Annual Report 2006
China Telecom Corporation Limited
HKEx Stock code: 728
NYSE Stock code: CHA
Ready for next MOVES
蓄勢待發 開拓未來
Our Mind
We strive to understand what our
customers want and innovate services to
delight them, making their life easier,
simpler, richer and more productive. We aim
to provide our services in an efficient way
leveraging our unique rich resources and
infrastructure. We firmly believe that when
we continue to progress our way to full
services convergence offering, our customers’
value will be further enhanced , with our
success and shareholder value to follow.
CONTENTS
2
4
6
12
22
30
40
51
54
68
74
77
83
85
87
88
89
90
92
140
144
146
Financial Highlights
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 Independent International Auditor
Consolidated Balance Sheet
Balance Sheet
Consolidated Income Statement
Consolidated Statement of Changes in Equity
Consolidated Cash Flow Statement
Notes to the Financial Statements
Supplementary Information for
American Depositary Shareholders
Financial Summary
Shareholder Information
Financial Highlights
Excluding amortisation of upfront connection fees
2004
2005
2006
Rate of change
(2006 over 2005)
4.7%
3.8%
-0.4p.p.
4.9%
-8.9%
33.4%
-15.8p.p.
4.9%
13.3%
11.5%
Operating revenue (RMB millions)
152,754
162,529
170,122
EBITDA (RMB millions)
EBITDA margin
Net profit1 (RMB millions)
Capital expenditure (RMB millions)
Free cash flow (RMB millions)
Total debt/Total equity2
Earnings per share (RMB)
Dividend per share (HK$)
Net asset value per share (RMB)
78,542
51.4%
19,565
56,307
17,048
94.5%
0.248
0.065
2.019
81,825
50.3%
21,131
53,864
21,801
77.6%
0.261
0.075
2.243
Including amortisation of upfront connection fees
2004
2005
Operating revenue (RMB millions)
161,212
169,310
EBITDA (RMB millions)
EBITDA margin
Net profit1 (RMB millions)
87,000
54.0%
28,023
88,606
52.3%
27,912
1 Net profit represents profit attributable to equity holders of the Company.
2 Total equity represents total equity attributable to equity holders of the Company.
For further information, please browse
our website at www.chinatelecom-h.com
84,911
49.9%
22,171
49,085
29,072
61.8%
0.274
0.085
2.501
2006
175,093
89,882
51.3%
27,142
002
ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
The charts below are based on financials excluding amortisation of upfront connection fees
OPERATING REVENUE
(RMB millions)
EBITDA
(RMB millions)
152,754
162,529
78,542
81,825
170,122
84,911
2004
2005
2006
2004
2005
2006
NET PROFIT
(RMB millions)
FREE CASH FLOW
(RMB millions)
21,131
19,565
22,171
29,072
21,801
17,048
2004
2005
2006
2004
2005
2006
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006 003
Corporate Information
China Telecom Corporation
Limited (“China Telecom” or the
“Company”) is the world’s
largest wireline
telecommunications and
broadband services provider,
providing telecommunications
and information services
covering voice, data, image and
multimedia in 20 provinces,
municipalities, and autonomous
regions in China, with more
than 223 million fixed line
subscribers and 28 million
broadband subscribers. Our H
shares and American
Depositary Shares (“ADSs”) are
listed on The Stock Exchange of
Hong Kong Limited and the
New York Stock Exchange
respectively.
Xinjiang
Gansu
Qinghai
Ningxia
Shaanxi
Jiangsu
Sichuan
Chongqing
Hubei
Anhui
Shanghai
Zhejiang
Jiangxi
Hunan
Guizhou
Fujian
Yunnan
Guangxi
Guangdong
China Telecom’s
Service Areas
Hainan
2002
2003
Milestones
SEPTEMBER 2002
Establishment of the Company
with service areas including
Shanghai, Guangdong, Jiangsu and
Zhejiang.
NOVEMBER 2002
The Company was listed on The
Stock Exchange of Hong Kong
Limited and the New York Stock
Exchange with net proceeds from
IPO of approximately US$1.3
billion.
DECEMBER 2003
Acquisition of six telecom
companies as its wholly-owned
subsidiaries, including Anhui
Telecom, Fujian Telecom, Jiangxi
Telecom, Guangxi Telecom,
Chongqing Telecom and Sichuan
Telecom, from China
Telecommunications Corporation
at a purchase price of RMB46.0
billion, expanding the Company’s
service areas to 10 provinces.
004
ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
BOARD OF DIRECTORS
Executive Directors
Wang Xiaochu (Chairman)
Leng Rongquan
Wu Andi
Zhang Jiping
Huang Wenlin
Li Ping
Yang Jie
Sun Kangmin
Non-Executive Director
Li Jinming
Independent Non-Executive
Directors
Zhang Youcai
Lo Hong Sui, Vincent
Shi Wanpeng
Xu Erming
Tse Hau Yin, Aloysius
NOMINATION COMMITTEE
Shi Wanpeng (Chairperson)
Zhang Youcai
Xu Erming
Tse Hau Yin, Aloysius
SUPERVISORY COMMITTEE
Zhang Xiuqin (Chairperson)
Zhu Lihao (Independent Supervisor)
Li Jian
Xu Cailiao
Ma Yuzhu (Employee Representative)
AUDIT COMMITTEE
Tse Hau Yin, Aloysius (Chairperson)
Zhang Youcai
Shi Wanpeng
Xu Erming
REMUNERATION
COMMITTEE
Lo Hong Sui, Vincent (Chairperson)
Shi Wanpeng
Xu Erming
Tse Hau Yin, Aloysius
COMPANY SECRETARY &
QUALIFIED ACCOUNTANT
Yung Shun Loy, Jacky
LEGAL
REPRESENTATIVE
Wang Xiaochu
INTERNATIONAL
AUDITOR
KPMG
LEGAL ADVISERS
Jingtian & Gongcheng
Freshfields Bruckhaus Deringer
Sullivan & Cromwell LLP
2004
2005
2006
MAY 2004
Global Offering of approximately
5.3 billion new H shares with net
proceeds of approximately US$1.5
billion.
JUNE 2004
Acquisition of ten telecom
companies as its wholly-owned
subsidiaries, including Hubei
Telecom, Hunan Telecom, Hainan
Telecom, Guizhou Telecom, Yunnan
Telecom, Shaanxi Telecom, Gansu
Telecom, Qinghai Telecom, Ningxia
Telecom and Xinjiang Telecom
from China Telecommunications
Corporation at a purchase price of
RMB27.8 billion, expanding the
Company’s service areas to 20
provinces.
DECEMBER 2004
Mr. Wang Xiaochu was appointed
as the Chairman and CEO on the
retirement of Mr. Zhou Deqiang.
OCTOBER 2005
Issued 6-month, RMB10 billion
denominated short term
commercial paper with an annual
interest rate of 2.54%.
2006
Strategic transformation gaining
momentum with integrated
development of voice and non-
voice businesses and driving
sustained growth; revenue from
non-voice business representing
29% of total operating revenues
(excluding amortisation of upfront
connection fees)
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006 005
Chairman’s Statement
Dear Shareholders,
I am very encouraged to see the positive results of 2006 driven by our strategic
transformation. In anticipation of rising challenges to our traditional wireline voice
services business by mobile substitution, we decisively advocated and implemented
strategic transformation two years ago, taking advantage of new business opportunities
enhanced by the advancement of information technology. Aiming at the diverse needs of
our customers, we continuously provided innovated products and services to delight and
enhance value to them, leveraging our rich talents and network resources as well as
our multi-services offering edge. These included improved high speed Internet
experience, feeding information to our customers for their needs in daily life or
business, providing IT and applications services to enhance their operating efficiency
and business opportunities. Our above initiatives have not only abated the challenges on
our traditional business operations, but also led to sustained growth in our overall
revenue and profit. We firmly believe that as we further deepen our implementation of
strategic transformation and progress our way to full services convergence offering, our
customers’ experience and value will be further enhanced, and our success and
enhancement of shareholder value will follow.
006
ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
FINANCIAL RESULTS
BUSINESS PERFORMANCE
In 2006, the Company achieved favorable financial
performance. Operating revenues reached
RMB175,093 million, an increase of 3.4% from 2005,
in which the amortisation of upfront connection fees
was RMB4,971 million. Excluding the upfront
connection fees, operating revenues was
RMB170,122 million, an increase of 4.7% from 2005;
EBITDA1 was RMB84,911 million, an increase of 3.8%
from 2005; EBITDA margin1 was 49.9%; profit
attributable to equity holders of the Company1 was
RMB22,171 million, an increase of 4.9% from 2005;
earnings per share1 was RMB0.27. Capital
expenditure decreased by 8.9% from 2005 to
RMB49,085 million as a result of more effective
expenditure control. Free cash flow2 reached
RMB29,072 million, an increase of 33.4% from 2005.
Taking into consideration the requirement for
shareholders’ return and the need to maintain
capital flexibility for ensuring the sustainable
development of the Company, the Board of Directors
will recommend at the forthcoming Annual General
Meeting that the dividend be further increased to an
equivalent of HK$0.085 per share, an increase of
13.3% from 2005.
In 2006, we firmly implemented our transformation
strategy and strengthened our execution capability.
In response to an increasingly competitive
environment, we emphasized the profitable
development of our voice business. Instead of
directly competing on pricing and driving revenue
growth solely based on subscriber base expansion,
we accelerated the development of integrated
information services and enriched the value content
of the transformation business. Leveraging our
multi-services offering edge, we consolidated our
traditional business through integrated development
while progressing our way towards an integrated
information services provider. In 2006, business
structure was further optimised, with revenue from
non-voice business accounting for 29.0% of operating
revenues (excluding the amortised upfront
connection fees), an increase of around 5 percentage
points. The integrated information services were
promptly launched and started taking shape with its
revenue accounting for 20.0% of value-added
services (“VAS”) revenue. Our customer base
continued to expand in 2006. The number of access
lines in service reached 223 million, a net increase of
12.95 million from 2005. The number of broadband
subscribers reached 28.32 million, a net increase of
7.30 million from 2005.
1
2
Including the amortisation of upfront connection fees, EBITDA was RMB89,882 million, EBITDA margin was 51.3%,
profit attributable to equity holders of the Company was RMB27,142 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 2006
007
Chairman’s Statement
In response to customers’ needs, we continued to
explore the potentials of integrated information
services, such as “Best Tone” services. By leveraging
our quality broadband access service, we
strengthened our efforts in developing Internet
value-added applications services, IT applications
and services, and maintenance outsourcing services.
“Branding” is a collective reflection of corporate
value. Effectively integrating services and products
into customer brands is critical to enhancing
customers’ perception, psychological preference and
product value. Riding on our reputable corporate and
business brands, we established our customer
branding structure with regard to various customer
segments. For enterprise customers, we further
enriched the services and applications of
“BizNavigator” to enhance their value through our
professional and customized information solutions.
For household customers, we launched “One Home”
to meet their diverse needs for communication and
information services, leveraging our multi-services
offering edge. We will closely monitor the
development of the individual customer market and
will launch our brand for individual customers in due
course so as to establish a comprehensive customer
branding structure.
We had adjusted our investment structure and focus
in line with our strategic transformation and
business development, with resources allocation
skewed towards high-return projects. We increased
investment for strategic and transformation
businesses, ensuring adequate investment in the
underlying network and advancing our network
capability on providing integrated services. At the
same time, we optimized resource allocation and
reduced investment in traditional business
infrastructure including network, buildings and
pipelines. We invigorated existing network resources
and increased the utilization of our traditional
network. In 2006, we basically completed our
intelligent network upgrade, further optimising our
IP network. We also incorporated soft-switches into
our network with scale, strengthening our
capabilities on providing integrated and differentiated
services.
In 2006, we actively enhanced our human resources
management system by strengthening employment
reform, improving performance appraisal
management, enhancing incentive schemes and
refining remuneration mechanisms and fringe
benefits. We closely monitored our employee
numbers and structure and sourced for experienced
personnel to join our Company. To promote the
development of our transformation business, we
implemented reforms on personnel management,
employment and remuneration systems for the new
and developing businesses.
We seized competitive advantage in the value chain
by leveraging third parties’ strategic resources and
strength. In appreciation of the importance of the
joint efforts of the value chain in promoting the
development of information services, we effectively
joined together various strategic resources. We
established close relationship with leading contents
and services providers, and strengthened
cooperation with equipment manufacturers for the
development of new businesses and new terminals
to further enhance our competitiveness along the
value chain.
We further strengthened precision management and
optimised resources allocation. We continued to
enhance the organisation and control of logistics,
capital and information flows. In 2006, the IT systems
had achieved initial transform from being product-
oriented to customer-oriented, from supporting a
unitary product to accommodating integrated
products and services packages. Significant progress
was made in the development of the provincial-
centralised customer relation management system
and the billing system for integrated services. These
had enhanced our precision management, marketing
and servicing capabilities. With the implementation
of stringent financial control, our capital resources
and costs were skewed towards high-growth and
high return business and operating units. We also
improved our assessment system for business
performance to enhance corporate value.
008
ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Looking ahead, we are fully confident. We shall
continue to progress our strategic transformation
and further innovate to improve our systems and
mechanisms. We shall also fully implement brand
oriented operations and continue to strengthen our
strategic execution capabilities to enhance value for
our customers, our company and our shareholders
altogether.
Finally, I would like to take this opportunity to
express my sincere appreciation to all of our
shareholders, directors, members of the Supervisory
Committee as well as our employees and customers.
CORPORATE GOVERNANCE
We are firmly committed to continuously improving
corporate governance. Starting from 2006, we further
enhanced our transparency by publishing monthly
subscriber numbers and disclosing additional
quarterly key business and financial metrics. We
continued to hold our Annual General Meeting in
Hong Kong and fully utilised our corporate website to
enhance interactive communications with
shareholders. Over the years, we continued to
improve our internal control systems covering
financial reporting, compliance, operational controls
and risk management functions, with reference to
international best practices and relevant regulatory
requirements. We implemented strict reviews of
internal controls and established standing
mechanisms to further improve operational
efficiencies, reduce corporate risks so as to
safeguard the interests of our shareholders.
OUTLOOK FOR 2007
Wang Xiaochu
Chairman and Chief Executive Officer
Beijing, PRC
26 March 2007
We have clearly noticed from a global perspective
that following the rapid expansion of mobile
business, the deployment of ever-changing IP
applications, and the acceleration of convergence of
“triple-play” networks, transformation has become
the global development trend of the
telecommunications industry. It will be increasingly
common for telecommunications operators to
develop full-services operation.
Following the comprehensive implementation of
China’s “Eleventh Five-Year Plan”, the entire
telecommunications industry in China will aim to
change its mode of growth and explore new areas of
development to achieve sustainable growth and
promote prosperity of the country. In recent years,
the informatisation process has continued to
accelerate in China with the rapidly growing demand
for information infrastructure, information
technology and applications services by the
government, enterprises and households. This brings
tremendous business opportunities for us. However,
we also well realise the irreversible trend of mobile
substitution and increasingly intensified competition
in the telecommunications industry. We shall strive
to grasp every opportunity to accomplish new
developments, leveraging our motivated and
innovative talents.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
009
25%
Business Review
Non-voice revenue increased by 25%
and represented 29% of operating revenues
We are no longer a telephone-lines
company providing call business only.
Our intelligent networks and systems could now
support a great variety of services to satisfy diverse needs of
our customers’ everyday life covering communications,
entertainment, information, high speed access to Internet. It
could also enhance our business customers on capturing
business opportunities and improving productivity. Our
continuous investment in enhancing our networks and
systems has been laying a solid foundation for our future full
services convergence offering .
010
ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Our
Business
Our People – Chen Yu
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
011
Business Review
The following table sets out our key operating data in 2004, 2005 and 2006:
Unit
2004
2005
2006
Local wireline access lines in service
Local voice usage
Domestic long distance usage
International, Hong Kong, Macau
and Taiwan long distance usage
Broadband subscribers
2M digital circuit leased
Volume of inbound local calls
Caller ID service subscribers
SMS usage volume
Colour Ring Tone subscribers
Thousand
Million pulses
Million minutes
Million minutes
Thousand
Thousand
Million minutes
Thousand
Million messages
Thousand
186,648
429,150
81,960
1,654
13,839
169.45
94,747
109,031
–
–
210,094
449,404
93,817
1,711
21,024
197.42
102,670
131,461
17,254
18,162
223,045
422,562
95,567
1,601
28,324
228.19
124,452
145,725
23,277
36,684
2006 over
2005 Rate
of change
6.2%
-6.0%
1.9%
-6.4%
34.7%
15.6%
21.2%
10.9%
34.9%
102.0%
In 2006, the Company witnessed a stable
development of its business with an increased
proportion of revenue from its non-voice services
business1, demonstrating the success of its business
transformation and the further optimisation of its
revenue structure.
In 2006, total operating revenues were RMB175,093
million, an increase of 3.4% from 2005. Excluding the
amortisation of upfront connection fees, the
Company’s operating revenues were RMB170,122
million, representing a 4.7% annual growth. The
increase in operating revenues was mainly
attributable to the rapid development of broadband
services and value-added services (“VAS”), driving up
revenue growth by 3.7% and 2.6% respectively. The
revenue from non-voice services accounted for 29.0%
of operating revenues excluding amortisation of
upfront connection fees, an increase of 4.8
percentage points from 2005.
PRODUCTS ANALYSIS
Voice Services
In 2006, revenue from voice services2 reached
RMB120,826 million, a decrease of 1.9% from 2005,
accounting for 71.0% of operating revenues
(excluding amortisation of upfront connection fees).
Of this, revenue from local telephone services was
Access Lines in Service
(millions)
186.7
42.2
12.4
19.0
210.1
57.1
14.1
20.9
223.0
62.7
15.5
22.5
113.1
118.0
122.3
2004
2005
2006
Residential
Enterprise
Public Telephone
PHS
1
2
Revenues from non-voice services include revenues from Internet access services, value-added services, managed
data services, leased line service and others.
Revenues from voice services include installation fees, monthly fees, local usage fees, domestic long distance fees,
International, Hong Kong, Macau and Taiwan long distance fees, and interconnection service fees.
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ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
RMB78,074 million, a decrease of 3.5%. Revenue
from domestic long distance services amounted to
RMB25,517 million, a decrease of 1.8%. Revenue
from international, Hong Kong, Macau and Taiwan
long distance telephone services totalled RMB3,140
million, a decrease of 7.8% while revenue from
interconnection was RMB14,095 million, an increase
of 9.8%.
In 2006, the total number of wireline telephone
subscribers reached 223.05 million, a net increase of
12.95 million, of which wireless local access services
grew by a net increase of 5.64 million subscribers, a
slight decline in net increase from 2005. The
Company has focused on the economic value of voice
services instead of boosting revenue growth solely by
pursuing subscriber base expansion. The Company
strictly restricted direct price competition,
differentiated regions, customers and services, and
launched product packages with precise positioning.
In addition, the Company persisted in upholding the
principle of effective coverage in order to optimise
wireless local access networks, reduce subsidies for
wireless local access terminals and enhance
efficiency in the utilisation of the cost of sales and
marketing.
Broadband Subscribers
(millions)
13.8
21.0
28.3
2004
2005
2006
Best Tone － Voice Search Engine
In anticipation of increasing challenges posed by
mobile communications and VOIP, the Company has
adopted a number of measures to stabilise its
revenue from voice services. Firstly, the Company
has proactively utilised its competitive edge through
the offering of multi-services and has strengthened
the packaging of its voice services with broadband
and value-added services. It has also consolidated
the integration of ordinary wireline telephone
services with its wireless local access services,
promoted its cordless PHS services, and its super
cordless services, which offer our customers the
advantages of integrated terminals and unified
numbers respectively. This has allowed the Company
to effectively leverage the scale advantage of its
ordinary wireline telephone services, telephone
number resources and the mobility of its wireless
local access services. Additionally, having firmly
seized the opportunity arising from the information
development of the affluent rural regions, the
Company has further developed and profitably
expanded its subscriber base in rural areas. In 2006,
there was a net addition of 3.46 million subscribers
to cordless PHS services and super cordless
services3, and a net increase of 4.70 million rural
subscribers.
3
Each subscriber of cordless PHS services or super cordless services includes both an ordinary wireline telephone
account and a wireless local access account.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
013
Business Review
Non-Voice Services
In 2006, revenue from non-voice services totalled
RMB49,296 million, an increase of 25.3% from 2005.
Of this, the revenue from Internet access services
grew 32.3% to RMB23,630 million, accounting for
13.9% of operating revenues (excluding the
amortisation of upfront connection fees) and an
increase of 2.9 percentage points from 2005.
Revenue from VAS increased by 41.7% to RMB14,133
million, accounting for 8.3% of operating revenues
(excluding the amortisation of upfront connection
fees), a rise of 2.2 percentage points from 2005. The
total revenues from managed data services and
leased lines services grew 1.5% to RMB7,534 million.
In 2006, the Company continued to expand its
broadband subscriber base. Total number of
broadband subscribers grew by 7.30 million to 28.32
million, representing an annual growth rate of 34.7%.
Meanwhile, the Company continued to promote the
differentiation of its broadband products, and speed
up network optimisation in order to provide high-end
subscribers with broadband products that offer high
reliability, richer applications, and better service. In
addition, the Company, through further improving the
interaction between broadband access, applications
SMS Volume
(millions)
12,111
11,166
9,907
7,347
2005 1H
2005 2H
2006 1H
2006 2H
Color Ring Tone Subscribers
(thousands)
36,684
27,717
18,162
10,731
2005 1H
2005 2H
2006 1H
2006 2H
and contents, was able to establish a nationwide
operation and sharing mechanism of its value-added
services such as music, video, software and online
game card recharging so as to reinforce the branding
strength of “ChinaVNet” services. The Company also
promoted the applications for key industries and
various market segments, and improved the
development, trial and promotion of its new products
such as IPTV, Internet on TV, collaborative
communication, and music gateway. In 2006, revenue
from Internet VAS grew 59.1%.
In 2006, Caller ID, SMS and “Colour Ring Tone”, our
wireline VAS, maintained rapid growth rates of
19.5%, 29.0% and 150.5% respectively. The Company
continued to expand its subscriber base for its
wireline VAS businesses, cooperated with different
service providers, introduced quality information
sources, and promoted functional SMS application
products such as “PHS Secretary” and “Account
Enquiry”. The Company also enabled easier
subscription to and tone changes of the “Colour Ring
Tone” services, and provided more personalised VAS
to subcribers. In 2006, the total number of Caller ID
service subscribers was 145.73 million. The number
of “Colour Ring Tone” subscribers was 36.68 million,
of which, 13.00 million were wireline “Color Ring
Tone” subscribers. SMS usage volume reached 23,277
million messages with an annual growth rate of 34.9%.
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ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
In 2006, the Company strongly promoted its
corporate customer brand — “BizNavigator”. To
satisfy the needs of large, medium and small-sized
corporate customers for different information and IT
solutions, the Company deployed three series of
application solutions including a sector version, an
information version and a communications version.
All versions offered tailor-made industry specific
solutions to meet the demands of corporate
customers. In addition, our new products, such as
“Enterprise Switchboard”, “Enterprise Colour Ring
Tone”, and “Mega Eyes”, received wide recognition
from various corporate customers, and has
effectively stabilised the Company’s business
services and invigorated VAS. In 2006, our
“BizNavigator” subscribers reached 507,000,
gradually creating our brand awareness on the
market, helping improve the public image of the
Company from a traditional wireline operator to an
integrated information services provider.
In early December 2006, the Company launched its
household brand — “One Home”. Leveraging on the
Company’s unique competitive edge as a wireline
operator on its household customers, “One Home”
deployed an “e8” package with integrated fixed line
telephony and broadband services, and an “e6”
The Company made great efforts in promoting
integrated information services including “Best
Tone” and corporate information applications.
Through the collection of more daily life information,
such as fashion, dining, shopping, accommodation,
and transportation, and optimising the functioning of
its “Best Tone” platform, the Company aimed to
satisfy the demand from general customers for
information enquiries and call forwarding. As a
result, the Company has gradually established a
leading position in voice-searching services. It also
has gradually strengthened the value chain for its
corporate information services through joint efforts
with the providers of equipment, software and
customer service so as to provide corporate
customers with integrated solutions for information
and applications. In 2006, VAS revenue from
integrated information and application services4 grew
106.4%.
In 2006, revenue from managed data services was
RMB3,031 million, an increase of 2.5%. This increase
was mainly attributable to the development of the
Company’s IT services and applications, the rapid
growth of its IP-VPN business and a narrower
decline in revenue from its DDN business. Revenue
from leased line services grew 0.9% to RMB4,503
million.
BRAND MANAGEMENT
In 2006, the Company solidified its business
transformation and implemented its customer brand
management strategy. Based on the consumption
patterns of the customers of wireline operators, the
Company has classified customers into three
categories, namely enterprises, households and
individuals, hence progressively building up
customer-oriented branding; and adopted branding
as the pivot for sales plans, the improvement of
quality distribution channels, the modification of
network systems, the research and development of
integrated terminals, as well as the re-allocation of
cost and resources.
BizNavigator － ICT for small & medium
enterprises
4
The revenue from integrated information application service of VAS included the revenue from “Best Tone”, corporate
information application, and IT service and application.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
015
Business Review
One Home – Integrated information services
for household customers
package with an integrated fixed line telephony and
PHS services. It customised an integrated terminal
to provide multi-Internet access for households
supplemented with VAS such as Caller ID and
“Colour Ring Tone”. Currently, the target market of
“One Home” is the top 40% household customers
with the most spending on fixed line telephony in
different regions. Since its introduction, “One Home”
has been well-received. This will help the future
stabilisation of fundamental businesses as well as
the expansion of integrated information services for
households.
