FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of September, 2006
(Indicate by check mark whether the registrant files
or will file annual reports under cover of
Form 20-F or Form 40-F.)
Form 20-F [X] Form 40-F [ ]
(Indicate by check mark whether the registrant by furnishing the
information contained in this form is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934. )
Yes [ ] No [X]
(If "Yes" is marked, indicate below the file number assigned
to registrant in connection with Rule 12g3-2(b): 82-__________. )
N/A
China Netcom Group Corporation (Hong Kong) Limited
Building C, No. 156, Fuxingmennei Avenue
Xicheng District
Beijing, 100031 PRC
This Form 6-K consists of:
The 2006 interim report of China Netcom Group Corporation (Hong Kong) Limited
(the "Registrant"), made by the Registrant in English on August 23, 2006.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
under-signed, thereunto duly authorized.
CHINA NETCOM GROUP CORPORATION (HONG KONG) LIMITED
By /s/ Miao Jianhua
By /s/ Mok Kam Wan
Name: Miao Jianhua and Mok Kam Wan
Title: Joint Company Secretaries
Date: September 5, 2006
Contents
Chairman's Statement 2
Chief Executive Officer's Statement 5
Independent Review Report 8
Interim Financial Statements
Unaudited Condensed Consolidated Income Statement 9
Unaudited Condensed Consolidated Balance Sheet 10
Unaudited Condensed Consolidated Statement of Changes in Equity 12
Unaudited Condensed Consolidated Statement of Cash Flows 14
Notes to the Interim Financial Statements 15
Supplementary Information for American Depositary Shares Holders 49
Other Information 51
1
Chairman's Statement
Dear Shareholders,
During the first half of 2006, the Company's commitment to the strategic goal
of transforming itself into a "broadband communications and multi-media
services provider" began to produce tangible results. The proportion of our
revenues generated from high-growth businesses* increased to 23.9% from 19.4%
during the same period last year. We are establishing a solid foundation for
sustained growth within a highly competitive market. At the same time, we have
made significant progress in our efforts to improve corporate governance.
Improvements in corporate governance are resulting in management innovations
and effective strategy implementation, allowing us to create value for
shareholders in an increasingly competitive business environment and in an
evolving information technology industry.
Implementation of Strategies
The rapid development of information technology in recent years, particularly
the increasing rate of Internet penetration, has created profound changes in
the global telecom services industry. Traditional narrow-band voice
communications based on PSTN networks are being replaced by IP Network-based
broadband information services that integrate voice, data and video. The
Company's greatest challenge is to make the most of opportunities resulting
from technological innovation and changes in demand for information services
to implement its "broadband strategy".
China's broadband market continued to experience impressive growth in the
first half of 2006. According to statistics of the Ministry of Information
Industry, broadband subscribers increased by 7.558 million in the first six
months of 2006 to 45.061 million. A speedy increase in disposable income, the
increasingly common use of computers, the proliferation of broadband
applications and content, and above all, the forthcoming 2008 Beijing Olympic
Games are factors which support quick growth in the broadband market. In order
to enhance China's global competitiveness, the PRC government is encouraging
the informatization process among small and medium-sized enterprises, rural
areas, government administrations and district communities. "Tripleplay" is an
explicit target of the government's Eleventh Five-Year Plan, which runs from
2006 to 2010. Both Chinese government policies and global informatization
trends are creating a shift from traditional communications to broadband
integrated information services. This will bring about unprecedented favorable
opportunities for the realization of the Company's strategic transformation.
The Company's commitments to transforming itself into a "broadband
communications and multi-media services provider" began to yield tangible
results during the first half of 2006. As the number of our broadband
subscribers continued to grow at a fast rate of 28.6 %, our revenues from
broadband content and applications also became significant. At the end of May
2006, the Company officially launched "CNC MAX", the first comprehensive
audio-visual entertainment portal in the PRC. Our broadband business model of
"charging for access + content" is maturing, based on the combination of "CNC
MAX" with other broadband application and content platforms offering special
local features that are operated by our provincial subsidiaries. In July 2006,
five other cities in the Company's northern service region were approved to
operate IPTV business. We believe the continuous deregulation of IPTV will
provide outstanding opportunities for the Company to develop broadband
applications and content services, as well as drive the "PC+TV" and "charging
for access+content" broadband business model to a greater degree of maturity.
2
In line with governmental efforts to promote informatization and the
increasing demand of integrated informatization services by our corporate
customers, the Company launched the "CNC Connected" brand of integrated
informatization services which integrate corporate telecommunications services
and IT services and applications in certain cities. The number of customers
for these services has risen quickly, attesting to the market's favorable
response. In an environment which reflects an increasing shift towards mobile
substitution, "CNC Connected" satisfies the incessantly increasing demand of
our corporate customers for sophisticated informatization services, and allows
us to build more in-depth cooperative relationships with our existing
corporate customers, and to bring about new business growth.
Corporate Governance
The Company's corporate governance project aims to create a world-class
corporate governance structure, and to serve as a model for other large
state-owned enterprises in China. It made major progress during the first half
of 2006.
Our pursuit of best-practices in the industry led to further improvements in
our corporate governance "hardware" in the first half of the year, defining
the scope for the state-owned controlling shareholders' participation. By
insisting that the Board of Directors include a majority of non-executive and
independent non-executive directors, we ensured its independence and
effectiveness as the key to good governance. We also made adjustments in the
composition of the Board of Directors and the Board Committees. The
Compensation and Nomination Committee was split into two separate bodies. The
Nomination Committee and the Corporate Governance Committee were combined to
form the Nomination and Corporate Governance Committee, with a majority of
independent non-executive directors and an independent non-executive director
as its chairperson. This ensures that the selection of the company's senior
management will comply with our strategic objectives, and conform to the
interests of all our shareholders. In addition, the Company established a
Supervision Committee to prevent insider dealing, maintain compliance with
relevant regulations, and to ensure ethical conduct by the Company's middle
and senior management. We have widened the scope of the Strategy Committee's
duties, so as to guarantee the Company's strategic initiatives are
scientifically formulated and effectively implemented in an ever-changing
business environment.
To ensure that the Board of Directors functions efficiently, and to enhance
its operational "software", we further improved the key operating procedures
of the Board of Directors including strategic planning procedures, the
Company's senior management performance appraisal system, processes for
nominating and appointing directors, and methods for examining connected
transactions. In addition, the Company implemented a new performance appraisal
system for the Board of Directors and individual directors. The objective is
to encourage directors to participate more actively in the Board's
decision-making meetings, and to ensure that they take the initiative to
understand the Company's business operations. These measures will help ensure
that decisions made by the Board of Directors will better represent the
interests of all of the Company's shareholders, providing support for
sustainable growth in the future.
Changes of Directors and Management
On 17 May 2006, Dr. Tian Suning resigned as the Company's Chief Executive
Officer while remaining as a Non-Executive Director and Vice Chairman of the
Board. On the same day, Mr. Jiang Weiping also resigned from his position as
an Executive Director. On behalf of the Board of Directors, I wish to express
our sincere gratitude to Dr. Tian and Mr. Jiang for their remarkable
contributions as Chief Executive Officer and Executive Director, respectively.
3
Future Prospects
Continued expansion of our high-growth businesses will remain our focus during
the second half of the year. We shall fully leverage opportunities created by
the technology innovation, the government's informatization drive and the 2008
Beijing Olympic Games. We remain committed to transforming the Company into a
"broadband communications and multi-media services provider". At the same
time, we shall continue to perfect the Company's corporate governance, turning
the Board of Directors into trusted representatives of the shareholders.
Last, but not least, I would like to extend my heartfelt gratitude to each and
every one of our shareholders for their consistent support and trust, and to
the management and all of the Company's staff members for their outstanding
contributions.
Zhang Chunjiang
Chairman
Hong Kong, August 23, 2006
* High-growth businesses include broadband and other Internet-related
services, value-added services, and business and data communications
services
4
Chief Executive Officer's Statement
Dear Shareholders,
In the first half of 2006, we encountered many challenges as well as new
opportunities for growth in our operations. Growth of the traditional fixed
line business was modest due to mobile substitution, but growth in our
high-growth businesses was rapid. Our strategy of becoming a "broadband
communications and multi-media services provider" began to produce tangible
results, with the proportion of revenue from high-growth businesses reaching
23.9%.
Financial Performance
In the first half of 2006, our continuing operations generated RMB43,181
million in revenues, including amortization of upfront connection fees of
RMB1,330 million. Excluding amortization of upfront connection fees, revenues
from continuing operations amounted to RMB41,851 million, an increase of 2.2%
over the same period of last year (unless otherwise specified, all the figures
are net of amortization of upfront connection fees and discontinued
operations). EBITDA was RMB22,969 million, and EBITDA margin was 54.9%. Net
profit was RMB5,815 million and net profit margin was 13.9%.
Throughout the first half, competition from mobile operators intensified, and
local regulatory authorities began to adjust tariffs for inter-district calls
at the beginning of 2006. As a result, we saw marginal decline in revenue
growth.
On 2 June 2006, the Company concluded an agreement with a consortium led by
Ashmore Emerging Markets Liquid Investment Portfolio and Spinnaker Global
Opportunity Fund Limited, disposing of our 100% equity interest in Asia Netcom
Corporation Limited ("Asia Netcom") for an amount of USD 168.84 million. The
transaction was completed on 22 August 2006. The disposal of Asia Netcom
enabled the Company to concentrate resources to focus on our domestic market
and the strategic objective of becoming a "broadband communications and
multi-media services provider."
Traditional Fixed-line Business
In 2006, our development strategy for the traditional fixed-line business has
been to retain our existing subscribers and traffic volume, while exploring
new markets. Local telephone service subscribers continued to grow during the
first half of 2006. The number of subscribers for local telephone services
reached 119.412 million by the end of June 2006 with 89.632 million fixed-line
subscribers and 29.780 million PHS subscribers, representing an increase of
1.9% and 14.1% respectively compared to the same period last year. In 2006,
mobile operators in China became more aggressive in vying for subscribers, and
the effect of mobile substitution for traditional fixed-line business was
becoming increasingly obvious. In the first half of 2006, the Company's local
telephone usage net of Internet dial-up usage dropped marginally to 108.107
billion pulses by 1.6% over the same period of last year. In order to cope
with mobile substitution and to reduce the churn rate, in the first half of
2006, we began to launch multi-business bundling services in certain pilot
cities. Multi-business bundling services have had a positive effect in the
enhancement of MOU (average monthly minutes of usage), the growth in new
subscribers and in revenue in the pilot cities, based on a soft launch in
those cities.
