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, 2005
(Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.)
Form 20-F X Form 40-F
----- -----
(Indicate by check mark whether the registrant by furnishing the
information contained in this form is also thereby furnishing
the information to the Commission pursuant to Rule 12g3-2(b)
under the Securities Exchange Act of 1934.)
Yes No X
----- -----
(If "Yes" is marked, indicate below the file number assigned to registrant
in connection with Rule 12g3-2(b): 82-__________.)
N/A
China Netcom Group Corporation (Hong Kong) Limited
Building C, No. 156, Fuxingmennei Avenue
Xicheng District
Beijing, 100031 PRC
This Form 6-K consists of:
The announcement of major transaction, connected transaction and continuing
connected transactions of China Netcom Group Corporation (Hong Kong) Limited
(the "Registrant"), made by the Registrant in English on September 12, 2005.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
under-signed, thereunto duly authorized.
CHINA NETCOM GROUP CORPORATION (HONG KONG) LIMITED
By /s/ Zhang Xiaotie
-----------------
By /s/ Oliver E Lixin
------------------
Name: Zhang Xiaotie and Oliver E Lixin
Title: Joint Company Secretaries
Date: September 12, 2005
The Stock Exchange of Hong Kong Limited takes no responsibility for the
contents of this announcement, makes no representation as to its accuracy or
completeness and expressly disclaims any liability whatsoever for any loss
howsoever arising from or in reliance upon the whole or any part of the
contents of this announcement.
CNC
CHINA NETCOM GROUP CORPORATION (HONG KONG) LIMITED
[GRAPHIC OMITTED][GRAPHIC OMITTED]
(incorporated in Hong Kong with limited liability under the Companies Ordinance)
(Stock Code: 906)
MAJOR TRANSACTION, CONNECTED TRANSACTION
AND CONTINUING CONNECTED TRANSACTIONS
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SUMMARY
The Acquisition
The Board of Directors announces that the Company entered into the Acquisition
Agreement on 12 September 2005, pursuant to which the Company agreed to acquire
and CNC BVI, the Company's immediate holding company, agreed to sell the entire
equity interest in the Target BVI Company for a purchase price of RMB12,800
million (equivalent to approximately HK$12,282 million), subject to certain
conditions.
The Target BVI Company holds the entire equity interest in the Target Company
which in turn owns the assets and liabilities and the business operations for
the provision of fixed-line telephone services, broadband and other
Internet-related services, and business and data communications services in the
Target Regions in the PRC. As a result of the Acquisition, the Company will
assume the bank and other loans less cash and bank deposits of the Target
Company in the amount of RMB23,209 million (equivalent to approximately
HK$22,269 million) as of 30 June 2005. As of 30 June 2005, the Target Company
had a total of approximately 28.86 million fixed-line subscribers and
approximately 2.78 million broadband subscribers. The Target Company had
approximately 90.2% market share of fixed-line telephone services and
approximately 90.7% market share of broadband services in the Target Regions as
of 30 June 2005.
Consideration for the Acquisition
The Acquisition was negotiated and entered into on an arm's length basis and on
normal commercial terms. The purchase price of the Acquisition is RMB12,800
million (equivalent to approximately HK$12,282 million), and consists of
payment of an initial cash consideration and a deferred consideration. The
initial consideration of RMB3,000 million (equivalent to approximately HK$2,879
million) will be satisfied on completion of the Acquisition by payment in cash
in RMB. The deferred consideration, in the amount of RMB9,800 million
(equivalent to approximately HK$9,403 million), represents the difference
between the total consideration and the initial consideration. From the date of
completion of the Acquisition, the Company will, at half-yearly intervals,
repay part of the deferred consideration and pay interest to CNC BVI on the
actual amount of deferred consideration remaining outstanding. The repayment of
deferred consideration at each half-yearly interval will be in equal amount of
RMB980 million (equivalent to approximately HK$940 million). Interest is
accrued daily and is payable at the rate of 5.265% per annum, being 10%
discount to the benchmark RMB lending rate of 5.85% per annum of commercial
banks in the PRC in respect of loans with tenure of five years as published by
the People's Bank of China and prevailing at 12:00 noon (Beijing time) on 8
September 2005, being two Business Days immediately preceding the date of the
Acquisition Agreement. The deferred consideration is payable within five years
after the date of completion of the Acquisition. The Company may, from time to
time, prepay all or part of the outstanding deferred consideration, at any time
after completion until the fifth anniversary of the completion of the
Acquisition, without penalty. The Company intends to finance the initial
consideration using existing internal cash resources, and the Company intends
to finance the deferred consideration using internal cash resources and/or
proceeds from future external financing.
Connected and major transaction
As at the Latest Practicable Date, CNC BVI beneficially owned approximately
70.49% of the issued share capital of the Company. CNC BVI is a wholly-owned
subsidiary of China Netcom Group. As such, both CNC BVI and China
1
Netcom Group are connected persons of the Company. The relevant applicable
percentage ratios under Rule 14.07 of the Hong Kong Listing Rules in respect
of the Acquisition exceed 25% but are below 100%. Accordingly, under the Hong
Kong Listing Rules, the Acquisition constitutes both a connected transaction
and a major transaction for the Company.
Reasons for and benefits of the Acquisition
The Board believes that the Acquisition represents an important opportunity for
the Group to increase coverage and achieve further growth, improve its service
capabilities, capture operating synergy and improve management efficiency. In
addition, the Acquisition will allow the Company to further benefit from the
sustained growth of the telecommunications industry in China and create
long-term value to Shareholders.
Continuing Connected Transactions
In order to facilitate the management of all continuing connected transactions
of the Company in China after the completion of the Acquisition, the Target
Company, CNC China and China Netcom Group entered into certain connected
transactions agreements on 12 September 2005 to regulate the continuing
connected transactions between China Netcom Group and its subsidiaries or
Associates (other than the Combined Group) on the one hand and the Combined
Group on the other, in respect of the Combined Group's operations in 12
provinces, municipalities and autonomous region in China. These agreements will
replace the existing connected transaction agreements between CNC China and
China Netcom Group if and when the Acquisition completes.
Independent Shareholders' approval and Independent Financial Adviser
The Board takes the view that the consideration payable by the Company for the
Target BVI Company and the other terms of the Acquisition are fair and
reasonable and that the Acquisition is in the interests of the Company and its
investors. An Independent Board Committee has been established by the Company
to advise the Independent Shareholders in respect of the terms of the
Acquisition and the terms of the Non-exempt Continuing Connected Transactions.
In this respect, CSFB has been retained as the independent financial adviser to
the Independent Board Committee and the Independent Shareholders.
The Acquisition and the Non-exempt Continuing Connected Transactions require
the approval of the Independent Shareholders at the Extraordinary General
Meeting at which China Netcom Group and its Associates will abstain from
voting. The votes of the Independent Shareholders at the Extraordinary General
Meeting shall be taken by poll.
Financial Advisers
CICC, Citigroup and Goldman Sachs are the financial advisers to the Company in
respect of the Acquisition.
Despatch of shareholders' circular
A circular containing, amongst other things, further information relating to
the Acquisition, the Continuing Connected Transactions, letter from the
Independent Board Committee and letter from CSFB, further financial and other
information of the Target Company and a notice of the Extraordinary General
Meeting will be despatched to the Shareholders as soon as practicable.
--------------------------------------------------------------------------------
ACQUISITION OF THE TARGET BVI COMPANY
Date: 12 September 2005
Parties: (1) Vendor: China Netcom Group Corporation (BVI) Limited
(2) Purchaser: China Netcom Group Corporation (Hong Kong) Limited
(3) Warrantor: China Network Communications Group Corporation
Pursuant to the Acquisition Agreement, the Company has agreed, subject to
certain conditions, to acquire from CNC BVI the entire equity interest in the
Target BVI Company for a purchase price of RMB12,800 million (equivalent to
approximately HK$12,282 million). Upon completion of the Acquisition, the
Target BVI Company will become a wholly-owned subsidiary of the Company.
2
China Netcom Group has given warranties, representations and undertakings in
respect of CNC BVI's title in the Target BVI Company and the Target Company,
the operations and assets and liabilities of the Target Company and the legal
status of those companies.
The Target BVI Company holds the entire equity interest in the Target Company
which in turn owns the assets and liabilities and the business operations for
the provision of fixed-line telephone services, broadband and other
Internet-related services, and business and data communications services in the
Target Regions in the PRC. As a result of the Acquisition, the Company will
assume the bank and other loans less cash and bank deposits of the Target
Company in the amount of RMB23,209 million (equivalent to approximately
HK$22,269 million) as of 30 June 2005. As of 30 June 2005, the Target Company
had a total of approximately 28.86 million fixed-line subscribers and
approximately 2.78 million broadband subscribers. The Target Company had
approximately 90.2% market share of fixed-line telephone services and
approximately 90.7% market share of broadband services in the Target Regions as
of 30 June 2005.
THE CONSIDERATION FOR THE ACQUISITION
The Acquisition was negotiated and entered into on an arm's length basis and on
normal commercial terms. The purchase price of the Acquisition is RMB12,800
million (equivalent to approximately HK$12,282 million), and consists of
payment of an initial cash consideration and a deferred consideration.
The purchase price of the Acquisition was determined based on various factors,
including the quality of the assets being acquired, their growth prospects,
earnings potential, competitive advantages in their respective markets and the
prospective profit contributions by the Target Company to the Group, as well as
by reference to other financial and operational factors. The purchase price for
the Acquisition represents a multiple of approximately 6.0 times the Target
Group's forecast profit after taxation and minority interests but before
extraordinary items (including an estimated upfront connection fee of
approximately RMB735 million (equivalent to approximately HK$705 million)) for
the year ending 31 December 2005, which is unlikely to be less than RMB2,150
million (equivalent to approximately HK$2,063 million). In addition, the
Company will assume the bank and other loans less cash and bank deposits of the
Target Company in the amount of RMB23,209 million (equivalent to approximately
HK$22,269 million) as of 30 June 2005 as a result of the Acquisition.
The initial consideration of RMB3,000 million (equivalent to approximately
HK$2,879 million) will be satisfied on completion of the Acquisition by payment
in cash in RMB.
The deferred consideration, in the amount of RMB9,800 million (equivalent to
approximately HK$9,403 million), represents the difference between the total
consideration and the initial consideration. From the date of completion of the
Acquisition, the Company will, at half-yearly intervals, repay part of the
deferred consideration and pay interest to CNC BVI on the actual amount of
deferred consideration remaining outstanding. The repayment of deferred
consideration at each half-yearly interval will be in equal amount of RMB980
million (equivalent to approximately HK$940 million). Interest is accrued daily
and is payable at the rate of 5.265% per annum, being 10% discount to the
benchmark RMB lending rate of 5.85% per annum of commercial banks in the PRC in
respect of loans with tenure of five years as published by the People's Bank of
China and prevailing at 12:00 noon (Beijing time) on 8 September 2005, being
two Business Days immediately preceding the date of the Acquisition Agreement.
The payment of the deferred consideration and the interest payments can be made
in RMB or US dollars as agreed between CNC BVI and the Company. Any payment
made in US dollars will be based on the Federal Reserve noon-buying rate
between US dollars and RMB which is quoted as of 12:00 noon (New York City
time) on the day which is two business days immediately prior to the date of
payment.
The deferred consideration is payable within five years after the date of
completion of the Acquisition. The Company may, from time to time, prepay all
or part of the outstanding deferred consideration, at any time after completion
until the fifth anniversary of the completion of the Acquisition, without
penalty.
The Board takes the view that the consideration payable by the Company for the
Target BVI Company and the other terms of the Acquisition are fair and
reasonable. In particular, the Board is of the view that the terms of the
deferred consideration are more favourable than the usual terms of a commercial
bank loan of a similar size and term. The Board is of the view that the
Acquisition is in the interests of the Company and its investors and recommends
the Independent Shareholders to vote in favour of the ordinary resolution to
approve the Acquisition at the Extraordinary General Meeting.
3
FINANCING OF THE ACQUISITION
The Company intends to finance the initial consideration using existing
internal cash resources. The Company intends to finance the deferred
consideration using internal cash resources and/or proceeds from future
external financing.
CONDITIONS OF THE COMPLETION OF THE ACQUISITION
Completion of the Acquisition is conditional upon the fulfilment or waiver
(where available) of the following conditions, among others, on or before 31
December 2005 or such other date as the Company, CNC BVI and China Netcom Group
may agree:
(a) the passing of resolutions by the Independent Shareholders approving the
Acquisition and the Non-exempt Continuing Connected Transactions;
(b) there having been no material adverse change to the financial condition,
business operations, or prospects of the Target Company; and
(c) the receipt of various approvals from the relevant PRC regulatory
authorities.
Certain PRC regulatory approvals have been obtained. The Target Company
currently has a legal person business licence as a limited liability company.
Upon approval by the relevant Chinese regulatory authorities, the legal person
business licence of the Target Company will be replaced by a new one issued by
the State Administration for Industry and Commerce to reflect its status as a
wholly foreign-owned enterprise. The business of the Target Company will not be
affected by the process of issuance of such new business licence.
The Acquisition shall be completed following the fulfilment or waiver (where
applicable) of the above conditions, and is expected to take place on 31
October 2005, or such other date as may be agreed between CNC BVI, China Netcom
Group and the Company, following notification by the Company to CNC BVI and
China Netcom Group of the fulfilment or waiver of all the conditions. If any of
the above-mentioned conditions is not fulfilled or waived by 31 December 2005,
or such other date as CNC BVI, China Netcom Group and the Company may agree,
the Acquisition Agreement shall lapse.
