CHINA
NETCOM GROUP CORPORATION (HONG KONG) LIMITED
中
國
網
通
集
團
(香
港)
有
限
公
司
(Incorporated
in Hong Kong with limited liability under the Companies Ordinance)
(Stock
Code: 906)
2008
INTERIM RESULTS ANNOUNCEMENT
CHAIRMAN’S
STATEMENT
Dear
Shareholders:
In
the first half of 2008, the Company integrated its resources for actively
developing innovative businesses, especially the broadband services in its push
for transformation into a “broadband communications and multimedia services
provider”, and achieved good results in the strategy. The revenue generated from
innovative businesses grew by 26.2% compared to the first half of 2007, and
accounted for 40.6% of total revenues, up 8.5 percentage points over the same
period of last year. Our performance in this business segment helped to partly
offset the continuing negative impact of fixed-mobile substitution.
I Financial
Performance
The
Company generated revenue of RMB 41,125 million in the first half of 2008.
Excluding upfront connection fees of RMB 505 million, revenue was RMB 40,620
million, representing a decrease of 0.15% over the same period of last year
(unless otherwise specified, all reported data hereafter exclude the effect of
upfront connection fees). Net profit was RMB 5,877 million, up 11.9% year on
year because of the change in corporate tax rate and gain on non-cash
transactions. If the impact of non-cash transactions was excluded, the net
profit would be RMB 5,420 million, up 3.2% year-on-year.
The
Company continued to execute its capital expenditure improvement plan in the
first half of 2008. It controlled investment in traditional businesses to
enhance free cash flow. It also increased investment in innovative businesses in
order to create a foundation for sustainable growth in future. The Company
reported a decline in total capital expenditure of 10.7% year-on-year to RMB
7,527 million. In particular, investment in the businesses of fixed-line and PHS
only accounted for 4.4% of the total, down 13.2 percentage points compared to
the same period last year. The Company reported an increase in free cash flow of
3.7% year-on-year to RMB8,428 million.
Improving
free cash flow and capital management led to reduction in our debt level and
greater financial strength. As of June 30, 2008, the Company’s interest-bearing
debt totaled RMB 55,190 million, a 10.6% decline compared to the end of 2007.
Debt-to-equity ratio decreased to 36.6% from 39.8% as of the end of
2007.
II Business
Performance
In
the first half of 2008, innovative businesses maintained growth momentum, while
traditional fixed-line services saw a continued falloff as fixed-mobile
substitution accelerated, and the trend spread to long-distance voice business.
In the first half of 2008, revenue generated from innovative businesses made up
for most of the decline in traditional fixed-line services.
Innovative
Businesses
Revenue
from innovative businesses was RMB 16,480 million in the first half of 2008. The
amount was up 26.2% over the same period of last year, accounting for 40.6% of
the total. This growth was mainly attributable to the rapid expansion of
broadband services. Other innovative businesses, such as ICT (information
communications technology), advertising and media services, also performed well.
The innovative business segment posted growth overall.
As
of June 30, 2008, broadband subscribers increased to 23,355 thousand. This
represented a net growth of 3,587 thousand when compared to the end of 2007. Our
share of the broadband market in our serviced areas was 90.4%, up 1.5 percentage
points year on year.
While
the number of the Company’s broadband services customers was growing fast, the
Company continued to step up effort to develop broadband content and application
services with an aim to increasing revenue contribution from the services. The
Company improved the business model based upon “content & application +
access.” In the first half of 2008, a full-scale upgrade of “CNC MAX” Client
introduced enriched content and a new charging system. This led to a significant
increase in penetration rate for content and application services among
broadband subscribers. In April 2008, the Company initiated its Net Vision Plan
leveraging the Company’s network resource superiority and advanced P2P
technology as well as its partnership with various content providers. The Plan
aims to provide enriched, high-definition, authorized online video content for
the subscribers. By June 30, 2008, the Company had signed trial contracts with
18 media content providers. In April 2008, the Company launched the video
monitoring service “CNC Eye” for residential subscribers and small and
medium-sized enterprises. “CNC Eye” provides internet-based services, such as
large-scale monitoring, remote access and centralized control. By the end of
June 30, 2008, over 40 thousand video monitoring stands had been built. We
believe that revenue contribution from the broadband content and application
services and ARPU from broadband subscribers will both increase as the
penetration of content and application services among the subscribers
rises.
Revenue
from broadband services in the first half of 2008 was RMB 8,859 million, a
year-on-year increase of 38.8%. Broadband services accounted for 21.8% of total
revenues, up 6.1 percentage points over the same period of last year. ARPU was
RMB 68.5. Revenue generated from broadband content and applications was RMB
1,270 million, up 69.1% over the same period of last year, accounting for RMB
9.8 of broadband ARPU.
In
the first half of 2008, the Company’s strategy for the ICT businesses was to
enhance its capability for providing integrated ICT solutions for key
industries, as well as to move towards the high end of the value chain, with an
aim to improving the profitability of its ICT business. We made breakthroughs in
enhancing our capability for serving such key sectors and industries as the
government, environmental protection and transportation. The Company won a
number of key projects for clients including the Ministry of Civil Affairs’
information systems for a minimum standard of living, pollution source
monitoring for the province of Neimenggu Autonomous Region and electronic police
system integration for Shenyang municipality.
