Form 6-K

1934 Act Registration No. 1-31517

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 6-K

 

 

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

 

For the Month of September 2004

 

 

China Telecom Corporation Limited

(Translation of registrant’s name into English)

 

 

31 Jinrong Street, Xicheng District

Beijing, China 100032

(Address of principal executive offices)

 

 

(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 if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):     )

 

(Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):     )

 

(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 the registrant in connection with Rule 12g3-2(b):82-            .)

 

THIS REPORT ON FORM 6-K SHALL BE DEEMED TO BE INCORPORATED BY REFERENCE IN THE PROSPECTUS INCLUDED IN THE REGISTRATION STATEMENT ON FORM F-3 (FILE NO.333-113181) OF CHINA TELECOM CORPORATION LIMITED AND TO BE A PART THEREOF FROM THE DATE ON WHICH THIS REPORT IS FURNISHED, TO THE EXTENT NOT SUPERSEDED BY DOCUMENTS OR REPORTS SUBSEQUENTLY FILED OR FURNISHED.

 

EXHIBITS

 

Exhibit

Number

   Page
1.1   Interim Report dated September 1, 2004   A-1
1.2   Announcement dated September 1, 2004   B-1
1.3   Disclosure dated September 2, 2004   C-1
1.4   Circular dated September 1, 2004   D-1

 

2

SIGNATURES

 

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 undersigned, thereunto duly authorized.

 

   

CHINA TELECOM CORPORATION LIMITED

Date: September 2, 2004

  

By:

  

/s/ Zhou Deqiang

   

Name:

  

Zhou Deqiang

   

Title:

  

Chairman and CEO

 

3

Exhibit 1.1

 

2

   Chairman’s Statement

8

   Independent Review Report of the International Auditors

9

   Unaudited Consolidated Balance Sheet

11

   Unaudited Consolidated Statement of Income

12

   Unaudited Consolidated Statement of Shareholders’ Equity

13

   Unaudited Consolidated Statement of Cash Flow

15

   Notes to the Unaudited Interim Financial Statements

31

   Supplementary Information for American Depositary Shareholders

34

   Other Information

 

A - 1

Dear Shareholders,

 

In the first half of 2004, driven by the sustained and rapid growth of the Chinese economy, the demand for telecommunications services continued to grow with a steady increase in the total volume of voice services, further expansion of Internet services and more opportunities for the development of value-added services. At the same time, competition within the telecommunications market further intensified. Voice services were the key focus of such competition as mobile substitution became more visible. While the increased market demands have provided us with new opportunities for development, the intensified competition among telecommunications operators has brought about new challenges to us.

 

Faced with this challenge, we adhered to our core value of “Innovation and Solid Execution”, focussed on improving our operational systems and enhancing corporate management, and consistently promoted our “market-oriented, customer-centred and return-driven” business model throughout the organisation. These measures improved our market responsiveness, product development, marketing capabilities and our ability to thrive in the market place, increasing our profitability and shareholders’ value. In the first half of 2004, our local wireline services subscriber base increased by 17.51 million, reaching 178 million at the end of June and our broadband subscriber base increased by 3.66 million, reaching 10.89 million at the end of June. Driven by the strength in our local voice services and broadband Internet services, we recorded a steady growth in operating revenue which reached RMB80,217 million, an increase of 8.3% over the same period in 2003. Our EBITDA was RMB43,991 million and our net profit was RMB14,708 million, of which RMB4,236 million was generated from amortisation of connection fees.

 

In the first half of this year, we successfully completed the acquisition of telecommunications businesses in ten provinces. To fund the acquisition, we raised net proceeds of approximately US$1.5 billion through a successful offering of new H shares. With the implementation of our management system, all levels of management of the newly acquired subsidiaries have been geared towards achieving their business and financial objectives. The growth rates of these companies increased and their operating and capital expenditures were effectively controlled, thus improving their profitability. In the first half of this year, our newly acquired telecommunications subsidiaries in the ten provinces generated revenue of RMB17,916 million from their operations, an increase of 10.0% from the same period last year, and realised net profit of RMB2,553 million, of which RMB818 million was generated from amortisation of connection fees. After the Acquisition, our basic earnings per share reached RMB0.19, representing an increase of 11.8% over the same period last year. We now enjoy better growth prospects.

 

In the first half of this year, we further improved the management of our distribution channels, implemented the revenue-and-service-accountability system and improved the efficiency of the distribution channels, whereby a client-focussed, full coverage distribution channel system was established which has helped to stabilise the usage from our existing customers and played an important role in driving revenue growth. At the same time, we made substantial adjustments to our marketing operation management model applied by head office, including strengthening the market strategy planning and unifying brand management, unifying customer service interface and reinforcing the sales planning function. In addition, a product development centre was set up to strengthen our business innovation capability.

 

Since our initial public offering, our financial management has been improving continuously. The key importance of financial management in various aspects of the business continued to be emphasised, overall budget control has been more stringently implemented and cost control has been further improved. With more centralised network maintenance and higher efficiency, our network operations and support expenses have decreased. Following our philosophy of “running the enterprise in an industrious and economical way”, we have focussed effort in cutting our administrative expenses. As a result, our management and administrative expenditure continued to decrease. However, in order to ensure the continuing growth of our core business in a competitive environment, our sales expenses increased. Capital expenditure is expected to be more proportionate between the first half and second half of this year. The first half of this year recorded a total capital expenditure of RMB25,018 million, an increase of 12.4% from the same period last year.

 

In the first half of this year, we continued to focus our effort on centralising our network resources management and network maintenance. A centralised control and maintenance system covering various

 

A - 2

telecommunications networks was preliminarily established in all our local branch companies. We have further centralised the management of local branch companies’ resources. A transmission resources management system has been established and a conduit resources management system is taking shape. These measures will help us to realise dynamic deployment and distribution of our network resources, effectively increase the efficiency of our network operations and maintenance, and improve our market responsiveness.

 

In the first half of this year, Business Process Re-engineering (“BPR”) has been extensively implemented throughout the Company. 212 out of our 228 local branch companies have adopted or are adopting BPR. With BPR as our platform to implement various new management measures, we were able to expand our process management over a wider area, implement process management reform at all levels of the business. In particular, we have made substantial progress in our process-based and integrated management of distribution channels. The implementation of BPR has accelerated the establishment of a market-oriented, process-based management system, and further enhanced our local branch companies’ overall marketing abilities, market responsiveness, provisioning capabilities and network management. This has in turn improved our operating efficiency and profitability.

 

Further progress has been made with the development of CTG-MBOSS, an information technology platform for our businesses. The management support system (“MSS”), one of the three sub-systems of CTG-MBOSS, has been successfully launched on a trial basis at Guangdong Telecom and Shanghai Telecom. Such system will be further implemented in these two subsidiaries and extended to subsidiaries in other provinces in the second half of this year. The implementation of MSS will enable us, through information sharing, to improve our operating efficiency and financial management and standardise the management of our internal control, thus effectively minimising business risks.

 

Business Review

 

In the first half of this year, our major business lines continued to grow. The subscriber base for our local telephone services expanded rapidly and the volume of our local voice services also increased substantially. The wireless local access service made an important contribution to the growth of our business. Broadband services continued to develop at high growth rates and revenue generated therefrom accounted for a higher proportion of our total operating revenue. The domestic long distance services recorded positive growth both in terms of volume and revenue.

 

Local Telephone Services

 

As our core business, local telephone services recorded RMB40,527 million in revenue, an increase of 7.7% from the same period last year. Local telephone revenue accounted for 50.5% of our total operating revenue, which was similar to that of last year.

 

As at the end of June, our local telephone subscriber base increased by 17.51 million and by 10.9% from the end of last year, reaching 178 million. The growth in wireless local access subscribers and public telephone users was particularly strong with the total number of subscribers increasing by 10.91 million and 1.43 million, respectively, from the end of last year, reaching 36.47 million and 11.03 million, respectively. Their semi-annual growth rates were 42.7% and 14.8%, respectively.

 

By leveraging the strengths in our distribution channels and further promoting our packaged products in the first half of this year, we generated local telephone usage fees of RMB24,072 million, an increase of 7.1% from the same period last year. At the same time, the total usage of local voice service reached 210.7 billion pulses, an increase of 13.6% from the same period last year.

 

The steady and rapid increase in the number of wireless local access subscribers has effectively mitigated the pressure from mobile substitution. The packaging of wireless local access with residential and business wireline services has created synergies and increased the value of wireline services. We have reduced the investment cost of the wireless local access service per subscriber by approximately 10% and have increased the utilisation of the network by approximately 3%, thus maintaining a desirable level of investment return on such business.

 

A - 3

Internet Services

 

In the first half of this year, the revenue generated from Internet services reached RMB6,602 million, an increase of 51.6% from the same period last year, and accounted for 8.2% of our total operating revenue, which increased by 2.4 percentage points over the same period last year. This line of revenue has contributed substantially to our overall growth in revenue. As at the end of June, our subscriber base for the broadband access service reached 10.89 million, an increase of 3.66 million from the end of last year or a semi-annual growth rate of 50.6%, hence strengthening our leading position in the broadband market.

 

We have focussed our attention on capitalising the strength of our full service portfolio. We combined broadband access with other wireline services and broadband application services and launched flexible tariff packages to create and satisfy different customer demands. The marketing strength of our broadband access products has been improved as we extended our distribution channels to full coverage. At the same time, based on “ChinaVnet” platform, we strengthened the integration of broadband application resources to encourage third party providers to join efforts in expanding the spectrum of the broadband content and applications market. As at the end of June 2004, the number of registered subscribers for “ChinaVnet” reached 4.66 million and over 200 broadband content providers nationwide joined “ChinaVnet”.

 

While the number of broadband subscribers was increasing rapidly, their ARPU value was kept at a relatively high level. Benefiting from economies of scale and centralised procurement, the investment cost per subscriber for broadband ADSL was reduced by approximately 5%, thus maintaining a relatively high investment return rate.

 

Long Distance Services

 

In the first half of this year, our revenue generated from domestic long distance services was RMB13,145 million, an increase of 3.6% from the same period last year. The total transmission volume for our domestic long distance services reached 39.4 billion minutes, an increase of 21.4% from the same period last year. We continued to maintain our leading position in this area.

 

While benefiting from increasing demands in the domestic long distance services market which was stimulated by the rapid growth of the Chinese economy, we adopted a flexible and efficient marketing strategy in the face of market competition. We maximised revenue from the domestic long distance services by adopting appropriate pricing strategies. Sales efforts were tailored to customers based on our detailed customer segmentation. For instance, we increased the density of public telephone outlets and strengthened our control over and further motivated the agency channels. These measures enabled us to maintain our strong position in the rapidly growing long distance services market for mobile population.

 

Revenue from international, Hong Kong, Macau and Taiwan long distance services decreased by 2.3% from the same period last year to RMB1,906 million in the first half of this year. The volume of international long distance usage was 812 million minutes, approximately the same as that of last year.

 

Managed Data and Leased Line Services

 

In the first half of this year, revenue generated from our managed data services was RMB1,524 million, a reduction of 6.4% from the same period last year, which accounted for 1.9% of our total operating revenue. Benefiting from the accelerating progress in the use of information technology by the general public, the leasing of standard ports of DDN, FR and ATM increased by 3.3%, 35.6% and 1.3%, respectively, from the end of 2003. On the other hand, under the pressure of competition within the market, the unit prices for our managed data services decreased.

 

We generated RMB2,112 million from our leased line services in the first half of this year, a reduction of 19.0% from the same period last year, which accounted for 2.6% of our total operating revenue. As at the end of June 2004, the total number of 2M digital lines leased was 146,200, a reduction of 10.4% from the end of 2003. This decrease was mainly due to the reduction in demand for leased lines from other domestic telecommunications operators.

 

A - 4

Interconnection Services

 

In the first half of this year, revenue from interconnection services was RMB5,013 million, an increase of 22.4% from the same period last year. The net interconnection revenue was RMB3,240 million, an increase of 25.0% from the same period last year. Driven by the continuous expansion of our subscriber base and the overall growth in the domestic telecommunications market, the volume of inbound local calls reached 46.2 billion minutes in the first half of this year, an increase of 32.4% from the same period last year. The volume of inbound long distance calls also increased compared to the same period last year.

 

Value-added Services

 

We continued our efforts to develop wireline value-added services in the first half of this year and substantially increased the revenue generated from them. As at the end of June 2004, our subscribers for the caller ID service reached 98.19 million, representing a penetration rate of 55.0%, an increase of nearly 4 percentage points from the end of 2003. The semi-annual usage volume for our telephone information service reached 1,038 million minutes, an increase of 35.0% from the same period last year. Since the launch of the SMS over wireless local access service in the first half of this year, the volume of its usage has increased substantially and the service has demonstrated great potential for further development. As an important component of wireline services, value-added services continue to be one of our key focuses and an important source of our future growth.

 

Outlook for the Second Half of the Year

 

In the second half of 2004, sustained, rapid, healthy and coordinated growth of the Chinese economy is expected. Accelerating adoption of information technology in the Chinese economy will continue to drive greater demands for telecommunications services. The increasing competition in the telecommunications market will become a significant factor in our operations in the second half of 2004.

 

We plan to fully explore the development potential of wireline services as our pillar business, conduct comprehensive network optimisation for the wireless local access network to improve our network quality and capability of developing new businesses. Furthermore, we will consistently develop our broadband access service, expand the market for broadband applications, strengthen the development of value-added services and continuously explore new areas for our services.

 

We will continue to strengthen the capacities of, and improve the management of, our distribution channels. We will also continue to harmonise the relationship between marketing, products development, distribution and customers, effectively improve marketing design and planning, and improve our brand management to enhance our brand value.

 

We intend to continue transforming our business towards a value-driven growth model. We will also continue to improve overall budget control and budget implementation accountability, optimise cost structure, enhance management of capital expenditure and achieve a more even distribution of capital and operating expenditure. Moreover, we will further implement BPR to establish a process-based management system with a long standing effect. We will strengthen our internal control system to achieve the international best practice, so as to mitigate business risks. We will also speed up the establishment of CTG-MBOSS to provide effective IT support for our marketing and sales, operational management and internal control.

 

With a view to improving our human resources capital, we will continue with our human resources reforms and implement a merit-based appointment system. We will expand our talented team consisting of professional business managers, technical specialists, skilful marketing and maintenance personnel and professional administrative personnel.

 

We will pay close attention to new developments in the regulation of the telecommunications industry. Based on our in-depth understanding of regulatory policies, we will continue to comply with all regulatory requirements and foster a favourable business environment. Based on a win-win philosophy and through the creation of a favourable competitive environment, we will promote the healthy development of the industry.

 

A - 5

In summary, we will adhere to our goal of becoming “a world-class telecommunications operator”. Focussing on rapid development, continued business reform, effective management and human-resources-based strategy, we will strive to achieve the sustainable and sound development of the business and maximise shareholders’ value.

 

Zhou Deqiang

Chairman and CEO

Beijing, PRC

1 September 2004

 

A - 6

LOGO

 

To the Board of Directors of

China Telecom Corporation Limited

 

INTRODUCTION

 

We have been instructed by the Company to review the interim financial statements of the Company and its subsidiaries (the “Group”) set out on pages 9 to 30.

 

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 interim financial statements to be in compliance with the relevant provisions thereof and International Accounting Standard 34 “Interim Financial Reporting” promulgated by the International Accounting Standards Board. The interim financial statements are the responsibility of, and have been approved by, the directors.

 

It is our responsibility to form an independent conclusion, based on our review, on the interim financial statements 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 Statement of Auditing Standards 700 “Engagement to review interim financial reports” issued by the Hong Kong Society of Accountants. A review consists principally of making enquiries of Group management and applying analytical procedures to the interim financial statements 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 statements.

 

REVIEW CONCLUSION

 

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 statements for the six-month period ended 30 June 2004.

 

KPMG

Certified Public Accountants

 

Hong Kong, China

1 September 2004

 

A - 7

         

30 June

2004

    

31 December

2003

  
           
     Note    RMB     RMB  

ASSETS

                  

Non-current assets

                  

Property, plant and equipment, net

         303,725     309,896  

Construction in progress

         39,522     31,617  

Lease prepayments

         4,555     4,485  

Interests in associates

         500     513  

Investments

         237     206  

Deferred tax assets

    9    10,662     10,523  

Other assets

         13,323     13,609  

Total non-current assets

         372,524     370,849  

Current assets

                  

Inventories

         3,227     3,253  

Accounts receivable, net

    4    15,186     12,951  

Prepayments and other current assets

         3,715     3,695  

Time deposits with maturity over three months

         350     473  

Cash and cash equivalents

    5    16,710     12,721  

Total current assets

         39,188     33,093  

Total assets

         411,712     403,942  

LIABILITIES AND SHAREHOLDERS’ EQUITY

                  

Current liabilities

                  

Short-term debt

    6    65,511     56,243  

Current portion of long-term debt

    7    14,970     13,957  

Accounts payable

    8    34,591     35,629  

Accrued expenses and other payables

         30,300     26,004  

Income tax payable

         3,664     3,395  

Current portion of finance lease obligations

         117     50  

Current portion of deferred revenues

         12,656     13,857  

Total current liabilities

         161,809     149,135  

Net current liabilities

         (122,621 )   (116,042 )

Total assets less current liabilities

         249,903     254,807  

 

The notes on pages 15 to 30 form part of these interim financial statements.

 

A - 8

         

30 June

2004

   

31 December

2003

            
     Note    RMB    RMB

Non-current liabilities

               

Long-term debt

    7    72,491    68,632

Finance lease obligations

         155    43

Deferred revenues

         29,219    32,744

Deferred tax liabilities

    9    1,575    1,325

Total non-current liabilities

         103,440    102,744

Total liabilities

         265,249    251,879

Minority interests

         1,349    1,269

Shareholders’ equity

               

Share capital

    10    80,932    75,614

Reserves

         64,182    75,180

Total shareholders’ equity

         145,114    150,794

Total liabilities and shareholders’ equity

         411,712    403,942

 

The notes on pages 15 to 30 form part of these interim financial statements.

