I C H N A T E L E C O M C O R P O R A T O N L M T E D I I I 中 國 電 信 股 份 有 限 公 司 A N N U A L R E P O R T 2 0 0 4 年 報 CONTENTS COMPANY PROFILE AND CORPORATE INFORMATION FINANCIAL HIGHLIGHTS CHAIRMAN’S STATEMENT BUSINESS REVIEW MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT REPORT OF THE DIRECTORS REPORT OF THE SUPERVISORY COMMITTEE CORPORATE GOVERNANCE NOTICE OF ANNUAL GENERAL MEETING REPORT OF THE INTERNATIONAL AUDITORS CONSOLIDATED BALANCE SHEET BALANCE SHEET CONSOLIDATED STATEMENT OF INCOME CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY CONSOLIDATED STATEMENT OF CASH FLOW NOTES TO THE FINANCIAL STATEMENTS 02 04 06 11 21 32 41 55 57 60 69 71 73 75 76 77 79 SUPPLEMENTARY INFORMATION FOR ADS HOLDERS 128 FINANCIAL SUMMARY 135 China Telecom Corporation Limited Annual Report 2004 01 COMPANY PROFILE AND CORPORATE INFORMATION China Telecom Corporation Limited (the “Company”) is 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, Sichuan province, Hubei province, Hunan province, Hainan province, Guizhou province, Yunnan province, Shaanxi province, Gansu province, Qinghai province, Ningxia Hui autonomous region and Xinjiang Uygur autonomous region in China. Our scope of business includes: (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 telecommunications and information-related system integration, technological development, technical services, information consulting, and conducting design, manufacture, sales and installation of telecommunications equipment. Our H shares and American Depositary Shares (“ADS”) were listed on the Stock Exchange of Hong Kong and the New York Stock Exchange on 15 November 2002 and 14 November 2002 respectively. As of 31 December 2004, our share capital comprises 80,932,368,321 shares, in which 13,877,410,000 are H shares. 02 China Telecom Corporation Limited Annual Report 2004 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: Wang Xiaochu International auditors: KPMG Legal advisers: Jingtian & Gongcheng Freshfields Bruckhaus Deringer Sullivan & Cromwell LLP Registered address: 31 Jinrong Avenue, Xicheng District, Beijing, PRC, 100032 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 ADSs: stock code: 728 New York Stock Exchange, Inc. stock code: CHA China Telecom Corporation Limited Annual Report 2004 03 FINANCIAL HIGHLIGHTS Financials (including amortisation of upfront connection fees) 2003 2004 Growth rate Operating revenue (RMB million) Operating profit (RMB million) EBITDA (RMB million) EBITDA Margin Net profit*(RMB million) 151,553 161,212 32,852 79,449 52.4% 13,882 39,830 87,000 54.0% 28,023 6.4% 21.2% 9.5% 1.6PP — Financials (excluding amortisation of upfront connection fees) 2003 2004 Growth rate Operating revenue (RMB million) Operating profit (RMB million) EBITDA (RMB million) EBITDA Margin Net profit* (RMB million) 141,782 152,754 23,081 69,678 49.1% 4,111 31,372 78,542 51.4% 19,565 7.7% 35.9% 12.7% 2.3PP — * Net profit for 2003 were arrived at after deducting deficit on revaluation of property, plant and equipment (RMB14,832 million) and related tax impact arising from 10 newly acquired provincial subsidiaries. Net profit for 2004 were arrived at after deducting deficit on revaluation of property, plant and equipment (RMB1,262 million) and related tax impact arising from across-the-board revaluation which was conducted every 3 years. Please refer to note 2(g) and note 3 of the audited financial statements for the related accounting policy and result of the revaluation. 04 China Telecom Corporation Limited Annual Report 2004 FINANCIAL HIGHLIGHTS The charts below are based on financials excluding amortisation of upfront connection fees. Operating Revenue (RMB million) Operating Profit (RMB million) 141,782 152,754 31,372 23,081 2003 2004 2003 2004 EBITDA (RMB million) 78,542 51.4% 69,678 49.1% Net Profit (RMB million) 19,565 4,111 2003 2004 2003 2004 EBITDA Margin China Telecom Corporation Limited Annual Report 2004 05 CHAIRMAN’S STATEMENT Dear Shareholders, It gives me great pleasure to present my first report to you. Appreciating the trust and the great responsibilities you and my fellow Directors have vested in me, since my appointment as the Chairman and Chief Executive Officer of the Company last year, I have undertaken extensive investigation and examination of the subsidiaries of the Company, communicated and exchanged opinions with the management, employees, customers, business partners of the Company and relevant regulatory authorities. I have gained a better understanding of the operations, corporate management, business strategy, corporate culture and other aspects of the Company. I have full confidence in the Company’s fundamentals and its future development. 06 China Telecom Corporation Limited Annual Report 2004 CHAIRMAN’S STATEMENT China Telecom is a long-standing and conditions and capital expenditure required leading operator in the wireline for our future business expansion, in telecommunications service sector. With a particular, the investment necessary for our substantial and solid subscriber base, a well future strategic transformation, the Board of recognised brand name, a high quality Directors will propose to declare a dividend telecommunications network, a strong in the amount equivalent to HK$0.065 per management foundation, an outstanding share in the upcoming Annual General management team and a group of high- Meeting, so that we can retain sufficient calibre employees, the Company has been financial flexibility, with a view to achieving operating efficiently and performing well. the best return to our shareholders. Our financial performance in 2004 was Our businesses grew steadily in 2004. Our favourable. We recorded continuous growth local telephone subscriber base increased by in revenue and were successful in managing 25.66 million, to 187 million, of which our operating costs and capital expenditure. 42.17 million was made up of local wireless The Company’s operating revenue reached access subscribers, with an increase of RMB161,212 million, an increase of 6.4% 16.60 million. Such growth made an from last year, of which RMB8,458 million important contribution to the increase in the was generated from the amortisation of usage volume and our operating revenue. upfront connection fees. Excluding the Long distance services developed better upfront connection fees, our operating than previous years, recording a revenue revenue was RMB152,754 million, an growth of 2.1%. Revenue generated from last year. Our increase of 7.7% from EBITDA* was RMB78,542 million, an increase of 12.7% from last year. Our EBITDA margin* was at a relatively high level of 51.4%. Our net profit* (after deduction of deficit on revaluation of property, plant and equipment of RMB1,262 million) was RMB19,565 million. Our earnings per share* reached RMB0.25. Internet services sustained rapid growth and accounted for 9.2% of our operating revenue (excluding the revenue from amortisation of upfront connection fees), an increase of 2.2 percentage points over 2003. This increase in revenue generated from Internet Services contributed to the increase in operating revenue (excluding the revenue from amortisation of upfront connection fees) of 2.9 percentage points. The Company’s strong operating cash flow Broadband subscribers increased by 6.61 provides funding for the necessary million to 13.84 million. Value-added investment in relation to our long-term services continued to grow steadily and development, and it also ensures our showed a strong potential for further shareholders receive a favourable cash growth. At the same time, the contribution return. Taking into consideration of the of non-voice services to revenue growth was Company’s operational and financial increasing. * After incorporating the revenue from the amortisation of upfront connection fees, EBITDA was RMB87,000 million, EBITDA margin was 54.0%, net profit was RMB28,023 million, earnings per share was RMB0.36. China Telecom Corporation Limited Annual Report 2004 07 CHAIRMAN’S STATEMENT Our Company has always attached great We see valuable growth opportunities in the importance to corporate governance and future. China’s GDP per capita has exceeded business integrity to ensure its sustainable a momentous US$1,000. Benefiting from the development. We shall continue to improve positive effect of macro economic measures our corporate governance and increase the of China and improving living standards of transparency of the Company in accordance the Chinese people, demand in the with the requirements of relevant regulatory telecommunications market is continuously authorities (in particular the requirements expanding. With the growing popularity of promulgated under the United States information technology, customers’ demands Sarbanes-Oxley Act of 2002) and generally for one- stop overall solutions for integrated accepted international best practice. We services and information provision are shall continue our efforts in promoting and increasing. improving our operational and information disclosure internal control systems. The In general, China Telecom Corporation Board of Directors has already approved the Limited faces both opportunities and optimisation of the Company’s internal challenges, with opportunities outweighing controls in accordance with COSO challenges. As the wireline framework, and the establishment of an telecommunications business enters into a integrated multi-level internal and external maturing phase worldwide, we have assessment system with a view to further realised the risks inherent in operating improving operational efficiency and only wireline telecommunications business. information quality and to better managing Following a comprehensive review of the financial risks to preserve shareholders’ history, current situation and prospects of interests. the telecommunications industry as well as the development direction of the Company, While the Company performed well in we have decided that, from 2005, our general, it faced a number of challenges: strategy will be to transform China Telecom the growth in the wireline telephone from a traditional network operator into a subscriber base has slowed down; the modern integrated information services wireline telecommunications services has provider. witnessed substantial substitution by the mobile services; revenue growth rate has We shall continue to pursue the operation of been declining. As a result of the intense mobile business proactively so as to realise competition, marketing costs increased potential synergies by operating both mobile continuously, putting pressure on growth of and wireline businesses. Simultaneously, we profits. Due to the lack of new prominent shall actively promote the establishment of growth-driving products, the disadvantages orderly competition through co-opetition. of providing only telecommunications services wireline became Based on a win-win business model, we shall actively explore the development of IP-based increasingly apparent. The Company’s multimedia services by leveraging our network resources have yet to be fully telecommunications network resources. We exploited. shall strengthen co-operation with content 08 China Telecom Corporation Limited Annual Report 2004 CHAIRMAN’S STATEMENT providers with a view to extending the value regions, to subsidise children who are chain. We shall seek to work with IT service unable to attend school owing to financial providers to provide differentiated total difficulties, and to help underprivileged solutions for our enterprise customers. In people in society. addition, the Company will fully exploit the development potential of rural telephony, We are confident in our future. By value-added services, leased line and other leveraging our strategic transformation and services with a view to creating new revenue competitive edge, and seizing the growth drivers. The Company will also strive opportunities brought by China’s economic to transform our networks into intelligent, growth and new technology, we shall broadband and IP based networks, and to endeavour to provide our customers with enhance the development and convergence modern integrated information services of of multi-terminals and multi-businesses. In high quality, and provide an even better addition, we shall leverage tariff packaging return to our shareholders. to deliver integrated information services and to ensure the Company’s sustainable Finally, on behalf of the Board of Directors development. of the Company, I would express our gratitude to Mr. Zhou Deqiang and Mr. To ensure our successful business Chang Xiaobin for their significant transformation, we shall implement contribution to China Telecom Corporation precision management at all levels of the Limited during their time with us, and at the Company, so that quantitative standards same time welcome Mr. Leng Rongquan, will be adopted with reduced data Mr. Yang Jie, Mr. Sun Kangmin and Mr. Li deviations in all aspects of management on Jinming to join the Board of Directors of the an integrated basis covering marketing Company. I also would like to take this activities, network operations, allocation of opportunity to express my sincere financial resources and human resources. appreciation to all of our shareholders, directors, members of the Supervisory As a telecommunications operator conscious Committee, employees and customers. of its social responsibilities, the Company has launched the “Green Internet” project to clean up Internet content to protect the well being of youngsters. The Company has also made great efforts to promote the establishment of the “Green Dynamic” Internet cafe chain for the purpose of creating a good and healthy Internet access environment for the public. In addition, the Company has taken active measures to provide humanitarian aid to tsunami victims in the Indian Ocean region and other Wang Xiaochu Chairman and Chief Executive Officer Beijing, PRC 31 March 2005 China Telecom Corporation Limited Annual Report 2004 09 PIONEERING BUSINESS REVIEW The following table sets out our key operating data in 2002, 2003 and 2004. Key Operating Data Unit 2002 2003 2004 thousand million pulses million minutes million minutes 133,056 360,986 98,333 59,492 160,988 384,496 70,621 67,312 186,648 429,150 37,665 81,960 million minutes thousand million minutes thousand thousand thousand thousand million minutes thousand 1,546 2,411 81,648 378.2 48.1 16.6 164.5 53,464 51,539 1,670 7,231 54,886 471.2 88.3 19.0 163.1 76,210 82,461 1,654 13,839 30,046 493.3 156.3 23.8 169.5 94,747 109,031 Change 2004 over 2003 15.9% 11.6% -46.7% 21.8% -1.0% 91.4% -45.3% 4.7% 77.0% 24.9% 3.9% 24.3% 32.2% Local wireline access lines in service Local voice usage Total dial-up usage Domestic long distance usage International (including Hong Kong, Macau and Taiwan) long distance usage Broadband subscribers Dial-up usage DDN ports (in 64K equivalents) FR ports (in 128K equivalents) ATM ports (in 2M equivalents) 2M digital circuits leased Volume of inbound local calls Caller ID service subscribers Telephone information service usage million minutes 932 1,743 2,419 38.8% On 30 June 2004, the Company acquired operating in the enlarged service areas (20 from China Telecommunications Corporation municipalities, provinces and autonomous the entire equity interests in Hubei Telecom regions) since 1 January 2002. Company Limited, Hunan Telecom Company Limited, Hainan Telecom Company Limited, Our core businesses yielded good results in Guizhou Telecom Company Limited, Yunnan 2004 with total operating revenue of Telecom Company Limited, Shaanxi Telecom RMB161,212 million, an increase of 6.4% Company Limited, Gansu Telecom Company from 2003. If amortised upfront connection Limited, Qinghai Telecom Company Limited, fees were excluded, operating revenue in Ningxia Telecom Company Limited and 2004 was RMB152,754 million, with an Xinjiang Telecom Company Limited. As a annual growth rate of 7.7%. Revenue result of the acquisition, the Company’s growth in our local telephone services, service coverage expanded from 10 to 20 Internet services and value-added services municipalities, provinces and autonomous are the prominent drivers. Our business regions. For comparison purposes, the development featured the following in operational and financial data for 2002, 2004: local telephone subscribers 2003 and 2004 is presented in this section experienced relatively high growth; local on such basis as if the Group has been voice usage grew faster than previous years; China Telecom Corporation Limited Annual Report 2004 11 BUSINESS REVIEW broadband subscribers maintained its strong increase of 5.8% from 2003 and growth and became a growing revenue represented 52.6% of our operating growth driver with increasing importance in revenue (excluding amortisation of upfront our revenue structure; domestic long connection fees) in 2004. distance services recorded both usage and revenue growth; value-added services We have aggressively expanded our local portfolio was further expanded. telephone subscribers and the total number of our subscribers reached 186.65 million at Benefited from the continuous rapid growth the end of 2004, an increase of 25.66 of China’s economy and accelerated social million, or 15.9% from 2003. Wireless local informationalisation, our core businesses access service and public telephone service maintained rapid growth over the past three subscribers grew relatively faster. As of the years. However, with increasingly intensified end of 2004, wireless local access service competition in the Chinese subscribers and public telephone service telecommunications market, the further subscribers reached 42.17 million and 12.39 expansion and price fluctuation of mobile million, increasing 16.60 million and 2.78 services, mobile substitution became more million, or 64.9% and 29.0%, respectively, apparent in 2004. It adversely affected the from 2003. In the local telephone services growth potential of our wireline telephone market, urban residential subscribers growth service. Although wireline usage sustained a has slowed down and the subscribers and favourable growth trend, revenue growth usage diversion exacerbated, while wireless was significantly lower than the usage local access service demand was growth. Therefore, our operating revenue comparatively stable and the rural growth rate is expected to slow down. telecommunications market exhibited a strong growth potential. Local Telephone Subscribers (million) 186.6 42.2 178.5 36.5 11.0 18.4 12.4 19.0 112.6 113.1 161.0 25.6 9.6 17.7 108.1 146.9 17.0 8.0 17.1 104.8 2003.6 2003.12 2004.6 2004.12 Residential Enterprise Public Telephone Wireless Local Access After years of effort, we have already built up our foundation for sustained growth and continuing innovation. This foundation consists of our extensive, advanced and multi-dimensional basic telecommunications networks, our huge customer base, our well functioning distribution channel system, our well-known corporate brand and professional network maintenance team. BUSINESS ANALYSIS Local telephone services Revenue from our local telephone services, our fundamental resource-type business, reached RMB80,338 million in 2004 with an 12 China Telecom Corporation Limited Annual Report 2004 BUSINESS REVIEW 429,150 360,986 + 6 . 5 % 384,496 1 . 6 % 1 + 2002 2003 2004 New Local Telephone Subscribers (million) Local Voice Usage (million pulses) 28.0 14.8 2.5 1.4 9.3 2003 Residential Enterprise 25.7 16.6 2.8 1.3 5.0 2004 Public Telephone Wireless Local Access Local usage fees reached RMB47,646 In 2005, we will continue to explore the million, an increase of 4.0% from 2003. growth potential of our wireline services Local voice usage grew 11.6% to 429,150 subscribers and promote the upgrade of million pulses, a higher growth rate than wireline telephone terminals to adapt to that in previous years. Wireless local access mobile, broadband and tailored services. We service made a substantial contribution to will utilise our current wireless local access the usage growth. Due to the increasing service network coverage to effectively mobile substitution, our local voice service develop the subscriber base. Also, we will usage was under ever-greater pressure of continue to optimise our network and usage diversion. We have optimised our further improve our network quality to distribution channel management and enhance customer satisfaction and reduce accentuated targeted marketing activities to churn rate. We will also expend great effort enhance customer loyalty. Based on in the development of value-added services customer segmentation, we implemented such as ‘SMS over PHS’ and ‘Color Ring various promotion measures, in particular Tone’. On the premise of ensured packaging our services and providing a investment returns, we will further develop variety of tariff plans, to effectively mitigate the rural telecommunications market and our local voice service usage diversion. actively explore potential opportunities for our wireline services. China Telecom Corporation Limited Annual Report 2004 13 BUSINESS REVIEW Internet services forward The development of our broadband business is significant to our strategic transformation. In 2005, we will keep our emphasis on, and strengthen our efforts on, broadband services. We will push the integration of broadband access with home and appliances explore for broadband and video opportunities services the applications of our broadband services. We will broadband solutions small and medium-sized enterprises based on their demands and in line with the situation of the industry. We will continue to improve and expand our customised packaging introduce actively expand to to revenue operating It reflected our services are our strategically Internet expanding business. Revenue from Internet services was RMB14,109 million in 2004, up 41.0% from 2003 and represented 9.2% of (excluding our amortisation of upfront connection fees), an increase of 2.2 percentage points from improved overall 2003. revenue structure. Broadband business became a key strategic driver for our sustainable development. In 2004, our broadband subscribers grew by 6.61 million or 91.4% from the end of 2003 to 13.84 million in 2004, with a market share of 92.6%1 in our service regions, further consolidated our leading position in the broadband access service market. Broadband subscribers (million) 13.8 + 9 1.4 % 7.2 +199.9 % 2.4 2002 2003 2004 enrich broadband information contents of to cooperation with content providers further the the ChinaVnet platform and to develop it into a one-stop and entertainment service center. At the same time, we will actively promote upgrades to broadband for our customers to adapt to “streaming media” and other broadband video application content, so as to satisfy the diverse demands of our customers. 1 Calculated based on statistical data from the Ministry of Information Industries (“MII”). 14 China Telecom Corporation Limited Annual Report 2004 Long distance services Domestic Long Distance Usage and Market Share (million minutes) 53.7% 49.4% 45.8% 81,960 67,312 21.8 % 59,492 1 3 . 1 % BUSINESS REVIEW from our domestic long distance services through measures such as further promotion of services packaging. Revenue from our international, Hong Kong, Macau and Taiwan long distance services, amounted to RMB3,788 million in 2004, down 3.9% from 2003. Usage in the year was 1,654 million minutes, approximately the same level as 2003. Our market share in this sector was 56.3%2, 4.9 percentage points down from 2003. Nevertheless, we maintained our leading position in this market. 