<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 2000.
REGISTRATION NO. 333-47256
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2.
TO
FORM F-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CHINA MOBILE (HONG KONG) LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
HONG KONG, CHINA NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
60TH FLOOR, THE CENTER
99 QUEEN'S ROAD CENTRAL
HONG KONG, CHINA
(852) 3121-8888
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CT CORPORATION SYSTEM
111 EIGHTH AVENUE
13TH FLOOR
NEW YORK, NY 10011
(212) 590-9200
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
MATTHEW BERSANI, ESQ. CHUN WEI, ESQ.
SHEARMAN & STERLING SULLIVAN & CROMWELL
12TH FLOOR, GLOUCESTER TOWER 28TH FLOOR
THE LANDMARK, 11 PEDDER STREET NINE QUEEN'S ROAD CENTRAL
HONG KONG, CHINA HONG KONG, CHINA
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO
BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Subject to Completion. Dated , 2000.
[CHINA MOBILE (HK) LOGO]
CHINA MOBILE (HONG KONG) LIMITED
[CHINESE CHARACTERS]
184,704,213 AMERICAN DEPOSITARY SHARES
REPRESENTING 923,521,065 ORDINARY SHARES
AND
US$600,000,000 % CONVERTIBLE NOTES DUE 2005
------------------------
China Mobile (Hong Kong) Limited is offering American depositary shares
representing ordinary shares in the form of ADSs or ordinary shares. Each ADS
represents five ordinary shares. Concurrently, China Mobile (HK) is offering
% convertible notes due 2005. The number of ordinary shares and ADSs to be
sold in the share offering may be adjusted as necessary to ensure that the total
gross proceeds of the share offering will be equivalent to approximately
US$6,575 million.
ADSs and ordinary shares of China Mobile (HK) are listed on the New York
Stock Exchange under the symbol "CHL" and on the Hong Kong Stock Exchange,
respectively. The last reported sale prices of the ADSs and the ordinary shares
on October 10, 2000 were US$35.00 per ADS and HK$55.50 per share. China Mobile
(HK) has applied to list the convertible notes on the Luxembourg Stock Exchange.
See "Risk Factors" beginning on page 19 to read about factors you should
consider before buying the ordinary shares or ADSs or the convertible notes.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
A copy of this prospectus, having attached to it the written consents
specified under the section headed "Miscellaneous" on page 199, will be
registered by the Registrar of Companies in Hong Kong as required by Section 38D
of the Companies Ordinance of Hong Kong. The Hong Kong Registrar of Companies,
the Hong Kong Securities and Futures Commission and The Stock Exchange of Hong
Kong Limited take no responsibility as to the contents of this prospectus and
make no representation as to its accuracy or completeness and expressly disclaim
any liability whatsoever for any loss howsoever arising from or in reliance upon
the whole or any part of the contents of this prospectus.
------------------------
<TABLE>
<CAPTION>
Per Per Total
ordinary Total convertible (convertible
share Per ADS (share offering) note note offering)
-------- ------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Initial price to public......... HK$ US$ US$ 100% US$
Underwriting discount........... HK$ US$ US$ % US$
Proceeds, before expenses, to
China Mobile (HK)............. HK$ US$ US$ % US$
</TABLE>
The underwriters in the share offering have the option to purchase up to
such number of additional ordinary shares and ADSs equal to 15% of the number of
the ordinary shares and ADSs initially offered from China Mobile (HK) at the
initial price to public less the underwriting discount. The underwriters in the
convertible note offering have the option to purchase up to such additional
principal amount of convertible notes equal to 15% of the aggregate principal
amount of the convertible notes initially offered from China Mobile (HK) at the
initial price to public less the underwriting discount.
The underwriters expect to deliver the ADSs in New York, New York on
, 2000, the ordinary shares in Hong Kong on , 2000 and
the convertible notes in New York, New York on , 2000.
The ordinary shares offered in the share offering will not commence trading
on the Hong Kong Stock Exchange until they are delivered, which is expected to
be three business days after the date of pricing. You may not be able to sell or
otherwise deal in these shares during the three-day period.
------------------------
CHINA INTERNATIONAL CAPITAL CORPORATION LIMITED
GOLDMAN SACHS (ASIA) L.L.C.
MERRILL LYNCH & CO.
------------------------
Prospectus dated , 2000.
<PAGE> 3
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company, the ordinary shares and ADSs being sold in
the share offering and the convertible notes being sold in the convertible note
offering and the financial statements and notes to those statements appearing
elsewhere in this prospectus. Unless otherwise indicated, information contained
in this prospectus assumes that the respective underwriters' option to purchase
additional ordinary shares or ADSs in the share offering or additional
convertible notes in the convertible note offering, as the case may be, will not
be exercised.
CHINA MOBILE (HONG KONG) LIMITED
INTRODUCTION
We are the leading provider of mobile communications services in six
provinces in China. We had approximately 23.9 million subscribers as of
September 20, 2000. On October 4, 2000, we agreed to acquire from our immediate
controlling shareholder, an indirect subsidiary of China Mobile Communications
Corporation, the mobile communications businesses currently operated by China
Mobile Communications Corporation in seven provinces, municipalities and
autonomous region in China, subject to regulatory and independent shareholder
approvals and other conditions. If the proposed acquisition is successfully
completed:
- we will have a geographically contiguous market covering all of the
coastal regions of mainland China;
- we will have approximately 55.9% of all cellular subscribers in mainland
China;
- our service areas will cover approximately 48.0% of the total population
in mainland China; and
- the cellular penetration rate in our combined market will be
approximately 7.1%, which indicates room for significant future growth.
OUR OPERATIONS
Our cellular networks are based primarily on the digital GSM technology.
Our networks reach all cities and counties and most major roads and highways in
the provinces in which we operate. Our networks are connected to China's
national fixed line telephone networks and the other cellular networks of China
Mobile Communications Corporation in the regions in which we do not currently
operate.
THE ACQUISITION
We have agreed to acquire from China Mobile Hong Kong (BVI) Limited, our
immediate controlling shareholder, the entire interest of the mobile
communications businesses currently operated by China Mobile Communications
Corporation in Beijing, Shanghai, Tianjin, Hebei, Liaoning, Shandong and
Guangxi. Each of these companies is the leading mobile communications services
provider in its geographic region. Most of these regions are among the most
developed and prosperous regions in China not yet serviced by us. As of
September 20, 2000, these seven companies had a total of approximately 15.4
million subscribers.
1
<PAGE> 4
The total purchase price is HK$256,021 million (US$32,840 million), to be
paid by us with a combination of cash and new shares to be issued to China
Mobile Hong Kong (BVI) Limited. We intend to finance the major part of the cash
portion of the purchase price using the proceeds from the share offering and
convertible note offering.
We will proceed with the acquisition only if the conditions set forth in
the acquisition agreement are satisfied or waived. These conditions include the
receipt of regulatory and independent shareholder approvals for the acquisition.
OUR BUSINESS STRATEGY
We believe that the telecommunications market in mainland China will
continue to expand rapidly. We are making this acquisition because it would
enhance our growth profile and significantly expand our size and positioning in
the market. Our business strategy has the following key elements:
- continue to actively grow our core mobile communications services by:
- maintaining focus on developing a high-quality subscriber base;
- broadening our subscriber base and increasing market penetration;
- focusing on integrating our businesses and realizing synergies to
improve efficiency; and
- nurturing our human capital;
- pursue strategic expansion in the broader telecommunications market in
mainland China and capturing new revenue streams; and
- continue to explore acquisition and other expansion opportunities.
OUR MAJORITY SHAREHOLDER
China Mobile Communications Corporation indirectly owns, and will continue
to own immediately after the completion of the concurrent share offering and
convertible note offering and the acquisition, approximately 75% of our
outstanding shares.
------------------------
Our principal executive office is located at 60th Floor, The Center, 99
Queen's Road Central, Hong Kong, China and our telephone number at this address
is (852) 3121-8888.
2
<PAGE> 5
THE OFFERINGS
The offerings described in this prospectus consist of the share offering
and the convertible note offering. The closing of one offering is not
conditional upon the closing of the other offering.
THE SHARE OFFERING
Securities offered............ 184,704,213 ADSs offered by us in the form of
ordinary shares or ADSs.
International offering... ADSs in the United States and
Internationally outside of Asia, Australasia
and the Middle East.
Asia offering............ ADSs in Asia, Australasia and
the Middle East, including 351,171,171 ordinary
shares to be offered to Vodafone Group Plc.
The above share numbers are provided for
illustrative purposes only and assumes that the
initial price to public will be HK$55.50 per
share, the closing price of our shares on the
Hong Kong Stock Exchange on October 10, 2000.
These numbers may be adjusted as necessary to
ensure that the total gross proceeds of the
share offering will be equivalent to
approximately US$6,575 million.
Number of shares outstanding
immediately after the share
offering and the
acquisition................. 17,956,622,822 ordinary shares (including
3,322,840,736 ordinary shares to be issued to
China Mobile Hong Kong (BVI) Limited as part of
the purchase price for the acquisition). These
numbers are provided for illustrative purposes
only and may vary depending on the number of
ordinary shares or ADSs to be issued in the
share offering and to be issued to China Mobile
Hong Kong (BVI) Limited.
Overallotment option.......... We have granted the underwriters for the share
offering an option exercisable within 28 days
of the date of this prospectus to purchase up
to such additional number of ADSs equal to 15%
of the ADSs initially offered.
Depositary.................... The Bank of New York.
THE CONVERTIBLE NOTE OFFERING
Securities offered............ US$600,000,000 aggregate principal amount of
% convertible notes due , 2005.
Offering price................ 100% of principal amount.
Overallotment option.......... We have granted the underwriters for the
convertible note offering an option exercisable
within 28 days of
3
<PAGE> 6
the date of this prospectus to purchase up to
an additional principal amount of convertible
notes equal to 15% of the aggregate principal
amount of the convertible notes initially
offered.
Interest...................... % per annum, payable semi-annually on
and of each year
commencing , 2001.
Conversion.................... You may convert your convertible notes into our
shares or ADSs at any time after 30 days from
the original issuance of the convertible notes
and before the close of business on the third
business day prior to maturity or early
redemption. The conversion price per ADS is
initially US$ per ADS, or HK$ per share
based on the fixed exchange rate of
US$1.00 = HK$ and the current share-to-ADS
ratio of 5:1. The conversion price may be
adjusted as described in "-- Adjustment of
Conversion Price" beginning on page 170.
Redemption at maturity........ We will redeem the convertible notes at 100% of
their principal amount, plus any accrued and
unpaid interest, on , 2005.
Taxes; optional tax redemption
by us....................... In the event that certain Hong Kong taxes are
payable in respect of payments under the
convertible notes as a result of any change in
Hong Kong laws or regulations, we will pay
additional amounts to compensate holders for
such taxes. We may, at our option, redeem the
convertible notes in such cases.
Our early redemption option;
holders' put option......... Prior to maturity, we may redeem the
convertible notes after , 2002 as
described in "-- Optional Redemption by China
Mobile (HK)" on page 168, and the holders may
require us to repay the convertible notes as
described in "-- Repayment at Option of
Holders" beginning on page 175.
Ratings....................... "BBB" by Standard & Poor's and "Baa2" by
Moody's Investors Service.
Trustee and conversion
agent......................... The Bank of New York.
USE OF PROCEEDS
We plan to use the total net proceeds from the concurrent share offering
and convertible note offering, together with Renminbi-denominated bank loans,
internal resources and other forms of external financing, if necessary, to
finance the cash portion of the purchase price for our acquisition of the seven
companies that we have agreed to acquire.
4
<PAGE> 7
SUMMARY OPERATING AND OTHER DATA
<TABLE>
<CAPTION>
AS OF OR FOR THE AS OF OR FOR THE
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
----------------------------------- JUNE 30,
1997 1998 1999 2000
---- ---- ---- ----------------
<S> <C> <C> <C> <C>
CHINA MOBILE (HK)
Total population base (in millions)(1)............ 115 188 324 326(2)
Cellular penetration (%)(3)....................... 3.0 3.7 5.5 8.0(2)
Subscribers (in thousands)
Contract........................................ 3,405 6,531 15,621 19,142
Prepaid(4)...................................... -- -- -- 2,496
----- ------ ------ ------
Total subscribers........................ 3,405 6,531 15,621 21,638*
===== ====== ====== ======
Market share (%)(3)............................... 97.6 94.5 87.4 83.0
Average churn rate (%)(5)(6)...................... 1.6 2.1 4.6 3.9
Average minutes of use per subscriber per month
(7)............................................. 441 385 383 320
Average revenue per subscriber per month
(RMB)(8)........................................ 474 450(9) 347(10) 261
TARGET COMPANIES
Total population base (in millions)(1)............ 277 279 281 282(2)
Cellular penetration (%)(3)....................... 1.4 2.5 4.2 6.1(2)
Subscribers (in thousands)
Contract........................................ 3,699 6,471 10,121 12,280
Prepaid(4)...................................... -- -- -- 1,363
----- ------ ------ ------
Total subscribers........................ 3,699 6,471 10,121 13,643**
===== ====== ====== ======
Market share (%)(3)............................... 94.6 91.3 85.4 80.0
Average churn rate (%)(5)(6)...................... 5.1 6.3 7.9 6.4
Average minutes of use per subscriber per month
(7)............................................. 419 386 340 310
Average revenue per subscriber per month
(RMB)(8)........................................ 387 309 270 224
CHINA MOBILE (HK) AND TARGET COMPANIES PRO FORMA
COMBINED
Combined total population base (in millions)(1)... 392 467 605 607(2)
Cellular penetration (%)(3)....................... 1.9 3.0 4.9 7.1(2)
Subscribers (in thousands)
Contract........................................ 7,104 13,002 25,743 31,422
Prepaid(4)...................................... -- -- -- 3,858
----- ------ ------ ------
Total subscribers........................ 7,104 13,002 25,743 35,280***
===== ====== ====== ======
Market share (%)(3)............................... 95.9 92.9 86.6 81.8
Average churn rate (%)(5)(6)...................... 3.4 4.2 5.9 4.9
Average minutes of use per subscriber per month
(7)............................................. 429 386 366 316
Average revenue per subscriber per month
(RMB)(8)........................................ 430 373(9) 310(10) 247
</TABLE>
---------------
* 23.9 million subscribers as of September 20, 2000.
** 15.4 million subscribers as of September 20, 2000.
*** 39.3 million subscribers as of September 20, 2000.
5
<PAGE> 8
(1) Source: 1998 China Statistical Yearbook, 1999 China Statistical Yearbook
and 2000 China Statistical Abstract.
(2) Estimate based on population as of December 31, 1999 as published in 2000
China Statistical Abstract, and further assuming the same annual population
growth rate in each province, municipality or autonomous region in 2000 as
in 1999.
(3) Calculated based on our estimate of the total number of cellular
subscribers.
(4) We and the companies that we have agreed to acquire began trial prepaid
services in selected cities in the second half of 1999 and launched prepaid
services on a full scale basis in the beginning of 2000.
(5) Measures the rate of subscriber disconnections from mobile telephone
service, determined by dividing (A) the sum of voluntary and involuntary
deactivations (excluding deactivations due to subscribers switching from
one of our contract services to another) during the relevant period by (B)
the average number of subscribers during the period (calculated as the
average at the beginning and end of the year (in the case of 1997 and 1998)
and at the beginning of the year and the end of each calendar month (in the
case of 1999 and the six months ended June 30, 2000). On this basis, our
calculated churn rate will be affected by the number of voluntary and
involuntary deactivations and the significant growth in our subscriber
base. For ease of comparison, the calculation includes the relevant
information of Jiangsu Mobile in respect of the full year of 1998 and the
relevant information of Fujian Mobile, Henan Mobile and Hainan Mobile in
respect of the full year of 1999.
(6) We began offering prepaid services in late 1999. Some of our subscribers
have switched from our contract services to our prepaid services, which do
not require subscriber registration. Since the exact number of such
subscribers cannot be ascertained, the above churn rate accounts for them
as churn subscribers, even though they remain our subscribers. Based on our
own recent market surveys, we believe that if such subscribers were to be
excluded from the churn rate calculation, our calculated churn rates would
be lower than those shown in the schedule above.
(7) Calculated by (A) dividing the total minutes of usage during the relevant
period by the average number of subscribers during the period (calculated
in the same manner as described in note (5) above) and (B) dividing the
result by the number of months in the period. For ease of comparison, the
calculation includes the relevant information of Jiangsu Mobile in respect
of the full year of 1998 and the relevant information of Fujian Mobile,
Henan Mobile and Hainan Mobile in respect of the full year of 1999.
(8) Calculated by (A) dividing the operating revenue during the relevant period
by the average number of subscribers during the period (calculated in the
same manner as described in note (5) above) and (B) dividing the result by
the number of months in the period.
(9) Excluding Jiangsu Mobile, because the operating revenues of Jiangsu Mobile
are included in our financial results only from June 4, 1998, the date of
its acquisition by us.
(10) Excluding Fujian Mobile, Henan Mobile and Hainan Mobile, because the
operating revenues of Fujian Mobile, Henan Mobile and Hainan Mobile are
included in our financial results only from November 12, 1999, the date of
their acquisition by us.
6
<PAGE> 9
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999
---- ---- ---- ---- ---- ----
RMB RMB RMB RMB RMB US$
(IN MILLIONS, EXCEPT PER SHARE AND PER ADS INFORMATION AND SHARE NUMBERS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
HONG KONG GAAP
Operating revenue........ 7,598 10,367 15,488 26,345 38,623 4,666
Operating expenses....... 2,856 5,405 10,074 18,410 24,983 3,018
Operating profit......... 4,742 4,962 5,414 7,935 13,640 1,648
Write-down and write-off
of TACS network
equipment............... -- -- -- 282 8,242 996
Profit before tax and
minority interests...... 4,954 4,941 5,953 9,387 6,444 778
Income tax............... 286 428 991 2,486 1,647 199
Net profit(1)............ 4,668 4,509 4,955 6,900 4,797 579
Basic and diluted net
profit per
share(2)(3)............. 0.50 0.52 0.59 0.40 0.05
Basic and diluted net
profit per ADS(2)(3).... 2.50 2.60 2.93 1.99 0.24
Shares utilized in basic
calculation (in
thousands).............. 9,010,000 9,534,365 11,780,788 12,069,108 12,069,108
Shares utilized in
diluted calculation (in
thousands).............. 9,010,000 9,534,365 11,782,521 12,072,383 12,072,383
US GAAP(4)
Operating revenue........ 10,440 15,322 23,853 35,516 44,940 5,429
Operating expenses....... 4,231 8,056 14,867 23,761 34,318 4,146
Operating profit......... 6,201 7,266 8,986 11,755 10,622 1,283
Profit before tax and
minority interests...... 6,464 7,411 9,571 13,548 11,482 1,387
Income tax............... 498 832 1,416 3,262 3,248 392
Net profit............... 5,974 6,575 8,148 10,285 8,234 995
Basic and diluted net
profit per
share(2)(3)............. 0.58 0.64 0.75 0.79 0.63 0.08
Basic and diluted net
profit per ADS(2)(3).... 2.90 3.20 3.77 3.94 3.13 0.38
Shares utilized in basic
calculation (in
thousands).............. 10,283,195 10,283,195 10,807,560 13,053,983 13,164,404 13,164,404
Shares utilized in
diluted calculation (in
thousands).............. 10,283,195 10,283,195 10,807,560 13,055,716 13,167,679 13,167,679
BALANCE SHEET DATA:
HONG KONG GAAP
Current assets
Cash and cash
Equivalents........... 3,128 2,976 40,071 17,481 19,349 2,337
Deposits with banks..... -- -- -- 1,311 8,227 994
Accounts receivable..... 807 1,087 1,592 2,482 4,957 599
Fixed assets............. 7,346 11,536 18,634 33,986 42,699 5,158
Total assets............. 13,563 18,136 64,950 64,541 87,435 10,562
Total short-term
debt(5)................. 513 1,504 2,148 5,337 4,419 534
Total long-term
debt(6)................. 2,004 1,946 2,870 991 2,332 282
Fixed rate notes......... -- -- -- -- 4,952 598
Total liabilities........ 4,522 5,657 10,386 18,699 30,343 3,665
Shareholders' equity..... 9,041 12,471 54,550 45,827 57,092 6,897
<CAPTION>
AS OF OR FOR THE SIX
MONTHS ENDED JUNE 30,
---------------------------------------
1999 2000 2000
---- ---- ----
RMB RMB US$
(IN MILLIONS, EXCEPT PER SHARE AND PER ADS INFORMATION AND SHARE NUMBERS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
HONG KONG GAAP
Operating revenue........ 16,940 28,897 3,490
Operating expenses....... 10,929 16,575 2,002
Operating profit......... 6,011 12,322 1,488
Write-down and write-off
of TACS network
equipment............... 500 -- --
Profit before tax and
minority interests...... 5,974 12,742 1,540
Income tax............... 1,970 4,018 485
Net profit(1)............ 4,004 8,724 1,055
Basic and diluted net
profit per
share(2)(3)............. 0.34 0.64 0.08
Basic and diluted net
profit per ADS(2)(3).... 1.70 3.18 0.39
Shares utilized in basic
calculation (in
thousands).............. 11,782,885 13,706,310 13,706,310
Shares utilized in
diluted calculation (in
thousands).............. 11,785,447 13,716,377 13,716,377
US GAAP(4)
Operating revenue........ 21,483 27,834 3,362
Operating expenses....... 13,870 16,606 2,006
Operating profit......... 7,613 11,228 1,356
Profit before tax and
minority interests...... 8,044 11,690 1,412
Income tax............... 2,460 3,532 427
Net profit............... 5,584 8,158 985
Basic and diluted net
profit per
share(2)(3)............. 0.43 0.60 0.07
Basic and diluted net
profit per ADS(2)(3).... 2.14 2.98 0.36
Shares utilized in basic
calculation (in
thousands).............. 13,056,080 13,706,310 13,706,310
Shares utilized in
diluted calculation (in
thousands).............. 13,058,642 13,716,377 13,716,377
BALANCE SHEET DATA:
HONG KONG GAAP
Current assets
Cash and cash
Equivalents........... 17,557 19,767 2,388
Deposits with banks..... 5,234 14,455 1,746
Accounts receivable..... 3,244 5,526 668
Fixed assets............. 35,297 44,399 5,363
Total assets............. 68,609 96,624 11,672
Total short-term
debt(5)................. 4,995 2,683 324
Total long-term
debt(6)................. 1,200 2,050 247
Fixed rate notes......... -- 4,957 599
Total liabilities........ 18,709 30,801 3,721
Shareholders' equity..... 49,900 65,823 7,951
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999
---- ---- ---- ---- ---- ----
RMB RMB RMB RMB RMB US$
(IN MILLIONS, EXCEPT PER SHARE AND PER ADS INFORMATION AND SHARE NUMBERS)
<S> <C> <C> <C> <C> <C> <C>
US GAAP(4)
Fixed assets............. 10,464 18,597 27,058 39,930 41,618 5,027
Total assets............. 17,693 27,960 79,986 75,098 87,570 10,577
Total long-term
debt(6)................. 2,015 2,054 3,054 2,472 2,333 282
Fixed rate notes......... -- -- -- -- 4,952 598
Shareholders' equity..... 12,570 20,871 66,715 51,665 55,927 6,755
OTHER FINANCIAL DATA:
HONG KONG GAAP
Capital
expenditures(7)......... 2,653 5,511 5,807 11,040 11,708 1,414
Adjusted cash flow(8).... 4,450 4,213 8,203 13,444 19,673 2,377
Net cash inflow from
operating activities.... 5,331 6,418 8,825 13,567 21,662 2,617
Net cash outflow from
investing activities.... (3,169) (5,264) (5,327) (36,357) (36,117) (4,363)
Net cash inflow/(outflow)
from financing
activities.............. (467) 899 34,218 325 18,337 2,215
Adjusted EBITDA(9)....... 5,707 6,436 8,180 12,869 21,603 2,609
Ratio of earnings to
fixed charges........... 23.5 20.2 17.1 23.7 10.5 --
US GAAP(4)
Net cash inflow from
operating activities.... 6,403 8,176 13,252 17,110 23,500 2,838
Net cash outflow from
investing activities.... 5,810 10,589 11,590 17,694 19,245 2,325
Net cash inflow/(outflow)
from financing
activities.............. (803) 2,385 35,440 (22,017) (2,589) (313)
Adjusted EBITDA(9)....... 7,257 9,495 12,821 17,675 24,660 2,980
Ratio of earnings to
fixed charges........... 28.8 27.5 24.1 22.4 14.7 --
<CAPTION>
AS OF OR FOR THE SIX
MONTHS ENDED JUNE 30,
---------------------------------------
1999 2000 2000
---- ---- ----
RMB RMB US$
(IN MILLIONS, EXCEPT PER SHARE AND PER ADS INFORMATION AND SHARE NUMBERS)
<S> <C> <C> <C>
US GAAP(4)
Fixed assets............. 42,144 43,439 5,247
Total assets............. 83,308 97,359 11,761
Total long-term
debt(6)................. 3,122 2,050 248
Fixed rate notes......... -- 4,957 599
Shareholders' equity..... 57,367 64,120 7,746
OTHER FINANCIAL DATA:
HONG KONG GAAP
Capital
expenditures(7)......... 4,591 8,498 1,027
Adjusted cash flow(8).... 8,582 17,053 2,060
Net cash inflow from
operating activities.... 9,801 19,566 2,364
Net cash outflow from
investing activities.... (8,438) (14,624) (1,767)
Net cash inflow/(outflow)
from financing
activities.............. (68) (2,011) (242)
Adjusted EBITDA(9)....... 9,578 16,817 2,031
Ratio of earnings to
fixed charges........... -- 24.6 --
US GAAP(4)
Net cash inflow from
operating activities.... 11,826 17,053 2,060
Net cash outflow from
investing activities.... 10,193 14,624 1,767
Net cash inflow/(outflow)
from financing
activities.............. (135) (2,011) (243)
Adjusted EBITDA(9)....... 11,922 15,636 1,889
Ratio of earnings to
fixed charges........... -- 22.6 --
</TABLE>
---------------
(1) After excluding the write-down and write-off of TACS network equipment and
the related tax effect, net profit for the years ended December 31, 1998 and
1999 and the six months ended June 30, 1999 was RMB 7,088 million, RMB
10,320 million and RMB 4,339 million, respectively.
(2) The basic and diluted net profit per share and per ADS amounts under Hong
Kong GAAP for the years ended December 31, 1996 and 1997 have been computed
by dividing net profit under Hong Kong GAAP by the weighted average number
of shares and the weighted average number of ADSs, respectively, outstanding
as if 9,010,000,000 ordinary shares and 1,802,000,000 ADSs (based on a ratio
of five shares to one ADS), respectively, issued in the IPO restructuring
were outstanding during these periods (in addition to shares actually
issued, if any).
The basic and diluted net profit per share and per ADS amounts under US GAAP
for the years ended December 31, 1995, 1996 and 1997 have been computed by
dividing net profit under US GAAP by the weighted average number of shares
and the weighted average number of ADSs, respectively, outstanding as if (A)
9,010,000,000 ordinary shares and 1,802,000,000 ADSs (based on a ratio of
five shares to one ADS), respectively, issued in the IPO restructuring and
(B) 1,273,195,021 ordinary shares and 254,639,004 ADSs, respectively, issued
to China Mobile Hong Kong (BVI) Limited as part of the consideration in the
acquisition of Fujian Mobile, Henan Mobile and Hainan Mobile were
outstanding during these periods (in addition to shares actually issued, if
any).
(3) The basic net profit per share and per ADS amounts under Hong Kong GAAP for
the years ended December 31, 1998 and 1999 have been computed by dividing
net profit by the weighted average number of shares and the weighted average
number of ADSs, respectively, in issue during 1998 and 1999. The calculation
of diluted net profit per share under Hong Kong GAAP for the years ended
8
<PAGE> 11
December 31, 1998 and 1999 have been compiled after adjusting for the
effects of all dilutive potential ordinary shares.
The basic net profit per share and per ADS amounts under US GAAP for the
years ended December 31, 1998 and 1999 have been computed by dividing net
profit by the weighted average number of shares and the weighted average
number of ADSs, respectively, as if 1,273,195,021 ordinary shares and
254,639,004 ADSs issued to China Mobile Hong Kong (BVI) Limited as part of
the consideration in the acquisition of Fujian Mobile, Henan Mobile and
Hainan Mobile were outstanding during these periods (in addition to shares
actually issued, if any). The calculation of diluted net profit per share
under US GAAP for the years ended December 31, 1998 and 1999 have been
compiled after adjusting for the effects of all dilutive potential ordinary
shares.
All dilutive potential ordinary shares arise from the share options granted
to our directors under our share option scheme which, if converted to
ordinary shares, would decrease profit attributable to shareholders per
share.
(4) The amounts for the years ended December 31, 1995, 1996, 1997, 1998 and 1999
are presented to reflect the acquisitions of Jiangsu Mobile, Fujian Mobile,
Henan Mobile and Hainan Mobile under the "as if pooling-of-interest" method,
as well as the effects of other differences between Hong Kong GAAP and US
GAAP.
(5) Total short-term debt includes short-term bank and other loans, current
portion of long-term bank and other loans and current installments of
obligations under capital leases.
(6) Total long-term debt includes long-term bank and other loans and obligations
under capital leases, net of current portion.
(7) Represents payments made for capital expenditures during the period.
(8) Represents net cash inflows from operating activities less net cash outflows
(inflows) from returns on investments and servicing of finance and taxation.
(9) Adjusted EBITDA represents earnings before interest income, interest
expense, income taxes, depreciation and amortization, non-operating income
(expense) and write-down and write-off of fixed assets.
For the years ended December 31, 1995, 1996, 1997, 1998 and 1999, and the
six months ended June 30, 1999 and 2000, non-operating income (expense)
under Hong Kong GAAP was RMB 125 million, RMB 97 million, RMB (27) million,
RMB (51) million, RMB 70 million, RMB 11 million and RMB (12) million,
respectively, and under US GAAP was RMB 124 million, RMB 103 million, RMB
(12) million, RMB (1) million, RMB (136) million, RMB 21 million and RMB 2
million, respectively. Write-down and write-off of fixed assets under Hong
Kong GAAP for the years ended December 31, 1998 and 1999 and the six months
ended June 30, 1999 was RMB 282 million, RMB 8,242 million, and RMB 500
million, and under US GAAP was RMB 136 million, RMB 5,267 million, and RMB
322 million, respectively. There was no write-down and write-off of fixed
assets under Hong Kong GAAP or US GAAP in the six months ended June 30,
2000.
EBITDA is commonly used in the telecommunications industry to analyze
companies on the basis of operating performance, leverage and liquidity.
Adjusted EBITDA is not intended to represent cash flow for the period, nor
has it been presented as an alternative to net profit as an indicator of
operating performance. The items of net profit excluded from adjusted EBITDA
are significant components in understanding and assessing our financial
performance, and our computation of adjusted EBITDA may not be comparable to
other similarly titled measures of other companies. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 56 and our consolidated statements of cash flows contained
elsewhere in this prospectus.
9
<PAGE> 12
SUMMARY HISTORICAL COMBINED FINANCIAL INFORMATION OF THE TARGET COMPANIES
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED AS OF OR FOR THE SIX
DECEMBER 31, MONTHS ENDED JUNE 30,
-------------------------------------- ---------------------------
1997 1998 1999 1999 1999 2000 2000
---- ---- ---- ---- ---- ---- ----
RMB RMB RMB US$ RMB RMB US$
(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
HONG KONG GAAP
Operating revenue...................... 12,977 18,859 26,384 3,187 11,827 15,706 1,897
Operating expenses..................... 8,193 13,408 17,864 2,158 8,183 9,956 1,202
Operating profit....................... 4,784 5,451 8,520 1,029 3,644 5,750 695
TACS write-down/write-off.............. -- -- 4,508 545 -- -- --
Profit before tax...................... 4,652 5,223 3,506 423 3,454 5,456 659
Income tax............................. 316 640 824 100 595 1,002 121
Net profit(1).......................... 4,336 4,583 2,682 323 2,859 4,454 538
US GAAP
Operating revenue...................... 12,977 18,859 25,663 3,100 11,827 15,467 1,868
Operating expenses..................... 8,236 13,712 22,125 2,673 8,278 9,878 1,193
Operating profit....................... 4,741 5,147 3,538 427 3,549 5,589 675
Profit before tax...................... 4,651 4,948 3,128 378 3,380 5,318 642
Income tax............................. 381 650 369 45 666 1,584 191
Net profit............................. 4,270 4,298 2,759 333 2,714 3,734 451
BALANCE SHEET DATA:
HONG KONG GAAP
Current assets
Cash and cash equivalents............ 557 4,641 561 6,467 781
Accounts receivable.................. 2,267 2,685 325 2,823 341
Fixed assets........................... 24,069 29,999 3,624 37,252 4,500
Total assets........................... 35,791 45,711 5,522 53,758 6,494
Total short-term debt(2)............... 4,992 6,513 787 5,340 645
Total long-term debt(3)................ 7,910 10,999 1,329 10,787 1,303
Total liabilities...................... 17,198 24,681 2,982 24,441 2,952
Owner's equity......................... 18,593 21,030 2,540 29,317 3,542
US GAAP
Fixed assets........................... 24,154 30,173 3,645 32,620 3,940
Total assets........................... 36,490 47,654 5,757 51,495 6,221
Total long-term debt(3)................ 7,910 10,999 1,329 10,787 1,303
Owner's equity......................... 18,462 21,146 2,554 26,443 3,194
OTHER FINANCIAL DATA:
HONG KONG GAAP
Capital expenditures(4)................ 6,346 9,868 11,385 1,375 5,180 4,580 553
Adjusted cash flow(5).................. 4,808 5,438 10,788 1,303 4,563 8,242 995
Net cash inflow from operating
activities........................... 5,813 7,810 13,428 1,622 6,245 10,823 1,307
Net cash outflow from investing
activities........................... (6,352) (9,864) (11,401) (1,377) (5,179) (4,614) (557)
Net cash inflow/(outflow) from
financing activities................. 1,360 4,589 4,697 567 3,393 (1,802) (218)
Adjusted EBITDA(6)..................... 6,520 8,409 13,322 1,609 5,804 8,452 1,021
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED AS OF OR FOR THE SIX
DECEMBER 31, MONTHS ENDED JUNE 30,
-------------------------------------- ---------------------------
1997 1998 1999 1999 1999 2000 2000
---- ---- ---- ---- ---- ---- ----
RMB RMB RMB US$ RMB RMB US$
(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
US GAAP
Net cash inflow from operating
activities........................... 5,265 6,730 11,637 1,406 5,348 9,539 1,152
Net cash outflow from investing
activities........................... (6,352) (9,864) (11,401) (1,377) (5,179) (4,614) (557)
Net cash inflow/(outflow) from
financing activities................. 903 3,297 3,848 465 2,608 (3,099) (374)
Adjusted EBITDA(6)..................... 6,479 8,108 12,855 1,553 5,712 8,297 1,002
</TABLE>
---------------
(1) After excluding the write-down and write-off of TACS network equipment and
the related tax effect, net profit for the year ended December 31, 1999 was
RMB 6,760 million.
