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Transforming to
Enhance Value
(cid:2)(cid:3) !==(cid:2)(cid:3) !
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2005
www.chinatelecom-h.com
31 Jinrong Avenue, Xicheng District,
Beijing, PRC, 100032
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CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2005
Stock code: 728
CONTENTS
Financial Highlights
Company Profile and Corporate Information
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 Report
Human Resources Development
Corporate Social Responsibility
Notice of Annual General Meeting
Report of the International Auditors
Consolidated Balance Sheet
Balance Sheet
Consolidated Income Statement
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flow
Notes to the Financial Statements
Supplementary Information for American Depositary Shareholders
Financial Summary
1
2
4
10
20
30
38
52
54
68
69
70
73
74
76
77
78
79
81
123
127
FINANCIAL HIGHLIGHTS
Financials excluding amortisation of upfront connection fees
Operating revenue (RMB millions)
EBITDA (RMB millions)
EBITDA margin
Net profit* (RMB millions)
Free cash flow (RMB millions)
2004
152,754
78,542
51.4%
19,565
17,048
Financials including amortisation of upfront connection fees
Operating revenue (RMB millions)
EBITDA (RMB millions)
EBITDA margin
Net profit* (RMB millions)
2004
161,212
87,000
54.0%
28,023
* Net profit represents profit attributable to equity holders of the Company.
2005
Growth rate
6.4%
4.2%
-1.1p.p.
8.0%
27.9%
162,529
81,825
50.3%
21,131
21,801
2005
169,310
88,606
52.3%
27,912
China Telecom Corporation Limited
Annual Report 2005 1
The charts below are based on financials excluding amortisation of upfront connection fees
Operating Revenue
(RMB millions)
141,782
152,754
162,529
200,000
150,000
100,000
50,000
EBITDA
(RMB millions)
100,000
75,000
69,678
50,000
25,000
78,542
81,825
0
2003
2004
2005
0
2003
2004
2005
Net Profit
(RMB millions)
24,000
18,000
12,000
6,000
4,111
21,131
19,565
Free Cash Flow
(RMB millions)
24,000
21,801
18,000
17,048
12,000
6,000
7,622
0
2003
2004
2005
0
2003
2004
2005
China Telecom Corporation Limited
Annual Report 2005
2
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)
(2)
(3)
(4)
operating a variety of domestic wireline telecommunications networks and facilities
(including wireless local loops);
providing voice, data, image, multimedia telecommunications and information services
based on the wireline networks;
providing international services and conducting accounts settlement with overseas
operators in accordance with state regulations; and
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 2005, our share capital comprises 80,932,368,321 shares, in
which 13,877,410,000 are H shares.
Chinese registered name:
(cid:635)(cid:2589)(cid:3915)(cid:1676)(cid:1622)(cid:875)(cid:964)(cid:2057)(cid:660)(cid:775)
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:
Facsimile:
Website:
(8610) 6642 8166
(8610) 6601 0728
www.chinatelecom-h.com
China Telecom Corporation Limited
Annual Report 2005 3
H share registrar:
ADS depositary:
Listings:
H shares:
ADSs:
Computershare Hong Kong Investor Services Limited
1712-1716, 17th Floor
Hopewell Centre
183 Queen’s Road East, Wanchai
Hong Kong
Bank of New York
101 Barclay Street
New York, NY 10286
The United States of America
The Stock Exchange of Hong Kong Limited
stock code: 728
New York Stock Exchange, Inc.
stock code: CHA
China Telecom Corporation Limited
Annual Report 2005
4
CHAIRMAN’S STATEMENT
Dear Shareholders,
Whilst 2005 was not an easy year for us, it was a year when hope was on the horizon. In spite of
intensifying competition, we managed to achieve sustained business growth through strategic
transformation. Our revenue increased by 6.4%, of which revenue from growth businesses (Internet
access and value-added services) rose by 37.6%, accounting for 17.1% of our operating revenue.
More importantly, I am very encouraged to see our people at all levels are now very committed to
finding new ways of delighting our customers and creating value for them. This is crucial to the
successful execution of our strategic transformation. I am fully confident in our sustainable future
growth and enhancing value to you, as shareholders.
China Telecom Corporation Limited
Annual Report 2005 5
CHAIRMAN’S STATEMENT
The Company’s financial performance in 2005 was favourable, with operating revenue reaching
RMB169,310 million, of which amortisation of upfront connection fees was RMB6,781 million.
Excluding the upfront connection fees, our operating revenue was RMB162,529 million, an
increase of 6.4% from 2004; EBITDA1 was RMB81,825 million, an increase of 4.2%; EBITDA
margin1 was 50.3%; profit attributable to equity holders of the Company1 was RMB21,131
million, an increase of 8.0% from 2004; earnings per share1 was RMB0.26. Capital expenditure
was effectively controlled, and decreased by 4.3% from 2004. Free cash flow2 reached
RMB21,801 million.
Having considered the need to maintain the capital flexibility for ensuring the sustainable
development of the Company and availability of capital for future development of our business,
the Board of Directors will recommend in the upcoming shareholders general meeting that
dividend be increased and a final dividend equivalent to HK$0.075 per share be declared,
representing an increase of 15.4% from 2004.
In 2005, our business developed steadily and our customer base progressively expanded. The
number of local telephone subscribers reached 210 million, a net increase of 23.45 million from
2004. The number of broadband subscribers reached 21.02 million, a net increase of 7.19
million from 2004, representing our third consecutive year-on-year increase. Our revenue
structure has been further optimised, and value-added services achieved a record high in
revenue reaching nearly RMB10.0 billion, contributing to a growth in operating revenue
(excluding amortisation of upfront connection fees) by 2.5 percentage points from 2004.
Our Company was confronted with severe challenges in 2005, when the value of
telecommunications services began to shift from telephony to information services and
enterprise customers’ business capabilities enabled by telecommunications. Faced with this new
situation, the Company adhered to its business tenet of continuously increasing its corporate
value. By the end of 2004, we proposed the idea of strategic transformation, and by mid-2005,
we had finalised the corresponding plan. While we reinforced the horizontal integration of
multi-networks, multi-terminals and multi-services, we also emphasized the vertical extension of
the value chain, and closely followed the shift in value. By leveraging the effective development
of our traditional wireline telecommunications business, we were able to intensively explore
business models for our emerging services and concentrate our efforts on the development of
integrated information services, so as to cultivate the new core competitive strength of the
Company.
In 2005, the varieties of our products were continuously enhanced, and new areas of value
creation were discovered. We launched many new services based on the intelligent upgrading of
wireline network and endeavored to prolong the life cycle of voice products. We also enriched
both the function and content of value-added services, such as “SMS over PHS” and “Color
Ring Tone”, thereby accelerating the development of these value-added services. We formulated
comprehensive and customised Information Communication and Technology (ICT) solutions for
enterprise customers in key industries, and actively developed new global businesses to enable
1
2
Including the amortisation of upfront connection fees, EBITDA was RMB88,606 million, EBITDA
margin was 52.3%, profit attributable to equity holders of the Company was RMB27,912 million and
earnings per share was RMB0.34.
Free cash flow is calculated from EBITDA (excluding amortisation of upfront connection fees) minus
capital expenditure and income tax.
China Telecom Corporation Limited
Annual Report 2005
6
CHAIRMAN’S STATEMENT (continued)
us to create value for customers while consolidating our market for enterprise customers. As
part of this strategic transformation, services such as “BizNavigator”, an ICT service for
enterprise customers and “Best Tone”, an integrated information enquiry service, were
successfully launched such that we were able to consolidate our traditional business while
exploring new sources of revenue and, more importantly, laid a solid foundation for providing
integrated communication and information services in future.
The Company optimised its resources allocation in 2005. We controlled our investment in
traditional wireline networks and implemented the upgrading to intelligent networks across the
board. The expansionary capital expenditure on PHS was compressed. We ensured proper
investment in marketing and business transformation and controlled effectively on labour costs
and administrative expenses, thereby enhancing the efficiency in utilising such costs. By issuing
short-term commercial paper at a low interest rate in the Chinese capital markets, finance costs
were effectively reduced. We further improved our remuneration system and enhanced our
efforts in staff training, thereby facilitating the career development of our employees.
In 2005, precision management was implemented across the board. Front line departments
were optimised by shifting from functional management to a more holistic focus on process
management. Precision sales and marketing were strengthened, and sales channels were
improved. Effective and scientific method of resources allocation was established to maximise
the effectiveness of the performance appraisal-oriented system. The quality of capital planning
and cash flow budgeting was upgraded, and our debt structure was continuously improved. IT
system was further developed to unify our front-end database and the establishment of our
customer relation management system was accelerated. Our operation supporting systems were
consolidated and our back-end resources database was gradually improved.
We continuously improved our corporate governance and internal controls during the year. The
Company held its annual general meeting in Hong Kong for the first time in 2005, with a view
to building a more direct and effective communication channel with our shareholders. In 2005,
we began to disclose our key operating data and certain financial data on a quarterly basis,
thereby improving the transparency of the Company. In September 2005, a new session of the
Board of Directors was elected and a Nomination Committee was newly formed. Additional
independent directors were appointed so that independent directors account for one third of
the members of the Board of Directors. An internationally renowned finance professional joined
the Audit Committee. The role of independent directors was strengthened. In 2005, the
Company continued to comply with requirements of the regulatory authorities and adhere to
the best international practices so as to strengthen our internal control progressively, minimise
corporate risk and enhance our standards of operation and management.
As a major telecommunications and information service provider in China, we have made
proactive efforts to discharge our social responsibilities by contributing to the
informationalisation of our community and the development of the national economy. We
enthusiastically engaged in environmental protection projects. In 2005, we provided monetary
support to the green landscaping project around the Three Gorges Reservoir peripheral area,
handicapped children and those who were unable to attend school due to poverty. We also
participated in setting up “School of Hope”. We sponsored the “International Scheme for the
Youth of China to Start up Businesses” in order to assist youngsters to start their way to be a
successful entrepreneur.
China Telecom Corporation Limited
Annual Report 2005 7
Looking ahead, we are fully confident in our future. With the steady and rapid growth of the
economy of China and burgeoning new technologies, customers demand will be increasingly
generated and therefore provide an ample market for the Company’s strategic transformation.
Our highly innovative management team and well performed employees constitute abundant
human resources for the transformation. Our growing customer base and solid financial
strength provide us with an important safeguard in terms of our capacity to ensure our
successful strategic transformation.
We shall adhere to the philosophy of co-opetition and proactively manage the changing
demand and shifts in industry value, thereby creating a favourable business environment for the
Company’s development. We shall fully utilise new technologies to energise our traditional
business. While enhancing the investment return on wireline network, we will also explore new
growth areas to assure the sustainable growth of the Company. Through dynamic allocation of
resources, we shall achieve a balanced development in both our traditional business and
business for transformation. We shall reinforce the planning for our operations, marketing and
network, get prepared to be a “Triple-player”, offering voice, data and video services in future.
Through the convergence of information service resources in our community, we shall make the
upmost effort to expand room for new growth. By leveraging our advantage on network
resources and distribution channel, we shall strenghten our leading position in the value chain
of integrated information services and endeavor to be the forerunner in the field of integrated
communication and information services.
Finally, on behalf of the Board of Directors of the Company, I would like to thank Mr. Cheng
Xiyuan and Mr. Feng Xiong for their dedication and hard work during their offices as directors
of the Company, and at the same time I welcome Mr. Tse Hau Yin, Aloysius and Mr. Xu Erming
to join the Board of Directors of the Company. I also take this opportunity to express my sincere
appreciation to all of our shareholders, directors and the members of the Supervisory
Committee as well as our employees and customers.
Wang Xiaochu
Chairman and Chief Executive Officer
Beijing, PRC
22 March 2006
A Well Developed
A well developed
Foundation
foundation
China Telecom Corporation Limited
Annual Report 2005
10
BUSINESS REVIEW
Change
2005 over
2004
12.6%
4.7%
14.5%
3.4%
51.9%
16.5%
8.4%
20.6%
46.3%
–
–
The following table sets out our key operating data in 2003, 2004 and 2005:
Unit
2003
2004
2005
Local wireline access lines
in service
Local voice usage
Thousand
Million pulses
Domestic long distance usage
Million minutes
International (including
Million minutes
Hong Kong, Macau and
Taiwan) long distance usage
Broadband subscribers
2M digital circuits leased
Thousand
Thousand
Volume of inbound local calls
Million minutes
Caller ID service subscribers
Thousand
Telephone information
Million minutes
service usage
SMS Usage Volume
Million messages
Color Ring Tone subscribers
Thousand
160,988
384,496
67,312
1,670
7,231
163.14
76,210
82,461
1,743
–
–
186,648
429,150
81,960
1,654
13,839
169.45
94,747
109,031
2,419
210,094
449,404
93,817
1,711
21,024
197.42
102,670
131,461
3,540
–
–
17,254
18,162
In 2005, we steadily implemented our strategic transformation, moving forward from a
traditional basic network operator to a modern integrated information services provider. While
maintaining steady development of our traditional wireline voice services, we made great efforts
in the strategic development of broadband service and “SMS over PHS”, Color Ring Tone and
other mature value-added services (“VAS”) to extend our value chain. In our effort to develop
business models for emerging services, we launched integrated services such as the “Best
Tone”, “BizNavigator” and fixed line and PHS convergence (“FPC”). We also conducted overall
planning for the Company, taking into account both the front end and back end in concert,
which reinforced our competitive advantages in service quality and brand name image in the
industry.
Our operating revenue in 2005 was RMB169,310 million, an increase of 5.0% from 2004.
Excluding the amortisation of upfront connection fees, our operating revenue was RMB162,529
million, representing a 6.4% annual growth. In 2005, revenue from our local telephone services
was slightly higher than that of previous year. Revenue from Internet access service and VAS
grew rapidly, driving the overall operating revenue up by 5.0%.
China Telecom Corporation Limited
Annual Report 2005 11
BUSINESS ANALYSIS
Local telephone services
In 2005, as the gap between mobile phone tariffs and tariffs for wireless local access services
narrowed, mobile substitution for wireline telephone subscribers and local usage exacerbated. To
ensure steady development of our local telephone services, an important foundation of the Company,
we effectively segmented our subscribers, launched diversified service packages, optimised our
distribution channels and strengthened our agent channels and on-line channels, while focusing our
effort on optimising the coverage of our wireless local access network at hot spots so as to improve
our service quality. Revenue from local telephone services for 2005 amounted to RMB80,945 million,
an increase of 0.8% from 2004, representing 49.8% of operating revenue (excluding the
amortisation of upfront connection fees). Revenue from local usage fees was similar to that of 2004.
Local voice usage amounted to 449,404 million pulses, indicating an annual growth of 4.7%.
In 2005, our local telephone subscribers reached 210.09 million, and our market share for
subscribers1 was 43.0%, a decrease of 1.3 percentage points from 2004. Based on regional
differences, we focused on newly constructed commercial buildings and residential communities
in urban areas, towns and prosperous rural regions, reasonably allocated our resources and
adopted a number of flexible ways for connection, sales and marketing, thereby rapidly
penetrating the targeted market. As a result, net increase of rural residential subscribers in 2005
was 4.90 million, representing a growth rate of 8.8%.
At the same time, we continued to optimise our local wireless telephone network by adhering
to our principle of effective coverage, so as to improve the network utilisation and service
quality and lower sales costs. In 2005, wireless local access services grew steadily with a net
increase of 14.91 million subscribers, an annual growth rate of 35.4%.
Local Telephone Subscriber
(million)
Local Voice Usage
(million pulses)
47.8%
47.8%
44.3%
44.3%
44.0%
44.0%
43.0%
43.0%
178.5
178.5
186.6
186.7
36.5
36.5
11.0
11.0
18.4
18.4
42.2
42.2
12.4
12.4
19.0
19.0
202.4
202.4
210.1
210.1
52.7
52.7
13.2
13.2
20.1
20.1
57.1
57.1
14.1
14.1
20.9
20.9
+ 4 . 7 %
449,404
429,150
+ 1 1.6 %
112.6
112.6
113.1
113.1
116.4
116.4
118.0
118.0
384,496
1H2004
1H2004
2H2004
2H2004
1H2005
1H2005
2H2005
2H2005
2003
2004
2005
Residential
Enterprise
Public Telephone
Wireless Local Access
Market Share
1
Market share for subscribers is calculated by dividing local telephone subscribers of the Company by
all of the wireline telephone subscribers and mobile telephone subscribers in the Company’s service
area, and based on statistical data from the Ministry of Information Industries (“MII”) and the
Company.
China Telecom Corporation Limited
Annual Report 2005
12
BUSINESS REVIEW (continued)
Internet and VAS services
In 2005, our Internet and VAS services grew rapidly. Revenue from Internet and VAS services
reached RMB27,838 million, an increase of 37.6% from 2004, accounting for 17.1% of our
operating revenue (excluding amortisation of upfront connection fees), which was 3.9
percentage points higher than in 2004.
Broadband service is our most valuable strategic operation and one of the major media for
various information services and applications. In 2005, the Company continued to expand its
broadband subscriber base to 21.02 million with a net increase of 7.19 million or a growth rate
of 51.9%. At the same time, we speeded up our exploration on the bandwidth-based
segmentation of broadband subscribers and provided differentiated services in terms of quality,
application contents and prices. We also began to consolidate the authentication and the billing
systems for broadband subscribers and proceed with simplifying the verification procedures for
broadband access and multiple applications in order to improve our customers’ experience and
upgrade the product value of broadband access.
Broadband Subscribers
(Thousand)
21,024
1 . 9 %
5
13,839
%
9 1.4
7,231
2003
2004
2005
In 2005, revenue from caller ID, telephone information services and Internet VAS continued to
experience fast growth. In addition, we made great efforts to promote the VAS on PHS,
including “SMS over PHS” and “Color Ring Tone” services. We emphasized the economy of
scale of these services and their packaging with traditional services. We strengthened our
China Telecom Corporation Limited
Annual Report 2005 13
“Short messaging services over PHS”
promotion of brand names via television advertisement and printed media. We also established
our service provider management platform and cooperated extensively with content providers
for SMS and “Color Ring Tone”. As a result, the annual SMS usage volume amounted to 17,254
million messages and there were 18.16 million subscribers for the “Color Ring Tone” service.
Long distance services
In 2005, revenue from domestic long distance services was RMB25,993 million, a slight decrease
of 0.9% from 2004. On the principle of stablising our market share, we responded quickly to
market changes and launched various packages to meet the needs of subscribers from different
segments in the market. We also increased our effort of promotion to lower the “perceived
price” by subscribers and alleviate the increasing diversion of our long distance traffic. Our
market share2 for domestic long distance usage was stablised with a decrease of 2.1 percentage
points from 2004 to 43.7% in 2005. Our domestic long distance usage grew 14.5% to 93,817
million in 2005.
In 2005, competition in international and Hong Kong, Macau and Taiwan long distance
telephone services was further intensified. Diversion to technologies such as Instant Message
and IP telephony was more apparent. Revenue from international long distance services was
RMB3,407 million, a decrease of 10.1% from 2004. Usage volume was 1,711 million minutes,
an increase of 3.4% over 2004. Market share2 dropped by 5.4 percentage points from 2004 to
50.8%. In order to alleviate the declining trend, we launched a variety of marketing initiatives
to address different customer segments, such as “familiarity numbers” package and
2
Based on statistical data from the MII and the Company.
China Telecom Corporation Limited
Annual Report 2005
14
BUSINESS REVIEW (continued)
combination of broadband and IP services. We also took advantage of the government policy of
“Supporting Overseas Expansion of the Enterprises in China” to enhance our marketing efforts
to target PRC enterprises seeking overseas development, so as to stabilise our revenue from
international, Hong Kong, Macau and Taiwan long distance telephone services.
49.4%
47.8%
45.8%
44.0%
44.3%
81,960
67,312
43.0%
43.7%
210.1
93,817
61.3%
56.2%
1,670
1,654
50.8%
1,711
2003
1H2004
2H2004
2004
1H2005
2H2005
2005
2003
2004
2005
Domestic Long Distance Usage (million minutes)
International Long Distance Usage (million minutes)
Market Share of Domestic Long Distance
Market Share of International Long Distance
Managed data and leased line services
In the wake of rapid informationalisation, we provided our corporate clients with integrated
one-stop shopping solutions through system integration and network maintenance outsourcing
service. We explored more thoroughly our customers’ needs for IT service and expanded our
market effectively. Revenue from managed data and leased line services was RMB7,422 million
in 2005.
Interconnection services
In 2005, revenue from interconnection was RMB12,838 million, an increase of 19.8% from
2004, and net interconnection revenue was RMB7,365 million, an increase of 11.2% from
2004. As the number of mobile subscribers continued to grow rapidly, the volume of inbound
local calls reached 102,670 million minutes, indicating an increase of 8.4% from 2004.
China Telecom Corporation Limited
Annual Report 2005 15
PRODUCT DEVELOPMENT, SERVICES INNOVATION AND BRAND
PROMOTION
In 2005, we achieved favorable results in the development of new products such as the
integrated terminal and integrated services. In order to enhance the value for our traditional
voice services, we developed FPC product, based on the principle of “terminal first and network
next”. In order to effectively expand the market for integrated information services, we
launched “Best Tone”, an integrated information enquiries service, and “BizNavigator”, an ICT
service for enterprise clients. We consolidated the public customer information services and the
enterprise application services, and cooperated with both downstream and upstream
enterprises, thereby achieving extension and expansion of the value chain of business lines and
service lines.
We reinforced our image of quality service through customer service hotline “10000”. We unified
the customer-oriented interfaces and service standards, and gradually build up our competitive
advantages in terms of customer friendliness and business handling capacity. We also further
optimised our own sales channels and improved coordination among such channels, and
enhanced the service standards of the business outlets. In addition, we strengthened our agency
distribution channels and the role of online customer service centres.
“BizNavigator” - ICT for small & medium enterprises
In 2005, we established our unified brand name framework and development planning. Service
brand names such as “Color Ring Tone” and “ChinaVnet” have already been well recognized. At
the same time, we designed customer segment-oriented service portfolio brand names such as the
“BizNavigator”, and our framework for brand names has been evolving from constituting mainly
service brand names to a blend of major service brand names and customer brand names.
China Telecom Corporation Limited
Annual Report 2005
16
BUSINESS REVIEW (continued)
IMPLEMENTATION OF NETWORK UPGRADING TO SUPPORT OUR
BUSINESS TRANSFORMATION
According to our established strategic deployment for our transformation, we took proactive
efforts in materialising our network transformation in 2005. Driven by the needs of customers and
technological advances, we speeded up the transformation of our existing network system to the
next generation network. We endeavour to materialise the speedy deployment of network and
services and the effective support to the integration of broadband and narrowband services, with
a view to minimise the costs of services provision and network operations, and to provide our
customers with differentiated network qualities and maintenance services. In 2005, we adhered to
the principle of “high quality, high value-adding applications, high utilisation of resources, low
churn rate and low subsidies”, and have seen great improvement in the operation of our wireless
local access network. Network quality of the wireless local access network improved significantly
by means of network optimisation. In 2005, we fully implemented the upgrade of wireline
network to intelligent network, and thereby speeded up the introduction of the “softswitch”
technology. As at the end of 2005, we had basically completed the network intelligence upgrade
in 40% of our subsidiaries, 35% of our subsidiaries completed part of local network upgrade, and
the remaining 25% of our subsidiaries were preparing for such upgrade. At present, in service
areas where the upgrading of intelligent network has been completed, new businesses such as our
wireline “Color Ring Tone”, prepaid services, “Unicode service”, wireline telephone number
portability within local network, have gradually found popularity among our customers. We expect
to complete all of our network upgrade by the end of 2006, thereby forming a centralised
management platform for subscribers and enabling centralised management of wireline telephone
subscribers, PHS subscribers and related services. These will lay a sound foundation for customer
identification, tailored services and provision of inter-network integration services. In addition, we
have also boosted IP-based Metropolitan Area Network (MAN) optimisation and broadband
speeding up in order to improve our bandwidth supporting capability and support key businesses
such as video services.
It is essential for our successful strategic transformation to optimise our capex structure and
improve investment efficiency. In 2005, we continuously adjusted and optimised our investment
structure and balanced the proportion between expansionary investment and maintenance
investment, and between strategic investment and recurring investment, thereby achieving
CAPEX Composition
7.9%
14.5%
5.4%
22.5%
17.6%
32.1%
Others
Communication
Infrastructure
IT & Support System
PHS
Data & Internet
Fixed Line &
Transmission
Network
6.0%
15.1%
6.0%
15.4%
20.7%
36.8%
2004
2005
China Telecom Corporation Limited
Annual Report 2005 17
effective interaction between investment, network capacity and market demand and service
provisioning capabilities. We continuously increased our investment in broadband and VAS, IT
support system, the intelligent upgrading of wireline network and network coverage in rural
areas, of which the proportion of investment in the data network and Internet increased by
approximately 3.1 percentage points from last year. Investment in wireless local access service has
been under control, the investment proportion of which dropped by 7.1 percentage points from
2004. Such investments have enabled continued, profitable growth of traditional fixed line service,
and provided more privileges to investment in key networks, services and geographical areas,
which have ensured fast growth of core services and products and satisfied the strategic demand
for network capabilities.
2006 BUSINESS OUTLOOK
In 2006, we will continue with our subscriber base development
and retention of existing subscribers and usage. We will allocate
our resources in a more rational way and adopt various
cooperation models to penetrate newly constructed residential
communities in urban areas and more profitable rural markets.
We will ensure that our wireless local access network be
optimised in areas where the usage volume is high, increase the
in-door coverage, and promote FPC service and other widely
accepted service packages. With these measures, we will ensure
a steady growth of our traditional voice service. We will also
promote broadband services in a more differentiated way and
enrich terminal functions and applications to accelerate its
growth. Based on the intelligent upgrading of network, we will
enrich personalised applications such as “SMS over PHS” and
“Color Ring Tone”. At the same time, we will push forward the
healthy development of VAS, speed up the promotion of transformation services featuring
“BizNavigator” and “Best Tone”, and establish a flexible joint marketing mechanism. By so doing,
we will firmly establish our leading position in the field of comprehensive information services.
“Best Tone” – Voice search engine
Stimulating
Growth
China Telecom Corporation Limited
Annual Report 2005
20
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
SUMMARY
Our operating revenue in 2005 was RMB169,310 million, an increase of 5.0% from 2004.
Operating expenses was RMB130,356 million, an increase of 7.4% from 2004; net profit1 (profit
attributable to equity holders of the Company) was RMB27,912 million, and earnings per share
were RMB0.34. EBITDA2 was RMB88,606 million, and EBITDA margin was 52.3%.