The
Company established a call center carrier firm in the first half of 2008. It has
been working with Miyun County Government in Beijing to build an industrial base
for the Company’s call center in the county. The move will create an edge for
the Company in the outsourcing services through the call centre business’s
specialized and professional operation and management.
In
the first half of 2008, ICT revenue grew by 28.5% year on year to RMB1,882
million, and accounted for 4.6% of total revenue.
During
the first half of 2008, we were improving the professional operation of our
advertising and media businesses. Improvements have included the integration of
information and data bases for the “Yellow Pages” and integration of media
channels so that the Company and its branches can better share the resources.
Our “Phone Navigation,” “Yellow Pages” and “Online advertising”
demonstrated robust growth. Revenue from advertising and media services was RMB
413 million, up by 339.4% year on year. Our strength in advertising and media
business is becoming more and more prominent.
Traditional
fixed-line services:
During
the first half of 2008, our traditional fixed-line service faced major
challenges. We are losing local access subscribers, leading to a decline in
revenue from the traditional business. As of June 30, 2008, we had 108,510
thousand local access subscribers, 2,310 thousand less than at the end of 2007.
Of this number, fixed-line subscribers declined by 1,499 thousand, while PHS
subscribers declined by 811 thousand.
Considering
the continuous decline in subscribers of our fixed-line business and PHS, our
strategy for 2008 is to use high-quality and bundled services, reformed pricing
mechanisms, and improved customer experience to promote customer loyalty and
thus arrest the decline in subscribers. We are working to upgrade the “Family
1+” from bundled services to household-oriented multimedia information services.
In May 2008, we launched a family gateway, which offered comprehensive
information services to “Family 1+” customers, combining simultaneous access to
the internet through various PCs, wireless internet access, family video
monitoring and IPTV services.
By
the end of the first half of 2008, there were 9,971 thousand “Family 1+”
subscribers. Penetration rate among broadband subscribers for the “Family 1+”
service was 36%. The increasing penetration rate for “Family 1+” and enriching
functions of the family gateway could make our customer enjoy the multimedia
services more during informatization and unlock the value of our fixed-line
network.
III. Broadband
Olympics
As
a focus of the world’s attention, the 2008 Beijing Olympic Games has been
successfully held. As the official partner for fixed-line communications for the
Games, the Company successfully carried out the work to ensure the smooth
operation of television transmission, broadband internet, WLAN (wireless local
area network) and telecommunication support for the sport events. We are proud
to have shown the world the marvels of the “Broadband Olympic” through our high
speed network, convenient internet access, various communication products, and
high service standards.
We
have built a high-speed and smooth broadband network to deliver the “Broadband
Olympics”. The network enables us to stimulate and satisfy the subscribers’
demand for information about the Olympics as well as their demand for content
and applications at a higher level. In the process, the Company has developed
its capability for providing total solution for corporate customers, boosting
the development of its broadband business and ICT business, as well as enhancing
the awareness about the Company’s brand and service standard.
We
believe that, after the 2008 Beijing Olympic Games, the high-quality broadband
network established during the Olympic Games as well as the broadband
consumption habit developed during the Olympic Games, will lead to a fast and
sustainable growth in the innovative business and thus help catalyze the
Company’s strategic transformation.
IV. Merger
On
June 2, 2008, China Unicom Limited (China Unicom) and the Company issued a joint
announcement, detailing proposals by China Unicom for a merger of the two
companies by way of a scheme of arrangement, which will be completed by an
exchange of shares. Pursuant to the proposals, each share of the Company is to
be exchanged for 1.508 shares of China Unicom, and each American Depositary
Share of the Company is to be exchanged for 3.016 China Unicom American
Depositary Shares. The merger is awaiting approval from the shareholders of the
Company and China Unicom.
We
believe that, given the global shift to mobile and broadband communications, the
merger with China Unicom will serve the long-term development interests of the
Company and shareholders. The merger will enable the new company to give full
play to the competitive advantages of both predecessor companies, and bring the
synergy into play. The new company is also expected to have access to a 3G
license. This will give the new company a basis in a higher-level industrial
chain and give it more stability and staying power in the domestic
telecommunications market. It will also increase value to shareholders of both
companies.
V. Changes
of directors
On
May 22, 2008, Mr. Victor Cha Mou Zing retired as independent non-executive
director of the Company. On May 23, 2008, Mr. Zhang Chunjiang and Mr. Zhang
Xiaotie resigned as executive directors of the Company. On behalf of the Board,
I would like to express my deep gratitude to Mr. Zhang Chunjiang, Mr. Zhang
Xiaotie and Mr. Victor Cha Mou Zing for their outstanding contributions to the
Company during their terms as directors.
VI. Looking
ahead
In
the second half of 2008, we will increase investment in our innovative
businesses, and step up effort to develop the innovative businesses, including
the broadband services. We will continue the transformation of the “Family 1+”
service in order to meet the demand of the household subscribers for
high-quality multimedia services during informatization and to enhance the value
of the fixed-line network. Meanwhile, we believe that the Company’s merger with
China Unicom will support and strengthen execution of these
strategies.