(2) Total short-term debt includes short-term bank and other loans, current
portion of long-term bank and other loans and current installments of
obligations under capital leases.
(3) Total long-term debt includes long-term bank and other loans and obligations
under capital leases, net of current portion.
(4) Represents payments made for capital expenditures during the period.
(5) Represents net cash inflows from operating activities less net cash outflows
(inflows) from returns on investments and servicing of finance and taxation.
(6) Adjusted EBITDA represents earnings before interest income, interest
expense, income taxes, depreciation and amortization, non-operating income
(expense) and write-down and write-off of fixed assets. Non-operating income
(expense) both under Hong Kong GAAP and US GAAP for the years ended December
31, 1997, 1998 and 1999, and the six months ended June 30, 1999 and 2000 was
RMB 77 million, RMB 68 million, RMB 123 million, RMB 57 million and RMB 52
million, respectively. Write-down and write-off of fixed assets for the year
ended December 31, 1999 was RMB 4,508 million. There was no write-down and
write-off of fixed assets for the years ended December 31, 1997 and 1998 and
the six months ended June 30, 1999 and 2000.
EBITDA is commonly used in the telecommunications industry to analyze
companies on the basis of operating performance, leverage and liquidity.
Adjusted EBITDA is not intended to represent cash flow for the period, nor
has it been presented as an alternative to net profit as an indicator of
operating performance. The items of net profit excluded from adjusted EBITDA
are significant components in understanding and assessing the financial
performance of the companies that we have agreed to acquire, and this
computation of adjusted EBITDA may not be comparable to other similarly
titled measures of other companies. You should also refer to the combined
statements of cash flows of the companies that we have agreed to acquire
contained elsewhere in this prospectus.
11
<PAGE> 14
SUMMARY PRO FORMA INCOME STATEMENT INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1999
HONG KONG GAAP:
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS CHINA
PRO FORMA CHINA FOR THE MOBILE
TARGET ADJUSTMENTS TARGET MOBILE ACQUISITION (HK)
COMPANIES FOR CERTAIN COMPANIES (HK) AND FINANCING PRO FORMA
HISTORICAL EVENTS PRO FORMA HISTORICAL TRANSACTIONS COMBINED
---------- ----------- --------- ---------- ------------- ----------
RMB RMB RMB RMB RMB RMB
(IN MILLIONS, EXCEPT PER SHARE INFORMATION AND SHARE NUMBERS)
<S> <C> <C> <C> <C> <C> <C>
Operating revenue
Usage fees...................... 16,285 16,285 25,812 42,097
Monthly fees.................... 4,564 4,564 4,981 9,545
Connection fees................. 2,113 2,113 4,319 6,432
Other operating revenue......... 3,422 3,422 3,511 6,933
------- ------- ------- ----------
Total operating revenue....... 26,384 26,384 38,623 65,007
------- ------- ------- ----------
Operating expenses
Leased lines.................... 3,309 3,309 3,723 7,032
Interconnection................. 4,867 4,867 6,453 11,320
Depreciation.................... 4,793 518(a) 5,311 7,411 12,722
Personnel....................... 546 546 2,256 2,802
Other operating expenses........ 4,349 4,349 5,140 9,489
------- ------- ------- ----------
Total operating expenses...... 17,864 18,382 24,983 43,365
------- ------- ------- ----------
Operating profit.................. 8,520 8,002 13,640 21,642
Write-down and write-off of TACS
network equipment............... (4,508) (4,508) (8,242) (12,750)
Other income...................... 9 9 552 561
Non-operating income, net......... 123 123 70 193
Interest income................... -- -- 767 (207)(d) 560
Finance costs..................... (638) (638) (343) (841)(e) (1,822)
------- ------- ------- ----------
Profit before tax................. 3,506 2,988 6,444 8,384
171(b)
Income tax........................ (824) (959)(c) (1,612) (1,647) (3,259)
------- ------- ------- ----------
Net profit........................ 2,682 1,376 4,797 5,125
======= ======= ======= ==========
Basic and diluted net profit per
pro forma share................. 0.31
==========
Pro forma shares utilized in basic
calculation (in thousands)...... 16,315,469
==========
Pro forma shares utilized in
diluted calculation (in
thousands)...................... 16,318,744
==========
</TABLE>
12
<PAGE> 15
SUMMARY PRO FORMA INCOME STATEMENT INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1999
US GAAP:
<TABLE>
<CAPTION>
TARGET COMPANIES CHINA MOBILE (HK)/TARGET COMPANIES COMBINED
---------------------------------------- ----------------------------------------------------------------
PRO FORMA TARGET CHINA
ADJUSTMENTS FOR US GAAP COMPANIES MOBILE (HK) PRO FORMA PRO FORMA US GAAP
HISTORICAL CERTAIN EVENTS PRO FORMA HISTORICAL HISTORICAL COMBINED ADJUSTMENTS PRO FORMA
---------- --------------- --------- ---------- ----------- ---------- ----------- ----------
RMB RMB RMB RMB RMB RMB RMB
RMB (IN MILLIONS, EXCEPT PER SHARE AND PER ADS
(IN MILLIONS) INFORMATION AND SHARE NUMBERS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total operating
revenue............ 25,663 25,663 25,663 44,940 70,603 70,603
Total operating
expenses........... 22,125 22,125 22,125 34,318 56,443 56,443
Other income......... 9 9 9 619 628 628
Non-operating income/
(expenses)......... 123 123 123 (136) (13) (13)
Interest income...... -- -- -- 773 773 (207)(d) 566
Finance costs........ (542) (542) (542) (396) (938) (841)(e) (1,779)
Income tax........... (369) (959)(c) (1,328) (369) (3,248) (3,617) (959)(c) (4,576)
------ ------ ------ ------ ---------- ----------
Net profit........... 2,759 1,800 2,759 8,234 10,993 8,986
====== ====== ====== ====== ========== ==========
Basic and diluted net
profit per pro
forma share........ 0.67 0.55
========== ==========
Pro forma shares
utilized in basic
calculation (in
thousands)......... 16,487,245 16,487,245
========== ==========
Pro forma shares
utilized in diluted
calculation (in
thousands)......... 16,490,520 16,490,520
========== ==========
Net profit per pro
forma ADS.......... 3.33 2.73
========== ==========
</TABLE>
13
<PAGE> 16
SUMMARY PRO FORMA INCOME STATEMENT INFORMATION
FOR THE SIX MONTHS ENDED JUNE 30, 2000
HONG KONG GAAP:
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA ADJUSTMENTS CHINA
ADJUSTMENTS CHINA FOR THE MOBILE
TARGET FOR TARGET MOBILE ACQUISITION (HK)
COMPANIES CERTAIN COMPANIES (HK) AND FINANCING PRO FORMA
HISTORICAL EVENTS PRO FORMA HISTORICAL TRANSACTIONS COMBINED
---------- ----------- --------- ---------- ------------- ----------
RMB RMB RMB RMB RMB RMB
(IN MILLIONS, EXCEPT PER SHARE AND PER ADS INFORMATION AND SHARE NUMBERS)
<S> <C> <C> <C> <C> <C> <C>
Operating revenue
Usage fees.................... 10,218 10,218 20,143 30,361
Monthly fees.................. 2,780 2,780 4,250 7,030
Connection fees............... 548 548 1,532 2,080
Other operating revenue....... 2,160 2,160 2,972 5,132
------ ------ ------ ----------
Total operating revenue..... 15,706 15,706 28,897 44,603
------ ------ ------ ----------
Operating expenses
Leased lines.................. 1,532 1,532 2,714 4,246
Interconnection............... 2,749 2,749 3,604 6,353
Depreciation.................. 2,652 305(a) 2,957 4,165 7,122
Personnel..................... 326 326 1,476 1,802
Other operating expenses...... 2,697 2,697 4,616 7,313
------ ------ ------ ----------
Total operating expenses.... 9,956 10,261 16,575 26,836
------ ------ ------ ----------
Operating profit................ 5,750 5,445 12,322 17,767
Other income.................... 50 50 330 380
Non-operating
income/(expenses)............. 52 52 (12) 40
Interest income -- -- 437 (125)(d) 312
Finance costs................... (396) (396) (335) (421)(e) (1,152)
------ ------ ------ ----------
Profit before tax............... 5,456 5,151 12,742 17,347
101(b)
Income tax...................... (1,002) (310)(c) (1,211) (4,018) (5,229)
------ ------ ------ ----------
Net profit...................... 4,454 3,940 8,724 12,118
====== ====== ====== ==========
Basic and diluted net profit per
pro forma share............... 0.68
==========
Pro forma shares utilized in
basic calculation (in
thousands).................... 17,952,672
==========
Pro forma shares utilized in
diluted calculation (in
thousands).................... 17,962,739
==========
</TABLE>
14
<PAGE> 17
US GAAP:
<TABLE>
<CAPTION>
TARGET COMPANIES CHINA MOBILE (HK)/TARGET COMPANIES COMBINED
--------------------------------------- ----------------------------------------------------------------
PRO FORMA
ADJUSTMENTS TARGET CHINA
FOR US GAAP COMPANIES MOBILE (HK) PRO FORMA PRO FORMA US GAAP
HISTORICAL CERTAIN EVENTS PRO FORMA HISTORICAL HISTORICAL COMBINED ADJUSTMENTS PRO FORMA
---------- -------------- --------- ---------- ----------- ---------- ----------- ----------
RMB RMB RMB RMB RMB RMB RMB RMB
(IN MILLIONS) (IN MILLIONS, EXCEPT PER SHARE AND PER ADS INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total operating
revenue............ 15,467 15,467 15,467 27,834 43,301 43,301
Total operating
expenses........... 9,878 9,878 9,878 16,606 26,484 26,484
Other income......... 50 50 50 330 380 380
Non-operating
income............. 52 52 52 2 54 54
Interest income...... -- -- -- 437 437 (125)(d) 312
Finance costs........ (373) (373) (373) (307) (680) (421)(e) (1,101)
Income tax........... (1,584) (310)(c) (1,894) (1,584) (3,532) (5,116) (310)(c) (5,426)
------ ------ ------ ------ ---------- ----------
Net profit........... 3,734 3,424 3,734 8,158 11,892 11,036
====== ====== ====== ====== ========== ==========
Basic and diluted
net profit per
pro forma
share.............. 0.70 0.65
========== ==========
Pro forma shares
utilized in basic
calculation (in
thousands)......... 17,029,151 17,029,151
========== ==========
Pro forma shares
utilized in diluted
calculation (in
thousands)......... 17,039,218 17,039,218
========== ==========
Net profit
per pro
forma ADS.......... 3.49 3.24
========== ==========
</TABLE>
15
<PAGE> 18
SUMMARY PRO FORMA BALANCE SHEET INFORMATION
AS OF JUNE 30, 2000
HONG KONG GAAP:
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS FOR CHINA
CHINA THE ACQUISITION MOBILE (HK)
TARGET COMPANIES MOBILE (HK) AND FINANCING PRO FORMA
HISTORICAL HISTORICAL TRANSACTIONS COMBINED
---------------- ----------- --------------- -----------
RMB RMB RMB RMB
(IN MILLIONS)
<S> <C> <C> <C> <C>
Cash and cash equivalents............. 6,467 19,767 (4,139)(f) 22,095
Other current assets.................. 4,697 22,509 27,206
Fixed assets.......................... 37,252 44,399 81,651
Other assets.......................... 5,342 9,949 15,291
------- ------- --------
Total assets...................... 53,758 96,624 146,243
======= ======= ========
Current liabilities................... 13,400 22,211 5,000(g) 40,611
Long-term bank and other loans........ 10,787 2,050 7,500(g) 20,337
Deferred revenue...................... 254 1,583 1,837
Fixed rate notes...................... -- 4,957 4,957
Convertible notes..................... -- -- 4,967(g) 4,967
------- ------- --------
Total liabilities................. 24,441 30,801 72,709
250,250(h)
(29,317)(i)
Shareholders' equity.................. 29,317 65,823 (242,539)(j) 73,534
------- ------- --------
Total liabilities and
shareholders' equity............ 53,758 96,624 146,243
======= ======= ========
</TABLE>
US GAAP:
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS FOR CHINA
CHINA THE ACQUISITION MOBILE (HK)
TARGET COMPANIES MOBILE (HK) AND FINANCING PRO FORMA
HISTORICAL HISTORICAL TRANSACTIONS COMBINED
---------------- ----------- --------------- -----------
RMB RMB RMB RMB
(IN MILLIONS)
<S> <C> <C> <C> <C>
Cash and cash equivalents............. 6,467 19,767 (4,139)(f) 22,095
Other current assets.................. 4,697 22,509 27,206
Fixed assets.......................... 32,620 43,439 76,059
Other assets.......................... 7,711 11,644 19,355
------- ------- -------
Total assets...................... 51,495 97,359 144,715
======= ======= =======
Current liabilities................... 13,400 22,275 5,000(g) 40,611
Long-term bank and other loans........ 10,787 2,050 7,500(g) 20,337
Deferred revenue...................... 622 3,957 4,579
Deferred tax liabilities.............. 243 -- 243
Fixed rate notes...................... -- 4,957 4,957
Convertible notes..................... -- -- 4,967(g) 4,967
------- ------- -------
Total liabilities................. 25,052 33,239 75,758
250,250(h)
Shareholders' equity.................. 26,443 64,120 (271,856)(k) 68,957
------- ------- -------
Total liabilities and
shareholders' equity............ 51,495 97,359 144,715
======= ======= =======
</TABLE>
16
<PAGE> 19
DESCRIPTION OF PRO FORMA ADJUSTMENTS
(a) The fixed assets of the companies that we have agreed to acquire were
revalued as of June 30, 2000, resulting in a revaluation surplus recorded on
that date. The adjustment records the additional depreciation resulting from the
revaluation of the fixed assets as if the revaluation surplus had been recorded
on January 1, 1999.
(b) The adjustment records the tax effect of the pro forma adjustment
described in note (a) above.
(c) Previously the connection fee revenue and certain surcharge revenue of
the companies that we have agreed to acquire were not subject to enterprise
income tax and, accordingly, no tax expense was included in the determination of
the historical results of operations for the year ended December 31, 1999 and
for the six-month period ended June 30, 2000. Upon the completion of the
registration of the companies that we have agreed to acquire as wholly foreign-
owned enterprises, in accordance with the Ministry of Finance ruling, such
revenue will be taxable at an enterprise income tax rate of 33%. The adjustment
records the applicable additional tax expense as if this revenue was taxable
since January 1, 1999.
(d) To adjust for reduction in the interest income for the cash portion of
the purchase consideration to be paid from the internal resources of China
Mobile (HK), as if the payment had been made on January 1, 1999. This interest
income is not subject to income tax.
(e) To record the interest expense of the convertible notes and the RMB
bank loans at interest rates of 3.8125% per annum (being the mid point of a
range from 2.875% to 4.750%, which range is shown for illustrative purposes
only, and is determined based on recent market transactions) and 5.346% per
annum for the RMB 7,500 million bank loan and 5.022% per annum for the RMB 5,000
million bank loan, respectively, as if the issuance of the convertible notes and
the RMB bank loans were consummated on January 1, 1999. The interest expense of
the convertible notes and the RMB bank loans are not deductible for income tax
purposes. Had the interest rate on the convertible notes varied by 1/8%, the
effect on the net profit would have been approximately RMB 6 million and RMB 3
million for the year ended December 31, 1999 and the six months ended June 30,
2000, respectively.
(f) To record the cash portion of the purchase consideration for the
companies that we have agreed to acquire to be paid from our internal resources
as of June 30, 2000.
(g) To record the liability arising from the issuance of convertible notes
and the raising of RMB bank loans for financing the acquisition as of June 30,
2000.
(h) To record the additional share capital arising from the issuance of
shares in the share offering and to China Mobile Hong Kong (BVI) Limited for
financing the acquisition as of June 30, 2000.
(i) To eliminate the owners' equity of the companies that we have agreed to
acquire as of June 30, 2000.
(j) To record goodwill as a result of the acquisition as if the acquisition
had taken place on June 30, 2000. The goodwill has been eliminated against
reserves of China Mobile (HK). Goodwill represents the difference between the
purchase consideration of HK$256,021 million and the estimated fair value of the
underlying net assets of the companies that we have agreed to acquire as of June
30, 2000.
(k) To record the total consideration paid of HK$256,021 million (RMB
271,856 million) as an equity transaction.
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HONG KONG REGULATORY MATTERS
This prospectus includes particulars given in compliance with the Rules
Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited
for the purpose of giving information with regard to us. Our directors
collectively and individually accept full responsibility for the accuracy of the
information contained in this prospectus and confirm, having made all reasonable
inquiries, that to the best of their knowledge and belief there are no other
facts the omission of which would make any statement in this prospectus
misleading.
If you are in any doubt about this prospectus, you should consult your
stock broker, bank manager, solicitor, professional accountant or other
professional advisor.
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RISK FACTORS
You should carefully consider the risks described below and the other
information in this prospectus before deciding to invest in the ordinary shares
or ADSs or the convertible notes.
RISKS RELATING TO OUR COMPANY AND THE TELECOMMUNICATIONS INDUSTRY IN CHINA
EXTENSIVE GOVERNMENT REGULATION MAY LIMIT OUR FLEXIBILITY TO RESPOND TO
MARKET CONDITIONS, COMPETITION OR CHANGES IN OUR COST STRUCTURE
The Ministry of Information Industry regulates, among others, the following
areas of the telecommunications industry under the leadership of the State
Council:
- formulating and enforcing industry policy, standards and regulations;
- granting telecommunications licenses;
- formulating interconnection and settlement standards for implementation
between telecommunications networks;
- together with other relevant regulatory authorities, formulating tariff
and service charge standards for telecommunications services;
- supervising the operations of telecommunications service providers;
- maintaining fair and orderly market competition among telecommunications
service providers; and
- allocating and administering public communications resources, such as
radio frequencies, number resources, domain names and addresses of
communications networks.
Other Chinese government authorities also take part in regulating tariff
policies and foreign investment in the telecommunications industry. The
regulatory framework within which we operate may limit our flexibility to
respond to market conditions, competition or changes in our cost structure. In
particular, future adverse changes in tariff policies and rates could
immediately decrease our revenues.
We operate our businesses with approvals granted by the State Council and
under licenses granted by the Ministry of Information Industry. If these
approvals or licenses are revoked or suspended, we will be adversely affected.
WE MAY BE AFFECTED BY FUTURE REGULATORY CHANGES
To provide a uniform regulatory framework for orderly development of the
telecommunications industry, the Chinese government is currently preparing a
draft telecommunications law. If and when the telecommunications law is adopted
by the National People's Congress, it is expected to become the fundamental
telecommunications statute and the legal basis for telecommunications
regulations in mainland China. The State Council has recently promulgated a set
of new telecommunications regulations. These regulations are substantially
consistent with the existing rules and guidelines for the telecommunications
industry, and are primarily intended to streamline and clarify the existing
rules and guidelines. They apply in the interim period prior to the adoption of
the telecommunications law. Although we expect that the telecommunica-
19
<PAGE> 22
tions law will positively affect the overall development of the
telecommunications industry in mainland China, we do not fully know what the
nature and scope of the telecommunications law will be. The telecommunications
law may contain provisions that could materially and adversely affect our
business, financial condition and results of operations.
COMPETITION FROM OTHER MOBILE COMMUNICATIONS SERVICE PROVIDERS MAY AFFECT
OUR SUBSCRIBER GROWTH AND PROFITABILITY BY CAUSING THE RATE OF OUR
SUBSCRIBER GROWTH TO DECLINE AND BRINGING ABOUT DECREASES IN TARIFF RATES
AND INCREASES IN SELLING AND PROMOTIONAL EXPENSES
China United Telecommunications Corporation operates (directly or through
its subsidiaries) in all of the provinces, municipalities and autonomous region
in which we and the companies that we have agreed to acquire operate. The
Chinese government encourages orderly competition in the telecommunications
industry in mainland China. Towards this end, it has extended certain favorable
regulatory policies to China Unicom in order to help it become a more viable
competitor. In particular, the Chinese government has permitted China Unicom to
lower its cellular service tariffs by up to 10% below the government guidance
rates (or up to 20% below the government guidance rates in areas where we and
the companies that we have agreed to acquire offer service packages that provide
local access only services on analog networks, which packages have lower tariff
rates compared to our standard tariff rates for services offered on GSM
networks). Some of our subsidiaries and companies that we have agreed to acquire
offer such local access only services over their TACS networks. We believe this
policy has helped China Unicom capture a significant number of price-sensitive
and low-usage cellular subscribers. As a result, China Unicom's market share has
increased over the past few years. See "Business -- Competition" beginning on
page 107. We could experience increased competition if the Chinese government
takes other actions in the future to further enhance China Unicom's competitive
position.
In addition to China Unicom, the State Council and the Ministry of
Information Industry may approve additional mobile communications service
providers in the future that may compete with us. We may also be subject to
competition from providers of new telecommunications services as a result of
technological development and the convergence of various telecommunications
services.
China recently concluded bilateral negotiations of the major terms for its
entry into the World Trade Organization with a number of countries, including
the United States, and the European Union. As a result, we expect the Chinese
government to gradually reduce current restrictions on foreign ownership in the
telecommunications industry. This could lead to the eventual opening of the
Chinese telecommunications market to foreign investors and operators, and could
result in or accelerate the issuance of new mobile communications service
licenses.
Increased competition from China Unicom and any introduction of new
competitors through the issuance of additional mobile communications service
licenses could adversely affect our financial results by, among other factors,
causing the rate of our subscriber growth to decline and bringing about
decreases in tariff rates and increases in selling and promotional expenses.
This could have a material adverse effect on our results of operations.
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WE ARE CONTROLLED BY CHINA MOBILE COMMUNICATIONS CORPORATION, WHICH MAY NOT
ALWAYS ACT IN YOUR BEST INTEREST
Immediately after the completion of the concurrent share and convertible
note offerings and the payment of the share consideration in connection with the
acquisition of the companies that we have agreed to acquire, China Mobile
Communications Corporation will indirectly own an aggregate of approximately 75%
of our shares. Accordingly, China Mobile Communications Corporation is, and will
be, able to:
- nominate our entire board of directors and, in turn, indirectly influence
the selection of our senior management;
- determine the timing and amount of our dividend payments; and
- otherwise control or influence actions that require the approval of our
shareholders.
The interests of China Mobile Communications Corporation as our ultimate
controlling person could conflict with the interests of our minority
shareholders.
In addition, China Mobile Communications Corporation also provides our
operating subsidiaries with services that are necessary for our business
activities, including:
- interconnection arrangements with its other subsidiaries' cellular
networks and roaming arrangements;
- the coordination of the provision of inter-provincial transmission leased
lines from China Telecommunications Corporation to us; and
- billing processing for domestic and international roaming services.
The interests of China Mobile Communications Corporation as the provider of
these services to our operating subsidiaries may conflict with our interests.
See "Relationship with China Mobile Communications Corporation" beginning on
page 133 for a description of the services provided to our operating
subsidiaries by China Mobile Communications Corporation and its other
subsidiaries.
In connection with our proposed acquisition, we have obtained certain
representations, warranties and indemnities from China Mobile Communications
Corporation, including with respect to any undisclosed contingent liabilities of
the companies that we have agreed to acquire. However, these may not be fully or
effectively enforced against China Mobile Communications Corporation.
THE LIMITED SPECTRUM ALLOCATED TO US MAY CONSTRAIN OUR FUTURE NETWORK
CAPACITY GROWTH
A cellular network's capacity is to a certain extent limited by the amount
of frequency spectrum available for it to use. Since the Ministry of Information
Industry allocates frequency spectrum to mobile communications operators in
mainland China, the capacity of our cellular network is limited by the amount of
spectrum that the Ministry of Information Industry allocates to us. The Ministry
of Information Industry has allocated 24 MHz in the 900 MHz frequency band and
10 MHz in the 1800 MHz frequency band to each of our operating subsidiaries and
the companies that we have agreed to acquire.
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<PAGE> 24
We believe that our current spectrum allocation, and that of the companies
that we have agreed to acquire, is sufficient for anticipated subscriber growth
in the near term, but we and the companies that we have agreed to acquire may
need additional spectrum to accommodate future subscriber growth or to develop
cellular services using third generation wireless communications technologies.
However, the Ministry of Information Industry may not allocate additional
spectrum to us or the companies that we have agreed to acquire. Our network
expansion plans and those of the companies that we have agreed to acquire may be
affected if we or these companies are unable to obtain additional spectrum. This
could in turn constrain our future network capacity growth and materially and
adversely affect our business, financial condition and results of operations.
CHANGES TO OUR INTERCONNECTION AND LEASED LINE ARRANGEMENTS MAY INCREASE
THE COST OF OUR OPERATION AND ADVERSELY AFFECT OUR PROFITABILITY
Our mobile communications services depend, in large part, upon our
interconnection arrangements. Currently, interconnection is necessary in the
case of all local calls between our subscribers and subscribers of fixed line or
other cellular networks. Interconnection and leased line arrangements are also
necessary for domestic long distance calls and international calls. We have
entered into interconnection and transmission line leasing agreements with the
relevant fixed line operators and other subsidiaries of China Mobile
Communications Corporation. The companies that we have agreed to acquire have
also entered into similar agreements.
The terms of our interconnection arrangements and leased line arrangements
have a material effect on our operating revenue and expenses. A material
increase in the interconnection or leased line expenses we pay could have a
material adverse effect on our results of operations. In addition, we will be
materially and adversely affected if we cannot enter into future interconnection
and leased line agreements on commercially acceptable terms. See "Relationship
with China Mobile Communications Corporation" beginning on page 133 and
"Relationship with China Telecommunications Corporation" beginning on page 141.
WE MAY BE UNABLE TO OBTAIN SUFFICIENT FINANCING TO FUND OUR SUBSTANTIAL
CAPITAL REQUIREMENTS, WHICH COULD LIMIT OUR GROWTH POTENTIAL
We estimate that we will require approximately RMB 86.3 billion (US$10.4
billion) for capital expenditures from 2000 through the end of 2002 for a range
of projects. We estimate that the companies that we have agreed to acquire will
require approximately RMB 49.7 billion (US$6.0 billion) for capital expenditures
from 2000 through the end of 2002 for a similar range of projects.
We believe that cash from operations, together with any necessary
borrowings, will provide sufficient financial resources to meet our projected
capital and other expenditure requirements. We currently plan to use the net
proceeds from the concurrent share offering and convertible note offering
described in this prospectus solely for the acquisition. If we have
underestimated our capital requirements or overestimated our future cash flows,
additional financing may be required. In addition, a significant feature of our
business strategy is to continue exploring opportunities for strategic
investments in the telecommunications industry in mainland China, which may
require additional capital resources.
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<PAGE> 25
Financing may not be available to us on acceptable terms. In addition, any
future issuance of our securities to foreign investors will require approval
from the China Securities Regulatory Commission, the State Council, and other
relevant government authorities. If adequate capital is not available, our
business prospects could be adversely affected.
CHANGES IN TECHNOLOGY MAY RENDER OUR CURRENT TECHNOLOGIES OBSOLETE OR
REQUIRE US TO MAKE SUBSTANTIAL CAPITAL INVESTMENTS
The telecommunications industry is subject to rapid and significant changes
in technology. Accordingly, although we strive to keep our technology up to
international standards, the mobile communications technologies currently
employed by us may become obsolete or subject to competition from new
technologies in the future. In addition, the cost of implementing new
technologies, upgrading our networks or expanding capacity could be significant.
In particular, in order for us to effectively respond to technological changes,
including the introduction of third-generation wireless communications
technologies, we may be required to make substantial capital expenditures in the
near future. This will in turn depend upon our ability to obtain additional
financing on commercially acceptable terms. The new technologies we implement,
such as wireless data applications, may not generate an acceptable rate of
return.
FAILURE TO CAPITALIZE ON NEW BUSINESS OPPORTUNITIES MAY HAVE AN ADVERSE
EFFECT ON OUR GROWTH POTENTIAL
We intend to pursue a number of new growth opportunities in the broader
telecommunications industry, including wireless data. These opportunities
involve new services for which there are no proven markets in mainland China. In
addition, the ability to deploy and deliver these services depends, in many
instances, on new and unproven technology. Our newly adopted wireless
communications technology may not perform as expected, and that we will be able
to successfully develop new technology to effectively and economically deliver
these services, or that we will be able to compete successfully in the delivery
of telecommunications services based on new technology.
ACTUAL OR PERCEIVED HEALTH RISKS COULD LEAD TO DECREASED MOBILE
COMMUNICATIONS USAGE AND DIFFICULTIES IN INCREASING NETWORK COVERAGE
According to certain published reports, the electromagnetic signals from
cellular handsets and transmission masts, which serve as antennae for
transmitting radio signals, may pose health risks and interfere with the
operation of electronic equipment. Although the findings in such reports are
disputed, actual or perceived risks of using cellular communications devices or
transmission masts could have an impact on cellular operators, including us. For
example, we could encounter difficulties in obtaining sites for additional base
transceiver stations required to expand our network coverage and experience
reductions in our growth rate, subscriber base or average usage per subscriber.
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RISKS RELATING TO THE ACQUISITION
WE MAY NOT COMPLETE THE ACQUISITION OF THE COMPANIES THAT WE HAVE AGREED TO
ACQUIRE
We will only be able to acquire the companies that we have agreed to
acquire if the conditions set forth in the acquisition agreement are satisfied
or waived. In particular, we may proceed with the acquisition only if we obtain
the approval of the relevant Chinese government authorities and our independent
shareholders. However, we may not be able to obtain these approvals. We also
have the right not to proceed with the acquisition if there is any material
adverse change in the business of the companies that we have agreed to acquire.
In addition, if our aggregate net proceeds from the concurrent share offering
and the convertible note offering and the financing that we obtain from bank
borrowings are less than the respective amounts we currently expect, we may not
have sufficient funds to finance the acquisition unless we can obtain additional
funds through other forms of external financing in addition to any available
internal resources. If we are not able to or choose not to acquire the companies
that we have agreed to acquire, the information regarding the companies that we
have agreed to acquire and the pro forma information in this prospectus giving
effect to the acquisition would not be relevant, and the proceeds of the
offerings will not be applied towards their intended use. Our net profit per
share and per ADS may also be significantly diluted following the offerings if
we do not complete the acquisition.
WE MAY FACE DIFFICULTIES AND INCUR ADDITIONAL COSTS IN INTEGRATING THE
ACQUIRED OPERATIONS WITH OUR EXISTING OPERATIONS
Once we complete the acquisition, we will have to integrate the operations
of the companies that we have agreed to acquire with our existing operations. We
may experience difficulties in assimilating the operations, assets, systems,
structure and personnel of previously separate operations into our existing
operations.
RISKS RELATING TO THE SHARE OFFERING
THE TRADING PRICES OF OUR SHARES COULD FALL DURING THE THREE-DAY PERIOD
BETWEEN PRICING OF THE ORDINARY SHARES OFFERED IN THE SHARE OFFERING AND
THE COMMENCEMENT OF TRADING OF THESE SHARES ON THE HONG KONG STOCK EXCHANGE
The initial price to the public of the ADSs and ordinary shares sold in the
share offering will be determined on the date of pricing. However, the ordinary
shares will not commence trading on the Hong Kong Stock Exchange until they are
delivered, which is expected to be three business days after the pricing date.
As a result, investors will not be able to sell or otherwise deal in those
shares for such three-day period. Accordingly, holders of those shares are
subject to the risk that the trading prices of our shares could fall before
trading in the ordinary shares offered in the share offering commences on the
Hong Kong Stock Exchange.
