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 March, 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 announcement on final results for the year 2005 of China Netcom Group
Corporation (Hong Kong) Limited (the "Registrant"), made by the Registrant in
English on March 21, 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: March 21, 2006
[GRAPHIC OMITTED]
CHINA NETCOM GROUP CORPORATION (HONG KONG) LIMITED
[GRAPHIC OMITTED]
(Incorporated in Hong Kong with limited liability under the Companies Ordinance)
(Stock Code: 906)
2005 ANNOUNCEMENT OF FINAL RESULTS
CHAIRMAN'S STATEMENT
Dear Shareholders,
I am pleased to report to you our operating results for the year 2005. In 2005,
the Company successfully achieved its goal of "growth and efficiency", with
sustained rapid growth in key businesses and substantial improvements in
management efficiency. For the year 2005, we recorded net profits of RMB13,888
million and profits per share of RMB2.11.
During the year, the Company moved ahead on important strategic initiatives,
including the enhancement of the Company's corporate governance and internal
controls and reforms in our marketing and sales channels. These have helped to
establish a strong foundation for sustainable growth.
Strategic Goals and Execution Capabilities
Shortly after our listing, we identified that becoming a "broadband
communications and multi-media services provider" was our ultimate strategic
goal. Since then, we have been committed to a transformation from a voice-based
narrowband operator to a provider of broadband communications and multi-media
services. To this end, the Company made significant progress in 2005 in its
three core strategies, "Broadband, Olympic and International". In 2005, our
broadband business sustained robust growth, including important advances in
broadband content and applications services. During the year, we also commenced
IPTV business in Harbin jointly with our partner. Harbin was the first city in
the PRC with permission to deploy IPTV service. We believe that our IPTV
services will bring about a major breakthrough in the growth our broadband
businesses.
In 2005, the Company entered into a Comprehensive Cooperation Agreement on
Olympics Communications Project Construction with the National Olympic Sports
Centre, aimed at providing broadband support to the Olympic Games. Besides
generating enormous revenues for the host country, previous Olympic Games have
served as an important driver for the adoption of technological breakthroughs,
such as television, mobile phones and even the Internet. Against this backdrop,
it is our dream that the coming Olympic Games will be the first "Broadband
Olympics". We will strive to develop our broadband businesses through
technological, business and service innovations, thereby expediting the
strategic transformation of the Company.
In 2005, we also made major headway in terms of international cooperation. Our
Strategic Alliance Agreement with Telef|fonica Internacional S.A. enabled
cooperation at shareholding and Board levels. We discussed opportunities for
cooperation in a variety of telecommunications service businesses. We believe
strategic cooperation will bring new expertise to our operations and
management. This will further enhance our ability to implement new business
strategies and innovation, and promote organic and rapid growth of the Company.
1
Expansion through Acquisitions in Four Northern Provinces
In the Extraordinary General Meeting held on 25 October 2005, shareholders
considered and approved the Company's acquisition from China Network
Communications Group Corporation, our controlling shareholder, of its the major
telecommunications assets and business operations in the provinces and regions
of Heilongjiang, Jilin, Neimenggu and Shanxi. After completion of the
transaction, our position as the leading operator in the northern service
regions was further strengthened, leading to a substantial increase in
shareholders' value.
Management Reforms and Governance Enhancement
We believe that a robust corporate governance structure and internal control
system are the key factors for the Company's core competence. A sound corporate
governance structure with effective checks-and-balances, strict and prudent
internal control system and a reliable information system is essential for the
sustained development of the Company and for maximizing shareholders' value.
Therefore, we have initiated management reforms in our corporate governance
structure, internal control system, information system and administrative
system. We are determined to create a world-class corporate governance
structure and to serve as a model for large-scale state-owned enterprises in
China.
Since going public, the Company has made significant progress in developing a
sound Board structure, which serves as a solid "hardware" platform for good
corporate governance. To further enhance corporate governance, a special
corporate governance project was launched at the end of 2005 under the direct
leadership of our Board's Corporate Governance Committee. This project has the
ultimate goal of building up effective and robust corporate governance
"software" incorporating world-class best practices.