Finally,
I would like to express my sincere gratitude to all shareholders for your
support to the Company.
Zuo
Xunsheng
Chairman
and Chief Executive Officer
Hong
Kong, August 25, 2008
GROUP
RESULTS
China
Netcom Group Corporation (Hong Kong) Limited (the “Company”) is pleased to
announce the unaudited consolidated results of the Company and its subsidiaries
(the “Group”) for the six months ended June 30, 2008.
UNAUDITED
CONSOLIDATED CONDENSED INCOME STATEMENT
FOR
THE SIX MONTHS ENDED JUNE 30 2008
|
|
|
|
Note
|
|
|
|
|
RMB
million
|
RMB
million
|
|
|
Unaudited
|
Unaudited
|
|
|
|
Restated
|
|
|
|
Note
2(d)
|
|
|
|
|
Continuing
operations:
|
|
|
|
Revenues
|
4
|
41,125
|
41,535
|
Depreciation and amortisation
|
|
(12,964)
|
(12,620)
|
Networks, operations and support
|
|
(6,396)
|
(6,645)
|
Staff costs
|
|
(6,202)
|
(5,732)
|
Selling, general and administrative
|
|
(4,520)
|
(4,863)
|
Other operating expenses
|
|
(2,376)
|
(1,721)
|
Other operating income
|
6
|
752
|
210
|
|
|
|
|
Operating Profit before interest income
|
|
9,419
|
10,164
|
Interest income
|
|
34
|
67
|
|
|
|
|
Profit from operations
|
|
9,453
|
10,231
|
Finance costs
|
|
(1,292)
|
(1,770)
|
|
|
|
|
Profit before taxation
|
|
8,161
|
8,461
|
Taxation
|
7
|
(1,779)
|
(2,355)
|
|
|
|
|
Profit for the period from continuing operations
|
|
6,382
|
6,106
|
|
|
|
|
Discontinued
operations:
|
|
|
|
Profit for the period from discontinued operations
|
|
—
|
624
|
|
|
|
|
Note
|
|
|
|
|
RMB
million
|
RMB
million
|
|
|
Unaudited
|
Unaudited
|
|
|
|
Restated
|
|
|
|
Note
2(d)
|
|
|
|
|
|
|
|
|
Profit for the period attributable to shareholders of the
Company
|
|
6,382
|
6,730
|
|
|
|
|
Earnings per share for profit from continuing operations attributable to
shareholders of the Company forthe period
|
|
|
|
-
Basic earnings per share
|
9
|
0.95
|
0.92
|
|
|
|
|
-
Diluted earnings per share
|
9
|
0.94
|
0.91
|
|
|
|
|
Earnings per share for profit from discontinued operations attributable to
shareholders of the Company for
the period
|
|
|
|
-
Basic earnings per share
|
9
|
—
|
0.09
|
|
|
|
|
-
Diluted earnings per share
|
9
|
—
|
0.09
|
|
|
|
|
Earnings
per share for profit attributable to shareholders of the Company
for
the
period
|
|
|
|
-
Basic earnings per share
|
9
|
0.95
|
1.01
|
|
|
|
|
-
Diluted earnings per share
|
9
|
0.94
|
1.00
|
|
|
|
|
UNAUDITED
CONSOLIDATED CONDENSED BALANCE SHEET
AS
AT JUNE 30 2008
|
Note
|
|
|
|
|
RMB
million
|
RMB
million
|
|
|
Unaudited
|
Audited
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
Cash
and bank deposits
|
|
4,686
|
5,395
|
Accounts
receivable
|
10
|
8,252
|
8,458
|
Inventories
and consumables
|
|
288
|
287
|
Prepayments,
other receivables and
other
current assets
|
|
1,196
|
1,021
|
Due
from holding companies and
fellow
subsidiaries
|
|
189
|
347
|
|
|
|
|
Total
current assets
|
|
14,611
|
15,508
|
|
|
|
|
Non-current
assets
|
|
|
|
Fixed
assets
|
|
152,044
|
156,948
|
Construction
in progress
|
|
5,372
|
3,990
|
Lease
prepayments
|
|
2,474
|
2,494
|
Intangible
assets
|
|
1,442
|
1,552
|
Deferred
tax assets
|
|
2,856
|
2,693
|
Other
non-current assets
|
|
2,928
|
3,243
|
|
|
|
|
Total
non-current assets
|
|
167,116
|
170,920
|
|
|
|
|
Total
assets
|
|
181,727
|
186,428
|
|
|
|
|
Liabilities
and equity
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
Accounts
payable
|
11
|
17,074
|
15,639
|
Accruals
and other payables
|
|
3,124
|
2,950
|
Short-term
commercial paper
|
|
—
|
20,000
|
Short-term
bank loans
|
|
30,328
|
11,850
|
Current
portion of long-term bank
and
other loans
|
|
4,723
|
5,322
|
Due
to holding companies and fellow subsidiaries
|
|
4,531
|
4,598
|
Current
portion of deferred revenues
|
|
6,865
|
7,103
|
Current
portion of provisions
|
|
3,361
|
3,381
|
Taxation
payable
|
|
1,895
|
3,750
|
|
|
|
|
Total
current liabilities
|
|
71,901
|
74,593
|
|
|
|
|
Net
current liabilities
|
|
(57,290)
|
(59,085)
|
|
|
|
|
Total
assets less current liabilities
|
|
109,826
|
111,835
|
|
|
|
|
Non-current
liabilities
|
|
|
|
Long-term
bank and other loans
|
|
12,861
|
14,425
|
Corporate
bonds
|
|
2,000
|
2,000
|
Due
to holding companies and fellow subsidiaries
|
|
3,318
|
6,169
|
Deferred
revenues
|
|
3,604
|
4,314
|
Provisions
|
|
2,043
|
2,007
|
Deferred
tax liabilities
|
|
819
|
856
|
Other
non-current liabilities
|
|
15
|
12
|
|
|
|
|
Total
non-current liabilities
|
|
24,660
|
29,783
|
|
|
|
|
Total
liabilities
|
|
96,561
|
104,376
|
|
|
|
|
Financed
by:
|
|
|
|
Share
capital
|
|
2,213
|
2,206
|
Reserves
|
|
82,953
|
79,846
|
|
|
|
|
Shareholders’
equity
|
|
85,166
|
82,052
|
|
|
|
|
Total liabilities and
