FORM
6-K
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
Report
of Foreign Private Issuer
Pursuant
to Rule 13a-16 or 15d-16 of
the
Securities Exchange Act of 1934
For
the month of August, 2008
(Indicate
by check mark whether the registrant files or will file annual reports under
cover of Form 20-F or Form 40-F.)
Form
20-F ü
Form 40-F ______
(Indicate
by check mark whether the registrant by furnishing the information contained in
this form is also thereby furnishing the information to the Commission pursuant
to Rule 12g3-2(b) under the Securities Exchange Act of 1934. )
Yes
______ No
ü
(If
"Yes" is marked, indicate below the file number assigned to registrant in
connection with Rule 12g3-2(b): 82-__________. )
N/A
China
Netcom Group Corporation (Hong Kong) Limited
Building
C, No. 156, Fuxingmennei Avenue
Xicheng
District
Beijing,
100031 PRC
This
Form 6-K consists of：
An
announcement on the proposed merger of China Unicom Limited and China Netcom
Group Corporation (Hong Kong) Limited (the “Registrant”) by way of a scheme of
arrangement of the Registrant under Section 166 of the Hong Kong Companies
Ordinance made
by the Registrant in English on August 15,
2008.
Document
1
|
THIS
DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE
ATTENTION
|
If you are in doubt as to any
aspect of this document or as to the action to be taken, you should consult a
licensed securities dealer or other registered institution in securities, a bank
manager, solicitor, professional accountant or other professional
adviser.
If you have sold or
transferred all your shares in China Netcom Group Corporation (Hong Kong)
Limited, you should at once hand this document and the accompanying forms of
proxy to the purchaser or the transferee or to the licensed securities dealer or
registered institution in securities or other agent through whom the sale or
transfer was effected for transmission to the purchaser or the
transferee.
The
Stock Exchange of Hong Kong Limited takes no responsibility for the contents of
this document, makes no representation as to its accuracy or completeness and
expressly disclaims any liability whatsoever for any loss howsoever arising from
or in reliance upon the whole or any part of the contents of this
document.
None of the Securities and Exchange
Commission, any state securities commission or any other regulatory authority of
the United States of America has approved or disapproved the securities referred
to in this document or passed upon the accuracy or adequacy of this document.
Any representation to the contrary is a criminal offence in the United States of
America.
 CHINA UNICOM
LIMITED
中國聯通股份有限公司
(incorporated in Hong Kong
with limited liability)
(Stock Code:
0762)
|
 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)
(Stock
Code: 0906)
|
PROPOSED
MERGER OF
CHINA
UNICOM LIMITED
AND
CHINA
NETCOM GROUP CORPORATION (HONG KONG) LIMITED
BY
WAY OF A SCHEME OF ARRANGEMENT OF
CHINA
NETCOM GROUP CORPORATION (HONG KONG) LIMITED
UNDER
SECTION 166 OF THE HONG KONG COMPANIES ORDINANCE
|
Lead
Financial Adviser to
China Unicom Limited
 |
Exclusive
Financial Adviser to
China
Netcom Group Corporation (Hong Kong) Limited
 |
|
Financial
Adviser to
China
Unicom Limited
 |
Independent
Financial Adviser to
the Independent Board
Committee of China Netcom Group Corporation (Hong Kong)
Limited
 |
All
capitalised terms used in this document have the meanings set out in the section
headed “Definitions” on pages 1 to 7 of this document.
A
letter from the Board is set out on pages 15 to 20 of this document. An
Explanatory Statement regarding the Scheme and the Proposals is set out on pages
57 to 93 of this document. A letter from the Independent Board Committee
containing its advice to the Disinterested Netcom Shareholders, the Netcom ADS
Holders and the Netcom Optionholders in respect of the Proposals is set out on
pages 21 and 22 of this document. A letter from N M Rothschild & Sons (Hong
Kong) Limited, the independent financial adviser to the Independent Board
Committee, containing its advice to the Independent Board Committee in respect
of the Proposals is set out on pages 23 to 56 of this document.
The
actions to be taken by the Netcom Shareholders, the Netcom ADS Holders and the
Netcom Optionholders are set out in the section headed “Actions to be Taken” on
pages i and ii of this document.
Notices
convening the Court Meeting and the Netcom EGM to be held at The Ballroom,
Island Shangri-La, Hong Kong on 17 September 2008 at respectively 4:00 p.m. and
4:30 p.m. (or immediately after the conclusion or adjournment of the Court
Meeting) are set out on pages N-1 to N-4 of this document. Whether or not you
are able to attend the Court Meeting or the Netcom EGM, you are strongly urged
to complete and sign the enclosed pink form of proxy in respect
of the Court Meeting and the enclosed white form of proxy in respect
of the Netcom EGM, in accordance with the instructions respectively printed on
them, and to deposit them at Netcom’s registered office at Room 6701, The
Center, 99 Queen’s Road Central, Hong Kong, as soon as possible but in any event
not later than the times and dates set out in the section headed “Actions to be
Taken” on pages i and ii of this document. The pink form of proxy in respect
of the Court Meeting may alternatively be handed to the Chairman of the Court
Meeting at the Court Meeting if it is not so deposited.
If
you are a Netcom ADS Holder, you are urged to execute and return the ADS Voting
Instruction Card to the Netcom Depositary by 10:00 a.m. on 10 September 2008
(New York time) in order to instruct the Netcom Depositary, in accordance with
the terms of the Netcom ADS Deposit Agreement and the ADS Voting Instruction
Card, to vote the Netcom Shares underlying the Netcom ADSs. If you wish to
attend the Court Meeting and the Netcom EGM (whether in person or by proxy) or
be entitled to be present in person or be represented by counsel at the Court
Hearing to support or oppose the petition to sanction the Scheme, you must
surrender your Netcom ADSs and withdraw the Netcom Shares in accordance with the
terms of the Netcom ADS Deposit Agreement. Netcom will pay to the Netcom
Depositary the fees for the cancellation of your Netcom ADSs, but you may incur
taxes and other charges in connection with such surrender and
withdrawal.
This
document is jointly issued by China Netcom Group Corporation (Hong Kong) Limited
and China Unicom Limited.actions to be taken
15
August 2008
|
ACTIONS
TO BE TAKEN
|
ACTIONS
TO BE TAKEN BY NETCOM SHAREHOLDERS
Completion
of Forms of Proxy
A
pink form of proxy for
use at the Court Meeting and a white form of proxy for use at
the Netcom EGM are enclosed with this document.
Whether
or not you are able to attend the Court Meeting or the Netcom EGM, if you are a
Disinterested Netcom Shareholder (other than an Exempt Principal Trader), you
are strongly urged to complete and sign the enclosed pink form of proxy in respect
of the Court Meeting in accordance with the instructions printed on it and if
you are a Netcom Shareholder, you are strongly urged to complete and sign the
enclosed white form of
proxy in respect of the Netcom EGM in accordance with the instructions printed
on it, and to deposit them, together with the power of attorney or other
authority (if any) under which they are signed or notarially certified copy of
such power of attorney or other authority, at Netcom’s registered office at Room
6701, The Center, 99 Queen’s Road Central, Hong Kong. The pink form of proxy for use at the
Court Meeting should be deposited not later than 4:00 p.m. on 15 September 2008
and, in order to be valid, the white form of proxy for use at the Netcom EGM
should be deposited not later than 4:30 p.m. on 15 September 2008. The
pink form of proxy in
respect of the Court Meeting may alternatively be handed to the Chairman of the
Court Meeting at the Court Meeting if it is not so deposited. The completion and
return of a form of proxy for the Court Meeting or the Netcom EGM will not
preclude you from attending and voting in person at the Court Meeting or the
Netcom EGM. In such event, the relevant form of proxy will be deemed to have
been revoked.
Determining
Entitlements to Vote at the Court Meeting and the Netcom EGM
For
the purpose of determining the entitlements of the Disinterested Netcom
Shareholders to attend and vote at the Court Meeting and the Netcom Shareholders
to attend and vote at the Netcom EGM, the register of members of Netcom will be
closed from 12 September 2008 to 17 September 2008 (both days inclusive) and
during such period, no transfer of Netcom Shares will be effected. In order to
qualify to vote at the Court Meeting and the Netcom EGM, all transfers
accompanied by the relevant share certificates must be lodged with the share
registrar of Netcom in Hong Kong, Computershare Hong Kong Investor Services
Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East,
Hong Kong before 4:30 p.m. (Hong Kong time) on 11 September 2008.
ACTIONS
TO BE TAKEN BY NETCOM ADS HOLDERS
Completion
of ADS Voting Instruction Card
If
you are a Netcom ADS Holder, you cannot vote at the Court Meeting or the Netcom
EGM directly, but as a registered Netcom ADS Holder as at 5:00 p.m. on 14 August
2008 (New York time), you may instruct the Netcom Depositary to vote the Netcom
Shares underlying your Netcom ADSs in accordance with the terms of the Netcom
ADS Deposit Agreement and the ADS Voting Instruction Card. An ADS Voting
Instruction Card is enclosed for this purpose and must be completed, signed and
returned in accordance with the instructions printed on it as soon as possible
but in any event so as to be received by the Netcom Depositary not later than the ADS Voting
Instruction Deadline. ADS Voting Instruction Cards may be returned to the
Netcom Depositary at its offices located at Citigroup Shareholder Services, P.O.
Box 43099, Providence RI 02940-5000, the United States of America. You may not
change the voting instructions indicated on your completed ADS Voting
Instruction Card unless you notify the Netcom Depositary of such change in
writing prior to the ADS Voting Instruction Deadline. If you hold Netcom ADSs
indirectly through a financial intermediary, you must follow the procedures of
the financial intermediary through which you hold your Netcom ADSs if you wish
to vote.
-
i -
Voting
at the Court Meeting and the Netcom EGM and Attending the Court
Hearing
If
you are a Netcom ADS Holder and wish to attend and vote at the Court Meeting and
the Netcom EGM directly, you must surrender your Netcom ADSs and withdraw the
Netcom Shares represented by such Netcom ADSs in accordance with the terms of
the Netcom ADS Deposit Agreement prior to 3:00 p.m. on 2 September 2008 (New
York time). Furthermore, if you are a Netcom ADS Holder and wish to be entitled
to be present in person or be represented by counsel at the Court Hearing to
support or oppose the petition for the sanction of the Scheme, you must
surrender your Netcom ADSs and withdraw the Netcom Shares represented by such
Netcom ADSs in accordance with the terms of the Netcom ADS Deposit Agreement
prior to 3:00 p.m. on 9 October 2008 (New York time) so that you can be
registered as a Netcom Shareholder prior to the Court Hearing. If you hold
Netcom ADSs indirectly through a financial intermediary and wish to attend and
vote at the Court Meeting and the Netcom EGM directly or be present in person or
represented by counsel at the Court Hearing, you must contact the financial
intermediary through which you hold your Netcom ADSs and request it to surrender
the Netcom ADSs beneficially owned by you and to withdraw the Netcom Shares.
Netcom will pay to the Netcom Depositary the fees for the cancellation of your
Netcom ADSs, but you may incur taxes and other charges in connection with such
surrender and withdrawal. In order to cancel your Netcom ADSs and withdraw the
underlying Netcom Shares, you should contact the Netcom Depositary at Citigroup
Shareholder Services, P.O. Box 43099, Providence RI 02940-5000, the United
States of America or by telephone at 1-877-248-4237 between 8:30 a.m. and 6:00
p.m. (New York time) Monday to Friday. Netcom ADS Holders who intend to
surrender their Netcom ADSs in the foregoing manner should not return their ADS
Voting Instruction Card.
The
Netcom Depositary will provide Netcom ADS Holders with copies of this document
and the ADS Voting Instruction Card, which, among other things, will contain
instructions as to the actions to be taken by Netcom ADS Holders in order to be
registered as Netcom Shareholders and be entitled to directly attend and vote at
the Court Meeting and the Netcom EGM and to be present in person or be
represented by counsel at the Court Hearing. If you would like further
information on surrendering your Netcom ADSs or have any questions relating to
this document or the completion and return of the ADS Voting Instruction Card,
please contact the Netcom Depositary at 1-877-248-4237 between 8:30 a.m. and
6:00 p.m. (New York time) Monday to Friday. The helpline cannot provide advice
on the merits of the Scheme or the Proposals or give any financial
advice.
ACTIONS
TO BE TAKEN BY NETCOM OPTIONHOLDERS
The
Option Proposal Letter, which sets out the terms of the Option Proposal and the
details of the Special Purpose Unicom Share Option Scheme, will be despatched to
the Netcom Optionholders on the same day as the date of despatch of this
document. Netcom Optionholders are urged to read the instructions and other
terms and conditions of the Option Proposal set out in the Option Proposal
Letter.
ACTIONS
TO BE TAKEN BY HOLDERS OF NETCOM SHARES HELD THROUGH TRUST OR CCASS
Netcom
will not recognise any person holding any Netcom Shares in trust. If you are a
beneficial owner whose Netcom Shares are held in trust by, or registered in the
name of, a trustee or nominee (other than HKSCC Nominees Limited), you should
provide the registered holder with instructions or make arrangements with him in
relation to the manner in which your Netcom Shares should be voted at the Court
Meeting and the Netcom EGM. Such instructions or arrangements should be given or
made in advance of the aforementioned latest time for the deposit of forms of
proxy in respect of the Court Meeting and the Netcom EGM in order to enable him
to have sufficient time to complete the forms of proxy and to submit them by the
relevant deadline stated above.
If
you are a beneficial owner whose Netcom Shares are deposited in CCASS and
registered under the name of HKSCC Nominees Limited, you must, unless you are an
Investor Participant, contact your broker, custodian, nominee, or other relevant
person who is, or has, in turn, deposited such Netcom Shares with, an Other
CCASS Participant regarding voting instructions to be given to such persons if
you wish to vote at the Court Meeting or at the Netcom EGM. You should contact
your broker, custodian, nominee or other relevant person in advance of the
latest time for the deposit of forms of proxy in respect of the Court Meeting
and the Netcom EGM in order to enable such broker, custodian, nominee or other
relevant person to have sufficient time to provide HKSCC with instructions or
make arrangements with HKSCC in relation to the manner in which your Netcom
Shares should be voted at the Court Meeting and the Netcom EGM.
-
ii -
|
IMPORTANT
NOTICE
|
NOTICE
TO US INVESTORS
The
Proposals relate to the securities of Netcom and Unicom, both of which are
incorporated under the laws of Hong Kong. The Proposals will be effected
pursuant to a scheme of arrangement under Hong Kong law. Accordingly, the Scheme
is subject to the disclosure requirements, rules and practices applicable to
Hong Kong schemes of arrangement, and the information disclosed in this document
may not be the same as that which would have been disclosed if this document had
been prepared for the purpose of complying with the requirements of US federal
securities laws or in accordance with the laws or regulations of any other
jurisdiction. The financial information included in this document has not been,
and will not be, prepared in accordance with US GAAP and thus may not be
comparable to financial information of US companies or companies whose financial
statements are prepared in accordance with US GAAP.
The
new Unicom Shares to be issued pursuant to the Share Proposal and the ADS
Proposal, including the new Unicom Shares underlying the new Unicom ADSs, will
be issued in reliance upon the exemption from the registration requirements of
the US Securities Act provided by Section 3(a)(10) thereof.
It
may be difficult for US holders of Netcom Shares or Netcom ADSs to enforce their
rights and any claim arising out of US securities laws, since Netcom and Unicom
are incorporated outside of the United States, some or all of their respective
officers and directors are resident outside of the United States and a
substantial portion of their respective assets are located outside the United
States. US holders of Netcom Shares or Netcom ADSs may not be able to sue a
foreign company or its officers or directors in a foreign court for violations
of US securities laws, or enforce against them a judgement rendered by a US
court. Further, it may be difficult to compel a foreign company and its
affiliates to subject themselves to a US court’s jurisdiction.
This
document will be despatched to the Netcom Shareholders and the Netcom Depositary
will arrange for the despatch of copies of this document to Netcom ADS Holders
at no cost to them. In addition, the Netcom Shareholders and the Netcom ADS
Holders may obtain free copies of this document at the website maintained by the
SEC at www.sec.gov or at the website maintained by the Hong Kong Stock Exchange
at www.hkexnews.hk.
FORWARD-LOOKING
STATEMENTS
All
statements, other than statements of historical facts included in this document,
are or may be forward-looking statements. Forward-looking statements include,
but are not limited to, those using words such as “seek”, “expect”,
“anticipate”, “estimate”, “believe”, “intend”, “project”, “plan”, “strategy”,
“forecast” and similar expressions or future or conditional verbs such as
“will”, “would”, “should”, “could”, “may” and “might”. These statements reflect
Unicom’s or Netcom’s (as the case may be) current expectations, beliefs, hopes,
intentions or strategies regarding the future and assumptions in light of
currently available information. Such forward-looking statements are not
guarantees of future performance or events and involve known and unknown risks
and uncertainties.
Accordingly,
actual results may differ materially from those described in such
forward-looking statements as a result of a number of factors, including,
without limitation, any changes in the regulatory regime and significant
policies for the PRC telecommunications industry, including changes in the
structure or functions of the primary industry regulator, the Ministry of
Industry and Information Technology (which has assumed the regulatory functions
of the former Ministry of Information Industry), or any changes in the
regulatory policies of the Ministry of Industry and Information Technology, the
State-owned Assets Supervision and Administration Commission and other relevant
government authorities of the PRC; any decisions by the PRC government in
relation to the technology standards and licences of third generation mobile
telecommunication; the results of the ongoing restructuring of the PRC
telecommunications industry; any changes in the effects of competition on the
demand and price of Unicom’s and Netcom’s telecommunications services; the
integration of Unicom and Netcom following the implementation of the Scheme; any
changes in telecommunications and related technologies and applications based on
such technologies; and any changes in political, economic, legal and social
conditions in the PRC including the PRC government’s policies with respect to
economic growth, consolidations or restructuring of and other structural changes
in the PRC telecommunications industry, foreign exchange, foreign investment and
entry by foreign companies into the PRC telecommunications market. Investors in
Unicom and Netcom should not place undue reliance on such forward-looking
statements, and neither Unicom nor Netcom undertake any obligation to update
publicly or revise any forward-looking statements.
-
iii -
|
CONTENTS
|
Page
|
Actions to be
Taken
|
i
|
||||
|
Important
Notice
|
iii
|
||||
|
Definitions
|
1
|
||||
|
Questions and
Answers
|
8
|
||||
|
Expected
Timetable
|
12
|
||||
|
Letter from the
Board
|
15
|
||||
|
Letter from the Independent
Board Committee
|
21
|
||||
|
Letter from
Rothschild
|
23
|
||||
|
Explanatory
Statement
|
57
|
||||
|
1.
|
Introduction
|
57
|
|||
|
2.
|
Background
to the Proposals
|
57
|
|||
|
3.
|
Summary
of the Proposals
|
58
|
|||
|
4.
|
Conditions
of the Proposals and the Scheme
|
62
|
|||
|
5.
|
Undertakings
|
65
|
|||
|
6.
|
Reasons
for and Benefits of the Proposed Merger
|
65
|
|||
|
7.
|
Business
Strategies of the Enlarged Group
|
68
|
|||
|
8.
|
Intentions
of Unicom with Regard to Netcom
|
69
|
|||
|
9.
|
Comparisons
of Value
|
70
|
|||
|
10.
|
Financial
Effects of the Proposals
|
73
|
|||
|
11.
|
Effects
of the Proposals on the Shareholding Structures of Netcom and
Unicom
|
73
|
|||
|
12.
|
Material
Interests of Netcom Directors and Effect of the Scheme on Such
Interests
|
75
|
|||
|
13.
|
Information
on Netcom
|
76
|
|||
|
14.
|
Information
on Unicom
|
76
|
|||
|
15.
|
Possible
Concert Party Agreement
|
80
|
|||
|
16.
|
Risk
Factors
|
80
|
|||
|
17.
|
Share
Certificates, Dealings and Listing
|
82
|
|||
|
18.
|
Registration
and Despatch of Unicom Share Certificates, Unicom ADSs and Option Grant
Letters
|
83
|
|||
-
iv -
|
19.
|
Trading
of Odd Lots of Unicom Shares
|
84
|
|||
|
20.
|
Overseas
Netcom Shareholders, Netcom ADS Holders and Netcom
Optionholders
|
84
|
|||
|
21.
|
Information
for Netcom Shareholders and Netcom ADS Holders in the United
States
|
||||
|
85
|
|||||
|
22.
|
Taxtation
|
86
|
|||
|
23.
|
Court
Meeting and Netcom EGM
|
91
|
|||
|
24.
|
Procedures
for Demanding a Poll at the Netcom EGM
|
92
|
|||
|
25.
|
Actions
to be Taken
|
92
|
|||
|
26.
|
Costs
of the Scheme
|
93
|
|||
|
27.
|
Further
Information
|
93
|
|||
|
28.
|
Where
You Can Find Additional Information
|
93
|
|||
|
29.
|
Language
|
93
|
|||
|
Appendix
I — Financial Information on the Netcom Group
|
I-1
|
||||
|
Appendix
II — Financial Information on the Unicom Group
|
II-1
|
||||
|
Appendix
III — Unaudited Pro Forma Consolidated Financial Information of the
Enlarged
|
|||||
|
Group
|
III-1
|
||||
|
Appendix
IV — General Information on Netcom
|
IV-1
|
||||
|
Appendix
V — General Information on Unicom
|
V-1
|
||||
|
Appendix
VI — Documents Available for Inspection
|
VI-1
|
||||
|
Scheme
of Arrangement
|
S-1
|
||||
|
Notice
of Court Meeting
|
N-1
|
||||
|
Notice
of Netcom EGM
|
N-3
|
||||
-
v -
|
DEFINITIONS
|
In this document, the following
expressions have the meanings respectively set opposite them unless the content
requires otherwise:
|
“3G”
|
:
|
third
generation mobile system, the next generation of mobile network
infrastructure that utilises the 2GHz spectrum
|
|
“ABLP”
|
:
|
AllianceBernstein
L.P., a Delaware limited partnership in the United States
|
|
“acting
in concert”
|
:
|
has
the meaning given to it in the Takeovers Code
|
|
“ADS
Proposal”
|
:
|
the
proposal to the Netcom ADS Holders for the cancellation of the Scheme
Shares underlying their Netcom ADSs in exchange for 3.016 new Unicom ADSs
for every Netcom ADS cancelled
|
|
“ADS
Voting Instruction Card”
|
:
|
the
white voting instruction card for use by Netcom ADS Holders for providing
instructions to the Netcom Depositary as to how to vote the Netcom Shares
underlying their Netcom ADSs in connection with the Court Meeting and the
Netcom EGM
|
|
“ADS
Voting Instruction Deadline”
|
:
|
10:00
a.m. (New York time) on 10 September 2008 (or such other time and date as
shall have been determined by the Netcom Depositary), being the deadline
for the receipt of the ADS Voting Instruction Card by the Netcom
Depositary from the Netcom ADS Holders
|
|
“ADSs”
|
:
|
American
Depositary Shares
|
|
“Announcement”
|
:
|
the
announcement dated 2 June 2008 jointly issued by Unicom and Netcom in
relation to, among other things, the proposed merger of Unicom and Netcom
by way of a scheme of arrangement of Netcom under Section 166 of the Hong
Kong Companies Ordinance and the Proposals
|
|
“Board”
|
:
|
the
board of directors of Netcom
|
|
“CCASS”
|
:
|
the
Central Clearing and Settlement System established and operated by
HKSCC
|
|
“CDMA”
|
:
|
Code
Division Multiple Access technology, which is a digital transmission
technology that accommodates higher throughput by using various coding
sequences to mix and separate voice and data signals for wireless
communication
|
|
“CDMA
Business”
|
:
|
the
CDMA business owned and operated by CUCL together with the relevant assets
of CUCL and the rights and liabilities of CUCL relating to its CDMA
subscribers and the shareholding interests of Unicom in certain
subsidiaries which operate CDMA-related businesses
|
|
“CDMA
Business Disposal”
|
:
|
the
proposed disposal by CUCL and Unicom of the CDMA Business to China
Telecom
|
|
“CDMA
Business Disposal Agreement”
|
:
|
the
definitive agreement dated 27 July 2008 entered into between Unicom, CUCL
and China Telecom relating to the CDMA Business Disposal
|
|
“CDMA
Business Disposal Framework Agreement”
|
:
|
the
framework agreement dated 2 June 2008 entered into between Unicom, CUCL
and China Telecom relating to the CDMA Business Disposal
|
|
“China
Telecom”
|
:
|
China
Telecom Corporation Limited 中國電信股份有限公司,
a joint stock company incorporated under the laws of the PRC with limited
liability and whose shares and ADSs are listed on the Hong Kong Stock
Exchange and the New York Stock
|
-
1 -
|
Exchange,
respectively
|
||
|
“CICC”
|
:
|
China
International Capital Corporation (Hong Kong) Limited, the lead financial
adviser to Unicom in connection with the Proposals
|
|
“Citigroup”
|
:
|
Citigroup
Global Markets Asia Limited, the exclusive financial adviser to Netcom in
connection with the Proposals
|
|
“Concert
Party Agreement”
|
:
|
the
agreement which is anticipated to be entered into between Unicom BVI and
Netcom BVI and pursuant to which they will become parties acting in
concert in respect of Unicom only after the completion of the
Scheme
|
|
“Court
Hearing”
|
:
|
the
hearing of the petition by the High Court for the sanction of the Scheme
and the confirmation of the capital reduction of Netcom
|
|
“Court
Meeting”
|
:
|
a
meeting of the Netcom Shareholders convened at the direction of the High
Court, notice of which is set out on pages N-1 and N-2 of this document,
and any adjournment thereof
|
|
“CUCL”
|
:
|
China
Unicom Corporation Limited, a company incorporated under the laws of the
PRC with limited liability and a wholly-owned subsidiary of
Unicom
|
|
“Disinterested
Netcom Shareholders”
|
:
|
Netcom
Shareholders other than Unicom and those Netcom Shareholders acting in
concert with Unicom
|
|
“Effective
Date”
|
:
|
the
date on which the Scheme becomes effective in accordance with the Hong
Kong Companies Ordinance, which is expected to be 15 October
2008
|
|
“Enlarged
Group”
|
:
|
the
Unicom Group and the Netcom Group
|
|
“Executive”
|
:
|
the
Executive Director of the Corporate Finance Division of the SFC or any
delegate of the Executive Director
|
|
“Exempt
Principal Traders”
|
:
|
certain
members of the respective group of companies to which JPMorgan and
Citigroup belong holding Netcom Securities in their capacity as exempt
principal traders under the Takeovers Code
|
|
“Explanatory
Statement”
|
:
|
the
explanatory statement set out on pages 57 to 93 of this document and
issued in compliance with Section 166A of the Hong Kong Companies
Ordinance
|
|
“Fully
Diluted Netcom Share Capital”
|
:
|
the
total number of Netcom Shares in issue and which would be in issue if all
of the outstanding Netcom Options had been exercised
|
|
“GHz”
|
:
|
Gigahertz,
a unit of measure of frequency; 1 GHz is equal to 1,000 MHz
|
|
“GSM”
|
:
|
global
cellular system for mobile communications, being a digital mobile cellular
telephone system operating in the 900 MHz, 1800 MHz and 1900 MHz frequency
band based on digital transmission and cellular network architecture with
roaming
|
|
“HIBOR”
|
:
|
Hong
Kong Interbank Offered Rate
|
|
“High
Court”
|
:
|
the
High Court of Hong Kong
|
|
“HK$”
|
:
|
Hong
Kong dollars, the lawful currency of Hong Kong
|
|
“HKFRS”
|
:
|
Hong
Kong Financial Reporting Standards
|
-
2 -
|
“HKSCC”
|
:
|
Hong
Kong Securities Clearing Company Limited
|
|
“Hong
Kong”
|
:
|
the
Hong Kong Special Administrative Region of the PRC
|
|
“Hong
Kong Companies Ordinance”
|
:
|
Companies
Ordinance, Chapter 32 of the Laws of Hong Kong
|
|
“Hong
Kong Stock Exchange”
|
:
|
The
Stock Exchange of Hong Kong Limited
|
|
“Independent
Board Committee”
|
:
|
the
independent committee of the Board established for the purpose of advising
the Disinterested Netcom Shareholders, the Netcom ADS Holders and the
Netcom Optionholders in respect of the Proposals
|
|
“Investor
Participant”
|
:
|
a
person admitted to participate in CCASS as an investor
participant
|
|
“JPMorgan”
|
:
|
J.P.
Morgan Securities (Asia Pacific) Limited, the financial adviser to Unicom
in connection with the Proposals
|
|
“Last
ADS Trading Date”
|
:
|
22
May 2008, being the last trading day prior to the suspension of trading in
Netcom ADSs and Unicom ADSs on the New York Stock Exchange pending the
issue of the Announcement
|
|
“Last
Trading Date”
|
:
|
23
May 2008, being the last trading day prior to the suspension of trading in
Netcom Shares and Unicom Shares on the Hong Kong Stock Exchange pending
the issue of the Announcement
|
|
“Latest
Practicable Date”
|
:
|
the
latest practicable date prior to the printing of this document for the
purpose of ascertaining certain information contained herein, being 11
August 2008 (New York time) for information relating to the Netcom ADSs
and the Unicom ADSs and 12 August 2008 (Hong Kong time) for other
information
|
|
“Listing
Rules”
|
:
|
Rules
Governing the Listing of Securities on The Stock Exchange of Hong Kong
Limited
|
|
“MHz”
|
:
|
Megahertz,
a unit of measure of frequency; 1 MHz is equal to one million cycles per
second
|
|
“Netcom”
|
:
|
China
Netcom Group Corporation (Hong Kong) Limited 中國網通集團（香港）有限公司,
a company incorporated under the laws of Hong Kong with limited liability
and whose Netcom Shares and Netcom ADSs are listed on the Hong Kong Stock
Exchange and the New York Stock Exchange, respectively
|
|
“Netcom
ADS Deposit Agreement”
|
:
|
the
Deposit Agreement dated 9 November 2004 entered into between Netcom, the
Netcom Depositary and all holders and beneficial owners of Netcom
ADSs
|
|
“Netcom
ADS Holders”
|
:
|
holders
of Netcom ADSs
|
|
“Netcom
ADSs”
|
:
|
ADSs
which are issued by the Netcom Depositary and traded on the New York Stock
Exchange, each representing ownership of 20 Netcom Shares
|
|
“Netcom
BVI”
|
:
|
China
Netcom Group Corporation (BVI) Limited 中國網通集團(BVI)有限公司,
a company incorporated under the laws of the British Virgin Islands and
the immediate controlling shareholder of Netcom
|
|
“Netcom
Depositary”
|
:
|
Citibank,
N.A., a national banking association organised under the laws of the
United States and acting in its capacity as depositary under the Netcom
ADS Deposit Agreement
|
-
3 -
|
“Netcom
Director(s)”
|
:
|
the
director(s) of Netcom
|
|
“Netcom
EGM”
|
:
|
the
extraordinary general meeting of Netcom, notice of which is set out on
pages N-3 and N-4 of this document, and any adjournment
thereof
|
|
“Netcom
Group”
|
:
|
Netcom
and its subsidiaries
|
|
“Netcom
Optionholders”
|
:
|
holders
of Netcom Options
|
|
“Netcom
Options”
|
:
|
outstanding
options to acquire Netcom Shares granted under the Netcom Share Option
Scheme
|
|
“Netcom
Parent”
|
:
|
中國網絡通信集團公司
(China Network Communications Group Corporation), a state-owned enterprise
established under the laws of the PRC
|
|
“Netcom
Securities”
|
:
|
Netcom
Shares, Netcom ADSs, Netcom Options and any other options, derivatives,
warrants or other securities convertible or exchangeable into Netcom
Shares which are issued by Netcom
|
|
“Netcom
Share Option Scheme”
|
:
|
the
Share Option Scheme adopted by Netcom on 30 September 2004, as amended
from time to time
|
|
“Netcom
Shareholders”
|
:
|
holders
of Netcom Shares
|
|
“Netcom
Shares”
|
:
|
ordinary
shares of US$0.04 each in the capital of Netcom
|
|
“NYSE
Rules”
|
:
|
the
rules of the New York Stock Exchange governing New York Stock Exchange
listed companies
|
|
“OFTA”
|
:
|
Office
of the Telecommunications Authority of Hong Kong
|
|
“Option
Proposal”
|
:
|
the
proposal to all of the Netcom Optionholders whereby they will be granted
Special Unicom Options in consideration for the cancellation of their
outstanding Netcom Options at the Scheme Record Time
|
|
“Option
Proposal Letter”
|
:
|
the
letter setting out the terms of the Option Proposal and the details of the
Special Purpose Unicom Share Option Scheme sent separately to the Netcom
Optionholders
|
|
“Options
Exercise Deadline”
|
:
|
4:30
p.m. on Friday, 10 October 2008, being the latest time for Netcom
Optionholders to exercise their Netcom Options in order to qualify for
entitlements under the Scheme
|
|
“Other
CCASS Participant”
|
:
|
a
broker, custodian, nominee or other relevant person who is, or has
deposited Netcom Shares with, a CCASS participant
|
|
“PRC”
or “China”
|
:
|
the
People’s Republic of China excluding, for the purpose of this document
only, Hong Kong, the Macau Special Administrative Region of the PRC and
Taiwan
|
|
“Proposals”
|
:
|
the
Share Proposal, the ADS Proposal and the Option Proposal and the
conditions thereof, as described in this document and, in the case of the
Option Proposal, in the Option Proposal Letter
|
|
“Relevant
Period”
|
:
|
the
period commencing from 2 December 2007 (being the date falling six months
prior to the date of the Announcement) and ending on the Latest
Practicable Date
|
|
“RMB”
|
:
|
Renminbi,
the lawful currency of the PRC
|
-
4 -
|
“Rothschild”
|
:
|
N
M Rothschild & Sons (Hong Kong) Limited, the independent financial
adviser to the Independent Board Committee in respect of the
Proposals
|
|
“Scheme”
|
:
|
the
scheme of arrangement under Section 166 of the Hong Kong Companies
Ordinance between Netcom and the Scheme Shareholders, details of which are
set out on pages S-1 to S-6 of this document, with or subject to any
modification thereof or addition thereto or condition approved or imposed
by the High Court
|
|
“Scheme
Record Time”
|
:
|
5:00
p.m. (Hong Kong time) on a trading day of the Hong Kong Stock Exchange and
immediately preceding the Effective Date, which is expected to be 14
October 2008
|
|
“Scheme
Shareholders”
|
:
|
holders
of the Scheme Shares
|
|
“Scheme
Shares”
|
:
|
all
the Netcom Shares in issue and such further Netcom Shares as may be issued
prior to the Scheme Record Time
|
|
“SEC”
|
:
|
the
Securities and Exchange Commission in the United States
|
|
“See-Through
Price”
|
:
|
the
price of an outstanding Netcom Option determined by deducting the exercise
price of the relevant Netcom Option from the value of HK$27.87 of a Scheme
Share under the Share Proposal, being the closing price of each Netcom
Share of HK$27.05 on the Hong Kong Stock Exchange on the Last Trading Date
plus a 3% premium over such closing price
|
|
“SFC”
|
:
|
Securities
and Futures Commission in Hong Kong
|
|
“SFO”
|
:
|
Securities
and Futures Ordinance, Chapter 571 of the Laws of Hong Kong
|
|
“Share
Exchange Ratio”
|
:
|
the
exchange ratio of 1.508 Unicom Shares for every Scheme Share cancelled
under the Scheme
|
|
“Share
Proposal”
|
:
|
the
proposal to the Netcom Shareholders for the cancellation of all of the
Scheme Shares pursuant to the Scheme based on the Share Exchange
Ratio
|
|
“SK
Telecom”
|
:
|
SK
Telecom Co., Ltd., a company incorporated in the Republic of Korea with
limited liability and listed on the Stock Market Division of the Korea
Exchange
|
|
“Special
Purpose Unicom Share Option Scheme”
|
:
|
a
share option scheme containing substantially the same terms as the Netcom
Share Option Scheme, which is proposed to be adopted by Unicom at the
Unicom EGM
|
|
“Special
Unicom Options”
|
:
|
options
proposed to be granted by Unicom under the Special Purpose Unicom Share
Option Scheme to Netcom Optionholders pursuant to the Option
Proposal
|
|
“Takeovers
Code”
|
:
|
The
Code on Takeovers and Mergers issued by the SFC
|
|
“Telecommunications
Ordinance”
|
:
|
Telecommunications
Ordinance, Chapter 106 of the Laws of Hong Kong
|
|
“Telefónica”
|
:
|
Telefónica
Internacional, S.A.U., a company incorporated in Spain
|
|
“trading
day”
|
:
|
a
day on which the Hong Kong Stock Exchange or the New York Stock Exchange
(as the case may be) is open for the business of dealings in
securities
|
|
“Unicom”
|
:
|
China
Unicom Limited 中國聯通股份有限公司,
a company incorporated under the laws of Hong Kong with limited liability
and whose Unicom Shares and Unicom ADSs are listed on the Hong Kong Stock
Exchange and the New York Stock Exchange, respectively
|
-
5 -
|
“Unicom
A Share Company”
|
:
|
中國聯合通信股份有限公司
(China United Telecommunications Corporation Limited), a company
incorporated under the laws of the PRC and whose shares are listed on the
Shanghai Stock Exchange
|
|
“Unicom
ADS Deposit Agreement”
|
:
|
the
Deposit Agreement dated 22 June 2000 entered into between Unicom, the
Unicom Depositary and all holders and beneficial owners of Unicom
ADSs
|
|
“Unicom
ADSs”
|
:
|
ADSs
which are issued by the Unicom Depositary and traded on the New York Stock
Exchange, each representing ownership of 10 Unicom Shares
|
|
“Unicom
BVI”
|
:
|
China
Unicom (BVI) Limited 中國聯通(BVI)有限公司,
a company incorporated in the British Virgin Islands and the immediate
controlling shareholder of Unicom
|
|
“Unicom
CDMA Lease”
|
:
|
the
CDMA lease agreement dated 26 October 2006 entered into between Unicom A
Share Company (whose rights and obligations under that agreement were
subsequently transferred to CUCL), Unicom New Horizon and Unicom Parent,
pursuant to which Unicom New Horizon agreed to lease capacity on its CDMA
network to CUCL
|
|
“Unicom
Depositary”
|
:
|
The
Bank of New York Mellon, a national banking association organised under
the laws of the United States and acting in its capacity as depositary
under the Unicom ADS Deposit Agreement
|
|
“Unicom
Director(s)”
|
:
|
the
director(s) of Unicom
|
|
“Unicom
EGM”
|
:
|
the
extraordinary general meeting of Unicom convened for the purpose of
approving, among other things, the Proposals and the adoption of the
Special Purpose Unicom Share Option Scheme, which will be held on 16
September 2008, and any adjournment thereof
|
|
“Unicom
Group”
|
:
|
Unicom
and its subsidiaries
|
|
“Unicom
New Horizon”
|
:
|
Unicom
New Horizon Mobile Telecommunications Company Limited, a company
incorporated in the PRC with limited liability and a wholly-owned
subsidiary of Unicom Parent
|
|
“Unicom
Options”
|
:
|
outstanding
options to acquire Unicom Shares granted under the Unicom Share Option
Schemes
|
|
“Unicom
Parent”
|
:
|
中國聯合通信有限公司
(China United Telecommunications Corporation), a state-owned enterprise
established under the laws of the PRC
|
|
“Unicom
Securities”
|
:
|
Unicom
Shares, Unicom ADSs, Unicom Options and any other options, derivatives,
warrants or other securities convertible or exchangeable into Unicom
Shares which are issued by Unicom
|
|
“Unicom
Share Option Schemes”
|
:
|
the
Pre-Global Offering Share Option Scheme and the Share Option Scheme, both
of which were adopted by Unicom on 1 June 2000, as amended from time to
time
|
|
“Unicom
Shareholders”
|
:
|
holders
of Unicom Shares
|
|
“Unicom
Shares”
|
:
|
ordinary
shares of HK$0.10 each in the capital of Unicom
|
|
“United
States” or “US”
|
:
|
the
United States of America, its territories and possessions, any State of
the United States, and the District of Columbia
|
-
6 -
|
“US
GAAP”
|
:
|
generally
accepted accounting principles in the United States
|
|
“US
Securities Act”
|
:
|
the
US Securities Act of 1933, as amended, including the related rules and
regulations promulgated thereunder
|
|
“US
Securities Exchange Act”
|
:
|
the
US Securities Exchange Act of 1934, as amended, including the related
rules and regulations promulgated thereunder
|
|
“US$”
or “US dollars”
|
:
|
United
States dollars, the lawful currency of the United States
|
|
“%”
|
:
|
per
cent.
|
This
document contains translations between Renminbi and Hong Kong dollar amounts at
RMB0.879 = HK$1.00, being the exchange rate prevailing on 12 August 2008. The
translations should not be taken as a representation that the Renminbi could
actually be converted into Hong Kong dollars at that rate or at
all.
-
-
7 -
|
QUESTIONS
AND ANSWERS
|
The
following are some of the questions you, as a Netcom Shareholder, a Netcom ADS
Holder or a Netcom Optionholder, may have and the answers to those questions.
However, you are urged to read
this entire document, including the Appendices, and if you are a Netcom
Optionholder, the Option Proposal Letter, carefully.
|
1.
|
What
is the purpose of this document? What is the Court Meeting and the Netcom
EGM? What is the Court Hearing?
|
|
|
•
|
The
purpose of this document is to provide you with further information
regarding the Proposals and, in particular, the Scheme, and the expected
timetable, to give you notices of the Court Meeting and the Netcom EGM and
to inform you of the date and place of the Court
Hearing.
|
|
|
•
|
At
the Court Meeting, the Scheme will be voted on by the Disinterested Netcom
Shareholders other than the Exempt Principal Traders and at the Netcom
EGM, the capital reduction of Netcom and the issue of the Netcom Shares to
Unicom in connection with the Scheme will be voted on by all of the Netcom
Shareholders.
|
|
|
•
|
At
the Court Hearing, the High Court will hear the petition for the sanction
of the Scheme and the confirmation of the capital reduction of Netcom. The
Court Hearing will take place on 14 October 2008 after the Court Meeting
and the Netcom EGM. An announcement will also be made of the date and time
of the Court Hearing.
|
|
2.
|
What
are the Proposals and the Scheme?
|
|
|
•
|
The
Proposals comprise of the Share Proposal, the ADS Proposal and the Option
Proposal. Please see paragraph 3 headed “Summary of the Proposals” in the
Explanatory Statement for a discussion of the Proposals and the
consideration you will be entitled to receive under the Proposals and
paragraph 4 headed “Conditions of the Proposals and the Scheme” in the
Explanatory Statement for a discussion of the conditions of the Proposals
and the Scheme.
|
|
|
•
|
The
Scheme is a scheme of arrangement under Section 166 of the Hong Kong
Companies Ordinance between Netcom and the Scheme Shareholders involving
the cancellation of all of the Scheme Shares. Upon the Scheme becoming
effective, the Scheme will be binding on Netcom and all of the Scheme
Shareholders, regardless of whether such Scheme Shareholders attended or
voted at the Court Meeting or the Netcom EGM, and Netcom will become a
wholly-owned subsidiary of Unicom.
|
|
3.
|
What
is the position of the Independent Board Committee with regard to the
Proposals?
|
|
|
•
|
The
Independent Board Committee, having considered the terms of the Proposals
and taken into account the advice of Rothschild, considers that the terms
of the Share Proposal, the ADS Proposal and the Option Proposal are fair
and reasonable so far as the Disinterested Netcom Shareholders, the Netcom
ADS Holders and the Netcom Optionholders, respectively, are
concerned.
|
|
4.
|
What
vote is required from the Netcom Shareholders in order for the Scheme to
be approved?
|
|
|
•
|
The
Scheme must be approved (by way of poll) by a majority in number
representing not less than three-fourths in value of the Netcom Shares
held by the Disinterested Netcom Shareholders (other than the Exempt
Principal Traders) who are present and voting either in person or by proxy
at the Court Meeting, provided that the number of votes cast against the
resolution to approve the Scheme at the Court Meeting is not more than 10%
of the votes attaching to all of the Netcom Shares held by the
Disinterested Netcom Shareholders, including the Exempt Principal
Traders.
|
|
|
•
|
In
addition to the vote for approving the Scheme at the Court Meeting, a
special resolution would need to be passed by a majority of not less than
three-fourths of the votes cast by the Netcom Shareholders present and
voting in person or by proxy at the Netcom EGM to (a) approve and give
effect to the reduction of the issued share capital of Netcom by
cancelling and extinguishing the Scheme Shares and (b) approve the issue
of the Netcom Shares to Unicom in connection with the
Scheme.
|
5. How
will the votes at the Court Meeting and the Netcom EGM be counted?
-
8 -
|
|
•
|
At
the Court Meeting, the Disinterested Netcom Shareholders (other than the
Exempt Principal Traders) who are present and voting either in person or
by proxy will be entitled to vote all of their respective Scheme Shares in
favour of the Scheme or against it. Alternatively, the Disinterested
Netcom Shareholders other than the Exempt Principal Traders may vote some
of their Scheme Shares in favour of the Scheme and any or all of the
balance of their Scheme Shares against the
Scheme.
|
|
|
•
|
The
“majority in number” requirement will be met if the number of such
Disinterested Netcom Shareholders voting in favour of the Scheme exceeds
the number of such Disinterested Netcom Shareholders voting against the
Scheme. For the purpose of calculating the “majority in number”
requirement, if a Disinterested Netcom Shareholder votes all of his Netcom
Shares in favour of the Scheme (or against the Scheme), he will be counted
as one Disinterested Netcom Shareholder voting in favour of the Scheme (or
against the Scheme) in respect of the number of his Netcom Shares so
voted. If a Disinterested Netcom Shareholder elects to vote a portion of
his Netcom Shares in favour of the Scheme and the balance of his Netcom
Shares against the Scheme, he will be counted as one Disinterested Netcom
Shareholder voting in favour of the Scheme in respect of the number of the
Netcom Shares voted in favour of the Scheme, and one Disinterested Netcom
Shareholder voting against the Scheme in respect of the number of the
Netcom Shares voted against the Scheme. As a result, any Disinterested
Netcom Shareholder voting both in favour of the Scheme and against the
Scheme will cancel himself out in terms of calculating the “majority in
number” requirement.
|
|
|
•
|
If
a proxy has been appointed to represent more than one Disinterested Netcom
Shareholder at the Court Meeting, for the purpose of calculating the
majority in number requirement, he will be counted as one Disinterested
Netcom Shareholder for each of the Disinterested Netcom Shareholders he
represents.
|
|
|
•
|
Individual
Netcom ADS Holders who have not become Netcom Shareholders will therefore
not be counted individually for the purposes of calculating the “majority
in number” requirement. Rather, the Netcom Depositary, as the sole
registered holder of the Netcom Shares underlying the Netcom ADSs, will be
counted as one Disinterested Netcom Shareholder for such purposes or if it
votes both for and against the Scheme, as two Disinterested Netcom
Shareholders.
|
|
|
•
|
At
the Netcom EGM, every Netcom Shareholder present and voting either in
person or by proxy will be entitled to vote all of his Netcom Shares in
favour of the special resolution for the capital reduction of Netcom and
the issue of the Netcom Shares to Unicom in connection with the Scheme or
against it. Alternatively, such Netcom Shareholders may vote some of their
Shares in favour of and some against the special resolution. At the Netcom
EGM, the special resolution will be passed if the value of the Netcom
Shares voted in favour of it is at least three-fourths of the total value
of the Netcom Shares voted at the Netcom
EGM.
|
|
6.
|
I
am a Netcom Shareholder. How do I vote on the
Proposals?
|
|
|
•
|
If
you are a Netcom Shareholder, you may, if you are a Disinterested Netcom
Shareholder other than an Exempt Principal Trader, vote in person or by
proxy at the Court Meeting (during which the Scheme will be voted on) and
you may vote in person or by proxy at the Netcom EGM (during which the
capital reduction of Netcom and the issue of Netcom Shares to Unicom in
connection with the Scheme will be voted
on).
|
|
|
•
|
Whether
or not you are able to attend the Court Meeting or the Netcom EGM, if you
are a Disinterested Netcom Shareholder other than an Exempt Principal
Trader, you are strongly urged to complete and sign the enclosed pink form of proxy in
respect of the Court Meeting, in accordance with the instructions printed
on it, and if you are a Netcom Shareholder, you are strongly urged to
complete and sign the enclosed white form of proxy in
respect of the Netcom EGM, in accordance with the instructions printed on
it, and to deposit them at the Netcom’s registered office at Room 6701,
The Center, 99 Queen’s Road Central, Hong Kong. The pink form of proxy for use
at the Court Meeting should be deposited not later than 4:00 p.m. on 15
September 2008 and, in order to be valid, the white form of proxy for use
at the Netcom EGM should be deposited not later than 4:30 p.m. on 15
September 2008. The pink form of proxy in
respect of the Court Meeting may alternatively be handed to the Chairman
of the Court Meeting at the Court Meeting if it is not so
deposited.
|
|
|
•
|
The
completion and return of a form of proxy for the Court Meeting or the
Netcom EGM will not preclude you from attending and voting in person at
the Court Meeting or the Netcom EGM. In such event, the relevant form of
proxy
|
-
9 -
| will be deemed to have been revoked. |
-
10 -
|
7.
|
I
am a Netcom ADS Holder. How do I vote on the
Proposals?
|
|
|
•
|
Since
Netcom ADS Holders are not Netcom Shareholders, you cannot vote at the
Court Meeting or the Netcom EGM directly. However, as a Netcom ADS Holder,
you can instruct the Netcom Depositary to vote the Netcom Shares
underlying your Netcom ADSs by completing and returning the ADS Voting
Instruction Card to the Netcom Depositary by not later than the ADS
Voting Instruction Deadline at its offices located at Citigroup
Shareholder Services, P.O. Box 43099, Providence RI 02940-5000, the United
States of America.
|
|
|
•
|
If
you hold your Netcom ADSs indirectly through a financial intermediary, you
must follow the relevant procedures provided by the financial intermediary
through which you hold your Netcom ADSs if you wish to vote the Netcom
Shares underlying your Netcom ADSs.
|
|
|
•
|
If
you wish to attend and vote at the Court Meeting and the Netcom EGM
directly, you must surrender your Netcom ADSs and withdraw the Netcom
Shares represented by such Netcom ADSs in accordance with the terms of the
Netcom ADS Deposit Agreement prior to 3:00 p.m. on 2 September 2008 (New
York time). Netcom will pay to the Netcom Depositary the fees for the
cancellation of your Netcom ADSs, but you may incur taxes and other
charges in connection with such surrender and
withdrawal.
|
|
8.
|
If
my Netcom Shares or Netcom ADSs are held in “street names” by my financial
intermediary, will my financial intermediary vote my Netcom Shares or
those underlying my Netcom ADSs for
me?
|
|
|
•
|
Your
financial intermediary should send you directions on how to provide it
with instructions to vote your Netcom Shares or the Netcom Shares
underlying your Netcom ADSs. If you do not provide your financial
intermediary with instructions on how to vote your Netcom Shares (whether
in the form of Netcom Shares or represented by Netcom ADSs), your
financial intermediary will not vote them at the Court Meeting and the
Netcom EGM. You should therefore ensure that your financial intermediary
is provided with instructions on how to vote your Netcom Shares or the
Netcom Shares underlying your Netcom ADSs by the deadlines set by your
financial intermediary. If you do not give voting instructions to your
financial intermediary, you will not be counted as having voted at the
Court Meeting and the Netcom EGM unless you have the Netcom Shares
(including any Netcom Shares underlying your Netcom ADSs) registered in
your name and appear in person or by proxy at the Court Meeting and the
Netcom EGM.
|
|
9.
|
Can
I change my vote after I have submitted my proxy with voting
instructions?
|
|
|
•
|
Yes.
If you are registered as a Netcom Shareholder, there are two ways in which
you may revoke your proxy and change your vote in respect of the
resolutions to be voted on at the Court Meeting or the Netcom
EGM:
|
|
|
(a)
|
you
may notify Netcom in writing of the revocation of your proxy and deposit a
new form of proxy, provided that such revised form of proxy is deposited
not less than 48 hours before the time for holding the Court Meeting or
the Netcom EGM or, in the case of the pink form of proxy in respect of the
Court Meeting, it may be handed to the Chairman of the Court Meeting at
the Court Meeting; or
|
|
|
(b)
|
you
may attend and vote at the Court Meeting or the Netcom EGM in person and
in such event, your relevant form of proxy will be deemed to have been
revoked.
|
|
|
•
|
If
you hold Netcom ADSs, you may not change the voting instructions indicated
on your completed ADS Voting Instruction Card unless you notify the Netcom
Depositary of such change in writing prior to the ADS Voting Instruction
Deadline.
|
|
|
•
|
If
you have instructed a financial intermediary to vote your Netcom Shares or
the Netcom Shares underlying your Netcom ADSs, you must follow the
directions received from such financial intermediary to change your vote
or revoke your proxy.
|
|
10.
|
I
am a Netcom ADS Holder. How can I be present in person or be represented
by counsel at the Court Hearing?
|
|
|
•
|
At
the Court Hearing, which will take place after the approval of the Scheme
at the Court Meeting, the High Court will hear the petition for the
sanction of the Scheme and the confirmation of the capital reduction of
Netcom.
|
-
11 -
|
|
•
|
Since
Netcom ADS Holders are not Netcom Shareholders, you cannot directly be
present in person or be represented by counsel at the Court Hearing to
support or oppose the petition for the sanction of the Scheme. However, if
you wish to be entitled to be present in person or be represented by
counsel at the Court Hearing to support or oppose the petition, you can do
so by surrendering your Netcom ADSs and withdrawing the Netcom Shares
represented by such Netcom ADSs in accordance with the terms of the Netcom
ADS Deposit Agreement prior to 3:00 p.m. on 9 October 2008 (New York time)
so that you can be registered as a Netcom Shareholder prior to the Court
Hearing. Netcom will pay to the Netcom Depositary the fees for the
cancellation of your Netcom ADSs, but you may incur taxes and other
charges in connection with such surrender and withdrawal. In order to
cancel your Netcom ADSs and withdraw the underlying Netcom Shares, you
should contact the Netcom Depositary at Citigroup Shareholder Services,
P.O. Box 43099, Providence RI 02940-5000, the United States of America or
by telephone at 1-877-248-4237 between 8:30 a.m. and 6:00 p.m. (New York
time) Monday to Friday.
|
|
11.
|
What
is the location, date and time of the Court Meeting and the Netcom
EGM?
|
|
|
•
|
The
Court Meeting and the Netcom EGM will be held at The Ballroom, Island
Shangri-La, Hong Kong on 17 September 2008 at respectively 4:00 p.m. and
4:30 p.m. (or immediately after the conclusion or adjournment of the Court
Meeting).
|
|
12.
|
What
is the location, date and time of the Court
Hearing?
|
|
|
•
|
The
Court Hearing will be held at the High Court at the High Court Building,
38 Queensway, Hong Kong and is expected to take place on 14 October 2008
at 9:30 a.m. An announcement will be made of the exact date and time of
the Court Hearing.
|
|
13.
|
Who
should I call if I have additional
questions?
|
|
|
•
|
If
a registered or beneficial owner of Netcom Shares in Hong Kong has
questions concerning administrative matters, such as dates, documentation
and procedures relating to the Proposals, please call the share registrar
of Netcom, Computershare Hong Kong Investor Services Limited, at (852)
2862 8648 between 9:00 a.m. and 6:00 p.m. (Hong Kong time) Monday to
Friday from 15 August 2008 to 17 September
2008.
|
|
|
•
|
If
you are a Netcom ADS Holder and have questions concerning administrative
matters, such as dates, documentation and procedures relating to the
Proposals, please call the Netcom Depositary at 1-877-248-4237 between
8:30 a.m. and 6:00 p.m. (New York time) Monday to
Friday.
|
|
|
•
|
These
helplines cannot and will not provide advice on the merits of the
Proposals or the Scheme or give any financial or legal advice, and will
not be soliciting proxies or votes in respect of the resolutions to be
voted on at the Court Meeting and the Netcom
EGM.
|
-
12 -
|
|
EXPECTED
TIMETABLE
|
Hong
Kong time
(unless
otherwise stated)
Latest
time to surrender Netcom ADSs to the Netcom Depositary
and
withdraw the underlying Netcom Shares in order to vote
|
directly
at the Court Meeting and the Netcom EGM(1).
|
3:00
p.m. on Tuesday,
|
|
2
September 2008
|
|
|
(New
York time)
|
ADS
Voting Instruction Deadline for receipt by the
Netcom
Depositary of completed ADS Voting
|
Instruction
Cards from Netcom ADS Holders(2)
|
10:00
a.m. on Wednesday,
|
|
10
September 2008
|
|
|
(New
York time)
|
Latest
time for lodging transfers of Netcom Shares
in
order to qualify for attending and voting at the
|
Court
Meeting and the Netcom EGM
|
before
4:30 p.m. on Thursday,
|
|
11
September 2008
|
Register
of members of Netcom closed for determination of
entitlements
of Disinterested Netcom Shareholders
other
than the Exempt Principal Traders to attend and
vote
at the Court Meeting and of Netcom Shareholders
|
to
attend and vote at the Netcom EGM(3)
|
Friday,
12 September 2008 to
|
|
Wednesday,
17 September 2008
|
|
|
(both
days inclusive)
|
Latest
time for lodging forms of proxy in respect of:
|
Court
Meeting(4)
|
4:00
p.m. on Monday, 15 September 2008
|
|
Netcom
EGM(4)
|
4:30
p.m. on Monday, 15 September 2008
|
|
Court
Meeting(5)
|
4:00
p.m. on Wednesday, 17 September 2008
|
|
Netcom
EGM(5)
|
4:30
p.m. on Wednesday, 17 September 2008
|
|
(or
immediately after the conclusion or
|
|
|
adjournment
of the Court Meeting)
|
|
|
Announcement
of the results of the Court Meeting
and
the Netcom EGM published on the Hong Kong
Stock
Exchange website
|
not
later than 7:00 p.m.
|
|
on
Wednesday, 17 September 2008
|
Announcement
of the date and time of the Court Hearing
published
on the Hong Kong Stock Exchange website and
in
The South China Morning Post, the Hong Kong
Economic
Times, The Wall Street Journal
|
and
The Asian Wall Street Journal
|
Thursday,
2 October 2008
|
|
Last
day for dealings in the Netcom Shares
|
Monday,
6 October 2008
|
|
Last
day for dealings in the Netcom ADSs.
|
Monday,
6 October 2008
|
Latest
time to surrender Netcom ADSs to the Netcom
Depositary
and withdraw the underlying Netcom
Shares
in order to become a Netcom Shareholder and
|
appear
at the Court Hearing
|
3:00
p.m. on Thursday, 9 October 2008
|
|
(New York
time)
|
Latest
time for lodging transfers of Netcom Shares
and
for the Netcom Optionholders to exercise
-
13 -
their
Netcom Options in order to qualify for
|
entitlements
under the Scheme
|
before
4:30 p.m. on Friday, 10 October 2008
|
|
Court
Hearing(6)
|
Tuesday,
14 October 2008
|
|
Scheme
Record Time
|
5:00
p.m. on Tuesday, 14 October 2008
|
Announcement
of (1) the results of the Court Hearing and
the
Netcom EGM and (2) the intention to withdraw the
listing
of the Netcom Shares and the Netcom ADSs from
the
Hong Kong Stock Exchange and the New York Stock
Exchange,
respectively, published on the Hong Kong Stock
|
Exchange
website
|
Tuesday,
14 October 2008
|
Announcement
of (1) the results of the Court Hearing and
the
Netcom EGM and (2) the intention to withdraw the
listing
of the Netcom Shares and the Netcom ADSs from
the
Hong Kong Stock Exchange and the New York Stock
Exchange,
respectively, published in The Wall Street
|
Journal
and The Asian Wall Street Journal
|
Wednesday,
15 October 2008
|
|
Effective
Date(7)
|
Wednesday,
15 October 2008
|
Withdrawal
of the listing of the Netcom Shares on
|
the
Hong Kong Stock Exchange.
|
9:30
a.m. on Wednesday, 15 October 2008
|
Announcement
of (1) the Effective Date and (2) the
withdrawal
of the listing of the Netcom Shares on
the
Hong Kong Stock Exchange published on the
|
Hong
Kong Stock Exchange website
|
Wednesday,
15 October 2008
|
Expected
withdrawal of the listing of the Netcom
|
ADSs
on the New York Stock Exchange
|
9:30
a.m. on Wednesday, 15 October 2008
|
(New York
time)
Certificates
for the new Unicom Shares and the new Unicom
ADSs
issued and letters granting the Special Unicom Options
|
pursuant
to the Proposals to be despatched on or before
|
Saturday,
25 October 2008
|
Period
during which odd lot trading arrangement in
|
relation
to the Unicom Shares is provided
|
Monday,
27 October 2008 to Friday,
|
14
November 2008
Netcom Shareholders,
Netcom ADS Holders and Netcom Optionholders should note that the timetable,
which is mainly dependent on the date of the Court Hearing, is subject to
change. Further announcement(s) will be made in the event that there is any
change to the timetable.
Notes:
|
(1)
|
Netcom
ADS Holders who wish to surrender their Netcom ADSs and withdraw the
underlying Netcom Shares in order to become Netcom Shareholders should
contact the Netcom Depositary at Citigroup Shareholder Services, P.O. Box
43099, Providence RI 02940-5000, the United States of America or by
telephone at 1-877-248-4237 between 8:30 a.m. and 6:00 p.m. (New York
time) Monday to Friday.
|
|
(2)
|
ADS
Voting Instruction Cards should be returned to the Netcom Depositary in
accordance with the instructions printed on them as soon as possible and
in any event not later than 10:00 a.m. (New York time) on 10 September
2008.
|
|
(3)
|
The
closure of the register of members of Netcom is not for the purpose of
determining entitlements under the
Scheme.
|
|
(4)
|
Forms
of proxy, together with the power of attorney or other authority (if any)
under which it is signed or a notarially certified copy thereof, must be
deposited at Netcom’s registered office at Room 6701, The Center, 99
Queen’s Road Central, Hong Kong, as soon as possible and in any event not
later than the times and dates stated above. The pink form of proxy in
respect of the Court Meeting may alternatively be handed to the Chairman
of the Court Meeting at the Court Meeting if it is not so deposited. In
order to be valid, the white form of proxy for the Netcom EGM must be
deposited by the time and
|
-
14 -
| date stated above. Completion and return of a form of proxy for the Court Meeting or the Netcom EGM will not preclude a Disinterested Netcom Shareholder and a Netcom Shareholder, respectively, from attending the relevant meeting and voting in person. In such event, the relevant form of proxy will be deemed to have been revoked. |
|
(5)
|
The
Court Meeting and the Netcom EGM will be held at The Ballroom, Island
Shangri-La, Hong Kong at the times and dates specified above. Notice of
the Court Meeting is set out on pages N-1 and N-2 of this document and
Notice of the Netcom EGM is set out on pages N-3 and N-4 of this
document.
|
|
(6)
|
The
Court Hearing will be held at the High Court at the High Court Building,
38 Queensway, Hong Kong.
|
|
(7)
|
The
Scheme will become effective upon all the conditions set out in paragraph
4 headed “Conditions of the Proposals and the Scheme” in the Explanatory
Statement on pages 62 to 65 of this document having been satisfied or
waived, as applicable.
|
-
15 -
|
|
LETTER
FROM THE BOARD
|
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)
(Stock
Code: 0906)
|
Executive
Directors:
ZUO
Xunsheng (Chairman)
LI
Jianguo
LI
Fushen
Non-executive
Directors:
YAN
Yixun
Cesareo
ALIERTA IZUEL
José
María ÁLVAREZ-PALLETE
Independent
Non-executive Directors:
John
Lawson THORNTON
QIAN
Yingyi
HOU
Ziqiang
Timpson
CHUNG Shui Ming
|
Registered
Office:
Room
6701, The Center
99
Queen’s Road Central
Hong
Kong
|
|
15
August 2008
|
To the Netcom Shareholders, the
Netcom ADS Holders and the Netcom Optionholders
Dear
Sir or Madam,
PROPOSED
MERGER OF
CHINA
UNICOM LIMITED
AND
CHINA
NETCOM GROUP CORPORATION (HONG KONG) LIMITED
BY
WAY OF A SCHEME OF ARRANGEMENT OF
CHINA
NETCOM GROUP CORPORATION (HONG KONG) LIMITED
UNDER
SECTION 166 OF THE HONG KONG COMPANIES ORDINANCE
1. INTRODUCTION
On
2 June 2008, the boards of directors of Unicom and Netcom jointly announced that
Unicom had formally presented the Proposals to the Board and requested the Board
to put forward the Proposals to the Netcom Shareholders for consideration of the
merger of Unicom and Netcom by way of a scheme of arrangement of Netcom under
Section 166 of the Hong Kong Companies Ordinance. As at the date of this letter,
Unicom neither owns nor has any interest in any Netcom Shares. The background to
the Proposals is set out in paragraph 2 headed “Background to the Proposals” in
the Explanatory Statement on page 57 of this document.
The
Proposals involve the cancellation of all of the Scheme Shares (including the
Netcom Shares to be issued pursuant to the exercise of the outstanding Netcom
Options prior to the Options Exercise Deadline and the Netcom Shares underlying
the Netcom ADSs) and all of the Netcom ADSs and the Netcom Options outstanding
at the Scheme Record Time. Upon the Scheme becoming effective, Netcom will
become a wholly-owned subsidiary of Unicom and the listings of the Netcom Shares
and the Netcom ADSs on the Hong Kong Stock Exchange and the New York Stock
Exchange, respectively, will be withdrawn.
Unicom
has appointed CICC as its lead financial adviser and JPMorgan as its financial
adviser in connection with
-
16 -
the
Proposals. Netcom has appointed Citigroup as its exclusive financial adviser in
connection with the Proposals.
In
compliance with Rule 2.1 of the Takeovers Code, the Board has established the
Independent Board Committee, comprising all of the independent non-executive
Netcom Directors, being Mr. Timpson Chung Shui Ming, Mr. John Lawson Thornton,
Dr. Qian Yingyi and Mr. Hou Ziqiang, to advise the Disinterested Netcom
Shareholders, the Netcom ADS Holders and the Netcom Optionholders in respect of
the Share Proposal, the ADS Proposal and the Option Proposal, respectively.
Rothschild has been appointed as the independent financial adviser to advise the
Independent Board Committee in respect of the Proposals. Three of the
non-executive Netcom Directors, Mr. Cesareo Alierta Izuel, Mr. José María
Álvarez-Pallete and Mr. Yan Yixun, are not on the Independent Board Committee
due to their direct or indirect interests in the Proposals as representative
directors of certain Netcom Shareholders and, therefore, they do not satisfy the
independent board committee criteria set out in Rule 2.8 of the Takeovers
Code.
The
Independent Board Committee, having considered the terms of the Share Proposal
and the ADS Proposal and taken into account the advice of Rothschild, considers
that the terms of the Share Proposal and the ADS Proposal are fair and
reasonable so far as the Disinterested Netcom Shareholders and the Netcom ADS
Holders are concerned and recommends the Disinterested Netcom Shareholders other
than the Exempt Principal Traders to, and the Netcom ADS Holders to instruct the
Netcom Depository holding the Netcom Shares on their behalf to, vote in favour
of the resolution to approve the Scheme at the Court Meeting and the special
resolution to approve and give effect to the Scheme at the Netcom EGM. The
Independent Board Committee, having considered the terms of the Option Proposal
and taken into account the advice of Rothschild, also considers that the terms
of the Option Proposal are fair and reasonable so far as the Netcom
Optionholders are concerned.
The
purpose of this document is to provide you with further information regarding
the Proposals and, in particular, the Scheme, to give you notices of the Court
Meeting and the Netcom EGM and to inform you of the date and place of the Court
Hearing. Your attention is also drawn to (1) the letter from the Independent
Board Committee set out on pages 21 and 22 of this document, (2) the letter from
Rothschild, the independent financial adviser to the Independent Board
Committee, set out on pages 23 to 56 of this document, (3) the Explanatory
Statement set out on pages 57 to 93 of this document and (4) the terms of the
Scheme set out on pages S-1 to S-6 of this document.
2. SUMMARY
OF THE PROPOSALS
The
Share Proposal and the Scheme
It
is proposed that, subject to the satisfaction or waiver, as applicable, of the
conditions of the Share Proposal as described in the Explanatory Statement, the
Share Proposal will be implemented by way of the Scheme pursuant to which the
Scheme Shares (including the Netcom Shares to be issued pursuant to the exercise
of the outstanding Netcom Options prior to the Options Exercise Deadline) will
be cancelled and, in consideration thereof, all of the Scheme Shareholders whose
names appear on the register of members of Netcom at the Scheme Record Time will
be entitled, save as regards fractional entitlements, to receive:
For every Scheme Share
cancelled
....................................................................................................................
1.508 new Unicom Shares
Under
the Share Proposal, the share capital of Netcom will, on the Effective Date, be
reduced by cancelling and extinguishing the Scheme Shares. Immediately
thereafter, the authorised share capital of Netcom will be increased to the
amount prior to the cancellation of the Scheme Shares by the creation of new
Netcom Shares and such Netcom Shares, being in the same number as the cancelled
Scheme Shares, will be issued to Unicom and/or its nominees at par, credited as
fully paid with the reserve arising from the cancellation of the Scheme
Shares.
The
Share Exchange Ratio of 1.508 Unicom Shares for every Scheme Share cancelled was
determined by Unicom on the basis of the closing price of each Netcom Share of
HK$27.05 on the Hong Kong Stock Exchange on the Last Trading Date plus a 3%
premium over such closing price, and the closing price of each Unicom Share of
HK$18.48 on the Hong Kong Stock Exchange on the Last Trading Date.
Based
on the Share Exchange Ratio and 6,699,197,200 Netcom Shares in issue as at the
Latest Practicable Date and assuming that none of the outstanding Netcom Options
had been exercised, the maximum number of Unicom Shares that Unicom will issue
under the Share Proposal, including those underlying the Unicom ADSs to be
issued under the ADS Proposal, is 10,102,389,377. This represents approximately
73.93% of the existing issued share capital of Unicom of 13,664,951,945 Unicom
Shares as at the Latest Practicable Date, and approximately 42.51% of the
enlarged issued share capital of Unicom of 23,767,341,322 Unicom Shares
immediately following the issue of the Unicom Shares (assuming that none of the
outstanding Unicom Options had been exercised) and approximately 42.11% of the
enlarged issued share capital of Unicom of 23,991,888,922 Unicom Shares
immediately following the issue of the Unicom Shares (assuming that all of the
outstanding
-
17 -
Unicom
Options had been exercised).
Based
on the Share Exchange Ratio and 6,825,033,460 Netcom Shares in issue as at the
Latest Practicable Date and assuming that all of the outstanding Netcom Options
had been exercised, the maximum number of Unicom Shares that Unicom will issue
under the Share Proposal, including those underlying the Unicom ADSs to be
issued under the ADS Proposal, is 10,292,150,457. This represents approximately
75.32% of the existing issued share capital of Unicom of 13,664,951,945 Unicom
Shares as at the Latest Practicable Date, and approximately 42.96% of the
enlarged issued share capital of Unicom of 23,957,102,402 Unicom Shares
immediately following the issue of the Unicom Shares (assuming that none of the
outstanding Unicom Options had been exercised) and approximately 42.56% of the
enlarged issued share capital of Unicom of 24,181,650,002 Unicom Shares
immediately following the issue of the Unicom Shares (assuming that all of the
outstanding Unicom Options had been exercised).
The
ADS Proposal
Pursuant
to the ADS Proposal, which is conditional upon the Scheme becoming effective,
the Scheme Shares underlying the Netcom ADSs will be cancelled along with all of
the other Scheme Shares pursuant to the Scheme and in consideration thereof, all
of the Netcom ADS Holders will be entitled to receive:
For
every Netcom ADS cancelled 3.016 new Unicom ADSs
As
at the Latest Practicable Date, there were 7,098,720 Netcom ADSs outstanding.
Each Netcom ADS represents 20 Netcom Shares and each Unicom ADS represents 10
Unicom Shares.
The
consideration for the ADS Proposal is equivalent to the consideration for the
Share Proposal and is calculated using the Share Exchange Ratio and taking into
account the number of Netcom Shares represented by a Netcom ADS and the number
of Unicom Shares represented by a Unicom ADS.
The
Option Proposal
As
at the Latest Practicable Date, there were 125,836,260 Netcom Options
outstanding. If all of such Netcom Options are exercised, a total of 125,836,260
Netcom Shares will be issued. If any Netcom Option is exercised resulting in
Netcom Shares being issued prior to or at the Scheme Record Time, such Netcom
Shares will constitute Scheme Shares and their holders will be eligible to
receive the consideration for the cancellation of their Scheme Shares under the
Scheme.
Pursuant
to the Option Proposal, which is conditional upon the Scheme becoming effective,
Unicom will grant Netcom Optionholders Special Unicom Options in consideration
for the cancellation of their outstanding Netcom Options at the Scheme Record
Time (whether vested or not). To the extent that Netcom Optionholders do not
exercise their outstanding Netcom Options prior to the Options Exercise
Deadline, their Netcom Options that remain outstanding at the Scheme Record Time
(whether vested or not) will, subject to the Scheme becoming effective, be
cancelled by the Board and such Netcom Optionholders will automatically be
granted Special Unicom Options in consideration for the cancellation of their
outstanding Netcom Options.
The
Option Proposal Letter, which sets out the terms of the Option Proposal and the
details of the Special Purpose Unicom Share Option Scheme, will be despatched to
the Netcom Optionholders on the same day as the despatch of this
document.
Total
Consideration
On
the basis of the value of HK$26.78 for every Scheme Share cancelled under the
Share Proposal (being the value of 1.508 Unicom Shares based on the weighted
average traded price of each Unicom Share of HK$17.76 on the Hong Kong Stock
Exchange on the Last Trading Date), the entire issued share capital of
6,699,197,200 Netcom Shares as at the Last Trading Date (assuming that none of
the outstanding Netcom Options as at the Last Trading Date had been exercised)
would be valued at approximately HK$179,404,501,016 and the Fully Diluted Netcom
Share Capital of 6,825,034,460 Netcom Shares as at the Last Trading Date would
be valued at approximately HK$182,774,422,839.
On
the basis of the value of HK$23.55 for every Scheme Share cancelled under the
Share Proposal (being the value of 1.508 Unicom Shares based on the weighted
average traded price of each Unicom Share of HK$15.62 on the Hong Kong Stock
Exchange on the Latest Practicable Date), the entire issued share capital of
6,699,197,200 Netcom Shares as at the Latest Practicable Date (assuming that
none of the outstanding Netcom Options as at the Latest Practicable Date had
been exercised) would be valued at approximately HK$157,766,094,060 and the
Fully Diluted Netcom Share Capital of 6,825,033,460 Netcom Shares as at the
Latest Practicable Date would be valued at approximately
HK$160,729,537,983.
-
18 -
3. CONDITIONS
OF THE PROPOSALS AND THE SCHEME
The
Share Proposal and the Scheme are subject to the satisfaction or waiver, as
applicable, of the conditions of the Share Proposal set out in paragraph 4
headed “Conditions of the Proposals and the Scheme” in the Explanatory Statement
on pages 62 to 65 of this document. All of these conditions will have to be
satisfied or waived, as applicable, on or before 30 November 2008 (or such later
date as Unicom and Netcom may agree and the High Court may allow), otherwise the
Proposals, including the Scheme, will lapse. Unicom and Netcom have agreed to
extend the date for all of the conditions to be satisfied or waived, as
applicable, from 30 September 2008 (as stated in the Announcement) to 30
November 2008 to accommodate the timetable of the High Court for the Court
Hearing. Assuming that all of these conditions are satisfied or waived, as
applicable, it is expected that the Scheme will become effective on or before 31
October 2008.
Each
of the ADS Proposal and the Option Proposal will also be conditional upon the
Scheme becoming effective.
4. REASONS
FOR AND BENEFITS OF THE PROPOSED MERGER
You
are urged to read carefully paragraph 6 headed “Reasons for and Benefits of the
Proposed Merger” in the Explanatory Statement on pages 65 to 68 of this
document.
5. BUSINESS
STRATEGIES OF THE ENLARGED GROUP
You
are referred to paragraph 7 headed “Business Strategies of the Enlarged Group”
in the Explanatory Statement on pages 68 and 69 of this document.
6. INTENTIONS
OF UNICOM WITH REGARD TO NETCOM
You
are referred to paragraph 8 headed “Intentions of Unicom with Regard to Netcom”
in the Explanatory Statement on pages 69 and 70 of this document.
7. INFORMATION
ON NETCOM AND UNICOM
Your
attention is drawn to paragraph 13 headed “Information on Netcom” in the
Explanatory Statement on page 76 of this document and the sections headed
“Financial Information on the Netcom Group” and “General Information on Netcom”
in Appendices I and IV, respectively, to the Explanatory Statement in this
document.
Your
attention is also drawn to paragraph 14 headed “Information on Unicom” in the
Explanatory Statement on pages 76 to 80 of this document and the sections headed
“Financial Information on the Unicom Group” and “General Information on Unicom”
in Appendices II and V, respectively, to the Explanatory Statement in this
document.
8.
OVERSEAS
NETCOM SHAREholders, NETCOM ADS Holders AND NETCOM
OPTIONHolders
Overseas
holders of Netcom Securities are requested to read specifically paragraph 20
headed “Overseas Netcom Shareholders, Netcom ADS Holders and Netcom
Optionholders” in the Explanatory Statement on pages 84 and 85 of this
document.
9.
INFORMATION
FOR NETCOM SHAREHOLDERS AND NETCOM ADS HOLDERS IN THE UNITED
STATES
Your
attention is drawn to paragraph 21 headed “Information for Netcom Shareholders
and Netcom ADS Holders in the United States” in the Explanatory Statement on
pages 85 and 86 of this document.
10. COURT
MEETING AND NETCOM EGM
Notices
convening the Court Meeting and the Netcom EGM to be held at The Ballroom,
Island Shangri-La, Hong Kong on 17 September 2008 at respectively 4:00 p.m. and
4:30 p.m. (or immediately after the conclusion or adjournment of the Court
Meeting) are set out on pages N-1 to N-4 of this document.
The
High Court has directed that the Court Meeting be held for the purpose of
considering and, if thought fit, passing a resolution to approve the Scheme,
with or without modification. The Scheme will be subject to the approval by the
Disinterested Netcom Shareholders other than the Exempt Principal Traders at the
Court Meeting in the manner referred to in paragraph 4
-
19 -
headed
“Conditions of the Proposals and the Scheme” in the Explanatory Statement on
pages 62 to 65 of this document.
Immediately
following the Court Meeting, the Netcom EGM will be held for the purpose of
considering and, if thought fit, passing a special resolution to approve the
implementation of the Scheme. All Netcom Shareholders will be entitled to attend
and vote on such special resolution at the Netcom EGM.
11. ACTIONS
TO BE TAKEN
The
actions which you are required to take in relation to the Proposals are set out
in the earlier section headed “Actions to be Taken” on pages i and ii of this
document.
12. TAXATION,
EFFECTS AND LIABILITIES
It
is emphasised that none of Unicom, Netcom, CICC, JPMorgan, Citigroup, Rothschild
and any of their respective directors or associates or any other person involved
in the Scheme and the Proposals accept responsibility for any tax or other
effects on, or liabilities of, any person or persons as a result of the
implementation or otherwise of the Scheme and the Proposals. Accordingly, you
are asked to read paragraph 22 headed “Taxation” in the Explanatory Statement
appearing on pages 86 to 91 of this document and if you are in any doubt as to
any aspect of this document or as to the action to be taken, you should consult
an appropriately qualified professional adviser.
13. FURTHER
INFORMATION
You
are urged to read carefully (1) the letter from the Independent Board Committee
set out on pages 21 and 22 of this document, (2) the letter from Rothschild, the
independent financial adviser to the Independent Board Committee, set out on
pages 23 to 56 of this document and (3) the Explanatory Statement in relation to
the Scheme set out on pages 57 to 93 of this document and the Appendices
thereto. In addition, the terms of the Scheme are set out on pages S-1 to S-6 of
this document. Netcom Optionholders are urged to read carefully the Option
Proposal Letter.
|
Yours
faithfully,
For
and on behalf of the Board of
China Netcom Group Corporation
(Hong Kong) Limited
Zuo
Xunsheng
Chairman
|
-
20 -
|
QUESTIONS
AND
ANSWERS
|
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)
15
August 2008
To
the Disinterested Netcom Shareholders,
the Netcom ADS
Holders and the Netcom Optionholders
Dear
Sir or Madam,
PROPOSED
MERGER OF
CHINA
UNICOM LIMITED
AND
CHINA
NETCOM GROUP CORPORATION (HONG KONG) LIMITED
BY
WAY OF A SCHEME OF ARRANGEMENT OF
CHINA
NETCOM GROUP CORPORATION (HONG KONG) LIMITED
UNDER
SECTION 166 OF THE HONG KONG COMPANIES ORDINANCE
We
refer to the document dated 15 August 2008 jointly issued by Netcom and Unicom
in relation to the Proposals (the “Scheme Document”), of which this letter forms
part. Terms defined in the Scheme Document shall have the same meanings in this
letter unless the context otherwise requires.
We
have been appointed by the Board as the Independent Board Committee to give a
recommendation to the Disinterested Netcom Shareholders, the Netcom ADS Holders
and the Netcom Optionholders in respect of the Share Proposal, the ADS Proposal
and the Option Proposal, respectively. Rothschild has been appointed by us as
our independent financial adviser in respect of the Share Proposal, the ADS
Proposal and the Option Proposal.
Having
considered the terms of the Share Proposal and the ADS Proposal and taken into
account the advice of Rothschild, in particular the factors, reasons and
recommendations as set out in the letter from Rothschild in the Scheme Document,
we consider that the terms of the Share Proposal and the ADS Proposal are fair
and reasonable so far as the Disinterested Netcom Shareholders and the Netcom
ADS Holders are concerned. Accordingly, we recommend the Disinterested Netcom
Shareholders other than the Exempt Principal Traders to, and the Netcom ADS
Holders to instruct the Netcom Depositary holding the Netcom Shares on their
behalf to, vote in favour of the resolution to approve the Scheme at the Court
Meeting and the special resolution to approve and give effect to the Scheme at
the Netcom EGM.
Having
considered the terms of the Option Proposal and taken into account the advice of
Rothschild, in particular the factors, reasons and recommendations as set out in
the letter from Rothschild in the Scheme Document, we consider that the terms of
the Option Proposal are fair and reasonable so far as the Netcom Optionholders
are concerned.
-
21 -
The
Independent Board Committee draws the attention of the Disinterested Netcom
Shareholders, the Netcom ADS Holders and the Netcom Optionholders to (1) the
letter from the Board set out on pages 15 to 20 of the Scheme Document, (2) the
Explanatory Statement set out on pages 57 to 93 of the Scheme Document and the
Appendices thereto and (3) the letter from Rothschild set out on pages 23 to 56
of the Scheme Document.
|
Yours
faithfully,
Timpson Chung Shui
Ming
John
Lawson Thornton
Qian
Yingyi
Hou
Ziqiang
Independent Board
Committee
|
-
22 -
|
LETTER
FROM
ROTHSCHILD
|
The following is the text of a
letter of advice from Rothschild, the independent financial adviser
appointed to advise the
Independent Board Committee, which has been prepared for the purpose of
incorporation into this document, setting out its advice to the Independent
Board Committee in respect of the Proposals.
15
August 2008
To
the independent board committee of
China Netcom
Group Corporation (Hong Kong) Limited
Dear
Sirs,
PROPOSED
MERGER OF
CHINA
UNICOM LIMITED
AND
CHINA
NETCOM GROUP CORPORATION (HONG KONG) LIMITED
BY
WAY OF A SCHEME OF ARRANGEMENT OF
CHINA
NETCOM GROUP CORPORATION (HONG KONG) LIMITED
UNDER
SECTION 166 OF THE HONG KONG COMPANIES ORDINANCE
We
refer to our engagement to advise the Independent Board Committee with respect
to the Proposals and the Scheme, details of which are contained in the scheme
document jointly issued by Netcom and Unicom dated 15 August 2008 (the “Scheme
Document”) of which this letter forms a part. Rothschild has been appointed as
the independent financial adviser to advise the Independent Board Committee as
to (a) whether or not the terms of the Share Proposal and the Scheme are fair
and reasonable so far as the Disinterested Netcom Shareholders are concerned,
(b) whether or not the terms of the ADS Proposal are fair and reasonable so far
as the Netcom ADS Holders are concerned, and (c) whether or not the terms of the
Option Proposal are fair and reasonable so far as the Netcom Optionholders are
concerned; and to (a) advise the Disinterested Netcom Shareholders as to how
they should vote on the Scheme at the Court Meeting and the Netcom EGM, and (b)
advise the Netcom ADS Holders as to how they should direct the Netcom Depository
to vote the Netcom Shares held on their behalf at the Court Meeting and the
Netcom EGM.
The
terms used in this letter shall have the same meanings as defined in the Scheme
Document unless the context otherwise requires.
In
accordance with Rule 2.1 of the Takeovers Code, the Board has established the
Independent Board Committee comprising all of the independent non-executive
Netcom Directors, namely Mr. Timpson Chung Shui Ming, Mr. John Lawson Thornton,
Dr. Qian Yingyi and Mr. Hou Ziqiang, for the purpose of advising the
Disinterested Netcom Shareholders, the Netcom ADS Holders and the Netcom
Optionholders in respect of the Share Proposal, the ADS Proposal and the Option
Proposal, respectively. Other than members of the Independent Board Committee,
none of the executive directors or non-executive directors of Netcom is
considered independent for the purpose of giving any advice or recommendation to
the Disinterested Netcom Shareholders, the Netcom ADS Holders and the Netcom
Optionholders in respect of the Share Proposal, the ADS Proposal and the Option
Proposal, respectively.
|
N
M Rothschild & Sons (Hong Kong) Limited
16th
Floor, Alexandra House
18
Chater Road, Central
Hong
Kong SAR
|
Telephone
Facsimile
|
+852
2525 5333
+852
2868 1728
+852
2810 6997
|
In
formulating our recommendation, we have relied on the information and facts
supplied to us by Netcom and have assumed that any information and
representations made to us are true, accurate and complete in all material
respects as at the date hereof and that they may be relied upon. We have also
assumed that all information, representations and opinions contained or referred
to in the Scheme Document are complete in all material respects, fair and
reasonable and have relied on them.
We
have been advised by the management of Netcom that no material facts have been
omitted and we are not aware of any facts or circumstances which would render
the information provided and the representations made to us untrue, inaccurate,
incomplete
-
23 -
or
misleading. We have no reason to doubt the truth, accuracy and completeness of
the information and representations provided to us by the management of Netcom.
The Netcom Directors (in respect of the information on the Netcom Group, Netcom
Parent and Netcom BVI only) and the Unicom Directors (in respect of information
other than that in relation to the Netcom Group, Netcom Parent and Netcom BVI)
have jointly and severally accepted full responsibility for the accuracy of the
information contained in the Scheme Document and have confirmed, having made all
reasonable enquiries, that, to the best of their knowledge, opinions expressed
in the Scheme Document have been arrived at after due and careful consideration
and there are no other facts not contained in the Scheme Document, the omission
of which would make any statement in relation to the Netcom Group, Netcom Parent
and Netcom BVI (in respect of the Netcom Directors) and the other statements
otherwise (in respect of the Unicom Directors) in the Scheme Document
misleading. We believe that we have reviewed sufficient information to reach an
informed view in order to provide a reasonable basis for our advice. We have
not, however, conducted any independent in-depth investigation into the business
and affairs of the Netcom Group, the Unicom Group or the Enlarged
Group.
We
have not considered the tax consequences on the Disinterested Netcom
Shareholders, the Netcom ADS Holders and the Netcom Optionholders of their
acceptances or non-acceptances of the Proposals since these are particular to
their own individual circumstances. In particular, holders of the Netcom Shares,
the Netcom ADSs and the Netcom Options who are residents outside of Hong Kong,
or subject to overseas taxes or Hong Kong taxation on securities dealing should
consider their own tax position with regard to the Proposals and, if in any
doubt, should consult their own professional advisers.
TERMS
OF THE PROPOSALS
The
terms of the Proposals are set out in the “Letter from the Board” and the
Explanatory Statement in the Scheme Document. In summary, the Proposals involve
the cancellation of all of the Scheme Shares (including the Netcom Shares to be
issued pursuant to the exercise of the outstanding Netcom Options prior to the
Options Exercise Deadline and the Netcom Shares underlying the Netcom ADSs) and
all of the Netcom ADSs and the Netcom Options outstanding at the Scheme Record
Time. The Proposals consist of three components and involve the following
principal steps:
The
Share Proposal:
|
•
|
Each
Scheme Shareholder will be entitled to receive 1.508 new Unicom Shares in
exchange for every Scheme Share (including the Netcom Shares to be issued
pursuant to the exercise of the outstanding Netcom Options prior to the
Options Exercise Deadline) cancelled. The Share Exchange Ratio of 1.508
new Unicom Shares for every Scheme Share cancelled was determined by
Unicom on the basis of the closing price of each Netcom Share of HK$27.05
on the Hong Kong Stock Exchange on the Last Trading Date plus a 3% premium
over such closing price, and the closing price of each Unicom Share of
HK$18.48 on the Hong Kong Stock Exchange on the Last Trading Date;
and
|
|
•
|
The
Share Proposal will be implemented by way of a scheme of arrangement of
Netcom under Section 166 of the Hong Kong Companies Ordinance, subject to
the satisfaction or waiver, as applicable, of the conditions of the
Proposals and the Scheme as described in the Explanatory Statement on or
before 30 November 2008 (or such later date as Unicom and Netcom may agree
and the High Court may allow), otherwise the Proposals, including the
Scheme, will lapse. Assuming that all of the conditions of the Proposals
and the Scheme are satisfied or waived, as applicable, it is expected that
the Scheme will become effective on or before 31 October
2008.
|
The
ADS Proposal:
|
•
|
Each
Netcom ADS Holder will be entitled to receive 3.016 new Unicom ADSs for
every Netcom ADS in exchange for the cancellation of the Scheme Shares
underlying each Netcom ADS (by applying the same Share Exchange Ratio as
the Share Proposal); and
|
|
•
|
The
ADS Proposal will be conditional upon the Scheme becoming effective. Upon
the Scheme becoming effective, Unicom intends to cause Netcom to apply for
the delisting of the Netcom ADSs from the New York Stock
Exchange.
|
-
24 -
The
Option Proposal:
|
•
|
Pursuant
to the Option Proposal, which is conditional upon the Scheme becoming
effective, Unicom will grant Netcom Optionholders Special Unicom Options
in consideration for the cancellation of their outstanding Netcom Options
at the Scheme Record Time (whether vested or not) using the formula set
out below:
|
Number
of Special Unicom Options = A x BExercise price of each Special Unicom Option =
C / A
where:
A is the Share Exchange
Ratio;
B is the number of outstanding
Netcom Options held by a Netcom Optionholder at the Scheme Record Time;
and
C is the exercise price of an
outstanding Netcom Option held by a Netcom Optionholder at the Scheme Record
Time.
The
above formula ensures that the value of the Special Unicom Options received by a
Netcom Optionholder is equivalent to the See-Through Price of that holder’s
outstanding Netcom Options.
Upon
the Scheme becoming effective, Netcom will become a wholly-owned subsidiary of
Unicom and the listings of the Netcom Shares and the Netcom ADSs on the Hong
Kong Stock Exchange and the New York Stock Exchange, respectively, will be
withdrawn.
BACKGROUND
AND Approach to our analyses
On
24 May 2008, the Ministry of Industry and Information Technology, the National
Development and Reform Commission and the Ministry of Finance of the PRC jointly
issued the Announcement on Deepening the Reform of the Structure of the
Telecommunications Sector (the “Telecoms Restructuring Announcement”) which
stated, among other things, that:
|
|
(a)
|
the
PRC government would deepen the reform of the structure of the
telecommunications sector and encourage the formation of three market
competitors with each having nationwide network resources, relatively
comparable strength and scale, as well as full service operation
capabilities;
|
|
|
(b)
|
the
allocation of telecommunications resources would be further optimised and
the competition structure would be improved;
and
|
|
|
(c)
|
three
3G licences would be granted once the contemplated restructuring had been
completed.
|
Due
to uncertainties surrounding the telecoms industry restructuring and 3G licence
issuance in China, and the difficulties in assessing the impact of 3G on the
businesses and operations of the Enlarged Group (after completion of the
Proposals and the CDMA Business Disposal), we have only considered 3G and its
implications in terms of potential synergies and risks for the Enlarged
Group.
On
25 May 2008, in response to the Telecoms Restructuring Announcement, Netcom and
Unicom separately announced that they were in discussions regarding a merger. On
2 June 2008, the boards of directors of Netcom and Unicom jointly announced that
Unicom formally presented the Proposals to the Board and requested the Board to
put forward the Proposals to the Netcom Shareholders for consideration. As such,
the Proposals form an integral part of the overall telecoms industry
restructuring in China.
On
27 July 2008, Unicom, CUCL (a wholly-owned subsidiary of Unicom) and China
Telecom entered into the CDMA Business Disposal Agreement pursuant to which CUCL
and Unicom will dispose the CDMA Business to China Telecom for a cash
consideration of RMB43.8 billion (subject to adjustment) payable in three
instalments. The CDMA Business Disposal is subject to various conditions,
including, among other things, (a) the approval of the Unicom Shareholders and
the shareholders of Unicom A Share Company for the CDMA Business Disposal, (b)
the approval of the independent Unicom Shareholders and the non-affiliated
shareholders of Unicom A Share Company for the waiver by CUCL of the option to
purchase the CDMA network from Unicom New Horizon and the termination of the
Unicom CDMA Lease, (c) the approval of the independent shareholders of China
Telecom for the leasing of capacity on the CDMA network by China
Telecommunications Corporation to China Telecom,
-
25 -
and
(d) the receipt of any other necessary regulatory or corporate approvals for the
completion of the CDMA Business Disposal.
In
assessing the terms of the Proposals, we have used the Share Exchange Ratio as a
principal means to evaluate whether or not the terms of the Proposals are fair
and reasonable. Our analyses compare the Share Exchange Ratio by using the
public market analysis and the comparable trading companies analysis. There is
however a limitation in that such information is either historical or pro forma
(given the structural change to the Unicom Group under the CDMA Business
Disposal) and does not necessarily reflect how the Enlarged Group (with or
without the CDMA Business) would have performed during the period in question.
In addition, since the CDMA Business Disposal is a separate and independent
transaction from the Proposals and is subject to conditions, we have conducted
our analyses under two scenarios as there was no certainty to the completion of
the CDMA Business Disposal at the time of issue of this advice letter. The two
scenarios are based on the possible outcomes of the CDMA Business Disposal,
namely:
(a) Scenario
A — the CDMA Business Disposal will be completed before the Effective Date;
and
(b) Scenario
B — the CDMA Business Disposal will not be completed at all.
As
noted from paragraph 14 headed “Information on Unicom” in the Explanatory
Statement, assuming the approvals of the respective shareholders of Unicom and
China Telecom referred to above are obtained and all of the other conditions of
the CDMA Business Disposal are satisfied or waived, as applicable, completion of
the CDMA Business Disposal will take place on 1 October 2008 (or such other date
as the parties thereto may agree) and before the Effective Date.
PRINCIPAL
FACTORS AND REASONS
In
arriving at our opinion, we have taken into consideration the following
principal factors and reasons:
1. Reasons
for and benefits of the proposed merger
Netcom
is a leading broadband and fixed-line telecommunications operator in the PRC
with service regions covering the area of Beijing Municipality, Tianjin
Municipality, Hebei Province, Henan Province, Shandong Province, Liaoning
Province, Heilongjiang Province, Jilin Province, Inner Mongolia Autonomous
Region and Shanxi Province. In its service regions (mainly the northern part of
China), Netcom provides fixed-line voice and value-added services, broadband and
other Internet-related services, information and communications technology
services, business and data communications services and advertising and media
services.
The
mobile voice services market in China is growing rapidly while the traditional
fixed-line voice services market is declining in the competitive
telecommunications landscape. The substitution of fixed-line voice services by
mobile voice services has accelerated in 2007. As demonstrated from Table 1
below, the subscriber numbers for mobile telephony has been growing compared to
declining subscriber numbers for fixed-line.
Table
1 — Subscriber numbers
|
As
at 31 December
|
|||
|
2007
|
2006
|
2005
|
|
|
(million)
|
(million)
|
(million)
|
|
|
Fixed
line subscribers
|
|||
|
Netcom
|
110.8
|
114.0
|
114.7
|
|
Growth
|
-2.8%
|
-0.6%
|
6.6%
|
|
China
Telecom
|
220.3
|
223.0
|
210.1
|
|
Growth
|
-1.2%
|
6.1%
|
12.6%
|
|
Mobile
subscribers
|
|||
|
Unicom
(GSM)
|
120.6
|
106.9
|
95.9
|
|
Growth
|
12.8%
|
11.5%
|
n.a.1
|
|
Unicom
(CDMA)
|
41.9
|
37.3
|
33.5
|
|
Growth
|
12.3%
|
11.3%
|
n.a.1
|
|
China
Mobile (Hong Kong) Limited (“China Mobile”)
|
369.3
|
301.2
|
246.7
|
|
Growth
|
22.6%
|
22.1%
|
20.8%
|
|
Source:
|
Annual
reports of the respective companies and Form 20-Fs filed by Netcom and
Unicom with the SEC for the fiscal year ended 31 December
2007
|
Notes:
|
1.
|
The
respective numbers of Unicom GSM and CDMA subscribers as at 31 December
2004 are not publicly available and the respective growth rates for
|
-
26 -
| 2005 are therefore not available. | |
|
2.
|
China
Tietong Telecommunication Corporation (“China Tietong”) is not included in
Table 1 above since it is not listed and has limited public information
available. According to its website, China Tietong’s number of fixed-line
subscribers in 2006 was approximately 18.2
million.
|
The
recent financial performance of Netcom, as discussed in paragraph 2 headed
“Business and financial performance — The Netcom Group — Financial performance”
below, illustrates the difficult operating environment Netcom faces as a
standalone fixed-line operator. These developments are expected to continue to
affect the growth prospects for fixed-line telephony products within Netcom’s
service regions. Recognising this, Netcom has been investing to provide
broadband and information and communication technologies (“ICT”) services using
its network, as these are growing industry segments which may counter the
erosion of its traditional fixed-line voice revenues. Furthermore, as noted from
the Chairman’s Statement in Netcom’s annual report for the year ended 31
December 2007, Netcom stated that it will “persevere in the pursuit of licenses
for mobile services and IPTV services which will pave the way for the Company to
become a comprehensive “broadband communications and multimedia service
provider””. Considering the above and taking into account that the Proposals
offer Netcom immediate access to a mobile platform with an existing network,
sales and distribution channel as well as approximately 120.6 million GSM
accounts as at 31 December 2007, the Proposals (being an integral part of the
overall telecoms industry restructuring in China) appear to be in line with the
business direction and objectives stated by the management of Netcom. We believe
an entry into the mobile market through the Proposals would address Netcom’s
needs more effectively than obtaining a greenfield mobile licence which in any
case would appear challenging given the PRC government’s plan as described in
the Telecoms Restructuring Announcement.
As
stated in the Explanatory Statement, the management of Unicom and Netcom believe
that there are strong commercial reasons for the proposed merger. As noted from
paragraph 6 headed “Reasons for and benefits of the proposed merger” in the
Explanatory Statement, after the proposed merger, the Enlarged Group is expected
to take steps to establish a leading position in the 3G wireless industry,
integrate its wireless and fixed-line businesses, and build a strong market
position in the 10 provinces in Northern China where the Netcom Group has
operations, which is expected to enhance the Enlarged Group’s brand recognition
and increase its overall competitiveness, business scale and shareholder value.
The directors of Unicom and Netcom believe that through effective integration,
synergies of the proposed merger will be realised gradually after completion of
the Proposals and the CDMA Business Disposal. We have discussed the anticipated
synergies with representatives of Unicom and Netcom and set out below is a
summary of our comments in this regard (please also refer to paragraph 6 headed
“Reasons for and benefits of the proposed merger” in the Explanatory Statement
for details of the anticipated synergies and paragraph 7 headed “Business
strategies of the Enlarged Group” in the Explanatory Statement for details of
the business strategies of the Enlarged Group):
(a) Provide
a full spectrum of telecommunications services
We
agree with the rationale presented in the Explanatory Statement that by
consolidating its businesses and underlying supporting systems, the Enlarged
Group should be in a position to provide integrated and customised
telecommunications services and products that address the different needs of its
diverse customer base.
Moreover,
according to the Explanatory Statement, a combination of the two companies’
respective resources and expertise in the wireless and fixed-line businesses can
enhance the Enlarged Group’s innovation capabilities. We regard the potential
for new products and services innovation as well as the customer demand for such
products as reasonable.
(b) Reinforce
brand recognition and market position
It
is reasonable to believe that the proposed merger would place the Enlarged Group
in a position to secure a 3G licence, and hence provide the Enlarged Group with
a means of providing high-quality value-added data and mobile entertainment
services. It is further possible, though uncertain, that these additional data
and entertainment services could help maintain wireless average revenue per user
(“ARPU”) at a stable level and strengthen the brand recognition of the Enlarged
Group.
Based
on the subscriber base as at 30 June 2008, Unicom had approximately 128 million
GSM users whilst Netcom had approximately 109 million fixed-line users and
approximately 23.36 million broadband users. The management of Unicom and Netcom
believe that the provision of 3G services and the combination of the Unicom and
Netcom subscriber bases may result in an enhanced brand recognition, market
perception, and economies of scale.
While
it is unclear how the combination of the two subscriber bases per se can
directly translate into foreseeable growth, we believe it is reasonable for the
management of Unicom and Netcom to target a reduction of customer churn and
increased market share via bundling and cross-selling products. The provision of
technologically more advanced 3G products and the marketing of the Enlarged
Group’s brand across an enlarged customer base may also lead to an increase in
-
27 -
the
recognition and quality perception of the Enlarged Group’s products and services
and thereby potentially help to improve customer retention.
(c) Multi-faceted
resource sharing
It
is highlighted in the Explanatory Statement that the Enlarged Group might be
able to take advantage of multi-faceted resource sharing, in particular through
its combined client, sales and marketing, procurement, and network.
As
mentioned in (b) above, it is reasonable to believe that cross-selling and
bundling opportunities can be used to try to improve customer retention and
market share improvement. This could potentially be executed more effectively by
a rationalised and more fully-controlled sales and distribution network which is
less dependent on agency channels. However, the extent of cost synergies may
become limited if there is an overlap of stores and potential re-branding
expenses, which have to be taken into account when examining potentially reduced
marketing expenditures from the promotion of a single brand. As noted in the
Explanatory Statement, the Enlarged Group is expected to benefit from
strengthened bargaining power with its suppliers and reduced procurement costs.
The Explanatory Statement states the Enlarged Group will consolidate its major
supplier resources. If there are or can be common suppliers to Netcom and Unicom
for the provision of both companies’ respective services, it is reasonable to
assume that the proposed merger could drive economies of scale and synergies in
procurement. However, the extent to which this is feasible, both in terms of
common suppliers and existing contracts, is currently uncertain. It is possible
that additional benefits may derive for Unicom’s wireless business from access
to Netcom’s fixed-line network by improving transmission and termination costs.
However, the ability to realise these synergies is highly uncertain.
Furthermore, even if realisable, the benefits and cost savings identified by the
management of Unicom and Netcom may however be limited to the extent that Netcom
is not a national operator and certain scale economies may therefore occur only
within Netcom’s regional footprint. It follows that we believe there are
reasonable grounds for synergies to result from a combination of resources as
outlined in the Explanatory Statement.
(d) Enhanced
human capital
In
accordance with the Explanatory Statement, we concur that the proposed merger
could create a pool of skilled professionals with expertise in wireless,
fixed-line and broadband products and services and thereby create a potential
opportunity for mutually beneficial knowledge-transfers. It is possible that
potential further cost synergies may derive from a repositioning of some
back-office headcounts to other key business areas such as marketing and sales
and that a combined human resource pool better meets the development needs of
the Enlarged Group as well as of each employee.
(e) Optimised
capital structure with enhanced financing capacity
The
proposed merger should reduce the relative leverage of the Enlarged Group
compared to Netcom’s current capital structure and the CDMA Business Disposal
should further reduce the Enlarged Group’s relative leverage in comparison to
Netcom’s current stand-alone capital structure.
Whilst
it is not possible for us to fully comment on the anticipated synergies as
expected by the management of Unicom and Netcom in the absence of a detailed
implementation plan and timetable which we understand is being formulated and
deliberated, we in-principle concur that the anticipated synergies as set out in
the Explanatory Statement are feasible. The management of Unicom and Netcom do
not expect the benefits as set out in the Explanatory Statement would be
materially adversely affected if the proposed CDMA Business Disposal is not
completed.
Netcom
Shareholders should note that any synergies would likely only be realised upon
the completion of the Proposals and potentially after a successful and timely
post-merger integration of Netcom’s and Unicom’s operations. Netcom Shareholders
should also note that there are substantial execution risks associated with the
implementation of a post-merger integration of the two businesses and that as a
result of the Proposals and the transformation of Netcom into an integrated
full-service operator, Netcom Shareholders will have exposure to the Enlarged
Group with a very different risk profile to that of Netcom today. Please refer
to paragraph 6 headed “Risk profile” below for our assessment of the new risks
profile of the Enlarged Group and paragraph 16 headed “Risk factors” in the
Explanatory Statement for details.
-
28 -
2. Business
and financial performance
(a) The
Netcom Group
(i) Business
Netcom
is a provider of fixed-line telephone services, broadband, other
Internet-related services, and business and data communications services in 10
northern municipalities, provinces and autonomous region in the PRC. Netcom’s
principal services includes fixed-line voice and value-added services, including
local, domestic long distance, international long distance and fixed-line value
added services; broadband and other Internet-related services, including access
services like X digital subscriber line (“XDSL”), local area network (“LAN”),
dialup, wireless, as well as broadband content and applications services; ICT
services, including information technology (“IT”) and communication technology
(“CT”) based integrated solutions. Netcom has a dominant position in its market
with approximately 90.4% of the fixed-line market share and 88.9% of the
broadband market share in its service region as at 31 December
2007.
(ii) Financial
performance
The
following is a summary of the audited consolidated income statements of the
Netcom Group’s continuing operations for the three years ended 31 December
2007.
Table
2 — Summary of audited consolidated income statement
|
For
the year ended 31 December
|
|||
|
2007
|
2006
|
2005
|
|
|
(Restated)
|
(Restated)
|
||
|
(RMB
million)
|
(RMB
million)
|
(RMB
million)
|
|
|
Revenue
|
84,005
|
84,194
|
83,927
|
|
Operating
expenses
|
(66,739)
|
(64,643)
|
(62,868)
|
|
Other
income
|
1,221
|
621
|
—
|
|
Interest
income
|
113
|
135
|
134
|
|
Dividend
income
|
—
|
—
|
29
|
|
Deficit
on revaluation of fixed assets
|
—
|
(1,335)
|
—
|
|
Finance
costs
|
(3,333)
|
(3,767)
|
(3,346)
|
|
Profit
before taxation
|
15,267
|
15,205
|
17,876
|
|
Taxation
|
(3,796)
|
(3,727)
|
(3,526)
|
|
Profit
for the year from continuing operations
|
11,471
|
11,478
|
14,350
|
|
Earnings per Netcom Share from
continuing operations attributable to the Netcom
Shareholders (RMB)
|
|||
|
Basic
|
1.72
|
1.74
|
2.18
|
|
Diluted
|
1.70
|
1.72
|
2.17
|
|
Dividend
per Netcom Share (HK$)
|
0.592
|
0.553
|
0.466
|
Source:
Annual report of Netcom for the year ended 31 December 2007
-
29 -
Revenue
The
Netcom Group’s revenues have been relatively flat over the past three years
ended 31 December 2007 despite holding a continued dominant position in its
market. Table 3 below sets out a breakdown of the Netcom Group’s revenue for the
three years ended 31 December 2007.
Table
3 — Revenue breakdown
|
For
the year ended 31 December
|
||||||
|
2007
|
2006
|
2005
|
||||
|
(Restated)
|
(Restated)
|
|||||
|
(RMB million)
|
(%)
|
(RMB
million)
|
(%)
|
(RMB
million)
|
(%)
|
|
|
Fixed-line
telephone services
|
59,226
|
70.5%
|
66,462
|
78.9%
|
69,729
|
83.1%
|
|
Broadband
services
|
13,835
|
16.5%
|
9,916
|
11.8%
|
7,289
|
8.7%
|
|
Other
Internet-related services
|
532
|
0.6%
|
516
|
0.6%
|
556
|
0.7%
|
|
Managed
data services
|
1,284
|
1.5%
|
1,413
|
1.7%
|
1,621
|
1.9%
|
|
Leased
line income
|
2,521
|
3.0%
|
2,540
|
3.0%
|
2,376
|
2.8%
|
|
ICT
services
|
3,990
|
4.8%
|
855
|
1.0%
|
186
|
0.2%
|
|
Other
services
|
2,617
|
3.1%
|
2,492
|
3.0%
|
2,170
|
2.6%
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
84,005
|
100.0%
|
84,194
|
100.0%
|
83,927
|
100.0%
|
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
Source:
Annual report of Netcom for the year ended 31 December 2007
Revenues
of the Netcom Group increased slightly from approximately RMB83,927 million for
the year ended 31 December 2005 to approximately RMB84,005 million for the year
ended 31 December 2007 and revenue from fixed-line telephone services segment
remained as the major revenue contributor.
However,
intensification of migration from fixed-line to mobile communications has
resulted in negative growth in the Netcom Group’s fixed-line subscriber base
from approximately 114.7 million subscribers in 2005 to approximately 110.8
million subscribers in 2007 which in turn led to lower volume of usage, downward
adjustment of realised tariff and overall decline in revenue from the fixed-line
telephone services segment to approximately RMB59,226 million for the year ended
31 December 2007 (2006: RMB66,462 million and 2005: RMB69,729
million).
The
decline was partially offset by the strong growth in revenue from broadband and
ICT services which increased from approximately RMB7,475 million for the year
ended 31 December 2005 to approximately RMB17,825 million for the year ended 31
December 2007 (representing a compound annual growth rate (“CAGR”) of
approximately 54.4%). The growth in revenue from the broadband services was
largely attributable to the increase in the number of broadband subscribers from
approximately 11.0 million subscribers in 2005 to approximately 19.8 million
subscribers in 2007 (representing a CAGR of approximately 34.2%) and sustained
growth in ARPU. The growth in revenue from the ICT service was largely due to
strengthening capability to provide total solutions to large corporations and
government which resulted in increase in the number of contracts signed.
Contribution from the broadband and ICT services accounted for approximately
21.3% of the revenue of the Netcom Group for the year ended 31 December 2007
(2006: 12.8% and 2005: 8.9%) as a result of efforts put into the development of
innovative businesses by the Netcom Group.
The
unaudited revenue of the Netcom Group for the three months ended 31 March 2008
was approximately RMB20,487 million.
Other
income
For
the years ended 31 December 2006 and 2007, approximately RMB621 million and
RMB1,221 million were recorded respectively as other income to reflect the
subsidy income for reinvesting the profit distributions received from a
subsidiary in the PRC to that subsidiary.
-
30 -
Earnings
before interest, tax, depreciation and amortisation (“EBITDA”) and EBITDA
margin
EBITDA
of the Netcom Group amounted to approximately RMB45,387 million, RMB45,085
million and RMB43,982 million for the years ended 31 December 2005, 2006 and
2007, respectively. The decline was due to increase in operating expenses from
approximately RMB62,868 million for the year ended 31 December 2005 to RMB64,643
million in 2006 to RMB66,739 million in 2007. EBITDA margins were approximately
54.1%, 53.5% and 52.4% for the years ended 31 December 2005, 2006 and 2007,
respectively (EBITDA of the Netcom Group is defined as earnings before interest
income, finance costs, taxation, depreciation, amortisation, dividend income and
deficit on revaluation of fixed assets).
If
excluding the effect of the other income (being a non-recurring item), the
adjusted EBITDA would amount to approximately RMB45,387 million, RMB44,464
million and RMB42,761 million for the years ended 31 December 2005, 2006 and
2007, respectively. The adjusted EBITDA margins were approximately 54.1%, 52.8%
and 50.9% for the years ended 31 December 2005, 2006 and 2007,
respectively.
Net
profit from continuing operations and net profit margin
Net
profit from continuing operations amounted to approximately RMB14,350 million,
RMB11,478 million and RMB11,471 million for the years ended 31 December 2005,
2006 and 2007, respectively. The main reason for the decrease in net profit in
2006 when compared to 2005 was that a deficit on revaluation of fixed assets of
approximately RMB1,335 million was recognised as an expense in 2006. Net profit
margins were approximately 17.1%, 13.6% and 13.7% for the years ended 31
December 2005, 2006 and 2007, respectively.
If
excluding the effect of the other income, the adjusted net profit would amount
to approximately RMB14,350 million, RMB10,857 million and RMB10,250 million for
the years ended 31 December 2005, 2006 and 2007, respectively. The adjusted net
profit margins would be approximately 17.1%, 12.9% and 12.2% for the years ended
31 December 2005, 2006 and 2007, respectively.
Indebtedness
Total debt of the Netcom Group was
approximately RMB82,130 million, RMB79,154 million and RMB61,726 million as at
31 December 2005, 2006 and 2007, respectively. The reduction in debt was mainly
due to repayment of debts by using the Netcom Group’s free cash-flow and
proceeds from the disposal of assets, liabilities and operations of
telecommunications in the branches in Guangdong Province and Shanghai
Municipality in the PRC by a wholly-owned subsidiary of Netcom (namely China
Netcom (Group) Company Limited). Net debt of the Netcom Group was approximately
RMB77,065 million, RMB71,426 million and RMB56,331 million as at 31 December
2005, 2006 and 2007, respectively. The net gearing ratio (calculated by dividing
net debt by shareholder’s equity) reduced from approximately 121.8% as at 31
December 2005 to approximately 96.3% as at 31 December 2006 and further to
approximately 68.7% as at 31 December 2007.
(iii) Future
prospects
Netcom’s prospects as a stand-alone
fixed-line operator will depend on its ability to stabilise revenue from
fixed-line services and on its ability to position Netcom as a leading provider
of growing broadband and ICT services.
This trend of fixed-to-mobile
substitution will potentially accelerate with mobile calling tariffs already
approaching fixed-line tariffs. Despite the fact that mobile telecommunications
operators accounted for 90.3% of the net increase in the revenue of the
telecommunications industry, mobile penetration in the PRC of 40.0% at the end
of the year 2007 is still significantly below penetration levels in many other
developed countries, where penetration levels have reached over 100% for some
countries (Source: Mobile World Database).
Netcom also has the opportunity to
benefit from the growing demand for broadband services and ICT solutions by
residential and business customers, respectively. During 2007, the number of
Internet users in the PRC increased by approximately 53.3% to 210 million
according to the annual report of Netcom for the year ended 31 December 2007.
Demand continues to grow in China, and increasingly so among younger, low-income
and rural households. Netcom has the opportunity to increase ARPU and profit
margins by meeting the demand for new content offerings and applications as part
of its stated strategic aim of transforming into a broadband communications and
multimedia services provider. However, as next generation mobile technologies
become available at competitive prices, some of these benefits may be eroded by
mobile broadband offerings gaining market share as for example experienced in
some 3G-enabled countries. Netcom also has established a long-term goal of
becoming “one of China’s leading ICT
-
31 -
service
providers as well as a network information specialist for government and
corporate customers”. The implementation of an effective ICT strategy could
enhance Netcom’s growth profile by benefiting from increasing demand for
outsourced data services such as corporate network operations and server
capacities.
(b) The
Unicom Group
(i) Business
Unicom, through its subsidiaries, is
principally engaged in GSM and CDMA cellular businesses in 31 provinces,
municipalities and autonomous regions in the PRC, the provision of international
and domestic long distance calls, data and Internet services and other related
telecommunications value-added businesses. Unicom also operates certain CDMA
mobile communications business in the Macau Special Administrative Region. As at
31 December 2007, Unicom had a total of approximately 162.5 million subscribers
for its GSM and CDMA cellular businesses, representing an annual growth rate of
approximately 12.7% and a market share in the service areas of approximately
29.7%. The total number of GSM subscribers and CDMA subscribers were
approximately 120.6 million and 41.9 million, respectively.
(ii) Financial
performance
The following is a summary of the
audited consolidated income statements of the Unicom Group for the three years
ended 31 December 2007.
Table
4 — Summary of audited consolidated income statement
|
For
the year ended 31 December
|
|||
|
2007
|
2006
|
2005
|
|
|
(Restated)
|
(Restated)
|
||
|
(RMB
million)
|
(RMB
million)
|
(RMB
million)
|
|
|
Revenue
|
99,539
|
95,348
|
88,038
|
|
Operating
costs and expenses
|
(83,906)
|
(81,492)
|
(77,306)
|
|
Cost
of telecommunications products sold
|
(5,032)
|
(4,915)
|
(3,674)
|
|
Realised/unrealised
loss on changes in fairvalue of derivative component ofconvertible
bonds
|
(569)
|
(2,397)
|
—
|
|
Other
gains
|
2,923
|
21
|
35
|
|
Profit
before taxation
|
12,955
|
6,565
|
7,093
|
|
Income
tax expenses
|
(3,654)
|
(2,764)
|
(2,170)
|
|
Profit
for the year
|
9,301
|
3,801
|
4,923
|
|
Attributable
to:
|
|||
|
Equity holders of
Unicom
|
9,300
|
3,801
|
4,923
|
|
Minority interest
|
1
|
—
|
—
|
|
Earnings
per Unicom Share for profitattributable to the equity holders ofUnicom
(RMB)
|
|||
|
Basic
|
0.713
|
0.302
|
0.392
|
|
Diluted
|
0.707
|
0.300
|
0.390
|
|
Dividend
per Unicom Share (RMB)
|
0.20
|
0.18
|
0.11
|
Source:
Annual report of Unicom for the year ended 31 December 2007
Revenue
The Unicom Group’s revenue has been
growing steadily over the past three years ended 31 December 2007 mainly driven
by the increase in its GSM cellular business. Table 5 below sets out a breakdown
of the Unicom Group’s revenue for the three years ended 31 December
2007.
-
32 -
Table
5 — Revenue breakdown
|
For
the year ended 31 December
|
||||||||
|
2007
|
2006
|
2005
|
||||||
|
(Restated)
|
(Restated)
|
|||||||
|
(RMB million)
|
(%)
|
(RMB
million)
|
(%)
|
(RMB
million)
|
(%)
|
|||
|
GSM
business
|
62,775
|
63.1%
|
59,882
|
62.8%
|
52,618
|
59.8%
|
||
|
CDMA
Business
|
27,730
|
27.9%
|
27,877
|
29.2%
|
28,089
|
31.9%
|
||
|
Data
and Internetbusiness
|
2,626
|
2.6%
|
2,320
|
2.4%
|
3,000
|
3.4%
|
||
|
Long
distance business
|
1,508
|
1.5%
|
1,015
|
1.1%
|
1,472
|
1.7%
|
||
|
Sales
of telecommunications products
|
4,900
|
4.9%
|
4,254
|
4.5%
|
2,859
|
3.2%
|
||
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|||
|
99,539
|
100.0%
|
95,348
|
100.0%
|
88,038
|
100.0%
|
|||
|
============
|
============
|
============
|
============
|
============
|
============
|
|||
Source:
Annual report of Unicom for the year ended 31 December 2007
Revenues
of the Unicom Group increased from approximately RMB88,038 million for the year
ended 31 December 2005 to approximately RMB99,539 million for the year ended 31
December 2007 primarily due to revenue growth in its GSM business.
Revenue
from Unicom’s GSM cellular business increased from approximately RMB52,618
million for the year ended 31 December 2005 to approximately RMB62,775 million
for the year ended 31 December 2007 (representing a CAGR of approximately 9.2%).
The increase was mainly due to increase in the number of subscribers, growth in
minutes of usage and revenue from GSM value-added services.
For
the same period, revenue from Unicom’s CDMA Business declined slightly from
approximately RMB28,089 million for the year ended 31 December 2005 to
approximately RMB27,730 million for the year ended 31 December 2007 despite
increase in the number of subscribers. The decline was mainly caused by the ARPU
of mass market customers being relatively low and the revenue from the existing
high-end customers was also significantly affected as a result of tariff
reduction caused by the implementation of the new “Calling-Party-Pays” tariff
policy.
The
number of GSM subscribers increased from approximately 95.9 million subscribers
in 2005 to approximately 120.6 million subscribers in 2007 (representing a CAGR
of approximately 12.1%) while the number of CDMA subscribers increased from
approximately 33.5 million subscribers in 2005 to approximately 41.9 million
subscribers in 2007 (representing a CAGR of approximately 11.8%). Revenue from
sales of telecommunication products relating to the CDMA Business increased to
approximately RMB4,900 million (2006: RMB4,254 million and 2005: RMB2,859
million) mainly due to the increase of CDMA subscribers during the same
period.
The
unaudited revenue of the Unicom Group for the three months ended 31 March 2008
was approximately RMB25,489 million, representing an increase of approximately
5.6% from the unaudited revenue of approximately RMB24,126 million for the three
months ended 31 March 2007.
Unrealised
loss on changes in fair value of derivative component of convertible
bonds
The Unicom Group recorded unrealised
losses on changes in fair value of derivative component of convertible bonds of
approximately RMB2,397 million and RMB569 million in each of the years ended 31
December 2006 and 2007, respectively. Convertible bonds in an aggregate
principal amount of US$1,000 million were issued to SK Telecom on 5 July 2006
and fully converted on 20 August 2007.
-
33 -
Other
gains
Unicom recorded other gains of
approximately RMB35 million, RMB21 million and RMB2,923 million for each of the
years ended 31 December 2005, 2006 and 2007. During 2007, Unicom reinvested the
undistributed profits into a subsidiary and was granted a refund on a portion of
the taxes previously paid by the subsidiary amounted to approximately RMB2,781
million. Such refund was recorded as part of the other gains for the year ended
31 December 2007.
EBITDA
and EBITDA margin
EBITDA
of the Unicom Group amounted to approximately RMB28,760 million, RMB29,648
million and RMB35,359 million for the years ended 31 December 2005, 2006 and
2007, respectively. EBITDA margins were approximately 32.7%, 31.1% and 35.5% for
the years ended 31 December 2005, 2006 and 2007, respectively (EBITDA of the
Unicom Group is defined as earnings before finance gains/(costs), interest
income, taxation, depreciation and amortisation).
If
excluding the effect of the unrealised loss on changes in fair value of
derivative component of convertible bonds and other gains from tax refund (both
being non-recurring items), the adjusted EBITDA would amount to approximately
RMB28,760 million, RMB32,045 million and RMB33,147 million for the years ended
31 December 2005, 2006 and 2007. The adjusted EBITDA margin was maintained at
similar level at approximately 32.7%, 33.6% and 33.3% for the years ended 31
December 2005, 2006 and 2007, respectively.
EBITDA
margin for the GSM business were approximately 48.8%, 44.6% and 44.5% for the
years ended 31 December 2005, 2006 and 2007, respectively and the EBITDA margin
for the CDMA Business were approximately 1.5%, 5.7% and 5.6% for the years ended
31 December 2005, 2006 and 2007, respectively.
Net
profit and net profit margin
Net
profit of the Unicom Group amounted to approximately RMB4,923 million, RMB3,801
million and RMB9,301 million for the years ended 31 December 2005, 2006 and
2007, respectively. The increase in net profit from 2005 to 2007 was mainly due
to the same reason as the increase in revenue as stated above. In addition, the
net profits for the years ended 31 December 2006 and 2007 were impacted by the
recognition of the unrealised loss on changes in fair value of derivative
component of convertible bonds as stated above. Net profit margins were
approximately 5.6%, 4.0% and 9.3 % for the years ended 31 December 2005, 2006
and 2007, respectively.
If
excluding the effect of the unrealised loss on changes in fair value of
derivative component of convertible bonds and other gains from tax refund, the
adjusted net profit would amount to approximately RMB4,923 million, RMB6,198
million and RMB7,089 million for the years ended 31 December 2005, 2006 and
2007. The adjusted net profit margins were approximately 5.6%, 6.5% and 7.1 %
for the years ended 31 December 2005, 2006 and 2007, respectively.
The
unaudited net profit of the Unicom Group for the three months ended 31 March
2008 was approximately RMB2,023 million, representing an increase of
approximately 1.6% from the unaudited net profit of approximately RMB1,991
million for the three months ended 31 March 2007.
Indebtedness
According to the annual report of
Unicom for the year ended 31 December 2007, the total interest-bearing debt for
the Unicom Group were approximately RMB25,646 million and RMB3,858 million as at
31 December 2006 and 2007, respectively. According to Appendix II to the
Explanatory Statement, the total interest-bearing debt was approximately
RMB35,042 million as at 31 December 2005. The reduction in debt in 2007 was
primarily due to the conversion of US$1,000 million worth of convertible bonds
into Unicom Shares by SK Telecom and the repayment of an aggregate of
approximately RMB10,961 million of short-term bonds and long-term bank loans by
Unicom. As a result, the Unicom Group was at a net cash position as at 31
December 2007. Net debt for the Unicom Group was approximately RMB13,207 million
as at 31 December 2006 and the net gearing ratio was approximately 16.5% as at
31 December 2006. (Note: Information to calculate the gearing ratio as at 31
December 2005 is not publicly available.)