2002 2003 2004 Usage Market Share Managed data and leased line services Revenue from our domestic long distance services reached RMB26,231 million, an increase of 3.0% from 2003. Total domestic long distance usage was 81,960 million minutes, representing an annual growth rate of 21.8%. Our domestic long distance services had a market share of 45.8%2, which was down 3.6 percentage points from 2003. Facing ever-intensified competition in the long distance services market and in order to maximise our revenue, we adopted a more effective pricing strategy and accelerated the development of public telephone supermarkets. Meanwhile, we further streamlined phone cards distribution channels to diverse long distance usage volume from mobile services. Our efforts were rewarded with increases in both domestic long distance usage and revenue. We will endeavor to maintain stable revenue 2 Calculated based on statistical data from MII. Revenue from our managed data services was RMB3,015 million, a decrease of 6.1% from 2003. Our leased bandwidth of our DDN, FR, and ATM services were 493.3 thousand, 156.3 thousand and 23.8 thousand at the end of 2004, increasing 4.7%, 77.0% and 24.9% from the end of 2003, respectively. Revenue from our leased line services was RMB4,154 million in 2004, a decrease of 18.6% from 2003. As of the end of 2004, we leased out a total of 169.5 thousand digital circuits (in 2Mbps equivalent), an increase of 3.9% from 2003. Due to increasingly intensified competition, unit prices in the leased line market were substantially lowered. As a result, revenue from leased line services decreased despite increasing digital circuits leased out. China Telecom Corporation Limited Annual Report 2004 15 BUSINESS REVIEW We will further explore the potential networks reached 94,747 million minutes in demand of other domestic 2004, an increase of 24.3% from 2003. The telecommunications operators based on our volume of inbound long distance calls also comparative advantages on our extensive recorded an increase. network coverage and technical maintenance. We will take greater initiatives Value-added services to promote our leased line services and effectively capitalise on our redundant Value-added services, our crucial sources of network resources to increase our network organic growth, are important for us to value. By doing so, we will be able to exploit the potential market and transform provide other domestic telecommunications our growth model. We accelerated the operators economical, reliable leased line development of our wireline value-added services with premium quality. With respect services in 2004. As a result, their to other corporate customers, we will contribution to our total operating revenue further investigate their demand for increased significantly. Subscribers of our information technology services and move caller ID services reached 109 million, with a towards the higher-end of the value chain. penetration rate of 58.4%, by the end of We will provide our customers with one- 2004, an increase by 7 percentage points stop comprehensive solutions through from 2003. The traffic volume of the services such as system integration and telephone information services amounted to outsourcing network maintenance. Our 2,419 million minutes, an increase of 38.8% efforts to create value for customers will at from 2003. Usage of ‘SMS over PHS’ grew the same time help us explore future rapidly after achieving interconnection with development potential. other wireline and mobile services operators, presenting a greater market Interconnection service potential for further growth. Revenue from our interconnection service To accelerate the development of value- reached RMB10,719 million in 2004, added services is a critical step in our indicating an increase of 28.1% from 2003. strategic transformation. We will upgrade Net interconnection revenue amounted to our existing networks into intelligent RMB6,624 million, an increase of 25.9% networks, and will integrate and optimise from 2003. As a result of our continuously our network platform for value-added expanding customer base and the growing services. We will adhere to our win-win Chinese telecommunications industry, the business development model to forge a volume of inbound local calls through our healthy industry value chain, cooperate with 16 China Telecom Corporation Limited Annual Report 2004 BUSINESS REVIEW We established our China Telecom brand strategy and commenced our China Telecom brand promotion scheme in 2004. While integrating and optimising our existing distribution channels, we managed to develop customer-segmentation focused distribution channels. As of 31 December 2004, we had 9,298 managers for major customers, 10,405 managers for corporate customers and 38,304 managers for community customers nationwide. Moreover, in order to meet customers’ increasingly diversified demands for telecommunications services, we further optimised our products and services development and marketing mechanisms, and established a ‘total solution’ service system for major customers. These measures facilitated our business transformation from a provider of telecommunications network services to an integrated telecommunications solutions provider. In order to reduce operating risks, we continued to promote and improve our centralised financial management system. By making use of the establishment of our internal control system, we standardised our operating activities and enhanced our comprehensive corporate management capabilities. We have made achievements in the establishment of internal control system by preliminarily completed the preparation of an internal control handbook in accordance with COSO* framework and rolled out the internal control handbook on trial basis. With respect to financial management, an accountability budget application and content providers in the development and promotion of value-added services, and thereby develop our value- added services into an important driving force for our revenue growth. Management innovation In 2004, adhering to our “market-oriented, customer-centered and return-driven” business model, we consolidated our advantages in network scale, distribution channels, human resources and corporate strengthened culture, further and management innovation. As a result, our marketing capability, corporate management and network support were all improved significantly. * COSO, or The Committee of Sponsoring Organisations of the Treadway Commission, is an organisation in the United States of America dedicated to improving the quality of financial reporting through business ethics, effective internal controls and corporate governance. The COSO framework is currently one of the widely- recognised internal control frameworks for international businesses community. China Telecom Corporation Limited Annual Report 2004 17 BUSINESS REVIEW system was further improved, revenue and cost management became more comprehensive, supervision and review of financial affairs was strengthened and the quality of our accounting personnel further improved. In 2004, we further strengthened our management on network maintenance, which steadily improved our network operating quality and supporting capabilities. The implementation of a network optimisation project which covered our entire service regions promoted our integrated and centralised local network maintenance mode to the top level in China. Our optimisation of wireless local access services, broadband and other networks also achieved remarkable results. As of the end of 2004, over 96% of failures system combining responsibility and of broadband access service were timely authority was basically formulated. The responded and resolved within the performance assessment system played an committed time frame. Successful even more prominent role in motivating connection rates of long distance telephone employees. A cash flow controlling networks were over 96%. Wireless local mechanism with the integration of access service call drop rate decreased to budgeting, monitoring and assessment was 1.4%, showing a much better performance also put in place. As a result, our external than the beginning of the year. Finally, we investment was put under effective control, improved our response system for major our asset management process was customers. We achieved 98.4% of timely optimised, and our long-term investment provision of end-to-end services to our management was improved. We made a major customers nationwide and 98.9% of breakthrough in our application of failures were timely responded, with only information technology in financial 0.8% of failure response complaints. At the management, with MSS (ERP) systems same time, the average time for provision of available on line for use by some of our services was substantially lowered. provincial subsidiaries. Our accounting 18 China Telecom Corporation Limited Annual Report 2004 BUSINESS REVIEW In 2005, we will steadily implement our services, we will actively extend our services strategic transformation from a traditional towards both ends of the industry value basic network operator to a modern chain to achieve win-win effect through integrated services and information provider. cooperation. In doing so, we will be able to While maintaining the steady development of enrich the contents of our services, create our traditional wireline voice business, we more opportunities for further development, will take active measures to launch mobile and consistently increase the revenue from businesses. Meanwhile, in line with the trend our non-voice businesses, such as broadband of integration of telecommunications and and value-added services, and percentage of information technology and based on our such revenue in our total revenue, so as to traditional transmission network services and realise healthy and sustainable growth of our customers’ diversified demands on one-stop business as a whole. China Telecom Corporation Limited Annual Report 2004 19 CLARITY MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Overview In 2004, our operating revenue increased steadily while our operating expenses were On 30 June 2004, the Company kept under effective control. Our profit completed its acquisition from China increased and our cash flow was strong. Telecommunications Corporation of the Through our acquisition of the Acquired entire equity interests in Hubei Telecom Companies, we successfully achieved our Company Limited, Hunan Telecom external expansion and created more Company Limited, Hainan Telecom growth opportunities. Company Limited, Guizhou Telecom Company Limited, Yunnan Telecom Our total operating revenue in 2004 grew Company Limited, Shaanxi Telecom 6.4% from 2003 to RMB161,212 million. Company Limited, Gansu Telecom Our operating expenses increased from Company Limited, Qinghai Telecom Company Limited, Ningxia Telecom Company Limited, Xinjiang Telecom Company Limited (hereinafter referred “Acquired as to collectively the 2003 by 2.3% to RMB121,382 million in 2004. Our net profit1 was RMB28,023 million and our earnings per share were for 2004. Our EBITDA2 was RMB87,000 million in 2004, with an EBITDA RMB0.36 Companies”). Since the Company and margin of 54.0%. 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”, and was accounted for in a manner similar to 1 2 Including deficit on revaluation of property, plant and equipment of RMB1,262 million. Our EBITDA represents profit before net finance costs, investment income, share of profit from associates, taxation, depreciation and amortisation, deficit on revaluation of property, a pooling-of-interests (“as-if-pooling-of- plant and equipment and minority interests. As interests accounting”). Accordingly, the assets and liabilities of the Acquired Companies have been accounted for based on their historical amounts and our financial statements for the period prior to the acquisition have been the telecommunications business is a capital intensive industry, capital expenditure, the level of gearing and finance costs may have a significant impact on the net profit of companies with similar results. Therefore, we believe EBITDA may be helpful in analysing the operating results of a telecommunications restated to include the financial position service provider like us. Although EBITDA is and results of operations of the Acquired Companies on a combined basis. Unless otherwise indicated in this section, our financial data for the period prior to the acquisition are presented based on those restated amounts. widely used in the global telecommunications industry as a benchmark to reflect the operating performance, financial capability and liquidity, it is not regarded as a measure of operating performance and liquidity under generally accepted accounting principles. It also does not represent cash flows from operating activities. In addition, our EBITDA may not be comparable to similar indicators provided by other companies. China Telecom Corporation Limited Annual Report 2004 21 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Excluding the amortisation of upfront upfront connection fees, the operating connection fees of RMB8,458 million, our revenue in 2004 increased by RMB10,972 operating revenue in 2004 was million or 7.7% from 2003, reaching RMB152,754 million, an increase of 7.7% RMB152,754 million. As the main sources from 2003; our net profit was RMB19,565 for the growth in our operating revenue, million, our earnings per share were local telephone services revenue, Internet RMB0.25; our EBITDA was RMB78,542 services revenue and interconnection million and EBITDA margin was 51.4%. revenue increased by RMB4,381 million, Operating Revenue RMB4,102 million, and RMB2,354 million, respectively, from 2003. Our long distance services revenue increased by 2.1% from Our total operating revenue in 2004 was 2003, while revenue from our managed RMB161,212 million, an increase of 6.4% data and leased line services decreased. from 2003. Excluding the amortisation of 22 China Telecom Corporation Limited Annual Report 2004 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS The following table sets forth a breakdown of our operating revenue for 2003 and 2004, together with their respective rates of change: For the Year Ended 31 December 2003 2004 Rate of Change (RMB in millions, except percentage data) 2,643 27,499 45,815 2,865 29,827 47,646 8.4% 8.5% 4.0% Wireline telephone services3 Local Installation fees Monthly fees Local usage fees Sub-total 75,957 80,338 5.8% Domestic long distance4 25,460 26,231 3.0% International, Hong Kong, Macau and Taiwan long distance4 Interconnections Upfront connection fees 3,943 8,365 9,771 3,788 10,719 8,458 (3.9%) 28.1% (13.4%) Sub-total 47,539 49,196 3.5% Internet Managed data Leased line services Others5 10,007 14,109 3,210 5,103 9,737 3,015 4,154 10,400 41.0% (6.1%) (18.6%) 6.8% Operating revenue (Excluding amortisation of upfront connection fees) 141,782 152,754 7.7% Total operating revenue 151,553 161,212 6.4% 3 4 5 Includes revenue from our registered subscribers, public telephones and prepaid calling cards services. Includes revenue from our VoIP long distance services. 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 Annual Report 2004 23 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Local Telephone Services and various marketing tactics like integrated marketing and sales Revenue from our local telephone services packaging. grew by 5.8% from RMB75,957 million in 2003 to RMB80,338 million in 2004, which Long Distance Telephone Services contributed 49.8% to our total operating revenue or 52.6% of our operating revenue Revenue from our long distance telephone excluding amortisation of upfront services increased by 2.1%, from connection fees. This was primarily due to RMB29,403 million in 2003 to RMB30,019 continued growth in our subscriber base million in 2004, representing 18.6% of our and growth in our local usage volume. total operating revenue or 19.7% of our operating revenue excluding amortisation of • Installation Fees. Upfront installation upfront connection fees. fees will be amortised over the expected customer relationship period • Domestic Long Distance Services. of 10 years. Revenue from amortisation Domestic long distance revenue of upfront installation fees increased increased by 3.0% from RMB25,460 by 8.4% from RMB2,643 million in million in 2003 to RMB26,231 million 2003 to RMB2,865 million in 2004. in 2004, primarily due to the rapid increase in domestic long distance • Monthly Fees. Revenue from monthly usage volume. In 2004, we seized the fees increased by RMB2,328 million, or opportunity brought by strong market 8.5%, from RMB27,499 million in demands and took an active and 2003 to RMB29,827 million in 2004, flexible approach towards the which was primarily due to the competition. As a result, our total sustained increase in the number of domestic long distance usage volume our local telephone subscribers. The increased by 21.8% from 2003 to number of subscribers for our access 81,960 million minutes in 2004, fully lines increased by 25.66 million or offsetting the negative influence from 15.9% from 160.99 million in 2003, price decreases, and the declining reaching 186.65 million as of the end trend in the revenue from domestic of 2004. long distance services in recent years • Local Usage Fees. Revenue from local was reversed. usage fees was RMB47,646 million, • International, Hong Kong, Macau and increased by 4.0%, from RMB45,815 Taiwan Long Distance Services. million in 2003, primarily due to an International, Hong Kong, Macau and increase in local voice usage. In 2004, Taiwan long distance services revenue despite the intensifying mobile decreased by 3.9%, from RMB3,943 substitution, we successfully increased million in 2003 to RMB3,788 million in our local usage volume usage by 11.6% 2004. The transmission volume of our from 2003 to 429,150 million pulses in international, Hong Kong, Macau and 2004, through our marketing channels Taiwan long distance services was 24 China Telecom Corporation Limited Annual Report 2004 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS 1,654 million minutes in 2004, which Interconnection Services was similar to that in 2003. The decrease in revenue was attributable to Revenue from interconnection services the decrease in prices. We plan to increased by 28.1%, from RMB8,365 million adopt a more flexible marketing in 2003 to RMB10,719 million in 2004, strategy to stimulate growth in usage representing 6.6% of our total operating volume. Internet Services revenue or 7.0% of our operating revenue excluding amortisation of upfront connection fees. This growth was primarily attributable to an increase in Revenue from our Internet services increased interconnection volume as a result of the by 41.0%, from RMB10,007 million in 2003 expansion in the domestic to RMB14,109 million in 2004, representing telecommunications services subscriber 8.8% of our total operating revenue or 9.2% base. of our operating revenue excluding amortisation of upfront connection fees. Other Businesses Driven by the rapid development of broadband services in recent years, our Revenue from our other businesses Internet services revenue recorded a increased by 6.8%, from RMB9,737 million sustained and rapid growth. The number of in 2003 to RMB10,400 million in 2004, our broadband subscribers increased by 6.61 representing 6.5% of our total operating million from the end of 2003 to 13.84 revenue or 6.8% of our operating revenue million as of the end of 2004. We believe excluding amortisation of upfront that there is still great potential for connection fees. This growth was primarily development in our broadband services. due to the increase in revenue from value- added services, including caller display Managed Data Services service and telephone message service. Revenue from our managed data services Upfront Connection Fees decreased by 6.1%, from RMB3,210 million in 2003 to RMB3,015 million in 2004. This Upfront connection fees represent the decrease was primarily due to the decrease amortised amount of the upfront fees in prices as a result of the intensifying received for the initial activation of wireline competition. Leased Line Services services, amortised over the expected customer relationship period of 10 years. Effective as of 1 July 2001, we ceased charging new subscribers upfront Revenue from leased line services decreased connection fees. Consequently, the by 18.6%, from RMB5,103 million in 2003 amortised amount decreased by 13.4%, to RMB4,154 million in 2004. The major from RMB9,771 million in 2003 to reason for this decrease was that the unit RMB8,458 million in 2004. price dropped as a result of the intensifying market competition. China Telecom Corporation Limited Annual Report 2004 25 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS The table below sets forth the amortisation of our upfront connection fees for each year from 2005 to 2011 based on a 10-year estimated amortisation period (with 2011 as the end of the amortisation period): Amortisation of upfront connection fees Operating Expenses For the Year Ending 31 December 2005 2006 2007 2008 2009 2010 2011 (RMB in millions) 6,782 4,965 3,295 2,022 1,151 497 98 operating revenue excluding amortisation of upfront connection fees. Our network In 2004, our operating expenses were operations and support expenses RMB121,382 million, representing an decreased and our depreciation and increase of 2.3% from 2003. The ratio amortisation expenses increased slightly of our operating expenses to total in 2004. Our selling, general and operating revenue decreased from administrative expenses, personnel 78.3% in 2003 to 75.3%, or decreased expenses, interconnection and other from 83.7% in 2003 to 79.5% of our operating expenses also increased. The following table sets forth a breakdown of our operating expenses for 2003 and 2004, together with their respective rates of change: For the Year Ended 31 December 2003 2004 Rate of Change (RMB in millions, except percentage data) 46,597 31,338 16,778 20,812 3,176 47,170 27,611 19,229 23,233 4,139 1.2% (11.9%) 14.6% 11.6% 30.3% Depreciation and amortisation Network operations and support Selling, general and administrative Personnel Interconnection and other operating expenses Total operating expenses 118,701 121,382 2.3% 26 China Telecom Corporation Limited Annual Report 2004 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS • Depreciation and Amortisation. Our • Personnel Expenses. Our personnel depreciation and amortisation expenses increased by 11.6%, from expenses were RMB47,170 million in RMB20,812 million in 2003 to 2004, an increase of 1.2% from 2003, RMB23,233 million in 2004. The representing 29.3% of our total Company established a performance- operating revenue. The depreciation linked remuneration scheme, which and amortisation expenses as a played an important role in attracting percentage of our operating revenue and retaining talented employees and excluding amortisation of upfront incentivising employees. connection fees decreased from 32.9% in 2003 to 30.9% in 2004. • Interconnection and Other Operating Expenses. Our interconnection and • Network Operations and Support. Our other operating expenses in 2004 network operations and support increased by RMB963 million, or expenses (excluding related personnel 30.3%, from RMB3,176 million in expenses) decreased by 11.9%, from 2003 to RMB4,139 million in 2004. RMB31,338 million in 2003 to The significant increase in inter- RMB27,611 million in 2004, primarily network traffic led to the corresponding due to a decrease in repair and increase in interconnection expenses. maintenance expenses as a result of The net interconnection revenue our centralised management of (interconnection revenue minus network maintenance and resources interconnection expenses) in 2004 was allocation. Our repair and maintenance RMB6,624 million, representing an expenses decreased by 9.4% from increase of 25.9% from 2003. 2003 to RMB12,217 million in 2004. • Selling, General and Administrative Net Finance Costs Expenses. Our selling, general and Our net finance costs increased by 48.1%, administrative expenses (excluding from RMB3,606 million in 2003 to related personnel expenses) increased RMB5,340 million in 2004. The Company by 14.6%, from RMB16,778 million in acquired the telecommunications businesses 2003 to RMB19,229 million in 2004. in the six regions as of 31 December 2003 Our selling expenses in 2004 increased and the ten regions as of 30 June 2004 by 42.5% from 2003, due to the respectively, and the purchase reinforcement of our marketing considerations included deferred payments strength to cope with increasingly totalling RMB50,150 million. The interest intensified market competition. expense incurred therefrom was the main However, with our proper control, the reason for the increase in our finance costs. growth rate of such expenses in the whole year was remarkably lower than that of the first half of 2004. At the same time, we continued to achieve savings in administrative expenses. China Telecom Corporation Limited Annual Report 2004 27 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Deficit on Revaluation of Property, Plant was RMB13,882 million and our net profit and Equipment excluding amortisation of upfront connection fees was RMB4,111 million. According to our accounting policy, During the reorganisation of revaluation of property, plant and telecommunications businesses in the ten equipment should be carried out at least regions in 2003, we carried out a once every three years. In 2004, we carried revaluation of the relevant property, plant out a revaluation on our property, plant and and equipment in accordance with the equipment and a revaluation deficit of relevant regulations and a revaluation deficit RMB1,262 million was recorded. of RMB14,832 million was resulted. This Income Tax was one of the reasons for the substantial increase in our net profit in 2004 from that of 2003. Our statutory tax rate is 33%. In 2004, our income tax expense was RMB5,187 million, Capital Expenditure representing an effective tax rate of 15.6%. The difference between the statutory tax In 2004, we continued to implement our rate and our effective tax rate was primarily prudent policy on capital expenditure. Our due to the exclusion of the upfront capital expenditure decreased by 8.6%, connection fees from taxable revenue and from RMB61,587 million in 2003 to the preferential income tax rate of 15% RMB56,307 million in 2004. Seizing the applied to some of our subsidiaries located opportunity brought along by urbanisation, in special economic zones and the western we maintained our leading position in part of China. Another reason for our access network. We also made efforts to effective tax rate being lower than the transform existing networks into intelligent, statutory tax rate was that some of our broadband and IP based networks, and at operating subsidiaries received tax credits of the same time made preparations for the RMB1,210 million in 2004 on the purchases construction of the next generation of domestic equipment. As the tax credits network. on purchases of domestic equipment are subject to various restrictions, we cannot Our planned capital expenditure for 2005 is reasonably foresee their impacts on effective RMB55,800 million. We expect to fund our tax rates in future years. Net Profit capital expenditure needs through a combination of cash flows generated from our operating activities, short-term and long-term bank loans and other debt and In 2004, our operating effectiveness and equity financing. We believe we will have profit level continued to grow and our net sufficient resources to meet our capital profit reached RMB28,023 million. expenditure requirements for the Excluding amortisation of upfront foreseeable future. connection fees, our net profit in 2004 was RMB19,565 million. Our net profit for 2003 28 China Telecom Corporation Limited Annual Report 2004 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Cash Flows and Capital Resources Our net cash used in financing activities was Cash Flows RMB8,981 million in 2004, as compared with a net cash outflow of RMB11,320 million in 2003. In May 2004, the Company Our net cash inflow was RMB744 million in raised net proceeds of RMB12,702 million 2004, as compared with a net cash outflow from the global offering of its H shares, of RMB10,022 million in 2003. The main which were used to settle part of the reason for the increase in our net cash flow purchase consideration on the acquisition of was the substantial growth in cash flow the Acquired Companies. On the other generated from our operating activities and hand, we continued to repay certain our successful issue of additional H shares. amounts of our loans in 2004. Our net cash The following table presents our cash flows (the difference between the proceeds from outflow used for the repayment of loans for 2003 and 2004: For the Year Ended 31 December 2003 2004 (RMB in millions) loans and the cash repayment for such loans) increased from RMB2,675 million in 2003 to RMB3,950 million in 2004. In addition, the amount of dividends paid by the Company in 2004 increased by RMB4,551 million. Net cash flows from operating activities Net cash used in 58,392 66,078 Working Capital investing activities (57,094) (56,353) Net cash used in financing activities (11,320) (8,981) Net (decrease)/increase in cash and cash equivalents (10,022) 744 Our net cash flows from operating activities were RMB66,078 million in 2004, an increase of RMB7,686 million from RMB58,392 million in 2003. This increase reflected the steady development of the Group’s business and improvement in operational efficiency. We achieved saving in capital expenditure for 2004. Net cash used in investing activities was RMB56,353 million, decreased by RMB741 million from that of 2003. Our working capital (total current assets minus total current liabilities) deficit was RMB118,412 million as of 31 December 2004, representing an increase of RMB2,370 million, compared with the deficit of RMB116,042 million in 2003. The increase in our working capital deficit was primarily due to the fact that in accordance with its credit level and in order to control risk, the Company had increased its short- term loans with lower interest rates. As of the end of 2004, our cash and cash equivalents reached RMB13,465 million, of which 99.2% was denominated in RMB. China Telecom Corporation Limited Annual Report 2004 29 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Indebtedness (total debt divided by total assets) was therefore increased to 36.4% as of the end Our indebtedness as of the end of 2003 and of 2004 from 34.4% as of the end of 2003. 2004 was as follows: Short-term debt Long-term debt maturing within a year Long-term debt (excluding current portion) As of 31 December 2003 2004 (RMB in millions) 56,243 65,976 Excluding the deferred considerations of RMB50,150 million payable to China Telecommunications Corporation for the two acquisitions, our loans would be decreased from RMB103,832 million as of 31 December 2003 to RMB100,034 million as of 31 December 2004. We believe we maintained a 13,957 11,842 solid capital structure. 