REASONS FOR AND BENEFITS OF THE ACQUISITION
The Company is a leading fixed-line telecommunications services provider in
China and a leading international data communications services provider in the
Asia-Pacific region. Its northern service region covers the area of Beijing
Municipality, Tianjin Municipality, Hebei Province, Henan Province, Shandong
Province and Liaoning Province in China. Its southern service region covers the
area of Shanghai Municipality and Guangdong Province in China. It is also the
only telecommunications company in China that operates an extensive regional
data network and offers international data services in the Asia-Pacific region.
The Board believes that the Acquisition represents an important opportunity for
the Group to increase coverage and achieve further growth, improve its service
capabilities, capture operating synergy and improve management efficiency. In
addition, the Acquisition will allow the Company to further benefit from the
sustained growth of the telecommunications industry in China and create
long-term value to Shareholders.
(A) Increase coverage and achieve further growth
One of the Company's strategies is to explore external growth opportunities
through targeted mergers and acquisitions. The Acquisition will significantly
expand the geographic coverage of the Company. The Target Regions have a total
population of approximately 122 million with GDP per capita of RMB11,446 in
2004, or approximately 9.0% over China's national average, according to the
National Bureau of Statistics of China. The GDP in the Target Regions grew
approximately 13.8% between 2003 and 2004, compared with a growth rate of
approximately 9.5% during the same period for China. The 30.5 million
fixed-line subscribers in the Target Regions represented approximately 9.8% of
the total fixed-line subscribers in China in 2004. With the addition of the
operations of the Target Company, the Group's combined service area, subscriber
base, revenue and net profit will be significantly enlarged, further
solidifying the Group's position as the dominant telecommunications provider in
northern China and allowing the Group to better capture the growth potentials
in the Chinese telecommunications industry.
The table below sets out the revenues, EBITDA and net profit of the Group and
the Target Group for the year ended 31
4
December 2004 and for the six months ended 30 June 2005.
For the year ended For the six months ended
31 December 2004 30 June 2005
Before Acquisition Before Acquisition
The Group Target Group The Group Target Group
Historical Historical Historical Historical
Restated (1) (unaudited) (unaudited) (unaudited)
(RMB in millions) (RMB in millions)
Revenues 64,922 18,616 33,724 9,712
EBITDA(2) 34,172 8,529 19,032 5,463
Profit from operations before revaluation deficit 15,511 2,114 9,882 2,282
Deficit on revaluation of property, plant and equipment - (11,318) - -
Net profit/(loss) 9,230 (6,531) 6,358 1,330
(1) Historical financial information of the Group for the year ended 31
December 2004 has been restated to reflect the impacts of the adoption of
the new and revised HKFRS which are effective for accounting periods
beginning on or after 1 January 2005.
(2) EBITDA refers to the earnings before finance costs, interest income,
dividend income, taxation, depreciation and amortisation, share of loss
of associated companies, and minority interests. EBITDA is not a measure
of financial performance or of liquidity under HKFRS because EBITDA is
not uniformly defined. EBITDA should not be considered a substitute for
or superior to the Company's results prepared under HKFRS as it cannot be
used to measure operating results and liquidity and does not represent
operating cash flows. In addition, it may not be comparable to similarly
titled indicators of other companies.
The table below sets out the subscriber bases of the Group, the Target Company,
and the Combined Group on an aggregate basis as of 31 December 2004:
The Group Target Company Combined Group
Fixed-line subscribers (in thousands) 80,383 27,696 108,079
Including: Personal Handyphone System ("PHS") subscribers 15,073 7,051 22,124
(in thousands)
Broadband subscribers (in thousands) 6,218 2,274 8,492
(B) Improve the Group's service capabilities
In the Target Regions, the Target Company is the incumbent fixed-line operator
and owns extensive local access networks and broad customer relationships.
Since the Target Regions are contiguous to the Group's current northern service
region, the Combined Group has significant advantages in servicing large and
medium corporate customers, especially those with business operations across
regions. The Combined Group can improve its service qualities and capabilities
by applying knowledge from the Group's service regions to the Target Regions
and through shared marketing strategies and expanded sales channels to better
meet customers' evolving telecommunications demands. The Combined Group will
also be able to enjoy significant cost advantages in developing and promoting
broadband and value-added services.
(C) Capture operating synergy and improve management efficiency
The Board believes that the Acquisition represents an important opportunity to
create additional shareholders' value for the Combined Group through
streamlined organisational structure, improved management efficiency, and
reduced operating cost. It is intended that, as soon as practicable after the
completion of the Acquisition, the operations, assets and liabilities of the
Target Company will be merged with those of CNC China. Thereafter, all of the
Combined Group's telecommunications businesses in China will be conducted
through CNC China. The Board believes that this streamlined organisational
structure will allow the Combined Group to better manage its business across
the combined service regions and improve management accountability. In
addition, the Board believes that the Combined Group will be able to achieve
greater economies of scale, operational efficiency and synergies from the
Acquisition by consolidating various managerial functions including strategic
and investment planning, corporate procurement, treasury and financial
management, human resources and employee training, development and maintenance
of information technology infrastructure and other general corporate services.
5
THE REORGANISATION
In preparation for the Acquisition, the Target Company was incorporated on 9
August 2005 as a wholly owned subsidiary of China Netcom Group and the Target
BVI Company was incorporated on 27 July 2005 as a wholly owned subsidiary of
CNC BVI. China Netcom Group's fixed-line telecommunications assets and related
liabilities (other than the international gateway and related international
network assets, as well as the inter-provincial fiber-optic network and related
assets and liabilities) in the Target Regions, were transferred to the Target
Company. Pursuant to the Equity Interest Injection Agreement, the entire equity
interest in the Target Company was injected into CNC BVI by China Netcom Group,
and then the entire equity interest in the Target Company was injected into the
Target BVI Company by CNC BVI.
After the completion of the Acquisition, the Target BVI Company, which owns the
entire equity interest of the Target Company, will become a wholly owned
subsidiary of the Company.
Subject to relevant regulatory approvals, it is intended that as soon as
practicable after the completion of the Acquisition, the operations, assets and
liabilities of the Target Company will be merged with that of CNC China by way
of merger by absorption so that all the telecommunications businesses of the
Combined Group in China will be conducted through CNC China. It is also
intended that both the Target BVI Company and the Target Company will be
liquidated.
Set out below are the shareholding structures and main operating subsidiaries
of the Company immediately prior to the Acquisition, immediately following
completion of the Acquisition and after completion of the Acquisition and the
merger by absorption.
Corporate structure immediately prior to the Acquisition
[GRAPHIC OMITTED]
6
Corporate structure immediately following completion of the Acquisition
[GRAPHIC OMITTED]
7
Corporate structure after completion of the Acquisition
and the merger by absorption
[GRAPHIC OMITTED]
(1) The five PRC Shareholders, all of which are established in the PRC, are
the Chinese Academy of Sciences, Information and Network Center of the
State Administration of Radio, Film and Television, China Railways
Telecommunications Center, Shanghai Alliance Investment Limited, and
Shandong Provincial State-owned Assets Supervision and Administration
Commission.
(2) All of the ordinary shares owned by the five PRC Shareholders are
registered in the name of China Netcom Group Corporation (BVI) Limited,
or CNC BVI, which holds such ordinary shares in trust for each of the
five PRC Shareholders. Consequently, the ownership percentage of the five
PRC Shareholders in the charts above reflects the aggregate beneficial
interests of these Shareholders as held through CNC BVI. The ownership
percentage of CNC BVI as indicated in the charts above reflects CNC BVI's
own beneficial ownership.
(3) Indicates jurisdiction of incorporation.
(4) The provincial businesses are operated under local branch offices of
CNC China or the Target Company (as the case may be) and these local
branch offices are not legal entities.
FINANCIAL INFORMATION OF THE TARGET GROUP
The following are the unaudited combined income statements of the Target Group
for each of the three years ended 31 December 2002, 2003 and 2004 and for the
six-month periods ended 30 June 2004 and 2005. The audited financial statements
of the Target Group prepared in accordance with HKFRS will be included in the
circular to be issued by the Company.
8
Year ended 31 December Six months ended
30 June
2002 2003 2004 2004 2005
RMB RMB million RMB million RMB million RMB
million million
Revenues 16,232 17,700 18,616 9,315 9,712
Operating expenses
Depreciation and amortization (5,988) (6,317) (6,426) (3,196) (3,184)
Networks, operations and support (4,087) (3,118) (2,426) (960) (992)
Staff costs (2,602) (3,398) (3,891) (1,892) (1,759)
Selling, general and administrative (2,245) (3,269) (3,311) (1,736) (1,369)
Other operating expenses (380) (537) (459) (225) (129)
Total operating expenses (15,302) (16,639) (16,513) (8,009) (7,433)
Operating profit before interest income and deficit on 930 1,061 2,103 1,306 2,279
revaluation of property, plant and equipment
Interest income 28 16 11 5 3
Deficit on revaluation of property, plant and equipment - - (11,318) - -
Profit/(loss) from operations 958 1,077 (9,204) 1,311 2,282
Finance costs (1,283) (1,270) (998) (500) (501)
Profit/(loss) before taxation (325) (193) (10,202) 811 1,781
Taxation 423 398 3,671 (102) (451)
Profit/(loss) for the year/period 98 205 (6,531) 709 1,330
The following are the unaudited combined balance sheets of the Target Group as
at 31 December 2002, 2003 and 2004 and as at 30 June 2005. The audited
financial statements of the Target Group prepared in accordance with HKFRS will
be included in the circular to be issued by the Company.
As at
As at 31 December 30 June
2002 2003 2004 2005
RMB million RMB million RMB million RMB million
Assets
Current assets
Cash and bank deposits 1,097 1,114 580 466
Accounts receivable 1,121 1,175 1,486 1,859
Inventories and consumables 291 209 302 273
Prepayments and other receivables 739 582 436 366
Due from ultimate holding company and fellow subsidiaries 141 94 714 166
Total current assets 3,389 3,174 3,518 3,130
Non-current assets
Lease prepayments for land 466 450 480 437
Property, plant and equipment 44,588 47,719 42,110 39,327
Construction in progress 3,518 2,354 2,995 3,178
Intangible assets 58 91 66 121
Deferred costs 668 672 654 593
Deferred tax assets 1,663 2,076 1,410 1,143
Other non-current assets 14 11 9 -
9
Total non-current assets 50,975 53,373 47,724 44,799
Total assets 54,364 56,547 51,242 47,929
Liabilities and equity
Current liabilities
Accounts payable 5,632 5,409 6,472 6,091
Accruals and other payables 1,639 1,267 1,513 1,319
Short-term bank loans 10,219 15,774 15,543 16,978
Current portion of long-term bank and other loans 5,727 3,676 4,457 3,484
Due to ultimate holding company and fellow subsidiaries 1,231 1,448 1,836 1,866
Current portion of deferred revenues 2,140 2,170 2,223 1,954
Current portion of provisions 1,495 1,550 1,531 1,513
Taxation payable 105 185 165 97
Total current liabilities 28,188 31,479 33,740 33,302
Net current liabilities (24,799) (28,305) (30,222) (30,172)
Total assets less current liabilities 26,176 25,068 17,502 14,627
Non-current liabilities
Long-term bank and other loans 10,924 7,863 4,191 3,213
Deferred revenues 3,963 2,981 2,171 1,860
Provisions 1,181 1,153 1,431 1,369
Deferred tax liabilities 2,497 2,759 255 50
Other non-current liabilities 57 29 24 4
Total non-current liabilities 18,622 14,785 8,072 6,496
Total liabilities 46,810 46,264 41,812 39,798
Owners' equity 7,554 10,283 9,430 8,131
Total liabilities & equity 54,364 56,547 51,242 47,929
Prior to the completion of the Reorganisation, the Target Group has distributed
its profits for the six months ended 30 June 2005, which amounted to RMB930
million (equivalent to approximately HK$892 million), to China Netcom Group.
Further detailed information in respect of the Target Group's historical
results of operations and financial position will be set out in the circular to
be issued by the Company.
PROSPECTIVE FINANCIAL INFORMATION
The Company and the Target Group have prepared certain prospective financial
information for the year ending 31 December 2005 in compliance with Rule
14A.56(8) and Rule 14.62 of the Hong Kong Listing Rules. Neither the Target
Group nor the Company intends to update this information during the year or to
update such information in future years, although the Directors are aware of
the requirements of Rule 13.09 notes 9 and 10 of the Hong Kong Listing Rules.
This information is necessarily based upon a number of assumptions that, while
presented with numerical specificity and considered reasonable by the Target
Group, are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the control of the
Company or the Target Group, and upon assumptions with respect to future
business decisions which are subject to change. Accordingly, there can be no
assurance that these results will be realised. The prospective financial
information presented below may vary from actual results, and these variations
may be material.
The Company and the Target Group believe that, on the bases and the assumptions
discussed below and in the absence of unforeseen circumstances, the Target
Group's forecast combined profit after taxation and minority interests but
before extraordinary items (including an estimated upfront connection fee of
approximately RMB735 million (equivalent to approximately HK$705 million)) for
the year ending 31 December 2005 under HKFRS is unlikely to be
10
less than RMB2,150 million (equivalent to approximately HK$2,063 million).