-
34 -
(iii) Future
prospects
On
27 July 2008, Unicom, CUCL (a wholly-owned subsidiary of Unicom) and China
Telecom entered into the CDMA Business Disposal Agreement pursuant to which CUCL
and Unicom will dispose of the CDMA Business. It is noted from the announcement
issued by Unicom in connection with the CDMA Business Disposal dated 28 July
2008 that, in the interest of reducing the complexity facing Unicom’s operations
and management, and deploying resources to enhance focus on the development of
Unicom’s GSM business and relevant brands so as to maximise the shareholder
value and return on investment, the Unicom Directors proposed the CDMA Business
Disposal. The Unicom Directors also believe that the CDMA Business Disposal can
better focus Unicom’s financial and operational resources on the enhancement of
its GSM business and the future development of 3G services and better position
the Enlarged Group (after completion of the proposed merger) to execute a
balanced business development plan, to enhance its long term competitiveness,
and to achieve a more distinct strategic positioning.
Upon
completion of the CDMA Business Disposal, Unicom expects to realise an estimated
gain before tax of approximately RMB37.56 billion under HKFRS.
In
connection with the CDMA Business Disposal, in order to optimise the allocation
of resources, to avoid duplication, to facilitate management and to enhance the
efficiency of the operation of the integrated assets, CUCL and China
Telecommunications Corporation plan to swap certain assets with each other based
on the principle of equality and reciprocity and in accordance with applicable
regulatory requirements.
In
the event that the CDMA Business Disposal does not proceed, Unicom will continue
to operate and manage both the GSM and the CDMA cellular businesses. In both
scenarios (i.e. with and without the CDMA Business Disposal), Unicom (after the
proposed merger) is set to benefit from the continuing trend of fixed-to-mobile
substitution in China and the expected increase in mobile penetration from
approximately 40.0% at the end of the year 2007 compared to penetration rates of
above 100% in other more developed countries.
Unicom
stated that it intends to increase projected subscriber growth by expanding more
into rural areas and by improving the quality and capacity of its GSM network.
Unicom’s further capital expenditure investments in infrastructure and
technology could offer the opportunity to maintain and potentially increase
Unicom’s mobile market share. Unicom’s focus on a potential 3G network upgrade
has the potential to add incremental ARPU through the ability to offer improved
value-added services. The launch of 3G by Unicom could also potentially improve
Unicom’s competitive position within the telecommunications industry in China as
3G represents a new basis for competition in terms of network strength and
service differentiation. However, it should be noted that any competitive
advantage for Unicom would likely depend on the successful completion of the
CDMA Business Disposal, the Proposals, the overall telecoms industry
restructuring, Unicom receiving a 3G licence, and the technology, conditions and
obligations associated with a 3G licence, if awarded, and the nature of any 3G
licences awarded to Unicom’s competitors.
Unicom
has established separate operating units for the GSM and CDMA operations in
2007. If the CDMA Business Disposal does not materialise, it remains unclear as
to whether the implemented corporate structure continues to be optimal and to
what extent the management wishes to divert resources from its current focus on
GSM back to the CDMA operations.
Please
refer to paragraph 14 headed “Information on Unicom” in the Explanatory
Statement for further details.
(c) The
Enlarged Group
Table
6 below sets out the proportions of some key historical financials for the year
ended 31 December 2007 contributed by the Netcom Group and the Unicom Group,
respectively, compared to the proportion of the equity of the Enlarged Group
allocated to the Netcom Shareholders under two scenarios. The table below should
be read in conjunction with the “Unaudited pro forma consolidated financial
information on the Enlarged Group” set out in Appendix III to the Explanatory
Statement.
-
35 -
Table
6 — Contribution analysis
Scenario
A — the CDMA Business Disposal will be completed before the Effective
Date
|
Netcom
Group1
|
Unicom
Group
|
Pro
forma adjustments2
|
Enlarged
Group
|
|||||
|
(RMB
million)
|
(%)
|
(RMB
million)
|
(%)
|
(RMB
million)
|
(%)
|
(RMB
million)
|
(%)
|
|
|
Revenue
|
84,081
|
55.84%
|
67,673
|
44.94%
|
(1,178)
|
(0.78)%
|
150,576
|
100.00%
|
|
EBITDA
|
42,7613
|
58.06%
|
31,2124
|
42.38%
|
(320)
|
(0.44)%
|
73,653
|
100.00%
|
|
Net
profit
|
10,2503
|
63.18%
|
6,2924
|
38.79%
|
(320)
|
(1.97)%
|
16,222
|
100.00%
|
|
Net
asset value
|
82,052
|
40.24%
|
122,175
|
59.92%
|
(320)
|
(0.16)%
|
203,907
|
100.00%
|
|
Net
debt/(cash)
|
56,331
|
n.m.
|
(31,288)
|
n.m.
|
—
|
—
|
25,043
|
n.m.
|
|
Equity
holdings on the
Effective
Date5
(Shares)
|
10,102,389,377
|
42.51%
|
13,664,951,945
|
57.49%
|
—
|
—
|
23,767,341,322
|
100.00%
|
Scenario
B — the CDMA Business Disposal will not be completed at all
|
Netcom
Group1
|
Unicom
Group
|
Pro
forma adjustments6
|
Enlarged
Group
|
|||||
|
(RMB
million)
|
(%)
|
(RMB
million)
|
(%)
|
(RMB
million)
|
(%)
|
(RMB
million)
|
(%)
|
|
|
Revenue
|
84,081
|
46.19%
|
99,539
|
54.68%
|
(1,579)
|
(0.87)%
|
182,041
|
100.00%
|
|
EBITDA
|
42,7613
|
56.57%
|
33,1474
|
43.85%
|
(320)
|
(0.42)%
|
75,588
|
100.00%
|
|
Net
profit
|
10,2503
|
60.23%
|
7,0894
|
41.65%
|
(320)
|
(1.88)%
|
17,019
|
100.00%
|
|
Net
asset value
|
82,052
|
45.85%
|
97,213
|
54.33%
|
(320)
|
(0.18)%
|
178,945
|
100.00%
|
|
Net
debt/(cash)
|
56,331
|
n.m.
|
(3,462)
|
n.m.
|
—
|
—
|
52,869
|
n.m.
|
|
Equity
holdings on the
Effective
Date5
(Shares)
|
10,102,389,377
|
42.51%
|
13,664,951,945
|
57.49%
|
—
|
—
|
23,767,341,322
|
100.00%
|
Source:
Appendix III to the Explanatory Statement and Rothschild analyses
Notes:
|
1.
|
The
financials of the continuing operations of the Netcom Group
only.
|
|
2.
|
Please
refer to note 4 to the “Unaudited pro forma consolidated financial
information on the Enlarged Group” set out in Appendix III to the
Explanatory Statement.
|
|
3.
|
The
EBITDA and net profit from continuing operations of the Netcom Group have
been adjusted to exclude the other income relating to subsidy income
received from reinvestment of the profit distributions received from a
subsidiary in the PRC to that subsidiary of approximately RMB1,221 million
for the year ended 31 December
2007.
|
|
4.
|
The
EBITDA and net profit of the Unicom Group have been adjusted to exclude
the unrealised loss on changes in fair value of derivative component of
convertible bonds of approximately RMB569 million and the other gains from
tax refund on reinvestment in a subsidiary of approximately RMB2,781
million for the year ended 31 December 2007 and do not include gain from
the CDMA Business Disposal.
|
|
5.
|
The
shareholding in the Enlarged Group is extracted from paragraph 11 of the
Explanatory Statement assuming the Scheme becomes effective and none of
the outstanding Netcom Options had been exercised. The number of Netcom
Shares shown in this table is the number of new Unicom Share assumed to be
issued pursuant to the Share Proposal (i.e. 6,699,197,200 Netcom Shares in
issue as at the Latest Practicable Date multiplied by the Share Exchange
Ratio).
|
|
6.
|
Please
refer to note 5 to the “Unaudited pro forma consolidated financial
information on the Enlarged Group” set out in Appendix III to the
Explanatory Statement.
|
|
7.
|
n.m.
denotes not meaningful.
|
Under Scenario A, Unicom would
realise an estimated one-off gain from the CDMA Business Disposal which in turn
would lead to a substantial enhancement in net profit attributable to the Netcom
Shareholders as a whole. However, Netcom Shareholders should note that such gain
is one-off in nature and if such gain were excluded, the Netcom Group would, as
illustrated in Table 6 above, contribute over 50% of revenue, EBITDA and net
profit to the Enlarged Group under both scenarios (except that the Netcom Group
would contribute approximately 46.19% of revenue to the Enlarged Group under
Scenario B) whilst the Netcom Shareholders would get approximately 42.51% of the
equity of the Enlarged Group. This implies that the Proposals (under both
scenarios) would result in a dilution in the revenue, EBITDA and net profit
attributable to the Netcom Shareholders on a pro forma basis. We believe the
dilution to be acceptable after considering the following:
|
|
(i)
|
following
the telecoms industry restructuring as contemplated in the Telecoms
Restructuring Announcement, it is envisaged that there will be three main
telecommunications operators (of which Unicom (post-merger) will be one of
them) with more comparable resources, strength and scale, and with
capability to offer full telecommunications services which, in turn, is
expected to lead to a more balanced competitive environment
|
-
36 -
| and better resource allocation within China’s telecommunications industry. The expected issuance of 3G licences should result in new opportunities for Unicom and other telecommunications operators; | ||
|
|
(ii)
|
Netcom’s
operational and financial performance in recent years has been affected by
increasingly rapid mobile substitution. An entry into the mobile market
through the Proposals should address Netcom’s needs effectively and is in
line with the stated business direction and objectives of
Netcom;
|
|
|
(iii)
|
the
synergies anticipated from the proposed merger (as set out in paragraph 6
headed “Reasons for and benefits of the proposed merger” in the
Explanatory Statement) are not reflected in the historical pro forma
consolidated financials of the Enlarged Group. Factoring in the synergies
anticipated from the proposed merger, the Enlarged Group should lead to
greater growth opportunities for the Netcom Shareholders than Netcom would
offer as a standalone entity in its current
structure;
|
|
|
(iv)
|
as
at 31 December 2007, the Netcom Group had net debt of approximately
RMB56,331 million whilst the Unicom Group had net cash of approximately
RMB3,462 million. The gearing position of the Enlarged Group should,
therefore, reduce as a result of the Proposals (although in a much greater
extent under Scenario A since the Unicom Group will receive cash proceeds
of RMB43.8 billion from the CDMA Business
Disposal).
|
3. Analysis
of the Share Exchange Ratio
(a) Public
market analysis
The
Share Proposal is an all-share transaction with no cash alternative. As the
market value of the Unicom Shares and the Netcom Shares vary according to their
trading price performance, we have analysed the historical exchange ratio by
dividing the closing share price of the Netcom Shares with the closing share
price of the Unicom Shares on a daily basis over the period from 24 May 2007
(being the day which is one year prior to the Last Trading Date) up to and
including the Last Trading Date (the “One-Year Period”) and up to and including
the Latest Practicable Date (see Chart 7 below). We have compared the prices
from 24 May 2007 and up to and including the Latest Practicable Date as we
consider that it would better reflect the prevailing market indication of the
underlying value of the Netcom Shares and the Unicom Shares. The Share Exchange
Ratio is higher than the One-Year Period average historical exchange ratio of
approximately 1.437 times.
-
37 -
Chart
7 — Historical exchange ratio
Source: Bloomberg
Table
8 below shows the premium/discount and change in capital value on a per share
basis based on the Share Exchange Ratio when compared to historical prices of
the Netcom Shares and the Unicom Shares during the One-Year Period.
Table
8 — Premium/discount and change in capital value based on the Share Exchange
Ratio
|
One
year prior to the Last Trading Date (i.e.the One-Year
Period)
|
Netcom
Share
price
|
Unicom
Share
price
|
Historical
exchange ratio1
|
Premium/
(discount) of the Share Exchange Ratio over/to the historical exchange
ratio
|
Implied
Netcom Share price2
|
Increase
|
|
30-day3
|
HK$23.77
|
HK$16.72
|
1.422
times
|
6.0%
|
HK$25.21
|
HK$1.44
|
|
60-day3
|
HK$23.33
|
HK$16.88
|
1.382
times
|
9.1%
|
HK$25.46
|
HK$2.13
|
|
90-day3
|
HK$23.56
|
HK$17.25
|
1.366
times
|
10.4%
|
HK$26.01
|
HK$2.45
|
|
120-day3
|
HK$23.59
|
HK$17.03
|
1.385
times
|
8.9%
|
HK$25.68
|
HK$2.09
|
|
Simple
average
|
8.6%
|
HK$2.03
|
Source
of closing prices: Bloomberg
Notes:
1. Closing
price of the Netcom Shares divided by the closing price of the Unicom
Shares.
2. Closing
price of the Unicom Shares multiplied by the Share Exchange Ratio.
3. Average
closing price for the 30, 60, 90 and 120 trading days immediately prior to and
including the Last Trading Date.
The
prices of the Netcom Shares and the Unicom Shares are largely linked to the
Share Exchange Ratio after the Announcement. The exchange ratio based on the
closing prices on the Latest Practicable Date was approximately 1.488 times.
Based on Table 8 above, the Share Exchange Ratio is at approximately 8.6%
premium (or an increase of approximately HK$2.03 in capital value on a per share
basis) over the historical exchange ratio over the One-Year Period.
Chart
9 below shows the daily closing prices of the Netcom Shares and the Netcom ADSs
from 24 May 2005 and up to and including the Latest Practicable
Date.
-
38 -
Chart
9 — Daily closing prices of the Netcom Shares and the Netcom ADSs
Source:
Bloomberg
|
Note:
|
Each
Netcom ADS represents 20 Netcom Shares. The closing prices of the Netcom
ADSs as shown in Chart 9 above have been divided by 20 to derive the
closing prices on a per Netcom Share basis and converted from US$ into HK$
by using an exchange rate of HK$7.80 for every
US$1.
|
Since
the transacted prices of the Netcom ADS (as illustrated by Chart 9 above) do not
differ significantly from the Netcom Shares, we are of the view that the prices
of the Netcom ADS are fully represented by those of the Netcom Shares, and vice
versa. As such, we have not conducted separate analyses on the ADS
Proposal.
Chart
10 below shows the daily closing prices of the Unicom Shares for the Three-Year
Period and up to and including the Latest Practicable Date. During the period
under review, the business of Unicom primarily consists of the GSM and CDMA
cellular businesses.
Chart 10 — Daily closing prices of
the Unicom Shares
Source:
Bloomberg
Chart
11 below shows the daily closing prices of the Netcom Shares relative to the
Unicom Shares and the Hang Seng Index for the Three-Year Period and up to and
including the Latest Practicable Date.
-
39 -
Chart
11 — Netcom Share price performance relative to the Unicom Shares
and
the
Hang Seng Index
Source:
Bloomberg
|
|
Note:
|
The
opening price of the Unicom Shares and the opening index of the Hang Seng
Index as shown in Chart 11 above were rebased to match the latest closing
price of the Netcom Shares on 24 May 2005, with the subsequent movements
in the Unicom Shares and the Hang Seng Index presented by reference to
such rebased opening position of the Netcom
Shares.
|
As
illustrated in the charts above, the price of the Netcom Shares increased by
approximately 154.0% during the Three-Year Period despite flat/declining
reported earnings by the Netcom Group since the year ended 31 December 2005. The
price of the Unicom Shares increased by an even greater percentage at
approximately 200.5% in the Three-Year Period on the back of growing reported
earnings by the Unicom Group. The price of the Unicom Shares on a relative basis
has consistently traded above the Netcom Shares since 26 June 2007. We believe
the out-performance of the Unicom Shares over the Netcom Shares can be
attributable to the growing preference or demand for mobile phones over
fixed-line telephones in the PRC, leading the market to expect stronger growth
from Unicom than that of Netcom (being a fixed-line operator in Northern China).
Robust organic growth in usage for Unicom was in sharp contrast with the
continuous loss of fixed-line customers and drop in usage for Netcom.
Notwithstanding declining financial and operational performance of Netcom, the
Netcom Share price has increased by approximately 33.6% during the One-Year
Period compared to an increase of approximately 59.9% and 20.4% respectively of
the Unicom Share price and the Hang Seng Index during the same period. We have
benchmarked against the Hang Seng Index (of which Netcom has been a constituent
stock since 6 March 2006 and Unicom has been a constituent stock since 1 June
2001) in our comparison in order to compare performance with the overall market
performance in Hong Kong.
Based
on our news search, we have noted that press reports on a possible restructuring
of the PRC telecom sector and the timing of 3G licence issuance can be traced
back to as early as 2001. In addition, the structure of the restructuring as
described in the press reports and research reports issued by securities brokers
since 2005 is largely similar to the Proposals and the CDMA Business Disposal.
In view of the above, it is reasonable to believe that the positive share price
movement of the Netcom Shares and in particular the Unicom Shares has, to a
certain extent, reflected the Proposals and the CDMA Business
Disposal.
For
the period from 3 June 2008 (i.e. after resumption of trading following the
release of the Announcement) and up to the Latest Practicable Date, the Netcom
Share price dropped by approximately 15.0% from the closing price of HK$27.05 on
the Last Trading Date to close at HK$23.00 on the Latest Practicable Date and
the Unicom Share price dropped by approximately 16.3% from the closing price of
HK$18.48 on the Last Trading Date to close at HK$15.46 on the Latest Practicable
Date. We believe the decrease in price of the Netcom Shares (as well as the
Unicom Shares) could be attributable to a combination of factors, including,
among other things, (1) the overall poor market sentiment in the Hong Kong stock
market as affected by external factors such as record high oil prices (the Hang
Seng Index closed at 21,640.89 on the Latest Practicable Date down by
approximately 11.2% from 3 June 2008); (2) profit-taking by investors; and (3)
growing focus on the integration challenges.
As
noted in the charts above, the highest closing price of the Netcom Shares and
the Unicom Shares over the Three-Year Period were HK$27.05 per Netcom Share on
the Last Trading Date and HK$19.58 per Unicom Share on 18 February 2008,
respectively. A comparison of the historical prices of the Netcom Shares and the
Unicom Shares is set out in paragraph 9 headed “Comparisons of value” in the
Explanatory Statement.
-
40 -
(b) Comparable
trading companies analysis
Netcom
We
have reviewed the trading multiples of companies comparable to Netcom (the
“Netcom Comparable Companies”). Since the Netcom Group is mainly engaged in
fixed-line and broadband operations in the PRC, the Netcom Comparable Companies
we have chosen are quoted, regional, fixed-line operators with significant
revenue generated from the fixed-line business (over 60% for the purpose of this
analysis) within a single market. In selecting the Netcom Comparable Companies,
we have taken into account their business activities, respective size and market
exposures. We note that there is not a single comparable company which is
perfectly comparable as a result of different operating markets, metrics,
management and regulations. The companies we have selected based on the above
criteria are China Telecom, KT Corporation and Telekom Malaysia Berhad (“Telekom
Malaysia”). To the best of our knowledge, this list is a fair representation of
companies comparable to Netcom.
We
have compared the enterprise value (“EV”)/EBITDA and PER multiples (being the
most commonly used multiples in the telecommunications sector) of Netcom and the
Netcom Comparable Companies as at the Last Trading Date and the Latest
Practicable Date, and our analysis is summarised in the following
table.
Table
12 — Trading multiples of the Netcom Comparable Companies
|
As
at the Last Trading Date
|
As
at the Latest Practicable Date
|
||||
|
Company
|
Listing
|
EV/
EBITDA1
|
PER1
|
EV/
EBITDA1
|
PER1
|
|
(Times)
|
(Times)
|
(Times)
|
(Times)
|
||
|
China
Telecom
|
Hong
Kong
|
5.7
|
18.1
|
4.4
|
13.0
|
|
KT
Corporation
|
Korea
|
4.5
|
13.0
|
4.3
|
12.2
|
|
Telekom
Malaysia
|
Kuala
Lumpur
|
4.7
|
10.7
|
5.0
|
11.6
|
|
Simple
average
|
5.0
|
13.9
|
4.6
|
12.3
|
|
|
Netcom
|
5.1
|
15.7
|
4.5
|
13.4
|
|
Sources: Bloomberg
and the latest published financial statements of the respective
companies
Notes:
|
|
1.
|
Based
on the EBITDA and net profit for the year ended 31 December 2007. In
respect of the Netcom Group, the EBITDA and net profit have been adjusted
to exclude the other income relating to subsidy income received from
reinvestment of the profit distributions received from a subsidiary in the
PRC to that subsidiary. EV is defined as the equity value plus net debt
and minority interests less cash and cash equivalents and interests in
associates.
|
|
|
2.
|
Exchange
rates into HK$ as at the Last Trading Date were
used.
|
The
EV/EBITDA multiple of Netcom as at the Last Trading Date and the PER multiples
of Netcom as at the Last Trading Date and the Latest Practicable Date were
higher than the average of the trading multiples of the Netcom Comparable
Companies. The EV/EBITDA multiple of Netcom as at the Latest Practicable Date
was lower than the average but within the range of the trading multiples of the
Netcom Comparable Companies.
Unicom
In
selecting the companies comparable to Unicom (the “Unicom Comparable
Companies”), we have adopted similar selection criteria as for Netcom whereby
the Unicom Comparable Companies we have chosen are quoted, regional operators
with significant revenue generated from wireless services (over 60% for the
purpose of this analysis) within a single market with a mobile penetration rate
of at least 30%. In selecting the Unicom Comparable Companies, we have taken
into account their business activities, respective size and market exposures. We
note that there is not a single comparable company which is perfectly comparable
as a result of different operating markets, metrics, management and regulations.
The companies have selected based on the above criteria are Advanced Info
Service Public Company Limited (“Advanced Info Service”), China Mobile, Digi.com
Berhad (“Digi.com”), PT Indosat Tbk (“Indosat”), Globe Telecom Incorporated
(“Globe Telecom”), Philippine Long Distance Telephone Company (“PLDT”) and PT
Telekomunikasi Indonesia Tbk (“PT Telekom”). To the best of our knowledge, this
list is a fair representation of companies comparable to
-
41 -
Unicom.
We
have compared the EV/EBITDA and PER multiples of Unicom and the Unicom
Comparable Companies as at the Last Trading Date and the Latest Practicable
Date, and our analysis is summarised in the following table. We have, for
illustrative purpose only, also compared the EV/EBITDA and PER multiples of
Unicom post the CDMA Business Disposal (i.e. Scenario A).
Table
13 — Trading multiples of the Unicom Comparable Companies
|
As
at the Last Trading Date
|
As
at the Latest Practicable Date
|
||||
|
Company
|
Listing
|
EV/
EBITDA1
|
PER1
|
EV/
EBITDA1
|
PER1
|
|
(Times)
|
(Times)
|
(Times)
|
(Times)
|
||
|
Advanced
Info Service
|
Bangkok
|
7.1
|
17.7
|
6.6
|
16.4
|
|
China
Mobile
|
Hong
Kong
|
10.7
|
25.6
|
7.9
|
19.3
|
|
Digi.com
|
Kuala
Lumpur
|
8.6
|
17.4
|
8.6
|
17.4
|
|
Globe
Telecom
|
Philippines
|
4.7
|
12.6
|
4.5
|
11.8
|
|
Indosat
|
Indonesia
|
4.7
|
15.8
|
4.8
|
16.2
|
|
PLDT
|
Philippines
|
5.7
|
12.9
|
5.8
|
13.0
|
|
PT
Telkom
|
Indonesia
|
5.2
|
13.5
|
4.5
|
11.8
|
|
Simple
average
|
6.7
|
16.5
|
6.1
|
15.1
|
|
|
Unicom
|
|||||
|
—
Scenario A2
|
6.2
|
35.7
|
5.0
|
29.9
|
|
|
—
Scenario B
|
6.7
|
31.7
|
5.6
|
26.5
|
|
Sources: Bloomberg
and the latest published consolidated financial statements of the respective
companies
Notes:
|
|
1.
|
Based
on the EBITDA and net profit for the year ended 31 December 2007. In
respect of the Unicom Group, the EBITDA and net profit have been adjusted
to exclude the unrealised loss on changes in fair value of derivative
component of convertible bonds and the other gains from tax refund on
reinvestment in a subsidiary. EV is defined as the equity value plus net
debt and minority interests less cash and cash equivalents and interests
in associates.
|
|
|
2.
|
EBITDA
and net profit of the Unicom Group adjusted to exclude contribution from
the CDMA Business and other inter-company transactions between the Netcom
Group and the Unicom Group.
|
|
|
3.
|
Exchange
rates into HK$ as at the Last Trading Date were
used.
|
Under both scenarios, the EV/EBITDA
multiples of Unicom implied by the closing price as at the Last Trading Date and
the Latest Practicable Date were lower than the average but within the range of
the trading multiples of the Unicom Comparable Companies but the PER multiples
of Unicom as at the Last Trading Date and the Latest Practicable Date were
higher than the average of the trading multiples of the Unicom Comparable
Companies.
The
Unicom Shares trade at a premium over the Netcom Shares both in terms of
EV/EBITDA and PER multiples. A possible explanation for Unicom’s higher multiple
is the growth potential of Unicom’s mobile operations when compared to Netcom’s
lower growth fixed-line operation (please refer to paragraph 2 headed “Business
and financial performance” above for details of the past performance of the
Netcom Group and the Unicom Group).
If
we use the average EV/EBITDA and PER multiples of the Netcom Comparable
Companies and the Unicom Comparable Companies to derive an implied share
exchange ratio as an additional means to evaluate the Share Exchange Ratio, the
implied share exchange ratio as at the Last Trading Date using (i) the average
EV/EBITDA multiple would be approximately 1.326 times under Scenario A and 1.413
times under Scenario B, and (ii) the average PER multiple would be approximately
2.805 times under Scenario A and 2.490 times under Scenario B. The implied share
exchange ratio under Scenario A as at the Last Trading Date using the average
PER multiple would be approximately 1.973 times if the proceeds from the CDMA
Business Disposal are recognised in this calculation. Given that the Share
Proposal is an all share-transaction with no cash alternative and the Share
Exchange Ratio is determined with reference to the closing prices as at the Last
Trading Date, we believe it is more appropriate to evaluate the Share Exchange
Ratio using public market
-
42 -
analysis.
(c) Comparable
transactions analysis
Whilst
looking at recent precedent transactions is considered to be an appropriate
benchmark for relative valuation, we are not aware of any directly comparable
all-share transactions of a relevant size within the telecommunications industry
in China and Hong Kong during the past four years and hence have been unable to
identify any reliable transaction benchmark to the Proposals. Furthermore, due
to incomparable circumstances that could range from specific industry
conditions, different growth prospects and unique shareholding structures, we
believe it is not meaningful to look at transactions across other geographies or
industry sectors. Therefore, we have based our opinion on the other analyses
presented in this letter.
The Share Proposal is structured as an all share-transaction such that the
Netcom Shareholders are offered an opportunity to continue to remain invested in
the Enlarged Group and share benefits as anticipated by the management of Netcom
and Unicom as set out in paragraph 6 headed “Reasons for and benefits of the
proposed merger” in the Explanatory Statement. Having considered the above and
in particular:
|
|
•
|
the
prices used to determine the Share Exchange Ratio were at historical highs
of the Netcom Shares and the Unicom Shares over the Three-Year
Period;
|
|
|
•
|
the
Share Exchange Ratio is at approximately 8.6% premium (or an increase of
approximately HK$2.03 in capital value on a per share basis) over the
historical exchange ratio during the One-Year Period using the public
market analysis method; and
|
|
|
•
|
the
Unicom Shares trade at a premium over the Netcom Shares both in terms of
EV/EBITDA and PER multiples as at the Last Trading Date and the Latest
Practicable Date using the comparable trading companies
analysis,
|
we
consider the Share Exchange Ratio to be fair and reasonable.
4. Dividend
and yield
Table 14 below sets out the dividend per share, dividend payout ratio and the
dividend yields of Netcom and Unicom for the year ended 31 December
2007.
Table
14 — Dividend yield of Netcom and Unicom
|
For
the financial year ended 31 December 2007
|
Netcom
|
Unicom
|
|
Dividend
per share
|
HK$0.592
|
HK$0.2051
|
|
Dividend
payout ratio2
|
37.5%
|
36.8%
|
|
Dividend
yield based on the closing price on the Latest Practicable
Date
|
2.6%
|
1.3%
|
|
Implied
dividend yield based on the closing price on the Last Trading
Date
|
2.2%
|
1.1%
|
Sources:
Bloomberg and the respective annual reports of Netcom and Unicom for the year
ended 31 December 2007
Notes:
|
1.
|
Converted
from RMB into HK$ by using the exchange rate of RMB0.975 for every
HK$1.
|
|
2.
|
Dividend
per share divided by basic earnings per share (after excluding the effect
of the other income of approximately RMB1,221 million in the net profit of
Netcom and excluding the effect of the unrealised loss on changes in fair
value of derivative component of convertible bonds of RMB569 million and
the other gains from tax refund of RMB2,781 million in the net profit of
Unicom).
|
Based on the comparison above, we note
that Unicom had a similar dividend payout ratio as Netcom (both as adjusted to
exclude non-recurring items) but an investment in the Netcom Shares had offered
a higher dividend yield than the dividend yield offered by the Unicom Shares.
However, there is no assurance that Netcom or Unicom will continue to pay
similar dividend in the future and the future dividend payment of the Enlarged
Group will depend on its dividend policy to be determined by the board of
directors of the Enlarged Group.
5. Historical
trading volume
-
43 -
Table 15 below sets out the trading volume of the Netcom Shares and the Unicom
Shares per month and the monthly trading volume as a percentage of the Netcom
Shares and the Unicom Shares held by the public for the period 1 May 2007 to 31
July 2008.
-
44 -
Table
15 — Liquidity analysis
|
Netcom
|
Unicom
|
|||
|
Monthly
trading volume of the Netcom Shares
|
Monthly
trading volume of the Netcom Shares as a percentage of public float of
Netcom1
|
Monthly
trading volume of the Unicom Shares
|
Monthly
trading volume of the Unicom Shares as a percentage of public float of
Unicom2
|
|
|
(million
shares)
|
(million
shares)
|
|||
|
2007
|
||||
|
May
|
241.6
|
11.8%
|
206.6
|
5.2%
|
|
June
|
254.1
|
12.4%
|
369.4
|
9.4%
|
|
July
|
229.8
|
11.2%
|
284.0
|
7.2%
|
|
August
|
263.1
|
12.8%
|
354.1
|
9.0%
|
|
September
|
306.4
|
14.9%
|
368.4
|
9.4%
|
|
October
|
547.9
|
26.7%
|
473.4
|
12.0%
|
|
November
|
390.3
|
19.0%
|
440.2
|
11.2%
|
|
December
|
208.1
|
10.1%
|
486.4
|
12.3%
|
|
Average
monthly trading volume(1 May 2007 to
31 December 2007)
|
305.2
|
14.9%
|
372.8
|
9.5%
|
|
2008
|
||||
|
January
|
333.8
|
16.3%
|
585.7
|
14.9%
|
|
February
|
208.4
|
10.2%
|
504.0
|
12.8%
|
|
March
|
267.4
|
13.0%
|
490.0
|
12.4%
|
|
April
|
242.5
|
11.8%
|
494.5
|
12.6%
|
|
May
|
212.3
|
10.3%
|
377.1
|
9.6%
|
|
June
|
376.8
|
18.4%
|
1,077.9
|
27.4%
|
|
July
|
155.4
|
7.6%
|
414.1
|
10.5%
|
|
Average
monthly trading volume(1 January 2008 to 31 July2008)
|
256.7
|
12.5%
|
563.3
|
14.3%
|
Source:
Bloomberg
Notes:
|
1.
|
Based
on 2,051,748,185 Netcom Shares, being 6,699,197,200 Netcom Shares in issue
as at the Latest Practicable Date less a total of 4,647,449,015 Netcom
Shares held by Netcom BVI.
|
|
2.
|
Based
on 3,939,951,925 Unicom Shares, being 13,664,951,945 Unicom Shares in
issue as at the Latest Practicable Date less a total of 9,725,000,020
Unicom Shares held by Unicom
Parent.
|
Both the Netcom Shares and the Unicom Shares are Hang Seng Index constituents
and have active trading records. Based on the closing prices of the Netcom
Shares and the Unicom Shares on the Latest Practicable Date, the Enlarged Group
would have a combined free float market capitalisation of approximately
HK$109,590.2 million and rank 16 amongst all the Hang Seng Index constituents
(currently, Netcom ranked 31 and Unicom ranked 25 in the Hang Seng Index). As
such, the Unicom Shares should continue to have active trading liquidity after
the Scheme becomes effective.
6. Risk
profile
Disinterested
Netcom Shareholders should also carefully consider the risk factors as set out
in paragraph 16 headed “Risk factors” in the Explanatory Statement when making
their voting decisions. As the risk profile of the Enlarged Group after
completion of the Proposals is likely to be different from that of Netcom in its
current form, we have set out below a discussion on the risk profile of the
Enlarged Group based on our assessment.
(a) Risks
related to competition
The
entry into the mobile market exposes Netcom to an intensely competitive market
versus its current market where
-
45 -
it
dominates with over 90% market share in its service regions. Currently, Unicom
is the number two player in a two-player mobile market and lags significantly
behind China Mobile in terms of number of customers, revenues, profit and
network reach and density. With the proposed acquisition of Unicom’s CDMA
Business by China Telecom and the issuance of 3G licences after industry
restructuring, competition may well increase in the market. Netcom has not been
exposed to major competition thus far and also has not been in a number two
position in its market. As such, the competitive risk profile of the Enlarged
Group is different to that of Netcom. It is worth noting, however, that whilst
Netcom operates in a far less competitive market than the mobile market,
Netcom’s business is itself in increasing competition with the mobile operators,
as customers switch from fixed-line to mobile services. As such, arguably,
Netcom Shareholders are already to some degree exposed to competition in the
broader telecommunications market, as witnessed by its eroding fixed-line
customer base.
(b) Risks
related to 3G licensing and network roll-out
Currently, the timing of 3G licence award is uncertain. This means that any
potential 3G upside could be delayed, and additionally that any 3G costs could
also be delayed, thereby having implications for the Unicom business going
forward. The nature of Netcom’s exposure to licensing risk and technology risk
would also change. In particular, as a result of the Proposals, Netcom would be
exposed to 3G risk which manifests itself in several ways.
Firstly, in the instance that the Enlarged Group is awarded a 3G licence, the
technology associated with the 3G licence which the Enlarged Group receives, is
currently uncertain. There are multiple 3G technology standards with certain
standards more widely adopted than others. The 3G standard which the Enlarged
Group adopts may have significant implications for the cost of 3G network
rollout, the range and cost of 3G terminals, the ability of the Enlarged Group’s
customers to roam on 3G networks overseas and the ability to host inbound 3G
roaming. As such, the technology standard adopted could have implications for
market share, revenues, operating costs and the capital expenditure requirements
of the Enlarged Group.
Secondly, the conditions of any 3G licence award are uncertain and could require
significant capital expenditure commitment, potentially in areas which are not
economically attractive for 3G rollout. 3G obligations could therefore have a
major impact on the Enlarged Group’s cash flow for several years.
Whilst
the 3G business as a whole is largely unproven and will require substantial
capital investment, it should also be noted that 3G is also an opportunity for
the Enlarged Group to improve its positioning in the mobile market.
|
|
(c)
|
Risks
related to the successful integration of Netcom and Unicom and realisation
of potential synergies
|
The
management of Netcom and Unicom refer to benefits of the proposed merger in the
Explanatory Statement. There is no assurance of an effective integration of
Netcom and Unicom and, even if the proposed merger is executed in an efficient,
effective and timely manner, there is no assurance that the Enlarged Group’s
performance, revenues, profits or shareholder value will be superior to those
which would have been achieved by each entity independently. In particular, the
reasons for and benefits of the proposed merger related to potential synergies
from a combination may not materialise or may be delayed due to several factors,
some of which may be outside the control of Netcom and Unicom. These factors
include, among other things:
|
|
•
|
difficulties
in integrating the operations of Netcom and Unicom, including information
systems, personnel, policies and procedures, and overlapping operations,
subsidiaries and branch networks;
|
|
|
•
|
unforeseen
contingent risks or latent liabilities relating to the proposed merger
that may become apparent in the
future;
|
|
|
•
|
difficulties
in managing a much larger business;
|
|
|
•
|
failure
to complete or to timely complete the CDMA Business Disposal or to achieve
the benefits anticipated from such
disposal;
|
|
|
•
|
diversion
of management’s attention from day-to-day business as a result of the need
to deal with integration issues;
|
-
46 -
|
|
•
|
loss
of key personnel; and/or
|
|
|
•
|
increase
in competition in the PRC telecommunications industry resulting from the
ongoing restructuring of the PRC telecommunications industry which, among
other things, may require an increase in marketing
efforts.
|
Any of
the above could adversely impact the anticipated benefits from the proposed
merger and could materially adversely affect the future business performance and
financial condition of the Enlarged Group. Furthermore, there could be
significant costs and inefficiencies incurred by the Enlarged Group as a result
of the proposed merger.
(d) Risks
related to the CDMA Business Disposal
With
regard to the Proposals, Unicom’s CDMA Business Disposal to China Telecom is a
potential risk to the value of the Enlarged Group. If the sale of the CDMA
Business is not realised at RMB43.8 billion or if the CDMA Business is retained
and its value is below RMB43.8 billion, there is a risk to the share price of
Unicom post-merger.
Netcom
Shareholders should note that according to paragraph 5 headed “Indebtedness” in
Appendix II to the Explanatory Statement, the CDMA Business Disposal will give
rise to mandatory prepayment under the terms of the syndicated loan agreement
relating to a syndicated term loan facility granted to Unicom. The reduction in
the shareholding of Unicom BVI in Unicom following the completion of the Scheme
will give rise to an event of default under the terms of the same syndicated
loan agreement. If waivers of such prepayment and such event of default are not
granted by the lenders to Unicom and if either the CDMA Business Disposal or the
Scheme is completed, Unicom will be required to prepay the entire principal
amount outstanding under such loan facility together with accrued interest on
completion of the CDMA Business Disposal or the Scheme. The principal amount
outstanding under such loan facility is expected to be US$200 million at the
time when the CDMA Business Disposal or the Scheme is completed and, under the
terms of the syndicated loan agreement, such amount is otherwise scheduled for
repayment in September 2010. If Unicom is required to prepay the principal
amount as stated above, it expects to have sufficient cash resources available
to fund such payment.
Accordingly,
as is evident from the above, the Enlarged Group will have a different risk
profile and Unicom Share price may be subject to significant volatility.
Therefore, Netcom Shareholders should carefully consider the nature of key
businesses of the Enlarged Group and the risks associated with holding an
investment in shares of Unicom post-merger. In addition, due to the regulated
nature and high-technology characteristics of the Unicom business, the Enlarged
Group’s performance will be subject to a number of factors, some of which are
beyond the control of the Enlarged Group. There is still considerable
uncertainty as to the benefits of a rapid and large exposure to the mobile
market in China. Netcom Shareholders should therefore consider their own
investment and risk-taking objectives in assessing the terms of the Proposals.
Moreover, there is no assurance that the current price level of the Netcom
Shares and the Unicom Shares will be sustainable, particularly for those Netcom
Shareholders who may be seeking to dispose of their investments in the market in
the future.
7. The
ADS Proposal
The consideration for the ADS Proposal is equivalent to the consideration for
the Share Proposal and is calculated using the Share Exchange Ratio and taking
into account the number of Netcom Shares which each Netcom ADS represents and
the number of the Unicom Shares which each Unicom ADS represents. Chart 9 above
shows the daily closing prices of the Netcom ADSs for the Three-Year Period and
up to and including the Latest Practicable Date.
8. The
Option Proposal
Pursuant
to the Option Proposal, which is conditional upon the Scheme becoming effective,
Unicom will grant Netcom Optionholders Special Unicom Option in consideration
for the cancellation of their outstanding Netcom Options at the Scheme Record
Time (whether vested or not). The number of Special Unicom Option that will be
granted to each Netcom Optionholder and the exercise price of a Special Unicom
Option will be determined by a formula which ensures that the value of the
Special Unicom Option received by a Netcom Optionholder is equivalent to the
See-Through Price of that holder’s outstanding Netcom Options. In other words,
the Netcom Optionholders will receive a consideration for their Netcom Options
that is comparable to the consideration which the Netcom Shareholders will
receive for their Scheme Shares.
The
Special Unicom Options will be granted by Unicom pursuant to the Special Purpose
Unicom Share Option Scheme which is proposed to be adopted by Unicom at the
Unicom EGM. The terms of the Special Purpose Unicom Share Option Scheme will be
substantially the same as the terms of the Netcom Share Option Scheme, save for
the following:
-
47 -
|
|
(a)
|
the
exercise price of a Special Unicom Option granted will be such price as
will result in the value of the Special Unicom Option received by the
Netcom Optionholders being equivalent to the See-Through Price;
and
|
|
|
(b)
|
other
than the Special Unicom Options to be granted pursuant to the Option
Proposal, no further Special Unicom Options will be granted under the
Special Purpose Unicom Share Option
Scheme.
|
To the extent that Netcom Optionholders do not exercise their outstanding Netcom
Options prior to the Options Exercise Deadline, their Netcom Options that remain
outstanding at the Scheme Record Time (whether vested or not) will, subject to
the Scheme becoming effective, be cancelled by the Board and such Netcom
Optionholders will automatically be granted Special Unicom Options in
consideration for the cancellation of their outstanding Netcom Options. Please
refer to paragraph 3 headed “Summary of the Proposals — The Option Proposal” in
the Explanatory Statement for further details. Netcom Optionholders should also
refer to the Option Proposal Letter.
FURTHER
CONSIDERATIONS
(a) Conditions
The Share Proposal is, and the Scheme will become effective and binding on
Netcom and all of the Scheme Shareholders, subject to the satisfaction or
waiver, as applicable, of the conditions as set out in paragraph 4 headed
“Conditions of the Proposals and the Scheme” in the Explanatory Statement on or
before 30 November 2008 (or such later date as Unicom and Netcom may agree and
the High Court may allow), otherwise the Proposals, including the Scheme, will
lapse. In particular, the Share Proposal is subject to, among other things,
approval of the Proposals by the Unicom Shareholders at a general meeting, the
approval of the Scheme by the Disinterested Netcom Shareholders at the Court
Meeting and the Netcom EGM, and the Court’s sanction of the Scheme. Further
details of the conditions are set out in the Explanatory Statement.
Assuming that all of the conditions are satisfied or waived, as applicable, it
is expected that the Scheme will become effective on or before 31 October 2008.
Each of the ADS Proposal and the Option Proposal is conditional upon the Scheme
becoming effective.
(b) Intentions
of Unicom with regard to Netcom
After the completion of the proposed merger, Unicom intends to continue with the
existing business of Netcom and to take measures to integrate the two companies
and improve the operating and financial performance of the Enlarged Group.
Unicom has no intention to introduce any major changes to the business of Netcom
or to redeploy any fixed assets of the Netcom Group. In addition, Unicom does
not intend to discontinue the employment of any of the employees of the Netcom
Group and intends to maintain the stability of its workforce. Unicom intends
that the management teams of Unicom and Netcom be integrated and utilised to an
optimal capacity in order to realise the synergies of the combined businesses of
the Enlarged Group.
Please refer to paragraph 8 headed “Intentions of Unicom with regard to Netcom”
in the Explanatory Statement for further details.
(c) Undertakings
Each of Netcom BVI and Telefónica has given an irrevocable undertaking to Unicom
to vote in favour of all of the resolutions for the approval of the Scheme and
any related matters for its implementation to be proposed at the Court Meeting
and the Netcom EGM in respect of its respective legal and beneficial
shareholding interest in Netcom. In addition, Netcom BVI has also received an
irrevocable instruction to vote in favour of all of the resolutions for the
approval of the Scheme and any related matters for its implementation at the
Court Meeting and the Netcom EGM in respect of the interest in Netcom which
Netcom BVI holds as trustee on behalf of a state-owned entity. Please refer to
paragraph 5 headed “Undertakings” in the Explanatory Statement for further
details.
(d) Possible
Concert Party Agreement
Netcom Shareholders should refer to paragraph 15 headed “Possible Concert Party
Agreement” in the Explanatory Statement for details of the Concert Party
Agreement which Unicom BVI and Netcom BVI intend to enter into following the
completion of the Scheme to cooperate actively to obtain or consolidate control
of Unicom.
(e) Fractions
and odd lots
-
48 -
Netcom Shareholders should refer to paragraph 3 headed “Summary of the Proposals
— Fractions” and paragraph 19 headed “Trading of odd lots of Unicom Shares” in
the Explanatory Statement for details about arrangement regarding fractions of
new Unicom Shares and new Unicom ADSs and odd lots of Unicom Shares,
respectively.
SUMMARY
Having
considered the above principal factors and reasons, we draw your attention to
the following in arriving at our recommendation:
|
|
(a)
|
Following
the telecommunications industry restructuring as contemplated in the
Telecoms Restructuring Announcement, it is envisaged that there will be
three main telecommunications operators (of which Unicom (post-merger)
will be one of them) with more comparable resources, strength and scale,
and with capability to offer full telecommunications services which, in
turn, is expected to lead to a more balanced competitive environment and
better resource allocation within China’s telecommunications industry. The
expected issuance of 3G licences should result in new opportunities for
Unicom and other telecommunications
operators;
|
|
|
(b)
|
Netcom’s
operational and financial performance in recent years has been affected by
increasingly rapid mobile substitution. Recognising this, Netcom has been
investing to provide broadband and ICT services using its network but the
increase in revenue from such initiatives has not been enough to
compensate for the loss in revenue from its fixed-line services. The
Proposals offer Netcom immediate access to a mobile platform and are
considered to be in line with the business direction and objectives as
noted from the Chairman’s Statement in Netcom’s annual report for the year
ended 31 December 2007 which stated that Netcom will “persevere in the
pursuit of licenses for mobile services and IPTV services which will pave
the way for the Company to become a comprehensive “broadband
communications and multimedia service
provider””;
|
|
|
(c)
|
Through
the Proposals, Netcom will become part of a larger group offering a full
spectrum of wireless, fixed, Internet and broadband and data value adding
services. The management of Unicom and Netcom believe that the proposed
merger has strong commercial reasons. After the proposed merger, the
Enlarged Group is expected to take steps to establish a leading position
in the 3G wireless industry, integrate its wireless and fixed-line
businesses, and build a strong market position in the 10 provinces in
Northern China where the Netcom Group has operations, which is expected to
enhance the Enlarged Group’s brand recognition and increase its overall
competitiveness, business scale and shareholder value. The directors of
Unicom and Netcom believe that through effective integration, synergies of
the proposed merger will be realised gradually after completion of the the
Proposals and the CDMA Business Disposal (as discussed in details in
paragraph 1 headed “Reasons for and benefits of the proposed merger”
above);
|
|
|
(d)
|
We
have discussed the anticipated synergies with representatives of Unicom
and Netcom and in-principle concur that the anticipated synergies as set
out in the Explanatory Statement are feasible (recognising that any
synergies would likely only be realised upon the completion of the
Proposals and potentially after a successful and timely post-merger
integration of Netcom’s and Unicom’s operations). The management of Unicom
and Netcom do not expect the benefits as set out in the Explanatory
Statement would be materially adversely affected if the proposed CDMA
Business Disposal is not completed;
|
|
|
(e)
|
If
the estimated one-off gain from the CDMA Business Disposal were excluded,
the Netcom Group would, as illustrated in Table 6 above, contribute over
50% of revenue, EBITDA and net profit to the Enlarged Group under both
scenarios (except that the Netcom Group would contribute approximately
46.19% of revenue to the Enlarged Group under Scenario B) whilst the
Netcom Shareholders would get approximately 42.51% of the equity of the
Enlarged Group. This implies that the Proposals (under both scenarios)
would result in a dilution in the revenue, EBITDA and net profit
attributable to the Netcom Shareholders on a pro forma basis. We believe
the dilution to be acceptable after considering the
following:
|
|
|
•
|
the
synergies anticipated from the proposed merger are not reflected in the
historical pro forma consolidated financials of the Enlarged Group.
Factoring in the synergies anticipated from the proposed merger, the
Enlarged Group should lead to greater growth opportunities for the Netcom
Shareholders than Netcom would offer as a standalone entity in its current
structure; and
|
|
|
•
|
the
gearing position of the Enlarged Group should reduce as a result of the
Proposals (although in a much greater extent under Scenario A since the
Unicom Group will receive a cash proceed of RMB43.8 billion from the CDMA
Business Disposal);
|
-
49 -
|
|
(f)
|
The
Share Exchange Ratio of 1.508 new Unicom Shares for every Scheme Share
cancelled was determined by Unicom on the basis of the closing price of
each Netcom Share of HK$27.05 on the Hong Kong Stock Exchange on the Last
Trading Date plus a 3% premium over such closing price, and the closing
price of each Unicom Share of HK$18.48 on the Hong Kong Stock Exchange on
the Last Trading Date:
|
|
|
•
|
the
prices used to determine the Share Exchange Ratio were at historical highs
of the Netcom Shares and the Unicom Shares over the Three-Year
Period;
|
|
|
•
|
the
Share Exchange Ratio is at approximately 8.6% premium (or an increase of
approximately HK$2.03 in capital value on a per share basis) over the
historical exchange ratio during the One-Year Period using the public
market analysis method (see Table 8 above);
and
|
|
|
•
|
the
Unicom Shares trade at a premium over the Netcom Shares both in terms of
EV/EBITDA and PER multiples as at the Last Trading Date and the Latest
Practicable Date using the comparable trading companies
analysis;
|
|
|
(g)
|
Unicom
had a similar dividend payout ratio as Netcom (both as adjusted to exclude
non-recurring items) for the year ended 31 December 2007 but an investment
in the Netcom Shares had offered a higher dividend yield than the dividend
yield offered by the Unicom Shares. The future dividend payment of the
Enlarged Group will depend on its dividend policy to be determined by the
board of directors of the Enlarged Group;
and
|
|
|
(h)
|
Both
the Netcom Shares and the Unicom Shares are Hang Seng Index constituents
and have active trading records. The Unicom Shares should continue to have
good trading liquidity after the Scheme becomes
effective.
|
RECOMMENDATIONS
The
Share Proposal
Having considered the above principal factors and reasons, we consider the terms
of the Share Proposal to be fair and reasonable so far as the Disinterested
Netcom Shareholders are concerned. Accordingly, we advise the Independent Board
Committee to recommend the Disinterested Netcom Shareholders to vote in favour
of the resolution to approve the Scheme at the Court Meeting, as well as to
recommend the Disinterested Netcom Shareholders (other than the Exempt Principal
Traders) to vote in favour of the special resolution to approve and give effect
to the Scheme at the Netcom EGM.
The
ADS Proposal
In reference to our opinion that the terms of the Share Proposal are fair and
reasonable, we consider that the terms of the ADS Proposal are also fair and
reasonable so far as the Netcom ADS Holders are concerned. Accordingly, we
advise the Independent Board Committee to recommend the Netcom ADS Holders to
instruct the Netcom Depository to vote the Netcom Shares held on their behalf in
favour of the resolution to approve the Scheme at the Court Meeting and the
special resolution to approve and give effect to the Scheme at the Netcom
EGM.
The
Option Proposal
In reference to our opinion that the terms of the Share Proposal are fair and
reasonable, we consider that the terms of the Option Proposal are also fair and
reasonable so far as the Netcom Optionholders are concerned.
|
Yours
very truly,
For
and on behalf of
N
M Rothschild & Sons (Hong Kong) Limited
|
|
Kelvin
Chau
Managing
Director
|
Catherine
Yien
Director
|
-
50 -
-
51 -
|
EXPLANATORY STATEMENT
|
This
Explanatory Statement constitutes the statement required under Section 166A of
the Hong Kong Companies Ordinance.
SCHEME
OF ARRANGEMENT
1. INTRODUCTION
On
2 June 2008, the boards of directors of Unicom and Netcom jointly announced that
Unicom had formally presented the Proposals to the Board and requested the Board
to put forward the Proposals to the Netcom Shareholders for consideration of the
merger of Unicom and Netcom by way of a scheme of arrangement of Netcom under
Section 166 of the Hong Kong Companies Ordinance.
The
Proposals involve the cancellation of all of the Scheme Shares (including the
Netcom Shares to be issued pursuant to the exercise of the outstanding Netcom
Options prior to the Options Exercise Deadline and the Netcom Shares underlying
the Netcom ADSs) and all of the Netcom ADSs and the Netcom Options oustanding at
the Scheme Record Time. Upon the Scheme becoming effective, Netcom will become a
wholly-owned subsidiary of Unicom and the listings of the Netcom Shares and the
Netcom ADSs on the Hong Kong Stock Exchange and the New York Stock Exchange,
respectively, will be withdrawn.
Implementation
of the Proposals will be carried out in accordance with Hong Kong laws, the
Takeovers Code, US federal securities laws and the requirements of the Hong Kong
Stock Exchange and the New York Stock Exchange.
The
purpose of this Explanatory Statement is to explain the terms and effects of the
Proposals and, in particular, the Scheme and to provide the Netcom Shareholders,
the Netcom ADS Holders and the Netcom Optionholders with other relevant
information in relation to the Proposals and the Scheme.
Your
attention is drawn to (1) the letter from the Board set out on pages 15 to 20 of
this document, (2) the letter from the Independent Board Committee set out on
pages 21 and 22 of this document, (3) the letter from Rothschild, the
independent financial adviser to the Independent Board Committee, set out on
pages 23 to 56 of this document and (4) the terms of the Scheme set out on pages
S-1 to S-6 of this document.
2. BACKGROUND
TO THE PROPOSALS
On
24 May 2008, the Ministry of Industry and Information Technology, the National
Development and Reform Commission and the Ministry of Finance of the PRC jointly
issued the Announcement on Deepening the Reform of the Structure of the
Telecommunications Sector (the “Telecoms Restructuring Announcement”) which
stated, among other things, (i) that the PRC government would deepen the reform
of the structure of the telecommunications sector and encourage the formation of
three market competitors with each having nationwide network resources,
relatively comparable strength and scale as well as full service operation
capabilities, (ii) that the allocation of telecommunications resources would be
further optimised and the competition structure would be improved, and (iii)
that three 3G licences would be granted once the contemplated restructuring had
been completed.
On
25 May 2008, in response to the Telecoms Restructuring Announcement, Unicom and
Netcom separately announced that they were in discussions regarding a
merger.
As
stated above, on 2 June 2008, the boards of directors of Unicom and Netcom
jointly announced that Unicom had formally presented the Proposals to the Board
and requested the Board to put forward the Proposals to the Netcom Shareholders
for consideration.
3. SUMMARY
OF THE PROPOSALS
The
Share Proposal and the Scheme
The Share Proposal will be implemented by way of the Scheme. Under the Scheme,
the Scheme Shares (including the Netcom Shares to be issued pursuant to the
exercise of the outstanding Netcom Options prior to the Options Exercise
Deadline) will be cancelled and, in consideration thereof, all of the Scheme
Shareholders whose names appear on the register of members of Netcom at the
Scheme Record Time will be entitled, save as regards fractional entitlements, to
receive:
-
52 -
For
every Scheme Share
cancelled ..............................................................................................................................
1.508 new Unicom Shares
Under
the Share Proposal, the share capital of Netcom will, on the Effective Date, be
reduced by cancelling and extinguishing the Scheme Shares. Immediately
thereafter, the authorised share capital of Netcom will be increased to the
amount prior to the cancellation of the Scheme Shares by the creation of new
Netcom Shares and such Netcom Shares, being in the same number as the cancelled
Scheme Shares, will be issued to Unicom and/or its nominees at par, credited as
fully paid with the reserve arising from the cancellation of the Scheme
Shares.
The
Share Exchange Ratio of 1.508 Unicom Shares for every Scheme Share cancelled was
determined by Unicom on the basis of the closing price of each Netcom Share of
HK$27.05 on the Hong Kong Stock Exchange on the Last Trading Date plus a 3%
premium over such closing price, and the closing price of each Unicom Share of
HK$18.48 on the Hong Kong Stock Exchange on the Last Trading Date.
Based
on the Share Exchange Ratio and 6,699,197,200 Netcom Shares in issue as at the
Latest Practicable Date and assuming that none of the outstanding Netcom Options
had been exercised, the maximum number of Unicom Shares that Unicom will issue
under the Share Proposal, including those underlying the Unicom ADSs to be
issued under the ADS Proposal, is 10,102,389,377. This represents approximately
73.93% of the existing issued share capital of Unicom of 13,664,951,945 Unicom
Shares as at the Latest Practicable Date, and approximately 42.51% of the
enlarged issued share capital of Unicom of 23,767,341,322 Unicom Shares
immediately following the issue of the Unicom Shares (assuming that none of the
outstanding Unicom Options had been exercised) and approximately 42.11% of the
enlarged issued share capital of Unicom of 23,991,888,922 Unicom Shares
immediately following the issue of the Unicom Shares (assuming that all of the
outstanding Unicom Options had been exercised).
Based
on the Share Exchange Ratio and 6,825,033,460 Netcom Shares in issue as at the
Latest Practicable Date and assuming that all of the outstanding Netcom Options
had been exercised, the maximum number of Unicom Shares that Unicom will issue
under the Share Proposal, including those underlying the Unicom ADSs to be
issued under the ADS Proposal, is 10,292,150,457. This represents approximately
75.32% of the existing issued share capital of Unicom of 13,664,951,945 Unicom
Shares as at the Latest Practicable Date, and approximately 42.96% of the
enlarged issued share capital of Unicom of 23,957,102,402 Unicom Shares
immediately following the issue of the Unicom Shares (assuming that none of the
outstanding Unicom Options had been exercised) and approximately 42.56% of the
enlarged issued share capital of Unicom of 24,181,650,002 Unicom Shares
immediately following the issue of the Unicom Shares (assuming that all of the
outstanding Unicom Options had been exercised).
The
ADS Proposal
Pursuant to the ADS Proposal, which is conditional upon the Scheme becoming
effective, the Scheme Shares underlying the Netcom ADSs will be cancelled along
with all of the other Scheme Shares pursuant to the Scheme and, in consideration
thereof, all of the Netcom ADS Holders will be entitled to receive:
For
every Netcom ADS
cancelled ..............................................................................................................................
3.016 new Unicom ADSs
As at
the Latest Practicable Date, there were 7,098,720 Netcom ADSs outstanding. Each
Netcom ADS represents 20 Netcom Shares and each Unicom ADS represents 10 Unicom
Shares.
The
consideration for the ADS Proposal is equivalent to the consideration for the
Share Proposal and is calculated using the Share Exchange Ratio and taking into
account the number of Netcom Shares represented by a Netcom ADS and the number
of Unicom Shares represented by a Unicom ADS.
The
Option Proposal
As at
the Latest Practicable Date, there were 125,836,260 Netcom Options outstanding.
If all of such Netcom Options are exercised, a total of 125,836,260 Netcom
Shares will be issued. If any Netcom Option is exercised resulting in Netcom
Shares being issued prior to or at the Scheme Record Time, such Netcom Shares
will constitute Scheme Shares and their holders will be eligible to receive the
consideration for the cancellation of their Scheme Shares under the
Scheme.
Pursuant to the Option Proposal, which is conditional upon the Scheme becoming
effective, Unicom will grant Netcom Optionholders Special Unicom Options in
consideration for the cancellation of their outstanding Netcom Options at the
Scheme Record Time (whether vested or not). To the extent that Netcom
Optionholders do not exercise their outstanding Netcom Options
-
53 -
prior
to the Options Exercise Deadline, their Netcom Options that remain outstanding
at the Scheme Record Time (whether vested or not) will, subject to the Scheme
becoming effective, be cancelled by the Board and such Netcom Optionholders will
automatically be granted Special Unicom Options in consideration for the
cancellation of their outstanding Netcom Options.
The
number of Special Unicom Options that will be granted to each Netcom
Optionholder and the exercise price of a Special Unicom Option will be
determined in accordance with the formula set out below:
Number
of Special Unicom Options = A x B
Exercise
price of each Special Unicom Option = C / A
where:
A is the Share Exchange
Ratio;
B is the number of outstanding
Netcom Options held by a Netcom Optionholder at the Scheme Record Time;
and
C is the exercise price of an
outstanding Netcom Option held by a Netcom Optionholder at the Scheme Record
Time.
The
above formula ensures that the value of the Special Unicom Options received by a
Netcom Optionholder is equivalent to the “See-Through Price” of that Netcom
Optionholder’s outstanding Netcom Options, that is, the value determined by
deducting the exercise price of the relevant Netcom Option from the value of
HK$27.87 of a Scheme Share under the Share Proposal, being the closing price of
each Netcom Share of HK$27.05 on the Hong Kong Stock Exchange on the Last
Trading Date plus a 3% premium over such closing price.
The
Special Unicom Options will be granted by Unicom pursuant to the Special Purpose
Unicom Share Option Scheme, which is proposed to be adopted by Unicom at the
Unicom EGM. The terms of the Special Purpose Unicom Share Option Scheme will be
substantially the same as the terms of the Netcom Share Option Scheme, save for
the following:
|
|
(a)
|
the
exercise price of a Special Unicom Option granted will be such price as
will result in the value of the Special Unicom Options received by the
Netcom Optionholders being equivalent to the See-Through Price;
and
|
|
|
(b)
|
other
than the Special Unicom Options to be granted pursuant to the Option
Proposal, no further Special Unicom Options will be granted under the
Special Purpose Unicom Share Option
Scheme.
|
Unicom
applied to the Hong Kong Stock Exchange for, and the Hong Kong Stock Exchange
has granted, a waiver from strict compliance with the requirement of Rule
17.03(9) of the Listing Rules so that the exercise price of the Special Unicom
Options granted under the Special Purpose Unicom Share Option Scheme will be the
price described above instead of a price to be determined by reference to the
closing price or the five day average closing price of a Unicom Share prior to
the date of grant of the Special Unicom Options as required by Rule 17.03(9) of
the Listing Rules. The reasons for the waiver application are that (i) the
Option Proposal ensures that the Netcom Optionholders will receive a
consideration for their outstanding Netcom Options which is comparable to the
consideration which the Scheme Shareholders will receive for the cancellation of
their Scheme Shares, (ii) the Option Proposal is a unique case and strict
compliance with the requirement of Rule 17.03(9) of the Listing Rules would be
unfair and impractical and (iii) the Option Proposal would also ensure that the
Netcom Optionholders are incentivised to remain in the employment of the
Enlarged Group following the completion of the Scheme.
Save
for the waiver from strict compliance with the requirement of Rule 17.03(9) of
the Listing Rules, the Special Purpose Unicom Share Option Scheme will comply
with the requirements of Chapter 17 of the Listing Rules.
The
adoption of the Special Purpose Unicom Share Option Scheme by Unicom is subject
to the satisfaction of the following conditions:
|
|
(a)
|
the
approval of the Unicom Shareholders having been obtained at the Unicom EGM
for the adoption of the Special Purpose Unicom Share Option
Scheme;
|
|
|
(b)
|
the
Hong Kong Stock Exchange having granted its approval for the listing of,
and permission to deal in, the Unicom Shares to be issued upon the
exercise of the Special Unicom Options;
and
|
|
|
(c)
|
the
Scheme becoming effective.
|
-
54 -
Assuming that none of the outstanding Netcom Options as at the Latest
Practicable Date is exercised or lapses prior to the Scheme Record Time,
pursuant to the Option Proposal, Unicom will grant to the Netcom Optionholders
in aggregate approximately 189,761,079 Special Unicom Options, which will be
exercisable into 189,761,079 Unicom Shares, representing approximately 1.39% of
the existing issued share capital of Unicom of 13,664,951,945 Unicom Shares as
at the Latest Practicable Date. Assuming that the Scheme becomes effective on 15
October 2008, the letters granting the Netcom Optionholders the Special Unicom
Options pursuant to the Option Proposal are expected to be despatched on or
before 25 October 2008.
Details of the new Special Unicom Options to be granted pursuant to the Option
Proposal are set out below:
|
Special
Unicom Options Granted in Consideration for the
Cancellation
of
|
Approximate Number
of Special Unicom Options to be Granted(1)
|
Exercise
Price of Special Unicom Options to be Granted
|
|
66,864,360
outstanding Netcom Options granted on 22 October 2004 with an exercise
price of HK$8.40 (“2004 Netcom Options”)(2)
|
100,831,454
|
HK$5.57
|
|
58,971,900
outstanding Netcom Options granted on 6 December 2005 with an exercise
price of HK$12.45 (“2005 Netcom Options”)(3)
|
88,929,625
|
HK$8.26
|
|
－－－－－－－
|
－－－－－－
|
|
|
Total
|
189,761,079
|
|
|
=============
|
=============
|
Notes:
|
|
(1)
|
Each
new Special Unicom Option gives the holder the right to subscribe for one
Unicom Share. Fractions of Special Unicom Options will not be granted to
the Netcom Optionholders.
|
|
|
(2)
|
For
the new Special Unicom Options to be granted in consideration for the
cancellation of the 2004 Netcom Options pursuant to the Option
Proposal:
|
|
|
(a)
|
100%
of the Special Unicom Options granted in respect of the outstanding 2004
Netcom Options held by the Netcom Optionholders at the Scheme Record Time
which are exercisable from 17 May 2006 to 16 November 2010 may be
exercised at any time from the Effective Date to 16 November
2010;
|
|
|
(b)
|
100%
of the Special Unicom Options granted in respect of the outstanding 2004
Netcom Options held by the Netcom Optionholders at the Scheme Record Time
which are exercisable from 17 May 2007 to 16 November 2010 may be
exercised at any time from the Effective Date to 16 November
2010;
|
|
|
(c)
|
100%
of the Special Unicom Options granted in respect of the outstanding 2004
Netcom Options held by the Netcom Optionholders at the Scheme Record Time
which are exercisable from 17 May 2008 to 16 November 2010 may be
exercised at any time from the Effective Date to 16 November 2010;
and
|
|
|
(d)
|
100%
of the Special Unicom Options granted in respect of the outstanding 2004
Netcom Options held by the Netcom Optionholders at the Scheme Record Time
which are exercisable from 17 May 2009 to 16 November 2010 may be
exercised at any time from 17 May 2009 to 16 November
2010.
|
|
|
(3)
|
For
the new Special Unicom Options to be granted in consideration for the
cancellation of the 2005 Netcom Options pursuant to the Option
Proposal:
|
|
|
(a)
|
100%
of the Special Unicom Options granted in respect of the outstanding 2005
Netcom Options held by the Netcom Optionholders at the Scheme Record Time
which are exercisable from 6 December 2007 to 5 December 2011 may be
exercised at any time from the Effective Date to 5 December
2011;
|
|
|
(b)
|
100%
of the Special Unicom Options granted in respect of the outstanding 2005
Netcom Options held by the Netcom Optionholders at the Scheme Record Time
which are exercisable from 6 December 2008 to 5 December 2011 may be
exercised at any time from 6 December 2008 to 5 December
2011;
|
|
|
(c)
|
100%
of the Special Unicom Options granted in respect of the outstanding 2005
Netcom Options held by the Netcom Optionholders at the Scheme Record Time
which are exercisable from 6 December 2009 to 5 December 2011 may be
exercised at any time from 6 December 2009 to 5 December 2011;
and
|
|
|
(d)
|
100%
of the Special Unicom Options granted in respect of the outstanding 2005
Netcom Options held by the Netcom Optionholders at the Scheme Record Time
which are exercisable from 6 December 2010 to 5 December 2011 may be
exercised at any time from 6 December 2010 to 5 December
2011.
|
-
55 -
The Option Proposal Letter, which sets out the terms of the Option Proposal and the details of the Special Purpose Unicom Share Option Scheme, will be despatched to the Netcom Optionholders on the same day as the despatch of this document.
Other
than the Netcom Shares, the Netcom ADSs and the Netcom Options, there are no
other options, derivatives, warrants or other securities convertible or
exchangeable into Netcom Shares which are issued by Netcom.
Total
Consideration
On the
basis of the value of HK$26.78 for every Scheme Share cancelled under the Share
Proposal (being the value of 1.508 Unicom Shares based on the weighted average
traded price of each Unicom Share of HK$17.76 on the Hong Kong Stock Exchange on
the Last Trading Date), the entire issued share capital of 6,699,197,200 Netcom
Shares as at the Last Trading Date (assuming that none of the outstanding Netcom
Options as at the Last Trading Date had been exercised) would be valued at
approximately HK$179,404,501,016 and the Fully Diluted Netcom Share Capital of
6,825,034,460 Netcom Shares as at the Last Trading Date would be valued at
approximately HK$182,774,422,839.
On the
basis of the value of HK$23.55 for every Scheme Share cancelled under the Share
Proposal (being the value of 1.508 Unicom Shares based on the weighted average
traded price of each Unicom Share of HK$15.62 on the Hong Kong Stock Exchange on
the Latest Practicable Date), the entire issued share capital of 6,699,197,200
Netcom Shares as at the Latest Practicable Date (assuming that none of the
outstanding Netcom Options as at the Latest Practicable Date had been exercised)
would be valued at approximately HK$157,766,094,060 and the Fully Diluted Netcom
Share Capital of 6,825,033,460 Netcom Shares as at the Latest Practicable Date
would be valued at approximately HK$160,729,537,983.
New
Unicom Shares and New Unicom ADSs
Unicom
will seek the approval of the Unicom Shareholders at the Unicom EGM for the
allotment and issue by Unicom of Unicom Shares pursuant to the Share Proposal
and the ADS Proposal. The Unicom Shares and the Unicom ADSs to be issued
pursuant to the Share Proposal and the ADS Proposal, respectively, will be
issued free from all liens, charges and encumbrances and together with all
rights attaching to them, including the right to receive all dividends and other
distributions, if any, declared, made or paid on or after the date of their
issue and will rank pari
passu with the existing Unicom Shares and Unicom ADSs,
respectively.
The
Unicom Shares to be issued pursuant to the Share Proposal and the ADS Proposal,
including the Unicom Shares underlying the Unicom ADSs to be issued pursuant to
the ADS Proposal, will be issued in reliance upon the exemption from the
registration requirements of the US Securities Act provided by Section 3(a)(10)
thereof.
An
application will be made to the Hong Kong Stock Exchange for the listing of, and
permission to deal in, the Unicom Shares to be issued pursuant to the Share
Proposal and the ADS Proposal and the Unicom Shares to be issued upon the
exercise of the Special Unicom Options. In addition, Unicom will make an
application to the New York Stock Exchange to list the Unicom ADSs representing
the Unicom Shares to be issued pursuant to the ADS Proposal.
Fractions
Under the Share Proposal and the ADS
Proposal, fractions of Unicom Shares and Unicom ADSs will not be issued to the
Scheme Shareholders and the Netcom ADS Holders, respectively. Fractional
entitlements of Scheme Shareholders to Unicom Shares will be aggregated and sold
in the market with the proceeds paid to Unicom for its own benefit. Fractional
entitlements of Netcom ADS Holders to Unicom ADSs will be aggregated and sold
with the proceeds paid, after deduction of the fees and expenses of the seller,
to the respective Netcom ADS Holders.
Under the Option Proposal, fractions of
Special Unicom Options will not be granted to the Netcom
Optionholders.
4. CONDITIONS
OF THE PROPOSALS AND THE SCHEME
The Share Proposal is, and the Scheme
will become effective and binding on Netcom and all of the Scheme Shareholders,
subject to the satisfaction or waiver, as applicable, of the following
conditions:
|
|
(a)
|
the
approval of the Unicom Shareholders in general meeting having been
obtained in accordance with the Listing Rules and the NYSE Rules for (i)
the Proposals, (ii) the allotment and issue by Unicom of Unicom Shares
pursuant to the Share Proposal and the ADS Proposal and (iii) the adoption
of the Special Purpose Unicom Share Option
Scheme;
|
-
56 -
|
|
(b)
|
the
approval of the Scheme (by way of poll) by a majority in number
representing not less than three-fourths in value of the Netcom Shares
held by the Disinterested Netcom Shareholders (other than the Exempt
Principal Traders) who are present and voting either in person or by proxy
at the Court Meeting, provided that the number of votes cast against the
resolution to approve the Scheme at the Court Meeting is not more than 10%
of the votes attaching to all of the Netcom Shares held by the
Disinterested Netcom Shareholders, including the Exempt Principal
Traders;
|
|
|
(c)
|
the
passing of a special resolution by a majority of not less than
three-fourths of the votes cast by the Netcom Shareholders present and
voting in person or by proxy at the Netcom EGM to (i) give effect to the
reduction of the share capital of Netcom by cancelling and extinguishing
the Scheme Shares and (ii) issue the Netcom Shares to
Unicom;
|
|
|
(d)
|
the
sanction of the Scheme (with or without modifications) and the
confirmation of the reduction of the share capital of Netcom by the High
Court under Sections 166 and 60, respectively, of the Hong Kong Companies
Ordinance (with Netcom having advised the High Court before the Court
Hearing that the Unicom Shares will be issued by Unicom in reliance on the
exemption from the registration requirements of the US Securities Act
provided by Section 3(a)(10) thereof based on the High Court’s sanctioning
of the Scheme, and in reliance on applicable exemptions under US state
securities laws);
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(e)
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a
copy of the order of the High Court sanctioning the Scheme and confirming
the reduction of the share capital of Netcom, together with a minute
approved by the High Court containing the particulars required by Section
61 of the Hong Kong Companies Ordinance, being delivered to and registered
by the Registrar of Companies in Hong
Kong;
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(f)
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the
Hong Kong Stock Exchange having granted its approval for the listing of,
and permission to deal in, the Unicom Shares to be issued pursuant to the
Share Proposal and the ADS Proposal and the Unicom Shares which may be
issued upon the exercise of the Special Unicom
Options;
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|
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(g)
|
the
New York Stock Exchange having granted its approval for the listing of the
Unicom ADSs representing the Unicom Shares to be issued pursuant to the
ADS Proposal;
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(h)
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all
filings with, notices to and waivers from any governmental or regulatory
body in connection with the Proposals having been made or obtained and, if
applicable, any waiting periods under any applicable antitrust or similar
laws and regulations having expired or
terminated;
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(i)
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all
authorisations, consents and approvals (including approval in-principle)
of any governmental or regulatory body in relation to the Proposals having
been obtained and remaining in full force and effect pursuant to the
provisions of any laws or regulations in Hong Kong, the PRC, the United
States and other relevant
jurisdictions;
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(j)
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all
third party consents in relation to the Proposals required pursuant to any
agreement to which any member of the Netcom Group is a party (where any
failure to obtain a consent would have a material adverse effect on the
business of the Netcom Group taken as a whole) having been obtained or
waived by the relevant party;
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(k)
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no
relevant government, governmental, quasi-governmental, statutory or
regulatory body, court or agency having granted any order or made any
decision that would make the Proposals void, unenforceable or illegal, or
restrict or prohibit the implementation of, or impose any additional
material conditions or obligations with respect to, the Proposals (other
than such orders or decisions as would not have a material adverse effect
on the legal ability of Unicom to proceed with or consummate the
Proposals);
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(l)
|
confirmation
from OFTA that the Proposals will not have, or be likely to have, the
effect of substantially lessening competition in a telecommunications
market in Hong Kong as referred to in Section 7P of the Telecommunications
Ordinance, to the extent that such confirmation is reasonably considered
necessary by Unicom and Netcom;
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(m)
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subject
to Note 2 to Rule 30.1 of the Takeovers Code, no event having occurred
which would make the Proposals or the cancellation of the Scheme Shares or
any of the Netcom Options void, unenforceable or illegal or which would
prohibit the implementation of the Proposals or impose any additional
material conditions or obligations with respect to the Proposals or any
part thereof or on the cancellation of the Scheme Shares or any of the
Netcom Options;
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|
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(n)
|
subject
to Note 2 to Rule 30.1 of the Takeovers Code, since the date of the
Announcement, there having been no material adverse change in the
business, financial or trading position of each of the Unicom Group or the
Netcom Group;
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57 -
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(o)
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save
in connection with the implementation of the Proposals, the listing of the
Unicom Shares and the Netcom Shares on the Hong Kong Stock Exchange and
the listing of the Unicom ADSs and the Netcom ADSs on the New York Stock
Exchange not having been withdrawn, and no indication having been received
from the SFC or the Hong Kong Stock Exchange or the SEC or the New York
Stock Exchange to the effect that the listing of the Unicom Shares or the
Netcom Shares on the Hong Kong Stock Exchange or the listing of the Unicom
ADSs or the Netcom ADSs on the New York Stock Exchange will or is likely
to be withdrawn; and
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(p)
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save
for the payment of a final dividend of HK$0.592 for each Netcom Share as
approved by the Netcom Shareholders at the annual general meeting of
Netcom held on 22 May 2008, since the date of the Announcement and up to
the Effective Date, Netcom not having declared, made or paid any dividend
or distribution of any kind, and not having agreed or proposed to declare,
make or pay any dividend or distribution of any
kind.
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The
condition in paragraph (b) above is the combined effect of Section 166 of the
Hong Kong Companies Ordinance and Rule 2.10 of the Takeovers Code. Insofar as
the statutory requirement for the sanction of the Scheme by the High Court is
concerned, a resolution for the approval of the Scheme will be deemed to have
been passed if a majority in number representing three-fourths in value of the
Netcom Shareholders present and voting either in person or by proxy at the Court
Meeting vote in favour of the Scheme.
Under
Rule 2.10 of the Takeovers Code, however, such a resolution will only be
considered to have been passed if (1) the Scheme is approved by at least 75% of
the votes attaching to the Netcom Shares held by the Disinterested Netcom
Shareholders other than the Exempt Principal Traders that are cast either in
person or by proxy at the Court Meeting and (2) the number of votes cast against
the resolution is not more than 10% of the votes attaching to all of the Netcom
Shares held by the Disinterested Netcom Shareholders, including the Exempt
Principal Traders.
As
at the Latest Practicable Date, there were 6,699,197,200 Netcom Shares in issue,
all of which were held by the Disinterested Netcom Shareholders. Assuming that
none of the parties acting in concert with Unicom become Netcom Shareholders
after the Latest Practicable Date and that none of the outstanding Netcom
Options are exercised after the Latest Practicable Date, 10% of such Netcom
Shares would amount to 669,919,720 Netcom Shares.
The
Exempt Principal Traders are certain members of the respective group of
companies to which JPMorgan and Citigroup belong holding Netcom Securities. The
Exempt Principal Traders are not presumed to be parties acting in concert with
Unicom in relation to the Proposals under the Takeovers Code notwithstanding
their connections with either JPMorgan or Citigroup. However, the Exempt
Principal Traders are prohibited under Rule 35.4 of the Takeovers Code from
voting the Netcom Shares beneficially owned by them at the Court Meeting
although they are Disinterested Netcom Shareholders and, as such, their Netcom
Shares will form part of the Scheme Shares.
None
of the conditions (a) to (m) and (o) above can be waived by Unicom or Netcom.
Netcom does not have the right to waive any of the conditions. Unicom reserves
the right to waive both or either of conditions (n) or (p) above. All of the
conditions will have to be satisfied or waived, as applicable, on or before 30
November 2008 (or such later date as Unicom and Netcom may agree and the High
Court may allow), otherwise the Proposals, including the Scheme, will lapse.
Unicom and Netcom have agreed to extend the date for all of the above conditions
to be satisfied or waived, as applicable, from 30 September 2008 (as stated in
the Announcement) to 30 November 2008 to accommodate the timetable of the High
Court for the Court Hearing. As at the Latest Practicable Date, none of the
conditions referred to above have been satisfied. Assuming that all of the above
conditions are satisfied or waived, as applicable, it is expected that the
Scheme will become effective on or before 31 October 2008.
Each
of the ADS Proposal and the Option Proposal is conditional upon the Scheme
becoming effective.
The
Netcom Shareholders, the Netcom ADS Holders, the Netcom Optionholders and all
potential investors in Netcom should be aware that the implementation of the
Proposals, including the Scheme, is subject to the conditions set out above
being satisfied or waived, as applicable, and thus, the Proposals, including the
Scheme, may or may not become effective. The Netcom Shareholders, the Netcom ADS
Holders, the Netcom Optionholders and all potential investors in Netcom should
therefore exercise caution when dealing in the Netcom Shares, the Netcom ADSs or
the Netcom Options or other securities of Netcom. Persons who are in doubt as to
the action they should take should consult their stockbroker, bank manager,
solicitor or other professional advisers.
5. UNDERTAKINGS
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58 -
Netcom
BVI has given an irrevocable undertaking to Unicom to vote in favour of all of
the resolutions for the approval of the Scheme and any related matters for its
implementation to be proposed at the Court Meeting and the Netcom EGM. Netcom
BVI is legally and beneficially interested in an aggregate of 4,647,449,014
Netcom Shares, representing approximately 69.37% of the issued share capital of
Netcom as at the Latest Practicable Date. Under the irrevocable undertaking,
Netcom Parent has also undertaken to use its best endeavours to procure the
performance by Netcom BVI of its obligations under the irrevocable
undertaking.
Netcom
BVI has also received an irrevocable instruction to vote in favour of all of the
resolutions for the approval of the Scheme and any related matters for its
implementation at the Court Meeting and the Netcom EGM in respect of the
149,683,549 Netcom Shares, representing approximately 2.23% of the issued share
capital of Netcom as at the Latest Practicable Date, which Netcom BVI holds as
trustee on behalf of a state-owned entity.
In
addition, Telefónica has given an irrevocable undertaking to Unicom to vote in
favour of all of the resolutions for the approval of the Scheme and any related
matters for its implementation to be proposed at the Court Meeting and the
Netcom EGM in respect of its holding of 333,971,305 Netcom Shares, representing
approximately 4.99% of the issued share capital of Netcom as at the Latest
Practicable Date.
Under
the terms of the irrevocable undertakings given by Netcom BVI and Telefónica and
the irrevocable instruction received by Netcom BVI, all of them would lapse (a)
if the Announcement had not been released by 30 June 2008 or (b) if Unicom
announced, with the consent of the Executive and before the posting of this
document, that it did not intend to proceed with the Scheme or (c) if the Scheme
lapses or is withdrawn in accordance with its terms or (d) in the event of a
higher competing offer for Netcom made by a third party.
In
addition to these conditions, the undertakings given by Netcom BVI and the
irrevocable instruction received by Netcom BVI would also lapse if the Scheme is
not approved at the Court Meeting or the Netcom EGM. Furthermore, the
undertaking given by Telefónica would likewise lapse (a) if the Scheme is not
approved at the Court Meeting or the Netcom EGM by 30 November 2008 or (b) if
since the date of the undertaking, there is a material adverse change in the
business, financial or trading position of Unicom or (c) in the event that
Rothschild did not render an opinion that the Proposals were fair and
reasonable.
6. REASONS
FOR AND BENEFITS OF THE PROPOSED MERGER
The
management of Unicom and Netcom believe that there are strong commercial reasons
for the proposed merger. After the proposed merger, the Enlarged Group is
expected to take steps to establish a leading position in the 3G wireless
industry, integrate its wireless and fixed-line businesses and build a strong
market position in the ten provinces in Northern China where the Netcom Group
has operations, which is expected to enhance the Enlarged Group’s brand
recognition and increase its overall competitiveness, business scale and
shareholder value.
(1) Provide
a full spectrum of telecommunications services
(a) Provide a full spectrum of
integrated services and products
If the
proposed merger is completed, the Enlarged Group is expected to have the
capability to deliver a full spectrum of telecommunications services. By
effectively consolidating its businesses and underlying supporting systems, the
Enlarged Group is expected to be able to provide integrated and customised
telecommunications services and products to address the different needs of its
diverse customer base.
(b) Combine the expertise in wireless
and fixed-line businesses to enhance innovation capabilities
By
integrating the Netcom Group’s and the Unicom Group’s extensive resources and
expertise in wireless and fixed-line businesses, the Enlarged Group is expected
to be able to enhance its innovation capabilities, thereby enabling it to
deliver better products and services that integrate wireless and fixed-line
services and are in line with the overall development and trend of the global
telecommunications industry.
(2) Reinforce
brand recognition and market position
The
proposed merger is expected to improve the Enlarged Group’s business
capabilities, enabling it to secure a licence to conduct business with 3G
technology, which is advanced telecommunications technology with broad
applications. In addition to the Enlarged Group’s intended focus on GSM and
future 3G businesses, it is intended that the Enlarged Group will take steps to
enhance the quality and service level of its wireless network and take steps to
launch high quality, cutting edge 3G services,
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59 -
which
are expected to help maintain wireless average revenue per user (ARPU) at a
stable level and strengthen the brand recognition of the Enlarged
Group.
At the same time, by integrating wireless and fixed-line technologies and
enhancing its broadband capability, the Enlarged Group expects to further drive
growth in the wireless and broadband areas of its businesses, provide high
quality integrated broadband products and services and effectively promote the
Enlarged Group’s brand name.
In addition, it is expected that the Enlarged Group will have a significantly
larger subscriber base, which is expected to enable it to achieve economies of
scale and enhance its brand awareness. Furthermore, the broader presence and
coverage of marketing and customer service networks are expected to effectively
enhance the Enlarged Group’s brand recognition and market position.
(3) Multi-faceted
resource sharing
(a) Client
Based on the subscriber base of Unicom and Netcom as at 30 June 2008, the
Enlarged Group is expected to have a combined total subscriber base of 259
million users, including 128 million GSM users, 109 million local access users
and 23.36 million broadband users. The Enlarged Group is expected to have a
multi-tiered and diversified client base, which will include government,
corporate, household and individual clients. By fully utilising its client base,
particularly the government and corporate clients in the ten provinces in
Northern China where the Netcom Group has operations, the Enlarged Group is
expected to have more cross-selling and bundling opportunities, which may result
in increased revenue and enhanced client loyalty.
(b) Sales and
marketing
The proposed merger is expected to enable the Enlarged Group to improve and
increase the coverage of its distribution channels nationwide, especially in the
ten provinces in Northern China where the Netcom Group has operations. Based on
the number of sales outlets of Unicom and Netcom as at 30 June 2008, the number
of self-operated sales outlets of the Enlarged Group is expected to exceed
18,000, among which 5,000 were previously operated by Unicom and over 13,000
were previously operated by Netcom. By fully consolidating and utilising its
distribution channels, the Enlarged Group is expected to reduce its overall
dependence on agency channels, effectively increasing its control over its
distribution channels and improving its operating efficiency.
The Enlarged Group is expected to have a larger client base and enhanced sales
distribution channels to implement its sales and marketing initiatives, and
create opportunities for innovation and development of customised marketing
strategies to address different market needs. Furthermore, it is expected that
the Enlarged Group may improve its marketing and sales efficiency and reduce
marketing expenditures by implementing unified advertising strategies for a
single brand.
(c) Procurement
The Enlarged Group’s increased scale and centralised supply chain management are
expected to strengthen its bargaining power and reduce its procurement
costs.
The proposed merger is expected to help the Enlarged Group to consolidate its
major supplier resources, optimise its supplier relationships and improve its
business and technology development through greater collaboration with its
suppliers.
(d) Network
Based on the network resources of Unicom and Netcom as at 31 May 2008 and 30
June 2008, the Enlarged Group is expected to have approximately 5.74 million
kilometres of long distance fiber optic cables, 0.92 million kilometres of
transmission pipes, 1.44 million kilometres of pole lines, 0.17 million wireless
base stations and 0.43 million PHS base stations.1 If the
proposed merger is completed, it is expected that the Enlarged Group will
facilitate resource sharing across its different networks and reduce leasing,
operating and maintenance costs, while enhancing its network coverage and
transmission quality.
At the same time, it is intended the Enlarged Group will fully utilise its
existing resources to conduct centralised planning for future investments in
backbone, transmission network, base stations and intranet stations, thereby
minimising repetitive construction to achieve cost savings.
(4) Enhanced
human capital
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After the proposed merger, the Enlarged Group is expected to have access to
enhanced expertise in the areas of wireless, fixed-line and broadband, which may
enable it to tap into Unicom’s and Netcom’s complementary human capital and
enhance its talent pools. By fully leveraging on its human capital, the Enlarged
Group is expected to further enhance its overall competitiveness and lay a
strong foundation for its long-term development.
The proposed merger is expected to enable the Enlarged Group to centralise its
human resources functions. By repositioning certain back office employees, the
Enlarged Group is expected to be able to focus on committing its human resources
to key business areas, such as sales and marketing.
After the proposed merger, the Enlarged Group is expected to have access to
strong human resources and the capability to optimise human capital development
planning based on existing staff structure and future development
needs.
(5) Optimised
capital structure with enhanced financing capacity
The
proposed merger of Unicom and Netcom and the CDMA Business Disposal are expected
to enable the Enlarged Group to reduce its combined debt levels, optimise its
capital structure and enhance its financing capacity. Furthermore, the expected
improvement to its overall financial strength will enable the Enlarged Group to
optimise its investment strategy and increase investment in key business areas,
such as wireless, broadband, value-added services and related
businesses.
In addition, the Enlarged Group is expected to be able to effectively access the
domestic and international capital markets in order to diversify its funding
sources, resulting in stronger support for its future business
development.
|
1
|
Statistics
on transmission pipes, pole lines and PHS base stations as at 31 May 2008.
Wireless base stations include GSM only and GSM and CDMA shared base
stations.
|
The management of Unicom and Netcom do not expect that the benefits referred to
above would be materially adversely affected if the proposed CDMA Business
Disposal is not completed.
7. BUSINESS
STRATEGIES OF THE ENLARGED GROUP
China’s telecommunications industry has experienced rapid growth in recent
years. In 2007, the aggregate revenue of China’s telecommunications industry
reached RMB1,854.5 billion. In terms of the number of wireless and fixed-line
subscribers, China has emerged as the largest telecommunications market in the
world. A favourable and stable macroeconomic environment combined with
relatively low penetration rate is expected to drive further growth in China’s
telecommunications industry in the next few years. In particular, the improving
living standards in China and the increase in demand for 3G, broadband and
value-added services are expected to continue to provide a favourable
environment for the future growth of the Enlarged Group.
By combining the resources and business strengths of Unicom and Netcom in
different areas, and upon obtaining a licence for mature 3G technology, it is
intended that the Enlarged Group will aim to become a world-class provider of
broadband communications and information services, establishing competitive
advantages in technology, products and services, providing professional and
multi-tiered information services and satisfying the changing and diverse needs
of China’s telecommunications market.
To achieve this, the Enlarged Group will focus on implementing the following
business strategies:
(1) Establish
a cutting edge 3G business and enhance brand image and core
competence
It is intended that the Enlarged Group will continue to improve the service
quality of its GSM business, which is expected to be a strong foundation for the
development of its 3G business. Upon being granted a 3G licence, it is planned
that the Enlarged Group would invest in a 3G network as well as in related
businesses, provide high quality services and products by combining the
technology, product maturity and advantages of 3G, particularly in the areas of
data and various value-added services, establish a market leading position in
the domestic 3G market and further promote the overall brand image of the
Enlarged Group. The Enlarged Group is expected to rely on the improved
capabilities in integrated wireless communications services to actively explore
existing and newly developed middle- to high-end markets and aims to capture a
one-third share of the future 3G market in terms of number of subscribers,
optimise the structure of its client base, increase its business income and
enhance its profitability.
(2) Leverage
on full service advantage in driving product innovation and market
expansion
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As the telecommunications operator with balanced full-service capabilities in
China’s telecommunications market, it is envisaged that the Enlarged Group would
leverage on its technical expertise and business development abilities in both
wireless and fixed-line areas to drive the integration of wireless and
fixed-line technologies and businesses, and take measures to establish a mature
and integrated full service operation system. At the same time, by referring to
international experience and active innovation, the Enlarged Group is expected
to provide various high value-added integrated telecommunications solutions,
which will address different customer needs in wireless and fixed-line
telecommunications.
(3) Fully
develop broadband multimedia business and accelerate the conversion into an
information service provider
It is planned that the Enlarged Group would continue to invest in its broadband
business, enhance the development model of combining “access and content” and
combine Internet-based applications, content, data and multimedia, all of which
are expected to be the driving forces for future development of the broadband
business, thereby enhancing the competitiveness of the Enlarged Group in
broadband business. It is intended that the Enlarged Group would take advantage
of the opportunities provided by the PRC’s government’s initiatives of
“Accelerating the Integration of Information and Industrialisation” to actively
develop information and communication technology services to satisfy the
information service needs of local government and corporate
clients.
(4) Optimise
investments and increase network coverage and service levels
It is planned that the Enlarged Group would use its strong cash flow after the
proposed merger to optimise its investment portfolio by increasing investment in
key business areas, such as wireless, broadband, value-added services and
information support systems, and improve network coverage and optimise
communications quality. The management of Unicom expects the wireless capital
expenditure of the Enlarged Group in 2008 to increase by approximately 100%
compared to the 2008 wireless capital expenditure announced by Unicom. The total
2009 and 2010 wireless capital expenditure of the Enlarged Group is estimated to
amount to RMB100 billion and will primarily be allocated to the development of
the 3G business.
It is intended that the Enlarged Group would implement differentiated investment
strategies, with its 2G business focusing on increasing depth and breadth, its
3G business focusing on key areas and its fixed-line business focusing on
investment return. It is intended that the Enlarged Group would promote its
integrated network service capabilities by implementing centralised investment
planning and fully utilising and optimising existing network
resource.
(5) Integrate
client and distribution channel resources and enhance marketing
efficiencies
It is intended that the Enlarged Group would leverage on its multi-tiered and
diverse client base and is expected to increase cross-selling and bundling sale
opportunities in order to increase its market share among all types of clients,
in particular government and corporate clients in the ten provinces in Northern
China. It is envisaged that the Enlarged Group would utilise its own
distribution channels to increase the proportion of sales through its own
distribution channels and enhance direct sale capabilities, resulting in
stronger control over various distribution channels and improvement of its
overall sales capabilities.
In addition, the Enlarged Group will develop unified advertising and promotion
strategies in order to enhance marketing efficiencies.
(6) Improve
service quality and enhance a customer-centric culture
It is planned that the Enlarged Group would integrate the customer service
resources of both Unicom and Netcom and provide customised and innovative
services based on different customers’ needs. At the same time, it is intended
that the Enlarged Group would improve operational efficiency, enhance service
interface platform, optimise service workflow, increase service capability and
quality and further enhance a customer-centric culture.
The directors of Unicom and Netcom believe that the effective implementation of
the above business strategies would enable the Enlarged Group to become a
world-class broadband communications and information services provider with
integrated wireless and fixed-line technologies, and fully realising its
potential in the expanding telecommunications market in China.
8. INTENTIONS
OF UNICOM WITH REGARD TO NETCOM
If
the Scheme is approved and the Proposals becomes effective, Unicom intends to
continue with the existing business of Netcom and has no intention to introduce
any major changes to the business of Netcom or to redeploy any fixed assets of
the Netcom Group.
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After
the completion of the proposed merger of Unicom and Netcom, the Enlarged Group
is expected to be an integrated telecommunications operator offering wireless,
fixed-line, broadband, data and value added services to its subscribers, and is
expected to be granted a 3G licence. Unicom intends to take measures to combine
the experience and technologies of the Unicom Group and the Netcom Group in the
wireless and fixed-line businesses, to promote business innovation and
competitiveness and to improve operating and financial performance through
developing targeted business strategies according to the dynamic market
developments.
Furthermore,
Unicom intends to fully utilise the network and hardware resources of Unicom and
Netcom to effectively expand network coverage, increase network capacity, and
improve transmission quality. Unicom also intends to share customer resources
and create more cross-selling and bundling sales opportunities. In addition,
Unicom intends to integrate the sales channels of Unicom and Netcom and
establish a unified national network of sales, distribution and services,
particularly in the ten provinces in Northern China where Netcom has
operations.
Unicom
does not intend to discontinue the employment of any of the employees of the
Netcom Group and intends to maintain the stability of the Netcom Group’s
workforce. Unicom intends that the management teams of Unicom and Netcom be
integrated and utilised to an optimal capacity in order to realise the synergies
of the combined businesses of the Enlarged Group.
Upon
the completion of the proposed merger, Mr. Chang Xiaobing will become the
Chairman and Chief Executive Officer of the Enlarged Group. The management of
the Enlarged Group is expected to be mainly drawn from the existing management
of Unicom and Netcom.
Unicom
and Netcom have established a joint working team led by Mr. Chang Xiaobing to
focus on the integration of Unicom and Netcom so as to ensure a smooth
implementation of the business strategies of the Enlarged Group following the
completion of the proposed merger. The integration work is expected to commence
immediately after the proposed merger has been completed and the majority of the
integration work is expected to be completed within one year. Upon the
completion of the proposed merger, Unicom will change its company name to “China
Unicom (Hong Kong) Limited 中國聯合網絡通信(香港)股份有限公司”,
with “China Unicom 中國聯通”
as its short name.
9. COMPARISONS
OF VALUE
Capital
Value
Based on the weighted average traded price of each Unicom Share of HK$17.76 on
the Hong Kong Stock Exchange on the Last Trading Date, the value of each Netcom
Share of HK$26.78 under the Share Proposal represents:
|
|
(a)
|
a
premium of approximately 4.4% over the weighted average traded price of
each Netcom Share of HK$25.66 on the Hong Kong Stock Exchange on the Last
Trading Date;
|
|
|
(b)
|
a
premium of approximately 9.7% over the average closing price of HK$24.41
of each Netcom Share based on the daily closing prices of Netcom Shares as
quoted on the Hong Kong Stock Exchange for the five trading days
immediately prior to and including the Last Trading
Date;
|
|
|
(c)
|
a
premium of approximately 8.6% over the average closing price of HK$24.66
of each Netcom Share based on the daily closing prices of Netcom Shares as
quoted on the Hong Kong Stock Exchange for the ten trading days
immediately prior to and including the Last Trading
Date;
|
|
|
(d)
|
a
premium of approximately 12.7% over the average closing price of HK$23.77
of each Netcom Share based on the daily closing prices of Netcom Shares as
quoted on the Hong Kong Stock Exchange for the 30 trading days immediately
prior to and including the Last Trading
Date;
|
|
|
(e)
|
a
premium of approximately 14.8% over the average closing price of HK$23.33
of each Netcom Share based on the daily closing prices of Netcom Shares as
quoted on the Hong Kong Stock Exchange for the 60 trading days immediately
prior to and including the Last Trading
Date;
|
|
|
(f)
|
a
premium of approximately 17.5% over the average closing price of HK$22.80
of each Netcom Share based on the daily closing prices of Netcom Shares as
quoted on the Hong Kong Stock Exchange for the 180 trading days
immediately prior to and including the Last Trading Date;
and
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|
|
(g)
|
a
premium of approximately 16.4% over the closing price of each Netcom Share
of HK$23.00 on the Hong Kong Stock Exchange on the Latest Practicable
Date.
|
Based
on the weighted average traded price of each Unicom Share of HK$15.62 on the
Hong Kong Stock Exchange on the Latest Practicable Date, the value of each
Netcom Share of HK$23.55 under the Share Proposal represents:
|
|
(a)
|
a
discount of approximately 8.2% to the weighted average traded price of
each Netcom Share of HK$25.66 on the Hong Kong Stock Exchange on the Last
Trading Date;
|
|
|
(b)
|
a
premium of approximately 1.8% over the weighted average traded price of
each Netcom Share of HK$23.14 on the Hong Kong Stock Exchange on the
Latest Practicable Date;
|
|
|
(c)
|
a
premium of approximately 1.5% over the average closing price of HK$23.20
of each Netcom Share based on the daily closing prices of Netcom Shares as
quoted on the Hong Kong Stock Exchange for the five trading days
immediately prior to and including the Latest Practicable
Date;
|
|
|
(d)
|
a
premium of approximately 0.3% over the average closing price of HK$23.49
of each Netcom Share based on the daily closing prices of Netcom Shares as
quoted on the Hong Kong Stock Exchange for the ten trading days
immediately prior to and including the Latest Practicable
Date;
|
|
|
(e)
|
a
premium of approximately 2.6% over the average closing price of HK$22.95
of each Netcom Share based on the daily closing prices of Netcom Shares as
quoted on the Hong Kong Stock Exchange for the 30 trading days immediately
prior to and including the Latest Practicable
Date;
|
|
|
(f)
|
a
premium of approximately 2.4% over the average closing price of HK$22.99
of each Netcom Share based on the daily closing prices of Netcom Shares as
quoted on the Hong Kong Stock Exchange for the 60 trading days immediately
prior to and including the Latest Practicable Date;
and
|
|
|
(g)
|
a
premium of approximately 1.7% over the average closing price of HK$23.16
of each Netcom Share based on the daily closing prices of Netcom Shares as
quoted on the Hong Kong Stock Exchange for the 180 trading days
immediately prior to and including the Latest Practicable
Date.
|
Based
on the weighted average traded price of each Unicom ADS of US$20.97 on the New
York Stock Exchange on the Last ADS Trading Date, the value of each Netcom ADS
of US$63.25 under the ADS Proposal represents:
|
|
(a)
|
a
premium of approximately 2.2% over the weighted average traded price of
each Netcom ADS of US$61.88 on the New York Stock Exchange on the Last ADS
Trading Date;
|
|
|
(b)
|
a
premium of approximately 4.1% over the average closing price of US$60.74
of each Netcom ADS based on the daily closing prices of Netcom ADSs as
quoted on the New York Stock Exchange for the five trading days
immediately prior to and including the Last ADS Trading
Date;
|
|
|
(c)
|
a
premium of approximately 0.8% over the average closing price of US$62.76
of each Netcom ADS based on the daily closing prices of Netcom ADSs as
quoted on the New York Stock Exchange for the ten trading days immediately
prior to and including the Last ADS Trading
Date;
|
|
|
(d)
|
a
premium of approximately 3.2% over the average closing price of US$61.28
of each Netcom ADS based on the daily closing prices of Netcom ADSs as
quoted on the New York Stock Exchange for the 30 trading days immediately
prior to and including the Last ADS Trading
Date;
|
|
|
(e)
|
a
premium of approximately 5.7% over the average closing price of US$59.84
of each Netcom ADS based on the daily closing prices of Netcom ADSs as
quoted on the New York Stock Exchange for the 60 trading days immediately
prior to and including the Last ADS Trading
Date;
|
|
|
(f)
|
a
premium of approximately 7.1% over the average closing price of US$59.08
of each Netcom ADS based on the daily closing prices of Netcom ADSs as
quoted on the New York Stock Exchange for the 180 trading days immediately
prior to and including the Last ADS Trading Date;
and
|
|
|
(g)
|
a
premium of approximately 6.2% over the closing price of each Netcom ADS of
US$59.57 on the New York Stock
|
-
64 -
| Exchange on the Latest Practicable Date. |
Based
on the weighted average traded price of each Unicom ADS of US$20.07 on the New
York Stock Exchange on the Latest Practicable Date, the value of each Netcom ADS
of US$60.53 under the ADS Proposal represents:
|
|
(a)
|
a
discount of approximately 2.2% to the weighted average traded price of
each Netcom ADS of US$61.88 on the New York Stock Exchange on the Last ADS
Trading Date;
|
|
|
(b)
|
a
premium of approximately 1.2% over the weighted average traded price of
each Netcom ADS of US$59.82 on the New York Stock Exchange on the Latest
Practicable Date;
|
|
|
(c)
|
a
discount of approximately 0.1% to the average closing price of US$60.57 of
each Netcom ADS based on the daily closing prices of Netcom ADSs as quoted
on the New York Stock Exchange for the five trading days immediately prior
to and including the Latest Practicable
Date;
|
|
|
(d)
|
a
discount of approximately 0.5% to the average closing price of US$60.81 of
each Netcom ADS based on the daily closing prices of Netcom ADSs as quoted
on the New York Stock Exchange for the ten trading days immediately prior
to and including the Latest Practicable
Date;
|
|
|
(e)
|
a
premium of approximately 2.5% over the average closing price of US$59.03
of each Netcom ADS based on the daily closing prices of Netcom ADSs as
quoted on the New York Stock Exchange for the 30 trading days immediately
prior to and including the Latest Practicable
Date;
|
|
|
(f)
|
a
premium of approximately 3.0% over the average closing price of US$58.78
of each Netcom ADS based on the daily closing prices of Netcom ADSs as
quoted on the New York Stock Exchange for the 60 trading days immediately
prior to and including the Latest Practicable Date;
and
|
|
|
(g)
|
a
premium of approximately 1.3% over the average closing price of US$59.73
of each Netcom ADS based on the daily closing prices of Netcom ADSs as
quoted on the New York Stock Exchange for the 180 trading days immediately
prior to and including the Latest Practicable
Date.
|
Net
Asset Value
Based
on the latest published audited consolidated financial statements of Netcom
under HKFRS, the net asset value of Netcom as at 31 December 2007 was
approximately RMB82,052 million (approximately HK$93,347 million). This is
equivalent to approximately HK$13.93 for each Netcom Share as at the Latest
Practicable Date, assuming that none of the outstanding Netcom Options had been
exercised.
On
that basis, the value of HK$23.55 for each Scheme Share under the Share
Proposal, being the value of 1.508 Unicom Shares based on the weighted average
traded price of each Unicom Share of HK$15.62 on the Hong Kong Stock Exchange on
the Latest Practicable Date, represents a multiple of 1.69 times of the net
asset value for each Netcom Share of HK$13.93.
Earnings
Based
on the latest published audited consolidated financial statements of Netcom
under HKFRS, the net profit from continuing operations after taxation and
extraordinary items of Netcom for the financial year ended 31 December 2007 was
approximately RMB11,471 million (approximately HK$13,050 million). This is
equivalent to approximately HK$1.95 for each Netcom Share as at the Latest
Practicable Date, assuming that none of the outstanding Netcom Options had been
exercised.
A
calculation of the price earnings multiple based on the value of HK$23.55 for
each Scheme Share under the Share Proposal, being the value of 1.508 Unicom
Shares based on the weighted average traded price of each Unicom Share of
HK$15.62 on the Hong Kong Stock Exchange on the Latest Practicable Date, yields
a multiple of 12.08.
10. FINANCIAL
EFFECTS OF THE PROPOSALS
Your
attention is drawn to Appendix III to this Explanatory Statement which sets out
the unaudited pro forma consolidated financial information of the Enlarged Group
which has been prepared for the purpose of illustrating the financial effects of
the Proposals and the CDMA Business Disposal.
-
65 -
11.
EFFECTS
OF THE PROPOSALS ON THE SHAREHOLDING STRUCTUREs OF NETCOM AND
UNICOM
Shareholding
Structure of Netcom
As at
the Latest Practicable Date, there were 6,699,197,200 Netcom Shares in issue
(including Netcom Shares underlying the Netcom ADSs), 7,098,720 Netcom ADSs
outstanding and 125,836,260 outstanding Netcom Options, which were exercisable
into 125,836,260 Netcom Shares. Other than the Netcom Shares, the Netcom ADSs
and the Netcom Options, there are no other options, derivatives, warrants or
other securities convertible or exchangeable into Netcom Shares which are issued
by Netcom.
Based
on publicly available information, the table below sets out the shareholding
structure of Netcom as at the Latest Practicable Date and following the
completion of the Proposals:
|
Name
|
As
at the Latest Practicable Date
|
Following
completion of the Proposals (assuming all of the outstanding
Netcom Options had been exercised)
|
Following
completion of the Proposals (assuming none of the outstanding
Netcom Options had been exercised)
|
|||
|
Number
of Netcom Shares
|
%
|
Number
of Netcom Shares
|
%
|
Number
of Netcom Shares
|
%
|
|
|
Disinterested
Netcom
Shareholders
comprising:
|
||||||
|
Netcom
BVI
|
4,647,449,015(1)
|
69.37%
|
0
|
0.00%
|
0
|
0.00%
|
|
5
PRC Netcom Shareholders
|
297,698,985(2)
|
4.44%
|
0
|
0.00%
|
0
|
0.00%
|
|
Telefónica
|
333,971,305
|
4.99%
|
0
|
0.00%
|
0
|
0.00%
|
|
ABLP
|
397,382,288
|
5.93%
|
0
|
0.00%
|
0
|
0.00%
|
|
Other
Public Netcom Shareholders
|
1,022,695,607
|
15.27%
|
0
|
0.00%
|
0
|
0.00%
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
6,699,197,200
|
100.00%
|
0
|
0.00%
|
0
|
0.00%
|
|
|
Unicom
|
0
|
0.00%
|
6,825,033,460
|
100.00%
|
6,699,197,200
|
100.00%
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
6,699,197,200
|
100.00%
|
6,825,033,460
|
100.00%
|
6,699,197,200
|
100.00%
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
Notes:
|
(1)
|
These
Netcom Shares consisted of 4,647,449,014 Netcom Shares in which Netcom BVI
was legally and beneficially interested and one Netcom Share held by a
wholly-owned subsidiary of Netcom
BVI.
|
|
(2)
|
These
297,698,985 Netcom Shares were held by Netcom BVI as trustee on behalf of
five PRC Netcom Shareholders.
|
Shareholding
Structure of Unicom
As at
the Latest Practicable Date, there were 13,664,951,945 Unicom Shares in issue
(including Unicom Shares underlying the Unicom ADSs), 40,060,116 Unicom ADSs
outstanding and 224,547,600 outstanding Unicom Options, which were exercisable
into 224,547,600 Unicom Shares. Other than the Unicom Shares, the Unicom ADSs
and the Unicom Options, there are no other options, derivatives, warrants or
other securities convertible or exchangeable into Unicom Shares which are issued
by Unicom.
Assuming
the Scheme becomes effective and none of the outstanding Netcom Options had been
exercised, a total of 10,102,389,377 Unicom Shares will be issued. Based on
publicly available information and assuming 10,102,389,377 Unicom Shares are
issued and there are no other changes in the shareholdings in Unicom prior to
the completion of the Proposals, the table below sets out the shareholding
structure of Unicom as at the Latest Practicable Date and following the
completion of the Proposals:
-
66 -
|
Name
|
As
at the Latest Practicable Date
|
Following
completion of the Proposals (assuming all of the outstanding
Unicom Options had been exercised)
|
Following
completion of the Proposals (assuming none of the outstanding
Unicom Options had been exercised)
|
|||
|
Number
of Unicom Shares
|
%
|
Number
of Unicom Shares
|
%
|
Number
of Unicom Shares
|
%
|
|
|
Unicom
BVI
|
9,725,000,020
|
71.17%
|
9,725,000,020
|
40.53%
|
9,725,000,020
|
40.92%
|
|
SK
Telecom
|
899,745,075
|
6.58%
|
899,745,075
|
3.75%
|
899,745,075
|
3.79%
|
|
Netcom
BVI
|
0
|
0.00%
|
7,008,353,114
|
29.21%
|
7,008,353,114
|
29.49%
|
|
5
PRC Netcom Shareholders
|
0
|
0.00%
|
448,930,069
|
1.87%
|
448,930,069
|
1.89%
|
|
Telefónica(1)
|
0
|
0.00%
|
503,628,727
|
2.10%
|
503,628,727
|
2.12%
|
|
ABLP
|
0
|
0.00%
|
599,252,490
|
2.50%
|
599,252,490
|
2.52%
|
|
Other
Public Unicom Shareholders
|
3,040,206,850
|
22.25%
|
4,806,979,427
|
20.04%
|
4,582,431,827
|
19.27%
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
13,664,951,945
|
100.00%
|
23,991,888,922
|
100.00%
|
23,767,341,322
|
100.00%
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
Note:
(1)
Based on Telefónica’s shareholding of 333,971,305 Netcom Shares as at the Latest
Practicable Date.
Assuming the Scheme becomes effective and all of the outstanding Netcom Options
had exercised, a total of 10,292,150,457 Unicom Shares will be issued. Based on
publicly available information and assuming 10,292,150,457 Unicom Shares are
issued and there are no other changes in the shareholdings in Unicom prior to
the completion of the Proposals, the table below sets out the shareholding
structure of Unicom as at the Latest Practicable Date and following the
completion of the Proposals:
|
Name
|
As
at the Latest Practicable Date
|
Following
completion of the Proposals (assuming all of the outstanding
Unicom Options had been exercised)
|
Following
completion of the Proposals (assuming none of the outstanding
Unicom Options had been exercised)
|
|||
|
Number
of Unicom Shares
|
%
|
Number
of Unicom Shares
|
%
|
Number
of Unicom Shares
|
%
|
|
|
Unicom
BVI
|
9,725,000,020
|
71.17%
|
9,725,000,020
|
40.22%
|
9,725,000,020
|
40.59%
|
|
SK
Telecom
|
899,745,075
|
6.58%
|
899,745,075
|
3.72%
|
899,745,075
|
3.76%
|
|
Netcom
BVI
|
0
|
0.00%
|
7,008,353,114
|
28.98%
|
7,008,353,114
|
29.25%
|
|
5
PRC Netcom Shareholders
|
0
|
0.00%
|
448,930,069
|
1.86%
|
448,930,069
|
1.87%
|
|
Telefónica(1)
|
0
|
0.00%
|
503,628,727
|
2.08%
|
503,628,727
|
2.10%
|
|
ABLP
|
0
|
0.00%
|
599,252,490
|
2.48%
|
599,252,490
|
2.50%
|
|
Other
Public Unicom Shareholders
|
3,040,206,850
|
22.25%
|
4,996,740,507
|
20.66%
|
4,772,192,907
|
19.93%
|
|
|
－－－－－－－－－
|
－－－－－－－－－
|
－－－－－－－－－
|
－－－－－－－－－
|
－－－－－－－－－
|
－－－－－－－－－
|
|
Total
|
13,664,951,945
|
100.00%
|
24,181,650,002
|
100.00%
|
23,957,102,402
|
100.00%
|
|
===============
|
===============
|
===============
|
===============
|
===============
|
===============
|
|
Note:
(1) Based
on Telefónica’s shareholding of 333,971,305 Netcom Shares as at the Latest
Practicable Date.
12.
MATERIAL
INTERESTS OF NETCOM DIRECTORS AND EFFECT OF THE SCHEME ON SUCH
INTERESTS
As at
the Latest Practicable Date, Mr. Zuo Xunsheng, Mr. Li Fushen and Mr. Yan Yixun,
all Netcom Directors, have 455,500, 480,000 and 354,000 Netcom Options
outstanding, respectively. Their rights under these Netcom Options are identical
to those of other Netcom Optionholders. Accordingly, pursuant to the Option
Proposal, to the extent that these Netcom Directors do not exercise their
outstanding Netcom Options prior to the Options Exercise Deadline, their Netcom
Options that remain outstanding at the Scheme Record Time (whether vested or
not) will, subject to the Scheme becoming effective, be cancelled by the Board
and these Netcom Directors will automatically be granted Special Unicom Options
in consideration for the cancellation of their outstanding Netcom Options. In
the event that any of these Netcom Directors exercise their Netcom Options
before the Options Exercise Deadline, such Netcom Director will be entitled to
attend and vote at the Court Meeting as a Disinterested Netcom Shareholder and
be bound by the Scheme if it becomes effective. However, none of these Netcom
Directors intends to exercise their Netcom Options prior to the Options Exercise
Deadline.
Except
for the effects of the Proposals and the Scheme on such interests of Mr. Zuo
Xunsheng, Mr. Li Fushen and Mr. Yan Yixun in the Netcom Options as described
above and as disclosed in paragraphs 5(a) and 9 of Appendix IV to this
Explanatory Statement, none of the Netcom Directors, whether as directors or
shareholders or creditors of Netcom or otherwise, has any
-
67 -
material
interests in the Scheme. Accordingly, other than the interests of the Netcom
Directors referred to above in Netcom Options, the Scheme does not have any
effect on the interests of the Netcom Directors.
13. INFORMATION
ON NETCOM
Netcom
was incorporated in Hong Kong with limited liability on 22 October 1999. Netcom
is a leading broadband and fixed-line telecommunications operator in the PRC,
with service regions consisting of Beijing Municipality, Tianjin Municipality,
Hebei Province, Henan Province, Shandong Province, Liaoning Province,
Heilongjiang Province, Jilin Province, Neimenggu Autonomous Region and Shanxi
Province. In its service regions, Netcom provides fixed-line voice and
value-added services, broadband and other Internet-related services, information
and communications technology services, business and data communications
services and advertising and media services.
The
Netcom Shares were listed on the Hong Kong Stock Exchange on 17 November 2004
(Hong Kong time) and the Netcom ADSs were listed on the New York Stock Exchange
on 16 November 2004 (New York time).
Your
attention is drawn to the financial information on the Netcom Group and the
general information on Netcom set out in Appendices I and IV, respectively, to
this Explanatory Statement.
14. INFORMATION
ON UNICOM
General
Information
Unicom
was incorporated in Hong Kong with limited liability on 8 February 2000. Unicom,
through its subsidiaries, is principally engaged in GSM and CDMA cellular
business in 31 provinces, municipalities and autonomous regions in the PRC, the
provision of international and domestic long distance calls, data and Internet
services and other related telecommunications value-added businesses. In
addition, Unicom also operates certain CDMA mobile communications business in
the Macau Special Administrative Region.
The Unicom Shares were listed on the Hong Kong Stock Exchange on 22 June 2000
(Hong Kong time) and the Unicom ADSs were listed on the New York Stock Exchange
on 21 June 2000 (New York time).
Your attention is drawn to the financial information on the Unicom Group and the
general information on Unicom set out in Appendices II and V, respectively, to
this Explanatory Statement.
Financial
and Trading Prospects of Unicom
China’s
telecommunications industry has undergone rapid growth and recently became the
largest market in the world in terms of the number of fixed-line and wireless
subscribers. Relatively low penetration rates, combined with robust
macroeconomic conditions, are expected to result in sustainable and rapid growth
of the telecommunications industry in China over the next few
years.
In
response to the changes in the competitive landscape and regulatory policies in
China’s telecommunications industry, operators are seeking restructuring
opportunities. Upon the completion of the restructuring initiatives contemplated
in the Telecoms Restructuring Announcement, there will be three main
telecommunications operators with more comparable scale and resources, and with
capability to offer fully integrated telecommunications services. This is
expected to lead to a more balanced competitive environment and better resource
allocation within China’s telecommunications industry. In addition, the expected
issuance of 3G wireless licences should result in new opportunities for Unicom
and other telecommunications operators.
Unicom
has agreed to dispose of the CDMA Business to China Telecom and is pursuing the
merger with Netcom. If the proposed transactions are completed, the Enlarged
Group is expected to become an integrated telecom full service provider offering
mobile, fixed-line, broadband and Internet, and value-added services. The
combination of the resources in 3G wireless, broadband and fixed-line
businesses, and continued technological innovation, are expected to improve the
Enlarged Group’s brand perception and competitive positioning.
If
the proposed transactions are completed, the Enlarged Group will discontinue its
CDMA business operations. For wireless services, the Enlarged Group will focus
on the development of its GSM and future 3G businesses. With the planned
expansion of network coverage, improvement of transmission capacity and service
quality, it is anticipated that the Enlarged Group will enhance its competitive
advantage in its GSM business. Meanwhile, the Enlarged Group is expected to be
granted a 3G licence after the completion of the proposed merger. By investing
in research and development of 3G services, the Enlarged
-
68 -
Group
is expected to facilitate its transition from GSM to 3G technology and enable it
to establish leading 3G services in China. These investments are expected to
enhance the Enlarged Group’s service capabilities in the wireless sector and
expand its customer base, improve user mix, and thus achieve a stable revenue
growth. The cash proceeds from the sale of the CDMA Business will primarily be
used to increase the investment in the GSM network to expand coverage of the GSM
network, improve IT support systems and the value-added business platform and
enhance the customer service quality of the GSM business, and to lay a
foundation for the future development of 3G business.
Based
on the subscriber base of Unicom and Netcom as at 30 June 2008, the Enlarged
Group is expected to have a combined total subscriber base of approximately 259
million users, including 128 million GSM users, 109 million local access users
and 23.36 million broadband users, which represents cross-selling and bundling
opportunities that may potentially lead to increase in customer loyalty,
reduction of churn rate and, ultimately, increase in the Enlarged Group’s market
share. The economies of scale offered by the effective integration of the
resources of Unicom and Netcom in sales and marketing, distribution channels and
network coverage are expected to allow the Enlarged Group to realise the
synergies from reducing sales and marketing costs, operating and maintenance
costs, administration costs as well as capital expenditures.
The
directors of Unicom and Netcom expect that the synergies of the merger will be
realised gradually after the completion of the proposed transactions. The scale,
resources and enhanced financial strength that are expected to result from an
integration of the Enlarged Group should enable the Enlarged Group to improve
its market position and increase shareholders’ value.
CDMA
Business Disposal and Related Transactions
On
2 June 2008, Unicom, CUCL and China Telecom entered into the CDMA Business
Disposal Framework Agreement which sets out the terms and conditions on which
Unicom, CUCL and China Telecom will proceed with the CDMA Business Disposal
whereby CUCL, a wholly-owned subsidiary of Unicom, will sell, and China Telecom
will purchase, the CDMA business of CUCL.
On
27 July 2008, Unicom, CUCL and China Telecom entered into the CDMA Business
Disposal Agreement which sets out the detailed terms and conditions on which
CUCL and Unicom will sell, and China Telecom will purchase, the CDMA
Business.
The
consideration for the CDMA Business Disposal is RMB43.8 billion (approximately
HK$49.8 billion) and is payable in cash by China Telecom in three instalments.
The consideration is subject to an adjustment mechanism as set out in the
announcement issued by Unicom on 28 July 2008 in relation to the CDMA Business
Disposal.
Upon
completion of the CDMA Business Disposal, Unicom expects to realise an estimated
gain before tax of approximately RMB37.56 billion (approximately HK$42.73
billion) under HKFRS. The estimated gain is calculated by using the
consideration for the CDMA Business Disposal to minus (a) the carrying net asset
value of the CDMA Business as at 31 December 2007 of RMB4.67 billion, (b) the
goodwill in relation to the CDMA Business of RMB0.37 billion arising from
Unicom’s past acquisitions of cellular businesses from Unicom Parent, (c) the
deferred revenue of RMB1.01 billion for the estimated value of support services
expected to be provided to China Telecom at no consideration during the
transitional period from the date of completion of the CDMA Business Disposal to
31 March 2009 or after the date of completion of the CDMA Business Disposal and
(d) the estimated transaction costs and expenses (other than income tax) of
RMB0.19 billion. The carrying net asset value of the CDMA Business is calculated
as the CDMA Business’ total assets minus the CDMA Business’ total liabilities as
at 31 December 2007.
The
gain expected to be recognised in the consolidated income statement of the
Unicom Group upon the completion of the CDMA Business Disposal is expected to be
different from the estimated gain disclosed above due to (a) the possible
adjustment to the consideration for the CDMA Business Disposal to be made in
accordance with the price adjustment mechanism referred to above, (b) the
possible adjustment to the detailed items of the CDMA Business as agreed in the
final list on or before the delivery date in accordance with the completion plan
set out in the CDMA Business Disposal Agreement, (c) the changes in estimated
transaction costs and expenses (other than income tax) to be incurred in the
CDMA Business Disposal, (d) the changes in the net asset value of the CDMA
Business from 31 December 2007 to the date of completion of the CDMA Business
Disposal and (e) the changes in the above estimated value of support services to
be provided to China Telecom at no additional consideration.
Unicom
expects to allocate the net proceeds from the CDMA Business Disposal for the
following purposes: (a) increasing the investment in the GSM network to expand
coverage of the GSM network, improve IT support systems and the value-added
business platform and enhance the customer service quality of the GSM business,
and to lay a foundation for the future development of 3G business, (b) reducing
the debt of the Unicom Group in order to decrease financing costs and (c)
funding of working capital and other general corporate purposes.
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Your
attention is drawn to Appendix III to this Explanatory Statement which sets out
the unaudited pro forma consolidated financial information of the Enlarged Group
which has been prepared for the purpose of illustrating the financial effects of
the Proposals and the CDMA Business Disposal.
In
connection with the CDMA Business Disposal, on 27 July 2008, CUCL agreed to
waive its right to exercise its option to purchase the CDMA network from Unicom
New Horizon at any time before 31 December 2008 or within one year after the
termination or expiry of the Unicom CDMA Lease pursuant to the Unicom CDMA Lease
and the parties to the Unicom CDMA Lease agreed to terminate the Unicom CDMA
Lease, in each case with effect from the completion of the CDMA Business
Disposal.
On
27 July 2008, Unicom Parent and Unicom New Horizon entered into an agreement to
sell the CDMA network to China Telecommunications Corporation, the controlling
shareholder of China Telecom, for a consideration of RMB66.2 billion
(approximately HK$75.3 billion). The completion of the disposal of the CDMA
network is expected to occur on the same date as the completion of the CDMA
Business Disposal. On 27 July 2008, China Telecom entered into a lease agreement
with China Telecommunications Corporation relating to the leasing of capacity on
the CDMA network to China Telecom.
In
connection with the CDMA Business Disposal, in order to optimise the allocation
of resources, to avoid duplication, to facilitate management and to enhance the
efficiency of the operation of the integrated assets, CUCL and China
Telecommunications Corporation plan to swap certain assets with each other based
on the principle of equality and reciprocity and in accordance with applicable
regulatory requirements.
The
CDMA Business Disposal is subject to various conditions, including, among other
things, (a) the approval of the Unicom Shareholders and the shareholders of
Unicom A Share Company for the CDMA Business Disposal, (b) the approval of the
independent Unicom Shareholders and the non-affiliated shareholders of Unicom A
Share Company for the waiver by CUCL of the option to purchase the CDMA network
from Unicom New Horizon and the termination of the Unicom CDMA Lease, (c) the
approval of the independent shareholders of China Telecom for the leasing of
capacity on the CDMA network by China Telecommunications Corporation to China
Telecom and (d) the receipt of any other necessary regulatory or corporate
approvals for the completion of the CDMA Business Disposal.
