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(cid:16)J(cid:15)D (cid:20) (cid:18) (cid:19) (cid:21) (cid:22) (cid:23) (cid:24) (cid:25) (cid:24) (cid:18) (cid:26) (cid:27) (cid:18) (cid:26) (cid:28) (cid:29) (cid:26) (cid:28) (cid:22) (cid:23) (cid:26) (cid:21) (cid:25) (cid:27) (cid:23) (cid:24) (cid:30) (cid:20) (cid:20) (cid:20) (cid:5) (cid:4) (cid:4) (cid:14) (cid:5) (cid:8) (cid:11) (cid:7) (cid:12) (cid:9) (cid:11) (cid:6) (cid:15) (cid:16) (cid:16) (cid:17) ƒXƒ¤“” CONTENTS COMPANY PROFILE AND CORPORATE INFORMATION CHAIRMAN’S STATEMENT BUSINESS REVIEW 2 5 9 DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT 19 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS REPORT OF THE DIRECTORS REPORT OF THE SUPERVISORY COMMITTEE CONNECTED TRANSACTIONS NOTICE OF ANNUAL GENERAL MEETING REPORT OF THE INTERNATIONAL AUDITORS CONSOLIDATED BALANCE SHEET BALANCE SHEET CONSOLIDATED STATEMENT OF INCOME CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY 25 36 49 51 59 63 65 67 69 70 CONSOLIDATED STATEMENT OF CASH FLOW 71 NOTES TO THE FINANCIAL STATEMENTS 73 SUPPLEMENTARY INFORMATION FOR ADS HOLDERS 122 FINANCIAL SUMMARY 127 China Telecom Corporation Limited 01 COMPANY PROFILE AND CORPORATE INFORMATION China Telecom Corporation Limited (the “Company”) 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, Zhejiang Province, Anhui Province, Fujian Province, Jiangxi Province, Guangxi Zhuang Autonomous Region, Chongqing Municipality and Sichuan 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) providing voice, data, image, multimedia telecommunications and information services based on the wireline networks; (3) providing international services and conducting accounts settlement with overseas operators in accordance with state regulations; and (4) providing telecommunication and integration, technological development, technical services, information consulting, and conducting design, manufacture, sales and installation of telecommunications equipment. information-related system Our H shares and American Depositary Shares (“ADS”) are listed on the Stock Exchange of Hong Kong and the New York Stock Exchange since 15 November 2002 and 14 November 2002 respectively. 02 Annual Report 2003 COMPANY PROFILE AND CORPORATE INFORMATION Chinese registered name: 中 國 電 信 股 份 有 限 公 司 English name: China Telecom Corporation Limited Authorised representative: Zhou Deqiang Company secretary: International auditors: Li Ping KPMG Legal advisers: Jingtian & Gongcheng Freshfields Bruckhaus Deringer Sullivan & Cromwell LLP Registered address: 31 Jinrong Street, Xicheng District, Beijing, 100032 PRC Telephone: (8610) 6642 8166 Facsimile: Website: (8610) 6601 0728 www.chinatelecom-h.com H share registrar: 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 ADS depositary: Listings: H shares: The Stock Exchange of Hong Kong Limited stock code: 728 ADS: New York Stock Exchange, Inc. stock code: CHA China Telecom Corporation Limited 03 4 Annual Report 2003 Dear Shareholders, Telecom Corporation Limited China performed with vitality in 2003. We have increased our overall strength significantly through our continuing efforts in innovation, solid execution, reforms and management improvement. Setting our goal to become “a world-class telecommunications operator” and our corporate objective to “maximise shareholders’ value”, we seized opportunities to accelerate growth. Further developing our business model “market-oriented”, of “customer-centered” and “return-driven”, we have significantly increased and enhanced our profitability and investment value. In 2003, while maintaining the pace of our organic growth, we also achieved external expansion through the successful acquisition of the telecommunications businesses from China Telecommunications Corporation in Anhui Province, Fujian Province, Jiangxi Province, Guangxi Region, Zhuang Autonomous Chongqing Municipality and Sichuan Province. Consequently, our market leadership position has been further consolidated. REVIEW OF 2003 In a favourable environment of China’s fast growing and strong economy, we upheld our priority in developing our business and achieved positive results in 2003. revenue Our revenue for 2003 reached RMB118,451 million, an increase of 8.1% from our restated for 2002. Operating expenses reached RMB86,003 million, an increase of 2.9% restated operating expenses for 2002. The growth rate of our expenses was lower than the growth rate of our revenue. Net profit reached RMB24,686 million and net profit margin was 20.8%. Our basic earnings per share was RMB0.33. from our Our core businesses had outstanding performance The wireline telephone services, our pillar business, maintained stable growth and provided us 2003. in CHAIRMAN’S STATEMENT with a steady cash flow. Driven by the strong demand, our wireless local services grew rapidly to become a new driving force of our voice services and mitigated the substitution effect of mobile services. Our broadband Internet services has been our most rapidly growing line of service and has enormous potential. local subscribers As of the end of 2003, our wireline telephone subscriber base reached 118 million, an increase of 21.30 million subscribers, or 22.0%, from year-end 2002. Of this increase in our subscriber base, the number of our reached 18.35 wireless million, an increase of 11.10 million, or 153.3%, from year-end 2002. The number of our broadband Internet subscribers reached 5.63 million, an increase of 3.76 million, or 200.4%, from year-end 2002. The steady growth in our local telephone subscriber base has strengthened our leading market position, while our continuously expanding broadband Internet subscriber base made room for further business growth. of successful acquisition Our the telecommunications businesses in the six service regions has enabled us to achieve in an strong external growth, resulting increase of 49.15 million local telephone subscribers, an increase of RMB37,071 million in operating revenue and an increase of RMB6,529 million in net profit. INNOVATION AND IMPLEMENTATION in to focus continued Our businesses and operations were greatly bolstered by our efforts innovation, restructuring, and enhanced management in 2003. We on implementing our strategies. In particular, we stimulated revenue growth by enhancing our distribution channels, improved operating implementing management efficiency by innovation, competitive implementing Business competence by Process and accelerated management modernisation by utilising information technology. Re-engineering increased (“BPR”), China Telecom Corporation Limited 05 CHAIRMAN’S STATEMENT In 2003, we continued to enhance our distribution channels as a necessary measure for evolving into a market-oriented business. With the establishment of our four major distribution channels and three major customer service units, we have generally completed the structure of a multi-level and seamless distribution channel that provides integrated services with full coverage. Such a unique distribution system has become our core competitive competence. We enhanced the overall competence of our employees in our marketing channels by optimizing our personnel structure, and increased our responsiveness to the market by optimizing our operating processes. We also improved our incentive mechanism by strengthening our merit-based evaluation scheme, such as sales accountability, and advanced support for our sales and services by optimizing our information system. In addition, we built up the service-level- agreement mechanism between the front- end and back-end operations, made timely allocations of network resources and therefore increased our responsiveness to the market in order to provide quality services. and identified strengthened the direction of our We management innovation and business focus by benchmarking with the best practices of the top telecommunications operators in the world. We incorporated all of our operating in controlling activities with our plans budget, the implementation, supervision and evaluation of our plans. We further centralised and streamlined our financial management system, so as to strengthen our internal control and management on both levels of our headquarters and provincial subsidiaries. Such measures resulted in an efficient control on expenditures, which helped boost our operating performance. By continuously improving our internal control and establishing a multi-level control mechanism, we have effectively minimised our operating and financial risks. 06 China Telecom Corporation Limited has reduced through resources We also made progress in the centralised management of our network resources, our effectively which maintenance costs for network operations. We optimised the use of our reserved network centralised allotment, which effectively controlled our capital expenditures and further increased the security and reliability of our network operations. In addition, we completed the centralisation of our management for our local network billing system and established a at headquarters and provincial levels, which provided further support for our operations. We restructured our network operations and maintenance from a network-oriented system to a market-oriented and customer- oriented consequently improved our network operating efficiency and responsiveness to our front-ends. system, which consolidated settlement system In Benchmarking with the best practices in the world, we continued to implement BPR in our local branch companies and built up strong strategic business units to enhance implementing our competitive ability. BPR, we improved our continuously residential customer process, commercial customer process, large enterprise customer process, billing process, investment process, and ongoing local network responsive resources management process. We also optimised the organisational structure of our local branch companies under the principle of centralisation and consolidation. By assigning a key performance indicator quota to each post, each employee bears his or her own operating responsibility. As a result, responsiveness and quality of our customer service improved significantly. the market In 2003, our information technology made steadfast progress. We formulated an IT Strategic Plan (“ITSP”), setting up the goal for our to be “unified network platform”, “unified data application structure”, technological structure “unified and to In our efficient structure organisational control processes”, and integration platform”, and the goal for our be “professionalised IT divisions”, “IT budgets” and “IT thereby establishing a new generation of integrated IT system for China Telecom known as CTG- ITSP, our Operation MBOSS. Supporting System (the “OSS”), which focuses on network operations, will help ensure stable network and operations, provide strong support for our marketing activities, and accelerate our responses to the market. Our Business Supporting System (the “BSS”), which focuses on our customers and business, will effectively customers’ experience and satisfaction with our services. Our Management Supporting System (the “MSS”), which focuses on our management process, will effectively reduce our administrative expenses and strengthen support to management decisions. improve our OUTLOOK FOR 2004 The average annual growth rate for China’s economy in the past 25 years was 9.4%. The GDP growth rate in 2003 exceeded 9%. Such continuously strong growth in China’s further growth created economy has potential in the Chinese telecommunications industry. The Chinese government’s goal of further living standards and its strategy for developing information technology have provided robust driving forces for the development of the telecommunications industry in China. In 2004, the government’s grand plans for strong developing China telecommunications bring invaluable opportunities for our growth. nation will improving residents’ into its a The regulatory environment in China has become more transparent than ever. We expect that the PRC regulators will continue to focus on regulatory issues such as interconnection and encourage orderly competition in the market. CHAIRMAN’S STATEMENT profitability In 2004, we will seize all opportunities to accelerate growth. To meet the high demand in the wireline telephone market, we will continue to fully leverage on the advantage of our customer base, networks and full business lines, in order to enhance our our shareholders’ value. While maintaining high organic growth, we will continue to expand externally by seeking opportunities for high- quality acquisition targets. We will strive to do our utmost to build China Telecom into a large corporation that is highly competitive worldwide. and maximise We will continue to devote our efforts in serving and repaying our society, and helping develop information technology for China’s economy and contributing to the development of China strong telecommunications country. into a DIVIDEND POLICY IN 2003 Based on our operating results, our Board of Directors will propose to declare a dividend of HK$0.065 per share in the forthcoming Annual General Meeting. Finally, I would like to take this opportunity to express my sincere appreciation to all of our shareholders, directors, supervisors, employees and customers. Zhou Deqiang Chairman and Chief Executive Officer Beijing, PRC 17 March 2004 China Telecom Corporation Limited 07 2 0 0 3 i s C h i n a Te l e c o m ’s f i r s t y e a r a f t e r c o m p l e t i o n o f i t s I P O . I n t h e f a c e o f t h e e v e r- c h a n g i n g c o m p e t i t i v e e n v i r o n m e n t a n d t h e e x p e c t a t i o n s o f t h e c a p i t a l m a r k e t , h o w d o e s C h i n a Te l e c o m m a i n t a i n i t s f a s t a n d h e a l t h y g r o w t h , i m p r o v e i t s o p e r a t i n g e f f i c i e n c y a n d c o n t i n u o u s l y m a x i m i s e s h a r e h o l d e r s ' v a l u e ? BUSINESS REVIEW The following table sets out major indicators of our business development in 2001, 2002 and 2003. 2001 2002 2003 2002 Change 2003 over Local wireline access lines in service (in thousands) Penetration rate of wireline service (%) Broadband subscribers (in thousands) 80,834 15.6% 483 96,788 18.6% 1,874 118,091 22.8% 5,630 Local voice usage (pulses in millions) 250,050 274,538 294,174 Total dial-up usage (minutes in millions)(1) Dial-up usage (minutes in millions) Domestic long distance usage 73,753 64,661 71,851 57,148 52,716 38,511 22.0% 4.2pp 200.4% 7.2% -26.6% -32.6% (minutes in millions) 42,700 46,793 53,809 15.0% 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) 1,561 222.4 27.7 8.0 2M digital circuits leased (lines in thousands) 113.6 1,493 278.3 39.8 15.9 122.7 1,618 366.1 76.8 16.9 128.6 8.4% 31.6% 93.0% 6.6% 4.8% Penetration rate of caller ID (% of lines in service) 28.3% 41.5% 53.7% 12.2pp Note: (1) including dial-up usage from customers of other ISPs. On 31 December 2003, we acquired the entire equity In 2003, we remained committed to our interests in Anhui Telecom Company Limited, Fujian development strategy of combining organic Telecom Company Limited, Jiangxi Telecom Company growth and external growth. We fully Limited, Guangxi Telecom Company Limited, utilised our strengths in customer base, Chongqing Telecom Company Limited and Sichuan network infrastructure and brand name. We Telecom Company Limited (the “Acquired Companies”) customised our strategy to respond rapidly from China Telecommunications Corporation (the to the market and enhanced our distribution “Acquisition”). Our service regions have expanded channels in order to significantly improve from 4 to 10 provinces (including provinces, our service quality. We also optimised our autonomous regions and municipalities, hereafter compensation mechanism, encouraged referred to as “regions”). For comparative purposes, management innovation, and improved our the financial and operating data referred to herein for management and operations, which 2001, 2002 and 2003 are presented on such a basis as ensured significant development in our core if our service regions have been 10 regions since 1 businesses in 2003. January 2001. China Telecom Corporation Limited 09 BUSINESS REVIEW Our revenue increased to RMB118,451 million in 2003 by 8.1% from 2002. Local telephone services grew steadily, contributing 2.8 percentage points to our revenue growth. Internet services developed rapidly and contributed 3.0 percentage points to our revenue growth. Our wireline value-added services also became new areas for growth. We achieved effective external growth through the acquisition of the telecommunications businesses in the six regions of China in 2003. The acquisition boosted our revenue growth Contribution to revenue growth (%) 3.0 2.8 2.8 0.5 0.1 -0.2 -0.3 -0.6 t e n r e t n I s e c i v r e s r e h t O & S A V e n o h p e l e T l a c o L n o i t c e n n o c r e t n I a t a D d e g a n a M e c n a t s i D g n o L e n i L d e s a e L e e f n o i t c e n n o c t n o r f p U and provided us with additional opportunities Local telephone services for long-term development. Revenue mix 2003 Local Telephone (49.0%) Long Distance (20.0%) Internet (6.9%) Upfront connection fee (6.7%) VAS & Other services (6.6%) Interconnection (5.4%) Leased Line (3.3%) Managed Data (2.1%) Revenue from local telephone services, our pillar business, reached RMB58,021 million in 2003, an increase of 5.5% from 2002. Local telephone services revenue represented 49.0% of our total revenue in 2003. Our wireline subscriber base continued to expand rapidly, as the total number of our subscribers reached 118 million at the end of 2003, an increase of 21 million, or 22.0%, from the end of 2002. Total wireless local access service subscribers reached 18.35 million at the end of 2003, representing an increase of 11.10 million, or 153.3%, from year-end 2002. The average cost of investment per line decreased 12% from 2002, which further increased our return on investment. Wireless local access Wireless local access service, an extension to our wireline telephone business, has become part of services using our public telecommunications network in our service regions. Wireless local access service provides limited mobility at relatively lower tariff and good voice quality. It is considered more environmentally friendly. These recent years have witnessed significant development in this service. 10 Annual Report 2003 BUSINESS REVIEW services effectively reduced the diversion to We have taken various measures to respond mobile telephone services by satisfying the to intensified competition in the market in needs of certain subscriber groups. It also 2003. In particular, we have focused on contributed to the growth in local wireline enhancing our distribution channels and revenue. Local telephone subscriber mix 2002 2003 Residential Enterprise Public Telephones Wireless Local Access 2002 74.6% 12.9% 5.0% 7.5% 2003 67.2% 11.6% 5.7% 15.5% Local voice usage continued to grow steadily and reached 294.2 billion pulses in 2003, an increase of 7.2% from 2002. Our dial-up Internet access usage was 52.7 billion pulses in 2003, a decrease of 26.6% from 2002. Such a decline was mainly due to the migration of customers from our dial- up Internet services to our broadband Internet services. closely monitored the service needs of major customer groups and implemented sales and service accountability. We also improved our product design and increased the promotion of product packages and various fee plans. These efforts have enabled us to effectively prevent the diversion of local voice usage and have accelerated our revenue growth. Local voice usage monthly growth rates over the same period in 2002 (%) 11.8 12.3 7.6 6.3 9.1 9.0 8.1 6.6 7.7 7.1 3.1 1.6 1 2 3 4 5 6 7 8 9 10 11 12 Broadband and other Internet services Internet services performed strongly in 2003. Revenue from Internet services reached RMB8,160 million in 2003, an increase of 66.1% from 2002. Revenue from Internet services represented 6.9% of our total revenue. As a result of the strong demand in broadband services, the total number of our broadband subscribers reached 5.63 million in 2003, an increase of 3.76 million, or 200.4%, from 2002. In terms of numbers, our broadband China Telecom Corporation Limited 11 BUSINESS REVIEW subscribers represented 4.8% of our total broadband access services, especially ADSL local telephone subscribers at the end of services. As a result, we have further 2003, which presents great potential for strengthened our leading position in the further growth. We have fully leveraged on our dominant position in local access networks, extensive distribution network and high-quality customer services in promoting various broadband services market. We took various measures to accelerate the penetration of broadband services and expand broadband customer base and coverage. Such measures included packaging our broadband services with other services we offer, packaging our broadband services with other companies’ sales of personal computers, and enhancing our long-term cooperation with Internet cafes and other owners of local access networks. In addition, through cooperating with contents and applications providers and promoting the integration of broadband access with contents and applications, we have focused on creating a win-win broadband industry value chain. We successfully developed various broadband value-added service platforms such as ChinaVnet and e-Customs to explore additional opportunities for our broadband access services. We believe that our broadband services will maintain high growth rates in the years ahead and will become one of our pillar businesses. fully ChinaVnet is a nationwide brand name for our Internet application services. We leverage on our customer base, network infrastructures, application sub-platforms, distribution channels, customer service, and promotion channels in developing our ChinaVnet service. Through integration of our Internet access services and the contents and applications provided by our partners, we have created a new business model for our Internet services, enriched contents and information applications available to our customers, and improved the business environment for Internet industry. We have been focusing on the support of sustainable development of Internet industry and on the win-win situation for our customers and our ChinaVnet partners. 