 

A - 9

         

Six-month periods

ended 30 June

  
          2004
     2003
  
     Note    RMB     RMB  

Operating revenues

    11    80,217     74,068  

Operating expenses

                  

Depreciation and amortisation

         (23,255 )   (22,666 )

Network operations and support

         (20,325 )   (20,767 )

Selling, general and administrative

         (14,105 )   (10,866 )

Other operating expenses

         (1,796 )   (1,541 )

Total operating expenses

         (59,481 )   (55,840 )

Operating profit

         20,736     18,228  

Net finance costs

    12    (2,341 )   (1,728 )

Investment loss

         —       (85 )

Share of profit from associates

         6     —    

Profit before taxation and minority interests

    13    18,401     16,415  

Taxation

    14    (3,681 )   (3,333 )

Profit before minority interests

         14,720     13,082  

Minority interests

         (12 )   (24 )

Profit attributable to shareholders

         14,708     13,058  

Basic earnings per share

    16    0.19     0.17  

Weighted average number of shares

         76,725     75,614  

 

The notes on pages 15 to 30 form part of these interim financial statements.

 

A - 10

     Note
    Share
capital
    Capital
reserve
    Share
premium
    Revaluation
reserve
     Surplus
reserves
    Statutory
common
welfare
fund
    Other
reserves
     Retained
earnings
     Total
shareholders’
equity
  
          RMB    RMB    RMB    RMB     RMB    RMB    RMB     RMB     RMB  

Balance as at 1 January 2003, as previously reported

         75,614    20,955    3,362    4,904     8,121    1,624    31,064     7,204     152,848  

Adjusted for the Second Acquisition

    1    —      —      —      —       —      —      34,177     —       34,177  

Balance as at 1 January 2003, as adjusted

         75,614    20,955    3,362    4,904     8,121    1,624    65,241     7,204     187,025  

Net profit for the six-month period ended 30 June 2003

         —      —      —      —       —      —      —       13,058     13,058  

Contributions from China Telecom

         —      —      —      —       —      —      —       215     215  

Distributions to China Telecom

         —      —      —      —       —      —      —       (214 )   (214 )

Transfer from retained earnings to other reserves

         —      —      —      —       —      —      3,823     (3,823 )   —    

Dividends

    15    —      —      —      —       —      —      —       (673 )   (673 )

Revaluation surplus realised

         —      —      —      (4 )   —      —      —       4     —    

Deferred tax on land use rights realised

         —      —      —      —       —      —      (76 )   76     —    

Balance as at 30 June 2003

         75,614    20,955    3,362    4,900     8,121    1,624    68,988     15,847     199,411  

Net profit for the six-month period ended 31 December 2003

         —      —      —      —       —      —      —       824     824  

Contributions from China Telecom

         —      —      —      —       —      —      —       4,094     4,094  

Distributions to China Telecom

         —      —      —      —       —      —      —       (1,020 )   (1,020 )

Assets distributed to China Telecom in connection with the Second Acquisition

    1    —      —      —      —       —      —      —       (10,762 )   (10,762 )

 

A-11

Recognition of deferred tax assets

    —      —      —       —      —       —      —      2,209     —       2,209  

Transfer from retained earnings to other reserves

         —      —       —      —       —      —      (15,635 )   15,635     —    

Consideration for the acquisition of the First Acquired Group

    1    —      —       —      —       —      —      (45,649 )   —       (45,649 )

Appropriations

         —      —       —      —       7,340    1,748    —       (9,088 )   —    

Transfer from other reserves to capital reserve

         —      (14,388 )   —      —       —      —      14,388     —       —    

Revaluation surplus

         —      —       —      1,537     —      —      —       —       1,537  

Eliminations of deferred tax liabilities

         —      —       —      —       —      —      —       150     150  

Revaluation surplus realised

         —      —       —      (13 )   —      —      —       13     —    

Deferred tax on land use rights realised

         —      —       —      —       —      —      (55 )   55     —    

Balance as at 31 December 2003

         75,614    6,567     3,362    6,424     15,461    3,372    24,246     15,748     150,794  

Issue of shares, net of issuing expenses of RMB294 million

         5,318    —       7,384    —       —      —      —       —       12,702  

Net profit for the six-month period ended 30 June 2004

         —      —       —      —       —      —      —       14,708     14,708  

Contributions from China Telecom

         —      —       —      —       —      —      —       100     100  

Transfer from retained earnings to other reserves

         —      —       —      —       —      —      2,653     (2,653 )   —    

Consideration for the acquisition of the Second Acquired Group

    1    —      —       —      —       —      —      (27,800 )   —       (27,800 )

Transfer from other reserves to capital reserve

         —      (9,371 )   —      —       —      —      9,371     —       —    

 

A-12

Dividends

    15    —      —       —      —       —      —      —       (5,224 )   (5,224 )

Revaluation surplus realised

         —      —       —      (8 )   —      —      —       8     —    

Effect of change in tax rate

    9    —      —       —      —       —      —      (166 )   —       (166 )

Deferred tax on land use rights realised

         —      —       —      —       —      —      (74 )   74     —    

Balance as at 30 June 2004

         80,932    (2,804 )   10,746    6,416     15,461    3,372    8,230     22,761     145,114  

 

The notes on pages 15 to 30 form part of these interim financial statements.

 

A-13

          

Six-month periods

ended 30 June

  
     Note
     2004
     2003
  
           RMB     RMB  

Net cash from operating activities

    (a )   35,517     29,558  

Cash flows from investing activities

                   

Capital expenditure

          (26,023 )   (24,161 )

Purchase of investments

          (42 )   (73 )

Lease prepayments

          (125 )   (28 )

Proceeds from disposal of property, plant and equipment

          136     49  

Increase in time deposits with maturity over three months

          (45 )   (294 )

Maturity of time deposits with maturity over three months

          168     1,262  

Net cash used in investing activities

          (25,931 )   (23,245 )

Cash flows from financing activities

                   

Capital element of finance lease payments

          (30 )   (35 )

Proceeds from issue of shares, net of issuing expenses

          12,702     —    

Proceeds from bank and other loans

          41,129     48,119  

Repayments of bank and other loans

          (42,083 )   (52,424 )

Payment of dividends

          (4,833 )   —    

Cash contributions from minority interests

          68     18  

Cash payment for the acquisition of the Second Acquired Group

          (12,650 )   —    

Cash contributions from China Telecom

          100     292  

Cash distributions to China Telecom

          —       (224 )

Net cash used in financing activities

          (5,597 )   (4,254 )

Net increase in cash and cash equivalents

          3,989     2,059  

Cash and cash equivalents at 1 January

          12,721     22,743  

Cash and cash equivalents at 30 June

          16,710     24,802  

 

The notes on pages 15 to 30 form part of these interim financial statements.

 

A-14

(a) Reconciliation of profit before taxation and minority interests to net cash from operating activities

 

     Six-month periods
ended 30 June
  
     2004
     2003
  
     RMB     RMB  

Profit before taxation and minority interests

    18,401     16,415  

Adjustments for:

             

Depreciation and amortisation

    23,255     22,666  

Provision for doubtful accounts

    679     733  

Investment loss

    —       85  

Share of profit from associates

    (6 )   —    

Interest income

    (109 )   (151 )

Interest expense

    2,522     1,820  

Unrealised foreign exchange (gains)/losses

    (56 )   41  

Loss on retirement and disposal of property, plant and equipment

    65     967  

Increase in accounts receivable

    (2,914 )   (3,702 )

Decrease/(increase) in inventories

    26     (271 )

Decrease/(increase) in prepayments and other current assets

    16     (108 )

Decrease/(increase) in other non-current assets

    169     (2 )

Increase/(decrease) in accounts payable

    878     (456 )

Increase in accrued expenses and other payables

    3,770     3,311  

Decrease in deferred revenues

    (4,726 )   (4,862 )

Cash generated from operations

    41,970     36,486  

Interest received

    109     151  

Interest paid

    (3,125 )   (2,572 )

Investment income received

    30     13  

Income tax paid

    (3,467 )   (4,520 )

Net cash from operating activities

    35,517     29,558  

 

The notes on pages 15 to 30 form part of these interim financial statements.

 

A-15

1. PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PRESENTATION

 

Principal activities

 

China Telecom Corporation Limited (the “Company”) and its subsidiaries (hereinafter, collectively referred to as the “Group”) are engaged in the provision of wireline telecommunications and related services in Shanghai Municipality, Guangdong Province, Jiangsu Province, Zhejiang Province, Anhui Province, Fujian Province, Jiangxi Province, Guangxi Zhuang Autonomous Region, Chongqing Municipality, Sichuan Province, Hubei Province, Hunan Province, Hainan Province, Guizhou Province, Yunnan Province, Shaanxi Province, Gansu Province, Qinghai Province, Ningxia Hui Autonomous Region and Xinjiang Uygur Autonomous Region of the People’s Republic of China (the “PRC”). The Group offers a comprehensive range of wireline telecommunications services to residential and business customers, including local, domestic long distance (“DLD”) and international long distance (“ILD”) telephone services, Internet and managed data, leased line, and other related services.

 

The operations of the Group are subject to the supervision and regulation by the PRC government. The Ministry of Information Industry, pursuant to the authority delegated to it by the PRC’s State Council, is responsible for formulating the telecommunications industry policies and regulations, including the regulation and setting of tariff levels for basic telecommunications services, such as local and long distance telephone services, managed data services, leased line and interconnection arrangements.

 

Organisation

 

The Company was incorporated in the PRC on 10 September 2002 as part of the reorganisation (the “Restructuring”) of China Telecommunications Corporation (“China Telecom” and together with its subsidiaries other than the Company referred to as “China Telecom Group”), a state-owned enterprise which is under the supervision and regulation of the Ministry of Information Industry. In November 2001, pursuant to a further industry restructuring plan approved by the State Council, China Telecom’s wireline telecommunications networks and related operations in 10 northern provinces, municipalities and autonomous regions of the PRC were transferred to China Netcom Group. China Telecom retained the wireline telecommunications networks and related operations of 21 provinces, municipalities and autonomous regions of the PRC, including those of the Company’s subsidiaries. In accordance with this industry restructuring plan, China Telecom and China Netcom Group own 70% and 30%, respectively, of the nationwide inter-provincial optic fibres.

 

A-16

1. PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PRESENTATION

 

Organisation

 

Pursuant to the resolution passed by the Company’s independent shareholders at an Extraordinary General Meeting held on 15 December 2003, the Company acquired the entire equity interests in Anhui Telecom Company Limited, Fujian Telecom Company Limited, Jiangxi Telecom Company Limited, Guangxi Telecom Company Limited, Chongqing Telecom Company Limited and Sichuan Telecom Company Limited (collectively the “First Acquired Group”) and certain network management and research and development facilities from China Telecom for a total purchase price of RMB46,000 million on 31 December 2003 (hereinafter, referred to as the “First Acquisition”). The purchase price consisted of a cash payment of RMB11,000 million and a long-term payable of RMB35,000 million. In connection with the First Acquisition and effective 31 December 2002, China Telecom transferred the wireline telecommunications business and related operations in Anhui Province, Fujian Province, Jiangxi Province, Guangxi Zhuang Autonomous Region, Chongqing Municipality and Sichuan Province together with the related assets and liabilities in consideration for the entire equity interests in each of the entities of the First Acquired Group. Certain assets historically associated with these operations were retained by China Telecom, and as at 31 December 2002, these assets amounted to RMB5,189 million and consisted primarily of investments in non-telecommunications industries and properties.

 

Pursuant to the resolution passed by the Company’s independent shareholders at an Extraordinary General Meeting held on 9 June 2004, the Company acquired the entire equity interests in Hubei Telecom Company Limited, Hunan Telecom Company Limited, Hainan Telecom Company Limited, Guizhou Telecom Company Limited, Yunnan Telecom Company Limited, Shaanxi Telecom Company Limited, Gansu Telecom Company Limited, Qinghai Telecom Company Limited, Ningxia Telecom Company Limited and Xinjiang Telecom Company Limited (collectively the “Second Acquired Group”) from China Telecom for a total purchase price of RMB27,800 million on 30 June 2004 (hereinafter, referred to as the “Second Acquisition”). The purchase price consisted of a cash payment of RMB8,340 million and a long-term payable of RMB19,460 million. On 30 June 2004, the Company repaid RMB4,310 million of this payable amount using the net proceeds from issue of new H shares in May 2004 (see Note 10). In connection with the Second Acquisition and effective 31 December 2003, China Telecom transferred the wireline telecommunications business and related operations in Hubei Province, Hunan Province, Hainan Province, Guizhou Province, Yunnan Province, Shaanxi Province, Gansu Province, Qinghai Province, Ningxia Hui Autonomous Region and Xinjiang Uygur Autonomous Region together with the related assets and liabilities in consideration for the entire equity interests in each of the entities of the Second Acquired Group. Certain assets historically associated with these operations were retained by China Telecom, and as at 31 December 2003, these assets amounted to RMB10,762 million and consisted primarily of investments in non-telecommunications industries and properties.

 

A-17

1. PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PRESENTATION

 

Basis of presentation

 

As the First Acquired Group and the Second Acquired Group (“the Acquired Groups”) were under the common control of China Telecom, the acquisitions have been reflected in the accompanying consolidated interim financial statements as a combination of entities under common control in a manner similar to a pooling-of-interests. Accordingly, the assets and liabilities of the Acquired Groups have been accounted for at historical amounts and the consolidated financial statements of the Company prior to the acquisitions have been restated to include the results of operations and assets and liabilities of the Acquired Groups on a combined basis. The assets retained by China Telecom in respect of the First Acquisition and the Second Acquisition have been reflected as distributions to China Telecom in the consolidated statement of shareholders’ equity as at 31 December 2002 and 31 December 2003 respectively. The considerations paid by the Company for the Acquired Groups have been accounted for as equity transactions in the consolidated statement of shareholders’ equity.

 

The results of operations previously reported by the Group for the six-month period ended 30 June 2003 have been restated to include the results of the First Acquired Group and the Second Acquired Group as set out below:

 

     The Group
(as previously
reported)
    The First
Acquired Group
    The Second
Acquired Group
    The Group
(combined)
     RMB millions    RMB millions    RMB millions    RMB millions

Result of operations:

                    

Operating revenues

    39,536    18,247    16,285    74,068

Operating profit

    12,198    4,863    1,167    18,228

Net profit

    9,260    3,371    427    13,058

Basic earnings per share (RMB)

    0.12    0.04    0.01    0.17

 

A-18

1. PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PRESENTATION

 

Basis of presentation

 

The financial condition as at 31 December 2003 and shareholders’ equity as at 31 December 2003 and 1 January 2003 previously reported by the Group have been restated to include the assets and liabilities of the Second Acquired Group as set out below:

 

     The Group
(as previously
reported)
    The Second Acquired
Group
    The Group
(combined)
     RMB millions    RMB millions    RMB millions

Financial condition:

               

Current assets

    25,504    7,589    33,093

Total assets

    305,605    98,337    403,942

Current liabilities

    96,666    52,469    149,135

Total liabilities

    173,064    78,815    251,879

Shareholders’ equity as at 31 December 2003

    131,272    19,522    150,794

Shareholders’ equity as at 1 January 2003

    152,848    34,177    187,025

 

For the periods presented, all significant balances and transactions between the Group and the Acquired Groups have been eliminated.

 

2. BASIS OF PREPARATION

 

These interim financial statements have been prepared in accordance with International Accounting Standard 34 “Interim Financial Reporting” promulgated by the International Accounting Standards Board and the disclosure requirements of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. These interim financial statements reflect the unaudited financial position of the Group as at 30 June 2004 and the unaudited results of operations and cash flows of the Group for the six-month period then ended, which are not necessarily indicative of the results of operations and cash flows expected for the year ending 31 December 2004.

 

The interim financial statements set out on pages 9 to 30 have been authorised for issue by the Board of Directors on 1 September 2004. These interim financial statements are unaudited, but have been reviewed by the Audit Committee of the Company. These interim financial statements have also been reviewed by the Company’s international auditors, KPMG, in accordance with Statement of Auditing Standards 700 “Engagements to review interim financial reports” issued by the Hong Kong Society of Accountants.

 

2. BASIS OF PREPARATION

 

The accounting policies adopted in the 2003 annual financial statements have been consistently applied by the Group in preparing these interim financial statements. The consolidated interim financial statements presented herein should be read in conjunction with the consolidated financial statements and notes thereto included in the 2003 annual report of the Company.

 

3. SEGMENTAL REPORTING

 

A business segment is a distinguishable component of the Group that is engaged in providing products or services and is subject to risks and rewards that are different from those of other segments. For the periods presented, the Group has one operating segment which is the provision of wireline telecommunications services. All the Group’s operating activities are carried out in the PRC.

 

A-19

4. ACCOUNTS RECEIVABLE, NET

 

Accounts receivable, net, are analysed as follows:

 

    

30 June

2004

     31 December
2003
  
     RMB millions     RMB millions  

Accounts receivable

    17,369     14,769  

Less: Allowance for doubtful accounts

    (2,183 )   (1,818 )
     15,186     12,951  

 

Amounts arising from the provision of wireline telecommunications services to residential and business customers are due within 30 days from the date of billing. Customers who have accounts overdue by more than 90 days will have their services disconnected.