The
CDMA Business Disposal is not dependent on the Proposals, but is instead a
transaction separate and independent from the Proposals. Accordingly, even if
the Scheme becomes effective, the CDMA Business Disposal may or may not be
completed, depending on whether the conditions of the CDMA Business Disposal
have been satisfied or waived, as applicable. Similarly, the Proposals are not
dependent on the completion of the CDMA Business Disposal, nor are they
dependent on the conditions of the CDMA Business Disposal being satisfied or
waived, as applicable. Accordingly, even if the CDMA Business Disposal is
completed, the Scheme may or may not be completed, depending on whether the
conditions of the Proposals have been satisfied or waived, as
applicable.
The
CDMA Business Disposal constitutes a major transaction for Unicom and is subject
to the approval of the Unicom Shareholders at the extraordinary general meeting
of Unicom to be held on 16 September 2008. Each of the waiver by CUCL of the
option to purchase the CDMA network and the termination of the Unicom CDMA Lease
constitutes a connected transaction for Unicom and is subject to the approval of
the independent Unicom Shareholders at the same extraordinary general meeting of
Unicom. As Unicom BVI is regarded as having a material interest in the CDMA
Business Disposal, the waiver by CUCL of the option to purchase the CDMA network
and the termination of the Unicom CDMA Lease, Unicom BVI will abstain from
voting on the resolutions for the approval of these matters at the extraordinary
general meeting of Unicom.
The
CDMA Business Disposal is not subject to the approval of the shareholders of
China Telecom. However, as stated above, the CDMA Business Disposal is subject
to, among other things, the leasing of capacity on the CDMA network by China
Telecommunications Corporation to China Telecom being approved by the
independent shareholders of China Telecom as it constitutes a connected
transaction for China Telecom. Such independent shareholders’ approval will be
sought by China Telecom at the extraordinary general meeting of China Telecom to
be held on 16 September 2008.
Assuming
the approvals of the shareholders of Unicom and China Telecom referred to above
are obtained and all of the other conditions of the CDMA Business Disposal are
satisfied or waived, as applicable, completion of the CDMA Business Disposal
will take place on 1 October 2008 (or such other date as the parties thereto may
agree) and before the Effective Date.
If
not all of the conditions of the CDMA Business Disposal are satisfied or waived,
as applicable, on or before 31 December 2008 (or such other date as Unicom, CUCL
and China Telecom may agree), the CDMA Business Disposal Agreement will
automatically terminate.
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Please
see the announcements issued by Unicom and China Telecom on 2 June 2008 and 28
July 2008, the circular to the Unicom Shareholders dated 1 August 2008 and the
circular to the shareholders of China Telecom dated 1 August 2008, each in
relation to the CDMA Business Disposal for further details.
Unicom
EGM to Approve the Proposals
As
stated in paragraph 4 headed “Conditions of the Proposals and the Scheme” in
this Explanatory Statement, one of the conditions of the Proposals and the
Scheme is the approval of the Unicom Shareholders having been obtained for,
among other things, the Proposals and the adoption of the Special Purpose Unicom
Share Option Scheme.
As
none of the Unicom Shareholders have a material interest in the matters to be
approved at the Unicom EGM, all of the Unicom Shareholders will be entitled to
vote on the resolutions to be proposed at the Unicom EGM. However,
notwithstanding the foregoing, two of the Netcom Directors, being Ms. Li Jianguo
and Mr. Timpson Chung Shui Ming, who hold 602,000 Unicom Shares and 6,000 Unicom
Shares, respectively, have each given an undertaking to Netcom to abstain from
voting at the Unicom EGM.
The
Unicom EGM will be held on 16 September 2008 immediately after the conclusion or
adjournment of the Unicom shareholders’ meeting to be held on the same day to
approve the CDMA Business Disposal. An announcement of the results of both of
the Unicom shareholders’ meetings will be published by Unicom on the Hong Kong
Stock Exchange website on 16 September 2008.
Continuing
Connected Transactions for Unicom
Upon
the completion of the proposed merger, Netcom will become a wholly-owned
subsidiary of Unicom and Netcom Parent will become a substantial shareholder of
Unicom (as defined under the Listing Rules). Current continuing connected
transactions between Netcom and Netcom Parent will therefore become continuing
connected transactions of Unicom. In addition, there are a number of existing
transactions between Unicom and its subsidiaries on the one hand and Netcom
Parent and its subsidiaries on the other in Unicom’s ordinary course of
business. These transactions include interconnection settlement, engineering and
information technology services, ancillary telecommunications services,
properties leasing, telecommunications facilities leasing and the provision and
sharing of management and other support services. Such transactions will also
constitute continuing connected transactions of Unicom upon completion of the
proposed merger and Unicom will need to comply with the Listing Rules in respect
of these transactions, some of which will require the approval of Unicom’s
independent shareholders. Furthermore, the terms of the existing continuing
connected transactions between Unicom and Unicom Parent relating to the
provision of services between the parties will be amended with effect from the
Effective Date to include China Netcom (Group) Company Limited, a wholly-owned
subsidiary of Netcom, as a party and to facilitate the business and operations
of the Enlarged Group, and are subject to the approval of Unicom’s independent
shareholders. Details of these continuing connected transactions are set out in
the circular to the Unicom Shareholders dated 15 August 2008.
15. POSSIBLE
CONCERT PARTY AGREEMENT
Each
of Unicom and Netcom has been informed by Unicom BVI and Netcom BVI,
respectively, that they are not and have never been parties acting in concert
with each other or with or in respect of either Unicom or Netcom. Each of Unicom
and Netcom has further been informed that Unicom BVI and Netcom BVI intend to
enter into the Concert Party Agreement upon or shortly after the last occurrence
of (i) the Proposals and the issue of Unicom Shares being duly approved by the
requisite majority of the Unicom Shareholders at the Unicom EGM, (ii) the Scheme
being duly approved by the requisite majority of the Disinterested Netcom
Shareholders other than the Exempt Principal Traders at the Court Meeting and
(iii) the special resolutions being duly passed with the requisite majority of
the Netcom Shareholders at the Netcom EGM. Pursuant to the Concert Party
Agreement, Unicom BVI and Netcom BVI will agree to cooperate actively to obtain
or consolidate control of Unicom following the completion of the Scheme. Thus,
Unicom BVI and Netcom BVI will only become parties acting in concert in respect
of Unicom following the completion of the Scheme but not before. In addition,
following the completion of the Scheme, Unicom BVI and Netcom BVI will also be
presumed to be acting in concert with each other in respect of Unicom pursuant
to class (1) of the definition of “acting in concert” in the Takeovers
Code.
On 26
May 2008, the State-owned Assets Supervision and Administration Commission
notified each of Unicom Parent and Netcom Parent, the respective ultimate parent
companies of Unicom and Netcom, that, among other things, it may, depending on
the outcome of any proposed merger of Unicom and Netcom, consider a merger of
Unicom Parent and Netcom Parent. Each of Unicom Parent and Netcom Parent has
confirmed to Unicom and Netcom, respectively, that it has not received any
notice or other indication and that it is not otherwise aware of the timing or
any term of or condition to such merger. On this basis, any merger of Unicom
Parent and Netcom Parent will not result in any change of control of Unicom or
Netcom and will not give rise to any
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implication
under Rule 26 of the Takeovers Code.
16. RISK
FACTORS
You should carefully consider the following risk factors in deciding whether to
vote in favour of or against the Scheme.
You
are also encouraged to refer to and carefully consider the sections headed “Item
3 — Key Information — Risk Factors” in the annual reports of Unicom and Netcom
on Form 20-F for the year ended 31 December 2007 filed with the SEC on 20 June
2008 and 22 May 2008, respectively, which contain a more detailed discussion of
the principal risks relevant to the Netcom Shareholders and the Netcom ADS
Holders in their consideration of the Scheme. Paragraph 28 below headed “Where
You Can Find Additional Information” in this Explanatory Statement sets out the
information on how to access these documents.
As the Share Exchange Ratio in the Scheme is fixed, the market value of the
consideration to be paid to you in connection with the Scheme will depend on the
market values of the Unicom Shares and the Unicom ADSs, respectively, on or
after the Effective Date.
Under
the Share Proposal and the ADS Proposal, the Scheme Shareholders and the Netcom
ADS Holders will receive a fixed number of Unicom Shares and Unicom ADS,
respectively, rather than a number of shares with a particular fixed market
value. The market values of the Unicom Shares, the Unicom ADSs, the Netcom
Shares and the Netcom ADSs on the Effective Date may vary significantly from
their respective prices on the Last Trading Date and the Last ADS Trading Date
or the date of the Court Meeting and the Netcom EGM. As the Share Exchange Ratio
will not be adjusted in order to reflect any changes in the respective market
prices of the Unicom Shares, the Unicom ADSs, the Netcom Shares and the Netcom
ADSs, the value of the consideration paid to the Scheme Shareholders and the
Netcom ADS Holders may be higher or lower than the market value of their Netcom
shares or Netcom ADSs on earlier dates.
The
Unicom Shares, the Unicom ADSs, the Netcom Shares and the Netcom ADSs have
historically been subject to substantial price volatility. No assurance can be
given as to the respective market prices of the Unicom Shares, the Unicom ADSs,
the Netcom Shares and the Netcom ADSs at any time before the Effective Date or
the market prices of the Unicom Shares and the Unicom ADSs after the Effective
Date.
The
results of operations or the financial condition of the Enlarged Group may
differ significantly from the unaudited pro forma consolidated financial
information of the Enlarged Group set out in Appendix III to this Explanatory
Statement.
The
unaudited pro forma consolidated financial information of the Enlarged Group has
been prepared for the purpose of illustrating the financial effects of the
Proposals and the CDMA Business Disposal as if they had taken place on 1 January
2007 for the pro forma consolidated income statement and the pro forma
consolidated cash flow statement, and 31 December 2007 for the pro forma
consolidated balance sheet. This pro forma financial information is presented
for illustrative purposes only and does not necessarily indicate the results of
operations or the financial position of the Enlarged Group that would have
resulted had the Proposals and the CDMA Business Disposal been completed at the
beginning of the period presented, nor is it indicative of the results of
operations in future periods or the future financial position of the Enlarged
Group. Accordingly, the results of operations and the financial condition of the
Enlarged Group may differ significantly from those illustrated by the unaudited
pro forma consolidated financial information of the Enlarged Group set out in
Appendix III to this Explanatory Statement.
The
Enlarged Group may fail to realise the anticipated benefits of the proposed
merger and the proposed merger may also expose the Enlarged Group to
uncertainties and risks, any of which could materially adversely affect the
future business performance and financial condition of the Enlarged Group.
Moreover, even if the anticipated benefits of the proposed merger are achieved,
they may not result in revenues or profits superior to those which would have
been achieved by Unicom and Netcom separately.
If
the Scheme becomes effective, Unicom will commence the process of integrating
the existing businesses and operations of Netcom and Unicom. Unicom and Netcom
believe that the proposed merger represents an important transaction for them,
following the industry trend of convergence between fixed lines and wireless
businesses within the PRC, allowing Unicom and Netcom to benefit from increased
economies of scale, reinforce their market position, improve their overall
competitiveness and lay the foundation for sustainable long-term
growth.
Nevertheless,
the scale, scope and nature of the integration and customer retention efforts
required in connection with the proposed merger present significant challenges,
and Unicom and Netcom may be unable to complete the integration of the
businesses on the currently scheduled timeline or fully realise the anticipated
benefits. In particular, the proposed merger may not meet Unicom’s expectations
and the realisation of the anticipated benefits may be delayed
or reduced as a result of numerous
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factors,
some of which are outside the control of Unicom and Netcom. These factors
include, among other things, (a) difficulties in integrating the operations of
Netcom and Unicom, including information systems, personnel, policies and
procedures, and overlapping operations, subsidiaries and branch networks, (b)
unforeseen contingent risks or latent liabilities relating to the proposed
merger that may only become apparent in the future, (c) difficulties in managing
a much larger business, (d) a failure to complete the CDMA Business Disposal or
to achieve the benefits anticipated from such disposal, (e) a failure to obtain
the anticipated 3G licence and (f) an increase in competition in the PRC
telecommunications industry resulting from the ongoing restructuring of the PRC
telecommunications industry which, among other things, may require an increase
in marketing efforts.
Any
of the above factors could materially adversely affect the future business
performance and financial condition of the Enlarged Group. Moreover, integrating
the respective businesses of Unicom and Netcom, even if achieved in an
efficient, effective and timely manner, may not result in revenues or profits
superior to those which would have been achieved by Unicom and Netcom
separately. In addition, the reduction in the shareholding of Unicom BVI in
Unicom following the completion of the Scheme will result in Unicom being
required to repay the loan referred to in paragraph 5 headed “Indebtedness” in
Appendix II to this Explanatory Statement.
The
completion of the CDMA Business Disposal is subject to various conditions and
there is no assurance that it will be completed.
On
27 July 2008, Unicom, CUCL and China Telecom entered into the CDMA Business
Disposal Agreement which sets out the detailed terms and conditions on which
CUCL and Unicom will sell, and China Telecom will purchase, the CDMA Business.
The completion of the CDMA Business Disposal is subject to various conditions,
which are discussed in paragraph 14 headed “Information on Unicom — CDMA
Business Disposal and Related Transactions” above in this Explanatory Statement.
If these conditions for the completion of the CDMA Business Disposal are not
satisfied or waived by 31 December 2008 (or such other date as Unicom, CUCL and
China Telecom may agree), the CDMA Business Disposal Agreement will
automatically terminate. There is no assurance that the conditions for the
completion of the CDMA Business Disposal will be satisfied or waived in
time.
Even
if the CDMA Business Disposal is completed, Unicom may fail to realise the
anticipated benefits of the CDMA Business Disposal and the CDMA Business
Disposal may also expose Unicom to uncertainties and risks, any of which could
materially adversely affect the future business performance and financial
condition of the Enlarged Group.
Unicom
believes that the CDMA Business Disposal will enable it to focus its financial
and operational resources on the enhancement of its GSM business and the
anticipated future development of 3G services and, if the proposed merger of
Unicom and Netcom is completed, will better enable the Enlarged Group to execute
a more focused business development plan, enhance its long-term competitiveness
and achieve a more distinct strategic positioning.
However,
even if the CDMA Business Disposal is completed, the benefits anticipated to
result from the CDMA Business Disposal may not be realised in the expected scale
or timeline due to numerous factors, some of which are beyond Unicom’s control,
and the CDMA Business Disposal may also expose Unicom to uncertainties and
risks. In particular, (a) Unicom may need to further strengthen its customer
relationships and may also need to further increase its marketing efforts and
expenses, (b) in connection with the completion of the CDMA Business Disposal, a
number of its employees will be transferred to China Telecom, including
employees who have relevant GSM service related experience and existing job
duties, and the completion of the CDMA Business Disposal may result in a loss of
key personnel and operational expertise and (c) Unicom may have to further
increase capital expenditures for expanding its other existing businesses,
including the GSM business.
Any
of the above factors could materially adversely affect the future business
performance, operating results and financial condition of the Enlarged Group. In
addition, the completion of the CDMA Business Disposal will result in Unicom
being required to prepay the loan referred to in paragraph 5 headed
“Indebtedness” in Appendix II to this Explanatory Statement.
17. SHARE
CERTIFICATES, DEALINGS AND LISTING
Upon
the Scheme becoming effective, all of the Scheme Shares (including the Scheme
Shares underlying the Netcom ADSs) will be cancelled. The share certificates for
the Scheme Shares will thereafter cease to have effect as documents or evidence
of title. An application will be made by Netcom to the Hong Kong Stock Exchange
for the voluntary withdrawal of the listing of the Netcom Shares from the Hong
Kong Stock Exchange.
Upon
the Scheme becoming effective, Unicom intends to cause Netcom to apply for the
delisting of the Netcom ADSs from the New York Stock Exchange and to terminate
the Netcom ADS Deposit Agreement. If the Scheme becomes effective, Unicom
intends to cause Netcom to file a Form 15 with the SEC to request that Netcom’s
reporting obligations under the US Securities Exchange Act be terminated or
suspended because the effectiveness of the Scheme will cause the number of
holders of Netcom
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Shares
in the United States to fall below 300.
The
Netcom Shareholders and the Netcom ADS Holders will be notified by way of an
announcement of the proposed withdrawal of the listings, the last day for
dealings in the Netcom Shares and the Netcom ADSs, the Effective Date and the
dates on which the withdrawal of the listing of the Netcom Shares on the Hong
Kong Stock Exchange and the delisting of the Netcom ADSs from the New York Stock
Exchange will become effective.
The
listing of the Netcom Shares on the Hong Kong Stock Exchange and the Netcom ADSs
on the New York Stock Exchange will not be withdrawn if the Proposals are not
approved, lapse or do not become unconditional for any reason.
18.
REGISTRATION
AND DESPATCH OF UNICOM SHARE CERTIFICATES, UNICOM ADSs AND OPTION GRANT
LETTERS
Scheme
Shareholders
In
order to determine entitlements under the Scheme, it is proposed that the
register of members of Netcom will be closed from Saturday, 11 October 2008, or
such other date as may be notified to the Netcom Shareholders by announcement.
The transferees of the Netcom Shares or their successors in title should ensure
that their Netcom Shares are lodged for registration in their names or in the
names of their nominees before 4:30 p.m. on Friday, 10 October 2008. The share
registrar of Netcom is Computershare Hong Kong Investor Services Limited, which
is located at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road
East, Hong Kong.
Assuming
that the Scheme becomes effective on Wednesday, 15 October 2008, the share
certificates for the Unicom Shares representing the consideration under the
Scheme are expected to be despatched to the Scheme Shareholders or persons
nominated by them on or before Saturday, 25 October 2008.
In
the absence of any specific instructions to the contrary received in writing by
the share registrar of Unicom before the Effective Date, the share certificates
for the Unicom Shares representing the consideration under the Scheme will be
sent to the Scheme Shareholders whose names appear on the register of members of
Netcom at the Scheme Record Time at their respective addresses or, in the case
of joint holders, to the registered address of that joint holder whose name
stands first on the register of members of Netcom in respect of the joint
holding. All such share certificates will be sent at the risk of the persons
entitled thereto and neither Unicom nor Netcom will be liable for any loss or
delay in transmission.
Settlement
of the consideration under the Scheme will be implemented in full in accordance
with the terms of the Scheme without regard to any lien, right of set-off,
counterclaim or other analogous right to which Unicom or Netcom may otherwise
be, or claim to be, entitled against any Scheme Shareholders.
Netcom
ADS Holders
Upon
the Scheme becoming effective, Unicom will allot and issue to the Netcom
Depositary, as the sole registered holder of the Scheme Shares underlying the
Netcom ADSs, 1.508 new Unicom Shares for each Netcom Share held by the Netcom
Depositary as at the Scheme Record Time. As soon as reasonably practicable
following the receipt by the Netcom Depositary of such new Unicom Shares, Netcom
will cause the Netcom Depositary to deliver such Unicom Shares into the
custodial account of the Unicom Depositary for purposes of issuing and
delivering new Unicom ADSs pursuant to the Unicom ADS Deposit Agreement. As soon
as is reasonably practicable following the delivery by the Netcom Depositary of
the new Unicom Shares into the custodial account of the Unicom Depositary, and
in any event not later than ten days following the Effective Date, the Unicom
Depositary will deliver or cause to be delivered the new Unicom ADSs to Netcom
ADS Holders in accordance with instructions received from the Netcom Depositary.
Netcom ADS Holders will receive 3.016 new Unicom ADSs for each Netcom ADS held
at the Scheme Record Time.
Netcom
Optionholders
Assuming that the Scheme becomes effective on Wednesday, 15 October 2008, the
letters granting the Netcom Optionholders Special Unicom Options in
consideration for the cancellation of the outstanding Netcom Options held by
them at the Scheme Record Time (whether vested or not) are expected to be
despatched to the Netcom Optionholders on or before Saturday, 25 October
2008.
In the
absence of any specific instructions to the contrary received in writing by
Unicom before the Effective Date, the letters granting the Special Unicom
Options will be sent to the Netcom Optionholders at their respective addresses
registered with
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Netcom.
All such letters will be sent at the risk of the Netcom Optionholders and
neither Unicom nor Netcom will be liable for any loss or delay in
transmission.
Settlement of the consideration under the Option Proposal will be implemented in
full in accordance with the terms of the Option Proposal without regard to any
lien, right of set-off, counterclaim or other analogous right to which Unicom or
Netcom may otherwise be, or claim to be, entitled against any Netcom
Optionholder.
19. TRADING
OF ODD LOTS OF UNICOM SHARES
In order to facilitate the trading of odd lots of Unicom Shares issued under the
Scheme, Unicom has appointed BOCI Securities Limited of 18/F Grand Millennium
Plaza, 181 Queen’s Road Central, Hong Kong to provide the service to match the
sale and purchase of odd lots of such Unicom Shares during the period from
Monday, 27 October 2008 to Friday, 14 November 2008 (both days inclusive).
Holders of the Unicom Shares issued in odd lots under the Scheme who wish to use
this facility may contact the following persons during the period referred to
above:
|
Contact
Person
|
Telephone
Number
|
|
Law,
Pak Hong Passe
Vice
President
|
(852)
2718 9663
|
|
Retail
Trading Department
|
Holders of odd lots of Unicom Shares under the Scheme should note that the
matching of the sale and purchase of odd lots of Unicom Shares is not
guaranteed. Such holders of the Unicom Shares are advised to consult their own
professional advisers if they are in doubt about the facility described
above.
20.
OVERSEAS
NETCOM SHAREHOLDERS, NETCOM ADS HOLDERS AND NETCOM
OPTIONHOLDERS
This
document has been prepared for the purposes of complying with Hong Kong law, the
Takeovers Code and the Listing Rules and the information disclosed may not be
the same as that which would have been disclosed if this document had been
prepared in accordance with the laws of jurisdictions outside Hong
Kong.
The
making of the Proposals to persons not resident in Hong Kong may be subject to
the laws of the relevant jurisdictions. Such persons should inform themselves
about and observe any applicable legal or regulatory requirements. It is the
responsibility of any overseas Netcom Shareholder, Netcom ADS Holders and Netcom
Optionholders wishing to accept any of the Proposals to satisfy themselves as to
the full observance of the laws of the relevant jurisdiction in connection
therewith, including the obtaining of any governmental, exchange control or
other consents which may be required, or the compliance with other necessary
formalities and the payment of any issue, transfer or other taxes due in such
jurisdiction.
The
Scheme provides that, where the Unicom Directors or the Netcom Directors have
been advised that the allotment and issue of the Unicom Shares to an overseas
Scheme Shareholder (other than a Scheme Shareholder residing in the United
States) may be prohibited by any relevant law or so prohibited except after
compliance with conditions or requirements which the Unicom Directors or the
Netcom Directors regard as unduly onerous by reason of delay, expense or
otherwise, Unicom may allot and issue the relevant Unicom Shares to a person
appointed by the Unicom Directors who will sell the same in the market as soon
as reasonably practicable and account to the relevant overseas Scheme
Shareholder for the net proceeds of sale (after the deduction of all expenses
incurred and tax payable in connection with such sale) in full satisfaction of
his rights to the Unicom Shares to which but for this provision he would have
become entitled under the Scheme, except that no payment will be made of any
amount less than HK$50, which will be retained for the benefit of Unicom. The
person appointed by the Unicom Directors will sell the relevant Unicom Shares in
the market as soon as reasonably practicable on or after the date when the share
certificates for their Unicom Shares are expected to be despatched to the other
Scheme Shareholders (which date is expected to be on or before Saturday, 25
October 2008) at such price(s) as may reasonably be obtained in the market. In
order to give effect to such sale, the person appointed by the Unicom Directors
shall be authorised as attorney on behalf of the Scheme Shareholder concerned to
execute and deliver a form of transfer or other instrument or instruction of
transfer and to give such instructions and to do all other things which he may
consider necessary or expedient in connection with such sale. The net proceeds
of sale after deduction of expenses will be sent to the relevant overseas Scheme
Shareholder at his own risk within 14 days after any such sale but in any event
within 28 days from the Effective Date. In the absence of bad faith or wilful
default, none of Unicom, Netcom and the person so appointed shall have any
liability for any loss or damage arising as a result of such sale.
21.
INFORMATION
FOR NETCOM SHAREHOLDERS AND NETCOM ADS HOLDERS IN THE UNITED
STATES
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Voting
Procedures for Netcom ADS Holders
If
you are a Netcom ADS Holder, you cannot vote at the Court Meeting or the Netcom
EGM directly, but as a registered Netcom ADS Holder as at 5:00 p.m. on 14 August
2008 (New York time), you may instruct the Netcom Depositary to vote the Netcom
Shares underlying your Netcom ADSs in accordance with the terms of the Netcom
ADS Deposit Agreement and the ADS Voting Instruction Card. An ADS Voting
Instruction Card is enclosed for this purpose and must be completed, signed and
returned in accordance with the instructions printed on it as soon as possible,
but in any event so as to be received by the Netcom Depositary not later than the ADS Voting
Instruction Deadline. ADS Voting Instruction Cards may be returned to the
Netcom Depositary at its offices located at Citigroup Shareholder Services, P.O.
Box 43099, Providence RI 02940-5000, the United States of America. You may not
change the voting instructions indicated on your completed ADS Voting
Instruction Card unless you notify the Netcom Depositary of such change in
writing prior to the ADS Voting Instruction Deadline. If you hold Netcom ADSs
indirectly through a financial intermediary, you must follow the procedures of
the financial intermediary through which you hold your Netcom ADSs if you wish
to vote.
If
you are a Netcom ADS Holder and wish to attend and vote at the Court Meeting and
the Netcom EGM directly, you must surrender your Netcom ADSs and withdraw the
Netcom Shares represented by such Netcom ADSs in accordance with the terms of
the Netcom ADS Deposit Agreement prior to 3:00 p.m. on 2 September 2008 (New
York time). Furthermore, if you are a Netcom ADS Holder and wish to be entitled
to be present in person or be represented by counsel at the Court Hearing to
support or oppose the petition for the sanction of the Scheme, you must
surrender your Netcom ADSs and withdraw the Netcom Shares represented by such
Netcom ADSs in accordance with the terms of the Netcom ADS Deposit Agreement
prior to 3:00 p.m. on 9 October 2008 (New York time) so that you can be
registered as a Netcom Shareholder prior to the Court Hearing. If you hold
Netcom ADSs indirectly through a financial intermediary and wish to attend and
vote at the Court Meeting and the Netcom EGM directly or be present in person or
represented by counsel at the Court Hearing, you must contact the financial
intermediary through which you hold your Netcom ADSs and request it to surrender
the Netcom ADSs beneficially owned by you and to withdraw the Netcom Shares.
Netcom will pay to the Netcom Depositary the fees for the cancellation of your
Netcom ADSs, but you may incur taxes and other charges in connection with such
surrender and withdrawal. In order to cancel your Netcom ADSs and withdraw the
underlying Netcom Shares, you should contact the Netcom Depositary at Citigroup
Shareholder Services, P.O. Box 43099, Providence RI 02940-5000, the United
States of America or by telephone at 1-877-248-4237 between 8:30 a.m. and 6:00
p.m. (New York time) Monday to Friday. Netcom ADS Holders who intend to
surrender their Netcom ADSs in the foregoing manner should not return their ADS
Voting Instruction Card.
The
Netcom Depositary will provide Netcom ADS Holders with copies of this document
and the ADS Voting Instruction Card, which, among other things, will contain
instructions as to the actions to be taken by Netcom ADS Holders in order to be
registered as Netcom Shareholders and be entitled to directly attend and vote at
the Court Meeting and the Netcom EGM and to be present in person or be
represented by counsel at the Court Hearing. If you would like further
information on surrendering your Netcom ADSs or have any questions relating to
this document or the completion and return of the ADS Voting Instruction Card,
please contact the Netcom Depositary at 1-877-248-4237 between 8:30 a.m. and
6:00 p.m. (New York time) Monday to Friday. The helpline cannot provide advice
on the merits of the Scheme or the Proposals or give any financial
advice.
Exemption
from Registration Under the US Securities Act
The
Unicom Shares to be issued pursuant to the Share Proposal and the ADS Proposal,
including the Unicom Shares underlying the Unicom ADSs to be issued pursuant to
the ADS Proposal, will be issued in reliance upon the exemption from the
registration requirements of the US Securities Act provided by Section 3(a)(10)
thereof.
For
the purpose of qualifying for the exemption from the registration requirements
of the US Securities Act provided by Section 3(a)(10) thereof with respect to
the Unicom Shares, including those represented by new Unicom ADSs, to be issued
to Netcom Shareholders and Netcom ADS Holders pursuant to the Scheme, Netcom
will advise the High Court before the Court Hearing that its sanction of the
Scheme will be relied upon by Unicom for such purpose as an approval of the
Scheme following a hearing on the fairness of the terms and conditions of the
Scheme to the Netcom Shareholders, at which hearing all such Netcom Shareholders
will be entitled to attend in person or through representation by counsel to
support or oppose the sanction of the Scheme and with respect to which adequate
notice shall have been given to them.
Neither
the SEC nor any state securities commission has approved or disapproved the
Unicom Shares or the Unicom ADSs representing those Unicom Shares offered
hereby, or passed upon the accuracy or adequacy of this document or any of the
accompanying documents. Any representation to the contrary is a criminal offence
in the United States.
Certain
US Resale Restrictions
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From the Effective Date, the Unicom Shares issued in connection with the Scheme
(including those represented by Unicom ADSs) will be freely transferable without
restriction under the US Securities Act other than by certain “affiliates” (as
such term is defined in Rule 144 under the US Securities Act) of Unicom as
described below. Persons who are “affiliates” of Unicom, or who have been
“affiliates” of Unicom at any time during a 90-day period immediately before the
Effective Date or before a sale by or on behalf of such persons, will be subject
to certain US transfer restrictions relating to the Unicom Shares they receive
under the Scheme, including those represented by Unicom ADSs. Such persons may
not sell their Unicom Shares or Unicom ADSs without registration under the US
Securities Act, except pursuant to the applicable resale provisions of Rule 144
under the Securities Act or in a transaction exempt from such registration
requirements (including a transaction that satisfies the applicable requirements
for resales outside the United States pursuant to Regulation S under the US
Securities Act).
A Netcom Shareholder or Netcom ADS
Holder who believes that he or she may be, may become or has been an affiliate
of Unicom should consult his or her own legal advisers prior to any sales of
Unicom Shares or Unicom ADSs received, as the case may be, pursuant to the
Scheme or the ADS Proposal.
Paragraph 22 headed “Taxation — US Federal Income Tax Considerations” below in
this Explanatory Statement contains a discussion of certain tax consequences
applicable to US holders of Netcom Shares and Netcom ADSs.
22. TAXATION
The Scheme Shareholders, the Netcom ADS Holders and the Netcom Optionholders,
whether in Hong Kong or in other jurisdictions, are recommended to consult their
professional advisers if they are in any doubt as to the taxation implications
of the Scheme or the Proposals and, in particular, whether the receipt of the
consideration under the Scheme or the Proposals would make such Scheme
Shareholder, Netcom ADS Holder or Netcom Optionholder liable to taxation in Hong
Kong or in other jurisdictions.
Certain
Hong Kong Tax Considerations
As the Scheme does not involve the sale and purchase of Hong Kong stock, no
stamp duty will be payable pursuant to the Stamp Duty Ordinance, Chapter 117 of
the Laws of Hong Kong, on the cancellation of the Scheme Shares (including the
Scheme Shares underlying the Netcom ADSs) upon the Scheme becoming
effective.
US
Federal Income Tax Considerations
Any discussion of tax issues set forth in this document was not intended or
written to be used, and it cannot be used, by any person for the purpose of
avoiding any tax penalties that may be imposed on such person. Every investor
should seek advice based on its particular circumstances from an independent tax
adviser.
The
following summary describes the US federal income tax considerations generally
applicable to US Holders (as defined below) of Scheme Shares or Netcom ADSs that
exchange their Scheme Shares or Netcom ADSs for Unicom Shares or Unicom ADSs
under the Share Proposal or the ADS Proposal, respectively. This summary is
based upon the US Internal Revenue Code of 1986, as amended (the “Code”),
proposed, temporary and final US Treasury regulations under the Code,
administrative rulings and judicial decisions, all as in effect as at the date
of this document and all of which are subject to change (possibly with
retroactive effect) or to differing interpretations. This summary applies only
to US Holders of Scheme Shares or Netcom ADSs who hold their Scheme Shares or
Netcom ADSs, and will hold any Unicom Shares or Unicom ADSs that they receive
under the Share Proposal or the ADS Proposal, respectively, as capital assets
within the meaning of Section 1221 of the Code. This summary does not discuss
all aspects of US federal income taxation that may be relevant to a particular
US Holder of Scheme Shares or Netcom ADSs in light of its particular
circumstances or to US Holders of Scheme Shares or Netcom ADSs subject to
special treatment under the US federal income tax laws, including:
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banks,
insurance companies, trusts and financial
institutions;
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tax-exempt
organisations;
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mutual
funds;
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US
Holders who have a functional currency other than the US
dollar;
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traders
in securities who elect to apply a mark-to-market method of
accounting;
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dealers
in securities or foreign currency;
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US
Holders that are liable for the alternative minimum
tax;
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US
Holders of Scheme Shares or Netcom ADSs who have received their Scheme
Shares or Netcom ADSs in compensatory
transactions;
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US
Holders of Scheme Shares or Netcom ADSs who hold their Scheme Shares or
Netcom ADSs as part of a hedge, straddle, constructive sale, conversion
transaction or other integrated
investment;
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US
Holders who hold Netcom Options;
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US
Holders of Scheme Shares or Netcom ADSs who own, directly, indirectly
through one or more entities, or as a result of certain constructive
ownership rules of the Code, 10% or more of the equity of
Netcom;
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except
to the extent discussed below, US Holders of Scheme Shares or Netcom ADSs
who will, following the exchange by such US Holders of Scheme Shares or
Netcom ADSs for Unicom Shares or Unicom ADSs in connection with the Share
Proposal or the ADS Proposal, hold directly, indirectly through one or
more entities, or as a result of certain constructive ownership rules of
the Code, 5% or more of either the total voting power or the total value
of the equity of Unicom (such US Holders will be referred to in this
document as “5% transferee shareholders”);
and
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US
Holders who will own, directly, indirectly through one or more entities,
or as a result of certain constructive ownership rules of the Code, 10% or
more of the equity of Unicom following the exchange of Scheme Shares or
Netcom ADSs for Unicom Shares or Unicom ADSs,
respectively.
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For
the purposes of this summary, a US Holder is:
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an
individual who is a US citizen or resident of the United States for US
federal income tax purposes;
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a
corporation, or other entity treated as a corporation for US federal
income tax purposes, created or organised under the laws of the United
States, any state thereof, or the District of
Columbia;
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an
estate that is subject to US federal income tax without regard to its
source; or
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a
trust if (i) a US court is able to exercise supervision over the
administration of the trust and one or more US persons have the authority
to control all substantial decisions of the trust or (ii) the trust has a
valid election in effect to be treated as a US person for US federal
income tax purposes.
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If
a partnership, or other entity treated as a partnership for US federal income
tax purposes, holds Scheme Shares or Netcom ADSs, the US federal income tax
treatment of a partner in the partnership generally will depend upon the status
of the partner and the activities of the partnership. Partners of partnerships,
or other entities treated as partnerships, that hold Scheme Shares or Netcom
ADSs should consult their tax advisers regarding the US federal income tax
consequences to them of the Share Proposal or the ADS Proposal.
This
summary is of a general nature only and is not intended to be, and should not be
construed to be, legal, business or tax advice to any prospective investor, and
no representation with respect to the tax consequences to any particular
investor is made. In addition, this discussion assumes that the Share Proposal
and the ADSs Proposal will be consummated according to the terms of the Scheme
and as described in this document. The following summary is not binding on the
US Internal Revenue Service (the “IRS”). As a result, the IRS could adopt a
contrary position, and a contrary position could be sustained by a
court.
US Holders of Scheme Shares or Netcom
ADSs should consult their own tax advisers concerning the US federal income tax
consequences of the Share Proposal and the ADS Proposal, the US federal income
tax consequences of the ownership and disposition of any Unicom Shares or Unicom
ADSs received by reason of the Share Proposal or the ADS Proposal, and any tax
consequences arising under any state, local or non-US taxing
jurisdictions.
Exchange
of Scheme Shares or Netcom ADSs for Unicom Shares or Unicom ADSs
For
US federal income tax purposes, the exchange of Scheme Shares and Netcom ADSs
for Unicom Shares and Unicom ADSs under the Share Proposal and the ADS Proposal,
respectively, has been structured with the aim of qualifying as a
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reorganisation
under the provisions of Section 368(a) of the Code. Because the determination of
whether the exchange of Scheme Shares and Netcom ADSs for Unicom Shares and
Unicom ADSs, respectively, will qualify as a reorganisation depends on the
resolution of complex issues and facts, there can be no assurances that the
exchange of Scheme Shares and Netcom ADSs for Unicom Shares and Unicom ADSs,
respectively, will qualify as a reorganisation. Netcom has not obtained, and
will not obtain, a ruling from the IRS or an opinion of US legal counsel
regarding the qualification of the exchange of Scheme Shares and Netcom ADSs for
Unicom Shares and Unicom ADSs as a reorganisation. The remainder of this section
assumes that the exchange of Scheme Shares and Netcom ADSs for Unicom Shares and
Unicom ADSs will qualify as a reorganisation.
Subject
to the PFIC (as defined below) rules discussed below, a US Holder generally will
not recognise any gain or loss upon receipt of Unicom Shares or Unicom ADSs
under the Share Proposal or the ADS Proposal, respectively, except with respect
to any cash received in lieu of fractional Unicom ADSs (as described below). The
aggregate adjusted tax basis of Unicom Shares or Unicom ADSs received by a US
Holder, including any fractional Unicom ADSs deemed to be received and converted
into cash (as described below), should be equal to the aggregate adjusted tax
basis of the Scheme Shares or Netcom ADSs surrendered. The holding period of the
Unicom Shares or Unicom ADSs received should include the period during which the
US Holder held the Scheme Shares or Netcom ADSs.
In
the case of a 5% transferee shareholder who exchanges Scheme Shares or Netcom
ADSs for Unicom Shares or Unicom ADSs, this treatment will apply provided that
the 5% transferee shareholder enters into a gain recognition agreement in
accordance with applicable US Treasury regulations. In addition, such 5%
transferee shareholders will be required to file certain annual information
statements with their US federal income tax returns for each of the first five
full taxable years following the taxable year of the Scheme. Such 5% transferee
shareholders should consult their tax advisers as to the US federal income tax
consequences of the Scheme to them.
A
US Holder of Netcom ADSs that receives cash in lieu of a fractional Unicom ADS
generally will be treated as having received a fractional Unicom ADS and then as
having sold the fractional Unicom ADS for cash. Such US Holder will generally
recognise capital gain or loss on any cash received in lieu of a fractional
Unicom ADS equal to the difference between the amount of cash received and the
basis allocated to the fractional Unicom ADS. Such capital gain or loss
generally will be long-term capital gain or loss if the US Holder has held the
Netcom ADSs for more than one year at the effective time of the Scheme. Net
long-term capital gains of non-corporate US Holders, including individuals, are
eligible for reduced rates of taxation. Deductions for capital losses are
subject to complex limitations under the Code.
The
US federal income tax consequences to a US Holder, including a US Holder that is
a 5% transferee shareholder, of an exchange of Scheme Shares or Netcom ADSs for
Unicom Shares or Unicom ADSs, respectively, would be different from the
consequences described above if Netcom were considered to be a passive foreign
investment company (a “PFIC”) in the taxable year of the exchange or in any
taxable year during which a US Holder has held Scheme Shares or Netcom ADSs.
Based on the projected composition of its income and assets, Netcom is not
expected to be a PFIC for its current taxable year. However, because this
conclusion is a factual determination that is determined at the close of the
taxable year and is subject to change on an annual basis, there can be no
assurances that Netcom will not be a PFIC for its current taxable year. US
Holders that hold Scheme Shares or Netcom ADSs should consult their own tax
advisers regarding the US federal income tax consequences if Netcom is or has
been a PFIC.
Any
US Holder that is a “significant holder” as defined in Section 1.368-3(c) of the
US Treasury regulations with respect to Netcom will be required to attach a
statement to its US federal income tax return for the taxable year of the Scheme
that contains the information listed in Section 1.368-3(b) of the US Treasury
regulations. Such statement must include the US Holder’s US federal income tax
basis in its Scheme Shares or Netcom ADSs and their fair market value
immediately before they were exchanged for Unicom Shares or Unicom ADSs. A
“significant holder” generally includes a holder of at least 5% (by vote or
value) of the stock of a corporation if the stock is publicly traded or a holder
of securities of a corporation with a basis of US$1,000,000 or more. All US
Holders of Scheme Shares or Netcom ADSs that receive Unicom Shares or Unicom
ADSs, respectively, will be required to retain permanent records of this
information. These records should include information regarding the amount,
basis and fair market value of Scheme Shares or Netcom ADSs surrendered, as well
as other relevant information. All US Holders should consult their own tax
advisers regarding any record-keeping and reporting requirements applicable to
them in respect of the Scheme.
Ownership
and Disposition of Unicom Shares or Unicom ADSs
The US Treasury has expressed concerns that parties to whom ADSs are released
may be taking actions that are inconsistent with the claiming of foreign tax
credits. Such actions would also be inconsistent with the claiming of the
reduced rate of tax, as described below, applicable to dividends received by
certain non-corporate US Holders. Accordingly, the analysis of the creditability
of any foreign taxes of any US Holder of Unicom ADSs and the availability of the
reduced tax rate for dividends
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received
by non-corporate US Holders of Unicom ADSs, each described below, could be
affected by actions taken by US Holders to whom the ADSs are
released.
The discussion below assumes that the representations contained in Unicom ADS
Deposit Agreement are true and that the obligations in the Unicom ADS Deposit
Agreement and any related agreement will be complied with in accordance with
their terms. A US Holder of Unicom ADSs should be treated as the holder of the
underlying Unicom Shares represented by those Unicom ADSs for US federal income
tax purposes. Exchanges of Unicom Shares for Unicom ADSs and Unicom ADSs for
Unicom Shares generally will not be subject to US federal income
tax.
Distributions
on Unicom Shares or Unicom ADSs
Subject to the PFIC rules discussed below, the gross amount of any distribution
with respect to Unicom Shares or Unicom ADSs will be taxable to US Holders of
Unicom Shares or Unicom ADSs as a dividend to the extent of Unicom’s current and
accumulated earnings and profits, as determined under US federal income tax
principles. To the extent that the amount of any distribution exceeds Unicom’s
current and accumulated earnings and profits, as determined under US federal
income tax principles, such distribution will first be treated as a tax-free
return of capital, to the extent of such US Holder’s adjusted tax basis in
Unicom Shares or Unicom ADSs, and thereafter as capital gain.
Subject
to certain limitations, dividends paid to non-corporate US Holders, including
individuals, with respect to Unicom Shares or Unicom ADSs may be eligible for a
reduced rate of taxation if Unicom is deemed to be a “qualified foreign
corporation” for US federal income tax purposes and if certain holding period
requirements are satisfied. A non-US corporation generally will be considered to
be a qualified foreign corporation with respect to dividends paid to
non-corporate US investors if (i) it is eligible for the benefits of a
comprehensive tax treaty with the United States that the Secretary of the
Treasury of the United States determines is satisfactory for purposes of this
provision and that includes an exchange of information program or (ii) the
shares or ADSs on which such dividends were paid are readily tradable on an
established securities market in the United States. There is currently no tax
treaty in effect between the United States and Hong Kong. However, at present,
the Unicom ADSs are traded on the New York Stock Exchange, an established
securities market in the United States, and, accordingly, Unicom should be
considered a qualified foreign corporation with respect to dividends paid to
non-corporate US Holders on the Unicom ADSs.
Distributions
will be includable in a US Holder’s gross income on the date actually or
constructively received by the US Holder. Dividends will not be eligible for the
dividends received deduction generally allowed to US corporations in respect of
dividends received from other US corporations.
The
US dollar value of any distribution made to a US Holder by Unicom in Hong Kong
dollars will be determined by reference to the exchange rate in effect on the
date the distribution is actually or constructively received by the US Holder or
the Unicom Depositary, respectively, regardless of whether the payment is in
fact converted into US dollars on that date. If any Hong Kong dollars received
on that date are not converted into US dollars on that date, any subsequent gain
or loss from exchange rate fluctuations with respect to such Hong Kong dollars
will be ordinary income or loss. This gain or loss will generally be treated as
US source gain or loss for US foreign tax credit limitation
purposes.
Dividends
generally will be treated as income from foreign sources for US foreign tax
credit limitation purposes. Subject to the limitations and conditions set forth
in the Code, US Holders may elect to claim a credit against their US federal
income tax liability in the event that any Hong Kong tax is withheld from
dividends received with respect to Unicom Shares or Unicom ADSs. The rules
relating to the determination of the foreign tax credit are complex and
prospective purchasers are urged to consult their personal tax advisers to
determine whether and to what extent they would be entitled to such credit. US
Holders that do not elect or are not permitted to claim foreign tax credits may
instead claim a deduction for any Hong Kong tax withheld.
Sale,
Exchange or Other Disposition of Unicom Shares or Unicom ADSs
Subject
to the PFIC rules discussed below, upon the sale, exchange or other disposition
of Unicom Shares or Unicom ADSs, a US Holder generally will recognise capital
gain or loss equal to the difference between the amount realised upon the sale,
exchange or other disposition of Unicom Shares or Unicom ADSs and the US
Holder’s adjusted tax basis in Unicom Shares or Unicom ADSs. The capital gain or
loss generally will be long-term capital gain or loss if, at the time of sale,
exchange or other disposition, the US Holder has held Unicom Shares or Unicom
ADSs for more than one year. Net long-term capital gains of non-corporate US
Holders, including individuals, are eligible for reduced rates of taxation.
Deductions for capital losses are subject to complex limitations under the Code.
Any such gain or loss that a US Holder recognises generally will be treated as
US source gain or loss for US foreign tax credit limitation
purposes.
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Passive
Foreign Investment Company Rules (PFIC Rules)
Special,
generally unfavourable, US federal income tax rules will apply to US Holders
that hold Unicom Shares or Unicom ADSs if Unicom is a PFIC at any time during
which the US Holder holds Unicom Shares or Unicom ADSs. A non-US corporation
generally is classified as a PFIC for US federal income tax purposes in any
taxable year if (i) at least 75% of its gross income is “passive” income or (ii)
at least 50% of the gross value of its assets (based on an average of the
quarterly values of the assets) is attributable to assets that produce passive
income or are held for the production of passive income.
Unicom
is not expected to be a PFIC in the current taxable year and is not expected to
be a PFIC in future taxable years. However, because this conclusion is a factual
determination that is determined at the close of the taxable year and is subject
to change on an annual basis, there can be no assurances that Unicom will not be
a PFIC for the current taxable year or any future taxable year. US Holders that
hold Unicom Shares or Unicom ADSs should consult their own tax advisers
regarding the US federal income tax consequences if Unicom is or becomes a
PFIC.
Backup
Withholding and Information Reporting
In
general, information reporting requirements will apply to dividends paid to
non-corporate US Holders with respect to Unicom Shares and Unicom ADSs, and to
proceeds received upon the sale, exchange or other disposition of Unicom Shares
or Unicom ADSs by US Holders. Furthermore, backup withholding (currently at a
rate of 28%) may apply to such amounts if a US Holder fails to furnish a correct
taxpayer identification number, to certify that such US Holder is not subject to
backup withholding or to otherwise comply with the backup withholding
requirements.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or credit against a US Holder’s US federal income tax liability, provided
that the US Holder timely furnishes the required information to the IRS. US
Holders should consult their own tax advisers as to their qualification for an
exemption from backup withholding and the procedure for obtaining such an
exemption.
5%
transferee shareholders who intend to enter into gain recognition agreements in
accordance with applicable US Treasury regulations must file such agreements
with their US federal income tax returns for the taxable year of the Scheme, and
will be required to file certain annual information statements with their US
federal income tax returns for each of the first five full taxable years
following the taxable year of the Scheme. Such 5% transferee shareholders should
consult their tax advisers regarding the requirements applicable to
them.
23. COURT
MEETING AND NETCOM EGM
Notices convening the Court Meeting and the Netcom EGM to be held at The
Ballroom, Island Shangri-La, Hong Kong on 17 September 2008 at respectively 4:00
p.m. and 4:30 p.m. (or immediately after the conclusion or adjournment of the
Court Meeting) are set out on pages N-1 to N-4 of this document.
The
High Court has directed that the Court Meeting be held for the purpose of
considering and, if thought fit, passing a resolution to approve the Scheme,
with or without modification. The Scheme will be subject to the approval by the
Disinterested Netcom Shareholders other than the Exempt Prinicpal Traders at the
Court Meeting in the manner referred to in paragraph 4 headed “Conditions of the
Proposals and the Scheme” above in this Explanatory Statement.
Immediately following the Court Meeting, the Netcom EGM will be held for the
purpose of considering and, if thought fit, passing a special resolution to
approve the implementation of the Scheme. All Netcom Shareholders will be
entitled to attend and vote on such special resolution at the Netcom
EGM.
24. PROCEDURES
FOR DEMANDING A POLL AT THE NETCOM EGM
In accordance with article 70(a) of the articles of association of Netcom, at
any general meeting a resolution put to the vote of the meeting shall be decided
on a show of hands unless (before or on the declaration of the result of the
show of hands or on the withdrawal of any other demand for a poll) a poll is
demanded by:
|
|
(i)
|
the
Chairman of the meeting; or
|
|
|
(ii)
|
at
least three Netcom Shareholders present in person (or in the case of a
Netcom Shareholder being a corporation, by its duly authorised
representative) or by proxy and entitled to vote at the meeting;
or
|
-
81 -
|
|
(iii)
|
any
Netcom Shareholder or Netcom Shareholders present in person (or in the
case of a Netcom Shareholder being a corporation, by its duly authorised
representative) or by proxy and representing in the aggregate not less
than one-tenth of the total voting rights of all Netcom Shareholders
having the right to attend and vote at the meeting;
or
|
|
|
(iv)
|
any
Netcom Shareholder or Netcom Shareholders present in person (or in the
case of a Netcom Shareholder being a corporation, by its duly authorised
representative) or by proxy and holding shares conferring a right to
attend and vote at the meeting on which there have been paid-up sums in
the aggregate equal to not less than one-tenth of the total sum paid up on
all shares conferring that right.
|
A poll
shall be taken at such time (being not later than thirty days after the date of
the demand) and in such manner (including the use of ballot or voting papers or
tickets) as the Chairman of the Netcom EGM may appoint. On a poll, every Netcom
Shareholder present at the Netcom EGM shall be entitled to one vote for every
fully paid-up Netcom Share of which he is the holder. The result of such poll
shall be deemed for all purposes to be the resolution of the meeting at which
the poll was so directed or demanded.
25. ACTIONS
TO BE TAKEN
A
pink form of proxy for
use at the Court Meeting and a white form of proxy for use at
the Netcom EGM are enclosed with this document.
Whether
or not you are able to attend the Court Meeting or the Netcom EGM, if you are a
Disinterested Netcom Shareholder (other than an Exempt Principal Trader), you
are strongly urged to complete and sign the enclosed pink form of proxy in respect
of the Court Meeting in accordance with the instructions printed on it and if
you are a Netcom Shareholder, you are strongly urged to complete and sign the
enclosed white form of
proxy in respect of the Netcom EGM in accordance with the instructions printed
on it, and to deposit them, together with the power of attorney or other
authority (if any) under which they are signed or notarially certified copy of
such power of attorney or other authority, at Netcom’s registered office at Room
6701, The Center, 99 Queen’s Road Central, Hong Kong. The pink form of proxy for use at the
Court Meeting should be deposited not later than 4:00 p.m. on 15 September 2008
and, in order to be valid, the white form of proxy for use at the Netcom EGM
should be deposited not later than 4:30 p.m. on 15 September 2008. The
pink form of proxy in
respect of the Court Meeting may alternatively be handed to the Chairman of the
Court Meeting at the Court Meeting if it is not so deposited. The completion and
return of a form of proxy for the Court Meeting or the Netcom EGM will not
preclude you from attending and voting in person at the Court Meeting or the
Netcom EGM. In such event, the relevant form of proxy will be deemed to have
been revoked.
If
a registered or beneficial owner of Netcom Shares in Hong Kong has questions
concerning administrative matters, such as dates, documentation and procedures
relating to the Proposals, please call the share registrar of Netcom,
Computershare Hong Kong Investor Services Limited, at (852) 2862 8648 between
9:00 a.m. and 6:00 p.m. (Hong Kong time) Monday to Friday from 15 August 2008 to
17 September 2008. This helpline cannot and will not provide advice on the
merits of the Proposals or the Scheme or give financial or legal
advice.
If
you are a Netcom ADS Holder, you should refer to paragraph 21 headed
“Information for Netcom Shareholders and Netcom ADS Holders in the United
States” above in this Explanatory Statement for further details.
If
you are a Netcom Optionholder, you should refer to the Option Proposal Letter
for further details.
26. COSTS
OF THE SCHEME
In the
event that the Scheme becomes effective, the costs of the Scheme incurred by
Netcom will be borne by Netcom. The costs of the Scheme and of its
implementation incurred by Netcom are expected to amount to approximately RMB100
million. These primarily consist of fees for financial advisers, legal advisers,
accounting, printing and other related charges.
In the event that the Scheme does not become effective, each of Netcom and
Unicom will bear its own expenses incurred in connection with the
Scheme.
27. FURTHER
INFORMATION
Further information is set out in the Appendices to this Explanatory Statement,
all of which form part of this Explanatory Statement.
28. WHERE
YOU CAN FIND ADDITIONAL INFORMATION
-
82 -
In
addition to the documents available for inspection set out in Appendix VI to
this Explanatory Statement, each of Unicom and Netcom publishes its annual and
interim reports, announcements and other corporate communications on their
websites at www.chinaunicom.com.hk and www.china-netcom.com, respectively, and
on the Hong Kong Stock Exchange’s website at www.hkexnews.hk. Information
published by Unicom and Netcom on the Hong Kong Stock Exchange’s website can be
found on such website by reference to their respective stock codes or stock
names.
Each
of Unicom and Netcom also files annual and other reports and submits other
information with the SEC. The SEC maintains an Internet website that contains
reports and other materials that are filed through the SEC’s Electronic Data
Gathering, Analysis and Retrieval (EDGAR) System. This system can be accessed at
www.sec.gov. Information filed by Unicom and Netcom with the SEC can be found by
reference to their respective corporate names or SEC file numbers. You may also
read and copy any documents filed by Unicom and Netcom at the SEC’s public
reference room located at 100 F Street, N.E., Washington, D.C. 20549, the United
States of America. You can call the SEC at 1-800-SEC-0330 (within the United
States) or 1-202-551-8090 (outside the United States) for further information on
the public reference room and its copy charges.
You
should rely only on the information contained or incorporated by reference in
this document in order to vote your Scheme Shares at the Court Meeting and the
Netcom EGM. Neither Unicom, Netcom, CICC, JPMorgan, Citigroup, Rothschild nor
any of their respective directors or associates has authorised anyone to provide
you with information that is different from what is contained in this document.
This document is dated 15 August 2008. No assumption should be made that the
information contained in this document is accurate as at any date other than the
Latest Practicable Date, and neither the despatch of this document to the Netcom
Shareholders, the Netcom ADS Holders or the Netcom Optionholders nor the payment
of the consideration pursuant to the Proposals shall create any implication to
the contrary.
29. LANGUAGE
The English language text of this document and the accompanying forms of proxy
shall prevail over the Chinese language text in the event of any
inconsistency.
-
83 -
|
APPENDIX I FINANCIAL
INFORMATION ON THE NETCOM
GROUP
|
Except
for the additional information for the year ended 31 December 2005 and the
funding and treasury policies and objectives shown in the paragraph headed
“Liquidity and Capital Resources” in section 4 headed “Management Discussion and
Analysis” and the information shown in section 5 headed “Indebtedness”, section
6 headed “Material Changes” and section 7 headed “Dividends”, the financial
information included in this Appendix I is extracted from the annual report of
Netcom for the year ended 31 December 2007 or the annual report of Netcom on
Form 20-F for the year ended 31 December 2007 filed with the SEC on 22 May 2008
or the announcement of Netcom on 21 April 2008 for the unaudited revenue for the
three months ended 31 March 2008. Unless otherwise defined, capitalised terms in
this Appendix I shall have the meanings set out in the “Definitions” section of
this document.
1. THREE
YEAR FINANCIAL SUMMARY
Due to
the disposal of Guangdong and Shanghai branches of the Netcom Group in 2007, the
operating results of Guangdong and Shanghai branches have been presented as
discontinued operations in accordance with HKFRS 5 issued by HKICPA. Also, the
acquisition of Beijing Telecom P&D Institute by the Netcom Group in 2007 has
been accounted for using merger accounting according to the Accounting Guideline
5 issued by the HKICPA. The financial information for 2005 and 2006 of the
Netcom Group is restated accordingly.
Subject to the adoption of the definitions in this document, the following
financial information for 2006 and 2007 is extracted from the audited
consolidated financial statements of Netcom for the financial year ended 31
December 2007, prepared in accordance with HKFRS, Hong Kong Accounting Standards
(“HKAS”) and interpretations issued by the Hong Kong Institute of Certified
Public Accountants (“HKICPA”). The financial information for 2005 is extracted
from the Financial Summary of the 2007 annual report of Netcom and is
unaudited.
RESULTS
|
Year
ended 31 December
|
|||
|
2005
|
2006
|
2007
|
|
|
(Restated)
|
(Restated)
|
||
|
(RMB)
|
(RMB)
|
(RMB)
|
|
|
(in
millions, except per share and
per
ADS information)
|
|||
|
Continuing
operations:
|
|||
|
Revenues
|
83,927
|
84,194
|
84,005
|
|
Local
usage fees
|
24,440
|
22,059
|
19,989
|
|
Monthly
fees
|
18,170
|
16,546
|
12,387
|
|
Upfront
installation fees
|
1,433
|
1,364
|
1,283
|
|
DLD
usage fees
|
9,773
|
9,495
|
8,769
|
|
ILD
usage fees
|
874
|
819
|
791
|
|
Value-added
services
|
3,970
|
5,341
|
6,114
|
|
Interconnection
fees
|
7,664
|
8,432
|
8,376
|
|
Upfront
connection fees
|
3,405
|
2,406
|
1,517
|
|
Broadband
service
|
7,289
|
9,916
|
13,835
|
|
Other
Internet-related service
|
556
|
516
|
532
|
|
Managed
data service
|
1,621
|
1,413
|
1,284
|
|
Leased
line income
|
2,376
|
2,540
|
2,521
|
|
Information
communications technology services
|
186
|
855
|
3,990
|
|
Other
services
|
2,170
|
2,492
|
2,617
|
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
|||
|
Operating
expense
|
(62,868)
|
(64,643)
|
(66,739)
|
|
Depreciation
and amortisation
|
(24,328)
|
(24,913)
|
(25,495)
|
|
Network,
operations and support
|
(12,610)
|
(13,344)
|
(14,145)
|
|
Staff
cost
|
(11,830)
|
(11,849)
|
(12,223)
|
-
I-1 -
|
Year
ended 31 December
|
|||
|
2005
|
2006
|
2007
|
|
|
(Restated)
|
(Restated)
|
||
|
(RMB)
|
(RMB)
|
(RMB)
|
|
|
(in
millions, except per share and
per
ADS information)
|
|||
|
Selling,
general and administrative
|
(12,726)
|
(12,607)
|
(10,615)
|
|
Other
operating expense
|
(1,374)
|
(1,930)
|
(4,261)
|
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
|||
|
Other
income
|
—
|
621
|
1,221
|
|
Interest
income
|
134
|
135
|
113
|
|
Dividend
income
|
29
|
—
|
—
|
|
Deficit
on revaluation of fixed assets
|
—
|
(1,335)
|
—
|
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
|||
|
Profit
from operations
|
21,222
|
18,972
|
18,600
|
|
Financial
cost
|
(3,346)
|
(3,767)
|
(3,333)
|
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
|||
|
Profit
before taxation
|
17,876
|
15,205
|
15,267
|
|
Taxation
|
(3,526)
|
(3,727)
|
(3,796)
|
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
|||
|
Profit
for the year from continuing operations
|
14,350
|
11,478
|
11,471
|
|
|
=============
|
=============
|
=============
|
|
|
|||
|
Discontinued
operations:
|
|||
|
(Loss)/profit
for the year from discontinued operations
|
(400)
|
1,487
|
624
|
|
|
=============
|
=============
|
=============
|
|
|
|||
|
Profit
for the year
|
13,950
|
12,965
|
12,095
|
|
|
=============
|
=============
|
=============
|
|
|
|||
|
Earnings
per share for profit from continuing operations attributable to
shareholders of Netcom for the year
|
|||
|
Basic
earnings per share
|
2.18
|
1.74
|
1.72
|
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
|||
|
Diluted
earnings per share
|
2.17
|
1.72
|
1.70
|
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
|||
|
(Losses)/earnings
per share for (loss)/profit from discontinued operations attributable to
shareholders of Netcom for the year
|
-
I-2 -
|
Year
ended 31 December
|
|||
|
2005
|
2006
|
2007
|
|
|
(Restated)
|
(Restated)
|
||
|
(RMB)
|
(RMB)
|
(RMB)
|
|
|
(in
millions, except per share and
per
ADS information)
|
|||
|
Basic
(losses)/earnings per share
|
(0.06)
|
0.22
|
0.09
|
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
|||
|
Diluted
(losses)/earnings per share
|
(0.06)
|
0.22
|
0.09
|
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
|||
|
Earnings
per share from operations attributable to shareholders of Netcom for the
year
|
|||
|
Basic
earnings per share
|
2.12
|
1.96
|
1.81
|
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
|||
|
Diluted
earnings per share
|
2.11
|
1.94
|
1.79
|
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
|||
|
Basic
earnings per ADS
|
42.40
|
39.20
|
36.20
|
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
|||
|
Diluted
earnings per ADS
|
42.20
|
38.80
|
35.80
|
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
|||
|
Dividend
proposed after balance sheet date (HK$)
|
3,073
|
3,678
|
3,951
|
|
|
=============
|
=============
|
=============
|
|
|
|||
|
Dividend
per ordinary share (HK$)
|
0.466
|
0.553
|
0.592
|
|
|
=============
|
=============
|
=============
|
-
I-3 -
ASSETS
AND LIABILITIES
|
As
at 31 December
|
|||
|
2005
|
2006
|
2007
|
|
|
(Restated)
|
(Restated)
|
||
|
(RMB)
|
(RMB)
|
(RMB)
|
|
|
(in
millions)
|
|||
|
Fixed
assets
|
168,760
|
168,141
|
156,948
|
|
Construction
in progress
|
6,822
|
6,335
|
3,990
|
|
Other
non-current assets
|
12,865
|
11,380
|
9,982
|
|
Cash
and bank deposits
|
5,065
|
7,728
|
5,395
|
|
Other
current assets
|
9,610
|
10,498
|
10,113
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
assets
|
203,122
|
204,082
|
186,428
|
|
=============
|
=============
|
=============
|
|
|
Short-term
bank loans
|
47,341
|
30,980
|
11,850
|
|
Accounts
payable
|
16,726
|
17,661
|
15,639
|
|
Other
current liabilities
|
34,337
|
42,192
|
47,104
|
|
Long-term
bank and other loans
|
18,143
|
23,219
|
14,425
|
|
Deferred
revenues
|
10,925
|
6,198
|
4,314
|
|
Other
non-current liabilities
|
12,363
|
9,638
|
11,044
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
liabilities
|
139,835
|
129,888
|
104,376
|
|
=============
|
=============
|
=============
|
|
|
Shareholders’
equity
|
63,287
|
74,194
|
82,052
|
|
=============
|
=============
|
=============
|
|
|
Total
liabilities and shareholders’ equity
|
203,122
|
204,082
|
186,428
|
|
=============
|
=============
|
=============
|
|
|
Note:
|
Due
to the disposal of Guangdong and Shanghai branches of the Netcom Group in
2007, the operating results of Guangdong and Shanghai branches have been
presented as discontinued operations in accordance with HKFRS 5 issued by
HKICPA. Also, the acquisition of Beijing Telecom P&D Institute by the
Netcom Group in 2007 which has been accounted for using merger accounting
according to the Accounting Guideline 5 issued by the HKICPA. The
financial information for 2005 and 2006 of the Netcom Group is restated
accordingly. There were no qualifications in the independent auditor’s
report issued by PricewaterhouseCoopers in respect of the original
financial statements of each of the three financial years ended 31
December 2005, 2006 and 2007.
|
-
I-4 -
|
2.
|
AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER
2007
|
Subject to the adoption of the definitions in this document, the following
information is extracted from the audited consolidated financial statements,
prepared in accordance with HKFRS, HKAS and interpretations issued by HKICPA, of
Netcom, for the year ended 31 December 2007:
Consolidated
Income Statement
For
the year ended 31 December 2007
|
Year
ended 31 December
|
|||
|
Note
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
||
|
Restated Note
2
|
|||
|
Continuing
operations:
|
|||
|
Revenues
|
7
|
84,005
|
84,194
|
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Operating
expenses
|
|||
|
Depreciation
and amortisation
|
(25,495)
|
(24,913)
|
|
|
Networks,
operations and support
|
(14,145)
|
(13,344)
|
|
|
Staff
costs
|
15
|
(12,223)
|
(11,849)
|
|
Selling,
general and administrative
|
(10,615)
|
(12,607)
|
|
|
Other
operating expenses
|
(4,261)
|
(1,930)
|
|
|
|
－－－－－－－
|
－－－－－－－
|
|
|
|
|||
|
Total
of operating expenses
|
8
|
(66,739)
|
(64,643)
|
|
|
－－－－－－－
|
－－－－－－－
|
|
|
|
|||
|
Other
income
|
9
|
1,221
|
621
|
|
Interest
income
|
113
|
135
|
|
|
Deficit
on revaluation of fixed assets
|
21(c)
|
—
|
(1,335)
|
|
|
－－－－－－－
|
－－－－－－－
|
|
|
|
|||
|
Profit
from operations
|
18,600
|
18,972
|
|
|
Finance
costs
|
10
|
(3,333)
|
(3,767)
|
|
|
－－－－－－－
|
－－－－－－－
|
|
|
|
|||
|
Profit
before taxation
|
15,267
|
15,205
|
|
|
Taxation
|
11
|
(3,796)
|
(3,727)
|
|
|
－－－－－－－
|
－－－－－－－
|
|
|
|
|||
|
Profit
for the year from continuing operations
|
11,471
|
11,478
|
|
|
|
=============
|
=============
|
|
|
|
|||
|
Discontinued
operations:
|
|||
|
Profit
for the year from discontinued operations
|
26
|
624
|
1,487
|
|
|
=============
|
=============
|
|
|
|
|||
|
Profit
for the year
|
12,095
|
12,965
|
|
|
|
=============
|
=============
|
|
|
|
|||
|
Dividends
proposed after the balance sheet date
|
13
|
3,700
|
3,695
|
|
|
=============
|
=============
|
|
|
|
|||
-
I-5 -
|
Year
ended 31 December
|
|||
|
Note
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
||
|
Restated Note
2
|
|||
|
Earnings
per share for profit from continuing operations attributable to Netcom
Shareholders for the year
|
|||
|
Basic
earnings per Netcom Share
|
14
|
RMB1.72
|
RMB1.74
|
|
|
=============
|
=============
|
|
|
|
|||
|
Diluted
earnings per Netcom Share
|
14
|
RMB1.70
|
RMB1.72
|
|
|
=============
|
=============
|
|
|
|
|||
|
Earnings
per share for profit from discontinued operations attributable to Netcom
Shareholders for the year
|
|||
|
Basic
earnings per share
|
14
|
RMB0.09
|
RMB0.22
|
|
|
=============
|
=============
|
|
|
|
|||
|
Diluted
earnings per Netcom Share
|
14
|
RMB0.09
|
RMB0.22
|
|
|
=============
|
=============
|
|
|
|
|||
|
Earnings
per share from operations attributable to Netcom Shareholders for the
year
|
|||
|
Basic
earnings per Netcom Share
|
14
|
RMB1.81
|
RMB1.96
|
|
|
=============
|
=============
|
|
|
|
|||
|
Diluted
earnings per Netcom Share
|
14
|
RMB1.79
|
RMB1.94
|
|
|
=============
|
=============
|
-
I-6 -
Consolidated
Balance Sheet
As
at 31 December 2007
|
As
at 31 December
|
|||
|
Note
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
||
|
Restated Note
2
|
|||
|
Assets
|
|||
|
Current
assets
|
|||
|
Cash
and bank deposits
|
17
|
5,395
|
7,728
|
|
Accounts
receivable
|
18
|
8,458
|
8,283
|
|
Inventories
and consumables
|
19
|
287
|
416
|
|
Prepayments,
other receivables and other current assets
|
20
|
1,021
|
1,441
|
|
Due
from holding companies and fellow subsidiaries
|
31
|
347
|
358
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Total
current assets
|
15,508
|
18,226
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Non-current
assets
|
|||
|
Fixed
assets
|
21
|
156,948
|
168,141
|
|
Construction
in progress
|
22
|
3,990
|
6,335
|
|
Lease
prepayments
|
23
|
2,494
|
2,364
|
|
Intangible
assets
|
24
|
1,552
|
1,591
|
|
Deferred
tax assets
|
34
|
2,693
|
3,459
|
|
Other
non-current assets
|
25
|
3,243
|
3,966
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Total
non-current assets
|
170,920
|
185,856
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Total
assets
|
186,428
|
204,082
|
|
|
=============
|
=============
|
||
-
I-7 -
|
As
at 31 December
|
|||
|
Note
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
||
|
Restated Note
2
|
|||
|
Liabilities
and equity
|
|||
|
Current
liabilities
|
|||
|
Accounts
payable
|
28
|
15,639
|
17,661
|
|
Accruals
and other payables
|
29
|
2,950
|
3,074
|
|
Short
term commercial paper
|
30(a)(i)
|
20,000
|
9,811
|
|
Short
term bank loans
|
30(a)(ii)
|
11,850
|
30,980
|
|
Current
portion of long term bank and other loans
|
30(b)
|
5,322
|
7,304
|
|
Due
to holding companies and fellow subsidiaries
|
31
|
4,598
|
7,505
|
|
Current
portion of deferred revenues
|
32
|
7,103
|
7,733
|
|
Current
portion of provisions
|
33
|
3,381
|
3,736
|
|
Taxation
payable
|
3,750
|
3,029
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Total
current liabilities
|
74,593
|
90,833
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Net
current liabilities
|
(59,085)
|
(72,607)
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Total
assets less current liabilities
|
111,835
|
113,249
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Non-current
liabilities
|
|||
|
Long
term bank and other loans
|
30(b)
|
14,425
|
23,219
|
|
Corporate
bonds
|
30(c)
|
2,000
|
—
|
|
Due
to holding companies and fellow subsidiaries
|
31
|
6,169
|
5,880
|
|
Deferred
revenues
|
32
|
4,314
|
6,198
|
|
Provisions
|
33
|
2,007
|
2,586
|
|
Deferred
tax liabilities
|
34
|
856
|
1,156
|
|
Other
non-current liabilities
|
12
|
16
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Total
non-current liabilities
|
29,783
|
39,055
|
|
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
liabilities
|
104,376
|
129,888
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Financed
by:
|
|||
|
Share
capital
|
35
|
2,206
|
2,199
|
|
Reserves
|
79,846
|
71,995
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Shareholders’
equity
|
82,052
|
74,194
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Total
liabilities and equity
|
186,428
|
204,082
|
|
|
=============
|
=============
|
-
I-8 -
Balance
Sheet — Netcom
As
at 31 December 2007
|
As
at 31 December
|
|||
|
Note
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
||
|
Assets
|
|||
|
Current
assets
|
|||
|
Cash
and bank deposits
|
17
|
113
|
1,772
|
|
Due
from subsidiaries
|
27
|
10,490
|
9,411
|
|
Prepayments,
other receivables and other current assets
|
20
|
16
|
268
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Total
current assets
|
10,619
|
11,451
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Non-current
assets
|
|||
|
Investments
in subsidiaries
|
27
|
71,000
|
62,937
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Total
assets
|
81,619
|
74,388
|
|
|
=============
|
=============
|
||
|
Liabilities
and equity
|
|||
|
Current
liabilities
|
|||
|
Accruals
and other payables
|
29
|
46
|
136
|
|
Due
to subsidiaries
|
27
|
14,271
|
12,754
|
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
current liabilities
|
14,317
|
12,890
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Net
current liabilities
|
(3,698)
|
(1,439)
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Total
assets less current liabilities
|
67,302
|
61,498
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Non-current
liabilities
|
|||
|
Long
term bank and other loans
|
9
|
—
|
|
|
Due
to holding company and fellow subsidiaries
|
31(c)
|
403
|
—
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Total
non-current liabilities
|
412
|
—
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Total
liabilities
|
14,729
|
12,890
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Financed
by:
|
|||
|
Share
capital
|
35
|
2,206
|
2,199
|
-
I-9 -
|
As
at 31 December
|
|||
|
Note
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
||
|
Reserves
|
37
|
64,684
|
59,299
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Shareholders’
equity
|
66,890
|
61,498
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Total
liabilities and equity
|
81,619
|
74,388
|
|
|
=============
|
=============
|
-
I-10 -
Consolidated
Statement of Changes in Equity
For
the year ended 31 December 2007
|
Attributable
to equity holders of Netcom
|
||||||||
|
Share
capital
|
Share
premium
|
Capital
reserve
|
Statutory
reserve
|
Revaluation
reserve
|
Other
reserve
|
Retained
earnings
|
Total
equity
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
(Note
35)
|
||||||||
|
Balance
as at 1 January 2006
|
2,181
|
42,750
|
387
|
8,550
|
4,101
|
(5,203)
|
10,244
|
63,010
|
|
Adjustments
for the acquisition (Note 2)
|
—
|
—
|
—
|
—
|
—
|
238
|
39
|
277
|
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
|
|
Balance
at 1 January 2006, as restated
|
2,181
|
42,750
|
387
|
8,550
|
4,101
|
(4,965)
|
10,283
|
63,287
|
|
Transfer
to statutory reserve (Note 12)
|
—
|
—
|
—
|
2,406
|
—
|
—
|
(2,406)
|
—
|
|
Appropriation
to statutory reserve (Note 12)
|
—
|
—
|
—
|
855
|
—
|
—
|
(855)
|
—
|
|
Transfers
to retained earnings in respect of depreciation differences on revalued
assets
|
—
|
—
|
—
|
—
|
(1,933)
|
(51)
|
1,984
|
—
|
|
Revaluation
surplus (Note 21)
|
—
|
—
|
—
|
—
|
1,071
|
—
|
—
|
1,071
|
|
Currency
translation differences (i)
|
—
|
—
|
—
|
—
|
—
|
(79)
|
—
|
(79)
|
|
Movement
of deferred tax recognised in equity (Note 34)
|
—
|
—
|
—
|
—
|
(353)
|
—
|
—
|
(353)
|
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
|
|
Net
income/(expense) recognised directly in equity
|
—
|
—
|
—
|
3,261
|
(1,215)
|
(130)
|
(1,277)
|
639
|
|
Profit
for the year from continuing operations
|
—
|
—
|
—
|
—
|
—
|
—
|
11,478
|
11,478
|
|
Profit
for the year from discontinued operations
|
—
|
—
|
—
|
—
|
—
|
—
|
1,487
|
1,487
|
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
|
|
Total
income recognised for 2006
|
—
|
—
|
—
|
3,261
|
(1,215)
|
(130)
|
11,688
|
13,604
|
|
Dividends
for 2005 distributed during the year (Note13)
|
—
|
—
|
—
|
—
|
—
|
—
|
(3,196)
|
(3,196)
|
|
Exercise
of Netcom Options (Note 35)
|
18
|
545
|
(73)
|
—
|
—
|
—
|
—
|
490
|
|
Distributions
to owners
|
—
|
—
|
—
|
—
|
—
|
—
|
(66)
|
(66)
|
|
Share-based
payments
|
—
|
—
|
75
|
—
|
—
|
—
|
—
|
75
|
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
|
|
Balance
as at 31 December 2006
|
2,199
|
43,295
|
389
|
11,811
|
2,886
|
(5,095)
|
18,709
|
74,194
|
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
|
|
(i)
|
Including
accumulated currency translation differences realized upon disposal of
Asia Netcom Corporation Limited amounting to RMB29
million.
|
-
I-11 -
|
Attributable
to equity holders of Netcom
|
||||||||
|
Share
capital
|
Share
premium
|
Capital
reserve
|
Statutory
reserve
|
Revaluation
reserve
|
Other
reserve
|
Retained
earnings
|
Total
equity
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
(Note
35)
|
||||||||
|
Balance
as at 1 January 2007
|
2,199
|
43,295
|
389
|
11,811
|
2,886
|
(5,095)
|
18,709
|
74,194
|
|
Transfer
to statutory reserve (Note 12)
|
—
|
—
|
—
|
1,517
|
—
|
—
|
(1,517)
|
—
|
|
Appropriation
to statutory reserve (Note 12)
|
—
|
—
|
—
|
868
|
—
|
—
|
(868)
|
—
|
|
Transfers
to retained earnings in respect of depreciation differences on revalued
assets
|
—
|
—
|
—
|
—
|
(2,031)
|
(104)
|
2,135
|
—
|
|
Transfers
to retained earnings in respect of revaluation reserve relating to
disposal of Guangdong and Shanghai branches
|
—
|
—
|
—
|
—
|
(69)
|
20
|
49
|
—
|
|
Currency
translation differences
|
—
|
—
|
—
|
—
|
—
|
(15)
|
—
|
(15)
|
|
Movement
of deferred tax recognised in equity (Note 34)
|
—
|
—
|
—
|
—
|
111
|
(664)
|
—
|
(553)
|
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
|
|
Net
income/(expense) recognised directly in equity
|
—
|
—
|
—
|
2,385
|
(1,989)
|
(763)
|
(201)
|
(568)
|
|
Profit
for the year from continuing operations
|
—
|
—
|
—
|
—
|
—
|
—
|
11,471
|
11,471
|
|
Profit
for the year from discontinued operations
|
—
|
—
|
—
|
—
|
—
|
—
|
624
|
624
|
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
|
|
Total
income recognised for 2007
|
—
|
—
|
—
|
2,385
|
(1,989)
|
(763)
|
11,894
|
11,527
|
|
Dividend
related to 2006 distributed during the year (Note 13)
|
—
|
—
|
—
|
—
|
—
|
—
|
(3,600)
|
(3,600)
|
|
Distributions
to owners
|
—
|
—
|
—
|
—
|
—
|
—
|
(48)
|
(48)
|
|
Exercise
of share options (Note 35)
|
7
|
243
|
(31)
|
—
|
—
|
—
|
—
|
219
|
|
Consideration
for the acquisition (Note 1)
|
—
|
—
|
—
|
—
|
—
|
(299)
|
—
|
(299)
|
|
Share-based
payments
|
—
|
—
|
59
|
—
|
—
|
—
|
—
|
59
|
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－－
|
|
|
Balance
as at 31 December 2007
|
2,206
|
43,538
|
417
|
14,196
|
897
|
(6,157)
|
26,955
|
82,052
|
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
|
-
I-12 -
Consolidated
Statement of Cash Flow
For
the year ended 31 December 2007
|
Year
ended 31 December
|
|||
|
Note
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
||
|
Restated Note
2
|
|||
|
Cash
flows from operating activities
|
|||
|
Net
cash inflows from operations
|
38(a)
|
39,309
|
39,156
|
|
Interest
received
|
113
|
136
|
|
|
Interest
paid
|
(2,856)
|
(3,564)
|
|
|
Profits
tax paid
|
(4,107)
|
(3,678)
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Cash
inflow from operating activities of continuing
operations
|
32,459
|
32,050
|
|
|
Cash
inflow from operating activities of discontinued
operations
|
26
|
388
|
2,085
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Net
cash inflow from operating activities
|
32,847
|
34,135
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Cash
flows from investing activities
|
|||
|
Purchase
of fixed assets and construction in progress
|
(20,488)
|
(24,064)
|
|
|
Prepayments
for leased network capacity
|
—
|
(318)
|
|
|
Prepayments
for leased land
|
(196)
|
(178)
|
|
|
Sale
of fixed assets
|
65
|
127
|
|
|
Net
decrease in time deposits with maturity over three
months
|
14
|
7
|
|
|
Other
income
|
1,467
|
375
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Cash
outflow from investing activities of continuing
operations
|
(19,138)
|
(24,051)
|
|
|
Cash
inflow/(outflow) from investing activities of discontinued
operations
|
26
|
3,103
|
(921)
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Net
cash outflow from investing activities
|
(16,035)
|
(24,972)
|
|
|
=============
|
=============
|
||
-
I-13 -
|
Year
ended 31 December
|
|||
|
Note
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
||
|
Restated Note
2
|
|||
|
Cash
flows from financing activities
|
|||
|
New
bank loans and other loans
|
66,396
|
89,002
|
|
|
Issue
of short-term commercial paper
|
20,000
|
9,676
|
|
|
Issue
of corporate bonds
|
2,000
|
—
|
|
|
Repayment
of short-term commercial paper
|
(9,676)
|
—
|
|
|
Repayment
of bank loans
|
(92,390)
|
(98,512)
|
|
|
Capital
element of finance lease payments
|
(890)
|
(1,347)
|
|
|
Payment
of prior years distribution to owner
|
(1,180)
|
(630)
|
|
|
Payment
to ultimate holding company for the acquisition of Beijing Telecom P&D
Institute
|
(299)
|
—
|
|
|
Payment
to ultimate holding company for the acquisition of New Horizon (Note
1)
|
(1,960)
|
(1,960)
|
|
|
Dividend
payment
|
(3,600)
|
(3,196)
|
|
|
Loans
from fellow subsidiaries and holding company
|
2,249
|
—
|
|
|
Issue
of shares upon exercise of share options
|
219
|
490
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Cash
outflow from financing activities of continuing
operations
|
(19,131)
|
(6,477)
|
|
|
Cash
inflow from financing activities of discontinued
operations
|
26
|
—
|
—
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Net
cash outflow from financing activities
|
(19,131)
|
(6,477)
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Cash
flows from continuing operations
|
(5,810)
|
1,522
|
|
|
Cash
flows from discontinued operations
|
3,491
|
1,164
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Increase/(decrease)
in cash and cash equivalents
|
(2,319)
|
2,686
|
|
|
=============
|
=============
|
||
|
Cash
and cash equivalents at beginning of year
|
7,623
|
4,937
|
|
|
=============
|
=============
|
||
|
Cash
and cash equivalents at end of year
|
17
|
5,304
|
7,623
|
|
=============
|
=============
|
-
I-14 -
1 THE
NETCOM GROUP AND ITS PRINCIPAL ACTIVITIES
Background
of the Netcom Group
Netcom
was incorporated in the Hong Kong as a limited liability company under the Hong
Kong Companies Ordinance, the Netcom Shares were listed on the Hong Kong Stock
Exchange on 17 November 2004 and the Netcom ADSs were listed on New York Stock
Exchange Inc. on 16 November 2004.
Netcom,
China Netcom (Holding) Company Limited (“China Netcom Holding”) and Netcom
Parent underwent reorganisation on 30 June 2004 (“Listing Reorganisation”).
Immediately after the Listing Reorganisation, Netcom Parent became Netcom’s
ultimate holding company.
Pursuant
to a resolution passed at the extraordinary general meeting of the Netcom
Shareholders on 25 October 2005, Netcom acquired the principal
telecommunications operations, assets and liabilities in the four northern
provinces/autonomous region, namely Shanxi Province, Neimenggu Autonomous
Region, Jilin Province and Heilongjiang Province from Netcom Parent (the
“Acquisition of New Horizon”). The consideration for the Acquisition of New
Horizon was determined at RMB12,800 million. The consideration consists of an
initial cash payment of RMB3,000 million and deferred payments of RMB9,800
million. The deferred payments will be settled in half-yearly installments over
five years. The interest charged on the deferred payments is to be calculated at
5.265% per annum.
Following
the Listing Reorganisation and the Acquisition of New Horizon, the Netcom Group
is the dominant provider of fixed line voice and value-added services, broadband
and other internet-related services, information communications technology
services, business and data communications services and advertising and media
services in ten northern provinces, municipalities and autonomous region in the
PRC, namely Beijing Municipality, Tianjin Municipality, Hebei Province, Liaoning
Province, Shandong Province, Henan Province, Shanxi Province, Neimenggu
Autonomous Region, Jilin Province and Heilongjiang Province. The Netcom Group
also provided telecommunications services to selected business and residential
customers in two southern municipality and province, namely Shanghai
Municipality and Guangdong Province in the PRC.
On
2 June 2006, the Netcom Group entered into an agreement with third party buyers
to dispose of its entire interest in the Asia Netcom Corporation Limited (“ANC
Group”) for an aggregate cash consideration of US$168.84 million, at fair value
determined by both parties. The transaction was completed on 22 August 2006. For
detailed information, please refer to note 26.
On
15 January 2007, Netcom’s wholly owned subsidiary, China Netcom (Group) Company
Limited (“CNC China”), entered into an assets transfer agreement with its
ultimate holding company, Netcom Parent. 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 14 February 2007, the independent shareholders passed an
ordinary resolution to approve the disposal. The disposal was completed on 28
February 2007 upon the approval granted from the Ministry of Information
Industry (“MII”). After the disposal of the Guangdong and Shanghai branches, the
Netcom Group only provides telecommunications operations in the ten northern
provinces, municipalities and autonomous region. For detailed information,
please refer to note 26.
On
5 December 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 31 December 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 Netcom
Parent. For detailed information, please refer to note 2.
Currently,
the Netcom 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, personalized ring etc.;
and
|
|
|
(c)
|
Interconnection
services provided to other domestic telecommunications service providers
including the fellow subsidiaries owned by Netcom Parent 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
The
financial statements have been prepared in accordance with HKFRS, HKAS and
interpretations issued by HKICPA. They have also been prepared in accordance
with the disclosure requirements of the Companies Ordinance and Rules Governing
the Listing Securities on The Stock Exchange of Hong Kong Limited. They have
been prepared under the historical cost convention modified by the revaluation
of certain fixed assets as explained in the accounting policies in Note 4 below,
and on a going concern basis.
A
significant percentage of the Netcom 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
Netcom Group’s short term borrowings have been rolled over upon maturity.
-
I-15 -
In
addition, on 30 April 2007 and 18 September 2007, the Netcom Group issued
commercial paper to raise additional funding of total RMB20 billion. On 8 June
2007, the Netcom Group issued corporate bonds to raise additional funding of
RMB2 billion. Based on the Netcom Group’s history of obtaining financing, its
relationship with its bankers and its operating performance, the Board considers
that the Netcom 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.
On
2 June 2006, the Netcom Group entered into an agreement with third party buyers
to dispose of the entire interests in the ANC Group and the disposal was
completed on 22 August 2006. On 15 January 2007, CNC China entered into an
assets transfer agreement with Netcom Parent to dispose of its assets and
liabilities in relation to its telecommunications operations in Guangdong and
Shanghai branches in the PRC and the disposal was completed on 28 February 2007.
In accordance with HKFRS 5 “Non-current assets held for sale and discontinued
operations” issued by the HKICPA, the results and cash flows of the operations
of the ANC Group and the Guangdong and Shanghai branches have been presented as
discontinued operations. The 2006 comparative figures in the income statement
and statement of cash flow were restated to reflect the disposal of Guangdong
and Shanghai branches accordingly. For detailed information, please refer to
note 26.
On
5 December 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 Netcom Parent.
Since Netcom Parent is the ultimate holding company of the Netcom Group, the
acquisition is a business combination under common control. Therefore, the
Netcom 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 Netcom Group from the earliest comparative
period presented. Accordingly, the financial information for year 2006 has been
restated.
The
impact of the restatement is summarized as below.
|
Year
ended 31 December 2006
|
|||||
|
Originally
stated
|
Disposal
of Guangdong and Shanghai Branches
|
Acquisition of
Beijing Telecom P&D Institute
|
Elimination
of intercompany transactions
|
Restated
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
Continuing
operations:
|
|||||
|
Revenues
|
86,921
|
(3,222)
|
165
|
330
|
84,194
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Profit
for the year from continuing operation
|
11,141
|
332
|
27
|
(22)
|
11,478
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
|
Discontinued
operations:
|
|||||
|
Profit/(loss)
from discontinued operations
|
1,819
|
(332)
|
—
|
—
|
1,487
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
|
Profit
for the year
|
12,960
|
—
|
27
|
(22)
|
12,965
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
|
Net
cash inflow from operating activities
|
34,133
|
—
|
20
|
(18)
|
34,135
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Net
cash outflow from investing activities
|
(24,991)
|
—
|
(2)
|
21
|
(24,972)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Net
cash outflow from financing activities
|
(6,447)
|
—
|
(30)
|
—
|
(6,477)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
current assets at 31 December 2006
|
18,059
|
—
|
218
|
(51)
|
18,226
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
assets at 31 December 2006
|
203,835
|
—
|
318
|
(71)
|
204,082
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
current liabilities at 31 December 2006
|
90,802
|
—
|
80
|
(49)
|
90,833
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
liabilities at 31 December 2006
|
129,857
|
—
|
80
|
(49)
|
129,888
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Shareholders’
equity at 31 December 2006
|
73,978
|
—
|
238
|
(22)
|
74,194
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
-
I-16 -
3 CHANGES
IN ACCOUNTING POLICIES
(a) Standards,
amendment and interpretations effective in 2007
HKFRS
7, ‘Financial instruments: Disclosures’, and the complementary amendment to HKAS
1, ‘Presentation of financial statements — Capital disclosures’, introduces new
disclosures relating to financial instruments and does not have a material
impact on the classification and valuation of the Netcom Group’s financial
instruments.
HK(IFRIC)
— Int 8, ‘Scope of HKFRS 2’, requires consideration of transactions involving
the issue of equity instruments, where the identifiable consideration received
is less than the fair value of the equity instruments issued in order to
establish whether or not they fall within the scope of HKFRS 2. This standard
does not have any impact on the Netcom Group’s financial
statements.
HK(IFRIC)
— Int 10, ‘Interim financial reporting and impairment’, prohibits the impairment
losses recognised in an interim period on goodwill and investments in equity
instruments and in financial assets carried at cost to be reversed at a
subsequent balance sheet date. This standard does not have any impact on the
Netcom Group’s financial statements.
(b) Interpretation
early adopted by the Netcom Group
HK(IFRIC)
— Int 13, ‘Customer loyalty programmes’ (effective from 1 July 2008) was early
adopted. HK(IFRIC) - Int 13 clarifies that where goods or services are sold
together with a customer loyalty incentive (for example, loyalty points or free
products), the arrangement is a multiple-element arrangement and the
consideration receivable from the customer is allocated between the components
of the arrangement using fair values. The Netcom Group only carried out a
limited customer loyalty program in 2007 and thus it has no material impact on
the financial statements of the Netcom Group.
(c) Standards,
amendments and interpretations effective in 2007 but not relevant
The following standards, amendments and interpretations to published standards
are mandatory for accounting periods beginning on or after 1 January 2007 but
they are not relevant to the Netcom Group’s operations:
|
|
●
|
HK(IFRIC)
— Int 7, ‘Applying the restatement approach under HKAS 29, Financial
reporting in hyper-inflationary
economies’;
|
|
|
●
|
HK(IFRIC)
— Int 9, ‘Re-assessment of embedded derivatives’;
and
|
|
|
●
|
HKFRS
4 (revised) — ‘Amendment to ‘Financial guarantee
contracts’.
|
|
(d)
|
Standards,
amendments and interpretations to existing standards that are not yet
effective and have not been early adopted by the Netcom
Group
|
The following standards, amendments and interpretations to existing standards
have been published and are mandatory for the Netcom Group’s accounting periods
beginning on or after 1 January 2008 or later periods, but the Netcom Group have
not early adopted them:
|
|
●
|
HK(IFRIC)
— Int 11, ‘HKFRS 2 — Group and treasury share transactions’. HK(IFRIC) —
Int 11 provides guidance on whether share-based transactions involving
treasury shares or involving Group entities (for example, options over a
parent’s shares) should be accounted for as equity-settled or cash-settled
share-based payment transactions in the stand-alone accounts of the parent
and Group companies. This interpretation is not expected to have an impact
on the Netcom Group’s financial
statements.
|
|
|
●
|
HK(IFRIC)
— Int 12, ‘Service concession arrangement’ (effective from 1 January
2008). IFRIC 12 applies to contractual arrangements whereby a private
sector operator participates in the development, financing, operation and
maintenance of infrastructure for public sector services. IFRIC 12, is not
expected to have an impact on the Netcom Group’s financial
statements.
|
|
|
●
|
HKAS
23 (Amendment), ‘Borrowing costs’ (effective from 1 January 2009). The
amendment requires an entity to capitalise borrowing costs directly
attributable to the acquisition, construction or production of a
qualifying asset (one that takes a substantial period of time to get ready
for use or sale) as part of the cost of that asset. The option of
immediately expensing those borrowing costs will be removed. Since the
Netcom Group does not expense those borrowing cost under the current
accounting policies, HKAS 23 (Amendment) has no impact on the Netcom
Group.
|
|
|
●
|
HKFRS
8, ‘Operating segments’ (effective from 1 January 2009). HKFRS 8 replaces
HKAS 14 and aligns segment reporting with the requirements of the US
standard SFAS 131, ‘Disclosures about segments of an enterprise and
related information’. The new standard requires a ‘management approach’,
under which segment information is presented on the same basis as that
used for internal reporting purposes. The financial statements of the
Netcom Group are presented on the same basis as that used for internal
reporting purpose. Adoption of HKFRS 8 will not have significant impact on
the Netcom Group.
|
|
|
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HK(IFRIC)
— Int 14, ‘HKAS 19 — The limit on a defined benefit asset, minimum funding
requirements and their interaction’ (effective from 1 January 2008).
HK(IFRIC) — Int 14 provides guidance on assessing the limit in IAS/HKAS 19
on the amount of the surplus that can be recognised as an asset. It also
explains how the pension asset or liability may be affected by a statutory
or contractual minimum funding requirement. The Netcom Group will apply
HK(IFRIC) — Int 14 from 1 January 2008, but it is not expected to have any
impact on the Netcom Group’s
accounts.
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4 PRINCIPAL
ACCOUNTING POLICIES
(a) Basis
of consolidation
Acquisitions of businesses under common control are accounted for using merger
accounting in accordance with AG 5 issued by HKICPA. The acquired assets are
stated at carrying amounts as if the acquired assets have been held by Netcom
from the beginning of the earliest period presented.
When
a subsidiary is disposed, the difference between the proceeds from the disposal
of the subsidiary and its carrying amount as of the date of disposal,
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including
the cumulative amount of any exchange differences that relates to the subsidiary
recognised in equity is recognised in the income statement as the gain or loss
on the disposal of the subsidiary.
All significant intercompany transactions and balances within the Netcom Group
are eliminated on consolidation.
(b) Subsidiaries
Subsidiaries are those entities in which Netcom, directly or indirectly,
controls the composition of the board of directors, controls more than half the
voting power or holds more than half of the issued share capital.
In
Netcom’s balance sheet, the investments in subsidiaries are stated at cost less
provision for impairment losses. The results of subsidiaries are accounted for
by Netcom on the basis of dividends received and receivables.
(c) Revenue
recognition
(i) The
Netcom Group’s revenues are recognised as follows:
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Revenues
derived from local, domestic long distance (“DLD”) and international long
distance (“ILD”) telephone usage, which vary depending on the day, the
time of day, the distance and duration of the call and the tariffs, are
recognised when the services are provided to
customers.
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Monthly
telephone service fees are recognised in the period during which the
telephone services are provided to
customers.
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Upfront
connection and installation fees received are deferred and recognised over
the expected customer relationship period of 10 years. With effect from 1
July 2001, no further upfront fees for connection were charged to
customers.
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Revenues
from the sale of prepaid calling cards are deferred and recognised as the
cards are consumed by customers.
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Revenues
from value-added communication services such as personalized ring and
caller number display are recognised when the services are provided to
customers.
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Revenues
from the provision of broadband and other Internet-related services and
managed data services are recognised when the services are provided to
customers.
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Revenues
from information communications technology services are recognised when
goods are delivered to the customers (which generally coincides with the
time when the customers have accepted the goods and the related risks and
rewards of ownership have been transferred to the customers) or when
services are rendered to the
customers.
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Interconnection
fees from domestic and foreign telecommunications operators are recognised
when the services are rendered as measured by the minutes of traffic
processed.
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Lease
income from the leasing of lines and customer-end equipment is recognised
over the term of the lease. Lease income from other domestic
telecommunications operators and business customers for the usage of the
Netcom Group’s fixed line telecommunications networks is measured by the
number of lines leased and the agreed upon rate per line leased. The lease
arrangements are primarily determined on a year to year
basis.
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Certain
PHS bundled service contracts comprise the provision of PHS services and
handsets to customers, under which customers either prepay a certain
amount of service fee or commit to spend a minimum monthly service fee for
a designated period in order to receive a free handset. When all of the
following criteria are met, PHS handsets and related services are
separately recognised as revenues arising from local, DLD, or ILD services
fees and sales of handsets according to their relative fair values. When
any one of the following criteria is not met, total revenues from PHS
bundled service contracts are recognised on a systematic basis to match
the shorter of the pattern of usage of the PHS services by customers and
the minimum non-cancellable contractual period. See Note 4(u)(ii) for the
policy on accounting for the cost of the
handsets.
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i)
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PHS
handsets and relative services have value on a stand-alone
basis;
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ii)
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Objective
and reliable fair value of PHS handsets and relative services
exists;
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iii)
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In
arrangements that include a general right of refund for the delivered
item, performance of the undelivered item is considered probable and
substantially in the Netcom Group’s
control.
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(ii) Interest income
Interest income is recognised on a time proportion basis, taking into account
the principal amounts outstanding and the interest rates
applicable.
(iii) Dividend income
Dividend income is recognised when the right to receive payment is
established.
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I-18 -
(d) Interest
expenses
Interest expense attributable to the acquisition, construction or production of
an asset that necessarily takes a substantial period of time to get ready for
its intended use or sale are capitalized as part of the cost of that
asset.
All
other interest expenses are charged to the income statement in the year in which
they are incurred.
(e) Interconnection
charges
Interconnection
charges represent amounts incurred for the use of other telecommunications
operators’ networks for facilitating the completion of calls that originate from
the Netcom Group’s fixed line telecommunications networks. Interconnection
charges are recognised on an accrual basis. Interconnection charges with
domestic operators and the fellow subsidiaries of the Netcom Group are accrued
based on actual amounts, while those with overseas operators are accrued based
on the actual amounts, if known, or the Netcom Group’s estimates.
(f) Translation
of foreign currencies
(i) Functional
currency
Items included in the financial statements of each of the Netcom Group’s
entities are measured using the currency of the primary economic environment in
which the entity operates (the “functional currency”), which is
Renminbi.
(ii) Transactions and
balances
Transactions in foreign currencies are translated at exchange rates ruling at
the transaction dates. Monetary assets and liabilities expressed in foreign
currencies at the balance sheet dates are translated at rates of exchange ruling
at the balance sheet dates. Exchange differences arising in these cases are
dealt with in the income statement.
(iii) The Netcom Group
The results and financial position of all the Netcom Group entities that have a
functional currency different from the presentation currency are translated into
the presentation currency as follows:
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Assets
and liabilities for each balance sheet presented are translated at the
closing rate at the date of that balance
sheet;
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●
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Income
and expenses for each income statement are translated at average exchange
rates (unless this average is not a reasonable approximation of the
cumulative effect of the rates prevailing on the transaction dates, in
which case income and expenses are translated at the dates of the
transactions); and
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All
resulting exchange differences are recognised as a separate component of
equity.
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On
consolidation, exchange differences arising from the translation of the net
investment in foreign entities, and of borrowings and other currency instruments
designated as hedges of such investments, are taken to shareholders’ equity.
When a foreign operation is sold, such exchange differences are recognised in
the income statement as part of the gain or loss on disposal.
(g) Cash
and cash equivalents
Cash and cash equivalents, comprising cash on hand, deposits held at call with
banks and cash investments with original maturities of three months or less are
carried at cost.
(h)
Accounts receivable and other receivables
Accounts and other receivables are recognised initially at fair value and
subsequently measured at amortized cost using the effective interest method,
less provision for impairment. A provision for impairment of accounts and other
receivables is established when there is objective evidence that the Netcom
Group will not be able to collect all amounts due according to the original
terms of receivables. The amount of the provision is the difference between the
asset’s carrying amount and the present value of estimated future cash flows,
discounted at the original effective interest rate. The amount of the provision
is recognised in the income statement.
(i) Inventories
and consumables
Inventories comprise mainly telephone handsets and are stated at the lower of
cost and net realizable value on a first-in, first-out basis, after provisions
for obsolescence. Net realizable value is the estimated selling price in the
ordinary course of business, less applicable variable selling
expenses.
Consumables
consist of materials and supplies used in maintaining the Netcom Group’s
telecommunication networks and are charged to the income statement when brought
into use. Consumables are valued at cost less any provision for
obsolescence.
(j) Lease
prepayments
(i) Lease prepayments for
land
Lease prepayments for land represent payments for land use rights. Lease
prepayments for land are stated at cost initially and expensed on a straight
line basis over the lease period.
(ii) Lease prepayments for network
capacity
Lease
prepayments for network capacity represent payments for network capacity on an
indefeasible right of use basis for Netcom’s own use. Lease prepayments for
network capacity are stated at cost initially and expensed on a straight-line
basis over the lease period.
(k) Fixed
assets
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I-19 -
(i) Construction-in-progress
Construction-in-progress represents buildings, telecommunications networks
plant, transmission and switching equipment under construction and pending
installation, and is stated at cost less impairment losses. Cost comprises
direct costs of construction including borrowing costs attributable to the
construction during the period of construction. When the asset being constructed
becomes available for use, the construction-in-progress is transferred to the
appropriate category of fixed assets.
(ii) Other fixed
assets
Other fixed
assets are initially stated at cost less accumulated depreciation and
accumulated impairment losses. Historical cost includes expenditure that is
directly attributable to the acquisition of the items. The subsequent costs are
included in the assets’ carrying amount or recognised as a separate asset, as
appropriate, only when it is probable that future economic benefits associated
with the item will flow to the Netcom Group and the cost of the item can be
measured reliably. Any other costs incurred in restoring fixed assets are
charged to the income statement as incurred.
Buildings subsequent to initial recognition are stated at cost less accumulated
impairment losses and depreciated over their expected useful lives.
(iii)
Revaluations
Fixed assets
other than buildings are carried at their revalued amounts. Revalued assets are
stated at fair value as of the revaluation date less accumulated depreciation.
When an item of fixed asset is revalued, any accumulated depreciation at the
date of the revaluation is restated proportionately together 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.
Increases in valuation are credited to the revaluation reserve. Decreases in
valuation are first set off against any revaluation surplus on earlier
valuations in respect of the same item and thereafter are debited to operating
profit. Any subsequent increases are credited to operating profit up to the
amount previously debited. Each year the difference between depreciation based
on the revalued carrying amount of the asset expensed in the income statement
and depreciation based on the asset’s original cost is transferred from the
revaluation reserve to retained earnings.
Revaluations on fixed assets will be performed with sufficient regularity by
independent valuers and in each of the intervening years, valuations will be
undertaken by executives of the Netcom Group.
(iv)
Depreciation
Fixed
assets are depreciated at rates sufficient to write off their costs or revalued
amounts less accumulated impairment losses and estimated residual values over
their estimated useful lives on a straight-line basis. The principal useful
lives are as follows:
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Buildings
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8-30
years
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Telecommunications
networks and equipment
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5-10
years
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Furniture,
fixture, motor vehicles and other equipment
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5-10
years
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The
useful lives and estimated residual values are reviewed and modified
periodically at every balance sheet date.
(v) Gain or loss on sale of fixed
assets
The
gain or loss on disposal of a fixed asset is the difference between the net
sales proceeds and the carrying amount of the relevant asset, and is recognised
in the income statement, except where the fixed asset is carried at valuation.
The relevant portion of the revaluation reserve realized in respect of previous
valuations is transferred to retained earnings and is shown as a movement in
reserves.
(l) Impairment
of assets
Assets that are subject to amortisation are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recognised for the amount by which the
asset’s carrying amount exceeds its recoverable amount. The recoverable amount
is the higher of an asset’s fair value less costs to sell and value in use. For
the purpose of assessing impairment, assets are grouped at the lowest levels for
which there are separately identifiable cash flows (cash-generating
units).
(m) Assets
held under leases
(i) Finance leases
Leases
of assets where the Netcom Group has substantially all the risks and rewards of
ownership are classified as finance leases. Finance leases are capitalized upon
commencement of the lease at the lower of the fair value of the leased assets
and the present value of the minimum lease payments. Each lease payment is
allocated between the liability and finance charges so as to achieve a constant
rate on the finance balance outstanding. The corresponding rental obligations,
net of finance charges, are included in current and non-current borrowings. The
interest element of the finance cost is recognised in the income statement over
the lease period so as to produce a constant periodic rate of interest on the
remaining balance of the liability for each period.
(ii)
Operating
leases
Leases
in which a significant portion of the risks and rewards of ownership are
retained by the lessor are classified as operating leases. Payments made under
operating leases (net of any incentives received from the lessor) are expensed
in the income statement on straight-line basis over the period of the
lease.
(n) Intangible
assets
(i) Purchased
software
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I-20 -
Expenditure
on purchased software is capitalized and amortized using the straight-line
method over the expected useful lives of the software, which vary from two to
five years.
(ii) Sponsorship fee
The
sponsorship fee for the 2008 Beijing Olympic Games has been capitalized and
amortized on a straight-line basis over 4 years, being the estimated beneficial
period under the sponsorship program. The cost of the intangible asset is
calculated based on the expected cash payment and the fair value of the services
to be provided.
(o) Accounts
payable
Accounts
payable are recognised initially at fair value and subsequently measured at
amortised cost using the effective interest method.
(p) Borrowings
Borrowings
are recognised initially at fair value, net of transaction costs incurred.
Borrowings are subsequently stated at amortised cost; any difference between the
proceeds (net of transaction costs) and the redemption value is recognised in
the income statement over the period of the borrowings using the effective
interest method.
Borrowings are classified as current liabilities unless the Netcom Group has an
unconditional right to defer settlement of the liability for at least 12 months
after the balance sheet date.
(q) Provisions
Provisions are recognised when the Netcom Group has a present legal or
constructive obligation as a result of past events, it is probable that an
outflow of resources will be required to settle the obligation, and a reliable
estimate of the amount can be made. Provisions are not recognised for operating
losses arising in future periods.
Where there are a number of similar obligations, the likelihood that an outflow
will be required in settlement is determined by considering the class of
obligations as a whole. A provision is recognised even if the likelihood of an
outflow with respect to any one item included in the same class of obligations
may be small.
Provisions are measured at the present value of the expenditures expected to be
required to settle the obligation using a pre-tax rate that reflects current
market assessments of the time value of money and the risks specific to the
obligation. The increase in the provision due to passage of time is recognised
in the income statement.
(r) Share
capital
Ordinary shares are classified as equity.
Where shares are issued, any consideration received (net of related income tax
effects) is included in equity attributable to Netcom’s equity
holders.
(s) Employee
benefits
(i) Pension
obligations
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(a)
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Employees
in the PRC are entitled to retirement benefits equal to a fixed proportion
of their salary at their normal retirement age which is paid by the PRC
government. As stipulated by the regulations of the PRC, the subsidiaries
in the PRC make contributions to the basic defined contribution pension
plans organized by their respective municipal governments under which they
are governed. The Netcom Group is required to make such contributions to
these plans at a rate of 20% of the salaries, bonuses and certain
allowances of the employees. The Netcom Group has no other material
obligation for post-retirement benefits beyond these payments as they fall
due. Payments made under these plans are expensed as
incurred.
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(b)
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The
Netcom Group also operates a mandatory provident fund scheme (“the MPF
scheme”) under the Hong Kong Mandatory Provident Fund Schemes Ordinance
for employees employed under the jurisdiction of the Hong Kong Employment
Ordinance. The MPF scheme is a defined contribution retirement scheme
administered by independent trustees. Under the MPF scheme, the employer
and its employees are each required to make contributions to the scheme at
5% of the employees’ relevant income, subject to a cap of monthly relevant
income of HK$20,000. Payments are expensed as
incurred.
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(ii) Early retirement
benefits
Early retirement benefits are recognised as expenses when the Netcom Group
reaches agreement with the relevant employees for early retirement.
(iii) Employee housing
benefits
One-off cash housing subsidies paid to PRC employees are charged to the income
statement in the year in which it is determined that the payment of such
subsidies is probable and the amounts can be reasonably estimated (see Note
33).
PRC
full-time employees of the Netcom Group participate in various
government-sponsored housing funds. The Netcom Group contributes on a monthly
basis to these funds based on certain percentages of the salaries of the
employees. The Netcom Group’s liability in respect of these funds is limited to
the contributions payable in each period. Contributions to these housing funds
are expensed as incurred.
(iv) Netcom Share Option
Scheme
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I-21 -
The Netcom
Group operates an equity-settled, share-based compensation plan. The fair value
of the employee services received in exchange for the grant of the options is
recognised as an expense. Fair values of the options with different vesting
periods are determined separately. The total amount to be expensed over the
vesting period is determined by reference to the fair value of the Netcom
Options granted, excluding the impact of any non-market vesting conditions (for
example, profitability and sales growth targets). Non-market vesting conditions
are included in assumptions about the number of Netcom Options that are expected
to become exercisable. At each balance sheet date, the entity revises its
estimates of the number of Netcom Options that are expected to become
exercisable. It recognises the impact of the revision of original estimates, if
any, in the income statement, and a corresponding adjustment to equity over the
remaining vesting period.
When the
Netcom Option is exercised, the consideration received after deduction of
transaction cost directly attributed to the exercise is recorded in share
capital (nominal value) and share premium.
(t) Deferred
taxation
Deferred
taxation is provided in full, using the liability method, on temporary
differences arising between the tax bases of assets and liabilities and their
carrying amounts in the financial statements. Tax rates enacted or substantially
enacted at the balance sheet date are used to determine deferred taxation.
Deferred tax assets are recognised to the extent that it is probable that future
taxable profit will be available against which the temporary differences can be
utilized.
(u) Other
non-current assets
(i) Deferred installation
costs
The
direct incremental costs associated with the installation of fixed line services
are deferred and expensed to the income statement over the expected customer
relationship period of 10 years except when the direct incremental costs exceed
the corresponding upfront installation fees. In such cases, the excess of the
direct incremental costs over the installation fees are recorded immediately as
expenses in the income statement.
(ii) Subscriber acquisition
costs
As
shown in note 4(c)(i), when certain bifurcation conditions are met, revenue
attributable to handsets given to customers under bundled service contracts is
recognised separately in the income statement of the period the contracts are
entered into. The cost of these handsets is expensed immediately to the income
statement in the same period. When any one of the aforementioned conditions is
not met, the costs of handsets given to customers under bundled service
contracts are deferred as subscriber acquisition costs and expensed to the
income statement on a systematic basis to match with the pattern of the customer
service income over the contract period.
(iii)
Prepaid network
capacities
Prepayments for the network capacities purchased on an indefeasible rights to
use (“IRU”) basis for resale are capitalized and expensed over the corresponding
lease period.
(v) Discontinued
operations
A discontinued operation is a component of the Netcom Group that may be a major
line of business or geographical area of operations that has been disposed or is
held for sale. The result of that component is separately reported as
“discontinued operations” in the income statement. The comparative income
statement and cashflow statement are restated as if the operation had been
discontinued from the start of the comparative period. The assets and
liabilities of such component classified as “discontinued operations” or “held
for sale” is presented separately in the assets and liabilities, respectively,
of the consolidated balance sheet, from the date it is first determined to be
discontinued or held for sale.
(w) Contingent
liabilities
A contingent liability is a possible obligation that arises from past events and
whose existence will only be confirmed by the occurrence or non-occurrence of
one or more uncertain future events not wholly within the control of the Netcom
Group. It can also be a present obligation arising from past events that is not
recognised because it is not probable that outflow of economic resources will be
required or the amount of obligation cannot be measured reliably.
A contingent liability is not recognised but is disclosed in the notes to the
financial statements when an outflow of economic benefits is less than probable
but not remote. When a change in the probability of an outflow occurs such that
the outflow is probable, the contingent liability will then be recognised as a
provision.
A contingent asset is a possible asset that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence of one or
more uncertain events not wholly within the control of the Netcom Group. A
contingent asset is disclosed when an inflow of economic benefits is probable
but only recognised in income statement when realized.
(x) 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 Netcom Group has one business segment, the provision
of fixed line telecommunications services. Less than 10% of the Netcom Group’s
assets and operations are located outside the PRC. Accordingly, no business and
geographical segment information is presented.
(y)
Earnings per Netcom Share (“EPS”) and per Netcom ADSs
Basic EPS is computed by dividing net profit attributable to Netcom Shareholders
by the weighted average number of Netcom Shares outstanding during the
year.
Diluted EPS is computed by dividing net profit attributable to Netcom
Shareholders by the weighted average number of ordinary and dilutive ordinary
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I-22 -
equivalent
shares outstanding during the year. Ordinary equivalent shares consist of Netcom
Shares issuable upon the exercise of outstanding stock options using the
treasury stock method.
Earnings per Netcom ADS is computed by multiplying the EPS by 20, which is the
number of Netcom Shares represented by each Netcom ADS.
5 CRITICAL
ACCOUNTING ESTIMATES AND JUDGMENTS
Estimates and judgments are continually evaluated and are based on historical
experience and other factors, including expectations of future events that are
believed to be reasonable under circumstances.
(a) Critical
accounting estimates and assumptions
The Netcom Group makes estimates and assumptions concerning the future. The
resulting accounting estimates will, by definition, seldom equal the related
actual results. The estimates and assumptions that have a significant risk of
causing a material adjustment to the carrying amounts of assets and liabilities
within the next financial year are discussed below:
(i) Depreciation of property, plant and
equipment
The
property, plant and equipment of the Netcom Group are depreciated at rates
sufficient to write off their costs or revalued amounts less accumulated
impairment losses and estimated residual values over their estimated useful
lives on a straight-line basis. The Netcom Group reviews the estimated useful
lives and estimated residual values periodically to ensure that the method and
rates of depreciation are consistent with the expected pattern of economic
benefits from property, plant and equipment. The Netcom Group estimates the
useful lives of the property, plant and equipment as set out in Note 4(k)(iv)
based on the historical experience with similar assets, taking into account
anticipated technological changes. The depreciation expenses in the future
periods will change if there are significant changes from previous
estimates.
As
of 31 December 2007, the Netcom Group did not change the estimate of useful
lives.
(ii) Revaluation of property, plant and
equipment
Apart
from lease prepayments for land and buildings, which are carried at cost, other
property, plant and equipment are carried at revalued amounts, being the fair
value at the date of revaluation, less subsequent accumulated depreciation and
impairment. Property, plant and equipment of the Netcom Group was revalued as of
31 December 2006 on a depreciated replacement cost basis by an independent
valuer. If the revalued amounts differ significantly from the carrying amounts
of the property, plant and equipment in the future, the carrying amounts will be
adjusted to the revalued amounts. The key assumptions made to determine the
revalued amounts include the estimated replacement costs and the estimated
useful lives of the property, plant and equipment. This will have an impact on
the Netcom Group’s future results, since any subsequent decreases in valuation
are set off first against increases on earlier valuations in respect of the same
item and thereafter are charged as an expense to the income statement and any
subsequent increases are credited as income to the income statement up to the
amount previously charged then to equity. In addition, the depreciation expenses
in future periods will change as the carrying amounts of such property, plant
and equipment change as a result of the revaluation.
(iii) Impairment of non-current
assets
At
each balance sheet date, the Netcom Group considers both internal and external
sources of information to assess whether there is any indication that
non-current assets, including property, plant and equipment, are impaired. If
any such indication exists, the recoverable amount of the assets is estimated
and an impairment loss is recognised to reduce the carrying amount of the asset
to its recoverable amount. The recoverable amount is the higher of value in use
or net selling price. Estimated values in use are determined based on estimated
discounted future cash flows of the cash generating unit at the lowest level to
which the asset belongs. Key assumptions made to determine the estimated
discounted future cash flows include the estimated future cash flows, estimated
growth rate and the estimated weighted average cost of capital of the Netcom
Group. Such impairment losses are recognised in the income statement, except
where the asset is carried at valuation and the impairment loss does not exceed
the revaluation surplus for that same asset, in which case the impairment loss
is treated as a revaluation decrease and charged to the revaluation reserve.
Accordingly, there will be an impact to the future results if there is a
significant change in the recoverable amounts of the non-current
assets.
At 31
December 2007, the Netcom Group did not identify any indication that non-current
assets were impaired.
(iv)
Revenue recognised for upfront
connection and installation fees
The
Netcom Group defers the recognition of upfront customer connection and
installation fees and amortizes them over the expected customer relationship
period of 10 years. The related direct incremental installation costs are
deferred and amortized over the same expected customer relationship period of 10
years, except when the direct incremental costs exceed the corresponding
installation fees, the excess amounts are immediately written off as an expense
to the income statement. The Netcom Group estimates the expected customer
relationship period based on the historical customer retention experience and
after factoring in the expected level of future competition, the risk of
technological or functional obsolescence to the Netcom Group’s services,
technological innovation, and the expected changes in the regulatory and social
environment. If the Netcom 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 the deferred revenues may change for future periods.
As
of 31 December 2007, the Netcom Group did not change the estimate of customer
relationship period.
(v)
Provision for doubtful
debts
The
Netcom Group maintains an allowance for doubtful debts for estimated losses
resulting from the inability of its customers to make the required payments. The
Netcom Group makes its estimates based on the aging of its accounts receivable
balances, customer’s creditworthiness, and historical write-off experience. If
the financial condition of its customers were to deteriorate, actual write-offs
might be higher than expected, and the Netcom Group would be required to revise
the basis of making the allowance and its future results would be
affected.
(vi) Fair value
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I-23 -
The
Netcom Group estimates the fair value of its financial assets and financial
liabilities including accounts receivable, other receivables and other current
assets, accounts payable, and bank and other loans for disclosure purposes by
discounting its future contractual cash flows at the estimated current market
interest rate that is available to the Netcom Group for similar financial
instruments. The future disclosed values will change if there are changes in the
estimated market interest rate.
6
FINANCIAL RISK MANAGEMENT
(a) Financial
risk factors
The Netcom Group’s major financial assets include bank deposits, accounts
receivable, notes receivable and other receivables. The Netcom Group’s major
financial liabilities include accounts payable, notes payable, other payable,
bank borrowings, commercial paper and corporate bonds.
The Netcom Group’s activities expose it to a variety of financial risks: market
risk (including currency risk, fair value interest rate risk and cash flow
interest rate risk), credit risk, and liquidity risk. The board has reviewed and
approved its relative risk management policy as follows:
(i) Foreign exchange
risk
The Netcom
Group’s major operational activities are carried out in mainland China and a
majority of the transactions are performed in Renminbi. On 31 December 2007, the
Netcom Group had certain bank deposits and borrowings were denominated in
foreign currencies, mainly in US dollar and HK dollar. Any change in the
exchange rates of these currencies to Renminbi will impact the Netcom Group’s
operating results.
As at 31
December 2007 and 2006, the Netcom Group had bank balances denominated in
foreign currencies amounting to RMB320 million and RMB1,946 million,
respectively. As at 31 December 2007 and 2006, the Netcom Group had bank
borrowings denominated in foreign currencies amounting to RMB1,246 million and
RMB1,432 million, respectively.
At 31
December 2007, if Renminbi had weakened/strengthened by 5% against the foreign
currencies, the impact of the fluctuation on an annual profit is presented in
the table below. The analysis covers bank deposits and borrowings. A positive
figure means the Renminbi has appreciated against foreign currencies and lead to
an increase of profit.
|
Increase/(Decrease)
in annual profit
|
||
|
31
December 2007
|
31
December 2006
|
|
|
RMB
million
|
RMB
million
|
|
|
HK
Dollar exchange rate fluctuation
|
||
|
5%
appreciation
|
7
|
32
|
|
5%
depreciation
|
(7)
|
(32)
|
|
=============
|
=============
|
|
|
US
Dollar exchange rate fluctuation
|
||
|
5%
appreciation
|
(21)
|
30
|
|
5%
depreciation
|
21
|
(30)
|
|
=============
|
=============
|
|
(ii) Cash flow and fair value interest
rate risk
As the
Netcom Group has no significant interest-bearing assets, the Netcom Group’s
income and operating cash flows are substantially independent of changes in
market interest rates.
The Netcom Group’s interest-rate risk
arises from interest bearing borrowings. Borrowings issued at variable rates
expose the Netcom Group to cash flow interest-rate risks. Borrowings issued at
fixed rates expose the Netcom Group to fair value interest-rate risks. the
Netcom Group does not use derivative financial tools to offset the cash flow
interest-rate risk. The footnote 30 discloses bank loans with fixed rates and
variable rates.
As at
31 December 2007, 83.96% of the Netcom Group’s loans were with fixed interest
rate (2006: 74.69%). If the market interest had (decreased)/increased by 2%, the
impact of the fluctuation on an annual profit is presented in the table
below:
|
Increase/(Decrease)
in annual profit
|
||
|
31
December 2007
|
31
December 2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Change
of interest rate
|
||
|
2%
increase
|
(476)
|
(454)
|
|
=============
|
=============
|
|
|
2%
decrease
|
476
|
454
|
|
=============
|
=============
|
|
(iii) Credit risk
The
Netcom Group provides telecommunication and related services to residential
clients and business clients. The Netcom Group will terminate a fixed line
service to residential clients if the accounts receivable are over 90 days.
Accounts receivable from other telecommunications operators and
-
I-24 -
customers
are due generally between 30 to 90 days from the billing date. The Netcom Group
analyses the aging of accounts receivable and the status of collection on a
monthly basis to formulate the appropriate collection strategy to ensure the
risk faced is not material.
The
carrying amount of accounts receivable included in the balance sheet represents
the Netcom Group’s exposure to credit risk in relation to its financial assets.
Most of the Netcom Group’s accounts receivable with aging over 30 days are
overdue. The Netcom Group evaluated the risk associated with the accounts
receivable balances with aging over 90 days, and made provisions accordingly.
The Netcom Group believes that adequate provision for uncollectible account
receivable has been made.
The
accounts receivable of the Netcom Group are disclosed in Note 18 to the
financial statements.
The
credit risk of the Netcom Group’s other financial assets (including cash and
cash equivalents and other receivables) arise from any counter parties’ breach
of contract. Thus, the highest risk the Netcom Group will bear is the book value
of the instrument.
The
Netcom Group’s cash management policy is to deposit cash and cash equivalents
mainly in state-owned banks and other banks, which are highly rated by an
international credit rating company. The rates are between BBB+ to BBBpi. The
management does not expect any loss to arise from bank
nonperformance.
(iv) Liquidity risk
The
Netcom Group is financed mainly by short term borrowings. As a result, there is
a significant working capital deficit as highlighted in balance sheet. Please
refer to Note 2 for more details.
The
Netcom Group’s aim is to maintain the balance between the availability and
liquidity of the funding by using interest bearing bank loans and other
borrowings, commercial paper, corporate bonds and other suitable financing
channels. The Netcom Group’s policy is to regularly monitor operating capital
demands and compliance with current and expected operating capital requirements.
The Netcom Group reviews cash flow forecasts of each entity on a regular basis
to maintain sufficient cash reserves and bank pledged funds and to deal with
short and long term capital demands.
The
following table shows the undiscounted balances of the financial liabilities
(including interest expense) categorized by time period from the balance sheet
date to the date of contract expiry.
|
31
December 2007
|
Total
|
Within
1
year
|
1-2
years
|
2-3
years
|
3-4
years
|
4-5
years
|
Over
5
years
|
|
RMB million
|
RMB million
|
RMB million
|
RMB million
|
RMB million
|
RMB million
|
RMB million
|
|
|
Accounts
payable
|
15,639
|
15,639
|
—
|
—
|
—
|
—
|
—
|
|
Short-term
loans
|
12,134
|
12,134
|
—
|
—
|
—
|
—
|
—
|
|
Long-term
bank and
other
loans
|
21,616
|
6,407
|
10,272
|
1,887
|
106
|
104
|
2,840
|
|
Commercial
paper
|
20,629
|
20,629
|
—
|
—
|
—
|
—
|
—
|
|
Corporate
bonds
|
2,900
|
90
|
90
|
90
|
90
|
90
|
2,450
|
|
Amounts
due to holding companies and fellow subsidiaries
|
8,870
|
2,319
|
2,214
|
4,337
|
—
|
—
|
—
|
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
|||||||
|
Total
|
81,788
|
57,218
|
12,576
|
6,314
|
196
|
194
|
5,290
|
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
31
December 2006
|
Total
|
Within
1
year
|
1-2
years
|
2-3
years
|
3-4
years
|
4-5
years
|
Over
5
years
|
|
|
RMB million
|
RMB million
|
RMB million
|
RMB million
|
RMB million
|
RMB million
|
RMB million
|
|
|
|||||||
|
Accounts
payable
|
17,661
|
17,661
|
—
|
—
|
—
|
—
|
—
|
|
Short-term
loans
|
31,602
|
31,602
|
—
|
—
|
—
|
—
|
—
|
|
Long-term
bank and
other
loans
|
36,343
|
8,980
|
7,814
|
10,416
|
431
|
430
|
8,272
|
|
Commercial
paper
|
10,000
|
10,000
|
—
|
—
|
—
|
—
|
—
|
|
Amounts
due to holding companies and fellow subsidiaries
|
8,781
|
2,352
|
2,248
|
2,143
|
2,038
|
—
|
—
|
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
|||||||
|
Total
|
104,387
|
70,595
|
10,062
|
12,559
|
2,469
|
430
|
8,272
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
The
Board has the responsibility to consider the future operational capital
requirements. The Netcom Group has a policy to maintain sufficient cash and cash
equivalents and to finance operations through bank lending. For bank facilities,
please refer to Note 39.