12 Annual Report 2003 BUSINESS REVIEW Broadband subscribers (in thousands) 1,461 22 241.3 % CAGR(1) = 4,147 430 18 1,426 138 8 337 2001 2002 2003 ADSL LAN Others note: CAGR of total broadband subscribers from 2001 to 2003 Our strategy of premium product Dial-up usage was 38.5 billion minutes in 2003, a decline of 32.6% from 2002. This decrease was mainly due to the migration of customers from our dial-up Internet services to our broadband Internet services. We will continue to foster customer reliance on our Internet services through various fee plans and our “DNET” value-added services, turning dial-up service into an “incubator” positioning has helped maintain a relatively for our broadband services. high level of average revenue per subscriber while the number of our broadband Value-added services subscribers increased rapidly in 2003. We reduced the average cost of investment per line by approximately 20% from 2002 through our centralised purchasing program and achieved significant returns on investment on broadband access services. Our wireline value-added services became new areas of growth in 2003, and contributed significantly to total revenue growth. We continued to promote existing value-added services, such as our caller ID ADSL (Asymmetrical Digital Subscriber Line) service provides subscribers with asymmetrical upstream and downstream data transmissions through the existing twisted cooper wires (that is, ordinary telephone lines). The upstream and downstream data transmission rates are up to 1Mbps and 8Mbps, respectively. ADSL service is very popular for its high downstream transmission speed, broad bandwidth, and outstanding performance, renowned as “Modern Information Highway Express” in western developed countries. Two access methods are currently available, namely the “virtual dial-up access ”and the “dedicated line access”. China Telecom Corporation Limited 13 BUSINESS REVIEW and telephone information services. As of business area, we implemented packaged the end of 2003, the penetration rate for service strategy and offered flexible VoIP our caller ID services reached 53.7%, an products to respond to competitions. These increase of approximately 10 percentage measures ensured stable development of our points from 2002. Total usage for our domestic long distance services. telephone information services was 1,335 million minutes in 2003, an increase of 112.9% from 2002. In addition, we increased cooperation with additional partners in developing and marketing new value-added services. We successfully launched new services such as “SMS over PHS”, “Telephone QQ”, and “Wireline SMS”. Moreover, we packaged our value- added services with our basic telecommunications services and launched Domestic Long Distance Usage and Market Share (minutes in millions) 65.3% 54.4% 46,793 50.3% 50.6% 53,809 45.8% 42,700 65.1% 54.2% 49.7% “Broadband New Vision”, “Walk with Me” 34.9% and other products, which significantly increased the customer base and usage of our value-added services. Long distance services 2001 2002 2003 VoIP PSTN Market share In 2003, the competition in the Our domestic long distance services international, Hong Kong, Macau and developed steadily. Revenue from domestic Taiwan long distance market has largely long distance services reached RMB19,888 stabilised. Our revenue in this service area million in 2003, representing a slight decline grew steadily to RMB3,770 million in 2003, of 1.2% from 2002, which is better than the representing an increase of 2.1% from market expectations. Total domestic long 2002. The international, Hong Kong, Macau distance usage was 53.8 billion minutes in and Taiwan long distance usage increased 2003, an increase of 15.0% from 2002. Our 8.4% from 2002 to 1.6 billion minutes in domestic long distance services have a 2003, while our market share reached market share of 50.6%, approximately 4 61.5%, nearly 2 percentage points higher percentage points down from 2002. than in 2002. Leveraging on our leading position in this 14 Annual Report 2003 International Long Distance Usage and Market Share (minutes in millions) 82.8% 59.7% 61.5% 1,561 70.7% 1,493 48.9% 1,618 38.7% 61.3% 51.1% 29.3% 2001 2002 2003 VoIP PSTN Market share Managed data and leased line services As a result of the accelerated utilisation of information technology in various industries in China, our managed data services continued to grow steadily. Revenue reached RMB2,540 million in 2003, an increase of 4.5% from 2002. Leased bandwidth of our DDN, FR, and ATM services grew by 31.6%, 93.0%, and 6.6%, respectively, from 2002. Revenue from our leased line services was RMB3,915 million in 2003, a decrease of 7.1% from 2002. As of the end of 2003, we BUSINESS REVIEW leased out a total of 129,000 digital circuits (in 2Mbps equivalent), an increase of 4.8% from 2002. In 2003, the structure of our leased line services customers changed substantially. Demand for leased line services of other telecommunications operators decreased as a result of the construction of their own transmission networks, while demand of major customers such as government entities, corporations and universities increased. The overall result was a slight increase in demand for our leased line services. The pressure on revenue from leased line services due to the decreased usage by other telecommunications operators has been reduced. Managed Data Services (ports in thousands) 366.1 278.3 222.4 76.8 27.7 8.0 39.8 15.9 16.9 2001 2002 2003 DDN (in 64K Equivalent) FR (in 128K Equivalent) ATM (in 2M Equivalent) China Telecom Corporation Limited 15 BUSINESS REVIEW Distribution channels and product management In 2003, we enhanced our distribution channels and improved our dedicated customer management system for large enterprise customers, community manager system, contract system for customers in rural areas and customer service hotline 10000. By reallocating our employees from back-end network support to front-end sales positions, we quickly expanded our sales team by approximately 60% to provide full coverage for all our customer groups. We made significant improvements in market responsiveness and service quality by optimizing the internal processes between our back-end and front-end operations. We improved professional training of our sales team and effectively motivated them by fully implementing an evaluation system and linking compensation to revenue generation and service quality. We also improved our information system in order to provide strong support for our distribution channels. In addition to the development of our own distribution channels, we also developed a comprehensive network of agents. The two systems complemented each other and achieved effective results in promoting our services to our target customers. Our improved distribution channels, one of our new competitive advantages, played an important role in ensuring our revenue growth in 2003 and enhanced our core We will further enhance our marketing efforts on major corporate customers, such as large group companies, and continue to provide product portfolios and solutions that combine network designing, leased line, system integration and network hosting services. By leveraging on our strengths in network infrastructure, technology and maintenance, we will also provide tailored services to major customers and transform ourselves from a network service provider to an integrated solution provider. Interconnection service Revenue from interconnection service reached RMB6,444 million in 2003, with net interconnection revenue reaching RMB3,596 million, indicating a steady increase from 2002. As a result of our continuously expanding customer base and the growth of the telecommunications market in China, the volume of inbound local calls through our networks reached 53.6 billion minutes competitiveness. in 2003, an increase of 34.4% from 2002. The volume of inbound long distance calls through our networks also significantly increased from 2002. 16 Annual Report 2003 BUSINESS REVIEW External growth The successful acquisition telecommunications businesses in of six regions led to accelerated overall revenue growth, with local telephone subscribers and broadband subscribers in the six regions increasing at rates of 23.1% and 239.7% respectively, which are higher than those of We continued to develop new products and the four regions. As of the end of 2003, the services, with an emphasis on our strengths penetration rate for local wireline services in diversified businesses. We introduced was 16.6% within the six regions, various product portfolios and fee plans for significantly lower than the 31.4% level in local voice, long distance, broadband and our original four service regions, which value-added services based on customer provided us with growth potential. The segmentation. We thereby expanded our acquisition successfully facilitated our customer base and enhanced customer external growth and formed a solid stickiness to our services. The implementation foundation for sustainable growth in the of packaged services strategy achieved future. significant results. The gradual promotion of packaged services and fee plans plays an important role in expanding our customer base and maintaining revenue growth. Ten regions Population : 528 million Local telephone subscribers : 118 million Local telephone penetration : 22.8% Broadband subscribers : 5.63 million Four Original Service Regions Six Newly-Acquired Service Regions Note: the population figures are those as at the end of 2003. Four regions Population : 223 million Local telephone subscribers : 69 million Local telephone penetration : 31.4% Broadband subscribers : 3.95 million China Telecom Corporation Limited 17 W e g o a l b e c o m e s e t o u r 2 0 0 3 " w o r l d - c l a s s t o i n a i m p r o v i n g t e l e c o m m u n i c a t i o n s o p e r a t o r " . W e p u r s u e d t h i s g o a l b y o r g a n i c g r o w t h a s w e l l a s e x t e r n a l e x p a n s i o n , o u r w h i l s t d i s t r i b u t i o n c h a n n e l s , b u s i n e s s p ro c e s s e s a n d t o i n f r a s t r u c t u r e I T i m p l e m e n t a p e o p l e oriented management philosophy. Through t h e r e l e n t l e s s e ff o r t s o f a l l o u r w e s t a f f , a c h i e v e d e x c e l l e n t r e s u l t s 2 0 0 3 . i n DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT Mr. Zhou Deqiang, age 62, is Chairman of our Board of Directors and Chief Executive Officer of our company in charge of our overall management. Mr. Zhou is a professor-level Senior Engineer. He graduated in 1968 from Nanjing Institute of Posts and Telecommunications with a degree in wireline telecommunications. Prior to joining China Telecommunications Corporation in May 2000, Mr. Zhou served as Vice Minister of the Ministry of Information Industry, or MII, and its predecessor ministry, the Ministry of Posts and Telecommunications, or MPT. Deputy Director General and Director General of Anhui Post and Telecommunications Administration, or PTA, and Deputy Chief Engineer of Beijing Long Distance Telephone Bureau. Mr. Zhou is also President of China Telecommunications Corporation. Mr. Zhou has in-depth industry knowledge and 35 years of extensive operational and managerial experience in the telecommunications industry in China. Mr. Chang Xiaobing, age 47, is Executive Director, President and Chief Operating Officer in charge of market development of our company. Mr. Chang is a professor-level Senior Engineer. Ms. Wu Andi, age 49, is Executive Director, Executive Vice President and the Chief Financial Officer in charge of financial management of our company. Ms. Wu is a Senior Accountant. She graduated in He graduated in 1982 from the Nanjing Institute of Posts 1983 from the Beijing Institute of Economics with a and Telecommunications with a B.S. degree in B.A. degree in finance and trading. From 1996 to telecommunications engineering and received an MBA 1998, Ms. Wu studied in a postgraduate program in degree from Tsinghua University in 2001. Prior to business economics management at the Chinese joining China Telecommunications Corporation in May Academy of Social Sciences. Prior to joining China 2000, Mr. Chang served as Deputy Director General Telecommunications Corporation in May 2000, Ms. and Director General of the Department of Wu served as Director General of the Department of Telecommunications Administration of the MII, Deputy Economic Adjustment and Communication Settlement Director General of the Directorate General of of the MII, and Director General, Deputy Director Telecommunications, or DGT of the MPT, and Deputy General and director of the Department of Finance Director of the Nanjing Municipal Posts and of the MPT. Ms. Wu is also Vice President of China Telecommunications Bureau of Jiangsu PTA. Mr. Chang Telecommunications Corporation. Ms. Wu has 22 is also Vice President of China Telecommunications years of financial experience in the Corporation. Mr. Chang has 22 years of operational and telecommunications industry in China. managerial experience in the telecommunications industry in China. China Telecom Corporation Limited 19 DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT Mr. Zhang Jiping, age 48, is Executive Director and Executive Vice President in charge of network construction and operations of our company. Mr. Zhang is a professor-level Senior Ms. Huang Wenlin, age 50, is Executive Director and Executive Vice President in charge of human resources management of our company. Ms. Huang is a Senior Economist. She Engineer. He graduated in 1982 from the Beijing graduated in 1984 from the Beijing Institute of Posts Institute of Posts and Telecommunications with a B.Sc. and Telecommunications with a degree in engineering degree in radio telecommunications engineering. From management. Prior to joining China 1986 to 1988, Mr. Zhang studied in a post-graduate Telecommunications Corporation in May 2000, Ms. program in applied computer engineering at Huang served as Director of the Domestic Northeastern Industrial University. Prior to joining Communications Division and Director of the China Telecommunications Corporation in May 2000, Communications Organisation Division of the DGT of Mr. Zhang was Deputy Director General of the DGT of the MPT. Ms. Huang is also Vice President of China the MPT, and Deputy Director General of Liaoning PTA Telecommunications Corporation. Ms. Huang has 29 and Director of the Network Management Center of years of operational and managerial experience in the the Liaoning PTA. Mr. Zhang is also Vice President of telecommunications industry in China. China Telecommunications Corporation. Mr. Zhang has 22 years of operational and managerial experience in the telecommunications industry in China. Mr. Li Ping, age 50, is Executive Director, Executive Vice President and Company Secretary of our company in Mr. Wei Leping, age 58, is Executive Director and Executive Vice President in charge of research and development of our company. Mr. Wei is a professor-level Senior charge of investor Engineer. He graduated in 1970 from Tsinghua relationship management. University with a degree in radio engineering and Mr. Li is a Senior Engineer. received a M.S. degree in communication and He graduated in 1976 from the Beijing Institute of information systems from the Research Institute of Posts and Telecommunications with a degree in radio Post and Telecommunications. Prior to joining China telecommunications and received an MBA degree from Telecommunications Corporation in April 2001, Mr. the State University of New York at Buffalo in 1989. Wei served as Deputy Director of the Prior to joining China Telecommunications Corporation Telecommunications Research Institute of the MII, in August 2000, Mr. Li served as Chairman and the Deputy Director of the Telecommunications Science President of China Telecom (Hong Kong) International Planning and Research Institute of the MPT and Deputy Limited, Vice Chairman and Executive Vice President of Director and Chief Engineer of the China Mobile (Hong Kong) Limited and Deputy Telecommunications Transmissions Research Center of Director General of the DGT of the MPT. Mr. Li is also the MPT. Mr. Wei is also Chief Engineer of China Vice President of China Telecommunications Telecommunications Corporation. Mr. Wei has 26 Corporation. Mr. Li has extensive experience in years of experience in research and development in the managing public companies and 28 years of telecommunications industry in China. operational and managerial experience in the telecommunications industry in China. 20 Annual Report 2003 DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT Mr. Cheng Xiyuan, age 60, is Executive Director of our company. Mr. Cheng is a professor-level Senior Engineer. He graduated from Chongqing Institute of Military Telecommunications Mr. Feng Xiong, age 58, is Executive Director of our company. Mr. Feng is a professor-level Senior Engineer. He graduated from Tsinghua University in 1970 with a degree in electronic engineering. He and Engineering in 1968 with a degree in received a master’s degree from Nanjing Institute of telecommunications. Prior to joining China Telecom Posts and Telecommunications in 1982 with a major in Group, Mr. Cheng served as Director General of communications and systems. Prior to joining China Shanghai Long Distance Telephone Bureau, and Telecom Group, Mr. Feng served as Deputy Chief Deputy Director General, Director General and Chief Engineer and Chief Engineer of the Nanjing Municipal Engineer of Shanghai PTA. Mr. Cheng currently serves Telecommunications Bureau of Jiangsu PTA, and as General Manager of China Telecom Group Shanghai Deputy Chief Engineer, Chief Engineer and a Deputy Corporation and has 35 years of operational and Director General of Jiangsu PTA. Mr. Feng currently managerial experience in the telecommunications serves as General Manager of China Telecom Group industry in China. Mr. Zhang Youcai, age 63, is independent non-executive Director of our company. Mr. Zhang graduated from Nanjing Industrial Chemistry College in 1965 with a degree in inorganic chemistry. He was formerly a 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 Deputy Director of the Planning Commission of Nantong City in Jiangsu Province and 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. Guangdong Corporation and has 22 years of operational and managerial experience in the telecommunications industry in China. Mr. Shi Wanpeng, age 67, is independent non-executive Director of our company. He graduated in 1960 from Northern Jiaotong University with a degree in Railway Transportation Management. Mr. Shi is a professor-level Senior Engineer and served as Deputy Director General of Department of Transportation, Director General of Department of Economy & Technology Cooperation of State Economy & Trade Commission, Director General of Department of Production Planning of State Development Planning Commission, and Vice Minister of State Economy Trade Commission. He has more than 40 years of operational and managerial experience in state-owned enterprises and industry development of PRC. China Telecom Corporation Limited 21 DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT Mr. Vincent Lo Hong Sui, age 56, 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 33 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 Mr. Wang Qi, age 49, 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 Master degree in international management. Prior to joining our 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 Finance Department of China Telecommunications Corporation. Mr. Wang has 29 years of managerial and accounting experience in the telecommunications of Science and Technology, a member of HK-US industry in China. 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. 22 Annual Report 2003 DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT Ms. Zhang Xiuqin, age 57, is the Chairperson of our Mr. Xie Songguang, age 55, is a Supervisor on our Supervisory Committee. Ms. Zhang is a Senior Supervisory Committee. Mr. Xie is a Senior Engineer. Accountant. Prior to joining China Telecom Group, Ms. He graduated from Nanjing Institute of Posts and Zhang served as a Director of the Systems Division of Telecommunications in 1985 with a major in the Financial Department of the MPT, Director of the communications. Mr. Xie completed an advanced Department of Economic Adjustment and business program in Hangzhou University in 1998. Communication Settlement of the MII, Director of the Prior to joining China Telecom Group, Mr. Xie served Communication Settlement Centre of the MII and as Deputy Director of the Telecommunications General Manager of the Huaxin Posts and Division, and Director of the Operation and Telecommunication Economic Development Center. Maintenance Division of Zhejiang PTA. Mr. Xie Since July 2000, Ms. Zhang has served as Director of currently serves as Deputy General Manager of China the Audit Department of China Telecommunications Telecom Group Zhejiang Corporation and has 29 years Corporation. Ms. Zhang has 35 years of operational of operational and managerial experience in the and managerial experience in the telecommunications telecommunications industry in China. industry in China. Mr. Li Jing, age 38, is a Supervisor on our Supervisory Mr. Wang Huanhui, age 59, has been the Supervisor Committee. Mr. Li is an economist. He graduated from representing employees from 1 April 2003. Mr. Wang the Central Party School in 1995 with a major in is a senior economist, and graduated from Beijing economics and management. Prior to joining China Institute of Posts and Telecommunications in 1969. In Telecom Group, Mr. Li worked at the Audit Division of August 2000, Mr. Wang was assigned as Director of the Jiangsu PTA, and the audit department and Supervisors Board of China Telecommunications financial department of Suzhou Municipal Posts and Corporations. Mr Wang has more than 30 years of Telecommunications Bureau. Mr. Li currently serves as operational and management experience in the a Deputy Director of the Audit Department of China telecommunications industry in China. Telecom Group Jiangsu Corporation and has 19 years of financial and auditing experience in the Ms. Zhu Lihao, age 63, is an independent Supervisor telecommunications industry in China. 