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RISKS RELATING TO THE CONVERTIBLE NOTE OFFERING
WE MAY BE UNABLE TO MEET OUR PAYMENT OBLIGATIONS UNDER THE CONVERTIBLE
NOTES IF WE FAIL TO RECEIVE DIVIDENDS AND OTHER PAYMENTS FROM OUR OPERATING
SUBSIDIARIES
We are a holding company and all of our operations are conducted through
our operating subsidiaries. We may not be able to meet our payment obligations
in respect of the convertible notes if we fail to receive funds from our
subsidiaries in the form of dividends or interest and principal payments on
inter-company loans. There are currently no legal, regulatory or contractual
restrictions on dividend payments by our subsidiaries. However, the ability of
our subsidiaries to make dividend and other payments to us may be restricted by
factors that include:
- change of applicable foreign exchange and other laws and
regulations; and
- agreements to which our subsidiaries are or may become subject.
In particular, under Chinese law, our operating subsidiaries may only pay
dividends after 10% of their net profit has been set aside as a statutory
surplus reserve. Our operating subsidiaries are not required to set aside any of
their net profit as part of the statutory surplus reserve if such reserve is at
least 50% of their respective registered capital. In addition, distributions by
our subsidiaries to us other than dividends may be subject to governmental
approval and taxation.
Because we are a holding company, the convertible notes are structurally
subordinated to all existing and future liabilities of our subsidiaries. The
aggregate long-term and short-term debt (including bills payable) of our
subsidiaries on our consolidated balance sheet as of June 30, 2000, was
approximately RMB 5,945 million (US$718 million). The aggregate long-term and
short-term debt (including bills payable) of the companies that we have agreed
to acquire as of June 30, 2000 was approximately RMB 16,127 million (US$1,948
million). Our subsidiaries may incur substantial additional indebtedness in the
future. If any of our subsidiaries is liquidated or restructured or becomes
insolvent, it may not be able to make dividend or other payments to us. This
would adversely affect our ability to meet our financial obligations, including
our obligations under the convertible notes. In addition, our right to
participate in any distribution of assets upon the liquidation, reorganization
or insolvency of any of our subsidiaries will be subject to the claims of the
subsidiary's creditors.
RISKS RELATING TO MAINLAND CHINA
Substantially all of our assets are located in mainland China and
substantially all of our revenue is derived from our operations in mainland
China. Accordingly, our financial condition and results of operations are
subject to a significant degree to economic, political and legal developments in
mainland China.
ADVERSE CHANGES IN ECONOMIC POLICIES OF THE CHINESE GOVERNMENT COULD HAVE A
MATERIAL ADVERSE EFFECT ON THE OVERALL ECONOMIC GROWTH OF MAINLAND CHINA,
WHICH COULD REDUCE THE DEMAND FOR OUR SERVICES AND ADVERSELY AFFECT OUR
COMPETITIVE POSITION
Since the late 1970s, the Chinese government has been reforming the Chinese
economic system. These reforms have resulted in significant economic growth and
social progress. Although we believe that economic reform and macroeconomic
policies
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and measures adopted by the Chinese government will continue to have a positive
effect on the economic development in mainland China and that we will continue
to benefit from such policies and measures, these policies and measures may from
time to time be modified or revised. Adverse changes in economic and social
conditions in mainland China, in policies of the Chinese government or in laws
and regulations in mainland China, if any, could have a material adverse effect
on the overall economic growth of mainland China and investment in the
telecommunications industry in mainland China. Such developments could adversely
affect our business, such as reducing the demand for our services and adversely
affecting our competitive position.
WE MAY NOT FREELY CONVERT RENMINBI INTO FOREIGN CURRENCY, WHICH COULD LIMIT
THE ABILITY OF OUR SUBSIDIARIES IN MAINLAND CHINA TO OBTAIN SUFFICIENT
FOREIGN EXCHANGE TO SATISFY THEIR FOREIGN EXCHANGE REQUIREMENTS OR PAY
DIVIDENDS TO US
Substantially all of our revenues and operating expenses are denominated in
Renminbi, while a portion of our capital expenditures and indebtedness are
denominated in US dollars and other foreign currencies. The Renminbi is
currently freely convertible under the "current account", which includes
dividends, trade and service-related foreign exchange transactions, but not
under the "capital account", which includes foreign direct investment, unless
the prior approval of the State Administration for Foreign Exchange is obtained.
Our operating subsidiaries are foreign investment enterprises. Currently,
they may purchase foreign exchange without the approval of the State
Administration for Foreign Exchange for settlement of "current account
transactions", including payment of dividends, by providing commercial documents
evidencing these transactions. They may also retain foreign exchange in their
current accounts (subject to a cap approved by the State Administration for
Foreign Exchange) to satisfy foreign exchange liabilities or to pay dividends.
In addition, if and when we acquire the companies that we have agreed to acquire
as described in this prospectus, they will also become foreign investment
enterprises and will be eligible for the same treatment that our current
subsidiaries are receiving. However, the relevant Chinese government authorities
may limit or eliminate our ability to purchase and retain foreign currencies in
the future. Also, our subsidiaries incorporated in mainland China may not be
able to obtain sufficient foreign exchange to satisfy their foreign exchange
requirements or pay dividends to us for our use in making any future dividend
payments or to satisfy other foreign exchange payment requirements. Foreign
exchange transactions under the capital account are still subject to limitations
and require approvals from the State Administration for Foreign Exchange. This
could affect our subsidiaries' ability to obtain foreign exchange through debt
or equity financing, including by means of loans or capital contributions from
us.
FLUCTUATIONS IN EXCHANGE RATES COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS
Substantially all of our operating revenue is denominated in Renminbi,
while a portion of our capital expenditures and some of our financing expenses
are denominated in US dollars. Because we may not be able to hedge effectively
against Renminbi devaluations, future movements in the exchange rate of Renminbi
and other currencies could have an adverse effect on our financial condition and
results of operations.
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THE CHINESE LEGAL SYSTEM EMBODIES UNCERTAINTIES WHICH COULD LIMIT THE LEGAL
PROTECTIONS AVAILABLE TO YOU
The Chinese legal system is a civil law system based on written statutes.
Unlike common law systems, it is a system in which decided legal cases have
little precedential value. In 1979, the Chinese government began to promulgate a
comprehensive system of laws and regulations governing economic matters in
general. Legislation over the past 20 years has significantly enhanced the
protections afforded to various forms of foreign investment in mainland China.
Our existing subsidiaries are, and after the acquisition the companies that we
have agreed to acquire will be, "wholly foreign-owned enterprises" which are
enterprises incorporated in mainland China and wholly-owned by Hong Kong Macau,
Taiwan or foreign investors, and subject to the laws and regulations applicable
to foreign investment in mainland China. However, these laws, regulations and
legal requirements are relatively recent, and their interpretation and
enforcement involve uncertainties, which could limit the legal protections
available to foreign investors.
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FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference in this
prospectus contain "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements are, by their
nature, subject to significant risks and uncertainties. These forward-looking
statements include, without limitation, statements relating to:
- our business strategy;
- the future growth of the telecommunications industry in mainland China,
including the factors driving such growth;
- the expected impact of tariff changes on our results of operations and
those of the companies that we have agreed to acquire;
- the expected impact of changes in competitive conditions in the mobile
communications sector in mainland China, including the expected impact of
China's entry into the World Trade Organization on our operations and
those of the companies that we have agreed to acquire;
- our ability to maintain and enhance our existing competitive advantages
and those of the companies that we have agreed to acquire;
- the expected impact of new operating arrangements on our results of
operations and those of the companies that we have agreed to acquire;
- our planned investment in wireless data technology platforms and that of
the companies that we have agreed to acquire and capital expenditures
relating to such investments;
- our network expansion plans and those of the companies that we have
agreed to acquire, including proposed capital investments under these
plans and the planned development of Digital Cellular System 1800
systems;
- the expected impact of the proposed acquisition of the companies that we
have agreed to acquire on our overall results and growth prospects,
including the impact of certain operating and other arrangements entered
into by the companies that we have agreed to acquire in connection with
the acquisition;
- the planned integration of the operations of the companies that we have
agreed to acquire with our existing operations and the expected
realization of operational and other synergies among our subsidiaries and
the impact of such integration and such synergies on our overall
business;
- the future growth of the remaining 18 operating subsidiaries of China
Mobile Communications Corporation in their respective geographic regions
following the proposed acquisition;
- our proposed strategic alliance with Vodafone Group Plc and the expected
impact of such strategic alliance on the future development of our
business;
- our future business development and economic performance and those of the
companies that we have agreed to acquire; and
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- prospective financial and subscriber information regarding, and the
future business development and economic performance of, the companies
that we have agreed to acquire, including the forecast information on
their combined subscriber number by the end of year 2000 on page 114 and
their combined revenue, net profit, cash flow from operating activities
and adjusted EBITDA for year 2000 on page 127.
The words "anticipate", "believe", "estimate", "expect", "intend", "plan"
and similar expressions, as they relate to us, are intended to identify a number
of these forward-looking statements.
These forward-looking statements reflect our current views with respect to
future events and are not a guarantee of future performance. Actual results may
differ materially from the information contained in the forward-looking
statements as a result of a number of factors, including, without limitation,
the risk factors set forth in this prospectus and the following:
- the impact on market demand, competition, tariffs and cost of leased
lines caused by the restructuring of the telecommunications industry in
mainland China;
- any changes in the regulatory policies of the Ministry of Information
Industry and other relevant government authorities relating to, among
other things:
- the granting of approvals and licenses;
- interconnection and transmission line arrangements;
- tariff policies;
- capital investment priorities; and
- spectrum and number resources allocation;
- the effects of competition on the demand for and price of our services
and those of the companies that we have agreed to acquire;
- any changes in cellular and wireless communications and related
technology, which could affect the viability and competitiveness of our
mobile communications networks and those of the companies that we have
agreed to acquire;
- the development of new technologies, applications or services affecting
our current and future businesses and those of the companies that we have
agreed to acquire and their impact on demand;
- factors affecting our future network expansion, wireless data application
development and other capital expenditure and development plans and those
of the companies that we have agreed to acquire, including, among other
things:
- the availability of adequate financing on acceptable terms;
- the adequacy of currently available spectrum or the availability of
additional spectrum;
- the availability of the requisite number of sites for locating network
equipment on reasonable commercial terms;
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- the availability of transmission lines and equipment when required;
and
- the availability of qualified management and technical personnel;
- changes in political, economic, legal and social conditions in mainland
China, including the Chinese government's specific policies with respect
to foreign investment in the telecommunications industry, economic
growth, inflation, foreign exchange and the availability of credit; and
- changes in population growth and GDP growth and their impact on the
demand for our services and those of the companies that we have agreed to
acquire.
In particular, the financial and subscriber projections for the companies
that we have agreed to acquire included in this prospectus under "The
Acquisition -- General" beginning on page 113 and "The
Acquisition -- Prospective Financial Information" beginning on page 126
represent our best estimate of the subscriber growth and results of operations
of these companies for the year ending December 31, 2000 under normal operating
circumstances. The projections are based upon a number of assumptions, including
those set forth in "The Acquisition -- Prospective Financial Information --
Bases and Assumptions" beginning on page 127. Some of these assumptions may not
materialize, and unanticipated events could adversely affect the actual results
and subscriber growth of the companies that we have agreed to acquire.
Consequently, actual results may vary materially from these projections. You are
cautioned not to place undue reliance on these projections.
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OUR COMPANY
OUR IPO RESTRUCTURING AND IPO
We were incorporated under the laws of Hong Kong on September 3, 1997. In
connection with our initial public offering in October 1997, the mobile
communications businesses and operations then controlled by the former Ministry
of Posts and Telecommunications in Guangdong and Zhejiang provinces were
restructured to form Guangdong Mobile Communication Company Limited and Zhejiang
Mobile Communication Company Limited, respectively. Upon the completion of the
restructuring, we obtained a 100% equity interest in Guangdong Mobile and a
99.63% equity interest in Zhejiang Mobile. On October 23, 1997, we completed our
initial public offering, raising net proceeds of approximately US$4,040 million.
We acquired the remaining 0.37% equity interest in Zhejiang Mobile in June 1999.
ACQUISITION OF JIANGSU MOBILE
On June 4, 1998, we acquired Jiangsu Mobile from China Mobile Hong Kong
(BVI) Limited, our immediate controlling shareholder, for HK$22,475 million
(US$2,900 million) in cash.
ACQUISITION OF FUJIAN MOBILE, HENAN MOBILE AND HAINAN MOBILE
On November 12, 1999, we acquired Fujian Mobile, Henan Mobile and Hainan
Mobile from China Mobile Hong Kong (BVI) Limited for HK$49,715 million (US$6,400
million), consisting of HK$19,031 million (US$2,450 million) in cash and the
remaining HK$30,684 million (US$3,950 million) in the form of 1,273,195,021 new
shares issued to China Mobile Hong Kong (BVI) Limited. We funded the cash
portion of the acquisition with the total net proceeds from a US$2,000 million
share offering and a concurrent US$600 million debt offering.
PROPOSED ACQUISITION OF BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI
MOBILE, LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
We have entered into a conditional acquisition agreement to acquire Beijing
Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong
Mobile and Guangxi Mobile from China Mobile Hong Kong (BVI) Limited. In
connection with the proposed acquisition, these companies have entered into
various services agreements and other agreements with China Mobile
Communications Corporation, our ultimate controlling shareholder, and its other
subsidiaries, as well as China Telecommunications Corporation and its
subsidiaries. The terms of the proposed acquisition and operating and financial
information regarding the companies that we have agreed to acquire are set forth
in this prospectus under "The Acquisition" beginning on page 113.
The map on the following page shows our existing coverage areas and the
coverage areas of these seven companies and sets forth certain population and
operating data in each of these areas:
31
<PAGE> 34
[MAP]
Note: Information in the map above is as of June 30, 2000, except population
data, which is as of December 31, 1999. Cellular penetration as of June 30, 2000
is an estimate based on population data as of December 31, 1999 as published in
the 2000 China Statistical Abstract, and further assuming the same annual
population growth rate in each province, municipality or autonomous region in
2000 as in 1999.
32
<PAGE> 35
The following depicts our corporate structure, with our principal
subsidiaries, immediately after the concurrent share offering and convertible
note offering and the proposed acquisition.
[CHINA MOBILE COMMUNICATIONS CORPORATION ORGANIZATIONAL CHART]
---------------
(1) China Mobile Communications Corporation owns all of the issued voting share
capital of and economic interest in China Mobile (HK) Group.
(2) Assumes that the underwriters' overallotment option in the share offering is
exercised in full.
(3) China Mobile (Shenzhen), our wholly-owned subsidiary incorporated in
mainland China, was established in June 2000 to improve profit monitoring
and financial management of our operating subsidiaries in mainland China, to
handle roaming and interconnection clearing and settlement among such
subsidiaries, and among such subsidiaries and other subsidiaries of China
Mobile Communications Corporation, and to conduct research and development
relating to wireless data communications.
In addition to its shareholding interest in us, China Mobile Communications
Corporation operates the leading mobile communications businesses in the
provinces, municipalities and autonomous regions in mainland China in which we
do not currently operate. As of June 30, 2000, China Mobile Communications
Corporation had 51.9 million cellular subscribers, including 21.6 million
cellular subscribers in the six provinces in which we operate.
33
<PAGE> 36
USE OF PROCEEDS
We estimate that the aggregate gross proceeds to us from the concurrent
share offering and convertible note offering described in this prospectus will
be approximately US$7,175 million, including approximately US$6,575 million from
the share offering and approximately US$600 million from the convertible note
offering, in each case before deducting underwriters' discounts and commissions
and offering expenses.
We plan to use the total net proceeds from the offerings, together with
Renminbi-denominated bank loans, internal resources and other forms of external
financing, if necessary, to finance the cash portion of the purchase price for
our acquisition of the seven companies that we have agreed to acquire. If the
acquisition is not completed, the net proceeds from the offerings will be used
for general corporate purposes or for other potential strategic investments in
the telecommunications industry in mainland China. Pending these uses, the net
proceeds will be invested in interest-bearing short-term deposits or short-term
U.S. government bonds.
DIVIDENDS AND DIVIDEND POLICY
We have not declared or paid any dividends since our incorporation in
September 1997. Our board of directors will determine the payment of any future
interim and final dividends. Final dividends are subject to approval by our
shareholders at an annual general meeting. The payment of dividends will depend
upon, among other things, our future earnings, capital requirements, financial
condition and general business conditions. Our ability to pay dividends will
also depend upon our subsidiaries' ability to distribute sufficient funds to us.
Holders of shares will receive the dividends as determined by the board of
directors pro rata according to amounts paid up on the shares in respect of
which the relevant dividend is paid. We may only pay dividends out of our
distributable profits.
Holders of ADSs will receive the same dividends as holders of the shares,
less the fees and expenses payable under the deposit agreement. We will pay cash
dividends, if any, on the shares underlying the ADSs to the depositary in Hong
Kong dollars and distribute stock dividends, if any, with respect to such shares
to the depositary. Unless otherwise described under "Description of American
Depositary Receipts -- Share Dividends and Other Distributions" beginning on
page 157:
- the depositary will convert any cash dividends it receives into US
dollars and pay these amounts to holders of ADSs; and
- the depositary will distribute any stock dividends underlying the ADSs to
holders of the ADSs.
34
<PAGE> 37
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
China Mobile (HK) for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ ----------
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges
in accordance with Hong Kong GAAP...... 23.5 20.2 17.1 23.7 10.5 24.6
in accordance with US GAAP............. 28.8 27.5 24.1 22.4 14.7 22.6
</TABLE>
CAPITALIZATION
The following table sets forth our consolidated short-term debt and
capitalization:
- as of June 30, 2000; and
- as adjusted to give effect to the following events as if they had
occurred on June 30, 2000:
- our sale of 923,521,065 ordinary shares offered in the share offering;
- our sale of the US$600 million principal amount of convertible notes
offered in the convertible note offering;
- the raising of a total of RMB 12,500 million (US$1,510 million) in
bank loans;
- the application of total gross proceeds from the concurrent share
offering and convertible note offering to the purchase price of the
proposed acquisition; and
- the issuance of 3,322,840,736 ordinary shares to China Mobile Hong
Kong (BVI) Limited as part of the purchase price of the proposed
acquisition.
The numbers of shares to be issued in the share offering and as part of the
purchase price of the acquisition are provided for illustrative purposes only
and assume that the initial price to public will be HK$55.50 per share, the
closing price of our shares on the Hong Kong Stock Exchange on October 10, 2000.
35
<PAGE> 38
You should read this table together with our consolidated financial
statements, the combined financial statements of the companies that we have
agreed to acquire, and the pro forma financial statements included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 2000
-----------------------------------------------
ACTUAL AS ADJUSTED ACTUAL AS ADJUSTED
------ ----------- ------ -----------
RMB RMB US$ US$
(IN MILLIONS)
<S> <C> <C> <C> <C>
SHORT-TERM DEBT:
Short-term bank and other loans.............. 2,330 9,268 282 1,119
Current portion of long-term bank and other
loans..................................... 285 2,074 34 251
Current installments of obligation under
capital lease............................. 68 1,681 8 203
------- -------- ----- ------
Total short-term debt..................... 2,683 13,023 324 1,573
======= ======== ===== ======
CAPITALIZATION:
Long-term bank and other loans, net of
current portion........................... 1,982 18,332 239 2,214
Obligations under capital lease -- long
term...................................... 68 2,005 8 242
7 7/8% Notes due 2004........................ 4,957 4,957 599 599
Convertible notes............................ -- 4,967 -- 600
Shareholders' equity.........................
Ordinary shares, par value HK$0.10 per share:
16,000,000,000 shares authorized(1),
13,706,429,021 shares issued, fully paid
and outstanding; 17,952,790,822 shares
as adjusted............................. 1,467 1,918 177 232
Reserves(2)............................... 64,356 71,616 7,774 8,651
------- -------- ----- ------
Total shareholders' equity........... 65,823 73,534 7,951 8,883
------- -------- ----- ------
Total capitalization................. 72,830 103,795 8,797 12,538
======= ======== ===== ======
</TABLE>
---------------
(1) Our board of directors has proposed, subject to approval by our
shareholders, to increase our authorized share capital to HK$3,000,000,000
divided into 30,000,000,000 ordinary shares of HK$0.10 each.
(2) Includes the effect of eliminating the excess of the purchase price over the
estimated fair value of the underlying net assets of the companies that we
have agreed to acquire as of June 30, 2000 against reserves.
Except as disclosed in this prospectus, there has been no material change
in our capitalization since June 30, 2000.
36
<PAGE> 39
EXCHANGE RATE INFORMATION
For your convenience, this prospectus contains translations between
Renminbi amounts and US dollars and between Hong Kong dollar amounts and US
dollars at RMB 8.2782 = US$1.00 and HK$7.7960 = US$1.00, the prevailing rates on
June 30, 2000. These translations are not a representation that the Renminbi or
Hong Kong dollar amounts could actually be converted into US dollars at those
rates, or at all.
The following tables set forth information concerning the noon buying rates
in New York City for cable transfers in Renminbi and Hong Kong dollars, as
certified for customs purposes by the Federal Reserve Bank in New York, for the
periods indicated:
<TABLE>
<CAPTION>
NOON BUYING RATE
--------------------------------------------
PERIOD PERIOD END AVERAGE(1) HIGH LOW
------ ---------- ---------- ---- ---
(RMB PER US$1.00)
<S> <C> <C> <C> <C>
1995............................................ 8.3374 8.3852 8.5000 8.2916
1996............................................ 8.3284 8.3395 8.3549 8.3002
1997............................................ 8.3100 8.3193 8.3290 8.2911
1998............................................ 8.3008 8.2991 8.3100 8.2778
1999............................................ 8.2795 8.2785 8.2800 8.2276
2000 (through October 10)....................... 8.2789 8.2787 8.2799 8.2768
</TABLE>
---------------
(1) The average of the noon buying rates on the last day of each month during
the relevant period.
<TABLE>
<CAPTION>
NOON BUYING RATE
--------------------------------------------
PERIOD PERIOD END AVERAGE(1) HIGH LOW
------ ---------- ---------- ---- ---
(HK DOLLAR PER US$1.00)
<S> <C> <C> <C> <C>
1995............................................ 7.7323 7.7354 7.7665 7.7300
1996............................................ 7.7347 7.7341 7.7440 7.7310
1997............................................ 7.7495 7.7440 7.7550 7.7275
1998............................................ 7.7476 7.7465 7.7595 7.7355
1999............................................ 7.7740 7.7599 7.7814 7.7465
2000 (through October 10)....................... 7.7970 7.7905 7.8008 7.7765
</TABLE>
---------------
(1) The average of the noon buying rates on the last day of each month during
the relevant period.
37
<PAGE> 40
MARKET PRICE INFORMATION
Our American depositary shares, each representing five ordinary shares, par
value HK$0.10 per share, have been listed and traded on the New York Stock
Exchange since October 22, 1997 under the symbol "CHL". Prior to July 5, 2000,
each of our ADSs represented 20 ordinary shares. Our shares have been listed and
traded on the Hong Kong Stock Exchange since October 23, 1997. Prior to these
listings, there was no public market for our equity securities. The New York
Stock Exchange and the Hong Kong Stock Exchange are the principal trading
markets for our ADSs and shares.
As of September 30, 2000, there were 13,710,261,021 ordinary shares issued
and outstanding. As of September 30, 2000, there were 98 registered holders of
American depositary receipts evidencing 137,071,304 ADSs. Since certain of the
ADSs are held by nominees, the above number may not be representative of the
actual number of U.S. beneficial holders of ADSs or the number of ADSs
beneficially held by U.S. persons. The depositary of the ADSs is The Bank of New
York.
38
<PAGE> 41
The high and low closing sale prices and the average daily trading volume
of the shares on the Hong Kong Stock Exchange and of the ADSs on the New York
Stock Exchange for each quarterly period since listing to 1999 and for each
month in 2000 (through October 10, 2000) are set forth below. The information
for periods prior to July 2000 have been restated to reflect the change in our
ADS-to-share ratio from one-to-twenty to one-to-five, which became effective on
July 5, 2000.
<TABLE>
<CAPTION>
PRICE PER PRICE PER AVERAGE DAILY
SHARE (HK$) ADS (US$) TRADING VOLUME
-------------- -------------- --------------------------
HIGH LOW HIGH LOW SHARES (HK$) ADSS (US$)
---- --- ---- --- ------------ ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1997
Fourth Quarter (from
October 22)............. 14.40 10.55 9.56 6.60 911.41 16.31
1998
First Quarter.............. 16.25 10.30 10.66 6.91 376.68 5.23
Second Quarter............. 16.15 11.40 10.42 7.53 269.84 5.03
Third Quarter.............. 13.70 8.90 9.00 5.74 280.39 4.95
Fourth Quarter............. 15.90 11.65 10.24 7.19 232.09 3.30
1999
First Quarter.............. 15.50 12.60 10.00 8.10 189.89 2.79
Second Quarter............. 22.45 13.05 14.39 8.55 295.64 3.76
Third Quarter.............. 26.70 21.00 17.16 13.56 256.28 3.78
Fourth Quarter............. 48.60 24.00 32.16 15.38 498.16 14.39
2000
January.................... 53.50 41.70 34.75 27.41 888.90 23.72
February................... 71.50 48.90 50.20 31.80 1,210.21 50.22
March...................... 79.00 62.75 50.73 41.42 1,006.85 47.09
April...................... 69.25 51.50 45.13 34.69 1,141.00 41.65
May........................ 62.00 47.90 38.97 30.80 1,165.28 27.79
June....................... 72.25 58.75 46.91 38.97 891.35 32.12
July....................... 75.75 62.25 48.94 40.38 738.64 16.45
August..................... 66.75 59.00 43.31 37.50 785.40 18.28
September.................. 62.75 47.20 39.81 31.63 848.43 23.17
October (through October
10, 2000)............... 59.00 51.00 37.38 31.88 1,212.32 24.07
</TABLE>
The closing prices per share and per ADS on October 10, 2000 were HK$55.50
and US$35.00, respectively. The trading volumes of our shares and ADSs on
October 10, 2000 were HK$604.34 million and US$8.79 million, respectively.
39
<PAGE> 42
OUR SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following tables present selected historical consolidated financial
data of our company as of and for each of the years in the five-year period
ended December 31, 1999 and as of and for the six-month periods ended June 30,
1999 and 2000.
The selected historical income statement data for the years ended December
31, 1997, 1998 and 1999 and the six-month periods ended June 30, 1999 and 2000
and the selected historical balance sheet data as of December 31, 1998 and 1999
and June 30, 2000 set forth below are derived from, should be read in
conjunction with, and are qualified in their entirety by reference to, our
consolidated financial statements, including the related notes included
elsewhere in this prospectus.
The selected historical Hong Kong GAAP income statement data for the years
ended December 31, 1995 and 1996 and the selected historical Hong Kong GAAP
balance sheet data as of December 31, 1995, 1996 and 1997 are derived from
audited financial statements that are not included herein.
The selected historical US GAAP balance sheet data as of December 31, 1995
and 1996 and the selected historical US GAAP income statement data for the year
ended December 31, 1995 set forth below are unaudited but, in the opinion of our
management, reflect the adjustments necessary for a fair presentation of these
data.
Our consolidated financial statements are prepared and presented in
accordance with Hong Kong GAAP. For a discussion of significant differences
between Hong Kong GAAP and US GAAP as they relate to us, and the effects of
these differences on net profit for the years ended December 31, 1997, 1998 and
1999 and for the six-month periods ended June 30, 1999 and 2000, and
shareholders' equity as of December 31, 1998 and 1999 and June 30, 2000, see
note 28 to the consolidated financial statements. In addition, our condensed
consolidated financial statements prepared and presented in accordance with US
GAAP for the relevant periods have been included in note 28 to the consolidated
financial statements. Historical results may not be indicative of the results to
be expected in the future.
In connection with our IPO restructuring in 1997, our acquisition of
Jiangsu Mobile in June 1998 and our acquisition of Fujian Mobile, Henan Mobile
and Hainan Mobile in November 1999, we entered into certain arrangements with
the predecessor of China Telecommunications Corporation. For a description of
these arrangements and their impact on our results of operations and financial
condition, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 56.
40
<PAGE> 43
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999
---- ---- ---- ---- ---- ----
RMB RMB RMB RMB RMB US$
(IN MILLIONS, EXCEPT PER SHARE AND PER ADS INFORMATION AND SHARE NUMBERS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
HONG KONG GAAP
Operating revenue........................ 7,598 10,367 15,488 26,345 38,623 4,666
Operating expenses....................... 2,856 5,405 10,074 18,410 24,983 3,018
Operating profit......................... 4,742 4,962 5,414 7,935 13,640 1,648
Write-down and write-off of TACS network
equipment............................... -- -- -- 282 8,242 996
Profit before tax and minority
interests............................... 4,954 4,941 5,953 9,387 6,444 778
Income tax............................... 286 428 991 2,486 1,647 199
Net profit............................... 4,668 4,509 4,955 6,900 4,797 579
Basic and diluted net profit per
share(1)(2)............................. 0.50 0.52 0.59 0.40 0.05
Basic and diluted net profit per
ADS(1)(2)............................... 2.50 2.60 2.93 1.99 0.24
Shares utilized in basic calculation (in
thousands).............................. 9,010,000 9,534,365 11,780,788 12,069,108 12,069,108
Shares utilized in diluted calculation
(in thousands).......................... 9,010,000 9,534,365 11,782,521 12,072,383 12,072,383
US GAAP(3)
Operating revenue........................ 10,440 15,322 23,853 35,516 44,940 5,429
Operating expenses....................... 4,231 8,056 14,867 23,761 34,318 4,146
Operating profit......................... 6,201 7,266 8,986 11,755 10,622 1,283
Profit before tax and minority
interests............................... 6,464 7,411 9,571 13,548 11,482 1,387
Income tax............................... 498 832 1,416 3,262 3,248 392
Net profit............................... 5,974 6,575 8,148 10,285 8,234 995
Basic and diluted net profit per
share(1)(2)............................. 0.58 0.64 0.75 0.79 0.63 0.08
Basic and diluted net profit per
ADS(1)(2)............................... 2.90 3.20 3.77 3.94 3.13 0.38
Shares utilized in basic calculation (in
thousands).............................. 10,283,195 10,283,195 10,807,560 13,053,983 13,164,404 13,164,404
Shares utilized in diluted calculation
(in thousands).......................... 10,283,195 10,283,195 10,807,560 13,055,716 13,167,679 13,167,679
BALANCE SHEET DATA:
HONG KONG GAAP
Current assets
Cash and cash equivalents............... 3,128 2,976 40,071 17,481 19,349 2,337
Deposits with banks..................... -- -- -- 1,311 8,227 994
Accounts receivable..................... 807 1,087 1,592 2,482 4,957 599
Fixed assets............................. 7,346 11,536 18,634 33,986 42,699 5,158
Total assets............................. 13,563 18,136 64,950 64,541 87,435 10,562
Total short-term debt(7)................. 513 1,504 2,148 5,337 4,419 534
Total long-term debt(8).................. 2,004 1,946 2,870 991 2,332 282
Fixed rate notes......................... -- -- -- -- 4,952 598
Total liabilities........................ 4,522 5,657 10,386 18,699 30,343 3,665
Shareholders' equity..................... 9,041 12,471 54,550 45,827 57,092 6,897
US GAAP(3)
Fixed assets............................. 10,464 18,597 27,058 39,930 41,618 5,027
Total assets............................. 17,693 27,960 79,986 75,098 87,570 10,577
Total long-term debt(8).................. 2,015 2,054 3,054 2,472 2,333 282
Fixed rate notes......................... -- -- -- -- 4,952 598
Shareholders' equity..................... 12,570 20,871 66,715 51,665 55,927 6,755
<CAPTION>
AS OF OR FOR THE SIX
MONTHS ENDED JUNE 30,
---------------------------------------
1999 2000 2000
---- ---- ----
RMB RMB US$
(IN MILLIONS, EXCEPT PER SHARE AND PER
ADS INFORMATION AND SHARE NUMBERS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
HONG KONG GAAP
Operating revenue........................ 16,940 28,897 3,490
Operating expenses....................... 10,929 16,575 2,002
Operating profit......................... 6,011 12,322 1,488
Write-down and write-off of TACS network
equipment............................... 500 -- --
Profit before tax and minority
interests............................... 5,974 12,742 1,540
Income tax............................... 1,970 4,018 485
Net profit............................... 4,004 8,724 1,005
Basic and diluted net profit per
share(1)(2)............................. 0.34 0.64 0.08
Basic and diluted net profit per
ADS(1)(2)............................... 1.70 3.18 0.39
Shares utilized in basic calculation (in
thousands).............................. 11,782,885 13,706,310 13,706,310
Shares utilized in diluted calculation
(in thousands).......................... 11,785,447 13,716,377 13,716,377
US GAAP(3)
Operating revenue........................ 21,483 27,834 3,362
Operating expenses....................... 13,870 16,606 2,006
Operating profit......................... 7,613 11,228 1,356
Profit before tax and minority
interests............................... 8,044 11,690 1,412
Income tax............................... 2,460 3,532 427
Net profit............................... 5,584 8,158 985
Basic and diluted net profit per
share(1)(2)............................. 0.43 0.60 0.07
Basic and diluted net profit per
ADS(1)(2)............................... 2.14 2.98 0.36
Shares utilized in basic calculation (in
thousands).............................. 13,056,080 13,706,310 13,706,310
Shares utilized in diluted calculation
(in thousands).......................... 13,058,642 13,716,377 13,716,377
BALANCE SHEET DATA:
HONG KONG GAAP
Current assets
Cash and cash equivalents............... 17,557 19,767 2,388
Deposits with banks..................... 5,234 14,455 1,746
Accounts receivable..................... 3,244 5,526 668
Fixed assets............................. 35,297 44,399 5,363
Total assets............................. 68,609 96,624 11,672
Total short-term debt(7)................. 4,995 2,683 324
Total long-term debt(8).................. 1,200 2,050 247
Fixed rate notes......................... -- 4,957 599
Total liabilities........................ 18,709 30,801 3,721
Shareholders' equity..................... 49,900 65,823 7,951
US GAAP(3)
Fixed assets............................. 42,144 43,439 5,247
Total assets............................. 83,308 97,359 11,761
Total long-term debt(8).................. 3,122 2,050 248
Fixed rate notes......................... -- 4,957 599
Shareholders' equity..................... 57,367 64,120 7,746
</TABLE>
41
<PAGE> 44
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999
---- ---- ---- ---- ---- ----
RMB RMB RMB RMB RMB US$
(IN MILLIONS, EXCEPT PER SHARE AND PER ADS INFORMATION AND SHARE NUMBERS)
<S> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
HONG KONG GAAP
Capital expenditures(4).................. 2,653 5,511 5,807 11,040 11,708 1,414
Adjusted cash flow(5).................... 4,450 4,213 8,203 13,444 19,673 2,377
Net cash inflow from operating
activities.............................. 5,331 6,418 8,825 13,567 21,662 2,617
Net cash outflow from investing
activities.............................. (3,169) (5,264) (5,327) (36,357) (36,117) (4,363)
Net cash inflow/(outflow) from financing
activities.............................. (467) 899 34,218 325 18,337 2,215
Adjusted EBITDA(6)....................... 5,707 6,436 8,180 12,869 21,603 2,609
US GAAP(3)
Net cash inflow from operating
activities.............................. 6,403 8,176 13,252 17,110 23,500 2,838
Net cash outflow from investing
activities.............................. 5,810 10,589 11,590 17,694 19,245 2,325
Net cash inflow/(outflow) from financing
activities.............................. (803) 2,385 35,440 (22,017) (2,589) (313)
Adjusted EBITDA(6)....................... 7,257 9,495 12,821 17,675 24,660 2,980
<CAPTION>
AS OF OR FOR THE SIX
MONTHS ENDED JUNE 30,
---------------------------------------
1999 2000 2000
---- ---- ----
RMB RMB US$
(IN MILLIONS, EXCEPT PER SHARE AND PER
ADS INFORMATION AND SHARE NUMBERS)
<S> <C> <C> <C>
OTHER FINANCIAL DATA:
HONG KONG GAAP
Capital expenditures(4).................. 4,591 8,498 1,027
Adjusted cash flow(5).................... 8,582 17,053 2,060
Net cash inflow from operating
activities.............................. 9,801 19,566 2,364
Net cash outflow from investing
activities.............................. (8,438) (14,624) (1,767)
Net cash inflow/(outflow) from financing
activities.............................. (68) (2,011) (242)
Adjusted EBITDA(6)....................... 9,578 16,817 2,031
US GAAP(3)
Net cash inflow from operating
activities.............................. 11,826 17,053 2,060
Net cash outflow from investing
activities.............................. 10,193 14,624 1,767
Net cash inflow/(outflow) from financing
activities.............................. (135) (2,011) (243)
Adjusted EBITDA(6)....................... 11,922 15,636 1,889
</TABLE>
---------------
(1) The basic and diluted net profit per share and per ADS amounts under Hong
Kong GAAP for the years ended December 31, 1996 and 1997 have been computed
by dividing net profit under Hong Kong GAAP by the weighted average number
of shares and the weighted average number of ADSs, respectively, outstanding
as if 9,010,000,000 ordinary shares and 1,802,000,000 ADSs (based on a ratio
of five shares to one ADS), respectively, issued in the IPO restructuring
were outstanding during these periods (in addition to shares actually
issued, if any).