The Company will continue to launch the brand for
individual consumers in due course.
Continued Network Optimisation, Strong
Support for Business Transformation
The Company continued to uphold the principle of
effective investment by fully exploring the resource
potential of wireline network. Through further
reduction of the Company’s capital expenditure and
improvement of its control over budgeting, the total
amount of capital expenditure has been strictly
controlled. In 2006, our capital expenditure was
RMB49,085 million or 28.9% of operating revenues
(excluding the amortisation of upfront connection
fees), indicating a decrease of RMB4,779 million or
4.2 percentage points from 2005. Meanwhile, as a
part of its business transformation, the Company
continued to enhance its network construction,
consolidation and modification, and sped up the
construction of platforms for integrated information
services. The Company has completed the upgrade
of its wireline network to an intelligent network and
has preliminarily formed its softswitch network
structure. It has also proactively implemented an
IPTV commercial trial, the technical preparation for
mobile communication, and the research on the
integration of both fixed line services and mobile
communication. As a result, the capacity of wireline
service innovation has been improved. Driven by the
business transformation, the Company’s capital
expenditure, except for the investment in
maintenance, optimisation and expansion of existing
networks, were focused on new businesses. This
involved (1) more investment in broadband access
layer and the broadband convergence layer to
guarantee a rational redundant broadband capacity;
(2) more investment in the platforms for VAS and
transformation businesses; (3) continued upgrading
of its wireline network to an intelligent network, and
the improvement of the softswitch network structure.
The Company applied dynamic management to the
existing network assets in order to facilitate cross-
regional asset re-allocation. For example, on the
PHS network, where the Company has drastically
reduced investment, 89,486 station re-allocations
were carried out, accounting for 10.0% of the total
number of base stations. As a result, utilisation rate
of PHS assets and the quality of services were
greatly enhanced.
In order to provide effective support for resolving the
problems of illegal access to customers’ accounts
and carrying out differentiated sales and service, in
particular for laying a good foundation for the
promotion of “One Home” in 2007, the Company
continued to promote precise identification of its
broadband customers and unique labels for them.
Meanwhile, CN2 network construction has been
completed and it started to carry softswitch relay
traffic. The CN2 network has been fully
interconnected with local transmission networks,
Metropolitan Area Networks, IDC, and Metropotical
Area VPN networks.
016
ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
By the end of 2006, the Company completed the
intelligentisation of its wireline network within its
service areas, and introduced new services, such as
telephone number portability, “Super Cordless” (one
call number for two phones), “Colour Ring Tone” and
softswitch broadband services such as instant
messages and video communication, etc. To date,
there are more than 20 new services offered on the
intelligentised wireline network platform. Moreover,
the Company continued to replace copper cables
with optic fibre cables gradually in order to support
high bandwidth services such as IPTV. In 2006, the
Company’s investment in copper cables decreased by
21.5% from 2005.
Strong Promotion of the Development of IT
Support System, Further Improvement of
Sales and Marketing
In 2006, the Company continuously improved the
development of its IT support systems. We
preliminarily achieved the goals of precise customer
profiles, and further improved targeted sales and
marketing with the help of IT support systems. Of the
corporate investment in IT development in 2006,
54.4% was spent on the Business Support System
(BSS), 25.0% was on Operation Support System
(OSS), 8.2% was on Management Support System
(MSS) and 12.4% was on IT infrastructure and other
systems. By the end of 2006, the Company completed
the deployment of CRM system in 146 local branch
companies, which accounted for 64.0% of the total
number of local branch companies and covered
71.0% of subscribers in its service areas. Steady
progress has been achieved in the development of
new billing systems. Integration of billing systems
was completed for 185, or 80.8% of local branch
companies covering 80.5% of subscribers.
The further enhancement of the Company’s IT
systems has preliminary supported customer brand
management. Its IT system has been preliminarily
transformed from a product-oriented system to a
customer-oriented one. By standardising user
identification through the establishment of a CRM
system, the Company not only realised differentiated
sales and services but also increased service
efficiency and improved customer satisfaction. At the
same time, CRM and the integrated billing systems
have provided better support to the statistical work
of “BizNavigator”, as well as the subscription to,
billing and accounting of “One Home”.
The continuous improvement of the Company’s IT
systems has facilitated fundamentally the
transformation of the Company from supporting a
unitary product to accommodating combination
marketing and integrated packages. This
improvement basically enabled IT support for
integrated services and preliminarily satisfied the
demand for retaining existing customers while
increasing the Company’s customer base, and the
demand for market management. The continuous
uploading of its two core systems, CRM and the
billing system, has facilitated the integration of IT
systems, which are scattered over the local branch
companies, including the sales and billing systems
of individual products such as local telephone, PHS,
and broadband service. The two systems effectively
supported sales channels and customer service, and
offered tremendous contribution to the healthy
development of the Company’s business.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
017
Business Review
2007 BUSINESS OUTLOOK
In 2007, the Company will fully implement its
customer brand management strategy to enhance
the sales and marketing of its two major customer
brands, “BizNavigator” and “One Home”.
“BizNavigator” — Targeting at corporate customers,
the Company will continue to promote business
information applications with emphasis on hotels,
commercial buildings, school campuses, conferences
and exhibitions, and government administrations.
The Company will commit itself to extending the
deployment of such information services, increasing
sales promotion for the communication and the
information versions, whilst further expanding the
influential power of its brand and stabilising the
revenue from its voice services.
“One Home” — Targeting at household customers,
the Company will accelerate the consolidation of its
existing services and leverage on the competitive
edge of multiple products. Through a customised
terminal such as a broadband wireless terminal, the
Company will improve customer experience with its
integrated services, and will continuously enhance
the products and supplementation of its VAS in order
to satisfy the ever-increasing demand among
household customers for integrated information
services.
For the sake of brand management, the Company
will optimise its channel services, reinforce the
professional sales capability of its direct sales
channels to the government and corporate
customers, and develop standardised services for the
electronic and physical channels between the
Company and its public customers. Meanwhile, the
Company will also enhance its IT systems so as to
improve its overall ability to carry out brand
management.
In 2007, the Company will continue to secure stable
revenues from voice services, further deploy its
integrated products and services, focus on the care
of and retention of its existing customers and
develop rural markets based on the principle of
profitable development. Meanwhile, the Company will
also continue to perfect its major businesses such as
broadband, VAS and “Best Tone” in order to increase
the revenue proportion of its non-voice services
while optimising its revenue structure. In addition,
the Company will continue to enhance the
differentiation of its broadband products, as well as
focusing on key industries and market segments in
order to develop a broadband customer base on a
large scale. Moreover, the Company will continue to
promote the business development of Caller ID, SMS
and “Colour Ring Tone”, and develop “ChinaVNet”
into an entertainment gateway for individuals and
households. In the future, “Best Tone” will provide a
comprehensive package of business travel services,
progressively launching ticket booking and room
reservations services.
018
ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
In the face of intensifying market competition, the
Company will be steadfast in adhering to its
formulated strategy, fully implement its brand
management strategy, and strive to maintain its
traditional voice business. In addition, the Company
will vigorously promote broadband and VAS services,
and proactively develop integrated information
application services in order to achieve healthy and
stable development of the Company.
China Telecom – An Integrated Information Service Provider
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
019
Management’s Discussion and Analysis of
Financial Conditions and Results of Operations
u r
n cials
a
O
Fi n
020
ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Our People – Xia Li
33%
Free cash flow sharply increased by 33%
to RMB29.1 billion
We aim to provide our services in the most efficient way, which
is essential for enhancing shareholder value. Riding on our
way to full services operation, we strictly control expenditure
with resources allocation skewed towards growth businesses
while generating more free cash flow for our shareholder
return and future investment for full services convergence
offering to deliver profitable growth.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
021
Management’s Discussion and Analysis of
Financial Conditions and Results of Operations
SUMMARY
OPERATING REVENUES
The Company’s operating revenues in 2006 were
RMB175,093 million, an increase of 3.4% from 2005.
Operating expenses were RMB136,483 million, an
increase of 4.7% from 2005; profit attributable to
equity holders of the Company was RMB27,142
million, and basic earnings per share were RMB0.34.
EBITDA1 was RMB89,882 million and EBITDA margin
was 51.3%.
Excluding amortisation of upfront connection fees of
RMB4,971 million, our operating revenues in 2006
were RMB170,122 million, an increase of 4.7% from
2005; profit attributable to equity holders of the
Company was RMB22,171 million; basic earnings per
share were RMB0.27. EBITDA1 was RMB84,911
million and EBITDA margin was 49.9%.
The Company’s operating revenues in 2006 were
RMB175,093 million, an increase of 3.4% from 2005.
Excluding the amortisation of upfront connection
fees, operating revenues in 2006 were RMB170,122
million, an increase of RMB7,593 million or 4.7%
from 2005. In which, revenue from Internet access
services, value-added services, and interconnection
increased by RMB5,768 million, RMB4,157 million
and RMB1,257 million respectively from 2005,
represented the major sources of operating revenues
growth. Revenue from managed data increased by
2.5% from 2005; revenues from leased line and other
services remained at similar level as 2005. Revenues
from local telephone services and long distance
services decreased generally.
1
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 (if applicable) 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.
022
ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
The following table sets forth a breakdown of operating revenues in 2005 and 2006, together with their
respective rates of change:
For the year ended 31 December
(RMB in millions, except percentage data)
Rate of
Change
2006
2005
Wireline telephone services2
Local
Installation fees
Monthly fees
Local usage fees
Subtotal
2,913
28,973
46,188
2,970
30,351
47,624
(1.9)%
(4.5)%
(3.0)%
78,074
80,945
(3.5)%
Domestic long distance3
International, Hong Kong, Macau and Taiwan long distance3
Interconnections
25,517
3,140
14,095
25,993
3,407
12,838
(1.8)%
(7.8)%
9.8%
Subtotal
42,752
42,238
1.2%
Internet access services
Value-added services
Managed data
Leased line services and others4
Operating revenues (excluding amortisation of
upfront connection fees)
Upfront connection fees
23,630
14,133
3,031
8,502
17,862
9,976
2,958
8,550
32.3%
41.7%
2.5%
(0.6)%
170,122
4,971
162,529
6,781
4.7%
(26.7)%
Total operating revenues
175,093
169,310
3.4%
Including revenue from our registered subscribers,
public telephones and pre-paid calling cards services.
LOCAL TELEPHONE SERVICES
Including revenue from VoIP long distance services.
Including primarily revenue from other domestic
telecommunications operators and business
customers for the lease of wireline
telecommunications network facilities, sales and
repairs and maintenance of customer-end equipment
and construction of telecommunications network and
infrastructure for customers.
Revenue from our local telephone services
decreased by 3.5% from RMB80,945 million in 2005
to RMB78,074 million in 2006, representing 44.6% of
our total operating revenues, or 45.9% of operating
revenue excluding the amortisation of upfront
connection fees. The major reason for the decrease
in revenue was that the declining tariffs for mobile
telephone services has narrowed the gap between
mobile service tariffs and wireline service tariffs,
mobile operations further exacerbated the diversion
from wireline services, causing a drop in our local
voice ARPU.
2
3
4
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
023
Management’s Discussion and Analysis of
Financial Conditions and Results of Operations
Installation fees Upfront installation fees is
amortised over the expected customer relationship
period of 10 years. Revenue from amortisation of
upfront installation fees decreased by 1.9% from
RMB2,970 million in 2005 to RMB2,913 million in
2006.
Monthly fees Revenue from monthly fees
decreased by RMB1,378 million, or 4.5%, from
RMB30,351 million in 2005 to RMB28,973 million in
2006.
Local usage fees Revenue from local usage fees
in 2006 was RMB46,188 million, a decrease of
RMB1,436 million or 3.0%, from 2005. Local voice
usage volume decreased by 6.0% from 2005 to
422,562 million pulses in 2006, due to the
intensifying mobile substitution and the
diversification of the means of communication.
LONG DISTANCE TELEPHONE
SERVICES
Revenue from the Company’s long distance
telephone services decreased by 2.5% from
RMB29,400 million in 2005 to RMB28,657 million in
2006, representing 16.4% of total operating revenues,
or 16.8% of operating revenues excluding
amortisation of upfront connection fees.
INTERCONNECTION SERVICES
Revenue from interconnection services increased by
9.8% from RMB12,838 million in 2005 to RMB14,095
million in 2006, representing 8.1% of our total
operating revenues, or 8.3% of operating revenues
excluding amortisation of upfront connection fees.
The growth was mainly attributable to an increase in
interconnection volume resulting from the growth of
the domestic telecommunications services
subscriber base and the traffic volume expansion in
the telecommunications market.
INTERNET ACCESS SERVICES
Revenue from Internet access services grew by
32.3% from RMB17,862 million in 2005 to RMB23,630
million in 2006, representing 13.5% of the total
operating revenues, or 13.9% of operating revenues
excluding amortisation of upfront connection fees.
Driven by the continuous expansion of our broadband
subscriber base in recent years, our Internet access
services revenue sustained a rapid growth. The
number of broadband subscribers increased by
34.7%, or 7.30 million to 28.32 million as of the end
of 2006 when compared to the end of 2005.
VALUE-ADDED SERVICES
Domestic long distance services In 2006,
revenue from domestic long distance services was
RMB25,517 million, decreased by 1.8% from
RMB25,993 million in 2005, while domestic long
distance telephone usage volume increased by 1.9%
from 93,817 million minutes in 2005 to 95,567 million
minutes in 2006. The decrease in revenue was
attributable to a decrease in average unit price,
which decreased from RMB0.28 per minute in 2005
to RMB0.27 per minute in 2006.
Revenue from value-added services grew by 41.7%
from RMB9,976 million in 2005 to RMB14,133 million
in 2006, representing 8.1% of our total operating
revenues, or 8.3% of operating revenues excluding
amortisation of upfront connection fees. The
increase in revenue from value-added services was
mainly attributable to the rapid development of
comprehensive information application services,
SMS, caller ID service, colour ring tone and
telephone information services.
International, Hong Kong, Macau and Taiwan
long distance services International, Hong Kong,
Macau and Taiwan long distance services revenue
decreased by 7.8% from RMB3,407 million in 2005 to
RMB3,140 million in 2006. Average unit price of
international, Hong Kong, Macau and Taiwan long
distance services was RMB1.96 per minute in 2006
which represented a slight decrease from RMB1.99
per minute in 2005. The decrease in revenue was
mainly attributable to a decrease in the usage
volume, which decreased by 6.4% from 2005.
MANAGED DATA SERVICES
Revenue from managed data services increased by
2.5% from RMB2,958 million in 2005 to RMB3,031
million in 2006. The growth in revenue was mainly
attributable to the increased demand of subscribers
for network resources.
024
ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
LEASED LINE AND OTHER SERVICES
UPFRONT CONNECTION FEES
Revenue from leased line and other services
decreased by 0.6% from RMB8,550 million in 2005 to
RMB8,502 million in 2006. In which, revenue from
leased line services grew by 0.9% from RMB4,464
million in 2005 to RMB4,503 million in 2006.
Upfront connection fees represent the amortised
amount of the upfront fees received for the initial
activation of the Company’s wireline services,
amortised over the expected customer
relationship period of 10 years. Effective from
July 2001, the Company ceased to charge new
subscribers upfront connection fees. The
amortised amount decreased by 26.7% from
RMB6,781 million in 2005 to RMB4,971 million in
2006.
The table below sets forth the amortisation of upfront connection fees for each year from 2007 to 2011 based
on the calculation of amortisation over the 10-year estimated amortisation period (with 2011 as the end of the
amortisation period):
2007
For the year ended 31 December
2010
2009
(RMB in millions)
2008
2011
Amortisation of upfront connection fees
3,295
2,022
1,151
497
98
OPERATING EXPENSES
In 2006, our operating expenses were
RMB136,483 million, an increase of 4.7% from
2005. The ratio of our operating expenses to total
operating revenues increased from 77.0% in 2005
to 77.9%, and the ratio of operating expenses to
operating revenues excluding amortisation of
upfront connection fees was 80.2%, unchanged
from 2005. The following table sets out a
breakdown of our operating expenses in 2005 and
2006 and their respective rates of change:
For the year ended 31 December
(RMB in millions, except percentage data)
Rate of
Change
2006
2005
Depreciation and amortisation
Network operations and support expenses
Selling, general and administrative expenses
Personnel expenses
Interconnection and other operating expenses
51,272
30,723
22,214
26,019
6,255
49,652
30,334
19,892
24,960
5,518
3.3%
1.3%
11.7%
4.2%
13.4%
Total operating expenses
136,483
130,356
4.7%
Depreciation and amortisation Depreciation
and amortisation expenses were RMB51,272 million
in 2006, an increase of 3.3% from 2005, representing
29.3% of our total operating revenues. The
depreciation and amortisation expenses as a
percentage of our operating revenues excluding
amortisation of upfront connection fees decreased
from 30.5% in 2005 to 30.1% in 2006.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
025
Management’s Discussion and Analysis of
Financial Conditions and Results of Operations
Network operations and support expenses Network
operations and support expenses increased by 1.3%
from RMB30,334 million in 2005 to RMB30,723
million in 2006, representing 17.5% of our total
operating revenues. The network operations and
support expenses as a percentage to operating
revenues excluding amortisation of upfront
connection fees decreased from 18.7% in 2005 to
18.1% in 2006.
Selling, general and administrative
expenses In 2006, selling, general and
administrative expenses amounted to RMB22,214
million, an increase of 11.7% from RMB19,892
million in 2005, representing 12.7% of our total
operating revenues. Selling, general and
administrative expenses as a percentage of operating
revenues excluding amortisation of upfront
connection fees increased from 12.2% in 2005 to
13.1% in 2006. This increase was mainly attributable
to additional efforts in retaining and expanding our
subscriber base, and improving the promotion of
business branding and customer branding in order to
bring these in line with our strategic transformation,
and also additional expenses for product research
and development.
Personnel expenses In 2006, personnel
expenses were RMB26,019 million, an increase of
4.2% from RMB24,960 million in 2005, or 0.5
percentage points below the growth rate of operating
revenues excluding amortisation of upfront
connection fees. Our personnel expenses accounted
for 14.9% of our total operating revenues, or 15.3%
of operating revenues excluding amortisation of
upfront connection fees, which is similar to that in
2005. The increase in personnel expenses was
mainly attributable to the maintenance of an
effective incentive system for employees.
Interconnection and other operating
expenses The Company’s interconnection and
other operating expenses increased by 13.4% from
RMB5,518 million in 2005 to RMB6,255 million in
2006. The growth in long distance voice
interconnections and the SMS interconnections
constituted most of the increase in interconnection
expenses. The net revenue from interconnections
(interconnection revenue less interconnection
expenses) amounted to RMB7,883 million, an
increase of 7.0% from 2005.
NET FINANCE COSTS
In 2006, the Company’s net finance costs were
RMB4,667 million, a decrease of RMB228 million or
4.7% from RMB4,895 million in 2005. Interest
expenses decreased by RMB622 million. The
decrease was attributable to the repayment of
borrowings and reduction in average interest rate
through various measures including the issue of
short term commercial paper. However, net
exchange gain in 2006 was RMB86 million, a
decrease of RMB477 million from RMB563 million in
2005. The main reason for the decrease in net
exchange gain was the decrease in magnitude of
appreciation of Renminbi against US Dollar and
Japanese Yen in 2006.
INCOME TAX
The Company’s statutory income tax rate is 33%. In
2006, the Company’s income tax expenses were
RMB6,754 million, and effective income tax rate was
19.9%, whereas the effective income tax rate
excluding upfront connection fees was 23.3%. The
difference between the effective income tax rate and
the statutory income tax rate was mainly attributable
to the exclusion of upfront connection fees from
taxable income, and the preferential income tax rate
of 15% enjoyed by our operating 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
the Company’s operating subsidiaries received tax
credits of RMB1,413 million on the purchases of
domestic equipment in 2006.
PROFIT ATTRIBUTABLE TO EQUITY
HOLDERS OF THE COMPANY
In 2006, profit attributable to equity holders of the
Company reached RMB27,142 million, a decrease of
2.8% from RMB27,912 million in 2005. Excluding
amortisation of upfront connection fees, profit
attributable to equity holders was RMB22,171
million, an increase of 4.9% from RMB21,131 million
in 2005. The Company has maintained a good level of
operating efficiency and profitability.
026
ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
CAPITAL EXPENDITURE
In 2006, the Company continued with its prudent
policy on capital expenditure. The capital expenditure
decreased by 8.9% from RMB53,864 million in 2005
to RMB49,085 million in 2006. In order to achieve the
strategic transformation of the Company, we have
effectively controlled the scale of capital expenditure
and optimised its structure, with emphasis on
significant reduction in capital expenditure on
wireless local access service and the increase of
investment in Internet access and data network.
In 2007, our estimated capital expenditure is
RMB47,000 million. 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 the future.
CASH FLOWS AND CAPITAL
RESOURCES
Cash Flows
In 2006, net cash inflow of the Company was
RMB3,070 million, while the net cash inflow was
RMB1,656 million in 2005.
The following table sets out our cash flow position in 2005 and 2006:
Net cash flows from operating activities
Net cash used in investing activities
Net cash used in financing activities
For the year ended
31 December
2006
2005
(RMB in millions)
74,506
(49,997)
(21,439)
68,359
(51,894)
(14,809)
Net increase in cash and cash equivalents
3,070
1,656
In 2006, the net cash flow from operating activities
was RMB74,506 million, an increase of RMB6,147
million from RMB68,359 million in 2005. Increase in
net cash from operating activities indicated the
steady growth in the Company’s business and an
improvement in our effective cost control.
In 2006, we achieved saving in capital expenditure.
Cash used in investing activities was RMB49,997
million, a decrease of RMB1,897 million from 2005.
In 2006, our net cash outflow in financing activities
was RMB21,439 million, as compared with the net
cash used of RMB14,809 million in 2005.
In April 2006, we raised RMB19,920 million in cash to
meet the working capital requirement of our
operations and reduce finance cost through the issue
of short-term commercial paper due in one year with
a nominal value of RMB20 billion. In addition, we
continued to repay certain long-term borrowings in
2006, and net cash used in repaying such borrowings
(the difference between the cash from borrowings
and the cash used for repaying borrowings)
increased from RMB9,046 million in 2005 to
RMB14,969 million in 2006.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
027
Management’s Discussion and Analysis of
Financial Conditions and Results of Operations
WORKING CAPITAL
By the end of 2006, the Company’s working capital
(total current assets minus total current liabilities)
deficit was RMB117,012 million, a decrease of
RMB3,301 million from the deficit of RMB120,313
million in 2005. The decrease in deficit was mainly
attributable to the growth in cash and cash
equivalents. By the end of 2006, the Company’s cash
and cash equivalents amounted to RMB18,191
million, of which 98.6% was denominated in
Renminbi.
INDEBTEDNESS
Our indebtedness analysis as of the end of 2005 and 2006 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)
As of 31 December
2006
2005
(RMB in millions)
79,516
8,242
48
87,806
37,257
–
76,005
8,963
108
85,076
55,777
52
Total debt
125,063
140,905
By the end of 2006, the Company’s total
indebtedness was RMB125,063 million, a decrease of
RMB15,842 million from 2005. The main reason for
the decrease was the repayment of certain long-term
borrowings.
Therefore, the ratio of the Company’s total
indebtedness to total assets decreased from 33.8% in
2005 to 30.2% in 2006. The Company believes that it
has continued to maintain a solid capital structure.
Most of the Company’s revenue receipts and
payments made are denominated in Renminbi, and
Renminbi is not a freely convertible currency. By the
end of 2006, loans in Renminbi, Japanese Yen, US
Dollar and Euro accounted for 96.5%, 1.6%, 1.1% and
0.7% of the Company’s total indebtedness,
respectively. 73.7% of our indebtedness was loans
with fixed interest rates.
028
ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
CONTRACTUAL OBLIGATIONS
The following table sets out the Company’s contractual obligations as of 31 December 2006:
Total
2007
Payable in
2008
(RMB in millions)
2009
Short-term debt
Long-term debt
Finance lease obligations
Operating lease commitments
Capital commitments
79,516
45,499
48
1,773
3,402
79,516
8,242
48
468
3,402
–
3,815
–
315
–
Total contractual obligations
130,238
91,676
4,130
–
656
–
266
–
922
2010 After 2010
–
246
–
223
–
469
–
32,540
–
501
–
33,041
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
029
Directors, Supervisors and Senior
Directors, Supervisors and Senior
Management
Management
7
5
3
1
2
4
6
8
1. Mr. Wang Xiaochu
2. Mr. Leng Rongquan
3. Ms. Wu Andi
4. Mr. Zhang Jiping
5. Ms. Huang Wenlin
6. Mr. Li Ping
7. Mr. Yang Jie
8. Mr. Sun Kangmin
030 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Mr. Leng Rongquan
Age 58, is Executive Director, President and Chief
Operating Officer of the 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 31 years
of operational management experience in the
telecommunications industry in China.
Mr. Wang Xiaochu
Age 49, is Chairman of the Board of Directors and Chief
Executive Officer of the 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 and Chairman
of the board of directors and a non-executive director of
China Communications Services Corporation Limited. 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 26 years of
management experience in the telecommunications
industry.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
031
Directors, Supervisors and Senior
Management
Ms. Wu Andi
Age 52, is Executive Director, Executive Vice President
and the Chief Financial Officer in charge of financial
management of the 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 25 years of
financial management experience in the
telecommunications industry in China.
Mr. Zhang Jiping
Age 51, is Executive Director and Executive Vice President
of the 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
25 years of operational and managerial experience in the
telecommunications industry in China.