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 degree in engineering economics. Ms. Zhu served as 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 41 years of experience in management and auditing. China Telecom Corporation Limited 23 G o i n g f o r w a r d , w e w i l l i m p l e m e n t c o n t i n u e o u r t o c o r e v a l u e o f " I n n o v a t i o n a n d S o l i d E x e c u t i o n " , t o p e r f e c t a " m a r k e t - o r i e n t e d , c u s t o m e r - c e n t e r e d a n d b u s i n e s s m o d e l , s t i m u l a t e v i t a l i t y r e t u r n - d r i v e n " f u r t h e r a n d r e f o r m s o u r t h r o u g h a n d i n n o v a t i o n s , a n d t o t o v i g o r i m p r o v e o u r c o r e c o m p e t i t i v e n e s s . MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Overview Companies. We have maintained an optimised and sound capital structure after As we and the Acquired Companies the completion of the acquisition of the were under the common control of Acquired Companies. China Telecommunications Corporation, our acquisition of the Acquired Our total operating revenue in 2003 grew Companies has been treated as a 8.1% from 2002 to RMB118,451 million. “combination of entities under common Our operating expenses increased from control”, which was accounted for in a 2002 by 2.9% to RMB86,003 million in manner similar to a pooling-of-interests 2003. Our net profit was RMB24,686 million (“as-if-pooling-of-interests accounting”). Accordingly, the assets and liabilities of the Acquired Companies have been and our basic earnings per share was RMB0.33 for 2003. Our EBITDA(1) was RMB65,369 million in 2003, with an EBITDA accounted for at historical amounts and margin of 55.2%. our financial statements for the period prior to the acquisition have been restated to include the financial position and results of operations of the Acquired Companies on a combined basis. Unless otherwise indicated in this section, our financial data for the period (1) Our EBITDA represents profit before net finance costs, investment income, share of profit from associates, taxation, depreciation and amortisation and minority interests. As the telecommunications business is a capital- intensive industry, capital expenditures, the level of gearing and finance costs may have a prior to the acquisition are presented significant impact on the net profit of based on those restated amounts. In 2003, our operating revenue increased while our operating expenses grew at a rate far below the rate at which our revenue increased. Our profit grew significantly. We companies with similar 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 the operating performance, financing capability and liquidity, continued to effectively control our capital it is not regarded as a measure of operating expenditures. In addition, we had sufficient operating cash flow. In 2003, we successfully achieved our external expansion through our acquisition of the Acquired 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. China Telecom Corporation Limited 25 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS The table below sets forth our total operating revenue, operating expenses, operating profit and net profit, together with the respective figures expressed as a percentage of our total operating revenue for 2002 and 2003, Year Ended 31 December 2002 Percentage of Operating 2003 Percentage of Operating Amount Revenue Amount Revenue (RMB in millions, except percentage data) 109,564 83,567 25,997 9,773 100.0% 118,451 76.3% 23.7% 8.9% 86,003 32,448 24,686 100.0% 72.6% 27.4% 20.8% revenue from other businesses increased RMB3,015 million, RMB3,246 million and Operating revenue Operating expenses Operating profit Net profit Operating Revenue total operating Our RMB8,887 million, revenue grew by from 8.1%, or RMB3,121 million, respectively, from 2002. In 2003, our long distance services revenue RMB109,564 million in 2002 to decreased by 0.7% from 2002. Revenue RMB118,451 million in 2003. As the main from our managed data and interconnection driving forces for the growth in our services increased steadily, while revenue operating revenue, local telephone services from our leased line services decreased. revenue, Internet services revenue and 26 Annual Report 2003 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS The following table sets forth a breakdown of our operating revenue, together with the respective figures expressed as a percentage of our total operating revenue for 2002 and 2003. Year Ended 31 December 2002 Percentage of Operating 2003 Percentage of Operating Amount Revenue Amount Revenue (RMB in millions, except percentage data) Wireline telephone services(1) Local Installation fees Monthly fees Local usage fees 1,575 18,998 34,433 1.4% 17.4% 31.4% 1,831 20,429 35,761 1.5% 17.3% 30.2% Sub-total 55,006 50.2% 58,021 49.0% Domestic long distance(2) 20,123 18.4% 19,888 16.8% International, Hong Kong, Macau and Taiwan long distance(2) Interconnections Upfront connection fees 3,694 5,921 8,554 3.4% 5.4% 7.8% 3,770 6,444 7,885 3.2% 5.4% 6.7% Sub-total 93,298 85.2% 96,008 81.1% Data and Internet services Internet Managed data Sub-total Leased line services Others(3) 4,914 2,431 7,345 4,214 4,707 4.5% 2.2% 8,160 2,540 6.7% 10,700 3.8% 4.3% 3,915 7,828 6.9% 2.1% 9.0% 3.3% 6.6% Total operating revenue 109,564 100.0% 118,451 100.0% (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, sale and repairs and maintenance of customer-end equipment, and lease of telecommunications network facilities. China Telecom Corporation Limited 27 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Local Telephone Services Internet usage. Our local usage in 2003 was 346.9 billion pulses and was at the Our local telephone services remained our same level as in 2002. While usage of pillar business, with revenue growing by dial-up Internet services (with a lower 5.5%, from RMB55,006 million in 2002 to fee) decreased by 26.6% from 2002, RMB58,021 million in 2003, which our local voice usage increased 7.2% contributed 49.0% to our total operating from 2002 to 294.2 billion pulses in revenue. This was primarily due to subscriber 2003. As a result, our revenue from growth and usage increase. As of the end of local usage fees increased in 2003. 2003, the total number of our local telephone access lines increased 21.30 Long Distance Telephone Services million, or 22.0%, from 96.79 million in 2002 to 118 million in 2003. Based on our Revenue from our long distance telephone extensive distribution networks that are close services represented 20.0% of our total to our customers and our various fee plans operating revenue in 2003 and decreased and product and service packages, we have from RMB23,817 million in 2002 to effectively reduced the diversion to mobile RMB23,658 million in 2003, or 0.7%. This services and achieved usage increase. was due to a decrease in actual price caused • Installation Fees. Upfront installation calls. However, the decrease in our long by the increase in the proportion of VoIP fees will be amortised over the distance services revenue was lower than expected customer relationship period the 2.4% decrease in 2002. We believe that of 10 years. Revenue from upfront the risk with regard to long distance installation fees increased by 16.3% telephone services was reduced. The from RMB1,575 million in 2002 to continuous growth in China’s economy RMB1,831 million in 2003, mainly due drives the demand for long distance to continuous increase in the number telephone services in China. We achieved a of access lines in recent years. rapid increase in long distance telephone usage based on our product and service • Monthly Fees. Revenue from monthly portfolios tailored to customers and our fees increased RMB1,431 million, or flexible fee strategies. 7.5%, from RMB18,998 million in 2002 to RMB20,429 million in 2003, • Domestic Long Distance Services. which was primarily due to the Domestic long distance revenue increase in the number of our access decreased by 1.2% from RMB20,123 lines in service. million in 2002 to RMB19,888 million in 2003. The total transmission volume • Local Usage Fees. Revenue from local for our domestic long distance services usage fees increased RMB1,328 increased from 2002 by 15.0% to 53.8 million, or 3.9%, from RMB34,433 billion minutes in 2003. The decrease million in 2002 to RMB35,761 million in domestic long distance revenue was in 2003, primarily due to an increase in due to a decrease in actual price voice usage. Our local usage includes caused by the increase in the both local voice usage and dial-up proportion of VoIP calls. 28 Annual Report 2003 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS • International, Hong Kong, Macau and Internet services will remain a major Taiwan Long Distance Services. driver for our revenue increase. International, Hong Kong, Macau and Taiwan long distance services revenue • Managed Data Services. Revenue from increased by 2.1%, from RMB3,694 our managed data services increased million in 2002 to RMB3,770 million in by 4.5%, from RMB2,431 million in 2003. The transmission volume of our 2002 to RMB2,540 million in 2003. international, Hong Kong, Macau and This increase was primarily due to an Taiwan long distance services increased increase in our leased bandwidth of by 8.4% from 2002 to 1.62 billion managed data services as a result of minutes in 2003. the continuous economic growth and an increase in the demand for Internet and Managed Data Services managed data services in our service Total revenue from our Internet and managed data services increased by 45.7%, from RMB7,345 million in 2002 to RMB10,700 million in 2003, which regions. Leased Line, Interconnection and Other Services represented 9.0% of our total operating • Leased Line Services. Revenue from revenue. We have an extensive local access leased line services decreased by 7.1% network and service network, which from RMB4,214 million in 2002 to provides strong support for meeting the RMB3,915 million in 2003. Usage of increasing demand of our customers for our leased line services in 2003 slightly Internet and managed data services. increased from 2002. Demand for our • Internet Services. Revenue from our customers continued to increase, leased line services from corporate Internet access services continued to although offset by the reduced volume increase rapidly by 66.1%, or RMB3,246 of usage of other telecommunications million, from RMB4,914 million in 2002 operators since they increased use of to RMB8,160 million in 2003. Revenue their own networks. The decrease in from our Internet services as a revenue was mainly due to a decrease percentage of our total operating in price of our leased line services revenue also increased from 4.5% in caused by a change in customer mix. 2002 to 6.9% in 2003. This increase was primarily due to the significant increase • Interconnection Services. Revenue from in broadband revenue caused by the interconnection fees increased by rapid expansion of our broadband 8.8%, from RMB5,921 million in 2002 subscriber base. The number of our to RMB6,444 million in 2003. This broadband subscribers increased by 3.76 increase was primarily due to an million from the end of 2002 to 5.63 increase in interconnection volume. In million as of the end of 2003. We believe 2003, our net interconnection income that revenue from our broadband (interconnection revenue deducted by China Telecom Corporation Limited 29 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS interconnection expenses) was and continued to develop traditional RMB3,596 million, representing an value-added services. increase of 16.3% compared to 2002. • Other Businesses. Revenue from our Upfront Connection Fees other businesses increased by 66.3%, Upfront connection fees represent the from RMB4,707 million in 2002 to amortised amount of the upfront fees RMB7,828 million in 2003. The received for the initial activation of wireline increase was primarily due to an services, amortised over the expected increase in revenue from our value- customer relationship period of 10 years. added services, and sale and repairs Effective as of 1 July 2001, we ceased and maintenance of customer-end charging new subscribers upfront equipment. In 2003, increase in our connection fees. Consequently, the revenue from value-added services amortised amount decreased by 7.8%, from contributed significantly to our total RMB8,554 million in 2002 to RMB7,885 revenue growth, as we developed and million in 2003. promoted new value-added services The table below sets forth the amortisation of our upfront connection fees for each year from 2004 to 2011 based on a 10-year estimated amortisation period (with 2011 as the end of the amortisation period): For the Year ended 31 December 2004 2005 2006 2007 2008 2009 2010 2011 (RMB in millions) Amortisation of upfront connection fees 6,815 5,475 4,048 2,738 1,690 955 414 83 Operating Expenses and amortisation expenses also decreased slightly in 2003. Our selling, general and In 2003, our operating expenses were administrative expenses and our personnel RMB86,003 million, representing an expenses increased, while our increase of 2.9% from 2002, which is lower interconnection and other operating than the growth rate of our revenue in expenses remained at similar levels to those 2003. Our network operations and support in 2002. expenses decreased and our depreciation 30 Annual Report 2003 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS The following table sets forth a breakdown of our operating expenses, together with the respective figures expressed as a percentage of our total operating revenue for 2002 and 2003: For the Year Ended 31 December 2002 Percentage of Operating 2003 Percentage of Operating Amount Revenue Amount Revenue (RMB in millions, except percentage data) Depreciation and amortisation 33,005 30.1% 32,921 27.8% Network operations and support(1) Selling, general and administrative(1) Personnel Interconnection and other 24,139 22.0% 22,759 19.2% 10,235 13,315 9.4% 12.2% 12,176 15,251 10.3% 12.9% operating expenses 2,873 2.6% 2,896 2.4% Total operating expenses 83,567 76.3% 86,003 72.6% (1) Excluding related personnel expenses. • Depreciation and Amortisation. Our depreciation and amortisation expenses was RMB32,921 million in 2003, decreased by 0.3% from 2002. The depreciation and amortisation expenses as a percentage of our operating revenue decreased from 30.1% in 2002 to 27.8% in 2003. • Network Operations and Support. Our network operations and support expenses (excluding related personnel expenses) decreased by 5.7%, from RMB24,139 million in 2002 to RMB22,759 million in 2003, primarily due to a decrease in repair and maintenance expenses as a result of our further centralised control over network maintenance and resources allocation. Our repair and maintenance expenses decreased by 21.8% from 2002 to RMB9,946 million in 2003. • Selling, General and Administrative Expenses. Our selling, general and administrative expenses (excluding related personnel expenses) increased by 19.0%, from RMB10,235 million in 2002 to RMB12,176 million in 2003. The increase in our selling and marketing expenses was due to the expansion of our customer base, which is offset by a decrease in our general and administrative expenses due to our strict expenditure control. We have effectively controlled the increase in the selling, general and administrative expenses. China Telecom Corporation Limited 31 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS • Personnel Expenses. Our personnel Income Tax expenses increased by 14.5%, from RMB13,315 million in 2002 to Our statutory tax rate is 33%. In 2003, our RMB15,251 million in 2003. The income tax expense was RMB5,933 million, increase was primarily due to the with an effective tax rate of 19.3%. The further reform of our compensation difference between the statutory tax rate system after our listing which resulted and our effective tax rate was primarily due in a merit-based mechanism and to the preferential income tax rate of 15% matched our employees’ compensation applied to some of our subsidiaries located with the prevailing market level. This in special economic zones in China and the enables us to maintain our strength in exclusion of the upfront connection fees human resources management. We from taxable revenue. believe that with the further implementation of our compensation Net Profit reform, the increase in our personnel expenses will gradually slow down. In 2003, our operating revenue grew steadily. Our operating expenses were under • Interconnection and Other Operating effective control and operating efficiency Expenses. Our interconnection and continued to improve. Our net profit other operating expenses in 2003 reached RMB24,686 million, with net profit increased by RMB23 million, or 0.8%, margin of 20.8%. from RMB2,873 million in 2002 to RMB2,896 million in 2003. Capital Expenditures Net Finance Costs Our capital expenditures decreased by 4.9%, from RMB45,014 million in 2002 to Our net finance costs decreased by 15.4%, RMB42,819 million in 2003. from RMB2,144 million in 2002 to RMB1,814 million in 2003. Our sufficient In 2003, we continued to implement our cash flows from operating activities enabled prudent policy on capital expenditures and us to repay a large amount of bank loans. further optimised the allocation of our capital Since we have obtained and retained the expenditures. As one of our focuses, we highest credit ratings from domestic banks continued to invest in our access network to in China, we utilised short-term loans to respond to the rapid growth in demand of our partially replace our long-term loans subject wireline users, broadband users and managed to our financial risk control. This contributes data users and to strengthen our market to the decrease in our finance costs. leadership position. We fully utilised the capabilities of our existing networks to increase our network utilisation. We had also reduced acquisition cost of equipment through our strengthened project management and centralised purchasing program. The above measures had effectively increased our return on investments. 32 Annual Report 2003 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS We expect to fund our capital expenditure Our principal source of liquidity was our needs through a combination of cash flows cash flows from operating activities, which generated from operating activities, short- reached RMB46,884 million in 2003, a term and long-term bank loans and other decrease of RMB5,274 million from debt and equity financing. We believe we RMB52,158 million in 2002. This decrease will have sufficient resources to meet our was primarily due to our income tax capital expenditure requirements in the payment of RMB6,461 million in 2003, an foreseeable future. increase of RMB5,795 million from 2002. Cash Flows and Capital Resources Due to a further decrease in our capital Cash Flows expenditures, net cash used in investing activities decreased by RMB6,279 million, from RMB47,060 million in 2002 to Our net cash outflow was RMB8,566 million RMB40,781 million in 2003. in 2003, as opposed to a net cash inflow of RMB10,988 million in 2002, primarily due Our net cash used in financing activities was to, on the one hand, the net proceeds of RMB14,669 million in 2003, as compared RMB10,659 million raised from our initial with a net cash inflow of RMB5,890 million public offering in 2002 and, on the other in 2002. This change was primarily due to, hand, our cash repayment of RMB11,000 on the one hand, the net proceeds raised million in 2003 as part of the acquisition from our initial public offering in 2002 and, consideration for the telecommunications on the other hand, our cash payment in businesses from our parent company. 2003 as part of the acquisition The following table summarises our cash businesses from our parent company. In consideration for the telecommunications flows for 2002 and 2003: addition, we repaid certain amount of our bank loans in 2003. Our net repayment of For the Year bank loans (the difference between the Ended 31 December proceeds from bank loans and the cash 2002 2003 (RMB in millions) repayment for such bank loans) increased from RMB1,096 million in 2002 to RMB2,722 million in 2003. Cash flows from operating activities 52,158 46,884 Net cash used in investing activities (47,060) (40,781) Net cash from/(used in) financing activities 5,890 (14,669) Net increase/(decrease) in cash and cash equivalents 10,988 (8,566) China Telecom Corporation Limited 33 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Working Capital Our total debt increased by RMB32,592 million to RMB96,196 million as of the end Our working capital (total current assets of 2003, primarily due to the deferred minus total current liabilities) deficit was consideration of RMB35,000 million to RMB71,162 million as of 31 December China Telecommunications Corporation as 2003, representing an increase of part of our acquisition consideration for the RMB5,314 million, compared with the telecommunications businesses in the six deficit of RMB65,848 million in 2002. The regions. Consequently, our debt-to-asset increase in our working capital deficit was ratio (total debt divided by total assets) primarily due to our cash payment of increased from 20.9% in 2002 to 31.5% in RMB11,000 million as part of the acquisition 2003, which we believe is a further consideration for the telecommunications optimisation of capital structure. businesses from our parent company. As of the end of 2003, our cash and cash RMB35,000 million for the acquisition equivalents reached RMB10,119 million. consideration, our long-term debt (including Excluding the deferred consideration of Indebtedness current portion) decreased from RMB23,268 million as of 31 December 2002, to RMB21,099 million as of 31 December Our indebtedness as of the end of 2002 and 2003, while our short-term debt decreased 2003 was as follows: from RMB40,336 million as of 31 December 2002, to RMB40,097 million as of 31 As of 31 December December 2003, reflecting our sound 2002 2003 (RMB in millions) Short-term debt 40,336 40,097 Long-term debt maturing within a year 5,674 6,434 Long-term debt (excluding current portion) 17,594 49,665 Total debt 63,604 96,196 financial condition. Of our total debt as of 31 December 2003, 94.4%, 3.0%, 2.1% and 0.5% were denominated in Renminbi, Japanese yen, U.S. dollars and Euro, respectively. 34 Annual Report 2003 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Contractual Obligations The following table sets forth our contractual obligations as of 31 December 2003: Payable in Total 2004 2005 2006 2007 Thereafter (RMB in millions) Short-term debt Long-term debt Operating lease commitments Capital commitments Guarantees 40,097 40,097 — — — — 56,099 6,434 5,386 5,590 1,060 37,629 1,192 6,204 — 500 6,204 — 200 117 113 — — — — — — 262 — — Total contractual obligations 103,592 53,235 5,586 5,707 1,173 37,891 We will further streamline our financial management system, improve our internal control system, strengthen the centralisation of financial management and overall budgeting management, continue the implementation of prudent capital expenditure policies, optimise our capital structure, and effectively control our operating expenses, in order to create higher value for our shareholders. China Telecom Corporation Limited 35 REPORT OF THE DIRECTORS The directors (the “Directors”) of China ACQUISITION BY THE COMPANY Telecom Corporation Limited (the “Company”) are pleased to present their On 31 December 2003, the Company report together with the audited financial completed the Acquisition of the Acquired statements of the Company and subsidiaries (the “Group”) prepared its in Companies, which are the leading providers of wireline telecommunications services, accordance with International Financial including wireline telephone, managed Reporting Standards for the year ended 31 data, Internet and leased line services in December 2003. their service areas. 