Excluding the amortisation of upfront connection fees of RMB6,781 million, our operating
revenue in 2005 was RMB162,529 million, an increase of 6.4% from 2004; net profit1 (profit
attributable to equity holders of the Company) was RMB21,131 million, earnings per share were
RMB0.26. EBITDA2 was RMB81,825 million and EBITDA margin was 50.3%.
OPERATING REVENUE
Our operating revenue in 2005 was RMB169,310 million, an increase of 5.0% from 2004.
Excluding the amortisation of upfront connection fees, our operating revenue in 2005 was
RMB162,529 million, an increase of RMB9,775 million or 6.4% from 2004. Revenue from
Internet access services and value-added services, and interconnection revenue increased by
RMB7,609 million and RMB2,119 million respectively from 2004, which represented the main
sources of revenue growth. The growth in local telephone services revenue was stablising, which
increased by 0.8% from 2004. Revenue from leased line services and other businesses increased
by 1.4% from 2004. On the other hand, revenue from long distance telephone services and
managed data services decreased.
1
2
Our net profit for 2004 included a deficit on revaluation of property, plant and equipment of
RMB1,262 million.
Our EBITDA refers to profit before net finance costs, investment income, share of profit from
associates, income tax, depreciation and amortisation, deficit on revaluation of property, plant and
equipment and minority interests. As 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 operating results. Therefore, we believe EBITDA may be helpful in
analysing the operating results of a telecommunications service provider like us. Although EBITDA has
been widely applied 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
net cash from operating activities. In addition, our EBITDA may not be comparable to similar
indicators provided by other companies.
China Telecom Corporation Limited
Annual Report 2005 21
The following table sets forth a breakdown of our operating revenue for 2004 and 2005,
together with their respective rates of change:
Wireline telephone services3
Local
Installation fees
Monthly fees
Local usage fees
For the year ended 31 December
2005
2004
Rate of
Change
(RMB in millions, except percentage data)
2,970
30,351
47,624
2,865
29,827
47,646
3.7%
1.8%
(0.0)%
Subtotal
80,945
80,338
0.8%
Domestic long distance4
International, Hong Kong, Macau and Taiwan long distance4
Interconnections
Upfront connection fees
25,993
3,407
12,838
6,781
26,231
3,788
10,719
8,458
(0.9)%
(10.1)%
19.8%
(19.8)%
Subtotal
49,019
49,196
(0.4)%
Internet access and value-added services
27,838
20,229
Managed data
Leased line services and others5
2,958
8,550
3,015
8,434
37.6%
(1.9)%
1.4%
Operating revenue (excluding amortisation of
upfront connection fees)
162,529
152,754
6.4%
Total operating revenue
169,310
161,212
5.0%
3
4
5
Including revenue from our registered subscribers, public telephones and pre-paid calling cards
services.
Including revenue from VoIP long distance services.
Including primarily revenue from the lease of telecommunications network facilities and provision of
sales and repairs and maintenance of customer-end equipment.
China Telecom Corporation Limited
Annual Report 2005
22
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (continued)
LOCAL TELEPHONE SERVICES
Revenue from our local telephone services grew by 0.8% from RMB80,338 million in 2004 to
RMB80,945 million in 2005, which accounted for 47.8% of our operating revenue or 49.8% of
our operating revenue excluding amortisation of upfront connection fees. This revenue growth
was mainly attributable to the continued growth of our subscriber base. However, as the gap
between mobile service tariffs and wireline service tariffs narrowed, mobile operations
exacerbated the diversion from wireline services, causing a decrease in local voice ARPU.
Installation fees. Upfront installation fees will be amortised over the expected customer
relationship period of 10 years. Revenue from amortisation of upfront installation fees increased
by 3.7% from RMB2,865 million in 2004 to RMB2,970 million in 2005.
Monthly fees. Revenue from monthly fees increased by RMB524 million, or 1.8%, from
RMB29,827 million in 2004 to RMB30,351 million in 2005.
Local usage fees. Revenue from local usage fees was RMB47,624 million in 2005, which was
similar to that of 2004. Local voice usage volume increased by 4.7% from 2004, to 449,404
million pulses in 2005. Due to the intensifying mobile substitution, popularisation of network
based communication and the diversification of the means of communication, revenue
contribution by traditional voice usage weakened.
LONG DISTANCE TELEPHONE SERVICES
Revenue from our long distance telephone services decreased by 2.1% from RMB30,019 million
in 2004 to RMB29,400 million in 2005, representing 17.4% of our operating revenue or 18.1%
of our operating revenue excluding amortisation of upfront connection fees.
Domestic long distance services. In 2005, revenue from our domestic long distance services
decreased by 0.9% from RMB26,231 million in 2004 to RMB25,993 million in 2005, while
domestic long distance telephone usage volume increased by 14.5% from 81,960 million
minutes in 2004 to 93,817 million minutes in 2005. The decrease in revenue was attributable to
a decrease in average unit price, which decreased from RMB0.32 per minute in 2004 to
RMB0.28 per minute in 2005.
International, Hong Kong, Macau and Taiwan long distance services. International, Hong Kong,
Macau and Taiwan long distance services revenue decreased by 10.1%, from RMB3,788 million
in 2004 to RMB3,407 million in 2005, while the usage volume of our international, Hong Kong,
Macau and Taiwan long distance usage volume increased by 3.4% from 2004. The decrease in
revenue was attributable to a decrease in average unit price, which decreased from RMB2.29
per minute in 2004 to RMB1.99 per minute in 2005.
INTERNET ACCESS AND VALUE-ADDED SERVICES
Revenue from our Internet access and value-added services increased by 37.6%, from
RMB20,229 million in 2004 to RMB27,838 million in 2005, representing 16.4% of our
operating revenue or 17.1% of our operating revenue excluding amortisation of upfront
connection fees. Driven by the continuous expansion of our broadband subscriber base in recent
years, our Internet access services revenue recorded a sustained and rapid growth. The number
of our broadband subscribers increased by 7.19 million from the end of 2004 to 21.02 million as
of the end of 2005. The increase in the revenue from value-added services was mainly
attributable to the rapid development of SMS, caller ID service, Color Ring Tone and telephone
information services, of which SMS and Color Ring Tone were the new drivers for revenue
growth.
China Telecom Corporation Limited
Annual Report 2005 23
INTERCONNECTION SERVICES
Revenue from our interconnection services increased by 19.8%, from RMB10,719 million in
2004 to RMB12,838 million in 2005, representing 7.6% of our operating revenue or 7.9% of
our operating revenue excluding amortisation of upfront connection fees. Increase in such
revenue was mainly attributable to an increase in interconnection volume resulting from the
expansion of the domestic telecommunications services subscriber base. The increase was also
attributable to the revenue from SMS interconnections newly introduced in 2005.
MANAGED DATA SERVICES
Revenue from our managed data services decreased by 1.9%, from RMB3,015 million in 2004
to RMB2,958 million in 2005. The decrease in revenue was mainly attributable to the
substitution by new connection methods and therefore reduced the usage volume of
conventional services.
LEASED LINE SERVICES AND OTHER BUSINESS
Revenue from our leased line services and other business increased by 1.4%, from RMB8,434
million in 2004 to RMB8,550 million in 2005, representing 5.0% of our operating revenue or
5.3% of our operating revenue excluding amortisation of upfront connection fees.
UPFRONT CONNECTION FEES
Upfront connection fees represent the amortised amount of the upfront fees received for the
initial activation of wireline services, amortised over the expected customer relationship period
of 10 years. Effective from July 2001, we ceased to charge new subscribers upfront connection
fees. The amortised amount decreased by 19.8%, from RMB8,458 million in 2004 to RMB6,781
million in 2005.
The table below sets forth the amortisation of upfront connection fees for each year from 2006
to 2011 based on the calculation of amortisation over the 10-year estimated amortisation
period (with 2011 as the end of the amortisation period):
For the year ending 31 December
2006
2007
2008
2009
2010
2011
(RMB in millions)
Amortisation of upfront connection fees
4,965
3,295
2,022
1,151
497
98
China Telecom Corporation Limited
Annual Report 2005
24
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (continued)
OPERATING EXPENSES
In 2005, our operating expenses were RMB130,356 million, representing an increase of 7.4%
from 2004. The ratio of our operating expenses to operating revenue increased from 75.3% in
2004 to 77.0%, or increased by 0.7 percentage points to 80.2% of our operating revenue
excluding amortisation of upfront connection fees. The following table sets out a breakdown of
our operating expenses in 2004 and 2005 and their respective rates of change:
Depreciation and amortisation
Network operations and support expenses
Selling, general and administrative expenses
Personnel expenses
Interconnection and other operating expenses
For the year ended 31 December
2005
2004
Rate of
Change
(RMB in millions, except percentage data)
49,652
30,334
19,892
24,960
5,518
47,170
27,611
19,229
23,233
4,139
5.3%
9.9%
3.4%
7.4%
33.3%
Total operating expenses
130,356
121,382
7.4%
Depreciation and amortisation
Our depreciation and amortisation expenses were RMB49,652 million in 2005, an increase of
5.3% from 2004, representing 29.3% of our operating revenue. The depreciation and
amortisation expenses as a percentage of our operating revenue excluding amortisation of
upfront connection fees decreased from 30.9% in 2004 to 30.5% in 2005.
Network operations and support expenses
Our network and support expenses excluding personnel expenses increased by 9.9%, from
RMB27,611 million in 2004 to RMB30,334 million in 2005, representing 17.9% of our
operating revenue. The network operations and support expenses as a percentage to our
operating revenue excluding amortisation of upfront connection fees increased from 18.1% in
2004 to 18.7% in 2005. In order to improve the maintenance quality of our network
operations, we appropriately increased our resources input to repairs and maintenance.
Selling, general and administrative expenses
In 2005, selling, general and administration expenses excluding personnel expenses amounted
to RMB19,892 million , an increase of 3.4% from RMB19,229 million in 2004, representing
11.7% of our operating revenue. Selling, general and administrative expenses as percentage of
our operating revenue excluding amortisation of upfront connection fees decreased from 12.6%
in 2004 to 12.2% in 2005. To cope with the market competition, we increased our
advertisement and promotion expenses to promote our corporate image, our core and new
businesses to bring these in line with our strategic transformation. We also launched advertising
and promotion campaigns in tandem with various marketing initiatives (such as service
packaging). Therefore, our advertisement expenses increased quickly.
China Telecom Corporation Limited
Annual Report 2005 25
Personnel expenses
In 2005, our personnel expenses increased by 7.4%, from RMB23,233 million in 2004 to
RMB24,960 million in 2005, representing 14.7% of our operating revenue, and 15.4% of our
operating revenue excluding amortisation of upfront connection fees, an increase of 0.2
percentage points from 2004. This increase was mainly attributable to an increase in reward to
employees with good performance in order to maintain and attract professionals and
management personnel for our strategic transformation.
Interconnection and other operating expenses
Our interconnection and other expenses increased by RMB1,379 million, from RMB4,139 million
in 2004 to RMB5,518 million in 2005, an increase of 33.3%. The significant growth in voice
interconnections and the newly added SMS interconnections led to the increase in
interconnection fees. The net revenue from interconnections (interconnection revenue less
interconnection expenses) amounted to RMB7,365 million, an increase of 11.2% from 2004.
NET FINANCE COSTS
In 2005, our net finance costs were RMB4,895 million, a decrease of RMB445 million or 8.3%
from RMB5,340 million in 2004.
Among the components of net finance costs, net exchange gain increased by RMB767 million
and interest expenses increased by RMB334 million.
The revaluation of Renminbi in 2005 was the main reason for the net exchange gain. According
to the exchange rates published by the People’s Bank of China on 30 December 2005, the
exchange rates of Renminbi to US dollars, Japanese Yen and Euro increased by 2.5%, 14.7%
and 14.9% respectively from 31 December 2004.
We acquired the telecommunications operations in 10 provinces including Hubei on 30 June
2004. The consideration for the acquisition included a deferred payment of RMB15,150 million,
and the full year interest expenses thereon in 2005 was the main reason for the increase in
interest expenses.
INCOME TAX
Our statutory income tax rate is 33%. In 2005, our income tax expenses were RMB6,160
million, and our effective income tax rate was 18.1%, whereas our effective income tax rate
excluding upfront connection fee was 22.5%. The difference between our effective income tax
rate and the statutory income tax rate was mainly due to the exclusion of upfront connection
fees from taxable revenue, and the preferential income tax rate of 15% enjoyed by our
subsidiaries located in special economic zones and in the western part of China. Another reason
for our effective tax rate being lower than the statutory tax rate was that some of our operating
subsidiaries received tax credits of RMB1,478 million on the purchases of domestic equipment in
2005. As the tax credits on purchases of domestic equipment are subject to various restrictions,
we cannot reasonably foresee their impact on the effective tax rate in future years.
NET PROFIT (PROFIT ATTRIBUTABLE TO EQUITY HOLDERS
OF THE COMPANY)
In 2005, our operating efficiency and profit level continued to grow steadily and our net profit
reached RMB27,912 million. Excluding amortisation of upfront connection fees, our net profit
was RMB21,131 million. Our net profit in 2004 was RMB28,023 million, and excluding
amortisation of upfront connection fees, it was RMB19,565 million. Excluding amortisation of
upfront connection fees, our net profit increased by 8.0% from 2004.
China Telecom Corporation Limited
Annual Report 2005
26
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (continued)
CAPITAL EXPENDITURE
In 2005, we continued our prudent policy on capital expenditure. Our capital expenditure
decreased by 4.3%, from RMB56,307 million in 2004 to RMB53,864 million in 2005. In
accordance with our strategic transformation, we further optimised our capital expenditure
structure and significantly reduced the capital expenditure on wireless local access service and
increased our investment in Internet access and data network. Proportion of the capital
expenditure on wireless local access service to the total capital expenditure decreased by 7.1
percentage points, and proportion of the capital expenditure on Internet access and data
network to the total capital expenditure increased by 3.1 percentage points from 2004.
In 2006, our estimated capital expenditure is RMB51 billion. The main sources of our capital are
cash generated from operating activities, bank borrowings and other indebtedness. We expect
that we will have sufficient funding sources to meet our capital expenditure requirements in
future.
CASH FLOWS AND CAPITAL RESOURCES
Cash Flows
In 2005, our net cash inflow was RMB1,656 million, as compared with the net cash inflow of
RMB744 million in 2004.
The following table sets out our cash flow position in 2004 and 2005:
Net cash flows from operating activities
Net cash used in investing activities
Net cash used in financing activities
For the year ended
31 December
2005
2004
(RMB in millions)
68,359
(51,894)
(14,809)
66,078
(56,353)
(8,981)
Net increase in cash and cash equivalents
1,656
744
In 2005, our net cash flow from operating activities was RMB68,359 million, an increase of
RMB2,281 million from RMB66,078 million in 2004. Increase in net cash from operating
activities indicated the steady growth in our business and an improvement in our operating
efficiency.
In 2005, we achieved saving in capital expenditure. Cash used in investing activities was
RMB51,894 million, a decrease of RMB4,459 million from 2004.
In 2005, our net cash flows used in financing activities were RMB14,809 million, compared to
the net cash used of RMB8,981 million in 2004.
In October 2005, we raised RMB9.88 billion in cash to meet the working capital requirement of
our operations through the issue of short-term commercial paper due in six months with a
nominal value of RMB10 billion. In addition, we continued to repay certain long-term
borrowings in 2005, and net cash used in repaying such borrowings (the difference between the
cash from borrowings and the cash used for repaying borrowings) increased from RMB3,950
million in 2004 to RMB9,046 million in 2005.
China Telecom Corporation Limited
Annual Report 2005 27
Working capital
By the end of 2005, our working capital (total current assets minus total current liabilities) deficit
was RMB120,313 million, an increase of RMB1,901 million from deficit of RMB118,412 million
of 2004. This increase was mainly attributable to an increase in short-term debts, which enjoyed
lower interest rates. By the end of 2005, our cash and cash equivalents amounted to
RMB15,121 million, of which 99.1% was denominated in Renminbi.
Indebtedness
The indebtedness as of the end of 2004 and 2005 was as follows:
Short-term debt
Long-term debt maturing within one year
Finance lease obligations maturing within one year
Long-term debt (excluding current portion)
Finance lease obligations (excluding current portion)
Total debt
As of 31 December
2005
2004
(RMB in millions)
76,005
8,963
108
55,777
52
65,976
11,842
156
72,366
157
140,905
150,497
By the end of 2005, our total indebtedness was RMB140,905 million, a decrease of RMB9,592
million from 2004. The main reason for the decrease was that we repaid certain long-term
borrowings with the net cash generated from our operating activities.
Therefore, the ratio of our total indebtedness to total assets decreased from 36.5% in 2004 to
33.8% in 2005. We believe that the Company has maintained a solid capital structure.
Most of our revenue-generating operations and payments made are denominated in Renminbi,
and Renminbi is not a freely convertible currency. By the end of 2005, loans in Renminbi,
Janpanese Yen, US Dollars and Euro represented 95.6%, 2.0% and 1.7% and 0.6% of our total
indebtedness, respectively. 66.4% of our indebtedness was loans with fixed interest rates terms.
CONTRACTUAL OBLIGATIONS
The following table sets out our contractual obligations as of 31 December 2005:
Payable in
Total
2006
2007
2008
2009 After 2009
(RMB in millions)
Short-term debt
Long-term debt
Finance lease obligations
Operating lease commitments
Capital commitments
76,005
64,740
160
1,062
2,791
76,005
8,963
108
326
2,791
–
8,773
52
195
–
–
3,824
–
134
–
–
382
–
119
–
–
42,798
–
288
–
Total contractual obligations
144,758
88,193
9,020
3,958
501
43,086
Going to the
Fruitful Future
China Telecom Corporation Limited
Annual Report 2005
30
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Mr. Wang Xiaochu
Age 48, is Chairman of the Board of Directors and Chief Executive
Officer of our Company. Mr. Wang has held positions such as director
general and deputy director general of the Hangzhou
Telecommunications Bureau in Zhejiang province, director general of
the Tianjin Posts and Telecommunications Administration, chairman
and chief executive officer of China Mobile (Hong Kong) Limited, and
vice president of China Mobile Communications Corporation. Mr.
Wang is also President of China Telecommunications Corporation. He
was responsible for the development of China Telecom’s telephone
network management systems and various other information
technology projects and as a result, received the Class Three National
Science and Technology Advancement Award and the former Ministry
of Posts and Telecommunications’s Class One Science and Technology
Advancement Award. Mr. Wang graduated from Beijing Institute of
Posts and Telecommunications in 1980 and received a Doctorate
degree in Business Administration from The Hong Kong Polytechnic
University in 2005. He has over 25 years of management experience in
the telecommunications industry.
Mr. Leng Rongquan
Age 57, is Executive Director, President and Chief Operating Office of
our Company. Mr. Leng is a director level senior engineer. He
graduated from the Beijing Institute of Posts and Telecommunications
with a Master of Science in engineering. Mr. Leng has held positions
such as chief engineer of the Beijing Long Distance Telephone Bureau,
deputy chief engineer of the Directorate General of
Telecommunications (”DGT”) of the Ministry of Posts and
Telecommunications (“MPT”), deputy director general of the DGT of
the MPT, deputy general manager of China Telecommunications
Corporation, deputy general manager of China Network
Communications Group Corporation and vice chairman of China
Netcom Group Corporation (Hong Kong) Limited. Mr. Leng is also Vice
President of China Telecommunications Corporation. Mr. Leng has had
30 years of operational management experience in the
telecommunications industry in the PRC.
Ms. Wu Andi
Age 51, is Executive Director, Executive Vice President and the Chief
Financial Officer in charge of financial management of our Company.
Ms. Wu is a Senior Accountant. She graduated in 1983 from the
Beijing Institute of Economics with a B.A. degree in finance and
trading. From 1996 to 1998, Ms. Wu studied in a postgraduate
program in business economics management at the Chinese Institute
of Social Sciences. Prior to joining China Telecommunications
Corporation in May 2000, Ms. Wu served as Director General of the
Department of Economic Adjustment and Communication Settlement
of the Ministry of Information Industry (“MII”), and Director General,
deputy Director General and director of the Department of Finance of
the MPT. Ms. Wu is also Vice President of China Telecommunications
Corporation. Ms. Wu has 24 years of financial management experience
in the telecommunications industry in China.
China Telecom Corporation Limited
Annual Report 2005 31
Mr. Zhang Jiping
Age 50, is Executive Director and Executive Vice President of our
Company. Mr. Zhang is a professor level Senior Engineer. He graduated
in 1982 from the Beijing University of Posts and Telecommunications
with a B.Sc. degree in radio telecommunications engineering. From
1986 to 1988, Mr. Zhang studied in a postgraduate program in applied
computer engineering at Northeastern Industrial University. Prior to
joining China Telecommunications Corporation in May 2000,
Mr. Zhang was Deputy Director General of DGT of MPT, and a Deputy
Director General and Director of the Network Management Center of
the Posts and Telecommunications Administration of Liaoning Province.
Mr. Zhang is also Vice President of China Telecommunications
Corporation and Chairman and General Manager of Northern Telecom
Co., Ltd. under China Telecommunications Corporation. Mr. Zhang has
24 years of operational and managerial experience in the
telecommunications industry in China.
Ms. Huang Wenlin
Age 52, is Executive Director and Executive Vice President of our
Company. Ms. Huang is a Senior Economist. She graduated in 1984
from the Beijing University of Posts and Telecommunications with a
major in engineering management. Prior to joining China
Telecommunications Corporation in May 2000, Ms. Huang served as
Director of the Domestic Communications Division and Director of the
Communications Organization Division of the DGT of the MPT.
Ms. Huang is also Vice President of China Telecommunications
Corporation. Ms. Huang has 31 years of operational and managerial
experience in the telecommunications industry in China.
Mr. Li Ping
Age 52, is Executive Director, Executive Vice President and Joint
Company Secretary of our Company. Mr. Li is a Senior Engineer. He
graduated in 1976 from the Beijing University of Posts and
Telecommunications with a major in radio telecommunications and
received an MBA degree from the state University of New York at
Buffalo in 1989. Prior to joining China Telecommunications
Corporation in August 2000, Mr. Li served as Chairman and President
of China Telecom (Hong Kong) International Limited, Vice Chairman
and Executive Vice President of China Mobile (Hong Kong) Limited and
Deputy Director General of the DGT of the MPT. Mr. Li is also Vice
President of China Telecommunications Corporation. Mr. Li has
extensive experience in managing public companies and 30 years of
operational and managerial experience in the telecommunications
industry in China.
China Telecom Corporation Limited
Annual Report 2005
32
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT (continued)
Mr. Wei Leping
Age 60, is Executive Director of our Company. Mr. Wei is a professor
level Senior Engineer. He graduated in 1970 from Tsinghua University
with a major in radio engineering and received a Master degree in
communication and information systems engineering from the
Research Institute of Post and Telecommunications. Prior to joining
China Telecommunications Corporation in April 2001, Mr. Wei served
as Deputy Director of the Telecommunications Research Institute of the
MII, Deputy Director of the Telecommunications Science Planning and
Research Institute of the MPT and Deputy Director and Chief Engineer
of the Telecommunications Transmissions Research Center of the MPT.
Mr. Wei is also Chief Engineer of China Telecommunications
Corporation. Mr. Wei has 28 years of experience in research and
development for network technologies in the telecommunications
industry in China.
Mr. Yang Jie
Age 44, is Executive Director and Executive Vice President of our
Company. Mr. Yang is a senior engineer at professor level. In 1984,
Mr. Yang graduated from Beijing University of Posts and
Telecommunications with a Bachelor degree in radio engineering. He
then obtained a master degree of telecommunications and information
management at the Norwegian School of Management. Mr. Yang
previously served as Deputy Director General of Shanxi Posts and
Telecommunications Administration, General Manager of Shanxi
Telecommunications Corporation, Vice President of China Telecom
Beijing Research Institute and General Manager of the Northern
Telecom Department of China Telecommunications Corporation. He is
also Vice President of China Telecommunications Corporation.
Mr. Yang has 22 years of operational and managerial experience in the
telecommunications industry in China.
Mr. Sun Kangmin
Age 49, is Executive Director and Executive Vice President of our
Company. Mr. Sun is a senior engineer. Mr. Sun previously served as
Department Head of the Information Industry Department of Sichuan
Province, Director General of Communications Bureau of Sichuan
Province as well as Chairman and General Manager of Sichuan Telecom
Company Limited. Mr. Sun has 22 years of operational and managerial
experience in the telecommunications industry in China.
China Telecom Corporation Limited
Annual Report 2005 33
Mr. Li Jinming
Age 54, is Non-executive Director of our Company. Mr. Li is Chairman
of Guangdong Rising Assets Management Co., Ltd., one of the
domestic shareholders of the Company, and Chairman of Shenzhen
Zhongjin Lingnan Nonfemet Company Limited. Mr. Li graduated from
Guangdong Provincial Broadcast and Television University, and studied
in the postgraduate class in the faculty of international economics of
Lingnan College, Zhongshan University, majoring in international
industry and commerce management. He is currently studying in the
EMBA class at Lingnan College, Zhongshan University. Mr. Li has held
positions such as section chief and deputy director general of the
Guangdong Provincial Discipline Inspection Commission, and director
and deputy general manager of Guangdong Rising Assets
Management Co., Ltd. Mr. Li has extensive experience in enterprise
management.
Mr. Zhang Youcai
Age 65, is Independent Non-executive Director of our Company. He is
currently a member of the Standing Committee of the National
People’s Congress, vice-chairman of the Financial and Economic Affairs
Committee and the chairman of the China Chief Financial Officer
Association. Mr. Zhang graduated from Nanjing Industrial Chemistry
College in 1965 with a major in inorganic chemistry. He was a former
Vice Minister of the Ministry of Finance of China and was responsible
for the formulation and implementation of government finance
policies. Mr. Zhang has contributed to the improvement and reform of
the finance system of China for more than a decade. Prior to serving at
the Ministry of Finance, Mr. Zhang served as a Deputy Director of the
Planning Commission of Nantong City in Jiangsu Province and a
Deputy Mayor and Mayor of Nantong. Mr. Zhang is also an
Independent Director of China Petroleum & Chemical Corporation. Mr.
Zhang has more than 40 years of experience in the regulation of
Chinese state-owned enterprises and finance administration.
China Telecom Corporation Limited
Annual Report 2005
34
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT (continued)
Mr. Lo Hong Sui Vincent
Age 58, is Independent Non-executive Director of our Company. Mr.
Lo is the Chairman and Chief Executive of the Shui On Group which
was founded by him in 1971. He is also the Chairman and Chief
Executive Officer of Shui On Land Limited.