 

Ageing analysis of accounts receivable from telephone and Internet subscribers is as follows:

 

    

30 June

2004

     31 December
2003
  
     RMB millions     RMB millions  

Current, within 1 month

    11,051     9,650  

1 to 3 months

    1,684     1,425  

4 to 12 months

    1,320     1,169  

More than 12 months

    826     611  
     14,881     12,855  

Less: Allowance for doubtful accounts

    (2,146 )   (1,780 )
     12,735     11,075  

 

4. ACCOUNTS RECEIVABLE, NET

 

Ageing analysis of accounts receivable from other telecommunications operators and customers is as follows:

 

    

30 June

2004

     31 December
2003
  
     RMB millions     RMB millions  

Current, within 1 month

    1,048     1,147  

1 to 3 months

    695     355  

4 to 12 months

    537     285  

More than 12 months

    208     127  
     2,488     1,914  

Less: Allowance for doubtful accounts

    (37 )   (38 )
     2,451     1,876  

 

5. CASH AND CASH EQUIVALENTS

 

    

30 June

2004

    31 December
2003
     RMB millions    RMB millions

Cash at bank and in hand

    12,464    12,451

Time deposits with maturity within three months

    4,246    270
     16,710    12,721

 

A-20

6. SHORT-TERM DEBT

 

Short-term debt is analysed as follows:

 

     Note
    

30 June

2004

    31 December
2003
           RMB millions    RMB millions

Bank loans

          56,042    56,243

Loans from China Telecom

    (i )   9,469    —  

Total short-term debt

          65,511    56,243

 

Note:

 

(i) The loans from China Telecom bear interest at fixed rates ranging from 2% to 3.45% per annum, are unsecured and are repayable within 1 year.

 

7. LONG-TERM DEBT

 

Long-term debt is analysed as follows:

 

     Note
    

30 June

2004

     31 December
2003
  
           RMB millions     RMB millions  

Bank loans

    (i )   37,300     47,553  

Other loans

          11     36  

Amount due to China Telecom in connection with the First Acquisition

    (ii )   35,000     35,000  

Amount due to China Telecom in connection with the Second Acquisition

    (iii )   15,150     —    

Total long-term debt

          87,461     82,589  

Less: current portion

          (14,970 )   (13,957 )

Non-current portion

          72,491     68,632  

 

Note:

 

(i) As at 30 June 2004, bank loans of RMB6 million (2003: RMB22 million) were secured by certain of the Group’s property, plant and equipment. The net book value of the property, plant and equipment pledged as security amounted to RMB1 million as at 30 June 2004 (2003: RMB27 million).

 

(ii) This represents the deferred consideration payable to China Telecom in respect of the First Acquisition (Note 1). The amount is unsecured, and for the first five years after the date of the First Acquisition, the Company pays interest on the outstanding balance at the rate of 5.184% per annum. Thereafter the interest rate is adjusted based on the prevailing market interest rate. This amount is repayable on 31 December 2013 and the Company may, from time to time, repay all or part of the amount at any time until 31 December 2013 without penalty.

 

(iii) This represents the remaining balance of the deferred consideration payable to China Telecom in respect of the Second Acquisition (Note 1). The amount is unsecured, and for the first five years after the date of the Second Acquisition, the Company pays interest on the outstanding balance at the rate of 5.184% per annum. Thereafter the interest rate is adjusted based on the prevailing market interest rate. This amount is repayable on 30 June 2014 and the Company may, from time to time, repay all or part of the amount at any time until 30 June 2014 without penalty.

 

A-21

8. ACCOUNTS PAYABLE

 

Accounts payable are analysed as follows:

 

    

30 June

2004

    31 December
2003
     RMB millions    RMB millions

Third parties

    26,923    28,367

China Telecom Group

    7,668    7,262
     34,591    35,629

 

Amounts due to China Telecom Group are repayable in accordance with normal commercial terms.

 

Ageing analysis of accounts payable is as follows:

 

    

30 June

2004

    31 December
2003
     RMB millions    RMB millions

Due within 1 month or on demand

    4,560    6,658

Due after 1 month but within 3 months

    7,688    5,661

Due after 3 months but within 6 months

    7,698    8,099

Due after 6 months

    14,645    15,211
     34,591    35,629

 

A-22

9. DEFERRED TAX ASSETS AND LIABILITIES

 

Deferred tax assets and deferred tax liabilities are attributable to the items set out below:

 

     Assets
    Liabilities
     Net balance
  
    

30 June

2004

    31 December
2003
   

30 June

2004

     31 December
2003
    

30 June

2004

     31 December
2003
  
     RMB millions    RMB millions    RMB millions     RMB millions     RMB millions     RMB millions  

Current

                                   

Provisions, primarily for receivables

    326    198    —       —       326     198  

Non-current

                                   

Property, plant and equipment

    74    67    (734 )   (579 )   (660 )   (512 )

Deferred revenues and installation costs

    2,032    1,788    (841 )   (746 )   1,191     1,042  

Land use rights

    8,230    8,470    —       —       8,230     8,470  

Deferred tax assets/(liabilities)

    10,662    10,523    (1,575 )   (1,325 )   9,087     9,198  

 

Movements in temporary differences are as follows:

 

     Note
    

Balance at

1 January
2004

     Recognised in
statement of income
     Recognised in
shareholders’ equity
    

Balance at

30 June

2004

  
           RMB millions     RMB millions     RMB millions     RMB millions  

Current

                               

Provisions, primarily for receivables

          198     128     —       326  

Non-current

                               

Property, plant and equipment

          (512 )   (148 )   —       (660 )

Deferred revenues and installation costs

          1,042     149     —       1,191  

Land use rights

    (i )   8,470     (74 )   (166 )   8,230  

Net deferred tax assets

          9,198     55     (166 )   9,087  
                 (Note 14 )            

 

Note:

 

(i) In connection with the Restructuring, the First Acquisition and the Second Acquisition, the land use rights of the Group were revalued as required by the relevant PRC rules and regulations. The tax bases of the land use rights have been adjusted to conform to such revalued amounts. The land use rights were not revalued for financial reporting purposes and accordingly, deferred tax assets were created with corresponding increases in shareholders’ equity.

 

In the second quarter of 2004, certain subsidiaries with operations in the western region of the PRC obtained approval from tax authority to reduce the income tax rate from 33% to 15% for the period from 1 January 2004 to 31 December 2010. Accordingly, the effect of the change in tax rate on the amount of the deferred tax asset expected to be realised during 2004 to 2010 amounting to RMB166 million was charged to shareholders’ equity.

 

A-23

10. SHARE CAPITAL

 

    

30 June

2004

    31 December
2003
     RMB millions    RMB millions

Registered, issued and fully paid

          

67,054,958,321 (2003: 67,586,776,503) ordinary domestic shares of RMB1.00 each

    67,055    67,587

13,877,410,000 (2003: 8,027,410,000) overseas listed H shares of RMB1.00 each

    13,877    8,027
     80,932    75,614

 

In May 2004, the Company issued and allotted 5,318,181,818 new H shares with a par value of RMB1.00 each, representing 4,466,693,018 H shares and 8,514,888 American Depositary Shares (“ADSs”, each representing 100 H shares), at prices of HK$2.30 per H share and US$29.49 per ADS, respectively, by way of a global offering to Hong Kong and overseas investors. As part of the global offering, 531,818,182 existing domestic shares of RMB1.00 each owned by China Telecom and the other domestic shareholders were converted into H shares and sold to Hong Kong and overseas investors. The Company raised net proceeds of RMB12,702 million from issue of new H shares.

 

11. OPERATING REVENUES

 

Operating revenues represent revenues from the provision of wireline telecommunications services. The components of the Group’s operating revenues are as follows:

 

          

Six-month periods

ended 30 June

     Note
     2004
    2003
           RMB millions    RMB millions

Upfront connection fees

    (i )   4,236    4,886

Upfront installation fees

    (ii )   1,432    1,301

Monthly fees

    (iii )   15,023    13,829

Local usage fees

    (iv )   24,072    22,486

DLD

    (iv )   13,145    12,693

ILD

    (iv )   1,906    1,951

Internet

    (v )   6,602    4,355

Managed data

    (vi )   1,524    1,628

Interconnections

    (vii )   5,013    4,095

Leased line

    (viii )   2,112    2,608

Others

    (ix )   5,152    4,236
           80,217    74,068

 

11. OPERATING REVENUES

 

Note:

 

  (i) Represent the amortised amount of the upfront fees received for the initial activation of wireline services.

 

  (ii) Represent the amortised amount of the upfront fees received for installation of wireline services.

 

A-24

  (iii) Represent amounts charged to customers each month for their use of the Group’s telephone services.

 

  (iv) Represent usage fees charged to customers for the provision of telephone services.

 

  (v) Represent amounts charged to customers for the provision of Internet access services.

 

  (vi) Represent amounts charged to customers for the provision of managed data transmission services.

 

  (vii) Represent amounts charged to domestic and foreign telecommunications operators for delivery of calls connecting to the Group’s wireline telecommunications networks.

 

  (viii) Represent lease income from other domestic telecommunications operators and business customers for the usage of the Group’s wireline telecommunications networks and is measured by the number of lines leased and the agreed upon rate per line leased. The lease arrangements are primarily on a year to year basis.

 

  (ix) Represent primarily revenues from provision of value-added telecommunications services to customers, sale and repairs and maintenance of customer-end equipment, and lease of telecommunications network facilities.

 

12. NET FINANCE COSTS

 

Net finance costs comprise:

 

    

Six-month periods

ended 30 June

  
     2004
     2003
  
     RMB millions     RMB millions  

Interest expense incurred

    3,260     2,576  

Less: Interest expense capitalised*

    (738 )   (756 )

Net interest expense

    2,522     1,820  

Interest income

    (109 )   (151 )

Foreign exchange losses

    4     100  

Foreign exchange gains

    (76 )   (41 )
     2,341     1,728  

*  Interest expense was capitalised in construction in progress at the following rates per annum

    4.1%–5.2%     4.3%–5.5%  

 

13. PROFIT BEFORE TAXATION AND MINORITY INTERESTS

 

Profit before taxation and minority interests is arrived at after charging:

 

    

Six-month periods

ended 30 June

     2004
    2003
     RMB millions    RMB millions

Personnel expenses

    11,689    10,342

Interconnection charges

    1,773    1,504

 

A-25

14. TAXATION

 

Taxation in the consolidated statement of income comprises:

 

    

Six-month periods

ended 30 June

  
     2004
     2003
  
     RMB millions     RMB millions  

Provision for PRC income tax

    3,736     3,782  

Deferred taxation (Note 9)

    (55 )   (449 )
     3,681     3,333  

 

A reconciliation of the expected tax with the actual tax expense is as follows:

 

    

Six-month periods

ended 30 June

  
     Note
     2004
     2003
  
           RMB millions     RMB millions  

Profit before taxation and minority interests

          18,401     16,415  

Expected PRC income tax expense at statutory tax rate of 33%

    (i )   6,072     5,417  

Differential tax rate on subsidiaries income

    (i )   (954 )   (398 )

Non-deductible expenses

    (ii )   435     199  

Non-taxable income

    (iii )   (1,872 )   (1,885 )

Income tax

          3,681     3,333  

 

14. TAXATION

 

  (i) The provision for PRC current income tax is based on a statutory rate of 33% of the assessable income of the Group as determined in accordance with the relevant income tax rules and regulations of the PRC, except for certain subsidiaries of the Group which are taxed at a preferential rate of 15%.

 

  (ii) Amounts represent personnel and other miscellaneous expenses in excess of statutory deductible limits for tax purpose.

 

  (iii) Amounts primarily represent connection fees received from customers which are not subject to income tax.

 

15. DIVIDENDS

 

Pursuant to the shareholders’ approval at the Annual General Meeting held on 3 May 2004, a final dividend of RMB0.069083 per share totaling RMB5,224 million in respect of the year ended 31 December 2003 was declared and was paid on 20 May 2004.

 

Pursuant to the shareholders’ approval at the Annual General Meeting held on 20 June 2003, a final dividend of RMB0.008897 per share totaling RMB673 million in respect of the year ended 31 December 2002 was declared and was paid on 10 July 2003.

 

The Board of Directors has resolved not to pay an interim dividend for the year ending 31 December 2004.

 

16. BASIC EARNINGS PER SHARE

 

The calculation of basic earnings per share for the six-month period ended 30 June 2004 is based on the net profit of RMB14,708 million and the weighted average number of shares in issue during the period of 76,724,576,113 shares. The weighted average number of shares in issue during the six-month period ended 30 June 2004 reflects the issuance of 5,318,181,818 new H shares in May 2004 (see Note 10). The calculation of basic earnings per share for the six-month period ended 30 June 2003 is based on the net profit of RMB13,058 million divided by 75,614,186,503 shares.

 

The amount of diluted earnings per share is not presented as there were no dilutive potential ordinary shares in existence for both periods presented.

 

A-26

17. CAPITAL COMMITMENTS

 

As at 30 June 2004, the Group had capital commitments as follows:

 

    

30 June

2004

    31 December
2003
     RMB millions    RMB millions

Authorised and contracted for

          

Properties

    2,268    1,857

Telecommunications network plant and equipment

    5,124    9,257
     7,392    11,114

Authorised but not contracted for

          

Properties

    2,105    2,458

Telecommunications network plant and equipment

    10,629    12,725
     12,734    15,183
18. RELATED PARTY TRANSACTIONS

 

The principal related party transactions with China Telecom Group which were carried out in the ordinary course of business are as follows:

 

          

Six-month periods

ended 30 June

     Note
     2004
    2003
           RMB millions    RMB millions

Purchases of telecommunications equipment and materials

    (i )   152    222

Construction, engineering and information technology services

    (ii )   2,597    2,851

Provision of community services

    (iii )   1,101    1,064

Provision of ancillary services

    (iv )   796    683

Provision of comprehensive services

    (v )   120    —  

Operating lease expenses

    (vi )   203    235

Centralised service expenses

    (vii )   108    144

Interconnection revenues

    (viii )   98    99

Interconnection charges

    (viii )   201    280

Interest on amounts due to and loans from China Telecom

    (ix )   993    —  

 

18. RELATED PARTY TRANSACTIONS

 

Note:

 

  (i) Represent purchases of telecommunications equipment and materials from China Telecom Group.

 

  (ii) Represent provision of network construction, engineering and information technology services to the Group by China Telecom Group.

 

  (iii) Represent amounts paid and payable by the Group to China Telecom Group in respect of cultural, educational, hygiene and other community services.

 

A-27

  (iv) Represent amounts paid and payable by the Group to China Telecom Group in respect of ancillary services such as repairs and maintenance of telecommunications equipment and facilities and certain customer services.

 

  (v) Represent amounts paid and payable by the Group to China Telecom Group in respect of comprehensive services provided (see scope of comprehensive service defined below).

 

  (vi) Represent amounts paid and payable to China Telecom Group for operating leases in respect of business premises and inter-provincial transmission optic fibres.

 

  (vii) Represent net amount charged by China Telecom to the Group for costs associated with common corporate services and international telecommunications facilities.

 

  (viii) Represent amounts charged from/to China Telecom for interconnection of domestic long distance telephone calls.

 

  (ix) Represent interest paid and payable to China Telecom with respect to the deferred consideration payable to China Telecom in connection with the First Acquisition and interest with respect to loans from China Telecom (Note 7).

 

In connection with the Second Acquisition, the Group and China Telecom Group entered into a number of agreements on 13 April 2004. The principal terms of these agreements are similar to those disclosed in Note 32 to the Group’s 2003 consolidated financial statements, other than an increase in the maximum commission rate for domestic equipment procurement from 1.8% to 3% to reflect the latest market price.

 

In addition, the Company entered into a comprehensive services framework agreement with China Telecom on 13 April 2004 to govern the terms and conditions of transactions between the Group and entities within China Telecom Group which were not within the scope of the agreements entered into previously. Such transactions include procurement of telecommunications equipment, network design, software upgrade, system integration, manufacture of calling cards and other services. Pursuant to this agreement, China Telecom Group charges the Group for these services in accordance with the following terms:

 

  • government prescribed price;

 

  • where there is no government prescribed price but where there is a government guided price, the government guided price will apply;

 

18. RELATED PARTY TRANSACTIONS

 

  • where there is neither a government prescribed price nor a government guided price, the market price will apply;

 

  • where none of the above is available, the price is to be agreed between the relevant parties, which shall be based on the cost incurred in providing the services plus a reasonable profit margin.

 

The directors of the Company are of the opinion that the above transactions with related parties were conducted in the ordinary course of business and on normal commercial terms or in accordance with the agreements governing such transactions, and this has been confirmed by the independent non-executive directors.

 

A-28

19. PRINCIPAL SUBSIDIARIES

 

Following the completion of the Second Acquisition on 30 June 2004, the Company has the following wholly-owned subsidiaries which principally affect the results of operations and the financial position of the Group:

 

Name of Company

   Type of legal entity
   Date of incorporation
   Registered capital
            (RMB millions)

Shanghai Telecom Company Limited

   Limited company   11 October 2002   15,984

Guangdong Telecom Company Limited

   Limited company   10 October 2002   47,513

Jiangsu Telecom Company Limited

   Limited company   19 October 2002   19,208

Zhejiang Telecom Company Limited

   Limited company   10 October 2002   22,400

Anhui Telecom Company Limited

   Limited company   26 August 2003   3,871

Fujian Telecom Company Limited

   Limited company   28 August 2003   10,364

Jiangxi Telecom Company Limited

   Limited company   18 September 2003   1,153

Guangxi Telecom Company Limited

   Limited company   28 August 2003   4,992

Chongqing Telecom Company Limited

   Limited company   22 August 2003   4,276

Sichuan Telecom Company Limited

   Limited company   28 August 2003   8,123

Hubei Telecom Company Limited

   Limited company   9 March 2004   5,412

Hunan Telecom Company Limited

   Limited company   12 March 2004   661

Hainan Telecom Company Limited

   Limited company   9 March 2004   580

Guizhou Telecom Company Limited

   Limited company   12 March 2004   2,401

Yunnan Telecom Company Limited

   Limited company   9 March 2004   3,747

Shaanxi Telecom Company Limited

   Limited company   8 March 2004   2,482

Gansu Telecom Company Limited

   Limited company   10 March 2004   3,413

Qinghai Telecom Company Limited

   Limited company   10 March 2004   965

Ningxia Telecom Company Limited

   Limited company   10 March 2004   795

Xinjiang Telecom Company Limited

   Limited company   11 March 2004   4,660

 

All of the above subsidiaries are incorporated in the PRC.

