Beijing Huarui.(4)(5)
4.34 Agreement on Mobile Communications Equipment Maintenance, dated September 20, 2000, between Shanghai Mobile and Shanghai Long-distance Telecommunications Engineering Company (“Shanghai Engineering”).(4)(5)
4.35 Agreement on Contracting Mobile Communications Projects, dated September 20, 2000, between Shanghai Mobile and Shanghai Engineering.(4)(5)

-77-


Exhibit

Number


Description of Exhibit


4.36 Building Leasing and Property Management Agreement, dated September 20, 2000, between Shanghai Mobile and Shanghai Communications Service Company (“Shanghai Service”).(4)(5)
4.37 Building Leasing Agreement, dated August 1, 2000, between Tianjin Mobile and Tianjin Communications Service Company (“Tianjin Service”).(4)(5)
4.38 Building Leasing and Property Management Agreement, dated August 1, 2000, between Hebei Mobile and Hebei Communications Service Company (“Hebei Service”).(4)(5)
4.39 Agreement on the Sales and Maintenance of Masts and Maintenance of Antennas and Feeder Lines, dated August 1, 2000, between Hebei Mobile and Hebei Provincial Posts and Telecommunications Equipment and Machinery Plant.(4)(5)
4.40 Building Leasing and Property Management Agreement, dated August 10, 2000, between Liaoning Mobile and Liaoning Communications Service Company (“Liaoning Service”).(4)(5)
4.41 Agreement on Communications Equipment Maintenance, dated September 8, 2000, between Liaoning Mobile and Liaoning Provincial Posts and Telecommunications Engineering Bureau (“Liaoning Engineering”).(4)(5)
4.42 Agreement on Mobile Communications Projects Construction, dated September 8, 2000, between Liaoning Mobile and Liaoning Engineering.(4)(5)
4.43 Building Leasing and Property Management Agreement, dated September 1, 2000, between Shandong Mobile and Shandong Communications Service Company (“Shandong Service”).(4)(5)
4.44 Agreement on Contracting Mobile Communications Projects, dated September 1, 2000, between Shandong Mobile and Shandong Mobile Communications Engineering Bureau.(4)(5)
4.45 Building Lease Agreement, dated August 26, 2000, between Guangxi Mobile and Guangxi Communications Service Company (“Guangxi Service”).(4)
8.1  List of major subsidiaries.
11.1  Code of Ethics.(1)
12.1  Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
12.2  Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
13.1  Certification of Chief Executive Officer pursuant to Rule 13a-14(b).
13.2  Certification of Chief Financial Officer pursuant to Rule 13a-14(b).

(1)Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2003 (File No. 1-14696; 333-12222), filed with the U.S. Securities and Exchange Commission on June 17, 2004.
(2)Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2000 (File No. 1-14696), filed with the U.S. Securities and Exchange Commission on June 26, 2001.
(3)Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2002 (File No. 1-14696), filed with the U.S. Securities and Exchange Commission on June 17, 2003.
(4)Incorporated by reference to our Registration Statement on Form F-3 (File No. 333-47256), filed with the Securities and Exchange Commission on October 30, 2000.

-78-


SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

CHINA MOBILE (HONG KONG) LIMITED

By:

/s/ WANG Jianzhou


Name:

WANG Jianzhou

Title:

Chairman and Chief Executive Officer

Date: June 13, 2005


Exhibit Index

Exhibit

Number


Description of Exhibit


1.1Memorandum and Articles of Association (as amended).(1)
2.1We agree to provide the Securities and Exchange Commission, upon request, copies of instruments defining the rights of holders of our long-term debt.
2.2Guarantee from China Mobile Communications Corporation for the RMB5 billion guaranteed bonds due 2011 issued by Guangdong Mobile.(2)
2.3Letter of Guarantee from China Mobile Communications Corporation for the RMB3 billion guaranteed bonds due 2007 and RMB5 billion guaranteed bonds due 2017, both issued by Guangdong Mobile in 2002 (with English translation).(3)
4.1Agreement regarding Settlement of Interconnection and Roaming, Transmission Line Leasing, Usage of Spectrum Frequency and Numbering Resources, dated July 1, 2004, between China Mobile (Hong Kong) Limited and China Mobile Communications Corporation (with English translation).
4.2Tax Indemnity, dated July 1, 2004, among China Mobile Hong Kong (BVI) Limited, China Mobile (Hong Kong) Limited and China Mobile Communications Corporation.
4.3Agreement on Use of Premises and Related Management Services, dated December 30, 2004, between China Mobile (Hong Kong) Limited and China Mobile Communications Corporation (with English translation).
4.4Telecommunications Services Agreement, dated December 30, 2004, between China Mobile (Hong Kong) Limited and China Mobile Communications Corporation (with English translation).
4.5Conditional Sale and Purchase Agreement, dated April 28, 2004 between China Mobile (Hong Kong) Limited, China Mobile Hong Kong (BVI) Limited and China Mobile Communications Corporation. (1)
4.6Asset Injection Agreement, dated April 9, 2004, between China Mobile Communications Corporation, Neimenggu Mobile Communication Company Limited and Neimenggu Communication Service Company (with English translation and schedule). (1)
4.7Asset Injection Agreement, dated April 9, 2004, between China Mobile Communications Corporation, Beijing P&T Consulting & Design Institute Company Limited and Beijing P&T Consulting & Design Institute (with English translation). (1)
4.8Asset Injection Agreement, dated April 9, 2004, between China Mobile Communications Corporation and China Mobile Communication Company Limited (with English translation). (1)
4.9Agreement on the Confirmation of Rights and Obligations, dated April 9, 2004, between China Mobile Communications Corporation, Neimenggu Mobile Communication Company Limited and Neimenggu Communication Service Company (with English translation and schedule). (1)
4.10Agreement on the Confirmation of Rights and Obligations, dated April 9, 2004, between China Mobile Communications Corporation, Beijing P&T Consulting & Design Institute Company Limited and Beijing P&T Consulting & Design Institute (with English translation). (1)
4.11Agreement on Use of Premises and Related Management Services, dated April 23, 2004, between Xinjiang Mobile Communication Company Limited and Xinjiang Communication Service Company (with English translation and schedule). (1)
4.12Agreement on Use of Premises and Related Management Services, dated April 27, 2004, between Beijing P&T Consulting & Design Institute Company Limited and Beijing P&T Consulting & Design Institute (with English translation). (1)


Exhibit
Number


Description of Exhibit


4.13Agreement on Use of Premises and Related Management Services, dated April 23, 2004, between China Mobile Communication Co., Ltd. and China Mobile Communications Corporation (with English translation). (1)
4.14Agreement on Use of Premises and Related Management Services, dated April 23, 2004, between China Mobile Communications Corporation and China Mobile Communication Co., Ltd (with English translation). (1)
4.15Consent Letter to the Substitution of Borrowers under the Consigned Loan Agreement, dated February 13, 2004, between China Mobile Communications Corporation, Neimenggu Mobile Communication Company Limited, Neimenggu Communication Service Company and Beijing Chang’an Sub-branch of Industrial and Commercial Bank of China (with English translation and schedule). (1)
4.16Agreement on Sharing of Administrative Services and Administrative Costs, dated April 27, 2004, between China Mobile Communication Co., Ltd. and China Mobile Communications Corporation (with English translation). (1)
4.17Trademark Licensing Agreement, dated April 23, 2004, between China Mobile Communications Corporation and China Mobile Communication Co., Ltd (with English translation). (1)
4.18Trademark License Agreement, dated July 18, 2002, between China Mobile Communications Corporation and China Mobile (Hong Kong) Limited (with English translation).(3)
4.19Tax Indemnity dated July 1, 2002 between China Mobile Hong Kong (BVI) Limited, China Mobile (Hong Kong) Limited and China Mobile Communications Corporation.(3)
4.20Telecommunications Services Agreement dated April 10, 2002 between Anhui Mobile Communication Company Limited and Anhui Communication Service Company (with English translation). (3)
4.21Telecommunications Services Agreement dated April 10, 2002 between Jiangxi Mobile Communication Company Limited and Jiangxi Communication Service Company (with English translation). (3)
4.22Telecommunications Services Agreement dated April 10, 2002 between Chongqing Mobile Communication Company Limited and Chongqing Communication Service Company (with English translation). (3)
4.23Telecommunications Services Agreement dated April 27, 2002 between Sichuan Mobile Communication Company Limited and Sichuan Communication Service Company (with English translation). (3)
4.24Telecommunications Services Agreement dated April 10, 2002 between Hubei Mobile Communication Company Limited and Hubei Communication Service Company (with English translation). (3)
4.25Telecommunications Services Agreement dated April 10, 2002 between Hunan Mobile Communication Company Limited and Hunan Communication Service Company (with English translation). (3)
4.26Telecommunications Services Agreement dated April 10, 2002 between Shaanxi Mobile Communication Company Limited and Shaanxi Communication Service Company (with English translation). (3)
4.27Telecommunications Services Agreement dated April 10, 2002 between Shanxi Mobile Communication Company Limited and Shanxi Communication Service Company (with English translation). (3)

Exhibit
Number


Description of Exhibit


4.28Service Agreement for Supply Installation and Maintenance of Steel Towers dated May 8, 2002 between China Mobile (Hong Kong) Limited and Hubei Communication Services Company (with English translation). (3)
4.29Co-operation Framework Agreement in respect of Indirect Loan dated May 10, 2002 between China Mobile Communications Corporation and China Mobile (Hong Kong) Limited (with English translation). (3)
4.30Building Leasing and Property Management Agreement, dated September 18, 2000, between Beijing Mobile and Beijing Communications Service Company (���Beijing Service”).(4)
4.31Building Leasing and Property Management Agreement, dated September 18, 2000, between Beijing Mobile and Beijing Service.(4)
4.32Agreement on Mobile Communications Equipment Maintenance and Modulation, dated September 18, 2000, between Beijing Mobile and Beijing Huarui Wireless Communications Equipment Installation Company (“Beijing Huarui”).(4)
4.33Agreement on Communications Projects Design and Construction, dated September 18, 2000, between Beijing Mobile and Beijing Huarui.(4)
4.34Agreement on Mobile Communications Equipment Maintenance, dated September 20, 2000, between Shanghai Mobile and Shanghai Long-distance Telecommunications Engineering Company (“Shanghai Engineering”).(4)
4.35Agreement on Contracting Mobile Communications Projects, dated September 20, 2000, between Shanghai Mobile and Shanghai Engineering.(4)
4.36Building Leasing and Property Management Agreement, dated September 20, 2000, between Shanghai Mobile and Shanghai Communications Service Company (“Shanghai Service”).(4)
4.37Building Leasing Agreement, dated August 1, 2000, between Tianjin Mobile and Tianjin Communications Service Company (“Tianjin Service”).(4)
4.38Building Leasing and Property Management Agreement, dated August 1, 2000, between Hebei Mobile and Hebei Communications Service Company (“Hebei Service”).(4)
4.39Agreement on the Sales and Maintenance of Masts and Maintenance of Antennas and Feeder Lines, dated August 1, 2000, between Hebei Mobile and Hebei Provincial Posts and Telecommunications Equipment and Machinery Plant.(4)
4.40Building Leasing and Property Management Agreement, dated August 10, 2000, between Liaoning Mobile and Liaoning Communications Service Company (“Liaoning Service”).(4)
4.41Agreement on Communications Equipment Maintenance, dated September 8, 2000, between Liaoning Mobile and Liaoning Provincial Posts and Telecommunications Engineering Bureau (“Liaoning Engineering”).(4)
4.42Agreement on Mobile Communications Projects Construction, dated September 8, 2000, between Liaoning Mobile and Liaoning Engineering.(4)
4.43Building Leasing and Property Management Agreement, dated September 1, 2000, between Shandong Mobile and Shandong Communications Service Company (“Shandong Service”).(4)
4.44Agreement on Contracting Mobile Communications Projects, dated September 1, 2000, between Shandong Mobile and Shandong Mobile Communications Engineering Bureau.(4)
4.45Building Lease Agreement, dated August 26, 2000, between Guangxi Mobile and Guangxi Communications Service Company (“Guangxi Service”).(4)(5)
8.1 List of major subsidiaries.

Exhibit
Number


Description of Exhibit


11.1 Code of Ethics.(1)(4)
12.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
12.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
13.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b).
13.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b).


(1)Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 20032000 (File No. 1-14696; 333-12222)1-14696), filed with the U.S. Securities and Exchange CommissionSEC on June 26, 2001.
(2)Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2002 (File No. 1-14696), filed with the SEC on June 17, 2003.
(3)Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2004 (File No. 1-14696), filed with the SEC on June 13, 2005.
(4)Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2003 (File No. 1-14696), filed with the SEC on June 17, 2004.
(5)Incorporated by reference to our Registration Statement on Form F-3 (File No. 333-47256), filed with the SEC on October 30, 2000.

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on Form 20-F on its behalf.

CHINA MOBILE LIMITED
By:

/s/ WANG Jianzhou

Name:WANG Jianzhou
Title:Chairman and Chief Executive Officer

Date: June 9, 2006

Exhibit Index

Exhibit

Number

Description of Exhibit

1.1Memorandum and Articles of Association (as amended).
2.1We agree to provide the SEC, upon request, copies of instruments defining the rights of holders of our long-term debt.
2.2Guarantee from China Mobile Communications Corporation for the RMB5,000 million guaranteed bonds due 2011 issued by Guangdong Mobile.(1)
2.3Letter of Guarantee from China Mobile Communications Corporation for the RMB3,000 million guaranteed bonds due 2007 and RMB5,000 million guaranteed bonds due 2017, both issued by Guangdong Mobile in 2002 (with English translation).(2)
4.1Agreement regarding Settlement of Interconnection and Roaming, Transmission Line Leasing, Usage of Spectrum Frequency and Numbering Resources, dated July 1, 2004, between China Mobile (Hong Kong) Limited and China Mobile Communications Corporation (with English translation).(3)
4.2Tax Indemnity, dated July 1, 2004, among China Mobile Hong Kong (BVI) Limited, China Mobile (Hong Kong) Limited and China Mobile Communications Corporation.(3)
4.3Agreement on Use of Premises and Related Management Services, dated December 30, 2004, between China Mobile (Hong Kong) Limited and China Mobile Communications Corporation (with English translation).(3)
4.4Telecommunications Services Agreement, dated December 30, 2004, between China Mobile (Hong Kong) Limited and China Mobile Communications Corporation (with English translation).(3)
4.5Conditional Sale and Purchase Agreement, dated April 28, 2004 between China Mobile (Hong Kong) Limited, China Mobile Hong Kong (BVI) Limited and China Mobile Communications Corporation. (4)
4.6Asset Injection Agreement, dated April 9, 2004, between China Mobile Communications Corporation, Neimenggu Mobile Communication Company Limited and Neimenggu Communication Service Company (with English translation and schedule). (4)
4.7Asset Injection Agreement, dated April 9, 2004, between China Mobile Communications Corporation, Beijing P&T Consulting & Design Institute Company Limited and Beijing P&T Consulting & Design Institute (with English translation). (4)
4.8Asset Injection Agreement, dated April 9, 2004, between China Mobile Communications Corporation and China Mobile Communication Company Limited (with English translation). (4)
4.9Agreement on the Confirmation of Rights and Obligations, dated April 9, 2004, between China Mobile Communications Corporation, Neimenggu Mobile Communication Company Limited and Neimenggu Communication Service Company (with English translation and schedule). (4)
4.10Agreement on the Confirmation of Rights and Obligations, dated April 9, 2004, between China Mobile Communications Corporation, Beijing P&T Consulting & Design Institute Company Limited and Beijing P&T Consulting & Design Institute (with English translation). (4)
4.11Agreement on Use of Premises and Related Management Services, dated April 23, 2004, between Xinjiang Mobile Communication Company Limited and Xinjiang Communication Service Company (with English translation and schedule). (4)
4.12Agreement on Use of Premises and Related Management Services, dated April 27, 2004, between Beijing P&T Consulting & Design Institute Company Limited and Beijing P&T Consulting & Design Institute (with English translation). (4)
4.13Agreement on Use of Premises and Related Management Services, dated April 23, 2004, between China Mobile Communication Co., Ltd. and China Mobile Communications Corporation (with English translation). (4)
4.14Agreement on Use of Premises and Related Management Services, dated April 23, 2004, between China Mobile Communications Corporation and China Mobile Communication Co., Ltd (with English translation). (4)

Exhibit
Number

Description of Exhibit

4.15Consent Letter to the Substitution of Borrowers under the Consigned Loan Agreement, dated February 13, 2004, between China Mobile Communications Corporation, Neimenggu Mobile Communication Company Limited, Neimenggu Communication Service Company and Beijing Chang’an Sub-branch of Industrial and Commercial Bank of China (with English translation and schedule). (4)
4.16Agreement on Sharing of Administrative Services and Administrative Costs, dated April 27, 2004, between China Mobile Communication Co., Ltd. and China Mobile Communications Corporation (with English translation). (4)
4.17Trademark Licensing Agreement, dated April 23, 2004, between China Mobile Communications Corporation and China Mobile Communication Co., Ltd (with English translation). (4)
4.18Trademark License Agreement, dated July 18, 2002, between China Mobile Communications Corporation and China Mobile (Hong Kong) Limited (with English translation).(2)
4.19Tax Indemnity dated July 1, 2002 between China Mobile Hong Kong (BVI) Limited, China Mobile (Hong Kong) Limited and China Mobile Communications Corporation.(2)
4.20Telecommunications Services Agreement dated April 10, 2002 between Anhui Mobile Communication Company Limited and Anhui Communication Service Company (with English translation). (2)
4.21Telecommunications Services Agreement dated April 10, 2002 between Jiangxi Mobile Communication Company Limited and Jiangxi Communication Service Company (with English translation). (2)
4.22Telecommunications Services Agreement dated April 10, 2002 between Chongqing Mobile Communication Company Limited and Chongqing Communication Service Company (with English translation). (2)
4.23Telecommunications Services Agreement dated April 27, 2002 between Sichuan Mobile Communication Company Limited and Sichuan Communication Service Company (with English translation). (2)
4.24Telecommunications Services Agreement dated April 10, 2002 between Hubei Mobile Communication Company Limited and Hubei Communication Service Company (with English translation). (2)
4.25Telecommunications Services Agreement dated April 10, 2002 between Hunan Mobile Communication Company Limited and Hunan Communication Service Company (with English translation). (2)
4.26Telecommunications Services Agreement dated April 10, 2002 between Shaanxi Mobile Communication Company Limited and Shaanxi Communication Service Company (with English translation). (2)
4.27Telecommunications Services Agreement dated April 10, 2002 between Shanxi Mobile Communication Company Limited and Shanxi Communication Service Company (with English translation). (2)
4.28Service Agreement for Supply Installation and Maintenance of Steel Towers dated May 8, 2002 between China Mobile (Hong Kong) Limited and Hubei Communication Services Company (with English translation). (2)
4.29Co-operation Framework Agreement in respect of Indirect Loan dated May 10, 2002 between China Mobile Communications Corporation and China Mobile (Hong Kong) Limited (with English translation). (2)
4.30Building Leasing and Property Management Agreement, dated September 18, 2000, between Beijing Mobile and Beijing Communications Service Company (“Beijing Service”).(5)
4.31Building Leasing and Property Management Agreement, dated September 18, 2000, between Beijing Mobile and Beijing Service.(5)
4.32Agreement on Mobile Communications Equipment Maintenance and Modulation, dated September 18, 2000, between Beijing Mobile and Beijing Huarui Wireless Communications Equipment Installation Company (“Beijing Huarui”).(5)
4.33Agreement on Communications Projects Design and Construction, dated September 18, 2000, between Beijing Mobile and Beijing Huarui.(5)
4.34Agreement on Mobile Communications Equipment Maintenance, dated September 20, 2000, between Shanghai Mobile and Shanghai Long-distance Telecommunications Engineering Company (“Shanghai Engineering”).(5)

Exhibit

Number

Description of Exhibit

4.35Agreement on Contracting Mobile Communications Projects, dated September 20, 2000, between Shanghai Mobile and Shanghai Engineering.(5)
4.36Building Leasing and Property Management Agreement, dated September 20, 2000, between Shanghai Mobile and Shanghai Communications Service Company (“Shanghai Service”).(5)
4.37Building Leasing Agreement, dated August 1, 2000, between Tianjin Mobile and Tianjin Communications Service Company (“Tianjin Service”).(5)
4.38Building Leasing and Property Management Agreement, dated August 1, 2000, between Hebei Mobile and Hebei Communications Service Company (“Hebei Service”).(5)
4.39Agreement on the Sales and Maintenance of Masts and Maintenance of Antennas and Feeder Lines, dated August 1, 2000, between Hebei Mobile and Hebei Provincial Posts and Telecommunications Equipment and Machinery Plant.(5)
4.40Building Leasing and Property Management Agreement, dated August 10, 2000, between Liaoning Mobile and Liaoning Communications Service Company (“Liaoning Service”).(5)
4.41Agreement on Communications Equipment Maintenance, dated September 8, 2000, between Liaoning Mobile and Liaoning Provincial Posts and Telecommunications Engineering Bureau (“Liaoning Engineering”).(5)
4.42Agreement on Mobile Communications Projects Construction, dated September 8, 2000, between Liaoning Mobile and Liaoning Engineering.(5)
4.43Building Leasing and Property Management Agreement, dated September 1, 2000, between Shandong Mobile and Shandong Communications Service Company (“Shandong Service”).(5)
4.44Agreement on Contracting Mobile Communications Projects, dated September 1, 2000, between Shandong Mobile and Shandong Mobile Communications Engineering Bureau.(5)
4.45Building Lease Agreement, dated August 26, 2000, between Guangxi Mobile and Guangxi Communications Service Company (“Guangxi Service”).(5)
8.1List of major subsidiaries.
11.1Code of Ethics.(4)
12.1Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
12.2Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
13.1Certification of Chief Executive Officer pursuant to Rule 13a-14(b).
13.2Certification of Chief Financial Officer pursuant to Rule 13a-14(b).


(1)Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2000 (File No. 1-14696), filed with the U.S. Securities and Exchange CommissionSEC on June 26, 2001.
(3)(2)Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2002 (File No. 1-14696), filed with the U.S. Securities and Exchange CommissionSEC on June 17, 2003.
(3)Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2004 (File No. 1-14696), filed with the SEC on June 13, 2005.
(4)Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2003 (File No. 1-14696), filed with the SEC on June 17, 2004.
(5)Incorporated by reference to our Registration Statement on Form F-3 (File No. 333-47256), filed with the Securities and Exchange CommissionSEC on October 30, 2000.

LOGO

China Mobile (Hong Kong) Limited

For the year ended December 31, 20042005

Consolidated Financial Statements


Index to Consolidated Financial Statements

 

   Page No.

Report of Independent Registered Public Accounting Firm

  F-2

Consolidated statements of income for each of the three years ended December 31, 2002, 2003, 2004 and 20042005

  F-3 - F-4

Consolidated balance sheets as of December 31, 20032004 and 20042005

  F-5 - F-6

Consolidated statements of cash flows for each of the three years ended December 31, 2002, 2003, 2004 and 20042005

  F-7 - F-10F-8

Consolidated statements of shareholders’ equity for each of the three years ended December 31, 2002, 2003, 2004 and 20042005

  F-11

Notes to consolidated financial statements

  F-12 - F-117

LOGOLOGO

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of

China Mobile (Hong Kong) Limited:

We have audited the accompanying consolidated balance sheets of China Mobile (Hong Kong) Limited and subsidiaries (the “Group”) as of December 31, 20032004 and 20042005 and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2004,2005, all expressed in Renminbi. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and generally accepted auditing standards in Hong Kong. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Mobile (Hong Kong) Limited and subsidiaries as of December 31, 20032004 and 2004,2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 20042005 in conformity with accounting principles generally accepted in Hong Kong.

In order to comply with the new and revised Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants, the Group changed its accounting policies for goodwill, land use rights and buildings held for own use, share-based payment and financial instruments and changed the manner in which it presents minority interests in the consolidated balance sheets and consolidated statements of income. Details of impact of the changes in accounting policies are discussed in note 3 to the consolidated financial statements.

Accounting principles generally accepted in Hong Kong vary in certain material respects from accounting principles generally accepted in the United States of America. Since prior period consolidated financial statements had been restated, the significant differences between HK GAAP and US GAAP are restated accordingly. Information relating to the nature and effect of such differences is presented in Note 32note 38 to the consolidated financial statements.

LOGO

Report of Independent Registered Public Accounting Firm (Continued)

The accompanying consolidated financial statements as of and for the year ended December 31, 20042005 have been translated into United States dollars solely for the convenience of the reader. We have audited the translation, and in our opinion, the consolidated financial statements expressed in Renminbi have been translated into United States dollars on the basis set forth in Notenote 1 to the consolidated financial statements.

/s/ KPMG

Hong Kong

March 11, 200516, 2006

Consolidated Statements of Income

(Amounts in millions, except share data)

 

      Year ended December 31,

 
      2002

  2003

  2004

  2004

 
   Note  RMB  RMB  RMB  US$ 

Operating revenue

                

Usage fees

     93,272  111,027  128,534  15,530 

Monthly fees

     16,901  20,666  24,760  2,992 

Other operating revenue

     18,388  26,911  39,087  4,722 
      

 

 

 

Total operating revenue

  4  128,561  158,604  192,381  23,244 
      

 

 

 

Operating expenses

                

Leased lines

     5,287  4,914  3,861  466 

Interconnection

     12,975  12,868  12,072  1,459 

Depreciation

     26,827  36,611  44,320  5,355 

Personnel

     6,757  7,700  9,717  1,174 

Other operating expenses

     27,919  43,308  62,677  7,573 
      

 

 

 

Total operating expenses

  5  79,765  105,401  132,647  16,027 
      

 

 

 

Operating profit

     48,796  53,203  59,734  7,217 

Amortization of goodwill

  14  (936) (1,850) (1,930) (233)

Other net income

  6  1,686  2,464  3,167  383 

Non-operating net income

  7  571  434  900  109 

Interest income

     713  807  1,014  122 

Finance costs

  20  (1,852) (2,099) (1,679) (203)
      

 

 

 

Profit before tax

     48,978  52,959  61,206  7,395 

Income tax

  8  (16,375) (17,412) (19,180) (2,317)
      

 

 

 

Profit after tax

     32,603  35,547  42,026  5,078 

Minority interests

     (2) 9  (22) (3)
      

 

 

 

Profit attributable to shareholders

     32,601  35,556  42,004  5,075 
      

 

 

 

Dividends attributable to the year:

                

Interim dividend declared and paid during the year

  9  —    3,339  4,175  504 

Final dividend proposed after the balance sheet date

  9  6,678  4,178  9,614  1,162 
      

 

 

 

      6,678  7,517  13,789  1,666 
      

 

 

 

      Year ended December 31, 
   Note  2003
(restated)
  2004
(restated)
  2005  2005 
      RMB  RMB  RMB  US$ 

Operating revenue

      

Usage fees

   111,027  128,534  156,710  19,418 

Monthly fees

   20,666  24,760  25,055  3,105 

Other operating revenue

   26,911  39,087  61,276  7,593 
              

Total operating revenue

  4  158,604  192,381  243,041  30,116 
              

Operating expenses

      

Leased lines

   4,914  3,861  3,224  399 

Interconnection

   12,868  12,072  15,309  1,897 

Depreciation

   36,488  44,186  56,368  6,985 

Personnel

   7,700  9,972  14,200  1,760 

Other operating expenses

   43,431  62,811  80,254  9,944 
              

Total operating expenses

  5  105,401  132,902  169,355  20,985 
              

Profit from operations

   53,203  59,479  73,686  9,131 

Amortization of goodwill

   (1,850) (1,930) —    —   

Other net income

  6  2,464  3,167  3,284  407 

Non-operating net income

  7  434  900  1,025  127 

Interest income

   807  1,014  1,615  200 

Finance costs

  23(a) (2,099) (1,679) (1,346) (167)
              

Profit before tax

   52,959  60,951  78,264  9,698 

Income tax

  8  (17,412) (19,180) (24,675) (3,058)
              

Profit for the year

   35,547  41,771  53,589  6,640 
              

Attributable to:

      

Equity shareholders of the Company

   35,556  41,749  53,549  6,635 

Minority interests

   (9) 22  40  5 
              

Profit for the year

   35,547  41,771  53,589  6,640 
              

Dividends payable to equity shareholders of the Company attributable to the year:

      

Interim dividend declared and paid during the year

  9(a) 3,339  4,175  9,259  1,147 

Final dividend proposed after the balance sheet date

  9(a) 4,178  9,614  11,767  1,458 
              
   7,517  13,789  21,026  2,605 
              

See accompanying notes to consolidated financial statements.

Consolidated Statements of Income (Continued)

(Amounts in millions, except share data)

 

     Year ended December 31,

     2002

  2003

  2004

  2004

   Note RMB  RMB  RMB  US$

Basic net profit per share

  3(u) RMB 1.70  RMB1.81  RMB2.14  US$0.26
     
  
  
  

Weighted average number of shares used in calculating basic net profit per share (thousands)

    19,151,322  19,671,654  19,673,185    
     
  
  
    

Diluted net profit per share

  3(u) RMB 1.70  RMB1.81  RMB2.13  US$0.26
     
  
  
  

Weighted average number of shares used in calculating diluted net profit per share (thousands)

    19,243,050  19,762,812  19,774,093    
     
  
  
    

   

Note

  Year ended December 31,
    

2003

(restated)

  

2004

(restated)

  2005  2005
      RMB  RMB  RMB  US$

Basic net income per share

  2(v) RMB1.81  RMB2.12  RMB2.71  US$0.34
              

Weighted average number of shares used in calculating basic net income per share(thousands)

   19,671,654  19,673,185  19,738,229  
            

Diluted net income per share

  2(v) RMB1.81  RMB2.12  RMB2.70  US$0.33
              

Weighted average number of shares used in calculating diluted net income per share (thousands)

   19,762,812  19,774,093  19,892,163  
            

See accompanying notes to consolidated financial statements.

Consolidated Balance Sheets

(Amounts in millions)

 

      December 31,

      2003

  2004

  2004

   Note  RMB  RMB  US$

Assets

            

Current assets

            

Cash and cash equivalents

     39,129  45,149  5,455

Deposits with banks

     17,227  20,264  2,448

Accounts receivable

  10  6,116  6,553  792

Other receivables

  11  1,787  1,879  227

Inventories

     2,050  2,499  302

Prepayments and other current assets

     2,128  2,974  359

Tax recoverable

     258  235  28

Amount due from ultimate holding company

  12  762  356  43
      
  
  

Total current assets

     69,457  79,909  9,654

Fixed assets

  13  171,604  218,063  26,347

Construction in progress

     28,370  31,239  3,774

Goodwill

  14  34,373  35,300  4,265

Interest in associates

  15  16  —    —  

Investment securities

  16  77  77  9

Deferred tax

  17  3,263  4,068  492

Deferred expenses

  18  143  96  12
      
  
  

Total assets

     307,303  368,752  44,553
      
  
  

      December 31,
   Note  2004
(restated)
  2005  2005
      RMB  RMB  US$

Assets

        

Current assets

        

Cash and cash equivalents

    45,149  64,461  7,988

Deposits with banks

    20,264  41,925  5,195

Tax recoverable

    235  165  20

Amount due from ultimate holding company

  10  356  63  8

Prepayments and other current assets

    2,974  3,583  444

Other receivables

  11  1,879  1,911  236

Accounts receivable

  12  6,553  6,603  818

Inventories

  13  2,499  2,365  293
           

Total current assets

    79,909  121,076  15,002

Property, plant and equipment

  14  212,459  216,505  26,827

Construction in progress

    30,510  34,201  4,238

Land lease prepayments

    6,333  7,243  898

Goodwill

  15  35,300  35,300  4,374

Interest in associates

  16  —    —    —  

Other financial assets

  17  77  77  10

Deferred tax assets

  18  4,068  6,625  822

Deferred expenses

  19  96  —    —  
           

Total assets

    368,752  421,027  52,171
           

See accompanying notes to consolidated financial statements.

Consolidated Balance Sheets (Continued)

(Amounts in millions)

 

      December 31,

      2003

  2004

  2004

   Note  RMB  RMB  US$

Liabilities and shareholders’ equity

            

Current liabilities

            

Accounts payable

  19  25,225  35,036  4,233

Bills payable

     2,059  1,676  203

Deferred revenue - current portion

  23  9,476  12,936  1,563

Bank loans and other interest-bearing borrowings

  20  13,090  8,180  988

Taxes payable

     4,516  6,664  805

Obligations under capital lease - current portion

  21  68  68  8

Amount due to immediate holding company

  12  47  98  12

Amount due to ultimate holding company

  12  1,352  459  55

Accrued expenses and other payables

  22  22,317  32,549  3,933
      
  
  

Total current liabilities

     78,150  97,666  11,800

Deferred taxation

  17  97  105  13

Bank loans and other interest-bearing borrowings

  20  19,407  13,000  1,571

Amount due to immediate holding company

  12  9,976  23,633  2,855

Deferred revenue - long term portion

  23  688  944  114
      
  
  

Total liabilities

     108,318  135,348  16,353

Minority interests

     182  243  29

Shareholders’ equity

     198,803  233,161  28,171
      
  
  

Total liabilities and shareholders’ equity

     307,303  368,752  44,553
      
  
  

      December 31,
   Note  2004
(restated)
  2005  2005
      RMB  RMB  US$

Liabilities and equity

        

Current liabilities

        

Accounts payable

  20  35,036  41,931  5,196

Bills payable

    1,676  1,359  169

Deferred revenue – current portion

  21  12,936  16,975  2,104

Accrued expenses and other payables

  22  32,549  40,007  4,957

Amount due to immediate holding company

  10  98  96  12

Amount due to ultimate holding company

  10  459  269  33

Interest-bearing borrowings

  23  8,180  —    —  

Obligations under capital lease

  24  68  68  8

Current taxation

    6,664  9,249  1,146
           

Total current liabilities

    97,666  109,954  13,625

Deferred tax liabilities

  18  105  97  12

Interest-bearing borrowings

  23  36,633  36,545  4,529

Deferred revenue, excluding current portion

  21  944  1,324  164
           

Total liabilities

    135,348  147,920  18,330

Total equity attributable to:

        

Equity shareholders of the Company

    233,161  272,824  33,806

Minority interests

    243  283  35
           

Total liabilities and equity

    368,752  421,027  52,171
           

See accompanying notes to consolidated financial statements.

