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 May, 2005
(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 |X| 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 |X|
(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:
The poll results in respect of the resolutions proposed at the Annual
General Meeting of China Netcom Group Corporation (Hong Kong) Limited (the
"Registrant") held on May 20 2005, made by the Registrant in English on May
20, 2005.
Contents
Chairman's Statement 2
Chief Executive Officer's Statement 4
Independent Review Report 9
Interim Financial Statements
Unaudited Condensed Consolidated Income Statement 10
Unaudited Condensed Consolidated Balance Sheet 11
Unaudited Condensed Consolidated Statement of Changes in Equity 13
Unaudited Condensed Consolidated Statement of Cash Flows 15
Notes to the Interim Financial Statements 16
Supplementary Information for American Depositary Shares Holders 54
Supplementary Financial Information 56
Other Information 57
Chairman's Statement
Dear Shareholders,
In the first half of 2005, the Company's focus is "growth and efficiency".
While taking various measures to strengthen the leading position of our core
businesses, our Company constantly sought new drivers to the growth of our
businesses. We made further reforms in our various management systems, thereby
enhancing the Company's operational efficiency in a sustainable manner. In the
first half of 2005, our revenues reached RMB33,724 million, net profits reached
RMB6,358 million and profit per share reached RMB0.96.
In the first half of 2005, our Board strived to establish a system for our
Board that meets the standards of the recommended best practices in the Code on
Corporate Governance Practices, in order to align our governance structure with
international market practices. At the same time, our Company continued the
enhancement of our internal control system since the launch of the enhancement
project at the end of last year. As a corporation of our scale and size and
with a history of over a hundred years in operation, to fulfill the
requirements of the Sarbanes-Oxley Act in a short period of time is a huge
challenge, and we are determined to be prepared for this challenge. In the
first half of the year, our internal control project team continued to inspect
and check our internal control system from the company-level control and
process-level control perspectives, and formulated standard models for
improvement. In the second half of the year, such internal control standard
models will be put into trial in some of the branches of the Company.
In the first half of 2005, we continued to focus on executing our three core
strategies, "Broadband, Olympic and International". As construction for the
Olympic stadiums began in the first half of this year, our Company together
with our controlling shareholder, China Network Communications Group
Corporation, has commenced the comprehensive implementation of our Olympic
strategy. The Company will strive to achieve the strategic goal of "Broadband
Olympic" through technical, business and service innovation. The "Broadband
Olympic" strategy serves to bring rapid growth to our broadband content and
other value-added businesses in order to offset the declining growth of our
traditional businesses. Hence, the sustained growth in our future business can
be attained.
In order to further enhance the value of the Company, by means of mergers and
acquisitions to achieve external growth, our Company has commenced the
acquisition of major telecommunications assets and business operations held by
China Network Communications Group Corporation, the controlling shareholder of
the Company, in Shanxi Province, Jilin Province, Heilongjiang Province and
Neimenggu Autonomous Region in 2005. An Extraordinary General Meeting will be
held at a suitable time such that the transaction can be considered and
approved at the Extraordinary General Meeting. Our Board believes that such
acquisition will provide further room for the Company's expansion, improve the
Company's service capabilities, capture operating synergy between the Company
and the target company to be acquired, thereby creating additional value to the
Company's shareholders.
The Company has entered into a Memorandum of Understanding with Telefonica,
S.A. on 21 July 2005 to explore the establishment of a broad strategic
cooperation. Our Board believes that our cooperation with Telefonica, S.A. will
further enhance our managerial and operational skills and is important to our
future business development and innovation.
The Company will continue to focus on "growth and efficiency" in the second
half of the year and will persist in implementing the three core strategies.
While continuing to promote the development of our broadband business, the
implementation of our Olympic strategy and the effective cooperation with our
international partners, we will strive to maintain a stable development of our
core telecommunications businesses. We will further refine our corporate
governance and comprehensively implement a robust internal control system. We
will further develop our value-added services as the industry becomes
increasingly competitive. At the same time, we will capture opportunities for
new businesses, especially wireless businesses, to further develop the growth
potential of the Company's new businesses.
On 12 September 2005, our Board accepted Mr Keith Rupert Murdoch's resignation
from his positions as a non-executive director of our Company and the chairman
of the Compensation Committee, and Mr Keith Rupert Murdoch is appointed as an
adviser to the Board. I would like to take this opportunity, on behalf of the
Board, to express our highest regards and deepest gratitude to Mr Keith Rupert
Murdoch for his exceptional contribution to the Company. Also, we welcome Mr
JosZ Mar'a clvarez-Pallete as a non-executive director. We believe that Mr
JosZ Mar'a clvarez-Pallete's expertise in corporate operations and
management will further strengthen the professionalism of our Board, which will
contribute to maximising the returns for our shareholders.
Zhang Chunjiang
Chairman
Hong Kong, 12 September 2005
Chief Executive Officer's Statement
Dear Shareholders,
In the first half of 2005, the telecommunications market in Mainland China was
very challenging. Not only was there intensified competition in the industry,
the market was also confronted with more uncertainties for its future
development. In such an environment, our Company, with the trust and support of
our Board, persisted in its goal in achieving "growth and efficiency". With the
concerted efforts of all our staff, we achieved considerable results in our
operations and management in the first half of 2005.
Financial Results
In the first half of 2005, we maintained a steady growth in our revenue,
achieved favourable results in cost control and recorded a substantial increase
in our operating results. For the first six months in 2005, we generated
revenue of RMB33,724 million (including amortisation of upfront connection fees
in the amount of RMB1,427 million). After excluding amortisation of upfront
connection fees, our revenue was RMB32,297 million, EBITDA* reached RMB17,605
million, EBITDA margin reached 54.5%, net profits amounted to RMB4,931 million
and profit margin reached 15.3%. Our operational efficiency was significantly
improved when compared to the same period last year.
Our free cash flow* maintained a steady growth, and reached RMB5,672 million as
at the end of June 2005, and our Capex reached RMB8,235 million for the same
period. Our capital structure became more solid as a result of the stable
growth in our operating results and our successful control of capital
expenditures. As at 30 June 2005, our interest-bearing debts reduced by
RMB9,502 million compared to the beginning of the year, and the total debt to
capitalisation ratio* decreased to 38.5%, representing a decrease of 5.8
percentage points.
Business Review
In 2005, we continued to fully leverage our advantages in local networks and
channels, and focused on the development of broadband services. We devoted
considerable efforts to enhance the loyalty of our fixed-line telephone
customers and further increase the growth in our PHS services to combat mobile
substitution. We vigorously fostered our value-added services to promote
sustained growth. While confronted with challenges to the fixed-line telephone
services, we achieved a comparatively favourable growth in our broadband
services and value-added services.
(1) Broadband and Internet Services
In the first half of 2005, we maintained a robust growth in our broadband
and Internet services. Our broadband and other Internet services generated
a revenue of RMB3,190 million, representing 9.9% of our total revenue
(excluding amortisation of upfront connection fees, same for the
following). As of 30 June 2005, the number of our broadband subscribers
reached 7.73 million, representing an increase of 84.6% over the same
period last year, and a market share of 87.6% in our northern service
region.
In 2005, the emphasis of our broadband services development is to realise
efficient growth brought by the increased economies of scale. While we
continued to increase the number of our broadband subscribers, we have
also taken measures to stabilise the revenue contribution of each
broadband subscriber. These measures include strengthening our marketing
efforts to business customers, enriching our broadband content and
providing our corporate customers and Internet cafZ customers with
premium after-sales services so as to increase their loyalty.
(2) Fixed-line Telephone Services
Local Telephone Services
In the first half of 2005, our local telephone services business remained
stable and it generated a revenue of RMB16,899 million, representing 52.3%
of our total revenue. As of 30 June 2005, the number of our local
telephone subscribers reached 85.24 million, representing an increase of
4.86 million subscribers compared to the end of last year, and a market
share of 93.8% in our northern service region. The growth in the local
telephone subscribers was primarily due to our PHS subscribers. In the
first half of 2005, the number of our PHS subscribers reached 18.11
million, representing an increase of 45.4% over the same period last year.
In the first half of 2005, the growth of our fixed-line telephone
subscriber base declined. Due to the impact of mobile substitution, the
usage volume of our fixed-line telephone services demonstrated a declining
trend compared to the same period last year. In order to maintain a steady
development of our local telephone services and increase the utilisation
rate of our local network resources, we strengthened our efforts in
expanding our subscriber base in urban and rural connecting areas, rural
areas and newly established urban residential communities in 2005.
Furthermore, with the opportunities brought about by the intelligence
upgrade of our local network, we comprehensively promoted the marketing of
our new businesses and new bundled products in order to retain existing
customers and attract more customers.
Long Distance Services
In the first half of 2005, the revenue generated from our long distance
services reached RMB4,491 million, representing 13.9% of our total
revenue. As a result of a constant increase in the proportion of VoIP
usage in our long distance services, our average tariff has declined.
Despite a continued growth in the usage volume of our long distance
services, the revenue generated from long distance services decreased
moderately when compared to the same period last year.
Value-added Services
In the first half of 2005, the revenue generated from our value-added
services reached RMB1,346 million, representing 4.2% of our total revenue.
Value-added services, as one of our key revenue growth drivers, continued
to record robust growth. In 2005, we continued our promotion of the
development of our value-added services. With the opportunities brought
about by the intelligence upgrade of our local network, we further
promoted our value-added products such as caller identification, telephone
information, voice messaging, telephone Q-bar, 4006 service, 800 service
and interactive telephone conferencing. As of 30 June 2005, the
penetration rate of our caller identification services reached 63.5%,
which was 5.3 percentage points higher than that at the end of 2004. The
usage of our telephone information services was 1,305 million minutes for
the six months, representing an increase of 14.2% over the same period
last year.
In the first half of 2005, the Company cooperated with SPs in an active
and comprehensive manner to vigorously develop value-added services for
PHS. The volume of PHS short message reached 1,993 million in the first
half of 2005, representing a growth of 56.8% over that for the whole year
of 2004. We formally launched our PHS "Personalised Ring" service at the
end of 2004 and acquired 2.66 million PHS "Personalised Ring" subscribers
as at the end of June 2005, with a penetration rate of 14.7%. As one of
our key service offerings, value-added services recorded robust growth,
demonstrating an enormous development potential.