The basic and diluted net profit per share and per ADS amounts under US GAAP
for the years ended December 31, 1995, 1996 and 1997 have been computed by
dividing net profit under US GAAP by the weighted average number of shares
and the weighted average number of ADSs, respectively, outstanding as if (A)
9,010,000,000 ordinary shares and 1,802,000,000 ADSs (based on a ratio of
five shares to one ADS), respectively, issued in the IPO restructuring and
(B) 1,273,195,021 ordinary shares and 254,639,004 ADSs, respectively, issued
to China Mobile Hong Kong (BVI) Limited as part of the consideration in the
acquisition of Fujian Mobile, Henan Mobile and Hainan Mobile were
outstanding during these periods (in addition to shares actually issued, if
any).
(2) The basic net profit per share and per ADS amounts under Hong Kong GAAP for
the years ended December 31, 1998 and 1999 have been computed by dividing
net profit by the weighted average number of shares and the weighted average
number of ADSs, respectively, in issue during 1998 and 1999. The calculation
of diluted net profit per share under Hong Kong GAAP for the years ended
December 31, 1998 and 1999 have been compiled after adjusting for the
effects of all dilutive potential ordinary shares.
The basic net profit per share and per ADS amounts under US GAAP for the
years ended December 31, 1998 and 1999 have been computed by dividing net
profit by the weighted average number of shares and the weighted average
number of ADSs, respectively, as if 1,273,195,021 ordinary shares and
254,639,004 ADSs issued to China Mobile Hong Kong (BVI) Limited as part of
the consideration in the acquisition of Fujian Mobile, Henan Mobile and
Hainan Mobile were outstanding during these periods (in addition to shares
actually issued, if any). The calculation of diluted net profit per share
under US GAAP for the years ended December 31, 1998 and 1999 have been
compiled after adjusting for the effects of all dilutive potential ordinary
shares, respectively.
42
<PAGE> 45
All dilutive potential ordinary shares arise from the share options granted
to our directors under our share option scheme which, if converted to
ordinary shares, would decrease profit attributable to shareholders per
share.
(3) The amounts for the years ended December 31, 1995, 1996, 1997, 1998 and 1999
are presented to reflect the acquisitions of Jiangsu Mobile, Fujian Mobile,
Henan Mobile and Hainan Mobile under the "as if pooling-of-interest" method,
as well as the effects of other differences between Hong Kong GAAP and US
GAAP.
(4) Represent payments made for capital expenditures during the year/period.
(5) Represents net cash inflows from operating activities less net cash outflows
(inflows) from returns on investments and servicing of finance and taxation.
(6) Adjusted EBITDA represents earnings before interest income, interest
expense, income taxes, depreciation and amortization, non-operating income
(expense) and write-down and write-off of fixed assets. For the years ended
December 31, 1995, 1996, 1997, 1998 and 1999, and the six months ended June
30, 1999 and 2000, non-operating income (expense) under Hong Kong GAAP was
RMB 125 million, RMB 97 million, RMB (27) million, RMB (51) million, RMB 70
million, RMB 11 million and RMB (12) million, and under US GAAP was RMB 124
million, RMB 103 million, RMB (12) million, RMB (1) million, RMB (136)
million, RMB 21 million and RMB 2 million, respectively. Write-down and
write-off of fixed assets under Hong Kong GAAP for the years ended December
31, 1998 and 1999 and the six months ended June 30, 1999 and 2000 was RMB
282 million, RMB 8,242 million, RMB 500 million and RMB 0 million and under
US GAAP was RMB 136 million, RMB 5,267 million, RMB 322 million and RMB 0
million, respectively.
EBITDA is commonly used in the telecommunications industry to analyze
companies on the basis of operating performance, leverage and liquidity.
Adjusted EBITDA is not intended to represent cash flow for the period, nor
has it been presented as an alternative to net profit as an indicator of
operating performance. The items of net profit excluded from adjusted EBITDA
are significant components in understanding and assessing our financial
performance, and our computation of adjusted EBITDA may not be comparable to
other similarly titled measures of other companies. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 56 and our consolidated statements of cash flows contained
elsewhere in this prospectus.
(7) Total short-term debt includes short-term bank and other loans, current
portion of long-term bank and other loans and current installments of
obligations under capital leases.
(8) Total long-term debt includes long-term bank and other loans and obligations
under capital leases, net of current portion.
43
<PAGE> 46
SELECTED HISTORICAL COMBINED FINANCIAL INFORMATION OF THE COMPANIES THAT WE HAVE
AGREED TO ACQUIRE
The following tables present selected historical combined financial data of
the companies that we have agreed to acquire as of and for each of the years in
the three-year period ended December 31, 1999 and as of and for the six-month
periods ended June 30, 1999 and 2000. These data are derived from, should be
read in conjunction with, and are qualified in their entirety by reference to,
the combined financial statements of the companies that we have agreed to
acquire, including the related notes, included elsewhere in this prospectus.
The combined financial statements of the companies that we have agreed to
acquire are prepared and presented in accordance with Hong Kong GAAP. For a
discussion of significant differences between Hong Kong GAAP and US GAAP as they
relate to the companies that we have agreed to acquire, and the effects of these
differences on net profit for the years ended December 31, 1997, 1998 and 1999
and for the six-month periods ended June 30, 1999 and 2000, and owners' equity
as of December 31, 1998 and 1999 and June 30, 2000, see note 23 to the combined
financial statements. Note 23 also includes the condensed combined financial
statements of the companies that we have agreed to acquire prepared and
presented in accordance with US GAAP for the relevant periods. Additional
information prepared and presented under US GAAP is included in note 24 to the
combined financial statements. Historical results may not be indicative of the
results to be expected in the future.
In connection with the proposed acquisition, the companies that we have
agreed to acquire have entered into service agreements and other agreements with
China Mobile Communications Corporation, China Telecommunications Corporation
and their respective subsidiaries. For a description of these arrangements, see
"Relationship with China Mobile Communications Corporation" beginning on page
133 and "Relationship with China Telecommunications Corporation" beginning on
page 141.
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED AS OF OR FOR THE SIX
DECEMBER 31, MONTHS ENDED JUNE 30,
---------------------------------- -----------------------
1997 1998 1999 1999 1999 2000 2000
---- ---- ---- ---- ---- ---- ----
RMB RMB RMB US$ RMB RMB US$
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
HONG KONG GAAP
Operating revenue.................. 12,977 18,859 26,384 3,187 11,827 15,706 1,897
Operating expenses................. 8,193 13,408 17,864 2,158 8,183 9,956 1,202
Operating profit................... 4,784 5,451 8,520 1,029 3,644 5,750 695
TACS write-down/write-off.......... -- -- 4,508 545 -- -- --
Profit before tax.................. 4,652 5,223 3,506 423 3,454 5,456 659
Income tax......................... 316 640 824 100 595 1,002 121
Net profit......................... 4,336 4,583 2,682 323 2,859 4,454 538
US GAAP
Operating revenue.................. 12,977 18,859 25,663 3,100 11,827 15,467 1,868
Operating expenses................. 8,236 13,712 22,125 2,673 8,278 9,878 1,193
Operating profit................... 4,741 5,147 3,538 427 3,549 5,589 675
Profit before tax.................. 4,651 4,948 3,128 378 3,380 5,318 642
Income tax......................... 381 650 369 45 666 1,584 191
Net profit......................... 4,270 4,298 2,759 333 2,714 3,734 451
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED AS OF OR FOR THE SIX
DECEMBER 31, MONTHS ENDED JUNE 30,
---------------------------------- -----------------------
1997 1998 1999 1999 1999 2000 2000
---- ---- ---- ---- ---- ---- ----
RMB RMB RMB US$ RMB RMB US$
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
HONG KONG GAAP
Current assets
Cash and cash equivalents........ 557 4,641 561 6,467 781
Accounts receivable.............. 2,267 2,685 325 2,823 341
Fixed assets....................... 24,069 29,999 3,624 37,252 4,500
Total assets....................... 35,791 45,711 5,522 53,758 6,494
Total short-term debt(1)........... 4,992 6,513 787 5,340 645
Total long-term debt(2)............ 7,910 10,999 1,329 10,787 1,303
Total liabilities.................. 17,198 24,681 2,982 24,441 2,952
Owner's equity..................... 18,593 21,030 2,540 29,317 3,542
US GAAP
Fixed assets....................... 24,154 30,173 3,645 32,620 3,940
Total assets....................... 36,490 47,654 5,757 51,495 6,221
Long-term debt(2).................. 7,910 10,999 1,329 10,787 1,303
Owner's equity..................... 18,462 21,146 2,554 26,443 3,194
OTHER FINANCIAL DATA:
HONG KONG GAAP
Capital expenditures(3)............ 6,346 9,868 11,385 1,375 5,180 4,580 553
Adjusted cash flow(4).............. 4,808 5,438 10,788 1,303 4,563 8,242 995
Net cash inflow from operating
activities....................... 5,813 7,810 13,428 1,622 6,245 10,823 1,307
Net cash outflow from investing
activities....................... (6,352) (9,864) (11,401) (1,377) (5,179) (4,614) (557)
Net cash inflow/(outflow) from
financing activities............. 1,360 4,589 4,697 567 3,393 (1,802) (218)
Adjusted EBITDA(5)................. 6,520 8,409 13,322 1,609 5,804 8,452 1,021
US GAAP
Net cash inflow from operating
activities....................... 5,265 6,730 11,637 1,406 5,348 9,539 1,152
Net cash outflow from investing
activities....................... (6,352) (9,864) (11,401) (1,377) (5,179) (4,614) (557)
Net cash inflow/(outflow) from
financing activities............. 903 3,297 3,848 465 2,608 (3,099) (374)
Adjusted EBITDA(5)................. 6,479 8,108 12,855 1,553 5,712 8,297 1,002
</TABLE>
---------------
(1) Total short-term debt includes short-term bank and other loans, current
portion of long-term bank and other loans and current portion of obligations
under capital leases.
(2) Total long-term debt includes long-term bank and other loans and obligations
under capital leases, net of current portion.
(3) Represent payments made for capital expenditures during the period.
(4) Represents net cash inflows from operating activities less net cash outflows
from returns on investments and servicing of finance and taxation.
45
<PAGE> 48
(5) Adjusted EBITDA represents earnings before interest income, interest
expense, income taxes, depreciation and amortization, non-operating income
(expense) and write-down and write-off of fixed assets. Non-operating income
(expense) both under Hong Kong GAAP and US GAAP for the years ended December
31, 1997, 1998 and 1999, and the six months ended June 30, 1999 and 2000 was
RMB 77 million, RMB 68 million, RMB 123 million, RMB 57 million and RMB 52
million, respectively. Write-down and write-off of fixed assets for the year
ended December 31, 1999 was RMB 4,508 million. There was no write-down and
write-off of fixed assets for the years ended December 31, 1997 and 1998,
and the six months ended June 30, 1999 and 2000.
EBITDA is commonly used in the telecommunications industry to analyze
companies on the basis of operating performance, leverage and liquidity.
Adjusted EBITDA is not intended to represent cash flow for the period, nor
has it been presented as an alternative to net profit as an indicator of
operating performance. The items of net profit excluded from adjusted EBITDA
are significant components in understanding and assessing the financial
performance of the companies that we have agreed to acquire, and this
computation of adjusted EBITDA may not be comparable to other similarly
titled measures of other companies. You should also refer to the combined
statements of cash flows of the companies that we have agreed to acquire
contained elsewhere in this prospectus.
46
<PAGE> 49
SELECTED PRO FORMA FINANCIAL INFORMATION
The following tables present selected pro forma income statement and
balance sheet data for the year ended December 31, 1999 and the six-month period
ended June 30, 2000, giving effect to:
- the proposed acquisition of Beijing Mobile, Shanghai Mobile, Tianjin
Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi
Mobile;
- the concurrent share offering and convertible note offering; and
- the Renminbi-denominated loans in connection with the proposed
acquisition.
The selected pro forma income statement and balance sheet data set forth
below are derived from and should be read in conjunction with the unaudited pro
forma statements of income and balance sheet, including the related notes,
included elsewhere in this prospectus. The information set forth in the pro
forma statements of income and balance sheet is unaudited but, in the opinion of
our management, reflects the significant adjustments necessary to depict the
effects of the transactions and arrangements described in the related notes as
if these changes had been implemented on the dates referred to below.
PRO FORMA ADJUSTMENTS FOR CERTAIN EVENTS
In connection with the proposed acquisition, the fixed assets of the
companies we have agreed to acquire were revalued as of June 30, 2000, and
connection fee revenue and certain surcharge revenue, previously not taxable
under PRC regulations, will become subject to enterprise income tax at a 33%
rate when the companies that we have agreed to acquire are registered as wholly
foreign-owned enterprises.
We expect that these events will have a material impact on our overall
results of operations following the acquisition. Therefore, we believe that the
presentation of pro forma information is necessary to supplement our historical
financial information.
The following selected unaudited pro forma income statement information
under Hong Kong GAAP for the year ended December 31, 1999 and for the six months
ended June 30, 2000 has been adjusted to give effect to these events as if they
had been consummated on January 1, 1999.
PRO FORMA ADJUSTMENTS FOR THE ACQUISITION AND FINANCINGS
In order to finance part of the cash portion of the purchase price for the
acquisition, we expect to complete the following financing transactions:
- the issuance of 923,521,065 ordinary shares resulting in gross cash
proceeds of approximately RMB 54,426 million (US$6,575 million)(the
number of shares is provided for illustrative purposes only and assumes
that the initial price to public will be HK$55.50 per share, the closing
price of our shares on the Hong Kong Stock Exchange on October 10, 2000);
- the issuance of convertible notes resulting in gross cash proceeds of
approximately RMB 4,967 million (US$600 million); and
- the raising of a total of RMB 12,500 million (US$1,510 million) in bank
loans.
47
<PAGE> 50
The following selected unaudited pro forma balance sheet information under
Hong Kong GAAP as of June 30, 2000 gives effect to these financing transactions,
the acquisition and the use of proceeds raised in the financing transactions as
if they had been consummated on June 30, 2000. The following selected unaudited
pro forma income statement information under Hong Kong GAAP for the year ended
December 31, 1999 and for the six-month period ended June 30, 2000 has been
further adjusted to give effect to the acquisition and the use of the proceeds
raised in the financing transactions as if they had been consummated on January
1, 1999.
SELECTED PRO FORMA INCOME STATEMENT INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1999
HONG KONG GAAP:
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS CHINA
PRO FORMA CHINA FOR THE MOBILE
TARGET ADJUSTMENTS TARGET MOBILE ACQUISITION (HK)
COMPANIES FOR CERTAIN COMPANIES (HK) AND FINANCING PRO FORMA
HISTORICAL EVENTS PRO FORMA HISTORICAL TRANSACTIONS COMBINED
---------- ----------- --------- ---------- ------------- ---------
RMB RMB RMB RMB RMB RMB
(IN MILLIONS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C>
Operating revenue
Usage fees.................. 16,285 16,285 25,812 42,097
Monthly fees................ 4,564 4,564 4,981 9,545
Connection fees............. 2,113 2,113 4,319 6,432
Other operating revenue..... 3,422 3,422 3,511 6,933
------ ------ ---------- ----------
Total operating revenue... 26,384 26,384 38,623 65,007
------ ------ ---------- ----------
Operating expenses............
Leased lines................ 3,309 3,309 3,723 7,032
Interconnection............. 4,867 4,867 6,453 11,320
Depreciation................ 4,793 518(a) 5,311 7,411 12,722
Personnel................... 546 546 2,256 2,802
Other operating expenses.... 4,349 4,349 5,140 9,489
------ ------ ---------- ----------
Total operating expenses.. 17,864 18,382 24,983 43,365
------ ------ ---------- ----------
Operating profit.............. 8,520 8,002 13,640 21,642
Write-down and write-off of
TACs network equipment...... (4,508) (4,508) (8,242) (12,750)
Other income.................. 9 9 552 561
Non-operating income/
(expenses).................. 123 123 70 193
Interest income............... -- -- 767 (207)(d) 560
Finance costs................. (638) (638) (343) (841)(e) (1,822)
------ ------ ---------- ----------
Profit before tax............. 3,506 2,988 6,444 8,384
171(b)
Income tax.................... (824) (959)(c) (1,612) (1,647) (3,259)
------ ------ ---------- ----------
Net profit.................... 2,682 1,376 4,797 5,125
====== ====== ========== ==========
Basic and diluted net profit
per pro forma share......... 0.31
==========
Pro forma shares utilized in
basic calculation (in
thousands).................. 16,315,469
==========
Pro forma shares utilized in
diluted calculation (in
thousands).................. 16,318,744
==========
</TABLE>
48
<PAGE> 51
US GAAP:
<TABLE>
<CAPTION>
TARGET COMPANIES CHINA MOBILE (HK)/TARGET COMPANIES COMBINED
--------------------------------------- ---------------------------------------------------------------
PRO FORMA CHINA
ADJUSTMENTS TARGET MOBILE
FOR CERTAIN US GAAP COMPANIES (HK) PRO FORMA PRO FORMA US GAAP
HISTORICAL EVENTS PRO FORMA HISTORICAL HISTORICAL COMBINED ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ---------- --------- ----------- ---------
RMB RMB RMB RMB RMB RMB RMB RMB
(IN MILLIONS) (IN MILLIONS, EXCEPT PER SHARE AND PER ADS INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total operating
revenue............ 25,663 25,663 25,663 44,940 70,603 70,603
Total operating
expenses........... 22,125 22,125 22,125 34,318 56,443 56,443
Other income......... 9 9 9 619 628 628
Non-operating
income/(expenses).. 123 123 123 (136) (13) (13)
Interest income...... -- -- -- 773 773 (207)(d) 566
Finance costs........ (542) (542) (542) (396) (938) (841)(e) (1,779)
Income tax........... (369) (959)(c) (1,328) (369) (3,248) (3,617) (959)(c) (4,576)
Minority interests... -- -- -- -- -- --
-------- -------- -------- -------- ---------- ----------
Net profit........... 2,759 1,800 2,759 8,234 10,993 8,986
======== ======== ======== ======== ========== ==========
Basic and diluted net
profit per pro
forma share........ 0.67 0.55
========== ==========
Pro forma shares
utilized in basic
calculation (in
thousands)......... 16,487,245 16,487,245
========== ==========
Pro forma shares
utilized in diluted
calculation (in
thousands)......... 16,490,520 16,490,520
========== ==========
Net profit per pro
forma ADS.......... 3.33 2.73
========== ==========
</TABLE>
49
<PAGE> 52
SELECTED PRO FORMA INCOME STATEMENT INFORMATION
FOR THE SIX MONTHS ENDED JUNE 30, 2000
HONG KONG GAAP:
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
PRO FORMA FOR THE CHINA
TARGET ADJUSTMENTS TARGET CHINA ACQUISITION MOBILE (HK)
COMPANIES FOR CERTAIN COMPANIES MOBILE (HK) AND FINANCING PRO FORMA
HISTORICAL EVENTS PRO FORMA HISTORICAL TRANSACTIONS COMBINED
---------- ----------- --------- ----------- ------------- -----------
RMB RMB RMB RMB RMB RMB
(IN MILLIONS, EXCEPT PER SHARE AND PER ADS INFORMATION)
<S> <C> <C> <C> <C> <C> <C>
Operating revenue
Usage fees.................... 10,218 10,218 20,143 30,361
Monthly fees.................. 2,780 2,780 4,250 7,030
Connection fees............... 548 548 1,532 2,080
Other operating
revenue..................... 2,160 2,160 2,972 5,132
-------- -------- ----------- -----------
Total operating revenue..... 15,706 15,706 28,897 44,603
-------- -------- ----------- -----------
Operating expenses
Leased lines.................. 1,532 1,532 2,714 4,246
Interconnection............... 2,749 2,749 3,604 6,353
Depreciation.................. 2,652 305(a) 2,957 4,165 7,122
Personnel..................... 326 326 1,476 1,802
Other operating expenses...... 2,697 2,697 4,616 7,313
-------- -------- ----------- -----------
Total operating expenses.... 9,956 10,261 16,575 26,836
-------- -------- ----------- -----------
Operating profit................ 5,750 5,445 12,322 17,767
Other income.................... 50 50 330 380
Non-operating
income/(expenses)............. 52 52 (12) 40
Interest income................. -- -- 437 (125)(d) 312
Finance costs................... (396) (396) (335) (421)(e) (1,152)
-------- -------- ----------- -----------
Profit before tax............... 5,456 5,151 12,742 17,347
101(b)
Income tax...................... (1,002) (310)(c) (1,211) (4,018) (5,229)
-------- -------- ----------- -----------
Net profit...................... 4,454 3,940 8,724 12,118
======== ======== =========== ===========
Basic and diluted net profit per
pro forma share............... 0.68
===========
Pro forma shares utilized in
basic calculation (in
thousands).................... 17,952,672
===========
Pro forma shares utilized in
diluted calculation (in
thousands).................... 17,962,739
===========
</TABLE>
50
<PAGE> 53
US GAAP:
<TABLE>
<CAPTION>
TARGET COMPANIES
------------------------------------
PRO FORMA
ADJUSTMENTS
FOR CERTAIN US GAAP
HISTORICAL EVENTS PRO FORMA
---------- ----------- ---------
RMB RMB RMB
(IN
MILLIONS)
<S> <C> <C> <C>
Total operating revenue..... 15,467 15,467
Total operating expenses.... 9,878 9,878
Other income................ 50 50
Non-operating income........ 52 52
Interest income............. -- --
Finance costs............... (373) (373)
Income tax.................. (1,584) (310)(c) (1,894)
------ ------
Net profit.................. 3,734 3,424
====== ======
Basic and diluted net profit
per pro forma share.......
Pro forma shares utilized in
basic calculation (in
thousands)................
Pro forma shares utilized in
diluted calculation (in
thousands)................
Net profit per pro forma
ADS.......................
<CAPTION>
CHINA MOBILE (HK)/TARGET COMPANIES COMBINED
---------------------------------------------------------------
CHINA
TARGET MOBILE
COMPANIES (HK) PRO FORMA PRO FORMA US GAAP
HISTORICAL HISTORICAL COMBINED ADJUSTMENTS PRO FORMA
---------- ---------- --------- ----------- ---------
RMB RMB RMB RMB RMB
(IN MILLIONS, EXCEPT PER SHARE AND PER ADS INFORMATION)
<S> <C> <C> <C> <C> <C>
Total operating revenue..... 15,467 27,834 43,301 43,301
Total operating expenses.... 9,878 16,606 26,484 26,484
Other income................ 50 330 380 380
Non-operating income........ 52 2 54 54
Interest income............. -- 437 437 (125)(d) 312
Finance costs............... (373) (307) (680) (421)(e) (1,101)
Income tax.................. (1,584) (3,532) (5,116) (310)(c) (5,426)
------ ------ ---------- ----------
Net profit.................. 3,734 8,158 11,892 11,036
====== ====== ========== ==========
Basic and diluted net profit
per pro forma share....... 0.70 0.65
========== ==========
Pro forma shares utilized in
basic calculation (in
thousands)................ 17,029,151 17,029,151
========== ==========
Pro forma shares utilized in
diluted calculation (in
thousands)................ 17,039,218 17,039,218
========== ==========
Net profit per pro forma
ADS....................... 3.49 3.24
========== ==========
</TABLE>
51
<PAGE> 54
SELECTED PRO FORMA BALANCE SHEET INFORMATION
AS OF JUNE 30, 2000
HONG KONG GAAP:
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR THE CHINA
TARGET CHINA ACQUISITION MOBILE (HK)
COMPANIES MOBILE (HK) AND FINANCING PRO FORMA
HISTORICAL HISTORICAL TRANSACTIONS COMBINED
---------- ----------- ------------- -----------
RMB RMB RMB RMB
(IN MILLIONS)
<S> <C> <C> <C> <C>
Cash and cash equivalents................... 6,467 19,767 (4,139)(f) 22,095
Other current assets........................ 4,697 22,509 27,206
Fixed assets................................ 37,252 44,399 81,651
Other assets................................ 5,342 9,949 15,291
------ ------ -------
Total assets........................... 53,758 96,624 146,243
====== ====== =======
Current liabilities......................... 13,400 22,211 5,000(g) 40,611
Long-term bank and other loans.............. 10,787 2,050 7,500(g) 20,337
Deferred revenue............................ 254 1,583 1,837
Fixed rate notes............................ -- 4,957 4,957
Convertible notes........................... -- -- 4,967(g) 4,967
------ ------ -------
Total liabilities...................... 24,441 30,801 72,709
250,250(h)
(29,317)(i)
Shareholders' equity........................ 29,317 65,823 (242,539)(j) 73,534
------ ------ -------
Total liabilities and
shareholders' equity............ 53,758 96,624 146,243
====== ====== =======
</TABLE>
52
<PAGE> 55
US GAAP:
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR THE CHINA
TARGET CHINA ACQUISITION MOBILE (HK)
COMPANIES MOBILE (HK) AND FINANCING PRO FORMA
HISTORICAL HISTORICAL TRANSACTIONS COMBINED
---------- ----------- ------------- -----------
RMB RMB RMB RMB
(IN MILLIONS)
<S> <C> <C> <C> <C>
Cash and cash equivalents................... 6,467 19,767 (4,139)(f) 22,095
Other current assets........................ 4,697 22,509 27,206
Fixed assets................................ 32,620 43,439 76,059
Other assets................................ 7,711 11,644 19,355
------ ------ -------
Total assets........................... 51,495 97,359 144,715
====== ====== =======
Current liabilities......................... 13,400 22,275 5,000(g) 40,675
Long-term bank and other loans.............. 10,787 2,050 7,500(g) 20,337
Deferred revenue............................ 622 3,957 4,579
Deferred tax liabilities.................... 243 -- 243
Fixed rate notes............................ -- 4,957 4,957
Convertible notes........................... -- -- 4,967(g) 4,967
------ ------ -------
Total liabilities...................... 25,052 33,239 75,758
250,250(h)
Shareholders' equity........................ 26,443 64,120 (271,856)(k) 68,957
------ ------ -------
Total liabilities and
shareholders' equity............ 51,495 97,359 144,715
====== ====== =======
</TABLE>
53
<PAGE> 56
DESCRIPTION OF PRO FORMA ADJUSTMENTS
(a) The fixed assets of the companies that we have agreed to acquire were
revalued as of June 30, 2000, resulting in a revaluation surplus recorded on
that date. The adjustment records the additional depreciation resulting from the
revaluation of the fixed assets as if the revaluation surplus had been recorded
on January 1, 1999.
(b) The adjustment records the tax effect of the pro forma adjustment
described in note (a) above.
(c) Previously, the connection fee revenue and certain surcharge revenue of
the companies that we have agreed to acquire were not subject to enterprise
income tax and, accordingly, no tax expense was included in the determination of
the historical results of operations for the year ended December 31, 1999 and
for the six-month period ended June 30, 2000. Upon the completion of the
registration of the companies that we have agreed to acquire as wholly
foreign-owned enterprises, in accordance with the Ministry of Finance ruling,
such revenue will be taxable at an enterprise income tax rate of 33%. The
adjustment records the applicable additional tax expense as if this revenue was
taxable since January 1, 1999.
(d) To adjust for reduction in the interest income for the cash portion of
the purchase consideration to be paid from the internal resources of China
Mobile (HK), as if the transaction had taken place on January 1, 1999. This
interest income is not subject to income tax.
(e) To record the interest expense of the convertible notes and the RMB
bank loans at interest rates of 3.8125% per annum (being the mid point of a
range from 2.875% to 4.750%, which range is shown for illustrative purposes
only, and is determined based on recent market transactions) and 5.346% per
annum for the RMB 7,500 million bank loan and 5.022% per annum for the RMB 5,000
million bank loan, respectively as if the issuance of the convertible notes and
the RMB bank loans were consummated on January 1, 1999. The interest expense of
the convertible notes and the RMB bank loans are not deductible for income tax
purposes. Had the interest rate on the convertible notes varied by 1/8%, the
effect on the net profit would have been approximately RMB 6 million and RMB 3
million for the year ended December 31, 1999 and the six months ended June 30,
2000, respectively.
(f) To record the cash portion of the purchase consideration for the
companies that we have agreed to acquire to be paid from our internal resources
as of June 30, 2000.
(g) To record the liability arising from the issuance of the convertible
notes and the raising of RMB bank loans for financing the acquisition as of June
30, 2000.
(h) To record the additional share capital arising from the issuance of
shares in the share offering and to China Mobile Hong Kong (BVI) Limited for
financing the acquisition as of June 30, 2000.
(i) To eliminate the owners' equity of the companies that we have agreed to
acquire as of June 30, 2000.
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(j) To record goodwill as a result of the acquisition as if the acquisition
had taken place on June 30, 2000. The goodwill has been eliminated against
reserves of China Mobile (HK). Goodwill represents the difference between the
purchase consideration of HK$256,021 million and the estimated fair value of the
underlying net assets of the companies that we have agreed to acquire as of June
30, 2000.
(k) To record the total consideration paid of HK$256,021 million (RMB
271,856 million) as an equity transaction.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
our consolidated financial statements, together with the related notes, included
elsewhere in this prospectus. The consolidated financial statements have been
prepared in accordance with Hong Kong GAAP, which differs in certain significant
respects from US GAAP. Note 28 to the consolidated financial statements
summarizes the significant differences between Hong Kong GAAP and US GAAP as
they relate to us, and provides a reconciliation to US GAAP of net profit and
shareholders' equity. In addition, note 28 to the consolidated financial
statements includes our condensed consolidated financial statements prepared and
presented in accordance with US GAAP for the relevant periods.