Such forecast has been prepared based on the following principal assumptions:
(1) there will be no material changes in existing political, legal,
regulatory, fiscal or economic conditions in the PRC, Hong Kong, or any
other territories in which the Target Group currently operates or which
are otherwise material to the Target Group's revenues;
(2) there will be no material changes in legislation or regulations
governing the telecommunications industry in the PRC, Hong Kong or any
other country or territory in which the Target Group operates or which
the Target Group has arrangements or agreements with, which would
materially affect the business or operations of the Target Group;
(3) inflation, interest rates or foreign currency exchange rates will not
differ materially from those prevailing as of the date of this
announcement;
(4) there will be no material changes in the bases or rates of taxation
appropriate to the Target Group, except as otherwise disclosed in this
announcement; and
(5) based on information currently available, there will be no tariff
reduction that will have a material adverse effect on the Target Group's
business.
The calculations of and accounting policies adopted in arriving at the profit
forecast have been reviewed by PricewaterhouseCoopers, the Company's
independent reporting accountants and CICC, Citigroup and Goldman Sachs have
discussed with the Company the bases and assumptions on which the profit
forecast has been made. The texts of the letters from PricewaterhouseCoopers,
CICC, Citigroup and Goldman Sachs in respect of the profit forecast will be set
out in the circular to be issued by the Company.
The Company and the Target Group are not currently aware of any extraordinary
items which have arisen or are likely to arise in respect of the year ending 31
December 2005 which would affect the prospective financial information
presented.
FURTHER INFORMATION ON THE TARGET COMPANY
Market environment of the Target Company
The Target Regions include Heilongjiang Province, Jilin Province, Neimenggu
Autonomous Region and Shanxi Province of the PRC, which accounted for
approximately 10.3% of the total GDP of China in 2004, with a growth rate of
GDP of approximately 13.8% from 2003 to 2004. The fixed-line telephone
penetration rate in the Target Regions reached approximately 24.9% as of 31
December 2004. The fixed-line telephone penetration rate in the Target Regions
is relatively low compared to that of the Group's existing service regions. The
Company believes this presents growth potential for the Target Company.
The map below indicates the Target Regions and the existing services regions of
the Group in China. The accompanying table sets out selected demographic and
market information related to the Target Regions and the whole of China for the
year ended or as of 31 December 2004, unless otherwise indicated.
11
[MAP OMITTED]
Target
Regions China
------- -----
Population (in millions) 122 1,300
GDP per capita (RMB) 11,446 10,502
2003-2004 growth rate of GDP (%) 13.8 9.5
Fixed-line subscribers (including PHS subscribers) 30.5 312
(in millions)
Fixed-line telephone penetration rate (%) 24.9 24.0
Broadband subscribers (in millions) 2.6 23.9
Sources: National Bureau of Statistics of China,
the MII and provincial telecommunications
administrations.
Overview of the Target Company
The Target Company is the dominant provider of fixed-line telephone services,
broadband and other Internet-related services, and business and data
communications services in the Target Regions.
The principal services of the Target Company consist of:
o fixed-line telephone services (including its PHS service), including:
- local, domestic long distance and international long distance services;
12
- value-added services, including caller identification, PHS short
messaging service, telephone information service and "Personalised
Ring" service; and
- interconnection services provided to other domestic telecommunications
operators;
o broadband and other Internet-related services, including broadband
access such as Digital Subscriber Line ("DSL") and Local Area Network
("LAN"), and dial-up Internet access and other services; and
o business and data communications services, including DDN, frame relay,
ATM, IP-VPN and leased line services.
The following table illustrates a breakdown of the revenue of the Target
Company for each of the years ended 31 December 2002, 2003 and 2004 and for the
six-month periods ended 30 June 2004 and 2005.
For the year ended 31 December For the six months ended 30 June
2002 2003 2004 2004 2005
Percentage Percentage Percentage Percentage Percentage
Amount of revenue Amount of revenue Amount of revenue Amount of revenue Amount of revenue
(RMB in millions, except percentage data)
Fixed-line telephone
services(1):
Local:
Local usage fees 5,867 36.1 6,118 34.6 6,197 33.3 3,155 33.9 3,188 32.6
Monthly fees 3,482 21.5 3,896 22.0 4,221 22.7 2,122 22.8 2,107 21.8
Upfront installation 203 1.3 223 1.3 230 1.2 118 1.3 118 1.3
fees
Subtotal 9,552 58.9 10,237 57.9 10,648 57.2 5,395 58.0 5,413 55.7
Domestic long 2,524 15.5 2,554 14.4 2,453 13.2 1,247 13.4 1,217 12.6
distance(2)
International long 134 0.8 133 0.8 113 0.6 57 0.6 51 0.5
distance(2)(3)
Value-added services 277 1.7 579 3.3 847 4.5 396 4.3 540 5.6
Interconnection fees 864 5.3 1,183 6.7 1,582 8.5 765 8.2 876 9.0
from domestic
carriers
Upfront connection 1,280 7.8 1,157 6.4 968 5.2 512 5.5 397 4.1
fees(4)
Subtotal 14,631 90.0 15,843 89.5 16,611 89.2 8,372 90.0 8,494 87.5
Broadband and other
Internet-
related services
Broadband services 279 1.7 663 3.7 1,034 5.6 478 5.1 735 7.6
(including broadband
access such as DSL
and LAN services)
Other 214 1.4 176 1.1 114 0.6 67 0.7 42 0.4
Internet-related
services
Subtotal 493 3.1 839 4.8 1,148 6.2 545 5.8 777 8.0
Business and data
communications
services:
Managed data 324 2.0 338 1.9 303 1.6 155 1.7 145 1.5
Leased line 609 3.8 374 2.1 270 1.5 132 1.4 169 1.7
Subtotal 933 5.8 712 4.0 573 3.1 287 3.1 314 3.2
Other services 175 1.1 306 1.7 284 1.5 111 1.1 127 1.3
Total 16,232 100.0 17,700 100.0 18,616 100.0 9,315 100.0 9,712 100.0
(1) Includes revenue from the Target Company's PHS services.
(2) Includes revenue from the Target Company's IP voice long distance services.
(3) Includes revenue from long distance calls to Hong Kong, Macau and Taiwan.
(4) In July 2001, the upfront connection fees charged on basic telephone
access services were eliminated by the MII.
13
The following table illustrates the key operating data of the Target Company
for each of the years ended or as of 31 December 2002, 2003, 2004 and for the
six months ended or as of 30 June 2005.
For the six
For the year ended months ended
31 December or as of 30
or as of 31 December June
2002 2003 2004 2005
Fixed-line subscribers (in thousands) 19,205 24,459 27,696 28,857
Including: PHS subscribers (in thousands) 841 4,373 7,051 7,991
Market share of fixed-line telephone services (%)(1) 96.5 94.5 90.8 90.2
Total usage of local telephone services (inclusive of Internet
dial-up usage) (in million pulses) 60,333 61,898 59,074 29,656
Total usage of local telephone services (exclusive of Internet
dial-up usage) (in million pulses) 51,241 54,596 55,883 28,675
Domestic long distance calls (in million minutes) 5,375.0 5,972.3 6,411.4 3,384.3
International long distance calls(2) (in million minutes) 33.4 38.1 35.3 17.2
Caller identification penetration rate (%)(3) 41.7 59.9 66.8 69.5
PHS short messages (in millions) - 63.0 716.7 822.2
Telephone information service (in million minutes) 142 243 480 262
Broadband subscribers (in thousands) 127.1 811.0 2,274.4 2,777.9
Market share of broadband services (%)(1) 100 97.1 87.9 90.7
(1) Refers to market share in Target Regions only. The market share of
fixed-line telephone services is calculated by dividing the number of the
Target Company's fixed-line subscribers as of 31 December 2002, 2003 and
2004 and 30 June 2005 by the total number of fixed-line subscribers in
the Target Regions as of such dates, as measured by the provincial
telecommunications administrations. The market share of broadband
services is calculated by dividing the number of the Target Company's
total broadband subscribers as of 31 December 2002, 2003 and 2004 and 30
June 2005 by the aggregate number of broadband subscribers in the Target
Regions as of such dates, as measured by the provincial
telecommunications administrations (other than the number of broadband
subscribers in Shanxi Province as of 31 December 2003, and the number of
broadband subscribers in Shanxi Province as of 31 December 2003 was
estimated by the Target Company).
(2) Including calls to Hong Kong, Macau and Taiwan.
(3) Calculated by dividing the number of the Target Company's caller
identification service users by the total number of fixed-line
subscribers of the Target Company.
The services of the Target Company
(a) Fixed-line telephone services (including PHS)
The Target Company is the dominant provider of fixed-line telephone services in
the Target Regions, with a market share of approximately 90.2% as of 30 June
2005, based on the number of fixed-line subscribers.
The Target Company's fixed-line telephone services consist of local telephone,
domestic long distance, international long distance, value-added and
interconnection services. The number of the Target Company's fixed-line
subscribers in the Target Regions has increased from approximately 19.21
million as of the end of 2002 to approximately 28.86 million as of 30 June
2005. Fixed-line telephone services represent the Target Company's principal
business activity. The Target Company expects that its fixed-line telephone
services will continue to provide a steady revenue stream.
The fixed-line penetration rate in the Target Regions increased from
approximately 16.3% as of the end of 2002 to approximately 24.9% as of 31
December 2004, due to the overall economic growth and growing demand for
telecommunications services. Nevertheless, such fixed-line penetration rate is
relatively low compared to that of the Company's existing service regions and
other developed countries, which provides an opportunity for future growth.
In 2000, the Target Company began to selectively build wireless local access
networks based on PHS technology to offer PHS services as a cost-effective
alternative to mobile services. Its PHS services have been introduced in most
cities in the Target Regions and were designed to provide its subscribers that
require mobility within an area with the same area code with a more
cost-effective tariff plan than traditional mobile services and access to
value-added data
14
services. The Target Company believes that its PHS services have contributed
to the growth in its customer base, overall call volumes and revenues, and
have also mitigated the substitution effect of mobile services. The number of
its PHS subscribers has grown rapidly since this service was introduced. As of
30 June 2005, the Target Company had approximately 7.99 million PHS
subscribers, compared to approximately 0.84 million at the end of 2002.
The Target Company also operates a network of approximately 1.6 million public
telephones located in the Target Regions as of 30 June 2005 which provides
local, domestic long distance and international long distance call services,
and some of which also provide Internet services. An important contributing
factor to the demand for public telephones services is China's large and
growing migrant population.
The Target Company is seeking to stimulate continued growth in fixed-line usage
through the introduction of value-added services, such as caller
identification, PHS short messaging service, telephone information services and
"Personalised Ring" service.
The following table summarises key information regarding the Target Company's
local telephone services in the Target Regions as of 31 December 2002, 2003 and
2004 and as of 30 June 2005:
As of 31 December As of 30 June
2002 2003 2004 2005
(in thousands, except percentages)
Fixed-line subscribers (1)(2)
Residential 15,456 16,423 16,523 16,555
Business 1,922 2,480 2,621 2,709
PHS 841 4,373 7,051 7,991
Public telephones 987 1,183 1,502 1,601
Total 19,205 24,459 27,696 28,857
Market share (%)(3) 96.5 94.5 90.8 90.2
(1) Fixed-line subscribers consist of all access lines in service as well as
PHS subscribers. The Target Company calculates PHS subscribers based on
number of active telephone numbers for its PHS services. The Target
Company increases its total number of fixed-line subscribers as soon as
practicable after activation of the service. The Target Company removes a
fixed-line subscriber from the total number of fixed-line subscribers as
soon as practicable after the fixed-line subscriber deactivates the
service voluntarily or three months after the date on which the
fixed-line subscriber's bill becomes overdue. Prepaid and postpaid
telephone card customers are not counted toward the Target Company's
fixed-line subscribers.
(2) Including PHS subscribers.
(3) Calculated by dividing the number of the Target Company's fixed-line
subscribers as of 31 December 2002, 2003 and 2004 and 30 June 2005 by
total number of fixed-line subscribers in the Target Regions as of such
dates, as measured by the provincial telecommunications administrations.
Local telephone services
The local telephone services of the Target Company have grown steadily in
recent years and continue to represent the largest portion of its fixed-line
telephone services in terms of revenues.
The following table sets forth information regarding usage of the Target
Company's local telephone services provided in the Target Regions for each of
the years ended 31 December 2002, 2003 and 2004 and for the six months ended 30
June 2005:
15
For the six
months ended
For the year ended 31 December 30 June
2002 2003 2004 2005
Total usage of local telephone services (inclusive of
Internet dial-up usage) (in million pulses)(1) 60,333 61,898 59,074 29,656
Total usage of local telephone services (exclusive of
Internet dial-up usage) (in million pulses)(1) 51,241 54,596 55,883 28,675
(1) Pulses are the billing units for calculating local telephone usage
fees.
The usage of the Target Company's Internet dial-up service has declined in the
last few years due to migration to broadband services. However, if the
declining Internet dial-up usage is excluded, the usage of the Target Company's
local telephone services increased in the three years ended 31 December 2004
due to a variety of factors, including strong economic growth in its markets,
an increase in the number of fixed-line subscribers, more focused sales and
marketing efforts and new services and features.
Domestic long distance services
The Target Company offers long distance services through its traditional
networks as well as VoIP long distance services. The Target Company is the
leading provider of domestic long distance services in the Target Regions with
approximately 39.9% market share of all fixed-line and mobile operators for the
six months ended 30 June 2005. Its market share has been declining in recent
years as a result of increasing competition and the Target Company has taken
various steps to stabilise its market share in domestic long distance services.
The Target Company's VoIP domestic long distance services in the Target Regions
as a percentage of its total domestic long distance services in terms of usage
increased from approximately 34.7% as of 31 December 2002 to approximately
44.9% as of 30 June 2005, primarily due to the increased usage of its
lower-priced VoIP long distance services compared to stable usage levels for
its long distance services using its traditional networks over this period.