Consolidated Statements of Cash Flows

(Amounts in millions)

 

   Year ended December 31,

 
   2002

  2003

  2004

  2004

 
   RMB  RMB  RMB  US$ 

Operating activities

             

Profit before taxation

  48,978  52,959  61,206  7,395 

Adjustments for:

             

- Depreciation of fixed assets

  26,827  36,611  44,320  5,355 

- Amortization of goodwill

  936  1,850  1,930  233 

- Profit on deemed disposal of a subsidiary

  (255) —    —    —   

- Loss on sale of fixed assets

  205  795  535  65 

- Write off of fixed assets

  96  669  5,900  713 

- Provision for doubtful accounts

  1,749  2,006  2,273  274 

- Amortization of deferred expenses

  43  47  47  6 

- Interest income

  (713) (807) (1,014) (123)

- Interest expense and capital lease charges

  1,852  2,099  1,679  203 

- Dividend income

  (25) (48) (84) (10)

- Unrealized exchange loss, net

  8  47  24  3 
   

 

 

 

Operating profit before changes in working capital

  79,701  96,228  116,816  14,114 

Increase in inventories

  (234) (464) (106) (13)

Decrease in amount due from fellow subsidiaries

  —    —    896  108 

Decrease in amount due from ultimate holding company

  765  520  662  80 

Increase in accounts receivable

  (733) (1,968) (2,082) (252)

(Increase)/decrease in other receivables

  (234) (259) 377  46 

Decrease/(increase) in prepayments and other current assets

  91  (69) (555) (67)

Decrease in amount due to fellow subsidiaries

  —    —    (4,661) (563)

Increase/(decrease) in amount due to ultimate holding company

  450  135  (1,257) (152)

Increase/(decrease) in amount due to immediate holding company

  402  (355) —    —   

Increase in accounts payable

  4,915  940  2,707  327 

Increase in accrued expenses and other payables

  469  6,246  6,365  769 

Increase in deferred revenue

  2,370  2,535  2,724  329 
   

 

 

 

Cash generated from operations

  87,962  103,489  121,886  14,726 

Tax paid

             

- PRC income tax paid

  (18,540) (17,955) (18,107) (2,188)
   

 

 

 

Net cash from operating activities carried forward

  69,422  85,534  103,779  12,538 
   

 

 

 

   Year ended December 31, 
   2003
(restated)
  2004
(restated)
  2005  2005 
   RMB  RMB  RMB  US$ 

Operating activities

     

Profit before tax

  52,959  60,951  78,264  9,698 

Adjustments for:

     

- Depreciation of property, plant and equipment

  36,488  44,186  56,368  6,985 

- Amortization of land lease prepayments

  123  134  169  21 

- Amortization of goodwill

  1,850  1,930  —    —   

- Loss on disposal of property, plant and equipment

  795  535  411  51 

- Write off of property, plant and equipment

  669  5,900  5,645  699 

- Allowance for doubtful accounts

  2,006  2,273  2,968  368 

- Amortization of deferred expenses

  47  47  —    —   

- Interest income

  (807) (1,014) (1,615) (200)

- Interest expense

  2,099  1,679  1,346  167 

- Dividend income

  (48) (84) (51) (6)

- Equity-settled share-based payment expenses

  —    255  1,553  192 

- Unrealized exchange loss, net

  47  24  108  13 
             

Profit from operations before changes in working capital

  96,228  116,816  145,166  17,988 

(Increase)/decrease in inventories

  (464) (106) 134  17 

Decrease in amount due from fellow subsidiaries

  —    896  —    —   

Decrease in amount due from ultimate holding company

  520  662  293  36 

Increase in accounts receivable

  (1,968) (2,082) (3,037) (376)

(Increase)/decrease in other receivables

  (259) 377  134  17 

Increase in prepayments and other current assets

  (69) (555) (609) (75)

Decrease in amount due to fellow subsidiaries

  —    (4,661) —    —   

Increase/(decrease) in amount due to ultimate holding company

  135  (1,257) (190) (24)

Decrease in amount due to immediate holding company

  (355) —    —    —   

Increase in accounts payable

  940  2,707  2,303  285 

Increase in bills payable

  —    —    11  1 

Increase in accrued expenses and other payables

  6,246  6,365  7,670  950 

Increase in deferred revenue

  2,535  2,724  4,419  548 
             

Cash generated from operations

  103,489  121,886  156,294  19,367 

Tax paid

     

- PRC income tax paid

  (17,955) (18,107) (24,585) (3,046)
             

Net cash generated from operating activities carried forward

  85,534  103,779  131,709  16,321 
             

See accompanying notes to consolidated financial statements.

Consolidated Statements of Cash Flows (Continued)

(Amounts in millions)

 

     Year ended December 31,

 
     2002

  2003

  2004

  2004

 
   Note RMB  RMB  RMB  US$ 

Net cash from operating activities brought forward

    69,422  85,534  103,779  12,538 
     

 

 

 

Investing activities

               

Payment of amount due to immediate holding company in respect of acquisition of subsidiaries

    —    (5,200) —    —   

Payment for acquisition of subsidiaries (net of cash and cash equivalents acquired)

  (b) (28,733) —    (12,238) (1,478)

Capital expenditure

    (41,000) (43,871) (59,143) (7,146)

Proceeds from sale of fixed assets

    411  233  93  11 

Proceeds from issuance of shares to minority interest by subsidiary, net of expenses

    412  —    —    —   

Decrease/(increase) in deposits with banks

    3,901  (6,158) (3,037) (367)

Interest received

    867  656  939  113 

Dividends received from associate

    25  48  84  10 
     

 

 

 

Net cash used in investing activities

    (64,117) (54,292) (73,302) (8,857)
     

 

 

 

Financing activities

               

Proceeds from issue of shares, net of expenses

    5,970  —    703  85 

Redemption of fixed rate notes

    —    —    (4,978) (601)

Proceeds from bank and other loans

    6,955  760  —    —   

Repayments of bank and other loans

    (12,232) (12,790) (9,783) (1,182)

Repayment of obligations under capital lease

    (1,652) —    —    —   

Proceeds from issue of bonds

    8,000  —    —    —   

Expenses on issue of bonds

    (53) —    —    —   

Capital elements of capital leases rentals paid

    —    —    (10) (1)

Interest paid

    (1,539) (2,640) (2,040) (246)

Dividends paid

    —    (10,018) (8,349) (1,009)
     

 

 

 

Net cash from / (used in) financing activities

    5,449  (24,688) (24,457) (2,954)
     

 

 

 

Net increase in cash and cash equivalents

    10,754  6,554  6,020  727 

Cash and cash equivalents at beginning of year

    21,821  32,575  39,129  4,728 
     

 

 

 

Cash and cash equivalents at end of year

    32,575  39,129  45,149  5,455 
     

 

 

 

Analysis of the balances of cash and cash equivalents

               

Deposits with banks maturing within three months when placed

    5,004  5,696  7,100  858 

Cash and bank balances

    27,571  33,433  38,049  4,597 
     

 

 

 

     32,575  39,129  45,149  5,455 
     

 

 

 

   Year ended December 31, 
   2003
(restated)
  2004
(restated)
  2005  2005 
   RMB  RMB  RMB  US$ 

Net cash generated from operating activities brought forward

  85,534  103,779  131,709  16,321 
             

Investing activities

     

Payment of amount due to immediate holding company in respect of acquisition of subsidiaries

  (5,200) —    —    —   

Payment for acquisition of subsidiaries (net of cash and cash equivalents acquired)

  —    (12,238) —    —   

Capital expenditure

  (43,283) (58,367) (66,027) (8,182)

Land lease prepayments

  (588) (776) (1,079) (134)

Proceeds from disposal of property, plant and equipment

  233  93  132  16 

Increase in deposits with banks

  (6,158) (3,037) (21,661) (2,684)

Interest received

  656  939  1,468  182 

Dividends received

  48  84  51  6 
             

Net cash used in investing activities

  (54,292) (73,302) (87,116) (10,796)
             

Financing activities

     

Proceeds from issue of shares under share option scheme

  —    703  3,422  424 

Redemption of convertible notes

  —    —    (5,611) (695)

Redemption of fixed rate notes

  —    (4,978) —    —   

Proceeds from interest-bearing borrowings

  760  —    —    —   

Repayments of interest-bearing borrowings

  (12,790) (9,783) (2,455) (304)

Capital elements of capital leases rentals paid

  —    (10) —    —   

Interest paid

  (2,640) (2,040) (1,635) (203)

Dividends paid

  (10,018) (8,349) (18,894) (2,341)
             

Net cash used in financing activities

  (24,688) (24,457) (25,173) (3,119)
             

Net increase in cash and cash equivalents

  6,554  6,020  19,420  2,406 

Cash and cash equivalents at beginning of year

  32,575  39,129  45,149  5,595 

Effect of changes in foreign exchange rate

  —    —    (108) (13)
             

Cash and cash equivalents at end of year

  39,129  45,149  64,461  7,988 
             

Analysis of the balances of cash and cash equivalents

     

Deposits with banks maturing within three months when placed

  5,696  7,100  11,069  1,372 

Cash and bank balances

  33,433  38,049  53,392  6,616 
             
  39,129  45,149  64,461  7,988 
             

See accompanying notes to consolidated financial statements.

Consolidated Statements of Cash Flows (Continued)

(Amounts in millions)

 

(a)Acquisition of subsidiariesSignificant non-cash transactions:

   Year ended December 31,

 
   2002

  2003

  2004

 
   RMB  RMB  RMB 

Net assets acquired:

          

Fixed assets

  43,665  —    34,678 

Construction in progress

  7,024  —    3,922 

Deferred tax

  918  —    193 

Inventories

  323  —    343 

Amount due from ultimate holding company

  1,544  —    256 

Amount due from fellow subsidiaries

  —    —    896 

Accounts receivable

  1,206  —    589 

Other receivables

  344  —    417 

Prepayments and other current assets

  579  —    291 

Cash and cash equivalents

  5,339  —    4,315 

Bank loans and other interest-bearing borrowings

  (4,342) —    (3,460)

Bills payable

  (66) —    (31)

Amount due to ultimate holding company

  (526) —    (364)

Amount due to fellow subsidiaries

  —    —    (4,661)

Accounts payable

  (3,849) —    (4,272)

Obligations under capital leases

  —    —    (10)

Accrued expenses and other payables

  (4,657) —    (4,263)

Long-term bank loans and other interest-bearing borrowings

  (11,285) —    —   

Taxes payable

  (1,395) —    (490)

Deferred revenue

  (1,022) —    (992)

Deferred taxation

  —    —    (4)
   

 
  

   33,800  —    27,353 

Goodwill arising on acquisition

  37,159  —    2,857 
   

 
  

   70,959  —    30,210 
   

 
  

Satisfied by: Cash consideration

  49,248  —    30,210 

                       Issue of ordinary shares

  21,711  —    —   
   

 
  

   70,959  —    30,210 
   

 
  

Consolidated StatementsThe Group incurred payables of Cash Flows (Continued)

(AmountsRMB28,176 and RMB1,332 to equipment suppliers and banks respectively for additions of construction in millions)

(b)Analysis of net outflow of cash and cash equivalents in respect of the acquisition of subsidiaries

   Year ended December 31,

 
   2002

  2003

  2004

 
   RMB  RMB  RMB 

Cash consideration

  49,248  —    30,210 

Cash and bank balances acquired

  (5,339) —    (4,315)

Amount due to immediate holding company

  (15,176) —    (13,657)
   

 
  

Net outflow of cash and cash equivalents in respect of acquisition of subsidiaries

  28,733  —    12,238 
   

 
  

(c)Significant non-cash transactions:

progress during the year ended December 31, 2005.

The Group incurred payables of RMB23,584 and RMB1,660 to equipment suppliers and banks respectively for additions of construction in progress during the year ended December 31, 2004.

The Group incurred payables of RMB17,235 and RMB2,059 to equipment suppliers and banks respectively for additions of construction in progress during the year ended December 31, 2003.

The Group incurred payables of RMB10,270 and RMB1,190 to equipment suppliers and banks respectively for additions of construction in progress during the year ended December 31, 2002. On July 1, 2002, the Group issued new shares to China Mobile Hong Kong (BVI) Limited (“CMHK (BVI)”) at HK$20,458 (RMB equivalent 21,711) respectively as part of the consideration for the acquisition of the entire issued share capital of Anhui Mobile (BVI) Limited (“Anhui Mobile BVI”), Jiangxi Mobile (BVI) Limited (“Jiangxi Mobile BVI”), Chongqing Mobile (BVI) Limited (“Chongqing Mobile BVI”), Sichuan Mobile (BVI) Limited (“Sichuan Mobile BVI”), Hubei Mobile (BVI) Limited (“Hubei Mobile BVI”), Hunan Mobile (BVI) Limited (“Hunan Mobile BVI”), Shaanxi Mobile (BVI) Limited (“Shaanxi Mobile BVI”) and Shanxi Mobile Communication (BVI) Limited (“Shanxi Mobile BVI”).

Consolidated Statements of Shareholders’ Equity

(Amounts in millions, except share data)

Statements of shareholders’ equity for the years:

 

   Number of
ordinary shares


  Share
capital


  Share
premium


  Capital
Reserve


  General
reserve


  PRC
statutory
reserves


  Retained
earnings


  Total

 
      RMB  RMB  RMB  RMB  RMB  RMB  RMB 

Shareholders’ equity at January 1, 2002

  18,605,405,241  1,986  347,011  (295,665) 72  17,676  41,903  112,983 

Transfer from statements of income

  —    —    —    —    —    —    32,601  32,601 

Shares issued under share option scheme

  2,100,000  —    24  —    —    —    —    24 

Issue of new shares

  236,634,212  25  6,180  —    —    —    —    6,205 

Issue of consideration shares for acquisition of subsidiaries

  827,514,446  88  21,623  —    —    —    —    21,711 

Expenses incurred in connection with the issue of consideration shares

  —    —    (259) —    —    —    —    (259)

Appropriation

  —    —    —    —    —    7,038  (7,038) —   
   
  
  

 

 
  
  

 

Shareholders’ equity at December 31, 2002

  19,671,653,899  2,099  374,579  (295,665) 72  24,714  67,466  173,265 
   
  
  

 

 
  
  

 

Shareholders’ equity at January 1, 2003

  19,671,653,899  2,099  374,579  (295,665) 72  24,714  67,466  173,265 

Transfer from statements of income

  —    —    —    —    —    —    35,556  35,556 

Dividends approved in respect of previous year

  —    —    —    —    —    —    (6,679) (6,679)

Dividends declared in respect of current year

  —    —    —    —    —    —    (3,339) (3,339)

Appropriation

  —    —    —    —    —    7,972  (7,972) —   
   
  
  

 

 
  
  

 

Shareholders’ equity at December 31, 2003

  19,671,653,899  2,099  374,579  (295,665) 72  32,686  85,032  198,803 
   
  
  

 

 
  
  

 

Shareholders’ equity at January 1, 2004

  19,671,653,899  2,099  374,579  (295,665) 72  32,686  85,032  198,803 

Transfer from statements of income

  —    —    —    —    —    —    42,004  42,004 

Dividend approved in respect of previous year

  —    —    —    —    —    —    (4,174) (4,174)

Dividend approved in respect of current year

  —    —    —    —    —    —    (4,175) (4,175)

Shares issued under share option scheme

  28,985,500  3  700  —    —    —    —    703 

Appropriation

  —    —    —    —    —    9,591  (9,591) —   
   
  
  

 

 
  
  

 

Shareholders’ equity at December 31, 2004

  19,700,639,399  2,102  375,279  (295,665) 72  42,277  109,096  233,161 
   
  
  

 

 
  
  

 

      Attributable to equity shareholders of the Company  Minority
interest
  

Total

equity

 
   

Number of
ordinary

shares

  Share
capital
  Share
premium
  Capital
Reserve
  General
reserve
  PRC
statutory
reserves
  Retained
earnings
  Total       
      RMB  RMB  RMB  RMB  RMB  RMB  RMB  RMB  RMB 

Equity at January 1, 2003

  19,671,653,899  2,099  374,579  (295,665) 72  24,714  67,466  173,265  191  173,456 

Transfer from statements of income

  —    —    —    —    —    —    35,556  35,556  (9) 35,547 

Dividends approved in respect of previous year

  —    —    —    —    —    —    (6,679) (6,679) —    (6,679)

Dividends declared in respect of current year

  —    —    —    —    —    —    (3,339) (3,339) —    (3,339)

Appropriation

  —    —    —    —    —    7,972  (7,972) —    —    —   
                               

Equity at December 31, 2003

  19,671,653,899  2,099  374,579  (295,665) 72  32,686  85,032  198,803  182  198,985 
                               

Equity at January 1, 2004

  19,671,653,899  2,099  374,579  (295,665) 72  32,686  85,032  198,803  182  198,985 

Transfer from statements of income (restated)

  —    —    —    —    —    —    41,749  41,749  22  41,771 

Dividends approved in respect of previous year

  —    —    —    —    —    —    (4,174) (4,174) —    (4,174)

Dividends declared in respect of current year

  —    —    —    —    —    —    (4,175) (4,175) —    (4,175)

Shares issued under share option scheme

  28,985,500  3  700  —    —    —    —    703  —    703 

Equity settled share-based transactions (restated)

  —    —    —    255  —    —    —    255  —    255 

Appropriation

  —    —    —    —    —    9,591  (9,591) —    —    —   

Minority interests arising from acquisition of a subsidiary

  —    —    —    —    —    —    —    —    39  39 
                               

Equity at December 31, 2004 (restated)

  19,700,639,399  2,102  375,279  (295,410) 72  42,277  108,841  233,161  243  233,404 
                               

Equity at January 1, 2005

                

- As previously reported

  19,700,639,399  2,102  375,279  (295,665) 72  42,277  109,096  233,161  243  233,404 

- Prior period adjustment in respect of Hong Kong Financial Reporting Standard 2

    —    —    255  —    —    (255) —    —    —   
                              

As restated, before opening balance adjustment

    2,102  375,279  (295,410) 72  42,277  108,841  233,161  243  233,404 

Opening balance adjustment in respect of Hong Kong Accounting Standard 39

    —    —    —    —    —    33  33  —    33 
                              

As restated, after opening balance adjustment

    2,102  375,279  (295,410) 72  42,277  108,874  233,194  243  233,437 

Transfer from statements of income

  —    —    —    —    —    —    53,549  53,549  40  53,589 

Dividends approved in respect of previous year

  —    —    —    —    —    —    (9,635) (9,635) —    (9,635)

Dividends declared in respect of current year

  —    —    —    —    —    —    (9,259) (9,259) —    (9,259)

Shares issued under share option scheme

  134,521,000  14  3,961  (553) —    —    —    3,422  —    3,422 

Equity settled share-based transactions

  —    —    —    1,553  —    —    —    1,553  —    1,553 

Appropriation

  —    —    —    —    —    11,118  (11,118) —    —    —   
                               

Equity at December 31, 2005

  19,835,160,399  2,116  379,240  (294,410) 72  53,395  132,411  272,824  283  273,107 
                               

See accompanying notes to consolidated financial statements.

Notes to Consolidated Financial Statements

(Amounts in millions, except share data)

 

1Organization, principal activities and basis of presentation

China Mobile (Hong Kong) Limited (“the Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) are principally engaged in the provision of mobile telecommunications and related services in thirty-one provinces, autonomous regions and municipalities in the People’s Republic of China (“PRC”) and market their services under the “China Mobile” logo, which is a registered trademark owned by China Mobile Communications Corporation (“China Mobile”CMCC”), a company incorporated in the PRC in July 1999 to hold and operate the mobile telecommunications networks nationwide as a result of restructuring of the telecommunications industry in the PRC. The telecommunications operations in the PRC previously controlled by the Ministry of Information Industry (“MII”) have been separated into four business lines: fixed line communications, mobile communications, paging services and satellite communications. Since then, the MII act exclusively as the industry regulator and are not involved in managing the day-to-day operations of telecommunications service providers in the PRC.

Prior to the restructuring (as described below, the “Restructuring”), the Group’s Total Access Communications Systems (“TACS”) and Global System for Mobile Communications (“GSM”) networks in Guangdong were owned by Guangdong Mobile Communication Corporation (together with the successor wholly-owned foreign enterprise formed in connection with the Restructuring, “Guangdong Mobile”), an enterprise formed in September 1988 and wholly owned by the MII on behalf of the State. Prior to the Restructuring, the Group’s GSM network in Zhejiang was owned by Zhejiang GSM Mobile Communication Company Limited (together with the successor sino-foreign joint venture company formed in connection with the Restructuring, “Zhejiang Mobile”), a company formed in February 1996 and 98.55% owned by the Zhejiang Provincial Posts and Telecommunications Administrations (“PTA”) (“Zhejiang PTA”), while the Group’s TACS networks in Zhejiang were owned and operated directly by the Zhejiang PTA.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

1Organization, principal activities and basis of presentation (Continued)

Restructuring

Pursuant to the Restructuring, the Company was established as a wholly-owned subsidiary of China Mobile Hong Kong (BVI) Limited (“CMHK (BVI)”), a company incorporated with limited liability in the British Virgin Islands. CMHK (BVI) is controlled by China Mobile (Hong Kong) Group Limited (“CMHKG”), which in turn is 51% owned by Telpo Communications (Group) Limited (“Telpo”), a Hong Kong company wholly owned by the MII, and as to 49% by the China Telecommunications Corporation (previously known as the Directorate General of Telecommunications, or the DGT). At December 31, 1999, the percentages of equity interests of CMHK (BVI), which in turn were owned by Telpo and DGT were changed to 57% and 43%, respectively. On May 12, 2000, China MobileCMCC acquired a 100% controlling interest in CMHKG. As a result of this, China MobileCMCC indirectly holds approximately 75% equity interest in the Company. Guangdong Mobile was formed as a wholly foreign-owned enterprise whereas Zhejiang Mobile was formed as a sino-foreign joint venture company. The Company is the sole equity owner in Guangdong Mobile and was initially the 99.63% joint venture partner in Zhejiang Mobile, with the remaining interests held by various local investors. The Company acquired the remaining 0.37% interest in Zhejiang Mobile in April 1999. Subsequent to the acquisition, Zhejiang Mobile became a wholly foreign-owned enterprise.

In connection with the Restructuring and in anticipation of the initial offering of the Company’s ordinary shares, the fixed assetsproperty, plant and equipment of Guangdong Mobile and Zhejiang Mobile were revalued as of May 31, 1997, by a firm of independent valuers and approved by the China State-owned Assets Administration Bureau. The value of fixed assetsproperty, plant and equipment and land lease prepayments of Guangdong Mobile and Zhejiang Mobile pursuant to the valuation, based on a depreciated replacement cost basis, was determined at RMB15,630. Upon the transfer of interests in Guangdong Mobile and Zhejiang Mobile by the MII and the DGT to the Company, 9,010,000,000 ordinary shares of HK$0.10 each were issued by the Company to CMHK (BVI) for consideration valued at RMB19,466. Such amount was based on the net asset value of Guangdong Mobile and Zhejiang Mobile at May 31, 1997, the effective date of the Restructuring, adjusted for additional earnings to September 26, 1997, the completion date of the Restructuring, of RMB1,132,RMB1,135, which is reflected as capital reserve.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

1Organization, principal activities and basis of presentation (Continued)

Equity offering

Subsequent to the Restructuring, in October 1997, the Company completed an initial public offering (the “Offering”) of an aggregate of 2,770,788,000 ordinary shares. Net proceeds to the Company for the Offering, after deduction of offering expenses, were approximately RMB33,570.

Acquisition of Jiangsu Mobile Communication Company Limited (“Jiangsu Mobile”)

Pursuant to the ordinary resolution passed by the Company’s shareholders on June 3, 1998, the Company acquired the entire issued share capital of China Telecom Jiangsu Mobile (BVI) Limited (“Jiangsu Mobile BVI”) from CMHK (BVI) by a total cash consideration of HK$22,475 (RMB equivalent 24,120) (hereinafter referred to as the “First Acquisition”).

The only asset of Jiangsu Mobile BVI is its interest in the entire equity of Jiangsu Mobile. Subsequent to the First Acquisition, Jiangsu Mobile became a wholly foreign-owned enterprise.

In connection with the First Acquisition, the fixed assetsproperty, plant and equipment and land lease prepayments of Jiangsu Mobile were revalued as of December 31, 1997, by a firm of independent valuers and approved by the China State-owned Assets Administration Bureau. The value of fixed assetsproperty, plant and equipment of Jiangsu Mobile pursuant to the valuation, based on a depreciated replacement cost basis, was determined at RMB7,879.

GoodwillIn prior years, goodwill arising onfrom the acquisition of Jiangsu Mobile BVI and Jiangsu MobileFirst Acquisition (RMB15,569), being the excess of the cost of investments (RMB24,120) over the fair value of the Group’s share of the separable net assets acquired (RMB8,551), was eliminated against reserves immediately on acquisition. The fair value of the Group’s share of the separable net assets acquired was based on the net asset value of Jiangsu Mobile at December 31, 1997 (RMB8,065), adjusted for additional earnings to June 3, 1998, the completion date of the First Acquisition, of RMB489. With effect from January 1, 2005, in order to comply with Hong Kong Financial Reporting Standard (“HKFRS”) 3 “Business combinations” and Hong Kong Accounting Standard (“HKAS”) 36 “Impairment of assets”, the Group has changed its accounting policies relating to goodwill. In accordance with the transitional arrangements under HKFRS 3, goodwill which had previously been taken into reserve will not be recognized in the consolidated statements of income on disposal or impairment of the acquired business, or under any other circumstances.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

1Organization, principal activities and basis of presentation (Continued)

Acquisition of Fujian Mobile Communication Company Limited (“Fujian Mobile”), Henan Mobile Communication Company Limited (“Henan Mobile”) and Hainan Mobile Communication Company Limited (“Hainan Mobile”)

Pursuant to an ordinary resolution passed by the Company’s shareholders on November 11, 1999, the Company acquired the entire issued share capital of Fujian Mobile (BVI) Limited (“Fujian Mobile BVI”), Henan Mobile (BVI) Limited (“Henan Mobile BVI”) and Hainan Mobile (BVI) Limited (“Hainan Mobile BVI”) from CMHK (BVI) for a total consideration of HK$49,715 (RMB equivalent 52,953) (hereinafter referred to as the “Second Acquisition”). The consideration was satisfied by cash of HK$19,031 (RMB equivalent 20,268) and an allotment of 1,273,195,021 ordinary shares of HK$0.10 each to CMHK (BVI) amounting to HK$30,684 (RMB equivalent 32,685). The only assets of each of Fujian Mobile BVI, Henan Mobile BVI and Hainan Mobile BVI are their interests in the entire equity of Fujian Mobile, Henan Mobile and Hainan Mobile, respectively.

In connection with the Second Acquisition, the fixed assetsproperty, plant and equipment and land lease prepayments of Fujian Mobile, Henan Mobile and Hainan Mobile were revalued as of June 30, 1999, by a firm of independent valuers and approved by the Ministry of Finance. The value of fixed assetsproperty, plant and equipment and land lease prepayments of Fujian Mobile, Henan Mobile and Hainan Mobile pursuant to the valuation, based on a depreciated replacement cost basis, was determined at RMB10,684.

GoodwillIn prior years, goodwill arising onfrom the acquisition of Fujian Mobile, Henan Mobile and Hainan MobileSecond Acquisition (RMB42,340), being the excess of the cost of investments (RMB52,953) over the fair value of the Group’s share of the separable net assets acquired (RMB10,613), was eliminated against reserves immediately on acquisition. The fair value of the Group’s share of the separable net assets acquired was based on the net assets of Fujian Mobile, Henan Mobile and Hainan Mobile at June 30, 1999 (RMB9,624), adjusted for additional earnings to November 11, 1999, the completion date of the Second Acquisition, of RMB989. With effect from January 1, 2005, in order to comply with HKFRS 3 and HKAS 36, the Group has changed its accounting policies relating to goodwill. In accordance with the transitional arrangements under HKFRS 3, goodwill which had previously been taken into reserve will not be recognized in the consolidated statements of income on disposal or impairment of the acquired business, or under any other circumstances.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

1Organization, principal activities and basis of presentation (Continued)

Equity offering and debt offering

In order to finance the acquisition consideration, the Company completed an international offering of an aggregate of 644,804,000 ordinary shares and debt offering with a principal amount of US$600 with maturity due on November 2, 2004. Further, the Company issued 1,273,195,021 consideration shares to CMHK (BVI), credited as fully paid as part of the acquisition consideration. Net proceeds to the Company for such equity offering and debt offering, after deduction of offering expenses and discount, were approximately RMB16,134 and RMB4,899, respectively.

Acquisition of Beijing Mobile Communication Company Limited (“Beijing Mobile”), Shanghai Mobile Communication Company Limited (“Shanghai Mobile”), Tianjin Mobile Communication Company Limited (“Tianjin Mobile”), Hebei Mobile Communication Company Limited (“Hebei Mobile”), Liaoning Mobile Communication Company Limited (“Liaoning Mobile”), Shandong Mobile Communication Company Limited (“Shandong Mobile”) and Guangxi Mobile Communication Company Limited (“Guangxi Mobile”)

Pursuant to an ordinary resolution passed by the Company’s shareholders on November 10, 2000, the Company acquired the entire issued share capital of Beijing Mobile (BVI) Limited (“Beijing Mobile BVI”), Shanghai Mobile (BVI) Limited (“Shanghai Mobile BVI”), Tianjin Mobile (BVI) Limited (“Tianjin Mobile BVI”), Hebei Mobile (BVI) Limited (“Hebei Mobile BVI”), Liaoning Mobile (BVI) Limited (“Liaoning Mobile BVI”), Shandong Mobile (BVI) Limited (“Shandong Mobile BVI”) and Guangxi Mobile (BVI) Limited (“Guangxi Mobile BVI”) from CMHK (BVI) for a total consideration of HK$256,021 (RMB equivalent 271,485) (hereinafter referred to as the “Third Acquisition”). The consideration was satisfied by cash of HK$74,609 (RMB equivalent 79,116) and an allotment of 3,779,407,375 ordinary shares of HK$0.10 each to CMHK (BVI) amounting to HK$181,412 (RMB equivalent 192,369). The only assets of each of Beijing Mobile BVI, Shanghai Mobile BVI, Tianjin Mobile BVI, Hebei Mobile BVI, Liaoning Mobile BVI, Shandong Mobile BVI and Guangxi Mobile BVI are their interests in the entire equity of Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi Mobile, respectively.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

1Organization, principal activities and basis of presentation (Continued)

In connection with the Third Acquisition, the fixed assetsproperty, plant and equipment and land lease prepayments of Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi Mobile were revalued as of June 30, 2000, by a firm of independent valuers and approved by the Ministry of Finance. The value of fixed assetsproperty, plant and equipment and land lease prepayments of Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi Mobile pursuant to the valuation, based on a depreciated replacement cost basis, was determined at RMB37,252.

GoodwillIn prior years, goodwill arising onfrom the acquisition of Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi MobileThird Acquisition (RMB238,891), being the excess of the cost of investments (RMB271,485) over the fair value of the Group’s share of the separable net assets acquired (RMB32,594), was eliminated against reserves immediately on acquisition. The fair value of the Group’s share of the separable net assets acquired was based on the net assets of Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi Mobile at June 30, 2000 (RMB29,966), adjusted for additional earnings to November 12, 2000, the completion date of the Third Acquisition, of RMB2,628.

With effect from January 1, 2005, in order to comply with HKFRS 3 and HKAS 36, the Group has changed its accounting policies relating to goodwill. In accordance with the transitional arrangements under HKFRS 3, goodwill which had previously been taken into reserve will not be recognized in the consolidated statements of income on disposal or impairment of the acquired business, or under any other circumstances.

Equity offering and debt offering

In order to finance the acquisition consideration, the Company completed an international offering of an aggregate of 1,115,643,845 ordinary shares and debt offering with a principal amount of US$690 with maturity due on November 3, 2005. Further the Company issued 3,779,407,375 consideration shares to CMHK (BVI), credited as fully paid as part of the acquisition consideration. Net proceeds to the Company for such equity offering and debt offering, after deduction of offering expenses and discount, were approximately RMB55,723 and RMB5,580, respectively.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

1Organization, principal activities and basis of presentation (Continued)

Acquisition of Anhui Mobile Communication Company Limited (“Anhui Mobile”), Jiangxi Mobile Communication Company Limited (“Jiangxi Mobile”), Chongqing Mobile Communication Company Limited (“Chongqing Mobile”), Sichuan Mobile Communication Company Limited (“Sichuan Mobile”), Hubei Mobile Communication Company Limited (“Hubei Mobile”), Hunan Mobile Communication Company Limited (“Hunan Mobile”), Shaanxi Mobile Communication Company Limited (“Shaanxi Mobile”) and Shanxi Mobile Communication Company Limited (“Shanxi Mobile”)

Pursuant to a resolution passed at the extraordinary general meeting held on June 24, 2002, the Company acquired the entire issued share capital of Anhui Mobile BVI Limited (“Anhui Mobile BVI”), Jiangxi Mobile BVI Limited (“Jiangxi Mobile BVI”), Chongqing Mobile BVI Limited (“Chongqing Mobile BVI”), Sichuan Mobile BVI Limited (“Sichuan Mobile BVI”), Hubei Mobile BVI Limited (“Hubei Mobile BVI”), Hunan Mobile BVI Limited (“Hunan Mobile BVI”), Shaanxi Mobile BVI Limited (“Shaanxi Mobile BVI”) and Shanxi Mobile BVI Limited (“Shanxi Mobile BVI”) from CMHK(BVI)CMHK (BVI). The acquisition was completed on July 1, 2002 for a total consideration of US$8,573 (RMB equivalent 70,959) (hereinafter referred to as the “Fourth Acquisition”). The consideration was satisfied by cash of RMB49,248 and an allotment of 827,514,446 ordinary shares of HK$0.10 each to CMHK (BVI) amounting to HK$20,458 (RMB equivalent 21,711). The only assets of each of Anhui Mobile BVI, Jiangxi Mobile BVI, Chongqing Mobile BVI, Sichuan Mobile BVI, Hubei Mobile BVI, Hunan Mobile BVI, Shaanxi Mobile BVI and Shanxi Mobile BVI are their interests in the entire equity of Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi Mobile, respectively.

In connection with the Fourth Acquisition, the fixed assetsproperty, plant and equipment and land lease prepayments of Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi Mobile were revalued as of December 31, 2001, by a firm of independent valuers and approved by the Ministry of Finance. The value of fixed assetsproperty, plant and equipment and land lease prepayments of Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi Mobile pursuant to the valuation, based on a depreciated replacement cost basis, was determined at RMB39,499.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

1Organization, principal activities and basis of presentation (Continued)

PositiveIn prior years, positive goodwill arising onfrom the acquisition of Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi MobileFourth Acquisition (RMB37,159), being the excess of the cost of investments (RMB70,959) over the fair value of the Group’s share of the separable net assets acquired (RMB33,800), is amortized to the consolidated statements of income on a straight-line basis over 20 years. Positive goodwill is stated in the consolidated balance sheet at cost less accumulated amortization and any impairment losses. The fair value of the Group’s share of the separable net assets acquired was based on the net assets of Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi Mobile at December 31, 2001 (RMB30,982), adjusted for additional earnings to June 30, 2002, the completion date of the Fourth Acquisition, of RMB2,818.

With effect from January 1, 2005, in order to comply with HKFRS 3 and HKAS 36, the Group has changed its accounting policies relating to goodwill. Under the new policy, the Group no longer amortizes positive goodwill but tests it at least annually for impairment.