36 Annual Report 2003 REPORT OF THE DIRECTORS DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT OF THE COMPANY The following table sets forth certain information concerning the Directors and senior management of the Company. Name Zhou Deqiang Age 62 Position in the Company Chairman of the Board of Directors and Appointment 10 September 2002 Date of Chang Xiaobing Wu Andi Zhang Jiping Huang Wenlin Li Ping Wei Leping Cheng Xiyuan Feng Xiong Zhang Youcai Vincent Lo Hong Sui Shi Wanpeng Wang Qi 47 49 48 50 50 58 60 58 63 56 67 49 Chief Executive Officer Executive Director, President and 10 September 2002 Chief Operating Officer Executive Director, Executive Vice President 10 September 2002 and Chief Financial Officer Executive Director and Executive Vice President Executive Director and Executive Vice President 10 September 2002 10 September 2002 Executive Director, Executive Vice President 10 September 2002 and Company Secretary Executive Director and Executive Vice President Executive Director Executive Director Independent Non-executive Director Independent Non-executive Director 10 September 2002 10 September 2002 10 September 2002 10 September 2002 10 September 2002 Independent Non-executive Director 20 June 2003 Controller 10 September 2002 China Telecom Corporation Limited 37 REPORT OF THE DIRECTORS The following table sets forth certain information concerning the senior management of the Company’s provincial subsidiaries: Name Cheng Xiyuan Age 60 Provincial Subsidiaries Chairman and President of Appointment 28 September 2002 Position in the Company’s Date of Feng Xiong Sun Jiuming Wang Jirong Zhang Jun’an Liu Yaoming Ke Ruiwen Sun Junyan Zou Bingxuan Sun Kangmin 58 57 50 47 52 40 42 54 46 Shanghai Telecom Company Ltd. Chairman and President of 28 September 2002 Guangdong Telecom Company Ltd. Chairman and President of 19 October 2002 Jiangsu Telecom Company Ltd. Chairman and President of Zhejiang Telecom Company Ltd. Chairman and President of Anhui Telecom Company Ltd. Chairman and President of Fujian Telecom Company Ltd. Chairman and President of Jiangxi Telecom Company Ltd. Chairman and President of Guangxi Telecom Company Ltd. 10 October 2002 19 August 2003 19 August 2003 12 September 2003 19 August 2003 Chairman and President of 19 August 2003 Chongqing Telecom Company Ltd. Chairman and President of Sichuan Telecom Company Ltd. 19 August 2003 38 Annual Report 2003 REPORT OF THE DIRECTORS SUPERVISORS OF THE COMPANY The following table sets forth certain information concerning the Supervisors of the Company: Name Zhang Xiuqin Wang Huanhui Zhu Lihao Xie Songguang Li Jing Age 57 59 63 55 38 Position in the Company Chairperson of Supervisory Committee Date of Appointment 10 September 2002 Employee Representative Supervisor 1 April 2003 Independent Supervisor Supervisor Supervisor 10 September 2002 10 September 2002 10 September 2002 DIRECTORS’ AND SUPERVISORS’ DIRECTORS’ INTEREST IN CONTRACTS INTERESTS AND SHORT POSITIONS IN AND SERVICE CONTRACTS SHARES, UNDERLYING SHARES AND DEBENTURES Save for Mr Shi Wanpeng, all the existing Directors have entered into a service As at 31 December 2003, none of the contract with the Company for a term of Directors and Supervisors of the Company three years. The term for Mr Shi Wanpeng is had any interests or short positions in the two years. shares, underlying shares of equity derivatives or debentures of the Company Save as the service contracts mentioned or its associated corporations (within the above, for the year ended 31 December meaning of Part XV of the Securities and 2003, the Directors did not have any Futures Ordinance (Chapter 571 of the Laws material interests, whether directly or of Hong Kong)) (the “SFO”) as recorded in indirectly, in any material contracts entered the register required to be kept under into by the Company, any of its holding section 352 of the SFO or as otherwise companies or subsidiaries or subsidiaries of notified to the Company and The Stock the Company’s holding companies. Exchange of Hong Kong Limited pursuant to the Model Code for Securities Transactions EMOLUMENTS OF DIRECTORS AND by Directors of Listed Companies. SUPERVISORS As at 31 December 2003, the Company has Please refer to note 25 of the audited not granted its Directors or Supervisors, or financial statements for details of the their respective spouses or children below emoluments of the Directors and the age of 18 any rights to subscribe for the Supervisors of the Company. shares or debentures of the Company or any of its associated corporations and none of them has ever exercised any such right to subscribe for the shares or debentures. China Telecom Corporation Limited 39 REPORT OF THE DIRECTORS SHARE CAPITAL The Company did not issue any new shares in the year of 2003. The share capital of the Company as at 31 December 2003 was RMB75,614,186,503 divided into 75,614,186,503 shares with a par value of RMB1.00 each. As at 31 December 2003, the share capital of the Company comprised: Shares Percentage of the total number of shares in issue as at 31 December 2003 (%) Number of shares as at 31 December 2003 Domestic shares (total): 67,586,776,503 89.38 Domestic shares held by: China Telecommunications Corporation 58,809,120,182 Guangdong Rising Assets Management Co., Ltd. 5,658,608,387 Jiangsu Guoxin Investment Group Co., Ltd. Zhejiang Financial Development Company 964,621,836 2,154,426,098 Total of H shares (including ADS): 8,027,410,000 77.78 7.48 1.27 2.85 10.62 Total 75,614,186,503 100.00 40 Annual Report 2003 REPORT OF THE DIRECTORS RESULTS SUMMARY OF FINANCIAL INFORMATION Results of the Group for the year ended 31 Please refer to pages 127 to 128 in this December 2003 and the financial position annual report for a summary of the of the Company and the Group as at that operating results, assets and liabilities of the date are set out in the audited financial Group for each of the years in the five-year statements on pages 65 to 121 in this period ended 31 December 2003. annual report. DIVIDEND BANK LOANS AND OTHER BORROWINGS Please refer to note 13 of the audited The Directors propose to declare a final financial statements for details of bank dividend of HK$0.065 per share, totalling loans and other borrowings of the Group. approximately RMB5,210 million for the year ended 31 December 2003. The CAPITALISED INTEREST dividend proposal shall be submitted for consideration at the annual general meeting Please refer to note 23 of the audited to be held on 3 May 2004. Dividends will be financial statements for details of the denominated and declared in Renminbi. Group’s capitalised interest for the year Dividends on domestic shares will be paid in ended 31 December 2003. Renminbi and dividends on H shares will be paid in Hong Kong dollars. The exchange FIXED ASSETS rate for dividends to be paid in Hong Kong dollars will be the mean of the average rate Please refer to note 3 of the audited of Hong Kong dollars to Renminbi as financial statements for movements in the announced by the People’s Bank of China fixed assets of the Group for the year ended for the week prior to the date of declaration 31 December 2003. of dividends. TRUST DEPOSITS AND OVERDUE FIXED PURCHASE, SALE AND REDEMPTION OF DEPOSITS SHARES The Company has not purchased, sold or not have any trust deposits or any overdue redeemed any securities of the Company fixed deposits with financial institutions or during the reporting period. any other units. As at 31 December 2003, the Company did China Telecom Corporation Limited 41 REPORT OF THE DIRECTORS RESERVES DONATIONS Pursuant to Article 147 of the Company’s For the year ended 31 December 2003, the articles of association (the “Articles of Group made charitable and other donations Association”), where the financial totalling RMB28 million. statements prepared in accordance with PRC accounting standards and regulations SUBSIDIARIES AND ASSOCIATED materially differ from those prepared in COMPANIES accordance with either international accounting standards or those of the place Please refer to notes 5 and 6 of the audited outside the PRC where the Company’s financial statements for details of the shares are listed, the distributable profit for Company’s subsidiaries and the Group’s the relevant accounting period shall be interests in associated companies as at 31 deemed to be the lesser of the amounts December 2003. shown in those respective financial statements. Distributable reserves of the CHANGES IN SHAREHOLDERS’ EQUITY Company as at 31 December 2003, calculated based on the above and prior to Please refer to the consolidated statement the proposed final dividend for 2003, of shareholders’ equity contained in the amounted to approximately RMB14,212 audited financial statements (page 70 of this million. annual report). In addition to the allocation to the statutory RETIREMENT BENEFITS reserve funds, the Directors propose to make an allocation to a discretionary surplus Please refer to note 33 of the audited reserve. The allocation proposal shall be financial statements for details of the submitted for consideration at the annual retirement benefits of the Group. general meeting to be held on 3 May 2004. Please also refer to note 19 of the audited STOCK APPRECIATION RIGHTS financial statements for details of the Please refer to note 34 of the audited movements in the reserves of the Company financial statements for details of the stock and the Group for the year ended 31 appreciation rights plan offered by the December 2003. Company. 42 Annual Report 2003 REPORT OF THE DIRECTORS PRE-EMPTIVE RIGHTS CONNECTED TRANSACTIONS There are no provisions for pre-emptive The following table sets out the connected rights in the Articles of Association requiring transactions with respect to the Company the Company to offer new shares to the (without the Acquired Companies), the existing shareholders in proportion to their related party transactions with respect to shareholdings. USE OF PROCEEDS the Acquired Companies and the combined ten regions’ amounts, respectively during the year ended 31 December 2003. Since the Company’s acquisition was only The use of the proceeds raised from the completed on 31 December 2003, prior to global offering of the H shares by the the completion of the acquisition, the Company in 2002 complies with the relevant related party transactions entered purposes disclosed in the Prospectus. into by the Acquired Companies or their subsidiaries with any connected persons of MAJOR CUSTOMERS AND SUPPLIERS the Company do not constitute connected transactions within the meaning of the For the year ended 31 December 2003, sales Rules Governing the Listing of Securities on to the five largest customers represented an The Stock Exchange of Hong Kong Limited amount not exceeding 30% of the (hereinafter referred to “the Listing Rules”). operating revenue of the Group. Accordingly, the transaction amounts with respect to the Acquired Companies and the For the year ended 31 December 2003, combined 10 regions’ amounts are purchases from the five largest equipment presented for information purpose only and suppliers represented an amount not have been disregarded for the purpose of exceeding 30% of the total purchases of determining whether the annual limits for the Group. connected transactions, as set out in the waiver letter dated 28 October 2002 issued by The Stock Exchange of Hong Kong Limited, have been exceeded. China Telecom Corporation Limited 43 REPORT OF THE DIRECTORS Transaction Acquired Companies) Companies amount transactions2 (in RMB millions) (in RMB millions) (in RMB millions) (in RMB millions) The Company Combined Annual limit (without the The Acquired 10 regions’ for connected Payment of costs associated with the provision of corporate 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 fibres from China Telecommunications Corporation Provision of engineering services by China Telecommunication Corporation and its subsidiaries (the “China Telecom Group”) Leasing of properties from China Telecom Group Leasing of properties by the Company 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 105 264 685 253 91 3,493 256 16 187 100 171 1,403 751 56 — — — — — 1,787 34 — 60 30 42 447 235 — 105 264 685 253 91 5,280 290 16 247 130 213 1,850 986 56 n/a1 n/a1 n/a1 n/a1 n/a1 4,392 n/a1 n/a1 n/a1 n/a1 n/a1 2,639 1,510 n/a1 1. All these connected transactions have been entered into on normal commercial terms and the transaction amount of each category was not expected to exceed 3% of the book value of the Company’s net tangible assets as at 31 December 2003. In accordance with Rule 14.25(1) of the Listing Rules, there shall be no need to apply for any waiver and therefore, no annual limit has been set. 2. The annual limits for the connected transactions are in relation to the connected transactions amounts of the Company (without the Acquired Companies). 44 Annual Report 2003 REPORT OF THE DIRECTORS For further details of the connected The independent non-executive Directors transactions, please refer to pages 51 to 58 have further confirmed that: of this annual report. The independent non-executive Directors Group’s expenditure for engineering have confirmed that all connected services has not exceeded the limit of transactions in the year ended 31 December RMB4,392 million; 1. the aggregate annual value of the 2003 to which the Group was a party: 2. the aggregate annual value of the 1. had been entered into, and the Group’s expenditure for community agreements governing those services has not exceeded the limit of transactions were entered into, by the RMB2,639 million; and Group in the ordinary and usual course of business; 3. the aggregate annual value of the 2. had been entered into either: Group’s expenditure for ancillary telecommunications services has not exceeded the limit of RMB1,510 (i) on normal commercial terms; or million. (ii) where there was no available The auditors of the Group have reviewed comparison to judge whether they the connected transactions of the Company are on normal commercial terms, (without the Acquired Companies) and on terms no less favourable than confirmed to the Directors that the those available to or from transactions: independent third parties, where applicable; and 1. have received the approval of the 3. had been entered into on terms that Directors; are fair and reasonable so far as the 2. have been entered into in accordance overall interest of the independent with the pricing policies as stated in shareholders of the Company are the relevant agreements; concerned. China Telecom Corporation Limited 45 REPORT OF THE DIRECTORS 3. have been entered into in accordance services, community services and with the terms of the agreements ancillary telecommunications services governing such transactions; and has not exceeded the limit of RMB4,392 million, RMB2,639 million 4. the aggregate annual value of the and RMB1,510 million respectively. Group’s expenditure for engineering EMPLOYEES As at 31 December 2003, the Group had 163,874 employees illustrated as follows: Management, finance and administration Sales and marketing Operations and maintenance Others Total Number of employees Percentage 25,077 73,387 64,339 1,071 163,874 15.3% 44.8% 39.3% 0.6% 100% As at 31 December 2003, the Group also COMPLIANCE WITH CODE OF BEST had 65,548 temporary employees. PRACTICE The Company has implemented a short- None of the Directors is aware of any term and long-term combined incentive information that would reasonably indicate remuneration scheme: the primary that the Company is not, or was not during components of an employee’s remuneration the period, in compliance with the Code of include basic salary, bonus based on Best Practice as set out in Appendix 14 of performance, compensation based on the Listing Rules, except that Mr Tan Ming, seniority and stock appreciation rights plan a member of the Company’s audit (stock appreciation rights are exclusively for committee, is not a non-executive director senior management and senior technological of the Company. Mr Tan Ming is an experts). In addition, the Company also employee representative on the Company’s emphasises the importance of employee audit committee, and his appointment on training and uses various means of training such committee complies with regulatory to improve the quality and capability of its requirements in the United States (where key employees. the Company’s ADS are listed). 46 Annual Report 2003 REPORT OF THE DIRECTORS MATERIAL INTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING SHARES OF THE COMPANY As at 31 December 2003, the interests or short positions of substantial shareholders who are entitled to exercise or control the exercise of 10% or more of the voting power at any of the Company’s general meetings and other persons who are required to disclose their interests pursuant to Part XV of the SFO (including those who are entitled to exercise or control the exercise of 5% or more of the voting power at any of the Company’s general meetings, but excluding the Directors and Supervisors) in the shares and underlying shares of equity derivatives of the Company as recorded in the register required to be kept under Section 336 of the SFO are as follows: (1) (a) Interests in domestic shares and H shares of the Company % of the total issued share capital Name of Shareholder Number and type of that type of shares held of shares Capacity China Telecommunications 58,809,120,182 87.01% Principal Corporation domestic shares Guangdong Rising Assets 5,658,608,387 8.37% Principal Management Co., Ltd. domestic shares The Capital Group Companies, Inc. 783,984,000 H shares 9.77% Investment manager Huawei Tech. Investment 737,770,000 9.19% Beneficial owner Co., Limited H shares J.P. Morgan Chase & Co. 681,938,957 8.50% Beneficial owner; H shares investment manager; others (shares available for lending) FMR Corp 484,722,000 H shares 6.04% Investment manager China Telecom Corporation Limited 47 REPORT OF THE DIRECTORS (b) Interests in underlying shares persons were recorded to hold any interests of the Company or short positions in the shares or underlying shares of the equity derivatives In the register required to be kept of the Company. under Section 336 of the SFO, no long positions of substantial MATERIAL LEGAL PROCEEDINGS shareholders or other persons who are required to disclose their As at 31 December 2003, as far as the interests pursuant to Part XV of Directors are aware of, the Company was the SFO were recorded to hold not involved in any material litigation or any interests in the underlying arbitration and no material litigation claims shares of equity derivatives of the were pending or threatened or made Company. against the Company. (2) Short position in shares and AUDITORS underlying shares of the Company KPMG and KPMG Huazhen were appointed In the register required to be kept under as the international and domestic auditors Section 336 of the SFO, China of the Company respectively for the year Telecommunications Corporation held ended 31 December 2003. KPMG has short positions in 977,004,913 domestic audited the accompanying financial shares which amounted to 1.45% of the statements which have been prepared in total issued domestic shares. This short accordance with International Financial position is created as part of a reform Reporting Standards. The Company has plan approved by the State Council on retained KPMG and KPMG Huazhen since the administration of rural the date of its listing. A resolution for the telecommunications services, in which reappointment of KPMG and KPMG China Telecommunications Corporation Huazhen as the international and domestic agreed to transfer 977,004,913 shares auditors of the Company for the year of the Company to Fujian Electronic ending 31 December 2004 will be proposed Information (Group) Co., Ltd.. Such at the 2003 annual general meeting of the transfer will only be made after the Company to be held on 3 May 2004. satisfaction of certain conditions precedent. The transfer will not be By Order of the Board carried out before 10 September 2005. Zhou Deqiang Chairman and Chief Executive Officer Save as stated above, as at 31 December 2003, in the register required to be kept Beijing, PRC under Section 336 of the SFO, no other 17 March 2004 48 Annual Report 2003 REPORT OF THE SUPERVISORY COMMITTEE To shareholders: The Supervisory Committee is of the view that during the year 2003, the Company During the period covered by this report, all continued to regard accelerated development the members of the Supervisory Committee as its key objective. The Company enhanced acted in accordance with the relevant the scale of its reforms and continued to provisions of the Company Law of the encourage system innovation and People’s Republic of China and the transformation so as to achieve better results. Company’s Articles of Association, adhered to With the steady improvement in the the principle of honesty and trustworthiness, economic efficiencies, the Company had and conscientiously performed their further enhanced its existing strengths. The supervisory duties, so as to safeguard the Supervisory Committee is satisfied with the rights and interests of the shareholders, as achievements made by the Company in 2003 well as the interests of the Company. and is fully confident in the Company’s During the period covered by this report, the prospects. Supervisory Committee held one meeting to The Supervisory Committee believes that review and discuss six proposals, including the during the year 2003, all the members of the Company’s financial statements for the year board of Directors, Chief Executive Officer 2002, the auditors’ report prepared by KPMG and other senior management have adhered for the year 2002 and the dividend to the principle of diligence and honesty, distribution proposal for the year 2002. The acted in good faith and in the best interests Supervisory Committee attended 2003 of the shareholders, duly performed their Annual General Meeting, the Extraordinary duties and obligations as set out in the General Meeting and three Board meetings of Articles of Association, conscientiously the Company during the year and reviewed implemented the various resolutions adopted the 2003 interim financial statements of the at the annual general meeting and board Company. The Supervisory Committee meetings of the Company and operated arranged for its members to review financial strictly in accordance with the code of affairs of the subsidiaries of the Company and practice for listed companies. None of them provided recommendations for improvement. has violated any law or regulation of the Through performing the work mentioned People’s Republic of China or the Company’s above, the Supervisory Committee monitored Articles of Association, nor has been involved the financial affairs of the Company and the in any activity damaging the interests of the performance of duties by the senior Company during the performance of their management and hence safeguarded the duties. rights and interests of the shareholders, as well as the long-term development of the Company. China Telecom Corporation Limited 49 REPORT OF THE SUPERVISORY COMMITTEE During the period covered by this report, the In the new year, the Supervisory Committee Company successfully completed the will continue to broaden its business acquisition of the telecommunication approach, further enhance supervision and businesses in the six regions, strictly in continue to work diligently to safeguard the accordance with the requirements of the interests of the shareholders. relevant laws and the decision of the general meeting of the Company. The whole By Order of the Supervisory Committee acquisition process conformed to the relevant rules and regulations. Zhang Xiuqin Chairperson of the Supervisory Committee Upon the review of the draft audited financial statements of the Company for the year Beijing, PRC 2003, prepared in accordance with PRC 12 March 2004 accounting rules and regulations and International Financial Reporting Standards respectively, and other available information, the Supervisory Committee is of the opinion that the respective financial statements have been prepared in accordance with the relevant accounting standards, the accounting treatment has adhered to the principle of consistency and that the respective financial statements truly and fairly reflect the Company’s financial conditions and results of operations. 