China Telecom Corp Ltd Annual Report 2002

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FY2002 Annual Report · China Telecom Corp Ltd

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CONTENTS

COMPANY PROFILE AND CORPORATE INFORMATION

CHAIRMAN’S STATEMENT

BUSINESS REVIEW

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

REPORT OF THE DIRECTORS

REPORT OF THE SUPERVISORY COMMITTEE

CONNECTED TRANSACTIONS

DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT

NOTICE OF ANNUAL GENERAL MEETING

REPORT OF THE INTERNATIONAL AUDITORS

CONSOLIDATED BALANCE SHEET

BALANCE SHEET

CONSOLIDATED STATEMENT OF INCOME

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

CONSOLIDATED STATEMENT OF CASH FLOW 69

NOTES TO THE FINANCIAL STATEMENTS

SUPPLEMENTARY INFORMATION FOR ADS HOLDERS

110

FINANCIAL SUMMARY

115

CHINA TELECOM
ANNUAL REPORT 2002

COMPANY PROFILE AND CORPORATE INFORMATION

China Telecom Corporation Limited is a joint stock limited company established pursuant to the PRC
Company Law by China Telecommunications Corporation as its sole promoter on 10 September 2002.

We are the leading provider of wireline telecommunications services in Shanghai Municipality, Guangdong
Province, Jiangsu Province and Zhejiang Province in China. Our scope of business includes the following:

(1) operating a variety of domestic wireline telecommunications networks and facilities (including

wireless local loops);

(2) operating voice, data, image, multimedia and other information services mainly based on the wireline

networks;

(3)

conducting accounts settlement relating to international telecommunications services in accordance
with state regulations; and

(4) dealing with system

information
consulting, telecommunications equipment design together with manufacture, implementation and
sales.

integration, technological development, technical services,

Our H shares and American Depositary Shares (“ADS”) were listed on the Stock Exchange of Hong Kong and
the New York Stock Exchange on 15 November 2002 and 14 November 2002 respectively.

Chinese registered name:

中 Œ „ q信 股 份 有 限 公 司

English name:

China Telecom Corporation Limited

Authorised representative:

Zhou Deqiang

Company secretary:

International auditors:

Legal advisers:

Li Ping

KPMG

Jingtian & Gongcheng
Freshfields Bruckhaus Deringer
Sullivan & Cromwell LLP

Registered address:

31 Jinrong Avenue, Xicheng District,
Beijing, PRC, 100032

Telephone:

Facsimle:

(8610) 6642 8166

(8610) 6601 0728

CHINA TELECOM
ANNUAL REPORT 2002
2

COMPANY PROFILE AND CORPORATE INFORMATION

Website:

www.chinatelecom-h.com

H share registrar:

ADS depositary:

Listings:

H shares:

ADSs:

Computershare Hong Kong Investor Services Limited
1712–1716, 17th Floor
Hopewell Centre
183 Queen’s Road East, Wanchai
Hong Kong

Bank of New York
101 Barclay Street
New York, NY 10286
The United States of America

The Stock Exchange of Hong Kong Limited
stock code: 728

New York Stock Exchange, Inc.
stock code: CHA

CHINA TELECOM
ANNUAL REPORT 2002
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CHAIRMAN’S STATEMENT

[divider]

CHINA TELECOM
ANNUAL REPORT 2002
4

CHAIRMAN’S STATEMENT

We firmly believe
in the maximisation of
shareholder value as our operating principle.
We seek to develop a business model that is
market-oriented,
and
return-driven. We strive to take advantage of
organic and external growth opportunities to
leverage our strength and continuously create
value for our shareholders.

customer-centered,

strategies based on

We fine-tune our marketing strategy according
to market conditions. We adopt different
marketing
specific
customer segments. This has enabled us to
in wireline voice
achieve stable growth
services and high growth in broadband and
Internet services. We have enhanced revenue
driven by traffic volume growth and also
actively developed new value-added services.
As a result, we have successfully maintained a
commanding market position.

through

centralised

We continue to take measures to improve cost
control and profitability. We have upgraded
our overall budget planning and control
cash,
capabilities
investment, and equipment procurement
management.
consistently
implemented operating expense controls,
operations
especially
and
network
in
maintenance, and have
reduced capital
expenditures, thereby improving profitability.

have

•

Dear shareholders,

In 2002 China Telecom Corporation Limited
successfully completed its corporate restructuring
and went on to complete its global initial public
offering. The Company has seized this opportunity
to advance closer to its goal of being a world-class
telecommunications company and has turned in a
strong performance for the year, surpassing its
its promises to
goals for 2002 and realising
shareholders.

REVIEW OF 2002

Revenue for the year grew by 10.1% to RMB75,496
million and net income increased to RMB16,864
million with a net profit margin of 22.3%, while
operating expenses of RMB54,118 million, 7.3% up
from 2001, increased at a rate lower than that of
revenue. We have expanded our wireline subscriber
base by 17.3%, adding 8.38 million access lines in
service, bringing our total to 56.86 million. We more
than doubled the size of our broadband business,
signing up approximately 0.98 million new
customers to reach a year-end subscriber base of
1.38 million. Profitability was enhanced with basic
earnings per share of RMB0.24.

Our strong performance is largely the result of the
effective execution of our business strategies,
continued improvement of our internal management
innovation, and
systems, encouragement of
steadfast work ethic. This has led the Company into
a new era of development along with a new
corporate image.

CHINA TELECOM
ANNUAL REPORT 2002
5

CHAIRMAN’S STATEMENT

•

continuing management

We are
reform
initiatives. We have re-positioned our local
branches as Basic Business Units and carried
out a critical overhaul of
their business
operations. We have established an internal
Service Level Agreement mechanism between
front-end marketing units and back-end
network support units. A Key Performance
Indicator system has been established to
improve performance evaluation. We have
upgraded
technology
infrastructure (CTG — MBOSS). All of these
efforts are designed to improve our operating
efficiency, market responsiveness and service
quality, so as
to strengthen our core
competitiveness.

information

our

We continue to capitalise on our network
advantages. Our network is characterised by
reliability, extensive coverage and high
its
further
capacity. While
structure, we have upgraded
network
intelligence. As a result, we are able to create
new value-added products and services for our
customers and are well-positioned to migrate
seamlessly
the next generation of
technology.

optimising

We have taken innovative measures in the
management of human resources. We have
established a compensation system
linked
with value creation and growth in profitability.
We have also set up a dual-track promotion
system for employee career development.
Together these new approaches have greatly
stimulated the enthusiasm and creativeness of
our employees, creating a strong basis for our
new corporate culture.

with

committee,

supervisory

corporate governance norms. We have
established a corporate governance structure
consisting of shareholders’ meetings, board of
and
directors,
corporate management
clear-cut
responsibilities. Under the board of directors,
we have established audit and remuneration
committees in which independent directors
play key roles. Further, we are continuing our
efforts to improve information disclosure to
transparent, efficient and smooth
ensure
communications between management and
investors.

We have adopted OECD corporate governance
standards. In accordance with relevant laws
and regulations, we have adopted OECD

In 2002, we successfully completed our initial
public offering, the world’s largest telecom IPO for
the year. Our shares have been listed on the Stock
Exchange of Hong Kong and the New York Stock

CHINA TELECOM
ANNUAL REPORT 2002
6

Exchange since November 2002. We take pride in
the fact that Fortune magazine named us as one of
the “most admired companies” for the year 2002.

possible when they are commercially viable, so as
to better serve our communities.

CHAIRMAN’S STATEMENT

OUTLOOK FOR 2003

industrial development,

We believe China’s economy will continue to record
strong and healthy growth in 2003 with the goal of
further improving the people’s living standards. The
government’s strategic focus is on the development
of information technology. Under the slogan of “let
technology drive
let
industrial development drive
technology”, a
nationwide promotional
campaign will help
stimulate demand for telecommunications services.
With low penetration rates across most of China for
wireline services, we see a huge potential for
growth. Data communications and
information
technology solutions have shown strong demand
among
the
popularisation of the Internet, the communication
of knowledge and information will drive the fast
growth of our broadband services. Various
information applications will stimulate high-
capacity, value-added services of all kinds. We
intend to take
full advantage of the unique
opportunity presented by China’s large and growing
market to create as much value as possible for our
shareholders.

segments. With

customer

all

Over time, we believe the regulatory environment
will become more transparent and mature. Tariff
policy for wireline telecommunication services is
in the
basically stable. Regulations benefit us
provision of new services that will enjoy strong
demand and high margins. We are actively seeking
to become a
telecommunications
operator.

full service

and

reform

restructuring

The
China’s
telecommunications sector continues to provide us
with both opportunities and challenges. We
welcome orderly competition as well as cooperation
with others in the years to come in the best interest
of our shareholders. As a responsible carrier, we
seek to provide as many telecom services as

We have the unique right, but not the obligation, to
grow through acquisitions of high-quality assets
from our parent company and see this type of
opportunity as an important means of expanding
our operations. If we seek to carry out such an
acquisition, however, it will be based on market
conditions and commercial considerations and will
be subject to minority shareholders’ approval.

We are excited by our future prospects. We will
continue to
improve capital expenditures and
operating expense control so as to enhance our
profitability. We are building China Telecom on the
values of innovation, integrity, cooperation, value
creation based on a carefully executed strategy. We
have a commitment to you, our shareholders and
customers,
this
Information Age.

the very best of

to share

DIVIDEND POLICY

At the forthcoming annual general meeting, the
board of directors will propose a dividend of
HK$0.065 per share on an annual basis. Actual
dividend payment for the year 2002 will be pro-
rated based on the period from the date of listing to
31 December 2002.

Finally, I would like to take this opportunity to
express my sincere thanks to all of our constituents
— our board members, supervisors, shareholders,
employees and customers, for your great support
this year.

Zhou Deqiang
Chairman and Chief Executive Officer

Beijing, PRC
24 April 2003

CHINA TELECOM
ANNUAL REPORT 2002
7

[Divider]

BUSINESS REVIEW

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CHINA TELECOM
ANNUAL REPORT 2002
8

BUSINESS REVIEW

our total to 56.86 million. We grew our broadband
subscriber base by 247.4%, signing up 0.98 million
new customers to attain a year-end subscriber base
of 1.38 million. We built up demand momentum for
value-added wireline
the
successful market debuts of V-net, information
telephone, 17901 direct dial VoIP, 4008 quasi toll-
free and wireline prepaid services.

services

through

further consolidated our market
In 2002, we
leadership position with the full implementation of
our market segmentation plan and of our growth
strategies geared toward wireline voice, broadband
and Internet, and value-added services.

satisfaction

through
We enhanced
customer
differentiated product provisioning, and
the
establishment of four clearly positioned servicing
and distribution channels, consisting of our key
account managers, community managers, rural
contract personnel and “1000” service hotline.
Customer complaints filed with the Ministry of
Information Industry against us declined 87% in
2002, falling to one of the lowest levels in the
industry.

We pushed ahead with our internal restructuring
and business re-engineering initiatives aimed at
instilling greater market responsiveness, more
effective cost control, higher efficiency and
competitiveness into our operations.

reflected

China’s regulatory environment has become more
transparent, and the competition more orderly. The
structural adjustment in wireline tariffs has been
financial
fully
company’s
the
in
performance of 2002. Tariff policy
regarding
wireline telecom services is basically stable. In the
mean time, the Ministry of Information Industry will
increase regulatory scrutiny, and actively facilitate
orderly competition in the market.

CHINA TELECOM
ANNUAL REPORT 2002
9

OVERVIEW

We are the leading provider of wireline telephone,
data, Internet and leased line services in Shanghai
Municipality, Guangdong Province, Jiangsu Province
and Zhejiang Province. As is consistent with our
first, service
philosophy of placing “customer
foremost”, we seek to develop a business model
is market-oriented, customer-centered and
that
an outstanding
return-driven. We
performance in 2002.

achieved

In 2002, our revenue grew by 10.1% to RMB75,496
million and net income increased to RMB16,864
million with a net profit margin of 22.3%. We have
expanded our wireline subscriber base by 17.3%,
adding 8.38 million access lines in service, bringing

BUSINESS REVIEW

The following table illustrates some major indicators of our business development in the last 3 years:

Local wireline access lines in service

(in thousands)

Penetration rate of wireline service (%)
Local voice usage (pulses in billions)
Domestic long distance usage

(minutes in millions)

International, Hong Kong, Macau and

Taiwan long distance usage
(minutes in millions)

DDN ports (in thousands) [in 64K equivalents]
FR ports (in thousands) [in 128K equivalents]
ATM ports (in thousands) [in 2M equivalents]
Broadband subscribers (in thousands)
Dial-up subscribers (in thousands)
Dial-up usage (minutes in billions)
2M digital circuits leased (lines in thousands)
Penetration rate of caller ID display

2000

2001

2002

39,822
18.3%
156.6

48,478
22.1%
158.8

56,859
25.7%
174.1

26,967

30,630

33,624

1,417
103.1
11.2
1.3
10
5,171
22.2
65.1

1,406
158.6
20.4
7.8
397
9,627
45.5
84.3

1,325
207.7
24.3
10.8
1,379
11,623
40.2
94.4

Change
2002 over
2001

17.3%
3.6 pp
9.6%

9.8%

-5.8%
31.0%
19.1%
38.5%
247.4%
20.7%
-11.6%
12.0%

(% of lines in service)

—

27.9%

41.9%

14.0 pp

CHINA TELECOM
ANNUAL REPORT 2002
10

Business Line Review

Local voice business sustained rapid growth

Generating 47.5% of total revenue, local wireline
voice service is the pillar of our business and the
focus of our development. We enjoy a dominant
market position in local services with a subscriber
market share of over 99%. Both our subscriber base
and traffic volume maintained high growth rates in
2002.

BUSINESS REVIEW

Local Wireline Subscribers

15%

2002

74%

Residential

Enterprise

Public Telephones

Wireless Local Access

Total Local Wireline Subscribers
(numbers in millions)

Subscriber base swiftly expanded

9 . 5

R : 1

48.5

56.9

39.8

2000

2001

2002

Local Wireline Subscribers

14%

2001

79%

Residential

Enterprise

Public Telephones

Wireless Local Access

for

and

business

foundation

We continued to rapidly expand our wireline
subscriber base in 2002. Adding 8.38 million new
access lines in service, we grew our subscriber base
by 17.3% to a total of 56.86 million access lines in
service at year-end. Such strong wireline subscriber
the
growth provides a solid
sustained development of our local voice, long
distance, Internet and data, and other services.
Meanwhile, we also improved the structure of our
subscriber base. Through strict emphasis on
profitability and high-end subscribers, we grew our
high-ARPU
telephone
subscribers by 21.3% and 58.5%, respectively.
Collectively, these valuable customers accounted
for 20.3% of our total subscribers at year-end, as
compared to 18.5% for 2001. Accelerating wireless
local access subscription was driven by strong
market demand. Being a natural extension of and
supplement to our wireline services, wireless local
access played a positive role in boosting local call
volume and revenue growth, and in stemming
competitive substitution. The year-end wireline
penetration rate of 25.7% in our service regions was
still significantly lower than the existing rates in
mature markets,
the great market
indicating
potential over which we preside.

public

CHINA TELECOM
ANNUAL REPORT 2002
11

BUSINESS REVIEW

Local telephone usage made steady headway

Local Wireline Usage (minutes in billions)

Total local usage, including voice and dial-up, grew
6.7% in 2002, totaling 226.6 billion pulses at year-
end. This growth was largely attributable to a 9.6%
growth in voice calls driven by expansion in our
subscriber base, enhancement of our distribution
channels and marketing
initiatives focused on
usage revenue. The upgrade made by some of our
subscribers from dial-up Internet access services to
broadband services led to a decrease in total dial-
up usage.

Local Wireline Usage (pulses in billions)

: 1 2 . 0 %

C A G R ( 1 )
54

157

159

174

2000

2001

2002

Voice Call

Dial-up Internet Access(2)

(1): 2000-2002CAGR of total usage
(2): including dial-up usage by our
subscribers and users of other
dial-up service providers

: 1 8 . 4 %

C A G R ( 1 )

118

146

2000
2000

2001
2001

2002
2002

Voice Call

Dial-up Internet Access(2)

(1): 2000-2002CAGR of total usage
(2): including dial-up usage by our
subscribers and users of other
dial-up service providers

Broadband and data business emerged as a major
driver of revenue growth

Internet and data business experienced
Our
explosive growth in 2002. Revenue grew 53.4%
from 2001 to RMB5,564 million, constituting 7.4%
of total revenue. We magnified our broadband
subscriber base by 247.4% from year-end 2001 to
serve 1.38 million total broadband users. ADSL
subscribers accounted for 81.4% of our total
broadband subscribers, numbering 1.12 million at
year-end 2002.

Broadband: Explosive growth

Over the past year, we successfully leveraged our
enormous existing subscriber base and dominant
control over the “last mile” access network to make
broadband access a strategic focus. Strong growth
in demand enabled us to position our broadband
services as premium products. Meanwhile, we
increased our brand name recognition through a
series of
campaigns
large-scale promotional
throughout 2002, the most notable of which was
the market momentum-pumping
“Ultimate
Broadband Tour”. Supporting operational efforts,

CHINA TELECOM
ANNUAL REPORT 2002
12

further

advances in technology have consistently brought
down equipment costs,
improving the
economics of our broadband business. Broadband
access is increasingly becoming a high growth, high
margin business that contributes significantly to our
revenue growth. We expect to quadruple our
broadband subscriber base by the end of 2005.

Cooperating with service providers, we have
introduced V-net, a new business model aimed at
promoting broadband penetration and usage. The
interaction between access and applications made
possible by V-net will open up a new range of
services to our end-users, including on-line gaming,
Video-On-Demand, on-line financial services, and
distance education, while equipping
service
providers with easy access to end user payments,
and to IDC, bandwidth and customer care services.
V-net will effectively promote the rapid proliferation
of broadband applications and stimulate growth in
our subscriber base and revenue.

Dial-up Internet access subscribers exceeded 10
million in 2002, an increase of 20.7% from 2001. A
well-established and growing narrow-band business
acts as a sort of incubator, nurturing demand for
our broadband business.

Broadband Subscribers
(numbers in thousands)

14
243

1,123

CAGR(1):1080%

8
88
301

2001

2002

LAN

Other

ADSL:6
LAN: 4

2000

ADSL

(1): 2000-2002 CAGR of total broadband

subscribers

BUSINESS REVIEW

Managed data: high growth in usage

line

remarkable development

in our
We achieved
managed data business over the past year. The
bandwidth volume of our Digital Data Network
(DDN), Frame Relay (FR) and Asynchronous Transfer
Mode (ATM) services grew by 31.0%, 19.1% and
38.5%, respectively. We continued to focus on this
business
strategically, and have been
committed to providing large enterprise customers
with tailored services and total solutions that
deliver real value. As we have become increasingly
recognised as one of China’s preferred providers of
managed data services, our subscriber base has
expanded without interruption and most of our
existing subscribers have upgraded their bandwidth
and increased their usage.

Managed Data-ATM
(numbers in thousands)

10.8

%
6
8
1
(1):
R
G
A
C

7.8

5.3

1.4

0.7

1.3

ATM Subscribers
2000

ATM (in 2M Equivalent)
2001

2002

(1): CAGR of ATM (in 2M equivalant)

CHINA TELECOM
ANNUAL REPORT 2002
13

BUSINESS REVIEW

Managed Data-FR (numbers in thousands)

Domestic long distance market share (1)

90%

70%

69%

72%

64%

60%

68%

55%

45%

67%

54%

44%

2000

2001

PSTN

2002 1H
VoIP

2002
Total

(1): in terms of total usage

IDD market share (1)

99%

98%

95%

90%

84%

72%

71%

69%

66%

61%
59%
57%

2000

2001

PSTN

2002 1H
VoIP

2002
Total

(1): in terms of total usage

CAGR(1):47 %

FR Subscribers
2000

FR (in 128k Equivalent)
2001

2002

(1): CAGR of FR (in 128k equivalant)

Managed Data-DDN
(numbers in thousands)

157

155

136

208

42%
CAGR(1):

159

103

DDN Subscribers DDN (in 64k Equivalent)
2001

2000

2002

(1): CAGR of DDN (in 64k equivalant)

Risk in long distance voice business moderated

Domestic and international, Hong Kong, Macau and
Taiwan long distance services accounted for 23.3%
of our total revenue in 2002, falling 3 percentage
points from 2001. Due to the shift to a fully
competitive market, tariff levels are set to a large
extent on a competitive basis. Our long distance
business therefore faces markedly reduced risk on
the tariff front.

CHINA TELECOM
ANNUAL REPORT 2002
14

Domestic long distance: Traffic growth steady

(minutes in millions)

2000

2001

2002

PSTN
VoIP
TOTAL

24,780
2,187
26,967

19,133
11,497
30,630

15,915
17,709
33,624

for

telephone

long distance

Domestic
services
accounted for 19.0% of our total revenue in 2002.
Our strategy
this business, which we
successfully enacted in 2002, has involved the
discretionary use of VoIP as a competitive tool to
maximise revenue. While the tariff premium for
PSTN services remained constant, we fine-tuned the
percentage of market-priced VoIP in total long
distance traffic to respond to competitive pressures
and best achieve our revenue target. In 2002, VoIP
services contributed 52.7% of total long distance
usage. As a result of the increase in usage of our
market-priced VoIP services, we believe that tariff-
related risks facing domestic long distance are
markedly reduced. Results for the second half of
2002 were even more encouraging. Revenue rose
1.0% over the first half of the year, and our market
share in terms of traffic volume was maintained
above 50%.

International, Hong Kong, Macau and Taiwan long
distance: slight decline in traffic

long

distance

telephone

Revenue from international, Hong Kong, Macau and
Taiwan
services
contributed 4.3% of our total revenue in 2002. At
year-end 2002 we held a market share of 59.2% in
terms of traffic volume. Total traffic declined by
5.8% from the previous year to 1.33 billion minutes.
The opening of international gateways by other
telecom operators in our service regions diverted a

BUSINESS REVIEW

the

international

portion of
traffic
previously transmitted by us. Also,
competition translated into higher VoIP usage.

that was
intensified

Value added services exhibited exceptional growth

the

added

signify

services

resources
including caller

striking
Value
combination of limited incremental investment and
attractive returns. We leveraged our network and
to promote value-added
customer
services,
ID display, call-up
information services and information telephone. By
the end of 2002, our caller ID display service had
23.84 million subscribers with a penetration rate of
41.9%, up from a penetration rate of 27.9% in 2001.
We partnered with government agencies, news
media and businesses to provide diversified call-up
information services and call center out-sourcing to
our customers, which also greatly boosted our voice
traffic.

In addition, we attempted to combine information
services with e-commerce applications. Utilising our
existing telephone billing and collection systems as
a payment platform, we provided wireline telephone
subscribers with such new services as telephone
lottery and telephone stock trading. We also
introduced 17901 direct dial VoIP, 4008 quasi toll-
free and wireline pre-paid services.

Interconnection and leased line businesses

Interconnection and leased line services accounted
for 9.9% of our total revenue in 2002. For local
interconnection, we charge a termination fee of
RMB0.06 per minute for inbound traffic, but, by
regulation, we are exempt from any interconnection
payment
to mobile
operators. Inbound local calls grew 10.8% in 2002.
Long distance interconnection was influenced by a

for outbound

traffic

local

CHINA TELECOM
ANNUAL REPORT 2002
15

investments. For example, we intend to capture
potential traffic generated by people on the move
full-function public phone
by deploying more
outlets in competitive areas, and increasing the
number of IN-based public phone terminals in
highly populated locations, such as schools and
hospitals.

Intensify development in broadband services. We
intend to quadruple our broadband subscriber base
over the next three years by continuing to leverage
our rich copper wire access resources and making
reasonable incremental investments. Given strong
market demand, we intend to maintain broadband’s
premium product positioning and to continue to
promote the proliferation of broadband application
services.

Mitigate long distance business risks and maintain
traffic growth. Our strategy for
long distance
services is centered on revenue stability, which we
can achieve by offering flexible pricing packages,
promoting the use of prepaid cards and continuing
our defensive strategy for VoIP service. We will not
promote lower tariffed VoIP services to a particular
customer segment unless there is a competing VoIP
product. This strategy has worked well
in
preventing competitive substitution and achieving
steady growth in domestic and international, Hong
Kong, Macau and Taiwan long distance traffic.

intend to
Emphasise business innovation. We
further capitalise on existing resources through
exploring new earnings models and promoting the
development of value added services. Major efforts
will also be made to create new revenue streams by
selling new products to our huge subscriber base,
as we did in 2002 with new services like 17901
direct dial VoIP, 4008 quasi toll-free and wireline
prepaid services. We believe these efforts will help
enhance our market leadership position.

