1
EXHIBIT 13.1
================================================================================
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
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
------------------------------
COMMISSION FILE NUMBER 1-14696
------------------------------
CHINA TELECOM (HONG KONG) LIMITED
(Exact Name of Registrant as Specified in Its Charter)
HONG KONG, CHINA
(Jurisdiction of Incorporation or Organization)
------------------------------
------------------------------
60TH FLOOR, THE CENTER
99 QUEEN'S ROAD CENTRAL
HONG KONG, CHINA
(852) 3121-8888
(Address and Telephone Number of Principal Executive Offices)
----------------
Securities registered or to be registered pursuant to Section 12(b) of
the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- ------------------------------
Ordinary shares, par value HK$0.10 per share 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.
================================================================================
2
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, 1999, 13,706,287,021 ordinary shares, par value HK$0.10
per share, were issued and outstanding.
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 which financial statement item the registrant has
elected to follow. Item 17 Item 18 X
-------- --------
================================================================================
3
TABLE OF CONTENTS
CHINA TELECOM (HONG KONG) LIMITED
Page
----
Certain Defined Terms and Conventions 1
Forward-Looking Statements 2
Recent Developments 2
Our Strategy 3
Special Note on the Financial Information Presented in This Annual Report 3
Glossary 4
PART I
Item 1. Description of Business 5
Item 2. Description of Property 21
Item 3. Legal Proceedings 21
Item 4. Control of Registrant 21
Item 5. Nature of Trading Market 22
Item 6. Exchange Controls and Other Limitations Affecting Security Holders 22
Item 7. Taxation 23
Item 8. Selected Financial Data 24
Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations 28
Item 9A. Quantitative and Qualitative Disclosures About Market Risk 40
Item 10. Directors and Officers of Registrant 41
Item 11. Compensation of Directors and Officers 42
Item 12. Options to Purchase Securities from Registrant or Subsidiaries 43
Item 13. Interest of Management in Certain Transactions 44
PART II
Item 14. Description of Securities to be Registered 49
PART III
Item 15. Defaults Upon Senior Securities 49
Item 16. Changes in Securities, Changes in Security for Registered Securities and Use of Proceeds 49
PART IV
Item 17. Financial Statements 51
Item 18. Financial Statements 51
-i-
4
Page
----
Item 19. Financial Statements and Exhibits 52
-ii-
5
CERTAIN DEFINED TERMS AND CONVENTIONS
Unless the context otherwise requires, all references to "we", "us", and
"our" in this annual report on Form 20-F are to China Telecom (Hong Kong)
Limited, a company incorporated under the laws of Hong Kong on September 3,
1997, and its consolidated subsidiaries, Guangdong Mobile Communication Company
Limited ("Guangdong Mobile") and Zhejiang Mobile Communication Company Limited
("Zhejiang Mobile") and in respect of any time from June 4, 1998, Jiangsu Mobile
Communication Company Limited ("Jiangsu Mobile") and in respect of any time from
November 12, 1999, Fujian Mobile Communication Company Limited ("Fujian
Mobile"), Henan Mobile Communication Company Limited ("Henan Mobile") and Hainan
Mobile Communication Company Limited ("Hainan Mobile"). Our operating and
financial information presented in this annual report in respect of any time
prior to our incorporation are to the cellular telecommunications businesses in
Guangdong and Zhejiang provinces of China that we assumed pursuant to a
corporate restructuring (the "IPO restructuring") effected in September 1997 in
connection with our initial public offering, or IPO. See "Item 1. Description of
Business -- Our History".
In this annual report, references to "China" are to the People's Republic
of China including, where the context permits, Hong Kong, Macau and Taiwan, and
references to "mainland China" are to the People's Republic of China excluding
Hong Kong, Macau and Taiwan. References to the "government" are to the
government of the People's Republic of China. References to "Hong Kong" are to
the Hong Kong Special Administrative Region of the People's Republic of China.
References to the "MII" are to the Ministry of Information Industry of China or,
in respect of references to any time prior to the establishment of the Ministry
of Information Industry, the former Ministry of Posts and Telecommunications
(the "MPT"). Pursuant to certain resolutions regarding the reorganization of
certain ministries of the government passed by the Ninth National People's
Congress in March 1998, the administrative functions of the MPT were assumed by
the MII, which is under the direct leadership of the State Council of China (the
"State Council"). See "Item 1. Description of Business -- Regulation".
In this annual report, references to "US dollars", "US$" or "$" are to
United States dollars, references to "RMB" are to Renminbi, the legal tender
currency in mainland China, and references to "HK$" are to Hong Kong dollars.
References to "Hong Kong GAAP" and to "US GAAP" are to generally accepted
accounting principles in Hong Kong and the United States, respectively.
References to "adjusted EBITDA" are to earnings before interest income, interest
expense, non-operating income (expenses), income taxes, depreciation,
amortization and write-down and write-off of fixed assets. The items of net
profit excluded from adjusted EBITDA are significant components in understanding
and assessing our financial performance and our computation of adjusted EBITDA
may not be comparable to other similarly titled measures of other companies.
We publish our consolidated financial statements in Renminbi. Solely for
the convenience of the reader, this annual report contains translations of
certain Renminbi and Hong Kong dollar amounts into US dollars and vice versa at
specified rates. These translations should not be construed as representations
that the Renminbi or Hong Kong dollar amounts actually represent such US Dollar
amounts or could be converted into US dollars at the rates indicated or at all.
Unless otherwise stated, the translations of Renminbi and Hong Kong dollars into
US dollars and vice versa have been made at the rate of RMB 8.2793 to US$1.00,
the rate quoted by the People's Bank of China, and HK$7.7740 to US$1.00, the
noon buying rates in New York City for cable transfers in Hong Kong dollars as
certified for customs purposes by the Federal Reserve Bank of New York on
December 31, 1999. See "Item 8. Selected Financial Data -- Exchange Rate
Information" for information regarding the noon buying rates from January 1,
1995 through December 31, 1999. On June 15, 2000, the noon buying rates for
Renminbi and Hong Kong dollars were RMB 8.2768 to US$1.00 and HK$7.7942 to
US$1.00, respectively. Any discrepancies in any table between totals and sums of
amounts listed therein are due to rounding.
The statistics set forth in this annual report relating to mainland China
are taken or derived from various government publications that we have not
prepared or independently verified. These statistics may not be consistent with
other statistics compiled within or outside mainland China.
-1-
6
FORWARD-LOOKING STATEMENTS
This annual report contains certain forward-looking statements that are, by
their nature, subject to significant risks and uncertainties. These
forward-looking statements include, without limitation, statements relating to
our business strategy, network expansion plans, including proposed capital
investments relating thereto, the planned development of new generation mobile
technologies and other technologies, the expected impact of tariff changes on
our results of operations, future developments in the telecommunications
industry in mainland China, including the restructuring of the industry, and
other statements relating to our future business development and economic
performance. The words "anticipate", "believe", "estimate", "expect", "intend"
and similar expressions, as they relate to us, are intended to identify certain
of such forward-looking statements. We do not intend to update these
forward-looking statements.
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: the
restructuring of the telecommunications industry in mainland China, any changes
in regulatory policies of the MII and other relevant government authorities,
which could affect, among other things, the granting of any requisite government
approvals, interconnection and transmission line arrangements, tariff policy,
capital investment priorities and spectrum allocation; the effects of
competition on the demand for and price of our cellular services; any changes in
cellular and related technology, which could affect the viability and
competitiveness of our cellular networks; and changes in political, economic,
legal and social conditions in China, including the Chinese government's
specific policies with respect to foreign investment in the telecommunications
industry, economic growth, inflation, foreign exchange, and the availability of
credit. In addition, our future network expansion and other capital expenditure
and development plans are dependent on numerous factors, including the
availability of adequate financing on acceptable terms, the adequacy of
currently available spectrum or the availability of additional spectrum, the
availability of the requisite number of sites for locating network equipment on
reasonable commercial terms, the availability of transmission lines and
equipment when required, and the availability of qualified management and
technical personnel.
RECENT DEVELOPMENTS
In February 1999, the State Council approved a restructuring plan for the
telecommunications industry in mainland China. Pursuant to this restructuring
plan, in May 2000 China Mobile acquired a 100% controlling interest in China
Telecom (Hong Kong) Group Limited ("CTHKG"), our parent company. Previously,
China Mobile owned a 57% interest in CTHKG and China Telecommunications
Corporation (formerly known as the Directorate General of Telecommunications, or
the DGT) ("CTC") owned a 43% interest in CTHKG. We are now approximately 75%
indirectly controlled by China Mobile and approximately 25% controlled by public
shareholders. See "Item 1. Description of Business -- Our History".
In view of the adjustment to our parent's shareholding structure, we plan
on changing our corporate name to "China Mobile (Hong Kong) Limited" and
adopting the "China Mobile" logo and trademark, pursuant to a non-exclusive
license agreement with China Mobile. See "Item 1. Description of Business --
Operations -- Brand Name". On June 16, 2000, we received shareholder approval
for the change of name and we plan to have the change become effective in July
2000. Our New York Stock Exchange ticker symbol will remain "CHL" after the name
change. We believe that the new trade name and logo will more appropriately
reflect our core objectives and the direction and focus of our future
development.
On June 16, 2000, we also received shareholder approval for the
Inter-provincial Long Distance Transmission Leased Line Fee Sharing Agreement
and the Inter-provincial Interconnection and Domestic and International Roaming
Settlement Agreement which we entered into with China Mobile on May 5, 2000.
These new arrangements are described in "Item 1. Description of Business --
Inter-provincial Transmission Line Leasing Costs", "Interconnection Revenue and
Costs" and "Roaming Revenue and Costs".
-2-
7
In July 2000, we plan on modifying the ratio of our ordinary shares to
American Depositary Shares ("ADSs") from twenty ordinary shares per ADS to five
ordinary shares per ADS. This change will result in each ADS holder receiving
three additional ADSs for every ADS they currently own.
As of May 31, 2000, our total number of subscribers reached 20.5 million.
OUR STRATEGY
We believe that the cellular telecommunications industry in mainland China
is undergoing a period of rapid development and has significant potential for
substantial growth. Our principal objective is to take advantage of this
potential through:
- internal growth, including:
- expanding our subscriber base and increasing usage;
- strengthening cost control and improving operating efficiency; and
- enhancing profitability; and
- external expansion by aggressively pursuing strategic investment
opportunities in the telecommunications industry in China.
In particular, we have formulated a business strategy to achieve internal
growth by enhancing our network quality and functional capabilities, developing
customized value added service packages and expanding our distribution channels,
developing brand awareness and promoting customer loyalty, controlling operating
costs and improving operating efficiency, and introducing advanced real time
billing systems and measures to ensure timely collection of receivables.
Because the telecommunications industry in mainland China is subject to a
high degree of government regulation, our ability to make strategic investments
in the telecommunications industry in mainland China will be subject to relevant
government approvals.
SPECIAL NOTE ON OUR FINANCIAL INFORMATION
PRESENTED IN THIS ANNUAL REPORT
On June 4, 1998, we acquired Jiangsu Mobile. On November 12, 1999, we
acquired Fujian Mobile, Henan Mobile and Hainan Mobile. See "Item 1. Description
of Business--Our History." As required under Hong Kong GAAP, we have adopted the
acquisition method to account for these acquisitions. Accordingly, our
consolidated financial statements include the results of Jiangsu Mobile from
June 4, 1998 and the results of Fujian Mobile, Henan Mobile and Hainan Mobile
from November 12, 1999, the respective dates of acquisition. Similarly, all
other Hong Kong GAAP financial information presented in this annual report
includes the results of Jiangsu Mobile only from June 4, 1998 and the results of
Fujian Mobile, Henan Mobile and Hainan Mobile only from November 12, 1999,
unless otherwise noted.
For US GAAP, as a result of our being under common control with Jiangsu
Mobile and with Fujian Mobile, Henan Mobile and Hainan Mobile prior to the
acquisitions, each of the acquisitions was considered a "combination 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
generally are restated on a combined basis. See "Item 9. Management's Discussion
and Analysis of Financial Condition and Results of Operations".
-3-
8
GLOSSARY
In this annual report, unless the context otherwise requires, the following
terms have the respective meanings set out below.
CDMA Code Division Multiple Access technology, which is a
continuous digital transmission technology that accommodates
higher throughput by using various coding sequences to mix
and separate voice and data signals for wireless
communication.
DCS 1800 Digital Cellular System for 1800 MHZ, a European digital
cellular standard based on GSM technology that operates in
the 1800 MHZ frequency band (also referred to as PCN).
GPRS General Packet Switched Radio Service refers to
packet-switched technology for wireless telecommunications
which allows the dynamic sharing of network capacity to
improve network efficiency, thereby facilitating higher data
access speeds for GSM mobile telephone users.
GSM Global System for Mobile Communications, pan-European mobile
telephone system operating in the 900 MHZ frequency band
based on digital transmission and cellular network
architecture with roaming. GSM is the standard accepted in
most of Europe, the Middle East, Africa, Australia and Asia
(with the exception of, among others, Japan and South
Korea).
GSM-900 A GSM network in the 900 MHZ frequency range.
SIM card Subscriber Identity Module card, an electronic card that is
inserted into a handset and identifies the subscriber to the
network. The SIM card contains the personal identification
number of the subscriber and identifies the network to which
the subscriber belongs.
TACS Total Access Communication Systems, a European standard for
analog mobile telephone transmissions in the 800 and 900 MHZ
frequency bands.
WAP Wireless Application Protocol, a software protocol stack
that defines a standardized means of transmitting
Internet-based content and data to mobile handsets and other
wireless handheld devices.
2.5G 2.5 Generation mobile telecommunication technologies are
interim mobile phone technologies that are designed to
facilitate an eventual migration from current second
generation mobile telecommunication technologies (including
GSM and CDMA) to third generation mobile telecommunication
technologies, including WAP and GPRS. These technologies
enhance the data communication capabilities of current
second generation wireless telecommunication systems.
3G Third Generation digital wireless telecommunication
technologies, include those that support packet data
switching, wireless broadband, multi-media and global
roaming.
-4-
9
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
We are China's leading provider of cellular telecommunications services in
Guangdong, Zhejiang, Jiangsu, Fujian, Henan and Hainan provinces in China, with
a total combined population of 320 million people throughout our coverage area.
Guangdong, Zhejiang, Jiangsu and Fujian are among mainland China's most
economically developed provinces and, as of December 31, 1999, they were also
among the provinces in mainland China with the largest number of cellular
subscribers. Henan is the most populous province in China and Hainan is the
largest special economic zone in China. As of December 31, 1999, we serviced a
total of approximately 15.6 million subscribers. This represented an estimated
market share of 87.4% of cellular subscribers in these six provinces and an
estimated 36.1% of all cellular subscribers in mainland China. As of May 31,
2000, our total number of subscribers reached 20.5 million.
OUR HISTORY
Prior to our IPO restructuring implemented in September 1997, our TACS and
GSM cellular networks in Guangdong were owned by Guangdong Mobile, a state-owned
enterprise formed in September 1988. In addition, prior to this restructuring,
our GSM cellular network in Zhejiang was owned by Zhejiang Mobile, a limited
liability company formed in February 1996 and 98.55% owned by the Zhejiang Posts
and Telecommunications Administration ("PTA"), and our TACS cellular network in
Zhejiang was owned by the Zhejiang PTA.
Pursuant to the IPO restructuring, China Telecom (Hong Kong) Limited was
incorporated under the laws of Hong Kong on September 3, 1997. The TACS network
owned by the Zhejiang PTA was transferred to Zhejiang Mobile, and 99.63% of the
equity interest in Zhejiang Mobile was then transferred to the former MPT (now
the MII), which, in turn, transferred its 100% equity interest in Guangdong
Mobile and 99.63% equity interest in Zhejiang Mobile to us. Following this
transfer, Guangdong Mobile was transformed into a wholly-owned foreign
enterprise and Zhejiang Mobile was transformed into a Sino-foreign joint
venture. In addition, certain personnel previously employed by the Posts and
Telecommunications Bureaus ("PTBs") in Guangdong and Zhejiang and involved in
the operations of the cellular networks in the two provinces were transferred to
Guangdong Mobile and Zhejiang Mobile, respectively. We acquired the remaining
0.37% interest in Zhejiang Mobile in June 1999.
On June 4, 1998, we acquired the entire interest in Jiangsu Mobile from our
controlling shareholder, China Telecom Hong Kong (BVI) Limited, for a cash
consideration of HK$22.475 billion (US$2.9 billion).
On November 12, 1999, we acquired the entire interest in each of Fujian
Mobile, Henan Mobile and Hainan Mobile from China Telecom Hong Kong (BVI)
Limited for a total purchase price of HK$49.715 billion (US$6.4 billion),
consisting of HK$19.031 billion (US$2.45 billion) in cash and the remaining
HK$30.684 billion (US$3.95 billion) in the form of 1,273,195,021 new shares.
In connection with our IPO restructuring and our acquisitions of Jiangsu
Mobile, Fujian Mobile, Henan Mobile and Hainan Mobile, we entered into various
services agreements and certain other arrangements with CTC and China Mobile
Communications Corporation ("China Mobile"), both of which are state-owned
enterprises under the regulatory supervision of the MII and the relevant
provincial PTAs. See "Item 13. Interest of Management in Certain Transactions".
CTC and the telecommunications operations of the PTAs and the PTBs are
collectively referred to herein as the "China Telecom system".
In February 1999, the State Council approved a restructuring plan for
the telecommunications industry in mainland China. Pursuant to this
restructuring plan, the telecommunications operations of the China Telecom
system (which was the sole provider of all public telecommunications services in
mainland China prior to 1993) have been separated along four business lines:
fixed line communications, mobile communications, paging and satellite
-5-
10
communications services. CTC, which was previously responsible for determining
the operational goals and policies at the national level for the
telecommunications businesses previously controlled by the MII, now holds the
fixed line telephone and data communications assets and operates the fixed line
telephone and data communications networks nationwide. In addition, China
Mobile, which was established in July 1999 as a state owned company, holds the
mobile communications assets resulting from this separation and operates mobile
telecommunications networks nationwide (including through subsidiaries that
directly own these assets and operate these networks).
As a result of the restructuring, the MII will no longer exert
administrative control over CTC and China Mobile, but will continue its role as
an industry regulator, providing macro policy guidance. CTC and China Mobile
will operate independently within their respective areas of operation. The MII
has affirmed that it will continue to perform the five undertakings it gave to
us last year, including the undertaking to provide full support to our
operations and development. See "Item 13. Interest of Management in Certain
Transactions".
Substantially completing this restructuring, on May 12, 2000 China Mobile
acquired a 100% controlling interest in CTHKG, our parent company. Previously,
China Mobile owned a 57% interest in CTHKG and CTC owned a 43% interest in
CTHKG. As a result of the restructuring, we are now approximately 75% indirectly
controlled by China Mobile and approximately 25% controlled by public
shareholders.
In view of the adjustment to our parent's shareholding structure, we plan
on changing our corporate name to "China Mobile (Hong Kong) Limited", and
adopting the "China Mobile" logo and trademark, pursuant to a non-exclusive
license agreement with China Mobile. See "Item 1. Description of Business --
Operations -- Brand Name". On June 16, 2000, we received shareholder approval
for the change of name and we plan to have the change become effective in July
2000. We believe that the new trade name and logo will more appropriately
reflect our core objectives and the direction and focus of our future
development.
OPERATIONS
We offer cellular telecommunications services in each of Guangdong,
Zhejiang, Jiangsu, Fujian, Henan and Hainan using digital GSM and analog TACS
technologies. Our cellular telephone networks reach all cities and counties and
most major roads and highways in the six provinces.
SUBSCRIBERS AND USAGE
We had a total of approximately 15.6 million cellular subscribers as of
December 31, 1999. Our subscriber base has grown 358.8% over the past two years
from 3.4 million at the end of 1997 to 15.6 million at the end of 1999. Our
acquisition of Jiangsu Mobile in June 1998 and the acquisition of Fujian Mobile,
Henan Mobile and Hainan Mobile in November 1999 have substantially expanded our
subscriber base. In addition, we believe that our subscriber growth has been
attributable to numerous factors, including significant economic growth in our
markets, our network expansion and development, our increased marketing and
sales efforts and improved distribution channels, decreased cost of initiating
services due to a general decline in handset prices and connection fees for our
services, and our enhanced roaming capabilities and value added services.
-6-
11
The following table sets forth selected historical information about our
cellular subscriber base for the periods indicated:
AS OF OR FOR THE
YEAR ENDED
DECEMBER 31,
--------------------------
1997 1998 1999
----- ----- -----
Subscribers (in thousands)
Guangdong Mobile 2,502 3,623 5,951
Zhejiang Mobile 903 1,507 2,859
Jiangsu Mobile -- 1,401 2,328
Fujian Mobile -- -- 2,507
Henan Mobile -- -- 1,730
Hainan Mobile -- -- 246
Total 3,405 6,531 15,621
Average churn rate(%)(1)
Guangdong Mobile 1.18 1.87 3.50
Zhejiang Mobile 2.93 2.06 4.75
Jiangsu Mobile(2) -- 2.85 4.80
Fujian Mobile(3) -- -- 3.49
Henan Mobile(3) -- -- 7.42
Hainan Mobile(3) -- -- 18.27
Market share(%)(4)
Guangdong Mobile 97.6 94.6 88.1
Zhejiang Mobile 97.0 93.5 84.7
Jiangsu Mobile -- 95.2 81.0
Fujian Mobile -- -- 89.1
Henan Mobile -- -- 97.8
Hainan Mobile -- -- 86.4
- ------------
(1) Measures the rate of subscriber disconnections from cellular telephone
service, determined by dividing the sum of voluntary and involuntary
deactivations (excluding deactivations due to subscribers switching
from our TACS networks to our GSM networks) during the relevant period
by the average of the numbers of subscribers at the beginning and end
of the period for each of 1997 and 1998 and by the weighted average
number of subscribers in each calendar month in the period for 1999.
The upward trend in churn rate is attributable in part, to our
tightened credit control policies, including the practice of
temporarily suspending service where accounts are delinquent for one
month, the making of full provision for accounts that are overdue for
three or more months, and the compulsory termination of services where
accounts are overdue for six or more months.
-7-
12
(2) We acquired Jiangsu Mobile in June 1998. The average churn rate of
Jiangsu Mobile in respect of the full year of 1998 is presented for
ease of comparison and is calculated based on the relevant information
of Jiangsu Mobile prior to and after its acquisition by us.
(3) We acquired Fujian Mobile, Henan Mobile and Hainan Mobile in November
1999. The average churn rate for each in respect of the full year of
1999 is presented for ease of comparison and is calculated based on the
relevant information of the respective companies prior to and after
their acquisition by us.
(4) Calculated based on total number of cellular subscribers in the relevant
province estimated by us.
The size and composition of our subscriber base and subscribers' usage
patterns have evolved over the last few years. When cellular telecommunications
services first became commercially available in mainland China, the subscriber
base consisted primarily of senior managers of state owned enterprises,
high-level government officials, individual entrepreneurs and managers of large
private enterprises. As tariffs and the price of handsets have decreased and
cellular technology has improved, cellular services have become increasingly
popular with the broader middle income market for both business and social uses.
These subscribers generally incur lower average monthly usage and are generally
more price-sensitive. Accordingly, as is typical in many countries with
developing cellular markets, the average usage and revenue per subscriber have
declined over the last few years as our cellular telephone penetration has
increased. See "-- Tariffs". Notwithstanding these declines, total minutes of
usage of our subscribers grew from approximately 10.0 billion minutes in 1996 to
approximately 56.2 billion minutes in 1999 (including an aggregate of
approximately 14.5 billion minutes for Fujian Mobile, Henan Mobile and Hainan
Mobile for the full year of 1999).
The following table sets forth selected historical information about our
cellular subscriber usage for the periods indicated:
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
---- ---- ----
Minutes of usage (in billions)
Guangdong Mobile 10.7 14.7 24.9
Zhejiang Mobile 3.7 5.7 9.8
Jiangsu Mobile(1) -- 4.6 7.0
Fujian Mobile(2) -- -- 8.5
Henan Mobile(2) -- -- 4.9
Hainan Mobile(2) -- -- 1.1
Total 14.4 25.0 56.2
Average minutes of usage per subscriber per month(3)
Guangdong Mobile 438 400 429(4)
Zhejiang Mobile 448 396 376
Jiangsu Mobile(1) -- 335 320
Fujian Mobile(2) -- -- 376
Henan Mobile(2) -- -- 310
Hainan Mobile(2) -- -- 436
-8-
13
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
---- ---- ----
Average revenue per subscriber per month (RMB)(5)
Guangdong Mobile 454 452 375
Zhejiang Mobile 534 443 316
Jiangsu Mobile -- n/a(6) 292
Fujian Mobile -- -- n/a(7)
Henan Mobile -- -- n/a(7)
Hainan Mobile -- -- n/a(7)
- ------------
(1) We acquired Jiangsu Mobile in June 1998. The minutes of usage and
average minutes of usage per subscriber per month of Jiangsu Mobile in
respect of the full year of 1998 are presented for ease of comparison
and are calculated based on the relevant information of Jiangsu Mobile
prior to and after its acquisition by us.
(2) We acquired Fujian Mobile, Henan Mobile and Hainan Mobile in November
1999. The minutes of usage and average minutes of usage per subscriber
per month in respect of the full year of 1999 are presented for ease of
comparison and are calculated based on the relevant information of
Fujian Mobile, Henan Mobile and Hainan Mobile prior to and after their
acquisition by us.
(3) Calculated by (i) dividing the total minutes of usage during the
relevant period by the average number of subscribers during the period
(calculated as the average of the numbers of subscribers at the
beginning and end of the period for 1997 and 1998 and as the weighted
average number of subscribers in each calendar month in the period for
1999) and (ii) dividing the result by the number of months in the
period.
(4) In Guangdong, the average usage by subscribers increased, in contrast
to the general decline in average usage, due to the introduction of new
value added services and an adjustment of the monthly usage fee from
RMB 100 to RMB 50.
(5) Calculated by (i) dividing the operating revenue during the relevant
period by the average number of subscribers during the period
(calculated as the average of the numbers of subscribers at the
beginning and end of the period for 1997 and 1998 and as the weighted
average number of subscribers in each calendar month in the period for
1999) and (ii) dividing the result by the number of months in the
period.
(6) Not available for the full year of 1998 because the operating revenues
of Jiangsu Mobile are included in our financial results only from June
4, 1998, the date of its acquisition by us.
(7) Not available for the full year of 1999 because the operating revenues
of Fujian Mobile, Henan Mobile and Hainan Mobile are included in our
financial results only from November 12, 1999, the date of their
acquisition by us.
TARIFFS
The tariffs payable by our subscribers are primarily usage charges,
connection fees, monthly fees and monthly service fees for value added services.
Usage charges reflect charges for both incoming and outgoing calls plus, where
applicable, an additional component reflecting domestic and international long
distance tariffs. Subscribers also pay fees for selection of specific telephone
numbers.
On initial subscription, new subscribers are charged a connection fee for
service activation. After initial connection, subscribers are required to pay a
fixed monthly fee. Subscribers incur basic usage charges on a per minute basis
for both incoming and outgoing calls, plus applicable long distance charges. For
calls made or received by subscribers who are roaming outside of their
registered service area, subscribers incur a roaming charge, plus applicable
long distance charges. Subscribers may also have to pay various local
surcharges. In addition, we collect fees for value added services. In 1998, we
adopted flexible long distance tariff plans distinguishing between day and night
and began offering tailored service packages based upon customer requirements as
well as the functions and features of our network resources.
-9-
14
Our tariffs are subject to regulation by various government authorities,
including the MII, the State Development and Planning Commission (the "SDPC")
and the relevant provincial price regulatory authorities and PTAs. For
connection fees, the MII sets a guidance price range in consultation with the
SDPC for all cellular operators in mainland China. The actual price range in
each province is determined by the relevant provincial PTAs in consultation with
the relevant provincial price regulatory authorities. In general, basic usage
charges, monthly fees, domestic roaming charges and applicable long distance
tariffs are also determined by the MII in consultation with the SDPC.
From time to time, we offer promotional packages or special rates to
subscribers. Some of our subsidiaries have offered services packages with
different connection fee rates and/or different monthly fee and/or usage fee
rates reflecting different scopes of service. These promotional or special rates
are subject to governmental approval or ratification. Failure to obtain the
relevant approval or ratification may affect our ability to offer these rates to
subscribers.
Connection fees in all six provinces in which we operate have been
substantially reduced in the past three years, accompanying a reduction in the
guidance prices for connection fees over that period. In 1999, with the relevant
government approval, we also reduced monthly fee rates in Guangdong and Zhejiang
and base usage surcharge rates in Jiangsu.
We anticipate that connection fees will be further reduced or eliminated in
the next few years, which we believe may help to expand our subscriber base and
increase total subscriber usage of our cellular services, thereby contributing
to our revenue growth in the long term. We expect our overall tariff rates to
remain stable despite further reductions in connection fees.
INTER-PROVINCIAL TRANSMISSION LINE LEASING COSTS
We entered into a new inter-provincial leased line arrangement with China
Mobile (acting on behalf of CTC) in May 2000, with effect from April 1, 1999 for
our six operating subsidiaries. With regard, however, to Guangdong Mobile,
Zhejiang Mobile and Jiangsu Mobile, the leased line arrangement will only be
implemented from October 1, 1999. The leased inter-provincial transmission lines
link our mobile switching centers with each other and with China Mobile's other
mobile switching centers. We are charged CTC's standard leasing fees adjusted
for a discount determined after negotiations with CTC.
Our leasing arrangements with Guangdong, Zhejiang, Jiangsu, Fujian, Henan
and Hainan PTAs with regard to the leasing of transmission lines within their
respective provinces are unaffected by this new inter-provincial leasing
arrangement. See "Item 13. Interest of Management in Certain Transactions --
Leasing of Transmission Lines" regarding these intra-provincial agreements.
INTERCONNECTION REVENUE AND COSTS
Our networks interconnect with the China Telecom system's fixed line
network, allowing our subscribers to communicate with fixed line subscribers and
subscribers to other cellular networks and to make and receive domestic and
international long distance calls. A majority of calls on our networks involve
interconnection with the fixed line network, including some calls made between
our cellular subscribers and subscribers of other cellular operators.
In October and September 1997, Guangdong Mobile and Zhejiang Mobile entered
into interconnection agreements with the Guangdong PTA and the Zhejiang PTA,
respectively. Similarly, Jiangsu Mobile entered into an interconnection
agreement with the Jiangsu PTA in April 1998. Effective October 1, 1999, our
interconnection agreements for Guangdong Mobile, Zhejiang Mobile and Jiangsu
Mobile have been replaced with new interconnection agreements with the relevant
PTAs in accordance with the measures adopted by the MII in connection with the
industry restructuring and applicable to all cellular operators in mainland
China. In August 1999, Fujian Mobile, Henan Mobile and Hainan Mobile entered
into interconnection agreements in accordance with the same new measures adopted
by the MII with the Fujian PTA, Henan PTA and Hainan PTA, respectively, with
effect from October 1, 1999. From April 1,
-10-
15
1999 to September 30, 1999, the accounts of Fujian Mobile, Henan Mobile and
Hainan Mobile were settled in the same manner as the accounts of Guangdong
Mobile, Zhejiang Mobile and Jiangsu Mobile.
Pursuant to the new arrangements with the PTAs in each of our six
provinces, for every local call made by subscribers of our networks to a fixed
line network user directly or to a subscriber of other cellular networks through
interconnection with the fixed line network, we pay the relevant PTA RMB 0.05
per minute. For calls made by subscribers of the fixed line network or
subscribers of other cellular networks to our subscribers, no fee is payable by
either us or the relevant PTA.
In addition, for every domestic long distance call made by our subscribers
using the relevant PTA's transmission lines, we retain RMB 0.14 per minute and
the relevant PTA will receive the rest of the long distance charges. Conversely,
for every domestic long distance call by fixed line subscribers of the relevant
PTA using any transmission line leased to us or China Mobile, the relevant PTA
will retain RMB 0.14 per minute, and we or China Mobile (as the case may be)
will receive the rest of the long distance charges. When our subscribers make
international long distance calls, we retain RMB 0.20 per minute and the
relevant PTA receives the rest of the international long distance charges.
In May 2000, we entered into a new agreement with China Mobile for
inter-provincial interconnection and domestic international roaming services,
which applies to our six operating subsidiaries with effect from April 1, 1999.
With regard, however, to Guangong Mobile, Zhejiang Mobile and Jiangsu Mobile,
the provisions in the agreement which relate to transmission leased lines will
be implemented only from October 1, 1999. The other provisions in the
interconnection and roaming agreement, such as the provision relating to the
roaming billing processing fee will be implemented from April 1, 1999. This new
agreement supercedes the interconnection and roaming agreement which we entered
into with China Mobile in October 1999. See "Item 9. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Interconnection
Arrangements" for a description of the interconnection arrangements in the 1999
agreement.
Pursuant to this new agreement, when a fixed line user in any province
where we operate makes a call to a cellular subscriber outside that province
using our long distance transmission lines, the fixed line operator will retain
RMB 0.14 per minute out of the total long distance call charges and we will be
entitled to the balance of the long distance call charges.