 

A-29

The Group’s accounting policies conform with IFRS which differ in certain significant respects from accounting principles generally accepted in the United States of America (“US GAAP”). The nature of differences which have a significant effect on the Group’s net profit and shareholders’ equity are set out below. The US GAAP reconciliation presented below is included as supplemental information and is not required as part of the basic interim financial statements and has not been subject to independent audit or review.

 

(A) REVALUATION OF PROPERTY, PLANT AND EQUIPMENT

 

In connection with the Restructuring, the property, plant and equipment of the Company’s predecessor operations were revalued as at 31 December 2001. The net revaluation deficit has been reflected in the consolidated financial statements as at 31 December 2001. Such revaluation resulted in an increase directly to shareholders’ equity of RMB4,154 million with respect to the increase in carrying amount of certain property, plant and equipment above their historical cost bases, and a charge to income of RMB11,930 million with respect to the reduction in carrying amount of certain property, plant and equipment below their historical cost bases.

 

In connection with the First Acquisition, the property, plant and equipment of the First Acquired Group were revalued as at 31 December 2002. The net revaluation deficit has been reflected in the consolidated financial statements as at 31 December 2002. Such revaluation resulted in an increase directly to shareholders’ equity of RMB760 million with respect to the increase in carrying amount of certain property, plant and equipment above their historical cost bases, and a charge to income of RMB14,690 million with respect to the reduction in carrying amount of certain property, plant and equipment below their historical cost bases.

 

In connection with the Second Acquisition, the property, plant and equipment of the Second Acquired Group were revalued as at 31 December 2003. The net revaluation deficit has been reflected in the consolidated financial statements as at 31 December 2003. Such revaluation resulted in an increase directly to shareholders’ equity of RMB1,537 million with respect to the increase in carrying amount of certain property, plant and equipment above their historical cost bases, and a charge to income of RMB14,832 million with respect to the reduction in carrying amount of certain property, plant and equipment below their historical cost bases.

 

Under US GAAP, property, plant and equipment are stated at their historical cost less accumulated depreciation unless an impairment loss has been recorded. An impairment loss on property, plant and equipment is recorded under US GAAP if the carrying amount of such asset exceeds its future undiscounted cash flows resulting from the use of the asset and its eventual disposition. The future undiscounted cash flows of the Group’s property, plant and equipment, whose carrying amount was reduced in connection with the Restructuring, the First Acquisition and the Second Acquisition, exceed the historical cost carrying amount of such property, plant and equipment and, therefore, impairment of such assets is not appropriate under US GAAP. Accordingly, the revaluation reserve recorded directly to shareholders’ equity and the charge to income recorded under IFRS as a result of the Restructuring, the First Acquisition and the Second Acquisition, are reversed for US GAAP purposes.

 

However, as a result of the tax deductibility of the net revaluation deficit, a deferred tax liability related to the net revaluation deficit is created under US GAAP with a corresponding decrease in shareholders’ equity.

 

(B) DISPOSAL OF REVALUED PROPERTY, PLANT AND EQUIPMENT

 

Under IFRS, on disposal of a revalued asset, the gain and loss on disposal of the asset is determined with reference to the asset’s revalued amount less subsequent depreciation, and any related revaluation surplus is transferred from the revaluation reserve to retained earnings. Under US GAAP, the gain and loss on disposal of an asset is determined with reference to the asset’s historical cost carrying amount and included in current earnings.

 

A-30

(C) EFFECT OF CHANGE IN TAX RATE

 

Under IFRS, the effect of a change in tax rate that results in a change in the carrying amounts of deferred tax assets and liabilities is charged or credited directly to equity, to the extent that such deferred tax assets and liabilities are previously charged or credited to equity. Under US GAAP, the effect of a change in tax rate for all items of deferred tax assets and liabilities is recorded in the income statement.

 

Reconciliation of net profit and shareholders’ equity under IFRS to US GAAP

 

The effect on net profit of significant differences between IFRS and US GAAP for the six-month period ended 30 June 2004 and 2003 is as follows:

 

     Six-month periods ended 30 June
  
     2004
     2004
     2003
  
     US$
millions		    

RMB

millions

    

RMB

millions

  
     (Note)              

Net profit under IFRS

      1,777       14,708       13,058  

US GAAP adjustments:

                         

Depreciation on revalued property, plant and equipment

      (426 )     (3,530 )     (2,037 )

Disposal of revalued property, plant and equipment

      (3 )     (24 )     (23 )

Effect of change in tax rate on deferred tax assets arising from revaluation of land use rights

      (20 )     (166 )     —    

Effect of change in tax rate on deferred tax liabilities arising from revaluation of property, plant and equipment

      251       2,079       —    

Deferred tax effect of US GAAP adjustments

      113       934       679  

Net profit under US GAAP

      1,692       14,001       11,677  

Basic earnings per share under US GAAP

    US$ 0.02     RMB 0.18     RMB 0.15  

Basic earnings per ADS* under US GAAP

    US$ 2.20     RMB 18.25     RMB 15.44  
* Basic earnings per ADS is calculated on the basis that one ADS is equivalent to 100 H shares.

 

A-31

The effect on shareholders’ equity of significant differences between IFRS and US GAAP as at 30 June 2004 and 31 December 2003 is as follows:

 

    

30 June

2004

    

30 June

2004

    

31 December

2003

  
        
     US$
millions		     RMB
millions		     RMB
millions		  
     (Note)              

Shareholders’ equity under IFRS

    17,533     145,114     150,794  

US GAAP adjustments:

                   

Revaluation of property, plant and equipment, net of minority interests

    3,112     25,758     29,312  

Deferred tax effect of US GAAP adjustment

    (779 )   (6,452 )   (9,465 )

Shareholders’ equity under US GAAP

    19,866     164,420     170,641  

 

Note:

 

Solely for the convenience of the reader, the amounts as at and for the six-month period ended 30 June 2004 have been translated into United States dollars at the noon buying rate in New York City on 30 June 2004 for cable transfers in RMB as certified for custom purposes by the Federal Reserve Bank of New York of US$1.00=RMB8.2766. No representation is made that the RMB amounts could have been, or could be, converted into United States dollars at that rate or at any other certain rate on 30 June 2004, or at any other date.

 

A-32

MANAGEMENT DISCUSSION AND ANALYSIS

 

According to paragraph 40 of Appendix 16 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, save as disclosed herein, the Company confirms that the current company information in relation to those matters set out in paragraph 32 of Appendix 16 has not changed materially from the information disclosed in the Company’s 2003 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 2004.

 

PURCHASE, SALE OR REDEMPTION OF SECURITIES

 

During the period, neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company’s listed securities.

 

DIRECTORS’ AND SUPERVISORS’ INTERESTS AND SHORT POSITIONS IN SHARES, UNDERLYING SHARES AND DEBENTURES

 

As at 30 June 2004, none of the Directors or Supervisors had any interests or short positions in any shares, underlying shares of equity derivatives or debentures of the Company or its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (the “SFO”)) as recorded in the register required to be kept under Section 352 of the SFO or as otherwise notified to the Company and The Stock Exchange of Hong Kong Limited pursuant to the Model Code for Securities Transactions by Directors of Listed Companies.

 

As at 30 June 2004, the Company has not granted its Directors or Supervisors, or their respective spouses or children below the age of 18 any rights to subscribe for the shares or debentures of the Company or any of its associated corporations and none of them has ever exercised any such right to subscribe for the shares or debentures.

 

A - 33

INTERESTS AND SHORT POSITIONS OF SUBSTANTIAL SHAREHOLDERS AND OTHER PERSONS IN SHARES AND UNDERLYING SHARES

 

As at 30 June 2004, the interests or short positions of substantial shareholders who are entitled to exercise or control the exercise of 10% or more of the voting power at any of the Company’s general meetings and other persons who are required to disclose their interests pursuant to Part XV of the SFO (including those who are entitled to exercise or control the exercise of 5% or more of the voting power at any of the Company’s general meetings, but excluding the Directors and Supervisors) in the shares and underlying shares of equity derivatives of the Company as recorded in the register required to be kept under Section 336 of the SFO are as follows:

 

(1) (a) Interests in domestic shares and H shares of the Company

 

Name of Shareholder

   Number and type
of shares held
   % of the total issued
share capital of that
type of shares
     Capacity
  

China Telecommunications Corporation

   58,346,370,499
domestic shares		   87.01 %   Principal  

Guangdong Rising Assets Management Co., Ltd.

   5,614,082,653
domestic shares		   8.37 %   Principal  

J.P. Morgan Chase & Co.

   1,401,997,276
H shares		   10.10 %   Beneficial owner;
investment
manager;
custodian
(shares
available for
lending		  
 
 
 
 
 
)

Huawei Tech. Investment Co., Limited

   959,154,000
H shares		   6.91 %   Beneficial owner  

The Capital Group Companies, Inc.

   883,744,400
H shares		   6.37 %   Investment
manager		  
 

 

A - 34

  (b) Interests in underlying shares of the Company

 

In the register required to be kept under Section 336 of the SFO, no long positions of substantial shareholders or other persons who are required to disclose their interests pursuant to Part XV of the SFO were recorded to hold any interests in the underlying shares of equity derivatives of the Company.

 

  (2) Short positions in shares and underlying shares of the Company

 

In the register required to be kept under Section 336 of the SFO, China Telecommunications Corporation held short positions in 977,004,913 domestic shares which amounted to 1.46% of the total issued domestic shares. This short position is created as part of a reform plan approved by the State Council on the administration of rural telecommunications services, in which China Telecommunications Corporation agreed to transfer 977,004,913 shares of the Company to Fujian Electronic Information (Group) Co., Ltd. Such transfer will only be made after the satisfaction of certain conditions precedent. The transfer will not be carried out before 10 September 2005.

 

Save as stated above, as at 30 June 2004, in the register required to be kept under Section 336 of the SFO, no other persons were recorded to hold any interests or short positions in the shares or underlying shares of the equity derivatives of the Company.

 

AUDIT COMMITTEE

 

The audit committee has reviewed with management and the Company’s international auditors, KPMG, the accounting principles and practices adopted by the Group and discussed internal control and financial reporting matters including the review of this Interim Report.

 

COMPLIANCE WITH CODE OF BEST PRACTICE

 

None of the Directors is aware of any information that would reasonably indicate that the Company is not, or was not during the period, in compliance with the Code of Best Practice as set out in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

 

By Order of the Board

Zhou Deqiang

Chairman and CEO

Beijing,

    PRC

1 September 2004

 

A - 35

 

Exhibit 1.2

 

LOGO

 

China Telecom Corporation Limited

 

LOGO

 

(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 0728)

Announcement of Interim Results for the Six Months Ended 30 June 2004

 

HIGHLIGHTS

• Total operating revenue was RMB80,217 million, up by 8.3%

 

• EBITDA reached RMB43,991 million

 

• Profit attributable to shareholders was RMB14,708 million

 

• Total number of access lines in service reached 178 million, up by 10.9% from the end of 2003

 

• Broadband subscribers reached 10.89 million, up by 50.6% from the end of 2003

 

 

Chairman’s Statement

 

Dear Shareholders,

 

In the first half of 2004, driven by the sustained and rapid growth of the Chinese economy, the demand for telecommunications services continued to grow with a steady increase in the total volume of voice services, further expansion of Internet services and more opportunities for the development of value-added services. At the same time, competition within the telecommunications market further intensified. Voice services were the key focus of such competition as mobile substitution became more visible. While the increased market demands have provided us with new opportunities for development, the intensified competition among telecommunications operators has brought about new challenges to us.

 

Faced with this challenge, we adhered to our core value of “Innovation and Solid Execution”, focussed on improving our operational systems and enhancing corporate management, and consistently promoted our “market-oriented, customer-centred and return-driven” business model throughout the organisation. These measures improved our market responsiveness, product development, marketing capabilities and our ability to thrive in the market place, increasing our profitability and shareholders’ value. In the first half of 2004, our local wireline services subscriber base increased by 17.51 million, reaching 178 million at the end of June and our broadband subscriber base increased by 3.66 million, reaching 10.89 million at the end of June. Driven by the strength in our local voice services and broadband Internet services, we recorded a steady growth in operating revenue which reached RMB80,217 million, an increase of 8.3% over the same period in 2003. Our EBITDA was RMB43,991 million and our net profit was RMB14,708 million, of which RMB4,236 million was generated from amortisation of connection fees.

 

In the first half of this year, we successfully completed the acquisition of telecommunications businesses in ten provinces. To fund the acquisition, we raised net proceeds of approximately US$1.5 billion through a successful offering of new H shares. With the implementation of our management system, all levels of management of the newly acquired subsidiaries have been geared towards achieving their business and financial objectives. The growth rates of these companies increased and their operating and capital expenditures were effectively controlled, thus improving their profitability. In the first half of this year, our newly acquired telecommunications subsidiaries in the ten provinces generated revenue of RMB17,916 million from their operations, an increase of 10.0% from the same period last year, and realised net profit of RMB2,553 million, of which RMB818 million was generated from amortisation of connection fees. After the Acquisition, our basic earnings per share reached RMB0.19, representing an increase of 11.8% over the same period last year. We now enjoy better growth prospects.

 

B-1

In the first half of this year, we further improved the management of our distribution channels, implemented the revenue-and-service-accountability system and improved the efficiency of the distribution channels, whereby a client-focussed, full coverage distribution channel system was established which has helped to stabilise the usage from our existing customers and played an important role in driving revenue growth. At the same time, we made substantial adjustments to our marketing operation management model applied by head office, including strengthening the market strategy planning and unifying brand management, unifying customer service interface and reinforcing the sales planning function. In addition, a product development centre was set up to strengthen our business innovation capability.

 

Since our initial public offering, our financial management has been improving continuously. The key importance of financial management in various aspects of the business continued to be emphasised, overall budget control has been more stringently implemented and cost control has been further improved. With more centralised network maintenance and higher efficiency, our network operations and support expenses have decreased. Following our philosophy of “running the enterprise in an industrious and economical way”, we have focussed effort in cutting our administrative expenses. As a result, our management and administrative expenditure continued to decrease. However, in order to ensure the continuing growth of our core business in a competitive environment, our sales expenses increased. Capital expenditure is expected to be more proportionate between the first half and second half of this year. The first half of this year recorded a total capital expenditure of RMB25,018 million, an increase of 12.4% from the same period last year.

 

In the first half of this year, we continued to focus our effort on centralising our network resources management and network maintenance. A centralised control and maintenance system covering various telecommunications networks was preliminarily established in all our local branch companies. We have further centralised the management of local branch companies’ resources. A transmission resources management system has been established and a conduit resources management system is taking shape. These measures will help us to realise dynamic deployment and distribution of our network resources, effectively increase the efficiency of our network operations and maintenance, and improve our market responsiveness.

 

In the first half of this year, Business Process Re-engineering (“BPR”) has been extensively implemented throughout the Company. 212 out of our 228 local branch companies have adopted or are adopting BPR. With BPR as our platform to implement various new management measures, we were able to expand our process management over a wider area, implement process management reform at all levels of the business. In particular, we have made substantial progress in our process-based and integrated management of distribution channels. The implementation of BPR has accelerated the establishment of a market-oriented, process-based management system, and further enhanced our local branch companies’ overall marketing abilities, market responsiveness, provisioning capabilities and network management. This has in turn improved our operating efficiency and profitability.

 

Further progress has been made with the development of CTG-MBOSS, an information technology platform for our businesses. The management support system (“MSS”), one of the three sub-systems of CTG-MBOSS, has been successfully launched on a trial basis at Guangdong Telecom and Shanghai Telecom. Such system will be further implemented in these two subsidiaries and extended to subsidiaries in other provinces in the second half of this year. The implementation of MSS will enable us, through information sharing, to improve our operating efficiency and financial management and standardise the management of our internal control, thus effectively minimising business risks.

 

Business Review

 

In the first half of this year, our major business lines continued to grow. The subscriber base for our local telephone services expanded rapidly and the volume of our local voice services also increased substantially. The wireless local access service made an important contribution to the growth of our business. Broadband services continued to develop at high growth rates and revenue generated therefrom accounted for a higher proportion of our total operating revenue. The domestic long distance services recorded positive growth both in terms of volume and revenue.

 

B-2

Local Telephone Services

 

As our core business, local telephone services recorded RMB40,527 million in revenue, an increase of 7.7% from the same period last year. Local telephone revenue accounted for 50.5% of our total operating revenue, which was similar to that of last year.

 

As at the end of June, the local telephone subscriber base increased by 17.51 million and by 10.9% from the end of last year, reaching 178 million. The growth in wireless local access subscribers and public telephone users was particularly strong with the total number of subscribers increasing by 10.91 million and 1.43 million, respectively, from the end of last year, reaching 36.47 million and 11.03 million, respectively. Their semi-annual growth rates were 42.7% and 14.8%, respectively.

 

By leveraging the strengths in our distribution channels and further promoting our packaged products in the first half of this year, we generated local telephone usage fees of RMB24,072 million, an increase of 7.1% from the same period last year. At the same time, the total usage of local voice service reached 210.7 billion pulses, an increase of 13.6% from the same period last year.

 

The steady and rapid increase in the number of wireless local access subscribers has effectively mitigated the pressure from mobile substitution. The packaging of wireless local access with residential and business wireline services has created synergies and increased the value of wireline services. We have reduced the investment cost of the wireless local access service per subscriber by approximately 10% and have increased the utilisation of the network by approximately 3%, thus maintaining a desirable level of investment return on such business.

 

Internet Services

 

In the first half of this year, the revenue generated from Internet services reached RMB6,602 million, an increase of 51.6% from the same period last year, and accounted for 8.2% of our total operating revenue, which increased by 2.4 percentage points over the same period last year. This line of revenue has contributed substantially to our overall growth in revenue. As at the end of June, the subscriber base for the broadband access service reached 10.89 million, an increase of 3.66 million from the end of last year or a semi-annual growth rate of 50.6%, hence strengthening our leading position in the broadband market.