The consolidated financial statements present, and the discussion and
analysis in this section pertain to, our consolidated financial position and
results of operations as of and for the years ended December 31, 1997, 1998 and
1999 and the six months ended June 30, 1999 and 2000, and reflect the results of
Jiangsu Mobile from June 4, 1998, the date we acquired it, and of Fujian Mobile,
Henan Mobile and Hainan Mobile from November 12, 1999, the date we acquired
them. Our consolidated financial position and results of operations prior to
September 27, 1997 represent the combined operations of Guangdong Mobile and
Zhejiang Mobile.
Except as disclosed in this prospectus, we believe that there has been no
material adverse change in our financial or trading position or prospects since
June 30, 2000, the date of our latest audited financial statements.
OVERVIEW OF OUR OPERATIONS
During 1997, 1998 and 1999 and the first six months of 2000, our network
capacity, subscriber base and usage and operations experienced significant
growth. We believe that with the market-oriented restructuring of the
telecommunications industry, as well as the development of the economy and
increase in per capita income in mainland China, the telecommunications industry
will continue to grow rapidly. Given the relatively low cellular penetration
rates in our markets, we believe that there is potential for significant future
subscriber growth.
Our results of operations are substantially dependent on a number of
factors, including:
- the number and quality of subscribers;
- the level of subscriber usage;
- the level and structure of tariffs; and
- interconnection, roaming and transmission line leasing arrangements.
We operate in an extensively regulated environment and our operations and
financial performance are significantly affected by the Chinese government's
regulation of the telecommunications industry. These regulations and policies
affect our tariff structure, interconnection and transmission line leasing
arrangements, technology and equipment standards and capital investment. Our
financial performance is also subject
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to economic and social conditions in mainland China and foreign currency
exchange fluctuations.
THE ACQUISITION OF JIANGSU MOBILE IN 1998 AND OF FUJIAN MOBILE, HENAN MOBILE AND
HAINAN MOBILE IN 1999 MATERIALLY IMPACTED OUR FINANCIAL RESULTS
We acquired Jiangsu Mobile on June 4, 1998 and Fujian Mobile, Henan Mobile
and Hainan Mobile on November 12, 1999. We have adopted the acquisition method
to account for these acquisitions under Hong Kong GAAP. Accordingly, the
consolidated financial statements include the results of Jiangsu Mobile from
June 4, 1998 and those of Fujian Mobile, Henan Mobile and Hainan Mobile from
November 12, 1999, the respective dates of the acquisitions.
Under US GAAP, the acquisitions of Jiangsu Mobile, Fujian Mobile, Henan
Mobile and Hainan Mobile are considered a "combination of entities under common
control" and are accounted for under the "as if pooling-of-interests" method,
whereby assets and liabilities are accounted for at historical cost and the
accounts of previously separate companies for periods prior to the combination
generally are restated on a combined basis.
Our acquisition of Jiangsu Mobile had a material impact on our overall
results of operations for 1998 and shareholders' equity as of December 31, 1998.
Our acquisition of Fujian Mobile, Henan Mobile and Hainan Mobile as part of our
growth strategy had a material impact on our overall results of operations for
1999 and shareholders' equity as of December 31, 1999. Those acquisitions
significantly expanded the size of the mobile communications markets we serve
and increased the number of our subscribers and usage of our services. As a
result, our operating revenue and operating expenses increased significantly in
1998 and 1999.
WRITE-DOWN AND WRITE-OFF OF TACS NETWORK EQUIPMENT AFFECTED OUR NET PROFITS IN
1998 AND 1999
Total Access Communication Systems (commonly known as TACS) is a European
standard for analog mobile telephone transmissions in the 800 and 900 MHz
frequency bands. Due to the rapid development of mobile telecommunications
technologies and the potentially limited economic life of our TACS network
equipment, we decided to accelerate the enhancement of our technology and the
migration of our TACS subscribers to our GSM network, resulting in write-downs
and write-offs of our TACS network equipment. We wrote down certain TACS network
equipment in 1998 and 1999 in aggregate amounts of RMB 282 million and RMB 6,720
million, respectively, and we wrote off certain TACS network equipment in 1999
in an aggregate amount of RMB 1,522 million. After the write-down and write-off,
the net book value of the TACS network equipment at the end of 1999 was RMB
1,525 million, representing 3.6% of the total net book value of fixed assets. As
of June 30, 2000, we had an aggregate of 1.35 million TACS subscribers,
representing 6.3% of our total subscribers, compared to 27.1% at December 31,
1998 and 10.2% at December 31, 1999.
We expect to continue to utilize the TACS networks until the end of their
economic life. However, we will also seek to identify the most economically
advantageous means for disposing of the TACS network equipment. As the
write-down and write-off of our TACS network equipment was substantially
completed in prior periods, we expect that
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future write-downs and write-offs relating to the TACS network equipment, if
any, will not have a material impact on our net profit in the future.
OPERATING ARRANGEMENTS WE ENTERED INTO IN 1997, 1998 AND 1999 MATERIALLY
IMPACTED OUR FINANCIAL RESULTS
Our current corporate structure was established as a result of our IPO
restructuring completed in September 1997, our acquisition of Jiangsu Mobile
completed in June 1998 and our acquisition of Fujian Mobile, Henan Mobile and
Hainan Mobile completed in November 1999. In connection with these transactions,
we entered into various operating arrangements. These arrangements included:
- agreements with respect to interconnection revenue and costs;
- leased line agreements;
- property leasing agreements;
- service agreements with the relevant fixed line operator or other local
service providers;
- a change in the tax treatment of connection fees and certain surcharge
revenue for our services; and
- the revaluation of fixed assets of Guangdong Mobile and Zhejiang Mobile
as of May 31, 1997, of Jiangsu Mobile as of December 31, 1997 and of
Fujian Mobile, Henan Mobile and Hainan Mobile as of June 30, 1999.
In addition, in October 1999 we entered into an agreement with China Mobile
Communications Corporation for inter-provincial interconnection and domestic and
international roaming, which apply to all of our six subsidiaries, with effect
from April 1, 1999. This agreement has been superseded by the interconnection
and roaming agreement that we entered into with China Mobile Communications
Corporation in May 2000, as described below.
Our financial results reflect the impact of the above arrangements as of
the dates they became effective. These arrangements and changes have had a
material impact on our overall results of operations. In particular, the
implementation of the interconnection agreements in 1997, 1998 and 1999 led to
significant increases in both operating revenue (in the form of usage fees and
other operating revenues) and operating expenses (in the form of interconnection
expenses). In addition, other operating expenses, including selling, general and
administrative expenses, or SG&A, increased as a result of the implementation of
agreements relating to billing and collection services and distribution and
sales. Depreciation expense increased as a result of the revaluation of fixed
assets, while income tax increased as a result of connection fees and certain
surcharges becoming fully taxable following the IPO restructuring and the
acquisitions.
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OUR NEW OPERATING ARRANGEMENTS WITH CHINA MOBILE COMMUNICATIONS CORPORATION HAVE
AFFECTED AND MAY CONTINUE TO AFFECT OUR FINANCIAL RESULTS
In May 2000, we entered into two agreements with China Mobile
Communications Corporation for:
- inter-provincial interconnection and domestic and international
roaming services; and
- sharing of inter-provincial leased line fees.
The agreements apply to our six operating subsidiaries with retroactive
effect from April 1, 1999, except that with regard to Guangdong Mobile, Zhejiang
Mobile and Jiangsu Mobile, the leased line fee sharing arrangement has
retroactive effect from October 1, 1999.
Prior to these arrangements, we leased intra-provincial transmission lines
to link our network to the fixed line network, but did not lease any
inter-provincial transmission lines. Instead, we paid China Mobile
Communications Corporation an inter-provincial interconnection fee. In
accordance with these arrangements, we lease certain inter-provincial
transmission lines. The rent payable by us is determined based on the standard
leasing fee stipulated by the relevant regulatory authorities after adjusting
for the discount that we are entitled to, and on the basis that the cellular
network operators at both ends of the transmission lines will share the leasing
fees equally. As a result, the new arrangements led to an increase in our
transmission leasing expenses, but a reduction in our inter-provincial
interconnection and roaming settlement expenses, which resulted in net savings
in our operating expenses for the six months ended June 30, 2000. We expect that
the reduction in interconnection and roaming costs will continue to exceed the
increased transmission line leasing fees in 2000. See "Relationship with China
Mobile Communications Corporation" beginning on page 133.
PRO FORMA FINANCIAL IMPACT OF THE PROPOSED ACQUISITION AND RELATED ARRANGEMENTS
We have conditionally agreed to acquire Beijing Mobile, Shanghai Mobile,
Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi
Mobile from China Mobile Hong Kong (BVI) Limited, our immediate controlling
shareholder, for a total purchase price of HK$256,021 million (US$32,840
million). As a result of the enlarged subscriber base and expanded network
coverage following the acquisition, we expect that our operating revenue and
operating expenses will increase significantly. See "Selected Pro Forma
Financial Information" beginning on page 47.
The acquisition will be accounted for as a purchase under Hong Kong GAAP.
As a result of the companies that we have agreed to acquire being under common
control with us, the acquisition will be considered a "combination of entities
under common control" under US GAAP. Under US GAAP, combinations of entities
under common control are accounted for under the "as if pooling-of-interests
method", whereby assets and liabilities are accounted for at historical cost and
the financial statements of previously separate companies for periods prior to
the combination generally are restated on a combined basis.
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GEOGRAPHICAL BREAKDOWN OF OUR OPERATING REVENUES BY PROVINCE
Currently, we provide mobile communications services in Guangdong,
Zhejiang, Jiangsu, Fujian, Henan and Hainan. Launched approximately five years
earlier than our operations in other provinces, Guangdong Mobile has greater
network capacity, serves more of our subscribers and accounts for a greater
portion of our operating revenue, expenses and profit than our other operating
subsidiaries.
The following charts show a percentage breakdown of our operating revenue
for the six months ended June 30, 2000 by contribution from each subsidiary.
PERCENTAGE OF OUR TOTAL OPERATING REVENUE
BY PROVINCE FOR THE SIX MONTHS ENDED JUNE 30, 2000
[OPERATING REVENUE CHART]
RESULTS OF OPERATIONS
The following table sets forth selected income statement data, expressed as
percentages of operating revenue, for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- --------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating revenue:.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Usage fees.................................... 56.3 62.0 66.8 65.0 69.7
Monthly fees.................................. 17.4 16.5 12.9 12.3 14.7
Connection fees............................... 20.5 12.6 11.2 14.3 5.3
Others........................................ 5.8 8.9 9.1 8.4 10.3
Operating expenses:
Leased lines.................................. 20.2 14.9 9.6 11.9 9.4
Interconnection............................... 7.8 18.0 16.7 16.4 12.5
Depreciation.................................. 17.3 17.5 19.2 19.4 14.4
Personnel..................................... 4.9 6.1 5.8 5.0 5.1
Other operating expenses...................... 14.8 13.4 13.4 11.8 16.0
----- ----- ----- ----- -----
Total operating expenses................... 65.0 69.9 64.7 64.5 57.4
----- ----- ----- ----- -----
Operating profit................................ 35.0 30.1 35.3 35.5 42.6
</TABLE>
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<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- --------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Write-down and write-off of TACS network
equipment..................................... -- (1.1) (21.3) (3.0) --
Other income.................................... 0.5 1.3 1.4 1.6 1.1
Finance costs................................... (1.1) (0.6) (0.9) (0.6) (1.1)
Interest income................................. 4.2 6.1 2.0 1.7 1.5
Non-operating income (expenses)................. (0.2) (0.2) 0.2 0.1 0
----- ----- ----- ----- -----
Profit before tax and minority Interests........ 38.4 35.6 16.7 35.2 44.1
Income tax...................................... (6.4) (9.4) (4.3) (11.6) (13.9)
----- ----- ----- ----- -----
Net profit(1)................................... 32.0% 26.2% 12.4% 23.6% 30.2%
===== ===== ===== ===== =====
</TABLE>
---------------
(1) Net profit margin before write-down and write-off of TACS network equipment
was 26.9% and 26.7% for the years ended 1998 and 1999, respectively, and
25.6% for the six months ended June 30, 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
OPERATING REVENUE. We derive operating revenue principally from usage
fees, monthly fees, and one-time connection fees charged to new contract
subscribers. Usage fees represent basic local usage fees for airtime and
applicable domestic and international long distance charges received from
subscribers for the use of our cellular networks and facilities, and fees in
respect of roaming out calls made by our subscribers outside their registered
service areas. We also derive revenue from other services, such as
interconnection and certain value added services.
Operating revenue increased 70.6% from RMB 16,940 million in the six months
ended June 30, 1999 to RMB 28,897 million in the same period in 2000. This
increase was due primarily to increased usage by subscribers in Guangdong
Mobile, Zhejiang Mobile and Jiangsu Mobile, and the inclusion of subscribers in
Fujian Mobile, Henan Mobile and Hainan Mobile upon their acquisition by us in
November 1999. Our total number of subscribers was 21.6 million as of June 30,
2000, compared to 8.8 million as of June 30, 1999. Excluding Fujian Mobile,
Henan Mobile and Hainan Mobile, operating revenue increased 37.2% from RMB
16,940 million in the six months ended June 30, 1999 to RMB 23,237 million in
the same period in 2000. Excluding connection fees, operating revenue increased
88.4% from RMB 14,523 million to RMB 27,365 million.
Usage Fees. Revenue from usage fees increased 82.9% from RMB 11,012
million in the six months ended June 30, 1999 to RMB 20,143 million in the same
period in 2000. This increase was due primarily to the increase in total
subscriber numbers and the expanded communications opportunities for subscribers
as a result of the expansion and improvement of fixed line and cellular networks
throughout mainland China. Excluding Fujian Mobile, Henan Mobile and Hainan
Mobile, usage fees increased 45.9% from RMB 11,012 million to RMB 16,065
million.
Monthly Fees. Revenue from monthly fees increased 104.2% from RMB 2,081
million in the six months ended June 30, 1999 to RMB 4,250 million in the same
period in 2000. This increase was mainly due to the increase in total subscriber
numbers.
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Excluding Fujian Mobile, Henan Mobile and Hainan Mobile, monthly fees increased
58.2% from RMB 2,081 million to RMB 3,293 million.
Connection Fees. Revenue from connection fees decreased 36.6% from RMB
2,417 million in the six months ended June 30, 1999 to RMB 1,532 million in the
same period in 2000. This decrease was mainly due to decreases in average
connection fees charged to new subscribers, partially offset by the increase in
total new subscribers, including subscribers of Fujian Mobile, Henan Mobile and
Hainan Mobile. Excluding Fujian Mobile, Henan Mobile and Hainan Mobile,
connection fees decreased 41.4% from RMB 2,417 million to RMB 1,417 million. We
believe that connection fees for new subscribers will continue to decrease and
will be eliminated in the near future, and that this will continue to help to
expand our subscriber base and result in increased total subscriber usage of our
services. As a percentage of operating revenue, connection fees decreased from
14.3% in the six months ended June 30, 1999 to 5.3% in the same period in 2000.
Other Operating Revenue. Other operating revenue increased 107.8% from RMB
1,430 million in the six months ended June 30, 1999 to RMB 2,972 million in the
same period in 2000. Excluding Fujian Mobile, Henan Mobile and Hainan Mobile,
other operating revenue increased by RMB 1,032 million, or 72.2%, from RMB 1,430
million in the six months ended June 30, 1999 to RMB 2,462 million in the same
period in 2000. Of this increase, interconnection revenue accounted for 69.3%,
revenue from value-added services accounted for 21.0% and incoming roaming
revenue accounted for 9.7%.
OPERATING EXPENSES. Operating expenses principally include leased line
expenses, interconnection expenses, depreciation expense relating to our
cellular network and other fixed assets, personnel expenses and other operating
expenses.
Operating expenses increased 51.7% from RMB 10,929 million in the six
months ended June 30, 1999 to RMB 16,575 million in the same period in 2000.
Excluding Fujian Mobile, Henan Mobile and Hainan Mobile, operating expenses
increased 19.9% from RMB 10,929 million in the six months ended June 30, 1999 to
RMB 13,099 million in the same period in 2000, mainly due to the increase in
other operating expenses.
Leased Lines. Total leased line payments increased 34.8% from RMB 2,014
million in the six months ended June 30, 1999 to RMB 2,714 million in the same
period in 2000. Excluding Fujian Mobile, Henan Mobile and Hainan Mobile, leased
line payments increased 5.9% from RMB 2,014 million in the six months ended June
30, 1999 to RMB 2,132 million in the same period in 2000. This increase was
mainly due to our leasing of inter-provincial transmission lines from China
Mobile Communications Corporation under an inter-provincial leased line
agreement with retroactive effect from April 1999, and the expansion of our
network to include new coverage areas and increase network transmission
capacity, offset in part by decreases in leased line tariffs. For a discussion
of the impact of the new inter-provincial leased line agreement, see "-- Our New
Operating Arrangements with China Mobile Communications Corporation Have
Affected and May Continue to Affect Our Financial Results" on page 59. As a
percentage of operating expenses, total leased line payments decreased from
18.4% in the six months ended June 30, 1999 to 16.4% in the same period in 2000,
reflecting decreases in leased line tariffs as well as greater efficiency in our
utilization of leased lines.
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Interconnection. Interconnection expenses increased 29.9% from RMB 2,775
million in the six months ended June 30, 1999 to RMB 3,604 million in the same
period in 2000. Excluding Fujian Mobile, Henan Mobile and Hainan Mobile,
interconnection expenses increased 8.7% from RMB 2,775 million in the six months
ended June 30, 1999 to RMB 3,016 million in the same period in 2000, primarily
due to an increase in home-location roaming (roaming out) and inter-network
traffic, offset in part by savings from our new inter-provincial interconnection
agreement with China Mobile Communications Corporation. For a discussion of the
impact of the new interconnection agreement, see "-- Our New Operating
Arrangements with China Mobile Communications Corporation Have Affected and May
Continue to Affect Our Financial Results" on page 59. As a percentage of
operating expenses, interconnection expenses decreased from 25.4% in the six
months ended June 30, 1999 to 21.7% in the same period in 2000.
Depreciation. Depreciation expense increased 26.3% from RMB 3,297 million
in the six months ended June 30, 1999 to RMB 4,165 million in the same period in
2000. Excluding Fujian Mobile, Henan Mobile and Hainan Mobile, depreciation
expense decreased 10.3% from RMB 3,297 million in the six months ended June 30,
1999 to RMB 2,959 million in the same period in 2000. As a percentage of
operating expenses, depreciation expense decreased from 30.2% in the six months
ended June 30, 1999 to 25.1% in the same period in 2000. These decreases were
due primarily to a reduction in the carrying costs of our fixed assets resulting
from write-downs and write-offs of our TACS network equipment in 1999.
Personnel. Personnel expenses increased 73.2% from RMB 852 million in the
six months ended June 30, 1999 to RMB 1,476 million in the same period in 2000.
Excluding Fujian Mobile, Henan Mobile and Hainan Mobile, personnel expenses
increased 38.1% from RMB 852 million in the six months ended June 30, 1999 to
RMB 1,177 million in the same period in 2000. This increase was due largely to
our implementation of a performance-based compensation scheme to encourage
quality performance as well as to attract and retain talented employees. As a
percentage of operating expenses, personnel expenses increased from 7.8% in the
six months ended June 30, 1999 to 8.9% in the same period in 2000.
Other Operating Expenses. Other operating expenses increased 131.8% from
RMB 1,991 million in the six months ended June 30, 1999 to RMB 4,616 million in
the same period in 2000. Excluding Fujian Mobile, Henan Mobile and Hainan
Mobile, other operating expenses increased 91.6% from RMB 1,991 million in the
six months ended June 30, 1999 to RMB 3,815 million in the same period in 2000.
This increase was primarily due to increased selling and promotion expenses and
provisions for doubtful accounts. The increase in selling and promotion expenses
was due largely to an increase in commission expenses as a result of subscriber
growth and our implementation of more aggressive marketing and sales promotion
strategies. The increase in provisions for doubtful accounts was due largely to
a substantial increase in lower-usage subscribers, which affected the overall
credit quality of our subscriber base. However, we believe that our ongoing
efforts to strengthen our credit controls have enabled us to effectively control
our level of doubtful accounts. As a percentage of operating expenses, other
operating expenses increased from 18.2% in the six months ended June 30, 1999 to
27.8% in the same period in 2000.
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OPERATING PROFIT. Operating profit increased 105.0% from RMB 6,011 million
in the six months ended June 30, 1999 to RMB 12,322 million in the same period
in 2000, and operating margin (operating profit as a percentage of operating
revenue) increased from 35.5% to 42.6%. Excluding Fujian Mobile, Henan Mobile
and Hainan Mobile, operating profit increased 68.7% from RMB 6,011 million in
the six months ended June 30, 1999 to RMB 10,138 million in the same period in
2000, and operating margin increased from 35.5% to 43.6%. The increase in
operating margin reflects more efficient network utilization as well as the
benefits of economies of scale, as we experienced significant subscriber growth
and total usage increase.
ADJUSTED EBITDA. Adjusted EBITDA represents earnings before interest
income, interest expense, non-operating income (expenses), income taxes,
depreciation and amortization and write-down and write-off of fixed assets.
Adjusted EBITDA increased 75.6% from RMB 9,578 million in the six months ended
June 30, 1999 to RMB 16,817 million in the same period in 2000. This increase
was due primarily to the inclusion of the results of Fujian Mobile, Henan Mobile
and Hainan Mobile in the results of the first six months of 2000, and the
increase in operating revenue due to subscriber growth as well as our cost
control efforts and the decreases in leased line tariffs. Adjusted EBITDA margin
(adjusted EBITDA as a percentage of operating revenue) increased from 56.5% to
58.2%, reflecting improvements in our operating efficiency. Excluding Fujian
Mobile, Henan Mobile and Hainan Mobile, adjusted EBITDA increased 39.4% from RMB
9,578 million in the six months ended June 30, 1999 to RMB 13,353 million in the
same period in 2000 and adjusted EBITDA margin increased from 56.5% to 57.5%.
While EBITDA is commonly used in the telecommunications industry worldwide as an
indicator of operating performance, leverage and liquidity, it is not presented
as a measure of performance in accordance with generally accepted accounting
principles and should not be considered as representing net cash flows from
operating activities.
OTHER INCOME. Other income, which primarily includes gross profit from
sales of SIM cards and handsets, increased 22.2% from RMB 270 million in the six
months ended June 30, 1999 to RMB 330 million in the same period in 2000. SIM
card refers to Subscriber Identity Module card, which is an electronic card that
is inserted into a handset and which contains the personal identification of the
subscriber and identifies the network to which the subscriber belongs. Excluding
Fujian Mobile, Henan Mobile and Hainan Mobile, other income decreased 4.4% from
RMB 270 million to RMB 258 million. This decrease reflected primarily decreased
sales of handsets, partially offset by increased sales of SIM cards resulting
from an increase in subscribers to our GSM networks.
INTEREST EXPENSE. Interest expense increased 213.1% from RMB 107 million
in the six months ended June 30, 1999 to RMB 335 million in the same period in
2000. The increase was primarily due to the interest on the US$600 million
five-year fixed rate notes issued in November 1999.
INTEREST INCOME. Interest income increased 51.2% from RMB 289 million in
the six months ended June 30, 1999 to RMB 437 million in the same period in 2000
due to increases in our cash on hand generated from operations.
PROFIT BEFORE TAX. Profit before tax increased 113.3% from RMB 5,974
million in the six months ended June 30, 1999 to RMB 12,742 million in the same
period in 2000.
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TAXATION. We incurred an income tax expense of RMB 1,970 million in the
six months ended June 30, 1999 and RMB 4,018 million in the same period in 2000,
reflecting an effective tax rate of 33.0% and 31.5%, respectively. The lower
effective tax rate in the first half of 2000 was primarily a result of the
preferential tax rate in certain cities served by Guangdong Mobile and Hainan
Mobile.
NET PROFIT. Net profit increased 117.9% from RMB 4,004 million in the six
months ended June 30, 1999 to RMB 8,724 million in the same period in 2000. Net
profit margin (net profit as a percentage of operating revenue) increased from
23.6% to 30.2%.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
OPERATING REVENUE. Operating revenue increased 46.6% from RMB 26,345
million in 1998 to RMB 38,623 million in 1999. This increase was due primarily
to the increase in usage fees as a result of subscriber growth in Guangdong and
Zhejiang in 1999 and the addition of subscribers following our acquisitions of
Fujian Mobile, Henan Mobile and Hainan Mobile in November 1999. The increase
also reflected the inclusion of the first full year of the results of Jiangsu
Mobile in 1999. Our total number of subscribers was 15.6 million at December 31,
1999, compared to 6.5 million at December 31, 1998. Excluding connection fees,
operating revenue increased from RMB 23,022 million in 1998 to RMB 34,304
million in 1999.
Usage Fees. Revenue from usage fees increased 57.9% from RMB 16,346
million in 1998 to RMB 25,812 million in 1999. This increase was primarily a
result of the increase in total subscriber numbers and the expanded
communications opportunities for subscribers as a result of the expansion and
improvement of our fixed line and cellular networks throughout mainland China
and the expansion of the scope and variety of our services. As a percentage of
operating revenue, usage fees increased from 62.0% in 1998 to 66.8% in 1999.
Monthly Fees. Revenue from monthly fees increased 14.6% from RMB 4,347
million in 1998 to RMB 4,981 million in 1999 due to the increase in total
subscriber numbers. This increase was partially offset by the downward
adjustment in monthly fee rates charged by Guangdong Mobile from RMB 100 in 1998
to RMB 50 in 1999 and by Zhejiang Mobile from RMB 62.5 to RMB 50 beginning April
1999. As a percentage of operating revenue, monthly fees decreased from 16.5% in
1998 to 12.9% in 1999.
Connection Fees. Revenue from connection fees increased 30.0% from RMB
3,323 million in 1998 to RMB 4,319 million in 1999 due to the increase in total
subscribers, partially offset by decreases in average connection fees charged to
new subscribers. As a percentage of operating revenue, connection fees decreased
from 12.6% in 1998 to 11.2% in 1999.
Other Operating Revenue. Other operating revenue increased 50.8% from RMB
2,329 million in 1998 to RMB 3,511 million in 1999. This is attributable to
increased interconnection services furnished to other telecommunications
operators.
OPERATING EXPENSES. Operating expenses increased 35.7% from RMB 18,410
million in 1998 to RMB 24,983 million in 1999, due primarily to increases in
interconnection expenses, depreciation expense, personnel expenses and other
operating expenses.
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Leased Lines. Total leased line payments decreased 5.0% from RMB 3,917
million in 1998 to RMB 3,723 million in 1999 due to decreases in leased line
tariffs. As a percentage of operating expenses, total leased line payments
decreased from 21.3% in 1998 to 14.9% in 1999, reflecting decreases in leased
line tariffs as well as greater efficiency in our utilization of leased lines.
Interconnection. Interconnection expenses increased 35.8% from RMB 4,752
million in 1998 to RMB 6,453 million in 1999, due primarily to the increase of
interconnection traffic and the inclusion of interconnection charges incurred by
Fujian Mobile, Henan Mobile and Hainan Mobile. As a percentage of operating
expenses, interconnection expenses remained flat at 25.8% in 1999.
Depreciation. Depreciation expense increased 61.2% from RMB 4,598 million
in 1998 to RMB 7,411 million in 1999, due to the increase in fixed assets
following our acquisition of Fujian Mobile, Henan Mobile and Hainan Mobile, as
well as increased capital expenditures that we made to improve and expand our
networks. As a percentage of operating expenses, depreciation expense increased
from 25.0% in 1998 to 29.7% in 1999.
Personnel. Personnel expenses increased 41.4% from RMB 1,595 million in
1998 to RMB 2,256 million in 1999, due primarily to the implementation of a
performance-based compensation program to attract and retain talented employees.
As a percentage of operating expenses, personnel expenses increased slightly
from 8.7% in 1998 to 9.0% in 1999.
Other Operating Expenses. Other operating expenses increased 44.9% from
RMB 3,548 million in 1998 to RMB 5,140 million in 1999. This increase was due
mainly to enhanced promotional activities aimed at attracting new subscribers.
As a result of the implementation of credit control measures to control bad debt
risks and fraud, provisions for doubtful accounts for Guangdong Mobile, Zhejiang
Mobile and Jiangsu Mobile as a percentage of operating revenue decreased from
2.12% in 1998 to 1.92% in 1999. In addition, as a percentage of recurring
revenue, provisions for doubtful accounts decreased from 2.42% to 2.17%. As a
percentage of operating expenses, other operating expenses increased from 19.3%
in 1998 to 20.6% in 1999.
OPERATING PROFIT. Operating profit increased 71.9% from RMB 7,935 million
in 1998 to RMB 13,640 million in 1999 and operating margin increased from 30.1%
to 35.3%. The increase in operating margin reflects more efficient network
utilization and cost structure, as well as the benefits of economies of scale,
as we experienced significant subscriber growth.
WRITE-DOWN AND WRITE-OFF OF TACS NETWORK EQUIPMENT. We decided to
accelerate and eventually eliminate our TACS services and migrate our TACS
subscribers to our GSM services. The write-down and write-off of our TACS
network equipment was RMB 282 million in 1998 and RMB 8,242 million in 1999.
ADJUSTED EBITDA. Adjusted EBITDA increased 67.9% from RMB 12,869 million
in 1998 to RMB 21,603 million in 1999. This increase was primarily due to the
decline in leased line expenses reflecting decreases in leased line tariffs and
the success of our cost control efforts, the full year impact, in 1999, of the
results of Jiangsu Mobile, and the inclusion of the results of Fujian Mobile,
Henan Mobile and Hainan Mobile from November 1999. Adjusted EBITDA margin
increased from 48.9% to 55.9%.
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OTHER INCOME. Other income increased 64.3% from RMB 336 million in 1998 to
RMB 552 million in 1999. This increase reflected primarily increased sales of
SIM cards and handsets resulting from subscriber growth.
FINANCE COSTS. Finance costs increased 114.4% from RMB 160 million in 1998
to RMB 343 million in 1999. The increase was primarily due to the addition of
finance costs incurred by Jiangsu Mobile since June 1998, as well as interest on
the US$600 million five-year fixed rate notes issued in November 1999.
INTEREST INCOME. Interest income decreased 52.3% from RMB 1,609 million in
1998 to RMB 767 million in 1999. The decrease was due primarily to the
application of proceeds from our initial public offering for network
construction and our acquisition of Jiangsu Mobile in June 1998.
NON-OPERATING INCOME. Non-operating income totaled RMB 70 million in 1999,
as compared to an expense of RMB 51 million in 1998. The increase was mainly due
to a reduction in losses from the sale of fixed assets in 1999 as compared to
1998.
PROFIT BEFORE TAX AND MINORITY INTERESTS. Profit before tax and minority
interests decreased 31.4% from RMB 9,387 million in 1998 to RMB 6,444 million in
1999.
TAXATION. Our income tax expense decreased 33.7% from RMB 2,486 million in
1998 to RMB 1,647 million in 1999, primarily due to the decline in profits
following the write-down and write-off of our TACS network equipment. Our
effective tax rate was 26.5% in 1998 and 25.6% in 1999.
NET PROFIT. Net profit decreased 30.5% from RMB 6,900 million in 1998 to
RMB 4,797 million in 1999, primarily as a result of the write-down and write-off
of the TACS network equipment. Net profit margin decreased from 26.2% to 12.4%.
Net profit before the write-down and write-off of the TACS network equipment was
RMB 10,319 million in 1999, representing an increase of 49.6% from 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
OPERATING REVENUE. Operating revenue increased 70.1% from RMB 15,488
million in 1997 to RMB 26,345 million in 1998, due primarily to subscriber
growth in Guangdong and Zhejiang and the addition of subscribers in Jiangsu,
leading to increases in usage fees and monthly fees. Excluding Jiangsu Mobile,
operating revenue increased 48.7% to RMB 23,035 million in 1998. Our total
number of subscribers increased 91.8% from 3.4 million at the end of 1997 to 6.5
million at the end of 1998. Excluding connection fees, operating revenue
increased from RMB 12,314 million in 1997 to RMB 23,022 million in 1998.
Usage Fees. Revenue from usage fees increased 87.5% from RMB 8,718 million
in 1997 to RMB 16,346 million in 1998. The increase was due primarily to the
increase in subscribers and the expanded communications opportunities for
subscribers. In addition, as a result of the implementation of interconnection
arrangements subsequent to our IPO restructuring and our acquisition of Jiangsu
Mobile, usage fees in 1998 included the full amount of revenues from domestic
and international long distance calls and from roaming out calls, including
amounts payable to other network operators in accordance with the relevant
agreements. These revenues were not included in usage fees prior to the
implementation of our interconnection agreements in October 1997. As
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<PAGE> 70
a percentage of operating revenue, usage fees increased from 56.3% in 1997 to
62.0% in 1998.