50 Annual Report 2003 CONNECTED TRANSACTIONS Prior to the completion of the Acquisition on written notification to China Telecommunications 31 December 2003, relevant transactions Corporation of its intention not to renew entered into by the Acquired Companies and the agreements upon expiry of their current their subsidiaries with any connected persons term. of the Company do not constitute connected transactions within the meaning of the Trademark Licence Agreement Listing Rules. Accordingly, the combined transaction amounts with respect to the Pursuant to the Trademark Licence telecom limited companies in Shanghai Agreement, China Telecommunications municipality, Guangdong province, Jiangsu Corporation has granted to the Company province, Zhejiang province, Anhui province, the right, on a royalty-free basis, to use Fujian province, Jiangxi province, Guangxi certain trademarks set out in a list appended Zhuang autonomous region, Chongqing to the Trademark License Agreement. On 26 municipality and Sichuan province (the “Ten October 2003, the Company and China Provincial Telecom Limited Companies”), are Telecommunications Corporation entered presented herein for information purpose into a supplemental trademark licence only. agreement to extend the scope of the licensees to include the Acquired CONNECTED TRANSACTIONS Companies and to amend the list of AGREEMENTS BETWEEN THE COMPANY trademarks as set out in the Trademark AND CHINA TELECOMMUNICATIONS Licence Agreement. CORPORATION Centralised Services Agreement The Company and China Telecommunications Corporation entered into certain connected Centralised Services include: transactions agreements set out below on 10 September 2002 and entered into a • the provision of management services supplemental connected transactions in relation to certain large enterprise agreement (the “Supplemental Connected customers of the headquarters of Transactions Agreement”) for the said China Telecommunications Corporation acquisition on 26 October 2003, the and the operation of business support Supplemental Connected Transactions centre and network management Agreement extends the terms of Trademark centre; and Licence Agreement, Centralised Services Agreement, Interconnection Agreement and • the use of the international Optic Fibers Leasing Agreement to 31 telecommunications transmission December 2005, automatically renewable facilities. for further periods of three years unless the Company provides three months’ prior The settlement of any net amount due to or due from the Company is made once a year. China Telecom Corporation Limited 51 CONNECTED TRANSACTIONS The provision of management services Company per annum according to their relating to certain large enterprise respective proportional income or aggregate customers of the headquarters of China volume of inbound and outbound Telecommunications Corporation, and the international calls, where appropriate. operation of the business support centre and the network management center. For the year ended 31 December 2003, the Under the Centralised Services Agreement, the provision of such services was RMB105 Company’s portion of the costs in respect of the Company and China Telecommunications million. Corporation share certain overhead costs and the Company has agreed to provide human The use of the international resources relating to administrative functions telecommunications facilities of China Telecommunications Corporation. Assets relating to the Centralised Services are China Telecommunications Corporation has used by both the Company and China retained the assets associated with Telecommunications Corporation. The international telecommunications facilities, Company has also agreed to provide the such as international gateways, undersea necessary human resources responsible for cables and satellite facilities, and has granted the upkeep and maintenance with respect to a licence to the Company to use such these assets, in addition to providing facilities. The Company has agreed to provide maintenance services in relation to the the necessary human resources responsible for international transmission facilities. the upkeep and maintenance with respect to the international telecommunications facilities. The Supplemental Connected Transactions The Supplemental Connected Transactions Agreement modifies the scope of the Agreement amends the scope of international centralised services to include sharing the use telecommunications facilities to include and costs of headquarters and certain international land cables and related domestic network support premises and related extended portions. The Company and China facilities such as air-conditioning, electricity Telecommunications Corporation agreed to and certain ancillary facilities. Costs of apportion the costs associated with operating centralised services such as the management such assets pro rata according to the of large enterprise customers, network aggregate volume of the inbound management center, business support center international calls terminated by and by the Company and sharing the use of outbound international calls originating from, headquarters, international gateways and the Company and China Telecommunications certain other premises together with costs Corporation, respectively. such as labor costs, depreciation of equipment and premises, daily expenses, For the year ended 31 December 2003, the costs relating to maintenance and research, Company’s portion of the costs in respect of are to be apportioned between China the use of international telecommunications Telecommunications Corporation and the facilities was RMB264 million. 52 Annual Report 2003 CONNECTED TRANSACTIONS Interconnection Agreement For the year ended 31 December 2003, the net settlement payment made by the In order to facilitate interconnection Company to China Telecommunications between subscribers within the Company’s Corporation pursuant to the Interconnection service regions and subscribers outside the Agreement was RMB432 million. service regions which are serviced by China Telecommunications Corporation, China Optic Fibers Leasing Agreement Telecommunications Corporation and the Company entered into an interconnection Pursuant to the Optic Fibers Leasing settlement agreement (the “Interconnection Agreement, the Company agreed to lease Agreement”). The Interconnection the relevant parts of the inter-provincial Agreement does not provide for early transmission optic fibers within Shanghai termination or non-renewal by the China municipality, Guangdong province, Jiangsu Telecommunications Corporation. province and Zhejiang province from China Telecommunications Corporation. Pursuant to the Interconnection Agreement, the telephone operator terminating a The amount payable by the Company to telephone call made to its local network China Telecommunications Corporation for shall be entitled to receive from the the leasing of the inter-provincial operator from which the telephone call transmission optic fibers is based on the originated a fee prescribed by the MII from depreciation charge for the optic fibers. In time to time, which is currently RMB0.06 addition, the Company agreed to be per minute. The formula for settlement is responsible for the maintenance of these based on the net volume of telephone calls optic fibers within Shanghai municipality, originating from the Company to China Guangdong province, Jiangsu province and Telecommunications Corporation or Zhejiang province. Apart from an extension originating from China Telecommunications of term of agreement as described in the Corporation to the Company multiplied by Supplemental Connected Transactions the MII prescribed settlement fee. Agreement, the remaining terms and conditions of the original Optic Fibers The settlement is made between the Leasing Agreement remain unchanged. Company and China Telecommunications Corporation on a monthly basis, with the For the year ended 31 December 2003, the operator who has originated more calls total amount paid by the Company to China paying the net amount to the operator who Telecommunications Corporation with has terminated more calls. Apart from an respect to optic fibers leasing was RMB91 extension of term of agreement as described million. in the Supplemental Connected Transactions Agreement, the remaining terms and conditions of the original Interconnection Agreement remain unchanged. China Telecom Corporation Limited 53 CONNECTED TRANSACTIONS PROVISIONS OF THE CONNECTED area of its intention not to renew the TRANSACTIONS AGREEMENT BETWEEN agreements upon expiry of the current term. CHINA TELECOMMUNICATIONS CORPORATION AND TEN PROVINCIAL Engineering Framework Agreements TELECOM COMPANIES The Ten Provincial Telecom Limited The telecom limited companies in Shanghai Companies entered into engineering municipality, Guangdong province, Jiangsu framework agreements (the “Engineering province and Zhejiang province, being Framework Agreements”) with the Provincial subsidiaries of the Company, (the “Four Subsisting Companies to govern the Provincial Telecom Limited Companies”), tendering for the right to provide the Ten each entered into the connected transactions Provincial Telecom Limited Companies with agreements mentioned below in October construction, design, equipment installation 2002 with certain subsidiaries of China and testing services and/or to act as general Telecommunications Corporation respectively contractors in relation to construction and within the service areas of the Company (the supervision of engineering projects and other “Provincial Subsisting Companies”). The Four services commissioned by the Ten Provincial Provincial Telecom Limited Companies and Telecom Limited Companies. the Provincial Subsisting Companies also entered into respective supplemental The charges payable for engineering related connected transactions agreement on 26 services rendered under the Engineering October 2003 in connection with the said Framework Agreements shall be determined acquisition, each of which continues to be by reference to the market price or market effective until 31 December 2005 and is rates as reflected by prices obtained through automatically renewable for further periods a tendering process. The Ten Provincial of three years unless any of the Four Telecom Limited Companies do not accord Provincial Telecom Limited Companies any priority to any of the Provincial Subsisting provides three months’ prior written Companies to provide such services, and the notification to the respective Provincial tender may be awarded to an independent Subsisting Company in the respective service third party. However, if the terms of an offer area of its intention not to renew the from a Provincial Subsisting Company are at agreements upon expiry of the current term. least as favourable as those offered by Each of the Acquired Companies entered Provincial Telecom Limited Companies would into the following connected transactions award the tender to the relevant Provincial another tenderer, it is expected that the Ten agreements with the respective Provincial Subsisting Company. Subsisting Company within its service areas. Such agreements are effective until 31 For the year ended 31 December 2003, the December 2005 and are automatically expenditure of the Four Provincial Telecom renewable for further periods of three years Limited Companies for engineering services unless any of the Acquired Companies was RMB3,493 million and the combined provides three months’ prior written transaction amount with respect to the Ten notification to the respective Provincial Provincial Telecom Limited Companies was Subsisting Company in the respective service RMB5,280 million. 54 Annual Report 2003 Property Leasing Framework Agreements Mutual leasing of properties Telecom Limited Companies and Subsisting Companies Under the Property Leasing Framework Agreements between the Ten Provincial the Telecom Provincial (the “Property Leasing Framework Agreements”), Limited Provincial the Ten Companies the lease properties 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 Ten Provincial lease Telecom Limited Companies also certain Provincial Subsisting Companies. properties from the to 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 2003, the expenditure for the property leasing of the Four Provincial Telecom Limited Companies was RMB256 million and the combined transaction amount with respect to the Ten Provincial Telecom Limited Companies was RMB290 million. For the same period, expenditure of the Provincial Subsisting Companies in the service regions of the Four Provincial Telecom Limited Companies for the property leasing was RMB16 million and the combined transaction amount with respect the Ten Provincial Telecom Limited Companies was RMB16 million. to Properties Sub-Leasing Framework Agreements CONNECTED TRANSACTIONS Companies 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’s Properties”). To formalise the arrangement, the Ten Provincial Telecom Limited Companies have entered into properties sub-leasing framework agreements (the “Properties Sub- Leasing Framework Agreements”) with the Provincial Subsisting Companies agreeing to give the Ten Provincial Telecom Limited Companies an indemnity with respect to any claims or costs incurred in connection with any defect in the titles to any such Third Party’s Properties. The amounts payable by the Ten Provincial Telecom Limited Companies to the Provincial Subsisting Companies under the Properties Sub-Leasing Framework Agreements are the same as the amounts payable by the Provincial Subsisting Companies to the relevant third parties. The rental charges for the Third Party’s 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 2003, the expenditure of the Four Provincial Telecom Limited Companies in relation to properties sub-leasing was RMB187 million and the combined transaction amount with respect to the Ten Provincial Telecom Limited Companies was RMB247 million. IT Services Framework Agreements The Ten Provincial Telecom Limited Companies entered into framework The Provincial Subsisting Companies sub-let agreements with the Provincial Subsisting to the Ten Provincial Telecom Limited Companies pursuant to which the Provincial China Telecom Corporation Limited 55 CONNECTED TRANSACTIONS Subsisting Companies agreed to provide the Framework Agreements”), the Provincial Ten Provincial Telecom Limited Companies Subsisting Companies agreed to provide with certain information technology services comprehensive procurement services, such as office automation and software including the management of tenders, adjustment (the “IT Services Framework verification of technical specifications and Agreements”). installation services. The Provincial Subsisting Companies are Pursuant to the Equipment Procurement entitled to tender for the right to provide Framework Agreements, the Ten Provincial the Ten Provincial Telecom Limited Telecom Limited Companies may request Companies with information technology that the Provincial Subsisting Companies act services. The charges payable for such as their agents in procuring foreign and information technology services under the IT domestic telecommunications equipment Services Framework Agreements shall be and other domestic non-telecommunications determined by reference to market rates as materials. reflected by prices obtained through a tendering process. The Ten Provincial Commission charges for these services are Telecom Limited Companies do not accord calculated at the maximum rate of: any priority to the Provincial Subsisting Companies to provide such services, and the (1) 1% of the contract value, in the tender may be awarded to an independent case of imported telecommunications third party. However, if the terms of an equipment; or offer from a Provincial Subsisting Company are at least as favourable as those offered (2) 1.8% of the contract value, in the case by another tenderer, the Company may of domestic telecommunications award the tender to the relevant Provincial equipment and other domestic non- Subsisting Company. telecommunications materials. For the year ended 31 December 2003, the For the year ended 31 December 2003, the expenditure of the Four Provincial Telecom expenditure of the Four Provincial Telecom Limited Companies for information Limited Companies for equipment technology services was RMB100 million procurement services was RMB171 million and the combined transaction amount with and the combined transaction amount with respect to the Ten Provincial Telecom respect to the Ten Provincial Telecom Limited Companies was RMB130 million. Limited Companies was RMB213 million. Equipment Procurement Services Community Services Framework Framework Agreements Agreements Pursuant to the equipment procurement China Telecommunications Corporation, framework agreements entered into through the Provincial Subsisting between the Ten Provincial Telecom Limited Companies, provides certain cultural, Companies and the Provincial Subsisting educational, property management, Companies (the “Equipment Procurement vehicles, health and medical services, hotel 56 Annual Report 2003 CONNECTED TRANSACTIONS and conference, community and sanitary Provincial Telecom Limited Companies services to the Ten Provincial Telecom under the Community Services Limited Companies. The arrangements are Framework Agreements; and set out in the community services framework agreements between the Ten (4) if the Provincial Subsisting Companies Provincial Telecom Limited Companies and cannot satisfy the needs of the Ten the Provincial Subsisting Companies (the Provincial Telecom Limited Companies “Community Services Framework for the services to be provided under Agreements”). If the Ten Provincial Telecom the Community Services Framework Limited Companies cannot, without Agreements or the terms offered by incurring significant additional costs and independent third parties are more expenses, obtain these services from a third favourable, the Ten Provincial Telecom party after such termination, the Provincial Limited Companies may obtain such Subsisting Companies cannot terminate the services from independent third provision of such services. parties. Although the Community Services Framework The Community Services Framework Agreements are on a non-exclusive basis, Agreements stipulate that the above the following conditions are to apply: community services be provided at: (1) the Ten Provincial Telecom Limited (1) the government prescribed price; Companies may give priority to the Provincial Subsisting Companies in using (2) where there is no government- the services, provided that the terms prescribed price but where there is a and conditions offered by independent government-guided price, the third parties to the Company are no government-guided price applies; more favourable than those offered by the Provincial Subsisting Companies for (3) where there is neither a government- the same services; prescribed price nor a government- guided price, the market price applies. (2) in return, the Provincial Subsisting The market price is defined as the price Limited Companies have undertaken to at which the same type of services are the Ten Provincial Telecom Limited provided by independent third parties Companies that the Provincial in the ordinary course of business; or Subsisting Companies shall not provide services to the Company on terms (4) where none of the above is applicable, which are less favourable than those the price is to be agreed between the offered by them to third parties; relevant parties for the provision of the above services, which shall be the (3) the Provincial Subsisting Companies reasonable cost incurred in providing are only entitled to provide the the same plus a reasonable marginal relevant services to third parties profit (for this purpose, reasonable provided that it would not affect the costs mean the costs confirmed by provision of services to the Ten both parties after negotiations). China Telecom Corporation Limited 57 CONNECTED TRANSACTIONS For the year ended 31 December 2003, the expenditure of the Four Provincial Telecom Limited Companies for community services was RMB1,403 million and the combined transaction amount with respect to the Ten Provincial Telecom Limited Companies was RMB1,850 million. Ancillary Telecommunications Services Framework Agreements of certain The Provincial Subsisting Companies provide certain repair services to the Ten Provincial Telecom Limited Companies, such as the repair telecommunications equipments, the maintenance of the fire telephone prevention equipments and booths and other customers services (the “Ancillary Telecommunications Services”) on a non-exclusive basis. Framework Agreements”), Under the framework agreements between the Ten Provincial Telecom Limited Companies and the Provincial Subsisting Companies for the provision of Ancillary Telecommunications (the “Ancillary Telecommunications Services Services the Provincial Subsisting Companies agreed to provide Ancillary Telecommunications Services to the Ten Provincial Telecom Limited Companies. However, if the Ten Provincial Telecom Limited Companies cannot, without incurring significant additional costs and expenses, obtain these services from a third party, the Provincial Subsisting Companies cannot terminate the provision of such services. The Ancillary Telecommunications Services Framework Agreements contain the same conditions as set out in (1) to (4) in the second paragraph under the heading “Community Services Framework Agreements” above. The Ancillary Telecommunications Services under the Ancillary Telecommunications Services Framework Agreements are provided 58 Annual Report 2003 in accordance with the same pricing policy as that of the Community Services Framework Agreements. For the year ended 31 December 2003, the expenditure of the Company in the Four Provincial Telecom Limited Companies for Ancillary Telecommunications Services was RMB751 million combined transaction amount with respect to the Ten Provincial Telecom Limited Companies was RMB986 million. and the Special Communications Network Leasing and Equipment Services Agreements to lease Provincial dedicated The agreed Provincial to The Subsisting Companies continue to be responsible for providing emergency network services and network the Chinese services government (the “Special Communications Subsisting Services”). the Companies infrastructure in connection with the Special Communications Services from the Four Provincial Telecom Limited Companies at a fee prescribed by the MII. On the other hand, the Four Provincial Telecom Limited Companies agreed to provide the necessary human resources to maintain and operate the Special Communications Services within the service regions in return for China Telecommunications Corporation reimbursing Limited the Companies its actual costs, including the costs for network operations and support, general and administrative expenses and certain other operating expenses. Provincial Telecom Four For the year ended 31 December 2003, the Four Provincial Telecom Limited Companies was paid RMB56 million for Special Communications Services provided to the Provincial Subsisting Companies. NOTICE OF ANNUAL GENERAL MEETING NOTICE IS HEREBY GIVEN that an annual Telecom general meeting of China And as special business, to consider and, if thought fit, pass the following as special Corporation Limited (the “Company”) for resolutions: the year ended 2003 will be held at 10:00 a.m. on 3 May 2004 at Beijing Nan Yue SPECIAL RESOLUTIONS Yuan Hotel, 186 Zheng Wang Fen, Feng Tai District, Beijing, PRC to consider and, if 5. “THAT: thought fit, pass the following business: ORDINARY RESOLUTIONS (a) subject to paragraph (c) below, the exercise by the board of directors of the Company during 1. to consider and approve the the Relevant Period (as hereafter consolidated financial statements of defined) of all the powers of the the Company, the report of the Board Company to allot, issue and deal of Directors, the report of the with additional shares of the Supervisory Committee and the report Company (“Shares”) and to make of the international auditors for the or grant offers, agreements and year ended 31 December 2003; options which might require the exercise of such powers be hereby 2. to consider and approve the profit generally and unconditionally distribution proposal and declaration of approved; a final dividend for the year ended 31 December 2003; (b) the approval in paragraph (a) shall authorise the board of directors of 3. to consider and approve the annual the Company during the Relevant remuneration proposal for the Period to make or grant offers, Company’s directors for the year agreements and options which ending 31 December 2004; 4. to consider and approve reappointment of KPMG as the the might require the exercise of such powers after the end of the Relevant Period; Company’s international auditors and (c) the amount of additional KPMG Huazhen as the Company’s domestic Shares or overseas-listed domestic auditors for the year ending foreign invested shares (“H 31 December 2004 and the Shares”) (as the case may be) authorisation to the board of directors allotted, issued and dealt with or of the Company to fix the agreed conditionally or remuneration thereof; unconditionally to be allotted, issued and dealt with either And to consider and approve other matters, separately or