(3) Business and Data Communication Services
In the first half of 2005, the revenue generated from our business and
data communication services reached RMB1,490 million, representing 4.6% of
our total revenue. Our business and data communication services remained
generally stable. Comparatively, in the first half of the year, the usage
volume of our managed data service achieved a higher growth rate. The
leased bandwidth of DDN, FR and ATM increased by 57.3%, 103.7% and 118.9%,
respectively over the same period last year. In terms of leased line
services, despite a substantial decline in the demand from our carrier
customers, the overall bandwidth of leased circuits still grew moderately
over the same period last year as a result of the increase in number and
demand of our business customers.
(4) International Services
In the first half of 2005, the revenue generated from our international
services reached RMB1,601 million, representing 5.0% of our total revenue.
In the first half of 2005, Asia Netcom, our wholly-owned subsidiary,
achieved a positive EBITDA. During the first six months, the number of
points of connection for our international managed data service reached
3,800, our international leased line bandwidth reached 23.2G and our
international incoming traffic reached 921 million minutes, representing
an increase of 165.4%, 74.0% and 2.4%, respectively over the same period
last year.
Outlook for the Second Half of the Year
We achieved relatively satisfactory results in reducing costs and enhancing
efficiency in the first half of 2005, and we will continue to refine our
management and realise management efficiency in the second half of 2005. While
consistently taking measures to ensure a steady growth in our fixed-line
telephone services, we will launch a "reward points" system and further refine
our customer retaining efforts with a view to preserving and consolidating our
existing market in an active and efficient way. We will continue our efforts in
improving the PHS networks and increasing their utilisation. We will persist in
our massive efforts in marketing our broadband services and enlarging the scale
of our broadband subscriber base. Furthermore, we will further tap the
potentials of the value-added services and strengthen the marketing efforts on
our value-added products.
In the second half of the year, we will continue to leverage the various
opportunities brought about by new technologies to accelerate the development
of our businesses, upgrade our overall brand images and push forward the
development of our broadband content. We will also strengthen our cooperation
with international telecommunications operators with extensive experience in
international operations so as to further refine our operations and management
and develop our new businesses. We strive to provide even better services for
our customers and maximise the returns for our shareholders.
Tian Suning
Vice Chairman and Chief Executive Officer
Hong Kong, 12 September 2005
* For definitions of EBITDA, free cash flow and total debt to capitalisation
ratio, please refer to our Company's 2004 annual report.
Independent Review Report
[PRICEWATERHOUSECOOPERS GRAPHIC OMITTED]
_______________________________________________________________________________
| Pricewaterhouse Coopers
| 22nd Floor Prince's Building
| Central Hong Kong
INDEPENDENT REVIEW REPORT TO THE BOARD OF DIRECTORS
CHINA NETCOM GROUP CORPORATION (HONG KONG) LIMITED
(incorporated in Hong Kong with limited liability)
Introduction
We have been instructed by the Company to review the interim financial report
set out on pages 10 to 53.
Respective responsibilities of directors and auditors
The Rules Governing the Listing of Securities on the Stock Exchange of Hong
Kong Limited require the preparation of an interim financial report to be in
compliance with HKAS 34 OOInterim financial reporting" issued by the Hong Kong
Institute of Certified Public Accountants and the relevant provisions thereof.
The interim financial report is the responsibility of, and has been approved
by, the directors.
It is our responsibility to form an independent opinion, based on our review,
on the interim financial report and to report our conclusion solely to you, as
a body, in accordance with our agreed terms of engagement and for no other
purpose. We do not assume responsibility towards or accept liability to any
other person for the contents of this report.
Review work performed
We conducted our review in accordance with SAS 700 "Engagements to review
interim financial reports" issued by the Hong Kong Institute of Certified
Public Accountants. A review consists principally of making enquiries of the
Group's management and applying analytical procedures to the interim financial
report and based thereon, assessing whether the accounting policies and
presentation have been consistently applied unless otherwise disclosed. A
review excludes audit procedures such as tests of controls and verification of
assets, liabilities and transactions. It is substantially less in scope than an
audit and therefore provides a lower level of assurance than an audit.
Accordingly we do not express an audit opinion on the interim financial report.
Opinion
On the basis of our review, which does not constitute an audit, we are not
aware of any material modifications that should be made to the interim
financial report for the six months ended 30 June 2005.
PricewaterhouseCoopers
Certified Public Accountants
Hong Kong, 12 September 2005
Interim Financial Statements
The Board of Directors (the "Directors") of China Netcom Group Corporation
(Hong Kong) Limited (the "Company") presents the unaudited condensed
consolidated interim financial statements (the "interim financial statements")
of the Company and its subsidiaries (collectively referred to as the "Group")
for the six months ended 30 June 2005, as follows:
UNAUDITED CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE SIX MONTHS ENDED 30 JUNE 2005
Note 2005 2004
RMB RMB
million million
Unaudited Audited
Revenues 6 33,724 32,498
Operating expenses
Depreciation and amortisation (9,265) (9,552)
Networks, operations and support (5,549) (5,167)
Staff costs (4,200) (4,294)
Selling, general and administrative (4,402) (4,199)
Other operating expenses (541) (724)
Operating profit before interest income and dividend income 9,767 8,562
Interest income 87 32
Dividend income 28 7
Profit from operations 7 9,882 8,601
Finance costs 8 (1,226) (1,604)
Share of loss of associated companies -- (1)
Profit before taxation 8,656 6,996
Taxation 9 (2,298) (2,121)
Profit for the period 6,358 4,875
Basic earnings per share 11 RMB0.96 RMB0.89
Diluted earnings per share 11 RMB0.96 RMB0.89
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
AS AT 30 JUNE 2005
As at As at
30 June 31 December
Note 2005 2004
RMB RMB
million million
Unaudited Restated
Assets
Current assets
Cash and bank deposits 12 8,790 10,053
Short-term investments 13 439 2,876
Accounts receivable 14 6,778 5,688
Inventories and consumables 502 941
Prepayments and other receivables 1,079 1,006
Due from holding companies and fellow
subsidiaries 489 373
Total current assets 18,077 20,937
Non-current assets
Property, plant and equipment 15 122,689 124,787
Construction in progress 9,172 7,602
Lease prepayments for land 3(c) 1,291 1,266
Intangible assets 16 926 316
Deferred costs 17 6,250 7,449
Deferred tax assets 2,881 2,394
Derivative assets 2 --
Other non-current assets 11 424
Total non-current assets 143,222 144,238
Total assets 161,299 165,175
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET (continued)
AS AT 30 JUNE 2005
As at As at
30 June 31 December
Note 2005 2004
RMB RMB
million million
Unaudited Restated
Liabilities and equity
Current liabilities
Accounts payable 18 13,281 14,653
Accruals and other payables 3,698 3,353
Short-term bank loans 19(a) 26,425 29,339
Current portion of long-term bank and other loans 19(b) 4,263 7,270
Due to holding companies and fellow subsidiaries 8,469 8,244
Current portion of deferred revenues 20 6,196 6,653
Current portion of provisions 2,480 2,596
Taxation payable 2,656 196
Total current liabilities 67,468 72,304
Net current liabilities (49,391) (51,367)
Total assets less current liabilities 93,831 92,871
Non-current liabilities
Long-term bank and other loans 19(b) 18,280 21,861
Deferred revenues 20 10,528 11,817
Provisions 2,080 2,143
Deferred tax liabilities 1,354 1,321
Derivative liabilities 83 --
Other non-current liabilities 22 564
Total non-current liabilities 32,347 37,706
Total liabilities 99,815 110,010
Financed by:
Share capital 21 2,181 2,181
Reserves 59,303 52,984
Shareholders' equity 61,484 55,165
Total liabilities & equity 161,299 165,175
Director Director
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED 30 JUNE 2005
Unaudited
Share Share Capital Statutory Revaluation Other Retained
capital premium reserve reserve reserve reserve earnings Total
RMB RMB RMB RMB RMB RMB RMB RMB
million million million million million million million million
(Note 21)
Balance as at 31 December 2004,
as previously reported 2,181 42,750 265 723 2,147 2,114 4,985 55,165
Effects of adoption of new HKFRSs:
Share-based payment (Note 3 (a)) -- -- 18 -- -- -- (18) --
Balance as at 31 December 2004,
as restated 2,181 42,750 283 723 2,147 2,114 4,967 55,165
Negative goodwill (Note 3(b)) -- -- -- -- -- -- 166 166
Foreign exchange contracts
(Note 3 (d)) -- -- -- -- -- -- 1 1
Balance as at 1 January 2005 as
restated 2,181 42,750 283 723 2,147 2,114 5,134 55,332
Profit for the period -- -- -- -- -- -- 6,358 6,358
Share-based payment (Note 3 (a)) -- -- 48 -- -- -- -- 48
Dividends to shareholders
(Note 10(a)) -- -- -- -- -- -- (259) (259)
Appropriation to statutory reserve
(Note 10 (b)) -- -- -- 3,378 -- -- (3,378) --
Transfer to retained earnings -- -- -- -- (417) (28) 445 --
Foreign currency translation
adjustment -- -- -- -- -- 5 -- 5
Balance as at30 June 2005 2,181 42,750 331 4,101 1,730 2,091 8,300 61,484
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY(continued)
FOR THE SIX MONTHS ENDED 30 JUNE 2005
Restated
Share Share Capital Statutory Revaluation Other Retained
capital premium reserve reserve reserve reserve earnings Total
RMB RMB RMB RMB RMB RMB RMB RMB
million million million million million million million million
(Note 21)
Balance as at 31 December 2003 1,819 34,168 -- -- 1,998 -- 5,391 43,376
Profit for the period -- -- -- -- -- -- 4,875 4,875
Movement of deferred tax
recognised in equity -- -- -- -- 846 2,355 (137) --
3,064
Transfer to retained earnings -- -- -- -- (280) (117) 397 --
Contributions from owners -- -- -- -- -- -- 201 201
Distributions to owners -- -- -- -- -- -- (2,600) (2,600)
Net assets distributed to owners in
accordance with reorganisation -- -- -- -- -- -- (6,047) (6,047)
Transfer to capital reserve upon
reorganisation -- -- 265 -- -- -- (265) --
Balance as at 30 June 2004 1,819 34,168 265 -- 2,564 2,238 1,815 42,869
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED 30 JUNE 2005
Six months ended 30 June
2005 2004
RMB RMB
million million
Unaudited Audited
Net cash inflow from operating activities 13,907 14,075
Net cash outflow from investing activities (5,737) (8,128)
Net cash outflow from financing activities (9,433) (9,114)
Decrease in cash and cash equivalents (1,263) (3,167)
Cash and cash equivalents at beginning of period 10,033 6,283
Cash and cash equivalents at end of period 8,770 3,116
Notes to the Interim Financial Statements
1 The group and principal activities
Background of the Group
China Netcom Group Corporation (Hong Kong) Limited (the "Company") was
incorporated in the Hong Kong Special Administrative Region ("Hong Kong")
of the People's Republic of China ("PRC") on 22 October 1999 as a limited
liability company under the Hong Kong Companies Ordinance.