Furthermore, the Target Company's "IP Direct" service allows customers direct
access to its VoIP network by dialing a 5-digit access code from any fixed-line
telephone terminal without having to purchase prepaid phone cards, which
resulted in an increasing usage of VoIP service in recent years.
The following table shows the total minutes of domestic long distance calls
carried through the Target Company's long distance network and the market share
of its domestic long distance services for each of the years ended 31 December
2002, 2003 and 2004 and for the six months ended 30 June 2005:
For the six
months ended
For the year ended 31 December 30 June
2002 2003 2004 2005
Domestic long distance calls (in millions)(1)
Traditional 3,510.6 3,100.7 3,397.8 1,865.0
VoIP 1,864.4 2,871.6 3,013.6 1,519.3
Total 5,375.0 5,972.3 6,411.4 3,384.3
Market share (%)(2) 45.6 41.9 39.6 39.9
(1) Includes calls originated by prepaid phone cards users and IP
subscribers that are carried over the Target Company's long
distance networks.
(2) Calculated by dividing the Target Company's domestic long distance usage
in the Target Regions for the years ended 31 December 2002, 2003 and 2004
and the six months ended 30 June 2005 by the aggregate domestic long
distance usage of all fixed-line and mobile operators in the Target
Regions for each of such period, as measured by the provincial
telecommunications administrations (other than the traditional usage for
Shanxi Province, and the traditional domestic long distance usage of all
fixed-line and mobile operators in Shanxi Province for each of such
period was estimated by the Target Company).
The increase in minutes of usage in the Target Company's domestic long distance
services in recent years is mainly due to economic development, increased
cross-regional business activities, growth in the Target Company's customer
base and new service offerings. The increase in competition may, however,
negatively affect the future growth rate of its domestic long distance
services.
International long distance services
16
The Target Company is the leading provider of international long distance
services in the Target Regions, with a total usage of approximately 17.22
million minutes and an approximately 43.2% market share for the overall
international long distance service in the Target Regions for the six months
ended 30 June 2005. The overall downward trend in its market share in recent
years is attributable to increased competition although for the year ended 31
December 2003, due to the substantial increase in VoIP international long
distance services usage, the Target Company's market share in that year has
increased over the previous year.
The Target Company also offers VoIP international long distance services in the
Target Regions. From the end of 2002 to 30 June 2005, VoIP international long
distance services as a percentage of the Target Company's total international
long distance services in terms of usage increased from approximately 40.2% to
approximately 44.1%, as price-sensitive customers increasingly elected to use
lower-priced VoIP international long distance services.
The following table sets forth certain information related to the usage and
market share of the Target Company's international long distance services for
each of the years ended 31 December 2002, 2003 and 2004 and for the six months
ended 30 June 2005.
For the six
months ended
For the year ended 31 December 30 June
2002 2003 2004 2005
International long distance calls (in millions)(1)
Traditional 20.0 19.6 19.6 9.6
VoIP 13.4 18.5 15.7 7.6
Total 33.4 38.1 35.3 17.2
Market share (%)(2) 50.3 54.8 45.5 43.2
(1) Includes calls originated by prepaid phone cards users and IP subscribers
that are carried over the Target Company's long distance networks and
include calls to Hong Kong, Macau and Taiwan.
(2) Calculated by dividing the Target Company's international long distance
usage in the Target Regions for the years ended 31 December 2002, 2003
and 2004 and the six months ended 30 June 2005 by the aggregate
international long distance usage of all fixed-line and mobile operators
in the Target Regions for each of such period, as measured by the
provincial telecommunications administrations (other than Shanxi Province
and the international long distance usage of all fixed-line and mobile
operators in Shanxi Province for each of such period was estimated by the
Target Company).
Value-added services
In addition to basic telephone services, the Target Company offers a range of
value-added services, including caller identification, PHS short messaging
service, telephone information service, "Personalised Ring", teleconferencing,
video conferencing and voice mail, etc. Its value-added services increase total
usage on its network and average revenue per fixed-line subscriber, thus
contributing to its revenues. For the three years ended 31 December 2002, 2003
and 2004 and for the six months ended 30 June 2005, value-added services
contributed approximately RMB 277 million, RMB 579 million, RMB 847 million and
RMB 540 million, respectively to the total revenue of the Target Company. For
the same periods, value-added services contributed to approximately 1.7%, 3.3%,
4.5% and 5.6%, respectively of the total revenue of the Target Company.
The value-added services primarily utilise the Target Company's existing
network and equipment, and marketing and sales channels. Therefore, the Target
Company has incurred limited additional costs in developing and promoting its
value-added services. By substantially increasing the traffic and utilisation
of the network, the value-added services have become an important growth
component of the average revenue per subscriber, thus making substantial
contribution to the growth of the Target Company's total revenue and profit.
Furthermore, the value-added services improve customer satisfaction, which
allows the Target Company to defend its market leading position even under
pressure of intensifying competition and mobile substitution.
Value-added services are still in a relatively early stage of development in
China, and the Target Company believes that there is significant growth
potential in this area.
The following table illustrates the key operating data of the Target Company's
value-added services for each of the years ended or as of 31 December 2002,
2003 and 2004 and for the six months ended or as of 30 June 2005.
17
For the six
months ended
or
For the year ended 31 December as of 30
or as of 31 December June
2002 2003 2004 2005
Caller identification service penetration rate (%)(1) 41.7 59.9 66.8 69.5
PHS short messages (in millions)(2) - 63.0 716.7 822.2
Telephone information service (in million minutes) 142 243 480 262
"Personalised Ring" service subscribers (in thousands)(3) - - 290 1,224
(1) Calculated by dividing the number of the Target Company's caller
identification service users by the total number of fixed-line
subscribers of the Target Company.
(2) The Target Company's PHS short messaging service was introduced in 2003.
(3) The "Personalised Ring" service was launched in 2004.
Caller identification service
The penetration rate of the Target Company's caller identification service in
the Target Regions has increased in the last few years due to the Target
Company's devoted efforts to promote such service. As of 31 December 2002,
2003, 2004 and 30 June 2005, the penetration rate of the Target Company's
caller identification service in the Target Regions was approximately 41.7%,
59.9%, 66.8% and 69.5%, respectively.
PHS short messaging
The Target Company's PHS short messaging service was introduced in 2003. For
each of the years ended 31 December 2003 and 2004 and for the six months ended
30 June 2005, the volume of the Target Company's PHS short messaging service
was approximately 63.0 million, 716.7 million and 822.2 million messages,
respectively.
In December 2004, the arrangements on interconnection of short messages with
China Telecom, China Mobile and China Unicom were finalised, which enabled the
Target Company's PHS subscribers to send short messages to the subscribers of
the networks of the aforesaid operators and vice versa, and such arrangements
accelerated the growth of the Target Company's PHS short messaging service.
Telephone information service
The Target Company's telephone information services allow users to access
information at its standard telephone usage rates plus information usage fees.
The Target Company also cooperates with other content and application service
providers so as to enable other specialised telephone information and
application services, such as telephone banking and telephone stock trading
services. For each of the years ended 31 December 2002, 2003, 2004 and for the
six months ended 30 June 2005, the total usage of the Target Company's
telephone information service were approximately 142 million minutes, 243
million minutes, 480 million minutes and 262 million minutes, respectively. The
Target Company intends to further expand the scope and usage of these services
and develop flexible revenue sharing arrangements with content and application
service providers.
"Personalised Ring" service
The Target Company also actively promotes the "Personalised Ring" service,
which was launched in the Target Regions at the end of 2004, and has rapidly
acquired approximately 1.22 million subscribers as of 30 June 2005.
Interconnection
The Target Company earns interconnection fees for terminating or transmitting
calls that originate from other domestic operators' networks and pays
interconnection fees to other operators in respect of calls originating from
its networks that are terminated on their networks. The Target Company earns
and pays such fees in respect of local and domestic and international long
distance calls and Internet service.
All interconnection and settlement arrangements among domestic operators in
China are governed by the
18
Telecommunications Regulations and the rules on
interconnection arrangements and settlement promulgated by the MII.
(b) Broadband and other Internet-related services
The Target Company is the leading provider of broadband and other
Internet-related services in the Target Regions. Broadband services represent
one of its fastest growing businesses. This growth has been driven by the
increasing affordability and rising use of personal computers and other
Internet access devices and the proliferation of content and applications, such
as online games and video-on-demand.
The following table sets forth selected information regarding the Target
Company's broadband, dial-up and dedicated Internet access services for each of
the years ended or as of 31 December 2002, 2003 and 2004 and for the six months
ended or as of 30 June 2005.
For the six
months ended
For the year ended or as of or
31 December as of 30 June
2002 2003 2004 2005
Broadband services:(1)
DSL subscribers (in thousands) 93.1 718.9 1,529.2 1,877.9
LAN subscribers and subscribers of other services
(in thousands) 34.0 92.1 745.2 900.0
Total (in thousands) 127.1 811.0 2,274.4 2,777.9
Market share (%)(2) 100 97.1 87.9 90.7
Dial-up and dedicated Internet access services:
Dial-up online usage (in million minutes) 8,104.9 7,184.6 3,081.2 899.7
Dedicated Internet access lines in service 2,750 1,900 565 377
(1) DSL subscribers are calculated based on the number of active accounts.
LAN subscribers consist of end-users and dedicated line users. LAN
end-users are calculated based on the number of ports subscribed for. The
number of LAN dedicated line users equals total monthly fees paid by such
users divided by a set monthly revenue per user. The current set monthly
revenue per user is RMB 90. The Target Company considers an account
active or a service subscribed for as soon as practicable after
activations of the applicable service. A subscriber is removed from the
total number of subscribers as soon as practicable after that subscriber
deactivates the service voluntarily or three months after the date on
which that subscriber's bill becomes overdue.
(2) Calculated by dividing the number of the Target Company's broadband
subscribers as of 31 December 2002, 2003 and 2004 and 30 June 2005 by the
aggregate number of broadband subscribers in the Target Regions as of
such dates, as measured by the provincial telecommunications
administrations (other than the number of broadband subscribers in Shanxi
Province as of 31 December 2003, and the number of broadband subscribers
in Shanxi Province as of 31 December 2003 was estimated by the Target
Company).
Broadband services
The Target Company is leveraging its extensive fixed-line network, large
customer base, experienced sales force and established brand to achieve a
leading position in the fast growing market for broadband services in China. As
of 30 June 2005, the Target Company had approximately 2.78 million broadband
subscribers and a market share of approximately 90.7% in the Target Regions,
having averaged net additional subscribers of approximately 84 thousand per
month during the six months ended 30 June 2005.
The Target Company has taken various initiatives to tailor its products and
services to meet the evolving broadband needs of its customers. In order to
increase broadband penetration rate in the Target Regions, the Target Company
has introduced a series of products with different access speeds and developed
tiered broadband usage package with different monthly payment plans to cater
for customers with different affordability and needs. In addition, in order to
further increase its revenue from broadband services, the Target Company has
developed and promoted broadband products and solutions that are suited to
various small and medium-sized enterprises. As a result, the proportion of
corporate customers and their revenue contribution to the broadband services
have been raised. The Target Company has also launched more products with high
bandwidth access and has established Internet cafe chains, thereby retaining
high-usage customers. Furthermore, the Target Company is actively working with
content providers, Internet service
19
providers and equipment manufacturers to
facilitate the introduction of new content, value-added services, applications
and devices that will enrich the online experience of its customers so as to
increase demand for and migration to broadband services and also average
revenue per unit.
DSL services
The Target Company promotes DSL services as the primary broadband service means
for residential customers and small and medium-sized enterprise customers in
the Target Regions. In the Target Regions, where the Target Company is the
dominant fixed-line operator, the number of subscribers to its DSL services has
grown steadily in recent years, with approximately 1.88 million DSL subscribers
as of 30 June 2005, compared with approximately 93 thousand subscribers as of
the end of 2002. As of 30 June 2005, the Target Company's DSL subscribers
accounted for approximately 67.6% of its total number of broadband subscribers.
LAN services
In addition to DSL technology, the Target Company also uses Ethernet
technology-based LANs, to provide its customers with broadband services. The
Target Company has selectively rolled out LANs in high density residential and
office buildings in the Target Regions, where customers demand a high
bandwidth. As of 30 June 2005, the Target Company had approximately 0.9 million
subscribers of its LAN services, representing approximately 32.4%of its total
broadband subscribers.
Other Internet-related services
The Target Company is also one of the largest providers of dial-up Internet
access services in the Target Regions in terms of number of subscribers. It
also offers communications-intensive business customers Internet access through
dedicated lines in the Target Regions. As of 30 June 2005, the Target Company
had a total of 377 dedicated Internet access subscribers. The Target Company
bundles this service with voice and data services to provide integrated
communications solutions to its business customers.
The Target Company also operates Internet data centers, which provide
co-location and website hosting services to business customers that lease
servers, routers and other network components for Internet-related solutions.
These services are used primarily by business customers seeking to outsource
the infrastructure needed to utilise the Internet in a cost effective way.
(c) Business and data communications services
The Target Company is the leading provider of business and data communications
services in the Target Regions. Managed data services represent a growing area
in China's telecommunications industry. The Target Company bundles the data
communications services together with fixed-line telephone services and
broadband services to attract communications-intensive business customers. The
Target Company is responding to increasing market demand in this area by
leveraging its network platforms for data transmission and by offering a broad
portfolio of services and customised solutions.