032 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Ms. Huang Wenlin
Age 53, is Executive Director and Executive Vice President
of the 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 32
years of operational and managerial experience in the
telecommunications industry in China.
Mr. Li Ping
Age 53, is Executive Director and Executive Vice President
of the 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, and Vice Chairman of
the board of directors and an executive director and Chief
Executive Officer of China Communications Services
Corporation Limited. Mr. Li has extensive experience in
managing public companies and 31 years of operational
and managerial experience in the telecommunications
industry in China.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
033
Directors, Supervisors and Senior
Management
Mr. Sun Kangmin
Age 50, is Executive Director and Executive Vice President
of the 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 23 years of
operational and managerial experience in the
telecommunications industry in China.
Mr. Yang Jie
Age 45, is Executive Director and Executive Vice President
of the 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 23 years
of operational and managerial experience in the
telecommunications industry in China.
034 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Mr. Li Jinming
Age 55, is Non-executive Director of the Company. Mr. Li
is the Chairman of Guangdong Rising Assets
Management Co., Ltd., one of the domestic shareholders
of the Company, and the Chairman of Shenzhen Zhongjin
Lingnan Nonfemet Company Limited. Mr. Li graduated
from Guangdong Provincial Broadcast and Television
University, and studied in the postgraduate programme in
the faculty of international economics of Lingnan College,
Zhongshan University, majoring in international industry
and commerce management. He holds an EMBA degree
from 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 66, is Independent Non-executive Director of the
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 financial
and accounting policies. Mr. Zhang has contributed to the
improvement and reform of the financial and accounting
systems of China over decades. 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 the Chairman of the
Supervisory Committee 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 2006
035
Directors, Supervisors and Senior
Management
Mr. Shi Wanpeng
Age 70, is Independent Non-executive Director of the
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). Mr. Shi is also an Independent Director of
China Petroleum & Chemical Corporation. He has more
than 40 years of operational and managerial experience
in state-owned enterprise and state industry
development of China.
Mr. Lo Hong Sui Vincent
Age 59, is Independent Non-executive Director of the
Company. Mr. Lo is the Chairman and Chief Executive
Officer of the Shui On Group which was founded by him in
1971. He is also the Chairman of Shui On Construction
And Materials Limited, and 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.
036 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Mr. Tse Hau Yin, Aloysius
Age 59, is Independent Non-executive Director of the
Company. 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 China and a
member of the KPMG China advisory board from 1997 to
2000. Mr. Tse is a graduate of the University of Hong
Kong.
Professor Xu Erming
Age 57, is Independent Non-executive director of the company.
He currently serves as the Deputy Dean of the Graduate School
at the Remin University of China, professor, PhD supervisor,
Professor Xu is also the Deputy Secretary-General of the Tenth
Session of the Academic Committee, as well as a member of the
Third Session of the University Affairs Committee of the Remin
University of China. He also serves as the Associate Convener of
the Fifth Session of the Business Administration Academic
Appraisal Group of the Academic Degree Committee of the State
Council, a member of China’s National MBA Education Advisory
Committee, deputy chairman of the Chinese Enterprise
Management Research Association, and as chairman of Beijing
Contemporary Enterprise Research Association. He is also
entitled to the State Council’s special government allowances.
Over the years, Professor Xu has conducted research in areas
related to strategic management, organisational theories,
international management and education management. He has
been responsible for research on many subjects put forward by
the National Natural Science Foundation, the National Social
Science Foundation, and other authorities at provincial and
ministry level. His many publications include Business Strategic
Management, Introduction to International Business
Management, a number of case studies, as well as a number of
academic dissertations such as Emperical Research: Effects on
Performance of Supervision Mechanisms Substitution Effect of
Listed Companies. He has also written as a columnist in the
Economic Daily. Professor Xu has received many awards such as
the Ministry of Education’s Class One Excellent Higher Education
Textbook Award as well as the State-Level Class Two Teaching
Award.
Professor Xu has been a visiting professor at over 10 domestic
universities. He has previously held positions at the New York
State University at Buffalo, the University of Scranton, the
University of Technology, Sydney, and Hong Kong Polytechnic
University.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
037
Directors, Supervisors and Senior
Management
Mr. Yung Shun Loy, Jacky
Age 44, is the Assistant Chief Financial Officer, qualified
accountant and Company Secretary of the 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 more than 20 years
of experience in auditing, company secretary and senior
financial management of listed companies.
Mr. Wang Qi
Age 52, is the controller of the 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 32 years of managerial and accounting
experience in the telecommunications industry in China.
Ms. Zhang Xiuqin
Age 60, is the Chairperson of the Supervisory Committee
of the Company. 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 38 years of
operational and managerial experience in the
telecommunications industry in China.
Ms. Zhu Lihao
Age 66, is an independent Supervisor on the Supervisory
Committee of the Company. Ms. Zhu is a member of The
Chinese Institute of Certified Public Accountants. 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 44 years of
experience in management and auditing.
Mr. Li Jian
Age 45, is a Supervisor on the Supervisory Committee of
the Company. He is currently the Vice President of the
Department of Diversified Business Management in
China Telecommunications Corporation, and an Executive
Vice President of China Communications Services
Corporation Limited. He graduated from Beijing Radio
and Television University in 1986 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 25 years of operational and
management experience in the telecommunications
industry.
038 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Mr. Xu Cailiao
Age 43, is a Supervisor on the Supervisory Committee of
the Company. 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 53, is an Employee Representative Supervisor on the
Supervisory Committee of the Company. 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 2006
039
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 2006.
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
2006 and the financial position of the Company and
the Group as at that date are set out in the audited
financial statements on pages 85 to 139 in this
annual report.
DIVIDEND
The Board proposes to declare a final dividend in the
amount equivalent to HK$0.085 per share, totaling
approximately RMB6,820 million for the year ended
31 December 2006. The dividend proposal will be
submitted for consideration at the Annual General
Meeting to be held on 29 May 2007. Dividends will be
denominated and declared in Renminbi. Dividends on
domestic shares will be paid in Renminbi. Dividends
on H shares will be paid in Hong Kong dollars. The
relevant exchange rate will be the mean of the
average offer 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 at
the Annual General Meeting. The final dividends are
expected to be paid around 15 June 2007 after its
approval at the Annual General Meeting.
ISSUE OF SHORT TERM COMMERCIAL
PAPER BY THE COMPANY
On 10 April 2006, the Company successfully issued a
short term commercial paper in the nominal amount
of RMB20 billion, due in one year with an annual
interest rate of 3.05%. The short term commercial
paper was issued through a book-building and
centralised placing process in the PRC inter-bank
debenture market on a nominal value basis. All the
proceeds from this issue of the short term
commercial paper were used to satisfy the
Company’s funding needs of production and
operations. The Company considers that the issue of
the short term commercial paper will enable it to
reduce its finance costs, to improve its capital-
raising structure and to enhance its market image.
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
Age
Position in the Company
Date of Appointment
Wang Xiaochu
Leng Rongquan
Wu Andi
Zhang Jiping
Huang Wenlin
Li Ping
Yang Jie
Sun Kangmin
Li Jinming
Zhang Youcai
Lo Hong Sui, Vincent
Shi Wanpeng
Xu Erming
Tse Hau Yin, Aloysius
Yung Shun Loy, Jacky
Wang Qi
49
58
52
51
53
53
45
50
55
66
59
70
57
59
44
52
Chairman and Chief Executive Officer
Executive Director, President and
Chief Operational Officer
20 December 2004
20 December 2004
Executive Director, Executive Vice President and
10 September 2002
Chief Financial Officer
Executive Director and Executive Vice President
Executive Director and Executive Vice President
Executive Director and Executive Vice President
Executive Director and Executive Vice President
Executive Director and Executive Vice President
Non-executive Director
Independent Non-executive Director
Independent Non-executive Director
Independent Non-executive Director
Independent Non-executive Director
Independent Non-executive Director
Assistant Chief Financial Officer,
Qualified Accountant and Company Secretary
Controller
10 September 2002
10 September 2002
10 September 2002
20 October 2004
20 October 2004
20 December 2004
10 September 2002
10 September 2002
20 June 2003
9 September 2005
9 September 2005
1 February 2005
10 September 2002
In May 2006, Mr. Wei Leping resigned from the position of Executive Director due to age.
040 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
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
Age
Position in the Company’s subsidiaries
at the provincial level
Zhang Weihua
Wang Wei
Chen Dexing
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
Yin Yiping
En Guangli
Yang Jianqing
Ma Linfeng
Gao Tongqing
46
42
51
60
51
49
55
43
47
57
46
47
53
52
44
43
47
59
46
51
43
Chairman of Shanghai Telecom Company Limited
General Manager of Shanghai Telecom Company Limited
Chairman and General Manager of
Guangdong Telecom Company Limited
Chairman and General Manager of
Jiangsu Telecom Company Limited
Chairman and General Manager of
Zhejiang Telecom Company Limited
Chairman and General Manager of
Anhui Telecom Company Limited
Chairman and General Manager of
Fujian Telecom Company Limited
Chairman and General Manager of
Jiangxi Telecom Company Limited
Chairman and General Manager of
Guangxi Telecom Company Limited
Chairman and General Manager of
Chongqing Telecom Company Limited
Chairman and General Manager of
Sichuan Telecom Company Limited
Chairman and General Manager of
Hubei Telecom Company Limited
Chairman and General Manager of
Hunan Telecom Company Limited
Chairman and General Manager of
Hainan Telecom Company Limited
Chairman and General Manager of
Guizhou Telecom Company Limited
Chairman of Yunnan Telecom Company Limited
General Manager of Yunnan Telecom Company Limited
Chairman of Shaanxi Telecom Company Limited
General Manager of Shaanxi Telecom Company Limited
Chairman and General Manager of
Gansu Telecom Company Limited
Chairman and General Manager of
Qinghai Telecom Company Limited
Chairman and General Manager of
Ningxia Telecom Company Limited
Chairman and General Manager of
Xinjiang Telecom Company Limited
Date of
Appointment
9 December 2005
20 October 2004
26 June 2006
19 October 2002
2 March 2005
14 February 2006
19 August 2003
12 September 2003
7 September 2005
19 August 2003
4 June 2004
5 March 2004
5 March 2004
7 September 2005
5 March 2004
5 November 2005
9 March 2005
20 October 2005
3 March 2005
5 March 2004
5 March 2004
5 March 2004
5 March 2004
In June 2006, Mr. Chen Dexing was appointed as the Chairman and the General Manager of Guangdong
Telecom Company Limited while Mr. Feng Xiong resigned from the position of Chairman and General Manager
of Guangdong Telecom Company Limited.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
041
Report of the Directors
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
Age
Position in the Company
Date of Appointment
Zhang Xiuqin
Zhu Lihao
Li Jian
Xu Cailiao
Ma Yuzhu
60
66
45
43
53
Chairperson of the Supervisory Committee
Independent Supervisor
Supervisor
Supervisor
Supervisor (Employee Representative)
10 September 2002
10 September 2002
9 September 2005
9 September 2005
9 September 2005
In March 2007, Ms. Zhang Xiuqin proposed to resign from the position of Supervisor and Chairperson of the
Supervisory Committee due to age while Mr. Li Jian proposed to resign from the position of Supervisor due to
a change in job responsibility. The Company has proposed to elect Mr. Xiao Jinxue and Ms. Wang Haiyun as
the Supervisors of the Company.
The abovementioned resignations and appointments will be effective upon approval by the 2006 Annual
General Meeting to be held on 29 May 2007.
SHARE CAPITAL
The share capital of the Company as at 31 December 2006 was RMB80,932,368,321, divided into 80,932,368,
321 shares of RMB1.00 each. As at 31 December 2006, the share capital of the Company comprised:
Shares
Domestic shares (total):
Domestic shares held by:
China Telecommunications Corporation
Guangdong Rising Assets Management Co., Ltd.
Zhejiang Financial Development Company
Fujian State-owned Assets Investment Holdings Co., Ltd.
Jiangsu Guoxin Investment Group Co., Ltd.
Total number of H shares (including ADSs)
Number of shares
as at 31 December 2006
Percentage of
the total number
of shares in issue as at
31 December 2006 (%)
67,054,958,321
57,377,053,317
5,614,082,653
2,137,473,626
969,317,182
957,031,543
13,877,410,000
82.85
70.89
6.94
2.64
1.20
1.18
17.15
Total
80,932,368,321
100.00
042 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
MATERIAL INTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING
SHARES OF THE COMPANY
As at 31 December 2006, 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
China Telecommunications
57,377,053,317
Corporation
Guangdong Rising Assets
Management Co., Ltd.
5,614,082,653
Domestic
shares
Domestic
shares
JPMorgan Chase & Co.
1,006,391,826
H shares
640,031,300
H shares
Commonwealth Bank
1,248,848,000
H shares
of Australia
Halbis Capital Management
716,540,000
H shares
(Hong Kong) Limited
Percentage of
the respective
type of number
shares (%)
Percentage
of the total
of shares
in issue (%)
Capacity
85.57
70.89
Beneficial owner
8.37
7.25
4.61
9.00
5.16
6.94
Beneficial owner
1.24
Beneficial owner;
investment manager;
custodian
0.79
Custodian — Licensed
Corporation/Approved
lending agent
1.55
Interest of a
controlled corporation
0.89
Investment manager
Save as stated above, as at 31 December 2006, 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 2006, none of the directors and
supervisors of the Company had any interests or
short positions in the shares, underlying shares of
equity derivatives or debentures of the Company or
its associated corporations (within the meaning in
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 Issuers.
As at 31 December 2006, 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 the shares or debentures.
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 Rules Governing The Listing of Securities on
The Stock Exchange of Hong Kong Limited (the
“Listing Rules”) and as agreed with The Stock
Exchange of Hong Kong Limited.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
043
Report of the Directors
DIRECTORS’ AND SUPERVISORS’
INTERESTS IN CONTRACTS
FIXED ASSETS
For the year ended 31 December 2006, none of the
directors or supervisors of the Company had any
material interest, whether directly or indirectly, in
any significant contracts entered into by the
Company, any of its holding companies or
subsidiaries or subsidiaries of the Company’s
holding company, apart from their service contracts.
EMOLUMENTS OF THE DIRECTORS
AND SUPERVISORS
Please refer to note 26 of the audited financial
statements for details of the emoluments of all
Directors and Supervisors of the Company in 2006.
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 144 to 145 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 2006.
BANK LOANS AND OTHER
BORROWINGS
Please refer to note 3 of the audited financial
statements for movements in the fixed assets of the
Group for the year ended 31 December 2006.
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 2006, calculated on the
above basis and before deducting the proposed final
dividends for 2006, amounted to approximately
RMB13,249 million.
In addition to the allocation to the statutory reserve
funds, the Board proposes 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 29 May 2007.
Please refer to note 19 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 2006.
DONATIONS
Please refer to note 13 of the audited financial
statements for details of bank loans and other
borrowings of the Company.
For the year ended 31 December 2006, the Group
made charitable and other donations to a total
amount of RMB23 million.
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 2006.
SUBSIDIARIES AND ASSOCIATED
COMPANIES
Please refer to note 5 and note 6 of the audited
financial statements for details of the Company’s
subsidiaries and the Group’s interests in associated
companies as at 31 December 2006.
044 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
CHANGES IN EQUITY
MAJOR CUSTOMERS AND SUPPLIERS
Please refer to the consolidated statement of
changes in equity contained in the audited financial
statements (page 89 of this annual report).
For the year ended 31 December 2006, sales to the
five largest customers of the Group represented an
amount no more than 30% of the operating revenues
of the Group.
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
For the year ended 31 December 2006, purchases
from the five largest suppliers of the Group
accounted for approximately 36.6% of the total
annual purchases of the Group.
For the year ended 31 December 2006, purchases
from the Group’s largest equipment supplier
accounted for approximately 12.7% of the total
annual purchases of the Group. The amount of the
Group’s annual purchases includes equipment
purchases, investments in infrastructure and
pipelines.
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.
To the knowledge of the Board, 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 for the year
ended 31 December 2006:
Transaction
Share of expenses for centralised services
1.
2. Net expenses for interconnection settlement
Provision of comprehensive services by
3.
China Telecommunications Corporation and
its subsidiaries (the “China Telecom Group”)
4. Mutual leasing of properties
5.
6.
Provision of IT services by China Telecom Group
Provision of equipment procurement services by
China Telecom Group
Provision of engineering services by China Telecom Group
Provision of community services by China Telecom Group
Provision of ancillary telecommunications services by
China Telecom Group
7.
8.
9.
1
2
Annual monetary
cap for continuing
connected transactions
(RMB million)
Group
(RMB million)
306
571
1,143
423
345
155
7,871
2,378
3,238
700
N/A1
1,4402
500
4902
470
8,327
3,410
3,9002
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 settlement agreements.
As stated in the circular by the Company on 8 September 2006, the monetary cap for the reporting year is the revised
amount.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
045
Report of the Directors
Centralised Services Agreement
Centralised services includes the provision of
management and operational services by the
Company to China Telecommunications Corporation
in relation to big corporate customers, its network
management centre and business support centre,
and also the provision of certain premises by the
China Telecommunications Corporation to the Group.
In addition, centralised services also includes the
common use of international telecommunications
facilities between both parties. The Centralised
Services Agreement was renewed on 30 August 2006
with expiration on 31 December 2007, and may be
automatically renewed for further periods of one
year upon expiration without limit in the number of
renewals, unless the Company provides a notice of
non-renewal in writing to the China
Telecommunications Corporation three months prior
to the end of the relevant term. The aggregate costs
incurred by the Company and China
Telecommunications Corporation for the provision of
management and operation services relating to big
corporate customers, as well as the business
support centre and the network management centre,
and by any of the parties in this agreement for the
provision of premises (including labour costs,
depreciation of equipment and premises, daily
expenses, costs relating to maintenance and
research) will be apportioned between the Company
and China Telecommunications Corporation on a pro
rata basis according to the revenues generated by
each party. The costs will be apportioned over a
period of one year. In relation to the common use of
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 originating from, the
Company and China Telecom Group, respectively.
Interconnection Settlement Agreement
Pursuant to the Interconnection Settlement
Agreement, the telephone operator terminating a
telephone call made to its local access network shall
be entitled to receive from the operator from which
the telephone call originated, a fee prescribed by the
MII, which is currently RMB0.06 per minute.
As stated in the public announcement by the
Company on 25 October 2006, the independent
shareholders of the Company resolved and approved
at the Extraordinary General Meeting the further
renewal of the Interconnection Settlement
Agreement on 30 August 2006 in accordance with its
provisions. The Agreement was renewed for another
two years and will expire on 31 December 2008 and
will be automatically renewed for a period of three
years upon expiration, unless the Company provides
notice of non-renewal in writing to the China
Telecommunications Corporation three months prior
to the end of the relevant term.
Comprehensive Services Framework
Agreement
The Comprehensive Services Framework Agreement
governs the terms and conditions of transactions
between the Company and China
Telecommunications Corporation at 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 the supply of
telecommunications equipment (such as optic fibre),
design, implementation and supervision of
telecommunications (network) projects, software
upgrade, system integration, manufacture of calling
cards and so on. Prices under such agreement shall
be determined in accordance with the government-
prescribed prices. In the absence of 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, that is, the prices at which
the same types of services are provided by
independent third party in the ordinary course of
business. If none of the above prices is applicable,
the prices shall be determined through negotiation
between the two parties based on reasonable costs
plus reasonable profit. In which “reasonable costs”
shall mean the costs determined by the two parties
after negotiations.
046 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
The Comprehensive Services Framework Agreement
was renewed on 30 August 2006 and will expire on 31
December 2007, and will be automatically renewed
for further periods of one year upon expiration
without limit in the number of renewals, unless the
Company provides notice of non-renewal in writing to
the China Telecommunications Corporation three
months prior to the expiration of the relevant term.
Listed Company — Parent Company
Agreement
As stated in the circular by the Company on 8
September 2006, for the purpose of organising the
structure of the Group’s connected transactions and
ease of internal management, the subsidiaries of the
Company, and China Telecommunications
Corporation and/or its associates agree to adjust the
major entities in the connected transactions
agreements. Pursuant to this, the Company and
China Telecommunications Corporation signed a
series of Listed Company — Parent Company
Agreement on 30 August 2006 as the framework
agreement for 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 and
Xinjiang Telecom Company Limited under the
Company (the “Twenty Provincial Telecom
Companies”), which governs the terms of continuing
connected transactions under the following six
agreements. Pursuant to the Listed Company —
Parent Company Agreement, the Company
represented the Group while the China
Telecommunications Corporation represented its
associates, and the parties signing the contracts will
be changed from individual subsidiaries of the
Company and of the China Telecommunications
Corporation to the Company and the China
Telecommunications Corporation. The terms and
conditions in the relevant connected transactions
agreements remain unchanged:
(1) Property Leasing Framework Agreements;
(2)
IT Services Framework Agreements;
(3) Equipment Procurement Services Framework
Agreements;
(4) Engineering Framework Agreements;
(5) Community Services Framework Agreements;
and
(6) Ancillary Telecommunications Services
Framework Agreements.
The followings are the Listed Company — Parent
Company Agreements:
Property Leasing Framework Agreement
Pursuant to the Property Leasing Framework
Agreement, 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. In
addition, the Twenty Provincial Telecom Companies
also lease certain properties to the Provincial
Subsisting Companies. The rent payable under the
relevant leases shall be determined based on the
market price with reference to the standards set
forth by local pricing authorities.
The Property Leasing Framework Agreement will
expire on 31 December 2007, and may be renewed
for further periods of one year upon expiration
without limit in the number of renewals, unless the
Company provides notice of non-renewal in writing to
the China Telecommunications Corporation three
months prior to the end of the the relevant term.
IT Services Framework Agreement
Pursuant to the IT Services Framework Agreement,
the Provincial Subsisting Companies may participate
in bids for the right to provide the Twenty Provincial
Telecom Companies with information technology
services, such as office automation, software testing
and network 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.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
047
Report of the Directors
The IT Services Framework Agreement may be
renewed for further periods of one year upon
expiration on 31 December 2007, unless the
Company provides notice of non-renewal in writing to
the China Telecommunications Corporation three
months prior to the expiry of the relevant term.
Equipment Procurement Services Framework
Agreement
Pursuant to the Equipment Procurement Services
Framework Agreement, 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 followings: (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.
The Equipment Procurement Services Framework
Agreement will expire on 31 December 2007, and
may be renewed for further periods of one year upon
expiration without limit in the number of renewals,
unless the Company provides notice of non-renewal
in writing to the China Telecommunications
Corporation three months prior to the end of the
relevant term.
Engineering Framework Agreement
The Engineering Framework Agreement sets out the
terms in respect of the supervision and management
of services relating to construction, design,
equipment installation and tests provided to the
Twenty Provincial Telecom Companies through bids
made by the Provincial Subsisting Companies, 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 the market rates as
reflected through the tender process. The charges
payable for the design or supervision of engineering
projects with a value over RMB500,000, or
construction of engineering projects with a value
over RMB2 million shall be determined by referring
to the tender price.
As stated in the public announcement by the
Company on 25 October 2006, the independent
shareholders of the Company resolved and approved
at the Extraordinary General Meeting that the
Engineering Framework Agreement will expire on 31
December 2008, and may be renewed for periods of
three years upon expiration without limit in the
number renewals, unless the Company provides
notice of non-renewal in writing to the China
Telecommunications Corporation three months prior
to the end of the relevant term.
Community Services Framework Agreement
Pursuant to the Community Services Framework
Agreement, the Provincial Subsisting Companies will
provide the Twenty Provincial Telecom Companies
with services relating to culture, education, property
management, vehicle service, health and medical
care, hotel and conference service, community and
sanitary service. The pricing terms for such services
are the same as those for comprehensive services.
The Community Services Framework Agreement will
expire on 31 December 2007, and may be renewed
for further periods of three years upon expiration
without limit in the number of renewals, unless
either party provides notice of non-renewal in writing
to the opposite party three months prior to the end
of the relevant term.
Ancillary Telecommunications Services Framework
Agreement
Pursuant to the Ancillary Telecommunications
Services Framework Agreement, the Provincial
Subsisting Companies agree to provide the Twenty
Provincial Telecom Companies with certain repair
and maintenance services, including repair of
telecommunications equipment, maintenance of 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 Ancillary Telecommunications Services
Framework Agreement will expire on 31 December
2007, and may be renewed for further periods of
three years upon expiration without limit in the
number of renewals, unless either party provides
notice of non-renewal in writing to the opposite party
three months prior to the end of the relevant term.
048 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
The independent non-executive directors of the
Company have confirmed that all continuing
connected transactions for the year ended 31
December 2006 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.
The international auditor of the Group have reviewed
the continuing connected transactions of the Group
and have confirmed to the Board that the
transactions:
1.
have received the approval of the Board;
2.
3.
have been entered into in accordance with the
pricing policies as stated in the relevant
agreements; and
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 its connected persons which are
subject to annual caps have not exceeded their
respective annual caps.
Strategic Agreement
As stated in the public announcement by the
Company on 25 October 2006, independent
shareholders of the Company resolved and approved
in the Extraordinary General Meeting, the signing of
a Strategic Agreement between the Company and
China Communications Services Corporation
Limited, a fellow subsidiary of which China
Telecommunications Corporation, our parent
company, is the holding company, on 30 August 2006
with an effective period between 1 January 2007 and
31 December 2009. Both parties may negotiate the
renewal of the Strategic Agreement upon the
expiration, and the renewal is subject to the
requirements of Chapter 14A of the Listing Rules
(including disclosure and independent shareholders’
approval requirements).