Equity offering and debt offering

In order to finance the acquisition consideration, the Company issued 236,634,212 new shares to Vodafone Holdings (Jersey) Limited at HK$5,850 (RMB equivalent 6,205). Further, the Company issued 827,514,446 consideration shares to CMHK (BVI), credited as fully paid as part of the acquisition consideration. Net proceeds to the Company for the equity offering, after deduction of offering expenses, was approximately RMB5,946. In addition, Guangdong Mobile issued five-year guaranteed bonds and fifteen-year guaranteed bonds, with a principal amount of RMB3,000 and RMB5,000 respectively, at an issue price equal to the face value of the bonds. Net proceeds to the Group for the debt offering, after deduction of offering expenses, was approximately RMB7,947.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

1Organization, principal activities and basis of presentation (Continued)

Acquisition of Neimenggu Mobile Communication Company Limited (“Neimenggu Mobile”), Jilin Mobile Communication Company Limited (“Jilin Mobile”), Heilongjiang Mobile Communication Company Limited (“Heilongjiang Mobile”), Guizhou Mobile Communication Company Limited (“Guizhou Mobile”), Yunnan Mobile Communication Company Limited (“Yunnan Mobile”), Xizang Mobile Communication Company Limited (“Xizang Mobile”), Gansu Mobile Communication Company Limited (“Gansu Mobile”), Qinghai Mobile Communication Company Limited (“Qinghai Mobile”), Ningxia Mobile Communication Company Limited (“Ningxia Mobile”), Xinjiang Mobile Communication Company Limited (“Xinjiang Mobile”), Beijing P&T Consulting & Design Institute Company Limited (“Jingyi Design Institute”) and China Mobile Communication Company Limited (“CMC”).

Pursuant to a resolution passed at the extraordinary general meeting held on June 16, 2004, the Company acquired the entire issued share capital of Neimenggu Mobile (BVI) Limited (“Neimenggu Mobile BVI”), Jilin Mobile (BVI) Limited (“Jilin Mobile BVI”), Heilongjiang Mobile (BVI) Limited (“Heilongjiang Mobile BVI”), Guizhou Mobile (BVI) Limited (“Guizhou Mobile BVI”), Yunnan Mobile (BVI) Limited (“Yunnan Mobile BVI”), Xizang Mobile (BVI) Limited (“Xizang Mobile BVI”), Gansu Mobile (BVI) Limited (“Gansu Mobile BVI”), Qinghai Mobile BVI Limited (“Qinghai Mobile BVI”), Ningxia Mobile (BVI) Limited (“Ningxia Mobile BVI”), Xinjiang Mobile (BVI) Limited (“Xinjiang Mobile BVI”), Beijing P&T Consulting & Design Institute (BVI) Limited (“Zhongjing Design Institute BVI”) and China Mobile Communication (BVI) Limited (“CMC BVI”) from CMHK(BVI)CMHK (BVI). The acquisition was completed on July 1, 2004 for a total consideration of US$3,650 (RMB equivalent 30,210) (hereinafter referred to as the “Fifth Acquisition”). The consideration was satisfied by cash. The only assets of each of Neimenggu Mobile BVI, Jilin Mobile BVI, Heilongjiang Mobile BVI, Guizhou Mobile BVI, Yunnan Mobile BVI, Xizang Mobile BVI, Gansu Mobile BVI, Qinghai Mobile BVI, Ningxia Mobile BVI, Xinjiang Mobile BVI, Zhongjing Design Institute BVI and CMC BVI are their interests in the entire equity of Neimenggu Mobile, Jilin Mobile, Heilongjiang Mobile, Guizhou Mobile, Yunnan Mobile, Xizang Mobile, Gansu Mobile, Qinghai Mobile, Ningxia Mobile, Xinjiang Mobile, Jingyi Design Institute and CMC, respectively.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

1Organization, principal activities and basis of presentation (Continued)

In connection with the Fifth Acquisition, the fixed assetsproperty, plant and equipment and land lease prepayments of Neimenggu Mobile, Jilin Mobile, Heilongjiang Mobile, Guizhou Mobile, Yunnan Mobile, Xizang Mobile, Gansu Mobile, Qinghai Mobile, Ningxia Mobile, Xinjiang Mobile, Jingyi Design Institute and CMC were revalued as of December 31, 2003, by a firm of independent valuers and approved by the State-owned Assets Supervision and Administration Commission of the State Council (“SASACSC”). The value of fixed assetsproperty, plant and equipment and land lease prepayments of Neimenggu Mobile, Jilin Mobile, Heilongjiang Mobile, Guizhou Mobile, Yunnan Mobile, Xizang Mobile, Gansu Mobile, Qinghai Mobile, Ningxia Mobile, Xinjiang Mobile, Jingyi Design Institute and CMC pursuant to the valuation, based on a depreciated replacement cost basis, was determined at RMB33,996.

PositiveIn prior years, positive goodwill arising onfrom the acquisition of Neimenggu Mobile, Jilin Mobile, Heilongjiang Mobile, Guizhou Mobile, Yunnan Mobile, Xizang Mobile, Gansu Mobile, Qinghai Mobile, Ningxia Mobile, Xinjiang Mobile, Jingyi Design Institute and CMCFifth Acquisition (RMB2,857), being the excess of the cost of investments (RMB30,210) over the fair value of the Group’s share of the separable net assets acquired (RMB27,353), iswas amortized to the consolidated statements of income on a straight-line basis over 20 years. Positive goodwill iswas stated in the consolidated balance sheet at cost less accumulated amortization and any impairment losses. The fair value of the Group’s share of the separable net assets acquired was based on the net assets of Neimenggu Mobile, Jilin Mobile, Heilongjiang Mobile, Guizhou Mobile, Yunnan Mobile, Xizang Mobile, Gansu Mobile, Qinghai Mobile, Ningxia Mobile, Xinjiang Mobile, Jingyi Design Institute and CMC at December 31, 2003 (RMB25,766), adjusted for additional earnings to June 30, 2004, the completion date of the Fifth Acquisition, of RMB1,587. With effect from January 1, 2005, in order to comply with HKFRS 3 and HKAS 36, the Group has changed its accounting policies relating to goodwill. Under the new policy, the Group no longer amortizes positive goodwill but tests it at least annually for impairment.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

1Organization, principal activities and basis of presentation (Continued)

Basis of preparation

The consolidated financial statements have been prepared on a consolidated basis to reflect the financial position and results of operations of the Company, Guangdong Mobile and Zhejiang Mobile from the date of the Restructuring and of Jiangsu Mobile, Fujian Mobile, Henan Mobile, Hainan Mobile, Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile, Guangxi Mobile, Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile, Shanxi Mobile, Neimenggu Mobile, Jilin Mobile, Heilongjiang Mobile, Guizhou Mobile, Yunnan Mobile, Xizang Mobile, Gansu Mobile, Qinghai Mobile, Ningxia Mobile, Xinjiang Mobile, Jingyi Design Institute and CMC from their respective dates of acquisition.

The consolidated statementsstatement of income for the year ended December 31, 2005 includes the results of the Company, the mobile telecommunications subsidiary in each of the thirty-one provinces, autonomous regions and municipalities in the PRC, Jingyi Design Institute and CMC for the year ended December 31, 2005.

The consolidated statement of income for the year ended December 31, 2004 includes the results of the Company, Guangdong Mobile, Zhejiang Mobile, Jiangsu Mobile, Fujian Mobile, Henan Mobile, Hainan Mobile, Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile, Guangxi Mobile, Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile, and Shanxi Mobile for the year ended December 31, 2004 and the post-acquisition results of Neimenggu Mobile, Jilin Mobile, Heilongjiang Mobile, Guizhou Mobile, Yunnan Mobile, Xizang Mobile, Gansu Mobile, Qinghai Mobile, Ningxia Mobile, Xinjiang Mobile, Jingyi Design Institute and CMC for the period from July 1, 2004 to December 31, 2004.

The consolidated statementsstatement of income for the year ended December 31, 2003 includes the results of the Company, Guangdong Mobile, Zhejiang Mobile, Jiangsu Mobile, Fujian Mobile, Henan Mobile, Hainan Mobile, Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile, Guangxi Mobile, Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile, and Shanxi Mobile for the year ended December 31, 2003. The consolidated statements of income for the year ended December 31, 2002 includes the results of the Company, Guangdong Mobile, Zhejiang Mobile, Jiangsu Mobile, Fujian Mobile, Henan Mobile, Hainan Mobile, Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile, Guangxi Mobile for the year ended December 31, 2002 and the post-acquisition results of Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi Mobile for the period from July 1, 2002 to December 31, 2002.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

1Organization, principal activities and basis of presentation (Continued)

The financial statements have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRSs”), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted in Hong Kong (“HK GAAP”). Significant differences between HK GAAP and accounting principles generally accepted in the United States (“US GAAP”) are set forth in Note 32.note 38.

The HKICPA has issued a number of new and revised HKFRSs that are effective or available for early adoption for accounting periods beginning on or after January 1, 2005. Information on the changes in accounting policies resulting from initial application of these new and revised HKFRSs for the current and prior accounting periods reflected in these financial statements is provided in note 3.

The consolidated financial statements are expressed in Renminbi. Solely for the convenience of the reader, for the December 31, 20042005 financial statements have been translated into United States dollars at the rate of US$1.00 = RMB8.2765RMB8.0702 quoted by the Federal Reserve Bank of New York on December 31, 2004.2005. No representation is made that the Renminbi amounts could have been, or could be, converted into United States dollars at that rate or at any other certain rate on December 31, 2004,2005, or any other certain date.

 

2Recently issued accounting standards

Hong Kong Institute of Certified Public Accountants (formerly named Hong Kong Society of Accountants) (“HKICPA”) has issued a number of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards (“new HKFRSs”) which are effective for accounting periods beginning on or after 1 January 2005.

The Group has not early adopted these new HKFRSs in the financial statements for the year ended 31 December 2004. The Group has commenced an assessment of the impact of these new HKFRSs but is not yet in a position to state whether these new HKFRSs would have a significant impact on its results of operations and financial position.

3Principal accounting policies

 

(a)Basis of consolidation

The consolidated financial statements include the accountsfinancial statements of the Company and all of its subsidiaries (see Note 30note 33 for details of the Company’s principal subsidiaries). The results of subsidiary companies are included in the consolidated statements of income, and the share attributable to minority interest is deducted from or added tointerests in the results of the Group are presented on the face of the consolidated statements of income after taxation.as an allocation of the total profit or loss for the year between minority interests and the equity shareholders of the Company. All significant inter-company balances and transactions have been eliminated.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

32Principal accounting policies (Continued)

 

(b)Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition. None of the Group’s cash and cash equivalents is restricted as to withdrawal.

 

(c)Associates

An associate is a companyan entity in which the Group has significant influence, but not control or joint control, over its management, including participation in the financial and operating policy decisions.

TheAn investment in an associate is accounted for in the consolidated financial statements under the equity method and is initially recorded at cost and adjusted thereafter for the post acquisition change in the Group’s share of the associate’s net assets. The consolidated statements of income include the Group’s share of the post-acquisition, post-tax results of the associates for the year, including any impairment loss on goodwill relating to the investment in associates recognized for the year (see notes 2(d) and 2(h)).

When the Group’s share of losses exceeds its interest in the associates, the Group’s interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associates.

Unrealized profits and losses resulting from transactions between the Group and its associates is includedare eliminated to the extent of the Group’s interest in the associates, except where unrealized losses provide evidence of an impairment of the asset transferred, in which case they are recognized immediately in the consolidated statements of income. Such amounts were immaterial for the years presented. In the consolidated balance sheets, interest in associates is stated at cost adjusted for post-acquisition retained result of operations, less impairment losses (see note 3(h)), unless it is acquired and held exclusively with a view to subsequent disposal in the near future or operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investor, in which case, it is stated at fair value with changes in fair value recognized in the consolidated statements of income as they arise.

 

(d)Goodwill

Positive goodwill arising on consolidationGoodwill represents the excess of the cost of the acquisitiona business combination over the Group’s share ofinterest in the net fair value of the acquiree’s identifiable assets, liabilities and liabilities acquired. In respect of controlled subsidiaries:contingent liabilities.

for acquisitions before January 1, 2001, positive goodwill is eliminated against reserves and is reduced by impairment losses recognized in the consolidated statements of income (see note 3(h)); and

for acquisitions on or after January 1, 2001, positive goodwill is amortized to the consolidated statements of income on a straight-line basis over 20 years. Positive goodwillGoodwill is stated in the consolidated balance sheets at cost less accumulated amortizationimpairment losses. Goodwill is allocated to cash-generating units and anyis tested annually for impairment losses recognized in the consolidated statements of income (see note 3(h)2(h)).

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

32Principal accounting policies (Continued)

 

(d)Goodwill (Continued)

Negative goodwill arising on acquisitions of controlled subsidiaries represents theAny excess of the Group’s share ofinterest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities acquired over the cost of the acquisition. Negative goodwill is accounted for as follows:

for acquisitions before January 1, 2001, negative goodwill is credited to a capital reserve; and

for acquisitions on or after January 1, 2001, to the extent that negative goodwill relates to an expectation of future losses and expenses that are identified in the plan of acquisition and can be measured reliably, but which have not yet been recognized, it is recognized in the consolidated statements of income when the future losses and expenses are recognized. Any remaining negative goodwill, but not exceeding the fair values of the non-monetary assets acquired, is recognized in the consolidated statements of income over the weighted average useful life of those non-monetary assets that are depreciable/amortizable. Negative goodwill in excess of the fair values of the non-monetary assets acquiredbusiness combination is recognized immediately in the consolidated statements of income.

On disposal of a cash generating unit, any attributable amount of purchased goodwill is included in the calculation of the gain or loss on disposal.

 

(e)Other investments in equity securities

In respectThe Group’s policies for investments in equity securities, other than investments in associates, are as follows:

Investments in equity securities that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are recognized in the consolidated balance sheet at cost less impairment losses (see note 2(h)).

Investments are recognized/derecognized on the date the Group commits to purchase/sell the investments or they expire.

(f)Property, plant and equipment

Property, plant and equipment are stated in the consolidated balance sheet at cost less accumulated depreciation and impairment losses (see note 2(h)). The circumstances and basis under which the revalued amount (including the revalued amount of land lease prepayments) is arrived at are set out in details in note 14.

The cost of property, plant and equipment comprises the purchase price and any negative goodwill not yetdirectly attributable costs of bringing the asset to its working condition and location for its intended use. Subsequent expenditure relating to an item of property, plant and equipment that has already been recognized is added to the carrying amount of the asset when it is probable that future economic benefits, in excess of the originally assessed standard of performance of the existing asset, will flow to the enterprise. All other subsequent expenditure is recognized as an expense in the period in which it is incurred.

Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognized in the consolidated statements of income it is shown inon the consolidated balance sheets as a deduction from assets in the same balance sheet classification as positive goodwill.date of retirement or disposal.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

32Principal accounting policies (Continued)

 

(e)(f)Other investments in securitiesProperty, plant and equipment (Continued)

The Group’s policies for investments in securities other than investments in subsidiariesDepreciation is calculated to write off the cost of items of property, plant and associates areequipment, less their estimated residual value, if any, using the straight-line method over their estimated useful lives as follows:

 

(i)Investments held on a continuing basis for an identified long-term purpose are classified as investment securities. Investment securities are stated in the consolidated balance sheet at cost less any provisions for diminution in value. Provisions are made when the fair values have declined below the carrying amounts, unless there is evidence that the decline is temporary,

Buildings

8 - 35 years

Telecommunications transceivers, switching centers, transmission and are recognized as an expense in the consolidated statements of income, such provisions being determined for each investment individually.other network equipment

7 - 10 years

Office equipment, furniture and fixtures and others

4 - 18 years

Where parts of an item of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually.

(ii)Profits or losses on disposal of investments in securities are determined as the difference between the estimated net disposal proceeds and the carrying amount of the investments and are accounted for in the consolidated statements of income as they arise.

 

(f)(g)FixedLeased assets and depreciation

 

 (i)FixedClassification of assets are stated at cost less accumulated depreciation and impairment losses (see note 3(h)). The circumstances and basis under whichleased to the revalued amount is arrived at are set out in details in Note 13.Group

Assets that are held by the Group under leases which transfer to the Group substantially all the risks and rewards of ownership are classified as being held under capital leases. Leases which do not transfer substantially all the risks and rewards of ownership to the Group are classified as operating leases.

(ii)The cost of fixed assets comprises the purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after the fixed asset has been put into operation, such as repairs and maintenance and overhaul costs, is normally charged to the consolidated statements of income in the year in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the fixed asset, the expenditure is capitalized as an additional cost of the fixed asset.

(iii)Gains or losses arising from the retirement or disposal of a fixed asset are determined as the difference between the estimated net disposal proceeds and the carrying amount of the asset and are recognized in the consolidated statements of income on the date of retirement or disposal.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

32Principal accounting policies (Continued)

 

(f)(g)FixedLeased assets and depreciation (Continued)

 

 (iv)(ii)Depreciation is calculated to write-off the cost of fixed assets on a straight-line basis over their estimated useful lives, to residual values, as follows:Assets acquired under capital leases

Depreciable life

Residual value

Land use rights

Over the period of grant—  

Buildings

8 - 35 years3%

Telecommunication transceivers, switching centers, transmission and other network equipment

7 - 10 years3%

Office equipment, furniture and fixtures and others

4 - 18 years3%

(g)Leased assets

Leases of assets under which the lessee assumes substantially all the risks and benefits of ownership are classified as capital leases.

Where the Group acquires the use of assets under capital leases, the amounts representing the fair value of the leased asset, or, if lower, the present value of the minimum lease payments, of such assets are included in the fixed assetsproperty, plant and equipment and the corresponding liabilities, net of finance charges, are recorded as obligations under capital leases. Depreciation is provided at rates which write off the cost of the assets in equal annual amounts over the term of the relevant lease or, where it is likely the Group will obtain ownership of the asset, the life of the asset, as set out in note 3(f)2(f). Impairment losses are accounted for in accordance with the accounting policy as set out in note 3(h)2(h). Finance charges implicit in the lease payments are charged to the consolidated statements of income over the period of the leases so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations for each accounting year.period. Contingent rentals are written off as an expense of the accounting period in which they are incurred. There were no contingent rentals recognized by the Group during the years presented.

(iii)Operating lease charges

Where the Group has the use of assets held under operating leases, payments made under the leases are charged to the consolidated statements of income in equal installments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognized in the consolidated statements of income as an integral part of the aggregate net lease payments made. Contingent rentals are charged to the consolidated statements of income in the accounting period in which they are incurred. There were no contingent rentals recognized by the Group during the years presented.

The cost of acquiring land held under an operating lease is amortized on a straight-line basis over the period of the lease term.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

32Principal accounting policies (Continued)

 

(h)Impairment of assets

 

(i)Impairment of investments in equity securities and other receivables

Investments in equity securities and other current receivables that are stated at cost are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such evidence exists, any impairment loss/allowance is determined and recognized as follows:

-For unquoted equity securities and current receivables that are carried at cost, the impairment loss/allowance is measured as the difference between the carrying amount of the financial asset and the estimated future cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material. Allowance for doubtful receivables are reversed if in a subsequent period the amount of the impairment loss decreases. Impairment losses for equity securities are not reversed.

(ii)Impairment of other assets

Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognized no longer exists or may have decreased:

 

fixed assets;
-property, plant and equipment;

 

-construction in progress;

-pre-paid interests in leasehold land classified as being held under an operating lease;

-investments in associates; and

-goodwill

Notes to Consolidated Financial Statements (Continued)

(Amounts in progress;

millions, except share data)

 

investments in associates; and
2Principal accounting policies (Continued)

 

positive goodwill (whether taken initially to reserves or recognized as an asset).
(h)Impairment of assets (Continued)

 

(ii)Impairment of other assets (Continued)

If any such indication exists, the asset’s recoverable amount is estimated. An impairment lossIn addition, for goodwill, the recoverable amount is recognized in the consolidated statementsestimated annually whether or not there is any indication of income whenever the carrying amount of an asset (including positive goodwill taken directly to reserves) exceeds its recoverable amount.impairment.

 

 (i)Calculation of recoverable amount

The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

(ii)Recognition of impairment losses

An impairment loss is recognized in the consolidated statements of income whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

32Principal accounting policies (Continued)

 

(h)Impairment of assets (Continued)

 

 (ii)Impairment of other assets (Continued)

(iii)Reversals of impairment losses

In respect of assets other than goodwill, an impairment loss is reversed if there has been a favourablefavorable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is reversed only if the loss was caused by a specific external event of an exceptional nature that is not expected to recur, and the increase in recoverable amount relates clearly to the reversal of the effect of that specific event.

reversed.

A reversal of an impairment lossesloss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals of impairment losses are credited to the consolidated statements of income in the year in which the reversals are recognized.

 

(i)Construction in progress

Construction in progress is stated at cost less any impairment losses (see note 3(h)2(h)). Cost comprises direct costs of construction as well as interest expense and exchange differences capitalized during the yearsperiods of construction and installation. Capitalization of these costs ceases and the construction in progress is transferred to fixed assetsproperty, plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided in respect of construction in progress until it is completed and ready for its intended use. No exchange differences were capitalized to the construction in progress during 2003 and 2004 and the exchange differences capitalized during 2002 were immaterial.years presented.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

32Principal accounting policies (Continued)

 

(j)Inventories

Inventories which consist primarily of handsets, SIM cards and accessories, are stated at the lower of cost and net realizable value. Cost represents purchase cost of goods calculated using the weighted average cost method. Net realizable value is determined by reference to the sales proceeds of items sold in the ordinary course of business after the balance sheet date or to management’s estimates based on prevailing market conditions.

When inventories are sold, the carrying amount of those inventories is recognized as a deduction of other net income due to its insignificance. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the yearperiod the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realizable value, is recognized as a reduction in the amount of inventories recognized as an expense in the yearperiod in which the reversal occurs. No reversal of any write-down of inventories occurred during the years presented.

 

(k)Accounts receivable and other receivables

Accounts receivable and other receivables are initially recognized at fair value and thereafter stated at amortized cost less allowances for doubtful accounts (see note 2(h)), except where the receivables are interest-free loans made to related parties without any fixed repayment terms. In such cases, the receivables are stated at cost less allowances for doubtful accounts (see note 2(h)).

(l)Deferred revenue

Deferred revenue which consists primarily of deferred revenue from prepaid service fees received from subscribers and deferred tax credit of purchase of domestic telecommunications equipment and deferred revenue from assignment of rights to income from subscribers with distributors of telecommunications services are stated in the consolidated balance sheets at the amount of consideration received according to the relevant assignment contracts if applicable, less income recognized in the consolidated statements of income up to the balance sheet date.

equipment.

Revenue from prepaid service fees is recognized when the mobile telecommunications services are rendered.

Deferred tax credit of purchase of domestic telecommunications equipment is amortized over the remaining lives of the related fixed assetsproperty, plant and equipment and credited as non-operating income in the consolidated statements of income.

Income from assignment of rights is deferred and recognized on a straight-line basis over the relevant assignment period. Details of the assignment of rights arrangement are set forth in Note 23.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

32Principal accounting policies (Continued)

 

(l)Fixed rate notes, bonds and convertible notes

Fixed rate notes, bonds and convertible notes are stated in the consolidated balance sheet at face value, less unamortized discount arising thereon, if any. The discount is amortized on a straight-line basis over the period from the date of issue to the date of maturity.

(m)Deferred expensesConvertible notes

Deferred expenses comprise incidentalConvertible notes that can be converted to share capital at the option of the holder, where the number of shares issued does not vary with changes in their fair value, are accounted for as compound financial instruments. At initial recognition the liability component of the convertible notes is calculated as the present value of the future interest and principal payments, discounted at the market rate of interest applicable at the time of initial recognition to similar liabilities that do not have a conversion option. Any excess of proceeds over the amount initially recognized as the liability component is recognized as the equity component. Transaction costs incurred in relationthat relate to the issue of a compound financial instrument are allocated to the fixed rateliability and equity component in proportion to the allocation of proceeds.

The liability component is subsequently carried at amortized cost. The interest expense recognized in the consolidated statements of income on the liability component is calculated using the effective interest method. The equity component is recognized in the capital reserve until either the notes bonds and convertibleare converted or redeemed.

If the notes are converted, the capital reserve, together with the carrying value of the Groupliability component at the time of conversion, are transferred to share capital and are amortized on a straight-line basis overshare premium as consideration for the periods from the date of issue to the date of maturity. In the event thatshares issued. If the notes are redeemed, priorthe capital reserve is released directly to the maturity date, the unamortized expenses are charged immediately to the consolidated statements of income.retained earnings.

 

(n)Interest costsInterest-bearing borrowings

Interest costsInterest-bearing borrowings are expensedrecognized initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortized cost with any difference between cost and redemption value being recognized in the consolidated statements of income inover the year in which they are incurred, except to the extent that they are capitalized as being directly attributable to the acquisition or construction of an asset which necessarily takes a substantial period of time to get ready for its intended use.the borrowings using the effective interest method.

 

(o)Accounts payable and other payables

Accounts payable and other payables are initially recognized at fair value and thereafter stated at amortized cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

2Principal accounting policies (Continued)

(p)Revenue recognition

Revenue is recognized when it is probable that the economic benefits will accrue to the Group and when the revenue can be measured reliably on the following basis:

 

 (i)usage fees and other operating revenue are recognized as revenue when the service is rendered;

 

 (ii)monthly fees are recognized as revenue in the month during which the service is rendered;

 

 (iii)deferred revenue from prepaid services is recognized as incomerevenue when the mobile telecommunications services are rendered upon actual usage by subscribers;

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

3Principal accounting policies (Continued)

(o)Revenue recognition (Continued)

 

 (iv)deferred revenue from assignment of rights to income from subscribers is recognized on a straight-line basis over the duration of the assignment period;

(v)interest income is recognized on a time-apportioned basis by reference to the principal outstanding and the rate applicable; and

 

 (vi)(v)sales of SIM cards and handsets are recognized on delivery of goods to the buyer. Such revenue, net of cost of goods sold, is included in other net income due to its insignificance.

 

(p)Allowance for doubtful accounts

The allowance for doubtful accounts is the Group’s best estimate of the amount of probable credit losses in the Group’s existing accounts receivable and other receivable. The Group determines the allowance based on the length of time the receivables are past due, the current business environment and the Group’s historical experience.

(q)Translation of foreign currencies

The functional currency and reporting currency of the Group’s operations is Renminbi. See Note 29.note 31. Foreign currency transactions are recorded at the applicable rates of exchange prevailing on the transaction dates. Monetary assets and liabilities denominated in currencies other than the functional currency are translated at the exchange rates ruling at the balance sheet date. Exchange gains and losses, other than those capitalized as construction in progress, are recognized in the consolidated statements of income. Exchange differences attributable to the translation of borrowings denominated in currencies other than the functional currency, and used for financing the construction of fixed assets,property, plant and equipment, are included in the cost of the related construction in progress. No exchange differences were capitalized to construction in progress during 2003 and 2004 and the exchange differences capitalized during 2002 were immaterial.years presented.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

32Principal accounting policies (Continued)

 

(r)Income Tax

Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognized in the consolidated statements of income except to the extent that they relate to items recognized directly in equity, in which case they are recognized in equity.

(i)Income tax for the year comprises current and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognized in the consolidated statements of income except to the extent that they relate to items recognized directly in equity, in which case they are recognized in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

(ii)Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

(iii)Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilized, are recognized. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilized.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

32Principal accounting policies (Continued)

 

(r)Income tax (Continued)

The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax purposes, negative goodwill treated as deferred income, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, the Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.

The amount of deferred tax recognized is measured based on the expected manner of realization or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted.

The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the related tax benefit to be utilized. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profitprofits will be available.

Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities if the Group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:

 

 (iv)-Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Currentin the case of current tax assets are offset against current taxand liabilities, the Group intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously; or

-in the case of deferred tax assets against deferred taxand liabilities, if and only if,they relate to income taxes levied by the Group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:same taxation authority on either:

 

in the case of current tax assets and liabilities, the Group intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously; or

in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:

the same taxable entity; or
-the same taxable entity; or

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

32Principal accounting policies (Continued)

 

(r)Income tax (Continued)

 

different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realize the current tax assets and settle the current tax liabilities on a net basis or realize and settle simultaneously.
-different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realize the current tax assets and settle the current tax liabilities on a net basis or realize and settle simultaneously.

 

(s)Provisions and contingent liabilities

 

 (i)Provisions are recognized for liabilities of uncertain timing or amount when the Group has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditures expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

 

 (ii)Provision for customer point reward program (the “Program”)

The Group invites its subscribers to participate in a customer point reward program (the “Program”), which provides subscribers the option of electing to receive free telecommunications services or other non-cash gifts. The level of bonus points earned under the Program varyvaries depending on the subscribers’ service consumption, loyalty and payment history. The estimated incremental costs of providing these free rewards are expensed in the consolidated statements of income and are accrued as a current liability on the consolidated balance sheet based on (i) the number of subscribers who are qualified to exercise their redemption right at period/year end and the estimated rate of redemptions based on past experience; (ii) the estimated number of subscribers who have no right to redeem the incentives at period/year end, but who will ultimately earn and claim awards under the Program; and (iii) type of incentives that subscribers will select for redemption based on past experience and the Group recognized the maximum potential liability. During the year, there are no significant changes in the Group’s assumptions.experience. As subscribers redeem rewards or subscribers’their entitlements of a limited number of subsidiaries become expire, the provision is reduced accordingly.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

32Principal accounting policies (Continued)

 

(t)Employee benefits

 

 (i)Salaries, annual bonuses, paid annual leave, leave passageShort term employee benefits and the costcontributions to the Group of non-monetary benefits are accrued in the year in which associated services are rendered by employees of the Group. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.defined contribution retirement plans

Salaries, annual bonuses, paid annual leave, leave passage, contributions to defined contribution plans and the cost of non-monetary benefits are accrued in the year in which the associated services are rendered by employees. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.

The Company’s contributions to Mandatory Provident Funds, as required under the Hong Kong Mandatory Provident Fund Schemes Ordinance, are recognized as an expense in the consolidated statements of income as incurred.

The employees of the subsidiaries participate in defined contribution retirement plans managed by the local government authorities whereby the subsidiaries are required to contribute to the schemes at fixed rates of the employees’ salary costs. In addition to the local governmental defined contribution retirement plans, certain subsidiaries also participate in supplementary defined contribution retirement plans managed by independent insurance companies whereby the subsidiaries are required to make contributions to the retirement plans at fixed rates of the employees’ salary costs or in accordance with the terms of the plans. The Group’s contributions to these plans are charged to the consolidated statements of income when incurred. The subsidiaries have no obligation for the payment of retirement and other post-retirement benefits of staff other than the contributions described above.

 

 (ii)The Company’s contributions to the Mandatory Provident Funds, as required under the Hong Kong Mandatory Provident Fund Schemes Ordinance, are recognized as an expense in the consolidated statements of income as incurred.Share-based payments

The fair value of share options granted to employees is recognized as an employee cost with a corresponding increase in a capital reserve within equity. The fair value is measured at grant date using the binomial lattice model, taking into account the terms and conditions upon which the options were granted. Where the employees have to meet vesting conditions before becoming unconditionally entitled to the share options, the total estimated fair value of the share options is spread over the vesting period, taking into account the probability that the options will vest. Otherwise, the fair value of options is recognized in the period in which the options are granted.

(iii)The employees of the subsidiaries participate in defined contribution retirement plans managed by the local government authorities whereby the subsidiaries are required to contribute to the schemes at fixed rates of the employees’ salary costs. In addition to the local governmental defined contribution retirement plans, certain subsidiaries also participate in supplementary defined contribution retirement plans managed by independent insurance companies whereby the subsidiaries are required to make contributions to the retirement plans at fixed rates of the employees’ salary costs or in accordance with the terms of the plans. The Group’s contributions to these plans are charged to the consolidated statements of income when incurred. The subsidiaries have no obligation for the payment of retirement and other post-retirement benefits of staff other than the contributions described above.

(iv)When the Group grants employees options to acquire shares of the Company, no employee benefit cost or obligation is recognized at the date of grant. When the options are exercised, equity is increased by the amount of the proceeds received.

(v)Termination benefits are recognized when, and only when the Group demonstrably commits itself to terminate employment or to provide benefits as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

32Principal accounting policies (Continued)

 

(t)Employee benefits (Continued)

(ii)Share-based payments (Continued)

During the vesting period, the number of share options that is expected to vest is reviewed. Any adjustment to the cumulative fair value recognized in prior years is charged/credited to the consolidated statements of income for the year of the review, unless the original employee expenses qualify for recognition as an asset, with a corresponding adjustment to the capital reserve. On vesting date, the amount recognized as an expense is adjusted to reflect the actual number of share options that vest (with a corresponding adjustment to the capital reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of the Company’s shares. The equity amount is recognized in the capital reserve until either the option is exercised (when it is transferred to the share premium account) or the option expires (when it is released directly to retained earnings).

(iii)Termination benefits

Termination benefits are recognized when, and only when the Group demonstrably commits itself to terminate employment or to provide benefits as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal.

(u)Borrowing costs

Borrowing costs are expensed in the consolidated statements of income in the period in which they are incurred, except to the extent that they are capitalized as being directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale.

The capitalization of borrowing costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalization of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or completed.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

2Principal accounting policies (Continued)

(v)Net profitincome per share

The calculation of basic net profitincome per share for the years ended December 31, 2002, 2003, 2004 and 20042005 are based on the net profit attributable to equity shareholders of the Company and the weighted average number of shares in issue during the years.

The calculation of diluted net profitincome per share for the years ended December 31, 2002, 2003, 2004 and 20042005 have been computed after adding back the interest expense on the convertible notes and adjusting for the effects of all dilutive potential ordinary shares. All dilutive potential ordinary shares arise from the share options granted under the share option scheme and convertible notes issued by the Group which, if converted to ordinary shares, would decrease net profitincome per share.

(v)Operating leases

Leases of assets under which the lessor has not transferred all the risks and benefits of ownership are classified as operating leases.

Where the Group has the use of assets under operating lease, payments made under the leases are charged to the consolidated statements of income in equal installments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognized in the consolidated statements of income as an integral part of the aggregate net lease payments made. Contingent rentals are charged to the consolidated statements of income in the accounting period in which they are incurred. There is no contingent rentals recognized by the Group during 2002, 2003 and 2004.

 

(w)Related parties

For the purposes of these financial statements, parties are considered to be related to the Group if the Group has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control or common significant influence. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities.

All materialentities and include entities which are under the significant influence of related parties transactions have been disclosed inof the relevant notes onGroup where those parties are individuals, and post-employment benefit plans which are for the financial statements.benefit of employees of the Group or of any entity that is a related party of the Group.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

32Principal accounting policies (Continued)

 

(x)Segment reporting

A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.

No analysis of the Group’s operating revenue and contribution to profit from operations by geographical segment or business segment has been presented as all the Group’s operating activities are carried out in the PRC and less than 10% of the Group’s operating revenue and contribution to profit from operations were derived from activities outside the Group’s mobile telecommunications and related services activities. There is no other geographical or business segment with segment assets equal to or greater than 10% of the Group’s total assets.

 

(y)Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principlesHKFRSs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and liabilitiesexpenses. The estimates and disclosureassociated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of contingentwhich form the basis of making the judgments about carrying values of assets and liabilities at the date of the financial statements and revenues and expenses during the years reported. Actual results could differthat are not readily apparent from those estimates. Estimates are used when accounting for allowance for doubtful accounts, the fixed assets’ depreciation and amortization periods and impairment of long-lived assets including goodwill.other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgments made by management in the application of HKFRSs that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 36.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

2Principal accounting policies (Continued)

(z)Minority interests

Minority interests at the balance sheet date, being the portion of the net assets of subsidiaries attributable to equity interests that are not owned by the Company, whether directly or indirectly through subsidiaries, are presented in the consolidated balance sheets and statements of equity, separately from equity attributable to the equity shareholders of the Company. Minority interests in the results of the Group are presented on the face of the consolidated statements of income as an allocation of the total profit or loss for the year between minority interests and the equity shareholders of the Company.