On another front, our internal control system project launched at the end of
2004 made significant progress in 2005. The objective of this project was to
comply with provisions of the Sarbanes-Oxley Act. During the year, the Company
designed systematic internal control standard models with reference to the
internationally recognized COSO internal control framework. The models have
been officially introduced throughout the Company. In 2005, we embarked on
implementation of an Enterprise Resources Planning (ERP) system. We also
launched a program to integrate and streamline information systems, as well as
to incorporate standardized internal control procedures into the system. The
purpose is to assure the efficiency of our internal controls and the accuracy
and timeliness of the Company's internal reporting system. As a result, we will
further strengthen security and monitoring of operations, creating a strong
foundation for healthy growth.
Adding Value to Shareholders
Taking into consideration our financial position, cash flow and potential new
businesses opportunities, the Board proposed a final dividend of HK$0.466 per
share for the financial year ended 31 December 2005.
In February 2006, the Company was officially declared and admitted as a
constituent stock of the Hang Seng Index, reflecting the recognition of our
efforts in maximizing shareholders' value. We will continue to strive for the
highest returns for our shareholders.
2
Future Prospects
Looking ahead, rapid development of the PRC economy and technological advances
in the information industry are expected to bring to the Company both
opportunities and challenges. The telecommunications sector is undergoing a
global transformation. Given the dominant trend, it is essential for the
Company to leverage opportunities presented by technological development and
improve its capacity for innovation. With "Transformation and Innovation" as
our focus for 2006, we will strive to enhance operational efficiency through
management optimization. We will also seek to achieve sustainable profitable
growth through innovation. We will further strategic cooperation with
international telecommunications operators in order to introduce into the
Company their advanced management expertise and know-how, thereby enhancing
management efficiency and minimizing the risks of implementing new business
strategies.
Given the growing trend of mobile substitution, mobile business has inevitably
become a key strategic focus of the Company. In 2006, we will prepare for the
launch of mobile services, especially by promoting integration between mobile
and fixed-line networks. On this basis, we are committed to providing customers
with broadband-based, multi-media information services integrating voice, data
and video, thereby gradually completing our transformation into a "broadband
communications and multi-media services provider".
Lastly, I would like to extend my sincere appreciation to our shareholders for
their trust and support. I am also grateful for the management and staff's
contribution to the Company in 2005. We are confident in our future. With the
continued commitment of management and staff, we will be able to deliver better
services to customers and create more value for shareholders.
[GRAPHIC OMITTED]
Zhang Chunjiang
Chairman
Hong Kong, 21 March 2006
3
CHIEF EXECUTIVE OFFICER'S STATEMENT
Dear Shareholders,
I have great pleasure in presenting our operating results for 2005, which
represent an outstanding performance. Efforts we made in streamlining our
management have produced remarkable results. In 2005, the Company has
experienced a second straight year of substantial improvements in operational
efficiency, coupled with solid growth in both net profits and free cash flow.
While the traditional fixed-line business remained healthy, our growth
businesses including broadband and value-added services grew rapidly, and
contributed a fast increasing share of total revenues. "CNC Connected", a
service targeted to business customers, has helped to build market share and
strengthen our competitive edge in the segment for business customers and key
accounts. We have been able to demonstrate our knowledge of the needs of this
segment, by integrating domestic and international resources and by offering
customized solutions.
In 2005, our efforts at external growth also paid off with acquisitions of
major telecom assets and businesses in the provinces and regions of
Heilongjiang, Jilin, Neimenggu and Shanxi. These enhanced competitiveness as
well as value to our shareholders.
1. Robust Financial Performance
In 2005, the Company experienced sustained growth in revenues and
operational efficiency, due to vigorous business expansion as well as the
imposition of strict cost controls. According to our financial statements
prepared by the merger accounting under generally accepted accounting
principles in Hong Kong and on the basis that all assets and businesses
acquired in 2004 were under the Company's control, revenues in 2005 were
RMB87,232 million, including amortization of upfront connection fees of
RMB3,405 million. If we exclude upfront connection fees, revenue was
RMB83,827 million, a year-on-year increase of 5.9%; EBITDA was RMB42,149
million, up 9.9% year-on-year; EBITDA margin improved from 48.5% last
year to 50.3%; Net profits were RMB10,483 million, while profit margin
was 12.5%. Operational efficiency was significantly improved.