concurrently by the if any. board of directors of the China Telecom Corporation Limited 59 NOTICE OF ANNUAL GENERAL MEETING Company pursuant to approval in paragraph the (a), otherwise than pursuant to (i) a Rights Issue (as hereafter defined) or (ii) any scrip dividend or similar special resolutions by a special resolution of the Company’s shareholders in general meetings. arrangement providing for the “Rights Issue” means an offer of allotment of Shares in lieu of the shares open for a period fixed by whole or part of a dividend on the board of directors of the Shares in accordance with the Company to holders of Shares on articles of association of the the register of members on a Company, shall not exceed 20% fixed record date in proportion of of each of the Company’s existing their then holdings of such Shares domestic shares and H shares (as (subject to such exclusion or other the case may be) in issue at the arrangements as the board of date of passing this special directors of the Company may resolution; and deem necessary or expedient in relation to fractional entitlements (d) for the purpose of special or having regard to any legal or resolution 5: practical restrictions or obligations under the laws of, or the “Relevant Period” means the requirement of, any recognised period from the passing of special regulatory body or any stock resolution 5 until the earlier of: exchange in any territory applicable to the Company) and (i) the conclusion of the next an offer, allotment or issue of annual general meeting of shares by way of rights shall be the Company; construed accordingly.” (ii) the expiration of the 12 6. months period following the “THAT the board of directors of the Company be authorised to increase the passing of these special registered capital of the Company to resolutions; and reflect the issue of shares in the Company authorised under special (iii) the revocation or variation of resolution 5, and to make such the authority given to the appropriate and necessary amendments board of directors of the to the articles of association of the Company under these Company as they think fit to reflect 60 Annual Report 2003 NOTICE OF ANNUAL GENERAL MEETING such increases in the registered capital certified power of attorney must be of the Company and to take any other delivered to the Office of the Board of action and complete any formality Directors of the Company for holders required to effect such increase of the of domestic shares and to registered capital of the Company.” Computershare Hong Kong Investor By Order of the Board Li Ping Company Secretary Beijing, PRC 17 March 2004 Notes: Services Limited for holders of H shares not 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: (1) Buyers who submit the relevant share transfer application forms to the Computershare Hong Kong Investor Company’s share registrar before 4:00 Services Limited p.m. on 2 April 2004 and then register Rooms 1901-1905, as shareholders on the register of 19th Floor, Hopewell Centre, members of the Company are entitled 183 Queens Road East, to attend the annual general meeting. Wanchai, Hong Kong (2) Each shareholder entitled to attend and vote at the annual general (4) A proxy of a shareholder may vote by meeting may appoint one or more hand or vote on a poll, but a proxy of a proxies to attend and vote on his shareholder who has appointed more behalf at the annual general meeting. than one proxy may only vote on a A proxy need not be a shareholder. poll. Each shareholder who wishes to appoint one or more proxies should (5) The registration procedure for first review the annual report of the attending the annual general meeting: Company for the year 2003, which is expected to be despatched to (a) shareholders attending the annual shareholders on 19 March 2004. general meeting in person or by proxy shall present their identity (3) To be valid, the form of proxy together certification. If the attending with the power of attorney or other shareholder is a corporation, its authorisation document (if any) signed legal representative or person by the authorised person or notarially authorised by the board or other China Telecom Corporation Limited 61 NOTICE OF ANNUAL GENERAL MEETING decision making authority shall (7) The annual general meeting is present a copy of the relevant expected to last for half a day and resolution of the board or other shareholders (in person or by proxy) decision making authority in order attending the annual general meeting to attend the annual general shall be responsible for their own meeting. transportation and accommodation (b) shareholders intending to attend expenses. the annual general meeting are to (8) The address of the office of the Board return the attendance slip via of Directors is as follows: hand delivery, mail or fax to the Office of the Board of Directors of 31 Jinrong Street the Company on or before 12 Xicheng District, Beijing 100032 April 2004. PRC (6) Closure of the register of members: Contact person: Li Ping The register of members of the Facsimile: (8610) 6601 0728 Telephone: (8610) 6642 8166 Company will be closed from 3 April 2004 to 3 May 2004 (both days inclusive). 62 Annual Report 2003 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 65 to 121 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 solely to you, as a body, in accordance with our agreed terms of engagement, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. 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 Corporation Limited 63 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 2003 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 17 March 2004 64 Annual Report 2003 CONSOLIDATED BALANCE SHEET at 31 December 2003 (Amounts in millions) Note 2003 RMB 2002 RMB 3 4 6 7 8 17 9 10 11 12 13 13 14 15 16 17 13 16 17 8 235,211 22,790 3,234 513 205 8,314 9,834 220,761 27,969 3,261 464 271 7,526 9,659 280,101 269,911 2,330 10,187 2,440 428 10,119 25,504 1,753 9,058 2,852 1,352 18,685 33,700 305,605 303,611 40,097 6,434 20,129 15,989 3,395 19 10,603 96,666 40,336 5,674 21,728 16,297 3,842 67 11,604 99,548 (71,162) (65,848) 208,939 204,063 49,665 19 25,389 1,325 76,398 17,594 82 31,735 618 50,029 173,064 149,577 1,269 1,186 174,333 150,763 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 The notes on pages 73 to 121 form part of these financial statements. China Telecom Corporation Limited 65 CONSOLIDATED BALANCE SHEET at 31 December 2003 (Amounts in millions) Note 2003 RMB 2002 RMB Balance brought forward 174,333 150,763 Shareholders’ equity Share capital Reserves 18 19 75,614 55,658 75,614 77,234 Total shareholders’ equity 131,272 152,848 Total liabilities and shareholders’ equity 305,605 303,611 Approved and authorised for issue by the Board of Directors on 17 March 2004. Zhou Deqiang Chairman and Chief Executive Officer Chang Xiaobing Executive Director, President and Wu Andi Executive Director, Executive Vice President Chief Operating Officer and Chief Financial Officer The notes on pages 73 to 121 form part of these financial statements. 66 Annual Report 2003 BALANCE SHEET at 31 December 2003 (Amounts in millions) Note 2003 RMB 2002 RMB 3 4 5 11 12 14 15 375 77 — — 164,821 142,706 46 — 165,319 142,706 1,776 — 1,190 1,527 1,000 9,570 2,966 12,097 168,285 154,803 106 975 932 — 570 1,385 ASSETS Non-current assets Property, plant and equipment, net Construction in progress Interests in subsidiaries Other assets Total non-current assets 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 Accounts payable Accrued expenses and other payables Income tax payable Total current liabilities 2,013 1,955 Net current assets 953 10,142 Total assets less current liabilities 166,272 152,848 Non-current liabilities Long-term debt 13 35,000 — Total liabilities 37,013 1,955 The notes on pages 73 to 121 form part of these financial statements. China Telecom Corporation Limited 67 BALANCE SHEET at 31 December 2003 (Amounts in millions) Shareholders’ equity Share capital Reserves Note 18 19 2003 RMB 2002 RMB 75,614 55,658 75,614 77,234 Total shareholders’ equity 131,272 152,848 Total liabilities and shareholders’ equity 168,285 154,803 Approved and authorised for issue by the Board of Directors on 17 March 2004. Zhou Deqiang Chairman and Chief Executive Officer Chang Xiaobing Executive Director, President and Wu Andi Executive Director, Executive Vice President Chief Operating Officer and Chief Financial Officer The notes on pages 73 to 121 form part of these financial statements. 68 Annual Report 2003 CONSOLIDATED STATEMENT OF INCOME for the year ended 31 December 2003 (Amounts in millions, except per share data) Note 2003 RMB 2002 RMB Operating revenues 20 118,451 109,564 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 Investment income Share of profit from associates Profit before taxation and minority interests Taxation Profit before minority interests Minority interests Profit attributable to shareholders Basic earnings per share Weighted average number of shares 21 22 3 23 24 27 29 29 (32,921) (31,883) (18,303) (2,896) (33,005) (32,228) (15,461) (2,873) (86,003) (83,567) 32,448 — (1,814) 7 34 30,675 (5,933) 24,742 (56) 25,997 (14,690) (2,144) 63 37 9,263 582 9,845 (72) 24,686 9,773 0.33 0.14 75,614 69,242 The notes on pages 73 to 121 form part of these financial statements. China Telecom Corporation Limited 69 CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY for the year ended 31 December 2003 (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 2002, as previously reported Adjusted for acquisition of the Acquired Group 1 Balance as at 1 January 2002, as adjusted Capitalisation as share capital upon incorporation of the Company Issue of shares, net of issuing expenses of RMB796 million Net profit Contributions from China Telecom Distributions to China Telecom Assets distributed to China Telecom in connection with the Acquisition Revaluation surplus Recognition of deferred tax assets Elimination of deferred tax liabilities Transfer from retained earnings to other reserves Appropriations Revaluation surplus realised Deferred tax on land use rights realised Balance as at 31 December 2002 Net profit Contributions from China Telecom Transfer from retained earnings to other reserves Consideration for the acquisition of the Acquired Group Transfer from other reserves to capital reserve Appropriations Dividends Revaluation surplus realised Deferred tax on land use rights realised Balance as at 1 3 8 8 19 1 19 28 — — — — — — 68,317 20,955 7,297 — — — — — — — — — — — — — — — — — — — — — — — — — — — 3,362 — — — — — — — — — — — 4,154 — 4,154 — — — — — — 760 — — — — (10) — — — — — — — — — — — — — — 4,059 89,272 97,485 — 37,671 — 37,671 — 41,730 89,272 135,156 — (89,272) — — 9,773 1,482 10,659 9,773 1,482 (2,221) (2,221) — — — — — — — — — — — — — — — 2,408 — (5,189) — — 20 (5,189) 760 2,408 20 — — — — — 8,121 — (12,999) — 1,624 12,999 (9,745) — — — — — (75) 10 75 75,614 — 20,955 — 3,362 — 4,904 — 8,121 — 1,624 — 31,064 — 7,204 24,686 152,848 24,686 — — — — — — — (14,388) — — — — — — — — — — — — — — — — — — — — — — (17) — — — — — 7,340 — — — — — 60 — 6,589 (6,589) 60 — — (45,649) — (45,649) — 14,388 — — 1,748 — — (9,088) (673) — — — (131) 17 131 — — (673) — — 31 December 2003 75,614 6,567 3,362 4,887 15,461 3,372 6,261 15,748 131,272 The notes on pages 73 to 121 form part of these financial statements. 70 Annual Report 2003 CONSOLIDATED STATEMENT OF CASH FLOW for the year ended 31 December 2003 (Amounts in millions) Note 2003 RMB 2002 RMB Cash flows from operating activities (a) 46,884 52,158 Cash flows from investing activities Capital expenditure Purchase of investments Lease prepayments Proceeds from disposal of investments Proceeds from disposal of property, plant and equipment Purchase of time deposits with maturity over three months Maturity of time deposits with maturity over three months (41,825) (60) (75) 52 (45,807) (179) (377) — 203 105 (426) (1,339) 1,350 537 Net cash used in investing activities (40,781) (47,060) 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 Payment of dividend Cash distributions to minority interests Cash payment for the acquisition of the Acquired Group Cash contributions from China Telecom Cash distributions to China Telecom — (111) 59,983 (62,705) (673) (27) (11,000) 60 (196) 10,659 (525) 61,982 (63,078) — (14) — 1,284 (4,418) Net cash (used in)/from financing activities (14,669) 5,890 Net (decrease)/increase in cash and cash equivalents (8,566) 10,988 Cash and cash equivalents at beginning of year 18,685 7,697 Cash and cash equivalents at end of year 10,119 18,685 The notes on pages 73 to 121 form part of these financial statements. China Telecom Corporation Limited 71 CONSOLIDATED STATEMENT OF CASH FLOW for the year ended 31 December 2003 (Amounts in millions) (a) Reconciliation of profit before taxation and minority interests to cash flows from operating activities 2003 RMB 2002 RMB Profit before taxation and minority interests 30,675 9,263 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 Loss on retirement and disposal of property, plant and equipment Increase in accounts receivable (Increase)/decrease in inventories Decrease in prepayments and other current assets Increase in other non-current assets (Decrease)/increase in accounts payable 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 32,921 — 670 (7) (34) (276) 2,890 314 424 (1,799) (577) 131 (38) (695) (1,304) (7,347) 55,948 276 (2,896) 17 (6,461) 33,005 14,690 625 (63) (37) (174) 3,201 288 1,662 (1,147) 484 1,887 (903) 271 (9) (7,251) 55,792 174 (3,234) 92 (666) Cash flows from operating activities 46,884 52,158 The notes on pages 73 to 121 form part of these financial statements. 72 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 1. 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, Zhejiang Province, Anhui Province, Fujian Province, Jiangxi Province, Guangxi Zhuang Autonomous Region, Chongqing Municipality and Sichuan 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 telephone services, Internet and managed long distance and international 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 Group are referred to as ‘‘China Telecom Group’’), a state-owned enterprise which is under the supervision and regulation of the Ministry of Information Industry. 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 in 10 northern provinces, and related operations telecommunications networks 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 the PRC, including those of the Company’s subsidiaries. In accordance with this industry restructuring plan, China Telecom and China Netcom Group own 70% and 30%, nationwide inter-provincial optic fibres. respectively, of the China Telecom Corporation Limited 73 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 1. PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PRESENTATION (continued) Organisation (continued) In connection with 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 in consideration for 68,317 million assets and liabilities (the ‘‘Predecessor Operations’’) 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 In connection with the Restructuring, certain assets historically Company at that date. associated with the Predecessor Operations were not transferred to the Company and were retained by China Telecom. These assets, which amounted to RMB11,285 million as at 31 December 2001, primarily related to investments in non-telecommunications industries, inter-provincial transmission optic fibres and properties. 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. Pursuant to the resolution passed by the Company’s independent shareholders at an Extraordinary General Meeting held on 15 December 2003, the Company acquired the entire equity interests in Anhui Telecom Company Limited, Fujian Telecom Company Limited, Jiangxi Telecom Company Limited, Guangxi Telecom Company Limited, Chongqing Telecom Company Limited and Sichuan Telecom Company Limited (‘‘the Acquired Group’’) and certain network management and research and development facilities from China Telecom for a total purchase price of RMB46,000 million (hereinafter, the ‘‘Acquisition’’) on 31 December 2003. The purchase price consisted of a cash payment of referred to as RMB11,000 million and a long-term payable of RMB35,000 million (see Note 13). Prior to the Acquisition and effective 31 December 2002, China Telecom transferred the wireline telecommunications business and related operations in Anhui Province, Fujian Province, Jiangxi Province, Guangxi Zhuang Autonomous Region, Chongqing Municipality and Sichuan Province together with the related assets and liabilities in consideration for the entire respective equity interests in each of the entities of the Acquired Group. Certain assets historically associated with these operations were retained by China Telecom, and as at 31 December 2002, these assets amounted to RMB5,189 million and consisted primarily of investments in non-telecommunications industries and properties. 74 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 1. PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PRESENTATION (continued) Basis of presentation Since China Telecom controlled the Predecessor Operations transferred to the Company and continues to control the Company, the accompanying consolidated financial statements for the periods prior to the legal formation of the Company have been prepared as a reorganisation of entities under common control interests in a manner similar to a pooling-of- (‘‘as-if-pooling-of-interests accounting’’). Accordingly, under as-if-pooling-of- interests accounting, the assets and liabilities of the Predecessor Operations transferred to the Company in connection with the Restructuring have been accounted for at historical amounts and as if the Predecessor Operations were transferred to the Company as at the earliest date presented. In addition, as the Acquired Group was under the common control of China Telecom, the Acquisition has been reflected in the accompanying consolidated financial statements as a combination of entities under common control in a manner similar to a pooling-of-interests. Accordingly, the assets and liabilities of the Acquired Group have been accounted for at historical amounts and the consolidated financial statements of the Company prior to the Acquisition have been restated to include the results of operations and assets and liabilities of the Acquired Group on a combined basis. The assets retained by China Telecom prior to the Acquisition have been reflected as a distribution to China Telecom in the consolidated statement of shareholders’ equity as at 31 December 2002. The consideration paid by the Company for the acquisition of the Acquired Group has been accounted for as an equity transaction in the consolidated statement of shareholders’ equity as at 31 December 2003. China Telecom Corporation Limited 75 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 1. PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PRESENTATION (continued) Basis of presentation (continued) The results of operations for the year ended 31 December 2002 and the financial condition and shareholders’ equity as at 31 December 2002 and 1 January 2002 previously reported by the Group and the Acquired Group and the combined amounts presented in the accompanying consolidated financial statements are set out below: The Group (without the Acquired Group) RMB millions The Acquired Group RMB millions Combined RMB millions Results of operations: Operating revenues Operating profit Net income/(loss) Basic earnings/(loss) per share (RMB) Financial condition: Current assets Total assets Current liabilities Total liabilities Shareholders’ equity as at 31 December 2002 Shareholders’ equity as at 1 January 2002 75,496 21,378 16,864 0.24 26,502 210,852 57,627 84,710 34,068 4,619 (7,091) (0.10) 7,198 92,759 41,921 64,867 109,564 25,997 9,773 0.14 33,700 303,611 99,548 149,577 125,008 27,840 152,848 97,485 37,671 135,156 For the periods presented, all significant balances and transactions between the Group and the Acquired Group prior to the Acquisition have been eliminated. 76 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 2. 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 International Accounting Accounting Standards Board (‘‘IASB’’). IFRS includes Standards (‘‘IAS’’) and interpretations. These financial statements also comply with the Hong Kong Companies Ordinance and the the disclosure requirements of 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. subsidiaries are included in the consolidated financial The financial statements from the date that control commences until the date that control ceases, results of 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. The consolidated statement of income includes the Group’s share of the results of its associates for the period. In the consolidated balance sheet, interests in associates are stated at the Group’s attributable share of net assets. China Telecom Corporation Limited 77 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 2. SIGNIFICANT ACCOUNTING POLICIES (continued) (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 the allowance for doubtful accounts is provided based upon the evaluation of recoverability of these accounts at the balance sheet date. (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. 78 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 2. SIGNIFICANT ACCOUNTING POLICIES (continued) (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. Subsequent to the revaluations which were 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 revalued, any accumulated depreciation at the date of the revaluation is restated 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. China Telecom Corporation Limited 79 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 2. 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 lives. As at 31 December 2003, the carrying amortised over their estimated useful amount of assets held under finance leases was RMB50 million (2002 : RMB187 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 residual value, as follows: life on a straight-line basis, after taking into account its estimated Buildings and improvements Telecommunications network plant, transmission and switching equipment Furniture, fixture, motor vehicles and other equipment (h) Lease prepayments Depreciable life 8 to 30 years 6 to 10 years 4 to 10 years Lease prepayments represent land use rights paid to the PRC’s land bureau. Land use rights are carried at cost and are written off on a straight-line basis over the respective periods of the rights which range from 20 years to 70 years. 80 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 2. SIGNIFICANT ACCOUNTING POLICIES (continued) (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. 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 in the opinion of (Note 2(l)). A provision is made where, management, the carrying amount of the investments exceeds its recoverable amount. losses (l) Impairment The carrying amounts of the Group’s long-lived assets, including property, plant and 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 amount of the reduction is recognised as an expense in the consolidated statement of income. The recoverable amount is the greater of the net selling price and the value in use. 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. China Telecom Corporation Limited 81 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 2. SIGNIFICANT ACCOUNTING POLICIES (continued) (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) (ii) Revenues derived from local, DLD and ILD telephone usage are recognised as the services are provided. 