equity
|
|
181,727
|
186,428
|
Notes
to the Unaudited Interim Financial Statements
1 The
Group and its principal activities
Background
of the Group
China
Netcom Group Corporation (Hong Kong) Limited (the “Company”) was incorporated on
October 22, 1999 in the Hong Kong Special Administrative Region (“Hong Kong”) of
the People’s Republic of China (“PRC”) as a limited liability company under the
Hong Kong Companies Ordinance, the shares of the Company were listed on The
Stock Exchange of Hong Kong Limited on November 17, 2004 and the ADSs were
listed on New York Stock Exchange Inc. on November 16, 2004.
On
January 15, 2007, the Company’s wholly owned subsidiary, China Netcom (Group)
Company Limited (“CNC China”), entered into an assets transfer agreement with
its ultimate holding Company, China Network Communications Group Corporation
(the “China Netcom Group”). Pursuant to the agreement, CNC China agreed to
dispose of its assets and liabilities in relation to its telecommunications
operations in Guangdong Province and Shanghai Municipality branches (“Guangdong
and Shanghai Branches”) in the PRC for consideration of RMB3.5 billion. On
February 14, 2007, the independent shareholders passed an ordinary resolution to
approve the disposal. The disposal was completed on February 28, 2007 upon the
approval granted from the original Ministry of Information
Industry.
After
the disposal of the Guangdong and Shanghai branches, the operation areas of the
Group included Beijing Municipality, Tianjin Municipality, Hebei Province,
Liaoning Province, Shandong Province, Henan Province, Shanxi Province, Neimenggu
Autonomous Region, Jilin Province and Heilongjiang Province in the
PRC.
On
December 5, 2007, China Netcom Group System Integration Limited Corporation
(“System Integration Corporation”), a wholly owned subsidiary of CNC China,
entered into an Equity Interest Transfer Agreement with China Netcom Group
Beijing Communications Corporation, pursuant to which System Integration
Corporation agreed to acquire the entire equity interest of Beijing
Telecommunications Planning and Designing Institute Corporation Limited
(“Beijing Telecom P&D Institute”) from China Netcom Group Beijing
Communications Corporation for a total consideration of RMB298.9 million. The
consideration was paid through a one-off cash payment. The acquisition was
registered with Beijing Property Transaction Administrative House and the
ownership was transferred on December 31, 2007. Prior to the acquisition,
Beijing Telecom P&D Institute was a wholly owned subsidiary of China Netcom
Group Beijing Communications Corporation, which is a wholly owned subsidiary of
China Netcom Group.
On
May 24, 2008, the Ministry of Industry and Information Technology, the National
Development and Reform Commission and the Ministry of Finance of the PRC jointly
made an announcement on Deepening the Reform of the Structure of the
Telecommunications Sector which stated that the PRC government will deepen the
reform of the structure of the telecommunications sector. This encouraged the
formation of three market competitors where each has nationwide network
resources, relatively comparable strength and scale, as well as full service
operation capabilities; it also noted that the allocation of telecommunications
resources will be further optimized and the competition structure will be
improved, and that three third generation mobile telecommunications licences
will be granted once the contemplated restructuring is completed. The boards of
directors of China Unicom Limited (“Unicom”) and the Company jointly announced
on June 2, 2008 that Unicom had formally presented a proposal to the board of
directors of the Company and requested that the board put forward the proposal
to the shareholders of the Company to consider the merger of Unicom and the
Company by way of a scheme of arrangement by the Company under Section 166 of
the Hong Kong Companies Ordinance. Upon completion of the merger, the issued
shares of the Company, the issued shares underlying the ADSs of the Company and
the outstanding share options of the Company will be cancelled. The Company will
become a wholly-owned subsidiary of Unicom, and the listings of the Company’s
shares and the Company’s ADSs on the Hong Kong Stock Exchange and the New York
Stock Exchange will be withdrawn. The completion of the proposed merger is
subject to certain conditions precedent, which include the results of the voting
of the shareholders of the Company at the court meeting and extraordinary
general meeting to be held on 17 September 2008.