5
During the first half of 2006, the Company continued the revision of its sales
and marketing system. We launched a number of new initiatives. These included
the following: establishment of a professional sales and marketing team for
each segment market, enabling in-depth exploration of customers' needs and
prompt response; changes in the incentive system for community managers to
become more performance-oriented; strengthening of proactive services and
proactive sales and marketing in our retail outlets and the phased launch of
"customer appointment" services; and the creation of online retail outlets to
provide our customers with more convenience and to shorten the time for our
response. As we implement these initiatives, our Company's sales and marketing
system is moving towards becoming more customer-oriented.
High Growth Businesses
Central to our strategic transformation and business development, we will
continue to focus on the enhancement of the contribution of high growth
businesses to revenues in 2006. Specific initiatives have included the
following: 1) expanding the customer base of broadband subscribers while
pushing forward the development of video and interaction-centered broadband
content and applications; 2) upgrading the intelligence of local networks and
developing new value-added services; and 3) accelerating the development of
"CNC Connected" services to create a growth engine for the future. Compared to
the same period last year, revenue from high growth businesses increased by
26.3%, improving our revenue structure.
During the first half of 2006, broadband business grew at high speed. The
number of broadband subscribers grew by 28.6% over the same period of last
year, to 13.506 million. Revenue from broadband and other Internet related
services amounted to RMB5,340 million, a year-on-year increase of 33.3%,
accounting for 12.8% of total revenue. Starting in the second half of 2005,
the Company intensified the development of broadband content and applications
and integrated resources along the industry chain, focusing on video and
interaction-centered broadband content and applications. In May 2006, the
Company established China Netcom Group Broadband Online Company Limited. This
new business concentrates on the development and marketing of broadband
content and applications. We also launched "CNC MAX", China's first
comprehensive audio-visual entertainment portal. Broadband content and
applications revenue for the period grew by 104.1%, to RMB402 million.
In May 2005, the Company commissioned the first commercial IPTV services of
China in Harbin, Heilongjiang province. In line with government policy of
"rural area informatization", in July 2005 the Company launched "integrated
informatization services for rural areas" based on IPTV technology in Henan
province. This has been approved as one of the models for "rural area
informatization" by the National Development And Reform Commission of the
People's Republic of China. By the end of June 2006, the Company had 85,800
subscribers for IPTV services, up by 48.1% over the end of last year. In July
2006, five other cities in the Company's service region were approved to
operate IPTV business. The introduction of IPTV expands our target subscribers
of our broadband business from PC's to the huge customer base of TV consumers.
It reinforces and accelerates the maturity of our broadband business model
based on "charging for access + contents" and helps the Company achieve
"tripleplay."
6
During the first half of 2006, the Company's value-added businesses saw fast
growth. Revenues amounted to RMB2,532 million, a year-on-year increase of
34.3%. The share of total revenue grew notably from 4.6% in the same period of
last year to 6.1%. Contribution of the value-added services to the ARPU of
local telephone services increased by 28.6% to RMB3.6 compared to the same
period of last year. In the first half of 2006, PHS short messages amounted to
4.025 billion pieces, a year-on-year increase of 43.0%. Subscribers of
personalized ring services amounted to 10.455 million, an increase of 169.5%
over the same period of last year. Within this expanded customer base,
subscribers for personalized ring services among fixed-line subscribers
amounted to 3.819 million. During the first half of 2006, the Company
soft-launched new value-added services in certain cities, such as personalized
ring services for fixed lines and voice navigation, all of which achieved
notable success in the market.
Taking advantage of the government's informatization policy, the Company began
a pilot test of integrated informatization services under the brand "CNC
Connected" targeted at small- and medium-sized corporations in certain cities
in 2006. Leveraging on our strengths in network resources, customers and
distribution channels, we integrated the resources of hardware suppliers,
service providers and applications providers to provide corporate customers
with integrated solutions including both standard modules and customized
solutions. It is expected that the service will be fully marketed in all of
the service regions in the second half of 2006, and becomes a new growth
engine.
Outlook
In the second half of 2006, we will emphasize retention of traditional
fixed-line business. With the phased completion of our local network
intelligence upgrading and billing and supporting systems upgrading,
multi-business bundling services will be marketed and implemented across our
service regions. Taking advantage of technology innovation, tripleplay and
informatization, our high growth businesses will continue to be a high
priority and we will promote broadband access, develop broadband content and
applications, expand broadband penetration rate among television consumers,
and refine our "charging for access + contents" business model. These measures
will lay a foundation for sustained growth and help accelerate our strategic
transformation.
Clearly, the year 2006 is full of opportunities and challenges. I believe that
with the efforts of the management and employees, the Company will see
healthier development in the future.
Zuo Xunsheng
Executive Director and Chief Executive Officer
Hong Kong, 23 August 2006
7
[PRICEWATERHOUSECOOPERS LOGO OMITTED]
Independent Review Report
PRICEWATERHOUSECOOPERS
22/F, Prince's Building
Central, Hong Kong
Telephone (852) 2289 8888
Facsimile (852) 2810 9888
www.pwchk.com
INDEPENDENT REVIEW REPORT TO THE BOARD OF DIRECTORS OF
CHINA NETCOM GROUP CORPORATION (HONG KONG) LIMITED
(incorporated in Hong Kong with limited liability)
Introduction
We have been instructed by the Company to review the interim financial
statements of the Company set out on pages 9 to 48.
Respective responsibilities of directors and auditors
The Rules Governing the Listing of Securities on the Stock Exchange of Hong
Kong Limited requires the preparation of consolidated condensed interim
financial information to be in compliance with Hong Kong Accounting Standard
34 "Interim financial reporting" issued by the Hong Kong Institute of
Certified Public Accountants and the relevant provisions thereof. The interim
financial statements is the responsibility of, and has been approved by, the
directors.
It is our responsibility to form an independent conclusion, based on our
review, on this 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 SAS 700 "Engagements to review
interim financial reports" issued by the Hong Kong Institute of Certified
Public Accountants. A review consists principally of making enquiries of the
Group's management and applying analytical procedures to the interim financial
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 months ended 30 June 2006.
PricewaterhouseCoopers
Certified Public Accountants
Hong Kong, 23 August 2006
8
Unaudited Condensed Consolidated Income Statement
For the six months ended 30 June 2006
Six months ended 30 June
----------------------------------
Note 2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Unaudited
Restated
(Note 2)
Continuing operations:
Revenues 4 43,181 42,773
--------------- --------------
Operating expenses
Depreciation and amortization (12,619) (12,398)
Networks, operations and support (6,234) (6,042)
Staff cost (5,910) (5,819)
Selling, general and administrative (6,051) (5,718)
Other operating expenses (687) (700)
--------------- --------------
Total operating expenses 5 (31,501) (30,677)
--------------- --------------
Operating profit before interest income and dividend income 11,680 12,096
Interest income 50 67
Dividend income -- 28
--------------- --------------
Profit from operations 11,730 12,191
Finance costs 6 (1,937) (1,701)
--------------- --------------
Profit before taxation 9,793 10,490
Taxation 7 (2,648) (2,750)
--------------- --------------
Profit for the period from continuing operations 7,145 7,740
=============== ==============
Discontinued operations:
Loss for the period from discontinued operations 17 (51) (52)
=============== ==============
Profit for the period attributable to shareholders of the Company 7,094 7,688
=============== ==============
Earnings per share for profit from continuing operations attributable to
shareholders of the Company for the period 9
- Basic earnings per share RMB1.08 RMB1.17
=============== ==============
- Diluted earnings per share RMB1.07 RMB1.17
=============== ==============
Loss per share for loss from discontinued operations attributable
to shareholders of the Company for the period 9
- Basic loss per share RMB(0.01) RMB(0.01)
=============== ==============
- Diluted loss per share RMB(0.01) RMB(0.01)
=============== ==============
9
The notes on pages 15 to 48 form an integral part of this condensed interim
financial information.
Unaudited Condensed Consolidated Balance Sheet
As at 30 June 2006
As at As at
30 June 31 December
Note 2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Audited
Assets
Current assets
Cash and bank deposits 10 5,482 4,895
Accounts receivable 11 7,686 7,401
Inventories and consumables 430 472
Prepayments, other receivables and other current assets 1,524 1,484
Due from holding companies and fellow subsidiaries 12 397 247
--------------- --------------
Subtotal 15,519 14,499
Assets of disposal group classified as held for sale 17 2,676 --
--------------- --------------
Total current assets 18,195 14,499
--------------- --------------
Non-current assets
Fixed assets 13 164,099 168,663
Construction in progress 12,355 6,822
Lease prepayments for land 14 1,925 1,949
Intangible assets 15 1,309 1,393
Deferred tax assets 3,803 3,480
Other non-current assets 16 4,239 6,034
--------------- --------------
Total non-current assets 187,730 188,341
--------------- --------------
Total assets 205,925 202,840
=============== ==============
The notes on pages 15 to 48 form an integral part of this condensed interim
financial information.
10
As at As at
30 June 31 December
Note 2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Audited
Liabilities and equity
Current liabilities
Accounts payables 18 19,787 16,719
Accruals and other payables 3,965 3,905
Short-term bank loans 19(a) 45,527 47,341
Current portion of long-term bank and other loans 19(b) 7,024 6,846
Due to holding companies and fellow subsidiaries 12 8,497 8,990
Current portion of deferred revenues 20 7,234 7,975
Current portion of provisions 4,027 4,029
Taxation payable 2,917 2,594
--------------- --------------
Subtotal 98,978 98,399
Liabilities of disposal group classified as held for sale 17 3,134 --
--------------- --------------
Total current liabilities 102,112 98,399
--------------- --------------
Net current liabilities (83,917) (83,900)
--------------- --------------
Total assets less current liabilities 103,813 104,441
--------------- --------------
Non-current liabilities
Long-term bank and other loans 19(b) 17,994 18,143
Due to holding companies and fellow subsidiaries 12 6,860 7,840
Deferred revenues 20 7,641 10,925
Provisions 2,942 3,174
Deferred tax liabilities 1,301 1,324
Other non-current liabilities 21 25
--------------- --------------
Total non-current liabilities 36,759 41,431
--------------- --------------
Total liabilities 138,871 139,830
--------------- --------------
Financed by:
Share capital 21 2,187 2,181
Reserves 64,867 60,829
--------------- --------------
Shareholders' equity 67,054 63,010
--------------- --------------
Total liabilities and equity 205,925 202,840
=============== ==============
The notes on pages 15 to 48 form an integral part of this condensed interim
financial information.