In addition, under this new agreement, when our GSM subscribers make calls
from their respective home locations to cellular subscribers outside of their
respective provinces using our long distance transmission lines, we will retain
all of the long distance call charges.
ROAMING REVENUE AND COSTS
The roaming services which we provide to our subscribers allow them to make
and receive telephone calls while they are outside of their registered service
area, including while in the coverage areas of other cellular networks with
which we have a roaming arrangement. Both our GSM and TACS networks offer
roaming services throughout mainland China. In addition, our GSM networks offer
roaming services in 56 countries and regions around the world. A cellular
telephone customer using roaming services is charged at our roaming usage rate
for both incoming and outgoing calls, plus applicable long distance charges.
In May 2000, we entered into a new agreement with China Mobile for
inter-provincial interconnection and domestic and international roaming
services, which applies to our six operating subsidiaries with effect from
April 1, 1999. For particulars regarding the implementation of the agreement see
"-- Interconnection Revenue and Costs". This new agreement supercedes the
interconnection and roaming agreement which we entered into with China Mobile in
October 1999. See "Item 9. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Roaming Arrangements" for a description
of the roaming arrangements in the 1999 agreement.
-11-
16
Under this new agreement, the caller's home service network charges the
roaming caller RMB 0.60 per minute and pays RMB 0.48 to the operator of the
visited network, while retaining the remaining Rmb 0.12. The new arrangements
also provide that when the roaming subscriber makes an inter-provincial call
from a roaming location, the operator of the visited network shall receive all
long distance call charges. Conversely, when the roaming subscriber receives an
inter-provincial call at a roaming location, the network operator with whom the
subscriber is registered shall retain all long distance call charges. In
addition, the operator of the roaming caller's home service network shall pay to
China Mobile a roaming billing processing fee of Rmb 0.02 for each domestic call
record processed and Rmb 0.30 for each international call record processed. We
continue to settle all inter-provincial and international roaming payments and
revenue sharing through China Mobile. With respect to roaming in Hong Kong,
Taiwan and Macau and international locations, we continue to share roaming
revenues with other cellular operators in accordance with the existing roaming
arrangements between China Mobile and those operators.
VALUE ADDED SERVICES
We offer a number of optional value added services to our subscribers.
These services include call forwarding, call waiting, conference calling, call
limitation, voice mail, short message services ("SMS") and "Chinese Secretary",
a live answering service. Certain advanced functions, such as caller
identification, BPS data transfer (which allows a user to dial into modem access
using a cellular handset) and facsimile transmissions, are available on our GSM
networks. We have also introduced pre-paid SIM cards (including fixed value and
rechargeable stored value SIM cards) and public mobile phone cards for the
convenience of our customers in certain targeted areas. Subscribers pay for
these services in advance, which we believe may help to improve the
collectibility of accounts receivables. In 1999, we used our SMS platform to
develop new value added services, including stock price quotations, sports news,
weather forecasts and on-line payment in select cities. We intend to further
expand the range of our value added services, with particular emphasis on
wireless data applications, which we believe can be achieved with modest initial
expenditures. Since November 1999, Guangdong Mobile, Zhejiang Mobile and Fujian
Mobile have conducted trial testing of WAP and GPRS technologies to evaluate
market response. The feedback has been positive, demonstrating substantial
market demand. See "-- Technology Development Plans" In addition, in May 2000 we
started providing internet protocol telephone services to our subscribers in all
six provinces. We intend to educate our subscribers about the benefits of value
added services through marketing and promotional efforts, as we believe that we
may increase the usage of our value added services by building up customer
awareness.
CUSTOMER SERVICE AND BILLING
We provide a full range of services that emphasize customer care from the
point of sale onward. At the point of sale, after all application procedures
have been completed, we are generally able to activate new subscriber
connections within a few hours for our GSM services and within 24 hours for our
TACS services. Our after-sales customer support services include customer
service hotlines in our service areas. These hotlines provide customers with
billing and service information, as well as receive customer reports of network
problems.
Generally, we have the same settlement policy for our subscribers in
different service areas, requiring these subscribers to settle their individual
accounts on a monthly basis. Subscribers may make payment either through direct
debit accounts established at certain branches of banks and certain post
offices, or by paying in person at numerous retail outlets and authorized
dealers in various cities and counties. Detailed statements are made available
upon the subscriber's request.
We impose a late payment fee on each subscriber whose account is not paid
by the monthly due date. Our current policy is to deactivate the subscriber's
services (i.e., an involuntary deactivation) if the subscriber's account remains
overdue after one month. Subscribers whose services have been involuntarily
deactivated must pay all overdue amounts, including applicable late payment
fees, to reactivate services. We do not require subscribers to post any deposit
before the initiation of local service. Despite the lack of widely available
credit information services in mainland China, we have implemented certain
subscriber registration procedures, such as identity checking and background
checking for corporate customers, to assist in credit control. We make provision
for doubtful accounts based on our assessment of
-12-
17
the recoverability of accounts receivable on maturity. In particular, we make
full provision for accounts receivable aged more than three months. The total
amount of the provision for doubtful accounts for each of 1997, 1998 and 1999
was RMB 449.1 million, RMB 558.1 million and RMB 771.0 million, respectively, or
2.9%, 2.1% and 2.0% of total operating revenue, respectively.
INFORMATION SYSTEMS
Our information technology infrastructure consists primarily of three
computerized information systems: the business operations support system
("BOSS"), the management information system ("MIS") and our internal business
communications network. Our BOSS provides day-to-day operational support to our
various business units, including customer care, billing and collection, and
sales and marketing. Our MIS collects and processes information data, including
operational and financial data, so that management and marketing personnel can
monitor subscriber satisfaction, analyze trends in calling patterns, target
network expansion and develop appropriate marketing strategies. Our internal
business communications network allows internal communications through our
intranet, video conference system and communications platform system. During
1999, we upgraded our information systems which has enabled us to enhance
operations management, implement credit controls and monitor mobile usage in
real-time. Our information systems operated through each Y2K critical date
without difficulty or interruption.
SERVICE DISTRIBUTION AND MARKETING
Since early 1997, we have significantly expanded our marketing and
distribution efforts to attract a growing number and increasingly diverse base
of potential subscribers and to maintain or even increase existing subscribers'
usage. We have focused on expanding our distribution channels, emphasizing
customer service, developing our brand name image, providing tailored service
packages and highlighting the quality and wide coverage of our networks.
DISTRIBUTION CHANNELS. We market our cellular services through a wide
network of authorized dealers (including retail outlets of the PTAs and post
offices) and through our own retail outlets.
The following table sets forth the total number of our authorized dealers
and retail outlets in each of the six provinces, as of December 31, 1999:
GUANGDONG ZHEJIANG JIANGSU FUJIAN HENAN HAINAN
--------- -------- ------- ------ ----- ------
2,220 2,167 1,742 1,483 1,296 267
===== ===== ===== ===== ===== ===
The authorized dealers market and sell our cellular services at prices
determined by us in accordance with the applicable price schedules in the
relevant provinces. In connection with these sales, the dealers pay to us all
related connection fees and other miscellaneous fees payable upon initial
connection. We in turn pay the dealers a fee of not more than RMB 300 per new
subscriber acquired. The commission structure has been determined taking into
account factors such as the results of market research and the revenues and
costs of the products. In addition to marketing our services, our authorized
dealers also perform various services for us, such as payment collection and the
provision of billing information and other customer services.
As of December 31, 1999, we also owned and operated 450 retail outlets. In
addition to serving as outlets where customers can subscribe for our network
services, certain of these outlets also sell handsets and most offer customers
after-sales support services, including the repair of handsets and collection of
payment.
We are seeking to develop other distribution channels, including on-line
sales and customer service facilities over the Internet, in order to further
strengthen our marketing efforts.
-13-
18
BRAND NAME. As the first and the leading cellular telephone services
provider in our markets, we believe we are well positioned to develop the image
of our brand name. We have historically marketed our services under the "China
Telecom" logo licensed from the CTC. Prior to the industry restructuring, "China
Telecom" was the marketing name used throughout mainland China by all
telecommunications services providers within the China Telecom system, including
fixed line as well as mobile communications services providers. As the industry
is being reorganized along business lines, China Mobile has started to promote
the "China Mobile" brand name to distinguish its cellular services from the
fixed line services of the China Telecom system and to establish a separate
brand identity. China Mobile has filed an application to register its name and
logo as a trademark and the registration is expected to become effective in
August 2000. In October 1999, we entered into a licensing agreement with China
Mobile for the use of the "China Mobile" name and logo. Under this agreement, no
license fee is payable by us for the first three years from the effective date
of the trademark registration and any fees payable after that will be no less
favorable than fees paid by affiliates of China Mobile. Although our licensing
arrangements with CTC for the "China Telecom" name and logo remain effective, we
started marketing our services under the "China Mobile" name in 1999, in
coordination with China Mobile's brand name promotion plan. As a result of our
promotional and marketing initiatives, the mark has attained wide recognition
and is closely identified with us by consumers. We plan to change our corporate
name to "China Mobile (Hong Kong) Limited" in July 2000.
SERVICE PACKAGES. In 1998, we started to offer service packages designed to
penetrate different segments of the market. For example, we have packages
offering different roaming, long distance and value added functions tailored for
subscribers with different needs. Subscribers of packages with fewer functions
generally pay lower tariffs. We have conducted marketing studies on these
packages and believe that they constitute an important part of our strategy to
maintain our competitiveness and subscriber growth.
CELLULAR NETWORKS
Each of our GSM networks consists of:
- cell sites, which are physical locations equipped with a base
transceiver station containing transmitters, receivers and
other equipment that communicate through radio channels with
cellular telephone handsets within the range of a cell;
- base station controllers, which connect to, and control, the base
transceiver station within each cell;
- mobile switching centers, which in turn control the base station
controllers and the routing of calls; and
- leased transmission lines, which link the mobile switching
centers, base station controllers, base transceiver stations
and the China Telecom system's fixed line network.
Our TACS networks are identical to our GSM networks in terms of network
infrastructure, except that the TACS networks do not employ base station
controllers. Instead, base transceiver stations are controlled by, and
communicate directly with, the mobile switching centers.
We commenced cellular telephone services with the establishment of TACS
networks in Guangdong in November 1987 and Zhejiang in May 1992. We launched our
GSM cellular networks in Guangdong in July 1995 and Zhejiang in December 1995.
Jiangsu Mobile commenced cellular services in Jiangsu in December 1992 with the
establishment of a TACS network and launched its GSM operations in December 1995
on a full commercial basis. Fujian Mobile, Henan Mobile and Hainan Mobile
commenced offering cellular telephone services with the establishment of TACS
networks in their respective provinces in May 1991, August 1991 and March 1992,
respectively, and launched GSM cellular networks in their respective provinces
in November 1995, April 1996 and May 1995, respectively.
-14-
19
The following table sets forth certain selected information regarding our
GSM and TACS networks as of December 31, 1999:
AS OF DECEMBER 31, 1999
-------------------------------------------------------------------------------
GUANGDONG ZHEJIANG JIANGSU FUJIAN HENAN HAINAN TOTAL
--------- -------- ------- ------ ----- ------ -----
Subscribers (in thousands)
GSM 5,507 2,478 1,919 2,350 1,543 226 14,023
TACS 444 381 409 157 187 20 1,598
----- ----- ----- ----- ----- --- ------
Total 5,951 2,859 2,328 2,507 1,730 246 15,621
Nominal network capacity (in
thousands)(1)
GSM 5,157 3,269 2,488 2,153 1,231 240 14,538
TACS 962 411 706 419 120 32 2,650
----- ----- ----- ----- ----- --- ------
Total 6,119 3,680 3,194 2,572 1,351 272 17,188
Mobile switching centers
GSM 72 56 29 24 28 3 212
TACS 26 14 30 10 6 2 88
----- ----- ----- ----- ----- --- ------
Total 98 70 59 34 34 5 300
Base station controllers(2)
GSM 118 182 97 98 65 16 576
Base transceiver stations
GSM 3,981 2,848 2,522 2,372 1,616 193 13,532
TACS 1,199 521 1,294 640 200 43 3,897
----- ----- ----- ----- ----- --- ------
Total 5,180 3,369 3,816 3,012 1,816 236 17,429
- ------------
(1) The number of subscribers that a network can adequately support at any
given time varies according to the level of network traffic. The
nominal network capacity, which is used for statistical convenience, is
based on the reporting standard stipulated by the MII. It assumes that
each installed voice channel can support voice traffic of 20
subscribers. The actual number of subscribers a network can adequately
support at any given time may differ substantially from this nominal
capacity without materially affecting service quality.
(2) In a TACS system, the base transceiver stations are connected directly
to the mobile switching centers. Accordingly, our TACS networks do not
utilize any base station controllers.
TRANSMISSION INFRASTRUCTURE
The physical infrastructure linking our base transceiver stations, base
station controllers and mobile switching centers and interconnecting our
networks to the fixed line network consists of transmission lines, which provide
the backbone infrastructure by which cellular call traffic is carried. We
currently lease intra-provincial transmission lines from the Guangdong,
Zhejiang, Jiangsu, Fujian, Henan and Hainan PTAs, and pay to the PTAs fees based
on tariff schedules stipulated by the relevant regulatory authorities. We are
also capable of developing our own transmission infrastructure and have built
our own infrastructure in certain areas where the PTAs do not currently have any
transmission lines in place or where the leasing of existing lines is not
economical. We also currently lease inter-provincial transmission lines from
China Mobile (acting on behalf of CTC).
-15-
20
NETWORK OPERATIONS AND MAINTENANCE
We believe that we have acquired considerable experience and technical
expertise in developing and operating cellular telecommunications networks in
mainland China. Day-to-day traffic management, troubleshooting and system
maintenance are conducted by our experienced team of engineers and technicians,
and technical staff are available for emergency repair work 24 hours a day. In
addition, we employ specialist teams for central maintenance of the networks. We
continue to seek to attract and retain qualified technical staff. 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. We maintain stocks of certain spare parts, such as circuit boards and
antennae, and believe that we would be able to obtain suitable replacements for
parts that we do not stock in a timely and commercially reasonable manner. To
date, we have not experienced any technical difficulties that have resulted in a
material interruption in cellular network services.
WRITE-DOWN AND WRITE-OFF OF TACS NETWORK EQUIPMENT
Due to the rapid development of mobile telecommunications technologies and
the potentially limited life cycle of our TACS network equipment, we decided to
accelerate the enhancement of our technology and to assist the migration of our
TACS subscribers to the GSM network, resulting in the writing-down and
writing-off of our TACS network equipment. See "Item 9. Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Write-down and
Write-off of TACS Network Equipment".
GSM NETWORK CAPACITY EXPANSION PLANS
Although our GSM cellular networks in Guangdong, Zhejiang, Jiangsu, Fujian
and Hainan commenced operations only in 1995, and in Henan in 1996, they have
grown rapidly, accounting for approximately 90% of our total subscribers as of
December 31, 1999. We intend to continue our network expansion and improvement
with an emphasis on increasing the coverage and capacity, and improving the
operating efficiency of our GSM networks. We intend to achieve capacity
expansion by adding cell sites in areas already within our network coverage and
by expanding coverage, including expanding coverage along railways and highways
and improving indoor coverage. Our network expansion plans depend to a large
extent upon the availability of sufficient spectrum. In addition, in order to
alleviate moderate congestion that has developed in certain major urban centers
with a high density of cellular subscribers, we have introduced GSM-compatible
DCS 1800 systems to add capacity in these areas.
TECHNOLOGY DEVELOPMENT PLANS
We believe that wireless data and its applications is one of the most
promising categories in wireless telecommunications. While we will continue to
utilize our GSM network to develop data services based on the current SMS
platform, we are focusing on developing data services based on WAP and GPRS
technologies. During 1999, we started testing WAP and GPRS technologies in
Guangdong, Zhejiang and Fujian provinces, in preparation for the broad
application of 2.5G and 3G mobile technologies for wireless data services and
wireless internet services.
Our tests of WAP services achieved positive results, demonstrating
substantial market demand. We currently offer WAP services in all six provinces
in which we operate, which provide wireless internet access enabling subscribers
to send and receive data over WAP enabled handsets or handheld computing devices
and provide access to such internet-based content such as weather forecasts,
financial updates, news broadcasts, business information, health information,
entertainment, traffic news and travel tips, e-commerce and on-line games.
We have also conducted advanced GPRS technology trials. GPRS will enable
operators to provide end-to-end packet-switched data transmission on the
existing GSM network, which improves wireless network utilization and enhances
wireless access rate for a variety of data applications, including WAP. We have
also completed tests running WAP applications over a GPRS platform. The tests
have run smoothly and we are currently testing GPRS international roaming.
-16-
21
We intend to continue focusing on the application of 2.5G and 3G mobile
communication technologies, so as to launch a panoply of new services and
realize our transformation from a mobile telecommunications operator to a
wireless multimedia services provider.
SPECTRUM
A cellular network's capacity is to a certain extent limited by the amount
of frequency spectrum available for use by the network. We have been approved by
the former State Radio Regulatory Commission (or SRRC), now a department within
the MII, to use 19 MHz of spectrum in the 900 MHz frequency band for an
indefinite term in each of our provinces. We also have the right to use 5 MHz of
spectrum in the 900 MHz frequency band in Guangdong, Zhejiang, Fujian, Henan
and Hainan and 6 MHz of spectrum in the 900 MHz frequency band in Jiangsu until
2005. These spectrum allocations may be renewed with approval of the MII. In
total, we currently have 24 MHz of spectrum in each of Guangdong and Zhejiang,
25 MHz of spectrum in Jiangsu and 24 MHz in Fujian, Henan and Hainan, each in
the 900 MHz frequency band.
We have been given permission to use 10 MHz of spectrum in the 1800 MHz
frequency band for an indefinite term in Guangdong, Jiangsu and Fujian. We have
used this spectrum to introduce DCS 1800 systems to expand the capacity of our
GSM networks in Guangdong, Jiangsu and Fujian by adding cell sites in certain
areas with a high density of cellular subscribers. Zhejiang Mobile, Henan Mobile
and Hainan Mobile expect that they will be given similar permission if
necessary.
In connection with the phasing out of our TACS networks, we plan to
reallocate all spectrum from our TACS networks to our GSM networks to increase
the capacity of our GSM networks. We also expect that technical development of
our networks will result in more efficient use of frequency spectrum. As a
result, we believe that we will be able to discontinue usage of the temporary
spectrum allocation on a timely basis without any material adverse effect on our
total capacity or service, even if approval from the MII for permanent use of
this spectrum is not obtained. When necessary, we may also apply to the MII for
additional spectrum allocation.
BASE STATION SITES
In urban areas, our base transceiver 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 transceiver stations. Typically,
base station sites are of limited size, as base transceiver 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 transceiver 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 cellular 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 cellular telecommunications equipment and in
accordance with technical standards set by the MII. Our TACS networks use
equipment primarily supplied by Ericsson and Motorola, while our GSM networks
use equipment primarily supplied by Ericsson, Motorola, Nokia, Italtel and
Alcatel. Our largest supplier accounted for approximately 25% of our network
equipment purchases in 1999, and the top five suppliers accounted for an
aggregate of 62% of our network equipment purchases in 1999.
COMPETITION
Our subsidiaries were the only providers of commercial cellular network
services in Guangdong, Zhejiang, Jiangsu, Fujian, Henan and Hainan until China
United Telecommunications Corporation ("Unicom"), commenced
-17-
22
operation of its GSM cellular networks in these provinces in July 1995, March
1997, October 1996, October 1996, May 1999 and August 1997, respectively.
Unicom is currently the second largest cellular telecommunications service
provider in mainland China. It is aggressively marketing its services in order
to build its subscriber base, and is seeking to expand and improve its network
coverage, quality and capacity. In addition, in order to support Unicom's
development, the government has permitted Unicom to maintain its tariffs at
levels that are within the range of 10% below to 10% above the state guidance
rates and has merged the paging operations formerly controlled by the China
Telecom system into Unicom. We could experience increased competition if the
government takes other actions in the future to enhance Unicom's competitive
position.
As investment in cellular networks is largely fixed cost investment, as
opposed to variable cost investment, and tariffs are subject to regulations by
government authorities, profitability in the cellular telephone industry is
fundamentally driven by subscriber growth. We believe that we have a significant
competitive advantage due to our wider network coverage, high network
performance standards, greater roaming capabilities, wide range of value added
services, management expertise and our existing arrangements and relationship
with the China Telecom system. However, there can be no assurance that the
government authorities will not approve additional cellular service providers in
the future that will compete with us. Nonetheless, given the relatively low
cellular penetration rates in our markets and in mainland China in general, we
believe there is substantial growth potential in general for our cellular
business. We believe that the reform and restructuring of China's
telecommunication's industry has created a more fair, orderly, transparent and
healthy telecommunications market. In addition, we believe that the introduction
of orderly competition has had a positive impact on the market for cellular
telecommunications services by stimulating network buildup and improvements in
service quality, increasing awareness of cellular services among potential
subscribers, and advancing the pace of the search for technical innovations and
efficiency improvements.
Since 1995, China has been engaged in extensive negotiations to join the
World Trade Organization. We may face increased competition from additional
cellular service providers if China joins the World Trade Organization. However,
as an established telecommunications company with a strong financial profile,
advanced network infrastructure, stable market position and sound management
expertise, we believe that we will greatly benefit from the increased market
demand and expansion of the telecommunications market which will result from
China's entry into the World Trade Organization. The entry would also accelerate
the restructuring of China's telecommunications regulatory scheme and would, we
believe, promote transparency, fairness and efficiency in the telecommunications
industry.
Although we face indirect competition from providers of other wireless
communications services, such as paging, which offer substantially lower prices
for services, we do not believe that they constitute significant competition, as
they provide a much more limited range of services compared to cellular
telecommunications services.
REGULATION
The cellular telecommunications industry is subject to a high degree of
regulation by the government. Regulations issued or implemented by the State
Council, the MII and other relevant government authorities, including the
Ministry of Foreign Trade and Economic Cooperation ("MOFTEC") and the SDPC,
encompass all key aspects of cellular 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 and spectrum
allocation.
The MII was established in March 1998 to assume, among other things, the
regulatory, administrative and other governmental duties of, and rights
previously exercised or enjoyed by, the former Ministry of Posts and
Telecommunications. The MII, under the leadership of the State Council, is
responsible for, among other things:
- formulating overall industry policy and regulations;
- coordinating telecommunications projects and networks at the national
level;
- enforcing industry standards and regulations;
- granting of licenses to provide telecommunications services;
-18-
23
- formulating interconnection and settlement standards for implementation
between telecommunications networks;
- formulating tariff and service charge policies for telecommunications
services;
- supervising the operations of telecommunications service providers;
- maintaining fair and orderly market competition among operators;
- allocating and administering public communications resources, such as
national radio frequencies, number resources, domain names and addresses
of communications networks;
- examining and approving the establishment of radio stations; and
- managing the day-to-day administration of the national
telecommunications sector.
In order to provide a uniform regulatory framework to encourage the orderly
development of the telecommunications industry, the government is currently
preparing a draft telecommunications law. If and when the telecommunications law
is adopted by the National People's Congress, it is expected to become the basic
telecommunications statute and the legal source of telecommunications
regulations in China. In addition, the MII is currently preparing a draft of the
telecommunications administration regulations, which will be subject to approval
by the State Council. The regulations are expected to provide and clarify the
regulatory rules and guidelines for the telecommunications industry in the
interim period prior to the adoption of the telecommunications law. Although we
expect that the telecommunications law and the regulations would have a positive
effect on the overall development of the telecommunications industry in China,
we do not fully know the nature and scope of what the telecommunications law and
the regulations will be.
ENTRY INTO THE INDUSTRY
Until 1993, telecommunications regulations and policies in mainland China
did not permit entities outside of the China Telecom system to engage in public
telecommunications operations in mainland China. In August 1993, the government
opened certain non-basic sectors of the telecommunications industry, such as
paging, to Chinese entities not affiliated with the MII. Cellular network
operators and providers of basic telecommunications services, such as local and
long distance fixed line telephone services, must receive specific approval from
the State Council in order to provide such services. Currently, in addition to
us and other entities controlled by China Mobile which operate in mainland China
outside of our markets, the State Council has granted approval to Unicom to
provide cellular services in all provinces in mainland China.
Current regulations in mainland China prohibit foreign-invested enterprises
and foreign entities (including individuals) from owning, operating or
participating in the operation of telecommunications services in mainland China
without approval from the State Council. We were granted special authorization
from the State Council to effect our IPO restructuring and initial public
offering and were granted special government authorization to effect the
acquisitions we have made and our related fund raising activities.
SPECTRUM USAGE
The Radio Administration Regulations, effective on September 11, 1993,
promulgated pursuant to a joint statement issued by the State Council and the
China Central Military Commission, empowers the former SRRC, under the joint
leadership of the State Council and the China Central Military Commission, to
undertake the centralized regulation of all radio frequencies. As part of the
government restructuring approved by the National People's Congress in March
1998, the MII assumed all the government functions of the former SRRC. In
coordination with the relevant provincial authorities, the MII allocates
frequency, including the 900 MHz, 1800 MHz and the 2000 MHz frequency bands
(which are reserved for mobile cellular applications). The frequency assigned to
an entity is not allowed to be leased, or, without approval of the MII,
transferred by the entity. In accordance with a joint circular from the SDPC and
the Ministry of Finance, China Mobile determines the amount of fees to be paid
to the MII for spectrum usage by each cellular network operator under its
control based on bandwidth of the frequency used and the number of base
transceiver stations within the operator's network, subject to the limitation
that the total annual payment by all such operators in mainland China shall
equal RMB 1.0 million per MHz of frequency allocated by the MII.
-19-
24
TARIFF SETTING
Our tariffs are subject to regulation by various government authorities,
including the SDPC, the MII, the relevant provincial price regulatory
authorities and the relevant PTAs. The connection fee is based on a guidance
price range set jointly by the MII in consultation with the SDPC, with the
actual tariff determined by the relevant PTAs in consultation with the relevant
price regulatory authorities. In general, basic usage charges, monthly fees,
domestic roaming usage charges and tariffs for all long distance and
international calls are fixed jointly by the MII and the SDPC. International
roaming charges are set pursuant to agreements between China Mobile and the
relevant foreign cellular operators.
INTERCONNECTION ARRANGEMENTS AND LEASED LINE ARRANGEMENTS
Cellular networks must interconnect with the China Telecom system's fixed
line network to enable subscribers to communicate with fixed line subscribers
and subscribers to other cellular networks and to make and receive domestic and
international long distance calls. The MII is responsible for approving
applications for interconnection with the fixed line network, while the CTC and
China Mobile are responsible for designing and implementing technical plans. The
applicable regulations provide that switching, transmission and other equipment
must conform with the technical standards approved by the MII. See "-- Technical
Standards". The MII also determines the amounts of standard lease tariffs paid
by telecommunications operators, with respect to leasing of transmission lines
that facilitate interconnection between cellular and fixed line networks. The
PTAs and the city and county telecommunications bureaus (the "CCTBs") are
responsible for the maintenance of the transmission lines and related equipment
in their respective localities.
TECHNICAL STANDARDS
The MII sets technical standards and controls the type of cellular
equipment used in public networks by requiring all network operators under its
control to purchase their equipment from suppliers who have obtained prior
certification from the MII. In addition, the Provisions on the Management of
Import of Radio Transmission Equipment, jointly issued by the former SRRC, the
State Economics and Trade Commission (the "SETC"), the MOFTEC and the General
Administration of Customs effective January 1, 1996, provides that before radio
transmission equipment (including cellular equipment) may be imported into
mainland China, an importer must obtain the necessary certification from the MII
and the State Mechanical and Electrical Products Import and Export Office.
To ensure the quality of interconnection and integration of cellular
networks with the fixed line network, applicable regulations provide that a
network access permit must be obtained from the MII with respect to each
specific type of terminal equipment to be used for interconnection, whether such
equipment is imported or manufactured domestically.
The establishment of base transceiver stations requires approval of the
relevant provincial regulatory authorities. A number of these approvals are
currently pending. We have not experienced and do not expect to experience
difficulty in obtaining permission to establish additional sites.
CAPITAL INVESTMENT
The SDPC is empowered by the State Council to exercise responsibility over
the approval of all major investment projects, including cellular network
development projects, involving total capital investment between RMB 50 million
and RMB 500 million. Any investment projects with total capital investment in
excess of RMB 500 million must obtain approval from the State Council.
Accordingly, project proposals and feasibility study reports for these projects,
following review and approval by the MII or China Mobile, are required to be
submitted for approval to the SDPC or the State Council.
-20-
25
EMPLOYEES
As of December 31, 1999, we had a total of 20,243 employees, including
20,207 employees in mainland China as classified in the following table, and 36
employees in Hong Kong. Approximately 40% of our permanent employees have
college or graduate degrees.
GUANGDONG ZHEJIANG JIANGSU FUJIAN HENAN HAINAN
--------- -------- ------- ------ ----- ------
Management 1,398 549 579 597 500 49
Technical and engineering 3,170 960 888 741 1,226 137
Sales and marketing 2,727 941 1,040 1,929 1,240 460
Financial and accounting 358 215 191 163 136 13
--------- -------- ------- ------ ----- ------
Total 7,653 2,665 2,698 3,430 3,102 659
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.
ITEM 2. DESCRIPTION OF PROPERTY.
Our principal executive offices are located in Hong Kong. Our regional
headquarters are located in Guangzhou, Hangzhou, Nanjing, Fuzhou, Zhengzhou and
Haikou. We own, lease or have use rights in various properties which consist of
land and buildings for offices, administrative centers, staff quarters, retail
outlets and technical facilities. We are in the process of obtaining land use
right certificates and property title certificates for a number of these
properties in Guangdong and Jiangsu. We believe that our use of these properties
are not affected by the fact that we have not yet obtained the relevant land use
right certificates and property title certificates. CTHKG, our indirect
controlling shareholder, has agreed to indemnify us against any loss or damage
caused by or arising from any challenge of, or interference with, our right to
use 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 3. LEGAL PROCEEDINGS.
We are not involved in any material litigation, arbitration or
administrative proceedings, and, so far as we are aware, no such litigation,
arbitration or administrative proceedings are pending or threatened.
ITEM 4. CONTROL OF REGISTRANT.
As of May 31, 2000, approximately 75.03% of our outstanding shares were
held by China Telecom Hong Kong (BVI) Limited, a wholly-owned subsidiary of
CTHKG. China Mobile holds a 100% controlling interest in CTHKG. No other persons
own ten percent (10%) or more of our ordinary shares. The following table sets
forth information regarding ownership of our stock as of December 31, 1999 by
all persons owning more than 10% of our ordinary shares, per value HK$0.10 per
share:
NUMBER OF ORDINARY PERCENTAGE OF OUTSTANDING
SHAREHOLDER SHARES OWNED ORDINARY SHARES
----------- ------------------ -------------------------
China Telecom Hong Kong 10,283,195,021 75.03%
(BVI) Limited
-21-
26
As of December 31, 1999, our directors and executive officers beneficially
owned an aggregate of 8,000 ordinary shares. We are not aware of any arrangement
which may at a subsequent date result in a change of control over us.
ITEM 5. NATURE OF TRADING MARKET.
In connection with our IPO, our American depositary shares, or ADSs , each
representing 20 ordinary shares, were listed and commenced trading on the New
York Stock Exchange (the "NYSE") on October 22, 1997 under the symbol "CHL". Our
shares were listed and commenced trading on the Hong Kong Stock Exchange on
October 23, 1997. Prior to these listings, there was no public market for our
equity securities. The NYSE and the Hong Kong Stock Exchange are the principal
trading markets for our ADSs and ordinary shares, which are not listed on any
other exchanges in or outside the United States.
As of December 31, 1999, there were 13,706,287,021 ordinary shares issued
and outstanding. As of December 31, 1999, there were 90 registered holders of
American depositary receipts evidencing 28,013,225 ADSs. Since certain of the
ADSs are held by nominees, the above number may not be representative of the
actual number of U.S. beneficial holders of ADSs or the number of ADSs
beneficially held by U.S. persons. The depositary of the ADSs is The Bank of
New York.
The high and low closing sale prices of the shares on the Hong Kong Stock
Exchange and of the ADSs on the NYSE for the periods indicated are as follows:
PRICE PER SHARE (HK$) PRICE PER ADS (US$)
------------------------ -----------------------
HIGH LOW HIGH LOW
-------- ------- -------- -------
1998
First Quarter 16.25 10.30 42.75 26.50
Second Quarter 16.55 11.15 41.94 30.00
Third Quarter 14.10 8.75 36.13 22.06
Fourth Quarter 15.95 11.60 40.94 28.63
1999
First Quarter 15.50 12.60 40.00 32.38
Second Quarter 22.45 13.05 57.56 34.19
Third Quarter 26.70 21.00 68.63 54.25
Fourth Quarter 48.60 24.00 128.63 61.50
2000
First Quarter 79.00 41.70 202.94 109.63
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY-HOLDERS.
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.
-22-
27
ITEM 7. TAXATION.
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 adviser 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, 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 16% on corporations and at a maximum rate of
15% 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.