68,632 72,366 Total debt 138,832 150,184 Our total debt was RMB150,184 million as of the end of 2004, increased by RMB11,352 million from that of 2003, primarily due to the deferred consideration of RMB15,150 million for our acquisition of the Acquired Companies from China Telecommunications Corporation in 2004. The debt-to-asset ratio Contractual Obligations Substantial business revenue and expenses of the Company were denominated in Renminbi, where Renminbi cannot be completely exchanged into foreign currencies freely. Of our total debt as of 31 December 2004, 95.2%, 2.1%, 1.9% and 0.8% were denominated in Renminbi, Japanese yen, U.S. dollars and Euros, respectively. 59.8% of the Group’s total debt was with fixed interest rate terms. The following table sets forth our contractual obligations as of 31 December 2004: Payable in Total 2005 2006 2007 2008 After 2008 (RMB million) 65,976 84,208 65,976 11,842 — 10,022 1,285 4,865 369 4,865 187 — — 8,343 137 — — 552 124 — — 53,449 468 — Short-term debt Long-term debt Operating lease commitments Capital commitments Total contractual obligations 156,334 83,052 10,209 8,480 676 53,917 30 China Telecom Corporation Limited Annual Report 2004 HARMONY DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT Mr. Wang Xiaochu, age 47, is Chairman of the Board of Directors and Chief Executive Officer of our Company. Mr. Wang has held positions such as director and deputy Mr. Leng Rongquan, is Executive age 56, Director, President and Chief Operating Office of our company. Mr. Leng is a director level senior engineer. He graduated from the director of the Hangzhou Telecommunications Beijing Institute of Posts and Bureau in Zhejiang province, director general Telecommunications with a Master of of the Tianjin Posts and Telecommunications Science in engineering. Mr. Leng has held Administration, chairman and chief executive positions such as chief engineer of the officer of China Mobile (Hong Kong) Limited, Beijing Long Distance Telephone Bureau, and vice president of China Mobile deputy chief engineer of the Communications Corporation. Mr. Wang is Telecommunications Bureau of the Ministry also President of China Telecommunications of Posts and Telecommunications, deputy Corporation. He was responsible for the director general of the Telecommunications development of China Telecom’s telephone Bureau of the Ministry of Posts and network management systems and various Telecommunications of the PRC, deputy other information technology projects and as general manager of China a result, received the Class Three National Telecommunications Corporation, deputy Science and Technology Advancement Award general manager of China Network and the former Ministry of Posts and Communications Group Corporation and Telecommunications’s Class One Science and vice chairman of China Netcom Group Technology Advancement Award. Mr. Wang Corporation (Hong Kong) Limited. Mr. Leng graduated from Beijing Institute of Posts and is also Vice President of China Telecommunications in 1980 and has over 24 Telecommunications Corporation. Mr. Leng years of management experience in the has had 29 years of operational telecommunications industry. management experience in the telecommunications industry in the PRC. 32 China Telecom Corporation Limited Annual Report 2004 DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT Ms. Wu Andi, age 50, is Executive Director, Executive Vice President and the Chief Financial Officer in charge of financial management of our company. Ms. Wu is a Senior Mr. Zhang Jiping, age 49, is Executive Director and Executive Vice President of our company. Mr. Zhang is a professor level Senior Engineer. He graduated in 1982 from the Accountant. She graduated in 1983 from the Beijing Institute of Posts and Beijing Institute of Economics with a B.A. Telecommunications with a B.Sc. degree in degree in finance and trading. From 1996 to radio telecommunications engineering. From 1998, Ms. Wu studied in a postgraduate 1986 to 1988, Mr. Zhang studied in a post- program in business economics management graduate program in applied computer at the Chinese Institute of Social Sciences. engineering at Northeastern Industrial Prior to joining China Telecommunications University. Prior to joining China Corporation in May 2000, Ms. Wu served as Telecommunications Corporation in May Director General of the Department of 2000, Mr. Zhang was a Deputy Director Economic Adjustment and Communication General of the DGT of the MPT, and a Settlement of the MII, and Director General, Deputy Director General of Liaoning PTA and deputy Director General and director of the Director of the Network Management Center Department of Finance of the MPT. Ms. Wu of the Liaoning PTA. Mr. Zhang is also Vice is also Vice President of China President of China Telecommunications Telecommunications Corporation. Ms. Wu Corporation. Mr. Zhang has 23 years of has 23 years of financial experience in the operational and managerial experience in the telecommunications industry in China. telecommunications industry in China. China Telecom Corporation Limited Annual Report 2004 33 DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT Ms. Huang Wenlin, is Executive age 51, Director and Executive Vice President of our company. Ms. Huang is a Senior Economist. She graduated in 1984 from the Beijing Institute of Mr. Li Ping, age 51, is Executive Director, Executive Vice President and Joint Company Secretary of our company. Mr. Li is a Senior Engineer. He graduated in 1976 from Posts and Telecommunications with a the Beijing Institute of Posts and concentration in engineering management. Telecommunications with a major in radio Prior to joining China Telecommunications telecommunications and received an MBA Corporation in May 2000, Ms. Huang served degree from the state University of New York as Director of the Domestic Communications at Buffalo in 1989. Prior to joining China Division and Director of the Communications Telecommunications Corporation in August Organization Division of the DGT of the MPT. 2000, Mr. Li served as Chairman and the Ms. Huang is also Vice President of China President of China Telecom (Hong Kong) Telecommunications Corporation. Ms. Huang International Limited, Vice Chairman and has 30 years of operational and managerial Executive Vice President of China Mobile experience in the telecommunications (Hong Kong) Limited and Deputy Director industry in China. General of the DGT and the MPT. Mr. Li is also Vice President of China Telecommunications Corporation. Mr. Li has extensive experience in managing public companies and 29 years of operational and managerial experience in the telecommunications industry in China. 34 China Telecom Corporation Limited Annual Report 2004 DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT Mr. Wei Leping, age 59, is Executive Director and Executive Vice President of our company. Mr. Wei is a professor level Senior Engineer. He graduated in 1970 from Tsinghua Mr. Yang Jie, age 43, is Executive Director and Executive Vice President of our company. Mr. Yang is a senior engineer at professor level. In 1984, Mr. Yang University with a major in radio engineering graduated from Beijing University of Posts and received a M.S. degree in and Telecommunications with a bachelor’s communication and information systems degree in wireless electronic engineering. from the Research Institute of Post and He then obtained a master degree of Telecommunications. Prior to joining China telecommunications and information Telecommunications Corporation in April management at the Norwegian School of 2001, Mr. Wei served as Deputy Director of Management. Mr. Yang previously served as the Telecommunications Research Institute of Deputy Director General of Shanxi the Ministry of Information Industry, Deputy Administration Bureau of Posts and Director of the Telecommunications Science Telecommunications, General Manager of Planning and Research Institute of the MPT Shanxi Telecommunications Corporation, and Deputy Director and Chief Engineer of Vice President of China Telecom Beijing the Telecommunications Transmissions Research Institute and General Manager of Research Center of the MPT. Mr. Wei is also the Northern Telecom Department of China Chief Engineer of China Telecommunications Telecommunications Corporation. He is also Corporation. Mr. Wei has 27 years of Vice President of China Telecommunications experience in research and development for Corporation. Mr. Yang has 21 years of network technologies in the experience in handling issues relating to the telecommunications industry in China. operation and management of the telecommunications industry in China. China Telecom Corporation Limited Annual Report 2004 35 DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT Mr. Sun Kangmin, age 48, is Executive Director and Executive Vice President of our company. Mr. Yang is a senior engineer. Mr. Sun previously served as Department Head of Mr. Feng Xiong, age 59, is Executive Director of our company, Chairman of the Board of Directors and General Manger of Guangdong Telecom Company Limited. Mr. the Information Industry Department of Feng is a professor level Senior Engineer. He Sichuan Province, Director General of graduated from Tsinghua University in 1970 Communications Bureau of Sichuan Province with a major in electronic engineering. He as well as Chairman and General Manager of received a master’s degree from Nanjing Sichuan Telecom Company Limited. Mr. Sun Institute of Posts and Telecommunications in has 21 years of experience in handling issues 1982 with a major in communications and relating to the operation and management of systems. Prior to joining China Telecom the telecommunications industry in China. Group, Mr. Feng served as Deputy Chief Mr. Cheng Xiyuan, is Executive age 61, Engineer and Chief Engineer of the Nanjing Municipal Telecommunications Bureau of Jiangsu PTA, and Deputy Chief Engineer, Director of our Chief Engineer and a Deputy Director company and Chairman General of Jiangsu PTA. Mr. Feng currently of the Board of serves as General Manager of China Directors of Shanghai Telecom Group Guangdong Corporation Telecom Company and has 23 years of operational and Limited. Mr. Cheng is a managerial experience in the Professor level Senior telecommunications industry in China. Engineer. He graduated from Chongqing Institute of Military Telecommunications and Engineering in 1968 with a major in telecommunications. Prior to joining China Telecom Group, Mr. Cheng served as Director General of Shanghai Long Distance Telephone Bureau, a Deputy Director General, Director General and Chief Engineer of Shanghai PTA and General Manager of China Telecom Group Shanghai Corporation and has 36 years of operational and managerial experience in the telecommunications industry in China. 36 China Telecom Corporation Limited Annual Report 2004 DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT Mr. Li Jinming, age is non-executive 53, director of our company. Mr. Li is Chairman of Guangdong Rising Assets Management Co., Ltd., one of the domestic Shareholders of the Mr. Zhang Youcai, age 64, is independent non-executive Director of our company. Mr. Zhang graduated from Nanjing Industrial Chemistry College in 1965 with a major in Company, and director of Shenzhen inorganic chemistry. He was a former Vice Zhongjin Lingnan Nonfemet Company Minister of the Ministry of Finance of China Limited. Mr. Li graduated from Guangdong and was responsible for the formulation and Provincial Broadcast and Television implementation of government finance University, and studied in the postgraduate policies. Mr. Zhang has contributed to the class in the faculty of international improvement and reform of the finance economics of Lingnan College, Zhongshan system of China over more than a decade. University, majoring in international industry Prior to serving at the Ministry of Finance, and commerce management. He is currently Mr. Zhang served as a Deputy Director of studying in the EMBA class at Lingnan the Planning Commission of Nantong City in College, Zhongshan University. Mr. Li has Jiangsu Province and a Deputy Mayor and held positions such as section chief and Mayor of Nantong. Mr. Zhang has more deputy director general of the Guangdong than 40 years of experience in the Provincial Discipline Inspection Commission, regulation of Chinese state-owned and director and deputy general manager of enterprises and finance administration. Guangdong Rising Assets Management Co., Ltd. Mr. Li has extensive experience in enterprise management. China Telecom Corporation Limited Annual Report 2004 37 DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT Mr. Shi Wanpeng, age 68, is independent non-executive Director of our company. He graduated in 1960 from Northern Jiaotong University with a major in Railway Transportation Mr. Vincent Hong Sui Lo, is Independent aged Non- 57, executive Director of our company. Mr. Lo founded the Shui On Group in 1971 and is the Group’s Chairman Management. Mr. Shi is a Professor level and Chief Executive. He is also Chairman Senior Engineer and served as deputy and Chief Executive Officer of Shui On Land director general and director general of Limited. The Group is engaged in property Department of Transportation and development, construction, construction Department of Economy & Technology materials, and hotel businesses. To further Cooperation of State Economy & Trade consolidate its prime developments in the Commission, and director general of Chinese Mainland, the Group established its Department of Production Planning of State property flagship — Shui On Land Limited in Development Planning Commission. He had 2004. more than 40 years of operational and managerial experience in state-owned Mr. Lo is a Member of The Tenth National enterprise and industry development of Committee of Chinese People’s Political PRC. 38 China Telecom Corporation Limited Annual Report 2004 Consultative Conference, Honorary Life President of Business and Professionals Federation of Hong Kong, President of Shanghai-Hong Kong Council for the Promotion and Development of Yangtze, Vice Chairman of All-China Federation of Industry & Commerce, Economic Adviser to the Chongqing Municipal Government, Vice Chairman of Chamber of International Commerce Shanghai, Member of Greater Pearl River Delta Business Council, Director of Great Eagle Holdings Ltd, Non-Executive Director of Hang Seng Bank Ltd, Court Member of The Hong Kong University of Science and Technology, Adviser to HK- Thailand Business Council, Director of The Real Estate Developers Association of Hong Kong, Adviser to Chinese Society of Macroeconomics and Peking University China Center for Economic Research, and Council Member of China Overseas Friendship Association. DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT He was awarded the Gold Bauhinia Star (GBS) in 1998 and appointed Justice of the Mr. Yung Shun Loy, Jacky, age 42, is the assistant Chief Financial Officer, qualified Peace in 1999 by the Government of the accountant and Joint Company Secretary of Hong Kong Special Administrative Region our Company. Mr. Yung is a fellow member (HKSAR). He was made an Honorary Citizen of the Hong Kong Institute of Certified of Shanghai in 1999. He was named Public Accountants and a fellow member of Businessman of the Year by the Hong Kong the Association of Chartered Certified Business Awards in 2001, and won the Accountants of United Kingdom. Mr. Yung Director of the Year Award in the category is also a Certified Practising Accountant of of Listed Company Executive Directors from Australia. Mr. Yung has nearly 20 years of The Hong Kong Institute of Directors in experience in auditing, company secretary 2002. and senior financial management of listed companies. Mr. Wang Qi, age 50, is the controller of is a senior our Company. Mr. Wang accountant. He studied at Beijing Institute Ms. Zhang Xiuqin, age 58, Chairperson of our Supervisory Committee. the is of Posts and Telecommunications and the Ms. Zhang is a Senior Accountant. Prior to Australian National University. Mr. Wang joining China Telecom Group, Ms. Zhang has a B.A. degree in international economics served as a Director of the Systems Division of and a Masters degree in international the Financial Department of the MPT, Director management. Prior to joining the Company, of the Department of Economic Adjustment Mr. Wang served as a Deputy Director and Communication Settlement of the MII, General of Anhui PTA. Mr. Wang also Director of the Communication Settlement served as a Deputy general Manager of Centre of the MII and General Manager of the China Telecom Group Anhui Corporation Huaxin Posts and Telecommunication prior to his relocation to the headquarters Economic Development Center. Since July of China Telecom Group in 2000. Mr. Wang 2000, Ms. Zhang has served as Director of the is also Managing Director of the Finance Audit Department of China Telecommunications Department of China Telecommunications Corporation. Ms. Zhang has 36 years of Corporation. Mr. Wang has 30 years of operational and managerial experience in managerial and accounting experience in the telecommunications industry in China. the telecommunications industry in China. China Telecom Corporation Limited Annual Report 2004 39 DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT Mr. Wang Huanhui, age 60, has been the Supervisor representing employees from 1 Mr. Xie Songguang, age 56, Supervisor on our Supervisory Committee. is a April this year. Mr. Wang is a senior Mr. Xie is a Senior Engineer. He graduated economist, and graduated from Beijing from Nanjing Institute of Posts and Institute of Posts and Telecommunications in Telecommunications in 1985 with a major in 1969. In August 2000, Mr. Wang was communications. Mr. Xie completed an assigned as Director of Supervisors Board of advanced business program in Hangzhou China Telecommunications Corporations. University in 1998. Prior to joining China Mr Wang has more than 30 years of Telecom Group, Mr. Xie served as a Deputy operational and management experience in Director of the Telecommunications the telecommunications industry in China. Division, and Director of the Operation and Ms. Zhu Lihao, age 64, is an independent Supervisor on our Supervisory Committee. Ms. Maintenance Division of Zhejiang PTA. Mr. Xie currently serves as a Deputy General Manager of China Telecom Group Zhejiang Zhu is a Senior Auditor and is a board member Corporation and has 30 years of operational of the Auditors’ Association. She graduated and managerial experience in the from Beijing Mining College in 1963 with a telecommunications industry in China. major in engineering economics. Ms. Zhu served as a Deputy Director General and Director General of the Department of Industry Mr. Li Jing, age 39, is a Supervisor on our is an Supervisory Committee. Mr. Li and Communications of the National Audit economist. He graduated from the Central Office of China, and the Director General of Party School in 1995 with a major in the Department of Foreign Affairs Auditing of economics and management. Prior to the Audit Bureau. Ms. Zhu has 42 years of joining China Telecom Group, Mr. Li worked experience in management and auditing. at the Audit Division of the Jiangsu PTA, and the audit department and financial department of Suzhou Municipal Posts and Telecommunications Bureau. Mr. Li currently serves as a Deputy Director of the Audit Department of China Telecom Group Jiangsu Corporation and has 20 years of financial and auditing experience in the telecommunications industry in China. 40 China Telecom Corporation Limited Annual Report 2004 REPORT OF THE DIRECTORS The Board of Directors (the “Directors”) of domestic shares will be paid in Renminbi China Telecom Corporation Limited (the and dividends on H shares will be paid in “Company”) are pleased to present their Hong Kong dollars. The relevant exchange report together with the audited financial rate will be the mean of the average rate of statements of the Company and subsidiaries (the “Group”) prepared its in Renminbi to Hong Kong dollars as announced by the People’s Bank of China accordance with International Financial for the week prior to the date of declaration Reporting Standards for the year ended 31 of dividends by the Annual General December 2004. PRINCIPAL BUSINESSES Meeting. The final dividends are expected to be paid around 23 June 2005 after its approval by the Annual General Meeting. The principal businesses of the Group are: NEW H SHARES ISSUING AND provision of comprehensive wireline ACQUISITION BY THE COMPANY telecommunications and other relevant services, including local telephone, domestic In May 2004, the Company issued long distance telephone, international long 5,318,181,818 new H shares of RMB1.00 distance telephone, Internet and managed each, including 4,466,693,018 H shares and data, leased line and other related services 8,514,888 ADSs (one ADS represents 100 H to its subscribers within the service area of shares). Such new H shares and ADSs, at an the Group. The principal business of the offer price of HK$2.30 each and US$29.49 Company is investment holding. each respectively, were offered to Hong RESULTS Kong and overseas investors under global offering. In addition, as part of the global offering, China Telecommunications Results of the Group for the year ended 31 Corporation and other holders of domestic December 2004 and the financial position shares converted 531,818,182 domestic of the Company and the Group as at that shares of RMB1.00 each held by them into date are set out in the audited financial H shares for the subscription by Hong Kong statements on pages 71 to 127 in this and overseas investors. Net proceeds of annual report. DIVIDEND RMB12,702 million were raised from the issue of new H shares, all of which were used to settle part of the consideration for the acquisition of telecommunications The Directors propose to declare a final businesses in the ten provinces. dividend in the amount equivalent to HK$0.065 per share, totalling approximately On 30 June 2004, the Company completed RMB5,576 million for the year ended 31 its acquisition from China December 2004. The dividend proposal will Telecommunications Corporation of the be submitted for consideration at the entire equity interests in Hubei Telecom Annual General Meeting to be held on 25 Company Limited, Hunan Telecom Company May 2005. Dividends will be denominated Limited, Hainan Telecom Company Limited, and declared in Renminbi. Dividends on Guizhou Telecom Company Limited, Yunnan China Telecom Corporation Limited Annual Report 2004 41 REPORT OF THE DIRECTORS Telecom Company Limited, Shaanxi Telecom of RMB27,800 million. The Acquired Company Limited, Gansu Telecom Company Companies are the leading providers of Limited, Qinghai Telecom Company Limited, wireline telecommunications services Ningxia Telecom Company Limited and including wireline telephone, data, Internet Xinjiang Telecom Company Limited (the and leased line services in their service “Acquired Companies”), for a consideration areas. DIRECTORS AND SENIOR MANAGEMENT OF THE COMPANY The following table sets forth certain information concerning the Directors and senior management of the Company as at 31 December 2004. Name Wang Xiaochu Age Position in the Company 47 Chairman of the Board of Directors and Chief Executive Officer Date of Appointment 20 December 2004 Leng Rongquan 56 Executive Director, President and 20 December 2004 Chief Operational Officer Wu Andi 50 Executive Director, Executive Vice President 10 September 2002 Zhang Jiping Huang Wenlin Li Ping Wei Leping Yang Jie Sun Kangmin Cheng Xiyuan Feng Xiong Li Jinming Zhang Youcai Shi Wanpeng Vincent Lo Hong Sui 49 51 51 59 43 48 61 59 64 68 57 and Chief Financial Officer Executive Director and Executive Vice President 10 September 2002 Executive Director and Executive Vice President 10 September 2002 Executive Director, Executive Vice President 10 September 2002 and Joint Company Secretary Executive Director and Executive Vice President 10 September 2002 Executive Director and Executive Vice President 20 October 2004 Executive Director and Executive Vice President 20 October 2004 Executive Director Executive Director 53 Non-executive Director Independent Non-executive Director Independent Non-executive Director 20 June 2003 Independent Non-executive Director 10 September 2002 10 September 2002 20 December 2004 10 September 2002 10 September 2002 10 September 2002 Wang Qi 50 Controller 42 China Telecom Corporation Limited Annual Report 2004 REPORT OF THE DIRECTORS On 1 February 2005, Mr. Yung Shun Loy, On 20 December 2004, Mr. Zhou Deqiang Jacky was appointed by the Company as the retired from his position as executive assistant chief financial officer, qualified director, chairman and chief executive accountant and joint company secretary of officer of the Company. Mr. Chang Xiaobin the Company. resigned from his position as executive director on the same date. On 2 November 2004, Mr. Chang Xiaobin resigned from his position as president and chief operating officer of the Company. The following table sets forth certain information concerning the senior management of the Company’s subsidiaries at the provincial level as at 31 December 2004: Position in the Company’s Name Cheng Xiyuan Age Subsidiaries at the Provincial Level 61 Chairman of Shanghai Telecom Company Limited Wang Wei 40 General Manager of Shanghai Telecom Company Limited Feng Xiong 59 Chairman and General Manager of Guangdong Telecom Company Limited Date of Appointment 28 September 2002 20 October 2004 28 September 2002 Sun Jiuming 58 Chairman and General Manager of 19 October 2002 Jiangsu Telecom Company Limited Wang Jirong 51 Chairman and General Manager of 10 October 2002 Zhang Jun’an 48 Chairman and General Manager of 19 August 2003 Zhejiang Telecom Company Limited Liu Yaoming 53 Chairman and General Manager of 19 August 2003 Anhui Telecom Company Limited Fujian Telecom Company Limited Ke Ruiwen 41 Chairman and General Manager of 12 September 2003 Sun Junyan 43 Chairman and General Manager of Guangxi 19 August 2003 Jiangxi Telecom Company Limited Telecom Company Limited Zou Bingxuan 55 Chairman and General Manager of 19 August 2003 Liu Hongjian 44 Chairman and General Manager of 4 June 2004 Chongqing Telecom Company Limited Liao Renbin 45 Chairman and General Manager of 5 March 2004 Sichuan Telecom Company Limited Hubei Telecom Company Limited Wen Huiguo 51 Chairman and General Manager of 5 March 2004 Hunan Telecom Company Limited China Telecom Corporation Limited Annual Report 2004 43 REPORT OF THE DIRECTORS Name Wang Dan Position in the Company’s Age Subsidiaries at the Provincial Level 54 Chairman and General Manager of Hainan Telecom Company Limited Date of Appointment 5 March 2004 Liao Kang 42 Chairman and General Manager of 5 March 2004 Guizhou Telecom Company Limited Wu Yongquan 59 Chairman and General Manager of 5 March 2004 Yunnan Telecom Company Limited Zhou Shifu 59 Chairman and General Manager of 5 March 2004 En Guangli 57 Chairman and General Manager of 5 March 2004 Shaanxi Telecom Company Limited Gansu Telecom Company Limited Yang Jianqing 44 Chairman and General Manager of 5 March 2004 Ma Linfeng 49 Chairman and General Manager of 5 March 2004 Qinghai Telecom Company Limited Ningxia Telecom Company Limited Gao Tongqing 41 Chairman and General Manager of 5 March 2004 Xingjiang Telecom Company Limited In March 2005, Zhang Xinjian was appointed as Chairman and General Manager of Zhejiang Telecom Company Limited, while Wang Jirong resigned from the position of Chairman and General Manager. In March 2005, Li Hua was appointed