Zuo Xunsheng Miao Jianhua
--------------------- ------------------------
Director Director
11
Unaudited Condensed Consolidated Statement of Changes in Equity For the six
months ended 30 June 2006
Six months ended 30 June 2006
---------------------------------------------------------------------------------
Attributable to shareholders of the Company (unaudited)
Share Share Capital Statutory Revaluation Other Retained Total
capital premium reserve reserve reserve reserve earnings equity
-------- -------- ------- ------- -------- ------- -------- -------
RMB RMB RMB RMB RMB RMB RMB RMB
million million million million million million million million
(Note 21)
Balance as at 1 January 2006 2,181 42,750 387 8,550 4,101 (5,203) 10,244 63,010
Transfer to statutory reserve
(Note 8 (iii)) -- -- -- 1,330 -- -- (1,330) --
Transferred to retained earnings -- -- -- -- (954) (37) 991 --
Currency translation differences -- -- -- -- -- (48) -- (48)
-------- -------- ------- ------- -------- ------- -------- -------
Net income/(expense) recognised
directly in equity -- -- -- 1,330 (954) (85) (339) (48)
Profit for the period -- -- -- -- -- -- 7,094 7,094
-------- -------- ------- ------- -------- ------- -------- -------
Total income recognized for the period -- -- -- 1,330 (954) (85) 6,755 7,046
Dividends related to 2005 distributed
during the period (Note 8(i)) -- -- -- -- -- -- (3,196) (3,196)
Issue of shares upon exercise
of share options (Note 21) 6 173 (23) -- -- -- -- 156
Share-based payment -- -- 38 -- -- -- -- 38
-------- -------- ------- ------- -------- ------- -------- -------
Balance as at 30 June 2006 2,187 42,923 402 9,880 3,147 (5,288) 13,803 67,054
======== ========= ======== ======== ======== ========= ======== ========
The notes on pages 15 to 48 form an integral part of this condensed interim
financial information.
12
Six months ended 30 June 2005
---------------------------------------------------------------------------------
Attributable to shareholders of the Company (unaudited)
Share Share Capital Statutory Revaluation Other Retained Total
capital premium reserve reserve reserve reserve earnings equity
-------- -------- ------- ------- -------- ------- -------- -------
RMB RMB RMB RMB RMB RMB RMB RMB
million million million million million million million million
(Note 21)
Balance as at 1 January 2005 2,181 42,750 283 723 4,735 5,866 8,224 64,762
Transfer to statutory reserve
(Note 8(iii)) -- -- -- 3,378 -- -- (3,378) --
Movement of deferred tax recognized in equity -- -- -- -- 1,097 843 (2,174)
(234 )
Transferred to retained earnings -- -- -- -- (777) (41) 818 --
Currency translation differences -- -- -- -- -- 5 -- 5
-------- -------- ------- ------- -------- ------- -------- -------
Net income/(expense)
recognised directly in equity -- -- -- 3,378 320 807 (4,734) (229)
Profit for the period -- -- -- -- -- -- 7,688 7,688
-------- -------- ------- ------- -------- ------- -------- -------
Total income recognized for the period -- -- -- 3,378 320 807 2,954 7,459
Contributions from owner -- -- -- -- -- -- 68 68
Dividends related to 2004 distributed
during the period -- -- -- -- -- -- (259) (259)
Distributions to owner -- -- -- -- -- -- (930) (930)
Net assets distributed to owner in
accordance with reorganization for
the Acquisition -- -- -- -- -- -- (1,533) (1,533)
Share-based payment -- -- 48 -- -- -- -- 48
-------- -------- ------- ------- -------- ------- -------- -------
Balance as at 30 June 2005 2,181 42,750 331 4,101 5,055 6,673 8,524 69,615
======== ======== ======= ======= ======== ======= ======== =======
The notes on pages 15 to 48 form an integral part of this condensed interim
financial information.
13
Unaudited Condensed Consolidated Statement of Cash Flows
For the six months ended 30 June 2006
Six months ended 30 June
---------------------------------
Note 2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Unaudited
Restated
Note 2
Continuing operations:
Net cash inflow from operating activities 17,959 18,087
Net cash outflow from investing activities (10,754) (9,174)
Net cash outflow from financing activities (6,420) (10,793)
--------------- --------------
Net cash inflow/(outflow) from continuing operations 785 (1,880)
Net cash inflow from discontinued operations 17 89 533
--------------- --------------
Increase/(decrease) in cash and cash equivalents 874 (1,347)
=============== ==============
Cash and cash equivalents at beginning of period 4,874 10,581
=============== ==============
Cash and cash equivalents at end of period 5,748 9,234
=============== ==============
- Continuing operations 10 5,480 8,384
- Cash and cash equivalents classified as held for sale 268 850
=============== ==============
The notes on pages 15 to 48 form an integral part of this condensed interim
financial information.
14
Notes to the Interim Financial Statements
1 The Group and its principal activities
Background of the Group
China Netcom Group Corporation (Hong Kong) Limited (the "Company") was
incorporated in the Hong Kong Special Administrative Region ("Hong Kong")
of the People's Republic of China ("PRC") as a limited liability company
under the Hong Kong Companies Ordinance. The Company, China Netcom
Holdings and China Network Communications Group Corporation (the "China
Netcom Group") underwent the reorganization on June 30 2004 ("the
Reorganization"). Following the Reorganization, the shares of the Company
were listed on The Stock Exchange of Hong Kong Limited on 17 November
2004 and the ADSs on 16 November 2004. Immediately after the
Reorganization, China Netcom Group became the ultimate holding company of
the Group. Pursuant to a resolution passed in the special general meeting
of the shareholders on 25 October 2005, the Company acquired the
principal telecommunications operations and assets in the four northern
provinces/autonomous region, namely Shanxi Province, Neimenggu Autonomous
Region, Jilin Province and Heilongjiang Province from China Netcom Group
(the "Acquisition"), and the Acquisition was completed on 25 October
2005. Please refer to note 1 to the financial statements of the 2005
Annual Report for the details and financial impact of the Acquisition.
Following the Acquisition, the Company and its subsidiary (collectively
refer to "the Group") is the dominant provider of fixed line telephone
services, broadband, other internet related services, and business and
data communications services in ten northern provinces, municipalities
and autonomous region in the PRC , namely Beijing Municipality, Tianjin
Municipality, Hebei Province, Liaoning Province, Shandong Province, Henan
Province, Shanxi Province, Neimenggu Autonomous Region, Jilin Province,
and Heilongjiang Province. The Group also provides telecommunications
services to selected business and residential customers in both a
southern municipality and a southern province in the PRC, namely Shanghai
Municipality and Guangdong Province. In addition, the Group operates a
network and offers international data services throughout the Asia
Pacific countries and regions through Asia Netcom Corporation Limited and
its subsidiaries (collectively referred to as "ANC Group").
The Group's principal services consist of:
o Fixed line telephone services (including the personal handy phone
system (PHS) services), comprising:
(a) Local, domestic long distance and international long distance
services;
(b) Value-added services, including caller identity, telephone
information services; and
(c) Interconnection services provided to other domestic
telecommunications service providers including the fellow
subsidiary owned by China Netcom Group operating outside the
twelve service regions;
o Broadband services and other Internet-related services;
o Business and data communications services, including integrated
regional data and voice communications services; and
15
1 The Group and its principal activities (continued)
Background of the Group (continued)
o International services consisting of international voice services
including international inbound calls destined for the PRC or
transit through the PRC or other Asia-Pacific countries and regions,
and leased line, Internet access, managed data and other
telecommunications services provided to business and carrier
customers located outside the PRC.
On 2 June 2006, the Group entered into an agreement with third party
buyers to dispose of its entire interest in the ANC Group at an aggregate
cash consideration of US$168.84 million (equivalent to RMB 1,362.57
million) at fair value determined by both parties. The Group agreed to
maintain its business relationship with ANC Group in connection with its
own international operations and such business relationship will include
the purchase of certain limited network capacity from ANC Group after the
disposal. The transaction was completed on 22 August 2006.
2 Basis of presentation
These unaudited condensed consolidated financial statements (the "interim
financial statements") have been prepared in accordance with Hong Kong
Accounting Standard ("HKAS") 34, "Interim Financial Reporting" issued by
the Hong Kong Institute of Certified Public Accountants (the "HKICPA")
and the disclosure requirements of the Hong Kong Companies Ordinance and
the Rules Governing the Listing of Securities on The Stock Exchange of
Hong Kong Limited.
The interim financial statements include the financial information of the
Group and have been prepared in accordance with the same accounting
policies adopted in the 2005 financial statements and the new accounting
policies as set out in Note 3 below. These interim financial statements
should be read in conjunction with the Group's 2005 financial statements.
In respect of the 2005 comparative figures, prior to the Acquisition,
China Netcom Group held the entire telecommunications operations and
assets of four northern provinces/autonomous region. Since China Netcom
Group is the Group's ultimate holding company, the Acquisition
constitutes a business combination under common control. Acquisition
under common control is outside the scope of Hong Kong Financial
Reporting Standard ("HKFRS") 3 "Business combinations" issued by HKICPA.
Accordingly, the Company has used merger accounting to record the
Acquisition in accordance with the Accounting Guideline 5 "Merger
Accounting For Common Control Acquisition" ("AG 5") issued by the HKICPA,
and the acquired assets are stated at carrying amounts as if the fixed
line telecommunications operations and assets of the four
provinces/autonomous region have been held by the Company from the
beginning of the earliest period presented. The 2005 comparatives of the
income statement and cash flow statement have been restated accordingly.
16
2 Basis of presentation (continued)
On 2 June 2006, the Group entered into an agreement with third party
buyers to dispose of the entire interests in the ANC Group and the
disposal was completed on 22 August 2006. The assets and liabilities of
the ANC Group have been classified as held for sales and carried at the
lower of carrying amount and fair value less costs to sell since their
carrying amount is recovered principally through a sales transaction
rather than through a continuing use since 2 June 2006 in accordance with
HKFRS 5 "Non-current assets held for sales and discontinued operations"
issued by the HKICPA. The results and cashflows of the operations of the
ANC Group have been presented as discontinued operations. The 2005
comparative figures of the income statement and statement of cash flow in
respect of the ANC Group have been re-presented as discontinued
operations accordingly.
A significant percentage of the Group's funding requirements is achieved
through short term borrowings. Consequently, the balance sheet indicates
a significant working capital deficit. In the past, a substantial portion
of the Group's short term borrowings have been rolled over upon maturity.