-
I-25 -
(b) Fair
value estimation
The fair value of financial instruments
that are actively traded is based on the market price as of balance sheet date.
The market price of the financial assets that the Netcom Group holds is the
current bidding price. The market price of financial liabilities is the offering
price. The fair value of the Netcom Group’s bank deposits, accounts receivable,
notes receivable, corporate bonds, commercial paper and short-term borrowings
approximate book value.
The nominal value less estimated credit
adjustments of trade receivables and payables are assumed to approximate their
fair values. The fair value of financial liabilities for disclosure purposes is
estimated by discounting the future contractual cash flows at the current market
interest rate that is available to the Netcom Group for similar financial
instruments.
(c) Objective
and policy of financial risk management
The Netcom Group defines the capital as
the shareholders’ equity. The Netcom Group’s objectives of the management of
capital are to maintain the ability to operate based on going concern, meet the
requirements of capital investment for the business development, bring benefit
to shareholders and other stakeholders, and also to maintain an optimal capital
structure to reduce the cost of capital.
In order to maintain or adjust the
capital structure, the Netcom Group may adjust the amount of dividends paid to
shareholders, return of capital to shareholders, issue new shares, sell assets
to reduce debt.
7
REVENUES
Revenues represent the turnover of the
Netcom 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 RMB2,358 million (2006: RMB2,387 million). The Netcom Group’s
revenues by business nature can be summarized as follows:
|
Year
ended 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million Restated
Note
2
|
|
|
Revenues
|
||
|
Local
usage fees
|
19,989
|
22,059
|
|
Monthly
telephone services
|
12,387
|
16,546
|
|
Upfront
installation fees
|
1,283
|
1,364
|
|
DLD
usage fees
|
8,769
|
9,495
|
|
ILD
usage fees
|
791
|
819
|
|
Value-added
services
|
6,114
|
5,341
|
|
Interconnection
fees
|
8,376
|
8,432
|
|
Upfront
connection fees
|
1,517
|
2,406
|
|
Broadband
services
|
13,835
|
9,916
|
|
Other
Internet-related services
|
532
|
516
|
|
Managed
data services
|
1,284
|
1,413
|
|
Leased
line income
|
2,521
|
2,540
|
|
Information
communications technology services
|
3,990
|
855
|
|
Other
services
|
2,617
|
2,492
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
84,005
|
84,194
|
|
=============
|
=============
|
|
8 OPERATING
EXPENSES BY NATURE
Operating expenses mainly represent:
|
Year
ended 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million Restated
Note
2
|
|
|
Staff
cost
|
12,223
|
11,849
|
|
Depreciation
and amortisation
|
25,495
|
24,913
|
|
Maintenance
cost
|
4,373
|
4,512
|
|
Miscellaneous
taxes and fees
|
358
|
278
|
|
Customer
installation cost
|
2,036
|
1,116
|
|
Interconnection
charges
|
4,014
|
3,915
|
|
Advertising
and promotion expenses
|
821
|
884
|
|
Sales
channel cost
|
2,298
|
2,118
|
|
Subscriber
acquisition and retention cost
|
1,582
|
3,646
|
|
Auditor’s
remuneration
|
54
|
61
|
|
Bad
and doubtful debt expenses
|
868
|
1,003
|
|
Operating
leases
|
1,900
|
1,969
|
-
I-26 -
|
Cost
of hardware sold in relation to information communications technology
services
|
2,830
|
598
|
|
=============
|
=============
|
9 OTHER
INCOME
Other
income is the subsidy income Netcom received arising from the reinvesting of the
profit distributions received from a subsidiary in the PRC to that
subsidiary.
10 FINANCE
COSTS
|
Year
ended 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million Restated
Note
2
|
|
|
Interest
expenses on:
|
||
|
—
Bank and other loans wholly repayable within five years
|
2,875
|
3,185
|
|
—
Bank and other loans wholly repayable after more than five
years
|
198
|
325
|
|
—
Deferred consideration related to Acquisition of New
Horizon
|
375
|
479
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
3,448
|
3,989
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Less:
Interest expenses capitalized in construction in progress
|
(165)
|
(233)
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Exchange
loss/(gain), net
|
25
|
(8)
|
|
Bank
charges
|
25
|
19
|
|
－－－－－－－
|
－－－－－－－
|
|
|
3,333
|
3,767
|
|
|
=============
|
=============
|
|
|
Interest
expenses were capitalized in construction in progress
using
the following annual interest rates
|
4.75%-5.82%
|
4.71%-5.28%
|
|
=============
|
=============
|
|
11
TAXATION
|
Year
ended 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million Restated
Note
2
|
|
|
PRC
enterprise income tax (“EIT”)
|
3,901
|
4,143
|
|
Overseas
profit tax
|
12
|
20
|
|
Deferred
taxation — Continuing operations (Note 34)
|
(66)
|
(436)
|
|
Deferred
taxation — Change in statutory taxation rate (Note 34)
|
(51)
|
—
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Taxation
charges
|
3,796
|
3,727
|
|
=============
|
=============
|
|
The
provision for PRC EIT is calculated based on the statutory income tax rate of
33% on the assessable profit of each of the entities comprising the Netcom 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
16 March 2007, the National People’s Congress approved the Corporate Income Tax
Law of the People’s Republic of China (the “New CIT Law”). This New CIT Law
reduces the corporate income tax rate for domestic enterprises from 33% to 25%
with effect from 1 January 2008. As a result of the new CIT Law, as at 16 March
2007, the carrying value of deferred tax assets has been written down by RMB775
million, with RMB111 million recognised in income statement and RMB664 million
recognised in equity. The carrying value of deferred tax liabilities has been
written down by RMB273 million, with RMB162 million recognised in the income
statement and RMB111 million recognised in equity. The impact of the change in
deferred taxation recognised in either the current income statement or equity as
a result of the New CIT Law corresponded to whether the related items were
previously recognised in income statement or equity.
-
I-27 -
On
28 November 2007, the National People’s Congress approved the Implementation
guide on the Corporate Income Tax Law of the People’s Republic of China (the
“New CIT Implementation guide”), with effect from 1 January 2008. Per a
bilateral tax affairs agreement, enterprises incorporated in Hong Kong is
required to pay a 5 percent corporate income tax on profits distributed from its
subsidiaries incorporated in the PRC. On 22 February 2008, the Ministry of
Finance and the State Administration of Taxation jointly issued CaiShui [2008],
Circular No. 1 (“Circular No. 1”). In accordance with the Circular No. 1,
accumulated retained earnings of foreign investment enterprises generated before
1 January 2008 and distributed to foreign investors after 2008 are exempt of
income tax. Earnings of foreign investment enterprises generated in or after
2008 and distributed to foreign investors should pay the withholding tax. As a
result, the Netcom Group may accrue deferred tax liability for the undistributed
earnings generated by CNC China during or after 2008 according to actual
situation.
On
26 December 2007, the State Council promulgated ‘Notice Regarding Preferential
Policy of Implementing EIT in Intervening Period’. The Netcom Group has
evaluated the regulation and considered that it will not have material impact on
the financial statements.
The
reconciliation between the Netcom Group’s actual tax charge and the amount which
is calculated based on the weighted average statutory tax rate is as
follows:
|
Year
ended 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million Restated
Note
2
|
|
|
Profit
before taxation
|
15,267
|
15,205
|
|
=============
|
=============
|
|
|
Weighted
average statutory tax rate
|
33%
|
33%
|
|
Tax
calculated at the weighted average statutory tax rate
|
5,038
|
5,018
|
|
Non-taxable
income (Note i)
|
(1,184)
|
(1,216)
|
|
Expenses
not deductible for tax purposes
|
68
|
64
|
|
Change
in statutory taxation rate (Note 34)
|
(51)
|
—
|
|
Others
|
(75)
|
(139)
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Tax
charge
|
3,796
|
3,727
|
|
=============
|
=============
|
|
Note:
|
|
(i)
|
Non-taxable
income comprises primarily of upfront connection fees charged to customers
which are amortized over the customer relationship and the subsidy income
obtained (Note 9).
|
12 PROFIT
ATTRIBUTABLE TO SHAREHOLDERS
|
|
(a)
|
For
the year ended 31 December 2007, profit attributable to shareholders
includes current year profit of RMB8,714million (2006: RMB17,475 million),
which has been recognized in Netcom’s financial
statements.
|
|
|
(b)
|
Netcom’s
subsidiary, CNC China is registered as a foreign investment enterprise in
the PRC. In accordance with the Articles of Association of CNC China, it
is required to provide for certain statutory reserves, namely, general
reserve and staff bonus and welfare fund, which are appropriated from
profits after tax but before any dividend
distribution.
|
CNC
China is required to allocate at least 10% of their profit after tax determined
under PRC GAAP to the general reserve fund until the cumulative amounts reach
50% of the registered capital. The statutory reserve can only be used, upon
obtaining approval from the relevant authority, to offset accumulated losses or
increase capital.
Accordingly,
CNC China appropriated approximately RMB868 million to the general reserve fund
for the year ended 31 December 2007 (2006: RMB855 million).
|
|
(c)
|
According
to a PRC tax approval document issued by the Ministry of Finance and State
Administration of Taxation to the Netcom Group, the Netcom 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. Up to 31 December 2007,
Netcom has made accumulated appropriation of RMB10,706 million to the
statutory reserve (Up to 31 December 2006: RMB9,189
million).
|
13 PROFIT
DISTRIBUTIONS
|
Year
ended 31 December
|
||||
|
2007
|
2006
|
|||
|
HK$
million
|
RMB
million
|
HK$
million
|
RMB
million
|
|
|
Final
dividend proposed after balance sheet date of HK$0.592 per share (2006:
HK$0.553 per share)
|
3,951
|
3,700
|
3,678
|
3,695
|
|
=============
|
=============
|
=============
|
=============
|
|
|
Dividend
distributed during the year
|
3,678
|
3,600
|
3,073
|
3,196
|
|
=============
|
=============
|
=============
|
=============
|
|
-
I-28 -
In the meeting of the Board held on 25
March 2008, the Board proposed a final dividend of HK$0.592 per ordinary share
for the year ended 31 December 2007. Dividends proposed after the balance sheet
date have not been reflected as a dividend payable and will be reflected as an
appropriation in the 2008 financial statements.
14 Earnings
per Netcom share
Basic earnings per Netcom Share is
computed using the weighted average number of Netcom Shares outstanding during
the year. Diluted earnings per Netcom Share is computed using the weighted
average number of Netcom Shares and potential ordinary shares outstanding during
the year.
The following table sets forth the
computation of basic and diluted earnings per Netcom Share:
|
Year
ended 31 December
|
||
|
2007
|
2006
|
|
|
(in
RMB millions, except share and per share data)
|
||
|
Restated
Note
2
|
||
|
Numerator:
|
||
|
Profit
for the year
|
||
|
—
Continuing operations
|
11,471
|
11,478
|
|
—
Discontinued operations
|
624
|
1,487
|
|
－－－－－－－
|
－－－－－－－
|
|
|
12,095
|
12,965
|
|
|
=============
|
=============
|
|
|
Denominator
|
||
|
Weighted
average number of Netcom Shares outstanding and shares used in
computing basic earnings per Netcom Share
|
6,657,045,212
|
6,615,520,381
|
|
Diluted
equivalent Netcom Shares arising from Netcom Options
|
80,583,956
|
51,955,496
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Shares
used in computing diluted earnings per Netcom Share
|
6,737,629,168
|
6,667,475,877
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Basic
earnings per Netcom Share (RMB)
|
||
|
—
Continuing operations
|
1.72
|
1.74
|
|
=============
|
=============
|
|
|
—
Discontinued operations
|
0.09
|
0.22
|
|
=============
|
=============
|
|
|
—
Profit for the year
|
1.81
|
1.96
|
|
=============
|
=============
|
|
|
Diluted
earnings per Netcom Share (RMB)
|
||
|
—
Continuing operations
|
1.70
|
1.72
|
|
=============
|
=============
|
|
|
—
Discontinued operations
|
0.09
|
0.22
|
|
=============
|
=============
|
|
|
—
Profit for the year
|
1.79
|
1.94
|
|
=============
|
=============
|
|
15 STAFF
COST INCLUDING DIRECTORS’ REMUNERATION
|
Year
ended 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Restated
Note
2
|
||
|
Wages,
salaries and welfare
|
10,778
|
10,504
|
|
Contributions
to pensions
|
1,445
|
1,345
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
12,223
|
11,849
|
|
=============
|
=============
|
|
-
I-29 -
16 NETCOM
DIRECTORS’ AND SENIOR MANAGEMENT’S EMOLUMENT
(a) Directors’
emoluments
The
following table sets out the emoluments paid to Netcom Directors during the year
of 2007:
|
Year
ended 31 December 2007
|
||||||
|
RMB
thousand
|
||||||
|
Fees
(a)
|
Basic salaries,
housing allowances, other allowances and benefits in
kind
|
Subtotal
|
Netcom Share
based compensation
|
Contributions
to retirement schemes
|
Total
|
|
|
Zhang
Chunjiang
|
—
|
840
|
840
|
149
|
21
|
1,010
|
|
Zuo
Xunsheng (i)
|
—
|
824
|
824
|
130
|
21
|
975
|
|
Li
Jianguo(ii)
|
—
|
344
|
344
|
—
|
9
|
353
|
|
Zhang
Xiaotie
|
—
|
724
|
724
|
130
|
21
|
875
|
|
Li
Fushen (iii)
|
—
|
697
|
697
|
130
|
21
|
848
|
|
Miao
Jianhua (iv)
|
—
|
360
|
360
|
182
|
12
|
554
|
|
Tian
Suning (v)
|
—
|
—
|
—
|
239
|
—
|
239
|
|
Li
Liming (vi)
|
—
|
22
|
22
|
114
|
21
|
157
|
|
Yan
Yixun
|
253
|
—
|
253
|
96
|
—
|
349
|
|
Cesareo
Alierta Izuel(vii)
|
14
|
—
|
14
|
—
|
—
|
14
|
|
José
María Álvarez-Pallete
|
318
|
—
|
318
|
—
|
—
|
318
|
|
Mauricio
Sartorius (viii)
|
239
|
—
|
239
|
—
|
—
|
239
|
|
John
Lawson Thornton
|
464
|
—
|
464
|
—
|
—
|
464
|
|
Victor
Cha Mou Zing
|
501
|
—
|
501
|
—
|
—
|
501
|
|
Qian
Yingyi
|
604
|
—
|
604
|
—
|
—
|
604
|
|
Hou
Ziqiang
|
506
|
—
|
506
|
—
|
—
|
506
|
|
Timpson
Chung Shui Ming
|
520
|
—
|
520
|
—
|
—
|
520
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
3,419
|
3,811
|
7,230
|
1,170
|
126
|
8,526
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
For the year ended 31 December 2007, the fees disclosed above include RMB2,595
thousand paid to independent non-executive directors.
The following table sets out the emoluments paid to the Netcom Directors during
the year ended 31 December 2006:
|
Year
ended 31 December 2006
|
||||||
|
RMB
thousand
|
||||||
|
Fees
(b)
|
Basic
salaries, housing allowances, other allowances and benefits in
kind
|
Subtotal
|
Share
based compensation
|
Contributions
to retirement schemes
|
Total
|
|
|
Zhang
Chunjiang
|
—
|
763
|
763
|
312
|
19
|
1,094
|
|
Zuo
Xunsheng (i)
|
—
|
746
|
746
|
272
|
19
|
1,037
|
|
Zhang
Xiaotie
|
—
|
671
|
671
|
272
|
19
|
962
|
|
Li
Fushen (iii)
|
—
|
671
|
671
|
272
|
19
|
962
|
|
Miao
Jianhua (iv)
|
—
|
671
|
671
|
238
|
19
|
928
|
|
Jiang
Weiping (ix)
|
—
|
453
|
453
|
238
|
19
|
710
|
|
Li
Liming (vi)
|
—
|
420
|
420
|
238
|
19
|
677
|
|
Tian
Suning (v)
|
—
|
—
|
—
|
312
|
—
|
312
|
|
Yan
Yixun
|
251
|
—
|
251
|
200
|
—
|
451
|
|
John
Lawson Thornton
|
409
|
—
|
409
|
—
|
—
|
409
|
|
Victor
Cha Mou Zing
|
453
|
—
|
453
|
—
|
—
|
453
|
|
Qian
Yingyi
|
545
|
—
|
545
|
—
|
—
|
545
|
|
Hou
Ziqiang
|
483
|
—
|
483
|
—
|
—
|
483
|
|
Timpson
Chung Shui Ming
|
460
|
—
|
460
|
—
|
—
|
460
|
|
José
María Álvarez-Pallete
|
317
|
—
|
317
|
—
|
—
|
317
|
|
Mauricio
Sartorius (viii)
|
9
|
—
|
9
|
—
|
—
|
9
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
-
I-30 -
|
Total
|
2,927
|
4,395
|
7,322
|
2,354
|
133
|
9,809
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
For
the year ended 31 December 2006, the fees disclosed above include RMB2,350
thousand paid to independent non-executive directors.
Note:
|
|
(a)
|
According
to the ordinary resolution passed at the Second Extraordinary General
Meetings held on 14 February 2007, the director’s fee for the Netcom
Directors shall be revised as follows: all non-executive Directors
nominated by Netcom Parent and all executive Directors shall not be
entitled to any director’s fee. This revision shall apply in respect of
each financial year commencing from the 2007 financial
year.
|
|
|
(b)
|
On
6 December 2006, according to the Netcom Directors’ discretion, Zhang
Chunjiang, Zuo Xunsheng, Zhang Xiaotie, Miao Jianhua, Li Liming, Jiang
Weiping and Tian Suning waived their emoluments for the years ended 31
December 2006 totalling RMB1,526 thousand. Details of the waivers are as
follows: Zhang Chunjiang RMB251 thousand, Zuo Xunsheng RMB158 thousand,
Zhang Xiaotie RMB251 thousand, Miao Jianhua RMB251 thousand, Jiang Weiping
RMB94 thousand, Li Liming RMB270 thousand, Tian Suning RMB251
thousand.
|
|
|
(i)
|
Appointed
in May 2006
|
|
|
(ii)
|
Appointed
in July 2007
|
|
|
(iii)
|
Appointed
in January 2007
|
|
|
(iv)
|
Resigned
in July 2007
|
|
|
(v)
|
Re-designated
as non-executive Directors in May 2006, resigned in July
2007
|
|
|
(vi)
|
Resigned
in January 2007
|
|
|
(vii)
|
Appointed
in December 2007
|
|
|
(viii)
|
Appointed
in December 2006, resigned in December
2007
|
|
|
(ix)
|
Resigned
in May 2006
|
(b) Five
highest paid individuals
The five individuals whose emoluments
were the highest for the year ended 31 December 2007 include three Netcom
Directors (2006: two) whose emoluments are reflected in the analysis presented
above. The emoluments payable to the remaining two (2006: three) individuals are
as follows:
|
Year
ended 31 December
|
||
|
2007
|
2006
|
|
|
RMB
thousand
|
RMB
thousand
|
|
|
Basic
salaries, housing allowances, other allowances and benefits in
kind
|
1,450
|
2,013
|
|
Share
based compensation
|
260
|
816
|
|
Contributions
to retirement schemes
|
42
|
57
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
1,752
|
2,886
|
|
=============
|
=============
|
|
The number of the remaining individuals
whose emoluments fell within the following bands is set out as
follows:
|
Year
ended 31 December
|
||
|
2007
|
2006
|
|
|
Nil
- RMB936,400 (equivalent of Nil — HK$1,000,000)
|
2
|
3
|
|
－－－－－－－
|
－－－－－－－
|
|
17 CASH
AND BANK DEPOSITS
|
Netcom
Group
|
Netcom
|
|||
|
As
at 31 December
|
As
at 31 December
|
|||
|
2007
|
2006
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million Restated
Note
2
|
RMB
million
|
RMB
million
|
|
|
Cash
and cash equivalents
|
5,304
|
7,623
|
113
|
1,772
|
|
Time
deposits with original maturities over three
months
|
91
|
105
|
—
|
—
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
-
I-31 -
|
Total
cash and bank deposits
|
5,395
|
7,728
|
113
|
1,772
|
|
=============
|
=============
|
=============
|
=============
|
|
|
Effective
interest rate of time deposits with original maturities over three months
(% per annum)
|
0.72
|
0.72
|
—
|
—
|
|
=============
|
=============
|
=============
|
=============
|
Included in cash and bank deposits as
of 31 December 2007 and 2006 are RMB denominated balances kept in the PRC
amounting to RMB5,054 million and RMB5,782 million respectively. The conversion
of RMB denominated balances into foreign currencies and the remittance of bank
balances and cash out of the PRC are subject to the rules and regulation of
foreign exchange control promulgated by the PRC government.
Included in the bank deposits were
deposits in state-owned banks amounting to RMB4,958 million at 31 December 2007
(2006: RMB7,577 million). For the year ended 31 December 2007, interest income
earned from these state-owned banks deposits amounted to RMB106 million (2006:
RMB121 million).
18 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 aging analysis of accounts
receivable based on the billing date is as follows:
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million Restated
Note
2
|
|
|
0-30
days
|
5,682
|
5,744
|
|
31-90
days
|
1,866
|
1,557
|
|
Over
90 days
|
2,308
|
2,326
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
9,856
|
9,627
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Less:
Allowance for doubtful debts
|
(1,398)
|
(1,344)
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Net
carrying amounts
|
8,458
|
8,283
|
|
=============
|
=============
|
|
The movement of allowance for doubtful
debts is as follows:
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million Restated
Note
2
|
|
|
Balance
at beginning of year
|
1,344
|
1,654
|
|
Additional
provisions
|
844
|
1,002
|
|
Less:
Write-offs
|
(750)
|
(1,246)
|
|
Disposal
of ANC Group
|
—
|
(66)
|
|
Disposal
of Guangdong and Shanghai Branches
|
(40)
|
—
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Balance
at end of year
|
1,398
|
1,344
|
|
=============
|
=============
|
|
The carrying value of accounts
receivable approximates their fair values based on cash flows discounted using
market rate of 7.47% (31 December 2006: 6.12%).
Included in the accounts receivable are
amounts due from other state-owned telecommunication operators amounting to
RMB833 million on 31 December 2007. (31 December 2006: RMB1,079
million).
19 INVENTORIES
AND CONSUMABLES
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million Restated
Note
2
|
|
-
I-32 -
|
Telephone
handsets and other customer end-products held for resale, at
cost
|
125
|
155
|
|
Consumables,
at cost
|
162
|
261
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
287
|
416
|
|
=============
|
=============
|
20 PREPAYMENTS,
OTHER RECEIVABLES AND OTHER CURRENT ASSETS
|
Netcom
Group
|
Netcom
|
|||
|
As
at 31 December
|
As
at 31 December
|
|||
|
2007
|
2006
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million Restated
Note
2
|
RMB
million
|
RMB
million
|
|
|
Prepaid
expenses, deposits and other current assets
|
605
|
812
|
8
|
15
|
|
Other
receivables
|
416
|
629
|
8
|
253
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
1,021
|
1,441
|
16
|
268
|
|
=============
|
=============
|
=============
|
=============
|
|
The carrying value of other receivables
approximates their fair values based on cash flows discounted using market rate
of 7.47% (2006: 6.12%).
21 FIXED
ASSETS
|
Buildings
|
Telecommunications
networks and equipment
|
Furniture,
fixture, motor vehicles and other equipment
|
Total
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
Cost/valuation:
|
||||
|
Balance
at 1 January 2006, as restated (Note 2)
|
27,149
|
280,301
|
19,796
|
327,246
|
|
Additions
|
52
|
755
|
639
|
1,446
|
|
Transferred
from construction in progress
|
688
|
21,449
|
2,621
|
24,758
|
|
Disposals/write
off
|
(6)
|
(1,947)
|
(524)
|
(2,477)
|
|
Disposal
of ANC Group
|
(172)
|
(636)
|
(45)
|
(853)
|
|
Fixed
assets revaluation deficit, net
|
—
|
(10,659)
|
(3,588)
|
(14,247)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Balance
at 31 December 2006
|
27,711
|
289,263
|
18,899
|
335,873
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Accumulated
depreciation:
|
||||
|
Balance
at 1 January 2006, as restated (Note 2)
|
(6,215)
|
(142,639)
|
(9,628)
|
(158,482)
|
|
Depreciation
charge for the year
|
(999)
|
(21,842)
|
(2,286)
|
(25,127)
|
|
Disposals/write
off
|
4
|
1,315
|
424
|
1,743
|
|
Disposal
of ANC Group
|
51
|
261
|
28
|
340
|
|
Fixed
assets revaluation deficit, net
|
—
|
11,778
|
2,016
|
13,794
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Balance
at 31 December 2006
|
(7,159)
|
(151,127)
|
(9,446)
|
(167,732)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Net
book value at 31 December 2006
|
20,552
|
138,136
|
9,453
|
168,141
|
|
=============
|
=============
|
=============
|
=============
|
|
|
Net
book value at 1 January 2006, as restated (Note
2)
|
20,934
|
137,662
|
10,168
|
168,764
|
|
=============
|
=============
|
=============
|
=============
|
-
I-33 -
|
Buildings
|
Telecommunications
networks and equipment
|
Furniture,
fixture, motor vehicles and other equipment
|
Total
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
Cost/valuation:
|
||||
|
Balance
at 1 January 2007
|
27,711
|
289,263
|
18,899
|
335,873
|
|
Additions
|
56
|
797
|
725
|
1,578
|
|
Transferred
from construction in progress
|
971
|
15,540
|
2,595
|
19,106
|
|
Disposals/write
off
|
(33)
|
(1,749)
|
(441)
|
(2,223)
|
|
Disposal
of Guangdong and Shanghai Branches
|
(550)
|
(7,635)
|
(344)
|
(8,529)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Balance
at 31 December 2007
|
28,155
|
296,216
|
21,434
|
345,805
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Accumulated
depreciation:
|
||||
|
Balance
at 1 January 2007
|
(7,159)
|
(151,127)
|
(9,446)
|
(167,732)
|
|
Depreciation
charge for the year
|
(1,030)
|
(21,977)
|
(2,004)
|
(25,011)
|
|
Disposals/write
off
|
16
|
1,337
|
395
|
1,748
|
|
Disposal
of Guangdong and
Shanghai
Branches
|
134
|
1,867
|
137
|
2,138
|
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
||||
|
Balance
at 31 December 2007
|
(8,039)
|
(169,900)
|
(10,918)
|
(188,857)
|
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
||||
|
Net
book value at 31 December 2007
|
20,116
|
126,316
|
10,516
|
156,948
|
|
=============
|
=============
|
=============
|
=============
|
|
|
Net
book value at 1 January 2007
|
20,552
|
138,136
|
9,453
|
168,141
|
|
=============
|
=============
|
=============
|
=============
|
(a) The
net book value of assets held under finance lease is as follows:
|
Buildings
|
Telecommunications
networks and equipment
|
Furniture,
fixture, motor vehicles and other equipment
|
Total
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
As
at 31 December 2007
|
—
|
217
|
2
|
219
|
|
=============
|
=============
|
=============
|
=============
|
|
|
As
at 31 December 2006
|
—
|
2,000
|
62
|
2,062
|
|
=============
|
=============
|
=============
|
=============
|
The
depreciation charge on assets held under finance lease amounted to RMB100
million in the year ended 31 December 2007 (2006: RMB351 million).
(b) The
analysis of the cost or revaluation of the fixed assets of the Netcom Group is
as follows:
|
Buildings
|
Telecommunications
networks and equipment
|
Furniture,
fixture, motor vehicles and other equipment
|
Total
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
31
December 2007
|
||||
|
Cost
|
28,155
|
—
|
—
|
28,155
|
|
Valuation
|
—
|
296,216
|
21,434
|
317,650
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
28,155
|
296,216
|
21,434
|
345,805
|
|
|
=============
|
=============
|
=============
|
=============
|
|
|
31
December 2006
|
||||
|
Cost
|
27,711
|
—
|
—
|
27,711
|
|
Valuation
|
—
|
289,263
|
18,899
|
308,162
|
-
I-34 -
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
27,711
|
289,263
|
18,899
|
335,873
|
|
|
============
|
=============
|
=============
|
=============
|
|
|
(c)
|
As
required by the PRC rules and regulations relevant to the Listing
Reorganisation, each class of fixed assets other than lease prepayments
for land and buildings as at 31 December 2003 was valued by Beijing China
Enterprise Appraisal Co. Ltd. (the “PRC valuer”), an independent valuer
registered in the PRC, on a depreciated replacement cost basis. The value
of such assets in the PRC injected into the Netcom Group was determined at
RMB122,456 million. Such revalued amounts served as the tax base of the
assets with immediate effect. The surplus on revaluation of certain fixed
assets of RMB2,982 million was credited to the revaluation reserve while
the deficit arising from the revaluation of certain fixed assets of
RMB25,778 million was recognised as an expense for the year ended 31
December 2003.
|
For
the Listing Reorganisation, valuations of the lease prepayments for land and
buildings of the Netcom Group were also performed. The surplus value of such
assets was determined at RMB6,967 million. Such amounts served as the tax base
for such assets with immediate effect. Details have been set out in Note
34(iii).
As
required by the PRC rules and regulations relevant to the Acquisition of New
Horizon, each class of fixed assets, other than lease prepayments for land and
buildings in the PRC, acquired as at 31 December 2004, was valued by the PRC
valuer, on a depreciated replacement cost basis. The value of such acquired
assets in the PRC was determined at RMB42,879 million. Such amounts served as
the tax base for such assets with immediate effect. The surplus on revaluation
of certain fixed assets of RMB3,863 million was credited to the revaluation
reserve while the deficit arising from the revaluation of certain fixed assets
of RMB11,318 million was recognised as an expense for the year ended 31 December
2004.
For
the Acquisition of New Horizon, valuations of the lease prepayments for land and
buildings were also performed. The surplus value of such assets was determined
at RMB2,553 million. Such amounts served as the tax base for such assets with
immediate effect. Details have been set out in Note 34(iii).
According
to the Netcom Group’s accounting policies, each class of fixed assets of the
Netcom Group other than buildings as at 31 December 2006 has been revalued by
the PRC valuer on a depreciated replacement cost basis. The value of such fixed
assets was determined at RMB147,573 million. The net deficit arising on the
revaluation was RMB453 million, the net deficit was split between a credit to
the revaluation reserve amounting to RMB1,071 million and an expense to the
income statement of RMB1,524 million for that year.
The
respective carrying amounts of the telecommunication networks and equipment and
furniture, fixtures, motor vehicles and other equipment would have been
RMB137,414 million and RMB12,382 million as at 31 December 2007 and RMB153,368
million and RMB11,651 million as at 31 December 2006 had they been stated at
cost less accumulated depreciation.
22 CONSTRUCTION
IN PROGRESS
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Restated
Note
2
|
||
|
Balance
at beginning of year
|
6,335
|
6,822
|
|
Additions
|
18,294
|
24,843
|
|
Transferred
to fixed assets
|
(19,106)
|
(24,758)
|
|
Transferred
to intangible assets
|
(399)
|
(572)
|
|
Disposal
of Guangdong and Shanghai Branches
|
(1,134)
|
—
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Balance
at end of year
|
3,990
|
6,335
|
|
=============
|
=============
|
|
23 LEASE
PREPAYMENT
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Lease
prepayments for land (i)
|
2,183
|
2,046
|
|
Lease
prepayments for network capacity (ii)
|
311
|
318
|
|
－－－－－－－
|
－－－－－－－
|
|
|
2,494
|
2,364
|
|
|
=============
|
=============
|
|
(i) Lease
prepayments for land
This
represents land use rights held in the PRC and their net book value is analysed
as follows:
|
As
at 31 December
|
||
|
2007
|
2006
|
|
-
I-35 -
|
RMB
million
|
RMB
million
|
|
|
Held
for
|
||
|
Lease
of between 10 to 50 years
|
2,162
|
2,024
|
|
Lease
of less than 10 years
|
21
|
22
|
|
－－－－－－－
|
－－－－－－－
|
|
|
2,183
|
2,046
|
|
|
=============
|
=============
|
The
movement of the lease prepayments for land is as follows:
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Balance
at beginning of year
|
2,046
|
1,949
|
|
Additions
|
232
|
165
|
|
Amortisation
for the year
|
(87)
|
(68)
|
|
Disposal
of Guangdong and Shanghai Branches
|
(8)
|
—
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Balance
at end of year
|
2,183
|
2,046
|
|
=============
|
=============
|
|
(ii) Lease
prepayments for network capacity
The
net book value is analysed as follows:
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Held
for
|
||
|
Lease
of between 10 to 50 years
|
311
|
318
|
|
=============
|
=============
|
|
The
movement of the lease prepayments for network capacity is as
follows:
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Balance
at beginning of year
|
318
|
—
|
|
Additions
|
—
|
318
|
|
Amortisation
for the year
|
(7)
|
—
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Balance
at end of year
|
311
|
318
|
|
=============
|
=============
|
|
24 INTANGIBLE
ASSETS
|
Purchased
software
|
Sponsorship
fees
|
Others
|
Total
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
Cost:
|
||||
|
Balance
at 1 January 2006, as restated (Note 2)
|
1,919
|
540
|
3
|
2,462
|
|
Additions
|
95
|
—
|
—
|
95
|
|
Transferred
from construction in progress
|
572
|
—
|
—
|
572
|
|
Disposals/write
off
|
(692)
|
—
|
(3)
|
(695)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Balance
at 31 December 2006
|
1,894
|
540
|
—
|
2,434
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Accumulated
amortisation:
|
||||
|
Balance
at 1 January 2006, as restated (Note 2)
|
(927)
|
(135)
|
(3)
|
(1,065)
|
-
I-36 -
|
Amortisation
for the year
|
(338)
|
(135)
|
—
|
(473)
|
|
Disposals/write
off
|
692
|
—
|
3
|
695
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Balance
at 31 December 2006
|
(573)
|
(270)
|
—
|
(843)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Net
book value at 1 January 2006, as restated (Note 2)
|
992
|
405
|
—
|
1,397
|
|
=============
|
=============
|
=============
|
=============
|
|
|
Net
book value at 31 December 2006
|
1,321
|
270
|
—
|
1,591
|
|
=============
|
=============
|
=============
|
=============
|
|
Purchased
software
|
Sponsorship fees
|
Total
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
Cost:
|
|||
|
Balance
at 1 January 2007
|
1,894
|
540
|
2,434
|
|
Additions
|
150
|
—
|
150
|
|
Transferred
from construction in progress
|
399
|
—
|
399
|
|
Disposals/write
off
|
(73)
|
—
|
(73)
|
|
Disposal
of Guangdong and Shanghai Branches
|
(75)
|
—
|
(75)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Balance
at 31 December 2007
|
2,295
|
540
|
2,835
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Accumulated
amortisation:
|
|||
|
Balance
at 1 January 2007
|
(573)
|
(270)
|
(843)
|
|
Amortisation
for the year
|
(394)
|
(135)
|
(529)
|
|
Disposals/write
off
|
69
|
—
|
69
|
|
Disposal
of Guangdong and Shanghai Branches
|
20
|
—
|
20
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Balance
at 31 December 2007
|
(878)
|
(405)
|
(1,283)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Net
book value at 1 January 2007
|
1,321
|
270
|
1,591
|
|
=============
|
=============
|
=============
|
|
|
Net
book value at 31 December 2007
|
1,417
|
135
|
1,552
|
|
=============
|
=============
|
=============
|
25 OTHER
NON-CURRENT ASSETS
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Installation
costs
|
2,847
|
3,525
|
|
Others
|
396
|
441
|
|
－－－－－－－
|
－－－－－－－
|
|
|
3,243
|
3,966
|
|
|
=============
|
=============
|
|
26 DISCONTINUED
OPERATIONS
On 15 January 2007, CNC China, entered
into an assets transfer agreement with it’s ultimate holding company, Netcom
Parent. 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. The disposal was completed on 28
February 2007. The gain on disposal amounted to RMB626 million. The results and
cash flows of Guangdong and Shanghai Branches for the year ended 31 December
2007 and 2006 are presented as discontinued operations.
On 2 June 2006, the Netcom Group
entered into an agreement with third party buyers to dispose of its entire
interest in the ANC Group for an aggregate cash consideration of US$168.84
million, or equivalent of RMB1,343.71 million. The disposal was completed on 22
August 2006. The gain on disposal amounted to RMB1,878 million. The results and
cash flows of the ANC Group for the year ended 31 December 2006 are presented as
discontinued operations.
-
I-37 -
The income statements and cash flow
statements related to discontinued operations are as follows:
|
Disposal
of Guangdong and Shanghai Branches
|
Disposal
of ANC Group
|
Total
|
||||
|
For
the
period
from
1
January 2007 to
28
February 2007
|
For
the
year
ended
31
December 2006
|
For
the
year
ended
31
December 2007
|
For
the
period
from
1
January 2006 to
22
August 2006
|
For
the
year
ended
31
December 2007
|
For
the
year
ended
31
December 2006
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
Discontinued
operations
|
||||||
|
Revenues
|
615
|
3,222
|
—
|
980
|
615
|
4,202
|
|
Expenses
|
(618)
|
(3,717)
|
—
|
(1,038)
|
(618)
|
(4,755)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Loss
before taxation of discontinued operations
|
(3)
|
(495)
|
—
|
(58)
|
(3)
|
(553)
|
|
Taxation
|
1
|
163
|
—
|
(1)
|
1
|
162
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Loss
for the period of discontinued operations
|
(2)
|
(332)
|
—
|
(59)
|
(2)
|
(391)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Gain
on disposal of discontinued operations before taxation
|
927
|
—
|
—
|
1,878
|
927
|
1,878
|
|
Taxation
|
(301)
|
—
|
—
|
—
|
(301)
|
—
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Gain
on discontinued operations after taxation
|
626
|
—
|
—
|
1,878
|
626
|
1,878
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Profit/(loss)
for the period/year from discontinued operations
|
624
|
(332)
|
—
|
1,819
|
624
|
1,487
|
|
=======
|
=======
|
=======
|
=======
|
=======
|
=======
|
|
|
Disposal
of Guangdong and Shanghai Branches
|
Disposal
of ANC Group
|
Total
|
||||
|
For
the
period
from
1
January 2007 to
28
February 2007
|
For
the
year
ended
31
December 2006
|
For
the
year
ended
31
December 2007
|
For
the
period
from
1
January 2006 to
22
August 2006
|
For
the
year
ended
31
December 2007
|
For
the
year
ended
31
December 2006
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
Discontinued
operations
|
||||||
|
Net
cash inflow from operating activities
|
388
|
1,902
|
—
|
183
|
388
|
2,085
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Cash
outflow from investing activities
|
(374)
|
(1,903)
|
—
|
(182)
|
(374)
|
(2,085)
|
|
Cash
inflow from disposal of discontinued operations
|
3,477
|
—
|
—
|
1,164
|
3,477
|
1,164
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Net
cash inflow/(outflow) from investing activities
|
3,103
|
(1,903)
|
—
|
982
|
3,103
|
(921)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Net
cash inflow from financing activities
|
—
|
—
|
—
|
—
|
—
|
—
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
-
I-38 -
|
Cash
flow from discontinued operations
|
3,491
|
(1)
|
—
|
1,165
|
3,491
|
1,164
|
|
=======
|
=======
|
=======
|
=======
|
=======
|
=======
|
27 INVESTMENTS
IN SUBSIDIARIES AND DUE FROM/(TO) SUBSIDIARIES
|
Netcom
|
||
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Investment
cost in subsidiaries
|
71,000
|
62,937
|
|
Due
from subsidiaries (Note (b))
|
10,490
|
9,411
|
|
Due
to subsidiaries (Note (c))
|
(14,271)
|
(12,754)
|
|
－－－－－－－
|
－－－－－－－
|
|
|
67,219
|
59,594
|
|
|
=============
|
=============
|
|
Notes:
(a) As
at 31 December 2007, Netcom has direct interests in the following subsidiaries,
which are private companies:
|
Company
name
|
Place
and date
of incorporation/ establishment
|
Registered
capital
|
Percentage
of equity interest attributable to Netcom
|
Principal
activities and place of operation
|
|
Directly
held:
|
||||
|
China
Netcom (Group) Company Limited (Note (i))
|
PRC
6
August 1999
|
RMB73,371
million
|
100%
|
Provision
of network communications services in the PRC
|
|
China
Netcom Corporation International Limited
|
Bermuda
15
October 2002
|
USD12,000
|
100%
|
Provision
of Investing Service in Bermuda
|
|
Indirect
held:
|
||||
|
China
Netcom Group System Integration Limited Corporation (Note
(ii))
|
PRC
30
April 2006
|
RMB50
million
|
100%
|
Provision
of Information Communications Technology Services in
PRC
|
|
China
Netcom Broadband Online Limited Corporation (Note (ii))
|
PRC
29
March 2006
|
RMB30
million
|
100%
|
Provision
of Internet Information services and value-added
telecommunications services in PRC
|
|
Beijing
Telecommunications Planning and Designing Institute Corporation Limited
(Note (iii))
|
PRC
1
June 2007
|
RMB264,227,115
|
100%
|
Provision
of telecommunications network construction, planning and technical
consulting services in
PRC
|
|
|
(i)
|
The
company is a wholly owned foreign enterprise established in the PRC. The
accounts of the company for the years ended 31 December 2006 and 2007 were
audited by PricewaterhouseCoopers Zhong Tian CPAs Limited
Company.
|
|
|
(ii)
|
These
companies are wholly owned domestic enterprises established in the PRC.
The accounts of these companies for the years ended 31 December 2006 and
2007 were audited by PricewaterhouseCoopers Zhong Tian CPAs Limited
Company, respectively.
|
|
|
(iii)
|
The
company is a wholly owned domestic enterprise established in the PRC. The
accounts of the company for the year ended 31 December 2007 were audited
by PricewaterhouseCoopers Zhong Tian CPAs Limited
Company.
|
|
|
(b)
|
The
balances are unsecured, non-interest bearing and have no fixed repayment
terms.
|
|
|
(c)
|
The
balances mainly represent deferred payments arising from the Acquisition
of New Horizon which have been transferred to CNC China at the carrying
amount. The balances are unsecured, non-interest bearing and have no fixed
repayment terms
|
-
I-39 -
28 ACCOUNTS
PAYABLE
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Restated
Note
2
|
||
|
0-30
days
|
6,214
|
5,763
|
|
31-60
days
|
1,462
|
2,236
|
|
61-90
days
|
1,266
|
1,449
|
|
91-180
days
|
2,251
|
2,990
|
|
Over
180 days
|
4,446
|
5,223
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
15,639
|
17,661
|
|
=============
|
=============
|
|
Included
in accounts payable are amounts due to other state-owned telecommunications
operators amounting to RMB23 million on 31 December 2007 (2006: RMB97
million).
29 ACCRUALS
AND OTHER PAYABLES
|
Netcom
Group
|
Netcom
|
|||
|
As
at 31 December
|
As
at 31 December
|
|||
|
2007
|
2006
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
Restated
Note
2
|
||||
|
Interest
payable
|
441
|
106
|
—
|
—
|
|
Payroll
payable
|
493
|
588
|
—
|
—
|
|
Accruals
and other payables
|
2,016
|
2,380
|
46
|
136
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
2,950
|
3,074
|
46
|
136
|
|
|
=============
|
=============
|
=============
|
=============
|
|
30 BANK
AND OTHER LOANS
|
|
(a)
|
(i)
|
CNC
China issued two lots of RMB10 billion unsecured commercial paper with
repayment periods of 1 year and 270 days on 30 April 2007 and 18 September
2007 in the PRC capital market respectively. The effective interest rates
are 3.34% and 3.93% respectively. The aggregated net cash proceeds raised
in these exercises is RMB20
billion.
|
The
book value of above said commercial paper approximates fair value which derives
from discounted cash flow at 3.93%.
On
20 July 2006, the Netcom Group issued RMB10 billion one-year non-interest
bearing unsecured commercial paper in the PRC capital market and raised net cash
proceeds of RMB9,676 million from this exercise. The commercial paper is
interest bearing at effective rate of 3.35%. The commercial paper was fully
repaid on 24 July 2007.
(ii) The
short term bank loans on 31 December 2007 were unsecured and
comprise:
|
As
at 31 December
|
|||
|
Currency
|
Interest
rate and final maturity
|
2007
|
2006
|
|
RMB
million
|
RMB
million
|
||
|
RMB
denominated
|
Interest
rates ranging from 4.86% to 6.72% per annum with maturity through 11
December 2008
|
11,850
|
30,980
|
|
=============
|
=============
|
||
The
carrying values of short term bank loans approximate their fair values which are
based on cash flows discounted using market rate of 4.86%-6.72% (31 December
2006: 4.86%-5.51%).
Included
in the short-term bank loans were loans from state-owned banks amounting to
RMB11,140 million as at 31 December 2007 (31 December 2006: RMB29,700
million).
(b) The
Netcom Group’s long term bank and other loans comprise:
-
I-40 -
|
As
at 31 December
|
|||
|
2007
|
2006
|
||
|
Note
|
RMB
million
|
RMB
million
|
|
|
Long
term bank loans
|
(i)
|
19,645
|
29,560
|
|
Finance
lease obligations
|
(ii)
|
102
|
963
|
|
－－－－－－－
|
－－－－－－－
|
||
|
19,747
|
30,523
|
||
|
－－－－－－－
|
－－－－－－－
|
||
|
Less:
Current portion
|
(5,322)
|
(7,304)
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
14,425
|
23,219
|
||
|
=============
|
=============
|
||
The carrying values of the current
portion of long term bank loans approximate their fair values which are based on
cash flows discounted using market rate of 7.47% (31 December 2006:
6.12%).
Included in the long term bank loans
were loans from state-owned banks amounting to RMB19,645 million as at 31
December 2007 (2006: RMB29,560 million).
(i) Long
term bank loans
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Loans
|
||
|
Unsecured
|
19,433
|
29,220
|
|
Secured
|
212
|
340
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
19,645
|
29,560
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Less:
Current portion
|
(5,220)
|
(6,446)
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Long
term loans
|
14,425
|
23,114
|
|
=============
|
=============
|
|
The
Netcom Group’s long term bank loans were repayable as follows:
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Within
one year
|
5,220
|
6,446
|
|
In
the second year
|
9,671
|
6,491
|
|
In
the third to fifth year, inclusive
|
1,952
|
9,723
|
|
After
the fifth year
|
2,802
|
6,900
|
|
－－－－－－－
|
－－－－－－－
|
|
|
19,645
|
29,560
|
|
|
=============
|
=============
|
|
|
As
at 31 December
|
|||
|
Currency
|
Interest
rate and final maturity
|
2007
|
2006
|
|
RMB
million
|
RMB
million
|
||
|
Bank
loan
|
|||
|
Renminbi
denominated
|
Interest
rates ranging from 2.4% to 10.08% per annum with maturity through 29
January 2022
|
18,399
|
28,128
|
|
US
Dollar denominated
|
Interest
rates ranging from 1.5% to 6.15% per annum with maturity through 31
October 2039
|
588
|
721
|
|
Japanese
Yen denominated
|
Interest
rate is 2.12% per annum with maturity through 7 January
2014
|
234
|
276
|
-
I-41 -
|
Euro
denominated
|
Interest
rates ranging from 1.10% to 7.85% per annum with maturity through 15 March
2034
|
415
|
435
|
|
Hong
Kong Dollar denominated
|
Interest
rates is 3.75% per annum with maturity through 31 December
2010
|
9
|
—
|
|
－－－－－－－
|
－－－－－－－
|
||
|
19,645
|
29,560
|
||
|
=============
|
=============
|
As
at 31 December 2007, bank loans of RMB212 million (31 December 2006: RMB340
million) were secured by the following:
|
|
●
|
Corporate
guarantees granted by Netcom Parent to the extent of RMB49 million (31
December 2006: RMB65 million); and
|
|
|
●
|
Corporate
guarantees granted by third parties to the extent of RMB163 million (31
December 2006: RMB275 million).
|
(ii) Finance
lease obligations
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Obligation
under finance leases
|
102
|
963
|
|
Less:
current portion
|
(102)
|
(858)
|
|
－－－－－－－
|
－－－－－－－
|
|
|
—
|
105
|
|
|
=============
|
=============
|
|
The
accumulated finance lease obligation payable to the related parties as at 31
December 2007 amounted to RMB102 million (2006: RMB963 million).
The
interest rates charged on finance lease are ranging from 5.18% to 5.7% with
maturity through 8 December 2008 (2006: 2.68% to 6.83% with maturity through 8
December 2008).
The
Netcom Group’s liabilities under finance leases are analysed as
follows:
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Within
one year
|
105
|
888
|
|
In
the second year
|
—
|
106
|
|
－－－－－－－
|
－－－－－－－
|
|
|
105
|
994
|
|
|
Less:
future finance charges on finance leases
|
(3)
|
(31)
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Present
value of finance lease liabilities
|
102
|
963
|
|
=============
|
=============
|
|
|
The
present value of finance lease liabilities is as follows:
|
||
|
Within
one year
|
102
|
858
|
|
In
the second year
|
—
|
105
|
|
－－－－－－－
|
－－－－－－－
|
|
|
102
|
963
|
|
|
=============
|
=============
|
|
(c) Corporate
bonds
On 8 June 2007, the Netcom Group
issued RMB2 billion ten-year corporate bonds, bearing interest at 4.5% per
annum. The corporate bonds are secured by a corporate guarantee granted by Bank
of China Limited.
|
|
(d)
|
The
fair value of the Netcom Group’s non-current portion of long term bank and
other loans at 31 December 2007 and 2006 were as
follows:
|
-
I-42 -
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Long
term bank loans
|
12,320
|
21,209
|
|
Finance
lease obligations
|
—
|
85
|
|
－－－－－－－
|
－－－－－－－
|
|
|
12,320
|
21,294
|
|
|
=============
|
=============
|
|
The fair value is based on cash flows
discounted using rates based on the market rates ranging from 3.25% to 7.05% (31
December 2006: 3.75% to 8.33%).
31 AMOUNT
DUE FROM/(TO) HOLDING COMPANIES AND FELLOW SUBSIDIARIES
|
Netcom
Group
|
Netcom
|
||||
|
As
at 31 December
|
As
at 31 December
|
||||
|
Note
|
2007
|
2006
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
||
|
Restated
Note
2
|
|||||
|
Current:
|
|||||
|
Due
from ultimate holding company
|
(a)
|
245
|
174
|
—
|
—
|
|
Due
from intermediate holding companies
|
(a)
|
6
|
3
|
—
|
—
|
|
Due
from fellow subsidiaries
|
(a)
|
96
|
181
|
—
|
—
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
||
|
Total
|
347
|
358
|
—
|
—
|
|
|
=============
|
=============
|
=============
|
=============
|
||
|
Due
to ultimate holding company
|
|||||
|
—
Deferred consideration
|
(b)
|
1,960
|
1,960
|
—
|
—
|
|
—
Others
|
(a)
|
1,371
|
3,282
|
—
|
—
|
|
Due
to fellow subsidiaries
|
(a)
|
1,267
|
2,263
|
—
|
—
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
||
|
Total
|
4,598
|
7,505
|
—
|
—
|
|
|
=============
|
=============
|
=============
|
=============
|
||
|
Non-current:
|
|||||
|
Due
to ultimate holding company
|
|||||
|
—
Deferred consideration
|
(b)
|
3,920
|
5,880
|
—
|
—
|
|
Due
to intermediate holding companies
|
(c)
|
78
|
—
|
78
|
—
|
|
Due
to fellow subsidiaries
|
(c)
|
2,171
|
—
|
325
|
—
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
||
|
Total
|
6,169
|
5,880
|
403
|
—
|
|
|
=============
|
=============
|
=============
|
=============
|
||
Notes:
|
|
(a)
|
These
are interest free, unsecured and have no fixed terms of
repayment.
|
|
|
(b)
|
Balance
represents the deferred payments arising from the Acquisition of New
Horizon outstanding at year end. The balance is charged at interest rate
of 5.265% per annum with final maturity through 30 June 2010. The deferred
payment is analysed as follows:
|
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Within
one year
|
1,960
|
1,960
|
|
In
the second year
|
1,960
|
1,960
|
|
In
the third to fifth year, inclusive
|
1,960
|
3,920
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
5,880
|
7,840
|
|
=============
|
=============
|
|
|
|
(c)
|
The
balances bear interest rates ranged from 3.0% to 3.8% per annum, unsecured
and have repayment terms of 3 years. The fair value of the balances is
RMB1,918 million.
|
-
I-43 -
32 DEFERRED
REVENUES
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Balance
at beginning of year:
|
||
|
—
upfront connection fees
|
3,099
|
5,505
|
|
—
upfront installation fees
|
5,767
|
6,769
|
|
—
advances from network capacity sales
|
—
|
2,354
|
|
—
prepaid telephony services
|
5,065
|
4,272
|
|
—
others
|
—
|
—
|
|
－－－－－－－
|
－－－－－－－
|
|
|
13,931
|
18,900
|
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Additions
for the year:
|
||
|
—
upfront connection fees
|
—
|
—
|
|
—
upfront installation fees
|
226
|
357
|
|
—
advances from network capacity sales
|
—
|
236
|
|
—
prepaid telephony services
|
31,749
|
30,360
|
|
—
others
|
86
|
—
|
|
－－－－－－－
|
－－－－－－－
|
|
|
32,061
|
30,953
|
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Reductions
for the year:
|
||
|
—
upfront connection fees
|
(1,517)
|
(2,406)
|
|
—
upfront installation fees
|
(1,279)
|
(1,359)
|
|
—
advances from network capacity sales
|
—
|
(2,590)
|
|
—
prepaid telephony services
|
(31,777)
|
(29,567)
|
|
—
others
|
(2)
|
—
|
|
－－－－－－－
|
－－－－－－－
|
|
|
(34,575)
|
(35,922)
|
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Included:
Disposal of discontinued operations
|
||
|
—
advances from network capacity sales
|
—
|
(2,450)
|
|
—
prepaid telephony services
|
(183)
|
(144)
|
|
－－－－－－－
|
－－－－－－－
|
|
|
(183)
|
(2,594)
|
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Balance
at end of year:
|
||
|
—
upfront connection fees
|
1,582
|
3,099
|
|
—
upfront installation fees
|
4,714
|
5,767
|
|
—
advances from network capacity sales
|
—
|
—
|
|
—
prepaid telephony services
|
5,037
|
5,065
|
|
—
others
|
84
|
—
|
|
－－－－－－－
|
－－－－－－－
|
|
|
11,417
|
13,931
|
|
|
=============
|
=============
|
|
|
Representing:
|
||
|
—
Current portion
|
7,103
|
7,733
|
|
—
Non-current portion
|
4,314
|
6,198
|
|
－－－－－－－
|
－－－－－－－
|
|
|
11,417
|
13,931
|
|
|
=============
|
=============
|
|
-
I-44 -
33 PROVISIONS
|
Early
retirement benefits
|
One-off
cash housing subsidies
|
Total
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
Note
b
|
Note
a & b
|
||
|
As
at 1 January 2007
|
3,137
|
3,185
|
6,322
|
|
Additional
provisions
|
—
|
—
|
—
|
|
Payments
during the year
|
(605)
|
(329)
|
(934)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
As
at 31 December 2007
|
2,532
|
2,856
|
5,388
|
|
=============
|
=============
|
=============
|
|
|
Analysis
of total provisions:
|
|||
|
—
Current portion
|
525
|
2,856
|
3,381
|
|
—
Non-current portion
|
2,007
|
—
|
2,007
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
2,532
|
2,856
|
5,388
|
|
|
=============
|
=============
|
=============
|
|
|
As
at 1 January 2006
|
3,763
|
3,440
|
7,203
|
|
Payments
during the year
|
(626)
|
(255)
|
(881)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
As
at 31 December 2006
|
3,137
|
3,185
|
6,322
|
|
=============
|
=============
|
=============
|
|
|
Analysis
of total provisions:
|
|||
|
—
Current portion
|
551
|
3,185
|
3,736
|
|
—
Non-current portion
|
2,586
|
—
|
2,586
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
3,137
|
3,185
|
6,322
|
|
|
=============
|
=============
|
=============
|
|
|
(a)
|
Certain
staff quarters, prior to 1998, have been sold to the Netcom Group’s
employees at preferential prices, subject to a number of eligibility
requirements. In 1998, the State Council issued a circular which
stipulated that the sale of quarters to employees at preferential prices
should be terminated. In 2000, the State Council issued a further circular
stating that cash subsidies should be made to certain eligible employees
following the withdrawal of the allocation of staff quarters. However, the
specific timetable and procedures for the implementation of these policies
were to be determined by individual provincial or municipal government
based on the particular situation of the provinces or
municipality.
|
Based
on the relevant detailed local government regulations promulgated, certain
entities within the Netcom Group have adopted cash housing subsidy plans. In
accordance with these plans, for those eligible employees who had not been
allocated with quarters or who had not been allocated with quarters up to the
prescribed standards before the discounted sales of quarters were terminated,
the Netcom Group required to pay them one-off cash housing subsidies based on
their years of service, positions and other criteria. Based on the available
information, the Netcom Group estimated the required provision for these cash
housing subsidies amounting to RMB4,142 million, which was charged to the income
statement in the year ended 31 December 2000 (the year in which the State
Council circular in respect of cash subsidies was issued).
|
|
(b)
|
Pursuant
to the Listing Reorganisation and the Acquisition of New Horizon, if the
actual payments required for these subsidies and early retirement benefits
differ from the amount provided as at 30 June 2004 and 30 June 2005,
Netcom Parent will bear any additional payments required or will be paid
the difference if the actual payments are lower than the amount
provided.
|
34 Deferred
taxation
Movements
of the deferred tax assets and liabilities are as follows:
|
Recognised
in Income Statement
|
|||||||
|
Balance
at 31 December 2006
|
Discontinued
operations — Disposed Guangdong and Shanghai
Branches
|
Continuing
operations Note 11
|
Change
in statutory tax rate Note 11
|
Change
in statutory Tax rate and recognised in
equity Note 11
|
Disposal
of Guangdong and Shanghai Branches
|
Balance
at 31 December 2007
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
Restated Note
2
|
|||||||
-
I-45 -
|
Deferred
tax assets:
|
|||||||
|
Deferred
revenue, primarily advances from customers
|
127
|
—
|
(11)
|
(24)
|
—
|
—
|
92
|
|
Temporary
differences from allowance for doubtful debts
|
314
|
(5)
|
73
|
(38)
|
—
|
(13)
|
331
|
|
Unrecognised
revaluation surplus/(deficit)
|
2,810
|
—
|
(104)
|
—
|
(664)
|
20
|
2,062
|
|
Others
|
208
|
—
|
53
|
(49)
|
—
|
(4)
|
208
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Balance
at end of year
|
3,459
|
(5)
|
11
|
(111)
|
(664)
|
3
|
2,693
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
|
Deferred
tax liabilities:
|
|||||||
|
Interest
capitalized
|
(789)
|
—
|
109
|
168
|
—
|
—
|
(512)
|
|
Fixed
assets depreciation
|
(301)
|
—
|
(55)
|
(15)
|
111
|
(28)
|
(288)
|
|
Others
|
(66)
|
—
|
1
|
9
|
—
|
—
|
(56)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Balance
at end of year
|
(1,156)
|
—
|
55
|
162
|
111
|
(28)
|
(856)
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
|
The
amounts in the consolidated balance sheet are as follows:
|
|||||||
|
Deferred
tax assets to be recovered after more than 12 months
|
2,860
|
2,038
|
|||||
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
|
Deferred
tax liabilities to be settled after more than 12 months
|
(1,014)
|
(740)
|
|||||
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
Recognised
in Income Statement
|
|||||
|
Balance
at 31 December 2005
|
Discontinued
operations
|
Continuing
operations
|
Balance
Recognised in Equity
|
Balance
at 31 December 2006
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
Restated Note
2
|
Restated Note
2
|
||||
|
Deferred
tax assets:
|
|||||
|
Deferred
revenue, primarily advances from customers
|
170
|
—
|
(43)
|
—
|
127
|
|
Temporary
differences from allowance for doubtful debts
|
350
|
(4)
|
(32)
|
—
|
314
|
|
Unrecognised
revaluation surplus and deficit (Note iii)
|
2,861
|
2
|
(53)
|
—
|
2,810
|
|
Others
|
99
|
4
|
105
|
—
|
208
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Balance
at end of year
|
3,480
|
2
|
(23)
|
—
|
3,459
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
|
Deferred
tax liabilities:
|
|||||
|
Interest
capitalized
|
(1,261)
|
—
|
472
|
—
|
(789)
|
|
Revaluation
surplus/deficit of fixed assets (Note i)
|
—
|
62
|
(10)
|
(353)
|
(301)
|
|
Others
|
(63)
|
—
|
(3)
|
—
|
(66)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Balance
at end of year
|
(1,324)
|
62
|
459
|
(353)
|
(1,156)
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
-
I-46 -
|
The
amounts in the consolidated balance sheet are as follows:
|
|||||
|
Deferred
tax assets to be recovered after more than 12
months
|
2,906
|
2,860
|
|||
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
|
Deferred
tax liabilities to be settled after more than 12
months
|
(1,190)
|
(1,014)
|
|||
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
|
Notes:
|
|
|
(i)
|
According
to the Netcom Group’s accounting policy as set out in note 4(k), the fixed
assets other than the lease prepayments for land and buildings of the
Netcom Group were revalued by the PRC valuer on a depreciated replacement
cost basis on 31 December 2006, as disclosed in note 21. The revalued
amounts are not used to determine the tax bases of these assets in the
future years. Accordingly, the Netcom Group’s deferred tax liabilities on
the balance sheet as at 31 December 2006, decreased by RMB150 million. The
net reduction comprised RMB353 million, being the deferred tax liabilities
originated from the revaluation surplus of fixed assets which was debited
to revaluation reserves, offset by RMB503 million, being the deferred tax
assets originated from the revaluation deficit of fixed assets which was
credited to the income statement for the year ended 31 December
2006.
|
|
|
(ii)
|
In
connection with the Listing Reorganisation and the Acquisition of New
Horizon, certain of the Netcom Group’s telecommunication networks and
equipment and furniture, fixtures, motor vehicles and other equipment were
revalued as at 31 December 2003 and 2004. Such revalued amounts determine
the tax bases for these assets for future years. In addition, except for
the item described in Note (iii) below, the tax bases of certain assets
and liabilities have been adjusted to the revalued amounts incorporated as
the carrying values in the balance
sheet.
|
|
|
In
connection with the Acquisition of New Horizon, the Netcom Group’s net
deferred tax assets were subsequently reduced by RMB1,077 million
(comprising deferred tax assets of RMB1,273 million and deferred tax
liabilities of RMB196 million), and this decrease was recorded as a debit
to owners’ equity upon the date of the Reorganisation on 30 June 2005. The
RMB1,077 million deduction comprises RMB1,097 million, being deferred tax
liabilities originating from the revaluation surplus of fixed assets
recorded and credited to revaluation reserves offset by RMB2,174 million
deferred tax assets debited to retained
earnings.
|
|
|
(iii)
|
In
addition, in order to determine the tax bases used for future years after
the Listing Reorganisation and the Acquisition of New Horizon, the Netcom
Group’s prepayments for the leasehold land and buildings were revalued for
PRC tax purposes as at 31 December 2003 and 2004. However, the resulting
revaluations of the prepayments for the leasehold land and buildings were
not incorporated into the consolidated financial statements. As a result,
deferred tax assets were subsequently recorded with corresponding
increases in owners’ equity upon the Listing Reorganisation on 30 June
2004 and the Acquisition of New Horizon on 30 June 2005. In the opinion of
the Board, it is more likely than not that the Netcom Group will realize
the benefits of the deferred tax asset after making reference to the
historical taxable income of the Netcom Group. The amount is to be
transferred to retained earnings upon the corresponding realization of the
underlying deferred tax assets.
|
During
the Listing Reorganisation, the leasehold land and buildings had a net surplus
on revaluation of RMB6,967 million as at 31 December 2003. As explained in the
preceding paragraph, a deferred tax asset of RMB2,355 million was subsequently
recorded with a corresponding increase in owner’s equity upon the Listing
Reorganisation on 30 June 2004.
During
the Acquisition of New Horizon, the leasehold land and buildings had a net
surplus on revaluation of RMB2,553 million as at 31 December 2004. As explained
above, a deferred tax asset of RMB843 million was subsequently recorded with a
corresponding increase in owner’s equity upon the Acquisition on 30 June
2005.
The
amount of transfer to retained earnings from unrecognised revaluation surplus
and deficit for the year ended 31 December 2007 was RMB104 million (2006: RMB51
million).
35 Share
capital
|
Authorised
|
||||||||
|
Ordinary
shares of US$0.04 each
|
Convertible
preference shares of US$0.04 each
|
Total
|
||||||
|
No.
of shares
|
US$
|
RMB
million
|
No.
of shares
|
US$
|
RMB
million
|
US$
|
RMB
million
|
|
|
As
at 1 January 2006, 2007 and 31 December 2007
|
25,000,000,000
|
1,000,000,000
|
8,277
|
7,741,782
|
309,671
|
3
|
1,000,309,671
|
8,280
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
|
Issued
|
||||||||
|
Ordinary
shares of US$0.04 each
|
Convertible
preference shares of US$0.04 each
|
Total
|
||||||
|
No.
of shares
|
US$
|
RMB
million
|
No.
of shares
|
US$
|
RMB
million
|
US$
|
RMB
million
|
|
|
As
at 1 January 2006
|
6,593,529,000
|
263,741,160
|
2,181
|
—
|
—
|
—
|
263,741,160
|
2,181
|
|
Exercise
of share options (Note)
|
57,114,500
|
2,284,580
|
18
|
—
|
—
|
—
|
2,284,580
|
18
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
As
at 31 December 2006
|
6,650,643,500
|
266,025,740
|
2,199
|
—
|
—
|
—
|
266,025,740
|
2,199
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
-
I-47 -
|
As
at 1 January 2007
|
6,650,643,500
|
266,025,740
|
2,199
|
—
|
—
|
—
|
266,025,740
|
2,199
|
|
Exercise
of share options (Note)
|
23,684,900
|
947,396
|
7
|
—
|
—
|
—
|
947,396
|
7
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
As
at 31 December 2007
|
6,674,328,400
|
266,973,136
|
2,206
|
—
|
—
|
—
|
266,973,136
|
2,206
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
|
Note:
|
The
Netcom Group issued new shares for the options exercised during this
period. During the year ended 31 December 2007, Netcom issued 16,231,400
shares (2006: 57,114,500 shares) upon exercise of options by participants
in the First Grant Share Option Scheme, and issued 7,453,500 shares (2006:
0 shares) upon exercise of options by participants in the Second Grant
Share Option Scheme. The total consideration received amounted to RMB219
million and the portion that exceeds the nominal value of the shares
issued was recorded as share premium of
Netcom.
|
36 Share
option scheme
A
share option scheme was approved pursuant to a shareholders’ resolution on 30
September 2004 (“Netcom Share Option Scheme”). Share options are granted to
directors of Netcom and to certain employees of the Netcom Group at the
directors’ discretion. Share options can be exercised at least 18 months from
the later of the date of grant or the date of the listing of the shares of
Netcom on the Hong Kong Stock Exchange and subject to certain vesting
restrictions on timing.
On
22 October 2004, 158,640,000 share options with an exercise price of HK$8.40
each were granted to the Netcom Directors and certain employees of the Netcom
Group (the “First Grant”).
Pursuant
to Netcom’s Share Option plan, Netcom granted 158,640,000 options to certain of
its directors and employees, immediately prior to the closing of its global
offering, to subscribe for its ordinary shares at the initial public offering
price under the Hong Kong public offering, excluding brokerage and trading fees,
and transaction and investor compensation levies. The First Grant has an
exercise period of six years from the date of grant. The grantees can exercise
40 percent of the options granted from 17 May 2006, and a further 20 percent of
the options granted from 17 May 2007. All unexercised share options will expire
on 16 November 2010.
On
6 December 2005, the board of directors approved the grant of 79,320,000 shares
of share options to certain management personnel and other professional
personnel designated by the Compensation Committee of the newly acquired four
northern provinces/autonomous region (“Second Grant”). The grantees can exercise
40% of the option granted from 6 December 2007, and all unexercised share
options will be expired on 5 December 2011.
The
grant date fair value of the share options granted in the First Grant is
determined by the Black-Scholes model based on the following assumptions:
expected dividend pay-out ratio of 35%, expected vesting period of 5 years,
expected volatility rate of 23.6% and risk-free interest rate of 4.3%. The
weighted average fair value of the Netcom Share Options on grant date was
determined as HK$1.22 per Netcom Share (RMB1.28 per Netcom Share). The grant
date fair value of the Netcom Share Options granted in the Second Grant is
determined by the Black-Scholes model based on the following assumptions:
expected dividend pay-out ratio of 35%, expected vesting period of 4 years,
expected volatility rate of 21.46% and risk-free interest rate of 4.3%. The
weighted average fair value of the Netcom Option on grant date was determined as
HK$1.28 per Netcom Share (RMB1.34 per Netcom Share). The model that decided the
weighted average fair value of the Netcom Options and the assumptions mentioned
above are subjective, and the changes of these subjective assumptions could
affect the weighted average fair value of the Netcom Option. Therefore,
Black-Scholes model may not reliably calculate the weighted average fair value
of the Netcom Options.
Modifications
to certain clauses of the Netcom Options schemes already granted were approved
on 16 May 2006, pursuant to a resolution of the Extraordinary General Meeting.
The modifications were mainly related to eligibility of the participants, number
of Netcom Options and exercise vesting schedules, rights upon cessation of
employment, death and loss of capacity, performance targets, and cancellation of
Netcom Options. The modifications did not have significant impact to the
financial statements.
The
movement of the Netcom Options granted during the year is summarized as
follows:
|
Exercise price
|
Weighted
average closing price per Netcom Share at respective days immediately
before the exercises of Netcom Options
|
No.
of Netcom Option exercisable as at 31 December
2006
|
||||||
|
No.
of Netcom Options
|
||||||||
|
As
at 1 January 2006
|
Granted
|
Exercised
|
Lapsed
and forfeited
|
As
at 31 December 2006
|
||||
|
HK$
|
HK$
|
|||||||
|
First
Grant
|
156,703,000
|
—
|
57,114,500
|
1,975,800
|
97,612,700
|
8.40
|
14.46
|
5,670,084
|
|
Second
Grant
|
79,320,000
|
—
|
—
|
285,800
|
79,034,200
|
12.45
|
—
|
—
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|||
|
Total
|
236,023,000
|
—
|
57,114,500
|
2,261,600
|
176,646,900
|
5,670,084
|
||
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
|||
-
I-48 -
|
Exercise
price
|
Weighted
average closing price per Netcom Share at respective days immediately
before the exercises of Netcom Options
|
No.
of Netcom Option exercisable as at 31
December 2007
|
||||||
|
No.
of Netcom Options
|
||||||||
|
As
at 1 January 2007
|
Granted
|
Exercised
|
Lapsed
and forfeited
|
As
at 31 December 2007
|
||||
|
HK$
|
HK$
|
|||||||
|
First
Grant
|
97,612,700
|
—
|
16,231,400
|
2,117,440
|
79,263,860
|
8.40
|
22.23
|
20,728,290
|
|
Second
Grant
|
79,034,200
|
—
|
7,453,500
|
—
|
71,580,700
|
12.45
|
23.92
|
24,490,320
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|||
|
Total
|
176,646,900
|
—
|
23,684,900
|
2,117,440
|
150,844,560
|
45,218,610
|
||
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
|||
Netcom
uses historical data to estimate pre-vesting option forfeitures and record
share-based compensation expense only for those awards that are expected to
vest.
The
compensation cost recognised in staff cost during the year ended 31 December
2007 was RMB59 million (For year ended 31 December 2006: RMB75 million). As at
31 December 2007, there was RMB47 million (As at 31 December 2006, there was
RMB106 million) of unrecognised compensation cost, adjusted for estimated
forfeitures, related to non-vested share-based awards granted to Netcom’s
employees. This cost is expected to be recognised over a weighted-average period
of 1.31 years. Total unrecognised compensation cost may be adjusted for future
changes in estimated forfeitures.
There
were no capitalized share-based compensation costs during the year ended 31
December 2007 and 2006.
The
intrinsic value for the Netcom Options exercised amounted to HK$656 million and
was calculated as the difference between the market value on the date of
exercise and the exercise price of the shares. The intrinsic value of Netcom
Options outstanding as of 31 December 2007 amounted to HK$1,980 million (31
December 2006: HK$1,879 million), which was calculated as the difference between
the closing stock price as of 31 December 2007 and the exercise price of the
Netcom Options.
The
weighted average remaining contractual life for outstanding Netcom Options,
vested and expected to vest or exercisable Netcom Options as of 31 December 2007
were 3.38 years and 3.45 years (as of 31 December 2006 was 4.35 years and 3.88
years), respectively.
37 Reserves
— Netcom
|
Share premium
|
Capital reserve
|
Retained
earnings
|
Total
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
As
at 1 January 2006
|
42,750
|
3,104
|
(1,381)
|
44,473
|
|
Profit
for the year
|
—
|
—
|
17,475
|
17,475
|
|
Dividends
distributed during the year (Note 13)
|
—
|
—
|
(3,196)
|
(3,196)
|
|
Share
based payments
|
545
|
(73)
|
—
|
472
|
|
Exercise
of share options
|
—
|
75
|
—
|
75
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
As
at 31 December 2006
|
43,295
|
3,106
|
12,898
|
59,299
|
|
=============
|
=============
|
=============
|
=============
|
|
|
Profit
for the year
|
—
|
—
|
8,714
|
8,714
|
|
Dividends
distributed during the year (Note 13)
|
—
|
—
|
(3,600)
|
(3,600)
|
|
Share
based payments
|
243
|
(31)
|
—
|
212
|
|
Exercise
of Netcom Options
|
—
|
59
|
—
|
59
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
As
at 31 December 2007
|
43,538
|
3,134
|
18,012
|
64,684
|
|
=============
|
=============
|
=============
|
=============
|
38 Consolidated
cash flow statements
(a) Reconciliation
of profit before taxation to net cash flows generated from the operating
activities of continuing operation
-
I-49 -
|
Year
ended 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Restated Note
2
|
||
|
Profit
before taxation
|
15,267
|
15,205
|
|
Adjusted
by:
|
||
|
Depreciation
of fixed assets and amortisation of intangible assets
|
25,402
|
24,845
|
|
Lease
prepayments for land
|
52
|
68
|
|
Lease
prepayments for network capacity
|
6
|
—
|
|
Deferred
costs charged to the income statement
|
876
|
996
|
|
Deficit
on revaluation of fixed assets
|
—
|
1,335
|
|
Bad
and doubtful debts
|
868
|
1,003
|
|
(Gain)/loss
on disposal of fixed assets
|
(357)
|
432
|
|
Share-based
payments
|
59
|
75
|
|
Other
income
|
(1,221)
|
(621)
|
|
Interest
income
|
(113)
|
(136)
|
|
Interest
expense
|
3,162
|
3,757
|
|
Foreign
exchange net loss/(gain)
|
25
|
(8)
|
|
Changes
in working capital
|
||
|
Increase
in accounts receivable
|
(1,357)
|
(1,944)
|
|
Decrease
in inventories and consumables
|
120
|
56
|
|
Decrease
in prepayments, other receivables and other current assets
|
142
|
229
|
|
Increase
in other non-current assets
|
(201)
|
(339)
|
|
Increase
in accounts payable
|
1,285
|
1,142
|
|
Decrease
in accruals and other payables
|
(2,384)
|
(4,308)
|
|
Decrease
in deferred revenues
|
(2,322)
|
(2,631)
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Net
cash inflow generated from operating activities of continuing
operations
|
39,309
|
39,156
|
|
=============
|
=============
|
|
(b)
Major non-cash transactions
During
2005, the Netcom Group paid RMB3,000 million as part of the total consideration
for the Acquisition of New Horizon. The remaining balance of RMB9,800 million
was recognised as a deferred payment and is included in amounts due to the
ultimate holding company. During the year ended 31 December 2007, payments made
in respect of the purchase were RMB1,960 million, the unpaid balance at 31
December 2007 was RMB5,880 million.
In
2007, the Netcom Group replaced copper cables in some network infrastructure
with optical fibers and related equipments. Some of this replacement was done
through non-monetary assets exchange with suppliers, which it exchanged optical
fibers and related equipments for the Netcom Group’s own copper cables. The cost
of the assets received was recorded at the fair value of asset surrendered. In
2007, the net book value and fair value of copper cables surrendered were RMB182
million and RMB568 million respectively. A gain on the non-monetary assets
exchange of RMB386 million is recognized in the current year income
statement.
(c) Net
investment gain from disposal of Guangdong and Shanghai branches
On
15 January 2007, CNC China entered into an assets transfer agreement with its
ultimate holding company, Netcom Parent. 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. The disposal was completed on 28 February 2007. The net assets of
Guangdong and Shanghai Branches as at the completion date are as listed
below:
|
As
at 28 February 2007
|
|
|
RMB
million
|
|
|
Net
assets disposed of (excluding the cash and cash
equivalents):
|
|
|
Accounts
receivable and other current assets
|
416
|
|
Fixed
assets and other non-current assets
|
7,630
|
|
Current
portion of deferred income
|
(183)
|
|
Accounts
payable
|
(2,046)
|
|
Long-term
loans
|
(3,000)
|
|
Other
liabilities
|
(267)
|
|
－－－－－－－
|
|
|
2,550
|
|
|
Gain
on disposal recognised in the income statement
|
927
|
|
－－－－－－－
|
|
|
Net
cash inflow from disposal of Guangdong and Shanghai
Branches
|
3,477
|
|
=============
|
|
|
Analysis
of cash inflow from disposal of Guangdong and Shanghai
Branches
|
|
|
Cash
consideration
|
3,500
|
|
Less:
Cash and cash equivalents of Disposed Guangdong and Shanghai
Branches
|
(23)
|
|
－－－－－－－
|
|
|
Net
cash inflow
|
3,477
|
|
=============
|
-
I-50 -
39 Banking
facilities
As
at 31 December 2007 and 2006, the utilized and unutilized banking facilities are
as follows:
|
Netcom
Group
|
Netcom
|
|||
|
As
at 31 December
|
As
at 31 December
|
|||
|
2007
|
2006
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
Amount
utilized
|
31,495
|
60,541
|
9
|
—
|
|
Amount
unutilized
|
106,824
|
115,588
|
2,238
|
—
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Aggregate
banking facilities
|
138,319
|
176,129
|
2,247
|
—
|
|
=============
|
=============
|
=============
|
=============
|
|
40 Commitments
(a) Capital
commitments
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Contracted
but not provided for
|
||
|
—
Leasehold land and buildings
|
10
|
26
|
|
—
Telecommunication networks and equipment
|
530
|
2,502
|
|
—
Others
|
9
|
5
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
549
|
2,533
|
|
=============
|
=============
|
|
|
Authorised
but not contracted for
|
||
|
—
Leasehold land and buildings
|
21
|
—
|
|
—
Telecommunication networks and equipment
|
106
|
300
|
|
—
Others
|
1
|
—
|
|
－－－－－－－
|
－－－－－－－
|
|
|
128
|
300
|
|
|
=============
|
=============
|
|
(b) Operating
lease commitments
The
Netcom Group has future minimum lease payments under non-cancelable operating
leases in respect of premises and equipment as follows:
|
As
at 31 December
|
||
|
2007
|
2006
|
|
|
RMB
million
|
RMB
million
|
|
|
Not
later than one year
|
579
|
734
|
|
Later
than one year and not later than five years
|
1,134
|
1,102
|
|
Later
than five years
|
291
|
517
|
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
2,004
|
2,353
|
|
=============
|
=============
|
|
41 Related
party transactions
All
state-controlled enterprises, their subsidiaries, their key management and their
close family, and their employees represent related parties of the
-
I-51 -
Netcom
Group as defined by HKAS 24. Netcom Parent, the Netcom Group’s parent company,
is a state-controlled enterprise directly controlled by the PRC government which
controls different state-owned enterprises driving the economy of the PRC. The
Netcom Group is the dominant fixed line telecommunications service provider in
northern China by virtue of its historical monopoly over these services. As a
result, the Netcom Group has extensive transactions including sales and
purchases of services, goods and fixed assets, leasing of assets and banking
transactions with other state-owned parties in its ordinary course of business.
These transactions are carried out at terms similar to those obtained by other
state-owned parties and have been reflected in the financial
statements.
The
Netcom Group’s operations are subject to the supervision of and regulation by
the PRC Government. The Ministry of Information Industry (MII), pursuant to the
authority delegated by the PRC’s State Council, is responsible for formulating
the policies and regulations for the telecommunications industry in China,
including granting licenses, allocating frequency spectrum, formulating
interconnection and settlement arrangements between telecommunications
operators, enforcing industry regulations and reviewing tariffs for domestic
services. Other PRC governmental authorities also regulate tariff policies,
capital investment and foreign investment in the telecommunications
industry.
As
a state-owned telecommunications operator, the Netcom Group has extensive
transactions with other state-owned telecommunications operators in its ordinary
course of business. These transactions are carried out in accordance with the
rules and regulations stipulated by the MII of the PRC Government and disclosed
below.
The
Netcom Group has extensive transactions with other members of Netcom Parent. It
is possible that the terms of the transactions between the Netcom Group and
other members of Netcom Parent are not the same as those that would result from
transactions with other related parties or wholly unrelated
parties.
Management
believes that meaningful information relative to related party disclosures has
been adequately disclosed.
|
For
the year ended 31 December
|
|||
|
2007
|
2006
|
||
|
Note
|
RMB
million
|
RMB
million
|
|
|
Restated
Note
2
|
|||
|
Emolument
of key management
|
|||
|
—
salaries and welfare and contributions to retirement
scheme
|
(i)
|
13
|
13
|
|
=============
|
=============
|
||
|
Interconnection
fees
|
|||
|
—
from fellow subsidiaries
|
(iv)(b)
|
602
|
381
|
|
—
from other state-owned telecommunications operators
|
(iv)(b)
|
6,333
|
6,726
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Subtotal
|
6,935
|
7,107
|
|
|
=============
|
=============
|
||
|
Interconnection
charges
|
|||
|
—
to fellow subsidiaries
|
(iv)(b)
|
687
|
820
|
|
—
to other state-owned telecommunications operators
|
(iv)(b)
|
1,595
|
1,758
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Subtotal
|
2,282
|
2,578
|
|
|
=============
|
=============
|
||
|
Rental
income from properties leased to fellow subsidiaries
|
(iv)(a),(iv)(c)
|
1
|
2
|
|
=============
|
=============
|
||
|
Purchase
of materials
|
|||
|
—
from fellow subsidiaries
|
(iv)(a),(iv)(c)
|
569
|
1,170
|
|
—
from other related companies
|
(iv)(a),(iv)(c)
|
99
|
122
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Subtotal
|
668
|
1,292
|
|
|
=============
|
=============
|
||
|
Receipt
of engineering, project planning, design, construction and
information technology services
|
|||
|
—
from fellow subsidiaries
|
(iv)(a),(iv)(b)
|
1,629
|
2,084
|
|
—
from other related companies
|
(iv)(a),(iv)(b)
|
317
|
368
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Subtotal
|
1,946
|
2,452
|
|
|
=============
|
=============
|
||
|
Provision
of engineering, project planning, design, construction and
information technology services — from other state-owned
telecommunications operators
|
(iv)(a)
|
54
|
45
|
|
=============
|
=============
|
||
-
I-52 -
|
Ancillary
telecommunications support services
|
|||
|
—
from fellow subsidiaries
|
(v),(iv)(a)
|
373
|
350
|
|
—
from other related companies
|
(v),(iv)(a)
|
75
|
58
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Subtotal
|
448
|
408
|
|
|
=============
|
=============
|
||
|
Payment
of operating lease rentals of premises
|
|||
|
—
to fellow subsidiaries
|
(iv)(a),(iv)(c)
|
636
|
680
|
|
=============
|
=============
|
||
|
Property
sub-lease rentals to fellow subsidiaries
|
(iv)(a),(iv)(c)
|
11
|
15
|
|
=============
|
=============
|
||
|
Common
corporate services income from ultimate holding
company
|
(vi)
|
125
|
121
|
|
=============
|
=============
|
||
|
Common
corporate services expenditure paid to ultimate holding
company
|
(vi)
|
477
|
448
|
|
=============
|
=============
|
||
|
Support
services received
|
|||
|
—
from ultimate holding company
|
(vii),(iv)(a)
|
—
|
2
|
|
—
from fellow subsidiaries
|
(vii),(iv)(a)
|
496
|
712
|
|
—
from other related companies
|
(vii),(iv)(a)
|
40
|
23
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Subtotal
|
536
|
737
|
|
|
=============
|
=============
|
||
|
Telecommunications
rental income from other state-owned telecommunications
operators
|
(iv)(b)
|
723
|
1,327
|
|
=============
|
=============
|
||
|
Payment
for lease of telecommunications facility
|
|||
|
—
to ultimate holding company
|
(viii)
|
66
|
75
|
|
—
to fellow subsidiaries
|
(viii)
|
243
|
307
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Subtotal
|
309
|
382
|
|
|
=============
|
=============
|
||
|
Payment
for purchase of long-term telecommunications capacity to fellow
subsidiaries
|
(ix),(xii)
|
—
|
36
|
|
=============
|
=============
|
||
|
Payment
for lease of long-term telecommunications capacity to fellow
subsidiaries
|
(x),(xii)
|
—
|
65
|
|
=============
|
=============
|
||
|
Management
fee received from fellow subsidiaries
|
(xi),(xii)
|
—
|
23
|
|
=============
|
=============
|
||
|
Information
communication technologies service income received
|
|||
|
—
from ultimate holding company
|
(xix),(iv)(a)
|
71
|
2
|
|
—
from fellow subsidiaries
|
(xix),(iv)(a)
|
61
|
60
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Subtotal
|
132
|
62
|
|
|
=============
|
=============
|
|
|
Notes:
|
|
|
(i)
|
Represents
the emoluments paid to all of the Netcom Directors and the top management
of the Netcom Group, who are considered as the related parties of the
Netcom Group.
|
-
I-53 -
|
|
(ii)
|
The
Netcom Group entered into finance lease arrangements with a related party,
details have been set out in Note
30(b).
|
|
|
(iii)
|
Related
party represents the non-listed investors of the fellow
subsidiaries.
|
|
|
(iv)
|
Priced
based on one of the following three
criteria:
|
|
|
(a)
|
market
price;
|
|
|
(b)
|
prices
based on government guidance; or
|
|
|
(c)
|
cost
plus basis.
|
|
|
(v)
|
Represents
provision of ancillary telecommunications support services to the Netcom
Group by the fellow subsidiaries and the related companies. These services
include certain telecommunications pre-sale, on-sale and after-sale
services, certain sales agency services, the printing and delivery of
invoice services, the maintenance of certain air-conditioning, fire alarm
equipment and telephone booths and other customer
services.
|
|
|
(vi)
|
The
Netcom Group entered into a Master Service Sharing Agreement with the
Netcom Parent pursuant to which expenses associated with common corporate
services is allocated between the Netcom Group and Netcom Parent based on
total assets as appropriate.
|
|
|
(vii)
|
Represents
the support services provided to the Netcom Group by the fellow
subsidiaries and the related companies. These support services include
equipment leasing services, motor vehicles services, safety and security
services, conference services, basic construction agency services,
equipment maintenance services, employee training services, advertising
services, printing services and other support
services.
|
|
|
(viii)
|
The
Netcom Group entered into a Telecommunications Facilities Leasing
Agreement with Netcom Parent pursuant to which the Netcom Group leases the
international telecommunications facilities and inter-provincial
transmission optic fibers from Netcom Parent. The lease payment is based
on the depreciation charge of the
assets.
|
|
|
(ix)
|
The
Netcom Group entered into a Capacity Purchase Agreement with East Asia
Netcom Limited (“EANL”), a wholly owned subsidiary of Netcom Parent,
pursuant to which the Netcom Group receives certain amounts of long-term
telecommunications capacity from Netcom Parent at market prices as set out
in the Capacity Purchase Agreement.
|
|
|
(x)
|
The
Netcom Group entered into a Capacity Lease Agreement with EANL, pursuant
to which the Netcom Group leases certain amount of capacity of Netcom
Parent’s telecommunications network at market rates as set out in the
Capacity Lease Agreement.
|
|
|
(xi)
|
The
Netcom Group entered into a Management Services Agreement with EANL,
pursuant to which the Netcom Group provides certain management services to
Netcom Parent either on a cost reimbursement basis or on the basis of cost
plus reasonable profits not exceeding the market price as set out in the
Management Service Agreement.
|
|
|
(xii)
|
Due
to the disposal of ANC Group on 22 August 2006, the Capacity Purchase
Agreement, the Capacity Lease Agreement and the Management Services
Agreement between the Netcom Group and East Asia Netcom Ltd (a formerly
wholly owned subsidiary of Netcom Parent) were no longer related party
transactions to the Netcom Group after 22 August
2006.
|
|
|
(xiii)
|
In
addition, pursuant to the Listing Reorganisation and the Acquisition of
New Horizon, Netcom Parent has agreed to hold and maintain, for the Netcom
Group’s benefit, all licenses received from the MII in connection with the
Restructured Businesses transferred to the Netcom Group. The licenses
maintained by Netcom Parent were granted by the MII at nil or nominal
costs. To the extent that Netcom Parent incurs a cost to maintain or
obtain licenses in the future, Netcom has agreed to reimburse Netcom
Parent for any such expense.
|
|
|
(xiv)
|
Netcom
Parent has also agreed to indemnify the Netcom Group in connection with
any tax and deferred tax liabilities not recognised in the financial
statements of the Netcom Group arising from transactions prior to the date
of Listing Reorganisation and the Acquisition in relation to the business
of the Netcom Group prior to the Listing and the business of the newly
required four provinces/autonomous region
respectively.
|
|
|
(xv)
|
As
at 31 December 2007, Netcom Parent granted corporate guarantees to the
Netcom Group as set out in Note
30(b).
|
|
|
(xvi)
|
Netcom
Parent, the Netcom Group’s ultimate holding company, entered into an
agreement (the “Sponsorship Agreement”) with Beijing Organization
Committee (“BOCOG”) which designated Netcom Parent as the exclusive
fixed-line telecommunications services partner in the PRC to sponsor the
2008 Beijing Olympic Games. Netcom Parent allocated the sponsorship fee to
its members based on the estimated future benefits derived from the
Sponsorship Agreement to respective members and the Netcom Group has
contributed a portion of the required support under the Sponsorship
Agreement through cash payment and provision of services to BOCOG
amounting to RMB0.54 billion. Accordingly, an intangible asset and a
payable to the ultimate holding company of the said amount have been
recognised on the Netcom Group’s balance
sheet.
|
|
|
(xvii)
|
As
at 31 December 2007, the Netcom Group has balances with other state-owned
telecommunication service providers, cash deposited in and loans granted
from state-owned banks as set out in Notes 18, 28, 17 and 30
respectively.
|
|
|
(xviii)
|
Up
to 31 December 2007, the deferred consideration in respect of the
Acquisition of New Horizon paid to Netcom Parent amounted to RMB3,920
million, and the balance of the deferred consideration amounted to
RMB5,880 million (2006: RMB7,840 million). The accumulated related
interest charged to income statement up to 31 December 2007 amounted to
RMB942 million (2006: RMB567
million).
|
|
|
(xix)
|
China
Netcom System Integration, an indirect wholly owned subsidiary of Netcom,
entered into an Information and Communications Technology Agreement on 7
November 2006 with Netcom Parent. Pursuant to the Information and
Communications Technology Agreement, China Netcom System Integration (and
its subsidiaries) will provide Information Communications Technology
Services to Netcom Parent. China Netcom System Integration will also
subcontract services ancillary to the provision of Information
Communications Technology Services, namely the System Installation and
Configuration Services to the subsidiaries and branches of Netcom Parent
in Netcom Parent’s southern service region in
PRC.
|
|
|
(xx)
|
On
31 December 2006, the Netcom Group acquired some assets from Netcom Parent
at an agreed price of RMB81
million.
|
-
I-54 -
|
|
(xxi)
|
On
15 January 2007, CNC China entered into an assets transfer agreement with
its ultimate holding company, Netcom Parent. 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 in the PRC for consideration of RMB3.5 billion. On
14 February 2007, the independent shareholders passed an ordinary
resolution to approve the disposal. The disposal was completed on 28
February 2007 upon the approval granted from the MII. For details, please
refer to Note 26.
|
|
|
(xxii)
|
On
5 December 2007, System Integration Corporation, a directly wholly owned
subsidiary of CNC China, entered into an equity interest transfer
agreement and agreed to acquire the entire equity interest of Beijing
Telecom P&D Institute from China Netcom Group Beijing Communications
Corporation at a consideration of RMB298.9 million. The acquisition was
completed on 31 December 2007. The difference of the consideration paid
and the net assets value of the Beijing Telecom P&D Institute is RMB61
million and recognised directly in the other reserve. For details, please
refer to Note 2.
|
|
|
(xxiii)
|
In
2007, the Netcom Group borrowed loans from fellow subsidiaries and other
holding companies. For the related terms, please refer to Note
31(c).
|
42 Significant
subsequent events
|
|
(i)
|
After
the balance sheet date the Board proposed a final dividend. Further
details are disclosed in Note 13.
|
|
|
(ii)
|
The
Netcom Group borrowed two foreign currency loans of HK$1 billion each from
a bank in Hong Kong on 1 February and 4 February 2008 respectively. Both
of the loans will mature on 31 December 2008. The actual annual interest
rates charged are 2.53% and 2.557%.
|
43 Ultimate
holding party
The
ultimate holding company is Netcom Parent which is owned and controlled by the
PRC Government.
44 Approval
of financial statements
The
financial statements were approved by the Board on 25 March 2008.
3. UNAUDITED
REVENUES FOR THE THREE MONTHS ENDED 31 MARCH 2008
As
announced by Netcom on 21 April 2008, the unaudited consolidated revenue of
Netcom for the three months ended 31 March 2008 was RMB20,487 million
(approximately HK$23,307 million), including upfront connection fees of RMB270
million (approximately HK$307 million). Excluding upfront connection fees, the
unaudited consolidated revenue of Netcom for the three months ended 31 March
2008 was RMB20,217 million (approximately HK$23,000 million).
4. MANAGEMENT
DISCUSSION AND ANALYSIS
Subject
to the adoption of the definitions in this document and the additional
information for the financial year ended 31 December 2005 and the funding and
treasury policies and objectives shown in the section headed “Liquidity and
Capital Resources”, the following management discussion and analysis of the
Netcom Group’s financial condition and results of operations is extracted from
the Form 20-F filed by Netcom with the SEC for the fiscal year ended 31 December
2007.
OVERVIEW
The
Netcom Group is a leading broadband communications and fixed-line
telecommunications operator in China and a dominant provider of fixed-line
telephone services, broadband and other Internet-related services, as well as
business and data communications services in its service region.
In
2007, the Netcom Group continued to face increasing mobile substitution and as a
result experienced increasing migration of fixed-line voice traffic,
particularly local fixed-line voice traffic, to mobile services. As part of its
strategy to mitigate the effect of mobile substitution on its fixed-line
telephone services, the Netcom Group has increased its efforts to diversify into
broadband and other Internet-related services, information and communications
services as well as value added services as part of its fixed-line services. The
Netcom Group also began offering advertising and media services in
2007.
FACTORS
AFFECTING RECENT RESULTS OF OPERATIONS of The Netcom Group
Sale
of Southern Service Region Business and Acquisition of Design
Institute
On
28 February 2007, the Netcom Group sold its assets and liabilities in relation
to its telecommunications operations in its southern service region. In
accordance with HKFRS 5 “Non-current assets held for sale and discontinued
operations” issued by the HKICPA, the Netcom Group has presented the results of
operations and cash flow from operations of its southern service region as
discontinued operations. Its income statement and statement of cash flow for
2005 and 2006 have been restated accordingly.
-
I-55 -
On
31 December 2007, the Netcom Group acquired the entire equity interest of Design
Institute from China Netcom Group Beijing Communications Corporation, a wholly
owned subsidiary of Netcom Parent. Since Netcom Parent is the ultimate holding
company of the Netcom Group, this acquisition is a business combination under
common control. The Netcom Group accounted for this acquisition using a method
similar to 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 Design Institute have been owned by the Netcom Group
since the beginning of the period presented. Accordingly, its financial
statements for 2005 and 2006 have been restated to include the financial results
of Design Institute as if the acquisition had occurred as of 1 January
2005.
The
following tables set forth the financial impact of the sale of the southern
service region business of the Netcom Group and acquisition of the Design
Institute as of and for the year ended 31 December 2005 and 2006.
|
Year
ended 31 December 2005
|
|||||
|
Originally
stated
|
Disposal
of the southern service region of the Netcom
Group
|
Acquisition of
Beijing Telecom P&D Institute
|
Elimination
of intercompany transactions
|
Restated
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
Continuing
operations:
|
|||||
|
Revenues
|
85,861
|
(2,120)
|
186
|
—
|
83,927
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Profit
for the year from continuing operation
|
14,114
|
174
|
62
|
—
|
14,350
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
|
Discontinued
operations:
|
|||||
|
Profit/(loss)
from discontinued operations
|
(226)
|
(174)
|
—
|
—
|
(400)
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
|
Profit
for the year
|
13,888
|
—
|
62
|
—
|
13,950
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
|
Net
cash inflow from operating activities
|
33,557
|
—
|
(22)
|
—
|
33,535
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Net
cash outflow from investing activities
|
(24,608)
|
—
|
31
|
—
|
(24,577)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Net
cash outflow from financing activities
|
(14,656)
|
—
|
18
|
—
|
(14,638)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
current assets at 31 December 2005
|
14,499
|
—
|
176
|
—
|
14,675
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
assets at 31 December 2005
|
202,840
|
—
|
282
|
—
|
203,122
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
current liabilities at 31 December 2005
|
98,399
|
—
|
5
|
—
|
98,404
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
liabilities at 31 December 2005
|
139,830
|
—
|
5
|
—
|
139,835
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Shareholders’
equity at 31 December 2005
|
63,010
|
—
|
277
|
—
|
63,287
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
-
I-56 -
|
Year
ended 31 December 2006
|
|||||
|
Originally
stated
|
Disposal
of the southern service region of the Netcom
Group
|
Acquisition of
Beijing Telecom P&D Institute
|
Elimination
of intercompany transactions
|
Restated
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
Continuing
operations:
|
|||||
|
Revenues
|
86,921
|
(3,222)
|
165
|
330
|
84,194
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Profit
for the year from continuing operation
|
11,141
|
332
|
27
|
(22)
|
11,478
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
|
Discontinued
operations:
|
|||||
|
Profit/(loss)
from discontinued operations
|
1,819
|
(332)
|
—
|
—
|
1,487
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
|
Profit
for the year
|
12,960
|
—
|
27
|
(22)
|
12,965
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
|
Net
cash inflow from operating activities
|
34,133
|
—
|
20
|
(18)
|
34,135
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Net
cash outflow from investing activities
|
(24,991)
|
—
|
(2)
|
21
|
(24,972)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Net
cash outflow from financing activities
|
(6,447)
|
—
|
(30)
|
—
|
(6,477)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
current assets at 31 December 2006
|
18,059
|
—
|
218
|
(51)
|
18,226
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
assets at 31 December 2006
|
203,835
|
—
|
318
|
(71)
|
204,082
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
current liabilities at 31 December 2006
|
90,802
|
—
|
80
|
(49)
|
90,833
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
liabilities at 31 December 2006
|
129,857
|
—
|
80
|
(49)
|
129,888
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Shareholders’
equity at 31 December 2006
|
73,978
|
—
|
238
|
(22)
|
74,194
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
Sale
of ANC Group
On
22 August 2006, the Netcom Group sold its 100% equity interest in ANC Group to
Connect Holdings Limited for US$168.84 million. The results of operations and
cash flows of ANC Group for the 2005 and 2006 have been classified as
discontinued operations.
The
Netcom Group’s 2005 Acquisition
On
31 October 2005, the Netcom Group acquired from Netcom Parent the fixed-line
telecommunications assets and related liabilities in Heilongjiang Province,
Jilin Province, the Neimenggu Autonomous Region and Shanxi Province. Since the
Netcom Group and the 2005 Acquired Assets and Liabilities were under the common
control of Netcom Parent, its 2005 Acquisition has been treated as a
“combination of entities under common control” which was accounted for in a
manner similar to pooling-of-interests. Accordingly, the 2005 Acquired Assets
and Liabilities have been recorded at book value under HKFRS as if the
businesses and assets have been owned by the Netcom Group as of 1 January
2005.
Revaluation
of the fixed assets of the Netcom Group
According
to the Netcom Group’s accounting policies, each class of its fixed assets other
than buildings were last revalued
-
I-57 -
at
31 December 2006 by the PRC valuer on a depreciated replacement cost basis. The
value of such fixed assets was determined at RMB147,573 million. The net deficit
arising on the revaluation (including the impact of the Southern Service Region
Business and presented as discontinued operations) was RMB453 million, the net
deficit was split between a credit to the revaluation reserve amounting to
RMB1,071 million and an expense to the income statement of RMB1,524 million for
that year.
RESULTS
OF OPERATIONS
The
table below sets forth a breakdown of the revenues of the Netcom Group’s
services and total operating expenses in terms of amount and as a percentage of
its total revenues, as well as net cash flow, for the periods
indicated.
Unless
otherwise specified, the following analysis is made on the basis of continuing
operations.
|
For
the Year Ended 31 December
|
||||||
|
2005
|
2006
|
2007
|
||||
|
Amount
|
Percentage of
Revenues
|
Amount
|
Percentage of
Revenues
|
Amount
|
Percentage of
Revenues
|
|
|
(Restated)
|
(Restated)
|
|||||
|
(millions
of RMB, except percentage data)
|
||||||
|
CONTINUING
OPERATIONS
|
||||||
|
Revenues:
|
||||||
|
Fixed-line
telephone services (1):
|
||||||
|
Local:
|
||||||
|
Local
usage fees
|
24,440
|
29.1%
|
22,059
|
26.2%
|
19,989
|
23.8%
|
|
Monthly
fees
|
18,170
|
21.7%
|
16,546
|
19.6%
|
12,387
|
14.8%
|
|
Upfront
installation fees
|
1,433
|
1.7%
|
1,364
|
1.6%
|
1,283
|
1.5%
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Subtotal
|
44,043
|
52.5%
|
39,969
|
47.4%
|
33,659
|
40.1%
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Domestic
long distance(2)
|
9,773
|
11.7%
|
9,495
|
11.3%
|
8,769
|
10.4%
|
|
International
long distance(2)
(3)
|
874
|
1.0%
|
819
|
1.0%
|
791
|
0.9%
|
|
Value-added
services
|
3,970
|
4.7%
|
5,341
|
6.3%
|
6,114
|
7.3%
|
|
Interconnection
fees
|
7,664
|
9.1%
|
8,432
|
10.0%
|
8,376
|
10.0%
|
|
Upfront
connection fees(4)
|
3,405
|
4.1%
|
2,406
|
2.9%
|
1,517
|
1.8%
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Subtotal
|
69,729
|
83.1%
|
66,462
|
78.9%
|
59,226
|
70.5%
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Broadband
services
|
7,289
|
8.7%
|
9,916
|
11.8%
|
13,835
|
16.5%
|
|
Other
Internet-related services
|
556
|
0.7%
|
516
|
0.6%
|
532
|
0.6%
|
|
Managed
data services
|
1,621
|
1.9%
|
1,413
|
1.7%
|
1,284
|
1.5%
|
|
Leased
line income
|
2,376
|
2.8%
|
2,540
|
3.0%
|
2,521
|
3.0%
|
|
ICT
services
|
186
|
0.2%
|
855
|
1.0%
|
3,990
|
4.8%
|
|
Other
services
|
2,170
|
2.6%
|
2,492
|
3.0%
|
2,617
|
3.1%
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
83,927
|
100.0%
|
84,194
|
100.0%
|
84,005
|
100.0%
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Operating
Expenses:
|
||||||
|
Depreciation
and amortization
|
(24,328)
|
(29.0%)
|
(24,913)
|
(29.6%)
|
(25,495)
|
(30.3%)
|
|
Network,
operations and support
|
(12,610)
|
(15.0%)
|
(13,344)
|
(15.8%)
|
(14,145)
|
(16.8%)
|
|
Staff
costs
|
(11,830)
|
(14.1%)
|
(11,849)
|
(14.1%)
|
(12,223)
|
(14.6%)
|
|
Selling,
general and administrative
|
(12,726)
|
(15.2%)
|
(12,607)
|
(15.0%)
|
(10,615)
|
(12.6%)
|
|
Other
operating expenses
|
(1,374)
|
(1.6%)
|
(1,930)
|
(2.3%)
|
(4,261)
|
(5.1%)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
(62,868)
|
(74.9%)
|
(64,643)
|
(76.8%)
|
(66,739)
|
(79.4%)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
-
I-58 -
|
Other
income
|
—
|
0.0%
|
621
|
0.7%
|
1,221
|
1.4%
|
|
Interest
income
|
134
|
0.2%
|
135
|
0.2%
|
113
|
0.1%
|
|
Dividend
income
|
29
|
0.0%
|
—
|
0.0%
|
—
|
0.0%
|
|
Deficit
on revaluation of fixed assets
|
—
|
0.0%
|
(1,335)
|
(1.6%)
|
—
|
0.0%
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Profit
from operations
|
21,222
|
25.3%
|
18,972
|
22.5%
|
18,600
|
22.1%
|
|
Finance
costs
|
(3,346)
|
(4.0%)
|
(3,767)
|
(4.4%)
|
(3,333)
|
(3.9%)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Profit
before taxation
|
17,876
|
21.3%
|
15,205
|
18.1%
|
15,267
|
18.2%
|
|
Taxation
|
(3,526)
|
(4.2%)
|
(3,727)
|
(4.5%)
|
(3,796)
|
(4.5%)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Profit for the year from
continuing operations
|
14,350
|
17.1%
|
11,478
|
13.6%
|
11,471
|
13.7%
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
DISCONTINUED
OPERATIONS
|
||||||
|
Loss/(profit) for the year from
discontinued operations
|
(400)
|
(0.5%)
|
1,487
|
1.8%
|
624
|
0.7%
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Profit
for the year
|
13,950
|
16.6%
|
12,965
|
15.4%
|
12,095
|
14.4%
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
CONTINUING
OPERATIONS
|
||||||
|
Cash inflow from operating
activities of continuing operation
|
32,191
|
38.4%
|
32,050
|
38.1%
|
32,459
|
38.6%
|
|
Cash outflow from investing
activities of continuing operations
|
(22,993)
|
(27.4%)
|
(24,051)
|
(28.6%)
|
(19,138)
|
(22.8%)
|
|
Cash outflow from financing
activities of continuing operations
|
(14,746)
|
(17.6%)
|
(6,477)
|
(7.7%)
|
(19,131)
|
(22.8%)
|
|
Cash flows from continuing
operations
|
(5,548)
|
(6.6%)
|
1,522
|
1.8%
|
(5,810)
|
(7.0%)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
DISCONTINUED
OPERATIONS
|
||||||
|
Cash
(outflow)/inflow from operating activities of discontinued
operations
|
1,344
|
1.6%
|
2,085
|
2.5%
|
388
|
0.5%
|
|
Cash (outflow)/inflow from
investing activities of discontinued operations
|
(1,584)
|
(1.9%)
|
(921)
|
(1.1%)
|
3,103
|
3.7%
|
|
Cash inflow from financing
activities of discontinued operations
|
108
|
0.1%
|
—
|
0.0%
|
—
|
0.0%
|
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
Cash flows from discontinued
operations
|
(132)
|
(0.2%)
|
1,164
|
1.4%
|
3,491
|
4.2%
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Increase/(decrease) in cash and
cash equivalents
|
(5,680)
|
(6.8%)
|
2,686
|
3.2%
|
(2,319)
|
(2.8%)
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
(1) Includes
revenues from the Netcom Group’s PHS services.
(2) Includes
revenues from the Netcom Group’s long distance VoIP services.
(3) Includes
revenues from calls to Hong Kong, Macau and Taiwan.
(4) Upfront
connection fees for basic telephone access services were eliminated by the MII
in July 2001.
-
I-59 -
Operating
results for the year ended 31 December 2007 and the year ended 31 December
2006
Revenues
The
Netcom Group’s revenue consist of revenues from the provision of
telecommunications services, net of business tax and government levies. Sources
of its revenues primarily consist of revenues from fixed-line telephone
services, broadband services, other Internet-related services, managed data
services, leased line services, ICT services and other service.
The
Netcom Group’s revenue for 2007 amounted to RMB84,005 million, decreased from
RMB84,194 million for 2006, of which upfront connection fees amounted to
RMB1,517 million. Excluding upfront connection fees*, its revenue for 2007 would
amount to RMB82,488 million, representing a growth of RMB700 million, or 0.9%,
from RMB81,788 million in 2006. The growth primarily reflected increases in
revenues from broadband services, ICT services and value-added services,
partially offset by the decrease in revenues from fixed-line telephone
services.
|
*
|
Upfront
connection fee represents the amortization of deferred upfront connection
fee received from the customers before 1 July 2001. No upfront connection
fee was received from the customers since then. Therefore, the Netcom
Group considers that analyses of its operating results excluding upfront
connection fee is more relevant to the readers of this
report.
|
Fixed-line
telephone services
Local
telephone services
Revenues
from the Netcom Group’s local telephone services (including PHS services)
comprise local usage fees, monthly fees and installation fees. These fees
generally vary based on the number of its fixed-line subscribers, average
realized tariffs and the usage volume of local calls (including those made to
connect to its dial-up Internet service). In 2007, revenues from the Netcom
Group’s local telephone services were RMB33,659 million, representing a decrease
of RMB6,310 million, or 15.8%, from RMB39,969 million in 2006, and accounting
for 40.1% of its total revenues in 2007, representing a decrease of 7.3
percentage points from 2006. The decrease in revenues from local telephone
services reflected a combination of decreases in revenues from local usage fees,
monthly fees and upfront installation fees as a result of increasingly intense
competition in the telecommunications market and increasing mobile
substitution.
Local usage fees. Usage fees
for local services include local usage fees charged for local telephone calls
and VoIP long distance calls, and communications fees for dial-up Internet
access. In 2007, revenues from the local usage fees of the Netcom Group were
RMB19,989 million, representing a decrease of RMB2,070 million, or 9.4%, from
RMB22,059 million in 2006. The decrease was primarily due to a combination of
(i) declining usage volume of local calls, which decreased by 11.92 billion
pulses, or 6%, to 202.55 billion pulses in 2007 from 214.47 billion in 2006; and
(ii) a decrease in its average realized tariff caused by changes in tariff
policies and increased competition.
Monthly fees. Monthly fees
represent the fixed amount of service charges to the Netcom Group’s customers
for using its fixed-line telephone services. In 2007, its revenues from monthly
fees were RMB12,387 million, representing a decrease of RMB4,159 million, or
25.1%, from RMB16,546 million in 2006, primarily due to the decrease in actual
monthly fees resulting from its promotion of special price packages in response
to increased market competition.
Upfront installation fees.
Installation fees represent the amortized amount of the upfront fees received
for installation of non-PHS fixed-line telephone services. These upfront
installation fees are deferred and recognized over the expected customer
relationship period, which is currently estimated to be ten years. Revenues from
the upfront installation fees were RMB1,283 million in 2007, representing a
decrease of RMB81 million, or 5.9%, from RMB1,364 million in 2006. The decrease
was principally attributable to upfront installation discount offered to new
subscribers, coupled with a decrease in the number of new subscribers in 2007 to
7.15 million from 8.66 million in 2006.
Domestic
long distance services
Revenues
from the Netcom Group’s domestic long distance services consist of usage fees
for domestic long distance calls originated by its fixed-line subscribers, users
of its prepaid phone cards and certain other customers. In 2007, its domestic
long distance revenues were RMB8,769 million, representing a decrease of RMB726
million, or 7.6%, from RMB9,495 million in 2006, primarily due to a decrease in
the average realized tariff resulting from competition with other carriers.
Revenues from its traditional domestic long distance service totaled RMB6,613
million, representing a decrease of RMB370 million, or 5.3%, from RMB6,983
million in 2006. Revenues from its VoIP long distance service totaled RMB2,156
million, representing a decrease of RMB356 million or 14.2% from RMB2,512
million in 2006.
-
I-60 -
International
long distance services
Revenues
from the Netcom Group’s international long distance services consist of usage
fees charged to its customers for their international long distance calls
originated in northern China, including those made to Hong Kong, Macau and
Taiwan. In 2007, this revenue was RMB791 million, representing a decrease of
RMB28 million, or 3.4%, from RMB819 million in 2006. The revenue decrease was
primarily attributable to a decrease in its realized tariff, resulting from
competition with other carriers partially offset by an increase in usage volume
to 344 million minutes in 2007 from 324 million minutes in 2006, or an increase
of 20 million minutes, or 6.2%.
Value-added
services
Revenues
from the Netcom Group’s value-added services consist of fees that it charges its
customers for the provision of caller identification, PHS short-messaging,
personalized ring, telephone information services, video- and tele-conferencing
and other value-added services. Revenues from its value-added services in 2007
were RMB6,114 million, representing an increase of RMB773 million, or 14.5%,
from RMB5,341 million in 2006. The increase was primarily attributable to the
rapid growth in the personalized ring and voice mail services.
Interconnection
services
Revenues
from the Netcom Group’s interconnection services represent interconnection fees
charged to other domestic telecommunications carriers, principally China Mobile,
China Unicom and China Telecom, for both local and long distance calls, and
revenues from its interconnections with Netcom Parent. Revenue from its
interconnection services amounted to RMB8,376 million in 2007, representing a
decrease of RMB56 million, or 0.7%, from RMB8,432 million in 2006. The decrease
in revenues was mainly due to a decrease in voice traffic from other
telecommunications carriers resulted from mobile substitution and a decrease in
its realized tariff as a result of the policy to adjust the inter-district
tariff.
Upfront
connection fees
Upfront
connection fees represent the amortized amount of the upfront fees received for
the initial activation of fixed-line telephone services. As a result of the
elimination of this fee on 1 July 2001, revenues from the amortized portion of
upfront connection fees were RMB1,517 million in 2007, representing a decrease
of RMB889 million, or 36.9%, from RMB2,406 million in 2006, and will continue to
decline in the coming years until the expiration of the amortization
period.
Broadband
services
Revenues
from the Netcom Group’s broadband services represent revenues generated from
DSL, LAN, and broadband-related value-added services. Total revenues from its
broadband services in 2007 were RMB13,835 million, representing an increase of
RMB3,919 million, or 39.5%, from RMB9,916 million in 2006. This growth in
revenue from broadband services was mainly attributable to the expansion of its
broadband subscriber base and the sustained growth in ARPU as a result of an
increasing number of subscribers of high-speed broadband access and broadband
content services. At the end of 2007, the number of its broadband services
subscribers was 19.8 million, representing an increase of 5.3 million, or 37.0%,
from 14.4 million at the end of 2006.
Other
Internet-related services
Revenues
from the Netcom Group’s other Internet-related services represent revenues
generated from the provision of internet dial-up service (other than
communication fees) and dedicated Internet access service. Revenues from other
Internet-related services were RMB532 million in 2007, representing an increase
of RMB16 million, or 3.1%, from RMB516 million in 2006. The increase was
primarily due to an increase in revenues from dedicated Internet access service
of RMB75 million from RMB391 million in 2006, partially offset by a decrease in
revenues from Internet dial-up service.
Managed
data services
Revenues
from the Netcom Group’s managed data services represent fees that it charges for
its DDN, frame relay, ATM, MPLS VPN and X.25 services. Revenues from its managed
data services were RMB1,284 million in 2007, representing a decrease of RMB129
million, or 9.1%, from RMB1,413 million in 2006. The decrease was primarily due
to decrease in usage of traditional services as a result of the substitution by
new ways of access.
-
I-61 -
Leased
line services
Revenues
from the Netcom Group’s leased line services represent fees that it receives
from its business and carrier customers for leasing circuit capacity to them,
including the lease of digital circuits, digital trunk lines and optic fibers.
Revenues from the Netcom Group’s leased line services were RMB2,521 million in
2007, representing a decrease of RMB19 million, or 0.7%, from RMB2,540 million
in 2006. This decrease was primarily due to the decrease in realized tariff,
partially offset by the increase in domestic circuit bandwidth leased to 218
thousand (x2Mbps) as of 31 December 2007 from 160 thousand (x2Mbps) as of 31
December 2006.
ICT
services
Through
its ICT services, the Netcom Group provides integrated services of system,
software development, management applications and fixed-line communication. In
2007, its ICT services have become an important driver of its overall revenue.
In 2007, revenue from information and communications technology services
amounted to RMB3,990 million, representing an increase of RMB3,135 million, or
366.7%, from RMB855 million in 2006. Revenue from information and communications
technology accounted for 4.8% of its total revenue in 2007, representing an
increase of 3.8 percentage points from 2006. The increase in its ICT revenue was
mainly due to continued strengthening of its capability to provide total
solutions to large corporations and government, which results in the significant
increase in ICT service contracts.
Other
services
Revenues
from other services, including revenues from service and maintenance fees, lease
payments for its non-telecommunications equipment, revenues from sales of
products, and advertising and media service. Revenues from other services were
RMB2,617 million in 2007 representing an increase of RMB125 million, or 5.0%,
from RMB2,492 million in 2006. The increase was primarily due to the increase in
the revenue from advertising and media business. In 2007, the revenue from
advertising and media service was RMB380 million, representing an increase of
RMB332 million from 2006.
Operating
expenses
The
key components of the Netcom Group’s operating expenses are depreciation and
amortization expenses, network operations and support expenses, selling, general
and administrative expenses, staff costs and other expenses. Its total operating
expenses in 2007 were RMB66,739 million, representing an increase of RMB2,096
million, or 3.2%, from RMB64,643 million in 2006, as compared to the 0.9%
increase in its revenues (excluding upfront connection fees) during this period.
The increase in its total operating expenses is principally attributable to
increased other expenses, network, operations and support expenses, depreciation
and amortization expenses, staff costs, and, partially offset by decreases in
selling, general and administrative expenses.
The
following table sets forth the components of the Netcom Group’s operating
expenses as percentages of its revenues for the periods indicated.
|
For
the Year Ended 31 December
|
||||
|
2006
|
2007
|
|||
|
Amount
|
Percentage
of revenues
|
Amount
|
Percentage
of revenues
|
|
|
(in
millions of RMB, except percentage data)
|
||||
|
Depreciation
and amortization
|
24,913
|
29.6%
|
25,495
|
30.3%
|
|
Network,
operations and support
|
13,344
|
15.8%
|
14,145
|
16.8%
|
|
Staff
costs
|
11,849
|
14.1%
|
12,223
|
14.6%
|
|
Selling,
general and administrative
|
12,607
|
15.0%
|
10,615
|
12.6%
|
|
Other
operating expenses
|
1,930
|
2.3%
|
4,261
|
5.1%
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
operating expenses
|
64,643
|
76.8%
|
66,739
|
79.4%
|
|
=============
|
=============
|
=============
|
=============
|
|
Depreciation
and amortization
The
Netcom Group depreciates its property, plant and equipment on a straight-line
basis over the estimated useful lives of
-
I-62 -
the
assets, after taking into account their estimated residual value. For example,
its telecommunication network and equipment are depreciated over periods
typically ranging from five to ten years. In 2007, its depreciation and
amortization expenses were RMB25,495 million, representing an increase of RMB582
million, or 2.3%, from RMB24,913 million in 2006. The increase was primarily
attributable to an increase in the total amount of fixed assets and intangible
assets subject to depreciation and amortization.
Network,
operations and support
Network,
operations and support expenses primarily consist of repair and maintenance
expenses incurred in connection with the operation of the Netcom Group’s
telecommunications networks, interconnection expenses, utility expenses and
expenses relating the installation costs for additional access lines that are
put in service each year, which are amortized on a straight-line basis over ten
years to the extent that such costs match the incremental revenues from new
customers. In 2007, these expenses amounted to RMB14,145 million, representing
an increase of RMB801 million, or 6.0%, from RMB13,344 million in 2006. The
increase in network, operations and support expenses was mainly due to the
increase in customer access cost as a result of the expansion in broadband
services. In addition, the costs of both the power and fuel consumed by its
equipment also increased under the impact of the rise in energy
prices.
Staff
costs
Staff
costs principally consist of expenses for salary and benefits, contributions to
pension plans and a housing fund, and the payment of early retirement benefits.
The Netcom Group’s staff costs amounted to RMB12,223 million in 2007,
representing an increase of RMB374 million, or 3.2%, from RMB11,849 million in
2006. The increase in staff costs was mainly due to its increase in the staff
cost in ICT services and the increase in the insurance premiums and welfare
brought by the average increase in social salaries.
Selling,
general and administrative
Selling,
general and administrative expenses primarily consist of sales and marketing
expenses, general and administrative expenses and provision for doubtful
accounts. The Netcom Group’s selling, general and administrative expenses
amounted to RMB10,615 million in 2007, representing a decrease of RMB1,992
million, or 15.8%, from RMB12,607 million in 2006. The decrease in selling,
general and administrative expenses was mainly due to the decrease in the
selling expenses, which in turn was due to the decrease in investments in mass
market users, leading to the decrease in the cost of acquiring customers and the
cost of retaining customers.
Other
operating expenses
Other
operating expenses amounted to RMB4,261 million in 2007, representing an
increase of RMB2,331 million, or 120.8%, from RMB1,930 million in 2006. The
increase in other operating expenses was mainly due to the significant increase
in the costs related to hardware sales of information and communications
technology services.
Deficit
on revaluation of fixed assets
In
2006, the Netcom Group recorded an expense of RMB1,335 million relating to the
deficit arising from the revaluation of fixed assets following the completion of
a valuation by an independent valuer of its fixed assets other than land and
buildings on a depreciated replacement basis according to its accounting
policies under HKFRS. The Netcom Group did not record any such expenses in 2007
as its management performed a valuation of its fixed assets other than land and
buildings and concluded that the value of fixed assets approximates the carrying
value of these fixed assets as at 31 December 2007.
Finance
costs
In
2007, the Netcom Group’s finance costs amounted to RMB3,333 million,
representing a decrease of RMB434 million, or 11.5%, from RMB3,767 million in
2006. The decrease in finance costs was mainly due to the Netcom Group’s
utilizing the sufficient cash flow to repay substantial amount of interest
bearing debts, at the same time eliminating the impact caused by the increasing
bank loan interest rates through the issue of short-term commercial papers and
corporate bonds which reduced the average level of its funding
costs.
Other
income
Other
income amounted to RMB1,221 million in 2007, representing an increase of RMB600
million from RMB621 million
-
I-63 -
in
2006. Other income is the subsidy income Netcom received from reinvesting the
profit distributions received from a subsidiary in the PRC to that
subsidiary.
Taxation
The
statutory tax rate on most of the Netcom Group’s operations in the PRC is 33%,
although some of its subsidiaries and affiliates in the PRC are subject to lower
statutory tax rates or enjoy preferential tax rates. Its income tax for 2007
amounted to RMB3,796 million, representing an effective taxation rate of 24.9%.
The effective taxation rate was lower than the statutory taxation rate, mainly
because upfront connection fees and other income was exempt from income
tax.
Profits
from continuing operations
The
Netcom Group’s profit for the year from continuing operations amounted to
RMB11,471 million in 2007, compared to RMB11,478 million in 2006. If the effect
of the income from upfront connection fees is excluded, its profit for 2007 from
continuing operations would amount to RMB9,954 million, representing an increase
of RMB882 million, or 9.7% from RMB9,072 million in 2006. The main reason for
the increase was that a deficit on revaluation of fixed assets of RMB1,335
million was recognized as an expense in 2006.
Profits
from discontinued operations
Net
profit for the year from discontinued operation in 2007 amounted to RMB624
million as a result of the disposal of the southern service region by CNC China,
the Netcom Group’s wholly-owned subsidiary, on 28 February 2007. Of that amount,
the net loss of its southern service region prior to the completion date
amounted to RMB2 million, and the investment gain net of taxes from the disposal
of its southern service region amounted to RMB626 million.
Profit
for the year
In
2007, the Netcom Group’s profit from operations (including continuing and
discontinued operations) was RMB12,095 million, as compared to RMB12,965 million
in 2006. If excluding the upfront connection fee, its profit for 2007 would
amount to RMB10,578 million, compared to RMB10,559 million in 2006.
Operating
results for the year ended 31 December 2006 and the year ended 31 December
2005
Revenues
The
Netcom Group’s revenue for 2006 amounted to RMB84,194 million, as compared to
RMB83,927 million for 2005, of which upfront connection fees amounted to
RMB2,406 million. Excluding upfront connection fees, its revenue for 2006 would
amount to RMB81,788 million, representing a growth of RMB1,266 million, or 1.6%,
from its revenue (excluding upfront connection fees) of RMB80,522 million in
2005. The growth primarily reflected increases in revenues from broadband
services, value-added services, interconnection fees and ICT
services.
Fixed-line
telephone services
Local
telephone services
Revenues
from the Netcom Group’s local telephone services (including PHS services)
comprise local usage fees, monthly fees and installation fees. They vary
depending on the number of its fixed-line subscribers, average realized tariffs
and the usage volume of local calls (including those made to connect to its
dial-up Internet service).