as Vice Chairman and General Manger of Yunnan Telecom Company Limited, while Wu Yongquan resigned from the position of General Manager. In March 2005, Yin Yiping was appointed as Vice Chairman and General Manger of Shaanxi Telecom Company Limited, while Zhou Shifu resigned from the position of General Manager. SUPERVISORS OF THE COMPANY The following table sets forth certain information concerning the Supervisors of the Company as at 31 December 2004: Name Zhang Xiuqin Wang Huanhui Zhu Lihao Xie Songguang Li Jing Age Position in the Company 58 Chairperson of Supervisory Committee Date of Appointment 10 September 2002 60 64 56 39 Employee Representative Supervisor 1 April 2003 Independent Supervisor Supervisor Supervisor 10 September 2002 10 September 2002 10 September 2002 44 China Telecom Corporation Limited Annual Report 2004 REPORT OF THE DIRECTORS SHARE CAPITAL The share capital of the Company as at 31 December 2004 was RMB80,932,368,321, divided into 80,932,368,321 shares with a par value of RMB1.00 each. As at 31 December 2004, the share capital of the Company comprised: Percentage of the total number of shares in issue as at 31 December 2004 (%) Number of shares as at 31 December 2004 Shares Domestic shares (total): 67,054,958,321 82.85 Domestic shares held by: China Telecommunications Corporation 58,346,370,499 Guangdong Rising Assets Management Co., Ltd. 5,614,082,653 Jiangsu Guoxin Investment Group Co., Ltd. Zhejiang Financial Development Company 957,031,543 2,137,473,626 Total of H shares (including ADS): 13,877,410,000 72.09 6.94 1.18 2.64 17.15 Total 80,932,368,321 100.00 Note: As at 31 December 2004, China Telecommunications Corporation held short positions in 969,317,182 domestic shares which amounted to 1.45% of the total issued domestic shares. This short position was created as part of a reform plan approved by the State Council on the administration of rural telecommunications services. According to this arrangement, China Telecommunications Corporation has agreed to transfer 969,317,182 shares of the Company to Fujian Electronic Information (Group) Co., Ltd., subject to the satisfaction of certain conditions precedent. The transfer will not be carried out before 10 September 2005. Moreover, such short position of domestic shares has been reduced when the Company conducted its global offering of H shares in May 2004, in accordance with the provisions on reduction of domestic shareholding set out in Provisional Measures on the Administration of the Reduction of the State- owned Shares for Raising Social Security Funds and consent letter issued by Fujian Electronic Information (Group) Co., Ltd. in March 2004. China Telecom Corporation Limited Annual Report 2004 45 REPORT OF THE DIRECTORS MATERIAL INTERESTS AND SHORT Company’s general meetings (excluding the POSITIONS IN SHARES AND UNDERLYING Directors and Supervisors) in the shares and SHARES OF THE COMPANY underlying shares of equity derivatives of the Company as recorded in the register As at 31 December 2004, the interests or required to be kept under Section 336 of short positions of persons who are entitled the Securities and Futures Ordinance (Hong to exercise or control the exercise of 5% or Kong Law Cap. 571) (the “SFO”) are as more of the voting power at any of the follows: Name of Shareholder H shares held H shares Capacity Number of % of total J.P. Morgan Chase & Co. 1,563,173,027 11.26% Beneficial owner; Save as stated above, as at 31 December 2004, in the register required to be kept under Section 336 of the SFO, no other persons were recorded to hold any interests or shares or underlying shares of the equity derivatives of the Company. short positions the in DIRECTORS’ AND SUPERVISORS’ INTERESTS AND SHORT POSITIONS IN SHARES, UNDERLYING SHARES AND DEBENTURES of shares underlying As at 31 December 2004, none of the Directors and Supervisors of the Company had any interests or short positions in the equity shares, derivatives or debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) as recorded in the register required to be kept under Section 352 of the SFO or as otherwise notified to the Company and The Stock Exchange of Hong Kong Limited pursuant to the Model Code for Securities Transactions by Directors of Listed Companies. 46 China Telecom Corporation Limited Annual Report 2004 investment manager; custodian As at 31 December 2004, the Company had not granted its Directors or Supervisors, or their respective spouses or children below the age of 18 any rights to subscribe for the 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 shares or debentures. DIRECTORS’ AND SUPERVISORS’ INTERESTS IN CONTRACTS For the year ended 31 December 2004, no Director or Supervisor of the Company had any material interest, whether directly or indirectly, in any contract of significance entered into by the Company, any of its holding subsidiaries or subsidiaries of the Company’s holding company, apart from service contracts. companies or EMOLUMENTS OF THE DIRECTORS AND SUPERVISORS Please refer to note 25 of the audited the financial statements and emoluments Supervisors of the Company. the Directors for details of of REPORT OF THE DIRECTORS PURCHASE, SALE AND REDEMPTION OF RESERVES SHARES Neither the Company or any of subsidiaries has purchased, sold its or articles of association (the “Articles of Association”), where the financial redeemed any securities of the Company statements prepared in accordance with Pursuant to Article 147 of the Company’s during the reporting period. PRC accounting standards and regulations materially differ from those prepared in SUMMARY OF FINANCIAL INFORMATION accordance with either international accounting standards or those of the place Please refer to pages 135 to 136 of this outside the PRC where the Company’s annual report for a summary of the shares are listed, the distributable profit for operating results, assets and liabilities of the the relevant accounting period shall be Group for each of the years in the five-year deemed to be the lesser of the amounts period ended 31 December 2004. shown in those respective financial statements. Distributable reserves of the BANK LOANS AND OTHER BORROWINGS Company as at 31 December 2004, calculated on the above basis and prior to Please refer to note 13 of the audited the proposed final dividend for 2004, financial statements for details of bank amounted to approximately RMB20,609 loans and other borrowings of the Group. million. CAPITALISED INTEREST In addition to the allocation to the statutory reserve funds, the Directors propose to Please refer to note 23 of the audited make an allocation to a discretionary surplus financial statements for details of the reserve. The allocation proposal shall be Group’s capitalised interest for the year submitted for consideration at the Annual ended 31 December 2004. General Meeting to be held on 25 May FIXED ASSETS 2005. Please refer to note 3 of the audited financial statements for details of the financial statements for movements in the movements in the reserves of the Company fixed assets of the Group for the year ended and the Group for the year ended 31 31 December 2004. December 2004. Please also refer to note 19 of the audited TRUST DEPOSITS AND OVERDUE FIXED DONATIONS DEPOSITS As at 31 December 2004, the Company did Group made charitable and other donations not have any trust deposits or any overdue totalling RMB17 million. For the year ended 31 December 2004, the fixed deposits with financial institutions or any other units. China Telecom Corporation Limited Annual Report 2004 47 REPORT OF THE DIRECTORS SUBSIDIARIES AND ASSOCIATED MAJOR CUSTOMERS AND SUPPLIERS COMPANIES Please refer to notes 5 and 6 of the audited to the five largest customers represented an financial statements for details of the amount not exceeding 30% of the Company’s subsidiaries and the Group’s operating revenue of the Group. For the year ended 31 December 2004, sales interests in associated companies as at 31 December 2004. For the year ended 31 December 2004, purchases from the five largest equipment CHANGES IN SHAREHOLDERS’ EQUITY suppliers of the Group accounted for approximately 36.6% of the total annual Please refer to the consolidated statement purchases of the Group. of shareholders’ equity contained in the audited financial statements (page 76 of this For the year ended 31 December 2004, annual report). RETIREMENT BENEFITS purchases from the Group’s largest supplier accounted for approximately 12.9% of the total annual purchases of the Group. The amount of the Group’s annual purchase Please refer to note 33 of the audited includes amount of equipment purchase, financial statements for details of the investments in infrastructure and pipeline, retirement benefits of the Group. and amount payable for interconnection settlement. SHARE APPRECIATION RIGHTS Please refer to note 34 of the audited director of the Company, their associates, or financial statements for details of the share any person holding more than 5% of the appreciation rights offered by the Company. share capital in the Company has any So far as the Directors are aware, no interests in such suppliers. PRE-EMPTIVE RIGHTS There are no provisions for pre-emptive rights in the Articles of Association requiring the Company to offer new shares to the existing shareholders in proportion to their shareholdings. 48 China Telecom Corporation Limited Annual Report 2004 REPORT OF THE DIRECTORS CONTINUING CONNECTED TRANSACTIONS The following table sets out the amounts of continuing connected transactions of the Group during the year ended 31 December 2004 (not including transactions between the Acquired Companies and the Company’s connected persons prior to 30 June 2004). Since the Company’s acquisition of the Acquired Companies was completed on 30 June 2004, prior to the completion of the acquisition, the relevant transactions entered into by the Acquired Companies or their subsidiaries with the Company’s connected persons did not constitute continuing connected transactions within the meaning of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (hereinafter referred to as the “Listing Rules”). Transaction Annual Monetary Cap for continuing connected transactions Group (in RMB millions) (in RMB millions) Share of expenses for centralised services Net payment for interconnection settlement Provision of comprehensive services by China Telecommunications Corporation and its subsidiaries (the “China Telecom Group”) Provision of engineering services by China Telecom Group Mutual leasing of properties 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 153 103 348 5,631 279 85 169 234 2,182 2,304 1,200 n/a1 1,600 8,327 500 200 300 450 3,410 2,640 1. According to a waiver letter issued by The Stock Exchange of Hong Kong Limited on 18 May 2004, the Company is not required to set an annual monetary cap for the total amount under interconnection agreements. China Telecom Corporation Limited Annual Report 2004 49 REPORT OF THE DIRECTORS On 13 April 2004, the Company and China Interconnection Agreement Telecommunications Corporation, its substantial shareholder, entered into a Pursuant to the Interconnection Agreement, supplemental agreement relating to the telephone operator terminating a centralised services agreement, telephone call made to its local access interconnection agreement and a network shall be entitled to receive from the comprehensive services framework operator from which the telephone call agreement. originated a fee prescribed by the MII from time to time, which is currently RMB0.06 Centralised Services Agreement per minute. The Centralised Services Agreement was Comprehensive Services Framework renewed on 30 December 2004 and may be Agreement renewed for further periods of one year upon expiration. The aggregate costs The Comprehensive Services Framework incurred by the Company and China Agreement was renewed on 30 December Telecommunications Corporation for the 2004, and can be renewed for further provision of management services relating periods of one year upon expiration. This to the operation of the business support agreement governs the terms and centre and the network management conditions of transactions between them on centre, the costs of headquarters and two levels: (i) between the Group and certain network support premises and certain associates held by China related facilities (including labor costs, Telecommunications Corporation as long- depreciation of equipment and premises, term investments; and (ii) between the daily expenses, costs relating to Group and certain subsidiaries of China maintenance and research) and certain large Telecommunications Corporation operating corporate customers of the headquarters of in other provinces (the “Provincial Subsisting China Telecommunications Corporation, will Companies”). Such transactions include be apportioned on a pro rata basis procurement of telecommunications between the Company and China equipment such as optic fibre, network Telecommunications Corporation according designs, software upgrade, system to the revenues generated by each party. In integration, manufacture of calling cards relation to the use of the international and so on. Prices under such agreement telecommunications facilities, the Company should be determined in accordance with and China Telecommunications Corporation the government-prescribed prices. In the have agreed to apportion the costs absence of the government-prescribed associated with operating such assets on a prices, the government-guided prices (if any) pro rata basis according to the aggregate shall apply. In the absence of both volume of the inbound international calls government-prescribed prices and terminated by, and outbound international government-guided prices, the market calls originated from, the Company and prices shall apply, i.e. the prices at which China Telecom Group, respectively. the same type of services are provided by 50 China Telecom Corporation Limited Annual Report 2004 REPORT OF THE DIRECTORS independent third party in the ordinary the Twenty Provincial Telecom Companies course of business. If none of such prices is by the Provincial Subsisting Companies applicable, the prices shall be determined through bidding, and/or services as the through agreements between the parties general contractors for the construction and based on reasonable costs plus reasonable supervision of engineering projects of the profits. For this purpose, “reasonable Twenty Provincial Telecom Companies. The costs” shall mean the costs determined by charges payable for such engineering the parties after negotiations. services shall be determined by reference to market rates as reflected by prices obtained As at 13 April 2004, the following through tender process. agreements or supplemental agreements thereto were entered into by each of Property Leasing Framework Shanghai Telecom Company Limited, Agreements Guangdong Telecom Company Limited, Jiangsu Telecom Company Limited, Zhejiang The Property Leasing Framework Telecom Company Limited, Anhui Telecom Agreements were renewed on 30 December Company Limited, Fujian Telecom Company 2004 and may be renewed for further Limited, Jiangxi Telecom Company Limited, periods of one year upon expiration. Guangxi Telecom Company Limited, Pursuant to such agreements, the Twenty Chongqing Telecom Company Limited, Provincial Telecom Companies under the Sichuan Telecom Company Limited, Hubei Company lease properties from the Telecom Company Limited, Hunan Telecom Provincial Subsisting Companies for use as Company Limited, Hainan Telecom Company business premises, offices, equipment Limited, Guizhou Telecom Company Limited, storage facilities and sites for network Yunnan Telecom Company Limited, Shaanxi equipment. On the other hand, the Twenty Telecom Company Limited, Gansu Telecom Provincial Telecom Companies also lease Company Limited, Qinghai Telecom Company certain properties to the Provincial Limited, Ningxia Telecom Company Limited, Subsisting Companies. The rent shall be Xinjiang Telecom Company Limited under the determined based on the market price with Company (the “Twenty Provincial Telecom reference to the standard set forth by local Companies”) and the Provincial Subsisting pricing authorities. Companies in their respective service area. Property Sub-Leasing Framework Engineering Framework Agreements Agreements The Engineering Framework Agreements The Property Sub-Leasing Framework will expire on 31 December 2006, and may Agreements were renewed on 30 December be renewed for further periods of three 2004 and may be renewed for further years upon expiration. These agreements periods of one year upon expiration. set out provisions in respect of the Pursuant to such agreements, the Provincial supervision and management of services Subsisting Companies sublease certain relating to construction, design, and properties owned and leased by equipment installation and tests provided to independent third parties to the Twenty China Telecom Corporation Limited Annual Report 2004 51 REPORT OF THE DIRECTORS Provincial Telecom Companies under the for procurement of imported Group for use as offices, retail outlets, spare telecommunications equipment; or (2) not parts storage facilities and sites for network more than 3% of the contract value for the equipment. The rent for sub-leasing of third procurement of domestic party property shall be determined based on telecommunications equipment and other the market price as agreed between the domestic non-telecommunications materials. relevant Provincial Subsisting Company and relevant third party through arm’s length Community Services Framework negotiation. Agreements IT Services Framework Agreements The Community Services Framework Agreements will expire on 31 December The IT Services Framework Agreements were 2006, and may be renewed for further renewed on 30 December 2004 and may be periods of three years upon expiration. renewed for further periods of one year Pursuant to such agreements, the Provincial upon expiration. Pursuant to such Subsisting Companies will provide the agreements, the Provincial Subsisting Twenty Provincial Telecom Companies with Companies may participate in the bidding services relating to culture, education, for the right to provide the Twenty property management, vehicle service, Provincial Telecom Companies with certain medical care, hotel and conference service, information technology services, such as community and sanitary service. The pricing office automation and software upgrade. terms for such services are the same as The charges payable for such IT services those for comprehensive services. shall be determined by reference to market rates or as determined by prices obtained Ancillary Telecommunications Services through the tender process. Framework Agreements Equipment Procurement Services The Ancillary Telecommunications Services Framework Agreements Framework Agreements will expire on 31 December 2006, and may be renewed for The Equipment Procurement Services further periods of three years upon Framework Agreements were renewed on expiration. Pursuant to such agreements, 30 December 2004 and may be renewed for the Provincial Subsisting Companies agree further periods of one year upon expiration. to provide the Twenty Provincial Telecom Pursuant to such agreements, the Provincial Companies with certain repair and Subsisting Companies have agreed to maintenance services, including provide comprehensive procurement maintenance of telecommunications services, including management of tenders, equipment, fire equipment and telephone verification of technical specifications and booths, as well as other customer services. installation services. The maximum The pricing terms for such services are the commission for such procurement services same as those for comprehensive services. shall be calculated based on the following: (1) not more than 1% of the contract value 52 China Telecom Corporation Limited Annual Report 2004 confirmed independent non-executive directors The have continuing connected transactions for the year ended 31 December 2004 to which the Group was a party: that all 1. governing into, and the had been entered agreements those transactions were entered into, by the Group in the ordinary and usual course of business; 2. had been entered into either: (i) on normal commercial terms; or (ii) where there was no available comparison to judge whether they are on normal commercial terms, on terms no less favourable than those available from independent third parties; and to or 3. had been entered into on terms that are fair and reasonable so far as the overall interests of the independent shareholders of the Company are concerned. REPORT OF THE DIRECTORS independent non-executive directors The have further confirmed that: continuing connected the values of transactions entered the Group and its connected persons which are subject to annual caps have not exceeded their respective annual caps. into between (not The auditors of the Group have reviewed the continuing connected transactions of the Group transactions entered into by the Acquired Companies and the Company’s connected persons prior to 30 June 2004) and have confirmed to the Directors that the transactions: including 1. 2. 3. have received the approval of the Directors of the Company; have been entered into in accordance with the pricing policies as stated in the relevant agreements; of have been entered into in accordance with the terms of the agreements governing such transactions; and the values connected continuing transactions entered into between the Group and connected persons of the Group which are subject to annual caps their have respective annual cap. exceeded not EMPLOYEES As at 31 December 2004, the Group had 253,050 employees illustrated as follows: Management, finance and administration Sales and marketing Operations and maintenance Others Total Number of employees Percentage 40,240 114,872 96,844 1,094 253,050 15.90% 45.40% 38.27% 0.43% 100% China Telecom Corporation Limited Annual Report 2004 53 REPORT OF THE DIRECTORS As at 31 December 2004, the Group also MATERIAL LEGAL PROCEEDINGS had 91,310 temporary employees. As at 31 December 2004, as far as the The Company has implemented a short- Directors are aware of, the Company was term and long-term combined incentive not involved in any material litigation or remuneration scheme: the primary arbitration and no material litigation claims components of an employee’s remuneration were pending or threatened or made include basic salary, bonus based on against the Company. performance, compensation based on seniority and share appreciation rights AUDITORS (share appreciation rights are exclusively for senior management and senior KPMG and KPMG Huazhen were appointed technological experts). In addition, the as the international and domestic auditors Company also emphasises the importance of the Company respectively for the year of employee training and uses various ended 31 December 2004. KPMG has means of training to improve the quality audited the accompanying financial and capability of its key employees. statements which have been prepared in COMPLIANCE WITH CODE OF BEST Reporting Standards. The Company has accordance with International Financial PRACTICE retained KPMG and KPMG Huazhen since the date of its listing. A resolution for the None of the Directors is aware of any reappointment of KPMG and KPMG information that would reasonably indicate Huazhen as the international and domestic that the Company is not, or was not during auditors of the Company for the year the period, in compliance with the Code of ending 31 December 2005 will be proposed Best Practice as set out in Appendix 14 of at the annual general meeting of the the Listing Rules. Company to be held on 25 May 2005. By Order of the Board Wang Xiaochu Chairman and Chief Executive Officer Beijing, PRC 31 March 2005 54 China Telecom Corporation Limited Annual Report 2004 REPORT OF THE SUPERVISORY COMMITTEE To shareholders, performance of the subsidiaries of the Company and provided recommendations During the reporting period, all members of for improvement. Through performing the the Supervisory Committee acted strictly in work mentioned above, the Supervisory accordance with the relevant provisions of Committee monitored the financial affairs the Company Law of the People’s Republic of the Company and the performance of of China and the Company’s Articles of duties by the senior management and Association and adhered to the principle of therefore safeguarded the rights and honesty, trustworthiness, diligence and interests of the Company and the prudence. The Supervisory Committee shareholders. conscientiously and actively performed their supervisory duties in light of the conditions The Supervisory Committee is of the view of the Company to protect the interests of that during the year 2004, the Company the shareholders and the benefits of the maintained growth at a fast pace and paid Company. great attention to implementing corporate governance principles to and preserving During the reporting period, the Supervisory integrity of the businesses of the Company. Committee held two meetings. The The Company continued to intensify its Supervisory Committee convened the third reform and strengthen its management meeting of the First Session of the capabilities, and therefore was able to Supervisory Committee to review and improve its economic efficiencies, and approve five proposals, including the maintain steady growth of all its businesses, Company’s financial statements prepared all of which contributed to an improvement for the year 2003, the auditors’ report in the value of the Company. prepared by KPMG and the profit appropriations proposal for the year 2003. The Supervisory Committee believes that The Supervisory Committee convened the during the year 2004, all members of the fourth meeting of the First Session of the Board of Directors, the Chief Executive Supervisory Committee to review and Officer and other members of the senior approve the 2004 interim financial management duly performed their duties statements of the Company, the and obligations in the best interests of the independent auditors’ review report, the shareholders, complied strictly with the code draft Charter for Supervisory Committee of of best practice for listed companies and China Telecom Corporation Limited and made great effort to safeguard proposals were adopted for consideration at shareholders’ interests. The management the 2004 Annual General Meeting. During team’s persistent hard work has resulted in the reporting period, members of the the strong financial performance of the Supervisory Committee attended the Company in 2004. Company’s 2003 Annual General Meeting, Extraordinary General Meetings, Class During the reporting period, the Company Meetings and eight meetings of the Board successfully completed the acquisition of the of Directors. The Supervisory Committee telecommunications businesses in ten also arranged for its members to review the provinces, and the issue of new H Shares China Telecom Corporation Limited Annual Report 2004 55 REPORT OF THE SUPERVISORY COMMITTEE strictly in accordance with the requirements In 2005, guided by the Company’s Articles of the relevant laws and the decision of the of Association and the relevant regulatory general meeting of the Company. The requirements, the Supervisory Committee whole process conformed to the standards will continue to review and improve existing and was valid. supervisory measures with a view to protecting the interests of the Company and Upon the review of the unqualified financial the shareholders. We will do our utmost to statements of the Company for the year complete the tasks entrusted by all 2004 and other relevant information, shareholders, so as to ensure the Company prepared in accordance with PRC continues to grow in the long term and that accounting rules and regulations and the shareholders’ interests in the Company International Financial Reporting Standards are preserved. and audited by domestic and international auditors of the Company, the Supervisory By Order of the Supervisory Committee Committee is of the opinion that the financial statements were prepared by Zhang Xiuqin Chairperson of the Supervisory Committee adhering to the principle of consistency and that they truly and fairly reflect the Beijing, PRC Company’s financial conditions and results 31 March 2005 of operations. 