Following the reorganization of the Company, China Netcom Holdings Company
Limited and China Netcom Communications Group Corporation ("China Netcom
Group") as set out in note 2 to the Group's financial statements for the
year ended 31 December 2004, the shares of the Company were listed on The
Stock Exchange of Hong Kong Limited on 17 November 2004 and the American
Depositary Shares of the Company were listed on The New York Stock
Exchange Inc. on 16 November 2004.
Principal activities
The Group is a dominant provider of fixed line telephone services,
broadband, other Internet-related services, and business and data
communications services in six northern municipalities and provinces,
namely Beijing Municipality, Tianjin Municipality, Hebei Province, Henan
Province, Shandong Province and Liaoning Province in the PRC. The Group
also provides telecommunications services to selected business and
residential customers in one southern municipality and one southern
province, namely Shanghai Municipality and Guangdong Province in the PRC.
In addition, the Group operates a network and offers international data
services throughout the Asia Pacific countries and regions.
2 Basis of presentation
These unaudited condensed consolidated financial statements (the "interim
financial statements") have been prepared in accordance with Hong Kong
Accounting Standard ("HKAS") 34, "Interim Financial Reporting" issued by
the Hong Kong Institute of Certified Public Accountants (the "HKICPA") and
the disclosure requirements of the Rules Governing the Listing of
Securities on The Stock Exchange of Hong Kong Limited.
The interim financial statements include the financial information of the
Company and its subsidiaries (collectively referred to as the "Group").
These interim financial statements should be read in conjunction with the
Group's 2004 financial statements. The details of the Company's
subsidiaries are set out in Note 22 to the 2004 financial statements.
The interim financial statements have been prepared in accordance with the
same accounting policies adopted in the Group's 2004 financial statements,
except for the accounting policy changes that will be reflected in the
2005 annual financial statements. Details of these changes in accounting
policies are set out in note 3 below.
The Company was listed following a reorganisation which was effective for
accounting purposes on 30 June 2004. The financial information for the six
months ended 30 June 2004 is extracted from the Company's prospectus for
the initial public offering and is presented as if the Group had been in
existence throughout that period. Further details regarding the Group's
reorganisation are set out in note 2 to the Group's 2004 financial
statements.
2 Basis of presentation (continued)
A significant percentage of the Group's funding requirements is achieved
through short term borrowings. Consequently, the balance sheet indicates a
significant working capital deficit. In the past, a substantial portion of
the Group's short term borrowings have been rolled over upon maturity.
Based on the Group's history of obtaining finance, its current finance,
its relationships with its bankers and its operating performance, the
directors consider that the Group will continue to be able to roll over
such short term financing, or will be able to obtain sufficient
alternative sources of financing to enable it to operate and meet its
liabilities as and when they fall due.
3 Changes in accounting policies
The HKICPA has issued a number of new and revised Hong Kong Financial
Reporting Standards and Hong Kong Accounting Standards ("new revised
HKFRSs") which are effective for accounting periods beginning on or after
1 January 2005.
As at 1 January 2005, the Group adopted the new revised HKFRSs as listed
below, which are relevant to its operations. The comparative figures in
respect of the six months ended 30 June 2004 have been amended as required
and where necessary, in accordance with the relevant requirements.
HKAS 1 Presentation of Financial Statements
HKAS 2 Inventories
HKAS 7 Cash Flow Statements
HKAS 8 Accounting Policies, Changes in Accounting Estimates
and Errors
HKAS 10 Events after the Balance Sheet Date
HKAS 12 Income Taxes
HKAS 14 Segment Reporting
HKAS 16 Property, Plant and Equipment
HKAS 17 Leases
HKAS 18 Revenue
HKAS 19 Employee Benefits
HKAS 21 The Effects of Changes in Foreign Exchange Rates
HKAS 23 Borrowing Costs
HKAS 24 Related Party Disclosures
HKAS 27 Consolidated and Separate Financial Statements
HKAS 28 Investments in Associates
HKAS 32 Financial Instruments: Disclosure and Presentation
HKAS 33 Earnings Per Share
HKAS 34 Interim Financial Reporting
HKAS 36 Impairment of Assets
HKAS 37 Provisions, Contingent Liabilities and Contingent Assets
HKAS 38 Intangible Assets
HKAS 39 Financial Instruments: Recognition and Measurement
HKFRS 1 First-time Adoption of Hong Kong Financial Reporting
Standards
HKFRS 2 Share-based Payment
HKFRS 3 Business Combinations
3 Changes in accounting policies (continued)
The adoption of these new revised HKFRSs by the Company did not have any
significant impact on its results of operations and financial position,
except for the adoption of HKFRS 2, HKFRS 3, HKAS 36, HKAS 17, HKAS 32 and
HKAS 39 as detailed below.
(a) HKFRS 2
In prior years, no employee benefit cost or obligation was recognised
when employees (including directors) were granted share options by
the Group over shares in the Company. When the share options were
exercised, equity was increased by the amount of the proceeds
received.
With effect from 1 January 2005, in order to comply with HKFRS 2, the
Group recognises the fair value of such share options as an expense
in the consolidated income statement, or as an asset if the cost
qualifies for recognition as an asset under the group's accounting
policies. A corresponding increase is recognised in a capital reserve
within equity.
This change in accounting policy has been accounted for
retrospectively as follows:
Effect of
As previously adoption of
reported new HKFRS As restated
RMB RMB RMB
million million million
As at 31 December 2004
Reserves:
Retained earnings 4,985 (18) 4,967
Capital reserve 265 18 283
The adoption of HKFRS 2 resulted in:
Six months ended 30 June
2005 2004
RMB RMB
million million
Increase in staff costs 48 --
The company's share option scheme was introduced upon the listing of
its shares in October, 2004. Accordingly, the adoption of HKFRS does
not have any impact to the Group's financial profit and loss account
for the six months ended 30 June 2004.
Details of the share option scheme are presented in note 22 of these
interim financial statements.
3 Changes in accounting policies (continued)
(b) HKFRS 3 and HKAS36 In prior years:
-- positive goodwill arising from acquisitions on or after 1
January 2001 was amortised to the consolidated income statement
on a straight-line basis over 20 years. Positive goodwill was
stated in the consolidated balance sheet at cost less
accumulated amortisation and any impairment losses; and
-- negative goodwill which arose from acquisitions on or after 1
January 2001 was amortised over the weighted average useful life
of the depreciable/amortisable non-monetary assets acquired,
except to the extent it related to identified expected future
losses as at the date of acquisition. In such cases it was
recognised in the consolidated income statement as those
expected losses was incurred.
With effect from 1 January 2005, in order to comply with HKFRS 3 and
HKAS 36, positive goodwill could no longer be amortised. Such
goodwill is tested annually for impairment, including in the year of
its initial recognition, as well as when there are indications of
impairment. Impairment losses are recognised when the carrying amount
of the cash generating unit to which the goodwill has been allocated
exceeds its recoverable amount.
With effect from 1 January 2005 and in accordance with HKFRS 3, if
the fair value of the net assets acquired in a business combination
exceeds the consideration paid (i.e. an amount arises which would
have been known as negative goodwill under the previous accounting
policy), the excess is recognised immediately in the consolidated
income statement as it arises.
3 Changes in accounting policies (continued)
(b) HKFRS 3 and HKAS 36 (continued)
The change in the net book value of negative goodwill, as disclosed
in note 20 to the 2004 financial statements, arising from the above
change in accounting policy has been prospectively accounted for from
1 January 2005 as follows:
Before Effect of
adoption of adoption of
new HKFRS new HKFRS As restated
RMB RMB RMB
million million million
As at 1 January 2005
Negative goodwill
(Included in intangible assets) (166) 166 --
Retained earnings 4,985 166 5,151
The adoption of HKFRS 3 and HKAS 36 resulted in:
Six months
ended
30 June 2005
RMB
million
Increase in amortisation expenses 7
(c) HKAS17
In prior years, land use rights and buildings held for own use were
stated at cost less accumulated depreciation and impairment losses.
Depreciation was calculated to write-off the cost of such assets on a
straight-line basis over their estimated useful lives, to residual
value.
With effect from 1 January 2005, in order to comply with HKAS 17,
land use rights held for own use are accounted for as operating
leases where the fair value of the interest in any buildings situated
on the leasehold land can be separately identified from the fair
value of the land use rights at either the time the lease was first
entered into by the Group or taken over from the previous lessee, or
at the date of construction of those buildings, if later.
Any pre-paid land premiums for acquiring the land use rights, or
other lease payments, are stated at cost and are written off on a
straight-line basis over the respective periods of the rights.
Any buildings held for own use which are situated on such land leases
continue to be presented as part of property, plant and equipment.