Monthly Fees. Revenue from monthly fees increased 61.5% from RMB 2,692
million in 1997 to RMB 4,347 million in 1998, due to the increase in total
subscribers. As a percentage of operating revenue, however, monthly fees
decreased from 17.4% in 1997 to 16.5% in 1998, due primarily to the
implementation of interconnection agreements in connection with our IPO, which
resulted in a change in the composition of our operating revenue.
Connection Fees. Revenue from connection fees increased 4.7% from RMB
3,174 million in 1997 to RMB 3,323 million in 1998, due to the increase in total
subscribers. The average connection fee for each new subscriber decreased 28.8%
from RMB 2,330 in 1997 to RMB 1,658 in 1998. As a percentage of operating
revenue, connection fees decreased from 20.5% in 1997 to 12.6% in 1998.
Other Operating Revenue. Other operating revenue increased 157.6% from RMB
904 million in 1997 to RMB 2,329 million in 1998, reflecting primarily increases
in revenue from fees charged to subscribers of other network operators for
roaming in our service areas, revenues from interconnection settlement and fees
charged to subscribers for value added services.
OPERATING EXPENSES. Operating expenses increased 82.7% from RMB 10,074
million in 1997 to RMB 18,410 million in 1998, due to higher leased line
payments, interconnection expenses, depreciation charges, personnel expenses and
other operating expenses.
Leased Lines. Total leased line payments increased 25.0% from RMB 3,134
million in 1997 to RMB 3,917 million in 1998, due primarily to network expansion
to include new coverage areas, as well as to increased network transmission
capacity within existing coverage areas, and the acquisition of Jiangsu Mobile.
As a percentage of operating expenses, total leased line payments decreased from
31.1% in 1997 to 21.3% in 1998, reflecting greater efficiency in the utilization
of leased lines and a decrease in leased line tariffs in Guangdong as a result
of the implementation of the new leased line agreement in October 1997.
Interconnection. Interconnection expenses increased 291.4% from RMB 1,214
million in 1997 to RMB 4,752 million in 1998. This was a result of the
implementation of new interconnection agreements in Guangdong and Zhejiang for
the full year in 1998, compared to less than three months in 1997, as well as
the implementation of a new interconnection agreement in Jiangsu from June 4,
1998 to December 31, 1998 and the general increase in the volume of roaming out
and inter-network traffic during 1998. As a percentage of operating expenses,
interconnection expenses increased from 12.1% in 1997 to 25.8% in 1998.
Depreciation. Depreciation expense increased 71.5% from RMB 2,681 million
in 1997 to RMB 4,598 million in 1998, primarily reflecting an increase in fixed
assets as a result of our acquisition of Jiangsu Mobile, the full year
depreciation in 1998 of assets of Guangdong Mobile and Zhejiang Mobile which
were revalued as of May 31, 1997 in connection with the IPO restructuring, as
well as increased capital expenditures we made to improve and expand our
networks. As a percentage of operating expenses, depreciation expense decreased
from 26.6% in 1997 to 25.0% in 1998.
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Personnel. Personnel expenses increased 111.0% from RMB 756 million in
1997 to RMB 1,595 million in 1998, due primarily to the addition of employees in
Jiangsu, the hiring of additional employees and the maintenance of a competitive
salary package to retain experienced employees in 1998 to support network
expansion and operation growth. Excluding Jiangsu Mobile, personnel expenses
increased 89.8% to RMB 1,435 million in 1998. As a percentage of operating
expenses, personnel expenses increased from 7.5% in 1997 to 8.7% in 1998.
Other Operating Expenses. Other operating expenses increased 55.0% from
RMB 2,289 million in 1997 to RMB 3,548 million in 1998, reflecting increases in
selling and promotion expenses, network maintenance costs and provisions for
doubtful accounts. The increase in selling and promotion expenses was due
primarily to enhanced marketing and distribution efforts. Although provisions
for doubtful accounts increased in 1998, provisions for doubtful accounts
decreased as a percentage of operating revenue, from 2.9% in 1997 to 2.1% in
1998. In addition, as a percentage of recurring revenue, provisions for doubtful
accounts decreased from 3.6% in 1997 to 2.4% in 1998 as a result of the measures
we implemented to control bad debt risk and fraud.
OPERATING PROFIT. Operating profit increased 46.6% from RMB 5,414 million
in 1997 to RMB 7,935 million in 1998. Operating margin declined from 35.0% in
1997 to 30.1% in 1998. This decrease was primarily due to increased operating
expenses as a result of our network expansion and development, as well as
changes implemented in connection with the IPO restructuring and the acquisition
of Jiangsu Mobile, coupled with slower growth in operating revenue resulting
from tariff reductions (especially reductions in connection fees) and the
addition of a larger number of subscribers with lower usage characteristics.
WRITE-DOWN OF TACS NETWORK EQUIPMENT. The write-down of TACS network
equipment of RMB 282 million in 1998 related to the TACS B network equipment of
Zhejiang Mobile. There was no write-down of TACS network equipment in 1997.
ADJUSTED EBITDA. Adjusted EBITDA increased 57.3% from RMB 8,180 million in
1997 to RMB 12,869 million in 1998. Adjusted EBITDA margin decreased from 52.8%
in 1997 to 48.8% in 1998.
OTHER INCOME. Other income increased 295.3% from RMB 85 million in 1997 to
RMB 336 million in 1998, reflecting primarily increased sales of SIM cards
resulting from the increase in subscribers to our GSM networks and a decrease in
the cost of SIM cards.
FINANCE COSTS. Finance costs decreased 8.6% from RMB 175 million in 1997
to RMB 160 million in 1998, primarily due to the repayment in 1998 of a portion
of our borrowings, and decreased borrowing as a result of the use of proceeds
from our initial public offering in October 1997 to finance our capital
requirements.
INTEREST INCOME. Interest income increased from RMB 656 million in 1997 to
RMB 1,609 million in 1998 primarily due to the interest earned for the full year
in 1998 on the remaining proceeds from our initial public offering in October
1997 as compared to interest earned on such proceeds for less than three months
in 1997.
NON-OPERATING EXPENSES. Non-operating expenses increased 88.9% from RMB 27
million in 1997 to RMB 51 million in 1998.
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PROFIT BEFORE TAX AND MINORITY INTERESTS. Profit before tax and minority
interests increased 57.7% from RMB 5,953 million in 1997 to RMB 9,387 million in
1998.
TAXATION. We incurred income tax expense of RMB 991 million in 1997 and
RMB 2,486 million in 1998, reflecting an effective tax rate of 16.6% and 26.5%,
respectively. The increase in the effective tax rate was primarily due to the
fact that connection fee revenue and certain surcharge revenues in Guangdong and
Zhejiang were subject to taxation for the full year in 1998, compared to less
than three months in 1997.
NET PROFIT. Net profit increased 39.2% from RMB 4,955 million in 1997 to
RMB 6,900 million in 1998. Net profit margin decreased from 32.0% to 26.2%.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL, CASH FLOWS AND FINANCING
As of June 30, 2000, we had a working capital surplus (current assets minus
current liabilities) of RMB 20,065 million and cash and cash equivalents of RMB
19,767 million, compared to RMB 14,031 million and RMB 19,349 million,
respectively, as of December 31, 1999, and RMB 7,083 million and RMB 17,481
million, respectively, as of December 31, 1998. The increase in working capital
and cash and cash equivalents in the first six months of 2000 was due primarily
to increased net cash flow from operations in 2000.
As of December 31, 1998, December 31, 1999 and June 30, 2000, accounts
receivable totaled RMB 2,482 million, RMB 4,957 million and RMB 5,526 million,
respectively. The increases in accounts receivable were due primarily to our
enlarged subscriber base and increased usage of our services, the inclusion of
accounts receivable from Jiangsu Mobile since June 1998 and those of Fujian
Mobile, Henan Mobile and Hainan Mobile since November 1999.
Short-term loans and current portion of obligations under capital leases
totaled RMB 5,337 million, RMB 4,419 million and RMB 2,683 million as at
December 31, 1998, December 31, 1999 and June 30, 2000, respectively.
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The following table summarizes certain cash flow information for the
periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- ------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(RMB IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net cash inflows from operating
activities.......................... 8,825 13,567 21,662 9,801 19,566
Net cash outflow from returns on
investments and servicing of finance
and taxation........................ (622) (123) (1,989) (1,219) (2,513)
Net cash outflow from investing
activities.......................... (5,327) (36,357) (36,117) (8,438) (14,624)
------ ------- ------- ------ --------
Net cash inflow (outflow) before
financing activities................ 2,876 (22,913) (16,444) 144 2,429
Net cash inflow (outflow) from
financing activities................ 34,218 325 18,337 (68) (2,011)
------ ------- ------- ------ --------
Increase (decrease) in cash and cash
equivalents......................... 37,094 (22,588) 1,893 76 418
====== ======= ======= ====== ========
</TABLE>
Net cash inflows from operating activities increased from 1997 to June 30,
2000, generally reflecting the growth in operating revenue due to the increase
in our subscriber base.
Net cash outflow from returns on investments and servicing of finance and
taxation decreased from 1997 to 1998 primarily due to an increase in interest
received, which is in part attributable to the proceeds of our initial public
offering in October 1997, which increase more than offset a significant increase
in income tax paid. Net cash outflow from returns on investments and servicing
of finance and taxation increased from 1998 to 1999, primarily due to a
significant increase in income tax paid and a substantial decrease in interest
received as a result of the application of the proceeds from our initial public
offering for the acquisition of Jiangsu Mobile and network construction. We had
a higher net cash outflow from returns on investments and servicing of finance
and taxation for the six months ended June 30, 2000 as compared to the same
period in 1999. This was mainly due to an increase in income tax paid on our
higher net taxable income.
Net cash outflow from investing activities increased significantly from
1997 to 1998, primarily due to the payment of the cash consideration for the
acquisition of Jiangsu Mobile as well as increased equipment purchases in
connection with our network expansion. Net cash outflow from investing
activities remained at a high level for 1999, primarily due to the payment of
the consideration for the acquisition of Fujian Mobile, Henan Mobile and Hainan
Mobile. Net cash outflow from investing activities increased significantly for
the six months ended June 30, 2000 primarily due to inclusion of the capital
expenditures of Fujian Mobile, Henan Mobile and Hainan Mobile in the first half
of 2000 and an increase in capital expenditures as we continued to expand our
network.
Net cash inflow from financing activities reflects net borrowings or
repayments of debt, but excludes credit extended to us by equipment suppliers
for additions to construction in progress. Net cash inflow from financing
activities decreased in 1998 compared to 1997 primarily because of the proceeds
from our initial public offering in 1997. Net cash inflow from financing
activities increased significantly in 1999 as
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compared to 1998, primarily due to the proceeds received from the follow-on
equity offering and the concurrent global offering of five-year fixed rate notes
completed in November 1999. Net cash outflow from financing activities increased
significantly for the six months ended June 30, 2000 due mainly to repayment of
bank and other loans in the first six months of 2000.
The majority of the net proceeds from the US$2,000 million follow-on equity
offering and US$600 million concurrent global offering of five-year fixed rate
notes were used to finance the acquisition of Fujian Mobile, Henan Mobile and
Hainan Mobile in 1999.
ADJUSTED NET TANGIBLE ASSETS
The following statement of adjusted net tangible assets is based on our
audited financial statements as of June 30, 2000, as set out elsewhere in this
prospectus, adjusted as described below:
<TABLE>
<CAPTION>
(RMB IN MILLIONS)
-----------------
<S> <C>
Our consolidated net tangible assets as of June 30, 2000.... 65,823
Increase in net tangible assets due to acquisition of the
companies that we have agreed to acquire.................. 29,317
Consideration payable for the acquisition of the companies
that we have agreed to acquire after eliminating the gross
proceeds from the share offering and the issuance of
shares to China Mobile Hong Kong (BVI) Limited............ (21,606)
-------
Adjusted net tangible assets................................ 73,534
=======
</TABLE>
INDEBTEDNESS
As of December 31, 1998 and 1999 and June 30, 2000, our aggregate long-term
bank and other loans and obligations under capital leases (excluding current
portions) totaled RMB 991 million, RMB 2,332 million and RMB 2,050 million,
respectively, and our short-term bank and other loans (including the short-term
portion of long-term loans and capital leases) totaled RMB 5,337 million, RMB
4,419 million and RMB 2,683 million, respectively. Our short-term loans
increased in 1998 mainly due to the inclusion of the short-term loans of Jiangsu
Mobile upon its acquisition by us. Our long-term loans increased in 1999 due to
the inclusion of the long-term loans of Fujian Mobile and Henan Mobile upon
their acquisition by us. Our short-term loans decreased in the first six months
of 2000 mainly due to the repayment of loans in this period. Total scheduled
long-term loans and obligations under capital lease payable in 2000, 2001 and
2002 will be approximately RMB 228 million, RMB 737 million and RMB 1,147
million, respectively. We currently plan to repay loan amounts due using cash in
hand and cash from our operating activities. Capital lease obligations totaled
RMB 136 million at June 30, 2000.
On November 2, 1999, we issued unsecured fixed rate notes with an aggregate
principal amount of US$600 million due on November 2, 2004. The notes bear
interest at the rate of 7.875% per annum and such interest is payable
semi-annually on May 2 and November 2 of each year. We made the first interest
payment on May 2, 2000.
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As of June 30, 2000, we had the following outstanding borrowings, all of
which were unsecured except for a short term loan of RMB 100 million:
<TABLE>
<CAPTION>
REPAYABLE
------------------------------------------
WITHIN ONE YEAR AFTER ONE YEAR TOTAL
--------------- -------------- -----
(RMB IN MILLIONS)
<S> <C> <C> <C>
Bank loans.................................... 2,437 1,467 3,904
Other loans................................... 178 515 693
Obligations under capital leases.............. 68 68 136
----- ----- -----
2,683 2,050 4,733
===== ===== =====
</TABLE>
As of June 30, 2000, we did not have any loans from related parties.
As of June 30, 2000, certain bank and other loans were guaranteed by the
following parties:
<TABLE>
<CAPTION>
GUARANTOR (RMB IN MILLIONS)
--------- -----------------
<S> <C>
Guangdong telecommunications administrative authority... 239
Fujian telecommunications administrative authority...... 595
Hebei telecommunications administrative authority....... 650
-----
Total.............................................. 1,484
=====
</TABLE>
As of August 31, 2000, we had outstanding borrowings of approximately RMB
9,994 million in aggregate. These borrowings comprise secured bank loans of
approximately RMB 100 million, unsecured bank loans of approximately RMB 2,853
million, other unsecured loans of approximately RMB 641 million, bills payable
of approximately RMB 1,332 million, capital lease obligations of approximately
RMB 101 million and unsecured fixed rate notes of approximately RMB 4,967
million.
Approximately RMB 720 million of the unsecured bank loans and approximately
RMB 32 million of other unsecured loans are guaranteed by third parties.
Except as disclosed above and apart from intra-group liabilities, none of
us or any of our subsidiaries had, as at the close of business on August 31,
2000, outstanding liabilities or any term loans or other borrowings or
indebtedness in the nature of borrowings, including bank overdrafts and loans,
debt securities or similar indebtedness, or any hire-purchase or capital lease
commitments, or any guarantees, mortgages, charges or other material contingent
liabilities.
CAPITAL EXPENDITURES
Capital expenditures incurred during 1997, 1998, 1999 and the six months
ended June 30, 2000 were RMB 8,719 million, RMB 15,030 million, RMB 12,226
million and RMB 7,434 million, respectively. Capital expenditures we made were
principally for the development, optimization and expansion of our GSM networks
and the development and trial of new technology-based services.
We anticipate that we will require an aggregate of approximately RMB 86.3
billion to finance our capital expenditures in years 2000, 2001 and 2002. Our
planned capital expenditures will allow us to:
- further expand our network capacity and coverage to improve the quality
of our services;
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- further optimize the structure, and enhance the management, of our
networks;
- increase our efforts in improving our business operation support system
and network support system;
- build our own transmission lines where economically advantageous; and
- develop and provide wireless data services and other new services using
existing and new technologies.
The following sets forth our planned total capital expenditure requirements
for the periods indicated. Actual future capital expenditures may differ from
the amounts indicated below.
<TABLE>
<CAPTION>
(RMB IN BILLIONS) (US$ IN BILLIONS)
----------------- -----------------
<S> <C> <C>
2000............................................... 27.8 3.4
2001............................................... 30.2 3.6
2002............................................... 28.3 3.4
---- ----
Total......................................... 86.3 10.4
</TABLE>
If the acquisition is completed, we estimate that the companies that we
have agreed to acquire will require an aggregate of approximately RMB 49.7
billion for similar capital expenditures from 2000 through the end of 2002 for
similar plans. See "The Acquisition -- Capital Expenditures" on page 124 for
additional details.
Following our initial public offering in 1997, we have funded capital
requirements primarily with cash generated from operations and, to the extent
necessary, short-term borrowings. We believe that cash on hand and cash
generated from future operations will be sufficient to fund most of the capital
expenditures and working capital necessary for our planned network expansion and
continued growth of our mobile communication operations through the end of 2002.
If necessary, we may seek to obtain additional sources of financing to fund our
network expansion and possible future acquisitions.
FOREIGN EXCHANGE
We maintain our accounts in Renminbi and substantially all of our revenue
and expenses are denominated in Renminbi. Our capital expenditures, a major
portion of which were denominated in US dollars and incurred in connection with
our purchase of imported equipment, totaled the equivalent of RMB 8,719 million,
RMB 15,030 million, RMB 12,226 million and RMB 7,434 million for 1997, 1998,
1999 and the six months ended June 30, 2000, respectively. In addition, we also
incur interest expense on foreign currency (mainly US dollar) denominated
borrowings. US dollar-denominated debt totaled the equivalent of RMB 1,746
million, RMB 6,119 million and RMB 5,993 million at December 31, 1998, December
31, 1999 and June 30, 2000, respectively, constituting 18.9%, 45.4% and 55.0% of
our total debt as of those dates, respectively.
All of our current operating subsidiaries are incorporated in mainland
China. Under the current foreign exchange system in mainland China, our
subsidiaries may not be able to hedge effectively against currency risk,
including any possible future Renminbi devaluation.
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Each of our operating subsidiaries is able to purchase foreign exchange for
settlement of current account transactions, as defined in applicable
regulations, in order to satisfy its foreign exchange requirements.
US GAAP RECONCILIATION
Our consolidated financial statements are prepared in accordance with Hong
Kong GAAP, which differs in certain significant respects from US GAAP. Under
Hong Kong GAAP, we adopted the acquisition method to account for the purchase of
Jiangsu Mobile in 1998 and of Fujian Mobile, Henan Mobile and Hainan Mobile in
1999. Under the acquisition method, the acquired results of Jiangsu Mobile,
Fujian Mobile, Henan Mobile and Hainan Mobile were included in the results of
operations from the date of their respective acquisitions. Goodwill arising on
the acquisition date, being the excess of the purchase price over the fair value
of our share of the separable net assets acquired, was eliminated against
reserves immediately on acquisition.
For US GAAP, as a result of us and Jiangsu Mobile, Fujian Mobile, Henan
Mobile and Hainan Mobile being under common control prior to our acquisition of
them, the acquisitions were considered a "combination of entities under common
control", which are accounted for under the "as if pooling-of-interests" method,
whereby assets and liabilities are accounted for at historical cost and the
financial statements of previously separate companies for periods prior to the
combination generally are restated on a combined basis. The cash consideration
we paid has been treated as an equity transaction in the year of the respective
acquisitions for US GAAP purposes.
In addition, there are other differences between Hong Kong GAAP and US GAAP
for the periods presented that relate primarily to:
- the computation of capitalized interest;
- the revaluation of fixed assets under Hong Kong GAAP, including the
revaluation in connection with our IPO restructuring and our acquisition
of Jiangsu Mobile, Fujian Mobile, Henan Mobile and Hainan Mobile;
- the recognition of deferred income taxes;
- the non-recognition under Hong Kong GAAP of certain employee housing
scheme costs that we bore;
- the treatment of share options we grant to directors and employees;
- the recognition of connection fee revenue and telephone number selection
fees; and
- the net savings arising from interconnection, roaming and leased line
agreements.
Historically, we recognized connection fee revenue as received for both
Hong Kong GAAP and US GAAP for all periods presented to June 30, 1999. Beginning
July 1, 1999, we adopted a new accounting policy under US GAAP to defer
connection fees received in excess of direct costs and recognize such deferred
amount over the estimated customer usage period for the related service. This
change in accounting policy for US GAAP significantly impacted the timing of our
recognition of connection fee revenue.
Disclosure relating to these differences can be found in notes 28 and 29 to
the consolidated financial statements. In addition, our condensed consolidated
balance
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<PAGE> 78
sheets as of December 31, 1998 and 1999 and June 30, 2000 and our condensed
consolidated statements of income, total shareholders' equity and cash flows for
the years ended December 31, 1997, 1998 and 1999 and for the six-month periods
ended June 30, 1999 and 2000 prepared and presented under US GAAP have been
included in note 29 to the consolidated financial statements to reflect the
impact of the significant differences between Hong Kong GAAP and US GAAP.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risks due to fluctuations in interest rates. The
majority of our debt is in the form of long-term, fixed- and variable-rate bank
and other loans with original maturities ranging from one to six years.
Accordingly, fluctuations in interest rates can lead to significant fluctuations
in the fair value of these debt instruments. From time to time, we may enter
into interest rate swap agreements designed to mitigate our exposure to interest
rate risks. In connection with the global offering of five-year fixed rate notes
in November 1999, we entered into an interest rate swap transaction on October
27, 1999, which was terminated and settled on October 28, 1999. We did not
consider it necessary to do so in the first six months of 2000.
We are also exposed to foreign currency risk as a result of our
telecommunications equipment being sourced substantially from overseas
suppliers. Specifically, our foreign currency exposure relates primarily to our
foreign currency-denominated short- and long-term debt, our firm purchase
commitments and, to a limited extent, cash and cash equivalents denominated in
foreign currencies. We may, from time to time, enter into currency swap
agreements and foreign exchange forward contracts designed to mitigate our
exposure to foreign currency risks, although we did not consider this to be
necessary in 1999 or in the first six months of 2000. Our foreign currency
hedging activity generally is expected to be limited to hedging of specific
future commitments and long-term debt denominated in foreign currencies.
The following table provides information regarding our interest
rate-sensitive financial instruments, which consist of fixed and variable rate
short-term and long-term debt obligations, as of December 31, 1999 and 1998, as
well as the expected maturity profile of such debt obligations.
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, DECEMBER 31,
1999 1998
---------------- ----------------
EXPECTED MATURITY DATE TOTAL TOTAL
---------------------------------------------- RECORDED FAIR RECORDED FAIR
2000 2001 2002 2003 2004 THEREAFTER AMOUNT VALUE AMOUNT VALUE
---- ---- ---- ---- ---- ---------- -------- ----- -------- -----
(RMB EQUIVALENT IN MILLIONS, EXCEPT INTEREST RATES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Debt:
Fixed rate bank and other
loans....................... 4,123 165 765 215 83 -- 5,351 5,386 5,963 5,786
Average interest rate....... 6.09% 7.50% 7.54% 7.51% 7.50% -- 6.42% -- 7.08%
Variable rate bank and other
loans....................... 228 811 186 -- -- -- 1,225 1,225 366 366
Average interest rate(1).... 6.11% 6.05% 5.93% -- -- -- 6.04% -- 6.07%
</TABLE>
---------------
(1) The interest rates for variable rate bank and other loans are calculated
based on the year-end indices.
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The following table provides information regarding our foreign
currency-sensitive financial instruments and transactions, which consist of cash
and cash equivalents, short- and long-term debt obligations and capital
commitments as of December 31, 1999 and 1998, and the expected maturity profile
of such debt obligations and capital commitments.
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, DECEMBER 31,
1999 1998
---------------- ----------------
TOTAL TOTAL
RECORDED FAIR RECORDED FAIR
2000 2001 2002 2003 2004 THEREAFTER AMOUNT VALUE AMOUNT VALUE
---- ---- ---- ---- ---- ---------- -------- ----- -------- -----
(RMB EQUIVALENT IN MILLIONS, EXCEPT INTEREST RATES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
On-balance sheet financial
instruments:
Cash and cash equivalents:
in US dollars............... 5,071 -- -- -- -- -- 5,071 5,071 1,103 1,103
in Hong Kong dollars........ 2,083 -- -- -- -- -- 2,083 2,083 6,937 6,937
Debt:
Fixed rate bank and other
loans (US dollar)......... 165 165 165 165 84 -- 744 751 1,016 840
Average interest rate....... 7.50% 7.50% 7.50% 7.50% 7.50% -- 7.50% -- 7.39%
Variable rate bank and other
loans (US dollar)......... 119 119 8 -- -- -- 246 246 366 366
Average interest rate(1).... 6.80% 6.80% 5.75% -- -- -- 6.77% -- 6.07%
Off-balance sheet commitments
Capital commitments
authorized and contracted
for in US dollars......... 4,932 -- -- -- -- -- 4,932 4,932 3,088 3,088
</TABLE>
---------------
(1) The interest rates for variable rate bank and other loans are calculated
based on the year-end indices.
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THE TELECOMMUNICATIONS INDUSTRY IN CHINA
Neither we or any of our affiliates or advisors, nor the underwriters or
any of their affiliates or advisors, have prepared or independently verified the
information identified in this section as having been extracted from publicly
available documents or provided by the Ministry of Information Industry.
THE TELECOMMUNICATIONS MARKET
The telecommunications industry in mainland China has experienced rapid
growth over the last three years. According to the Ministry of Information
Industry, fixed line subscribers increased from approximately 70.3 million at
the end of 1997 to approximately 108.8 million at the end of 1999. Over the same
period, cellular subscribers increased from 13.7 million to 43.2 million. The
following table sets forth certain information relating to population and the
telecommunications industry in mainland China as of December 31, 1997, 1998 and
1999.
<TABLE>
<CAPTION>
COMPOUND
ANNUAL
AS OF DECEMBER 31, GROWTH RATE
----------------------- -----------
1997 1998 1999 1997-1999
----- ----- ----- -----------
<S> <C> <C> <C> <C>
Population (in millions).............................. 1,236 1,248 1,259 0.9%
Fixed line subscribers (in millions).................. 70.3 87.4 108.8 24.4%
Fixed line penetration................................ 5.7% 7.0% 8.6% --
Cellular subscribers (in millions).................... 13.7 25.0 43.2 77.9%
Cellular penetration.................................. 1.1% 2.0% 3.4% --
</TABLE>
---------------
Sources: 1998 China Statistical Yearbook, 1999 China Statistical Yearbook, 2000
China Statistical Abstract and the Ministry of Information Industry.
Penetration refers to the number of subscribers per 100 of population and
penetration rate shows the total number of subscribers as a percentage of the
total population in a service area.
The telephone penetration rate in mainland China is still relatively low
compared to other countries. As a result, we believe that, given the rapid
growth of the economy in mainland China, the telecommunications market has
significant potential for continued growth. The table below sets forth
comparative industry and economic information for mainland China and certain
other countries and regions.
<TABLE>
<CAPTION>
CELLULAR TOTAL CELLULAR FIXED LINE GDP PER
PENETRATION SUBSCRIBERS PENETRATION CAPITA
COUNTRY/REGION 1999 1999 1999 1999
-------------- ----------- -------------- ----------- -------
(%) (THOUSANDS) (%) (US$)
<S> <C> <C> <C> <C>
India....................................... 0.2 1,584 2.5 474
Pakistan.................................... 0.4 476 2.2 454
Mainland China.............................. 3.4 43,238 8.6 778
Philippines................................. 3.6 2,724 3.8 996
Thailand.................................... 4.2 2,585 8.5 2,090
Brazil...................................... 8.7 14,593 14.9 3,395
Argentina................................... 12.1 4,429 20.1 7,751
Turkey...................................... 12.5 8,044 28.0 3,053
Malaysia.................................... 12.9 2,919 19.5 3,817
Chile....................................... 14.8 2,224 20.7 4,593
United States............................... 31.1 84,716 68.4 33,944
United Kingdom.............................. 40.5 23,944 62.2 24,784
</TABLE>
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<PAGE> 81
<TABLE>
<CAPTION>
CELLULAR TOTAL CELLULAR FIXED LINE GDP PER
PENETRATION SUBSCRIBERS PENETRATION CAPITA
COUNTRY/REGION 1999 1999 1999 1999
-------------- ----------- -------------- ----------- -------
(%) (THOUSANDS) (%) (US$)
<S> <C> <C> <C> <C>
Singapore................................... 41.7 1,343 58.4 27,559
Japan....................................... 46.6 59,000 49.3 34,445
South Korea................................. 51.5 24,135 45.8 8,420
Hong Kong................................... 55.0 3,782 56.4 21,659
</TABLE>
---------------
Sources: Prodata and The Economist Intelligence Unit; the Ministry of
Information Industry (for mainland China).
The mobile communications sector is one of the fastest growing sectors
within the telecommunications industry in mainland China. According to the
Ministry of Information Industry, the number of cellular subscribers in mainland
China increased from approximately 13.7 million at the end of 1997 to
approximately 43.2 million at the end of 1999, representing a compound annual
growth rate of 77.9%, compared to a compound annual growth rate of 24.4% in the
number of fixed line subscribers over the same period. Recent data from the
Ministry of Information Industry and China Mobile Communications Corporation
indicate that the number of cellular subscribers increased to approximately 63.1
million as of June 30, 2000. Currently, China has the third largest number of
cellular subscribers in the world after the United States and Japan. Mobile
communications services are currently available in most cities in mainland
China. Despite the rapid growth in the number of subscribers in recent years,
the mobile penetration rate in mainland China is still relatively low compared
to other Asian and international markets.
The following table sets forth certain information regarding the number of
mobile subscribers of the major mobile communications service providers in
mainland China as of December 31, 1997, 1998 and 1999 and as of June 30, 2000:
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, JUNE 30,
CELLULAR SUBSCRIBERS (IN MILLIONS) -------------------- --------
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
China Mobile Communications Corporation
China Mobile (HK)................................ 3.4 6.5 15.6 21.6
Other subsidiaries of China Mobile Communications
Corporation................................... 9.8 17.1 22.4 30.3
---- ---- ---- ----
Total............................................ 13.2 23.6 38.0 51.9
==== ==== ==== ====
China Unicom....................................... 0.5 1.4 5.2 11.1
---- ---- ---- ----
Total.................................... 13.7 25.0 43.2 63.1
==== ==== ==== ====
</TABLE>
---------------
Sources: the Ministry of Information Industry and China Mobile Communications
Corporation.
INDUSTRY STRUCTURE
INDUSTRY RESTRUCTURING
Prior to 1993, all public telecommunications networks and services in
mainland China were controlled and operated by the Ministry of Information
Industry through the
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former Directorate General of Telecommunications, the provincial
telecommunications administrations, and their city and county level bureaus. In
the first half of 2000, the Chinese government substantially completed a
restructuring of the telecommunications industry. One of the principal
objectives of the restructuring was to separate the government's regulatory
function from its business management functions in respect of state-owned
enterprises. As a result, the Ministry of Information Industry ceased to have an
indirect controlling interest in China Mobile (HK), and no longer exercises
control over telecommunications operations, but continues in its capacity as the
industry regulator providing industry policy guidance, as well as exercising
regulatory authority over all telecommunications services providers in mainland
China.
As part of the restructuring, the telecommunications operations previously
controlled by the Ministry of Information Industry have been separated along
four business lines: fixed line communications, mobile communications, paging
services and satellite communications.
China Mobile Communications Corporation was established in July 1999 as a
state-owned company to hold and operate the mobile communications networks
nationwide resulting from the separation. China Telecommunications Corporation
was established in May 2000 as a state-owned company to hold and operate the
fixed line telephone and data communications networks nationwide resulting from
the separation.
The Ministry of Information Industry has recently confirmed that it will
continue, within its regulatory function, to honor the undertakings it gave us
in 1999 in relation to, among other things, extending its full support to our
present and future development.
INDUSTRY PARTICIPANTS
It is the Chinese government's policy to encourage orderly competition in
the telecommunications industry. As a result of the restructuring of the
industry, a number of new industry participants have emerged, including the
entities which have been reorganized on the basis of the telecommunications
operations formerly controlled by the Ministry of Information Industry.
FIXED LINE COMMUNICATIONS. Following the industry restructuring in 1999,
China Telecommunications Corporation was established to operate fixed line
networks and provide fixed line telephone and data communications services
nationwide. China Unicom also provides fixed line services.
MOBILE COMMUNICATIONS. Currently, we provide mobile communications
services in six provinces in mainland China. China Mobile Communications
Corporation, our ultimate controlling shareholder, provides mobile
communications services in the provinces, municipalities and autonomous regions
in which we do not currently operate. In addition, China Unicom also offers
mobile communications services in most provinces, municipalities and autonomous
regions in China.
INTERNET PROTOCOL TELEPHONY AND DATA COMMUNICATIONS. Internet Protocol
telephony service offers significant pricing advantages over traditional
telephony services that utilize public switched telephone networks. Internet
Protocol refers to protocol used for the Internet that facilitates
communications among multiple networks. In 1999, China Telecommunications
Corporation, China Netcom Corporation, China Unicom and Jitong Communications
Co. Ltd. began offering Internet Protocol telephony services. In
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May 2000, we and China Mobile Communications Corporation, our parent company,
also began offering Internet Protocol telephony services to cellular
subscribers.
China Telecommunications Corporation, China Mobile Communications
Corporation (including us), China Unicom, China Netcom Corporation and Jitong
Communications Co. Ltd. are the five principal data communications service
providers in mainland China.