Pursuant to the Strategic Agreement, the business
areas of the strategic alliance between the two
parties governed by the terms and conditions in the
agreement include: design, implementation and
supervision of the communications engineering,
maintenance management service, contents
application service, sales channel service, usage of
telecommunications and other new businesses
arising from time to time which are appropriate for
the collaboration between the two parties. China
Communications Services Corporation Limited
pledges its support to the strategic transformation of
the Company from traditional basic
telecommunications operator to comprehensive
information service provider, its active support to the
Company’s business development, and its active use
of the Company’s products and services in its own
business.
Such services shall comply with the related
standards of China or the standards agreed by both
parties, and shall be on terms no less favourable
than those available to any third parties to which the
same or similar services are provided by either
party. Without breaching the requirements governed
by PRC laws, in respect of the same services, where
the terms and conditions of services provided by
either party of the Strategic Agreement are the same
as those provided by an independent third party, the
party under the Strategic Agreement shall have the
priority to be appointed as the service provider by the
other party.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
049
Report of the Directors
Other important terms of the Agreement are listed in
detail in the circular on 8 September 2006.
AUDITORS
COMPLIANCE WITH CODE ON
CORPORATE GOVERNANCE
PRACTICES
Please see the “Corporate Governance Report” set
out in page 54 of this 2006 annual report of the
Company for details of our compliance with the Code
on Corporate Governance Practices.
MATERIAL LEGAL PROCEEDINGS
As at 31 December 2006, the Company was not
involved in any material litigation or arbitration, and
as far as the Company is aware of, no material
litigation or claims were pending or threatened or
made against the Company.
KPMG and KPMG Huazhen were appointed as the
international and domestic auditors of the Company
for the year ended 31 December 2006. 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 2007 will be
proposed at the Annual General Meeting of the
Company to be held on 29 May 2007.
By Order of the Board
Wang Xiaochu
Chairman and Chief Executive Officer
Beijing, PRC
26 March 2007
050 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Report of the Supervisory Committee
Dear Shareholders,
The Supervisory Committee of China Telecom
Corporation Limited spared no effort in performing
its duties in accordance with the relevant laws and
regulations of the PRC and the Articles of
Association of the Company, and supervising
effectively whether the resolutions made by the
Board of Directors are in compliance with relevant
laws and in the best interests of the Company and its
shareholders, and safeguarding the interests of
shareholders and the long-term benefits of the
Company.
During the reporting period, the Supervisory
Committee held two meetings. At the second
meeting of the Second Session of the Supervisory
Committee held in March 2006, the Company’s
operating results and financial statements for 2005
were reviewed. In addition, the Second Session of the
Supervisory Committee reviewed and approved five
agenda items, including the financial statements,
profit distribution proposal, the independent
auditors’ report for the year ended 2005, the report
of the Supervisory Committee for the year ended
2005, and the work plan of the Supervisory
Committee for the year 2006. At the third meeting of
the Second Session of the Supervisory Committee
held in August of the same year, the interim financial
statements and the independent auditors’ review
report of 2006 were reviewed. During the reporting
period, members of the supervisory committee
supervised the major decision-making processes of
the Company and the performance of duties carried
out by members of the Board of Directors and the
senior management through their attendance of the
Annual General Meeting of the Company for 2005
and the meetings of the Board of Directors.
The Supervisory Committee is of the view that during
the reporting period, the traditional voice services of
the Company faced acute challenges posed by
intensifying market competition. The Company
proactively promoted strategic transformation and
maintained the fundamentals of its traditional
business. It actively implemented precise
management, optimised the resources allocation,
enhanced internal reform and innovated its
development model so that the Company could enjoy
better economic benefits and growth quality,
fulfilling its commitments to its investors.
Meanwhile, the Company has attached great
importance to its corporate governance and business
integrity. In accordance with relevant regulations,
including the Sarbane-Oxley Act Section 404, the
Company strengthened the improvement and
execution of its internal control, allowing the
enhancement of both the internal control
environment and management standards. The
Company thus maintained healthy and stable
development.
The Supervisory Committee believes that during
2006, all members of the Board of Directors and
members of senior management have complied with
relevant laws and regulations, diligently carried out
the resolutions approved in shareholders’ general
meetings, persisted in managing the operation of the
Company in accordance with the law, and prudent in
their decision-making. The Board’s and the senior
management contributed greatly towards achieving
excellent financial results for the Company.
Upon the review of the unqualified financial
statements of the Company for the year ended 2006
and other relevant information which were prepared
in accordance with PRC accounting rules and
regulations and International Financial Reporting
Standards, audited by domestic and international
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 in line with the principle of consistency and
that they truly and fairly reflect the Company’s
financial position and results of operations.
In 2007, guided by the Articles of Association of the
Company and relevant regulatory requirements, the
Supervisory Committee will do its utmost in all
aspects to preserve the interests of the Company and
its shareholders, to supervise the deliveries of
commitment to shareholders of the Company and to
strive to excel in the discharge of its duties.
By Order of the Supervisory Committee
Zhang Xiuqin
Chairperson of the Supervisory Committee
Beijing, PRC
26 March 2007
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
051
Corporate Governance Report
Our
Systems
052 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Our People – Li Nao
1
At the 2006 Interactive Investor Relations
Award, the Company’s website
(www.chinatelecom-h.com) was named
“Best Conglomerates IR Site” and
“Best Information Services IR Site”
We are dedicated to improving our corporate governance and
transparency to enhance our operating efficiency and investor
confidence. Our efforts on perfecting our internal controls and
systems in accordance with international best practice and US
Sarbanes-Oxley Act requirements have not only further
strengthened our existing operations but also better prepared
us for our full services convergence offering in future. Our
dedication to improved transparency has greatly secured our
stakeholders’ confidence and support for our future
development.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
053
Corporate Governance Report
Act of 2002 and the regulatory requirements of the
U.S. Securities and Exchange Commission and the
New York Stock Exchange, to confirm its compliance
with related financial reporting, information
disclosure and corporate internal controls
requirements.
In 2006, the Company’s efforts and achievements in
corporate governance received recognition from
authoritative institutions. The Company was
accredited with “CAPITAL Outstanding China
Enterprise Awards – Telecommunications” by
CAPITAL magazine. At the 2006 Interactive Investor
Relations Awards, the Company’s website
(www.chinatelecom-h.com) was named “Best
Conglomerates IR Site” and “Best Information
Services IR Site”. The Company won the silver award
in the category of “Interior Design:
Telecommunications (Other Countries)” in the “2006
International ARC Awards”. China Telecom
Corporation Limited was awarded with the “Best
Commitment to Strong Dividend Payment 2006 –
China” by FinanceAsia for the year 2006.
2. OVERALL STRUCTURE OF
CORPORATE GOVERNANCE
A double-tier structure has been adopted as our
overall structure of corporate governance: the Board
and the Supervisory Committee are established
under the Shareholders’ Meeting while the Audit
Committee, Remuneration Committee and
Nomination Committee are set up under the Board.
The Board is authorised by the Articles of
The Company has been attaching great importance
to corporate governance, inheriting an excellent and
conservative management style, and insisting on
practicing corporate governance with efficient
management and operations of top industry
standard. In 2006, we continued to make efforts in
establishing and improving the Company’s internal
control mechanism, strengthening information
disclosure and enhancing the Company’s
transparency, developing corporate governance
practices and protecting shareholders’ interests to
the maximum degree.
Save for the roles of Chairman and Chief Executive
Officer of the Company being performed by the same
individual, for the year ended 2006, the Company has
been in compliance with all the code provisions as
set out in Appendix 14 “Code on Corporate
Governance Practices” of the Listing Rules.
In the Company’s opinion, through supervision of the
Board and independent non-executive directors, and
with effective control of the Company’s internal
operations, the same individual performing the roles
of Chairman and Chief Executive Officer can achieve
the goal of improving the Company’s efficiency in
decision-making and executions, and effectively
capture business opportunities. Many international
leading corporations also have a similar
arrangement.
1. OVERVIEW OF CORPORATE
GOVERNANCE
As a company incorporated in China, the Company
adopts the 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, the
current Articles of Association is in compliance with
the Listing Rules and the regulatory requirements
for listed companies in Hong Kong and the United
States and these rules serve as guidance for the
Company to improve its foundation of corporate
governance. The Company has regularly published
responsibility statements relating to its internal
control in accordance with the US Sarbanes-Oxley
China Telecom’s 2005 Annual Report won silver
award in the “International ARC Awards”
054 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
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. Voting results are
published in newspapers and on the websites of the
Company and The Stock Exchange of Hong Kong
Limited. The Company attaches great importance to
the general meetings and the communication
between directors and shareholders. The directors
provide detailed and complete answers to questions
raised by shareholders in the general meetings.
China Telecom’s website honoured with “Best IR
Site” of two industry categories in “Interactive
Investor Relations Award”
In 2006, the Company convened two general
meetings: the Annual General Meeting (“AGM”) for
2005 and an Extraordinary General Meeting (“EGM”).
The AGM for 2005 held on 23 May 2006 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 and
the declaration of final dividends, as well as the
appointment of international auditors and domestic
auditors, and the issue of short term commercial
papers.
At the EGM held on 25 October 2006, a proposal
concerning the Company’s continuing connected
transactions was approved, and the Strategic
Agreement signed between the Company and China
Communications Services Corporation Limited was
also approved.
Annual General Meeting was held in Hong Kong on 23 May 2006
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
055
China Telecom was accredited with “The 1st
Capital Outstanding China Enterprise Awards —
Telecommunications”
Association to make major decisions with regard to
the Company’s operations and to oversee the daily
operations by the senior management. The
Supervisory Committee is mainly responsible for the
supervision of the performance of duties by the
Board and senior management. Each of the Board of
Directors and the Supervisory Committee is
independently accountable to the Shareholders’
Meeting.
Shareholders’ Meeting
At each of the general meetings, a separate
shareholders’ resolution is proposed in respect to
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
Corporate Governance Report
Board of Directors
The second session of the Board re-selected on 9
September 2005 comprised 15 directors with a
period of office for three years. In May 2006, Mr. Wei
Leping resigned from the position of Executive
Director of the China Telecom Corporation Limited
due to age. The current Board of Directors
comprises 14 directors with eight executive
directors, one non-executive director, and five
independent non-executive directors. The number of
independent non-executive directors constitute more
than one-third of the Board members. Mr. Tse Hau
Yin, Aloysius, who is the Chairman of the Audit
Committee, is an internationally renowned financial
expert with expertise in accounting and financial
management. The Audit Committee, Remuneration
Committee and Nomination Committee under the
Board, all consisting of independent non-executive
directors, ensure that the Board will be able to make
independent judgments effectively.
The Company strictly complies with the Code on
Corporate Governance Practices of the Listing Rules
and rigorously regulates the operating procedures of
the Board and the committees under it, and ensures
that the proceedings of Board meetings are
standardised in terms of organisation, regulations
and personnel. The Board is responsible for effective
supervision of the preparation of accounts for each
financial period, so that such accounts truly and
fairly reflect the financial position, operating results
and cash flows of the Company for each period. In
preparing the accounts for the year ended 31
December 2006, the directors selected appropriate
accounting policies and made prudent, fair and
reasonable judgments and estimates and prepared
the accounts on an going concern basis.
Attendance rate of individual directors (including attendance with written proxies) at Board
meetings in 2006
Number of Directors
Executive Directors
Meetings for
The Second Session of the Board
Attendance Rate
14
Leng Rongquan
1. Wang Xiaochu (Chairman)
2.
3. Wu Andi
4.
Zhang Jiping
5. Huang Wenlin
6.
7.
8.
Li Ping
Yang Jie
Sun Kangmin
4/4
4/4
4/4
4/4
4/4
4/4
4/4
4/4
100%
100%
100%
100%
100%
100%
100%
100%
Independent Non-Executive Directors
Meetings for
The Second Session of the Board
Attendance Rate
1.
2.
3.
4.
5.
Zhang Youcai
Lo Hong Sui, Vincent
Shi Wanpeng
Xu Erming
Tse Hau Yin, Aloysius
Non-Executive Directors
1.
Li Jinming
4/4
4/4
4/4
4/4
4/4
100%
100%
100%
100%
100%
Meetings for
The Second Session of the Board
Attendance Rate
4/4
100%
056 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
The Board plays a significant role in matters such as
operations, budgeting, decision-making, supervision,
internal controls and the corporate governance of
the Company. In 2006, the Board (including the
committees under it) convened 10 meetings. At the
meetings, the Board reviewed matters including the
Company’s annual and interim financial statements,
proposals for annual profit distribution proposal,
annual and interim reports, proposals for the
appointment of auditors, proposals for granting
stock appreciation rights, the issue of the short-term
commercial paper, adjustment to connected
transactions, improvement plans for internal
controls, annual budget, fees for independent
auditors, and the code on board meeting practices.
The Company has always placed emphasis on the
continuous training of directors. In December 2006,
the Company invited relevant experts to provide
training on corporate risk management to all
directors.
Based on the written confirmation from the
directors, all of the Company’s directors have strictly
complied with Appendix 10 Model Code for Securities
Transactions by Directors of Listed Issuers of the
Listing Rules regarding the standard requirements
for directors in conducting securities transactions.
The Company has received annual independence
confirmations from each of the independent non-
executive directors, and considers them to be
independent.
Audit Committee
Pursuant to Listing Rule 3.21, which provides that
the majority of the audit committee members must
be independent non-executive directors of the issuer,
the Audit Committee comprises four independent
non-executive directors. The Charter for the Audit
Committee 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 control 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
independent auditors. The Audit Committee also has
the authority to set up a reporting system to receive
and handle cases of complaints or complaints made
on an anonymous basis regarding the Company’s
accounting and internal controls. The Audit
Committee will regularly report on its work to the
Board.
In 2006, the Audit Committee convened four
meetings, where it mainly reviewed important
matters relating to the Company’s annual and
interim financial statements, connected transactions
and execution reports, the appointment and fees of
independent auditors, the assessment report of the
Company’s internal control, reports on the internal
audit, and the Strategic Alliance Agreement signed
with the China Communications Services Corporation
Limited. Apart from the above meetings, the Audit
Committee also communicated with the independent
auditors in the absence of Management.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
057
Corporate Governance Report
Attendance rate of individual members of the Audit Committee in 2006 (including attendance
with written proxies)
Second Session of the Audit Committee
Number of Committee members
Percentage of Independent Non-executive directors of the Committee
4
100%
Member of the Committee
Number of Meetings
Attendance Rate
Tse Hau Yin, Aloysius (Chairperson of the Committee)
Zhang Youcai
Shi Wanpeng
Xu Erming
Remuneration Committee
Pursuant to provision B.11 of the Code on Corporate
Governance Practices which states that a majority of
the members of the Remuneration Committee of
listed issuer should be independent non-executive
directors, the Remuneration Committee of the
Company was formed by four independent non-
executive directors. The Charter for the
Remuneration Committee clearly defines the status,
qualifications, work procedures, duties and
responsibilities, funding and remuneration etc. of the
Remuneration Committee. The Remuneration
Committee assists the Company’s Board to formulate
overall remuneration policy, structure the Company’s
directors and senior management personnel, and to
establish related remuneration procedures that are
standardised and transparent. The Remuneration
Committee’s principal duties include supervision on
the compliance of the Company’s remuneration
4/4
4/4
4/4
4/4
100%
100%
100%
100%
system with legal requirements, presenting the
evaluation report on the Company’s remuneration
system to the Board, as well as giving
recommendations to the Board in respect of the
overall remuneration policy and structure for the
Company’s directors and senior management
personnel. Its responsibilities comply with the
requirements of the Code on Corporate Governance
Practices. The Remuneration Committee regularly
reports on its work to the Board.
In 2006, the Second Session of the Remuneration
Committee convened one meeting, where it approved
the Proposal Relating to Second Phase of Granting
the Stock Appreciation Rights, and recommended the
Board to approve such a proposal. In considering the
proposal, each member declared there was no
conflict between the proposal under consideration
and his personal interest.
Attendance rate of individual members of the Remuneration Committee in 2006 (including
attendance with written proxies):
Second Session of the Remuneration Committee
Number of Committee members
Percentage of Independent Non-executive Directors of the Committee
4
100%
Member of the Committee
Number of Meetings
Attendance Rate
Lo Hong Sui, Vincent (Chairperson of the Committee)
Shi Wanpeng
Xu Erming
Tse Hau Yin, Aloysius
1/1
1/1
1/1
1/1
100%
100%
100%
100%
058 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Supervisory Committee
The Company established the Supervisory Committee
in accordance with the PRC Company Law. At
present, the Supervisory Committee comprises five
supervisors, of which there is an external
independent supervisor and an employee
representative supervisor. In March 2007, Ms. Zhang
Xiuqin had submitted her resignation from the
position of Supervisor and Chairperson of the
Supervisory Committee due to age and Mr. Li Jian
had submitted his resignation from the position of
Supervisor due to a change of job responsibilities.
The Company’s Supervisory Committee has proposed
to elect Mr. Xiao Jinxue and Ms. Wang Haiyun as the
Supervisors of the Company. The abovementioned
resignations and appointments will be effective upon
the review and approval of the 2006 Annual General
Meeting to be held on 29 May 2007.
The principal duties of the Supervisory
Committee consist of supervising, in accordance
with the law, the Company’s financials and
performance of the directors, managers and
other senior management of the Company so as
to prevent them from abusing their powers. The
Supervisory Committee is a standing supervisory
organisation of the Company, which is
accountable and reports to all shareholders. The
Supervisory Committee usually holds meetings
once or twice a year.
Nomination Committee
Pursuant to the recommended best practices of the
Code on Corporate Governance Practices, the
Company’s Nomination Committee was formed by
four independent non-executive directors. The
Charter for the Nomination Committee clearly
defines the status, qualifications, work procedures,
duties and responsibilities, funding and
remuneration etc. of the Nomination Committee, and
it specially requires that the Nomination Committee
members have no significant connection to the
Company, and comply with the requirements related
to independence. The Nomination Committee assists
the Board to formulate standardised, prudent and
transparent procedures and succession plans for the
appointment of directors, and further improve the
composition of the Board. The principal duties of the
Nomination Committee include: regularly reviewing
the structure, number of members and composition
of the Board; identifying candidates and advising the
Board with the appropriate qualifications for the
position of Directors; evaluating the independence of
independent non-executive directors; advising the
Board on matters regarding the appointment or re-
appointment of directors and succession plans for
the directors (in particular the Chairman and Chief
Executive Officer). The Nomination Committee is
accountable to the Board and regularly reports on its
work. The Nomination Committee has not convened
in 2006 because there were no significant matters
such as the addition and replacement of directors.
Independent Director Committee
Pursuant to the Listing Rules, the Company’s Board
established an Independent Director Committee on
30 August 2006 which comprised five independent
directors reviewing: the Engineering Framework
Agreement of China Telecom and the transactions
under it, the Interconnection Settlement Agreement
and the transactions under it, and the Strategic
Alliance Framework Agreement to be signed with
China Communications Services Corporation
Limited. The committee also submits
recommendations on these matters to the
independent shareholders.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
059
Corporate Governance Report
Attendance rate of individual members of the Supervisory Committee in 2006
The Second Session of Supervisory Committee
Number of supervisors
Number of meetings in 2006
5
2
Supervisors
Number of Meetings
Attendance Rate
Zhang Xiuqin (Chairperson)
Ma Yuzhu (Employee Representative)
Zhu Lihao (Independent Supervisor)
Li Jian
Xu Cailiao
2/2
2/2
2/2
2/2
2/2
100%
100%
100%
100%
100%
Independent Auditors
The international and domestic independent auditors of the Company are KPMG and KPMG Huazhen,
respectively. In order to maintain their independence, the non-auditing services provided by the auditors have
not contravened the requirements of the US Sarbanes-Oxley Act of 2002 and have obtained pre-approval from
the Audit Committee.
Breakdown of the remuneration received by the independent auditors for audit services provided to the
Company for the year ended 31 December 2006 is as follows:
Subject of the Service
Audit services
Non-audit services (Internal Control Advisory Service)
Fee
(RMB million)
61.00
10.85
The Audit Committee approved the re-
appointment of KPMG and KPMG Huazhen as the
international and domestic independent auditors
of the Company for the year ending 31 December
2007. The resolution has been agreed by the
Board of Directors, and will be submitted to the
shareholders general meeting for approval.
060 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
3. ESTABLISHMENT AND
IMPLEMENTATION OF ANCILLARY
MECHANISM
Clear definition of the respective
responsibilities of the Board of Directors and
the Management
The Articles of Association of the Company rule that
the Board is accountable to the shareholders
meetings, and its duties include the execution of
resolutions, formulation of major decisions for
operations, financial proposals and policies, the
Company’s management system, and the
appointments of managers and other personnel of
the Company. The Articles of Association clearly
defines the respective terms of reference of the
Board and the Management. The Management is
responsible for the operation and management of the
Company, the organisation and implementation of
the resolutions of the Board, the annual operation
plans and investment proposals of the Company,
determining the establishment of the Company’s
internal administrative institutions and sub-
institutions, and performs such other duties as
authorised by the Articles of Association and the
Board. In order to maintain the highly efficient
operation, flexibility and swiftness of operational
decision-making, the Board, 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 in exercising its powers.
Strengthening of the supervisory function of
the Audit Committee
The Audit Committee pays close attention to the
Company’s preparation in relation to the internal
control stated in the Sarbanes-Oxley Act Section 404
and receives regular reports on the work of the
internal audit and the execution of connected
transactions. In 2006, the audit department of the
Company submitted four reports to the Audit
Committee regarding the annual plan for the
Company’s internal audit, the status of each task in
the internal audit in particular the internal control
assessment, significant findings from the audit,
recommendations for work improvement, and other
matters with which the Audit Committee was
concerned. Meanwhile, the Audit Committee has
discussed with the independent auditors for the
results of audit work and internal control. The above
measures ensured the Audit Committee immediately
understood the Company’s related situations and
could better perform its supervisory duties. The
reports also made practical and professional
recommendations for the improvement of the
Company’s situation, and promoted the continuous
improvement and perfection of the internal audit
function.
4.
INTERNAL CONTROL
Establishment and implementation of the
internal control system
The Board is aware of its responsibility to ensure a
solid, complete and effective internal control system
of the Company in order to protect shareholder
investment and the Company’s assets. The Board
also understands its responsibility to review the
effectiveness of this system. The Company’s
Management is responsible for the establishment
and implementation of the internal control system.
The internal control system is built on a clear
organisational structure, management duties,
delegation and accountability, definite targets and
strategies, policies and procedures, overall risk
assessment and management, a sound management
accounting system, and continued analysis and
supervision of operational performance. It covers all
businesses and transactions of the Company. To
make the internal control system more effective, the
Company has formulated a “Code of Conduct for the
Senior Management of China Telecom Corporation
Limited” and a “Code of Conduct for the Employees
of China Telecom Corporation Limited”. Meanwhile,
the Company has established and improved its
internal declaration system, which encourages
anonymous reporting of situations where employees,
especially directors and senior management
personnel, breach the rules.
Annually, the departmental managers and other
responsible personnel of each subsidiary assist the
Management in formulating and submitting to the
Board for approval the annual operation plan and
budget. At the same time, in accordance with the
Company’s targets and strategies, they also continue
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
061
Corporate Governance Report
to supervise and assess the risks of business
procedures at both a management level and an
operational level; and also formulate, in a timely
manner, the corresponding measures for any
significant changes. Each unit and department of the
Company has the responsibility to organise the
design of its operational process, the formulation
and implementation of its internal controls and to
provide guidance to subordinate units in respect of
the implementation of internal control and self
assessment in its professional areas.
The internal audit department is responsible for
organising the assessment of internal control. In
2006, the Company’s internal audit department
initiated and organised the evaluation of internal
control in all areas of the Company. It reports the
related situation, on a regular and on an ad-hoc
basis, to the Audit Committee in a timely manner,
and executed the opinions and recommendations
provided by the Audit Committee. The internal audit
department places much emphasis on risk control
and coordinates with the independent auditors to
formulate and execute various audit plans in respect
of different control areas.
The Company has been continuously improving its
internal control system. In order to meet the
regulatory requirements of its places of listing (the
U.S. and Hong Kong), and strengthen its internal
controls while guarding against operational risks,
the Company initiated an improvement project on
“Internal Control System over Financial Reporting” in
August 2003. Over more than three years, the
Company has formulated the Internal Control
Manual and its Limits of Authority Lists, the
Provisional Administrative Measures of Internal
Control and the Provisional Measures for the
Evaluation of Internal Control of China Telecom
Corporation Limited, in accordance with the
requirements of the U.S. securities regulatory
authorities and the COSO Internal Control
Framework to ensure that its financial statements
are true and reliable and will meet the needs of
internal governance as well as the requirements of
regulatory bodies of the capital market. The
provincial companies formulated the Implementing
Rules in order to meet the same requirements.
In accordance with requirements of the Listing
Rules, in February 2005, the Company engaged an
internationally recognised accountant who is a highly
experienced professional in the auditing and
financial control of listed companies to act as the
Assistant Chief Financial Officer and Company
Secretary of the Company. As a qualified accountant
of the Company, he also helped improve financial
reporting procedures and internal control
mechanisms.
To ensure the truthfulness, accuracy, completeness
and timeliness of the Company’s information
disclosure, the Company has formulated “Rules for
the Information Disclosure Management of China
Telecom Corporation Limited (Trial)” in order to
improve the management of the Company’s
information disclosure. It primarily focuses on: the
disclosure of important information such as share
price sensitive information and annual and interim
reports; standardising the Company’s internal
collection, organisation, summarisation and
reporting system regarding the Company’s important
information; formulating procedures for regular and
irregular external disclosure of documents; and
defining the responsibilities and behavior standards
of related internal departments, branches, and
subsidiaries of the Company in respect of
information disclosure.