Where losses applicable to the minority exceed the minority’s interest in the equity of a subsidiary, the excess, and any further losses applicable to the minority, are charged against the Group’s interest except to the extent that the minority has a binding obligation to, and is able to, make additional investment to cover the losses. If the subsidiary subsequently reports profits, the Group’s interest is allocated all such profits until the minority’s share of losses previously absorbed by the Group has been recovered.

3Changes in accounting policies

The HKICPA has issued a number of new and revised HKFRSs that are effective for accounting periods beginning on or after January 1, 2005.

The accounting policies of the Group after the adoption of these new and revised HKFRSs have been summarized in note 2. The following sets out information on the significant changes in accounting policies for the current and prior accounting periods reflected in these financial statements.

The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period (see note 37).

(a)Restatement of prior periods and opening balances

The following tables disclose the adjustments that have been made in accordance with the transitional provisions of the respective HKFRSs to each of the line items in the consolidated statements of income and other significant related disclosure items as previously reported for the years ended December 31, 2003 and 2004 and the consolidated balance sheet as previously reported as of December 31, 2004. The effects of the changes in accounting policies on the balances as of January 1, 2003, 2004 and 2005 are disclosed in consolidated statements of equity.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

3Changes in accounting policies (Continued)

(a)Restatement of prior periods and opening balances (Continued)

Effect on the consolidated financial statements

Consolidated statement of income for the year ended December 31, 2003

   

2003 (as

previously
reported)

  Effect of new policy (increase/
(decrease) in profit for the year)
  

2003

(as restated)

 
   HKAS 1
(note 3(d))
  HKAS 17
(note 3(e))
  Sub-total  
   RMB  RMB  RMB  RMB  RMB 

Operating revenue

  158,604  —    —    —    158,604 
                

Operating expenses

      

Leased lines

  (4,914) —    —    —    (4,914)

Interconnection

  (12,868) —    —    —    (12,868)

Depreciation

  (36,611) —    123  123  (36,488)

Personnel

  (7,700) —    —    —    (7,700)

Other operating expenses

  (43,308) —    (123) (123) (43,431)
                

Total operating expenses

  (105,401) —    —    —    (105,401)
                

Profit from operations

  53,203  —    —    —    53,203 

Other income and expenses

  (244) —    —    —    (244)
                

Profit before tax

  52,959  —    —    —    52,959 

Income tax

  (17,412) —    —    —    (17,412)

Minority interests

  9  (9) —    (9) —   
                

Profit for the year

  35,556  (9) —    (9) 35,547 
                

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

3Changes in accounting policies (Continued)

(a)Restatement of prior periods and opening balances (Continued)

Effect on the consolidated financial statements (Continued)

Consolidated statement of income for the year ended December 31, 2003 (Continued)

   

2003 (as

previously
reported)

  Effect of new policy (increase/
(decrease) in profit for the year)
  

2003

(as restated)

 
     HKAS 1
(note 3(d))
  HKAS 17
(note 3(e))
  Sub-total  
   RMB  RMB  RMB  RMB  RMB 

Attributable to:

        

Equity shareholders of the Company

  35,556  —    —    —    35,556 

Minority interests

  —    (9) —    (9) (9)
                

Profit for the year

  35,556  (9) —    (9) 35,547 
                

Net income per share

        

Basic

  RMB1.81  —    —    —    RMB1.81 
                

Diluted

  RMB1.81  —    —    —    RMB1.81 
                

Other significant disclosure items:

        

Operating lease charges

  2,364  —    123  123  2,487 
                

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

3Changes in accounting policies (Continued)

(a)Restatement of prior periods and opening balances (Continued)

Effect on the consolidated financial statements (Continued)

Consolidated statement of income for the year ended December 31, 2004

   

2004 (as

previously
reported)

  Effect of new policy (increase/(decrease) in
profit for the year)
  

2004

(as restated)

 
    HKFRS 2
(note3(f))
  HKAS 1
(note 3(d))
  HKAS 17
(note 3(e))
  Sub-total  
   RMB  RMB  RMB  RMB  RMB  RMB 

Operating revenue

  192,381  —    —    —    —    192,381 
                   

Operating expenses

        

Leased lines

  (3,861) —    —    —    —    (3,861)

Interconnection

  (12,072) —    —    —    —    (12,072)

Depreciation

  (44,320) —    —    134  134  (44,186)

Personnel

  (9,717) (255) —    —    (255) (9,972)

Other operating expenses

  (62,677) —    —    (134) (134) (62,811)
                   

Total operating expenses

  (132,647) (255) —    —    (255) (132,902)
                   

Profit from operations

  59,734  (255) —    —    (255) 59,479 

Other income and expenses

  1,472  —    —    —    —    1,472 
                   

Profit before tax

  61,206  (255) —    —    (255) 60,951 

Income tax

  (19,180) —    —    —    —    (19,180)

Minority interests

  (22) —    22  —    22  —   
                   

Profit for the year

  42,004  (255) 22  —    (233) 41,771 
                   

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

3Changes in accounting policies (Continued)

(a)Restatement of prior periods and opening balances (Continued)

Effect on the consolidated financial statements (Continued)

Consolidated statement of income for the year ended December 31, 2004 (Continued)

   

2004 (as

previously
reported)

  

Effect of new policy (increase/(decrease)

in profit for the year)

  

2004

(as restated)

     HKFRS 2
(note 3(f))
  HKAS 1
(note 3(d))
  HKAS 17
(note 3(e))
  Sub-total  
   RMB  RMB  RMB  RMB  RMB  RMB

Attributable to:

          

Equity shareholders of the Company

  42,004   (255) —    —     (255) 41,749

Minority interests

  —     —    22  —     22  22
                    

Profit for the year

  42,004   (255) 22  —     (233)  41,771
                    

Net income per share

          

Basic

  RMB2.14  RMB(0.02) —    —    RMB(0.02) RMB2.12
                    

Diluted

  RMB2.13  RMB(0.01) —    —    RMB(0.01) RMB2.12
                    

Other significant disclosure items:

          

Operating lease charges

  3,245   —    —    134   134  3,379
                    

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

3Changes in accounting policies (Continued)

(a)Restatement of prior periods and opening balances (Continued)

Effect on the consolidated financial statements (Continued)

Consolidated balance sheet as of December 31, 2004

   

2004 (as

previously
reported)

  

Effect of new policy (increase/(decrease)

in net assets)

  

2004

(as restated)

 
    HKFRS 2
(note 3(f))
  HKAS 1
(note 3(d))
  HKAS 17
(note 3(e))
  Sub-total  
   RMB  RMB  RMB  RMB  RMB  RMB 

Total current asset

  79,909  —    —    —    —    79,909 

Property, plant and equipment

  218,063  —    —    (5,604) (5,604) 212,459 

Construction in progress

  31,239  —    —    (729) (729) 30,510 

Land lease prepayments

  —    —    —    6,333  6,333  6,333 

Other non-current assets

  39,541  —    —    —    —    39,541 
                   

Total assets

  368,752  —    —    —    —    368,752 
                   

Total current liabilities

  (97,666) —    —    —    —    (97,666)

Non-current liabilities

  (37,682) —    —    —    —    (37,682)
                   

Total liabilities

  (135,348) —    —    —    —    (135,348)

Minority interests

  (243) —    243  —    243  —   
                   
  (135,591) —    243  —    243  (135,348)
                   

Net assets

  233,161  —    243  —    243  233,404 
                   

Total equity attributable to:

         

Equity shareholders of the Company

  233,161  —    —    —    —    233,161 

Minority interests

  —    —    243  —    243  243 
                   

Total equity

  233,161  —    243  —    243  233,404 
                   

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

3Changes in accounting policies (Continued)

(b)Estimated effect of changes in accounting policies on the current period

The following tables provide estimates of the extent to which each of the line items in the consolidated statements of income and balance sheet and other significant related disclosure items for the year ended December 31, 2005 is higher or lower than it would have been had the previous policies still been applied in the year, where it is practicable to make such estimates.

Effect on the consolidated financial statements

Estimated effect on the consolidated statement of income for the year ended December 31, 2005

   Effect of new policy (increase/(decrease) in profit
for the year)
  

Total

 
   HKFRS 2
(note 3(f))
  HKFRS 3
(note 3(c))
  HKAS 17
(note 3(e))
  HKAS 39
(note 3(g))
  
   RMB  RMB  RMB  RMB  RMB 

Operating revenue

  —    —    —    —    —   
                

Operating expenses

        

Leased lines

  —    —    —    —    —   

Interconnection

  —    —    —    —    —   

Depreciation

  —    —    169  —    169 

Personnel

  (1,553) —    —    —    (1,553)

Other operating expenses

  —    —    (169) —    (169)
                

Total operating expenses

  (1,553) —    —    —    (1,553)
                

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

3Changes in accounting policies (Continued)

(b)Estimated effect of changes in accounting policies on the current period (Continued)

Effect on the consolidated financial statements (Continued)

Estimated effect on the consolidated statement of income for the year ended December 31, 2005 (Continued)

   

Effect of new policy (increase/(decrease)

in profit for the year)

  

Total

 
   HKFRS 2
(note 3(f))
  HKFRS 3
(note 3(c))
  HKAS 17
(note 3(e))
  HKAS 39
(note 3(g))
  
   RMB  RMB  RMB  RMB  RMB 

Profit from operations

  (1,553) —    —    —    (1,553)

Amortization of goodwill

  —    2,001  —    —    2,001 

Non-operating net income

  —    —    —    32  32 

Finance costs

  —    —    —    (41) (41)

Other income and expenses

  —    —    —    —    —   
                   

Profit before tax

  (1,553)  2,001  —    (9) 439 

Income tax

  —    —    —    —    —   
                   

Profit for the year

  (1,553)  2,001  —    (9) 439 
                   

Attributable to:

        

Equity shareholders of the Company

  (1,553)  2,001  —    (9) 439 

Minority interests

  —    —    —    —    —   
                   

Profit for the year

  (1,553)  2,001  —    (9) 439 
                   

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

3Changes in accounting policies (Continued)

(b)Estimated effect of changes in accounting policies on the current period (Continued)

Effect on the consolidated financial statements (Continued)

Estimated effect on the consolidated statement of income for the year ended December 31, 2005 (Continued)

   

Effect of new policy (increase/(decrease)

in profit for the year)

  

Total

 
   HKFRS 2
(note 3(f))
  HKFRS 3
(note 3(c))
  HKAS 17
(note 3(e))
  HKAS 39
(note 3(g))
  
   RMB  RMB  RMB  RMB  RMB 

Net income per share

       

Basic

  RMB(0.08) RMB0.10  —    —    RMB0.02 
                   

Diluted

  RMB(0.08) RMB0.10  —    —    RMB0.02 
                   

Other significant disclosure items:

       

Interest expenses of bonds

   —     —    —    (12)  (12)

Interest expenses of convertible notes

   —     —    —    (29)  (29)

Operating lease charges

   —     —    (169) —     (169)
                   

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

3Changes in accounting policies (Continued)

(b)Estimated effect of changes in accounting policies on the current period (Continued)

Effect on the consolidated financial statements (Continued)

Estimated effect on the consolidated balance sheet as of December 31, 2005

   

Effect of new policy (increase/(decrease)

in net assets)

  

Total

 
   HKFRS 2
(note 3(f))
  HKFRS 3
(note 3(c))
  HKAS 17
(note 3(e))
  HKAS 39
(note 3(g))
  
   RMB  RMB  RMB  RMB  RMB 

Total current assets

  —    —    —    —    —   

Property, plant and equipment

  —    —    (5,922) —    (5,922)

Construction in progress

  —    —    (1,321) —    (1,321)

Land lease prepayments

  —    —    7,243  —    7,243 

Goodwill

  —    2,001  —    —    2,001 

Deferred expenses

  —    —    —    (64) (64)

Other non-current assets

  —    —    —    —    —   
                

Total assets

  —    2,001  —    (64) 1,937 
                

Total current liabilities

  —    —    —    —    —   

Non-current liabilities

        

Interest-bearing borrowings

  —    —    —    88  88 

Other non-current liabilities

  —    —    —    —    —   
                

Total liabilities

  —    —    —    88  88 
                

Net assets

  —    2,001  —    24  2,025 
                

Total equity attributable to:

        

Equity shareholders of the Company

  —    2,001  —    24  2,025 

Minority interests

  —    —    —    —    —   
                

Total equity

  —    2,001  —    24  2,025 
                

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

3Changes in accounting policies (Continued)

(b)Estimated effect of changes in accounting policies on the current period (Continued)

Effect on the consolidated financial statements (Continued)

Estimated effect on net income recognized directly in consolidated equity for the year ended December 31, 2005

   Effect of new policy
increase in equity
  

Total

   HKAS 17
(note 3(e))
  HKAS 39
(note3(g))
  
   RMB  RMB  RMB

For the year ended December 31, 2005

      

Attributable to equity shareholders of the Company

  —    33  33

Minority interests

  —    —    —  
         

Total equity

  —    33  33
         

Estimated effect on amounts recognized as capital transactions with owners of the Group for the year ended December 31, 2005

Effect of new policy
increase

HKFRS 2

(note 3(f))

RMB

Attributable to equity shareholders of the Company

1,553

Minority interests

—  

Total equity

1,553

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

3Changes in accounting policies (Continued)

(c)Amortization of positive and negative goodwill (HKFRS 3 “Business combinations” and HKAS 36 “Impairment of assets”)

In prior years:

-positive goodwill arising from acquisitions before January 1, 2001 was eliminated against reserves and was reduced by impairment losses recognized in the consolidated statements of income;

-positive goodwill arising from acquisitions on or after January 1, 2001 was amortized to the consolidated statements of income on a straight-line basis over 20 years. Positive goodwill was stated in the consolidated balance sheet at cost less accumulated amortization and any impairment losses;

-negative goodwill arising from acquisitions before January 1, 2001 was credited to a capital reserve; and

-negative goodwill which arose from acquisitions on or after January 1, 2001 was amortized over the weighted average life of the depreciable/amortizable non-monetary assets acquired, except to the extent is related to identified expected future losses as at the date of acquisition. In such cases it was recognized in the consolidated statements of income as those expected losses were incurred.

With effect from January 1, 2005, in order to comply with HKFRS 3 and HKAS 36, the Group adopted a new accounting policy for amortization of positive and negative goodwill as set out in note 2(d).

The new policy in respect of positive goodwill has been applied prospectively in accordance with the transitional arrangements under HKFRS 3. As a result, comparative amounts have not been restated, the cumulative amount of amortization as of January 1, 2005 has been offset against the cost of the goodwill and no amortization charge for goodwill has been recognized in the consolidated statements of income for the year ended December 31, 2005.

The change in policy relating to negative goodwill had no effect on the financial report as there was no negative goodwill deferred as of December 31, 2004.

Also in accordance with the transitional arrangements under HKFRS 3, goodwill which had previously been taken into reserve (i.e. goodwill which arose before January 1, 2001) will not be recognized in the consolidated statements of income on disposal or impairment of the acquired business, or under any other circumstances.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

3Changes in accounting policies (Continued)

(d)Minority interests (HKAS 1 “Presentation of financial statements” and HKAS 27 “Consolidated and separate financial statements”)

In prior years, minority interests at the balance sheet date were presented in the consolidated balance sheet separately from liabilities and as deduction from net assets. Minority interests in the results of the Group for the year were also separately presented in the consolidated statements of income as a deduction before arriving at the profit attributable to equity shareholders.

With effect from January 1, 2005, in order to comply with HKAS 1 and HKAS 27, the Group adopted a new accounting policy for minority interests as set out in note 2(z).

The presentation of minority interests in the consolidated balance sheet, consolidated statements of income and consolidated statements of equity for the comparative period has been restated accordingly.

(e)Land use rights and buildings held for own use (HKAS 17 “Leases”)

In prior years, land use rights and buildings held for own use were stated at cost less accumulated depreciation and impairment losses. Depreciation was calculated to write-off the cost of such assets on a straight-line basis over their estimated useful lives, to residual value.

With effect from January 1, 2005, in order to comply with HKAS 17, the Group adopted a new accounting policy for land use rights and building held for own use as set out in note 2(g).

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

3Changes in accounting policies (Continued)

(e)Land use rights and buildings held for own use (HKAS 17 “Leases”) (Continued)

The new accounting policy has been adopted retrospectively. There is no impact on the Group’s net assets as at the year end and on the Group’s profit attributable to equity shareholders for the periods presented. An additional line item “Land lease prepayments”, which was previously included in “Property, plant and equipment” and “Construction in progress” has been included on the face of the consolidated balance sheet. Comparative figures for “Property, plant and equipment” and “Construction in progress” have been reclassified to conform to the current year’s presentation. Amortization charges relating to land lease prepayments have been included in “Other operating expenses”. Additionally, “Depreciation” and “Other operating expenses” in the consolidated statements of income for the years ended December 31, 2003 and 2004 have been restated.

(f)Employee share option scheme (HKFRS 2 “Share-based payment”)

In prior years, no employee benefit cost or obligation was recognized when employees (which term includes directors) were granted share options by the Group over shares in the Company. When the share options were exercised, equity was increased by the amount of the proceeds received.

With effect from January 1, 2005, in order to comply with HKFRS 2, the Group adopted a new accounting policy for the employee share option scheme as set out in note 2(t).

The new accounting policy has been applied retrospectively with comparatives restated in accordance with HKFRS 2, except that the Group has adopted the transitional provisions set out in paragraph 53 of HKFRS 2 under which the new recognition and measurement policies have not been applied to the following grants of options:

-all share options granted to employees on or before November 7, 2002; and

-all share options granted to employees after November 7, 2002 but which had vested before January 1, 2005.

Details of the share option scheme are set out in note 30.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

3Changes in accounting policies (Continued)

(g)Financial instruments (HKAS 32 “Financial instruments: Disclosure and presentation” and HKAS 39 “Financial instruments: Recognition and measurement”)

In prior years, convertible notes and bonds were stated in the consolidated balance sheet at face value, less unamortized discount arising upon issuance. The discount was amortized on a straight-line basis over the period from the date of issue to the date of maturity.

With effect from January 1, 2005, and in accordance with HKAS 32 and HKAS 39, the Group adopted new accounting policies for financial instruments as set out in note 2(e), 2(m) and 2(n).

The new accounting policies have been adopted by way of opening balance adjustment to retained earnings as at January 1, 2005. Comparative amounts have not been restated as this is prohibited by the transitional arrangements in HKAS 39.

(h)Definition of related parties (HKAS 24 “Related party disclosures”)

As a result of the adoption of HKAS 24, the definition of related parties as disclosed in note 2(w) has been expanded to clarify that related parties include entities that are under the significant influence of a related party that is an individual (i.e. key management personnel, significant shareholders and/or their close family members) and post-employment benefit plans which are for the benefit of employees of the Group or of any entity that is a related party to the Group. The clarification of the definition of related parties has not resulted in any material changes to the previously reported disclosures of related party transactions nor has it had any material effect on the disclosures made in the current period, as compared to those that would have been reported had SSAP 20,Related party disclosures, still been in effect.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

4Operating revenue

The principal activities of the Group are the provision of mobile telecommunications and related services in thirty-one provinces, autonomous regions and municipalities in the PRC. The principal activity of the Company is investment holding.

Operating revenue primarily represents usage fees, monthly fees and other operating revenue derived from the Group’s mobile telecommunications networks, net of PRC business tax and government surcharges.tax. Business tax and government surcharges areis charged at approximately 3% to 3.3% of the corresponding revenue.

Operating revenue consistconsists of:

 

 (i)Usage fees which represent standard local usage fee for airtime and, where applicable, Domestic Direct Dial (“DDD”) charges and International Direct Dial (“IDD”) charges receivable from subscribers for the use of the Group’s mobile telecommunications networks and facilities; revenue from assignment of rights to income from subscribers, and fees in respect of roaming out calls. Roaming out calls are those made by the Group’s subscribers outside the local service areas. See Notenote 5 (ii).

 

 (ii)Monthly fees which represent fixed amounts charged to subscribers each month for their entitlement to use the Group’s mobile telecommunications and related services.

 

 (iii)Other operating revenue mainly represents charges for wireless data and value added services and interconnection revenue.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

5Operating expenses

Operating expenses consist of:

 

 (i)Leased line charges which represent expenses paid or payable for the use of leased lines between the main switches, base transceiver stations, base station controllers, base stations, fixed line network connectors and long distance network connectors.

 

 (ii)Interconnection charges which represent amounts paid or payable in respect of call made between the Group’s mobile telecommunications networks, the fixed line networks and other GSM network operators in the PRC. Included in the amounts are also charges in respect of the Group’s subscribers roaming outside the service areas of the Group’s mobile telecommunications networks (see Notenote 4 (i)).

 

 (iii)Personnel expenses which represent staff salaries, bonuses and medical benefits, provision for staff welfare expenses, and contributions to staff retirement scheme.

(iv)Other operating expenses which consist of:

   Year ended December 31,

   2002

  2003

  2004

   RMB  RMB  RMB

Selling and promotion

  12,259  21,071  26,460

Maintenance

  2,691  4,683  8,588

Provision for doubtful accounts

  1,749  2,006  2,273

Operating lease charges

  1,701  2,364  3,245

Other expenses (Note (a))

  9,519  13,184  22,111
   
  
  
   27,919  43,308  62,677
   
  
  

(a)Other expenses consist of offices expenses, utilities charges, traveling expenses, entertainment expenses, spectrum charges, insurance expenses, consumablesscheme and supplies, debt collection fees, write-off of fixed assets and other miscellaneousequity settled share-based payment expenses.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

5Operating expenses (Continued)

(iv)Other operating expenses which consist of:

   Year ended December 31,
   2003  2004  2005
   RMB  RMB  RMB
   (restated)  (restated)   

Selling and promotion

  21,071  26,460  34,117

Maintenance

  4,683  8,588  11,851

Allowance for doubtful accounts and other receivables

  2,006  2,273  2,968

Operating lease charges

  2,487  3,379  4,157

Other expenses (note (a))

  13,184  22,111  27,161
         
  43,431  62,811  80,254
         

(a)Other expenses consist of offices expenses, utilities charges, traveling expenses, entertainment expenses, spectrum charges and numbering resources fees, insurance expenses, consumables and supplies, debt collection fees, write-off of property, plant and equipment and other miscellaneous expenses.

6Other net income

Other net income primarily consists of the gross margin from sales of SIM cards and handsets.

 

   Year ended December 31,

 
   2002

  2003

  2004

 
   RMB  RMB  RMB 

Sales of SIM cards and handsets

  3,641  5,305  6,035 

Cost of SIM cards and handsets

  (1,955) (2,841) (2,868)
   

 

 

   1,686  2,464  3,167 
   

 

 

7Non-operating net income

Non-operating net income consists of:

   Year ended December 31,

   2002

  2003

  2004

   RMB  RMB  RMB

Exchange gain / (loss)

  47  (38) 21

Penalty income

  192  193  232

Amortization of deferred tax credit of purchase of domestic telecommunications equipment

  59  188  352

Others

  273  91  295
   
  

 

Total non-operating net income

  571  434  900
   
  

 
   Year ended December 31, 
   2003  2004  2005 
   RMB  RMB  RMB 

Sales of SIM cards and handsets

  5,305  6,035  6,524 

Cost of SIM cards and handsets

  (2,841) (2,868) (3,240)
          
  2,464  3,167  3,284 
          

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

7Non-operating net income

Non-operating net income consists of:

   Year ended December 31, 
   2003  2004  2005 
   RMB  RMB  RMB 

Exchange (loss)/gain

  (38) 21  (130)

Penalty income

  193  232  177 

Amortization of deferred tax credit of purchase of domestic telecommunications equipment

  188  352  526 

Others

  91  295  452 
          

Total non-operating net income

  434  900  1,025 
          

 

8Income tax

 

 (i)No provision has been made for Hong Kong profits tax as there were no estimated Hong Kong assessable profits for the years ended December 31, 2002, 2003, 2004 and 2004.2005.

 

 (ii)The provision for the PRC enterprise income tax is based on a statutory income tax rate of 33% of the assessable profit of the Group as determined in accordance with the relevant income tax rules and regulations of the PRC during the year, except for certain subsidiaries of the Company and certain operations of the subsidiaries located within special economic zones in the PRC, which enjoy a preferential rate of 30% and 15% respectively.

Income tax in the consolidated statements of income represents:

 

  Year ended December 31,

   Year ended December 31, 
  2002

 2003

 2004

   2003 2004 2005 
  RMB RMB RMB   RMB RMB RMB 

Provision for PRC enterprise income tax on the estimated taxable profits for the year

  17,724  16,020  20,145   16,020  20,145  27,487 

Over-provision in respect of PRC enterprise income tax for prior year

  (14) (375) (357)  (375) (357) (247)
  

 

 

          
  17,710  15,645  19,788   15,645  19,788  27,240 

Origination and reversal of temporary differences (Note 17)

  (1,335) 1,767  (608)

Origination and reversal of temporary differences (note 18)

  1,767  (608) (2,565)
  

 

 

          
  16,375  17,412  19,180   17,412  19,180  24,675 
  

 

 

          

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

8Income tax (Continued)

The provision for income tax differs from the amount computed by applying the PRC statutory income tax rate of 33% to profit before tax and minority interests for the following reasons:

 

  Year ended December 31, 
  Year ended December 31,

   2003 2004 2005 
  2002

 2003

 2004

   RMB RMB RMB 
  RMB RMB RMB    (restated) 

Expected PRC taxation at statutory tax rates

  16,163  17,477  20,198   17,477  20,114  25,827 

Non-taxable items

       

- Interest income

  (25) (12) (26)  (12) (26) (24)

Non-deductible expenses on PRC operations

  851  1,059  551   1,059  635  711 

Non-deductible expenses on Hong Kong operations

  242  324  217   324  217  180 

Rate differential on PRC operations

  (859) (1,286) (1,390)  (1,286) (1,390) (1,801)

Rate differential on Hong Kong operations

  229  277  166   277  166  123 

Reversal of deferred taxation due to change of tax rate

  (97) 17  (13)  17  (13) (1)

Over-provision for prior year

  (14) (375) (357)  (375) (357) (247)

Others

  (115) (69) (166)  (69) (166) (93)
  

 

 

          

Income tax

  16,375  17,412  19,180   17,412  19,180  24,675 
  

 

 

          

 

9Dividends

 

(a)Dividends attributable to the year:

 

   Year ended December 31,

   2002

  2003

  2004

   RMB  RMB  RMB

Interim dividend declared and paid of HK$0.20 (equivalent to approximately RMB0.21) (2002: Nil; 2003: HK$0.16 (equivalent to approximately RMB0.17)) per share

  —    3,339  4,175

Final dividend proposed after the balance sheet date of HK$0.46 (equivalent to approximately RMB0.49) (2002: HK$0.32 (equivalent to approximately RMB0.34); 2003: HK$0.20 (equivalent to approximately RMB0.21)) per share

  6,678  4,178  9,614
   
  
  
   6,678  7,517  13,789
   
  
  
   Year ended December 31,
   2003  2004  2005
   RMB  RMB  RMB

Interim dividend declared and paid of HK$0.45 (equivalent to approximately RMB0.47) (2003: HK$0.16 (equivalent to approximately RMB0.17); 2004: HK$0.20 (equivalent to approximately RMB0.21)) per share

  3,339  4,175  9,259

Final dividend proposed after the balance sheet date of HK$0.57 (equivalent to approximately RMB0.59) (2003: HK$0.20 (equivalent to approximately RMB0.21); 2004: HK$0.46 (equivalent to approximately RMB0.49)) per share

  4,178  9,614  11,767
         
  7,517  13,789  21,026
         

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

9Dividends (Continued)

 

(a)Dividends attributable to the year (Continued):

The proposed final dividend proposedwhich is declared in Hong Kong dollars is translated into RMB at the rate HK$1 = RMB1.0403, being the rate announced by the State Administration of Foreign Exchange in the PRC on December 31, 2005. As the final dividend is declared after the balance sheet date, hassuch dividend is not been recognized as a liability at the balance sheet date.December 31, 2005.

 

(b)Dividends attributable to the previous financial year, approved and paid during the year:

 

   2002

  2003

  2004

   RMB  RMB  RMB

Final dividend in respect of the previous financial year, approved and paid during the year, of HK$0.20 (equivalent to approximately RMB0.21) (2002:Nil; 2003: HK$0.32 (equivalent to approximately RMB0.34)) per share

  —    6,679  4,174
   
  
  
   2003  2004  2005
   RMB  RMB  RMB

Final dividend in respect of the previous financial year, approved and paid during the year, of HK$0.46 (equivalent to approximately RMB0.49) (2003: HK$0.32 (equivalent to approximately RMB0.34; 2004: HK$0.20 (equivalent to approximately RMB0.21)) per share

  6,679  4,174  9,635
         

10Amounts due from/to ultimate holding company and amount due to immediate holding company

Amounts due from/to ultimate holding company are unsecured, non-interest bearing, repayable on demand and arose in the ordinary course of business.

Amount due to immediate holding company under current liabilities represented interest payable on the deferred consideration payable (see note 23), which is expected to be settled within one year.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

11Other receivables

   December 31, 
   2004  2005 
   RMB  RMB 

Other receivables

  2,018  2,021 

Less: Allowance for doubtful accounts

  (139) (110)
       
  1,879  1,911 
       

Other receivables primarily comprise receivables from sales agents of revenue collected on behalf of the Group, utilities deposits and rental deposits.

All of other receivables, except utilities deposits and rental deposits, are expected to be recovered within one year.

Allowance for doubtful accounts for the years is analyzed as follows:

RMB

At January 1, 2003

125

Provision for the year

88

Written-off

(100)

At December 31, 2003

113

Acquired on acquisition of subsidiaries

6

Provision for the year

40

Written-off

(20)

At December 31, 2004

139

Written-back for the year

(19)

Written-off

(10)

At December 31, 2005

110

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

12Accounts receivable

 

   December 31,

 
   2003

  2004

 
   RMB  RMB 

Accounts receivable

  10,534  10,206 

Less: Allowance for doubtful accounts

  (4,418) (3,653)
   

 

   6,116  6,553 
   

 

   December 31, 
   2004  2005 
   RMB  RMB 

Accounts receivable

  10,206  10,068 

Less: Allowance for doubtful accounts

  (3,653) (3,465)
       
  6,553  6,603 
       

The ageing of accounts receivable, net of allowance for doubtful accounts, is analyzed as follows:

 

   December 31,

   2003

  2004

   RMB  RMB

Within 30 days

  5,121  5,339

31-60 days

  545  666

61-90 days

  450  548
   
  
   6,116  6,553
   
  

   December 31,
   2004  2005
   RMB  RMB

Within 30 days

  5,339  5,269

31-60 days

  666  697

61-90 days

  548  637
      
  6,553  6,603
      

Balances are due for payment within one month from the date of billing. Customers with balances that are overdue or exceed credit limits are required to settle all outstanding balances before any further phone calls can be made.

All of the accounts receivable are expected to be recovered within one year.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

1012Accounts receivable (Continued)

Allowance for doubtful accounts for the years is analyzed as follows:

 

   RMB

 

At January 1, 2002

3,973

Acquired on acquisition of subsidiaries

992

Provision for the year

1,601

Written-off

(2,265)


At December 31, 20022003

  4,301 

Provision for the year

  1,918 

Written-off

  (1,801)
  

At December 31, 2003

  4,418 

Acquired on acquisition of subsidiaries

  1,074 

Provision for the year

  2,233 

Written-off

  (4,072)
  

At December 31, 2004

  3,653 

Provision for the year

  
2,987

Written-off

(3,175)

At December 31, 2005

3,465

 

1113Other receivablesInventories

   December 31,

 
   2003

  2004

 
   RMB  RMB 

Other receivables

  1,900  2,018 

Less: Allowance for doubtful accounts

  (113) (139)
   

 

   1,787  1,879 
   

 

Other receivablesInventories primarily comprise receivables from sales agents of revenue collected on behalf of the Group, utilities depositshandsets, SIM cards and rental deposits.handset accessories.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

1114Other receivables (Continued)Property, plant and equipment

Allowance for doubtful accountsProperty, plant and equipment for the years is analyzed as follows:

 

RMB

At January 1, 2002

—  

Provision for the year

148

Written-off

(23)


At December 31, 2002

125

Provision for the year

88

Written-off

(100)


At December 31, 2003

113

Acquired on acquisition of subsidiaries

6

Provision for the year

40

Written-off

(20)


At December 31, 2004

139


12Amounts due from/to ultimate holding company and amount due to immediate holding company

Amounts due from/to ultimate holding company are unsecured, non-interest bearing, repayable on demand and arose in the ordinary course of business.

At December 31, 2003, amount due to immediate holding company included in non-current liabilities primarily represented the balance of the purchase consideration for acquisition of subsidiaries in 2002 as described in note 26(b).

At December 31, 2004, amount due to immediate holding company included in non-current liabilities primarily represented the balances of the purchase consideration of RMB9,976 and RMB13,657 for acquisition of subsidiaries in 2002 and 2004 as described in note 26(b) and 26(c) respectively.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

12Amounts due from/to ultimate holding company and amount due to immediate holding company (Continued)

The balances of the purchase consideration for acquisitions of subsidiaries in 2002 and 2004, are unsecured, bear interest at the rate of two year US dollar LIBOR swap rate per annum (for the year ended December 31, 2003: 3.801% per annum and for the year ended December 31, 2004: 2.595% to 3.801% per annum) and are not expected to be settled within one year. The balances are due on July 1, 2017 and 2019 respectively.

The balances are subordinated to other senior debts owed by the Company from time to time including the convertible notes. The Company may make early payment of all or part of the balances at any time before the date without penalty.

The movements of amount due to immediate holding company included in non-current liabilities are as follows:

   December 31,

   2003

  2004

   RMB  RMB

Balance at beginning of year

  15,176  9,976

Addition during the year

  —    13,657

Less: Repayments during the year

  (5,200) —  
   

 

Balance at end of year

  9,976  23,633
   

 

The current portion of amount due to immediate holding company represented interest payable on the unpaid balance of the purchase consideration, which is expected to be settled within one year.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

13Fixed assets

   December 31,

 
   2003

  2004

 
   RMB  RMB 

Land use rights and buildings

  24,957  38,839 

Telecommunications transceivers, switching centers, transmission and other network equipment

  233,026  291,031 

Office equipment, furniture and fixtures and others

  11,600  14,059 
   

 

   269,583  343,929 

Less: accumulated depreciation

  (97,979) (125,866)
   

 

   171,604  218,063 
   

 

   December 31, 
   2004  2005 
   RMB  RMB 
   (restated)    

Buildings

  32,783  37,486 

Telecommunications transceivers, switching centers, transmission and other network equipment

  291,031  311,859 

Office equipment, furniture and fixtures and others

  14,059  14,780 
       
  337,873  364,125 

Less: accumulated depreciation

  (125,414) (147,620)
       
  212,459  216,505 
       

All of the Group’s buildings are located outside Hong Kong.

The Group leases certain telecommunications equipment under capital leases. None of the leases includes contingent rentals.