OTHER COMMUNICATIONS SERVICES. There are over 1,500 paging service
providers in mainland China. China Unicom is the largest provider of paging
services among them.
China Telecommunications Corporation is currently conducting trial
operations in certain cities of telephone services based on Personal Access
System technology. This technology is based on a small-scale and low-speed
wireless access application, which is generally used to supplement and extend
city fixed line networks.
China Satellite Communications Corporation, which assumed the satellite
operations previously controlled by the Ministry of Information Industry, is the
largest provider of satellite communications services in mainland China.
The following table sets forth certain information regarding the principal
participants in the telecommunications industry in mainland China:
<TABLE>
<CAPTION>
PARTICIPANT PRINCIPAL BUSINESS
----------- ------------------
<S> <C>
China Mobile Communications - Mobile communications services
Corporation(1)(2) - Wireless data communications
services
- Internet access services
- Internet Protocol telephony services
China Telecommunications - Fixed line telephony
Corporation(1) - Data communications services
- Internet access services
- Internet Protocol telephony services
China Unicom(3) - Mobile communications services
- Data communications services
- Paging(1)
- Fixed line telephony
- Internet access services
- Internet Protocol telephony services
China Satellite Communications - Satellite communications
Corporation(1)
Jitong Communications Co. Ltd. - Data communications services
- Internet access services
- Internet Protocol telephony services
China Netcom Corporation - Data communications services
- Internet access services
- Internet Protocol telephony services
</TABLE>
---------------
(1) Reorganized on the basis of the telecommunications operations previously
controlled by the Ministry of Information Industry.
(2) Includes China Mobile (HK), which is approximately 75% indirectly owned by
China Mobile Communications Corporation and approximately 25% owned by
public shareholders.
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<PAGE> 84
(3) Includes China Unicom's listed subsidiary, which is 77.5% indirectly owned
by China Unicom and 22.5% owned by public shareholders, based on publicly
available information.
INDUSTRY TRENDS
We believe that the telecommunications industry in mainland China will be
driven by several important trends in the future, including:
CONTINUED STRONG GROWTH
We believe the telecommunications industry will continue to experience
strong growth, as the continued development of mainland China's economy is
expected to increase the demand for communications services. With a relatively
low cellular penetration rate of 3.4% at the end of 1999, China's mobile
communications industry offers strong potential for growth. We anticipate that
wireless voice service will become increasingly popular as a result of improving
wireless network quality, decreasing costs of wireless services and increasing
demand for mobility. At current growth rates, we believe that the application of
mobile handsets to Internet-based content and data will further drive future
industry growth, and that the wireless penetration rate will surpass fixed line
penetration in the future.
GROWTH IN DEMAND FOR WIRELESS DATA SERVICES
In addition to basic voice telecommunications, we believe that demand for
wireless data services will also be a growth driver in the long-term. The
introduction of new wireless technologies, such as general packet-switched radio
service, and eventually third generation technologies, will facilitate access to
Internet-based content and data as well as electronic transactions using mobile
handsets and other forms of wireless terminal devices. The application of these
new technologies enables cellular users to conduct multi-media communications
involving voice, video and data.
AN INCREASINGLY OPEN AND TRANSPARENT REGULATORY ENVIRONMENT AND ORDERLY
COMPETITIVE ENVIRONMENT
We believe that an open and transparent regulatory environment is pivotal
to the healthy development of the telecommunications industry in mainland China.
In addition, we believe that the recently completed industry restructuring will
promote the continued growth of the industry by enhancing regulatory
transparency, encouraging autonomous enterprise management and promoting orderly
competition. China's pending entry into the World Trade Organization is expected
to open the domestic telecommunications market to external competition, further
encouraging progress toward a more open and transparent regulatory environment.
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BUSINESS
GENERAL
We are the leading provider of mobile communications services in six
provinces in China. We had approximately 23.9 million subscribers as of
September 20, 2000. On October 4, 2000, we agreed to acquire from our majority
shareholder, an indirect subsidiary of China Mobile Communications Corporation,
the mobile communications services currently operated by China Mobile
Communications Corporation in seven provinces, municipalities and autonomous
region in China, subject to regulatory and independent shareholder approvals and
other conditions. Each of those companies that we have agreed to acquire is the
leading mobile communications services provider in its geographic area. If the
proposed acquisition is completed:
- we will have a geographically contiguous market covering all of the
coastal regions of mainland China;
- we will have approximately 55.9% of all cellular subscribers in mainland
China, based on market data as of June 30, 2000 compiled by China Mobile
Communications Corporation;
- our service areas will cover approximately 48.0% of the total population
in mainland China; and
- the cellular penetration rate in our combined market will be
approximately 7.1%, which indicates room for significant future growth,
based on market data as of June 30, 2000 compiled by China Mobile
Communications Corporation.
The following table sets forth certain subscriber and market share
information in the geographic areas in which we and the companies that we have
agreed to acquire operate as of June 30, 2000, as well as on a pro forma
combined basis as of the same date, giving effect to the proposed acquisition as
if it had been completed on such date:
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
------------------------------------
CHINA MOBILE TARGET PRO FORMA
(HK) COMPANIES COMBINED
------------ --------- ---------
<S> <C> <C> <C>
Population base (in millions)(1)................... 326 282 607
Cellular penetration (%)(1)(2)..................... 8.0 6.1 7.1
Subscribers (in millions).......................... 21.6 13.6 35.3
As a percentage of total cellular subscribers in
mainland China(3)................................ 34.3 21.6 55.9
Market share (%)(2)................................ 83.0 80.0 81.8
</TABLE>
---------------
(1) Estimate based on population data as of December 31, 1999 as published in
2000 China Statistical Abstract, and further assuming the same annual
population growth rate in each province, municipality or autonomous region
in 2000 as in 1999.
(2) Based on our estimate of the total number of subscribers.
(3) Based on data from the Ministry of Information Industry and China Mobile
Communications Corporation for the total number of subscribers in mainland
China as of June 30, 2000.
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We and the companies that we have agreed to acquire are also major
providers of Internet Protocol communications services and wireless data
services in the respective geographic areas in which we and these companies
operate.
STRATEGY
We believe that the telecommunications industry in mainland China has
potential for significant future growth, and will continue to experience rapid
increases in cellular penetration, growth in voice and data traffic, expansion
in the range of available telecommunications services, and escalating consumer
demand for modern technologies, such as those relating to the convergence of
voice, data and video. We believe that this growth will be fostered by continued
strong economic development, the low penetration rates for telecommunications
services currently prevailing in mainland China and the introduction of new
technologies. The recently completed industry restructuring, which we believe
had as one of its principal objectives the creation of a more orderly
competitive environment, will also stimulate growth in this industry.
We are the leading mobile communications operator in some of the most
economically prosperous and developed markets in mainland China. We believe that
the proposed acquisition represents a significant opportunity for us to
consolidate our strong market position, and will allow us to capitalize on
growth opportunities in the broader telecommunications industry in mainland
China as well as to assume, in the future, a leadership position in the global
telecommunications industry.
Our objective is to maximize profitability and to create value for our
investors. We intend to pursue this growth objective through three principal
business strategies:
CONTINUE TO ACTIVELY GROW OUR CORE MOBILE COMMUNICATIONS BUSINESS
MAINTAIN FOCUS ON DEVELOPING A HIGH-QUALITY SUBSCRIBER BASE. While we
intend to continue our efforts toward achieving rapid subscriber growth in
absolute terms, we believe that our economic performance is best served by
maintaining our focus on developing a high-quality subscriber base, as measured
by higher minutes of usage, higher revenue per subscriber and margins, lower
churn rates and lower risk of default. We plan to achieve this by enhancing our
network quality, coverage and performance, developing more value-added services
and customized products and enhancing customer services, such as personalized
services and payment convenience. We also intend to capitalize on the leading
"CHINA MOBILE" brand name, including using promotional campaigns that emphasize
quality of service. We expect to maintain and enhance the significant
competitive advantages that we currently enjoy in these areas and in the
high-quality subscriber segment.
BROADEN SUBSCRIBER BASE AND INCREASE MARKET PENETRATION. We believe that
mobile services will continue to move towards eventual mass popularization. We
intend to capture additional subscribers from this rapidly growing market by
offering products and services that are specifically tailored to the different
customer segments in the Chinese mobile communications market, and further
enhance our competitive position. For example, we began selectively offering
prepaid services during the second half of 1999 in order to target certain lower
usage customers and travellers. As of June 30, 2000, prepaid subscribers
accounted for approximately 11.5% of our total subscriber base. We plan to
leverage our extensive distribution networks, our leading brand name
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<PAGE> 87
and our cellular network quality to continue our efforts in marketing our
prepaid services to a certain segment of potential cellular users. We believe
with accumulated and satisfactory usage experience, there is significant long
term potential for these subscribers to increase usage and become regular,
higher quality users of our mobile communications services and other new
services we may offer.
FOCUS ON INTEGRATING OUR BUSINESSES AND REALIZING SYNERGIES TO IMPROVE
EFFICIENCY. We expect to expand significantly if the proposed acquisition is
completed. As a result, we plan to focus on integrating the acquired businesses
with our existing businesses and realizing operational and other synergies from
the combination, leveraging our experience from our acquisition of Jiangsu
Mobile in 1998 and of Fujian Mobile, Henan Mobile and Hainan Mobile in 1999. We
intend to implement a number of integration plans, including:
- streamlining our capital expenditure plans and continuing to invest in
our GSM networks with an emphasis on increasing their coverage, capacity
and operating efficiency, as well as further enhancing their quality;
- establishing uniform operating procedures to increase operational
efficiency;
- implementing specific measures to maintain low churn rates, control bad
debts and enhance subscriber usage;
- centralizing reporting and financial control functions; and
- implementing performance-oriented enterprise evaluation standards, which
are consistent with practices adopted by us, by which the performance of
these businesses and their management will be measured.
We intend to realize synergies in a number of areas, including:
- leveraging our contiguous market coverage along the coastal regions of
mainland China to achieve cost savings in interconnection and other
arrangements;
- leveraging our strong market position to realize volume cost savings in
transmission line leasing and equipment and other purchases;
- leveraging the results of centralized research, development, billing and
accounting functions; and
- leveraging the "CHINA MOBILE" brand name to centralize our marketing
efforts to a greater degree and ensure consistency of our branding
strategy.
In addition, we expect that the sharing of management resources and
technological expertise among all of our operating subsidiaries will assist us
in both areas.
NURTURE HUMAN CAPITAL. The development of human capital is essential to
our business, particularly as we expand quickly in size and as we seek to
capture rapid technological development opportunities to expand the range of our
services. We plan
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<PAGE> 88
to continue to aggressively pursue measures to attract, retain and promote
highly qualified personnel. These measures include:
- increasing the overall education level and technical expertise of our
workforce;
- implementing attractive compensation schemes, such as our recently
expanded employee stock option plan, to link employee compensation to our
results of operations and the performance of our shares;
- rapidly promoting and increasing the responsibility of highly qualified
managers;
- providing extensive training;
- implementing an extensive evaluation system so that productive employees
are appropriately incentivized, and under-performing personnel are
effectively and quickly identified, and appropriate measures are taken;
and
- enhancing advancement opportunities for technical personnel so that they
share the same career opportunities as management professionals.
PURSUE STRATEGIC EXPANSION IN THE BROADER TELECOMMUNICATIONS MARKET IN
MAINLAND CHINA AND CAPTURE NEW REVENUE STREAMS
We expect that the broader telecommunications market in mainland China will
continue to expand quickly, as a result of significant market demand, rapid
technological development and a more open regulatory framework. We intend to
capture opportunities in the broader telecommunications market by leveraging our
substantial subscriber base and moving up the value chain, as well as
penetrating the non-cellular market at each level (as illustrated by the
following chart):
[BROADER TELECOMMUNICATIONS MARKET CHART]
This value creation strategy emphasizes the following elements:
- As mobile communications technologies advance, we intend to further
enhance our current GSM mobile communications network with various
technologies to
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<PAGE> 89
increase network coverage and network capacity and to enhance network
intelligence;
- We believe Internet Protocol based services will have tremendous growth
opportunities as a result of the convergence of voice and data services
and the increasing needs for higher speed access. We intend to target the
business market of Internet Protocol based services with bundled voice
and data, fixed line and wireless services, while marketing our Internet
Protocol telephony services to our mobile subscribers;
- With the rapid development of the Internet, wireless Internet access
presents enhanced business opportunities for us. We will implement
applications based on various new technologies, including WAP and general
packet-switched radio service, to deploy wireless Internet access
services, while moving towards a seamless transition to third generation
technology in the future;
- To further move up the value chain, we are developing our own mobile
Internet portal and intend to develop our mobile information service
center. The mobile information service center will serve as the standard
platform that hosts our mobile e-commerce and wireless virtual private
network and will have end-to-end security, authentication and
location-based information functions. We intend to seek strategic
alliances or ventures, or jointly undertake business initiatives, with
key wireless data industry players, which could include technology,
equipment and application service providers, content providers, such as
those relating to banking, securities trading and electronic gaming, and
other companies that bring strategic value to our wireless data
initiatives; and
- We intend to strategically build out our transmission trunk lines in high
voice or data traffic routes where economically advantageous, while
utilizing leased lines for our low traffic routes and connections.
CONTINUE TO EXPLORE ACQUISITION AND OTHER EXPANSION OPPORTUNITIES
CONTINUE TO EXPLORE OPPORTUNITIES TO ACQUIRE ATTRACTIVE TELECOMMUNICATIONS
ASSETS IN MAINLAND CHINA. If the proposed acquisition is completed, our
subscriber base as a percentage of all subscribers in mainland China will
increase from approximately 34.3% to approximately 55.9%, according to total
market size data compiled by China Mobile Communications Corporation as of June
30, 2000. The mobile communications businesses operated by China Mobile
Communications Corporation in the remaining 18 provinces, municipalities and
autonomous regions are also growing rapidly, and some of them may represent
attractive opportunities for further acquisitions.
Based on data compiled by China Mobile Communications Corporation, it had
approximately 16.7 million subscribers in those 18 provinces, municipalities and
autonomous regions as of June 30, 2000, and the relevant businesses had, on
average, a subscriber growth rate of 75.4% from the end of 1997 to the end of
1999. Those regions, collectively accounting for approximately 52.0% of China's
population, had an average cellular penetration rate of 1.9% as of December 31,
1999. We believe those provinces, municipalities and autonomous regions have
potential for significant growth, and will continue to experience strong
economic growth, in part assisted by recently announced Chinese government
policies to promote the rapid development of the western and northern regions of
China.
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SEEK LONG-TERM INTERNATIONAL GROWTH OPPORTUNITIES. We intend to assume in
the future a leadership position in the global telecommunications industry in
terms of markets, technology and services. We intend to explore opportunities
for potential strategic partnerships or cooperative arrangements with leading
international telecommunications operators and content and technology providers.
OPERATIONS
We offer mobile communications services using primarily digital GSM
technology and, to a lesser extent, analog TACS technology. Our cellular
networks reach all cities and counties and most major roads and highways in the
six provinces. The following table sets forth certain demographic and industry
data for these six provinces for the periods indicated:
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR
ENDED DECEMBER 31,
---------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Population (in thousands)(1)
Guangdong........................................... 70,510 71,430 72,700
Zhejiang............................................ 44,350 44,560 44,750
Jiangsu............................................. 71,480 71,820 72,130
Fujian.............................................. 32,820 32,990 33,160
Henan............................................... 92,430 93,150 93,870
Hainan.............................................. 7,430 7,530 7,620
GDP per capita (RMB)(1)
Guangdong........................................... 10,428 11,184 11,739
Zhejiang............................................ 10,515 11,202 11,981
Jiangsu............................................. 9,344 10,050 10,699
Fujian.............................................. 9,258 10,121 10,969
Henan............................................... 4,430 4,676 4,899
Hainan.............................................. 5,698 5,869 6,227
Cellular penetration (%)(2)
Guangdong........................................... 3.6 5.4 9.4
Zhejiang............................................ 2.1 3.6 7.6
Jiangsu............................................. 1.2 2.1 4.0
Fujian.............................................. 2.4 4.5 8.5
Henan............................................... 0.4 1.0 1.9
Hainan.............................................. 1.7 2.5 3.8
Fixed line penetration (%)(3)
Guangdong........................................... 11.8 13.4 15.9
Zhejiang............................................ 9.1 11.3 14.9
Jiangsu............................................. 8.3 10.4 12.5
Fujian.............................................. 8.7 10.5 13.1
Henan............................................... 3.2 4.8 6.2
Hainan.............................................. 5.2 5.8 6.9
</TABLE>
---------------
(1) Source: 1998 China Statistical Yearbook, 1999 China Statistical Yearbook and
2000 China Statistical Abstract.
(2) Calculated based on our estimate of the total number of cellular
subscribers, including subscribers of other operators.
(3) Source: the Ministry of Information Industry.
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<PAGE> 91
SUBSCRIBERS AND USAGE
Our subscriber base has grown substantially, from approximately 3.4 million
in 1997 to approximately 23.9 million as of September 20, 2000. We have a market
share of approximately 83.0% in the six provinces in which we operate as of June
30, 2000. We believe that our subscriber growth has been attributable to
numerous factors, including:
- our acquisitions;
- significant overall economic growth in the markets in which we operate;
- expansion in the coverage of our networks;
- wide recognition of our brand and diversified services;
- increased marketing and sales efforts and improved distribution channels;
- increased fixed line access resulting in additional communication
opportunities;
- decreased cost of initiating services to new cellular subscribers due to
a general decline in handset prices and our connection fees; and
- enhanced roaming capabilities and value added services.
The size and composition of our subscriber base and subscribers' usage
patterns have changed over the last few years. As tariffs and the price of
handsets have decreased and cellular technology has improved over time, mobile
communications services have become increasingly popular with the broader middle
income market for both business and social uses. In general, the highest usage
subscribers with the greatest communications needs have tended to be the early
subscribers of mobile services. As penetration increases, newer subscribers on
average incur lower monthly usage, and are generally more price-sensitive.
Accordingly, as is typical in many countries with developing mobile
communications markets, the average usage and revenue per subscriber have
declined over the last few years as our cellular penetration has increased. At
the same time, connection fees for mobile communications services in mainland
China have declined significantly, which reduced the cost for non-users to
become cellular subscribers and for existing cellular users to switch between
cellular networks. This, together with increased competition, has contributed to
the increase in our churn rates since 1997. However, total minutes of usage of
our subscribers has grown significantly since 1997.
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<PAGE> 92
The following table sets forth selected historical information about our
cellular subscriber base (including subscribers for our prepaid services) for
the six provinces for the periods indicated:
SUBSCRIBER BASE AND RELATED INFORMATION
<TABLE>
<CAPTION>
AS OF OR FOR
AS OF OR FOR THE YEAR THE SIX MONTHS
ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ --------------
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Subscribers (in thousands)
Guangdong............................... 2,502 3,623 5,951 9,167
Zhejiang................................ 903 1,507 2,859 3,995
Jiangsu................................. -- 1,401 2,328 3,268
Fujian.................................. -- -- 2,507 2,766
Henan................................... -- -- 1,730 2,158
Hainan.................................. -- -- 246 284
----- ----- ------ ------
Total................................ 3,405 6,531 15,621 21,638*
===== ===== ====== ======
Average churn rate (%)(1)
Guangdong............................... 1.2 1.9 3.5 2.7
Zhejiang................................ 2.9 2.1 4.8 3.7
Jiangsu(2).............................. -- 2.9 4.8 7.1
Fujian(3)............................... -- -- 3.5 3.8
Henan(3)................................ -- -- 7.4 4.7
Hainan(3)............................... -- -- 18.3 4.1
Market share (%)(4)
Guangdong............................... 97.6 94.6 88.1 85.2
Zhejiang................................ 97.0 93.5 84.7 81.5
Jiangsu................................. -- 95.2 81.0 74.8
Fujian.................................. -- -- 89.1 82.2
Henan................................... -- -- 97.8 94.2
Hainan.................................. -- -- 86.4 71.2
Minutes of usage (in billions)
Guangdong............................... 10.7 14.7 24.9 16.0
Zhejiang................................ 3.7 5.7 9.8 6.2
Jiangsu(5).............................. -- 4.6 7.0 4.8
Fujian(6)............................... -- -- 8.5 4.8
Henan(6)................................ -- -- 4.9 3.1
Hainan(6)............................... -- -- 1.1 0.6
</TABLE>
90
<PAGE> 93
<TABLE>
<CAPTION>
AS OF OR FOR
AS OF OR FOR THE YEAR THE SIX MONTHS
ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ --------------
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average minutes of usage per subscriber
per month(7)
Guangdong............................... 438 400 429(8) 357
Zhejiang................................ 448 396 376 306
Jiangsu(5).............................. -- 335 320 285
Fujian(6)............................... -- -- 376 304
Henan(6)................................ -- -- 310 268
Hainan(6)............................... -- -- 436 397
Average revenue per subscriber
per month (RMB)(9)
Guangdong............................... 454 452 376 325
Zhejiang................................ 534 443 320 240
Jiangsu................................. -- n/a(10) 301 227
Fujian.................................. -- -- n/a(11) 188
Henan................................... -- -- n/a(11) 196
Hainan.................................. -- -- n/a(11) 284
</TABLE>
---------------
* 23.9 million subscribers as of September 20, 2000.
(1) Measures the rate of subscriber disconnections from mobile telephone
service, determined by dividing (A) the sum of voluntary and involuntary
deactivations (excluding deactivations due to subscribers switching from
one of our contract services to another) during the relevant period by (B)
the average number of subscribers during the period (calculated as the
average at the beginning and end of the year (in the case of 1997 and
1998), and at the beginning of the year and the end of each calendar month
(in the case of 1999 and the six months ended June 30, 2000)). On this
basis our calculated churn rate will be affected by the number of voluntary
and involuntary deactivations and the significant growth in our subscriber
base.
The upward trend in our calculated churn rate is attributable in part, to
our tightened credit control policies and the compulsory termination of
services where accounts are overdue for six or more months. In addition, we
began offering prepaid services in late 1999. Some of our subscribers have
switched from our contract services to our prepaid service, which does not
require subscriber registration. Since the exact number of such subscribers
cannot be ascertained, the above churn rate accounts for them as churn
subscribers, even though they remain our subscribers. Based on our own
recent market surveys, we believe that if such subscribers were to be
excluded from the calculation, our calculated churn rate would be lower
than that shown in the schedule above.
(2) We acquired Jiangsu Mobile in June 1998. The average churn rate of Jiangsu
Mobile in respect of the full year of 1998 is presented for ease of
comparison and is calculated based on the relevant information of Jiangsu
Mobile prior to and after its acquisition by us.
(3) We acquired Fujian Mobile, Henan Mobile and Hainan Mobile in November 1999.
The average churn rate for each of these subsidiaries in respect of the
full year of
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1999 is presented for ease of comparison and is calculated based on the
relevant information of the respective companies prior to and after their
acquisition by us.
(4) Calculated based on total number of cellular subscribers in the relevant
provinces estimated by us.
(5) We acquired Jiangsu Mobile in June 1998. The minutes of usage and average
minutes of usage per subscriber per month of Jiangsu Mobile in respect of
the full year of 1998 are presented for ease of comparison and are
calculated based on the relevant information of Jiangsu Mobile prior to and
after its acquisition by us.
(6) We acquired Fujian Mobile, Henan Mobile and Hainan Mobile in November 1999.
The minutes of usage and average minutes of usage per subscriber per month
in respect of the full year of 1999 are presented for ease of comparison
and are calculated based on the relevant information of Fujian Mobile,
Henan Mobile and Hainan Mobile prior to and after their acquisition by us.
(7) Calculated by (A) dividing the total minutes of usage during the relevant
period by the average number of subscribers during the period (calculated
in the same manner as described in note (1) above) and (B) dividing the
result by the number of months in the period.
(8) In Guangdong, the average usage by subscribers increased, in contrast to a
general decline in average usage, due to the introduction of new value
added services.
(9) Calculated by (A) dividing the operating revenue during the relevant period
by the average number of subscribers during the period (calculated in the
same manner as described in note (1) above) and (B) dividing the result by
the number of months in the period.
(10) Not available for the full year of 1998 because the operating revenues of
Jiangsu Mobile are included in our financial results only from June 4,
1998, the date of its acquisition by us.
(11) Not available for the full year of 1999 because the operating revenues of
Fujian Mobile, Henan Mobile and Hainan Mobile are included in our financial
results only from November 12, 1999, the date of their acquisition by us.
CONTRACT SUBSCRIBERS
The following table sets forth the total number of our contract cellular
subscribers for the periods and in the provinces indicated.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------ ---------------
1997 1998 1999 2000
----- ----- ------ ---------------
<S> <C> <C> <C> <C>
CONTRACT SUBSCRIBERS (in thousands)
Guangdong...................................... 2,502 3,623 5,951 7,923
Zhejiang....................................... 903 1,507 2,859 3,579
Jiangsu........................................ -- 1,401 2,328 2,718
Fujian......................................... -- -- 2,507 2,572
Henan.......................................... -- -- 1,730 2,075
Hainan......................................... -- -- 246 275
----- ----- ------ ------
Total........................................ 3,405 6,531 15,621 19,142
===== ===== ====== ======
</TABLE>
92
<PAGE> 95
PREPAID SUBSCRIBERS
In the second half of 1999, we introduced prepaid services. Our prepaid
subscribers can make and receive local and domestic and international long
distance calls, and most of those subscribers also enjoy nationwide domestic
roaming services. Each prepaid card has a value of RMB 50, RMB 100, RMB 300 or
RMB 500 with a valid term of 180 days, 180 days, 360 days or 360 days,
respectively. When a call is made or received by a prepaid subscriber, our
system automatically deducts usage fees from the value stored in the card.
Prepaid subscribers can add value to their SIM cards by purchasing
value-adding cards in the rest of mainland China when they are outside of their
home cellular network (where such subscriber initially purchased the prepaid SIM
card). Under our current arrangement with China Mobile Communications
Corporation, its subsidiary in the location that issues the value-adding card
remits 85% of the face value of the value-adding card to the subscriber's home
network operator, and keeps the remainder as a handling charge.
We believe our prepaid services complement our traditional contract
services, and are important means of expanding our subscriber base. In
particular, subscribers to our prepaid services do not have to pay connection
fees and monthly fees. Prepaid services also allow for easier subscription by
non-local residents as compared to those required for traditional contract
services. We believe that continued economic growth, the benefits of mobility,
and current low cellular penetration rates in mainland China compared to
demographically and culturally similar markets are among the fundamental factors
that will further drive cellular subscriber growth towards eventual mass
popularization. We believe prepaid services represent an effective tool for
capturing additional subscribers and driving penetration in developing markets,
such as mainland China, while keeping credit quality in check. Prepaid services
also help introduce the enhanced benefit of mobility to non-mobile users. With
accumulated and satisfactory usage experience, there is significant long term
potential for these subscribers to substantially increase usage and become
regular, higher quality users of our mobile communications services and other
new services we may offer.
Our prepaid services have experienced rapid and significant growth in the
first half of 2000. As of June 30, 2000, we had an aggregate of approximately
2.5 million subscribers for our prepaid services, representing 11.5% of our
total subscriber base as of that date. The following table sets forth the total
number of our prepaid subscribers by province as of June 30, 2000:
<TABLE>
<CAPTION>
GUANGDONG ZHEJIANG JIANGSU FUJIAN HENAN HAINAN TOTAL
--------- -------- ------- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Prepaid subscribers (in thousands)... 1,244 416 550 193 83 9 2,496
As a percentage of all subscribers
(%)................................ 13.8 10.4 16.8 7.0 3.8 3.2 11.5
</TABLE>
TARIFFS
The tariffs payable by our subscribers are primarily usage charges,
including roaming charges, monthly fees, connection fees and monthly service
fees for value added services. Usage charges reflect charges for both incoming
and outgoing calls plus, where applicable, an additional component reflecting
domestic and international long distance charges. When using roaming services,
our subscribers pay roaming
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<PAGE> 96
charges plus, where applicable, an additional component reflecting domestic and
international long distance charges. Subscribers also pay fees for selection of
specific telephone numbers.
Our tariffs are subject to regulation by various government authorities,
including the Ministry of Information Industry, the State Development Planning
Commission and the relevant provincial price regulatory authorities. For
connection fees, the Ministry of Information Industry sets a guidance price
range in consultation with the State Development Planning Commission for all
mobile communications operators in mainland China. The actual price range in
each province is determined by the relevant provincial price regulatory
authorities. In general, basic usage charges, monthly fees, domestic roaming
charges and applicable long distance tariffs are also determined by the Ministry
of Information Industry in consultation with the State Development Planning
Commission.
The following table summarizes some of the current basic charges for our
full service packages:
<TABLE>
<CAPTION>
GUANGDONG ZHEJIANG JIANGSU FUJIAN HENAN HAINAN
--------- -------- ------- ------ ----- ------
(IN RMB)
<S> <C> <C> <C> <C> <C> <C>
CONTRACT SUBSCRIBERS
Connection fee(1)..................... 500-800 300 550 700 500-800 400
Monthly fee(2)........................ 50 50 50 50 60(3) 50
Base usage charge (per minute)(2)..... 0.50 0.50(4) 0.50(4) 0.40 0.48(3) 0.40
Domestic roaming charge (per minute).. 0.60 0.60 0.60 0.60 0.72(3) 0.60
PREPAID SUBSCRIBERS
Base usage charge (per minute)........ 0.60 0.60 0.60 0.60 0.60 0.60
Domestic roaming charge (per minute).. 0.80 0.80 0.80 0.80 0.80 0.80
</TABLE>
---------------
(1) Our operating subsidiaries offer different service packages with different
connection fee rates. From time to time and in different regions in their
respective provinces, our operating subsidiaries may also offer promotional
connection fee rates, which could be substantially lower than the upper
limit indicated in the table.
(2) We also offer certain specialized packages, in particular TACS network
packages that offer local access services only, which have lower monthly
fees and base usage charges than those indicated above.
(3) Henan Mobile's monthly fee, base usage and domestic roaming charges include
an additional 20% surcharge.
(4) The base usage charges of Zhejiang Mobile and Jiangsu Mobile include an
additional 25% surcharge.
In addition, we also charge long distance tariffs where applicable.
In order to develop our WAP services, we plan to charge a preferential
usage fee for our WAP services at RMB 0.15 per minute (up to RMB 30 per month
for the first 500 minutes in a month). This preferential usage fee rate will be
effective from October 21, 2000 to May 20, 2001.
CONTRACT SUBSCRIBERS. Upon initial subscription, our new subscribers are
charged a connection fee for service activation. After initial connection,
subscribers are required to
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<PAGE> 97
pay a fixed monthly fee. Subscribers incur base usage charges on a per minute
basis for both incoming and outgoing calls, plus applicable long distance
charges. For calls made or received by subscribers who are roaming outside of
their registered service area, subscribers incur a roaming charge, plus
applicable long distance charges. Subscribers may also have to pay various local
surcharges. In addition, we collect fees for value added services.
Connection fees in all six provinces in which we operate have been
substantially reduced in the past three years, accompanying a reduction in the
guidance prices for connection fees over that period. In 1999, with the relevant
government approval, we also reduced monthly fee rates in Guangdong and Zhejiang
and base usage surcharge rates in Jiangsu. We anticipate that connection fees
will be further reduced or eliminated in the next few years, which we believe
may help to expand our subscriber base and increase total subscriber usage of
our cellular services, thereby contributing to our revenue growth in the long
term. We expect our overall tariff rates to remain stable despite further
reductions in connection fees. Connection fees have become an increasingly less
important source of our revenue. We expect that its importance will continue to
decline.
PREPAID SUBSCRIBERS. We do not charge connection fees and monthly fees for
our prepaid services. Subscribers for our prepaid services only incur base usage
charges on a per minute basis for both incoming and outgoing calls, plus
applicable long distance tariffs.
INTERCONNECTION
Interconnection refers to various arrangements that permit the connection
of our networks to other networks such as the fixed line telephone network.
INTERCONNECTION WITH CHINA TELECOMMUNICATIONS CORPORATION (FOR LOCAL AND
LONG DISTANCE CALLS). Our networks interconnect with China Telecommunications
Corporation's public fixed line network, allowing our subscribers to communicate
with fixed line subscribers and to make and receive local, domestic and
international long distance calls. A majority of calls on our networks involve
interconnection with China Telecommunications Corporation's fixed line network.
Each of our operating subsidiaries has an interconnection agreement with the
relevant subsidiary of China Telecommunications Corporation that operates the
fixed line network in its province. The economic terms of these agreements are
standardized from province to province. See "Relationship with China
Telecommunications Corporation" beginning on page 141.
Calls between our subscribers and China Unicom's subscribers interconnect
through China Telecommunications Corporation's fixed line network, and the
operator of the calling party settles with China Telecommunications Corporation.
We and China Unicom each settle separately with China Telecommunications
Corporation for such calls. We pay China Telecommunications Corporation RMB 0.05
per minute of the base usage charge for such local calls when our subscriber is
the calling party.
INTERCONNECTION WITH CHINA MOBILE COMMUNICATIONS CORPORATION (FOR LONG
DISTANCE CALLS AND ROAMING CALLS). We also have an inter-provincial
interconnection and roaming agreement with China Mobile Communications
Corporation, under which the other subsidiaries of China Mobile Communications
Corporation and we provide to each
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<PAGE> 98
other domestic inter-provincial network interconnection services and domestic
and international roaming services. See "Relationship with China Mobile
Communications Corporation" beginning on page 133.