BUSINESS REVIEW

significant structural change in traffic pattern in
2002. The traffic routing deregulation enacted in
2002 stimulated long distance operators, including
ourselves, to carry on their own networks the long
distance traffic generated by their own subscribers.
The net impact of this change on us was limited, as
we experienced reductions on both the revenue and
the expense sides of the equation.

financial

The total amount of local and long distance 2 Mbit
digital leased circuits grew 12.0% in 2002. Our
marketing efforts focused on providing global one-
stop shopping and total solution packages to
enterprise
government,
customers. We are capable of providing consulting,
service provisioning, trouble-shooting, billing and
collection, and technical support, all at one single
point of contact. We have established an excellent
brand image among our major customers through
our outstanding SLA service provision.

large

and

Business Strategies

Continue to expand our wireline subscriber base in
a profitable manner. We intend to continue to
expand our subscriber base, focusing on high-
return regions and high-value segments, through
re-allocation of existing
the
resources combined with appropriate additional

integration and

CHINA TELECOM
ANNUAL REPORT 2002
16

customer

to
customer

Boost
satisfaction: Distributing
differentiated products and tailored services via
four channels. We will continue to implement our
three-pronged general strategy of delivering
individually tailored total solutions and global one
large enterprise
stop shopping services
stickiness,
increase
to
customers
providing specialised services
to small- and
medium-sized enterprise customers to boost profit
growth, and affording standardised services to
residential customers to reduce operating costs. We
will continue to allocate more personnel to “front-
end” operations where these experienced workers,
equipped with adequate training, will enhance our
direct customer service capability. Since
the
compensation of “front-end” employees can be
more closely linked to revenue, we will be able to
convert formerly fixed costs into variable costs.

Network development and IT systems

Network development

BUSINESS REVIEW

smooth service on the user end. We are the first
telecom operator in China to achieve this, ensuring
superior service for our large enterprise customers.

Our broadband access network was a key focus of
our network development in 2002. While ADSL was
our mainstream technology, we offered even higher
bandwidth products such as VDSL. We also
developed WLAN presence in high mobility business
areas in major cities, including hotels, airports,
cafes and office buildings. For example, at the end
of 2002, we obtained authorisation to deploy WLAN
in 206 hot spots in Shanghai.

Throughout, utilisation of existing resources has
been a major focus. We managed to
improve
network efficiency and increase utilisation through
deployment
resource
optimisation. At the end of 2002, the utilisation of
local and long distance switches rose 5.0 and 3.2
percentage points, respectively, as compared with
2001.

re-allocation

and

Our wireline network boasts unparalleled coverage
and scale in our service regions. At the end of 2002,
our fiber-optic network had a total cable length of
250,000 kilometers. Local and long distance switching
capacity totaled 74.76 million lines and 1.67 million
ports, respectively. The bandwidth of our international
gateway totaled 8.12 Gbps.

We continued to utilise existing network resources,
including our Intelligent Network platform, to roll
out value-added and new services. The year 2002
witnessed the market debut of such new services as
MPLS-VPN, 17901 direct dial VoIP and 4008 quasi
toll-free services.

IT systems

our

employed

Our network infrastructure is 100% digitalised, high
speed, reliable and multi-dimensional in terms of
servicing capability. SDH+DWDM technology
is
transmission
in
broadly
infrastructure, and Gigabit routers are widely
deployed in our broadband Internet network. Strong
reliability and high quality characterised our
network operations in 2002, as demonstrated by
our connection rate of over 96%. Our broad
implementation of advanced
technology has
allowed us
fiber optic capacity
deployment on a real-time basis while maintaining

to optimise

As a consistent corporate focus, we have always
sought to improve operational and management
efficiency through establishing strong IT systems.
Our IT systems (CTG-MBOSS) include the Business
Support System (BSS), Operation Support System
(OSS) and Management Support System (MSS).
IT design heralds the
Implementation of our
technological and organisational restructuring of
our
the Enterprise
Application
technology has
allowed for smooth interconnection between all

IT systems. Adoption of
Integration

(EAI)

CHINA TELECOM
ANNUAL REPORT 2002
17

BUSINESS REVIEW

the

The

planned

company.

major systems, enabling full information sharing
within
future
development of our IT system is expected to further
enhance market
improve
customer service, significantly raise operation and
management
our
competitiveness.

responsiveness and

strengthen

levels

and

Organisational restructuring and business re-
engineering

Determined to maintain market
leadership and
improve our competitiveness, we continued to
implement internal restructuring and business re-
engineering measures aimed at further gearing our
company toward a “market-oriented, customer-
centered and return-driven” business model.

Market-oriented, stream-lined operational structure

In 2002 we launched an organisational restructuring
that involved all levels of our operations, from the
headquarters to the provincial subsidiaries and
local branches. A new
“front-end-back-end”
structure has been established at each level to
enhance market responsiveness. The front-end is
composed of “customer
interface units” with
related marketing functions, while at the back-end,
all network resources have been consolidated to
provide the front-end with service provisioning,
quality control, billing and operation support
services. An internal Service Level Agreement (SLA)
system has been set up between the front-end and
the back-end to ensure more concerted and high
quality end-to-end service delivery.

Illustration of the New Organizational Structure

Back End

Front End

Network
process re-
engineering

Large
enterprises

Network

Network
operations &
maintenance

SLA

Product
management

Business
subscribers

Network
Construction

Public
subscribers

Account
managers

Community
managers

Rural
contract
agents

"1000"
Hotline

End
users

CHINA TELECOM
ANNUAL REPORT 2002
18

Business process re-engineering

Drawing from international best practices and from
our own experiences with a number of pilot
programs, we are in the process of implementing
business process re-engineering in all 47 of our
Basic Business Units, or local network operations.

Our efforts are centered on large corporate account
resource utilisation, capital
service, network
expenditure and performance evaluation. We
implemented
the Key Account Management
Process, which is based upon dedicated account
managers with industry specific training. We are
also working
to control costs and enhance
operational efficiency with the Network Resource
Allocation Process. As part of this effort, we have
implemented a computerised order processing
system that creates an updated information link
running throughout our entire
internal service
provisioning chain. This system allows us to fill
customer orders more quickly, and to monitor the
provisioning process in a systematic manner. Efforts
to
improve capital expenditure control and
investment returns are centered on the Recurring
Capital Expenditure Process, which utilises an
investment priority system that ranks investment
needs according to return prospects. Finally, we
have established a KPI-linked compensation system
to motivate our work force. Our dedicated efforts to
put these processes into effect have instilled in our
for
in
employees a belief
shareholders,
our
have
competitiveness.

strengthened

creating

value

and

BUSINESS REVIEW

Human resource development and the re-shaping
of our corporate culture

Over the past year, we have adopted a series of
measures
resource
to enhance our human
capabilities and re-shape the corporate culture of
implemented a new
China Telecom. We have
evaluation system based on clearly defined Key
Performance Indicators that links compensation to
In addition,
performance evaluation
competition has been introduced in the designation
and resignation of job posts. Both measures have
helped establish a human resource management
system that provides adequate motivation to our
employees. We are excited to witness our energised
team shaping new corporate values of innovation,
execution, integrity and value creation.

results.

CHINA TELECOM
ANNUAL REPORT 2002
19

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

[Divider]

CHINA TELECOM
ANNUAL REPORT 2002
20

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

in our

increased by 7.3%

Our total operating revenue in 2002 grew 10.1%
in 2001 to RMB75,496 million. Our
over that
to
operating expenses
RMB54,118 million in 2002. Surpassing the profit
forecast set out
initial public offering
prospectus by RMB367 million, we attained a net
income of RMB16,864 million for the year and our
basic earnings per share was RMB0.24. Our
EBITDA(1) was RMB42,260 million
in 2002,
representing an EBITDA margin (defined as EBITDA
divided by total operating revenue) of 56.0%. Our
cash flows from operating activities increased by
13.3% to RMB37,102 million in 2002.

(1)

associates,

depreciation
interests. As

Our EBITDA represents profit before net finance
(costs)/income, investment income, share of profit
and
from
taxation,
the
and minority
amortisation
telecommunications business is a capital-intensive
industry, capital expenditures, the level of gearing and
finance costs may have a significant impact on the net
profit of companies with similar operating results.
Therefore, we believe EBITDA may be helpful
in
analysing the operating results of a telecommunications
service provider like us. Although EBITDA is widely
used in the global telecommunications industry as a
benchmark to reflect operating performance, financing
capability and
is not regarded as a
it
measure of operating performance and liquidity under
generally accepted accounting principles. It also does
not represent cash flows from operating activities. In
addition, our EBITDA may not be comparable to similar
indicators provided by other companies.

liquidity,

You should read the following discussion and
analysis in conjunction with our audited financial
statements and the accompanying notes included
elsewhere in this annual report.

Overview

We made substantial achievements in the fiscal
year of 2002, in terms of steady revenue growth,
effective control of operating expenses, significantly
improved profitability and strong growth of cash
generated from operations. We also significantly
reduced our capital expenditures in 2002. As a
result, we managed to achieve our internal financial
targets. Our strong financial position has set a solid
foundation for future developments.

CHINA TELECOM
ANNUAL REPORT 2002
21

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

The table below sets forth our total operating revenue, operating expenses, operating income, net income
and cash flows from operating activities in terms of amount and as a percentage of our total operating
revenue for 2001 and 2002:

Year Ended 31 December

2001

Percentage
of Operating
Revenue

2002

Percentage
of Operating
Revenue

Amount

(RMB in millions, except percentage data)

100.0%
73.6%
26.4%
10.0%

75,496
54,118
21,378
16,864

100.0%
71.7%
28.3%
22.3%

—

37,102

—

Amount

68,546
50,448
18,098
6,883

32,761

services usage and

priced VoIP
increased
competition, the rate of decline decelerated from
that of 2001. Fuelled by the surge in broadband
subscribers and continued growth in managed data
services, our total revenue from
Internet and
managed data services increased by 53.4% from
that of 2001 to account for 7.4% of our total
operating revenue in 2002. Revenue from leased
line services, interconnection and other services
also maintained positive growth.

Operating revenue
Operating expenses
Operating income
Net income
Cash flows from

operating activities

Operating Revenue

Our total operating revenue grew by RMB6,950
million, or 10.1%, from RMB68,546 million in 2001
to RMB75,496 million
in 2002. Driven by the
continued expansion of our wireline telephone
subscriber base and a higher proportion of high-end
subscribers, revenue from our
local telephone
services grew 12.1%. Although revenue from our
long distance telephone services decreased by
2.3% due to an increase in the proportion of lower

CHINA TELECOM
ANNUAL REPORT 2002
22

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

The following table sets forth a breakdown of our operating revenue in terms of amount and as a
percentage of our total operating revenue for 2001 and 2002:

Year Ended 31 December

2001

Percentage
of Operating
Revenue

Amount

2002

Percentage
of Operating
Revenue

Amount

(RMB in millions, except percentage data)

780
10,186
21,004

31,970

14,676

3,392
3,814
6,290

60,142

2,150
1,477

3,627

2,862

1,915

1.1%
14.9%
30.6%

46.6%

21.4%

4.9%
5.6%
9.2%

87.7%

3.1%
2.2%

5.3%

4.2%

2.8%

995
12,460
22,392

35,847

14,365

3,285
4,363
6,018

63,878

3,775
1,789

5,564

3,095

2,959

1.3%
16.5%
29.7%

47.5%

19.0%

4.3%
5.8%
8.0%

84.6%

5.0%
2.4%

7.4%

4.1%

3.9%

Wireline telephone services(1)
Local:

Installation fees
Monthly fees
Local usage fees

Sub-total

Domestic long distance(2)
International, Hong Kong, Macau and

Taiwan long distance(2)

Interconnections
Upfront connection fees

Sub-total

Data and Internet services:

Internet
Managed data

Sub-total

Leased line services

Other services(3)

Toal operating revenue

68,546

100.0%

75,496

100.0%

(1)

Includes revenue from our registered subscribers, public telephones and prepaid calling cards services.

(2)

Includes revenue from our VoIP long distance services.

(3)

Includes primarily revenue from the provision of value-added telecommunications services and the sale and
maintenance of certain customer-end equipment.

CHINA TELECOM
ANNUAL REPORT 2002
23

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Local Telephone Services

Long Distance Telephone Services

Revenue from long distance telephone services
decreased by 2.3%, from RMB18,068 million in
2001 to RMB17,650 million in 2002, primarily due
to a higher proportion of the lower priced VoIP
services to total long distance telephone usage. The
rate at which revenue decreased, however, was
lower than that of 2001.

•

2001

Domestic Long Distance Services. Domestic
long distance revenue decreased by 2.1%,
from RMB14,676 million
to
RMB14,365 million in 2002. While total usage
of our domestic
long distance services
increased, it was insufficient to offset the
adverse impact of a higher proportion of the
substantially lower priced VoIP services to the
total usage. Total usage of domestic long
distance services (including calls originated
subscribers)
from wireline
increased by 9.8%, from 30.63 billion minutes
in 2001 to 33.62 billion minutes in 2002.
Usage of our VoIP domestic long distance
services increased as a percentage of the total
usage of domestic long distance services, from
37.5% in 2001 to 52.7% in 2002.

and mobile

international

International Long Distance Services. Revenue
from
long distance services
decreased by 3.2%, from RMB3,392 million in
in 2002. This
2001 to RMB3,285 million
revenue decrease was primarily due
to
increased
Total usage of
international long distance services (including
calls originated from wireline and mobile
subscribers) decreased by 5.8%, from 1.41
billion minutes in 2001 to 1.33 billion minutes
in 2002.

competition.

telephone

in 2002.

The position of our local telephone services as the
largest revenue source of our wireline services was
further enhanced as local revenue grew by 12.1%,
from RMB31,970 million in 2001 to RMB35,847
services
Local
million
contributed 47.5% of our total operating revenue
for 2002, which rose 0.9 percentage points from
46.6% in 2001. The increase in local revenue
primarily resulted from increases in revenue from
monthly fees and
local usage fees driven by
subscriber growth. The number of our access lines
in service increased by 8.38 million, or 17.3%, from
48.48 million at 31 December 2001 to 56.86 million
at 31 December 2002.

•

the expected customer

Installation Fees. Installation fees received
from customers are deferred and amortised
relationship
over
the
period of 10 years. Revenue
amortised amount of upfront installation fees
increased by 27.6%, from RMB780 million in
2001 to RMB995 million in 2002. The increase
was primarily due to the rapid increase in the
number of our access lines in service in recent
years.

from

• Monthly Fees. Monthly fee revenue increased
by 22.3%, from RMB10,186 million in 2001 to
RMB12,460 million in 2002, primarily due to a
19.3% increase in the average number of our
access lines in service, from 44.15 million in
2001 to 52.67 million in 2002.

•

Local Usage Fees. Revenue from local usage
increased by 6.6%, from RMB21,004 million in
2001 to RMB22,392 million
in 2002. The
increase was primarily due to an increase in
local telephone usage volume (including dial-
up usage), which increased by 6.7%, from
212.4 billion pulses in 2001 to 226.6 billion
pulses in 2002.

CHINA TELECOM
ANNUAL REPORT 2002
24

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Internet and Managed Data Services

substantial

in China. Demand for our
services

Our service regions are among the most prosperous
areas
Internet and
managed data
from business and
residential subscribers continued to increase, and
subscriber base
particularly, our broadband
experienced
Altogether,
Internet and managed data service revenue grew
53.4%, from RMB3,627 million in 2001 to RMB5,564
million in 2002, and accounted for 7.4% of our total
operating revenue in 2002. We expect such revenue
will continue to increase as our subscriber base and
usage of our Internet and managed data services
continue to grow.

growth.

•

Internet Services.
Internet access services
revenue increased by 75.6%, or RMB1,625
million, from RMB2,150 million in 2001 to
RMB3,775 million in 2002. While usage of dial-
up Internet services decreased, strong growth
in broadband subscription was the key driver
of
revenue. Our
broadband subscribers (primarily ADSL and
LAN subscribers) increased by 982,000, or
247.4%, to 1,379,000 at the end of 2002.
Broadband service has emerged as a major
contributor to our revenue growth.

the boost

Internet

• Managed Data Services. Driven primarily by
growth in the usage of our services, revenue
increased by
from managed data services
21.1%, from RMB1,477 million in 2001 to
RMB1,789 million in 2002. The total leased
bandwidth of our DDN services was 207,700 x
64Kbps at 31 December 2002, representing an
increase of 31.0% from that at 31 December
2001. The total leased bandwidth of our ATM
services was 10,800 x 2Mbps at 31 December
2002, representing an increase of 38.5% from
that at 31 December 2001, and the total

leased bandwidth of our frame relay services
was 24,300 x 128Kbps at 31 December 2002,
representing an increase of 19.1% from that at
31 December 2001.

Leased Line, Interconnection and Other Services

•

increased by 8.1%,

Leased Line Services. Revenue from leased
line services
from
RMB2,862 million in 2001 to RMB3,095 million
in 2002. This increase was fuelled by a 12.0%
increase
in bandwidth of digital circuits
leased, which amounted to 94,400 x 2Mbps at
the end of 2002.

Interconnection Services. Revenue
from
interconnection fees increased by 14.4%, from
RMB3,814 million in 2001 to RMB4,363 million
in 2002. This increase primarily reflected the
settlement revenue we began to receive from
international
China Telecom Group and
operators
interconnection
under
agreement with China Telecom Group and our
arrangement with China Telecom Group for
apportionment of international settlement with
effect from 1 January 2002, which amounted to
RMB1,954 million in 2002. This increase was
in
by
partially
interconnection revenue from other operators
of RMB1,405 million.

decrease

offset

our

• Other Services. Revenue from other services
increased by 54.5%, from RMB1,915 million in
2001 to RMB2,959 million in 2002, primarily
due to the rapid growth in our value-added
telephone services and revenue from the sale
and rental of customer-end equipment. The
contribution of
total
operating revenue increased from 2.8% in
2001 to 3.9% in 2002.

these services

CHINA TELECOM
ANNUAL REPORT 2002
25

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Upfront Connection Fees

Upfront connection fees represent the upfront fees
received
initial activation of wireline
services, amortised over the expected customer

the

for

relationship period of 10 years. Effective from 1 July
2001, we ceased charging upfront connection fees
to new subscribers. Consequently, the amortised
amount decreased by 4.3%, from RMB6,290 million
in 2001 to RMB6,018 million in 2002.

The table below sets forth the amortisation of our upfront connection fees for each of the years from 2003
to 2011 based on a 10-year estimated amortisation period:

2003

2004

2005

Year Ended 31 December
2007

2008

2006

2009

2010

2011

(RMB in millions)

5,535

4,784

3,842

2,815

1,886

1,158

646

274

and

experienced

Our operating expenses increased by 7.3%, from
RMB50,448 million in 2001 to RMB54,118 million in
interconnection
2002. While personnel
increases,
expenses
depreciation and amortisation expenses grew
moderately. Moreover, we maintained the level of
selling, general and administrative expenses and
reduced network operations and
significantly
support expenses.

significant

Amortisation of

upfront
connection fees

Operating Expenses

In 2002, we took the initiative to centralise our
financial and budget management, equipment
procurement, billing, network resource allocation
and network maintenance to improve the efficiency
of our resource utilisation, to rationalise our cost
structure and to keep operating expenses under
control.

CHINA TELECOM
ANNUAL REPORT 2002
26

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

The following table breaks down our operating expenses in terms of amount and as a percentage of our
total operating revenue for 2001 and 2002:

Depreciation and amortisation
Network operations and support(1)
Selling, general and administrative(1)
Personnel
Interconnection charges and other expenses

Amount

19,451
16,477
6,986
6,207
1,327

Year Ended 31 December

2001

Percentage
of Operating
Revenue

2002

Percentage
of Operating
Revenue

Amount

(RMB in millions, except percentage data)

28.4%
24.0%
10.2%
9.1%
1.9%

20,882
14,724
6,960
8,915
2,637

27.7%
19.5%
9.2%
11.8%
3.5%

71.7%

Total operating expenses

50,448

73.6%

54,118

(1)

Does not include personnel expenses.

increases

Depreciation and Amortisation. Our depreciation
and amortisation expenses increased by 7.4%, from
RMB19,451 million in 2001 to RMB20,882 million in
capital
to
2002, mainly due
expenditures in recent years. In 2002, we tightened
control over capital expenditures. As a result, the
rate at which depreciation and amortisation
expenses increased was lower than the 11.9%
increase in 2001 compared to 2000 and the amount
of depreciation and amortisation expenses as a
percentage of total operating revenue dropped by
0.7 percentage points as compared with 2001.

Network Operations and Support. In 2002, we further
resource
centralised network maintenance and
allocation
improve efficiency and network
utilisation, thereby trimming our network operations
and support expenses (excluding related personnel
expenses) by 10.6%, from RMB16,477 million in 2001
to RMB14,724 million in 2002. This decrease was
mainly due to a 22.4% decrease in our maintenance
in 2001 to
expenses,
RMB7,937 million in 2002.

from RMB10,225 million

Selling, General and Administrative Expenses.
Despite the continued expansion of our customer
base, our selling, general and administrative
expenses (excluding related personnel expenses)
dropped slightly to RMB6,960 million in 2002 from
RMB6,986 million
in 2001. This reflected our
improved operating efficiency and the benefits of
economies of scale. Selling and marketing expenses
decreased by 1.8%, from RMB3,074 million in 2001
to RMB3,019 million
in 2002. General and
administrative expenses increased by 0.7%, from
RMB3,912 million in 2001 to RMB3,941 million in
2002.

Personnel Expenses. Our personnel expenses
increased by 43.6%, from RMB6,207 million in 2001
to RMB8,915 million in 2002. This increase was
primarily due to the enhancement of our merit-
based compensation system to retain and motivate
competent
our
compensation in line with that of market level. We
believe such a system helps improve our corporate
competitiveness.

personnel,

bring

and

CHINA TELECOM
ANNUAL REPORT 2002
27

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Income Tax

tax

rate was primarily due

Our statutory income tax rate is 33%. In 2002, our
income
tax expense was RMB3,855 million,
representing an effective tax rate of 18.5%. The
difference between the statutory tax rate and our
the
effective
preferential income tax rate of 15% applied to some
of our subsidiaries located in special economic
zones in China and the exclusion of the upfront
connection fees and part of the usage fees from
taxable revenue. See note 24 to the audited
financial statements included elsewhere in this
annual report for further details in respect of the
reconciliation of our effective tax rate to the
statutory tax rate.

Net Income

In 2002, we surpassed the profit forecast set out in
our initial public offering prospectus. Driven by
steady revenue growth, coupled with the effective
control over operating expenses, our net income
reached RMB16,864 million.

Capital Expenditures

Our capital expenditures decreased by 27.8%, from
RMB40,028 million in 2001 to RMB28,919 million in
2002.

Interconnection Charges and Other Expenses.
Interconnection and other expenses increased by
98.7%, from RMB1,327 million in 2001 to RMB2,637
million in 2002. This increase was primarily due to
the settlement expenses we began to pay to China
Telecom Group and international operators under
our interconnection agreement with China Telecom
Group and our arrangement with China Telecom
Group for apportionment of international settlement
with effect from 1 January 2002, which amounted to
increase was
RMB2,160 million
in 2002. This
in domestic
partially offset by a decrease
interconnection
to other
operators of RMB842 million.

expenses payable

Net Finance Costs/(Income)

in net foreign
Caused primarily by a change
exchange differences, we had net finance costs of
RMB632 million in 2002 as opposed to net finance
income of RMB293 million in 2001. We experienced
a net foreign exchange loss of RMB221 million in
2002, as compared to a net foreign exchange gain
of RMB430 million in 2001. In addition, while our
in 2002 decreased by
gross
RMB94 million from 2001 as a result of the
repayment of bank loans, net interest expense
increased from RMB383 million in 2001 to RMB551
million in 2002. This increase was primarily due to a
reduction in the amount of capitalised interest of
RMB262 million following a decrease in our capital
expenditures.

interest expense

CHINA TELECOM
ANNUAL REPORT 2002
28

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

The table below sets forth our historical and planned capital expenditures for the years indicated. Actual
capital expenditures for the years after 31 December 2002 may differ from the amounts indicated below.

Year Ended 31 December

2000

2001

2002

2003
(Planned)

2004
(Planned)

(RMB in millions)

Total capital expenditures

34,310

40,028

28,919

25,000

23,500

The advanced and expansive network infrastructure
we built in recent years, together with the improved
utilisation of these resources, allowed us the
flexibility to substantially decrease our capital
expenditure in 2002.

We further rationalised the allocation of our capital
expenditures in 2002. We continued to allocate a
majority of our capital expenditures
the
development of access infrastructure in order to
meet subscriber growth needs and to strengthen
our position as the owner of the “last mile”. Internet
and data networks were another major area of
capital expenditure as we capitalised on the surging
demand for broadband, managed data and Internet
services. In addition, we increased expenditures for
our Business Support System (BSS), Operation
Support System (OSS) and Management Support
System (MSS) as part of our effort to improve
customer service quality, operating efficiency and
information disclosure.