In connection with the Restructuring, pursuant to an approval document dated September 5, 1997 issued by China State-owned Assets Administration Bureau, the fixed assetsproperty, plant and equipment and land lease prepayments of Guangdong Mobile and Zhejiang Mobile as of May 31, 1997 were valued by Zhongqihua Assets Appraisal Company (“ZAAC”), a firm of independent valuers registered in the PRC, on a replacement cost basis. The value of fixed assetsproperty, plant and equipment and land lease prepayments of Guangdong Mobile and Zhejiang Mobile has been determined at RMB15,630 reflecting a surplus on revaluation of approximately RMB3,529.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

14Property, plant and equipment (Continued)

In connection with the acquisition of Jiangsu Mobile, and pursuant to an approval document dated April 7, 1998 issued by China State-owned Assets Administration Bureau, the fixed assetsproperty, plant and equipment and land lease prepayments of Jiangsu Mobile as of December 31, 1997 were valued by ZAAC on a replacement cost basis. The value of fixed assetsproperty, plant and equipment and land lease prepayments of Jiangsu Mobile has been determined at RMB7,879 reflecting a surplus on revaluation of approximately RMB2,443.

In connection with the acquisition of Fujian Mobile, Henan Mobile and Hainan Mobile, and pursuant to an approval document dated September 27, 1999 issued by the Ministry of Finance, the fixed assetsproperty, plant and equipment and land lease prepayments of Fujian Mobile, Henan Mobile and Hainan Mobile as of June 30, 1999 were valued by China International Engineering Consulting Corporation (“CIECC��) on a replacement cost basis. The aggregate value of fixed assetsproperty, plant and equipment and land lease prepayments of Fujian Mobile, Henan Mobile and Hainan Mobile has been determined at RMB10,684 reflecting a surplus on revaluation of approximately RMB391.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

13Fixed assets (Continued)

In connection with the acquisition of Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi Mobile, and pursuant to an approval document dated August 28, 2000 issued by the Ministry of Finance, the fixed assetsproperty, plant and equipment and land lease prepayments of Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi Mobile as of June 30, 2000 were valued by China Assets Appraisal Corporation Ltd. (“CAAC”) on a replacement cost basis. The aggregate value of fixed assetsproperty, plant and equipment and land lease prepayments of Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi Mobile has been determined at RMB37,252 reflecting a surplus on revaluation of approximately RMB4,823.

In connection with the acquisition of Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi Mobile, and pursuant to an approval document dated May 15, 2002 issued by the Ministry of Finance, the fixed assetsproperty, plant and equipment and land lease prepayments of Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi Mobile as of December 31, 2001 were valued by China Enterprise Appraisals (“CEA”) on a replacement cost basis. The aggregate value of fixed assetsproperty, plant and equipment and land lease prepayments of Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi Mobile has been determined at RMB39,499 reflecting a net deficit on revaluation of approximately RMB833.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

14Property, plant and equipment (Continued)

In connection with the acquisition of Neimenggu Mobile, Jilin Mobile, Heilongjiang Mobile, Guizhou Mobile, Yunnan Mobile, Xizang Mobile, Gansu Mobile, Qinghai Mobile, Ningxia Mobile, Xinjiang Mobile, Jingyi Design Institute and CMC, and pursuant to an approval document dated March 31, 2004 issued by the SASACSC, the fixed assetsproperty, plant and equipment and land lease prepayments of Neimenggu Mobile, Jilin Mobile, Heilongjiang Mobile, Guizhou Mobile, Yunnan Mobile, Xizang Mobile, Gansu Mobile, Qinghai Mobile, Ningxia Mobile, Xinjiang Mobile, Jingyi Design Institute and CMC as of December 31, 2003 were valued by CEA, China United Assets Appraisals (“CUAA”) and Zhongdi Real Estate Valuation (“ZREV”) on a replacement cost basis. The aggregate value of fixed assetsproperty, plant and equipment and land lease prepayments of Neimenggu Mobile, Jilin Mobile, Heilongjiang Mobile, Guizhou Mobile, Yunnan Mobile, Xizang Mobile, Gansu Mobile, Qinghai Mobile, Ningxia Mobile and Xinjiang Mobile has been determined at RMB33,996 reflecting a net deficit on revaluation of approximately RMB2,781.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

13Fixed assets (Continued)

The Group’s buildings and land and buildingslease prepayments in Guangdong Mobile and Zhejiang Mobile, Jiangsu Mobile, Fujian Mobile, Henan Mobile and Hainan Mobile, Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi Mobile, Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi Mobile, and Neimenggu Mobile, Jilin Mobile, Heilongjiang Mobile, Guizhou Mobile, Yunnan Mobile, Xizang Mobile, Gansu Mobile, Qinghai Mobile, Ningxia Mobile, Xinjiang Mobile, Jingyi Design Institute and CMCeach of the above mentioned subsidiaries were also valued separately by Chesterton Petty Limited, independent qualified valuers in Hong Kong as of May 31, 1997, December 31, 1997, June 30, 1999, June 30, 2000, December 31, 2001 and December 31, 2003 respectively. The values of such reports have been determined at approximately the same amounts asvalue by the ZAAC, CIECC, CAAC, CEA, CUAA and ZREV reports.

independent qualified valuers in the PRC.

Other than revaluations carried out in compliance with relevant PRC rules and regulations, the Group has no plan to revalue its fixed assetsproperty, plant and equipment and land lease prepayments on a regular basis.

The effect of the above six revaluations is to decrease annual depreciation charges by approximately RMB260 (2003:RMB646 (2004: approximately RMB325) and increase amortization of land lease prepayments by RMB98 (2004: approximately RMB501)RMB65).

The historical cost net book value of the fixed assets of these subsidiaries in the Group’s financial statements as of the respective revaluation dates and the revalued basis of these fixed assets are as follows:

   Net Book Value

  Revalued
Amount


   RMB  RMB

Land use rights and buildings

  11,143  14,093

Telecommunications transceivers, switching centers, transmission and other network equipment

  121,567  126,450

Office equipment, furniture and fixtures and others

  4,658  4,397
   
  
   137,368  144,940
   
  

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

14GoodwillProperty, plant and equipment (Continued)

The historical cost net book value of the property, plant and equipment and land lease prepayments of these subsidiaries in the Group’s financial statements as of the respective revaluation dates and the revalued basis of these property, plant and equipment and land lease prepayments are as follows:

   Goodwill

  

Positive

goodwill

carried in

reserves


   RMB  RMB

Cost:

      

Balance at beginning of year

  37,159  296,800

Addition arising on acquisition of subsidiaries

  2,857  —  
   
  

Balance at end of year

  40,016  296,800
   
  

Accumulated amortization:

      

Balance at beginning of year

  2,786  —  

Amortization for the year

  1,930  —  
   
  

Balance at end of year

  4,716  —  
   
  

Carrying amount:

      

At December 31, 2004

  35,300  296,800
   
  

At December 31, 2003

  34,373  296,800
   
  

   Net book value  Revalued
amount
   RMB
(restated)
  RMB
(restated)

Buildings

  9,824  10,348

Telecommunications transceivers, switching centers, transmission and other network equipment

  121,567  126,450

Office equipment, furniture and fixtures and others

  4,658  4,397
      

Total property, plant and equipment

  136,049  141,195
      

Land lease prepayments

  1,319  3,745
      

 

15Interest in associatesGoodwill

 

   December 31,

 
   2003

  2004

 
   RMB  RMB 

Unlisted shares, at cost

  37  21 

Capital contributions, at cost

  9  9 
   

 

   46  30 

Less: Provision for impairment

  (30) (30)
   

 

   16  —   
   

 

   Goodwill  Positive
goodwill
carried in
reserves
   RMB  RMB

Cost:

   

Balance at January 1, 2005

  40,016  296,800

Opening balance adjustment to eliminate accumulated amortization

  (4,716) —  
      

Balance at December 31, 2005

  35,300  296,800
      

Accumulated amortization:

   

Balance at January 1, 2005

  4,716  —  

Eliminated against cost at January 1, 2005

  (4,716) —  
      

Balance at December 31, 2005

  —    —  
      

Carrying amount:

   

At December 31, 2005

  35,300  296,800
      

At December 31, 2004

  35,300  296,800
      

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

15Interest in associatesGoodwill (Continued)

Impairment tests for goodwill

Goodwill arose from acquisitions of subsidiaries in previous years. In 2004, positive goodwill not already recognized directly in reserves was amortized on a straight-line basis over 20 years. The amortization of positive goodwill for the year ended December 31, 2004 was separately presented and included in the consolidated statements of income.

As explained further in note 3(c), with effect from January 1, 2005, the Group no longer amortizes goodwill but tests for impairment annually. In accordance with the transitional provisions set out in HKFRS 3, the accumulated amortization of goodwill as of January 1, 2005 has been eliminated against the cost of goodwill as at that date.

As set out in HKAS 36, cash generating units are the smallest identifiable group of assets that generate cash inflows from continuing use that are largely independent of the cash flows from other assets. For the purpose of impairment testing of goodwill, goodwill is allocated to a group of cash-generating units (being subsidiaries acquired in each acquisition). Such group of cash-generating units represents the lowest level within the Group at which the goodwill is monitored for internal management purposes and also is within the segment determined in accordance with HKAS 14 Segment Reporting.

The recoverable amount of the cash-generating units equals the value-in-use which is determined by the discounted cash flow method. The data from the Group’s detailed planning is used to project cash flows for the subsidiaries (cash generating units) to which the goodwill relates for the five years ending December 31, 2010 with subsequent transition to perpetuity. For the years following the detailed planning period, the assumed continual growth of 1% for perpetuity was used which complies with general expectations for the business. The present value of cash flows is calculated by discounting with a pre-tax interest rate of approximately 11%.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

16Interest in associates

December 31,
20042005
RMBRMB

Share of net assets

—  —  

Details of the associates, all of which are unlisted corporate entities, are as follows:

 

Name of associate


  Place of
incorporation
and operation


  

Proportion of

ownership

interest held

by the subsidiary


  

Principal activity

Activity


China Motion United Telecom Limited

  Hong Kong  30% Provision of
telecommunications services

Shenzhen China Motion Telecom United Limited

  PRC  30% Provision of
telecommunications services

Fujian FUNO Mobile Communication Technology Company Limited (“Fujian FUNO”) (Formerly known as “Fujian Nokia Mobile Communication Technology Company Limited”) was an associated companyOwing to the lack of recent audited financial statements of the Groupassociates, the Group’s share of the associates’ net assets are based on latest management accounts which showed net liabilities as at December 31, 2003. During2004 and 2005. The Company has made full impairment loss on the year,cost of investment in the Group acquired additional equity interestassociates in Fujian FUNO2004 and thus Fujian FUNO became a subsidiary of the Group.2005.

 

1617Investment securitiesOther financial assets

 

   December 31,

   2003

  2004

   RMB  RMB

Unlisted equity securities in the PRC, at cost

  77  77
   
  
   December 31,
   2004  2005
   RMB  RMB

Available-for-sale equity securities:

    

- Unlisted equity securities in the PRC (2004: investment securities)

  77  77
      

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

1718Deferred tax assets and liabilities

 

(a)The components of deferred tax assets/(liabilities) recognized in the consolidated balance sheet and the movements during the year for the Group are as follows:

Deferred tax assets and liabilities recognized and the movements during 20032004

 

  

At

January 1,
2003


 Additions on
acquisition of
subsidiaries


  Credited/
(charged) to
consolidated
statements
of income


 At
December 31,
2003


   At
January 1,
2004
 Additions on
acquisition of
subsidiaries
 Credited/
(charged) to
consolidated
statements
of income
 At
December 31,
2004
 
  RMB RMB  RMB RMB   RMB RMB RMB RMB 

Deferred tax assets arising from:

           

Provision for obsolete inventories

  16  —    7  23   23  —    7  30 

Write-down and write-off of fixed assets relating to network equipment

  200  —    825  1,025 

Write-off of certain network equipment and related assets

  1,025  —    1,201  2,226 

Amortization of deferred revenue

  154  —    (85) 69   69  —    (69) —   

Income recognition on prepaid service fees

  3,259  —    (2,780) 479   479  —    (437) 42 

Provision for certain operating expenses

  —    —    367  367   367  115  394  876 

Provision for doubtful accounts

  1,362  —    (62) 1,300 

Allowance for doubtful accounts

  1,300  78  (484) 894 
  

 
  

 

             
  4,991  —    (1,728) 3,263   3,263  193  612  4,068 
  

 
  

 

             

Deferred tax liabilities arising from:

           

Capitalized interest

  (58) —    (39) (97)  (97) (4) (4) (105)
  

 
  

 

             

Total

  4,933  —    (1,767) 3,166   3,166  189  608  3,963 
  

 
  

 

             

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

1718Deferred tax assets and liabilities (continued)(Continued)

Deferred tax assets and liabilities recognized and the movements during 20042005

 

  At
January 1,
2004


 Additions on
acquisition of
subsidiaries


 Credited/
(charged) to
consolidated
statements
of income


 At
December 31,
2004


   

At
January 1, 

2005

 Credited/
(charged) to
consolidated
statements
of income
 At
December 31,
2005
 
  RMB RMB RMB RMB   RMB RMB RMB 

Deferred tax assets arising from:

       

Provision for obsolete inventories

  23  —    7  30   30  (21) 9 

Write-down and write-off of fixed assets relating to network equipment

  1,025  —    1,201  2,226 

Amortization of deferred revenue

  69  —    (69) —   

Write-off of certain network equipment and related assets

  2,226  1,739  3,965 

Income recognition on prepaid service fees

  479  —    (437) 42   42  (42) —   

Provision for certain operating expenses

  367  115  394  876   876  804  1,680 

Provision for doubtful accounts

  1,300  78  (484) 894 

Allowance for doubtful accounts

  894  77  971 
  

 

 

 

          
  3,263  193  612  4,068   4,068  2,557  6,625 
  

 

 

 

          

Deferred tax liabilities arising from:

       

Capitalized interest

  (97) (4) (4) (105)  (105) 8  (97)
  

 

 

 

          

Total

  3,166  189  608  3,963   3,963  2,565  6,528 
  

 

 

 

          

 

   December 31,

 
   2003

  2004

 
   RMB  RMB 

Net deferred tax assets recognized in the balance sheet

  3,263  4.068 

Net deferred tax liabilities recognized in the balance sheet

  (97) (105)
   

 

   3,166  3,963 
   

 

   December 31, 
   2004  2005 
   RMB  RMB 

Net deferred tax assets recognized in the consolidatedbalance sheet

  4,068  6,625 

Net deferred tax liabilities recognized in the consolidated balance sheet

  (105) (97)
       

Total

  3,963  6,528 
       

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

1718Deferred tax assets and liabilities (continued)(Continued)

 

(b)Deferred tax of the Group not provided for:

As described in Note 13,note 14, in connection with the Restructuring and the subsequent acquisitions, the fixed assetsproperty, plant and equipment of Guangdong Mobile and Zhejiang Mobile and the acquired subsidiaries were revalued on different basis dates. Such revalued amounts would serve as the tax base for these assets for future years. As a result, the timing differences that gave rise to the potential net deferred tax liabilities of these subsidiaries relating to the revaluation of fixed assetsproperty, plant and equipment of totaling RMB6,732 were eliminated.

In addition, in connection with the Fifth Acquisition, the tax base of the acquired subsidiaries’ assets and liabilities have been adjusted to conform to the related financial carrying amounts. As a result, the timing differences that gave rise to the potential net deferred tax assets of these subsidiaries relating to the temporary differences allowance for doubtful accounts and capitalized interest of totaling RMB105 were eliminated.

Additionally, the tax losses carried forward relating to Liaoning Mobile and Guangxi Mobile, Chongqing Mobile and Sichuan Mobile, and Jilin Mobile, Xinjiang Mobile, Jingxi Design Institute and CMC of RMB72, RMB378 and RMB228 were eliminated as of June 30, 2000, December 31, 2001 and December 31, 2003 respectively.

 

1819Deferred expenses

 

   Year ended December 31,

 
   2003

  2004

 
   RMB  RMB 

Balance at beginning of year

  190  143 

Less: Amortization for the year

  (47) (47)
   

 

Balance at the end of year

  143  96 
   

 

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

19Accounts payable

Accounts payable primarily includes payables for network expansion projects expenditure, leased lines and interconnection expenses.

The ageing analysis of accounts payable as at December 31 is analyzed as follows:

   December 31,

   2003

  2004

   RMB  RMB

Amounts payables in the next:

      

1 month or on demand

  14,066  22,815

2-3 months

  3,348  3,119

4-6 months

  2,198  2,773

7-9 months

  1,966  2,465

10-12 months

  3,647  3,864
   
  
   25,225  35,036
   
  

20Bank loans and other interest-bearing borrowings

     December 31,

     2003

  2004

     Current
liabilities


  

Non-

current
liabilities


  Total

  Current
liabilities


  

Non-

current
liabilities


  Total

   Note RMB  RMB  RMB  RMB  RMB  RMB

Bank loans

  (a) 1,853  672  2,525  315  —    315

Other loans

  (a) 6,253  —    6,253  2,140  —    2,140

Fixed rate notes

  (b) 4,984  —    4,984  —    —    —  

Convertible notes

  (c) —    5,735  5,735  5,725  —    5,725

Bonds

  (d) —    13,000  13,000  —    13,000  13,000
     
  
  
  
  
  
     13,090  19,407  32,497  8,180  13,000  21,180
     
  
  
  
  
  
   Year ended December 31, 
   2004  2005 
   RMB  RMB 

Balance at beginning of year

  143  96 

Less: Opening balance adjustment eliminated against financial instruments

  —    (96)

          Amortization for the year

  (47) —   
       

Balance at the end of year

  96  —   
       

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

20Bank loansAccounts payable

Accounts payable primarily includes payables for network expansion projects expenditure, leased lines and interconnection expenses.

The ageing analysis of accounts payable as of December 31 is analyzed as follows:

   December 31,
   2004  2005
   RMB  RMB

Amounts payables in the next:

    

1 month or on demand

  22,815  27,493

2-3 months

  3,119  4,599

4-6 months

  2,773  3,675

7-9 months

  2,465  1,448

10-12 months

  3,864  4,716
      
  35,036  41,931
      

The accounts payable are expected to be settled within one year.

21Deferred revenue

Deferred revenue includes primarily prepaid service fees received from subscribers and deferred tax credit of purchase of domestic telecommunications equipment. Prepaid service fees are recognized as income when the mobile telecommunications services are rendered upon actual usage by subscribers. Deferred tax credit of purchase of domestic telecommunications equipment is amortized as non-operating income over the remaining lives of the related property, plant and equipment.

   December 31, 
   2004  2005 
   RMB  RMB 

Balance at beginning of year

  10,164  13,880 

Additions on acquisition of subsidiaries

  992  —   

Additions during the year

  83,375  105,407 

Recognized in the consolidated statements of income

  (80,651) (100,988)
       

Balance at end of year

  13,880  18,299 

Less: Current portion

  (12,936) (16,975)
       

Non-current portion

  944  1,324 
       

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

22Accrued expenses and other interest-bearing borrowings (Continued)payables

 

   December 31,
   2004  2005
   RMB  RMB

Other payables

  8,192  9,030

Receipts in advance

  18,896  23,856

Accrued salaries, wages and benefits

  1,833  2,200

Accrued expenses

  3,628  4,921
      
  32,549  40,007
      

23Interest-bearing borrowings

     December 31,
     2004  2005
     Current
liabilities
  Non-current
liabilities
  Total  Current
liabilities
  Non-current
liabilities
  Total
   Note RMB  RMB  RMB  RMB  RMB  RMB

Bank loans

  (a) 315  —    315  —    —    —  

Other loans

  (a) 2,140  —    2,140  —    —    —  

Convertible notes

  (b) 5,725  —    5,725  —    —    —  

Bonds

  (c) —    13,000  13,000  —    12,912  12,912

Deferred consideration payable

  (d) —    23,633  23,633  —    23,633  23,633
                   
   8,180  36,633  44,813  —    36,545  36,545
                   

All of the above bank and other loans are unsecured.

AtAs of December 31, 2004, other loans includeincluded designated loans borrowed from China Mobile,CMCC, the ultimate holding company, totaling RMB2,140, (at December 31, 2003: RMB6,170), which bear interest rates at 3.45% per annum (2003: 3.57% per annum) with maturities in 2005 (2003: 2004).2005.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

23Interest-bearing borrowings (Continued)

The Group did not have outstanding borrowings under short-term bank and other loans as of December 31, 2005. The Group’s borrowings under short-term bank and other loans arewere used primarily to finance construction projects and generally consist of unsecured loans and are repayable in full on respective due dates with interest rates ranging from 4.78% to 5.34% per annum at December 31, 2003 and at 3.45% per annum atas of December 31, 2004. The Group’s weighted average interest rate on short-term loans was 4.82% per annum and 3.45% per annum at December 31, 2003 and 2004, respectively.2004.

 

(a)Long-term bank and other loans

 

      December 31,

   

Interest rate and final maturity


  2003

  2004

      RMB  RMB
Renminbi denominated bank loans:      

For construction of telecommunications network

  Floating interest rates at 4.96% per annum as of December 31, 2004 with maturities in 2005 (i)  1,096  193
   Fixed interest rates ranging from 5.43% to 5.49% per annum as of December 31, 2003 with maturities in 2004  255  —  
December 31,

Interest rate and final maturity

20042005
RMBRMB

Renminbi denominated bank loans:

For construction of telecommunications network

Floating interest rates at 4.96% per annum as of December 31, 2004 with maturities in 2005 (i)

193—  

Renminbi denominated bank loans:

For working capital

Floating interest rate at 4.94% per annum as of December 31, 2004 with maturities in 2005

60—  

US dollar denominated bank loans:

For construction of telecommunications network

Fixed interest rate ranging from 5.25% to 5.75% per annum as of December 31, 2004 with maturities in 2005

62—  

Total long-term loans

315—  

Less: current portion

(315)—  
—  —  

(i)At December 31, 2004, bank loans amounting to RMB193 were guaranteed by Hebei Provincial Telecommunications Company.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

2023Bank loans and other interest-bearingInterest-bearing borrowings (Continued)

 

(a)Long-term bank and other loans (Continued)

      December 31,

 
   

Interest rate and final maturity


  2003

  2004

 
      RMB  RMB 
Renminbi denominated bank loans:       

For working capital

  Floating interest rate at 4.94% per annum as of December 31, 2004 with maturities in 2005  400  60 
Renminbi denominated other loans:       

For working capital

  Floating interest rate at 3.57% per annum as of December 21, 2003 with maturities in 2004  5,024  —   
   Fixed interest rate at 3.57% per annum as of December 31, 2003 with maturities in 2004  1,146  —   
US dollar denominated bank loans:       

For construction of telecommunications network

  Fixed interest rate ranging from 5.25% to 5.75% per annum as of December 31, 2004 with maturities in 2005  126  62 
US dollar denominated other loans:       

For construction of telecommunications network

  Fixed interest rate at 7.5% per annum as of December 31, 2003 with maturities through 2004  81  —   
      

 

Total long-term loans

     8,128  315 

Less: current portion

     (7,456) (315)
      

 

      672  —   
      

 

(i)At December 31, 2004, bank loans amounting to RMB193 was guaranteed by Hebei Provincial Telecommunications Company (“PTC”).

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

20Bank loans and other interest-bearing borrowings (Continued)

(a)Long-term bank and other loans (Continued)

The aggregate maturities of long-term bank and other loans subsequent to December 31, 2004 are as follows:

   RMB

2005

  315
   

Interest expense, net of the amounts capitalized, is as follows:

 

   Year ended December 31,

 
   2002

  2003

  2004

 
   RMB  RMB  RMB 

Interest incurred

  1,213  1,211  719 

Interest element of capital lease

  47  —    —   

Interest capitalized

  (181) (152) (16)
   

 

 

   1,079  1,059  703 

Interest expenses of fixed rate notes

  394  394  330 

Interest expenses of convertible notes

  128  129  129 

Interest expenses of bonds

  251  517  517 
   

 

 

Interest expense

  1,852  2,099  1,679 
   

 

 

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

20Bank loans and other interest-bearing borrowings (Continued)
   Year ended December 31, 
   2003  2004  2005 
   RMB  RMB  RMB 

Interest incurred

  1,211  719  685 

Interest capitalized

  (152) (16) (2)
          
  1,059  703  683 

Interest expenses of fixed rate notes

  394  330  —   

Interest expenses of convertible notes

  129  129  135 

Interest expenses of bonds

  517  517  528 
          

Interest expense

  2,099  1,679  1,346 
          

 

(b)Fixed rate notes

On November 2, 1999, the Company issued unsecured fixed rate notes (the “FRN”) with a principal amount of US$600 at an issue price equal to 99.724% of the principal amount of the FRN, due on November 2, 2004. The FRN bear interest at the rate of 7.875% per annum and such interest is payable semi-annually on May 2 and November 2 of each year, commencing May 2, 2000. In accordance with the covenants of the FRN, there is a limitation on the Group’s pledges, sale and leaseback transactions and the ability of the Company’s subsidiaries to incur debt. So long as any notes remain outstanding, whereas no additional debt is allowed to incur by any subsidiaries if the aggregate debt of the subsidiaries exceeds 120% of the consolidated adjusted earnings before interest, tax, depreciation, amortization and write-down and write-off of fixed assets (“adjusted EBITDA”) for the most recently completed 12 months period. For the years presented, the Group has complied with the above covenants. The fixed rate notes were fully redeemed during the year.

(c)Convertible notes

 

 (i)On November 3, 2000, the Company issued convertible notes (the “CN”) in an aggregate principal amount of US$690 at an issue price equal to 100% of the principal amount of the CN. The CN bear interest at the rate of 2.25% per annum, payable semi-annually on May 3 and November 3 of each year commencing May 3, 2001. Unless previously redeemed, converted or purchased and cancelled, the CN willwould be redeemed at 100% of the principal amount, plus any accrued and unpaid interest on November 3, 2005. The CN arewere unsecured, senior and unsubordinated obligations of the Company.

 

 (ii)The CN arewere convertible at any time on or after December 3, 2000 and before the close of business on the third business day prior to the earlier of (1) the maturity date of November 3, 2005 or (2) the redemption date fixed for early redemption, at an initial conversion price, subject to adjustment in certain events, of HK$59.04 per share.

(iii)During the year, no CN were converted into ordinary shares of the Company.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

2023Bank loans and other interest-bearingInterest-bearing borrowings (Continued)

 

(c)(b)Convertible notes (Continued)

 

 (iv)(iii)In accordance with the covenants given by the Company given to the note holders, there iswas a limitation on the Group’s pledges, sale and leaseback transactions and the ability of the Company’s subsidiaries to incur debt. So long as any notes remainremained outstanding, whereas no additional debt iswas allowed to incurbe incurred by any subsidiaries if the aggregate debt of the subsidiaries exceedsexceeded 120% of the consolidated adjusted EBITDA for the most recently completed 12 months period. For the years presented, the Group has complied with the above covenants.

 

(iv)During the year, no CN were converted into ordinary shares of the Company. The CN were fully redeemed during the year.

(d)(c)Bonds

 

 (i)On June 18, 2001, Guangdong Mobile issued guaranteed bonds with a principal amount of RMB5,000 (the “Ten-year Bonds”) at an issue price equal to the face value of the bonds.

The Ten-year Bonds bear interest at a floating rate, adjusted annually from the first day of each interest payable year and payable annually. The bonds, redeemable at 100% of the principal amount, will mature on June 18, 2011 and the interest will be accrued up to June 17, 2011. Incidental costs incurred in relation to the issue of the bonds are amortized on a straight-line basis over the period from the date of issue to the date of maturity.

 

 (ii)On October 28, 2002, Guangdong Mobile issued five-year guaranteed bonds (the “Five-year Bonds”) and fifteen-year guaranteed bonds (the “Fifteen-year Bonds”), with a principal amount of RMB3,000 and RMB5,000 respectively, at an issue price equal to the face value of the bonds.

The Five-year Bonds and the Fifteen-year Bonds bear interest at the rate of 3.5% per annum and 4.5% per annum respectively and payable annually. They are redeemable at 100% of the principal amount and will mature on October 28, 2007 and October 28, 2017 and the interest will be accrued up to October 27, 2007 and October 27, 2017, respectively.

 

The Company has issued a joint and irrevocable guarantee (the “Guarantee”) for the performance of the above bonds. China Mobile has also issued a further guarantee in relation to the performance by the Company of its obligations under the Guarantee. The maximum exposure of the Guarantee is the face value of the bonds which have been reflected as liabilities in the consolidated balance sheet as at December 31, 2004.

(iii)The Company has issued a joint and irrevocable guarantee (the “Guarantee”) for the performance of the above bonds. CMCC has also issued a further guarantee in relation to the performance by the Company of its obligations under the Guarantee. The maximum exposure of the Guarantee is the face value of the bonds.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

2123Interest-bearing borrowings (Continued)

(d)Deferred consideration payable

This represents the balances of the deferred consideration of RMB9,976 and RMB13,657 payable to immediate holding company in respect of the acquisitions of subsidiaries in 2002 and 2004, respectively.

The deferred consideration payable is unsecured, bear interest at the rate of two year US dollar LIBOR swap rate per annum (for the year ended December 31, 2004: 2.595 to 3.801% per annum and for the year ended December 31, 2005: 3.801% per annum). The balances are subordinated to other senior debts owed by the Company from time to time. The Company may make early payment of all or part of the balances at any time before the date without penalty but the balances are not expected to be settled within one year. The balances in respect of the acquisitions of subsidiaries in 2002 and 2004 are due on July 1, 2017 and 2019, respectively.

24Obligations under capital lease

 

 (i)Hainan Mobile entered into certain capital lease agreements to finance the purchase of telecommunications equipment. The leases are denominated in Renminbi and the lease term was expired in 2003. The legal title of the equipment will be transferred to Hainan Mobile when all outstanding lease payments are paid.

 

 (ii)The following is a schedule by years of future minimum lease payments under capital lease together with the present value of the net minimum lease payments as of December 31, 2004:2005:

 

   RMB

 

2005

  71 
   

Total minimum lease payments

  71 

Less: Amount representing interest

  (3)
   

Present value of net minimum lease payments

  68 

Less: Obligations under capital lease - current portion

  (68)
   

   —   
   

22Accrued expenses and other payables

   December 31,

   2003

  2004

   RMB  RMB

Other payables

  5,376  8,192

Receipts in advance

  13,393  18,896

Accrued salaries, wages and benefits

  1,435  1,833

Accrued expenses

  2,113  3,628
   
  
   22,317  32,549
   
  
   RMB 

2006

  71 
    

Total minimum lease payments

  71 

Less: Amount representing interest

  (3)
    

Present value of net minimum lease payments

  68 

Less: Obligations under capital lease - current portion

  (68)
    
  —   
    

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

23Deferred revenue

Deferred revenue includes primarily prepaid service fees received from subscribers and deferred tax credit of purchase of domestic telecommunications equipments. Prepaid service fees are recognized as income when the mobile telecommunications services are rendered upon actual usage by subscribers. Deferred tax credit of purchase of domestic telecommunications equipment is amortized as non-operating income over the remaining lives of the related fixed assets.

Deferred revenue at December 31, 2003 also includes income from assignment of rights. The balance represents the unamortized portion of proceeds received by Guangdong Mobile from certain distributors of telecommunications services pursuant to assignment of rights agreements under which Guangdong Mobile sold certain mobile phone numbers to these distributors at RMB0.0092 each, in return for assigning to such distributors the rights to certain revenue such as usage fees, monthly fees, connection fees, telephone number selection fees and 50% value-added services fees from those subscribers over a period of seven years. The distributors have no recourse to the Group under the relevant agreements and the Group retains no credit risk from such subscribers during the seven-year period. The proceeds received by Guangdong Mobile have been accounted for as deferred revenue and are amortized over a period of seven years. After the expiration of the relevant agreements, the rights to income from these subscribers will revert to the Group. Deferred revenue of income from assignment of rights was fully amortized during the year

   December 31,

 
   2003

  2004

 
   RMB  RMB 

Balance at beginning of year

  7,629  10,164 

Additions on acquisition of subsidiaries

  —    992 

Additions during the year

  54,032  83,375 

Recognized in the consolidated statements of income

  (51,497) (80,651)
   

 

Balance at end of year

  10,164  13,880 

Less: Current portion

  (9,476) (12,936)
   

 

Non-current portion

  688  944 
   

 

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

2425Commitments and contingencies

 

(a)Operating leases

Future minimum lease payments as of December 31, 20042005 under non-cancellablenon-cancelable operating leases having initial or remaining lease terms of more than one year are as follows:

 

  RMB

  RMB

2005

  3,619

2006

  1,716  3,529

2007

  1,405  2,081

2008

  1,072  1,562

2009

  807  1,134

2010

  798

Thereafter

  1,464  1,455
  
   
  10,083  10,559
  
   

 

(b)Capital commitments

As of December 31, 2004,2005, the Group had capital commitments as follows:

 

   RMB

Authorized and contracted for

  11,61911,867

Authorized but not contracted for

  32,99447,474
   

59,341
   44,613

(c)
Acquisition of all the issued shares of Peoples (defined as below)

Pursuant to resolution of board of directors meeting dated October 19, 2005, the directors approved the voluntary conditional cash offers to acquire all the issued shares and for cancellation of all outstanding options, of China Resources Peoples Telephone Company Limited (“Peoples”) by Fit Best Limited, a wholly-owned subsidiary of the Company.

On November 10, 2005, the Company and Peoples had issued a composite offer and response document (the “Composite Document”) in relation to the voluntary conditional cash offers to acquire all the issued shares of Peoples (“Share Offer”) and to cancel all outstanding share options of Peoples Options (“Option Offer”).

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

25Commitments and contingencies (Continued)

(c)Acquisition of all the issued shares of Peoples (defined as below) (Continued)

On December 29, 2005, being the First Closing Date, all conditions in the Share Offer were fulfilled and the Share Offer became unconditional in all aspects and the Option Offer therefore also became unconditional on the same date. On the basis of the Share Offer price of HK$4.55 per share and 743,641,019 shares in issue, the entire Share Offer is valued at approximately HK$3,384 (approximately RMB3,520). On the basis of the Option Offer price of HK$1.00 per option and there were 484 share options outstanding, the entire Option Offer is valued at approximately HK$0.0005 (approximately RMB0.0005).

26Employee and retirement benefits

 

(a)As stipulated by the regulations of the PRC, the subsidiaries in the PRC participate in basic defined contribution pension plans organized by their respective Municipal Governments under which they are governed.

Employees in the PRC are entitled to retirement benefits equal to a fixed proportion of their salary at their normal retirement age. The Group has no other material obligation for payment of basic retirement benefits beyond the annual contributions which are calculated at a rate based on the salaries, bonuses and certain allowances of its employees.

Other than the above, certain subsidiaries also participate in supplementary defined contribution retirement plans managed by independent insurance companies whereby the subsidiaries are required to make contributions to the retirement plans at fixed rates of the employees’ salary costs or in accordance with the terms of the plans.

Expenses incurred by the subsidiaries in connection with the retirement scheme were RMB451, RMB546, RMB771 and RMB771,RMB886, respectively, for three years ended December 31, 2002, 2003, 2004 and 2004,2005, respectively.