In 2006, the Company, with the authorisation by the
Board, and through integrating the development of
business and management, formulated the
Provisional Administrative Measures of the
Responsibility for Internal Control. Through
strengthening management and clarifying work
duties, the Company was able to effectively
implement internal control responsibilities and
promote the formation of close loop management.
Internal management of the Company was made
more standardised and scientific, and more complete
and effective internal control systems were
established. Employees’ understanding of internal
control and responsibilities were reinforced. This
allowed the Company to gradually build a team of
internal control professionals in China Telecom, and
thus establish a corporate image for credible
operation.
062 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
In 2006, the Company further strengthened its IT
internal control mechanism. As a result, efficiency
and effectiveness of internal control were enhanced
through the support of IT infrastructure. Additionally,
risk management was also strengthened and
corporate informationisation was promoted through
the improvement of IT internal control mechanisms.
Implementation of IT internal control further
improved and enhanced the security of the
Company’s information system to ensure that the
integrity, timeliness, reliability and confidentiality of
data and information was maintained.
Annual Evaluation
The Company has adopted the COSO Internal Control
Framework as the standard for its internal control
and self-evaluation. The Company insists on risk
guidance principles, and on the basis of overall
evaluation, it identified key control areas and points
for major evaluation through risk assessment.
Internal control and self-evaluation adopts a top-
down approach which reinforces evaluation in
respect of control points at the corporate level and
control points corresponding to major accounting
items. In 2006, the Company improved the
organisation and management of its evaluation,
evaluation procedures and documentation, and
reinforced control evaluation at the corporate level,
and made the evaluation mechanism more mature
and adaptable. It organised full-coverage internal
control evaluation, focusing on inspection of the key
controls and major areas, to prevent occurrence of
significant internal control deficiency, whilst
promoting the improvement of internal control.
The Board, through the Audit Committee, reviewed
the internal control system of the Company and its
subsidiaries for the financial year ended 31
December 2006, which covered controls over
financial reporting, operations and compliance, as
well as risk management functions. The Board is of
the view that the Company’s internal control system
is effective.
INVESTOR RELATIONSHIP AND
5.
TRANSPARENT INFORMATION
DISCLOSURE MECHANISM
The Company’s Investor Relations Department is
responsible for maintaining proactive
communications with investors and other capital
market participants and providing them, in a timely
manner, with the necessary information and services
so as to allow them to fully understand the
operations and development of the Company.
In 2006, the Company started making quarterly
disclosures of EBITDA and net profit data, and
monthly announcements on the number of local
telephone services subscribers. The Company has
further improved its communication with capital
markets and enhanced its transparency with respect
to information disclosure.
2006 Interim Results Announcement
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
063
Corporate Governance Report
China Telecom organized the 2006 Reverse Roadshow for analysts in
Shanghai
China Telecom participated the Money Show in the US
The Company maintains close contact with investors
and analysts daily. In 2006, the Company participated
in many investors conferences hosted by major
international investment banks in order to maintain
active communication with institutional investors.
The Company also participated in the “Money Show”
in the U.S. in order to improve its proactive
communication with U.S. retail investors. These
interactions further enhanced the image and
transparency of the Company within the capital
market.
The Company’s investor relations website not only
functions as the primary channel to distribute news
and company information to investors and capital
markets, but is also critical to the valuation of the
listed company and its compliance with rules on
information disclosure. Recently, the Company’s
website has been under continuous reform and
innovation. In accordance with the requirements of
capital markets and international best practices, the
Company has further improved the functions, design,
investor interactivity and disclosure of information on
its website in order to facilitate interactive
communication with its investors and shareholders.
In 2006, the Company organised reverse roadshows
and introduced to major analysts the business
performances and execution at strategic
transformation of several provincial subsidiaries
located in the eastern, central and western provinces
in China, strengthening investors’ awareness and
confidence in the Company’s transformation
strategy.
064 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
6. SIGNIFICANT DIFFERENCES
BETWEEN THE CORPORATE
GOVERNANCE PRACTICES FOLLOWED
BY THE COMPANY AND THOSE
FOLLOWED BY NYSE-LISTED U.S.
COMPANIES
The Company was established in the PRC and is
currently 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
differences between the corporate governance
practices followed by the Company and the listing
standards followed by NYSE-listed U.S. companies.
Pursuant to the requirements of the NYSE Listed
Company Manual, the Board of Directors of all
NYSE-listed U.S. companies must be made up by a
majority of independent directors. Under currently
applicable PRC and Hong Kong laws and regulations,
the Board of the Company is not required to be
formed with a majority of independent directors. As a
listed company on the Stock Exchange, the Company
needs to comply with the Listing Rules. These rules
require that at least one third of the Board of
Directors of a listed company be independent
directors. The Board of the Company comprises 14
directors, of which five are independent directors,
making the number of independent directors exceed
one third of the total number of directors on the
Board, in compliance with the number set out as a
recommended best practice in the Code on
Corporate Governance Practice of the Listing Rules.
These independent directors also satisfy the
requirements on “independence” under the Listing
Rules, however, the related standard is different
from the requirements in Section 303A.02 of the
Listed Company Manual of NYSE.
Chairman Wang Xiaochu was invited to host the opening bell of New
York Stock Exchange
Pursuant to the requirements of the Listed Company
Manual of NYSE, companies shall formulate separate
corporate governance rules. Under 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 has
implemented the Code on Corporate Governance
Practices of the Stock Exchange for the year ended
31 December 2006.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
065
243,072
Human Resources Development
A total of 243,072 employees fully dedicated to
serving our 223 million fixed-line subscribers
and 28.32 million broadband subscribers
We have been heavily investing in our people as
their skills and dedications are essential to providing
delightful and efficient services to our customers and
hence to our success. We provide our talents with good
training and opportunities to advance their career, realize
their earnings potential and attain job achievement. Our
talents have been empowered to tackle challenges from
increasing and diverse demand from our customers, which is
essential to our success on full services convergence offering.
066 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
O u r
P eople
Our People – Sun Ying
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
067
Human Resources Development
SUMMARY
The Company has always been attaching great
importance to human resources development, and
considers its employees as the Company’s most
important asset and an essential foundation for the
Company’s long-term sustainable development.
Being a long-established telecommunications
services company, the Company has already built up
rich human resources over the years. Based on this
and its progressive transformation, the Company has
proactively innovated and vigorously advanced the
precise management of human resources and
optimised the Company’s human resources
structure. Pursuant to the corporate culture which
values the employees as the foundation of the
enterprise, the Company shows more care for its
employees and pays much attention to their personal
development. Through human resources
management and cultivation of employees’ abilities,
BASIC EMPLOYEES DISTRIBUTION
the Company has strengthened the enthusiasm,
initiative and creativity of its employees. At the same
time, the Company made great efforts to build up a
troupe of specialised, professional and high-quality
workforce which is well managed and good at
implementation. All these measures facilitate the
growth of both the value of the Company and its
employees.
In 2006, the Company intensified the reforms of its
human resources system. By enforcing the job
segmentation policy and sourcing for experienced
and leading talents, the Company developed and
promoted reforms relating to the human resources,
labor and distribution systems in its emerging
businesses. Leveraging market-oriented and
innovative management, the Company facilitated its
business development and strategic transformation.
At the end of 2006, the Company had a total of 243,072 employees. The employees’ distribution was as follows:
Management, Finance and Administration
Sales and Marketing
Operation and Maintenance
Research and Development
Total
No. of employees
Percentage
38,899
113,342
89,728
1,103
243,072
16.0%
46.6%
36.9%
0.5%
100%
In addition, the Company had another 95,544 staff
seconded by third parties.
In order to retain quality employees, the Company
has adopted several effective measures. Firstly, it
improved its salary incentive system by offering a
merit-based remuneration scheme which rewards
excellent employees for their outstanding
performance and contribution. Secondly, the
Company has also been constantly improving its
promotion system, implementing an open and
competitive recruitment policy within the Company
and providing a conducive environment for
outstanding talents to stand out. Thirdly, the
Company established a corporate annuity system
which is open to all employees, with privileges given
to employees holding key positions. The
implementation of the corporate annuity system
encourages employees to be more proactive, and
which, by taking into account the contributions by the
employees, works to retain talents. Fourthly, the
Company implemented a Stock Appreciation Rights
scheme for its senior management. This scheme
closely links increases in the corporate value with
appraisals of the performance and effectiveness of
its senior management, hence preventing them from
068 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Employees were participating in the professional knowledge training
running the business in a near-sighted manner. The
necessary intertwining of the value of the Company
and its shareholders with the interests of senior
management encourages senior management to
care more for the long-term development and
interests of the Company and builds a sense of duty
among them to create value for the shareholders.
Finally, the Company has continued to improve its
management system for outstanding talents. It
actively developed a selection programme for
identifying outstanding employees in order to build
core teams. It has also provided these core teams
with trainings tailored to their needs so as to
enhance their overall working capability.
ENRICHING HUMAN ASSETS,
ENHANCING COMPETITIVENESS OF
HUMAN RESOURCES
1. Strengthening of senior management
team development, elevation of corporate
leadership
The Company places much emphasis on the
training of its directors and senior management.
In 2006, the Company arranged for the directors
and senior management training on corporate
risk management by relevant experts so that
they have more understanding of the latest
developments in this field. Since 2006, the
Company has been vigorously strengthening the
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
069
Human Resources Development
development of its senior management team, in
order to enhance their managerial skills that
are crucial for strategic transformation. Firstly,
the Company has strengthened the performance
assessment of its senior management, kept
track of the performance of their teams and
operations in a timely manner, and
strengthened its supervision of all levels of
management teams. Secondly, the Company has
organised leadership development programmes
for its senior management. These programmes
have shaped the preliminary framework for
leadership development and management while
accommodating the needs of the Company.
Additionally, the Company pays close attention
to cultivate future leaders at the provincial
subsidiaries and has preliminarily built a
successor team with excellent ability and
morality, appropriate age and reasonable
knowledge structure. This team will provide the
key management talents for the success of the
Company’s strategic transformation and future
development.
Improve training on technology and
operation, enhance employees
competence
The Company has established a comprehensive
staff training framework which combines both
in-house and third-party trainings, through the
use of both in-class and online study. Over the
past years, the Company has developed a large-
scale and high quality internal training team
which has been playing an important role in
staff training. In addition, the Company also
made the best use of the China Telecom E-
University, providing free and convenient self-
training facilities for its employees and offering
better support to the technology and operational
needs of its employees holding different
positions.
In 2006, in addition to regular trainings, the
Company held a number of sales and marketing
skills trainings for various important
transformation business projects like “Best
Tone”. The Company also organised a number of
training sessions on the latest 3G technology.
2.
3. Reforming the employment system,
optimising human resources allocation
Since 2006, the Company has reinforced the
reform of its human resources system. Through
the implementation of its job segmentation
policy, the Company actively attracted
experienced talents and established an
employee redeployment system so as to
optimises its employee structure and meet the
demand for different types of talents in the
course of the Company’s strategic
transformation. On one hand, the Company set
up a multi-channel system for recruiting talents
which greatly increased the employment of
various types of essential and experienced
talents who were crucial for the Company’s
strategic transformation. On the other, by
implementing measures such as job
segmentation, the Company standardised its
management of employees’ contracts, reinforced
its employee appraisal and other systems, built
and optimised an employee redeployment
system and increased the vitality of its human
resources. In 2006, the Company achieved
negative growth in the total number of staff,
resulting in a further optimisation of its
employee structure and a more reasonable
allocation of human resources.
BUILD A HARMONIOUS RELATIONSHIP
WITH EMPLOYEES
All management personnel at various levels of the
Company pay close attention to communicating with
junior-level employees. Through measures such as
conferences with employee representatives,
employee communication and consultation systems,
visits to the grass roots operation units and direct
discussions with employees, the management
obtained views and suggestions from employees.
Meanwhile, they have sought to promote and explain
to employees the important policies and measures
regarding the Company’s strategic transformation,
reform and development. They have also studied and
addressed problems raised by employees. In respect
070 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Labour unions insist on promoting corporate
democratic management. They proactively enhance
the corporate democratic management system with
employee representative conferences as the basic
framework, and have basically established a
provincial employee representative conference
system in the Company. Meanwhile, in accordance
with the demand for establishing “a new model of
corporate – employee relationship which is
standardised, fair and reasonable, mutually
beneficial, harmonious and stable”, the Company has
reinforced the coordination of labour relations and
further improved the system of equal negotiation on
collective contracts amongst all levels of the
Company. In addition, the Company has also
established precautions investigation and dispute
solving systems for labour relations, enhanced work
force, and standardised operational processes.
The present remuneration mechanism of the
Company is based on a position pay-scale basis. The
salaries of staff members are determined with
reference to their positions and performances. The
Company offers equal payment for equal work. It
does not discriminate its employees based on their
gender.
of employee healthcare and welfare, the Company
has implemented regular health checks for its staff
and has established various interest clubs in
accordance with the needs of its employees so as to
ensure both of their physical and mental health. In
addition, to ensure the safety of employees, regular
supervisory checks on production safety have been
carried out. In 2006, the Company has continued to
further improve production safety, thereby ensuring
that the health and safety of its employees are well
protected.
Labour unions operating at different levels in the
Company have established a “care-giving” system,
under which union representatives visited and took
care of employees in need and helping them solve
their work and daily life problems during periods
such as major festivals and natural disasters.
Through the signing of a collective agreement, the
Company protected legal interests of the employees,
and granted special benefits (such as pregnancy and
maternity leave) to female employees. The Company
has also established a poverty assistance center to
raise funds for employees who face difficulties in
paying living and medical expenses due to sickness
or natural disasters.
Telecommunications labour unions actively revolve
around the strategic transformation of the Company
and with its operations focusing on promoting the
innovations of services, techniques and
management, and elevating the standardised service
level. Labour unions of different levels actively
organised and participated in organising various
types of collective economic and technological
innovation activities, such as labour competitions,
on-the-job technical training and staff suggestion
schemes. In addition, they also organised and
implemented the learning campaign and general
discussion meetings for the strategic transformation,
and insisted on creating innovative learning working
groups to promote and ensure the development of a
learning enterprise.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
071
Corporate Social Responsibility
Our
Heart
072 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Our People – Liu Yi
3,000
Provided access lines in service to
more than 3,000 administrative
villages in 6 provinces to enhance
sustainable development of rural
communications as well as the
Company
We are dedicated to operating our business
with integrity and honesty to ensure that
consumers could enjoy our services with peace of
mind. We strive to maintain fair and orderly
competition. We advocate win-win co-operation along value chain
to foster overall industry development. We aim to leverage our
sustained development to contribute to the country’s economic
development, environmental protection and construction of
harmonious society, which are crucial to our success on full services
convergence offering.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
073
Corporate Social Responsibility
CARE FOR RURAL AREAS
The Company has always attached great importance
to the development of communications and
information facilities in rural areas. In this regard,
the Company has implemented a model information
facility construction project called “Serving
Thousands of Townships and Villages”, under which,
quality, efficient, convenient and sufficient
information networks have been established, and
thus have laid a solid foundation for the information
technology popularization in rural areas.
Driven by a strong sense of social responsibility and
in response to the requirements of development in a
scientific way and establishment of a harmonious
society, the Company has made consistent efforts to
improve communications in rural areas by
completing telephone connections to more than
3,000 villages in six provinces including Hubei,
Yunnan, Shaanxi, Sichuan, Gansu and Qinghai. In this
way, the Company has made its due contribution to
the construction of China’s rural areas and at the
same time has promoted the Company’s sustainable
development.
China Telecom workers were constructing networks in rural village area
As the largest fixed network operator in China, China
Telecom Corporation Limited has made consistent
efforts to provide the general public with convenient,
uninterrupted and efficient telecommunication and
information services. Facing the general public’s
increasing demand for widespread application of
information technology, the Company, through the
integration and innovation of its services and
terminals, has expanded the channels for the public
to obtain and exchange information. This process,
while helping promote popularisation of information
technology and improve living standards, has allowed
the Company to achieve sustainable and healthy
development.
In line with further strategic adjustment in economic
structure and continuous acceleration of the process
of popularisation of information technology in
national economic activities in China, the Company,
through its strategic transformation, has actively
engaged in various mutual beneficial collaborations
in the industry. This has resulted in a range of
benefits, such combination and extension of the
industry value chain, continuous expansion of areas
for cooperation, improvement in operating efficiency
in the whole industry, and creation and maintenance
of a healthy and harmonious industrial environment,
all of which has contributed to sustainable and
healthy development of the industry and helped to
achieve the Company’s goal of serving the national
economy and promoting social development.
The Company has established the “Information
Services Alliance for Small and Medium Enterprises
in China” in conjunction with eight other reputable
corporations. The members of the alliance increased
to 15 in 2006, and are expected to increase further as
it is becoming more and more influential. The
alliance provides a platform for companies to share
their experiences and learn from each other. It also,
through active cooperation with manufacturers in
areas such as products, distribution channels and
trainings, provides practical solutions to various
issues and demands raised by enterprise customers
relating to application of information technology, and
in this way has promoted the popularisation of
information technology.
074 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
CARE FOR POVERTY ALLEVIATION
CARE FOR MODEL EMPLOYEE
As a corporate member of the society, the Company
is mindful of repaying the society through
involvement in public welfare activities and other
ways to fulfil its responsibilities to the society while
pursuing its business development. In 2006, the
Company continued its poverty alleviation aid
activities in Yanyuan and Muli, Sichuan Province. By
way of investment in local infrastructures, training of
local people and other activities, the Company
helped improve the living conditions (both materially
and culturally) of local people. In light of the features
of the Company and specific condition of such poor
areas, the Company focused its poverty alleviation
work on three aspects: education, medical health
and information technology application, aiming at
gradually improving local productivity and providing
local people with practical benefits.
CARE FOR EDUCATION
In order to support education in China and allow
equal education opportunity to the under-privileged,
the Company has actively provided funding to many
poor and disabled children who would otherwise not
be able to go to school. It has participated in the
construction of “Primary Schools of Hope” and
helped improve the conditions of schools. The
Company entered into an agreement with the New
Great Wall Project sponsored by China Foundation
for Poverty Alleviation, whereby, it provided annual
subsidies to newly admitted disadvantaged college
students in Yanyuan and Muli. 111 of such students
received subsidies in 2006. Also in 2006, the
Company and the China National Youth Palace
Association jointly sponsored the “One-hour
Campaign”, encouraging parents to spend one hour a
day communicating with children, participating in
their activities and learning together with their
children. The Company also subsidised the editing
and publication of the “One-hour Booklet” for the
purpose to enrich students’ extracurricular activities.
The Company attaches great importance to
remarkable services and good attitude of model
employees, and actively carries forward the merits of
model worker. In 2006, the Company gave a donation
to the All China Federation of Trade Unions in order
to assist in the filming of “Model Workers in China”,
a TV documentary of 100 episodes, for the purpose of
widely advocating remarkable deeds and merits of
model employees and outstanding workers.
CARE FOR EMERGENCY
COMMUNICATION
In Decembers 2006, a powerful earthquake off the
coast of Taiwan in the South China Sea disconnected
numerous international undersea fibre optic cables.
International and regional communications between
neighbouring countries and regions were severely
affected. There was widespread disruption to
international, Hong Kong, Macau and Taiwan
communication lines as well as to internet
connection. After the earthquake, the Company
promptly activated the undersea cables emergency
plan, urgently acquired or leased available network
resources in the Asia-Pacific region, and made its
best efforts to resume international, Hong Kong,
Macau and Taiwan communications affected by the
earthquake, so as to minimize losses to subscribers.
In the summer of 2006, severe tropical storms
“Chanchu”, “Bilis” and “Kaemi” landed in China one
after another, and caused disastrous rainstorms and
flooding in southern provinces such as Fujian,
Guandong, Hunan, Guangxi and Jiangxi. Whereupon,
the Company immediately took actions and
measures to ensure smooth communications in
these regions while dedicating itself to disaster relief
activities. The Company restored various
communication services to the general public in a
timely manner and proactively provided other
operators with emergency support. Through such
activities, the Company fully performed its function
as a major infrastructure operator and successfully
fulfilled its social responsibility as a leading
corporation.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
075
Corporate Social Responsibility
CARE FOR ENVIRONMENT
The Company has paid great attention to maintaining
a healthy environment for human beings. Its
telecommunications projects are always constructed
under the guideline and measures of environmental
protection. When purchasing its telecommunications
equipment, the Company carefully selects optic fibre
cables and transmission systems that are noiseless
and free from electromagnetic radiation and
pollutants. When carrying out field surveys on
communication routes, the Company always tries to
avoid mines, forests, grasslands, wild animal
habitats, natural heritage sites, human relic sites,
nature reserves and famous scenic areas. When
laying down optic fibre cables, the Company adopts
directional drilling technique which allows cables to
pass directly through any obstacle without affecting
the surrounding environment.
In the future, adhering to the principle of serving the
people, contributing to the society and enhancing the
Company’s comprehensive strength, the Company
will continue to participate in public welfare
activities, provide return to the society, and make its
due contribution to the building of a more
harmonious society.
076 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
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 2006 will be held at
11:00 am on 29 May 2007 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.
5.
6.
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
auditor for the year ended 31 December 2006 be
considered and approved, and the Board of
Directors (the “Board”) be authorised to prepare
the budget of the Company for year 2007;
THAT the profit distribution proposal and the
declaration and payment of a final dividend for
the year ended 31 December 2006 be considered
and approved;
THAT the reappointment of KPMG and KPMG
Huazhen as the international auditor and
domestic auditor of the Company respectively
for the year ending 31 December 2007 be
considered and approved, and the Board be
authorised to fix the remuneration of the
auditors;
THAT Ms. Zhang Xiuqin’s resignation from her
position as a supervisor of the Company be
considered and approved;
THAT Mr. Li Jian’s resignation from his position
as a supervisor of the Company be considered
and approved;
THAT Mr. Xiao Jinxue’s appointment as a
supervisor of the Company be considered and
approved and shall take effect from the date of
this resolution until 9 September 2008, and that
any one of the directors of the Company be
authorised to represent the Company in signing
a service agreement with Mr. Xiao Jinxue, and
the Supervisory Committee be authorised to fix
the remuneration of Mr. Xiao Jinxue;
7.
THAT Ms. Wang Haiyun’s appointment as a
supervisor of the Company be considered and
approved and shall take effect from the date of
this resolution until 9 September 2008, and that
any one of the directors of the Company be
authorised to represent the Company in signing
a service agreement with Ms. Wang Haiyun, and
the Supervisory Committee be authorised to fix
the remuneration of Ms. Wang Haiyun;
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
8.
THAT the articles of association of the Company
be amended as follows:
(1) THAT the existing Article 10 of the articles
of association of the Company be deleted in
its entirety and be restated as the following
new Article 10:
“The Company may invest in other limited
liability companies or joint stock limited
companies. The Company’s liabilities to an
invested company shall be limited to the
amount of its capital contribution to the
invested company.
The Company shall not be a shareholder
with unlimited liabilities of any other
organisations operating for profits.
The Company may, according to its
operating and management needs, operate
as a holding company in accordance with
the law.”
(2) THAT the existing Article 13 Clause 2 of the
articles of association of the Company be
deleted in its entirety and be restated as
the following new Article 13 Clause 2:
“The Company’s scope of business
includes: the operation of various domestic
fixed telecommunications networks and
facilities (including the local wireless ring
circuit) in the twenty provinces,
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
077
Notice of Annual General Meeting
municipalities, and autonomous regions of
Shanghai, Guangdong, Jiangsu, Zhejiang,
Anhui, Fujian, Jiangxi, Guangxi, Chongqing,
Sichuan, Hubei, Hunan, Hainan, Guizhou,
Yunnan, Shaanxi, Gansu, Qinghai, Ningxia
and Xinjiang; operate voice, digital, image
and multi media communications and
information services on the foundation of
the fixed telecommunication networks;
make settlements with foreign
telecommunications operators in relation to
international telecommunication
businesses in accordance with the State
provisions; engage in system integration,
advertising, technology development,
technology services, information consulting,
equipment manufacture, sale, design and
construction in connection with
communications and information
businesses.”
(3) THAT the existing Article 47 Clause 2 of the
articles of association of the Company be
deleted in its entirety and be restated as
the following new Article 47 Clause 2:
“Application by a holder of Domestic-
Invested Shares, who has lost his share
certificate, for a replacement share
certificate shall be dealt with in accordance
with the requirements of the Company
Law.”
(4) THAT the existing Article 94 of the articles
of association of the Company be deleted in
its entirely and be restated as the following
new Article 94:
“The Company shall have a board of
directors. The board of directors shall
consist of fourteen (14) directors, of which
five (5) shall be independent (non-executive)
directors (meaning directors who are
independent from the Company’s
shareholders and do not hold office in the
Company.)
The board of directors shall have one (1)
Chairman.
When necessary, the board of directors may
establish audit, wages, nomination and
other specialised committees.”
078 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
(5) THAT the existing Article 151 of the articles
of association of the Company be deleted in
its entirety and be restated as the following
new Article 151:
“When distributing its after-tax profits in a
given year, the Company shall contribute
10% of the profits to the Company’s
statutory common reserve fund. Where the
accumulated amount of the statutory
common reserve fund reaches 50% or more
of the registered capital of the Company, no
further contribution is required.
Where the statutory common reserve fund
is insufficient to make for the losses of the
Company in the previous year, before
making contribution to the statutory
common reserve fund, the profits made in
the current year shall be used to make up
for the losses first.
After making contribution to the statutory
common reserve fund from its after-tax
profits, the Company may, subject to
resolutions adopted at a general meeting,
make contributions to discretionary
common reserve fund.
After making up for losses and making
contributions to the common reserve fund,
any remaining profits shall be distributed to
the shareholders in proportion to their
respective shareholdings.”