Mr. Lo is a Member of The Tenth National Committee of Chinese
People’s Political 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, 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.
He was awarded the Gold Bauhinia Star in 1998 and appointed Justice
of the Peace in 1999 by the Government of the Hong Kong Special
Administrative Region. He was made an Honorary Citizen of Shanghai
in 1999 and was named Businessman of the Year by the Hong Kong
Business Awards in 2001. He also won the Director of the Year Award
in the category of Listed Company Executive Directors from The Hong
Kong Institute of Directors in 2002. In 2005, he was awarded the
Chevalier des Arts et des Lettres by the French government.
Mr. Shi Wanpeng
Age 69, is Independent Non-executive Director of our Company. He is
currently a member of the Standing Committee of the Tenth Chinese
People’s Political Consultative Conference. Mr. Shi graduated in 1960
from Northern Jiaotong University with a major in Railway
Transportation Management. He is a Professor level Senior Engineer
and served as Deputy Director General and Director General of
Department of Transportation and Department of Economy &
Technology Cooperation of State Economy & Trade Commission,
Director General of Department of Production Planning of State
Development Planning Commission, Deputy Director of Economic and
Trade Office of the State Council, Chairman of China Textile Industry
Association and Vice Chairman of the State Economic and Trade
Commission (minister level). He has more than 40 years of operational
and managerial experience in state-owned enterprise and state
industry development of PRC.
China Telecom Corporation Limited
Annual Report 2005 35
Mr. Xu Erming
Age 56, is Independent Non-executive Director of our Company. He is
currently the Dean of the School of Business and the supervisor of the
PhD candidates of Remin University of China. Mr. Xu is also a member
of the Fifth Session of the Academic Appraisal Group of the Academic
Degree Committee of the State Council, the Chairman of the Steering
Committee (Section of Higher Education in Business Administration) of
the Ministry of Education as well as the Professor of the University of
Scranton and the Polytechnic University of Hong Kong etc. Mr. Xu
graduated from Remin University of China and obtained the PhD in
Economics in 1994. Over the years, he has been working as the
Instructor and Associate Professor of the Faculty of Industrial
Economics as well as the Professor and the Assistant Dean, and
subsequently, the Dean of the School of Business Administration of
Remin University of China. Mr. Xu has attained a relatively high level of
academic research standards on the strategic management and
operational aspects of enterprises.
Mr. Tse Hau Yin, Aloysius
Age 58, is Independent Non-executive Director of our Company. He
joined the Board of Directors of the Company in September 2005.
Mr. Tse is currently an Independent Non-executive Director of CNOOC
Limited, China Construction Bank Corporation, Wing Hang Bank,
Limited and Linmark Group Limited and is currently the Chairman of
the International Advisory Council of The People’s Municipal
Government of Wuhan. Mr. Tse is a fellow of The Institute of Chartered
Accountants in England and Wales, and the Hong Kong Institute of
Certified Public Accountants (“HKICPA”). Mr. Tse is a past president of
the HKICPA. He joined KPMG in 1976 and became a partner in 1984
and retired in March 2003. Mr. Tse was a non-executive Chairman of
KPMG’s operations in the PRC and a member of the KPMG China
advisory board from 1997 to 2000. Mr. Tse is a graduate of the
University of Hong Kong.
China Telecom Corporation Limited
Annual Report 2005
36
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT (continued)
Mr. Wang Qi
Age 51, is the controller of our Company. Mr. Wang is a senior
accountant. He studied at Beijing Institute of Posts and
Telecommunications and the Australian National University. Mr. Wang
has a B.A. degree in international economics and a Master degree in
international management. Prior to joining the Company, Mr. Wang
served as a Deputy Director General of Anhui PTA. Mr. Wang also served
as a Deputy General Manager of China Telecom Group Anhui
Corporation prior to his relocation to the headquarters of China Telecom
Group in 2000. Mr. Wang is also Managing Director of the Finance
Department of China Telecommunications Corporation. Mr. Wang has
31 years of managerial and accounting experience in the
telecommunications industry in China.
Mr. Yung Shun Loy, Jacky
Age 43, is the Assistant Chief Financial Officer, qualified accountant and
Joint Company Secretary of our Company. Mr. Yung is a fellow member
of the Hong Kong Institute of Certified Public Accountants and a fellow
member of the Association of Chartered Certified Accountants of
United Kingdom. Mr. Yung is also a Certified Practising Accountant of
Australia. Mr. Yung has nearly 20 years of experience in auditing,
company secretary and senior financial management of listed
companies.
Ms. Zhang Xiuqin
Age 59, is the Chairperson of our Supervisory Committee. Ms. Zhang is
a Senior Accountant. Prior to joining China Telecom Group, Ms. Zhang
served as a Director of the Systems Division of the Financial
Department of the MPT, Director of the Department of Economic
Adjustment and Communication Settlement of the MII, Director of the
Communication Settlement Centre of the MII and General Manager of
the Huaxin Posts and Telecommunications Economic Development
Center. Ms. Zhang has served as Director of the Audit Department of
our Company. Ms. Zhang has 37 years of operational and managerial
experience in the telecommunications industry in China.
Ms. Zhu Lihao
Age 65, is an independent Supervisor on our Supervisory Committee.
Ms. Zhu is a Senior Auditor and is a PRC registered accountant. She
graduated from Engineering Economics Department of Beijing Mining
College in 1963. Ms. Zhu served as a Deputy Director General and
Director General of the Department of Industry and Communications
of the National Audit Bureau of China, and the Director General of the
Department of Foreign Affairs and Foreign-related Auditing of the
Audit Bureau. Ms. Zhu has 43 years of experience in management and
auditing.
China Telecom Corporation Limited
Annual Report 2005 37
Mr. Li Jian
Age 44, is a Supervisor on our Supervisory Committee. He is currently
the Vice President of the Department of Diversified Business
Management in China Telecommunications Corporation. He graduated
from Beijing Radio and Television University in 1982 with a major in
Accounting and obtained a Master degree in International Business
Administration from Australian National University. Previously, he was
the Director of Treasury Division of the Department of Finance of the
Ministry of Posts and Telecommunications and served at China
Telecommunications Corporation to take up the post of the Director of
the Treasury Division and Assets Division, the Director of the General
Affairs and Assets Division under the Department of Finance, the
Chairman and President of China Telecom (Hong Kong) International
Limited and the Managing Director of the Investor Relations
Department of our Company. Mr. Li is an accountant and has 24 years
of operational and management experience in the telecommunications
industry.
Mr. Xu Cailiao
Age 42, is a Supervisor on our Supervisory Committee. He is currently a
Director of the Corporate Strategic Department of our Company. He
graduated from the School of Law of Peking University in 1987 and
obtained a Master degree in Law. Previously, he was a Director of the
State Commission for Economic Restructuring and the Managing
Director of the Hong Kong branch of Irico Group etc. He was qualified
to practise law in China in 1988. Mr. Xu is highly experienced in
respect of corporate governance, organizational development and
process management.
Mr. Ma Yuzhu
Age 52, is an Employee Representative Supervisor on our Supervisory
Committee. He is currently a Director of the Corporate Culture
Department of our Company and the Vice Chairman of the Trade
Union of China Telecommunications Corporation. Mr. Ma graduated in
1982 from the Beijing Institute of Posts and Telecommunications with a
majoring in telecommunications. Mr. Ma studied part- time in
Australian National University in 2000 and obtained a Master degree in
International Business Administration in 2001. Mr. Ma previously
worked as Director General in China Communications Construction
No. 1 engineering bureau, Director of the department of General
Engineering of DGT. Mr. Ma is a senior Engineer and has over 30 years
of telecommunications construction and operational management
experience in the telecommunications industry.
China Telecom Corporation Limited
Annual Report 2005
38
REPORT OF THE DIRECTORS
The Board of Directors (the “Board”) of China Telecom Corporation Limited (the “Company”) is
pleased to present its report together with the audited financial statements of the Company and
its subsidiaries (the “Group”) prepared in accordance with International Financial Reporting
Standards for the year ended 31 December 2005.
PRINCIPAL BUSINESSES
The principal businesses of the Group are: provision of comprehensive wireline
telecommunications and other relevant services, including local telephone, domestic long
distance telephone, international long distance telephone, Internet and managed data, leased
line and other related services to its subscribers within the service area of the Group. The
principal business of the Company is investment holding.
RESULTS
Results of the Group for the year ended 31 December 2005 and the financial position of the
Company and the Group as at that date are set out in the audited financial statements on
pages 74 to 122 in this annual report.
DIVIDEND
The Directors propose to declare a final dividend in the amount equivalent to HK$0.075 per
share, totaling approximately RMB6,315 million for the year ended 31 December 2005. The
dividend proposal will be submitted for consideration at the Annual General Meeting to be held
on 23 May 2006. Dividends will be denominated and declared in Renminbi. Dividends on
domestic shares will be paid in Renminbi and dividends on H shares will be paid in Hong Kong
dollars. The relevant exchange rate will be the mean of the average rate of Renminbi to Hong
Kong dollars as announced by the People’s Bank of China for the week prior to the date of
declaration of dividends by the Annual General Meeting. The final dividends are expected to be
paid around 15 June 2006 after its approval by the Annual General Meeting.
ISSUE OF SHORT TERM COMMERCIAL PAPER BY THE COMPANY
Pursuant to the resolution passed at the Extraordinary General Meeting held on 18 October
2005, the Company may, before the date on which the annual general meeting of the
Company for the year ended 31 December 2005 is held, issue short term commercial paper, in
one or more tranches, with a maximum outstanding repayment amount of RMB30 billion.
On 25 October 2005, the Company successfully issued short term commercial paper in the
nominal amount of RMB10 billion, due in 6 months with an annual interest rate of 2.54%. The
short term commercial paper was issued through a book-building and centralised placing
process in the PRC inter-bank debenture market on a discounted basis. All the proceeds from
this issue of short term commercial paper will be used to satisfy the Company’s funding needs
of production and operation. The Company considers that the issue of short term commercial
paper will enable it to lower its finance costs, to diversify its capital-raising channels and to
improve its market image.
China Telecom Corporation Limited
Annual Report 2005 39
DIRECTORS AND SENIOR MANAGEMENT OF THE COMPANY
The following table sets out certain information concerning the directors and senior
management of the Company as at the date of this Report:
Name
Wang Xiaochu
Leng Rongquan
Age
Position in the Company
Date of Appointment
48
57
Chairman and Chief Executive Officer
20 December 2004
Executive Director, President and Chief
20 December 2004
Operational Officer
Wu Andi
51
Executive Director, Executive Vice
10 September 2002
Zhang Jiping
Huang Wenlin
Li Ping
Wei Leping
Yang Jie
Sun Kangmin
Li Jinming
Zhang Youcai
Lo Hong Sui, Vincent
Shi Wanpeng
Xu Erming
Tse Hau Yin, Aloysius
Wang Qi
Yung Shun Loy, Jacky
50
52
52
60
44
49
54
65
58
69
56
58
51
43
President 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
10 September 2002
Executive Director and Executive Vice President
20 October 2004
Executive Director and Executive Vice President
20 October 2004
Non-executive Director
20 December 2004
Independent Non-executive Director
10 September 2002
Independent Non-executive Director
10 September 2002
Independent Non-executive Director
20 June 2003
Independent Non-executive Director
9 September 2005
Independent Non-executive Director
9 September 2005
Controller
10 September 2002
Assistant Chief Financial Officer, Qualified
1 February 2005
Accountant and Joint Company Secretary
On 9 September 2005, the office term of the First Session of the Board of Directors of the
Company expired, and Mr. Cheng Xiyuan and Mr. Feng Xiong ceased to be the executive
directors of the Company. On 9 September 2005, all members of the First Session of the Board
of Directors, except Mr. Cheng Xiyuan and Mr. Feng Xiong, were reappointed as members of
the Second Session of the Board of Directors pursuant to a resolution passed at the
Extraordinary General Meeting. The meeting also elected Mr. Xu Erming and Mr. Tse Hau Yin,
Aloysius as independent non-executive directors of the Company.
On 22 March 2006, Mr. Wei Leping has resigned from the position of executive vice president of
the Company, and proposed to resign from the position of executive director, which will be
effective after approval in 2005 Annual General Meeting.
China Telecom Corporation Limited
Annual Report 2005
40
REPORT OF THE DIRECTORS (continued)
The following table sets out certain information concerning the senior management of the
Company’s subsidiaries at the provincial level as at the date of this Report:
Name
Zhang Weihua
Wang Wei
Feng Xiong
Sun Jiuming
Zhang Xinjian
Tao Ping
Liu Yaoming
Ke Ruiwen
Zhao Qiang
Zou Bingxuan
Liu Hongjian
Liao Renbin
Wen Huiguo
Jin Dongbin
Liao Kang
Li Hua
Position in the Company’s
subsidiaries at the provincial level
Age
Date of Appointment
45
41
60
59
50
48
54
42
46
56
45
46
52
51
43
42
Chairman of Shanghai Telecom Company Limited
9 December 2005
General Manager of Shanghai Telecom
20 October 2004
Company Limited
Chairman and General Manager of
28 September 2002
Guangdong Telecom Company Limited
Chairman and General Manager of Jiangsu
19 October 2002
Telecom Company Limited
Chairman and General Manager of Zhejiang
2 March 2005
Telecom Company Limited
Chairman and General Manager of Anhui
14 February 2006
Telecom Company Limited
Chairman and General Manager of Fujian
19 August 2003
Telecom Company Limited
Chairman and General Manager of Jiangxi
12 September 2003
Telecom Company Limited
Chairman and General Manager of Guangxi
7 September 2005
Telecom Company Limited
Chairman and General Manager of Chongqing
19 August 2003
Telecom Company Limited
Chairman and General Manager of Sichuan
4 June 2004
Telecom Company Limited
Chairman and General Manager of Hubei
5 March 2004
Telecom Company Limited
Chairman and General Manager of Hunan
5 March 2004
Telecom Company Limited
Chairman and General Manager of Hainan
7 September 2005
Telecom Company Limited
Chairman and General Manager of Guizhou
5 March 2004
Telecom Company Limited
Chairman of Yunnan Telecom Company Limited
5 November 2005
General Manager of Yunnan Telecom
9 March 2005
Company Limited
Yin Yiping
46
Chairman of Shaanxi Telecom Company Limited
20 October 2005
En Guangli
Yang Jianqing
Ma Linfeng
Gao Tongqing
General Manager of Shaanxi Telecom
3 March 2005
Company Limited
58
45
50
42
Chairman and General Manager of Gansu
5 March 2004
Telecom Company Limited
Chairman and General Manager of Qinghai
5 March 2004
Telecom Company Limited
Chairman and General Manager of Ningxia
5 March 2004
Telecom Company Limited
Chairman and General Manager of Xinjiang
5 March 2004
Telecom Company Limited
China Telecom Corporation Limited
Annual Report 2005 41
In September 2005, Zhao Qiang was appointed as the Chairman and the General Manager of
Guangxi Telecom Company Limited while Sun Junyan resigned from the position of the
Chairman and the General Manager of Guangxi Telecom Company Limited.
In September 2005, Jin Dongbin was appointed as the Chairman and the General Manager of
Hainan Telecom Company Limited while Wang Dan resigned from the position of the Chairman
and the General Manager of Hainan Telecom Company Limited.
In October 2005, Yin Yiping was appointed as the Chairman of Shaanxi Telecom Company
Limited while Zhou Shifu resigned from the position of the Chairman of Shaanxi Telecom
Company Limited.
In November 2005, Li Hua was appointed as the Chairman of Yunnan Telecom Company
Limited while Wu Yongquan resigned from the position of the Chairman of Yunnan Telecom
Company Limited.
In December 2005, Zhang Weihua was appointed as the Chairman of Shanghai Telecom
Company Limited while Cheng Xiyuan resigned from the position of the Chairman of Shanghai
Telecom Company Limited.
In February 2006, Tao Ping was appointed as the Chairman and the General Manager of Anhui
Telecom Company Limited while Zhang Jun’an resigned from the position of the Chairman and
the General Manager of Anhui Telecom Company Limited.
SUPERVISORS OF THE COMPANY
The following table sets out certain information concerning the supervisors of the Company as
at the date of this Report:
Name
Zhang Xiuqin
Zhu Lihao
Li Jian
Xu Cailiao
Ma Yuzhu
Age
Position in the Company
Date of Appointment
59
65
44
42
52
Chairperson of the Supervisory Committee
10 September 2002
Independent Supervisor
Supervisor
Supervisor
10 September 2002
9 September 2005
9 September 2005
Supervisor (Employee Representative)
9 September 2005
On 9 September 2005, the office term of the First Session of the Supervisory Committee of the
Company expired, and Mr. Wang Huanhui, Mr. Li Jing and Mr. Xie Songguang ceased to be the
supervisors of the Company. At the same time, Mr. Li Jian and Mr. Xu Cailiao were elected as
supervisors pursuant to the resolution of the Company’s extraordinary general meeting held on
the same day, and Mr. Ma Yuzhu was elected as a supervisor (employee representative) in the
employee representatives meeting.
China Telecom Corporation Limited
Annual Report 2005
42
REPORT OF THE DIRECTORS (continued)
SHARE CAPITAL
The share capital of the Company as at 31 December 2005 was RMB80,932,368,321, divided
into 80,932,368,321 shares of RMB1.00 each. As at 31 December 2005, the share capital of the
Company comprised:
Shares
Number of
shares as at
31 December 2005
Percentage
of the total
number of shares
in issue as at
31 December 2005
(%)
Domestic shares (total):
67,054,958,321
82.85
Domestic shares held by:
China Telecommunications Corporation
Guangdong Rising Assets Management Co., Ltd.
Jiangsu Guoxin Investment Group Co., Ltd.
Zhejiang Financial Development Company
Fujian State-owned Assets Investment Holdings Co., Ltd.
57,377,053,317
5,614,082,653
957,031,543
2,137,473,626
969,317,182
Total number of H shares (including ADSs):
13,877,410,000
70.89
6.94
1.18
2.64
1.20
17.15
Total
80,932,368,321
100.00
China Telecom Corporation Limited
Annual Report 2005 43
MATERIAL INTERESTS AND SHORT POSITIONS IN SHARES AND
UNDERLYING SHARES OF THE COMPANY
As at 31 December 2005, the interests or short position of persons who are entitled to exercise
or control the exercise of 5% or more of the voting power at any of the Company’s general
meetings (excluding the Directors and Supervisors) in the shares and underlying shares of equity
derivatives of the Company as recorded in the register required to be maintained under Section
336 of the Securities and Futures Ordinance (Cap 571 of the Laws of Hong Kong) (the “SFO”)
are as follows:
Name of
shareholder
Number of
shares held
Type of shares
Percentage Percentage
of the of the total
number
of shares
in issue
respective
type of
shares
(%)
(%)
Capacity
China Telecommunications
57,377,053,317
Domestic shares
85.57
70.89
Beneficial owner
Corporation
Guangdong Rising Assets
5,614,082,653
Domestic shares
8.37
6.94
Beneficial owner
Management Co., Ltd.
JPMorgan Chase & Co.
1,080,661,621
H shares
7.79
1.34
Beneficial owner;
investment
manager;
custodian
Save as stated above, as at 31 December 2005, in the register required to be maintained under
Section 336 of the SFO, no other persons were recorded to hold any interests or short positions
in the shares or underlying shares of the equity derivatives of the Company.
DIRECTORS’ AND SUPERVISORS’ INTERESTS AND SHORT
POSITIONS IN SHARES, UNDERLYING SHARES AND DEBENTURES
As at 31 December 2005, none of the directors and supervisors of the Company had any
interests or short positions in the share, underlying shares of equity 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 maintained 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.
As at 31 December 2005, 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.
China Telecom Corporation Limited
Annual Report 2005
44
REPORT OF THE DIRECTORS (continued)
PUBLIC FLOAT
As at the date of this Report, based on the information that is publicly available to the Company
and within the knowledge of the Directors, the Company has maintained the prescribed public
float under the Listing Rules and as agreed with The Stock Exchange of Hong Kong Limited.
DIRECTORS’ AND SUPERVISORS’ INTERESTS IN CONTRACTS
For the year ended 31 December 2005, 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 companies or subsidiaries or subsidiaries of the Company’s
holding company, apart from service contracts.
EMOLUMENTS OF THE DIRECTORS AND SUPERVISORS
Please refer to note 26 of the audited financial statements for details of the emoluments of the
Directors and Supervisors of the Company in 2005.
PURCHASE, SALE AND REDEMPTION OF SHARES
Neither the Company nor any of its subsidiaries has purchased, sold or redeemed any securities
of the Company during the reporting period.
SUMMARY OF FINANCIAL INFORMATION
Please refer to pages 127 to 128 of this annual report for a summary of the operating results,
assets and liabilities of the Group for each of the years in the five-year period ended 31
December 2005.
BANK LOANS AND OTHER BORROWINGS
Please refer to note 14 of the audited financial statements for details of bank loans and other
borrowings of the Group.
CAPITALISED INTEREST
Please refer to note 24 of the audited financial statements for details of the Group’s capitalised
interest for the year ended 31 December 2005.
FIXED ASSETS
Please refer to note 4 of the audited financial statements for movements in the fixed assets of
the Group for the year ended 31 December 2005.
TRUST DEPOSITS AND OVERDUE FIXED DEPOSITS
As at 31 December 2005, the Company did not have any trust deposit or any overdue fixed
deposits with financial institutions or any other units.
China Telecom Corporation Limited
Annual Report 2005 45
RESERVES
Pursuant to Article 147 of the Company’s articles of association (the “Articles of Association”),
where the financial statements prepared in accordance with PRC accounting standards and
regulations materially differ from those prepared in accordance with either International
Financial Reporting Standards or those of the place outside the PRC where the Company’s
shares are listed, the distributable profit for the relevant accounting period shall be deemed to
be the lesser of the amounts shown in those respective financial statements. Distributable
reserves of the Company as at 31 December 2005, calculated on the above basis and before
deducting the proposed final dividends for 2005, amounted to approximately RMB7,858 million.
In addition to the allocation to the statutory reserve funds, the Directors propose to make an
allocation to a discretionary surplus reserve. The allocation proposal shall be submitted for
consideration at the Annual General Meeting to be held on 23 May 2006.
Please refer to note 20 of the audited financial statements for details of the movements in the
reserves of the Company and the Group for the year ended 31 December 2005.
DONATIONS
For the year ended 31 December 2005, the Group made charitable and other donations in a
total amount of RMB21 million.
SUBSIDIARIES AND ASSOCIATED COMPANIES
Please refer to note 6 and note 7 of the audited financial statements for details of the
Company’s subsidiaries and the Group’s interests in associated companies as at 31 December
2005.
CHANGES IN EQUITY
Please refer to the consolidated statement of changes in equity contained in the audited
financial statements (page 78 of this annual report).
RETIREMENT BENEFITS
Please refer to note 34 of the audited financial statements for details of the retirement benefits
provided by the Group.
STOCK APPRECIATION RIGHTS
Please refer to note 35 of the audited financial statements for details of the stock appreciation
rights offered by the Company.
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.
China Telecom Corporation Limited
Annual Report 2005
46
REPORT OF THE DIRECTORS (continued)
MAJOR CUSTOMERS AND SUPPLIERS
For the year ended 31 December 2005, sales to the five largest customers of the Group
represented an amount not exceeding 30% of the operating revenue of the Group.
For the year ended 31 December 2005, purchases from the five largest suppliers of the Group
accounted for approximately 33.7% of the total annual purchases of the Group.
For the year ended 31 December 2005, purchases from the Group’s largest supplier accounted
for approximately 10.8% of the total annual purchases of the Group. The amount of the
Group’s annual purchase includes amount of equipment purchase, investments in infrastructure
and pipeline, and amount payable for interconnection settlement.
So far as the Directors are aware, no director of the Company, their associates, or any person
holding more than 5% of the issued share capital in the Company has any interests in such
suppliers.
CONTINUING CONNECTED TRANSACTIONS
The following table sets out the amounts of continuing connected transactions of the Group
during the year ended 31 December 2005:
Transaction
Annual Monetary
cap for continuing
connected
transactions
Group
(RMB millions)
(RMB millions)
Share of expenses for centralised services
Net expenses 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
275
542
425
6,411
388
43
164
267
2,632
2,456
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.
800
N/A 1
1,070
8,327
440
130
320
470
3,410
2,640
China Telecom Corporation Limited
Annual Report 2005 47
Centralised Services Agreement
The Centralised Services Agreement was renewed on 15 December 2005, and may be renewed
for further periods of one year upon expiration. The aggregate costs incurred by the Company
and China Telecommunications Corporation for the provision of management services relating
to the operation of the business support centre and the network management centre, the costs
of headquarters and certain network support premises and related facilities (including labour
costs, depreciation of equipment and premises, daily expenses, costs relating to maintenance
and research) and certain large corporate customers of the headquarters of China
Telecommunications Corporation, will be apportioned on a pro rata basis between the Company
and China Telecommunications Corporation according to the revenues generated by each party.
In relation to the use of the international telecommunications facilities, the Company and China
Telecommunications Corporation have agreed to apportion the costs associated with operating
such assets on a pro rata basis, according to the aggregate volume of the inbound international
calls terminated by, and outbound international calls originated from, the Company and China
Telecom Group, respectively.
The Company and China Telecommunications Corporation entered into a supplemental
agreement in relation to the Centralised Services Agreement on 15 December, 2005, to amend
the scope of the centralised services by including in the Centralised Services Agreement the
management and operation services provided by the Company to China Telecommunications
Corporation, and amended the Centralised Services Agreement to make it, in addition to being
applicable to both parties, also applicable to the subsidiaries and branches of the parties as well
as any entities controlled by them. Except for the abovementioned amendments, other material
terms and conditions of the original Centralised Services Agreement remain unchanged.
Interconnection Agreement
Pursuant to the Interconnection Agreement, the telephone operator terminating a telephone
call made to its local assess network shall be entitled to receive from the operator from which
the telephone call originated a fee prescribed by the MII from time to time, which is currently
RMB0.06 per minute.
Comprehensive Services Framework Agreement
The Comprehensive Services Framework Agreement was renewed on 15 December 2005, and
may be renewed for further periods of one year upon expiration. This Agreement governs the
terms and conditions of transactions between them on two levels: (i) between the Group and
certain associates held by China Telecommunications Corporation as long-term investments; and
(ii) between the Group and certain subsidiaries of China Telecommunications Corporation
operating in other provinces (the “Provincial Subsisting Companies”). Such transactions include
procurement of telecommunications equipment such as optic fiber, network designs, software
upgrade, system integration, manufacture of calling cards and so on. Prices under such
agreement should be determined in accordance with the government-prescribed prices. In the
absence of the government-prescribed prices, the government-guided prices (if any) shall apply.