We expect to fund our capital expenditure needs
through a combination of cash generated from
operating activities, short-term and long-term bank
loans and other debt and equity financing. We
believe we will have sufficient resources to meet
our capital expenditure
the
foreseeable future.

requirements

for

Liquidity and Capital Resources

Cash Flows

We experienced a net cash inflow of RMB12,541
million in 2002 as opposed to a net cash outflow of
RMB9,979 million in 2001. We raised RMB10,659
million from the initial public offering of our shares
in international capital markets in the fourth quarter
of 2002. Furthermore, our net cash flow benefited
from an increase in cash flows from operating
activities and a substantial reduction in capital
expenditures.

The table below summarises our cash flows for
2001 and 2002.

Year Ended
31 December

2001

2002

(RMB in millions)

32,761
(35,399)

37,102
(29,095)

Cash flows from operating activities
Net cash used in investing activities
Net cash (used in)/ from financing

activities

(7,341)

4,534

(Decrease)/increase in cash and

cash equivalents

(9,979)

12,541

CHINA TELECOM
ANNUAL REPORT 2002
29

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Working Capital

Our working capital (defined as total current assets
minus total current liabilities) was a deficit of
RMB31,125 million at 31 December 2002 and a
deficit of RMB43,316 million at 31 December 2001.
The reduction in working capital deficit in 2002 was
primarily
the net proceeds of
RMB10,659 million we received from the initial
public offering of our shares. In addition, from 31
December 2001 to 31 December 2002, our net
accounts receivable increased by RMB353 million,
and our accounts payable decreased by RMB520
million.

result of

the

Our cash and cash equivalents were RMB16,423
million at 31 December 2002, of which 70.2%,
23.4% and 6.4% were denominated in Renminbi, US
dollars and Hong Kong dollars, respectively.

Indebtedness

Our indebtedness at 31 December 2001 and 2002
was as follows:

Short-term debt
Current portion of long-term debt
Long-term debt, excluding current

portion

Total debt

2001

2002

(RMB in millions)

18,827
3,621

19,175
2,219

7,101

4,853

29,549

26,247

Our principal source of liquidity is cash flows from
operating activities.
In 2002, cash flows from
operating activities was RMB37,102 million,
representing an increase of RMB4,341 million from
RMB32,761 million in 2001. This increase was
mainly due to an RMB1,603 million increase in cash
generated from operations and a RMB2,973 million
decrease in income tax paid.

Stemming from a substantial decrease in capital
expenditures, net cash used in investing activities
fell by RMB6,304 million, from RMB35,399 million in
2001 to RMB29,095 million in 2002.

Net cash from financing activities was RMB4,534
million in 2002, while net cash used in financing
activities was RMB7,341 million
in 2001. This
change was primarily due to the net proceeds of
RMB10,659 million we raised from the initial public
offering of our shares in the fourth quarter of 2002.
This cash inflow was offset by the substantial
amount of bank loans we were able to repay, given
the significant increase in cash flows from operating
activities and the substantial decrease in our capital
expenditures. As a result, net cash flow from bank
debt (proceeds from bank debts minus repayments
of bank debts) changed from a net cash inflow of
RMB4,444 million in 2001 to a net cash outflow of
RMB3,529 million in 2002. See our audited financial
statements included elsewhere in this annual report
for further details of net cash from financing
activities.

CHINA TELECOM
ANNUAL REPORT 2002
30

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

With the benefit of increased cash flows from
operating activities and decreased amount of cash
used in investing activities, we paid off a significant
amount of bank loans. This, together with the
proceeds from the initial public offering of our
shares, has strengthened our capital structure. Our
debt-to-asset ratio (defined as total debt divided by
total assets) declined from 15.6% at 31 December
2001 to 12.4% at 31 December 2002. This has
provided us with a solid foundation for continuing
organic and external growth.

In 2002, we further centralised cash management to
boost efficiency. Our total debt was reduced by
RMB3,302 million to RMB26,247 million at 31

Contractual Obligations

December 2002, of which 84.0%, 10.0% and 6.0%
were denominated in Renminbi, Japanese Yen and
US dollars, respectively.

Having established and maintained high credit
ratings at major commercial banks in the PRC, we
have been able to obtain adequate debt financing
on preferable terms. In 2002, we fine-tuned our
the dual
debt
costs and
objectives of
managing financial risks. The weighted average
interest rate of our short-term debt was 4.7% at 31
December 2002, representing an 80 basis points
decrease from that at 31 December 2001.

financing strategy
reducing

to achieve
financing

The following table sets forth our contractual obligations at 31 December 2002:

Repayable in

Total

2003

2004

2005

2006

Thereafter

(RMB in millions)

Short-term debt
Long-term debt
Operating lease commitments
Capital commitments
Guarantees

19,175
7,072
1,438
4,239
6

19,175
2,219
457
4,239
6

—
1,196
355
—
—

Total contractual obligations

31,930

26,096

1,551

—
825
114
—
—

939

—
268
75
—
—

343

—
2,564
437
—
—

3,001

We will continue to pursue steady revenue growth, implement prudent financial management policies,
control operating expenses, rationalise our cost structure, reduce capital expenditures and enhance the
investment return of our capital projects. We are confident in our ability to create higher value for our
shareholders.

CHINA TELECOM
ANNUAL REPORT 2002
31

REPORT OF THE DIRECTORS

[Divider]

CHINA TELECOM
ANNUAL REPORT 2002
32

The directors (the “Directors”) of China Telecom
Corporation Limited (the “Company”) are pleased to
present their report together with the audited
financial statements of the Company and
its
subsidiaries (the “Group”) prepared in accordance
with International Financial Reporting Standards for
the year ended 31 December 2002.

PRINCIPAL ACTIVITIES

the

leading provider of wireline
We are
Shanghai
telecommunications
Municipality, Guangdong Province, Jiangsu Province
and Zhejiang Province in China. Our scope of
business includes the following:

services

(1) operating a variety of domestic wireline
telecommunications networks and facilities
(including wireless local loops);

(2) operating voice, data, image, multimedia and
other information services mainly based on the
wireline networks;

(3)

conducting accounts settlement relating to
international telecommunications services in
accordance with state regulations; and

REPORT OF THE DIRECTORS

(4) dealing with system integration, technological
development, technical services, information
telecommunications equipment
consulting,
design
manufacture,
implementation and sales.

together

with

CORPORATE GOVERNANCE

We have made efforts to optimise our corporate
internal
governance
management
the
transparency of information disclosure.

structure,
practises,

regulate

improve

and

Our shareholders’ meetings, the Board of Directors
and its respective committees, the Supervisory
Committee and the management team check and
balance the powers of each other and discharge
their functions in a regulated matter.

in order

We conduct our business in strict compliance with
to be
our Articles of Association
accountable to all our shareholders. All directors
have performed their duties conscientiously and
diligently. Our Board of Directors consists of two
independent non-executive directors who are
experienced in terms of corporate management and
reputable in the community. The independent non-
executive directors have provided a check and
balance to decisions made by the Board of Directors
and thus effectively guarded the interest of minority
shareholders.

two committees have

We have established an audit committee and a
in 2002 and 2003
remuneration committee
two
respectively. The
independent non-executive directors and one
employee respresentative. The audit committee is
primarily responsible
for the accuracy of the
financial information and is required to opine on the
fairness and reasonableness of the connected

CHINA TELECOM
ANNUAL REPORT 2002
33

REPORT OF THE DIRECTORS

remuneration committee

is
transactions. The
primarily responsible
for the determination of
remuneration packages for managerial officers and
to ensure the fairness of the remuneration policy
with the purpose of incentivising the employees.

Being a H share company, we have complied with
the PRC laws to establish a Supervisory Committee.
The Supervisory Committee has supervised the
legality and regularity of the Company’s financial
affairs, the performance of our Directors and senior
management.

investors’

We aim to improve our corporate transparency in
order to strengthen the confidence of investors. The
Company has established various departments to
focus on secretarial matters of the Board of
relationship. These
Directors and
departments are primarily responsible
for the
development of a communication channel with the
investors
disclosure.
Simultaneously, pursuant to the relevant laws and
information
internal control and
regulations,
disclosure systems have been strengthened in order
to enhance corporate transparency.

information

and

DIRECTORS AND SENIOR MANAGEMENT OF THE COMPANY

The following table sets forth certain information concerning the Directors and senior management of the
Company.

Name

Age

Position in the Company

Date of Appointment

Chairman of the Board of Directors and Chief
Executive Officer

10 September 2002

Executive Director and President

10 September 2002

Executive Director, Executive Vice President
and Chief Financial Officer

10 September 2002

Executive Director and Executive Vice President

10 September 2002

Executive Director and Executive Vice President

10 September 2002

Executive Director, Executive Vice President
and Company Secretary

10 September 2002

Executive Director and Executive Vice President

10 September 2002

Executive Director

10 September 2002

Independent Non-executive Director

10 September 2002

Independent Non-executive Director

10 September 2002

Chairman and President of Jiangsu Telecom
Corporation Limited

19 October 2002

Zhou Deqiang

Chang Xiaobing

Wu Andi

Zhang Jiping

Huang Wenlin

Li Ping

Wei Leping

Cheng Xiyuan

Feng Xiong

Zhang Youcai

Vincent Lo Hong Sui

Sun Jiuming

CHINA TELECOM
ANNUAL REPORT 2002
34

REPORT OF THE DIRECTORS

Name

Wang Jirong

Wang Qi

Age

Position in the Company

Date of Appointment

Chairman and President of Zhejiang Telecom
Corporation Limited

10 October 2002

Controller of China Telecom Corporation Limited

10 September 2002

The executive Directors of the Company also hold executive positions with China Telecommunications
Corporation.

SUPERVISORS

The following table sets forth certain information concerning the Supervisors of the Company:

Name

Age

Position in the Company

Date of Appointment

Zhang Xiuqin

Tan Ming1

Zhu Lihao

Xie Songguang

Li Jing

Chairperson of Supervisory Committee

10 September 2002

Supervisor

Independent Supervisor

Supervisor

10 September 2002

Mr. Tan Ming resigned from his position as Supervisor effective on 1 April 2003, and has been replaced by Mr. Wang
Huanhui.

DIRECTORS’ INTEREST IN AND RIGHT TO ACQUIRE
SHARES

As at 31 December 2002, none of the Directors of
the Company had any interest in any shares or
debentures of the Company or any associated
corporation (as defined in the Securities (Disclosure
of Interest) Ordinance of Hong Kong (the “SDIO”))
as recorded in the register required to be kept
under section 29 of the SDIO, or as otherwise
notified to the Company and the HKSE pursuant to
the Model Code for Securities Transactions by
Directors of Listed Companies or, in the case of
Supervisors, which would be required to be notified
as above if they had been Directors.

As at 31 December 2002, the Company has not
granted its Directors, or their respective spouses or
children below the age of 18 any rights to subscribe
for its equity securities.

DIRECTORS’
SERVICE CONTRACTS

INTEREST

IN CONTRACTS AND

Each of the existing Directors entered into a service
contract with the Company for a term of three years.

Save as the service contracts mentioned above, for
the year ended 31 December 2002, the Directors did
not have any material interests, whether directly or
indirectly, in any contracts of significance entered
into by the Company, any of its holding companies
or subsidiaries or subsidiaries of the Company’s
holding company.

CHINA TELECOM
ANNUAL REPORT 2002
35

REPORT OF THE DIRECTORS

EMOLUMENTS OF
SUPERVISORS

THE

DIRECTORS

AND

Please refer to note 25 of the audited financial
statements for details of the emoluments of the
Directors and Supervisors of the Company.

SHARE CAPITAL

and

registered

businesses

Corporation

Telecommunications

The Company was incorporated on 10 September
2002 with
capital of
68,317,270,803 ordinary domestic shares with a par
value of RMB1.00 each. Such shares were issued to
in
China
for the transfer of the wireline
consideration
telecommunications
related
operations in Shanghai Municipality, Guangdong
Province, Jiangsu Province and Zhejiang Province to
the Company. As part of a reform plan approved by
the State Council with respect to the administration
services, China
of
Telecommunications
transferred
5,719,768,087 shares, 975,047,636 shares and
2,177,711,698 shares to Guangdong Rising Assets
Management Co., Ltd., Jiangsu Guoxin Investment
Group Co., Ltd. and Zhejiang Financial Development
Company, respectively.

telecommunications

Corporation

rural

controlling

shareholder,

Pursuant to the global offering of the Company’s H
shares conducted in 2002 (the “Global Offering”),
issued 6,868,767,600 H shares
the Company
(including H shares underlying American Depositary
Shares (“ADSs”)) in November 2002 and a further
428,148,100 H shares in December 2002. The
China
Company’s
Telecommunications Corporation, and each of
Guangdong Rising Assets Management Co., Ltd.,
Jiangsu Guoxin Investment Group Co., Ltd. and
Zhejiang Financial Development Company, sold
598,327,900 H shares, 57,571,100 H shares,
9,814,100 H shares and 21,919,300 H shares,
in November 2002 and a further
respectively,
37,295,300 H shares, 3,588,600 H shares, 611,700
H shares and 1,366,300 H shares, respectively, in
December 2002. After the completion of the Global
Offering, 8,027,410,000 H shares were held by the
public, representing approximately 10.62% of the
issued share capital of
the Company. The
Company’s H shares and ADSs were listed on The
Stock Exchange of Hong Kong Limited (the “HKSE”)
and the New York Stock Exchange (the “NYSE”) on
15 November 2002 and 14 November 2002,
respectively.

CHINA TELECOM
ANNUAL REPORT 2002
36

The share capital of the Company in issue as fully paid or credited as fully paid as at 31 December 2002 was
75,614,186,503 shares with a par value of RMB1.00 each. As at 31 December 2002 the share capital of the
Company comprised:

REPORT OF THE DIRECTORS

Domestic shares (total):
Domestic shares held by:

China Telecommunications Corporation
Guangdong Rising Assets Management Co., Ltd.
Jiangsu Guoxin Investment Group Co., Ltd.
Zhejiang Financial Development Company

H shares (including H shares underlying ADSs)
Total

RESULTS

Results of the Group for the year ended 31
December 2002 and the financial position of the
Company and the Group as at that date are set out
in the audited financial statements on pages 64 to
109 in this annual report.

DIVIDEND

the

year,

representing a

The directors propose to declare a final dividend for
the year ended 31 December 2002 on the basis of
HK$0.065 per share, pro-rated based on the number
of days the Company’s shares have been listed
during
total of
approximately RMB672 million. The dividend
proposal shall be submitted for consideration at the
annual general meeting to be held on 20 June 2003.
Dividends will be denominated and declared in
Renminbi. Dividends on domestic shares will be
paid in Renminbi and dividends on H shares will be
paid in Hong Kong dollars. The exchange rate for
dividends to be paid in Hong Kong dollars will be
the mean of the average rate of Hong Kong dollars

Number of
shares as at
31 December 2002

67,586,776,503

58,809,120,182
5,658,608,387
964,621,836
2,154,426,098

8,027,410,000
75,614,186,503

Percentage of the
total number of
shares in issue as
at 31 December
2002 (%)

89.38

77.78
7.48
1.27
2.85

10.62
100.00

to Renminbi as announced by the People’s Bank of
China for the week prior to the date of declaration
of dividends.

PURCHASE, SALE AND REDEMPTION OF SHARES

Except for the issue of shares in connection with the
Global Offering, the Company has not purchased,
sold or redeemed any securities of the Company
during the reporting period.

SUMMARY OF FINANCIAL INFORMATION

Please refer to pages 115 to 116 in this annual
report for a summary of the operating results and
financial condition of the Group for each of the
years in the four year period ended 31 December
2002.

BANK LOANS AND OTHER BORROWINGS

Please refer to note 13 of the audited financial
statements for details of bank loans and other
borrowings of the Group.

CHINA TELECOM
ANNUAL REPORT 2002
37

REPORT OF THE DIRECTORS

CAPITALISED INTEREST

Please refer to note 23 of the audited financial
statements for details of the Group’s capitalised
interest for the year ended 31 December 2002.

FIXED ASSETS

Please refer to note 3 of the audited financial
statements for movements in the fixed assets of the
Group for the year ended 31 December 2002.

TRUST DEPOSITS AND OVERDUE FIXED DEPOSITS

Please also refer to note 19 of the audited financial
statements for details of the movements in the
reserves of the Company and of the Group for the
year ended 31 December 2002.

DONATIONS

For the year ended 31 December 2002, the Group
made charitable and other donations totaling
RMB23 million.

SUBSIDIARIES AND ASSOCIATED COMPANIES

As at 31 December 2002, the Group did not have
any trust deposits or any overdue fixed deposits
with financial institutions or any other units.

Please refer to notes 5 and 6 of the audited
financial statements for details of the Company’s
subsidiaries and the Group’s interests in associated
companies as at 31 December 2002.

RESERVES

CHANGES IN SHAREHOLDERS’ EQUITY

Please refer to page 68 of this annual report for the
consolidated statement of shareholders’ equity.

RETIREMENT BENEFITS

Please refer to note 33 of the audited financial
statements for details of the retirement benefits of
the Group.

and

accounting

Pursuant to Article 147 of the Company’s articles of
association (the “Articles of Assocation”), where the
financial statements prepared in accordance with
PRC
regulations
standards
materially differ from those prepared in accordance
with either international accounting standards, or
those of the place outside the PRC where the
Company’s shares are listed, the distributable profit
for the relevant accounting period shall be deemed
to be the lesser of the amounts shown in those
respective
statements. Distributable
reserves of the Company as at 31 December 2002,
calculated based on the above and prior to the
proposed final dividend for 2002, amounted to
approximately RMB6,497 million.

financial

In addition to the allocation to the statutory reserve
funds, the Directors propose to allocate RMB6,497
million to a discretionary surplus reserve. The
allocation proposal
for
consideration at the annual general meeting to be
held on 20 June 2003.

submitted

shall be

CHINA TELECOM
ANNUAL REPORT 2002
38

PRE-EMPTIVE RIGHTS

There are no provisions for pre-emptive rights in the
Articles of Association requiring the Company to
offer new shares to the existing shareholders in
proportion to their shareholdings.

USE OF PROCEEDS

The net proceeds from the Global Offering, after
deduction of fees and expenses, amounted to
RMB10,659 million. As at 31 December 2002, these
proceeds have been deposited in interest-bearing
accounts as short-term deposits and will be used for
the expansion and upgrading of the Company’s
telecommunications network
the
improvement of the Company’s business operation
the development of
supporting systems and
telecommunications applications and technologies

infrastructure,

CONNECTED TRANSACTIONS

REPORT OF THE DIRECTORS

from

as originally proposed in the Company’s prospectus.
The remaining amount will be used to fund potential
Telecommunications
China
acquisitions
Corporation and its subsidiaries (“China Telecom
Group”)
the
telecommunications
in China that are
industry
consistent with our business strategies and for
general corporate purposes.

investments

strategic

and

MAJOR CUSTOMERS AND SUPPLIERS

For the year ended 31 December 2002, sales to the
five largest customers represented an amount not
exceeding 30% of the operating revenue of the Group.

the

For the year ended 31 December 2002, purchases
from
suppliers
represented an amount not exceeding 30% of the
total purchases of the Group.

largest equipment

five

During the year ended 31 December 2002, the Group had the following connected transactions
expenditures:

Transaction

Amount

Annual limit

(in RMB millions)

Payment of costs associated with the provision of

management services (part of centralised services)

Payment of costs associated with international

telecommunications facilities
(part of centralised services)
Payment of interconnection fees to

China Telecommunications Corporation

Payment of interconnection fees to the Company by

China Telecommunications Corporation

Leasing of optic fibers from

China Telecommunications Corporation

Provision of engineering services by China Telecom Group
Leasing of properties from China Telecom Group

414

687

302

102
3,243
266

N/A1

N/A1
4,392
N/A1

CHINA TELECOM
ANNUAL REPORT 2002
39

REPORT OF THE DIRECTORS

Transaction

Leasing of properties by the Group to

China Telecom Group

Provision of third party property sub-leasing by

China Telecom Group

Provision of IT services by China Telecom Group
Provision of equipment procurement services by

China Telecom Group

Provision of community services by

China Telecom Group

Provision of ancillary telecommunications

services by China Telecom Group

Provision of special communications services to

China Telecom Group

Amount

Annual limit

(in RMB millions)

321
151

782

1,291

1,219

N/A1

N/A1
N/A1

N/A1

2,639

1,510

N/A1

Since these transactions are all on normal commercial terms in which the total consideration of each transaction is not
expected to exceed 3 percent of the book value of the net tangible assets of the Company as at 31 December 2002 and
therefore Rule 14.25(1) of the Listing Rules shall apply. Since no waivers have been applied for, no specific annual
limits have been set.

Following the transfer of China Telephony Directory Company in September 2002 from China Telecom Group to China
Netcom Group, which is not a connected party, the Company has subsquently adjusted the amount incurred under the
equipment procurement agreements.

For further details of the connected transactions
please refer to pages 44 to 50 of this annual report.

The
independent non-executive Directors have
confirmed that all connected transactions in the
year ended 31 December 2002 to which the Group
was a party:

had been entered into, and the agreements
governing those transactions were entered
into, by the Group in the ordinary and usual
course of business;

(ii) where there was no available comparison
to judge whether they are on normal
less
commercial terms, on terms no
favourable than those available to or
from independent third parties; and

had been entered into on terms that are fair
and reasonable so far as the independent
shareholders of the Company are concerned.

independent non-executive Directors have

The
further confirmed that:

had been entered into either:

(i)

on normal commercial terms; or

the aggregate annual value of the Group’s
expenditure for engineering services has not
exceeded the limit of RMB4,392 million;

CHINA TELECOM
ANNUAL REPORT 2002
40

the aggregate annual value of the Group’s
expenditure for community services has not
exceeded the limit of RMB2,639 million; and

the aggregate annual value of ancillary
telecommunications services has not exceeded
the limit of RMB1,510 million.

The auditors of the Group have reviewed the
the
connected
Directors that the transactions:

transactions and confirmed

have received the approval of the Directors of
the Company;

have been entered into in accordance with the
pricing policies as stated
in the relevant
agreements, where applicable;

have been entered into in accordance with the
terms of the agreements governing such
transactions; and

for
services

engineering
and

the aggregate annual value of the Group’s
services,
expenditure
community
ancillary
telecommunications services, respectively, has
not exceeded the limits of RMB4,392 million,
RMB2,639 million and RMB1,510 million,
respectively.

REPORT OF THE DIRECTORS

EMPLOYEES

As at 31 December 2002, the Group had 102,647
employees illustrated as follows:

Number of
employees Percentage

Management, finance and

administration
Sales and marketing
Operations and maintenance
Others

18,200
27,263
52,581
4,603

17.7
26.6
51.2
4.5

Total

102,647

100.0

As at 31 December 2002, the Group also had 39,714
temporary employees.

incentive

combined

The Company has implemented a short-term and
remuneration
long-term
scheme: the primary components of an employee’s
remuneration include basic salary, bonus based on
performance, compensation based on seniority and
share appreciation rights (share appreciation rights
are exclusively for senior management and senior
technological experts). In addition, the Company
importance of employee
also emphasises the
training and uses various means of training to
improve the quality and capability of its employees.

COMPLIANCE WITH CODE OF BEST PRACTICE

Throughout the period commencing from the date
of the listing of the Company’s H shares on The
Stock Exchange of Hong Kong Limited on 15
November 2002 through to 31 December 2002, the
Company was in compliance with the Code of Best
Practice as set out in the Listing Rules.

CHINA TELECOM
ANNUAL REPORT 2002
41

REPORT OF THE DIRECTORS

SUBSTANTIAL INTERESTS IN THE SHARE CAPITAL OF THE COMPANY

The Company has been notified of the following interests in the Company’s issued shares as at 31
December 2002 amounting to 10% or more of the ordinary shares in issue:

Ordinary
shares held

Percentage
of Total
Issued Shares

China Telecommunications Corporation

58,809,120,182

77.78%

interests

Apart from the foregoing, no person or corporation
had any
in the share capital of the
Company as recorded in the register required to be
kept under section 16(1) of the SDIO as having an
interest in 10% or more of the issued share capital
of the Company.

MATERIAL LEGAL PROCEEDINGS

As at 31 December 2002, as far as the Directors are
aware of, the Group was not involved in any
material litigation or arbitration and no material
litigation claims were pending or threatened or
made against the Group.

AUDITORS

KPMG Huazhen and KPMG were appointed as the
domestic and international auditors of the Company
respectively for the year ended 31 December 2002.
KPMG has audited the accompanying financial
statements which have been prepared
in
accordance with International Financial Reporting
Standards. The Company has
retained KPMG
Huazhen and KPMG since the date of its listing. A
resolution for the reappointment of KPMG Huazhen
and KPMG as the domestic and
international
auditors of the Company for the year ending 31
December 2003 will be proposed at the annual
general meeting of the Company to be held on 20
June 2003.

By Order of the Board
Zhou Deqiang
Chairman

Beijing, PRC
24 April 2003

CHINA TELECOM
ANNUAL REPORT 2002
42

REPORT OF THE SUPERVISORY COMMITTEE

To shareholders:

During the period covered by this report, all the
members of the Supervisory Committee acted in
accordance with the relevant provisions of the
Company Law of the People’s Republic of China and
the Company’s Articles of the Association, adhered
to the principle of honesty and trustworthiness, and
conscientiously performed their supervisory duties,
so as to safeguard the rights and interests of the
shareholders.