In 2005, the Company continued to implement strict control over capital
expenditures in order to achieve profitable growth. CAPEX was reduced by
2.5% in 2005, to RMB27,562 million. CAPEX as a percentage of total
revenue (excluding upfront connection fees) was also lower than the
previous year, falling by 2.8 percentage points to 32.9% in 2005. In
2005, we maintained growth in free cash flow, which amounted to RMB5,995
million, up 11.1% from last year.
As of the end of 2005, total interest-bearing debts declined modestly by
0.6% to RMB82,130 million. However, the interest coverage ratio rose from
8.9 times of the last year to 10.9 times, reflecting an improved ability
to repay debts and interests.
2. Traditional Fixed-line Business: Stable Growth
In 2005, we effectively mitigated the impact of mobile substitution on
the traditional fixed-line business through service improvements, reform
of marketing and sales channels, and the introduction of new services and
service bundling. Each of these contributed to maintaining healthy growth
in this business segment. By the end of 2005, the number of fixed-line
telephone subscribers reached 115.33 million, representing growth of
6.7%. This included 27.34 million PHS subscribers, an increase of 23.6%
over the end of 2004. Sustained high growth in the PHS business remained
the key driver for the expansion of the fixed-line telephone subscriber
base. In 2005, local voice services maintained stable revenue in contrast
to revenue from long distance voice services, which continued to decline.
Owing to substantial revenue growth in interconnection services during
the year, overall revenues from the traditional fixed-line voice business
were stable. Besides, average subscriber acquisition cost for PHS
business significantly declined in 2005, down to RMB100 from RMB255 in
2004. Meanwhile, improvement in services and development of new products
helped to control the downward trend in Average Revenue per Unit (ARPU)
of local telephone services in the second half of 2005, establishing
4
a solid foundation for healthy development in 2006.
3. High Growth Businesses: Sharp Expansion
Broadband services and value-added services are playing a pivotal role in
our transformation into a "broadband communications and multi-media
services provider." Both experienced rapid growth in 2005. They have
become the engine for sustainable and profitable growth of the Company.
In 2005, the number of broadband subscribers increased by 35.1% to11.48
million. Revenues from broadband and Internet businesses grew by 34.6% to
RMB8,350 million contributing 10.0% of total revenue (excluding upfront
connection fees).
In the second half of 2005, we invested heavily in broadband content and
application services and undertook an integration of related resources in
this sector and internal broadband resources in order to prepare for the
development of "video-oriented" broadband content and application
services in the future. During the year, the Company also launched trial
IPTV services with our partners in Harbin, Heilongjiang Province. The
growth of application-based businesses and intensified marketing efforts
devoted to business customers in 2005 stabilized and even tilt upward
ARPU in the broadband business from the second half of 2005. Subject to
regulatory approval, we believe that growth in IPTV and other broadband
application-based services will further promote expansion of our
broadband businesses in the future.
In 2005, our value-added services recorded strong growth. Revenues from
value-added services were RMB4,000 million, representing year-on-year
growth of 33.6%. The increase was due in large part to the launch of
value-added services for PHS subscribers. The volume of PHS short
messages reached 6,780 million while the number of Personalized Ring
subscribers reached 6.814 million, up 241% and 981% respectively from the
previous year.
Thanks to strong revenue growth from broadband and value-added services,
the Company was able to achieve a more balanced revenue structure. The
category of "High Growth Business Revenues," which includes revenue from
broadband services, value-added services, and business and data
communications services, increased 24.5% over the previous year, while
its contribution to total revenue (excluding upfront connection fees)
rose by 3.5 percentage points to 23.0%.
In relation to the business customers' market, the Company re-launched
the "CNC Connected" brand in 2005, providing integrated solutions to
business customers. Due to the competitive edge we have due to our
geographical location in the capital city, as well as our rich
international network resources, we were able to further consolidate our
lead in the business market.
4. Management Innovations Leading to Prominent Effect
We relentlessly pursued our objective of enhancing operational efficiency
by closely monitoring the best practices in the sector and establishing
first class operation management systems. In 2005, the Company built on
the management advantages of our "Headquarters- Branches" structure. We
continued to centralize management in terms of financial management,
capital controls, human resources, procurement, information systems, and
network operations, as well as maintenance and development. The
centralization of operational procedures and resources management
significantly enhanced operational efficiency. In 2005, operating
expenses accounted for 79.6% of total revenue(excluding upfront
connection fees), a decrease of 3.8 percentage points from 2004. The
proportion of various costs to total revenues generally recorded
decreases.