56 China Telecom Corporation Limited Annual Report 2004 CORPORATE GOVERNANCE The Company has always attached great Company within its authority, which include importance to corporate governance so as formulation of development plans and to ensure its sustainable development. Since operational strategies; and supervision and its initial public offering, in accordance with assessment of the Company’s management. the requirements of regulatory authorities The Board of Directors usually meets at least on corporate governance and international twice each year. best practice, the Company has always been dedicated to establishing a multi-tier The existing Board of Directors of the internal control mechanism and Company consists of 15 members, strengthening its corporate governance comprising 11 executive directors, one non- system in order to bring it in line with the executive director and three independent international practice of a modern company, non-executive directors. All the executive improving its corporate governance and directors of the Company are experienced in increasing transparency of the Company. By the operation and management of doing so, the Company is able to expand its telecommunications institutions. The operations, enhance its efficiency and independent non-executive directors are effectiveness, and maximise its shareholders’ independent of the shareholders of the interests as a whole. Board of Directors Company and do not assume any management position in the Company. All of them satisfy the regulatory requirements for independence and are well-known As a company listed in Hong Kong and US, specialists in economic, trading and financial we place special emphasis on compliance fields, and are experts with extensive with all the regulatory requirements in experience in corporate management. We places where it is listed. The current Articles believe that our Board, with its diverse of Association of the Company, which take composition, can fully, reasonably, and into full consideration the laws and impartially represent and safeguard the regulations of mainland China and the Rules interests of all shareholders, particularly the Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the Listing Rules) as well as requirements listed companies, regulatory for US provide guidance to the Company on the improvement of its corporate governance. The Board of Directors is responsible for the minority shareholders. At present, an audit committee (the Audit Committee) and a remuneration committee (the Remuneration Committee) have been set up under the Board of Directors. Audit Committee implementation of corporate governance The Audit Committee was set up in 2002, within the Company in accordance with the and consists of three members. At present Articles of Association. Its principal all the members are independent non- responsibilities include: implementing executive directors. The Audit Committee is resolutions of the shareholders’ general accountable to the Board of Directors and meetings; making decisions on important reports to it periodically. Usually, the matters and administrative affairs of the Committee meets at least twice each year. China Telecom Corporation Limited Annual Report 2004 57 CORPORATE GOVERNANCE The Articles of Association of the Audit Supervisory Committee Committee were approved by the Board of Directors of the Company in March 2005, according to which, the principal responsibilities of the Audit Committee The Company has set up a supervisory committee (the Supervisory Committee) in accordance with the requirement under PRC include supervision of the Company to law. The Supervisory Committee consists of ensure authenticity and completeness of its five supervisors, including one external financial statements, effectiveness and supervisor. The Supervisory Committee, as a integration of the internal control system. It stand-alone supervisory organisation, is also supervises our internal audit accountable and reports to all shareholders. department, and is responsible for the Generally, the Supervisory Committee meets review and consideration of the qualification at least once or twice each year. Its principal and appointment of independent auditors. responsibilities include supervision of the The Audit Committee has the power to Company’s financial matters in accordance establish a mechanism for receiving and with the law and supervising the handling complaints or anonymous reports performance of duties by directors, in respect of accounting, internal financial managers and other senior management control and audit matters of the Company. personnel and ensuring they do not abuse Remuneration Committee their authorities. In order to regulate further the operation of the Supervisory Committee, the Supervisory Committee has The Remuneration Committee was set up in considered and adopted the Charter for 2003. It consists of three members, all of Supervisory Committee of China Telecom whom are independent non-executive Corporation Limited, which are proposed to directors. The Remuneration Committee is be submitted to the 2005 annual accountable to the Board of Directors and shareholders’ general meeting for reports to it on its work periodically. Usually, consideration and approval. the Remuneration Committee meets at least twice each year. The Articles of Association Internal Control of the Remuneration Committee were approved by the Board of Directors of the The Company reviews the results of the Company in March 2005, according to implementation of its internal control which, its principal responsibilities include mechanism on a regular basis in order to ensuring that the Company’s remuneration ensure that its internal monitoring and system complies with the relevant regulatory control mechanism operates soundly, stably requirements, submitting assessment and effectively, so that the investment of reports on the Company’s remuneration shareholders and assets of the Company can system to the Board of Directors, and be safeguarded. presenting recommendations to the Board of Directors on the overall remuneration In accordance with the requirement of the policy and structure relating to directors and Sarbanes-Oxley Act of 2002 of the US, the senior management of the Company. Company has established an internal control 58 China Telecom Corporation Limited Annual Report 2004 CORPORATE GOVERNANCE mechanism in respect of financial reporting Directors of the Company adopted the Code within the COSO framework. In 2004, the of Occupational Ethics for Employees of Board of Directors of the Company adopted China Telecom Corporation Limited by the Manual of China Telecom Corporation reference to the provisions of the Corporate Limited on Internal Control in Respect of Governance Code issued by the New York Financial Reporting, and has started Securities Exchange, for the purpose of formulating detailed rules for its regulating and guiding implementation. management personnel the and senior other In order to further strengthen the that they perform their duties legally and in employees of the Company, so as to ensure management of connected transactions, so good faith. as to protect the interests of the Company and shareholders, particularly minority Corporate Transparency and Investors shareholders, the Board of Directors of the Communications Company adopted the Measures of China Telecom Corporation Limited on the The Company stresses the importance of Management of Connected Transactions in transparency, and has established a general 2004. office and an investor relations department to assist investors and facilitate information In February 2005, a professional who is disclosure, so as to maintain a daily experienced in the auditing of financial communication channel with shareholders, statements, company secretarial matters and investors and media. In addition, the financial management of listed companies Company provides investors and media with was appointed by the Company as a senior important information and responds to financial officer and the qualified investors’ latest key questions through accountant of the Company, in accordance meetings with investment analysts, reverse with the requirement of the Listing Rules, to road shows, press conferences, telephone assist the Company in its improvement of conferences with investors and other financial reporting procedures and internal means, to promote their understanding of control systems as the qualified accountant the development of the Company’s business of the Company. and the overall telecommunications industry Code of Ethics in China. In March 2005, the Board of Directors of In accordance with the requirement of the the Company adopted the Rules of China Sarbanes-Oxley Act of the US, the Board of Telecom Corporation Limited on the Directors of the Company adopted the Code Management of Information Disclosure (for of Occupational Ethics for Senior Trial Implementation), with a view to Management of China Telecom Corporation strengthening the management of the Limited, at the same time, the Board of Company’s information disclosure. China Telecom Corporation Limited Annual Report 2004 59 NOTICE OF ANNUAL GENERAL MEETING 5. “THAT: (a) (b) (c) subject to paragraph (c) below, the exercise by the board of directors of the Company during the Relevant Period (as hereinafter defined) of all the powers of the Company to allot, issue and deal with additional shares of the Company (“Shares”) and to make or grant offers, agreements and options which might require the exercise of such powers be hereby generally unconditionally approved; and the approval in paragraph (a) shall authorise the board of directors of the Company during the Relevant Period to make or grant offers, agreements and options which might require the exercise of such powers after the end of the Relevant Period; or dealt with the amount of additional domestic Shares or overseas-listed foreign invested shares (“H Shares”) (as the case may be) allotted, issued agreed and conditionally or unconditionally to be allotted, issued and dealt with either separately or concurrently once every twelve months by the board of directors of the Company in pursuant paragraph than pursuant to (i) a Rights Issue (as hereinafter defined) or (ii) any scrip dividend or similar arrangement providing for the allotment of Shares in lieu of the whole or part of a dividend on Shares in accordance with the articles of association of the Company shall not exceed 20% of each of the (a), otherwise the approval to of China NOTICE IS HEREBY GIVEN that an annual general meeting Telecom Corporation Limited (the “Company”) for the year ended 2004 will be held at 10:00a.m. on 25 May 2005 at Nathan Room, Lower Lobby, Conrad Hong Kong, Pacific Place, 88 Queensway, Hong Kong to consider and, if thought fit, pass the following business: ORDINARY RESOLUTIONS 1. 2. 3. approve consider to the and consolidated financial statements of the Company, the report of the Board of Directors, and the Supervisory Committee and the report of the international auditors for the year ended 31 December 2004; report of to consider and approve the profit distribution proposal and declaration and payment of a final dividend for the year ended 31 December 2004; and consider the approve to reappointment of KPMG as the Company’s international auditors and KPMG Huazhen as the Company’s domestic auditors and for the year ending 31 December 2005 and the authorisation to the board of directors of the the Company remuneration thereof; and fix to to consider and approve other matters, if any. And as special business, to consider and, if thought fit, pass the following as special resolutions: SPECIAL RESOLUTIONS 4. to consider and approve the Charter for Supervisory Committee of China Telecom Corporation Limited; 60 China Telecom Corporation Limited Annual Report 2004 existing Company’s domestic Shares and H shares (as the case may be) in issue at the date of passing this special resolution; and (d) for the purpose of this special resolution 5: 6. “Relevant Period” means the period from the passing of special resolution 5 until the earlier of: (i) (ii) (iii) the conclusion of the next annual general meeting of the Company; the expiration of the 12 months period following the passing of special resolutions; and these the revocation or variation of the authority given to the board of directors of the Company these resolutions by a special the special resolution of Company’s shareholders in general meetings. under “Rights Issue” means an offer of shares open for a period fixed by the board of directors of the Company to holders of Shares on the register of members on a fixed record date in proportion of their then holdings of such Shares (subject to such exclusion or other arrangements as the board of directors of the Company may deem necessary or expedient in relation to fractional entitlements or having regard to any legal or practical restrictions or obligations the under requirement of, any recognised regulatory body or any stock exchange territory applicable to the Company) and laws of, or any the in NOTICE OF ANNUAL GENERAL MEETING an offer, allotment or issue of shares by way of rights shall be construed accordingly.” to make “THAT the board of directors of the Company be authorised to increase the registered capital of the Company to in the reflect the issue of shares special Company authorised under resolution 5, and such appropriate and necessary amendments to the articles of association of the Company as they think fit to reflect such increases in the registered capital of the Company and to take any other action and complete any formality required to effect such increase of the registered capital of the Company.” By Order of the Board Li Ping Yung Shun Loy, Jacky Joint Company Secretaries Beijing, PRC 6 April, 2005 China Telecom Corporation Limited Annual Report 2004 61 NOTICE OF ANNUAL GENERAL MEETING Notes: The address of the share registrar for the Company’s H Shares is as follows: (1) Buyers who submit the share transfer application forms to the Company’s Computershare Hong Kong Investor share registrar before 4:00 p.m. on 22 Services Limited April 2005 and then register as 46th Floor, Hopewell Centre, shareholders on the register of 183 Queen’s Road East, members of the Company are entitled Wanchai, Hong Kong to attend the annual general meeting. (2) Each shareholder entitled to attend hand or vote on a poll, but a proxy of a and vote at the annual general shareholder who has appointed more meeting may appoint one or more than one proxy may only vote on a (4) A proxy of a shareholder may vote by proxies to attend and vote on his poll. behalf at the annual general meeting. A proxy need not be a shareholder. (5) The registration procedure for Each shareholder who wishes to attending the annual general meeting: appoint one or more proxies should first review the annual report of the (a) shareholders attending the annual Company for the year 2004, which is general meeting in person or by expected to be despatched to proxy shall present their identity shareholders around 7 April 2005. certification. If the attending shareholder is a corporation, its (3) To be valid, the form of proxy together legal representative or person with the power of attorney or other authorised by the board or other authorisation document (if any) signed decision making authority shall by the authorised person or notarially present a copy of the relevant certified power of attorney must be resolution of the board or other delivered to the Office of the Board of decision making authority in order the Company for holders of domestic to attend the annual general shares and to the Computershare Hong meeting. Kong Investor Services Limited for holders of H shares not less than 24 (b) shareholders intending to attend hours before the designated time for the annual general meeting shall the holding of the annual general return the attendance slip via meeting. Completion and return of a hand delivery, mail or fax to the form of proxy will not preclude a Office of the Board of the shareholder from attending in person Company on or before 4 May and voting at the annual general 2005. meeting if he so wishes. 62 China Telecom Corporation Limited Annual Report 2004 NOTICE OF ANNUAL GENERAL MEETING (6) Closure of the register of members: The register of members of the Company will be closed from 25 April 2005 to 25 May 2005 (both days inclusive). (7) The address of the Office of the Board is as follows: 31 Jinrong Street Xicheng District, Beijing 100032 PRC Contact person: Li Ping Yung Shun Loy, Jacky Telephone: (8610) 6642 8166 Facsimile: (8610) 6601 0728 (8) The Charter for Supervisory Committee of China Telecom Corporation Limited to be tabled to the current meeting for consideration and approval is attached hereto. Jiping as (9) As of the date of this announcement, the Board consists of Mr. Wang Xiaochu as the chairman and chief executive officer, Mr. Leng Rongquan as the president and chief operating officer, Ms. Wu Andi as the executive financial vice president and chief officer, Mr. Zhang the executive vice president, Ms. Huang Wenlin as the executive vice president, Mr. Li Ping as the executive vice president and joint company secretary, Mr. Wei Leping as the executive vice the president, Mr. Yang executive vice president, Mr. Sun Kangmin vice the president, Mr. Cheng Xiyuan and Mr. Feng Xiong as the executive directors, Mr. Li Jinming as the non-executive director, and Mr. Zhang Youcai, Mr. Vincent Lo Hong Sui and Mr. Shi Wanpeng as the independent non- executive directors. executive Jie as as China Telecom Corporation Limited Annual Report 2004 63 NOTICE OF ANNUAL GENERAL MEETING Charter for Supervisory Committee of China Telecom Corporation Limited (Draft) Chapter 1 General Provisions is adopted Corporation Limited to Article 1 The Charter for the Supervisory (the “Charter”) of China Committee Telecom (the “Company”) protect legitimate interests of the Company and shareholders, and to regulate the structure and behaviors of the Supervisory Committee (the “Committee”) pursuant the Company Law of Peoples’ Republic of China (the “Company Law”), and other applicable laws and regulations, as well as the Articles of Association of the Company (“Articles of Association”). to shall system 2 The Committee Article be responsible to the shareholders, oversee the financial the performance of the directors, general managers and other senior officers, and the safeguard Company and shareholders. interests of legitimate oversee and supervisors Article 3 The loyally perform the oversight duties pursuant to applicable laws, regulations and the Articles of Association. shall Article 4 The Company shall provide the Supervisors with necessary information and materials for supervisors to perform their duties. The supervisors shall independently perform duties set out in applicable laws, regulations and the Articles of Association. The Company shall provide for appropriate funding for the expenses and reasonable in incurred by costs performing its duties. the Committee Chapter 2 Supervisors Article 5 The supervisors shall, among others, be literate and have experience in management, accounting and auditing. legally 64 China Telecom Corporation Limited Annual Report 2004 Article 6 The following persons shall not serve as the supervisor of the Company: (1) (2) (3) (4) (5) (6) (7) a person who does not have or who has limited capacity for civil conduct; or misappropriation a person who has been sentenced for infringement of corruption, bribery, property of property or other crimes which disrupt the social economic order, in which case less than a term of five years has lapsed since the sentence was served, or a person who has been deprived of his political rights and not more than five years have the sentence was served; lapsed since a person who was a former director, factory manager or manager of a company or enterprise which became bankrupt and has been liquidated as a result of mismanagement and who was personally liable for such bankruptcy, in which case less than three years the date of since have elapsed completion of such liquidation of the company or enterprise; a person who was a legal representative of a company or enterprise the business license of which was revoked due to violation of law and who was personally liable therefor, in which case less than three years have elapsed since the date of the revocation of the business license; a person who has a large amount of debt overdue; a person who investigation by violation of criminal law; is currently under for judicial body a person who, according to laws and regulations, cannot act as a leader of an enterprise; (8) a person other than a natural person; NOTICE OF ANNUAL GENERAL MEETING (9) for a person who was convicted by competent authority violating applicable securities regulations and such conviction involves a finding that such person acted fraudulently or dishonestly, in which case less than five years have elapsed since the date of such conviction. Article 7 The supervisors shall abide by provisions of applicable laws, regulations and the Articles of Association, and perform the obligations of integrity and diligence. Article 8 The supervisors shall not disclose the secrets of the Company, unless legally mandated or required by the Articles of Association. Article 9 The supervisors shall not take the advantage of his or her position in the Company to seek for personal benefits, take bribes or other illegal compensation, and shall not appropriate any property of the Company. Article 10 Each supervisor shall serve a term of 3 years, which term is renewable upon re-election. Article 11 Any supervisor causing any loss to the Company as a result of his or her violation of applicable laws, regulations and the Articles of Association when performing duties shall be liable for the Company. the Article 12 The supervisors may resign prior to the expiry of the current term, provided that resignation of any supervisor elected on the general shareholders meeting is subject to the approval thereof, and the resignation of any supervisor elected by employees shall be approved pursuant to the employee election procedures of the Company. Any supervisor causing any loss to the Company as a result of his or her unapproved resignation shall be liable for the Company. Article 13 Any supervisor absent on two consecutive Committee meetings shall be deemed as incapable of performing his or her duty, in which case the Committee shall shareholder recommend meeting representative meeting to remove this supervisor. employee general the or Chapter 3 Constituents and Functions of Committee Article 14 The Committee shall comprise 5 supervisors, including 1 outside supervisor (hereinafter meaning supervisors who do in the Company). Any not hold office supervisor elected by the shareholders shall be replaced on the general shareholder meeting, while any supervisor elected by the employees shall be replaced by employees through election procedure. shall organize the duties of Article 15 The Committee shall have 1 the chairperson, who implementation of the Committee. The appointment and removal of the chairperson of the Committee shall be determined by two thirds of the voting rights held by the supervisors. Article 16 The Committee may set up an office responsible for day-to-day work of the Committee. Article 17 The Committee shall exercise the following functions and powers in accordance with law: (1) (2) to review the Company’s financial position, to request information from relevant departments and personnel of the Company, and to inspect financial documents and relevant information of subsidiaries of the Company; to supervise directors, managers and other senior officers who violate laws, regulations the Articles of Association in performing their duties; and China Telecom Corporation Limited Annual Report 2004 65 NOTICE OF ANNUAL GENERAL MEETING (3) (4) (5) (6) the Articles to require directors, managers and other senior officers of the Company laws, to rectify their violations of regulations of or Association or their behavior which impairs the interests of the Company; to report to the board of directors, general shareholder meeting, securities regulatory body and other relevant authorities where necessary; to check the financial information, including report to be submitted by the board of directors to the general shareholder meeting, business report and profit distribution plan, and retain certified accountant and auditor for review in case of doubt on behalf of the Company; to propose to convene an extraordinary general shareholder meeting; to negotiate with, or bring actions against, a director on behalf of the Company; (7) Other functions and powers set forth in the Articles of Association. The supervisors shall attend the board meeting as non-voting representatives. Article 18 The Committee’s oversight records of directors, managers and other senior officers, as well as the conclusion of financial or other special examination shall constitute major basis for their performance evaluation. Chapter 4 Convening and Attendance of Committee Meeting Article 19 The Committee meeting shall be held at least twice a year and shall be convened by the Committee. the chairperson of Article 20 In case that the chairperson is unable to convene the meeting under specific circumstances, the chairperson shall delegate a supervisor to perform the duty on his or her behalf. the Article 21 The written notice of Committee meeting shall be distributed to all supervisors 10 days prior to the meeting, and the notice shall include: (1) the date of the meeting; (2) the venue of the meeting; (3) the subject matters of the meeting; (4) the date of the notice. Article 22 The Committee shall notify all supervisors of the date of the meeting in accordance with the provisions, and provide them with adequate materials, including background introduction of the subject matters, any information as well as data which can facilitate the supervisors to understand the business development of the Company. Article 23 Any Committee meeting shall not be valid unless it is attended by more than two thirds of the supervisors. Article 24 The supervisors are obligated to attend the Committee meeting in person. Where a supervisor is unable to attend a meeting for any reason, he or she may by a written power of attorney appoint another supervisor to attend the meeting on his or her behalf. The power of attorney shall set out the name of the authorized person, the scope and the term of the authorization, and shall be signed or stamped by the authorizing supervisor. The authorized supervisor shall exercise the power as authorized. 