The Target Company offers managed data products, such as DDN, frame relay, ATM
and IP-VPN, and leased line products, including domestic and international
leased circuits. Its customers for these services include government entities,
large financial institutions and other domestic and multinational businesses,
ISPs and other telecommunications operators. The Target Company focuses on
diversifying its business and data communications services and products and
providing quality customer service to its large corporate and carrier
customers.
Managed data services
The Target Company provides a variety of managed data services to its business
customers, including DDN, frame relay, ATM and IP-VPN services. The Target
Company anticipates that demand for data communications services will be
fuelled by growth in the emerging services segment, which includes e-commerce,
broadband content, network applications and IP-VPN services. The Target
Company's DDN services provide high quality and reliable transmission at speeds
ranging from 9.6kbps to 2Mbps to meet the increasing demand for low- to
medium-speed transmission capacity from business customers and government
agencies. The Target Company also offers advanced high-speed data
communications services based on frame relay and ATM technologies to major
business customers, including multinational corporations, government agencies
and financial institutions. These services enable flexible and cost-effective
use of bandwidth resources and many of the Target Company's customers are
increasingly using ATM
20
services to form VPNs to link their local area networks
in different locations.
The following table sets forth selected information regarding the managed data
services of the Target Company as of 31 December 2002, 2003 and 2004 and as of
30 June 2005.
As of 30
As of 31 December June
2002 2003 2004 2005
Number of ports
DDN 42,591 44,083 43,760 43,050
Frame relay 670 696 689 685
ATM 82 151 777 1,081
Leased bandwidth
DDN (x64kbps) 176,988 185,767 190,503 199,862
Frame relay (x128kbps) 800 855 855 845
ATM (x2Mbps) 4,096 7,473 16,678 17,250
Leased line services
The Target Company is a major provider of dedicated leased line services to
businesses, government agencies and other telecommunications operators in the
Target Regions. The Target Company leases network elements, including digital
circuits, digital trunk lines and optical fibers, to business and government
customers as well as other telecommunications operators.
As of 30 June 2005, the Target Company leased circuits totalling 12,543
(x2Mbps) in bandwidth to its customers, and an increasing percentage of its
leased circuits are of higher capacity. The following table sets forth the
respective amounts of bandwidth of the leased line services of the Target
Company provided to its business customers and carrier customers as of 31
December 2002, 2003 and 2004 and as of 30 June 2005.
As of 30
As of 31 December June
2002 2003 2004 2005
Bandwidth of leased circuits (x2Mbps)
Business customers 2,694 3,983 7,006 9,483
Carrier customers 9,192 6,456 4,211 3,060
Total 11,886 10,439 11,217 12,543
Due to the increased demand for data services, the number of business customers
increased steadily in recent years. On the other hand, as more and more carrier
customers built their own network and generally reduced the circuits leased
with the Target Company, the bandwidth of circuits leased by carrier customers
decreased through the periods indicated above.
Tariffs
The Target Company and the Group are subject to the same regulatory framework
with respect to the tariffs of the various services offered by the Target
Company. Accordingly, the tariff structures and rates charged by the Target
Company for its various services are similar to those of the Group. For some of
the newly introduced services, such as PHS short messaging service, the tariff
has been set by the Company with the necessary tariff details filed with the
MII. For the six months ended 30 June 2005, the tariff for PHS short messaging
service ranges from RMB0.08 to RMB0.15 per message.
Marketing, sales, distribution and customer services
(a) Marketing, sales, distribution and customer services initiatives
The Target Company has implemented initiatives for each of its market segments,
consisting of residential, small and medium-sized enterprise and large business
customers. The Target Company conducts sales primarily through its service
representatives and account managers, direct and third-party sales outlets,
service hotline, and its website.
21
The Target Company's service representatives cover particular areas and provide
consulting, upfront installation and trouble-shooting services to its
residential and small and medium-sized enterprise customers. Its account
managers, in addition to those services provided by service representatives,
also provide technical support, billing and collection services to its small
and medium-sized enterprise and large customers. Its service representatives
and account managers are evaluated based on quality of customer service
provided, number of new customers generated and revenue growth.
The Target Company also conducts sales through its own sales outlets and the
sales outlets of third parties. Its partnership with third-party distributors
enables the Target Company to more effectively market to a broader customer
base, increase market penetration and identify potential markets, while
reducing its operating expenses. As of 30 June 2005, the Target Company had
26,049 sales and marketing employees in the Target Regions. The Target Company
also had 3,388 direct sales and customer service outlets and 34,291 authorised
third-party agents in the Target Regions as of 30 June 2005.
In recent years, the Target Company has also substantially increased the amount
of residential marketing activities conducted both on its "10060" hotline and
through its website. "10060" is the nationwide telephone number for customer
service centers across China, providing comprehensive customer service for all
service offerings, including service inquiry, billing inquiry, recharge and
customer complaints.
In addition, for its high-end residential and small and medium-sized enterprise
customers, the Target Company provides tailored services through "Gold Club"
memberships. "Gold Club" members enjoy discounts on its and its partners'
products, as well as rewards programs.
The Target Company provides customised services and comprehensive solution
packages to large business customers, including international customers. For
its small and medium-sized enterprise customers, the Target Company provides
additional customised solutions for each industry.
The Target Company markets to its enterprise customers through advertising and
trade shows, online advertising, industry and regional events, sponsored
activities as well as through its partners, including its suppliers.
(b) Trademarks
The Target Company markets its services under the "CNC" brand name and logo,
which are registered trademarks in China owned by its ultimate parent company,
China Netcom Group. Upon completion of the Acquisition, the Target Company has
the right to use these trademarks on a royalty-free basis until 2014, which is
automatically renewable at the option of the Target Company.
(c) Billing services and credit control
The Target Company bills its residential customers on a monthly basis and
payments are usually due within a month of the last date of the billing period.
The Target Company provides a range of payment choices for the convenience of
its customers, including direct-debit service, which automatically deducts the
monthly payment from the subscriber's designated bank account. The Target
Company also provides specially tailored billing and collection services to its
large business customers to help them more effectively plan and monitor their
telecommunications needs.
The Target Company charges a late payment fee on subscriber accounts with
payments that are not settled by the monthly due date. The Target Company
generally deactivates services for subscribers whose accounts are more than 30
days overdue. These subscribers whose services have been deactivated must pay
all overdue amounts, including applicable late payment fees, to reactivate
their services. The Target Company will terminate a subscriber's service and
will remove him or her from the subscriber list if his or her account is
overdue for more than three months. The Target Company has implemented
subscriber registration procedures, including credit and background checking
for PHS customers to strengthen credit control. The Target Company also
actively promotes its prepaid telephone services as a means of controlling bad
debts.
Network infrastructure
The network which the Target Company operates consists of transport networks,
service networks and support and information systems. The service networks,
which support the Target Company's basic and value-added telecommunications
services, consist of its local access networks, including PHS networks,
fixed-line telephone switch networks, Internet and data service networks and
intelligent networks. The support and information systems include
22
Operation Support System ("OSS") and Business Support System ("BSS") to
support the reliable and effective operation of the Target Company's networks.
In addition, the Target Company is building an information technology network
and Management Support System ("MSS") which is designed to ensure the speed
and accuracy of its internal information flow.
(a) Transport networks
The Target Company operates an advanced, high-speed, large capacity, secure and
reliable fiber-optic transport network throughout the Target Regions. The
inter-provincial fiber-optic cables in the Target Regions, which are owned by
China Netcom Group, and operated by the Target Company, are integrated with the
Target Company's own intra-provincial transport network. This fiber-optic
network is supplemented by satellite transmissions and microwave links. The
fiber-optic transport network that the Target Company operates allows it to
more easily manage networks with enhanced reliability. In addition, the Target
Company offers a series of advanced protection technologies to customers with
varying service level requirements.
(b) Service networks
Local access networks
The Target Company has extensive local access network coverage in the Target
Regions. Its local access network covers most cities, counties and villages in
the Target Regions. With its comprehensive local access networks, the Target
Company is able to provide customised solutions to its customers.
The Target Company continues to upgrade its existing copper line local access
networks using DSL technology. The Target Company has selectively connected
additional large office buildings and business centers with broadband services
using fibre optic cables.
Fixed-line telephone switch networks
A substantial portion of the Target Company's fixed-line telephone networks has
been built in the last decade. All of its switches are digital. The network
consists of 45 local switch networks and a long distance switch network. As of
30 June 2005, the total capacity of local switches reached approximately 35.11
million lines, and the capacity of long distance switches reached approximately
14,437 (x2Mbps) in bandwidth. The Target Company adopts advanced technology to
ensure network reliability and to improve the utilisation rate of its network.
Internet and data service networks
The Target Company has developed large capacity, high quality and reliable
Internet and data networks in the Target Regions. Its Internet networks
primarily rely on switch routers with high bandwidths. They are structured with
two layers, the backbone network layer and the application layer. Its backbone
networks are meshed to achieve maximum reliability and stability. A majority of
the main routes in this layer has transmission capacity at 10Gbps, or at
2.5Gbps. As of 30 June 2005, the Target Company also had a backbone IP network
with a total bandwidth of 46,609 (x2Mbps). In addition, this network also
allows the Target Company to provide services such as IP-VPN, Internet data
center, e-commerce and video-on-demand services. The Target Company's data
network system includes a DDN network and a frame relay and ATM network. These
networks cover all cities and counties in the Target Regions. In particular,
the Target Company's ATM network allows the Target Company to provide various
access services, flexible broadband management capability and quality
end-to-end services.
(c) Support and information systems
The Target Company's OSS provides support for the operational management and
control of its service networks, as well as resource management. It enhances
the overall management of the Target Company's networks and helps ensure
effective troubleshooting, efficient utilisation of network resources and
smooth operation of networks. The Target Company's BSS principally consists of
operation management, billing, customer service and other systems. It provides
comprehensive and integrated support for various aspects of the Target
Company's business, such as customer relationship management and tiered service
for its large business customers.
Research and development
The Target Company's research and development requirements are primarily
fulfilled by China Netcom Group in return
23
for a service fee that is negotiated on a case-by-case basis. These research
and development activities are focused primarily on operational planning and
development of value-added services.
Competition
The Target Company competes with other telecommunications providers in
virtually all aspects of its business, including fixed-line telephone services,
broadband and other Internet-related services and business and data
communications services. The Target Company's principal competitors in China
are telecommunications carriers wholly or majority-owned by the PRC government,
including three fixed-line service providers and two licensed mobile service
providers. Since the Target Company controls most of the local access network,
including "last mile" access network in the Target Regions, it has experienced
limited competition to date in the provision of local telephone services.
However, competition may increase in the future as other licensed operators
develop their own networks, including through the use of alternative
technologies.
Employees
The following table sets forth information regarding employees of the Target
Company as of 30 June 2005:
As of 30 June 2005
Number of Percentage of Total
Employees Employees (%)
Management, finance and administrative 7,361 14.5
Sales and marketing 26,049 51.5
Operations and maintenance 14,646 28.9
Others(1) 2,580 5.1
Total 50,636 100.0
(1) Includes research and development employees.
Capital expenditure
The following table sets forth the Target Company's actual and planned total
capital expenditure requirements for the periods indicated:
Capital Expenditures
(RMB in millions)
2002 8,372
2003 7,922
2004 7,017
2005 (Planned) 6,500
2006 (Planned) 6,300
The Target Company will continue to focus on controlling its capital
expenditures and improving its network efficiency. It is expected that the
planned capital expenditures for the years 2005 and 2006 will mainly relate to
further rollout of broadband services, local access networks and transport and
switching networks.
The capital expenditure estimates above are subject to uncertainty and actual
capital expenditures in future periods may differ significantly from these
estimates. In addition, the Target Company may enter into new
telecommunications businesses in the future, which may require additional
capital expenditures.
RELATIONSHIP WITH CNC BVI AND CHINA NETCOM GROUP
CNC BVI is a company incorporated in the British Virgin Islands and is the
immediate holding company of the Company. CNC BVI is an investment holding
company.
China Netcom Group is a state-owned enterprise established under the laws of
the PRC and is the ultimate holding company of the Company. China Netcom Group
is the second largest fixed-line telecommunications operator in China.
24
China Netcom Group owns and operates its fixed-line telecommunications
networks, and provides telecommunications services including fixed-line
telephone, broadband and other Internet-related services in all provinces,
municipalities and autonomous regions in China (including the Target Regions
prior to the completion of the Acquisition) that are outside the Company's
existing northern and southern service regions (which include Beijing
Municipality, Tianjin Municipality, Hebei Province, Henan Province, Shandong
Province, Liaoning Province, Shanghai Municipality and Guangdong Province).
As at the Latest Practicable Date, China Netcom Group beneficially owned 100%
of CNC BVI's issued share capital, and CNC BVI beneficially owned approximately
70.49% of the Company's issued share capital. CNC BVI and China Netcom Group
are therefore connected persons of the Company.
In connection with the initial public offering of the Company in November 2004,
China Netcom Group has, by a letter of undertakings that is legally binding
indefinitely, undertaken that it will support the Company's existing operations
and future development, including that the Company will be treated equally with
any other operators of fixed-line telephone, broadband, Internet and certain
other telecommunications services that are controlled by China Netcom Group and
the Company will have the option to provide additional telecommunications
services in the service regions that fall within China Netcom Group's scope of
business.