 

We have focussed our attention on capitalising the strength of our full service portfolio. We combined broadband access with other wireline services and broadband application services and launched flexible tariff packages to create and satisfy different customer demands. The marketing strength of our broadband access products has been improved as we extended our distribution channels to full coverage. At the same time, based on “ChinaVnet” platform, we strengthened the integration of broadband application resources to encourage third party providers to join efforts in expanding the spectrum of the broadband content and applications market. As at the end of June 2004, the number of registered subscribers for “ChinaVnet” reached 4.66 million and over 200 broadband content providers nationwide joined “ChinaVnet”.

 

While the number of broadband subscribers was increasing rapidly, their ARPU value was kept at a relatively high level. Benefiting from economies of scale and centralised procurement, the investment cost per subscriber for broadband ADSL was reduced by approximately 5%, thus maintaining a relatively high investment return rate.

 

Long Distance Services

 

In the first half of this year, our revenue generated from domestic long distance services was RMB13,145 million, an increase of 3.6% from the same period last year. The total transmission volume for our domestic long distance services reached 39.4 billion minutes, an increase of 21.4% from the same period last year. We continued to maintain our leading position in this area.

 

While benefiting from increasing demands in the domestic long distance services market which was stimulated by the rapid growth of the Chinese economy, we adopted a flexible and efficient marketing strategy in the face of market competition. We maximised revenue from the domestic long distance services by adopting appropriate pricing strategies. Sales efforts were tailored to customers based on

 

B-3

our detailed customer segmentation. For instance, we increased the density of public telephone outlets and strengthened our control over and further motivated the agency channels. These measures enabled us to maintain our strong position in the rapidly growing long distance services market for mobile population.

 

Revenue from international, Hong Kong, Macau and Taiwan long distance services decreased by 2.3% from the same period last year to RMB1,906 million in the first half of this year. The volume of international long distance usage was 812 million minutes, approximately the same as that of last year.

 

Managed Data and Leased Line Services

 

In the first half of this year, revenue generated from our managed data services was RMB1,524 million, a reduction of 6.4% from the same period last year, which accounted for 1.9% of our total operating revenue. Benefiting from the accelerating progress in the use of information technology by the general public, the leasing of standard ports of DDN, FR and ATM increased by 3.3%, 35.6% and 1.3%, respectively, from the end of 2003. On the other hand, under the pressure of competition within the market, the unit prices for our managed data services decreased.

 

We generated RMB2,112 million from our leased line services in the first half of this year, a reduction of 19.0% from the same period last year, which accounted for 2.6% of our total operating revenue. As at the end of June 2004, the total number of 2M digital lines leased was 146,200, a reduction of 10.4% from the end of 2003. This decrease was mainly due to the reduction in demand for leased lines from other domestic telecommunications operators.

 

Interconnection Services

 

In the first half of this year, revenue from interconnection services was RMB5,013 million, an increase of 22.4% from the same period last year. The net interconnection revenue was RMB3,240 million, an increase of 25.0% from the same period last year. Driven by the continuous expansion of our subscriber base and the overall growth in the domestic telecommunications market, the volume of inbound local calls reached 46.2 billion minutes in the first half of this year, an increase of 32.4% from the same period last year. The volume of inbound long distance calls also increased compared to the same period last year.

 

Value-added Services

 

We continued our efforts to develop wireline value-added services in the first half of this year and substantially increased the revenue generated from them. As at the end of June 2004, our subscribers for the caller ID service reached 98.19 million, representing a penetration rate of 55.0%, an increase of nearly 4 percentage points from the end of 2003. The semi-annual usage volume for our telephone information service reached 1,038 million minutes, an increase of 35.0% from the same period last year. Since the launch of the SMS over wireless local access service in the first half of this year, the volume of its usage has increased substantially and the service has demonstrated great potential for further development. As an important component of wireline services, value-added services continue to be one of our key focuses and an important source of our future growth.

 

Outlook for the Second Half of the Year

 

In the second half of 2004, sustained, rapid, healthy and coordinated growth of the Chinese economy is expected. Accelerating adoption of information technology in the Chinese economy will continue to drive greater demands for telecommunications services. The increasing competition in the telecommunications market will become a significant factor in our operations in the second half of 2004._We plan to fully explore the development potential of wireline services as our pillar business, conduct comprehensive network optimisation for the wireless local access network to improve our network quality and capability of developing new businesses. Furthermore, we will consistently develop our broadband access service, expand the market for broadband applications, strengthen the development of value-added services and continuously explore new areas for our services.

 

We will continue to strengthen the capacities of, and improve the management of, our distribution channels. We will also continue to harmonise the relationship between marketing, products development, distribution and customers, effectively improve marketing design and planning, and improve our brand management to enhance our brand value.

 

B-4

We intend to continue transforming our business towards a value-driven growth model. We will also continue to improve overall budget control and budget implementation accountability, optimise cost structure, enhance management of capital expenditure and achieve a more even distribution of capital and operating expenditure. Moreover, we will further implement BPR to establish a process-based management system with a long standing effect. We will strengthen our internal control system to achieve the international best practice, so as to mitigate business risks. We will also speed up the establishment of CTG-MBOSS to provide effective IT support for our marketing and sales, operational management and internal control.

 

With a view to improving our human resources capital, we will continue with our human resources reforms and implement a merit-based appointment system. We will expand our talented team consisting of professional business managers, technical specialists, skilful marketing and maintenance personnel and professional administrative personnel.

 

We will pay close attention to new developments in the regulation of the telecommunications industry. Based on our in-depth understanding of regulatory policies, we will continue to comply with all regulatory requirements and foster a favourable business environment. Based on a win-win philosophy and through the creation of a favourable competitive environment, we will promote the healthy development of the industry.

 

In summary, we will adhere to our goal of becoming “a world-class telecommunications operator”. Focussing on rapid development, continued business reform, effective management and human-resources-based strategy, we will strive to achieve the sustainable and sound development of the business and maximise shareholders’ value.

 

Zhou Deqiang

Chairman and CEO

 

Beijing, PRC

1 September 2004

 

B-5

GROUP RESULTS

 

China Telecom Corporation Limited (the “Company”) is pleased to announce the unaudited consolidated results of the Company and its subsidiaries (the “Group”) for the six months ended 30 June 2004.

 

CONSOLIDATED BALANCE SHEET (UNAUDITED)

at 30 June 2004

(Amounts in millions)

 

         

30 June

2004

    

31 December

2003

  
           
     Note    RMB     RMB  

ASSETS

                  

Non-current assets

                  

Property, plant and equipment, net

         303,725     309,896  

Construction in progress

         39,522     31,617  

Lease prepayments

         4,555     4,485  

Interests in associates

         500     513  

Investments

         237     206  

Deferred tax assets

    9    10,662     10,523  

Other assets

         13,323     13,609  
         
 

Total non-current assets

         372,524     370,849  

Current assets

                  

Inventories

         3,227     3,253  

Accounts receivable, net

    4    15,186     12,951  

Prepayments and other current assets

         3,715     3,695  

Time deposits with maturity over three months

         350     473  

Cash and cash equivalents

    5    16,710     12,721  
         
 

Total current assets

         39,188     33,093  
         
 

Total assets

         411,712     403,942  
         
 

LIABILITIES AND SHAREHOLDERS’ EQUITY

                  

Current liabilities

                  

Short-term debt

    6    65,511     56,243  

Current portion of long-term debt

    7    14,970     13,957  

Accounts payable

    8    34,591     35,629  

Accrued expenses and other payables

         30,300     26,004  

Income tax payable

         3,664     3,395  

Current portion of finance lease obligations

         117     50  

Current portion of deferred revenues

         12,656     13,857  
         
 

Total current liabilities

         161,809     149,135  
         
 

Net current liabilities

         (122,621 )   (116,042 )
         
 

Total assets less current liabilities

         249,903     254,807  

Non-current liabilities

                  

Long-term debt

    7    72,491     68,632  

Finance lease obligations

         155     43  

Deferred revenues

         29,219     32,744  

Deferred tax liabilities

    9    1,575     1,325  
         
 

Total non-current liabilities

         103,440     102,744  
         
 

Total liabilities

         265,249     251,879  

Minority interests

         1,349     1,269  

Shareholders’ equity

                  

Share capital

    10    80,932     75,614  

Reserves

         64,182     75,180  
         
 

Total shareholders’ equity

         145,114     150,794  
         
 

Total liabilities and shareholders’ equity

         411,712     403,942  
         
 

 

B-6

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

for the six-month period ended 30 June 2004

(Amounts in millions, except per share data)

 

          Six-month periods
ended 30 June
  
     Note
    2004
     2003
  
          RMB     RMB  

Operating revenues

    11    80,217     74,068  

Operating expenses

                  

Depreciation and amortisation

         (23,255 )   (22,666 )

Network operations and support

         (20,325 )   (20,767 )

Selling, general and administrative

         (14,105 )   (10,866 )

Other operating expenses

         (1,796 )   (1,541 )
         
 

Total operating expenses

         (59,481 )   (55,840 )
         
 

Operating profit

         20,736     18,228  

Net finance costs

    12    (2,341 )   (1,728 )

Investment loss

         —       (85 )

Share of profit from associates

         6     —    
         
 

Profit before taxation and minority interests

    13    18,401     16,415  

Taxation

    14    (3,681 )   (3,333 )
         
 

Profit before minority interests

         14,720     13,082  

Minority interests

         (12 )   (24 )
         
 

Profit attributable to shareholders

         14,708     13,058  
         
 

Basic earnings per share

    16    0.19     0.17  
         
 

Weighted average number of shares

         76,725     75,614  
         
 

 

B-7

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)

for the six-month period ended 30 June 2004

(Amounts in millions)

 

     Note
    Share
capital
    Capital
reserve
     Share
premium
    Revaluation
reserve
     Surplus
reserves
    Statutory
common
welfare
fund
    Other
reserves
      Retained
earnings
      Total
shareholders’
equity
  
          RMB    RMB     RMB    RMB     RMB    RMB    RMB      RMB      RMB  

Balance as at 1 January 2003, as previously reported

         75,614    20,955     3,362    4,904     8,121    1,624    31,064      7,204      152,848  

Adjusted for the Second Acquisition

    1    —      —       —      —       —      —      34,177      —        34,177  
         
  
 
  
 
  
  
  
  

Balance as at 1 January 2003, as adjusted

         75,614    20,955     3,362    4,904     8,121    1,624    65,241      7,204      187,025  

Net profit for the six-month period ended 30 June 2003

         —      —       —      —       —      —      —        13,058      13,058  

Contributions from China Telecom

         —      —       —      —       —      —      —        215      215  

Distributions to China Telecom

         —      —       —      —       —      —      —        (214 )    (214 )

Transfer from retained earnings to other reserves

         —      —       —      —       —      —      3,823      (3,823 )    —    

Dividends

    15    —      —       —      —       —      —      —        (673 )    (673 )

Revaluation surplus realised

         —      —       —      (4 )   —      —      —        4      —    

Deferred tax on land use rights realised

         —      —       —      —       —      —      (76 )    76      —    
         
  
 
  
 
  
  
  
  

Balance as at 30 June 2003

         75,614    20,955     3,362    4,900     8,121    1,624    68,988      15,847      199,411  
         
  
 
  
 
  
  
  
  

Net profit for the six-month period ended 31 December 2003

         —      —       —      —       —      —      —        824      824  

Contributions from China Telecom

         —      —       —      —       —      —      —        4,094      4,094  

Distributions to China Telecom

         —      —       —      —       —      —      —        (1,020 )    (1,020 )

Assets distributed to China Telecom in connection with the Second Acquisition

    1    —      —       —      —       —      —      —        (10,762 )    (10,762 )

Recognition of deferred tax assets

         —      —       —      —       —      —      2,209      —        2,209  

Transfer from retained earnings to other reserves

         —      —       —      —       —      —      (15,635 )    15,635      —    

Consideration for the acquisition of the First Acquired Group

    1    —      —       —      —       —      —      (45,649 )    —        (45,649 )

Appropriations

         —      —       —      —       7,340    1,748    —        (9,088 )    —    

Transfer from other reserves to capital reserve

         —      (14,388 )   —      —       —      —      14,388      —        —    

Revaluation surplus

         —      —       —      1,537     —      —      —        —        1,537  

Eliminations of deferred tax liabilities

         —      —       —      —       —      —      —        150      150  

Revaluation surplus realised

         —      —       —      (13 )   —      —      —        13      —    

Deferred tax on land use rights realised

         —      —       —      —       —      —      (55 )    55      —    
         
  
 
  
 
  
  
  
  

Balance as at 31 December 2003

         75,614    6,567     3,362    6,424     15,461    3,372    24,246      15,748      150,794  
         
  
 
  
 
  
  
  
      

 

B-8

     Note
    Share
capital
    Capital
reserve
     Share
premium
    Revaluation
reserve
     Surplus
reserves
    Statutory
common
welfare
fund
    Other
reserves
      Retained
earnings
      Total
shareholders’
equity
  
          RMB    RMB     RMB    RMB     RMB    RMB    RMB      RMB      RMB  

Issue of shares, net of issuing expenses of RMB294 million

         5,318    —       7,384    —       —      —      —        —        12,702  

Net profit for the six-month period ended 30 June 2004

         —      —       —      —       —      —      —        14,708      14,708  

Contributions from China Telecom

         —      —       —      —       —      —      —        100      100  

Transfer from retained earnings to other reserves

         —      —       —      —       —      —      2,653      (2,653 )    —    

Consideration for the acquisition of the Second Acquired Group

    1    —      —       —      —       —      —      (27,800 )    —        (27,800 )

Transfer from other reserves to capital reserve

         —      (9,371 )   —      —       —      —      9,371      —        —    

Dividends

    15    —      —       —      —       —      —      —        (5,224 )    (5,224 )

Revaluation surplus realised

         —      —       —      (8 )   —      —      —        8      —    

Effect of change in tax rate

    9    —      —       —      —       —      —      (166 )    —        (166 )

Deferred tax on land use rights realised

         —      —       —      —       —      —      (74 )    74      —    
         
  
 
  
 
  
  
  
  

Balance as at 30 June 2004

         80,932    (2,804 )   10,746    6,416     15,461    3,372    8,230      22,761      145,114  
         
  
 
  
 
  
  
  
  

 

B-9

CONSOLIDATED STATEMENT OF CASH FLOW (UNAUDITED)

for the six-month period ended 30 June 2004

(Amounts in millions)

 

           Six-month periods
ended 30 June
  
           2004
     2003
  
     Note     RMB     RMB  

Net cash from operating activities

    (a )   35,517     29,558  
          
 

Cash flows from investing activities

                   

Capital expenditure

          (26,023 )   (24,161 )

Purchase of investments

          (42 )   (73 )

Lease prepayments

          (125 )   (28 )

Proceeds from disposal of property, plant and equipment

          136     49  

Increase in time deposits with maturity over three months

          (45 )   (294 )

Maturity of time deposits with maturity over three months

          168     1,262  
          
 

Net cash used in investing activities

          (25,931 )   (23,245 )
          
 

Cash flows from financing activities

                   

Capital element of finance lease payments

          (30 )   (35 )

Proceeds from issue of shares, net of issuing expenses

          12,702     —    

Proceeds from bank and other loans

          41,129     48,119  

Repayments of bank and other loans

          (42,083 )   (52,424 )

Payment of dividends

          (4,833 )   —    

Cash contributions from minority interests

          68     18  

Cash payment for the acquisition of the Second Acquired Group

          (12,650 )   —    

Cash contributions from China Telecom

          100     292  

Cash distributions to China Telecom

          —       (224 )
          
 

Net cash used in financing activities

          (5,597 )   (4,254 )
          
 

Net increase in cash and cash equivalents

          3,989     2,059  

Cash and cash equivalents at 1 January

          12,721     22,743  
          
 

Cash and cash equivalents at 30 June

          16,710     24,802  
          
 

 

(a) Reconciliation of profit before taxation and minority interests to net cash from operating activities

 

     Six-month periods
ended 30 June
  
     2004
     2003
  
     RMB     RMB  

Profit before taxation and minority interests

    18,401     16,415  

Adjustments for:

             

Depreciation and amortisation

    23,255     22,666  

Provision for doubtful accounts

    679     733  

Investment loss

    —       85  

Share of profit from associates

    (6 )   —    

Interest income

    (109 )   (151 )

Interest expense

    2,522     1,820  

Unrealised foreign exchange (gains)/losses

    (56 )   41  

Loss on retirement and disposal of property, plant and equipment

    65     967  

Increase in accounts receivable

    (2,914 )   (3,702 )

Decrease/(increase) in inventories

    26     (271 )

Decrease/(increase) in prepayments and other current assets

    16     (108 )

Decrease/(increase) in other non-current assets

    169     (2 )

Increase/(decrease) in accounts payable

    878     (456 )

Increase in accrued expenses and other payables

    3,770     3,311  

Decrease in deferred revenues

    (4,726 )   (4,862 )
    
 

Cash generated from operations

    41,970     36,486  

Interest received

    109     151  

Interest paid

    (3,125 )   (2,572 )

Investment income received

    30     13  

Income tax paid

    (3,467 )   (4,520 )
    
 

Net cash from operating activities

    35,517     29,558  
    
 

 

B-10

Notes to the Unaudited Interim Financial Statements

for the six-month period ended 30 June 2004

 

1. PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PRESENTATION

 

Principal activities

 

China Telecom Corporation Limited (the “Company”) and its subsidiaries (hereinafter, collectively referred to as the “Group”) are engaged in the provision of wireline telecommunications and related services in Shanghai Municipality, Guangdong Province, Jiangsu Province, Zhejiang Province, Anhui Province, Fujian Province, Jiangxi Province, Guangxi Zhuang Autonomous Region, Chongqing Municipality, Sichuan Province, Hubei Province, Hunan Province, Hainan Province, Guizhou Province, Yunnan Province, Shaanxi Province, Gansu Province, Qinghai Province, Ningxia Hui Autonomous Region and Xinjiang Uygur Autonomous Region of the People’s Republic of China (the “PRC”). The Group offers a comprehensive range of wireline telecommunications services to residential and business customers, including local, domestic long distance (“DLD”) and international long distance (“ILD”) telephone services, Internet and managed data, leased line, and other related services.