The Supervisory Committee has held two meetings
its establishment. Ms Zhang Xiuqin was
since
elected the Chairperson of the first Supervisory
Committee of the Company at its first meeting on 6
September 2002. The second meeting was held on 1
April 2003 to consider and to examine the audited
financial statements of the Company prepared for
the year 2002 and to further consider the dividend
distribution proposal and the draft auditors’ report
prepared by KPMG.

The Supervisory Committee believes the audited
financial statements of the Company for the year
2002 truly, accurately and objectively reflect the
results of
financial condition and
Company’s
the dividend
further believes
It
operations.
distribution proposal takes into account the interests
of shareholders and
long-term
development, and the accounting and financial
administration comply with the relevant provisions of
the Accounting Standards
for Enterprises and
Accounting System for Enterprises promulgated by
the Ministry of Finance of the People’s Republic of
China.

the Company’s

in compliance with

The Supervisory Committee believes that, in 2002,
the Company operated
its
Articles of Association, the Company Law of the
People’s Republic of China and other relevant PRC
laws and
regulations
regulations as well as
promulgated by domestic and overseas securities
commissions. All members of the board of directors
and the senior management adhere to the principle
of diligence, honesty and trustworthiness, worked
diligently and made valuable contributions to the
development of the Company. As
far as the
Supervisory Committee is aware of, no member of
the board of directors or any senior management
has violated any law or regulation of the PRC or the
Articles of Association of the Company, nor has any
of them been involved in any activity damaging the
interests of the Company during the performance of
their duties.

the new

financial year,

In
the Supervisory
Committee will continue to work diligently to
safeguard the interests of the shareholders.

By Order of the Supervisory Committee
Zhang Xiuqin
Chairperson of the Supervisory Committee

Beijing, PRC
1 April 2003

CHINA TELECOM
ANNUAL REPORT 2002
43

CONNECTED TRANSACTIONS

World Bank Loan

China

In 1994, the Ministry of Finance obtained a loan
from the World Bank (the “World Bank Loan”), of
series of novations, China
which, after a
Telecommunications Corporation became
the
borrower. A portion of the World Bank Loan was
advanced
Telecommunications
Corporation to the Company for general corporate
use. The Company also bears the cost of servicing
that portion of the World Bank Loan. As at 31
December 2002, the outstanding amount of the
World Bank Loan owed by the Company was
US$46.61 million. The Company has fully repaid
such outstanding portion of the World Bank Loan in
March 2003.

Guarantees

the

former Shanghai,
In 1993 and 1994,
Jiangsu and Zhejiang Posts and
Guangdong,
Telecommunications Administrations entered into
various loan agreements with China Import and
Export Bank for an aggregate loan amount of
the
to
Japanese yen
38,436 million
telecommunications networks,
development of
including
inter-provincial
transmission optic fibers. These loans were novated
to the four provincial subsidiaries of the Company
and were guaranteed by China Telecommunications
Corporation.

the development of

finance

CHINA TELECOM
ANNUAL REPORT 2002
44

As the Company has assumed the guarantees in
place of China Telecommunications Corporation
immediately after its listing, such guarantees no
longer constitute connected transactions.

Terms
of
Agreements

Other

Connected

Transactions

On 10 September 2002, the Company and China
into
Telecommunications Corporation entered
certain connected transactions agreements set out
below. The term of the agreements will expire on 31
December 2004, automatically
for
further periods of three years unless the Company
provides three months’ written notification to China
Telecommunications Corporation of its intention not
to renew the agreements upon expiry of their
current term.

renewable

Trademark Licence Agreement

Pursuant to the Trademark Licence Agreement, China
Telecommunications Corporation has granted to the
Company the right, on a royalty-free basis, to use
the trademark bearing the China Telecom logo
which is in the process of being registered at the
State Trademark Office under the PRC State General
Administration for Industry and Commerce, as well
as the right to use certain other registered
trademarks and trademarks in the process of being
registered.

Centralised Services Agreement

Centralised Services include:

•

the

the provision of management services
in
relation to certain large enterprise customers
China
headquarters
of
Telecommunications Corporation and
the
operation of business support centre and
network management centre; and

•

the use of the international telecommunications
transmission facilities.

The use of the international telecommunications
facilities

CONNECTED TRANSACTIONS

The settlement of any net amount due to or due
from the Company is made once a year.

The provision of management services relating to
certain large enterprise customers of the
headquarters of China Telecommunications
Corporation, and the operation of the business
support centre and the network management
centre

Under the Centralised Services Agreement, the
Group and China Telecommunications Corporation
share certain overhead costs and the Group has
agreed to provide human resources relating to
administrative functions of China Telecom Group.
Assets relating to the Centralised Services are used
by both the Group and China Telecom Group. The
Group has also agreed to provide the necessary
human resources responsible for the upkeep and
in
maintenance with respect to these assets,
addition to providing maintenance services
in
relation to the international transmission facilities.
The aggregate costs incurred by the Group and
China Telecommunications Corporation
the
provision of the Centralised Services (which include
salaries and benefits of employees of the Group,
depreciation
properties,
equipment
maintenance fees and research and development
fees) are apportioned pro rata between the Group
and
Corporation
Telecommunications
according to the revenues generated by each of the
Group and China Telecom Group.

China

and

for

For the year ended 31 December 2002, the Group’s
portion of the costs in respect of the provision of
such services was RMB69 million.

Corporation

Telecommunications

China
has
retained the assets associated with international
telecommunications facilities, such as international
gateways, undersea cables and satellite facilities,
and has granted a licence to the Group to use such
facilities. The Group has agreed to provide the
necessary human resources responsible for the
upkeep and maintenance with respect to the
international
facilities. The
telecommunications
Group and China Telecommunications Corporation
agreed to apportion the costs associated with
operating such assets pro rata according to the
aggregate volume of the inbound international calls
terminated by and outbound international calls
originating from, the Group and China Telecom
Group, respectively.

For the year ended 31 December 2002, the Group’s
portion of the costs in respect of the use of
international
facilities was
telecommunications
RMB414 million.

Interconnection Agreement

facilitate

interconnection between
In order to
subscribers within the Group’s service regions and
subscribers outside the service regions which are
serviced by China
Telecom Group, China
Telecommunications Corporation and the Company
entered
settlement
agreement (the “Interconnection Agreement”). The
Interconnection Agreement does not provide for
early termination or non-renewal by China Telecom
Group.

interconnection

into

CHINA TELECOM
ANNUAL REPORT 2002
45

For the year ended 31 December 2002, the total
amount
China
the
Telecommunications Corporation with respect to
optic fibers leasing was RMB102 million.

Group

paid

Engineering Agreements

The Group and the provincial subsidiaries of China
Telecom Group in each of the Group’s service
regions (the “Provincial Subsisting Companies”)
entered into engineering framework agreements
(the “Engineering Framework Agreements”)
to
govern the tendering for the right to provide the
construction, design, equipment
Group with
installation and testing services and/or to act as
general contractors in relation to construction and
supervision of engineering projects commissioned
by the Group.

for engineering

The charges payable
related
services rendered under the Engineering Framework
Agreements shall be determined by reference to
market rates as reflected by prices obtained
through a tendering process. The Group does not
accord any priority to any of the Provincial
Subsisting Companies to provide such services, and
the tender may be awarded to an independent third
party. However, if the terms of an offer from a
Provincial Subsisting Company are at
least as
favourable as those offered by another tenderer, it
is expected that the Group would award the tender
to the relevant Provincial Subsisting Company.

For the year ended 31 December 2002, the Group’s
expenditure for engineering services was RMB3,243
million.

CONNECTED TRANSACTIONS

Pursuant to the Interconnection Agreement, the
telephone operator terminating a telephone call
made to its local network shall be entitled to receive
from the operator from which the telephone call
originated a fee prescribed by the MII, which is
currently RMB0.06 per minute. The formula for
settlement is based on the net volume of telephone
calls originating from the Group to China Telecom
Group or originating from China Telecom Group to
the MII prescribed
the Group multiplied by
settlement fee.

The settlement is made between the Group and
China Telecom Group on a monthly basis, with the
operator who has originated more calls paying the
net amount to the operator who has terminated
more calls.

For the year ended 31 December 2002, the net
settlement payment made by the Group to China
Telecom Group pursuant to the Interconnection
Agreement was RMB385 million.

Optic Fibers Leasing Agreement

Pursuant to the Optic Fibers Leasing Agreement, the
Company agreed to lease the relevant parts of the
inter-provincial transmission optic fibers within the
Group’s service regions from China Telecom Group.

The amount payable by the Group to China
Telecommunications Corporation for the leasing of
the
is
inter-provincial transmission optic fibers
based on the depreciation charge for the optic
to be
fibers.
responsible for the maintenance of these optic
fibers within the Group’s service regions.

the Group agreed

In addition,

CHINA TELECOM
ANNUAL REPORT 2002
46

Property Leasing Agreements

Mutual leasing of properties

Under the Property Leasing Framework Agreements
between the Group and the Provincial Subsisting
Companies, the Group leases properties from the
Provincial Subsisting Companies for use as its
business premises, offices, equipment storage
facilities and sites for network equipment. Under
the Property Leasing Framework Agreements, the
the
Group also
Provincial Subsisting Companies.

leases certain properties

The rental charges in respect of each property are
based on market rates, with reference to amounts
stipulated by local price bureaus. Rental charges
are payable monthly in arrears and subject to
review every three years.

For the year ended 31 December 2002, the Group’s
expenditure for the property leasing was RMB266
the Provincial
the same period,
million. For
Subsisting Companies’ expenditure for the property
leasing was RMB3 million.

CONNECTED TRANSACTIONS

Third Party Properties Sub-Leasing Agreements

The Provincial Subsisting Companies sub-let to the
Group certain properties owned by and leased from
independent third parties for use as offices, retail
outlets, spare parts storage facilities and sites for
network equipment (the “Third Party Properties”).
China Telecom Group has agreed to give the Group
an indemnity with respect to any claims or costs
incurred by the Group in connection with any defect
in the titles to any such Third Party Properties.

The amounts payable by the Group to the Provincial
the Third Party
Subsisting Companies under
Properties Sub-Leasing Agreements are the same as
the amounts payable by China Telecom Group to the
relevant third parties. The rental charges for the
Third Party Properties are based on market rates
negotiated between
the Provincial Subsisting
Companies and the relevant third party on an arm’s
length basis.

For the year ended 31 December 2002, the Group’s
expenditure in relation to third party properties
sub-leasing was RMB321 million.

IT Services Agreements

The Group entered into framework agreements with
the Provincial Subsisting Companies pursuant to
which the Provincial Subsisting Companies agreed
information
to provide the Group with certain
technology services such as office automation and
software adjustment (the “IT Services Framework
Agreements”).

CHINA TELECOM
ANNUAL REPORT 2002
47

CONNECTED TRANSACTIONS

The Provincial Subsisting Companies are entitled to
tender for the right to provide the Group with
technology services. The charges
information
payable for such information technology services
under the IT Services Framework Agreements shall
be determined by reference to market rates as
reflected by prices obtained through a tendering
process. The Group does not accord any priority to
the Provincial Subsisting Companies to provide
such services, and the tender may be awarded to an
independent third party. However, if the terms of an
offer from a Provincial Subsisting Company are at
least as favourable as those offered by another
tenderer, the Group may award the tender to the
relevant Provincial Subsisting Company.

For the year ended 31 December 2002, the Group’s
expenditure for information technology services
was RMB151 million.

Equipment Procurement Services Agreements

Provincial

Pursuant to the equipment procurement framework
agreements entered into between the Group and
(the
Subsisting
the
“Equipment Procurement Framework Agreements”),
the Provincial Subsisting Companies agreed to
services,
comprehensive procurement
provide
including the management of tenders, verification
of technical specifications and installation services.

Companies

procuring

Pursuant to the Equipment Procurement Framework
Agreements, the Group may request that the
Provincial Subsisting Companies act as their agents
domestic
foreign
in
telecommunications equipment and other domestic
non-telecommunications materials. The Group may
give priority to the Provincial Subsisting Companies
if the terms and conditions of the services provided
by them are at least as favourable as those offered
by independent third parties.

and

CHINA TELECOM
ANNUAL REPORT 2002
48

Commission charges
calculated at the maximum rate of:

for

these services are

(1) 1% of the contract value, in the case of

imported telecommunications equipment; or

(2) 1.8% of the contract value, in the case of
domestic telecommunications equipment and
other
non-telecommunications
materials.

domestic

For the year ended 31 December 2002, the Group’s
expenditure for equipment procurement services
was RMB78 million.

Community Services Agreements

through

the Provincial
China Telecom Group,
Subsisting Companies, provides certain cultural,
educational, property management, vehicles, health
and medical services, hotel and conference,
community and sanitary services to the Group. The
arrangements are set out in the community services
framework agreements between the Group and the
Provincial Subsisting Companies (the “Community
Services Framework Agreements”). If the Group
cannot, without
incurring significant additional
costs and expenses, obtain these services from a
third party after such termination, the Provincial
Subsisting Companies
the
provision of such services.

terminate

cannot

Although
the Community Services Framework
Agreements are on a non-exclusive basis, the
following conditions are to apply:

(1)

the Group may give priority to the Provincial
Subsisting Companies in using the services,
provided that the terms and conditions offered
by independent third parties to the Group are
no more favourable than those offered by the
Provincial Subsisting Companies for the same
services;

(2)

(3)

(4)

in return, the Provincial Subsisting Companies
have undertaken to the Group that the
Provincial Subsisting Companies shall not
provide services to the Group on terms which
are less favourable than those offered by them
to third parties;

the Provincial Subsisting Companies are only
entitled to provide the relevant services to
third parties provided that it would not affect
the provision of services to the Group under
the
Framework
Agreements; and

Community

Services

if the Provincial Subsisting Companies cannot
satisfy the needs of the Group for the services
to be provided under the Community Services
Framework Agreements or the terms offered by
independent third parties are more favourable,
the Group may obtain such services from
independent third parties.

The Community Services Framework Agreements
stipulate that the above community services be
provided at:

(1)

the government prescribed price;

(2) where there is no government-prescribed price
but where there is a government-guided price,
the government-guided price applies;

(3) where

there

is neither a government
prescribed price nor a government-guided
price, the market price applies. The market
price is defined as the price at which the same
type of services are provided by independent
third parties
the ordinary course of
business; or

CONNECTED TRANSACTIONS

(4) where none of the above is applicable, the
price is to be agreed between the relevant
parties for the provision of the above services,
which shall be the reasonable cost incurred in
providing the same plus a reasonable marginal
profit (for this purpose, “reasonable costs”
means the costs confirmed by both parties
after negotiations).

For the year ended 31 December 2002, the Group’s
expenditure for community services was RMB1,291
million.

Ancillary Telecommunications Services Agreements

The Provincial Subsisting Companies provide
certain repair services to the Group, such as the
repair of certain telecommunications equipment,
the maintenance of the fire prevention equipment
and telephone booths and other customers services
(the “Ancillary Telecommunications Services”) on a
non-exclusive basis.

(the

“Ancillary

Under the framework agreements between the
Group and the Provincial Subsisting Companies for
the provision of Ancillary Telecommunications
Services
Telecommunications
Services Framework Agreements”), the Provincial
Subsisting Companies agreed to provide Ancillary
Telecommunications Services
the Group.
However, if the Group cannot, without incurring
significant additional costs and expenses, obtain
these services from a third party, the Provincial
Subsisting Companies
the
provision of such services.

terminate

cannot

Ancillary

Agreements

Telecommunications

Services
The
Framework
same
conditions as set out in (1) to (4) in the second
paragraph under the heading “Community Services
Agreements” above.

contain

the

CHINA TELECOM
ANNUAL REPORT 2002
49

CONNECTED TRANSACTIONS

Ancillary

The Ancillary Telecommunications Services under
the
Services
Framework Agreements are provided in accordance
with the same pricing policy as that of the
Community Services Framework Agreements.

Telecommunications

For the year ended 31 December 2002, the Group’s
expenditure
for Ancillary Telecommunications
Services was RMB1,219 million.

Special Communications Services Agreements

The Provincial Subsisting Companies continue to be
for providing emergency network
responsible
services and network services dedicated to the
Chinese government (the “Special Communications
Services”).

The Provincial Subsisting Companies agreed to
lease the infrastructure in connection with the
Special Communications Services from the Group at
a fee prescribed by the MII.

On the other hand, the Group agreed to provide the
to maintain and
resources
necessary human
operate
the Special Communications Services
within the Service Regions in return for China
Telecom Group reimbursing the Group its actual
costs, including the costs for network operations
and support, general and administrative expenses
and certain other operating expenses.

For the year ended 31 December 2002, the Group
was
Special
RMB28 million
Communications Services by China Telecom Group.

paid

for

CHINA TELECOM
ANNUAL REPORT 2002
50

DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT

MR. Zhou Deqiang, age 61, is Chairman

MR. Chang Xiaobing, age 46, is an

MS. Wu Andi, age 48, is an Executive

of our Board of Directors and Chief

Executive Director and President in

Director, Executive Vice President and

Executive Officer of our company in

charge of marketing development of our

the Chief Financial Officer in charge of

charge of our overall management. Mr.

company. Mr. Chang is a professor level

financial management of our company.

Zhou is a professor level Senior

Senior Engineer. He graduated in 1982

Ms. Wu is a Senior Accountant. She

Engineer. He graduated in 1968 from

from the Nanjing Institute of Posts and

graduated in 1983 from the Beijing

Nanjing Institute of Posts and

Telecommunications with a B.S. degree

Institute of Economics with a B.A.

Telecommunications with a major in

in telecommunications engineering and

degree in finance and trading. From

wireline telecommunications. Prior to

received an MBA degree from Tsinghua

1996 to 1998, Ms. Wu studied in a post-

joining China Telecommunications

University in 2001. Prior to joining

graduate program in business

Corporation in May 2000, Mr. Zhou

China Telecommunications Corporation

economics management at the Chinese

served as a Vice Minister of the MII and

in May 2000, Mr. Chang served as a

Institute of Social Sciences. Prior to

its predecessor ministry, the Ministry of

Deputy Director General and Director

joining China Telecommunications

Posts and Telecommunications, or MPT,

General of the Department of

Corporation in May 2000, Ms. Wu

a Deputy Director General and Director

Telecommunications Administration of

served as Director General of the

General of Anhui Posts and

the Ministry of Information Industry, a

Department of Economic Adjustment

Telecommunications Administration, or

Deputy Director General of the

and Communication Settlement of the

PTA, and a Deputy Chief Engineer of

Directorate General of

Ministry of Information Industry, and

Beijing Long Distance Telephone

Telecommunications, or DGT of the

director General, deputy Director

Bureau. Mr. Zhou is also President of

MPT, and a Deputy Director of the

General and director of the Department

China Telecommunications Corporation.

Nanjing Municipal Posts and

of Finance of the MPT. Ms. Wu is also a

Mr. Zhou has in-depth industry

Telecommunications Bureau of Jiangsu

Vice President of China

knowledge and 34 years of extensive

PTA. Mr. Chang is also a Vice President

Telecommunications Corporation. Ms.

operational and managerial experience

of China Telecommunications

Wu has 21 years of financial experience

in the telecommunications industry in

Corporation. Mr. Chang has 21 years of

in the telecommunications industry in

China.

operational and managerial experience

China.

in the telecommunications industry in

China.

CHINA TELECOM
ANNUAL REPORT 2002
51

DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT

MR. Zhang Jiping, age 47, is an

MS. Huang Wenlin, age 49, is an

MR. Li Ping, age 49, is an Executive

Executive Director and Executive Vice

Director, Executive Vice President and

President in charge of network

President in charge of human resources

Company Secretary of our company in

construction and operations of our

management of our company. Ms.

charge of investor relationship

company. Mr. Zhang is a professor level

Huang is a Senior Economist. She

management. Mr. Li is a Senior

Senior Engineer. He graduated in 1982

graduated in 1984 from the Beijing

Engineer. He graduated in 1976 from

from the Beijing Institute of Posts and

Institute of Posts and

the Beijing Institute of Posts and

Telecommunications with a B.Sc.

Telecommunications with a

Telecommunications with a major in

degree in radio telecommunications

concentration in engineering

radio telecommunications and received

engineering. From 1986 to 1988, Mr.

management. Prior to joining China

an MBA degree from the state

Zhang studied in a post-graduate

Telecommunications Corporation in May

University of New York at Buffalo in

program in applied computer

2000, Ms. Huang served as Director of

1989. Prior to joining China

engineering at Northeastern Industrial

the Domestic Communications Division

Telecommunications Corporation in

University. Prior to joining China

and Director of the Communications

August 2000, Mr. Li served as Chairman

Telecommunications Corporation in May

Organization Division of the DGT of the

and the President of China Telecom

2000, Mr. Zhang was a Deputy Director

MPT. Ms. Huang is also a Vice President

(Hong Kong) International Limited, a

General of the DGT of the MPT, and a

of China Telecommunications

Vice Chairman and Executive Vice

Deputy Director General of Liaoning PTA

Corporation. Ms. Huang has 28 years of

President of China Mobile (Hong Kong)

and Director of the Network

operational and managerial experience

Limited and a Deputy Director General

Management Center of the Liaoning

in the telecommunications industry in

of the DGT and the MPT. Mr. Li is also a

PTA. Mr. Zhang is also a Vice President

China.

Vice President of China

of China Telecommunications

Corporation. Mr. Zhang has 21 years of

operational and managerial experience

in the telecommunications industry in

China.

Telecommunications Corporation. Mr. Li

has extensive experience in managing

public companies and 27 years of

operational and managerial experience

in the telecommunications industry in

China.

CHINA TELECOM
ANNUAL REPORT 2002
52

DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT

MR. Wei Leping, age 57, is an Executive

MR. Cheng Xiyuan, age 59, is an

MR. Feng Xiong, age 57, is an Executive

Director and Executive Vice President in

Executive Director of our company. Mr.

Director of our company. Mr. Feng is a

charge of research and development

Cheng is a professor level Senior

professor level Senior Engineer. He

work of our company. Mr. Wei is a

Engineer. He graduated from Chongqing

graduated from Tsinghua University in

professor level Senior Engineer. He

Institute of Military

1970 with a major in electronic

graduated in 1970 from Tsinghua

Telecommunications and Engineering in

engineering. He received a master’s

University with a major in radio

1968 with a major in

degree from Nanjing Institute of Posts

engineering and received a M.S. degree

telecommunications. Prior to joining

and Telecommunications in 1982 with a

in communication and information

china Telecom Group, Mr. Cheng served

major in communications and systems.

systems from the Research Institute of

as Director General of Shanghai Long

Prior to joining China Telecom Group,

Post and Telecommunications. Prior to

Distance Telephone Bureau, and a

Mr. Feng served as a Deputy Chief

joining China Telecommunications

Deputy Director General, Director

Engineer and Chief Engineer of the

corporation in April 2001, Mr. Wei

General and Chief Engineer of Shanghai

Nanjing Municipal Telecommunications

served as a Deputy Director of the

PTA. Mr. Cheng currently serves as

Bureau of Jiangsu PTA, and a Deputy

Telecommunications Research Institute

General Manager of China Telecom

Chief Engineer, Chief Engineer and a

of the Ministry of Information Industry,

Group Shanghai Corporation and has 34

Deputy Director General of Jiangsu PTA.

a Deputy Director of the

years of operational and managerial

Mr. Feng currently serves as General

Telecommunications Science Planning

experience in the telecommunications

Manager of China Telecom Group

and Research Institute of the MPT and a

industry in China.

Deputy Director and Chief Engineer of

the Telecommunications Transmissions

Research Center of the MPT. Mr. Wei is

also Chief Engineer of China

Telecommunications Corporation. Mr.

Wei has 25 years of experience in

research and development for network

technologies in the telecommunications

industry in China.

Guangdong Corporation and has 21

years of operational and managerial

experience in the telecommunications

industry in China.

CHINA TELECOM
ANNUAL REPORT 2002
53

DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT

MR. Zhang Youcai, age 62, is an

independent Non-executive Director of

our company. Mr. Zhang graduated

from Nanjing Industrial Chemistry

College in 1965 with a major in

inorganic chemistry. He was a former

Vice Minister of the Ministry of Finance

of China and was responsible for the

formulation and implementation of

government finance policies. Mr. Zhang

has contributed to the improvement

and reform of the finance system of

China over more than a decade. Prior to

serving at the Ministry of Finance, Mr.

Zhang served as a Deputy Director of

the Planning Commission of Nantong

City in Jiangsu Province and a Deputy

Mayor and Mayor of Nantong. Mr.

Zhang has more than 40 years of

experience in the regulation of Chinese

state-owned enterprises and finance

administration.