In the absence of both government-prescribed prices and government-guided prices, the market
prices shall apply, i.e., the prices at which the same type of services are provided by independent
third party in the ordinary course of business. If none of such prices is applicable, the prices shall
be determined through consultation between the parties based on reasonable costs plus
reasonable profit. For this purpose, “reasonable costs” shall mean the costs determined by the
parties after negotiations.
China Telecom Corporation Limited
Annual Report 2005
48
REPORT OF THE DIRECTORS (continued)
In December 2005, the following agreements were renewed by each of Shanghai Telecom
Company Limited, Guangdong Telecom Company Limited, Jiangsu Telecom Company Limited,
Zhejiang Telecom Company Limited, Anhui Telecom Company Limited, Fujian Telecom Company
Limited, Jiangxi Telecom Company Limited, Guangxi Telecom Company Limited, Chongqing
Telecom Company Limited, Sichuan Telecom Company Limited, 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, Xinjiang Telecom Company Limited under the Company (the “Twenty
Provincial Telecom Companies”) and the Provincial Subsisting Companies in their respective
service region.
Property Leasing Framework Agreements
The Property Leasing Framework Agreements were renewed on 15 December 2005, and may be
renewed for further periods of one year upon expiration. Pursuant to such agreements, the
Twenty Provincial Telecom Companies under the Company lease properties from the Provincial
Subsisting Companies for use as business premises, offices, equipment storage facilities and
sites for network equipment. On the other hand, the Twenty Provincial Telecom Companies also
lease certain properties to the Provincial Subsisting Companies. The rent shall be determined
based on the market price with reference to the standard set forth by local pricing authorities.
Property Sub-Leasing Framework Agreements
The Property Sub-Leasing Framework Agreements were renewed on 15 December 2005, and
may be renewed for further periods of one year upon expiration. Pursuant to such agreements,
the Provincial Subsisting Companies sub-lease certain properties owned and leased by
independent third parties to the Twenty Provincial Telecom Companies under the Group for use
as offices, retail outlets, spare parts storage facilities and sites for network equipment. The rent
for sub-leasing of third party property shall be determined based on the market price as agreed
between the relevant Provincial Subsisting Company and relevant third party through arm’s
length negotiation.
IT Services Framework Agreements
The IT Services Framework Agreements were renewed on 15 December 2005, and may be
renewed for further periods of one year upon expiration. Pursuant to such agreements, the
Provincial Subsisting Companies may participate in the bidding for the right to provide the
Twenty Provincial Telecom Companies with certain information technology services, such as
office automation and software upgrade. The charges payable for such IT services shall be
determined by reference to market rates or as determined by prices obtained through the
tender process.
Equipment Procurement Services Framework Agreements
The Equipment Procurement Services Framework Agreements were renewed on 15 December
2005, and may be renewed for further periods of one year upon expiration. Pursuant to such
agreements, the Provincial Subsisting Companies have agreed to provide comprehensive
procurement services, including management of tenders, verification of technical specifications
and installation services. The maximum commission for such procurement services shall be
calculated based on the following: (1) not more than 1% of the contract value for procurement
of imported telecommunications equipment; or (2) not more than 3% of the contract value for
the procurement of domestic telecommunications equipment and other domestic non-
telecommunications materials.
China Telecom Corporation Limited
Annual Report 2005 49
Engineering Framework Agreements
The Engineering Framework Agreements will expire on 31 December 2006, and may be
renewed for further periods of three years upon expiration. These agreements set out provisions
in respect of the supervision and management of services relating to construction, design, and
equipment installation and tests provided to the Twenty Provincial Telecom Companies by the
Provincial Subsisting Companies through bidding, and/or services as the general contractors for
the construction and supervision of engineering projects of the Twenty Provincial Telecom
Companies. The charges payable for such engineering services shall be determined by reference
to market rates as reflected by prices obtained through tender process.
Community Services Framework Agreements
The Community Services Framework Agreements will expire on 31 December 2006, and may be
renewed for further periods of three years upon expiration. Pursuant to such agreements, the
Provincial Subsisting Companies will provide the Twenty Provincial Telecom Companies with
services relating to culture, education, property management, vehicle service, medical care, hotel
and conference service, community and sanitary service. The pricing terms for such services are
the same as those for comprehensive services.
Ancillary Telecommunications Services Framework Agreements
The Ancillary Telecommunications Services Framework Agreements will expire on 31 December
2006, and may be renewed for further periods of three years upon expiration. Pursuant to such
agreements, the Provincial Subsisting Companies agree to provide the Twenty Provincial Telecom
Companies with certain repair and maintenance services, including maintenance of
telecommunications equipment, fire equipment and telephone booths, as well as other customer
services. The pricing terms for such services are the same as those for comprehensive services.
The independent non-executive directors have confirmed that all continuing connected
transactions for the year ended 31 December 2005 to which the Group was a party:
1.
had been entered into, and the agreements governing 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 to or (if applicable) from independent third
parties; and
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.
The independent non-executive directors have further confirmed that:
The values of continuing connected transactions entered into between the
Group and its connected persons which are subject to annual caps have
not exceeded their respective annual caps.
China Telecom Corporation Limited
Annual Report 2005
50
REPORT OF THE DIRECTORS (continued)
The auditors of the Group have reviewed the continuing connected transactions of the Group
and have confirmed to the Directors that the transactions:
1.
2.
3.
have received the approval of the Directors;
have been entered into in accordance with the pricing policies as stated in the relevant
agreements;
have been entered into in accordance with the terms of the agreements governing such
transactions; and the values of continuing connected transactions entered into between
the Group and connected persons of the Group which are subject to annual caps have not
exceeded their respective annual cap.
EMPLOYEES
As at 31 December 2005, the group has 244,867 employees illustrated as follows:
Management, finance and administration
Sales and marketing
Operations and maintenance
Others
Total
Number of
employees
38,975
113,329
91,443
1,120
Percentage
15.92%
46.28%
37.34%
0.46%
244,867
100%
As at 31 December 2005, the Group also had 97,090 staffs seconded by third parties.
The Company has implemented a short-term and long-term combined incentive scheme: the
primary components of an employee’s remuneration include basic salary, bonus based on
performance, compensation based on seniority and stock appreciation rights (stock appreciation
rights are exclusively for senior management and senior technological experts). In addition, the
Company also emphasizes the importance of employee training and uses various means of
training to improve the quality and capability of key employees.
COMPLIANCE WITH CODE ON CORPORATE GOVERNANCE
PRACTICES
Please see the “Corporate Governance Report” set out in page 54 of this 2005 annual report of
the Company for details of our compliance with the Code on Corporate Governance Practices.
China Telecom Corporation Limited
Annual Report 2005 51
MATERIAL LEGAL PROCEEDINGS
As at 31 December 2005, as far as the Directors are aware of, the Company was not involved in
any material litigation or arbitration and no material litigation claims were pending or
threatened or made against the Company.
AUDITORS
KPMG and KPMG Huazhen were appointed as the international and domestic auditors of the
Company for the year ended 31 December 2005. KPMG has audited the accompanying
financial statements, which have been prepared in accordance with International Financial
Reporting Standards. The Company has retained KPMG and KPMG Huazhen since the date of its
listing. A resolution for the reappointment of KPMG and KPMG Huazhen as the international
and domestic auditors of the Company for the year ending 31 December 2006 will be proposed
at the annual general meeting of the Company to be held on 23 May 2006.
By Order of the Board
Wang Xiaochu
Chairman and Chief Executive Officer
Beijing, PRC
22 March 2006
China Telecom Corporation Limited
Annual Report 2005
52
REPORT OF THE SUPERVISORY COMMITTEE
Dear Shareholders,
In 2005, the Supervisory Committee of China Telecom Corporation Limited had spared no effort
in performing its duties and earnestly safeguarding the interests of the shareholders and the
benefits of the Company in accordance with the relevant laws and regulations of the PRC and
the Articles of Association of the Company.
During the reporting period, the Supervisory Committee held three meetings. At the fifth
meeting of the First Session of the Supervisory Committee held in March 2005, operating results
and the Company’s financial statements for 2004 had been reviewed. In addition, the First
Session of the Supervisory Committee reviewed and approved five agenda items, including the
financial statements, profit appropriation proposal and the independent auditors’ report for the
year ended 31 December 2004. At the sixth meeting of the First Session of the Supervisory
Committee held in August of the same year, the interim financial statements and the
independent auditors’ review report of 2005 were reviewed, and a summary of the work of the
First Session of the Supervisory Committee was made. The term for the First Session of the
Supervisory Committee expired on 9 September 2005, and the work targets during the three-
year period of office had been successfully achieved. Re-election for the Supervisory Committee
was completed pursuant to the requirements of the Company Law of PRC and the Company’s
Articles of Association. At the first meeting of the Second Session of the Supervisory Committee
held in September 2005, the resolution for the election of Ms. Zhang Xiuqin as the Chairman of
the Second Session of the Supervisory Committee of China Telecom Corporation Limited was
approved. During the reporting period, through attending the Annual General Meeting of the
Company for 2004, the Extraordinary General Meetings and the meetings of the Board of
Directors in 2005, members of the Supervisory Committee supervised the major decision-making
processes of the Company and the performance of duties by the members of the Board of
Directors and the senior management.
The Supervisory Committee is of the view that in 2005, the Company focused on corporate
transformation and precision management, maintained growth at a fast pace and paid great
attention to implementing corporate governance and preserving integrity of the businesses of
the Company. It continued to intensify reform and strengthen its management capabilities, so
that our services had grown steadily with greater cost-effectiveness and improvement in the
value of the Company.
The Supervisory Committee believes that during 2005, all members of the Board of Directors
and members of the senior management were dedicated, hard-working and prudent in their
decision-making. They had strictly complied with the Listing Rules during work to protect the
interests of the shareholders and to achieve admirable financial performance of the company.
China Telecom Corporation Limited
Annual Report 2005 53
Upon the review of the unqualified financial statements of the Company for the year ended
2005 and other relevant information which were prepared in accordance with PRC accounting
rules and regulations and International Financial Reporting Standards, audited by external
auditors of the Company and proposed to be submitted to the shareholders general meeting by
the Board of Directors, the Supervisory Committee is of the opinion that the financial statements
were prepared by adhering to the principle of consistency and that they truly and fairly reflect
the Company’s financial position and results of operations.
In 2006, guided by the Articles of Association of the Company and relevant regulatory
requirements, the Supervisory Committee will further enhance its work procedures and do the
utmost to perform its supervisory role with a view to preserving the interests of the Company
and its shareholders.
By order of the Supervisory Committee
Zhang Xiuqin
Chairperson of the Supervisory Committee
Beijing, PRC
22 March 2006
China Telecom Corporation Limited
Annual Report 2005
54
CORPORATE GOVERNANCE REPORT
The Company has been attaching great importance to corporate governance. In 2005, we
continued to make efforts in establishing and perfecting the Company’s corporate governance
guidelines in accordance with the relevant regulatory requirements and international best
practice on corporate governance. By so doing, the Company’s operation became more
systematic, its management became more efficient and its operation became more rational, and
the shareholders’ interests as a whole were protected to the maximum degree. The Charters for
Audit Committee and Remuneration Committee of the Company have been amended in March
2005 to reflect certain code provisions under Appendix 14 Code on Corporate Governance
Practices of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong
Limited (the Listing Rules) which became effective from 1 January 2005. The roles of Chairman
and Chief Executive Officer of the Company are performed by the same individual. Save as
stated above, the Company is in compliance with all the code provisions as set out in Appendix
14 Code on Corporate Governance Practices of the Listing Rules throughout the year ended
31 December 2005.
1. OVERVIEW OF CORPORATE GOVERNANCE
Summary of corporate governance
As a company incorporated in China, the Company adopts the recently amended PRC
Company Law and other related laws and regulations as the basic guidelines for the
Company’s corporate governance. As a company listed both in Hong Kong and the United
States, we have always given special attention to the relevant regulatory requirements of
where we are listed. The current Articles of Association have fully taken into consideration
of the Listing Rules and its alignment and integration with the regulatory requirements for
listed companies in the United States, and serve as a guidance for the Company to
improve its foundation of corporate governance. The Company has made a further step
to regularly release responsibilities statement in respect of internal control in accordance
with the Sarbanes-Oxley Act of 2002 of the U.S., the regulatory requirements of the U.S.
Securities and Exchange Commission and the New York Stock Exchange to confirm that
the Company has complied with requirements of regulations in relation to financial
reporting, information disclosure and corporate internal controls.
China Telecom Corporation Limited
Annual Report 2005 55
In 2005, the Company’s efforts and achievement in corporate governance received
recognition from authouritative institutions. In the list of winners in the selection for
“Asia’s Best Managed Companies 2005” by Euromoney, a well-known international
financial magazine, the Company won the “The Best Managed Telecommunications
Company in China” award; and in the list of winners for “2005 Asia Investor Relations
Ranking” in Institutional Investors, a renowned international financial magazine,
Mr. Wang Xiaochu, our Chairman and Chief Executive Officer, won “The Best CEO in
China” award for 2005.
Chairman Wang Xiaochu awarded “The Best CEO in
China” for 2005
China Telecom awarded “The Best Managed
Telecommunications Company in China” for 2005
Overall structure for corporate governance
A double-tier structure has been adopted as our overall structure of corporate governance:
the Board of Directors and the Supervisory Committee under the Shareholders’ Meeting,
and various committees under the Board of Directors. The Board of Directors is authorised
by the Articles of Association to make major decisions for the Company’s operations, and
it also oversees the routine management by the senior management personnel. The
Supervisory Committee is mainly responsible for the supervision of the performance of
duties by the Board of Directors and the senior management personnel. Each of the Board
of Directors and the Supervisory Committee is independently accountable to the
Shareholders’ Meeting.
China Telecom Corporation Limited
Annual Report 2005
56
CORPORATE GOVERNANCE REPORT (continued)
2. OPERATION OF THE CORPORATE GOVERNANCE STRUCTURE
Shareholders’ Meeting
In 2005, the Company convened three shareholders general meetings, including the Annual
General Meeeting (“AGM”) for 2004 and two Extraordinary General Meetings (“EGMs“).
The AGM for 2004 held on 25
May 2005 mainly reviewed and
approved the consolidated
financial statements, Report of
the Directors, Report of the
Supervisory Committee, Report
of the International Auditors, the
annual profit distribution
proposal for the year ended
31 December 2004 and the
declaration of final dividends. It
also approved the renewal of appointment of KPMG and KPMG Huazhen as our
international auditors and domestic auditors respectively for the year ended 31 December
2005, and authorised the Board of Directors to determine the remuneration of the
auditors. The AGM also approved the Charter for Supervisory Committee of China
Telecom Corporation Limited.
Annual General Meeting was held in Hong Kong on 25 May 2005
At the EGM held on 9 September 2005, new sessions of the Board of Directors and
Supervisory Committee were elected, and the Articles of Association of the Company were
amended accordingly.
At the EGM held on 18 October 2005, it was approved that one or more tranches of short-
term commercial paper can be issued by the Company prior to the AGM for the year ended
31 December 2005, with a maximum outstanding repayment amount of RMB30 billion.
At each of the shareholders general meetings, separate shareholders resolution is
proposed in respect of each independent item, and details of the voting procedures and
the right of voting by poll at the demand of shareholders are recorded in the circulars to
shareholders in accordance with the Articles of Association and listing rules of the places
of listing. The circulars to shareholders also provide details of the resolutions. Results of
the voting are published in the newspapers and on the website of The Stock Exchange of
Hong Kong Limited.
China Telecom Corporation Limited
Annual Report 2005 57
Board of Directors
The Company strictly complies with the Code on Corporate Governance Practices of the Listing Rules of The
Stock Exchange of Hong Kong Limited and seriously regulates the operating procedures of the Board of
Directors and the committees under it, and ensure that proceeding of the Board meetings are standardised in
terms of organisation, regulations and personnel. The Board of Directors is responsible for supervision of the
preparation of accounts for each financial period, so that such accounts truly and fairly reflect the financial
position, the operating results and cash flows of the Company for each period. In preparing the accounts for
the year ended 31 December 2005, the directors selected appropriate accounting policies and made
judgments and estimates which were prudent, fair and reasonable, and prepared the accounts on going
concern basis. A statement by the international auditors about their reporting responsibilities is included in
the Report of the International Auditors on page 73.
Based on confirmation from the directors, all of the Company’s directors have strictly complied with Appendix
10 Model Code for Securities Transaction by Directors of Listed Issuers of the Listing Rules regarding the
standard requirements for directors in conducting securities transactions.
On 9 September 2005, re-election of the Board of Directors of the Company was conducted and gave birth to
the second session of the Board of Directors consisting of 15 directors with 9 executive directors, 1 non-
executive director, and 5 independent non-executive directors, each having a period of office of 3 years.
Pursuant to the recommended best practices of the Code on Corporate Governance Practices of the Listing
Rules, 2 additional independent non-executive directors were elected to the Board of Directors, making the
number of independent non-executive directors equal to one third of the directors in the Board of Directors,
which further reinforced the independence of the Board of Directors and ensured that the Board of Directors
will be able to make independent judgments effectively. The Company has received annual independence
confirmation from each of the independent non-executive directors, and considers them to be independent.
Members of the new sessions of the Audit Committee and the Remuneration Committee were also elected,
and a Nomination Committee was newly established in order to assist the Board of Directors to work out a
formal, prudent and transparent procedure for the appointment of directors, and plans for succession of
directors. Mr. Tse Hau Yin, Aloysius, an independent non-executive director who was elected in the additional
election as the chairman of the Audit Committee, is an internationally renowned financial expert and is very
experienced in accounting and financial management.
In 2005, the Board of Directors was playing a more and more important role in matters such as operations of
the Company, budgeting, decision-making, supervision, internal controls and corporate governance. In 2005,
the Board of Directors convened ten meetings (including the committees under it). All the directors had an
attendance rate of 100%. At the meetings, the Board of Directors reviewed matters such as the final
accounts, assets valuation assessment report, issue of short-term commercial paper, proposal of financial
budget for 2006, resolutions on extension of ongoing connected transactions, implementation plan for
remuneration of directors, progress report on the establishment of the internal control system and evaluation
arrangement etc. The Board of Directors also reviewed and approved certain fundamental systems in respect
of corporate governance such as the Code on Conducts and Ethics for Employees of China Telecom
Corporation Limited and the Provisional Rules on Disclosure of China Telecom Corporation Limited.
China Telecom Corporation Limited
Annual Report 2005
58
CORPORATE GOVERNANCE REPORT (continued)
Attendance rate of individual directors (including attendance with written
proxies) at Board meetings in 2005:
Number of Directors:
15
Executive Directors
Wang Xiaochu (Chairman)
Leng Rongquan
Wu Andi
Zhang Jiping
Huang Wenlin
Li Ping
Wei Leping
Yang Jie
Sun Kangmin
Cheng Xiyuan (First Session)
Feng Xiong (First Session)
Independent Non-
Executive Directors
Zhang Youcai
Lo Hong Sui, Vincent
Shi Wanpeng
Xu Erming (Second Session)
Tse Hau Yin, Aloysius
(Second Session)
Non-Executive
Directors
Li Jinming
Meetings
for The First
Session of
the Board
Attendance
Rate
Meetings
for The Second
Session of
of the Board
Attendance
Rate
3/3
3/3
3/3
3/3
3/3
3/3
3/3
3/3
3/3
3/3
3/3
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
2/2
2/2
2/2
2/2
2/2
2/2
2/2
2/2
2/2
N/A
N/A
100%
100%
100%
100%
100%
100%
100%
100%
100%
N/A
N/A
Meetings
for The First
Session of
the Board
Attendance
Rate
Meetings
for The Second
Session of
the Board
Attendance
Rate
3/3
3/3
3/3
N/A
N/A
100%
100%
100%
N/A
N/A
2/2
2/2
2/2
2/2
2/2
100%
100%
100%
100%
100%
Meetings
for The First
Session of
the Board
Attendance
Rate
Meetings
for The Second
Session of
the Board
Attendance
Rate
3/3
100%
2/2
100%
China Telecom Corporation Limited
Annual Report 2005 59
Besides, the Company was also committed to continuously expanding the communication
channel for the independent directors. Internal audit department of the Company can
report directly to the Audit Committee on matters of importance and be subject to their
supervision. At the same time, there was a smooth communication channel between the
Audit Committee and the external auditors. These enabled the independent directors to
fully utilise their experience and capabilities in the aspects of the Company’s operations,
financial management and corporate governance etc.
The Company has always placed emphasis on the continuous training of directors and
improving their understanding of regulatory rules. In 2005, the Company organised a
series of training for directors on securities regulations such as the new PRC Company
Law, updates of the Listing Rules and the Sarbanes-Oxley Act of 2002.
Committees under the Board
▲ Audit Committee
The Company set up an Audit Committee in 2002 with one chairman. In 2005, a
new session of the Audit Committee was successfully elected. Pursuant to the
recommended best practices of the Code on Corporate Governance Practices, the
new Audit Committee comprises 4 members which was one more than the previous
Audit Committee, and is formed entirely by independent non-executive directors,
each having a period of office of 3 years. The Audit Committee will regularly report
on its work to the Board of Directors. Usually, at least 3 regular meetings are held
each year.
The Board of Directors approved the Charter for the Audit Committee in March
2005, which clearly defines the status, qualifications, work procedures, duties and
responsibilities, funding and remuneration, etc. of the Audit Committee.
The Audit Committee’s principal duties include the supervision on the truthfulness
and completeness of the Company’s financial statements, the effectiveness and
completeness of the Company’s internal controls and risk management system as
well as the work of the Company’s internal audit department. It is also responsible
for the monitoring and review of the qualifications, selection and appointment,
independence and services of external independent auditors. The Audit Committee
has set up a reporting system to receive and handle cases of complaints or
anonymous reports regarding the Company’s accounting, internal control on
accounting and auditing matters.
In 2005, the Audit Committee convened 3 meetings, where it mainly reviewed the
2004 audited financial statements, the 2005 interim financial statements, the
extension of ongoing connected transactions and other related arrangements, and
was debriefed about the establishment of the internal control system and
assessment arrangements, and reviewed the reports by external auditors in relation
to the annual audit plans and arrangements for 2005, reports on the internal audit,
assessment of internal controls and the Company’s risk management etc., and
proposed practical and professional amelioration recommendations according to the
actual situation of the Company.
China Telecom Corporation Limited
Annual Report 2005
60
CORPORATE GOVERNANCE REPORT (continued)
Attendance rate of individual members of the 2005 Audit Committee
(including attendance with written proxies):
Number of the Committee members
First Session:
3
Second Session: 4
Percentage of Independent Non-executive directors of the Committee: 100%
Meetings
for the First
Session of
the Committee
Attendance
Rate
Meetings
for the Second
Session of
the Committee
Attendance
Rate
2/2
2/2
2/2
n/a
n/a
100%
100%
100%
n/a
n/a
n/a
1/1
1/1
1/1
1/1
n/a
100%
100%
100%
100%
Member of the Committee
Lo Hong Sui, Vincent
(First Session)
Shi Wanpeng
Zhang Youcai
Tse Hau Yin, Aloysius
(Second Session)
Xu Erming (Second Session)
▲ Remuneration Committee
The Company established the Remuneration Committee in 2003 which was formed
entirely by independent non-executive directors with one chairman. In 2005, the
second session of the Remuneration Committee was successfully elected and the
newly elected Remuneration Committee comprises 4 members, which was one more
than the previous Remuneration Committee. Pursuant to the recommended best
practices of the Code on Corporate Governance Practices, the new Remuneration
Committee was formed entirely by independent non-executive directors, each
having a period of office of 3 years. The Remuneration Committee regularly reports
on its work to the Board of Directors and meets when necessary.
The Board of Directors approved the Charter for the Remuneration Committee in
March 2005, which clearly defines the status, qualifications, work procedures, duties
and responsibilities, funding and remuneration etc. of the Remuneration Committee.
China Telecom Corporation Limited
Annual Report 2005 61
The Remuneration Committee’s principal duties include the supervision on the
compliance of the Company’s remuneration system with the legal requirements. It
reports to the Board of Directors and submits to the Board of Directors remuneration
evaluation report of the Company. It makes recommendations to the Board of
Directors in respect of the overall remuneration policy and structure for the directors
and senior management personnel and fully complies with the requirements of the
Code on Corporate Governance Practices.
In 2005, the Remuneration Committee convened two meetings, where it mainly
approved the Charter for the Remuneration Committee, reviewed and approved the
Remuneration Implementation Proposal of the Second Session of the Board of
Directors and also recommended the Board of Directors to approve such proposal. In
considering the remuneration proposals of the member of the Remuneration
Committee, each member declared his personal interest and abstained from his right
of voting accordingly.
Attendance rate of individual members of the Remuneration Committee (including with
written proxies) in 2005:
Number of the Committee members
First Session:
3
Second Session: 4
Percentage of Independent Non-executive directors of the Committee: 100%
Meetings
for the First
Session of
the Committee
Attendance
Rate
Meetings
for the Second
Session of
the Committee
Attendance
Rate
1/1
1/1
1/1
n/a
n/a
100%
100%
100%
n/a
n/a
1/1
1/1
n/a
1/1
1/1
100%
100%
n/a
100%
100%
Member of the Committee
Lo Hong Sui, Vincent
Shi Wanpeng
Zhang Youcai (First Session)
Tse Hau Yin, Aloysius
(Second Session)
Xu Erming (Second Session)
▲ Nomination Committee
Pursuant to the recommended best practices of the Code on Corporate Governance
Practices, the Company established a Nomination Committee in September 2005
which comprised 4 members (Mr. Shi Wanpeng (Chairperson), Mr. Zhang Youcai,
Mr. Xu Erming and Mr. Tse Hau Yin, Aloysius) in total with one chairman. It was
formed entirely by independent non-executive directors, each having a period of
office of 3 years. The Nomination Committee is accountable to and regularly reports
on its work to the Board of Directors, and meets when necessary. No meeting was
held in 2005.
China Telecom Corporation Limited
Annual Report 2005
62
CORPORATE GOVERNANCE REPORT (continued)
The Board of Directors approved the Charter for the Nomination Committee in
September 2005, which clearly defines the status, qualifications, work procedures,
duties and responsibilities, funding and remuneration etc. of the Nomination
Committee.