In
2006, revenues from the Netcom Group’s local telephone services were RMB39,969
million, representing a decrease of RMB4,074 million, or 9.3%, from RMB44,043
million in 2005, and accounting for 47.4% of its total revenues in
2006.
Local usage fees. Usage fees
for local services include local usage fees charged for local telephone calls
and VoIP long distance calls, and communications fees for dial-up Internet
access. In 2006, revenues from the Netcom Group’s local usage fees were
RMB22,059 million, representing a decrease of RMB2,381 million, or 9.7%, from
RMB24,440 million in 2005. The decrease was primarily due to a decrease of 12.14
billion pulses, or 5.4%, in the usage volume of local calls to 214.47 billion
pulses in 2006 from 226.61 billion in 2005, coupled with a decrease in its
realized tariff as a result of increased competition.
Monthly fees. Monthly fees
represent the fixed amount of service charges to its customers for using its
fixed-line telephone
-
I-64 -
services.
In 2006, its revenues from monthly fees were RMB16,546 million, representing a
decrease of RMB1,624 million, or 8.9%, from RMB18,170 million in 2005, primarily
due to a decrease in the number of its fixed-line subscribers in its service
regions and a decrease in its realized tariff.
Upfront installation fees.
Installation fees represent the amortized amount of the upfront fees received
for installation of non-PHS fixed-line telephone services. These upfront
installation fees are deferred and recognized over the expected customer
relationship period, which is currently estimated to be ten years. Revenues from
the upfront installation fees were RMB1,364 million in 2006, representing a
decrease of RMB69 million, or 4.8%, from RMB1,433 million in 2005. The decrease
was principally attributable to upfront installation discount offered to new
subscribers, coupled with a decrease in the number of new subscribers in 2006 to
8.66 million from 9.23 million in 2005.
Domestic
long distance services
Revenues
from the Netcom Group’s domestic long distance services consist of usage fees
for domestic long distance calls originated by its fixed-line subscribers, users
of its prepaid phone cards and certain other customers. In 2006, its domestic
long distance revenues were RMB9,495 million, representing a decrease of RMB278
million, or 2.8%, from RMB9,773 million in 2005. The decrease was primarily due
to a combination of (i) revenues from its traditional domestic long distance
service totaled RMB6,983 million, representing a decreased of RMB79 million, or
1.1%, from RMB7,062 million in 2005; and (ii) revenues from its VoIP long
distance service totaled RMB2,512 million, representing a decrease of RMB199
million or 7.4% from RMB2,711 million in 2005.
International
long distance services
Revenues
from the Netcom Group’s international long distance services consist of usage
fees charged to its customers for their international long distance calls
originated in its service regions, including those made to Hong Kong, Macau and
Taiwan.
In
2006, this revenue was RMB819 million, representing a decrease of RMB55 million,
or 6.3%, from RMB874 million in 2005. The revenue decrease was primarily
attributable to a decrease in the volume of international long distance calls.
In 2006, the usage of international long distance calls decreased from 352
million minutes in 2005 by 28 million minutes, or 8.1%, to 324 million
minutes.
Value-added
services
Revenues
from the Netcom Group’s value-added services consist of fees that it charges its
customers for the provision of caller identification, PHS short-messaging,
personalized ring, telephone information services, video- and tele-conferencing
and other value-added services.
Revenues
from the Netcom Group’s value-added services in 2006 were RMB5,341 million,
representing an increase of RMB1,371 million, or 34.5%, from RMB3,970 million in
2005. The increase was primarily attributable to increases in the number of
subscribers and average usage volume per customer. In 2006, the number of
subscribers of its caller identification service totaled 78.4 million, which
reached a penetration rate of 68.8% of its access lines in service as of 31
December 2006. The number of PHS short messages sent from its network in 2006
increased to 7.8 billion from 6.8 billion in 2005 and the number of its
personalized ring subscribers totaled 15.76 million, representing an increase of
131.3% from that in 2005.
Interconnection
services
Revenues
from the Netcom Group’s interconnection services represent interconnection fees
charged to other domestic telecommunications carriers, principally China Mobile,
China Unicom and China Telecom, for both local and long distance calls, and
revenues from its interconnections with Netcom Parent.
Revenue
from the Netcom Group’s interconnection services amounted to RMB8,432 million in
2006, representing an increase of RMB768 million, or 10.0%, from RMB7,664
million in 2005. The growth in revenue was mainly due to an increase in
interconnection fees from other domestic and international telecommunication
carriers and an increase in revenue from settlement of interconnection fees with
its associates.
Upfront
connection fees
Upfront
connection fees represent the amortized amount of the upfront fees received for
the initial activation of fixed-line telephone services. As a result of the
elimination of this fee on 1 July 2001, revenues from the amortized portion of
upfront
-
I-65 -
connection
fees were RMB2,406 million in 2006, representing a decrease of RMB999 million,
or 29.3%, from RMB3,405 million in 2005, and will continue to decline in the
coming years until the expiration of the amortization period.
Broadband
services
Revenues
from the Netcom Group’s broadband services represent revenues generated from
DSL, LAN, and broadband-related value-added services. Total revenues from its
broadband services in 2006 were RMB9,916 million, representing an increase of
RMB2,627 million, or 36.0%, from RMB7,289 million in 2005. This increase
reflects the rapid expansion of its broadband subscriber base. The total number
of subscribers of its broadband services increased by approximately 3.4 million,
or 30.7%, or to 14.4 million as of 31 December 2006 from approximately 11.0
million as of 31 December 2005.
Other
Internet-related services
Revenues
from the Netcom Group’s other Internet-related services represent revenues
generated from the provision of internet dial-up service (other than
communication fees) and dedicated Internet access service. Revenues from other
Internet-related services were RMB516 million in 2006, representing a decrease
of RMB40 million, or 7.2%, from RMB556 million in 2005. The decrease was
primarily due to a decrease in revenues from Internet dial-up service of RMB92
million from RMB217 million in 2005, partially offset by an increase in revenues
from dedicated Internet access services.
Managed
data services
Revenues
from the Netcom Group’s managed data services represent fees that it charges for
its DDN, frame relay, ATM, MPLS VPN and X.25 services. Revenues from its managed
data services were RMB1,413 million in 2006, representing a decrease of RMB208
million, or 12.8%, from RMB1,621 million in 2005. The decrease was primarily due
to decrease in average realized tariff as a result of increased market
competition.
Leased
line services
Revenues
from the Netcom Group’s leased line services represent fees that it receives
from its business and carrier customers for leasing circuit capacity to them,
including the lease of digital circuits, digital trunk lines and optic fibers.
Revenues from its leased line services were RMB2,540 million in 2006,
representing an increase of RMB164 million, or 6.9%, from RMB2,376 million in
2005. This increase was primarily due to an increase in domestic circuit
bandwidth leased to 160 thousand (x2Mbps) as of 31 December 2006 from 126
thousand (x2Mbps) as of 31 December 2005.
ICT
services
Through
its ICT services, the Netcom Group provides integrated services of system
integration, software development, management applications and fixed-line
communication. In 2006, revenue from information and communications technology
services amounted to RMB855 million, representing an increase of RMB669 million,
or 359.7%, from RMB186 million in 2005. The increase was mainly due to continued
strengthening of its capability to provide total solutions to large corporations
and government, which results in the significant increase in contracts for ICT
services.
Other
services
Revenues
from other services, including revenues from service and maintenance fees, lease
payments for its non-telecommunications equipment, revenues from sales of
products, and advertising and media service. Revenues from other services were
RMB2,492 million in 2006, representing an increase of RMB322 million, or 14.8%,
from RMB2,170 million in 2005. The increase was primarily due to an increase in
businesses such as the maintenance of equipment for customers and project
construction.
Operating
expenses
The
key components of the Netcom Group’s operating expenses are depreciation and
amortization expenses, network operations and support expenses, selling, general
and administrative expenses, staff costs and other expenses. Its total operating
expenses in 2006 were RMB64,643 million, representing an increase of RMB1,775
million, or 2.8%, from RMB62,868 million in 2005. The increase in its total
operating expenses is principally attributable to increased network operations
and support expenses, depreciation and amortization expenses and other expenses,
partially offset by decreases in selling, general and administrative
expenses.
-
I-66 -
The
following table sets forth the components of the Netcom Group’s operating
expenses as percentages of its revenues for the periods indicated.
|
For
the Year Ended 31 December
|
||||
|
2005
|
2006
|
|||
|
Amount
|
Percentage
of revenues
|
Amount
|
Percentage
of revenues
|
|
|
(in
millions of RMB, except percentage data)
|
||||
|
Depreciation
and amortization
|
24,328
|
29.0%
|
24,913
|
29.6%
|
|
Network,
operations and support
|
12,610
|
15.0%
|
13,344
|
15.8%
|
|
Staff
costs
|
11,830
|
14.1%
|
11,849
|
14.1%
|
|
Selling,
general and administrative
|
12,726
|
15.2%
|
12,607
|
15.0%
|
|
Other
operating expenses
|
1,374
|
1.6%
|
1,930
|
2.3%
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
operating expenses
|
62,868
|
74.9%
|
64,643
|
76.8%
|
|
=============
|
=============
|
=============
|
=============
|
|
Depreciation
and amortization
The
Netcom Group depreciates its property, plant and equipment on a straight-line
basis over the estimated useful lives of the assets, after taking into account
their estimated residual value. For example, its telecommunication network and
equipment are depreciated over periods typically ranging from five to ten years.
In 2006, its depreciation and amortization expenses were RMB24,913 million,
representing an increase of RMB585 million, or 2.4%, from RMB24,328 million in
2005. The increase was primarily attributable to an increase in the total amount
of fixed assets and intangible assets subject to depreciation and amortization.
As of 31 December 2006, the value of its fixed assets totaled RMB335.9 billion,
representing an increase of 8.7 billion, or 2.7%, from RMB327.2 billion as of 31
December 2005.
Network,
operations and support
Network,
operations and support expenses primarily consist of repair and maintenance
expenses incurred in connection with the operation of its telecommunications
networks, interconnection expenses, utility expenses and expenses relating to
the installation costs for additional access lines that are put in service each
year, which are amortized on a straight-line basis over ten years to the extent
that such costs match the incremental revenues from new customers. In 2006,
these expenses amounted to RMB13,344 million, representing an increase of RMB734
million, or 5.8%, from RMB12,610 million in 2005. The increase was primarily
attributable to an increase of RMB882 million in interconnection expenses with
Netcom Parent and other carriers.
Staff
costs
Staff
costs principally consist of expenses for salary and benefits, contributions to
pension plans and a housing fund, and the payment of early retirement benefits.
In 2006, the Netcom Group’s staff costs were RMB11,849 million compared to
RMB11,830 million in 2005.
Selling,
general and administrative
Selling,
general and administrative expenses primarily consist of sales and marketing
expenses, general and administrative expense and provision for doubtful
accounts. The Netcom Group’s selling, general and administrative expenses
amounted to RMB12,607 million in 2006, representing a decrease of RMB119
million, or 0.9%, from RMB12,726 million in 2005. The decrease was mainly
attributable to a decrease in subscribers acquisition cost resulting from a
decrease in the growth in the number of new PHS customers. The decrease was
partially offset by an increase in subscribers retention cost, sales channel
cost and other marketing expenses resulting from increased
competition.
Other
operating expenses
In
2006, other operating expenses were RMB1,930 million, representing an increase
of RMB556 million, or 40.5%, from RMB1,374 million in 2005, primarily due to an
increase in expenses relating to developing ICT services.
Deficit
on revaluation of fixed assets
-
I-67 -
In
2006, the Netcom Group recorded an expense of RMB1,335 million relating to the
deficit arising from the revaluation of fixed assets following the completion of
a valuation by the PRC valuer of its fixed assets other than land and buildings
on a depreciated replacement basis according to its accounting policies under
HKFRS. The Netcom Group did not record any such expenses in 2005 as its
management performed a valuation of its fixed assets other than land and
buildings and concluded that the value of fixed assets were close to the
carrying value of these fixed assets as at 31 December 2005.
Finance
costs
In
2006, the Netcom Group’s finance costs were RMB3,767 million, representing an
increase of RMB421 million, or 12.6%, from RMB3,346 million in 2005, which was
primarily attributable to an increase of RMB136 million in interest expenses and
a decrease of RMB221 million in foreign exchange gains primarily resulting from
the depreciation of the value of Renminbi against the Euro in 2006. The increase
in interest expenses was primarily attributable to an increase of RMB392 million
in 2006 resulting from deferred payments in respect of the 2005 Acquired Assets
and Liabilities.
Taxation
The
statutory tax rate on most of the Netcom Group’s operations in the PRC is 33%,
although some of its subsidiaries and affiliates in the PRC are subject to lower
statutory tax rates or enjoy preferential tax rates.
In
2006, the Netcom Group’s taxation expense was RMB3,727 million, representing an
increase of RMB201 million from RMB3,526 million in 2005.
The
Netcom Group’s effective tax rate in 2006 was 24.5%, as compared to 19.7% in
2005. The effective tax rate in 2005 was lower primarily because it benefited
from a non-recurring tax reduction of RMB837 million after offsetting the
accumulated pre-restructuring losses with a taxable profit in 2005. The tax rate
in 2006 was lower than the statutory tax rate mainly because the revenues from
upfront connection fees and certain revenues from investment were not taxable
under the PRC law.
Profits
from continuing operations
The
Netcom Group’s profit for the year from continuing operations amounted to
RMB11,478 million in 2006, as compared to RMB14,350 million in 2005. Excluding
income from upfront connection fees, its profit for 2006 amounted to RMB9,072
million, representing a decrease of RMB1,873 million, or 17.1%, from RMB10,945
million in 2005. The decrease was primarily attributable to the RMB1,335 million
of expenses relating to deficit on revaluation of fixed asset.
Profits
from discontinued operations
In
2006, the Netcom Group’s profit from discontinued operations was RMB1,487
million, representing a net gain of RMB1,878 million from the sale of Asia
Netcom, a net loss of RMB59 million incurred by Asia Netcom in 2006 prior to the
closing of the sale of Asia Netcom and a net loss of RMB332 million incurred by
the telecommunications business in its southern service region.
Profit
for the year
In
2006, the Netcom Group’s profit from operations (including continuing and
discontinued operations) was RMB12,965 million, representing a decrease of
RMB985 million, or 7.1%, from RMB13,950 million in 2005.
LIQUIDITY
AND CAPITAL RESOURCES
Overview
The
Netcom Group’s primary source of funding have been cash provided by operating
activities, short-term bank loans and commercial papers and its primary uses of
funds have been capital expenditures and repayment of bank loans, for the year
ended 31 December 2007.
The
following table summarizes its cash flows for the periods
indicated:
-
I-68 -
|
For
the Year Ended 31 December
|
|||
|
2005
|
2006
|
2007
|
|
|
(in
millions of RMB)
|
|||
|
Net
cash inflow from operating activities from continuing
operations
|
32,191
|
32,050
|
32,459
|
|
Net
cash outflow for investing activities from continuing
operations
|
(22,993)
|
(24,051)
|
(19,138)
|
|
Net
cash outflow from financing activities from continuing
operations
|
(14,746)
|
(6,477)
|
(19,131)
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Increase/(decrease)
in cash from continuing operations
|
(5,548)
|
1,522
|
(5,810)
|
|
Increase/(decrease)
in cash from discontinued operations
|
(132)
|
1,164
|
3,491
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Increase/(decrease)
in cash and cash equivalents
|
(5,680)
|
2,686
|
(2,319)
|
|
=============
|
=============
|
=============
|
|
Taking
into account cash generated from operating activities and short-term and
long-term bank loans, the Netcom Group believes that it has access to sufficient
working capital for the next 12 months.
Net
cash inflow from operating activities
The
Netcom Group’s net cash inflow from operating activities in 2007 was RMB32,459
million, representing an increase of RMB409 million, or 1.3%, from RMB32,050
million in 2006. The increase principally reflects a combination
of:
● an
increase of RMB153 million in net cash inflows generated from operations from
2006 to 2007;
● an
increase of RMB429 million in cash outflow for profit tax paid from 2006 to
2007; and
● a
decrease of RMB708 million in interest paid from 2006 to 2007 resulting from
repayment of debt.
The
Netcom Group’s net cash inflow from operating activities in 2006 was RMB32,050
million, representing a decrease of RMB141 million, or 0.4%, from RMB32,191
million in 2005. The decrease principally reflects a combination
of:
● a
decrease of RMB147 million in net cash inflows generated from operations from
2005 to 2006;
● a
decrease of RMB350 million in cash outflow for profit tax paid from 2005 to
2006; and
● an
increase of RMB320 million in interest paid from 2005 to 2006 resulting
primarily from interest on a deferred payment for the 2005 Acquired Assets and
Liabilities.
Set
out below is a breakdown of its net cash inflow from operating activities for
the periods indicated:
|
Year
Ended 31 December
|
|||
|
2005
|
2006
|
2007
|
|
|
(RMB
millions)
|
|||
|
Net
cash inflows generated from operations
|
39,303
|
39,156
|
39,309
|
|
Interest
received
|
131
|
136
|
113
|
|
Dividends
received
|
29
|
—
|
—
|
|
Interest
paid
|
(3,244)
|
(3,564)
|
(2,856)
|
|
Profits
tax paid
|
(4,028)
|
(3,678)
|
(4,107)
|
|
Cash
inflow from operating activities of continuing
operations
|
32,191
|
32,050
|
32,459
|
|
Cash
inflow from operating activities of discontinued
operations
|
1,344
|
2,085
|
388
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Net
cash inflow from operating activities
|
33,535
|
34,135
|
32,847
|
|
=============
|
=============
|
=============
|
|
All
of the Netcom Group’s operations in the PRC are conducted through its wholly
foreign-owned subsidiary, CNC China.
-
I-69 -
The
Netcom Group’s telecommunications businesses outside of the PRC are primarily
owned and conducted by China Netcom (USA) Operations Limited and China Netcom
(Hong Kong) Operations Limited, its wholly owned subsidiaries incorporated in
the US and Hong Kong, respectively. Accordingly, its future cash flow will
consist principally of dividends from its subsidiaries. Its ability to pay
dividends depends substantially on the payment of dividends to the Netcom Group
by CNC China. CNC China must follow the laws and regulations of the PRC and
their respective articles of association in declaring and paying dividends to
the Netcom Group. As a wholly foreign-owned enterprise in China, CNC China is
required to provide for a reserve fund and staff and workers’ bonus and welfare
fund, each of which is allocated from net profit after taxation but before
dividend distribution according to the prevailing accounting rules and
regulations in the PRC. CNC China is required to allocate at least 10% of its
net profit to the reserve fund until the balance of this fund has reached 50% of
its registered capital. Appropriations to the staff and workers’ bonus and
welfare fund, which are determined at the discretion of the directors of CNC
China, are charged as expenses as incurred in the consolidated financial
statements. In 2005, 2006 and 2007, CNC China contributed approximately RMB1,044
million, RMB855 million, and RMB868 million respectively, to these statutory
funds. None of the contributions by CNC China to these statutory funds may be
used for dividend purposes.
Net
cash outflow for investing activities
The
Netcom Group’s net cash outflow in investment activities in 2007 amounted to
RMB19,138 million, representing a decrease of RMB4,913 million, or 20.4%, from
RMB24,051 million in 2006, which was mainly due to the significant decrease in
its capital expenditures in 2007 compared to 2006, as the Netcom Group focused
on controlling its capital expenditure levels by improving its network
efficiency and developing new products and services to better utilize its
existing networks.
The
Netcom Group’s net cash outflow from investing activities in 2006 was RMB24,051
million, representing an increase of RMB1,058 million, or 4.6%, from RMB22,993
million in 2005. The increase was primarily attributable to the fact that it had
more cash inflow in 2005 as it sold certain short-term investments in that
year.
The
Netcom Group must obtain approvals from the National Development and Reform
Commission (“NDRC”) and the MII, and in some cases, the State Council for any
government-funded project involving significant capital investment in its
operations. In addition, approvals from the NDRC and the MII are required for
investment projects concerning national security, such as the construction of
domestic backbone transmission networks, international gateways, and other
telecommunications infrastructure projects.
Net
cash inflow/(outflow) from financing activities
The
Netcom Group’s net cash outflow in financing activities in 2007 amounted to
RMB19,131 million, representing an increase of RMB12,654 million, or 195.4%,
from RMB6,477 million in 2006. The increase was mainly due to the increase in
the repayment of interest bearing debts in 2007 compared to 2006.
Its
net cash outflow from financing activities in 2006 was RMB6,477 million,
representing a decrease of RMB8,269 million, or 56.1%, from RMB14,746 million in
2005. The decrease was mainly due to:
|
|
●
|
an
increase of RMB11,429 million in new bank loans and other loans from 2005
to 2006;
|
|
|
●
|
an
increase of RMB9,676 million in proceeds from the issuance of short-term
commercial papers from 2005 to 2006;
and
|
|
|
●
|
an
increase of RMB13,223 million in repayment of bank loans from 2005 to
2006.
|
Net
cash inflow/(outflow) from discontinued operations
In
2007, the Netcom Group’s net cash inflow from discontinued operations was
RMB3,491 million, compared to a net cash inflow of RMB1,164 million from
discontinued operations in 2006. The primary reason for this trend was that it
received RMB3,500 million as consideration for the disposal of assets,
liabilities and operations on telecommunications operations of its southern
service region.
In
2006, the Netcom Group’s net cash inflow from discontinued operations was
RMB1,164 million, compared to a net cash outflow of RMB132 million from
discontinued operations in 2005. The increase resulted from the consideration it
received from the sale of Asia Netcom.
-
I-70 -
Working
capital
As
at 31 December 2007, the shortfall of its working capital amounted to RMB59,085
million, a decrease of RMB13,522 million or 18.6% in shortfall from RMB72,607
million in 2006. The decrease in shortfall of working capital was mainly due to
a decrease in its short-term loans outstanding.
Indebtedness
The
Netcom Group issued two tranches of commercial paper for the aggregate amount of
RMB20 billion in 2007. One tranche of the commercial paper was issued for the
amount of RMB10 billion at an interest rate of 3.34% with a maturity period of
365 days, and the other tranche of the commercial paper was issued for the
amount of RMB10 billion at an interest rate of 3.93% per annum with a maturity
period of 270 days.
Its
indebtedness as of the dates indicated was as follows:
|
As
of 31 December
|
|||
|
2005
|
2006
|
2007
|
|
|
(in
millions of RMB)
|
|||
|
Short
term bank loans
|
47,341
|
30,980
|
11,850
|
|
Current
portion of long term bank and other loans
|
6,846
|
7,304
|
5,322
|
|
Long
term bank and other loans net of current portion
|
18,143
|
23,219
|
14,425
|
|
Short
term commercial paper
|
—
|
9,811
|
20,000
|
|
Corporate
bonds
|
—
|
—
|
2,000
|
|
Current
portion of amounts due to holding companies and fellow
subsidiaries
|
1,960
|
1,960
|
1,960
|
|
Amounts
due to holding companies and fellow subsidiaries net of current
portion
|
7,840
|
5,880
|
6,169
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
82,130
|
79,154
|
61,726
|
|
=============
|
=============
|
=============
|
|
As
at 31 December 2007, the Netcom Group’s total indebtedness amounted to RMB61,726
million, representing a decrease of RMB17,428 million or 22% from RMB79,154
million as at the end of 2006. The source of capital for the repayment was its
free cash-flow and the consideration for the disposal of assets, liabilities and
operations of its southern service region business.
As
at 31 December 2007, the proportion of its short-term debts to its total
indebtedness was 63.4%, which approximately equaled to 63.2% as at 31 December
2006.
As
at 31 December 2007, the Netcom Group’s debt to capital ratio was 39.8%,
calculated as the ratio of total indebtedness to the sum of total indebtedness,
owner’s equity and the balance of deferred revenues, representing a decrease of
7.5 percentage points from 47.3% as at 31 December 2006. Its financial position
was significantly improved.
As
at 31 December 2006, the debt to capital ratio of the Netcom Group was 47.3%,
calculated as the ratio of total indebtedness to the sum of total indebtedness,
owner’s equity and the balance of deferred revenues, representing a decrease of
5.2 percentage points from 52.5% as at 31 December 2005. Their financial
position was significantly improved.
As
at 31 December 2005, 2006 and 2007, their aggregate outstanding banking
facilities available amounted to RMB104,731 million, RMB115,588 million and
RMB106,824 million in total respectively.
As
at 31 December 2005, 2006 and 2007, 79.67%, 74.69% and 83.96% of the Netcom
Group’s loans were with fixed interest rate respectively.
Currencies
of cash and bank and indebtedness are as follows:
-
I-71 -
|
As
at 31 December
|
|||
|
2005
|
2006
|
2007
|
|
|
RMB
million
|
RMB
million
|
RMB
million
|
|
|
Balances
denominated in RMB
|
|||
|
Cash
and bank deposits
|
3,967
|
5,782
|
5,054
|
|
Bank
and other loans
|
70,332
|
60,071
|
30,351
|
|
Short-term
commercial paper
|
—
|
9,811
|
20,000
|
|
Amounts
due to holding companies and fellow subsidiaries
|
7,840
|
5,880
|
5,766
|
|
Corporate
bonds
|
—
|
—
|
2,000
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Subtotal
|
82,139
|
81,544
|
63,171
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Balances
denominated in currencies other than RMB
|
|||
|
Cash
and bank deposits
|
1,098
|
1,946
|
341
|
|
Bank
and other loans
|
1,998
|
1,432
|
1,246
|
|
Amounts
due to holding companies and fellow subsidiaries
|
—
|
—
|
403
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Subtotal
|
3,096
|
3,378
|
1,990
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
85,235
|
84,922
|
65,161
|
|
=============
|
=============
|
=============
|
|
Contractual
obligations and commitments, including off-balance sheet
arrangements
The
following table sets forth information regarding its aggregate payment
obligations in future years of the contractual obligations and commercial
commitments that the Netcom Group had as of 31 December 2007.(1)
|
Payments
Due (by stages as indicated)
|
|||||||
|
Total
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
|
|
(RMB
millions)
|
|||||||
|
Short-term
bank loans
|
12,134
|
12,134
|
—
|
—
|
—
|
—
|
—
|
|
Long-term
bank and other loans
|
21,616
|
6,407
|
10,272
|
1,887
|
106
|
104
|
2,840
|
|
Short-term
commercial paper
|
20,629
|
20,629
|
—
|
—
|
—
|
—
|
—
|
|
Corporate
bonds
|
2,900
|
90
|
90
|
90
|
90
|
90
|
2,450
|
|
Amounts
due to holding companies and fellow subsidiaries
|
8,870
|
2,319
|
2,214
|
4,337
|
—
|
—
|
—
|
|
Operating
lease commitments
|
2,004
|
579
|
346
|
305
|
247
|
236
|
291
|
|
Capital
commitments
|
677
|
661
|
—
|
16
|
—
|
—
|
—
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
68,830
|
42,819
|
12,922
|
6,635
|
443
|
430
|
5,581
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
The
following table sets forth information regarding our aggregate payment
obligations in future years of the contractual obligations and commercial
commitments that we had as of 31 December 2006(1).
-
I-72 -
|
Payments
Due in the Period
|
|||||||
|
Total
|
2007
|
2008
|
2009
|
2010
|
2011
|
Thereafter
|
|
|
(RMB
in millions)
|
|||||||
|
Short-term
bank loans
|
31,563
|
31,563
|
—
|
—
|
—
|
—
|
—
|
|
Long-term
bank and other loans
|
36,224
|
8,860
|
7,814
|
10,416
|
431
|
430
|
8,273
|
|
Short-term
commercial paper
|
10,000
|
10,000
|
—
|
—
|
—
|
—
|
—
|
|
Amounts
due to holding companies and fellow subsidiaries
|
8,781
|
2,352
|
2,248
|
2,143
|
2,038
|
—
|
—
|
|
Operating
lease commitments
|
2,353
|
734
|
313
|
283
|
261
|
245
|
517
|
|
Capital
commitments
|
2,833
|
2,746
|
86
|
1
|
—
|
—
|
—
|
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
Total
|
91,754
|
56,255
|
10,461
|
12,843
|
2,730
|
675
|
8,790
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
The
following table sets forth information regarding our aggregate payment
obligations in future years of the contractual obligations and commercial
commitments that we had as of 31 December 2005(1).
|
Payments
Due in the Period
|
|||||||
|
Total
|
2006
|
2007
|
2008
|
2009
|
2010
|
Thereafter
|
|
|
(RMB
in millions)
|
|||||||
|
Short-term
bank loans
|
48,200
|
48,200
|
—
|
—
|
—
|
—
|
—
|
|
Long-term
bank and other loans
|
28,652
|
7,874
|
9,461
|
6,124
|
249
|
246
|
4,698
|
|
Amounts
due to holding companies and fellow subsidiaries
|
11,133
|
2,433
|
2,330
|
2,227
|
2,123
|
2,020
|
—
|
|
Operating
lease commitments
|
4,066
|
994
|
434
|
333
|
308
|
298
|
1,699
|
|
Capital
commitments
|
1,854
|
1,678
|
170
|
6
|
—
|
—
|
—
|
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
－－－－－－－
|
|
|
Total
|
93,905
|
61,179
|
12,395
|
8,690
|
2,680
|
2,564
|
6,397
|
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
=============
|
|
|
(1)
|
The
amounts shown include interest charged for each year and the amounts of
interest charged on variable rate debt have been calculated using the
interest rate as of 31 December 2007, 2006 and
2005.
|
Capital
expenditures
Capital
expenditure includes cash paid towards the purchase of fixed assets,
construction in progress, prepayment for leased network capacity and prepayment
for leased land. The following table sets forth the Netcom Group’s actual and
planned total capital expenditure requirements for the periods
indicated:
|
Capital
Expenditures
|
|
|
(in
millions of RMB)
|
|
|
2005
|
25,964
|
|
2006
|
24,560
|
|
2007
|
20,684
|
|
2008
(planned)
|
19,600
|
Historically,
most of the Netcom Group’s capital expenditures were budgeted for the
improvement of its networks and related equipment. In particular, capital
expenditures related to its local access, switching, broadband services, data
and transport networks each accounted for a significant percentage of its total
capital expenditures. Expenditures for other projects were mainly related to
investments in facilities to house its telecommunications equipment and other
facilities. Its total capital expenditures in each of 2005, 2006 and 2007 were
lower than that of each previous year as the Netcom Group focused on controlling
its capital expenditure levels by improving its network efficiency and
developing new products and services to better utilize its existing
networks.
The
Netcom Group’s capital expenditure in 2007 amounted to RMB20,684 million,
representing a decrease of RMB3,876 million, or 15.8%, from RMB24,560 million in
2006, which was mainly due to its emphasis on enhancing the utilization rate of
the Netcom Group’s existing network and its implementation of a policy which
focused on cost-effectiveness, which reasonably reduced capital expenditure. In
2007, the Netcom Group continued to increase its investment in broadband and
Internet, and the
-
I-73 -
Netcom
Group also accordingly reduced its investment in local telephones and network
transmission equipment.
The
Netcom Group expected to further reduce its capital expenditure in 2008, which
was estimated at RMB19,600 million. Many factors could affect the timing, amount
and nature of its capital expenditure, including the overall economic
environment, customer demand, technology development and other related factors.
The Netcom Group’s estimated capital expenditure had a certain degree of
uncertainty, and the future actual capital expenditure may deviate from the
estimated amount. It anticipates that it will meet its capital expenditure
requirements with cash generated from operating activities, short-term and
long-term loans, debentures and other borrowings and equity financing. It
considers that it shall have sufficient capital to meet its future capital
expenditure requirements.
Capital
resources
The
Netcom Group expects to fund its capital expenditure needs with a combination of
cash generated from operating activities, short-term and long-term bank loans,
short-term commercial paper and other borrowings or equity financings. The
Netcom Group believes that it will have sufficient capital resources to satisfy
its capital expenditure requirements in the foreseeable future
periods.
Funding
and treasury policies and objectives
The
funding and treasury policies and objectives in terms of the manner in which
treasury activities were controlled by the Netcom Group for the year ended 31
December 2006 and 2007 are set out in paragraph 6(a) and 6(c) of the audited
consolidated financial statements for the year ended 31 December 2007 presented
in the section 2 of Appendix I. The relevant funding and treasury policies for
the year ended 31 December 2005 are consistent with those set out
above.
5. INDEBTEDNESS
As
at the close of business on 30 June 2008, being the latest practicable date for
the purpose of this indebtedness statement, the Netcom Group’s indebtedness was
as follows:
|
RMB
million
|
|
|
Short-term
bank loans
|
30,328
|
|
Current
portion of long-term bank and other loans
|
4,723
|
|
Long-term
bank and other loans net of current portion
|
12,861
|
|
Corporate
bonds
|
2,000
|
|
Current
portion of amounts due to holding companies and fellow
subsidiaries
|
1,960
|
|
Amounts
due to holding companies and fellow subsidiaries net of current
portion
|
3,318
|
|
－－－－－－－
|
|
|
Total
|
55,190
|
|
=============
|
Save
as disclosed above and apart from intra-group liabilities, the Netcom Group did
not have any debt securities, any other borrowings or indebtedness in the nature
of borrowings, including bank overdrafts and liabilities under acceptances
(other than normal trade bills) or acceptance credits or hire purchase
commitments, debentures, mortgages, charges, loans, guarantees or other material
contingent liabilities outstanding as at the close of business on 30 June
2008.
6. MATERIAL
CHANGES
On
2 June 2008, the boards of directors of Unicom and Netcom jointly announced that
Unicom formally presented the Proposals to the Board to put forward the
Proposals to the Netcom Shareholders to consider the merger of Unicom and Netcom
by way of a scheme of arrangement of Netcom under Section 166 of the Hong Kong
Companies Ordinance. Please refer to the Explanatory Statement in this document
for further details of the Proposals and the Scheme.
Save
as disclosed above, the Netcom Directors are not aware of any material changes
in the financial or trading position or outlook of the Netcom Group subsequent
to 31 December 2007, being the date to which the latest audited financial
statements were made up.
7. DIVIDENDS
-
I-74 -
Save
for the final dividend of HK$0.592 for each Netcom Share which was approved by
the Netcom Shareholders at the annual general meeting of Netcom held on 22 May
2008, the Scheme Shareholders will not be entitled to retain any dividend or
other distribution which has been or may be declared in respect of the Scheme
Shares and which has a record date before the Scheme becomes effective. As at
the Latest Practicable Date, no such dividend or other distribution had been
declared.
-
I-75 -
APPENDIX
II
FINANCIAL INFORMATION ON THE UNICOM GROUP
Except
for the additional information for the year ended 31 December 2005, the funding
and treasury policies and objectives shown in paragraph I headed “Overview” in
section 4 headed “Management Discussion and Analysis” for the year ended 31
December 2007, the information on planned capital expenditure in 2008 set out in
paragraph VI headed “Capital Expenditures and Free Cash Flow” in section 4
headed “Management Discussion and Analysis” for the year ended 31 December 2007
and the information show in section 5 headed “Indebtedness” and section 6 headed
“Material Changes”, the financial information included in this Appendix II is
extracted from the annual report of Unicom for the year ended 31 December 2007
or the annual report of Unicom on Form 20-F for the year ended 31 December 2007
filed with the SEC on 20 June 2008, and the unaudited consolidated results of
Unicom for the three months ended 31 March 2008.
1.
THREE YEAR FINANCIAL SUMMARY
Subject
to the adoption of the definitions in this document, the following financial
information for the years ended 31 December 2006 and 2007 is extracted from the
audited consolidated financial statements of Unicom for the financial year ended
31 December 2007 prepared in accordance with HKFRS, Hong Kong Accounting
Standards (“HKAS”) and Interpretations issued by the Hong Kong Institute of
Certified Public Accountants (“HKICPA”). The financial information for the year
ended 31 December 2005 is extracted from the Financial Summary of the 2007
annual report of Unicom and is unaudited.
The
financial information for the years ended 31 December 2005 and 2006 have been
restated as a result of the acquisition by CUCL of the Guizhou cellular
telecommunication assets and business (the “Guizhou Business”) from Unicom
Parent, effective on 31 December 2007, which has been accounted for using merger
accounting as if the Guizhou Business had always been part of the Unicom
Group.
The
auditors’ reports issued by PricewaterhouseCoopers in respect of the Unicom
Group’s audited consolidated financial statements for each of the years ended 31
December 2005, 2006 and 2007 set out in the annual reports of Unicom for the
years ended 31 December 2005, 2006 and 2007 did not contain any
qualifications.
Summary
Consolidated Income Statements
|
For
the year ended 31 December
|
|||
|
2006
|
2005
|
||
|
2007
|
(As
restated)
|
(As
restated)
|
|
|
(All
amounts in RMB thousands except per Unicom Share
data)
|
|||
|
Revenue
(Turnover)
|
||||||||||||
|
GSM
Business
|
62,775,304 | 59,882,238 | 52,618,111 | |||||||||
|
CDMA
Business
|
27,730,240 | 27,876,475 | 28,088,642 | |||||||||
|
Data
and Internet Business
|
2,625,853 | 2,320,392 | 3,000,107 | |||||||||
|
Long
Distance Business
|
1,507,501 | 1,014,550 | 1,471,773 | |||||||||
|
－－－－
|
－－－－
|
－－－－
|
||||||||||
|
Total
service revenue
|
94,638,898 | 91,093,655 | 85,178,633 | |||||||||
|
Sales
of telecommunications products
|
4,900,489 | 4,253,660 | 2,859,300 | |||||||||
|
－－－－
|
－－－－
|
－－－－
|
||||||||||
|
Total
revenue
|
99,539,387 | 95,347,315 | 88,037,933 | |||||||||
|
========
|
========
|
========
|
||||||||||
|
Profit
before income tax
|
12,955,027 | 6,564,912 | 7,092,732 | |||||||||
|
Income
tax expenses
|
(3,654,170 | ) | (2,763,885 | ) | (2,170,411 | ) | ||||||
|
－－－－
|
－－－－
|
－－－－
|
||||||||||
|
Profit
for the year
|
9,300,857 | 3,801,027 | 4,922,321 | |||||||||
|
========
|
========
|
========
|
||||||||||
- II-1
-
|
For
the year ended 31 December
|
||||||||||||
|
2006
|
2005
|
|||||||||||
|
2007
|
(As
restated)
|
(As
restated)
|
||||||||||
|
(All amounts in RMB
thousands except per Unicom Share data)
|
||||||||||||
|
Attributable
to:
|
||||||||||||
|
Equity
holders of Unicom
|
9,299,784 | 3,800,920 | 4,922,087 | |||||||||
|
Minority
interest
|
1,073 | 107 | 234 | |||||||||
|
－－－－
|
－－－－
|
－－－－
|
||||||||||
| 9,300,857 | 3,801,027 | 4,922,321 | ||||||||||
|
========
|
========
|
========
|
||||||||||
|
Proposed
final dividend
|
2,726,858 | 2,282,578 | 1,383,169 | |||||||||
|
========
|
========
|
========
|
||||||||||
|
Dividend
paid during the year
|
2,284,942 | 1,384,146 | 1,256,924 | |||||||||
|
========
|
========
|
========
|
||||||||||
|
Dividend
per Unicom Share (RMB)
|
0.20 | 0.18 | 0.11 | |||||||||
|
========
|
========
|
========
|
||||||||||
|
Earnings
per Unicom Share attributable to the equity holders of Unicom during the
year
|
||||||||||||
|
Basic
earnings per Unicom Share (RMB)
|
0.713 | 0.302 | 0.392 | |||||||||
|
========
|
========
|
========
|
||||||||||
|
Diluted
earnings per Unicom Share (RMB)
|
0.707 | 0.300 | 0.390 | |||||||||
|
========
|
========
|
========
|
||||||||||
|
Basic
earnings per Unicom ADS (RMB)
|
7.134 | 3.017 | 3.916 | |||||||||
|
========
|
========
|
========
|
||||||||||
|
Diluted
earnings per Unicom ADS (RMB)
|
7.066 | 3.005 | 3.904 | |||||||||
|
========
|
========
|
========
|
||||||||||
Summary
Consolidated Balance Sheets
|
As
at 31 December
|
||||||||||||
|
2006
|
2005
|
|||||||||||
|
2007
|
(As
restated)
|
(As
restated)
|
||||||||||
|
(All
amounts in RMB thousands)
|
||||||||||||
|
Total
assets
|
149,422,370 | 148,296,714 | 144,621,319 | |||||||||
|
Total
liabilities
|
52,205,276 | 68,432,549 | 67,950,829 | |||||||||
|
－－－－
|
－－－－
|
－－－－
|
||||||||||
|
Total
equity
|
97,217,094 | 79,864,165 | 76,670,490 | |||||||||
|
========
|
========
|
==========
|
||||||||||
- II-2
-
2. AUDITED
CONSOLIDATED FINANCIAL INFORMATION
Subject
to the adoption of the definitions in this document, the following financial
information is extracted from the audited consolidated financial statements of
the Unicom Group for the year ended 31 December 2007.
Consolidated
Balance Sheet
As
at 31 December 2007
(All
amounts in RMB thousands)
|
As
at 31 December
|
||||||||||||
|
2006
|
||||||||||||
|
Note
|
2007
|
As
restated (Note
2.1)
|
||||||||||
|
ASSETS
|
||||||||||||
|
Non-current
assets
|
||||||||||||
|
Property,
plant and equipment
|
6 | 116,162,165 | 112,795,627 | |||||||||
|
Goodwill
|
7 | 3,143,983 | 3,143,983 | |||||||||
|
Other
assets
|
8 | 12,855,199 | 11,356,812 | |||||||||
|
Deferred
income tax assets
|
9 | 426,902 | 309,668 | |||||||||
|
－－－－－
|
－－－－－
|
|||||||||||
| 132,588,249 | 127,606,090 | |||||||||||
|
－－－－－
|
－－－－－
|
|||||||||||
|
Current
assets
|
||||||||||||
|
Inventories
|
10 | 2,528,364 | 2,373,871 | |||||||||
|
Accounts
receivable, net
|
11 | 3,211,154 | 3,442,211 | |||||||||
|
Prepayments
and other current assets
|
12 | 3,516,279 | 2,039,840 | |||||||||
|
Amounts
due from related parties
|
33.1 | 109,096 | 257,170 | |||||||||
|
Amounts
due from Domestic Carriers
|
33.2 | 149,736 | 138,521 | |||||||||
|
Short-term
bank deposits
|
13 | 644,016 | 195,820 | |||||||||
|
Cash
and cash equivalents
|
14 | 6,675,476 | 12,243,191 | |||||||||
|
－－－－－
|
－－－－－
|
|||||||||||
| 16,834,121 | 20,690,624 | |||||||||||
|
－－－－－
|
－－－－－
|
|||||||||||
|
Total
assets
|
149,422,370 | 148,296,714 | ||||||||||
|
===========
|
===========
|
|||||||||||
|
EQUITY
|
||||||||||||
|
Capital
and reserves attributable to Unicom’s equity holders
|
||||||||||||
|
Share
capital
|
15 | 1,436,908 | 1,344,440 | |||||||||
|
Share
premium
|
15 | 64,320,066 | 53,222,976 | |||||||||
|
Reserves
|
16 | 3,968,515 | 4,007,437 | |||||||||
|
Retained
profits
|
||||||||||||
|
—
Proposed final dividend
|
31 | 2,726,858 | 2,282,578 | |||||||||
|
—
Others
|
24,760,833 | 19,003,893 | ||||||||||
|
－－－－
|
－－－－－
|
|||||||||||
| 97,213,180 | 79,861,324 | |||||||||||
|
－－－－－
|
－－－－－
|
|||||||||||
|
Minority
interest in equity
|
22 | (a) | 3,914 | 2,841 | ||||||||
|
－－－－－
|
－－－－－
|
|||||||||||
- II-3
-
|
Total
equity
|
97,217,094 | 79,864,165 | ||||||||||
|
==========
|
==========
|
|||||||||||
|
LIABILITIES
|
||||||||||||
|
Non-current
liabilities
|
||||||||||||
|
Long-term
bank loans
|
17 | 1,660,921 | 4,139,349 | |||||||||
|
Convertible
bonds
|
18 | — | 10,324,949 | |||||||||
|
Obligations
under finance leases
|
19 | 3,882 | 10,230 | |||||||||
|
Deferred
income tax liabilities
|
9 | 5,864 | 5,879 | |||||||||
|
Deferred
revenue
|
4.2 | (b) | 1,303,015 | 2,260,728 | ||||||||
|
－－－－
|
－－－－
|
|||||||||||
| 2,973,682 | 16,741,135 | |||||||||||
|
－－－－
|
－－－－
|
|||||||||||
|
Current
liabilities
|
||||||||||||
|
Payables
and accrued liabilities
|
20 | 32,031,307 | 26,543,904 | |||||||||
|
Taxes
payable
|
1,239,512 | 1,634,316 | ||||||||||
|
Amounts
due to Unicom Parent
|
33.1 | 820,699 | 1,088,297 | |||||||||
|
Amounts
due to related parties
|
33.1 | 769,558 | 328,702 | |||||||||
|
Amounts
due to Domestic Carriers
|
33.2 | 600,283 | 854,885 | |||||||||
|
Short-term
bonds
|
21 | — | 7,087,217 | |||||||||
|
Current
portion of long-term bank loans
|
17 | 2,191,382 | 3,984,350 | |||||||||
|
Current
portion of obligations under finance leases
|
19 | 1,448 | 100,004 | |||||||||
|
Advances
from customers
|
11,577,405 | 10,069,739 | ||||||||||
|
－－－－
|
－－－－
|
|||||||||||
| 49,231,594 | 51,691,414 | |||||||||||
|
－－－－
|
－－－－
|
|||||||||||
|
Total
liabilities
|
52,205,276 | 68,432,549 | ||||||||||
|
－－－－
|
－－－－
|
|||||||||||
|
Total
equity and liabilities
|
149,422,370 | 148,296,714 | ||||||||||
|
=========
|
=========
|
|||||||||||
|
Net
current liabilities
|
(32,397,473 | ) | (31,000,790 | ) | ||||||||
|
=========
|
=========
|
|||||||||||
|
Total
assets less current liabilities
|
100,190,776 | 96,605,300 | ||||||||||
|
=========
|
=========
|
|||||||||||
- II-4
-
Consolidated
Income Statement
For
the year ended 31 December 2007
(All
amounts in RMB thousands, except per Unicom Share data)
|
Year
ended 31 December
|
|||
|
2006
|
|||
|
Note
|
2007
|
As
restated (Note
2.1)
|
|
|
Revenue
(Turnover)
|
|||
|
GSM
Business
|
5,
23, 33
|
62,775,304
|
59,882,238
|
|
CDMA
Business
|
5,
23, 33
|
27,730,240
|
27,876,475
|
|
Data
and Internet Business
|
5,
23, 33
|
2,625,853
|
2,320,392
|
|
Long
Distance Business
|
5,
23, 33
|
1,507,501
|
1,014,550
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Total
service revenue
|
94,638,898
|
91,093,655
|
|
|
Sales
of telecommunications products
|
5,
23
|
4,900,489
|
4,253,660
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Total
revenue
|
5,
23
|
99,539,387
|
95,347,315
|
|
Leased
lines and network capacities
|
25,
33
|
(9,135,497)
|
(8,942,999)
|
|
Interconnection
charges
|
33
|
(10,906,819)
|
(9,671,225)
|
|
Depreciation
and amortisation
|
25
|
(22,677,167)
|
(22,686,568)
|
|
Employee
benefit expenses
|
26,
27, 28
|
(7,139,988)
|
(6,680,679)
|
|
Selling
and marketing
|
25,
33
|
(19,681,372)
|
(19,571,330)
|
|
General,
administrative and other expenses
|
25,
33
|
(14,639,362)
|
(13,543,391)
|
|
Cost
of telecommunications products sold
|
25
|
(5,031,706)
|
(4,914,876)
|
|
Financial
gains/(costs)
|
25
|
87,008
|
(659,632)
|
|
Interest
income
|
186,243
|
263,542
|
|
|
Realised/unrealised
loss on changes in fair value of derivative component of convertible
bonds
|
18
|
(568,860)
|
(2,396,592)
|
|
Other
gains — net
|
24
|
2,923,160
|
21,347
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Profit
before income tax
|
12,955,027
|
6,564,912
|
|
|
Income
tax expenses
|
9
|
(3,654,170)
|
(2,763,885)
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Profit
for the year
|
9,300,857
|
3,801,027
|
|
|
=============
|
=============
|
||
|
Attributable
to:
|
|||
|
Equity
holders of Unicom
|
9,299,784
|
3,800,920
|
|
|
Minority
interest
|
1,073
|
107
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
9,300,857
|
3,801,027
|
||
|
=============
|
=============
|
||
|
Proposed
final dividend
|
31
|
2,726,858
|
2,282,578
|
|
=============
|
=============
|
||
|
Dividend
paid during the year
|
31
|
2,284,942
|
1,384,146
|
|
=============
|
=============
|
||
- II-5
-
|
Earnings
per Unicom Share for profit attributable to the equity holders of Unicom
during the year
|
|||
|
Basic
earnings per Unicom Share (RMB)
|
30
|
0.713
|
0.302
|
|
=============
|
=============
|
||
|
Diluted
earnings per Unicom Share (RMB)
|
30
|
0.707
|
0.300
|
|
=============
|
=============
|
||
|
Number
of Unicom Shares outstanding for basic earnings (in
thousands)
|
30
|
13,036,566
|
12,599,018
|
|
=============
|
=============
|
||
|
Number
of Unicom Shares outstanding for diluted earnings (in
thousands)
|
30
|
13,161,089
|
12,649,306
|
|
=============
|
=============
|
||
|
Basic
earnings per Unicom ADS (RMB)
|
30
|
7.134
|
3.017
|
|
=============
|
=============
|
||
|
Diluted
earnings per Unicom ADS (RMB)
|
30
|
7.066
|
3.005
|
|
=============
|
=============
|
||
|
Number
of Unicom ADSs outstanding for basic earnings (in
thousands)
|
30
|
1,303,657
|
1,259,902
|
|
=============
|
=============
|
||
|
Number
of Unicom ADSs outstanding for diluted earnings (in
thousands)
|
30
|
1,316,109
|
1,264,931
|
|
=============
|
=============
|
- II-6
-
Consolidated
Statement of Changes in Equity
For
the year ended 31 December 2007
(All
amounts in RMB thousands)
|
The
Unicom Group
|
||||||||||||||||||||||||||||||||||||||||
|
Share
capital
|
Share
premium
|
Employee
share-based compensation reserve
|
Revaluation
reserve
|
Statutory
reserves
|
Other
reserve
|
Retained
profits
|
Total
|
Minority
interest
|
Total
equity
|
|||||||||||||||||||||||||||||||
|
Balance
at 1 January 2006 (As previously reported)
|
1,333,621 | 52,601,014 | 215,361 | 176,853 | 2,435,117 | — | 19,522,379 | 76,284,345 | 2,734 | 76,287,079 | ||||||||||||||||||||||||||||||
|
Adjusted
for Business Combination under common control (Note
1)
|
— | — | — | — | — | 383,411 | — | 383,411 | — | 383,411 | ||||||||||||||||||||||||||||||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||||||||||||||||||||||||||||||
|
Balance
at 1 January 2006 (As restated)
|
1,333,621 | 52,601,014 | 215,361 | 176,853 | 2,435,117 | 383,411 | 19,522,379 | 76,667,756 | 2,734 | 76,670,490 | ||||||||||||||||||||||||||||||
|
Revaluation
of buildings — gross (Note
6)
|
— | — | — | 200,330 | — | — | — | 200,330 | — | 200,330 | ||||||||||||||||||||||||||||||
|
Revaluation
of buildings — tax (Note
6)
|
— | — | — | (105,129 | ) | — | — | — | (105,129 | ) | — | (105,129 | ) | |||||||||||||||||||||||||||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||||||||||||||||||||||||||||||
|
Net
income and expense recognised directly in equity
|
— | — | — | 95,201 | — | — | — | 95,201 | — | 95,201 | ||||||||||||||||||||||||||||||
|
Profit
for the year
|
— | — | — | — | — | — | 3,800,920 | 3,800,920 | 107 | 3,801,027 | ||||||||||||||||||||||||||||||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||||||||||||||||||||||||||||||
|
Total
recognised income and expense for 2006
|
— | — | — | 95,201 | — | — | 3,800,920 | 3,896,121 | 107 | 3,896,228 | ||||||||||||||||||||||||||||||
|
Employee
share option scheme:
|
||||||||||||||||||||||||||||||||||||||||
|
—
Value of employee services
|
— | — | 146,294 | — | — | — | — | 146,294 | — | 146,294 | ||||||||||||||||||||||||||||||
|
—
Recognition of share issued on exercise of options (Note
29)
|
10,819 | 621,962 | (97,482 | ) | — | — | — | — | 535,299 | — | 535,299 | |||||||||||||||||||||||||||||
|
Transfer
of retained profits to other reserve due to Business Combination under
common control (Note
1)
|
— | — | — | — | — | 69,096 | (69,096 | ) | — | — | — | |||||||||||||||||||||||||||||
|
Appropriation
to statutory reserve (Note
16)
|
— | — | — | — | 583,586 | — | (583,586 | ) | — | — | — | |||||||||||||||||||||||||||||
|
Dividends
relating to 2005 (Note 31)
|
— | — | — | — | — | — | (1,384,146 | ) | (1,384,146 | ) | — | (1,384,146 | ) | |||||||||||||||||||||||||||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－－
|
－－－－－－
|
－－－－－
|
－－－－－
|
－－－－－－
|
－－－－－
|
－－－－－
|
|||||||||||||||||||||||||||||||
|
Balance
at 31 December 2006 (As restated)
|
1,344,440 | 53,222,976 | 264,173 | 272,054 | 3,018,703 | 452,507 | 21,286,471 | 79,861,324 | 2,841 | 79,864,165 | ||||||||||||||||||||||||||||||
|
==========
|
==========
|
==========
|
==========
|
===========
|
===========
|
===========
|
===========
|
===========
|
===========
|
|||||||||||||||||||||||||||||||
|
Balance
at 1 January 2007 (As previously reported)
|
1,344,440 | 53,222,976 | 264,173 | 272,054 | 3,018,703 | — | 21,286,471 | 79,408,817 | 2,841 | 79,411,658 | ||||||||||||||||||||||||||||||
|
Adjusted
for Business Combination under common control (Note
1)
|
— | — | — | — | — | 452,507 | — | 452,507 | — | 452,507 | ||||||||||||||||||||||||||||||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||||||||||||||||||||||||||||||
- II-7
-
|
Balance
at 1 January 2007 (As restated)
|
1,344,440 | 53,222,976 | 264,173 | 272,054 | 3,018,703 | 452,507 | 21,286,471 | 79,861,324 | 2,841 | 79,864,165 | ||||||||||||||||||||||||||||||
|
Revaluation
of buildings — tax (Note 6)
|
— | — | — | 29,482 | — | — | — | 29,482 | — | 29,482 | ||||||||||||||||||||||||||||||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||||||||||||||||||||||||||||||
|
Net
income and expense recognised directly in equity
|
— | — | — | 29,482 | — | — | — | 29,482 | — | 29,482 | ||||||||||||||||||||||||||||||
|
Profit
for the year
|
— | — | — | — | — | — | 9,299,784 | 9,299,784 | 1,073 | 9,300,857 | ||||||||||||||||||||||||||||||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－－
|
－－－－－－
|
|||||||||||||||||||||||||||||||
|
Total
recognised income and expense for 2007
|
— | — | — | 29,482 | — | — | 9,299,784 | 9,329,266 | 1,073 | 9,330,339 | ||||||||||||||||||||||||||||||
|
Employee
share option scheme:
|
||||||||||||||||||||||||||||||||||||||||
|
— Value
of employee services
|
— | — | 157,262 | — | — | — | — | 157,262 | — | 157,262 | ||||||||||||||||||||||||||||||
|
—
Recognition of share issued on exercise of options (Note
29)
|
5,206 | 366,324 | (58,268 | ) | — | — | — | — | 313,262 | — | 313,262 | |||||||||||||||||||||||||||||
|
Conversion
of convertible bonds (Note 18)
|
87,262 | 10,730,766 | — | — | — | — | — | 10,818,028 | — | 10,818,028 | ||||||||||||||||||||||||||||||
|
Consideration
for purchase of entity under common control (Note 1)
|
— | — | — | — | — | (880,000 | ) | — | (880,000 | ) | — | (880,000 | ) | |||||||||||||||||||||||||||
|
Transfer
of retained profits to other reserve due to Business Combination under
common control (Note 1)
|
— | — | — | — | — | 95,277 | (95,277 | ) | — | — | — | |||||||||||||||||||||||||||||
|
Transfer
of profit of entity under common control to Unicom Parent (Note
1)
|
— | — | — | — | — | (101,020 | ) | — | (101,020 | ) | — | (101,020 | ) | |||||||||||||||||||||||||||
|
Appropriation
to statutory reserve (Note 16)
|
— | — | — | — | 718,345 | — | (718,345 | ) | — | — | — | |||||||||||||||||||||||||||||
|
Dividends
relating to 2006 (Note 31)
|
— | — | — | — | — | — | (2,284,942 | ) | (2,284,942 | ) | — | (2,284,942 | ) | |||||||||||||||||||||||||||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||||||||||||||||||||||||||||||
|
Balance
at 31 December 2007
|
1,436,908 | 64,320,066 | 363,167 | 301,536 | 3,737,048 | (433,236 | ) | 27,487,691 | 97,213,180 | 3,914 | 97,217,094 | |||||||||||||||||||||||||||||
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
|||||||||||||||||||||||||||||||
- II-8
-
Consolidated
Cash Flow Statement
For
the year ended 31 December 2007
(All
amounts in RMB thousands)
|
Year
ended 31 December
|
|||
|
2006
|
|||
|
Note
|
2007
|
As
restated (Note
2.1)
|
|
|
Cash
flows from operating activities
|
|||
|
Cash
generated from operations
|
(a)
|
36,836,129
|
39,217,031
|
|
Interest
received
|
188,555
|
251,222
|
|
|
Interest
paid
|
(498,080)
|
(1,212,745)
|
|
|
Income
tax paid
|
(4,195,111)
|
(2,113,144)
|
|
|
－－－－
|
－－－－
|
||
|
Net
cash generated from operating activities
|
32,331,493
|
36,142,364
|
|
|
－－－－
|
－－－－
|
||
|
Cash
flows from investing activities
|
|||
|
Purchase
of property, plant and equipment
|
(21,501,863)
|
(16,977,370)
|
|
|
Proceeds
from sale of property, plant and equipment
|
82,029
|
59,455
|
|
|
Consideration
for purchase of entity under common control
|
1
|
(880,000)
|
—
|
|
(Increase)/decrease
in short-term bank deposits
|
(448,196)
|
86,637
|
|
|
Purchase
of other assets
|
(2,218,552)
|
(743,336)
|
|
|
－－－－
|
－－－－
|
||
|
Net
cash used in investing activities
|
(24,966,582)
|
(17,574,614)
|
|
|
－－－－
|
－－－－
|
||
|
Cash
flows from financing activities
|
|||
|
Proceeds
from exercise of share options
|
313,262
|
535,299
|
|
|
Proceeds
from short-term bonds
|
—
|
6,949,700
|
|
|
Proceeds
from short-term bank loans
|
—
|
2,143,000
|
|
|
Proceeds
from long-term bank loans
|
—
|
1,345,050
|
|
|
Proceeds
from issuance of convertible bonds
|
—
|
7,993,500
|
|
|
Repayment
of short-term bonds
|
(6,969,700)
|
(9,731,800)
|
|
|
Repayment
of short-term bank loans
|
—
|
(8,905,858)
|
|
|
Repayment
of long-term bank loans
|
(3,991,246)
|
(10,758,599)
|
|
|
Dividends
paid to Unicom’s equity holders
|
31
|
(2,284,942)
|
(1,384,146)
|
|
－－－－
|
－－－－
|
||
|
Net
cash used in financing activities
|
(12,932,626)
|
(11,813,854)
|
|
|
－－－－
|
－－－－
|
||
|
Net
(decrease)/increase in cash and cash equivalents
|
(5,567,715)
|
6,753,896
|
|
|
Cash
and cash equivalents, beginning of year
|
12,243,191
|
5,489,295
|
|
|
－－－－
|
－－－－
|
||
|
Cash
and cash equivalents, end of year
|
14
|
6,675,476
|
12,243,191
|
|
========
|
========
|
||
|
Analysis
of the balances of cash and cash equivalents:
|
|||
|
Cash
balances
|
4,155
|
4,549
|
|
|
Bank
balances
|
6,671,321
|
12,238,642
|
|
|
－－－－
|
－－－－
|
||
|
6,675,476
|
12,243,191
|
||
|
==========
|
==========
|
- II-9
-
(a) The
reconciliation of profit before income tax to cash generated from operations is
as follows:
|
Year
ended 31 December
|
||
|
2006
|
||
|
2007
|
As
restated (Note
2.1)
|
|
|
Profit
before income tax
|
12,955,027
|
6,564,912
|
|
Adjustments
for:
|
||
|
Depreciation
and amortisation
|
22,677,167
|
22,686,568
|
|
Amortisation
of customer acquisition costs of contractual CDMA
subscribers
|
4,000,358
|
4,375,353
|
|
Interest
income
|
(186,243)
|
(263,542)
|
|
Financial
(gains)/costs
|
(256,794)
|
460,003
|
|
Loss
on disposal of property, plant and equipment
|
109,021
|
144,950
|
|
Share-based
compensation costs
|
157,262
|
146,294
|
|
Provision
for doubtful debts
|
1,727,009
|
1,753,915
|
|
Realised/unrealised
loss on changes in fair value of derivative component of convertible
bonds
|
568,860
|
2,396,592
|
|
Changes
in working capital:
|
||
|
Increase
in accounts receivable
|
(1,495,952)
|
(591,235)
|
|
Increase
in inventories
|
(154,493)
|
(214,437)
|
|
Increase
in other assets
|
(3,103,991)
|
(1,877,314)
|
|
Increase
in prepayments and other current assets
|
(2,165,549)
|
(415,625)
|
|
Increase
in amounts due from Domestic Carriers
|
(11,215)
|
(36)
|
|
Decrease
in amounts due from related parties
|
148,074
|
220,750
|
|
Increase
in payables and accrued liabilities
|
1,499,999
|
2,300,159
|
|
Increase
in advances from customers
|
1,507,666
|
2,097,677
|
|
Decrease
in deferred revenue
|
(957,713)
|
(1,106,934)
|
|
(Decrease)/increase
in amounts due to Domestic Carriers
|
(254,602)
|
18,017
|
|
(Decrease)/increase
in amounts due to Unicom Parent
|
(368,618)
|
308,883
|
|
Increase
in amounts due to related parties
|
440,856
|
212,081
|
|
－－－－
|
－－－－
|
|
|
Cash
generated from operations
|
36,836,129
|
39,217,031
|
|
========
|
========
|
|
(b) Major
non-cash transactions:
|
|
(i)
|
Payables
to equipment suppliers for construction-in-progress during 2007 increased
by approximately RMB4.0 billion (2006: approximately RMB5.1
billion).
|
|
|
(ii)
|
On
20 August 2007, the US$1 billion convertible bonds were fully converted
into 899,745,075 Unicom Shares. Please refer to Note 18 for
details.
|
- II-10
-
Notes
to the Consolidated Financial Statements
(All
amounts in RMB thousands unless otherwise stated)
1. ORGANISATION
AND PRINCIPAL ACTIVITIES
Unicom
was incorporated as a limited liability company in Hong Kong on 8 February 2000.
The principal activities of Unicom are investment holding and Unicom’s
subsidiaries are principally engaged in the provision of GSM and CDMA cellular,
long distance, data and Internet services in the PRC. The GSM and CDMA
businesses are hereinafter collectively referred to as the “Cellular Business”.
The address of Unicom’s registered office is 75th Floor, The Center, 99 Queen’s
Road Central, Hong Kong.
The
Unicom Shares were listed on the Hong Kong Stock Exchange on 22 June 2000 and
the Unicom ADSs were listed on the New York Stock Exchange on 21 June
2000.
The
immediate holding company of Unicom is Unicom BVI. The majority of the equity
interests in Unicom BVI is owned by Unicom A Share Company, a joint stock
company incorporated in the PRC on 31 December 2001, with its A shares listed on
the Shanghai Stock Exchange on 9 October 2002. The majority of the equity
interest in Unicom A Share Company is owned by Unicom Parent. The Unicom
Directors consider Unicom Parent to be the ultimate holding
company.
Purchase
of assets and business of Guizhou branch of Unicom Parent (hereinafter referred
to as “Business Combination”)
Pursuant
to an asset transfer agreement entered between CUCL and Unicom Parent on 16
November 2007, CUCL agreed to purchase the GSM cellular telecommunication assets
and business, and the CDMA cellular telecommunication business (operated through
a leasing of CDMA network capacity from Unicom New Horizon) of the Guizhou
branch of Unicom Parent (“Guizhou Business”) at a cash consideration of RMB880
million. The consideration for the Business Combination was determined with
reference to the results of a business valuation using methods commonly used in
capital market transactions in the telecommunications industry and the
negotiations between the parties. In addition, pursuant to the asset transfer
agreement, the profit or loss of the Guizhou Business for the period from 31
December 2006 to the effective date of the Business Combination was transferred
to Unicom Parent.
The
aforementioned Business Combination became effective on 31 December 2007, when
all the conditions to the Business Combination were satisfied and cash
consideration was settled by CUCL. Upon the completion of the Business
Combination, the cellular telecommunications business operations of CUCL have
been expanded to all provinces, cities and autonomous regions in the PRC. Unicom
has adopted merger accounting to account for this business combination of
entities and businesses under the common control of Unicom Parent. Please refer
to Note 2.1 for details.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
The
principal accounting policies applied in the preparation of these consolidated
financial statements are set out below. These policies have been consistently
applied to all the years presented, unless otherwise stated.
2.1 Basis
of Preparation
The
consolidated financial statements have been prepared under the historical cost
convention, modified by the revaluation of buildings, financial assets and
financial liabilities (including derivative financial instruments) at fair value
through profit or loss. They have been prepared in accordance with HKFRS, which
collective term includes all applicable individual Hong Kong Financial Reporting
Standards, Hong Kong Accounting Standards (HKAS) and Interpretations issued by
the Hong Kong Institute of Certified Public Accountants (“HKICPA”), and the
requirements of the Hong Kong Companies Ordinance. They also comply with the
applicable disclosure provisions of the Listing Rules. The consolidated
financial statements prepared by the PRC subsidiaries for PRC statutory
reporting purposes are based on the Chinese Accounting Standards for Business
Enterprises (“CAS”) issued by the Ministry of Finance, which were effective from
1 January 2007 with certain transitional provisions. There are certain
differences between the Unicom Group’s HKFRS financial statements and PRC
statutory financial statements. The principal adjustments made on PRC statutory
financial statements to conform to HKFRS include the following:
|
|
•
|
reversal
of revaluation surplus and related depreciation and amortisation charges
arising from the revaluation of assets performed by independent valuers
for the purpose of reporting to relevant PRC government authorities prior
to 1 January 2007;
|
|
|
•
|
recognition
of goodwill associated with the acquisition of subsidiaries prior to
2005;
|
|
|
•
|
capitalisation
of the direct costs associated with the acquisition of subsidiaries prior
to 2005;
|
|
|
•
|
additional
capitalisation of borrowing costs prior to the adoption of CAS on 1
January 2007;
|
|
|
•
|
capitalisation
and amortisation of upfront non-refundable revenue and the related direct
incremental costs for activating cellular subscribers prior to the
adoption of CAS on 1 January 2007;
and
|
|
|
•
|
adjustments
on deferred taxation in relation to HKFRS
adjustments.
|
Since
the Unicom Group and the Guizhou Business were both under the common control of
Unicom Parent prior to the Business Combination, the purchase of the Guizhou
Business is considered as a business combination of entities and businesses
under common control, which has been accounted for using merger accounting in
accordance with the Accounting Guideline 5 “Merger Accounting For Common Control
Combinations” (“AG 5”) issued by the HKICPA in November 2005. The acquired
assets and liabilities of the Guizhou Business are stated at historical cost,
and are included in the consolidated financial statements from the beginning of
the earliest period presented as if the Guizhou Business had always been part of
the Unicom Group. As a result, the 2006 comparative figures in the consolidated
financial statements have been restated accordingly.
- II-11
-
The
following tables summarise the combined results of operations and the financial
positions of the Unicom Group and the Guizhou Business as at and for the years
ended 31 December 2007 and 2006 to reflect the impact of the effect of the
Business Combination under common control:
|
The
Unicom Group (before the Business Combination)
|
Guizhou
Business
|
Elimination
|
The
Unicom
Group
(after the Business Combination)
|
|
|
For
the year ended/as at 31 December 2007
|
||||
|
Results
of operations:
|
||||
|
Revenue
(Turnover)
|
98,515,372
|
1,407,223
|
(383,208)
|
99,539,387
|
|
Profit
for the year
|
9,205,580
|
95,277
|
—
|
9,300,857
|
|
Basic
earnings per share (RMB)
|
0.706
|
—
|
—
|
0.713
|
|
Financial
position:
|
||||
|
Non-current
assets
|
130,763,519
|
1,824,730
|
—
|
132,588,249
|
|
Current
assets
|
16,857,746
|
165,824
|
(189,449)
|
16,834,121
|
|
Total
assets
|
147,621,265
|
1,990,554
|
(189,449)
|
149,422,370
|
|
Non-current
liabilities
|
2,960,312
|
13,370
|
—
|
2,973,682
|
|
Current
liabilities
|
47,890,623
|
1,530,420
|
(189,449)
|
49,231,594
|
|
Total
liabilities
|
50,850,935
|
1,543,790
|
(189,449)
|
52,205,276
|
|
Net
assets
|
96,770,330
|
446,764
|
—
|
97,217,094
|
|
The
Unicom Group (before the Business Combination)
|
Guizhou
Business
|
Elimination
|
The
Unicom Group (after the Business Combination)
|
|
|
For
the year ended/as at 31 December 2006
|
||||
|
Results
of operations:
|
||||
|
Revenue
(Turnover)
|
94,294,493
|
1,352,867
|
(300,045)
|
95,347,315
|
|
Profit
for the year
|
3,731,931
|
69,096
|
—
|
3,801,027
|
|
Basic
earnings per share (RMB)
|
0.296
|
—
|
—
|
0.302
|
|
Financial
position:
|
||||
|
Non-current
assets
|
126,011,725
|
1,594,365
|
—
|
127,606,090
|
|
Current
assets
|
20,426,261
|
303,215
|
(38,852)
|
20,690,624
|
|
Total
assets
|
146,437,986
|
1,897,580
|
(38,852)
|
148,296,714
|
|
Non-current
liabilities
|
16,723,791
|
17,344
|
—
|
16,741,135
|
|
Current
liabilities
|
50,302,537
|
1,427,729
|
(38,852)
|
51,691,414
|
|
Total
liabilities
|
67,026,328
|
1,445,073
|
(38,852)
|
68,432,549
|
|
Net
assets
|
79,411,658
|
452,507
|
—
|
79,864,165
|
As
at 31 December 2007, the current liabilities of the Unicom Group had exceeded
the current assets by approximately RMB32.4 billion (31 December 2006:
approximately RMB31.0 billion). Taking into account the available sources of
financing and continuous net cash inflows from operating activities, the Unicom
Group has sufficient funds to meet its working capital requirements and debt
obligations. As a result, the consolidated financial statements of the Unicom
Group for the year ended 31 December 2007 have been prepared under the going
concern basis.
The
preparation of the consolidated financial statements in conformity with HKFRS
requires the use of certain critical accounting estimates. It also requires
management to exercise its judgment in the process of applying the Unicom
Group’s accounting policies. The areas involving a higher degree of judgment or
complexity, or areas where assumptions and estimates are significant to the
consolidated financial statements are disclosed in Note 4.
(a) Standards, amendments and
interpretations effective in 2007 that are relevant and are applicable to the
Unicom Group’s operation
|
|
•
|
HKFRS
7, “Financial instruments: Disclosures”, and the complementary amendment
to HKAS 1, “Presentation of financial statements — Capital disclosures”,
introduce new disclosures relating to financial instruments and capital
management which do not have any significant impact on the classification
and valuation of the Unicom Group’s financial
instruments.
|
|
|
•
|
HK(IFRIC)-Int
8, “Scope of HKFRS 2”, requires consideration of transactions involving
the issuance of equity instruments, where the identifiable consideration
received is less than the fair value of the equity instruments issued in
order to establish whether or not they fall within the scope of HKFRS 2.
This interpretation does not have any significant impact on the Unicom
Group’s consolidated financial
statements.
|
|
|
•
|
HK(IFRIC)-Int
9, “Reassessment of embedded derivatives”, requires an entity to assess
whether an embedded derivative is required to be separated from the host
contract and accounted for as a derivative when the entity first becomes a
party to the contract. Subsequent reassessment is prohibited unless there
is a change in the terms of the contract that significantly modifies the
cash flows that otherwise would be required under the contract, in which
case reassessment is required. As the Unicom Group did not change the
terms of these kind of contracts, this interpretation does not have any
impact on the Unicom Group’s consolidated financial
statements.
|
|
|
•
|
HK(IFRIC)-Int
10, “Interim financial reporting and impairment”, prohibits the impairment
losses recognised in an interim period on goodwill, investments in equity
instruments and investments in financial assets carried at cost to be
reversed at a subsequent balance sheet date. This interpretation does not
have any significant impact on the Unicom Group’s consolidated financial
statements.
|
- II-12
-
(b) Interpretation to existing standards
effective in 2007 and not relevant for the Unicom Group’s
operation
|
|
•
|
HK(IFRIC)-Int
7, “Applying the restatement approach under HKAS 29, Financial reporting
in hyperinflationary economies”, provides guidance on how to apply
requirements of HKAS 29 in a reporting period in which an entity
identifies the existence of hyperinflation in the economy of its
functional currency, when the economy was not hyperinflationary in the
prior period. As none of the Unicom Group entities have a currency of
hyperinflationary economy as its functional currency, this interpretation
is not relevant to the Unicom Group’s
operation.
|
|
(c)
|
Standards, amendments and
interpretations to existing standards that are not yet effective in 2007
and have not been early adopted by the Unicom
Group
|
|
|
•
|
HKFRS
8, “Operating segments” (effective for annual periods beginning on or
after 1 January 2009), replaces HKAS 14 and aligns segment reporting with
the requirements of the US Standard SFAS 131, “Disclosures about segments
of an enterprise and related information”. The new standard requires a
“management approach”, under which segment information is presented on the
same basis as that used for internal reporting purposes. The Unicom Group
will apply HKFRS 8 from 1 January 2009. This standard is not expected to
have any significant impact on the classification and presentation of the
Unicom Group’s consolidated financial
statements.
|
|
|
•
|
(Revised)
HKAS 1, “Presentation of financial statements” (effective for annual
periods beginning on or after 1 January 2009). The revised HKAS 1 affects
the presentation of owner changes in equity and of comprehensive income.
It does not change the recognition, measurement or disclosures of specific
transactions and other events required by other HKFRS. Management is
currently assessing the impact of (Revised) HKAS 1 on the Unicom Group’s
consolidated financial statements but the probable key impact will be on
the manner in which the Unicom Group presents financial
statements.
|
|
|
•
|
HKAS
23 (Amendment), “Borrowing costs” (applied to borrowing cost related to
qualifying assets for which the commencement date for capitalisation is on
or after 1 January 2009). The amendment requires an entity to capitalise
borrowing costs directly attributable to the acquisition, construction or
production of a qualifying asset (one that takes a substantial period of
time to get ready for use or sale) as part of the cost of that asset. The
option of immediately expensing those borrowing costs will be removed.
HKAS 23 (Amendment) is not expected to have a material impact on the
Unicom Group’s consolidated financial
statements.
|
|
|
•
|
HK(IFRIC)-Int
11, “Group and treasury share transactions” (effective for annual periods
beginning on or after 1 March 2007), provides guidance on whether
share-based transactions involving treasury shares or involving group
entities (for example, options over parent’s shares) should be accounted
for as equity-settled or cash-settled share-based payment transactions in
the stand-alone accounts of the parent and group companies. Management is
currently assessing the impact of HK(IFRIC)-Int 11 on the Unicom Group’s
and Unicom’s financial statements.
|
|
|
•
|
HK(IFRIC)-Int
13, “Customer loyalty programmes” (effective for annual periods beginning
on or after 1 July 2008), clarifies that where goods or services are sold
together with a customer loyalty incentive (for example, loyalty points or
free services/products), the arrangement is a multiple-element arrangement
and the consideration received or receivable from the customer is
allocated between the components of the arrangement using fair values.
Management is currently assessing the impact of HK(IFRIC)-Int 13 on the
Unicom Group’s operations and consolidated financial
statements.
|
(d) Interpretations to existing
standards that are not yet effective and not relevant for the Unicom Group’s
operations
|
|
•
|
HK(IFRIC)-Int
12, “Service concession arrangements” (effective for annual periods
beginning on or after 1 January 2008). HK(IFRIC)-Int 12 applies to
contractual arrangements whereby a private sector operator participates in
the development, financing, operation and maintenance of infrastructure
for public sector services. HK(IFRIC)-Int 12 is not relevant to the Unicom
Group’s operations because the Unicom Group did not involve in such
arrangements.
|
|
|
•
|
HK(IFRIC)-Int
14, “The limit on a defined benefit asset, minimum funding requirements
and their interaction” (effective for annual periods beginning on or after
1 January 2008). HK(IFRIC)-Int 14 provides guidance on assessing the limit
in HKAS 19 on the amount of the surplus that can be recognised as an
asset. It also explains how the pension asset or liability may be affected
by a statutory or contractual minimum funding requirement. HK(IFRIC)-Int
14 is not relevant to the Unicom Group’s operations because none of the
Unicom Group’s companies have defined benefit
assets.
|
2.2
Consolidation
The
consolidated financial statements include the financial statements of Unicom and
all of its subsidiaries made up to 31 December.
(a) Subsidiaries
Subsidiaries
are all entities (including special purpose entities) over which the Unicom
Group has the power to govern the financial and operating policies generally
accompanying a shareholding of more than one half of the voting rights. The
existence and effect of potential voting rights that are currently exercisable
or convertible are considered when assessing whether the Unicom Group controls
another entity.
Subsidiaries
are fully consolidated from the date on which control is transferred to the
Unicom Group. They are de-consolidated from the date that control
ceases.
The
Unicom Group has acquired the equity interests of certain subsidiaries prior to
2005 (refer to Note 7 for details). Prior to the adoption of HKFRS in 2005, the
Unicom Group accounted for the acquisition of subsidiaries under common control
in accordance with the original HK SSAP 27 “Accounting for Group
Reconstructions” (“HK SSAP 27”) under the previous accounting principles
generally accepted in Hong Kong and the requirement of the Hong Kong Companies
Ordinance. Since the criteria for applying merger accounting under the HK SSAP
27 was not satisfied, the purchase method of accounting was used to account for
the acquisitions of those subsidiaries (including common control transactions)
by the Unicom Group prior to 2005.
- II-13
-
Under
the purchase method of accounting, the cost of an acquisition is measured at the
fair value of the assets given, equity instruments issued and liabilities
incurred or assumed at the date of exchange, plus costs directly attributable to
the acquisition. Identifiable assets acquired and liabilities and contingent
liabilities assumed are measured initially at their fair values at the
acquisition date, irrespective of the extent of any minority interest. The
excess of the cost of acquisition over the fair value of the Unicom Group’s
share of the identifiable net assets acquired is recorded as goodwill. If the
cost of acquisition is less than the fair value of the Unicom Group’s share of
the identifiable net assets of the subsidiary acquired, the difference is
recognised directly in the income statement.
Upon
the adoption of HKFRS in 2005, merger accounting is used by the Unicom Group to
account for the business combination of entities and businesses under common
control in accordance with AG 5 issued by the HKICPA. The results of operations
and financial position of such entities or businesses are included in the
consolidated financial statements as if the businesses were always part of the
Unicom Group from the beginning of the earliest period presented or since the
date when the combining entities or businesses first came under common control,
where this is a shorter period, regardless of the date of the common control
combination.
Inter-company
transactions, balances and unrealised gains on transactions between group
companies are eliminated. Unrealised losses are also eliminated unless the
transaction provides evidence of an impairment of the asset transferred.
Accounting policies of subsidiaries would be changed when necessary in the
consolidated financial statements to ensure consistency with the policies
adopted by the Unicom Group.
In
Unicom’s balance sheet, the investments in subsidiaries are stated at cost less
provision for impairment losses. The results of subsidiaries are accounted for
by Unicom on the basis of dividends received and receivable.
(b) Minority
interests
Minority
interests at the balance sheet date, being the portion of the net assets of
subsidiaries attributable to interests that are not owned by Unicom, whether
directly or indirectly through subsidiaries, are presented in the consolidated
balance sheets and statements of changes in equity within equity, separately
from equity attributable to the equity holders of Unicom. Minority interests in
the results of the Unicom Group are presented on the face of the consolidated
income statements as an allocation of the total profit or loss for the year
between minority shareholders and the equity holders of Unicom.
Where
losses applicable to the minority exceed the minority’s interest in the equity
of a subsidiary, the excess, and any further losses applicable to the minority,
are charged against the Unicom Group’s interest except to the extent that the
minority has a binding obligation to, and is able to, make additional investment
to cover the losses. If the subsidiary subsequently reports profits, the Unicom
Group’s interest is allocated all such profits until the minority’s share of
losses previously absorbed by the Unicom Group has been recovered.
The
Unicom Group applies a policy of treating transactions with minority interests
as transactions with parties external to the Unicom Group. Disposals to minority
interests result in gains or losses for the Unicom Group that are recorded in
the consolidated financial statements. Purchases from minority interests result
in goodwill, being the difference of any consideration paid and the relevant
share of the carrying value of the net assets of the subsidiary
acquired.
2.3 Segment
Reporting
A
business segment is a group of assets and operations engaged in providing
products or services that are subject to risks and returns that are different
from those of other business segments. The Unicom Group has not presented
geographical segments as the Unicom Group operates primarily in one geographical
segment. This is also consistent with the Unicom Group’s internal financial
reporting.
Unallocated
costs primarily represent corporate expenses, realised/unrealised loss on
changes in fair value of derivative component of convertible bonds and income
tax expense, whilst unallocated income represents interest income and other
gains (including the tax refund on reinvestment in a subsidiary) that cannot be
identified to different operating segments. Segment assets consist primarily of
property, plant and equipment, other assets, prepayments, inventories,
receivables and operating cash. Segment liabilities primarily comprise operating
liabilities. Capital expenditure mainly comprises additions to property, plant
and equipment.
2.4 Foreign
Currency Translation
(a) Functional and presentation
currency
Items
included in the financial statements of each of the Unicom Group’s entities are
measured using the currency of the primary economic environment in which the
entities operate (“the functional currency”). The consolidated financial
statements are presented in RMB, which is Unicom’s functional and presentation
currency.
(b) Transactions and
balances
Foreign
currency transactions are translated into the functional currency using the
exchange rates prevailing at the dates of the transactions. Foreign exchange
gains and losses resulting from the settlement of such transactions and from the
translation at year-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the income
statement.
2.5 Property,
Plant and Equipment
Buildings
are stated at fair value, based on periodic valuations by external independent
valuers, less subsequent depreciation for buildings. The last external
independent valuations were performed on buildings as at 31 August 2006. In the
intervening years, the Unicom Directors review the carrying value of buildings
and adjustment is made where in the Unicom Directors’ opinion there has been a
material change in value. Other property, plant and equipment, comprising
leasehold improvements, plant, telecommunications equipment, office furniture,
fixtures and others are stated at historical cost less accumulated depreciation
and accumulated impairment losses. The cost of an asset comprises its purchase
price and any directly attributable costs of bringing the asset to its working
condition and location for its intended use.
Subsequent
costs are included in the asset’s carrying amount or recognised as a separate
asset, as appropriate, only when it is probable at the time the costs are
incurred that future economic benefits associated with the item will flow to the
Unicom Group, and the cost of the item can be measured reliably. The carrying
amount of the replaced part is derecognised. All other repairs and maintenance
are charged to the income statement during the financial period in which they
are incurred.
- II-14
-
Increases
in the carrying amount arising from revaluation of buildings are credited to the
revaluation reserve in shareholders’ equity. Decreases that offset previous
increases on the same asset are charged against the revaluation reserve directly
in equity, all other decreases are charged to the income statement. Upon the
disposal or retirement of revaluated buildings, the realised portion of the
revaluation reserve is transferred from the revaluation reserve to retained
profits.
Depreciation
on property, plant and equipment is calculated using the straight-line method to
allocate their costs or revalued amounts less their residual values over their
estimated useful lives, as follows:
|
Depreciable
life
|
Residual
rate
|
|
|
Buildings
|
10-40
years
|
3%
|
|
Telecommunications
equipment
|
5-15
years
|
3%
|
|
Office
furniture, fixtures and others
|
5-7
years
|
3%
|
Leasehold
improvements are depreciated over the shorter of their estimated useful lives
and the lease periods.
The
assets’ residual values and useful lives are reviewed, and adjusted if
appropriate, at each balance sheet date.
Construction-in-progress
(“CIP”) represents buildings, plant and equipment under construction and pending
installation, and is stated at cost less accumulated impairment losses. Costs
include construction and acquisition costs, and interest charges arising from
borrowings used to finance the assets during the construction period. No
provision for depreciation is made on construction-in-progress until such time
as the assets are completed and ready for use.
An
asset’s carrying amount is written down immediately to its recoverable amount if
the asset’s carrying amount is greater than its estimated recoverable amount
(Note 2.8).
Gain
or loss on disposal of a property, plant or equipment are determined by
comparing the net sales proceeds with the carrying amounts, and are recognised
within “general, administrative and other expenses” in the income statement.
When revalued assets are sold, the amounts included in the revaluation reserve
are transferred to retained profits.
2.6 Goodwill
Goodwill
represents the excess of the cost of an acquisition over the fair value of the
Unicom Group’s share of the net identifiable assets of the acquired subsidiaries
at the date of acquisition. Goodwill is tested annually for impairment and
carried at cost less accumulated impairment losses. Impairment losses on
goodwill are not reversed. Gain or loss on the disposal of an entity includes
the carrying amount of goodwill relating to the entity sold.
Goodwill
is allocated to cash-generating units for the purpose of impairment testing. The
allocation is made to those cash-generating units or groups of cash-generating
units that are expected to benefit from the business combination in which the
goodwill arose. The Unicom Group has allocated goodwill to the GSM Business and
the CDMA Business which it operates (Note 2.8).
2.7 Other
Assets
Other
assets mainly represent (i) capitalised direct incremental costs for activating
GSM and CDMA subscribers; (ii) customer acquisition costs under contractual CDMA
subscriber packages; (iii) computer software; (iv) prepaid rental for premises
and leased lines; and (v) prepayment for land use rights.
Capitalised
direct incremental costs for activating GSM and CDMA subscribers, including
costs of SIM/UIM cards and commissions which are directly associated with
upfront non-refundable revenue received upon activation of cellular services,
are amortised over the expected customer service periods. The expected customer
service periods are estimated based on the expected stabilised churn rates of
subscribers.
Customer
acquisition costs under contractual CDMA subscriber packages represent the cost
of CDMA handsets given to contractual subscribers under special promotional
packages. Such customer acquisition costs, to the extent recoverable, are
amortised over the contractual period (not exceeding 2 years) during which the
minimum contract revenue is expected to flow to the Unicom Group. Customer
acquisition costs of contractual CDMA subscribers are included in “prepayment
and other current assets” when the customer contract is within 1 year of expiry,
whereas they are recorded as “other assets” when the unexpired contract period
is over 1 year.
Acquired
computer software licences are capitalised on the basis of the costs incurred to
acquire and bring to use the specific software. These costs are amortised over
their estimated useful lives.
Long-term
prepaid rental for premises and leased lines are amortised using a straight-line
method over the lease period.
Long-term
prepayment for land use rights are amortised over the period of the lease on a
straight-line basis.
2.8 Impairment
of Non-Financial Assets
Assets
that have an indefinite useful life or are not yet available for use are not
subject to amortisation and are tested for impairment at each balance sheet
date. Assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. An
impairment loss is recognised for the amount by which the asset’s carrying
amount exceeds its recoverable amount. The recoverable amount is the higher of
(i) an asset’s fair value less costs to sell and (ii) value in use. For the
purposes of assessing impairment, assets are grouped at the lowest levels for
which there are separately identifiable cash flows (cash-generating units).
Assets other than goodwill that suffered from impairment are reviewed for
possible reversal of the impairment at each reporting date.
2.9 Inventories
Inventories,
which principally comprise handsets, SIM cards, UIM cards and accessories, are
stated at the lower of cost and net realisable value. Cost is based on the
weighted average method and comprises all costs of purchase and other costs
incurred in bringing the inventories to their present location and condition.
Net realisable value for all the inventories including CDMA handsets is
determined on the basis of anticipated sales proceeds less estimated selling
expenses.
- II-15
-
2.10 Accounts
Receivable and Other Receivables
Accounts
receivable and other receivables are recognised initially at fair value and
subsequently measured at amortised cost using the effective interest method,
less provision for impairment. A provision for impairment of accounts receivable
and other receivables is established when there is objective evidence that the
Unicom Group will not be able to collect all amounts due according to the
original terms of the receivables. The amount of the provision is the difference
between the assets’ carrying amount and the present value of estimated future
cash flows. The carrying amount of the assets is reduced through the use of a
provision account, and the amount of the loss is recognised within “general,
administrative and other expenses” in the income statement. When a receivable is
proven to be uncollectible with sufficient evidence, it is written off against
the provision account for receivables. Subsequent recoveries of amounts
previously written off are credited against “general, administrative and other
expenses” in the income statement.
2.11 Short-term
Bank Deposits
Short-term
bank deposits are cash invested in fixed-term deposits with original maturities
ranging from more than 3 months to 1 year.
2.12 Cash
and Cash Equivalents
Cash
and cash equivalents include cash in hand, deposits held at call with banks and
other short-term highly liquid investments with original maturities of 3 months
or less.
2.13 Convertible
Bonds
As
the functional currency of the Unicom Group is RMB, the conversion of the
convertible bonds denominated in Hong Kong Dollars did not result in settlement
by the exchange of a fixed amount of cash in RMB, the functional currency of the
Unicom Group, for a fixed number of Unicom Shares. In accordance with the
requirements of HKAS 39, “Financial Instruments — Recognition and Measurement”,
the convertible bond contract must be separated into two component elements: a
derivative component consisting of the conversion option and a liability
component consisting of the straight debt element of the bonds.
On
the issue of the convertible bonds, the fair value of the embedded conversion
option was calculated using the Binomial model. The derivative component, the
embedded conversion option, was carried at fair value on the balance sheet with
any changes in fair value being charged or credited to the income statement in
the period when the change occurred. The remainder of the proceeds was allocated
to the debt element of the bonds, net of transaction costs, and was recorded as
the liability component. The liability component was subsequently carried at
amortised cost until extinguished on conversion or redemption. Interest expense
was calculated using the effective interest method by applying the effective
interest rate to the liability component through the maturity date.
If
the convertible bonds were converted, the carrying amounts of the derivative and
liability components were transferred to share capital and share premium as
consideration for the shares issued. If the convertible bonds were redeemed, any
difference between the amount paid and the carrying amounts of both components
was recognised in the income statement.
2.14 Deferred
Revenue and Advances from Customers
(a) Deferred revenue
Deferred
revenue represents upfront non-refundable revenue, including connection fee and
receipts from activation of SIM/UIM cards relating to GSM and CDMA businesses,
which are deferred and recognised over the expected service period.
(b)
Advances from
customers
Advances
from customers are amounts paid by customers for GSM and CDMA prepaid cards,
Internet protocol (“IP”) telephone cards, other calling cards and GSM and CDMA
prepaid service fees, which cover future telecommunications services (over a
period of one to twelve months). Advances from customers are stated at the
amount of proceeds received less the amount already recognised as revenues upon
the rendering of services.
2.15 Borrowings
Borrowings
are recognised initially at fair value, net of transaction costs incurred.
Borrowings are subsequently stated at amortised cost, any difference between the
proceeds (net of transaction costs) and the redemption value is recognised in
the income statement over the period of the borrowings using the effective
interest method.
Borrowings
are classified as current liabilities unless the Unicom Group has an
unconditional right to defer settlement of the liability for at least 12 months
after the balance sheet date.
2.16 Employee
Benefits
(a) Retirement
benefits
The
Unicom Group participates in defined contribution pension schemes. For defined
contribution plan, the Unicom Group pays contributions to publicly or privately
administered pension insurance plans on a mandatory, contractual or voluntary
basis. The Unicom Group has no further payment obligations once the
contributions have been paid. The contributions are recognised as employee
benefit expenses when they are due. Prepaid contributions are recognised as an
asset to the extent that a reduction in the future payments is
available.
(b) Housing benefits
The
Unicom Group’s contributions to the housing fund, special monetary housing
benefits and other housing benefits are expensed as incurred.
- II-16
-
(c) Share-based compensation
costs
The
Unicom Group operates an equity-settled, share-based compensation plan. The fair
value of the employee services received in exchange for the grant of the share
options is recognised as an expense. The total amount to be expensed over the
vesting period is determined by reference to the fair value of the share options
granted excluding the impact of any non-market vesting conditions (for example,
revenue and profit targets). However, non-market vesting conditions are
considered in determining the number of options that are expected to vest. At
each balance sheet date, the Unicom Group revises its estimates of the number of
share options that are expected to become exercisable. The Unicom Group
recognises the impact of the revision of original estimates, if any, in the
income statement, and a corresponding adjustment to equity.
The
proceeds received net of any directly attributable transaction costs are
credited to share capital (nominal value) and share premium when the share
options are exercised. The corresponding employee share-based compensation
reserve is transferred to share premium.
2.17 Provisions
Provisions
are recognised when the Unicom Group has present legal or constructive
obligations as a result of past events, it is probable that an outflow of
resources will be required to settle the obligation, and the amount has been
reliably estimated. Where there are a number of similar obligations, the
likelihood that an outflow will be required in settlement is determined by
considering the class of obligations as a whole. A provision is recognised even
if the likelihood of an outflow with respect to any one item included in the
same class of obligations may be small.
Provisions
are measured at the present value of the pre-tax amount of expenditures expected
to be required to settle the obligation that reflects current market assessments
of the time value of money and the risks specific to the obligation. The
increase in the provision due to passage of time is recognised as interest
expense.
2.18 Revenue
Recognition
Revenue
comprises the fair value of the consideration received or receivable for the
services and sales of telecommunications products in the ordinary course of the
Unicom Group’s activities. Revenue is shown net of business tax, government
surcharges, returns and discounts and after eliminating sales within the Unicom
Group.
The
Unicom Group recognises revenue when the amount of revenue can be reliably
measured, it is probable that future economic benefits will flow to the entity
and specific criteria have been met for each of the Unicom Group’s activities as
described below. The amount of revenue is not considered to be reliably
measurable until all contingencies relating to the sale have been resolved. The
Unicom Group bases its estimates on historical results, taking into
consideration the type of customer, the type of transaction and the specifics of
each arrangement.
(a) Sales of services and
goods
|
|
•
|
Usage
fees are recognised when the service is
rendered;
|
|
|
•
|
Monthly
fees are recognised as revenue in the month during which the services are
rendered;
|
|
|
•
|
Revenue
from telephone cards, which represent service fees received from customers
for telephone services, is recognised when the related service is rendered
upon actual usage of the telephone cards by
customers;
|
|
|
•
|
Leased
lines and indefeasible rights of use (“IRU”) are treated as operating
leases with rental income recognised on a straight-line basis over the
lease term, except for the lease of specific and identified network assets
that transfer substantially all the risks and rewards incidental to the
ownership to the lessee, which is recognised as capacity
sales;
|
|
|
•
|
Value-added
services revenue, which mainly represents revenue from the provision of
services such as short message, cool ringtone, CDMA IX wireless data
services and secretarial services to subscribers, are recognised when
service is rendered;
|
|
|
•
|
Standalone
sales of telecommunications products, which mainly represent handsets and
accessories, are recognised when title has been passed to the buyers;
and
|
|
|
•
|
For
CDMA promotional package where CDMA handsets are provided to subscribers
for their use during a specified contract period (Note 4.2(a)), since the
commercial substance of the transaction is to develop new contractual
subscribers by offering handsets, the two elements of CDMA cellular
services and handsets are considered as a linked transaction. Service
revenues from such promotional package are recognised based upon actual
usage of cellular service at the tariff set out in the contracts. The
costs of CDMA handsets are considered as subscriber acquisition costs,
which are deferred and amortised over the specified contract period (refer
to Note 2.7).
|
(b) Interest income
Interest
income from deposits in banks or other financial institutions is recognised on a
time proportion basis, using the effective interest method.
(c) Dividend income
Dividend
income is recognised when the right to receive payment is
established.
- II-17
-
2.19 Leases
(as the lessee)
(a) Operating lease
Leases
in which a significant portion of the risks and rewards of ownership are
retained by the lessor are classified as operating leases. Payments made under
operating leases (net of any incentives received from the lessor), including
long-term prepayment for land use rights, are expensed in the income statement
on a straight-line basis over the period of the lease.
(b) Finance lease
Leases
of assets where the Unicom Group has substantially all the risks and rewards of
ownership are classified as finance leases. Finance leases are capitalised at
the lease’s commencement at the lower of the fair value of the leased property
and the present value of the minimum lease payments. Each lease payment is
allocated between the liability and finance charges so as to achieve a constant
rate of interest on the liability balance outstanding. The corresponding
liabilities, net of finance charges, are recorded as obligations under finance
leases. The interest element implicit in the lease payment is recognised in the
income statement over the lease period so as to produce a constant periodic rate
of interest on the remaining balance of the liability for each
period.
2.20 Costs
under Subscriber Point Reward Program
The
estimated costs of providing telecommunications services or providing non-cash
gifts under the subscriber point reward program are calculated based on the
value of bonus points awarded to subscribers, and are recognised as “selling and
marketing expenses” when subscribers accumulate bonus points. The value of a
bonus point and the criteria for awarding bonus points are established by the
Unicom Group at the inception of the program.
2.21 Borrowing
Costs
Borrowing
costs are expensed as incurred, except for interest directly attributable to the
acquisition, construction or production of an asset that necessarily takes a
substantial period of time to get ready for its intended use, in which case they
are capitalised as part of the cost of that asset. Capitalisation of borrowing
costs commences when expenditures for the asset and borrowing costs are being
incurred and the activities to prepare the asset for its intended use are in
progress. Borrowing costs are capitalised up to the date when the project is
completed and ready for its intended use.
To
the extent that funds are borrowed specifically for the purpose of obtaining a
qualifying asset, the amount of borrowing costs eligible for capitalisation is
determined at the actual borrowing costs incurred on that borrowing during the
period less any investment income on the temporary investment of those
borrowings.
To
the extent that funds are borrowed generally and used for the purpose of
obtaining a qualifying asset, the amount of borrowing costs eligible for
capitalisation is determined by applying a capitalisation rate to the
expenditures on that asset. The capitalisation rate is the weighted average of
the borrowing costs applicable to the borrowings of the Unicom Group that are
outstanding during the period, other than borrowings made specifically for the
purpose of obtaining a qualifying asset. The amount of borrowing costs
capitalised during a period should not exceed the amount of borrowing cost
incurred during that period. Other borrowing costs are recognised as expenses
when incurred.
2.22 Taxation
(a) Current income
tax
The
current income tax charge is calculated on the basis of the tax laws enacted or
substantively enacted at the balance sheet date in the countries where Unicom
and its subsidiaries operate and generate taxable income. Management
periodically evaluates positions taken in tax returns with respect to situations
in which applicable tax regulation is subject to interpretation and establishes
provisions where appropriate on the basis of the amount expected to be paid to
the tax authorities.
(b) Deferred income
tax
Deferred
income tax is provided in full, using the liability method, on temporary
differences arising between the tax bases of assets and liabilities and their
carrying amounts in the consolidated financial statements. However, if the
deferred income tax arises from initial recognition of an asset or liability in
a transaction other than a business combination that at the time of the
transaction affects neither accounting nor taxable profit or loss, it is not
accounted for. Deferred income tax is determined using tax rates (and laws) that
have been enacted or substantially enacted by the balance sheet date and are
expected to apply when the related deferred income tax asset is realised or the
deferred income tax liability is settled.
Deferred
income tax assets are recognised to the extent that it is probable that future
taxable profit will be available against which the temporary differences can be
utilised.
2.23 Government
grants
Government
grants are recognised at their fair values where there is a reasonable assurance
that the grant will be received and the Unicom Group will comply with all
attached conditions. Grants relating to assets are included in non-current
liabilities, which are credited to the income statement on a straight-line basis
over the expected lives of the related assets. Grants relating to costs are
deferred and recognised in the income statement over the period necessary to
match them with the costs that they are intended to compensate.
2.24 Dividend
Distribution
Dividend
distribution to Unicom Shareholders is recognised as a liability in Unicom’s
financial statements in the period in which the dividends are approved by Unicom
Shareholders.
2.25 Contingent
Liabilities and Contingent Assets
A
contingent liability is a possible obligation that arises from past events and
whose existence will only be confirmed by the occurrence or non-occurrence of
one or more uncertain future events not wholly within the control of the Unicom
Group. It can also be a present obligation arising from past events that is not
recognised because it is not probable that outflow of economic resources will be
required or the amount of obligation cannot be measured reliably.
- II-18
-
A
contingent liability is not recognised but is disclosed in the notes to the
financial statements. When a change in the probability of an outflow occurs so
that outflow is probable, the liability will then be recognised as a
provision.
A
contingent asset is a possible asset that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence of one or
more uncertain future events not wholly within the control of the Unicom
Group.
Contingent
assets are not recognised but are disclosed in the notes to the financial
statements when an inflow of economic benefits is probable. When an inflow is
virtually certain, an asset is recognised.
2.26 Earnings
per Unicom Share and per Unicom ADS
Basic
earnings per Unicom Share is computed by dividing the profit attributable to
equity holders by the weighted average number of Unicom Shares outstanding
during the year.
Diluted
earnings per Unicom Share is computed by dividing the profit attributable to
equity holders by the weighted average number of Unicom Shares, after adjusting
for the effects of the dilutive potential Unicom Shares.
Basic
and diluted earnings per Unicom ADS are computed by multiplying earnings per
Unicom Share by 10, which is the number of Unicom Shares represented by each
Unicom ADS.
3. FINANCIAL
RISK MANAGEMENT
3.1 Financial
risk factors
The
Unicom Group’s activities expose it to a variety of financial risks: market risk
(including currency risk, cash flow interest rate risk and fair value interest
rate risk), credit risk and liquidity risk. The Unicom Group’s overall risk
management program focuses on the unpredictability of financial markets and
seeks to minimise potential adverse effects on the Unicom Group’s financial
performance.
Financial
risk management is carried out by the Unicom Group’s finance department at its
headquarters, following the overall directions determined by the board of
directors of Unicom (the “Unicom Board”). The Unicom Group’s finance department
identifies and evaluates financial risks in close co-operation with the Unicom
Group’s operating units.
(a) Market risk
(i) Foreign
exchange risk
The
Unicom Group’s businesses are mainly conducted in RMB, except for certain
subsidiaries located in Hong Kong, Macau and the US. The Unicom Group is exposed
to foreign exchange risk arising from various currency exposures, primarily with
respect to US dollars and HK dollars. Exchange risk exists with respect to the
repayment of indebtedness to foreign lenders, payables to equipment suppliers
and contractors and dividends to equity holders.
The
Unicom Group’s finance department at its headquarters is responsible for
monitoring the amount of monetary assets and liabilities denominated in foreign
currencies. As at 31 December 2007, the Unicom Group had only approximately
US$0.5 billion (2006: approximately US$1.0 billion) bank loans after having
repaid long-term bank borrowings amounting to approximately US$0.5 billion
during 2007. The Unicom Group also had cash and cash equivalents and short-term
bank deposits of approximately US$119 million (2006: approximately US$501
million) and approximately HK$465 million (2006: approximately HK$664 million).
Considering the gradual appreciation of RMB against both HK dollars and US
dollars which is expected to continue and the amount of foreign monetary
liabilities were greater than that of foreign monetary assets as at 31 December
2007, the management is of the view that the foreign exchange risk is not
significant.
As
at 31 December 2007, if RMB had strengthened/weakened by 10% against the US
dollars and HK dollars while all other variables are held constant, the Unicom
Group would have recognised additional exchange gain/loss of approximately
RMB235 million (2006: approximately RMB323 million) for the US dollar and HK
dollar denominated cash and cash equivalents, short-term bank deposits and bank
loans.
(ii) Cash
flow and fair value interest rate risk
The
Unicom Group’s interest-bearing assets are mainly represented by bank deposits,
management does not expect the changes in market deposit interest rates will
have significant impact on the financial statements as the deposits are all
short-term in nature and the interest involved will not be
significant.
The
Unicom Group’s interest rate risk arises from long-term bank loans and liability
component of convertible bonds (which was fully converted on 20 August 2007).
Bank loans issued at floating rates expose the Unicom Group to cash flow
interest rate risk. Bank loans, short-term bonds and liability component of
convertible bonds issued at fixed rates expose the Unicom Group to fair value
interest rate risk. The Unicom Group determines the amount of its fixed rate or
floating rate borrowings depending on the prevailing market conditions. During
2007 and 2006, the Unicom Group’s borrowings were mainly at variable rates and
were mainly denominated in US dollars (refer to Note 17).
Increases
in interest rates will increase the cost of new borrowing and the interest
expense with respect to the Unicom Group’s outstanding floating rate borrowings,
and therefore could have a material adverse effect on the Unicom Group’s
financial position. From time to time, the Unicom Group may enter into interest
rate swap agreements designed to mitigate its exposure to interest rate risks in
connection with the floating rate borrowings, although the Unicom Group did not
consider it necessary to do so in 2007 and 2006.
As
at 31 December 2007, the Unicom Group had approximately RMB200 million (2006:
approximately RMB315 million) of long-term bank loans at fixed rates and while
approximately RMB3,652 million (2006: approximately RMB7,809 million) of
long-term bank loans at floating rates. There were no balances outstanding for
short-term bonds (2006: approximately RMB7,087 million) and the liability
component of convertible bonds (2006: approximately RMB7,117 million) as at 31
December 2007.
- II-19
-
For
the year ended 31 December 2007, if interest rates on the floating rate
borrowings had been 10% higher/lower while all other variables are held
constant, the interest expenses would have been increased/ decreased by
approximately RMB49 million (2006: approximately RMB59 million).
(b) Credit risk
Credit
risk is managed on a group basis. Credit risk arises from cash and cash
equivalents and short-term bank deposits with banks in Hong Kong, as well as
credit exposures to corporate customers, individual subscribers, related parties
and other operators.
The
table below shows the bank deposits and cash and cash equivalents balances held
at the major banks as at 31 December 2007 and 2006:
|
2007
|
2006
|
|
|
Short-term
bank deposits
|
||
|
State-owned
banks
|
527,885
|
21,432
|
|
Other
banks
|
116,131
|
174,388
|
|
－－－－
|
－－－－
|
|
|
644,016
|
195,820
|
|
|
========
|
========
|
|
|
Cash
and cash equivalents
|
||
|
State-owned
banks
|
6,525,506
|
12,055,646
|
|
Other
banks
|
149,970
|
187,545
|
|
－－－－
|
－－－－
|
|
|
6,675,476
|
12,243,191
|
|
|
========
|
=========
|
It
is expected that there is no significant credit risk associated with the bank
deposits and cash and cash equivalents since the state-owned banks have support
from the government and other banks are medium or large size listed banks.
Management does not expect that there will be any significant losses from
non-performance by these counterparties.
In
addition, the Unicom Group has no significant concentrations of credit risk with
respect to corporate customers and individual subscribers. The extent of the
Unicom Group’s credit exposure is mainly represented by the fair value of
accounts receivable for services. The Unicom Group has policies to limit the
credit exposure on accounts receivable for services. The Unicom Group assesses
the credit quality of and sets credit limits on these customers by taking into
account their financial position, past history and other factors. The normal
credit period granted by the Unicom Group is on average 30 days from the date of
invoice. The utilisation of credit limits is regularly monitored by the Unicom
Group.
Credit
risk relating to amounts due from related parties and other operators is not
considered to be significant as these companies are reputable and their
receivables are settled on a regular basis.
(c) Liquidity risk
Prudent
liquidity risk management includes maintaining sufficient cash and availability
of funds including short-term bank loans and the issuance of bonds. Due to the
dynamic nature of the underlying businesses, the Unicom Group’s finance
department at its headquarters maintains flexibility in funding through having
adequate amount of cash and cash equivalents and utilising different sources of
financing when necessary.
The
table below analyses the Unicom Group’s and Unicom’s bank loans, convertible
bonds and obligations under finance lease (including interests to be accrued)
into relevant maturity groupings based on the remaining period from the balance
sheet date to the contractual maturity date. The amounts disclosed in the table
are the contractual undiscounted cash flows. Balances due within 12 months
approximated the carrying balances, as the impact of discounting is not
significant. Except for the amounts presented below, all other financial
liabilities are due within 12 months.
|
The
Unicom Group
|
Less
than 1 year
|
Between
1 and 2 years
|
Between
2 and 5 years
|
Over 5
years
|
|
At
31 December 2007
|
||||
|
Bank
loans
|
2,360,140
|
80,830
|
1,726,022
|
—
|
|
Obligations
under finance lease
|
1,520
|
1,824
|
2,264
|
—
|
|
－－－－
|
－－－－
|
－－－－
|
－－－－
|
|
|
2,361,660
|
82,654
|
1,728,286
|
—
|
|
|
=========
|
=========
|
=========
|
=========
|
|
|
At
31 December 2006
|
||||
|
Bank
loans
|
4,272,004
|
2,583,182
|
1,936,621
|
—
|
|
Convertible
bonds
|
—
|
—
|
8,141,351
|
—
|
|
Obligations
under finance lease
|
105,101
|
8,059
|
2,639
|
58
|
|
－－－－
|
－－－－
|
－－－－
|
－－－－
|
|
|
4,377,105
|
2,591,241
|
10,080,611
|
58
|
|
|
=========
|
=========
|
=========
|
=========
|
- II-20
-
|
Unicom
|
Less
than 1 year
|
Between
1
and
2 years
|
Between
2
and
5 years
|
Over
5 years
|
|
At
31 December 2007
|
||||
|
Bank
loans
|
2,352,940
|
73,630
|
1,521,462
|
—
|
|
=========
|
=========
|
=========
|
==========
|
|
|
At
31 December 2006
|
||||
|
Bank
loans
|
224,520
|
2,539,664
|
1,724,861
|
—
|
|
Convertible
bonds
|
—
|
—
|
8,141,351
|
—
|
|
－－－－－
|
－－－－
|
－－－－－
|
－－－－－
|
|
|
224,520
|
2,539,664
|
9,866,212
|
—
|
|
|
==========
|
==========
|
==========
|
==========
|
3.2 Capital
risk management
The
Unicom Group’s objectives when managing capital are:
• To
safeguard the Unicom Group’s ability to continue as a going concern in order to
provide returns for shareholders and benefits for other
stakeholders.
• To
support the Unicom Group’s stability and growth.
• To
provide capital for the purpose of strengthening the Unicom Group’s risk
management capability.
In
order to maintain or adjust the capital structure, the Unicom Group reviews and
manages its capital structure actively and regularly to ensure optimal capital
structure and shareholder returns, taking into account the future capital
requirements of the Unicom Group and capital efficiency, prevailing and
projected profitability, projected operating cash flows, projected capital
expenditures and projected strategic investment opportunities.
The
Unicom Group monitors capital on the basis of the debt-to-capitalisation ratio.
This ratio is calculated as interest bearing debts plus minority interest over
interest bearing debts plus total equity. Interest bearing debts represent
short-term bonds, long-term bank loans, convertible bonds, and obligations under
finance leases, as shown in the consolidated balance sheet. Total equity
represents capital and reserves attributable to Unicom’s equity holders plus
minority interest as shown in the consolidated balance sheet.
The
Unicom Group’s debt-to-capitalisation ratios at 31 December 2007 and 2006 are as
follows:
|
2006
|
||
|
2007
|
(As
restated)
|
|
|
Interest
bearing debts:
|
||
|
—
Short-term bonds
|
—
|
7,087,217
|
|
—
Long-term bank loans
|
1,660,921
|
4,139,349
|
|
—
Convertible bonds
|
—
|
10,324,949
|
|
—
Obligations under finance leases
|
3,882
|
10,230
|
|
—
Current portion of long-term bank loans
|
2,191,382
|
3,984,350
|
|
—
Current portion of obligations under finance leases
|
1,448
|
100,004
|
|
－－－－－
|
－－－－
|
|
|
3,857,633
|
25,646,099
|
|
|
Minority
interest
|
3,914
|
2,841
|
|
－－－－
|
－－－－
|
|
|
Interest
bearing debts plus minority interest
|
3,861,547
|
25,648,940
|
|
－－－－
|
－－－－－
|
|
|
Total
equity:
|
||
|
—
Capital and reserves attributable to Unicom’s equity
holders
|
97,213,180
|
79,861,324
|
|
—
Minority interest
|
3,914
|
2,841
|
|
－－－－－
|
－－－－－
|
|
|
Interest
bearing debts plus total equity
|
101,074,727
|
105,510,264
|
|
－－－－－
|
－－－－－
|
|
|
Debt-to-capitalisation
ratio
|
3.8%
|
24.3%
|
|
==========
|
===========
|
- II-21
-
The
decrease in debt-to-capitalisation ratio during 2007 resulted primarily from the
conversion of convertible bonds into Unicom’s shares and the repayment of
short-term bonds and long-term bank loans by the Unicom Group.
3.3 Fair
value estimation
The
estimate of the fair value of the conversion option of the convertible bonds,
that is separated from the host debt contract and accounted for as a derivative
liability, is determined by using valuation techniques. The Unicom Group selects
an appropriate valuation method and makes assumptions with reference to market
conditions existing at each balance sheet date and conversion date, refer to
Note 18 for details.
The
carrying value of trade receivables (net of impairment provision) and payables
are a reasonable approximation of their fair values. The fair value of financial
liabilities for disclosure purposes is estimated by discounting the future
contractual cash flows at the current market interest rate that is available to
the Unicom Group for similar financial instruments.
4. CRITICAL
ACCOUNTING ESTIMATES AND JUDGMENTS
Estimates
and judgments are continually evaluated and are based on historical experience
and other factors, including expectations of future events that are believed to
be reasonable under the circumstances.
4.1 Critical
accounting estimates and assumptions
The
Unicom Group makes estimates and assumptions concerning the future. The
resulting accounting estimates may not equal to the related actual results. The
estimates and assumptions that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within the next
financial year are discussed below.
(a) Depreciation on property, plant and
equipment
Depreciation
on the Unicom Group’s property, plant and equipment is calculated using the
straight-line method to allocate cost or revalued amounts to residual values
over the estimated useful lives. The Unicom Group reviews the useful lives and
residual values periodically to ensure that the method and rates of depreciation
are consistent with the expected pattern of realisation of economic benefits
from property, plant and equipment. The Unicom Group estimates the useful lives
of property, plant and equipment based on historical experience, taking into
account of anticipated technological changes. If there are significant changes
from previously estimated useful lives, the amount of depreciation expenses may
change. The cost or revalued amount and accumulated depreciation of property,
plant and equipment as at 31 December 2007 amounted to approximately RMB231.1
billion (2006: approximately RMB208.3 billion) and approximately RMB114.9
billion (2006: approximately RMB95.6 billion), respectively.
(b) Impairment of non-current
assets
The
Unicom Group tests whether non-current assets have suffered from any impairment,
in accordance with the accounting policy stated in Note 2.8. The recoverable
amount of an asset is the higher of its fair value less costs to sell and its
value in use. Management estimates value in use based on estimated discounted
pre-tax future cash flows of the cash generating unit at the lowest level to
which the asset belongs. If there is any significant change in management’s
assumptions, including discount rates or growth rates in the future cash flow
projection, the estimated recoverable amounts of the non-current assets and the
Unicom Group’s results would be significantly affected.
(c) Provision for doubtful
debts
Accounts
receivables are recognised initially at fair value and subsequently measured at
amortised cost using the effective interest method, less provision for
impairment. The Unicom Group evaluates specific accounts receivable where there
are indications that the receivable may be doubtful or is not collectible. The
Unicom Group records a provision based on its best estimates to reduce the
receivable balance to the amount that is expected to be collected. For the
remaining receivable balances as at each reporting date, the Unicom Group makes
a provision based on observable data indicating that there is a measurable
decrease in the estimated future cash flows from the remaining balances. The
Unicom Group makes such estimates based on its past experience, historical
collection patterns, subscribers’ credibility and collection trends. For general
subscribers of Cellular, Long Distance, Data and Internet businesses, the Unicom
Group makes a full provision for receivables aged over 3 months, which is
consistent with its credit policy with respect to relevant
subscribers.
The
Unicom Group’s estimates described above are based on past experience,
subscribers’ credibility and collection trends. If circumstances change (e.g.
due to factors including developments in the Unicom Group’s business and the
external market environment), the Unicom Group may need to re-evaluate its
policies on doubtful debts, and make additional provisions in the
future.
(d) Provision for subscriber point
reward program
The
Unicom Group has implemented a subscriber point reward program, which is a bonus
point based scheme that rewards subscribers according to their service
consumption, loyalty and payment history. The cost of the subscriber point
reward program is charged to the income statement as “selling and marketing”
expenses, instead of a reduction of revenue. The estimated liability is
recognised based on (i) the value of each bonus point awarded to subscribers,
and (ii) the number of bonus points related to subscribers who are qualified or
expected to be qualified to exercise their redemption right at each balance
sheet date. If subscribers redeem rewards or their entitlements expire, the
provision is adjusted accordingly. The Unicom Group has recognised a liability
for this program amounting to approximately RMB634 million as at 31 December
2007 (2006: approximately RMB556 million). As
- II-22
-
the
Unicom Group has no adequate stabilised and reliable historical redemption
statistics in the past, the Unicom Group may need to re-assess the method for
accounting for the bonus point reward program when they are available in future
and upon the adoption of HK(IFRIC)-Int 13 which is effective from 1 January
2009.
(e) Income tax and deferred
taxation
The
Unicom Group estimates its income tax provision and deferred taxation in
accordance with the prevailing tax rules and regulations, taking into account
any special approvals obtained from relevant tax authorities and any
preferential tax treatment to which it is entitled in each location or
jurisdiction in which the Unicom Group operates. There are many transactions and
calculations for which the ultimate tax determination is uncertain during the
ordinary course of business. The Unicom Group recognises liabilities for
anticipated tax audit issues based on estimates of whether additional taxes will
be due. Where the final tax outcome of these matters is different from the
amounts that were initially recorded, such differences will impact the income
tax and deferred tax provisions in the period in which such determination is
made.
For
temporary differences which give rise to deferred tax assets, the Unicom Group
has assessed the likelihood that the deferred tax assets could be recovered.
Major deferred tax assets relate to provision for doubtful debts, accruals of
expenses not yet deductible for tax purpose and write-down of inventory to net
realisable value. Due to the effects of these temporary differences on income
tax, the Unicom Group has recorded net deferred tax assets amounting to
approximately RMB427 million as at 31 December 2007 (2006: approximately RMB310
million). Deferred tax assets are recognised based on the Unicom Group’s
estimates and assumptions that they will be recovered from taxable income
arising from continuing operations in the foreseeable future.
The
Unicom Group believes it has recorded adequate current tax provision and
deferred taxes based on the prevailing tax rules and regulations and its current
best estimates and assumptions. In the event that future tax rules and
regulations or related circumstances change, adjustments to current and deferred
taxation may be necessary.
(f) Fair value of conversion
option
On
5 July 2006, Unicom issued a zero coupon convertible bonds with an aggregate
principal amount of US$1 billion. The three-year convertible bond was issued
with a conversion price of HK$8.63 and was fully converted into Unicom Shares on
20 August 2007. The embedded conversion option of the convertible bonds has been
separated from the host debt contract and accounted for as a derivative
liability carried at fair value through profit or loss (Note 18). The fair value
of this conversion option which is not traded in an active market is determined
by using valuation techniques. The Unicom Group uses its judgment to select an
appropriate valuation method and makes assumptions that are mainly based on
market conditions existing at each balance sheet date and conversion date. The
valuation model requires the input of subjective assumptions, including the
volatility of share price, stock closing price, dividend yield, risk free rate,
and expected option life. Changes in subjective input assumptions can materially
affect the fair value estimate. From 31 December 2006 to 20 August 2007, the
realised loss resulting from changes in fair value of the conversion option of
the convertible bonds was approximately RMB569 million (2006: unrealised loss of
approximately RMB2,397 million).
- II-23
-
4.2 Critical
judgments in applying the Unicom Group’s accounting policies
(a) Capitalisation of CDMA customer
acquisition costs
The
Unicom Group has been operating the CDMA business since the beginning of 2002.
In order to accelerate the development of the CDMA business and subscriber
growth, the Unicom Group offers certain promotional packages. As part of the
contractual arrangements with certain CDMA contractual subscribers under these
special promotional packages, CDMA handsets were provided to the subscribers for
their use during the specified contract period ranging from six months to two
years. In return, the subscribers are required to incur a minimum amount of
service fees during the contract period. If the contractual subscribers can
fulfill the minimum contract spending amounts by the end of the contract period,
they will not be obliged to repay the remaining costs of the CDMA handsets given
to them for their use. In addition, to secure contract performance, these
subscribers are required under their contracts to (1) prepay certain amounts of
service fees or deposits, (2) maintain a bank deposit in one of the designated
commercial banks to secure their minimum contract amounts, or (3) provide a
guarantor who will compensate the Unicom Group for any loss in the event of the
subscriber’s non-performance of related contractual obligations.
The
Unicom Group considers the costs of the CDMA handsets provided to contractual
subscribers under these promotional packages as customer acquisition costs for
the development of these new CDMA contractual subscribers. Such customer
acquisition costs are deferred to the extent expected to be recoverable, and
amortised over the contractual periods (not exceeding two years), over which
future economic benefits are expected to flow to the Unicom Group in the form of
minimum contract revenue.
The
Unicom Group determined its accounting policy for capitalisation of customer
acquisition costs of contractual CDMA subscribers after a careful evaluation of
specific facts and circumstances, and believes that the capitalisation of such
costs is appropriate because future economic benefits are expected to flow to
the Unicom Group in the form of future contractual revenues, taking into
consideration (1) the historically high ARPUs and low churn rate, and low
default or bad debt rates of these subscribers; (2) the Unicom Group’s
established procedures in and the relatively low cost of enforcement of
contracts in default; and (3) the existence of specified contract periods with
minimum contract spending amounts and built-in contractual safeguarding measures
such as prepayments, bank deposits, and guarantees received, as well as penalty
clauses imposed on subscribers.
Therefore,
the Unicom Group believes that the customer acquisition costs are recoverable
from future revenue to be derived from these promotional packages, and the
capitalisation and amortisation of these customer acquisition costs is an
appropriate accounting policy. Furthermore, the Unicom Group continuously
assesses and evaluates the recoverability of these customer acquisition costs,
based on detailed reviews of historical subscriber churn rates and estimated
default rates. Based on the Unicom Group’s current assessment and evaluation,
the Unicom Group believes that the carrying amounts of the customer acquisition
costs as at the balance sheet date could be recovered.
The
Unicom Group has made the above recoverability assessments based on the current
legal and operating environment relating to the subscribers’ contract
performance and other information currently available. Actual results may differ
significantly from the current situation and the Unicom Group’s current
estimates. If the situation changes significantly in the future, the Unicom
Group may need to accelerate the amortisation of customer acquisition costs
based on conditions at that time.
(b) Recognition of upfront
non-refundable revenue and direct incremental costs
The
Unicom Group defers and amortises upfront non-refundable revenue, including
connection fees and activation fees of SIM cards or UIM cards from cellular
subscribers over the expected customer service period. Accordingly, the related
direct incremental costs of acquiring and activating GSM and CDMA subscribers,
including costs of SIM or UIM cards and commissions which are directly
associated with upfront non-refundable revenue received upon activation of
cellular services, are also capitalised and amortised over the same expected
customer service period. The Unicom Group only capitalises costs to the extent
that they will generate future economic benefits. The excess of the direct
incremental costs over the corresponding upfront non-refundable revenue, if any,
are expensed to the income statement immediately.
The
expected customer service period for the cellular business is estimated based on
the expected stabilised churn rates of subscribers after taking into
consideration factors such as customer retention experience, the expected level
of competition, the risk of technological or functional obsolescence of the
Unicom Group’s services and the current regulatory environment. If the estimate
of the expected stabilised churn rate changes for future periods as a result of
unexpected changes in competition environment, telecommunications technology or
regulatory environment, the amount and timing of recognition of these deferred
direct incremental costs and deferred revenue would also be
changed.
The
weighted average customer service period of Cellular Business based on current
estimation after considering the prevailing market environment is approximately
3 years from 1 January 2007 onwards (2006: approximately 4 years). The effects
of the change of accounting estimate in expected weighted average customer
service period is to decrease both the deferred revenue and other assets by
approximately RMB506 million each as at 31 December 2007 and increase both the
amortisation of deferred revenue and the amortisation of other assets by
approximately RMB506 million each for the year ended 31 December
2007.
(c) Lease of CDMA network
capacity
Pursuant
to a CDMA lease agreement signed by the Unicom Group with Unicom Parent and
Unicom New Horizon in 2002 (“Original CDMA Lease Agreement”), Unicom New Horizon
agreed to lease the capacity of the CDMA network to the Unicom
Group.