MR. Vincent Lo Hong Sui, age 55, is an
independent Non-executive Director of
our company. Mr. Lo is the chairman and
chief executive of the Shui On Group
which he founded 32 years ago. He is
also the founding chairman and current
president of the Business and
Professionals Federation of Hong Kong,
a member of The Tenth National
Committee of Chinese People’s Political
Consultative Conference, Vice Chairman
of the All-China Federation of Industry
and Commerce, the president of the
Shanghai-Hong Kong Council for the
Promotion and Development of Yangtze,
court member of the Hong Kong
University of Science and Technology, a
member of HK-US Business Council-HK
Section, a director of The Real Estate
Development Association of Hong Kong,
an adviser to the Chinese Society of
Macroeconomics, an adviser to Peking
University China Center for Economic
Research, a council member of the China
Overseas Friendship Association, a
director of Great Eagle Holdings Limited
and a non-executive director of Hang
Seng Bank Limited and New World China
Land Limited. He was awarded the Gold
Bauhinia Star in 1998 and appointed
Justice of the Peace in 1999 by the
Government of the Hong Kong Special
Administrative Region. He was made an
Honorary Citizen of Shanghai in 1999. In
2001, he was named Businessman of the
Year by the DHL/South China Morning
Post Hong Kong Business Awards, and
most recently he received one of the
Hong Kong Institute of Directors’ “2002
Director of the Year” awards.

CHINA TELECOM
ANNUAL REPORT 2002
54

DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT

MR. Sun Jiuming, age 56, is president

MR. Wang Jirong, age 49, is Deputy

and Chairman of Board of Directors of

Director and President of Zhejiang

Jiangsu Telecommunications Corporation

Telecommunications Corporation Ltd. Mr.

Ltd. Mr. Sun is a Senior Engineer, and he

Wang is a professor level Senior

graduated from Nanjing Institute of Posts

Engineer, and graduated from Nanjing

Institute of Posts and

Telecommunications and the Australian

National University. Mr. Wang was

formerly Deputy Director of Suzhou

Telecommunications Bureau. He has 33

years of operational and management

experience in the telecommunications

industry in China.

and Telecommunications and the

Australian National University in 1982

with a B.Sc. degree in radio

telecommunications engineering. Mr Sun

was a Deputy Director of the Nanjing

Municipal Posts and Telecommunications

Bureau, and Director of Nantong Posts

Bureau, Director and Deputy Director of

Nantong Telecommunications Bureau,

and President of Jiangsu

Telecommunications Corporation. Mr.

Sun has 21 years experience of

operational and management in the

telecommunications industry in China.

CHINA TELECOM
ANNUAL REPORT 2002
55

DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT

MR. Wang Qi, age 48, is the controller of our Company. Mr. Wang is a senior accountant. He studied at Beijing Institute of Posts and

Telecommunications and the Australian National University. Mr. Wang has a B.A. degree in international economics and a Masters

degree in international management. Prior to joining the Company, Mr. Wang served as a Deputy Director General of Anhui PTA. Mr.

Wang also served as a Deputy general Manager of China Telecom Group Anhui Corporation prior to his relocation to the

headquarters of China Telecom Group in 2000. Mr. Wang is also Managing Director of the Planning and Finance Department of China

Telecommunications Corporation. Mr. Wang has 28 years of managerial and accounting experience in the telecommunications

industry in China.

MS. Zhang Xiuqin, age 56, is the Chairperson of our Supervisory Committee. Ms. Zhang is a Senior Accountant. Prior to joining

China Telecom Group, Ms. Zhang served as a Director of the Systems Division of the Financial Department of the MPT, Director of

the Department of Economic Adjustment and Communication Settlement of the MII, Director of the Communication Settlement

Centre of the MII and General Manager of the Huaxin Posts and Telecommunication Economic Development Center. Since July 2000,

Ms. Zhang has served as Director of the Audit Department of China Telecommunications Corporation. Ms. Zhang has 34 years of

operational and managerial experience in the telecommunications industry in China.

MR. Wang Huanhui, age 58, has been the Supervisor representing employees from 1 April this year. Mr. Wang is a senior

economist, and graduated from Beijing Institute of Posts and Telecommunications in 1969. In August 2000, Mr. Wang was assigned

as Director of Supervisors Board of China Telecommunications Corporations. Mr Wang has more than 30 years of operational and

management experience in the telecommunications industry in China.

MS. Zhu Lihao, age 62, is an independent Supervisor on our Supervisory Committee. Ms. Zhu is a Senior Auditor and is a board

member of the Auditors’ Association. She graduated from Beijing Mining College in 1963 with a major in engineering economics. Ms.

Zhu served as a Deputy Director General and Director General of the Department of Industry and Communications of the National

Audit Office of China, and the Director General of the Department of Foreign Affairs Auditing of the Audit Bureau. Ms. Zhu has 40

years of experience in management and auditing.

MR. Xie Songguang, age 54, is a Supervisor on our Supervisory Committee. Mr. Xie is a Senior Engineer. He graduated from Nanjing

Institute of Posts and Telecommunications in 1985 with a major in communications. Mr. Xie completed an advanced business

program in Hangzhou University in 1998. Prior to joining China Telecom Group, Mr. Xie served as a Deputy Director of the

Telecommunications Division, and Director of the Operation and Maintenance Division of Zhejiang PTA. Mr. Xie currently serves as a

Deputy General Manager of China Telecom Group Zhejiang Corporation and has 28 years of operational and managerial experience

in the telecommunications industry in China.

MR. Li Jing, age 37, is a Supervisor on our Supervisory Committee. Mr. Li is an economist. He graduated from the Central Party

School in 1995 with a major in economics and management. Prior to joining China Telecom Group, Mr. Li worked at the Audit

Division of the Jiangsu PTA, and the audit department and financial department of Suzhou Municipal Posts and Telecommunications

Bureau. Mr. Li currently serves as a Deputy Director of the Audit Department of China Telecom Group Jiangsu Corporation and has

18 years of financial and auditing experience in the telecommunications industry in China.

CHINA TELECOM
ANNUAL REPORT 2002
56

NOTICE OF ANNUAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that an Annual General
Meeting of China Telecom Corporation Limited (the
“Company”) for the year ended 31 December 2002
will be held at 10:00 a.m. on 20 June 2003 at Beijing
Nan Yue Yuan Hotel, 186 Zheng Wang Fen, Feng Tai
District, Beijing, PRC to consider the following
businesses:

ORDINARY RESOLUTIONS

to consider and approve other matters, if any.

And as special business, to consider and, if thought
fit, to pass the followings as special resolutions:

SPECIAL RESOLUTIONS

“THAT:

to consider and approve the consolidated
financial statements of the Company, the
report of the Board of Directors, the report of
the Supervisory Committee and the report of
the international auditors for the year ended
31 December 2002;

to consider and approve the profit distribution
proposal and declaration and payment of a
final dividend for the year ended 31 December
2002;

to consider and approve the appointment of
Mr. Shi Wanpeng as an independent non-
executive director of the Company;

the

and

consider

approve
for

annual
to
the Company’s
remuneration proposal
directors for the year to be ended 31 December
2003. The current salary system of a state-
owned enterprise shall be changed into the
salary system based on a joint stock company
with salary benefits of a joint stock company
which include the basic salary, allowance and
subsidies, performance based bonus, annuity,
insurance benefits and share appreciation rights;

to consider and approve the reappointment of
KPMG Huazhen as the Company’s domestic
auditors and KPMG as
the Company’s
international auditors for the year ending 31
December 2003 and the authorisation to the
directors to fix the remuneration thereof; and

(a)

(b)

(c)

subject to paragraph (c) below, the
exercise by the directors during the
Relevant Period (as hereinafter defined)
of all the powers of the Company to allot,
issue and deal with additional Shares and
to make or grant offers, agreements and
options which might require the exercise
of such powers be hereby generally and
unconditionally approved;

in paragraph
the directors during

(a) shall
the approval
the
authorise
Relevant Period to make or grant offers,
agreements and options which might
require the exercise of such powers after
the end of the Relevant Period;

the aggregate nominal amount of share
capital allotted, issued and dealt with or
agreed conditionally or unconditionally to
issued and dealt with
be allotted,
(whether pursuant
to an option or
otherwise) by the directors pursuant to
the approval in paragraph (a), otherwise
than pursuant to (i) a Rights Issue (as
hereinafter defined) or (ii) any scrip
dividend
arrangement
providing for the allotment of Shares in
lieu of the whole or part of a dividend on
Shares in accordance with the Articles of
Association,
the
aggregate of (aa) 20% of the aggregate
nominal amount of the share capital of
the Company in issue at the date of

shall not exceed

similar

CHINA TELECOM
ANNUAL REPORT 2002
57

NOTICE OF ANNUAL GENERAL MEETING

passing this Resolution, plus (bb) (if the
directors are so authorised by a separate
ordinary resolution of the shareholders of
the Company) the aggregate nominal
amount of share capital of the Company
repurchased by the Company subsequent
to the passing of this Resolution (up to
maximum equivalent to 10% of the
aggregate nominal amount of the share
capital of the Company in issue at the
date of passing this Resolution), and the
said
limited
approval
accordingly; and

shall

(d)

for the purpose of this Resolution:

“Relevant Period” means the period from
the passing of this Resolution until the
earlier of:

(i)

(ii)

the conclusion of the next annual
general meeting of the Company;

the expiry of the period within which
the next annual general meeting of
the Company is required by the
Articles of Association or
the
Companies Ordinance to be held;
and

(iii)

the revocation or variation of the
authority given to the directors
under this Resolution by resolution
of the Company’s shareholders in
general meetings; and

“Rights Issue” means an offer of shares
open for a period fixed by the directors to
holders of Shares on the register of
members on a fixed record date
in
proportion of their then holdings of such
Shares (subject to such exclusion or
other arrangements as the directors may

CHINA TELECOM
ANNUAL REPORT 2002
58

to any

deem necessary or expedient in relation
fractional entitlements or having
to
legal or practical
regard
restrictions or obligations under the laws
of, or the requirement of, any recognised
regulatory body or any stock exchange in
any territory applicable to the Company)
and an offer, allotment or issue of shares
by way of rights shall be construed
accordingly.”

“THAT
the directors be and are hereby
authorised to exercise the powers of the
in paragraph (a) of
Company referred to
Resolution 7 in respect of the share capital of
the Company repurchased by the Company
referred to in sub-paragraph (bb) of paragraph
(c) of such resolution.”

After the completion of the global offering of
the Company’s shares and pursuant to the
Chinese laws and regulations, the following
amendments to the Articles of Association
shall be made to the provisions relating to the
Company’s shareholding structure.

“THAT amendments shall be made to the
Articles of Association in order to reflect the
aggregate number of shares issued by the
Company and the details of the amendments
are as follows:

(a) Article 6 of the Articles of Association

shall be restated as follows:

In accordance with the provisions of the
Company Law, the Special Regulations
and the Mandatory Provisions for Articles
of Association of Companies to be Listed
Overseas (the “Mandatory Provisions”)
and other PRC laws and administrative
regulations, the Company convened its
general meeting on 20 June 2003 to

amend the original Articles of Association
of the Company (the “Original Articles of
Association”) and adopt these Articles of
Association (the “Articles of Association”
or “these Articles of Association”).

(b) Article 20 of the Company’s Articles of

Association shall be restated as follows:

the

the approval of

relevant
By
companies department authorised by the
State Council, the Company may issue a
total of 75,614,186,503 ordinary shares,
of which 68,317,270,803 were issued to
the promoter of the Company at the time
when the Company was established,
representing 90.35% of the entire issued
share capital.

(c)

Article 21 of the Company’s Articles of
Association shall be restated as follows:

from

the
the

the Company after

All the 7,296,915,700 ordinary shares
issued by
its
the overseas-listed
incorporation are
foreign-invested shares (H Shares). A
total of 730,494,300 shares have been
respective
reduced
shareholdings
State-owned
shareholders of the Company, namely,
China Telecommunications Corporation,
Guangdong Rising Assets Management
Co., Ltd.,
Investment
Jiangsu Guoxin
Group Co., Ltd. and Zhejiang Financial
Development Company during the global
offering and all the reduced shares have
become
foreign-
the overseas-listed
invested shares (H Shares). The total of
foreign-invested
the
shares (H Shares) issued by the Company
shall
shares,
representing 10.62% of the issued share
capital of the Company.

overseas-listed

8,027,410,000

NOTICE OF ANNUAL GENERAL MEETING

Rising

Guangdong

The share capital structure of
the
Company is as follows: there are a total
shares
of 75,614,186,503 ordinary
issued, of which 58,809,120,182 shares
the promoter, China
are held by
Telecommunications
Corporation,
representing 77.78% of the total of the
ordinary shares issued by the Company.
The other holders of the domestic shares
Assets
are
Management Co., Ltd., holding a total of
5,658,608,387
representing
7.48% of the total of the ordinary shares
issued by the Company, Jiangsu Guoxin
Investment Group Co., Ltd., holding a
total of 964,621,836 shares representing
1.27% of the total of the ordinary shares
issued by the Company and Zhejiang
Financial Development Company, holding
a
shares
representing 2.85% of the total of the
ordinary shares issued by the Company.
A total of 8,027,410,000 overseas-listed
foreign-invested share are held by
foreign-
holders
invested shares, representing 10.62% of
the total of the ordinary shares issued by
the Company.”

overseas-listed

2,154,426,098

total

10. “THAT Article 43 of the Articles of Association
shall be amended as follows due to the repeal
of the Securities (Clearing Houses) Ordinance
on 1 April 2003:

transfer of Overseas-Listed Foreign
The
Invested Shares in the Company listed in Hong
Kong shall be carried out in writing on normal
or standard instruments of transfer or on a
form acceptable to the Board of Directors; and
such transfer instrument can be signed only by
hand or, if the transferor or transferee is a
securities
its
representative recognised in accordance with

institution

clearing

CHINA TELECOM
ANNUAL REPORT 2002
59

NOTICE OF ANNUAL GENERAL MEETING

section 37 of the Securities and Futures
Ordinance (Hong Kong Law Chapter 571),
in printed
signed by hand or signed
mechanical form. All the transfer instruments
shall be maintained in the legal address of the
Company or other place the Board of Director
may designate from time to time.”

By Order of the Board
Li Ping
Company Secretary

Beijing, PRC
24 April 2003

Notes:

(1) Buyers who submit

the share

transfer
application forms to the Company’s share
registrar before 4:00 p.m. on 19 May 2003
(Monday) and then registered as shareholders
on the register of members of the Company are
entitled to attend the annual general meeting.

(2)

(3)

Each shareholder entitled to attend and vote
at the annual general meeting may appoint
one or more proxies to attend and vote on his
behalf at the annual general meeting. A proxy
need not be a shareholder. Each shareholder
who wishes to appoint one or more proxies
should first review the annual report of the
Company for the year 2002, which is expected
to be despatched to shareholders before 30
April 2003 (Wednesday).

To be valid, the form of proxy together with the
power of attorney or other authorisation
document (if any) signed by the authorised
person or notarially certified power of attorney
must be delivered to the Secretariat of the
board for holders of domestic shares and to
the Computershare Hong Kong
Ivestor
Services Limited for holders of H shares not

CHINA TELECOM
ANNUAL REPORT 2002
60

less than 24 hours before the designated time
for the holding of the annual general meeting.
Completion and return of a form of proxy will
not preclude a shareholder from attending in
person and voting at the annual general
meeting if he so wishes.

The address of the share registrar for the
Company’s H Shares is as follows:

Computershare Hong Kong Investor Services

Limited

Rooms 1712-1716,
17th Floor, Hopewell Centre
183 Queens Road East, Wanchai, Hong Kong

(4) A proxy of a shareholder may vote by hand or
vote on a poll, but a proxy of a shareholder
who has appointed more than one proxy may
only vote on a poll.

(5)

In connection with special resolution 7 set out
above, the directors have no plans to issue any
new share for the time being. In accordance
with section 57B of the Companies Ordinance
(Cap. 32) and the Rules Governing the Listing
of Securities on the Stock Exchange of Hong
Kong Limited, the authorisation given by the
shareholders is a general mandate.

(6)

The registration procedure for attending the
annual general meeting:

(a)

legal

shareholder attending the annual general
meeting
in person or by proxy shall
present its identity certification. If the
attending shareholder is a corporation,
its
representative or person
authorised by the board or other decision
making authority shall present the copy
of the relevant resolution of the board or
other decision making authority in order
to attend the annual general meeting;
and

NOTICE OF ANNUAL GENERAL MEETING

(b)

shareholders
intending to attend the
annual general meeting shall return the
attendance slip via hand delivery, mail or
fax to the Secretariat on or before 30 May
2003 (Friday).

(7) Closure of the register of members:

The register of members of the Company will
be closed from 20 May 2003 (Tuesday) to 20
June 2003 (Friday) (both days inclusive).

(8)

The annual general meeting is expected to last
for half a day and shareholders (in person or
the annual general
by proxy) attending
meeting shall be responsible for their own
transportation and accommodation expenses.

(9)

The address of the Secretariat of the Board is
as follows:

31 Jinrong Street
Xicheng District, Beijing 100032
PRC

Contact person:
Telephone:
Fascmile:

Li Ping
(8610) 6642 8166
(8610) 6601 0728

CHINA TELECOM
ANNUAL REPORT 2002
61

REPORT OF THE INTERNATIONAL AUDITORS

To the Shareholders of
China Telecom Corporation Limited
(Incorporated in The People’s Republic of China with limited liability)

We have audited the financial statements on pages 64 to 109 which have been prepared in accordance with
International Financial Reporting Standards promulgated by the International Accounting Standards Board.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS

The Company’s directors are responsible for the preparation of financial statements which give a true and
fair view. In preparing financial statements which give a true and fair view it is fundamental that
appropriate accounting policies are selected and applied consistently, that judgements and estimates are
made which are prudent and reasonable and that the reasons for any significant departure from applicable
accounting standards are stated.

It is our responsibility to form an independent opinion, based on our audit, on those financial statements
and to report our opinion to you.

BASIS OF OPINION

We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong
Society of Accountants. An audit includes examination, on a test basis, of evidence relevant to the amounts
and disclosures in the financial statements. It also includes an assessment of the significant estimates and
judgements made by the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the Company’s and the Group’s circumstances, consistently applied
and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we
considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to
whether the financial statements are free from material misstatement. In forming our opinion we also
evaluated the overall adequacy of the presentation of information in the financial statements. We believe
that our audit provides a reasonable basis for our opinion.

CHINA TELECOM
ANNUAL REPORT 2002
62

REPORT OF THE INTERNATIONAL AUDITORS

OPINION

In our opinion, the financial statements give a true and fair view of the state of affairs of the Company and
of the Group as at 31 December 2002 and of the Group’s profit and cash flows for the year then ended and
have been properly prepared in accordance with International Financial Reporting Standards promulgated
by the International Accounting Standards Board and the disclosure requirements of the Hong Kong
Companies Ordinance.

KPMG
Certified Public Accountants

Hong Kong, China
24 April 2003

CHINA TELECOM
ANNUAL REPORT 2002
63

CONSOLIDATED BALANCE SHEET

at 31 December 2002
(Amounts in millions)

ASSETS

Non-current assets

Property, plant and equipment, net
Construction in progress
Lease prepayments
Interests in associates
Investments
Deferred tax assets
Other assets

Total non-current assets

Current assets
Inventories
Accounts receivable, net
Prepayments and other current assets
Time deposits with maturity over three months
Cash and cash equivalents

Total current assets

Total assets

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities
Short-term debt
Current portion of long-term debt
Accounts payable
Accrued expenses and other payables
Income tax payable
Current portion of finance lease obligations
Current portion of deferred revenues

Total current liabilities

Net current liabilities

Total assets less current liabilities

Non-current liabilities

Long-term debt
Finance lease obligations
Deferred revenues
Deferred tax liabilities

Total non-current liabilities

Total liabilities

Minority interests

Balance carried forward

Note

2002
RMB

2001
RMB

3
4

6
7
8
17

9
10
11

13
13
14
15

16
17

13
16
17
8

149,165
20,319
2,644
429
270
5,118
6,405

138,623
23,274
2,638
417
446
4,059
5,749

184,350

175,206

1,066
5,961
1,736
1,316
16,423

26,502

1,413
5,608
2,752
473
3,882

14,128

210,852

189,334

19,175
2,219
14,399
10,266
3,842
—
7,726

57,627

18,827
3,621
14,919
11,672
212
38
8,155

57,444

(31,125)

(43,316)

153,225

131,890

4,853
—
21,612
618

27,083

84,710

1,134

7,101
11
26,353
—

33,465

90,909

940

85,844

91,849

The notes on pages 71 to 109 form part of these financial statements.

CONSOLIDATED BALANCE SHEET (CONTINUED)

at 31 December 2002
(Amounts in millions)

Note

2002
RMB

2001
RMB

Balance brought forward

85,844

91,849

Shareholders’ equity

Share capital
Reserves

18
19

75,614
49,394

—
97,485

Total shareholders’ equity

125,008

97,485

Total liabilities and shareholders’ equity

210,852

189,334

Approved and authorised for issue by the Board of Directors on 24 April 2003.

Zhou Deqiang
Chairman and Chief
Executive Officer

Chang Xiaobing
Executive Director
and President

Wu Andi
Executive Director,
Executive Vice President
and Chief Financial Officer

The notes on pages 71 to 109 form part of these financial statements.

BALANCE SHEET

at 31 December 2002
(Amounts in millions)

ASSETS

Non-current assets

Interests in subsidiaries

Current assets

Prepayments and other current assets
Time deposits with maturity over three months
Cash and cash equivalents

Total current assets

Total assets

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities

Accrued expenses and other payables
Income tax payable

Total current liabilities

Net current assets

Total assets less current liabilities

Shareholders’ equity

Share capital
Reserves

Total shareholders’ equity

Total liabilities and shareholders’ equity

Approved and authorised for issue by the Board of Directors on 24 April 2003.

Note

2002
RMB

18
19

114,866

1,527
1,000
9,570

12,097

126,963

570
1,385

1,955

10,142

125,008

75,614
49,394

125,008

126,963

Zhou Deqiang
Chairman and Chief
Executive Officer

Chang Xiaobing
Executive Director
and President

Wu Andi
Executive Director,
Executive Vice President
and Chief Financial Officer

The notes on pages 71 to 109 form part of these financial statements.

CONSOLIDATED STATEMENT OF INCOME

for the year ended 31 December 2002
(Amounts in millions, except per share data)

Operating revenues

Operating expenses

Depreciation and amortisation
Network operations and support
Selling, general and administrative
Other operating expenses

Total operating expenses

Operating profit

Deficit on revaluation of property, plant and equipment

Net finance (costs)/income

Investment income

Share of profit from associates

Note

2002
RMB

2001
RMB

75,496

68,546

(20,882)
(20,131)
(10,468)
(2,637)

(19,451)
(20,269)
(9,401)
(1,327)

(54,118)

(50,448)

21,378

18,098

—

(11,930)

(632)

293

310

Profit before taxation and minority interests

20,785

6,793

Taxation

(3,855)

Profit before minority interests

Minority interests

Profit attributable to shareholders

Basic earnings per share

Weighted average number of shares

16,930

6,862

(66)

16,864

6,883

0.24

0.10

69,242

68,317

The notes on pages 71 to 109 form part of these financial statements.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

for the year ended 31 December 2002
(Amounts in millions)

Share
capital
RMB

Capital
reserve
RMB

Share
premium
RMB

Revaluation
reserve
RMB

Surplus
reserves
RMB

Note

Statutory
common
welfare fund
RMB

Other
reserves
RMB

Retained
earnings
RMB

Total
shareholders’
equity
RMB

Balance as at 1 January

2001
Net profit
Contributions from China

Telecom

Distributions to China

Telecom

Assets distributed to
China Telecom in
connection with the
Restructuring
Revaluation surplus
Recognition of deferred

tax assets
Elimination of net

deferred tax liabilities

Balance as at 31

December 2001
Capitalisation as share

capital upon
incorporation of the
Company

Issue of shares, net of
issuing expenses of
RMB796 million

Net profit
Appropriations
Revaluation surplus

realised
Deferred tax on

amortisation of land
use rights realised

Balance as at 31

December 2002

—-
—

—

—
—

—

—
—

—

—
—

—

—
—

—

—
—

—

1
3

18, 19

68,317

20,955

—

7,297
—
—

—

—
—
—

—

3,362
—
—

—

—
—

—

—
4,154

—

4,154

—

—
—
—

(10)

—

—
—

—

—
—

—

—
—

—

—
—

—

— 101,619
6,883
—

101,619
6,883

—

3,003

— (15,835)

(15,835)

— (11,285)
—
—

(11,285)
4,154

4,059

—

4,887

4,059

4,887

—

4,059

89,272

97,485

—

— (89,272)

—

—
—
8,121

—

—
—
1,624

—

—
—
—

—

(75)

—
16,864
(9,745)

10,659
16,864
—

—

75,614

20,955

3,362

4,144

8,121

1,624

3,984

7,204

125,008

The notes on pages 71 to 109 form part of these financial statements.