CONTINUING CONNECTED TRANSACTIONS
In October 2004, CNC China, a wholly-owned subsidiary of the Company, entered
into certain agreements with China Netcom Group to regulate certain ongoing
transactions between CNC China on the one hand and China Netcom Group and its
subsidiaries or Associates (other than the Group) on the other. These
transactions are continuing connected transactions of the Company under the
Hong Kong Listing Rules. In respect of some of these continuing connected
transactions, annual caps representing the maximum aggregate annual value of
consideration payable under these transactions have been set. The Group has
complied with these caps for the financial year ended 31 December 2004 and also
for the period commencing from 1 January 2005 and ending on the date of this
announcement.
It is expected that after completion of the Acquisition, similar ongoing
transactions will be conducted between the Target Company on the one hand and
China Netcom Group and its subsidiaries or Associates (other than the Combined
Group) on the other. These transactions will, after completion of the
Acquisition, become continuing connected transactions of the Company. In order
to facilitate the management of all continuing connected transactions of the
Company in China after the completion of the Acquisition, the Target Company,
CNC China and China Netcom Group entered into certain connected transactions
agreements on 12 September 2005 to regulate the continuing connected
transactions between China Netcom Group and its subsidiaries or Associates
(other than the Combined Group) on the one hand and the Combined Group on the
other, in respect of the Combined Group's operations in 12 provinces,
municipalities and autonomous region in China. These agreements will replace
the existing connected transaction agreements between CNC China and China
Netcom Group if and when the Acquisition completes. These agreements are
summarised below:
Domestic Interconnection Settlement Agreement
The Target Company, CNC China and China Netcom Group entered into the Domestic
Interconnection Settlement Agreement on 12 September 2005. Pursuant to the
Domestic Interconnection Settlement Agreement, the parties agreed to
interconnect the network of China Netcom Group on the one hand and that of CNC
China and the Target Company (together with CNC China, the "Combined Operating
Group") on the other and settle the charges received in respect of domestic
long distance voice services within their respective service regions on a
quarterly basis.
For domestic long distance voice services between China Netcom Group and the
Combined Operating Group, the telephone operator in the location of the calling
party makes a settlement payment to the telephone operator in the location of
the called party at the rate of RMB0.06 per minute (in case where the call
terminates within the network of either China Netcom Group or the Combined
Operating Group) or RMB0.09 per minute (in case where the call terminates
outside the network of either China Netcom Group or the Combined Operating
Group).
The rates of RMB0.06 per minute and RMB0.09 per minute mentioned above shall be
adjusted with reference to the relevant standards, tariffs or policies
promulgated by the relevant regulatory authorities in China from time to time.
The Domestic Interconnection Settlement Agreement takes effect from the date of
completion of the Acquisition and is valid until 31 December 2007. If the
Combined Operating Group notifies China Netcom Group at least three months
prior to the expiration of the agreement of its intention to renew the
agreement, the agreement can be renewed with the
25
same terms for further periods
of three years.
International Long Distance Voice Services Settlement Agreement
CNC China and China Netcom Group entered into the International Long Distance
Voice Services Settlement Agreement on 12 September 2005. Pursuant to the
International Long Distance Voice Services Settlement Agreement, the parties
agreed to interconnect the networks of China Netcom Group and CNC China and
settle the charges received in respect of international long distance voice
services on a quarterly basis.
For outbound international calls, China Netcom Group reimburses CNC China for
any amount it has paid to overseas telecommunications operators. The revenues
received by China Netcom Group less the amount paid to overseas
telecommunications operators are shared between China Netcom Group and CNC
China in proportion to the estimated costs incurred by China Netcom Group and
the Combined Operating Group in connection with the provision of outbound
international long distance voice services.
For inbound international calls, the revenues received by CNC China from
overseas telecommunications operators (other than the Company and its
controlled entities) less the amount paid to China Netcom Group at the rate of
RMB0.06 per minute (in case where the call terminates within the network of
China Netcom Group) or RMB0.09 per minute (in case where the call terminates
within the network of other operators) are shared between China Netcom Group
and CNC China in proportion to the estimated costs incurred by China Netcom
Group and the Combined Operating Group in connection with the provision of
inbound international long distance voice services.
The rates of RMB0.06 per minute and RMB0.09 per minute mentioned above shall be
adjusted with reference to the relevant standards, tariffs or policies
promulgated by the relevant regulatory authorities in China from time to time.
The International Long Distance Voice Services Settlement Agreement takes
effect from the date of completion of the Acquisition and is valid until 31
December 2007. If CNC China notifies China Netcom Group at least three months
prior to the expiration of the agreement of its intention to renew the
agreement, the agreement can be renewed with the same terms for further periods
of three years.
The transactions under the Domestic Interconnection Settlement Agreement and
the International Long Distance Voice Services Settlement Agreement will be
subject to reporting and announcement requirements set out in Rules 14A.45 to
14A.47 of the Hong Kong Listing Rules and the independent shareholders'
approval requirements under Rule 14A.48 of the Hong Kong Listing Rules.
Property Leasing Agreement
The Target Company, CNC China and China Netcom Group entered into the Property
Leasing Agreement on 12 September 2005. Pursuant to the Property Leasing
Agreement:
(i) the Combined Operating Group leases to China Netcom Group a total of 54
buildings and units with an aggregate floor area of approximately 4,300 square
metres located throughout the Combined Operating Group's service regions, for
use as offices and other ancillary purposes; and
(ii) China Netcom Group leases to the Combined Operating Group a total of 22
parcels of land with an aggregate site area of approximately 26,700 square
metres and 42,097 buildings and units with an aggregate floor area of
approximately 9,264,000 square metres located throughout the Combined Operating
Group's service regions, for use as offices, telecommunications equipment sites
and other ancillary purposes.
The charges payable by the Combined Operating Group and by China Netcom Group
under the Property Leasing Agreement are based on market rates or the
depreciation and maintenance charges in respect of each property, provided such
depreciation and maintenance charges shall not be higher than the market rates.
The charges are payable quarterly in arrears and are subject to review every
year to take into account the then prevailing market rates of the properties
leased in that year. Sallmanns, the independent property valuer of the Company,
has reviewed the Property Leasing Agreement, and has confirmed that the rental
charges payable by the Combined Operating Group under the Property Leasing
Agreement are no higher than prevailing market rates and the rental charges
payable by China Netcom Group under the Property Leasing Agreement are fair and
reasonable.
The Property Leasing Agreement takes effect from the date of completion of the
Acquisition and is valid until 31 December 2007. If the Combined Operating
Group notifies China Netcom Group at least three months prior to the
26
expiration of the agreement of its intention to renew the agreement, the
agreement can be renewed with the same terms for further periods of three
years.
For the three years ended 31 December 2002, 2003 and 2004, the rental charges
that the Combined Operating Group paid to China Netcom Group amounted to RMB
43.79 million, RMB 52.56 million and RMB 316 million, respectively. For the
same periods, the rental charges paid by China Netcom Group to the Combined
Operating Group amounted to RMB 1 million, RMB 4 million and RMB 3.11 million,
respectively.
Prior to the restructuring implemented for the purpose of the Company's listing
in 2004, CNC China only leased a small number of properties (less than 2,000 in
each of the two years ended 31 December 2002 and 2003). Prior to the
Reorganisation, the Target Company also only leased a very small number of
properties. As a result of the restructuring for the Company's listing and the
Acquisition, many more properties will be leased from China Netcom Group to the
Combined Operating Group and from the Combined Operating Group to China Netcom
Group under the Property Leasing Agreement. The total rental charges payable by
the Combined Operating Group to China Netcom Group in each of the three
financial years ending 31 December 2005, 2006 and 2007 are not expected to
exceed RMB 1,250 million, and the total rental charges receivable by the
Combined Operating Group from China Netcom Group in each of the three financial
years ending 31 December 2005, 2006 and 2007 are not expected to exceed RMB 35
million. Accordingly, these amounts have been set as the proposed caps for this
connected transaction.
Property Sub-leasing Agreement
The Target Company, CNC China and China Netcom Group entered into the Property
Sub-leasing Agreement on 12 September 2005. Pursuant to the Property
Sub-leasing Agreement, China Netcom Group agreed to sub-let to the Combined
Operating Group a total of 84 parcels of land and 6,263 building and units
owned by and leased from independent third parties, for use as offices,
telecommunications equipment sites and other ancillary purposes.
The amounts payable by the Combined Operating Group under the Property
Sub-leasing Agreement are the same as the rental charges and other fees
(including management fees) payable by China Netcom Group to the relevant third
parties.
The Property Sub-leasing Agreement takes effect from the date of completion of
the Acquisition and is valid until 31 December 2007. If the Combined Operating
Group notifies China Netcom Group at least three months prior to the expiration
of the agreement of its intention to renew the agreement, the agreement can be
renewed with the same terms for further periods of three years.
The above property sub-leasing arrangement did not exist in respect of CNC
China prior to the restructuring implemented for the purpose of the Company's
listing in 2004. Such arrangement also did not exist in respect of the Target
Company prior to the Reorganisation. The total amount paid by the Group for
sub-let properties for the second half of the financial year ended 31 December
2004 (during which period the restructuring for the Company's listing has been
effective) was RMB 33 million. Based on the number of properties to be sub-let
under the Property Sub-leasing Agreement and the rental charges and other fees
payable under the underlying lease agreements, the total amount payable by the
Combined Operating Group to China Netcom Group for property sub-leasing in each
of the three financial years ending 31 December 2005, 2006 and 2007 is not
expected to exceed RMB 100 million. Accordingly, the amount has been set as the
proposed cap for this connected transaction.
Master Sharing Agreement
The Target Company, CNC China and China Netcom Group entered into the Master
Sharing Agreement on 12 September 2005. Pursuant to the Master Sharing
Agreement:
(a) the Combined Operating Group will provide customer relationship
management services for large enterprise customers of China Netcom Group;
(b) the Combined Operating Group will provide network management services to
China Netcom Group;
(c) the Combined Operating Group will share with China Netcom Group the
services provided by administrative and managerial staff in respect of
central management of the business operations, financial control, human
resources and other related matters of both the Combined Operating Group
and China Netcom Group;
(d) the Combined Operating Group will provide to China Netcom Group
supporting services such as billing and
27
settlement provided by the business support centre;
(e) China Netcom Group will provide to the Combined Operating Group
supporting services, including telephone card production, development and
related services and IC card inter-provincial and inter-network clearing
services;
(f) China Netcom Group will provide to the Combined Operating Group certain
other shared services, including advertising, publicity, research and
development, business hospitality, maintenance and property management;
(g) China Netcom Group will provide certain office space in its headquarters
to the Combined Operating Group for use as its principal executive
office; and
(h) the Combined Operating Group and China Netcom Group will share the
revenues received by China Netcom Group from other operators whose
networks interconnect with the Internet backbone network of China Netcom
Group and will share the monthly connection fee that China Netcom Group
pays to the State Internet Switching Centre.
The Combined Operating Group and China Netcom Group own certain equipment and
facilities forming the Internet backbone network of China Netcom Group. This
Internet backbone network interconnect with the networks of other operators.
Such interconnection generates revenue which is settled with China Netcom Group
and shared between China Netcom Group and the Combined Operating Group under
the Master Sharing Agreement. Prior to the Master Sharing Agreement coming into
effect, the revenue generated from such interconnection was shared between the
Group and China Netcom Group although the transaction is not regulated by the
existing Master Sharing Agreement between CNC China and China Netcom Group. The
interconnection revenue received by the Group from China Netcom Group and the
connection fee paid by the Group to China Netcom Group in the second half of
2004, as well as in the first half of 2005, do not exceed the 0.1% threshold
under Rule 14A.33 of the Hong Kong Listing Rules.
The services set out in paragraphs (a) to (g) above and the revenue and fee set
out in paragraph (h) above are shared between the Combined Operating Group and
China Netcom Group on an on-going basis from time to time and the aggregate
costs incurred by the Combined Operating Group or China Netcom Group for the
provision of the services set out in paragraphs (a) to (g) above and the
revenue and fee receivable and payable by China Netcom Group as referred to in
paragraph (h) above are apportioned between the Combined Operating Group and
China Netcom Group according to their respective total assets value as shown in
their respective financial statements on an annual basis.
The costs of the services provided under the Master Sharing Agreement are not
directly related to the volumes of business or revenues of the parties. After
completion of the Acquisition, China Netcom Group's primary fixed-line
telephone business in the northern part of China will be injected into the
Combined Operating Group, and the Group's revenues will be increased as a
result. Accordingly, the Board considers that it is more appropriate for the
costs of the services, revenues and fees payable or receivable under the Master
Sharing Agreement to be shared on the basis of the parties' respective total
assets value as opposed to their respective revenues.
The Master Sharing Agreement takes effect from the date of completion of the
Acquisition and is valid until 31 December 2007. If the Combined Operating
Group notifies China Netcom Group at least three months prior to the expiration
of the agreement of its intention to renew the agreement, the agreement can be
renewed with the same terms for further periods of three years.
All of the above provision or sharing of services and revenue and fee did not
exist in respect of CNC China prior to the restructuring implemented for the
purpose of the Company's listing in 2004. Such provision or sharing of services
and revenue and fee also did not exist between the Target Company and China
Netcom Group prior to the Reorganisation. The total amount paid by the Group to
China Netcom Group for the sharing of services under paragraphs (e) to (g)
above for the second half of the financial year ended 31 December 2004 (during
which period the restructuring for the Company's listing has been effective)
was RMB 213 million and the total amount paid by China Netcom Group to the
Group for the sharing of services under paragraphs (a) to (d) above for the
same period was RMB 19 million. Based on the aggregate historical expenditures
incurred for the provision of relevant services described in paragraphs (a) to
(g) above, the aggregate historical revenue generated from the interconnection
of the Internet backbone network (which interconnection revenue amounted to
approximately RMB5.98 million for the second half of 2004) and the projected
total assets values of China Netcom Group and the Combined Operating Group,
respectively, the aggregate amount receivable by the Combined Operating Group
from China Netcom Group in respect of services set out in paragraphs (a) to (d)
above and in respect of the revenue set out in paragraph (h) above in each of
the three financial years ending 31 December 2005, 2006 and 2007 is not
expected to exceed RMB 180 million, and the total amount payable by the
28
Combined Operating Group to China Netcom Group in respect of services set out
in paragraphs (e) to (g) and in respect of the fee set out in paragraph (h)
above in each of the three financial years ending 31 December 2005, 2006 and
2007 is not expected to exceed RMB 485 million. Accordingly, these amounts have
been set as the proposed caps for this connected transaction.