(6) THAT Article 152 Clause 1 of the articles of
association of the Company be deleted in
its entirety and be restated as the following
new Article 152 Clause 1:
“The company shall not allocate dividends
or carry out other allocations in the form of
bonuses before it has compensated for its
losses and made allocations to the
statutory common reserve fund. Dividends
paid by the Company shall not carry any
interest except where the Company has
failed to pay the dividends to the
shareholders on the date on which such
dividends become payable.”
(7) THAT Article 154 Clause 1 of the articles of
(2) THAT the Board or any two or more
association of the Company be deleted in
its entirety and be restated as the following
new Article 154 Clause 1:
“The common reserve funds of the
Company shall be applied for making up for
losses, expanding the Company’s
production and operation or capitalisation.
However, the capital surplus fund shall not
be applied for making up losses of the
Company.”
(8) THAT Article 155 of the articles of
association of the Company be repealed.
(9) THAT the re-ordering of the sequence
numbers of the articles and corresponding
clauses of the articles of association of the
Company be made as a result of the above
amendments to the articles of association
of the Company.
(10) Any one of the Directors of the Company
(the “Directors”) be authorised to adopt all
acts considered necessary or appropriate to
complete the approval, and/ or registration
and filing of these amendments to the
articles of association of the Company in
the abovementioned paragraphs 8(1) to 8(9).
9.
THAT the issue of debenture by the Board be
considered, approved, confirmed and ratified.
(1) THAT the Company’s issue of debentures
denominated in local or foreign currencies,
in one or more tranches, including, but not
limited to, short-term commercial paper,
asset-backed notes, company bonds,
corporate debts and asset securitization
products, from the date of this meeting
until the date on which the annual general
meeting of the Company for the year ended
2007 is held, with a maximum outstanding
repayment amount of RMB40 billion be
approved (the “Issue”).
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) determine the specific terms,
conditions and other matters of the
Issue (including, but not limited to, the
determination of the type, actual
aggregate amount, interest rate,
rating, guarantee arrangements and
use of proceeds of the Issue);
(b) 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,
preparation and dissemination of
relevant application documents to the
regulatory body, and the securing of
approvals from the regulatory body);
and
(c)
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 that have
already been undertaken by the Board or
the Directors in connection with the Issue,
be hereby approved, confirmed and ratified.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
079
Notice of Annual General Meeting
10. THAT:
(a)
(b)
(c)
subject to paragraph (c) below, the exercise
by the Board 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 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 by the Board
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
10:
“Relevant Period” means the period from
the passing of special resolution 10 until
the earliest of:
(i)
the conclusion of the next annual
general meeting of the Company;
(ii)
(iii)
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 under
these special resolutions by a special
resolution of the Company’s
shareholders in its general meeting.
“Rights Issue” means an offer of shares open
for a period fixed by the Board to holders of
Shares on the register of members on a fixed
record date in proportion of their holdings of
such Shares (subject to such exclusion or other
arrangements as the Board 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.
11. THAT the Board be authorised to increase the
registered capital of the Company to reflect the
issue of shares in the Company authorised
under special resolution 10, 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
Yung Shun Loy, Jacky
Company Secretary
Beijing, PRC
11 April 2007
080 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Notes:
(1)
In March 2007, Ms. Zhang Xiuqin proposed to retire
from her position as supervisor and chairperson of
the Supervisory Committee due to age, and Mr. Li Jian
proposed to resign from his position as supervisor of
the Supervisory Committee due to a change in job
responsibility. The Supervisory Committee of the
Company has proposed to elect Mr. Xiao Jinxue and
Ms. Wang Haiyun to the position of supervisor in the
Company. The Company will make an announcement
in accordance with the Listing Rules regarding the
resignations and appointments upon the requisite
resolutions having been approved at the annual
general meeting.
(2)
The resigning supervisors have separately confirmed
that they hold no differences in opinion with the Board
of Directors and do not have any matters, in relation
to their resignations, that should be brought to the
attention of the shareholders.
(3) Brief introduction on candidates of supervisors
Mr. Xiao Jinxue
Age 43, is the Managing Director of the Corporate
Strategy Department (Legal Department) of the
Company. He graduated from Beijing Institute of Posts
and Telecommunications in 1987 majoring in
Engineering Management, obtaining a Masters
degree. Prior to his current position, Mr. Xiao served
as an Officer and later, Assistant Dean at the
Corporate Management Faculty of the Institute of
Cadre Management under the Ministry of Posts and
Telecommunications, and a Standing Committee
Member and Deputy Managing Director of the Beijing
Research Institute of China Telecom Group. He is a
senior engineer at a professor level and has 20 years
of managerial experience in the telecommunications
industry in China.
Ms. Wang Haiyun
Age 43, is the Deputy Director of the Audit
Department of the Company. Ms. Wang graduated
with a Bachelor degree in Business Financial
Accounting from Jiangxi University of Finance and
Economics in 1985. Prior to her current position, she
worked in finance-related jobs serving at the
Research Institute for Fiscal Science of Ministry of
Finance, Zhong Zhou CPA Co. Ltd., and the
Telecommunications Headquarters of the Ministry of
Posts and Telecommunications. She is a senior
accountant and has 22 years of finance and audit
experience.
(4)
Concerning item 8 above, as the Articles only exist in
Chinese, the Chinese text of the relevant proposed
resolution shall prevail over the English text.
The articles of association of the Company (“Articles”)
was originally formulated in accordance with the
Requisite Clauses of Articles of Association for
Companies Seeking Overseas Listing (“Requisite
Clauses”) which is an applicable PRC regulation.
Clause 3 of article 10 of the articles of association
was prepared in conformity to clause 2 of article 8 of
the Requisite Clauses which stipulates, “Upon
approval of the companies approving department
authorized by the State Council, the Company may,
according to its operating and management needs,
operate as a holding company as prescribed in clause
2 of Article 12 of the Company Law.” Since the PRC
Company Law was amended in the year 2006, the
stipulation of clause 2 of article 12 of the law is not
the same as that before such amendment. Thus, the
Articles are amended accordingly. The new
amendment to the Articles no longer refers to a
specific article in the PRC Company Law in order to
avoid further corresponding amendment to the
Articles in the case that the PRC Company Law is
further amended. Based on the above, the Company
needed to restate Clause 3 article 10 of the Articles.
In accordance with the development needs of the
Company, we propose to add an “advertising” item to
the Company’s scope of business, warranting the need
to restate article 13 clause 2 of the Articles.
Clause 2 of article 47 of the Articles was originated
from clause 2 of article 41 of the Requisite Clauses
which stipulates ”Application by a holder of Domestic-
Invested Shares, who has lost his share certificate, for
a replacement share certificate shall be dealt with in
accordance with Article 150 of the Company Law.”
Since the PRC Company Law was amended in the year
2006, the stipulation of Article 150 of the PRC
Company Law is not the same as that before such
amendment. Thus, the Articles are amended
accordingly. The new amendment to the Articles no
longer refers to a specific article in the PRC Company
Law. This is to avoid further corresponding
amendment to the Articles in the case that the PRC
Company Law is further amended. Based on the
above, the Company needed to restate article 47
clause 2 of its Articles.
The Company has proposed to restate article 94 of its
Articles, due to the resignation of an executive
director last May which reduced the number of
directors of the Company from 15 to 14.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
081
Notice of Annual General Meeting
(9)
The registration procedure for attending the annual
general meeting:
(a)
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.
(b)
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 8 May 2007.
(10) Closure of the register of members:
The register of members of the Company will be
closed from 29 April 2007 to 29 May 2007 (both days
inclusive).
(11) 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.
(12) The address of the Office of the Board is as follows:
31 Jinrong Street
Xicheng District, Beijing 100032
PRC
Contact person: Yung Shun Loy, Jacky
Telephone: (8610) 6642 8166
(8610) 6601 0728
Facsimile:
Article 151, article 152 and article 155 of the Articles
are stipulations regarding the statutory welfare fund.
The latest amendments to the PRC Company Law
have abolished the statutory welfare fund system.
Pursuant to the stipulations of the currently
applicable PRC Company Law, the clauses regarding
the statutory welfare fund in the Articles are deleted
accordingly. As Clause 1 of article 154 of the Articles
is currently in contradiction with the current PRC
Company Law, the clause is now amended to be
consistent with currently applicable PRC Company
Law. This amendment makes it clear that the capital
surplus fund shall not be used to make up corporate
losses. Hence, the Company needed to restate article
151, article 152 clause 1 and article 154 clause 1,
repeal article 155 and make corresponding
adjustments on the sequence numbers of the Articles
of association.
Shareholders who submit their share transfer
application forms to the Company’s share registrar
before 4:30 p.m. on 27 April 2007 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 2006, which is expected to be
dispatched to shareholders around 12 April 2007.
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
Computershare Hong Kong Investor Services Limited
Room 1806-1807, 18th Floor, Hopewell Centre, 183
Queen’s Road East, Wanchai, Hong Kong
(5)
(6)
(7)
(8)
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.
082 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Report of The Independent International Auditor
To the Shareholders of
China Telecom Corporation Limited
(Incorporated in The People’s Republic of China with limited liability)
We have audited the consolidated financial statements of China Telecom Corporation Limited (the “Company”)
set out on pages 85 to 139, which comprise the consolidated and company balance sheets as at 31 December
2006, and the consolidated income statement, the consolidated statement of changes in equity and the
consolidated cash flow statement for the year then ended, and a summary of significant accounting policies
and other explanatory notes.
DIRECTORS’ RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
The directors of the Company are responsible for the preparation and the true and fair presentation of these
financial statements in accordance with International Financial Reporting Standards promulgated by the
International Accounting Standards Board and the disclosure requirements of the Hong Kong Companies
Ordinance. This responsibility includes designing, implementing and maintaining internal control relevant to
the preparation and the true and fair presentation of financial statements that are free from material
misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and
making accounting estimates that are reasonable in the circumstances.
AUDITOR’S RESPONSIBILITY
Our responsibility is to express an opinion on these financial statements based on our audit. This report is
made solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept
liability to any other person for the contents of the report.
We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong
Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements
and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are
free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditor’s judgement, including the assessment
of the risks of material misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entity’s preparation and true
and fair presentation of the financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s
internal control. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation
of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
083
Report of The Independent International Auditor
OPINION
In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of the
Company and of the Group as at 31 December 2006 and of the Group’s profit and cash flows for the year then
ended 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
8th Floor, Prince’s Building
10 Chater Road
Central, Hong Kong
26 March 2007
084 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Consolidated Balance Sheet
at 31 December 2006
(Amounts in millions)
Note
2006
RMB
2005
RMB
ASSETS
Non-current assets
Property, plant and equipment, net
Construction in progress
Lease prepayments
Interests in associates
Investments
Deferred tax assets
Other assets
Total non-current assets
Current assets
Inventories
Accounts receivable, net
Prepayments and other current assets
Time deposits with maturity over three months
Cash and cash equivalents
Total current assets
Total assets
LIABILITIES AND 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
3
4
6
7
8
17
9
10
11
12
13
13
14
15
16
17
13
16
17
8
328,304
18,416
5,092
581
225
10,866
10,994
328,281
23,567
5,117
548
182
10,885
11,893
374,478
380,473
3,018
15,806
2,429
119
18,191
39,563
2,702
16,142
2,406
292
15,121
36,663
414,041
417,136
79,516
8,242
31,986
26,570
3,115
48
7,098
76,005
8,963
33,949
26,885
2,108
108
8,958
156,575
156,976
(117,012)
(120,313)
257,466
260,160
37,257
–
13,625
2,711
53,593
55,777
52
18,750
2,620
77,199
210,168
234,175
The notes on pages 92 to 139 form part of these financial statements.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
085
Consolidated Balance Sheet
at 31 December 2006
(Amounts in millions)
Equity
Share capital
Reserves
Total equity attributable to equity holders of the Company
Minority interests
Total equity
Total liabilities and equity
Note
18
19
2006
RMB
2005
RMB
80,932
121,493
202,425
1,448
80,932
100,585
181,517
1,444
203,873
182,961
414,041
417,136
Approved and authorised for issue by the Board of Directors on 26 March 2007.
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 92 to 139 form part of these financial statements.
086 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Balance Sheet
at 31 December 2006
(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
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
Note
2006
RMB
2005
RMB
3
4
5
10
11
12
13
14
15
13
18
19
371
249
177,132
26
348
156
165,926
31
177,778
166,461
266
64,935
8,381
73,582
18
51,738
4,139
55,895
251,360
222,356
20,000
69
15,809
1,419
37,297
36,285
9,917
74
719
576
11,286
44,609
214,063
211,070
30,150
67,447
80,932
102,981
40,150
51,436
80,932
89,988
183,913
170,920
251,360
222,356
Total liabilities and equity
Approved and authorised for issue by the Board of Directors on 26 March 2007.
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 92 to 139 form part of these financial statements.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
087
Consolidated Income Statement
for the year ended 31 December 2006
(Amounts in millions, except per share data)
Operating revenues
Operating expenses
Depreciation and amortisation
Network operations and support
Selling, general and administrative
Personnel expenses
Other operating expenses
Total operating expenses
Operating profit
Net finance costs
Investment loss
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
20
21
22
23
24
2006
RMB
2005
RMB
175,093
169,310
(51,272)
(30,723)
(22,214)
(26,019)
(6,255)
(49,652)
(30,334)
(19,892)
(24,960)
(5,518)
(136,483)
(130,356)
38,610
38,954
(4,667)
(4,895)
(25)
61
(7)
62
33,979
34,114
25
(6,754)
(6,160)
27,225
27,954
27,142
83
27,912
42
27,225
27,954
0.34
0.34
80,932
80,932
30
30
The notes on pages 92 to 139 form part of these financial statements.
088 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Consolidated Statement of Changes in Equity
for the year ended 31 December 2006
(Amounts in millions)
Attributable to equity holders of the Company
Share
capital
RMB
Capital
reserve
RMB
Share
premium
RMB
Re–
valuation
reserve
RMB
Surplus
reserves
RMB
Statutory
common
welfare
fund
RMB
Other
reserves
RMB
Retained
earnings
RMB
Minority
interests
RMB
Total
RMB
Total
equity
RMB
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)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(5)
–
12
(189)
(182)
–
–
134
(12)
189
(5)
–
–
–
311
27,912
(5)
27,912
–
–
–
–
–
42
(5)
–
–
–
(5)
27,954
(182)
28,223
27,907
42
27,949
–
–
9,509
–
–
–
1,285
—
–
–
–
–
–
–
(10,794)
(5,596)
–
–
–
(5,596)
12
(23)
–
–
12
(23)
–
(5,596)
80,932
(2,804)
10,746
7,451
35,138
7,078
7,501
35,475
181,517
1,444
182,961
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(94)
–
–
–
(94)
–
(94)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5
–
–
94
33
(33)
(182)
182
5
–
–
–
44
–
44
–
–
–
–
–
5
–
–
–
44
(100)
–
243
27,142
49
27,142
–
83
49
27,225
(100)
–
27,385
–
27,191
–
83
(79)
27,274
(79)
7,078
7,602
–
(7,078)
–
–
–
–
–
–
(7,602)
(6,283)
–
–
(6,283)
–
–
–
–
–
(6,283)
Balance as at 1 January 2005
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
Profit for the year
Total recognised income
and expenses
Contributions from
minority interests
Distributions to minority interests
Appropriations
Dividends
Balance as at 31 December 2005
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
Change in fair value of available–
for–sale equity securities
(net of deferred tax)
Profit for the year
Total recognised income
and expenses
Distributions to minority interests
Transfer from statutory common
welfare fund to surplus reserves
Appropriations
Dividends
Note
8
19
29
8
19
19
29
Balance as at 31 December 2006
80,932
(2,804)
10,746
7,357
49,818
–
7,401
48,975
202,425
1,448
203,873
The notes on pages 92 to 139 form part of these financial statements.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
089
Consolidated Cash Flow Statement
for the year ended 31 December 2006
(Amounts in millions)
Net cash from operating activities
Cash flows from investing activities
Capital expenditure
Lease prepayments
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)
2006
RMB
2005
RMB
74,506
68,359
(50,447)
(83)
(52,083)
(386)
360
(119)
292
552
(292)
315
Net cash used in investing activities
(49,997)
(51,894)
Cash flows from financing activities
Principal 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 minority interests
(108)
95,164
(100,133)
(10,000)
(6,283)
(79)
(156)
95,538
(94,584)
(10,000)
(5,596)
(11)
Net cash used in financing activities
(21,439)
(14,809)
Net increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
3,070
1,656
15,121
13,465
18,191
15,121
The notes on pages 92 to 139 form part of these financial statements.
090 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Consolidated Cash Flow Statement
for the year ended 31 December 2006
(Amounts in millions)
(a) Reconciliation of profit before taxation to net cash from operating activities
Profit before taxation
Adjustments for:
Depreciation and amortisation
Impairment losses for bad and doubtful debts
Investment loss
Share of profit from associates
Interest income
Interest expense
Unrealised foreign exchange gains
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
(Increase)/decrease in inventories
Decrease in prepayments and other current assets
Decrease in other non-current assets
Increase/(decrease) in accounts payable
Decrease in accrued expenses and other payables
Decrease in deferred revenues
Cash generated from operations
Interest received
Interest paid
Investment income received
Income tax paid
2006
RMB
2005
RMB
33,979
34,114
51,272
1,232
25
(61)
(326)
5,079
(50)
2,110
–
93,260
(905)
(316)
31
1,478
70
(1,437)
(6,985)
85,196
326
(5,388)
26
(5,654)
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)
Net cash from operating activities
74,506
68,359
The notes on pages 92 to 139 form part of these financial statements.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
091
Notes to the Financial Statements
for the year ended 31 December 2006
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 and international long distance telephone services, Internet and
managed data, leased line, and other related services.
The operations of the Group are subject to the supervision and regulation by the PRC government. The
Ministry of Information Industry, pursuant to the authority delegated to it by the PRC’s State Council, is
responsible for formulating the telecommunications industry policies and regulations, including the
regulation and setting of tariff levels for basic telecommunications services, such as local and long
distance telephone services, managed data services, leased line and interconnection arrangements.
Organisation
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 Group 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 Group and China Netcom Group own 70% and 30%, respectively, of
the nationwide inter-provincial optic fibers.
As part of the reorganisation (the “Restructuring”) 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 13).
092 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
1. PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PRESENTATION
(continued)
Organisation (continued)
Pursuant to the resolution passed by the Company’s independent shareholders at an Extraordinary
General Meeting held on 9 June 2004, the Company acquired the entire equity interests in Hubei
Telecom Company Limited, Hunan Telecom Company Limited, Hainan Telecom Company Limited,
Guizhou Telecom Company Limited, Yunnan Telecom Company Limited, Shaanxi Telecom Company
Limited, Gansu Telecom Company Limited, Qinghai Telecom Company Limited, Ningxia Telecom
Company Limited and Xinjiang Telecom Company Limited (collectively the “Second Acquired Group”)
from China Telecom for a total purchase price of RMB27,800 million on 30 June 2004 (hereinafter,
referred to as the “Second Acquisition”). The purchase price consisted of a cash payment of RMB8,340
million and a long-term payable of RMB19,460 million. On 30 June 2004, the Company repaid RMB4,310
million of this payable amount using the net proceeds from issue of new H shares in May 2004 (see Note
13).
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 consideration 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 2(g)) and available-for-sale equity securities (Note
2(k)). The accounting policies described below have been consistently applied by the Group.
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 2006
093
Notes to the Financial Statements
for the year ended 31 December 2006
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.
The IASB has issued certain new and revised IFRS which are effective for accounting periods on or
after 1 January 2006. The adoption of these new and revised IFRS did not result in significant
changes to the Group’s accounting policies applied in these financial statements for the years
presented.
The Group has not applied any new standard or interpretation that is not yet effective for the
current accounting period (see Note 38).
With effect from 1 January 2006, the Group has presented the amount of personnel expenses on
the face of the consolidated income statement as a separate caption and has disclosed the
respective amounts attributable to the network operations and support, and selling, general and
administrative functions in the notes to the financial statements. The related comparative figures
have been reclassified to conform with the current year’s presentation.
(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.
094 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(b) Basis of consolidation (continued)
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.
(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 (Note 2(i)), 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 2006
095
Notes to the Financial Statements
for the year ended 31 December 2006
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(g) Property, plant and equipment (continued)
Subsequent to the revaluation as described in Note 3, property, plant and equipment are carried at
revalued amount, being the fair value at the date of the revaluation, less subsequent accumulated
depreciation and impairment losses. When an item of property, plant and equipment is revalued,
any accumulated depreciation at the date of the revaluation is restated proportionately with the
change in the gross carrying amount of the asset so that the carrying amount of the asset after
revaluation equals its revalued amount. The separate classes into which the Company groups
assets for the revaluation are buildings and improvements; telecommunications network plant and
transmission and switching equipment; and furniture, fixture, motor vehicles and other equipment.
When an item of property, plant and equipment is revalued, the entire class of property, plant and
equipment to which that asset belongs is revalued simultaneously. When an asset’s carrying
amount is increased as a result of a revaluation, the increase is credited directly to 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 2006, the carrying amount of assets held under finance leases was RMB197
million (2005: RMB272 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.
096 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(g) Property, plant and equipment (continued)
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
Depreciable lives
primarily range from
8 to 30 years
6 to 10 years
4 to 10 years
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)
(k)
Investments in subsidiaries
In the Company’s stand-alone balance sheet, investments in subsidiaries are stated at cost less
impairment losses (Note 2(l)).
Investments
Investments in available-for-sale equity securities are carried at fair value with any change in fair
value being recognised directly in equity. When these investments are derecognised or impaired,
the cumulative gain or loss previously recognised directly in equity is recognised in the
consolidated income statement. Investments in equity securities that do not have a quoted market
price in an active market and whose fair value cannot be reliably measured are stated at cost less
impairment losses (Note 2(l)).
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
097
Notes to the Financial Statements
for the year ended 31 December 2006
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(l)
Impairment
(i)
Impairment of investments in equity securities and impairment losses for trade and
other receivables
Investments in 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 2005 and 2006, no impairment loss was made for
investments in equity securities. For the year ended 31 December 2006, impairment losses
for trade and other receivables of RMB1,232 million (2005: RMB1,274 million) were
recognised.
(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. When an asset does not generate cash flows largely
independent of those from other assets, the recoverable amount is determined for the
smallest group of assets that generates cash inflows independently (i.e. a cash-generating
unit). 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 2006, a provision for
impairment loss of nil (2005: RMB163 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.
098 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(m) Revenue recognition
The Group’s revenues are principally derived from the provision of local, domestic long distance
(“DLD”) and international long distance (“ILD”) telephone services which consist of (i) usage
charges for telephone services, which vary depending on the day, the time of day, distance and
duration of the telephone call, (ii) a monthly telephone service fee, (iii) service activation and
installation fees, and (iv) charges for value-added telecommunications services, such as 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)
Revenues derived from local, DLD and ILD telephone usage are recognised as the services
are provided.
(ii) Upfront fees received for activation of wireline services and wireline installation charges are
deferred and recognised over the expected customer relationship period. The related direct
incremental customer acquisition costs are deferred to the extent of the upfront fees and are
amortised over the same expected customer relationship period.
(iii) Monthly telephone service fees are recognised in the month during which the telephone
services are provided to customers.
(iv) Revenues from sale of prepaid calling cards are recognised as the cards are used by
customers.
(v)
Revenues derived from value-added telecommunications services are recognised when the
services are provided to customers.
Other related wireline telecommunications service revenues are recognised as follows:
(i)
(ii)
Revenues from the provision of Internet and managed data services are recognised when the
services are provided to customers.
Interconnection fees from domestic and foreign telecommunications operators are recognised
when the services are rendered as measured by the minutes of traffic processed.
(iii) Lease income from operating leases is recognised over the term of the lease.
(iv)
Sale of customer-end equipment is recognised on delivery of the equipment to customers and
when the significant risks and rewards of ownership and title have been transferred to the
customers.
(n) Advertising and promotion expense
The costs for advertising and promoting the Group’s wireline telecommunications services are
expensed as incurred. Advertising and promotion expense, which is included in selling, general and
administrative expenses, was RMB10,514 million for the year ended 31 December 2006 (2005:
RMB9,417 million).
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
099
Notes to the Financial Statements
for the year ended 31 December 2006
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(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
2006, research and development expense was RMB292 million (2005: RMB261 million).
(q) Employee benefits
The Group’s contributions to defined contribution retirement plans administered by the PRC
government are recognised as an expense in the consolidated income statement as incurred.
Further information is set out in Note 34.
Compensation expense 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 charged or
credited to the consolidated income statement. Further details of the Group’s stock appreciation
rights scheme are set out in Note 35.
(r)
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 the amount initially recognised and redemption value being recognised in
the consolidated income statement over the period of the borrowings, together with any interest,
using the effective interest method.
(s) 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.
(t) 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.
100 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(t) Provisions and contingent liabilities (continued)
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.
(u)
Income tax
Income tax comprises current and deferred tax. Income tax is recognised in the consolidated
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.