The
Group’s principal services
Currently,
the Group’s principal services consist of:
• Fixed
line voice and value-added services, comprising:
|
(a)
|
Local,
domestic long distance and international long distance
services;
|
|
(b)
|
Value-added
services, including caller identity, telephone information services;
and
|
|
(c)
|
Interconnection
services provided to other domestic telecommunications operators including
the fellow subsidiary owned by China Netcom Group operating outside the
ten service regions;
|
• Broadband
services and other Internet-related services;
|
•
|
Information
Communications Technology Services, including system integration, software
services, outsourcing services, professional consulting services,
professional services related with network information and disaster
recovery, and other integrated solutions to client based on information
and communications industry;
|
• Business
and data communications services, including managed data services and leased
line services; and
• Advertising
and media services.
2 Basis
of presentation
|
(a)
|
These
unaudited consolidated condensed financial statements (the “interim
financial statements”) have been prepared in accordance with Hong Kong
Accounting Standard (“HKAS”) 34, “Interim Financial Reporting” issued by
the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) and
the disclosure requirements of the Hong Kong Companies Ordinance and the
Rules Governing the Listing of Securities on The Stock Exchange of Hong
Kong Limited.
|
|
|
The
interim financial statements include the financial information of the
Company and its subsidiaries and have been prepared in accordance with the
same accounting policies adopted in the 2007 financial statements and the
new accounting policies as set out in Note 3 below. These interim
financial statements should be read in conjunction with the Group’s 2007
financial statements.
|
|
(b)
|
A
significant percentage of the Group’s funding requirements is achieved
through short term borrowings. Consequently, the balance sheet indicates a
significant working capital deficit. In the past, a substantial portion of
the Group’s short term borrowings have been rolled over upon maturity.
Based on the Group’s history of obtaining financing, its relationships
with its bankers and its operating performance, the directors consider
that the Group will continue to be able to roll over such short term
financing, or will be able to obtain sufficient alternative sources of
financing to enable it to operate and meet its liabilities as and when
they fall due.
|
|
(c)
|
On
January 15, 2007, CNC China entered into an assets transfer agreement with
China Netcom Group to dispose of its assets and liabilities relating to
its telecommunications operations in Guangdong and Shanghai branches in
the PRC and the disposal was completed on February 28, 2007. In accordance
with Hong Kong Financial Reporting Standard (“HKFRS”) 5 “Non-current
assets held for sales and discontinued operations” issued by the HKICPA,
the results and cash flows of the operations of Guangdong and Shanghai
branches for the six months ended June 30, 2007 have been presented as
discontinued operations.
|
|
(d)
|
On
December 5, 2007, System Integration Corporation entered into an Equity
Interest Transfer Agreement with China Netcom Beijing Communications
Corporation, pursuant to which System Integration Corporation agreed to
acquire the entire equity interest of Beijing Telecom P&D Institute
from China Netcom Group Beijing Communications Corporation. Before the
acquisition, Beijing Telecom P&D Institute was a wholly owned
subsidiary of China Netcom Group Beijing Communications Corporation, which
is a wholly owned subsidiary of China Netcom Group. Since China Netcom
Group is the ultimate holding company of the Group, the acquisition is a
business combination under common control. Therefore, the Group accounted
for this acquisition using the pooling of interest method according to
Accounting Guideline No. 5 - Merger Accounting for Common Control
Transactions (“AG 5”). The acquired businesses and assets are recorded at
book value under HKFRS as if the businesses and assets of Beijing Telecom
P&D Institute have been owned by the Group from the earliest
comparative period presented. Accordingly, the financial information for
the six months ended June 30, 2007 has been
restated.
|
3 Accounting
policies
Except
as described below, the accounting policies adopted for six months ended June
30, 2008 are consistent with those of the annual financial statements for the
year ended December 31, 2007 as described in the 2007 annual financial
statements.
Taxes
on income in the interim periods are accrued using the tax rate that would be
applicable to expected total annual earnings.
The
following standards, amendments and interpretations to published standards are
mandatory for accounting periods beginning on or after January 1, 2008. The
Group adopted them in the six months ended June 30, 2008, but they do not have
any significant impact on the financial statements of the Group.