Engineering and Information Technology Services Agreement
The Target Company, CNC China and China Netcom Group entered into the
Engineering and Information Technology Services Agreement on 12 September 2005
to govern the arrangements with respect to the provision of certain engineering
and information technology-related services to the Combined Operating Group by
China Netcom Group. These services include:
(a) the provision of planning, surveying and design services in relation to
telecommunications engineering projects;
(b) the provision of construction services in relation to telecommunications
engineering projects;
(c) the provision of supervision services in relation to telecommunications
engineering projects; and
(d) the provision of information technology services, including office
automation, software testing, network upgrade, new business development
and support system development.
The charges payable for engineering and information technology-related services
described above are determined with reference to market rates. In addition,
where the value of any single item of engineering design or supervision-related
service exceeds RMB0.5 million or where the value of any single item of
engineering construction-related service exceeds RMB2 million, the award of
such services will be subject to tender. The charges are settled between the
Combined Operating Group and China Netcom Group as and when the relevant
services are provided.
The Engineering and Information Technology Services Agreement takes effect from
the date of completion of the Acquisition and is valid until 31 December 2007.
If the Combined Operating Group notifies China Netcom Group at least three
months prior to the expiration of the agreement of its intention to renew the
agreement, the agreement can be renewed with the same terms for further periods
of three years.
For the three years ended 31 December 2002, 2003 and 2004, the service charges
paid by the Combined Operating Group to China Netcom Group in respect of
engineering and information technology-related services amounted to RMB 3,759
million, RMB 4,198 million and RMB 3,821 million, respectively. Based on the
historical service charges paid by the Combined Operating Group to China Netcom
Group and the extent and volume of the engineering and information
technology-related services the Combined Operating Group expects China Netcom
Group to provide, the total amount payable by the Combined Operating Group to
China Netcom Group for provision of engineering and information
technology-related services in each of the three financial years ending 31
December 2005, 2006 and 2007 is not expected to exceed RMB 4,400 million.
Accordingly, this amount has been set as the proposed cap for this connected
transaction.
Materials Procurement Agreement
The Target Company, CNC China and China Netcom Group entered into the Materials
Procurement Agreement on 12 September 2005 under which:
(a) the Combined Operating Group may request China Netcom Group to act as its
agent for the procurement of imported and domestic telecommunications
equipment and other domestic non-telecommunications equipment;
(b) the Combined Operating Group may purchase from China Netcom Group certain
products, including cables, modems and yellow pages telephone
directories; and
(c) China Netcom Group will provide to the Combined Operating Group storage
and transportation services related to the procurement and purchase of
materials or equipment under the agreement.
Commission and/or charges for the domestic materials procurement services
referred to in paragraph (a) above shall not exceed the maximum rate of 3% of
the contract value. Commission and/or charges for the above imported materials
procurement services shall not exceed the maximum rate of 1% of the contract
value. The price for the purchase of China Netcom Group's products referred to
in paragraph (b) above is determined with reference to the following
29
pricing principles and limits:
o the government fixed price;
o where there is no government fixed price but a government guidance price
exists, the government guidance price;
o where there is neither a government fixed price nor a government guidance
price, the market price; or
o where none of the above is applicable, the price to be agreed between
the relevant parties and determined on a cost-plus basis.
Commission charges for the storage and transportation services referred to in
paragraph (c) above are determined with reference to market rates.
Payments under the Materials Procurement Agreement will be made as and when
the relevant equipment or products have been procured and delivered.
The Materials Procurement Agreement takes effect from the date of completion
of the Acquisition and is valid until 31 December 2007. If the Combined
Operating Group notifies China Netcom Group at least three months prior to the
expiration of the agreement of its intention to renew the agreement, the
agreement can be renewed with the same terms for further periods of three
years.
For the three years ended 31 December 2002, 2003 and 2004, the historical
volumes of sale and purchase of equipment and products for the Combined
Operating Group amounted to RMB 4,910 million, RMB 4,892 million and RMB 2,944
million, respectively.
Prior to the restructuring implemented for the purpose of the Company's
listing in 2004, nearly all of the products and equipment purchased by the
Combined Operating Group from China Netcom Group were made as direct
purchases, where the relevant products and materials were purchased by China
Netcom Group and then resold to the Company. Accordingly, China Netcom Group
acted primarily as principal rather than as our agent earning commissions, and
no historical figures of a comparable nature are available. Based on the
historical volumes of purchases made by the Combined Operating Group and with
reference to the level of commission charges set out in the Materials
Procurement Agreement, the total amount payable by the Combined Operating
Group to China Netcom Group, including both commissions and purchase prices,
for each of the three financial years ending 31 December 2005, 2006 and 2007
is not expected to exceed RMB 2,000 million. Accordingly, this amount has been
set as the proposed cap for this connected transaction.
Ancillary Telecommunications Services Agreement
The Target Company, CNC China and China Netcom Group entered into the Ancillary
Telecommunications Services Agreement on 12 September 2005 to govern the
arrangements with respect to the provision of ancillary telecommunications
services to the Combined Operating Group by China Netcom Group. These services
include certain telecommunications pre-sale, on-sale and after-sale services
such as assembling and repairing of certain telecommunications equipment, sales
agency services, printing and invoice delivery services, maintenance of
telephone booths, customers acquisition and servicing and other customers'
services.
The charges payable for the services described above are determined with
reference to the following pricing principles and limits:
o the government fixed price;
o where there is no government fixed price but a government guidance price
exists, the government guidance price;
o where there is neither a government fixed price nor a government guidance
price, the market price; or
o where none of the above is applicable, the price to be agreed between
the relevant parties and determined on a cost-plus basis.
The service charges are settled between the Combined Operating Group and China
Netcom Group as and when the
30
relevant services are provided.
The Ancillary Telecommunications Services Agreement takes effect from the date
of completion of the Acquisition and is valid until 31 December 2007. If the
Combined Operating Group notifies China Netcom Group at least three months
prior to the expiration of the agreement of its intention to renew the
agreement, the agreement can be renewed with the same terms for further periods
of three years.
For the three years ended 31 December 2002, 2003 and 2004, the services charges
paid by the Combined Operating Group to China Netcom Group for ancillary
telecommunications services amounted to RMB 1,373 million, RMB 1,880 million
and RMB 789 million, respectively. Based on the historical service charges paid
and the estimated extent and volume of ancillary telecommunications services
required from China Netcom Group, the total amount payable by the Combined
Operating Group to China Netcom Group for provision of ancillary
telecommunications services in each of the three financial years ending 31
December 2005, 2006 and 2007 is not expected to exceed RMB 1,200 million.
Accordingly, this amount has been set as the proposed cap for this connected
transaction.
Support Services Agreement
The Target Company, CNC China and China Netcom Group entered into the Support
Services Agreement on 12 September 2005. Under the Support Services Agreement,
China Netcom Group provides the Combined Operating Group with various support
services, including equipment leasing (other than equipment covered under the
Telecommunications Facilities Leasing Agreement) and maintenance services,
motor vehicles services, security services, basic construction agency services,
research and development services, employee training services and advertising
services and other support services.
The charges payable for the services described above are determined with
reference to the following pricing principles and limits:
o the government fixed price;
o where there is no government fixed price but a government guidance price
exists, the government guidance price;
o where there is neither a government fixed price nor a government guidance
price, the market price; or
o where none of the above is applicable, the price to be agreed between
the relevant parties and determined on a cost-plus basis.
The service charges are settled between the Combined Operating Group and China
Netcom Group as and when relevant services are provided.
The Support Services Agreement takes effect from the date of completion of the
Acquisition and is valid until 31 December 2007. If the Combined Operating
Group notifies China Netcom Group at least three months prior to the expiration
of the agreement of its intention to renew the agreement, the agreement can be
renewed with the same terms for further periods of three years.
For the three years ended 31 December 2002, 2003 and 2004, the support service
charges paid by the Combined Operating Group to China Netcom Group amounted to
RMB 1,385 million, RMB 1,481 million and RMB 1,073 million, respectively. Based
on the historical service charges paid and the estimated extent and volume of
support services required from China Netcom Group, the total amount payable by
the Combined Operating Group to China Netcom Group for provision of support
services in each of the three financial years ending 31 December 2005, 2006 and
2007 is not expected to exceed RMB 1,610 million. Accordingly, this amount has
been set as the proposed cap for this connected transaction.
Telecommunications Facilities Leasing Agreement
The Target Company, CNC China and China Netcom Group entered into the
Telecommunications Facilities Leasing Agreement on 12 September 2005, under
which:
(a) China Netcom Group leases inter-provincial fiber-optic cables within the
Combined Operating Group's service regions to the Combined Operating
Group;
31
(b) China Netcom Group leases certain international telecommunications
resources (including international telecommunications channel gateways,
international telecommunications service gateways, international
submarine cable capacity, international land cables and international
satellite facilities) to the Combined Operating Group; and
(c) China Netcom Group leases certain other telecommunications facilities
required by the Combined Operating Group for its operations.
The rental charges for the leasing of inter-provincial fiber-optic cables,
international telecommunications resources and other telecommunications
facilities are based on the annual depreciation charges of such fiber-optic
cables, resources and telecommunications facilities provided that such charges
shall not be higher than market rates. The Combined Operating Group shall be
responsible for the on-going maintenance of such inter-provincial fiber-optic
cables and international telecommunications resources. The Combined Operating
Group and China Netcom Group shall determine and agree which party is to
provide maintenance service to the telecommunications facilities referred to in
paragraph (c) above. Unless otherwise agreed by the Combined Group and China
Netcom Group, such maintenance service charges shall be borne by the Combined
Operating Group. If China Netcom Group shall be responsible for maintaining any
telecommunications facilities referred to in paragraph (c) above, the Combined
Operating Group shall pay to China Netcom Group the relevant maintenance
service charges which shall be determined with reference to market rates. Where
there are no market rates, the maintenance charges shall be agreed between the
parties and determined on a cost-plus basis. The net rental charges and service
charges due to China Netcom Group under the Telecommunications Facilities
Leasing Agreement will be settled between the Combined Operating Group and
China Netcom Group on a quarterly basis.
The Telecommunications Facilities Leasing Agreement takes effect from the date
of completion of the Acquisition and is valid until 31 December 2007. If the
Combined Operating Group notifies China Netcom Group at least three months
prior to the expiration of the agreement of its intention to renew the
agreement, the agreement can be renewed with the same terms for further periods
of three years.
The above telecommunications facilities leasing arrangement did not exist in
respect of CNC China prior to the restructuring implemented for the purpose of
the Company's listing in 2004. Such arrangement also did not exist in respect
of the Target Company prior to the Reorganisation. The total charges paid by
the Group to China Netcom Group for the lease of telecommunications facilities
for the second half of the financial year ended 31 December 2004 (during which
period the restructuring for the Company's listing has been effective) was RMB
138 million. Based on the annual depreciation charges, the current market rates
and the expected telecommunications facilities required to be leased from China
Netcom Group, the total amount payable by the Combined Operating Group to China
Netcom Group under this leasing agreement in each of the three financial years
ending 31 December 2005, 2006 and 2007 is not expected to exceed RMB 600
million. Accordingly, this amount has been set as the proposed cap for this
connected transaction.
Continuing connected transactions relating to Asia Netcom
In preparation for the Company's listing in 2004, certain continuing connected
transactions were entered into between Asia Netcom, a wholly owned subsidiary
of the Company, and EANL, an indirect wholly owned subsidiary of China Netcom
Group. These continuing connected transactions relate to the purchase and lease
of telecommunications capacity by Asia Netcom from EANL and the provision of
certain management services by Asia Netcom to EANL. These continuing connected
transactions will not be affected by the Acquisition and the terms and the
annual caps applicable to such transactions will remain unchanged.
COMPLIANCE WITH THE HONG KONG LISTING RULES
Following completion of the Acquisition, the Combined Operating Group will
continue to enter into transactions described in the section headed "Continuing
Connected Transactions" above. Such transactions would constitute continuing
connected transactions for the Company under the Hong Kong Listing Rules for so
long as members of China Netcom Group remain as connected persons within the
meaning of the Hong Kong Listing Rules.
The Board (including members of the Independent Board Committee) is of the
opinion that the terms of the Continuing Connected Transactions described in
the section headed "Continuing Connected Transactions" above have been entered
into, and will be carried out, in the ordinary and usual course of business of
the Combined Operating Group and on normal commercial terms which are fair and
reasonable so far as the interests of the Independent Shareholders of the
Company are concerned.