3 Changes in accounting policies (continued)
(c) HKAS17 (continued)
The new accounting policy has been adopted retrospectively and land
use rights have been reclassified from "Property, plant and
equipment" or "Construction in progress" to "Lease prepayments for
land" on the face of the consolidated balance sheet. The
reclassification has no impact on the Group's net assets as at the
period end/year end nor on the Group's profit attributable to equity
shareholders for the periods presented. The amortisation charges in
the consolidated income statement in respect of land use rights are
is now recorded as "Amortization of lease prepayments for land",
which is included in the line item "Depreciation and amortization" on
the face of the consolidated income statement.
Effect of
As previously adoption
reported of HKFRS As restated
RMB RMB RMB
million million million
As at 31 December 2004
Land and buildings 14,238 (795) 13,443
Construction in progress 8,073 (471) 7,602
Lease prepayments for land -- 1,266 1,266
(d) HKAS 32 and HKAS 39
HKAS 32 and HKAS 39 establish principles for disclosure,
presentation, recognition and measurement of financial instruments,
including non-derivative financial assets, non-derivative financial
liabilities and derivative instruments for hedging activities.
Under HKAS 39, financial instruments will be carried at either
amortised cost or fair value, depending on their classification.
Movements in fair value will be either charged to net profit or loss
or taken to equity in accordance with the standard. In addition, all
derivatives, including those embedded in non-derivative host
contracts are recognised in the balance sheet at fair value.
3 Changes in accounting policies (continued)
(d) HKAS 32 and HKAS 39 (continued)
This change in accounting policy has been prospectively accounted for
from 1 January 2005 as follows:
Effect of
Before adoption adoption
of new HKFRS of new HKFRS As restated
RMB RMB RMB
million million million
As at 1 January 2005
Contract receivable
(Included in non-current assets) 408 (408) --
Contract payable
(Included in non-current liabilities) (533) 533 --
Discount on foreign currency
exchange forward contracts
(Included in deferred costs) 59 (59) --
Derivative assets -- 9 9
Derivative liabilities -- (74) (74)
Retained earnings 4,985 1 4,986
The adoption of HKAS 39 resulted in:
Six months
ended
30 June 2005
RMB
million
Decrease in profit before taxation 15
3 Changes in accounting policies (continued)
(e) Summary of impact of changes in accounting policies
The impact of the changes to accounting policies as set out in notes
(a) to (d) above on the Group's profit and equity was as follows:
2005
RMB
million
Six months ended 30 June
(a) HKFRS2 48
(b) HKFRS3 and HKAS36 7
(d) HKAS32 and HKAS39 15
Decrease in profit before taxation 70
As at 1 January
(b) HKFRS3 and HKAS36 166
(d) HKAS32 and HKAS39 1
Increase in total equity 167
4 Financial risk management
(a) Financial risk factors
The Group's activities expose it to a variety of financial risks,
market risks including currency risk and fair value interest rate
risk, credit risk, liquidity risk and cash flow interest rate risk.
(i) Foreign exchange risk
The Group has assets and liabilities that are subject to
fluctuations in foreign currency exchange rates. The Group had
foreign currency denominated bank balances amounting to RMB
8,185 and RMB 1,822 million as at 31 December 2004 and 30 June
2005 respectively. The Group also has foreign currency
denominated bank loans amounting to RMB 3,914 and RMB 2,279
million as at 31 December 2004 and 30 June 2005 respectively.
(ii) Credit risk
The carrying amount of accounts receivable included in the
balance sheet represents the Group's exposure to credit risk in
relation to its financial assets. The Group's receivables are
unsecured to the extent they are not covered by security
deposits. The Group believes that adequate provision for
uncollectible account receivable has been made.
4 Financial risk management (continued)
(a) Financial risk factors (continued)
(iii) Liquidity risk
A significant percentage of the Group's funding requirements is
achieved through short term borrowings, and the balance sheet
indicates a significant working capital deficit. Please refer to
note 2 for the details.
(iv) Cash flow and fair value interest rate risk
The Group is exposed to changes in interest due to its long-term
debt obligations. The Group enters into debt obligations to
support general corporate purposes including capital
expenditures, acquisitions, and working capital needs.
Borrowings at variable rates expose the Group to cash flow
interest rate risk. Borrowings issued at fixed rates expose the
Group to fair value interest rate risk. The bank loans issued at
variable rates and fixed rates are disclosed in note 19 of these
interim financial statements.
(b) Fair value estimation
The fair value of financial instruments traded in active markets is
based on quoted market prices at the balance sheet date. The quoted
market price used for financial assets held by the Group is the
current bid price; the appropriate quoted market price for financial
liabilities is the current ask price.
The nominal value less estimated credit adjustments of trade
receivables and payables are assumed to approximate their fair value.
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 Group for
similar financial instruments.
5 Critical accounting estimates and judgements
The 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 amount
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 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 Group
reviews the useful lives periodically to ensure that the method and
rates of deprecation are consistent with the expected pattern of
economic benefits from property, plant and equipment. The Group
estimates the useful lives of the property, plant and equipment 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.
5 Critical accounting estimates and judgements (continued)
(ii) Revaluation of property, plant and equipment
The property, plant and equipment of the Group are revalued as of 31
December 2003 on a depreciated replacement cost basis. Apart from
land and buildings, which are carried at cost, property, plant and
equipment are carried at the revalued amounts, being the fair value
at the date of revaluation, less subsequent accumulated depreciation
and impairment losses. Revaluations are performed at intervals of not
more than three years by independent valuers and, in each of the
intervening years, valuations are undertaken by professional
qualified executives employed by us. 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. This will have an impact on the Group's future
results, since any subsequent decreases in valuation are first set
off against increases on earlier revaluations 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. In addition, the
depreciation expense in future periods will change as the carrying
amounts of the property, plant and equipment changes as a result of
the revaluation.
(iii) Impairment of non-current assets
At each balance sheet date, the Group considers both internal and
external sources of information to assess where 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. Estimated recoverable amount is determined based
on estimated discounted future cash flows of the cash-generating unit
at the lowest level to which the asset belongs. The recoverable
amount is the higher of value in use or net selling price. 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 the 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 of the
recoverable amounts of the non-current assets.
(iv) Revenue recognition for upfront connection and installation fees
The Group defers the recognition of upfront customer connection and
installation fees and amortises them over the expected customer
relationship period of 10 years. The related direct incremental
installation costs are deferred and amortised over the same expected
customer relationship period of 10 years, except that when the direct
incremental costs exceed the corresponding installation fees, if any,
the excess amounts are immediately written-off as expenses to the
income statement . The 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 Group's services, technological innovation, and the expected
changes in the regulatory and social environment. If the Group's
estimate of the expected customer relationship period changes as a
result of increased competition, changes in telecommunications
technology or other factors, the amount and timing of recognition of
the deferred revenues may change for future periods.
5 Critical accounting estimates and judgements (continued)
(v) Recognition of revenues and costs under PHS bundled service contracts
The Group provides Personal Handyphone System ("PHS") services, which
is an extension of the local wireline telecommunications service, to
the customers. Promotional packages comprise the bundled provision of
PHS services and the provision of 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 of time
in order to receive a free handset. The total revenues received or
receivable are recognised as deferred revenue. The cost of handsets
provided to customers and related commissions paid and payable to
distributors are treated as deferred customer acquisition costs, to
the extent recoverable. Such deferred revenue and deferred costs are
amortised to the income statement on a systematic basis to match the
pattern of usage of the related service over the contract period. If
the pattern of the usage of the PHS services by the customers changes
in the future, the amortization period of the revenues and costs will
change accordingly, which will have an impact to its future results.
(vi) Provision for doubtful debts
The Group maintains an allowance for doubtful debts for estimated
losses resulting from the inability of its customers to make the
required payments. The Group makes its estimates based on the aging
of its accounts receivable balances, customer creditworthiness, and
historical write-off experience. If the financial condition of the
Group's customers were to deteriorate, actual write-offs might be
higher than expected and future results will be affected. Any
deterioration might also lead to a revision of the basis used for
estimating the allowance for doubtful debts in the future.
(vii) Fair value
The Group estimates the fair value of its financial liabilities for
disclosure purposes by discounting the future contractual cash flows
at the estimated current market interest rate that is available to
the Group for similar financial instruments. The future disclosed
values will change if there are changes in the estimated market
interest rate.
6 Revenues
Revenues represent the turnover of the Group and are derived from the
provision of fixed line telecommunications and related services, net of
the PRC business taxes and government levies. The Group's revenues by
business nature can be summarised as follows:
Six months ended 30 June
2005 2004
RMB RMB
million million
Unaudited Audited
Revenues
Local usage fees 9,299 9,443
Monthly telephone service 6,998 6,936
Upfront installation fees 602 641
DLD usage fees 4,038 4,509
ILD usage fees 527 734
Value-added services 1,346 1,019
Interconnection fees 2,987 2,223
Upfront connection fees 1,427 1,774
Broadband service 2,799 1,815
Other internet-related service 588 784
Managed data service 778 681
Leased line income 1,276 1,264
Other services 1,059 675
Total 33,724 32,498
6 Revenues (continued)
The Group's revenues by geographical location of the customers can be
summarised as follows:
Six months ended 30 June
2005 2004
RMB RMB
million million
Unaudited Audited
Domestic telecommunications services
(Being revenues generated from customers located in the PRC)
Local usage fees 9,299 9,443
Monthly telephone service 6,998 6,936
Upfront installation fees 602 641
DLD usage fees 4,038 4,509
ILD usage fees 453 673
Value-added services 1,346 1,019
Interconnection fees 2,332 1,719
Upfront connection fees 1,427 1,774
Broadband service 2,799 1,815
Internet-related service 391 613
Managed data service 573 546
Leased line income 917 1,021
Other services 948 514
32,123 31,223
International telecommunications services
(Being revenues generated from customers located
outside the PRC, including Hong Kong and Macau Special
Administrative Regions and Taiwan) 1,601 1,275
Total 33,724 32,498
7 Profit from operations
Profit from operations is stated after charging or crediting the
following:
Six months ended 30 June
2005 2004
RMB RMB
million million
Unaudited Audited
Charging
Depreciation:
- Owned property, plant and equipment 9,034 9,398
- Leased property, plant and equipment 79 91
Loss on disposal of fixed assets (included in networks
operations and support expenses) -- 80
Amortisation of intangible assets 137 51
Amortisation of lease prepayments for land 15 13
Contributions to pension plans (included in staff costs) 404 418
Cost of inventories 384 180
Operating leases:
-Land and buildings 371 108
-Network and machinery 816 720
Interconnection charges 1,554 917
Bad debt expenses 279 478
Unrealised loss on short-term investments -- 7
PHS subscriber acquisition costs 1,141 862
Crediting
Gain on disposal of fixed assets (included in
networks operations and support expenses) 2 --
Foreign exchange gain, net 118 15
Gain on disposal of short-term investments 28 --
8 Finance costs
Six months ended 30 June
2005 2004
RMB RMB
million million
Unaudited Audited
Interest expenses on:
-Bank and other loans wholly repayable within five years 1,358 1,814
-Bank and other loans wholly repayable after
more than five years 86 42
1,444 1,856
Less: Interest expenses capitalised in construction in progress (107) (258)
1,337 1,598
Foreign exchange gain, net (118) (15)
Bank charges 7 12
Amortisation of discount on foreign currency exchange forward contracts -- 9
1,226 1,604
Interest expenses were capitalised in construction in
progress using the following annual interest rates 3.91%-4.88% 3.65%-5.45%
9 Taxation
Six months ended 30 June
2005 2004
RMB RMB
million million
Unaudited Audited
PRC enterprise income tax ("EIT") 2,752 1,389
Deferred taxation (454) 732
Taxation charges 2,298 2,121
The provision for EIT is calculated based on the statutory income tax rate
of 33% on the assessable profit of each of the entities 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 17.5% to 30%, prevailing in
the countries in which those entities operates.