According
to the terms of the Original CDMA Lease Agreement, the initial lease period is
for one year, renewable for additional one-year term at the Unicom Group’s
option. The Unicom Group has the exclusive right to lease and operate the CDMA
network capacity in the relevant regions. Also, the Unicom Group has the option
to add or reduce the capacity leased by giving specified period of advance
notice. The lease fee per unit of capacity is calculated on the basis that if
full capacity is leased, it would permit Unicom New Horizon to recover its
investment in constructing the CDMA network in 7 years, together with an
internal return rate of 8%. The Unicom Group has the option to purchase the
network assets with reference to the appraised value of the network determined
by an independent appraiser.
Unicom
New Horizon has the legal ownership of the CDMA network, is directly responsible
for the planning, financing and construction of the CDMA network, and directly
enters into all construction contracts with suppliers and constructors. The
Unicom Group believes it only bears the risks associated with the operation of
the CDMA business during the relevant leasing periods and is free from any
ownership risks of the CDMA network and the risks and rewards of ownership of
the leased assets rest substantially with the lessor.
- II-24
-
At
the inception of the Original CDMA Lease Agreement, there was a high degree of
uncertainty related to the market conditions and operating results of the CDMA
business. It was highly uncertain whether the Unicom Group would continue to
lease the network in the future or to estimate the future network capacity to be
leased. The Unicom Group was also unable to determine whether or not it would
exercise the purchase option in future. Given these uncertainties and due to the
fact that the risks associated with the ownership of the CDMA assets
substantially remained with Unicom Parent and Unicom New Horizon, the Unicom
Group accounted for the leasing of the CDMA network as operating leases for the
initial three-year expected lease period, so as to reflect the respective rights
and obligations of the relevant parties to the Original CDMA Lease
Agreement.
On
24 March 2005, the Unicom Group entered into another CDMA Lease Agreement (“2005
CDMA Lease Agreement”) with Unicom Parent and Unicom New Horizon to replace the
Original CDMA Lease Agreement. The lease period under 2005 CDMA Lease Agreement
was effective from 1 January 2005 to 31 December 2006. Key terms of the 2005
CDMA Lease Agreement, including exclusive operating rights and purchase option,
are substantially similar to those contained in the Original CDMA Lease
Agreement except that the CDMA lease has an initial term of two years and the
lease fee of the CDMA Network is to be determined on the basis of the audited
CDMA service revenue. Given that the uncertainties continued, the Unicom Group
still at that time considered the risks associated with the ownership of the
CDMA assets still substantially remained with Unicom Parent and Unicom New
Horizon, and concluded the leasing of the CDMA network to be an operating
lease.
On
26 October 2006, the Unicom Group entered into a new CDMA Lease Agreement (the
“2006 CDMA Lease Agreement”) with Unicom Parent and Unicom New Horizon to renew
the 2005 CDMA Lease Agreement effective from 1 January 2007. Pursuant to the
2006 CDMA Lease Agreement, the initial lease period is for one year, renewable
for an additional one-year term at the Unicom Group’s option. The lease fee of
the CDMA network for 2007 and 2008 is as follows:
|
|
•
|
31%
of the audited CDMA service revenue of the lessee for each of the years
2007 and 2008; or
|
|
|
•
|
30%
of the audited CDMA service revenue of the lessee for the year 2007 or
2008, where the audited CDMA business profit before taxation of the lessee
for the relevant year is less than the audited CDMA business profit before
taxation of the lessee for the year 2006 as set out in the relevant annual
audited financial statements of the
lessee.
|
Under
the 2006 CDMA Lease Agreement, the annual lease fee of the CDMA network shall
not be less than a certain minimum level (the “Minimum Lease Fee”) regardless of
the amount of CDMA service revenue for that year. The Minimum Lease Fee for 2007
is 90% of the total amount of lease fee paid by the Unicom Group to Unicom New
Horizon for 2006 pursuant to the 2005 CDMA Lease Agreement. The Minimum Lease
Fee for 2008 shall be 90% of the total amount of lease fee paid by the Unicom
Group to Unicom New Horizon for 2007 pursuant to the 2006 CDMA Lease Agreement.
The level of lease fee under the 2006 CDMA Lease Agreement has been set by
reference to the Unicom Group’s view of the industry trends, including factors
such as CDMA subscribers and average revenue per user per month
levels.
At
the inception of the 2006 CDMA Lease Agreement, the Unicom Group believed the
uncertainties of the CDMA business continue to exist, particularly due to the
fact that (i) the service revenue of CDMA business was stagnant; (ii) the
uncertainty of the future success of CDMA business arising from keen market
competition; and (iii) the uncertainty in the future changes in technology,
technological standards and government regulatory environment. In addition, the
Unicom Group was still unable to determine whether it would renew the lease or
whether it would exercise the purchase option when the 2006 CDMA Lease Agreement
expires after the expected term of 2 years. As a result, the Unicom Group
considered the risks associated with the ownership of the CDMA assets still
substantially remain with Unicom Parent and Unicom New Horizon, and has
concluded the leasing of the CDMA network will still be accounted for as an
operating lease. On 29 June 2007, the Unicom Group renewed the lease with Unicom
New Horizon for another year ending 31 December 2008.
At
the beginning of each lease term, the Unicom Group will reassess the appropriate
lease classification based on the relevant factors and circumstances at that
time. Based on the above accounting judgment made, the operating lease expense
has been recorded in the consolidated income statement, and the carrying values
of the CDMA assets and the related liabilities have not been reflected in the
consolidated balance sheet of the Unicom Group. For the year ended 31 December
2007, the lease expense of approximately RMB8,382 million (2006: approximately
RMB8,257 million) was recorded under leased lines and network capacities in the
income statement.
5. SEGMENT
INFORMATION
The
Unicom Group comprises four business segments based on the various types of
telecommunications services mainly provided to customers in Mainland China. The
major business segments operated by the Unicom Group are classified as
below:
|
|
•
|
GSM
Business — the provision of GSM telephone and related
services;
|
|
|
•
|
CDMA
Business — the provision of CDMA telephone and related services, through a
leasing arrangement for CDMA network capacity from Unicom New
Horizon;
|
|
|
•
|
Data
and Internet Business — the provision of domestic and international data,
Internet and other related services;
and
|
|
|
•
|
Long
Distance Business — the provision of domestic and international long
distance and other related
services.
|
The
Unicom Group’s primary measure of segment results is based on segment profit or
loss before income tax. Unallocated costs primarily represent corporate
expenses, realised/unrealised loss on changes in fair value of derivative
component of convertible bonds and income tax expense whilst unallocated income
represents interest income and other gains (including the tax refund on
reinvestment in a subsidiary), which cannot be identified to different operating
segments.
- II-25
-
5.1 Business
Segments
|
2007
|
|||||||
|
GSM
Business
|
CDMA
Business
|
Data
and Internet Business
|
Long
Distance Business
|
Unallocated
Amounts
|
Elimination
|
Total
|
|
|
Revenue
(Turnover):
|
|||||||
|
Usage
fee
|
35,111,665
|
13,941,247
|
1,712,831
|
352,081
|
—
|
51,117,824
|
|
|
Monthly
fee
|
6,965,329
|
4,574,887
|
—
|
—
|
—
|
11,540,216
|
|
|
Interconnection
revenue
|
6,022,826
|
2,066,187
|
36,300
|
476,803
|
—
|
8,602,116
|
|
|
Leased
lines rental
|
—
|
—
|
535,832
|
670,866
|
—
|
1,206,698
|
|
|
Value-added
services revenue
|
13,528,197
|
6,413,204
|
331,133
|
—
|
—
|
20,272,534
|
|
|
Other
revenue
|
1,147,287
|
734,715
|
9,757
|
7,751
|
—
|
1,899,510
|
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
||
|
Total
services revenue
|
62,775,304
|
27,730,240
|
2,625,853
|
1,507,501
|
—
|
94,638,898
|
|
|
Sales
of telecommunications products
|
11,521
|
4,888,282
|
677
|
9
|
—
|
4,900,489
|
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
||
|
Total
revenue from external customers
|
62,786,825
|
32,618,522
|
2,626,530
|
1,507,510
|
—
|
99,539,387
|
|
|
Intersegment
revenue
|
—
|
—
|
2,186,120
|
1,705,045
|
—
|
(3,891,165)
|
—
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|
|
Total
revenue
|
62,786,825
|
32,618,522
|
4,812,650
|
3,212,555
|
—
|
(3,891,165)
|
99,539,387
|
|
Leased
lines and network capacities
|
(235,722)
|
(8,486,539)
|
(396,148)
|
(49,195)
|
—
|
32,107
|
(9,135,497)
|
|
Interconnection
charges
|
(10,021,694)
|
(3,553,441)
|
(319,282)
|
(871,460)
|
—
|
3,859,058
|
(10,906,819)
|
|
Depreciation
and amortisation
|
(19,057,783)
|
(630,829)
|
(2,286,406)
|
(701,779)
|
(370)
|
(22,677,167)
|
|
|
Employee
benefit expenses
|
(4,411,785)
|
(1,777,553)
|
(509,627)
|
(245,845)
|
(195,178)
|
(7,139,988)
|
|
|
Selling
and marketing
|
(9,878,991)
|
(8,912,742)
|
(631,987)
|
(257,625)
|
(27)
|
(19,681,372)
|
|
|
General,
administrative and other expenses
|
(10,098,930)
|
(3,263,971)
|
(744,068)
|
(504,450)
|
(27,943)
|
(14,639,362)
|
|
|
Cost
of telecommunications products sold
|
(229,199)
|
(4,800,842)
|
(1,651)
|
(14)
|
—
|
(5,031,706)
|
|
|
Financial
gains/(costs)
|
134,162
|
(15,159)
|
20,236
|
15,325
|
(723,868)
|
656,312
|
87,008
|
|
Interest
income
|
107,060
|
14,865
|
16,863
|
5,286
|
698,481
|
(656,312)
|
186,243
|
|
Realised/unrealised
loss on changes in fair value of derivative component of convertible
bonds
|
—
|
—
|
—
|
—
|
(568,860)
|
(568,860)
|
|
|
Other
gains-net
|
131,582
|
7,197
|
950
|
2,194
|
2,781,237
|
2,923,160
|
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－－
|
||
|
Segment
profit (loss) before income tax
|
9,225,525
|
1,199,508
|
(38,470)
|
604,992
|
1,963,472
|
12,955,027
|
|
|
==========
|
==========
|
==========
|
==========
|
==========
|
|||
|
Income
tax expenses
|
(3,654,170)
|
||||||
|
－－－－－
|
|||||||
|
Profit
for the year
|
9,300,857
|
||||||
|
==========
|
|||||||
|
Attributable
to:
|
|||||||
|
Equity
holders of Unicom
|
9,299,784
|
||||||
|
Minority
interest
|
1,073
|
||||||
|
－－－－－
|
|||||||
|
9,300,857
|
|||||||
|
===========
|
|||||||
|
Other
information:
|
|||||||
|
Provision
for doubtful debts
|
1,257,670
|
395,263
|
45,916
|
28,160
|
—
|
1,727,009
|
|
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
||
|
Capital
expenditures for segment assets (a)
|
16,492,453
|
—
|
2,223,724
|
2,744,467
|
4,257,277
|
25,717,921
|
|
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
||
- II-26
-
|
2006 (As
restated)
|
|||||||
|
GSM
Business
|
CDMA
Business
|
Data
and Internet Business
|
Long
Distance Business
|
Unallocated
Amounts
|
Elimination
|
Total
|
|
|
Revenue
(Turnover):
|
|||||||
|
Usage
fee
|
34,067,003
|
15,085,577
|
1,769,012
|
63,340
|
—
|
50,984,932
|
|
|
Monthly
fee
|
7,437,095
|
5,122,008
|
—
|
—
|
—
|
12,559,103
|
|
|
Interconnection
revenue
|
4,921,363
|
1,759,293
|
39,758
|
389,375
|
—
|
7,109,789
|
|
|
Leased
lines rental
|
—
|
—
|
472,475
|
557,270
|
—
|
1,029,745
|
|
|
Value-added
services revenue
|
11,597,432
|
5,375,579
|
—
|
—
|
—
|
16,973,011
|
|
|
Other
revenue
|
1,859,345
|
534,018
|
39,147
|
4,565
|
—
|
2,437,075
|
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
||
|
Total
services revenue
|
59,882,238
|
27,876,475
|
2,320,392
|
1,014,550
|
—
|
91,093,655
|
|
|
Sales
of telecommunications products
|
8,166
|
4,243,594
|
1,900
|
—
|
—
|
4,253,660
|
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
||
|
Total
revenue from external customers
|
59,890,404
|
32,120,069
|
2,322,292
|
1,014,550
|
—
|
95,347,315
|
|
|
Intersegment
revenue
|
—
|
—
|
3,033,392
|
1,836,887
|
—
|
(4,870,279)
|
—
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|
|
Total
revenue
|
59,890,404
|
32,120,069
|
5,355,684
|
2,851,437
|
—
|
(4,870,279)
|
95,347,315
|
|
Leased
lines and network capacities
|
(244,896)
|
(8,348,151)
|
(303,858)
|
(64,785)
|
—
|
18,691
|
(8,942,999)
|
|
Interconnection
charges
|
(9,580,077)
|
(3,533,740)
|
(481,528)
|
(927,468)
|
—
|
4,851,588
|
(9,671,225)
|
|
Depreciation
and amortisation
|
(18,877,780)
|
(718,467)
|
(2,419,598)
|
(670,191)
|
(532)
|
(22,686,568)
|
|
|
Employee
benefit expenses
|
(4,160,376)
|
(1,537,816)
|
(527,358)
|
(272,653)
|
(182,476)
|
(6,680,679)
|
|
|
Selling
and marketing
|
(9,415,055)
|
(9,248,734)
|
(683,402)
|
(224,078)
|
(61)
|
(19,571,330)
|
|
|
General,
administrative and other expenses
|
(9,562,494)
|
(2,896,574)
|
(797,130)
|
(259,900)
|
(27,293)
|
(13,543,391)
|
|
|
Cost
of telecommunications products sold
|
(189,692)
|
(4,718,968)
|
(6,197)
|
(19)
|
—
|
(4,914,876)
|
|
|
Financial
costs
|
(475,571)
|
(51,656)
|
(35,512)
|
(54,229)
|
(467,026)
|
424,362
|
(659,632)
|
|
Interest
income
|
127,046
|
6,903
|
12,483
|
2,323
|
539,149
|
(424,362)
|
263,542
|
|
Realised/unrealised
loss on changes in fair value of derivative component of convertible
bonds
|
—
|
—
|
—
|
—
|
(2,396,592)
|
(2,396,592)
|
|
|
Other
gains/(loss)-net
|
23,513
|
982
|
246
|
(3,409)
|
15
|
21,347
|
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
||
|
Segment
profit (loss) before income tax
|
7,535,022
|
1,073,848
|
113,830
|
377,028
|
(2,534,816)
|
6,564,912
|
|
|
==========
|
==========
|
==========
|
==========
|
==========
|
|||
|
Income
tax expenses
|
(2,763,885)
|
||||||
|
－－－－－
|
|||||||
|
Profit
for the year
|
3,801,027
|
||||||
|
==========
|
|||||||
|
Attributable
to:
|
|||||||
|
Equity
holders of Unicom
|
3,800,920
|
||||||
|
Minority
interest
|
107
|
||||||
|
－－－－－
|
|||||||
|
3,801,027
|
|||||||
|
===========
|
|||||||
|
Other
information:
|
|||||||
|
Provision
for doubtful debts
|
1,133,690
|
460,515
|
106,883
|
52,827
|
—
|
1,753,915
|
|
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
||
|
Capital
expenditures for segment assets (a)
|
10,822,935
|
—
|
2,500,814
|
2,640,789
|
5,827,151
|
21,791,689
|
|
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
||
- II-27
-
|
31
December 2007
|
|||||||
|
GSM
Business
|
CDMA
Business
|
Data
and Internet Business
|
Long
Distance Business
|
Unallocated
Amounts
|
Elimination
|
Total
|
|
|
Total
segment assets
|
107,735,724
|
9,885,462
|
7,985,260
|
17,573,749
|
56,499,840
|
(50,257,665)
|
149,422,370
|
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
||
|
Total
segment liabilities
|
32,947,282
|
9,100,579
|
2,526,811
|
3,831,729
|
3,798,875
|
52,205,276
|
|
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
||
|
31
December 2006 (As restated)
|
|||||||
|
GSM
Business
|
CDMA
Business
|
Data
and Internet Business
|
Long
Distance Business
|
Unallocated
Amounts
|
Elimination
|
Total
|
|
|
Total
segment assets
|
108,993,645
|
7,876,684
|
8,300,155
|
16,810,768
|
56,477,257
|
(50,161,795)
|
148,296,714
|
|
==========
|
=========
|
=========
|
=========
|
=========
|
==========
|
||
|
Total
segment liabilities
|
39,529,979
|
8,137,358
|
2,801,914
|
3,673,741
|
14,289,557
|
68,432,549
|
|
|
==========
|
=========
|
==========
|
==========
|
==========
|
==========
|
||
|
|
(a)
|
Capital
expenditures classified under “Unallocated amounts” represent capital
expenditures on common facilities, which benefit all business
segments.
|
5.2 Geographical
Segments
The
customers of the Unicom Group’s services are mainly in China. There is no other
geographical segment with segment revenue from external customers equal to or
greater than 10% of total revenue.
In
addition, although the Unicom Group has its corporate headquarters in Hong Kong,
a substantial portion of the Unicom Group’s non-current assets (including
property, plant and equipment and other assets) are situated in China, as the
Unicom Group’s principal activities are conducted in China. For 2007 and 2006,
substantially all capital expenditures were incurred to acquire assets located
in China and less than 10% of the Unicom Group’s assets and operations are
located outside China. Accordingly, no geographical segment information is
presented.
- II-28
-
6. PROPERTY,
PLANT AND EQUIPMENT
|
The
Unicom Group
|
||||||||||||||||||||||||||||
|
2007
|
2006
(As
restated)
|
|||||||||||||||||||||||||||
|
Buildings
|
Tele-
communications equipment
|
Office
furniture, fixtures and others
|
Leasehold
improvements
|
Construction- in-progress
|
Total
|
Total
|
||||||||||||||||||||||
|
Cost
or valuation:
|
||||||||||||||||||||||||||||
|
Beginning
of year
|
14,803,953 | 168,812,268 | 9,674,505 | 1,388,443 | 13,670,239 | 208,349,408 | 189,027,732 | |||||||||||||||||||||
|
Additions
|
171,943 | 206,103 | 364,650 | — | 24,975,225 | 25,717,921 | 21,791,689 | |||||||||||||||||||||
|
Transfer
from CIP
|
1,461,030 | 20,609,388 | 1,181,800 | 427,006 | (23,679,224 | ) | — | — | ||||||||||||||||||||
|
Revaluation
surplus
|
— | — | — | — | — | — | 200,330 | |||||||||||||||||||||
|
Reclassification
to other assets
|
— | — | — | — | — | — | (528,428 | ) | ||||||||||||||||||||
|
Disposals
|
(75,865 | ) | (2,487,221 | ) | (237,219 | ) | (203,846 | ) | — | (3,004,151 | ) | (2,141,915 | ) | |||||||||||||||
|
－－－－－
|
－－－－－
|
－－－－
|
－－－－
|
－－－－
|
－－－－
|
－－－－－
|
||||||||||||||||||||||
|
End
of year
|
16,361,061 | 187,140,538 | 10,983,736 | 1,611,603 | 14,966,240 | 231,063,178 | 208,349,408 | |||||||||||||||||||||
|
－－－－－
|
－－－－－
|
－－－－
|
－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
||||||||||||||||||||||
|
Representing:
|
||||||||||||||||||||||||||||
|
At
cost
|
3,829,030 | 187,140,538 | 10,983,736 | 1,611,603 | 14,966,240 | 218,531,147 | 195,817,377 | |||||||||||||||||||||
|
At
valuation
|
12,532,031 | — | — | — | — | 12,532,031 | 12,532,031 | |||||||||||||||||||||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
||||||||||||||||||||||
| 16,361,061 | 187,140,538 | 10,983,736 | 1,611,603 | 14,966,240 | 231,063,178 | 208,349,408 | ||||||||||||||||||||||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
||||||||||||||||||||||
|
Accumulated
depreciation and impairment:
|
||||||||||||||||||||||||||||
|
Beginning
of year
|
3,568,448 | 86,137,955 | 5,031,750 | 801,321 | 14,307 | 95,553,781 | 75,227,572 | |||||||||||||||||||||
|
Charge
for the year
|
321,038 | 19,866,791 | 1,691,176 | 281,328 | — | 22,160,333 | 22,263,719 | |||||||||||||||||||||
|
Disposals
|
(62,917 | ) | (2,328,303 | ) | (218,035 | ) | (203,846 | ) | — | (2,813,101 | ) | (1,937,510 | ) | |||||||||||||||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
||||||||||||||||||||||
|
End
of year
|
3,826,569 | 103,676,443 | 6,504,891 | 878,803 | 14,307 | 114,901,013 | 95,553,781 | |||||||||||||||||||||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
||||||||||||||||||||||
|
Net
book value:
|
||||||||||||||||||||||||||||
|
End
of year
|
12,534,492 | 83,464,095 | 4,478,845 | 732,800 | 14,951,933 | 116,162,165 | 112,795,627 | |||||||||||||||||||||
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
||||||||||||||||||||||
|
Beginning
of year
|
11,235,505 | 82,674,313 | 4,642,755 | 587,122 | 13,655,932 | 112,795,627 | 113,800,160 | |||||||||||||||||||||
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
==========
|
||||||||||||||||||||||
- II-29
-
|
Unicom
|
||||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||||
|
Tele-
communications equipment
|
Office
furniture, fixtures and others
|
Construction-
in-progress
|
Total
|
Total
|
||||||||||||||||
|
Cost:
|
||||||||||||||||||||
|
Beginning of year
|
50,792 | 8,060 | — | 58,852 | 60,935 | |||||||||||||||
|
Additions
|
— | 547 | 4,414 | 4,961 | 388 | |||||||||||||||
|
Disposals
|
(3,452 | ) | (1,307 | ) | — | (4,759 | ) | (2,471 | ) | |||||||||||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
||||||||||||||||
|
End of year
|
47,340 | 7,300 | 4,414 | 59,054 | 58,852 | |||||||||||||||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
||||||||||||||||
|
Accumulated
depreciation:
|
||||||||||||||||||||
|
Beginning of year
|
12,754 | 7,452 | — | 20,206 | 17,275 | |||||||||||||||
|
Charge for the year
|
3,277 | 370 | — | 3,647 | 3,985 | |||||||||||||||
|
Disposals
|
(989 | ) | (813 | ) | — | (1,802 | ) | (1,054 | ) | |||||||||||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
||||||||||||||||
|
End of year
|
15,042 | 7,009 | — | 22,051 | 20,206 | |||||||||||||||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
||||||||||||||||
|
Net
book value:
|
||||||||||||||||||||
|
End of year
|
32,298 | 291 | 4,414 | 37,003 | 38,646 | |||||||||||||||
|
===========
|
===========
|
===========
|
===========
|
===========
|
||||||||||||||||
|
Beginning of year
|
38,038 | 608 | — | 38,646 | 43,660 | |||||||||||||||
|
===========
|
===========
|
===========
|
===========
|
===========
|
||||||||||||||||
For
the year ended 31 December 2007, interest expense of approximately RMB274
million (2006: approximately RMB431 million) was capitalised to
construction-in-progress. The capitalised borrowing rate represents the cost of
capital for raising the related borrowings externally and varied from 3.60% to
5.80% for the year ended 31 December 2007 (2006: 3.60% to 5.83%).
Buildings
of the Unicom Group were revalued at 31 March 2000 and 31 August 2006
respectively by independent property valuation firms, using the replacement cost
or open market value approach, as appropriate. As at 31 December 2007, the
accumulated revaluation surplus on the buildings resulting from all previous
revaluations of the buildings amounted to approximately RMB377 million. The
revaluation surplus net of the related deferred income tax of approximately
RMB76 million (2006: approximately RMB105 million) was credited to revaluation
reserve in shareholders’ equity. The additional depreciation attributable to the
revaluation surplus amounted to approximately RMB18.5 million for 2007 (2006:
approximately RMB8.8 million). As at 31 December 2007, the carrying value of
buildings would have been approximately RMB12,236 million (2006: approximately
RMB10,989 million) had they been stated at historical cost less accumulated
depreciation. The Unicom Directors consider the fair values of these buildings
were not materially different from their carrying values as at 31 December
2007.
Telecommunications
equipment held under finance leases represents wireless public phone equipment.
As at 31 December 2007, net book value of wireless public phone equipment under
finance leases amounted to approximately RMB189 million (2006: approximately
RMB231 million) (Note 19).
For
the year ended 31 December 2007, the Unicom Group recognised loss on disposal of
property, plant and equipment of approximately RMB109 million (2006:
approximately RMB145 million).
7. GOODWILL
— Unicom GROUP
|
The
Unicom Group
|
||
|
2007
|
2006
|
|
|
Cost:
|
||
|
Goodwill
arising from acquisitions
|
3,143,983
|
3,143,983
|
|
=========
|
=========
|
|
Goodwill
arising from the acquisitions of Unicom New Century Telecommunications Co., Ltd.
and Unicom New World Telecommunications Co., Ltd. in 2002 and 2003 respectively
represented the excess of the purchase considerations over the Unicom Group’s
shares of the fair values of the separately identifiable net assets acquired
prior to the adoption of HKFRS and AG 5 in 2005 (refer to Note
2.2(a)).
Goodwill
is allocated to the Unicom Group’s cash-generating units (“CGU”) identified
according to business segments. The recoverable amount of goodwill is determined
based on value in use calculations. These calculations use pre-tax cash flow
projections based on financial budgets approved by management, including
expected profit margins, growth rates and the applicable discount rates.
Management determined expected profit margins based on past performance and its
expectations in relation to market developments. The expected growth rates used
are consistent with the forecasts of the business segments. The discount rates
used are pre-tax and reflect specific risks relating to the business. Based on
management’s assessment results, there was no impairment of goodwill as at 31
December 2007 and 2006.
- II-30
-
8. OTHER
ASSETS — Unicom GROUP
|
The
Unicom Group
|
|||
|
2006
|
|||
|
Note
|
2007
|
(As
restated)
|
|
|
Direct
incremental costs for activating subscribers
|
(a)
|
1,301,112
|
2,260,728
|
|
Customer
acquisition costs of contractual CDMA subscribers
|
4.2(a),
(b)
|
2,349,225
|
1,712,426
|
|
Long-term
prepayment for land use rights
|
(c)
|
5,881,167
|
4,933,290
|
|
Purchased
software
|
(d)
|
1,020,673
|
681,712
|
|
Prepaid
rental for premises and leased lines
|
1,233,019
|
1,006,252
|
|
|
Others
|
(d)
|
1,070,003
|
762,404
|
|
－－－－
|
－－－－
|
||
|
12,855,199
|
11,356,812
|
||
|
=========
|
=========
|
||
|
|
(a)
|
For
the year ended 31 December 2007, amortisation of direct incremental costs
for activating GSM and CDMA subscribers amounted to approximately RMB1,527
million (2006: approximately RMB1,829 million) (Note 25), which has been
included in “selling and marketing”
expenses.
|
|
|
(b)
|
For
the year ended 31 December 2007, amortisation of the customer acquisition
costs of contractual CDMA subscribers amounted to approximately RMB4,000
million (2006: approximately RMB4,375 million) (Note 25), which was
recorded in “selling and marketing” expenses. As at 31 December 2007, the
carrying amount of unamortised customer acquisition costs of contractual
CDMA subscribers totaled approximately RMB2,857 million (2006:
approximately RMB2,170 million), with approximately RMB2,349 million
(2006: approximately RMB1,712 million) recorded in “other assets” (for
contracts expiring over 1 year) and approximately RMB508 million (2006:
approximately RMB458 million) recorded in “prepayments and other current
assets” (for contracts expiring within 1 year) (Note
12).
|
|
|
(c)
|
The
Unicom Group’s long-term prepayment for land use rights represents prepaid
operating lease payments for land use rights in China and their net book
value is analysed as follows:
|
|
The
Unicom Group
|
||
|
2006
|
||
|
2007
|
(As
restated)
|
|
|
Held on:
|
||
|
Leases of between 10 to 50 years
|
5,836,838
|
4,898,461
|
|
Leases of less than 10 years
|
44,329
|
34,829
|
|
－－－－－
|
－－－－－
|
|
|
5,881,167
|
4,933,290
|
|
|
=========
|
==========
|
|
For
the year ended 31 December 2007, the long-term prepayment for land use rights
expensed in the income statement amounted to approximately RMB174 million (2006:
approximately RMB171 million), which was recorded in “general, administrative
and other expenses”.
|
|
(d)
|
For
the year ended 31 December 2007, the amortisation of purchased software
and others of other assets amounted to approximately RMB517 million (2006:
approximately RMB423 million) (Note
25).
|
9. TAXATION
— Unicom GROUP
Provision
for taxation represents:
|
The
Unicom Group
|
||
|
2006
|
||
|
2007
|
(As
restated)
|
|
|
Provision
for enterprise income tax on the estimated taxable profits for
the year
|
||
|
—
Hong Kong
|
5,916
|
4,817
|
|
—
Outside Hong Kong
|
3,736,021
|
2,838,365
|
|
－－－－－
|
－－－－－
|
|
|
3,741,937
|
2,843,182
|
|
|
Deferred
taxation
|
(87,767)
|
(79,297)
|
|
－－－－－
|
－－－－－－
|
|
|
3,654,170
|
2,763,885
|
|
|
==========
|
===========
|
|
|
|
(a)
|
Unicom
did not have any assessable income sourced from Hong Kong for the years
ended 31 December 2007 and 2006.
|
- II-31
-
|
|
(b)
|
China
Unicom International Limited (“Unicom International”, a subsidiary of
Unicom) assessed its income tax liability in Hong Kong using the tax rate
of 17.5% (2006: 17.5%). The income tax liability of Unicom International
amounted to approximately RMB5.92 million for the year ended 31 December
2007 (2006: approximately RMB4.82
million).
|
|
|
(c)
|
China
Unicom (Macau) Company Limited (“Unicom Macau”, a subsidiary of Unicom)
assessed its income tax liability in Macau using progressive tax rates
from 3% to 12%. There is no Macau income tax liability of Unicom Macau for
the years ended 31 December 2007 and 2006 as there were no assessable
profits in both years.
|
|
|
(d)
|
Various
provincial/municipal branches of CUCL were granted preferential tax
treatment by relevant tax authorities to assess their enterprise income
tax at the rates of 13% or 18% in China for the years ended 31 December
2007 and 2006. The remaining provincial branches were assessed at the
statutory tax rate of 33%.
|
|
|
(e)
|
For
the year ended 31 December 2007, Unicom Huasheng Telecommunications
Technology Company Limited (“Unicom Huasheng”, a subsidiary of CUCL) and
its branches are subject to income tax at the statutory enterprise income
tax rate of 33% in China. The income tax liabilities of Unicom Huasheng
and its branches were assessed separately by relevant local tax
authorities.
|
|
|
(f)
|
Before
the Business Combination became effective on 31 December 2007, Guizhou
Business was operated by Guizhou branch of Unicom Parent. The income tax
of Guizhou branch of Unicom Parent was reported on a consolidated basis
with Unicom Parent and no separate tax return was prepared. The
accumulated tax losses incurred by Guizhou Business have not been fully
utilised by Unicom Parent, therefore no income tax expenses were
recognised for the Guizhou Business in 2007 or prior years in accounting
for the Guizhou Business using merger
accounting.
|
|
|
In
addition, in accordance with the relevant PRC tax laws and regulations,
the accumulated tax losses and other temporary differences associated with
Guizhou Business carried forward from prior years could not be utilised by
CUCL upon the completion of the Business Combination. Accordingly,
deferred tax assets and liabilities were not recognised by CUCL in the
relevant periods presented in applying merger accounting to the Business
Combination of Guizhou Business.
|
|
|
(g)
|
Pursuant
to the new PRC enterprise income tax law passed by the Tenth National
People’s Congress on 16 March 2007, the new enterprise income tax rates
for domestic and foreign enterprises are unified at 25% and are effective
from 1 January 2008. However, for entities operating in special economic
zones that previously enjoyed preferential tax rates, the applicable tax
rate will be increased progressively to 25% over a five year period. As a
result, the deferred tax balance has been adjusted to reflect the tax
rates that are expected to apply to the respective periods when the asset
is expected to be realised or the liability is expected to be settled,
resulting in a decrease of approximately RMB130 million of net deferred
tax assets in the balance sheet as at 31 December 2007 and approximately
RMB154 million of deferred taxation charged to the income statement and
approximately RMB24 million of deferred taxation credited to equity for
the year ended 31 December 2007.
|
|
|
(h)
|
On
6 December 2007, the State Council issued the detail implementation
regulations of the new PRC enterprise income tax law. Pursuant to the
regulations, a 5% withholding income tax will be levied on dividends
declared on or after 1 January 2008 by foreign investment enterprises to
their foreign shareholders in Hong Kong. Pursuant to a notice jointly
issued by the Ministry of Finance and the State Administration of Taxation
on 22 February 2008, where foreign investment enterprises declare
dividends in 2008 and beyond out of their cumulative retained profits as
at 31 December 2007, such dividends are exempted from withholding income
tax. For dividends paid out of profits earned by foreign investment
enterprises after 1 January 2008, the 5% withholding income tax will be
applicable, unless the investor is deemed as a PRC Tax Resident
Enterprise. Management is currently assessing the PRC Tax Resident
Enterprise status of Unicom and the impact of this tax regulation on the
Unicom Group’s operations and financial position effective from
2008.
|
Reconciliation
between applicable statutory tax rate and the effective tax rate:
|
The
Unicom Group
|
||||||||||||
|
2006
|
||||||||||||
|
Note
|
2007
|
(As
restated)
|
||||||||||
|
PRC
statutory tax rate of 33%
|
33.0 | % | 33.0 | % | ||||||||
|
Non-deductible
expenses
|
1.1 | % | 1.8 | % | ||||||||
|
Realised/unrealised
loss on changes in fair value of derivative component of convertible
bonds
|
1.4 | % | 12.0 | % | ||||||||
|
Non-taxable
income
|
||||||||||||
|
—
Tax refund on reinvestment in a subsidiary
|
24 | (7.1 | %) | — | ||||||||
|
—
Interest income
|
(0.1 | %) | (0.6 | %) | ||||||||
|
—
Connection fee
|
— | (1.3 | %) | |||||||||
|
Accumulated
tax losses and other temporary differences of Guizhou Business
not recognised by the Unicom Group
|
(f)
|
(0.2 | %) | (0.3 | %) | |||||||
|
Impact
of PRC preferential tax rates
|
(1.1 | %) | (2.3 | %) | ||||||||
|
Investment
tax credits for domestic equipment
|
— | (0.2 | %) | |||||||||
|
Effect
of change of tax rate under the new PRC enterprise income tax
law
|
(g)
|
1.2 | % | — | ||||||||
|
－－－－
|
－－－－
|
|||||||||||
|
Effective
tax rate
|
28.2 | % | 42.1 | % | ||||||||
|
========
|
========
|
|||||||||||
- II-32
-
Tax
effect of preferential tax rate is as follows:
|
The
Unicom Group
|
||
|
2007
|
2006
|
|
|
Aggregate
amount (RMB in millions)
|
148
|
150
|
|
Per
share effect (RMB)
|
0.011
|
0.012
|
|
=========
|
=========
|
|
Deferred
tax assets and liabilities are offset when there is a legally enforceable right
to offset tax assets against tax liabilities and when the deferred income taxes
relate to the same fiscal authority. The offset amounts are as
follows:
|
The
Unicom Group
|
||
|
2007
|
2006
|
|
|
Deferred
tax assets:
|
||
|
—
Deferred tax asset to be recovered after 12 months
|
461,902
|
787,991
|
|
—
Deferred tax asset to be recovered within 12 months
|
680,452
|
887,636
|
|
－－－－
|
－－－－
|
|
|
1,142,354
|
1,675,627
|
|
|
－－－－
|
－－－－
|
|
|
Deferred
tax liabilities:
|
||
|
—
Deferred tax liabilities to be settled after 12 months
|
(448,620)
|
(1,051,774)
|
|
—
Deferred tax liabilities to be settled within 12 months
|
(266,832)
|
(314,185)
|
|
－－－－
|
－－－－
|
|
|
(715,452)
|
(1,365,959)
|
|
|
－－－－
|
－－－－－
|
|
|
Net
deferred tax assets after offsetting
|
426,902
|
309,668
|
|
=========
|
==========
|
|
|
Deferred
tax liabilities that cannot be offset
|
(5,864)
|
(5,879)
|
|
=========
|
==========
|
|
There
were no material unrecognised deferred tax assets as at 31 December 2007 and
2006.
The
movement of the net deferred tax assets/liabilities is as follows:
|
The
Unicom Group
|
|||
|
Note
|
2007
|
2006
|
|
|
Net
deferred tax assets after offsetting:
|
|||
|
—
Beginning of year
|
309,668
|
335,234
|
|
|
—
Deferred tax credited to the income statement
|
87,752
|
79,563
|
|
|
—
Deferred tax credited/(charged) to equity
|
6
|
29,482
|
(105,129)
|
|
－－－－
|
－－－－
|
||
|
— End of
year
|
426,902
|
309,668
|
|
|
========
|
========
|
||
|
The
deferred tax liabilities that cannot be offset:
|
|||
|
—
Beginning of year
|
(5,879)
|
(5,613)
|
|
|
—
Deferred tax credited/(charged) to the income statement
|
15
|
(266)
|
|
|
－－－－－
|
－－－－
|
||
|
— End of
year
|
(5,864)
|
(5,879)
|
|
|
==========
|
=========
|
||
- II-33
-
Deferred
taxation as at year-end represents the taxation effect of the following
temporary differences, taking into consideration the offsetting of balances
related to the same fiscal authority:
|
The
Unicom Group
|
|||
|
Note
|
2007
|
2006
|
|
|
China
|
|||
|
Deferred
tax assets:
|
|||
|
Interest
on loans from CCF joint ventures
|
(i)
|
23,129
|
45,463
|
|
Loss
arising from terminations of CCF Arrangements
|
(i)
|
—
|
20,636
|
|
Provision
for doubtful debts
|
411,274
|
492,920
|
|
|
Write-down
of inventories to net realisable value
|
39,833
|
32,858
|
|
|
Accruals
of retirement benefits
|
12,993
|
18,137
|
|
|
Additional
depreciation deductible for tax in future years
|
—
|
6,315
|
|
|
Monetary
housing benefits
|
8,595
|
12,607
|
|
|
Net
amount of deferral and amortisation of upfront non-refundable
revenue
|
321,936
|
740,429
|
|
|
Accruals
of expenses not yet deductible for tax purpose
|
257,145
|
232,863
|
|
|
Others
|
67,449
|
73,399
|
|
|
－－－－
|
－－－－
|
||
|
1,142,354
|
1,675,627
|
||
|
－－－－
|
－－－－
|
||
|
Deferred
tax liabilities:
|
|||
|
Net
amount of capitalisation and amortisation of direct incremental
costs
|
(321,936)
|
(740,429)
|
|
|
Capitalised
interest already deducted for tax purpose
|
(317,869)
|
(520,401)
|
|
|
Revaluation
of buildings
|
6
|
(75,647)
|
(105,129)
|
|
－－－－
|
－－－－－
|
||
|
(715,452)
|
(1,365,959)
|
||
|
－－－－
|
－－－－－
|
||
|
426,902
|
309,668
|
||
|
=========
|
==========
|
||
|
Hong
Kong
|
|||
|
Deferred
tax liabilities:
|
|||
|
Accelerated
depreciation for tax purpose
|
(5,864)
|
(5,879)
|
|
|
==========
|
==========
|
||
|
|
(i)
|
Prior
to 2000, in the process of developing its cellular networks, the GSM
Business entered into cooperation agreements with certain contractual
joint ventures (the “CJVs”) established in China. Each CJV was established
by one or more Chinese enterprises and one or more foreign parties. The
aforementioned cooperation arrangements are referred to as the
China-China-Foreign Arrangement (the “CCF Arrangements”). Pursuant to the
CCF Arrangements, the CJVs extended funding to the GSM Business for the
construction of telecommunications systems and network equipment in China.
Based on the terms of the cooperation agreements, the CCF Arrangements had
been accounted for as secured financing arrangements to the GSM Business,
and interest had been accrued by the GSM Business based on the funds
provided by the CJVs at the then prevailing market borrowing rates. All
CCF Arrangements were terminated in 1999 and 2000, the related loss on the
termination of CCF Arrangements was charged to the income statement as
incurred. Pursuant to the approval of relevant tax authorities, all the
interest costs and the loss on termination of these CCF Arrangements are
to be deducted against current taxable income over 7 years. The resulting
deferred tax assets were recognised
accordingly.
|
10. INVENTORIES
— Unicom GROUP
|
The
Unicom Group
|
||
|
2006
|
||
|
2007
|
(As
restated)
|
|
|
Handsets
|
1,587,124
|
1,489,132
|
|
Telephone
cards
|
584,742
|
531,407
|
|
Others
|
356,498
|
353,332
|
|
－－－－
|
－－－－－
|
|
|
2,528,364
|
2,373,871
|
|
|
=============
|
=============
|
|
The
cost of inventories recognised as expense and included in cost of
telecommunications products sold amounted to approximately RMB5,032 million
(2006: approximately RMB4,915 million).
For
the year ended 31 December 2007, the write-down of inventories to net realisable
value amounted to approximately RMB163 million (2006: approximately RMB47
million), which was mainly due to the decline of market values of certain
handsets.
- II-34
-
11. ACCOUNTS
RECEIVABLE, NET — Unicom GROUP
|
The
Unicom Group
|
||
|
2006
|
||
|
2007
|
(As
restated)
|
|
|
Accounts
receivable for GSM services
|
2,558,757
|
3,486,610
|
|
Accounts
receivable for CDMA services
|
1,637,100
|
2,248,486
|
|
Accounts
receivable for Data and Internet services
|
203,623
|
323,369
|
|
Accounts
receivable for Long Distance services
|
440,615
|
458,402
|
|
－－－－
|
－－－－
|
|
|
Sub-total
|
4,840,095
|
6,516,867
|
|
Less: Provision
for doubtful debts for GSM services
|
(1,027,899)
|
(1,864,775)
|
|
Provision for doubtful debts
for CDMA services
|
(442,192)
|
(912,892)
|
|
Provision for doubtful debts
for Data and Internet services
|
(104,218)
|
(77,006)
|
|
Provision for doubtful debts
for Long Distance services
|
(54,632)
|
(219,983)
|
|
－－－－
|
－－－－－
|
|
|
3,211,154
|
3,442,211
|
|
|
=========
|
=========
|
|
- II-35
-
The
aging analysis of accounts receivable is as follows:
|
The
Unicom Group
|
||
|
2006
|
||
|
2007
|
(As
restated)
|
|
|
Within
one month
|
1,968,344
|
2,343,254
|
|
More
than one month to three months
|
944,300
|
935,798
|
|
More
than three months to one year
|
1,519,487
|
1,719,787
|
|
More
than one year
|
407,964
|
1,518,028
|
|
－－－－
|
－－－－
|
|
|
4,840,095
|
6,516,867
|
|
|
=========
|
=========
|
|
The
normal credit period granted by the Unicom Group is on average 30 days from the
date of invoice.
There
is no significant concentration of credit risk with respect to individual
customers’ receivables, as the Unicom Group has a large number of
customers.
Accounts
receivable that are less than three months past due are not considered impaired.
As at 31 December 2007, accounts receivable of approximately RMB1,243 million
(2006: approximately RMB1,099 million) were past due but not impaired. These
relate to a number of individuals and corporate customers for whom there is no
recent history of default. The aging analysis of these receivables is as
follows:
|
The
Unicom Group
|
||
|
2006
|
||
|
2007
|
(As
restated)
|
|
|
More
than one month to three months
|
944,300
|
935,798
|
|
More
than three months to one year
|
282,379
|
102,196
|
|
More
than one year
|
16,131
|
60,963
|
|
－－－－－
|
－－－－
|
|
|
1,242,810
|
1,098,957
|
|
|
==========
|
=========
|
|
As
at 31 December 2007, accounts receivable of approximately RMB1,629 million
(2006: approximately RMB3,075 million) were impaired. The individually impaired
receivables mainly relate to subscriber usage fees. The aging of these
receivables is as follows:
|
The
Unicom Group
|
||
|
2006
|
||
|
2007
|
(As
restated)
|
|
|
More
than three months to one year
|
1,237,108
|
1,617,591
|
|
More
than one year
|
391,833
|
1,457,065
|
|
－－－－
|
－－－－
|
|
|
1,628,941
|
3,074,656
|
|
|
=========
|
=========
|
|
Provision
for doubtful debts is analysed as follows:
|
The
Unicom Group
|
||
|
2006
|
||
|
2007
|
(As
restated)
|
|
|
Balance,
beginning of year
|
3,074,656
|
3,132,660
|
|
Provision
for the year
|
1,727,009
|
1,753,915
|
|
Written-off
during the year
|
(3,172,724)
|
(1,811,919)
|
|
－－－－－
|
－－－－－
|
|
|
Balance,
end of year
|
1,628,941
|
3,074,656
|
|
==========
|
==========
|
|
The
creation and release of provision for impaired receivables have been included in
“general, administrative and other expenses” in the income statement (Note 25).
Amounts charged to the allowance account are generally written-off when there is
reliable evidence to indicate no expectation of recovering additional
cash.
The
maximum exposure to credit risk at the reporting date is the fair value of
accounts receivable mentioned above. The Unicom Group does not hold any
collateral as security.
- II-36
-
12. PREPAYMENTS
AND OTHER CURRENT ASSETS
|
The
Unicom Group
|
Unicom
|
||||
|
2006
|
|||||
|
Note
|
2007
|
(As
restated)
|
2007
|
2006
|
|
|
Prepaid
rental
|
488,001
|
375,269
|
426
|
153
|
|
|
Deposits
and prepayments
|
682,206
|
760,629
|
4,558
|
5,284
|
|
|
Advances
to employees
|
132,407
|
162,830
|
3
|
11
|
|
|
Customer
acquisition costs of contractual CDMA subscribers
|
8(b)
|
508,340
|
458,095
|
—
|
—
|
|
Tax
refund on reinvestment in a subsidiary
|
24
|
1,458,715
|
—
|
—
|
—
|
|
Others
|
246,610
|
283,017
|
6,809
|
5,542
|
|
|
－－－－
|
－－－－
|
－－－－
|
－－－－
|
||
|
3,516,279
|
2,039,840
|
11,796
|
10,990
|
||
|
=========
|
=========
|
=========
|
=========
|
||
The
aging analysis of prepayments and other current assets is as
follows:
|
The
Unicom Group
|
Unicom
|
|||
|
2006
|
||||
|
2007
|
(As
restated)
|
2007
|
2006
|
|
|
Within
one year
|
3,371,984
|
1,943,711
|
9,819
|
9,174
|
|
More
than one year
|
144,295
|
96,129
|
1,977
|
1,816
|
|
－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|
|
3,516,279
|
2,039,840
|
11,796
|
10,990
|
|
|
=========
|
=========
|
==========
|
==========
|
|
13. SHORT-TERM
BANK DEPOSITS
|
The
Unicom Group
|
Unicom
|
|||
|
2007
|
2006
|
2007
|
2006
|
|
|
Bank
deposits with maturity exceeding three months
|
635,645
|
187,449
|
635,645
|
187,449
|
|
Restricted
bank deposit
|
8,371
|
8,371
|
—
|
—
|
|
－－－－
|
－－－－
|
－－－－
|
－－－－
|
|
|
644,016
|
195,820
|
635,645
|
187,449
|
|
|
========
|
========
|
=========
|
=========
|
|
The
effective interest rate on bank deposits at 31 December 2007 ranged from 3.56%
to 5.28% (2006: 3.92% to 5.36%). The bank deposits have a weighted average
maturity of 177 days.
As
at 31 December 2007, restricted bank deposit represented deposits that were
subject to externally imposed restriction relating to construction payable as
requested by a contractor.
14. CASH
AND CASH EQUIVALENTS
|
The
Unicom Group
|
Unicom
|
|||
|
2006
|
||||
|
2007
|
(As
restated)
|
2007
|
2006
|
|
|
Cash
at bank and in hand
|
6,119,784
|
11,241,559
|
31,128
|
12,725
|
|
Bank
deposits with original maturities of three months or less
|
555,692
|
1,001,632
|
463,132
|
907,276
|
|
－－－－
|
－－－－－
|
－－－－
|
－－－－－
|
|
|
6,675,476
|
12,243,191
|
494,260
|
920,001
|
|
|
=========
|
==========
|
=========
|
==========
|
|
The
effective interest rate on bank deposits at 31 December 2007 ranged from 2.69%
to 5.31% (2006: 3.20% to 5.49%). The bank deposits have a weighted average
maturity of 66 days.
- II-37
-
15. SHARE
CAPITAL — Unicom
|
Unicom
|
||
|
2007
|
2006
|
|
|
HK$’000
|
HK$’000
|
|
|
Authorised:
|
||
|
30,000,000,000
Unicom Shares
|
3,000,000
|
3,000,000
|
|
=========
|
=========
|
|
|
Issued
and fully paid:
|
Number
of Unicom Shares
|
Unicom
Shares value of HK$0.1 each
|
Share capital
|
Share
premium
|
Total
|
|
’000
|
HK$’000
|
HK$’000
|
HK$’000
|
HK$’000
|
|
|
At
1 January 2006
|
12,574,265
|
1,257,426
|
1,333,621
|
52,601,014
|
53,934,635
|
|
Employee
share option scheme
|
|||||
|
—Recognition
of Unicom Shares issued on exercise of Unicom Options (Note
29)
|
106,724
|
10,672
|
10,819
|
621,962
|
632,781
|
|
－－－－
|
－－－－
|
－－－－
|
－－－－－
|
－－－－－
|
|
|
At
31 December 2006
|
12,680,989
|
1,268,098
|
1,344,440
|
53,222,976
|
54,567,416
|
|
Employee
share option scheme
|
|||||
|
—Recognition
of Unicom Shares issued on exercise of Unicom Options (Note
29)
|
53,556
|
5,356
|
5,206
|
366,324
|
371,530
|
|
Conversion
of convertible bonds (Note 18)
|
899,745
|
89,975
|
87,262
|
10,730,766
|
10,818,028
|
|
－－－－
|
－－－－
|
－－－－
|
－－－－－
|
－－－－－
|
|
|
At
31 December 2007
|
13,634,290
|
1,363,429
|
1,436,908
|
64,320,066
|
65,756,974
|
|
=========
|
=========
|
========
|
==========
|
==========
|
16. RESERVES
(a) Nature
and purpose of reserves
(i) Statutory
reserves
CUCL
has registered as foreign investment enterprises in the PRC. In accordance with
the Articles of Association of CUCL, it is required to provide for certain
statutory reserves, namely, general reserve fund and staff bonus and welfare
fund, which are appropriated from profit after tax and minority interests but
before dividend distribution.
CUCL
is required to allocate at least 10% of its profit after tax and minority
interests determined under the PRC Company Law to the general reserve fund until
the cumulative amounts reach 50% of the registered capital. The statutory
reserve can only be used, upon approval obtained from the relevant authority, to
offset accumulated losses or increase capital.
CUCL
appropriated approximately RMB718 million (2006: approximately RMB584 million)
to the general reserve fund for the year ended 31 December 2007.
Appropriation
to the staff bonus and welfare fund is at the discretion of the Unicom
Directors. The staff bonus and welfare fund can only be used for special bonuses
or the collective welfare of the employees and are not distributable as cash
dividends. Under HKFRS, the appropriations to the staff bonus and welfare fund
will be charged to the income statement as expenses incurred since any assets
acquired through this fund belong to the employees. For the years ended 31
December 2007 and 2006, no appropriation to staff bonus and welfare fund has
been made by CUCL.
(ii) ther reserve
Other
reserve reflects the effect of the Business Combination, which includes the
consideration paid, net assets acquired and profit transferred to Unicom Parent
pursuant to the asset transfer agreement for the Business
Combination.
(b) Profit
attributable to equity holders
For
the year ended 31 December 2007, profit attributable to equity holders included
a profit of approximately RMB2,757 million (2006: approximately RMB659 million),
which has been dealt with in the financial statements of Unicom. As at 31
December 2007, the amount of profit distributable to equity holders of Unicom
amounted to approximately RMB2,840 million (2006: approximately RMB2,368
million).
- II-38
-
17. LONG-TERM
BANK LOANS
|
The
Unicom Group
|
Unicom
|
||||
|
Interest
rates and final maturity
|
2007
|
2006
|
2007
|
2006
|
|
|
RMB
denominated bank loans
|
Fixed
interest rates of 3.60% (2006: 3.60% to 5.58%) per annum with maturity
through 2010 (2006: maturity through 2010)
|
||||
|
—
unsecured
|
200,000
|
315,000
|
—
|
—
|
|
|
－－－－
|
－－－－
|
－－－－
|
－－－－
|
||
|
200,000
|
315,000
|
—
|
—
|
||
|
－－－－
|
－－－－
|
－－－－
|
－－－－
|
||
|
US$
denominated bank loans
|
Floating
interest rates of US$ LIBOR plus interest margin of 0.35% to 0.44% (2006:
0.35% to 0.44%) per annum with maturity through 2010 (2006: maturity
through 2010) (a)
|
||||
|
—
unsecured
|
3,652,303
|
7,808,699
|
3,652,303
|
3,904,349
|
|
|
－－－－
|
－－－－
|
－－－－
|
－－－－
|
||
|
Sub-total
|
3,852,303
|
8,123,699
|
3,652,303
|
3,904,349
|
|
|
－－－－
|
－－－－
|
－－－－
|
－－－－
|
||
|
Less:
Current portion
|
(2,191,382)
|
(3,984,350)
|
(2,191,382)
|
—
|
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
||
|
1,660,921
|
4,139,349
|
1,460,921
|
3,904,349
|
||
|
==========
|
==========
|
==========
|
==========
|
||
The
repayment schedule of the long-term bank loans is as follows:
|
The
Unicom Group
|
Unicom
|
|||
|
2007
|
2006
|
2007
|
2006
|
|
|
Balances
due:
|
||||
|
—
not later than one year
|
2,191,382
|
3,984,350
|
2,191,382
|
—
|
|
— later
than one year and not later than two years
|
—
|
2,377,609
|
—
|
2,342,610
|
|
— later
than two years and not later than five years
|
1,660,921
|
1,761,740
|
1,460,921
|
1,561,739
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|
|
3,852,303
|
8,123,699
|
3,652,303
|
3,904,349
|
|
|
Less:
Portion classified as current liabilities
|
(2,191,382)
|
(3,984,350)
|
(2,191,382)
|
—
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|
|
1,660,921
|
4,139,349
|
1,460,921
|
3,904,349
|
|
|
==========
|
==========
|
==========
|
==========
|
|
|
|
(a)
|
On
26 September 2003, Unicom signed an agreement with 13 financial
institutions for a long-term syndicated loan of US$700 million. This
facility was split into 3 tranches (i) US$200 million 3-year loan; (ii)
US$300 million 5-year loan; and (iii) US$200 million 7-year loan and
carried an interest rate of 0.28%, 0.35% and 0.44% over US dollar LIBOR
per annum for each tranche, respectively. In October 2003, Unicom and CUCL
entered into an agreement to re-lend such funds to CUCL with similar terms
to finance the network construction of CUCL. Unicom has fully repaid the
US$200 million 3-year loan in 2006.
|
|
|
|
In
addition, on 25 February 2004, CUCL signed an agreement with various
financial institutions for a long-term syndicated loan of US$500 million
to finance its working capital and network construction expenditure. This
facility is repayable in 3 years and carries an interest rate of 0.40%
over US dollar LIBOR per annum. In February 2007, CUCL fully repaid the
US$500 million loan.
|
|
|
(b)
|
The
effective interest rate of long-term bank loans denominated in RMB at 31
December 2007 was 3.60% (31 December 2006: 4.22%), and the effective
interest rates of long-term bank loans denominated in US$ at 31 December
2007 ranged from 4.95% to 5.04% (31 December 2006: from 5.72% to
5.81%).
|
|
|
(c)
|
The
carrying amount of long-term bank loans approximated their fair values as
at balance sheet date.
|
18. CONVERTIBLE
BONDS
There
were no outstanding convertible bonds as at 31 December 2007. The carrying
values of the derivative component and liability component of convertible bonds
outstanding as at 31 December 2006 were as follows:
|
The
Unicom Group and Unicom
|
||
|
2007
|
2006
|
|
|
Liability
component
|
—
|
7,117,035
|
|
Derivative
component
|
—
|
3,207,914
|
|
－－－－
|
－－－－
|
|
|
Carrying
value of convertible bonds
|
—
|
10,324,949
|
|
－－－－
|
－－－－－
|
|
|
Number
of conversion shares at the issuance date (shares)
|
—
|
899,745,075
|
|
========
|
==========
|
|
- II-39
-
On
5 July 2006, Unicom issued a zero coupon convertible bonds with an aggregate
principal amount of US$1 billion (the “Convertible Bonds”) to SK Telecom, an
overseas telecommunications service operator in Korea. The bondholder has the
option to convert the Convertible Bonds into Unicom Shares at a conversion price
of HK$8.63 (an equivalent of approximately US$1.11) per share subject to
adjustment for, among other matters, consolidation, subdivision or
reclassification of shares, capitalisation of profits or reserves, rights issues
and other events, which have diluting effects on the issued share capital of
Unicom at any time from and including the first anniversary after the date of
issuance up to the close of business in Hong Kong on the day falling seven days
prior to 5 July 2009, the maturity date of the Convertible Bonds. Unless
previously redeemed, converted, or purchased and cancelled, the Convertible
Bonds will be redeemed at 104.26% of its principal amount on 5 July
2009.
At
any time after 5 July 2007 or on the occurrence of a relevant event as defined
in the Convertible Bonds agreement, a bondholder may freely assign or transfer
any of the Convertible Bonds registered in its name to any third party provided
that no assignment or transfer may be made to a person who is (i) a fixed line
or mobile telecommunications operator in the PRC (a competitor operator), or
(ii) directly or indirectly an affiliate of a competitor operator.
On
5 July 2008 (the “Put Option Date”), each bondholder will have the right at such
holder’s option, to require Unicom to redeem all or some of the Convertible
Bonds held by such holder on the Put Option Date at 102.82% of the principal
amount. To exercise such right, the holder of the relevant Convertible Bonds
must deliver its notice of redemption together with the Certificate evidencing
the Convertible Bonds to be redeemed not later than 40 days prior to the Put
Option Date.
On
20 August 2007, Unicom received a notice delivered by SK Telecom, the sole
holder of outstanding Convertible Bonds, pursuant to the terms and conditions of
the Convertible Bonds for the conversion in full of the Convertible Bonds into
Unicom Shares. Accordingly, on 31 August 2007, Unicom allotted and issued
899,745,075 Unicom Shares to SK Telecom.
As
the functional currency of the Unicom Group is RMB, the conversion of the
Convertible Bonds denominated in Hong Kong dollars did not result in settlement
by the exchange of a fixed amount of cash in RMB, the functional currency of the
Unicom Group, for a fixed number of Unicom Shares. In accordance with the
requirements of HKAS 39, “Financial Instruments — Recognition and Measurement”,
the bond contract must be separated into two components: a derivative component
consisting of the conversion option and a liability component consisting of the
straight debt element of the bonds. The conversion option was carried at fair
value on the balance sheet with any changes in fair value being charged or
credited to the income statement in the period when the change
occurred.
The
fair value of the derivative component of the Convertible Bonds was calculated
using the Binomial model with the major inputs used in the model as at 20 August
2007 and 31 December 2006 as follows:
|
20
August 2007 (Conversion date)
|
31
December 2006
|
|
|
Stock
price
|
HK$12.16
|
HK$11.40
|
|
Exercise
price
|
HK$8.63
|
HK$8.63
|
|
Volatility
|
37%
|
31%
|
|
Dividend
yield
|
2%
|
2%
|
|
Risk
free rate
|
3.89%
|
3.51-3.55%
|
|
Expected
life
|
1.13-1.88 years
|
1.76-2.51 years
|
|
Option
value
|
HK$4.20
|
HK$3.56
|
Any
changes in the major inputs into the model will result in changes in the fair
value of the derivative component. Prior to conversion, the change in the fair
value of the conversion option from 31 December 2006 to 20 August 2007 resulted
in a fair value loss of approximately RMB569 million (2006: approximately
RMB2,397 million), which has been recorded in the “Realised/unrealised loss on
changes in fair value of derivative component of convertible bonds” in the
income statement for the year ended 31 December 2007.
The
initial carrying amount of the liability component was the residual amount of
proceeds after deducting the issuance cost of the Convertible Bonds and the fair
value of the derivative component as at 5 July 2006, and was subsequently
carried at amortised cost. Interest expense was calculated using the effective
interest method by applying the effective interest rate of 5.53% to the adjusted
liability component. Should the aforesaid derivative component not be separated
out and the entire Convertible Bonds be considered as the liability component,
the effective interest rate would have been 1.46%.
The
Convertible Bonds with carrying value of approximately RMB10,818 million as at
20 August 2007 was fully converted into 899,745,075 Unicom Shares. The share
conversion resulted in an increase in share capital and share premium by
approximately RMB87 million and RMB10,731 million respectively (Note
15).
19. OBLIGATIONS
UNDER FINANCE LEASES — Unicom GROUP
- II-40
-
Obligations
under finance leases are analysed as follows:
|
The
Unicom Group
|
||
|
2006
|
||
|
2007
|
(As
restated)
|
|
|
Total
minimum lease payments under finance leases:
|
||
|
—
not later than one year
|
1,520
|
105,101
|
|
— later
than one year and not later than two years
|
1,824
|
8,059
|
|
— later
than two years and not later than five years
|
2,264
|
2,639
|
|
— later
than five years
|
—
|
58
|
|
－－－－
|
－－－－－
|
|
|
5,608
|
115,857
|
|
|
Less:
Future finance charges
|
(278)
|
(5,623)
|
|
－－－－
|
－－－－－
|
|
|
Present
value of minimum obligations
|
5,330
|
110,234
|
|
=========
|
==========
|
|
|
Representing
obligations under finance leases:
|
||
|
—
current liabilities
|
1,448
|
100,004
|
|
=========
|
==========
|
|
|
—
non-current liabilities
|
3,882
|
10,230
|
|
==========
|
==========
|
|
|
The
present value of obligations under finance leases:
|
||
|
—
not later than one year
|
1,448
|
100,004
|
|
— later
than one year and not later than two years
|
1,727
|
7,666
|
|
— later
than two years and not later than five years
|
2,155
|
2,510
|
|
— later
than five years
|
—
|
54
|
|
－－－－
|
－－－－－
|
|
|
5,330
|
110,234
|
|
|
Less:
Portion classified as current liabilities
|
(1,448)
|
(100,004)
|
|
－－－－－
|
－－－－－
|
|
|
3,882
|
10,230
|
|
|
==========
|
==========
|
|
Obligations
under finance leases were mainly related to the leasing of wireless public phone
equipment (Note 6).
For
the year ended 31 December 2007, interest rates of obligations under finance
leases ranged from 4% to 5% (2006: 4% to 5%) per annum.
The
carrying amounts of obligations under finance leases approximated their fair
values as at balance sheet date.
20. PAYABLES
AND ACCRUED LIABILITIES
|
The
Unicom Group
|
Unicom
|
||||
|
2006
|
|||||
|
Note
|
2007
|
(As
restated)
|
2007
|
2006
|
|
|
Payables
to contractors and equipment suppliers
|
20,357,177
|
16,355,649
|
—
|
—
|
|
|
Accrued
expenses
|
2,681,173
|
2,251,746
|
26,918
|
33,292
|
|
|
Payables
to telecommunications product suppliers
|
1,863,724
|
1,879,017
|
—
|
—
|
|
|
Customer
deposits
|
2,188,244
|
1,887,661
|
—
|
—
|
|
|
Maintenance
expense payables
|
1,394,671
|
1,214,163
|
—
|
—
|
|
|
Salary
and welfare payables
|
731,062
|
608,122
|
—
|
—
|
|
|
Amounts
due to services providers/content providers
|
1,073,820
|
800,756
|
—
|
—
|
|
|
Provision
for subscriber points expenses
|
4.1(d)
|
633,608
|
555,586
|
—
|
—
|
|
Others
|
(a)
|
1,107,828
|
991,204
|
30,699
|
34,779
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
||
|
32,031,307
|
26,543,904
|
57,617
|
68,071
|
||
|
==========
|
==========
|
==========
|
==========
|
||
(a) Others
included miscellaneous accruals for housing fund and other government
surcharges.
The
aging analysis of payables and accrued liabilities is as follows:
|
The
Unicom Group
|
Unicom
|
|||
|
2006
|
||||
|
2007
|
(As
restated)
|
2007
|
2006
|
|
|
Less
than six months
|
24,077,455
|
20,390,910
|
57,617
|
68,071
|
|
Six
months to one year
|
5,063,993
|
3,993,082
|
—
|
—
|
|
More
than one year
|
2,889,859
|
2,159,912
|
—
|
—
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|
|
32,031,307
|
26,543,904
|
57,617
|
68,071
|
|
|
==========
|
==========
|
==========
|
==========
|
|
- II-41
-
21. SHORT-TERM
BONDS — Unicom GROUP
In
March 2006, CUCL completed an offering of short-term bonds of RMB1.0 billion
with a maturity period of 365 days carrying at interest rate of 3.12% per annum,
which was fully repaid in March 2007.
In
July 2006, CUCL completed another offering of short-term bonds in an aggregate
amount of RMB6.0 billion, consisting of three tranches of RMB2.0 billion each,
with a maturity period of 180 days, 270 days and 365 days, respectively. The
interest rates of the bonds ranged from 3.05% to 3.35% per annum. The bonds were
also fully repaid in 2007.
22. INVESTMENTS
IN AND LOANS/AMOUNT DUE TO/FROM SUBSIDIARIES — Unicom
(a) Investments
in subsidiaries
|
Unicom
|
||
|
2007
|
2006
|
|
|
Unlisted
equity investments, at cost
|
55,436,519
|
55,341,026
|
|
==========
|
==========
|
|
- II-42
-
As
at 31 December 2007, the details of Unicom’s subsidiaries are as
follows:
|
Name
|
Place
and date of incorporation and nature of legal entity
|
Percentage
of equity interests held
|
Particular
of issued share capital
|
Principal
activities and place of operation
|
|
|
Direct
|
Indirect
|
||||
|
China
Unicom Corporation Limited
|
The
PRC,
21
April 2000,
limited
liability company
|
100%
|
—
|
RMB64,721,120,000
(Note (i))
|
Telecommunications
operation in the PRC
|
|
Unicom
New World (BVI) Limited
|
British
Virgin Islands, 5 November 2003, limited
company
|
100%
|
—
|
1,000
shares, HK$1 each
|
Investment
holding in BVI
|
|
China
Unicom International Limited
|
Hong
Kong,
24
May 2000,
limited
company
|
100%
|
—
|
60,100,000
shares, HK$1 each (Note (ii))
|
Telecommunications
service in Hong Kong
|
|
China
Unicom USA Co.
|
USA,
24
May 2002, corporation
|
—
|
100%
|
US$500,000 (Note
(iii))
|
Telecommunications
service in USA
|
|
China
Unicom (Macau) Company Limited
|
Macau,
15
October 2004, limited company
|
99%
|
1%
|
MOP
60,000,000
|
Telecommunications
operation in Macau
|
|
Billion
Express Investments Limited
|
British
Virgin Islands, 15 August 2007, limited
company
|
100%
|
—
|
1
share, US$1 each
|
Investment
holding in BVI
|
|
Central
Link Investment Limited
|
Hong
Kong,
31
August 2007, limited company
|
—
|
100%
|
2
shares, HK$1 each
|
Dormant
|
|
Unicom
Huasheng Telecommunications Technology Company Limited
|
The
PRC,
1
July 2005,
limited
liability company
|
—
|
99.5%
|
RMB500,000,000
|
Sales
of telecom products in the PRC
|
|
|
Note
(i):
|
Pursuant
to a resolution by the Unicom Board on 31 July 2007, Unicom approved CUCL
to increase its share capital from approximately RMB47.43 billion to
approximately RMB64.72 billion.
|
|
|
Note
(ii):
|
Pursuant
to a resolution by the Unicom Board on 28 March 2007, Unicom approved
Unicom International to increase its share capital from HK$100,000 to
HK$60.1 million.
|
|
|
Note
(iii):
|
China
Unicom USA Co. increased its share capital from US$10,000 to US$500,000
during the year.
|
(b) Loans
to subsidiaries
|
|
(i)
|
In
October 2003, Unicom and CUCL signed an agreement for a long-term
unsecured loan of US$700 million with terms similar to the long-term
syndicated bank loan to finance the network construction of CUCL (Note
17(a)). The loan was split into 3 tranches (i) US$200 million 3-year loan;
(ii) US$300 million 5-year loan and (iii) US$200 million 7-year loan and
carried an interest rate of 0.4%, 0.47% and 0.55% over US dollar LIBOR per
annum, respectively. During 2006, CUCL fully repaid the US$200 million
3-year loan.
|
|
|
(ii)
|
In
September 2006, Unicom and CUCL signed an agreement for a long-term
unsecured loan of US$995 million. The loan is interest bearing at 5.67%
per annum and wholly repayable in
2009.
|
|
|
(iii)
|
In
July 2006, Unicom and Unicom Macau signed an agreement for a long-term
loan facility of HK$60 million. As at 31 December 2007, Unicom Macau has
utilised HK$59.4 million, equivalent to approximately RMB55.6 million
(2006: approximately HK$29.3 million, equivalent to approximately RMB29.5
million). The loans are unsecured, interest-free and repayable in
September 2008.
|
|
|
|
In
September 2007, Unicom and Unicom Macau signed another agreement for a
long-term loan facility of MOP40 million. As at 31 December 2007, Unicom
Macau has not utilised the facility
yet.
|
|
|
(iv)
|
The
carrying amounts of loans to subsidiaries approximated their fair values
as at balance sheet date.
|
(c) Amounts
due to/from subsidiaries
The
amounts due to/from subsidiaries, other than loans to subsidiaries as disclosed
above, are unsecured, interest-free and repayable on demand.
23. REVENUE
(TURNOVER) — Unicom GROUP
Revenue
primarily comprises usage fees, monthly fees, interconnection revenue, leased
line rental income, value-added services revenue and sales of telecommunications
products earned by the Unicom Group. Tariffs for these services are subject to
regulations by various government authorities, including the State Development
and Reform Commission, the Ministry of Information Industry (“MII”) and the
provincial price regulatory authorities.
Revenue
is presented net of business tax and government surcharges. Relevant business
tax and government surcharges amounted to approximately RMB2,369 million for the
year ended 31 December 2007 (2006: approximately RMB2,316 million).
- II-43
-
The
major components of revenue are as follows:
|
2006
|
|||
|
Note
|
2007
|
(As
restated)
|
|
|
GSM
Business
|
|||
|
Usage
fee
|
(a)
(i)
|
35,111,665
|
34,067,003
|
|
Monthly
fee
|
(b)
|
6,965,329
|
7,437,095
|
|
Interconnection
revenue
|
(c)
|
6,022,826
|
4,921,363
|
|
Value-added
services revenue
|
(e)
|
13,528,197
|
11,597,432
|
|
Other
revenue
|
1,147,287
|
1,859,345
|
|
|
－－－－
|
－－－－
|
||
|
Total
GSM service revenue
|
62,775,304
|
59,882,238
|
|
|
－－－－－
|
－－－－－
|
||
|
CDMA
Business
|
|||
|
Usage
fee
|
(a)
(i)
|
13,941,247
|
15,085,577
|
|
Monthly
fee
|
(b)
|
4,574,887
|
5,122,008
|
|
Interconnection
revenue
|
(c)
|
2,066,187
|
1,759,293
|
|
Value-added
services revenue
|
(e)
|
6,413,204
|
5,375,579
|
|
Other
revenue
|
734,715
|
534,018
|
|
|
－－－－－
|
－－－－－
|
||
|
Total
CDMA service revenue
|
27,730,240
|
27,876,475
|
|
|
－－－－－
|
－－－－－
|
||
|
Data and Internet
Business
|
|||
|
Usage
fee
|
(a)
(ii)
|
1,712,831
|
1,769,012
|
|
Interconnection
revenue
|
(c)
|
36,300
|
39,758
|
|
Leased
lines rental income
|
(d)
|
535,832
|
472,475
|
|
Value-added
services revenue
|
(e)
|
331,133
|
—
|
|
Other
revenue
|
9,757
|
39,147
|
|
|
－－－－－
|
－－－－－
|
||
|
Total
Data and Internet service revenue
|
2,625,853
|
2,320,392
|
|
|
－－－－－
|
－－－－－
|
||
|
Long Distance
Business
|
|||
|
Usage
fee
|
(a)
(ii)
|
352,081
|
63,340
|
|
Interconnection
revenue
|
(c)
|
476,803
|
389,375
|
|
Leased
lines rental income
|
(d)
|
670,866
|
557,270
|
|
Other
revenue
|
7,751
|
4,565
|
|
|
－－－－－
|
－－－－－
|
||
|
Total
Long Distance service revenue
|
1,507,501
|
1,014,550
|
|
|
－－－－－
|
－－－－－
|
||
|
Total
service revenue
|
94,638,898
|
91,093,655
|
|
|
Sales
of telecommunications products
|
4,900,489
|
4,253,660
|
|
|
－－－－－
|
－－－－－
|
||
|
Total
revenue
|
99,539,387
|
95,347,315
|
|
|
==========
|
==========
|
|
|
(a)
|
Usage
fees comprise:
|
|
|
(i)
|
charges
for incoming and outgoing calls made by cellular subscribers including
charges for local calls, domestic direct dial (“DDD”) and international
direct dial (“IDD”) as well as roaming fees for calls made by cellular
subscribers outside their local service areas;
and
|
|
|
(ii)
|
charges
for IP telephone calls, data and Internet services and fixed line long
distance calls.
|
|
|
(b)
|
Monthly
fees represent fixed amounts charged to cellular subscribers on a monthly
basis for maintaining their access to the related
services.
|
|
|
(c)
|
Interconnection
revenue represents amounts received from other operators, including Unicom
Parent, for calls from their networks to the Unicom Group’s networks. It
also includes roaming-in fees received from other operators, for calls
made by their subscribers using the Unicom Group’s cellular networks
(Notes 33.1(a) and 33.2(a)).
|
|
|
(d)
|
Leased
lines rental income represents rentals received for leasing of
transmission lines and IRU to business customers and other major
telecommunications service operators in China. Other major
telecommunications service operators include China Telecommunications
Corporation and its subsidiaries, China Mobile Communications Corporation
and its subsidiaries and China Network Communication Group Corporation and
its subsidiaries. These entities are collectively referred to as “Domestic
Carriers”.
|
|
|
(e)
|
Value-added
services revenue mainly represents revenue from the provision of services
such as short message, cool ringtone, CDMA 1X wireless data services and
secretarial services to
subscribers.
|
- II-44
-
24. OTHER
GAINS — NET
|
2006
|
|||
|
Note
|
2007
|
(As
restated)
|
|
|
Tax
refund on reinvestment in a subsidiary
|
(a)
|
2,780,682
|
—
|
|
Others
|
142,478
|
21,347
|
|
|
－－－－－
|
－－－－－
|
||
|
2,923,160
|
21,347
|
||
|
==========
|
==========
|
|
|
Note
(a):
|
During
2007, Unicom reinvested the undistributed profits into a subsidiary and
was granted a refund of a portion of the taxes previously paid by this
subsidiary as permitted under the tax law effective until 31 December
2007. This tax refund on reinvestment in a subsidiary was recorded as
“other gains”.
|
25. EXPENSES
BY NATURE — Unicom GROUP
The
following expenses are analysed by nature:
|
2006
|
|||
|
Note
|
2007
|
(As
restated)
|
|
|
Depreciation
on property, plant and equipment
|
6
|
22,160,333
|
22,263,719
|
|
Amortisation
of other assets
|
8(d)
|
516,834
|
422,849
|
|
－－－－－
|
－－－－－
|
||
|
Total
depreciation and amortisation
|
22,677,167
|
22,686,568
|
|
|
Amortisation
of direct incremental costs for activating cellular
subscribers
|
8(a)
|
1,527,459
|
1,828,784
|
|
Amortisation
of customer acquisition costs of contractual CDMA
subscribers
|
8(b)
|
4,000,358
|
4,375,353
|
|
Provision
for doubtful debts:
|
|||
|
—
GSM Business
|
1,257,670
|
1,133,690
|
|
|
— CDMA
Business
|
395,263
|
460,515
|
|
|
— Data
and Internet Business
|
45,916
|
106,883
|
|
|
— Long
Distance Business
|
28,160
|
52,827
|
|
|
－－－－－
|
－－－－－
|
||
|
Total
provision for doubtful debts
|
11
|
1,727,009
|
1,753,915
|
|
Write-down
of inventories to net realisable value
|
10
|
163,268
|
46,795
|
|
Cost
of inventories
|
10
|
5,031,706
|
4,914,876
|
|
Auditors’
remuneration
|
68,578
|
120,323
|
|
|
Operating
lease charges:
|
|||
|
—
Leased lines
|
753,859
|
686,376
|
|
|
— CDMA
network capacities
|
4.2(c)
|
8,381,638
|
8,256,623
|
|
—
Others
|
1,724,877
|
1,483,828
|
|
|
－－－－－
|
－－－－－
|
||
|
Total
operating lease expenses
|
10,860,374
|
10,426,827
|
|
|
Other
expenses:
|
|||
|
— Repair
and maintenance
|
3,125,440
|
2,954,132
|
|
|
—
Travelling, entertainment and meeting
|
878,585
|
791,046
|
|
|
— Power
and water charges
|
3,009,933
|
2,674,195
|
|
|
—
Vehicle usage
|
701,841
|
588,653
|
|
|
— Office
and administration expenses
|
1,214,775
|
1,131,779
|
|
|
==========
|
==========
|
- II-45
-
|
Note
|
2007
|
2006
(As
restated)
|
|
|
Financial
(gains)/costs:
|
|||
|
—
Interest on bank loans repayable over 5 years
|
—
|
956
|
|
|
—
Interest on bank loans and bonds repayable within 5 years
|
367,952
|
1,170,599
|
|
|
—
Interest element of finance lease
|
4,735
|
33,895
|
|
|
—
Interest expense on convertible bonds
|
18
|
241,535
|
193,123
|
|
— Less:
Amounts capitalised in construction-in-progress
|
6
|
(273,551)
|
(430,814)
|
|
－－－－－
|
－－－－－
|
||
|
Total
interest expense
|
340,671
|
967,759
|
|
|
—
Exchange gain, net
|
(480,322)
|
(372,691)
|
|
|
—
Others
|
52,643
|
64,564
|
|
|
－－－－－
|
－－－－－
|
||
|
Total
financial (gains)/costs
|
(87,008)
|
659,632
|
|
|
==========
|
==========
|
26. EMPLOYEE
BENEFIT EXPENSES — Unicom GROUP
|
2006
|
|||
|
Note
|
2007
|
(As
restated)
|
|
|
Employee
benefit expenses:
|
|||
|
—
Salaries and wages
|
5,635,509
|
5,184,865
|
|
|
—
Contributions to defined contribution pension schemes
|
27
|
542,894
|
478,305
|
|
—
Contributions to supplementary defined contribution pension
schemes
|
27
|
72,011
|
54,037
|
|
—
Contributions to state-sponsored fund
|
28
|
287,184
|
286,785
|
|
—
Monetary housing benefits
|
28
|
32,588
|
35,528
|
|
— Other
housing benefits
|
28
|
412,540
|
494,865
|
|
—
Share-based compensation
|
29
|
157,262
|
146,294
|
|
－－－－
|
－－－－
|
||
|
Total
|
7,139,988
|
6,680,679
|
|
|
==========
|
==========
|
26.1 Directors’
and senior management’s emoluments
The
remuneration of every Unicom Director for the year ended 31 December 2007 is set
out below:
|
Name
of Unicom Director
|
Notes
|
Fees
|
Salaries
and allowance
|
Bonuses
paid and payable
|
Other
benefits Note(a)
|
Contri-
butions to pension schemes
|
Total
|
|
Chang
Xiaobing
|
—
|
2,247
|
1,730
|
715
|
21
|
4,713
|
|
|
Shang
Bing
|
—
|
1,966
|
1,405
|
612
|
21
|
4,004
|
|
|
Tong
Jilu
|
—
|
1,592
|
1,112
|
469
|
21
|
3,194
|
|
|
Yang
Xiaowei
|
(f)
|
—
|
1,264
|
848
|
434
|
21
|
2,567
|
|
Li
Zhengmao
|
(f)
|
—
|
1,264
|
848
|
434
|
21
|
2,567
|
|
Li
Gang
|
(f)
|
—
|
1,264
|
848
|
410
|
21
|
2,543
|
|
Zhang
Junan
|
(f)
|
—
|
1,264
|
848
|
410
|
21
|
2,543
|
|
Miao
Jianhua
|
(b)
|
—
|
595
|
402
|
—
|
9
|
1,006
|
|
Lu
Jianguo
|
(f)
|
300
|
—
|
—
|
434
|
—
|
734
|
|
Lee
Suk Hwan
|
(c)
|
54
|
—
|
—
|
—
|
—
|
54
|
|
Wu
Jinglian
|
384
|
—
|
—
|
24
|
—
|
408
|
|
|
Shan
Weijian
|
346
|
—
|
—
|
24
|
—
|
370
|
|
|
Cheung
Wing Lam, Linus
|
365
|
—
|
—
|
24
|
—
|
389
|
|
|
Wong
Wai Ming
|
(d)
|
375
|
—
|
—
|
—
|
—
|
375
|
|
Li
Jianguo
|
(e)
|
—
|
659
|
—
|
229
|
12
|
900
|
|
－－－－
|
－－－－
|
－－－－
|
－－－－
|
－－－－
|
－－－－－
|
||
|
Total
|
1,824
|
12,115
|
8,041
|
4,219
|
168
|
26,367
|
|
|
=========
|
=========
|
=========
|
=========
|
=========
|
=========
|
- II-46
-
The
remuneration of every Unicom Director for the year ended 31 December 2006 is set
out below:
|
Name
of Unicom Director
|
Notes
|
Fees
|
Salaries
and allowance
|
Bonuses
paid and payable
|
Other
benefits Note(a)
|
Contri-
butions to pension schemes
|
Total
|
|
Chang
Xiaobing
|
—
|
2,460
|
2,092
|
788
|
19
|
5,359
|
|
|
Shang
Bing
|
—
|
2,152
|
1,632
|
688
|
19
|
4,491
|
|
|
Tong
Jilu
|
—
|
1,742
|
1,291
|
534
|
19
|
3,586
|
|
|
Li
Jianguo
|
(e)
|
—
|
1,038
|
738
|
399
|
15
|
2,190
|
|
Yang
Xiaowei
|
(f)
|
—
|
1,038
|
738
|
397
|
15
|
2,188
|
|
Li
Zhengmao
|
(f)
|
—
|
1,038
|
738
|
397
|
15
|
2,188
|
|
Li
Gang
|
(f)
|
—
|
1,038
|
738
|
338
|
15
|
2,129
|
|
Zhang
Junan
|
(f)
|
—
|
1,038
|
738
|
338
|
15
|
2,129
|
|
Lu
Jianguo
|
(f)
|
247
|
—
|
—
|
399
|
—
|
646
|
|
Wu
Jinglian
|
420
|
—
|
—
|
100
|
—
|
520
|
|
|
Shan
Weijian
|
379
|
—
|
—
|
100
|
—
|
479
|
|
|
Cheung
Wing Lam, Linus
|
400
|
—
|
—
|
84
|
—
|
484
|
|
|
Wong
Wai Ming
|
(d)
|
390
|
—
|
—
|
—
|
—
|
390
|
|
Li
Qiuhong
|
(g)
|
—
|
346
|
235
|
57
|
3
|
641
|
|
Lo
Wing Yan, William
|
(g)
|
—
|
608
|
—
|
(248)
|
3
|
363
|
|
Ye
Fengping
|
(g)
|
—
|
346
|
—
|
63
|
3
|
412
|
|
Liu
Yunjie
|
(g)
|
81
|
—
|
—
|
39
|
—
|
120
|
|
－－－－
|
－－－－
|
－－－－
|
－－－－
|
－－－－
|
－－－－
|
||
|
Total
|
1,917
|
12,844
|
8,940
|
4,473
|
141
|
28,315
|
|
|
========
|
========
|
========
|
========
|
=========
|
========
|
|
|
Notes:
|
|
|
(a)
|
Other
benefits represent the share options granted to the Unicom Directors under
the Unicom Share Option Schemes. In 2007, Unicom has changed the
presentation basis of the disclosure of other benefits by using
share-based compensation costs recognised for the relevant year, which is
consistent with the Unicom Group’s accounting policies as set out in Note
2.16(c). In previous years, other benefits represented the difference
between the market price of the options and the exercise price of the
options exercised during the year. Accordingly, the comparative
information of other benefits for the year ended 31 December 2006 has been
revised by Unicom to conform with the current year’s
presentation.
|
|
|
(b)
|
Mr.
Miao Jianhua was appointed as executive director on 12 July
2007.
|
|
|
(c)
|
Mr.
Lee Suk Hwan was appointed as non-executive director on 23 October
2007.
|
|
|
(d)
|
Mr.
Wong Wai Ming was appointed as independent non-executive director on 19
January 2006.
|
|
|
(e)
|
Ms.
Li Jianguo was appointed as executive director on 1 April 2006 and
resigned on 9 July 2007.
|
|
|
(f)
|
Mr.
Yang Xiaowei, Mr. Li Zhengmao, Mr. Li Gang and Mr. Zhang Junan were
appointed as executive directors on 1 April 2006. Mr. Lu Jianguo was
appointed as non-executive director on 1 April
2006.
|
|
|
(g)
|
Mr.
Li Qiuhong, Mr. Lo Wing Yan, William, and Mr. Ye Fengping resigned as
executive directors on 1 April 2006. Mr. Liu Yunjie resigned as
non-executive director on 1 April
2006.
|
During
2007, no share options were granted to the Unicom Directors (2006: 2,840,000
share options were granted to the then existing Unicom Directors and 3,000,000
share options were granted to management who were later appointed as Unicom
Directors). No Unicom Director waived the right to receive emoluments during the
year (2006: Nil).
During
2007 and 2006, Unicom did not incur any payment to any director for loss of
office or as inducement to any director to join Unicom.
26.2 Five
highest paid individuals
Of
the five highest paid individuals for the year ended 31 December 2007, all of
them were existing Unicom Directors and their remuneration has been disclosed in
Note 26.1. Of the five highest paid individuals for the year ended 31 December
2006, four of them were the then Unicom Directors whose remuneration was
disclosed in Note 26.1. For the year ended 31 December 2006, the remaining
highest paid individual was a past director whose remuneration falls within the
band from RMB1.5 million to RMB2.0 million. His remuneration is set out
below.
|
2007
|
2006
|
|
|
Salaries
and allowances
|
—
|
1,038
|
|
Bonuses
paid and payable
|
—
|
706
|
|
Other
benefits (Note 26.1(a))
|
—
|
232
|
|
Contributions
to pension schemes
|
—
|
9
|
|
－－－
|
－－－
|
|
|
—
|
1,985
|
|
|
=======
|
=======
|
- II-47
-
27. RETIREMENT
BENEFITS — Unicom GROUP
Full
time employees in China are covered by a state-sponsored defined contribution
pension scheme under which the employees are entitled to an annual pension equal
to a fixed proportion of their basic salaries at their retirement dates. The PRC
government is responsible for the pension liability to these retired employees.
The Unicom Group was required to make defined contributions to the pension
scheme at the rate of 20% of the employees’ basic salaries for the year ended 31
December 2007 (2006: 19%). Under this scheme, the Unicom Group has no obligation
for post-retirement benefits beyond the annual contributions.
In
addition, effective from 11 August 1998, a supplementary defined contribution
pension plan managed by an independent insurance company was established. Under
this plan, the Unicom Group makes a monthly defined contribution of 4% to 16%
(2006: 2% to 16%) of the monthly salaries of the relevant employees. There were
no vested benefits attributable to past services upon adoption of the
plan.
Retirement
benefits charged to the income statement are as follows:
|
2006
|
||
|
2007
|
(As
restated)
|
|
|
Contributions
to defined contribution pension schemes
|
542,894
|
478,305
|
|
Contributions
to supplementary defined contribution pension schemes
|
72,011
|
54,037
|
|
=========
|
=========
|
28. HOUSING
BENEFITS — Unicom GROUP
Under
housing reform schemes in accordance with government regulations at the
provincial level in China, the Unicom Group provided benefits to certain
qualified employees to enable them to purchase living quarters at a discount.
For GSM Business, certain of these living quarters were provided by Unicom
Parent and the related benefits were not charged to the Unicom Group. Housing
benefits which were not charged to the Unicom Group amounted to approximately
RMB14.9 million for 2007 (2006: approximately RMB14.9 million).
In
addition, full time employees in China are entitled to participate in a
state-sponsored housing fund. The fund can be used for the construction of
living quarters or may be withdrawn upon the retirement of the employees. The
Unicom Group is required to make annual contributions to the housing fund at a
rate of 10% (2006: 10%) of the employees’ basic salaries.
According
to the central government policy on housing reform based on a State Council
circular issued in 1998, monetary housing subsidies in the form of special cash
payments are to be made by certain China enterprises to their employees in order
to enable them to purchase living quarters. Under this general policy,
enterprises are allowed to establish their own housing reform schemes, taking
into consideration the actual financial capability of the
enterprises.
The
Unicom Group finalised its monetary housing benefit scheme as a special employee
incentive scheme for all qualified employees in 2001. According to the scheme,
the total amount of monetary housing benefit for each employee is determined
based on the working age of the employee and the property market price
prevailing in the relevant location. The total monetary housing benefit is
divided into three annual payments in the proportion of 40%, 30% and 30%
respectively. In order to be included in the incentive scheme, employees are
required to sign a service contract with a minimum service period. The employees
will be entitled to the first 40% payment only when the following criteria are
met in a particular year:
(i) the
provincial branch in which the employees are working has achieved the annual
performance budget set by head office management; and
(ii) the
employees continue to be under the employment of the Unicom Group at the time of
the payment.
Similarly,
the employees will only be entitled to the second and then the third annual
payments when and only when the above two conditions are also fulfilled in
subsequent years.
For
the years ended 31 December 2007 and 2006, certain provinces achieved the annual
performance budget and were thus approved by management to distribute and pay
out such monetary housing benefits. The provisions for special monetary housing
benefits for qualified employees of these provinces for the years ended 31
December 2007 and 2006 amounted to approximately RMB33 million and RMB36
million, respectively, based on the aforementioned distribution plan. The
remaining provinces were not entitled to the special monetary housing benefits
in 2007 since they did not achieve their annual performance budget in 2007 and
accordingly, no provision for such benefits was made.
The
expenses incurred by the Unicom Group in relation to the housing benefits
described above are as follows:
|
2006
|
||
|
2007
|
(As
restated)
|
|
|
Contributions
to state-sponsored fund
|
287,184
|
286,785
|
|
Special
monetary housing benefits
|
32,588
|
35,528
|
|
Other
housing benefits
|
412,540
|
494,865
|
|
－－－－
|
－－－－
|
|
|
732,312
|
817,178
|
|
|
========
|
========
|
29. SHARE
OPTION SCHEME
Unicom
adopted a share option scheme (the “Share Option Scheme”) and a fixed award
pre-global offering share options scheme (“Pre-Global Offering Share Option
Scheme”) on 1 June 2000 for the granting of share options to qualified
employees, with terms amended on 13 May 2002 and 11 May 2007.
All
of the Unicom Options granted are governed by the amended terms of the Share
Option Scheme and Pre-Global Offering Share Option Scheme as mentioned
below.
- II-48
-
Movements
in the number of Unicom Options outstanding and their related weighted average
exercise prices are as follows:
|
Unicom
|
||||
|
2007
|
2006
|
|||
|
Average
exercise price in HK$ per share
|
Number
of share options involved
|
Average
exercise price in HK$ per share
|
Number
of share options involved
|
|
|
Balance,
beginning of year
|
6.95
|
314,256,000
|
6.51
|
257,602,000
|
|
Granted
|
—
|
—
|
6.35
|
167,466,000
|
|
Forfeited
|
8.43
|
(3,420,800)
|
6.92
|
(4,088,000)
|
|
Exercised
|
6.03
|
(53,555,600)
|
4.95
|
(106,724,000)
|
|
－－－－
|
－－－－－－
|
－－－－
|
－－－－－－
|
|
|
Balance,
end of year
|
7.12
|
257,279,600
|
6.95
|
314,256,000
|
|
========
|
===========
|
========
|
===========
|
|
Unicom
Options exercised for the year ended 31 December 2007 resulted in 53,555,600
Unicom Shares being issued (2006: 106,724,000 Unicom Shares), with exercise
proceeds of approximately RMB313 million (2006: approximately RMB535
million).
As
at 31 December 2007, out of the 257,279,600 outstanding Unicom Options (2006:
314,256,000 Unicom Options), 92,713,600 Unicom Options (2006: 115,683,600 Unicom
Options) were exercisable, and the weighted average exercise price was HK$8.48
(2006: HK$8.09).
As
at 31 December 2007, information of outstanding Unicom Options is summarised as
follows:
|
Date
of Unicom Options grant
|
The
period during which a Unicom Option may be exercised
|
The
price per Unicom Share to be paid on exercise of Unicom
Options
|
Number
of Unicom Options outstanding as at 31
December 2007
|
Number
of Unicom Options outstanding as at 31
December 2006
|
|
Unicom
Options granted under the Pre-Global Offering Share Option
Scheme:
|
||||
|
22
June 2000 (a)
|
22
June 2002 to
21
June 2010
|
HK$15.42
|
21,126,800
|
24,178,000
|
|
Unicom
Options granted under the Share Option Scheme:
|
||||
|
30
June 2001 (b)
|
30
June 2001 to
22
June 2010
|
HK$15.42
|
5,608,000
|
6,292,000
|
|
10
July 2002 (c)
|
10
July 2003 to
9
July 2008
|
HK$6.18
|
3,308,000
|
11,540,400
|
|
21
May 2003 (d)
|
21
May 2004 to
20
May 2009
|
HK$4.30
|
11,092,800
|
25,611,600
|
|
20
July 2004 (e)
|
20
July 2005 to
19
July 2010
|
HK$5.92
|
50,924,000
|
80,224,000
|
|
21
December 2004 (f)
|
21
December 2005 to
20
December 2010
|
HK$6.20
|
654,000
|
654,000
|
|
15
February 2006 (g)
|
15
February 2008 to
14
February 2012
|
HK$6.35
|
164,566,000
|
165,756,000
|
|
－－－－－
|
－－－－－
|
|||
|
257,279,600
|
314,256,000
|
|||
|
==========
|
==========
|
|||
|
|
(a)
|
Pursuant
to the resolution passed by the Unicom Board in June 2000, a total of the
27,116,600 Unicom Options were granted on 22 June 2000 to the senior
management, including directors, and certain other employees (which
represent, on their full exercise, 27,116,600 Unicom Shares) under the
fixed award Pre-Global Offering Share Option Scheme adopted by Unicom on 1
June 2000 in the following terms:
|
|
|
(i)
|
the
exercise price is equivalent to the share issue price of the Global
Offering of HK$15.42 per Unicom Share (excluding the brokerage fee and
Hong Kong Stock Exchange transaction levy);
and
|
|
|
(ii)
|
the
Unicom Options are vested and exercisable after 2 years from the grant
date and expire 10 years from the date of
grant.
|
|
|
No
further Unicom Option can be granted under the Pre-Global Offering Option
Scheme.
|
-
II-49 -
|
|
The
Pre-Global Offering Option Scheme had been amended in conjunction with the
amended terms of the Share Option Scheme on 13 May 2002 and 11 May 2007,
respectively. Apart from the above two terms, the principal terms are
substantially the same as the amended Share Option Scheme in all material
aspects.
|
|
|
(b)
|
On
1 June 2000, Unicom adopted the Share Option Scheme pursuant to which the
Unicom Directors may, at their discretion, invite employees, including
executive directors, of Unicom or any of its subsidiaries, to take up
share options to subscribe for shares up to a maximum aggregate number of
shares (including those that could be subscribed for under the Pre-Global
Offering Share Option Scheme as described above) equal to 10% of the total
issued share capital of Unicom. Pursuant to the Share Option Scheme, the
nominal consideration payable by a participant for the grant of Unicom
Options will be HK$1.00. The exercise price payable by a participant upon
the exercise of a Unicom Option will be determined by the Unicom Directors
at their discretion at the date of grant, except that such price may not
be set below a minimum price which is the higher
of:
|
|
|
(i)
|
the
nominal value of a share; and
|
|
|
(ii)
|
80%
of the average of the closing prices of Unicom Shares on the Hong Kong
Stock Exchange on the five trading days immediately preceding the date of
grant of the Unicom Options on which there were dealings in the Unicom
Shares on the Hong Kong Stock
Exchange.
|
|
|
The
period during which an option may be exercised will be determined by the
Unicom Directors at their discretion, except that no Unicom Option may be
exercised later than 10 years from 22 June 2000. According to a resolution
of the Unicom Board in June 2001, Unicom has granted 6,724,000 Unicom
Options under the Share Option Scheme which represent, on their full
exercise, 6,724,000 Unicom Shares to certain employees of the Unicom Group
under the following terms:
|
|
|
(i)
|
the
price of a Unicom Share payable by a participant upon the exercise of a
Unicom Option shall be HK$15.42 (excluding the brokerage fee and Hong Kong
Stock Exchange transaction levy);
and
|
|
|
(ii)
|
the
Unicom Options are vested on the date of grant and exercisable from the
date of grant to 22 June 2010.
|
|
|
The
terms of the Share Option Scheme were amended on 13 May 2002 to comply
with the requirements set out in the Chapter 17 of the Listing Rules which
came into effect on 1 September 2001 with the following major
amendments:
|
|
|
(i)
|
Unicom
Options may be granted to employees including executive directors of the
Unicom Group or any of the non-executive
directors;
|
|
|
(ii)
|
the
option period commences on a day after the date on which a Unicom Option
is offered but not later than 10 years from the offer date;
and
|
|
|
(iii)
|
minimum
subscription price shall not be less than the higher
of:
|
|
|
•
|
the
nominal value of the Unicom Shares;
|
|
|
•
|
the
closing price of the Unicom Shares of the stock exchange as stated in the
stock exchange’s quotation sheets on the offer date in respect of the
Unicom Options; and
|
|
|
•
|
the
average closing price of the Unicom Shares on the stock exchange’s
quotation sheets for the five trading days immediately preceding the offer
date.
|
|
|
On
11 May 2007, Unicom further amended the Share Option Scheme with major
amendments related to the exercise of Unicom Options upon cessation of
employment. These amendments are made in order to reduce the
administrative burden on Unicom to monitor outstanding Unicom Options for
grantees whose employment has been
terminated.
|
|
|
(c)
|
Pursuant
to the resolution passed by the Unicom Board and the Independent
Non-Executive Directors of Unicom dated 10 July 2002, a total of
36,028,000 Unicom Options were granted to eligible individuals including
directors, independent non-executive directors, and the non-executive
directors of Unicom under the amended Share Option Scheme under the
following terms:
|
|
|
(i)
|
aggregate
of 2,802,000 Unicom Options were granted to the executive directors,
non-executive directors and independent non-executive directors of
Unicom;
|
|
|
(ii)
|
the
exercise price per Unicom Option is HK$6.18;
and
|
|
|
(iii)
|
the
vesting dates and exercisable periods of the Unicom Options are as
follows:
|
|
Vesting
dates
|
Exercisable
periods
|
Portions
|
|
10
July 2003
|
10
July 2003 to 9 July 2008
|
40%
|
|
10
July 2004
|
10
July 2004 to 9 July 2008
|
30%
|
|
10
July 2005
|
10
July 2005 to 9 July 2008
|
30%
|
|
|
(d)
|
Pursuant
to the resolution passed by the Unicom Board and the Independent
Non-Executive Directors of Unicom dated 21 May 2003 and 30 May 2003, a
total of 105,590,000 Unicom Options and 366,000 Unicom Options were
granted to eligible individuals (including directors, independent
non-executive directors, non-executive directors, middle to senior
management of the Unicom Group) respectively, under the amended Share
Option Scheme in the following
terms:
|
|
|
(i)
|
an
aggregate of 2,772,000 Unicom Options were granted to the executive
directors, non-executive directors and independent non-executive directors
of Unicom;
|
-
II-50 -
|
|
(ii)
|
the
exercise prices per Unicom Option are HK$4.30 and HK$4.66, respectively;
and
|
|
|
(iii)
|
the
vesting dates and exercisable periods of the Unicom Options are as
follows:
|
|
Vesting
dates
|
Exercisable
periods
|
Portions
|
|
21
May 2004
|
21
May 2004 to 20 May 2009
|
40%
|
|
21
May 2005
|
21
May 2005 to 20 May 2009
|
30%
|
|
21
May 2006
|
21
May 2006 to 20 May 2009
|
30%
|
|
|
(e)
|
Pursuant
to the resolution passed by the Unicom Board and the Independent
Non-Executive Directors of Unicom dated 20 July 2004, a total of
112,668,000 Unicom Options were granted to eligible individuals (including
directors, independent non-executive directors, non-executive directors,
middle to senior management of the Unicom Group), under the amended Share
Option Scheme in the following
terms:
|
|
|
(i)
|
an
aggregate of 3,366,000 Unicom Options were granted to the executive
directors, non-executive directors and independent non-executive directors
of Unicom;
|
|
|
(ii)
|
the
exercise price per Unicom Option is HK$5.92;
and
|
|
|
(iii)
|
the
vesting dates and exercisable periods of the Unicom Options are as
follows:
|
|
Vesting
dates
|
Exercisable
periods
|
Portions
|
|
20
July 2005
|
20
July 2005 to 19 July 2010
|
40%
|
|
20
July 2006
|
20
July 2006 to 19 July 2010
|
30%
|
|
20
July 2007
|
20
July 2007 to 19 July 2010
|
30%
|
|
|
(f)
|
Pursuant
to the resolution passed by the Unicom Board and the Independent
Non-Executive Directors of Unicom dated 21 December 2004, a total of
654,000 Unicom Options were granted to the executive directors of Unicom,
under the amended Share Option Scheme in the following
terms:
|
|
|
(i)
|
the
exercise price per Unicom Option is HK$6.20;
and
|
|
|
(ii)
|
the
vesting dates and exercisable periods of the Unicom Options are as
follows:
|
|
Vesting
dates
|
Exercisable
periods
|
Portions
|
|
21
December 2005
|
21
December 2005 to 20 December 2010
|
40%
|
|
21
December 2006
|
21
December 2006 to 20 December 2010
|
30%
|
|
21
December 2007
|
21
December 2007 to 20 December 2010
|
30%
|
|
|
(g)
|
Pursuant
to the resolution passed by the Unicom Board and the Independent
Non-Executive Directors of Unicom dated 15 February 2006, a total of
167,466,000 Unicom Options were granted to eligible individuals (including
directors and middle to senior management of the Unicom Group) under the
amended Share Option Scheme in the following
terms:
|
|
|
(i)
|
this
grant comprises basic and conditional portions. The criterion for the
exercise of the conditional portion of Unicom Options are based on the
achievement of revenue and profit targets of the 2006 budget of the Unicom
Group and respective provincial branches. Under this scheme, out of the
total of 167,466,000 Unicom Options granted, 37,762,000 Unicom Options
were granted with performance
conditions;
|
|
|
(ii)
|
an
aggregate of 2,840,000 Unicom Options were granted to the then executive
directors of Unicom;
|
|
|
(iii)
|
the
exercise price per Unicom Option is HK$6.35;
and
|
|
|
(iv)
|
the
vesting dates and exercisable periods of the Unicom Options are as
follows:
|
|
Vesting
dates
|
Exercisable
periods
|
Portions
|
|
15
February 2008
|
15
February 2008 to 14 February 2012
|
50%
|
|
15
February 2009
|
15
February 2009 to 14 February 2012
|
50%
|
The
Unicom Group recognised share-based employee compensation costs based on the
estimated fair value of Unicom Options at the grant date by using the
Black-Scholes valuation model. Because the Black-Scholes valuation model
requires the input of subjective assumptions, including the volatility of share
price, change in subjective input assumptions can materially affect the fair
value estimate. Accordingly, the fair value of Unicom Options granted under the
above scheme in 2006 was HK$2.10 per Unicom Option. The significant assumptions
used was the closing price of HK$6.35 at the grant date, exercise price of
HK$6.35 per Unicom Share, volatility of 39%, expected life of share options of 5
years, expected dividend yield of 2% and annual risk-free interest rate of 4%.
The volatility measured at the standard deviation of expected share price
returns is based on statistical analysis of daily share prices over the last 5
years.
For
the year ended 31 December 2007, employee share-based compensation costs
amortised over the vesting periods of the share options amounted to
approximately RMB157 million (2006: approximately RMB146 million).
-
II-51 -
(h) Details
of Unicom Options exercised during 2007 and 2006 are as follows:
For
the year ended 31 December 2007:
|
Grant
date
|
Exercise
price
|
Weighted
average closing price per Unicom Share at respective days immediately
before days of exercise of Unicom Options
|
Proceeds
received
|
Number
of Unicom Shares
involved
|
|
HK$
|
HK$
|
HK$
|
||
|
22
June 2000
|
15.42
|
17.56
|
34,657,992
|
2,247,600
|
|
30
June 2001
|
15.42
|
17.62
|
8,450,160
|
548,000
|
|
10
July 2002
|
6.18
|
12.96
|
49,793,496
|
8,057,200
|
|
21
May 2003
|
4.30
|
12.95
|
60,057,240
|
13,966,800
|
|
20
July 2004
|
5.92
|
13.77
|
170,117,120
|
28,736,000
|
|
－－－－－
|
－－－－－
|
|||
|
323,076,008
|
53,555,600
|
|||
|
===========
|
==========
|
For
the year ended 31 December 2006:
|
Grant
date
|
Exercise
price
|
Weighted
average closing price per Unicom Share at respective days immediately
before days of exercise of Unicom Options
|
Proceeds
received
|
Number
of Unicom Shares involved
|
|
HK$
|
HK$
|
HK$
|
||
|
10
July 2002
|
6.18
|
8.82
|
81,180,480
|
13,136,000
|
|
21
May 2003
|
4.30
|
8.35
|
282,742,200
|
65,754,000
|
|
30
May 2003
|
4.66
|
8.51
|
986,860
|
212,000
|
|
20
July 2004
|
5.92
|
8.80
|
163,522,240
|
27,622,000
|
|
－－－－－
|
－－－－－
|
|||
|
528,431,780
|
106,724,000
|
|||
|
===========
|
===========
|
30. EARNINGS
PER UNICOM SHARE
Earnings
per Unicom Share and Unicom ADS:
Basic
earnings per Unicom Share for the years ended 31 December 2007 and 2006 were
computed by dividing the profit attributable to equity holders by the weighted
average number of Unicom Shares outstanding during the years.
Diluted
earnings per Unicom Share for the years ended 31 December 2007 and 2006 were
computed by dividing the profit attributable to equity holders by the weighted
average number of Unicom Shares outstanding during the years, after adjusting
for the effects of the dilutive potential Unicom Shares. All potential Unicom
Shares arose from (i) Unicom Options granted under the amended Pre-Global
Offering Share Option Scheme; (ii) Unicom Options granted under the amended
Share Option Scheme and (iii) the Convertible Bonds. The potential Unicom Shares
which are not dilutive mainly arose from Unicom Options granted under the
amended Pre-Global Offering Share Option Scheme and the Convertible Bonds and
are excluded from the weighted average number of Unicom Shares for the purpose
of computation of diluted earnings per Unicom Share.
|
2007
|
2006 (As
restated)
|
|||||
|
Profit
attributable to equity holders
|
Unicom
Shares In thousands
|
Per Unicom Share amount
|
Profit
attributable to equity holders
|
Unicom
Shares In thousands
|
Per Unicom Share
Amount
|
|
|
RMB’000
|
RMB
|
RMB’000
|
RMB
|
|||
|
Basic
earnings
|
9,299,784
|
13,036,566
|
0.713
|
3,800,920
|
12,599,018
|
0.302
|
|
=========
|
=========
|
|||||
|
Effect
of conversion of Unicom Options
|
—
|
124,523
|
—
|
50,288
|
||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Diluted
earnings
|
9,299,784
|
13,161,089
|
0.707
|
3,800,920
|
12,649,306
|
0.300
|
|
==========
|
==========
|
=========
|
==========
|
==========
|
=========
|
|
Basic
and diluted earnings per Unicom ADS have been computed by multiplying the
earnings per Unicom Share by 10, which is the number of Unicom Shares
represented by each Unicom ADS.
-
II-52 -
To
enable an investor to better understand the Unicom Group’s results, below is a
table reconciling earnings per Unicom Share to adjusted earnings per Unicom
Share, excluding the realised/unrealised loss on changes in fair value of
derivative component of Convertible Bonds and other gains from tax refund on
reinvestment in a subsidiary. These adjusting items are not considered to be
indicators of the Unicom Group’s operating performance.
-
II-53 -
|
2006
|
||
|
2007
|
(As
restated)
|
|
|
Profit
attributable to equity holders of Unicom
|
9,299,784
|
3,800,920
|
|
Adjustments
for:
|
||
|
Realised/unrealised
loss on changes in fair value of derivative component of Convertible
Bonds
|
568,860
|
2,396,592
|
|
Other
gains from tax refund on reinvestment in a subsidiary
|
(2,780,682)
|
—
|
|
－－－－－
|
－－－－－
|
|
|
Adjusted
profit attributable to equity holders excluding the
realised/ unrealised loss on changes in fair value of
derivative component of Convertible Bonds and other gains from tax refund
on reinvestment in a subsidiary
|
7,087,962
|
6,197,512
|
|
==========
|
===========
|
|
|
Adjusted
basic earnings per Unicom Share excluding the realised/unrealised loss on
changes in fair value of derivative component of Convertible Bonds and
other gains from tax refund on reinvestment in a subsidiary
(RMB)
|
0.544
|
0.492
|
|
===========
|
==========
|
|
|
Adjusted
diluted earnings per Unicom Share excluding the realised/unrealised loss
on changes in fair value of derivative component of Convertible Bonds and
other gains from tax refund on reinvestment in a subsidiary
(RMB)
|
0.539
|
0.490
|
|
===========
|
==========
|
31. DIVIDENDS
At
the annual general meeting held on 11 May 2007, the Unicom Shareholders approved
the payment of a final dividend of RMB0.18 per Unicom Share for the year ended
31 December 2006 totaling approximately RMB2,285 million, which has been
reflected as an appropriation of retained profits during the year ended 31
December 2007. As at 31 December 2007, such dividends have been fully paid by
Unicom.
At
a meeting held on 27 March 2008, the Unicom Board proposed the payment of a
final dividend of RMB0.20 per Unicom Share to the Unicom Shareholders for the
year ended 31 December 2007 totaling approximately RMB2,727 million. This
proposed dividend has not been reflected as a dividend payable in the financial
statements as at 31 December 2007, but will be reflected as an appropriation of
retained profits in the financial statements for the year ending 31 December
2008.
|
2007
|
2006
|
|
|
Proposed
final dividend of RMB0.20 (2006: RMB0.18) per Unicom Share
|
2,726,858
|
2,282,578
|
|
==========
|
==========
|
32. FAIR
VALUE OF FINANCIAL INSTRUMENTS
Financial
assets of the Unicom Group mainly include cash and cash equivalents, short-term
bank deposits, accounts receivable, amounts due from related parties and
Domestic Carriers. Financial liabilities of the Unicom Group mainly include
payables and accrued liabilities, bank loans, convertible bonds, short-term
bonds, lease payables and amounts due to Unicom Parent, related parties and
Domestic Carriers.
Cash
and cash equivalents and short-term bank deposits denominated in foreign
currencies, as summarised below, have been translated to RMB at the applicable
rates quoted by the People’s Bank of China as at 31 December 2007 and
2006.
|
The
Unicom Group
|
||||||
|
2007
|
2006
|
|||||
|
Original
currency
|
Exchange
rate
|
RMB
equivalent
|
Original
currency
|
Exchange
rate
|
RMB
equivalent
|
|
|
’000
|
’000
|
’000
|
’000
|
|||
|
Cash
and cash equivalents:
|
||||||
|
—
denominated in HK dollars
|
394,439
|
0.94
|
369,345
|
651,551
|
1.00
|
654,613
|
|
—
denominated in US dollars
|
41,179
|
7.30
|
300,797
|
478,937
|
7.81
|
3,735,659
|
|
—
denominated in MOP
|
64
|
0.91
|
58
|
—
|
0.98
|
—
|
|
—
denominated in EURO
|
2,603
|
10.67
|
27,767
|
1,700
|
10.27
|
17,457
|
|
－－－－－
|
－－－－－
|
|||||
|
Sub-total
|
697,967
|
4,407,729
|
||||
|
－－－－－
|
－－－－－
|
|||||
-
II-54 -
|
Short-term
bank deposits:
|
||||||
|
—
denominated in HK dollars
|
70,884
|
0.94
|
66,375
|
13,000
|
1.00
|
13,060
|
|
—
denominated in US dollars
|
77,933
|
7.30
|
569,270
|
22,333
|
7.81
|
174,389
|
|
－－－－－
|
－－－－－
|
|||||
|
Sub-total
|
635,645
|
187,449
|
||||
|
－－－－－
|
－－－－－
|
|||||
|
Total
|
1,333,612
|
4,595,178
|
||||
|
==========
|
==========
|
|
Unicom
|
||||||
|
2007
|
2006
|
|||||
|
Original
currency
|
Exchange
rate
|
RMB
equivalent
|
Original
currency
|
Exchange
rate
|
RMB
equivalent
|
|
|
’000
|
’000
|
’000
|
’000
|
|||
|
Cash
and cash equivalents:
|
||||||
|
—
denominated in HK dollars
|
354,867
|
0.94
|
332,290
|
624,847
|
1.00
|
627,765
|
|
—
denominated in US dollars
|
22,174
|
7.30
|
161,970
|
37,424
|
7.81
|
292,236
|
|
－－－－－
|
－－－－－
|
|||||
|
Sub-total
|
494,260
|
920,001
|
||||
|
－－－－－
|
－－－－－
|
|||||
|
Short-term
bank deposits:
|
||||||
|
—
denominated in HK dollars
|
70,884
|
0.94
|
66,375
|
13,000
|
1.00
|
13,060
|
|
—
denominated in US dollars
|
77,933
|
7.30
|
569,270
|
22,333
|
7.81
|
174,389
|
|
－－－－－
|
－－－－－
|
|||||
|
Sub-total
|
635,645
|
187,449
|
||||
|
－－－－－
|
－－－－－
|
|||||
|
Total
|
1,129,905
|
1,107,450
|
||||
|
==========
|
==========
|
|||||
The
Unicom Group did not have and does not believe it will have any difficulties in
exchanging its foreign currency cash into RMB at the exchange rates quoted by
the People’s Bank of China. The carrying amounts of the Unicom Group’s cash and
cash equivalents, short-term bank deposits, other current financial assets and
liabilities approximated their fair values as at 31 December 2007 and 2006 due
to the nature or short maturity of those instruments.
The
carrying amounts of receivables and payables which are all subject to normal
trade credit terms approximated their fair values as at balance sheet
date.
The
carrying amounts of long-term bank loans approximated their fair values as at
balance sheet date based on prevailing market borrowing rates available for
comparable bank loans with similar terms and maturities.
33. RELATED
PARTY TRANSACTIONS — Unicom GROUP
Unicom
Parent is a state-owned enterprise directly controlled by the PRC government.
The PRC government is Unicom’s ultimate controlling party. State-owned
enterprises and their subsidiaries, in addition to Unicom Parent, directly or
indirectly controlled by the PRC government are also considered to be related
parties of the Unicom Group. Neither Unicom Parent nor the PRC government
publishes financial statements available for public use.
The
PRC government also controls a significant portion of the productive assets and
entities in the PRC. The Unicom Group provides telecommunications services as
part of its retail transactions, thus, is likely to have extensive transactions
with the employees of other state-controlled entities, including their key
management personnel and their close family members. These transactions are
carried out on commercial terms that are consistently applied to all
customers.
Management
considers other state-owned enterprises that have other material transactions
with the Unicom Group include other telecommunications service operators,
equipment vendors, construction vendors, and state-owned banks in the PRC.
Management believes that meaningful information relative to related party
transactions has been adequately disclosed below.
The
Unicom Group’s telecommunications networks depend, in large part, on
interconnection with the network and on transmission lines leased from other
Domestic Carriers.
-
II-55 -
33.1 Unicom
Parent and its subsidiaries
The
table set forth below summarises the names of significant related parties
(excluding Domestic Carriers and other major state-owned enterprises which are
summarised in Note 33.2 and 33.3 respectively) and the nature of relationship
with the Unicom as at 31 December 2007:
|
Name
of related parties
|
Nature
of relationship with Unicom
|
|
China
United Telecommunications Corporation (“Unicom Parent”)
|
Ultimate
holding company
|
|
Unicom
NewSpace Corporation Limited (“Unicom
NewSpace”)
|
A
subsidiary of Unicom Parent
|
|
Unicom
Xingye Science and Technology Trade Company Limited
(”Unicom
Xingye”)
|
A
subsidiary of Unicom Parent
|
|
Unicom
Import and Export Company Limited (“Unicom I/E
Co”)
|
A
subsidiary of Unicom Parent
|
|
Unicom
New Horizon Mobile Telecommunications Company Limited (“Unicom New
Horizon”)
|
A
subsidiary of Unicom Parent
|
|
Unicom
New Guoxin Telecommunications Corporation Limited (“New
Guoxin”)
|
A
subsidiary of Unicom Parent
|
|
China
Information Technology Designing & Consulting Institute
(“CITDCI”)
|
A
subsidiary of Unicom Parent
|
|
UNISK
(Beijing) Information Technology Corporation Limited
(“UNISK”)
|
A
joint venture company of Unicom
Parent
|
(a) Transactions with Unicom Parent and
its subsidiaries
The
following is a summary of significant recurring transactions carried out by the
Unicom Group with Unicom Parent and its subsidiaries. In the Unicom Directors’
opinion, these transactions were carried out in the ordinary course of
business.
|
2006
|
|||
|
Note
|
2007
|
(As
restated)
|
|
|
Transactions
with Unicom Parent and its subsidiaries:
|
|||
|
Interconnection
revenues
|
(ii),
(iv)
|
37,257
|
60,744
|
|
Interconnection
charges
|
(iii),
(iv)
|
6,329
|
15,701
|
|
Rental
income for premises and facilities
|
(i),
(v)
|
17,017
|
16,257
|
|
Charge
for operator-based subscriber value-added services
by
New Guoxin
|
(i),
(vi)
|
378,462
|
374,035
|
|
Charge
for customer services by New Guoxin
|
(i),
(vii)
|
860,653
|
681,162
|
|
Agency
fee incurred for subscriber development services
by
New Guoxin
|
(i),
(viii)
|
115,610
|
58,982
|
|
CDMA
network capacity lease rental
|
(i),
(ix)
|
8,381,638
|
8,256,623
|
|
Constructed
capacity related cost of CDMA network
|
(i),
(x)
|
215,080
|
188,656
|
|
Charges
for cellular subscriber value-added service by UNISK and Unicom
NewSpace
|
(i),
(xi)
|
54,491
|
45,618
|
|
Rental
charges for premises, equipment and facilities
|
(i),
(xii)
|
30,958
|
27,931
|
|
Charges
for the international gateway services
|
(i),
(xiii)
|
15,213
|
17,143
|
|
Purchase
of telecom cards
|
(i),
(xiv)
|
697,285
|
712,098
|
|
Agency
fee incurred for procurement of telecommunications
equipment
|
(i),
(xv)
|
18,073
|
13,166
|
|
Charge
for engineering design and technical services by CITDCI
|
(i),
(xvi)
|
58,003
|
—
|
|
=========
|
=========
|
|
|
(i)
|
On
26 October 2006, CUCL entered into the new agreements “2006 Comprehensive
Services Agreement” and “2006 CDMA Lease Agreement” with Unicom Parent and
Unicom New Horizon to continue to carry out the related party
transactions. The new agreements have been approved by the minority
shareholders of Unicom on 1 December 2006, and become effective from 1
January 2007. Upon completion of Business Combination, the 2006
Comprehensive Services Agreement and 2006 CDMA Lease Agreement were
amended where necessary so that the service area of CUCL is extended to
include Guizhou province. In addition, the rights and obligations of
Guizhou branch of Unicom Parent under the framework agreement entered with
Guizhou branch of Unicom Huasheng for the procurement of CDMA mobile
handsets on 19 December 2006 were assigned to and assumed by
CUCL.
|
|
|
|
The
purchase of Guizhou Business has been accounted for using merger
accounting in accordance with AG 5. Accordingly, the transactions between
Guizhou branch of Unicom Parent and the Unicom Group were eliminated and
not disclosed as related party transactions in the consolidated financial
statements.
|
|
|
(ii)
|
Interconnection
revenues represent the amounts received or receivable from Unicom Parent
for calls from its networks to the Unicom Group’s
networks.
|
|
|
(iii)
|
Interconnection
charges are for calls made from the Unicom Group’s networks to Unicom
Parent’s networks.
|
|
|
(iv)
|
Interconnection
settlement between Unicom Parent’s network and the Unicom Group’s
network is based on standards established from time to time by the
MII.
|
-
II-56 -
|
|
(v)
|
Pursuant
to 2006 Comprehensive Services Agreement, the Unicom Group agreed to
provide premises to New Guoxin. The rental amount is based on the lower of
depreciation costs and market price for similar premises in that
locality.
|
|
|
(vi)
|
Pursuant
to 2006 Comprehensive Services Agreement, the Unicom Group shall retain
40% of the actually received revenue generated from the value-added
services provided by New Guoxin to the Unicom Group’s subscribers and
allocate 60% of such revenue to New Guoxin. The settlement should be made
among branches of the Unicom Group and New Guoxin
respectively.
|
|
|
(vii)
|
Pursuant
to 2006 Comprehensive Services Agreement, New Guoxin provides business
inquiries, tariff inquiries, account maintenance, complaints handling, and
customer interview and subscriber retention services to the Unicom Group’s
customers. The service fee payable by the Unicom Group shall be calculated
on the basis of the customer service costs plus a profit margin, which
shall not exceed 10%. The customer service costs were determined by the
actual cost per operator seat and the number of effective operator seats.
In addition, Guangdong has been added as one of the economically developed
metropolises in determining the cost per operator
seat.
|
|
|
(viii)
|
Pursuant
to 2006 Comprehensive Services Agreement, New Guoxin provides subscriber
development services to the Unicom Group through telephone or other
channels by utilising its own network, equipment and operators. The agency
fee chargeable to the Unicom Group does not exceed the average of agency
fees chargeable by any independent third party agent in the same
region.
|
|
|
(ix)
|
Pursuant
to 2006 CDMA Lease Agreement entered among CUCL, Unicom Parent and Unicom
New Horizon, Unicom New Horizon agreed to lease the capacity of CDMA
network to CUCL. Details please refer to Note
4.2(c).
|
|
|
(x)
|
Pursuant
to 2006 CDMA Lease Agreement, the constructed capacity related costs in
connection with the CDMA network capacity used by the Unicom Group,
including the rentals for the exchange centers and the base stations,
water and electricity charges, heating charges and fuel charges for the
relevant equipment etc., as well as the maintenance costs of a non-capital
nature, are charged to the Unicom Group. The proportion of the constructed
capacity related costs to be borne by the Unicom Group shall be calculated
on a monthly basis by reference to the actual number of cumulative CDMA
subscribers of the Unicom Group at the end of the month prior to the
occurrence of the costs divided by 90%, as a percentage of the total
capacity available on the CDMA
network.
|
|
|
(xi)
|
Pursuant
to 2006 Comprehensive Services Agreement, UNISK and Unicom NewSpace agreed
to provide the cellular subscribers of CUCL various types of value-added
services through its cellular communication network and data platform. The
Unicom Group should retain a portion of the revenue generated from the
value-added service provided to the Unicom Group’s subscribers (and
actually received by the Unicom Group) and allocate a portion of such fees
to UNISK and Unicom NewSpace for settlement, on the condition that such
proportion allocated to UNISK and Unicom NewSpace should not exceed the
average proportion for independent value-added telecommunications content
providers who provide value-added telecommunications content to the Unicom
Group in the same region. The percentage of revenue to be allocated to
UNISK and Unicom NewSpace by the Unicom Group varies depending on the
types of value-added service provided to the Unicom
Group.
|
|
|
(xii)
|
Pursuant
to 2006 Comprehensive Services Agreement, CUCL and Unicom Parent agreed to
mutually lease premises, equipment and facilities from each other. Rentals
are based on the lower of depreciation costs and market
rates.
|
|
|
(xiii)
|
Pursuant
to 2006 Comprehensive Services Agreement, charges for international
gateway services represent the amounts paid or payable to Unicom Parent
for international gateway services provided for the Unicom Group’s
international long distance networks. The charge for this service is based
on the cost of operation and maintenance of the international gateway
facilities incurred by Unicom Parent, including depreciation, together
with a margin of 10% over cost.
|
|
|
(xiv)
|
Pursuant
to 2006 Comprehensive Services Agreement, the Unicom Group agreed to
purchase telephone cards from Unicom Parent (to be imported by Unicom
Xingye) at cost plus a margin to be agreed from time to time, but not to
exceed 20%, and subject to appropriate volume discounts. Prices and
volumes are subject to review by the parties on an annual
basis.
|
|
|
(xv)
|
Pursuant
to 2006 Comprehensive Services Agreement, Unicom I/E Co. agreed to provide
equipment procurement services to the Unicom Group. Unicom I/E Co. charges
the Unicom Group 0.55% (for contract up to an amount of US$30 million
(inclusive)) and 0.35% (for contract with an amount of more than US$30
million) of the value of imported equipment, and 0.25% (for contract up to
an amount of RMB200 million (inclusive)) and 0.l5% (for contract with an
amount of more than RMB200 million) of the value of domestic equipment for
such services.
|
|
|
(xvi)
|
Pursuant
to 2006 Comprehensive Services Agreement, CITDCI agreed to provide
engineering design and technical services to the Unicom Group based on its
demands and requirements. The service fee standards for the engineering
design and technical services are determined based on standards
promulgated by the relevant government authorities. In addition, such
prices should not be higher than those adopted by an independent third
party providing similar services in the same
industry.
|
|
|
(xvii)
|
Unicom
Parent is the registered proprietor of the “Unicom” trademark in English
and the trademark bearing the “Unicom” logo, which are registered at the
PRC State Trademark Bureau. Pursuant to an exclusive PRC trademark licence
agreement entered into between Unicom Parent and CUCL, CUCL and its
affiliates are granted the right to use these trademarks on a royalty free
basis for an initial period of 5 years, renewable at CUCL’s
option.
|
(b) Purchase of assets and business of
Guizhou branch of Unicom Parent
Pursuant
to an asset transfer agreement entered between CUCL and Unicom Parent on 16
November 2007, CUCL agreed to purchase the Guizhou Business at a cash
consideration of RMB880 million. The consideration for the Business Combination
was determined with reference to the results of a business valuation using
methods commonly used in capital market transactions in the telecommunications
industry and the negotiations between the parties. In addition, pursuant to the
asset transfer agreement, the profit or loss of the Guizhou Business for the
period from 31 December 2006 to the effective date of the Business Combination
was transferred to Unicom Parent.