 

(b)The Group also operates a Mandatory Provident Fund Scheme (“the MPF scheme”) under the Hong Kong Mandatory Provident Fund Schemes Ordinance for employees employed under the jurisdiction of the Hong Kong Employment Ordinance. The MPF scheme is a defined contribution retirement scheme administered by independent trustees. Under the MPF scheme, the employer and its employees are each required to make contributions to the scheme at 5% of the employees’ relevant income, subject to a cap of monthly relevant income of HK$0.02. Contributions to the scheme vest immediately.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

2627Related party transactions

 

(a)Companies are considered to be related if one company has the ability, directly or indirectly, to control the other company or exercise significant influence over the other company in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.Transactions with CMCC

TheFollowing the completion of acquisition of the ten mobile telecommunications companies and other mobile telecommunications assets on July 1, 2004, the Group has significantoperates the mobile telecommunications services in all thirty-one provinces, autonomous regions and directly administered municipalities in the PRC. Prior to the acquisition, transactions entered into by the Group with China Mobile (thethe subsidiaries previously directly owned by the Company’s ultimate holding company) and itscompany, CMCC, are considered as related party transactions. Following the acquisition, as these subsidiaries other thannow become the members of the Group, (the “China Mobile Group”).

these transactions are eliminated on a consolidated basis and therefore are not considered as related party transactions.

The following is a summary of principal related party transactions carried outentered into by the Group with CMCC and its subsidiaries, excluding the China Mobile Group after eliminating intercompany transactions(the “CMCC Group”), for yearsthe year ended December 31, 2002, 2003 and 2004.2005.

 

      Year ended December 31,

      2002

  2003

  2004

   Note  RMB  RMB  RMB

Interconnection revenue

  (i) 8,167  6,010  2,438

Interconnection charges

  (ii) 8,333  6,290  2,117

Leased line charges

  (iii) 484  515  132

Spectrum fees

  (iv) 224  508  303

Operating lease charges

  (v) 189  264  281

Roaming billing processing fees

  (vi) 225  194  22

Equipment maintenance service fees

  (vii) 54  57  81

Construction and related service fees

  (viii) 223  313  287

Purchase of transmission tower and transmission tower-related service and antenna maintenance service fees

  (ix) 87  84  148

Prepaid card sales commission income

  (x) 197  281  142

Prepaid card sales commission expenses

  (x) 195  283  155

Technology platform development and maintenance service income

  (xi) 39  22  25

Telecommunications lines maintenance service fees

  (xii) 22  44  54

Interest paid / payable

  (xiii) 645  906  645
NoteRMB

Property leasing and management services charges

(i)589

Telecommunications services charges

(ii)1,866

Interest paid/payable

(iii)647

Notes:

(i)Property leasing and management services charges represent the rental and property management fees paid or payable to CMCC Group in respect of business premises and offices, retail outlets and warehouses.
(ii)Telecommunications services charges represent the amounts paid or payable to CMCC Group for the telecommunications project planning, design and construction services; telecommunications line and pipeline construction services; and telecommunications line maintenance services.
(iii)Interest paid/payable represents the interest paid or payable to CMCC and CMHK (BVI), the Company’s immediate holding company, in respect of the designated loans borrowed and the balance of purchase consideration for acquisition of subsidiaries.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

2627Related party transactions (Continued)

 

(a)Transactions with CMCC (Continued)

The following is a summary of principal related party transactions carried out by the Group with CMCC Group for the years ended December 31, 2003 and 2004.

      Year ended December 31,
   Note  2003  2004
      RMB  RMB

Interconnection revenue

  (i) 6,010  2,438

Interconnection charges

  (ii) 6,290  2,117

Leased line charges

  (iii) 515  132

Spectrum fees

  (iv) 508  303

Operating lease charges

  (v) 264  281

Roaming billing processing fees

  (vi) 194  22

Equipment maintenance service fees

  (vii) 57  81

Construction and related service fees

  (viii) 313  287

Purchase of transmission tower and transmission tower-related service and antenna maintenance service fees

  (ix) 84  148

Prepaid card sales commission income

  (x) 281  142

Prepaid card sales commission expenses

  (x) 283  155

Technology platform development and maintenance service income

  (xi) 22  25

Telecommunications lines maintenance service fees

  (xii) 44  54

Interest paid / payable

  (xiii) 906  645

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

27Related party transactions (Continued)

(a)Transactions with CMCC (Continued)


Notes:

 

(i)A mobile telephone user using roaming services is charged at the respective roaming usage rate and applicable long distance charges for roaming in calls. Interconnection revenue represents domestic and international roaming in usage charges and applicable long distance charges from non-subscribers received or receivable from the relevant domestic and international mobile telecommunication operators through the China MobileCMCC Group.

(ii)A mobile telephone user using roaming services is charged at the respective roaming usage rate and applicable long distance charges for roaming out calls. Interconnection charges represent the amount of domestic and international roaming out charges and applicable long distance charges received or receivable from subscribers which isare to be remitted to the relevant domestic and international mobile telecommunication operators for their share of revenue through the China MobileCMCC Group.

(iii)Leased line charges represent expenses paid or payable to the China MobileCMCC Group for the use of inter-provincial leased lines which link the Group’s mobile switching centers together and with other mobile switching centers of the China MobileCMCC Group.

(iv)Spectrum fees represent the spectrum usage fees paid or payable to the China MobileCMCC Group for the usage of the frequency bands allocated to the Company’s subsidiaries in the PRC.

(v)Operating lease charges represent the rental and property management fees paid or payable to the subsidiaries of China MobileCMCC for operating leases in respect of land and buildings and others.

(vi)Roaming billing processing fees represent the amounts paid or payable to the China MobileCMCC Group for the provision of the roaming billing processing services to the Company’s subsidiaries.
(vii)Equipment maintenance service fees represent the amount paid or payable to subsidiaries of CMCC for the provision of the maintenance services to the Company’s subsidiaries.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

2627Related party transactions (Continued)

 

(a)Transactions with CMCC (Continued)

Notes: (Continued)

 

(vii)Equipment maintenance service fees represent the amount paid or payable to subsidiaries of China Mobile for the provision of the maintenance services to the Company’s subsidiaries.

(viii)Construction and related service fees represent the amount paid or payable to subsidiaries of China MobileCMCC for the provision of telecommunications projects planning, design and construction services and telecommunications lines and pipelines construction services to the Company’s subsidiaries.

(ix)This represents payment made by Hebei Mobile to acquire transmission towers from a subsidiary of China MobileCMCC and expenses paid or payable to relevant subsidiary of China MobileCMCC for the provision of transmission towers related services and antenna maintenance services provided to Hebei Mobile; and payment made by the Group to Hubei CommunicationsCommunication Services Company, a subsidiary of China Mobile,CMCC, in respect of the purchase of transmission towers and for the provision of transmission tower related services.

(x)Prepaid card sales commission income and commission expenses represent handling charges received/receivable from subsidiaries of China MobileCMCC to the Company’s subsidiaries or paid/payable by the Company’s subsidiaries to subsidiaries of China MobileCMCC in respect of prepaid card services.

(xi)Technology platform development and maintenance service income represents the amounts received or receivable from the China MobileCMCC Group in respect of equipment charges, systems integration fees, software licensing fees, technical support fees and/or major overhaul charges for the mobile information service center platform.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

26Related party transactions (Continued)

Notes: (Continued)

(xii)Telecommunications lines maintenance service fees represent the amount paid or payable by Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi Mobile to the relevant subsidiaries of China MobileCMCC for the provision of telecommunications lines maintenance services.

(xiii)Interest paid/payable represents the interest paid or payable to China MobileCMCC and CMHK (BVI) in respect of the designated loans borrowed and the balance of purchase consideration for acquisition of subsidiaries.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

(b)27Pursuant to a resolution passed at the extraordinary general meeting held on June 24, 2002, the Company acquired the entire issued share capital of Anhui Mobile BVI, Jiangxi Mobile BVI, Chongqing Mobile BVI, Sichuan Mobile BVI, Hubei Mobile BVI, Hunan Mobile BVI, Shaanxi Mobile BVI and Shanxi Mobile BVI from CMHK (BVI), the immediate holding company of the Company, for a total consideration of US$8,573 (RMB equivalent 70,959). The consideration was satisfied by a cash payment of RMB49,248 and allotment of shares to CMHK (BVI) amounted to HK$20,458 (RMB equivalent 21,711). The only assets of each of Anhui Mobile BVI, Jiangxi Mobile BVI, Chongqing Mobile BVI, Sichuan Mobile BVI, Hubei Mobile BVI, Hunan Mobile BVI, Shaanxi Mobile BVI and Shanxi Mobile BVI are their interests in the entire equity of Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi Mobile, respectively.Related party transactions (Continued)

 

(c)(b)Pursuant to a resolution passed at the extraordinary general meeting held on June 16, 2004, the Company acquired the entire issued share capital of Neimenggu Mobile BVI, Jilin Mobile BVI, Heilongjiang Mobile BVI, Guizhou Mobile BVI, Yunnan Mobile BVI, Xizang Mobile BVI, Gansu Mobile BVI, Qinghai Mobile BVI, Ningxia Mobile BVI, Xinjiang Mobile BVI, Zhongjing Design Institute BVI and CMC BVI from CMHK (BVI), the immediate holding company of the Company, for a total consideration of US$3,650 (RMB equivalent 30,210). The total consideration was satisfied by cash. The only assets of each of Neimenggu Mobile BVI, Jilin Mobile BVI, Heilongjiang Mobile BVI, Guizhou Mobile BVI, Yunnan Mobile BVI, Xizang Mobile BVI, Gansu Mobile BVI, Qinghai Mobile BVI, Ningxia Mobile BVI, Xinjiang Mobile BVI, Zhongjing Design Institute BVI and CMC BVI are their interests in the entire equity of Neimenggu Mobile, Jilin Mobile, Heilongjiang Mobile, Guizhou Mobile, Yunnan Mobile, Xizang Mobile, Gansu Mobile, Qinghai Mobile, Ningxia Mobile, Xinjiang Mobile, Jingyi Design Institute and CMC respectively.

(c)Key management personnel remuneration

Remuneration for key management personnel represents directors’ remuneration which amounted to HK$40 for the year ended December 31, 2005 (2004: HK$16).

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

2728Shareholders’ equityTransactions with other state-controlled entities in the PRC

The Group is a state-controlled enterprise and operates in an economic regime currently predominated by state-controlled enterprises. Apart from transactions with parent company and its affiliates, the Group conducts certain business activities with enterprises directly or indirectly owned or controlled by the PRC government and government authorities and agencies (collectively referred to as “state-controlled entities”) in the ordinary course of business. These transactions primarily include rendering and receiving services and sales and purchase of goods, are carried out at terms similar to those that would be entered into with non-state-controlled entities and have been reflected in the financial statements.

Share capitalAs part of the transactions with state-controlled entities as mentioned above, the Group has material transactions with other state-controlled telecommunications operators in the PRC in the normal course of providing telecommunications services. These transactions are conducted and settled in accordance with rules and regulations stipulated by the Ministry of Information Industry of the PRC Government.

The Group’s principal transactions with other state-controlled telecommunications operators in the PRC are as follows:

 

   

Number of
ordinary

shares


  

Nominal

amount of

each ordinary
share


  Amount
HK$


Authorized:

          

Balance at December 31, 2003 and 2004

  30,000,000,000  HK$0.10  3,000
   
      

Issued and fully paid:

          

Balance at January 1, 2003 and December 31, 2003

  19,671,653,899  HK$0.10  1,967
   
      
       
 
RMB
equivalent
  2,099
          

Balance at January 1, 2004

  19,671,653,899  HK$0.10  1,967

Shares issued under share option scheme

  28,985,500  HK$0.10  3
   
      

Balance at December 31, 2004

  19,700,639,399      1,970
   
      
       
 
RMB
equivalent
  2,102
          
   Year ended December 31,
   2003  2004  2005
   RMB  RMB  RMB

Interconnection revenue

  2,277  4,208  6,196

Interconnection charges

  6,563  10,016  13,588

Leased line charges

  4,346  3,385  3,054

Although certain of the Group’s activities are conducted with PRC government authorities and affiliates and other state-controlled enterprises, the Group believes that such activities are not material and the Group’s principal transactions with other state-controlled telecommunications operators as described in above in the PRC have provided meaningful disclosure.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

2729Shareholders’ equity

Share capital

   

Number of

ordinary

shares

  

Nominal

amount of

each ordinary

share

  Amount
         HK$

Authorized:

      

Balance at December 31, 2004 and 2005

  30,000,000,000  HK$0.10  3,000
        

Issued and fully paid:

      

Balance at January 1, 2004

  19,671,653,899  HK$0.10  1,967

Shares issued under share option scheme

  28,985,500  HK$0.10  3
        

Balance at December 31, 2004

  19,700,639,399    1,970
        
    RMB
equivalent
  2,102
       

Balance at January 1, 2005

  19,700,639,399  HK$0.10  1,970

Shares issued under share option scheme

  134,521,000  HK$0.10  14
        

Balance at December 31, 2005

  19,835,160,399    1,984
        
    RMB
equivalent
  2,116
       

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

29Shareholders’ equity (Continued)

Share capital (Continued)

The Company was established in Hong Kong on September 3, 1997 as a limited company, with a registered share capital of HK$10,000 divided into 100,000 shares of HK$0.10 each, two of which were issued and credited as fully paid.

At an extraordinary general meeting of the Company held on September 27, 1997,

 

 (i)the authorized share capital of the Company was increased from HK$10,000 to HK$1,600,000,000 by the creation of an additional 15,999,900,000 shares of HK$0.10 each; and

 

 (ii)9,009,999,998 shares were credited as fully paid and issued to CMHK (BVI) for the transfer of interests in Guangdong Mobile and Zhejiang Mobile to the Company.

Pursuant to the resolutions passed on October 21, 1997, the Company issued 2,600,000,000 shares of HK$0.10 each at HK$11.68 per share and the shares were listed on the New York Stock Exchange and The Stock Exchange of Hong Kong Limited on October 22, 1997 and October 23, 1997, respectively. On November 7, 1997, the Company issued 170,788,000 shares of HK$0.10 each at HK$11.68 per share by way of a placing among professional and institutional investors.

Pursuant to ordinary resolutions passed at directors’ meetings held on November 1, 1999 and November 3, 1999 respectively, the Company issued 560,700,000 and 84,104,000 ordinary shares of HK$0.10 each to professional and institutional investors, at a consideration of HK$24.10 per share, for financing the acquisition of Fujian Mobile BVI, Henan Mobile BVI and Hainan Mobile BVI.

Pursuant to an ordinary resolution passed at an extraordinary general meeting held on November 11, 1999, 1,273,195,021 ordinary shares of HK$0.10 each were issued and credited as fully paid to CMHK (BVI), at a consideration of HK$24.10 per share as part of the consideration for the acquisition of Fujian Mobile BVI, Henan Mobile BVI and Hainan Mobile BVI.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

2729Shareholders’ equity (Continued)

Share capital (Continued)

Pursuant to resolutions passed at directors’ meetings held on November 2, 2000 and November 8, 2000 respectively, the Company issued 1,068,396,405 and 47,247,440 ordinary shares of HK$0.10 each to professional and institutional investors, at a consideration of HK$48 per share, for financing the acquisition of Beijing Mobile BVI, Shanghai Mobile BVI, Tianjin Mobile BVI, Hebei Mobile BVI, Liaoning Mobile BVI, Shandong Mobile BVI and Guangxi Mobile BVI.

Pursuant to ordinary resolutions passed at an extraordinary general meeting held on November 10, 2000, the Company’s authorized share capital was increased to HK$3,000,000,000 by the creation of an additional 14,000,000,000 ordinary shares of HK$0.10 each, ranking pari passu with the existing shares of the Company, and 3,779,407,375 ordinary shares of HK$0.10 each were issued and credited as fully paid to CMHK (BVI), at a consideration of HK$48 per share as part of the consideration for the acquisition of Beijing Mobile BVI, Shanghai Mobile BVI, Tianjin Mobile BVI, Hebei Mobile BVI, Liaoning Mobile BVI, Shandong Mobile BVI and Guangxi Mobile BVI.

Pursuant to a resolution passed at a directors’ meeting held on May 16, 2002, the Company issued 236,634,212 ordinary shares of HK$0.10 each to Vodafone Holdings (Jersey) Limited, at a consideration of HK$24.7217 per share, for financing the acquisition of Anhui Mobile BVI, Jiangxi Mobile BVI, Chongqing Mobile BVI, Sichuan Mobile BVI, Hubei Mobile BVI, Hunan Mobile BVI, Shaanxi Mobile BVI and Shanxi Mobile BVI.

Pursuant to an ordinary resolution passed at an extraordinary general meeting held on June 24, 2002, 827,514,446 ordinary shares of HK$0.10 each were issued and credited as fully paid to CMHK (BVI) at HK$24.7217 per share as part of the consideration of the acquisition of Anhui Mobile BVI, Jiangxi Mobile BVI, Chongqing Mobile BVI, Sichuan Mobile BVI, Hubei Mobile BVI, Hunan Mobile BVI, Shaanxi Mobile BVI and Shanxi Mobile BVI.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

2729Shareholders’ equity (Continued)

Reserves

Capital reserve

As mentioned in Note 1, thisThis amount represents the total of the following:

 

the additional earnings of Guangdong Mobile and Zhejiang Mobile from June 1, 1997 to September 26, 1997, the completion date of the Restructuring (RMB1,132);
§the additional earnings of Guangdong Mobile and Zhejiang Mobile from June 1, 1997 to September 26, 1997, the completion date of the Restructuring (RMB1,135);

 

goodwill arising on the acquisition of Jiangsu Mobile BVI and Jiangsu Mobile on June 3, 1998 (RMB15,569), which has been eliminated against capital reserve immediately upon acquisition;
§goodwill arising on the acquisition of Jiangsu Mobile BVI and Jiangsu Mobile on June 3, 1998 (RMB15,569), which has been eliminated against capital reserve immediately upon acquisition;

 

goodwill arising on the acquisition of Fujian Mobile BVI, Henan Mobile BVI, Hainan Mobile BVI, Fujian Mobile, Henan Mobile and Hainan Mobile on November 11, 1999 (RMB42,340), which has been eliminated against capital reserve immediately upon acquisition; and
§goodwill arising on the acquisition of Fujian Mobile BVI, Henan Mobile BVI, Hainan Mobile BVI, Fujian Mobile, Henan Mobile and Hainan Mobile on November 11, 1999 (RMB42,340), which has been eliminated against capital reserve immediately upon acquisition;

 

goodwill arising on the acquisition of Beijing Mobile BVI, Shanghai Mobile BVI, Tianjin Mobile BVI, Hebei Mobile BVI, Liaoning Mobile BVI, Shandong Mobile BVI, Guangxi Mobile BVI, Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi Mobile on November 12, 2000 (RMB238,891), which has been eliminated against capital reserve immediately upon acquisition.
§goodwill arising on the acquisition of Beijing Mobile BVI, Shanghai Mobile BVI, Tianjin Mobile BVI, Hebei Mobile BVI, Liaoning Mobile BVI, Shandong Mobile BVI, Guangxi Mobile BVI, Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi Mobile on November 12, 2000 (RMB238,891), which has been eliminated against capital reserve immediately upon acquisition; and

 

§the fair value of the actual or estimated number of unexercised share options granted to employees of the Company recognized in accordance with the accounting policy adopted for share-based payments in note 2(t)(ii) (RMB1,255);

PRC statutory reserves

PRC statutory reserves include general reserve, enterprise expansion fund, statutory surplus reserve and statutory public welfare fund.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

2729Shareholders’ equity (Continued)

Reserves (Continued)

PRC statutory reserves (Continued)

In accordance with Accounting Regulations for Business Enterprises, foreign investment enterprises in the PRC are required to transfer at least 10% of their profit after taxation, as determined under accounting principles generally accepted in the PRC (“PRC GAAP”) to the general reserve until the balance of the general reserve is equal to 50% of their registered capital. Moreover, they are required to transfer a certain percentage of their profit after taxation, as determined under PRC GAAP, to the enterprise expansion fund. During the year, appropriations were made by each of the above subsidiaries to the general reserve and the enterprise expansion fund each at 10% of their profit after taxation determined under PRC GAAP.

The general reserve can be used to reduce previous years’ losses and to increase the capital of the subsidiaries while the enterprise expansion fund can be used to increase the capital of the subsidiaries, to acquire fixed assetsproperty, plant and equipment and to increase current assets.

At December 31, 2000, Shanghai Mobile has not yet registered as a wholly-foreign owned enterprise. As a result, appropriations were made by Shanghai Mobile, according to its Articles of Association to the statutory surplus reserve and the statutory public welfare fund both at 10% of its profit after taxation determined under PRC GAAP during the year ended December 31, 2000.

Statutory surplus reserve can be used to reduce previous years’ losses, if any, and may be converted into paid-up capital, provided that the balance after such conversion is not less than 25% of the registered capital of the subsidiaries. Statutory public welfare fund can only be utilized on capital items for the collective benefits of the employees such as the construction of staff quarters and other staff welfare facilities. This reserve is non-distributable other than in liquidation.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

2729Shareholders’ equity (Continued)

Reserves (Continued)

PRC statutory reserves (Continued)

At December 31, 20032004 and 2004,2005, the balances of the general reserve, enterprise expansion fund, statutory surplus reserve and statutory public welfare fund were RMB13,562RMB18,394 and RMB18,394, RMB18,890RMB24,035, RMB23,646 and RMB23,646, RMB100 andRMB29,325, RMB102 and RMB134RMB31 and RMB135 and RMB4, respectively.

Distributable reserves

At December 31, 20032004 and 2004,2005, the amount of distributable reserves of the Company amounted to RMB38,926RMB55,474 (restated) and RMB55,482.RMB64,441.

 

2830Equity compensation benefits

Pursuant to a resolution passed at an annual general meeting held on June 24, 2002, the share option scheme established on October 8, 1997 (the “Old Scheme”) was terminated and the current share option scheme (the “Current Scheme”) was adopted.

Under the Old Scheme, the directors of the Company may, at their discretion, invite employees, including executive directors of the Company or any of its subsidiaries, to take up options to subscribe for shares of the Company. Under the Current Scheme, the directors of the Company may, at their discretion, invite employees, executive directors and non-executive directors of the Company, any of its holding companies and any of their respective subsidiaries and any entity in which the Company or any of its subsidiaries holds any equity interest, to take up options to subscribe for shares of the Company.

The maximum aggregate number of shares which can be subscribed pursuant to options that are or may be granted under the above schemes equals to 10% of the total issued share capital of the Company as at the date of adoption of the Current Scheme. Options lapsed or cancelled in accordance with the terms of the Old Scheme or the Current Scheme will not be counted for the purpose of calculating this 10% limit. The consideration payable for the grant of each option under each of the Old Scheme and the Current Scheme is HK$1.00.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

2830Equity compensation benefits (Continued)

For options granted before September 1, 2001 under the Old Scheme, the exercise price of options was determined by the directors of the Company at their discretion provided that such price may not be set below a minimum price which is the higher of:

 

 (i)the nominal value of a share; and

 

 (ii)80% of the average of the closing price of the share on The Stock Exchange of Hong Kong Limited (the “SEHK”) on the five trading days immediately preceding the date on which the option was granted.

With effect from September 1, 2001, the SEHK requires that the exercise price of options to be at least the higher of the nominal value of a share, the closing price of the shares on the SEHK on the date on which the option was granted and the average closing price of the shares on the SEHK for the five trading days immediately preceding the date on which the option was granted.

For options granted under the Current Scheme, the exercise price of options shall be determined by the directors of the Company at their discretion provided that such price may not be set below a minimum price which is the highest of:

 

 (i)the nominal value of a share;

 

 (ii)the closing price of the shares on the SEHK on the date on which the option was granted; and

 

 (iii)the average closing price of the shares on the SEHK for the five trading days immediately preceding the date on which the option was granted.

During the year ended December 31, 2004, share options involving a total number of 290,176,000 ordinary shares were granted under the Current Scheme to certain directors and employees of the Group.

Under both the Old Scheme and the Current Scheme, the term of the option is determined by the directors at their discretion, provided that all options shall be exercised within 10 years after the adoption of the scheme (in the case of the Old Scheme) and within 10 years after the date on which the option is granted (in the case of the Current Scheme).

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

2830Equity compensation benefits (Continued)

 

During the year ended December 31, 2003, no options were granted under the Current Scheme.

(a)The terms and conditions of the grants that existed during the years are as follows, whereby all options are settled by physical delivery of shares:

 

During the year ended December 31, 2004, options were exercised to subscribe for 28,985,500 ordinary share of HK$0.10 each at a total consideration of HK$2.9 (RMB equivalent 3.1). During the year ended December 31, 2003, no options were exercised.

At December 31, 2003 and 2004, the outstanding options were as follows:

Date of options granted


  

Normal period during

which options

exercisable


  Price per
share to be
paid on
exercise of
options


  Number of shares
involved in the options
outstanding at the year end


At December 31, 2004

          

November 26, 1999

  

November 26, 1999

to October 7, 2007

  HK$33.91  1,000,000

November 26, 1999

  

November 26, 2002

to October 7, 2007

  HK$33.91  1,000,000

April 25, 2000

  

April 25, 2002

to October 7, 2007

  HK$45.04  14,185,000

April 25, 2000

  

April 25, 2005

to October 7, 2007

  HK$45.04  14,185,000

June 22, 2001

  

June 22, 2003

to October 7, 2007

  HK$32.10  36,244,500

June 22, 2001

  

June 22, 2006

to October 7, 2007

  HK$32.10  36,224,500

July 3, 2002

  

July 3, 2004

to July 2, 2012

  HK$22.85  59,579,250

July 3, 2002

  

July 3, 2007

to July 2, 2012

  HK$22.85  59,579,250
   

Number of

instruments

  

Vesting conditions

  

Contractual
life of

options

   2004  2005    

Option granted to directors

        

- on November 26, 1999

  2,000,000  2,000,000  50% on date of grant,  8 years
      50% three years from the date of grant  

- on April 25, 2000

  1,516,000  1,516,000  50% two years from the date of grant,  7 years
      50% five years from the date of grant  

- on June 22, 2001

  285,000  142,500  50% two years from the date of grant,  6 years
      50% five years from the date of grant  

- on July 3, 2002

  750,000  375,000  50% two years from the date of grant,  10 years
      50% five years from the date of grant  

- on October 28, 2004

  2,450,000  1,518,000  40% one year from the date of grant,  10 years
      30% two years from the date of grant  
      30% three years from the date of grant  

- on December 21, 2004

  600,000  600,000  40% one year from the date of grant,  10 years
      30% two years from the date of grant  
      30% three years from the date of grant  

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

2830Equity compensation benefits (Continued)

 

Date of options granted


  

Normal period during

which options

exercisable


  Price per
share to be
paid on
exercise of
options


  Number of shares
involved in the options
outstanding at the year end


At December 31, 2004 (Continued)

          

October 28, 2004

  

October 28, 2005

to October 27,2014

  HK$22.75  115,277,400

October 28, 2004

  

October 28, 2006

to October 27, 2014

  HK$22.75  86,458,050

October 28, 2004

  

October 28, 2007

to October 27, 2014

  HK$22.75  86,458,050

December 21, 2004

  

December 21, 2005

to December 20, 2014

  HK$26.75  240,000

December 21, 2004

  

December 21, 2006

to December 20, 2014

  HK$26.75  180,000

December 21, 2004

  

December 21, 2007

to December 20, 2014

  HK$26.75  180,000
(a)The terms and conditions of the grants that existed during the years are as follows, whereby all options are settled by physical delivery of shares: (Continued)

   

Number of

instruments

  

Vesting conditions

  

Contractual
life of

options

   2004  2005    

Option granted to directors

        

(Continued)

        

- on November 8, 2005

  —    7,790,000  40% one year from the date of grant,  10 years
      30% two years from the date of grant  
      30% three years from the date of grant  

Option granted to other employees

        

- on April 25, 2000

  26,854,000  26,092,000  50% two years from the date of grant,  7 years
      50% five years from the date of grant  

- on June 22, 2001

  72,204,000  52,390,750  50% two years from the date of grant,  6 years
      50% five years from the date of grant  

- on July 3, 2002

  118,408,500  75,570,000  50% two years from the date of grant,  10 years
      50% five years from the date of grant  

- on October 28, 2004

  285,992,500  213,121,500  40% one year from the date of grant,  10 years
      30% two years from the date of grant,  
      30% three years from the date of grant  

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

2830Equity compensation benefits (Continued)

 

Date of options granted


  

Normal period during

which options

exercisable


  Price per
share to be
paid on
exercise of
options


  Number of shares
involved in the options
outstanding at the year end


At December 31, 2003

          

November 26, 1999

  

November 26, 1999

to October 7, 2007

  HK$33.91  3,500,000

November 26, 1999

  

November 26, 2002

to October 7, 2007

  HK$33.91  3,500,000

April 25, 2000

  

April 25, 2002

to October 7, 2007

  HK$45.04  14,686,000

April 25, 2000

  

April 25, 2005

to October 7, 2007

  HK$45.04  14,686,000

June 22, 2001

  

June 22, 2003

to October 7, 2007

  HK$32.10  37,052,250

June 22, 2001

  

June 22, 2006

to October 7, 2007

  HK$32.10  37,052,250

July 3, 2002

  

July 3, 2004

to July 2, 2012

  HK$22.85  74,243,750

July 3, 2002

  

July 3, 2007

to July 2, 2012

  HK$22.85  74,243,750
(a)The terms and conditions of the grants that existed during the years are as follows, whereby all options are settled by physical delivery of shares: (Continued)

   

Number of

instruments

  

Vesting conditions

  

Contractual
life of

options

   2004  2005    

Option granted to other employees

        

(Continued)

        

- on November 8, 2005

  —    281,578,500  40% one year from the date of grant,  10 years
      30% two years from the date of grant,  
      30% three years from the date of grant  
          

Total share options

  511,060,000  662,694,250    
          

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

2930Equity compensation benefits (Continued)

(b)The number and weighted average exercise prices of share options are as follows:

   December 31, 
   2004  2005 
   Weighted
average
exercise
price
  

Number of
shares
involved

in the

options

  Weighted
average
exercise
price
  

Number of
shares

involved

in the

options

 
   HK$     HK$    

Balance at beginning of year

  28.31  258,964,000  25.39  511,060,000 

Granted

  22.76  290,425,000  34.87  289,777,500 

Exercised

  22.85  (28,985,500) 24.13  (134,521,000)

Cancelled

  32.75  (9,343,500) 30.38  (3,622,250)
           

Balance at end of year

  25.39  511,060,000  29.76  662,694,250 
           

Option vested at December 31,

  28.85  112,008,750  31.19  94,537,550 
           

The weighted average share price at the date of exercise for shares options exercised during the year was HK$34.20 (2004: HK$26.37).

The options outstanding at December 31, 2005 and 2004 had exercise prices ranging from HK$22.75 to HK$45.04 and a weighted average remaining contractual life of 8.1 years (2004: 7.9 years).

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

30Equity compensation benefits (Continued)

(c)Fair value of share options and assumptions

The fair value of services received in return for share options granted are measured by reference to the fair value of share options granted. The estimate of the fair value of the services received is measured based on a binomial lattice model. The contractual life of the option is used as an input into this model. Expectations of early exercise are incorporated into the binomial lattice model.

   2004  2005 

Fair value at measurement date

  HK$  7.06  HK$10.28 

Share price

  HK$22.76  HK$34.50 

Exercise price

  HK$22.76  HK$34.87 

Expected volatility (expressed as weighted average volatility used in the modeling under binomial lattice model)

  28.0% 24.6%

Option life (expressed as weighted average life used in the modeling under binomial lattice model)

  10 years  10 years 

Expected dividends

  2.8% 2.6%

Risk-free interest rate (based on Exchange Fund Notes)

  4.1% 4.5%
       

The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share options), adjusted for any expected changes to future volatility due to publicly available information. Expected dividends are based on historical dividends and planned dividend payment ratio, if any. Changes in the subjective input assumptions could materially affect the fair value estimate.

Share options were granted under a service condition. This condition has not been taken into account in the grant date fair value measurement of the services received. There were no market conditions associated with the share option grants.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

31Foreign currency exchange

The Renminbi is not freely convertible into foreign currencies. All foreign exchange transactions involving Renminbi must take place through the People’s Bank of China or other institutions authorized to buy and sell foreign exchange or at a swap center.

Currently the Company’s subsidiaries established in the PRC are able to purchase foreign exchange for settlement of “current account transactions” (as defined in the applicable regulations), including payment of dividends without the approval of the State Administration of Foreign Exchange (“SAFE”). However, there can be no assurance that the current authorization for foreign investment enterprises to retain their foreign exchange to satisfy foreign exchange liabilities or to pay dividends in the future will not be limited or eliminated or that the subsidiaries of the Company will be able to obtain sufficient foreign exchange to pay dividends or satisfy their foreign exchange requirements. Foreign exchange transactions under the capital account continue to be subject to limitations and require approvals of the SAFE, which could affect the ability of the Company’s subsidiaries established in the PRC to obtain foreign exchange through debt or equity financing, including by means of loans or capital contribution from the Company.

32Financial instruments

Exposure to credit, liquidity, interest rate and foreign currency risks arises in the normal course of the Group’s business. These risks are limited by the Group’s financial management policies and practices described below.

(a)Credit risk

Substantially all the Group’s cash and cash equivalents are deposited with financial institutions in Hong Kong and the PRC. The accounts receivable of the Group are mainly spread among its subscribers.

The Group’s credit risk is primarily attributable to accounts receivable and other receivables. Management has a credit policy in place and the exposures to these credit risks are monitored on an ongoing basis.

The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet. The Group does not have any significant exposure to any individual customer or counterparty nor does it have any major concentration of credit risk related to any financial instruments.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3032Financial instruments (Continued)

(b)Liquidity risk

The Group’s policy is to regularly monitor current and expected liquidity requirements to ensure that it maintains sufficient reserves of cash to meet its liquidity requirements in the short and longer term.

(c)Interest rate risk

The Group has interest rate risk as certain interest-bearing borrowings are on a variable rate basis. The interest rates and terms of repayment of the interest-bearing borrowings of the Group are disclosed in note 23. The Group does not expect any changes in interest rate which might materially affect the Group’s result of operations.

During the year, the Group had not entered into any interest rate swap contracts.

(d)Foreign currency risk

The Group has foreign currency risk as certain cash and cash equivalents are denominated in foreign currencies, principally US dollars and Hong Kong dollars. The Group does not expect any appreciation or depreciation of the Renminbi against foreign currency which might materially affect the Group’s result of operations.

During the year, the Group had not entered into any forward exchange contracts.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

32Financial instruments (Continued)

(e)Fair values

The following financial assets and financial liabilities have their carrying amount approximately equal to their fair values: accounts receivable, other receivables, other current assets, cash and cash equivalents, accounts payable, other payables and deferred consideration payable except as follows:

   2004  2005
   Carrying
Amount
  Fair
value
  Carrying
amount
  Fair
value
   RMB  RMB  RMB  RMB

Interest-bearing borrowings:

        

- bank and other loans

  2,455  2,431  —    —  

- convertible notes

  5,725  5,666  —    —  

- bonds

  13,000  12,119  12,912  13,685

The fair value of bank and other loans is estimated as the present value of future cash flows, discounted at current market interest rates for similar financial instruments. The fair value of convertible notes and bonds is based on quoted market prices at the balance sheet date without any deduction for transaction costs.