• HK(IFRIC)
- Int 11, ‘HKFRS 2 — Group and treasury share transactions’
• HK(IFRIC)
- Int 12, ‘Service concession arrangements’
• HK(IFRIC)
- Int 14, ‘HKAS 19 — the limit on a defined benefit asset, minimum funding
requirements and their interaction’
4 Revenues
Revenues
represent the turnover of the Group and are derived from the provision of fixed
line telecommunications and related services, net of the PRC business taxes and
government levies amounting to RMB 1,171 million (For the six months ended June
30, 2007: RMB 1,165 million). The Group’s revenues by business nature can be
summarized as follows:
|
|
|
|
|
|
RMB
million
|
RMB
million
|
|
Unaudited
|
Unaudited
|
|
|
Restated
Note
2(d)
|
|
|
|
Revenues
|
|
|
Local
usage fees
|
9,072
|
10,281
|
Monthly
telephone services
|
5,132
|
6,697
|
Upfront
installation fees
|
599
|
653
|
DLD
usage fees
|
3,945
|
4,471
|
ILD
usage fees
|
356
|
411
|
Value-added
services
|
2,993
|
3,035
|
Interconnection
fees
|
3,951
|
4,203
|
Upfront
connection fees
|
505
|
855
|
Broadband
services
|
8,859
|
6,383
|
Other
Internet-related services
|
301
|
249
|
Managed
data services
|
538
|
641
|
Leased
line income
|
1,494
|
1,189
|
Information
communications technology services
|
1,882
|
1,465
|
Advertising
and media services
|
413
|
94
|
Other
services
|
1,085
|
908
|
|
|
|
Total
|
41,125
|
41,535
|
|
|
|
5 Segmental
reporting
Business
segments provide services that are subject to risks and returns that are
different from other business segments. Geographical segments provide services
within a particular economic environment that is subject to risks and returns
that differ from those of components operating in other economic environments.
Currently the Group has one business segment, the provision of fixed line
telecommunications services. Less than 10% of the Group’s assets and operations
are located outside the PRC. Accordingly, no business and geographical segment
information is presented.
6 Other
operating income
Other
operating income mainly included a pre-tax gain on the non-monetary asset
exchanges of RMB 610 million (For the six months ended June 30, 2007, there is
no such transaction). For the six months ended June 30, 2008, the Group replaced
copper cables in some network infrastructure with optical fibers and related
equipments. Most of this replacement was done through non-monetary asset
exchanges with suppliers, whereby optical fibers and related equipments were
exchanged for the Group’s own copper cables. The assets received was recorded at
the fair value of the assets surrendered. The difference between fair value and
net book value of the assets surrendered was recorded in current period’s income
statement. For the six months ended June 30, 2008, the net book value and fair
value of copper cables surrendered were RMB 324 million and RMB 934 million
respectively. A pre-tax gain on the non-monetary asset exchanges of RMB 610
million is recognized in the income statement for the current
period.
7 Taxation
|
Six
months ended June 30
|
|
|
|
|
RMB
million
|
RMB
million
|
|
Unaudited
|
Unaudited
|
|
|
Restated
Note
2(d)
|
|
|
|
PRC
enterprise income tax (“EIT”)
|
1,971
|
2,589
|
Overseas
profit tax
|
9
|
11
|
Deferred
taxation-continuing operations
|
(201)
|
(194)
|
Deferred
taxation-change in statutory taxation rate
|
—
|
(51)
|
|
|
|
Taxation
charges
|
1,779
|
2,355
|
|
|
|
The
provision for EIT is calculated based on the statutory income tax rate of 25%
(For the six months ended June 30, 2007: 33%) on the assessable profit of each
of the entities now comprising the Group in the PRC as determined in accordance
with the relevant income tax rules and regulations in the PRC.
Taxation
on profits derived from certain subsidiaries outside the PRC, including Hong
Kong, has been calculated on the estimated assessable profit at the rates of
taxation ranging from 17.50% to 34.00%, prevailing in the countries in which
those entities operate.
On
March 16, 2007, the National People’s Congress approved the Enterprise Income
Tax Law of the People’s Republic of China (the “New EIT Law”). This New EIT Law
reduces the enterprise income tax rate for domestic enterprises from 33% to 25%
with effect from January 1, 2008.
On
December 6, 2007, the State Council promulgated the Detailed Implementation
Regulations for the implementation of the Enterprise Income Tax Law of the
People’s Republic of China (the “New EIT Implementation Regulations”), with
effect from January 1, 2008. Per a bilateral tax affairs agreement, enterprises
incorporated in Hong Kong are required to pay a 5 percent corporate income tax
on profits distributed from its subsidiaries incorporated in the PRC. On
February 22, 2008, the Ministry of Finance and the State Administration of
Taxation jointly issued Circular on Preferential Policies of Enterprise Income
Tax (“CaiShui [2008] Circular No. 1”). In accordance with the CaiShui [2008]
Circular No. 1, earnings of foreign investment enterprises generated in or after
2008 and distributed to foreign investors should pay the withholding tax. As
stipulated in New EIT Law, if earnings of tax resident enterprise are
distributed to another tax resident enterprise, the withholding tax could be
exempted. According to New EIT Law and New EIT Implementation Regulations, a tax
resident enterprise is an entity incorporated in PRC, or incorporated outside
PRC but its “place of effective management” is in the PRC. At present, the tax
authority has not yet announced the formal guideline on the certification
procedures of tax resident enterprise. The Company preliminarily assessed and
concluded that it satisfied the definition of tax resident enterprise.
Therefore, as of June 30, 2008, there is no deferred tax liability accrued in
the Group´s interim financial statements for the CNC China´s undistributed
profit generated in the six months ended June 30, 2008. The Group will continue
to assess the impact to financial statements when further guideline is
issued.