In addition, on 20 July 2006, the Group issued commercial papers to raise
additional funding of RMB10 billion. Based on the Group's history of
obtaining finance, its current finance, its relationships with its
bankers and its operating performance, the directors consider that the
Group will continue to be able to roll over such short term financing, or
will be able to obtain sufficient alternative sources of financing to
enable it to operate and meet its liabilities as and when they fall due.
3 Changes in accounting policies
In 2006, the Group adopted the new and revised HKFRSs as listed below,
which are relevant to its operations.
HKAS 21 (revised) Movement impact of foreign currency--net investment in
foreign operations HKAS 39 (revised) Predictive accounting of cash flow
hedging of inner group transaction HKAS 39 (revised) Fair value option
HKAS 39 (revised) Financial guarantee contract HKFRS 4 (revised)
Financial guarantee contract
The adoption of these new and revised HKFRSs by the Company did not have
any significant impact on its results of operations and financial
position.
17
4 Revenues
Revenues represent the turnover of the Group and are derived from the
provision of fixed line telecommunications and related services, net of
the PRC business taxes and government levies. The Group's revenues by
business nature can be summarized as follows:
Six months ended 30 June
----------------------------------
2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Unaudited
Restated
(Note 2)
Revenues
Local usage fees 11,448 12,487
Monthly telephone service 8,700 9,105
Upfront installation fees 694 720
DLD usage fees 5,057 5,255
ILD usage fees 556 509
Value-added services 2,532 1,886
Interconnection fees 4,028 3,863
Upfront connection fees 1,330 1,824
Broadband service 4,993 3,674
Other internet-related service 347 332
Managed data service 784 829
Leased line income 1,361 1,211
Other services 1,351 1,078
--------------- --------------
Total 43,181 42,773
=============== ==============
The revenues of the Group's international telecommunication services
derived from the ANC Group operation have been separately disclosed as
discontinued operations in note 17. The Company considers that the
remaining revenue earned from its international telecommunication
services is not material. Accordingly, the revenue is not separately
disclosed and has been included in the analysis above.
18
5 Operating expenses
Operating expenses are composed of the following items:
Six months ended 30 June
----------------------------------
2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Unaudited
Restated
(Note 2)
Staff costs 5,910 5,819
Depreciation and amortisation 12,619 12,398
Maintenance costs 1,986 2,039
Miscellaneous taxes and fees 147 144
Installation costs 575 557
Interconnection charges 1,851 1,731
Advertising and promotion expenses 396 384
Sales channel cost 1,135 912
Subscribers acquisition and retention costs 1,795 2,131
Auditors' remuneration 11 8
Bad and doubtful debt expenses 543 441
Operating leases 1,006 867
=============== ==============
19
6 Finance costs
Six months ended 30 June
----------------------------------
2006 2005
---------------- ---------------
RMB RMB
million million
Unaudited Unaudited
Restated
(Note 2)
Interest expenses on:
-Bank and other loans wholly repayable within five years 1,667 1,921
-Bank and other loans wholly repayable after more than five years 124 71
-Deferred consideration related to Acquisition (Note 12) 251 --
---------------- ---------------
2,042 1,992
Less: Interest expenses capitalised in construction in progress (115) (135)
Exchange loss / (gain), net 1 (165)
Bank charges 9 9
---------------- ---------------
1,937 1,701
================ ===============
Interest expenses were capitalised in construction
in progress using the following annual interest rates 4.28%-5.03% 3.91%-4.88%
================ ===============
7 Taxation
Six months ended 30 June
----------------------------------
2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Unaudited
Restated
(Note 2)
PRC enterprise income tax ("EIT") 2,993 3,375
Overseas profit tax 1 --
Deferred taxation (346) (625)
--------------- --------------
Taxation charges 2,648 2,750
--------------- --------------
20
7 Taxation (continued)
The provision for PRC EIT is calculated based on the statutory income tax
rate of 33% on the assessable profit of each of the entities now
comprising the Group in the PRC as determined in accordance with the
relevant income tax rules and regulations in the PRC.
Taxation on profits derived from certain subsidiaries outside the PRC,
including Hong Kong, has been calculated on the estimated assessable
profit at the rates of taxation ranging from 17.50% to 30.00%, prevailing
in the countries in which those entities operate.
The reconciliation between the Group's actual tax charge and the amount
which is calculated based on the weighted average statutory tax rate is
as follows:
Six months ended 30 June
----------------------------------
2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Unaudited
Restated
(Note 2)
Profit before taxation 9,793 10,490
=============== ==============
Weighted average statutory tax rate 33% 33%
Tax calculated at the weighted average statutory tax rate 3,231 3,462
Non-taxable income (Note below) (535) (701)
Expenses not deductible for tax purposes 20 72
Others (68) (83)
Tax charge 2,648 2,750
=============== ==============
Note: Non-taxable income comprises primarily upfront connection fees
charged to customers and amortized over the customer relationship
period.
21
8 Profit distributions
Six months ended 30 June
---------------------------------------------------------------------
2006 (Note(i)) 2005
--------------------------------- ----------------------------------
HK$ RMB HK$ RMB
million million million million
Unaudited Unaudited Unaudited Unaudited
Dividend distributed during the period 3,073 3,196 245 259
-------------- ------------ -------------- --------------
Notes:
(i) Pursuant to the shareholder's approval at the Annual General Meeting
held on 16 May 2006, a final dividend of HK$0.466 per share totaling
RMB3,196 million in respect of the year ended 31 December 2005 was
declared and was paid on 6 June 2006, which has been reflected as an
appropriation of retained earnings for the six months ended 30 June
2006.
(ii) No interim dividend has been proposed by the directors for the
period ended 30 June 2006. The payment of any future dividends will
be determined by the Board of Directors.
(iii) Appropriation to statutory reserve
According to a PRC tax approval document issued by Ministry of
Finance and State Administration of Taxation to the Group, the
Group's upfront connection fees are not subject to EIT and an amount
equaled to the upfront connection fees recognised in the retained
earnings should be transferred from retained earnings to a statutory
reserve. For the six months ended 30 June 2006, the Company has made
an appropriation of RMB 1,330 million to the statutory reserve (For
the six months ended 30 June 2005: RMB 3,378 million).
22
9 Earnings per share
Basic earnings per share is computed using the weighted average number of
ordinary shares outstanding during the period. Diluted earnings per share
is computed using the weighted average number of ordinary shares and
potential ordinary shares outstanding during the period.
The following table sets forth the computation of basic and diluted net
earnings/(loss) per share:
Six months ended 30 June
----------------------------------
2006 2005
--------------- --------------
(in RMB millions, except share
and per share data)
Unaudited Unaudited
Restated
(Note 2)
Numerator:
Profit/(loss) for the period 7,094 7,688
=============== ==============
- Continuing operations 7,145 7,740
- Discontinued operations (51) (52)
Denominator:
Weighted average number of ordinary shares outstanding and
shares used in computing basic earnings per share 6,596,123,569 6,593,529,000
Diluted equivalent shares arising from share options 50,441,318 34,754,749
----------------- ----------------
Shares used in computing diluted earnings per share 6,646,564,887 6,628,283,749
----------------- ----------------
Basic earnings/(loss) per share
- Continuing operations RMB1.08 RMB1.17
=============== ==============
- Discontinued operations RMB(0.01) RMB(0.01)
=============== ==============
Diluted earnings/(loss) per share
- Continuing operations RMB1.07 RMB1.17
=============== ==============
- Discontinued operations RMB(0.01) RMB(0.01)
=============== ==============
23
10 Cash and bank deposits
As at As at
30 June 31 December
2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Audited
Cash and cash equivalents 5,480 4,874
Time deposits with original maturities over three months 2 21
--------------- --------------
Total cash and bank deposits 5,482 4,895
=============== ==============
Effective interest rate of time deposits with original maturities
over three months (%) 0.72 0.72
=============== ==============
Included in cash and bank deposits at the end of each of 30 June 2006 and
31 December 2005 are Renminbi denominated balances kept in the PRC
amounting to RMB 4,769 million and RMB 3,797 million respectively. The
conversion of Renminbi denominated balances into foreign currencies and
the remittance of bank balances and cash out of the PRC are subject to
the rules and regulations of foreign exchange control promulgated by the
PRC government.
24
11 Accounts receivable
Amounts due from the provision of fixed line telecommunications service
to residential and business customers are due within 30 days from the
date of billing. Residential customers who have accounts overdue by more
than 90 days will in normal circumstances have their services
disconnected. Accounts receivable from other telecommunications operators
and customers are due between 30 to 90 days from the billing date.
The ageing analysis of accounts receivable based on the billing date is
as follows:
As at As at
30 June 31 December
2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Audited
0-30 days 5,657 5,446
31-90 days 1,467 1,556
Over 90 days 2,687 2,053
--------------- --------------
Total 9,811 9,055
--------------- --------------
Less: Allowance for doubtful debts (2,125) (1,654)
--------------- --------------
Net carrying amounts 7,686 7,401
--------------- --------------
The fair value of accounts receivable approximate their carrying values
based on cash flows discounted using a rate based on the borrowing rate
of 5.85% (31 December 2005: 5.58%).
Included in the accounts receivable are amounts due from other
state-owned telecommunication operators amounting to RMB 1,209 million
(31 December 2005: RMB 1,003 million).
25
12 Amounts due from/(to) holding companies and fellow subsidiaries
As at As at
30 June 31 December
2006 2005
--------------- --------------
Note RMB RMB
million million
Unaudited Audited
Current:
Due from ultimate holding company (a) 346 89
Due from other holding companies (a) 2 1
Due from fellow subsidiaries (a) 49 157
--------------- --------------
Total 397 247
--------------- --------------
Due to ultimate holding company
- Deferred consideration (b) 1,960 1,960
- Others (a) 4,587 3,877
Due to fellow subsidiaries (a) 1,950 3,153
--------------- --------------
Total 8,497 8,990
--------------- --------------
Non-current:
Due to ultimate holding company
- Deferred consideration (b) 6,860 7,840
6,860 7,840
--------------- --------------
Note:
(a) These are interest free, unsecured and have no fixed terms of
repayment.