The fair values of all other financial instruments approximate their carrying amounts due to the nature or short maturity of these instruments.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

33Principal subsidiaries

Details of the Company’s principal subsidiaries are as follows:

 

Name of company


 

Place and date of

date of
incorporation/

establishment


 

Authorized, issued and

paid up capital


 

Attributable

equity


interest %


  

Principal activitiesactivity/ies


  Authorized

 Issued and paid up

  

Guangdong Mobile

 PRC
September 28,
1988
 —   RMB 5,595RMB5,595 100% Mobile
telecommunications
operator

Zhejiang Mobile

 PRC
February 2,
1996
 —   RMB 2,118RMB2,118 100% Mobile
telecommunications
operator

Jiangsu Mobile BVI

 BVI
March 6,
1998
10,000 shares
at HK$1
1 share at HK$1100%Investment holding
company

Jiangsu Mobile

PRC
December 10,
1992
—  RMB 2,800100%Mobile
telecommunications
operator

Fujian Mobile BVI

BVI
September 1,
1999
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

FujianJiangsu Mobile

 PRC
September 7,
1999
December 10, 1992
 —   RMB 5,247RMB2,800 100% Mobile
telecommunications
operator

HenanFujian Mobile BVI

 BVI
September 1,
1999
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

HenanFujian Mobile

 PRC
August 6,
September 7, 1999
 —   RMB 4,368RMB5,247 100% Mobile
telecommunications
operator

HainanHenan Mobile BVI

 BVI
September 1,
1999
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

HainanHenan Mobile

 PRC
August 19,
6, 1999
 —   RMB 643RMB4,368 100% Mobile
telecommunications
operator

BeijingHainan Mobile BVI

 BVI
September 1,
2000
1999
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

BeijingHainan Mobile

 PRC
July 26,
2000 August 19, 1999
 —   RMB 6,125RMB643 100% Mobile
telecommunications
operator

Beijing Mobile BVI

BVI September 1, 200010,000 shares at HK$11 share at HK$1100%Investment holding company

Beijing Mobile

PRC July 26, 2000—  RMB6,125100%Mobile telecommunications operator

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3033Principal subsidiaries (Continued)

Details of the Company’s principal subsidiaries are as follows (Continued):

 

Name of company


 

Place and date of

date of
incorporation/

establishment


Authorized, issued and paid up capital 

Authorized, issued andAttributable

paid up capital


Attributable
equity
interest %


  

Principal activitiesactivity/ies


  Authorized

 Issued and paid up

  

Shanghai Mobile BVI

 BVI
September 1,
2000
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Shanghai Mobile

 PRC
August 4,
2000
 —   RMB6,039 100% Mobile
telecommunications
operator

Tianjin Mobile BVI

 BVI
September 1,
2000
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Tianjin Mobile

 PRC
July 24,
2000
 —   RMB2,151 100% Mobile
telecommunications
operator

Hebei Mobile BVI

 BVI
September 1,
2000
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Hebei Mobile

 PRC
July 31,
2000
 —   RMB4,315 100% Mobile
telecommunications
operator

Liaoning Mobile BVI

 BVI
September 1,
2000
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Liaoning Mobile

 PRC
August 7,
2000
 —   RMB5,140 100% 

Mobile
telecommunications

operator

Shandong Mobile BVI

 BVI
September 1,
2000
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Shandong Mobile

 PRC
August 7,
2000
 —   RMB6,342 100% Mobile
telecommunications
operator

Guangxi Mobile BVI

 BVI
September 1,
2000
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Guangxi Mobile

 PRC
August 3,
2000
 —   RMB2,341 100% Mobile
telecommunications
operator

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3033Principal subsidiaries (Continued)

Details of the Company’s principal subsidiaries are as follows (Continued):

 

Name of company


 

Place and date of

date of
incorporation/

establishment


Authorized, issued and paid up capital 

Authorized, issued andAttributable

paid up capital


Attributable
equity
interest %


  

Principal activitiesactivity/ies


  Authorized

 Issued and paid up

  

Anhui Mobile BVI

 BVI
May 10,
2002
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Anhui Mobile

 PRC
January 29,
2002
 —   RMB4,099 100% Mobile
telecommunications
operator

Jiangxi Mobile BVI

 BVI
May 10,
2002
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Jiangxi Mobile

 PRC
January 18,
2002
 —   RMB2,933 100% Mobile
telecommunications
operator

Chongqing Mobile BVI

 BVI
May 10,
2002
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Chongqing Mobile

 PRC
January 28,
2002
 —   RMB3,030 100% Mobile
telecommunications
operator

Sichuan Mobile BVI

 BVI
May 10,
2002
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Sichuan Mobile

 PRC
February 4,
2002
 —   RMB7,484 100% Mobile
telecommunications
operator

Hubei Mobile BVI

 BVI
May 10,
2002
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Hubei Mobile

 PRC
February 1,
2002
 —   RMB3,961 100% Mobile
telecommunications
operator

Hunan Mobile BVI

 BVI
May 10,
2002
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3033Principal subsidiaries (Continued)

Details of the Company’s principal subsidiaries are as follows (Continued):

 

Name of company


Place and
date of
incorporation/
establishment


 

Authorized, issuedPlace and date of

incorporation/

establishment

Authorized, issued and paid up capital


 

Attributable

equity
interest %


  

Principal activitiesactivity/ies


  Authorized

 Issued and paid up

  

Hunan Mobile

 PRC
February 6,
2002
 —   RMB4,016 100% Mobile
telecommunications
operator

Shaanxi Mobile BVI

 BVI
May 10,
2002
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Shaanxi Mobile

 PRC
February 3,
2002
 —   RMB3,171 100% Mobile
telecommunications
operator

Shanxi Mobile BVI

 BVI
May 10,
2002
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Shanxi Mobile

 PRC
February 4,
2002
 —   RMB2,773 100% Mobile
telecommunications
operator

Neimenggu Mobile BVI

 BVI
March 4,
2004
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Neimenggu Mobile

 PRC
January 16,
2004
 —   RMB2,863 100% Mobile
telecommunications
operator

Jilin Mobile BVI

 BVI
March 4,
2004
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Jilin Mobile

 PRC
January 18,
2004
 —   RMB3,278 100% Mobile
telecommunications
operator

Heilongjiang Mobile BVI

 BVI
March 4,
2004
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Heilongjiang Mobile

 PRC
February 2,
2004
 —   RMB4,501 100% Mobile
telecommunications
operator

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3033Principal subsidiaries (Continued)

Details of the Company’s principal subsidiaries are as follows (Continued):

 

Name of company


 

Place and date of

date of
incorporation/

establishment


Authorized, issued and paid up capital 

Authorized, issued andAttributable

paid up capital


Attributable
equity
interest %


  

Principal activitiesactivity/ies


  Authorized

 Issued and paid up

  

Guizhou Mobile BVI

 BVI
March 4, 2004
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Guizhou Mobile

 PRC
January 19,
2004
 —   RMB2,542 100% Mobile
telecommunications
operator

Yunnan Mobile BVI

 BVI
March 4, 2004
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Yunnan Mobile

 PRC
January 19,
2004
 —   RMB4,137 100% Mobile
telecommunications
operator

Xizang Mobile BVI

 BVI
March 4, 2004
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Xizang Mobile

 PRC
February 9,
2004
 —   RMB849 100% Mobile
telecommunications
operator

Gansu Mobile BVI

 BVI
March 4, 2004
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Gansu Mobile

 PRC
January 29,
2004
 —   RMB1,703 100% Mobile
telecommunications
operator

Qinghai Mobile BVI

 BVI
March 4, 2004
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Qinghai Mobile

 PRC
February 2,
2004
 —   RMB903 100% Mobile
telecommunications
operator

Ningxia Mobile BVI

 BVI
March 4, 2004
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Ningxia Mobile

 PRC
January 30,
2004
 —   RMB740 100% Mobile
telecommunications
operator

Xinjiang Mobile BVI

 BVI
March 4, 2004
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Xinjiang Mobile

 PRC
February 3,
2004
 —   RMB2,582 100% Mobile
telecommunications
operator

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3033Principal subsidiaries (Continued)

Details of the Company’s principal subsidiaries are as follows (Continued):

 

Name of company


 

Place and date of

date of
incorporation/

establishment


Authorized, issued and paid up capital 

Authorized, issued andAttributable

paid up capital


Attributable
equity
interest %


  

Principal activitiesactivity/ies


  Authorized

 Issued and paid up

  

Zhongjing Design Institute BVI

 BVI
March 4, 2004
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

Jingyi Design Institute

 PRC
March 15,
2004
 —   RMB160 100% Provision of
telecommunications
network planning
design and
consulting services

CMC BVI

 BVI
March 4, 2004
 10,000 shares
at HK$1
 1 share at HK$1 100% Investment holding
company

CMC

 PRC
February 27,
2004
 —   RMB1,642 100% Network and
business
coordination center

China Mobile Holding Company Limited

 PRC
June 9,
2000
 —   US$30 100% Investment holding
company

China Mobile (Shenzhen) Limited

 PRC
March 20,
2003
 —   US$8 100% Provision of
roaming clearance
services

Aspire Holdings Limited

 Cayman
Islands

June 5,
2000
 1,500,000,000
shares at
HK$0.1
 HK$94 66.41% Investment holding
company

Aspire (BVI) Limited

 BVI
June 7,
2000
 50,000 shares
at US$1
 US$0.001 66.41% Investment holding
company

Aspire Technologies (Shenzhen) Limited

 PRC
December 1,
2000
 —   US$10 66.41% Technology
platform
development and
maintenance

Aspire Information Network (Shenzhen) Limited

 PRC
August 1,
2001
 —   US$5 66.41% Provision of mobile
data solutions,
system integration
and development

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3033Principal subsidiaries (Continued)

Details of the Company’s principal subsidiaries are as follows (Continued):

 

Name of company


  Place and date of
incorporation/
establishment


  

Authorized, issued and

paid up capital


  Attributable
equity
interest %


  Principal activities

    Authorized

  Issued and paid up

   

Aspire Information

Technologies (Beijing) Limited

  PRC
October 9, 2004
  —    US$1  66.41% Technology
platform
development and
maintenance

Fujian FUNO

  PRC
April 8, 1998
  —    US$4  51% Network planning
and optimizing
construction-
testing and
supervising,
technology support,
development and
training of Nokia
GSM 900/1800
Mobile
Communication
System

Name of company

Place and date of

incorporation/

establishment

Authorized, issued and paid up capital

Attributable

equity
interest %

Principal activity/ies

AuthorizedIssued and paid up

Aspire Information Technologies (Beijing) Limited

PRC October 9, 2004—  US$566.41%Technology platform development and maintenance

Fujian FUNO

PRC April 8, 1998—  US$451%Network planning and optimizing construction-testing and supervising, technology support, development and training of Nokia GSM 900/1800 Mobile Communication System

Advanced Roaming & Clearing House Limited

BVI April 4, 200550,000 shares at US$12 share at US$1100%Provision of roaming clearance service

Fit Best Limited

BVI September 15, 200550,000 shares at US$11 share at US$1100%Investment holding company

DividendDividends declared in respect of previous financial year, approved and paid by the Company’s subsidiaries for the financial years ended December 31, 2002, 2003, 2004 and 20042005 amounting to RMB18,000, RMB27,301, RMB25,978 and RMB25,978RMB28,625 respectively. All dividend income from these subsidiaries was entirely eliminated in preparing the consolidated financial statements.

31Post balance sheet events

After the balance sheet date the directors proposed a final dividend. Further details are disclosed in Note 9.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

34Post balance sheet events

(a)On January 12, 2006, the Company announced that they have received valid acceptance in respect of the voluntary conditional cash offer to acquire (i) 741,294,601 shares of Peoples and (ii) 310 share options of Peoples. The Company applied the provisions of the Hong Kong Companies Ordinance to compulsorily acquire any remaining issued shares of Peoples and Peoples has applied for a de-listing of shares of Peoples from the SEHK. Up to March 16, 2006, the Group has paid approximately HK$3,379 (approximately RMB3,515) to acquire 99.86% interest in Peoples. The completion of the compulsory acquisition is currently expected to take place by the end of March 2006.

(b)After the balance sheet date the directors proposed a final dividend. Further details are disclosed in note 9.

35Comparative figures

Certain comparative figures have been adjusted as a result of the changes in accounting policies. Further details are disclosed in note 3.

36Accounting estimates and judgments

Key sources of estimation uncertainty

Notes 15, 30 and 32 contain information about the assumptions and their risk factors relating to goodwill impairment, fair value of share options granted and financial instruments. Other key sources of estimation uncertainty are as follows:

Allowance for doubtful accounts

The Group maintains allowance for doubtful accounts based upon evaluation of the recoverability of the accounts receivable and other receivables at each balance sheet date. The estimates are based on the ageing of the accounts receivable and other receivables balances and the historical write-off experience, net of recoveries. If the financial condition of the customers were to deteriorate, additional allowance may be required.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

36Accounting estimates and judgments (Continued)

Depreciation

Depreciation is calculated to write off the cost of items of property, plant and equipment, less their estimated residual value, if any, using the straight-line method over their estimated useful lives. The Group reviews the estimated useful lives and residual values of the assets annually in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives and residual values are based on the Group’s historical experience with similar assets and taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.

Impairment of property, plant and equipment

The Group’s property, plant and equipment comprise a significant portion of the Group’s total assets. Changes in technology or industry conditions may cause the estimated period of use or the value of these assets to change. Long-lived assets including property, plant and equipment are reviewed for impairment at least annually or whenever events or changes in circumstances have indicated that their carrying amounts may not be recoverable. If any such indication exists, the asset’s recoverable amount is estimated.

The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset, which requires significant judgment relating to level of revenue and amount of operating costs. The Group uses all readily available information in determining an amount that is a reasonable approximation of the recoverable amount, including estimates based on reasonable and supportable assumptions and projections of revenue and operating costs. Changes in these estimates could have a significant impact on the carrying value of the assets and could result in additional impairment charge or reversal of impairment in future periods.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

37Possible impact of amendments, new standards and interpretations issued but not yet effective for the annual accounting year ended December 31, 2005

Up to the date of issue of these financial statements, the HKICPA has issued the following amendments, new standards and interpretations which are not yet effective for the accounting period ended December 31, 2005 and which have not been adopted in these financial statements:

Effective for
accounting periods
beginning on or after
HK(IFRIC) 4

Determining whether an arrangement contains a lease

January 1, 2006
Amendments to HKFRS 4

Insurance contracts – Financial guarantee contracts

January 1, 2006
Amendments to HKAS 19

Employee benefits - Actuarial Gains and Losses, Group Plans and Disclosures

January 1, 2006
Amendments to HKAS 21

The effects of changes in foreign exchange rates

January 1, 2006

- Net investment in a foreign operation

Amendments to HKAS 39

Financial instruments: Recognition and measurement:

January 1, 2006

- Cash flow hedge accounting of forecast intragroup transactions

- Fair value option

- Financial guarantee contracts

Amendments, as a consequence of the Hong Kong Companies (Amendment) Ordinance 2005, to:
- HKAS 1

Presentation of financial statements

January 1, 2006
- HKAS 27

Consolidated and separate financial statements

January 1, 2006
- HKFRS 3

Business combinations

January 1, 2006
HKFRS 7

Financial instruments: Disclosures

January 1, 2007
Amendment to HKAS 1

Presentation of financial statements: Capital disclosures

January 1, 2007

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

37Possible impact of amendments, new standards and interpretations issued but not yet effective for the annual accounting year ended December 31, 2005 (Continued)

In addition, the Hong Kong Companies (Amendment) Ordinance 2005 came into effect on December 1, 2005 and would be first applicable to the Group’s financial statements for the period beginning January 1, 2006.

The Group is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application. So far it has concluded that the adoption the amendments to HKAS 1, HKAS 27, HKFRS 3 made as a result of the Hong Kong Companies (Amendment) Ordinance 2005 are not applicable to any of the Group’s operations and that the adoption of the rest of them is unlikely to have a significant impact on the Group’s results of operations and financial position.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

38Significant differences between HK GAAP and US GAAP

The Group’s accounting policies conform withto generally accepted accounting principles in Hong Kong (“HK GAAP”) which differ in certain material respects from those applicable generally accepted accounting principles in the United States of America (“US GAAP”).

The significant differences relate principally to the following items and the adjustments considered necessary to present the net profitincome and shareholders’ equity in accordance with US GAAP are shown in the tables set out below:

 

(a)Effect of combination of entities under common control

Under HK GAAP, the Group adopted the purchase accounting method to account for the purchase of subsidiaries from the holding company. Under the purchase accounting method, the acquired results are included in the results of operations from the date of their acquisition. For acquisitions before January 1, 2001, goodwill arising on the acquisition, being the excess of the cost over the fair value of the Group’s share of the separable net assets acquired, is eliminated against reserves immediately on acquisition. For acquisitions on or after January 1, 2001, goodwill arising on the acquisition is amortized to the consolidated statements of income on a straight-line basis over 20 years.

With effect from January 1, 2005, in order to comply with HKFRS 3 and HKAS 36, the Group adopted a new accounting policy for goodwill. The Group no longer amortizes positive goodwill. Such goodwill is tested annually for impairment, including in the year of its initial recognition, as well as when there are indications of impairment.

As a result of the Group and the acquired subsidiaries being under common control prior to the acquisition, such acquisitions under US GAAP are considered “combinations of entities under common control”. Under US GAAP, combinations of entities under common control are accounted for under the “as if pooling-of-interests” method, whereby assets and liabilities are accounted for at historical cost and the financial statements of previously separate companies for periods prior to the combination are restated on a combined basis. The consideration paid and payable by the Group has been treated as distribution to owner in the year of acquisition. Goodwill arising on consolidation and the amortization of goodwill which are recognized under HK GAAP hashave been reversed for US GAAP purposes.

 

(b)Capitalization of interest

Under HK GAAP, interest costs are only capitalized to the extent that funds are borrowed and used for the purpose of obtaining qualifying asset which necessarily takes a substantial period of time to get ready for its intended use.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3238Significant differences between HK GAAP and US GAAP (Continued)

 

(b)Capitalization of interest (Continued)

Under US GAAP, interest costs capitalized are determined based on specific borrowings related to the acquisition or construction of an asset, if an entity’s financing plans associate a specific new borrowing with a qualifying asset. If average accumulated expenditures for the asset exceed the amounts of specific new borrowings associated with an asset, additional interest costs capitalized are based on the weighted average interest rate applicable to other borrowings of the entity.

 

(c)Revaluation and impairment of fixed assetsproperty, plant and equipment and land lease prepayments

For certain periods prior to May 31, 1997, the fixed assetsproperty, plant and equipment and land lease prepayments of the subsidiaries were revalued in compliance with PRC rules and regulations, resulting in an increase in shareholders’ equity.

Additionally, the fixed assetsproperty, plant and equipment and land lease prepayments of the subsidiaries were revalued as a result of the restructuring occurred in 1997 and the subsequent acquisitions. These fixed assetproperty, plant and equipment and land lease prepayments revaluations result in an increase in shareholders’ equity with respect to the increase in carrying amount of certain fixed assetsproperty, plant and equipment and land lease prepayments above their historical cost bases, except the Fourth Acquisition and Fifth Acquisition.

In connection with the Fourth Acquisition and the Fifth Acquisition, the fixed assetsproperty, plant and equipment and land lease prepayments of the subsidiaries acquired were revalued at December 31, 2001 and December 31, 2003 respectively. Such revaluations resulted in an increase directly to those shareholders’ equity with respect to the increase in carrying amount of certain fixed assetsproperty, plant and equipment and land lease prepayments above their historical cost bases, and a charge to the consolidated statements of income with respect to the decrease in carrying amount of certain fixed assetsproperty, plant and equipment and land lease prepayments below their historical cost bases.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

38Significant differences between HK GAAP and US GAAP (Continued)

(c)Revaluation and impairment of property, plant and equipment and land lease prepayments (Continued)

The carrying amount of fixed assetsproperty, plant and equipment and land lease prepayments under HK GAAP is reviewed periodically in order to assess whether the recoverable amount has declined below the carrying amount. When such a decline occurs, the carrying amount is reduced to the recoverable amount based on the expected future cash flows generated by the fixed assets,property, plant and equipment and land lease prepayments, discounted to their present values using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. A subsequent increase in the recoverable amount is written back to results of operations when circumstances and events that led to the write-down or write-off cease to exist.

As discussed in note 3 (e), the Group retrospectively adopted a new accounting policy under HK GAAP for land use rights and building held for own use. An additional line item “Land lease prepayments”, which was previously included in “Property, plant and equipment” and “Construction in progress” has been included on the face of the consolidated balance sheet. Comparative figures for “Property, plant and equipment” and “Construction in progress” have been reclassified to conform to the current year’s presentation. Amortization charges relating to land lease prepayments have been included in “Other operating expenses”. Additionally, “Depreciation” and “Other operating expenses” in the consolidated statements of income for the years ended December 31, 2003 and 2004 have been restated under HK GAAP.

For US GAAP, an additional line item “Revaluation of land lease prepayments”, which was previously included in “Revaluation of property, plant and equipment” has been included in the reconciliation of net income and shareholders’ equity from HK GAAP to US GAAP. Comparative figures for “Revaluation of property, plant and equipment” have been reclassified to conform to current year’s presentation. An additional line item “Land lease prepayments”, which was previously included in “Property, plant and equipment” and “Construction in progress” has been included on the face of the condensed consolidated balance sheets. Comparative figures for “Property, plant and equipment” and “Construction in progress” have been reclassified to conform to the current year’s presentation. Amortization charges relating to land lease prepayments have been included in “Selling, general and administration”. Additionally, “Depreciation” and “Selling, general and administration” in the condensed consolidated statements of income for the years ended December 31, 2003 and 2004 have been restated to conform to the current year’s presentation. There is no impact on the Group’s significant differences between HK GAAP and US GAAP as at the year end and on the Group’s profit attributable to equity shareholders for the periods presented.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3238Significant differences between HK GAAP and US GAAP (Continued)

 

(c)Revaluation and impairment of fixed assetsproperty, plant and equipment and land lease prepayments (Continued)

Under US GAAP, fixed assetsproperty, plant and equipment are stated at their historical cost, less accumulated depreciation.depreciation and land lease prepayments are stated at their historical cost, amortized on a straight line basis over the period of the lease term. Accordingly, the revaluation reserve recorded directly to shareholders’ equity and the charge to statements of income statement under HK GAAP as a result of the revaluation of fixed assetsproperty, plant and equipment and land lease prepayments are reversed for US GAAP purposes. Additionally, as a result of the tax deductibility of the revaluation reserve, a deferred tax asset related to the reversal of the net revaluation reserve is created under US GAAP with a corresponding increase in shareholders’ equity.

Under US GAAP, fixed assetsproperty, plant and equipment and land lease prepayments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Any subsequent increase in the recoverable amount written back to results of operations when circumstances and events that led to the write-down or write-off cease to exist under HK GAAP is reversed for US GAAP purposes.

For the years presented, there were no differences related to impairment charges under HK GAAP and US GAAP. The US GAAP difference as shown in the reconciliation represents the reversal of revaluation reserves and the related depreciation and amortization which are recognized under HK GAAP.

 

(d)Employee housing scheme

The Group provides staff quarters under its employee housing schemes at below market prices. Under HK GAAP, employee housing scheme costs borne by the corresponding PTAs and not charged to the subsidiaries are not recognized by the subsidiaries.

Under US GAAP, employee housing scheme costs borne by the corresponding PTAs and not charged to the subsidiaries are reflected as an expense in the statementstatements of income and a corresponding capital contribution. Additionally, under US GAAP, the costs to be borne by the subsidiaries are accrued over the term of the program.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3238Significant differences between HK GAAP and US GAAP (Continued)

 

(e)Deferred taxation

Until December 31, 2002, under HK GAAP, the Group provides for deferred tax liabilities only to the extent that there is a reasonable probability that such deferred tax liabilities will become payable in the foreseeable future. Deferred tax assets are not recognized unless their realization is assured beyond reasonable doubt.

With effect from January 1, 2003, in order to comply with SSAP 12 (revised) issued by the HKICPA, the Group adopted a new accounting policy for deferred tax. Deferred tax assets and liabilities arise from deductible and taxable temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the tax bases respectively. The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the related tax benefit to be utilized. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profit will be available. The new accounting policy has been adopted retrospectively.

Under US GAAP, provisions are made for all deferred taxes as they arise, except a valuation allowance is provided against deferred tax assets when realization of such amounts does not meet the criteria of “more likely than not”. For the years presented, there were no differences related to the recognition of deferred tax under HK GAAP and US GAAP. The US GAAP difference as shown in the reconciliation represents the deferred tax effects of US GAAP adjustments.

 

(f)Share option scheme

The Group grants share options to directors and employees. Under HK GAAP and prior to January 1, 2005, the proceeds received are recognized as an increase to capital upon the exercise of the share options. The Group does not account for the issuance of stock options until they are exercised. With effect from January 1, 2005, in order to comply with HKFRS 2, the Group recognizes the fair value of such share options as an expense in the consolidated statements of income, or as an asset, if the cost qualifies for recognition as an asset under the Group’s accounting policies. A corresponding increase is recognized in a capital reserve within equity.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

38Significant differences between HK GAAP and US GAAP (Continued)

(f)Share option scheme (Continued)

Under US GAAP, the Group determines compensation expenses based upon the excess, if any, of the quoted market price of the shares on the date of grant over the exercise price of the options and amortizes thisoptions. Such amount is charged to the consolidated statements of income over the vesting period of the options. Any expense recognized based on the fair value of share options under HK GAAP is reversed under US GAAP.

The adjustments represent the amortization of compensation expenses in relation to share option concerned.

Notesscheme amounted to Consolidated Financial Statements (Continued)

(Amounts in millions, exceptRMB192, RMB86 and RMB68 for the years ended December 31, 2003, 2004 and 2005 respectively under US GAAP and the reversal of expenses recognized based on the fair value of share data)options under HK GAAP amounted to RMBnil, RMB255 and RMB1,553 for the years ended December 31, 2003, 2004 and 2005 respectively.

32Significant differences between HK GAAP and US GAAP (Continued)

 

(g)Revenue recognition

Until June 30, 1999, under both HK GAAP and US GAAP, connection fees revenue and telephone number selection fees were recognized as received. Under US GAAP, effective July 1, 1999, net connection fees and telephone number selection fees received in excess of direct costs were deferred and recognized over the estimated customer usage period of approximately 48 months.

Under US GAAP, effective January 1, 2000, the Group adopted provisions of Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”). In December 2003, Staff Accounting Bulletin No.104, “Revenue Recognition” (“SAB 104”) updates the guidance in SAB 101 and Emerging Issues Task Force Issue 00-21 “Revenue Arrangement with Multiple Deliverable” (“EITF 00-21”). EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. Under SAB 104, connection fees and telephone number selection fees received and incremental direct costs up to, but not exceeding such fees, were deferred and amortized over the estimated customer usage period for the related service. The cumulative effect from the adoption of SAB 104 was not material.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

38Significant differences between HK GAAP and US GAAP (Continued)

 

(h)Interconnection, roaming and leased line agreements

In May 2000, the Group entered into new agreements with China MobileCMCC for inter-provincial interconnection and domestic and international roaming services, and inter-provincial long distance transmission leased line arrangement with retrospective effect from October 1, 1999 for Guangdong Mobile, Zhejiang Mobile and Jiangsu Mobile and from April 1, 1999 for Fujian Mobile, Henan Mobile and Hainan Mobile. Under HK GAAP, the net savings refunded to the Group as a result of the two agreements taking retrospective effect were recorded in operations for the year ended December 31, 2000. Under US GAAP, such net savings are deferred and amortized on a straight-line basis over seven years.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

32Significant differences between HK GAAP and US GAAP (Continued)

 

(i)Recently Issued Accounting Standards

Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004)

In December 2004, the FASBFinancial Accounting Standards Board (the “FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“(��SFAS No. 123R”), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS No.123RNo. 123R replaces SFAS No.123,No. 123, “Accounting for Stock-Based Compensationand supersedes Accounting Principles Board Opinion Opinion (“APB Opinion No.25,Opinion”) No. 25, “Accounting for Stock Issued to Employees”. SFAS No.123RNo. 123R is effective for all interim and annual periods beginning after June 15, 2005. Under a new US Securities and Exchange Commission rule, a company may elect to adopt the provisions of SFAS No.123R at the beginning of their first annual period beginning after June 15, 2005. Consequently,The Company have adopted this Statement on January 1, 2006 and will use the Company has elected to defermodified-prospective transition method and will not restate prior periods for the adoption of SFAS No.123R until January 1, 2006. The Company isNo. 123R. Since the fair value of share options granted to employees will be recognized as an employee cost in order to comply HKFRS 2, the process of determiningestimated impact on the impactGroup as a result of the adoption of SFAS No.123R. The pro forma results disclosed areNo. 123R is not necessarily indicative of what the impact of SFAS No.123R will be upon adoption.significant.

SFAS No. 153

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets”, which eliminates an exception in Accounting Principles BoardAPB Opinion No. 29, “Accounting for Nonmonetary Transactions”, for recognizing nonmonetary exchanges of similar productive assets at fair value and replaces it with a general exception for recognizing exchanges of nonmonetary assets at fair value that do not have commercial substance. This Statement will beis effective for the Group for nonmonetary asset exchanges occurring on or after January 1, 2006. The Group does not believe that the adoption of SFAS No. 153 will have a significant effect on its financial statements.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3238Significant differences between HK GAAP and US GAAP (Continued)

 

(j)(i)Related party transactionsRecently Issued Accounting Standards (Continued)

SFAS No. 154

The Group has transactions withIn May 2005, the state-controlled telecommunications operatorsFASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, which replaces APB Opinion No. 20 “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements” and changes the requirement for the accounting for and reporting of a change in accounting principle. SFAS No. 154 establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the PRC.

Under HK GAAP, transactionsabsence of explicit transition requirements specific to a newly adopted accounting principle. This Statement is effective for the Group entered into withfor all accounting changes and any corrections of errors made in fiscal years beginning after December 15, 2005. The impact on the state-controlled telecommunications operators in the PRCconsolidated financial statements will depend on new pronouncements that are not disclosed as related party transactions.subsequently issued.

Under US GAAP, transactions between the Group and the state-controlled telecommunications operators in the PRC are also disclosed as related party transactions. Details of transactions between the Group and the state-controlled telecommunications operators in the PRC are contained in Note 33.

(k)SFAS No. 155Emerging Issues Task Force (“EITF”) 00-21

In November 2002,February 2006, the EITF reachedFASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”, which permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation and amends SFAS No. 140 to eliminate the prohibition on a consensus on Issue 00-21 (EITF 00-21) “Revenue Arrangements with Multiple Deliverables”. EITF 00-21 addresses certain aspects of the accounting byqualifying special-purpose entity from holding a vendor for arrangements under which the vendor will perform multiple revenue generating activities, EITF 00-21derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 will be effective for interim periodsall financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after JuneSeptember 15, 2003.2006. The Group was required to adopt EITF 00-21 on January 1, 2004. Thedoes not believe that the adoption of EITF 00-21 had noSFAS No. 155 will have a significant effect on its financial statements.

SFAS No. 156

In March 2006, the Group’s consolidatedFASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets”, which amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. The Statement requires entities to initially recognize servicing rights at fair value and subsequently measure them either at fair value or amortized cost. Subsequently, entities may elect to measure separately recognized servicing assets and liabilities using the current amortization method or at fair value, with changes in value recognized in current period earnings. The Group does not believe that the adoption of SFAS No. 156 will have a significant effect on its financial statements.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3238Significant differences between HK GAAP and US GAAP (Continued)

The effect on net profitincome of significant differences between HK GAAP and US GAAP is as follows:

 

  Year ended December 31,

    Year ended December 31, 
  2002

 2003

 2004

   Note 2003   2004   2005 
  RMB RMB RMB    RMB   RMB   RMB 

Net profit under HK GAAP

  32,601  35,556  42,004 

Profit attributable to equity shareholders under HK GAAP

   35,556  (A)  41,749  (A)  53,549 

Adjustments:

            

Effect of combination of entities under common control, net of tax

  5,088  (1,358) 1,587   (a) (1,358)   1,587    —   

Capitalized interest

  (100) (96) (116)  (b) (96)   (116)   (106)

Revaluation of fixed assets

  672  3,984  (380)

Revaluation of property, plant and equipment

  (c) 4,075  (B)  (448) (B)  (818)

Revaluation of land lease prepayments

  (c) (91) (B)  68  (B)  98 

Share option scheme

  (331) (192) (86)  (f) (192) (C)  169  (C)  1,485 

Amortization of net connection fees and telephone number selection fees

  853  659  109   (g) 659    109    6 

Amortization of net savings from interconnection, roaming and leased line agreements

  85  86  86   (h) 86    86    86 

Reversal of goodwill amortization

  936  1,850  1,930   (a) 1,850    1,930    —   

Deferred tax effects of US GAAP adjustments

  (388) (969) (73)  (e) (969)   (73)   204 
  

 

 

               

Net profit under US GAAP

  39,416  39,520  45,061 

Net income under US GAAP

   39,520    45,061    54,504 
  

 

 

               

Basic net profit per share in accordance with US GAAP

  2.01  2.01  2.29 
  

 

 

Diluted net profit per share in accordance with US GAAP

  2.01  2.01  2.29 
  

 

 

Basic net profit per ADS* in accordance with US GAAP

  10.07  10.05  11.45 
  

 

 

Diluted net profit per ADS* in accordance with US GAAP

  10.06  10.03  11.43 
  

 

 

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

38Significant differences between HK GAAP and US GAAP (Continued)

The effect on net income of significant differences between HK GAAP and US GAAP is as follows: (continued)

   Year ended December 31,
   2003  2004  2005
   RMB  RMB  RMB

Basic net income per share in accordance with US GAAP

  2.01  2.29  2.76
         

Diluted net income per share in accordance with US GAAP

  2.01  2.29  2.75
         

Basic net income per ADS* in accordance with US GAAP

  10.05  11.45  13.81
         

Diluted net income per ADS* in accordance with US GAAP

  10.03  11.43  13.73
         

 *Based on a ratio of 5 ordinary shares to one ADS
(A)Restated – see note 3
(B)Restated – see note 38 (c)
(C)Restated – see note 38 (f)

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

38Significant differences between HK GAAP and US GAAP (Continued)

The effect on shareholders’ equity of significant differences between HK GAAP and US GAAP is as follows:

      As of December 31, 
   Note  2004     2005 
      RMB     RMB 

Shareholders’ equity under HK GAAP

    233,161  (A)  272,824 

Adjustments:

       

Capitalized interest

  (b)  264    158 

Revaluation of property, plant and equipment

       

- cost

  (c)  (5,370)   (5,370)

- accumulated depreciation and others

  (c)  7,887  (B)  7,069 

Revaluation of land lease prepayments

  (c)  (2,242) (B)  (2,144)

Deferred tax adjustments on revaluations

  (e)  (57)   142 

Employee housing scheme

  (d)  (1,674)   (1,674)

Deemed capital contribution for employee housing scheme

  (d)  1,674    1,674 

Deferral of net connection fees and telephone number selection fees

  (g)  (6)   

Deferral of net savings from interconnection, roaming and leased line agreements

  (h)  (200)   (114)

Reversal of goodwill

  (a)  (35,300)   (35,300)

Deferred tax effects of US GAAP adjustments

  (e)  (18)   (13)
           

Shareholders’ equity under US GAAP

    198,119    237,252 
           

(A)Restated – see note 3
(B)Restated – see note 38 (c)

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

38Significant differences between HK GAAP and US GAAP (Continued)

The following are condensed consolidated balance sheets of the Group as of December 31, 2004 and 2005, and the related condensed consolidated statements of income, total shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2005, restated to reflect the impact of the differences between HK GAAP and US GAAP. Certain comparative figures have been reclassified to conform to current year’s presentation.