The principal duties of the Nomination Committee include: regularly reviews the
structure, number of members and composition of the Board of Directors; identifies
candidates for directors with the appropriate qualifications and advises the Board of
Directors about this; evaluates the independence of independent non-executive
directors; advises the Board of Directors on matters regarding the appointment or
re-appointment of directors and the succession plan for directors (in particular the
Chairman and Chief Executive Officer).
Supervisory Committee
The Company established its First Session of the Supervisory Committee in 2002 in
accordance with the PRC Company Law. In September 2005, the Second Session of the
Supervisory Committee was formed through election at the shareholders’ general meeting.
At present, the Supervisory Committee comprises 5 supervisors, of which there is an external
supervisor and an employee representative supervisor. The Supervisory Committee is a
standing supervisory organisation of the Company, which is accountable and reports to all
shareholders. The Supervisory Committee holds meetings at least twice a year.
The principal duties of the Supervisory Committee consist of supervising, in accordance
with the law, the Company’s financial affairs and performance of directors, managers and
other senior officers of the Company and prevent them from abusing their powers.
In order to further standardise the operation of the Supervisory Committee, at the 2004
Annual General Meeting held in May 2005, the Charter of the Supervisory Committee of
China Telecom Corporation Limited was approved as a special resolution.
Attendance rate of individual members of the Supervisory Committee in 2005
Number of supervisors: 5
Supervisors
Zhang Xiuqin (Chairperson)
Wang Huanhui (Employee
Representative, First Session)
Zhu Lihao (Independent
Supervisor)
Xie Songguan (First Session)
Li Jing (First Session)
Ma Yuzhu (Employee
Representative, Second Session)
Li Jian (Second Session)
Xu Cailiao (Second Session)
Meetings
for the first
Session of
the Committee
Attendance
Rate
Meetings
for the second
Session of
the Committee
Attendance
Rate
2/2
2/2
2/2
2/2
2/2
n/a
n/a
n/a
100%
100%
100%
100%
100%
n/a
n/a
n/a
1/1
n/a
1/1
n/a
n/a
1/1
1/1
1/1
100%
n/a
100%
n/a
n/a
100%
100%
100%
China Telecom Corporation Limited
Annual Report 2005 63
External Auditors
The international and domestic auditors of the Company are KPMG and KPMG Huazhen
respectively. In order to maintain its independence, the non-audit services provided by the
auditors have not been in contravention to the requirements of the Sarbanes-Oxley Act of
2002 and have obtained pre-approval from the Audit Committee.
Breakdown of the remuneration received by the external auditors for audit and non-audit
services for the Company during 2005 is as follows:
Subject of the service
Audit services
Non-audit services (Internal Control Advisory Service)
Fee for 2005
(RMB millions)
45.76
3.73
The Audit Committee approved the re-appointment of KPMG and KPMG Huazhen as the
international and domestic auditors of the Company for the year ending 31 December
2006, and the resolution has been agreed by the Board of Directors, and will be submitted
to the shareholders general meeting for approval.
3. ESTABLISHMENT AND IMPLEMENTATION OF ANCILLARY
MECHANISMS
Strengthening of the monitoring function of the Board
The Board of Directors leads and supervises the Company with a strong sense of
responsibility. All the Directors are aware of the need to be objective, prudent in
decision-making, highly efficient in operation for the overall interests of the Company
and shareholders.
In order to strengthen the leadership and monitoring functions of the Board of Directors in
respect of corporate governance, the Company adopts a number of measures to
strengthen the monitoring function of the Board of Directors, thereby making it more
standardised, institutionalised and systematic.
▲ Clearly defining the duties between the Board of Directors and the Management
The roles of Chairman and Chief Executive Officer of the Company are performed by
the same person. The Board of Directors considers that this could enhance the
Company’s decision-making and operational efficiency, and enable the Company to
grasp business opportunities effectively. Further, such arrangement is being adopted
by many international leading enterprises. At the same time, the Company increased
the number of independent non-executive directors to five, accounting for one-third
of the total number of directors during the year. Such arrangement further
strengthened the independence and objectivity of the decisions made by the Board
of Directors and provide full and impartial supervision over the Company’s
management, with a view to ensuring shareholders’ best interests.
China Telecom Corporation Limited
Annual Report 2005
64
CORPORATE GOVERNANCE REPORT (continued)
The Articles of Association clearly define the respective terms of reference of the
Board of Directors and the Management. Major decision-making for operation,
financial proposals and policies, formulation of the basic management system of the
Company and the establishment of the Company’s internal administrative
institutions and sub-institutions shall be determined by the Board of Directors,
whereas the Management is responsible for the operation and management of the
Company, and organises and implements resolutions of the Board of Directors and
the annual operation plans and investment proposals of the Company, and performs
such other duties authorised by the Articles of Association and the Board of
Directors.
In order to keep the highly efficient operation and the flexibility and swiftness of
operational decision-making, the Board of Directors, when necessary, may delegate
its managing and administrative powers to the Management, and provide clear
guidance regarding such delegation so as to avoid seriously impeding or
undermining the overall capacities of the Board of Directors in exercising of its
powers.
Establishment of the internal control system
In order to meet the regulatory requirements of the listing places such as the U.S. and
Hong Kong and strengthen the internal controls of the Company and guard against
operational risks of the Company, the Company launched the establishment of the
“Internal Control System over Financial Reporting” in August 2003. Over more than two
years, the Company has formulated the Manual on Internal Control over Financial
Reporting and its Implementing Rules in accordance with the requirements of the U.S.
securities regulatory authorities and the COSO internal control framework. They are
implemented after a certain period of trial to ensure that the financial statements are true
and reliable and will meet the need of internal governance and the requirements of the
capital market.
In 2005, the Company, in accordance with authorisation by the Board of Directors,
speeded up the establishment of the internal control mechanism and improved a series of
internal control measures, including the Internal Control Manual of China Telecom
Corporation Limited (2005) the Limits of Authority Lists, the Provisional Administrative
Measures of Internal Control of China Telecom Corporation Limited and the Provisional
Measures for Evaluation of Internal Control over Financial Reporting of China Telecom
Corporation Limited.
In respect of the control environment, in order to strengthen the corporate governance of
the Company and standardise the operations of the Board of Directors and to increase the
Company’s transparency, we have also formulated the Provisional Rules on Information
Disclosure of China Telecom Corporation Limited, the Administrative Measures on
Contracts of China Telecom corporation Limited, the Code of Ethics for Senior officers of
China Telecom corporation Limited and the Code of Conduct and Ethics for Employees of
China Telecom Corporation Limited.
In order to meet the requirements of Public Company Accounting Oversight Board
Auditing Standards No. 2 of the U.S. in respect of the requirements for internal control
mechanisms of listed companies on the information system relating to financial reporting,
the Company fully launched the internal control improvement for its information system in
China Telecom Corporation Limited
Annual Report 2005 65
the end of 2005, and based on the earlier efforts, to standardise its information system
according to the internal control requirements to ensure that the internal control system
relating to financial reporting can be more complete.
In accordance with requirements of the Listing Rules, in February 2005, the Company
engaged Mr. Yung Shun Loy, Jacky, who is a professional highly experienced in auditing of
listed companies, company secretary and financial management, and an international
qualified accountant to act as the assistant chief financial officer and joint company
secretary of the Company. As a qualified accountant of the Company, he also helps
improving the financial reporting procedures and its internal control mechanism.
In strict compliance with the Sarbanes-Oxley Act of 2002 and related regulatory
requirements, the Company has established and improved its internal complaining
mechanism. The website of the Company publishes the correspondence addresses and
telephone numbers for making complaints and encourages anonymous reporting on the
contravention by employees of the Company, in particular, its directors and senior
management.
In 2005, the internal control system of the Company is further standardised and
scientised. The Board of Directors and the Management placed much emphasis on the
improvement of internal control system, and results of the improvement of the internal
control system were recognised by the Board of Directors, which has laid a sound
foundation for the further improvement of the Company’s internal control system in 2006.
Summary of the Significant Ways in which the Corporate Governance Practices
of the Company differ from those followed by Domestic Companies under
NYSE Listing Standards
The Company was established in the PRC and is listed on The Stock Exchange of Hong
Kong Limited (“Stock Exchange”) and the New York Stock Exchange (“NYSE”). As a
foreign private issuer, the Company is not required to comply with all the corporate
governance rules of Section 303A of the NYSE Listed Company Manual. However, the
Company is required to 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 and Hong Kong laws and regulations, the Board of
Directors of the Company is not required to be formed by independent directors in
majority. Since we are listed on the Stock Exchange, the Company will need to comply
with the Listing Rules. These rules require that at least 3 independent directors shall be on
the board of directors of a listed company. The Board of Directors of the Company
comprises 15 directors, of which 5 are independent directors. These independent directors
satisfy the requirements on “independence” under both the Listing Rules and Section
303A.02 of the Listed Company Manual of NYSE.
Pursuant to the currently applicable PRC and Hong Kong laws and regulations, the Company
is not required to formulate any rules for corporate governance; therefore the Company has
not formulated any separate corporate governance rules. However, the Company complies
with the Code on Corporate Governance Practices of the Stock Exchange.
China Telecom Corporation Limited
Annual Report 2005
66
CORPORATE GOVERNANCE REPORT (continued)
Risk management mechanism
In order to further improve our internal control and reduce corporate risks, the
Company has recently commenced a comprehensive research on risk management in
accordance with the COSO framework and the requirements on risk management and
corporate internal control set out by the Stock Exchange, and has introduced the idea
of comprehensive risk management, so as to improve the risk management system step
by step.
Pursuant to the framework of Guidance for Comprehensive Risk Management of
Corporations under Central Government, regulations of the places of listing and
requirements for corporate internal controls, the Company will, based on the actual
situation, further strengthen, standardise and improve the corporate risk management
mechanism.
The Company has had good foundation of internal control. However, the Company will
continue to improve and upgrade its risk management system, and gradually apply such to
the ordinary and daily course of business and view the upgrading of risk management as a
continuous work.
Information disclosure mechanism
The Board of Directors approved the Provisional Rules on Information Disclosure of China
Telecom Corporation Limited and the Internal Responsibility Statement System (Provisional)
of China Telecom Corporation Limited and other related mechanisms to form our
information disclosure management system.
The Company attaches great importance to high transparency for information, and the
Board of Directors insists on the active communication with its investors, and in particular
communicates with shareholders at the AGM and other shareholders general meetings
and encourages their participation. To encourage and facilitate shareholders, in particular
2005 Annual Results
Announcement
China Telecom Corporation Limited
Annual Report 2005 67
public shareholders to actively attend shareholders general meeting and meanwhile
improve the direct exchange and communication between the Board of Directors and
shareholders, since the AGM in 2004, the AGM began to be held in Hong Kong, which
changed the tradition of holding AGM in Beijing. In 2005, we began to disclose our key
operating data and certain financial data on a quarterly basis and in 2006, we began to
disclose the number of subscribers on monthly basis. The Company also establishes and
maintains a smooth channel for exchange of information by way of our annual reports,
interim reports and other information disclosure methods. It also endeavours to continue
to improve the channel and methods of communication with shareholders and increase
the transparency for corporate information. In addition, the Company creates many
channels such as meeting with investment analysts, feedback road shows, news release
and telephone conference with investors to provide them with important information and
to respond to significant issues which are the concerns of investors recently. These moves
help them to better understand the operations of the Company and the overall
development of the telecommunication industry. The Company has established an investor
service centre both in Beijing and in Hong Kong serving investors specially in the aspects
of reception and information disclosure, so as to maintain its normal communication with
shareholders, investors and the media.
The overall remuneration package and long-term incentive mechanism
By making references to the remuneration level in the market, the Company’s
remuneration system gradually converges with the market. The Company strengthens the
performance management and reasonably determines the remuneration level, and further
reinforces its incentives and constraint mechanism.
Remuneration of the executive directors balances both short-term and long-term
incentives. It takes into account effects such as the scale of the corporation, the
remuneration standard at large and also fully demonstrates the principle that
remuneration should be linked to performance and the system of awards and penalty. It
also strengthens the executive directors’ sense for long-term development to avoid
activities for short-term behavior.
Remuneration of independent directors makes reference to the standards of independent
directors’ remuneration in both the domestic and international companies, and be
adjusted according to changes in remuneration of the market.
In order to better encourage our staff to create more value for the Company, the
shareholders meeting held in September 2002 approved the stock appreciation scheme for
the senior management that links the remuneration of the senior management with the
Company’s future results and the performance of the H shares.
China Telecom Corporation Limited
Annual Report 2005
68
HUMAN RESOURCES DEVELOPMENT
In 2005, efforts the Company made in respect of its human resources revolved around corporate
transformation, guided by the philosophy that talents make a company prosperous and the
people – oriented philosophy. Taking the route of transforming our teams and system, we
explored new human resources management mechanisms in emerging business areas. We
speeded up the reform of our labour force, personnel matters and remuneration system. We
made obvious achievement in the control of the scale of workforce, structure optimisation,
capability enhancement and energy buildup.
In order to establish a system of human resources management which focuses on qualities of
human resources, in 2005, the Company commenced its study on the quality model. We
worked with international well-known consulting groups to create staff quality dictionary
consisting of groups from 9 position groups and 28 quality items. The establishment of the
quality model has laid a sound foundation for the standardisation, personalised development
and optimisation of human resources allocation.
The company has attached great importance to identifying, honoring and training people who have
excellent performance and good potentials of development. In 2005, 206 outstanding employees
were selected by the Company as outstanding workers of the Group, and were showered with
ceremonious honor through many ways. Also, we have come up with proposals for assembling our
working teams with the best people. We continued to make great effort in promoting their career
development, and improving “Double Channels” system where the positions of management and
positions of special technology can develop side-by-side. Based on position groups and quality
model, we started career development design for each position group in detail.
In 2005, the Company also refined our remuneration system so that it will better match the
track of our employee’s career development. Also, the remuneration package of our employees
is more closely linked to the Company’s overall performance as well as their own performance.
We controlled more strictly our personnel cost, and established a resources allocation model for
labor costs so that on the one hand it will ensure that the overall costs be under control, and on
the other hand, the allocation of labor costs have now become more scientific and rationalised.
In 2005, the Company continued its
investment in the training of employees,
thereby achieving a win-win situation
where the competitive strengths of both
the Company and the employees were
enhanced. Through the year, 200,000
employees in companies of all levels had
participated in various training programs
for more than 40 hours, representing
81.6% of all the employees, of which
there were 25,000 management
employees and 175,000 professional
employees joining various training
programs. The total person-time for training was 890,000 person-times, and the total length of
training time was 1,630,000 person-days. Average time employees spent in training are 8.1
working days. In order to enhance the level of corporate management, the Company
cooperated with well-know universities both in China and overseas in training our middle and
high level management. We have also fully leveraged our corporate strengths and established
China Telecom E-University so that our employees all over the country may register for the
learning and training at any time. In 2005, 230,000 of our employees have participated in
online learning, and average number of hours spent in the online learning was 37.8. China
Telecom E-University has now become an effective platform for our staff to acquire more
knowledge and improve their skills for their positions. This has become more and more
important in the training of our staff and has effectively reduced our training costs.
Employees were participating in the training for “China Telecom E-University”
China Telecom Corporation Limited
Annual Report 2005 69
CORPORATE SOCIAL RESPONSIBILITY
As a telecommunication corporation with an established history of development, China Telecom
Corporation Limited has been making consistent efforts in providing the general public with
convenient and efficient telecommunication and information services. In 2005, the Company
proposed the idea of transforming from a traditional wireline network provider to a “integrated
information service provider”. In doing so, we strived to expand the channels where the public
may obtain and exchange information, speeded up the informatisation of the society and
improved the living standards of the people by integration of services with the information
terminals as well as their respective innovation, with an aim that in turn benefits the Company
in achieving a sustainable and healthy development.
As a corporate citizen, the Company always bears in mind of fulfilling its social responsibility by
participating in public welfare businesses while pursuing its business development. In 2005, the
Company continued to take part in helping the poor and subsidising the local construction in the
Yanyuan and Muli of Sichuan Province. By making investment to improve the local infrastructure
and providing training for the expertise, we succeeded in improving the living conditions, from
both the material or spiritual perspectives, of the local citizens. After the South Asia Tsunami, both
the Company and the entities under its control, based on the spirit of humanitarianism, actively
made donations to the affected nations through many channels so as to help those disaster
victims to rebuild their homes as well as their communities. In order to support education in China
and help offer equal education opportunity to the under-privileged, the Company provided
funding to the unschooled and the disabled children and participated in the construction of
“School of Hope” in order to help improving the conditions of the schools. In 2005, the Company
lent a helping hand to sponsor the “International Scheme for the Youth of China to Start up
Businesses”, which will help them on their way to successful business ventures.
The Company makes an active effort in promoting scientific research. In 2005, we sponsored the
convening of the ITC, a remarkable and highly authoritative international event in the field of the
IT research and application in connection with the global telecommunication and internet, as a
way to show our support to the researchers in their hard work to explore and keep track with the
development of the state-of-the-art technology in the telecommunication industry.
The Company places high
importance in maintaining a
healthy living environment for the
people and always applies the
environmental protection ideas and
measures during the course of
construction of the
telecommunications projects. In
selecting telecommunication
equipment, we meticulously select
those optic fibre cables and
transmission systems that are
noiseless and would not produce
electromagnetic radiations or
pollutants. When carrying out the
field works on tracking of the
communication routes, we deliberately avoid from carrying out those works at the mines,
forests, grasslands, wide animals, natural heritages, human relic, natural reserves and famous
scenic landscapes, etc. When laying down the optic fibre cables, we normally adopt the drilling
techniques so that cables can directly pass through any obstacles without having to change the
surrounding environment. The Company is enthusiastic in promoting environmental protection.
In 2005, we invested and took part in the project of constructing the landscaping belt around
the peripheral Three Gorges Dam areas as a way to make contribution towards the protection of
the land and water along the Yangtze River.
Emergency repair team was providing emergency telecommunications services
to customers
China Telecom Corporation Limited
Annual Report 2005
70
NOTICE OF ANNUAL GENERAL MEETING
NOTICE IS HEREBY GIVEN that the annual general meeting of China Telecom Corporation
Limited (the “Company”) for the year ended 2005 will be held at 11:00 am on 23 May 2006 in
the Ballroom, Level 3, JW Marriott Hotel Hong Kong, Pacific Place, 88 Queensway, Hong Kong
to consider and, if thought fit, pass the following businesses:
ORDINARY RESOLUTIONS
1.
2.
3.
4.
THAT the consolidated financial statements of the Company, the report of the Board of
Directors, the report of the Supervisory Committee and the report of the international
auditors for the year ended 31 December 2005 be considered and approved, and the
Board of Directors be authorised to prepare the budget of the Company for year 2006;
THAT the profit distribution proposal and the declaration and payment of a final dividend
for the year ended 31 December 2005 be considered and approved;
THAT the reappointment of KPMG and KPMG Huazhen as the international auditors and
domestic auditors of the Company respectively for the year ending 31 December 2006 be
considered and approved, and the Board of Directors of the Company be authorised to fix
the remuneration of the auditors;
THAT Mr. Wei Leping’s resignation from the position as an executive director of the
Company be considered and approved; and
to consider and approve other businesses (if any).
And as special business, to consider and, if thought fit, pass the following as special resolutions:
SPECIAL RESOLUTIONS
5.
THAT the issue of short-term commercial paper by the Board of Directors be considered,
approved, confirmed and ratified.
(1)
THAT the Company’s issue of short-term commercial paper before end of October
2006 pursuant to The Notice of the People’s Bank of China on the Issue of Short-
term Commercial Paper by China Telecom Corporation Limited (Yin Fa [2005] No.
286) and based on the need of the Company and the market conditions, and with a
maximum outstanding repayment amount of RMB30 billion be approved; THAT the
Company’s issue of short-term commercial paper, in one or more tranches, from end
of October 2006 to the day before the date on which the annual general meeting of
the Company for the year ending 31 December 2006 is held, and with a maximum
outstanding repayment amount of RMB40 billion be approved (the “Issue”).
(2)
THAT the board of directors of the Company (the “Board”) or any two or more
directors of the Company (the “Directors”) duly authorised by the Board, taking into
consideration the specific needs of the Company and other market conditions, be
and are hereby generally and unconditionally authorised to:
(a)
(b)
(c)
determine the specific terms, conditions and other matters of the Issue (including,
but not limited to, the determination of the actual aggregate amount, interest
rate, rating, guarantee arrangements and use of proceeds of the Issue);
do all such acts which are necessary and incidental to the Issue (including, but
not limited to, the securing of approvals, the determination of underwriting
arrangements and the preparation of relevant application documents); and
take all such steps which are necessary for the purposes of executing the Issue
(including, but not limited to, the execution of all requisite documentation and
the disclosure of relevant information in accordance with applicable laws),
and to the extent that any of the aforementioned acts and steps have already been
undertaken by the Board or the Directors in connection with the Issue, such acts and
steps be hereby approved, confirmed and ratified.
China Telecom Corporation Limited
Annual Report 2005 71
6.
“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 and unconditionally approved;
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;
the amount of additional domestic Shares or overseas-listed foreign invested shares
(“H Shares”) (as the case may be) allotted, issued and dealt with or agreed
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 pursuant to the approval in paragraph (a), otherwise 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 Company’s existing 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 6:
“Relevant Period” means the period from the passing of special resolution 6 until
the earliest 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 these special
resolutions; and
the revocation or variation of the authority given to the board of directors of
the Company under these special resolutions by a special resolution of the
Company’s shareholders in general meeting.
“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 under the laws of, or the
requirement of, any recognised regulatory body or any stock exchange in any
territory applicable to the Company) and an offer, allotment or issue of shares by
way of rights shall be construed accordingly.”
7.
“THAT the board of directors of the Company be authorised to increase the registered
capital of the Company to reflect the issue of shares in the Company authorised under
special resolution 6, and to make 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
Joint Company Secretaries
Yung Shun Loy, Jacky
Beijing, PRC
3 April 2006
China Telecom Corporation Limited
Annual Report 2005
72
NOTICE OF ANNUAL GENERAL MEETING (continued)
Notes:
(1) Mr. Wei Leping proposed to retire from his position as executive director of the Company, which will
be effective after approval in the annual general meeting.
(2)
(3)
(4)
Buyers who submit the share transfer application forms to the Company’s share registrar before
4:00 pm on 21 April 2006 and then register as shareholders on the register of members of the
Company are entitled to attend the annual general meeting.
Each shareholder entitled to attend and vote at the annual general meeting may appoint one or more
proxies to attend and vote on his behalf at the annual general meeting. A proxy need not be a
shareholder. Each shareholder who wishes to appoint one or more proxies should first review the
annual report of the Company for the year 2005, which is expected to be despatched to shareholders
around 4 April 2006.
To be valid, the form of proxy together with the power of attorney or other authorisation document
(if any) signed by the authorised person or notarially certified power of attorney must be delivered to
the Office of the Board of the Company for holders of domestic shares and to the Computershare
Hong Kong Investor Services Limited for holders of H shares not less than 24 hours before the
designated time for the holding of the annual general meeting. Completion and return of a form of
proxy will not preclude a shareholder from attending in person and voting at the annual general
meeting if he so wishes.
The address of the share registrar for the Company’s H shares is as follows:
Computershare Hong Kong Investor Services Limited
46th Floor, Hopewell Centre,
183 Queen’s Road East,
Wanchai, Hong Kong
(5)
A proxy of a shareholder may vote by hand or vote on a poll, but a proxy of a shareholder who has
appointed more than one proxy may only vote on a poll.
(6)
The registration procedure for attending the annual general meeting:
(a)
(b)
shareholders attending the annual general meeting in person or by proxy shall present their
identity certification. If the attending shareholder is a corporation, its legal representative or
person authorised by the board or other decision making authority shall present a copy of the
relevant resolution of the board or other decision making authority in order to attend the
annual general meeting.
shareholders intending to attend the annual general meeting shall return the attendance slip
via hand delivery, mail or fax to the Office of the Board of the Company on or before 2 May
2006.
(7)
Closure of the register of members:
The register of members of the Company will be closed from 24 April 2006 to 23 May 2006 (both
days inclusive).
(8)
The annual general meeting is expected to last for half a day and shareholders (in person or by proxy)
attending the annual general meeting shall be responsible for their own transport and
accommodation expenses.
(9)
The address of the Office of the Board is as follows:
31 Jinrong Street
Xicheng District, Beijing 100032
PRC
Contact person:
Telephone:
Facsimile:
Yung Shun Loy, Jacky
Li Ping
(8610) 6642 8166
(8610) 6601 0728
China Telecom Corporation Limited
Annual Report 2005 73
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 74 to 122 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 Hong Kong Standards on Auditing 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.
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 2005 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
22 March 2006
China Telecom Corporation Limited
Annual Report 2005
74
CONSOLIDATED BALANCE SHEET
at 31 December 2005
(Amounts in millions)
ASSETS
Non-current assets
Property, plant and equipment, net
Construction in progress
Lease prepayments
Interests in associates
Other 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 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
The notes on pages 81 to 122 form part of these financial statements.
Note
2005
RMB
2004
RMB
4
5
7
8
9
18
10
11
12
13
14
14
15
16
17
18
14
17
18
9
328,281
23,567
5,117
548
182
10,885
11,893
320,179
29,450
4,830
511
200
10,805
13,063
380,473
379,038
2,702
16,142
2,406
292
15,121
2,767
13,921
3,064
315
13,465
36,663
33,532
417,136
412,570
76,005
8,963
33,949
26,885
2,108
108
8,958
65,976
11,842
33,658
27,531
1,192
156
11,589
156,976
151,944
(120,313)
(118,412)
260,160
260,626
55,777
52
18,750
2,620
72,366
157
25,182
2,302
77,199
100,007
234,175
251,951
China Telecom Corporation Limited
Annual Report 2005 75
at 31 December 2005
(Amounts in millions)
Note
19
20
2005
RMB
2004
RMB
80,932
100,585
80,932
78,274
Equity
Share capital
Reserves
Total equity attributable to equity holders of the Company
181,517
159,206
Minority interests
Total equity
Total liabilities and equity
3(i)
1,444
1,413
182,961
160,619
417,136
412,570
Approved and authorised for issue by the Board of Directors on 22 March 2006.
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 81 to 122 form part of these financial statements.