 

The operations of the Group are subject to the supervision and regulation by the PRC government. The Ministry of Information Industry, pursuant to the authority delegated to it by the PRC’s State Council, is responsible for formulating the telecommunications industry policies and regulations, including the regulation and setting of tariff levels for basic telecommunications services, such as local and long distance telephone services, managed data services, leased line and interconnection arrangements.

 

Organisation

 

The Company was incorporated in the PRC on 10 September 2002 as part of the reorganisation (the “Restructuring”) of China Telecommunications Corporation (“China Telecom” and together with its subsidiaries other than the Company referred to as “China Telecom Group”), a state-owned enterprise which is under the supervision and regulation of the Ministry of Information Industry. In November 2001, pursuant to a further industry restructuring plan approved by the State Council, China Telecom’s wireline telecommunications networks and related operations in 10 northern provinces, municipalities and autonomous regions of the PRC were transferred to China Netcom Group. China Telecom retained the wireline telecommunications networks and related operations of 21 provinces, municipalities and autonomous regions of the PRC, including those of the Company’s subsidiaries. In accordance with this industry restructuring plan, China Telecom and China Netcom Group own 70% and 30%, respectively, of the nationwide inter-provincial optic fibres.

 

Pursuant to the resolution passed by the Company’s independent shareholders at an Extraordinary General Meeting held on 15 December 2003, the Company acquired the entire equity interests in Anhui Telecom Company Limited, Fujian Telecom Company Limited, Jiangxi Telecom Company Limited, Guangxi Telecom Company Limited, Chongqing Telecom Company Limited and Sichuan Telecom Company Limited (collectively the “First Acquired Group”) and certain network management and research and development facilities from China Telecom for a total purchase price of RMB46,000 million on 31 December 2003 (hereinafter, referred to as the “First Acquisition”). The purchase price consisted of a cash payment of RMB11,000 million and a long-term payable of RMB35,000 million. In connection with the First Acquisition and effective 31 December 2002, China Telecom transferred the wireline telecommunications business and related operations in Anhui Province, Fujian Province, Jiangxi Province, Guangxi Zhuang Autonomous Region, Chongqing Municipality and Sichuan Province together with the related assets and liabilities in consideration for the entire equity interests in each of the entities of the First Acquired Group. Certain assets historically associated with these operations were retained by China Telecom, and as at 31 December 2002, these assets amounted to RMB5,189 million and consisted primarily of investments in non-telecommunications industries and properties.

 

Pursuant to the resolution passed by the Company’s independent shareholders at an Extraordinary General Meeting held on 9 June 2004, the Company acquired the entire equity interests in Hubei

 

B-11

Telecom Company Limited, Hunan Telecom Company Limited, Hainan Telecom Company Limited, Guizhou Telecom Company Limited, Yunnan Telecom Company Limited, Shaanxi Telecom Company Limited, Gansu Telecom Company Limited, Qinghai Telecom Company Limited, Ningxia Telecom Company Limited and Xinjiang Telecom Company Limited (collectively the “Second Acquired Group”) from China Telecom for a total purchase price of RMB27,800 million on 30 June 2004 (hereinafter, referred to as the “Second Acquisition”). The purchase price consisted of a cash payment of RMB8,340 million and a long-term payable of RMB19,460 million. On 30 June 2004, the Company repaid RMB4,310 million of this payable amount using the net proceeds from issue of new H shares in May 2004 (see Note 10). In connection with the Second Acquisition and effective 31 December 2003, China Telecom transferred the wireline telecommunications business and related operations in Hubei Province, Hunan Province, Hainan Province, Guizhou Province, Yunnan Province, Shaanxi Province, Gansu Province, Qinghai Province, Ningxia Hui Autonomous Region and Xinjiang Uygur Autonomous Region together with the related assets and liabilities in consideration for the entire equity interests in each of the entities of the Second Acquired Group. Certain assets historically associated with these operations were retained by China Telecom, and as at 31 December 2003, these assets amounted to RMB10,762 million and consisted primarily of investments in non-telecommunications industries and properties.

 

Basis of presentation

 

As the First Acquired Group and the Second Acquired Group (“the Acquired Groups”) were under the common control of China Telecom, the acquisitions have been reflected in the accompanying consolidated interim financial statements as a combination of entities under common control in a manner similar to a pooling-of-interests. Accordingly, the assets and liabilities of the Acquired Groups have been accounted for at historical amounts and the consolidated financial statements of the Company prior to the acquisitions have been restated to include the results of operations and assets and liabilities of the Acquired Groups on a combined basis. The assets retained by China Telecom in respect of the First Acquisition and the Second Acquisition have been reflected as distributions to China Telecom in the consolidated statement of shareholders’ equity as at 31 December 2002 and 31 December 2003 respectively. The considerations paid by the Company for the Acquired Groups have been accounted for as equity transactions in the consolidated statement of shareholders’ equity.

 

The results of operations previously reported by the Group for the six-month period ended 30 June 2003 have been restated to include the results of the First Acquired Group and the Second Acquired Group as set out below:

 

     The Group
(as previously
reported)
    The First
Acquired Group
    The Second
Acquired Group
    The Group
(combined)
     RMB millions    RMB millions    RMB millions    RMB millions

Result of operations:

                    

Operating revenues

    39,536    18,247    16,285    74,068

Operating profit

    12,198    4,863    1,167    18,228

Net profit

    9,260    3,371    427    13,058

Basic earnings per share (RMB)

    0.12    0.04    0.01    0.17

 

B-12

The financial condition as at 31 December 2003 and shareholders’ equity as at 31 December 2003 and 1 January 2003 previously reported by the Group have been restated to include the assets and liabilities of the Second Acquired Group as set out below:

 

     The Group
(as previously
reported)
    The Second Acquired
Group
    The Group
(combined)
     RMB millions    RMB millions    RMB millions

Financial condition:

               

Current assets

    25,504    7,589    33,093

Total assets

    305,605    98,337    403,942

Current liabilities

    96,666    52,469    149,135

Total liabilities

    173,064    78,815    251,879

Shareholders’ equity as at 31 December 2003

    131,272    19,522    150,794

Shareholders’ equity as at 1 January 2003

    152,848    34,177    187,025

 

For the periods presented, all significant balances and transactions between the Group and the Acquired Groups have been eliminated.

 

2. BASIS OF PREPARATION

 

These interim financial statements have been prepared in accordance with International Accounting Standard 34 “Interim Financial Reporting” promulgated by the International Accounting Standards Board and the disclosure requirements of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. These interim financial statements reflect the unaudited financial position of the Group as at 30 June 2004 and the unaudited results of operations and cash flows of the Group for the six-month period then ended, which are not necessarily indicative of the results of operations and cash flows expected for the year ending 31 December 2004.

 

These interim financial statements have been authorised for issue by the Board of Directors on 1 September 2004. These interim financial statements are unaudited, but have been reviewed by the Audit Committee of the Company. These interim financial statements have also been reviewed by the Company’s international auditors, KPMG, in accordance with Statement of Auditing Standards 700 “Engagements to review interim financial reports” issued by the Hong Kong Society of Accountants.

 

The accounting policies adopted in the 2003 annual financial statements have been consistently applied by the Group in preparing these interim financial statements. The consolidated interim financial statements presented herein should be read in conjunction with the consolidated financial statements and notes thereto included in the 2003 annual report of the Company.

 

3. SEGMENTAL REPORTING

 

A business segment is a distinguishable component of the Group that is engaged in providing products or services and is subject to risks and rewards that are different from those of other segments. For the periods presented, the Group has one operating segment which is the provision of wireline telecommunications services. All the Group’s operating activities are carried out in the PRC.

 

B-13

4. ACCOUNTS RECEIVABLE, NET

 

Accounts receivable, net, are analysed as follows:

 

    

30 June

2004

     31 December
2003
  
     RMB millions     RMB millions  

Accounts receivable

    17,369     14,769  

Less: Allowance for doubtful accounts

    (2,183 )   (1,818 )
    
 
     15,186     12,951  
    
 

 

Amounts arising from the provision of wireline telecommunications services to residential and business customers are due within 30 days from the date of billing. Customers who have accounts overdue by more than 90 days will have their services disconnected.

 

Ageing analysis of accounts receivable from telephone and Internet subscribers is as follows:

 

    

30 June

2004

     31 December
2003
  
     RMB millions     RMB millions  

Current, within 1 month

    11,051     9,650  

1 to 3 months

    1,684     1,425  

4 to 12 months

    1,320     1,169  

More than 12 months

    826     611  
    
 
     14,881     12,855  

Less: Allowance for doubtful accounts

    (2,146 )   (1,780 )
    
 
     12,735     11,075  
    
 

 

Ageing analysis of accounts receivable from other telecommunications operators and customers is as follows:

 

    

30 June

2004

     31 December
2003
  
     RMB millions     RMB millions  

Current, within 1 month

    1,048     1,147  

1 to 3 months

    695     355  

4 to 12 months

    537     285  

More than 12 months

    208     127  
    
 
     2,488     1,914  

Less: Allowance for doubtful accounts

    (37 )   (38 )
    
 
     2,451     1,876  
    
 

 

B-14

5. CASH AND CASH EQUIVALENTS

 

    

30 June

2004

    31 December
2003
     RMB millions    RMB millions

Cash at bank and in hand

    12,464    12,451

Time deposits with maturity within three months

    4,246    270
    
  
     16,710    12,721
    
  

 

6. SHORT-TERM DEBT

 

Short-term debt is analysed as follows:

 

          

30 June

2004

    31 December
2003
     Note     RMB millions    RMB millions

Bank loans

          56,042    56,243

Loans from China Telecom

    (i )   9,469    —  
          
  

Total short-term debt

          65,511    56,243
          
  

Note:

 

  (i) The loans from China Telecom bear interest at fixed rates ranging from 2% to 3.45% per annum, are unsecured and are repayable within 1 year.

 

7. LONG-TERM DEBT

 

Long-term debt is analysed as follows:

 

           30 June 2004
     31 December
2003
  
     Note     RMB millions     RMB millions  

Bank loans

    (i )   37,300     47,553  

Other loans

          11     36  

Amount due to China Telecom in connection with the First Acquisition

    (ii )   35,000     35,000  

Amount due to China Telecom in connection with the Second Acquisition

    (iii )   15,150     —    
          
 

Total long-term debt

          87,461     82,589  

Less: current portion

          (14,970 )   (13,957 )
          
 

Non-current portion

          72,491     68,632  
          
 

Note:

 

  (i) As at 30 June 2004, bank loans of RMB6 million (2003: RMB22 million) were secured by certain of the Group’s property, plant and equipment. The net book value of the property, plant and equipment pledged as security amounted to RMB1 million as at 30 June 2004 (2003: RMB27 million).

 

  (ii) This represents the deferred consideration payable to China Telecom in respect of the First Acquisition (Note 1). The amount is unsecured, and for the first five years after the date of the First Acquisition, the Company pays interest on the outstanding balance at the rate of

 

B-15

5.184% per annum. Thereafter the interest rate is adjusted based on the prevailing market interest rate. This amount is repayable on 31 December 2013 and the Company may, from time to time, repay all or part of the amount at any time until 31 December 2013 without penalty.

 

  (iii) This represents the remaining balance of the deferred consideration payable to China Telecom in respect of the Second Acquisition (Note 1). The amount is unsecured, and for the first five years after the date of the Second Acquisition, the Company pays interest on the outstanding balance at the rate of 5.184% per annum. Thereafter the interest rate is adjusted based on the prevailing market interest rate. This amount is repayable on 30 June 2014 and the Company may, from time to time, repay all or part of the amount at any time until 30 June 2014 without penalty.

 

8. ACCOUNTS PAYABLE

 

Accounts payable are analysed as follows:

 

    

30 June

2004

    31 December
2003
     RMB millions    RMB millions

Third parties

    26,923    28,367

China Telecom Group

    7,668    7,262
    
  
     34,591    35,629
    
  

 

Amounts due to China Telecom Group are repayable in accordance with normal commercial terms.

 

Ageing analysis of accounts payable is as follows:

 

    

30 June

2004

    31 December
2003
     RMB millions    RMB millions

Due within 1 month or on demand

    4,560    6,658

Due after 1 month but within 3 months

    7,688    5,661

Due after 3 months but within 6 months

    7,698    8,099

Due after 6 months

    14,645    15,211
    
  
     34,591    35,629
    
  

 

B-16

9. DEFERRED TAX ASSETS AND LIABILITIES

 

Deferred tax assets and deferred tax liabilities are attributable to the items set out below:

 

     Assets
    Liabilities
     Net balance
  
     30 June
2004
    31 December
2003
    30 June
2004
     31 December
2003
     30 June
2004
     31 December
2003
  
     RMB
millions		    RMB
millions		    RMB
millions		     RMB
millions		     RMB
millions		    

RMB

millions

  

Current

                                   

Provisions, primarily for receivables

    326    198    —       —       326     198  

Non-current

                                   

Property, plant and equipment

    74    67    (734 )   (579 )   (660 )   (512 )

Deferred revenues and installation costs

    2,032    1,788    (841 )   (746 )   1,191     1,042  

Land use rights

    8,230    8,470    —       —       8,230     8,470  
    
  
  
 
 
 

Deferred tax assets/(liabilities)

    10,662    10,523    (1,575 )   (1,325 )   9,087     9,198  
    
  
  
 
 
 

 

Movements in temporary differences are as follows:

 

     Note
     Balance at
1 January
2004
     Recognised
in statement
of income
    

Recognised in

shareholders’ equity

     Balance at
30 June
2004
  
           RMB
millions		     RMB
millions		     RMB millions     RMB
millions		  

Current

                               

Provisions, primarily for receivables

          198     128     —       326  

Non-current

                               

Property, plant and equipment

          (512 )   (148 )   —       (660 )

Deferred revenues and installation costs

          1,042     149     —       1,191  

Land use rights

    (i )   8,470     (74 )   (166 )   8,230  
          
 
 
 

Net deferred tax assets

          9,198     55     (166 )   9,087  
          
 
 
 
                 (Note 14 )            

 

Note:

 

  (i) In connection with the Restructuring, the First Acquisition and the Second Acquisition, the land use rights of the Group were revalued as required by the relevant PRC rules and regulations. The tax bases of the land use rights have been adjusted to conform to such revalued amounts. The land use rights were not revalued for financial reporting purposes and accordingly, deferred tax assets were created with corresponding increases in shareholders’ equity.

 

In the second quarter of 2004, certain subsidiaries with operations in the western region of the PRC obtained approval from tax authority to reduce the income tax rate from 33% to 15% for the period from 1 January 2004 to 31 December 2010. Accordingly, the effect of the change in tax rate on the amount of the deferred tax asset expected to be realised during 2004 to 2010 amounting to RMB166 million was charged to shareholders’ equity.

 

B-17

10. SHARE CAPITAL

 

     30 June
2004
    31 December
2003
     RMB
millions		    RMB
millions

Registered, issued and fully paid

          

67,054,958,321 (2003: 67,586,776,503) ordinary domestic shares of RMB1.00 each

    67,055    67,587

13,877,410,000 (2003: 8,027,410,000) overseas listed H shares of RMB1.00 each

    13,877    8,027
    
  
     80,932    75,614
    
  

 

In May 2004, the Company issued and allotted 5,318,181,818 new H shares with a par value of RMB1.00 each, representing 4,466,693,018 H shares and 8,514,888 American Depositary Shares (“ADSs”, each representing 100 H shares), at prices of HK$2.30 per H share and US$29.49 per ADS, respectively, by way of a global offering to Hong Kong and overseas investors. As part of the global offering, 531,818,182 existing domestic shares of RMB1.00 each owned by China Telecom and the other domestic shareholders were converted into H shares and sold to Hong Kong and overseas investors. The Company raised net proceeds of RMB12,702 million from issue of new H shares.

 

11. OPERATING REVENUES

 

Operating revenues represent revenues from the provision of wireline telecommunications services. The components of the Group’s operating revenues are as follows:

 

           Six-month periods ended 30
June
     Note
     2004
    2003
           RMB millions    RMB millions

Upfront connection fees

    (i )   4,236    4,886

Upfront installation fees

    (ii )   1,432    1,301

Monthly fees

    (iii )   15,023    13,829

Local usage fees

    (iv )   24,072    22,486

DLD

    (iv )   13,145    12,693

ILD

    (iv )   1,906    1,951

Internet

    (v )   6,602    4,355

Managed data

    (vi )   1,524    1,628

Interconnections

    (vii )   5,013    4,095

Leased line

    (viii )   2,112    2,608

Others

    (ix )   5,152    4,236
          
  
           80,217    74,068
          
  

 

Note:

 

  (i) Represent the amortised amount of the upfront fees received for the initial activation of wireline services.

 

  (ii) Represent the amortised amount of the upfront fees received for installation of wireline services.

 

B-18

  (iii) Represent amounts charged to customers each month for their use of the Group’s telephone services.

 

  (iv) Represent usage fees charged to customers for the provision of telephone services.

 

  (v) Represent amounts charged to customers for the provision of Internet access services.

 

  (vi) Represent amounts charged to customers for the provision of managed data transmission services.

 

  (vii) Represent amounts charged to domestic and foreign telecommunications operators for delivery of calls connecting to the Group’s wireline telecommunications networks.

 

  (viii) Represent lease income from other domestic telecommunications operators and business customers for the usage of the Group’s wireline telecommunications networks and is measured by the number of lines leased and the agreed upon rate per line leased. The lease arrangements are primarily on a year to year basis.

 

  (ix) Represent primarily revenues from provision of value-added telecommunications services to customers, sale and repairs and maintenance of customer-end equipment, and lease of telecommunications network facilities.