Condensed consolidated statements of income

   Year ended December 31, 
   2003  2004  2005 
   RMB  RMB  RMB 
   (restated)  (restated)    

Operating revenue

    

Usage fees

  125,702  136,876  156,710 

Monthly fees

  24,067  26,458  25,055 

Connection fees

  1,173  252  7 

Other operating revenue

  35,118  47,051  67,804 
          

Total operating revenue

  186,060  210,637  249,576 
          

Operating expenses

    

Cost of services and sales (excluding depreciation of RMB41,861, RMB47,050 and RMB55,422 included below)

  27,869  24,387  28,555 

Depreciation

  41,861  47,050  55,422 

Selling, general and administration

  56,984  74,596  87,878 
          

Total operating expenses

  126,714  146,033  171,855 
          

Profit from operations

  59,346  64,604  77,721 

Non-operating net income

  527  949  499 

Interest income

  860  1,032  1,615 

Interest expense

  (2,213) (1,738) (1,346)
          

Profit before tax

  58,520  64,847  78,489 

Income tax

  (19,009) (19,764) (23,945)
          

Profit after tax

  39,511  45,083  54,544 

Minority interests

  9  (22) (40)
          

Net income

  39,520  45,061  54,504 
          

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

38Significant differences between HK GAAP and US GAAP (Continued)

Condensed consolidated statements of income (Continued)

  Year ended December 31,
  2003 2004 2005
  RMB RMB RMB

Basic net income per share

 RMB2.01 RMB2.29 RMB2.76
         

Basic net income per ADS*

 RMB10.05 RMB11.45 RMB13.81
         

Diluted net income per share

 RMB2.01 RMB2.29 RMB2.75
         

Diluted net income per ADS*

 RMB10.03 RMB11.43 RMB13.73
         

*Based on a ratio of 5 ordinary shares to one ADS

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3238Significant differences between HK GAAP and US GAAP (Continued)

The effect on shareholders’ equity of significant differences between HK GAAP and US GAAP is as follows:Condensed consolidated balance sheets

 

   As of December 31,

 
   2003

  2004

 
   RMB  RMB 

Shareholders’ equity under HK GAAP

  198,803  233,161 

Adjustments:

       

Effect of combination of entities under common control

  25,766  —   

Capitalized interest

  380  264 

Revaluation of fixed assets

       

- Cost

  (7,796) (7,796)

- Accumulated depreciation and other

  8,451  8,071 

Deferred tax adjustments on revaluations

  21  (57)

Employee housing scheme

  (1,674) (1,674)

Deemed capital contribution for employee housing scheme

  1,674  1,674 

Deferral of net connection fees and telephone number selection fees

  (115) (6)

Deferral of net savings from interconnection, roaming and leased line agreements

  (286) (200)

Reversal of goodwill

  (34,373) (35,300)

Deferred tax effects of US GAAP adjustments

  (23) (18)
   

 

Shareholders’ equity under US GAAP

  190,828  198,119 
   

 

As a result of the Group and the acquired entities purchased in 2004 being under common control, the condensed financial information of the Group under US GAAP for the years presented have been restated to reflect the combination of the Group and these acquired entities under the “as if pooling-of-interest’ method, whereby assets and liabilities are accounted for at historical cost and the financial statements of previously separate companies for periods prior to the combination are restated on a combined basis.

   December 31,
   2004  2005
   RMB  RMB
   (restated)   

Assets

    

Current assets

    

Cash and cash equivalents

  45,149  64,461

Deposits with banks

  20,264  41,925

Accounts receivable

  6,447  6,446

Other receivables

  1,835  1,888

Tax recoverable

  235  165

Current portion of deferred tax

  1,843  2,660

Inventories

  2,499  2,365

Prepayments and other current assets

  2,974  3,583

Amount due from ultimate holding company

  356  63

Amounts due from related parties

  150  180
      

Total current assets

  81,752  123,736

Property, plant and equipment

  215,240  218,362

Construction in progress

  30,510  34,201

Land lease prepayments

  4,091  5,099

Other financial assets

  77  77

Interest in associates

  —    —  

Deferred tax – non-current

  2,232  4,143

Deferred expenses

  101  —  
      

Total assets

  334,003  385,618
      

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3238Significant differences between HK GAAP and US GAAP (Continued)

The following are condensedCondensed consolidated balance sheets of the Group as of December 31, 2003 and 2004, and the related condensed consolidated statements of income, total shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2004, restated to reflect the impact of the differences between HK GAAP and US GAAP.

Condensed consolidated statements of income(Continued)

 

   Year ended December 31,

 
   2002

  2003

  2004

 
   RMB  RMB  RMB 

Operating revenue

          

Usage fees

  117,392  125,702  136,876 

Monthly fees

  22,234  24,067  26,458 

Connection fees

  1,505  1,173  252 

Other operating revenue

  21,828  29,339  40,678 
   

 

 

Total operating revenue

  162,959  180,281  204,264 
   

 

 

Operating expenses

          

Cost of services (excluding depreciation of Rmb32,801, Rmb41,936 and Rmb47,133 included below)

  28,103  24,757  21,357 

Depreciation

  32,801  41,936  47,133 

Selling, general and administration

  45,087  56,909  74,513 
   

 

 

Total operating expenses

  105,991  123,602  143,003 
   

 

 

Operating profits

  56,968  56,679  61,261 

Other net income

  2,050  2,667  3,343 

Non-operating net income

  739  527  949 

Interest income

  788  860  1,032 

Interest expenses

  (2,141) (2,213) (1,738)
   

 

 

Profit before tax

  58,404  58,520  64,847 

Income tax

  (18,986) (19,009) (19,764)
   

 

 

Profit after tax

  39,418  39,511  45,083 

Minority interests

  (2) 9  (22)
   

 

 

Net income

  39,416  39,520  45,061 
   

 

 

   December 31,
   2004  2005
   RMB  RMB
   (restated)   

Liabilities and shareholders’ equity

    

Current liabilities

    

Accounts payable

  33,005  39,908

Bills payable

  1,676  1,359

Interest-bearing borrowings

  8,180  —  

Current installments of obligation under capital lease

  68  68

Current taxation

  6,664  9,249

Amounts due to related parties

  2,208  2,172

Accrued expenses and other payables

  32,372  39,858

Amount due to immediate holding company

  98  96

Amount due to ultimate holding company

  459  269

Deferred revenue

  12,936  16,975
      

Total current liabilities

  97,666  109,954

Interest-bearing borrowings

  13,000  12,912

Deferred revenue, excluding current portion

  1,155  1,438

Deferred tax liabilities

  187  146

Amount due to immediate holding company

  23,633  23,633
      

Total liabilities

  135,641  148,083

Minority interests

  243  283

Shareholders’ equity

  198,119  237,252
      

Total liabilities and shareholders’ equity

  334,003  385,618
      

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3238Significant differences between HK GAAP and US GAAP (Continued)

Condensed consolidated statements of income (Continued)

Year ended December 31,

2002

2003

2004

RMBRMBRMB

Basic net profit per share

RMB 2.01RMB 2.01RMB 2.29



Basic net profit per ADS*

RMB 10.07RMB 10.05RMB 11.45



Diluted net profit per share

RMB 2.01RMB 2.01RMB 2.29



Diluted net profit per ADS*

RMB 10.06RMB 10.03RMB 11.43




*Based on a ratio of 5 ordinary shares to one ADS

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

32Significant differences between HK GAAP and US GAAP (Continued)

Condensed consolidated balance sheets

   December 31,

   2003

  2004

   RMB  RMB

Assets

      

Current assets

      

Cash and cash equivalents

  40,300  45,149

Deposits with banks

  17,352  20,264

Accounts receivable

  6,652  6,447

Other receivables

  2,091  1,835

Tax recoverable

  258  235

Deferred tax – current portion

  2,243  1,843

Inventories

  2,380  2,499

Prepayments and other current assets

  2,630  2,974

Amount due from ultimate holding company

  1,143  356

Amounts due from related parties

  170  150
   
  

Total current assets

  75,219  81,752

Fixed assets

  206,635  218,602

Construction in progress

  33,429  31,239

Investment securities

  77  77

Interest in associates

  16  —  

Deferred tax – non-current

  1,211  2,232

Deferred expenses

  311  101
   
  

Total assets

  316,898  334,003
   
  

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

32Significant differences between HK GAAP and US GAAP (Continued)

Condensed consolidated balance sheets

   December 31,

   2003

  2004

   RMB  RMB

Liabilities and shareholders’ equity

      

Current liabilities

      

Accounts payable

  27,511  33,005

Bills payable

  2,083  1,676

Bank loans and other interest-bearing borrowings

  18,230  8,180

Obligation under capital lease – current portion

  78  68

Taxes payable

  4,521  6,664

Amounts due to related parties

  2,305  2,208

Accrued expenses and other payables

  25,480  32,372

Amount due to immediate holding company

  47  98

Amount due to ultimate holding company

  1,595  459

Amount due to fellow subsidiaries

  2,830  —  

Deferred revenue - current portion

  10,188  12,936
   
  

Total current liabilities

  94,868  97,666

Bank loans and other interest-bearing borrowings

  19,407  13,000

Deferred revenue – long term portion

  1,422  1,155

Deferred taxation – non-current

  215  187

Amount due to immediate holding company

  9,976  23,633
   
  

Total liabilities

  125,888  135,641

Minority interests

  182  243

Shareholders’ equity

  190,828  198,119
   
  

Total liabilities and shareholders’ equity

  316,898  334,003
   
  

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

32Significant differences between HK GAAP and US GAAP (Continued)

Condensed consolidated statements of total shareholders’ equity for the following years:

 

   RMB

 

Shareholders’ equity at January 1, 2002

153,572

Net profit for the year ended December 31, 2002

39,416

Issue of ordinary shares

27,681

Deemed capital distribution

(70,959)

Distribution to owner

(911)

Contribution by owner

10,806

Stock-based compensation

331


Shareholders’ equity at December 31, 20022003

  159,936 

Net profitincome for the year ended December 31, 2003

  39,520 

Distribution to owner

  (11,141)

Contribution by owner

  911 

Tax effect on evaluationrevaluation

  1,410 

Stock-based compensation

  192 
  

Shareholders’ equity at December 31, 2003

  190,828 

Net profitincome for the year ended December 31, 2004

  45,061 

Issue of ordinary shares

  703 

Deemed capital distribution

  (30,210)

Distribution to owner

  (8,349)

Stock-based compensation

  86 
  

Shareholders’ equity at December 31, 2004

  198,119 

Net income for the year ended December 31, 2005

  
54,504

Issue of ordinary shares

3,422

Distribution to owner

(18,894)

Stock-based compensation

68

Others

33

Shareholders’ equity at December 31, 2005

237,252

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3238Significant differences between HK GAAP and US GAAP (Continued)

Condensed consolidated statements of cash flows

The Group applies Hong Kong Statement of Standard Accounting Practice No. 15 (revised 2001)HKAS 7 “Cash Flow Statements” (“HK SSAP 15”). Its objectives and principles are similar to those set out in SFAS No. 95, “Statement of Cash Flows” (“SFAS 95”). The principal differences between the standards relate to classification. Under HK SSAP 15,HKAS 7, the Group presents its cash flows for (a) operating activities; (b) investing activities; and (c) financing activities. Dividend received and interest received under investing activities and interest paid under financing activities shown under HK SSAP 15HKAS 7 would be included as operating activities under SFAS 95, with the exception of distributions, which under SFAS 95 would be classified as financing activities. Summarized cash flow data by operating, investing and financing activities in accordance with SFAS 95 are as follows:

 

  Year ended December 31,

   Year ended December 31, 
  2002

 2003

 2004

   2003 2004 2005 
  RMB RMB RMB   RMB RMB RMB 

Net cash inflow/(outflow) from

       

Operating activities

  88,429  93,131  111,112   93,131  111,112  131,593 

Investing activities

  (54,827) (63,571) (65,619)  (63,571) (65,619) (88,635)

Financing activities

  (27,388) (23,549) (40,644)  (23,549) (40,644) (23,538)
  

 

 

          

Increase in cash and cash equivalents

  6,214  6,011  4,849   6,011  4,849  19,420 

Cash and cash equivalents at beginning of year

  28,075  34,289  40,300   34,289  40,300  45,149 

Effect of changes in foreign exchange rate

  —    —    (108)
  

 

 

          

Cash and cash equivalents at end of year

  34,289  40,300  45,149   40,300  45,149  64,461 
  

 

 

          

Interest paid (net of amounts capitalized)

  2,105  2,831  2,040   2,831  2,040  1,635 
  

 

 

          

Income taxes paid

  19,155  18,668  18,244   18,668  18,244  24,585 
  

 

 

          

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3238Significant differences between HK GAAP and US GAAP (Continued)

Significant non-cash transactions

The Group incurred payables of RMB28,176 and RMB1,332 to equipment suppliers and banks respectively for additions of construction in progress during the year ended December 31, 2005.

The Group incurred payables of RMB23,980 and RMB1,675 to equipment suppliers and banks respectively for additions of construction in progress during the year ended December 31, 2004.

The Group incurred payables of RMB20,790 and RMB2,059 to equipment suppliers and banks respectively for additions of construction in progress during the year ended December 31, 2003.

 

The Group incurred payables of RMB14,173 and RMB1,273 to equipment suppliers and banks respectively for additions of construction in progress during the year ended December 31, 2002.

3339Additional information required by US GAAP

The following additional financial statement disclosures are required under US GAAP and are presented on a US GAAP basis.

Income tax

The Company is subject to Hong Kong profits tax at 16% for the year ended December 31, 2002 and 17.5% for the years ended December 31, 2003, 2004.2004 and 2005. No provision for Hong Kong profits tax has been made as there was no assessable profit earned by the Company for the year.

The Group’s PRC subsidiaries are subject to the statutory income tax rate of 33%, except for certain subsidiaries of the Company and certain operations of the subsidiaries located within special economic zones in the PRC, which enjoy a preferential rate of 30% and 15% respectively.

The components of income before income taxes are as follows:

 

  Year ended December 31,

   Year ended December 31, 
  2002

 2003

 2004

   2003 2004 2005 
  RMB RMB RMB   RMB RMB RMB 

Hong Kong operation

  (1) (2) (1)  (2) (1) (1)

PRC operation

  58,405  58,522  64,848   58,522  64,848  78,490 
  

 

 

          
  58,404  58,520  64,847   58,520  64,847  78,489 
  

 

 

          

All of the pre-tax income, except for an insignificant loss, is from the PRC.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3339Additional information required by US GAAP (Continued)

Income tax (Continued)

All income tax expenses are related to PRC enterprise income tax. The components of PRC income tax expense are as follows:

 

   Year ended December 31,

 
   2002

  2003

  2004

 
   RMB  RMB  RMB 

Current

  20,046  15,845  19,788 

Deferred

  (1,060) 3,164  (24)
   

 
  

   18,986  19,009  19,764 
   

 
  

   Year ended December 31, 
   2003  2004  2005 
   RMB  RMB  RMB 

Current

  15,845  19,788  26,714 

Deferred

  3,164  (24) (2,769)
          
  19,009  19,764  23,945 
          

The provision for income tax differs from the amount computed by applying the PRC statutory income tax rate of 33% to profit before tax and minority interests for the following reasons:

 

  Year ended December 31,

   Year ended December 31, 
  2002

 2003

 2004

   2003 2004 2005 
  RMB RMB RMB   RMB RMB RMB 

Expected PRC taxation at statutory tax rates

  19,273  19,312  21,400   19,312  21,400  25,901 

Non-taxable items

       

- Connection fee

  (182) (179) (27)  (179) (27) (1)

- Interest income

  (25) (12) (26)  (12) (26) (24)

- Amortization of deferred tax credit

  (30) (70) (125)

Amortization of deferred tax credit

  (70) (125) (526)

Non-deductible expenses on PRC operations

  953  1,523  415   1,523  415  395 

Non-deductible expenses on Hong Kong operations

  242  324  217   324  217  175 

Rate differential on PRC operations

  (1,336) (1,732) (1,902)  (1,732) (1,902) (1,758)

Rate differential on Hong Kong operations

  229  277  166   277  166  119 

Reversal of deferred taxation due to change of income tax rate

  (9) 23  169   23  169  4 

Over-provision for prior year

  (14) (375) (357)  (375) (357) (247)

Others

  (115) (82) (166)  (82) (166) (93)
  

 

 

          

Income tax

  18,986  19,009  19,764   19,009  19,764  23,945 
  

 

 

          

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3339Additional information required by US GAAP (Continued)

Income tax (Continued)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below.

 

   December 31,

 
   2003

  2004

 
   RMB  RMB 

Deferred tax assets:

       

Inventories

  23  30 

Accounts receivable

  1,300  894 

Fixed assets

  1,046  2,169 

Accrued expenses and other payable

  606  876 

Deferred revenue

  479  106 
   

 

Gross deferred tax assets

  3,454  4,075 

Deferred tax liabilities:

       

Fixed assets

  (215) (187)
   

 

Net deferred tax assets

  3,239  3,888 

Less: Current portion of net deferred tax assets

  (2,243) (1,843)
   

 

   996  2,045 
   

 

   December 31, 
   2004  2005 
   RMB  RMB 

Deferred tax assets:

   

Inventories

  30  9 

Accounts receivable

  894  971 

Property, plant and equipment and land lease prepayments

  2,169  4,107 

Accrued expenses and other payable

  876  1,680 

Deferred revenue

  106  36 
       

Gross deferred tax assets

  4,075  6,803 

Deferred tax liabilities:

   

Property, plant and equipment

  (187) (146)
       

Net deferred tax assets

  3,888  6,657 

Less: Current portion of net deferred tax assets

  (1,843) (2,660)
       
  2,045  3,997 
       

Accounts receivable

 

  December 31,

   December 31, 
  2003

 2004

   2004 2005 
  RMB RMB   RMB RMB 

Accounts receivable

  11,821  10,100   10,100  9,911 

Less: Allowance for doubtful accounts

  (5,169) (3,653)  (3,653) (3,465)
  

 

       
  6,652  6,447   6,447  6,446 
  

 

       

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3339Additional information required by US GAAP (Continued)

Accounts receivable (Continued)

Allowance for doubtful accounts is analyzed as follows:

 

   RMB

 

At January 1, 2002

5,546

Provision for the year

2,472

Written-off

(2,771)


At December 31, 20022003

  5,247 

Provision for the year

  2,579 

Written-off

  (2,657)
  

At December 31, 2003

  5,169 

Provision for the year

  2,569 

Written-off

  (4,085)
  

At December 31, 2004

  3,653 

Provision for the year

  
2,987

Written-off

(3,175)

At December 31, 2005

3,465

Other receivables

 

  December 31,

   December 31, 
  2003

 2004

   2004 2005 
  RMB RMB   RMB RMB 

Other receivables

  2,206  1,974   1,974  1,998 

Less: Allowance for doubtful accounts

  (115) (139)  (139) (110)
  

 

       
  2,091  1,835   1,835  1,888 
  

 

       

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3339Additional information required by US GAAP (Continued)

Other receivables (Continued)

Allowance for doubtful accounts is analyzed as follows:

 

   RMB

 

At January 1, 2002

—  

Provision for the year

148

Written-off

(23)


At December 31, 20022003

  125 

Provision for the year

  90 

Written-off

  (100)
  

At December 31, 2003

  115 

Provision for the year

  46 

Written-off

  (22)
  

At December 31, 2004

  139 

Written-back for the year

  
(19

)

Written-off

(10)

At December 31, 2005

110

Fixed assetsProperty, plant and equipment

 

  December 31,

   December 31, 
  2003

 2004

   2004 2005 
  RMB RMB   RMB RMB 

Land use rights and buildings

  28,829  36,731 
  (restated) 

Buildings

  33,042  37,827 

Telecommunications transceivers, switching centers, transmission and other network equipment

  298,589  339,700   339,700  369,554 

Office equipment, furniture and fixtures and others

  15,377  16,687   16,687  16,732 
  

 

       
  342,795  393,118   389,429  424,113 

Less: accumulated depreciation

  (136,160) (174,516)  (174,189) (205,751)
  

 

       
  206,635  218,602   215,240  218,362 
  

 

       

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3339Additional information required by US GAAP (Continued)

Deferred revenue and other items

 

   Year ended December 31,

 
   2003

  2004

 
   RMB  RMB 

Balance at beginning of year

  10,126  11,610 

Addition during the year

  56,342  85,248 

Recognized in the condensed consolidated statements of income

  (54,858) (82,767)
   

 

Balance at end of year

  11,610  14,091 

Less: Current portion

  (10,188) (12,936)
   

 

   1,422  1,155 
   

 

   Year ended December 31, 
   2004  2005 
   RMB  RMB 

Balance at beginning of year

  11,610  14,091 

Addition during the year

  85,248  105,407 

Recognized in the condensed consolidated statements of income

  (82,767) (101,085)
       

Balance at end of year

  14,091  18,413 

Less: Current portion

  (12,936) (16,975)
       
  1,155  1,438 
       

Deferred revenue comprises:

 

 (i)the unamortized portion of proceeds received by Guangdong Mobile from certain distributors of telecommunications services which are amortized over a period of seven years;

(ii)the unamortized portion of connection fees and telephone number selection fees received which are recognized over the estimated subscriber usage period for the related services;

 

 (iii)(ii)the deferred tax credit of purchase of domestic telecommunications equipment which is amortized over the remaining lives of the related fixed assets;property, plant and equipment;

 

 (iv)(iii)the prepaid services fees received from subscribers which are recognized as income when the mobile telecommunications services are rendered upon actual usage by subscribers; and

 

 (v)(iv)the unamortized portion of net savings attributable to the Group as a result of the provincial interconnection, roaming and leased line agreements.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3339Additional information required by US GAAP (Continued)

Deferred expenses

 

   Year ended December 31,

 
   2003

  2004

 
   RMB  RMB 

Balance at beginning of year

  912  311 

Recognized in the condensed consolidated statements of income

  (601) (210)
   

 

Balance at end of year

  311  101 
   

 

   Year ended December 31, 
   2004  2005 
   RMB  RMB 

Balance at beginning of year

  311  101 

Recognized in the condensed consolidated statements of income

  (210) (5)

Opening balance adjustment eliminated against financial instruments

  —    (96)
       

Balance at end of year

  101  —   
       

Deferred expenses comprise:

 

 (i)the unamortized portion of issuance costs in respect of the fixed rate notes, convertible notes and bonds; and

 

 (ii)the unamortized portion of direct costs related to connection fees and telephone number selection fees received.

Stock option plan

Details of the Company’s stock option plan and options granted under the plan are contained in Note 28.note 30. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model and the binomial lattice model for 2004 and 2005 respectively, with the following assumptions used for grants: expected dividend yield of 2%2.65% and 2.65%2.58% during 20022004 and 2004;2005; expected volatility of 32.44%27.38% and 27.38%24.58% for the share option granted during 20022004 and 20042005 respectively; risk-free interest rate of 5.3%4.06% and 4.1%4.54% during 20022004 and 20042005 respectively; and expected life of 10 years and 10 years during 20022004 and 20042005 respectively. The per share fair value of stock options granted during 20022004 and 20042005 were HK$9.156.64 and HK$6.6410.28 on the date of grant, respectively.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3339Additional information required by US GAAP (Continued)

Stock option plan (continued)(Continued)

The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations including FASB Interpretation No. 44, “Account for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25”, issued in March 2000, to account for its plan. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. FASB No. 123, “Accounting for Stock-Based Compensation” and FASB Statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB 123”, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, the Company has elected to continue to apply the intrinsic-valued-based method of accounting described above, and has adopted only the disclosure requirements of SFAS 123, as amended. The compensation cost that has been charged against income for US GAAP for the Company’s stock option plan was RMB331 for 2002, RMB192 for 2003, and RMB86 for 2004.2004 and RMB68 for 2005. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period.

 

      Year ended December 31,

 
      2003

  2004

 
      RMB  RMB 

Net profit, as reported

     39,520  45,061 

Add stock-based employee compensation expense included in net income

     192  86 

Deduct total stock-based employee compensation expense determined under fair-value-based method

     (1,158) (842)
      

 

Proforma net income

     38,554  44,305 
      

 

Basic net profit per share

  As reported
Pro forma
  2.01
1.96
 
 
 2.29
2.25
 
 

Diluted net profit per share

  As reported
Pro forma
  2.01
1.96
 
 
 2.29
2.25
 
 
   Year ended December 31, 
   2004  2005 
   RMB  RMB 

Net income, as reported

  45,061  54,504 

Add stock-based employee compensation expense included in net income

  86  68 

Deduct total stock-based employee compensation expense determined under fair-value-based method

  (842) (1,752)
       

Pro forma net income

  44,305  52,820 
       

Basic net income per share

   

As reported

  2.29  2.76 

Pro forma

  2.25  2.68 

Diluted net income per share

   

As reported

  2.29  2.75 

Pro forma

  2.25  2.66 

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3339Additional information required by US GAAP (Continued)

Net profitincome per share

The following is a reconciliation of the numerators and denominators of the basic and diluted net profitincome per share computations prepared under US GAAP.

 

   For the year ended December 31, 2002

  For the year ended December 31, 2003

  For the year ended December 31, 2004

   

Income

(Numerator)


  

Shares

(Denominator)


  Per share
amount


  

Income

(Numerator)


  

Shares

(Denominator)


  Per share
Amount


  

Income

(Numerator)


  

Shares

(Denominator)


  

Per share

Amount


Basic net profit per share

  39,416  19,561  2.01  39,520  19,672  2.01  45,061  19,673  2.29
         
        
        

Effect of dilutive securities

                           

Convertible notes

  129  91     129  91     129  91   

Stock options

  —    1     —    —       —    10   
   
  
     
  
     
  
   

Diluted net profit per share

  39,545  19,653  2.01  39,649  19,763  2.01  45,190  19,774  2.29
   
  
  
  
  
  
  
  
  

Fair value

Financial assets of the Group include cash and cash equivalents, deposits with banks, accounts receivable, other receivables and amounts due from related parties. Financial liabilities of the Group include accounts payable, bank and other loans, other payables and amounts due to related parties. It is not practicable to estimate the fair value of the amounts due from and due to related parties without incurring excessive cost.

The following table presents the carrying amounts and fair values of the Group’s bank and other loans as of December 31, 2003 and 2004:

   December 31, 2003

  December 31, 2004

   Carrying
amount


  

Fair

Value


  Carrying
amount


  

Fair

value


   RMB  RMB  RMB  RMB

Fixed rate bank and other loans

  1,659  1,668  1,432  1,408

Variable rate bank and other loans

  12,259  12,259  1,023  1,023

Fixed rate notes

  4,984  5,209  —    —  

Convertible notes

  5,735  5,713  5,725  5,666

Bonds

  13,000  13,054  13,000  12,119
   
  
  
  

Total

  37,637  37,903  21,180  20,216
   
  
  
  

The fair values of all other financial instruments approximate their carrying amounts due to the nature or short maturity of these instruments.

   For the year ended December 31, 2003  For the year ended December 31, 2004  For the year ended December 31, 2005
   

Income

(Numerator)

  

Shares

(Denominator)

  

Per share

Amount

  

Income

(Numerator)

  

Shares

(Denominator)

  

Per share

Amount

  

Income

(Numerator)

  

Shares

(Denominator)

  

Per share

Amount

Basic net income per share

  39,520  19,672  2.01  45,061  19,673  2.29  54,504  19,738  2.76
                     

Effect of dilutive securities

                  

Convertible notes

  129  91    129  91    135  76  

Stock options

  —    —      —    10    —    78  
                        

Diluted net income per share

  39,649  19,763  2.01  45,190  19,774  2.29  54,639  19,892  2.75
                           

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3339Additional information required by US GAAP (Continued)

RelatedPrincipal related party transactions

 

 Year ended December 31,

     Year ended December 31,
   2002

  2003

  2004

     2003  2004  2005
  Note RMB  RMB  RMB  Note  RMB  RMB  RMB

Interconnection revenue

  (ii) 12,458  9,624  5,940  (ii)  9,624  5,940  6,196

Interconnection charges

  (ii) 16,838  15,103  11,911  (ii)  15,103  11,911  13,588

Leased line charges

  (ii) 6,751  5,501  3,719  (ii)  5,501  3,719  2,995

Spectrum fees

  (i) 278  635  406  (i)  635  406  —  

Operating lease charges

  (ii) 559  577  643  (ii)  577  643  780

Sales commission expenses

  (iii) 109  74  69

Debt collection service fees

  (iv) 81  68  43

Billing service fees

  (v) 10  5  5

Roaming billing processing fees

  (i) 438  375  22  (i)  375  22  —  

Equipment maintenance service fees

  (i) 55  66  89  (i)  66  89  153

Rental charges of synchronized clock ports

  (vi) 28  21  26  (iii)  21  26  59

Construction and related service fees

  (i) 1,067  720  366  (i)  720  366  1,154

Purchases of transmission tower and transmission tower-related service and antenna maintenance service fees

  (i) 208  98  197  (i)  98  197  187

Technology platform development and maintenance service income

  (i) 39  22  25  (i)  22  25  12

Telecommunications lines maintenance service fees

  (i) 158  235  157  (i)  235  157  404

Interest paid/payable

  (i) 1,107  1,091  721  (i)  1,091  721  647

Network design fee

  (vii) 192  105  48

Rental income

  (viii) 7  —    —  

Capital contributions

  (ix) 10,806  911  —    (iv)  911  —    —  

Distributions

  (x) 911  1,123  —    (v)  1,123  —    —  

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

3339Additional information required by US GAAP (Continued)

RelatedPrincipal related party transactions (Continued)

 


Notes:

 

(i)Descriptions of the nature of the related party transactions are set forth in Note 26.note 27.
(ii)Descriptions of the nature of the related party transactions are set forth in Note 26.note 27. The amounts also include charges paid or payable to the state-controlled telecommunications operators in the PRC.
(iii)Sales commission expenses represent sales commission paid or payable to the state-controlled telecommunications operators in the PRC for the selling of prepaid cards on behalf of the Company’s subsidiaries.
(iv)Debt collection service fees represent service fees paid or payable to the state-controlled telecommunications operators in the PRC for the provision of debt collection service to the Company’s subsidiaries.
(v)Billing service fees represent service fees paid or payable to the state-controlled telecommunications operators in the PRC for the provision of billing processing services to the Company’s subsidiaries.
(vi)Rental charges of synchronized clock ports represent the amount paid or payable to China MobileCMCC for the rental of synchronized clock ports.
(vii)Network design fee represents amount paid or payable to subsidiaries of China Mobile for the provision of network design services.
(viii)Rental income represents the amount received or receivable from the state-controlled telecommunications operators in the PRC for operating leases in respect of land and buildings and others.
(ix)(iv)Capital contributions represent capital contributions in the form of cash or construction projects received from China Mobile.CMCC.
(x)(v)Distributions represent cash payments from the Company’s subsidiaries to China Mobile.CMCC.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

33Additional information required by US GAAP (Continued)

Segment reporting

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, established standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.

The Company’s operating segments are comprised of its mobile telecommunications businesses operated within the thirty-one provinces, autonomous regions and municipalities in the PRC. The operating segments are managed separately because each operating segment represents a strategic business unit that serves different markets. All operating segments provide mobile telecommunications services to individual customers within their geographic market. The Company’s operating segments have been aggregated into a single reportable segment as permitted under US GAAP because management believes all of the criteria for aggregation have been met.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

39Additional information required by US GAAP (Continued)

Business risks

The Group conducts its principal operations in the PRC and accordingly is subject to special considerations and significant risks not typically associated with investments in equity securities of United States and Western European companies. These include risks associated with, among others, the political, economic and legal environment, extensive government regulations and competition in the mobile telecommunications industry.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

33Additional information required by US GAAP (Continued)

New telecommunications law

In order to provide a uniform regulatory framework for the telecommunications industry in the PRC, the MII, pursuant to the direction of the PRC State Council, is currently preparing a draft of the Telecommunications Law of the PRC (the “Telecommunications Law”). The draft law, when formulated, will be submitted to the National People’s Congress for review and adoption. It is unclear if and when the Telecommunications Law will be adopted, and the nature and scope of regulation envisaged by the Telecommunications Law are not fully known. There can be no assurance that the Telecommunications Law, if adopted, would not have a material adverse effect on the Group’s business, financial condition and results of operations.

Amount of spectrum availability

The Group’s mobile telecommunications system’s subscriber capacity is limited by the amount of spectrum available for use by the system. The former State Radio Regulatory Commission, now a department within the MII, is responsible for the overall allocation of radio frequency spectrum in the PRC. There can be no assurance that the Group would be granted additional spectrum when and if required, and any resulting levels of system congestion could result in subscriber dissatisfaction, decreased system usage by subscribers and increased churn rate.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

 

39Additional information required by US GAAP (Continued)

Interconnection arrangement with networks of other operators

The Group’s mobile telecommunications services depend in large part upon access to the network of other operators. Any disruption of interconnection with the networks of operators could have a material adverse effect on the Group’s results of operations.

Changes in technology

The telecommunications industry is subject to rapid and significant changes in technology. Accordingly, the mobile telecommunications technologies that the Group currently employs may become obsolete or subject to competition from new technologies in the future, including new wireless telecommunications technologies. In addition, the new technologies the Group implements, such as wireless data applications, may not generate an acceptable rate of return.

Notes to Consolidated Financial Statements (Continued)

(Amounts in millions, except share data)

33Additional information required by US GAAP (Continued)

New competition

Current Chinese government policy concerning the telecommunications sector is to encourage orderly competition. There can be no assurance that the State Council will not approve additional telecommunications service providers in the future, including providers of mobile telecommunications services, that may compete against the Group. In additions,addition, China’s accession into the WTO could lead to increased foreign investment in the telecommunications market in Mainland China, thereby increasing competition and foreign participation in the mobile telecommunications service sector in Mainland China. Increased competition and foreign participation may have a material adverse effect on the Group’s financial conditions and resultresults of operation.

Self insurance risk

The Group does not maintain any insurance policies to cover its assets.

 

Interest rate risk

The interest rates and terms of repayment of the bank and other loans payable of the Group are disclosed in Note 20.

Foreign currency risk

The Group has foreign currency risk as certain loans and cash and cash equivalents are denominated in foreign currencies, principally US dollars and Hong Kong dollars. Depreciation or appreciation of the Renminbi against foreign currencies affects the Group’s results of operations.

Credit risk

Substantially all of the Group’s cash and cash equivalents are deposited with Hong Kong and PRC financial

institutions. The accounts receivable of the Group are spread among a number of customers.

F-117F-142