Management innovations helped to improve operational efficiency. At the
same time, the Company's ERP and internal control projects are in
progress as planned.
In 2005, the Company was ranked No. 1 in the "Integrated Satisfaction
Index Survey on Telecommunication Customer Services," sponsored by The
Ministry of Information Industry. The
5
Company has maintained this ranking for four consecutive years.
5. Future Outlook
Looking ahead, we expect market competition to intensify across the
telecommunications sector. However, we also see abundant opportunities
arising from changes in the market environment and regulatory policies,
which will help us achieve our strategic goal of transformation into a
"broadband communications and multi-media services provider." In 2006,
the Company will focus on the following key operating strategies:
- Traditional fixed-line business: Our strategy is to strengthen our
leading position in the market by bundling PHS and other services;
- High-growth businesses: We will devote substantial efforts to the
development of broadband and value-added services in order to
further boost the segment's revenue contribution. While expanding
the broadband subscriber base, we will promote development of
"video-oriented" broadband contents and application services. We
will maintain growth momentum in value-added services by
introducing innovations in value-added services for fixed-line
telephones;
- "CNC Connected": We will provide one-stop customized services for
business customers integrating communications, networking and IT in
order to satisfy their diversified and personalized needs. The
objective is to foster a stable and loyal business customer base
and to maintain market share in the market for business customers;
- Mobile business: We will actively prepare for entry into the mobile
sector, so as to establish a solid foundation for the Company's
transformation into a provider of broadband communications and
multi-media services to all end users across all networks;
- Cooperation with leading international operators: We will extend
strategic cooperation with international telecom operators in order
to adopt advanced management practices and benefit from their
expertise, thereby enhancing our capability for business innovation
and mitigating the entry risks of new businesses; and
- Operations management: We will maintain cost control efforts
through prudent management of capital expenditures, and pursue
higher free cash flow and improved gearing structure of the
Company.
2006 is a year of challenges and opportunities. With the joint efforts of
the Board, management and staff, I am confident that we will continue to
achieve substantial gains for our shareholders. Last but not least, I
would like to take this opportunity to express my deepest gratitude to
all our customers, shareholders, Board, management and employees for
their invaluable trust and support.
[GRAPHIC OMITTED]
Tian Suning
Vice Chairman and Chief Executive Officer
Hong Kong, 21 March 2006
6
GROUP RESULTS
China Netcom Group Corporation (Hong Kong) Limited (the "Company") is pleased
to announce the audited consolidated results of the Company and its
subsidiaries (the "Group") for the year ended December 31, 2005.
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2005
Year ended December 31,
Note 2005 2004
RMB RMB
million million
Restated
Notes 2&3
Revenues 4 87,232 83,494
-------- --------
Operating expenses
Depreciation and amortization (25,049) (25,180)
Networks, operations and support (14,417) (13,973)
Staff costs (12,333) (11,950)
Selling, general and administrative (13,438) (12,877)
Other operating expenses (1,490) (1,993)
-------- --------
Total of operating expenses (66,727) (65,973)
-------- --------
Operating profit before interest income, dividend income and deficit on 20,505 17,521
revaluation of fixed assets
Interest income 157 87
Dividend income 29 17
Deficit on revaluation of fixed assets - (11,318)
-------- --------
Profit from operations 20,691 6,307
Finance costs (mainly represents interest costs) (3,374) (3,930)
Share of loss of associated companies - (1)
-------- --------
Profit before taxation 17,317 2,376
Taxation (charge)/credit 6 (3,429) 323
-------- --------
Profit for the year 13,888 2,699
========= ========
Basic earnings per share 8 RMB2.11 RMB0.48
========= ========
Diluted earnings per share 8 RMB2.10 RMB0.48
========= ========
7
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 2005
As at December 31,
Note 2005 2004
RMB RMB
million million
Restated
Notes 2&3
Assets
Current assets
Cash and bank deposits 4,895 10,633
Short-term investments 2 2,876
Accounts receivable 9 7,401 7,174
Inventories and consumables 472 1,243