(b) Balance represents the deferred payments arising from the
Acquisition outstanding at period end. The balance is charged at
interest rate of 5.265 % per annum with final maturity through 30
June 2010. The deferred payment is analyzed as follows:
As at As at
30 June 31 December
2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Audited
Within one year 1,960 1,960
In the second year 1,960 1,960
In the third to fifth year, inclusive 4,900 5,880
--------------- --------------
Total 8,820 9,800
--------------- --------------
26
13 Fixed assets
Furniture,
fixture,
motor
Telecommunications vehicles and
networks and other
Buildings equipment equipment Total
-------------- ------------ -------------- --------------
RMB RMB RMB RMB
million million million million
Unaudited Unaudited Unaudited Unaudited
Cost / valuation:
Balance at 1 January 2006 27,050 280,301 19,770 327,121
Additions 11 245 182 438
Transferred from construction in progress 65 7,114 777 7,956
Disposals/write off (1) (133) (54) (188)
Classified assets as held for sale (172) (635) (42) (849)
-------------- ------------ -------------- --------------
Balance at 30 June 2006 26,953 286,892 20,633 334,478
-------------- ------------ -------------- --------------
Accumulated depreciation:
Balance at 1 January 2006 (6,201) (142,639) (9,618) (158,458)
Charges for the period (588) (10,846) (986) (12,420)
Disposals/write off -- 111 48 159
Classified assets as held for sale 51 261 28 340
-------------- ------------ -------------- --------------
Balance at 30 June 2006 (6,738) (153,113) (10,528) (170,379)
-------------- ------------ -------------- --------------
Net book value at 30 June 2006 20,215 133,779 10,105 164,099
============== ============ ============== ==============
Net book value at 1 January 2006 20,849 137,662 10,152 168,663
============== ============ ============== ==============
27
13 Fixed assets (continued)
Furniture,
fixture,
motor
Telecommunications vehicles and
networks and other
Buildings equipment equipment Total
-------------- ------------ -------------- --------------
RMB RMB RMB RMB
million million million million
Audited Audited Audited Audited
Cost / valuation:
Balance at 1 January 2005 25,967 264,383 13,788 304,138
Reclassifications 818 (4,981) 4,163 --
Additions 413 975 490 1,878
Transferred from construction in progress 1,659 23,106 2,053 26,818
Disposals/write off (48) (1,940) (541) (2,529)
Distributed to owner in accordance with
reorganization for the Acquisition (1,759) (1,242) (183) (3,184)
-------------- ------------ -------------- --------------
Balance at 31 December 2005 27,050 280,301 19,770 327,121
-------------- ------------ -------------- --------------
Accumulated depreciation:
Balance at 1 January 2005 (5,382) (124,673) (7,186) (137,241)
Reclassifications (354) 1,170 (816) --
Charges for the year (956) (21,541) (2,157) (24,654)
Disposals/write off 4 1,662 451 2,117
Distributed to owner in accordance with
reorganization for the Acquisition 487 743 90 1,320
-------------- ------------ -------------- --------------
Balance at 31 December 2005 (6,201) (142,639) (9,618) (158,458)
-------------- ------------ -------------- --------------
Net book value at 31 December 2005 20,849 137,662 10,152 168,663
============== ============ ============== ==============
Net book value at 1 January 2005 20,585 139,710 6,602 166,897
============== ============ ============== ==============
28
14 Lease prepayments for land
This represents land use rights in PRC and their net book value is
analyzed as follows:
As at As at
30 June 31 December
2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Audited
Held for:
Lease of between 10 to 50 years 1,900 1,933
Lease of less than 10 years 25 16
--------------- --------------
Balance at end of period/year 1,925 1,949
=============== ==============
The movement of the lease prepayments for land is as follows:
As at As at
30 June 31 December
2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Audited
Balance at beginning of period/year 1,949 1,746
Additions 20 280
Charge for the period/year (44) (37)
Distributed to owner upon reorganizations for the Acquisition -- (40)
--------------- --------------
Balance at end of period/year 1,925 1,949
=============== ==============
29
15 Intangible assets
Purchased Sponsorship
Goodwill software fees Total
-------------- ------------ -------------- --------------
RMB RMB RMB RMB
million million million million
Unaudited Unaudited Unaudited Unaudited
(Note 24(xv))
Cost:
Balance at 1 January 2006 3 1,913 540 2,456
Additions -- 120 -- 120
Write off (3) 628) -- (631)
-------------- ------------ -------------- --------------
Balance at 30 June 2006 -- 1,405 540 1,945
-------------- ------------ -------------- --------------
Accumulated amortization:
Balance at 1 January 2006 (3) (925) (135) (1,063)
Amortization for the period -- (136) (68) (204)
Write off 3 628 -- 631
-------------- ------------ -------------- --------------
Balance at 30 June 2006 -- (433) (203) (636)
-------------- ------------ -------------- --------------
Net book value at 1 January 2006 -- 988 405 1,393
-------------- ------------ -------------- --------------
Net book value at 30 June 2006 -- 972 337 1,309
============== ============ ============== ==============
Purchased Sponsorship
Goodwill software fees Total
-------------- ------------ -------------- --------------
RMB RMB RMB RMB
million million million million
Audited Audited Audited Audited
Cost:
Balance at 1 January 2005 3 1,250 -- 1,253
Additions -- 663 540 1,203
-------------- ------------ -------------- --------------
Balance at 31 December 2005 3 1,913 540 2,456
-------------- ------------ -------------- --------------
Accumulated amortization:
Balance at 1 January 2005 (3) (702) -- (705)
Amortization for the year -- (223) (135) (358)
-------------- ------------ -------------- --------------
Balance at 31 December 2005 (3) (925) (135) (1,063)
-------------- ------------ -------------- --------------
Net book value at 1 January 2005 -- 548 -- 548
-------------- ------------ -------------- --------------
Net book value at 31 December 2005 -- 988 405 1,393
============== ============ ============== ==============
30
16 Other non-current assets
As at As at
30 June 31 December
2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Audited
Installation costs 3,851 4,197
Prepaid network capacities 174 1,454
Others 214 383
--------------- --------------
4,239 6,034
=============== ==============
17 Discontinued operations
On 2 June 2006, the Group entered into agreement to dispose of its entire
interest in the ANC Group ("Sales and Purchase Agreement"). The disposal
was completed on 22 August 2006. The results and cashflow of the ANC
Group are presented in this interim financial statement as discontinued
operations.
The income statement and statement of cash flows of the ANC Group are set
out below:
Six months ended 30 June
----------------------------------
Note 2006 2005
--------------- --------------
1,2 RMB RMB
million million
Unaudited Unaudited
Discontinued operations:
Revenues 726 663
Expenses (776) (716)
--------------- --------------
Loss before taxation of discontinued operations (50) (53)
Taxation (1) 1
--------------- --------------
Loss after tax of discontinued operations (51) (52)
=============== ==============
31
17 Discontinued operations (continued)
Six months ended 30 June
----------------------------------
Note 2006 2005
--------------- --------------
1,2 RMB RMB
million million
Unaudited Unaudited
Discontinued operations:
Net cash inflow/(outflow) from operating activities 215 (96)
Net cash outflow from investing activities (126) (171)
Net cash inflow from financing activities -- 800
--------------- --------------
Net cash inflow from discontinued operations 89 533
=============== ==============
The assets and liabilities related to the ANC Group have been presented
as held for sale following the entering of the Sales and Purchase
Agreement and classified as a disposal group. An analysis of the disposal
group is as follows:
As at 30 June
Note 2006
--------------
1,2 RMB
million
Unaudited
Assets of disposal group classified as held for sale
Cash and bank deposits 288
Accounts receivable 348
Fixed assets 509
Prepaid networks capacities 1,314
Other assets 217
--------------
Total assets of the disposal group 2,676
==============
Liabilities of disposal group classified as held for sale
Advance from network capacity sales 2,450
Accounts payable 151
Accruals and other payables 225
Other liabilities 308
--------------
Total liabilities of the disposal group 3,134
==============
32
18 Accounts payable
As at As at
30 June 31 December
2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Audited
0-30 days 6,871 6,281
31-60 days 2,060 1,796
61-90 days 1,982 1,297
91-180 days 2,683 1,940
Over 180 days 6,191 5,405
--------------- --------------
Total 19,787 16,719
=============== ==============
Included in accounts payable are amounts due to other state-owned
telecommunications operators amounting to RMB 42 million (31 December
2005: RMB 48 million).
19 Bank and other loans
(a) As at 30 June 2006, the short term bank loans were Renminbi
denominated and unsecured:
As at As at
30 June 31 December
Interest rate and final maturity 2006 2005
--------------------------------- ---------------- ---------------
RMB RMB
million million
Unaudited Audited
Interest rates ranging from 4.70% to 5.27% per annum with maturity
through 30 June 2007 45,527 47,341
=============== ==============
The carrying values of short term bank loans approximate their fair
values which are based on cash flows discounted using rates based on
the borrowing rate of 4.70%-5.27% (31 December 2005: 4.70%-5.02%).
Included in the short-term bank loans were loans from state-owned
banks amounting to RMB 44,527 million as at 30 June 2006 (31
December 2005: RMB 46,541 million).
33
19 Bank and other loans (continued)
(b) The Group's long term bank and other loans comprise:
As at As at
30 June 31 December
Note 2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Audited
Long term bank loans (i) 23,160 22,734
Finance lease obligations (ii) 1,858 2,255
--------------- --------------
25,018 24,989
--------------- --------------
Less: current portion (7,024) (6,846)
--------------- --------------
17,994 18,143
=============== ==============
The carrying values of the current portion of long term bank loans
approximate their fair values which are based on cash flows
discounted using a rate based on the borrowing rate of 5.85% (31
December 2005: 5.58%).
Included in the long term bank loans were loans from state-owned
banks amounting to RMB 23,160 million as at 30 June 2006 (31
December 2005: RMB 22,685 million).
(i) Long term bank loans
As at As at
30 June 31 December
2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Audited
Loans
Unsecured 22,878 22,414
Secured 282 320
--------------- --------------
Total 23,160 22,734
--------------- --------------
Less: current portion (5,417) (5,579)
--------------- --------------
Long term loans 17,743 17,155
=============== ==============
34
19 Bank and other loans (continued)
(b) The Group's long term bank and other loans comprise: (continued)
(i) Long term bank loans (continued)
The Group's long term bank loans were repayable as follows:
As at As at
30 June 31 December
2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Audited
Within one year 5,417 5,579
In the second year 6,253 7,774
In the third to fifth year, inclusive 4,538 5,886
After the fifth year 6,952 3,495
--------------- --------------
23,160 22,734
=============== ==============
As at 30 June 2006, secured bank loans was RMB 282 million (31
December 2005: RMB 320 million) which were secured by the
followings:
o Corporate guarantees granted by China Netcom Group to the extent of RMB 69 million (31
December 2005: RMB 75 million); and
o Corporate guarantees granted by third parties to the extent of RMB 213 million (31 December
2005: RMB 245 million).