STAMP DUTY
Hong Kong stamp duty, currently charged at the rate of HK$1.125 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$2.25 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 are 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). Hong Kong estate duty is imposed on
a progressive scale from 5% to 15%. The rate of and the threshold for estate
duty has, in the past, been adjusted on a fairly regular basis. No estate duty
is payable when the aggregate value of the dutiable estate does not exceed
HK$7.5 million, and the maximum rate of duty of 15% applies when the aggregate
value of the dutiable estate exceeds HK$10.5 million.
-23-
28
ITEM 8. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL INFORMATION
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, 1999. The selected historical income statement data for the years
ended December 31, 1997, 1998 and 1999 and the selected historical balance sheet
data as of December 31, 1998 and 1999 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. The selected historical
Hong Kong GAAP income statement data for the years ended December 31, 1995 and
1996 and the selected historical Hong Kong GAAP balance sheet data as of
December 31, 1995, 1996 and 1997 are derived from audited financial statements
that are not included herein. The selected historical US GAAP income statement
data for the year ended December 31, 1995, and the selected historical US GAAP
balance sheet data as of December 31, 1995 and 1996 set forth below are
unaudited, but, in the opinion of our management, reflect the adjustments
necessary for a fair presentation of such data.
Our consolidated financial statements are prepared and presented in
accordance with Hong Kong GAAP. As required under Hong Kong GAAP, we have
adopted the acquisition method to account for our acquisitions of Jiangsu
Mobile, Fujian Mobile, Henan Mobile and Hainan Mobile. Accordingly, the
consolidated financial statements include the results of Jiangsu Mobile only
from June 4, 1998, and the results of Fujian Mobile, Henan Mobile and Hainan
Mobile only from November 12, 1999, the respective dates they were acquired by
us. In contrast, under US GAAP, our acquisitions of Jiangsu Mobile, Fujian
Mobile, Henan Mobile and Hainan Mobile 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 accounts of previously separate companies for periods
prior to the combination generally are restated on a combined basis. For a
discussion of significant differences between Hong Kong GAAP and US GAAP as they
relate to us, and the effects of such differences on net profit for the years
ended December 31, 1997, 1998 and 1999, and shareholders' equity as of December
31, 1998 and 1999, see Note 28 to our consolidated financial statements. In
addition, our condensed consolidated financial statements prepared and presented
in accordance with US GAAP for the relevant periods have been included in Note
28 to the consolidated financial statements.
In connection with the IPO restructuring, we entered into certain
arrangements, which include (i) new agreements with respect to interconnection
revenue and costs, including an adjustment to the risk sharing arrangement with
the relevant PTAs for uncollectible subscriber receivables for DDD, domestic
long distance direct dialing, and IDD, international long distance direct
dialing, calls, (ii) a new leased line agreement in Guangdong, (iii) an
agreement with the Guangdong PTA allowing us to retain certain local network
service charge revenues, (iv) new service agreements, (v) a change in the tax
treatment of connection fees and certain surcharge revenues for our services and
(vi) the revaluation of fixed assets as of May 31, 1997. Similarly, in
connection with our acquisition of Jiangsu Mobile, we entered into arrangements
with respect to interconnection, certain property leasing, certain services, tax
treatment of connection fees and certain surcharge revenues, and the revaluation
of assets of Jiangsu Mobile as of December 31, 1997. In October 1999, in
accordance with the measures adopted by the MII in connection with industry
restructuring and applicable to all cellular operators in mainland China, we
replaced our interconnection arrangements with Guangdong PTA, Zhejiang PTA and
Jiangsu PTA with new agreements. In connection with our acquisition of Fujian
Mobile, Henan Mobile and Hainan Mobile, we entered into similar new arrangements
for our operations in these three provinces, including arrangements with respect
to interconnection, property leasing, billing and collection services, tax
treatment of connection fees and certain surcharge revenues, and the revaluation
of assets of Fujian Mobile, Henan Mobile and Hainan Mobile as of June 30, 1999.
In October 1999, we also entered into an agreement with China Mobile regarding
inter-provincial interconnection and domestic and international roaming, with
effect from April 1, 1999. Our acquisitions and these new or amended
arrangements have had material impact on our financial results from the date of
acquisition or effectiveness of these arrangements. For a description of such
arrangements, see "Item 9. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Operating Arrangements We Entered Into in
1997, 1998 and 1999 Materially Impacted Our Financial Results" and "Item 13.
Interest of Management in Certain Transaction."
-24-
29
In May 2000, we entered into new agreements with China Mobile regarding
inter-provincial transmission line leasing and inter-provincial interconnection
and domestic and international roaming. These new agreements did not have any
impact on our financial results for the year ended December 31, 1999. For a
detailed description of these new agreements, see "Item 1. Description of
Business -- Inter-provincial Transmission Line Leasing Costs", "Interconnection
Revenue and Costs" and "Roaming Revenue and Costs".
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999
--------- --------- --------- --------- --------- ----------
RMB RMB RMB RMB RMB US$
(IN MILLIONS, EXCEPT SHARE, PER SHARE AND PER ADS INFORMATION)
Income Statement Data:
HONG KONG GAAP
Operating revenue 7,598 10,367 15,488 26,345 38,623 4,665
Operating expenses 2,856 5,405 10,074 18,410 24,983 3,018
Operating profit 4,742 4,962 5,414 7,935 13,640 1,647
Write-down and write-off of TACS network
equipment -- -- -- 282 8,242 995
Profit before tax and minority interests 4,954 4,941 5,953 9,387 6,444 778
Income tax 286 428 991 2,486 1,647 199
Net profit 4,668 4,509 4,955 6,900 4,797 579
Basic and diluted net profit per share(1)(2) 0.50 0.52 0.59 0.40 0.05
Basic and diluted net profit per ADS(1)(2) 10.02 10.39 11.71 7.95 0.96
Shares utilized in basic calculation (in 9,010,000 9,534,365 11,780,788 12,069,108 12,069,108
thousands)
Shares utilized in diluted calculation (in 9,010,000 9,534,365 11,782,521 12,072,383 12,072,383
thousands)
US GAAP(3)
Operating revenue 10,440 15,322 23,853 35,516 45,426 5,488
Operating expenses 4,231 8,056 14,867 23,761 34,804 4,204
Operating profit 6,201 7,266 8,986 11,755 10,622 1,284
Profit before tax and minority interests 6,464 7,411 9,571 13,548 11,482 1,387
Income tax 498 832 1,416 3,262 3,248 392
Net profit 5,974 6,575 8,148 10,285 8,234 995
Basic and diluted net profit per share(1)(2) 0.58 0.64 0.75 0.79 0.63 0.08
Basic and diluted net profit per ADS(1)(2) 11.62 12.79 15.08 15.76 12.51 1.51
Shares utilized in basic calculation (in
thousands) 10,283,195 10,283,195 10,807,560 13,053,983 13,164,404 13,164,404
Shares utilized in diluted calculation (in
thousands) 10,283,195 10,283,195 10,807,560 13,055,716 13,167,679 13,167,679
-25-
30
AS OF THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999
------ ------ ------ ------ ------ ------
RMB RMB RMB RMB RMB US$
(in millions, except share, per share and per ADS information)
BALANCE SHEET DATA:
HONG KONG GAAP
Current assets
Cash and cash equivalents 3,128 2,976 40,071 17,481 19,349 2,337
Deposits with banks - - - 1,311 8,227 994
Accounts receivable 807 1,087 1,592 2,482 4,957 599
Fixed assets 7,346 11,536 18,634 33,986 42,699 5,157
Total assets 13,563 18,136 64,950 64,541 87,435 10,561
Short-term bank and other loans 513 1,504 2,148 5,337 4,419 534
Long-term bank and other loans 2,004 1,946 2,870 991 2,332 282
Total liabilities 4,522 5,657 10,386 18,699 30,343 3,665
Shareholders' equity 9,041 12,471 54,550 45,827 57,092 6,896
US GAAP(3)
Fixed assets 10,464 18,597 27,058 39,930 41,618 5,027
Total assets 17,693 27,960 79,986 75,098 87,570 10,577
Long-term bank and other loans 2,015 2,054 3,054 2,472 2,333 282
Shareholders' equity 12,570 20,871 66,715 51,665 55,927 6,755
OTHER FINANCIAL DATA:
HONG KONG GAAP
Capital expenditures 2,653 5,511 5,807 11,040 11,708 1,414
Operating cash flow(4) 4,450 4,213 8,203 13,444 19,673 2,376
Adjusted EBITDA(5) 5,707 6,436 8,180 12,869 21,603 2,609
US GAAP(3)
Operating cash flow 8,176 6,403 13,252 17,110 23,500 2,838
- ------------
(1) The basic and diluted net profit per share and per ADS amounts
under Hong Kong GAAP for the years ended December 31, 1996 and 1997 have
been computed by dividing net profit under Hong Kong GAAP by the weighted
average number of shares and the weighted average number of ADSs,
respectively, outstanding as if 9,010,000,000 ordinary shares and
450,500,000 ADSs (based on a ratio of 20 shares to one ADS), respectively,
issued in the IPO restructuring were outstanding during these periods (in
addition to shares actually issued, if any).
The basic and diluted net profit per share and per ADS amounts under US
GAAP for the years ended December 31, 1995, 1996 and 1997 have been
computed by dividing net profit under US GAAP by the weighted average
number of shares and the weighted average number of ADSs, respectively,
outstanding as if (i) 9,010,000,000 ordinary shares and 450,500,000 ADSs
(based on a ratio of 20 shares to one ADS), respectively, issued in the IPO
restructuring and (ii) 1,273,195,021 ordinary shares and 63,659,751 ADSs,
respectively, issued to China Telecom Hong Kong (BVI) Limited as part of
the consideration in the acquisition of Fujian Mobile, Henan Mobile and
Hainan Mobile were outstanding during these periods (in addition to shares
actually issued, if any).
(2) The basic net profit per share and per ADS amounts under Hong Kong GAAP for
the years ended December 31, 1998 and 1999, have been computed by dividing
net profit by the weighted average number of shares and the weighted
average number of ADSs,
-26-
31
respectively, in issue during 1998 and 1999. The calculation of diluted net
profit per share under Hong Kong GAAP for the years ended December 31, 1998
and 1999 have been compiled after adjusting for the effects of all dilutive
potential ordinary shares, respectively.
The basic net profit per share and per ADS amounts under US GAAP for the
years ended December 31, 1998 and 1999, have been computed by dividing net
profit by the weighted average number of shares and the weighted average
number of ADSs, respectively, as if 1,273,195,021 ordinary shares and
63,659,751 ADSs issued to China Telecom (Hong Kong) BVI Limited as part of
the consideration in the acquisition of Fujian Mobile, Henan Mobile and
Hainan Mobile were outstanding during these periods (in addition to shares
actually issued, if any). The calculation of diluted net profit per share
under US GAAP for the years ended December 31, 1998 and 1999 have been
compiled after adjusting for the effects of all dilutive potential ordinary
shares, respectively. All dilutive potential ordinary shares arise from the
share options granted to the directors under the share option scheme which,
if converted to ordinary shares, would decrease profit attributable to
shareholders per share.
(3) The amounts for the years ended December 31, 1995, 1996, 1997, 1998
and 1999 are presented to reflect the acquisitions of Jiangsu Mobile,
Fujian Mobile, Henan Mobile and Hainan Mobile under the "as if
pooling-of-interest" method, as well as the effects of other differences
between Hong Kong GAAP and US GAAP.
(4) Net cash inflows from operating activities without regard to net cash
outflows (inflows) from returns on investments and servicing of finance and
taxation.
(5) Adjusted EBITDA represents earnings before interest income, interest
expense, non-operating income (expense), income taxes, depreciation,
amortization and write-down and write-off of fixed assets. While EBITDA is
commonly used in the telecommunications industry to analyze companies on
the basis of operating performance, leverage and liquidity, it is not
presented as a measure of performance in accordance with generally accepted
accounting principles and should not be considered as representing net cash
flow from operating activities. The items of net profit excluded from
EBITDA are significant components in understanding and assessing our
financial performance, and our computation of EBITDA may not be comparable
to other similarly titled measures of other companies. See "Item 9.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated statements of our cash flows contained
elsewhere in this annual report.
EXCHANGE RATE INFORMATION
China
The following table sets forth certain information concerning
exchange rates between Renminbi and US dollars for the periods
indicated:
NOON BUYING RATE
---------------------------------------------------------
PERIOD
PERIOD END AVERAGE* HIGH LOW
- ------ ------ ------- ---- ---
(RMB PER US$1)
1995 8.3374 8.3852 8.5000 8.2916
1996 8.3284 8.3395 8.3549 8.3002
1997 8.3100 8.3193 8.3290 8.2911
1998 8.3008 8.2991 8.3100 8.2778
1999 8.2795 8.2785 8.2800 8.2276
- ------------
* The average of the noon buying rates on the last day of each month during
the relevant period.
-27-
32
Hong Kong
The following table sets forth certain information regarding the exchange
rates between Hong Kong dollars and US dollars for the periods indicated:
NOON BUYING RATE
--------------------------------------------------------------
PERIOD
PERIOD END AVERAGE* HIGH LOW
- ------ ------ -------- ------ ------
(HK$ per US$1)
1995 7.7323 7.7354 7.7665 7.7300
1996 7.7347 7.7341 7.7440 7.7310
1997 7.7495 7.7440 7.7550 7.7275
1998 7.7476 7.7465 7.7595 7.7355
1999 7.7740 7.7599 7.7814 7.7465
- ------------
* The average of the noon buying rates on the last day of each month during
the relevant period.
DIVIDEND PAYMENTS
The Board of Directors does not intend to recommend the payment of a
dividend for the year ended December 31, 1999. As we are experiencing a period
of rapid growth, the Board deems it desirable that capital be retained for
additional investment, network expansion and optimization, as well as potential
acquisition of quality assets. We have not declared or paid any dividends since
our incorporation in September 1997.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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. The consolidated financial statements have been
prepared in accordance with Hong Kong GAAP, which differ in certain significant
respects from US GAAP. Note 28 to the consolidated financial statements
summarizes the significant differences between Hong Kong GAAP and US GAAP as
they relate to us and provides a reconciliation to US GAAP of net profit and
shareholders' equity. In addition, Note 28 to the consolidated financial
statements includes our condensed consolidated financial statements prepared and
presented in accordance with US GAAP for the relevant periods. The 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, 1997, 1998 and 1999, and reflect the
results of Jiangsu Mobile from June 4, 1998, the date we acquired it and Fujian
Mobile, Henan Mobile and Hainan Mobile from November 12, 1999, the date we
acquired them. Our consolidated financial position and results of operations
prior to September 27, 1997 represent the combined operations of Guangdong
Mobile and Zhejiang Mobile.
OVERVIEW OF OUR OPERATIONS
During 1997, 1998 and 1999, our cellular network capacity, subscriber base
and operations experienced significant growth. See "Item 1. Description of
Business". We believe that with the market-oriented restructuring of the
telecommunications industry, as well as the development of the 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
markets, we believe that there is potential for significant future subscriber
growth.
Our results of operations, like those of other cellular network operators,
are substantially dependent on a number of factors, including:
-28-
33
- the number of subscribers;
- the level of subscriber usage;
- the level and structure of tariffs; and
- interconnection, roaming and transmission line arrangements with China
Mobile and other telecommunications operators.
Like other cellular network operators in mainland China, we operate in an
extensively regulated environment and our operations and financial performance
are significantly affected by the Chinese government's regulation of the
telecommunications industry and its restructuring. These regulations and
policies may affect our interconnection and transmission line arrangements,
technology and equipment standards, capital investment priorities and tariff
structure. See "Item 1. Description of Business -- Regulation". Our financial
performance is also subject to the economic and social conditions in mainland
China and foreign currency exchange fluctuations.
THE ACQUISITION OF JIANGSU MOBILE, FUJIAN MOBILE, HENAN MOBILE AND HAINAN MOBILE
MATERIALLY IMPACTED OUR FINANCIAL RESULTS
We acquired Jiangsu Mobile on June 4, 1998 and Fujian Mobile, Henan Mobile
and Hainan Mobile on November 12, 1999. We have adopted the acquisition method
to account for these acquisitions under Hong Kong GAAP. Accordingly, the
consolidated financial statements include the results of Jiangsu Mobile from
June 4, 1998 and those of Fujian Mobile, Henan Mobile and Hainan Mobile from
November 12, 1999, the respective dates of the acquisitions.
Under US GAAP, the acquisitions of Jiangsu Mobile, Fujian Mobile, Henan
Mobile and Hainan Mobile 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 accounts of previously separate companies for periods prior to the
combination generally are restated on a combined basis.
Our acquisition of Jiangsu Mobile had a material impact on our overall
results of operations for 1998 and shareholders' equity as of December 31, 1998.
Our acquisition of Fujian Mobile, Henan Mobile and Hainan Mobile had a material
impact on our overall results of operations for 1999 and shareholders' equity as
of December 31, 1999.
WRITE-DOWN AND WRITE-OFF OF TACS NETWORK EQUIPMENT
Due to the rapid development of mobile telecommunications technologies and
the potentially limited life cycle of our TACS network equipment, we decided to
accelerate the enhancement of our technology and to assist the migration of our
TACS subscribers to the GSM network, resulting in the writing-down and
writing-off of our TACS network equipment. We decided to write-down certain TACS
network equipment in 1998 and 1999 in aggregate amounts of RMB 282 million and
RMB 6,720 million, respectively and we decided to write-off certain TACS network
equipment in 1999 in an aggregate amount of RMB 1,522 million. The carrying
amount of the TACS network equipment in use at the end of 1999, before the
write-down and write-off was RMB 9,767 million, representing 18.6 per cent of
the carrying amount of total fixed assets. After the write-down and write-off,
the carrying amount of the TACS network equipment was RMB 1,525 million. We
determined the existence of impairment by comparing the carrying amount of the
TACS network equipment to their future discounted net cash flows expected to be
generated over the economic life of each TACS network in service at December 31,
1998 and December 31, 1999. The impairment of each TACS network in service was
calculated as the amount by which the carrying amounts of the individual TACS
network assets exceeded their fair value estimates based on the discounted net
cash flow expected to be generated by each TACS network. Additionally, in 1999
we wrote-off certain TACS network equipment which had been removed from service.
At the end of 1999, we had an aggregate of 1.6 million TACS subscribers,
representing 10 per cent of our total subscribers.
The decision to accelerate the enhancement of our technology is expected to
lead to an improvement in our asset quality, maximize operational flexibility
and maintain our competitiveness in light of the ongoing opening and reform of
China's telecommunications industry and the increasingly competitive market
environment. Concurrently, we expect to control transfer costs associated with
the migration of our TACS subscribers to the GSM network. We also expect to
continue to utilize the TACS network equipment prior to the physical end of the
life cycle of the TACS network equipment and to identify the economic means for
dismantling the equipment, so as to protect the interests of our shareholders.
-29-
34
NEW OPERATING ARRANGEMENTS MAY AFFECT FUTURE FINANCIAL RESULTS
In May 2000, we entered into new agreements with China Mobile (acting on
behalf of CTC) regarding inter-provincial transmission line leasing and
inter-provincial interconnection and domestic and international roaming. These
new agreements did not have any impact on our financial results for the year
ended December 31, 1999. They may, however, affect future financial results.
These new agreements are described in further detail in "Item 1. Description of
Business -- Inter-provincial Transmission Line Leasing Costs", "Interconnection
Revenue and Costs" and "Roaming Revenues and Costs".
OPERATING ARRANGEMENTS WE ENTERED INTO IN 1997, 1998 AND 1999 MATERIALLY
IMPACTED OUR FINANCIAL RESULTS
Our current organizational structure was established pursuant to our IPO
restructuring completed in September 1997, our acquisition of Jiangsu Mobile
completed in June 1998 and our acquisition of Fujian Mobile, Henan Mobile and
Hainan Mobile completed in November 1999. In connection with these transactions,
we entered into various operating arrangements to facilitate the transfer of the
operations from the relevant PTAs and China Mobile to us, to integrate these
operations within our operating structure and to improve our overall operational
efficiency. These arrangements included:
- agreements with the PTAs with respect to interconnection revenue and
costs, including an adjustment to the risk sharing arrangement with the
relevant PTAs for uncollectible subscriber receivables for domestic and
international long distance calls;
- leased line agreements;
- agreements with certain PTAs allowing us to retain local network
service charge revenue;
- service agreements with the relevant PTAs or other local service
providers;
- a change in the tax treatment of connection fees and certain surcharge
revenue for our services; and
- the revaluation of fixed assets of Guangdong Mobile and Zhejiang
Mobile as of May 31, 1997, of Jiangsu Mobile as of December 31, 1997 and
of Fujian Mobile, Henan Mobile and Hainan Mobile as of June 30, 1999.
In addition, in October 1999 we entered into an agreement with China Mobile
for inter-provincial interconnection and domestic and international roaming,
which applied to all of our six subsidiaries, with effect from April 1, 1999.
These arrangements are described in "-- Interconnection Arrangements" and
"-- Roaming Arrangements".
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. In particular, the
implementation of the interconnection agreements in 1997, 1998 and 1999 led to
significant increases in both operating revenue (in the form of usage fees and
other operating revenues) and operating expenses (in the form of interconnection
and leased expenses). In addition, other operating expenses including selling,
general and administrative expenses ("SG&A") increased as a result of the
implementation of agreements relating to billing and collection services and
distribution and sales. Depreciation expense increased as a result of the
revaluation of fixed assets, while income tax increased as a result of
connection fees and certain surcharges becoming fully taxable following the
IPO restructuring and the acquisitions.
INTERCONNECTION ARRANGEMENTS
Under the agreement entered into with China Mobile in October 1999, when a
fixed line user in any province where we operate makes a call to a cellular
subscriber outside that province using our long distance transmission lines, the
fixed line operator will retain RMB 0.14 per minute out of the total long
distance call charges (including long distance surcharge). We will be entitled
to 20% of the balance of the long distance call charges, while China Mobile will
receive the remaining 80%.
In addition, under the agreement with China Mobile, when our GSM
subscribers make calls from their respective home locations to cellular
subscribers outside of their respective provinces using China Mobile's long
distance transmission lines, we
-30-
35
will keep RMB 0.14 per minute of the total long distance call charges. We will
also receive 20% of the balance of the charges (including any surcharge), while
China Mobile will receive the remaining 80%.
ROAMING ARRANGEMENTS
Under the agreement entered into with China Mobile in October 1999, the
caller's home service network charges the roaming caller RMB 0.60 per minute and
pays RMB 0.48 to the operator of the visited network, while retaining the
remaining RMB 0.12. When a cellular subscriber roams using China Mobile's
inter-provincial signaling lines, both the operator of the visited network and
the operator of the caller's home service network shall pay RMB 0.04 to China
Mobile for the use of China mobile's signaling lines. With respect to roaming in
Hong Kong, Taiwan and Macau and international locations, we continue to share
roaming revenues with other cellular operators in accordance with the existing
roaming arrangements between China Mobile and those operators.
GEOGRAPHICAL BREAKDOWN OF OUR OPERATIONS IN GUANGDONG, ZHEJIANG, JIANGSU,
FUJIAN, HENAN AND HAINAN
We conduct our cellular operations in Guangdong, Zhejiang, Jiangsu, Fujian,
Henan and Hainan. Launched approximately five years earlier than our other
cellular operations, our networks in Guangdong have greater capacity, serve the
majority of our subscribers and account for the majority of our operating
revenue, expenses and profit. As of December 31, 1999, our subscribers in
Guangdong, Zhejiang, Jiangsu, Fujian, Henan and Hainan represented 38.1%, 18.3%,
14.9%, 16.0%, 11.1% and 1.6% of our total subscribers, respectively. During
1999, our operations in Guangdong, Zhejiang, Jiangsu, Fujian, Henan and Hainan
accounted for 56.5%, 21.5%, 17.0%, 2.8%, 1.9% and 0.3% of our operating revenue
and 61.8%, 20.3%, 12.9%, 2.9%, 1.8% and 0.3% of our operating profit,
respectively. The contributions of our operations in Fujian, Henan and Hainan to
operating revenue and operating profit are minimal, in part because these
operations were acquired at the end of 1999. The following table sets forth
certain financial information by geographical regions for 1997, 1998 and 1999:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------
1997 1998 1999
---- ---- ----
GUANGDONG ZHEJIANG GUANGDONG ZHEJIANG JIANGSU GUANGDONG ZHEJIANG JIANGSU FUJIAN HENAN HAINAN
MOBILE MOBILE MOBILE MOBILE MOBILE MOBILE MOBILE MOBILE MOBILE MOBILE MOBILE
--------- -------- --------- -------- ------- --------- -------- ------- ------ ------ ------
Operating revenue 11,075 4,413 16,629 6,406 3,310 21,822 8,291 6,569 1,067 731 143
(RMB in millions)
Operating margin 36.6% 31.2% 30.5% 29.3% 23.6% 38.8% 33.6% 26.9% 36.8% 34.2% 26.9%
Adjusted EBITDA margin 53.8% 50.8% 46.8% 55.9% 48.0% 55.3% 57.2% 57.3% 60.9% 52.4% 49.3%
RESULTS OF OPERATIONS
For the reasons described above, our results of operations are not directly
comparable with those in prior years as a result of our acquisitions and the
material changes made to our operating agreements.
The following table sets forth selected income statement data, expressed as
percentages of operating revenue, for the periods indicated:
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
------ ------ ------
Operating revenue: 100.0% 100.0% 100.0%
Usage fees 56.3 62.0 66.8
Monthly fees 17.4 16.5 12.9
Connection fees 20.5 12.6 11.2
Other Operating revenue 5.8 8.9 9.1
-31-
36
Operating expenses:
Leased lines 20.2 14.9 9.6
Interconnection 7.8 18.0 16.7
Depreciation 17.3 17.5 19.2
Personnel 4.9 6.1 5.8
Other operating expenses 14.8 13.4 13.4
---- ---- ----
Total operating expenses 65.0 69.9 64.7
Operating profit 35.0 30.1 35.3
Write-down and write-off of TACS network equipment -- (1.1) (21.3)
Other income 0.5 1.3 1.4
Finance costs (1.1) (0.6) (0.9)
Interest income 4.2 6.1 2.0
Non-operating income (expenses) (0.2) (0.2) 0.2
---- ---- ----
Profit before tax and minority interests 38.4 35.6 16.7
Income Tax (6.4) (9.4) (4.3)
---- ---- ----
Net Profit 32.0% 26.2% 12.4%
==== ==== ====
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
OPERATING REVENUE. We derive operating revenue principally from usage fees,
monthly fees, and one-time connection fees charged to new subscribers. Usage
fees represent standard local usage fees for airtime and applicable domestic and
international long distance charges receivable from subscribers for the use of
our cellular networks and facilities, and fees in respect of roaming out calls
made by our subscribers outside their registered service areas. We also receive
fees for other services we provide, including interconnection settlement
revenue, fees charged for certain value added services and telephone number
selection and for roaming services provided to other cellular networks'
subscribers.
Operating revenue increased 46.6% from RMB 26,345 million in 1998 to
RMB 38,623 million in 1999. This increase was due primarily to the increase in
usage fees as a result of subscriber growth in Guangdong and Zhejiang, the full
year impact of the addition of subscribers of Jiangsu Mobile as a result of its
acquisition by us and subscriber growth of Jiangsu Mobile in 1999, as well as
the addition of subscribers of Fujian Mobile, Henan Mobile and Hainan Mobile
following their acquisitions by us. Our total number of subscribers was 15.6
million at December 31, 1999, compared to 6.5 million at December 31, 1998.
Excluding connection fees, operating revenue increased from RMB 23,022 million
to RMB 34,304 million.
Revenue from usage fees increased 57.9% from RMB 16,346 million in 1998 to
RMB 25,812 million in 1999. This increase was primarily a result of the increase
in total subscriber numbers and the expanded communications opportunities for
subscribers as a result of the expansion and improvement of fixed line and
cellular networks throughout mainland China and the expansion of the scope and
variety of our services. We believe that the introduction of prepaid calling
cards will generate additional usage fees which will increase the contribution
of usage fees to operating revenue. As a percentage of operating revenue, usage
fees increased from 62.0% in 1998 to 66.8% in 1999.
Revenue from monthly fees increased 14.6% from RMB 4,347 million in 1998 to
RMB 4,981 million in 1999 due to the increase in total subscriber numbers. The
increase, however, was less than the increase in number of subscribers in 1999,
primarily due to the downward adjustment in monthly fee rates charged by
Guangdong Mobile, from RMB 100 in 1998 to RMB 50 in 1999 and Zhejiang Mobile,
from RMB 62.5 to RMB 50 beginning April 1999. We believe that maintaining
monthly fees at their current levels will help retain existing subscribers and
attract new subscribers, thereby ensuring a steady contribution to operating
revenue. As a percentage of operating revenue, monthly fees decreased from 16.5%
in 1998 to 12.9% in 1999.
Revenue from connection fees increased 30.0% from RMB 3,323 million in 1998
to RMB 4,319 million in 1999 due to the increase in total subscribers, partially
offset by decreases in average connection fees charged to new subscribers. We
-32-
37
believe that the reduction and possible eventual elimination of
connection fees for new subscribers may help to expand our subscriber base and
result in increased total subscriber usage of our cellular services, and may
reduce our reliance on connection fees to drive revenue growth. As a percentage
of operating revenue, connection fees decreased from 12.6% in 1998 to 11.2% in
1999.
Other operating revenue increased 50.8% from RMB 2,329 million in 1998 to
RMB 3,511 million in 1999. This increase resulted principally from an increase
in interconnection services furnished to other telecommunication operators.
Other operating revenue includes revenue from value added services which,
although currently insignificant, we believe will increase and will become a
significant source of revenue in the future.
OPERATING EXPENSES. Operating expenses include principally leased line
expenses, interconnection expenses, depreciation expense relating to our
cellular network and other fixed assets, personnel expenses and other operating
expenses, which primarily consist of selling and promotion expenses, network
maintenance costs, provision for doubtful accounts and operating lease charges.
Operating expenses increased 35.7% from RMB 18,410 million in 1998 to
RMB 24,983 million in 1999, due primarily to increases in interconnection
expenses, depreciation expense, personnel expenses and other operating expenses.
Of the total increase in operating expenses, 25.9%, 42.8%, 10.1% and 24.2% was
accounted for by increases in interconnection expenses, depreciation expense,
personnel expenses and other operating expenses, respectively.
Total leased line payments decreased 5.0% from RMB 3,917 million in 1998 to
RMB 3,723 million in 1999, due to decreases in leased line tariffs. As a
percentage of operating expenses, total leased line payments decreased from
21.3% in 1998 to 14.9% in 1999, reflecting decreases in leased line tariffs as
well as greater efficiency in our utilization of leased lines.
Interconnection expenses increased 35.8% from RMB 4,752 million in 1998 to
RMB 6,453 million in 1999, due primarily to the increase of interconnection
traffic and the inclusion of interconnection charges incurred by Fujian Mobile,
Henan Mobile and Hainan Mobile which were not required to be settled in full
when incurred in prior years. As a percentage of operating expenses,
interconnection expenses remained flat at 25.8% in 1999.
Depreciation expense increased 61.2% from RMB 4,598 million in 1998 to
RMB 7,411 million in 1999, due to the increase in fixed assets following our
acquisition of Fujian Mobile, Henan Mobile and Hainan Mobile as well as
increased capital expenditures that we made to improve and expand our networks.
As a percentage of operating expenses, depreciation expense increased from 25.0%
in 1998 to 29.7% in 1999.
Personnel expenses increased 41.4% from RMB 1,595 million in 1998 to
RMB 2,256 million in 1999, due primarily to the implementation of a
performance-based compensation program to attract and retain talented employees.
As a percentage of operating expenses, personnel expenses increased slightly
from 8.7% in 1998 to 9.0% in 1999.
Other operating expenses increased 44.9% from RMB 3,548 million in 1998 to
RMB 5,140 million in 1999. This increase was due mainly to the introduction of
additional promotional activities to attract new subscribers. Since 1998, we
have implemented a number of measures in Guangdong, Zhejiang and Jiangsu
provinces to control bad debt risks and fraud, such as enhanced subscriber
registration procedures, the imposition of credit limits for high usage
subscribers and tightened controls to improve timely payment by subscribers. As
a result, provisions for doubtful accounts for Guangdong Mobile, Zhejiang Mobile
and Jiangsu Mobile as a percentage of operating revenue decreased from 2.12% in
1998 to 1.92% in 1999. In addition, as a percentage of recurring revenue (i.e.,
total operating revenue less connection fees), provisions for doubtful accounts
decreased from 2.42% to 2.17%. We have applied these credit control measures in
Fujian, Henan and Hainan as well, and are currently making improvements to their
recovery systems and hardware used to implement such controls. As a percentage
of operating expenses, other operating expenses increased from 19.3% in 1998 to
20.6% in 1999.
OPERATING PROFIT. Operating profit increased 71.9% from RMB 7,935 million
in 1998 to RMB 13,640 million in 1999 and operating margin (operating profit as
a percentage of operating revenue) increased from 30.1% to 35.3%. The increase
in operating margin reflects fast subscriber growth and total usage increase as
well as a more efficient network and cost structure.