Prepayments, other receivables and other current assets 1,482 1,442
Due from ultimate holding company and fellow subsidiaries 247 1,087
-------- --------
Total current assets 14,499 24,455
-------- --------
Non-current assets
Fixed assets 168,663 166,897
Construction in progress 6,822 10,597
Lease prepayments for land 1,949 1,746
Intangible assets 1,393 382
Deferred tax assets 3,480 3,804
Other non-current assets 6,034 8,536
-------- --------
Total non-current assets 188,341 191,962
-------- --------
Total assets 202,840 216,417
========= ========
Liabilities and equity
Current liabilities
Accounts payable 10 16,719 21,125
Accruals and other payables 3,905 4,866
Short term bank loans 47,341 44,882
Current portion of long term bank and other loans 6,846 11,727
Due to ultimate holding company and fellow subsidiaries 8,990 10,080
Current portion of deferred revenues 7,975 8,876
Current portion of provisions 4,029 4,127
Taxation payable 2,594 361
-------- --------
Total current liabilities 98,399 106,044
-------- --------
Net current liabilities (83,900) (81,589)
-------- --------
Total assets less current liabilities 104,441 110,373
-------- --------
8
Non-current liabilities
Long term bank and other loans 18,143 26,052
Due to ultimate holding company and fellow subsidiaries 7,840 -
Deferred revenues 10,925 13,988
Provisions 3,174 3,574
Deferred tax liabilities 1,324 1,576
Other non-current liabilities 25 588
-------- --------
Total non-current liabilities 41,431 45,778
-------- --------
Total liabilities 139,830 151,822
-------- --------
Financed by:
Share capital 2,181 2,181
Reserves 60,829 62,414
-------- --------
Shareholders' equity 63,010 64,595
-------- --------
Total liabilities & equity 202,840 216,417
========= ========
Notes:
1 Background of the group
China Netcom Group Corporation (Hong Kong) Limited (the "Company") was
incorporated in the Hong Kong Special Administrative Region ("Hong Kong")
of the People's Republic of China ("PRC") on October 22, 1999 as a
limited liability company under the Hong Kong Companies Ordinance. The
shares of the Company were listed on The Stock Exchange of Hong Kong
Limited on November 17, 2004 and the ADSs of the Company were listed on
The New York Stock Exchange Inc. on November 16, 2004. Prior to a
reorganization conducted for the listing of the shares of the Company
(the "Listing Reorganization"), the Company's ultimate holding company
was China Netcom Holdings Company Limited ("China Netcom Holdings").
The Company, China Netcom Holdings and China Network Communications Group
Corporation (the "China Netcom Group") underwent the Listing
Reorganization on June 30, 2004. China Netcom Group, established by the
State Council of the PRC ("State Council") in May 2002, was formed under
a restructuring plan approved by the State Council relating to the fixed
line telecommunication section. Its fixed line telecommunications
businesses were split from the Northern operations originally operated by
China Telecommunication Corporation. Immediately after the Listing
Reorganization, China Netcom Group became the ultimate holding company of
the Company and the Company and its subsidiaries (the "Group") owned the
assets and liabilities of fixed line telecommunications businesses
originally owned by China Netcom Group in the six northern provinces and
municipalities (namely Beijing Municipality, Tianjin Municipality, Hebei
Province, Liaoning Province, Shandong Province and Henan Province) and
two southern province and municipality (namely Shanghai Municipality and
Guangdong Province) in the PRC and the assets and liabilities of fixed
line telecommunications business in Asia Pacific Region originally owned
by the Group. Also, the Group leased from China Netcom Group the
inter-provincial optic fiber of the twelve service regions in the PRC and
the submarine cable assets in the Asia Pacific Region which had been
retained by China Netcom Group.
Pursuant to a resolution passed in the special general meeting of the
shareholders on October 25, 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"). In anticipation for the Acquisition, China Netcom
Group established China Netcom Group New Horizon (BVI) Limited ("New
Horizon (BVI)") and China Netcom Group New Horizon Telecommunication
Limited ("New Horizon"). China Netcom Group's fixed line
telecommunications businesses in the four northern provinces/autonomous
regions were transferred to New Horizon (BVI) through a group
restructuring. Upon the completion of the acquisition of the entire
interest of New Horizon (BVI) and New Horizon from China Netcom Group,
the Company controlled the fixed line telecommunications businesses in
the four northern provinces/autonomous regions.