(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.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
101
Notes to the Financial Statements
for the year ended 31 December 2006
3. PROPERTY, PLANT AND EQUIPMENT, NET
The Group:
Telecom-
munications
network plant
and
equipment
RMB
millions
Furniture,
fixture, motor
vehicles and
other
equipment
RMB
millions
Buildings and
improvements
RMB
millions
66,344
63
4,684
(262)
70,829
103
3,259
(362)
(83)
449,304
1,352
50,580
(15,984)
485,252
735
47,414
(13,773)
3,467
20,638
523
2,545
(1,660)
22,046
577
1,113
(1,153)
(3,384)
Total
RMB
millions
536,286
1,938
57,809
(17,906)
578,127
1,415
51,786
(15,288)
–
Cost/valuation:
Balance at 1 January 2005
Additions
Transferred from construction
in progress
Disposals
Balance at 31 December 2005
Additions
Transferred from construction
in progress
Disposals
Reclassification
Balance at 31 December 2006
73,746
523,095
19,199
616,040
Accumulated depreciation
and impairment:
Balance at 1 January 2005
Depreciation charge for the year
Provision for impairment
Written back on disposals
Balance at 31 December 2005
Depreciation charge for the year
Written back on disposals
Reclassification
(11,018)
(2,943)
–
119
(13,842)
(2,943)
135
(117)
(195,216)
(43,630)
(163)
13,971
(225,038)
(45,275)
11,618
(1,384)
(9,873)
(2,616)
–
1,523
(10,966)
(2,490)
1,065
1,501
(216,107)
(49,189)
(163)
15,613
(249,846)
(50,708)
12,818
–
Balance at 31 December 2006
(16,767)
(260,079)
(10,890)
(287,736)
Net book value at 31 December
2006
56,979
263,016
8,309
328,304
Net book value at 31 December
2005
56,987
260,214
11,080
328,281
102 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
3. PROPERTY, PLANT AND EQUIPMENT, NET (continued)
The Company:
Telecom-
munications
network plant
and
equipment
RMB
millions
Furniture,
fixture, motor
vehicles and
other
equipment
RMB
millions
Total
RMB
millions
306
2
18
–
326
3
84
(21)
14
406
(6)
(40)
(46)
(49)
15
(5)
(85)
321
280
99
2
38
(2)
137
2
9
(12)
(14)
122
(48)
(21)
(69)
(20)
12
5
(72)
50
68
405
4
56
(2)
463
5
93
(33)
–
528
(54)
(61)
(115)
(69)
27
–
(157)
371
348
Cost:
Balance at 1 January 2005
Additions
Transferred from construction in progress
Disposals
Balance at 31 December 2005
Additions
Transferred from construction in progress
Disposals
Reclassification
Balance at 31 December 2006
Accumulated depreciation:
Balance at 1 January 2005
Depreciation charge for the year
Balance at 31 December 2005
Depreciation charge for the year
Disposals
Reclassification
Balance at 31 December 2006
Net book value at 31 December 2006
Net book value at 31 December 2005
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 2006
103
Notes to the Financial Statements
for the year ended 31 December 2006
3. PROPERTY, PLANT AND EQUIPMENT, NET (continued)
The following is a summary of the carrying value of the Group’s property, plant and equipment prior to
the revaluation and the revalued amounts of these assets as at 31 December 2004:
Carrying
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
Buildings and improvements
Telecommunications network
plant and equipment
Furniture, fixture, motor vehicles
and other equipment
For the years ended 31 December 2006 and 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.
4. CONSTRUCTION IN PROGRESS
The Group
RMB
millions
The Company
RMB
millions
29,450
51,926
(57,809)
23,567
46,635
(51,786)
18,416
73
139
(56)
156
186
(93)
249
The Company
2006
RMB
millions
2005
RMB
millions
177,132
165,926
Balance at 1 January 2005
Additions
Transferred to property, plant and equipment
Balance at 31 December 2005
Additions
Transferred to property, plant and equipment
Balance at 31 December 2006
5.
INVESTMENTS IN SUBSIDIARIES
Unquoted investments, at cost
104 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
5.
INVESTMENTS IN SUBSIDIARIES (continued)
Details of the Company’s subsidiaries at 31 December 2006, which principally affected the results of
operations and the financial position of the Group, are as follows:
Name of Company
Type of legal entity
Date of
incorporation
Registered
capital
(RMB millions)
Shanghai Telecom Company Limited
Limited Company
11 October 2002
Guangdong Telecom Company Limited
Limited Company
10 October 2002
Jiangsu Telecom Company Limited
Limited Company
19 October 2002
Zhejiang Telecom Company Limited
Limited Company
10 October 2002
Anhui Telecom Company Limited
Limited Company
26 August 2003
Fujian Telecom Company Limited
Limited Company
28 August 2003
Jiangxi Telecom Company Limited
Limited Company
18 September 2003
Guangxi Telecom Company Limited
Limited Company
28 August 2003
Chongqing Telecom Company Limited
Limited Company
22 August 2003
Sichuan Telecom Company Limited
Limited Company
28 August 2003
Hubei Telecom Company Limited
Limited Company
9 March 2004
Hunan Telecom Company Limited
Limited Company
12 March 2004
Hainan Telecom Company Limited
Limited Company
9 March 2004
Guizhou Telecom Company Limited
Limited Company
12 March 2004
Yunnan Telecom Company Limited
Limited Company
9 March 2004
Shaanxi Telecom Company Limited
Limited Company
8 March 2004
Gansu Telecom Company Limited
Limited Company
10 March 2004
Qinghai Telecom Company Limited
Limited Company
10 March 2004
Ningxia Telecom Company Limited
Limited Company
10 March 2004
Xinjiang Telecom Company Limited
Limited Company
11 March 2004
15,984
47,513
19,208
22,400
3,871
10,364
4,523
4,992
4,276
8,123
6,208
3,574
1,233
2,801
3,747
3,254
4,515
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.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
105
Notes to the Financial Statements
for the year ended 31 December 2006
6.
INTERESTS IN ASSOCIATES
Share of net assets
The Group
2006
RMB
millions
2005
RMB
millions
581
548
The Group’s interests in associates are accounted for under the equity method and are individually and
in aggregate not material to the Group’s financial conditions or results of operations for all periods
presented. Details of the Group’s principal associates are as follows:
Name of company
Attributable
equity interest
Principal activities
Shenzhen Shekou Telecommunications
50% Provision of telecommunications
Company Limited
services
Shanghai Information Investment
24% Provision of information technology
Incorporation
consultancy services
The above associates are established in the PRC and are not traded on any stock exchange.
7.
INVESTMENTS
Available-for-sale equity securities
Other unlisted equity investments
The Group
2006
RMB
millions
2005
RMB
millions
104
121
225
38
144
182
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.
106 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
8. DEFERRED TAX ASSETS AND LIABILITIES
Deferred tax assets and deferred tax liabilities are attributable to the items set out below:
The Group:
Assets
Liabilities
2006
RMB
2005
RMB
millions millions millions millions millions millions
2005
RMB
2005
RMB
2006
RMB
Net balance
2006
RMB
Current
Provisions and impairment
losses, primarily for
receivables
Non-Current
Property, plant and equipment
Deferred revenues and
installation costs
Land use rights
Available-for-sale equity
securities
413
611
294
–
–
413
294
610
(1,566)
(1,508)
(955)
(898)
2,152
7,690
2,114
7,867
(1,123)
–
(1,112)
–
1,029
7,690
1,002
7,867
–
–
(22)
–
(22)
–
Deferred tax assets/(liabilities)
10,866
10,885
(2,711)
(2,620)
8,155
8,265
The Group recognises a deferred tax asset only to the extent that it is probable that future taxable
income will be available against which the asset can be utilised. The Group has reviewed its deferred tax
assets as at 31 December 2006 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.
Movements in temporary differences are as follows:
Balance at
Recognised
Balance at
1 January
in income
Recognised 31 December
2005
RMB
statement
in equity
RMB
RMB
2005
RMB
Note
millions
millions
millions
millions
Current
Provisions and impairment losses,
primarily for receivables
Non-current
Property, plant and equipment
Deferred revenues and installation
costs
Land use rights
Net deferred tax assets
(i) and (ii)
286
8
(779)
(119)
935
8,061
8,503
67
(189)
(233)
(Note 25)
–
–
–
(5)
(5)
294
(898)
1,002
7,867
8,265
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
107
Notes to the Financial Statements
for the year ended 31 December 2006
8. DEFERRED TAX ASSETS AND LIABILITIES (continued)
Balance at
Recognised
Balance at
1 January
in income
Recognised 31 December
2006
RMB
statement
in equity
RMB
RMB
2006
RMB
Note
millions
millions
millions
millions
Current
Provisions and impairment losses,
primarily for receivables
Non-current
Property, plant and equipment
Deferred revenues and installation
costs
Land use rights
Available-for-sale equity securities
Net deferred tax assets
(i) and (ii)
294
(898)
1,002
7,867
–
8,265
119
(57)
27
(182)
–
(93)
(Note 25)
–
–
–
5
(22)
(17)
413
(955)
1,029
7,690
(22)
8,155
Note:
(i)
In connection with the Restructuring and the Acquisitions, the land use rights of the Predecessor Operations,
the First Acquired Group and the Second Acquired Group were revalued as required by the relevant PRC rules
and regulations. The tax bases of the land use rights were adjusted to conform to such revalued amounts. The
land use rights were not revalued for financial reporting purposes and accordingly, the deferred tax assets
were created with corresponding increases in shareholders’ equity under the caption of other reserves.
(ii)
The amounts recognised in equity represent the effect of change in tax rate for a subsidiary on the carrying
amount of the deferred tax asset which was previously charged or credited to equity.
9.
INVENTORIES
Inventories represent:
Materials and supplies
Goods for resale
The Group
2006
RMB
millions
1,770
1,248
3,018
2005
RMB
millions
1,854
848
2,702
108 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
10. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, are analysed as follows:
Accounts receivable
Third parties
Amounts due from subsidiaries
China Telecom Group
Other state-controlled
telecommunications operators
in the PRC
The Group
2006
RMB
millions
15,375
–
136
2005
RMB
millions
15,636
–
224
1,791
1,786
17,302
17,646
Less: Impairment losses for bad
and doubtful debts
(1,496)
(1,504)
15,806
16,142
The Company
2006
RMB
millions
2005
RMB
millions
153
69
–
44
266
–
266
–
18
–
–
18
–
18
Amounts due from the provision of wireline telecommunications services to residential and business
customers are due within 30 days from the date of billing.
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
The Group
2006
RMB
millions
1,504
1,221
(1,229)
2005
RMB
millions
1,682
1,274
(1,452)
At end of year
1,496
1,504
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
109
Notes to the Financial Statements
for the year ended 31 December 2006
10. ACCOUNTS RECEIVABLE, NET (continued)
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
2006
RMB
millions
11,634
1,055
1,060
314
14,063
(1,374)
2005
RMB
millions
12,104
1,563
1,037
340
15,044
(1,377)
12,689
13,667
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
2006
RMB
millions
2005
RMB
millions
The Company
2006
RMB
millions
2005
RMB
millions
1,626
765
529
319
3,239
(122)
3,117
1,244
686
371
301
2,602
(127)
2,475
76
104
80
6
266
–
266
–
10
8
–
18
–
18
110 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
11. PREPAYMENTS AND OTHER CURRENT ASSETS
Prepayments and other current assets represent:
Amounts due from China Telecom
Group
Amounts due from subsidiaries
Other state-controlled
telecommunications operators
in the PRC
Prepayments in connection with
construction work and
equipment purchases
Prepaid expenses and deposits
Other receivables
The Group
2006
RMB
millions
2005
RMB
millions
The Company
2006
RMB
millions
2005
RMB
millions
548
–
242
742
517
380
606
–
397
679
389
335
3
64,919
4
51,725
–
–
1
12
–
–
–
9
2,429
2,406
64,935
51,738
12. CASH AND CASH EQUIVALENTS
The Group
2006
RMB
millions
2005
RMB
millions
The Company
2006
RMB
millions
2005
RMB
millions
Cash at bank and in hand
Time deposits with original
10,486
11,583
maturity within three months
7,705
3,538
18,191
15,121
881
7,500
8,381
727
3,412
4,139
13. SHORT-TERM AND LONG-TERM DEBT
Short-term debt comprises:
The Group
2006
RMB
millions
35,750
20,000
23,766
2005
RMB
millions
45,704
9,917
20,384
The Company
2006
RMB
millions
2005
RMB
millions
–
20,000
–
–
9,917
–
Loans from state-controlled banks
— unsecured
Commercial paper – unsecured
Loans from China Telecom
Group – unsecured
Total short-term debt
79,516
76,005
20,000
9,917
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
111
Notes to the Financial Statements
for the year ended 31 December 2006
13. SHORT-TERM AND LONG-TERM DEBT (continued)
Weighted average interest rate of the Group’s total short-term debt as at 31 December 2006 was 3.7%
(2005: 4.2%). As at 31 December 2006, the loans from state-controlled banks bear interest at rates
ranging from 4.7% to 5.7% per annum and are repayable within one year; the commercial paper bears
interest at a fixed rate of 3.05% per annum and is repayable in April 2007; the loans from China Telecom
Group bear interest at fixed rates ranging from 2.30% to 2.55% per annum and are repayable within one
year.
Long-term debt comprises:
Interest rates and final maturity
The Group
The Company
2006
RMB
2005
RMB
2006
RMB
2005
RMB
millions
millions
millions
millions
Bank loans — unsecured
Renminbi denominated
Interest rates ranging from 3.6% to 6.4%
per annum with maturities through 2020
11,039
19,112
US Dollars denominated
Interest rates ranging from 0.5% to 8.3%
per annum with maturities through 2038
1,320
2,087
Japanese Yen denominated
Interest rates ranging from 0.6% to 3.5%
per annum with maturities through 2040
2,053
2,449
Euro denominated
Interest rates ranging from 0.5% to 6.0%
per annum with maturities through 2032
851
843
–
–
–
–
–
–
–
–
–
–
–
–
–
–
84
93
15,347
24,584
2
6
15,000
25,000
15,000
25,000
15,150
15,150
15,150
15,150
45,499
64,740
30,150
40,150
(8,242)
(8,963 )
–
–
37,257
55,777
30,150
40,150
Other currencies
denominated
Other loans — unsecured
Renminbi denominated
Amount due to China Telecom
— unsecured
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
112 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
13. 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 bears interest on the outstanding balance at 5.184% per annum until 31 December 2008.
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 April 2006, 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 bears interest on the outstanding balance at 5.184% per annum until
30 June 2009. 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.
The aggregate maturities of the Group’s and the Company’s long-term debts subsequent to 31
December 2006 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
2006
RMB
millions
8,242
3,815
656
246
208
32,332
2005
RMB
millions
8,963
8,773
3,824
382
252
42,546
The Company
2006
RMB
millions
2005
RMB
millions
–
–
–
–
–
30,150
–
–
–
–
–
40,150
45,499
64,740
30,150
40,150
The Group’s short-term and long-term debts do not contain any financial covenants. As at 31 December
2006, the Group had available credit facilities of RMB40,268 million (2005: RMB31,266 million) which it
can draw upon.
14. ACCOUNTS PAYABLE
Accounts payable are analysed as follows:
Third parties
China Telecom Group
Other state-controlled
telecommunications operators
in the PRC
The Group
2006
RMB
millions
25,441
6,482
2005
RMB
millions
26,996
6,886
63
67
31,986
33,949
The Company
2006
RMB
millions
2005
RMB
millions
61
8
–
69
74
–
–
74
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
113
Notes to the Financial Statements
for the year ended 31 December 2006
14. ACCOUNTS PAYABLE (continued)
Amounts due to China Telecom Group are repayable in accordance with contractual terms which are
similar to those terms offered by third parties.
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
2006
RMB
millions
5,923
8,687
7,181
10,195
31,986
2005
RMB
millions
5,379
8,797
9,283
10,490
33,949
The Company
2006
RMB
millions
2005
RMB
millions
–
45
9
15
69
–
46
4
24
74
15. ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payables represent:
Amounts due to China Telecom
Group
Amounts due to subsidiaries
Other state-controlled
telecommunications operators
in the PRC
Accrued expenses
Customer deposits and receipts
in advance
The Group
2006
RMB
millions
2005
RMB
millions
The Company
2006
RMB
millions
2005
RMB
millions
1,982
–
181
12,756
11,651
4,534
–
243
12,087
10,021
175
14,340
–
1,204
90
26,570
26,885
15,809
104
–
–
571
44
719
114 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
16. FINANCE LEASE OBLIGATIONS
Obligations under finance leases are analysed as follows:
Within 1 year
Between 1 to 2 years
Total minimum lease payments
Less: finance charges related to future periods
Present value of minimum lease payments
Less: current portion
Non-current portion
17. DEFERRED REVENUES
The Group
2006
RMB
millions
2005
RMB
millions
48
–
48
–
48
(48)
–
114
55
169
(9)
160
(108)
52
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
2006
RMB
millions
2005
RMB
millions
27,708
36,771
912
4,204
5,116
(4,971)
(2,913)
(4,217)
1,431
3,895
5,326
(6,781)
(2,970)
(4,638)
20,723
27,708
7,098
13,625
8,958
18,750
20,723
27,708
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
115
Notes to the Financial Statements
for the year ended 31 December 2006
17. DEFERRED REVENUES (continued)
Included in other non-current assets are capitalised direct incremental costs associated with the
installation of wireline services. As at 31 December 2006, the unamortised portion of these costs was
RMB8,473 million (2005: RMB10,025 million).
18. 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
2006
RMB
millions
2005
RMB
millions
67,055
13,877
67,055
13,877
80,932
80,932
All ordinary domestic shares and H shares rank pari passu in all material respects.
116 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
19. RESERVES
The Group
Balance as at 1 January 2005
Effect of change in tax
rate (Note 8)
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 (iii) and (iv))
Dividends (Note 29)
Capital
Share
Re-
valuation
Surplus
reserve
premium
reserve
reserves
RMB
RMB
RMB
RMB
Statutory
common
welfare
fund
RMB
millions
(Note (i))
millions
millions
millions
millions
Other
Retained
reserves
earnings
RMB
RMB
Total
RMB
millions
(Note (ii))
millions
millions
(2,804 )
10,746
7,585
25,629
5,793
7,683
23,642
78,274
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(134 )
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
9,509
–
1,285
–
(5 )
–
–
134
(5 )
–
12
(12 )
–
(189 )
–
–
–
189
27,912
(10,794 )
(5,596 )
–
27,912
–
(5,596 )
Balance as at 31 December 2005
(2,804 )
10,746
7,451
35,138
7,078
7,501
35,475
100,585
Effect of change in tax
rate (Note 8)
Revaluation surplus realised
Deferred tax on revaluation
surplus of property, plant
and equipment realised
Deferred tax on land use
rights realised
Change in fair value of
available-for-sale equity
securities (net of deferred tax)
Profit for the year
Transfer from statutory common
welfare fund to surplus
reserves (Note (iv))
Appropriations (Notes (iii) and (iv))
Dividends (Note 29)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(94)
–
–
–
–
–
–
–
–
–
–
–
–
–
7,078
7,602
–
Balance as at 31 December 2006
(2,804)
10,746
7,357
49,818
–
–
–
–
–
–
(7,078)
–
–
–
5
–
–
94
33
(33)
(182)
182
5
–
–
–
44
–
–
–
–
–
44
27,142
27,142
–
(7,602)
(6,283)
–
–
(6,283)
7,401
48,975
121,493
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
117
Notes to the Financial Statements
for the year ended 31 December 2006
19. RESERVES (continued)
The Company
Capital
Share
Surplus
reserve
premium reserves
RMB
RMB
RMB
Statutory
Retained
common
welfare earnings/
fund
RMB
(deficit)
RMB
Total
RMB
millions
(Note (i))
millions
millions
millions
millions
millions
Balance as at 1 January 2005
Profit for the year
Appropriations (Notes (iii) and (iv))
Dividends (Note 29)
29,168
–
10,746
–
–
–
–
–
25,629
–
9,509
–
5,793
–
1,285
–
(29,375 )
53,623
(10,794 )
(5,596 )
41,961
53,623
–
(5,596 )
Balance as at 31 December 2005
29,168
10,746
35,138
7,078
7,858
89,988
Profit for the year
Transfer from statutory common welfare
fund to surplus reserves (Note (iv))
Appropriations (Notes (iii) and (iv))
Dividends (Note 29)
–
–
–
–
–
–
–
–
Balance as at 31 December 2006
29,168
10,746
49,818
–
–
19,276
19,276
7,078
7,602
–
(7,078)
–
–
–
–
(7,602)
(6,283)
–
–
(6,283)
13,249
102,981
Note:
(i)
(ii)
(iii)
Capital reserve of the Group represents the sum of (a) the difference between the carrying amount of the
Company’s net assets and the par value of the Company’s shares issued upon its formation; and (b) the
difference between the consideration paid by the Company for the acquired entities under the First Acquisition
and the Second Acquisition, which were accounted for as equity transactions as disclosed in Note 1 to the
financial statements, and the historical carrying amount of net assets of these acquired entities.
Capital reserve of the Company represents the difference between the carrying amount of the Company’s net
assets and the par value of the Company’s shares issued upon its formation.
Other reserves represent primarily the balance of the deferred tax assets resulted from the revaluation of land
use rights for tax purposes (and not for financial reporting purposes) as disclosed in Note 8 to the financial
statements.
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 2006, the Company
transferred RMB2,534 million (2005: RMB2,570 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, the transfer of RMB5,068 million for the year ended 31 December 2006 (2005: RMB6,939 million),
being 20% (2005: 27%) 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.
118 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
19. RESERVES (continued)
Note:
(iv)
According to the Company’s Articles of Association, the Company was 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 the transfer of
RMB1,285 million, being 5% of the year’s net profit determined in accordance with the PRC accounting rules
and regulations, to this fund.
Pursuant to the revision of the PRC Company Law, companies with limited liabilities and companies limited by
shares are no longer required to make annual profit appropriation to the statutory common welfare fund
commencing on 1 January 2006. The opening balance of the Group’s statutory common welfare fund as at 1
January 2006 was transferred to the surplus reserves in accordance with “Notice on accounting issue relating
to the implementation of the Company Law of the PRC” issued by the Ministry of Finance.
(v)
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 2006, the amount
of retained earnings available for distribution was RMB13,249 million (2005: RMB7,858 million), being the
amount determined in accordance with IFRS. Final dividend of approximately RMB6,820 million in respect of
the financial year 2006 proposed after the balance sheet date has not been recognised as a liability at the
balance sheet date (Note 29).
20. OPERATING REVENUES
Operating revenues represent revenues from the provision of wireline telecommunications services. The
components of the Group’s operating revenues are as follows:
Note
(i)
(ii)
(iii)
(iv)
(iv)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
The Group
2006
RMB
millions
2005
RMB
millions
4,971
2,913
28,973
46,188
25,517
3,140
23,630
3,031
14,095
4,503
14,133
3,999
6,781
2,970
30,351
47,624
25,993
3,407
17,862
2,958
12,838
4,464
9,976
4,086
175,093
169,310
Upfront connection fees
Upfront installation fees
Monthly fees
Local usage fees
DLD
ILD
Internet
Managed data
Interconnections
Leased line
Value-added services
Others
Note:
(i)
Represent the amortised amount of the upfront fees received for initial activation of wireline services.
(ii)
Represent the amortised amount of the upfront fees received for installation of wireline services.
(iii)
Represent amounts charged to customers each month for their use of the Group’s telephone services.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
119
Notes to the Financial Statements
for the year ended 31 December 2006
20. OPERATING REVENUES (continued)
Note:
(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.
(viii) Represent primarily 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)
Represent amounts charged to customers for provision of wireline value-added services, which comprise
primarily caller ID services, short messaging services, ring tone services, integrated information services and
telephone information services.
(x)
Represent primarily revenues from sale and repairs and maintenance of customer-end equipment, and
constructions of telecommunications network and infrastructure for customers.
21. PERSONNEL EXPENSES
Personnel expenses are attributable to the following functions:
Network operations and support
Selling, general and administrative
22. OTHER OPERATING EXPENSES
Other operating expenses consist of:
Interconnection charges
Donations
Others
Note
(i)
The Group
2006
RMB
millions
17,529
8,490
2005
RMB
millions
17,459
7,501
26,019
24,960
The Group
2006
RMB
millions
6,212
23
20
6,255
2005
RMB
millions
5,473
21
24
5,518
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.
120 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
23. TOTAL OPERATING EXPENSES
Total operating expenses for the year ended 31 December 2006 include auditors’ remuneration of RMB61
million (2005: RMB46 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
2006
RMB
millions
2005
RMB
millions
5,795
(716)
5,079
(326)
60
(146)
4,667
6,763
(1,062)
5,701
(243)
42
(605)
4,895
*
Interest expense was capitalised in construction in
progress at the following rates per annum
1.9%–5.0%
2.1%–5.1%
25. INCOME TAX
Income tax in the consolidated income statement comprises:
Provision for PRC income tax
Deferred taxation — PRC (Note 8)
The Group
2006
RMB
millions
6,661
93
6,754
2005
RMB
millions
5,927
233
6,160
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
121
Notes to the Financial Statements
for the year ended 31 December 2006
25. INCOME TAX (continued)
A reconciliation of the expected tax with the actual tax expense is as follows:
Profit before taxation
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
Income tax
Note
(i)
(i)
(ii)
(iii)
The Group
2006
RMB
millions
2005
RMB
millions
33,979
34,114
11,213
(1,714)
657
(1,989)
(1,413)
11,258
(1,689)
720
(2,651)
(1,478)
6,754
6,160
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 7.5% 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.