35
19 Bank and other loans (continued)
(b) The Group's long term bank and other loans comprise: (continued)
(ii) Finance lease obligations
As at As at
30 June 31 December
2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Audited
Obligation under finance leases 1,858 2,255
Less: current portion (1,607) (1,267)
--------------- --------------
251 988
=============== ==============
The accumulated finance lease obligation payable to the related
party as at 30 June 2006 amounted to RMB 1,858 million. (31
December 2005: RMB 2,255 million).
The interest rates charged on finance lease are ranging from
5.02% to 7.09% with maturity through 8 December 2008 (31
December 2005: 2.50% to 5.70% with maturity through 8 December
2008).
36
19 Bank and other loans (continued)
(b) The Group's long term bank and other loans comprise: (continued)
(ii) Finance lease obligations (continued)
The Group's liabilities under finance leases are analyzed as
follows:
As at As at
30 June 31 December
2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Audited
Within one year 1,642 1,319
In the second year 182 903
In the third to fifth year, inclusive 75 106
--------------- --------------
1,899 2,328
Less: future finance charges on finance leases (41) (73)
--------------- --------------
Present value of finance lease liabilities 1,858 2,255
=============== ==============
The present value of finance lease liabilities is as follows:
Within one year 1,607 1,267
In the second year 178 885
In the third to fifth year, inclusive 73 103
--------------- --------------
1,858 2,255
=============== ==============
37
19 Bank and other loans (continued)
(c) The fair value of the Group's non-current portion of long term bank
and other loans at 30 June 2006 and 31 December 2005 were as
follows:
As at As at
30 June 31 December
--------------- --------------
2006 2005
RMB RMB
million million
Unaudited Audited
Long term bank loans 15,598 15,571
Finance lease obligations 244 958
--------------- --------------
15,842 16,529
=============== ==============
The fair value are based on cash flows discounted using rates based
on the borrowing rates of ranging from 2.25% to 7.39% (31 December
2005: 2.54% to 6.12%).
38
20 Deferred revenues
As at As at
30 June 31 December
2006 2005
------------- --------------
RMB RMB
million million
Unaudited Audited
Balance at beginning of period/year:
- upfront connection fees 5,505 8,910
- upfront installation fees 6,769 7,638
- advances from network capacity sales 2,354 2,173
- prepaid telephony services 4,272 4,143
------------- --------------
18,900 22,864
------------- --------------
Additions for the period/year:
- upfront connection fees -- --
- upfront installation fees 194 573
- advances from network capacity sales 185 461
- prepaid telephony services 13,549 24,435
------------- --------------
13,928 25,469
------------- --------------
Reductions for the period/year:
- upfront connection fees (1,330) (3,405)
- upfront installation fees (688) (1,442)
- advances from network capacity sales (70) (280)
- prepaid telephony services (13,245) (24,306)
------------- --------------
(15,333) (29,433)
------------- --------------
Classified as held for sale
- advances from network capacity sales (2,450) --
- prepaid telephony services (170) --
------------- --------------
(2,620) --
------------- --------------
Balance at end of period/year:
- upfront connection fees 4,175 5,505
- upfront installation fees 6,275 6,769
- advances from network capacity sales 19 2,354
- prepaid telephony services 4,406 4,272
------------- --------------
14,875 18,900
------------- --------------
Representing:
- Current portion 7,234 7,975
- Non-current portion 7,641 10,925
------------- --------------
14,875 18,900
------------- --------------
39
21 Share capital
Authorized
------------------------------------------------------------------------------------------------
Convertible preference shares of
Ordinary shares of US$0.04 each US$0.04 each Total
------------------------------------ --------------------------------- ----------------------
RMB No. RMB RMB
No. of shares US$ million of shares US$ million US$ million
------------ --------- ------- --------- ------- ------ --------- ----------
As at 1 January 2005
and 2006 and as
at 30 June 2006 25,000,000,000 1,000,000,000 8,277 7,741,782 309,671 3 1,000,309,671 8,280
--------------- ------------- ------- --------- ------- ------ ------------- ----------
Issued
------------------------------------------------------------------------------------------------
Convertible preference shares of
Ordinary shares of US$0.04 each US$0.04 each Total
------------------------------------ --------------------------------- ----------------------
RMB No. RMB RMB
No. of shares US$ million of shares US$ million US$ million
------------ --------- ------- --------- ------- ------ --------- ----------
As at
1 January 2005
and 2006 6,593,529,000 263,741,160 2,181 -- -- -- 263,741,160 2,181
--------------- ------------- ------- --------- ------- ------ ------------- ----------
Issue of shares upon
exercise of share
options (Note) 18,042,300 721,692 6 -- -- -- 721,692 6
--------------- ------------- ------- --------- ------- ------ ------------- ----------
As at 30 June 2006 6,611,571,300 264,462,852 2,187 -- -- -- 264,462,852 2,187
--------------- ------------- ------- --------- ------- ------ ------------- ----------
Note: As at 30 June 2006, 40% of the 156,703,000 First Grant options
(note22) outstanding at 1 January 2006 were exercisable, of which
18,042,300 options (2005: nil) were exercised during the period
with an exercise price of HK$8.40. The proportion of the total
considerations received amounting to RMB 156 million, exceeds the
nominal value of the shares issued was recorded as share premium
of the Company.
22 Share option scheme
A share option scheme was approved pursuant to a directors' resolution on
30 September 2004 ("Share Option Scheme"). Share options are granted to
directors of the Company and to certain employees of the Group at the
directors' discretion. Share options can be exercised at least 18 months
from the later of the date of grant or the date of the listing of the
shares of the Company on the Hong Kong Stock Exchange and are subject to
certain vesting restrictions on timing.
On 22 October 2004, 158,640,000 share options with an exercise price of
HK$ 8.40 each were granted to the directors of the Company and certain
employees of the Group (the "First Grant"). These options were granted
immediately prior to the closing of the Company's initial global
offering, to subscribe for its ordinary shares at the initial public
offering price under the Hong Kong public offering, excluding brokerage
and trading fees, and transaction and investor compensation levies. The
First Grant has an exercise period of six years from the date of grant.
40
22 Share option scheme (continued)
On 6 December 2005, the board of directors approved the granting of
79,320,000 shares of share options to certain management personnel and
other professional personnel designated by the Compensation Committee of
the newly acquired four northern provinces/autonomous region (the "Second
Grant").
The fair value at the grant date of the share options granted in the
First Grant is determined using the Black-scholes valuation model based
on the following assumptions: expected dividend pay-off ratio of 35%,
expected vesting period of 5 years, expected fluctuation rate of 23.6%
and risk-free interest rate of 4.3%. The weighted average fair value of
each share option on grant date was determined as HK$ 1.22 per share (RMB
1.28 per share); the fair value at the grant date of the share options
granted in the Second Grant is determined using the Black-scholes
valuation model based on the following assumptions: expected dividend
pay-off ratio of 35%, expected vesting period of 4 years, expected
fluctuation rate of 21.46% and risk-free interest rate of 4.3%. The
weighted average fair value of each share option on grant date was
determined as HK$ 1.28 per share (RMB 1.34 per share). Since there is
subjectivity exercised in the valuation model adopted and the underlying
assumptions on which the fair value of the share options are determined,
and any change in these subjective assumptions may have a significant
impact to the fair value of the share options, the Black-Scholes Model
adopted may not be a reliable determinant of the fair value of the share
options.
A modification to certain clauses of the share option schemes already
granted was approved on 16 May 2006, pursuant to a directors' resolution.
The modifications are related to certain aspects including eligible
participants, exercise of options and vesting schedules, rights upon
cessation of employment, right upon death, rights upon loss of capacity,
performance targets, cancellation of options. The modification did not
have any impact to the interim financial statement. Please refer to the
related announcement on the modifications of share option scheme.
The movement of the share options already granted during the period/year
is summarized as follows:
No. of share options
-----------------------------------------------------------------------
As at 1 As at 31 Exercise
January December price
2005 Granted Exercised Lapsed Cancelled 2005 (HK$)
------------ --------- -------- -------- --------- ---------- ---------
First Grant 157,720,000 -- -- -- 1,017,000 156,703,000 8.40
Second Grant -- 79,320,000 -- -- -- 79,320,000 12.45
No. of share options
-----------------------------------------------------------------------
As at 1 As at 30 Exercise
January June price
2006 Granted Exercised Lapsed Cancelled 2006 (HK$)
------------ --------- --------- -------- --------- ---------- ---------
First Grant 156,703,000 -- 18,042,300 -- 1,975,500 136,685,200 8.40
Second Grant 79,320,000 -- -- -- 125,500 79,194,500 12.45
41
23 Commitments
(a) Capital commitments
As at As at
30 June 31 December
2006 2005
-------------- --------------
RMB RMB
million million
Unaudited Audited
Contracted but not provided for
Leasehold land and buildings
- Continuing operations 201 215
- Discontinued operations -- 12
Telecommunications networks and equipment
- Continuing operations 1,819 1,357
- Discontinued operations 70 19
Others
- Continuing operations 11 112
-------------- --------------
Total
- Continuing operations 2,031 1,684
- Discontinued operations 70 31
-------------- --------------
Authorized but not contracted for
Leasehold land and buildings
- Continuing operations 11 1
- Discontinued operations -- 26
Telecommunications networks and equipment
- Continuing operations 260 112
- Discontinued operations 11 --
Others
- Continuing operations 13 --
-------------- --------------
Total
- Continuing operations 284 113
- Discontinued operations 11 26
-------------- --------------
42
23 Commitments (continued)
(b) Operating lease commitments
The Group has future minimum lease payments under non-cancelable
operating leases in respect of premises and equipment as follows:
As at As at
30 June 31 December
2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Audited
Not later than one year
- Continuing operations 764 583
- Discontinued operations 244 411
Later than one year and not later than five years
- Continuing operations 429 527
- Discontinued operations 954 846
Later than five years
- Continuing operations 188 186
- Discontinued operations 1,564 1,513
--------------- --------------
Total
- Continuing operations 1,381 1,296
- Discontinued operations 2,762 2,770
--------------- --------------
24 Related party transactions
All state-controlled enterprises, their subsidiaries, their key
management and their close family, and their employees represent related
parties of the Group as defined by HKAS 24. China Netcom Group, the
Group's parent company, is a state-controlled enterprise directly
controlled by the PRC government which controls different state-owned
enterprises drives the economy of the PRC. The Group is the dominant
fixed line telecommunications service provider in northen China by virtue
of its historical monopoly over these services. As a result, the Group
has extensive transactions including sales to, purchases of services,
goods and fixed assets from, leasing of assets from and banking
transactions with other state-owned parties in its ordinary course of
business. These transactions are carried out at terms similar to those
obtained by other state-owned parties and have been reflected in the
financial statements.