After taking into consideration of the financial position and prospects
of the acquired businesses and the conditions of the capital market, the
consideration of Acquisition was determined at RMB12,800 million. The
consideration consists of an
9
initial cash payment of RMB3,000 million and deferred payments of
RMB9,800 million. The deferred payments will be settled in half-yearly
installments over five years. The interest charged on the deferred
payments is to be calculated at 5.265% per annum.
The Group's PRC 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 State Council, is
responsible for formulating the telecommunications industry policies and
regulations (the "Telecommunications Regulations").
Under the Telecommunications Regulations, all telecommunications
operators in the PRC must obtain a telecommunications service operating
license from the MII or from the provincial telecommunications
administrations. Providers of value-added services within a single
province are required to obtain licenses from provincial
telecommunications administrations. Providers of basic telecommunications
services and providers of value-added services in two or more provinces,
autonomous region and municipalities are required to obtain licenses from
the MII. China Netcom (Group) Company Limited ("CNC China") and New
Horizon, the Group's principal operating subsidiaries in China, as
indirect subsidiaries of China Netcom Group, have the right to operate
the Group's telecommunications business in twelve service regions under
the authorization of China Netcom Group, which holds the license required
for operating the Group's telecommunications businesses in the PRC.
Following the Listing Reorganization and the Acquisition, China Netcom
Group continues to be the holder of the licenses for operating a
telecommunications network in China, but has, with the consent of the
MII, granted the Group the right to operate under its licenses, the
assets described above and the related business. The Company is the
holder of licenses that are necessary to own and operate the assets that
are outside the PRC described above in such key countries and regions
such as Hong Kong, Japan, Singapore and Korea.
Following the Acquisition, 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, 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 two southern municipality and province, namely Shanghai
Municipality and Guangdong Province in the PRC. In addition, the Group
operates a network and offers international data services throughout the
Asia Pacific countries and regions.
Following the Listing Reorganization and the Acquisition, 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
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.
2 Basis of presentation
The financial statements have been prepared in accordance with Hong Kong
Financial Reporting Standards ("HKFRS"), Hong Kong Accounting Standards
("HKAS") and interpretations issued by the Hong Kong Institute of
Certified Public Accountants ("HKICPA"). They have also been prepared in
accordance with the disclosure requirements of the Hong Kong Companies
Ordinance and Rules Governing the Listing Securities on The Stock
Exchange of Hong Kong Limited. They have been prepared under the
historical cost convention modified by the revaluation of certain fixed
assets and the marking to fair values of certain investments and on a
going concern basis.
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. Accordingly, the Company has used
merger accounting to record the Acquisition in accordance with the
Accounting Guideline 5 "Merger Accounting For Common Control Acquisition"
("AG5") 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
10
earliest period presented. The 2004 comparatives of the financial
statements have been restated accordingly.
The preparation of financial statements in conformity with HKFRS requires
the use of certain critical accounting estimates. It also requires
management to exercise its judgement in the process of applying the
Company's accounting policies.
The financial statements include the financial information of the Company
and its subsidiaries (collectively referred to as the "Group").
A significant percentage of the Group's funding requirements is achieved
through short term borrowings. Consequently, the balance sheet indicates
a significant working capital deficit. In the past, a substantial portion
of the Group's short term borrowings have been rolled over upon maturity.
Based on the Group's history of obtaining finance, its 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 2005, the Group adopted certain new or revised HKFRSs which are
relevant to its operations as listed below. The comparative figures in
respect of the year ended December 31, 2004 have been restated where
necessary, in accordance with the relevant requirements.