8 Profit
distributions
|
Six
months ended June 30
|
|
2008
(Note(i))
|
2007
|
|
HK$
million
|
RMB
million
|
HK$
million
|
RMB
million
|
|
Unaudited
|
Unaudited
|
Unaudited
|
Unaudited
|
|
|
|
|
|
Dividend
distributed during
the
period
|
3,960
|
3,499
|
3,678
|
3,600
|
|
|
|
|
|
|
(i)
|
Pursuant
to the shareholder’s approval at the Annual General Meeting held on May
22, 2008, a final dividend of HK$0.592 per share totaling RMB 3,499
million in respect of the year ended December 31, 2007 was declared and
was paid on June 12, 2008, which has been reflected as a reduction of
retained earnings for the six months ended June 30,
2008.
|
|
(ii)
|
No
interim dividend has been proposed by the directors for the period ended
June 30, 2008. The payment of any future dividends will be determined by
the Board of Directors.
|
|
(iii)
|
Appropriation
to statutory reserve
|
|
|
According
to a PRC tax approval document issued by the Ministry of Finance and State
Administration of Taxation to the Group, the Group’s upfront connection
fees are not subject to EIT and an amount equal to the upfront connection
fees recognised in the retained earnings should be transferred from
retained earnings to a statutory reserve. At June 30, 2008, the Company
has made an aggregated appropriation of 11,211 million to the statutory
reserve (At June 30, 2007: RMB 10,044 million). For the six months ended
June 30, 2008, the Company made an appropriation of RMB 505 million (For
the six months period ended June 30, 2007: RMB 855
million).
|
9 Earnings
per share
Basic
earnings per share are computed using the weighted average number of ordinary
shares outstanding during the period. Diluted earnings per share are computed
using the weighted average number of ordinary shares and potential ordinary
shares outstanding during the period.
The
following table sets forth the computation of basic and diluted earnings per
share:
|
Six
months ended June 30
|
|
|
|
|
(in
RMB million, except share and per share data)
|
|
Unaudited
|
Unaudited
|
|
|
Restated
Note
2(d)
|
|
|
|
Numerator:
|
|
|
Profit
for the period
|
|
|
-
Continuing operations
|
6,382
|
6,106
|
-
Discontinued operations
|
—
|
624
|
|
|
|
|
|
|
|
6,382
|
6,730
|
|
|
|
|
|
|
Denominator:
|
|
|
Weighted
average number of ordinary shares outstanding
and
shares used in computing basic earnings per share
|
6,686,088,782
|
6,651,863,638
|
Diluted
equivalent shares arising from share options
|
76,232,189
|
79,595,001
|
|
|
|
Shares
used in computing diluted earnings per share
|
6,762,320,971
|
6,731,458,639
|
|
|
|
|
|
|
Basic
earnings per share (RMB)
|
|
|
-
Continuing operations
|
0.95
|
0.92
|
|
|
|
|
|
|
-
Discontinued operations
|
—
|
0.09
|
|
|
|
|
|
|
-
Profit for the period
|
0.95
|
1.01
|
|
|
|
|
|
|
Diluted
earnings per share (RMB)
|
|
|
-
Continuing operations
|
0.94
|
0.91
|
|
|
|
|
|
|
-
Discontinued operations
|
—
|
0.09
|
|
|
|
|
|
|
-
Profit for the period
|
0.94
|
1.00
|
|
|
|
10 Accounts
receivable
Amounts
due from the provision of fixed line telecommunications services to residential
and business customers are due within 30 days from the date of billing.
Residential customers who have accounts overdue by more than 90 days will in
normal circumstances have their services disconnected. Accounts receivable from
other telecommunications operators and customers are due generally between 30 to
90 days from the billing date.
The
ageing analysis of accounts receivable based on the billing date is as
follows:
|
As
at
June
30
2008
|
As
at December 31
2007
|
|
RMB
million
|
RMB
million
|
|
Unaudited
|
Audited
|
|
|
|
0-30
days
|
5,236
|
5,682
|
31-90
days
|
1,758
|
1,866
|
Over
90 days
|
3,116
|
2,308
|
|
|
|
|
|
|
Total
|
10,110
|
9,856
|
|
|
|
Less:
Allowance for doubtful debts
|
(1,858)
|
(1,398)
|
|
|
|
|
|
|
Net
carrying amounts
|
8,252
|
8,458
|
|
|
|
The
carrying value of accounts receivable approximates their fair values based on
cash flows discounted using a market rate of 7.47% (December 31, 2007:
7.47%).
Included
in accounts receivable are amounts due from other state-owned telecommunication
operators amounting to RMB 757 million as at June 30, 2008 (December 31, 2007:
RMB 833 million).
11 Accounts
payable
|
As
at
June
30
2008
|
As
at December 31 2007
|
|
RMB
million
|
RMB
million
|
|
Unaudited
|
Audited
|
|
|
|
0-30
days
|
6,264
|
6,214
|
31-60
days
|
1,842
|
1,462
|
61-90
days
|
1,315
|
1,266
|
91-180
days
|
2,444
|
2,251
|
Over
180 days
|
5,209
|
4,446
|
|
|
|
|
|
|
Total
|
17,074
|
15,639
|
|
|
|
Included
in accounts payable were amounts due to other state-owned telecommunications
operators amounting to RMB 37 million as at June 30, 2008 (December 31, 2007:
RMB 23 million).