 

12. NET FINANCE COSTS

 

Net finance costs comprise:

 

    

Six-month periods

ended 30 June

  
     2004
     2003
  
     RMB millions     RMB millions  

Interest expense incurred

    3,260     2,576  

Less: Interest expense capitalized*

    (738 )   (756 )
    
 

Net interest expense

    2,522     1,820  

Interest income

    (109 )   (151 )

Foreign exchange losses

    4     100  

Foreign exchange gains

    (76 )   (41 )
    
 
     2,341     1,728  
    
 

*  Interest expense was capitalized in construction in progress at the following rates per annum

    4.1%–5.2%     4.3%–5.5%  
    
 

 

B-19

13. PROFIT BEFORE TAXATION AND MINORITY INTERESTS

 

Profit before taxation and minority interests is arrived at after charging:

 

     Six-month periods ended 30
June
     2004
    2003
     RMB millions    RMB millions

Personnel expenses

    11,689    10,342

Interconnection charges

    1,773    1,504
    
  

 

14. TAXATION

 

Taxation in the consolidated statement of income comprises:

 

     Six-month periods ended 30
June
  
     2004
     2003
  
     RMB millions     RMB millions  

Provision for PRC income tax

    3,736     3,782  

Deferred taxation (Note 9)

    (55 )   (449 )
    
 
     3,681     3,333  
    
 

 

A reconciliation of the expected tax with the actual tax expense is as follows:

 

           Six-month periods ended 30
June
  
     Note
     2004
     2003
  
           RMB millions     RMB millions  

Profit before taxation and minority interests

          18,401     16,415  

Expected PRC income tax expense at statutory tax rate of 33%

    (i )   6,072     5,417  

Differential tax rate on subsidiaries income

    (i )   (954 )   (398 )

Non-deductible expenses

    (ii )   435     199  

Non-taxable income

    (iii )   (1,872 )   (1,885 )
          
 

Income tax

          3,681     3,333  
          
 

 

  (i) The provision for PRC current income tax is based on a statutory rate of 33% of the assessable income of the Group as determined in accordance with the relevant income tax rules and regulations of the PRC, except for certain subsidiaries of the Group which are taxed at a preferential rate of 15%.

 

  (ii) Amounts represent personnel and other miscellaneous expenses in excess of statutory deductible limits for tax purpose.

 

  (iii) Amounts primarily represent connection fees received from customers which are not subject to income tax.

 

15. DIVIDENDS

 

Pursuant to the shareholders’ approval at the Annual General Meeting held on 3 May 2004, a final dividend of RMB0.069083 per share totaling RMB5,224 million in respect of the year ended 31 December 2003 was declared and was paid on 20 May 2004.

 

B-20

Pursuant to the shareholders’ approval at the Annual General Meeting held on 20 June 2003, a final dividend of RMB0.008897 per share totaling RMB673 million in respect of the year ended 31 December 2002 was declared and was paid on 10 July 2003.

 

The Board of Directors has resolved not to pay an interim dividend for the year ending 31 December 2004.

 

16. BASIC EARNINGS PER SHARE

 

The calculation of basic earnings per share for the six-month period ended 30 June 2004 is based on the net profit of RMB14,708 million and the weighted average number of shares in issue during the period of 76,724,576,113 shares. The weighted average number of shares in issue during the six-month period ended 30 June 2004 reflects the issuance of 5,318,181,818 new H shares in May 2004 (see Note 10). The calculation of basic earnings per share for the six-month period ended 30 June 2003 is based on the net profit of RMB13,058 million divided by 75,614,186,503 shares.

 

The amount of diluted earnings per share is not presented as there were no dilutive potential ordinary shares in existence for both periods presented.

 

17. CAPITAL COMMITMENTS

 

As at 30 June 2004, the Group had capital commitments as follows:

 

    

30 June

2004

    31 December
2003
     RMB millions    RMB millions

Authorised and contracted for Properties

    2,268    1,857

Telecommunications network plant and equipment

    5,124    9,257
    
  
     7,392    11,114
    
  

Authorised but not contracted for

          

Properties

    2,105    2,458

Telecommunications network plant and equipment

    10,629    12,725
    
  
     12,734    15,183
    
  

 

18. RELATED PARTY TRANSACTIONS

 

The principal related party transactions with China Telecom Group which were carried out in the ordinary course of business are as follows:

 

          

Six-month periods

ended 30 June

     Note
     2004
    2003
           RMB millions    RMB millions

Purchases of telecommunications equipment and materials

    (i )   152    222

Construction, engineering and information technology services

    (ii )   2,597    2,851

Provision of community services

    (iii )   1,101    1,064

Provision of ancillary services

    (iv )   796    683

Provision of comprehensive services

    (v )   120    —  

Operating lease expenses

    (vi )   203    235

Centralised service expenses

    (vii )   108    144

Interconnection revenues

    (viii )   98    99

Interconnection charges

    (viii )   201    280

Interest on amounts due to and loans from China Telecom

    (ix )   993    —  

 

Note:

 

  (i) Represent purchases of telecommunications equipment and materials from China Telecom Group.

 

B-21

  (ii) Represent provision of network construction, engineering and information technology services to the Group by China Telecom Group.

 

  (iii) Represent amounts paid and payable by the Group to China Telecom Group in respect of cultural, educational, hygiene and other community services.

 

  (iv) Represent amounts paid and payable by the Group to China Telecom Group in respect of ancillary services such as repairs and maintenance of telecommunications equipment and facilities and certain customer services.

 

  (v) Represent amounts paid and payable by the Group to China Telecom Group in respect of comprehensive services provided (see scope of comprehensive service defined below).

 

  (vi) Represent amounts paid and payable to China Telecom Group for operating leases in respect of business premises and inter-provincial transmission optic fibres.

 

  (vii) Represent net amount charged by China Telecom to the Group for costs associated with common corporate services and international telecommunications facilities.

 

  (viii) Represent amounts charged from/to China Telecom for interconnection of domestic long distance telephone calls.

 

  (ix) Represent interest paid and payable to China Telecom with respect to the deferred consideration payable to China Telecom in connection with the First Acquisition and interest with respect to loans from China Telecom (Note 7).

 

In connection with the Second Acquisition, the Group and China Telecom Group entered into a number of agreements on 13 April 2004. The principal terms of these agreements are similar to those disclosed in Note 32 to the Group’s 2003 consolidated financial statements, other than an increase in the maximum commission rate for domestic equipment procurement from 1.8% to 3% to reflect the latest market price.

 

In addition, the Company entered into a comprehensive services framework agreement with China Telecom on 13 April 2004 to govern the terms and conditions of transactions between the Group and entities within China Telecom Group which were not within the scope of the agreements entered into previously. Such transactions include procurement of telecommunications equipment, network design, software upgrade, system integration, manufacture of calling cards and other services. Pursuant to this agreement, China Telecom Group charges the Group for these services in accordance with the following terms:

 

  • government prescribed price;

 

  • where there is no government prescribed price but where there is a government guided price, the government guided price will apply;

 

  • where there is neither a government prescribed price nor a government guided price, the market price will apply;

 

  • where none of the above is available, the price is to be agreed between the relevant parties, which shall be based on the cost incurred in providing the services plus a reasonable profit margin.

 

B-22

The directors of the Company are of the opinion that the above transactions with related parties were conducted in the ordinary course of business and on normal commercial terms or in accordance with the agreements governing such transactions, and this has been confirmed by the independent non-executive directors.

 

19. PRINCIPAL SUBSIDIARIES

 

Following the completion of the Second Acquisition on 30 June 2004, the Company has the following wholly-owned subsidiaries which principally affect the results of operations and the financial position of the Group:

 

Name of Company

    Type of legal entity
    Date of incorporation
    Registered capital
               (RMB millions)

Shanghai Telecom Company Limited

    Limited company    11 October 2002    15,984

Guangdong Telecom Company Limited

    Limited company    10 October 2002    47,513

Jiangsu Telecom Company Limited

    Limited company    19 October 2002    19,208

Zhejiang Telecom Company Limited

    Limited company    10 October 2002    22,400

Anhui Telecom Company Limited

    Limited company    26 August 2003    3,871

Fujian Telecom Company Limited

    Limited company    28 August 2003    10,364

Jiangxi Telecom Company Limited

    Limited company    18 September 2003    1,153

Guangxi Telecom Company Limited

    Limited company    28 August 2003    4,992

Chongqing Telecom Company Limited

    Limited company    22 August 2003    4,276

Sichuan Telecom Company Limited

    Limited company    28 August 2003    8,123

Hubei Telecom Company Limited

    Limited company    9 March 2004    5,412

Hunan Telecom Company Limited

    Limited company    12 March 2004    661

Hainan Telecom Company Limited

    Limited company    9 March 2004    580

Guizhou Telecom Company Limited

    Limited company    12 March 2004    2,401

Yunnan Telecom Company Limited

    Limited company    9 March 2004    3,747

Shaanxi Telecom Company Limited

    Limited company    8 March 2004    2,482

Gansu Telecom Company Limited

    Limited company    10 March 2004    3,413

Qinghai Telecom Company Limited

    Limited company    10 March 2004    965

Ningxia Telecom Company Limited

    Limited company    10 March 2004    795

Xinjiang Telecom Company Limited

    Limited company    11 March 2004    4,660

 

All of the above subsidiaries are incorporated in the PRC.

 

Supplementary Information for American Depositary Shareholders

 

The Group’s accounting policies conform with IFRS which differ in certain significant respects from accounting principles generally accepted in the United States of America (“US GAAP”). The nature of differences which have a significant effect on the Group’s net profit and shareholders’ equity are set out below. The US GAAP reconciliation presented below is included as supplemental information and is not required as part of the basic interim financial statements and has not been subject to independent audit or review.

 

(a) Revaluation of property, plant and equipment

 

In connection with the Restructuring, the property, plant and equipment of the Company’s predecessor operations were revalued as at 31 December 2001. The net revaluation deficit has been reflected in the consolidated financial statements as at 31 December 2001. Such revaluation resulted in an increase directly to shareholders’ equity of RMB4,154 million with respect to the increase in carrying amount of certain property, plant and equipment above their historical cost bases, and a charge to income of RMB11,930 million with respect to the reduction in carrying amount of certain property, plant and equipment below their historical cost bases.

 

B-23

In connection with the First Acquisition, the property, plant and equipment of the First Acquired Group were revalued as at 31 December 2002. The net revaluation deficit has been reflected in the consolidated financial statements as at 31 December 2002. Such revaluation resulted in an increase directly to shareholders’ equity of RMB760 million with respect to the increase in carrying amount of certain property, plant and equipment above their historical cost bases, and a charge to income of RMB14,690 million with respect to the reduction in carrying amount of certain property, plant and equipment below their historical cost bases.

 

In connection with the Second Acquisition, the property, plant and equipment of the Second Acquired Group were revalued as at 31 December 2003. The net revaluation deficit has been reflected in the consolidated financial statements as at 31 December 2003. Such revaluation resulted in an increase directly to shareholders’ equity of RMB1,537 million with respect to the increase in carrying amount of certain property, plant and equipment above their historical cost bases, and a charge to income of RMB14,832 million with respect to the reduction in carrying amount of certain property, plant and equipment below their historical cost bases.

 

Under US GAAP, property, plant and equipment are stated at their historical cost less accumulated depreciation unless an impairment loss has been recorded. An impairment loss on property, plant and equipment is recorded under US GAAP if the carrying amount of such asset exceeds its future undiscounted cash flows resulting from the use of the asset and its eventual disposition. The future undiscounted cash flows of the Group’s property, plant and equipment, whose carrying amount was reduced in connection with the Restructuring, the First Acquisition and the Second Acquisition, exceed the historical cost carrying amount of such property, plant and equipment and, therefore, impairment of such assets is not appropriate under US GAAP. Accordingly, the revaluation reserve recorded directly to shareholders’ equity and the charge to income recorded under IFRS as a result of the Restructuring, the First Acquisition and the Second Acquisition, are reversed for US GAAP purposes.

 

However, as a result of the tax deductibility of the net revaluation deficit, a deferred tax liability related to the net revaluation deficit is created under US GAAP with a corresponding decrease in shareholders’ equity.

 

(b) Disposal of revalued property, plant and equipment

 

Under IFRS, on disposal of a revalued asset, the gain and loss on disposal of the asset is determined with reference to the asset’s revalued amount less subsequent depreciation, and any related revaluation surplus is transferred from the revaluation reserve to retained earnings. Under US GAAP, the gain and loss on disposal of an asset is determined with reference to the asset’s historical cost carrying amount and included in current earnings.

 

(c) Effect of change in tax rate

 

Under IFRS, the effect of a change in tax rate that results in a change in the carrying amounts of deferred tax assets and liabilities is charged or credited directly to equity, to the extent that such deferred tax assets and liabilities are previously charged or credited to equity. Under US GAAP, the effect of a change in tax rate for all items of deferred tax assets and liabilities is recorded in the income statement.

 

B-24

Reconciliation of net profit and shareholders’ equity under IFRS to US GAAP

 

The effect on net profit of significant differences between IFRS and US GAAP for the six-month period ended 30 June 2004 and 2003 is as follows:

 

     Six-month periods ended 30 June
  
     2004
     2004
     2003
  
     US$
millions		     RMB
millions		     RMB
millions		  
     (Note)              

Net profit under IFRS

      1,777     14,708     13,058  

US GAAP adjustments:

                     

Depreciation on revalued property, plant and equipment

      (426 )   (3,530 )   (2,037 )

Disposal of revalued property, plant and equipment

      (3 )   (24 )   (23 )

Effect of change in tax rate on deferred tax assets arising from revaluation of land use rights

      (20 )   (166 )   —    

Effect of change in tax rate on deferred tax liabilities arising from revaluation of property, plant and equipment

      251     2,079     —    

Deferred tax effect of US GAAP adjustments

      113     934     679  
    
 
 

Net profit under US GAAP

      1,692     14,001     11,677  
    
 
 

Basic earnings per share under US GAAP

    US$ 0.02     RMB0.18     RMB0.15  
    
 
 

Basic earnings per ADS* under US GAAP

    US$ 2.20     RMB18.25     RMB15.44  
    
 
 
* Basic earnings per ADS is calculated on the basis that one ADS is equivalent to 100 H shares.

 

The effect on shareholders’ equity of significant differences between IFRS and US GAAP as at 30 June 2004 and 31 December 2003 is as follows:

 

     30 June
2004
     30 June
2004
     31 December
2003
  
     US$
millions		     RMB
millions		     RMB
millions		  
     (Note)              

Shareholders’ equity under IFRS

    17,533     145,114     150,794  

US GAAP adjustments:

                   

Revaluation of property, plant and equipment, net of minority interests

    3,112     25,758     29,312  

Deferred tax effect of US GAAP adjustment

    (779 )   (6,452 )   (9,465 )
    
 
 

Shareholders’ equity under US GAAP

    19,866     164,420     170,641  
    
 
 

Note: Solely for the convenience of the reader, the amounts as at and for the six-month period ended 30 June 2004 have been translated into United States dollars at the noon buying rate in New York City on 30 June 2004 for cable transfers in RMB as certified for custom purposes by the Federal Reserve Bank of New York of US$1.00=RMB8.2766. No representation is made that the RMB amounts could have been, or could be, converted into United States dollars at that rate or at any other certain rate on 30 June 2004, or at any other date.

 

PURCHASE, SALE OR REDEMPTION OF SECURITIES

 

For the six months ended 30 June 2004, neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company’s listed securities.

 

B-25

AUDIT COMMITTEE

 

The audit committee has reviewed with management and the Company’s international auditors, KPMG, the accounting principles and practices adopted by the Group and discussed internal control and financial reporting matters including the review of the Interim Report for the six months ended 30 June 2004.

 

COMPLIANCE WITH CODE OF BEST PRACTICE

 

None of the Directors is aware of any information that would reasonably indicate that the Company is not, or was not during the period, in compliance with the Code of Best Practice as set out in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

 

INTERIM REPORT

 

The Interim Report for the six months ended 30 June 2004 will be despatched to shareholders as well as made available on The Stock Exchange of Hong Kong Limited’s website (www.hkex.com.hk) and the Company’s website (www.chinatelecom-h.com) in due course.

 

Forward-Looking Statements

 

The Company would also like to caution readers about the forward-looking nature of certain of the above statements. These forward-looking statements are subject to risks and uncertainties, some of which are beyond our control. Potential risks and uncertainties include those concerning the continued growth of the telecommunications industry in China, the development of the regulatory environment and our ability to successfully execute our business strategies.

 

BOARD OF DIRECTORS

 

As of the date of this announcement, our Board consists of Mr. Zhou Deqiang as the chairman and chief executive officer, Mr. Chang Xiaobing as the president and chief operating officer, Ms. Wu Andi as the executive vice president and chief financial officer, Mr. Zhang Jiping as the executive vice president, Ms. Huang Wenlin as the executive vice president, Mr. Li Ping as the executive vice president and company secretary, Mr. Wei Leping as the executive vice president, Mr. Cheng Xiyuan and Mr. Feng Xiong as the executive directors, Mr. Zhang Youcai, Mr. Vincent Lo Hong Sui and Mr. Shi Wanpeng as the independent non-executive directors.

 

B-26

Exhibit 1.3

 

LOGO

 

China Telecom Corporation Limited

 

LOGO

 

(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

 

Disclosure of Earnings Before Interest, Tax, Depreciation and Amortization (“EBITDA”) and Reconciliation to Cash Flows from Operating Activities

 

On September 1, 2004, the Company presented EBITDA in its interim report and announcement of the interim report for the six months ended June 30, 2004 in Hong Kong.

 

The Company’s EBITDA represents profit before net finance costs, investment income, share of profit from associates, taxation, depreciation and amortisation and minority interests. As the telecommunications business is a capital-intensive industry, capital expenditures, the level of gearing and finance costs may have a significant impact on the net profit of companies with similar operating results. Therefore, the Company believes EBITDA may be helpful in analysing the operating results of a telecommunications service provider like itself. Although EBITDA is widely used in the global telecommunications industry as a benchmark to reflect operating performance, financing capability and liquidity, it is not regarded as a measure of operating performance and liquidity under generally accepted accounting principles (“GAAP”). It also does not represent cash flows from operating activities. In addition, the Company’s EBITDA may not be comparable to similar indicators provided by other companies.