66 China Telecom Corporation Limited Annual Report 2004 NOTICE OF ANNUAL GENERAL MEETING chairperson determines that some proposal shall not be included, he or she shall provide reasons therefor on the meeting. Any proposal to be included in the agenda shall be subject to procedures prescribed in article 26. Chapter 6 Voting and Resolution of Committee Meeting Article 28 The voting of the Committee meeting is by show of hands with each supervisor having one vote. Article 29 The Committee shall vote on the proposals included in the agenda item by item. Article 30 No resolution of the Committee shall take effect unless approved by two thirds of the voting rights. The resolution shall be in writing. Article 31 The Committee may make proposal to the board or the general shall be shareholder meeting, which implemented by the board via organizing relevant departments. The chairperson of the Committee or the supervisor designated the the Committee shall supervise by Committee implementation of resolutions. the Committee or the supervisor designated by the Committee shall record the resolution implementation progress, and report to the Committee. the chairperson The of Article 32 The supervisors shall execute the resolutions of the Committee. Article 33 The responsible Committee. supervisors shall be the for any resolutions of Any supervisor who failed to attend, and failed to authorize a representative to attend, the meeting, shall be deemed that he or she has abandoned the voting right. Chapter 5 Agenda and Proposals of Committee Meeting Article 25 shall: The proposal of the Committee (1) be in compliance with laws, regulations and the Articles of Association, within the business scope of the Company and functions of the Committee; (2) be in the interests of the Company and shareholders; (3) have specific topics and matters; (4) be submitted in writing. shall be determined by Article 26 The agenda of the Committee meeting the chairperson. Except for the proposals, the Committee may determine new proposals during the meeting as the case may be. shall provide Where any new proposal is determined, the adequate Committee background materials, introduction any the information and data which can facilitate the supervisors to understand the business development of the Company. including of proposals, Article 27 The supervisors shall submit to the office of the Committee any proposal or subject matter for discussion on Committee meeting prior to the meeting, and the chairperson shall determine whether to the include the agenda. them in If China Telecom Corporation Limited Annual Report 2004 67 NOTICE OF ANNUAL GENERAL MEETING Article 34 The Committee shall report to the annual general shareholder meeting the work performance of the current term, including times, meeting themes, and the Committee shall opine independently on the following matters: the meetings (1) (2) the Legitimate operation of the Company, legality of decision- including adequacy of making procedures, any procedures, internal violations of laws, regulations, the Articles of Association or impairment of corporate interests by directors and managers in performing their duties; control Financial condition of the Company, including the audit opinion issued by the accountant firm and their opinions on relevant matters, and the opinions on whether the financial statements financial reflected have conditions and results of operation of the Company; fairly the (3) Use of proceeds, including whether the actual use of proceeds is consistent with the committed use of proceeds, and whether the procedure to revise the use of proceeds complies with law; (4) Major acquisition and assets restructuring projects, including the rationality of the price, any existence of insider impairment of interests of some shareholders or loss of corporate assets; trading, or (5) Connected transactions, party including whether the price is fair and whether there is any act impairing the corporate interests. Chapter 7 Minutes of Committee Meeting Article 35 Minutes shall be kept during the Committee meetings and shall be signed by the attending supervisors and the recorders. request The attending supervisor may 68 China Telecom Corporation Limited Annual Report 2004 descriptive information on his or her speech to be recorded on the minutes. Article 36 The minutes of the Committee meeting shall state: (1) Meeting date, venue and the person’s name who calls for the meeting; (2) Names of attending supervisors and proxy supervisors (agent); (3) Agenda; (4) Key points of speeches; (5) Voting manner and result of each voting item (affirmative votes, veto votes or waiving votes). Article 37 The minutes of Committee meetings shall be true and complete, and be kept properly as important archives of the Company and major basis of supervisor liabilities for future reference. Article 38 The minutes of the Committee meetings shall be kept by the office of the Committee. Chapter 8 Supplementary Article 39 Any matter not provided herein shall be pursuant to applicable laws and regulations, and the Articles of Association. Article 40 In case of any inconsistency between this Charter and provisions of the Company Law, other applicable laws and regulatory documents regulations, other and the provisions of the latter shall prevail. the Articles of Association, 41 This Charter, Article any amendment thereof, shall take effect upon the approval of the general shareholder meeting. and Article 42 This Charter shall be interpreted by the Committee of the Company. 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 71 to 127 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 Institute of Certified Public 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 Annual Report 2004 69 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 2004 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 31 March 2005 70 China Telecom Corporation Limited Annual Report 2004 CONSOLIDATED BALANCE SHEET " " " At 31 December 2004 (Amounts in millions) Note 2004 RMB 2003 RMB 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 3 4 6 7 8 17 9 10 11 12 13 13 14 15 16 17 13 16 17 8 320,179 29,450 4,830 511 200 10,805 13,063 309,896 31,617 4,485 513 206 10,523 13,609 379,038 370,849 2,767 13,921 3,064 315 13,465 33,532 3,253 12,951 3,695 473 12,721 33,093 412,570 403,942 65,976 11,842 33,658 27,531 1,192 156 11,589 56,243 13,957 35,629 26,004 3,395 50 13,857 151,944 149,135 (118,412) (116,042) 260,626 254,807 72,366 157 25,182 2,302 68,632 43 32,744 1,325 100,007 102,744 251,951 1,413 251,879 1,269 253,364 253,148 The notes on pages 79 to 127 form part of these financial statements. China Telecom Corporation Limited Annual Report 2004 71 " " " CONSOLIDATED BALANCE SHEET At 31 December 2004 (Amounts in millions) Note 2004 RMB 2003 RMB Balance brought forward 253,364 253,148 Shareholders’ equity Share capital Reserves 18 19 80,932 78,274 75,614 75,180 Total shareholders’ equity 159,206 150,794 Total liabilities and shareholders’ equity 412,570 403,942 Approved and authorised for issue by the Board of Directors on 31 March 2005. Wang Xiaochu Chairman and Chief Executive Officer Leng Rongquan Executive Director, President and Chief Wu Andi Executive Director, Executive Vice President Operating Officer and Chief Financial Officer The notes on pages 79 to 127 form part of these financial statements. 72 China Telecom Corporation Limited Annual Report 2004 BALANCE SHEET " " " At 31 December 2004 (Amounts in millions) Note 2004 RMB 2003 RMB 3 4 5 10 11 12 14 15 351 73 205,027 37 375 77 184,343 46 205,488 184,841 5 2,519 3,682 3 — 1,776 1,190 — 6,209 2,966 211,697 187,807 17 2,324 — 106 975 932 2,341 2,013 3,868 953 ASSETS Non-current assets Property, plant and equipment, net Construction in progress Interests in subsidiaries Other assets Total non-current assets Current assets Accounts receivable, net Prepayments and other current assets Cash and cash equivalents Income tax recoverable Total current assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Accrued expenses and other payables Income tax payable Total current liabilities Net current assets Total assets less current liabilities 209,356 185,794 Non-current liabilities Long-term debt 13 50,150 35,000 Total liabilities 52,491 37,013 The notes on pages 79 to 127 form part of these financial statements. China Telecom Corporation Limited Annual Report 2004 73 " " " BALANCE SHEET At 31 December 2004 (Amounts in millions) Shareholders’ equity Share capital Reserves Note 18 19 2004 RMB 2003 RMB 80,932 78,274 75,614 75,180 Total shareholders’ equity 159,206 150,794 Total liabilities and shareholders’ equity 211,697 187,807 Approved and authorised for issue by the Board of Directors on 31 March 2005. Wang Xiaochu Chairman and Chief Executive Officer Leng Rongquan Executive Director, President and Chief Operating Officer Wu Andi Executive Director, Executive Vice President and Chief Financial Officer The notes on pages 79 to 127 form part of these financial statements. 74 China Telecom Corporation Limited Annual Report 2004 CONSOLIDATED STATEMENT OF INCOME " " " Operating revenues Operating expenses Depreciation and amortisation Network operations and support Selling, general and administrative Other operating expenses Total operating expenses Operating profit Deficit on revaluation of property, plant and equipment Net finance costs Investment income/(loss) 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 For the year ended 31 December 2004 (Amounts in millions, except per share data) Note 2004 RMB 2003 RMB 20 161,212 151,553 (47,170) (43,070) (27,003) (4,139) (46,597) (44,118) (24,810) (3,176) (121,382) (118,701) 39,830 (1,262) (5,340) 6 29 33,263 (5,187) 28,076 (53) 32,852 (14,832) (3,606) (42) 35 14,407 (469) 13,938 (56) 28,023 13,882 0.36 0.18 78,840 75,614 21 22 3 23 24 27 29 29 The notes on pages 79 to 127 form part of these financial statements. China Telecom Corporation Limited Annual Report 2004 75 " " " CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY For the year ended 31 December 2004 (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 75,614 20,955 3,362 4,904 8,121 1,624 31,064 7,204 152,848 1 — — — — — — 34,177 — 34,177 75,614 — 20,955 — 3,362 — 4,904 — 8,121 — 1,624 — 65,241 — — — — — — — — — — — — — — — — — — (14,388) — — — — — — — — — — — — — — — — — — — — — — — — 1,537 — — — — — — — (17) — 7,204 13,882 4,309 187,025 13,882 4,309 (1,234) (1,234) — — — (10,762) — — (10,762) 1,537 2,209 — — 150 2,209 150 — (11,812) 11,812 — — (45,649) — (45,649) — — — — — — — — — — — — — — — 7,340 — — — 14,388 — — — 1,748 — — — (9,088) (673) 17 — — (131) 131 — — (673) — — 75,614 6,567 3,362 6,424 15,461 3,372 24,246 15,748 150,794 5,318 — — — — — — — — — — (9,371) — — — — — — — — — — — — — — 7,384 — — — — — — — — — — — — — — — — — — 1,233 — — — — — — — — — — — — — — 28,023 100 — 2,653 (2,653) — (27,800) — — 9,371 — — — — — — — 10,168 — — — — — (72) — 2,421 — — — (378) — — (12,589) (5,224) — — (244) 72 — — — — (165) 165 12,702 28,023 100 — (27,800) — 1,233 (378) — (5,224) (244) — — 80,932 (2,804) 10,746 7,585 25,629 5,793 7,683 23,642 159,206 1 3 8 8 1 19 1 3 8 19 28 8 Balance as at 1 January 2003, as previously reported Adjusted for the Second Acquisition Balance as at 1 January 2003, as adjusted Net profit Contributions from China Telecom Distributions to China Telecom Assets distributed to China Telecom in connection with the Second Acquisition Revaluation surplus Recognition of deferred tax assets Elimination of deferred tax liabilities Transfer from retained earnings to other reserves Consideration for the acquisition of the First Acquired Group Transfer from other reserves to capital reserve Appropriations Dividends Revaluation surplus realised Deferred tax on land use rights realised Balance as at 31 December 2003 Issue of shares, net of issuing expenses of RMB294 million Net profit Contributions from China Telecom Transfer from retained earnings to other reserves Consideration for the acquisition of the Second Acquired Group Transfer from other reserves to capital reserve Revaluation surplus Deferred tax on revaluation surplus of property, plant and equipment Appropriations Dividends Effect of change in tax rate Revaluation surplus realised Deferred tax on land use rights realised Balance as at 31 December 2004 The notes on pages 79 to 127 form part of these financial statements. 76 China Telecom Corporation Limited Annual Report 2004 CONSOLIDATED STATEMENT OF CASH FLOW " " " For the year ended 31 December 2004 (Amounts in millions) Note 2004 RMB 2003 RMB Cash flows from operating activities (a) 66,078 58,392 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 (56,446) (42) (444) 42 379 (325) 483 (57,692) (485) (355) 52 348 (466) 1,504 Net cash used in investing activities (56,353) (57,094) Cash flows from financing activities Proceeds from issue of shares, net of issuing expenses Capital element of finance lease payments Proceeds from bank and other loans Repayments of bank and other loans Payment of dividends Cash contributions from/(distributions to) minority interests Cash payment for the acquisition of the First Acquired Group Cash payment for the acquisition of the Second Acquired Group Cash contributions from China Telecom Cash distributions to China Telecom 12,702 (50) 77,120 (81,070) (5,224) 91 — (12,650) 100 — — (210) 83,472 (86,147) (673) (27) (11,000) — 3,461 (196) Net cash used in financing activities (8,981) (11,320) Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year 744 12,721 (10,022) 22,743 Cash and cash equivalents at end of year 13,465 12,721 The notes on pages 79 to 127 form part of these financial statements. China Telecom Corporation Limited Annual Report 2004 77 " " " CONSOLIDATED STATEMENT OF CASH FLOW For the year ended 31 December 2004 (Amounts in millions) (a) Reconciliation of profit before taxation and minority interests to cash flows from operating activities Profit before taxation and minority interests Adjustments for: Depreciation and amortisation Deficit on revaluation of property, plant and equipment Provision for doubtful accounts Investment (income)/loss Share of profit from associates Interest income Interest expense Unrealised foreign exchange losses Loss on retirement and disposal of property, plant and equipment and impairment loss Increase in accounts receivable Decrease/(increase) in inventories Decrease in prepayments and other current assets Decrease in other non-current assets Increase/(decrease) in accounts payable Increase in accrued expenses and other payables Decrease in deferred revenues Cash generated from operations Interest received Interest paid Investment income received Income tax paid 2004 RMB 2003 RMB 33,263 14,407 47,170 1,262 1,121 (6) (29) (231) 5,367 152 961 (2,091) 486 481 297 55 1,517 (9,830) 79,945 231 (6,824) 43 (7,317) 46,597 14,832 1,037 42 (35) (331) 3,340 495 1,628 (2,383) (687) 116 12 (335) 34 (9,320) 69,449 331 (4,944) 17 (6,461) Cash flows from operating activities 66,078 58,392 The notes on pages 79 to 127 form part of these financial statements. 78 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 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, Sichuan Province, Hubei Province, Hunan Province, Hainan Province, Guizhou Province, Yunnan Province, Shaanxi Province, Gansu Province, Qinghai Province, Ningxia Hui Autonomous Region and Xinjiang Uygur Autonomous Region 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 (‘‘DLD’’) and international long distance (‘‘ILD’’) telephone services, Internet and managed data, leased line, and other related services. The operations of the Group are subject to the supervision and regulation by the PRC government. The Ministry of Information Industry, pursuant to the authority delegated to it by the PRC’s State Council, is responsible for formulating the telecommunications industry policies and regulations, including the regulation and setting of tariff levels for basic telecommunications services, such as local and long distance telephone services, managed data services, leased line and interconnection arrangements. Organisation The Company was incorporated in the PRC on 10 September 2002 as part of the reorganisation (the ‘‘Restructuring’’) of China Telecommunications Corporation (‘‘China Telecom’’ and together with its subsidiaries other than the Company are referred to as ‘‘China Telecom Group’’), a state-owned enterprise which is under the supervision and regulation of the Ministry of Information Industry. In November 2001, pursuant to a further industry restructuring plan approved by the State Council, China Telecom’s wireline in 10 northern provinces, telecommunications networks and related operations 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%, respectively, of the nationwide inter-provincial optic fibres. China Telecom Corporation Limited Annual Report 2004 79 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 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 assets and liabilities (the ‘‘Predecessor Operations’’) in consideration for 68,317 million ordinary domestic shares of the Company. The shares issued to China Telecom have a par value of RMB1.00 each and represented the entire registered and issued share capital of the Company of that date. In connection with the Restructuring, certain assets historically 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 were 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, Limited Chongqing Telecom Company (collectively the ‘‘First Acquired Group’’) and certain network management and research Limited and Sichuan Telecom Company and development facilities from China Telecom for a total purchase price of RMB46,000 million on 31 December 2003 (hereinafter, referred to as the ‘‘First Acquisition’’). The purchase price consisted of a cash payment of RMB11,000 million and a long-term payable of RMB35,000 million (Note 13). Prior to the First Acquisition and effective 31 December 2002, China Telecom transferred the wireline telecommunications business and related Jiangxi Province, Guangxi Zhuang operations Autonomous Region, Chongqing Municipality and Sichuan Province together with the in Anhui Province, Fujian Province, related assets and liabilities in consideration for the entire equity interests in each of the entities of the First 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 telecommunications industries and properties. investments in non- 80 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 1. PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PRESENTATION (continued) Organisation (continued) Pursuant to the resolution passed by the Company’s independent shareholders at an Extraordinary General Meeting held on 9 June 2004, the Company acquired the entire equity interests in Hubei Telecom Company Limited, Hunan Telecom Company Limited, Hainan Telecom Company Limited, Guizhou Telecom Company Limited, Yunnan Telecom Company Limited, Shaanxi Telecom Company Limited, Gansu Telecom Company Limited, Qinghai Telecom Company Limited, Ningxia Telecom Company Limited and Xinjiang Telecom Company Limited (collectively the ‘‘Second Acquired Group’’) from China Telecom for a total purchase price of RMB27,800 million on 30 June 2004 (hereinafter, referred to as the ‘‘Second Acquisition’’). The purchase price consisted of a cash payment of RMB8,340 million and a long-term payable of RMB19,460 million. On 30 June 2004, the Company repaid RMB4,310 million of this payable amount using the net proceeds from issue of new H shares in May 2004 (see Note 13). Prior to the Second Acquisition and effective 31 December 2003, China Telecom transferred the wireline telecommunications business and related operations in Hubei Province, Hunan Province, Hainan Province, Guizhou Province, Yunnan Province, Shaanxi Province, Gansu Province, Qinghai Province, Ningxia Hui Autonomous Region and Xinjiang Uygur Autonomous Region together with the related assets and liabilities in consideration for the entire equity interests in each of the entities of the Second Acquired Group. Certain assets historically associated with these operations were retained by China Telecom, and as at 31 December 2003, these assets amounted to RMB10,762 million and consisted primarily of investments in non-telecommunications industries and properties. Basis of presentation Since China Telecom controlled the Predecessor Operations transferred to the Company the accompanying consolidated financial and continues the Company, to control statements for the periods prior to the legal formation of the Company have been prepared as a reorganisation of entities under common control in a manner similar to a pooling-of-interests (‘‘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. China Telecom Corporation Limited Annual Report 2004 81 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 1. PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PRESENTATION (continued) Basis of presentation (continued) In addition, as the First Acquired Group and the Second Acquired Group (‘‘the Acquired Groups’’) were under the common control of China Telecom, the First Acquisition and the Second Acquisition (‘‘the Acquisitions’’) have been reflected in the accompanying in consolidated financial statements as a combination of entities under common control a manner similar to a pooling-of-interests. Accordingly, the assets and liabilities of the Acquired Groups have been accounted for at historical amounts and the consolidated financial statements of the Company prior to the Acquisitions have been restated to include the results of operations and assets and liabilities of the Acquired Groups on a combined basis. The assets retained by China Telecom in respect of the Acquisitions were reflected as distributions to China Telecom in the consolidated statement of shareholders’ equity as at 31 December 2002 and 31 December 2003 respectively. The considerations paid by the Company for the acquisition of the Acquired Groups have been accounted for as equity transactions in the consolidated statement of shareholders’ equity. The results of operations for the year ended 31 December 2003 and the financial condition as at 31 December 2003 and the shareholders’ equity as at 31 December 2003 and 1 January 2003 previously reported by the Group and the Second Acquired Group and the combined amounts presented in the accompanying consolidated financial statements are set out below: The Group (as previously reported) RMB millions The Second Acquired Group RMB millions Combined RMB millions Results of operations: Operating revenues Operating profit Net profit/(loss) Basic earnings/(loss) per share (RMB) Financial condition: Current assets Total assets Current liabilities Total liabilities Shareholders’ equity as at 31 December 2003 Shareholders’ equity as at 1 January 2003 118,451 32,448 24,686 0.33 25,504 305,605 96,666 173,064 33,102 404 (10,804) (0.15) 7,589 98,337 52,469 78,815 151,553 32,852 13,882 0.18 33,093 403,942 149,135 251,879 131,272 19,522 150,794 152,848 34,177 187,025 For the periods presented, all significant balances and transactions between the Group and the Acquired Groups prior to the Acquisitions have been eliminated. 82 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 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. The IASB has issued a number of new and revised International Financial Reporting Standards and International Accounting Standards (collectively new ‘‘IFRSs’’) which are effective for accounting periods beginning on or after 1 January 2005. The Group has not early adopted these new IFRSs in the financial statements for the year ended 31 December 2004. The Group has already commenced an assessment of the impact of these new IFRSs but is not yet in a position to state whether these new IFRSs would have significant impact on its results of operations and financial position. (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. The financial results of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases, and the share attributable to minority interests is deducted from or added to profit before minority interests. All significant intercompany balances and transactions and any unrealised gains/losses arising from intercompany transactions are eliminated on consolidation. China Telecom Corporation Limited Annual Report 2004 83 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 2. SIGNIFICANT ACCOUNTING POLICIES (continued) (b) Basis of consolidation (continued) 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. (c) Translation of foreign currencies The functional and reporting currency of the Group is Renminbi (‘‘RMB’’). Foreign currency transactions during the year are translated into RMB at the applicable rates of exchange quoted by the People’s Bank of China (‘‘PBOC rates’’) prevailing on the transaction dates. Foreign currency monetary assets and liabilities are translated into RMB at the applicable PBOC rates at the balance sheet date. Exchange differences, other than those capitalised as construction in progress, are recognised as income or expense in the consolidated statement of income. For the periods presented, no exchange differences were capitalised. (d) Cash and cash equivalents Cash and cash equivalents comprise cash at bank and in hand and time deposits with original maturities of three months or less when purchased. Cash equivalents are stated at cost, which approximates fair value. None of the Group’s cash and cash equivalents is restricted as to withdrawal. (e) Accounts receivable Accounts receivable are stated at cost less allowance for doubtful accounts. An allowance for doubtful accounts is provided based upon the evaluation of the recoverability of these accounts at the balance sheet date. (f) Inventories Inventories consist of materials and supplies used in maintaining the wireline telecommunications network and goods for valued at cost less a provision for obsolescence. resale. Materials and supplies are 84 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 2. SIGNIFICANT ACCOUNTING POLICIES (continued) (f) Inventories (continued) Inventories that are held for resale are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. (g) Property, plant and equipment less subsequent Property, plant and equipment are initially recorded at cost, 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. to the revaluations Subsequent (Note 3), which were based on depreciated replacement costs, 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 Annual Report 2004 85 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 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 lives. As at 31 December finance leases are amortised over their estimated useful 2004, the carrying amount of assets held under finance leases was RMB314 million (2003 : RMB239 million). Gains or losses arising from retirement or disposal of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised as income or expense in the consolidated statement of income on the date of disposal. On disposal of a revalued asset, the related revaluation surplus is transferred from the revaluation reserve to retained earnings. Depreciation is provided to write off the cost/revalued amount of each asset over its estimated useful life on a straight-line basis, after taking into account its estimated residual value, as follows: Depreciable lives primarily range from Buildings and improvements Telecommunications network plant, transmission and switching equipment Furniture, fixture, motor vehicles and other equipment 8 to 30 years 6 to 10 years 4 to 10 years (h) Lease prepayments Lease prepayments represent land use rights paid to the PRC’s land bureau. Land use rights are carried at cost and are written off on a straight-line basis over the respective periods of the rights which range from 20 years to 70 years. 