CONSOLIDATED STATEMENT OF CASH FLOW

for the year ended 31 December 2002
(Amounts in millions)

Cash flows from operating activities

Cash flows from investing activities

Capital expenditure
Purchase of investments
Lease prepayments
Proceeds from disposal of property, plant and equipment
Increase in time deposits with maturity over three months
Maturity of time deposits with maturity over three months

Note

(a)

2002
RMB

2001
RMB

37,102

32,761

(28,169)
(50)
(74)
41
(1,312)
469

(34,610)
(290)
(437)
72
(473)
339

Net cash used in investing activities

(29,095)

(35,399)

Cash flows from financing activities

Proceeds from initial public offering, net of issuing expenses
Capital element of finance lease payments
Proceeds from bank debt
Repayments of bank debt
Cash distributions to minority interests
Cash contributions from China Telecom
Cash distributions to China Telecom

10,659
(49)
25,749
(29,278)
(12)
—
(2,535)

—
(305)
21,423
(16,979)
—
3,003
(14,483)

Net cash from/(used in) financing activities

4,534

(7,341)

Net increase/(decrease) in cash and cash equivalents

12,541

(9,979)

Cash and cash equivalents at beginning of year

3,882

13,861

Cash and cash equivalents at end of year

16,423

3,882

The notes on pages 71 to 109 form part of these financial statements.

CONSOLIDATED STATEMENT OF CASH FLOW (CONTINUED)

for the year ended 31 December 2002
(Amounts in millions)

(a) Reconciliation of profit before taxation and minority interests to cash flows from operating

activities

2002
RMB

2001
RMB

Profit before taxation and minority interests

20,785

6,793

Adjustments for:

Depreciation and amortisation
Deficit on revaluation of property, plant and equipment
Provision for doubtful accounts
Investment income
Share of profit from associates
Interest income
Interest expense
Unrealised foreign exchange losses/(gains)
Loss on retirement and disposal of property, plant and equipment
(Increase)/decrease in accounts receivable
Decrease/(increase) in inventories
Decrease/(increase) in prepayments and other current assets
Increase in other non-current assets
(Decrease)/increase in accounts payable
Increase/(decrease) in accrued expenses and other payables
Decrease in deferred revenues

Cash generated from operations

Interest received
Interest paid
Investment income received
Income tax paid

20,882
—
345
(4)
(35)
(140)
1,321
227
410
(698)
347
1,149
(588)
(78)
157
(5,170)

38,910
140
(1,315)
33
(666)

19,451
11,930
186
(310)
(22)
(246)
1,415
(325)
1,720
1,336
(99)
(550)
(1,139)
1,231
(373)
(3,691)

37,307
246
(1,408)
255
(3,639)

Cash flows from operating activities

37,102

32,761

The notes on pages 71 to 109 form part of these financial statements.

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PRESENTATION

Principal activities

China Telecom Corporation Limited (‘‘the Company’’) and its subsidiaries (hereinafter, collectively
referred to as ‘‘the Group’’) are engaged in the provision of wireline telecommunications and related
services in Shanghai Municipality, Guangdong Province, Jiangsu Province and Zhejiang Province of
the People’s Republic of China (‘‘the PRC’’). The Group offers a comprehensive range of wireline
telecommunications services to residential and business customers, including local, domestic long
distance and international long distance telephone services, Internet and managed data, leased line,
and other related services.

The operations of the Group are subject to the supervision and regulation by the PRC government.
The Ministry of Information Industry, pursuant to the authority delegated to it by the PRC’s State
Council, is responsible for formulating the telecommunications industry policies and regulations,
including the regulation and setting of tariff levels for basic telecommunications services, such as
local and long distance telephone services, managed data services, leased line and interconnection
arrangements.

Organisation

The Company was incorporated in the PRC on 10 September 2002 as part of the reorganisation (the
‘‘Restructuring’’) of China Telecommunications Corporation (‘‘China Telecom’’ and together with its
subsidiaries other than the Company referred to as ‘‘China Telecom Group’’), a state-owned
enterprise which is under the supervision and regulation of the Ministry of Information Industry.

Pursuant
to the Restructuring, China Telecom transferred to the Company the wireline
telecommunications business and related operations in Shanghai Municipality, Guangdong
Province, Jiangsu Province and Zhejiang Province together with the related assets and liabilities
(the ‘‘Predecessor Operations’’) in consideration for 68,317 million ordinary domestic shares of the
Company. The shares issued to China Telecom have a par value of RMB1.00 each and represented
the entire registered and issued share capital of the Company at that date. As discussed below,
certain assets historically associated with the Predecessor Operations were not transferred to the
Company but were retained by China Telecom in connection with the Restructuring.

China Telecom was initially established in May 2000 to operate the PRC’s nationwide wireline
telecommunications network as part of the restructuring of the PRC’s telecommunications industry.
In November 2001, pursuant to a further industry restructuring plan approved by the State Council,
China Telecom’s wireline telecommunications networks and related operations in 10 northern
provinces, municipalities and autonomous regions of the PRC were transferred to China Netcom
Group. China Telecom retained the wireline telecommunications networks and related operations of
21 provinces, municipalities and autonomous regions of
including the Predecessor
Operations. In accordance with this industry restructuring plan, China Telecom and China Netcom
Group own 70% and 30%, respectively, of the nationwide inter-provincial optic fibres.

the PRC,

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PRESENTATION (Continued)

Basis of presentation

Since China Telecom controlled the Predecessor Operations transferred to the Company before the
Restructuring and continues to control the Company after the Restructuring, the accompanying
financial statements have been prepared as a reorganisation of businesses under common control in
a manner similar to a pooling-of-interests. Accordingly, the assets and liabilities transferred to the
Company have been recognised at historical amounts. For periods prior to the legal formation of the
Company and its subsidiaries, the assets, liabilities, revenue and expenses of the entities comprising
the Predecessor Operations were combined in preparing the financial statements.

The accompanying consolidated financial statements present the results of the Company and its
subsidiaries as if the Group had been in existence throughout the years presented and as if the
Predecessor Operations were transferred to the Company from China Telecom as at 1 January 2001.
In addition, the consolidated financial statements for the year ended 31 December 2001 include the
results related to certain assets historically associated with the Predecessor Operations that were
not transferred to the Company and were retained by China Telecom in connection with the
Restructuring. The assets retained by China Telecom primarily related to investments in non-
telecommunications industries, inter-provincial transmission optic fibres and properties and, as at 31
December 2001, consisted of the following:

Current assets, primarily prepayments
Property, plant and equipment, net
Construction in progress
Interests in associates and long-term investments

RMB millions

1,128
4,457
686
5,014

11,285

In preparing the consolidated financial statements, the assets and liabilities, revenues and expenses
of the Predecessor Operations are reflected in the accompanying consolidated financial statements.
In addition, for the year ended 31 December 2001, the consolidated financial statements have been
prepared to include certain assets historically associated with the Predecessor Operations that were
retained by China Telecom. As a result of the segregation and separate management of these assets
by China Telecom beginning 31 December 2001, the assets retained by China Telecom have been
reflected as a distribution to China Telecom in the consolidated statement of shareholders’ equity as
at 31 December 2001.

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PRESENTATION (Continued)

Basis of presentation (Continued)

Management believes that all historical costs of operations have been reflected in the consolidated
financial statements for the year ended 31 December 2001. Expenses that were specifically identified
including the costs of ancillary, social and supporting services
to the Predecessor Operations,
provided to the Predecessor Operations by China Telecom and its affiliates, are reflected in the
consolidated financial statements. Expenses associated with corporate services provided by China
Telecom (consisting primarily of corporate headquarter administrative expenses) were allocated
based on revenues to companies within China Telecom, including the Predecessor Operations. The
amount of corporate administrative expenses allocated to the Group for the year ended 31 December
2001 was RMB118 million. Management believes that the method of allocation of corporate
administrative expenses presents a reasonable basis of estimating what the Group’s expenses would
have been on a stand-alone basis for the year ended 31 December 2001.

SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of preparation

The accompanying financial statements have been prepared in accordance with International
Financial Reporting Standards (‘‘IFRS’’) promulgated by the International Accounting Standards
Board (‘‘IASB’’). IFRS includes International Accounting Standards (‘‘IAS’’) and interpretations.
These financial statements also comply with the disclosure requirements of the Hong Kong
Companies Ordinance and the applicable disclosure provisions of the Rules Governing the
Listing of Securities on the Stock Exchange of Hong Kong Limited.

These financial statements are prepared on the historical cost basis as modified by the
revaluation of certain property, plant and equipment (Note 3).

The preparation of the financial statements in accordance with IFRS 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 the
reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The accounting policies described below have been consistently
applied by the Group.

(b) Basis of consolidation

A subsidiary is an enterprise controlled by the Company. Control exists when the Company has
the power, directly or indirectly, to govern the financial and operating policies of an enterprise
so as to obtain benefits from its activities.

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

SIGNIFICANT ACCOUNTING POLICIES (Continued)

(b) Basis of consolidation (Continued)

The financial results of subsidiaries are included in the consolidated financial statements from
the date that control commences until the date that control ceases, and the share attributable
to minority interests is deducted from or added to profit before minority interests. All significant
intercompany balances and transactions and any unrealised gains/losses arising from
intercompany transactions are eliminated on consolidation.

An associate is a company, not being a subsidiary, in which the Group exercises significant
influence over its management. Significant influence is the power to participate in the financial
and operating policy decisions of the investee but is not control over those policies.

its
The consolidated statement of
associates for the period. In the consolidated balance sheet, interests in associates are stated
at the Group’s attributable share of net assets.

income includes the Group’s share of the results of

(c)

Translation of foreign currencies

The functional and reporting currency of the Group is Renminbi (‘‘RMB’’). Foreign currency
transactions during the year are translated into RMB at the applicable rates of exchange quoted
by the People’s Bank of China (‘‘PBOC rates’’) prevailing on the transaction dates. Foreign
currency monetary assets and liabilities are translated into RMB at the applicable PBOC rates at
the balance sheet date.

Exchange differences, other than those capitalised as construction in progress, are recognised
as income or expense in the consolidated statement of income. For the periods presented, no
exchange differences were capitalised.

(d)

Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and in hand and time deposits with original
maturities of three months or less when purchased. Cash equivalents are stated at cost, which
approximates fair value. None of the Group’s cash and cash equivalents is restricted as to
withdrawal.

(e) Accounts receivable

Accounts receivable are stated at cost less allowance for doubtful accounts. An allowance for
doubtful accounts is provided based upon the evaluation of the recoverability of these
accounts at the balance sheet date.

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

SIGNIFICANT ACCOUNTING POLICIES (Continued)

(f)

Inventories

Inventories consist of materials and supplies used in maintaining the Group’s wireline
telecommunications network and goods for resale. Materials and supplies are valued at cost
less a provision for obsolescence.

Inventories that are held for resale are stated at the lower of cost and net realisable value. Net
realisable value is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale.

(g) Property, plant and equipment

Property, plant and equipment are initially recorded at cost less accumulated depreciation and
impairment losses (Note 2(l)). The cost of an asset comprises its purchase price, any directly
attributable costs of bringing the asset to working condition and location for its intended use
and the cost of borrowed funds used during the periods of construction. Expenditure incurred
after the asset has been put into operation is capitalised only when it increases the future
economic benefits embodied in the item of property, plant and equipment. All other
expenditure, including the cost of repairs and maintenance, is expensed as it is incurred.

the date of

Subsequent to the revaluation carried out as at 31 December 2001, which was based on
depreciated replacement costs (Note 3), property, plant and equipment are carried at revalued
amount, being the fair value at the date of the revaluation, less subsequent accumulated
depreciation and impairment losses. When an item of property, plant and equipment is
the revaluation is restated
revalued, any accumulated depreciation at
proportionately with the change in the gross carrying amount of the asset so that the
carrying amount of the asset after revaluation equals its revalued amount. The separate classes
into which the Company groups assets for the revaluation are buildings and improvements;
telecommunications network plant and transmission and switching equipment; and furniture,
fixture, motor vehicles and other equipment. When an item of property, plant and equipment is
revalued, the entire class of property, plant and equipment to which that asset belongs is
revalued simultaneously. When an asset’s carrying amount is increased as a result of a
revaluation, the increase is credited directly to shareholders’ equity under the component of
revaluation reserve. However, a revaluation increase is recognised as income to the extent that
it reverses a revaluation decrease of the same asset previously recognised as an expense.
When an asset’s carrying amount is decreased as a result of a revaluation, the decrease is
recognised as an expense in the consolidated statement of income. However, a revaluation
decrease is charged directly against any related revaluation surplus to the extent that the
decrease does not exceed the amount held in the revaluation reserve in respect of that same
asset. Revaluations are performed with sufficient regularity such that the carrying amount does
not differ materially from that which would be determined using fair value at the balance sheet
date. Revaluations are performed annually on items which experience significant and volatile
movements in fair value while items which experience insignificant movements in fair value are
revalued every three years.

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

SIGNIFICANT ACCOUNTING POLICIES (Continued)

(g) Property, plant and equipment (Continued)

Assets acquired under leasing agreements which effectively transfer substantially all the risks
and benefits incidental to ownership from the lessor to the lessee are classified as assets under
finance leases. Assets under finance leases are initially recorded at amounts equivalent to the
present value of the minimum lease payments (computed using the rate of interest implicit in
the lease) which approximate the fair value at the inception of the lease. The net present value
of
the future minimum lease payments is recorded correspondingly as a finance lease
obligation. Assets under finance leases are amortised over their estimated useful lives. As at 31
December 2002, none of the Group’s assets were held under finance leases (2001 : RMB48
million).

Gains or losses arising from retirement or disposal of property, plant and equipment are
determined as the difference between the net disposal proceeds and the carrying amount of the
asset and are recognised as income or expense in the consolidated statement of income on the
date of disposal. On disposal of a revalued asset, the related revaluation surplus is transferred
from the revaluation reserve to retained earnings.

Depreciation is provided to write off the cost/revalued amount of each asset over its estimated
useful life on a straight-line basis, after taking into account its estimated residual value, as
follows:

Depreciable life

Buildings and improvements
Telecommunications network plant, transmission and switching equipment
Furniture, fixture, motor vehicles and other equipment

8 to 30 years
6 to 10 years
4 to 10 years

(h)

Lease prepayments

Lease prepayments represent land use rights paid to the PRC’s land bureau. Land use rights are
carried at cost and are amortised on a straight-line basis over the respective periods of the
rights which range from 20 years to 70 years.

(i)

Construction in progress

Construction in progress represents buildings, telecommunications network plant, transmission
and switching equipment and other equipment under construction and pending installation,
and is stated at cost less impairment losses (Note 2(l)). Cost comprises direct costs of
construction as well as interest charges, and foreign exchange differences on related borrowed
funds to the extent that they are regarded as an adjustment to interest charges, during the
periods of construction. Capitalisation of these costs ceases and the construction in progress is
transferred to property, plant and equipment when the asset is substantially ready for its
intended use.

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

SIGNIFICANT ACCOUNTING POLICIES (Continued)

(i)

Construction in progress (Continued)

No depreciation is provided in respect of construction in progress.

(j)

Investments in subsidiaries

In the Company’s stand-alone balance sheet, investments in subsidiaries are accounted for
using the equity method.

(k)

Investments

Investments in non-marketable equity securities are stated at cost
less provision for
impairment losses (Note 2(l)). A provision is made where, in the opinion of management, the
carrying amount of the investments exceeds its recoverable amount.

(l)

Impairment

the Group’s long-lived assets,

including property, plant and
The carrying amounts of
equipment, are reviewed periodically in order to assess whether the recoverable amounts
have declined below the carrying amounts. These assets are tested for impairment whenever
events or changes in circumstances indicate that their recorded carrying amounts may not be
recoverable. When such a decline has occurred, the carrying amount is reduced to the
recoverable amount. The recoverable amount is the greater of the net selling price and the
value in use. The amount of the reduction is recognised as an expense in the consolidated
statement of income. In determining the value in use, expected future cash flows generated by
the assets are discounted to their present value. For the periods presented, no impairment
losses were recognised in the consolidated statement of income.

(m) Revenue recognition

The Group’s revenues are principally derived from the provision of local, domestic long distance
(‘‘DLD’’) and international long distance (‘‘ILD’’) telephone services which consist of (i) usage
charges for telephone services, which vary depending on the day, the time of day, distance and
duration of the telephone call, (ii) a monthly telephone service fee, (iii) service activation and
installation fees, and (iv) charges for value-added telecommunications services, such as call
waiting, call diverting and caller number display. The Group records wireline service revenues
over the periods they are earned as follows:

(i)

Revenues derived from local, DLD and ILD telephone usage are recognised as the services
are provided.

(ii) Upfront fees received for activation of wireline services and wireline installation charges
are deferred and recognised over the expected customer relationship period. The related
direct incremental customer acquisition costs are deferred to the extent of the upfront
fees and are amortised over the same expected customer relationship period.

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

SIGNIFICANT ACCOUNTING POLICIES (Continued)

(m) Revenue recognition (Continued)

(iii) Monthly telephone service fees are recognised in the month during which the telephone

services are provided to customers.

(iv) Revenues from sale of prepaid calling cards are recognised as the cards are used by

customers.

(v)

Revenues derived from value-added telecommunications services are recognised when
the services are provided to customers.

Other related wireline telecommunications service revenues are recognised as follows:

(i)

(ii)

Revenues from the provision of Internet and managed data services are recognised when
the services are provided to customers.

Interconnection fees from domestic and foreign telecommunications operators are
recognised when the services are rendered as measured by the minutes of traffic
processed.

(iii)

Lease income from operating leases is recognised over the term of the lease.

(iv) Sale of customer-end equipment is recognised on delivery of the equipment to customers
and when the significant risks and rewards of ownership and title have been transferred to
the customers.

(n) Advertising and promotion expense

The costs for advertising and promoting the Group’s wireline telecommunications services are
expensed as incurred. Advertising and promotion expense, which is included in selling, general
and administrative expenses, was RMB1,300 million for the year ended 31 December 2002
(2001 : RMB1,097 million).

(o) Net financing costs

financing costs comprise interest

interest expense on
Net
borrowings, and foreign exchange gains and losses. Interest income from bank deposits is
recognised on a time proportion basis that takes into account the effective yield on the asset.

income on bank deposits,

Interest costs incurred in connection with borrowings are expensed as incurred, except to the
extent that they are capitalised as being directly attributable to the construction of an asset
which necessarily takes a substantial period of time to get ready for its intended use.

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

SIGNIFICANT ACCOUNTING POLICIES (Continued)

(p) Research and development expense

Research and development expenditure is expensed as incurred. For the year ended 31
December 2002, research and development expense was RMB172 million (2001 : RMB123
million).

(q)

Employee benefits

The Group’s contributions to defined contribution retirement plans administered by the PRC
government are recognised as an expense in the consolidated statement of income. Further
information is set out in Note 33.

(r)

Provisions

A provision is recognised in the consolidated balance sheet when the Group has a legal or
constructive obligation as a result of a past event, and it is probable that an outflow of
economic benefits will be required to settle the obligation.

(s)

Income tax

Income tax comprises current and deferred tax. Current tax is calculated on the taxable income
for the year by applying the applicable tax rates. Deferred tax is provided using the balance
sheet liability method, providing for all temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for taxation
purposes. The amount of deferred tax is calculated on the basis of the enacted tax rates that
are expected to apply in the period when the asset is realised or the liability is settled. The
effect on deferred tax of any changes in tax rates is charged or credited to the consolidated
statement of income. A deferred tax asset is recognised only to the extent that it is probable
that future taxable income will be available against which the asset can be utilised. Deferred
tax assets are reduced to the extent that it is no longer probable that the related tax benefit will
be realised.

(t)

Dividends

Dividends are recognised as a liability in the period in which they are declared.

(u) Segmental reporting

A business segment is a distinguishable component of the Group that is engaged in providing
products or services and is subject to risks and rewards that are different from those of other
segments. For the periods presented, the Group has one operating segment which is the
provision of wireline telecommunications services. All the Group’s operating activities are
carried out in the PRC.

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

PROPERTY, PLANT AND EQUIPMENT, NET

The Group:

Buildings and
improvements
RMB millions

Telecommunications
network plant and
equipment
RMB millions

Furniture,
fixture, motor
vehicles and
other equipment
RMB millions

Total
RMB millions

Cost/valuation:
Balance at 1 January 2001
Additions
Transferred from construction in progress
Disposals
Revaluation
Distributions to China Telecom in

connection with the Restructuring

22,944
1,187
4,481
(265)
641

(2,865)

164,450
5,763
30,915
(3,794)
(28,016)

9,919
877
1,501
(780)
(2,328)

197,313
7,827
36,897
(4,839)
(29,703)

(2,057)

(1,130)

(6,052)

Balance at 31 December 2001

26,123

167,261

8,059

201,443

Accumulated depreciation:
Balance at 1 January 2001
Depreciation charge for the year
Written back on disposals
Revaluation
Distributions to China Telecom in

connection with the Restructuring

(3,506)
(918)
126
1,482

480

(62,612)
(17,116)
2,288
18,719

(3,667)
(1,417)
480
1,726

(69,785)
(19,451)
2,894
21,927

742

373

1,595

Balance at 31 December 2001

(2,336)

(57,979)

(2,505)

(62,820)

Net book value at 31 December 2001

23,787

109,282

5,554

138,623

Cost/valuation:
Balance at 1 January 2002
Additions
Transferred from construction in progress
Disposals

26,123
438
4,888
(81)

167,261
1,133
23,530
(1,136)

8,059
356
1,529
(250)

201,443
1,927
29,947
(1,467)

Balance at 31 December 2002

31,368

190,788

9,694

231,850

Accumulated depreciation:
Balance at 1 January 2002
Depreciation charge for the year
Written back on disposals

(2,336)
(1,188)
25

(57,979)
(18,281)
796

(2,505)
(1,413)
196

(62,820)
(20,882)
1,017

Balance at 31 December 2002

(3,499)

(75,464)

(3,722)

(82,685)

Net book value at 31 December 2002

27,869

115,324

5,972

149,165

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

PROPERTY, PLANT AND EQUIPMENT, NET (Continued)

As required by the relevant PRC rules and regulations with respect to the Restructuring, the property,
plant and equipment of the Group as at 31 December 2001 were revalued for each asset class by
Beijing China Enterprise Appraisal Co., Ltd. (the ‘‘PRC valuers’’), independent valuers registered in
the PRC, on a depreciated replacement cost basis. The value of the property, plant and equipment
was determined at RMB138,623 million. The tax base of such assets has been adjusted to the
revalued amount (Note 8). The surplus on revaluation of certain property, plant and equipment
totalling RMB4,154 million was credited to the revaluation reserve while the deficit arising from the
revaluation of certain property, plant and equipment totalling RMB11,930 million was recognised as
an expense for the year ended 31 December 2001. The reduction in the carrying amount was
primarily the result of the-then market decline in the replacement cost of certain network switching
equipment. The net deficit on the revaluation of the property, plant and equipment of RMB7,776
million was reflected in the consolidated balance sheet of the Group as at 31 December 2001.

The Group’s properties were also revalued separately by Chesterton Petty Limited, independent
qualified valuers in Hong Kong, as at 31 December 2001. The value arrived at by these valuers was
approximately the same as that arrived at by the PRC valuers.

The historical carrying amounts of the Group’s property, plant and equipment as at 31 December
2001 and the revalued amounts of these assets were as follows:

Historical
carrying
amount
RMB millions

Revaluation
surplus
RMB millions

Revaluation
deficit
RMB millions

Revalued
amount
RMB millions

Buildings and improvements
Telecommunications network plant

21,664

2,361

(238)

23,787

and equipment

118,579

1,653

(10,950)

109,282

Furniture, fixture, motor vehicles and

other equipment

6,156

140

(742)

5,554

146,399

4,154

(11,930)

138,623

In connection with the initial public offering of the Company’s H shares, the properties of the Group
as at 30 June 2002 were valued by Chesterton Petty Limited, independent qualified valuers in Hong
Kong, as required by the Rules Governing the Listing of Securities on the Stock Exchange of Hong
Kong Limited. The value of the properties other than land use rights was not materially different from
the book carrying value as at 30 June 2002 and therefore the consolidated financial statements have
not been adjusted.

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

CONSTRUCTION IN PROGRESS

The Group
2002
RMB millions

2001
RMB millions

Balance at beginning of year
Additions
Transferred to property, plant and equipment
Distributions to China Telecom in connection with the Restructuring

23,274
26,992
(29,947)
—

28,656
32,201
(36,897)
(686)

Balance at end of year

20,319

23,274

INTERESTS IN SUBSIDIARIES

Share of net assets

The Company
2002
RMB millions

114,866

Details of the Company’s subsidiaries at 31 December 2002 which principally affected the results of
operations and the financial position of the Group are as follows:

Name of Company

Type of
legal entity

Date of
incorporation

Registered
capital
(RMB millions)

Direct
attributable
equity interest

Principal activities

Guangdong Telecom
Company Limited

Limited company

10 October
2002

Zhejiang Telecom

Limited company

Company Limited

Jiangsu Telecom

Limited company

Company Limited

Shanghai Telecom

Limited company

Company Limited

10 October
2002

19 October
2002

11 October
2002

47,513

100% Provision of

telecommunications
services

22,400

100% Provision of

telecommunications
services

19,208

100% Provision of

telecommunications
services

15,984

100% Provision of

telecommunications
services

The above subsidiaries are incorporated in the PRC.