The Group's operations are subject to the supervision of and regulation
by the PRC Government. The Ministry of Information Industry (MII),
pursuant to the authority delegated by the PRC's State Council, is
responsible for formulating the policies and regulations for the
telecommunications industry in China, including granting license,
allocating frequency spectrum, formulating interconnection and settlement
arrangement between telecommunications operator, enforcing industry
regulation and reviewing tariffs for domestic services. Other PRC
governmental authorities also regulate tariff polices, capital investment
and foreign investment in the telecommunications industry.
43
24 Related party transactions (continued)
As a state-owned telecommunication operator, the Group has extensive
transactions with other state-owned telecommunication operators in its
ordinary course of business. These transactions are carried out in
accordance with the rules and regulations stipulated by the MII of the
PRC Government and disclosed below.
The Group has extensive transactions with other members of the China
Netcom Group. It is possible that the terms of the transactions between
the Group and other members of the China Netcom Group are not the same as
those that would result from transactions with other related parties or
wholly unrelated parties.
Management believes that meaningful information relative to related party
disclosures has been adequately disclosed.
Six months ended 30 June
----------------------------------
Note 2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Unaudited
Restated
Emoluments to key management (i) 3 6
--------------- --------------
Interconnection fees
- from fellow subsidiaries (iv)(b) 145 149
- from other state-owned telecommunications operators (iv)(b) 3,352 3,059
--------------- --------------
Subtotal 3,497 3,208
--------------- --------------
Interconnection charges
- to fellow subsidiaries (iv)(b) 394 307
- to other state-owned telecommunications operators (iv)(b) 830 671
--------------- --------------
Subtotal 1,224 978
--------------- --------------
Rental income from properties leased to fellow subsidiaries (iv)(a),(iv)(c) 1 --
--------------- --------------
Purchase of materials
- from fellow subsidiaries (iv)(a),(iv)(c) 668 581
- from other related companies (iv)(a),(iv)(c) 70 109
--------------- --------------
Subtotal 738 690
--------------- --------------
44
24 Related party transactions (continued)
Six months ended 30 June
----------------------------------
Note 2006 2005
--------------- --------------
RMB RMB
million million
Unaudited Unaudited
Restated
(Note 2)
Receipt of engineering, project planning, design, construction
and information technology services
- from fellow subsidiaries (iv)(a),(iv)(b) 836 704
- from other related companies (iv)(a),(iv)(b) 138 97
--------------- --------------
Subtotal 974 801
--------------- --------------
Ancillary telecommunications support services
- from fellow subsidiaries (v) 155 106
- from other related companies (v) 18 11
--------------- --------------
Subtotal 173 117
--------------- --------------
Payment of operating lease rentals of premises
- to fellow subsidiaries (iv)(a),(iv)(c) 333 294
--------------- --------------
Property sub-lease rentals to fellow subsidiaries (iv)(a),(iv)(c) 6 --
--------------- --------------
Common corporate services income from ultimate
holding company (vi) 51 28
--------------- --------------
Common corporate services expenditure paid to ultimate
holding company (vi) 162 117
--------------- --------------
45
24 Related party transactions (continued)
Six months ended 30 June
----------------------------------
Note 2006 2005
--------------- --------------
MB RMB
million million
Unaudited Unaudited
Restated
(Note 2)
Support services received
- from ultimate holding company (vii) -- 2
- from fellow subsidiaries (vii) 373 324
- from other related companies (vii) 40 193
--------------- --------------
Subtotal 413 519
--------------- --------------
Telecommunications rental income from other state-owned
telecommunications operators (iv)(b) 135 613
--------------- --------------
Payment for lease of telecommunications facility
- to ultimate holding company (viii) 37 --
- to fellow subsidiaries (viii) 153 292
--------------- --------------
Subtotal 190 292
--------------- --------------
Payment for purchase of long-term telecommunications
capacity to fellow subsidiaries (ix) 36 91
--------------- --------------
Payment for lease of long-term telecommunications
capacity to fellow subsidiaries (x) 65 52
--------------- --------------
Management fee received from fellow subsidiaries (xi) 23 55
--------------- --------------
46
24 Related party transactions (continued)
Notes:
(i) Represents the emoluments paid to all of the directors and the top
management of the Group, who are considered to be the related
parties of the Group.
(ii) The Group entered into finance lease arrangements with a related
party, which was included in Note 19 b(ii).
(iii) Related party represents the non-listed investees of the fellow
subsidiaries.
(iv) Priced based on one of the following three criteria:
(a) market price;
(b) prices based on government guidance; or
(c) cost plus basis.
(v) Represents provision of ancillary telecommunications support
services to the Group by the fellow subsidiaries and the related
companies. These services include certain telecommunications
pre-sale, on-sale and after-sale services, certain sales agency
services, the printing and delivery of invoice services, the
maintenance of certain air-conditioning, fire alarm equipment and
telephone booths and other customer services.
(vi) The Group entered into a Master Service Sharing agreement with
China Netcom Group pursuant to which expenses associated with
common corporate services is allocated between the Group and China
Netcom Group based on total asset as appropriate.
(vii) Represents the support services provided to the Group by the
fellow subsidiaries and the related companies. These support
services include equipment leasing services, motor vehicles
services, safety and security services, conference services, basic
construction agency services, equipment maintenance services,
employee training services, advertising services, printing
services and other support services.
(viii) The Group entered into a Telecommunications Facilities Leasing
Agreement with China Netcom Group pursuant to which the Group
leases the international telecommunications facilities and
inter-provincial transmission optic fibers from China Netcom
Group. The lease payment is based on the depreciation charge of
the assets.
(ix) The Group entered into a Capacity Purchase Agreement with East
Asia Netcom Limited ("EANL"), a wholly owned subsidiary of China
Netcom Group, pursuant to which the Group receives certain amounts
of long-term telecommunications capacity from China Netcom Group
at market prices as set out in the Capacity Purchase Agreement.
(x) The Group entered into a Capacity Lease Agreement with EANL,
pursuant to which the Group leases certain amount of capacity of
China Netcom Group's telecommunications network at market rates as
set out in the Capacity Lease Agreement.
(xi) The Group entered into a Management Services Agreement with EANL,
pursuant to which the Group provides certain management services
to China Netcom Group either on a cost reimbursement basis or on
the basis of cost plus reasonable profits not exceeding the market
price as set out in the Management Service Agreement.
(xii) In addition, pursuant to the Listing Reorganization and the
Acquisition, China Netcom Group have agreed to hold and maintain,
for the Group's benefit, all licenses received from the MII in
connection with the Restructured Businesses transferred to the
Group. The licenses maintained by China Netcom Group were granted
by the MII at nil or nominal costs. To the extent that China
Netcom Group incurs a cost to maintain or obtain licenses in the
future, the Company has agreed reimburse China Netcom Group for
any such expense.
47
24 Related party transactions (continued)
(xiii) China Netcom Group has also agreed to indemnify the Group in
connection with any tax and deferred tax liabilities not
recognized in the financial statements of the Group arising from
transactions prior to the date of Listing Reorganization and the
Acquisition in relation to the business of the Group prior to the
Acquisition and the business of the newly required four
provinces/autonomous region respectively.
(xiv) As at 30 June 2006, China Netcom Group had granted corporate
guarantees to the Group as set out in Note 19 (b).
(xv) China Netcom Group, the Group's ultimate holding company, entered
into an agreement (the "Sponsorship Agreement") with Beijing
Organization Committee ("BOCOG") which designated China Netcom
Group as the exclusive fixed-line telecommunications services
partner in the People's Republic of China ("PRC") to sponsor the
2008 Beijing Olympic Games. China Netcom Group allocated the
sponsorship fee to its members based on the estimated future
benefits derived from the Sponsorship Agreement to respective
members and the Group has contributed a portion of the required
support under the Sponsorship Agreement through providing cash to
BOCOG amounting to RMB 540 million. Accordingly, an intangible
asset and a payable to the ultimate holding company of the said
amount have been recognized on the Group' balance sheet. Up to 30
June 2006, the settlement to China Netcom Group totaled 195
million and the balance of China Netcom Group amounted to RMB
345million as at 30 June 2006 (31 December 2005: RMB540 million).
(xvi) As at 30 June 2006, the Group has balances with other state-owned
telecommunication service providers and loans granted from
state-owned banks as set out in Notes 11, 18 and 19 respectively.
(xvii) For the six months period to 30 June 2006, the deferred
consideration in respect of the Acquisition paid to China Netcom
Group amounted to RMB 980 million (for the six months period ended
30 June 2005: nil), and the balance of deferred consideration as
of 30 June 2006 amounted to RMB 8,820 million (31 December 2005:
RMB 9,800 million) as set out in Note 12(b). The related interest
chared for six months period ended 30 June 2006 amounted to RMB
251 million (for the six months period ended 30 June 2005: nil) as
set out in Note 6.
25 Significant subsequent events
(i) The Group completed the disposal of the ANC Group to third party
buyers on 22 August 2006. The Group expects to record a net gain
ranging from approximately RMB1.7 billion to RMB1.9 billion and
the gain will be reported as part of discontinued operations for
the year ending 31 December 2006. On the same date, the Group
committed to purchase network capacities from the third party
buyers in the amount of no less than US$60,000,000 in the next
three years in accordance with a capacity purchase agreement.
(ii) On 20 July 2006, China Netcom (Group) Limited, the wholly owned
subsidiary of the Group, issued RMB 10 billion one-year Commercial
Paper in the PRC capital market with RMB 9,676 million net cash
inflow from this offering. The interest rate charged on this
Commercial Paper is 3.35%.
26 Ultimate holding party
The ultimate holding company is China Netcom Group which is owned and
controlled by the PRC Government.
27 Approval of financial statements
The financial statements were approved by the Board of Directors on
23 August 2006
48
Supplementary Information for American Depositary Shares Holders
The consolidated financial statements of the Group have been prepared in
accordance with Hong Kong GAAP, which differs in certain material respects
from U.S. GAAP. Differences between Hong Kong GAAP and U.S. GAAP, which may
have a significant impact on the consolidated net income and the consolidated
shareholders' equity are described below.