-
II-57 -
The
aforementioned Business Combination became effective on 31 December 2007, when
all the conditions to the Business Combination were satisfied and cash
consideration was settled by CUCL. Please refer to Note 1 for
details.
(c) Amounts due from and to related
parties/Unicom Parent
Amounts
due from and to related parties or Unicom Parent and its subsidiaries are
unsecured, interest free, repayable on demand/on contract terms and arise in the
ordinary course of business in respect of transactions with Unicom Parent or its
subsidiaries as described in (a) above.
(d) Amount due to/(from) Unicom
Parent
|
The
Unicom Group
|
||
|
2006
|
||
|
2007
|
(As
restated)
|
|
|
Due
to Unicom Parent, beginning of year
|
1,088,297
|
779,414
|
|
Interconnection
revenues
|
(37,257)
|
(60,744)
|
|
Interconnection
charges
|
6,329
|
15,701
|
|
Revenue
for leasing of premises and facilities
|
(17,017)
|
(16,257)
|
|
Rental
charges for premises, equipment and facilities
|
30,958
|
27,931
|
|
Charges
for the international gateway services
|
15,213
|
17,143
|
|
Transfer
of profit of Guizhou Business to Unicom Parent
under
terms of the Business Combination
|
101,020
|
—
|
|
Net
(payment)/receipt during the year
|
(366,844)
|
325,109
|
|
－－－－
|
－－－－
|
|
|
Due
to Unicom Parent, end of year
|
820,699
|
1,088,297
|
|
========
|
=========
|
|
-
II-58 -
33.2 Domestic Carriers
(a) Transactions with Domestic
Carriers
The
following is a summary of significant transactions with Domestic Carriers in the
ordinary course of business:
|
The
Unicom Group
|
|||
|
Note
|
2007
|
2006
(As
restated)
|
|
|
Interconnection
revenue
|
(i)
|
6,985,782
|
5,557,246
|
|
Interconnection
charges
|
(i)
|
10,394,740
|
9,237,341
|
|
Leased
line revenue
|
(ii)
|
34,756
|
54,912
|
|
Leased
line charges
|
(ii)
|
403,863
|
329,983
|
|
=========
|
=========
|
||
|
|
(i)
|
The
interconnection revenue and charges mainly represent the amounts due from
or to Domestic Carriers for telephone calls made between the Unicom
Group’s networks and the network of Domestic Carriers. The interconnection
settlements are calculated in accordance with interconnection agreements
reached between the branches of the Unicom Group and Domestic Carriers on
a provincial basis. The terms of these agreements are set in accordance
with the standard settlement arrangement stipulated by the
MII.
|
|
|
(ii)
|
Leased
line charges are paid or payable to Domestic Carriers by the Unicom Group
for the provision of transmission lines. At the same time, the Unicom
Group leases transmission lines to Domestic Carriers in return for leased
line rental income. The charges are calculated at a fixed charge per line,
depending on the number of lines being used by the Unicom Group and
Domestic Carriers.
|
(b) Amounts due from and to Domestic
Carriers
|
The
Unicom Group
|
||
|
2007
|
2006
(As
restated)
|
|
|
Amounts
due from Domestic Carriers
|
||
|
—
Receivables for interconnection revenue and leased line
revenue
|
170,231
|
158,894
|
|
—
Less: Provision for doubtful debts
|
(20,495)
|
(20,373)
|
|
－－－－
|
－－－－－
|
|
|
149,736
|
138,521
|
|
|
=========
|
==========
|
|
|
Amounts
due to Domestic Carriers
|
||
|
—
Payables for interconnection charges and leased lines
charges
|
600,283
|
854,885
|
|
=========
|
==========
|
|
All
amounts due from and to Domestic Carriers were unsecured, interest-free and
repayable within one year.
33.3 Other major state-owned
enterprises
(a) Transactions with other major
state-owned enterprises
The
following is a summary of significant transactions with other major state-owned
enterprises in the ordinary course of business:
|
The
Unicom Group
|
||
|
2007
|
2006
(As
restated)
|
|
|
Purchase
of CDMA handsets
|
1,151,048
|
1,144,181
|
|
Construction
and installation fee
|
220,698
|
220,086
|
|
Purchase
of equipment
|
1,136,038
|
1,660,562
|
|
Line
leasing revenue
|
178,502
|
166,559
|
|
Finance
income/costs, include:
|
||
|
—
Interest income
|
172,415
|
226,788
|
|
—
Interest expense
|
10,593
|
840,698
|
|
Short-term
bank loan received
|
—
|
2,070,000
|
|
Long-term
bank loan received
|
—
|
1,315,000
|
|
Short-term
bank loan repaid
|
—
|
7,372,661
|
|
Long-term
bank loan repaid
|
115,000
|
8,853,008
|
|
=========
|
=========
|
|
(b) Amounts due from and to other major
state-owned enterprises
The
balances with other major state-owned enterprises in various line items of the
consolidated balance sheet are listed as follows:
-
II-59 -
|
The
Unicom Group
|
||
|
2007
|
2006 (As
restated)
|
|
|
Current
assets
|
||
|
Prepayment
and other current assets
|
53,418
|
288,930
|
|
Short-term
bank deposits
|
527,885
|
21,432
|
|
Cash
and cash equivalents
|
6,525,506
|
12,055,646
|
|
Non-current
liabilities
|
||
|
Long-term
bank loans
|
200,000
|
235,000
|
|
Current
liabilities
|
||
|
Payables
and accrued liabilities
|
667,749
|
666,726
|
|
Current
portion of long-term bank loans
|
—
|
80,000
|
|
==========
|
==========
|
|
34. CONTINGENCIES
AND COMMITMENTS
34.1 Capital
commitments
As
at 31 December 2007 and 2006, the Unicom Group had capital commitments, mainly
in relation to the construction of telecommunications networks, as
follows:
|
The
Unicom Group
|
||||
|
2007
|
2006
(As
restated)
|
|||
|
Land
and buildings
|
Equipment
|
Total
|
Total
|
|
|
Authorised
and contracted for
|
837,103
|
2,415,361
|
3,252,464
|
2,729,602
|
|
Authorised
but not contracted for
|
611,294
|
1,768,886
|
2,380,180
|
943,280
|
|
－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|
|
Total
|
1,448,397
|
4,184,247
|
5,632,644
|
3,672,882
|
|
==========
|
==========
|
==========
|
==========
|
|
As
at 31 December 2007, approximately RMB153 million (2006: approximately RMB203
million) of capital commitment outstanding was denominated in US dollars,
equivalent to approximately US$21 million (2006: approximately US$26
million).
As
at 31 December 2007, Unicom had capital commitments in relation to the capacity
expansion of marine cable, as follows:
|
Unicom
|
||
|
2007
|
2006
|
|
|
Authorised
and contracted for
|
—
|
—
|
|
Authorised
but not contracted for
|
18,592
|
—
|
|
－－－－－
|
－－－－－
|
|
|
18,592
|
—
|
|
|
==========
|
==========
|
|
-
II-60 -
34.2 Operating lease
commitments
As
at 31 December 2007 and 2006, the Unicom Group had total future aggregate
minimum operating lease payments under operating leases as follows:
|
The
Unicom Group
|
|||||
|
2007
|
2006
(As
restated)
|
||||
|
Land
and buildings
|
Equipment
|
CDMA
network capacity (a)
|
Total
|
Total
|
|
|
Leases
expiring:
|
|||||
|
—
not later than one year
|
942,544
|
31,284
|
7,543,474
|
8,517,302
|
8,503,568
|
|
— later
than one year and not later than
five years
|
2,071,864
|
80,979
|
—
|
2,152,843
|
1,976,475
|
|
— later
than five years
|
1,690,041
|
50,303
|
—
|
1,740,344
|
1,107,791
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|
|
Total
|
4,704,449
|
162,566
|
7,543,474
|
12,410,489
|
11,587,834
|
|
==========
|
==========
|
==========
|
==========
|
==========
|
|
|
|
(a)
|
In
relation to the above CDMA network capacity commitment, it is estimated
based on the Minimum Lease Fee pursuant to 2006 CDMA Lease Agreement (see
Note 4.2(c) for details).
|
As
at 31 December 2007 and 2006, Unicom had total future aggregate minimum
operating lease payments under operating leases as follows:
|
Unicom
|
||
|
2007
|
2006
|
|
|
Office
premise lease expiring:
|
||
|
—
not later than one year
|
10,225
|
10,971
|
|
— later
than one year and not later than five years
|
4,261
|
15,542
|
|
－－－－－
|
－－－－－
|
|
|
Total
|
14,486
|
26,513
|
|
==========
|
==========
|
|
34.3 Commitment to purchase CDMA
handsets
As
at 31 December 2007, the Unicom Group committed to purchase CDMA handsets from
third party vendors amounting to approximately RMB2,435 million (2006:
approximately RMB1,237 million).
35. EVENTS
AFTER BALANCE SHEET
After
the balance sheet date, the Unicom Board proposed a final dividend for 2007. For
details, see Note 31.
36. COMPARATIVE
FIGURES
As
stated in Note 2.1, comparative figures have been restated to reflect the
effects of Business Combination under common control, which is accounted for
using merger accounting in accordance with AG 5.
37. APPROVAL
OF FINANCIAL STATEMENTS
The
financial statements were approved by the Unicom Board on 27 March
2008.
-
II-61 -
3. UNAUDITED
CONSOLIDATED RESULTS FOR THE THREE MONTHS ENDED 31 MARCH 2008
Subject
to the adoption of the definitions in this document, the following financial
information is extracted from the unaudited consolidated results of the Unicom
Group for the three months ended 31 March 2008, which were announced on 24 April
2008.
Unaudited
Condensed Consolidated Balance Sheet
As
at 31 March 2008
(All
amounts in RMB thousands)
|
Unaudited
|
Audited
|
|
|
31
March 2008
|
31
December 2007
|
|
|
ASSETS
|
||
|
Non-current
assets
|
||
|
Property,
plant and equipment
|
113,210,439
|
116,162,165
|
|
Goodwill
|
3,143,983
|
3,143,983
|
|
Other
assets
|
12,891,721
|
12,855,199
|
|
Deferred
income tax assets
|
640,312
|
426,902
|
|
－－－－
|
－－－－
|
|
|
129,886,455
|
132,588,249
|
|
|
－－－－
|
－－－－
|
|
|
Current
assets
|
||
|
Inventories
|
2,237,739
|
2,528,364
|
|
Accounts
receivable, net
|
3,340,288
|
3,211,154
|
|
Prepayments
and other current assets
|
2,966,882
|
3,516,279
|
|
Amounts
due from related parties
|
86,174
|
109,096
|
|
Amounts
due from Domestic Carriers
|
166,185
|
149,736
|
|
Short-term
bank deposits
|
609,912
|
644,016
|
|
Cash
and cash equivalents
|
9,847,305
|
6,675,476
|
|
－－－－
|
－－－－
|
|
|
19,254,485
|
16,834,121
|
|
|
－－－－
|
－－－－
|
|
|
Total
assets
|
149,140,940
|
149,422,370
|
|
=========
|
=========
|
|
|
EQUITY
|
||
|
Capital
and reserves attributable to Unicom’s equity holders
|
||
|
Share
capital
|
1,438,786
|
1,436,908
|
|
Share
premium
|
64,497,837
|
64,320,066
|
|
Reserves
|
3,965,250
|
3,968,515
|
|
Retained
profits
|
||
|
—
Proposed 2007 final dividend
|
2,726,858
|
2,726,858
|
|
—
Others
|
26,783,083
|
24,760,833
|
|
－－－－
|
－－－－
|
|
|
99,411,814
|
97,213,180
|
|
|
Minority interest in
equity
|
4,230
|
3,914
|
|
－－－－
|
－－－－
|
|
|
Total
equity
|
99,416,044
|
97,217,094
|
|
－－－－
|
－－－－
|
-
II-62 -
|
Unaudited
|
Audited
|
|
|
LIABILITIES
|
31
March 2008
|
31
December 2007
|
|
Non-current
liabilities
|
||
|
Long-term
bank loans
|
1,604,367
|
1,660,921
|
|
Obligations
under finance leases
|
3,175
|
3,882
|
|
Deferred
income tax liabilities
|
5,721
|
5,864
|
|
Deferred
revenue
|
1,231,032
|
1,303,015
|
|
－－－－－
|
－－－－－
|
|
|
2,844,295
|
2,973,682
|
|
|
－－－－－
|
－－－－－
|
|
|
Current
liabilities
|
||
|
Payables
and accrued liabilities
|
29,873,856
|
32,031,307
|
|
Taxes
payable
|
1,166,963
|
1,239,512
|
|
Amounts
due to Unicom Parent
|
98,384
|
820,699
|
|
Amounts
due to related parties
|
879,114
|
769,558
|
|
Amounts
due to Domestic Carriers
|
688,816
|
600,283
|
|
Current
portion of long-term bank loans
|
2,106,550
|
2,191,382
|
|
Current
portion of obligations under finance leases
|
971
|
1,448
|
|
Advances
from customers
|
12,065,947
|
11,577,405
|
|
－－－－－
|
－－－－－－
|
|
|
46,880,601
|
49,231,594
|
|
|
－－－－－
|
－－－－－
|
|
|
Total
liabilities
|
49,724,896
|
52,205,276
|
|
－－－－－
|
－－－－－
|
|
|
Total equity and
liabilities
|
149,140,940
|
149,422,370
|
|
==========
|
==========
|
|
|
Net current
liabilities
|
(27,626,116)
|
(32,397,473)
|
|
==========
|
==========
|
|
|
Total assets less current
liabilities
|
102,260,339
|
100,190,776
|
|
==========
|
==========
|
-
II-63 -
Unaudited
Condensed Consolidated Income Statement
For
the three months ended 31 March 2008
(All
amounts in RMB thousands, except per share data)
|
Unaudited
Three
months ended
31
March
|
|||
|
2007
|
|||
|
Note
|
2008
|
As
restated (Note 2)
|
|
|
Revenue
(Turnover)
|
|||
|
GSM
Business
|
16,262,428
|
15,252,211
|
|
|
CDMA
Business
|
6,781,221
|
6,657,968
|
|
|
Data
and Internet Business
|
685,631
|
622,211
|
|
|
Long
Distance Business
|
412,435
|
328,321
|
|
|
－－－－－
|
－－－－－
|
||
|
Total
service revenue
|
24,141,715
|
22,860,711
|
|
|
Sales
of telecommunications products
|
1,347,778
|
1,264,894
|
|
|
－－－－－
|
－－－－－
|
||
|
Total
revenue
|
25,489,493
|
24,125,605
|
|
|
Leased
lines and network capacities
|
(2,273,415)
|
(2,207,727)
|
|
|
Interconnection
charges
|
(2,861,363)
|
(2,493,307)
|
|
|
Depreciation
and amortisation
|
(5,741,691)
|
(5,707,856)
|
|
|
Employee
benefit expenses
|
(1,830,708)
|
(1,682,574)
|
|
|
Selling
and marketing
|
(5,085,751)
|
(4,526,826)
|
|
|
General,
administrative and other expenses
|
(3,750,784)
|
(3,420,605)
|
|
|
Cost
of telecommunications products sold
|
(1,253,215)
|
(1,400,198)
|
|
|
Financial
gains/(costs)
|
57,146
|
(61,052)
|
|
|
Interest
income
|
30,239
|
61,624
|
|
|
Unrealised
gain on changes in fair value of derivative
component
of convertible bonds
|
—
|
146,432
|
|
|
Other
gains — net
|
11,881
|
14,075
|
|
|
－－－－－
|
－－－－－
|
||
|
Profit before income
tax
|
2,791,832
|
2,847,591
|
|
|
Income
tax expenses
|
3
|
(769,266)
|
(856,699)
|
|
－－－－－
|
－－－－－
|
||
|
Profit for the
period
|
2,022,566
|
1,990,892
|
|
|
==========
|
==========
|
||
|
Attributable
to:
|
|||
|
Equity
holders of Unicom
|
2,022,250
|
1,990,788
|
|
|
Minority
interest
|
316
|
104
|
|
|
－－－－－
|
－－－－－
|
||
|
2,022,566
|
1,990,892
|
||
|
===========
|
===========
|
||
|
Basic
earnings per Unicom Share (RMB)
|
4
|
0.148
|
0.157
|
|
===========
|
===========
|
||
|
Diluted
earnings per Unicom Share (RMB)
|
4
|
0.147
|
0.134
|
|
===========
|
===========
|
||
-
II-64 -
Unaudited
Condensed Consolidated Cash Flow Statement
For
the three months ended 31 March 2008
(All
amounts in RMB thousands)
|
Unaudited
Three
months ended
31
March
|
||
|
2007
|
||
|
2008
|
As
restated (Note 2)
|
|
|
Net
cash generated from operating activities
|
7,750,348
|
8,438,477
|
|
Net
cash used in investing activities
|
(4,732,519)
|
(4,594,088)
|
|
Net
cash from/(used in) financing activities
|
154,000
|
(6,802,611)
|
|
－－－－－
|
－－－－－
|
|
|
Net increase/(decrease) in cash
and cash equivalents
|
3,171,829
|
(2,958,222)
|
|
Cash
and cash equivalents, beginning of period
|
6,675,476
|
12,243,191
|
|
－－－－－
|
－－－－－
|
|
|
Cash and cash equivalents, end
of period
|
9,847,305
|
9,284,969
|
|
==========
|
==========
|
|
|
Analysis
of the balances of cash and cash equivalents:
|
||
|
Cash
balances
|
2,892
|
3,910
|
|
Bank
balances
|
9,844,413
|
9,281,059
|
|
－－－－－
|
－－－－－
|
|
|
9,847,305
|
9,284,969
|
|
|
==========
|
==========
|
|
-
II-65 -
NOTES
(All
amounts in RMB thousands unless otherwise stated)
1. GENERAL
INFORMATION
Unicom
was incorporated as a limited liability company in Hong Kong on 8 February 2000.
The principal activities of Unicom are investment holding and Unicom’s
subsidiaries are principally engaged in the provision of GSM and CDMA cellular,
long distance, data and Internet services in the PRC. The GSM and CDMA
businesses are hereinafter collectively referred to as the “Cellular Business”.
The address of Unicom’s registered office is 75th Floor, The Center, 99 Queen’s
Road Central, Hong Kong.
Purchase
of assets and business of Guizhou branch of Unicom Parent (hereinafter referred
to as “Business Combination”)
Pursuant
to an asset transfer agreement entered between CUCL and Unicom Parent on 16
November 2007, CUCL agreed to purchase the GSM cellular telecommunication assets
and business, and the CDMA cellular telecommunication business (operated through
a leasing of CDMA network capacity from Unicom New Horizon of Guizhou branch of
Unicom Parent (collectively known as “Guizhou Business”) at a cash consideration
of RMB880 million. The consideration for the Business Combination was determined
with reference to the results of a business valuation using methods commonly
used in capital market transactions in the telecommunications industry and by
the negotiations between the parties.
The
aforementioned Business Combination became effective on 31 December 2007, when
all the conditions to the Business Combination were satisfied and cash
consideration was settled by CUCL. Upon the completion of the Business
Combination, the cellular telecommunications business operations of CUCL have
been expanded to all provinces, cities and autonomous regions in the PRC. Unicom
has adopted merger accounting to account for this business combination of
entities and businesses under the common control of Unicom Parent. Please refer
to Note 2 for details.
2. BASIS
OF PREPARATION
Since
the Unicom Group and Guizhou Business were both under the common control of
Unicom Parent prior to the Business Combination, the purchase of Guizhou
Business is considered as a business combination of entities and businesses
under common control, which has been accounted for using merger accounting in
accordance with the Accounting Guideline 5 “Merger Accounting For Common Control
Combinations” (“AG 5”) issued by the Hong Kong Institute of Certified Public
Accountants (“HKICPA”) in November 2005. The acquired assets and liabilities of
Guizhou Business are stated at historical costs, and are included in the
consolidated financial statements from the beginning of the earliest period
presented as if the Guizhou Business had always been part of the Unicom Group.
As a result, the 2007 comparative figures in the unaudited condensed
consolidated financial information have been restated accordingly.
As
at 31 March 2008, the current liabilities of the Unicom Group had exceeded the
current assets by approximately RMB27.6 billion (31 December 2007: approximately
RMB32.4 billion). Taking into account of available sources of financing and
continuous net cash inflows from operating activities, the Unicom Group has
sufficient funds to meet its working capital requirements and debt obligations.
As a result, the unaudited condensed consolidated financial information of the
Unicom Group for the three months ended 31 March 2008 have been prepared under
the going concern basis.
The
unaudited condensed consolidated financial information has been prepared in
accordance with HKFRS issued by the HKICPA. The accounting policies and
estimates adopted in the preparation of the unaudited condensed consolidated
financial information for the three months ended 31 March 2008 are consistent
with those used in preparing the annual financial statements for the year ended
31 December 2007.
3. TAXATION
Pursuant
to the new PRC enterprise income tax law passed by the Tenth National People’s
Congress on 16 March 2007, the new enterprise income tax rates for domestic and
foreign enterprises are unified at 25% (for the three months ended 31 March
2007: 33%) and effective from 1 January 2008. However, for entities operating in
special economic zones that previously enjoyed preferential tax rates, the
applicable tax rate will be increased progressively to 25% over a five year
period.
4. EARNINGS
PER SHARE
Basic
earnings per Unicom Share for the three months ended 31 March 2008 and 2007 were
computed by dividing the profit attributable to equity holders by the weighted
average number of Unicom Shares outstanding during the periods.
Diluted
earnings per Unicom Share for the three months ended 31 March 2008 and 2007 were
computed by dividing the profit attributable to equity holders by the weighted
average number of Unicom Shares outstanding during the periods, after adjusting
for the effects of the dilutive potential Unicom Shares. All potential Unicom
Shares arose from (i) Unicom Options granted under the amended Pre-Global
Offering Share Option Scheme; (ii) Unicom Options granted under the amended
Share Option Scheme and (iii) the convertible bonds. For the purpose of
computation of diluted earnings per Unicom Share for the three months ended 31
March 2007, the potential Unicom Shares which are not dilutive mainly arose from
Unicom Options granted under the amended Pre-Global Offering Share Option Scheme
and are excluded from the weighted average number of Unicom Shares.
|
Unaudited
|
||||||
|
Three
months ended 31 March
|
||||||
|
2007
|
||||||
|
2008
|
(As
restated)
|
|||||
|
Profit
attributable to equity holders
|
Unicom
Shares
|
Per Unicom Share amount
|
Profit
attributable to equity holders
|
Unicom
Shares
|
Per Unicom Share amount
|
|
|
RMB’000
|
In
thousands
|
RMB
|
RMB’000
|
In
thousands
|
RMB
|
|
|
Basic
earnings
|
2,022,250
|
13,645,328
|
0.148
|
1,990,788
|
12,685,184
|
0.157
|
|
=========
|
=========
|
|||||
|
Effect
of conversion of
Unicom
Options
|
—
|
142,870
|
—
|
133,143
|
||
|
Effect
of convertible bonds
|
—
|
—
|
(152,678)
|
899,745
|
||
|
－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Diluted
earnings
|
2,022,250
|
13,788,198
|
0.147
|
1,838,110
|
13,718,072
|
0.134
|
|
=========
|
==========
|
=========
|
==========
|
==========
|
==========
|
|
-
II-66 -
To enable an investor to better
understand the Unicom Group’s results, below is a table reconciling earnings per
Unicom Share to adjusted earnings per Unicom Share, excluding the unrealised
gain on changes in fair value of derivative component of convertible bonds that
is not considered to be an indicator of the Unicom Group’s operating
performance.
|
Unaudited
Three
months ended 31 March
|
||
|
2007
|
||
|
2008
|
(As
restated)
|
|
|
Profit
attributable to equity holders of Unicom
|
2,022,250
|
1,990,788
|
|
Adjustments
for:
|
||
|
Unrealised
gain on changes in fair value of derivative component of convertible
bonds
|
—
|
(146,432)
|
|
－－－－－
|
－－－－－
|
|
|
Adjusted
profit attributable to equity holders excluding the unrealised gain on
changes in fair value of derivative component of convertible
bonds
|
2,022,250
|
1,844,356
|
|
==========
|
==========
|
|
|
Adjusted
basic earnings per Unicom Share excluding the unrealised gain on changes
in fair value of derivative component of convertible bonds
(RMB)
|
0.148
|
0.145
|
|
==========
|
==========
|
|
|
Adjusted
diluted earnings per Unicom Share excluding the unrealised gain on changes
in fair value of derivative component of convertible bonds
(RMB)
|
0.147
|
0.134
|
|
==========
|
==========
|
|
5. RELATED
PARTY TRANSACTIONS
For the
three months
ended 31 March 2008, the Unicom Group had related party transactions with Unicom
Parent and its subsidiaries of which approximately RMB9.39 million (for the
three months ended 31 March 2007: approximately RMB14.92 million) were included
in revenue and approximately RMB2.33 billion (for the three months ended 31
March 2007: approximately RMB2.26 billion) were included in costs and
expenses.
The purchase of Guizhou
Business has been accounted for using merger accounting in accordance with AG 5.
Accordingly, the transactions between Guizhou branch of Unicom Parent and the
Unicom Group were eliminated and not considered as related party transactions in
the unaudited condensed consolidated financial information.
6. COMPARATIVE
FIGURES
As stated
in Note 2, comparative figures have been restated to reflect the effects of
Business Combination under common control, which is accounted for using merger
accounting in accordance with AG 5.
4. MANAGEMENT
DISCUSSION AND ANALYSIS
Subject to the
adoption of the definitions in this document, the following management
discussion and analysis of the Unicom Group’s financial condition and results of
operations is extracted from the annual reports of Unicom for each of the years
ended 31 December 2005, 2006 and 2007, except that the figures for each of the
years ended 31 December 2004, 2005 and 2006 have been updated to reflect the
restated financial information for each of those years as a result of the
acquisition by CUCL of the Guizhou Business from Unicom Parent, effective on 31
December 2007.
For
the years ended 31 December 2006 and 2007, in order to enable an investor to
better understand the Unicom Group’s results and management analysis, the
management of the Unicom Group has also provided additional analysis on the
effects of excluding realised or unrealised loss on changes in the fair value of
the derivative component of convertible bonds and other gains from tax refund on
reinvestment in a subsidiary (which are not considered to be indicators of the
Unicom Group’s operating performance) on the result of operations.
FOR
THE YEAR ENDED 31 DECEMBER 2007
In
2007, the Unicom Group’s business continued to grow effectively as it further
strengthened the quality of respective business. The Unicom Group’s revenue
maintained steady growth and reached RMB99.54 billion for 2007,
up by 4.4% from 2006. The Unicom Group’s profitability further improved and its
profit before income tax amounted to RMB12.96 billion, up by 97.3% from 2006.
Profit for the year amounted to RMB9.3 billion, up by 144.7% from last
year.
-
II-67 -
I. OVERVIEW
In
2007, the Unicom Group’s business continued to grow effectively as it further
strengthened the quality of respective business. The Unicom Group’s revenue
maintained steady growth and reached RMB99.54 billion for 2007, up by 4.4% from
2006. The Unicom Group’s profitability further improved and its profit before
income tax amounted to RMB12.96 billion, up by 97.3% from 2006. Profit for the
year amounted to RMB9.3 billion, up by 144.7% from last year. Basic earnings per
Unicom Share was RMB0.713, up by 136.1% from 2006. EBITDA (Note 1) was RMB32.44
billion in 2007, up by 9.5% from 2006. Excluding the effect of realised loss on
changes in fair value of derivatives component of Convertible Bonds and other
gains from tax refund on reinvestment in a subsidiary, profit before income tax
would be RMB10.74 billion, up by 19.9% from 2006 and adjusted profit for the
year would be RMB7.09 billion, up by 14.4% from 2006, adjusted earnings per
Unicom Share would be RMB0.544 in 2007, up by 10.6% from 2006, and adjusted
EBITDA would be RMB33.00 billion, up by 3.1% from 2006.
|
|
Note
1:
|
EBITDA
represents profit for the year before interest income, financial
gains/costs, other gains-net (other gains include the tax refund on
reinvestment in a subsidiary), income tax and depreciation and
amortisation. As the telecommunications business is a capital intensive
industry, capital expenditures and financial gains/costs may have a
significant impact on the net profit of the companies with similar
operating results. Therefore, the Unicom Group believes EBITDA may be
helpful in analyzing the operating results of a telecommunications service
operator like Unicom.
|
|
|
|
Adjusted
EBITDA represents profit for the year before realised/unrealised loss on
changes in fair value of derivative component of convertible bonds,
interest income, financial gains/costs, other gains-net (other gains
include the tax refund on reinvestment in a subsidiary), income tax,
depreciation and amortisation. The Unicom Group believes that the adjusted
EBITDA may provide not only more meaningful supplemental information to
but also facilitates the management and investors to assess its
performance and liquidity by excluding realised/unrealised loss on changes
in fair value of derivative component of convertible bonds that is not
considered as an indicator of its operating performance from a cash flow
perspective.
|
|
|
|
Although
EBITDA has been widely applied in the global telecommunications industry
as indicator to reflect the operating performance, financial capability
and liquidity, it should be considered in addition to, and is not a
substitute for or superior to, the measure of financial performance
prepared under the generally accepted accounting principles (the “GAAP”)
as it does not have any standardised meaning under GAAP and is not
regarded as measures of operating performance and liquidity under GAAP. In
addition, it may not be comparable to similar indicators provided by other
companies.
|
The Unicom Group also improved its
balance sheet structure in 2007. Its liabilities-to-assets ratio (Note 2)
decreased from 46.1% as at 31 December 2006 to 34.9% as at 31 December 2007. Net
cash generated from operating activities changed from RMB36.14 billion in 2006
to RMB32.33 billion in 2007 due to increase in the settlement of payables and
increase in payment of income tax during the year, after deducting the capital
expenditures for 2007 of RMB25.72 billion, the free cash flows (representing net
cash generated from operating activities minus capital expenditures) in 2007
amounted to RMB6.61 billion.
The funding and treasury policies and
objectives in terms of the manner in which treasury activities were controlled
by the Unicom Group for the years ended 31 December 2006 and 2007 are set out in
paragraphs 3.1 and 3.2 of its audited consolidated financial information for the
year ended 31 December 2007 which is presented in section 2 of this Appendix II.
The relevant funding and treasury policies for the year ended 31 December 2005
are consistent with those set out above.
II. REVENUE
In 2007, in response to the challenge
of the tariff reduction caused by the implementation of “Calling-Party-Pays”
tariff policy, the Unicom Group made proactive efforts to develop its
subscribers and promote its value-added services. As a result, its revenue
continued to grow steadily in 2007. Its total revenue was RMB99.54 billion, up
by 4.4% from 2006. Out of the total revenue in 2007, its total service revenue
was RMB94.64 billion, up by 3.9% from 2006, and the revenue from sales of
telecommunications products was RMB4.90 billion, up by 15.2% from
2006.
-
II-68 -
The table below sets forth the changes
in service revenue composition and the percentage of total service revenue for
each of the Unicom Group’s business segment for year 2007 and year
2006.
|
2007
|
2006
(As
restated)
|
|||
|
RMB
in million
|
As
percentage of total service revenue
|
RMB
in million
|
As
percentage of total service revenue
|
|
|
Total
service revenue
|
94,639
|
100.0%
|
91,094
|
100.0%
|
|
Include: Cellular
|
90,506
|
95.6%
|
87,759
|
96.3%
|
|
Of
which: GSM
|
62,776
|
66.3%
|
59,882
|
65.7%
|
|
CDMA
|
27,730
|
29.3%
|
27,877
|
30.6%
|
|
Long distance, data and
Internet
|
4,133
|
4.4%
|
3,335
|
3.7%
|
1. GSM
Cellular Business
In
2007, the Unicom Group has maintained a continued growth in GSM cellular
business. Revenue from its GSM cellular business increased by 4.8% from RMB59.89
billion in 2006 to RMB62.79 billion in 2007, of which service revenue accounted
for RMB62.78 billion, up by 4.8% from 2006. The average revenue per user (the
“ARPU”) per month decreased from RMB49.2 in 2006 to RMB46.0 in
2007.
Due
to the Unicom Group’s efforts to strengthen the business development and
promotion of the value-added business, revenue from GSM value-added services
amounted to RMB13.53 billion in 2007, up by 16.6% from 2006. The share of
revenue from GSM value-added services as a percentage of the GSM service revenue
increased from 19.4% in 2006 to 21.6% in 2007.
In
line with the growth of the GSM cellular business and interconnection traffic
volume, the Unicom Group’s interconnection revenue from the GSM cellular
business increased to RMB6.02 billion in 2007, up by 22.4% from
2006.
Note
2: Liabilities-to-assets
ratio represents total liabilities over total assets.
2. CDMA
Cellular Business
In
2007, the Unicom Group continued to focus on an effective development on CDMA
cellular business. Revenue from CDMA cellular business reached RMB32.62 billion,
up by 1.6% from 2006. Out of the total revenue from CDMA cellular business, its
service revenue was RMB27.73 billion and decreased slightly by 0.5% from 2006.
This was caused by the ARPU of mass market customers was relatively low and the
revenue from the existing high-end customers was also significantly affected by
the new “Calling-Party-Pays” tariff policy, resulting in the decrease of ARPU
per month by RMB7.7 from RMB65.8 in 2006 to RMB58.1 in 2007. Revenue from sales
of telecommunications products relating to the Unicom Group’s CDMA cellular
business increased to RMB4.89 billion, up by 15.2% from 2006.
The
Unicom Group strengthened the promotion of CDMA 1X business and made efforts in
encouraging its customers to form a user habit to use CDMA 1X services to
increase its revenue from CDMA value-added services. Value-added service revenue
from CDMA cellular business reached RMB6.41 billion in 2007, up by 19.3% from
2006, and accounted for 23.1% of the service revenue from CDMA cellular business
in 2007, up from 19.3% in 2006. Out of the service revenue from CDMA cellular
business, revenue from CDMA 1X data business was RMB2.85 billion, up by 41.9%
from 2006 and accounted for 44.5% of the value-added service revenue from CDMA
cellular business in 2007.
In
line with the growth of CDMA cellular business and interconnection traffic
volume, interconnection revenue from CDMA cellular business reached RMB2.07
billion for 2007, up by 17.4% when compared with 2006.
3. Long
Distance, Data and Internet Businesses
Tariff for traditional businesses such
as outgoing long distance calls continued to decrease due to intensifying market
competition. In response, the Unicom Group adjusted its business structure to
actively promote the rapid development of data and Internet business. In 2007,
its service revenue from long distance, data and Internet businesses was RMB4.13
billion, up by 23.9% from 2006.
III. COSTS
AND EXPENSES
In 2007, the Unicom Group continued to
strengthen its costs and expenses control and enhanced the effectiveness of its
costs and expenses. The Unicom Group’s total costs and expenses, including
financial gains/costs and interest income in 2007 were RMB88.94 billion, up by
2.9% from 2006, which is lower than the revenue growth in 2007 by 1.5 percentage
points. Excluding the cost of telecommunications products sold, the Unicom
Group’s operating costs and expenses amounted to RMB83.91 billion, accounted for
88.7% of the service revenue in 2007. Cost of telecommunications products sold
was RMB5.03 billion.
-
II-69 -
The table below illustrates the major
items of operating costs and expenses for year 2007 and year 2006 and their
respective percentage of the corresponding service revenues:
|
2007
|
2006
(As
restated)
|
|||
|
RMB
in million
|
As
percentage of service revenue
|
RMB
in million
|
As
percentage of service revenue
|
|
|
Total
operating costs and expenses
|
83,906
|
88.7%
|
81,492
|
89.4%
|
|
Leased
lines and network capacities
|
9,135
|
9.7%
|
8,943
|
9.8%
|
|
Interconnection
charges
|
10,907
|
11.5%
|
9,671
|
10.6%
|
|
Depreciation
and amortisation
|
22,677
|
24.0%
|
22,687
|
24.9%
|
|
Employee
benefit expenses
|
7,140
|
7.5%
|
6,681
|
7.3%
|
|
Selling
and marketing
|
19,681
|
20.8%
|
19,571
|
21.5%
|
|
General,
administrative and other expenses
|
14,639
|
15.5%
|
13,543
|
14.9%
|
|
Financial
(gains)/costs and interest income
|
(273)
|
(0.3%)
|
396
|
0.4%
|
1. Leased
lines and network capacities
The Unicom Group’s total leasing
expenses for leased lines and network capacities reached RMB9.14 billion in
2007, up by 2.2% from 2006, and accounted for 9.7% of the service revenue in
2007, decreased by 0.1 percentage point from 2006. Pursuant to the connected
party transactions agreement, the Unicom Group paid Unicom Parent 31% of its
CDMA service revenue as the leasing fees for the network capacity. Such network
capacity lease expense for the CDMA cellular business increased from RMB8.26
billion in 2006 to RMB8.38 billion in 2007.
2. Interconnection
charges
In line with the business growth and
increase in interconnection traffic volume, interconnection charges amounted to
RMB10.91 billion in 2007, up by 12.8% from 2006. Interconnection charges as a
percentage of the service revenue increased from 10.6% in 2006 to 11.5% in 2007.
Net interconnection charges in 2007 was RMB2.30 billion, down by 10.0% from
2006, and accounted for 2.4% of the service revenue in 2007, down from 2.8% in
2006.
3. Depreciation
and amortisation
Depreciation and amortisation expenses
amounted to RMB22.68 billion in 2007, maintained at the same level with last
year. Depreciation and amortisation expenses, as a percentage of the service
revenue changed from 24.9% in 2006 to 24.0% in 2007.
4. Employee
benefit expenses
In 2007, due to various factors
including the recruitment of new staff for business expansion, increase in the
employee social benefits as a result of increased average wages and increase in
share-based compensation costs under the share option scheme, employee benefit
expenses for the year increased to RMB7.14 billion, up by 6.9% from 2006.
Employee benefit expenses as a percentage of the service revenue changed from
7.3% in 2006 to 7.5% in 2007.
5. Selling
and marketing
In 2007, the Unicom Group continued to
strengthen its control over selling and marketing expenses, to maintain handset
cost subsidies at a reasonable level and to improve the management of sales
agents by assessing the effectiveness of commission scheme based on the revenue
contribution from the subscribers brought by such agents. Its selling and
marketing expenses totaled RMB19.68 billion in 2007, up by 0.6% from 2006. As a
percentage of the service revenue, the Unicom Group’s selling and marketing
expenses decreased from 21.5% in 2006 to 20.8% in 2007. Of such selling and
marketing expenses, amortisation of customer acquisition costs on contractual
CDMA subscribers was RMB4.00 billion in 2007, down by 8.6% from
2006.
6. General,
administrative and other expenses
Affected by factors such as expansion
of network facilities and base stations, increases in utilities charges and
maintenance fees, the Unicom Group’s general, administrative and other expenses
increased to RMB14.64 billion in 2007, up by 8.1% from 2006. General,
administrative and other expenses as a percentage of the service revenue
increased from 14.9% in 2006 to 15.5% in 2007.
-
II-70 -
7. Financial
gains/costs, net of interest income
In 2007, the Unicom Group further
strengthened and improved its capital structure through centralised treasury
management and fund distribution. As the Unicom Group further improved its debt
structure and benefited from RMB appreciation, it recorded financial gains and
interest income of RMB0.27 billion in 2007 as compared with financial costs, net
of interest income of RMB0.40 billion in 2006. Such financial gains included an
exchange gain of RMB0.48 billion due to the appreciation of RMB during
2007.
8. Cost
of telecommunications products sold
Cost of telecommunications products
sold increased to RMB5.03 billion in 2007, up by 2.4% from 2006. This increase
was primarily due to an increase in the CDMA handset units purchased and sold.
As the corresponding sales of telecommunications products increased to RMB4.90
billion, up by 15.2% from 2006, the net loss from sales of telecommunications
products was RMB0.13 billion, which was RMB0.53 billion less than the net loss
in 2006.
|
9.
|
Realised
loss on changes in fair value of derivative component of Convertible Bonds
and other gains from tax refund on reinvestment in a
subsidiary
|
The Unicom Group issued the Convertible
Bonds to SK Telecom, an overseas telecommunications service operator in Korea.
In accordance with the requirements of Hong Kong Accounting Standard 39,
“Financial Instruments — Recognition and Measurement”, due to the increase in
the price of Unicom Shares, the fair value of the derivative component in
respect of the Convertible Bonds has increased in 2007 and therefore resulted in
a realised loss on changes in fair value of derivative component of Convertible
Bonds of RMB0.57 billion recognised in the income statement. The realised loss
had no impact on the Unicom Group’s cash flows in 2007. Since SK Telecom had
fully converted the Convertible Bonds into Unicom Shares on 20 August 2007, as a
result, Unicom no longer needs to recognise the changes in fair value of
derivative component of Convertible Bonds from that date onwards.
During
2007, Unicom reinvested the undistributed profits into a subsidiary and was
granted a refund on a portion of the taxes previously paid by the subsidiary
amounting to approximately RMB2.78 billion, which was recorded as “other
gains”.
IV. EARNINGS
1. Profit
before income tax
In 2007, the Unicom Group’s profit
before income tax was RMB12.96 billion. Excluding the effect of realised loss of
RMB0.57 billion on the changes in fair value of derivative component of
Convertible Bonds and other gains from tax refund of RMB2.78 billion on
reinvestment in a subsidiary, its profit before income tax would be RMB10.74
billion, up by 19.9% from 2006.
In
particular, profit before income tax for the GSM cellular business grew steadily
and reached RMB9.23 billion, up by 22.4% from 2006 as a result of the increase
in revenue from GSM cellular business. Profit before income tax for the CDMA
cellular business reached RMB1.20 billion, up by 11.7% from 2006 as a result of
the Unicom Group’s effective cost control measures. Profit before income tax for
the long distance, data and Internet businesses was RMB0.57 billion, up by 15.4%
from 2006 as a result of Unicom’s focus on developing profitable
businesses.
2. Income
tax
The Unicom Group’s income tax was
RMB3.65 billion in 2007 and the effective tax rate in 2007 was 28.2%. Excluding
the effects of realised loss on changes in fair value of the derivative
component of the Convertible Bonds and other gains from tax refund on
reinvestment in a subsidiary, the Unicom Group’s effective tax rate would be
34.0%, increased by 3.2 percentage points from 30.8% in 2006. Pursuant to the
new PRC enterprise income tax rates which became effective on 1 January 2008,
the Unicom Group’s deferred tax balance as at 31 December 2007 was adjusted to
reflect such change and resulted in an increase of RMB0.15 billion of deferred
tax expenses for the year ended 31 December 2007, and the impact on the
effective tax rate was 1.2 percentage points.
3. Profit
for the year
The Unicom Group’s profit for the year
reached RMB9.30 billion, and its basic earnings per Unicom Share was RMB0.713 in
2007, up by 136.1% from 2006. Excluding the effect of realised loss on changes
in fair value of the derivative component of the Convertible Bonds and other
gains from tax refund on reinvestment in a subsidiary, the Unicom Group’s
adjusted profit for the year would be RMB7.09 billion, up by 14.4% from 2006 and
the adjusted basic earnings per Unicom Share would be RMB0.544, up by 10.6% from
2006.
-
II-71 -
V. ADJUSTED
EBITDA
The Unicom Group’s EBITDA was RMB32.44
billion in 2007, up by 9.5% from 2006. Excluding the effects of realised loss on
changes in fair value of derivative component of Convertible Bonds, the adjusted
EBITDA would be RMB33.00 billion, up by 3.1% from 2006. Adjusted EBITDA margin
(representing adjusted EBITDA as a percentage of the total revenue) was 33.2%,
down by 0.4 percentage point from 2006.
In particular, the Unicom Group’s
EBITDA for the GSM cellular business was RMB27.91 billion, up by 4.4% from 2006.
EBITDA margin (representing EBITDA as a percentage of the total revenue) for the
GSM cellular business changed from 44.6% in 2006 to 44.5% in 2007. EBITDA for
the CDMA cellular business was RMB1.82 billion, down by 0.7% from 2006. EBITDA
margin for the CDMA cellular business changed from 5.7% in 2006 to 5.6% in 2007.
EBITDA for the long distance, data and Internet businesses was RMB3.49 billion,
down by 4.5% from 2006. EBITDA margin for the long distance, data and Internet
businesses decreased from 44.6% in 2006 to 43.5% in 2007.
VI. CAPITAL
EXPENDITURES AND FREE CASH FLOW
The Unicom Group’s capital expenditures
totaled RMB25.72 billion in 2007, which were mainly invested on GSM network
infrastructure. Capital expenditures attributable to the GSM cellular business
were RMB16.49 billion. Capital expenditures for the long distance, data and
Internet businesses (including access network) were RMB0.72 billion. Capital
expenditures for local gateway and infrastructure network were RMB4.25 billion.
Capital expenditures for billing, customer services and information technology
system, as well as buildings and other expenditures were RMB4.26
billion.
Cash inflow from operating activities
changed from RMB36.14 billion in 2006 to RMB32.33 billion in 2007 due to the
settlement of payables and increase in payment of income tax. After deducting
capital expenditures of RMB25.72 billion, the free cash flow was RMB6.61 billion
in 2007.
The table below illustrates the capital
expenditures of various major businesses in 2007 and the planned expenditures in
2008.
|
2007
|
2008
|
|||
|
RMB
(in
billion)
|
RMB
(in
billion)
|
As
percentage
|
||
|
Total
|
25.72
|
47.25
|
100%
|
|
|
Wireless
(including GSM cellular)
|
16.49
|
35.00
|
74.1%
|
|
|
Long
distance, data and Internet
|
0.72
|
1.10
|
2.3%
|
|
|
Gateway
and infrastructure network
|
4.25
|
4.80
|
10.2%
|
|
|
Others
|
4.26
|
6.35
|
13.4%
|
The
Unicom Group’s capital expenditures planned for 2008 are estimated to be
approximately RMB47.25 billion. Upon the completion of the proposed merger, the
management of Unicom expects to increase the capital expenditure for wireless
business (including GSM cellular) of the Enlarged Group in 2008 by approximately
100% when compared to the planned 2008 capital expenditures disclosed by Unicom
in its 2007 annual report. As a result, capital expenditures for the wireless
business are estimated to be approximately RMB35.00 billion, which will be used
to expand wireless network coverage, improve IT support systems and the
value-added
business platform. Capital expenditures for the long distance, data and Internet
businesses (including access network) are estimated to be approximately RMB1.10
billion. Capital expenditures for local gateway and infrastructure network are
estimated to be approximately RMB4.80 billion. Capital expenditures for
information technology systems and buildings and other expenditures are
estimated to be approximately RMB6.35 billion. The Unicom Group plans to rely
primarily on the net cash generated from operating activities and available
sources of financing to satisfy its capital expenditures needs.
The
estimated planned capital expenditure in 2008 described above has been updated
by the management of the Unicom Group in respect of the proposed merger, which
is different from the related information set out in paragraph VI headed
“Capital Expenditures and Free Cash Flow” under the section headed “Management
Discussion and Analysis” in the 2007 annual report of Unicom.
-
II-72 -
VII. BALANCE
SHEET
In 2007, the Unicom Group’s balance
sheet structure was more stable. Its total assets increased from RMB148.30
billion as at 31 December 2006 to RMB149.42 billion as at 31 December 2007. Its
total interest-bearing debts decreased from RMB25.65 billion as at 31 December
2006 to RMB3.86 billion as at 31 December 2007. The liabilities-to-assets ratio
decreased from 46.1% as at 31 December 2006 to 34.9% as at 31 December 2007. The
debt-to-capitalisation ratio (Note 3) decreased from 24.3% as at 31 December
2006 to 3.8% as at 31 December 2007. The decrease in debt-to-capitalisation
ratio during 2007 resulted primarily from the conversion of the Convertible
Bonds into Unicom Shares and the repayment of short-term bonds and long-term
bank loans by the Unicom Group.
As at 31 December 2007, the Unicom
Group had net current liabilities (i.e. current assets minus current
liabilities) of RMB32.40 billion, representing an increase of RMB1.40 billion
from RMB31.00 billion as at 31 December 2006. Taking into account of continuous
net cash generated from operating activities and available sources of financing,
the Unicom Group believes that its funds are sufficient to meet with its working
capital requirements and debt obligations in 2008.
|
|
Note
3:
|
Debt-to-capitalisation
ratio represents interest bearing debts plus minority interest over
interest bearing debts plus total
equity.
|
-
II-73 -
FOR
THE YEAR ENDED 31 DECEMBER 2006
I. Overview
In
2006, the Unicom Group continued to grow its business effectively. Its total
revenue maintained steady growth and reached RMB95.35 billion by the end of
2006, up by 8.3% from 2005. Its profit for the year amounted to RMB3.80 billion.
Excluding the effect of the RMB2.40 billion unrealised loss on changes in fair
value of derivative component of Convertible Bonds at fair value, the profit for
the year would increase by 25.9% from RMB4.92 billion in 2005 to RMB6.20 billion
in 2006. Basic earnings per Unicom Share in 2006 were RMB0.302. Excluding the
effect of the RMB2.40 billion unrealised loss on changes in fair value of
derivative component of Convertible Bonds, adjusted basic earnings per Unicom
Share in 2006 would be RMB0.492, up by 25.5% from 2005. Adjusted EBITDA (Note 1)
was RMB32.02 billion in 2006.
The
Unicom Group has maintained a sound balance sheet structure during the year as
the liabilities-to-assets ratio (Note 2) decreased from 47.0% as at 31 December
2005 to 46.1% as at 31 December 2006. The capital expenditures for 2006 were
RMB21.79 billion. Cash flow continued to improve. Free cash flow (i.e. net cash
inflow from operating activities minus capital expenditures) increased from
RMB13.66 billion in 2005 to RMB14.35 billion in 2006. Its net cash inflow from
operating activities amounted to RMB36.14 billion, increased by 15.1% from
2005.
|
|
Note 1:
|
EBITDA
represents profit for the year before interest income, financial costs,
other gains-net, income tax and depreciation and amortisation. As the
telecommunications business is a capital intensive industry, capital
expenditures and financial costs may have a significant impact on the net
profit of the companies with similar operating results. Therefore, the
Unicom Group believes EBITDA may be helpful in analyzing the operating
results of a telecommunications service operator like
Unicom.
|
Adjusted
EBITDA represents profit for the year before unrealised loss on changes in fair
value of derivative component of Convertible Bonds, interest income, financial
costs, other gains-net, income tax, depreciation and amortisation. The Unicom
Group believes that the adjusted EBITDA may provide not only more meaningful
supplemental information to but also facilitates the management and investors to
assess its performance and liquidity by excluding unrealised loss on changes in
fair value of derivative component of Convertible Bonds that is not considered
as an indicator of its operating performance from a cash flow
perspective.
Although
EBITDA and adjusted EBITDA have been widely applied in the global
telecommunications industry as indicators to reflect the operating performance,
financial capability and liquidity, it should be considered in addition to, and
is not a substitute for or superior to, the measure of financial performance
prepared under the generally accepted accounting principles (the “GAAP”) as they
do not have any standardised meaning under GAAP and are not regarded as measures
of operating performance and liquidity under GAAP. In addition, they may not be
comparable to similar indicators provided by other companies.
Note
2: Liabilities-to-assets ratio represents total liabilities over
total assets.
II. REVENUE
The Unicom Group’s revenue continued to
grow steadily in 2006. The total revenue was RMB95.35 billion, up by 8.3% from
2005. Of the total revenue in 2006, the Unicom Group’s total service revenue was
RMB91.09 billion, up by 6.9% from 2005, and revenue from the sales of
telecommunications products was RMB4.25 billion, up by 48.8% from
2005.
The table below sets forth the changes
in service revenue composition and the percentage of total service revenue for
each of the Unicom Group’s business segment for the years of 2005 and
2006:
|
2006
(As
restated)
|
2005
(As
restated)
|
||||
|
RMB
in million
|
As
percentage of total service revenue
|
RMB
in million
|
As
percentage of total service revenue
|
||
|
Total
service revenue
|
91,094
|
100.0%
|
85,179
|
100.0%
|
|
|
Include: Cellular
|
87,759
|
96.3%
|
80,707
|
94.8%
|
|
|
Of
which: GSM
|
59,882
|
65.7%
|
52,618
|
61.8%
|
|
|
CDMA
|
27,877
|
30.6%
|
28,089
|
33.0%
|
|
|
Long
Distance, Data and Internet
|
3,335
|
3.7%
|
4,472
|
5.2%
|
|
1. GSM
Cellular Business
In 2006, the Unicom Group has maintained a continued growth in GSM Cellular
Business. Revenue from its GSM Cellular Business increased by 13.8% from
RMB52.62 billion in 2005 to RMB59.89 billion in 2006, of which service revenue
accounted for RMB59.88 billion, also up by 13.8% from 2005. Such increase is
mainly due to increase in the number of subscribers and in revenue from GSM
value-added services. ARPU also increased from RMB48.5 in 2005 to RMB49.2 in
2006, up by RMB0.7. Sales of telecommunications products relating to the Unicom
Group’s GSM Cellular Business was RMB8.17 million in 2006.
-
II-74 -
Revenue from GSM value-added services amounted to RMB11.60 billion in 2006, up
by 45.0% from 2005. The share of revenue from GSM value-added services as a
percentage of the GSM service revenue increased from 15.2% in 2005 to 19.4% in
2006 due to the Unicom Group’s efforts to strengthen the development and
promotion of the value-added business.
In line with the growth of the GSM Cellular Business and interconnection traffic
volume, interconnection revenue from the GSM Business increased to RMB4.92
billion in 2006, up by 42.3% from 2005.
2. CDMA
Cellular Business
In 2006, the Unicom Group continued to emphasise an effective development on
CDMA Cellular Business. Revenue from CDMA Cellular Business reached RMB32.12
billion, an increase of 3.8% from 2005. Of the total revenue from CDMA Cellular
Business, service revenue was RMB27.88 billion and decreased by 0.8% from 2005
due to a decrease of the ARPU by RMB9.1 from RMB74.9 in 2005 to RMB65.8 in 2006.
Such ARPU decrease was because certain high-end contractual customers did not
renew their contracts upon expiry while the average ARPU of new customers was
relatively lower. Sales of telecommunications products relating to the Unicom
Group’s CDMA Cellular Business increased to RMB4.24 billion, up by 49.4% from
2005.
The Unicom Group continued to utilise the technical advantages of CDMA1X
technology to improve its revenue from CDMA value-added services. Such revenue
reached RMB5.38 billion in 2006, up by 29.4% from 2005, and accounted for 19.3%
of the service revenue from CDMA Cellular Business in 2006, an increase from
14.8% in 2005. Of the service revenue from CDMA Cellular Business, revenue from
CDMA1X data business was RMB2.01 billion, representing an increase of 51.1% from
2005 and accounting for 37.4% of the value-added service revenue from CDMA
Cellular Business in 2006.
In line with the growth of CDMA Cellular Business and interconnection traffic
volume, interconnection revenue from CDMA Cellular Business reached RMB1.76
billion by the end of 2006, up by 24.9% from 2005.
3. Long
Distance, Data and Internet Business
Tariff for traditional businesses such
as outgoing long distance calls continued to decrease due to intensive market
competition. To address this, the Unicom Group adjusted its business structure
and dropped less profitable products. In 2006, its service revenue from Long
Distance, Data and Internet Business was RMB3.33 billion, down by 25.4% from
2005 due to a decrease of 3.4% of the total minutes of outgoing domestic and
international calls from 2005.
III. COSTS
AND EXPENSES
In 2006, the Unicom Group strengthened
expense control and total costs and expenses were RMB88.78 billion. Excluding
the effect of the RMB2.40 billion unrealised loss on changes in fair value of
derivative component of the Convertible Bonds, costs and expenses would be
RMB86.39 billion, increase by 6.7% from 2005, which is slower than the 8.3%
growth in the total revenue in 2006.
The table below illustrates the major
cost items from 2005 and 2006 and their respective share of service
revenue:
|
2006
(As
restated)
|
2005
(As
restated)
|
||||
|
RMB
in million
|
As
percentage of service revenue
|
RMB
in million
|
As
percentage of service revenue
|
||
|
Total
costs and expenses
|
88,783
|
97.4%
|
80,945
|
94.9%
|
|
|
Leased
lines and network capacities
|
8,943
|
9.8%
|
8,900
|
10.4%
|
|
|
Interconnection
charges
|
9,671
|
10.6%
|
8,436
|
9.9%
|
|
|
Depreciation
and amortisation
|
22,687
|
24.9%
|
20,635
|
24.2%
|
|
|
Employee
benefit expenses
|
6,681
|
7.3%
|
5,653
|
6.6%
|
|
|
Selling
and marketing
|
19,571
|
21.5%
|
20,795
|
24.4%
|
|
|
General,
administrative and other expenses
|
13,543
|
14.9%
|
11,855
|
13.9%
|
|
|
Finance
costs, net of interest income
|
396
|
0.4%
|
1,032
|
1.2%
|
|
|
Cost
of telecommunications products sold
|
4,915
|
5.4%
|
3,674
|
4.3%
|
|
|
Unrealised
loss on changes in fair value of derivative component of Convertible
Bonds
|
2,397
|
2.6%
|
—
|
—
|
|
|
Other
gains-net
|
(21)
|
—
|
(35)
|
—
|
|
-
II-75 -
1. Leased
lines and network capacities
The Unicom Group’s aggregate lease
expense for leased lines and network capacities reached RMB8.94 billion in 2006,
up by 0.5% from 2005, and as a percentage of the service revenue decreased from
10.4% in 2005 to 9.8% in 2006. Under the connected party transactions agreement,
lease expense for the CDMA network capacity in 2006 was calculated based on 30%
of the business income from the Unicom Group’s CDMA Cellular Business in 2006.
Network capacity lease expense for the CDMA Cellular Business for year 2006
increased from RMB8.08 billion in 2005 to RMB8.26 billion in 2006.
2. Interconnection
charges
Due to the increase in interconnection
traffic volume, interconnection charges increased to RMB9.67 billion in 2006, up
by 14.6% from 2005. Interconnection charges as a percentage of the service
revenue increased from 9.9% in 2005 to 10.6% in 2006. Net interconnection
charges from 2006 was RMB2.56 billion, down by 17.5% from 2005, and accounted
for 2.8% of the service revenue in 2006 as opposed to 3.6% in 2005.
3. Depreciation
and amortisation
Depreciation and amortisation expenses
increased by 9.9% from RMB20.63 billion in 2005 to RMB22.69 billion in 2006 and,
as a percentage of the service revenue, increased from 24.2% in 2005 to 24.9% in
2006.
4. Employee
benefit expenses
In 2006, due to various factors
including a general increase in the employee insurance premium expenditure,
recruitment of new staff for business expansion and increase of share-based
compensation costs from the grant of new share options under the share option
scheme in 2006, employee benefit expenses for the year increased to RMB6.68
billion, up by 18.2% from 2005, and represented 7.3% of the service revenue, up
from 6.6% in 2005.
5. Selling
and marketing
In 2006, due to the Unicom Group’s
effective cost control measures, particularly on the customer acquisition costs
on contractual CDMA subscribers and commission expenses, selling and marketing
expenses totaled RMB19.57 billion in 2006, a decrease of 5.9% from 2005. Such
selling and marketing expenses accounted for 21.5% of the Unicom Group’s service
revenue in 2006, down by 2.9% from 24.4% in 2005. Amortisation of customer
acquisition costs on contractual CDMA subscribers was RMB4.38 billion (2005:
RMB6.07 billion) in 2006. The balance of unamortised CDMA customer acquisition
costs decreased from RMB3.11 billion as of 31 December 2005 to RMB2.17 billion
as of 31 December 2006.
6. General,
administrative and other expenses
Affected by factors such as increases
in rents for base stations, maintenance fees, utilities charges and other
expenses, general, administrative and other expenses increased by 14.2% from
RMB11.86 billion in 2005 to RMB13.54 billion in 2006. General, administrative
and other expenses as a percentage of the service revenue increased from 13.9%
in 2005 to 14.9% in 2006.
7. Finance
costs, net of interest income
In 2006, the Unicom Group further
strengthened and improved its capital structure, centralised management and
enforced effective application of its capital resources. As the Unicom Group
improved its cash inflow from operating activities and improved its debt
structure through the issuance of Convertible Bonds and short-term bonds,
finance costs, net of interest income decreased from RMB1.03 billion in 2005 to
RMB0.40 billion in 2006, down by 61.6%. In addition, the Unicom Group recorded
an exchange gain of RMB0.37 billion due to the appreciation of RMB during 2006,
which also contributed to the decrease of its finance costs.
-
II-76 -
8. Cost
of telecommunications products sold
The cost of telecommunications products
sold increased to RMB4.91 billion, up by 33.8% from 2005. This increase was
primarily due to increases in the CDMA handsets units purchased and sold. The
corresponding sales of telecommunications products was RMB4.25 billion, up by
48.77%. The net loss from the sales of telecommunications products was RMB0.66
billion, which is RMB0.15 billion less than the net loss in 2005.
9. Unrealised
loss on changes in fair value of derivative component of Convertible
Bonds
In July 2006, the Unicom Group issued
the Convertible Bonds to SK Telecom, a mobile telecommunications service
operator in Korea. In accordance with the requirements of Hong Kong Accounting
Standard 39, “Financial Instruments — Recognition and Measurement”, the bond
contract must be separated into two components: a derivative component
consisting of the conversion option and a liability component consisting of the
straight debt element of the bond. The conversion option is carried at fair
value on the balance sheet with any changes in fair value being charged or
credited to the income statement in the period when the change occurs. The fair
value of the derivative component of the Convertible Bond is calculated using
the Binomial model, which considers various factors including exercise price,
volatility, expected dividend yield, risk free rate, expected life of options
and the closing price of Unicom Shares at valuation date. Due to the substantial
increase in the price of Unicom Shares from HK$6.95 as at 5 July 2006 (the
issuance date of the Convertible Bonds) to HK$11.40 as at 31 December 2006, the
fair value of the derivative component in respect of the Convertible Bonds has
increased and therefore resulted in an unrealised loss on changes in fair value
of derivative component of Convertible Bonds of the RMB2.40 billion recognised
in the income statement. The unrealised loss had no effect on the Unicom Group’s
cash flows or other aspects of the Unicom Group’s operations in
2006.
IV. EARNINGS
1. Profit
before income tax
In 2006, the Unicom Group’s profit
before income tax was RMB6.56 billion after the unrealised loss on changes in
fair value of derivative component of Convertible Bonds of the RMB2.40 billion.
Excluding the effect of the RMB2.40 billion unrealised loss on changes in fair
value of derivative component of Convertible Bonds, the Unicom Group’s profit
before income tax would be RMB8.96 billion, an increase of 26.3% from
2005.
Profit before income tax for the GSM
Cellular Business was RMB7.54 billion, up by 4.1% from 2005 as a result of the
increase in revenue from GSM Cellular Business. Profit before income tax for the
CDMA Cellular Business improved quarter on quarter and reached RMB1.07 billion.
Profit before income tax for the Long Distance, Data and Internet Business was
RMB0.49 billion after Unicom focused on developing profitable
businesses.
2. Income
tax
The Unicom Group’s income tax increased
to RMB2.76 billion in 2006 and the effective tax rate in 2006 was 42.1%.
Excluding the effect of the RMB2.40 billion unrealised loss on changes in fair
value of derivative component of Convertible Bonds, the effective tax rate would
be 30.8%, similar to 30.6% in 2005.
3. Profit
for the year
The Unicom Group’s profit for the year
reached RMB3.80 billion in 2006. Basic earnings per Unicom Share in 2006 were
RMB0.302. Excluding the effect of the RMB2.40 billion unrealised loss on changes
in fair value of derivative component of Convertible Bonds, the profit for the
year would be RMB6.20 billion and the adjusted basic earnings per Unicom Share
would be RMB0.492, an increase of 25.5% from 2005.
V. ADJUSTED
EBITDA
Adjusted EBITDA was RMB32.02 billion in
2006 and adjusted EBITDA margin (Adjusted EBITDA as a percentage of the total
revenue) was 33.6%.
EBITDA for the GSM Cellular Business
was RMB26.74 billion, up by 4.1% from 2005. EBITDA margin (EBITDA as a
percentage of the total revenue) for the GSM Cellular Business decreased from
48.8% in 2005 to 44.6% in 2006 as a result of increased commission expenses
under intensified competition environment and increased interconnection charges.
EBITDA for the CDMA Cellular Business increased from RMB0.48 billion in 2005 to
RMB1.84 billion in 2006 and the EBITDA margin for the CDMA Cellular Business
increased from 1.5% in 2005 to 5.7% in 2006. EBITDA for the Long Distance, Data
and Internet Business was RMB3.66 billion, an increase of 36.7% from 2005.
EBITDA margin for the Long Distance, Data and Internet Business increased from
32.1% in 2005 to 44.6% in 2006.
-
II-77 -
VI. CAPITAL
EXPENDITURES AND FREE CASH FLOW
The Unicom Group’s capital expenditures
totalled RMB21.79 billion in 2006, representing an increase of 22.8% from
RMB17.75 billion in 2005. Capital expenditures attributable to the GSM Cellular
Business were RMB10.82 billion. Capital expenditures for the Long Distance, Data
and Internet Business were RMB1.44 billion. Capital expenditures for local
gateway and infrastructure network were RMB3.70 billion. Capital expenditures
for billing system, customer services and information technology system and
buildings and others were RMB5.83 billion.
Both cash inflow from operating
activities and free cash flow continued to improve from RMB31.41 billion and
RMB13.66 billion in 2005 to RMB36.14 billion and RMB14.35 billion in 2006,
respectively. Cash inflow from operating activities increased by 15.1% from
2005.
The table below illustrates the capital
expenditures of various major businesses in 2006 and the planned expenditures in
2007:
|
2006
(As
restated)
|
2007
|
||
|
RMB
in billion
|
RMB
in billion
|
||
|
Total
|
21.79
|
26.24
|
|
|
GSM
Cellular
|
10.82
|
13.84
|
|
|
Long
Distance, Data and Internet
|
1.44
|
1.00
|
|
|
Gateway
and infrastructure network
|
3.70
|
3.90
|
|
|
Others
|
5.83
|
7.50
|
Capital expenditures planned for 2007
are estimated RMB26.24 billion, capital expenditures for the GSM Cellular
Business are estimated to be approximately RMB13.84 billion which will be used
to satisfy customers’ demand, improve the quality of network coverage and
increase the network capacity as appropriate. Capital expenditures for the Long
Distance, Data and Internet Business are estimated to be approximately RMB1.00
billion. Capital expenditures for local gateway and infrastructure network are
estimated to be approximately RMB3.90 billion. Capital expenditures for
information technology system and buildings and others are estimated to be
approximately RMB7.50 billion.
The Unicom Group plans to rely
primarily on cash generated from operating activities to satisfy its capital
expenditures needs.
VII. BALANCE
SHEET
In 2006, the Unicom Group’s balance
sheet structure was further improved. Total assets increased from RMB144.62
billion as of 31 December 2005 to RMB148.30 billion as of 31 December 2006.
Total interest-bearing debts decreased from RMB35.04 billion as of 31 December
2005 to RMB25.65 billion as of 31 December 2006. The liabilities-to-assets ratio
decreased from 47.0% as at 31 December 2005 to 46.1% as at 31 December 2006. The
debt-to-capitalisation ratio (Note 3) decreased from 31.4% as at 31 December
2005 to 24.3% as at 31 December 2006.
As of 31 December 2006, the Unicom
Group had net current liabilities (i.e. current assets minus current
liabilities) of RMB31.00 billion, representing a decrease of RMB5.80 billion
from RMB36.80 billion at the end of 2005. Taking into account of available
sources of financing and continuous net cash inflows from operating activities,
the Unicom Group believes that it has sufficient funds to meet its working
capital requirements and debt obligations.
Note
3: Debt-to-capitalisation
ratio represents interest bearing debts plus minority interest over interest
bearing debts plus total equity.
-
II-78 -
FOR
THE YEAR ENDED 31 DECEMBER 2005
I. OVERVIEW
In 2005, the Unicom Group adhered to
the market-oriented approach and effectively accelerated its business
development. Revenue saw steady growth and earnings also increased. Free cash
flow (i.e. net cash inflow from operating activities minus capital expenditures)
and liabilities-to-assets ratio continued to improve.
Total revenue increased by 10.5% from
2004 to RMB88.04 billion in 2005. EBITDA (Note 1) increased by 5.9% from 2004 to
RMB28.72 billion. Profit for the year increased by 12.0% from 2004 to RMB4.92
billion. Basic earnings per Unicom Share were RMB0.392, an increase of RMB0.042
from RMB0.350 in 2004. Capital expenditures for the whole year were RMB17.75
billion. Free cash flow improved from RMB5.72 billion in 2004 to RMB13.66
billion in 2005.
|
|
Note 1:
|
EBITDA
represents profit for the year before interest income, finance costs, net
other income, income tax expense, depreciation and amortisation and
minority interests. As the telecommunications business is a capital
intensive industry, capital expenditure and finance costs may have a
significant impact on the profit for the year of the companies with
similar operating results. Therefore, the Unicom Group believes EBITDA may
be helpful in analyzing the operation results of a telecommunications
service provider like Unicom. 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, the Unicom Group’s EBITDA may
not be comparable to similar indicators provided by other
companies.
|
II. REVENUE
Growth in the revenue of Unicom
continued to remain steady in 2005. The total revenue was RMB88.04 billion, up
by 10.5% from 2004. Of the total revenue in 2005, service revenue was RMB85.18
billion, up 9.3% from 2004.
The table below sets forth the changes
in revenue composition and the percentage of total revenue for each of the
Unicom Group’s business segments for the years of 2004 and 2005.
|
2004
(As
restated)
|
2005
(As
restated)
|
||||
|
RMB
in million
|
As
percentage of total
|
RMB
in million
|
As
percentage of total
|
||
|
Revenue
|
|||||
|
Cellular
|
74,231
|
93.2%
|
83,551
|
94.9%
|
|
|
include: GSM
|
47,930
|
60.2%
|
52,621
|
59.8%
|
|
|
CDMA
|
26,301
|
33.0%
|
30,930
|
35.1%
|
|
|
Long
Distance, Data and Internet
|
5,437
|
6.8%
|
4,487
|
5.1%
|
|
|
Total
revenue
|
79,668
|
100.0%
|
88,038
|
100.0%
|
|
1. GSM
Cellular Business
As the Unicom Group’s GSM subscriber
base further expanded, revenue from the GSM Cellular Business continued to grow
steadily. Revenue increased by 9.8% from 2004 to RMB52.62 billion in 2005. ARPU
decreased slightly from RMB50.4 in 2004 to RMB48.5, down by RMB1.9.
The table below sets forth the revenue
composition of the Unicom Group’s GSM Cellular Business and their respective
share of revenue from GSM Cellular Business for the years of 2004 and
2005.
|
2004
(As
restated)
|
2005
(As
restated)
|
||||
|
RMB
in million
|
As
percentage of total
|
RMB
in million
|
As
percentage of total
|
||
|
Revenue
|
47,930
|
100.0%
|
52,621
|
100.0%
|
|
|
(1)
Service
revenue
|
47,926
|
100.0%
|
52,618
|
100.0%
|
|
|
Include: Usage
fee
|
32,349
|
67.5%
|
32,449
|
61.7%
|
|
|
Monthly fee
|
7,000
|
14.6%
|
6,918
|
13.1%
|
|
|
Interconnection
revenue
|
2,592
|
5.4%
|
3,459
|
6.6%
|
|
|
Others
|
5,985
|
12.5%
|
9,792
|
18.6%
|
|
|
(2) Sales
of telecommunications products
|
4
|
0.0%
|
3
|
0.0%
|
|
-
II-79 -
Service
revenue from GSM Cellular Business was RMB52.62 billion in 2005. Of the total,
usage fees reached RMB32.45 billion, representing 61.7% of the total revenue
from GSM Cellular Business. Monthly fees reached RMB6.92 billion, representing
13.1% of the revenue from GSM Cellular Business. Interconnection revenue was
RMB3.46 billion, accounting for 6.6% of the revenue from GSM Cellular
Business.
As
the Unicom Group continuously promoted its value-added services such as SMS,
Cool Ringtone in 2005, revenue from GSM value-added services amounted to RMB8.00
billion in 2005, with its share of the GSM service revenue increased from 10.1%
in 2004 to 15.2%.
2. CDMA
Cellular Business
In
2005, Unicom continued the transformation of marketing model for CDMA Cellular
Business and effectively controlled the increase of marketing expenses,
particularly reducing the handset subsidy costs so as to realize effective
growth. Revenue from CDMA Cellular Business was RMB30.93 billion in 2005, an
increase of 17.6% from 2004. Due to the expanding subscriber base, ARPU for the
Unicom Group’s CDMA Cellular Business decreased by RMB10.7 from RMB85.6 in 2004
to RMB74.9 in 2005.
The
table below sets forth the revenue composition of the Unicom Group’s CDMA
Cellular Business and their respective share of revenue from CDMA Cellular
Business in the years of 2004 and 2005.
|
2004 (As
restated)
|
2005 (As
restated)
|
|||
|
RMB
in million
|
As
percentage of total
|
RMB
in million
|
As
percentage of total
|
|
|
Revenue
|
26,301
|
100.0%
|
30,930
|
100.0%
|
|
(1) Service
revenue
|
24,588
|
93.5%
|
28,089
|
90.8%
|
|
Include: Usage
fee
|
16,334
|
62.1%
|
17,086
|
55.2%
|
|
Monthly
fee
|
4,677
|
17.8%
|
5,001
|
16.2%
|
|
Interconnection
revenue
|
920
|
3.5%
|
1,408
|
4.6%
|
|
Others
|
2,657
|
10.1%
|
4,594
|
14.8%
|
|
(2) Sales
of telecommunications products
|
1,713
|
6.5%
|
2,841
|
9.2%
|
Service
revenue as a percentage of the revenue from CDMA Cellular Business was 90.8% in
2005. CDMA usage fee reached RMB17.09 billion, representing 55.2% of the revenue
from CDMA Cellular Business. Monthly fee totaled RMB5.00 billion, accounting for
16.2% of the revenue from CDMA Cellular Business. Interconnection revenue
amounted to RMB1.41 billion, representing 4.6% of the revenue from CDMA Cellular
Business.
Based
on its CDMA1X business and technology superiority, Unicom devoted great efforts
to the development of the CDMA wireless data business so as to continuously
increase the revenue contribution of this value-added business. Revenue from the
value-added business of the CDMA Cellular Business reached RMB4.16 billion, and
accounted for 14.8% of the service revenue from CDMA Cellular Business in 2005,
an increase from 9.8% in 2004.
3. Revenue
from the Long Distance, Data and Internet Business
Because
of intensified market competition and increased marketing efforts by other
operators, tariffs for businesses such as outgoing long distance calls and
leased lines fell relatively faster. The total minutes of outgoing international
and domestic long distance calls grew by 4.8% from 2004. However, revenue
totaled RMB4.49 billion in 2005, down 17.5% from 2004.
III. Costs
and Expenses
The
Unicom Group’s costs and expenses in 2005 were RMB80.95 billion, up by 10.4%
from 2004.
-
II-80 -
The
table below illustrates the major cost items from 2004 and 2005 and their
respective share of total revenue.
|
2004 (As
restated)
|
2005 (As
restated)
|
|||
|
RMB
in million
|
As
percentage of total operating revenue
|
RMB
in million
|
As
percentage of total operating revenue
|
|
|
Total
costs and expenses
|
73,295
|
92.0%
|
80,945
|
91.9%
|
|
include:
|
||||
|
Leased
lines and network capacities
|
7,486
|
9.4%
|
8,900
|
10.1%
|
|
Interconnection
charges
|
7,527
|
9.5%
|
8,436
|
9.6%
|
|
Depreciation
and amortisation
|
19,205
|
24.0%
|
20,635
|
23.4%
|
|
Employee
benefit expenses
|
4,653
|
5.8%
|
5,653
|
6.4%
|
|
Selling
and marketing
|
19,670
|
24.7%
|
20,795
|
23.6%
|
|
General,
administrative and other expenses
|
10,599
|
13.3%
|
11,855
|
13.4%
|
|
Cost
of telecommunication products sold
|
2,612
|
3.3%
|
3,674
|
4.2%
|
|
Net
finance costs
|
1,647
|
2.1%
|
1,032
|
1.2%
|
1. Leased
lines and network capacities
The
aggregate lease expense for leased lines and network capacities of Unicom
reached RMB8.90 billion, up 18.9% from 2004, and as a percentage of the total
revenue increased from 9.4% in 2004 to 10.1%. Network capacities lease expense
for the CDMA Cellular Business increased from RMB6.68 billion in 2004 to RMB8.08
billion. Under the new CDMA Network Capacities Leasing Agreement, lease expense
for the network capacities in 2005 was calculated as 29% of the service revenue
from the Unicom Group’s CDMA Cellular Business in 2005.
2. Interconnection
charges
Due
to the increase in interconnection traffic volume, interconnection charges
increased to RMB8.44 billion in 2005, up 12.1% from 2004. Interconnection
charges for the GSM Cellular Business increased by 11.7% from 2004.
Interconnection charges for the CDMA Cellular Business increased by 19.7% from
2004. Interconnection charges for the Long Distance, Data and Internet Business
decreased by 14.9% from 2004. Interconnection charges as a percentage of the
total revenue was 9.6% in 2005, representing a slight increase from
2004.
3. Depreciation
and amortisation
Because
of the increased assets scale, depreciation and amortisation expenses increased
by 7.4% from 2004 to RMB20.64 billion in 2005. However, due to a greater
increase in total revenue, depreciation and amortisation expenses as a
percentage of total revenue decreased from 24.0% in 2004 to 23.4% in
2005.
4. Employee
benefit expenses
In
2005, due to various factors including a general increase in the employee
insurance premium expenditure, the introduction of certain new social insurance
items and the adoption of the new HKFRS which required the share-based payments
arising from share option granted to be amortised over the vesting periods and
recognised as personnel expenses, employee benefit expenses recorded an
increase. Employee benefit expenses for the whole year was RMB5.65 billion, up
21.5% from 2004, and represented 6.4% of the total revenue, up from 5.8% in
2004.
5. Selling
and marketing expenses
The
Unicom Group’s selling and marketing expenses primarily included sales
commissions, promotion and advertising expenses, amortisation of the capitalised
customer acquisition costs of contractual CDMA subscribers and customer
retention costs. Selling and marketing expenses totaled RMB20.80 billion in
2005, an increase of 5.7% from 2004, which was lower than the growth rate in the
total revenue by 4.8 percentage points. Amortisation of capitalised customer
acquisition costs on contractual CDMA
-
II-81 -
subscribers
was RMB6.07 billion. The balance of unamortised capitalised CDMA customer
acquisition costs decreased from RMB4.95 billion as of 31 December 2004 to
RMB3.11 billion as of 31 December 2005, easing the pressure from subsequent
amortisation charges on CDMA subscribers acquisition costs.
In
2005, Unicom put emphasis on enhancing cost effectiveness through reinforcing
the transformation of the marketing model. Selling and marketing expenses as a
percentage of the total revenue was 23.6%, down 1.1 percentage points from 24.7%
in 2004.
6. General,
administrative and other expenses
Affected
by factors such as the successive expiration of the warranty periods for
Unicom’s network equipment, a significant increase in the renewal maintenance
fees, a relatively fast growth in the consumption of water and electricity at
its base stations due to the increase in the scale of Unicom’s network and in
energy prices, general, administrative and other expenses were RMB11.86 billion
in 2005, up 11.9% from 2004. General, administrative and other expenses as a
percentage of the total revenue increased from 13.3% in 2004 to 13.4%. In 2005,
Unicom strengthened effective control over bad debts and the provision for bad
debts for the whole year was RMB1.52 billion, down 30.9% from 2004. The overall
bad debt ratio decreased from 2.8% in 2004 to 1.8%.
7. Cost
of telecommunications products sold
In
2005, the cost of telecommunications products sold was RMB3.67 billion, up by
40.7% from 2004, representing 4.2% of the total revenue.
8. Interest
income and finance costs
Interest
income in 2005 fell to RMB101 million, down 2.9% from 2004. Finance costs were
RMB1.13 billion, down 35.4% from 2004. Net finance costs decreased by 37.3% from
RMB1.65 billion in 2004 to RMB1.03 billion in 2005, primarily due to an
effective reduction in interest expense as a result of the issuance of RMB10
billion short-term bonds. In addition, Unicom recorded an exchange gain of
RMB0.274 billion due to the revaluation of RMB during 2005.
IV. Earnings
1. Profit
before income tax
Unicom
made efforts to strengthen cost and expense control and strived to realise the
coordinated development of “Quantity, Earnings and Effectiveness”. In 2005, its
profit before income tax was RMB7.09 billion, an increase of 11.3% from
2004.
Profit
before income tax for the GSM Cellular Business continued to grow steadily to
RMB7.24 billion, up 6.9% from 2004. Profit before income tax for the CDMA
Cellular Business improved quarter on quarter. Profit before income tax for the
CDMA Cellular Business for the second half of 2005 reached RMB0.33 billion. Loss
for CDMA Cellular Business for the whole year was RMB0.17 billion, a reduction
of RMB0.43 billion in loss from 2004. Profit before income tax for the Long
Distance, Data and Internet Business was RMB0.14 billion.
2. Income
tax expenses
The
Unicom Group’s income tax expenses increased to RMB2.17 billion in 2005, up by
9.8% from 2004. The effective tax rate was 30.6%.
3. Profit
for the year
The
Unicom Group’s profit for the year reached RMB4.92 billion in 2005. Basic
earnings per Unicom Share in 2005 were RMB0.392, an increase of 12.0% from
RMB0.350 in 2004.
V. EBITDA
EBITDA
of Unicom increased by 5.9% from 2004 to RMB28.72 billion in 2005. EBITDA margin
(EBITDA as a percentage of the revenue) was 32.6%, down 1.4 percentage points
from 2004.
EBITDA
for the GSM Cellular Business was RMB25.7 billion, up 4.3% from 2004. EBITDA
margin decreased from 51.3% in 2004 to 48.8%. EBITDA for the CDMA Cellular
Business increased from RMB-1.7 billion in 2004 to RMB0.48 billion. EBITDA for
the Long Distance, Data and Internet Business was RMB2.68 billion, an decrease
of 2.9% from 2004.
-
II-82 -
VI. Capital
expenditures and free cash flow
The
Unicom Group’s capital expenditures totaled RMB17.75 billion in 2005. Capital
expenditures attributable to the Cellular Business were RMB7.47 billion. Capital
expenditures for the Long Distance, Data and Internet Business were RMB1.18
billion. Capital expenditures for local gateway and infrastructure network were
RMB2.95 billion. Capital expenditures for billing system, customer services and
information technology system and buildings were RMB6.15 billion.
Free
cash flow improved further from RMB5.6 billion in 2004 to RMB13.66 billion in
2005.
The
table below illustrates the capital expenditures of various major segments in
2005 and the planned expenditures in 2006.
|
2005 (As
restated)
|
2006
Planned
|
|
|
RMB
in billion
|
RMB
in billion
|
|
|
Total
|
17.75
|
22.43
|
|
Cellular
|
7.47
|
11.23
|
|
Long
Distance, Data and Internet
|
1.18
|
1.47
|
|
Gateway
and infrastructure network
|
2.95
|
3.78
|
|
Others
|
6.15
|
5.95
|
Capital
expenditures planned for 2006 are RMB22.43 billion. Capital expenditures planned
for the GSM Cellular Business are RMB11.23 billion which will be used to satisfy
the demand of the Unicom Group’s subscribers, improve the quality of network
coverage and increase the network capacity as appropriate, as well as to upgrade
the GPRS networks in some major cities. Capital expenditures planned for Long
Distance, Data and Internet Business are RMB1.47 billion. Capital expenditures
planned for local gateway and infrastructure network are RMB3.78 billion.
Capital expenditures planned for billing system, customer services and
information technology system and buildings and others are RMB5.95
billion.
Unicom
plans to rely largely on cash generated from operating activities to satisfy its
capital expenditures needs in 2006.
VII. Balance
Sheet
In
2005, Unicom’s balance sheet structure remained sound and its financial position
further improved. Total assets changed from RMB151.06 billion as of 31 December
2004 to RMB144.62 billion as of 31 December 2005. Total liabilities decreased
from RMB78.22 billion as of 31 December 2004 to RMB67.95 billion as of 31
December 2005. The liabilities-to-assets ratio decreased from 51.8% as of 31
December 2004 to 47.0% as of 31 December 2005.
As
of 31 December 2005, the Unicom Group had interest bearing debts of RMB35,042
million, of which RMB23,636 million was denominated in RMB, RMB1,722 million was
denominated in HK$ and RMB9,684 million was denominated in US$. Among the
interest bearing debts, RMB7,442 million was carried at fixed interest rates. As
of 31 December 2005, the Unicom Group had cash and cash equivalents of RMB5,489
million, of which RMB4,771 million was denominated in RMB, RMB48 million was
denominated in HK$ and RMB670 million was denominated in US$.
As
of 31 December 2005, if the RMB had appreciated by 10% while all other variables
are held constant, the Unicom Group would have recognised an additional exchange
gain of RMB1,040 million.
As
of 31 December 2005, the Unicom Group had net current liabilities (i.e. current
assets minus current liabilities) of RMB36.80 billion, representing an increase
of RMB6.65 billion from RMB30.15 billion at the end of 2004. Taking into account
available financing and continuous net cash inflows from its operating results,
the Unicom Group believes that Unicom has sufficient funds to meet its working
capital requirements and debt obligations.
5. INDEBTEDNESS
At
the close of business on 30 June 2008, being the latest practicable date for the
purpose of this indebtedness statement, the Unicom Group had the following
outstanding borrowings:
-
II-83 -
|
Bank
loans
|
Interest
rate and final maturity
|
RMB
million
|
|
—
Renminbi denominated
|
Interest
rate was 3.60% per annum with maturity through 17 July
2010
|
200
|
|
— US
dollar denominated
|
Interest
rates ranging from 3.46% to 3.55% per annum with maturity
through 26 September 2010
|
3,430
|
|
Finance
lease obligations
|
3
|
|
|
－－－－
|
||
|
3,633
|
||
|
Less:
Current portion of long-term bank loans and finance lease
obligations
|
(2,058)
|
|
|
－－－－
|
||
|
Long-term
portion of long-term bank loans and finance lease
obligations
|
1,575
|
|
|
========
|
All
the bank loans as at 30 June 2008 were unsecured.
At
the close of business on 30 June 2008, the Unicom Group had operating lease
commitments amounting to approximately RMB8.8 billion, of which approximately
RMB3.5 billion was related to the CDMA network capacity leasing.
Save
as aforesaid and apart from intra-group liabilities, the Unicom Group did not
have, at the close of business on 30 June 2008, any debt securities and other
borrowings or any mortgages, charges, debentures, loan capital issued and
outstanding or authorised or otherwise created but unissued, bank overdrafts,
loans, liabilities under acceptance (other than normal trade bills) or other
similar indebtedness, hire purchase and finance lease commitments or any
guarantees or other material contingent liabilities.
The
completion of the CDMA Business Disposal will give rise to a mandatory
prepayment under the terms of the syndicated loan agreement relating to a
syndicated term loan facility granted to Unicom, which is included in the
long-term portion of long-term bank loans and finance lease obligations in the
table of indebtedness set out above. The reduction in the shareholding of Unicom
BVI in Unicom following the completion of the Scheme will give rise to an event
of default under the terms of the same syndicated loan agreement. Unicom is
currently in discussions with its lenders for waivers to be granted in respect
of the prepayment and the event of default described above and associated
covenants. If such waivers are not granted by Unicom’s lenders and if either the
CDMA Business Disposal or the Scheme is completed, Unicom will be required to
repay the entire principal amount outstanding under such loan facility together
with accrued interest on completion of the CDMA Business Disposal or the Scheme.
The principal amount outstanding under such loan facility is expected to be
US$200 million at the time the CDMA Business Disposal or the Scheme is completed
and, under the terms of the syndicated loan agreement, such amount is otherwise
scheduled for repayment in September 2010. If Unicom is required to repay the
outstanding principal amount as stated above, it expects to have sufficient cash
resources available to fund such payment.
6. MATERIAL
CHANGES
On
2 June 2008, the boards of directors of Unicom and Netcom jointly announced that
Unicom formally presented the Proposals to the Board to put forward the
Proposals to the Netcom Shareholders to consider the merger of Unicom and Netcom
by way of a scheme of arrangement of Netcom under Section 166 of the Hong Kong
Companies Ordinance. Please refer to the Explanatory Statement in this document
for further details of the Proposals and the Scheme.
On
27 July 2008, Unicom and its wholly-owned subsidiary, CUCL, entered into the
CDMA Business Disposal Agreement to sell the CDMA Business to China Telecom for
a cash consideration of RMB43.8 billion (approximately HK$49.8 billion), which
is subject to adjustment. The CDMA Business Disposal is a separate and
independent transaction from the Proposals. Please refer to paragraph 14 headed
“Information on Unicom — CDMA Business Disposal and Related Transactions” in the
Explanatory Statement in this document for further details.
-
II-84 -
Save
as disclosed above, the Unicom Directors are not aware of any material changes
in the financial or trading position or outlook of the Unicom Group subsequent
to 31 December 2007, being the date to which the latest audited financial
statements of the Unicom Group were made up.
-
II-85 -
|
APPENDIX
III
|
UNAUDITED
PRO FORMA CONSOLIDATED
|
|
|
FINANCIAL
INFORMATION OF THE ENLARGED GROUP
|
||
|
1.
|
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF THE ENLARGED
GROUP
|
INTRODUCTION
The
following unaudited pro forma consolidated balance sheet, consolidated income
statement and consolidated cash flow statement of the Enlarged Group
(collectively referred to as the “Unaudited Pro Forma Consolidated Financial
Information”)
have been prepared on the basis of the notes set out below for the purpose of
illustrating the effect of the proposed very substantial acquisition of 100%
equity interests in Netcom by Unicom (the “Proposed Merger”) as if it had taken
place on 31 December 2007 for the unaudited pro forma consolidated balance sheet
and on 1 January 2007 for the unaudited pro forma consolidated income statement
and consolidated cash flow statement. The Unaudited Pro Forma Consolidated
Financial Information has been prepared for illustrative purposes only and
because of its hypothetical nature, it may not give a true picture of the
financial position, results of operations and cash flows of the Enlarged Group
had the Proposed Merger been completed as at 31 December 2007 or 1 January 2007
respectively or at any future dates.
The
Unaudited Pro Forma Consolidated Financial Information should be read in
conjunction with the audited consolidated financial statements of the Netcom
Group and of the Unicom Group for the year ended 31 December 2007 as set out in
Appendix I and Appendix II, respectively, to the Explanatory Statement, other
financial information elsewhere in this document and the unaudited pro forma
financial information of the Unicom Group illustrating the effect of the CDMA
Business Disposal as set out in Appendix I to the circular relating to the CDMA
Business Disposal dated 1 August 2008 issued by Unicom (the “Disposal of CDMA
Business Circular”).
- III-1
-
Unaudited
Pro Forma Consolidated Balance Sheet of the Enlarged Group
(All
amounts in RMB million unless otherwise stated)
|
As
at 31 December 2007
|
|||||||
|
Extracted
from the Disposal of CDMA Business Circular (Notes 1 &
5)
|
Pro
Forma Adjustments
|
||||||
|
Unicom
Group
|
Deduct:
CDMA
business
|
Other
pro
forma
adjustments
|
Adjusted
amount
after
CDMA
Business
Disposal
|
Netcom
Group
|
Other
pro
forma
adjustments
|
The
Enlarged
Group
|
|
|
Note
2
|
Note
3
|
Note
4
|
Note
5
|
||||
|
ASSETS
|
|||||||
|
Non-current
assets
|
|||||||
|
Property,
plant and equipment
|
116,162
|
2,823
|
113,339
|
160,938
|
274,277
|
||
|
Goodwill
|
3,144
|
—
|
(373)
|
2,771
|
—
|
2,771
|
|
|
Other
assets
|
12,855
|
2,960
|
9,895
|
7,289
|
17,184
|
||
|
Deferred
income tax assets
|
427
|
37
|
18
|
408
|
2,693
|
3,101
|
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
132,588
|
5,820
|
126,413
|
170,920
|
297,333
|
|||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Current
assets
|
|||||||
|
Inventories
|
2,528
|
1,765
|
763
|
287
|
1,050
|
||
|
Accounts
receivable, net
|
3,211
|
1,323
|
1,888
|
7,625
|
9,513
|
||
|
Prepayments
and other current
assets
|
3,517
|
849
|
2,668
|
940
|
3,608
|
||
|
Amounts
due from related parties
|
109
|
—
|
109
|
347
|
456
|
||
|
Amounts
due from Domestic
Carriers
|
150
|
—
|
13,140
|
13,290
|
914
|
(163)(c)
|
14,041
|
|
Short-term
bank deposits
|
644
|
—
|
644
|
91
|
735
|
||
|
Cash
and cash equivalents
|
6,675
|
2,834
|
30,660
|
34,501
|
5,304
|
39,805
|
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
16,834
|
6,771
|
53,863
|
15,508
|
69,208
|
|||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Total
assets
|
149,422
|
12,591
|
180,276
|
186,428
|
366,541
|
||
|
=============
|
=============
|
=============
|
=============
|
=============
|
|||
- III-2
-
Unaudited
Pro Forma Consolidated Balance Sheet of the Enlarged Group
(Continued)
(All
amounts in RMB million unless otherwise stated)
|
As
at 31 December 2007
|
|||||||
|
Extracted
from the Disposal of CDMA
Business
Circular (Notes 1 & 5)
|
Pro
Forma
|
Adjustments
|
|||||
|
Unicom
Group
|
Deduct:
CDMA
business
|
Other
pro
forma
adjustments
|
Adjusted
amount
after
CDMA
Business
Disposal
|
Netcom
Group
|
Other
pro
forma
adjustments
|
The
Enlarged
Group
|
|
|
Note
2
|
Note
3
|
Note
4
|
Note
5
|
||||
|
EQUITY
|
|||||||
|
Capital
and reserves attributable
to Unicom’s equity holders
|
|||||||
|
Share
capital
|
1,437
|
—
|
1,437
|
2,206
|
(1,307)(a)
|
2,336
|
|
|
Share
premium
|
64,320
|
—
|
64,320
|
43,538
|
121,719
(a)
|
229,577
|
|
|
Reserves
|
3,968
|
—
|
3,968
|
9,353
|
(120,412)(a)
|
(107,091)
|
|
|
Equity
of CDMA Business (net assets)
|
—
|
4,669
|
4,669
|
—
|
—
|
—
|
|
|
Retained
profits
|
|||||||
|
-
Proposed final dividend
|
2,727
|
—
|
2,727
|
3,700
|
6,427
|
||
|
-
Others
|
24,761
|
—
|
24,962
|
49,723
|
23,255
|
(320)(b)
|
72,658
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
97,213
|
4,669
|
122,175
|
82,052
|
203,907
|
|||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Minority
interest in equity
|
4
|
4
|
—
|
—
|
—
|
||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Total
equity
|
97,217
|
4,673
|
122,175
|
82,052
|
203,907
|
||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
LIABILITIES
|
|||||||
|
Non-current
liabilities
|
|||||||
|
Long-term
bank loans
|
1,661
|
—
|
(1,461)
|
200
|
14,425
|
14,625
|
|
|
Corporate
bonds
|
—
|
—
|
—
|
2,000
|
2,000
|
||
|
Obligations
under finance
leases
|
4
|
—
|
4
|
—
|
4
|
||
|
Deferred
income tax
liabilities
|
6
|
—
|
6
|
856
|
862
|
||
|
Deferred
revenue
|
1,302
|
609
|
481
|
1,174
|
6,367
|
7,541
|
|
|
Provisions
|
—
|
—
|
—
|
2,007
|
2,007
|
||
|
Amounts
due to related
parties
|
—
|
—
|
—
|
6,169
|
6,169
|
||
|
Other
non-current liabilities
|
—
|
—
|
—
|
12
|
12
|
||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
2,973
|
609
|
1,384
|
31,836
|
33,220
|
|||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
- III-3
-
Unaudited
Pro Forma Consolidated Balance Sheet of the Enlarged Group
(Continued)
(All
amounts in RMB million unless otherwise stated)
|
As
at 31 December 2007
|
|||||||
|
Extracted
from the Disposal of CDMA
Business
Circular (Notes 1 & 5)
|
Pro
Forma
|
Adjustments
|
|||||
|
Unicom
Group
|
Deduct:
CDMA
business
|
Other
pro
forma
adjustments
|
Adjusted
amount
after
CDMA
Business
Disposal
|
Netcom
Group
|
Other
pro
forma
adjustments
|
The
Enlarged
Group
|
|
|
Note
2
|
Note
3
|
Note
4
|
Note
5
|
||||
|
Current
liabilities
|
|||||||
|
Payables
and accrued liabilities
|
32,032
|
2,476
|
100
|
29,656
|
17,988
|
320(b)
|
47,964
|
|
Taxes
payable
|
1,240
|
10
|
12,707
|
13,937
|
3,750
|
17,687
|
|
|
Amounts
due to Unicom Parent
|
821
|
—
|
821
|
—
|
821
|
||
|
Amounts
due to related parties
|
770
|
—
|
770
|
4,886
|
5,656
|
||
|
Amounts
due to Domestic
Carriers
|
600
|
—
|
600
|
74
|
(163)(c)
|
511
|
|
|
Short
term bank loans
|
—
|
—
|
—
|
11,850
|
11,850
|
||
|
Short-term
bonds
|
—
|
—
|
—
|
20,000
|
20,000
|
||
|
Current
portion of long-term
bank loans
|
2,191
|
—
|
1,461
|
3,652
|
5,220
|
8,872
|
|
|
Current
portion of obligations
under finance leases
|
1
|
—
|
1
|
102
|
103
|
||
|
Current
portion of provision
|
—
|
—
|
—
|
3,381
|
3,381
|
||
|
Advances
from customers
|
11,577
|
4,823
|
526
|
7,280
|
5,289
|
12,569
|
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
49,232
|
7,309
|
56,717
|
72,540
|
129,414
|
|||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Total
liabilities
|
52,205
|
7,918
|
58,101
|
104,376
|
162,634
|
||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Total
equity and liabilities
|
149,422
|
12,591
|
180,276
|
186,428
|
366,541
|
||
|
=============
|
=============
|
=============
|
=============
|
=============
|
|||
|
Adjusted
net tangible assets of the Enlarged Group
|
Note
6
|
198,564
|
|||||
|
=============
|
|||||||
|
Adjusted
net tangible assets of the Enlarged Group per Unicom Share
(RMB)
|
Note
7
|
8.36
|
|||||
|
=============
|
|||||||
- III-4
-
Unaudited
Pro Forma Consolidated Income Statement of the Enlarged Group
(All
amounts in RMB million unless otherwise stated)
|
For
the year ended 31 December 2007
|
|||||||
|
Extracted
from the Disposal of CDMA
Business
Circular (Notes 1 & 5)
|
Pro Forma |
Adjustments
|
|||||
|
Unicom
Group
|
Deduct:
CDMA
business
|
Other
pro
forma
adjustments
|
Adjusted
amount
after
CDMA
Business
Disposal
|
Netcom
Group
|
Other
pro
forma
adjustments
|
The
Enlarged
Group
|
|
|
Note
2
|
Note
3
|
Note
4
|
Note
5
|
||||
|
Continuing
operations
|
|||||||
|
Revenues
(Turnover)
|
99,539
|
32,618
|
752
|
67,673
|
84,081
|
(1,178)(d)
|
150,576
|
|
Leased
lines and network
capacities
|
(9,135)
|
(8,487)
|
(648)
|
(611)
|
27(d)
|
(1,232)
|
|
|
Interconnection
charges
|
(10,907)
|
(3,553)
|
(1,209)
|
(8,563)
|
(4,014)
|
1,151(d)
|
(11,426)
|
|
Depreciation
and amortisation
|
(22,677)
|
(1,012)
|
(390)
|
(22,055)
|
(25,495)
|
(47,550)
|
|
|
Employee
benefit expenses
|
(7,140)
|
(1,824)
|
(5,316)
|
(12,223)
|
(17,539)
|
||
|
Selling
and marketing
|
(19,681)
|
(8,913)
|
(10,768)
|
(4,959)
|
(15,727)
|
||
|
General,
administrative and other
expenses
|
(14,639)
|
(3,569)
|
(11,070)
|
(15,682)
|
(320)(b)
|
(27,072)
|
|
|
Cost
of telecommunications
products sold
|
(5,032)
|
(4,801)
|
(231)
|
(3,831)
|
(4,062)
|
||
|
Financial
gains/(costs)
|
87
|
(15)
|
(54)
|
48
|
(3,333)
|
(3,285)
|
|
|
Interest
income
|
186
|
15
|
171
|
113
|
284
|
||
|
Realised
loss on changes in fair
value of derivative component
of convertible bonds
|
(569)
|
—
|
(569)
|
—
|
(569)
|
||
|
Other
gains - net
|
2,923
|
7
|
2,916
|
1,221
|
4,137
|
||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Profit
before income tax
|
12,955
|
466
|
11,588
|
15,267
|
26,535
|
||
|
Income
tax expenses
|
(3,654)
|
(272)
|
298
|
(3,084)
|
(3,796)
|
(6,880)
|
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Profit
for the year from
continuing operations
|
9,301
|
194
|
8,504
|
11,471
|
19,655
|
||
|
Profit
for the year from
discontinued operations
|
—
|
—
|
25,439
|
25,439
|
624
|
26,063
|
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Profit
for the year
|
9,301
|
194
|
33,943
|
12,095
|
45,718
|
||
|
=============
|
=============
|
=============
|
=============
|
=============
|
|||
- III-5
-
Unaudited
Pro Forma Consolidated Cash Flow Statement of the Enlarged Group
(All
amounts in RMB million unless otherwise stated)
|
For
the year ended 31 December 2007
|
|||||||
|
Extracted
from the Disposal of CDMA
Business
Circular (Notes 1 & 5)
|
Pro
Forma
|
Adjustments
|
|||||
|
Unicom
Group
|
Deduct:
CDMA
business
|
Other
pro
forma
adjustments
|
Adjusted
amount
after
CDMA
Business
Disposal
|
Netcom
Group
|
Other
pro
forma
adjustments
|
The
Enlarged
Group
|
|
|
Note
2
|
Note
3
|
Note
5
|
|||||
|
Cash
flows from operating activities
|
|||||||
|
Cash
generated from operations
|
36,836
|
1,133
|
35,703
|
40,776
|
76,479
|
||
|
Interest
received
|
189
|
15
|
174
|
113
|
287
|
||
|
Interest
paid
|
(498)
|
—
|
108
|
(390)
|
(3,021)
|
(3,411)
|
|
|
Income
tax paid
|
(4,195)
|
—
|
(4,195)
|
(4,107)
|
(8,302)
|
||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Cash
inflow from operating activities of
continuing operations
|
32,332
|
1,148
|
31,292
|
33,761
|
65,053
|
||
|
Cash
inflow from operating activities of
discontinued operations
|
—
|
—
|
—
|
388
|
388
|
||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Net
cash generated from operating activities
|
32,332
|
1,148
|
31,292
|
34,149
|
65,441
|
||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Cash
flows from investing activities
|
|||||||
|
Purchase
of property, plant and
equipment
|
(21,502)
|
—
|
(21,502)
|
(20,323)
|
(41,825)
|
||
|
Proceeds
from sale of property, plant and
equipment
|
82
|
—
|
82
|
65
|
147
|
||
|
Consideration
for purchase of entity
under common control
|
(880)
|
—
|
(880)
|
(2,259)
|
(3,139)
|
||
|
(Increase)/decrease
in short-term bank
deposits
|
(448)
|
—
|
(448)
|
14
|
(434)
|
||
|
Purchase
of other assets
|
(2,219)
|
—
|
(2,219)
|
(196)
|
(2,415)
|
||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Cash
outflow used in investing activities of
continuing operations
|
(24,967)
|
—
|
(24,967)
|
(22,699)
|
(47,666)
|
||
|
Cash
inflow from investing activities of
discontinued operations
|
—
|
—
|
43,800
|
43,800
|
3,103
|
46,903
|
|
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Net
cash (used in)/from investing activities
|
(24,967)
|
—
|
18,833
|
(19,596)
|
(763)
|
||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
- III-6
-
Unaudited
Pro Forma Consolidated Cash Flow Statement of the Enlarged Group
(Continued)
(All
amounts in RMB million unless otherwise stated)
|
For
the year ended 31 December 2007
|
|||||||
|
Extracted
from the Disposal of CDMA
Business
Circular (Notes 1 & 5)
|
Pro
Forma
|
Adjustments
|
|||||
|
Unicom
Group
|
Deduct:
CDMA
business
|
Other
pro
forma
adjustments
|
Adjusted
amount
after
CDMA
Business
Disposal
|
Netcom
Group
|
Other
pro
forma
adjustments
|
The
Enlarged
Group
|
|
|
Note
2
|
Note
3
|
Note
5
|
|||||
|
Cash
flows from financing activities
|
|||||||
|
Proceeds
from exercise of share
options
|
313
|
—
|
313
|
219
|
532
|
||
|
Proceeds
from short-term bonds
|
—
|
—
|
—
|
20,000
|
20,000
|
||
|
Proceeds
from short-term bank loans
|
—
|
—
|
—
|
63,837
|
63,837
|
||
|
Proceeds
from long-term bank loans
|
—
|
—
|
—
|
2,559
|
2,559
|
||
|
Proceeds
from issuance of corporate
bonds
|
—
|
—
|
—
|
2,000
|
2,000
|
||
|
Proceeds
from related parties loans
|
—
|
—
|
—
|
2,249
|
2,249
|
||
|
Repayment
of short-term bonds
|
(6,970)
|
—
|
(6,970)
|
(9,676)
|
(16,646)
|
||
|
Repayment
of short-term bank loans
|
—
|
—
|
—
|
(82,965)
|
(82,965)
|
||
|
Repayment
of long-term bank loans
|
(3,991)
|
—
|
(3,845)
|
(7,836)
|
(9,425)
|
(17,261)
|
|
|
Repayment
of capital element of
finance lease payments
|
—
|
—
|
—
|
(890)
|
(890)
|
||
|
Payment
of prior year distribution to
owner
|
—
|
—
|
—
|
(1,180)
|
(1,180)
|
||
|
Dividends
paid to equity holders
|
(2,285)
|
—
|
(2,285)
|
(3,600)
|
(5,885)
|
||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Cash
outflow used in financing
activities of continuing operations
|
(12,933)
|
—
|
(16,778)
|
(16,872)
|
(33,650)
|
||
|
Cash
inflow from financing activities of
discontinued operations
|
—
|
—
|
—
|
—
|
—
|
||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Net
cash used in financing activities
|
(12,933)
|
—
|
(16,778)
|
(16,872)
|
(33,650)
|
||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Cash
flows (used in)/from continuing
operations
|
(5,568)
|
1,148
|
(10,453)
|
(5,810)
|
(16,263)
|
||
|
Cash
flows from discontinued
operations
|
—
|
—
|
43,800
|
3,491
|
47,291
|
||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Net
(decrease)/ increase in cash and
cash equivalents
|
(5,568)
|
1,148
|
33,347
|
(2,319)
|
31,028
|
||
|
Cash
and cash equivalents at the
beginning of year
|
12,243
|
1,686
|
10,557
|
7,623
|
18,180
|
||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
Cash
and cash equivalents at the end
of year
|
6,675
|
2,834
|
43,904
|
5,304
|
49,208
|
||
|
=============
|
=============
|
=============
|
=============
|
=============
|
|||
- III-7
-
Unaudited
Pro Forma Consolidated Cash Flow Statement of the Enlarged Group
(Continued)
(All
amounts in RMB million unless otherwise stated)
|
For
the year ended 31 December 2007
|
|||||||
|
Extracted
from the Disposal of CDMA
Business
Circular (Notes 1 & 5)
|
Pro Forma |
Adjustments
|
|||||
|
Unicom
Group
|
Deduct:
CDMA
business
|
Other
pro
forma
adjustments
|
Adjusted
amount
after
CDMA
Business
Disposal
|
Netcom
Group
|
Other
pro
forma
adjustments
|
The
Enlarged
Group
|
|
|
Note
2
|
Note
3
|
Note
5
|
|||||
|
Analysis
of the balances of cash
and cash equivalents:
|
|||||||
|
Cash
balances
|
4
|
—
|
4
|
4
|
8
|
||
|
Bank
balances
|
6,671
|
2,834
|
43,900
|
5,300
|
49,200
|
||
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
－－－－－
|
|||
|
6,675
|
2,834
|
43,904
|
5,304
|
49,208
|
|||
|
=============
|
=============
|
=============
|
=============
|
=============
|
|||
Notes
to the Unaudited Pro Forma Consolidated Financial Information of the Enlarged
Group
|
1.
|
Prior
to the Proposed Merger, the majority of the equity interests of both
Unicom and Netcom are ultimately held by the State-owned Assets
Supervision and Administration Commission of the PRC. For accounting
purposes, the Proposed Merger is considered to be a business combination
of entities and businesses under common control. The Proposed Merger has
been accounted for using merger accounting in accordance with the AG 5
issued by the HKICPA. The Unaudited Pro Forma Consolidated Financial
Information presents the Proposed Merger as if it had occurred on 31
December 2007 for the unaudited pro forma consolidated balance sheet and
on 1 January 2007 for the unaudited pro forma consolidated income
statement and the unaudited pro forma consolidated cash flow
statement.
|
|
According
to the announcement issued by Unicom dated 28 July 2008 relating to the
CDMA Business Disposal, Unicom, CUCL and China Telecom entered into the
CDMA Business Disposal Agreement on 27 July 2008, which sets out the terms
and conditions on which Unicom and CUCL will sell, and China Telecom will
purchase, the CDMA Business. To facilitate investors in their analysis of
the impact of the Proposed Merger on the financial position, results of
operations and cash flow of the Unicom Group, it is assumed that the CDMA
Business Disposal has been completed as at 31 December 2007 for the
unaudited pro forma consolidated balance sheet or 1 January 2007 for the
unaudited pro forma consolidated income statement and the unaudited pro
forma consolidated cash flow statement. The historical numbers for the
Unicom Group and the pro forma adjustments to reflect the CDMA Business
Disposal to arrive at the figures included in the column titled “Adjusted
amount after CDMA Business Disposal” included in the Unaudited Pro Forma
Consolidated Financial Information is based on the unaudited pro forma
financial information of the Unicom Group illustrating the effect of the
CDMA Business Disposal as set out in Appendix I to the Disposal of CDMA
Business Circular.
|
|
2.
|
The
amounts are extracted from the audited consolidated financial statements
of the Unicom Group for the year ended 31 December 2007 set out in
Unicom’s published annual report for the year ended 31 December 2007
(“2007 Annual Report”).
|
|
Prior
to the Proposed Merger, the Unicom Group’s fixed assets other than
buildings are stated at historical cost less accumulated depreciation and
accumulated impairment losses, and buildings are stated at revalued
amounts. On the other hand, Netcom’s fixed line telecommunications
equipment is carried at revalued amounts, and buildings are stated at
historical cost less accumulated depreciation and accumulated impairment
losses.
|
|
|
In
order to ensure consistency of accounting policies of the buildings and
the fixed line telecommunications equipment adopted by the Enlarged Group
and to enhance the comparability with the accounting policies adopted by
other fixed line telecommunications operators, the Unicom Board has, on 25
July 2008, approved the change in the following accounting policies of the
Unicom Group, which will take effect only on the completion of the
Proposed Merger:
|
|
|
a)
|
Buildings
of the Unicom Group will be stated at historical costs (less accumulated
depreciation and accumulated impairment losses) instead of at revalued
amounts.
|
|
|
b)
|
Telecommunications
equipment of long distance, data and Internet business of the Unicom Group
will be stated at revalued amounts instead of historical costs (less
accumulated depreciation and accumulated impairment
losses).
|
The
pro forma adjustments for the Proposed Merger included in the Unaudited Pro
Forma Consolidated Financial Information are prepared in a manner consistent
with the accounting policies of the Unicom Group. Based on a consultation made
by Unicom with Hong Kong Stock Exchange, it was considered that the above two
proposed changes of accounting policies are not the subject matter of the
Proposed Merger, and in order to comply with Rule 4.29(1) of the Listing Rules,
no adjustment has been made to Unicom Group’s unadjusted historical financial
information for the year ended 31 December 2007 for the proposed changes in
accounting policies described in the preceding paragraph. In addition, in the
Unaudited Pro Forma Consolidated Financial Information, the fixed line
telecommunications equipment of Netcom is still stated at revalued amounts,
according to Rule 4.29(3) of the Listing Rules, no pro forma adjustment was made
since this accounting policy adopted by Netcom is consistent with the future
accounting policies to be adopted by Unicom on the completion of the Proposed
Merger.
In
order to provide additional information to the investors, assuming that the
above proposed changes in accounting policies had taken place on 31 December
2007, in respect of the unaudited pro forma consolidated balance sheet of the
Enlarged Group as at 31 December 2007, such changes in
- III-8
-
accounting
policies would have resulted in a decrease in the net carrying values of
buildings and telecommunications equipment (recorded under “Property, plant and
equipment”) of the Unicom Group amounting to approximately RMB303 million
(representing a reversal of revaluation surplus of approximately RMB378 million
and the decrease in accumulated depreciation i.e. increase in retained profits
of approximately RMB75 million) and approximately RMB814 million (comprised of
revaluation surplus of approximately RMB395 million and revaluation deficit of
approximately RMB1,209 million for the telecommunications equipment)
respectively, and an increase in deferred income tax assets and liabilities of
the Unicom Group amounting to approximately RMB302 million and approximately
RMB23 million respectively. Accordingly, revaluation reserves (recorded under
“Reserves”) and retained profits of the Unicom Group would decrease by
approximately RMB6 million and approximately RMB832 million respectively. The
aforementioned calculation was based on a revaluation performed by an
independent valuer in the PRC on the relevant telecommunications equipment as at
31 December 2007 using the replacement cost or open market value approach, as
appropriate.
Similarly,
assuming that the proposed changes in accounting policies had been applied on 1
January 2007 and that a valuation had been performed on the telecommunications
equipment as at 1 January 2007 and the results of which was not materially
different from the valuation described in the preceding paragraph as at 31
December 2007, in respect of the unaudited pro forma consolidated income
statement for the year ended 31 December 2007, such changes in accounting
policies would have resulted in a decrease in depreciation and amortisation of
the Unicom Group amounting to approximately RMB281 million, an increase of
general, administration and other expenses of the Unicom Group arising from the
devaluation of equipment amounting to approximately RMB1,209 million, and a
decrease in deferred income tax expenses of the Unicom Group amounting to
approximately RMB232 million. Accordingly, profit for the year of the Unicom
Group would decrease by approximately RMB696 million.
|
3.
|
The
amounts are based on the audited consolidated financial statements of the
Netcom Group for the year ended 31 December 2007 set out in Appendix I to
the Explanatory Statement, and after certain figures have been
reclassified to conform to the accounting policies and the presentation of
the Unicom Group’s audited financial statements for the year ended 31
December 2007.
|
|
4.
|
The
adjustments reflect the following:
|
|
|
a)
|
The
adjustment represents the estimated financial impact of issuing new Unicom
Shares in consideration of the cancellation of the Scheme Shares under the
Scheme and the elimination of Unicom´s investment in Netcom using merger
accounting. As described in this document, Unicom will allot and issue
approximately 10.1 billion new Unicom Shares as consideration for the
Share Proposal (including those underlying the Unicom ADSs to be issued
under the ADS Proposal) and the enlarged issued share capital of Unicom
will be approximately 23.76 billion Unicom Shares immediately following
the issue of such new Unicom Shares, based on the Share Exchange Ratio and
the outstanding number of Unicom Shares and Netcom Shares respectively on
the Last Trading Date and assuming that none of the outstanding Netcom
Options or Unicom Options had been exercised. The fair value of the new
Unicom Shares to be issued at the date of completion of the Proposed
Merger may be different from the fair value of the new Unicom Shares used
in the preparation of the unaudited pro forma consolidated balance sheet
of the Enlarged Group as presented above. In this circumstance, the actual
adjustment to the share premium and reserve resulting from the Proposed
Merger may be different from those presented
above.
|
|
|
b)
|
The
adjustment represents the estimated professional fees and other
transaction costs directly attributable to the Proposed Merger of
approximately RMB320 million which is expensed in the unaudited pro forma
consolidated income statement.
|
|
|
c)
|
The
adjustment represents the elimination of inter-company receivables and
payables between the Unicom Group and the Netcom Group as at 31 December
2007.
|
|
|
d)
|
The
adjustment represents the elimination of inter-company transactions
between the Unicom Group and the Netcom Group for the year ended 31
December 2007, including interconnection revenue and charges amounting to
approximately RMB1,151 million and leased line revenue and charges
amounting to approximately RMB27
million.
|
|
|
e)
|
Pursuant
to the Special Purpose Unicom Share Option Scheme, the Netcom Options
outstanding as at the Scheme Record Time will be cancelled and the Netcom
Optionholders will be granted Special Unicom Options as consideration for
the cancellation of their Netcom Options. Unicom has estimated the fair
value of the Special Unicom Options assuming the Proposed Merger had been
completed on the Last Trading Date and considered that the cancellation of
the Netcom Options outstanding as at the Scheme Record Time and the grant
of the Special Unicom Options to the Netcom Optionholders will have no
significant impact on the Unaudited Pro Forma Consolidated Financial
Information. Since the estimated fair values of the Netcom Options and the
Special Unicom Options will be changed upon completion of the Proposed
Merger, there may be significant impact on the consolidated financial
information if the fair value of the Special Unicom Options is
significantly higher than the Netcom Options at that
time.
|
|
5.
|
The
Unaudited Pro Forma Consolidated Financial Information has been prepared
based on the unaudited pro forma financial information reflecting the CDMA
Business Disposal as set out in the Disposal of CDMA Business Circular,
after considering the pro forma adjustments as set out
above.
|
Although
Unicom expects the CDMA Business Disposal will be completed before the
completion of the Proposed Merger, the CDMA Business Disposal and the Proposed
Merger are two separate and independent transactions. In order to give investors
additional information, Unicom has presented the Unaudited Pro Forma
Consolidated Financial Information below assuming that there is no CDMA Business
Disposal:
|
(In
RMB million)
|
Unicom
Group
|
Netcom
Group
|
Pro
forma
adjustments
|
Note
|
The
Enlarged
Group
|
|
As
at 31 December 2007
|
|||||
|
Total
Assets
|
149,422
|
186,428
|
(163)
|
(a)
|
335,687
|
|
Total
Liabilities
|
52,205
|
104,376
|
(163)
|
(a)
|
156,738
|
|
320
|
(c)
|
||||
|
Capital
and reserves attributable to Unicom’s equity holders
|
97,213
|
82,052
|
(320)
|
(c)
|
178,945
|
|
For
the year ended 31 December 2007
|
|||||
|
Revenue
|
99,539
|
84,081
|
(1,579)
|
(b)
|
182,041
|
|
Profit
for the year
|
9,301
|
12,095
|
(320)
|
(c)
|
21,076
|
- III-9
-
Notes:
|
|
(a)
|
The
adjustment represents the elimination of inter-company receivables and
payables between the Unicom Group and the Netcom Group as at 31 December
2007.
|
|
|
(b)
|
The
adjustment represents the elimination of inter-company transactions
between the Unicom Group and the Netcom Group for the year ended 31
December 2007 including interconnection revenue and charges generated from
CDMA business.
|
|
|
(c)
|
The
adjustment represents the estimated professional fees and other
transaction costs directly attributable to the Proposed Merger expensed in
the unaudited pro forma consolidated income
statement.
|
|
6.
|
The
unaudited pro forma adjusted net tangible assets of the Enlarged Group as
at 31 December 2007 is based on the unaudited pro forma adjusted net
assets of the Enlarged Group attributable to equity holders of Unicom as
at 31 December 2007 of approximately RMB203,907 million less intangible
assets (i.e. goodwill, purchased software and other intangible assets) of
the Enlarged Group as at 31 December 2007 of approximately RMB5,343
million.
|
|
7.
|
The
number of the Unicom Shares used for the calculation of this figure is
approximately 23,764 million Unicom Shares, comprising approximately
13,662 million Unicom Shares issued and outstanding and approximately
10,102 million new Unicom Shares to be issued, based on the outstanding
number of the Unicom Shares and the Netcom Shares respectively on the Last
Trading Date and assuming that none of the outstanding Netcom Options or
Unicom Options had been exercised.
|
|
8.
|
No
other adjustment has been made to reflect any trading result or other
transaction of the Unicom Group and the Netcom Group entered into
subsequent to 31 December 2007.
|
- III-10
-
|
2.
|
ACCOUNTANT’S
REPORT ON THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF
THE ENLARGED GROUP
|
The
following is the text of an accountant’s report received from
PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, for inclusion
in this document, in respect of the unaudited pro forma consolidated financial
information of the Enlarged Group.
ACCOUNTANT’S
REPORT ON THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF THE
ENLARGED GROUP TO THE DIRECTORS OF CHINA UNICOM LIMITED
We report
on the unaudited pro forma consolidated financial information set out on pages
III-1 to III-11 under the heading of “Unaudited Pro Forma Consolidated Financial
Information of the Enlarged Group” (the “Unaudited Pro Forma Consolidated
Financial Information”) in Appendix III to the explanatory statement
(“Explanatory Statement”) of the document dated 15 August 2008 (the “Scheme
Document”) jointly issued by China Unicom Limited (“Unicom”) and China Netcom
Group Corporation (Hong Kong) Limited (“Netcom”) in connection with the proposed
merger (the “Proposed Merger”) of Unicom and Netcom by way of a scheme of
arrangement of Netcom, which is included in Appendix IV to the circular dated 15
August 2008 (the “Unicom Circular”) issued by Unicom in connection with the very
substantial acquisition by Unicom of 100% of the equity interest of Netcom in
connection with the Proposed Merger. The Unaudited Pro Forma Consolidated
Financial Information has been prepared by the directors of Unicom (the “Unicom
Directors”), for illustrative purposes only, to provide information about how
the Proposed Merger might have affected the relevant financial information of
Unicom and its subsidiaries (the “Unicom Group”). The basis of preparation of
the Unaudited Pro Forma Consolidated Financial Information is set out on pages
III-1 to III-11 in Appendix III to the Explanatory Statement of the Scheme
Document.
Respective
Responsibilities of the Unicom Directors and the Reporting
Accountant
It is the
responsibility solely of the Unicom Directors to prepare the Unaudited Pro Forma
Consolidated Financial Information in accordance with Rule 4.29 of the Rules
Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited
(the “Listing Rules”) and Accounting Guideline 7 “Preparation of Pro Forma
Financial Information for Inclusion in Investment Circulars” issued by the Hong
Kong Institute of Certified Public Accountants (the “HKICPA”).
It is our
responsibility to form an opinion, as required by Rule 4.29(7) of the Listing
Rules, on the Unaudited Pro Forma Consolidated Financial Information and to
report our opinion to you. We do not accept any responsibility for any reports
previously given by us on any financial information used in the compilation of
the Unaudited Pro Forma Consolidated Financial Information beyond that owed to
those to whom those reports were addressed by us at the dates of their
issue.