86 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 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 in the opinion of impairment losses (Note 2(l)). A provision is made where, the carrying amount of the investments exceeds its recoverable management, amount. (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 year ended 31 December 2004, a provision for impairment loss of RMB88 million (2003 : Nil) was made to fully impair the carrying value of certain equipment for outdated telecommunications services. China Telecom Corporation Limited Annual Report 2004 87 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 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. 88 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 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 RMB8,701 million for the year ended 31 December 2004 (2003 : RMB5,758 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 2004, research and development expense was RMB172 million (2003 : RMB166 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 Annual Report 2004 89 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 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 temporary provided using the balance sheet liability method, providing for all 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, except for the effect of a change in tax rate that results in a change in the carrying amount of deferred tax assets and liabilities is charged or credited directly to shareholders’ equity, to the extent that such deferred tax assets and liabilities are previously charged or credited to equity. 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. 90 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 3. PROPERTY, PLANT AND EQUIPMENT, NET The Group: Telecomm- unications network plant and equipment RMB millions Furniture, fixture, motor vehicles and other equipment RMB millions Buildings and improve- ments RMB millions Total RMB millions 60,939 178 421,014 1,469 19,264 696 501,217 2,343 4,380 (119) 22 944 49,775 (14,195) 17 (8,776) 1,976 (1,259) (39) — 56,131 (15,573) — (7,832) Cost/valuation: Balance at 1 January 2004 Additions Transferred from construction in progress Disposals Reclassification Revaluations Balance at 31 December 2004 66,344 449,304 20,638 536,286 Accumulated depreciation: Balance at 1 January 2004 Depreciation charge for the year Provision for impairment Written back on disposals Reclassification Revaluations Balance at 31 December (8,331) (174,961) (8,029) (191,321) (2,646) — 37 (11) (67) (41,246) (88) 13,214 (5) 7,870 (2,930) — 1,070 16 — (46,822) (88) 14,321 — 7,803 2004 (11,018) (195,216) (9,873) (216,107) Net book value at 31 December 2004 55,326 254,088 10,765 320,179 Net book value at 31 December 2003 52,608 246,053 11,235 309,896 China Telecom Corporation Limited Annual Report 2004 91 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 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: Balance at 1 January 2004 Additions Transferred from construction in progress Reclassification Balance at 31 December 2004 Accumulated depreciation: Balance at 1 January 2004 Depreciation charge for the year Reclassification Balance at 31 December 2004 Net book value at 31 December 2004 Net book value at 31 December 2003 360 — 19 (73) 306 (1) (47) 42 (6) 300 359 16 5 5 73 99 — (6) (42) (48) 51 16 376 5 24 — 405 (1) (53) — (54) 351 375 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 (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. 92 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 3. PROPERTY, PLANT AND EQUIPMENT, NET (continued) In connection with the First Acquisition, the property, plant and equipment of the First 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 (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. In connection with the Second Acquisition, the property, plant and equipment of the Second Acquired Group as at 31 December 2003 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 RMB74,685 million (Note 8). The surplus on revaluation of certain property, plant and equipment totalling RMB1,537 million was credited to the revaluation reserve while the deficit arising from the revaluation of certain property, plant and equipment totalling RMB14,832 million was recognised as an expense for the year ended 31 December 2003. In accordance with the Group’s accounting policy (Note 2(g)), the property, plant and equipment of the Group as at 31 December 2004 were revalued for each asset class by the directors of the Company on a depreciated replacement cost basis. The value of the property, plant and equipment was determined at RMB320,179 million. The surplus on revaluation of certain property, plant and equipment totalling RMB1,233 million was credited to the revaluation reserve while the deficit arising from the revaluation of certain property, plant and equipment totalling RMB1,262 million was recognised as an expense for the year ended 31 December 2004. China Telecom Corporation Limited Annual Report 2004 93 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 3. PROPERTY, PLANT AND EQUIPMENT, NET (continued) The following is a summary of the carrying value of the Group’s property, plant and equipment prior to the revaluation and the revalued amounts of these assets as at 31 December 2004 : Carrying Revalued value prior to amounts revaluation RMB millions RMB millions RMB millions RMB millions Revaluation surplus Revaluation deficit Building and improvements 54,449 877 — 55,326 Telecommunications network plant and equipment Furniture, fixture, motor vehicles and other 254,994 356 (1,262) 254,088 equipment 10,765 — — 10,765 320,208 1,233 (1,262) 320,179 4. CONSTRUCTION IN PROGRESS Balance at beginning of year Additions Transferred to property, plant and equipment Balance at end of year 5. INTERESTS IN SUBSIDIARIES The Group RMB millions The Company RMB millions 31,617 53,964 (56,131) 29,450 77 20 (24) 73 The Company 2004 RMB millions 2003 RMB millions Share of net assets 205,027 184,343 94 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 5. INTERESTS IN SUBSIDIARIES (continued) Details of the Company’s subsidiaries at 31 December 2004, which principally affected the results of operations and the financial position of the Group, are as follows: Name of Company Type of legal entity Date of incorporation Registered capital (RMB millions) 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 October 2002 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 Hubei Telecom Company Limited Limited Company 9 March 2004 Hunan Telecom Company Limited Limited Company 12 March 2004 Hainan Telecom Company Limited Limited Company 9 March 2004 Guizhou Telecom Company Limited Limited Company 12 March 2004 Yunnan Telecom Company Limited Limited Company 9 March 2004 Shaanxi Telecom Company Limited Limited Company 8 March 2004 Gansu Telecom Company Limited Limited Company 10 March 2004 Qinghai Telecom Company Limited Limited Company 10 March 2004 Ningxia Telecom Company Limited Limited Company 10 March 2004 Xinjiang Telecom Company Limited Limited Company 11 March 2004 15,984 47,513 19,208 22,400 3,871 10,364 1,153 4,992 4,276 8,123 5,412 661 580 2,401 3,747 2,482 3,413 965 795 4,660 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 2004 RMB millions 2003 RMB millions Share of net assets 511 513 China Telecom Corporation Limited Annual Report 2004 95 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 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 2004 RMB millions 2003 RMB millions Unlisted equity investments 200 206 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. 96 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 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 Assets Liabilities Net balance 2004 RMB millions 2003 RMB millions 2004 RMB millions 2003 RMB millions 2004 RMB millions 2003 RMB millions 286 198 — — 286 198 and equipment 516 67 (1,295) (579) (779) (512) Deferred revenues and installation costs Land use rights Deferred tax assets/ (liabilities) 1,942 8,061 1,788 8,470 (1,007) — (746) — 935 8,061 1,042 8,470 10,805 10,523 (2,302) (1,325) 8,503 9,198 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 adjustments based on changes in circumstances that affect the Group’s assessment of the future taxable income. The allowance is subject realisability of the deferred tax assets. The Group has reviewed its deferred tax assets as at 31 December 2003 and 2004. 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 2003 and 2004 in respect of deferred tax assets arising from temporary differences. China Telecom Corporation Limited Annual Report 2004 97 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 8. DEFERRED TAX ASSETS AND LIABILITIES (continued) Movements in temporary differences are as follows: Balance at 1 January 2003 RMB millions Recognised in statement of income RMB millions Recognised in shareholders’ equity RMB millions Balance at 31 December 2003 RMB millions Note Current Provisions, primarily for receivables Non-current Property, plant and equipment Deferred revenues and installation costs Tax loss Land use rights Net deferred tax assets (ii) (ii) (ii) (i) (iii) 555 17 (374) 198 (5,680) 4,042 1,126 (512) 1,261 — 6,392 2,528 383 1,234 (131) (602) (1,234) 2,209 1,042 — 8,470 5,545 (Note 24) 1,125 9,198 Balance at 31 December 2004 Note RMB millions RMB millions RMB millions RMB millions Recognised in shareholders’ equity Recognised in statement of income Balance at 1 January 2004 Current Provisions, primarily for receivables Non-current Property, plant and 198 88 — 286 equipment (iv) (512) 111 (378) (779) Deferred revenues and installation costs Land use rights (iii) Net deferred tax assets 1,042 8,470 9,198 (107) (165) — (244) 935 8,061 (73) (Note 24) (622) 8,503 98 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 8. DEFERRED TAX ASSETS AND LIABILITIES (continued) Note: (i) Represents net tax loss carry forward of the Second Acquired Group for the year ended 31 December 2003. 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. (ii) As described in Note 3, in connection with the Restructuring and the Acquisitions, the property, plant and equipment of the Predecessor Operations, the First Acquired Group and the Second Acquired Group were revalued as at 31 December 2001, 2002 and 2003, respectively. The tax bases of these assets were adjusted to conform to the respective revalued amounts. In addition, in connection with the Restructuring and the Acquisitions, the tax bases of the assets and liabilities of the Predecessor Operations and the Acquired Groups that gave rise to the temporary differences were 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 these items were eliminated. The reductions in net deferred tax liabilities of RMB4,887 million as at 31 December 2001, RMB20 million as at 31 December 2002 and RMB150 million as at 31 December 2003 were credited to shareholders’ equity. (iii) In connection with the Restructuring and the Acquisitions, the land use rights of the Predecessor Operations, the First Acquired Group and the Second Acquired Group, which as at 31 December 2001, 2002 and 2003 had a total carrying amounts of RMB2,638 million, RMB617 million and RMB1,251 million, respectively, were revalued as required by the relevant PRC rules and regulations. The revalued amounts of the Predecessor Operations’ and the Acquired Groups’ land use rights as at 31 December 2001, 2002 and 2003 were determined at RMB14,939 million, RMB7,913 million and RMB8,464 million, respectively. The tax bases of the land use rights were 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 amounts of RMB4,059 million, RMB2,408 million and RMB2,209 million as at 31 December 2001, 2002 and 2003, 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. In 2004, certain subsidiaries of the Group with operations in the western region of the PRC obtained approval from tax authority to reduce the income tax rate from 33% to 15% for the period from 1 January 2004 to 31 December 2010. In addition, certain subsidiaries of the Group obtained approval from tax authority to reduce income tax rate from 33% to 15% with effect from 1 January 2004. Accordingly, the effect of the change in tax rate on the amount of the deferred tax asset expected to be realised during the relevant periods amounting to RMB244 million was charged to shareholders’ equity. (iv) As described in Note 3, in accordance with the Group’s accounting policy, the property, plant and equipment of the Group were revalued as at 31 December 2004. The tax bases of these assets were not adjusted to conform to such revalued amounts and accordingly, a deferred tax asset and a deferred tax liability in the respective amount of RMB356 million and RMB378 million in respect of the revaluation deficit and surplus were recognised. The deferred tax asset was credited to the income statement while the deferred tax liability was charged to shareholders’ equity. China Telecom Corporation Limited Annual Report 2004 99 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 9. INVENTORIES Inventories represent: Materials and supplies Goods for resale The Group 2004 RMB millions 2003 RMB millions 1,907 860 2,104 1,149 2,767 3,253 10. ACCOUNTS RECEIVABLE, NET Accounts receivable, net, are analysed as follows: The Group The Company 2004 RMB 2003 RMB 2004 RMB 2003 RMB millions millions millions millions Accounts receivable Less: Allowance for doubtful accounts 15,603 (1,682) 14,769 (1,818) 13,921 12,951 5 — 5 — — — 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. 100 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 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 The Group 2004 RMB millions 2003 RMB millions 1,818 1,121 (1,257) 1,859 1,037 (1,078) At end of year 1,682 1,818 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 2004 2003 RMB millions RMB millions 10,258 1,270 1,083 526 9,650 1,425 1,169 611 13,137 (1,609) 12,855 (1,780) 11,528 11,075 The Company did not have accounts receivable balance from telephone and Internet subscribers. China Telecom Corporation Limited Annual Report 2004 101 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 10. ACCOUNTS RECEIVABLE, NET (continued) Ageing analysis of accounts receivable from other telecommunications operators and customers is as follows: The Group 2004 2003 2004 The Company Current, within 1 month 1 to 3 months 4 to 12 months More than 12 months Less: Allowance for doubtful accounts RMB millions RMB millions RMB millions 1,358 550 275 283 1,147 355 285 127 2,466 (73) 1,914 (38) 2,393 1,876 5 — — — 5 — 5 11. PREPAYMENTS AND OTHER CURRENT ASSETS Prepayments and other current assets represent: 2003 RMB 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 The Group 2004 RMB 2003 RMB The Company 2004 RMB 2003 RMB millions millions millions millions 640 — 854 607 963 844 — 4 2,502 31 1,737 609 609 1,633 — — 13 — 6 2 3,064 3,695 2,519 1,776 102 China Telecom Corporation Limited Annual Report 2004 12. CASH AND CASH EQUIVALENTS NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 The Group The Company 2004 RMB millions 2003 RMB millions 2004 RMB millions 2003 RMB millions Cash at bank and in hand Time deposits with maturity within three 10,512 12,451 882 months 2,953 270 2,800 990 200 13,465 12,721 3,682 1,190 13. SHORT-TERM AND LONG-TERM DEBT Short-term debt comprises: The Group 2004 2003 RMB millions RMB millions Bank loans Loans from China Telecom Group 55,887 10,089 56,243 — Total short-term debt 65,976 56,243 Weighted average interest rate of the Group’s short-term debt as at 31 December 2004 was 4.4% (2003 : 4.6%). The loans from China Telecom Group bear interest at fixed rates ranging from 2.0% to 5.0% per annum, are unsecured and are repayable within one year. China Telecom Corporation Limited Annual Report 2004 103 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 13. SHORT-TERM AND LONG-TERM DEBT (continued) Long-term debt comprises: Interest rates and final maturity The Group 2004 RMB millions 2003 RMB millions The Company 2004 RMB millions 2003 RMB millions Bank loans Renminbi denominated Interest rates ranging from 2.9% to 6.6% per 26,859 38,339 US Dollars denominated Interest rates ranging from 0.5% to 9.2% per 2,883 3,922 annum with maturities through 2015 Japanese Yen Interest rates ranging from 0.6% to 3.5% per 3,182 4,180 annum with maturities through 2038 annum with maturities through 2040 Interest rates ranging from 0.5% to 9.2% per 1,053 1,039 annum with maturities through 2032 70 73 34,047 47,553 11 — 13 23 — — — — — — — — — — — — — — — — 35,000 35,000 35,000 35,000 15,150 — 15,150 — 84,208 (11,842) 82,589 (13,957) 50,150 — 35,000 — 72,366 68,632 50,150 35,000 Note: (i) This represents the deferred consideration payable to China Telecom in respect of the First Acquisition (Note 1). The amount is unsecured, and for the first five years after the date of the First Acquisition, the Company pays interest on the outstanding balance at the rate of 5.184% per annum. Thereafter the interest rate is adjusted based on the prevailing market interest rate. This amount is repayable on 31 December 2013 and the Company may, from time to time, repay all or part of the amount at any time until 31 December 2013 without penalty. 104 China Telecom Corporation Limited Annual Report 2004 denominated Euro denominated Other currencies Other loans Renminbi denominated US Dollars denominated Amount due to China Telecom In connection with the First Acquisition — Renminbi denominated (Note (i)) In connection with the Second Acquisition — Renminbi denominated (Note (ii)) Total long-term debt current portion Less: Non-current portion NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 13. SHORT-TERM AND LONG-TERM DEBT (continued) Long-term debt comprises: (continued) (ii) This represents the remaining balance of the deferred consideration payable to China Telecom in respect of the Second Acquisition (Note 1). The amount is unsecured, and for the first five years after the date of the Second Acquisition, the Company pays interest on the outstanding balance at the rate of 5.184% per annum. Thereafter the interest rate is adjusted based on the prevailing market interest rate. This amount is repayable on 30 June 2014 and the Company may, from time to time, repay all or part of the amount at any time until 30 June 2014 without penalty. As at 31 December 2004, no bank loans were secured. As at 31 December 2003, bank loans of RMB22 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 RMB27 million as at 31 December 2003. The aggregate maturities of the Group’s and the Company’s long-term debt subsequent to 31 December 2004 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 2004 RMB 2003 RMB The Company 2004 RMB 2003 RMB millions millions millions millions 11,842 10,022 8,343 552 268 13,957 15,458 10,531 2,864 723 — — — — — — — — — — 53,181 39,056 50,150 35,000 84,208 82,589 50,150 35,000 The Group’s short-term and long-term debts do not contain any financial covenants. As at 31 December 2004, the Group had available credit facilities of RMB27,855 million (2003 : RMB30,965 million) which it can draw upon. China Telecom Corporation Limited Annual Report 2004 105 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 14. ACCOUNTS PAYABLE Accounts payable are analysed as follows: Third parties China Telecom Group The Group The Company 2004 RMB 2003 RMB 2004 RMB 2003 RMB millions millions millions millions 26,591 7,067 28,367 7,262 33,658 35,629 17 — 17 106 — 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 2004 RMB 2003 RMB 2004 RMB 2003 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 5,599 6,451 7,856 13,752 6,658 5,661 8,099 15,211 33,658 35,629 6 4 — 7 17 106 — — — 106 106 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 15. ACCRUED EXPENSES AND OTHER PAYABLES Accrued expenses and other payables represent: The Group The Company 2004 RMB 2003 RMB 2004 RMB 2003 RMB millions millions millions millions Amounts due to China Telecom Group Accrued expenses Customer deposits and receipts in 4,889 15,923 5,165 17,150 230 2,094 advance 6,719 3,689 — 319 656 — 27,531 26,004 2,324 975 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 Non-current portion The Group 2004 2003 RMB millions RMB millions 163 110 51 324 (11) 313 (156) 157 52 46 — 98 (5) 93 (50) 43 China Telecom Corporation Limited Annual Report 2004 107 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 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 2004 2003 RMB millions RMB millions Balance at beginning of year 46,601 55,921 Additions for the year — installation fees — calling cards Reduction for the year — amortisation of connection fees — amortisation of installation fees — usage of calling cards 2,135 4,392 3,309 5,451 6,527 8,760 (8,458) (2,865) (5,034) (9,771) (2,643) (5,666) Balance at end of year 36,771 46,601 Representing: — Current portion — Non-current portion 11,589 25,182 13,857 32,744 36,771 46,601 Included in other non-current assets are capitalised direct incremental costs associated with the installation of wireline services. As at 31 December 2004, the unamortised portion of these costs was RMB11,428 million (2003 : RMB12,366 million). 108 China Telecom Corporation Limited Annual Report 2004 18. SHARE CAPITAL NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 The Group and the Company 2004 RMB millions 2003 RMB millions Registered, issued and fully paid 67,054,958,321 (2003 : 67,586,776,503) ordinary domestic shares of RMB1.00 each 67,055 67,587 13,877,410,000 (2003 : 8,027,410,000) overseas listed H shares of RMB1.00 each 13,877 8,027 80,932 75,614 In May 2004, the Company issued and allotted 5,318,181,818 new H shares with a par value of RMB1.00 each, representing 4,466,693,018 H shares and 8,514,888 American Depositary Shares (‘‘ADS’’, each representing 100 H shares), at prices of HK$2.30 per H share and US$29.49 per ADS, respectively, by way of a global offering to Hong Kong and overseas investors. As part of the global offering, 531,818,182 existing 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. The Company raised net proceeds of RMB12,702 million from issue of new H shares. All ordinary domestic shares and H shares rank pari passu in all material respects. China Telecom Corporation Limited Annual Report 2004 109 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 19. RESERVES The Group and the Company Balance as at 1 January 2003, as previously reported (Note 1) Adjusted for the Second 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 Total RMB millions 20,955 3,362 4,904 8,121 1,624 31,064 7,204 77,234 Acquisition — — — — — 34,177 — 34,177 Balance as at 1 January 2003, as adjusted Net profit Contributions from China Telecom Distributions to China Telecom Assets distributed to China Telecom in connection with the Second Acquisition (Note 1) Revaluation surplus (Note 3) Recognition of deferred tax assets (Note 8) Elimination of deferred tax liabilities (Note 8) Transfer from retained earnings to other reserves Consideration for the acquisition of the First Acquired Group (Note 1) Transfer from other reserves to capital reserve Appropriations (Notes (i) and (ii)) Dividends Revaluation surplus realised Deferred tax on land use rights realised Balance as at 31 December 2003 Issue of shares, net of issuing expenses of RMB294 million Net profit Contributions from China Telecom Transfer from retained earnings to other reserves Consideration for the acquisition of the Second Acquired Group (Note 1) Transfer from other reserves to capital reserve Revaluation surplus (Note 3) Deferred tax on revaluation surplus of property, plant and equipment (Note 8) Appropriations (Notes (i) and (ii)) Dividends (Note 28) Effect of change in tax rate (Note 8) Revaluation surplus realised Deferred tax on land use rights realised 20,955 — 3,362 — — — — — — — — — (14,388) — — — — — — — — — — — — — — — — — 4,904 — — — — 1,537 — — — — — — — (17) — 8,121 — 1,624 — 65,241 — 7,204 13,882 111,411 13,882 — — — — — — — — — — — — — — — — — — — 4,309 (1,234) 4,309 (1,234) (10,762) — (10,762) 1,537 2,209 — — 150 (11,812) 11,812 2,209 150 — — (45,649) — (45,649) — 7,340 — — — 1,748 — — 14,388 — — — — (9,088) (673) 17 — — (131) 131 — — (673) — — 6,567 3,362 6,424 15,461 3,372 24,246 15,748 75,180 — — — — — (9,371) — — — — — — — 7,384 — — — — — — — — — — — — — — — — — — 1,233 — — — — (72) — — — — — — — — — 10,168 — — — — — — — — — — — — 2,421 — — — — — — — — 28,023 100 2,653 (2,653) 7,384 28,023 100 — (27,800) 9,371 — — — — (27,800) — 1,233 (378) — — (244) — (165) — (12,589) (5,224) — 72 165 (378) — (5,224) (244) — — Balance as at 31 December 2004 (2,804) 10,746 7,585 25,629 5,793 7,683 23,642 78,274 110 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 19. RESERVES (continued) Note: (i) 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 2004, the Company transferred RMB2,421 million (2003 : RMB1,748 million), being 10% of the year’s net profit determined in accordance with PRC accounting rules and regulations, to this reserve. According to the Company’s Articles of Association, the Directors authorised, subject to shareholders’ approval, for the year ended 31 December 2004, the transfer of RMB7,747 million (2003 : RMB5,592 million), being 32% (2003 : 32%) 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. (ii) 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 2004, the Directors authorised, subject to shareholders’ approval, the transfer of RMB2,421 million (2003 : RMB1,748 million), being 10% (2003 : 10%) of the year’s net profit determined in accordance with the PRC accounting rules and regulations, to this fund. (iii) 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 2004, the amount of retained earnings available for distribution was RMB20,609 million (2003 : RMB14,212 million), being the amount determined in accordance with the PRC accounting rules and regulations. Final dividend of approximately RMB5,576 million in respect of the financial year 2004 proposed after the balance sheet date has not been recognised as a liability at the balance sheet date (Note 28). China Telecom Corporation Limited Annual Report 2004 111 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 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 2004 RMB millions 2003 RMB millions 8,458 2,865 29,827 47,646 26,231 3,788 14,109 3,015 10,719 4,154 10,400 9,771 2,643 27,499 45,815 25,460 3,943 10,007 3,210 8,365 5,103 9,737 161,212 151,553 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. 