-33-
38
WRITE-DOWN AND WRITE-OFF OF TACS NETWORK EQUIPMENT. The write-down and
write-off of our TACS network equipment was RMB 282 million in 1998 and
RMB 8,242 million in 1999, due to the acceleration of the development of our
technology. See "-- Write-down and Write-off of TACS Network Equipment".
ADJUSTED EBITDA. Adjusted EBITDA represents earnings before interest
income, interest expense, non-operating income (expenses), income taxes,
depreciation and amortization, and write-down and write-off of fixed assets.
Adjusted EBITDA increased 67.9% from RMB 12,869 million in 1998 to RMB 21,603
million in 1999. This increase was primarily due to the decline in leased line
expenses reflecting the success of our cost control efforts. Adjusted EBITDA
margin (adjusted EBITDA as a percentage of operating revenue) increased from
48.9% to 55.9%. While EBITDA is commonly used in the telecommunications industry
worldwide as an indicator of operating performance, leverage and liquidity, it
is not presented as a measure of performance in accordance with generally
accepted accounting principles and should not be considered as representing net
cash flows from operating activities.
OTHER INCOME. Other income, which includes primarily gross profit from
sales of SIM cards, handsets and accessories, increased 64.3% from RMB 336
million in 1998 to RMB 552 million in 1999. This increase reflected primarily
increased sales of SIM cards and handsets resulting from the increase in
subscribers to our GSM networks and a decrease in SIM card costs.
FINANCE COSTS. Finance Costs increased 114.4% from RMB 160 million in 1998
to RMB 343 million in 1999. The increase was primarily due to the increased
borrowings by Zhejiang Mobile and Jiangsu Mobile and interest on the US$600
million five-year fixed rate notes issued in 1999.
INTEREST INCOME. Interest income decreased 52.3% from RMB 1,609 million in
1998 to RMB 767 million in 1999. The decrease was due primarily to a reduction
in funds from our 1997 IPO earning interest because such funds have been
utilized for network construction and our acquisition of Jiangsu Mobile in 1998.
Non-operating income totaled RMB 70 million in 1999, as compared to an
expense of RMB 51 million in 1998. The increase was mainly due to a reduction in
losses from the sale of fixed assets in 1999 as compared to 1998.
Profit before tax and minority interests decreased 31.4% from RMB 9,387
million in 1998 to RMB 6,444 million in 1999.
TAXATION. Our income tax expense decreased 33.7% from RMB 2,486 million in
1998 to RMB 1,647 million in 1999, primarily due to the decline in profits
following the write-down and write-off of our TACS network equipment. In
addition, Hainan Mobile is accorded privileged tax treatment and its income is
assessed at a 15% preferential tax rate, instead of the 33% statutory rate,
because it is situated in the Hainan Special Administrative Zone.
NET PROFIT. Net profit decreased 30.5% from RMB 6,900 million in 1998 to
RMB 4,797 million in 1999, primarily as a result of the write-down and write-off
of the TACS network equipment. Net profit margin (net profit as a percentage of
operating revenue) decreased from 26.2% to 12.4%. Net profit before the
write-down and write-off of the TACS network equipment was RMB 10,320 million,
representing an increase of 49.6% from 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
OPERATING REVENUE. Operating revenue increased 70.1% from RMB 15,488
million in 1997 to RMB 26,345 million in 1998, due primarily to subscriber
growth in Guangdong and Zhejiang and the addition of subscribers in Jiangsu,
leading to increases in usage fees and monthly fees. Excluding Jiangsu Mobile,
operating revenue increased 48.7% to RMB 23,035 million in 1998. Our total
number of subscribers increased 91.8% from 3.4 million at the end of 1997 to
6.5 million at the end of 1998. Excluding connection fees, operating revenue
increased from RMB 12,314 million in 1997 to RMB 23,022 million in 1998.
Revenue from usage fees increased 87.5% from RMB 8,718 million in 1997 to
RMB 16,346 million in 1998. Excluding Jiangsu Mobile, usage fees increased 63.3%
to RMB 14,238 million in 1998. The increase was due primarily to the increase in
subscribers and the expanded communications opportunities for subscribers. In
addition, as a result of the implementation
-34-
39
of interconnection arrangements subsequent to our IPO restructuring and our
acquisition of Jiangsu Mobile, usage fees in 1998 included the full amount of
revenues from domestic and international long distance calls and from roaming
out calls, including amounts payable to other network operators in accordance
with the relevant agreements. These revenues were not included in usage fees
prior to the implementation of our interconnection agreements in October 1997.
As a percentage of operating revenue, usage fees increased from 56.3% in 1997 to
62.0% in 1998.
Revenue from monthly fees increased 61.5% from RMB 2,692 million in 1997 to
RMB 4,347 million in 1998, due to the increase in total subscribers. Excluding
Jiangsu Mobile, monthly fees increased 46.4% to RMB 3,942 million in 1998, and
replaced connection fees as the second largest component of operating revenue.
As a percentage of operating revenue, however, monthly fees decreased from 17.4%
in 1997 to 16.5% in 1998, due primarily to the implementation of interconnection
agreements in connection with our IPO, which resulted in a change in the
composition of our operating revenue.
Revenue from connection fees increased 4.7% from RMB 3,174 million in 1997
to RMB 3,323 million in 1998, due to the increase in total subscribers.
Excluding Jiangsu Mobile, connection fees decreased 8.7% to RMB 2,896 million in
1998 as a result of decreases in average connection fees charged to each new
subscriber in Guangdong and Zhejiang. The average connection fee for each new
subscriber decreased 28.8% from RMB 2,330 in 1997 to RMB 1,658 in 1998. As a
percentage of operating revenue, connection fees decreased from 20.5% in 1997 to
12.6% in 1998.
Other operating revenue increased 157.7% from RMB 904 million in 1997 to
RMB 2,329 million in 1998, reflecting primarily increases in revenue from fees
charged to subscribers of other network operators for roaming in our service
areas, revenues from interconnection settlement and fees charged to subscribers
for value added services. Excluding Jiangsu Mobile, other operating revenue
increased 116.7% to RMB 1,959 million in 1998 as a result of the implementation
of interconnection arrangements subsequent to the IPO restructuring.
OPERATING EXPENSES. Operating expenses increased 82.7% from RMB 10,074
million in 1997 to RMB 18,410 million in 1998, due to higher leased line
payments, interconnection expenses, depreciation charges, personnel expenses and
other operating expenses. Excluding Jiangsu Mobile, operating expenses increased
60.5% to RMB 16,165 million in 1998. Of the total increase in operating
expenses, 9.4%, 42.4%, 23.0%, 10.1% and 15.1% was accounted for by the increase
in leased line payments, interconnection expenses, depreciation charges,
personnel expenses and other operating expenses, respectively.
Total leased line payments increased 25.0% from RMB 3,134 million in 1997
to RMB 3,917 million in 1998, due primarily to the acquisition of Jiangsu Mobile
and network expansion to include new coverage areas, as well as to increased
network transmission capacity within existing coverage areas. Excluding Jiangsu
Mobile, leased line payments increased 3.4% to RMB 3,242 million in 1998. As a
percentage of operating expenses, total leased line payments decreased from
31.1% in 1997 to 21.3% in 1998, reflecting greater efficiency in the utilization
of leased lines and a decrease in leased line tariffs in Guangdong as a result
of the implementation of the new leased line agreement in October 1997.
Interconnection expenses increased 291.4% from RMB 1,214 million in 1997 to
RMB 4,752 million in 1998 as a result of the implementation of new
interconnection agreements in Guangdong and Zhejiang for the full year in 1998,
compared to less than three months in 1997, as well as the implementation of a
new interconnection agreement in Jiangsu from June 4, 1998 to December 31, 1998
and the general increase in the volume of roaming out and inter-network traffic
during 1998. Excluding Jiangsu Mobile, interconnection expenses increased 248.6%
to RMB 4,232 million in 1998. As a percentage of operating expenses,
interconnection expenses increased from 12.1% in 1997 to 25.8% in 1998.
Depreciation expense increased 71.5% from RMB 2,681 million in 1997 to
RMB 4,598 million in 1998, primarily reflecting an increase in fixed assets as a
result of the acquisition of Jiangsu Mobile, the full year depreciation in 1998
of assets of Guangdong Mobile and Zhejiang Mobile which were revalued as of
May 31, 1997 in connection with the IPO restructuring, as well as increased
capital expenditures we made to improve and expand our networks. Excluding
Jiangsu Mobile, depreciation expenses increased 41.1% to RMB 3,783 million in
1998. As a percentage of operating expenses, depreciation expense decreased from
26.6% in 1997 to 25.0% in 1998.
Personnel expenses increased 111.0% from RMB 756 million in 1997 to
RMB 1,595 million in 1998, due primarily to the addition of employees in
Jiangsu, the hiring of additional employees and the maintenance of a competitive
salary package
-35-
40
to retain experienced employees in 1998 to support network expansion and
operation growth. Excluding Jiangsu Mobile, personnel expenses increased 89.8%
to RMB 1,435 million in 1998. As a percentage of operating expenses, personnel
expenses increased from 7.5% in 1997 to 8.7% in 1998.
Other operating expenses increased 55.0% from RMB 2,289 million in 1997 to
RMB 3,548 million in 1998, reflecting increases in selling and promotion
expenses, network maintenance costs and provisions for doubtful accounts.
Excluding Jiangsu Mobile, other operating expenses increased 39.3% to RMB 3,189
million in 1998. The increase in selling and promotion expenses was due
primarily to the addition of marketing and distribution operations in Jiangsu,
as well as increased efforts on marketing and distribution in Guangdong and
Zhejiang. Although provisions for doubtful accounts increased in 1998, as a
percentage of operating revenue, provisions for doubtful accounts decreased from
2.9% in 1997 to 2.1% in 1998. In addition, as a percentage of recurring revenue,
provisions for doubtful accounts decreased from 3.6% in 1997 to 2.4% in 1998 as
a result of the measures we implemented to control bad debt risks and fraud.
OPERATING PROFIT. Operating profit increased 46.6% from RMB 5,414 million
in 1997 to RMB 7,935 million in 1998. Operating margin declined from 35.0% in
1997 to 30.1% in 1998, primarily due to increased operating expenses as a result
of our network expansion and development, as well as changes implemented in
connection with the IPO restructuring and the acquisition of Jiangsu Mobile,
coupled with slower growth in operating revenue resulting from tariff reductions
(especially reductions in connection fees) and the addition of a larger number
of subscribers with lower usage characteristics. Excluding Jiangsu Mobile,
operating profit increased 26.9% to RMB 6,871 million in 1998, and operating
margin declined from 35.0% in 1997 to 29.8% in 1998.
WRITE-DOWN OF TACS NETWORK EQUIPMENT. The write-down of TACS network
equipment of Rmb 282 million in 1998 was for TACS B network equipment of
Zhejiang Mobile. There was no write-down of TACS network equipment in 1997.
See"--Write-down and Write-off of TACS Network Equipment"
ADJUSTED EBITDA. Adjusted EBITDA increased 57.3% from RMB 8,180 million in
1997 to RMB 12,869 million in 1998. Adjusted EBITDA margin decreased from 52.8%
in 1997 to 48.8% in 1998. Excluding Jiangsu Mobile, adjusted EBITDA increased
37.9% to RMB 11,280 million in 1998, and adjusted EBITDA margin decreased to
49.0% in 1998.
OTHER INCOME. Other income increased 295.3% from RMB 85 million in 1997 to
RMB 336 million in 1998, reflecting primarily increased sales of SIM cards
resulting from the increase in subscribers to our GSM networks and a decrease in
the cost of SIM cards.
FINANCE COSTS. Finance Costs decreased 8.6% from RMB 175 million in 1997 to
RMB 160 million in 1998, primarily due to the repayment in 1998 of a portion of
our borrowings and decreased borrowing as a result of the use of proceeds from
our initial public offering in October 1997 to finance our capital requirements.
INTEREST INCOME. Interest income increased from RMB 656 million in 1997 to
RMB 1,609 million in 1998 primarily due to the interest income earned for the
full year in 1998 on the remaining proceeds from our initial public offering in
October 1997, as compared to interest income earned on such proceeds in less
than three months in 1997.
Non-operating expenses increased 88.9% from RMB 27 million in 1997 to
RMB 51 million in 1998.
Profit before tax and minority interests increased 57.7% from RMB 5,953
million in 1997 to RMB 9,387 million in 1998.
TAXATION. We incurred income tax expense of RMB 991 million in 1997 and
RMB 2,486 million in 1998, reflecting an effective tax rate of 16.6% and 26.5%,
respectively. The increase in the effective tax rate was primarily due to the
fact that connection fee revenue and certain surcharge revenues in Guangdong and
Zhejiang were subject to taxation for the full year in 1998, compared to less
than three months in 1997, as well as the taxation of similar revenue items for
Jiangsu Mobile after it completed its registration in August 1998 as a wholly
foreign-owned enterprise as a result of its acquisition by us.
-36-
41
NET PROFIT. Net profit increased 39.2% from RMB 4,955 million in 1997 to
RMB 6,900 million in 1998. Net profit margin decreased from 32.0% to 26.2%.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL, CASH FLOWS AND FINANCING
As of December 31, 1999, we had a working capital surplus (current assets
minus current liabilities) of RMB 14,031 million and cash and cash equivalents
of RMB 19,349 million, compared to RMB 7,083 million and RMB 17,481 million,
respectively, as of December 31, 1998. The increase in working capital and cash
and cash equivalents in 1999 was due primarily to the earnings from operations
in 1999 and the acquisition of Fujian Mobile, Henan Mobile and Hainan Mobile. As
of December 31, 1998 and December 31, 1999, accounts receivable totaled
RMB 2,482 million and RMB 4,957 million, respectively. The increases in accounts
receivable were primarily a result of increased sales of our services and the
acquisition of Fujian Mobile, Henan Mobile and Hainan Mobile. Short-term and
long-term bank and other loans totaled RMB 6,328 million and RMB 6,576 million
as at December 31, 1998 and December 31, 1999, respectively.
The following table summarizes certain cash flow information for the
periods indicated.
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1998 1999
------ ------ ------
8,825 13,567 21,662
Net cash inflows from operating activities
Net cash outflow from returns on investments and servicing of (622) (123) (1,989)
finance and taxation
------ ------- -------
Net cash outflow from investing activities (5,327) (36,357) (36,117)
Net cash inflow (outflow) before financing activities 2,876 (22,913) (16,444)
------ ------- -------
Net cash inflow from financing activities 34,218 325 18,337
------ ------- -------
Increase (decrease) in cash and cash equivalents 37,094 (22,588) 1,893
------ ------- -------
Net cash inflows from operating activities increased from 1997 to 1999,
generally reflecting the growth in operating revenue due to the increase in our
subscriber base through internal growth and acquisitions.
Net cash outflow from returns on investments and servicing of finance and
taxation decreased from 1997 to 1998 primarily due to an increase in interest
received on the proceeds of our initial public offering, which more than offset
a significant increase in Chinese income tax paid. Net cash outflow from returns
on investments and servicing of finance and taxation increased from 1998 to
1999, primarily due to a significant increase in Chinese income tax paid and a
substantial decrease in interest received as a result of the application of the
proceeds from our initial public offering towards the acquisition of Jiangsu
Mobile.
Net cash outflow from investing activities increased significantly from
1997 to 1998, primarily due to the payment of the consideration for the
acquisition of Jiangsu Mobile and an increase in deposits with banks in 1998 as
well as increased equipment purchases in connection with our network expansion.
Net cash outflow from investing activities remained at a high level for 1999,
primarily due to the payment of the consideration for the acquisition of Fujian
Mobile, Henan Mobile and Hainan Mobile.
Net cash inflow from financing activities reflects net borrowings or
repayments of debt, but excludes credit extended to us by equipment suppliers
for additions to construction in progress. Net cash inflow from financing
activities increased significantly in 1997 as a result of our initial public
offering and decreased in 1998 as a result of repayments of bank and other
-37-
42
loans. Net cash inflow from financing activities increased significantly in 1999
as compared to 1998, primarily due to the proceeds received from the US$600
million global bond offering conducted in November 1999.
The majority of the net proceeds from the global bond offering and the US$2
billion concurrent equity offering were used to finance the acquisition of
Fujian Mobile, Henan Mobile and Hainan Mobile.
INDEBTEDNESS
As of December 31, 1997 and 1998 and 1999, our aggregate long-term bank and
other loans (excluding current portions) totaled RMB 2,870 million, RMB 991
million and RMB 2,225 million, respectively, and our short-term bank and other
loans (including the short-term portion of long-term loans) totaled RMB 2,147
million, RMB 5,337 million and RMB 4,351 million, respectively. Our short-term
loans increased in 1998 mainly due to the inclusion of the short-term loans of
Jiangsu Mobile upon its acquisition by us. Our long-term loans increased in 1999
due to the inclusion of the long-term loans of Fujian Mobile and Henan Mobile
upon their acquisition by us. Total scheduled long-term loans payable in 2000,
2001 and 2002 will be approximately RMB 394 million, RMB 976 million and RMB 952
million, respectively. We currently plan to repay loan amounts due using cash in
hand and cash from our operating activities. Capital lease obligations totaled
RMB 175 million at December 31, 1999.
On November 2, 1999, we issued unsecured fixed rate notes with a principal
amount of US$600,000,000 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.
CAPITAL EXPENDITURES
Capital expenditures during 1997, 1998 and 1999 were RMB 8,719 million,
RMB 15,030 million and RMB 16,568 million, respectively. Capital expenditures we
made were principally for the development, optimization and expansion of our GSM
networks and for the testing of new 2.5G technologies.
We anticipate that we will require approximately RMB 86,323.4 million to
finance our capital expenditures for 2000, 2001 and 2002.
The following table sets forth our planned capital expenditure requirements
for the periods indicated. Actual future capital expenditures may differ from
the amounts indicated below.
2000 2001 2002
-------- -------- --------
(RMB IN MILLIONS)
Capital Expenditures 27,818.9 30,243.1 28,261.4
Prior to our initial public offering, we relied on a combination of cash
generated from operations, short-term and long-term bank and other borrowings
(including borrowings from the Guangdong PTA and the Zhejiang PTA) and credit
from equipment suppliers for our capital expenditures and other capital
requirements. Following our initial public offering, we have funded capital
requirements primarily with the proceeds from that offering, cash generated from
operations and, to the extent necessary, short-term borrowings. We believe that
cash in hand 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 cellular operations
through the end of 2002. If necessary, we may seek to obtain additional sources
of financing to fund our network expansion and possible future acquisitions.
FOREIGN EXCHANGE
We maintain our accounts in Renminbi and substantially all of our revenue
and expenses are denominated in Renminbi. Our capital expenditures, a major
portion of which were denominated in U.S. dollars and incurred in connection
with our
-38-
43
purchase of imported equipment, totaled the equivalent of RMB 8,719 million,
RMB 15,030 million and RMB 16,568 million, for 1997, 1998 and 1999,
respectively. In addition, we also incur interest expense on foreign currency
(mainly U.S. dollar) denominated borrowings. U.S. dollar-denominated long-term
loans (excluding current portions) totaled the equivalent of RMB 2,370 million,
RMB 991 million and RMB 706 million at December 31, 1997, December 31, 1998 and
December 31, 1999, respectively, constituting 82.6%, 100% and 31.7% of our total
long-term loans (excluding current portions) as of those dates, respectively.
All of our current operating subsidiaries are incorporated in mainland
China. 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.
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.
US GAAP RECONCILIATION
Our consolidated financial statements are prepared in accordance with Hong
Kong GAAP, which differ in certain significant respects from US GAAP. Under Hong
Kong GAAP, we adopted the acquisition method to account for the purchase of
Jiangsu Mobile, Fujian Mobile, Henan Mobile and Hainan Mobile. Under the
acquisition method, the acquired results of Jiangsu Mobile, Fujian Mobile, Henan
Mobile and Hainan Mobile were included in the results of operations from the
date of their respective acquisitions. Goodwill arising on the acquisition date,
being the excess of the cost over the fair value of our share of the separable
net assets acquired, was eliminated against reserves immediately on acquisition.
For US GAAP, as a result of us and Jiangsu Mobile, Fujian Mobile, Henan
Mobile and Hainan Mobile being under common control prior to the acquisition,
the acquisitions were considered a "combination 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 generally are
restated on a combined basis. The cash consideration we paid has been treated as
an equity transaction in the year of the respective acquisitions for US GAAP
purposes.
In addition, there are other differences between Hong Kong GAAP and US GAAP
for the periods presented that relate primarily to:
- the computation of capitalized interest;
- the revaluation of fixed assets under Hong Kong GAAP, including the
revaluation in connection with our IPO restructuring and our acquisition
of Jiangsu Mobile, Fujian Mobile, Henan Mobile and Hainan Mobile;
- the recognition of deferred income taxes;
- the non-recognition under Hong Kong GAAP of certain employee housing
scheme costs that we bore; and
- the treatment of share options we grant to directors and employees.
Additionally, connection fee revenue was recognized as received for both
Hong Kong GAAP and US GAAP for all periods presented to June 30, 1999. Beginning
July 1, 1999, we adopted a new accounting policy under US GAAP to defer
connection fees received in excess of direct costs and recognize such deferred
amount over the estimated customer usage period for the related service. This
change in accounting policy for US GAAP has significantly impacted the timing of
connection fee revenue recognized.
Disclosure relating to these differences can be found in Note 28 of the
consolidated financial statements. In addition, the condensed consolidated
balance sheets as of December 31, 1998 and 1999 and the condensed consolidated
statements of
-39-
44
income, total shareholders' equity and cash flows for the years ended
December 31, 1997, 1998 and 1999 prepared and presented under US GAAP have been
included in Notes 28 and 29 of the consolidated financial statements to reflect
the impact of the significant differences between Hong Kong GAAP and US GAAP.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 five 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 1999.
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- and long-term debt, our firm purchase
commitments and, to a limited extent, cash and cash equivalents denominated in
foreign currencies. We may, from time to time, enter into currency swap
agreements and foreign exchange forward contracts designed to mitigate our
exposure to foreign currency risks, although we did not consider this to be
necessary in 1999. 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.
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, 1999 and 1998.
AS OF
AS OF DECEMBER 31, 1999 DECEMBER 31, 1998,
----------------------------- ------------------
TOTAL TOTAL
EXPECTED MATURITY DATE RECORDED FAIR RECORDED FAIR
2000 2001 2002 2003 2004 THEREAFTER AMOUNT VALUE AMOUNT VALUE
----- ----- ----- ----- ---- ---------- -------- ----- -------- -----
(RMB EQUIVALENT IN MILLIONS, EXCEPT INTEREST RATES)
Debt:
Fixed rate bank and other loans 4,123 165 765 215 83 -- 5,351 5,386 5,963 5,786
Average Interest Rate 6.09% 7.50% 7.54% 7.51% 7.50% -- 6.42% -- 7.08%
Variable rate bank and other loans 228 811 186 -- -- -- 1,225 1,225 366 366
Average interest rate* 6.11% 6.05% 5.93% -- -- -- 6.04% -- 6.07%
- ------------
* The interest rates for variable rate bank and other loans are calculated based
on the year-end indices.
The following table provides information regarding our foreign
currency-sensitive financial instruments and transactions, which consist of cash
and cash equivalents, short- and long-term debt obligations and capital
commitments as of December 31, 1999 and 1998.
AS OF
AS OF DECEMBER 31, 1999 DECEMBER 31, 1998,
----------------------------- ------------------
TOTAL TOTAL
RECORDED FAIR RECORDED FAIR
2000 2001 2002 2003 2004 THEREAFTER AMOUNT VALUE AMOUNT VALUE
----- ----- ----- ----- ---- ---------- -------- ----- -------- -----
(RMB EQUIVALENT IN MILLIONS, EXCEPT INTEREST RATES)
On-balance sheet financial
instruments:
Cash and cash equivalents:
in U.S. dollars 5,071 -- -- -- -- -- 5,071 5,071 1,103 1,103
in Hong Kong dollars 2,083 -- -- -- -- -- 2,083 2,083 6,937 6,937
Debt:
Fixed rate bank and other loans
(U.S. dollar) 165 165 165 165 84 -- 744 751 1,016 840
Average interest rate 7.50% 7.50% 7.50% 7.50% 7.50% -- 7.50% -- 7.39%
Variable rate bank and other
loans (U.S. dollar) 119 119 8 -- -- -- 246 246 366 366
Average interest rate* 6.80% 6.80% 5.75% -- -- -- 6.77% -- 6.07%
Off-balance sheet commitments
Capital commitments authorized
and contracted for in U.S. dollars 4,932 -- -- -- -- -- 4,932 4,932 3,088 3,088
- ------------
* The interest rates for variable rate bank and other loans are calculated
based on the year-end indices.
-40-
45
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT.
The following table sets forth certain information concerning our directors
and executive officers as of December 31, 1999.
NAME AGE POSITION MEMBER SINCE
- ---- --- -------- ------------
Wang Xiaochu 42 Chairman; President 1999
Li Ping 46 Vice Chairman; Executive Vice President; Joint 1997
Company Secretary
Ding Donghua 63 Director; Chief Financial Officer 1997
Li Gang 43 Director 1999
Xu Long 43 Director 1999
He Ning 38 Director 1998
Liu Ping 54 Director 1999
Yuan Jianguo 49 Director 1999
Wei Yiping 48 Director 1999
Cui Xun 61 Vice Chairman (Non-Executive Director) 1997
Arthur Li Kwok Cheung 54 Independent Non-Executive Director 1997
Antony Leung Kam Chung 48 Independent Non-Executive Director 1997
Mr. Wang Xiaochu is our Chairman and President. Mr. Wang is in charge of
our overall management. In April 2000, Mr. Wang was appointed Vice President of
China Mobile. Prior to joining us, Mr. Wang served as the Director General of
the Tianjin PTA. He also served as Director and Deputy Director of the Hangzhou
PTB in Zhejiang province. He was responsible for the development of China
Telecom system's telephone network management systems and various other
information technology projects. Mr. Wang graduated from the Beijing University
of Posts and Telecommunications in 1980 and has over 19 years of management
experience in the telecommunications industry.
Mr. Li Ping is a Vice Chairman, our Executive Vice President and our Joint
Company Secretary. Mr. Li is in charge of our business operations and investor
relations. He previously served as Deputy Director General of the CTC and
Deputy Director General of the Heilongjiang PTA. He graduated from the Beijing
University of Posts and Telecommunications in 1976 and received an MBA degree
from the State University of New York in 1989. Mr. Li has over 21 years'
operational and management experience in the telecommunications industry.
Mr. Ding Donghua is a Director and our Chief Financial Officer. Mr. Ding
is in charge of our overall financial management. He was previously the Chief
Economist, Chief Accountant, Deputy Chief Economist and Department Director of
the Guangdong PTA. He graduated from the Beijing University of Posts and
Telecommunications in 1961 and has 38 years' management experience in the
telecommunications industry, as well as in economics and finance.
Mr. Li Gang is a Director. He is also the Vice Chairman and President of
Guangdong Mobile. Mr. Li previously served as Director of Guangdong Mobile
Communications Bureau and a Director of the Telecommunications Maintenance
Department of the Guangdong PTA. Mr. Li graduated from Beijing University of
Posts and Telecommunications in 1985 and has over 26 years of experience in the
telecommunications industry.
Mr. Xu Long is a Director. He is also the Chairman and President of
Zhejiang Mobile. Mr. Xu previously served as a Deputy Director of the Zhejiang
PTA and a Deputy Director of the Shaoxing PTB in Zhejiang province. Mr. Xu
graduated from Zhejiang University of Broadcasting and Television in 1985. He
is a senior economist and has over 22 years of experience in the
telecommunications industry.
-41-
46
Mr. He Ning is a Director. Mr. He is responsible for the mobile
telecommunications operations in Jiangsu Province. Mr. He is also the Chairman
and President of Jiangsu Mobile. Mr. He previously served as a Deputy Director
General of the Jiangsu PTB, the Director and Deputy Director of the Jiangsu
Mobile Communications Bureau, and Deputy Director of the Zhenjiang CCTB in
Jiangsu province. He graduated from the Nanjing Institute of Posts and
Telecommunications in 1983, and has 16 years of experience in the
telecommunications industry.
Mr. Liu Ping is a Director. He is also the Chairman and President of
Fujian Mobile. Mr. Liu previously served as a Deputy Director of the Fujian PTA
and Director of the Fuzhou PTB. Mr. Liu graduated from Nanjing Institute of
Posts and Telecommunications in 1985 and has over 22 years of experience in the
telecommunications industry.
Mr. Yuan Jianguo is a Director. He is also the Chairman and President of
Henan Mobile. Mr. Yuan previously served as the Deputy Director of the Henan
PTA and as a Director and Deputy Director of the Henan Mobile Communications
Bureau. Mr. Yuan holds a masters degree in Economics Law from Chinese Academy
of Social Sciences and has 29 years of experience in the telecommunications
industry.
Mr. Wei Yiping is a Director. He is also the Chairman and President of
Hainan Mobile. Mr. Wei previously served as the Deputy Director of the Hainan
PTA and as Director of the Sanya PTB. Mr. Wei graduated from the Xi'an Foreign
Languages Institute and has 29 years of experience in the telecommunications
industry.
Mr. Cui Xun is a Vice Chairman. Mr. Cui is also the Director General of
the Guangdong PTA and the Chairman of Guangdong Mobile. He has served as Deputy
Director General and Chief Engineer of the Guangdong PTA as well as Chief
Engineer, Deputy Director and Deputy Chief Engineer of the Guangzhou CCTB in
Guangdong province. Mr. Cui graduated from the Beijing University of Posts and
Telecommunications in 1962. He has 37 years of experience in the
telecommunications industry.
Professor Arthur Li Kwok Cheung is a Director. Professor Li is the Vice
Chancellor of the Chinese University of Hong Kong, a Non-Executive Director of
Glaxo Wellcome plc, a Director of the Bank of East Asia Limited and a
Non-Executive Director and Chairman of the Board of Regal Hotel Group plc. He
holds a doctorate degree in medicine from Cambridge University and an honorary
doctorate degree in science. He previously served as a board member of the Hong
Kong Hospital Authority and as President of the College of Surgeons of Hong
Kong. Professor Li has been an Advisor on Hong Kong Affairs to the People's
Republic of China and a Member of the Basic Law Consultative Committee and was a
Member of the Preparatory Committee of the Special Administrative Region of the
National People's Congress, a Member of the Selection Committee of the First
Government of the Hong Kong Special Administrative Region and a Committee Member
of the Ninth Annual Chinese People's Political Consultative Conference.
Mr. Antony Leung Kam Chung is a Director. Mr. Leung is Chairman for the
Asia Pacific region of The Chase Manhattan Bank. He graduated from the
University of Hong Kong and completed the Advanced Management Program at Harvard
Business School. Mr. Leung's public service appointments include Member of the
Executive Council of the Hong Kong Special Administrative Region, Chairman of
the Education Commission and Member of the Exchange Fund Advisory Committee.
There is no family relationship between any of our directors or executive
officers and any other of our directors or executive officers.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
The aggregate amount of compensation that we paid to our directors and
executive officers during 1999 for services performed as directors, officers or
employees was HK$10,564,347 (US$1,361,104).
-42-
47
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
We have adopted a share option 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. The consideration payable by a participant for the
grant of an option under the share option scheme will be HK$1.00. The price for
a share payable by a participant upon the exercise of an option will be
determined by our directors in their discretion, except 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 prices of ordinary shares on
the Hong Kong Stock Exchange on the five trading days immediately preceding the
date of grant of the option. The period during which an option may be exercised
will be determined by the directors in their discretion, except that no option
may be exercised later than 10 years after the adoption date of the scheme.
On April 20, 1999, Shi Cuiming, our former Chairman and Chief Executive
Officer, exercised options to purchase an aggregate of 2,900,000 ordinary
shares, and Chen Zhaobin, our former Vice Chairman and President, exercised
options to purchase an aggregate of 2,600,000 shares, each at the exercise price
of HK$11.10 per share. On September 9, 1999, each of Lu Errui and Zhu Jianhua,
who were our former Directors, exercised options to purchase 1,000,000 shares,
each at the exercise price of HK$11.10 per share.
As of December 31, 1999, options exercisable for an aggregate of 12,700,000
shares had been granted to the following directors under our share option scheme
and were outstanding:
These following options are exercisable at a price of HK$11.10 per share
through March 8, 2006.