122 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
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
in kind
RMB
thousands
Discretionary
bonuses
RMB
thousands
Retirement
scheme
contributions
RMB
thousands
Share-based
payments
RMB
thousands
Total
RMB
thousands
2006
Executive directors
Wang Xiaochu
Leng Rongquan
Wu Andi
Zhang Jiping
Huang Wenlin
Li Ping
Wei Leping
Yang Jie
Sun Kangmin
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
Independent supervisor
Zhu Lihao
—
—
—
—
—
—
—
—
—
150
200
150
150
500
—
—
—
—
75
324
291
276
276
276
276
108
276
276
—
—
—
—
—
142
131
109
173
—
745
671
633
633
633
633
107
633
633
—
—
—
—
—
218
174
188
263
—
64
58
54
54
54
54
22
52
53
—
—
—
—
—
50
40
36
50
—
—
—
314
314
314
314
162
—
—
—
—
—
—
—
236
170
144
236
—
1,133
1,020
1,277
1,277
1,277
1,277
399
961
962
150
200
150
150
500
646
515
477
722
75
1,225
2,934
6,164
641
2,204
13,168
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
123
Notes to the Financial Statements
for the year ended 31 December 2006
26. DIRECTORS’ AND SUPERVISORS’ REMUNERATION (continued)
The following table sets out the remuneration received or receivable by the Company’s directors and
supervisors (continued):
Directors’/
supervisors’
fees
RMB
thousands
Salaries,
allowances
and benefits
in kind
RMB
thousands
Discretionary
bonuses
RMB
thousands
Retirement
scheme
contributions
RMB
thousands
Share-based
payments
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
–
–
–
–
–
–
–
–
–
–
–
130
208
130
50
173
–
–
–
–
–
–
10
60
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
–
–
61
55
51
51
51
51
51
49
50
13
57
–
–
–
–
–
44
12
10
15
13
16
–
–
–
–
278
278
278
278
278
–
–
232
232
–
–
–
–
–
209
151
128
209
–
–
–
–
398
359
839
839
839
839
839
499
499
879
958
130
208
130
50
173
645
273
224
354
170
206
10
60
761
3,082
3,376
650
2,551
10,420
124 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
27. INDIVIDUALS WITH HIGHEST EMOLUMENTS
Of the five highest paid individuals of the Group for the year ended 31 December 2006, all of them were
directors of the Company and their remuneration has been disclosed in Note 26. Of the five highest paid
individuals of the Group for the year ended 31 December 2005, four of them were directors of the
Company and whose remuneration was disclosed in Note 26. For the year ended 31 December 2005, the
Group’s remaining highest paid individual was not a director or a supervisor of the Company and whose
remuneration included salaries, allowances and benefits in kind of RMB850 thousands and retirement
benefits of RMB82 thousands.
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 RMB19,276
million (2005: RMB18,451 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 26 March 2007, a final dividend of
equivalent to HK$0.085 per share totalling approximately RMB6,820 million for the year ended 31
December 2006 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
2006.
Pursuant to the shareholders’ approval at the Annual General Meeting held on 23 May 2006, a final
dividend of RMB0.077637 (equivalent to HK$0.075) per share totalling RMB6,283 million in respect of the
year ended 31 December 2005 was declared, which was paid on 15 June 2006.
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, which was paid on 23 June 2005.
30. BASIC EARNINGS PER SHARE
The calculation of basic earnings per share for the years ended 31 December 2006 and 2005 is based on
the profit attributable to equity holders of the Company of RMB27,142 million and RMB27,912 million,
respectively, divided by 80,932,368,321 shares.
The amount of diluted earnings per share is not presented as there were no dilutive potential ordinary
shares in existence for all periods presented.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
125
Notes to the Financial Statements
for the year ended 31 December 2006
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 2006 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
2006
RMB
millions
2005
RMB
millions
468
315
266
223
172
329
326
195
134
119
108
180
Total minimum lease payments
1,773
1,062
Total rental expense in respect of operating leases charged to the consolidated income statement for
the year ended 31 December 2006 was RMB1,262 million (2005: RMB1,208 million).
Capital commitments
As at 31 December 2006 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
The Company
2006
RMB
millions
2005
RMB
millions
2006
RMB
millions
2005
RMB
millions
570
2,832
3,402
1,622
5,590
7,212
513
2,278
2,791
1,896
3,047
4,943
113
3
116
165
6
171
148
16
164
110
15
125
126 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
31. COMMITMENTS AND CONTINGENCIES (continued)
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 2006 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, or other forms
of contingent liabilities.
As at 31 December 2006, the Company’s undiscounted maximum amount of potential future
payments under guarantees given to banks in respect of banking facilities granted to subsidiaries
was RMB1,649 million (2005: RMB1,497 million).
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 outcome 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.
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.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
127
Notes to the Financial Statements
for the year ended 31 December 2006
32. CONCENTRATION OF RISKS (continued)
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
2006
RMB
millions
12,035
3,405
1,088
2005
RMB
millions
10,947
2,643
2,020
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 13.
128 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
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 a part of a large group of companies under China Telecom, a company 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:
2006
RMB
millions
2005
RMB
millions
155
8,216
2,378
3,238
1,143
364
306
179
750
2,361
267
6,575
2,632
2,456
425
386
275
183
725
2,849
Note
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(viii)
(ix)
(i)
Represent commission paid and payable for procurement services provided by China Telecom Group.
(ii)
(iii)
(iv)
(v)
Represent network construction, engineering and information technology services provided by China
Telecom Group.
Represent amounts paid and payable to China Telecom Group in respect of cultural, educational, hygiene
and other community services.
Represent amounts paid and payable 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 to entities of China Telecom Group which were not within the scope
of other related party service agreements in respect of services for procurement of telecommunications
equipment, network design, software upgrade, system integration and manufacturing of calling cards.
(vi)
Represent amounts paid and payable to China Telecom Group for leases of business premises and inter-
provincial transmission optic fibres.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
129
Notes to the Financial Statements
for the year ended 31 December 2006
33. RELATED PARTY TRANSACTIONS (continued)
(a) Transactions with China Telecom Group (continued)
Note:
(vii) Represent net amount charged by China Telecom 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 Group with respect to the amounts due to China
Telecom and loans from China Telecom Group (Note 13).
Amounts due from/to China Telecom Group included in the following 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
2006
RMB
millions
136
548
684
6,482
1,982
23,766
30,150
2005
RMB
millions
224
606
830
6,886
4,534
20,384
40,150
Total amounts due to China Telecom Group
62,380
71,954
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 contractual terms which are
similar to those terms offered by third parties. The term and conditions associated with short-term
debt and long-term debt payable to China Telecom Group are set out in Note 13.
As at 31 December 2006 and 2005, no material impairment losses for bad and doubtful debts was
recorded in respect of amounts due from China Telecom Group.
On 30 August 2006, the Company entered into a strategic agreement (“the Agreement”) with China
Communication Services Corporation Limited (“CCS”), a company under the control of China
Telecommunication Corporation. The Agreement was approved by the Company’s independent
shareholders at an Extraordinary General Meeting held on 25 October 2006. The Agreement will be
effective from 1 January 2007 to 31 December 2009, pursuant to which the Company’s subsidiaries
in the Shanghai, Guangdong, Zhejiang, Fujian, Hubei and Hainan regions will, on an annual basis,
procure design, construction and engineering services provided by CCS for at least 12.5% of these
subsidiaries’ capital expenditure. In return, CCS agreed to provide an additional price discount of at
least 5% for the above services. In addition, the above subsidiaries will also procure facilities
management services provided by CCS of not less than RMB1,330 million during the effective
period of the Agreement.
130 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
33. RELATED PARTY TRANSACTIONS (continued)
(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
2006
RMB
thousands
2005
RMB
thousands
10,323
641
2,204
7,219
650
2,551
13,168
10,420
The above remuneration is included in personnel expenses.
(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-controlled public utilities enterprise and operates in an economic regime
currently dominated by entities directly or indirectly controlled by the State through government
authorities, agencies, affiliations and other organisations (collectively referred to as “state-
controlled entities”).
Apart from transactions with parent company and its affiliates, the Group have transactions with
other state-controlled entities which include but not limited to the following:
— sales and purchases of goods, properties and other assets
— rendering and receiving services
— lease of assets
— depositing and borrowing money
— use of public utilities
These transactions are conducted in the ordinary course of the Group’s business on terms
comparable to the terms of transactions with other entities that are not state-controlled. The
Group prices its telecommunications services and products based on government-regulated tariff
rates, where applicable, or based on commercial negotiations. The Group has also established its
procurement policies and approval processes for purchases of products and services, which do not
depend on whether the counterparties are state-controlled entities or not.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
131
Notes to the Financial Statements
for the year ended 31 December 2006
33. RELATED PARTY TRANSACTIONS (continued)
(d) Transactions with other state-owned entities in the PRC (continued)
Having considered the transactions potentially affected by related party relationships, the entity’s
pricing strategy, procurement policies and approval processes, and the information that would be
necessary for an understanding of the potential effect of the related party relationship on the
financial statements, the directors are of the opinion that the following related party transactions
require disclosure of numeric details:
(i) Transactions with other state-controlled telecommunications operators in the PRC
The Group’s wireline telecommunications networks interconnect with the networks of other
state-controlled 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-
controlled telecommunications operators in the PRC is disclosed in Note 32.
Amounts due from/to other state-controlled telecommunications operators in the PRC
included in the following balances are summarised as follows:
Accounts receivable
Prepayments and other current assets
Total amounts due from other state-controlled
telecommunications operators in the PRC
Accounts payable
Accrued expenses and other payables
Total amounts due to other state-controlled
telecommunications operators in the PRC
2006
RMB
millions
1,791
242
2005
RMB
millions
1,786
397
2,033
2,183
63
181
244
67
243
310
Amounts due from/to other state-controlled telecommunications operators in the PRC bear
no interest, are unsecured and are repayable in accordance with normal commercial terms.
As at 31 December 2006 and 2005, there were no material impairment losses for bad and
doubtful debts in respect of amounts due from other state-controlled telecommunications
operators in the PRC.
132 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
33. RELATED PARTY TRANSACTIONS (continued)
(d) Transactions with other state-owned entities in the PRC (continued)
(ii) Transactions with state-controlled banks
The Group deposits its cash balances with several state-controlled banks in the PRC and
obtains short-term and long-term loans from these banks in the ordinary course of business.
The interest rates of the bank deposits and loans are regulated by the People’s Bank of
China. The Group’s interest income earned from deposits with and interest expenses incurred
on loans from state-controlled banks in the PRC are as follows:
Interest income
Interest expense
2006
RMB
millions
326
2,993
2005
RMB
millions
243
3,861
The amounts of cash deposited with and loans from state-controlled banks in the PRC are
summarised as follows:
Cash at bank
Time deposits with maturity within three months
Time deposits with maturity over three months
2006
RMB
millions
10,475
7,705
119
2005
RMB
millions
11,572
3,538
292
Total deposits with state-controlled banks in the PRC
18,299
15,402
Short-term loans
Long-term loans
35,750
15,347
45,704
24,584
Total loans with state-controlled banks in the PRC
51,097
70,288
Further details of the interest rates and repayment terms of loans from state-controlled
banks are set out in Note 13.
The directors believe the above information provides meaningful disclosure of related party
transactions.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
133
Notes to the Financial Statements
for the year ended 31 December 2006
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 2006 were RMB2,374 million (2005:
RMB2,258 million).
The amount payable for contributions to defined contribution retirement plans as at 31 December 2006
was RMB522 million (2005: RMB591 million).
35. STOCK APPRECIATION RIGHTS
The Group implemented a stock appreciation rights plan for members of its management to provide
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. The Company recognises compensation expense
of the stock appreciation rights over the applicable vesting period.
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 had 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 had 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.
In January 2006, the Company’s compensation committee approved the granting of 837.3 million stock
appreciation right units to eligible employees. Under the terms of this grant, all stock appreciation
rights had a contractual life of six years from date of grant and an exercise price of HK$2.85 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.
134 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
35. STOCK APPRECIATION RIGHTS (continued)
During the year ended 31 December 2006, 67 million (2005: 70 million) stock appreciation right units
were exercised. For the year ended 31 December 2006, compensation expense recognised by the Group
in respect of stock appreciation rights was RMB514 million (2005: RMB81 million).
As at 31 December 2006, the carrying amount of liability arising from stock appreciation rights was
RMB574 million (2005: RMB129 million). As at 31 December 2006, the intrinsic value of the vested stock
appreciation rights outstanding was nil (2005: RMB0.4 million).
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 2006 and 2005, the carrying amounts and fair values
of the Group’s long-term debt were as follows:
2006
2005
Carrying
amount
RMB
millions
Fair
value
RMB
millions
Carrying
amount
RMB
millions
Fair
value
RMB
millions
Long-term debt
45,499
43,733
64,740
63,561
Except for available-for-sale equity securities which had fair value of RMB104 million as at 31 December
2006 (2005: RMB38 million) based on quoted price on a PRC stock exchange, the Group’s long-term
investments are unlisted equity interests for which no quoted market prices exist 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.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
135
Notes to the Financial Statements
for the year ended 31 December 2006
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 other factors 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 amortises 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 with
consideration of 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 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 its 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.
136 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
37. ACCOUNTING ESTIMATES AND JUDGEMENTS (continued)
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 would 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. When an asset does not generate
cash flows largely independent of those from other assets, the recoverable amount is determined for the
smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit). 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.
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.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
137
Notes to the Financial Statements
for the year ended 31 December 2006
38. POSSIBLE IMPACT OF AMENDMENTS, NEW STANDARDS AND
INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE FOR THE ANNUAL
ACCOUNTING PERIOD ENDED 31 DECEMBER 2006
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 2006 and which have not been adopted in these financial statements:
IFRS 7, Financial instruments: disclosures
IFRS 8, Operating segments
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 2007
1 January 2009
1 March 2006
1 May 2006
1 June 2006
IFRIC 10, Interim financial reporting and impairment
1 November 2006
IFRIC 11, IFRS 2 — Group and treasury share transactions
IFRIC 12, Service concession arrangements
Amendment to IAS 1, Presentation of financial statements:
capital disclosures
Revised guidance on Implementing IFRS 4
1 March 2007
1 January 2008
1 January 2007
1 January 2007
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 the adoption of the above amendments, revised guidance, new standards and new
interpretations is unlikely to have a significant impact on the Group’s results of operations and financial
position.
138 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
39. NON-ADJUSTING POST BALANCE SHEET EVENT
On 16 March 2007, the Fifth Plenary Session of the Tenth National People’s Congress passed the
Corporate Income Tax Law of the People’s Republic of China (“new tax law”), which will take effect on 1
January 2008. According to the new tax law, the corporate income tax rate for entities other than certain
high-tech enterprises and small-scale enterprises earning a “small profit”, as defined in the new tax
law, will be revised to 25%. In addition, entities that are currently taxed at preferential rates will be
subject to a five-year transition period during which the tax rates will gradually be increased to the
unified rate of 25% from 1 January 2008. As a result of the new tax law, it is expected that the income
tax rate applicable to the Company and certain of its subsidiaries will be reduced from 33% to 25% from
1 January 2008. However, since the detailed implementation rules as to how the existing preferential
rates will gradually be increased to the unified rate of 25% over the five-year transition period have not
been formulated and promulgated, management is not yet in a position to estimate the impact of the
new tax law on the deferred tax assets and liabilities of certain subsidiaries which are being taxed at
preferential rates. The financial effect of the new tax law, if any, will be reflected in the Group’s 2007
financial statements. The enactment of the new tax law is not expected to have any financial effect on
the amounts accrued in the balance sheet in respect of current tax payable.
40. PARENT AND ULTIMATE HOLDING COMPANY
The parent and ultimate holding company of the Group as at 31 December 2006 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 2006
139
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.
140 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
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.
(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.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
141
Supplementary Information for American
Depositary Shareholders
(e) Recently issued accounting standards
SFAS No. 157
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” which defines fair value,
provides a framework for measuring fair value, and expands the disclosures required for fair value
measurements. SFAS No. 157 applies to other accounting pronouncements that require fair value
measurements and does not require any new fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after 15 November 2007. Currently, the Group does not expect the adoption of
SFAS No. 157 will have a material impact on its consolidation financial statements.
FIN No. 48
In June 2006, the FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes
— an interpretation of SFAS No. 109” (“FIN48”). FIN 48 requires that the Group recognises in the
consolidated financial statements the impact of a tax position, if that position is more likely than not of
being sustained upon examination, based on the technical merits of the position. FIN 48 will be effective
for the first fiscal year beginning after 15 December 2006. Currently, the Group does not expect the
adoption of this Interpretation will have a material effect 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 2006 and 2005 is as follows:
Net profit attributable to equity holders of
the Company under IFRS
US GAAP adjustments:
Depreciation on revalued property, plant and equipment,
net of minority interests of RMB14 million for 2006 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
Net profit attributable to equity holders of the Company
under US GAAP
Basic earnings per share under US GAAP
Basic earnings per ADS* under US GAAP
2006
RMB
millions
2005
RMB
millions
27,142
27,912
(6,410)
(406)
5
(22)
1,737
(6,844)
(316)
(5)
22
1,806
22,046
22,575
0.27
27.24
0.28
27.89
*
Basic earnings per ADS is calculated on the basis that one ADS is equivalent to 100 H shares.
142 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
The effect on equity of significant differences between IFRS and US GAAP as at 31 December 2006 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 RMB10 million as at
31 December 2006 and RMB24 million
as at 31 December 2005
Deferred tax effect of US GAAP adjustment
Equity attributable to equity holders of the Company
under US GAAP
2006
RMB
millions
2005
RMB
millions
202,425
181,517
8,471
(1,976)
15,287
(3,691)
208,920
193,113
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
143
Financial Summary
(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
Personnel expenses
Other operating expenses
2006
RMB
4,971
2,913
28,973
46,188
25,517
3,140
23,630
3,031
14,095
4,503
18,132
175,093
51,272
30,723
22,214
26,019
6,255
Year ended 31 December
2004
RMB
2005
RMB
2003
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
30,334
19,892
24,960
5,518
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
27,611
19,229
23,233
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
31,338
16,778
20,812
3,176
2002
RMB
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
34,403
13,503
18,894
3,188
Operating expenses
136,483
130,356
121,382
118,701
115,798
38,610
38,954
39,830
32,852
25,108
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
–
(4,667)
(25)
61
33,979
(6,754)
–
(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)
Profit for the year
27,225
27,954
28,076
13,938
Attributable to:
Equity holders of the Company
Minority interests
27,142
83
27,912
42
28,023
53
13,882
56
Profit for the year
27,225
27,954
28,076
13,938
Basic earnings per share
0.34
0.34
0.36
0.18
144 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
(14,690)
(4,071)
50
38
6,435
1,856
8,291
8,219
72
8,291
0.12
2006
RMB
As at 31 December
2004
RMB
2005
RMB
2003
RMB
2002
RMB
Financial condition
Property, plant and equipment,
net
Construction in progress
Other non-current assets
Cash and bank deposits
Other current assets
328,304
18,416
27,758
18,310
21,253
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
Total assets
414,041
417,136
412,570
403,942
423,701
Current liabilities
Non-current liabilities
156,575
53,593
156,976
77,199
151,944
100,007
149,135
102,744
147,478
88,012
Total liabilities
210,168
234,175
251,951
251,879
235,490
Total equity attributable
to equity holders of
the Company
Minority interests
202,425
1,448
181,517
1,444
159,206
1,413
150,794
1,269
187,025
1,186
Total equity
203,873
182,961
160,619
152,063
188,211
Total liabilities and equity
414,041
417,136
412,570
403,942
423,701
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
145
Shareholder Information
Share Information
Share Listing
China Telecom Corporation Limited’s H shares were listed on The Stock Exchange of Hong Kong Limited on
15 November 2002 and New York Stock Exchange as American Depositary Shares (ADSs) on 14 November
2002. ADSs are issued by Bank of New York. Each ADS traded in the United States represents 100 ordinary
shares.
Stock Code
The Stock Exchange of Hong Kong Limited
New York Stock Exchange
728
CHA
Share Price Performance
2006 share price
HK$ per H share
US$ per ADS
High
4.31
Low
2.28
Close
High
Low
Close
4.26
54.75
29.62
54.40
Share price change in 2006
+49%
+49%
Number of issued shares: (as at 31 December 2006)
80,932,368,321
Market capitalisation: (as at 31 December 2006)
HK$345 billion
Share price performance of China Telecom (CT) on the Stock Exchange of Hong Kong Limited versus Hang
Seng Index (HSI) and MSCI World Telecom Service Sector Index (MSCI) from IPO on 15 November 2002 to 31
December 2006.
300
250
200
150
100
50
0
CT (+189.8%)
HSI (+105.0%)
MSCI (+57.7%)
Nov-02
Mar-03
Jul-03
Nov-03
Mar-04
Jul-04
Nov-04
Mar-05
Jul-05
Nov-05
Mar-06
Jul-06
Nov-06 Dec-06
China Telecom
HSI
MSCI
146 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Distribution of shares and shareholdings
The share capital of the Company as at 31 December 2006 was RMB80,932,368,321, divided into
80,932,368,321 shares of RMB1.00 each. As at 31 December 2006, the share capital of the Company
comprised:
Number of shares
% of the total
number of shares
Total number of Domestic shares:
Domestic shares held by:
China Telecommunications Corporation
Guangdong Rising Assets Management Co., Ltd.
Zhejiang Financial Development Company
Fujian State-owned Assets Investment Holdings Co., Ltd.
Jiangsu Guoxin Investment Group Co., Ltd.
67,054,958,321
57,377,053,317
5,614,082,653
2,137,473,626
969,317,182
957,031,543
Total number of H shares (including ADSs):
13,877,410,000
Total
80,932,368,321
82.85
70.89
6.94
2.64
1.20
1.18
17.15
100
Major shareholders of H shares
The following table shows the major shareholders that exercised or controlled the exercise of 5% or above of
H shares as at 31 December 2006.
Name of shareholder
Commonwealth Bank of Australia
JPMorgan Chase & Co.
Number of
H shares held
% of the total number
of H shares in issue
1,248,848,000
1,006,391,826
9.00
7.25
5.16
Halbis Capital Management (Hong Kong) Limited
716,540,000
Dividend History
Financial Year
2002 Final
2003 Final
2004 Final
2005 Final
2006 Final
Shareholder
Approval Date
20 June 2003
3 May 2004
25 May 2005
23 May 2006
29 May 2007
Payment Date
10 July 2003
20 May 2004
23 June 2005
15 June 2006
15 June 2007
Dividend per
Share (HK$)
0.00837*
0.065
0.065
0.075
0.085**
*
On the basis of HK$0.065 per share, pro-rated based on the number of days the Company’s shares have been listed
during the year of 2002.
**
The dividend proposal is subject to shareholders’ approval at the annual general meeting to be held on 29 May 2007.
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
147
Shareholder Information
Annual Reports
Our annual reports in both English and Chinese are now available through the Internet at
http://www.chinatelecom-h.com.
The Company will file an annual report in Form 20-F for the year 2006 with the United States Securities &
Exchange Commission by 30 June 2007.
Annual General Meeting
To be held at 11a.m. on 29 May 2007 in JW Marriott Hotel Hong Kong
Registered Office
Address:
31 Jinrong Avenue
Xicheng District
Beijing
PRC 100032
86 10 6642 8166
86 10 6601 0728
Tel:
Fax:
H share registrar
Computershare Hong Kong Investor Services Limited
Address:
1712–1716, 17th Floor
Hopewell Centre
183 Queen’s Road East, Wanchai
Hong Kong
852 2862 8555
852 2865 0990
hkinfo@computershare.com.hk
Tel:
Fax:
Email:
Investor Relations
Investor Relations Department
Tel:
Fax:
Email:
852 2877 9777
852 2877 0988
ir@chinatelecom-h.com
Office of the Board of Directors
Tel:
Fax:
Email:
86 10 6642 8166
86 10 6601 0728
ir@chinatelecom.com.cn
ADS depositary
The Bank of New York
Address:
Investor Services
P.O. Box 11258
Church Street Station
New York, NY 10286-1258
1-888-269-2377 (toll free in USA)
1-212-815-3700 (international)
shareowners@bankofny.com
http://www.stockbny.com
Tel:
Email:
Websites:
Reminder — Invitation to China Telecom — Annual Report Survey
Annual report is a key communication bridge between you and the Company. So we would like to conduct a
survey to find out your comments for our further improvement in the future. Your responses are very valuable
and we would highly appreciate if you can spare your precious time to complete the questionnaire, “Your
Views on 2006 Annual Report,” attached in this annual report. Please return it by post or fax to us at
+852 2877 0988. You can also fill in the electronic form at www.chinatelecom-h.com. Thank you!
For further information, please browse our website at www.chinatelecom-h.com
Forward-Looking Statements
Certain statements contained in this document may be viewed as “forward-looking statements” within the meaning
of Section 27A of the U.S. Securities Act of 1933 (as amended) and Section 21E of the U.S. Securities Exchange Act of
1934 (as amended). Such forward-looking statements are subject to known and unknown risks, uncertainties and
other factors, which may cause the actual performance, financial condition or results of operations of China Telecom
Corporation Limited (the “Company”) to be materially different from any future performance, financial condition or
results of operations implied by such forward-looking statements. In addition, we do not intend to update these
forward-looking statements. Further information regarding these risks, uncertainties and other factors is included
in the Company’s most recent Annual Report on Form 20-F filed with the U.S. Securities and Exchange Commission
(the “SEC”) and in the Company’s other filings with the SEC.
148 ANNUAL REPORT 2006
CHINA TELECOM CORPORATION LIMITED
Our
Mind
Our
Business
Our
Financials
Our
Systems
Our
People
Our
Heart
Our Mind Our Business Our Financials Our Systems Our People Our Heart
are ready for full services convergence offering (voice, data, media) to provide
one-stop services and total solutions to our customers to satisfy their needs on
communications, entertainment and information in their everyday life.
Ready for next MOVES
CHINA TELECOM CORPORATION LIMITED
ANNUAL REPORT 2006
www.chinatelecom-h.com
31 Jinrong Avenue, Xicheng District,
Beijing, PRC, 100032
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