China Telecom Corporation Limited
Annual Report 2005
76
BALANCE SHEET
at 31 December 2005
(Amounts in millions)
ASSETS
Non-current assets
Property, plant and equipment, net
Construction in progress
Investments 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 EQUITY
Current liabilities
Short-term debt
Accounts payable
Accrued expenses and other payables
Income tax payable
Total current liabilities
Net current assets
Total assets less current liabilities
Non-current liabilities
Long-term debt
Total liabilities
Equity
Share capital
Reserves
Total equity
Total liabilities and equity
Note
2005
RMB
2004
RMB
(Note 3(iii))
4
5
6
11
12
13
14
15
16
14
19
20
348
156
165,926
31
351
73
168,714
37
166,461
169,175
18
51,738
4,139
–
55,895
5
2,519
3,682
3
6,209
222,356
175,384
9,917
74
719
576
11,286
44,609
–
17
2,324
–
2,341
3,868
211,070
173,043
40,150
51,436
80,932
89,988
50,150
52,491
80,932
41,961
170,920
122,893
222,356
175,384
Approved and authorised for issue by the Board of Directors on 22 March 2006.
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 81 to 122 form part of these financial statements.
China Telecom Corporation Limited
Annual Report 2005 77
CONSOLIDATED INCOME STATEMENT
for the year ended 31 December 2005
(Amounts in millions, except per share data)
Operating revenues
Operating expenses
Depreciation and amortisation
Network operations and support
Selling, general and administrative
Other operating expenses
Total operating expenses
Operating profit
Deficit on revaluation of property, plant and equipment
Net finance costs
Investment (loss)/income
Share of profit from associates
Profit before taxation
Income tax
Profit for the year
Attributable to:
Equity holders of the Company
Minority interests
Profit for the year
Basic earnings per share
Weighted average number of shares
Note
21
2005
RMB
2004
RMB
169,310
161,212
(49,652)
(47,793)
(27,393)
(5,518)
(47,170)
(43,070)
(27,003)
(4,139)
(130,356)
(121,382)
38,954
39,830
–
(4,895)
(7)
62
34,114
(6,160)
(1,262)
(5,340)
6
29
33,263
(5,187)
27,954
28,076
27,912
42
28,023
53
27,954
28,076
0.34
0.36
80,932
78,840
22
23
4
24
25
3(i)
30
30
The notes on pages 81 to 122 form part of these financial statements.
China Telecom Corporation Limited
Annual Report 2005
78
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2005
(Amounts in millions)
Attributable to equity holders of the Company
Share
capital
RMB
Note
Capital
reserve premium
RMB
RMB
Re-
Share valuation
reserve
RMB
Statutory
common
welfare
fund
RMB
Surplus
reserves
RMB
Other
reserves
RMB
Retained
earnings
RMB
(Note 3(i))
Minority
interests
RMB
Total
RMB
Total
equity
RMB
Balance as at 1 January 2004
75,614
6,567
3,362
6,424
15,461
3,372
24,246
15,748
150,794
1,269
152,063
Net income recognised directly
in equity:
Revaluation surplus of property,
plant and equipment
Deferred tax on revaluation
surplus of property,
plant and equipment
Effect of change in tax rate
Revaluation surplus realised
Deferred tax on land use
rights realised
Profit for the year
Total recognised income and
expenses
Issue of shares, net of issuing
expenses of RMB294 million
Contributions from minority interests
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
Appropriations
Dividends
Balance as at 31 December 2004
Net income recognised
directly in equity:
Effect of change in tax rate
Revaluation surplus realised
Deferred tax on revaluation surplus
of property, plant and
equipment realised
Deferred tax on land use
rights realised
4
9
9
1
20
9
Profit for the year
Total recognised income and expenses
Contributions from minority interests
Distributions to minority interests
Appropriations
Dividends
20
29
–
–
–
–
–
–
–
–
5,318
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(9,371 )
–
–
–
–
–
–
–
–
–
–
7,384
–
–
–
–
–
–
–
1,233
–
–
(72 )
–
1,161
–
1,161
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,233
(378 )
(244 )
–
–
–
72
(378 )
(244 )
–
(165 )
165
–
(787 )
–
237
28,023
611
28,023
(787 )
28,260
28,634
–
–
–
–
–
100
12,702
–
100
2,653
(2,653 )
–
(27,800 )
–
(27,800 )
–
10,168
–
–
2,421
–
9,371
–
–
–
(12,589 )
(5,224 )
–
–
(5,224 )
–
–
–
–
–
–
53
53
–
91
–
–
–
–
–
–
1,233
(378 )
(244 )
–
–
611
28,076
28,687
12,702
91
100
–
(27,800 )
–
–
(5,224 )
80,932
(2,804 )
10,746
7,585
25,629
5,793
7,683
23,642
159,206
1,413
160,619
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(134 )
–
–
(134 )
–
(134 )
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
9,509
–
–
–
–
1,285
–
(5 )
–
–
134
12
(12 )
(189 )
189
(5 )
–
–
–
(182 )
–
(182 )
–
–
–
–
311
27,912
(5 )
27,912
28,223
–
–
(10,794 )
(5,596 )
27,907
–
–
–
(5,596 )
–
–
–
–
–
42
42
12
(23 )
–
–
(5 )
–
–
–
(5 )
27,954
27,949
12
(23 )
–
(5,596 )
Balance as at 31 December 2005
80,932
(2,804 )
10,746
7,451
35,138
7,078
7,501
35,475
181,517
1,444
182,961
The notes on pages 81 to 122 form part of these financial statements.
China Telecom Corporation Limited
Annual Report 2005 79
CONSOLIDATED STATEMENT OF CASH FLOW
for the year ended 31 December 2005
(Amounts in millions)
Net cash from operating activities
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
Note
(a)
2005
RMB
2004
RMB
68,359
66,078
(52,083)
–
(386)
–
552
(292)
315
(56,446)
(42)
(444)
42
379
(325)
483
Net cash used in investing activities
(51,894)
(56,353)
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
Repayment of amount due to China Telecom in connection with
the First Acquisition
Payment of dividends
Net cash (distributions to)/contributions from minority interests
Cash payment for the acquisition of the Second Acquired Group
Cash contributions from China Telecom
–
(156)
95,538
(94,584)
(10,000)
(5,596)
(11)
–
–
12,702
(50)
77,120
(81,070)
–
(5,224)
91
(12,650)
100
Net cash used in financing activities
(14,809)
(8,981)
Net increase in cash and cash equivalents
Cash and cash equivalents at 1 January
1,656
13,456
744
12,721
Cash and cash equivalents at 31 December
15,121
13,465
The notes on pages 81 to 122 form part of these financial statements.
China Telecom Corporation Limited
Annual Report 2005
80
CONSOLIDATED STATEMENT OF CASH FLOW (continued)
for the year ended 31 December 2005
(Amounts in millions)
(a)
Reconciliation of profit before taxation to net cash from operating activities
Profit before taxation
Adjustments for:
Depreciation and amortisation
Deficit on revaluation of property, plant and equipment
Impairment losses for bad and doubtful debts
Investment loss/(income)
Share of profit from associates
Interest income
Interest expense
Unrealised foreign exchange (gains)/losses
Loss on retirement and disposal of property, plant and equipment
Impairment losses on property, plant and equipment
Operating profit before changes in working capital
Increase in accounts receivable
Decrease in inventories
Decrease in prepayments and other current assets
Decrease in other non-current assets
(Decrease)/increase in accounts payable
(Decrease)/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
2005
RMB
2004
RMB
34,114
33,263
49,652
–
1,274
7
(62)
(243)
5,701
(390)
1,741
163
91,957
(3,495)
65
483
806
(253)
(637)
(9,063)
79,863
243
(6,772)
36
(5,011)
47,170
1,262
1,121
(6)
(29)
(231)
5,367
152
873
88
89,030
(2,091)
486
481
297
55
1,517
(9,830)
79,945
231
(6,824)
43
(7,317)
Net cash from operating activities
68,359
66,078
The notes on pages 81 to 122 form part of these financial statements.
China Telecom Corporation Limited
Annual Report 2005 81
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2005
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
China Telecommunications Corporation (“China Telecom” and together with its subsidiaries other than the
Company referred to as “China Telecom Group”) is a state-owned enterprise which is under the supervision
and regulation of the Ministry of Information Industry. In November 2001, pursuant to an industry
restructuring plan approved by the State Council, China Telecom’s wireline telecommunications networks
and related operations in 10 northern provinces, municipalities and autonomous regions of the PRC were
transferred to China Netcom Group. China Telecom retained the wireline telecommunications networks and
related operations of 21 provinces, municipalities and autonomous regions of 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 fibers.
As part of an reorganisation (the “Restructing”) of China Telecom, the Company was incorporated in the
PRC on 10 September, 2002. 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.
Pursuant to the resolution passed by the Company’s independent shareholders at an Extraordinary General
Meeting held on 15 December 2003, the Company acquired the entire equity interests in Anhui Telecom
Company Limited, Fujian Telecom Company Limited, Jiangxi Telecom Company Limited, Guangxi Telecom
Company Limited, Chongqing Telecom Company Limited and Sichuan Telecom Company Limited
(collectively the “First Acquired Group”) and certain network management and research 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 (see Note 14).
China Telecom Corporation Limited
Annual Report 2005
82
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
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 14).
Basis of presentation
Since the Company, 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 consolidated financial statements as a combination
of entities under common control in a manner similar to a pooling-of-interests. Accordingly, the assets and
liabilities of the Acquired 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 considerations paid by
the Company for the acquisition of the Acquired Groups have been accounted for as equity transactions in
the consolidated statement of changes in equity.
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 Accounting Standards Board (“IASB”).
IFRS includes International Accounting Standards (“IAS”) and interpretations. These financial
statements also comply with the disclosure requirements of the Hong Kong Companies Ordinance and
the applicable disclosure provisions of the Rules Governing the Listing of Securities on the Stock
Exchange of Hong Kong Limited.
These financial statements are prepared on the historical cost basis as modified by the revaluation of
certain property, plant and equipment (Note 4). The accounting policies described below have been
consistently applied by the Group, except those disclosed in Note 3.
The preparation of the financial statements in conformity with IFRS requires management to make
judgements, estimates and assumptions that affect the application of policies and 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.
The estimates and associated assumptions are based on historical experience and various other factors
that are believed to be reasonable under the circumstances, the results of which form the basis of
making the judgments about carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results could differ from those estimates.
China Telecom Corporation Limited
Annual Report 2005 83
for the year ended 31 December 2005
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(a) Basis of preparation (continued)
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting
estimates are recognised in the period in which the estimate is revised if the revision affects only that
period or in the period of the revision and future periods if the revision affects both current and future
periods.
Judgement made by management in the application of IFRS that have significant effect on the
financial statements and estimates with a significant risk of material adjustment in future financial
periods are described in Note 37.
(b) Basis of consolidation
The consolidated financial statements comprise the Company and its subsidiaries and the Group’s
interests in associates. A subsidiary is an entity controlled by the Company. Control exists when the
Company has the power, directly or indirectly, to govern the financial and operating policies of an
entity 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 profit attributable to minority
interests is separately presented on the face of the consolidated income statement as an allocation of
the profit or loss for the year between the minority interests and the equity holders of the Company.
Minority interests at the balance sheet date, being the portion of the net assets of subsidiaries
attributable to equity interests that are not owned by the Company, whether directly or indirectly
through subsidiaries, are presented in the consolidated balance sheet and consolidated statement of
changes in equity within equity, separately from equity attributable to the equity holders of the
Company.
An associate is an entity, not being a subsidiary, in which the Group exercises significant influence, but
not control, 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.
An investment in an associate is accounted for in the consolidated financial statements under the
equity method and is initially recorded at cost and adjusted thereafter for the Group’s equity share of
the post-acquisition results of the associate.
All significant intercompany balances and transactions and any unrealised gains arising from
intercompany transactions are eliminated on consolidation. Unrealised gains arising from transactions
with associates are eliminated to the extent of the Group’s interest in the entity. Unrealised losses are
eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of
impairment.
China Telecom Corporation Limited
Annual Report 2005
84
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(c)
Translation of foreign currencies
The functional and presentation 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 income statement. 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) Trade and other receivables
Trade and other receivables are initially recognised at fair value and thereafter stated at amortised cost
less impairment losses for bad and doubtful debts (Note 2(l)).
(f)
Inventories
Inventories consist of materials and supplies used in maintaining the wireline telecommunications
network and goods for resale. Materials and supplies are valued at cost using the first in, first out
method, less a provision for obsolescence.
Inventories that are held for resale are stated at the lower of cost and net realisable value. Net
realisable value is the estimated selling price in the ordinary course of business less the estimated costs
of completion and the estimated costs necessary to make the sale.
(g) Property, plant and equipment
Property, plant and equipment are initially recorded at cost, less subsequent 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, including cost of replacing part of such an item, is capitalised only when
it increases the future economic benefits embodied in the item of property, plant and equipment and
the cost can be measured reliably. All other expenditure, including the cost of repairs and
maintenance, is expensed as it is incurred.
China Telecom Corporation Limited
Annual Report 2005 85
for the year ended 31 December 2005
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(g) Property, plant and equipment (continued)
Subsequent to the revaluation as described in (Note 4), 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 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
income statement. 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.
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 held 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 held under finance
leases are amortised over their estimated useful lives on a straight-line basis. As at 31 December 2005,
the carrying amount of assets held under finance leases was RMB272 million (2004: RMB314 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 income statement 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:
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
Depreciable lives
primarily range from
China Telecom Corporation Limited
Annual Report 2005
86
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(g) Property, plant and equipment (continued)
Where parts of an item of property, plant and equipment have different useful lives, the cost or
valuation of the item is allocated on a reasonable basis between the parts and each part is depreciated
separately. Both the useful life of an asset and its residual value are reviewed annually.
(h) Lease prepayments
Lease prepayments represent land use rights paid to the PRC’s land bureau. Land use rights are carried
at cost less accumulated amortisation and impairment losses (Note 2(l)). Amortisation is provided to
write off the cost of lease prepayments on a straight-line basis over the respective periods of the rights
which range from 20 years to 70 years.
(i)
Construction in progress
Construction in progress represents buildings, telecommunications network plant, transmission and
switching equipment and other equipment under construction and pending installation, and is stated
at cost less impairment losses (Note 2(l)). The cost of an item comprises direct costs of construction,
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 stated at cost less
impairment losses (Note 2(l)).
(k) Other investments
Investments in non-marketable equity securities are stated at cost less impairment losses (Note 2(l)).
(l)
Impairment
(i)
Impairment of investments in non-marketable equity securities and impairment losses for trade
and other receivables
Investments in non-marketable equity securities and trade and other receivables are reviewed at
each balance sheet date to determine whether there is objective evidence of impairment. If such
evidence exists, the impairment loss is measured as the difference between the asset’s carrying
amount and the estimated future cash flows, discounted at the current market rate of return for
a similar financial asset where the effect of discounting is material, and is recognised as an
expense in the consolidated income statement. Impairment losses for trade and other receivables
are reversed through profit and loss if in a subsequent period the amount of the impairment
losses decreases. Impairment losses for equity securities are not reversed.
For the years ended 31 December 2004 and 2005, no impairment loss was made for investments
in non-marketable securities. For the year ended 31 December 2005, impairment losses for trade
and other receivables of RMB1,274 million (2004: RMB1,121 million) were recognised.
China Telecom Corporation Limited
Annual Report 2005 87
for the year ended 31 December 2005
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(l)
Impairment (continued)
(ii)
Impairment of other assets
The carrying amounts of the Group’s long-lived assets, including property, plant and equipment
and lease prepayments 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 income statement. 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 2005, a
provision for impairment loss of RMB163 million (2004: RMB88 million) was made against the
carrying value of certain outdated telecommunications service equipment.
The Group assesses at each balance sheet date whether there is any indication that an
impairment loss recognised for an asset in prior years may no longer exist. An impairment loss is
reversed if there has been a favourable change in the estimates used to determine the
recoverable amount. A subsequent increase in the recoverable amount of an asset, when the
circumstances and events that led to the write-down or write-off cease to exist, is recognised as
an income in the consolidated income statement. The reversal is reduced by the amount that
would have been recognised as depreciation had the write-down or write-off not occurred. For
the years presented, no reversal of impairment loss was recognised in the consolidated income
statement.
(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 services, such as caller ID services, short messaging services, telephone
information services and ring tone services. 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)
Revenues from sale of prepaid calling cards are recognised as the cards are used by customers.
China Telecom Corporation Limited
Annual Report 2005
88
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(m) Revenue recognition (continued)
(v)
Revenues derived from value-added services are recognised when the services are provided to
customers.
Other related wireline telecommunications service revenues are recognised as follows:
(i)
(ii)
Revenues from the provision of Internet and managed data services are recognised when the
services are provided to customers.
Interconnection fees from domestic and foreign telecommunications operators are recognised
when the services are rendered as measured by the minutes of traffic processed.
(iii)
Lease income from operating leases is recognised over the term of the lease.
(iv)
Sale of customer-end equipment is recognised on delivery of the equipment to customers and
when the significant risks and rewards of ownership and title have been transferred to the
customers.
(n) Advertising and promotion expense
The costs for advertising and promoting the Group’s wireline telecommunications services are
expensed as incurred. Advertising and promotion expense, which is included in selling, general and
administrative expenses, was RMB9,417 million for the year ended 31 December 2005
(2004: RMB8,701 million).
(o) Net finance costs
Net finance costs comprise interest income on bank deposits, interest expense on borrowings, and
foreign exchange gains and losses. Interest income from bank deposits is recognised as it accrues using
the effective interest method.
Interest costs incurred in connection with borrowings, calculated using the effective interest method,
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
2005, research and development expense was RMB261 million (2004: RMB172 million).
China Telecom Corporation Limited
Annual Report 2005 89
for the year ended 31 December 2005
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(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 income statement as incurred. Further
information is set out in Note 34.
(r)
(s)
(t)
(u)
Compensation under the Group’s stock appreciation rights scheme is measured as the amount by
which the quoted market price of the Company’s H shares exceeds the exercise price. Compensation
expense in respect of the stock appreciation rights granted is accrued as a charge to the income
statement over the applicable vesting period based on the fair value of the stock appreciation rights.
The liability of the accrued compensation expense is re-measured to fair value at each balance sheet
date with the effect of changes in the fair value of the liability is charged or credited to the income
statement. Further details of the Group’s stock appreciation rights scheme are set out in Note 35.
Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs.
Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any
difference between cost and redemption value being recognised in income statement over the period
of the borrowings using the effective interest method.
Trade and other payables
Trade and other payables are initially recognised at fair value and thereafter stated at amortised cost
unless the effect of discounting would be immaterial, in which case they are stated at cost.
Provisions and contingent liabilities
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. Where the time value of money is material, provisions are stated at
the present value of the expenditure expected to settle the obligation.
Where it is not probable that an outflow of economic benefits will be required, or the amount cannot
be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of
outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed
by the occurrence or non-occurrence of one or more future events, are also disclosed as contingent
liabilities unless the probability of outflow of economic benefits is remote.
Income tax
Income tax comprises current and deferred tax. Income tax is recognised in the income statement
except to the extent that it relates to items recognised directly in equity, in which case it is recognised
in equity. Current tax is calculated on the taxable income for the year by applying the applicable tax
rates. Deferred tax is provided using the balance sheet liability method, providing for all temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for taxation purposes. The amount of deferred tax is calculated on the basis of the
enacted tax rates that are expected to apply in the period when the asset is realised or the liability is
settled. The effect on deferred tax of any changes in tax rates is charged or credited to the
consolidated income statement, except for the effect of a change in tax rate on the carrying amount
of deferred tax assets and liabilities which were previously charged or credited directly to equity upon
initial recognition, in such case the effect of a change in tax rate is also 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.
China Telecom Corporation Limited
Annual Report 2005
90
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(v) Dividends
Dividends are recognised as a liability in the period in which they are declared.
(w) 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.
3. CHANGES IN ACCOUNTING POLICIES, FINANCIAL STATEMENT
PRESENTATION AND DISCLOSURES
The IASB has issued a number of new and revised IFRS and Interpretations that are effective for accounting
periods beginning on or after 1 January 2005. The Group has adopted these new and revised IFRS in the
preparation of the Group’s financial statements for the year ended 31 December 2005. The Group has not
applied any new standard or interpretation that is not yet effective for the current accounting period
(Note 38).
The accounting policies of the Group after the adoption of these new and revised IFRS have been
summarised in Note 2. The following sets out further information on the changes in accounting policies,
financial statement presentation and disclosures for the annual accounting period beginning on 1 January
2005 which have been reflected in these financial statements.
(i) Minority interests (IAS 1 “Presentation of financial statements” and IAS 27
“Consolidated and separate financial statements”)
In prior years, minority interests at the balance sheet date were presented in the Group’s consolidated
balance sheet separately from liabilities and equity. Minority interests in the results of the Group for
the year were also separately presented in the Group’s consolidated income statement as deduction
before arriving at the profit attributable to shareholders.
With effect from 1 January 2005, in order to comply with IAS 1 and IAS 27, minority interests at the
balance sheet date are presented in the Group’s consolidated balance sheet within equity, separately
from the equity attributable to the equity holders of the Company, and minority interests in the results
of the Group for the period are presented on the face of the Group’s consolidated income statement
as an allocation of the total profit or loss for the period between the minority interests and the equity
holders of the Company.
The presentation of minority interests in the Group’s consolidated balance sheet, the Group’s
consolidated income statement and the Group’s consolidated statement of changes in equity for the
comparative period has been restated accordingly.
China Telecom Corporation Limited
Annual Report 2005 91
for the year ended 31 December 2005
3. CHANGES IN ACCOUNTING POLICIES, FINANCIAL STATEMENT
PRESENTATION AND DISCLOSURES (continued)
(ii) Related party disclosures (IAS 24 “Related party disclosures”)
The Group is a state-owned enterprise and operates in an economic regime currently predominated by
state-owned enterprises. Apart from transactions with parent company and its affiliates, the Group
conducts certain business activities with enterprises directly or indirectly owned or controlled by the
PRC government and government authorities and affiliates (collectively “state-owned entities”) in the
ordinary course of business. In prior years, transactions with state-owned entities other than China
Telecom and its affiliates were not required to be disclosed as related party transactions.
With effect from 1 January 2005, in order to comply with IAS 24, the Group has made further
disclosure of key management personnel compensation, contributions to post-retirement benefit plans
and transactions with state-owned entities in the PRC. Numeric disclosure of certain related party
transactions described in Note 33 for the comparative period has been made accordingly.
(iii) Accounting for investments in subsidiaries (IAS 27 “Consolidated and separate
financial statements”)
In prior years, investments in subsidiaries are accounted for using the equity method in the Company’s
stand-alone balance sheet.
With effect from 1 January 2005, in order to comply with IAS 27, investments in subsidiaries are
accounted for using the cost method. Investments in subsidiaries and reserve balances in the
Company’s stand-alone balance sheet for the comparative period have been restated accordingly.
The following table discloses the adjustments that have been made in accordance with IAS 27 to each
of the line items in the Company’s balance sheet as previously reported as at 31 December 2004. The
effect of such change on reserve balances as at 1 January 2004 and 2005 are disclosed in Note 20.
2004
(as previously
reported)
RMB millions
Effect on
new policy
(decrease in
net assets)
RMB millions
2004
(as restated)
RMB millions
Investments in subsidiaries
Reserves
205,027
78,274
(36,313)
(36,313)
168,714
41,961
Management considers that it is impractical to provide an estimate of the extent to which investments
in subsidiaries and reserve balances in the Company’s balance sheet as at 31 December 2005 is higher
or lower than it would have been had the previous accounting policy still been applied in the year
because management has sole discretion to determine the dividends to be declared from subsidiaries
to the Company which would affect the carrying value of investments in subsidiaries under the equity
method.
China Telecom Corporation Limited
Annual Report 2005
92
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
4. PROPERTY, PLANT AND EQUIPMENT, NET
The Group:
Furniture,
Telecomm-
fixture, motor
unications
vehicles and
network plant
and equipment other equipment
RMB millions
RMB millions
Buildings and
improvements
RMB millions
Total
RMB millions
Cost/valuation:
Balance at 1 January 2004
Additions
Transferred from construction in progress
Disposals
Reclassification
Revaluations
Balance at 31 December 2004
Additions
Transferred from construction in progress
Disposals
60,939
178
4,380
(119)
22
944
66,344
63
4,684
(262)
421,014
1,469
49,775
(14,195)
17
(8,776)
449,304
1,352
50,580
(15,984)
19,264
696
1,976
(1,259)
(39)
–
20,638
523
2,545
(1,660)
501,217
2,343
56,131
(15,573)
–
(7,832)
536,286
1,938
57,809
(17,906)
Balance at 31 December 2005
70,829
485,252
22,046
578,127
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 2004
Depreciation charge for the year
Provision for impairment
Written back on disposals
(8,331)
(2,646)
–
37
(11)
(67)
(11,018)
(2,943)
–
119
(174,961)
(41,246)
(88)
13,214
(5)
7,870
(195,216)
(43,630)
(163)
13,971
(8,029)
(2,930)
–
1,070
16
–
(9,873)
(2,616)
–
1,523
(191,321)
(46,822)
(88)
14,321
–
7,803
(216,107)
(49,189)
(163)
15,613
Balance at 31 December 2005
(13,842)
(225,038)
(10,966)
(249,846)
Net book value at 31 December 2005
56,987
260,214
11,080
328,281
Net book value at 31 December 2004
55,326
254,088
10,765
320,179
China Telecom Corporation Limited
Annual Report 2005 93
for the year ended 31 December 2005
4. PROPERTY, PLANT AND EQUIPMENT, NET (continued)
The Company:
Telecomm-
unications
network plant
and equipment
RMB millions
Furniture,
fixture, motor
vehicles and
other equipment
RMB millions
Total
RMB millions
360
–
19
(73)
306
2
18
–
326
(1)
(47)
42
(6)
(40)
(46)
280
300
16
5
5
73
99
2
38
(2)
137
–
(6)
(42)
(48)
(21)
(69)
68
51
376
5
24
–
405
4
56
(2)
463
(1)
(53)
–
(54)
(61)
(115)
348
351
Cost:
Balance at 1 January 2004
Additions
Transferred from construction in progress
Reclassification
Balance at 31 December 2004
Additions
Transferred from construction in progress
Disposals
Balance at 31 December 2005
Accumulated depreciation:
Balance at 1 January 2004
Depreciation charge for the year
Reclassification
Balance at 31 December 2004
Depreciation charge for the year
Balance at 31 December 2005
Net book value at 31 December 2005
Net book value at 31 December 2004
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 as at 31 December
2004 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 2005
94
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
4. 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:
Buildings and improvements
Telecommunications network plant
and equipment
Furniture, fixture, motor vehicles
and other equipment
Carrying
value prior to
revaluation
RMB millions
54,449
254,994
10,765
Revaluation
surplus
RMB millions
Revaluation
deficit
RMB millions
Revalued
amounts
RMB millions
877
356
–
–
55,326
(1,262)
254,088
–
10,765
320,208
1,233
(1,262)
320,179
For the year ended 31 December 2005, no revaluation was performed as the Group did not have any items
of property, plant and equipment which experienced significant and volatile movements in fair value.