32
It is expected that, the proposed annual cap for the years 2005 to 2007 for
each category of Continuing Connected Transactions under the Master Sharing
Agreement, the Ancillary Telecommunications Services Agreement, the Support
Services Agreement and the Telecommunications Facilities Leasing Agreement, and
the proposed annual cap for the years 2005 to 2007 for charges payable by the
Combined Operating Group under both the Property Leasing Agreement and the
Property Sub-leasing Agreement and for the charges payable by China Netcom
Group under the Property Leasing Agreement, will be less than the 2.5%
threshold under Rule 14A.34 of the Hong Kong Listing Rules. Accordingly, these
transactions will be exempt from the independent shareholders' approval
requirements under the Hong Kong Listing Rules, but such transactions will
still be subject to the reporting and announcement requirements set out in
Rules 14A.45 to 14A.47 of the Hong Kong Listing Rules.
For each category of Continuing Connected Transactions under the Engineering
and Information Technology Services Agreement and the Materials Procurement
Agreement, as the proposed annual cap will exceed the 2.5% threshold under Rule
14A.34 of the Hong Kong Listing Rules, such transactions will constitute
non-exempt continuing connected transactions under Rule 14A.35 of the Hong Kong
Listing Rules and will be subject to the reporting and announcement
requirements set out in Rules 14A.45 to 14A.47 of the Hong Kong Listing Rules
and the independent shareholders' approval requirements under Rule 14A.48 of
the Hong Kong Listing Rules.
Under Rule 14A.35(2) of the Hong Kong Listing Rules, in respect of a continuing
connected transaction which is not fully exempted, a cap must be set and
disclosed. The caps for the Continuing Connected Transactions (other than those
under the Domestic Interconnection Settlement Agreement and the International
Long Distance Voice Services Settlement Agreement) for each of three years
ending 31 December 2005, 2006 and 2007 are set out below:
Continuing Connected Transactions Proposed annual cap (RMB in millions)
--------------------------------- ------------------- --------------------------
Property Leasing Agreement payable by the Combined Operating Group -
1,250 payable by China Netcom Group - 35
Property Sub-leasing Agreement 100
Master Sharing Agreement payable by the Combined Operating Group -
485 payable by China Netcom Group - 180
Engineering and Information Technology Services Agreement 4,400
Materials Procurement Agreement 2,000
Ancillary Telecommunications Services Agreement 1,200
Support Services Agreement 1,610
Telecommunications Facilities Leasing Agreement 600
Special circumstances exist for both the Domestic Interconnection Settlement
Agreement and the International Long Distance Voice Services Settlement
Agreement and no cap is proposed in respect of the settlement of domestic and
international long distance voice services for the following reasons:
(i) any growth in the domestic and international long distance voice services
will necessarily result in increased transaction volumes under the
Domestic Interconnection Settlement Agreement and the International Long
Distance Voice Services Settlement Agreement, which the Company will not
be able to control as it depends entirely on customer usage. Any caps on
these transactions will therefore potentially limit the Company's ability
to conduct or expand its business in the ordinary course; and
(ii) the settlement rates in respect of long distance voice services are
determined with reference to the relevant standard tariff or policies
promulgated by the relevant regulatory authorities in China, which are
subject to change from time to time, and the Company is not in a position
to set the settlement rates at its discretion.
The Company has applied to the Hong Kong Stock Exchange that no caps be
proposed for the transactions contemplated under the Domestic Interconnection
Settlement Agreement and the International Long Distance Voice Services
Settlement Agreement. Such transactions will be subject to the reporting and
announcement requirements set out in Rule 14A.45 to 14A.47 of the Hong Kong
Listing Rules and the independent shareholders' approval requirements under
Rule 14A. 48 of the Hong Kong Listing Rules.
DEFINITIONS
33
In this announcement, unless the context otherwise requires, the following
expressions have the following meanings:
"Acquisition" the proposed acquisition by the Company
of the entire issued share capital of
the Target BVI Company pursuant to the
Acquisition Agreement, as described in
the section headed "Acquisition of the
Target BVI Company" in this announcement
"Acquisition Agreement" the conditional sale and
purchase agreement dated 12 September
2005 entered into among the Company, CNC
BVI and China Netcom Group relating to
the Acquisition
"ADSs" American depositary shares issued by
Citibank, N.A., each representing
ownership of 20 Shares, which are listed
on the New York Stock Exchange, Inc.
"Asia Netcom" Asia Netcom Corporation Limited, a
wholly-owned subsidiary of the Company
"Associates" as defined in the Hong Kong Listing Rules
"Board" or "Board of Directors" the board of Directors
"Business Day" a day (excluding Saturdays) on which
banks are generally open in Hong Kong
for the transaction of normal banking
business
"China" or "PRC" the People's Republic of China
(excluding, for the purpose of this
announcement, Hong Kong, Macau and
Taiwan)
"China Mobile" China Mobile Communications Corporation
a company established under the laws of
the PRC
"China Netcom Group" China Network Communications Group
Corporation, a company established
under the laws of the PRC and the
ultimate controlling shareholder
of the Company
"China Telecom" China Telecommunications Corporation
a company established under the laws
of the PRC
"China Unicom" China United Telecommunications
Corporation, a company established under
the laws of the PRC
"CICC" China International Capital Corporation
(Hong Kong) Limited, which is licensed
for Type 1 regulated activity (dealing
in securities), Type 4 regulated
activity (advising on securities), Type
6 regulated activity (advising on
corporate finance) and Type 9 regulated
activity (asset management) under the
Securities and Futures Ordinance and
financial adviser to the Company in
respect of the Acquisition
"Citigroup" Citigroup Global Markets Asia Limited,
which is deemed licensed for Type 1
regulated activity (dealing in
securities), Type 4 regulated activity
(advising on securities) and Type 6
regulated activity (advising on
corporate finance) under the Securities
and Futures Ordinance and financial
adviser to the Company in respect of the
Acquisition
"CNC BVI" China Netcom Group Corporation
(BVI) Limited, a company incorporated in
the British Virgin Islands with limited
liability and the direct controlling
shareholder of the Company
"CNC China" China Netcom (Group) Company
Limited), formerly known as China
Netcom Corporation Limited, a company
established in the PRC with limited
liability as a wholly foreign owned
enterprise and a wholly owned subsidiary
of the Company
"Combined Group" the Company, its existing subsidiaries
and the Target Group
"Companies Ordinance" the Companies Ordinance (Chapter 32 of
the Laws of Hong Kong)
"Company" China Netcom Group Corporation (Hong
Kong) Limited, a company incorporated in
Hong Kong whose Shares are listed on the
Hong Kong Stock Exchange and whose ADSs
are listed on the New York Stock
Exchange, Inc.
34
"Continuing Connected Transactions" the connected transactions described in
the section headed "Continuing Connected
Transactions" in this announcement
"CSFB" or "Independent Adviser" Financial Credit Suisse First Boston
(Hong Kong) Limited, which is deemed
licensed for Type 1 regulated activity
(dealing in securities), Type 4 regulated
activity (advising on securities) and
Type 6 regulated activity (advising on
corporate finance) under the Securities
and Futures Ordinance, being the
independent financial adviser to the
Independent Board Committee and the
Independent Shareholders in respect of
the Acquisition and the Non-exempt
Continuing Connected Transactions
"CSRC" China Securities Regulatory Commission
"Directors" the directors of the Company
"EANL" East Asia Netcom Ltd., a company
incorporated in Bermuda with limited
liability and an indirect wholly owned
subsidiary of China Netcom Group
"Equity Interest
Injection Agreement" the equity interest injection agreement
dated 9 August 2005 entered into among
the Target BVI Company, CNC BVI and
China Netcom Group
"Extraordinary General Meeting" the extraordinary general meeting of
the Company to be convened on 25 October
2005 or any adjournment thereof
"Financial Advisers" CICC, Citigroup and Goldman Sachs, being
the financial advisers to the Company
in respect of the Acquisition
"GDP" gross domestic product
"Goldman Sachs" Goldman Sachs (Asia) L.L.C.,
which is licensed for Type 1 regulated
activity (dealing in securities), Type
4 regulated activity (advising on
securities), Type 5 regulated activity
(advising on futures contracts), Type 6
regulated activity (advising on
corporate finance) and Type 9 regulated
activity (asset management) under the
Securities and Futures Ordinance and
financial adviser to the Company in
respect of the Acquisition
"Group" the Company and its existing subsidiaries
"HK$" Hong Kong dollars, the lawful currency
of Hong Kong
"HKFRS" Hong Kong Financial Reporting Standards
issued by Hong Kong Institute of
Certified Public Accountants
"Hong Kong" Hong Kong Special Administrative Region
of the People's Republic of China
"Hong Kong Listing Rules" the Rules Governing the Listing of
Securities on The Stock Exchange of Hong
Kong Limited
"Hong Kong Stock Exchange" The Stock Exchange of Hong Kong Limited
"Independent Board Committee" the committee of Directors, consisting
of John Lawson Thornton, Victor Cha Mou
Zing, Qian Yingyi, Hou Ziqiang and
Timpson Chung Shui Ming, being all the
independent non-executive Directors,
formed to advise the Independent
Shareholders in respect of the terms of
the Acquisition and the Non-exempt
Continuing Connected Transactions
"Independent Shareholders" Shareholders other than China Netcom
Group and its Associates
"Latest Practicable Date" 8 September 2005, being the latest
practicable date prior to the printing
of this announcement for ascertaining
certain information contained herein
"MII" Ministry of Information Industry of the
PRC, or where the context so requires,
its predecessor, the former Ministry of
Posts and Telecommunication
"MOC" the Ministry of Commerce of the PRC
"Non-exempt Continuing continuing connected transactions
Connected Transactions" contemplated under the Domestic
Interconnection Settlement Agreement,
the International Long Distance Voice
Services Settlement Agreement, the
Engineering and Information Technology
35
Services Agreement and the Materials
Procurement Agreement, such
transactions and agreements are further
described in the section headed
"Continuing Connected Transactions" in
this announcement
"Reorganisation" the successive steps whereby China
Netcom Group transferred the
telecommunications operations in the
Target Regions and related assets and
liabilities to the Target Company, as
further described in the section headed
"The Reorganisation" in this
announcement
"RMB" Renminbi, the lawful currency of the PRC
"Sallmanns" Sallmanns (Far East) Limited, a chartered
surveyor and independent property
valuer to the Company
"SASAC" State-owned Assets Supervision and
Administration Commission of the State
Council
"Securities and Futures Ordinance" the Securities and Futures Ordinance
(Chapter 571 of the laws of Hong Kong)
"Share(s)" ordinary shares in the Company's issued
share capital with a par value of
US$0.04 per share which are listed on
the Hong Kong Stock Exchange
"Shareholders" holders of Shares
"State Council" the State Council of the PRC
"Target BVI Company" China Netcom Group New Horizon
Communications Corporation (BVI) Limited,
a company incorporated in the British
Virgin Islands
"Target Company" China Netcom Group New Horizon
Communications Corporation Limited, a
company incorporated in the PRC and the
term "Target Company" shall, if the
context so requires, include any
predecessor entity or person carrying on
its business before the Reorganisation
"Target Group" the Target BVI Company and the Target
Company
"Target Regions" the regions in which the Target Company
operates its business, being
Heilongjiang Province, Jilin Province,
Neimenggu Autonomous Region, and Shanxi
Province of the PRC
"Telecommunications Regulations" The PRC Telecommunications Regulations
which became effective as of 25 September
2000
"US dollars" or "US$" United States dollars, the lawful
currency of the United States of America
For your convenience and unless otherwise specified, this announcement contains
translations between RMB and US dollars at RMB8.0998 = US$1.00, between RMB and
Hong Kong dollars at RMB1.0422 = HK$1.00, and between Hong Kong dollars and US
dollars at HK$7.7718 = US$1.00, the prevailing rates on 31 August 2005. The
translations are not representations that the RMB, Hong Kong dollar and US
dollar amounts could actually be converted at those rates, if at all.
FURTHER INFORMATION
As at the Latest Practicable Date, CNC BVI beneficially owned approximately
70.49% of the issued share capital of the Company. CNC BVI is a wholly-owned
subsidiary of China Netcom Group. As such, both CNC BVI and China Netcom Group
are connected persons of the Company. The relevant applicable percentage ratios
under Rule 14.07 of the Hong Kong Listing Rules in respect of the Acquisition
exceed 25% but below 100%. Accordingly, under the Hong Kong Listing Rules, the
Acquisition constitutes both a connected transaction and a major transaction
for the Company.
An Independent Board Committee has been established to advise the Independent
Shareholders in respect of the terms of the Acquisition and the terms of the
Non-exempt Continuing Connected Transactions. In this respect, CSFB has been
retained as the independent financial adviser to the Independent Board
Committee and the Independent Shareholders.
China Netcom Group and its Associates being connected persons of the Company,
will abstain from voting on the ordinary resolutions to approve the Acquisition
and the Non-exempt Continuing Connected Transactions. The votes of the
Independent Shareholders at the Extraordinary General Meeting shall be taken by
poll.
36
A circular containing, amongst other things, further information relating to
the Acquisition, the Continuing Connected Transactions, letter from the
Independent Board Committee and letter from CSFB, further financial and other
information of the Target Company and a notice of the Extraordinary General
Meeting will be despatched to the Shareholders as soon as practicable.
Yours faithfully,
China Netcom Group Corporation (Hong Kong) Limited
Zhang Chunjiang
Chairman
Hong Kong, 12 September 2005
As at the date of this announcement, the Board of Directors of the Company
comprises Mr. Zhang Chunjiang, Dr. Tian Suning, Mr. Zhang Xiaotie and Mr. Miao
Jianhua as executive directors, Mr. Jiang Weiping, Ms. Li Liming, Mr.
Jos|$$|Aae Mar|$$|Aaia |$$|AaAlvarez-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.