The effect on net income of significant differences between Hong Kong GAAP and
U.S.GAAP for the six months ended 30 June 2006 and 2005 is as follows:
Six months ended 30 June
2005 2006 2006
Unaudited Unaudited Unaudited
US$ million
RMB million except except per
per share data share data
Restated
Note 2
Consolidated profit/(loss) for the period under Hong Kong GAAP
-- continuing operations 7,740 7,145 894
-- discontinued operations (52) (51) (6)
7,688 7,094 888
U.S. GAAP adjustments which are only related to continuing operations
Depreciation of revalued fixed assets (2,401) (2,436) (305)
Tax effect on the above adjustments 792 804 101
(1,609) (1,632) (204)
Consolidated profit/(loss) for the period under U.S. GAAP
-- continuing operations 6,131 5,513 690
-- discontinued operations (52) (51) (6)
6,079 5,462 684
Shares used in computing basic earnings per share (million) 6,594 6,596 6,596
Shares used in computing diluted earnings per share (million) 6,628 6,647 6,647
Earnings per share for profit from continuing operations
attributable to shareholders of the Company for the
period under U.S. GAAP
- Basic earnings per share RMB0.93 RMB0.84 US$0.10
- Diluted earnings per share RMB0.93 RMB0.83 US$0.10
49
Loss per share for loss from discontinued operations
attributable to shareholders of the Company for the
period under U.S. GAAP
- Basic loss per share RMB(0.01) RMB(0.01) --
- Diluted loss per share RMB(0.01) RMB(0.01) --
50
The effect on shareholders' equity of significant differences between Hong
Kong GAAP and U.S. GAAP as at 30 June 2006 and 31 December 2005 is as follows:
31 December 2005 30 June 2006 30 June 2006
Unaudited Unaudited Unaudited
RMB RMB US$
million million million
Consolidated shareholders' equity
under Hong Kong GAAP 63,010 67,054 8,386
U.S.GAAP adjustments:
Revaluation of fixed assets 30,251 30,251 3,783
Depreciation of revalued fixed assets (8,639) (11,075) (1,385)
Tax effect on the above adjustments (7,132) (6,328) (791)
Consolidated shareholders' equity under U.S. GAAP 77,490 79,902 9,993
Other Information
Directors' and chief executive's interests in shares and short positions
Some of our directors personally hold options to subscribe for ordinary shares
of the Company, as disclosed under the paragraph "Directors', chief
executive's and employees' rights to acquire shares" below. These share
options were granted pursuant to the terms of the share option scheme adopted
by the Company on 30 September 2004 and subsequently amended on 16 May 2006
(the "Share Option Scheme").
Apart from those disclosed herein, as at 30 June 2006, none of the directors
nor the chief executive of the Company had any interests or short positions in
any of the shares, underlying shares or debentures of the Company or any of
its associated corporations (within the meaning of the Securities and Futures
Ordinance (the "SFO")) that is required to be recorded and kept in the
register in accordance with section 352 of the SFO, any interests required to
be notified to the Company and The Stock Exchange of Hong Kong Limited (the
"Stock Exchange") pursuant to the Model Code for Securities Transactions by
Directors of Listed Issuers (the "Model Code").
Directors', chief executive's and employees' rights to acquire shares
Share Option Scheme of the Company
During the six months ended 30 June 2006, no share option has been granted
under the Share Option Scheme.
As at 30 June 2006, the directors and chief executive of the Company,
employees of the Group and other persons had the following personal interests
in options to subscribe for shares of the Company granted under the Share
Option Scheme of the Company.
No. of shares No. of shares No. of shares
Price per share
involved in the involved in the No. of shares acquired on
be paid on
options outstanding options Date on which involved in the exercise of
exercise of
at the beginning outstanding at options were options cancelled
51
options during options
of the period period end granted during the period the period
HK$
Directors
Zhang Chunjiang 920,000 920,000 22 October 2004 -- -- 8.40
Tian Suning 920,000 920,000 22 October 2004 -- -- 8.40
Zuo Xunsheng 800,000 800,000 22 October 2004 -- -- 8.40
(also the chief
executive officer)
Zhang Xiaotie 800,000 630,000 22 October 2004 -- 170,000 8.40
Miao Jianhua 700,000 700,000 22 October 2004 -- -- 8.40
Li Liming 700,000 620,000 22 October 2004 -- 80,000 8.40
Yan Yixun 590,000 590,000 22 October 2004 -- -- 8.40
Employees 150,683,000* 131,505,200 22 October 2004 1,739,500 17, 438,300
8.40
79,320,000 79,194,500 6 December 2005 125,500 --
12.45
Other Persons 590,000 -- 22 October 2004 236,000 354,000
8.40
Total 215,879,700(a) 18,042,300
52
* The number of shares involved in the options outstanding at the beginning
of the period included share options granted to Mr. Jiang Weiping
involving a total of 700,000 shares. Mr. Jiang Weiping resigned as
executive director of the Company in May 2006, and he continues to serve
as the general manager of the human resource department of the Company.
Notes:
(a) The total number of shares involved in the options outstanding at period
end represents 3.27 per cent. of the issued share capital of the Company
as at the date of this report.
(b) Grantees of the share options granted on 22 October 2004 are entitled to
exercise the options in the following periods:
(i) in respect of 40 per cent. of the options granted, from 17 May
2006 to 16 November 2010;
(ii) in respect of a further 20 per cent. of the options granted, from
17 May 2007 to 16 November 2010;
(iii) in respect of a further 20 per cent. of the options granted, from
17 May 2008 to 16 November 2010; and
(iv) in respect of the remaining 20 per cent. of the options granted,
from 17 May 2009 to 16 November 2010.
(c) Grantees of the share options granted on 6 December 2005 are entitled to
exercise the options in the following periods:
(i) in respect of 40 per cent. of the options granted, from 6 December
2007 to 5 December 2011;
(ii) in respect of a further 20 per cent. of the options granted, from
6 December 2008 to 5 December 2011;
(iii) in respect of a further 20 per cent. of the options granted, from
6 December 2009 to 5 December 2011; and
(iv) in respect of the remaining 20 per cent. of the options granted,
from 6 December 2010 to 5 December 2011.
Details of share options exercised during the period:
Weighted average
closing price per
share immediately
Period during Exercise before dates of Proceeds Number of shares
which options price exercise of options received involved in the
were exercised (HK$) (HK$) (HK$) options
From 17 May 2006 to 8.40 12.79 151,555,320 18,042,300
30 June 2006
53
Substantial interests in the share capital of the Company
The Company has been notified of the following interests in the Company's
issued shares at 30 June 2006 amounting to 5 per cent. or more of the ordinary
shares in issue:
Percentage
Ordinary shares held of total
directly indirectly issued shares
(i) China Network Communications Group Corporation -- 4,945,148,000(1)(2) 74.80%
(ii) China Netcom Group Corporation (BVI) Limited 4,647,449,014(1) 297,698,986(1)(2) 74.80%
Notes:
(1) China Network Communications Group Corporation ("China Netcom Group")
beneficially owns 4,647,449,014 shares held by its wholly-owned
subsidiary, China Netcom Group Corporation (BVI) Limited ("CNC BVI") and
1 share held by CNC Cayman, Limited ("CNC Cayman"), a wholly-owned
subsidiary of CNC BVI. The percentage of total issued share capital of
the Company beneficially held by China Netcom Group is 70.29 per cent.
(2) China Netcom Group is deemed under the SFO to be interested in
297,698,985 shares held by CNC BVI as trustee on behalf of certain
shareholders, representing 4.50 per cent. of the issued share capital of
the Company.
Apart from the foregoing, as at 30 June 2006, no person or corporation had any
interest in the share capital of the Company as recorded in the registers
required to be kept under section 336 of the SFO as having an interest in 5
per cent. or more of or any short position in the issued share capital of the
Company.
Discussion and analysis of the Company's performance
In compliance with paragraph 40(2) of Appendix 16 to the Rules Governing the
Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Listing
Rules"), the Company confirms that, save for the completion of the disposal by
the Company of 100% equity interest in Asia Netcom Corporation Limited on 22
August 2006 pursuant to an agreement dated 2 June 2006 (details of which are
set out in the Company's announcements dated 2 June 2006 and 23 August 2006)
and the adjustment to tariffs for inter-district voice calls by the Company's
subsidiaries in certain provinces with effect from 1 March 2006 as required by
the relevant regulatory authorities of the government, the current information
in relation to those matters set out in paragraph 32 of Appendix 16 to the
Listing Rules as applicable to the Company has not changed materially from the
information disclosed in the Company's 2005 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 2006.
54
Audit Committee
The Audit Committee reviewed with management the accounting principles and
practices adopted by the Company and discussed auditing, internal control and
financial report matters including review of the unaudited interim financial
statements for the six months ended 30 June 2006.
Compliance with the code provisions set out in the Code on Corporate Governance
Practices
The Company has complied with all code provisions of the Code on Corporate
Governance Practices as set out in Appendix 14 to the Listing Rules throughout
the six months ended 30 June 2006.
Under the amended Section 303A of New York Stock Exchange Listed Company
Manual, foreign issuers (including China Netcom Group Corporation (Hong Kong)
Limited) listed on the NYSE are required to disclose a summary of the
significant differences between their domestic corporate governance rules and
NYSE corporate governance rules that would apply to a U.S. domestic issuer. A
summary of such differences appears on our website at
http://www.china-netcom.com/english/inv/Corporate_Governance_Differences.htm.
Compliance with the Model Code
The Company has adopted the Model Code as set out in Appendix 10 to the
Listing Rules. All directors have confirmed, following enquiry by the Company,
that they have complied with the required standard set out in the Model Code
throughout the period from 1 January 2006 to 30 June 2006.
Purchase, sale or redemption of the Company's listed securities
During the six months ended 30 June 2006, neither the Company nor any of its
subsidiaries purchased, sold or redeemed any of the Company's listed
securities.
Forward-looking statements
This interim report includes "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. All statements of
historical facts, including in this interim report that address activities,
events or developments which we expect or anticipate will or may occur in the
future are hereby identified as forward looking statements for the purpose of
the safe harbor provided by Section 27A of the U.S. Securities Act of 1933, as
amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as
amended. The words such as believe, intend, expect, anticipate, project,
estimate, predict, plan and similar expression are also intended to identify
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors, which may cause the actual
performance, financial condition or results of operations of the Company to be
materially different from any future performance, financial condition or
results of operations implied by such forward-looking statements. Further
information regarding these risks, uncertainties and other factors is included
in the Company's most recent Annual Report on Form 20-F filed with the U.S.
Securities and Exchange Commission (the "SEC") and in the Company's other
filings with the SEC.
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