5. CONSTRUCTION IN PROGRESS
Balance at 1 January 2004
Additions
Transferred to property, plant and equipment
Balance at 31 December 2004
Additions
Transferred to property, plant and equipment
Balance at 31 December 2005
6.
INVESTMENTS IN SUBSIDIARIES
The Group
RMB millions
The Company
RMB millions
31,617
53,964
(56,131)
29,450
51,926
(57,809)
23,567
77
20
(24)
73
139
(56)
156
The Company
2005
RMB millions
2004
RMB millions
Unquoted investments, at cost
165,926
168,714
China Telecom Corporation Limited
Annual Report 2005 95
for the year ended 31 December 2005
6.
INVESTMENTS IN SUBSIDIARIES (continued)
Details of the Company’s subsidiaries at 31 December 2005, 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
Guangdong Telecom Company Limited
Jiangsu Telecom Company Limited
Zhejiang Telecom Company Limited
Anhui Telecom Company Limited
Fujian Telecom Company Limited
Jiangxi Telecom Company Limited
Guangxi Telecom Company Limited
Chongqing Telecom Company Limited
Sichuan Telecom Company Limited
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
Xinjiang Telecom Company Limited
Limited Company
Limited Company
Limited Company
Limited Company
Limited Company
Limited Company
Limited Company
Limited Company
Limited Company
Limited Company
Limited Company
Limited Company
Limited Company
Limited Company
Limited Company
Limited Company
Limited Company
Limited Company
Limited Company
Limited Company
11 October 2002
10 October 2002
19 October 2002
10 October 2002
26 August 2003
28 August 2003
18 September 2003
28 August 2003
22 August 2003
28 August 2003
9 March 2004
12 March 2004
9 March 2004
12 March 2004
9 March 2004
8 March 2004
10 March 2004
10 March 2004
10 March 2004
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.
7.
INTERESTS IN ASSOCIATES
Share of net assets
The Group
2005
RMB millions
2004
RMB millions
548
511
China Telecom Corporation Limited
Annual Report 2005
96
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
7.
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 Company Limited
50% Provision of
telecommunications
services
Shanghai Information Investment Incorporation
24% Provision of information
technology consultancy
services
The above associates are established in the PRC and are not traded on any stock exchange.
8. OTHER INVESTMENTS
The Group
2005
RMB millions
2004
RMB millions
Unlisted equity investments
182
200
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 impairment loss. The Group has no investment in
marketable securities.
9. DEFERRED TAX ASSETS AND LIABILITIES
Deferred tax assets and deferred tax liabilities are attributable to the items set out below:
The Group:
Current
Impairment losses, primarily
for receivables
Non-Current
Property, plant and equipment
Deferred revenues and
installation costs
Land use rights
Assets
2005
RMB
millions
2004
RMB
millions
Liabilities
2005
RMB
millions
2004
RMB
millions
Net balance
2005
RMB
millions
2004
RMB
millions
294
610
286
516
–
–
294
286
(1,508)
(1,295)
(898)
(779)
2,114
7,867
1,942
8,061
(1,112)
–
(1,007)
–
1,002
7,867
935
8,061
Deferred tax assets/(liabilities)
10,885
10,805
(2,620)
(2,302)
8,265
8,503
China Telecom Corporation Limited
Annual Report 2005 97
for the year ended 31 December 2005
9. DEFERRED TAX ASSETS AND LIABILITIES (continued)
A valuation allowance on deferred tax assets is recorded if it is probable that some portion or all of the
deferred tax assets will not be realised through recovery of taxes previously paid and/or future taxable
income. The allowance is subject to ongoing adjustments based on changes in circumstances that affect the
Group’s assessment of the realisability of the deferred tax assets. The Group has reviewed its deferred tax
assets as at 31 December 2004 and 2005. 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 probable the Group will realise the benefits of these temporary differences. Therefore, no valuation
allowances were provided for the years ended 31 December 2004 and 2005 in respect of deferred tax assets
arising from temporary differences.
Movements in temporary differences are as follows:
Balance at
1 January
2004
RMB millions
Recognised
in income
statement
RMB millions
Note
Recognised
in equity
RMB millions
Balance at
31 December
2004
RMB millions
Current
Impairment losses, primarily
of receivables
Non-current
Property, plant and equipment
Deferred revenues and
installation costs
Land use rights
(i)
(ii)
Net deferred tax assets
198
(512)
1,042
8,470
9,198
88
111
(107)
(165)
(73)
(Note 25)
–
(378)
–
(244)
(622)
286
(779)
935
8,061
8,503
Balance at
1 January
2005
Note RMB millions
Recognised
in income
statement
RMB millions
Recognised
in equity
RMB millions
Balance at
31 December
2005
RMB millions
Current
Impairment losses, primarily
of receivables
Non-current
Property, plant and equipment
Deferred revenues and
installation costs
Land use rights
(iii)
Net deferred tax assets
286
(779)
935
8,061
8,503
8
(119)
67
(189)
(233)
(Note 25)
–
–
–
(5)
(5)
294
(898)
1,002
7,867
8,265
China Telecom Corporation Limited
Annual Report 2005
98
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
9. DEFERRED TAX ASSETS AND LIABILITIES (continued)
Note:
(i)
(ii)
(iii)
As described in Note 4, 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 base of these assets was 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 equity as
the related revaluation deficit was charged to income statement and the revaluation surplus was credited to
equity.
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. Since the deferred tax asset was previously
credited to equity upon initial recognition, the effect of the change in tax on carrying amount of the deferred tax
asset expected to be realised during the relevant period amounting to RMB244 million was charged to equity.
In 2005, a subsidiary of the Group obtained approval from tax authority for income tax exemption for the period
from 1 January 2005 to 31 December 2009 and a 50% reduction in tax rate for the period from 1 January 2010 to
31 December 2014. Since the deferred tax asset was previously credited to equity upon initial recognition, the
effect of the change in tax rate on the carrying amount of the deferred tax asset expected to be realised by that
subsidiary during the relevant period amounting to RMB5 million was charged to equity. The effect of income tax
exemption is not material to the consolidated financial statements.
10. INVENTORIES
Inventories represent:
Materials and supplies
Goods for resale
The Group
2005
RMB millions
2004
RMB millions
1,854
848
2,702
1,907
860
2,767
11. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, are analysed as follows:
The Group
2005
RMB millions
2004
RMB millions
The Company
2005
RMB millions
2004
RMB millions
Accounts receivable
Third parties
Amount due from subsidiaries
China Telecom Group
17,422
–
224
15,368
–
235
17,646
15,603
Less: Impairment losses for bad
and doubtful debts
(1,504)
(1,682)
16,142
13,921
–
18
–
18
–
18
–
5
–
5
–
5
China Telecom Corporation Limited
Annual Report 2005 99
for the year ended 31 December 2005
11. ACCOUNTS RECEIVABLE, NET (continued)
Amounts due from the provision of wireline telecommunications services to residential and business
customers are due within 30 days from the date of billing. Customers who have accounts overdue by more
than 90 days will have their services disconnected.
The following table summarises the changes in impairment losses for bad and doubtful debts:
At beginning of year
Impairment losses for bad and doubtful debts
Accounts receivable written off
At end of year
The Group
2005
RMB millions
2004
RMB millions
1,682
1,274
(1,452)
1,818
1,121
(1,257)
1,504
1,682
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: Impairment losses for bad and doubtful debts
The Group
2005
RMB millions
2004
RMB millions
12,104
1,563
1,037
340
15,044
(1,377)
10,258
1,270
1,083
526
13,137
(1,609)
13,667
11,528
The Company did not have accounts receivable balance from telephone and Internet subscribers.
Ageing analysis of accounts receivable from other telecommunications operators and customers is as
follows:
Current, within 1 month
1 to 3 months
4 to 12 months
More than 12 months
Less: Impairment losses for bad
and doubtful debts
The Group
2005
RMB millions
2004
RMB millions
The Company
2005
RMB millions
2004
RMB millions
1,244
686
371
301
2,602
1,358
550
275
283
2,466
(127)
(73)
2,475
2,393
–
10
8
–
18
–
18
5
–
–
–
5
–
5
100
China Telecom Corporation Limited
Annual Report 2005
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
12. PREPAYMENTS AND OTHER CURRENT ASSETS
Prepayments and other current assets represent:
Amounts due from
China Telecom Group
Amounts due from subsidiaries
Prepayments in connection with
construction work and
equipment purchases
Prepaid expenses and deposits
Other receivables
The Group
2005
RMB millions
2004
RMB millions
The Company
2005
RMB millions
2004
RMB millions
606
–
679
389
732
640
–
854
607
963
4
51,725
4
2,502
–
–
9
–
–
13
2,406
3,064
51,738
2,519
13. CASH AND CASH EQUIVALENTS
Cash at bank and in hand
Time deposits with maturity
within three months
The Group
2005
RMB millions
2004
RMB millions
The Company
2005
RMB millions
2004
RMB millions
11,583
10,512
3,538
2,953
15,121
13,465
727
3,412
4,139
882
2,800
3,682
14. SHORT-TERM AND LONG-TERM DEBT
Short-term debt comprises:
The Group
2005
RMB millions
2004
RMB millions
The Company
2005
RMB millions
2004
RMB millions
Bank loans – unsecured
Commercial paper
Loans from China Telecom Group
45,704
9,917
20,384
55,887
–
10,089
Total short-term debt
76,005
65,976
–
9,917
–
9,917
–
–
–
–
Weighted average interest rate of the Group’s total short-term debt as at 31 December 2005 was 4.2%
(2004: 4.4%). The unsecured bank loans bear interest at rates ranging from 4.7% to 6.0% per annum and
are repayable within one year. The commercial paper bears interest at a fixed rate of 2.54% per annum, is
unsecured and is repayable within six months. The loans from China Telecom Group bear interest at fixed
rates ranging from 2.3% to 5.0% per annum, are unsecured and are repayable within one year.
China Telecom Corporation Limited
Annual Report 2005 101
for the year ended 31 December 2005
14. SHORT-TERM AND LONG-TERM DEBT (continued)
Long-term debt comprises:
Interest rates and
final maturity
The Group
2005
RMB
millions
2004
RMB
millions
The Company
2005
RMB
millions
2004
RMB
millions
Bank loans
Renminbi denominated
Interest rates ranging from
2.9% to 6.4% per annum
with maturities through 2020
19,112
26,859
US Dollars denominated
Interest rates ranging from
0.5% to 8.3% per annum
with maturities through 2038
2,087
2,883
Japanese Yen denominated Interest rates ranging from
0.6% to 3.5% per annum
with maturities through 2040
2,449
3,182
–
–
–
–
–
–
–
–
–
–
–
–
–
–
843
93
1,053
70
24,584
34,047
6
11
25,000
35,000
25,000
35,000
15,150
15,150
15,150
15,150
64,740
84,208
40,150
50,150
(8,963)
(11,842)
–
–
55,777
72,366
40,150
50,150
Euro denominated
Interest rates ranging from
0.5% to 7.4% per annum
with maturities through 2032
Other currencies
Other loans
Renminbi 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
Less: current portion
Non-current portion
102
China Telecom Corporation Limited
Annual Report 2005
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
14. SHORT-TERM AND LONG-TERM DEBT (continued)
Note:
(i)
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. In October 2005, the
Company repaid RMB10,000 million to China Telecom.
(ii)
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 and 2005, no bank loans were secured.
The aggregate maturities of the Group’s and the Company’s long-term debts subsequent to 31 December
2005 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
2005
RMB millions
2004
RMB millions
The Company
2005
RMB millions
2004
RMB millions
8,963
8,773
3,824
382
252
42,546
11,842
10,022
8,343
552
268
53,181
–
–
–
–
–
40,150
–
–
–
–
–
50,150
64,740
84,208
40,150
50,150
The Group’s short-term and long-term debts do not contain any financial covenants. As at 31 December
2005, the Group had available credit facilities of RMB31,266 million (2004: RMB27,855 million) which it can
draw upon.
15. ACCOUNTS PAYABLE
Accounts payable are analysed as follows:
Third parties
China Telecom Group
The Group
2005
RMB millions
2004
RMB millions
The Company
2005
RMB millions
2004
RMB millions
27,063
6,886
26,591
7,067
33,949
33,658
74
–
74
17
–
17
China Telecom Corporation Limited
Annual Report 2005 103
for the year ended 31 December 2005
15. ACCOUNTS PAYABLE (continued)
Ageing analysis of accounts payable is as follows:
Due within 1 month or on demand
Due after 1 month but within
3 months
Due after 3 months but within
6 months
Due after 6 months
The Group
2005
RMB millions
2004
RMB millions
The Company
2005
RMB millions
2004
RMB millions
5,379
8,797
9,283
10,490
5,599
6,451
7,856
13,752
33,949
33,658
–
46
4
24
74
6
4
–
7
17
16. ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payables represent:
The Group
2005
RMB millions
2004
RMB millions
The Company
2005
RMB millions
2004
RMB millions
Amounts due to China Telecom Group
Accrued expenses
Customer deposits and receipts
in advance
4,534
12,330
10,021
4,889
15,923
6,719
26,885
27,531
104
571
44
719
230
2,094
–
2,324
17. 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
2005
RMB millions
2004
RMB millions
114
55
–
169
(9)
160
(108)
52
163
110
51
324
(11)
313
(156)
157
104
China Telecom Corporation Limited
Annual Report 2005
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
18. 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.
Balance at beginning of year
Additions for the year
– installation fees
– calling cards
Reduction for the year
– amortisation of connection fees
– amortisation of installation fees
– usage of calling cards
Balance at end of year
Representing:
– Current portion
– Non-current portion
The Group
2005
RMB millions
2004
RMB millions
36,771
46,601
1,431
3,895
5,326
(6,781)
(2,970)
(4,638)
2,135
4,392
6,527
(8,458)
(2,865)
(5,034)
27,708
36,771
8,958
18,750
11,589
25,182
27,708
36,771
Included in other non-current assets are capitalised direct incremental costs associated with the installation
of wireline services. As at 31 December 2005, the unamortised portion of these costs was RMB10,025
million (2004: RMB11,428 million).
19. SHARE CAPITAL
Registered, issued and fully paid
67,054,958,321 ordinary domestic shares of RMB1.00 each
13,877,410,000 overseas listed H shares of RMB1.00 each
The Group and
the Company
2005
RMB millions
2004
RMB millions
67,055
13,877
67,055
13,877
80,932
80,932
China Telecom Corporation Limited
Annual Report 2005 105
for the year ended 31 December 2005
19. SHARE CAPITAL (continued)
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.
20. RESERVES
The Group
Balance as at 1 January 2004
Revaluation surplus (Note 4)
Deferred tax on revaluation
surplus of property, plant
and equipment (Note 9)
Effect of change in tax rate
(Note 9)
Revaluation surplus realised
Deferred tax on land use
rights realised
Profit for the year
Issue of shares, net of issuing
expenses of RMB294 million
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
Appropriations (Notes (i) and (ii))
Dividends
Balance as at 31 December 2004
Effect of change in tax rate (Note 9)
Revaluation surplus realised
Deferred tax on revaluation surplus
of property, plant and
equipment realised
Deferred tax on land use rights realised
Profit for the year
Appropriations (Notes (i) and (ii))
Dividends (Note 29)
Capital
reserve
RMB
millions
6,567
–
Share
premium
RMB
millions
Re-
valuation
reserve
RMB
millions
3,362
–
6,424
1,233
Surplus
reserves
RMB
millions
15,461
–
Statutory
common
welfare
fund
RMB
millions
3,372
–
–
–
–
–
–
–
–
–
–
(9,371 )
–
–
(2,804 )
–
–
–
–
–
–
–
–
–
–
–
–
7,384
–
–
–
–
–
–
–
–
(72 )
–
–
–
–
–
–
–
–
–
10,746
–
–
7,585
–
(134 )
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
10,168
–
25,629
–
–
–
–
–
9,509
–
Other
reserves
RMB
millions
24,246
–
Retained
earnings
RMB
millions
15,748
–
(378 )
(244 )
–
(165 )
–
–
–
–
–
72
165
28,023
–
100
Total
RMB
millions
75,180
1,233
(378 )
(244 )
–
–
28,023
7,384
100
2,653
(2,653 )
–
(27,800 )
–
(27,800 )
9,371
–
–
7,683
(5 )
–
12
(189 )
–
–
–
–
(12,589 )
(5,224 )
23,642
–
134
(12 )
189
27,912
(10,794 )
(5,596 )
–
–
(5,224 )
78,274
(5 )
–
–
–
27,912
–
(5,596 )
7,501
35,475
100,585
–
–
–
–
–
–
–
–
–
–
2,421
–
5,793
–
–
–
–
–
1,285
–
7,078
Balance as at 31 December 2005
(2,804 )
10,746
7,451
35,138
106
China Telecom Corporation Limited
Annual Report 2005
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
20. RESERVES (continued)
The Company
Balance as at 1 January 2004,
as previously reported
Prior period adjustment in respect
of investments in subsidiaries
(Note 3(iii))
Balance as at 1 January 2004,
as restated
Profit for the year
Issue of shares, net of issuing
expenses of RMB294 million
Appropriations (Notes (i) and (ii))
Dividends
Balance as at 31 December 2004
(Note 3(iii))
Profit for the year
Appropriations (Notes (i) and (ii))
Dividends (Note 29)
Capital
reserve
RMB
millions
Share
premium
RMB
millions
Re-
valuation
reserve
RMB
millions
Surplus
reserves
RMB
millions
Statutory
common
welfare
fund
RMB
millions
Other
reserves
RMB
millions
Retained
earnings/
(deficits)
RMB
millions
Total
RMB
millions
6,567
3,362
6,424
15,461
3,372
24,246
15,748
75,180
22,601
–
(6,424 )
–
–
(24,246 )
(33,298 )
(41,367 )
29,168
–
–
–
–
29,168
–
–
–
3,362
–
7,384
–
–
10,746
–
–
–
–
–
–
–
–
–
–
–
–
–
15,461
–
–
10,168
–
25,629
–
9,509
–
35,138
3,372
–
–
2,421
–
5,793
–
1,285
–
7,078
–
–
–
–
–
–
–
–
–
–
(17,550 )
5,988
–
(12,589 )
(5,224 )
(29,375 )
53,623
(10,794 )
(5,596 )
33,813
5,988
7,384
–
(5,224 )
41,961
53,623
–
(5,596 )
7,858
89,988
Balance as at 31 December 2005
29,168
10,746
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 2005, the Company transferred
RMB2,570 million (2004: RMB2,421 million), being 10% of the year’s net profit determined in accordance with the
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 2005, the transfer of RMB6,939 million (2004: RMB7,747 million), being 27% (2004:
32%) of the year’s net profit determined in accordance with the PRC accounting rules and regulations, to a
discretionary surplus reserve.
The statutory and discretionary 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 2005, the Directors authorised, subject to shareholders’ approval, the transfer of
RMB1,285 million (2004: RMB2,421 million), being 5% (2004: 10%) of the year’s net profit determined in
accordance with the PRC accounting rules and regulations, to this fund.
China Telecom Corporation Limited
Annual Report 2005 107
for the year ended 31 December 2005
20. RESERVES (continued)
Note:
(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 2005, the amount of
retained earnings available for distribution was RMB7,858 million, being the amount determined in accordance
with IFRS. As described in Note 3(iii), the accounting policy for investment in subsidiaries under IFRS was changed
with effect from 1 January 2005 and hence affects the calculation of retained earnings available for distribution to
shareholders of the Company under IFRS. The amount of retained earnings available for distribution as at 31
December 2004 prior to this change in accounting policy was RMB20,609 million, being the amount determined in
accordance with the PRC accounting rules and regulations. Final dividend of approximately RMB6,315 million in
respect of the financial year 2005 proposed after the balance sheet date has not been recognised as a liability at
the balance sheet date (Note 29).
21. OPERATING REVENUES
Operating revenues represent revenues from the provision of wireline telecommunications services. The
components of the Group’s operating revenues are as follows:
Upfront connection fees
Upfront installation fees
Monthly fees
Local usage fees
DLD
ILD
Internet
Managed data
Interconnections
Leased line
Value-added services
Others
Note:
The Group
Note
2005
RMB millions
2004
RMB millions
(i)
(ii)
(iii)
(iv)
(iv)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
6,781
2,970
30,351
47,624
25,993
3,407
17,862
2,958
12,838
4,464
9,976
4,086
8,458
2,865
29,827
47,646
26,231
3,788
14,109
3,015
10,719
4,154
6,120
4,280
169,310
161,212
(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 voice and data
traffic connecting to the Group’s wireline telecommunications networks.
108
China Telecom Corporation Limited
Annual Report 2005
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
21. OPERATING REVENUES (continued)
Note:
(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.
(ix)
(x)
Represent amounts charged to customers for provision of value-added services, which comprise primarily caller ID
services, short messaging services, telephone information services and ring tone services.
Represent primarily revenue from sale and repairs and maintenance of customer-end equipment and provision of
consulting services.
22. OTHER OPERATING EXPENSES
Other operating expenses consist of:
Interconnection charges
Donations
Others
Note
(i)
The Group
2005
RMB millions
2004
RMB millions
5,473
21
24
5,518
4,095
17
27
4,139
Note:
(i)
Interconnection charges represent amounts incurred for the use of other domestic and foreign telecommunications
operators’ networks for delivery of voice and data traffic that originate from the Group’s wireline
telecommunications networks.
23. TOTAL OPERATING EXPENSES
Total operating expenses for the year ended 31 December 2005 include personnel expenses of RMB24,960
million (2004: RMB23,233 million) and auditors’ remuneration of RMB46 million (2004: RMB48 million).
24. 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
2005
RMB millions
2004
RMB millions
6,763
(1,062)
5,701
(243)
42
(605)
4,895
6,834
(1,467)
5,367
(231)
207
(3)
5,340
* Interest expense was capitalised in construction in progress
at the following rates per annum
2.1%-5.1%
4.1%-5.2%
China Telecom Corporation Limited
Annual Report 2005 109
for the year ended 31 December 2005
The Group
2005
RMB millions
2004
RMB millions
5,927
233
6,160
5,114
73
5,187
25. INCOME TAX
Income tax in the consolidated income statement comprises:
Provision for PRC income tax
Deferred taxation (Note 9)
A reconciliation of the expected tax with the actual tax expense is as follows:
The Group
Note
2005
RMB millions
2004
RMB millions
Profit before taxation
34,114
33,263
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
11,258
(1,689)
720
(2,651)
(1,478)
10,977
(1,608)
294
(3,266)
(1,210)
6,160
5,187
Note:
(i)
(ii)
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 preferential rates ranging from 0% to 15%.
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.
110
China Telecom Corporation Limited
Annual Report 2005
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
26. DIRECTORS’ AND SUPERVISORS’ REMUNERATION
The following table sets out the remuneration received or receivable by the Company’s directors and
supervisors:
Directors’/
supervisors’
fees
RMB
thousands
Salaries,
allowances
and benefits Discretionary
bonuses
RMB
thousands
in kind
RMB
thousands
Share-based
payments
RMB
thousands
Retirement
scheme
contributions
RMB
thousands
Total
RMB
thousands
2005
Executive directors
Wang Xiaochu
Leng Rongquan
Wu Andi
Zhang Jiping
Huang Wenlin
Li Ping
Wei Leping
Yang Jie
Sun Kangmin
Cheng Xiyuan
Feng Xiong
Independent non-executive
directors
Zhang Youcai
Vincent Lo Hong Sui
Shi Wanpeng
Xu Erming
Tse Hau Yin
Supervisors
Zhang Xiuqin
Li Jian
Xu Cailiao
Ma Yuzhu
Li Jing
Xie Songguang
Wang Huanhui
Independent supervisor
Zhu Lihao
2004
–
–
–
–
–
–
–
–
–
–
–
130
208
130
50
173
–
–
–
–
–
–
10
60
761
524
304
274
259
259
259
259
259
259
258
159
182
–
–
–
–
–
130
32
23
43
53
70
–
–
33
30
251
251
251
251
251
191
191
475
487
–
–
–
–
–
262
78
63
87
104
120
–
–
–
–
278
278
278
278
278
–
–
232
232
–
–
–
–
–
209
151
128
209
–
–
–
–
61
55
51
51
51
51
51
49
50
13
57
–
–
–
–
–
44
12
10
15
13
16
–
–
398
359
839
839
839
839
839
499
499
879
958
130
208
130
50
173
645
273
224
354
170
206
10
60
3,082
2,271
3,376
3,277
2,551
2,446
650
515
10,420
9,033
China Telecom Corporation Limited
Annual Report 2005 111
for the year ended 31 December 2005
27. INDIVIDUALS WITH HIGHEST EMOLUMENTS
Of the five highest paid individuals of the Group for the year ended 31 December 2005, four are directors of
the Company and their remuneration has been included in Note 26. Of the five highest paid individuals of
the Group for the year ended 31 December 2004, one was a director of the Company and whose
remuneration was included in Note 26. The following table sets out the emoluments of the Group’s
remaining highest paid employees who were not director or supervisor of the Company during the periods
presented:
Salaries, allowances and benefits in kind
Retirement benefits
2005
RMB
thousands
2004
RMB
thousands
850
82
932
2,777
223
3,000
The number of these employees whose emoluments fall within the following band is set out below:
HK$ equivalent
Nil – 1,000,000
2005
Number
2004
Number
1
4
None of these employees received any inducements or compensation for loss of office, or waived any
emoluments during the periods presented.
28. PROFIT ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY
The consolidated profit attributable to equity holders of the Company includes a profit of RMB18,451
million (2004 (restated): RMB5,988 million) which has been dealt with in the stand-alone financial
statements of the Company.
29. DIVIDENDS
Pursuant to a resolution passed at the Directors’ meeting on 22 March 2006, a final dividend of equivalent
to HK$0.075 per share totalling approximately RMB6,315 million for the year ended 31 December 2005 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 2005.
Pursuant to the shareholders’ approval at the Annual General Meeting held on 25 May 2005, a final
dividend of RMB0.069139 (equivalent to HK$0.065) per share totalling RMB5,596 million in respect of the
year ended 31 December 2004 was declared and was paid on 23 June 2005.
112
China Telecom Corporation Limited
Annual Report 2005
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
30. BASIC EARNINGS PER SHARE
The calculation of basic earnings per share for the year ended 31 December 2005 is based on the profit
attributable to equity holders of the Company of RMB27,912 million divided by 80,932,368,321 shares. The
calculation of basic earnings per share for the year ended 31 December 2004 is based on the profit
attributable to equity holders of the Company 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 19).