The reconciliation between the Group's actual tax charge and the amount
which is calculated based on the weighted average statutory tax rate is as
follows:
Six months ended 30 June
2005 2004
RMB RMB
million million
Unaudited Audited
Profit before taxation 8,656 6,996
Weighted average statutory tax rate 33% 33%
Tax calculated at the weighted average statutory tax rate 2,856 2,309
Non-taxable income (Note below) (570) (587)
Expenses not deductible for tax purposes 63 112
Tax losses not recognised/(utilised) 4 231
Others (55) 56
Tax charges 2,298 2,121
Note: Non-taxable income comprises primarily upfront connection fees charged to customers and amortised
over the customer relationship period.
10 Profit distributions and allocations
Six months ended 30 June
(a) Dividends 2005 2004
HKD RMB HKD RMB
million million million million
Unaudited Unaudited Audited Audited
Final dividend paid, of HK$0.037
per ordinary share 245 259 -- --
Notes:
(i) On 6 April 2005, the directors proposed a final dividend of
HK$0.037 per ordinary share for the year ended 31 December 2004,
which was paid on 10 June 2005 and has been reflected as an
appropriation of retained earnings for the six months ended 30
June 2005.
(ii) No interim dividend has been proposed by the directors for the
period ended 30 June 2005. The payment of any future dividends
will be determined by the Board of Directors.
(b) Appropriation to statutory reserve
According to a PRC tax approval document issued by Ministry of
Finance and State Administration of Taxation to China Netcom (Group)
Company Limited ("CNC China"), the Group's primary operating
subsidiary, the Group's upfront connection fees are not subject to
EIT and an amount equal to the upfront connection fees recognised in
the income statement should be transferred from retained earnings to
a statutory reserve. As at 31 December 2004, the aggregated upfront
connection fees recognised in the income statement amounted to RMB
3,378 million, which was transferred to the statutory reserve in
accordance with the aforementioned approval document.
For the six months ended 30 June 2005, the Company has not made other
appropriations to the statutory reserve which will be made at year
end.
11 Earnings per share
Basic earnings per share is computed using the weighted average number of
ordinary shares outstanding during the year. Diluted earnings per share is
computed using the weighted average number of ordinary shares and
potential ordinary shares outstanding during the year.
The following table sets forth the computation of basic and diluted net
earnings per share:
Six months ended 30 June
2005 2004
(in RMB millions, except share
and per share data)
Unaudited Audited
Numerator:
Profit for the periods 6,358 4,875
Denominator:
Weighted average number of ordinary shares outstanding
and shares used in computing basic earnings per share 6,593,529,000 5,492,258,218
Weighted average number of potential ordinary shares:
Diluted equivalent shares arising from convertible
Preference shares -- 7,741,782
Diluted equivalent shares arising from share option 34,754,749 --
Shares used in computing diluted earnings per share 6,628,283,749 5,500,000,000
Basic earnings per share RMB0.96 RMB0.89
Diluted earnings per share RMB0.96 RMB0.89
12 Cash and bank deposits
30 June 31 December
2005 2004
RMB RMB
million million
Unaudited Audited
Cash and cash equivalents 8,770 10,033
Time deposits with original maturities over three months 20 20
Total cash and bank deposits 8,790 10,053
Included in the cash and bank deposits as at the end of each of 31
December 2004 and 30 June 2005 are Renminbi denominated balances kept in
the PRC amounting to RMB 1,868 million and RMB 6,968 million,
respectively. The conversion of Renminbi denominated balances into foreign
currencies and the remittance of bank balances and cash out of the PRC are
subject to the rules and regulations of foreign exchange control
promulgated by the PRC government.
13 Short-term investments
The Group's short-term investments comprise primarily investments in
listed debt securities and investment funds.
During the period ended 30 June 2005, the carrying value of the short-term
investments disposed of by the Group amounted to RMB 2,465 million and the
gain on disposal amounted to RMB 28 million.
14 Accounts receivable
Amounts due from the provision of fixed line telecommunications service 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 between 30 to 90 days from the billing date.
The ageing analysis of accounts receivable based on the billing date is as
follows:
30 June 31 December
2005 2004
RMB RMB
million million
Unaudited Audited
0-30 days 4,965 4,479
31-90 days 1,315 861
Over 90 days 1,801 1,404
Total 8,081 6,744
Less: Allowance for doubtful debts (1,303) (1,056)
Net carrying amounts 6,778 5,688
The carrying value of accounts receivable approximates their fair values
based on cash flows discounted using a rate based on the average
short-term borrowing rate of 5.22% (2004: 5.22%).
Included in the accounts receivable are amounts due from other state-owned
telecommunication operators amounting to RMB 1,009 million (2004: RMB 789
million).
15 Property, Plant and equipment
Furniture,
Telecommu- fixtures, motor
nications vehicles and
networks and other
Buildings equipment equipment Total
RMB RMB RMB RMB
million million million million
Unaudited
Cost/valuation:
Balance at 1 January 2005 17,799 195,130 8,872 221,801
Reclassification of land use rights to
lease prepayments for land (1,130) -- -- (1,130)
Balance at 1 January 2005, as restated 16,669 195,130 8,872 220,671
Additions 47 390 5 442
Transferred from construction in progress 963 5,662 7 6,632
Disposals (64) (49) (12) (125)
Balance at 30 June 2005 17,615 201,133 8,872 227,620
Accumulated depreciation:
Balance at 1 January 2005 (3,561) (88,243) (4,415) (96,219)
Reclassification of land use right to
lease prepayments for land 335 -- -- 335
Balance at 1 January 2005, as restated (3,226) (88,243) (4,415) (95,884)
Charge for the period (589) (7,855) (669) (9,113)
Disposals 18 46 2 66
Balance at 30 June 2005 (3,797) (96,052) (5,082) (104,931)
Net book value at Dec 31 2004 14,238 106,887 4,457 125,582
Net book value at Dec 31 2004, as restated 13,443 106,887 4,457 124,787
Net book value at 30 June 2005 13,818 105,081 3,790 122,689
15 Property, Plant and equipment (continued)
Furniture,
Telecommu- fixtures, motor
nications vehicles and
networks and other
Buildings equipment equipment Total
RMB RMB RMB RMB
million million million million
Restated
Cost/valuation:
Balance at 1 January 2004 28,998 180,932 7,477 217,407
Reclassification of land use right
to lease prepayments for land (1,597) -- -- (1,597)
Balance at 1 January 2004, as restated 27,401 180,932 7,477 215,810
Additions 75 115 234 424
Transferred from construction in progress 1,272 24,160 1,561 26,993
Disposals (51) (812) (75) (938)
Distributed to owners on 30 June (12,028) (9,265) (325) (21,618)
Balance at 31 December 2004 17,799 195,130 8,872 221,801
Balance at 31 December 2004, as restated 16,669 195,130 8,872 220,671
Accumulated depreciation:
Balance at 1 January 2004 (5,465) (74,548) (3,475) (83,488)
Reclassification of land use right
to lease prepayments for land 315 -- -- 315
Balance at 1 January 2004, as restated (5,150) (74,548) (3,475) (83,173)
Charge for the year (717) (16,791) (1,078) (18,586)
Disposals 2 591 64 657
Distributed to owners on 30 June 2,639 2,505 74 5,218
Balance at 31 December 2004 (3,561) (88,243) (4,415) (96,219)
Balance at 31 December 2004, as restated (3,226) (88,243) (4,415) (95,884)
Net book value at 31 December 2004 14,238 106,887 4,457 125,582
Net book value at 31 December 2004,
as restated 13,443 106,887 4,457 124,787
16 Intangible assets
Negative Purchased Sponsorship fee
goodwill software (Note 25 (x)) Total
RMB RMB RMB RMB
million million million million
Cost:
Balance at 31 December 2004 (178) 1,112 -- 934
Negative goodwill transferred to retained
earnings (Note 3 (b)) 181 -- -- 181
Balance at 1 January 2005, as restated 3 1,112 -- 1,115
Additions -- 101 480 581
Balance at 30 June 2005 3 1,213 480 1,696
Accumulated amortisation:
Balance at 31 December 2004 12 (630) -- (618)
Negative goodwill transferred to retained
earnings (Note 3 (b)) (15) -- -- (15)
Balance at 1 January 2005, as restated (3) (630) -- --
Amortisation for the period -- (77) (60) (137)
Balance at 30 June 2005 (3) (707) (60) (770)
Net book value at 30 June 2005 -- 506 420 926
Net book value at 31 December 2004 (166) 482 -- 316
17 Deferred cost
As at 30 June
2005 2004
RMB RMB
million million
Unaudited Audited
Balance at beginning of period
- Installation costs 4,274 4,708
- Customer acquisition costs 1,304 1,370
- Prepaid networks capacities 1,322 1,248
- Discount on foreign currency exchange forward contracts 59 77
- Others 490 469
7,449 7,872
Additions for the period
- Installation costs 86 520
- Customer acquisition costs 74 1,547
- Prepaid networks capacities 179 113
- Discount on foreign currency exchange forward contracts -- --
- Others 1 204
340 2,384
Charge for the period
- Installation costs (403) (537)
- Customer acquisition costs (820) (835)
- Prepaid network capacities (58) (21)
- Discount on foreign currency exchange forward contracts -- (9)
- Others (199) (123)
(1,480) (1,525)
Transferred to opening retained earnings (Note 3(d))
- Discount on foreign currency exchange forward contract (59) --
Distributed to owners in accordance with Reorganisation on 30 June 2004
- Prepaid network capacity -- (61)
- Others -- (113)
-- (174)
Balance at end of period
- Installation costs 3,957 4,691
- Customer acquisition costs 558 2,082
- Prepaid network capacities 1,443 1,279
- Discount on foreign currency exchange forward contracts -- 68
- Others 292 437
6,250 8,557
During 2005, due to a change in the nature of promotions offered by the
Group, the average amortisation period of customer acquisition costs fell
below one year. In response to this, the Group has recorded customer
acquisition costs arising in 2005 as prepaid expenses. The total amount of
customer acquisition costs in prepaid expenses as at 30 June 2005 was RMB
90 million.