 

The following table sets forth a reconciliation of the EBITDA for the six months ended June 30, 2004 to cash flows from operating activities, being the most comparable GAAP measure under International Financial Reporting Standards:

 

     RMB
millions
  
     (unaudited)  

EBITDA

    43,991  

Adjustments:

       

Non-cash items included in EBITDA

    760  

Net change in working capital

    1,945  

Decrease in deferred revenue

    (4,726 )

Net interest paid

    (3,016 )

Income tax paid

    (3,467 )

Investment income received

    30  
    

Cash flows from operating activities

    35,517  
    

 

September 1, 2004

 

C - 1

Exhibit 1.4

 

If you are in doubt as to any aspect of this circular or as to the action to be taken, you should consult your stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

 

If you have sold or transferred your shares in China Telecom Corporation Limited, you should at once hand this circular together with the accompanying form of proxy to the purchaser or other transferee or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser or transferee.

 

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

 

LOGO

 

China Telecom Corporation Limited

 

LOGO

 

(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

 

(Stock Code: 0728)

 

PROPOSED APPOINTMENT OF DIRECTORS AND

PROPOSED AMENDMENTS TO THE ARTICLES OF ASSOCIATION

 

A letter from the Chairman of China Telecom Corporation Limited is set out on pages 2 to 4 of this circular.

 

A notice convening an extraordinary general meeting of the shareholders of the Company to be held at 31 Jinrong Street, Xicheng District, Beijing, PRC on October 20, 2004 at 10:00 a.m. is set out on pages 5 to 9 of this circular.

 

Whether or not you are able to attend the meeting, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon as soon as practicable and in any event not later than 24 hours before the time appointed for holding the meeting or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the meetings or at any adjourned meetings should you so wish.

 

D-1

    Page

Definitions

   1

Letter from the Chairman

   2

APPENDIX         Notice of EGM

   5

 

D-2

In this circular, unless the context otherwise requires, the following expressions have the following meanings:

 

“Articles of Association”

    the articles of association of the Company, as amended, modified or otherwise supplemented from time to time

“Company”

    China Telecom Corporation Limited, a joint stock limited company incorporated in the PRC with limited liability on September 10, 2002, whose H Shares are listed on the Stock Exchange and whose American depositary shares are listed on the New York Stock Exchange

“Directors”

    the directors of the Company

“Extraordinary General Meeting” or “EGM”

    the extraordinary general meeting of the Company to be convened on October 20, 2004, the notice of which is set out on pages 5 to 9 of this circular, or any adjournment thereof

“H Share(s)”

    overseas listed foreign invested shares in the Company’s issued share capital with a par value of RMB1.00 per share which are listed on the Stock Exchange

“Hong Kong”

    the Hong Kong Special Administrative Region of the PRC

“PRC” or “China”

    the People’s Republic of China (excluding, for the purposes of this circular, Hong Kong, Taiwan and Macau)

“Proposed Amendments”

    the proposed amendments to the Articles of Association of the Company as set out in the Appendix to this circular

“RMB”

    Renminbi, the lawful currency of the PRC

“Shareholders”

    shareholders of the Company

“Stock Exchange”

    The Stock Exchange of Hong Kong Limited

 

D-3

LOGO

 

China Telecom Corporation Limited

 

LOGO

 

(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

 

(Stock Code: 0728)

 

Executive Directors:

Zhou Deqiang

Chang Xiaobing

Wu Andi

Zhang Jiping

Huang Wenlin

Li Ping

Wei Leping

Cheng Xiyuan

Feng Xiong

Registered Office:

31 Jinrong Street

Xicheng District

Beijing, 100032

PRC

 

Place of business in Hong Kong:

38th Floor

Dah Sing Financial Centre

108 Gloucester Road

Wanchai, Hong Kong

Independent Non-executive Directors:

Zhang Youcai

Vincent Lo Hong Sui

Shi Wanpeng

September 1, 2004

To the Shareholders

 

Dear Sir or Madam,

 

PROPOSED APPOINTMENT OF DIRECTORS AND

PROPOSED AMENDMENTS TO THE ARTICLES OF ASSOCIATION

 

1. INTRODUCTION

 

The purpose of this circular is to provide you with information regarding the resolutions to be proposed at the EGM for the approval of (i) the appointment of Directors and (ii) the amendments to the Articles of Association.

 

2. PROPOSED APPOINTMENT OF DIRECTORS

 

The Directors propose to elect Mr. Yang Jie and Mr. Sun Kangmin as executive Directors. Their biographies are set out below:

 

Mr. Yang Jie

 

D-4

Mr. Yang Jie, aged 42, is a senior engineer. In 1984, Mr. Yang graduated from Beijing University of Posts and Telecommunications with a bachelor’s degree in wireless electronic engineering. He then obtained a master degree of telecommunications and information management at the Norwegian School of Management. Mr. Yang previously served as the Deputy Director General of Shanxi Administration Bureau of Posts and Telecommunications, the General Manager of Shanxi Telecommunications Corporation, the Vice President of China Telecom Beijing Research Institute and the General Manager of the Northern Telecom Department of China Telecom. He is currently serving as the Deputy General Manager of China Telecommunications Corporation. Mr. Yang has 20 years of experience in handling issues relating to the operation and management of the telecommunications industry in China.

 

As of the date hereof, Mr. Yang has no equity interest in the Company.

 

After obtaining approval from shareholders in respect of Mr. Yang’s appointment, the Company will enter into a service contract with Mr. Yang for a term expiring on September 9, 2005. His remuneration will be determined by the board of Directors.

 

Mr. Sun Kangmin

 

Mr. Sun Kangmin, aged 47, is a senior engineer. Mr. Sun previously served as the Department Head of the Information Industry Department of Sichuan Province, the Director General of Communications Bureau of Sichuan Province as well as the Chairman and the General Manager of Sichuan Telecom Company Limited. Mr. Sun has 21 years of experience in handling issues relating to the operation and management of the telecommunications industry in China.

 

As of the date hereof, Mr. Sun has no equity interest in the Company.

 

After obtaining approval from shareholders in respect of Mr. Sun’s appointment, the Company will enter into a service contract with Mr. Sun for a term expiring on September 9, 2005. His remuneration will be determined by the board of Directors.

 

3. PROPOSED AMENDMENTS TO THE ARTICLES OF ASSOCIATION

 

The Directors propose to make certain amendments to its Articles of Association to meet the Company’s development. A full text of the Proposed Amendments is set out in the notice of EGM set out in the Appendix to this circular. According to the Articles of Association and the relevant laws and regulations, the Proposed Amendments are subject to the approval of the Shareholders by way of a special resolution at the EGM.

 

4. ACTIONS TO BE TAKEN

 

A notice convening the EGM is set out in the Appendix to this circular. The relevant proxy form and notice of attendance are enclosed. At the EGM, an ordinary resolution will be proposed to approve the appointment of Mr. Yang Jie and Mr. Sun Kangmin as executive Directors, and a special resolution will be proposed to approve the amendments to Article 6, 20, 21, 24, 94 and 133 of the Articles of Association.

 

Shareholders of the Company who intend to attend the EGM are required to return the notice of attendance to the Company on or before September 29, 2004.

 

Whether or not Shareholders are able to attend the EGM, they are requested to complete and return the enclosed form of proxy to the Company’s registered office, 31 Jinrong Street, Xicheng District, Beijing 100032, PRC as soon as practicable and in any event by not later than 24 hours before the time appointed for holding the EGM. Completion and return of the form of proxy will not preclude Shareholders from attending and voting in person at the EGM should they so wish.

 

D-5

5. PROCEDURES FOR DEMANDING A POLL BY SHAREHOLDERS

 

Pursuant to the Articles of Association, a general voting shall be made at the shareholders meeting by a show of hands. However, (i) the chairman of the meeting, (ii) at least two shareholders or proxies of such shareholders with voting rights, and (iii) one or more shareholders including proxy or proxies of such shareholders accounting individually or jointly 10% or more of the Company shares with voting right(s), shall have the right to request for a voting by poll before or after a voting by show of hands.

 

Issues concerning election of the chairman or suspension of a meeting shall be voted by poll. Other issues shall be voted by poll at the time to be decided by the chairman, and the meeting can go on with discussion of other matters. The result of such voting shall also be regarded as the resolution adopted at the meeting. A person who has made a request for voting by poll can withdraw it.

 

6. RECOMMENDATIONS

 

The Directors believe that the proposed appointment of the executive Directors and the Proposed Amendments to the Articles of Association are in the best interests of the Company and the Shareholders as a whole and recommend the Shareholders to vote in favour of the relevant resolutions to be proposed at the EGM.

 

By order of the Board of Directors

China Telecom Corporation Limited

Zhou Deqiang

Chairman and CEO

 

D-6

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this notice, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this notice.

 

LOGO

 

China Telecom Corporation Limited

 

LOGO

 

(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

 

(Stock Code: 0728)

 

NOTICE OF EXTRAORDINARY GENERAL MEETING

 

NOTICE IS HEREBY GIVEN that an Extraordinary General Meeting of China Telecom Corporation Limited (the “Company”) will be held at 10:00 a.m. on October 20, 2004 at 31 Jinrong Street, Xicheng District, Beijing, PRC for the purposes of considering and, if thought fit, passing, with or without modifications, the following resolutions:

 

ORDINARY RESOLUTION

 

  1. THAT the appointment of Mr. Yang Jie and Mr. Sun Kangmin to serve as the executive directors of the Company be and is hereby considered and approved with their term of office starting from the date of this resolution to September 9, 2005 and that any director of the Company be and is hereby authorized to sign on behalf of the Company the director’s service contract with Mr. Yang Jie and Mr. Sun Kangmin respectively, and that the board of directors be and is hereby authorized to determine their remunerations.

 

SPECIAL RESOLUTION

 

  2. THAT the articles of association of the Company (the “Articles of Association”) be and are hereby amended as follows:

 

  (a) Article 6 of the Articles of Association shall be amended as follows:

 

“The Company’s Articles of Association (the “Articles of Association” or “these Articles of Association”) are enacted in accordance with the provisions of the Company Law, the Special Regulations and the Mandatory Provisions for Articles of Association of Companies to be Listed Overseas (the “Mandatory Provisions”) and other PRC laws and administrative regulations.”

 

  (b) Article 20 of the Articles of Association shall be amended as follows:

 

“By the approval of the relevant companies department authorized by the State Council, the Company may issue a total of 80,932,368,321 ordinary shares, of which 68,317,270,803 were issued to the promoter of the Company at the time when the Company was established, representing 84.41% of the entire issued share capital.”

 

D-7

  (c) Article 21 of the Articles of Association shall be amended as follows:

 

“All the 12,615,097,518 ordinary shares issued by the Company after its incorporation are the overseas-listed foreign-invested shares (H Shares). Pursuant to the Provisional Measures on the Administration of the Reduction of the State-Owned Shares for Raising Social Security Funds, the number of overseas-listed foreign-invested shares (H Shares) converted from a reduction by holders of State-owned shares of their shareholdings of the State-owned shares amounted to 1,262,312,482 shares. The total of the overseas-listed foreign-invested shares (H Shares) issued by the Company shall be 13,877,410,000 shares, representing 17.15% of the issued share capital of the Company.

 

The share capital structure of the Company is as follows: there are a total of 80,932,368,321 ordinary shares issued, of which 58,346,370,499 shares are held by the promoter, China Telecommunications Corporation, representing 72.09% of the total of the ordinary shares issued by the Company. The other holders of the domestic shares are Guangdong Rising Assets Management Co., Ltd., holding a total of 5,614,082,653 shares representing 6.94% of the total of the ordinary shares issued by the Company, Jiangsu Guoxin Investment Group Co., Ltd., holding a total of 957,031,543 shares representing 1.18% of the total of the ordinary shares issued by the Company and Zhejiang Financial Development Company, holding a total of 2,137,473,626 shares representing 2.64% of the total of the ordinary shares issued by the Company. A total of 13,877,410,000 overseas-listed foreign-invested shares are held by holders of overseas-listed foreign-invested shares, representing 17.15% of the total of the ordinary shares issued by the Company.”

 

  (d) Article 24 of the Articles of Association shall be amended as follows:

 

“The registered capital of the Company shall be RMB80,932,368,321.”

 

  (e) The first paragraph of Article 94 of the Articles of Association shall be amended as follows:

 

“The Company shall have a board of directors. The board of directors shall consist of fifteen (15) directors, of which three (3) shall be independent (non-executive) directors (meaning directors who are independent from the Company’s shareholders and do not hold office in the Company hereinafter).”

 

  (f) The second paragraph of Article 133 of the Articles of Association shall be amended as follows:

 

“If a director or his associate (as defined in the Rules Governing the Listing of Securities of The Stock Exchange of Hong Kong Limited) has a material interest in any contract, transaction, arrangement or other matters that requires the approval of the board of directors, the relevant director shall not vote for the relevant matter at the meeting of the board of directors, and shall not be listed in the quorum of the meeting.”

 

THAT the directors of the Company be and are hereby authorized to take all actions which in their opinion are necessary or desirable to complete the procedures for the approval and/or registration or filing of the aforementioned amendment of the Articles of Association.

 

Details concerning the proposed new directors

 

Details concerning the proposed new directors are as follows:

 

Mr. Yang Jie

 

Mr. Yang Jie, aged 42, is a senior engineer. In 1984, Mr. Yang graduated from Beijing University of Posts and Telecommunications with a bachelor’s degree in wireless electronic engineering. He then obtained a master degree of telecommunications and information

 

D-8

management at the Norwegian School of Management. Mr. Yang previously served as the Deputy Director General of Shanxi Administration Bureau of Posts and Telecommunications, the General Manager of Shanxi Telecommunications Corporation, the Vice President of China Telecom Beijing Research Institute and the General Manager of the Northern Telecom Department of China Telecom. He is currently serving as the Deputy General Manager of China Telecommunications Corporation. Mr. Yang has 20 years of experience in handling issues relating to the operation and management of the telecommunications industry in China.

 

Equity Interest in the Company

 

As of the date hereof, Mr. Yang has no equity interest in the Company.

 

Mr. Sun Kangmin

 

Mr. Sun Kangmin, aged 47, is a senior engineer. Mr. Sun previously served as the Department Head of the Information Industry Department of Sichuan Province, the Director General of Communications Bureau of Sichuan Province as well as the Chairman and the General Manager of Sichuan Telecom Company Limited. Mr. Sun has 21 years of experience in handling issues relating to the operation and management of the telecommunications industry in China.

 

Equity Interest in the Company

 

As of the date hereof, Mr. Sun has no equity interest in the Company.

 

By Order of the Board

Li Ping

Company Secretary

September 1, 2004.

 

Notes:

 

1. The Register of Members of the Company will be closed from September 20, 2004 and October 20, 2004 (both dates inclusive), during which time no share transfers of the Company’s H shares will be effected. Buyers who submit the share transfer application forms to the Company’s share registrar before 4:00 p.m. on September 17, 2004 (Friday) and then registered as Shareholders on the register of members of the Company are entitled to attend the extraordinary general meeting.

 

2. Each shareholder entitled to attend and vote at the extraordinary general meeting may appoint one or more proxies to attend and vote on his behalf at the extraordinary general meeting. A proxy need not be a shareholder.

 

3. To be valid, the form of proxy together with the power of attorney or other authorization document (if any) signed by the authorized person or notarially certified power of attorney must be delivered to the Office of the Board for holders of domestic shares and to the Computershare Hong Kong Investor Services Limited for holders of H shares not less than 24 hours before the designated time for the holding of the extraordinary general meeting. Completion and return of a form of proxy will not preclude a shareholder from attending in person and voting at the extraordinary general meeting if he so wishes.

 

 

The address of the share registrar for the Company’s H Shares is as follows:

 

Computershare Hong Kong Investor Services Limited

46th Floor, Hopewell Centre

183 Queens Road East, Wanchai, Hong Kong

 

4. A proxy of a shareholder may vote by hand or vote on a poll, but a proxy of a shareholder who has appointed more than one proxy may only vote on a poll.

 

5. The registration procedure for attending the extraordinary general meeting is as follows:

 

  (a) shareholders attending the extraordinary general meeting in person or by proxy are required to present their identity certification. If the attending shareholder is a corporation, its legal representative or person authorized by the board or other decision making authority is required to present a copy of the relevant resolution of the board or other decision making authority approving it is the legal or duly authorized representative in order to attend the extraordinary general meeting on behalf of such corporation; and

 

D-9

  (b) shareholders intending to attend the extraordinary general meeting “in person or by proxy” are required to return the attendance slip via hand delivery, mail or fax to the Office of the Board of Directors on or before Wednesday, September 29, 2004.

 

6. The extraordinary general meeting is expected to last for half a day and shareholders (in person or by proxy) attending the extraordinary general meeting shall be responsible for their own transportation and accommodation expenses.

 

7. The address of the Office of the Board of Directors is as follows:

 

31 Jinrong Street

Xicheng District, Beijing 100032

PRC

 

Contact person: Li Ping

Telephone: (8610) 6642 8166

Fax: (8610) 6601 0728

 

D-10

8. As of the date of this announcement, our Board consists of Mr. Zhou Deqiang as the chairman and chief executive officer, Mr. Chang Xiaobing as the president and chief operating officer, Ms. Wu Andi as the executive vice president and chief financial officer, Mr. Zhang Jiping as the executive vice president, Ms. Huang Wenlin as the executive vice president, Mr. Li Ping as the executive vice president and company secretary, Mr. Wei Leping as the executive vice president, Mr. Cheng Xiyuan and Mr. Feng Xiong as the executive directors, Mr. Zhang Youcai, Mr. Vincent Lo Hong Sui and Mr. Shi Wanpeng as the independent non-executive directors.

 

D-11