112 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 21. OTHER OPERATING EXPENSES Other operating expenses consist of: Interconnection charges Donations Others Note: Note (i) The Group 2004 RMB millions 2003 RMB millions 4,095 17 27 3,104 41 31 4,139 3,176 (i) Interconnection charges represent amounts incurred for the use of other domestic and foreign 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 2004 include personnel expenses of RMB23,233 million (2003 : RMB20,812 million) and auditors’ remuneration of RMB48 million (2003 : RMB36 million). China Telecom Corporation Limited Annual Report 2004 113 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 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 The Group 2004 RMB millions 2003 RMB millions 6,834 (1,467) 5,367 (231) 207 (3) 4,948 (1,608) 3,340 (331) 647 (50) 5,340 3,606 * Interest expense was capitalised in construction in progress at the following rates per annum 4.1% to 5.2% 4.3% to 5.5% 24. TAXATION Taxation in the consolidated statement of income comprises: Provision for PRC income tax Deferred taxation (Note 8) The Group 2004 2003 RMB millions RMB millions 5,114 73 6,014 (5,545) 5,187 469 114 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 24. TAXATION (continued) A reconciliation of the expected tax with the actual tax expense is as follows: The Group 2004 RMB millions 2003 RMB millions Note Profit before taxation and minority interests 33,263 14,407 Expected PRC income tax expense at statutory tax rate of 33% Differential tax rate on subsidiaries’ income Non-deductible expenses Non-taxable income Tax credit for domestic equipment purchases (i) (i) (ii) (iii) Income tax Note: 10,977 (1,608) 294 (3,266) (1,210) 4,754 (314) 515 (3,659) (827) 5,187 469 (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 Annual Report 2004 115 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 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 2004 RMB 2003 RMB thousands thousands 524 7,994 515 452 4,618 493 9,033 5,563 Included in the directors’ and supervisors’ remuneration were fees of RMB524,000 (2003 : RMB452,000) paid or payable to the independent non-executive directors and independent supervisors for the year ended 31 December 2004. The number of directors and supervisors whose remuneration falls within the following band is set out below: HK$ equivalent Nil–1,000,000 2004 Number 2003 Number 21 17 None of the directors and supervisors received any fees, bonuses, inducements, or compensation for loss of office, or waived any emoluments during the periods presented. 116 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 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 2004 RMB 2003 RMB thousand thousand 2,777 223 1,627 97 3,000 1,724 The number of these employees whose emoluments fall within the following band is set out below: HK$ equivalent Nil–1,000,000 2004 Number 2003 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 RMB28,023 million (2003 : RMB13,882 million) which has been dealt with in the stand-alone financial statements of the Company. China Telecom Corporation Limited Annual Report 2004 117 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 28. DIVIDENDS Pursuant to a resolution passed at the Directors’ meeting on 31 March 2005, a final dividend of equivalent to HK$0.065 per share totalling approximately RMB5,576 million for the year ended 31 December 2004 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 2004. Pursuant to the shareholders’ approval at the Annual General Meeting held on 3 May 2004, a final dividend of RMB0.069083 per share totalling RMB5,224 million in respect of the year ended 31 December 2003 was declared and was paid on 20 May 2004. 29. BASIC EARNINGS PER SHARE The calculation of basic earnings per share for the year ended 31 December 2004 is based on the net profit of RMB28,023 million and the weighted average number of shares in issue during the year of 78,839,968,917 shares. The weighted average number of shares in issue for the year ended 31 December 2004 reflects the issuance of 5,318,181,818 new H shares in May 2004 (Note 18). The calculation of basic earnings per share for the year ended 31 December 2003 is based on the net profit of RMB13,882 million and the weighted average number of shares in issue during the year of 75,614,186,503 shares. 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 and the Company lease 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. 118 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 30. COMMITMENTS AND CONTINGENCIES (continued) Operating lease commitments (continued) As at 31 December 2004 and 2003, future minimum lease payments under non-cancellable operating leases having initial or remaining lease terms of more than one year were as follows: The Group 2004 2003 RMB millions RMB millions The Company 2004 RMB millions 2003 RMB millions Within 1 year Between 1 to 2 years Between 2 to 3 years Between 3 to 4 years Between 4 to 5 years Thereafter 369 187 137 124 127 341 600 221 133 126 82 238 Total minimum lease payments 1,285 1,400 — 2 1 — — — 3 — — — — — — — Total rental expense in respect of operating leases charged to the consolidated statement of income for the year ended 31 December 2004 was RMB1,271 million (2003 : RMB1,262 million). China Telecom Corporation Limited Annual Report 2004 119 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 30. COMMITMENTS AND CONTINGENCIES (continued) Capital commitments As at 31 December 2004 and 2003, the Group and the Company had capital commitments as follows: The Group The Company 2004 RMB 2003 RMB 2004 RMB 2003 RMB millions millions millions millions Authorised and contracted for Properties Telecommunications network 918 2,184 plant and equipment 3,947 7,028 Authorised but not contracted for Properties Telecommunications network 4,865 9,212 1,699 1,933 plant and equipment 9,168 9,668 10,867 11,601 Contingent liabilities 17 36 53 287 15 302 — — — — — — (a) The Company and the Group were advised by their PRC lawyers that, except for liabilities arising out of or relating to the businesses of the Predecessor Operations and the Acquired Groups Restructuring and the Acquisitions, no other transferred to the Company in connection with the 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 Acquisitions. 120 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 30. COMMITMENTS AND CONTINGENCIES (continued) Contingent liabilities (continued) (b) As at 31 December 2004 and 2003, the undiscounted maximum amount of potential future payments under guarantees given to banks in respect of banking facilities granted to the parties below were as follows: China Telecom Group and the Group’s investees Subsidiaries The Group 2004 2003 RMB millions RMB millions The Company 2004 RMB millions 2003 RMB millions — — — 42 — 42 — 1,884 — 1,492 1,884 1,492 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 2004 and 2003, 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. China Telecom Corporation Limited Annual Report 2004 121 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 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. 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. 122 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 31. CONCENTRATION OF RISKS (continued) Currency risk Substantially all of the revenue-generating operations of the Group are transacted in RMB, which is not fully convertible into foreign currencies. On 1 January 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted by the People’s Bank of China. However, the unification of the exchange rate does not imply convertibility of RMB into United States dollars or other foreign currencies. All foreign exchange transactions must take place either through the People’s Bank of China or other institutions authorised to buy and sell foreign exchange or at a 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’ invoices, shipping documents and signed contracts. Interest rate risk The interest rates and terms of repayment of the Group’s debts are disclosed in Note 13. 32. RELATED PARTY TRANSACTIONS Companies are considered to be related if one company has the ability, directly or indirectly, to control the other company or exercise significant influence over the other company in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence. The Group conducts business with enterprises directly or indirectly owned or controlled by the PRC government (‘‘state-owned enterprises’’). Furthermore, the PRC government itself 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. China Telecom Corporation Limited Annual Report 2004 123 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 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: 2004 RMB millions 2003 RMB millions Note Purchases of telecommunications equipment and materials Construction, engineering and information technology services Provision of community services Provision of ancillary services Provision of comprehensive services Operating lease expenses Centralised service expenses Interconnection revenues Interconnection charges Interest on amounts due to and loans from China Telecom Group Note: (i) (ii) (iii) (iv) (v) (vi) (vii) (vii) (viii) (ix) 304 6,568 2,417 2,490 361 393 163 98 201 2,426 573 7,999 2,563 1,311 — 353 369 253 685 — (i) Represent purchases of telecommunications equipment and materials from China Telecom Group. (ii) (iii) (iv) (v) (vi) Represent provision of network construction, engineering and information technology services to the Group by China Telecom Group. Represent amounts paid and payable by the Group to China Telecom Group in respect of cultural, educational, hygiene and other community services. 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. Represent amounts paid and payable by the Group to China Telecom Group in respect of comprehensive services provided (see scope of comprehensive services defined below). Represent amounts paid and payable to China Telecom Group for operating leases in respect of business premises and inter-provincial transmission optic fibres. (vii) Represent net amount charged by China Telecom to the Group for costs associated with common corporate services and international telecommunications facilities. (viii) Represent amounts charged from/to China Telecom for telephone calls. interconnection of domestic long distance (ix) Represent interest paid and payable to China Telecom with respect to the deferred consideration payable to China Telecom in connection with the Acquisitions and interest with respect to loans from China Telecom Group (Note 13). 124 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 32. RELATED PARTY TRANSACTIONS (continued) In connection with the Second Acquisition, the Group and China Telecom Group entered into a number of agreements on 13 April 2004. The principal terms of these agreements are similar to those disclosed in Note 32 to the Group’s 2003 consolidated financial than an increase in the maximum commission rate for domestic statements, other equipment procurement from 1.8% to 3.0% to reflect the latest market price. In addition, the Company entered into a comprehensive services framework agreement with China Telecom on 13 April 2004 to govern the terms and conditions of transactions between the Group and entities within China Telecom Group which were not within the scope of the agreements entered into previously. Such transactions include procurement of telecommunications equipment, network design, software upgrade, system integration, manufacture of calling cards and other services. Pursuant to this agreement, China Telecom Group charges 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. 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. 33. EMPLOYEE BENEFITS PLAN As stipulated by the regulations of the PRC, the Group participates in various defined contribution retirement plans organised by municipal and provincial governments for its employees. The Group is required to make contributions to the retirement plans at rates ranging from 18% to 20% of the salaries, bonuses and certain allowances of the employees. A member of the plan is entitled to a pension equal to a fixed proportion of the salary prevailing at the member’s retirement date. The Group has no other material obligation for the payment of pension benefits associated with these plans beyond the annual contributions described above. The Group’s contributions for the year ended 31 December 2004 were RMB2,031 million (2003 : RMB1,996 million). China Telecom Corporation Limited Annual Report 2004 125 " " " NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2004 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 from the Hong Kong dollar amount equal to the product of the number of stock 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. During the year ended 31 December 2004, 70 million stock appreciation right units were exercised. No stock appreciation right units were exercised in the year ended 31 December 2003. The Company recognises compensation expense of the stock appreciation rights over the applicable vesting period. For the year ended 31 December 2004, compensation expense recognised was RMB70 million (2003 : RMB97 million). 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. 126 China Telecom Corporation Limited Annual Report 2004 NOTES TO THE FINANCIAL STATEMENTS " " " For the year ended 31 December 2004 35. FAIR VALUES OF FINANCIAL INSTRUMENTS (continued) 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 2004 and 2003, the carrying amounts and fair values of the Group’s long-term debt were as follows: 2004 2003 Carrying amount RMB millions Fair value RMB millions Carrying amount RMB millions Fair value RMB millions Long-term debt 84,208 82,850 82,589 83,070 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 2004 to be China Telecommunications Corporation, a state-owned enterprise established in the PRC. China Telecom Corporation Limited Annual Report 2004 127 " " " 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 First Acquisition, the property, plant and equipment of the First 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. In connection with the Second Acquisition, the property, plant and equipment of the Second Acquired Group were revalued as at 31 December 2003 (see Note 3 on the financial statements). The net revaluation deficit has been reflected in the consolidated financial statements as at 31 December 2003. Such revaluation resulted in an increase directly to shareholders’ equity of RMB1,537 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 RMB14,832 million with respect to the reduction in carrying amount of certain property, plant and equipment below their historical cost bases. In accordance with Group’s accounting policy, the property, plant and equipment of the Group were revalued as at 31 December 2004 (see Note 3 on the financial statements). The net revaluation deficit has been reflected in the consolidated financial statements as at 31 December 2004. Such revaluation resulted in an increase directly to shareholders’ equity of RMB1,233 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 RMB1,262 million with respect to the reduction in carrying amount of certain property, plant and equipment below their historical cost bases. 128 China Telecom Corporation Limited Annual Report 2004 SUPPLEMENTARY INFORMATION FOR ADS HOLDERS " " " (a) Revaluation of property, plant and equipment (continued) 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 as a result of the above revaluations, 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 reserves recorded directly to shareholders’ equity and the charges to income recorded under IFRS as a result of the above revaluations are reversed for US GAAP purposes. However, as a result of the tax deductibility of the net revaluation deficit, a deferred tax is created under US GAAP with a liability related to the net revaluation deficit corresponding decrease in shareholders’ equity. (b) Disposal of revalued property, plant and equipment Under IFRS, on disposal of a revalued asset, the related revaluation surplus is transferred from the revaluation reserve to retained earnings. Under US GAAP, the gain and loss on disposal of an asset is determined with reference to the asset’s historical cost carrying amount and included in current earnings. (c) Effect of change in tax rate Under IFRS, the effect of a change in tax rate that results in a change in the carrying amounts of deferred tax assets and liabilities is charged or credited directly to equity, to the extent that such deferred tax assets and liabilities are previously charged or credited to equity. Under US GAAP, the effect of a change in tax rate for all assets and liabilities is recorded in the income statement. items of deferred tax (d) 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. China Telecom Corporation Limited Annual Report 2004 129 " " " SUPPLEMENTARY INFORMATION FOR ADS HOLDERS (d) Related party transactions (continued) Under US GAAP, there are no similar exemptions. The Group’s principal transactions with state-controlled telecommunications operators in the PRC were as follows: Interconnection revenues Interconnection charges Leased line revenues 2004 RMB millions 2003 RMB millions 8,964 2,190 2,701 6,931 1,154 3,476 The amounts set out above represent the historical costs incurred by the related parties in carrying out such transactions. (e) Recently issued accounting standards SFAS No. 123R In December 2004, the FASB issued SFAS No. 123 (revised 2004), ‘‘Share-based payment’’ (SFAS No. 123R). SFAS No. 123R addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R requires an entity to recognise the grant-date fair-value of stock options and other equity-based compensation issued to employees in the income statement. SFAS No. 123R generally requires that an entity account for those transactions using the fair-value- based method, and eliminates an entity’s ability to account for share-based compensation transactions using the intrinsic value method of accounting, which was permitted under Statement 123, as originally issued. For the Group, SFAS No. 123R is effective at the beginning of the reporting period that begins after 15 June 2005. Currently, the Group impact on its does not expect the application of SFAS No. 123R will have a material consolidated financial statements. 130 China Telecom Corporation Limited Annual Report 2004 SUPPLEMENTARY INFORMATION FOR ADS HOLDERS " " " (e) Recently issued accounting standards (continued) SFAS No. 151 In November 2004, the FASB issued SFAS No. 151, ‘‘Inventory costs’’. SFAS No. 151 clarifies accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 requires that those items be recognised as current period charges. Additionally, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion based on normal capacity of the production facilities. For the Group, SFAS No. 151 is effective for fiscal years beginning after 15 June 2005. Currently, the Group does not expect the application of SFAS No. 151 will have a material impact on its consolidated financial statements. SFAS No. 152 In December 2004, the FASB issued SFAS No. 152, ‘‘Accounting for Real Estate Time- Sharing Transactions’’. SFAS No. 152 amends SFAS No. 66, ‘‘Accounting for Sales of Real Estate’’ to reference accounting and reporting guidance for real estate time-sharing transactions. SFAS No. 152 amends SFAS No. 67, ‘‘Accounting for Costs and Initial Rental Operations of Real Estate Projects’’, so that the guidance in SFAS No. 67 about incidental operations and costs incurred to sell real estate projects does not apply to real-estate time- sharing transactions. For the Group, SFAS No. 152 is effective for fiscal years beginning after 15 June 2005. Currently, the Group does not expect the application of SFAS No. 152 will have a material impact on its consolidated financial statements. SFAS No. 153 In December 2004, the FASB issued SFAS No. 153, ‘‘Exchanges of Non-monetary Assets’’. SFAS No. 153 addresses the accounting for non-monetary exchanges of productive assets. SFAS No. 153 requires non-monetary exchanges to be accounted for at fair value, recognising any gains or losses, if the fair value is determinable within reasonable limits and the transaction has commercial substance. For the Group, SFAS No. 153 is effective for fiscal years beginning after 15 June 2005. Currently, the Group does not expect the impact on its consolidated financial application of SFAS No. 153 will have a material statements. China Telecom Corporation Limited Annual Report 2004 131 " " " SUPPLEMENTARY INFORMATION FOR ADS HOLDERS (f) 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 2004 and 2003 is as follows: (Note) 2004 US$ millions 2004 RMB millions 2003 RMB millions 3,386 28,023 13,882 Net profit under IFRS US GAAP adjustments: Reversal of deficit on revaluation of property, plant and equipment 152 1,262 14,832 Depreciation on revalued property, plant and equipment, net of minority interests Disposal of revalued property, plant and (817) (6,766) (3,940) equipment (16) (128) (60) Effect of change in tax rate on deferred tax assets arising from revaluation of land use rights (29) (244) — Effect of change in tax rate on deferred tax liabilities arising from revaluation of property, plant and equipment Deferred tax effect of US GAAP adjustments 264 167 2,189 1,379 — (3,262) Net profit under US GAAP 3,107 25,715 21,452 Basic earnings per share under US GAAP 0.04 0.33 0.28 Basic earnings per ADS* under US GAAP 3.94 32.62 28.37 * Basic earnings per ADS is calculated on the basis that one ADS is equivalent to 100 H shares. 132 China Telecom Corporation Limited Annual Report 2004 SUPPLEMENTARY INFORMATION FOR ADS HOLDERS " " " (f) 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 2004 and 2003 is as follows: (Note) 2004 US$ 2004 RMB 2003 RMB millions millions millions Shareholders’ equity under IFRS 19,236 159,206 150,794 US GAAP adjustments: Revaluation of property, plant and equipment, net of minority interests Deferred tax effect of US GAAP adjustment 2,712 (667) 22,447 (5,519) 29,312 (9,465) Shareholders’ equity under US GAAP 21,281 176,134 170,641 Note: Solely for the convenience of the reader, the amounts for 2004 have been translated into United States dollars at the noon buying rate in New York City on 31 December 2004 for cable transfers in RMB as certified for custom purposes by the Federal Reserve Bank of New York of US$1.00=RMB8.2765. 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 2004, or at any other date. China Telecom Corporation Limited Annual Report 2004 133 " " " SUPPLEMENTARY INFORMATION FOR ADS HOLDERS Summary of the Significant Ways in Which the Corporate Governance Practices of China Telecom Corporation Limited (the ‘‘Company’’) Differ from Those Followed by Domestic Companies under NYSE Listing Standards As a company incorporated in the People’s Republic of China (the ‘‘PRC’’) and listed on the Stock Exchange of Hong Kong Limited (the ‘‘HKSE’’) and the New York Stock Exchange (the ‘‘NYSE’’), the Company, as a foreign private issuer, is not required to comply with all of the corporate governance rules of Section 303A of the NYSE Listed Company Manual, but should disclose the significant ways in which the corporate governance practices of the Company differ from those followed by domestic companies under NYSE listing standards. Under currently applicable PRC or Hong Kong laws and regulations, the Company is not required to have a board with a majority of independent directors. As a company listed in HKSE, the Company is subject to the requirement of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the ‘‘Hong Kong Listing Rules’’) that at least three members of its board of directors be independent as determined thereunder. The Company currently has three independent directors out of a total of fifteen directors, who satisfies both the requirement regarding ‘‘independence’’ of the Hong Kong Listing Rules and Section 303A.02 of the NYSE Listed Company Manual. Currently, the Company does not have a nomination/corporate governance committee and is not required to do so under currently applicable PRC or Hong Kong laws and regulations. All members of the audit committee of the Company have extensive management experience. However, they do not possess direct experience or expertise in respect of the reconciliation of financial statements with U.S. GAAP and the evaluation of reports filed with the U.S. Securities and Exchange Commission (‘‘SEC’’) by SEC-reporting issuers. Our audit committee is in the process of considering appointing, from time to time, an external financial expert as a consultant. The Company has not adopted a separate set of corporate governance guidelines and is not required to do so under currently applicable PRC or Hong Kong laws and regulations. However, the Company is in compliance with the Code on Corporate Governance Practices promulgated by the HKSE. 134 China Telecom Corporation Limited Annual Report 2004 FINANCIAL SUMMARY " " " (Amounts in millions, except per share data) Year ended 31 December 2004 RMB 2003 RMB 2002 RMB 2001 RMB 2000 RMB (Note) (Note) (Note) (Note) 8,458 2,865 29,827 47,646 26,231 3,788 14,109 3,015 10,719 4,154 10,400 9,771 2,643 27,499 45,815 25,460 3,943 10,007 3,210 8,365 5,103 9,737 10,564 2,305 25,338 44,440 25,726 3,878 5,998 3,147 7,524 5,520 6,466 10,942 1,887 20,491 42,516 26,679 3,991 3,395 2,660 6,712 5,176 5,632 10,882 1,466 14,452 41,806 30,862 6,097 1,721 2,779 7,508 8,051 4,041 161,212 151,553 140,906 130,081 129,665 36,683 45,810 43,046 46,215 19,164 20,585 2,192 3,188 41,777 46,359 18,879 2,352 46,597 44,118 24,810 3,176 47,170 43,070 27,003 4,139 Results Upfront connection fees Upfront installation fees Monthly fees Local usage fees DLD ILD Internet Managed data Interconnections Leased line Others Operating revenues Depreciation and amortisation Network operations and support Selling, general and administratrive Other operating expenses Operating expenses 121,382 118,701 115,798 109,367 101,085 Operating profit Deficit on revaluation of property, plant and equipment Net finance costs Investment income/(loss) Share of profit from associates 39,830 32,852 25,108 20,714 28,580 (1,262) (5,340) 6 29 (14,832) (3,606) (42) 35 (14,690) (4,071) 50 38 (11,930) (2,228) 261 22 — (1,450) 257 45 Profit before taxation and minority interests Taxation 33,263 (5,187) 14,407 (469) 6,435 1,856 6,839 1,499 27,432 (4,556) Profit before minority interests Minority interests 28,076 (53) 13,938 (56) 8,291 (72) 8,338 14 22,876 (75) Profit attributable to shareholders 28,023 13,882 8,219 8,352 22,801 Basic earnings per share 0.36 0.18 0.12 0.12 0.33 China Telecom Corporation Limited Annual Report 2004 135 " " " FINANCIAL SUMMARY (Amounts in millions, except per share data) Financial condition Property, plant and equipment, net Construction in progress Other non-current assets Cash and bank deposits Other current assets 2004 RMB As at 31 December 2003 2002 RMB RMB 2001 RMB 2000 RMB (Note) (Note) (Note) (Note) 320,179 309,896 311,241 312,326 285,587 52,401 37,192 27,738 32,290 31,617 29,336 42,180 31,388 29,450 29,409 13,780 19,752 13,194 19,899 24,254 18,724 15,993 21,547 25,832 28,641 Total assets 412,570 403,942 423,701 423,434 420,199 Current liabilities Non-current liabilities 151,944 149,135 147,478 144,060 129,222 88,012 108,914 124,001 100,007 102,744 Total liabilities 251,951 251,879 235,490 252,974 253,223 Minority interests 1,413 1,269 1,186 988 991 Shareholders’ equity 159,206 150,794 187,025 169,472 165,985 Total liabilities and shareholders’ equity 412,570 403,942 423,701 423,434 420,199 Note: On 30 June 2004, we acquired the entire equity interests in Hubei Telecom Company Limited, Hunan Telecom Company Limited, Hainan Telecom Company Limited, Guizhou Telecom Company Limited, Yunnan Telecom Company Limited, Shaanxi Telecom Company Limited, Gansu Telecom Company Limited, Qinghai Telecom Company Limited, Ningxia Telecom Company Limited and Xinjiang Telecom Company Limited (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. 136 China Telecom Corporation Limited Annual Report 2004