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. (iii) Monthly telephone service fees are recognised in the month during which the telephone services are provided to customers. (iv) (v) Revenues from sale of prepaid calling cards are recognised as the cards are used by customers. 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) Revenues from the provision of Internet and managed data services are recognised when the services are provided to customers. (ii) 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. 82 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 2. SIGNIFICANT ACCOUNTING POLICIES (continued) (m) Revenue recognition (continued) (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 RMB4,172 million for the year ended 31 December 2003 (2002 : RMB1,837 million). (o) Net financing costs Net financing costs comprise interest income on bank deposits, interest expense on Interest income from bank borrowings, and foreign exchange gains and losses. deposits is recognised on a time proportion basis that takes into account the effective yield on the asset. 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. (p) Research and development expense Research and development expenditure is expensed as incurred. For the year ended 31 December 2003, research and development expense was RMB126 million (2002 : RMB188 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. China Telecom Corporation Limited 83 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 2. SIGNIFICANT ACCOUNTING POLICIES (continued) (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 of the Group’s operating activities are carried out in the PRC. 84 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 3. PROPERTY, PLANT AND EQUIPMENT, NET The Group: Telecomm- unications Furniture, fixture, motor network plant and vehicles and other Buildings and improve- ments RMB millions equipment RMB millions equipment RMB million Total RMB millions 43,405 286 281,689 2,289 13,377 536 338,471 3,111 3,591 (204) 39,726 (2,687) 1,570 (370) 44,887 (3,261) Cost/valuation: Balance at 1 January 2003 Additions Transferred from construction in progress Disposals Balance at 31 December 2003 47,078 321,017 15,113 383,208 Accumulated depreciation: Balance at 1 January 2003 Depreciation charge for the year Written back on disposals Balance at 31 December (4,806) (107,912) (4,992) (117,710) (1,751) 28 (29,233) 2,289 (1,937) 317 (32,921) 2,634 2003 (6,529) (134,856) (6,612) (147,997) Net book value at 31 December 2003 Net book value at 31 December 2002 40,549 186,161 8,501 235,211 38,599 173,777 8,385 220,761 China Telecom Corporation Limited 85 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 3. PROPERTY, PLANT AND EQUIPMENT, NET (continued) The Company: Telecomm- unications Furniture, fixture, motor network plant and vehicles and other equipment RMB millions equipment RMB millions Total RMB millions Cost: Additions Transferred from construction in progress Balance at 31 December 2003 Accumulated depreciation: Depreciation charge for the year Balance at 31 December 2003 331 29 360 (1) (1) Net book value at 31 December 2003 359 16 — 16 — — 16 347 29 376 (1) (1) 375 In connection with the Restructuring, the property, plant and equipment of the Predecessor Operations as at 31 December 2001 were revalued as required by the relevant PRC rules and regulations 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. 86 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 3. PROPERTY, PLANT AND EQUIPMENT, NET (continued) The following is a summary of the historical carrying amounts of the property, plant and equipment of the Predecessor Operations and the revalued amounts of these assets: Historical carrying Revaluation Revaluation Revalued amounts amounts RMB millions RMB millions RMB millions RMB millions surplus deficit Buildings and improvements Telecommunications network 21,664 2,361 (238) 23,787 plant 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 addition, in connection with the Acquisition, the property, plant and equipment of the Acquired Group as at 31 December 2002 were revalued as required by the relevant PRC rules and regulations for each asset class by the PRC valuers on a depreciated replacement cost basis. The value of the property, plant and equipment was determined at RMB71,596 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 RMB760 million was credited to the revaluation reserve while the deficit arising from the revaluation of certain property, plant and equipment totalling RMB14,690 million was recognised as an expense for the year ended 31 December 2002. China Telecom Corporation Limited 87 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 3. PROPERTY, PLANT AND EQUIPMENT, NET (continued) The following is a summary of the historical carrying amounts of the Acquired Group’s property, plant and equipment and the revalued amounts of these assets: Historical carrying Revaluation Revaluation Revalued amounts amounts RMB millions RMB millions RMB millions RMB millions surplus deficit Buildings and improvements Telecommunications network 10,091 704 (65) 10,730 plant and equipment 72,572 — (14,119) 58,453 Furniture, fixture, motor vehicles and other equipment 2,863 56 (506) 2,413 85,526 760 (14,690) 71,596 The reduction in the carrying amounts was primarily the result of the-then market decline in the replacement cost of certain network switching equipment during the years prior to 2002. The net deficit on the revaluation of the Predecessor Operations’ property, plant and equipment of RMB7,776 million and net deficit on the revaluation of the Acquired Group’s property, plant and equipment of RMB13,930 million were reflected in the consolidated balance sheet of the Group as at 31 December 2001 and 31 December 2002 respectively. 4. CONSTRUCTION IN PROGRESS Balance at beginning of year Additions Transferred to property, plant and equipment Balance at end of year The Group RMB millions The Company RMB millions 27,969 39,708 (44,887) 22,790 — 106 (29) 77 88 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 5. INTERESTS IN SUBSIDIARIES The Company 2003 2002 RMB millions RMB millions Share of net assets 164,821 142,706 Details of the Company’s subsidiaries at 31 December 2003, 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 Shanghai Telecom Company Limited Limited company 11 October 2002 Guangdong Telecom Company Limited Limited company 10 October 2002 Jiangsu Telecom Company Limited Limited company 19 October2002 Zhejiang Telecom Company Limited Limited company 10 October 2002 Anhui Telecom Company Limited Limited company 26 August 2003 Fujian Telecom Company Limited Limited company 28 August 2003 Jiangxi Telecom Company Limited Limited company 18 September 2003 Guangxi Telecom Company Limited Limited company 28 August 2003 Chongqing Telecom Company Limited Limited company 22 August 2003 Sichuan Telecom Company Limited Limited company 28 August 2003 (RMB millions) 15,984 47,513 19,208 22,400 3,871 10,364 1,153 4,992 4,276 8,123 All of the above subsidiaries are incorporated in the PRC, are wholly-owned by the Company and are engaged in provision of telecommunications services. 6. INTERESTS IN ASSOCIATES The Group 2003 2002 RMB millions RMB millions Share of net assets 513 464 China Telecom Corporation Limited 89 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 6. INTERESTS IN ASSOCIATES (continued) 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 Attributable equity interest Principal activities Shenzhen Shekou Telecommunications 50% Provision of Company Limited telecommunications services Shanghai Information Investment 24% Provision of information Incorporation technology consultancy services The above associates are established in the PRC and are not traded on any stock exchange. 7. INVESTMENTS The Group 2003 2002 RMB millions RMB millions Unlisted equity investments 205 271 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. 90 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 8. DEFERRED TAX ASSETS AND LIABILITIES Deferred tax assets and deferred tax liabilities are attributable to the items set out below: The Group: Current Provisions, primarily for receivables Non-Current Property, plant and Assets Liabilities Net balance 2003 RMB millions 2002 RMB millions 2003 RMB millions 2002 RMB millions 2003 RMB millions 2002 RMB millions 198 99 — — 198 99 equipment 67 — (579) (193) (512) (193) Deferred revenues and installation costs Land use rights Deferred tax 1,788 6,261 1,035 6,392 (746) — (425) — 1,042 6,261 610 6,392 assets/(liabilities) 8,314 7,526 (1,325) (618) 6,989 6,908 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 to ongoing previously paid and/or future taxable income. The allowance is subject 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 2002 and 2003. 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 2002 and 2003 in respect of deferred tax assets arising from temporary differences. China Telecom Corporation Limited 91 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 8. DEFERRED TAX ASSETS AND LIABILITIES (continued) Movements in temporary differences are as follows: Balance at Recognised in Recognised in Balance at 1 January 2002 statement of income shareholders’ equity 31 December 2002 Note RMB millions RMB millions RMB millions RMB millions Current Provisions, primarily for receivables . Non-current Property, plant and equipment Deferred revenues and installation costs Tax loss Land use rights Net deferred tax (liabilities)/assets (ii) (ii) (ii) (i) (iii) 362 106 (369) 99 (5,190) 4,010 987 (193) 534 — 4,059 674 163 (75) (598) (163) 2,408 610 — 6,392 (235) 4,878 (Note 24) 2,265 6,908 92 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 8. DEFERRED TAX ASSETS AND LIABILITIES (continued) Balance at Recognised Recognised in Balance at 1 January 2003 in statement of income shareholders’ equity 31 December 2003 RMB millions RMB millions RMB millions RMB millions Current Provisions, primarily for receivables Non-current Property, plant and equipment Deferred revenues and installation costs Land use rights Net deferred tax assets 99 99 (193) (319) 610 6,392 6,908 432 (131) 81 (Note 24) — — — — — 198 (512) 1,042 6,261 6,989 Note: (i) (ii) (iii) Represents net tax loss carry forward of the Acquired Group for the year. As the tax loss was utilised by China Telecom in the same tax year, the utilisation of the deferred tax asset was reflected as a distribution to China Telecom in the statement of shareholders’ equity. As described in Note 3, in connection with the Restructuring and the Acquisition, the property, plant and equipment of the Predecessor Operations and the Acquired Group were revalued. The tax bases of these assets have been adjusted to conform to the respective revalued amounts. In addition, in connection with the Restructuring and the Acquisition, the tax bases of the assets and liabilities of the Predecessor Operations and the Acquired Group 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 reductions in net deferred tax liabilities of RMB4,887 million as at 31 December 2001 and RMB20 million as at 31 December 2002 were credited to shareholders’ equity. In connection with the Restructuring and the Acquisition, the Predecessor Operations’ and the Acquired Group’s land use rights, which as at 31 December 2001 and 31 December 2002 had a total carrying amount of RMB2,638 million and RMB617 million, respectively, were revalued as required by the relevant PRC rules and regulations. The revalued amounts of the Predecessor Operations’ and the Acquired Group’s land use rights as at 31 December 2001 and 31 December 2002 were determined at RMB14,939 million and RMB7,913 million, respectively. The tax bases of the land use rights have been adjusted to conform to such revalued amounts. The land use rights were not revalued for financial reporting purposes and accordingly, deferred tax assets were created with carrying amount of RMB4,059 million and RMB2,408 million as at 31 December 2001 and 31 December 2002, respectively, with corresponding increases 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 assets. China Telecom Corporation Limited 93 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 9. INVENTORIES Inventories represent: Materials and supplies Goods for resale 10. ACCOUNTS RECEIVABLE, NET Accounts receivable, net, are analysed as follows: Accounts receivable Less: Allowance for doubtful accounts The Group 2003 RMB millions 2002 RMB millions 1,530 800 1,435 318 2,330 1,753 The Group 2003 RMB millions 2002 RMB millions 11,278 (1,091) 10,105 (1,047) 10,187 9,058 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. 94 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 10. ACCOUNTS RECEIVABLE, NET (continued) The following table summarises the changes in the allowance for doubtful accounts: At beginning of year Provision for doubtful accounts Accounts receivable written off At end of year The Group 2003 RMB millions 2002 RMB millions 1,047 670 (626) 1,123 625 (701) 1,091 1,047 Ageing analysis of accounts receivable from telephone and Internet 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 2003 RMB millions 2002 RMB millions 7,919 841 656 400 7,124 801 574 427 9,816 (1,056) 8,926 (1,001) 8,760 7,925 China Telecom Corporation Limited 95 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 10. ACCOUNTS RECEIVABLE, NET (continued) Ageing analysis of accounts receivable from other telecommunications operators and customers is as follows: The Group 2003 2002 RMB millions RMB millions 923 228 211 100 578 237 239 125 1,462 (35) 1,179 (46) 1,427 1,133 Current, within 1 month 1 to 3 months 4 to 12 months More than 12 months Less: Allowance for doubtful accounts 11. PREPAYMENTS AND OTHER CURRENT ASSETS Prepayments and other current assets represent: The Group The Company 2003 RMB 2002 RMB 2003 RMB 2002 RMB millions millions millions millions 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 479 — 394 412 480 — 675 456 1,155 1,241 31 1,737 34 1,493 — 6 2 — — — 2,440 2,852 1,776 1,527 96 Annual Report 2003 12. CASH AND CASH EQUIVALENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 The Group The Company 2003 RMB millions 2002 RMB millions 2003 RMB millions 2002 RMB millions Cash at bank and in hand Time deposits with maturity within three 9,851 13,828 990 4,815 months 268 4,857 200 4,755 10,119 18,685 1,190 9,570 13. SHORT-TERM AND LONG-TERM DEBT Short-term debt comprises: The Group 2003 2002 RMB millions RMB millions Bank loans 40,097 40,336 Weighted average interest rate of the Group’s short-term debt as at 31 December 2003 was 4.6% (2002 : 4.7%). China Telecom Corporation Limited 97 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 13. SHORT-TERM AND LONG-TERM DEBT (continued) Long-term debt comprises: Interest rates and final maturity millions millions millions millions The Group The Company 2003 RMB 2002 RMB 2003 RMB 2002 RMB Bank loans Renminbi denominated Interest rates ranging from 2.3% to 6.2% per 15,705 16,648 annum with maturities through 2007 US Dollars denominated Interest rates ranging from 0.6% to 7.6% per 2,053 3,321 annum with maturities through 2038 Japanese Yen Interest rates ranging from 0.6% to 3.5% per 2,832 2,838 denominated annum with maturities through 2022 Euro denominated Interest rates ranging from 0.5% to 8.1% per 504 436 annum with maturities through 2032 Other currencies Other loans Renminbi denominated Amount due to China Telecom 5 17 21,099 23,260 — 8 — — — — — — — Renminbi denominated Note (i) 35,000 — 35,000 Total long-term debt Less: current portion 56,099 23,268 35,000 (6,434) (5,674) — Non-current portion 49,665 17,594 35,000 — — — — — — — — — — Note (i) This represents the amount payable to China Telecom in respect of the Acquisition (Note 1). For the first five years after the date of the Acquisition, the Company will pay interest on the outstanding balance at the rate of 5.184% per annum. Thereafter the interest rate will be adjusted based on the prevailing market interest rate. This amount is repayable on 31 December 2013. However, the Company may, from time to time, repay all or part of the amount at any time until 31 December 2013 without penalty. 98 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 13. SHORT-TERM AND LONG-TERM DEBT (continued) As at 31 December 2003, no bank loans were secured. As at 31 December 2002, bank loans of RMB26 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 RMB3 million as at 31 December 2002. The aggregate maturities of the Group’s and the Company’s long-term debt subsequent to 31 December 2003 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 2003 RMB 2002 RMB The Company 2003 RMB 2002 RMB millions millions millions millions 6,434 5,386 5,590 1,060 467 37,162 5,674 7,496 4,675 1,786 389 3,248 — — — — — 35,000 56,099 23,268 35,000 — — — — — — — The Group’s short-term and long-term debts do not contain any financial covenants. As at 31 December 2003, the Group had available credit facilities of RMB17,829 million (2002 : RMB9,079 million) which it can draw upon. China Telecom Corporation Limited 99 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 14. ACCOUNTS PAYABLE Accounts payable are analysed as follows: The Group The Company 2003 RMB 2002 RMB 2003 RMB 2002 RMB millions millions millions millions Third parties China Telecom Group 17,203 2,926 18,079 3,649 106 — 20,129 21,728 106 — — — Amounts due to China Telecom Group are repayable in accordance with normal commercial terms. Ageing analysis of accounts payable is as follows: The Group The Company 2003 RMB 2002 RMB 2003 RMB 2002 RMB millions millions millions millions 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 2,708 3,608 6,009 7,804 3,220 3,718 4,696 10,094 106 — — — 20,129 21,728 106 — — — — — 100 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 15. ACCRUED EXPENSES AND OTHER PAYABLES Accrued expenses and other payables represent: The Group The Company 2003 RMB 2002 RMB 2003 RMB 2002 RMB millions millions millions millions Distributions payable to China Telecom Amounts due to China Telecom Group Accrued expenses Customer deposits and receipts in — 1,779 11,354 196 2,360 12,587 advance 2,856 1,154 — 319 656 — — — 570 — 15,989 16,297 975 570 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 Total minimum lease payments Less: finance charges related to future periods Present value of minimum lease payments Less: current portion The Group 2003 RMB millions 2002 RMB millions 20 20 — 40 (2) 38 (19) 67 73 18 158 (9) 149 (67) Non-current portion 19 82 China Telecom Corporation Limited 101 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 17. DEFERRED REVENUES 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 2003 2002 RMB millions RMB millions Balance at beginning of year 43,339 50,590 Additions for the year — installation fees — calling cards Reduction for the year — amortisation of connection fees — amortisation of installation fees — usage of calling cards 2,534 4,464 3,014 6,865 6,998 9,879 (7,885) (1,831) (4,629) (8,554) (1,575) (7,001) Balance at end of year 35,992 43,339 Representing: — Current portion — Non-current portion 10,603 25,389 11,604 31,735 35,992 43,339 Included in other non-current assets are capitalised direct incremental costs associated with the installation of wireline services. As at 31 December 2003, the unamortised portion of these costs was RMB8,720 million (2002 : RMB8,761 million). 102 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 18. SHARE CAPITAL Registered, issued and fully paid 67,586,776,503 ordinary domestic shares of RMB1.00 each 8,027,410,000 overseas listed H shares of RMB1.00 each The Group and the Company 2003 RMB millions 2002 RMB millions 67,587 8,027 67,587 8,027 75,614 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 telecommunications services, China Telecom transferred a portion of its shareholdings in the Company to certain state- owned enterprises (‘‘Other Domestic Shareholders’’) owned and controlled by the provincial governments in each of Guangdong Province, Jiangsu 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. China Telecom Corporation Limited 103 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 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 Capital reserve RMB millions Share premium RMB millions Revaluation reserve RMB millions Surplus reserves RMB millions Statutory common welfare fund RMB millions Balance as at 1 January 2002, as adjusted (Note 1) — Capitalisation as share capital upon incorporation of the Company (Note (i)) Issue of shares, net of issuing expenses of RMB796 million Net profit Contributions from China Telecom Distributions to China Telecom Assets distributed to China Telecom in connection with the Acquisition Revaluation surplus Recognition of deferred tax assets Elimination of deferred tax liabilities Transfer from retained earnings to other reserves Appropriations (Notes (ii) and (iii)) Revaluation surplus realised Deferred tax on land use rights realised Balance as at 31 December 2002 Net profit Contributions from China Telecom Transfer from retained earnings to other reserves Consideration for the acquisition of the Acquired Group (Note 1) Transfer from other reserves to capital reserve Appropriations (Notes (ii) and (iii)) Dividends (Note 28) Revaluation surplus realised Deferred tax on land use rights realised 20,955 — — — — — — — — — — — — 20,955 — — — — (14,388) — — — — — — 3,362 — — — — — — — — — — — 4,154 — — — — — — 760 — — — — (10) — 3,362 — — 4,904 — — — — — — — — — — — — — — (17) — Other reserves RMB millions Retained earnings RMB millions Total RMB millions 41,730 89,272 135,156 (89,272) (68,317) — — — — — — — 2,408 — 9,773 1,482 (2,221) (5,189) — — — — — — — — — — — — — — — — — — — — — — — 20 — 8,121 — — 1,624 — (12,999) — — 12,999 (9,745) 10 — — (75) 75 8,121 — — — — — 7,340 — — 1,624 — — — — — 1,748 — — 31,064 — — 7,204 24,686 60 77,234 24,686 60 6,589 (6,589) — (45,649) — (45,649) 14,388 — — — — (9,088) (673) 17 — — (131) 131 3,362 9,773 1,482 (2,221) (5,189) 760 2,408 20 — — — — — — (673) — — Balance as at 31 December 2003 6,567 3,362 4,887 15,461 3,372 6,261 15,748 55,658 104 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 19. RESERVES (continued) Capital reserve RMB millions Share premium RMB millions Revaluation reserve RMB millions Surplus reserves RMB millions Statutory common welfare fund RMB millions Other reserves RMB millions Retained earnings RMB millions The Company Balance as at 1 January 2002, as adjusted (Note 1) Capitalisation upon incorporation of the Company Issue of shares, net of issuing expenses of RMB796 million Net profit Contributions from China Telecom Distributions to China Telecom Assets distributed to China Telecom in connection with the Acquisition Revaluation surplus Recognition of deferred tax assets Elimination of deferred tax liabilities Transfer from retained earnings to other reserves Appropriations (Notes (ii) and (iii)) Revaluation surplus realised Deferred tax on land use rights realised Balance as at 31 December 2002 Net profit Contributions from China Telecom Transfer from retained earnings to other reserves Consideration for the acquisition of the Acquired Group (Note 1) Transfer from other reserves to capital reserve Appropriations (Notes (ii) and (iii)) Dividends (Note 28) Revaluation surplus realised Deferred tax on land use rights realised — 20,955 — — — — — — — — — — — — 20,955 — — — — (14,388) — — — — Total RMB millions 37,671 29,168 3,362 9,773 1,482 (2,221) (5,189) 760 2,408 20 — — — — — — 3,362 — — — — — — — — — — — — 4,154 — — — — — 760 — — — — (10) — — — — — — — — — — — — — — — — — — — — — 37,671 4,059 — — — — — — 2,408 — — — 9,773 1,482 (2,221) (5,189) — — — 20 — 8,121 — — 1,624 — (12,999) — — 12,999 (9,745) 10 — — (75) 75 3,362 — — 4,904 — — — — — — — — — — — — — — (17) — 8,121 — — — — — 7,340 — — 1,624 — — — — — 1,748 — — 31,064 — — 7,204 24,686 60 77,234 24,686 60 6,589 (6,589) — (45,649) — (45,649) 14,388 — — — — (9,088) (673) 17 — — (673) — — — (131) 131 — Balance as at 31 December 2003 6,567 3,362 4,887 15,461 3,372 6,261 15,748 55,658 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 2003, the Company transferred RMB1,748 million (2002 : RMB1,624 million), being 10% of the year’s net profit determined in accordance with PRC accounting rules and regulations, to this reserve. China Telecom Corporation Limited 105 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 19. RESERVES (continued) According to the Company’s Articles of Association, the Directors authorised, subject to shareholders’ approval, for the year ended 31 December 2003, the transfer of RMB5,592 million (2002 : RMB6,497 million), being 32% (2002 : 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 2003, the Directors authorised, subject to shareholders’ approval, the transfer of RMB1,748 million (2002 : RMB1,624 million), being 10% (2002 : 10%) of the year’s net profit determined in accordance with the PRC accounting rules and regulations, to this fund. (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 2003, the amount of retained earnings available for distribution was RMB14,212 million (2002 : RMB6,497 million), being the amount determined in accordance with the PRC accounting rules and regulations. Final dividend of RMB5,210 million in respect of the financial year 2003 proposed after the balance sheet date has not been recognised as a liability at the balance sheet date (Note 28). 