Basis
of Opinion
We
conducted our engagement in accordance with Hong Kong Standard on Investment
Circular Reporting Engagements 300 “Accountants’ Reports on Pro Forma Financial
Information in Investment Circulars” issued by the HKICPA. Our work, which
involved no independent examination of any of the underlying financial
information, consisted primarily of comparing the audited consolidated balance
sheet as at 31 December 2007, audited consolidated income statement and cash
flow statement for the year ended 31 December 2007 of the Unicom Group with the
audited financial statements of the Unicom Group for the year ended 31 December
2007 as set out in Appendix II to the Explanatory Statement of the Scheme
Document, which is included in Appendix IV to the Unicom Circular, considering
the evidence supporting the adjustments and discussing the Unaudited Pro Forma
Consolidated Financial Information with the Unicom Directors.
We
planned and performed our work so as to obtain the information and explanations
we considered necessary in order to provide us with sufficient evidence to give
reasonable assurance that the Unaudited Pro Forma Consolidated Financial
- III-11
-
Information
has been properly compiled by the Unicom Directors on the basis stated, that
such basis is consistent with the accounting policies of the Unicom Group and
that the adjustments are appropriate for the purposes of the Unaudited Pro Forma
Consolidated Financial Information as disclosed pursuant to Rule 4.29(1) of the
Listing Rules.
Our work
has not been carried out in accordance with auditing standards or other
standards and practices generally accepted in the United States of America or
auditing standards of the Public Company Accounting Oversight Board (United
States) and accordingly should not be relied upon as if it had been carried out
in accordance with those standards and practices.
The
Unaudited Pro Forma Consolidated Financial Information is for illustrative
purposes only, based on the judgements and assumptions of the Unicom Directors,
and, because of its hypothetical nature, does not provide any assurance or
indication that any event will take place in the future and may not be
indicative of:
— the
financial position of the Unicom Group as at 31 December 2007 or any future
date, or
— the
results and cash flows of the Unicom Group for the year end 31 December 2007 or
any future periods.
Opinion
In our
opinion:
|
a)
|
the
Unaudited Pro Forma Consolidated Financial Information has been properly
compiled by the Unicom Directors on the basis
stated;
|
|
b)
|
such
basis is consistent with the accounting policies of the Unicom Group;
and
|
|
c)
|
the
adjustments are appropriate for the purposes of the Unaudited Pro Forma
Consolidated Financial Information as disclosed pursuant to Rule 4.29(1)
of the Listing Rules.
|
PricewaterhouseCoopers
Certified
Public Accountant
sHong
Kong, 15 August 2008
-
III-12 -
|
APPENDIX
IV
|
GENERAL
INFORMATION ON NETCOM
|
1. RESPONSIBILITY
STATEMENT
This document includes particulars
given in compliance with the Takeovers Code for the purpose of giving
information with regard to the Scheme and Netcom.
The information contained in this
document relating to the Unicom Group, Unicom Parent and Unicom BVI has been
supplied by Unicom. The issue of this document has been approved by the Netcom
Directors, who jointly and severally accept full responsibility for the accuracy
of the information contained in this document so far as it relates to the Netcom
Group, Netcom Parent and Netcom BVI only and confirm, having made all reasonable
enquiries, that to the best of their knowledge, their opinons expressed in this
document have been arrived at after due and careful consideration and there are
no other facts not contained in this document, the omission of which would make
any of the statements relating to the Netcom Group, Netcom Parent and Netcom BVI
in this document misleading.
2. SHARE
CAPITAL
(a) As
at the Latest Practicable Date, the authorised and issued share capital of
Netcom were as follows:
|
Authorised
Share Capital:
|
US$
|
||
|
25,000,000,000
Netcom Shares
|
1,000,000,000
|
||
|
=============
|
|||
|
Issued
and Fully Paid-up Share Capital:
|
|||
|
6,699,197,200
Netcom Shares
|
267,967,888
|
||
|
=============
|
|
(b)
|
All of the Netcom Shares rank pari passu in all respects as regards rights to capital, dividends and voting. |
|
(c)
|
Netcom issued 24,868,800 new Netcom Shares pursuant to the exercise of Netcom Options after 31 December 2007, being the end of the last financial year of Netcom, up to the Latest Practicable Date. |
|
(d)
|
As at the Latest Practicable Date, there were 7,098,720 Netcom ADSs outstanding. Each Netcom ADS represents 20 Netcom Shares. |
|
(e)
|
As at the Latest Practicable Date, there were 125,836,260 Netcom Options outstanding. If all of such Netcom Options are exercised, a total of 125,836,260 new Netcom Shares will be issued. These Netcom Options were issued pursuant to the Netcom Share Option Scheme. Two grants of the Netcom Options were made by Netcom. The Netcom Options granted on 22 October 2004, of which 66,864,360 Netcom Options were outstanding as at the Latest Practicable Date, have an exercise price of HK$8.40 and may be exercised in stages from 17 May 2006 to 16 November 2010. The Netcom Options granted on 6 December 2005, of which 58,971,900 Netcom Options were outstanding as at the Latest Practicable Date, have an exercise price of HK$12.45 and may be exercised in stages from 6 December 2007 to 5 December 2011. |
| (f) | Other than the Netcom Shares, the Netcom ADSs and the Netcom Options, there are no other options, derivatives, warrants or other securities convertible or exchangeable into Netcom Shares which are issued by Netcom. |
3. MARKET
PRICES
Netcom
Shares
The table below shows the closing
prices of the Netcom Shares as quoted on the Hong Kong Stock Exchange on (1) the
Latest Practicable Date, (2) the Last Trading Date and (3) at the end of each of
the calendar months during the Relevant Period:
-
IV-1 -
|
Date
|
Closing
Price for
each
Netcom Share
|
||
|
(HK$)
|
|||
|
31
December 2007
|
23.45
|
||
|
31
January 2008
|
23.80
|
||
|
29
February 2008
|
24.65
|
||
|
31
March 2008
|
22.40
|
||
|
30
April 2008
|
23.50
|
||
|
23
May 2008 (Last Trading Date)
|
27.05
|
||
|
30
May 2008
|
27.05
|
(1) | |
|
30
June 2008
|
21.25
|
||
|
31
July 2008
|
24.00
|
||
|
12
August 2008 (Latest Practicable Date)
|
23.00
|
Note:
(1) This
is the closing price on the Last Trading Date. The Netcom Shares were suspended
from trading on the Hong Kong Stock Exchange from 12:26 p.m. (Hong Kong time) on
the Last Trading Date and resumed trading at 9:30 a.m. (Hong Kong time) on
3 June 2008.
During the Relevant Period, the highest
closing price of the Netcom Shares as quoted on the Hong Kong Stock Exchange was
HK$27.05 each on 23 May 2008 and the lowest closing price of the Netcom Shares
as quoted on the Hong Kong Stock Exchange was HK$19.90 each on 20 March
2008.
Netcom
ADSs
The table below shows the closing
prices of the Netcom ADSs as quoted on the New York Stock Exchange on (1) the
Latest Practicable Date, (2) the Last ADS Trading Date and (3) at the end of
each of the calendar months during the Relevant Period:
|
Date
|
Closing
Price for
each
Netcom ADS
|
||
|
(US$)
|
|||
|
31
December 2007
|
59.40
|
||
|
31
January 2008
|
62.35
|
||
|
29
February 2008
|
61.23
|
||
|
31
March 2008
|
57.99
|
||
|
30
April 2008
|
61.05
|
||
|
22
May 2008 (Last ADS Trading Date)
|
61.97
|
||
|
30
May 2008
|
61.97
|
(1) | |
|
30
June 2008
|
54.59
|
||
|
31
July 2008
|
60.58
|
||
|
11
August 2008 (Latest Practicable Date)
|
59.57
|
-
IV-2 -
Note:
(1) This
is the closing price on the Last ADS Trading Date. The Netcom ADSs were
suspended from trading on the New York Stock Exchange from 9:30 a.m. (New York
time) on 23 May 2008 and resumed trading at 9:30 a.m. (New York time) on 3 June
2008.
During the Relevant Period, the highest
closing price of the Netcom ADSs as quoted on the New York Stock Exchange was
US$68.50 each on 23 May 2008 and the lowest closing price of the Netcom ADSs as
quoted on the New York Stock Exchange was US$52.30 each on 26 June
2008.
4. SHAREHOLDINGS
IN NETCOM SECURITIES
(a) As
at the Latest Practicable Date, the following Netcom Directors and chief
executive of Netcom had, or were deemed to have, interests or short positions in
the Netcom Shares, underlying Netcom Shares or debentures of Netcom or any of
its associated corporations (within the meaning of Part XV of the SFO) which
were required to be notified to Netcom and the Hong Kong Stock Exchange pursuant
to Divisions 7 and 8 of Part XV of the SFO (including interests and short
positions which they were deemed or taken to have undersuch provisions of the
SFO), or which are required, pursuant to Section 352 of the SFO to be entered in
the register referred to therein, or which are required, pursuant to the Model
Code for Securities Transactions by Directors of Listed Issuers contained in the
Listing Rules, to be notified to Netcom and the Hong Kong Stock
Exchange:
|
Name
of Netcom Director
|
Number
and
Description of
Equity
Derivatives(1)
|
Number
of
Underlying
Netcom
Shares
Involved
in
the
Netcom
Options
|
%
of
Shareholding
|
|
|
Zuo
Xunsheng
|
455,500
|
455,500
|
0.007%
|
|
|
Li
Fushen
|
480,000
|
480,000
|
0.007%
|
|
|
Yan
Yixun
|
354,000
|
354,000
|
0.005%
|
|
|
－－－－－－－
|
－－－－－－－
|
|||
|
Total
|
1,289,500
|
0.019%
|
||
|
=============
|
=============
|
Note:
(1)
The Netcom Options were all granted on 22 October 2004 under the Netcom Share
Option Scheme. Grantees of such Netcom Options are entitled to exercise the
Netcom Options at a price of HK$8.40 each in the following periods:
(i) in
respect of 40% of the Netcom Options granted, from 17 May 2006 to 16 November
2010;
(ii) in
respect of a further 20% of the Netcom Options granted, from 17 May 2007 to 16
November 2010;
(iii) in
respect of a further 20% of the Netcom Options granted, from 17 May 2008 to 16
November 2010; and
(iv) in
respect of the remaining 20% of the Netcom Options granted, from 17 May 2009 to
16 November 2010.
-
IV-3 -
(b) As
at the Latest Practicable Date, entities (other than exempt principal traders)
which control or are controlled by or under the same control as Citigroup held
the following interests in Netcom:
|
Netcom
Securities
|
Expiry
Period
|
Exercise
Price
|
Quantity
Held
|
Conversion
Rate
|
Conversion
Amount
Netcom
Shares
|
|
|
Netcom
Shares
|
3,429,500
|
|||||
|
Netcom
ADSs
|
13,209
|
20
|
264,180
|
|||
|
Call
Options on Netcom ADSs
|
September
2008
|
US$70.00
|
6(1)
|
100
|
12,000
|
The
above interests have been disclosed in this document due to Citigroup’s role as
the financial adviser to Netcom.
Note:
(1) Short
position.
(c) As
at the Latest Practicable Date:
|
(i)
|
save as disclosed in paragraph 4(b) of this Appendix IV, none of the subsidiaries of Netcom, any of the pension funds of the Netcom Group and any adviser to Netcom as specified in class (2) of the definition of “associate” under the Takeovers Code (but excluding exempt principal traders) owned or controlled any Netcom Securities; |
|
(ii)
|
there were no arrangements of the kind referred to in the third paragraph of Note 8 to Rule 22 of the Takeovers Code between Netcom, or any person who is an associate of Netcom by virtue of classes (1), (2), (3) or (4) of the definition of “associate” under the Takeovers Code, and any other person; |
|
(iii)
|
save as disclosed in paragraph 4(b) of this Appendix IV, no fund managers (other than exempt fund managers) connected with Netcom who managed funds on a discretionary basis owned or controlled any Netcom Securities; and |
|
(iv)
|
none of the Netcom Directors had borrowed or lent any Netcom Securities. |
5. DEALINGS
IN NETCOM SECURITIES
|
(a)
|
During the Relevant Period, save as disclosed in this paragraph 5(a) below, none of the Netcom Directors had dealt for value in any Netcom Securities: |
|
Name
|
Date
|
Type
of
Transaction
|
Number
of
Netcom
Securities
|
Price
|
|
|
Zuo
Xunsheng
|
5
May 2008
|
Exercise
of Netcom Options
|
24,500
Netcom Options
|
HK$8.40
for each Netcom Option
|
|
|
5
May 2008
|
Sale
|
24,500
Netcom Shares
|
HK$25.50
for each Netcom Share
|
|
(b)
|
During the period commencing from 2 June 2008, being the date of the Announcement, and ending on the Latest Practicable Date, the following entities (other than exempt principal traders) which control or are controlled by or under the same control as Citigroup had dealt for value in Netcom Shares and Netcom ADSs: |
Netcom
ADS
|
Name
|
Settlement
Date
|
Type
of
Transaction
|
Number
of
Netcom
ADSs
|
Price
for each Netcom
ADS
|
|
|
Citigroup
Global Markets, Inc.
|
17
July 2008
|
Sale
|
1,708
|
US$60.876
|
|
|
17
July 2008
|
Sale
|
310
|
US$60.83
|
||
|
1
August 2008
|
Sale
|
27
|
US$61.64
|
-
IV-4 -
(c) During
the period commencing from 2 June 2008, being the date of the Announcement, and
ending on the Latest Practicable Date:
|
(i)
|
save as disclosed in paragraph 5(b) of this Appendix IV, none of the subsidiaries of Netcom, any of the pension funds of the Netcom Group and any adviser to Netcom as specified in class (2) of the definition of “associate” under the Takeovers Code (but excluding exempt principal traders) had dealt for value in any Netcom Securities; |
|
(ii)
|
no person who had an arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with Netcom or with any person who is an associate of Netcom by virtue of classes (1), (2), (3) and (4) of the definition of “associate” under the Takeovers Code had dealt for value in any Netcom Securities; and |
|
(iii)
|
no fund managers (other than exempt fund managers) connected with Netcom who managed funds on a discretionary basis had dealt for value in any Netcom Securities. |
6. SHAREHOLDINGS
IN UNICOM SECURITIES
|
(a)
|
As at the Latest Practicable Date: | |
|
(i)
|
Li Jianguo, an executive Netcom Director, held 602,000 Unicom Shares; and | |
|
(ii)
|
Timpson Chung Shui Ming, an independent non-executive Netcom Director, held 6,000 Unicom Shares. | |
|
(b)
|
As at the Latest Practicable Date, entities (other than exempt principal traders) which control or are controlled by or under the same control as Citigroup held the following interests in Unicom: | |
|
Unicom
Securities
|
Quantity
Held
|
Conversion
Rate
|
Conversion
Amount
-
Unicom
Shares
|
|
|
Unicom
Shares
|
13,914,000
|
|||
|
Unicom
ADSs
|
502,570
|
10
|
5,025,700
|
The
above interests have been disclosed in this document due to Citigroup’s role as
the financial adviser to Netcom.
|
(c)
|
As at the Latest Practicable Date: | |
|
(i)
|
save as disclosed in paragraph 6(a) of this Appendix IV, neither Netcom nor any of the Netcom Directors was interested in any Unicom Securities or had borrowed or lent any Unicom Securities; | |
|
(ii)
|
save as disclosed in paragraph 6(b) of this Appendix IV, none of the subsidiaries of Netcom, any of the pension funds of the Netcom Group and any adviser to Netcom as specified in class (2) of the definition of “associate” under the Takeovers Code (but excluding exempt principal traders) owned or controlled any Unicom Securities; and | |
|
(iii)
|
save as disclosed in paragraph 6(b) of this Appendix IV, no fund managers (other than exempt fund managers) connected with Netcom who managed funds on a discretionary basis owned or controlled any Unicom Securities. |
7. DEALINGS IN UNICOM SECURITIES
|
(a)
|
During the Relevant Period, save as disclosed in this paragraph 7(a) below, neither Netcom nor any of the Netcom Directors had dealt for value in any Unicom Securities: | |
|
Name
|
Date
|
Type
of
Transaction
|
Number
of
Unicom
Securities
|
Price
|
|
|
Timpson
Chung Shui Ming
|
12
December 2007
|
Purchase
|
6,000
Unicom Shares
|
HK$15.64
for each Unicom Share
|
|
|
Li
Jianguo
|
28
February 2008
|
Exercise
of Unicom Options
|
292,000
Unicom Options
|
HK$15.42
for each Unicom Option
|
|
|
28
February 2008
|
Sale
|
292,000
Unicom Shares
|
HK$19.74
for each Unicom Share
|
||
|
8
July 2008
|
Exercise
of Unicom Options
|
142,000
Unicom Options
|
HK$5.92
for each Unicom Option
|
||
|
8
July 2008
|
Exercise
of Unicom Options
|
460,000
Unicom Options
|
HK$6.35
for each Unicom Option
|
-
IV-5 -
|
(b)
|
During the period commencing from 2 June 2008, being the date of the Announcement, and ending on the Latest Practicable Date, the following entities (other than exempt principal traders) which control or are controlled by or under the same control as Citigroup had dealt for value in Unicom Shares and Unicom ADSs: | |
Unicom
Shares
|
Name
|
Settlement
Date
|
Type
of
Transaction
|
Number
of
Unicom
Shares
|
Price
for each Unicom
Share
|
|
|
Nikko
Asset Management Co. Ltd.
|
12
June 2008
|
Purchase
|
50,000
|
HK$14.18
|
|
|
Citigroup
Global Markets Asia Limited
|
7
August 2008
|
Purchase
|
20,000
|
HK$16.02
|
|
|
7
August 2008
|
Sale
|
20,000
|
HK$15.96
|
Unicom ADSs
|
Name
|
Settlement
Date
|
Type
of
Transaction
|
Number
of
Unicom
ADSs
|
Price
for each
Unicom
ADS
|
|
|
Citigroup
Global Markets,
Inc
|
5
June 2008
|
Sale
|
100
|
US$19.206
|
|
|
2
July 2008
|
Sale
|
51
|
US$18.46
|
||
|
2
July 2008
|
Sale
|
26
|
US$18.45
|
||
|
2
July 2008
|
Sale
|
68
|
US$18.47
|
||
|
2
July 2008
|
Sale
|
57
|
US$18.48
|
||
|
11
July 2008
|
Sale
|
200
|
US$19.47
|
||
|
4
August 2008
|
Sale
|
34
|
US$20.33
|
||
|
4
August 2008
|
Sale
|
606
|
US$20.341
|
||
|
8
August 2008
|
Sale
|
600
|
US$20.232
|
|
(c)
|
During the period commencing from 2 June 2008, being the date of the Announcement, and ending on the Latest Practicable Date: | |
|
(i)
|
save as disclosed in paragraph 7(b) of this Appendix IV, none of the subsidiaries of Netcom, any of the pension funds of the Netcom Group and any adviser to Netcom as specified in class (2) of the definition of “associate” under the Takeovers Code (but excluding exempt principal traders) had dealt for value in any Unicom Securities; | |
|
(ii)
|
no person who had an arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with Netcom or with any person who is an associate of Netcom by virtue of classes (1), (2), (3) and (4) of the definition of “associate” under the Takeovers Code had dealt for value in any Unicom Securities; and | |
|
(iii)
|
save as disclosed in paragraph 7(b) of this Appendix IV, no fund managers (other than exempt fund managers) connected with Netcom who managed funds on a discretionary basis had dealt for value in any Unicom Securities. |
-
IV-6 -
8. MATERIAL
LITIGATION
As at the Latest Practicable Date, none
of the members of the Netcom Group was engaged in any litigation of material
importance and there was no litigation or claim of material importance known to
the Netcom Directors to be pending or threatened by or against any member of the
Netcom Group.
9. ARRANGEMENTS
AFFECTING NETCOM DIRECTORS
|
As
at the Latest Practicable Date:
|
||
|
(1)
|
no
benefit (save for statutory compensation required under appropriate laws)
would be given to any Netcom Director as compensation for loss of office
or otherwise in connection with the Scheme;
|
|
|
(2)
|
save
for the Proposals, there are no agreements or arrangements between any
Netcom Director and any other person which is conditional on or dependent
upon the outcome of the Scheme or otherwise connected with the Scheme;
and
|
|
|
(3)
|
there
are no material contracts entered into by Unicom in which any Netcom
Director has a material personal
interest.
|
|
10. SERVICE
CONTRACTS
As at the Latest Practicable Date,
there were no service contracts entered into by any Netcom Directors with Netcom
or any of its subsidiaries or associated companies (1) which (including both
continuous or fixed term contracts) had been entered into or amended within six
months before the date of the Announcement, (2) which were continuous contracts
with a notice period of 12 months or more or (3) which were fixed term contracts
with more than 12 months to run irrespective of the notice period.
11. MATERIAL
CONTRACTS
The following contracts (being
contracts not entered into in the ordinary course of business of the Netcom
Group) have been entered into by members of the Netcom Group after the date two
years before 2 June 2008, being the date of the Announcement, up to and
including the Latest Practicable Date and which are or may be
material:
|
(1)
|
a
strategic alliance agreement entered into between Netcom and Telefónica
dated 14 November 2005, and as amended by an agreement between Netcom and
Telefónica dated 12 November 2006, in connection with the cooperation of
Netcom and Telefónica in certain areas, including, among others,
management exchange, international business including voice and IP
peering, call centres, mobile services, technological assistance in the
areas of VAS, IPTV solutions, mobile content and other related areas as
well as the co-operation in the purchase of technology, end user equipment
and infrastructure;
|
|
|
(2)
|
a
share purchase agreement dated 2 June 2006 entered into among China Netcom
Corporation International Limited (the “Seller”), Netcom, Northern Trust
(Guernsey) Limited as custodian for Asset Holder PCC Limited re Ashmore
Emerging Markets Liquid Investment Portfolio (“Ashmore”) and Spinnaker
Global Opportunity Fund Limited (“Spinnaker” and together with Ashmore,
the “Purchasers”) in relation to the disposal by the Seller of the entire
equity interests in Asia Netcom Corporation Limited to the Purchasers for
a total cash consideration of US$168,840,000;
|
|
|
(3)
|
an
asset transfer agreement dated 15 January 2007 entered into between Netcom
Parent and China Netcom (Group) Company Limited in relation to the
disposal of the telecommunications operations of China Netcom (Group)
Company Limited in Shanghai Municipality and Guangdong Province and
related assets and liabilities to Netcom Parent at a total cash
consideration of RMB3.5 billion;
|
|
|
(4)
|
an
equity interest transfer agreement entered into between China Netcom Group
System Integration Limited Corporation and China Netcom Group Beijing
Communications Corporation on 5 December 2007, pursuant to which China
Netcom System Integration Limited Corporation agreed to acquire the entire
equity interest of Beijing Telecommunications Planning and Designing
Institute Corporation Limited from China Netcom Group Beijing
Communications Corporation for a total consideration of
RMB298,915,300;
|
|
|
(5)
|
a
loan agreement entered into between Netcom and Netcom BVI dated on 17
December 2007, pursuant to which Netcom BVI extended a loan of HK$83
million to Netcom at an annual interest rate of 6 months HIBOR plus 0.1%;
and
|
|
|
(6)
|
a
loan agreement entered into between Netcom and China Netcom Corporation
(BVI) Limited dated on 17 December2007, pursuant to which China Netcom
Corporation (BVI) Limited extended a loan of HK$347 million to Netcom at
an annual interest rate of 6 months HIBOR plus 0.1%.
|
|
-
IV-7 -
12. EXPERTS
The names and qualifications of the
professional advisers to Netcom who have been named in this document or given
their opinion or advice which are contained in this document are set out
below:
|
Name
|
Qualification
|
|
|
Citigroup
Global Markets Asia Limited
|
A
corporation licensed under the SFO to carry on Type 1 (dealing in
securities), Type 4 (advising on securities), Type 6 (advising on
corporate finance) and Type 7 (providing automated trading services)
regulated activities
|
|
|
N
M Rothschild & Sons (Hong Kong) Limited
|
A
corporation licensed under the SFO to carry on Type 1 (dealing in
securities), Type 4 (advising on securities) and Type 6 (advising on
corporate finance) regulated
activities
|
13. CONSENTS
|
(a)
|
Citigroup
has given and has not withdrawn its written consent to the issue of this
document with the inclusion of references to its name in the form and
context in which they respectively appear.
|
|
|
(b)
|
Rothschild
has given and has not withdrawn its written consent to the issue of this
document with the inclusion of the text of its letter and references to
its name in the form and context in which they respectively
appear.
|
-
IV-8 -
|
APPENDIX
V
|
GENERAL
INFORMATION ON NETCOM
|
1. RESPONSIBILITY
STATEMENT
This document includes particulars
given in compliance with the Takeovers Code for the purpose of giving
information with regard to the Scheme and Unicom.
The information contained in this
document relating to the Netcom Group, Netcom Parent and Netcom BVI has been
supplied by Netcom. The issue of this document has been approved by the Unicom
Directors, who jointly and severally accept full responsibility for the accuracy
of the information contained in this document (other than that in relation to
the Netcom Group, Netcom Parent and Netcom BVI) and confirm, having made all
reasonable enquiries, that to the best of their knowledge, their opinions
expressed in this document have been arrived at after due and careful
consideration and there are no other facts not contained in this document, the
omission of which would make any of the statements in this document (other than
those in relation to the Netcom Group, Netcom Parent and Netcom BVI)
misleading.
|
2.
|
SHARE
CAPITAL
|
|
|
(a)
|
As
at the Latest Practicable Date, the authorised and issued share capital of
Unicom were as follows:
|
|
|
Authorised
Share Capital:
|
HK$
|
|
|
30,000,000,000
Unicom Shares
|
3,000,000,000
|
|
|
=============
|
||
|
Issued
and Fully Paid-up Share Capital:
|
||
|
13,664,951,945
Unicom Shares
|
1,366,495,195
|
|
|
=============
|
|
(b)
|
All
the Unicom Shares rank pari passu in all
respects as regards rights to capital, dividends and
voting.
|
||
|
(c)
|
Unicom
issued 30,662,000 Unicom Shares pursuant to the exercise of Unicom Options
after 31 December 2007, being the end of the last financial year of
Unicom, up to the Latest Practicable Date.
|
||
|
(d)
|
No
Unicom Shares have been repurchased by Unicom after 31 December 2007,
being the end of the last financial year of Unicom.
|
||
|
(e)
|
As
at the Latest Practicable Date, there were 40,060,116 Unicom ADSs
outstanding. Each Unicom ADS represents 10 Unicom
Shares.
|
||
|
(f)
|
As
at the Latest Practicable Date, there were 224,547,600 Unicom Options
outstanding. If all of such Unicom Options are exercised, a total of
224,547,600 Unicom Shares will be issued. These Unicom Options were issued
pursuant to the Unicom Share Option Schemes. The Unicom Options granted
pursuant to the Unicom Pre-Global Offering Share Option Scheme on 22 June
2000, of which 16,977,600 Unicom Options were outstanding as at the Latest
Practicable Date, have an exercise price of HK$15.42 and may be exercised
from 22 June 2002 to 21 June 2010. The Unicom Options granted pursuant to
the Unicom Share Option Scheme:
|
||
|
(i)
|
on
30 June 2001, of which 4,390,000 Unicom Options were outstanding as at the
Latest Practicable Date, have an exercise price of HK$15.42 and may be
exercised from 30 June 2001 to 22 June 2010;
|
||
|
(ii)
|
on
10 July 2002 had an exercise price of HK$6.18 and might be exercised in
stages from 10 July 2003 to 9 July 2008. All of these Unicom Options have
lapsed;
|
||
|
(iii)
|
on
21 May 2003, of which 9,286,000 Unicom Options were outstanding as at the
Latest Practicable Date, have an exercise price of HK$4.30 and may be
exercised in stages from 21 May 2004 to 20 May 2009;
|
||
|
(iv)
|
on
20 July 2004, of which 41,316,000 Unicom Options were outstanding as at
the Latest Practicable Date, have an exercise price of HK$5.92 and may be
exercised in stages from 20 July 2005 to 19 July 2010;
|
||
- V-1
-
|
(v)
|
on
21 December 2004, of which 654,000 Unicom Option were outstanding as at
the Latest Practicable Date, have an exercise price of HK$6.20 and may be
exercised in stages from 21 December 2005 to 20 December 2010;
and
|
||
|
(vi)
|
on
15 February 2006, of which 151,924,000 Unicom Option were outstanding as
at the Latest Practicable Date, have an exercise price of HK$6.35 and may
be exercised in stages from 15 February 2008 to 14 February
2012.
|
||
|
(g)
|
Other
than the Unicom Shares, the Unicom ADSs and the Unicom Options, there are
no other options, derivatives, warrants or other securities convertible or
exchangeable into Unicom Shares which are issued by
Unicom.
|
||
|
(h)
|
There
has been no reorganisation of the capital of Unicom during the two
financial years preceding the date of the
Announcement.
|
||
3. MARKET
PRICES
Unicom
Shares
The table below shows the closing
prices of the Unicom Shares as quoted on the Hong Kong Stock Exchange on (1) the
Latest Practicable Date, (2) the Last Trading Date and (3) at the end of each of
the calendar months during the Relevant Period:
|
Date
|
Closing
Price for each Unicom Share
|
||
|
(HK$)
|
|||
|
31
December 2007
|
17.90
|
||
|
31
January 2008
|
17.98
|
||
|
29
February 2008
|
17.14
|
||
|
31
March 2008
|
16.38
|
||
|
30
April 2008
|
16.88
|
||
|
23
May 2008 (Last Trading Date)
|
18.48
|
||
|
30
May 2008
|
18.48
|
(1)
|
|
|
30
June 2008
|
14.48
|
||
|
31
July 2008
|
16.18
|
||
|
12
August 2008 (Latest Practicable Date)
|
15.46
|
|
Note:
|
|
|
(1)
|
This
is the closing price on the Last Trading Date. The Unicom Shares were
suspended from trading on the Hong Kong Stock Exchange from 12:26 p.m.
(Hong Kong time) on the Last Trading Date and resumed trading at 9:30 a.m.
(Hong Kong time) on 3 June 2008.
|
During the Relevant Period, the highest closing price of the Unicom Shares as
quoted on the Hong Kong Stock Exchange was HK$19.58 each on 18 February 2008 and
the lowest closing price of the Unicom Shares as quoted on the Hong Kong Stock
Exchange was HK$13.92 each on 10 June 2008.
Unicom
ADSs
The table below shows the closing
prices of the Unicom ADSs as quoted on the New York Stock Exchange on (1) the
Latest Practicable Date, (2) the Last ADS Trading Date and (3) at the end of
each of the calendar months during the Relevant Period:
|
Date
|
Closing
Price for
each
Unicom ADS
|
||
|
(US$)
|
|||
|
31
December 2007
|
22.40
|
||
|
31
January 2008
|
23.67
|
||
|
29
February 2008
|
21.23
|
||
|
31
March 2008
|
21.27
|
||
|
30
April 2008
|
21.57
|
||
|
22
May 2008 (Last ADS Trading Date)
|
20.96
|
||
|
30
May 2008
|
20.96
|
(1)
|
|
|
30
June 2008
|
18.52
|
||
|
31
July 2008
|
20.46
|
||
|
11
August 2008 (Latest Practicable Date)
|
20.01
|
- V-2
-
|
Note:
|
|
|
(1)
|
This
is the closing price on the Last ADS Trading Date. The Unicom ADSs were
suspended from trading on the New York Stock Exchange from 9:30 a.m. (New
York time) on 23 May 2008 and resumed trading at 9:30 a.m. (New York time)
on 3 June 2008.
|
During the Relevant Period, the highest
closing price of the Unicom ADSs as quoted on the New York Stock Exchange was
US$25.07 each on 1 February 2008 and the lowest closing price of the Unicom ADSs
as quoted on the New York Stock Exchange was US$17.49 each on 11 June
2008.
|
4.
|
SHAREHOLDINGS
IN NETCOM SECURITIES
|
||||
|
(a)
|
As
at the Latest Practicable Date:
|
||||
|
(i)
|
neither
Unicom nor any of the Unicom Directors was interested in any Netcom
Securities or had borrowed or lent any Netcom Securities;
and
|
||||
|
(ii)
|
none
of the parties acting in concert with Unicom owned or controlled any
Netcom Securities or had borrowed or lent any Netcom
Securities.
|
||||
|
(b)
|
As
at the Latest Practicable Date, the shareholdings in Netcom owned or
controlled by the persons who, prior to the despatch of this document, had
given irrevocable undertakings to Unicom to vote in favour of all of the
resolutions to approve the Scheme and any related matters for the
implementation of the Scheme to be proposed at the Court Meeting and the
Netcom EGM are as follows:
|
||||
|
Netcom
Shareholder
|
Number
of Netcom Shares Held
|
%
of Shareholding
|
|
|
Netcom
BVI
|
4,647,449,014
|
69.37%
|
|
|
Telefónica
|
333,971,305
|
4.99%
|
|
|
－－－－－－－
|
－－－－－－－
|
||
|
Total
|
4,981,420,319
|
74.36%
|
|
|
=============
|
=============
|
In addition, Netcom BVI has received an
irrevocable instruction to vote in favour of all of the resolutions to approve
the Scheme and any related matters for the implementation of the Scheme to be
proposed at the Court Meeting and the Netcom EGM in respect of the 149,683,549
Netcom Shares, representing approximately 2.23% of the issued share capital of
Netcom as at the Latest Practicable Date, which Netcom BVI holds as trustee on
behalf of a state-owned entity.
|
5.
|
DEALINGS
IN NETCOM SECURITIES
|
||||||
| (a) | During the Relevant Period, save as disclosed in this paragraph 5(a) below, neither Unicom nor any of the Unicom Directors had dealt for value in any Netcom Securities: | ||||||
|
Name
|
Date
|
Type
of
Transaction
|
Number
of Netcom
Securities
|
Price
|
|||
|
Tong
Jilu(1)
|
12
February 2008
|
Purchase
|
20,000
Netcom Shares
|
HK$22.25
|
|||
|
18
February 2008
|
Sale
|
20,000
Netcom Shares
|
HK$26.10
|
||||
|
Note:
|
|||||||
|
(1)
|
Director
of each of Unicom, Unicom Parent and Unicom A Share
Company.
|
||||||
|
(b)
|
During
the Relevant Period, the following entities (other than exempt fund
managers) which control or are controlled by or under the same control as
JPMorgan had dealt for value in Netcom Shares and Netcom ADSs1:
|
||||||
- V-3
-
Netcom Shares
The following transactions took place during the period from 2 December 2007 to
May 2008 and are aggregated on a daily basis.
|
Name
|
Date
|
Type
of Transaction
|
Number
of Netcom Shares
|
Average
Price (HK$)
|
Maximum
Price (HK$)
|
Minimum
Price (HK$)
|
|
|
Bear
Stearns International Limited
|
6
December 2007
|
Purchase
|
10,500
|
24.80
|
24.80
|
24.80
|
|
|
7
December 2007
|
Purchase
|
31,500
|
24.20
|
24.20
|
24.20
|
||
|
11
December 2007
|
Purchase
|
18,000
|
23.96
|
23.96
|
23.96
|
||
|
11
December 2007
|
Sale
|
100,000
|
24.37
|
24.37
|
24.37
|
||
|
12
December 2007
|
Purchase
|
20,000
|
24.13
|
24.13
|
24.13
|
||
|
17
December 2007
|
Purchase
|
50,000
|
23.68
|
23.68
|
23.68
|
||
|
4
January 2008
|
Purchase
|
14,000
|
23.73
|
23.73
|
23.73
|
||
|
7
January 2008
|
Purchase
|
280,000
|
23.70
|
23.70
|
23.70
|
||
|
8
January 2008
|
Purchase
|
17,500
|
24.45
|
24.45
|
24.45
|
||
|
14
January 2008
|
Purchase
|
15,500
|
24.72
|
24.81
|
24.57
|
||
|
15
January 2008
|
Purchase
|
4,000
|
24.49
|
24.49
|
24.49
|
||
|
21
January 2008
|
Purchase
|
150,000
|
24.98
|
25.03
|
24.88
|
||
|
1
February 2008
|
Purchase
|
13,500
|
24.30
|
24.30
|
24.30
|
||
|
5
February 2008
|
Purchase
|
100,000
|
24.55
|
24.55
|
24.55
|
||
|
20
February 2008
|
Purchase
|
50,000
|
24.53
|
24.53
|
24.53
|
||
|
18
March 2008
|
Sale
|
254,000
|
20.74
|
20.88
|
20.63
|
||
|
25
March 2008
|
Purchase
|
200,000
|
21.46
|
21.47
|
21.42
|
||
|
25
March 2008
|
Sale
|
2,000,000
|
19.46
|
19.46
|
19.46
|
||
|
26
March 2008
|
Purchase
|
190,000
|
21.67
|
21.82
|
21.52
|
||
|
3
April 2008
|
Purchase
|
80,000
|
23.68
|
23.68
|
23.68
|
||
|
J.P.
Morgan Securities Limited
|
31
January 2008
|
Purchase
|
160,000
|
24.20
|
24.20
|
24.20
|
|
|
1
February 2008
|
Purchase
|
300,000
|
24.20
|
24.45
|
23.75
|
||
|
19
February 2008
|
Purchase
|
18,000
|
25.00
|
25.00
|
25.00
|
||
|
22
February 2008
|
Sale
|
18,000
|
23.97
|
23.97
|
23.97
|
||
|
29
February 2008
|
Purchase
|
439,500
|
24.53
|
24.55
|
24.41
|
||
|
3
March 2008
|
Sale
|
269,500
|
23.71
|
23.85
|
23.60
|
||
|
4
March 2008
|
Sale
|
130,000
|
23.61
|
23.71
|
23.60
|
||
|
6
March 2008
|
Purchase
|
11,500
|
24.73
|
24.73
|
24.73.
|
||
|
11
March 2008
|
Sale
|
12,000
|
23.70
|
23.70
|
23.70
|
||
|
14
March 2008
|
Sale
|
39,500
|
22.25
|
22.25
|
22.25
|
||
|
18
March 2008
|
Purchase
|
11,000
|
21.25
|
21.25
|
21.25
|
||
|
1
April 2008
|
Sale
|
11,000
|
22.80
|
22.80
|
22.80
|
||
|
2
April 2008
|
Purchase
|
270,000
|
23.96
|
24.05
|
23.80
|
||
|
3
April 2008
|
Purchase
|
250,000
|
23.43
|
23.75
|
23.25
|
||
|
7
April 2008
|
Purchase
|
468,500
|
22.89
|
23.25
|
22.60
|
||
|
10
April 2008
|
Sale
|
168,500
|
22.28
|
22.30
|
22.25
|
||
|
11
April 2008
|
Sale
|
100,000
|
23.00
|
23.00
|
23.00
|
||
|
15
April 2008
|
Sale
|
100,000
|
21.75
|
21.75
|
21.75
|
||
|
17
April 2008
|
Purchase
|
293,500
|
22.75
|
23.00
|
22.60
|
||
|
18
April 2008
|
Purchase
|
206,500
|
22.52
|
22.65
|
22.35
|
||
|
21
April 2008
|
Purchase
|
300,000
|
22.87
|
23.00
|
22.80
|
||
|
24
April 2008
|
Sale
|
200,000
|
23.70
|
23.75
|
23.65
|
||
|
25
April 2008
|
Purchase
|
200,000
|
23.30
|
23.35
|
23.25
|
||
|
29
April 2008
|
Sale
|
300,000
|
23.98
|
24.05
|
23.95
|
||
|
30
April 2008
|
Purchase
|
300,000
|
23.60
|
23.70
|
23.50
|
||
|
J.P.
Morgan Whitefriars Inc.
|
10
December 2007
|
Purchase
|
87,000
|
23.68
|
23.68
|
23.68
|
|
|
11
December 2007
|
Purchase
|
70,500
|
24.09
|
24.09
|
24.09
|
||
|
12
December 2007
|
Purchase
|
33,000
|
24.12
|
24.12
|
24.12
|
||
|
21
February 2008
|
Sale
|
11,500
|
24.72
|
24.72
|
24.72
|
||
|
11
March 2008
|
Sale
|
7,500
|
23.72
|
23.72
|
23.72
|
||
|
1
April 2008
|
Purchase
|
19,000
|
23.00
|
23.00
|
23.00
|
- V-4
-
Note:
(1) Certain
exempted dealings undertaken by J.P. Morgan Securities Limited, J.P. Morgan
Whitefriars Inc., Bear Stearns & Co., Inc. and Bear Stearns International
Limited are excluded as such entities are exempt principal traders
The following transactions took place during the period from 2 May 2008 to the
Latest Practicable Date.
|
Name
|
Date
|
Type
of
Transaction
|
Number
of
Netcom
Shares
|
Price
(HK$)
|
|
|
Bear
Stearns International Limited
|
15
May 2008
|
Sale
|
596,500
|
24.68
|
|
|
22
May 2008
|
Purchase
|
72,000
|
24.00
|
||
|
J.P.
Morgan Securities Limited
|
2
May 2008
|
Sale
|
100,000
|
24.30
|
|
|
2
May 2008
|
Sale
|
100,000
|
24.45
|
||
|
2
May 2008
|
Sale
|
100,000
|
24.60
|
||
|
2
May 2008
|
Sale
|
100,000
|
24.70
|
||
|
2
May 2008
|
Sale
|
100,000
|
25.15
|
||
|
2
May 2008
|
Sale
|
100,000
|
25.20
|
||
|
2
May 2008
|
Sale
|
100,000
|
25.25
|
||
|
5
May 2008
|
Purchase
|
100,000
|
24.50
|
||
|
8
May 2008
|
Sale
|
200,000
|
25.35
|
||
|
14
May 2008
|
Purchase
|
100,000
|
25.00
|
||
|
14
May 2008
|
Purchase
|
34,500
|
25.10
|
||
|
14
May 2008
|
Purchase
|
150,000
|
25.15
|
||
|
14
May 2008
|
Purchase
|
100,000
|
25.20
|
||
|
15
May 2008
|
Purchase
|
8,000
|
23.50
|
||
|
15
May 2008
|
Purchase
|
15,500
|
23.80
|
||
|
15
May 2008
|
Purchase
|
100,000
|
23.90
|
||
|
15
May 2008
|
Purchase
|
100,000
|
24.05
|
||
|
15
May 2008
|
Purchase
|
100,000
|
24.10
|
||
|
16
May 2008
|
Purchase
|
92,000
|
23.90
|
||
|
19
May 2008
|
Purchase
|
100,000
|
23.50
|
||
|
19
May 2008
|
Purchase
|
100,000
|
23.70
|
||
|
19
May 2008
|
Purchase
|
100,000
|
23.80
|
||
|
19
May 2008
|
Purchase
|
100,000
|
24.00
|
||
|
21
May 2008
|
Sale
|
100,000
|
24.00
|
||
|
21
May 2008
|
Sale
|
100,000
|
24.20
|
||
|
22
May 2008
|
Sale
|
20,000
|
23.30
|
||
|
22
May 2008
|
Sale
|
50,000
|
23.55
|
||
|
22
May 2008
|
Sale
|
20,000
|
23.60
|
||
|
22
May 2008
|
Sale
|
20,000
|
23.65
|
||
|
22
May 2008
|
Sale
|
40,000
|
23.65
|
||
|
22
May 2008
|
Sale
|
50,000
|
23.70
|
||
|
22
May 2008
|
Sale
|
50,000
|
23.80
|
||
|
22
May 2008
|
Sale
|
50,000
|
23.80
|
||
|
22
May 2008
|
Sale
|
50,000
|
23.90
|
||
|
22
May 2008
|
Sale
|
50,000
|
23.90
|
||
|
22
May 2008
|
Sale
|
100,000
|
24.00
|
||
|
22
May 2008
|
Sale
|
100,000
|
24.05
|
||
|
23
May 2008
|
Sale
|
100,000
|
24.40
|
||
|
23
May 2008
|
Sale
|
100,000
|
25.00
|
||
|
23
May 2008
|
Purchase
|
100,000
|
25.30
|
- V-5
-
Netcom ADSs
The following transactions took place
during the period from 2 May 2008 to the Latest Practicable Date.
|
Name
|
Date
|
Type
of
Transaction
|
Number
of
Netcom
ADSs
|
Average
Price
(US$)
|
Maximum
Price
(US$)
|
Minimum
Price
(US$)
|
|
|
Bear
Stearns & Co., Inc.
|
7
December 2007
|
Sale
|
15,500
|
61.07
|
61.07
|
61.07
|
|
|
28
December 2007
|
Sale
|
45,000
|
60.00
|
60.00
|
60.00
|
||
|
4
January 2008
|
Purchase
|
16,350
|
62.00
|
62.00
|
62.00
|
||
|
7
January 2008
|
Purchase
|
28,300
|
61.00
|
61.00
|
61.00
|
||
|
28
January 2008
|
Sale
|
12,000
|
60.00
|
60.00
|
60.00
|
||
|
28
January 2008
|
Purchase
|
51,600
|
62.10
|
62.10
|
62.10
|
||
|
20
February 2008
|
Sale
|
4
|
62.77
|
62.77
|
62.77
|
||
|
6
March 2008
|
Sale
|
10,000
|
59.92
|
59.92
|
59.92
|
||
|
7
March 2008
|
Sale
|
10,000
|
58.65
|
58.65
|
58.65
|
||
|
14
March 2008
|
Sale
|
9,000
|
57.72
|
57.72
|
57.72
|
||
|
19
March 2008
|
Sale
|
19,000
|
54.29
|
54.29
|
54.29
|
||
|
20
March 2008
|
Sale
|
2
|
53.65
|
53.65
|
53.65
|
||
|
27
March 2008
|
Sale
|
200
|
57.45
|
57.45
|
57.45
|
||
|
28
March 2008
|
Sale
|
7,900
|
58.31
|
58.31
|
58.31
|
||
|
31
March 2008
|
Purchase
|
100
|
58.21
|
58.21
|
58.21
|
||
|
1
April 2008
|
Purchase
|
100
|
61.81
|
61.81
|
61.81
|
||
|
3
April 2008
|
Sale
|
17,500
|
60.38
|
60.38
|
60.38
|
||
|
J.P.
Morgan Securities Limited
|
30
January 2008
|
Sale
|
8,000
|
64.57
|
64.57
|
64.57
|
|
|
31
January 2008
|
Sale
|
15,000
|
62.99
|
62.99
|
62.99
|
||
|
1
April 2008
|
Sale
|
26,000
|
62.07
|
62.07
|
62.07
|
||
|
4
April 2008
|
Sale
|
12,100
|
61.55
|
61.55
|
61.55
|
||
|
7
April 2008
|
Sale
|
11,325
|
58.71
|
58.71
|
58.71
|
||
|
11
April 2008
|
Purchase
|
18,425
|
57.01
|
57.01
|
57.01
|
||
|
16
April 2008
|
Sale
|
25,000
|
59.45
|
59.45
|
59.45
|
||
|
18
April 2008
|
Sale
|
15,172
|
59.38
|
59.38
|
59.38
|
||
|
21
April 2008
|
Purchase
|
172
|
58.05
|
58.05
|
58.05
|
The following transactions took place
during the period from 2 May 2008 to the Latest Practicable
Date.
|
Name
|
Date
|
Type
of
Transaction
|
Number
of
Netcom
ADSs
|
Price (US$)
|
|
|
J.P.
Morgan Securities Limited
|
16
May 2008
|
Sale
|
15,000
|
62.73
|
|
|
21
May 2008
|
Purchase
|
40,000
|
60.06
|
|
(c)
|
During
the Relevant Period
|
||||
|
(i)
|
save
as disclosed in paragraphs 5(a) and 5(b) of this Appendix V, none of the
parties acting in concert with Unicom had dealt for value in any Netcom
Securities;
|
||||
|
(ii)
|
none
of the persons referred to in paragraph 4(b) of this Appendix V had dealt
for value in any Netcom Securities; and
|
||||
|
(iii)
|
no
persons who had any arrangements of the kind referred to in Note 8 to Rule
22 of the Takeovers Code with Unicom or any of the parties acting in
concert with Unicom had dealt for value in any Netcom
Securities.
|
||||
- V-6
-
6. SHAREHOLDINGS
IN UNICOM SECURITIES
|
(a)
|
As
at the Latest Practicable Date, the following Unicom Directors and chief
executive of Unicom had, or were deemed to have, interests or short
positions in the Unicom Shares, underlying Unicom Shares or debentures of
Unicom or any of its associated corporations (within the meaning of Part
XV of the SFO) which were required to be notified to Unicom and the Hong
Kong Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO
(including interests and short positions which they were deemed or taken
to have under such provisions of the SFO), or which are required, pursuant
to Section 352 of the SFO to be entered in the register referred to
therein, or which are required, pursuant to the Model Code for Securities
Transactions by Directors of Listed Issuers contained in the Listing
Rules, to be notified to Unicom and the Hong Kong Stock
Exchange:
|
- V-7
-
|
Name
of Unicom Director
|
Capacity and
Nature
|
Date
of Grant of Unicom Options
|
Exercise
Price
|
Number
of Outstanding Unicom Options(1)(2)
|
%
of
Shareholding
|
|
|
Chang
Xiaobing
|
Beneficial
owner
(Personal)
|
21
December 2004
|
HK$6.20
|
526,000
|
||
|
15
February 2006
|
HK$6.35
|
800,000
|
||||
|
－－－－－－－
|
－－－－－－－
|
|||||
|
1,326,000
|
0.010%
|
|||||
|
Tong
Jilu
|
Beneficial
owner
|
30
June 2001
|
HK$15.42
|
292,000
|
||
|
(Personal)
|
20
July 2004
|
HK$5.92
|
92,000
|
|||
|
15
February 2006
|
HK$6.35
|
500,000
|
||||
|
Beneficial
owner
|
20
July 2004
|
HK$5.92
|
32,000
|
|||
|
(Spouse)
|
15
February 2006
|
HK$6.35
|
40,000
|
|||
|
－－－－－－－
|
－－－－－－－
|
|||||
|
956,000
|
0.007%
|
|||||
|
Li
Gang
|
Beneficial
owner
(Personal)
|
15
February 2006
|
HK$6.35
|
500,000
|
0.004%
|
|
|
Zhang
Junan
|
Beneficial
owner
(Personal)
|
15
February 2006
|
HK$6.35
|
500,000
|
0.004%
|
|
|
Lu
Jianguo
|
Beneficial
owner
|
22
June 2000
|
HK$15.42
|
292,600
|
||
|
(Personal)
|
20
July 2004
|
HK$5.92
|
292,000
|
|||
|
15
February 2006
|
HK$6.35
|
500,000
|
||||
|
──────
|
─────
|
|||||
|
1,084,600
|
0.008%
|
|||||
|
Wu
Jinglian
|
Beneficial
owner
|
21
May 2003
|
HK$4.30
|
292,000
|
||
|
(Personal)
|
20
July 2004
|
HK$5.92
|
292,000
|
|||
|
──────
|
─────
|
|||||
|
584,000
|
0.004%
|
|||||
|
Shan
Weijian
|
Beneficial
owner
|
21
May 2003
|
HK$4.30
|
292,000
|
||
|
(Personal)
|
20
July 2004
|
HK$5.92
|
292,000
|
|||
|
───────
|
──────
|
|||||
|
584,000
|
0.004%
|
|||||
|
Total
|
5,534,600
|
0.041%
|
||||
|
=============
|
=============
|
Notes:
(1) Each
Unicom Option gives the holder the right to subscribe for one Unicom
Share.
- V-8
-
(2) Particulars
of the Unicom Options are as follows:
|
Date
of Grant
|
Exercise
Period
|
|
|
Options
granted pursuant to the Unicom Pre-Global Offering Share Option
Scheme
|
||
|
22
June 2000
|
22
June 2002 to 21 June 2010
|
|
|
Options
granted pursuant to the Unicom Share Option Scheme
|
||
|
30
June 2001
|
30
June 2001 to 22 June 2010
|
|
|
21
May 2003
|
21
May 2004 to 20 May 2009 (in respect of 40% of the Unicom Options
granted)
|
|
|
21
May 2005 to 20 May 2009 (in respect of 30% of the Unicom Options
granted)
|
||
|
21
May 2006 to 20 May 2009 (in respect of the remaining 30% of the Unicom
Options granted)
|
||
|
20
July 2004
|
20
July 2005 to 19 July 2010 (in respect of 40% of the Unicom Options
granted)
|
|
|
20
July 2006 to 19 July 2010 (in respect of 30% of the Unicom Options
granted)
|
||
|
20
July 2007 to 19 July 2010 (in respect of the remaining 30% of the Unicom
Options granted)
|
||
|
21
December 2004
|
21
December 2005 to 20 December 2010 (in respect of 40% of the Unicom Options
granted)
|
|
|
21
December 2006 to 20 December 2010 (in respect of 30% of the Unicom Options
granted)
|
||
|
21
December 2007 to 20 December 2010 (in respect of the remaining 30% of the
Unicom Options granted)
|
||
|
15
February 2006
|
15
February 2008 to 14 February 2012 (in respect of 50% of the Unicom Options
granted)
|
|
|
15
February 2009 to 14 February 2012 (in respect of the remaining 50% of the
Unicom Options granted)
|
||
| (b) | As at the Latest Practicable Date, the following persons, who are a director or supervisor of Unicom Parent or Unicom A Share Company and are therefore parties acting in concert with Unicom, had the following interests in Unicom Options: |
|
Name
|
Capacity
and
Nature
|
Date
of Grant of Unicom Options
|
Exercise
Price
|
Number of
Outstanding Unicom Options(1)(2)
|
% Shareholding
|
|
|
Jiang Peihua(3)
|
Beneficial
owner
|
22
June 2000
|
HK$15.42
|
1,600
|
||
|
(Personal)
|
15
February 2006
|
HK$6.35
|
206,000
|
|||
|
－－－－－－－
|
－－－－－－－
|
|||||
|
207,600
|
0.0015%
|
|||||
|
Liu Yunjie(4)
|
Beneficial
owner
|
22
June 2000
|
HK$15.42
|
148,600
|
0.0011%
|
|
|
(Personal)
|
||||||
|
Zhang Jian(4)
|
Beneficial
owner
|
15
February 2006
|
HK$6.35
|
218,000
|
0.0016%
|
|
|
(Personal)
|
||||||
|
Zhao Chuanli(5)
|
Beneficial
owner
|
22
June 2000
|
HK$15.42
|
24,400
|
||
|
(Personal)
|
15
February 2006
|
HK$6.35
|
210,000
|
|||
|
－－－－－－－
|
－－－－－－－
|
|||||
|
234,400
|
0.0017%
|
- V-9
-
| (1) | Each Unicom Option gives the holder the right to subscribe for one Unicom Share. | |
| (2) | Particulars of the Unicom Options are as follows: | |
|
Date
of Grant
|
Exercise
Period
|
|
|
Options
granted pursuant to the Unicom Pre-Global Offering Share Option
Scheme
|
||
|
22
June 2000
|
22
June 2002 to 21 June 2010
|
|
|
Options
granted pursuant to the Unicom Share Option Scheme
|
||
|
15
February 2006
|
15
February 2008 to 14 February 2012 (in respect of 50% of the Unicom Options
granted)
|
|
|
15
February 2009 to 14 February 2012 (in respect of the remaining 50% of the
Unicom Options granted)
|
||
| (3) | Director of Unicom Parent. | ||
| (4) | Director of Unicom A Share Company. | ||
| (5) | Supervisor of Unicom A Share Company. | ||
| (c) |
As at the Latest
Practicable Date, the shareholdings in Unicom owned or controlled by the
parties acting in concert with Unicom (other than the directors of Unicom,
Unicom Parent and Unicom A Share Company as disclosed in paragraphs 6(a)
and 6(b) of this Appendix V) are as
follows:
|
||
|
Unicom
Shares Held
|
%
Shareholding
|
|||
|
Name
|
Directly
|
Indirectly
|
||
|
Unicom
Parent
|
—
|
9,725,000,020
|
71.17%
|
|
|
Unicom
A Share Company
|
—
|
9,725,000,020
|
71.17%
|
|
|
Unicom
BVI
|
9,725,000,020
|
—
|
71.17%
|
|
|
China
International Capital Corporation Hong Kong Asset Management Limited
(“CICCHKAM”)(1)
|
1,824,000
|
—
|
0.013%
|
|
| (1) | CICCHKAM is a fellow subsidiary of CICC, which is the lead financial adviser to Unicom, and is therefore presumed to be a party acting in concert with Unicom in relation to the Proposals under the Takeovers Code. The Unicom Shares were held by CICCHKAM on behalf of discretionary accounts which were under the management of CICCHKAM. | ||
| (d) | As at the Latest Practicable Date: | ||
| (i) | save as disclosed in paragraph 6(a) of this Appendix V, none of the Unicom Directors was interested in any Unicom Securities or had borrowed or lent any Unicom Securities; | ||
| (ii) | save as disclosed in paragraphs 6(b) and 6(c) of this Appendix V, none of the parties acting in concert with Unicom owned or controlled any Unicom Securities or had borrowed or lent any Unicom Securities; and | ||
| (iii) | none of the persons referred to in paragraph 4(b) of this Appendix V owned or controlled any Unicom Securities. | ||
|
|
|||
7. DEALINGS
IN UNICOM SECURITIES
(a) During
the Relevant Period, the following parties acting in concert with Unicom had
dealt for value in Unicom Securities:
- V-10
-
|
Name
|
Date
|
Type
of
Transaction
|
Number
of
Unicom
Securities
|
Price
|
|
|
Tong Jilu(1)
|
1
February 2008
|
Exercise
of Unicom Options
|
200,000
Unicom Options
|
HK$5.92
for each Unicom Option
|
|
|
1
February 2008
|
Sale
|
8,000
Unicom Shares
|
HK$18.42
for each Unicom Share
|
||
|
1
February 2008
|
Sale
|
92,000
Unicom Shares
|
HK$18.40
for each Unicom Share
|
||
|
1
February 2008
|
Sale
|
50,000
Unicom Shares
|
HK$18.34
for each Unicom Share
|
||
|
1
February 2008
|
Sale
|
50,000
Unicom Shares
|
HK$18.30
for each Unicom Share
|
||
|
Jiang Peihua(2)
|
31
December 2007
|
Exercise
of Unicom Options
|
10,000
Unicom Options
|
HK$5.92
for each Unicom Option
|
|
|
31
December 2007
|
Sale
|
10,000
Unicom Shares
|
HK$17.66
for each Unicom Share
|
||
|
31
December 2007
|
Exercise
of Unicom Options
|
130,000
Unicom Options
|
HK$15.42
for each Unicom Option
|
||
|
31
December 2007
|
Sale
|
80,000
Unicom Shares
|
HK$17.72
for each Unicom Share
|
||
|
31
December 2007
|
Sale
|
50,000
Unicom Shares
|
HK$17.86
for each Unicom Share
|
||
|
28
March 2008
|
Exercise
of Unicom Options
|
102,000
Unicom Options
|
HK$6.35
for each Unicom Option
|
||
|
28
March 2008
|
Sale
|
102,000
Unicom Shares
|
HK$17.06
for each Unicom Share
|
||
|
Liu Yunjie(3)
|
11
January 2008
|
Exercise
of Unicom Options
|
144,000
Unicom Options
|
HK$15.42
for each Unicom Option
|
|
|
11
January 2008
|
Sale
|
58,000
Unicom Shares
|
HK$18.80
for each Unicom Share
|
||
|
11
January 2008
|
Sale
|
36,000
Unicom Shares
|
HK$18.82
for each Unicom Share
|
||
|
11
January 2008
|
Sale
|
50,000
Unicom Shares
|
HK$18.84
for each Unicom Share
|
||
|
Zhang Jian(3)
|
18
February 2008
|
Exercise
of Unicom Options
|
90,000
Unicom Options
|
HK$6.35
for each Unicom Option
|
- V-11
-
|
18
February 2008
|
Sale
|
90,000
Unicom Shares
|
HK$19.68
for each Unicom Share
|
||
|
Zhao Chuanli(4)
|
24
December 2007
|
Exercise
of Unicom Options
|
20,000
Unicom Options
|
HK$5.92
for each Unicom Option
|
|
|
24
December 2007
|
Sale
|
20,000
Unicom Shares
|
HK$17.50
for each Unicom Share
|
||
|
27
December 2007
|
Exercise
of Unicom Options
|
20,000
Unicom Options
|
HK$5.92
for each Unicom Option
|
||
|
27
December 2007
|
Sale
|
20,000
Unicom Shares
|
HK$18.40
for each Unicom Share
|
||
|
4
February 2008
|
Exercise
of Unicom Options
|
24,000
Unicom Options
|
HK$5.92
for each Unicom Option
|
||
|
4
February 2008
|
Sale
|
24,000
Unicom Shares
|
HK$19.20
for each Unicom Share
|
||
|
4
February 2008
|
Exercise
of Unicom Options
|
100,000
Unicom Options
|
HK$15.42
for each Unicom Option
|
||
|
4
February 2008
|
Sale
|
100,000
Unicom Shares
|
HK$19.42
for each Unicom Share
|
||
|
14
February 2008
|
Exercise
of Unicom Options
|
30,000
Unicom Options
|
HK$15.42
for each Unicom Option
|
||
|
14
February 2008
|
Sale
|
30,000
Unicom Shares
|
HK$18.50
for each Unicom Share
|
||
|
15
February 2008
|
Exercise
of Unicom Options
|
30,000
Unicom Options
|
HK$15.42
for each Unicom Option
|
||
|
15
February 2008
|
Sale
|
30,000
Unicom Shares
|
HK$18.80
for each Unicom Share
|
||
|
15
February 2008
|
Exercise
of Unicom Options
|
50,000
Unicom Options
|
HK$6.35
for each Unicom Option
|
||
|
15
February 2008
|
Sale
|
18,000
Unicom Shares
|
HK$19.00
for each Unicom Share
|
||
|
15
February 2008
|
Sale
|
32,000
Unicom Shares
|
HK$19.02
for each Unicom Share
|
||
|
18
February 2008
|
Exercise
of Unicom Options
|
20,000
Unicom Options
|
HK$15.42
for each Unicom Option
|
||
|
18
February 2008
|
Sale
|
20,000
Unicom Shares
|
HK$20.00
for each Unicom Share
|
||
|
18
February 2008
|
Exercise
of Unicom Options
|
20,000
Unicom Options
|
HK$6.35
for each Unicom Option
|
- V-12
-
|
18
February 2008
|
Sale
|
20,000
Unicom Shares
|
HK$20.00
for each Unicom Share
|
||
|
CICCHKAM(5)
|
5
December 2007
|
Sale
|
30,000
Unicom Shares
|
HK$16.06
for each Unicom Share
|
|
|
5
December 2007
|
Sale
|
70,000
Unicom Shares
|
HK$16.08
for each Unicom Share
|
||
|
5
December 2007
|
Sale
|
58,000
Unicom Shares
|
HK$16.10
for each Unicom Share
|
||
|
5
December 2007
|
Sale
|
96,000
Unicom Shares
|
HK$16.12
for each Unicom Share
|
||
|
5
December 2007
|
Sale
|
30,000
Unicom Shares
|
HK$16.14
for each Unicom Share
|
||
|
5
December 2007
|
Sale
|
10,000
Unicom Shares
|
HK$16.16
for each Unicom Share
|
||
|
5
December 2007
|
Sale
|
50,000
Unicom Shares
|
HK$16.18
for each Unicom Share
|
||
|
5
December 2007
|
Sale
|
10,000
Unicom Shares
|
HK$16.20
for each Unicom Share
|
||
|
5
December 2007
|
Sale
|
58,000
Unicom Shares
|
HK$16.22
for each Unicom Share
|
||
|
5
December 2007
|
Sale
|
30,000
Unicom Shares
|
HK$16.24
for each Unicom Share
|
||
|
5
December 2007
|
Sale
|
18,000
Unicom Shares
|
HK$16.26
for each Unicom Share
|
||
|
5
December 2007
|
Sale
|
60,000
Unicom Shares
|
HK$16.28
for each Unicom Share
|
||
|
5
December 2007
|
Sale
|
10,000
Unicom Shares
|
HK$16.30
for each Unicom Share
|
||
|
5
December 2007
|
Sale
|
10,000
Unicom Shares
|
HK$16.32
for each Unicom Share
|
||
|
5
December 2007
|
Sale
|
10,000
Unicom Shares
|
HK$16.36
for each Unicom Share
|
||
|
6
December 2007
|
Sale
|
26,000
Unicom Shares
|
HK$16.14
for each Unicom Share
|
||
|
6
December 2007
|
Sale
|
20,000
Unicom Shares
|
HK$16.16
for each Unicom Share
|
||
|
6
December 2007
|
Sale
|
22,000
Unicom Shares
|
HK$16.18
for each Unicom Share
|
- V-13
-
|
6
December 2007
|
Sale
|
20,000
Unicom Shares
|
HK$16.20
for each Unicom Share
|
||
|
6
December 2007
|
Sale
|
6,000
Unicom Shares
|
HK$16.28
for each Unicom Share
|
||
|
6
December 2007
|
Sale
|
22,000
Unicom Shares
|
HK$16.30
for each Unicom Share
|
||
|
6
December 2007
|
Sale
|
10,000
Unicom Shares
|
HK$16.32
for each Unicom Share
|
||
|
6
December 2007
|
Sale
|
20,000
Unicom Shares
|
HK$16.38
for each Unicom Share
|
||
|
6
December 2007
|
Sale
|
20,000
Unicom Shares
|
HK$16.40
for each Unicom Share
|
||
|
6
December 2007
|
Sale
|
10,000
Unicom Shares
|
HK$16.42
for each Unicom Share
|
||
|
6
December 2007
|
Sale
|
10,000
Unicom Shares
|
HK$16.44
for each Unicom Share
|
||
|
6
December 2007
|
Sale
|
40,000
Unicom Shares
|
HK$16.46
for each Unicom Share
|
||
|
6
December 2007
|
Sale
|
30,000
Unicom Shares
|
HK$16.48
for each Unicom Share
|
||
|
6
December 2007
|
Sale
|
20,000
Unicom Shares
|
HK$16.50
for each Unicom Share
|
||
|
15
February 2008
|
Purchase
|
100,000
Unicom Shares
|
HK$19.50
for each Unicom Share
|
||
|
15
February 2008
|
Purchase
|
20,000
Unicom Shares
|
HK$19.60
for each Unicom Share
|
||
|
15
February 2008
|
Purchase
|
80,000
Unicom Shares
|
HK$19.66
for each Unicom Share
|
||
|
15
February 2008
|
Purchase
|
20,000
Unicom Shares
|
HK$19.72
for each Unicom Share
|
||
|
6
March 2008
|
Purchase
|
6,000
Unicom Shares
|
HK$17.06
for each Unicom Share
|
||
|
6
March 2008
|
Purchase
|
20,000
Unicom Shares
|
HK$17.12
for each Unicom Share
|
||
|
6
March 2008
|
Purchase
|
14,000
Unicom Shares
|
HK$17.14
for each Unicom Share
|
||
|
6
March 2008
|
Purchase
|
30,000
Unicom Shares
|
HK$17.16
for each Unicom Share
|
−
- V-14
-
|
6
March 2008
|
Purchase
|
50,000
Unicom Shares
|
HK$17.18
for each Unicom Share
|
||
|
6
March 2008
|
Purchase
|
20,000
Unicom Shares
|
HK$17.24
for each Unicom Share
|
||
|
6
March 2008
|
Purchase
|
20,000
Unicom Shares
|
HK$17.26
for each Unicom Share
|
||
|
6
March 2008
|
Purchase
|
20,000
Unicom Shares
|
HK$17.28
for each Unicom Share
|
||
|
6
March 2008
|
Purchase
|
2,000
Unicom Shares
|
HK$17.32
for each Unicom Share
|
||
|
6
March 2008
|
Purchase
|
30,000
Unicom Shares
|
HK$17.36
for each Unicom Share
|
||
|
6
March 2008
|
Purchase
|
40,000
Unicom Shares
|
HK$17.40
for each Unicom Share
|
||
|
6
March 2008
|
Purchase
|
46,000
Unicom Shares
|
HK$17.42
for each Unicom Share
|
||
|
6
March 2008
|
Purchase
|
20,000
Unicom Shares
|
HK$17.44
for each Unicom Share
|
||
|
6
March 2008
|
Purchase
|
10,000
Unicom Shares
|
HK$17.46
for each Unicom Share
|
||
|
6
March 2008
|
Purchase
|
44,000
Unicom Shares
|
HK$17.52
for each Unicom Share
|
||
|
6
March 2008
|
Purchase
|
30,000
Unicom Shares
|
HK$17.54
for each Unicom Share
|
||
|
6
March 2008
|
Purchase
|
38,000
Unicom Shares
|
HK$17.58
for each Unicom Share
|
||
|
14
April 2008
|
Purchase
|
50,000
Unicom Shares
|
HK$15.90
for each Unicom Share
|
||
|
14
April 2008
|
Purchase
|
20,000
Unicom Shares
|
HK$15.92
for each Unicom Share
|
||
|
14
April 2008
|
Purchase
|
40,000
Unicom Shares
|
HK$15.96
for each Unicom Share
|
||
|
14
April 2008
|
Purchase
|
40,000
Unicom Shares
|
HK$15.98
for each Unicom Share
|
||
|
14
April 2008
|
Purchase
|
72,000
Unicom Shares
|
HK$16.00
for each Unicom Share
|
||
|
14
April 2008
|
Purchase
|
50,000
Unicom Shares
|
HK$16.02
for each Unicom Share
|
- V-15
-
|
14
April 2008
|
Purchase
|
10,000
Unicom Shares
|
HK$16.06
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
70,000
Unicom Shares
|
HK$16.90
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
10,000
Unicom Shares
|
HK$16.86
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
36,000
Unicom Shares
|
HK$16.96
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
14,000
Unicom Shares
|
HK$16.98
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
30,000
Unicom Shares
|
HK$16.94
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
30,000
Unicom Shares
|
HK$16.88
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
60,000
Unicom Shares
|
HK$16.84
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
60,000
Unicom Shares
|
HK$16.92
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
20,000
Unicom Shares
|
HK$17.00
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
50,000
Unicom Shares
|
HK$17.04
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
20,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
10,000
Unicom Shares
|
HK$17.08
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
40,000
Unicom Shares
|
HK$17.16
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
10,000
Unicom Shares
|
HK$16.92
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
8,000
Unicom Shares
|
HK$16.86
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
2,000
Unicom Shares
|
HK$16.86
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
20,000
Unicom Shares
|
HK$16.94
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
10,000
Unicom Shares
|
HK$16.98
for each Unicom Share
|
- V-16
-
|
29
April 2008
|
Purchase
|
4,000
Unicom Shares
|
HK$16.96
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
6,000
Unicom Shares
|
HK$16.96
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
10,000
Unicom Shares
|
HK$16.94
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
10,000
Unicom Shares
|
HK$16.92
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
10,000
Unicom Shares
|
HK$16.90
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
10,000
Unicom Shares
|
HK$16.86
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
20,000
Unicom Shares
|
HK$16.84
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
4,000
Unicom Shares
|
HK$17.00
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
6,000
Unicom Shares
|
HK$17.00
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
10,000
Unicom Shares
|
HK$17.00
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
10,000
Unicom Shares
|
HK$17.00
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
2,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
4,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
4,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
10,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
4,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
2,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
10,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
2,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
- V-17
-
|
29
April 2008
|
Purchase
|
2,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
10,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
2,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
4,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
4,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
2,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
2,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
6,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
2,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
4,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
4,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
20,000
Unicom Shares
|
HK$17.06
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
10,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
10,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
20,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
29
April 2008
|
Purchase
|
10,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
||
|
2
May 2008
|
Purchase
|
30,000
Unicom Shares
|
HK$17.06
for each Unicom Share
|
||
|
2
May 2008
|
Purchase
|
10,000
Unicom Shares
|
HK$17.08
for each Unicom Share
|
||
|
2
May 2008
|
Purchase
|
40,000
Unicom Shares
|
HK$17.10
for each Unicom Share
|
- V-18
-
|
2
May 2008
|
Purchase
|
20,000
Unicom Shares
|
HK$17.12
for each Unicom Share
|
||
|
2
May 2008
|
Purchase
|
30,000
Unicom Shares
|
HK$17.14
for each Unicom Share
|
||
|
2
May 2008
|
Purchase
|
20,000
Unicom Shares
|
HK$17.22
for each Unicom Share
|
Notes:
(1) Director
of each of Unicom, Unicom Parent and Unicom A Share Company.
(2) Director
of Unicom Parent.
(3) Director
of Unicom A Share Company.
(4) Supervisor
of Unicom A Share Company.
(5) All
of the transactions were entered into on behalf of discretionary accounts which
were under the management of CICCHKAM.
(b) During
the Relevant Period, the following entities (other than exempt fund managers)
which control or are controlled by or under the same control as JPMorgan had
dealt for value in Unicom Shares and Unicom ADSs1:
Unicom
Shares
The following transactions took place
during the period from 2 December 2007 to 1 May 2008 and are aggregated on a
daily basis.
|
Name
|
Date
|
Transaction
Type
|
Number
of Unicom Shares
|
Average
Price (HK$)
|
Maximum
Price (HK$)
|
Minimum
Price (HK$)
|
|
|
Bear
Stearns International Limited
|
5
December 2007
|
Purchase
|
400,000
|
16.11
|
16.16
|
16.10
|
|
|
6
December 2007
|
Purchase
|
20,000
|
16.45
|
16.45
|
16.45
|
||
|
7
December 2007
|
Purchase
|
52,000
|
16.52
|
16.52
|
16.52
|
||
|
11
December 2007
|
Purchase
|
58,000
|
16.23
|
16.23
|
16.23
|
||
|
11
December 2007
|
Sale
|
200,000
|
16.37
|
16.38
|
16.36
|
||
|
12
December 2007
|
Purchase
|
136,000
|
15.74
|
15.96
|
15.66
|
||
|
17
December 2007
|
Purchase
|
364,000
|
15.01
|
15.14
|
14.84
|
||
|
19
December 2007
|
Sale
|
100,000
|
15.98
|
15.98
|
15.98
|
- V-19
-
|
4
January 2008
|
Purchase
|
24,000
|
16.66
|
16.66
|
16.66
|
||
|
8
January 2008
|
Purchase
|
32,000
|
16.19
|
16.19
|
16.19
|
||
|
10
January 2008
|
Sale
|
400,000
|
17.90
|
18.08
|
17.82
|
||
|
11
January 2008
|
Sale
|
100,000
|
18.66
|
18.66
|
18.66
|
||
|
14
January 2008
|
Purchase
|
26,000
|
17.73
|
17.76
|
17.67
|
||
|
15
January 2008
|
Purchase
|
6,000
|
18.38
|
18.38
|
18.38
|
||
|
21
January 2008
|
Purchase
|
100,000
|
16.54
|
16.54
|
16.54
|
||
|
25
January 2008
|
Purchase
|
890,000
|
18.22
|
18.22
|
18.22
|
||
|
25
January 2008
|
Sale
|
100,000
|
17.96
|
17.96
|
17.96
|
||
|
29
January 2008
|
Sale
|
100,000
|
18.04
|
18.04
|
18.04
|
||
|
30
January 2008
|
Sale
|
2,000
|
18.42
|
18.42
|
18.42
|
||
|
31
January 2008
|
Sale
|
100,000
|
17.98
|
17.98
|
17.98
|
||
|
1
February 2008
|
Purchase
|
22,000
|
18.44
|
18.44
|
18.44
|
||
|
1
February 2008
|
Sale
|
100,000
|
19.18
|
19.18
|
19.18
|
||
|
5
February 2008
|
Sale
|
6,000
|
19.46
|
19.46
|
19.46
|
||
|
11
February 2008
|
Sale
|
100,000
|
18.38
|
18.38
|
18.38
|
||
|
29
February 2008
|
Purchase
|
86,000
|
17.16
|
17.16
|
17.16
|
||
|
4
March 2008
|
Purchase
|
100,000
|
16.16
|
16.16
|
16.16
|
||
|
12
March 2008
|
Purchase
|
16,000
|
18.02
|
18.02
|
18.02
|
||
|
1
April 2008
|
Purchase
|
100,000
|
16.24
|
16.24
|
16.24
|
||
|
9
April 2008
|
Purchase
|
100,000
|
16.38
|
16.38
|
16.38
|
||
|
10
April 2008
|
Purchase
|
200,000
|
16.06
|
16.08
|
16.04
|
||
|
25
April 2008
|
Purchase
|
200,000
|
16.40
|
16.40
|
16.40
|
||
|
J.P.
Morgan Securities Limited
|
5
December 2007
|
Purchase
|
7,000,000
|
16.10
|
16.16
|
16.10
|
|
|
5
December 2007
|
Sale
|
3,626,000
|
16.20
|
16.22
|
16.17
|
||
|
6
December 2007
|
Sale
|
274,000
|
16.66
|
16.74
|
16.60
|
||
|
7
December 2007
|
Sale
|
1,000,000
|
16.25
|
16.88
|
15.76
|
||
|
10
December 2007
|
Sale
|
500,000
|
16.15
|
16.32
|
16.08
|
||
|
14
December 2007
|
Sale
|
94,000
|
15.56
|
15.56
|
15.56
|
||
|
17
December 2007
|
Purchase
|
94,000
|
15.40
|
15.40
|
15.40
|
||
|
16
January 2008
|
Sale
|
220,000
|
17.22
|
17.40
|
17.20
|
||
|
17
January 2008
|
Sale
|
180,000
|
17.30
|
17.30
|
17.30
|
||
|
23
January 2008
|
Purchase
|
400,000
|
16.20
|
16.26
|
16.14
|
||
|
3
February 2008
|
Purchase
|
450,000
|
19.28
|
19.28
|
19.28
|
||
|
4
February 2008
|
Sale
|
50,000
|
19.48
|
19.48
|
19.48
|
||
|
5
February 2008
|
Sale
|
400,000
|
19.46
|
19.60
|
19.34
|
||
|
6
February 2008
|
Sale
|
200,000
|
18.49
|
18.50
|
18.48
|
||
|
11
February 2008
|
Sale
|
246,000
|
18.22
|
18.40
|
18.09
|
||
|
12
February 2008
|
Purchase
|
72,500,000
|
17.62
|
17.62
|
17.62
|
||
|
12
February 2008
|
Sale
|
8,938,000
|
18.12
|
18.44
|
17.90
|
||
|
13
February 2008
|
Purchase
|
262,000
|
17.89
|
17.89
|
17.89
|
||
|
13
February 2008
|
Sale
|
13,080,000
|
17.88
|
18.10
|
17.68
|
||
|
14
February 2008
|
Sale
|
16,292,000
|
18.79
|
18.96
|
18.36
|
||
|
15
February 2008
|
Sale
|
13,816,000
|
19.21
|
19.92
|
18.94
|
||
|
18
February 2008
|
Sale
|
1,306,000
|
19.68
|
19.74
|
19.68
|
||
|
19
February 2008
|
Sale
|
126,000
|
19.20
|
19.20
|
19.17
|
||
|
21
February 2008
|
Sale
|
398,000
|
18.77
|
19.00
|
18.30
|
||
|
22
February 2008
|
Sale
|
100,000
|
18.50
|
18.50
|
18.50
|
||
|
4
March 2008
|
Purchase
|
200,000
|
16.20
|
16.20
|
16.20
|
||
|
5
March 2008
|
Sale
|
200,000
|
16.99
|
17.16
|
16.82
|
||
|
20
March 2008
|
Purchase
|
546,000
|
15.71
|
15.74
|
15.38
|
||
|
25
March 2008
|
Sale
|
746,000
|
17.01
|
17.52
|
16.56
|
||
|
26
March 2008
|
Sale
|
200,000
|
17.79
|
17.84
|
17.74
|
||
|
15
April 2008
|
Sale
|
250,000
|
16.22
|
16.24
|
16.20
|
||
|
16
April 2008
|
Sale
|
700,000
|
16.37
|
16.50
|
16.26
|
||
|
18
April 2008
|
Purchase
|
48,000
|
16.35
|
16.35
|
16.35
|
||
|
28
April 2008
|
Sale
|
48,000
|
16.28
|
16.28
|
16.28
|
- V-20
-
|
J.P.
Morgan Whitefriars Inc.
|
11
January 2008
|
Purchase
|
30,000
|
18.56
|
18.56
|
18.56
|
|
|
25
January 2008
|
Sale
|
2,000
|
17.72
|
17.72
|
17.72
|
||
|
31
January 2008
|
Sale
|
24,000
|
18.58
|
18.58
|
18.58
|
||
|
5
February 2008
|
Sale
|
4,000
|
19.18
|
19.18
|
19.18
|
||
|
26
February 2008
|
Purchase
|
160,000
|
17.84
|
17.84
|
17.84
|
||
|
28
February 2008
|
Sale
|
160,000
|
17.99
|
17.99
|
17.99
|
||
|
4
March 2008
|
Purchase
|
190,000
|
17.01
|
17.01
|
17.01
|
||
|
11
March 2008
|
Purchase
|
48,000
|
17.61
|
17.61
|
17.61
|
||
|
14
March 2008
|
Sale
|
238,000
|
17.51
|
17.51
|
17.51
|
||
|
18
March 2008
|
Purchase
|
238,000
|
16.49
|
16.49
|
16.49
|
||
|
20
March 2008
|
Sale
|
142,000
|
15.92
|
15.92
|
15.92
|
||
|
26
March 2008
|
Sale
|
96,000
|
17.60
|
17.60
|
17.60
|
Note:
| (1) | Certain exempted dealings undertaken by J.P. Morgan Securities Limited, J.P. Morgan Whitefriars Inc., Bear Stearns & Co., Inc. and Bear Stearns International Limited are excluded as such entities are exempt principal traders. |
The following transactions took place
during the period from 2 May 2008 to the Latest Practicable Date.
|
Name
|
Date
|
Transaction
Type
|
Number
of
Unicom
Shares
|
Price
(HK$)
|
|
|
Bear
Stearns International Limited
|
14
May 2008
|
Sale
|
1,560,000
|
16.72
|
|
|
22
May 2008
|
Purchase
|
114,000
|
16.83
|
Unicom
ADSs
The following transactions took place
during the period from 2 December 2007 to 1 May 2008 and are aggregated on a
daily basis.
|
Name
|
Date
|
Transaction
Type
|
Number
of Unicom ADSs
|
Average
Price (US$)
|
Maximum
Price (US$)
|
Minimum
Price (US$)
|
|
|
Bear
Stearns & Co., Inc.
|
6
December 2007
|
Sale
|
53,600
|
21.27
|
21.27
|
21.27
|
|
|
12
December 2007
|
Sale
|
4,800
|
20.20
|
20.20
|
20.20
|
||
|
28
December 2007
|
Purchase
|
29,600
|
22.56
|
22.56
|
22.56
|
||
|
9
January 2008
|
Sale
|
112,000
|
20.00
|
20.00
|
20.00
|
||
|
10
January 2008
|
Purchase
|
129,400
|
22.97
|
22.97
|
22.97
|
||
|
11
January 2008
|
Purchase
|
130,000
|
23.60
|
23.60
|
23.60
|
||
|
13
February 2008
|
Sale
|
59,800
|
23.55
|
23.55
|
23.55
|
||
|
15
February 2008
|
Purchase
|
34,600
|
24.92
|
24.92
|
24.92
|
||
|
7
March 2008
|
Purchase
|
15,600
|
21.14
|
21.14
|
21.14
|
||
|
7
March 2008
|
Purchase
|
38,000
|
21.96
|
21.96
|
21.96
|
||
|
20
March 2008
|
Purchase
|
30,000
|
20.62
|
20.62
|
20.62
|
||
|
20
March 2008
|
Sale
|
7
|
21.03
|
21.03
|
21.03
|
||
|
27
March 2008
|
Sale
|
400
|
22.62
|
22.62
|
22.62
|
||
|
28
March 2008
|
Sale
|
10,000
|
21.52
|
21.52
|
21.52
|
||
|
31
March 2008
|
Purchase
|
400
|
21.13
|
21.13
|
21.13
|
||
|
10
April 2008
|
Sale
|
70,000
|
20.74
|
20.74
|
20.74
|
||
|
17
April 2008
|
Purchase
|
50,000
|
21.34
|
21.34
|
21.34
|
||
|
18
April 2008
|
Purchase
|
23,500
|
21.34
|
21.34
|
21.34
|
||
|
25
April 2008
|
Sale
|
53,400
|
20.93
|
20.93
|
20.93
|
||
|
J.P.
Morgan Securities Limited
|
4
December 2007
|
Sale
|
125,000
|
21.15
|
21.15
|
21.15
|
|
|
5
December 2007
|
Sale
|
35,000
|
21.41
|
21.41
|
21.41
|
||
|
11
December 2007
|
Sale
|
40,000
|
20.25
|
20.25
|
20.25
|
- V-21
-
|
11
December 2007
|
Purchase
|
40,000
|
20.25
|
20.25
|
20.25
|
||
|
15
January 2008
|
Purchase
|
40,000
|
21.71
|
21.71
|
21.71
|
||
|
22
January 2008
|
Sale
|
40,019
|
21.03
|
21.03
|
21.03
|
||
|
23
January 2008
|
Purchase
|
19
|
21.35
|
21.35
|
21.35
|
||
|
5
February 2008
|
Purchase
|
40,000
|
23.52
|
23.52
|
23.52
|
||
|
6
February 2008
|
Purchase
|
10,000
|
22.90
|
22.90
|
22.90
|
||
|
12
February 2008
|
Sale
|
821,000
|
23.50
|
23.50
|
23.50
|
||
|
13
February 2008
|
Sale
|
725,000
|
23.32
|
23.32
|
23.32
|
||
|
14
February 2008
|
Sale
|
330,000
|
24.02
|
24.02
|
24.02
|
||
|
19
March 2008
|
Purchase
|
50,000
|
20.84
|
20.84
|
20.84
|
||
|
26
March 2008
|
Sale
|
10,000
|
22.45
|
22.45
|
22.45
|
||
|
10
April 2008
|
Purchase
|
31,000
|
20.48
|
20.48
|
20.48
|
||
|
11
April 2008
|
Purchase
|
12
|
20.27
|
20.27
|
20.27
|
||
|
11
April 2008
|
Sale
|
12
|
20.27
|
20.27
|
20.27
|
||
|
11
April 2008
|
Purchase
|
41,100
|
20.27
|
20.27
|
20.27
|
||
|
14
April 2008
|
Purchase
|
17,900
|
20.05
|
20.05
|
20.05
|
||
|
15
April 2008
|
Purchase
|
25,000
|
20.61
|
20.61
|
20.61
|
||
|
16
April 2008
|
Sale
|
20,000
|
21.15
|
21.15
|
21.15
|
| (c) | During the Relevant Period: | ||
| (i) | save as disclosed in paragraphs 7(a) and 7(b) of this Appendix V, none of the Unicom Directors and any of the parties acting in concert with Unicom had dealt for value in any Unicom Securities; | ||
| (ii) | none of the persons referred to in paragraph 4(b) of this Appendix V had dealt for value in any Unicom Securities; and | ||
| (iii) | no persons who had any arrangements of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with Unicom or any of the parties acting in concert with Unicom had dealt for value in any Unicom Securities. | ||
8. MATERIAL
LITIGATION
As at the Latest Practicable Date, none
of the members of the Unicom Group was engaged in any litigation of material
importance and there was no litigation or claim of material importance known to
the Unicom Directors to be pending or threatened by or against any member of the
Unicom Group.
9. ARRANGEMENTS
IN CONNECTION WITH THE SCHEME
| (a) | Save for the Proposals and save as disclosed in paragraph 5 headed “Undertakings” in the Explanatory Statement, there is no agreement, arrangement or undertaking, including any compensation arrangement, between Unicom or any party acting in concert with it on the one hand and any of the Netcom Directors, recent Netcom Directors, Netcom Shareholders or recent Netcom Shareholders on the other hand having any connection with or dependence upon the Scheme. | ||
| (b) | There is no agreement or arrangement to which Unicom is a party which relate to the circumstances in which it may or may not invoke or seek to invoke a condition to the Scheme. | ||
| (c) | The emoluments of the Unicom Directors will not be affected by the Scheme or by any associated transaction. | ||
10. MATERIAL
CONTRACTS
The following contracts (being
contracts not entered into in the ordinary course of business of the Unicom
Group) have been entered into by members of the Unicom Group after the date two
years before 2 June 2008, being the date of the Announcement, up to and
including the Latest Practicable Date and which are or may be
material:
| (1) | a subscription agreement dated 20 June 2006 entered into between Unicom and SK Telecom pursuant to which Unicom agreed to issue to SK Telecom an aggregate principal amount of US$1,000,000,000 zero coupon convertible bonds due 2009 in consideration of SK Telecom agreeing to pay an issue price of 100% of the principal amount of the convertible bonds; | ||
- V-22
-
|
(2)
|
a
strategic alliance framework agreement dated 20 June 2006 entered into
between Unicom and SK Telecom in connection with the cooperation of both
parties in certain areas (such as CDMA handsets, value-added services, VAS
business plan, marketing, IT infrastructure and network) relating to the
business, technical and operational cooperation on the further development
of CDMA cellular communications services;
|
|
|
(3)
|
the
Unicom CDMA Lease;
|
|
|
(4)
|
a
transfer agreement dated 26 October 2006 entered into between Unicom A
Share Company and CUCL pursuant to which Unicom A Share Company agreed to
transfer all of its rights and obligations under the Unicom CDMA Lease to
CUCL;
|
|
|
(5)
|
a
comprehensive services agreement dated 26 October 2006 (the “2006
Comprehensive Services Agreement”) entered into between Unicom A Share
Company and Unicom Parent pursuant to which Unicom Parent agreed (by
itself or through the subsidiaries of Unicom Parent) to enter into various
service arrangements with Unicom A Share Company (the rights and
obligations of Unicom A Share Company under that agreement were
subsequently transferred to CUCL);
|
|
|
(6)
|
a
transfer agreement dated 26 October 2006 entered into between Unicom A
Share Company and CUCL pursuant to which Unicom A Share Company agreed to
transfer all of its rights and obligations under the 2006 Comprehensive
Services Agreement to CUCL;
|
|
|
(7)
|
a
framework agreement dated 19 December 2006 entered into between Unicom
Huasheng Telecommunications Technology Co., Ltd., an indirect subsidiary
of Unicom, and the Guizhou branch of Unicom Parent for Unicom Huasheng
Telecommunications Technology Co., Ltd. to procure the supply of CDMA
mobile handsets from the Guizhou branch of Unicom Parent for a
consideration of the aggregate price set out in the relevant supply
notices for the period from 1 January 2006 to 31 December 2008. The amount
payable by Unicom Huasheng Telecommunications Technology Co., Ltd. under
the agreement will not be more than RMB180 million for the year ending 31
December 2008;
|
|
|
(8)
|
an
asset transfer agreement dated 16 November 2007 entered into between CUCL
and Unicom Parent in connection with the acquisition by CUCL of the GSM
cellular telecommunication assets and business and the CDMA cellular
telecommunication business, comprising the relevant assets, rights and
obligations of the Guizhou Branch of Unicom Parent (“Unicom Guizhou
Assets”), from Unicom Parent for a cash consideration of RMB880
million;
|
|
|
(9)
|
a
supplemental agreement dated 16 November 2007 entered into between Unicom
New Horizon, Unicom Parent, CUCL and Unicom A Share Company in connection
with the acquisition of the Unicom Guizhou Assets and the Unicom CDMA
Lease;
|
|
|
(10)
|
an
irrevocable undertaking dated 1 June 2008 entered into between Telefónica
and Unicom pursuant to which Telefónica has undertaken to Unicom to, among
other things, vote in favour of all of the resolutions to approve the
Scheme at the Court Meeting;
|
|
|
(11)
|
an
irrevocable undertaking dated 1 June 2008 entered into between Netcom BVI,
Netcom Parent and Unicom pursuant to which Netcom BVI has undertaken to
Unicom to, among other things, vote in favour of all of the resolutions to
approve the Scheme at the Court Meeting;
|
|
|
(12)
|
the
CDMA Business Disposal Framework Agreement;
|
|
|
(13)
|
the
CDMA Business Disposal Agreement;
|
|
|
(14)
|
an
option waiver and lease termination agreement dated 27 July 2008 (the
“Option Waiver and Lease Termination Agreement”) entered into between
Unicom Parent, Unicom New Horizon and Unicom A Share Company (the rights
and obligations of Unicom A Share Company under that agreement were
subsequently transferred to CUCL) relating to the waiver by CUCL of its
right to exercise its option to purchase the CDMA network from Unicom New
Horizon pursuant to the Unicom CDMA Lease and the termination of the
Unicom CDMA Lease;
|
|
|
(15)
|
a
transfer agreement dated 27 July 2008 entered into between Unicom A Share
Company and CUCL pursuant to which Unicom A Share Company agreed to
transfer all of its rights and obligations under the Option Waiver and
Lease Termination Agreement to
CUCL;
|
- V-23
-
|
(16)
|
the
framework agreement dated 12 August 2008 entered into between Netcom
Parent and CUCL to record the principles governing, and the principal
terms of, the existing continuing transactions between the parties
relating to the interconnection of their respective networks and the
settlement of charges in respect of domestic long distance voice
services;
|
|
|
(17)
|
the
framework agreement dated 12 August 2008 entered into between Netcom
Parent and CUCL to record the principles governing, and the principal
terms of, the existing continuing transactions between the parties
relating to the leasing of property by CUCL from Netcom
Parent;
|
|
|
(18)
|
the
framework agreement dated 12 August 2008 entered into between Netcom
Parent and CUCL to record the principles governing, and the principal
terms of, the existing continuing transactions between the parties
relating to the provision of certain engineering and information
technology services to CUCL by Netcom Parent;
|
|
|
(19)
|
the
framework agreement dated 12 August 2008 entered into between Netcom
Parent and CUCL to record the principles governing, and the principal
terms of, the existing continuing transactions between the parties
relating to the provision of ancillary telecommunications services to CUCL
by Netcom Parent;
|
|
|
(20)
|
the
framework agreement dated 12 August 2008 entered into between Netcom
Parent and CUCL to record the principles governing, and the principal
terms of, the existing continuing transactions between the parties
relating to provision of various support services to CUCL by Netcom
Parent;
|
|
|
(21)
|
the
framework agreement dated 12 August 2008 entered into between Netcom
Parent and CUCL to record the principles governing, and the principal
terms of, the pre-existing continuing transactions between the parties
relating to the lease of certain telecommunications resources and certain
other telecommunications facilities by CUCL;
|
|
|
(22)
|
the
comprehensive services agreement dated 12 August 2008 (the “2008
Comprehensive Services Agreement”) entered into between Unicom Parent and
Unicom A Share Company (the rights and obligations of Unicom A Share
Company under that agreement were subsequently transferred to CUCL and
China Netcom (Group) Company Limited (“CNC China”), a wholly-owned
subsidiary of Netcom) relating to the provision of services between the
parties; and
|
|
|
(23)
|
a
transfer agreement dated 12 August 2008 entered into between Unicom A
Share Company, CUCL and CNC China pursuant to which Unicom A Share Company
agreed to transfer all of its rights and obligations under the 2008
Comprehensive Services Agreement to CUCL and CNC
China.
|
11. EXPERTS
The names and qualifications of the
professional advisers to Unicom who have been named in this document or given
their opinion or advice which are contained in this document are set out
below:
|
Name
|
Qualification
|
|
|
China
International Capital Corporation
(Hong
Kong) Limited
|
A
corporation licensed under the SFO to carry on Type 1 (dealing in
securities), Type 4 (advising on securities), Type 6 (advising on
corporate finance) and Type 9 (asset management) regulated
activities
|
|
|
J.P.
Morgan Securities (Asia Pacific) Limited
|
A
registered institution under the SFO licensed to carry on Type 1 (dealing
in securities), Type 4 (advising on securities), Type 6 (advising on
corporate finance) and Type 7 (providing automated trading services)
regulated activities, and a restricted licence bank under the Banking
Ordinance, Chapter 155 of the Laws of Hong Kong
|
|
|
PricewaterhouseCoopers
|
Certified
Public Accountants
|
- V-24
-
|
12.
|
CONSENTS
|
|
|
(a)
|
Each
of CICC and JPMorgan has given and has not withdrawn its written consent
to the issue of this document with the inclusion of references to its name
in the form and context in which they respectively
appear.
|
|
|
(b)
|
PricewaterhouseCoopers
has given and has not withdrawn its written consent to the issue of this
document with the inclusion of the text of its letter and references to
its name in the form and context in which they respectively
appear.
|
|
|
13.
|
MISCELLANEOUS
|
|
|
(a)
|
The
principal members of Unicom’s concert group are (1) Unicom, (2) Unicom
BVI, (3) Unicom A Share Company and (4) Unicom Parent.
|
|
|
(b)
|
Unicom
Parent is the ultimate holding company of Unicom. Unicom Parent held
approximately 60.74% of the issued share capital of Unicom A Share
Company, which in turn held approximately 82.10% of the issued share
capital of Unicom BVI, wh ich in turn held approximately 71.17% of the
issued share capital of Unicom as at the Latest Practicable
Date.
|
|
|
(c)
|
The
registered address of Unicom and its principal office in Hong Kong is at
75th Floor, The Center, 99 Queen’s Road Central, Hong Kong. The Unicom
Directors are Mr. Chang Xiaobing, Mr. Tong Jilu, Mr Li Gang, Mr. Zhang
Junan, Mr. Lu Jianguo, Mr. Lee Suk Hwan, Mr. Wu Jinglian, Mr. Shan
Weijian, Mr. Cheung Wing Lam, Linus and Mr. Wong Wai
Ming.
|
|
|
(d)
|
The
registered address of Unicom Parent is at Room 615, 6/F., Office Tower 3,
Henderson Center, No. 18, Jianguomen Nei Ave., Dongcheng District, Beijing
100005, the PRC. The directors of Unicom Parent are Mr. Chang Xiaobing,
Mr. Tong Jilu, Mr. Li Gang, Mr. Zhang Junan, Mr. Dong Qunke, Mr. Li Xiong,
Mr. Zhang Dongchen and Mr. Jiang Peihua.
|
|
|
(e)
|
The
registered address of Unicom A Share Company is at 29/F, Lian Tong Tower,
1033 Chang Ning Road, Shanghai 200050, the PRC. The directors of Unicom A
Share Company are Mr. Chang Xiaobing, Mr. Lu Jianguo, Mr. Tong Jilu, Mr.
Liu Yunjie, Mr. Zhang Jian, Mr. Gao Shangquan, Mr. Chen Xiaoyue, Mr. Chen
Junliang and Mr. Wang Chenguang. The supervisors of Unicom A Share Company
are Mr. Zhao Chuanli and Ms. Tang Fuxin.
|
|
|
(f)
|
The
registered address of Unicom BVI is at Craigmuir Chambers, P.O.Box 71,
Road Town, Tortola, British Virgin Islands. The directors of Unicom BVI
Company are Mr. Chang Xiaobing and Mr. Li Qiuhong.
|
|
|
(g)
|
CICC
is the lead financial adviser to Unicom and its address is at 29th Floor,
One International Finance Centre, 1 Harbour View Street, Central, Hong
Kong.
|
|
|
(h)
|
JPMorgan
is the financial adviser to Unicom and its address is at 28/F, Chater
House, 8 Connaught Road Central, Hong Kong.
|
|
|
(i)
|
Unicom
does not have any intention to transfer, charge or pledge any Netcom
Shares it acquires pursuant to the Scheme to any other
person.
|
|
|
(j)
|
As
at the Latest Practicable Date, there were no arrangements of the kind
referred to in Note 8 to Rule 22 of the Takeovers Code which existed
between Unicom or any of the parties acting in concert with Unicom and any
other person.
|
|
- V-25
-
|
APPENDIX
VI
|
DOCUMENTS
AVAILABLE FOR INSPECTION
|
Copies of the following documents are
available for inspection from the date of this document until the Effective Date
or the date on which the Scheme is withdrawn or lapses, whichever is the
earliest (1) at the office of Netcom at Room 6701, The Center, 99 Queen’s Road
Central, Hong Kong from 9:30 a.m. to 5:30 p.m. (except Saturdays, Sundays and
public holidays), (2) on the website of Netcom at www.china-netcom.com,
(3) on the website of Unicom at www.chinaunicom.com.hk
and (4) on the website of the SFC at www.sfc.hk:
|
|
(1)
|
the
memorandum and articles of association of
Netcom;
|
|
|
(2)
|
the
memorandum and articles of association of
Unicom;
|
|
|
(3)
|
the
annual reports of Netcom for the two financial years ended 31 December
2007;
|
|
|
(4)
|
the
annual reports of Unicom for the two financial years ended 31 December
2007;
|
|
|
(5)
|
the
announcement dated 21 April 2008 made by Netcom of its unaudited
consolidated revenues for the three months ended 31 March
2008;
|
|
|
(6)
|
the
announcement dated 24 April 2008 made by Unicom of its unaudited
consolidated results for the three months ended 31 March
2008;
|
|
|
(7)
|
the
letter from the Board;
|
|
|
(8)
|
the
letter from the Independent Board
Committee;
|
|
|
(9)
|
the
letter from Rothschild;
|
|
|
(10)
|
the
unaudited pro forma consolidated financial information of the Enlarged
Group, the text of which is set out in Appendix III to the Explanatory
Statement;
|
|
|
(11)
|
the
accountant’s report from PricewaterhouseCoopers in respect of the
unaudited pro forma consolidated financial information of the Enlarged
Group, the text of which is set out in Appendix III to the Explanatory
Statement;
|
|
|
(12)
|
the
Option Proposal Letter;
|
|
|
(13)
|
the
proposed rules of the Special Purpose Unicom Share Option
Scheme;
|
|
|
(14)
|
the
ADS Voting Instruction Card;
|
|
|
(15)
|
the
Netcom Depositary’s Notice of Court Meeting and Extraordinary General
Meeting of Netcom;
|
|
|
(16)
|
the
written consents referred to in paragraph 13 headed “Consents” in Appendix
IV to the Explanatory Statement;
|
|
|
(17)
|
the
written consents referred to in paragraph 12 headed “Consents” in Appendix
V to the Explanatory Statement;
|
|
|
(18)
|
the
irrevocable undertakings from Netcom BVI and Telefónica and the
irrevocable instruction received by Netcom BVI referred to in paragraph 5
headed “Undertakings” in the Explanatory
Statement;
|
|
|
(19)
|
the
material contracts referred to in paragraph 11 headed “Material Contracts”
in Appendix IV to the Explanatory
Statement;
|
|
|
(20)
|
the
material contracts referred to in paragraph 10 headed “Material Contracts”
in Appendix V to the Explanatory
Statement;
|
|
|
(21)
|
the
full list of dealings during the Relevant Period by (a) Bear Stearns
International Limited, J.P. Morgan Securities Limited and J.P. Morgan
Whitefriars Inc. in the Netcom Shares and the Unicom Shares and (b) Bear
Stearns & Co., Inc. and J.P. Morgan Securities Limited in the Netcom
ADSs and the Unicom ADSs; and
|
|
|
(22)
|
this
document.
|
-
VI-1 -
|
SCHEME
OF ARRANGEMENT
|
|
|
HCMP
1452/2008
|
IN
THE HIGH COURT OF THE
HONG
KONG SPECIAL ADMINISTRATIVE REGION
COURT
OF FIRST INSTANCE
MISCELLANEOUS
PROCEEDINGS NO. 1452 OF 2008
IN
THE MATTER OF
China
Netcom Group Corporation (Hong Kong) Limited
中國網通集團（香港）有限公司
AND
IN
THE MATTER OF
the
Companies Ordinance, Chapter 32 of the Laws of Hong Kong
SCHEME
OF ARRANGEMENT
(under
Section 166 of the Companies Ordinance,
Chapter
32 of the Laws of Hong Kong)
between
China
Netcom Group Corporation (Hong Kong) Limited
中國網通集團（香港）有限公司
and
the
holders of the Scheme Shares
(as
hereinafter defined)
|
PRELIMINARY
|
|
|
(A)
|
In
this Scheme of Arrangement, unless inconsistent with the subject or
context, the following expressions shall have the meanings respectively
set opposite them:
|
|
“Court
Meeting”
|
a
meeting of the holders of the Netcom Shares convened by direction of the
High Court for the purpose of approving this Scheme
|
|
|
“Effective
Date”
|
the
date on which this Scheme becomes effective in accordance with Clause 7 of
this Scheme
|
|
|
“High
Court”
|
High
Court of Hong Kong
|
|
|
“holder”
|
a
registered holder, including any person entitled by transmission to be
registered as such and joint holders
|
|
|
“Hong
Kong”
|
the
Hong Kong Special Administrative Region of the People’s Republic of
China
|
-
S-1 -
|
“Netcom”
|
China
Netcom Group Corporation (Hong Kong) Limited 中國網通集團（香港）有限公司,
a company incorporated under the laws of Hong Kong with limited
liability
|
|
|
“Netcom
Shares”
|
ordinary
shares of US$0.04 each in the capital of Netcom
|
|
|
“Register”
|
the
register of members of Netcom
|
|
|
“Scheme”
|
this
scheme of arrangement under Section 166 of the Companies Ordinance in its
present form or with or subject to any modification thereof or addition
thereto or conditions approved or imposed by the High
Court
|
|
|
“Scheme
Record Time”
|
5:00
p.m. (Hong Kong time) on a day on which The Stock Exchange of Hong Kong
Limited is open for trading and immediately preceding the Effective
Date
|
|
|
“Scheme
Shares”
|
all
the Netcom Shares in issue as at the Scheme Record Time
|
|
|
“Takeovers
Code”
|
The
Code on Takeovers and Mergers issued by the Securities and Futures
Commission in Hong Kong
|
|
|
“Unicom”
|
China
Unicom Limited 中國聯通股份有限公司,
a company incorporated under the laws of Hong Kong with limited
liability
|
|
|
“Unicom
Shares”
|
ordinary
shares of HK$0.10 each in the capital of Unicom
|
|
|
“HK$”
|
Hong
Kong dollars, the lawful currency of Hong
Kong
|
|
|
“US$”
|
United
States dollars, the lawful currency of the United
States
|
|
(B)
|
The
authorised share capital of Netcom at the date of this Scheme is
US$1,000,000,000 divided into 25,000,000,000 Netcom Shares, 6,699,197,200
of which have been issued and are fully
paid.
|
|
(C)
|
The
primary purpose of this Scheme is that Netcom shall become a wholly-owned
subsidiary of Unicom and the holders of the Scheme Shares shall become
shareholders of Unicom.
|
|
(D)
|
Unicom
as at the date of this Scheme does not beneficially own any Netcom
Shares.
|
|
(E)
|
As
at the date of this Scheme, various members of the group of companies to
which J.P. Morgan Securities (Asia Pacific) Limited belongs trade in
securities and derivative products including or involving the Netcom
Shares the number of which may fluctuate from time to time. By virtue of
their relationships with J.P. Morgan Securities (Asia Pacific) Limited,
which is the financial adviser to Unicom in respect of this Scheme, and as
such members are exempt principal traders under the Takeovers Code, each
of such members is precluded from voting at the Court Meeting
notwithstanding that the Netcom Shares in which any of them is legally or
beneficially interested will form part of the Scheme Shares. Each of these
members has accordingly undertaken to Netcom, through J.P. Morgan
Securities (Asia Pacific) Limited, that in relation to the Netcom Shares
which will be beneficially owned by any of them at the time of the Court
Meeting, such Netcom Shares would neither be represented nor voted at the
Court Meeting unless otherwise permitted under the Takeovers Code or by
the Securities and Futures Commission of Hong
Kong.
|
|
(F)
|
Further,
as at the date of this Scheme, various members of the group of companies
to which Citigroup Global Markets Asia Limited belongs trade in securities
and derivative products including or involving the Netcom Shares the
number of which may fluctuate from time to time. By virtue of their
relationships with Citigroup Global Markets Asia Limited, which is the
exclusive financial adviser to Netcom in respect of this Scheme, and as
such members are exempt principal traders under the Takeovers Code, each
of such members is precluded from voting at the Court Meeting
notwithstanding that the Netcom Shares in which any of them is legally or
beneficially interested will form part of the Scheme Shares. Each of these
members has accordingly undertaken to Netcom, through Citigroup Global
Markets Asia Limited, that in relation to the Netcom Shares which will be
beneficially owned by any of them at the time of the Court Meeting, such
Netcom Shares would neither be represented nor voted at the Court Meeting
unless otherwise permitted under the Takeovers Code or by the Securities
and Futures Commission of Hong
Kong.
|
-
S-2 -
|
(G)
|
Unicom
has agreed to appear by Counsel at the hearing of the petition to sanction
this Scheme and to undertake to the High Court to be bound by this Scheme
and to execute and do and procure to be executed and done all such
documents, acts and things as may be necessary or desirable to be executed
or done by Unicom for the purpose of giving effect to this
Scheme.
|
THE
SCHEME
PART
I
Cancellation
of the Scheme Shares
1. On
the Effective Date:
|
|
(a)
|
the
authorised and issued share capital of Netcom shall be reduced by
cancelling and extinguishing the Scheme
Shares;
|
|
|
(b)
|
subject
to and forthwith upon such reduction of capital taking effect, the
authorised share capital of Netcom shall be increased to its former amount
of US$1,000,000,000 by the creation of such number of Netcom Shares as
shall be equal to the number of the Scheme Shares cancelled;
and
|
|
|
(c)
|
Netcom
shall apply the credit arising in its books of account as a result of the
reduction of capital referred to in sub-clause (a) of this Clause 1 in
paying up in full at par the Netcom Shares created pursuant to sub-clause
(b) of this Clause 1, which Netcom Shares shall be allotted and issued,
credited as fully paid, to Unicom or its nominees or
both.
|
PART
II
Consideration
for the cancellation of the Scheme Shares
|
|
2.
|
(a)
|
In
consideration of the cancellation and extinguishment of the Scheme Shares,
Unicom shall, subject as provided in sub-clauses (b) and (c) of this
Clause 2, allot and issue to each holder of the Scheme Shares (as
appearing on the Register at the Scheme Record Time) the Unicom Shares,
credited as fully paid, in the proportion of 1.508 Unicom Shares for every
Scheme Share then held by them.
|
|
|
(b)
|
In
the case where the directors of Unicom or Netcom have been advised that
the allotment and issue of the Unicom Shares to a holder of the Scheme
Shares under sub-clause (a) of this Clause 2 may be prohibited by any
relevant law or so prohibited except after compliance with conditions or
requirements which the directors of Unicom or Netcom regard as unduly
onerous by reason of delay, expense or otherwise, Unicom may allot and
issue the relevant Unicom Shares to a person appointed by the directors of
Unicom who shall sell the same in the market as soon as reasonably
practicable and account to such holder of the Scheme Shares for the net
proceeds of sale (after the deduction of all expenses incurred and tax
payable in connection with such sale) in full satisfaction of his rights
to the Unicom Shares to which but for this sub-clause (b) of this Clause
2, he would have become entitled under the Scheme, except that no payment
will be made of any amount less than HK$50, which will be retained for the
benefit of Unicom. In order to give effect to such sale, the person
appointed by the directors of Unicom shall be authorised as attorney on
behalf of the holders of the Scheme Shares concerned to execute and
deliver as transferor forms of transfer or other instruments or
instructions of transfer and to give such instructions and to do all other
things which he may consider necessary or expedient in connection with
such sale. In the absence of bad faith or wilful default, none of Netcom,
Unicom and the person so appointed shall have any liability for any loss
or damage arising as a result of such
sale.
|
-
S-3 -
|
|
(c)
|
No
holder of any Scheme Shares shall be entitled to have allotted and issued
to him a fraction of a Unicom Share but all fractions to which, but for
this sub-clause (c) of this Clause 2, any such holder would have become
entitled shall be aggregated (and, if necessary, rounded up to the nearest
whole number of Unicom Shares) and allotted and issued to a person
nominated by Unicom who shall sell the same and the net proceeds of sale
shall be paid to Unicom for its own
benefit.
|
PART
III
General
|
3.
|
The
Unicom Shares to be allotted and issued pursuant to Clause 2 of this
Scheme shall form one class with and rank pari
passu in all respects with the existing Unicom
Shares.
|
|
4.
|
(a)
|
Not
later than ten days after the Effective Date, Unicom shall effect as of
the Effective Date the allotment and issue of the Unicom Shares pursuant
to Clause 2 of this Scheme.
|
|
|
(b)
|
Not
later than ten days after the Effective Date, Unicom shall deliver or
cause to be delivered (except to the extent to which Unicom may be
prohibited by law in any part of the world from so doing) the certificates
for the Unicom Shares allotted and issued in accordance with Clause 2 of
this Scheme to the person or persons to whom the same shall have been
respectively so allotted and issued by sending such certificates through
the post (by airmail where available) in pre-paid envelopes addressed to
such persons:
|
|
|
(i)
|
(subject
to (iii) below) in the case of each sole holder to the registered address
of such holder as appearing on the Register at the Scheme Record Time;
or
|
|
|
(ii)
|
(subject
to (iii) below) in the case of joint holders to the registered address as
appearing on the Register at the Scheme Record Time of the joint holder
whose name then stands first on the Register in respect of the relevant
joint holding; or
|
|
|
(iii)
|
in
the case of the Unicom Shares allotted and issued pursuant to sub-clauses
(b) and (c) of Clause 2 of this Scheme, to the relevant persons appointed
by the directors of Unicom,
|
provided
that the foregoing shall not preclude Unicom from delivering or procuring to be
delivered the certificates for the Unicom Shares allotted and issued as
aforesaid to any such person or persons by a method other than posting subject
to the prior agreement of such person or persons or to any person or persons as
may be indicated in writing before the Effective Date to the share registrar of
Unicom, Hong Kong Registrars Limited, at 46th Floor, Hopewell Centre, 183
Queen’s Road East, Wanchai, Hong Kong.
|
|
(c)
|
Not
later than 28 days after the Effective Date, Unicom shall deliver or cause
to be delivered (except to the extent to which Unicom may be prohibited by
law from so doing) the cheques representing the net proceeds of sale
payable by Unicom in accordance with sub-clause (b) of Clause 2 of this
Scheme to the person or persons to whom the same shall have been
respectively so payable by sending such cheques through the post (by air
mail where available) in pre-paid envelopes addressed to such
persons:
|
|
|
(i)
|
in
the case of each sole holder to the registered address of such holder as
appearing on the Register at the Scheme Record Time;
or
|
|
|
(ii)
|
in
the case of joint holders to the registered address as appearing on the
Register at the Scheme Record Time of the joint holder whose name then
stands first on the Register in respect of the relevant joint
holding,
|
provided
that the foregoing shall not preclude Unicom from delivering or procuring to be
delivered the cheques representing the net proceeds of sale to any such person
or persons by a method other than posting subject to the prior agreement of such
person or persons or to any person or persons as may be indicated in writing
before the Effective
Date to the share registrar of Unicom, Hong Kong Registrars Limited, at its
address aforesaid. All cheques shall be drawn on a licensed bank in Hong Kong
or, if the amount of such proceeds has been converted to a currency other than
Hong Kong dollars, a bank carrying on business in the country in which such
currency is legal tender and made payable to the order of the person or persons
to whom in accordance with the foregoing provisions of this Clause 4 the
envelope containing the same is addressed and the encashment of any such cheque
shall be a good discharge to Unicom for the moneys represented
thereby.
-
S-4 -
|
|
(d)
|
All
certificates and, if applicable, cheques shall be posted at the risk of
the addressees and other persons entitled thereto and neither Unicom nor
Netcom shall be responsible for any loss or delay in
transmission.
|
|
|
(e)
|
In
case where delivery of any certificate for the Unicom Shares has been
returned undelivered, then in every such case the same shall be retained
by the share registrar of Unicom, Hong Kong Registrars Limited, at its
address aforesaid pending their collection, but nothing in this provision
shall limit or restrict the application of any provisions in the articles
of association of Unicom from time to time regarding untraceable
shareholders.
|
|
|
(f)
|
On
or after the day being six calendar months after the posting of the
cheques pursuant to sub-clause (c) of this Clause 4, Unicom shall have the
right to cancel or countermand payment of any such cheque which has not
then been encashed or has been returned uncashed and shall place all
monies represented thereby in a deposit account in Unicom’s name with a
licensed bank in Hong Kong appointed by Unicom. Unicom shall hold such
monies until the expiration of six years from the Effective Date and shall
prior to such date make payments thereout of the sums payable pursuant to
sub-clause (b) of Clause 2 of this Scheme to the persons who satisfy
Unicom that they are respectively entitled thereto and the cheques
referred to in sub-clause (c) of this Clause 4 of which they are payees
have not been cashed. Any payments made by Unicom hereunder shall include
any interest accrued on the sums to which the respective persons are
entitled pursuant to sub-clause (b) of Clause 2 of this Scheme, calculated
at the annual rate prevailing from time to time at the licensed bank in
which the monies are deposited, subject, if applicable, to the deduction
of any interest or withholding tax or any other deductions required by
law. Unicom shall exercise its absolute discretion in determining whether
or not it is satisfied that any person is so entitled and a certificate of
Unicom to the effect that any particular person is so entitled or not so
entitled, as the case may be, shall be conclusive and binding upon all
persons claiming an interest in the relevant
monies.
|
|
|
(g)
|
On
the expiration of six years from the Effective Date, Unicom shall be
released from any further obligation to make any payments under this
Scheme and Unicom shall retain the balance, if any, of the sums standing
to the credit of the deposit account referred to in sub-clause (f) of this
Clause 4 including accrued interest subject, if applicable, to the
deduction of any interest or withholding tax required by
law.
|
|
|
(h)
|
The
preceding sub-clauses of this Clause 4 shall be subject to any prohibition
or condition imposed by law.
|
|
5.
|
With
effect from and including the Effective Date, each instrument of transfer
and certificate validly subsisting at the Scheme Record Time in respect of
a transfer or holding of any number of the Scheme Shares shall cease to be
valid for any purpose as an instrument of transfer or a certificate for
such Scheme Shares and every holder of the Scheme Shares shall be bound at
the request of Netcom to deliver up such certificate to Netcom for
cancellation thereof.
|
|
6.
|
With
effect from and including the Effective Date, all mandates or relevant
instructions to Netcom in relation to the Scheme Shares shall cease to be
valid as effective mandates or
instructions.
|
|
7.
|
The
Scheme shall become effective as soon as an office copy of the Order of
the High Court sanctioning this Scheme under Section 166 of the Companies
Ordinance and confirming, under Section 60 of the same Ordinance, the
reduction of capital provided for by this Scheme, together with a minute
relating to the share capital of Netcom and containing the particulars
required by Section 61 of such Ordinance, shall have been duly registered
by the Registrar of Companies.
|
|
8.
|
Unless
this Scheme shall have become effective on or before 30 November 2008 or
such later date as the High Court may allow, this Scheme shall
lapse.
|
|
9.
|
Netcom
and Unicom may jointly consent for and on behalf of all concerned to any
modification of, or addition to, this Scheme or to any condition which the
High Court may approve or impose.
|
-
S-5 -
|
10.
|
All
costs, charges and expenses of and incidental to this Scheme and the costs
of carrying this Scheme into effect shall be borne by
Netcom.
|
Dated 15
August 2008
-
S-6 -
|
NOTICE
OF COURT MEETING
|
HCMP
1452/2008
IN
THE HIGH COURT OF THE
HONG
KONG SPECIAL ADMINISTRATIVE REGION
COURT
OF FIRST INSTANCE
MISCELLANEOUS
PROCEEDINGS NO. 1452 OF 2008
|
IN
THE MATTER OF
|
||
China
Netcom Group Corporation (Hong Kong) Limited
中國網通集團（香港）有限公司
AND
IN
THE MATTER OF
the
Companies Ordinance, Chapter 32 of the Laws of Hong Kong
|
NOTICE
OF COURT MEETING
|
|||
NOTICE
IS HEREBY GIVEN that, by an Order dated 12 August 2008 made in the above
matters, the Court has directed a Meeting to be convened of the holders of the
ordinary shares of US$0.04 each in the capital of the Company for the purpose of
considering and, if thought fit, approving (with or without modification) a
Scheme of Arrangement proposed to be made between the Company and the holders of
its ordinary shares of US$0.04 each and that such Meeting will be held at The
Ballroom, Island Shangri-La, Hong Kong on Wednesday, 17 September 2008 at 4:00
p.m. at which place and time all such holders of the ordinary shares of US$0.04
each in the capital of the Company are requested to attend.
A
copy of the Scheme of Arrangement and a copy of the Explanatory Statement
required to be furnished pursuant to Section 166A of the abovementioned
Ordinance are incorporated in the composite document of which this Notice forms
part.
The
abovementioned holders of the ordinary shares of US$0.04 each in the capital of
the Company may vote in person at the Meeting or they may appoint one or more
persons, whether a member of the Company or not, as their proxies to attend and
vote in their stead. A pink form of proxy for use at the Meeting is enclosed
herewith.
It
is requested that forms appointing proxies, together with the power of attorney
or other authority, if any, under which it is signed or notarially certified
copy of such power of attorney or other authority, be deposited at the Company’s
registered office at Room 6701, The Center, 99 Queen’s Road Central, Hong Kong,
at least 48 hours before the time appointed for holding the Meeting, but if
forms are not so deposited they may be handed to the Chairman of the Meeting at
the Meeting.
In
the case of joint holders of a share, the vote of the senior who tenders a vote,
whether in person or by proxy, will be accepted to the exclusion of the vote(s)
of the other joint holder(s) and, for this purpose, seniority will be determined
by the order in which the names stand on the Register of Members of the Company
in respect of the relevant joint holding.
For
the purpose of determining the entitlement to attend and vote at the Meeting,
the Register of Members of the Company will be closed from 12 September 2008 to
17 September 2008 (both dates inclusive) and during such period, no transfer of
shares will be effected.
-
N-1 -
By
the same Order, the Court has appointed Zuo Xunsheng or, failing him, Li Fushen
or, failing him, Yan Yixun to act as Chairman of the Meeting and has directed
the Chairman to report the result thereof to the Court.
The
Scheme of Arrangement will be subject to the subsequent approval of the
Court.
Dated
15 August 2008
|
LINKLATERS
10th
Floor, Alexandra House
Chater
Road
Hong
Kong
Solicitors
for China Netcom Group Corporation (Hong Kong)
Limited
|
-
N-2 -
|
NOTICE
OF NETCOM EGM
|
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)
(Stock
Code: 0906)
NOTICE IS HEREBY GIVEN that an
Extraordinary General Meeting of China Netcom Group Corporation (Hong Kong)
Limited 中國網通集團(香港)有限公司 will be
held at The Ballroom, Island Shangri-La, Hong Kong on 17 September 2008 at 4:30
p.m. (or immediately after the conclusion or adjournment of the Meeting of the
holders of the ordinary shares of US$0.04 each in the capital of the Company
convened by direction of the High Court of the Hong Kong Special Administrative
Region for the same place and day) for the purpose of considering and, if
thought fit, passing, with or without modifications, the following resolution,
which will be proposed as a Special Resolution:
SPECIAL
RESOLUTION
“THAT:
|
|
(A)
|
the
Scheme of Arrangement dated 15 August 2008 (the “Scheme”) between the
Company and the holders of the Scheme Shares (as defined in the Scheme) in
the form of the print which has been produced to this Meeting and for the
purposes of identification signed by the Chairman of this Meeting, with
any modification thereof or addition thereto or condition approved or
imposed by the High Court of the Hong Kong Special Administrative Region,
be and is hereby approved; and
|
|
|
(B)
|
for
the purposes of giving effect to the Scheme, on the Effective Date (as
defined in the Scheme):
|
|
|
(1)
|
the
authorised and issued share capital of the Company be reduced by
cancelling and extinguishing the Scheme
Shares;
|
|
|
(2)
|
subject
to and forthwith upon such reduction of share capital taking effect, the
authorised share capital of the Company be increased to its former amount
of US$1,000,000,000 by the creation of such number of ordinary shares of
US$0.04 each in the capital of the Company as shall be equal to the number
of the Scheme Shares cancelled; and
|
|
|
(3)
|
the
Company shall apply the credit arising in its books of account as a result
of such reduction of share capital in paying up in full at par the
ordinary shares of US$0.04 each in the capital of the Company to be
created as aforesaid, which new shares shall be allotted and issued,
credited as fully paid, to China Unicom Limited and/or its nominees and
the directors of the Company be and are hereby unconditionally authorised
to allot and issue the same
accordingly.”
|
|
By
Order of the Board
China
Netcom Group Corporation (Hong Kong) Limited
Huo
Haifeng Mok Kam
Wan
Joint
Company Secretaries
|
Hong
Kong, 15 August 2008
|
Registered
office:
|
Room
6701, The Center
99
Queen’s Road Central
Hong
Kong
-
N-3 -
Notes:
|
1.
|
A
white form of proxy for use at the Meeting is enclosed with this
Notice.
|
|
2.
|
A
member entitled to attend and vote at the Meeting is entitled to appoint
one or more proxies to attend and, on a poll, vote in his stead. A proxy
need not be a member of the
Company.
|
|
3.
|
In
order to be valid, the white form of proxy, together with the power of
attorney or other authority, if any, under which it is signed or
notarially certified copy of such power of attorney or other authority,
must be deposited at the Company’s registered office at Room 6701, The
Center, 99 Queen’s Road Central, Hong Kong, at least 48 hours before the
time appointed for holding the Meeting. Completion and return of the white
form of proxy will not preclude a member from attending and voting in
person at the Meeting or at any adjourned Meeting if a member so
wishes.
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4.
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When
two or more persons are registered as the holders of any share and if more
than one of such joint holders be present at the Meeting, personally or by
proxy, that one so present whose name stands first on the Register of
Members in respect of such shares shall alone be entitled to vote in
respect thereof.
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N-4 -
SIGNATURE
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the under-signed, thereunto duly
authorized.
CHINA NETCOM GROUP CORPORATION (HONG
KONG) LIMITED
By
/s/
Huo
Haifeng
By
/s/
Mok Kam
Wan
Name: Huo
Haifeng and Mok Kam Wan
Title: Joint
Company
Secretaries
Date:
August 13, 2008