The amount of diluted earnings per share is not presented as there were no dilutive potential ordinary shares
in existence for all periods presented.
31. COMMITMENTS AND CONTINGENCIES
Operating lease commitments
The Group leases business premises through non-cancelable 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. The Company does not have significant operating lease commitments.
As at 31 December 2004 and 2005, the Group’s future minimum lease payments under non-cancelable
operating leases having initial or remaining lease terms of more than one year were as follows:
Within 1 year
Between 1 to 2 years
Between 2 to 3 years
Between 3 to 4 years
Between 4 to 5 years
Thereafter
2005
RMB millions
2004
RMB millions
326
195
134
119
108
180
369
187
137
124
127
341
Total minimum lease payments
1,062
1,285
Total rental expense in respect of operating leases charged to the consolidated income statement for the
year ended 31 December 2005 was RMB1,208 million (2004: RMB1,271 million).
China Telecom Corporation Limited
Annual Report 2005 113
for the year ended 31 December 2005
31. COMMITMENTS AND CONTINGENCIES (continued)
Capital commitments
As at 31 December 2004 and 2005, the Group and the Company had capital commitments as follows:
Authorised and contracted for
– Properties
– Telecommunications network plant
and equipment
Authorised but not contracted for
– Properties
– Telecommunications network plant
and equipment
The Group
2005
RMB millions
2004
RMB millions
The Company
2005
RMB millions
2004
RMB millions
513
2,278
2,791
1,896
3,047
4,943
918
3,947
4,865
1,699
9,168
10,867
148
16
164
110
15
125
17
36
53
287
15
302
Contingent liabilities
(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 transferred to
the Company in connection with the Restructuring and the Acquisitions, no other liabilities were
assumed by the Company or the Group, and the Company or the Group are not jointly and severally
liable for other debts and obligations incurred by China Telecom Group prior to the Restructuring and
the Acquisitions.
(b)
As at 31 December 2004 and 2005, the Group did not have contingent liabilities in respect of
guarantees given to banks in respect of banking facilities granted to other parties, nor other forms of
contingent liabilities.
As at 31 December 2005, the Company’s undiscounted maximum amount of potential future
payments under guarantees given to banks in respect of banking facilities granted to subsidiaries was
RMB1,497 million (2004: RMB1,884 million). The Company monitors the conditions that are subject to
the guarantees to identify whether it is probable that a loss has occurred, and recognised any such
losses under guarantees when those losses can be estimated. As at 31 December 2004 and 2005, it
was not probable that the Company would be required to make payments under these guarantees.
Thus no liability was accrued for losses related to the Company’s obligations under these guarantee
arrangements.
Legal contingencies
The Group is a defendant in certain lawsuits as well as the named party in other proceedings arising in the
ordinary course of business. While the outcomes of such contingencies, lawsuits or other proceedings
cannot be determined at present, management believes that any resulting liabilities will not have a material
adverse effect on the financial position or operating results of the Group.
114
China Telecom Corporation Limited
Annual Report 2005
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
32. 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 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 places 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 companies operating in United States and Western Europe.
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.
The Group’s wireline telecommunications networks interconnect with the networks of other state-owned
telecommunications operators. The Group also leases wireline telecommunications networks to these
operators in the normal course of business. The interconnection and leased line charges are regulated by the
Ministry of Information Industry. The extent of the Group’s interconnection and leased line transactions with
other state-owned telecommunications operators in the PRC is as follows:
Interconnection revenues
Interconnection charges
Leased line revenues
2005
RMB millions
2004
RMB millions
10,947
2,643
2,020
8,964
2,190
2,701
China Telecom Corporation Limited
Annual Report 2005 115
for the year ended 31 December 2005
32. 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.
On 21 July 2005, the People’s Bank of China announced that the PRC government reformed the exchange
rate regime by adopting a managed floating exchange rate regime based on market supply and demand
with reference to a basket of currencies.
Interest rate risk
The interest rates and terms of repayment of the Group’s debts are disclosed in Note 14.
33. RELATED PARTY TRANSACTIONS
Companies are considered to be related if one company has the ability, directly or indirectly, to control or
jointly 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.
(a) Transactions with China Telecom Group
The Group is part of a large group of companies under China Telecom, which is owned by the PRC
government, 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 unrelated parties.
The principal transactions with China Telecom Group which were carried out in the ordinary course of
business are as follows:
Purchases of telecommunications equipment and materials
Construction, engineering and information
technology services
Provision of community services
Provision of ancillary services
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
2005
RMB millions
2004
RMB millions
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(viii)
(ix)
267
6,575
2,632
2,456
425
386
275
183
725
2,849
304
6,568
2,417
2,490
361
393
163
98
201
2,426
116
China Telecom Corporation Limited
Annual Report 2005
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
33. RELATED PARTY TRANSACTIONS (continued)
(a) Transactions with China Telecom Group (continued)
Note:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
Represent commission paid and payable by the Group for equipment and materials procurement services
provided by China Telecom Group.
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 entities of China Telecom Group which were not
within the scope of other related party service agreements in respect of services like procurement of
telecommunications equipment, network design, software upgrade, system integration and manufacturing
of calling cards.
Represent amounts paid and payable to China Telecom Group for operating leases in respect of business
premises and inter-provincial transmission optic fibres.
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 interconnection of domestic long distance
telephone calls.
(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 14).
Amounts due from/to China Telecom Group included in respective balances are summarised as follows:
Accounts receivable
Prepayments and other current assets
Total amounts due from China Telecom Group
Accounts payable
Accrued expenses and other payables
Short-term debt
Long-term debt
2005
RMB millions
2004
RMB millions
224
606
830
6,886
4,534
20,384
40,150
235
640
875
7,067
4,889
10,089
50,150
Total amounts due to China Telecom Group
71,954
72,195
China Telecom Corporation Limited
Annual Report 2005 117
for the year ended 31 December 2005
33. RELATED PARTY TRANSACTIONS (continued)
(a) Transactions with China Telecom Group (continued)
Amounts due from/to China Telecom Group, other than short-term debt and long-term debt, bear no
interest, are unsecured and are repayable in accordance with normal commercial terms. The term and
conditions associated with short-term debt and long-term debt payable to China Telecom Group are
set out in Note 14.
As at 31 December 2004 and 2005, no impairment losses for bad and doubtful debts were recorded in
respect of amounts due from China Telecom Group.
(b) Key management personnel compensation
Key management personnel are those persons having authority and responsibility for planning,
directing and controlling the activities of the Group, directly or indirectly, including directors and
supervisors of the Group.
Key management personnel compensation of the Group is summarised as follows:
Short-term employee benefits
Post-employment benefits
Equity-based compensation benefits
2005
RMB
thousands
2004
RMB
thousands
7,219
650
2,551
10,420
6,072
515
2,446
9,033
The above remuneration is included in personnel expenses (Note 23).
(c) Contributions to post-employment benefit plans
The Group participates in various defined contribution post-employment benefit plans organised by
municipal and provincial governments for its employees. Further details of the Group’s post-
employment benefit plans are disclosed in Note 34.
(d) Transactions with other state-owned entities in the PRC
The Group is a state-owned enterprise and operates in an economic regime currently predominated by
state-owned entities. Apart from transactions with parent company and its affiliates, the Group
conducts certain business activities with enterprises directly or indirectly owned or controlled by the
PRC government and government authorities and agencies (collectively referred to as “state-owned
entities”) in the ordinary course of business. These transactions, which include sales and purchase of
goods, rendering and receiving services, lease of assets and obtaining finance, are carried out at terms
similar to those that would be entered into with non-state-owned entities and have been reflected in
the financial statements.
Further information of the Group’s principal transactions with other state-owned telecommunications
operators in the PRC in the normal course of providing telecommunications services are set out in
Note 32.
Management believes the above information has provided meaningful disclosure of related party
transactions.
118
China Telecom Corporation Limited
Annual Report 2005
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
34. POST-EMPLOYMENT BENEFITS PLANS
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 2005 were RMB2,258 million (2004:
RMB2,031 million).
The outstanding amount of contributions to defined contribution retirement plans as at 31 December 2005
was RMB591 million (2004: RMB599 million).
35. STOCK APPRECIATION RIGHTS
The Group implemented a stock appreciation rights plan for members of its management in order to provide
further incentives to these employees. Under this plan, stock appreciation rights are granted in units with
each unit representing one H share. No shares will be issued under the stock appreciation rights plan. 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.
In March 2003, the Company’s compensation committee approved the granting of 276.5 million stock
appreciation right units to eligible employees. Under the terms of this grant, all stock appreciation rights will
have a contractual life of six years from date of grant and an exercise price of HK$1.48 per unit. 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 April 2005, the Company’s compensation committee approved the granting of 560.0 million stock
appreciation right units to eligible employees. Under the terms of this grant, all stock appreciation rights will
have a contractual life of six years from date of grant and an exercise price of HK$2.78 per unit. A recipient
of stock appreciation rights may not exercise the rights in the first 24 months after the date of grant. As at
each of the third, fourth, fifth and six 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.
During the year ended 31 December 2005, 70 million (2004: 70 million) stock appreciation right units were
exercised.
The Company recognised compensation expense of the stock appreciation rights over the applicable vesting
period. For the year ended 31 December 2005, compensation expense recognised by the Group in respect
of stock appreciation rights was RMB81 million (2004: RMB70 million).
China Telecom Corporation Limited
Annual Report 2005 119
for the year ended 31 December 2005
35. STOCK APPRECIATION RIGHTS (continued)
As at 31 December 2005, the carrying amount of liability arising from stock appreciation rights was RMB129
million (2004: RMB113 million). As at 31 December 2005, the intrinsic value of the vested stock
appreciation rights outstanding was RMB0.4 million (2004: Nil).
36. FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial assets of the Group include cash and cash equivalents, time deposits, investments, accounts
receivable, amounts due from China Telecom Group, advances and other receivables. Financial liabilities of
the Group include debts, accounts payable, amounts due to China Telecom Group, accrued expenses and
other payables. The Group does not hold nor issue financial instruments for trading purposes.
The disclosures of the fair value estimates, methods and assumptions set forth below for the Group’s
financial instruments are made to comply with the requirements of IAS 32 and IAS 39, and should be read in
conjunction with the Group’s consolidated financial statements and related notes. The estimated fair value
amounts have been determined by the Group using market information and valuation methodologies
considered appropriate. However, considerable judgment is required to interpret market data to develop the
estimates of fair values. Accordingly, the estimates presented herein are not necessarily indicative of the
amounts the Group could realise in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The following summarises the major methods and assumptions used in estimating the fair values of the
Group’s financial instruments.
Long-term debt: The fair values of long-term indebtedness are estimated by discounting future cash flows
using current market interest rates offered to the Group for debt with substantially the same characteristics
and maturities. As at 31 December 2004 and 2005, the carrying amounts and fair values of the Group’s
long-term debt were as follows:
2005
2004
Carrying
amount
RMB millions
Fair
value
RMB millions
Carrying
amount
RMB millions
Fair
value
RMB millions
Long-term debt
64,740
63,561
84,208
82,850
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.
120
China Telecom Corporation Limited
Annual Report 2005
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
37. ACCOUNTING ESTIMATES AND JUDGEMENTS
The Group’s financial position and results of operations are sensitive to accounting methods, assumptions
and estimates that underlie the preparation of the consolidated financial statements. The Group bases the
assumptions and estimates on historical experience and on various other assumptions that the Group
believes to be reasonable and which form the basis for making judgements about matters that are not
readily apparent from other sources. On an on-going basis, management evaluates its estimates. Actual
results may differ from those estimates as facts, circumstances and conditions change.
The selection of significant accounting policies, the judgements and other uncertainties affecting application
of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors
to be considered when reviewing the consolidated financial statements. The significant accounting policies
are set forth in Note 2. The Group believes the following significant accounting policies involve the most
significant judgements and estimates used in the preparation of the consolidated financial statements.
Revenue recognition for upfront connection and installation fees
The Group defers the recognition of upfront fees for activation of wireline services and wireline installation
fees and amortise such fees over the expected customer relationship period of ten years. The related direct
incremental customer acquisition costs (including direct costs of installation) are also deferred and amortised
over the same expected customer relationship period. The Group estimates the expected customer
relationship period based on the historical customer retention experience and factoring in the expected level
of future competition, the risk of technological or functional obsolescence of its services, technological
innovation, and the expected changes in the regulatory and social environment. If the Group’s estimate of
the expected customer relationship period changes as a result of increased competition, changes in
telecommunications technology or other factors, the amount and timing of recognition of deferred revenue
and deferred customer acquisition costs would change for future periods. There have been no significant
changes to the estimated customer relationship period for the years presented.
Impairment losses for bad and doubtful debts
The Group estimates impairment losses for bad and doubtful debts resulting from the inability of the
customers to make the required payments. The Group bases the estimates on the aging of the accounts
receivable balance, customer credit-worthiness, and historical write-off experience. If the financial condition
of the customers were to deteriorate, actual write-offs might be higher than expected and could
significantly affect the results of future periods.
Impairment on long-lived assets
If circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the asset
may be considered “impaired”, and an impairment loss may be recognised in accordance with accounting
policy for impairment of long-lived assets as described in Note 2(l). The carrying amounts of long-lived assets
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 recoverable amount. The recoverable amount is the greater of the net
selling price and the value in use. It is difficult to precisely estimate selling price because quoted market
prices for the Group’s long-lived assets may not be readily available. In determining the value in use,
expected future cash flows generated by the asset are discounted to their present value, which requires
significant judgement relating to level of revenue and amount of operating costs. The Group uses all readily
available information in determining an amount that is a reasonable approximation of recoverable amount,
including estimates based on reasonable and supportable assumptions and projections of revenue and
amount of operating costs. Changes in these estimates could have a significant impact on the carrying value
of the assets and could result in additional impairment charge or reversal of impairment in future periods.
China Telecom Corporation Limited
Annual Report 2005 121
for the year ended 31 December 2005
37. ACCOUNTING ESTIMATES AND JUDGEMENTS (continued)
Depreciation
Property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives of the
assets, after taking into account their estimated residual value. The Group reviews the estimated useful lives
and residual values of the assets annually in order to determine the amount of depreciation expense to be
recorded during any reporting period. The useful lives and residual values are based on the Group’s historical
experience with similar assets and taking into account anticipated technological changes. The depreciation
expense for future periods is adjusted if there are significant changes from previous estimates.
38. POSSIBLE IMPACT OF AMENDMENTS, NEW STANDARDS AND
INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE FOR THE ANNUAL
ACCOUNTING PERIOD ENDED 31 DECEMBER 2005
Up to the date of issue of these financial statements, the IASB has issued the following amendments, new
standards and interpretations which are not yet effective for the annual accounting period ended
31 December 2005 and which have not been adopted in these financial statements:
IFRS 6, Exploration for and evaluation of mineral resources
IFRS 7, Financial instruments: disclosures
IFRIC 4, Determining whether an arrangement contains a lease
IFRIC 5, Rights to interests arising from decommissioning,
restoration environmental rehabilitation funds
IFRIC 6, Liabilities arising from participating in a specific market
– Waste electrical and electronic equipment
IFRIC 7, Applying the restatement approach under IAS 29,
Financial reporting in hyperinflationary economies
IFRIC 8, Scope of IFRS 2
IFRIC 9, Reassessment of embedded derivatives
Effective for accounting
period beginning on or after
1 January 2006
1 January 2007
1 January 2006
1 January 2006
1 December 2005
1 March 2006
1 May 2006
1 June 2006
Amendment to IAS 1, Presentation of financial statements: capital disclosures
1 January 2007
Amendment to IAS 19, Employee benefits – Actuarial gains and losses,
group plans and disclosures
Amendment to IAS 21, Net investment in a foreign operation
Amendments to IAS 39, Financial instruments: Recognition and measurement:
– Cash flow hedge accounting of forecast intragroup transactions
– The fair value option
– Financial guarantee contracts
1 January 2006
1 January 2006
1 January 2006
1 January 2006
1 January 2006
Amendments to IFRS 1, First-time Adoption of International Financial Reporting Standards
1 January 2006
122
China Telecom Corporation Limited
Annual Report 2005
NOTES TO THE FINANCIAL STATEMENTS (continued)
for the year ended 31 December 2005
38. POSSIBLE IMPACT OF AMENDMENTS, NEW STANDARDS AND
INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE FOR THE ANNUAL
ACCOUNTING PERIOD ENDED 31 DECEMBER 2005 (continued)
The Group is in the process of making an assessment of what the impact of these amendments, new
standards and new interpretations is expected to be in the period of initial application. So far the Group
believes that IFRS 6, IFRIC 5, IFRIC 6, IFRIC 7, IFRIC 8, IFRIC 9 and the amendments to IAS 19, IAS 21 and
IFRS 1 are not applicable to any of the Group’s operations and that the adoption of the rest of the above
amendments, new standards and new interpretations is unlikely to have a significant impact on the Group’s
results of operations and financial position.
39. COMPARATIVE FIGURES
Certain comparative figures have been adjusted or reclassified as a result of the changes in accounting
policies disclosed in Note 3.
40. PARENT AND ULTIMATE HOLDING COMPANY
The parent and ultimate holding company of the Group at 31 December 2005 is China Telecommunications
Corporation, a state-owned enterprise established in the PRC. This entity does not produce financial
statements available for public use.
China Telecom Corporation Limited
Annual Report 2005 123
SUPPLEMENTARY INFORMATION FOR
AMERICAN DEPOSITARY SHAREHOLDERS
The Group’s accounting policies conform with IFRS which differ in certain significant respects from accounting
principles generally accepted in the United States of America (“US GAAP”). The significant differences are set out
below.
(a) Revaluation of property, plant and equipment
In connection with the Restructuring, the property, plant and equipment of the Company’s predecessor
operations were revalued as at 31 December 2001. The net revaluation deficit was reflected in the
consolidated financial statements as at 31 December 2001. Such revaluation resulted in an increase directly
to 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. The net revaluation deficit was reflected in the consolidated financial
statements as at 31 December 2002. Such revaluation resulted in an increase directly to 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. The net revaluation deficit was reflected in the consolidated
financial statements as at 31 December 2003. Such revaluation resulted in an increase directly to 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. The net revaluation deficit was reflected in the consolidated financial
statements as at 31 December 2004. Such revaluation resulted in an increase directly to 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.
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 reserve
recorded directly to 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 liability related to
the net revaluation deficit is created under US GAAP with a corresponding decrease in equity.
124
China Telecom Corporation Limited
Annual Report 2005
SUPPLEMENTARY INFORMATION FOR AMERICAN
DEPOSITARY SHAREHOLDERS (continued)
(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 were previously charged or credited to equity upon initial recognition. Under US GAAP, the
effect of a change in tax rate for all items of deferred tax assets and liabilities is recorded in the income
statement.
(d) Minority interests
Under IFRS, minority interests at the balance sheet date are presented in the consolidated balance sheet
within equity, separately from the equity attributable to the equity shareholders of the Company, and
minority interests in the results of the Group for the period are presented on the face of the consolidated
income statement as an allocation of the total net profit for the period between the minority interests and
the equity shareholders of the Company. Under US GAAP, minority interests at the balance sheet date are
presented in the consolidated balance sheet either as liabilities or separately from liability and equity.
Minority interests in the results of the Group for the period are also separately presented in the consolidated
income statement as deduction before arriving at the net profit.
(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
does not expect the application of SFAS No. 123R 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
application of SFAS No. 153 will have a material impact on its consolidated financial statements.
China Telecom Corporation Limited
Annual Report 2005 125
(e) Recently issued accounting standards (continued)
EITF 04-13
In September 2005, the Emerging Issues Task Force of the FASB issued EITF Issue No. 04-13 “Accounting for
Purchases and Sales of Inventory with the Same Counterparty” (“EITF 04-13”). EITF 04-13 provides guidance
as to when purchases and sales of inventory with the same counterparty should be accounted for as a single
exchange transaction. EITF 04-13 also provides guidance as to when a non-monetary exchange of inventory
should be accounted for at fair value. EITF 04-13 will be applied to new arrangements entered into, and
modifications or renewals of existing arrangements occurring after 1 January 2007. Currently, the Group
does not expect the application of EITF 04-13 will have a material impact on its consolidated financial
statements.
SFAS No. 155
In February 2006, the FASB issued SFAS No.155, “Accounting for Certain Hybrid Financial Instruments”.
SFAS No.155 amends SFAS No.133 and SFAS No. 140 and allows financial instruments that have embedded
derivatives that otherwise would require bifurcation from the host to be accounted for as a whole, if the
holder irrevocably elects to account for the whole instrument on a fair value basis. Subsequent changes in
the fair value of the instrument would be recognised in the income statement. For the Group, SFAS No.155
is effective for fiscal years beginning after 15 September 2006. Currently, the Group does not expect the
application of SFAS No. 155 will have a material impact on its consolidated financial statements.
(f) Reconciliation of net profit and equity attributable to equity holders of the Company
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 2005 is as follows:
Net profit attributable to equity holders of the Company under IFRS
US GAAP adjustments:
Reversal of deficit on revaluation of property, plant and equipment
Depreciation on revalued property, plant and equipment,
net of minority interest of RMB16 million for 2004 and
RMB15 million for 2005
Disposal of revalued property, plant and equipment
Effect of change in tax rate on deferred tax assets arising
from revaluation of land use rights
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
2005
US$
millions
(Note)
2005
RMB
millions
2004
RMB
millions
3,459
27,912
28,023
–
–
1,262
(848)
(39)
(1)
3
224
(6,844)
(316)
(6,766)
(128)
(5)
(244)
22
1,806
2,189
1,379
Net profit attributable to equity holders of the Company
under US GAAP
2,798
22,575
25,715
Basic earnings per share under US GAAP
Basic earnings per ADS* under US GAAP
0.03
3.46
0.28
0.33
27.89
32.62
* Basic earnings per ADS is calculated on the basis that one ADS is equivalent to 100 H shares.
126
China Telecom Corporation Limited
Annual Report 2005
SUPPLEMENTARY INFORMATION FOR AMERICAN
DEPOSITARY SHAREHOLDERS (continued)
(f) Reconciliation of net profit and equity attributable to equity holders of the Company
under IFRS to US GAAP (continued)
The effect on equity of significant differences between IFRS and US GAAP as at 31 December 2004 and
2005 is as follows:
Equity attributable to equity holders of the Company under IFRS
US GAAP adjustments:
Revaluation of property, plant and equipment, net of minority
interests of RMB39 million as at 31 December 2004 and
RMB24 million as at 31 December 2005
Deferred tax effect of US GAAP adjustment
2005
US$
millions
(Note)
2005
RMB
millions
2004
RMB
millions
22,492
181,517
159,206
1,894
(457)
15,287
(3,691)
22,447
(5,519)
Equity attributable to equity holders of the Company under US GAAP
23,929
193,113
176,134
Note: Solely for the convenience of the reader, the amounts as at and for the year ended 31 December 2005 have been
translated into United States dollars at the noon buying rate in New York City on 31 December 2005 for
cable transfers in RMB as certified for custom purposes by the Federal Reserve Bank of New York of
US$1.00 = RMB8.0702. 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 2005, or at
any other date.
China Telecom Corporation Limited
Annual Report 2005 127
FINANCIAL SUMMERY
(Amounts in millions, except per share data)
Results
Upfront connection fees
Upfront installation fees
Monthly fees
Local usage fees
DLD
ILD
Internet
Managed data
Interconnections
Leased line
Value-added services and others
Operating revenues
Depreciation and amortisation
Network operations and support
Selling, general and
administrative
Other operating expenses
2005
RMB
6,781
2,970
30,351
47,624
25,993
3,407
17,862
2,958
12,838
4,464
14,062
169,310
49,652
47,793
27,393
5,518
Year ended 31 December
2003
RMB
2004
RMB
2002
RMB
8,458
2,865
29,827
47,646
26,231
3,788
14,109
3,015
10,719
4,154
10,400
161,212
47,170
43,070
27,003
4,139
9,771
2,643
27,499
45,815
25,460
3,943
10,007
3,210
8,365
5,103
9,737
151,553
46,597
44,118
24,810
3,176
10,564
2,305
25,338
44,440
25,726
3,878
5,998
3,147
7,524
5,520
6,466
140,906
45,810
46,215
20,585
3,188
2001
RMB
10,942
1,887
20,491
42,516
26,679
3,991
3,395
2,660
6,712
5,176
5,632
130,081
41,777
46,359
18,879
2,352
Operating expenses
130,356
121,382
118,701
115,798
109,367
Operating profit
Deficit on revaluation of property,
plant and equipment
Net finance costs
Investment (loss)/income
Share of profit from associates
Profit before taxation
Income tax
38,954
39,830
32,852
25,108
20,714
–
(4,895)
(7)
62
34,114
(6,160)
(1,262)
(5,340)
6
29
33,263
(5,187)
(14,832)
(3,606)
(42)
35
14,407
(469)
(14,690)
(4,071)
50
38
6,435
1,856
(11,930)
(2,228)
261
22
6,839
1,499
Profit for the year
27,954
28,076
13,938
8,291
8,338
Attributable to:
Equity holders of the Company
Minority interests
27,912
42
28,023
53
13,882
56
8,219
72
8,352
(14)
Profit for the year
27,954
28,076
13,938
8,291
8,338
Basic earnings per share
0.34
0.36
0.18
0.12
0.12
128
China Telecom Corporation Limited
Annual Report 2005
FINANCIAL SUMMARY (continued)
(Amounts in millions, except per share data)
2005
RMB
As at 31 December
2003
RMB
2004
RMB
2002
RMB
2001
RMB
Financial condition
Property, plant and equipment,
net
Construction in progress
Other non-current assets
Cash and bank deposits
Other current assets
328,281
23,567
28,625
15,413
21,250
320,179
29,450
29,409
13,780
19,752
309,896
31,617
29,336
13,194
19,899
311,241
37,192
32,290
24,254
18,724
312,326
42,180
31,388
15,993
21,547
Total assets
417,136
412,570
403,942
423,701
423,434
Current liabilities
Non-current liabilities
156,976
77,199
151,944
100,007
149,135
102,744
147,478
88,012
144,060
108,914
Total liabilities
234,175
251,951
251,879
235,490
252,974
Total equity attributable
to equity holders of
the Company
Minority interests
181,517
1,444
159,206
1,413
150,794
1,269
187,025
1,186
169,472
988
Total equity
182,961
160,619
152,063
188,211
170,460
Total liabilities and equity
417,136
412,570
403,942
423,701
423,434
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CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2005
www.chinatelecom-h.com
31 Jinrong Avenue, Xicheng District,
Beijing, PRC, 100032