o HKAS 1 Presentation of Financial Statements
o HKAS 2 Inventories
o HKAS 7 Cash Flow Statements
o HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
o HKAS 10 Events after the Balance Sheet Date
o HKAS 12 Income Taxes
o HKAS 14 Segment Reporting
o HKAS 16 Property, plant and equipment
o HKAS 17 Leases
o HKAS 18 Revenue
o HKAS 19 Employee Benefits
o HKAS 21 The Effects of Changes in Foreign Exchange Rates
o HKAS 23 Borrowing Costs
o HKAS 24 Related Party Disclosures
o HKAS 27 Consolidated and Separate Financial Statements
o HKAS 28 Investments in Associates
o HKAS 32 Financial Instruments: Disclosure and Presentation
o HKAS 33 Earnings per Share
o HKAS 36 Impairment of Assets
o HKAS 37 Provisions, Contingent Liabilities and Contingent Assets
o HKAS 38 Intangible Assets
o HKAS 39 Financial Instruments: Recognition and Measurement
o HKFRS 2 Share-based Payment
o HKFRS 3 Business Combinations
The adoption of these new or revised HKFRSs did not have any significant
impacts on the results of operations and financial position of the Group,
except for the adoption of HKFRS 2, HKFRS 3, HKAS 36, HKAS 17, HKAS 32
and HKAS 39.
The impact of the adoption of HKFRS 2, HKFRS 3, HKAS 36, HKAS 17, HKAS 32
and HKAS 39 to the financial position and results of the Group was as
follows:
2005
RMB
million
11
For the year ended 31
HKFRS 2 104
HKFRS 3 and HKAS 36 15
HKAS 32 and HKAS 39 15
-------
Decrease in profit before taxation 134
-------
As at January 1,
HKFRS 3 and HKAS 36 166
HKAS 32 and HKAS 39 1
-------
Increase in total equity 167
=========
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:
Year ended December 31,
2005 2004
RMB RMB
million million
Restated
Note 2
Revenues
Local usage fees 24,582 24,858
Monthly telephone services 18,261 17,964
Upfront installation fees 1,442 1,568
DLD usage fees 10,260 11,266
ILD usage fees 1,464 1,415
Value-added services 4,000 2,993
Interconnection fees 7,783 6,453
Upfront connection fees 3,405 4,346
Broadband services 7,916 5,307
Other Internet-related services 812 1,259
Managed data services 1,802 1,829
Leased line income 2,921 2,591
Other services 2,584 1,645
------- -------
Total 87,232 83,494
======== ========
5 Segmental reporting
Business segments provide services that are subject to risks and returns
that are different from other business segments. Geographical segments
provide services within a particular economic environment that is subject
to risks and returns that differ from those of components operating in
other economic environments. Currently the Group has one business
segment, the provision of fixed line telecommunications services. Less
than 10% of the Group's assets and operations are located outside the
PRC. Accordingly, no business and geographical segment information is
presented.
6 Taxation
Year ended December 31,
2005 2004
RMB RMB
million million
Restated
Note 2
PRC enterprise income tax ("EIT") 3,581 2,932
12
Overseas profit tax 10 -
Deferred taxation (162) (3,255)
------- -------
Taxation charges/(credit) 3,429 (323)
======== ========
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.
Tax loss previously unrecognised has been utilised which resulted in the
reduction of tax expense amounting to RMB837 million in the current year.
7 Profit distributions
Year ended December 31,
2005 2004
HK$ RMB HK$ RMB
million million million million
Final dividend proposed after balance sheet date of 3,073 3,196 245 259
HK$0.466 per share (2004: HK$0.037 per share)
Dividend distributed during the year 245 259 - -
Dividends proposed after the balance sheet date have not been reflected
as dividends payable.
8 Earnings per share
Basic earnings per share is computed using the weighted average number of
ordinary shares outstanding during the year. Diluted earnings per share
is computed using the weighted average number of ordinary shares and
potential ordinary shares outstanding during the year.
Weighted average number of ordinary shares outstanding and shares used in
computing basic earnings per share is 6,593,529,000 (the number of 2004
is 5,622,685,175) and basic earnings per share is RMB 2.11(2004: RMB
0.48). Shares used in computing diluted earnings per share is
6,627,641,723 (the number of 2004 is 5,630,034,452) and diluted earnings
per share is RMB 2.10(2004: RMB 0.48).