DIRECTOR NUMBER OF SHARES COVERED BY OPTIONS
Li Ping 2,400,000
Ding Donghua 2,100,000
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
Wang Xiaochu 3,900,000
Li Ping 1,200,000
Ding Donghua 1,100,000
Li Gang 1,000,000
He Ning 1,000,000
On April 25, 2000, options exercisable for an aggregate of 31,590,000
shares were granted to employees under our share option scheme and are
outstanding. The options are exercisable at a price of HK$45.04 per share
through October 7, 2007. Options exercisable for 5,594,000 shares of the
31,590,000 shares were granted to the following directors:
DIRECTOR NUMBER OF SHARES COVERED BY OPTIONS
Wang Xiaochu 200,000
-43-
48
DIRECTOR NUMBER OF SHARES COVERED BY OPTIONS
Li Ping 200,000
Ding Donghua 200,000
Li Gang 180,000
Xu Long 1,170,000
He Ning 166,000
Liu Ping 1,162,000
Yuan Jianguo 1,160,000
Wei Yiping 1,156,000
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
As of December 31, 1999, China Mobile indirectly owns an aggregate of
75.03% of our issued share capital. Each of the MII and China Mobile has
undertaken that:
- they will extend their full support to our present operations and
future development;
- we will be the only cellular telecommunications services company
operating in mainland China regulated by the MII under China Mobile's
control that will be listed on any securities exchange in Hong Kong or
outside China;
- to the extent within the MII's scope of regulation or China Mobile's
control (as the case may be), we will be treated equally with any other
cellular network operators in respect of all approvals, transactions and
arrangements between us and other entities regulated by the MII or
between us and other cellular telecommunications operators controlled by
China Mobile (as the case may be);
- China Mobile and the provincial entities under its control will not,
and the MII will not allow them to, participate, directly or indirectly,
in the provision of cellular telecommunications services in any province
in which we currently operate or may operate in the future; and
- China Mobile will contribute to us, at our option, the entire interest,
if any, held by it in any CDMA project in any province in which we
operate, when and if the CDMA project, after trial operations, becomes
commercially feasible. We will also have the option to operate additional
communications services that fall within China Mobile's scope of business
(including the development and commercial operation of services using new
technology such as 3G cellular technology).
With respect to the third undertaking by the MII listed above, in some
areas (such as tariff setting), the MII shares regulatory responsibilities with
other government authorities. In these cases, the MII undertaking may not be
effective.
In connection with our IPO restructuring in 1997, we entered into various
agreements with the CTC and certain other entities within the China Telecom
system.
In connection with our acquisition of Jiangsu Mobile, we entered into
similar transactions with the Jiangsu PTA and the CTC in 1998. Some of these
arrangements have been revised in connection with the industry restructuring. In
connection with our acquisition of Fujian Mobile, Henan Mobile and Hainan
Mobile, in 1999, each operating subsidiary entered into similar arrangements
with China Mobile, the CTC and the relevant provincial PTAs. These transactions
and
-44-
49
the key changes are described below. We cannot predict what further effects,
if any, the restructuring of the telecommunications industry in mainland China
may have on these arrangements.
LEASING OF OFFICES AND SITES FOR NETWORK EQUIPMENT
The Guangdong, Zhejiang and Jiangsu PTAs have leased certain premises to us
for use as offices, retail outlets, warehouses and sites for locating equipment
for terms of between three to fifty years. Similar agreements were entered into
between Fujian Mobile, Henan Mobile and Hainan Mobile and the relevant
provincial PTAs for terms of between six months and one year. These agreements
are renewable for another year (in the case of Fujian) or on an annual basis (in
the case of Henan and Hainan). The rental payments under these lease agreements
are determined with reference to market rates. In Fujian, Fujian Mobile also
leases to Fujian PTA certain properties under similar terms.
In addition, Fujian Mobile, Henan Mobile and Hainan Mobile lease from
subsidiaries of China Mobile various properties for cell sites and switching
equipment.
Our current Hong Kong head office is leased from Fu Hao Properties Limited,
a wholly-owned subsidiary of CTHKG.
LEASING OF TRANSMISSION LINES
We lease certain transmission lines from the Guangdong, Zhejiang, Jiangsu,
Fujian, Henan and Hainan PTAs in order to link our base transceiver stations,
base station controllers and mobile switching centers and to interconnect our
network to the fixed line network and the cellular networks of other operators.
In August 1999, each of Fujian Mobile, Henan Mobile and Hainan Mobile
entered into two agreements in relation to the leasing of local and
intra-provincial long distance transmission lines with the relevant provincial
PTAs. These agreements were retroactively effective from April 1, 1999, valid
for one year (in the case of Hainan) or through December 31, 1999 (in the case
of Fujian and Henan). The agreements are 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.
Lease payments are standardized and are based on tariff schedules
stipulated by the MII in consultation with the SDPC from time to time, which are
applicable to other cellular and fixed line operators. We were entitled to a 30%
volume discount on the standardized lease payments payable for the period from
April 1, 1999 until the MII implemented new tariff schedules. The relevant
regulatory authorities informed us that they reduced standard tariff rates by an
average of 30% with retroactive effect from October 1, 1999 and, as a result,
the 30% discount originally enjoyed by us was discontinued as of that date. We
subsequently negotiated a new discount rate of 20% with respect to our lease
payments in connection with the leasing of transmission lines.
In addition, in May 2000 we entered into a new agreement with China Mobile
in relation to the leasing of inter-provincial transmission lines. This
agreement is described in "Item 1. Description of Business -- Inter-provincial
Transmission Line Leasing Costs".
INTERCONNECTION ARRANGEMENTS
Our networks interconnect with the fixed line network, allowing our
subscribers to communicate with fixed line users and subscribers of other
cellular networks and to make and receive domestic and international long
distance calls. Interconnection agreements were initially entered into between
Guangdong Mobile and the Guangdong PTA in October 1997, between Zhejiang Mobile
and the Zhejiang PTA in September 1997, and between Jiangsu Mobile and the
Jiangsu PTA in April 1998. These interconnection arrangements have been replaced
by new agreements that we entered into with the relevant PTAs in accordance with
measures adopted by the MII and applicable to all operators in the industry.
Fujian Mobile, Henan Mobile and Hainan Mobile also entered into similar
agreements in August 1999 with the relevant PTAs. The agreements, which were
initially effective through December 31, 1999, are automatically renewed on an
annual basis
-45-
50
unless either party notifies the other of its intention to terminate at least
three months prior to the expiration of the term. In addition, we entered into a
new agreement with China Mobile regarding settlement of inter-provincial long
distance calls in May 2000 which supercedes our previous agreement with China
Mobile. This agreement is described in "Item 1. Description of Business --
Interconnection Revenue and Costs".
BILLING AND ACCOUNT PROCESSING SERVICES
Zhejiang Mobile's billing services agreement with the Zhejiang PTA expired
and will not be renewed. Zhejiang Mobile currently handles its own billing
processing.
Fujian Mobile, Henan Mobile and Hainan Mobile entered into billing services
agreements with the relevant PTAs in August 1999. Pursuant to these agreements,
the PTAs will provide to the relevant companies billing and accounts processing
services for their cellular operations, including the preparation of customer
invoices. In return, the PTAs charge a monthly handling fee of RMB 0.50 per
mobile telephone number.
The initial term of the agreements in Fujian and Henan expired on
December 31, 1999 while the agreement in Hainan expired on April 1, 2000. The
Henan agreement was automatically renewed for another year. The agreements in
Fujian and Hainan are 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.
COLLECTION SERVICES
The agreement between Guangdong Mobile and the Guangdong PTA for payment
collection services is still in effect. The agreement between Jiangsu Mobile and
the Jiangsu PTA for payment collection services expired and will not be renewed.
Jiangsu Mobile currently handles its own payment collections.
Fujian Mobile, Henan Mobile and Hainan Mobile entered into agreements with
the relevant PTAs for certain payment collection services in these provinces.
Pursuant to these agreements, each of the companies pay a fee of RMB 0.01 to the
relevant PTA for each RMB 1.00 collected. The agreements were effective from
April 1, 1999 (in the case of Fujian and Hainan) or July 1, 1999 (in the case of
Henan) and valid for terms of between six months and one year. The agreements
for Fujian and Hainan 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.
DISTRIBUTION AND MARKETING ARRANGEMENTS
We market and sell our cellular services in Zhejiang and Jiangsu and GSM
services in Guangdong, in part, through authorized dealers within the China
Telecom system, pursuant to marketing agreements between Guangdong Mobile and
the Guangdong PTA and between Zhejiang Mobile and the Zhejiang PTA, each entered
into in September 1997, and pursuant to an agency agreement between Jiangsu
Mobile and the Jiangsu PTA, entered into in April 1998. The agreement in
Guangdong expired in October 1999 and has not yet been renewed. The agreement in
Zhejiang was renewed on February 17, 2000. The agreement in Jiangsu is for an
initial term of five years from January 1, 1998 and will be automatically
renewed for another year unless Jiangsu Mobile notifies the Jiangsu PTA of its
intention to terminate at least three months prior to the expiration of the
term. Jiangsu Mobile also has its own new distribution network.
Fujian Mobile, Henan Mobile and Hainan Mobile entered into agency
agreements in August 1999 with the relevant PTAs to market and sell cellular
services in the relevant provinces. The agreements were effective from April 1,
1999 (in the case of Fujian and Hainan) or July 1, 1999 (in the case of Henan)
and valid for terms of between six months and one year. These agreements will be
automatically renewed for another year unless Fujian Mobile, Henan Mobile and
Hainan Mobile notify the relevant PTA of its intention to terminate at least
three months prior to the expiration of the term.
Service fees payable by Fujian Mobile in respect of such sales arrangements
are to be agreed upon between the parties to the agreement but cannot be less
than the fees we pay to independent dealers. In Henan, the service fee payable
-46-
51
to the Henan PTA is RMB 250 per new subscriber, and an agency fee equal to 5% of
the total sales value of all pre-paid card sales. In Hainan, the service fee
payable to the Hainan PTA is RMB 250 (for bulk sales) or RMB 150 (for retail
sales) per new subscriber, plus a service fee equal to 5% (for bulk sales) or 4%
(for retail sales) of the total sales value of all pre-paid card sales.
ROAMING ARRANGEMENTS
We offer automatic roaming services to our subscribers, which permits
subscribers to make and receive telephone calls while they are outside of their
registered service area, including in the coverage areas of other cellular
systems with which the user's home system has a roaming arrangement. The MII has
promulgated regulations governing the sharing of roaming usage revenue among
cellular operators within the China Telecom system. Our arrangement with China
Telecom for domestic and international roaming was initially entered into in
September 1997 in connection with our IPO. In October 1999, we entered into a
new agreement with China Mobile which was superceded by the agreement entered
into with China Mobile in May 2000 which will be valid for two years commencing
on April 1, 1999, and renewable on an annual basis. The arrangements under the
new agreement are described in "Item 1. Description of Business -- Roaming
Revenue and Costs".
LICENSING OF TRADEMARK
The CTC is the owner of the "China Telecom" logo. Pursuant to a
non-exclusive agreement entered into between the CTC and us in September 1997,
we have obtained the right to use the "China Telecom" trademark for a term of
six years from October 20, 1997, or such period that the CTC shall have the
right to the trademark, whichever period is longer. No license fee is payable by
us in respect of the first three years and the fees payable thereafter, if any,
shall be no less favorable than fees paid by other entities within the China
Telecom system for the use of the trademark. The agreement was supplemented in
April 1998 to extend the license arrangement to Jiangsu Mobile. The CTC may
license the trademark to other affiliated parties, but may not unilaterally
terminate the license agreement.
Pursuant to a supplemental agreement entered into between the CTC and us in
September 1999, the CTC has granted to Fujian Mobile, Henan Mobile and Hainan
Mobile, the right to use the trademark for the same term as the original license
agreement.
China Mobile has applied for trademark registration of the "China Mobile"
name and logo in mainland China and Hong Kong. Pursuant to a non-exclusive
license agreement we entered into in October 1999 with China Mobile, we have
obtained the right to use the name and logo for a term of six years. No license
fee is payable by us for the period up to the third anniversary of the date when
the registration of the name and logo becomes effective. The parties will
negotiate any fees payable after that period, provided that the fees cannot
exceed the fees that China Mobile charges its affiliates. China Mobile may
terminate the license agreement if it no longer has any beneficial interests in
us.
SPECTRUM FEES
The MII and the MOF jointly determine the standardized spectrum fees
payable to the MII by all cellular operators in mainland China, including us.
Based on this standardized fee scale, China Mobile determines the allocation of
spectrum usage fees to be paid by each cellular operator under its control and
the aggregate sum paid to the MII. In October 1999, we entered into an agreement
with China Mobile which grants our existing networks the exclusive right to use
the frequency spectrum and telephone number allocated to us. For the usage of
the 800/900 MHz and 1800 MHz frequency band, the charges will be shared between
our and China Mobile's networks. Sixty per cent of the charges will be based on
the number of base stations at the end of the previous year and 40% will be
based on 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.
In 1999, we paid spectrum fees of approximately RMB 11.7 million (including
RMB 1.3 million paid by Fujian Mobile, Henan Mobile and Hainan Mobile).
-47-
52
LEASING OF SYNCHRONIZED CLOCK PORTS
Each of Fujian Mobile, Henan Mobile and Hainan Mobile leases from the
respective provincial PTAs synchronized clock ports pursuant to agreements
entered into with the relevant PTAs. The synchronized clocks ensure both the
mobile and the fixed line network operate at the same point in time. The annual
rental fee is RMB25,000 per clock port.
Fujian Mobile's agreement and Henan Mobile's agreement expired on
December 31, 1999 and; Hainan Mobile's agreement expired on April 1, 2000. These
agreements are 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.
EQUIPMENT MAINTENANCE SERVICES
Pursuant to agreements entered into in August 1999, Fujian Mobile obtains
maintenance services from the Fujian PTA for its operating equipment, such as
transmission equipment, electrical equipment and other ancillary facilities. The
agreement expired on December 31, 1999, but is automatically renewable on an
annual basis. Either party may terminate the agreement at any time upon three
months' prior written notice.
Monthly service charges payable by Fujian Mobile are calculated based on
tariff standards stipulated by the MII from time to time. Under the agreement,
Fujian Mobile pays to the Fujian PTA an annual fee of 1% of the total book value
of its operating equipment for the maintenance of such equipment.
MISCELLANEOUS
The transactions mentioned above have been entered into in the ordinary
course of business and on normal commercial terms. Under the Listing Rules of
the Hong Kong Stock Exchange, these transactions are considered to be "connected
transactions" and would normally require full disclosure and 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 the Hong Kong Stock Exchange to grant a waiver from
these requirements. On the basis of confirmations received that the transactions
have been entered into in the usual and ordinary course of business, on normal
commercial terms and are fair and reasonable, the Hong Kong Stock Exchange
granted a waiver from compliance with the normal approval and disclosure
requirements related to connected transactions under the Listing Rules on some
or all of the following conditions:
1. the transactions will be entered into on normal commercial terms and
will be carried out in accordance with the terms set out in the
agreements governing these transactions and will be carried out in the
ordinary and usual course of business and are fair and reasonable so
far as our shareholders are concerned;
2. details of the transactions as set out in rule 14.25(1)(A) to (D) of
the Listing Rules, shall be disclosed in our annual report;
3. our independent non-executive directors shall review annually the
transactions and confirm in our next annual report that:
(a) the transactions have been entered into by us in the ordinary and
usual course of our business;
(b) the transactions have been entered into on terms that are fair and
reasonable so far as our shareholders are concerned; and
(c) the transactions have been entered into on normal commercial terms
and in accordance with the terms of the agreement governing these
transactions.
-48-
53
4. our auditors shall review annually the transactions, details of which
shall be set forth in our annual report and accounts and confirm in our
next annual report as well as provide our directors with a letter
stating that:
(a) the transactions have received the approval of our directors;
(b) the transactions are in accordance with our stated pricing policies;
and
(c) the transactions have been conducted in the manner as stated in 3(c)
above.
The MII, on its own behalf and on behalf of relevant entities within the
China Telecom system, China Mobile and its associates and us has confirmed to
the Hong Kong Stock Exchange/us that the auditors will be granted access to such
of our records as the auditors consider necessary for the purpose of reviewing
the transactions mentioned above.
With respect to the new arrangements of the following types entered into by
us, the waiver was granted under the additional condition that they shall not
exceed the upper limits set out below in each of our fiscal years:
- property lease payments to the PTAs in any fiscal year shall not exceed
0.34% of our operating revenue in that fiscal year;
- synchronized clock port rentals in any fiscal year shall not exceed
0.008% of our operating revenue in that fiscal year;
- equipment maintenance charges payable by Fujian Mobile to the Fujian PTA
in any fiscal year shall not exceed 0.019% of our operating revenue in
that fiscal year.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.
Not Applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS.
CHANGE IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
None.
USE OF PROCEEDS
The following use of proceeds information relates to the registration
statement on Form F-1 (File No. 333-7634), filed by us in connection with our
IPO. The effective date of the registration statement was October 15, 1997.
-49-
54
The net offering proceeds to us from the sale of ordinary shares registered
pursuant to the registration statement (the "Registered Shares") were
US$2,329,581,581. The combined net proceeds to us from (i) the sale of the
Registered Shares and (ii) the concurrent sale of ordinary shares to certain
corporate investors in reliance on Regulation S under the Securities Act, which
shares were not registered under the Securities Act, were US$4,039,738,989.
As of December 31, 1999, approximately RMB 24.1 billion (US$2.9 billion) of
such combined net proceeds had been used to fund the acquisition of Jiangsu
Mobile from China Telecom Hong Kong (BVI) Limited, our parent company, and
approximately RMB 1.7 billion (US$210.6 million) had been used to fund the
expansion of our cellular networks in Guangdong, Zhejiang and Jiangsu. The
remainder of the proceeds were held in bank deposits as of December 31, 1999 and
will be applied to fund the expansion of our cellular networks, the
implementation of a new management information system and billing clearance and
collection systems and strategic investments in the telecommunications industry
and for general corporate purposes. None of the network-related payments were
direct or indirect payments to our directors, officers or affiliates.
The following use of proceeds information relates to the registration
statements on Form F-3 (File Nos. 333-10956 & 333-11068), filed by us in
connection with our offering of American depositary shares and to the
registration statements on Form F-3 (File Nos. 333-10958 & 333-11070), filed by
us in connection with our offering of global notes.
The details of the offering of American depositary shares are as follows:
Title of Security American depositary shares each representing 20 ordinary
shares, par value HK$0.10 (the "ADSs"). The ADSs were
registered on Form 8-A (with reference to registration
statement on Form F-1 (File No. 333-7634)), filed with
the SEC on September 22, 1997
Effective date of the initial registration statement on
Form F-3 (File No. 333-10956) registering an aggregate
amount of US$1,900,000,000 of ordinary shares underlying
the ADSs October 27, 1999
Effective date of the additional registration statement
on Form F-3 (File No. 333-11068) registering an aggregate
amount of US$100,000,000 of ordinary shares underlying
additional ADSs October 28, 1999
Closing Date November 2, 1999
Managing Underwriters Bear Stearns Asia Limited, China International
Capital Corporation and Goldman Sachs (Asia) L.L.C.
Aggregate Amount Registered US$2,000,000,000 of ordinary shares
Amount Sold 32,240,200 ADSs in the form of ADSs or shares
Aggregate Offering Price of Amount Sold US$1,999,859,606
Aggregate Underwriting discount US$39,997,192
Other Offering Expenses US$6,081,702
Aggregate Net Offering Proceeds to the Company US$1,953,780,712
The details of the offering of global notes are as follows:
Title of Security: 7 7/8% Notes due 2004
-50-
55
Effective date of the initial registration statement on
Form F-3 (File No. 333-10958) registering US$500,000,000
principal amount of the Notes October 27, 1999
Effective date of the additional registration statement on
Form F-3 (File No. 333-11070) registering US$100,000,000
principal amount of the Notes October 28, 1999
Closing Date November 2, 1999
Managing Underwriters Chase Securities Inc., Merrill Lynch & Co.
and BOCI Capital Limited.
The following is information regarding the proceeds from our offering of
global notes:
Aggregate Amount Registered US$600,000,000 7 7/8% Notes due 2004
Aggregate Price of Offering Amount Registered US$600,000,000
Amount Sold US$600,000,000
Aggregate Offering Price of Amount Sold US$598,344,000
Aggregate Underwriting discount US$2,250,000
Other Offering Expenses US$3,262,588
Aggregate Net Offering Proceeds to Company US$592,831,412
The combined net proceeds of the offerings was US$2,546,612,124. We used
all of the proceeds to finance the cash portion of the purchase price of our
acquisition of Fujian Mobile, Henan Mobile and Hainan Mobile. The payments were
made to China Telecom Hong Kong (BVI) Limited, our immediate controlling
shareholder.
PART IV
ITEM 17. FINANCIAL STATEMENTS.
CTHK Limited 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.
CHINA TELECOM (HONG KONG) LIMITED:
Index to consolidated financial statements F-1
Independent auditors' report F-2
Consolidated statements of income for each of the three years ended December 31, 1997, 1998 and 1999 F-3
Consolidated statements of recognized gains and losses for each of the three years ended
-51-
56
December 31, 1997, 1998 and 1999 F-5
Consolidated balance sheets as of December 31, 1998 and 1999 F-6
Consolidated statements of cash flows for each of the three years ended December 31, 1997, 1998 and 1999 F-8
Consolidated statements of shareholders' equity for each of the three years ended December 31, 1997, 1998 and 1999 F-14
Notes to consolidated financial statements F-15
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.
(a) See Item 18 for a list of the financial statements filed as part of
this annual report.
(b) Exhibits to this annual report:
EXHIBIT INDEX*
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
2.1 Conditional Sale and Purchase Agreement, dated October 4, 1999, among China Telecom (HK) (BVI),
China Telecom Hong Kong (Group) Limited and China Telecom (HK).
10.1 Agreement Regarding Provincial Network Interconnection, Roaming and Settlement of Account,
dated October 8, 1999, between China Telecom (HK) and China Mobile.
10.2 Agreement Regarding the Use of Frequency/Number Resources, dated October 8, 1999, between
China Telecom (HK) and China Mobile.
10.3 Agreement on Trademark Use, dated October 8, 1999, between China Telecom (HK) and China Mobile.
10.4 Supplemental Agreement to Trademark Licensing Agreement, dated September 15, 1999, between China
Telecom (HK) and Directorate General Telecommunications.
10.5 Agreement Regarding Network Interconnection and Settlement of Account, dated October 8, 1999,
between Guangdong Mobile and Guangdong PTA.
10.6 Agreement Regarding Network Interconnection and Settlement of Account, dated October 5, between
Zhejiang Mobile and Zhejiang PTA.
10.7 Agreement Regarding Network Interconnection and Settlement of Account, dated October 8, 1999,
between Jiangsu Mobile and Jiangsu PTA.
10.8 Agreement Regarding Network Interconnection and Settlement of Account, dated August 30, 1999,
between Fujian Mobile Communication Bureau and Fujian PTA.
10.9 Synchronous Clock Port Leasing Agreement, dated August 30, 1999, between Fujian Mobile Communication
Bureau and Fujian PTA.
10.10 Local Transmission Line Leasing Agreement, dated August 30, 1999, between Fujian Mobil Communication
Bureau and Fujian PTA.
-52-
57
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
10.11 Long Distance Line Leasing Agreement, dated August 30, 1999, between Fujian Mobile Communication
Bureau and Fujian PTA.
10.12 Business Agency Agreement, dated August 30, 1999, between Fujian Mobile Communication Bureau and
Fujian PTA.
10.13 Account Processing Agreement, dated August 30, 1999, between Fujian Mobile Communication Bureau and
Fujian PTA.
10.14 Collection Agreement, dated August 30, 1999, between Fujian Mobile Communication Bureau and
Fujian PTA.
10.15 Building and Facilities Leasing Agreement, dated August 30, 1999, between Fujian Mobile Communication
Company Limited and Fujian PTA.
10.16 Building and Facilities Leasing Agreement (leasing to PTA), dated August 30, 1999, between Fujian Mobile
Communication Bureau and Fujian PTA.
10.17 Agreement on Equipment Maintenance, dated August 30, 1999, between Fujian Mobile Communication Bureau
and Fujian PTA.
10.18 Building and Facility Leasing Agreement, dated September 25, 1999, between Fujian Mobile Communication
Company Limited and Fujian Xunjie Communications Technical Services Company ("Xunjie").
10.19 Agreement Regarding Network Interconnection and Settlement of Account, dated August 20, 1999, between
Henan Mobile Communication Company Limited and Henan PTA.
10.20 Synchronous Clock Port Leasing Agreement, dated August 19, 1999, between Henan Mobile Communication
Company Limited and Henan PTA.
10.21 Local Transmission Line Leasing Agreement, dated August 19, 1999, between Henan Mobile Communication
Company Limited and Henan PTA.
10.22 Long Distance Line Leasing Agreement, dated August 19, 1999, between Henan Mobile Communication
Company Limited and Henan PTA.
10.23 Business Agency Agreement, dated August 19, 1999, between Henan Mobile Communication Company Limited
and Henan PTA.
10.24 Business Agency Agreement, dated August 19, 1999, between Henan Mobile Communication Company Limited
and Henan Feida Communication Development Company Limited ("Feida").
10.25 Account Processing Agreement, dated August 19, 1999, between Henan Mobile Communication Company
Limited and Henan PTA.
10.26 Collection Agreement, dated August 19, 1999, between Henan Mobile Communication Company Limited and
Henan PTA.
10.27 Collection Agreement, dated August 19, 1999, between Henan Mobile Communication Company Limited and
Feida.
10.28 Building and Facilities Leasing Agreement, dated August 19, 1999, between Henan Mobile Communication
Company Limited and Henan PTA.
10.29 Real Estates Leasing Agreement, dated September 23, 1999, between Henan Mobile Communication Company
Limited and Feida.
10.30 Agreement Regarding Network Interconnection and Settlement of Account, dated August 20, 1999,
between Hainan Mobile Communication Company Limited and Hainan PTA.
-53-
58
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
10.31 Synchronous Clock Port Leasing Agreement, dated August 20, 1999, between Hainan Mobile Communication
Company Limited and Hainan PTA.
10.32 Local Transmission Line Leasing Agreement, dated August 20, 1999, between Hainan Mobile Communication
Company Limited and Hainan PTA.
10.33 Long Distance Line Leasing Agreement, dated August 20, 1999, between Hainan Mobile Communication
Company Limited and Hainan PTA.
10.34 Business Agency Agreement, dated August 20, 1999, between Hainan Mobile Communication Company Limited
and Hainan PTA.
10.35 Account Processing Agreement, dated August 20, 1999, between Hainan Mobile Communication Company
Limited and Hainan PTA.
10.36 Collection Agreement, dated August 20, 1999, between Hainan Mobile Communication Company Limited and
Hainan PTA.
10.37 Building and Facilities Leasing Agreement, dated August 20, 1999, between Hainan Mobile Communication
Company Limited and Hainan PTA.
10.38 Real Estates Leasing Agreement dated September 24, 1999, between Hainan Mobile Communication Company
Limited and Hainan Communication Service Company ("Hainan Service").
10.39 Inter-Provincial Long-Distance Transmission Leased Line Fee Sharing Agreement, dated May 5, 2000, between
China Mobile Communication Group and China Telecom (Hong Kong) Limited (in Chinese with English
translation).
10.40 Inter-Provincial Network Interconnection, Domestic and International Roaming and Settlement Agreement,
dated May 5, 2000, between China Mobile Communication Group and China Telecom (Hong Kong) Limited
(in Chinese with English translation).
10.41 Tenancy Agreement, dated June 7, 2000, between Fu Hao Properties Limited and China Telecom (Hong
Kong) Limited.
- ---------------
* Other than Exhibits 10.39, 10.40 and 10.41 which are attached hereto, all
of the exhibits listed in this index are incorporated By reference to our
Registration Statement on Form F-3 (File No. 333-10956) filed
with the U.S. Securities and Exchange Commission.
-54-
59
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CHINA TELECOM (HONG KONG) LIMITED
By: /s/ WANG XIAOCHU
-----------------------------
Name: Wang Xiaochu
Title: Chairman and President
Date: June 20, 2000
60
EXHIBIT INDEX*
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE NO.
2.1 Conditional Sale and Purchase Agreement, dated October 4, 1999,
among China Telecom (HK) (BVI), China Telecom Hong Kong (Group)
Limited and China Telecom (HK).
10.1 Agreement Regarding Provincial Network Interconnection, Roaming
and Settlement of Account, dated October 8, 1999, between China
Telecom (HK) and China Mobile.
10.2 Agreement Regarding the Use of Frequency/Number Resources, dated
October 8, 1999, between China Telecom (HK) and China Mobile.
10.3 Agreement on Trademark Use, dated October 8, 1999, between China
Telecom (HK) and China Mobile.
10.4 Supplemental Agreement to Trademark Licensing Agreement, dated
September 15, 1999, between China Telecom (HK) and Directorate
General Telecommunications.
10.5 Agreement Regarding Network Interconnection and Settlement of Account,
dated October 8, 1999, between Guangdong Mobile and Guangdong PTA.
10.6 Agreement Regarding Network Interconnection and Settlement of Account,
dated October 5, between Zhejiang Mobile and Zhejiang PTA.
10.7 Agreement Regarding Network Interconnection and Settlement of Account,
dated October 8, 1999, between Jiangsu Mobile and Jiangsu PTA.
10.8 Agreement Regarding Network Interconnection and Settlement of Account,
dated August 30, 1999, between Fujian Mobile Communication Bureau and
Fujian PTA.
10.9 Synchronous Clock Port Leasing Agreement, dated August 30, 1999,
between Fujian Mobile Communication Bureau and Fujian PTA.
10.10 Local Transmission Line Leasing Agreement, dated August 30, 1999,
between Fujian Mobil Communication Bureau and Fujian PTA.
10.11 Long Distance Line Leasing Agreement, dated August 30, 1999, between
Fujian Mobile Communication Bureau and Fujian PTA.
10.12 Business Agency Agreement, dated August 30, 1999, between Fujian Mobile
Communication Bureau and Fujian PTA.
10.13 Account Processing Agreement, dated August 30, 1999, between Fujian
Mobile Communication Bureau and Fujian PTA.
10.14 Collection Agreement, dated August 30, 1999, between Fujian Mobile
Communication Bureau and Fujian PTA.
10.15 Building and Facilities Leasing Agreement, dated August 30, 1999,
between Fujian Mobile Communication Company Limited and Fujian PTA.
10.16 Building and Facilities Leasing Agreement (leasing to PTA),
dated August 30, 1999, between Fujian Mobile Communication
Bureau and Fujian PTA.
10.17 Agreement on Equipment Maintenance, dated August 30, 1999, between
Fujian Mobile Communication Bureau and Fujian PTA.
10.18 Building and Facility Leasing Agreement, dated September 25, 1999,
between Fujian Mobile Communication Company Limited and Fujian Xunjie
Communications Technical Services Company ("Xunjie").
61
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE NO
10.19 Agreement Regarding Network Interconnection and Settlement of
Account, dated August 20, 1999, between Henan Mobile
Communication Company Limited and Henan PTA.
10.20 Synchronous Clock Port Leasing Agreement, dated August 19, 1999,
between Henan Mobile Communication Company Limited and Henan PTA.
10.21 Local Transmission Line Leasing Agreement, dated August 19, 1999,
between Henan Mobile Communication Company Limited and Henan PTA.
10.22 Long Distance Line Leasing Agreement, dated August 19, 1999, between
Henan Mobile Communication Company Limited and Henan PTA.
10.23 Business Agency Agreement, dated August 19, 1999, between Henan Mobile
Communication Company Limited and Henan PTA.
10.24 Business Agency Agreement, dated August 19, 1999, between Henan
Mobile Communication Company Limited and Henan Feida
Communication Development Company Limited ("Feida").
10.25 Account Processing Agreement, dated August 19, 1999, between Henan
Mobile Communication Company Limited and Henan PTA.
10.26 Collection Agreement, dated August 19, 1999, between Henan Mobile
Communication Company Limited and Henan PTA.
10.27 Collection Agreement, dated August 19, 1999, between Henan Mobile
Communication Company Limited and Feida.
10.28 Building and Facilities Leasing Agreement, dated August 19, 1999,
between Henan Mobile Communication Company Limited and Henan PTA.
10.29 Real Estates Leasing Agreement, dated September 23, 1999, between Henan
Mobile Communication Company Limited and Feida.
10.30 Agreement Regarding Network Interconnection and Settlement of Account,
dated August 20, 1999, between Hainan Mobile Communication Company
Limited and Hainan PTA.
10.31 Synchronous Clock Port Leasing Agreement, dated August 20, 1999,
between Hainan Mobile Communication Company Limited and Hainan PTA.
10.32 Local Transmission Line Leasing Agreement, dated August 20, 1999,
between Hainan Mobile Communication Company Limited and Hainan PTA.
10.33 Long Distance Line Leasing Agreement, dated August 20, 1999, between
Hainan Mobile Communication Company Limited and Hainan PTA.
10.34 Business Agency Agreement, dated August 20, 1999, between Hainan Mobile
Communication Company Limited and Hainan PTA.
10.35 Account Processing Agreement, dated August 20, 1999, between Hainan
Mobile Communication Company Limited and Hainan PTA.
10.36 Collection Agreement, dated August 20, 1999, between Hainan Mobile
Communication Company Limited and Hainan PTA.
10.37 Building and Facilities Leasing Agreement, dated August 20, 1999,
between Hainan Mobile Communication Company Limited and Hainan PTA.
62
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE NO
10.38 Real Estates Leasing Agreement dated September 24, 1999, between
Hainan Mobile Communication Company Limited and Hainan
Communication Service Company ("Hainan Service").
10.39 Inter-Provincial Long-Distance Transmission Leased Line Fee
Sharing Agreement, dated May 5, 2000, between China Mobile
Communication Group and China Telecom (Hong Kong) Limited (in
Chinese with English translation).