18 Accounts payable
30 June 31 December
2005 2004
RMB RMB
million million
Unaudited Audited
0-30 days 4,165 6,122
31-60 days 1,269 1,833
61-90 days 864 925
91-180 days 1,989 2,115
Over 180 days 4,994 3,658
13,281 14,653
Included in accounts payable are amounts due to other state-owned
telecommunication operators amounting to RMB 2,010 million (2004: RMB
1,781 million).
19 Bank and other loans
(a) As at 30 June 2005, the short term bank loans were unsecured and
comprise:
30 June 31 December
Currency Interest rate and final maturity 2005 2004
RMB RMB
million million
Unaudited Audited
Renminbi Variable interest rates ranging from
denominated 4.54% to 5.02% per annum with
maturity through 6 January 2006 26,274 29,220
US Dollar Variable interest rates ranging from
denominated 3.98% to 4.70% per annum with
maturity through 29 November 2005 151 119
26,425 29,339
The carrying value of short term bank loans approximate their fair
values which are based on cash flows discounted using rates based on
the borrowing rate of 3.27%-5.94%% (2004: 2.59%-5.94%).
19 Bank and other loans (continued)
(b) The Group's long term bank and other loans comprise:
30 June 31 December
2005 2004
RMB RMB
million million
Note Unaudited Audited
Bank and other loans (i) 21,257 27,571
Finance lease obligations (ii) 1,286 1,560
22,543 29,131
Less: Current portion (4,263) (7,270)
18,280 21,861
The carrying values of the current portion of long term bank loans
approximate their fair values which are based on cash flows
discounted using a rate based on the borrowing rate of 5.22% (2004:
5.22%).
(i) Long term bank and other loans
30 June 31 December
2005 2004
RMB RMB
million million
Unaudited Audited
Loans
Unsecured 19,158 25,228
Secured 2,099 2,343
Total 21,257 27,571
Less: Current portion (4,101) (7,060)
Long-term loans 17,156 20,511
19 Bank and other loans (continued)
(b) The Group's long term bank and other loans comprise: (continued)
(i) Long term bank and other loans (continued)
The Group's long term bank and other loans (excluding finance
lease liabilities) were repayable as follows:
30 June 31 December
2005 2004
RMB RMB
million million
Unaudited Audited
Within one year 4,101 7,060
In the second year 6,083 6,550
In the third to fifth year 8,154 11,196
After the fifth year 2,919 2,765
21,257 27,571
As at 30 June 2005, bank loans amounting to RMB 2,099 million
(2004: RMB 2,343 million) were secured by the following:
(i) Certain property, plant and equipment amounting to RMB 3
million (2004: RMB 22 million) in respect of loans
amounting to RMB 1 million (2004: RMB 3 million);
(ii) Corporate guarantees granted by China Netcom Group to the
extent of RMB 1,782 million (2004: RMB 1,888 million); and
(iii) Corporate guarantees granted by third parties to the
extent of RMB 316 million (2004: RMB 452 million).
19 Bank and other loans (continued)
(b) The Group's long term bank and other loans comprise: (continued)
(ii) Finance lease obligations
30 June 31 December
2005 2004
RMB RMB
million million
Unaudited Audited
Obligation under finance leases 1,286 1,560
Less: current portion (162) (210)
1,124 1,350
During the year ended 31 December 2004, the Group entered into a
finance lease arrangement with a related party for certain
existing fixed assets in return for funding of RMB 1,085
million. The net book value of such fixed assets amounted to RMB
857 million (2004: RMB 954 million). The lease obligation
payable to the related party as at 30 June 2005 amounted to RMB
1,051 million (2004: RMB 1,070 million).
The Group's liabilities under finance leases are analysed as
follows:
30 June 31 December
2005 2004
RMB RMB
million million
Unaudited Audited
Within one year 193 390
In the second year 1,110 662
In the third to fifth year, inclusive 36 580
1,339 1,632
Less: future finance charges on finance leases (53) (72)
Present value of finance lease liabilities 1,286 1,560
The present value of finance lease liabilities is as follows:
Within one year 162 210
In the second year 1,088 776
In the third to fifth year, inclusive 36 574
1,286 1,560
19 Bank and other loans (continued)
(c) The fair value of the Group's significant financial liabilities at 30
June 2005, and 31 December 2004, are as follows:
30 June 31 December
2005 2004
RMB RMB
million million
Unaudited Audited
Long-term bank and other loans 16,843 18,763
Finance lease obligations 1,025 1,088
The fair values are based on cash flows discounted using rates based
on the Group's average weighted borrowing rates of between 0.50% to
8.30% (2004: 0.19% to 9.20%).
20 Deferred revenue
As at 30 June
2005 2004
RMB RMB
million million
Unaudited Audited
Balance at beginning of period
- upfront connection fees 7,012 10,390
- upfront installation fees 6,404 6,691
- advances from network capacity sales 2,173 2,050
- prepaid telephony services 2,881 2,702
18,470 21,833
Additions for the period
- upfront connection fees -- --
- upfront installation fees 230 637
- advances from network capacity sales 244 68
- prepaid telephony services 7,132 6,793
7,606 7,498
20 Deferred revenue (continued)
As at 30 June
2005 2004
RMB RMB
million million
Unaudited Audited
Reductions for the period
- upfront connection fees (1,427) (1,774)
- upfront installation fees (602) (641)
- advances from network capacity sales (153) (59)
- prepaid telephony services (7,170) (6,631)
(9,352) (9,105)
Distributed to owners in accordance with
the reorganisation on 30 June 2004
- advances from network capacity sales -- (5)
- prepaid telephony services -- (44)
-- (49)
Balance at end of period
- upfront connection fees 5,585 8,616
- upfront installation fees 6,032 6,687
- advances from network capacity sales 2,264 2,054
- prepaid telephony services 2,843 2,820
16,724 20,177
Representing:
- Current portion 6,196 6,783
- Non-current portion 10,528 13,394
16,724 20,177
21 Share capital
Authorised
Convertible preference shares
Ordinary shares of US$0.04 of US$0.04 each Total
No. of RMB No. of RMB RMB
shares US$ million shares US$ million US$ million
At 1 January
and 30 June 2005 25,000,000,000 1,000,000,000 8,277 7,741,782 309,671 3 1,000,309,671 8,280
Issued
Convertible preference shares
Ordinary shares of US$0.04 of US$0.04 each Total
No. of RMB No. of RMB RMB
shares US$ million shares US$ million US$ million
At 1 January
and 30 June 2005 6,593,529,000 263,741,160 2,181 -- -- -- 263,741,160 2,181
22 Share option scheme
A share option scheme was approved pursuant to a directors' resolution on
30 September 2004 ("Share Option Scheme"). Share options are granted to
directors of the Company and to certain employees of the 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 the Company on the Hong Kong Stock Exchange and subject to
certain vesting schedule.
On 22 October 2004, 158,640,000 share options with an exercise price of
HK$ 8.40 each were granted to certain directors of the Company and certain
employees of the Group.
The total number of ordinary shares that are available for issuance upon
the exercise of options granted pursuant to this scheme may not exceed 10%
of the total number of issued ordinary shares. The Company may, however,
seek separate approvals from its shareholders for granting options beyond
the 10% limit. The scheme will be valid and effective for a period of six
years and no options may be granted pursuant to this scheme following the
expiration of the scheme.
Pursuant to the Company's share option plan, the Company 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 options granted under this plan has a
vesting period of 42 months from the date of listing of our shares and
will expire six years from the date of grant.
22 Share option scheme (continued)
Details of the share options granted immediately prior to the closing of
the global offering and the movement during the period are summarised as
follows:
No. of share options
Subscription
No. of price per
Outstanding Granted directors Exercised Lapsed Cancelled Outstanding share
as at during the and during during during as at 30 of the Option
Date of grant 1 January 2005 period employees the period the period the period June 2005 Company period
HK$
22/10/2004 157,720,000 -- 456 -- -- -- 157,720,000 8.40 157,720,000
23 Contingent liabilities
Guarantees
30 June 31 December
2005 2004
RMB RMB
million million
Unaudited Audited
Guarantees for US dollar denominated bank loans of third parties 31 63
In 2000, a subsidiary of the Company entered into an agreement to provide
a guarantee to a subsidiary of China Mobile for a foreign currency
borrowing. The guarantee arose from the assumption of responsibilities by
both parties as part of the legacy arrangements of their predecessor
companies commonly controlled by the state government.