9 Accounts receivable
Amounts due from the provision of fixed line telecommunications services
to residential and business customers are due within 30 days from the
date of billing. Residential customers who have accounts overdue by more
than 90 days will in normal circumstances have their services
disconnected. Accounts receivable from other telecommunications
operations 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 December 31,
2005 2004
RMB RMB
million million
Restated
Note 2
0-30 days 5,446 5,503
31-90 days 1,556 1,122
Over 90 days 2,053 1,961
------- -------
Total 9,055 8,586
------- -------
Less: Allowance for doubtful debts (1,654) (1,412)
13
------- -------
Net carrying amounts 7,401 7,174
======== ========
10 Accounts payable
As at December 31,
2005 2004
RMB RMB
million million
Restated
Note 2
0-30 days 6,281 8,371
31-60 days 1,796 2,351
61-90 days 1,297 1,223
91-180 days 1,940 2,922
Over 180 days 5,405 6,258
------- -------
Total 16,719 21,125
======== ========
AUDIT COMMITTEE
The Audit Committee reviewed with management the accounting policies and
practices adopted by the Group and discussed auditing, internal control and
financial report matters including the review of the audited financial
statements for the year ended December 31, 2005.
COMPLIANCE WITH THE CODE PROVISIONS OF THE CODE ON CORPORATE GOVERNANCE
PRACTICES
The Company has established an audit committee, a compensation and nomination
committee, a strategic planning committee and a corporate governance committee
and adopted written terms of reference in respect of each of these committees.
At the time when the compensation and nomination committee was established, it
comprised an executive director, a non-executive director and an independent
non-executive director. In compliance with the relevant code provisions of the
Code on Corporate Governance Practices, Mr Victor Cha Mou Zing and Mr Hou
Ziqiang, two of the independent non-executive directors of the Company, were
appointed by the board of directors of the Company on 1 February 2005 as
additional members of the compensation and nomination committee.
Save as disclosed above and other than the requirements relating to the
preparation and content of a Corporate Governance Report (which only come into
effect in respect of the Company's annual report for the financial year ended
December 31, 2005), the Company has complied with the code provisions of the
Code on Corporate Governance Practices throughout the year ended December 31,
2005.
Under the amended Corporate Governance Rules of New York Stock Exchange, Inc.
(the "NYSE"), foreign issuers (including the Company) 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.
PURCHASE, SALE OR REDEMPTION OF THE COMPANY'S LISTED SECURITIES
The Company and its subsidiaries did not purchase, sell or redeem any of the
listed securities of the Company during the year.
14
CLOSURE OF REGISTER OF MEMBERS
The register of members of the Company will be closed from 11 May 2006 to 16
May 2006 (both days inclusive), during which period no transfer of shares in
the Company will be effected. In order to qualify for the proposed final
dividend, all transfers, accompanied by the relevant share certificates, must
be lodged with the Company's registrar, Computershare Hong Kong Investor
Services Limited, Room 1712-16, 17th Floor, Hopewell Centre, 183 Queen's Road
East, Wan Chai, Hong Kong, not later than 4 p.m. on 10 May, 2006.
ANNUAL REPORT
The Annual Report for the year ended December 31, 2005 containing all
information required by Appendix 16 to the Listing Rules will be published on
the website of the Hong Kong Stock Exchange (www.hkex.com.hk) as well as the
website of the Company (www.china-netcom.com).
FORWARD-LOOKING STATEMENTS
Certain statements contained in this announcement may be viewed as
"forward-looking statements" within the meaning of Section 27A of the U.S.
Securities Act of 1933, as amended, and Section 21E of the U.S. Securities
Exchange Act of 1934, as amended. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors, which may cause the actual
performance, financial condition or results of operations of the Company to be
materially different from any future performance, financial condition or
results of operations implied by such forward-looking statements. Further
information regarding these risks, uncertainties and other factors is included
in the Company's Annual Report on Form 20-F filed with the U.S. Securities and
Exchange Commission (the "SEC") and in the Company's other filings with the
SEC.
As at the date of this announcement, the Board of Directors of the Company
comprises Mr. Zhang Chunjiang, Dr. Tian Suning, Mr. Zhang Xiaotie, Mr. Miao
Jianhua and Mr. Jiang Weiping as executive directors, Ms. Li Liming, Mr Jose
Maria Alvarez-Pallete and Mr. Yan Yixun as non-executive directors and Mr. John
Lawson Thornton, Mr. Victor Cha Mou Zing, Dr. Qian Yingyi, Mr. Hou Ziqiang, and
Mr. Timpson Chung Shui Ming as independent non-executive directors.
15