10.40 Inter-Provincial Network Interconnection, Domestic and
International Roaming and Settlement Agreement, dated May 5,
2000, between China Mobile Communication Group and China Telecom
(Hong Kong) Limited ( in Chinese with English translation).
10.41 Tenancy Agreement, dated June 7, 2000, between Fu Hao Properties
Limited and China Telecom (Hong Kong) Limited.
- --------------
* Other than Exhibits 10.39, 10.40 and 10.41 which are attached
hereto, all of the exhibits listed in this index are incorporated by
reference to our Registration Statement on Form F-3 (File No. 333-10956)
filed with the U.S. Securities and Exchange Commission.
63
China Telecom (Hong Kong) Limited
Consolidated financial statements
Index to Consolidated Financial Statements
PAGE NO.
-----------
Independent auditors' report F-2
Consolidated statements of income for each of the three years ended
December 31, 1997, 1998 and 1999 F-3 - F-4
Consolidated statement of recognized gains and losses for each of the three
years ended December 31, 1997, 1998 and 1999 F-5
Consolidated balance sheets as of December 31, 1998 and 1999 F-6 - F-7
Consolidated statements of cash flows for each of the three years ended
December 31, 1997, 1998 and 1999 F-8 - F-13
Consolidated statements of shareholders' equity for each of the three
years ended December 31, 1997, 1998 and 1999 F-14
Notes to consolidated financial statements F-15 - F-83
F-1
64
Independent Auditors' Report
The Board of Directors
China Telecom (Hong Kong) Limited:
We have audited the accompanying consolidated balance sheets of China Telecom
(Hong Kong) Limited and subsidiaries (the "Group") as of December 31, 1998 and
1999 and the related consolidated statements of income, statement of recognized
gains and losses, shareholders' equity and cash flows for each of the years in
the three-year period ended December 31, 1999, 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 generally accepted auditing standards
in the United States of America and 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 includes 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 Telecom (Hong
Kong) Limited and subsidiaries as of December 31, 1998 and 1999 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 in conformity with accounting principles
generally accepted in Hong Kong.
Accounting principles generally accepted in Hong Kong vary in certain material
respects from generally accepted accounting principles in the United States of
America. Application of generally accepted accounting principles in the United
States of America would have affected results of operations for each of the
years in the three-year period ended December 31, 1999 and shareholders' equity
as of December 31, 1998 and 1999 to the extent summarized in Note 28 to the
consolidated financial statements.
The accompanying consolidated financial statements as of and for the year ended
December 31, 1999 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 Note 1 to the consolidated
financial statements.
Hong Kong
April 13, 2000
F-2
65
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Consolidated Statements of Income
(Amounts in millions, except per share data)
Year ended December 31,
--------------------------------------------
Note 1997 1998 1999 1999
RMB RMB RMB US$
OPERATING REVENUE
Usage fees 8,718 16,346 25,812 3,118
Monthly fees 2,692 4,347 4,981 601
Connection fees 3,174 3,323 4,319 522
Other operating revenue 904 2,329 3,511 424
------ ------ ------ -----
TOTAL OPERATING REVENUE 3 15,488 26,345 38,623 4,665
====== ====== ====== =====
OPERATING EXPENSES
Leased lines 3,134 3,917 3,723 450
Interconnection 1,214 4,752 6,453 779
Depreciation 2,681 4,598 7,411 895
Personnel 756 1,595 2,256 273
Other operating expenses 2,289 3,548 5,140 621
------ ------ ------ -----
TOTAL OPERATING EXPENSES 4 10,074 18,410 24,983 3,018
====== ====== ====== =====
OPERATING PROFIT 5,414 7,935 13,640 1,647
WRITE-DOWN AND WRITE-OFF OF
TACS NETWORK EQUIPMENT 5 -- (282) (8,242) (995)
OTHER INCOME 6 85 336 552 67
NON-OPERATING INCOME/ 7 (27) (51) 70 8
(EXPENSES)
INTEREST INCOME 8 656 1,609 767 92
FINANCE COSTS 14 (175) (160) (343) (41)
------ ------ ------ -----
PROFIT BEFORE TAX 5,953 9,387 6,444 778
INCOME TAX 9 (991) (2,486) (1,647) (199)
------ ------ ------- -----
PROFIT AFTER TAX 4,962 6,901 4,797 579
MINORITY INTERESTS (7) (1) -- --
------ ------ ------ -----
PROFIT ATTRIBUTABLE TO 4,955 6,900 4,797 579
SHAREHOLDERS ====== ====== ====== =====
F-3
66
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Consolidated Statements of Income (Continued)
(Amounts in millions, except per share data)
Year ended December 31,
------------------------------------------------------
Note 1997 1998 1999 1999
RMB RMB RMB US$
BASIC NET PROFIT PER SHARE 2(q) RMB 52 cents RMB 59 cents RMB 40 cents US$ 5 cents
============ ============ ============ ===========
WEIGHTED AVERAGE
NUMBER OF SHARES USED
IN CALCULATING BASIC NET
PROFIT PER SHARE
(THOUSANDS) 9,534,365 11,780,788 12,069,108
========= ========== ==========
DILUTED NET PROFIT PER
SHARE 2(q) RMB 59 cents RMB 40 cents US$ 5 cents
============ ============ ===========
WEIGHTED AVERAGE
NUMBER OF SHARES USED
IN CALCULATING DILUTED
NET PROFIT PER SHARE
(THOUSANDS) 11,782,521 12,072,383
========== ==========
See accompanying notes to consolidated financial statements.
F-4
67
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Consolidated Statement of Recognized Gains and Losses
(Amounts in millions)
Year ended December 31,
------------------------------------------
1997 1998 1999 1999
RMB RMB RMB US$
Net profit for the year 1,514 6,900 4,797 579
Capital reserve arising on
consolidation/elimination of
goodwill arising on the acquisition
of subsidiaries against reserves 1,132 (15,622) (42,440) (5,126)
----- ------- ------- ------
2,646 (8,722) (37,643) (4,547)
===== ======= ======= ======
See accompanying notes to consolidated financial statements.
F-5
68
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Consolidated Balance Sheets
(Amounts in millions)
December 31,
------------------------------------
Note 1998 1999 1999
RMB RMB US$
ASSETS
Current assets
Cash and cash equivalents 17,481 19,349 2,337
Deposits with banks 1,311 8,227 994
Accounts receivable 10 2,482 4,957 599
Other receivables 326 549 66
Inventories 101 207 25
Prepaid expenses and other current
assets 1,046 517 62
Amount due from ultimate holding
company 13 -- 92 11
Amounts due from related
parties 14 287 1,700 205
------ ------ ------
Total current assets 23,034 35,598 4,299
Fixed assets 11 33,986 42,699 5,157
Construction in progress 7,339 6,735 814
Interest in associates 12 30 46 6
Deferred tax assets 15 152 2,306 279
Deferred expenses 17 -- 51 6
------ ------ ------
TOTAL ASSETS 64,541 87,435 10,561
====== ====== ======
F-6
69
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Consolidated Balance Sheets (Continued)
(Amounts in millions)
December 31,
------------------------------------
Note 1998 1999 1999
RMB RMB US$
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable 5,963 6,026 728
Bills payable -- 1,779 215
Bank and other loans 16 5,337 4,351 526
Taxes payable 1,299 2,868 346
Obligations under capital lease
-- current portion 19 -- 68 8
Amount due to ultimate holding
company 13 -- 664 80
Amounts due to related parties 14 596 1,696 205
Accrued expenses and other payables 18 2,756 4,115 497
------ ------ ------
Total current liabilities 15,951 21,567 2,605
Bank and other loans 16 991 2,225 269
Obligations under capital lease
-- long term Portion 19 -- 107 13
Deferred revenue 21 1,757 1,492 180
Fixed rate notes 20 -- 4,952 598
------ ------ ------
TOTAL LIABILITIES 18,699 30,343 3,665
Minority interests 15 -- --
SHAREHOLDERS' EQUITY 45,827 57,092 6,896
------ ------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' 64,541 87,435 10,561
EQUITY ====== ====== ======
See accompanying notes to consolidated financial statements.
F-7
70
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Consolidated Statements of Cash Flows
(Amounts in millions)
Year ended December 31,
-------------------------------------------
Note 1997 1998 1999 1999
RMB RMB RMB US$
NET CASH INFLOWS FROM OPERATING
ACTIVITIES (a) 8,825 13,567 21,662 2,616
------ ------ ------ ------
RETURNS ON INVESTMENTS AND
SERVICING OF FINANCE
Interest received 414 1,815 934 113
Interest paid (268) (352) (445) (54)
Distributions (222) -- -- --
------ ------ ------ ------
NET CASH INFLOW/(OUTFLOW) FROM
RETURNS ON INVESTMENTS AND
SERVICING OF FINANCE (76) 1,463 489 59
------ ------ ------ ------
TAXATION
Hong Kong profits tax
refunded/(paid) -- (11) 1 --
PRC income tax paid (546) (1,575) (2,479) (299)
------ ------ ------ ------
TAX PAID (546) (1,586) (2,478) (299)
------ ------ ------ ------
INVESTING ACTIVITIES
Payment for acquisition of
minority interests -- -- (15) (2)
Payment for acquisition of
Subsidiaries (net of cash and
cash equivalents acquired) (b) -- (24,114) (18,187) (2,197)
Capital expenditures (5,807) (11,040) (11,708) (1,414)
Investment in associates (31) -- -- --
Proceeds from sale of fixed assets 13 36 709 86
Decrease in amounts due from
related parties 498 72 -- --
Increase in deposits with banks -- (1,311) (6,916) (835)
------ ------- ------- ------
NET CASH OUTFLOW FROM INVESTING
ACTIVITIES (5,327) (36,357) (36,117) (4,362)
====== ======= ======= ======
NET CASH (OUTFLOW)/INFLOW BEFORE
FINANCING ACTIVITIES 2,876 (22,913) (16,444) (1,986)
------ ------- ------- ------
F-8
71
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Consolidated Statements of Cash Flows (Continued)
(Amounts in millions)
Year ended December 31,
------------------------------------------
Note 1997 1998 1999 1999
RMB RMB RMB US$
FINANCING ACTIVITIES
Proceeds from issue of shares, net
of expenses 33,570 -- 16,223 1,959
Proceeds from issue of fixed rates
notes, net of discount (c) -- -- 4,952 598
Expenses on issue of fixed rate
notes -- -- (53) (6)
Proceeds from bank and other loans (c) 710 3,754 6,868 830
Repayments of bank and other loans (c) (524) (3,207) (9,653) (1,166)
(Decrease)/increase in amounts due
to related parties 216 (222) -- --
Proceeds from capital contribution 246 -- -- --
------ ------- ------- ------
NET CASH INFLOW FROM FINANCING
ACTIVITIES 34,218 325 18,337 2,215
------ ------- ------- ------
INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS 37,094 (22,588) 1,893 229
EFFECT OF CHANGES IN FOREIGN
EXCHANGE RATES 1 (1) (25) (3)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 2,975 40,070 17,481 2,111
------ ------- ------- ------
CASH AND CASH EQUIVALENTS AT END
OF YEAR 40,070 17,481 19,349 2,337
====== ======= ======= ======
ANALYSIS OF THE BALANCES OF CASH
AND CASH EQUIVALENTS
Deposits with banks with maturity
period within three months when
placed 33,913 7,538 6,986 844
Cash and bank balances 6,157 9,943 12,363 1,493
------ ------- ------- ------
40,070 17,481 19,349 2,337
====== ======= ======= ======
See accompanying notes to consolidated financial statements.
F-9
72
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Consolidated Statements of Cash Flows (Continued)
(Amounts in millions)
(a) THE RECONCILIATION OF PROFIT BEFORE TAX AND MINORITY INTERESTS TO NET CASH
INFLOWS FROM OPERATING ACTIVITIES IS AS FOLLOWS:
Year ended December 31,
-----------------------------------------------
1997 1998 1999 1999
RMB RMB RMB US$
Profit from ordinary activities
before taxation 5,953 9,387 6,444 778
Depreciation of fixed assets 2,681 4,598 7,411 895
Write-down and write-off of TACS
network equipment -- 282 8,242 996
Provision for doubtful accounts 449 558 771 93
Amortization of deferred expenses -- -- 2 --
Loss on sale of other fixed assets 13 59 1 --
Interest income (657) (1,609) (767) (93)
Interest and capital lease charges 175 160 343 42
Unrealized exchange loss/(gain), net (1) 1 25 3
Increase in accounts receivable (954) (1,080) (2,167) (262)
(Increase)/decrease in other
receivables (29) 392 (245) (30)
(Increase)/decrease in inventories 157 49 (43) (5)
Decrease in amount due from ultimate
holding company -- -- 14 2
Decrease/(increase) in prepaid
expenses and other current assets (86) (932) 781 94
Increase in amounts due from related
parties -- (55) (127) (15)
Decrease in accounts payable (7) (117) (36) (5)
Increase in amount due to ultimate
holding company -- -- 329 40
Increase in amounts due to related
parties 32 548 426 52
Increase/(decrease) in accrued
expenses and other payables (55) 922 523 63
(Decrease)/increase in deferred 1,154 404 (265) (32)
revenue ----- ------ ------ -----
Net cash inflows from operating
activities 8,825 13,567 21,662 2,616
===== ====== ====== =====
F-10
73
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Consolidated Statements of Cash Flows (Continued)
(Amounts in millions)
(b) ACQUISITION OF SUBSIDIARIES
1998 1999
RMB RMB
NET ASSETS ACQUIRED:
Fixed assets 7,443 11,186
Construction in progress 1,488 1,060
Interest in an associate -- 16
Deferred tax assets 1 3
Inventories 73 63
Amount due from ultimate holding company -- 106
Amounts due from related parties 233 1,286
Accounts receivable 367 1,079
Other receivables 137 145
Prepaid expenses and other current assets 9 181
Cash and bank balances 6 2,081
Bank and other loans (683) (1,267)
Bills payable -- (310)
Amount due to ultimate holding company -- (335)
Amounts due to related parties (4) (674)
Accounts payable (333) (1,121)
Accrued expenses and other payables (158) (796)
Taxation -- (249)
Long-term bank and other loans (81) (1,766)
Obligations under capital lease -- (175)
------ ------
8,498 10,513
Goodwill arising on acquisition 15,622 42,440
------ ------
24,120 52,953
====== ======
Satisfied by: Cash paid 24,120 20,268
Issue of ordinary shares -- 32,685
------ ------
24,120 52,953
====== ======
The subsidiaries acquired during the year ended December 31, 1999 contributed
RMB1,439 to the Group's net operating cash flows, paid RMB44 in respect of the
net returns on investments and servicing of finance, utilized RMB657 for
investing activities and contributed RMB717 for financing activities.
The subsidiaries acquired during the year ended December 31, 1998 contributed
RMB1,340 to the Group's net operating cash flows, paid RMB44 in respect of the
net returns on investments and servicing of finance, utilized RMB2,533 for
investing activities and contributed RMB2,208 for financing activities.
F-11
74
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Consolidated Statements of Cash Flows (Continued)
(Amounts in millions)
(b) ACQUISITION OF SUBSIDIARIES (CONT'D)
ANALYSIS OF NET OUTFLOW OF CASH AND CASH EQUIVALENTS IN RESPECT OF THE
ACQUISITION OF SUBSIDIARIES
1998 1999
RMB RMB
Cash consideration 24,120 20,268
Cash and bank balances acquired (6) (2,081)
------ ------
Net outflow of cash and cash equivalents
in respect of the acquisition of subsidiaries 24,114 18,187
====== ======
(c) ANALYSIS OF CHANGES IN FINANCING DURING THE YEARS:
Bank and Fixed rates
other loans notes
RMB million RMB million
Balance at January 1, 1997 3,450 --
Proceeds from bank and other loans 710 --
Loan from a related party (Note (d)) 1,382 --
Repayments of bank and other loans (524) --
Effect of foreign exchange rates (1) --
------ -----
Balance at December 31, 1997 5,017 --
====== =====
Balance at January 1, 1998 5,017 --
Acquired on acquisition of subsidiaries (Note (b)) 764 --
Proceeds from bank and other loans 3,754 --
Repayments of bank and other loans (3,207) --
------ -----
Balance at December 31, 1998 6,328 --
====== =====
Balance at January 1, 1999 6,328 --
Acquired on acquisition of subsidiaries (Note (b)) 3,033 --
Proceeds from bank and other loans 6,868 --
Repayment of bank and other loans (9,653) --
Issue of fixed rates notes -- 4,952
------ -----
Balance at December 31, 1999 6,576 4,952
====== =====
F-12
75
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Consolidated Statements of Cash Flows (Continued)
(Amounts in millions)
(d) SIGNIFICANT NON-CASH TRANSACTIONS:
The Group incurred payables of RMB3,374 and RMB1,486, to equipment
suppliers and banks respectively for additions of construction in progress
during the year ended December 31, 1999.
The Group incurred payables of RMB3,977 and RMB13 to equipment suppliers
and related parties respectively for additions of construction in progress
during the year ended December 31, 1998.
In addition, the Group incurred payables of RMB1,530 to equipment suppliers
and a loan of RMB1,382 from a related party for additions of construction
in progress during the year ended December 31, 1997.
In November 1999, the Group issued new shares to China Mobile Hong Kong
(BVI) Limited ("CTHK (BVI)") at HK$30,684 (RMB equivalent 32,685) as part
of the consideration for the acquisition of Fujian Mobile (BVI) Limited
("Fujian Mobile BVI"), Henan Mobile (BVI) Limited ("Henan Mobile BVI") and
Hainan Mobile (BVI) Limited ("Hainan Mobile BVI").
F-13
76
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Consolidated Statements of Shareholders' Equity
(Amounts in millions, except share data)
STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS:
Number of Capital
ordinary Share Subsidiaries' Share reserve/ General
shares capital capital premium (goodwill) reserve
RMB RMB RMB RMB RMB
Owner's equity at January 1, 1997 -- -- 480 -- -- --
Capital contribution -- -- -- -- -- --
Revaluation surplus -- -- -- -- -- --
Transfer from statement of income to
September 26, 1997 -- -- -- -- -- --
Distribution to owner -- -- -- -- -- --
Transfer to capital of Guangdong
Mobile and Zhejiang Mobile -- -- 7,232 -- -- --
-------------- ----- ------ ------ ------- --
Owner's equity at September 27, 1997 -- -- 7,712 -- -- --
Effect of Restructuring 9,010,000,000 965 (7,712) 17,369 1,132 --
-------------- ----- ------ ------ ------- --
Shareholders' equity at September 27,
1997 after Restructuring 9,010,000,000 965 -- 17,369 1,132 --
Issue of ordinary shares, net of
expenses 2,770,788,000 296 -- 33,274 -- --
Transfer from statement of income from
September 27, 1997 -- -- -- -- -- --
Appropriations -- -- -- -- -- 72
-------------- ----- ------ ------ ------- --
Shareholders' equity at
December 31, 1997 11,780,788,000 1,261 -- 50,643 1,132 72
Goodwill arising on acquisition of
Jiangsu Mobile -- -- -- -- (15,622) --
Transfer from statement of income -- -- -- -- -- --
Appropriation -- -- -- -- -- --
-------------- ----- ------ ------ ------- --
Shareholders' equity at
December 31, 1998 11,780,788,000 1,261 -- 50,643 (14,490) 72
============== ===== ====== ====== ======= ==
Shareholders' equity at
January 1, 1999 11,780,788,000 1,261 -- 50,643 (14,490) 72
Goodwill arising on acquisition of
Fujian Mobile, Henan Mobile and
Hainan Mobile -- -- (42,440) -- --
Transfer from statement of income --
Shares issued under share option
scheme 7,500,000 1 -- 88 -- --
Issue of new shares to the professional
and Institutional investors 644,804,000 69 -- 16,484 -- --
Issue of consideration shares for
acquisition of subsidiaries 1,273,195,021 136 -- 32,549 -- --
Expenses incurred in connection with
the issue of new shares to professional
and institutional investors -- -- -- (419) -- --
Appropriation -- -- -- -- -- --
-------------- ----- ------ ------- -------- --
13,706,287,021 1,467 -- 99,345 (56,930) 72
============== ===== ====== ======= ======== ==
PRC
Revaluation statutory Retained
reserve reserves earnings Total
RMB RMB RMB RMB
Owner's equity at January 1, 1997 223 3,041 8,727 12,471
Capital contribution -- 246 -- 246
Revaluation surplus 3,529 -- -- 3,529
Transfer from statement of income to
September 26, 1997 -- -- 3,442 3,442
Distribution to owner -- (36) (186) (222)
Transfer to capital of Guangdong
Mobile and Zhejiang Mobile -- -- (7,232) --
------ ------ ------ -------
Owner's equity at September 27, 1997 3,752 3,251 4,751 19,466
Effect of Restructuring (3,752) (3,251) (4,751) --
------ ------ ------ -------
Shareholders' equity at September 27,
1997 after Restructuring -- -- -- 19,466
Issue of ordinary shares, net of
expenses -- -- -- 33,570
Transfer from statement of income from
September 27, 1997 -- -- 1,513 1,513
Appropriations -- 111 (183) --
------ ------ ------ -------
Shareholders' equity at
December 31, 1997 -- 111 1,330 54,549
Goodwill arising on acquisition of
Jiangsu Mobile -- -- -- (15,622)
Transfer from statement of income -- -- 6,900 6,900
Appropriation -- 2,092 (2,092) --
------ ------ ------- -------
Shareholders' equity at
December 31, 1998 -- 2,203 6,138 45,827
====== ====== ======= =======
Shareholders' equity at
January 1, 1999 -- 2,203 6,138 45,827
Goodwill arising on acquisition of
Fujian Mobile, Henan Mobile and
Hainan Mobile -- -- -- (42,440)
Transfer from statement of income 4,797 4,797
Shares issued under share option
scheme -- -- -- 89
Issue of new shares to the professional
and Institutional investors -- -- -- 16,553
Issue of consideration shares for
acquisition of subsidiaries -- -- -- 32,685
Expenses incurred in connection with
the issue of new shares to professional
and institutional investors -- -- -- (419)
Appropriation -- 3,524 (3,524) --
----- ------ ------ -------
-- 5,727 7,411 57,092
===== ====== ====== =======
See accompanying notes to consolidated financial statements.
F-14
77
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements
(Amounts in millions, except share data)
1 ORGANIZATION, PRINCIPAL ACTIVITIES AND BASIS OF PRESENTATION
China Telecom (Hong Kong) Limited ("the Company") and its subsidiaries
(hereinafter collectively referred to as the "Group") are principally
engaged in the provision of cellular telephone and related services in
Guangdong, Zhejiang and Jiangsu provinces of the People's Republic of China
("PRC") and market their services under the "China Telecom" logo, which is
a registered trademark owned by China Mobile Communications Corporation, a
company incorporated in the PRC and under the control of the Ministry of
Information Industry ("MII").
Prior to the restructuring (as described below, the "Restructuring"), the
Group's Total Access Communications Systems ("TACS") and Global System for
Mobile Communications ("GSM") cellular 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 cellular 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 ("Zhejiang PTA"), while the Group's TACS cellular networks
in Zhejiang were owned and operated directly by the Zhejiang PTA.
Restructuring
Pursuant to the Restructuring, the Company was established as a
wholly-owned subsidiary of CTHK (BVI), a company incorporated with limited
liability in the British Virgin Islands. CTHK (BVI) is controlled by China
Telecom (Hong Kong) Group Limited, which in turn is owned as to 51% by
Telpo Communications (Group) Limited ("Telpo"), a Hong Kong company wholly
owned by the MII, and as to 49% by the China Telecommunications Corporation
(formerly known as the Directorate General of Telecommunications, or the
DGT). At December 31, 1999, the percentages of equity interests of CTHK
(BVI), which in turn owned by Telpo and DGT were changed to 57% and 43%,
respectively. 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 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.
F-15
78
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
1 ORGANIZATION, PRINCIPAL ACTIVITIES AND BASIS OF PRESENTATION (CONTINUED)
Restructuring (Continued)
In connection with the Restructuring and in anticipation of the listing of
the Company's ordinary shares, the fixed assets 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 assets 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 CTHK (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,
which is reflected as capital reserve.
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 CTHK (BVI)
by a total cash consideration of HK$22,475 (RMB equivalent 24,120)
(hereinafter referred to as the "Jiangsu Acquisition"). The only asset of
Jiangsu Mobile BVI is its interest in the entire equity of Jiangsu Mobile.
Subsequent to the Jiangsu Acquisition, Jiangsu Mobile became a
wholly-foreign owned enterprise.
In connection with the Jiangsu Acquisition, the fixed assets 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 assets of Jiangsu Mobile pursuant to the valuation,
based on a depreciated replacement cost basis, was determined at RMB7,879.
Goodwill arising on the acquisition of Jiangsu Mobile BVI and Jiangsu
Mobile (RMB15,622), 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 (RMB8,498), 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 (RMB8,009), adjusted for additional earnings to June 3,
1998, the completion date of the Jiangsu Acquisition, of RMB489.
F-16
79
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
1 ORGANIZATION, 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 entired issued share capital of
Fujian Mobile (BVI), Henan Mobile (BVI) and Hainan Mobile (BVI) from CTHK
(BVI) for a total consideration of HK$49,715 (RMB equivalent 52,953)
(hereinafter referred to as the "Acquisition"). The consideration was
satisfied by a cash of HK$19,031 (RMB equivalent 20,268) and allotment of
1,273,195,021 ordinary shares of HK$0.1 each to CTHK (BVI) amounted 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 Acquisition, the fixed assets 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 assets of Fujian Mobile, Henan Mobile and Hainan Mobile pursuant
to the valuation, based on a depreciated replacement cost basis, was
determined at RMB10,684.
Goodwill arising on the acquisition of Fujian Mobile, Henan Mobile and
Hainan Mobile (RMB42,440), 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 (RMB10,513), 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 (RMB9,524), adjusted for additional
earnings to November 11, 1999, the completion date of the Acquisition, of
RMB989.
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 million with maturity due
on November 2, 2004. Further the Company issued totalling 1,273,195,021
consideration shares to CTHK(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.
F-17
80
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
1 ORGANIZATION, 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 and Hainan
Mobile from their respective dates of acquisition. The consolidated
statements of income for the year ended December 31, 1999 includes the
results of the company, Guangdong Mobile, Zhejiang Mobile and Jiangsu
Mobile for the twelve months ended December 31, 1999 and the
post-acquisition results of Fujian Mobile, Henan Mobile and Hainan Mobile
for the period from November 12, 1999 to December 31, 1999. The
consolidated statements of income for the year ended December 31, 1998
includes the results of the Company, Guangdong Mobile and Zhejiang Mobile
for the year ended December 31, 1998 and the post-acquisition results of
Jiangsu Mobile for the period from June 4, 1998 to December 31, 1998. The
consolidated financial position and results of operations prior to
September 27, 1997 represent the former combined operations of Guangdong
Mobile and Zhejiang Mobile.
The financial statements have been prepared in accordance with 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 28.
The consolidated financial statements are expressed in Renminbi. Solely for
the convenience of the reader, for the December 31, 1999 financial
statements have been translated into United States dollars at the rate of
US$1.00 = RMB8.2793 quoted by the People's Bank of China on December 31,
1999. 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, 1999, or any other certain date.
F-18
81
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
2 PRINCIPAL ACCOUNTING POLICIES
(a) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries (see Note 27 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 interests is deducted from or added to the consolidation income
after taxation. All significant inter-company balances and transactions
have been eliminated.
(b) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are short-term, highly liquid investments which
are readily convertible into known amounts of cash without notice and which
are within three months of maturity when acquired. For the purposes of the
statement of cash flows, cash equivalents would also include advances from
banks repayable within three months from the date of the advance. None of
the Group's cash and cash equivalents is restricted as to withdrawal.
(c) ASSOCIATES
An associate is a company in which the Group has significant influence, but
not control or joint control, over its management, including participation
in the financial and operating policies decisions.
The Group's share of the results of its associates is included in the
consolidated statements of income. Such amounts were immaterial for the
periods presented. In the consolidated balance sheets, interest in
associates is stated at cost less any provisions for diminution in value
which is other than temporary as determined by the directors for each
associate individually. Any such provisions are recognized as an expense
in the consolidated statements of income.
F-19
82
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
2 PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(d) FIXED ASSETS AND DEPRECIATION
(i) Fixed assets are stated at cost/revalued amount less accumulated
depreciation. The circumstances and basis under which the revalued amount
is arrived at are set out in details in Note 11.
(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. Expenditures incurred after the fixed
asset has been put into operation, such as repairs and maintenance and
overhaul costs, are normally charged to the statements of income in the
period 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 fixed assets
are determined as the difference between the net disposal proceeds and the
carrying amount of the asset and are recognized as income or expense in
the consolidated statements of income on the date of retirement or
disposal.
(iv) The carrying amount of fixed assets carried at depreciated cost is
reviewed periodically in order to assess whether the recoverable amount
has declined below the carrying amount. When such a decline has occurred,
the carrying amount is reduced to the recoverable amount. The amount of
the reduction is recognized as an expense in the statement of income. In
determining the recoverable amount, expected future cash flows generated
by the fixed assets are discounted to their present values.
A subsequent increase in the recoverable amount of an asset carried at
depreciated cost is written back to the statements of income when the
circumstances and events that led to the write-down or write-off cease to
exist. The amount written back is reduced by the amount that would have
been recognized as depreciation had the write-down or write-off not
occurred. No amounts were written back for the years presented.
F-20
83
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
2 PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(d) FIXED ASSETS AND DEPRECIATION (CONTINUED)
(v) Depreciation is calculated to write off the cost, or revalued amount where
appropriate, of fixed assets on a straight-line basis over their estimated
useful lives, to residual values, as follows:
Depreciable life Residual value
Land use rights Over the period of grant --
Buildings 8 -35 years 3%
Telecommunication transceivers,
switching centers and other network
equipment 7 years 3%
Office equipment, furniture and
fixtures and others 4 - 18 years 3%
(e) LEASED ASSETS
Where assets are acquired under capital leases, the amounts representing
the outright purchase price, which approximate the present value of the
minimum lease payments, of such assets are included in fixed assets and the
corresponding liabilities, net of finance charges, are recorded as
obligations under capital lease. Depreciation is provided at rates which
write off the cost of the assets in equal annual amounts over the shorter
of the period of the leases or the estimated useful lives of the assets as
set out in note 2(d) above. Finance charges implicit in the lease payments
are charged to the statements of income over the period of the leases so as
to produce and approximately constant periodic rate of charge on the
remaining balance of the obligations for each accounting period.
(f) CONSTRUCTION IN PROGRESS
Construction in progress is stated at cost. Cost comprises direct costs of
construction as well as interest expense and exchange differences
capitalized during the periods of construction and installation.
Capitalization of these costs ceases and the construction in progress is
transferred to fixed assets 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.
F-21
84
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
2 PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(g) 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 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 period 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 period in which the reversal occurs. No amounts were written
back for the periods presented.
(h) DEFERRED REVENUE
Deferred revenue from assignment of rights to income from subscribers with
distributors of telecommunications services is stated in the balance sheet
at the amount of consideration received according to the relevant
assignment contracts less income recognized in the statements of income up
to the balance sheet date. Income is deferred and recognized on a
straight-line basis over the relevant assignment period. For assignment
contracts which the distributors surrender for early cancellation, the
balance of the Group's deferred revenue in respect of those contracts is
recognized as non-operating income in the consolidated statements of income
when the assignment contracts are cancelled.
(i) FIXED RATE NOTES
Fixed rate notes are stated on the balance sheet at face value, less
unamortized discount arising on issuance of notes. The discount is
amortized on a straight-line basis over the period from the date of issue
to the date of maturity.
(j) DEFERRED EXPENSES
Deferred expenses comprise incidental costs incurred in relation to the
issue of the Company's fixed rate notes and are amortized on a
straight-line basis over the period from the date of issue to the date of
maturity. In the event that the notes are redeemed prior to the maturity
date, the unamortized expenses are charged immediately to the consolidated
statements of income.
F-22
85
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
2 PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(k) 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 such costs
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.
(l) 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 bases:
(i) usage fees 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) connection fees are recognized as revenue when received;
(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 proportion basis on the
principal outstanding and at the rate applicable; and
(vi) sales of handsets and SIM cards are recognized on delivery of goods
to the buyer. Such revenue, net of cost of goods sold, is included
in other income due to its insignificance.
(m) ALLOWANCE FOR DOUBTFUL ACCOUNTS
An allowance for doubtful accounts is provided based upon evaluation of the
recoverability of the receivables at the balance sheet date.
(n) TRANSLATION OF FOREIGN CURRENCIES
The functional currency of the Group's operations is Renminbi. See Note 26.
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 differences attributable to the translation of borrowings
denominated in currencies other than the functional currency, and used for
financing the construction of fixed assets, are included in the cost of the
related construction in progress. Exchange differences capitalized to
construction in progress are immaterial for the periods presented. Other
exchange gains and losses are recognized in the consolidated statements of
income.