INTERESTS IN ASSOCIATES

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

The Group
2002
RMB millions

2001
RMB millions

Share of net assets

429

417

The Group’s interests in associates are accounted for under the equity method and are individually
and in aggregate not material to the Group’s financial conditions or results of operations for all
periods presented. Details of the Group’s principal associates are as follows:

Name of company

equity interest Principal activities

Attributable

Shenzhen Shekou Telecommunications

50.00% Provision of telecommunications services

Company Limited

Shanghai Information Investment

Incorporation

24.00% Provision of information technology
consultancy services

The above associates are established in the PRC and are not traded on any stock exchange.

INVESTMENTS

The Group
2002
RMB millions

2001
RMB millions

Unlisted equity investments

270

446

Unlisted equity investments mainly represent the Group’s various interests in PRC private enterprises
which are mainly engaged in the provision of information technology services and Internet contents.
These investments are accounted for at cost, less provision for any impairment. The Group has no
investments in marketable securities.

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

DEFERRED TAX ASSETS AND LIABILITIES

Deferred tax assets and deferred tax liabilities are attributable to the items set out below:

The Group:

Assets

2002

2001
RMB millions RMB millions RMB millions RMB millions RMB millions RMB millions

2001

Liabilities
2002

Net balance
2002

Current
Provisions, primarily for accounts

receivable

Non-current
Property, plant and equipment
Deferred revenues and installation

costs

Land use rights

—

1,035

3,984

—

4,059

—

(193)

(425)

—

Deferred tax assets

5,118

4,059

(618)

—

(193)

610

3,984

—

4,059

4,500

4,059

A valuation allowance on deferred tax assets is recorded if it is more likely than not that some
portion or all of the deferred tax assets will not be realised through recovery of taxes previously paid
and/or future taxable income. The allowance is subject to ongoing adjustments based on changes in
circumstances that affect the Group’s assessment of the realisability of the deferred tax assets. The
Group has reviewed its deferred tax assets as at 31 December 2001 and 2002. Based on the level of
historical taxable income and projections for future taxable income over the periods which the
deferred tax assets are deductible, management believes that it is more likely than not the Group will
realise the benefits of these temporary differences. Therefore, no valuation allowances were
provided for the years ended 31 December 2001 and 2002 in respect of deferred tax assets arising
from temporary differences.

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

DEFERRED TAX ASSETS AND LIABILITIES (Continued)

Movements in temporary differences are as follows:

Balance at 1
January 2001
RMB millions

Note

Recognised
in statement
of income
RMB millions

Recognised in
shareholders’
equity
RMB millions

Balance at 31
December
2001
RMB millions

Current
Provisions, primarily for accounts receivable

Non-current
Property, plant and equipment
Deferred revenues and installation costs
Land use rights

(i)

(i)
(i)
(ii)

308

(88)

(220)

—

(9,194)
611
—

3,271
205
—

5,923
(816)
4,059

—
—
4,059

Net deferred tax (liabilities)/assets

(8,275)

3,388

8,946

4,059

Current
Provisions, primarily for accounts receivable

Non-current
Property, plant and equipment
Deferred revenues and installation costs
Land use rights

Net deferred tax assets

(Note 24)

Balance at
1 January 2002
RMB millions

Recognised in
statement of income
RMB millions

Balance at
31 December 2002
RMB millions

—

—
—
4,059

4,059

(193)
610
(75)

441

(Note 24)

(193)
610
3,984

4,500

Note:

(i)

(ii)

As described in Note 3, in connection with the Restructuring, the Group’s property, plant and equipment were revalued
as at 31 December 2001. The tax base of these assets has been adjusted to conform to the respective revalued amount.
In addition, in connection with the Restructuring, the tax bases of the Group’s assets and liabilities that gave rise to the
temporary differences above have been adjusted to conform to the related financial carrying amounts. As a result, the
timing differences that gave rise to the net deferred tax liabilities relating to the items above were eliminated. The
reduction in net deferred tax liabilities of RMB4,887 million as at 31 December 2001 was reflected as a credit to
shareholders’ equity.

In connection with the Restructuring, the Group’s land use rights, which as at 31 December 2001 had a carrying amount
of RMB2,638 million, were revalued as required by the relevant PRC rules and regulations. The revalued amount of the
land use rights was determined at RMB14,939 million. The tax base of the land use rights has been adjusted to conform
to such revalued amount. The land use rights were not revalued for financial reporting purposes and accordingly, a
deferred tax asset of RMB4,059 million was created with a corresponding increase in shareholders’ equity. Based upon
the level of historical taxable income and projections of future taxable income, management believes that it is more
likely than not the Group will realise the benefits of the deferred tax asset.

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

INVENTORIES

Inventories represent:

Materials and supplies
Goods for resale

10. ACCOUNTS RECEIVABLE, NET

Accounts receivable, net, is analysed as follows:

Accounts receivable
Less: Allowance for doubtful accounts

The Group
2002
RMB millions

2001
RMB millions

911
155

1,166
247

1,066

1,413

The Group
2002
RMB millions

2001
RMB millions

6,440
(479)

6,121
(513)

5,961

5,608

Amounts due from the provision of wireline telecommunications services to residential and business
customers are due within 30 days from the date of billing. Customers who have accounts overdue by
more than 90 days will have their services disconnected.

The following table summarises the changes in the allowance for doubtful accounts:

The Group
2002
RMB millions

2001
RMB millions

513
345
(379)

479

661
186
(334)

513

At beginning of year
Provision for doubtful accounts
Accounts receivable written off

At end of year

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

10. ACCOUNTS RECEIVABLE, NET (Continued)

Ageing analysis of accounts receivable from telephone subscribers is as follows:

Current, within 1 month
1 to 3 months
4 to 12 months
More than 12 months

Less: Allowance for doubtful accounts

The Group
2002
RMB millions

2001
RMB millions

5,036
352
309
130

5,827
(439)

4,436
709
233
255

5,633
(488)

5,388

5,145

Ageing analysis of accounts receivable from other telecommunications operators and customers is as
follows:

The Group
2002
RMB millions

2001
RMB millions

Current, within 1 month
1 to 3 months
4 to 12 months
More than 12 months

Less: Allowance for doubtful accounts

363
109
85
56

613
(40)

573

189
137
77
85

488
(25)

463

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

11. PREPAYMENTS AND OTHER CURRENT ASSETS

Prepayments and other current assets represent:

Amounts due from China Telecom Group
Amounts due from subsidiaries
Prepayments in connection with construction

work and equipment purchases

Prepaid expenses and deposits
Other receivables

12. CASH AND CASH EQUIVALENTS

The Group
2002
RMB millions

2001
RMB millions

The Company
2002
RMB millions

342
—

376
269
749

970
—

383
247
1,152

34
1,493

—
—
—

1,736

2,752

1,527

The Group
2002
RMB millions

2001
RMB millions

The Company
2002
RMB millions

Cash at bank and in hand
Time deposits with maturity within three months

11,574
4,849

3,604
278

16,423

3,882

4,815
4,755

9,570

13. SHORT-TERM AND LONG-TERM DEBT

Short-term debt comprises:

The Group
2002
RMB millions

2001
RMB millions

Bank loans

19,175

18,827

Weighted average interest rate of the Group’s short-term debt as at 31 December 2002 was 4.7%
(2001 : 5.5%).

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

13. SHORT-TERM AND LONG-TERM DEBT (Continued)

Long-term debt comprises:

Interest rates and final maturity

The Group

2002
RMB millions

2001
RMB millions

Bank loans

Renminbi denominated

Interest rates ranging from 4.5% to 8.0% per

2,867

6,005

annum with maturities through 2006

US Dollars denominated

Interest rates ranging from 2.0% to 8.3% per

1,582

2,137

annum with maturities through 2021

Japanese Yen denominated

Interest rates ranging from 2.5% to 3.5% per

2,623

2,544

annum with maturities through 2022

Other loans

Renminbi denominated

Interest rate at 2.4% per annum

—

7,072

10,686

Total long-term debt

Less: current portion

Non-current portion

7,072

10,722

(2,219)

(3,621)

4,853

7,101

As at 31 December 2002, no bank loans were secured. As at 31 December 2001, bank loans of
RMB14 million were secured by certain of the Group’s property, plant and equipment. The net book
value of the property, plant and equipment pledged as security amounted to RMB4 million as at 31
December 2001.

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

13. SHORT-TERM AND LONG-TERM DEBT (Continued)

The aggregate maturities of the Group’s long-term debt subsequent to 31 December 2002 are as
follows:

Within 1 year
Between 1 to 2 years
Between 2 to 3 years
Between 3 to 4 years
Between 4 to 5 years
Thereafter

The Group
2002
RMB millions

2001
RMB millions

2,219
1,196
825
268
219
2,345

3,621
2,795
1,306
325
263
2,412

7,072

10,722

The Group’s short-term and long-term debts do not contain any financial covenants. As at 31
December 2002, the Group had available credit facilities of RMB2,634 million (2001 : RMB Nil) which
it can draw upon.

14. ACCOUNTS PAYABLE

Accounts payable are analysed as follows:

Third parties
China Telecom Group

The Group
2002
RMB millions

2001
RMB millions

11,505
2,894

12,498
2,421

14,399

14,919

Amounts due to China Telecom Group are repayable in accordance with normal commercial terms.

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

14. ACCOUNTS PAYABLE (Continued)

Ageing analysis of accounts payable is as follows:

Due within 1 month or on demand
Due after 1 month but within 3 months
Due after 3 months but within 6 months
Due after 6 months

15. ACCRUED EXPENSES AND OTHER PAYABLES

Accrued expenses and other payables represent:

The Group
2002
RMB millions

2001
RMB millions

1,715
2,701
3,329
6,654

2,166
2,010
2,150
8,593

14,399

14,919

The Group
2002
RMB millions

2001
RMB millions

The Company
2002
RMB millions

Distributions payable to China Telecom
Amounts due to China Telecom Group
Accrued expenses
Customer deposits and receipts in advance

—
1,790
7,884
592

2,535
1,673
6,883
581

10,266

11,672

—
—
570
—

570

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

16.

FINANCE LEASE OBLIGATIONS

Obligations under finance leases are analysed as follows:

Within 1 year
Between 1 to 2 years
Between 2 to 3 years
Less:

finance charges related to future periods

Present value of minimum lease payments
Less: current portion

Non-current portion

17. DEFERRED REVENUES

The Group
2002
RMB millions

2001
RMB millions

—
—
—
—

—
—

—

40
7
4
(2)

49
(38)

Deferred revenues represent the unearned portion of upfront connection fees and installation fees
received from customers and the unused portion of calling cards. Connection fees and installation
fees are amortised over the expected customer relationship period of 10 years. Beginning 1 July
2001, connection fees were no longer collected from new customers.

The Group
2002
RMB millions

2001
RMB millions

34,508

38,199

—
1,987
5,235

7,222

(6,018)
(995)
(5,379)

1,168
2,019
5,580

8,767

(6,290)
(780)
(5,388)

29,338

34,508

7,726
21,612

29,338

8,155
26,353

34,508

Balance at beginning of year
Additions for the year
— connection fees
— installation fees
— calling cards

Reduction for the year

— amortisation of connection fees
— amortisation of installation fees
— usage of calling cards

Balance at end of year

Representing:

— Current portion
— Non-current portion

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

17. DEFERRED REVENUES (Continued)

Included in other non-current assets are capitalised direct incremental costs associated with the
installation of wireline services. As at 31 December 2002, the unamortised portion of these costs was
RMB5,687 million (2001 : RMB5,126 million).

18. SHARE CAPITAL

Registered, issued and fully paid
67,586,776,503 ordinary domestic shares of RMB 1.00 each
8,027,410,000 overseas listed H shares of RMB 1.00 each

The Group and the Company
2001
RMB millions

2002
RMB millions

67,587
8,027

75,614

—
—

—

The Company was incorporated on 10 September 2002 with a registered capital of 68,317,270,803
ordinary domestic shares with a par value of RMB1.00 each. Such shares were issued to China
Telecom in consideration for the assets and liabilities related to the Predecessor Operations
transferred to the Company (Note 1). As part of a reform plan approved by the State Council on the
administration of rural telecommunication services, China Telecom transferred a portion of its
shareholdings in the Company to certain state-owned enterprises (‘‘Other Domestic Shareholders’’)
Jiangsu
owned and controlled by the provincial governments in each of Guangdong Province,
Province and Zhejiang Province.

Pursuant to the resolutions passed at an extraordinary general meeting held on 4 November 2002
and approvals from relevant government authorities, the Company was authorised to increase its
share capital to a maximum of 76,216 million shares with a par value of RMB1.00 each and offer not
more than 7,899 million of such shares to investors outside the PRC. China Telecom and the Other
Domestic Shareholders were authorised to offer not more than 791 million shares in aggregate of
their shareholdings in the Company to investors outside the PRC. The shares sold by China Telecom
and the Other Domestic Shareholders to investors outside the PRC would be converted into H shares.

In November 2002, the Company issued 6,868,767,600 H shares with a par value of RMB1.00 each,
representing 377,820,000 H shares and 64,909,476 American Depositary Shares (‘‘ADSs’’, each
representing 100 H shares), at prices of HK$1.47 per H share and US$18.98 per ADS, respectively, by
way of a global initial public offering to Hong Kong and overseas investors. As part of the global
initial public offering, 687,632,400 ordinary domestic shares of RMB1.00 each owned by China
Telecom and the Other Domestic Shareholders were converted into H shares and sold to Hong Kong
and overseas investors.

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

18. SHARE CAPITAL (Continued)

In December 2002, the Company issued 428,148,100 H shares with a par value of RMB1.00 each,
representing 4,281,481 ADSs at US$18.98 per ADS to overseas investors upon exercise of an over-
allotment option granted to the underwriters in connection with the global initial public offering. In
addition, 42,861,900 ordinary domestic shares of RMB1.00 each owned by China Telecom and the
Other Domestic Shareholders were converted into H shares and sold to overseas investors.

All ordinary domestic shares and H shares rank pari passu in all material respects.

19. RESERVES

The Group

Statutory
common

Capital

reserve
RMB

Revaluation

Surplus

welfare

Other

Retained

premium
RMB

reserve
RMB

reserves
RMB

fund
RMB

reserves
RMB

earnings
RMB

Total
RMB

millions

Balance as at 1 January 2001

Net profit
Contributions from China

Telecom

Distributions to China Telecom

Assets distributed to China

Telecom in connection with

the Restructuring (Note 1)

Revaluation surplus (Note 3)

Recognition of deferred tax

assets (Note 8)

Elimination of net deferred tax

liabilities (Note 8)

Balance as at 31 December 2001

Capitalisation as share capital

upon incorporation of the

—

Company (Note (i))

20,955

—

Issue of shares, net of issuing

expenses of RMB796 million

Net profit

Appropriations (Notes (ii) and

(iii))

Revaluation surplus realised

Deferred tax on amortisation of

land use rights realised

—

3,362

—

4,154

—

4,154

—

(10)

—

— 101,619

101,619

—

6,883

3,003

— (15,835)

(15,835)

— (11,285)

(11,285)

—

4,059

—

4,154

4,059

—

4,887

4,059

89,272

97,485

— (89,272)

(68,317)

—

3,362

— 16,864

16,864

8,121

1,624

—

(75)

(9,745)

—

Balance as at 31 December 2002

20,955

3,362

4,144

8,121

1,624

3,984

7,204

49,394

19. RESERVES (Continued)

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

Statutory

common

The Company

Capital
reserve
RMB

Share
premium
RMB

Revaluation
reserve
RMB

Surplus
reserves
RMB

welfare
fund
RMB

Other
reserves
RMB

Retained
earnings
RMB

Total
RMB

millions

Capitalisation as share capital

upon incorporation of the

Company (Note (i))

20,955

—

4,154

Issue of shares, net of issuing
expenses of RMB796 million

Net profit

Appropriations (Notes (ii) and

(iii))

Revaluation surplus realised

Deferred tax on amortisation of

land use rights realised

—

3,362

—

(10)

—

4,059

— 29,168

—

3,362

— 16,864

16,864

8,121

1,624

—

(75)

(9,745)

—

Balance as at 31 December 2002

20,955

3,362

4,144

8,121

1,624

3,984

7,204

49,394

Note:

(i)

The amount of RMB68,317 million represents the par value of shares issued to China Telecom upon incorporation of the

Company.

(ii)

According to the Company’s Articles of Association, the Company is required to transfer 10% of its net profit, as

determined in accordance with the PRC accounting rules and regulations, to a statutory surplus reserve until such

reserve balance reaches 50% of the registered capital. The transfer to this reserve must be made before distribution of

any dividend to shareholders. For the year ended 31 December 2002, the Company transferred RMB1,624 million, being

10% of the year’s net profit determined in accordance with PRC accounting rules and regulations, to this reserve.

According to the Company’s Articles of Association, the Directors authorised, subject to shareholders’ approval, the

transfer of RMB6,497 million, being 40% of the year’s net profit determined in accordance with PRC accounting rules

and regulations, to a discretionary surplus reserve.

The surplus reserves are non-distributable other than liquidation and can be used to make good of previous years’

losses, if any, and may be utilised for business expansion or converted into share capital by issuing new shares to

existing shareholders in proportion to their shareholdings or by increasing the par value of the shares currently held by
them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

(iii)

According to the Company’s Articles of Association, the Company is required to transfer 5% to 10% of its net profit, as

determined in accordance with the PRC accounting rules and regulations, to a statutory common welfare fund. This fund

can only be utilised on capital items for the collective benefits of the Company’s employees such as construction of

dormitories, canteen and other staff welfare facilities. This fund is non-distributable other than on liquidation. The

transfer to this fund must be made before distribution of any dividend to shareholders. For the year ended 31 December

2002, the Directors authorised, subject to shareholders’ approval, the transfer of RMB1,624 million, being 10% of the
year’s net profit determined in accordance with the PRC accounting rules and regulations, to this fund.

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

19. RESERVES (Continued)

(iv)

According to the Company’s Articles of Association, the amount of retained earnings available for distribution to

shareholders of the Company is the lower of the amount determined in accordance with the PRC accounting rules and

regulations and the amount determined in accordance with IFRS. At 31 December 2002, the amount of retained earnings
available for distribution was RMB6,497 million, being the amount determined in accordance with the PRC accounting

rules and regulations. Final dividend of RMB672 million in respect of the financial year 2002 proposed after the balance

sheet date has not been recognised as a liability at the balance sheet date (Note 28).

20. OPERATING REVENUES

Operating revenues represent revenues from the provision of wireline telecommunications services,
net of PRC business tax and government levies, where applicable, in all periods presented. The
components of the Group’s operating revenues are as follows:

Upfront connection fees
Upfront installation fees
Monthly fees
Local usage fees
DLD
ILD
Internet
Managed data
Interconnections
Leased line
Others

Note:

Note

(i)
(ii)
(iii)
(iv)
(iv)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)

The Group
2002
RMB millions

2001
RMB millions

6,018
995
12,460
22,392
14,365
3,285
3,775
1,789
4,363
3,095
2,959

6,290
780
10,186
21,004
14,676
3,392
2,150
1,477
3,814
2,862
1,915

75,496

68,546

(i)

Represent the amortised amount of the upfront fees received for initial activation of wireline services.

(ii)

Represent the amortised amount of the upfront fees received for installation of wireline services.

(iii)

Represent amounts charged to customers each month for their use of the Group’s telephone services.

(iv)

Represent usage fees charged to customers for the provision of telephone services.

(v)

Represent amounts charged to customers for the provision of Internet access services.

(vi)

Represent amounts charged to customers for the provision of managed data transmission services.

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

20. OPERATING REVENUES (Continued)

(vii)

Represent amounts charged to domestic and foreign telecommunications operators for delivery of calls connecting to

the Group’s wireline telecommunications networks.

(viii) Represent lease income from other domestic telecommunications operators and business customers for the usage of

the Group’s wireline telecommunications networks and is measured by the number of lines leased and the agreed upon

rate per line leased. The lease arrangements are primarily on a year to year basis.

(ix)

Represent primarily revenues from provision of value-added telecommunications services to customers, sale and repairs

and maintenance of customer-end equipment.

21. OTHER OPERATING EXPENSES

Other operating expenses consist of:

Interconnection charges
Donations
Others

Note:

Note

(i)

The Group
2002
RMB millions

2001
RMB millions

2,608
23
6

1,290
26
11

2,637

1,327

(i)

Interconnection charges represent amounts incurred for the use of other telecommunications operators’ networks for

facilitating the completion of calls that originate from the Group’s wireline telecommunications networks.

22. TOTAL OPERATING EXPENSES

Total operating expenses for the year ended 31 December 2002 include personnel expenses of
RMB8,915 million (2001 : RMB6,207 million) and auditors’ remuneration of RMB19 million (2001 :
RMB Nil).

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

23. NET FINANCE COSTS/(INCOME)

Net finance costs/(income) comprise:

Interest expense incurred
Less:

Interest expense capitalised*

Net interest expense
Interest income
Foreign exchange losses
Foreign exchange gains

The Group
2002
RMB millions

2001
RMB millions

1,321
(770)

1,415
(1,032)

551
(140)
228
(7)

632

383
(246)
3
(433)

(293)

* Interest expense was capitalised in construction in progress at

the following rates per annum

4.4% to 5.6% 5.1% to 5.8%

24. TAXATION

Taxation in the consolidated statement of income comprises:

Provision for PRC income tax
Deferred taxation (Note 8)

The Group
2002
RMB millions

2001
RMB millions

4,296
(441)

3,319
(3,388)

3,855

(69)

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

24. TAXATION (Continued)

A reconciliation of the expected tax with the actual tax expense/(benefit) is as follows:

The Group
2002
RMB millions

2001
RMB millions

Note

Profit before taxation and minority interests

20,785

6,793

Expected PRC income tax expense at statutory tax rate of

33%

Differential tax rate on subsidiaries’ income
Non-deductible expenses
Non-taxable income

(i)
(i)

(ii)

Income tax

Note:

6,859
(708)
542
(2,838)

2,242
(506)
436
(2,241)

3,855

(69)

(i)

The provision for PRC current income tax is based on a statutory rate of 33% of the assessable income of the Group as

determined in accordance with the relevant income tax rules and regulations of the PRC, except for certain subsidiaries

of the Company which are taxed at a preferential rate of 15%.

(ii)

Amounts primarily represent connection fees and certain usage fees on phone calls received from customers which are

not subject to income tax.

25. DIRECTORS’ AND SUPERVISORS’ REMUNERATION

The following table sets out the remuneration received or receivable by the Company’s directors and
supervisors during the periods presented:

Fees
Salaries, allowances and benefits in kind
Retirement benefits

2002
RMB
thousand

2001
RMB
thousand

127
3,148
211

—
1,602
145

3,486

1,747

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

25. DIRECTORS’ AND SUPERVISORS’ REMUNERATION (Continued)

Included in the directors’ and supervisors’ remuneration were fees of RMB127,000 (2001 : RMB Nil)
paid or payable to the independent non-executive directors and independent supervisors for the year
ended 31 December 2002.

The number of directors and supervisors whose remuneration falls within the following band is set
out below:

HK$ equivalent
Nil–1,000,000

2002
Number

2001
Number

None of the directors and supervisors received any fees, bonuses, inducements, or compensation for
loss of office, or waived any emoluments during the periods presented.

26.

INDIVIDUALS WITH HIGHEST EMOLUMENTS

Of the five highest paid individuals of the Group during the periods presented, one is a director of
the Company and his remuneration has been included in Note 25 above. The following table sets out
the emoluments of the Group’s remaining four highest paid employees who were not directors or
supervisors of the Company during the periods presented:

Salaries, allowances and benefits in kind
Retirement benefits

2002
RMB
thousand

2001
RMB
thousand

1,614
110

991
108

1,724

1,099

The number of these employees whose emoluments fall within the following band is set out below:

HK$ equivalent
Nil–1,000,000

2002
Number

2001
Number

None of these employees received any inducements or compensation for loss of office, or waived any
emoluments during the periods presented.

100

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

27. PROFIT ATTRIBUTABLE TO SHAREHOLDERS

The profit attributable to shareholders includes a profit of RMB16,864 million which has been dealt
with in the stand-alone financial statements of the Company.

28. DIVIDENDS

Pursuant to a resolution passed at the Directors’ meeting on 24 April 2003, a final dividend of
RMB0.00888 per share totalling RMB672 million was proposed for shareholders’ approval at the
Annual General Meeting. The dividend has not been provided for in the financial statements for the
year ended 31 December 2002.