The directors are of the opinion that the possibility of the guaranteed
party defaulting on the outstanding balance of the borrowing is unlikely,
hence no provisions have been made for the guarantee.
24 Commitments
(a) Capital commitments
30 June 31 December
2005 2004
RMB RMB
million million
Unaudited Audited
Contracted but not provided for land and buildings 36 47
Telecommunications networks and equipment 1,136 986
1,172 1,033
Authorised but not contracted for
Land and buildings 233 2
Telecommunications networks and equipment 2,220 1,778
2,453 1,780
(b) Operating lease commitments
The Group has future minimum lease payments under non-cancellable
operating leases in respect of premises and equipment as follows:
30 June 31 December
2005 2004
RMB RMB
million million
Unaudited Audited
Not later than one year 873 793
Later than one year and not later than five years 1,640 1,129
Later than five years 1,893 1,510
4,406 3,432
25 Related party transactions
China Netcom Group, the Group's parent company, is a state-controlled
enterprise directly controlled by the PRC government. The PRC government
is the Company's ultimate controlling party. Neither China Netcom Group
nor the PRC government publishes financial statements available for public
use.
All state-controlled enterprises, their subsidiaries, their key management
and their close family, and their employees (collectively referred as
"state-owned parties") are ultimately related parties of the Group. The
Group has extensive transactions including provision and receiving of
services, leasing of assets and obtaining finances, with these state-owned
parties in its ordinary course of business. These transactions are carried
out at terms similar to those with other non-state-owned parties and have
been reflected in the Financial Information.
The Group's operations are subject to the supervision of and regulation by
the PRC Government. The Ministry of Information Industry (the "MII"),
pursuant to the authority delegated by the PRC's State Council, is
responsible for formulating the telecommunications industry policies and
regulations for all telecommunication operators in China. As a state-owned
telecommunication operator, the Group has extensive transactions with
other state-owned telecommunication 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 Group has extensive transactions with other members of the China
Netcom Group. As a result of this relationship, it is possible that the
terms of the transactions between the Group and other members of the China
Netcom Group 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.
25 Related party transactions (continued)
The directors consider that the following related party transactions were
carried out in the normal course of business of the Group and at terms
mutually agreed between the Group and the respective related parties.
Six months ended 30 June
2005 2004
RMB RMB
Note million million
Unaudited Audited
Interconnection income
- from fellow subsidiaries (i)(b) 142 --
- from other state-owned telecommunication operators (i)(b) 2,190 1,719
Sub total 2,332 1,719
Interconnection charges
- to fellow subsidiaries (i)(b) (277) --
- to other state-owned telecommunication operators (i)(b) (524) (357)
Sub total (801) (357)
Rental income from properties leased to fellow
subsidiaries (i)(a), (i)(c) -- 2
Purchase of materials
- from fellow subsidiaries (i)(a), (i)(c) (433) (528)
- from related company (i)(a), (i)(c) (101) (670)
Sub total (534) (1,198)
Receipt of engineering, project planning, design,
construction and information technology services
- from fellow subsidiaries (i)(a), (i)(b) 592 321
- from related company (i)(a), (i)(b) 80 564
Sub total 672 885
Ancillary telecommunications support services
- from fellow subsidiaries (ii) (100) (207)
- from related company (ii) (11) (232)
Sub total (111) (439)
25 Related party transactions (continued)
Six months ended 30 June
2005 2004
RMB RMB
Note million million
Unaudited Audited
Payment of operating lease rentals of premises
- to fellow subsidiaries (i)(a), (i)(c) (292) (7)
- to related company (i)(a), (i)(c) -- (5)
Sub total (292) (12)
Common corporate services income received from
ultimate holding company (iii) 28 --
Common corporate services expenses paid to ultimate
holding company (iii) (117) --
Support services
- from ultimate holding company (iv) (2) --
- from fellow subsidiaries (iv) (290) (187)
- from related company (iv) (1) (149)
Sub total (293) (336)
Rental income for lease of telecommunications facilities
to other stated-owned telecommunication operators 613 519
Payment of operating lease rentals of
telecommunications facilities to ultimate
holding company (v) (118) --
Payment for purchase of long-term telecommunications
capacity to ultimate holding company (vi) (91) --
Payment for lease of long-term telecommunications
capacity to ultimate holding company (vii) (52) --
Management fee received from ultimate
holding company (viii) 55 --
25 Related party transactions (continued)
Notes:
(i) Transactions with individual related parties before reorganisation on
30 June 2004 were priced based on one of the following three
criteria:
(a) market price;
(b) prices based on government guidance; or
(c) cost plus basis.
(ii) Represents provision of ancillary telecommunications support services
to the 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
customers services.
(iii) The Group entered into a Master Service Sharing agreement with China
Netcom Group pursuant to which expenses associated with common
corporate services are allocated between the Group and China Netcom
Group based on revenues as appropriate.
(iv) Represents the support services provided to the 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.
(v) The Group entered into a Telecommunications Facilities Leasing
Agreement with China Netcom Group pursuant to which the Group leases
the international telecommunications facilities and inter-provincial
transmission optic fibres from China Netcom Group. The lease payment
is based on the depreciation charge of the assets.
(vi) The Group entered into a Capacity Purchase Agreement with East Asia
Netcom Limited ("EANL"), a wholly owned subsidiary of China Netcom
Group, pursuant to which the Group receives certain amounts of
long-term telecommunications capacity from China Netcom Group at
market prices as set out in the Capacity Purchase Agreement.
(vii) The Group entered into a Capacity Lease Agreement with EANL,
pursuant to which the Group leases certain amounts of capacity on
China Netcom Group's telecommunications network at market rates as
set out in the Capacity Lease Agreement.
(viii) The Group entered into a Management Services Agreement with EANL,
pursuant to which the Group provides certain management services to
China Netcom Group 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.
(ix) The Group entered into finance lease arrangements with a related
party, details have been set out in Note 19 (b) (ii).
(x) China Netcom Group, the Company's ultimate holding company, entered
into an agreement (the "Sponsorship Agreement") with Beijing
Organisation Committee ("BOCOG") which designated China Netcom Group
as the exclusive fixed-line telecommunications services partner in
the People's Republic of China ("PRC") to sponsor the 2008 Beijing
Olympic Games. China Netcom Group allocated the sponsorship fee to
its members based on the estimated future benefits derived from the
Sponsorship Agreement to respective members and the Company
contributes a portion of the required support under the Sponsorship
Agreement through providing telecommunications goods and services to
BOCOG amounting to RMB 480 million. Accordingly, an intangible asset
and a payable to the ultimate holding company of the said amount have
been recognised on the Company's balance sheet.
(xi) As at 30 June 2005, China Netcom Group granted corporate guarantees
to the Group as set out in Note 19 (b) (i).
26 Significant subsequent events
(a) The Company has undertaken to The Stock Exchange of Hong Kong Limited
to use its best efforts to release the guarantees granted by China
Netcom Group, or failing such, to arrange for the settlement of the
relevant loans, within six months from its listing on 17 November
2004. The balance of such loans amounted to RMB1,782 million as at 30
June 2005. After the balance sheet date, all the bank loans
guaranteed by China Netcom Group have been repaid and the related
bank guarantees have been released.
(b) On 12 September 2005, the Company entered into an agreement to
acquire the entire equity interest in China Netcom Group New Horizon
Communications Corporation (BVI) Limited from China Netcom Group, its
ultimate holding company, for a total cash consideration of RMB12.8
billion, subject to certain conditions. China Netcom Group New
Horizon Communications Corporation (BVI) Limited currently operates
the fixed line telecommunication businesses in four provinces /
autonomous regions, namely Shanxi Province, Jilin Province,
Heilongjiang Province and Inner Mongolia Autonomous Region in the
PRC. This proposed acquisition is subject to the approval of the
Company's shareholders. Further details can be found in the Company's
announcement issued on 12 September 2005.
27 Ultimate controlling party
The Company's ultimate holding company is China Netcom Group which is
owned and controlled by the PRC Government.
The directors regard the PRC Government as being the ultimate controlling
party.
28 Approval of financial statements
The financial statements were approved by the Board of Directors on 12
September 2005.
Supplement Information for American Depositary Shares Holders
Reconciliation of Hong Kong GAAP and Accounting Principles Generally Accepted
in the United States ("U.S. GAAP")
The unaudited condensed consolidated financial statements of the Group (the
"Interim Financial Statements") have been prepared in accordance with Hong Kong
GAAP, which differs in certain material respects from U.S. GAAP. Differences
between Hong Kong GAAP and U.S. GAAP, which may have significant impact on the
consolidated net profit and the consolidated shareholders' equity, are
described below.
The effect on net profit of significant differences between Hong Kong GAAP and
U.S. GAAP for the six months ended 30 June 2004 and 2005 is as follows:
Six months ended 30 June
2004 2005 2005
RMB RMB US$
million million million
Restated
(Note (a)) Unaudited Unaudited
Consolidated profit for the year under Hong Kong GAAP 4,875 6,358 768
U.S. GAAP adjustments:
Depreciation of re-valued fixed assets (1,685) (1,758) (212)
Others 4 -- --
Tax effect on the above adjustments 560 580 70
Consolidated profit for the year under U.S. GAAP 3,754 5,180 626
Shares used in computing basic earnings per share 5,492 6,594 6,594
Shares used in computing diluted earnings per share 5,500 6,628 6,628
Basic earnings per share under U.S. GAAP RMB0.68 RMB0.78 USD0.09
Diluted earnings per share under U.S. GAAP RMB0.68 RMB0.78 USD0.09
Reconciliation of Hong Kong GAAP and Accounting Principles Generally Accepted
in the United States ("U.S. GAAP) (continued)
The effect on shareholders' equity of significant differences between Hong Kong
GAAP and U.S. GAAP as at 31 December 2004 and 30 June 2005 is as follows:
31 December 30 June 30 June
2004 2005 2005
RMB RMB US$
million million million
Restated
Note (a) Unaudited Unaudited
Consolidated shareholders' equity under
Hong Kong GAAP 55,165 61,484 7,429
U.S. GAAP adjustments:
Revaluation of fixed assets 22,796 19,267 2,328
Depreciation of revalued fixed assets (3,529) (1,758) (212)
Difference from recognition of negative goodwill 166 -- --
Other 1 -- --
Tax effect on the above adjustments (6,359) (5,778) (698)
Consolidated shareholders' equity under U.S. GAAP 68,240 73,215 8,847
(a) Regarding the restatements of the Group's 2004 financial statements under
Hong Kong GAAP due to the adoption of new accounting standards, please
refer to the details under note 3 of the interim financial statements.