12. Significant
subsequent events
On
August 15, 2008, the Company issued a scheme document in relation to the
proposed merger between the Company and Unicom to its shareholders. The
completion of the proposed merger is subject to certain conditions precedent,
which include the results of the voting of the shareholders of the Company at
the court meeting and extraordinary general meeting to be held on September 17,
2008.
Interim
dividend
The
board of directors of the Company has resolved that no interim dividend be paid
for the six months ended June 30, 2008.
Audit
Committee
The
Audit Committee reviewed with management the accounting policies and practices
adopted by the Group and discussed auditing, internal control and financial
reporting matters including the review of the unaudited interim financial
statements for the six months ended June 30, 2008.
Compliance
with the code provisions set out in the Code on Corporate Governance
Practices
Throughout
the six months ended June 30, 2008, other than the roles of the Chairman and the
Chief Executive Officer being performed by Mr. Zuo Xunsheng with effect from May
25, 2008, the Company has complied with all code provisions of the Code on
Corporate Governance Practices as set out in Appendix 14 to the Rules Governing
the Listing of Securities on The Stock Exchange of Hong Kong Limited (the
“Listing Rules”).
Mr.
Zuo Xunsheng joined the Board of Directors of the Company in May 2006 and has
been an Executive Director and Chief Executive Officer of the Company since his
appointment to the Board. After the resignation of Mr. Zhang Chunjiang from his
positions as Chairman and Executive Director of the Company on May 23, 2008, Mr.
Zuo Xunsheng was re-designated as the Chairman of the Company with effect from
May 25, 2008. Mr. Zuo Xunsheng continues to hold his positions as Executive
Director and Chief Executive Officer of the Company after the
re-designation.
The
Company considers that the combination of the roles of the Chairman and the
Chief Executive Officer can promote the efficient formulation and implementation
of the Company’s strategies which will enable the Group to grasp business
opportunities efficiently and promptly. The Company considers that through the
supervision of its Board and its Independent Non-executive Directors, a
balancing mechanism exists so that the interests of the shareholders are
adequately and fairly represented.
Under
the amended Section 303A of the New York Stock Exchange Listed Company Manual,
foreign issuers (including the Company) listed on the New York Stock Exchange,
Inc. (the “NYSE”) are required to disclose a summary of the significant
differences between their domestic corporate governance rules and NYSE corporate
governance rules that would apply to a U.S. domestic issuer. A summary of such
differences appears on our website at
http://www.china-netcom.com/eng/about/summary.htm.
Compliance
with the Model Code
The
Company has adopted the Model Code for Securities Transactions by Directors of
Listed Issuers (the “Model Code”) as set out in Appendix 10 to the Listing
Rules. All directors have confirmed, following enquiry by the Company, which
they have complied with the required standard set out in the Model Code
throughout the period from January 1, 2008 to June 30, 2008.
Purchase,
sale or redemption of the Company’s listed securities
During
the six months ended June 30, 2008, neither the Company nor any of its
subsidiaries purchased, sold or redeemed any of the Company’s listed
securities.
PUBLICATION
OF INTERIM RESULTS ON THE WEBSITES OF THE STOCK EXCHANGE OF HONG KONG LIMITED
AND THE COMPANY
The
2008 Interim Report will be dispatched to shareholders as well as made available
on the HKExnews website of The Stock Exchange of Hong Kong Limited at
http://www.hkexnews.hk as well as the website of the Company at
http://www.china-netcom.com.
The
2008 interim financial information set out above does not constitute the Group’s
statutory financial statements for the six months ended June 30, 2008 but is
extracted from the consolidated condensed financial statements for the six
months ended June 30, 2008 to be included in the 2008 Interim
Report.
Forward-looking
statements
This announcement includes
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Save for statements of historical facts, all
statements in this announcement that address activities, events or developments
which the Company expects or anticipates will or may occur in the future are
hereby identified as forward looking statements for the purpose of the safe
harbour provided by 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. The
words such as believe, intend, expect, anticipate, project, estimate, predict,
plan and similar expression are also intended to identify forward-looking
statements. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors, which may cause the actual performance,
financial condition or results of operations of the Company to be materially
different from any future performance, financial condition or results of
operations implied by such forward-looking statements. Further information
regarding these risks, uncertainties and other factors is included in the
Company’s 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.
As
at the date of this announcement, the board of directors of the Company
comprises Mr. Zuo Xunsheng, Ms. Li Jianguo and Mr. Li Fushen as executive
directors, Mr. Yan Yixun, Mr. Cesareo Alierta Izuel and Mr. José María
Álvarez-Pallete as non-executive directors and Mr. John Lawson Thornton, Dr.
Qian Yingyi, Mr. Hou Ziqiang and Mr. Timpson Chung Shui Ming as independent
non-executive directors.