F-23
86
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
2 PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(o) DEFERRED TAXATION
Deferred taxation is provided under liability method in respect of the tax
effect arising from all material timing differences between the accounting
and tax treatment of income and expenditure, which are expected with
reasonable probability to crystallize in the foreseeable future. Future
deferred tax benefits are not recognized unless their realization is
assured beyond reasonable doubt.
(p) RETIREMENT BENEFITS
Contributions to retirement schemes are charged to the consolidated
statements of income as and when incurred (see Note 23).
(q) NET PROFIT PER SHARE
The calculation of basic net profit per share for the years ended
December 31, 1997 has been computed by dividing net profit by the weighted
average number of shares outstanding as if the shares issued in the
Restructuring were outstanding for the year shown. The calculation of basic
net profit per share for the years ended December 31, 1998 and 1999 is
based on the net profit and the weighted average number of shares in issue
during the years.
The calculation of diluted net profit per share for the years ended
December 31, 1998 and 1999 has been computed after adjusting for the
effects of all dilutive potential ordinary shares. All dilutive potential
ordinary shares arise from the share options granted to the directors under
the share option scheme which, if converted to ordinary shares, would
decrease net profit per share. No diluted net profit per share for the year
ended December 31, 1997 is calculated as the share options to the directors
were initially granted in March 1998.
(r) OPERATING LEASES
Rental payable under operating lease are accounted for in the consolidated
statements of income on a straight-line basis over the periods of the
respective leases.
(s) RELATED PARTIES
For the purposes of these accounts, 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 or other entities.
F-24
87
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
2 PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(t) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 periods reported.
Actual results could differ from those estimates. Estimates are used when
accounting for allowance for doubtful accounts, the length of fixed assets'
lives, and write-down and write-off of long-lived assets. Actual results
may differ from these estimates.
3 OPERATING REVENUE
The principal activities of the Group are the provision of cellular
telephone and related services in Guangdong, Zhejiang, Jiangsu, Fujian,
Henan and Hainan provinces of the People's Republic of China. The principal
activity of the Company is investment holding.
Operating revenue primarily represents usage fees, monthly fees and
connection fees for the use of the Group's cellular telephone networks, net
of PRC business tax and government surcharges and central irrigation
construction levy. Business tax and government surcharges are charged at
approximately 3.3% to 3.65% of the corresponding revenue and central
irrigation construction levy was charged at approximately 3% of certain
connection and surcharge revenue.
F-25
88
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in thousands, except share data)
3 OPERATING REVENUE (CONTINUED)
Operating revenue is further analyzed as follows:
Year ended December 31,
----------------------------------------
Note 1997 1998 1999
RMB RMB RMB
Guangdong Mobile:
Usage fees (i) 6,206 10,423 14,811
Monthly fees (ii) 2,201 3,072 2,436
Connection fees (iii) 2,060 1,887 2,894
Other operating revenue (iv) 608 1,247 1,681
------ ------ ------
11,075 16,629 21,822
------ ------ ------
Zhejiang Mobile:
Usage fees (i) 2,512 3,815 5,386
Monthly fees (ii) 492 870 1,230
Connection fees (iii) 1,113 1,009 806
Other operating revenue (iv) 296 712 869
------ ------ ------
4,413 6,406 8,291
------ ------ ------
Jiangsu Mobile:
Usage fees (i) -- 2,107 4,236
Monthly fees (ii) -- 406 1,008
Connection fees (iii) -- 427 529
Other operating revenue (iv) -- 370 796
------ ------ ------
-- 3,310 6,569
------ ------ ------
Fujian Mobile:
Usage fees (i) -- -- 764
Monthly fees (ii) -- -- 141
Connection fees (iii) -- -- 68
Other operating revenue (iv) -- -- 94
------ ------ ------
-- -- 1,067
------ ------ ------
F-26
89
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
3 OPERATING REVENUE (CONTINUED)
Operating revenue is further analyzed as follows:
Year ended December 31,
-------------------------------------
Note 1997 1998 1999
RMB RMB RMB
Henan Mobile:
Usage fees (i) -- -- 520
Monthly fees (ii) -- -- 144
Connection fees (iii) -- -- 16
Other operating revenue (iv) -- -- 51
------ ------ ------
731
------ ------ ------
Hainan Mobile:
Usage fees (i) -- -- 95
Monthly fees (ii) -- -- 22
Connection fees (iii) -- -- 6
Other operating revenue (iv) -- -- 20
------ ------ ------
-- -- 143
------ ------ ------
Total operating revenue 15,488 26,345 38,623
====== ====== ======
F-27
90
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
3 OPERATING REVENUE (CONTINUED)
NOTES:
(i) Usage fees 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 cellular communication 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
Note 4(ii)).
For Guangdong Mobile and Zhejiang Mobile, prior to October 20, 1997,
IDD and certain DDD call charges receivable from subscribers are not
reflected as revenue. Pursuant to the interconnection agreements,
with effect from October 20, 1997, Guangdong Mobile and Zhejiang
Mobile reflect IDD and DDD calls charges receivable from subscribers
and the amounts payable by relevant PTAs to the Group for inbound
calls to the Group's subscribers which originate from the China
Telecom System's fixed line network as revenue. References to the
"China Telecom System", are the systems under the control of the
MII, operates fixed line networks and provides fixed line telephone
and data communications services in the PRC.
(ii) Monthly fees represent fixed amounts charged to subscribers each
month for their entitlement to use the Group's cellular telephone
and related services.
(iii) Connection fees represent amounts charged to subscribers for the
initial connection to the Group's cellular telecommunications
network.
(iv) Other operating revenue mainly represents telephone number selection
fees, charges for value added services, interconnection revenue and
roaming in fees. Roaming in fees are received from China Mobile
Communications Corporation ("China Mobile") or the MII in respect of
calls made by non-subscribers using the Group's cellular
telecommunications networks.
F-28
91
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
4 OPERATING EXPENSES
Operating expenses consist of:
Year ended December 31,
--------------------------------------
Note 1997 1998 1999
RMB RMB RMB
Guangdong Mobile:
Leased lines (i) 2,374 2,280 1,634
Interconnection (ii) 705 3,177 3,849
Depreciation 1,854 2,533 3,307
Personnel (iii) 634 1,182 1,661
Other operating expenses (iv) 1,449 2,386 2,895
----- ------ ------
7,016 11,558 13,346
----- ------ ------
Zhejiang Mobile:
Leased lines (i) 760 962 915
Interconnection (ii) 509 1,055 1,285
Depreciation 826 1,250 1,796
Personnel (iii) 116 234 273
Other operating expenses (iv) 825 748 1,235
----- ------ ------
3,036 4,249 5,504
----- ------- ------
Jiangsu Mobile:
Leased lines (i) -- 675 996
Interconnection (ii) -- 520 1,012
Depreciation -- 814 1,925
Personnel (iii) -- 160 220
Other operating expenses (iv) -- 359 651
----- ------ ------
-- 2,528 4,804
----- ------ ------
F-29
92
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
4 OPERATING EXPENSES (CONTINUED)
Year ended December 31,
---------------------------------------
Note 1997 1998 1999
RMB RMB RMB
Fujian Mobile:
Leased lines (i) -- -- 81
Interconnection (ii) -- -- 157
Depreciation -- -- 237
Personnel (iii) -- -- 39
Other operating expenses (iv) -- -- 160
------ ------ ------
-- -- 674
------ ------ ------
Henan Mobile:
Leased lines (i) -- -- 86
Interconnection (ii) -- -- 114
Depreciation -- -- 113
Personnel (iii) -- -- 30
Other operating expenses (iv) -- -- 138
------ ------ ------
- 481
------ ------- ------
Hainan Mobile:
Leased lines (i) -- -- 11
Interconnection (ii) -- -- 36
Depreciation -- -- 30
Personnel (iii) -- -- 5
Other operating expenses (iv) -- -- 22
------ ------ ------
-- -- 104
------ ------ ------
The holding company:
Depreciation 1 1 3
Personnel (iii) 6 19 28
Other operating expenses (iv) 15 55 39
------ ------ ------
22 75 70
------ ------ ------
10,074 18,410 24,983
====== ====== ======
F-30
93
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
4 OPERATING EXPENSES (CONTINUED)
NOTES:
(i) Leased line charges represent expenses paid 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 represent amounts paid in respect of call
made between the Group's cellular networks, the fixed line networks
in the relevant provinces and other GSM network operators in other
provinces in the PRC. Prior to October 20, 1997, no interconnection
charge was payable by Guangdong Mobile for either the TACS or GSM
network or by Zhejiang Mobile for the TACS network. Pursuant to the
interconnection agreements, Guangdong Mobile and Zhejiang Mobile
recorded the amounts payable to PTAs for calls which interconnect
with the fixed line network as interconnection charges with effect
from October 20, 1997. Included in the amounts are also charges in
respect of the Group's subscribers roaming outside the service areas
of Guangdong Mobile, Zhejiang Mobile, Jiangsu Mobile, Fujian Mobile,
Henan Mobile or Hainan Mobile (see Note 3(i)).
(iii) Personnel expenses represent staff salaries, bonuses and medical
benefits, provision for staff welfare expenses and contributions to
staff retirement scheme.
(iv) Other operating expenses consist of:
Year ended December 31,
--------------------------------------
1997 1998 1999
RMB RMB RMB
Selling and promotion 623 995 1,582
Maintenance 339 448 499
Provision for doubtful
accounts (Note 10) 449 558 771
Operating lease charges 228 301 539
Other expenses (Note (a)) 650 1,246 1,749
----- ----- -----
2,289 3,548 5,140
===== ===== =====
F-31
94
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
4 OPERATING EXPENSES (CONTINUED)
NOTES: (CONTINUED)
These items are further analyzed as follows:
Year ended December 31,
-----------------------------------
1997 1998 1999
RMB RMB RMB
Guangdong Mobile:
Selling and promotion 309 626 901
Maintenance 209 373 315
Provision for doubtful accounts 386 360 441
Operating lease charges 145 113 247
Other expenses (Note (a)) 400 914 991
----- ----- -----
1,449 2,386 2,895
----- ----- -----
Zhejiang Mobile:
Selling and promotion 314 271 443
Maintenance 130 52 99
Provision for doubtful accounts 63 124 131
Operating lease charges 82 133 148
Other expenses (Note (a)) 236 168 414
----- ----- -----
825 748 1,235
----- ----- -----
Jiangsu Mobile:
Selling and promotion -- 90 151
Maintenance -- 23 41
Provision for doubtful accounts -- 74 132
Operating lease charges -- 50 113
Other expenses (Note (a)) -- 122 214
----- ----- -----
-- 359 651
----- ----- -----
F-32
95
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in million, except share data)
4 OPERATING EXPENSES (CONTINUED)
NOTES: (CONTINUED)
Year ended December 31,
-------------------------------------
1997 1998 1999
RMB RMB RMB
Fujian Mobile:
Selling and promotion -- -- 35
Maintenance -- -- 25
Provision for doubtful accounts -- -- 30
Operating lease charges -- -- 14
Other expenses (Note (a)) -- -- 56
----- ----- -----
-- -- 160
----- ----- -----
Henan Mobile:
Selling and promotion -- -- 44
Maintenance -- -- 15
Provision for doubtful accounts -- -- 38
Operating lease charges -- -- 12
Other expenses (Note (a)) -- -- 29
----- ----- -----
-- -- 138
----- ----- -----
Hainan Mobile:
Selling and promotion -- -- 5
Maintenance -- -- 4
Provision for doubtful accounts -- -- (1)
Operating lease charges -- -- 2
Other expenses (Note (a)) -- -- 12
----- ----- -----
-- -- 22
----- ----- -----
The holding company:
Selling and promotion -- 8 3
Operating lease charges 1 5 3
Other expenses (Note (a)) 14 42 33
----- ----- -----
15 55 39
----- ----- -----
2,289 3,548 5,140
===== ===== =====
F-33
96
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in million, except share data)
4 OPERATING EXPENSES (CONTINUED)
NOTES: (CONTINUED)
(a) Other expenses consist of offices expenses, utilities charges,
travelling expenses, entertainment expenses, spectrum charges,
insurance expenses, consumables and supplies, debt collection fees and
other miscellaneous expenses.
5 WRITE-DOWN AND WRITE-OFF OF TACS NETWORK EQUIPMENT
1998 1999
RMB RMB
Write-down of TACS network equipment (a) 282 6,720
Write-off of TACS network equipment (b) -- 1,522
--- -----
282 8,242
=== =====
TACS represents Total Assess Communication System, a European standard for
analog mobile telephone transmissions in the 800 and 900 MHz frequency
bands.
(a) In light of the gradual opening of the telecommunications market
in the PRC and the rapid change of technology, the Group has reviewed
the carrying value of all TACS network and related equipment at
December 31, 1999. Based on the estimated recoverable value of these
assets, a write-down of RMB6,720 has been made in the current year.
(b) This represents the write-off of certain TACS network equipment
which have been removed from service.
6 OTHER INCOME
Other income primarily consists of gross margin from sales of cellular
telephone handsets and SIM cards.
F-34
97
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in million, except share data)
7 NON-OPERATING INCOME/(EXPENSES)
Non-operating income/(expenses) consists of:
Year ended December 31,
--------------------------------
1997 1998 1999
RMB RMB RMB
Exchange (loss)/gain (61) 19 (9)
Loss on sale of other fixed assets (13) (59) (1)
Penalty income on overdue accounts 93 64 72
Others (46) (75) 8
--- --- --
Total non-operating income/(expenses) (27) (51) 70
=== === ==
8 INTEREST INCOME
Interest income earned by the Group amounted to RMB767 (1998: RMB1,609),
of which RMB410 (1998: RMB1,426) relates to the interest income earned by
the Company. Interest income was classified as an exceptional item in the
financial statements for the year ended December 31, 1998.
F-35
98
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in million, except share data)
9 INCOME TAX
(i) No provision has been made for Hong Kong profits tax as there was no
estimated assessable profits for the year ended December 31, 1999.
The provision for Hong Kong profits tax is calculated at 16.5% and
16% of the estimated assessable profits of the holding company's
unconsolidated financial statements for the year ended December 31,
1997 and 1998, respectively.
(ii) Pursuant to the income tax rules and regulations of the PRC, the
Group's subsidiaries in the PRC are subject to the statutory income
tax rate of 33% for the year ended December 31, 1999, except Hainan
Mobile at a tax rate of 15%. According to notices from the PRC
Ministry of Finance, connection fees and certain surcharges, which
were previously not subject to income tax, are subject to an income
tax rate of 33% with effect from January 1, 2000 for Fujian Mobile
and January 27, 2000 for Henan Mobile and 15% with effect from
January 19, 2000 for Hainan Mobile.
Income tax in the consolidated statements of income represents:
Year ended December 31,
-----------------------------------
1997 1998 1999
RMB RMB RMB
Provision for Hong Kong profits
tax for the year 8 3 --
Overprovision in respect of
Hong Kong profits tax for prior year -- -- (2)
---- ----- ------
8 3 (2)
Underprovision in respect of PRC
income tax for prior year -- -- 24
Provision for PRC income tax
on the estimated taxable profits
for the year 985 2,609 3,776
Deferred tax assets (Note 15) (2) (126) (2,151)
---- ----- ------
991 2,486 1,647
==== ===== ======
F-36
99
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
9 INCOME 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,
-----------------------------------
1997 1998 1999
RMB RMB RMB
Expected PRC taxation at statutory
tax rates 1,965 3,098 2,127
Non-taxable items
-- Connection fee (803) (65) (29)
-- Surcharge (118) (87) (37)
-- Interest income (86) (225) (66)
Non-deductible expenses 37 124 150
Rate differential on PRC operations -- -- (371)
Rate differential on Hong Kong operations (81) (233) (45)
Non-recognition of deferred taxes
-- Generation of timing difference 43 76 254
-- Reversal of timing difference -- (187) (265)
Others 34 (15) (71)
----- ----- -----
Income tax 991 2,486 1,647
===== ===== =====
10 ACCOUNTS RECEIVABLE
December 31,
------------------
1998 1999
RMB RMB
Accounts receivable 3,383 6,313
Less: Allowance for doubtful
accounts (901) (1,356)
----- ------
2,482 4,957
===== ======
F-37
100
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
10 ACCOUNTS RECEIVABLE (CONTINUED)
Allowance for doubtful accounts is analyzed as follows:
RMB
At January 1, 1997 250
Provision for the year 449
Written-off (5)
-----
At December 31, 1997 694
Acquired on acquisition of subsidiaries 182
Provision for the year 558
Written-off (533)
-----
At December 31, 1998 901
Acquired on acquisition of subsidiaries 517
Provision for the year 771
Written-off (833)
-----
At December 31, 1999 1,356
=====
11 FIXED ASSETS
December 31,
---------------------
1998 1999
RMB RMB
Land use rights and buildings 1,761 2,878
Telecommunication transceivers, switching
centers and other network equipment 38,320 58,173
Office equipment, furniture and fixtures and others 843 1,797
------ ------
40,924 62,848
Less: accumulated depreciation 6,938 20,149
------ ------
33,986 42,699
====== ======
All of the Group's buildings are located outside Hong Kong.
The net book value of fixed assets of the Group includes an amount of
RMB431 (1998: Nil) in respect of assets held under capital lease.
F-38
101
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
11 FIXED ASSETS (CONTINUED)
In connection with the Restructuring, pursuant to an approval document
dated September 5, 1997 issued by China State-owned Assets Administration
Bureau, the fixed assets 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 depreciated
replacement cost basis. The value of fixed assets of Guangdong Mobile and
Zhejiang Mobile has been determined at RMB15,630 reflecting a surplus on
revaluation of approximately RMB3,529. Such revalued amount for fixed
assets of Guangdong Mobile and Zhejiang Mobile has been reflected as of
May 31, 1997 in the accompanying consolidated financial statements.
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 assets of Jiangsu Mobile as of
December 31, 1997 were valued by ZAAC on a depreciated replacement cost
basis. The value of fixed assets 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 assets of Fujian Mobile,
Henan Mobile and Hainan Mobile as of June 30, 1999 were valued by China
International Engineering Consulting Corporation ("CIECC") on a
depreciated replacement cost basis. The aggregate value of fixed assets of
Fujian Mobile, Henan Mobile and Hainan Mobile has been determined at
RMB10,684 reflecting a surplus on revaluation of approximately RMB391.
The Group's land and buildings in Guangdong Mobile and Zhejiang Mobile,
Jiangsu Mobile and Fujian Mobile, Henan Mobile and Hainan Mobile were also
valued separately by Chesterton Petty Limited as of May 31, 1997,
December 31, 1997 and June 30, 1999 respectively, independent qualified
valuers in Hong Kong. The values of such reports have been determined at
approximately the same amounts as the ZAAC and CIECC reports.
Other than revaluations carried out in compliance with relevant PRC rules
and regulations, the Group has no plan to revalue its fixed assets on a
regular basis.
The effect of the above three revaluations is to increase annual
depreciation charges by approximately RMB1,113 (1998: approximately
RMB1,041).
F-39
102
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
11 FIXED ASSETS (CONTINUED)
The historical cost net book value of the fixed assets of Guangdong Mobile
and Zhejiang Mobile in the Group's financial statements as of May 31, 1997
and the revalued basis of these fixed assets are as follows:
Revalued
Net book value Amount
-------------- --------
RMB RMB
Land use rights and buildings 444 552
Telecommunication transceivers, switching
centers and other network equipment 11,186 14,591
Office equipment, furniture and fixtures and others 471 487
-------------- --------
12,101 15,630
============== ========
The historical cost net book value of the fixed assets of Jiangsu Mobile
as of December 31, 1997 and the revalued basis of these fixed assets are
as follows:
Revalued
Net book value Amount
-------------- --------
RMB RMB
Land use rights and buildings 15 25
Telecommunication transceivers, switching
centers and other network equipment 5,409 7,842
Office equipment, furniture and fixtures and others 12 12
-------------- --------
5,436 7,879
============== ========
The historical cost net book value of the fixed assets of Fujian Mobile,
Henan Mobile and Hainan Mobile as of June 30, 1999 and the revalued basis
of these fixed assets are as follows:
Revalued
Net book value Amount
-------------- --------
RMB RMB
Land use rights and buildings 152 159
Telecommunication transceivers, switching
centers and other network equipment 9,931 10,322
Office equipment, furniture and fixtures and others 210 203
-------------- --------
10,293 10,684
============== ========
F-40
103
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
12 INTEREST IN ASSOCIATES
December 31,
---------------------
1998 1999
RMB RMB
Unlisted shares, at cost 21 37
Capital contributions, at cost 9 9
---- ----
30 46
==== ====
Details of the associates, all of which are unlisted corporate entities,
are as follows:
Place of Attributable
incorporation interest held Principal
Name of associate and operation by the Group Activity
China Motion United Hong Kong 30% Provision of
Telecom Limited telecommunication
services
Shenzhen China Motion PRC 30% Provision of
Telecom United telecommunication
Limited services
Fujian Nokia Mobile PRC 50% Network planning and
Communication Technology optimizing
Company Limited construction-testing
and supervising,
technology support,
development and
training of Nokia GSM
900/1800 Mobile
Communication system
13 AMOUNTS DUE FROM/TO ULTIMATE 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.
F-41
104
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
14 AMOUNTS DUE FROM/TO RELATED PARTIES
Amounts due from/to related parties are unsecured, non-interest bearing
and repayable on demand and arose in the ordinary course of business.
15 DEFERRED TAX ASSETS
Movements on deferred tax assets comprise:
December 31,
------------------
1998 1999
RMB RMB
Balance at beginning of year 24 152
Acquired on acquisition of subsidiaries 2 3
Transferred from consolidated statements of income (Note 9) 126 2,151
---- -----
Balance at end of year 152 2,306
==== =====
Deferred tax assets of the Group provided for are as follows:
December 31,
---------------------
1998 1999
RMB RMB
Provision for obsolete inventories 26 51
Write-down of fixed assets relating to TACs equipment 44 2,182
Amortization of deferred revenue 82 73
---- -----
152 2,306
==== =====
F-42
105
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
15 DEFERRED TAX ASSETS (CONTINUED)
Deferred tax asset of the Group not provided for is as follows:
December 31,
---------------------
1998 1999
RMB RMB
Provision for doubtful accounts 283 402
==== ====
As described in Note 11, in connection with the Restructuring, the fixed
assets of Guangdong Mobile and Zhejiang Mobile have been revalued at
May 31, 1997. As a result of such valuation, the fixed assets basis
differences that gave rise to the potential deferred tax liabilities of
Guangdong Mobile and Zhejiang Mobile were eliminated (RMB547 as of May 31,
1997).
In connection with the acquisition of Jiangsu Mobile, the fixed assets of
Jiangsu Mobile have been revalued at December 31, 1997. As a result of
such valuation, the fixed assets basis differences that gave rise to the
potential deferred tax liabilities of Jiangsu Mobile were eliminated
(RMB149 as of December 31, 1997).
In connection with the acquisition of Fujian Mobile, Henan Mobile and
Hainan Mobile, the fixed assets of Fujian Mobile, Henan Mobile and Hainan
Mobile have been revalued at June 30, 1999. As a result of such valuation,
the fixed assets basis differences that give rise to the potential
deferred tax liabilities were eliminated (RMB825 as of June 30, 1999).
F-43
106
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
16 BANK AND OTHER LOANS
SHORT-TERM
December 31,
----------------------
1998 1999
RMB RMB
Bank loans 4,112 3,957
Current portion of long-term bank and other loans 1,225 394
----- -----
5,337 4,351
===== =====
Included in the short-term loans is an amount of RMB100 (1998: Nil) which
is secured by cash at bank amounting to RMB100 (1998: Nil). All other
short-term loans are unsecured.
The Group's borrowings under short-term loans are 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 7.27% to 11% at December 31, 1997, from 5.81% to 6.57% at
December 31, 1998 and from 5.02% to 7.11% at December 31, 1999. The
Group's weighted average interest rate on short-term loans was 9.87%,
6.18% and 5.85% at December 31, 1997, 1998 and 1999 respectively.
F-44
107
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
16 BANK AND OTHER LOANS (CONTINUED)
LONG-TERM
December 31,
------------------
Interest rate and final 1998 1999
Maturity RMB RMB
RENMINBI DENOMINATED BANK LOANS:
For construction of Fixed interest rates of 7.56% per -- 650
Telecommunications annum with maturities through 2003
Network (c)
Floating interest rates at 5.94% -- 595
per annum as of December 31, 1999
with maturities through 2002 (a)
Floating interest rates at 5.94% -- 383
per annum as of December 31, 1999
with maturities through 2002
Fixed interest rates ranging from 34 --
7.67% to 9.5% per annum with
maturities through 1999
US DOLLAR DENOMINATED BANK LOANS:
For construction of Floating interest rates of LIBOR with 311 207
Telecommunications maturities through 2001 (b)
Network
F-45
108
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
16 BANK AND OTHER LOANS (CONTINUED)
LONG-TERM (CONTINUED)
December 31,
------------------
Interest rate and final 1998 1999
maturity RMB RMB
RENMINBI DENOMINATED LOANS FROM RELATED PARTIES:
For construction of Fixed interest rate of 10.98% per 800 --
Telecommunications annum, with maturities through
Network 1999
US DOLLAR DENOMINATED OTHER LOANS:
For construction of Majority at fixed interest 1,016 744
telecommunications rates ranging from 6.4% to 7.5% per
Network annum with maturities through
2004
For construction of Floating interest rate of LIBOR 55 40
Telecommunications plus 0.45% per annum with
Network maturities through 2001 (b)
----- -----
Total long-term loans 2,216 2,619
Less: current portion 1,225 394
----- -----
991 2,225
===== =====
(a) Guaranteed by the Fujian PTA.
(b) Guaranteed by the Guangdong PTA.
(c) Guaranteed by the Hebei PTA.
At December 31, 1999, LIBOR was approximately 5.3%.
F-46
109
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
16 BANK AND OTHER LOANS (CONTINUED)
LONG-TERM (CONTINUED)
The aggregate maturities of long-term bank and other loans subsequent to
December 31, 1999 are as follows:
RMB
2000 394
2001 976
2002 952
2003 216
2004 81
-----
2,619
=====
Interest expense, net of the amounts capitalized, is as follows:
Year ended December 31,
-----------------------------------
1997 1998 1999
RMB RMB RMB
Interest incurred 287 307 485
Interest element of capital lease -- -- 1
Interest capitalized (112) (147) (143)
---- ---- ----
Interest expense 175 160 343
==== ==== ====
F-47
110
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
17 DEFERRED EXPENSES
Year ended December 31,
-----------------------
1998 1999
RMB RMB
Additions during the year -- 53
Less: Amortization for the year -- (2)
---- ----
Balance at the end of year -- 51
==== ====
18 ACCRUED EXPENSES AND OTHER PAYABLES
December 31,
--------------------
1998 1999
RMB RMB
Other payables 1,144 1,954
Accrued salaries, wages and benefits 1,274 1,549
Accrued expenses 338 612
----- -----
2,756 4,115
===== =====
F-48
111
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
19 OBLIGATIONS UNDER CAPITAL LEASE
(i) In 1998, Hainan Mobile entered into a capital lease agreement to
finance the purchase of telecommunications equipment. The lease is
denominated in United States dollars and the lease term is for 4
years expiring in 2002. 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, 1999:
RMB
2000 78
2001 73
2002 35
---
Total minimum lease payments 186
Less: Amount representing interest (11)
---
Present value of net minimum lease payments 175
Less: Obligations under capital lease - current portion (68)
---
107
===
(iii) The capital lease is guaranteed by Hainan PTA.
20 FIXED RATES NOTES
1998 1999
RMB RMB
US dollar 7.875% fixed rate notes due 2004 -- 4,952
==== =====
On November 2, 1999, the company issued unsecured fixed rates notes (the
"notes") with a principal amount of US$600 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.
F-49
112
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
21 DEFERRED REVENUE
Deferred revenue from assignment of rights to income from subscribers
represents the unamortized portion of proceeds received by Guangdong Mobile
from certain distributors of telecommunications services pursuant to
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 maintains 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.
December 31,
--------------------
1998 1999
RMB RMB
Balance at beginning of year 1,353 1,757
Additions 689 48
Recognized in the consolidated statements of income (285) (313)
----- -----
Balance at end of year 1,757 1,492
===== =====
F-50
113
22 COMMITMENTS AND CONTINGENCIES
(a) OPERATING LEASES
Future minimum lease payments as of December 31, 1999 under non-cancellable
operating leases having initial or remaining lease terms of more than one
year are as follows:
RMB
2000 4,644
2001 3,526
2002 3,486
2003 2,571
2004 2,439
Thereafter 7,350
------
24,016
======
(b) CAPITAL COMMITMENTS
As of December 31, 1999, the Group had capital commitments as follows:
RMB
Authorized and contracted for 7,489
Authorized but not contracted for 15,988
------
23,477
======
F-51
114
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
23 EMPLOYEE AND RETIREMENT BENEFITS
The employees of the subsidiaries participate in defined benefit retirement
plans managed by the local government authorities whereby the subsidiaries
are required to contribute to the schemes at fixed rate of the employees'
salary costs. The subsidiaries have no obligation for the payment of
retirement and other post-retirement benefits of staff other than the
contributions described above. Expenses incurred by the subsidiaries in
connection with the retirement scheme were RMB101 , RMB209 and RMB251
respectively, for three years ended December 31, 1997, 1998 and 1999
respectively.
Pursuant to PRC regulation and prior to the Restructuring and the
subsequent acquisitions, the subsidiaries were required to provide staff
quarters to eligible employees and their immediate families. The Group has
established separate employee housing reform schemes in order to comply
with the regulation at the provincial level. Under such schemes, the Group
is required to either purchase or build housing which is to be sold or
rented to eligible employees. Through May 31, 1997, housing provided under
the schemes was shared between Guangdong Mobile and the Guangdong PTA, in
Guangdong Mobile's case and purchased or built entirely by the Zhejiang PTA
in Zhejiang Mobile's case. Through December 31, 1997, housing provided
under the schemes was purchased or built entirely by the Jiangsu PTA in
Jiangsu Mobile's case. Through June 30, 1999, housing provided under the
schemes were purchased or built entirely by the Fujian PTA, Henan PTA and
Hainan PTA in the cases of Fujian Mobile, Henan Mobile and Hainan Mobile.
Following the Restructuring and the subsequent acquisitions, management
intends to continue with the housing schemes previously in place for
existing employees. The Group estimates the total cost of the subsidy to be
provided for such housing scheme in respect of employees to be
approximately RMB440, of which RMB155 has been accrued through December 31,
1999. All previous costs incurred by the relevant PTAs have not been
charged to the Group.
F-52
115
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
24 RELATED PARTY TRANSACTIONS
The Group's operations are subject to extensive regulation by the PRC
government. The MII, pursuant to the authority delegated to it by the PRC
State Council, directly or indirectly regulates licensing, competition,
interconnection, technology and equipment standards, and other aspects of
the PRC telecommunications industry. The MII, together with other PRC
government entities, also regulates tariff policy, foreign investment and
spectrum allocation and spectrum usage fees. Specifically, the Group's
tariffs are subject to the regulation by various Government authorities,
including the State Development Planning Commission ("SDPC"), the MII, the
PTAs and the relevant provincial price regulatory authorities. Connection
fees charged by the Group are based on a guidance price range set jointly
by the MII and SDPC, with each actual fee determined by the Group in
consultation with the relevant provincial price regulatory authorities. In
general, the Group's base usage charges and domestic roaming usage charges
are set by the MII and SDPC. International roaming charges are determined
pursuant to agreements formed between the DGT or China Mobile and other
cellular operators. The principal related party transactions, which were
entered into with the MII and other entities under the control of the MII,
are as follows:
Year Ended December 31,
--------------------------------
NOTE 1997 1998 1999
RMB RMB RMB
Interconnection revenue (i) 28 752 1,242
Interconnection charges (ii) 739 3,925 5,275
Leased line charges (iii) 3,134 3,917 3,723
Roaming revenue (iv) 470 1,053 1,497
Roaming expenses (v) 475 827 1,178
Spectrum fees (vi) 20 12 12
Operating lease charges (vii) 152 227 280
Sales commission (viii) 152 264 378
Debt collection service fees (viii) 60 133 143
Billing service fees (viii) 1 1 2
Equipment maintenance service fee (ix) -- -- --
Rental charges of synchronized clock
ports (x) -- -- 2
Purchase of mobile phones and
equipment 1,743 -- --
Interest paid/payable (xi) 106 83 --
Interest received 3 -- --
Capital contributions (xii) 246 -- --
Distributions (xiii) 222 -- --
F-53
116
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
24 RELATED PARTY TRANSACTIONS (CONTINUED)
NOTES:
(i) Interconnection revenue represents the amounts received or
receivable from the Guangdong PTA, the Zhejiang PTA, the
Jiangsu PTA, the Fujian PTA, the Henan PTA and the Hainan PTA
("the relevant PTAs") in respect of calls made between the Group's
cellular networks, the fixed line networks in Guangdong, Zhejiang,
Jiangsu, Fujian, Henan and Hainan provinces ("the relevant
provinces") and other GSM network operators in other provinces in
the PRC. Prior to October 1, 1999, no interconnection revenue was
received by the Group in respect of inter-provincial outbound
calls made from the fixed line networks in the relevant provinces
to other GSM networks in other provinces in the PRC. Pursuant to
the interconnection agreement dated October 8, 1999 and with
effect from October 1, 1999, the Group records the amounts
receivable from the relevant PTAs for inter-provincial outbound
calls originating from the fixed line networks in the relevant
provinces, which terminate on GSM networks in other provinces in
the PRC as interconnection revenue.