Supplement Financial Information
The restated consolidated income statement for the year ended 31 December 2004
due to the adoption of new accounting polices set out in note 3 to the interim
financial statements is set out below.
For the year ended
31 December 2004
RMB
million
Restated
Revenues 64,922
Operating expenses
Depreciation and amortisation (18,754)
Networks, operations and support (11,591)
Staff costs (8,059)
Selling, general and administrative (9,566)
Other operating expenses (1,534)
Operating profit before interest income and dividend income 15,418
Interest income 76
Dividend income 17
Profit from operations 15,511
Finance costs (2,932)
Share of loss of associated companies (1)
Profit before taxation 12,578
Taxation (3,348)
Profit for the year 9,230
Profit before taxation decreased by RMB 18 million is a result of the
retrospective adoption of HKFRS2 (note 3(a)).
Other Information
Directors' and chief executive's interests in shares and short positions
Some of our directors personally hold options to subscribe for ordinary shares
of the Company, as disclosed under the paragraph "Directors', chief executive's
and employees' rights to acquire shares" below. These share options were
granted pursuant to the terms of the share option scheme adopted by the Company
on 30 September 2004 (the "Share Option Scheme").
Apart from those disclosed herein, as at 30 June 2005, none of the directors
nor the chief executive of the Company had any interests or short positions in
any of the shares, underlying shares or debentures of the Company or any of its
associated corporations (within the meaning of the Securities and Futures
Ordinance (the "SFO")) that is required to be recorded and kept in the register
in accordance with section 352 of the SFO, any interests required to be
notified to the Company and The Stock Exchange of Hong Kong Limited (the "Stock
Exchange") pursuant to the Model Code for Securities Transactions by Directors
of Listed Issuers (the "Model Code").
Directors', chief executive's and employees' rights to acquire shares
Share Option Scheme of the Company
During the six months ended 30 June 2005, no share option has been granted
under the Share Option Scheme.
As at 30 June 2005, the directors and chief executive of the Company and
employees of the Group had the following personal interests in options to
subscribe for shares of the Company granted under the Share Option Scheme.
No. of shares involved No. of shares involved
in the options outstanding in the options
at the beginning outstanding
of the period(a) at period end
Directors
Zhang Chunjiang 920,000 920,000
Tian Suning
(also the chief executive officer) 920,000 920,000
Zhang Xiaotie 800,000 800,000
Miao Jianhua 700,000 700,000
Jiang Weiping 700,000 700,000
Li Liming 700,000 700,000
Yan Yixun 590,000 590,000
Keith Rupert Murdoch 590,000 590,000
Employees 151,800,000 151,800,000
157,720,000(b)
Share Option Scheme of the Company (continued)
Notes:
(a) All the options outstanding at the beginning of the period were granted on
22 October 2004. The shares of the Company were listed on the Stock
Exchange on 17 November 2004 and therefore immediately before the date of
grant of the options, the shares of the Company were not yet traded.
(b) The total number of shares involved in the options outstanding at period
end represents 2.39 per cent. of the issued share capital of the Company
as at the date of this report.
Grantees of the share options granted on 22 October 2004 are entitled to
exercise the options at a price of HK$8.40 per share in the following periods:
(i) in respect of 40 per cent. of the options granted, from 17 May 2006 to 16
November 2010;
(ii) in respect of a further 30 per cent. of the options granted, from 17 May
2007 to 16 November 2010; and
(iii) in respect of the remaining 30 per cent. of the options granted, from 17
May 2008 to 16 November 2010.
No share option has been exercised, cancelled or lapsed during the six months
ended 30 June 2005.
Substantial interests in the share capital of the Company
The Company has been notified of the following interests in the Company's
issued shares at 30 June 2005 amounting to 5 per cent. or more of the ordinary
shares in issue:
Ordinary shares held Percentage of total
directly indirectly issued shares
(i) China Network Communications
Group Corporation -- 5,142,030,473(1)(2)(3) 77.99%
(ii) China Netcom Group Corporation
(BVI) Limited 4,647,449,014(1) 494,581,459(1)(2)(3) 77.99%
Notes:
(1) China Network Communications Group Corporation ("China Netcom Group")
beneficially owns 4,647,449,014 shares held by its wholly-owned
subsidiary, China Netcom Group Corporation (BVI) Limited ("CNC BVI") and 1
share held by CNC Cayman, Limited ("CNC Cayman"), a wholly-owned
subsidiary of CNC BVI. The percentage of total issued share capital of the
Company beneficially held by China Netcom Group is 70.49 per cent.
(2) China Netcom Group is deemed under the SFO to be interested in 297,698,985
shares held by CNC BVI as trustee on behalf of certain shareholders,
representing 4.52 per cent. of the issued share capital of the Company.
(3) As at 30 June 2005, China Netcom Group is also deemed under the SFO to be
interested in 196,882,473 shares held by CNC Fund, L.P. ("CNC Fund"), a
limited liability partnership, through CNC Cayman as one of the general
partners of the limited partnership. As of the date of this interim
report, China Netcom Group is not deemed under the SFO to be interested in
the 196,882,473 shares previously held by CNC Fund through CNC Cayman as
CNC Fund has disposed of such shares.
Apart from the foregoing, as at 30 June 2005, no person or corporation had any
interest in the share capital of the Company as recorded in the registers
required to be kept under section 336 of the SFO as having an interest in 5 per
cent. or more of or any short position in the issued share capital of the
Company.
Discussion and analysis of the Company's performance
In compliance with paragraph 40(2) of Appendix 16 to the Rules Governing the
Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Listing
Rules"), the Company confirms that, save for the Company's proposed acquisition
of the assets and liabilities and the business operations for the provision of
fixed-line telephone services, broadband and other Internet-related services in
Heilongjiang Province, Jilin Province, Neimenggu Autonomous Region and Shanxi
Province in the People's Republic of China (details of which are set out in the
Company's announcement dated 12 September 2005), the current information in
relation to those matters set out in paragraph 32 of Appendix 16 to the Listing
Rules as applicable to the Company has not changed materially from the
information disclosed in the Company's 2004 Annual Report.
Interim dividend
The board of directors of the Company has resolved that no interim dividend be
paid for the six months ended 30 June 2005.
Purchase, sale or redemption of the Company's listed securities
During the six months ended 30 June 2005, neither the Company nor any of its
subsidiaries purchased, sold or redeemed any of the Company's listed
securities.
Audit Committee
The Audit Committee reviewed with management the accounting principles and
practices adopted by the Company and discussed auditing, internal control and
financial report matters including the review of the unaudited interim
financial statements for the six months ended 30 June 2005.
Compliance with the code provisions set out in the Code on Corporate
Governance Practices
The Company has, since October 2004, established an audit committee, a
compensation committee, a strategic planning committee and a corporate
governance committee. In compliance with the relevant code provisions of the
Code on Corporate Governance Practices as set out in Appendix 14 to the Listing
Rules (the "Code on Corporate Governance Practices"), the board of directors of
the Company adopted written terms of reference in respect of each of the audit
committee, the compensation committee, the strategic planning committee and the
corporate governance committee on 1 February 2005.
At the time when the compensation committee was established, it comprised an
executive director, a non-executive director and an independent non-executive
director. In compliance with the relevant code provisions of the Code on
Corporate Governance Practices, Mr Victor Cha Mou Zing and Mr Hou Ziqiang, two
of the independent non-executive directors of the Company, were appointed by
the board of directors of the Company on 1 February 2005 as additional members
of the compensation committee.
Save as disclosed above and other than the requirements relating to the
preparation and content of a Corporate Governance Report (which will come into
effect in respect of the Company's annual report for the financial year ending
31 December 2005), the Company has complied with the code provisions of the
Code on Corporate Governance Practices throughout the six months ended 30 June
2005.
Compliance with the code provisions set out in the Code on Corporate Governance
Practices (continued)
Under the amended Corporate Governance Rules of New York Stock Exchange, Inc.
(the "NYSE"), foreign issuers (including China Netcom Group Corporation (Hong
Kong) Limited) listed on the NYSE are required to disclose a summary of the
significant differences between their domestic corporate governance rules and
NYSE corporate governance rules that would apply to a U.S. domestic issuer. A
summary of such differences appears on our website at
http://www.china-netcom.com/english/inv/Corporate_Governance_Differences.htm.
Compliance with the Model Code
The Company has adopted the Model Code as set out in Appendix 10 to the Listing
Rules. All directors have confirmed, following enquiry by the Company, that
they have complied with the required standard set out in the Model Code
throughout the period from 1 January 2005 to 30 June 2005.
Forward Looking Statements
Certain statements contained in this announcement may be viewed as
OOforward-looking statements'' within the meaning of Section 27A of the U.S.
Securities Act of 1933, as amended, and Section 21E of the U.S. Securities
Exchange Act of 1934, as amended. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors, which may cause the actual
performance, financial condition or results of operations of the Company to be
materially different from any future performance, financial condition or
results of operations implied by such forward-looking statements. Further
information regarding these risks, uncertainties and other factors is included
in the Company's most recent Annual Report on Form 20-F filed with the U.S.
Securities and Exchange Commission (the OOSEC'') and in the Company's other
filings with the SEC.
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/ Zhang Xiaotie
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By /s/ Oliver E Lixin
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Name: Zhang Xiaotie and Oliver E Lixin
Title: Joint Company Secretaries
Date: May 20, 2005