29. BASIC EARNINGS PER SHARE

The calculation of basic earnings per share is based on the net profit of RMB16,864 million (2001 :
RMB6,883 million) and the weighted average number of shares in issue during the year of
69,241,674,942 (2001 : 68,317,270,803), as if the 68,317,270,803 shares issued and outstanding
upon the legal formation of the Company on 10 September 2002 had been outstanding for all periods
presented. The weighted average number of shares for the year ended 31 December 2002 also
reflects the issuance of 7,296,915,700 shares in 2002 in connection with the Company’s global initial
public offering (Note 18).

The amount of diluted earnings per share is not presented as there were no dilutive potential
ordinary shares in existence for both years.

30. COMMITMENTS AND CONTINGENCIES

Operating lease commitments

The Group leases business premises through non-cancellable operating leases. These operating
leases do not contain provisions for contingent lease rentals. None of the rental agreements contain
escalation provisions that may require higher future rental payments nor impose restrictions on
dividends, additional debt and/or further leasing.

101

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

30. COMMITMENTS AND CONTINGENCIES (Continued)

Operating lease commitments (Continued)

As at 31 December 2002, future minimum lease payments under non-cancellable operating leases
having initial or remaining lease terms of more than one year, which include the new lease
agreements with China Telecom Group (Note 32), were as follows:

Within 1 year
Between 1 to 2 years
Between 2 to 3 years
Between 3 to 4 years
Between 4 to 5 years
Thereafter

The Group
2002
RMB millions

2001
RMB millions

457
355
114
75
70
367

334
154
111
73
52
316

Total minimum lease payments

1,438

1,040

Total rental expense in respect of operating leases charged to the consolidated statement of income
for the year ended 31 December 2002 was RMB807 million (2001 : RMB523 million).

Capital commitments

As at 31 December 2002, the Group had capital commitments as follows:

The Group
2002
RMB millions

2001
RMB millions

800
3,439

755
2,742

4,239

3,497

1,359
3,640

1,398
5,831

4,999

7,229

Authorised and contracted for

Properties
Telecommunications network plant and equipment

Authorised but not contracted for

Properties
Telecommunications network plant and equipment

102

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

30. COMMITMENTS AND CONTINGENCIES (Continued)

Contingent liabilities

(a)

The Company has been advised by its PRC lawyers that, except for liabilities constituting or
arising out of or relating to the business transferred to the Company in the Restructuring, no
other liabilities were assumed by the Company, and the Company is not jointly and severally
liable for other debts and obligations incurred by China Telecom Group prior
to the
Restructuring.

(b)

As at 31 December 2002, the undiscounted maximum amount of potential future payments
under guarantees given to banks in respect of banking facilities granted to the parties below
were as follows:

China Telecom Group and the Group’s

investees
Subsidiaries

The Group
2002
RMB millions

2001
RMB millions

The Company
2002
RMB millions

6
—

150
—

150

—
2,869

2,869

The Group monitors the conditions that are subject to the guarantees to identify whether it is
probable that a loss has occurred, and recognise any such losses under guarantees when those
losses can be estimated. At 31 December 2001 and 2002, it was not probable that the Group would
be required to make payments under these guarantees. Thus no liability was accrued for losses
related to the Group’s obligations under these guarantee arrangements.

Legal contingencies

The Group is a defendant in certain lawsuits as well as the named party in other proceedings arising
in the ordinary course of business. While the outcomes of such contingencies, lawsuits or other
proceedings cannot be determined at present, management believes that any resulting liabilities will
not have a material adverse effect on the financial position or operating results of the Group.

103

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

31. CONCENTRATION OF RISKS

Credit and concentration risks

The carrying amounts of cash and cash equivalents, time deposits, accounts receivable and other
receivables represent the Group’s maximum exposure to credit risk in relation to financial assets. The
majority of the Group’s accounts receivable relate to provision of telecommunications services to
residential and corporate customers operating in various industries. The Group performs ongoing
credit evaluations of its customers’ financial condition and generally does not require collateral on
accounts receivable. The Group maintains an allowance for doubtful accounts and actual losses have
been within management’s expectations.

The Group has a diversified base of customers. No single customer contributed more than 10% of
revenues for the periods presented.

The Group does not have concentrations of available sources of labour, services, franchises, licenses
or other rights that could, if suddenly eliminated, severely impact its operations. The Group invests
its cash with several large state-owned financial institutions in the PRC and international financial
institutions.

Business and economic 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, legal environment and social uncertainties in the PRC, influence of the
Ministry of Information Industry over certain aspects of the Group’s operations and competition in
the telecommunications industry.
In addition, the ability to negotiate and implement specific
business development projects in a timely and favourable manner may be impacted by political
considerations unrelated to or beyond the control of the Group. Although the PRC government has
been pursuing economic reform policies for the past two decades, no assurance can be given that the
PRC government will continue to pursue such policies or that such policies may not be significantly
altered. There is also no guarantee that the PRC government’s pursuit of economic reforms will be
consistent or effective and as a result, changes in the rate or method of taxation, reduction in tariff
protection and other import restrictions, and changes in State policies and regulations affecting the
telecommunications industry may have a negative impact on the Group’s operating results and
financial condition.

104

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

31. CONCENTRATION OF RISKS (Continued)

Currency risk

Substantially all of the revenue-generating operations of the Group are transacted in RMB, which is
not fully convertible into foreign currencies. On 1 January 1994, the PRC government abolished the
dual rate system and introduced a single rate of exchange as quoted by the People’s Bank of China.
However, the unification of the exchange rate does not imply convertibility of RMB into United States
dollars or other foreign currencies. All foreign exchange transactions must take place either through
the People’s Bank of China or other institutions authorised to buy and sell foreign exchange or at a
foreign currency payments by the People’s Bank of China or other
swap center. Approval of
institutions requires submitting a payment application form together with suppliers’
invoices,
shipping documents and signed contracts.

Interest rate risk

The interest rates and terms of repayment of the Group’s debts are disclosed in Note 13.

32. RELATED PARTY TRANSACTIONS

Companies are considered to be related if one company has the ability, directly or indirectly, to
control the other company or exercise significant influence over the other company in making
financial and operating decisions. Companies are also considered to be related if they are subject to
common control or common significant influence.

The Group conducts business with enterprises directly or indirectly owned or controlled by the PRC
government (‘‘state-owned enterprises’’). Furthermore, the PRC government itself represents a
significant customer of the Group both directly through its numerous authorities and indirectly
through its numerous affiliates and other organisations. The Group considers that the provision of
wireline telecommunications services to the PRC government authorities and affiliates and other
state-owned enterprises are activities in the ordinary course of business in the PRC and has not
disclosed such services as related party transactions.

The Group is part of a larger group of companies under China Telecom and has significant
transactions and relationships with members of China Telecom. Because of these relationships, it is
possible that the terms of these transactions are not the same as those that would result from
transactions among wholly unrelated parties. Under IFRS, state-owned enterprises, other than China
Telecom and its affiliates, are not disclosed as related parties. Related parties refer to enterprises
over which China Telecom is able to exercise control or significant influence.

105

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

32. RELATED PARTY TRANSACTIONS (Continued)

The principal related party transactions with China Telecom Group, which were carried out in the
ordinary course of business, are as follows:

Purchases of telecommunications equipment and materials
Construction, engineering and information technology

services

Provision of community services
Provision of ancillary services
Operating lease expenses
Centralised service expenses
Interconnection revenues
Interconnection charges

Note:

2002
RMB millions

2001
RMB millions

Note

(i)

(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(vii)

3,394
1,291
1,219
368
483
302
687

2,331

2,884
742
613
94
—
—
—

(i)

Represent purchases of telecommunications equipment and materials from China Telecom Group.

(ii)

Represent provision of network construction, engineering and information technology services to the Group by China
Telecom Group.

(iii)

Represent amounts paid and payable by the Group to China Telecom Group in respect of cultural, educational, hygiene

and other community services.

(iv)

Represent amounts paid and payable by the Group to China Telecom Group in respect of ancillary services such as

repairs and maintenance of telecommunications equipment and facilities and certain customer services.

(v)

Represent amounts paid and payable to China Telecom Group for operating leases in respect of business premises and

inter-provincial transmission optic fibres.

(vi)

Represent net amount charged by China Telecom to the Group for costs associated with common corporate services and

international telecommunications facilities.

(vii)

Represent amounts charged from/to China Telecom for interconnection of domestic long distance telephone calls.

The directors of the Company are of the opinion that the above transactions with related parties were
conducted in the ordinary course of business and on normal commercial terms or in accordance with
the agreements governing such transactions, and this has been confirmed by the independent non-
executive directors.

106

32. RELATED PARTY TRANSACTIONS (Continued)

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

In connection with the Restructuring, the Group and China Telecom Group entered into a number of
agreements effective on 1 January 2002 with an initial term expiring on 31 December 2004. The terms
of the principal agreements are summarised as follows:

(1)

(2)

(3)

(4)

(5)

(6)

The Company has entered into an agreement with China Telecom pursuant to which expenses
associated with common corporate services and international telecommunications facilities will
be allocated between the Group and China Telecom based on revenues or volume of traffic as
appropriate.

The Company has entered into an agreement with China Telecom for interconnection of
domestic long distance telephone calls. Pursuant to the interconnection agreement, the
telephony operator terminating a telephone call made to its local network shall be entitled to
receive a fee prescribed by the Ministry of Information Industry from the operator from which
the telephone call is originated.

The Company has entered into an optic fibre leasing agreement with China Telecom pursuant to
which the Company will
lease the inter-provincial transmission optic fibres in Shanghai
Municipality, Guangdong Province, Jiangsu Province and Zhejiang Province from China Telecom.
The lease payment will be based on the depreciation charge of the optic fibres.

The Group has entered into agreements with China Telecom Group pursuant to which China
Telecom Group will provide the Group with construction, design, equipment installation, testing
and engineering project management services.
the Group has entered into
information technology service agreements with China Telecom Group pursuant to which China
Telecom Group will provide the Group with certain information technology services including
office automation and software modification. The amounts to be charged for these services will
be determined by reference to market rates as reflected in prices obtained through a tender.

In addition,

The Group has entered into property leasing agreements with China Telecom Group pursuant to
which the Group will lease certain business premises and storage facilities from China Telecom
Group. The rental charges will be based on market rates, with reference to amounts stipulated
by local price bureaus.

The Group has entered into agreements with China Telecom Group pursuant to which China
Telecom Group will provide the Group with the procurement of equipment and materials. The
amount to be charged for this service will be based on a percentage not exceeding 1.8% of the
contract value of the equipment and materials purchased.

107

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

32. RELATED PARTY TRANSACTIONS (Continued)

(7)

The Group has entered into community services agreements for cultural, educational, hygiene
and other community services with China Telecom Group. In addition, the Group has entered
into ancillary services agreements with China Telecom Group. The ancillary services to be
provided by China Telecom Group will include repairs and maintenance of telecommunications
equipment and facilities and certain customer services. Pursuant to these agreements, China
Telecom Group will charge the Group for these services in accordance with the following terms:

government prescribed price;

where there is no government prescribed price but where there is a government guided
price, the government guided price will apply;

where there is neither a government prescribed price nor a government guided price, the
market price will apply;

where none of the above is available, the price is to be agreed between the relevant
parties, which shall be based on the cost incurred in providing the services plus a
reasonable profit margin.

Pursuant to the Restructuring, China Telecom has agreed to hold and maintain, for the Group’s
benefit, all licenses received from the Ministry of Information Industry in connection with the
Predecessor Operations transferred to the Group. The licenses maintained by China Telecom
were granted by the Ministry of Information Industry at zero or nominal cost. To the extent that
China Telecom incurs a cost to maintain or obtain licenses in the future, the Company will
reimburse China Telecom for the expenses it incurs.

33. EMPLOYEE BENEFITS PLAN

As stipulated by the regulations of the PRC, the Group participates in various defined contribution
retirement plans organised by municipal and provincial governments for its employees. The Group is
required to make contributions to the retirement plans at rates ranging from 18% to 20% of the
salaries, bonuses and certain allowances of the employees. A member of the plan is entitled to a
pension equal to a fixed proportion of the salary prevailing at the member’s retirement date. The
Group has no other material obligation for the payment of pension benefits associated with these
plans beyond the annual contributions described above. The Group’s contributions for the year
ended 31 December 2002 were RMB999 million (2001 : RMB849 million).

108

34.

FAIR VALUES OF FINANCIAL INSTRUMENTS

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2002

Financial assets of the Group include cash and cash equivalents, time deposits,
investments,
accounts receivable, amounts due from China Telecom Group, advances and other receivables.
Financial liabilities of the Group include debts, accounts payable, amounts due to China Telecom
Group, accrued expenses and other payables. The Group does not hold nor issue financial
instruments for trading purposes.

The following disclosure of the estimated fair value of financial instruments is made in accordance
with the requirements of IAS 32 and IAS 39. Fair value estimates, methods and assumptions, set
forth below for the Group’s financial instruments, are made to comply with the requirements of IAS
32 and IAS 39, and should be read in conjunction with the Group’s consolidated financial statements
and related notes. The estimated fair value amounts have been determined by the Group using
market information and valuation methodologies considered appropriate. However, considerable
judgement is required to interpret market data to develop the estimates of fair values. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts the Group could realise
in a current market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.

The following summarises the major methods and assumptions used in estimating the fair values of
the Group’s financial instruments.

Long-term debt: The fair values of long-term indebtedness are estimated by discounting future cash
flows using current market interest rates offered to the Group for debt with substantially the same
characteristics and maturities. As at 31 December 2002 and 2001, the carrying amounts and fair
values of the Group’s long-term debt were as follows:

2002

2001

Carrying
amount
RMB millions

Fair value
RMB millions

Carrying
amount
RMB millions

Fair value
RMB millions

Long-term debt

7,072

7,368

10,722

11,160

The Group’s long term investments are unlisted equity interests and there are no quoted market
prices for such interests in the PRC. Accordingly, a reasonable estimate of their fair values could not
be made without incurring excessive costs.

The fair values of all other financial instruments approximate their carrying amounts due to the
short-term maturity of these instruments.

35. ULTIMATE HOLDING COMPANY

The directors consider the ultimate holding company of the Group at 31 December 2002 to be China
Telecommunications Corporation, a state-owned enterprise established in the PRC.

109

SUPPLEMENTARY INFORMATION FOR ADS HOLDERS

The Group’s accounting policies conform with IFRS which differ in certain significant respects from US
GAAP. Differences which have a significant effect on net profit and shareholders’ equity are set out below.

(a) Revaluation of property, plant and equipment

In connection with the Restructuring, the property, plant and equipment of the Group were revalued as
at 31 December 2001 (see Note 3 on the financial statements). The net revaluation deficit has been
reflected in the consolidated financial statements as at 31 December 2001. Such revaluation resulted
in an increase directly to shareholders’ equity of RMB4,154 million with respect to the increase in
carrying amount of certain property, plant and equipment above their historical cost bases, and a
charge to income of RMB11,930 million with respect to the reduction in carrying amount of certain
property, plant and equipment below their historical cost bases.

Under US GAAP, property, plant and equipment are stated at their historical cost less accumulated
depreciation unless an impairment loss has been recorded. An impairment loss on property, plant and
equipment is recorded under US GAAP if the carrying amount of such asset exceeds its future
undiscounted cash flows resulting from the use of the asset and its eventual disposition. The future
undiscounted cash flows of the Group’s property, plant and equipment, whose carrying amount was
reduced in connection with the Restructuring, exceed the historical cost carrying amount of such
property, plant and equipment and, therefore, impairment of such assets is not appropriate under US
GAAP. Accordingly, the revaluation reserve recorded directly to shareholders’ equity and the charge to
income recorded under IFRS as a result of the Restructuring are reversed for US GAAP purposes.

However, as a result of the tax deductibility of the net revaluation deficit, a deferred tax liability
related to the net revaluation deficit is created under US GAAP with a corresponding decrease in
shareholders’ equity.

(b) Disposal of revalued property, plant and equipment

Under IFRS, on disposal of a revalued asset, the related revaluation surplus is transferred from the
revaluation reserve to retained earnings. Under US GAAP, the gain and loss on disposal of an asset is
determined with reference to the asset’s historical carrying amount and included in current earnings.

Under IFRS, transactions with state-controlled enterprises other than China Telecom and its affiliates
are not required to be disclosed as related party transactions. Furthermore, government departments
and agencies are deemed not to be related parties to the extent that such transactions are in the
normal course of business. Therefore, related party transactions as disclosed in Note 32 on the
financial statements only refer to transactions with China Telecom Group.

CHINA TELECOM
ANNUAL REPORT 2002
110

SUPPLEMENTARY INFORMATION FOR ADS HOLDERS (CONTINUED)

Under US GAAP, there are no similar exemptions. The Group’s principal transactions with state-
controlled telecommunications operators in the PRC were as follows:

Interconnection revenues
Interconnection charges
Leased line revenues

2002
RMB millions

2001
RMB millions

2,409
448
2,727

3,814
1,290
2,839

The amounts set out above represent the historical costs incurred by the related parties in carrying
out such transactions.

(d) Recently issued accounting standards

SFAS No. 143

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No.
143 requires the Group to record the fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development and/or normal use of the assets. The
Group is also required to record a corresponding asset which is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation, the obligation will be
adjusted at the end of each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Group is required to adopt SFAS No. 143 on 1 January 2003.
The Group does not expect the adoption of SFAS No. 143 will have a material impact on its
consolidated financial statements.

SFAS No. 145

In April 2002, the FASB issued SFAS No. 145, which rescinds SFAS No. 4, “Reporting Gains and Losses
from Extinguishment of Debt”, and an amendment of that Statement, SFAS No. 64, “Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements”. SFAS No. 145 also rescinds SFAS No. 44,
“Accounting for Intangible Assets of Motor Carriers”. SFAS No. 145 amends SFAS No. 13, “Accounting
for Leases”, to eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that have economic effects
that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or describe their
applicability under changed conditions.

CHINA TELECOM
ANNUAL REPORT 2002
111

SUPPLEMENTARY INFORMATION FOR ADS HOLDERS (CONTINUED)

The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 shall be applied in fiscal years
beginning after 15 May 2002. The provisions in paragraphs 8 and 9(c) of SFAS No. 145 related to
Statement 13 shall be effective for transactions occurring after 15 May 2002. All other provisions of
SFAS No. 145 shall be effective for financial statements issued on or after 15 May 2002. The Group
does not expect the adoption of SFAS No. 145 will have a material impact on its consolidated financial
statements.

SFAS No. 146

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities” which applies to costs associated with an exit activity (including restructuring) or with a
disposal of long-lived assets. SFAS No. 146 requires an entity to record a liability for cost associated
with an exit or disposal activity when that liability is incurred and can be measured at fair value.
Commitment to an exit plan or a plan of disposal expresses only management’s intended future
actions and does not meet the requirement for recognising a liability and the related expense. An
entity is required to disclose information about its exit and disposal activities, the related costs, and
changes in those costs in the notes to the interim and annual financial statements that include the
period in which an exit or disposal activity is initiated and in any subsequent period until the activity is
completed. The Group is required to adopt SFAS No. 146 on 1 January 2003. The provisions of SFAS
No. 146 are required to be applied prospectively after the adoption date to newly exit or disposal
activities. Therefore, management cannot determine the potential effect that the adoption of SFAS No.
146 will have on the Group’s consolidated financial statements.

FIN No. 45

Including

Indirect Guarantees of

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees,
Indebtedness to Others, an
interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34".
This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued. The Interpretation also clarifies
that a guarantor is required to recognise, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after 31 December 2002. The disclosure requirements are
effective for financial statements of interim and annual periods ending after 31 December 2002. The
Group does not expect the application of this Interpretation will have a material effect on its
consolidated financial statements.

FIN No. 46

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51”. This Interpretation addresses the consolidation by business enterprises
of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to
variable interests in variable interest entities created after 31 January 2003, and to variable interests

CHINA TELECOM
ANNUAL REPORT 2002
112

SUPPLEMENTARY INFORMATION FOR ADS HOLDERS (CONTINUED)

in variable interest entities obtained after 31 January 2003. The Interpretation requires certain
disclosures in financial statements issued after 31 January 2003 if it is reasonably possible that the
Group will consolidate or disclose information about variable interest entities when the Interpretation
becomes effective. The Group does not expect the application of this Interpretation will have a
material impact on its consolidated financial statements.

Reconciliation of net profit and shareholders’ equity under IFRS to US GAAP

The effect on net profit of significant differences between IFRS and US GAAP for the year ended 31
December 2002 is as follows:

(Note)
2002
US$
millions

2002
RMB
millions

2001
RMB
millions

2,037

16,864

6,883

Net profit under IFRS
US GAAP adjustments:

Reversal of deficit on revaluation of property,

plant and equipment, net of minority interests

—

11,838

Depreciation on revalued property, plant

and equipment

Disposal of revalued property, plant

and equipment

Deferred tax effect of US GAAP adjustments

(186)

(1,542)

—

(7)
64

(55)
527

—
(3,936)

Net profit under US GAAP

1,908

15,794

14,785

Basic earnings per share under US GAAP

Basic earnings per ADS* under US GAAP

0.03

2.76

0.23

0.22

22.81

21.64

Basic earnings per ADS is calculated on the basis that one ADS is equivalent to 100 shares.

CHINA TELECOM
ANNUAL REPORT 2002
113

SUPPLEMENTARY INFORMATION FOR ADS HOLDERS (CONTINUED)

The effect on shareholders’ equity of significant differences between IFRS and US GAAP as at 31
December 2002 is as follows:

Shareholders’ equity under IFRS
US GAAP adjustments:

Revaluation of property, plant and equipment,

net of minority interests

Deferred tax effect of US GAAP adjustment

(Note)
2002
US$
millions

2002
RMB
millions

2001
RMB
millions

15,098

125,008

97,485

735
(246)

6,087
(2,039)

7,684
(2,566)

Shareholders’ equity under US GAAP

15,587

129,056

102,603

Note:

Solely for the convenience of the reader, the amounts for 2002 have been translated into United States dollars at the
noon buying rate in New York City on 31 December 2002 for cable transfers in RMB as certified for custom purposes by
the Federal Reserve Bank of New York of US$1.00=RMB8.2800. No representation is made that the RMB amounts could
have been, or could be, converted into United States dollars at that rate or at any other certain rate on 31 December
2002, or at any other date.

CHINA TELECOM
ANNUAL REPORT 2002
114

FINANCIAL SUMMARY

(Amounts in millions, except per share data)

2002
RMB

Year ended 31 December
2000
RMB

2001
RMB

6,018
995
12,460
22,392
14,365
3,285
3,775
1,789
4,363
3,095
2,959

6,290
780
10,186
21,004
14,676
3,392
2,150
1,477
3,814
2,862
1,915

6,322
583
7,763
20,503
17,190
5,177
1,144
1,750
4,869
4,268
1,452

1999
RMB

5,923
442
6,829
18,371
15,220
6,043
435
1,429
4,779
4,549
1,271

Results

Upfront connection fees
Upfront installation fees
Monthly fees
Local usage fees
DLD
ILD
Internet
Managed data
Interconnections
Leased line
Others

Operating revenues

75,496

68,546

71,021

65,291

Depreciation and amortisation
Network operations and support
Selling, general and administratrive
Other operating expenses

(20,882)
(20,131)
(10,468)
(2,637)

(19,451)
(20,269)
(9,401)
(1,327)

(17,386)
(19,004)
(9,743)
(1,264)

(14,903)
(15,584)
(7,553)
(889)

Operating expenses

(54,118)

(50,448)

(47,397)

(38,929)

Operating profit
Deficit on revaluation of property, plant and

equipment

Net finance (costs)/income
Investment income
Share of profit from associates

Profit before taxation
Taxation

Profit before minority interests
Minority interests

21,378

18,098

23,624

26,362

—
(632)
4
35

20,785
(3,855)

16,930
(66)

(11,930)
293
310
22

6,793
69

6,862
21

—
298
177
45

24,144
(4,857)

19,287
(68)

—
(516)
95
20

25,961
(5,459)

20,502
(93)

Profit attributable to shareholders

16,864

6,883

19,219

20,409

Basic earnings per share

0.24

0.10

0.28

0.30

115

FINANCIAL SUMMARY

(Amounts in millions)

Financial condition

Property, plant and equipment, net
Construction in progress
Other non-current assets
Cash and bank deposits
Other current assets

2002
RMB

As at 31 December
2001
RMB

2000
RMB

149,165
20,319
14,866
17,739
8,763

138,623
23,274
13,309
4,355
9,773

127,528
28,656
14,516
14,200
12,501

1999
RMB

116,461
26,313
11,158
15,640
12,795

Total assets

210,852

189,334

197,401

182,367

Current liabilities
Non-current liabilities

57,627
27,083

57,444
33,465

43,799
51,033

36,443
54,508

Total liabilities

84,710

90,909

94,832

90,951

Minority interests

1,134

940

950

866

Shareholders’ equity

125,008

97,485

101,619

90,550

Total liabilities and shareholders’ equity

210,852

189,334

197,401

182,367

Note:

The above summary present the results of the Company and its subsidiaries as if the Group had been in existence throughout the

years presented and as if the Predecessor Operations were transferred to the Company from China Telecommunications Corporation

as at 1 January 1999.

116