(ii) Interconnection charges represent the amounts paid or payable to
China Mobile or the relevant PTAs in respect of calls made between
the Group's cellular networks, the fixed line networks in the
relevant provinces and other GSM network operators in other
provinces in the PRC. Prior to October 1, 1999, no interconnection
charges were paid/payable in respect of inter-provincial outbound
calls made from the fixed line networks in the relevant provinces
to other GSM networks in other provinces in the PRC. Pursuant to
the interconnection agreement dated October 8, 1999 and with
effect from October 1, 1999, the Group records the amounts payable
to China Mobile for inter-provincial outbound calls originating
from the fixed line networks in the relevant provinces, which
terminate on other GSM networks in other provinces in the PRC as
interconnection charges.
(iii) Leased line charges represent expenses paid or payable to the
relevant PTAs for the use of leased lines between the base
transceiver stations, base station controllers, base stations,
fixed line network connectors, long distance network connectors
and main switches.
(iv) A cellular telephone user using roaming services is charged at the
respective roaming usage rate for roaming in calls, in addition to
applicable long distance charges. Roaming revenue represents
domestic and international roaming in usage charges from
non-subscribers received or receivable from the relevant domestic
and international cellular telephone operators through the MII or
China Mobile. With effect form April 1, 1999, all settlements of
inter-provincial roaming and corresponding interconnection
revenues are made through China Mobile instead of the MII.
F-54
117
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
24 RELATED PARTY TRANSACTIONS (CONTINUED)
NOTES: (CONTINUED)
(v) A cellular telephone user using roaming services is charged at the
respective roaming usage rate for roaming out calls, in addition
to applicable long distance charges. Roaming expenses represent
the amount of domestic and international roaming out charges
received or receivable from subscribers which is to be remitted
to the relevant domestic and international cellular telephone
operators for their share of the roaming revenue through the MII
or China Mobile. With effect from April 1, 1999, all settlements
of inter-provincial roaming and corresponding interconnection
charges are made through China Mobile instead of the MII.
(vi) Spectrum fees represent the spectrum usage fees paid or payable
to MII through China Mobile for the usage of the frequency bands
allocated to the Company's subsidiaries in the PRC.
(vii) Operating lease charges represent the rental paid or payable to
the relevant PTAs for operating leases in respect of land and
buildings and others.
(viii) With effect from October 20, 1997 for Guangdong Mobile and Zhejiang
Mobile, January 1, 1998 for Jiangsu Mobile, April 1, 1999 for
Fujian Mobile and Hainan Mobile and July 1, 1999 for Henan Mobile,
each of these subsidiaries entered into certain services
agreements in respect of marketing services with authorized
dealers, debt collection services and billing services with the
relevant PTAs.
Sales commission represents the amounts paid or payable to the
relevant PTAs for their marketing of the cellular services in the
relevant provinces.
Debt collection service fees represent the amounts paid or payable
to the relevant PTAs for their provision of debt collection
services to the Company's subsidiaries.
Billing service fees represent the amounts paid or payable to the
Fujian PTA and Henan PTA for their provision of the billing
services to Fujian Mobile and Henan Mobile.
(ix) Equipment maintenance service fees represent the amount paid or
payable to the Fujian PTA for its provision of the maintenance
services to Fujian Mobile. No such expenses were incurred for the
year ended December 31, 1999.
(x) Rental charges of synchronized clock ports represent expenses paid
or payable to the relevant PTAs for leasing of synchronized clock
ports by the Company's subsidiaries.
(xi) Interest paid/payable represents the interest incurred on loans
borrowed from Zhejiang PTA and Telpo.
F-55
118
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
24 RELATED PARTY TRANSACTIONS (CONTINUED)
NOTES: (CONTINUED)
(xii) Capital contributions in 1997 represent capital contributions in
the form of cash received from the Zhejiang PTA upon the
establishment of Zhejiang Mobile and cash received from the
Guangdong PTA, respectively.
(xiii) Distributions represent cash payments by the Group to acquire
assets transferred to the Guangdong PTA for business unrelated to
the Group, and the cash effects of the effective settlement of an
intercompany account balance arising in the ordinary course of
business related to Zhejiang Mobile's TACS operations.
(b) Pursuant to the ordinary resolution passed by the Company's shareholders on
November 11, 1999, the Company acquired the entire issued share capital of
Fujian Mobile BVI, Henan Mobile BVI and Hainan Mobile BVI from CTHK (BVI),
the immediate holding company of the Company, for a total consideration of
HK$49,715 (RMB equivalent 52,953). The consideration was satisfied by a
cash of HK$19,031 (RMB equivalent 20,268) and allotment of shares to CTHK
(BVI) amounted 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.
Pursuant to the ordinary resolution passed by the Company's shareholders on
June 3, 1998, the Company acquired the entire issued share capital of
Jiangsu Mobile BVI from CTHK (BVI), for a total cash consideration of
HK$22,475 (RMB equivalent 24,120). The only asset of Jiangsu Mobile BVI is
its interest in the entire equity of Jiangsu Mobile.
25 SHAREHOLDERS' EQUITY
SHARE CAPITAL
Nominal
Number of Amount of
ordinary each ordinary
shares Share Amount
HK$
AUTHORIZED:
Balance at December 31, 1998 and 1999
16,000,000,000 HK$0.1 1,600
============== =====
F-56
119
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
25 SHAREHOLDERS' EQUITY (CONTINUED)
SHARE CAPITAL (CONTINUED)
Nominal
Number of amount of
ordinary each ordinary
shares share Amount
HK$
ISSUED AND FULLY PAID:
Balance at January 1, 1998 and
December 31, 1998 11,780,788,000 HK$0.1 1,178
============== =====
RMB
equivalent 1,261
=====
Balance at January 1, 1999 11,780,788,000 HK$0.1 1,178
Issue of new shares to the
professional and institutional
investors 644,804,000 HK$0.1 65
Issue of consideration shares for
acquisition of subsidiaries 1,273,195,021 HK$0.1 127
Shares issued under share option
scheme (Note 26) HK$0.1
7,500,000 1
-------------- -----
Balance at December 31, 1999 13,706,287,021 1,371
============== =====
RMB
equivalent 1,467
=====
F-57
120
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
25 SHAREHOLDERS' 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 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 authorised share capital of the Company was increased from HK$10
to HK$1,600,000 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 CTHK
(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$0.1 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$0.1 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$0.1 each to professional
and institutional investors, at a consideration of HK$24.1 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$0.1
each were issued and credited as fully paid to CTHK (BVI), at a
consideration of HK$24.1 per share as part of the consideration for the
acquisition of Fujian Mobile BVI, Henan Mobile BVI and Hainan Mobile BVI.
F-58
121
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
25 SHAREHOLDERS' EQUITY (CONTINUED)
RESERVES
Capital reserve
As mentioned in Note 1, this 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); and
- goodwill arising on the acquisition of Jiangsu Mobile BVI and Jiangsu
Mobile on June 3, 1998 (RMB15,622), 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 (RMB42,440), which has been eliminated against
capital reserve immediately upon acquisition.
PRC statutory reserves
PRC statutory reserves include general reserve, enterprise expansion fund,
statutory surplus reserve and statutory public welfare fund.
At December 31, 1999, Guangdong Mobile, Zhejiang Mobile, Jiangsu Mobile and
Fujian Mobile are wholly-foreign owned enterprises. In accordance with
Accounting Regulations for PRC Enterprises with Foreign Investment, they
are required to transfer at lease 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 at 10% and 30%, respectively, of
their profits after taxation determined under PRC GAAP.
The general reserve can be used to make good losses and to increase the
capital of the subsidiaries while enterprise expansion fund can be used to
increase the capital of the subsidiaries, to acquire fixed assets and to
increase current assets.
F-59
122
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
25 SHAREHOLDERS' EQUITY (CONTINUED)
RESERVES (CONTINUED)
As Henan Mobile and Hainan Mobile were only registered as wholly-foreign
owned enterprises on January 27, 2000 and January 19, 2000, respectively,
they are not required to make the above transfers for the year ended
December 31, 1999. According to their Articles of Association and
Regulations on Posts and Telecommunications Enterprises, Henan Mobile and
Hainan Mobile are required to transfer a certain percentage of profit after
taxation, as determined under PRC GAAP, to the statutory surplus reserve
and statutory public welfare fund. During the year, appropriations were
made by Henan Mobile and Hainan mobile to the statutory surplus reserve and
the statutory public welfare fund at 10% and 9%, respectively, of their
profit after taxation determined under PRC GAAP.
Statutory surplus reserve can be used to make good previous years' losses,
if any, and may be converted into paid-up capital, provided that the
balance after such offset is not less than 25% of the registered capital of
the subsidiaries. Statutory public welfare reserve 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.
At 31 December 1999, the balances of the general reserve, enterprise
expansion fund, statutory surplus reserve and statutory public welfare fund
were RMB1,400 (1998: RMB523), RMB4,198 (1998: RMB1,569), RMB83 (1998:
RMB74) and RMB46 (1998: RMB37) respectively.
Distributable reserves
At December 31, 1999, the amount of distributable reserves of the Company
amounted to RMB3,082 (1998: RMB1,848).
SHARE OPTION SCHEME
On October 8, 1997, the Company adopted a share option scheme pursuant to
which 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 up to a maximum
aggregate number of shares equal to 10% of the total issued share capital
of the Company. According to the share option scheme, the consideration
payable by a participant for the grant of an option under the share option
scheme will be HK$1.00. The price of a share payable by a participant upon
the exercise of an option will be determined by the directors of the
Company at their discretion, except 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 prices of shares on The Stock
Exchange of Hong Kong Limited on the five trading days immediately
preceding the date of grant of the option.
F-60
123
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
25 SHAREHOLDERS' EQUITY (CONTINUED)
SHARE OPTION SCHEME (CONTINUED)
The period during which an option may be exercised will be determined by
the directors at their discretion, except that no option may be exercised
later than 10 years after the adoption date of the scheme.
On March 9, 1998 and November 26, 1999, a total number of share options of
20,200,000 were granted under the share option scheme to certain directors
of the Company. During the year, options were exercised to subscribe for
7,500,000 ordinary shares of HK$0.1 each at a consideration of HK$11.1 per
share.
At December 31, 1999 and 1998, the outstanding options were:
Period during Number of options
which options Exercise outstanding at
Date options granted exercisable Price the year end
AT DECEMBER 31, 1999
March 9, 1998 March 9, 1998 HK$11.1 4,500,000
to March 8, 2006
November 26, 1999 November 26, 1999 HK$33.91 4,100,000
to October 7, 2007
November 26, 1999 November 26, 2002 HK$33.91 4,100,000
to October 7, 2007
AT DECEMBER 31, 1998
March 9, 1998 March 9, 1998 HK$11.1 12,000,000
to March 8, 2006
F-61
124
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
26 FOREIGN 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.
27 PRINCIPAL SUBSIDIARIES
Details of the Company's principal subsidiaries are as follows:
Authorized, issued and
Place and date paid up capital Attributable
of incorporation/ --------------------------------------- equity
Name of company establishment Authorized Issued and paid up interest % Principal activities
Guangdong Mobile PRC -- RMB 5,595 100% Cellular telephone
September 28, 1988 operator
Zhejiang Mobile PRC -- RMB 2,118 100% Cellular telephone
February 2, 1996 operator
Jiangsu Mobile BVI BVI 10,000 shares 1 share at HK$1 100% Investment holding
March 6, 1998 at HK$1 company
Jiangsu Mobile PRC -- RMB 2,800 100% Cellular telephone
December 10, 1992 operator
Fujian Mobile BVI BVI 10,000 shares 1 share at HK$1 100% Investment holding
September 1, 1999 at HK$1 company
Fujian Mobile PRC -- RMB 5,247 100% Cellular telephone
January 17, 1991 operator
Henan Mobile BVI BVI 10,000 shares 1 share at HK$1 100% Investment holding
September 1, 1999 at HK$1 company
Henan Mobile PRC -- RMB 4,368 100% Cellular telephone
August 1, 1991 operator
Hainan Mobile BVI BVI 10,000 shares 1 share at HK$1 100% Investment holding
September 1, 1999 at HK$1 company
Hainan Mobile PRC -- RMB 643 100% Cellular telephone
September 1, 1993 operator
F-62
125
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
27 PRINCIPAL SUBSIDIARIES (CONTINUED)
Total dividend declared by the Company's subsidiaries for the financial
year ended December 31, 1999 amounted to RMB985 (1998: NIL).
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP
The Group's accounting policies conform with HK GAAP which differ in
certain material respects from US GAAP. The significant differences relate
principally to the following items and the adjustments considered necessary
to present the net profit 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 acquisition method to account for the
purchase of Jiangsu Mobile, Fujian Mobile, Henan Mobile and Hainan Mobile.
Under the acquisition method, the acquired results are included in the
results of operations from the date of their acquisition. 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.
As a result of the Group, Jiangsu Mobile, Fujian Mobile, Henan Mobile and
Hainan Mobile being under common control prior to the acquisition, such
acquisition under US GAAP is considered a "combination 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 generally are restated on a combined basis. The
consideration paid by the Group has been treated as an equity transaction
in the year of acquisition for US GAAP purposes.
(B) CAPITALIZATION OF INTEREST
Under HK GAAP, the Group capitalizes interest costs to the extent that the
related borrowings are 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.
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.
F-63
126
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
(C) REVALUATION AND IMPAIRMENT OF FIXED ASSETS
For certain periods prior to May 31, 1997, the fixed assets of the
subsidiaries were revalued in compliance with PRC rules and regulations,
resulting in an increase in shareholders' equity.
Additionally, the fixed assets of Guangdong Mobile and Zhejiang Mobile were
revalued as of May 31, 1997 as a result of the Restructuring that occurred
in 1997. The fixed assets of Jiangsu Mobile were revalued as of
December 31, 1997 upon its acquisition by the Group on June 3, 1998. The
fixed assets of Fujian Mobile, Henan Mobile and Hainan Mobile were revalued
as of June 30, 1999 upon their acquisitions by the Group on November 11,
1999. These fixed asset revaluations result in an increase in shareholders'
equity with respect to the increase in carrying amount of certain fixed
assets above their historical cost bases.
The carrying amount of fixed assets under Hong Kong 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, discounted to their present values. A
subsequent increase in the recoverable amount is written back to the
statement of income when circumstances and events that led to the
write-down or write-off cease to exist.
Under US GAAP, fixed assets are stated at their historical cost, less
accumulated depreciation. However, as a result of the tax deductibility of
the revaluation reserve, a deferred tax asset related to the reversal of
the revaluation reserve is created under US GAAP with a corresponding
increase in shareholders' equity.
Under US GAAP, fixed assets 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.
F-64
127
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
(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 PTA 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 statement 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.
(E) DEFERRED TAXATION
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.
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 criterion of "more
likely than not".
(F) SHARE OPTION SCHEME
The Group grants share options to directors and employees. Under HK GAAP,
the proceeds received are recognized as an increase to capital upon the
exercise of the share options.
Under US GAAP, the Group determines compensation expense 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 this amount over
the vesting period of the option concerned.
(G) REVENUE RECOGNITION
Until June 30, 1999, under both Hong Kong GAAP and US GAAP, connection fee
revenue was recognized as received. Under US GAAP, effective July 1, 1999,
net connection fees received in excess of direct costs are deferred and
recognized over the estimated customer usage period for the related
service.
F-65
128
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
(H) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
establishes accounting and reporting standards for derivative instruments
and for hedging activities. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and the type of hedge transaction. SFAS 133, as
amended, is effective for fiscal years beginning after June 15, 2000. The
Company has not yet assessed the impact of the adoption of SFAS 133.
The effect on net profit of significant differences between HK GAAP and US
GAAP is as follows:
Year ended December 31,
------------------------------------
1997 1998 1999
RMB RMB RMB
Net profit under HK GAAP 4,955 6,900 4,797
Adjustments:
Effect of combination of entities under
common control 3,219 2,774 2,204
Capitalized interest 59 58 7
Revaluation of fixed assets 411 1,250 3,781
Employee housing scheme (186) (45) (57)
Deferred taxation (155) (188) (267)
Share option scheme -- (32) (22)
Recognition of connection fees -- -- (1,214)
Deferred tax effects of US GAAP adjustments (155) (432) (995)
----- ------ ------
Net profit under US GAAP 8,148 10,285 8,234
===== ====== ======
Basic and diluted net profit per share in
accordance with US GAAP 0.75 0.79 0.63
===== ====== ======
F-66
129
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
28 SIGNIFICANT 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,
----------------------
1998 1999
RMB RMB
Shareholders' equity under HK GAAP 45,827 57,092
Adjustments:
Effect of combination of entities under common control 8,902 --
Capitalized interest 294 301
Revaluation of fixed assets
-- Cost (6,195) (6,586)
-- Accumulated depreciation and other 1,725 5,506
Deferred tax adjustments on revaluations 1,475 304
Employee housing scheme (553) (610)
Deemed capital contribution for employee housing scheme 442 525
Recognition of connection fees -- (1,214)
Recognition of deferred taxes (155) 402
Deferred tax effects of US GAAP adjustments (97) 207
------ ------
Shareholders' equity under US GAAP 51,665 55,927
====== ======
F-67
130
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
The following are condensed consolidated balance sheets of the Group as of
December 31, 1998 and 1999, 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, 1999,
restated to reflect the impact of the differences between HK GAAP and
US GAAP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
-------------------------------------
1997 1998 1999
RMB RMB RMB
OPERATING REVENUE
Usage fees 13,379 22,169 31,441
Monthly fees 3,707 5,755 6,371
Connection fees 5,509 4,753 3,557
Other operating revenue 1,258 2,839 4,057
------ ------ ------
TOTAL OPERATING REVENUE 23,853 35,516 45,426
------ ------ ------
OPERATING EXPENSES
Leased lines 4,518 5,165 4,690
Interconnection 1,589 5,511 7,683
Depreciation 3,783 5,463 8,152
Personnel 1,089 1,844 2,555
Other operating expenses 3,888 5,642 6,457
Write-down and write-off of TACs network
equipment -- 136 5,267
------ ------ ------
TOTAL OPERATING EXPENSES 14,867 23,761 34,804
====== ====== ======
OPERATING PROFITS 8,986 11,755 10,622
OTHER INCOME 52 321 619
NON-OPERATING EXPENSES (12) (1) (136)
INTEREST INCOME 664 1,615 773
FINANCE COSTS (119) (142) (396)
------ ------ ------
PROFIT BEFORE TAX 9,571 13,548 11,482
INCOME TAX (1,416) (3,262) (3,248)
------ ------ ------
PROFIT AFTER TAX 8,155 10,286 8,234
MINORITY INTERESTS (7) (1) --
------ ------ ------
NET PROFIT 8,148 10,285 8,234
====== ====== ======
F-68
131
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31,
----------------------
1998 1999
RMB RMB
ASSETS
Current assets
Cash and cash equivalents 17,683 19,349
Deposits with banks 1,311 8,227
Accounts receivable 3,300 4,957
Other receivables 408 549
Inventories 199 207
Prepaid expenses and other current assets 1,081 517
Amount due from ultimate holding company -- 92
Amounts due from related parties 1,737 1,700
------ ------
Total current assets 25,719 35,598
Fixed assets 39,930 41,618
Construction in progress 8,021 7,036
Interest in associates 46 46
Deferred tax assets 1,382 3,221
Deferred expenses -- 51
------ ------
TOTAL ASSETS 75,098 87,570
====== ======
F-69
132
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
December 31,
----------------------
1998 1999
RMB RMB
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bills payable -- 1,779
Accounts payable 6,620 6,026
Bank and other loans 6,724 4,351
Obligation under capital lease -- current portion 63 68
Taxes payable 1,299 2,868
Amounts due to related parties 1,143 1,696
Accrued expenses and other payables 3,340 4,200
Amount due to ultimate holding company -- 664
------ ------
Total current liabilities 19,189 21,652
Bank and other loans 2,295 2,226
Deferred revenue 1,757 2,706
Obligation under capital lease -- long term portion 177 107
Fixed rates notes 4,952
------ ------
TOTAL LIABILITIES 23,418 31,643
Minority interests 15 --
SHAREHOLDERS' EQUITY 51,665 55,927
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 75,098 87,570
====== ======
F-70
133
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF TOTAL SHAREHOLDERS' EQUITY FOR THE
FOLLOWING YEARS:
RMB
Owner's equity at January 1, 1997 20,871
Net profit for the year ended December 31, 1997 8,148
Capital contribution 246
Distribution to owner (809)
Contribution by owner 1,871
Issue of ordinary shares 33,570
Tax effect of revaluations 2,666
Deemed capital contribution for employee housing scheme 152
-------
Shareholders' equity at December 31, 1997 66,715
Net profit for the year ended December 31, 1998 10,285
Deemed capital distribution (24,121)
Distribution to owner (1,528)
Contribution by owner 207
Deemed capital contribution for employee housing scheme 75
Stock-based compensation 32
-------
Shareholders' equity at December 31, 1998 51,665
Net profit for the year ended December 31, 1999 8,234
Issue of ordinary shares 48,908
Deemed capital distribution (52,953)
Distribution to owner (1,336)
Contribution to owner 351
Deemed capital contribution for employee housing scheme 82
Tax effect of revaluations 954
Stock-based compensation 22
-------
Shareholders' equity at December 31, 1999 55,927
=======
F-71
134
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
28 SIGNIFICANT 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 "Cash Flow Statements" ("HK SSAP 15"). Its objectives and principles
are similar to those set out in Statement of Financial Accounting Standards
No. 95, "Statement of Cash Flows" ("SFAS 95"). The principal differences
between the standards relate to classification. Under HK SSAP 15, the Group
presents its cash flows for (a) operating activities; (b) returns on
investments and servicing of finance; (c) taxation; (d) investing
activities; and (e) financing activities. Cash flows from taxation and
returns on investments and servicing of finance shown herein 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,
--------------------------------------
1997 1998 1999
RMB RMB RMB
Net cash inflow from
Operating activities 13,252 17,110 23,500
Investing activities (11,590) (17,694) (19,245)
Financing activities 35,440 (22,017) (2,589)
------- ------- -------
Increase/(decrease) in cash and
cash equivalents 37,102 (22,601) 1,666
Cash and cash equivalents at
beginning of year 3,182 40,284 17,683
------- ------- -------
Cash and cash equivalents at end
of year 40,284 17,683 19,349
======= ======= =======
Interest paid (net of amounts capitalised) 159 244 352
======= ======= =======
Income taxes paid 666 1,744 3,222
======= ======= =======
F-72
135
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
SIGNIFICANT NON-CASH TRANSACTIONS
The Group incurred payables of RMB3,773 and RMB1,779 to equipment suppliers
and banks respectively for additions of construction in progress during the
year ended December 31, 1999.
The Group incurred payables of RMB4,319 and RMB13 to equipment suppliers
and related parties respectively for additions of construction in progress
during the year ended December 31, 1998.
In addition, the Group incurred payables of RMB2,193 to equipment suppliers
and a loan of RMB1,382 from a related party for additions of construction
in progress during the year ended December 31, 1997.
29 ADDITIONAL INFORMATION REQUIRED BY US GAAP
The following additional financial statement disclosures are required under
US GAAP and are presented on a US GAAP basis.
WRITE-DOWN AND WRITE-OFF OF TACS NETWORK EQUIPMENT
Year ended December 31,
-----------------------
1998 1999
RMB RMB
Write-down of TACS network equipment 183 4,359
Write-off of TACS network equipment -- 908
---- -----
183 5,267
==== =====
F-73
136
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
29 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
WRITE-DOWN AND WRITE-OFF OF TACS NETWORK EQUIPMENT (CONTINUED)
During the year, in light of the gradual opening of the telecommunication
market in the PRC and the rapid change of technology, the Company has
re-assessed the recoverability of the carrying amount of the TACS network
equipment which are held for use at December 31, 1998 and 1999. The Company
determined the existence of impairment by comparing the carrying amount of
these equipment to their future undiscounted net cash flows expected to be
generated over the economic life of each TACS network in service at
December 31, 1998 and 1999. The Company has recognized impairment write
downs of RMB 183 million and RMB4,359 on these equipment in 1998 and 1999,
respectively. Such amount of loss is measured by the amount by which the
carrying amounts of the individual TACS network assets exceed their fair
value determined based on the discounted net cash flow expected to be
generated by each TACS network. Additionally, the Company has written-off
RMB908 of certain TACS network equipment which have been removed from
service at December 31, 1999.
INCOME TAX
The Company is subject to Hong Kong profits tax at 16% for the years ended
December 31, 1998 and 1999 (1997: 16.5%).
The Group's PRC subsidiaries are subject to the statutory income tax rate
of 33%, except Hainan Mobile at a tax rate of 15%.
The components of income tax expense are as follows:
Year ended December 31,
---------------------------------------
1997 1998 1999
RMB RMB RMB
Current 1,113 2,770 4,134
Deferred 303 492 (886)
----- ----- -----
1,416 3,262 3,248
===== ===== =====
F-74
137
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
29 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED) INCOME 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,
-------------------------------------
1997 1998 1999
RMB RMB RMB
Expected PRC taxation at statutory
tax rates 3,158 4,471 3,789
Non-taxable items
-- Connection fee (1,574) (537) (107)
-- Surcharge (375) (337) (168)
-- Offshore income (86) (225) (66)
Non-deductible expenses 341 152 191
Rate differential on PRC operations -- -- (385)
Rate differential on Hong Kong
operations (81) (233) (46)
Reversal of deferred taxation due to
change of income tax rate -- -- 84
Others 33 (29) (44)
------ ----- -----
Income tax 1,416 3,262 3,248
====== ===== =====
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,
----------------------
1998 1999
RMB RMB
Deferred tax assets:
Provision for obsolete inventories 34 51
Provision for doubtful accounts 514 402
Revaluation of fixed assets 1,518 2,488
Amortization of deferred revenue 82 370
----- -----
Gross deferred tax assets 2,148 3,311
Deferred tax liabilities:
Capitalized interest (97) (90)
Fixed assets basis difference (669) --
----- -----
Net deferred tax assets 1,382 3,221
===== =====
F-75
138
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
29 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
ACCOUNTS RECEIVABLE
December 31,
-----------------------
1998 1999
RMB RMB
Accounts receivable 4,899 6,313
Less: Allowance for doubtful accounts (1,599) (1,356)
------ ------
3,300 4,957
====== ======
Allowance for doubtful accounts is analyzed as follows:
RMB
At January 1, 1997 472
Provision for the year 767
Written-off (6)
------
At December 31, 1997 1,233
Provision for the year 978
Written-off (612)
------
At December 31, 1998 1,599
Provision for the year 1,102
Written-off (1,345)
------
At December 31, 1999 1,356
======
F-76
139
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
29 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
FIXED ASSETS
December 31,
------------------------
1998 1999
RMB RMB
Land use rights and buildings 1,851 2,810
Telecommunication transceivers, switching
centers and other network equipment 48,479 48,605
Office equipment, furniture and fixtures and others 1,133 1,844
------- -------
51,463 53,259
Less: accumulated depreciation (11,533) (11,641)
------- -------
39,930 41,618
======= =======
STOCK OPTION PLAN
Details of the Company's stock option plan and options granted under the
plan are contained in Note 21. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions used for grants: no dividend yield for all
years; expected volatility of 66.0 percent; risk-free interest rate of
9.5 percent; and expected life of 8 years. The per share fair value of
stock options granted during 1998 and 1999 were HK$10.85 and HK$31.48 on
the date of grant, respectively.
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations, in accounting for
its plan. As such, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeds the
exercise price. The compensation cost that has been charged against income
for US GAAP for the Company's stock option plan was RMB32 for 1998 and
RMB22 for 1999. Had compensation cost for the Company's stock option plan
been determined based on the fair value at the grant date for it stock
options under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", the Company's net profit and net
profit per share would have been reduced to the pro forma amounts indicated
below:
F-77
140
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
29 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
1998 1999
RMB RMB
Net profit As reported 10,285 8,234
Pro forma 10,178 8,113
Basic net profit per share As reported 0.79 0.63
Pro forma 0.78 0.62
Diluted net profit per share As reported 0.79 0.63
Pro forma 0.78 0.62
NET PROFIT PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted net profit per share computations prepared under US GAAP.
For the year ended December 31, 1997 For the year ended December 31, 1998 For the year ended December 31, 1999
--------------------------------------- ------------------------------------- ------------------------------------
Income Shares Per Share Income Shares Per Share Income Shares Per share
(Numerator) (Denominator) amount (Numerator) (Denominator) amount (Numerator) (Denominator) amount
(in millions) (in millions) (in millions)
BASIC NET
PROFIT PER
SHARE 8,148 10,808 0.75 10,285 13,054 0.79 8,234 13,165 0.63
===== ==== ====
EFFECT OF
DILUTIVE
SECURITIES
Stock options -- 2 3
------ ------ ------
DILUTED NET
PROFIT PER
SHARE 8,148 10,808 0.75 10,285 13,056 0.79 8,234 13,168 0.63
===== ====== ==== ====== ====== ==== ===== ====== ====
The fair values of all other financial instruments approximate their
carrying amounts due to the nature or short maturity of these instruments.
F-78
141
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
29 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
FAIR VALUE
Financial assets of the Group include cash and cash equivalents, accounts
receivable, other receivables and due from related parties. Financial
liabilities of the Group include accounts payable, bank and other loans,
other payables and 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, 1997, 1998 and 1999:
December 31, 1997 December 31, 1998 December 31, 1999
------------------- ------------------- -------------------
Carrying Fair Carrying Fair Carrying Fair
amount value amount Value amount value
RMB RMB RMB RMB RMB RMB
Fixed rate bank and
other loans 4,824 4,602 6,303 6,134 6,330 6,364
Variable rate bank and
other loans
517 517 2,716 2,716 247 247
Fixed rate notes -- -- -- -- 4,952 4,965
----- ----- ----- ----- ------ ------
Total bank and other
loans 5,341 5,119 9,019 8,850 11,529 11,576
===== ===== ===== ===== ====== ======
The fair values of all other financial instruments approximate their
carrying amounts due to the nature or short maturity of these instruments.
F-79
142
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
29 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
RELATED PARTY TRANSACTIONS
Year ended December 31,
-----------------------------------
1997 1998 1999
RMB RMB RMB
Interconnection revenue 38 868 1,474
Interconnection charges 774 4,301 6,176
Leased line charges 4,518 5,165 4,690
Roaming revenue 750 1,379 1,771
Roaming expenses 815 1,210 1,506
Spectrum fees 25 17 14
Operating lease charges 222 352 385
Sales commission 176 308 412
Debt collection service fees 60 170 170
Billing service fees 1 2 9
Equipment maintenance service fee -- -- --
Rental charges of synchronized clock parts -- -- 3
Purchase of mobile phones and equipment 2,529 24 --
Interest paid/payable 106 84 --
Interest received 3 -- --
Capital contributions 5,521 207 --
Distributions 4,213 1,528 --
Descriptions of the nature of the related party transactions are set forth
in Note 20.
SEGMENT REPORTING
Statement of Financial Accounting Standards 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 cellular businesses
operated within the Guangzhou, Zhejiang, Jiangsu, Fujian, Henan and Hainan
provinces of 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 cellular services to
individual customers within their geographic market. The Company's
operating segments have been aggregated into a single operating segment as
they are expected to exhibit similar future economic characteristics.
F-80
143
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
29 ADDITIONAL 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, influence of the MII
over substantially all aspects of the Group's operations and competition in
the cellular telephone industry (see Note 24).
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 cellular system's subscriber capacity is limited by the amount
of spectrum available for use by the system. 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.
F-81
144
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
29 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
DEPENDENCE ON THE MII SYSTEM'S PSTN AND INTERCONNECTION ARRANGEMENT
The Group's cellular services depend in large part upon access to the China
Telecom System's fixed line network. Limitations on the fixed line network
would lower local, long-distance and international call completion rates
for the Group's subscribers. There can be no assurance that increasing
usage of the network would not result in additional strain on the fixed
line network switching capacity, or that the existing quality of the fixed
line network will remain adequate.
In addition, the Group's operating revenues and expenses are affected by
the terms of its interconnection arrangements. A material increase in
interconnection charges payable by the Group could have a material adverse
effect on the Group's results of operations. There can be no assurance that
the commercial terms of future interconnection arrangements will be
acceptable to the Group.
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 16.
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-82
145
China Telecom (Hong Kong) Limited
Consolidated financial statements
for the year ended December 31, 1999
Notes to Consolidated Financial Statements (Continued)
(Amounts in millions, except share data)
30 COMPARATIVE FIGURES
The presentation and classification of items in the accounts have been
changed due to adoption of the requirement of HKSSAP 1 (revised)
"Presentation of financial statements". As a result, additional line items
have been included on the face of the consolidated statements of income and
the balance sheet as required by HKSSAP 1 (revised). Comparative figures
have been reclassified to conform with the current year's presentation.
F-83