106 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 20. OPERATING REVENUES Operating revenues represent revenues from the provision of wireline telecommunications services. The components of the Group’s operating revenues are as follows: Note (i) (ii) (iii) (iv) (iv) (iv) (v) (vi) (vii) (viii) (ix) The Group 2003 RMB millions 2002 RMB millions 7,885 1,831 20,429 35,761 19,888 3,770 8,160 2,540 6,444 3,915 7,828 8,554 1,575 18,998 34,433 20,123 3,694 4,914 2,431 5,921 4,214 4,707 118,451 109,564 Upfront connection fees Upfront installation fees Monthly fees Local usage fees DLD ILD Internet Managed data Interconnections Leased line Others Note: (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. (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, and lease of telecommunications network facilities. China Telecom Corporation Limited 107 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 21. OTHER OPERATING EXPENSES Other operating expenses consist of: Interconnection charges Donations Others Note: Note (i) The Group 2003 RMB millions 2002 RMB millions 2,848 28 20 2,828 28 17 2,896 2,873 (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 2003 include personnel expenses of RMB15,251 million (2002 : RMB13,315 million) and auditors’ remuneration of RMB36 million (2002 : RMB19 million). 23. NET FINANCE COSTS Net finance costs comprise: Interest expense incurred Less: Interest expense capitalised* Net interest expense Interest income Foreign exchange losses Foreign exchange gains * Interest expense was capitalised in construction in progress at the following rates per annum The Group 2003 RMB millions 2002 RMB millions 2,890 (1,177) 1,713 (276) 422 (45) 3,201 (1,196) 2,005 (174) 330 (17) 1,814 4.3% to 5.5% 2,144 4.4% to 5.6% 108 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 24. TAXATION Taxation in the consolidated statement of income comprises: Provision for PRC income tax Deferred taxation (Note 8) The Group 2003 RMB 2002 RMB millions millions 6,014 (81) 4,296 (4,878) 5,933 (582) A reconciliation of the expected tax with the actual tax expense/(benefit) is as follows: The Group 2003 RMB 2002 RMB Note millions millions Profit before taxation and minority interests 30,675 9,263 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) (iii) Income tax Note: 10,123 (692) 291 (3,789) 3,057 (708) 800 (3,731) 5,933 (582) (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 represent personnel and other miscellaneous expenses in excess of statutory deductible limits for tax purpose. (iii) Amounts primarily represent connection fees received from customers which are not subject to income tax. China Telecom Corporation Limited 109 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 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 2003 RMB 2002 RMB thousand thousand 452 4,618 493 127 3,148 211 5,563 3,486 Included in the directors’ and supervisors’ remuneration were fees of RMB452,000 (2002 : RMB127,000) paid or payable to the independent non-executive directors and independent supervisors for the year ended 31 December 2003. The number of directors and supervisors whose remuneration falls within the following band is set out below: HK$ equivalent Nil–1,000,000 2003 Number 2002 Number 17 16 None of inducements, or compensation for loss of office, or waived any emoluments during the periods presented. the directors and supervisors received any fees, bonuses, 110 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 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 2003 RMB thousand 2002 RMB thousand 1,627 97 1,614 110 1,724 1,724 The number of these employees whose emoluments fall within the following band is set out below: HK$ equivalent Nil–1,000,000 2003 Number 2002 Number 4 4 None of these employees received any inducements or compensation for loss of office, or waived any emoluments during the periods presented. 27. PROFIT ATTRIBUTABLE TO SHAREHOLDERS The profit attributable to shareholders includes a profit of RMB24,686 million (2002 : RMB9,773 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 17 March 2004, a final dividend of RMB0.0689 per share totalling RMB5,210 million was proposed for shareholders’ approval at the Annual General Meeting. The dividend has not been provided for in the consolidated financial statements for the year ended 31 December 2003. Pursuant to the shareholders’ approval at the Annual General Meeting held on 20 June 2003, a final dividend of RMB0.008897 per share totalling RMB673 million in respect of the year ended 31 December 2002 was declared and was paid on 10 July 2003. China Telecom Corporation Limited 111 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 29. BASIC EARNINGS PER SHARE The calculation of basic earnings per share for the year ended 31 December 2003 is based on the net profit of RMB24,686 million and the weighted average number of shares in issue during the year of 75,614,186,503 shares. The calculation of basic earnings per share for the year ended 31 December 2002 is based on the net profit of RMB9,773 million and the weighted average number of shares in issue during the year of 69,241,674,942 shares, as if the the 68,317,270,803 shares issued and outstanding upon the legal Company on 10 September 2002 had been outstanding throughout the year 2002. 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). formation of The amount of diluted earnings per share is not presented as there were no dilutive potential ordinary shares in existence for all periods presented. 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. As at 31 December 2003 and 2002, future minimum lease payments under non-cancellable operating leases having initial or remaining lease terms of more than one year 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 2003 RMB millions 2002 RMB millions 500 200 117 113 70 192 487 375 128 84 78 389 Total minimum lease payments 1,192 1,541 Total rental expense in respect of operating leases charged to the consolidated statement of income for the year ended 31 December 2003 was RMB989 million (2002 : RMB886 million). 112 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 30. COMMITMENTS AND CONTINGENCIES (continued) Capital commitments As at 31 December 2003 and 2002, the Group had capital commitments as follows: Authorised and contracted for Properties Telecommunications network plant and equipment The Group 2003 RMB millions 2002 RMB millions 1,571 4,633 1,096 7,773 6,204 8,869 Authorised but not contracted for Properties Telecommunications network plant and equipment 1,405 7,316 2,482 12,570 8,721 15,052 Contingent liabilities (a) The Company and the Group have been advised by their PRC lawyers that, except for liabilities arising out of or relating to the businesses of the Predecessor Operations and the Acquired Group transferred to the Company in connection with the Restructuring and the Acquisition, no other liabilities were assumed by the Company or the Group, and the Company or the Group are not jointly and severally liable for other debts and obligations incurred by China Telecom Group prior to the Restructuring and the Acquisition. China Telecom Corporation Limited 113 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 30. COMMITMENTS AND CONTINGENCIES (continued) Contingent liabilities (continued) (b) As at 31 December 2003 and 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 Third parties The Group 2003 RMB millions 2002 RMB millions The Company 2003 2002 RMB millions RMB millions — — — — 6 — 151 157 — 1,492 — — 2,869 — 1,492 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 recognises any such losses under guarantees when those losses can be estimated. At 31 December 2003 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. 114 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 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 management’s expectations. losses have been within 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. China Telecom Corporation Limited 115 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 31. CONCENTRATION OF RISKS (continued) Currency risk Substantially all of the revenue-generating operations of the Group are transacted in RMB, which is not the PRC government abolished the dual rate system and introduced a single rate of exchange as fully convertible into foreign currencies. On 1 January 1994, 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 swap center. Approval of foreign currency payments by the People’s Bank of China or other institutions requires submitting a payment application form together with suppliers’ documents and signed contracts. invoices, shipping 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 the Group both directly through its numerous represents a significant customer of 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. 116 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 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: 2003 RMB 2002 RMB Note millions millions (i) (ii) (iii) (iv) (v) (vi) (vii) (vii) 213 1,366 5,410 1,850 986 290 369 253 685 5,625 1,650 1,439 373 483 302 687 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: (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. China Telecom Corporation Limited 117 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 32. RELATED PARTY TRANSACTIONS (continued) 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. In connection with the Restructuring and the Acquisition, the Group and China Telecom Group entered into a number of agreements effective 1 January 2002 and 1 January 2003, respectively, with terms expiring on 31 December 2005. The terms of the principal agreements are summarised as follows: (1) The Company has entered into an agreement with China Telecom pursuant to which expenses telecommunications international facilities will be allocated between the Group and China corporate common services and associated with Telecom based on revenues or volume of traffic as appropriate. (2) 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. (3) 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. (4) 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. In addition, 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. (5) 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. 118 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 32. RELATED PARTY TRANSACTIONS (continued) (6) 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. (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 include repairs and ancillary services to be provided by China Telecom Group will 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. China Telecom has agreed to hold and maintain, for the Group’s benefit, all licenses received from the Ministry of Information Industry associated with the operations of the Predecessor Operations and the Acquired 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. China Telecom Corporation Limited 119 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 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 17% to 22% 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 December 2003 were RMB1,443 million (2002 : RMB1,467 million). the year ended 31 34. STOCK APPRECIATION RIGHTS The Company implemented a plan of stock appreciation rights for members of its senior management in order to provide further incentives to these employees. Under this plan, stock appreciation rights were granted in units with each unit representing one H share. No shares will be issued under the stock appreciation rights plan. Under the plan, all stock appreciation rights will have an exercise period of six years. A recipient of stock appreciation rights may not exercise the rights in the first 18 months after the date of grant. As at each of the third, fourth, fifth and sixth anniversary of the date of grant, the total number of stock appreciation rights exercisable may not in aggregate exceed 25%, 50%, 75% and 100%, respectively, of the total stock appreciation rights granted to such person. In March 2003, the Company’s compensation committee approved the plan for stock appreciation rights pursuant to which the Company granted 276 million stock appreciation right units to eligible employees during 2003. The exercise price of stock appreciation rights granted in 2003 is the initial public offering price of the Company’s H shares. Upon exercise of the stock appreciation rights, a recipient will receive, subject to any applicable withholding tax, a cash payment in RMB, translated the number of stock from the Hong Kong dollar amount equal to the product of appreciation rights exercised and the difference between the exercise price and market price of the Company’s H shares at the date of exercise based on the applicable exchange rate between RMB and Hong Kong dollar at the date of the exercise. The Company recognises compensation expense of the stock appreciation rights over the applicable vesting period. For the year ended 31 December 2003, compensation expense recognised was RMB97 million (2002 : Nil). 120 Annual Report 2003 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2003 35. FAIR VALUES OF FINANCIAL INSTRUMENTS 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 disclosures of the 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 judgment 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 2003 and 2002, the carrying amounts and fair values of the Group’s long-term debt were as follows: 2003 2002 Carrying amount RMB millions Fair value RMB millions Carrying amount RMB millions Fair value RMB millions Long-term debt 56,099 56,296 23,268 23,854 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. 36. ULTIMATE HOLDING COMPANY The directors consider the ultimate holding company of the Group at 31 December 2003 to be China Telecommunications Corporation, a state-owned enterprise established in the PRC. China Telecom Corporation Limited 121 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 Predecessor Operations 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. In connection with the Acquisition, the property, plant and equipment of the Acquired Group were revalued as at 31 December 2002 (see Note 3 on the financial statements). The net revaluation deficit has been reflected in the consolidated financial statements as at 31 December 2002. Such revaluation resulted in an increase directly to shareholders’ equity of RMB760 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 RMB14,690 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 and the Acquisition, 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 and the Acquisition 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. 122 Annual Report 2003 SUPPLEMENTARY INFORMATION FOR ADS HOLDERS (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 cost carrying amount and included in current earnings. (c) Related party transactions 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. 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 2003 RMB 2002 RMB millions millions 5,010 898 2,751 3,967 668 3,586 The amounts set out above represent the historical costs incurred by the related parties in carrying out such transactions. China Telecom Corporation Limited 123 SUPPLEMENTARY INFORMATION FOR ADS HOLDERS (d) Recently issued accounting standards SFAS No.150 In May 2003, the FASB issued SFAS No. 150, ‘‘Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. It also includes required disclosures for financial instruments within its scope. For the Group, SFAS No. 150 was effective for instruments entered into or modified after 31 May 2003 and otherwise will be effective at the beginning of the first financial year beginning after 15 June 2003. FASB Staff Position No. FAS150-3 deferred certain provisions of SFAS No.150 for certain mandatorily redeemable non-controlling interests. The Group currently does not have any financial instruments that are within the scope of SFAS No. 150. FIN No. 46R In December 2003, the FASB issued Interpretation No. 46 (revised December 2003), ‘‘Consolidation of Variable Interest Entities (FIN 46R), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, ‘‘Consolidation of Variable Interest Entities, which was issued in January 2003. The Group will be required to apply FIN 46R to variable interests in Variable Interest Entities (‘‘VIEs’’) created after 31 December 2003. For variable interests in VIEs created before 1 January 2004, the Interpretation will be applied beginning on 1 January 2005. For any VIEs that must be consolidated under FIN 46R that were created before 1 January 2004, the assets, liabilities and non-controlling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognised interest being recognised as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and non-controlling interest of the VIE. The Group does not expect the application of this Interpretation will have a material impact on its consolidated financial statements. 124 Annual Report 2003 SUPPLEMENTARY INFORMATION FOR ADS HOLDERS (e) 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 years ended 31 December 2003 and 2002 is as follows: (Note) 2003 US$ millions 2003 RMB millions 2002 RMB millions 2,983 24,686 9,773 — — 14,690 Net profit under IFRS US GAAP adjustments: Reversal of deficit on revaluation of property, plant and equipment, net of minority interests Depreciation on revalued property, plant and equipment (476) (3,940) (1,542) Disposal of revalued property, plant and equipment Deferred tax effect of US GAAP adjustments (7) 159 (60) 1,320 (55) (4,321) Net profit under US GAAP 2,659 22,006 18,545 Basic earnings per share under US GAAP 0.04 0.29 0.27 Basic earnings per ADS* under US GAAP 3.52 29.10 26.78 * Basic earnings per ADS is calculated on the basis that one ADS is equivalent to 100 H shares. China Telecom Corporation Limited 125 SUPPLEMENTARY INFORMATION FOR ADS HOLDERS (e) Reconciliation of net profit and shareholders’ equity under IFRS to US GAAP (continued) The effect on shareholders’ equity of significant differences between IFRS and US GAAP as at 31 December 2003 and 2002 is as follows: (Note) 2003 US$ 2003 RMB 2002 RMB millions millions millions Shareholders’ equity under IFRS 15,860 131,272 152,848 US GAAP adjustments: Revaluation of property, plant and equipment, net of minority interests Deferred tax effect of US GAAP adjustment 1,935 (642) 16,017 (5,316) 20,017 (6,636) Shareholders’ equity under US GAAP 17,153 141,973 166,229 Note: Solely for the convenience of the reader, the amounts for 2003 have been translated into United States dollars at the noon buying rate in New York City on 31 December 2003 for cable transfers in RMB as certified for custom purposes by the Federal Reserve Bank of New York of US$1.00=RMB8.2767. 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 2003, or at any other date. 126 Annual Report 2003 FINANCIAL SUMMARY (Amounts in millions) Year ended 31 December 2003 RMB 2002 RMB 2001 RMB 2000 RMB 1999 RMB (Note) (Note) (Note) (Note) 7,885 1,831 20,429 35,761 19,888 3,770 8,160 2,540 6,444 3,915 7,828 8,554 1,575 18,998 34,433 20,123 3,694 4,914 2,431 5,921 4,214 4,707 8,896 1,264 15,300 32,502 20,625 3,785 2,800 2,052 5,316 4,040 3,917 8,877 971 11,071 31,800 23,853 5,787 1,455 2,261 6,247 6,302 2,809 8,391 751 9,505 28,282 21,551 6,819 544 1,888 5,876 6,264 2,236 Results Upfront connection fees Upfront installation fees Monthly fees Local usage fees DLD ILD Internet Managed data Interconnections Leased line Other Operating revenues 118,451 109,564 100,497 101,433 92,107 Depreciation and amortisation Network operations and support Selling, general and administrative Other operating expenses (32,921) (31,883) (18,303) (2,896) (33,005) (32,228) (15,461) (2,873) (30,175) (31,890) (13,951) (1,865) (26,606) (29,419) (14,410) (1,735) (22,444) (24,871) (11,543) (1,188) Operating expenses (86,003) (83,567) (77,881) (72,170) (60,046) Operating profit 32,448 25,997 22,616 29,263 32,061 Deficit on revaluation of property, plant and equipment Net finance costs Investment income Share of profit from associates Profit before taxation and minority interests Taxation — (14,690) (2,144) 63 37 (1,814) 7 34 (11,930) (876) 301 22 — (452) 159 45 — (1,020) 106 20 30,675 (5,933) 9,263 582 10,133 (161) 29,015 (5,596) 31,167 (6,409) Profit before minority interests Minority interests 24,742 (56) 9,845 (72) 9,972 14 23,419 (75) 24,758 (101) Profit attributable to shareholders 24,686 9,773 9,986 23,344 24,657 Basic earning per share 0.33 0.14 0.15 0.34 0.36 China Telecom Corporation Limited 127 FINANCIAL SUMMARY (Amounts in millions) As at 31 December 2003 RMB 2002 RMB 2001 RMB 2000 RMB 1999 RMB (Note) (Note) (Note) (Note) Financial condition Property, plant and equipment, net 235,211 220,761 221,333 202,659 180,807 Construction in progress Other non-current assets Cash and bank deposits Other current assets 22,790 22,100 10,547 14,957 27,969 21,181 20,037 13,663 32,764 21,195 8,247 15,549 39,615 19,926 18,737 20,313 37,712 15,133 22,342 20,550 Total assets 305,605 303,611 299,088 301,250 276,544 Current liabilities Non-current liabilities 96,666 76,398 99,548 50,029 96,209 66,735 83,616 82,485 70,626 85,868 Total liabilities 173,064 149,577 162,944 166,101 156,494 Minority interests 1,269 1,186 988 991 922 Shareholders’ equity 131,272 152,848 135,156 134,158 119,128 Total liabilities and shareholders’ equity 305,605 303,611 299,088 301,250 276,544 Note: On 31 December 2003, we acquired the entire equity interests in the Acquired Companies from China Telecommunications Corporation. As we and the Acquired Companies were under the common control of China Telecommunications Corporation, our acquisition of the Acquired Companies has been treated as a ‘‘combination of entities under common control’’, which was accounted for in a manner similar to a pooling-of-interests (‘‘as-if- pooling-of-interests accounting’’). Accordingly, the assets and liabilities of the Acquired Companies have been accounted for at historical amounts and our financial statements for periods prior to the acquisition have been restated to include the financial position and results of operations of the Acquired Companies on a combined basis. 128 Annual Report 2003