INTERCONNECTION REVENUE SHARING AND SETTLEMENT. Where calls involve
interconnection with China Telecommunications Corporation's fixed line network
or China Mobile Communications Corporation's network, our interconnection
arrangement with China Telecommunications Corporation or China Mobile
Communications Corporation provides for the sharing and settlement of revenues
from the basic usage charge, and, if applicable, roaming charges and domestic
and international long distance charges.
The following table summarizes the terms of our interconnection arrangement
with China Telecommunications Corporation, including China Telecommunications
Corporation's subsidiaries in each province, as they relate to revenue sharing
and settlement of the base usage charges for non-roaming local calls:
REVENUE SHARING AND SETTLEMENT OF
BASE USAGE CHARGES FOR NON-ROAMING LOCAL CALLS
<TABLE>
<CAPTION>
ORIGINATING TERMINATING
TYPE OF CALLS SUBSCRIBER SUBSCRIBER SETTLEMENT ARRANGEMENTS
------------- ----------- ----------- -----------------------
<S> <C> <C> <C>
Mobile to fixed Our subscriber China Our contract subscribers:
Telecommunications - We collect the base usage charge of RMB
Corporation's 0.40 to RMB 0.50 per minute from our
fixed line subscriber making the call(1)
subscriber - We pay RMB 0.05 per minute to China
Telecommunications Corporation
Our prepaid subscribers:
- We are credited with the base prepaid
usage charge of RMB 0.60 per minute
from our subscriber making the call
- We pay RMB 0.05 per minute to China
Telecommunications Corporation
Fixed to mobile China Our subscriber Our contract subscribers:
Telecommunications
Corporation's - We collect base usage charge of RMB
fixed line 0.40 to RMB 0.50 per minute from our
subscriber subscriber receiving the call(1)
- No revenue sharing or settlement
Our prepaid subscribers:
- We are credited with the base prepaid
usage charge of RMB 0.60 per minute
from our subscriber receiving the call
- No revenue sharing or settlement
</TABLE>
---------------
(1) See "-- Tariffs" beginning on page 93 for the amount of the base usage
charge in each province.
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<PAGE> 99
Where applicable, we collect domestic long distance charges in addition to
the base usage charges. The following table summarizes the terms of our
interconnection arrangement with each of China Telecommunications Corporation
and China Mobile Communications Corporation as they relate to revenue sharing
and settlement of the domestic long distance charges.
REVENUE SHARING AND SETTLEMENT OF DOMESTIC LONG DISTANCE CHARGES
<TABLE>
<CAPTION>
ORIGINATING TERMINATING
TYPE OF CALLS SUBSCRIBER SUBSCRIBER SETTLEMENT ARRANGEMENTS
------------- ----------- ----------- -----------------------
<S> <C> <C> <C>
Mobile to fixed Our subscriber China Contract and prepaid subscribers:
Telecommunications - In addition to the base usage charge,
Corporation's we collect the domestic long distance
fixed line charge of RMB 0.60 to RMB 1.00 per
subscriber minute from our subscriber making the
call(1)
- We keep RMB 0.14 per minute of the
domestic long distance charges and pay
the rest to China Telecommunications
Corporation
Fixed to mobile China Our subscriber or Contract and prepaid subscribers:
(through our Telecommunications China Mobile - China Telecommunications Corporation
transmission Corporation's Communications collects the domestic long distance
lines) fixed line Corporation's charge from its subscriber making the
subscriber in our subscriber call
service area - China Telecommunications Corporation
keeps RMB 0.14 per minute of the
domestic long distance charges and pays
the rest to us
Mobile to mobile Our subscriber China Mobile Contract and prepaid subscribers:
(through our Communications - In addition to the base usage charge,
transmission Corporation's we collect the domestic long distance
lines) subscriber charges of RMB 0.60 to RMB 1.00 per
minute from our subscriber making the
call(1)
- No revenue sharing or settlement
Mobile to mobile China Mobile Our subscriber Contract and prepaid subscribers:
(through Communications - In addition to its base usage charge,
transmission Corporation's China Mobile Communications Corporation
lines of China subscriber collects the domestic long distance
Mobile charge from its subscriber making the
Communications call
Corporation) - No revenue sharing or settlement
</TABLE>
---------------
(1) Currently, domestic long distance tariffs are RMB 0.60 per minute in the
case of intra-provincial long distance calls, and RMB 0.80 to RMB 1.00 per
minute, depending on distance, in the case of inter-provincial calls.
Additional surcharges may apply in certain provinces. Certain off-peak
discounts may apply to such domestic long distance tariffs.
Where applicable, we collect international long distance charges in
addition to base usage charges. The following table summarizes the terms of our
interconnection
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<PAGE> 100
arrangement with China Telecommunications Corporation as they relate to
international long distance call charges.
REVENUE SHARING AND SETTLEMENT OF INTERNATIONAL LONG DISTANCE CHARGES
<TABLE>
<CAPTION>
TYPE OF CALL SETTLEMENT ARRANGEMENTS
------------ -----------------------
<S> <C>
Outgoing calls from our subscriber - In addition to the base usage charges, we collect the
international long distance charges from our subscriber
making the call
- We keep RMB 0.20 per minute of the international long
distance charge and pay to China Telecommunications
Corporation the rest of the international long distance
charge
Incoming calls to our subscriber - No revenue sharing or settlement(1)
</TABLE>
---------------
(1) Except for incoming international calls that interconnect with our gateway
in Guangzhou, Guangdong province, for which we receive a portion of the long
distance charge from China Telecommunications Corporation.
ROAMING
Roaming services allow mobile subscribers to make and receive calls while
outside of their local service areas.
We provide roaming capabilities to our subscribers, which allow them to
make and receive telephone calls while they are physically outside of their
registered service area and are in the coverage areas of other cellular networks
with which we have a roaming arrangement. Both our GSM and TACS networks offer
roaming capabilities throughout mainland China. In addition, our GSM networks
offer roaming capabilities in 56 countries and regions around the world, where
we currently have roaming arrangements with relevant local operators. A cellular
subscriber using roaming services is charged at our per-minute roaming charge
(instead of the base usage charge) for both incoming and outgoing calls, plus
applicable long distance charges.
We have a domestic roaming arrangement with China Mobile Communications
Corporation, under which our subscribers (of both GSM and TACS networks) can
make and receive telephone calls while they are located in the service areas of
China Mobile Communications Corporation in the rest of mainland China where we
currently do not operate. Conversely, we offer roaming services to China Mobile
Communications Corporation's subscribers while they are physically located in
our service areas.
The following table sets forth our revenue sharing and settlement
arrangement with China Mobile Communications Corporation for base roaming
charges. We currently do not have a roaming arrangement with China Unicom.
REVENUE SHARING AND SETTLEMENT OF THE BASIC ROAMING CHARGES
<TABLE>
<CAPTION>
TYPE OF ROAMING SETTLEMENT ARRANGEMENTS
--------------- -----------------------
<S> <C>
OUR CONTRACT SUBSCRIBERS:
Our subscriber roaming into the mobile - We collect the base roaming charge of RMB 0.60
network of China Mobile Communications per minute from our subscriber making or
Corporation receiving the call while roaming(1)
- We pay 80% of the base roaming charge to China
Mobile Communications Corporation
</TABLE>
98
<PAGE> 101
<TABLE>
<CAPTION>
TYPE OF ROAMING SETTLEMENT ARRANGEMENTS
--------------- -----------------------
<S> <C>
OUR PREPAID SUBSCRIBERS:
- We are credited with the base prepaid roaming
charge of RMB 0.80 per minute from our
subscriber making or receiving the call while
roaming(1)
- We pay 80% of such amount to China Mobile
Communications Corporation
Subscriber of China Mobile Communications CHINA MOBILE COMMUNICATIONS CORPORATION'S
Corporation roaming into our network CONTRACT SUBSCRIBERS:
- China Mobile Communications Corporation collects
the base roaming charge from its subscriber
making or receiving the call while roaming
- China Mobile Communications Corporation pays to
us 80% of such base roaming charge collected
CHINA MOBILE COMMUNICATIONS CORPORATION'S PREPAID
SUBSCRIBERS:
- China Mobile Communications Corporation is
credited with the base roaming charge from its
subscriber making or receiving the call while
roaming
- China Mobile Communications Corporation pays to
us 80% of such base roaming charge credited
</TABLE>
---------------
(1) See "-- Tariffs" beginning on page 93 for the amount of the base roaming
charge in each province.
REVENUE SHARING AND SETTLEMENT OF LONG DISTANCE CHARGE WHEN ROAMING. In
addition to the base roaming charge, long distance charges may be generated when
a subscriber is roaming, either when our subscriber is making a long distance
call from the roaming location, or when our subscriber is receiving a call
(which necessarily involves long distance connection from our subscriber's home
network to the location in which he is roaming). Under our arrangements with
China Mobile Communications Corporation:
- Where a cellular subscriber makes a call while roaming, the visited
network operator receives all long distance charges incurred. The visited
network operator then settles those long distance charges, if settlement
applies, in accordance with the long distance revenue sharing and
settlement arrangements described above under "-- Interconnection" on
page 95; and
- Where a cellular subscriber receives a call while roaming, the home
network operator receives and keeps all long distance charges incurred by
that subscriber.
VALUE ADDED SERVICES AND NEW SERVICES
In addition to basic mobile communications services, we offer a number of
optional value added services. Recently, we have also begun offering certain new
services, such as wireless data and Internet Protocol telephony, that capitalize
on new technology-enabled opportunities.
VOICE FUNCTIONS. We offer a variety of basic value added services with
voice function, including call forwarding, call waiting, conference calling,
call limitation, voice mail and "Chinese Secretary", a live answering service.
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WIRELESS DATA. We believe that wireless data will be one of the fastest
growing segments of the telecommunications market in mainland China over the
next several years. We intend to further expand the range of our value added
services, with particular emphasis on wireless data applications, which we
believe can be achieved with modest initial expenditures.
In 1999, we used our short message service platform to develop new value
added services in selected cities in our service areas, including stock price
quotations, sports news, weather forecasts and on-line payment. We will continue
to utilize our GSM network to provide data services based on the current short
message service platform where consumer demands can be more economically served
by short message service. These data services include, for example, transmission
of short messages to facsimile and e-mail addresses.
We currently offer WAP services in all six provinces in which we operate.
WAP refers to Wireless Application Protocol, which is a software protocol stack
that defines a standardized means of transmitting Internet-based content and
data to mobile handsets and other wireless handheld devices. Our WAP services
provide wireless Internet access enabling subscribers to send and receive data
over WAP enabled handsets or handheld computing devices and provide access to
Internet-based content, such as weather forecasts, financial updates, news
broadcasts, business information, health information, entertainment, traffic
news and travel tips, e-commerce and on-line games.
We have also conducted advanced General Packet-Switched Radio Service
technology trials. This technology will enable operators to provide end-to-end
packet-switched data transmission on the existing GSM network, which improves
wireless network utilization and enhances the wireless access rate for a variety
of data applications, including WAP. We have also completed tests running WAP
applications over a general packet-switched radio service platform. In August
2000, we installed and, conducted a stand alone test of, our first full general
packet-switched radio service network for the offering of WAP services over this
network.
INTERNET PROTOCOL TELEPHONY. In May 2000, we began providing Internet
Protocol telephony service, which allows users to make domestic and
international long distance calls at significantly lower cost. Our Internet
Protocol telephony service covers all of our service areas. We intend to build
customer awareness of the benefits of our Internet Protocol telephony service
through marketing and promotional efforts.
"172" ISP SERVICES. Recently, we launched "172" ISP services, which enable
users to access the Internet through both mobile handsets or fixed line
telephones by dialling a prefix. Our "172" ISP services are still at an early
stage and the scope of these services is, therefore, currently limited. We
intend to provide integrated voice, data and video access to both cellular and
non-cellular users through such services in the near future.
We intend to continue focusing on the application of general
packet-switched radio service and third generation mobile communication
technologies, so as to launch new wireless multimedia services. Third generation
refers to the third generation digital wireless telecommunications technologies,
including those that support packet data switching, wireless broadband,
multi-media and global roaming.
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RESEARCH AND DEVELOPMENT
Our research and development efforts focus on:
- developing advanced data application solutions suitable for the
particulars of the consumer markets in mainland China; and
- monitoring technological trends that may have an impact on the
development of our current business and the implementation of our
wireless data strategy.
In light of the increasingly competitive and rapidly evolving
telecommunications market in mainland China, we expect to continue to devote
resources to the research and development of new products, services and
technology applications. We have established a research and development center
in Shenzhen, Guangdong to lead our research and development efforts on
developing wireless data applications.
CUSTOMER SERVICE, BILLING AND CREDIT CONTROL
We provide a full range of services that emphasize customer care from the
point of sale onward. At the point of sale, after all application procedures
have been completed, we are generally able to activate new subscriber
connections within a few hours for our GSM services and within 24 hours for our
TACS services. Our after-sales customer support services include customer
service hotlines in our service areas. These hotlines provide customers with
billing and service information, as well as receive customer reports of network
problems.
We do not require subscribers to post any deposit before the initiation of
local service, although subscribers may choose to establish direct debits from
their bank accounts. Our prepaid subscribers may also choose to authorize the
automatic adding of value to their stored value cards through direct debit
arrangements. Despite the lack of widely available credit information services
in mainland China, we have implemented certain subscriber registration
procedures, such as identity checks and background checks for corporate
customers to assist in credit control.
Generally, we have the same settlement policy for our subscribers in
different service areas, requiring these subscribers to settle their individual
accounts on a monthly basis. Subscribers may make payment either through direct
debit accounts established at certain branches of banks and certain post
offices, or by paying in person at numerous retail outlets and authorized
dealers in various cities and counties. Detailed statements are made available
upon the subscriber's request.
We impose a late payment fee on each subscriber whose account is not paid
by the monthly due date. Our current policy is to deactivate the subscriber's
services (i.e., an involuntary deactivation) if the subscriber's account remains
overdue after one month. Subscribers whose services have been involuntarily
deactivated must pay all overdue amounts, including applicable late payment
fees, to reactivate services.
We make provision for doubtful accounts based on our assessment of the
recoverability of accounts receivable on maturity. In particular, we make full
provision for accounts receivable that are overdue for more than three months.
The total amount of the provision for doubtful accounts for each of 1997, 1998
and 1999 and the six months ended June 30, 2000 was RMB 449 million, RMB 558
million, RMB 771 million and RMB
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647 million (US$78 million), respectively, or 2.9%, 2.1%, 2.0% and 2.2% of total
operating revenue, respectively.
INFORMATION SYSTEMS
Our information technology infrastructure consists primarily of three
computerized information systems: the business operations support system, the
management information system and our internal business communications network.
Our business operations support system provides day-to-day operational support
to our various business units, including customer care, billing and collection,
and sales and marketing. Our management information system collects and
processes information data, including operational and financial data, so that
management and marketing personnel can monitor subscriber satisfaction, analyze
trends in calling patterns, target network expansion and develop appropriate
marketing strategies. Our internal business communications network allows
internal communications through our intranet, video conference system and
communications platform system. During 1999, we upgraded our information systems
which has enabled us to enhance operations management, implement credit controls
and monitor mobile usage in real time. Our information systems operated through
each critical date relating to the year 2000 issue without difficulty or
interruption. However, there is no assurance that a year 2000 problem that may
occur or be detected at a later date will not pose operational problems or have
an adverse effect on our business, financial condition or results of operations.
SERVICE DISTRIBUTION AND MARKETING
Since early 1997, we have significantly expanded our marketing and
distribution efforts to attract a growing number and an increasingly diverse
base of potential subscribers. We have focused on expanding our distribution
channels, while emphasizing our brand name and network and service superiority.
DISTRIBUTION CHANNELS. We market our services through an extensive network
of authorized dealers (including retail outlets of the fixed line operators and
post offices) and through our own retail outlets.
As of June 30, 2000, we had 12,937 authorized third-party dealers and owned
and operated 538 retail outlets as set forth in the following table.
<TABLE>
<CAPTION>
GUANGDONG ZHEJIANG JIANGSU FUJIAN HENAN HAINAN
--------- -------- ------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Authorized third-party dealers..... 1,857 2,455 1,536 4,465 2,210 414
Owned and operated retail
outlets.......................... 114 76 84 35 197 32
----- ----- ----- ----- ----- ---
Total.............................. 1,971 2,531 1,620 4,500 2,407 446
===== ===== ===== ===== ===== ===
</TABLE>
The authorized dealers market and sell our services at prices determined by
us in accordance with the applicable price schedules in the relevant provinces.
In connection with these sales, the dealers pay to us all related connection
fees and other miscellaneous fees payable upon initial connection. We in turn
pay the dealers a fee of RMB 150 to RMB 300 per new subscriber acquired. In
addition to marketing our services, some of our authorized dealers also perform
various services for us, such as payment collection and the provision of billing
information and other customer services.
As of June 30, 2000, we also owned and operated 538 retail outlets. In
addition to serving as outlets where customers can subscribe for our network
services, most of
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these outlets also offer customers after-sales support services, including the
repair of handsets and collection of payment.
We are seeking to develop other distribution channels, including on-line
sales and customer service facilities over the Internet, in order to further
strengthen our marketing efforts.
BRAND NAME. As the first and the leading mobile telephone services
provider in our markets, we believe we are well positioned to develop our brand
name. We market our services under the "CHINA MOBILE" brand name, which is the
marketing name used throughout mainland China by China Mobile Communications
Corporation. As a result of promotional and marketing initiatives by us and
China Mobile Communications Corporation's other operating subsidiaries, the mark
has attained wide recognition and is closely identified with us by consumers.
China Mobile Communications Corporation has filed an application to register the
"CHINA MOBILE" logo as a trademark in mainland China. In addition, applications
have been filed in Hong Kong to register "CHINA MOBILE and logo" as our
trademark for certain goods and services.
In October 1999, we entered into a licensing agreement with China Mobile
Communications Corporation for the use of the "CHINA MOBILE" name and logo by us
and our operating subsidiaries. Under this agreement, no license fee is payable
by us for the first three years from the effective date of the trademark
registration and any fees payable after that will be no less favorable than fees
paid by other affiliates of China Mobile Communications Corporation.
We also changed our corporate name to "China Mobile (Hong Kong) Limited" as
of June 28, 2000.
CELLULAR NETWORKS
Each of our GSM networks consists of:
- cell sites, which are physical locations equipped with a base transceiver
station containing transmitters, receivers and other equipment that
communicate through radio channels (which are communication paths for
transmitting voice or non-voice signals) with mobile telephone handsets
within the range of a cell (which is the coverage area of the whole or
part of a base station);
- base station controllers, which connect to, and control, the base
transceiver station within each cell;
- mobile switching centers, which in turn control the base station
controllers and the routing of calls; and
- leased transmission lines, which link the mobile switching centers, base
station controllers, base transceiver stations and fixed line networks.
A base station or base transceiver station is a transmitter and receiver
which serves as a bridge between all mobile users in a cell and connects mobile
calls to the mobile switching center. Base station controller refers to
equipment that monitors and controls one or more base stations, performing the
functions of message exchange and frequency administration. A mobile switching
center is a central switching point to which each call is connected, which
controls the routing of calls.
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The following table sets forth certain selected information regarding our
GSM and TACS networks in each province as of June 30, 2000:
<TABLE>
<CAPTION>
GUANGDONG ZHEJIANG JIANGSU FUJIAN HENAN HAINAN TOTAL
--------- -------- ------- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Subscribers (in thousands)
GSM................................ 8,883 3,586 2,871 2,635 2,042 269 20,286
TACS............................... 284 409 397 131 116 15 1,352
------ ----- ----- ----- ----- --- ------
Total............................ 9,167 3,995 3,268 2,766 2,158 284 21,638
====== ===== ===== ===== ===== === ======
Voice channels (in thousands)
GSM................................ 338 185 143 151 83 12 912
TACS............................... 19 19 32 14 6 1 91
------ ----- ----- ----- ----- --- ------
Total............................ 357 204 175 165 89 13 1,003
====== ===== ===== ===== ===== === ======
Mobile switching centers
GSM................................ 89 59 33 32 35 3 251
TACS............................... 25 14 30 10 6 2 87
------ ----- ----- ----- ----- --- ------
Total............................ 114 73 63 42 41 5 338
====== ===== ===== ===== ===== === ======
Base station controllers(1)
GSM................................ 156 170 98 115 87 17 643
Base transceiver stations
GSM................................ 5,056 3,105 2,839 2,890 2,414 196 16,500
TACS............................... 1,199 524 1,284 611 200 43 3,861
------ ----- ----- ----- ----- --- ------
Total............................ 6,255 3,629 4,123 3,501 2,614 239 20,361
====== ===== ===== ===== ===== === ======
</TABLE>
---------------
(1) In a TACS system, the base transceiver stations are connected directly to
the mobile switching centers. Accordingly, our TACS networks do not utilize
any base station controllers.
GSM NETWORK CAPACITY EXPANSION PLANS
Although our GSM cellular networks commenced operations only in 1995 (and
in the case of Henan Mobile, in 1996), they have grown rapidly, accounting for
approximately 94% of our total subscribers as of June 30, 2000. We intend to
continue our network expansion and improvement with an emphasis on increasing
the coverage and capacity and improving the operating efficiency of our GSM
networks. We intend to achieve capacity expansion by adding cell sites in areas
already within our network coverage and by expanding coverage, including along
railways and highways and improving indoor coverage. Our network expansion plans
depend to a large extent upon the availability of sufficient spectrum. In
addition, in order to improve the quality of our cellular networks in certain
major urban centers, we introduced GSM-compatible Digital Cellular System 1800
systems to add capacity and seek to achieve seamless coverage in these areas.
MIGRATION FROM TACS TO GSM NETWORK
Recent advances in GSM technologies have substantially increased network
capacity and the service quality. The economic life cycle of our current TACS
network equipment is also much more limited compared to that of our GSM
networks. Accordingly, to make more efficient use of our spectrum resources and
accelerate the
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enhancement of our network, we have decided to reduce and eventually eliminate
the use of the current TACS service and migrate our existing TACS subscribers to
our GSM services at no additional cost to these subscribers. Through our
marketing efforts, we encourage our TACS subscribers to migrate to our GSM
networks by, for example, highlighting the attractiveness of value added
services that are not available to TACS subscribers. The companies that we have
agreed to acquire are in the process of implementing similar migration plans.
The migration is part of our overall network development plan. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Write-down and Write-off of TACS Network Equipment Affected Our
Net Profits in 1998 and 1999" beginning on page 57.
SPECTRUM
A cellular network's capacity is to a certain extent limited by the amount
of frequency spectrum available for it to use. The Ministry of Information
Industry has allocated 24 MHz in the 900 MHz frequency band to us to operate our
cellular networks. In addition, we also have the right to use 10 MHz of spectrum
in the 1800 MHz frequency band in each of the provinces in which we operate. We
have used this spectrum to introduce Digital Cellular System 1800 systems to
expand the capacity of our GSM networks in Guangdong, Jiangsu and Fujian by
adding cell sites in certain areas with a high density of cellular subscribers.
TRANSMISSION INFRASTRUCTURE
The physical infrastructure linking our base transceiver stations, base
station controllers and mobile switching centers and interconnecting our
networks to the fixed line network consists of transmission lines, which provide
the backbone infrastructure by which mobile call traffic is carried.
INTRA-PROVINCIAL TRANSMISSION LINES. We currently lease intra-provincial
and local transmission lines from China Telecommunications Corporation's
subsidiaries that operate the fixed line networks in Guangdong, Zhejiang,
Jiangsu, Fujian, Henan and Hainan, and pay to them fees based on tariff
schedules stipulated by the relevant regulatory authorities after adjusting for
the discounts that we have negotiated. See "Relationship with China
Telecommunications Corporation -- Leasing of Intra-provincial or Local
Transmission Lines" beginning on page 142.
We have also built our own infrastructure in certain areas where the fixed
line network operators do not currently have any transmission lines in place or
where the leasing of existing lines is not economical. As part of our network
operation strategy, we intend to build our own transmission lines where
economically advantageous, such as in high voice traffic areas. In areas where
the leasing of transmission lines makes more economic sense, we intend to
continue to leverage our group buying capacity to negotiate preferential leasing
rates.
INTER-PROVINCIAL TRANSMISSION LINES. We entered into a new
inter-provincial leased line arrangement with China Mobile Communications
Corporation in May 2000, with effect from April 1, 1999. The leased
inter-provincial transmission lines link our mobile switching centers with each
other and with China Mobile Communications Corporation's other mobile switching
centers.
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Prior to these arrangements, we leased intra-provincial transmission lines
to link our network to the fixed line network, but did not lease any
inter-provincial transmission lines. Instead, we paid China Mobile
Communications Corporation an inter-provincial interconnection fee. Under these
arrangements, we lease from China Telecommunications Corporation (and via China
Mobile Communications Corporation) inter-provincial transmission lines. The
leasing charge payable by us is determined based on the standard leasing fee
stipulated by the relevant regulatory authorities after adjusting for the
discounts that we have negotiated, and the cellular network operators at both
ends of the transmission lines will share the leasing fees equally. The new
arrangements led to an increase in our transmission line leasing expenses, but a
greater reduction in our inter-provincial interconnection and roaming settlement
expenses payable to China Mobile Communications Corporation, resulting in net
savings in our operating expenses.
NETWORK OPERATIONS AND MAINTENANCE
We believe that we have considerable network operation and maintenance
experience and technical expertise. Day-to-day traffic management,
troubleshooting and system maintenance are conducted by our experienced team of
engineers and technicians, and technical staff are available for emergency
repair work 24 hours a day. In addition, we employ specialist teams for central
maintenance of the networks. We continue to seek to attract and retain qualified
technical staff. Currently, most technical difficulties relating to the networks
are resolved by our staff, although our equipment suppliers also provide back-up
maintenance and technical support. To date, we have not experienced any
technical difficulties that have resulted in a material interruption in cellular
network services.
BASE STATION SITES
In urban areas, our base transceiver station sites are located mostly on
existing structures, typically at the top of tall buildings. In rural areas,
masts are often constructed for locating base transceiver stations. Typically,
base station sites are of limited size, as base transceiver station equipment
does not generally require significant space. Generally, depending on the length
of time required for negotiation with respect to use of the land or buildings,
construction of a base transceiver station takes approximately one to three
months in an urban area and approximately three to six months in a rural area.
We anticipate that we will need a significant number of new sites in connection
with the expansion of our cellular networks. There can be no assurance that we
will be able to obtain the requisite number of sites on reasonable commercial
terms.
EQUIPMENT SUPPLIERS
We select our principal suppliers from among leading international and
domestic manufacturers of mobile communications equipment and in accordance with
technical standards set by the Ministry of Information Industry. Our TACS
networks use equipment primarily supplied by Ericsson and Motorola, while our
GSM networks use equipment primarily supplied by Ericsson, Motorola, Nokia,
Italtel and Alcatel. Our largest supplier accounted for approximately 25% of our
network equipment purchases in 1999, and the top five suppliers accounted for an
aggregate of 62% of our network equipment purchases in 1999.
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COMPETITION
China Unicom operates, directly or through its subsidiaries, in all of the
provinces, municipalities and autonomous region in which we and the companies
that we have agreed to acquire operate. The Chinese government encourages
orderly and fair competition in the telecommunications industry in mainland
China. Towards this end, it has extended certain favorable regulatory policies
to China Unicom in order to help it become a more viable competitor to us and
China Mobile Communications Corporation. In particular, the Chinese government
has permitted China Unicom to lower its mobile service tariffs by up to 10%
below the government guidance rates (or up to 20% below the government guidance
rates in areas where we offer service packages that provide local access only
services on analog networks, which packages have lower tariff rates compared to
our standard tariff rates for services offered on GSM networks). Some of our
subsidiaries offer such local access only services with limited scope over their
TACS networks. We believe this policy has helped China Unicom capture a
significant number of price-sensitive and low-usage cellular subscribers. Based
on publicly available information in respect of China Unicom's listed
subsidiary, as of December 31, 1999, China Unicom's listed subsidiary had an
estimated market share of approximately 14.2% of cellular subscribers in its
service areas, as compared to approximately 3.6% and 7.1% as of December 31,
1997 and 1998, respectively.
We compete on the basis of our network coverage and quality, the pricing of
our services, the range of services we offer and our service quality. We believe
that we have significant competitive advantages due to:
- our superior cellular networks;
- our financial resources;
- our experienced management team and high quality employees;
- our widely-recognized brand name and logo that are closely identified
with us by consumers;
- our broad distribution networks and our focus on customer services; and
- our extensive range of value added services.
We believe these advantages have contributed to our superior subscriber
quality compared to that of our competitor, as measured by average usage levels,
average revenues per subscriber and doubtful accounts levels.
In addition to China Unicom, the State Council and the Ministry of
Information Industry may approve additional mobile service providers in the
future that may compete with us. We may also be subject to competition from
providers of new telecommunications services based on new or existing
technologies. Nonetheless, given the relatively low cellular penetration rates
in our markets and in mainland China in general, we believe there is substantial
growth potential for our mobile communications business. We believe that the
restructuring of the telecommunications industry in mainland China has created a
fair, orderly, transparent and healthy telecommunications market.
We also face indirect competition from providers of other wireless
communications services, such as paging and city-wide mobile telephone services
based on Personal Access System technology operated by China Telecommunications
Corporation and its
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subsidiaries, which offer substantially lower prices for their services.
However, we do not believe that they are significant competitors, as they
provide a much more limited range of services compared to mobile communications
services.
In addition, China Great Wall Communications Corporation has conducted
trial operations in several cities in mainland China using 800 MHz Code Division
Multiple Access technology. Code Division Multiple Access technology is a
continuous digital transmission technology that accommodates higher throughput
by using various coding sequences to mix and separate voice and data signals for
wireless communication. The Ministry of Information Industry has not issued a
license authorizing the commercial operation of cellular networks using this
technology in mainland China. However, in March 1999, the State Council granted
China Unicom its approval to utilize this technology for commercial mobile
communications operations. We believe that the second generation of this
technology has limited commercial value to our business due to the rapid
development of wireless communications technology. In addition, we believe that
the current second generation of this technology will not significantly change
the relative competitive strengths of existing telecommunications operators. As
a result, we have decided not to pursue its development.
China recently concluded bilateral negotiations of the major terms for its
entry into the World Trade Organization with a number of countries, including
the United States, and the European Union. As a result, we expect the Chinese
government to gradually relax current restrictions on foreign ownership in the
telecommunications industry. This could lead to the eventual opening of the
Chinese telecommunications market to foreign investors and operators, and could
result in or accelerate the issue of new telecommunications service licenses.
MANAGEMENT MEASURES AND PERFORMANCE EVALUATION SYSTEMS
Since our initial public offering in 1997, we have made considerable
efforts in transforming our operating subsidiaries into profit-driven,
market-oriented enterprises to create value for our investors. We have adopted a
series of management measures and performance evaluation systems that assist us
in maximizing efficiency and integrating the operations of our subsidiaries. We
monitor the progress of our operating subsidiaries, our management and employees
on a regular basis.
We have established a stringent nine-point evaluation standard by which the
performance of our subsidiaries and their management are measured:
- subscriber growth;
- revenue growth;
- average minutes of usage per subscriber;
- average revenue per subscriber;
- churn rate;
- level of bad debts;
- net profit;
- EBITDA margin; and
- productivity.
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EMPLOYEES
As of June 30, 2000, we had 19,547 employees, including 19,505 employees in
our six operating subsidiaries as classified below, eight employees at China
Mobile (Shenzhen), and 34 employees in Hong Kong. Approximately 40% of our full
time employees have college or graduate degrees.
<TABLE>
<CAPTION>
GUANGDONG ZHEJIANG JIANGSU FUJIAN HENAN HAINAN TOTAL
--------- -------- ------- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Management............... 1,280 321 697 604 508 49 3,459
Technical and
engineering............ 2,918 930 813 753 1,147 137 6,698
Sales and marketing...... 2,502 1,059 992 1,693 1,239 460 7,945
Financial and
accounting............. 358 198 179 145 136 13 1,029
Others................... 0 278 24 0 72 0 374
----- ----- ----- ----- ----- ----- ------
Total........... 7,058 2,786 2,705 3,195 3,102 659 19,505
===== ===== ===== ===== ===== ===== ======
</TABLE>
We maintain a performance-based employee management and compensation system
that enhances our employees' sense of participation and responsibility. To
encourage our employees to make positive contributions to our management, we
have adopted a 360 degree performance review system, which allows our employees
to review the performance of our managers and vice versa.
In addition, we have adopted an employee compensation system that is linked
to our results of operations and the performance of our shares. In April 2000,
we expanded the scope of participants in our stock option plan to include the
middle level management of our operating subsidiaries.
We have focused on increasing the productivity of our workforce, including
that of the businesses which we have acquired. The following chart shows certain
information relating to the number of subscribers per employee of each of our
operating subsidiaries and China Mobile (HK) for the periods indicated.
NUMBER OF SUBSCRIBERS PER EMPLOYEE
[NUMBER OF SUBSCRIBERS PER EMPLOYEE CHART]
<TABLE>
<S> <C> <C>
as of December 31, 1998 as of December 31, 1999
Guangdong|Mobile 487.00 778.00
Zhejiang|Mobile 613.00 1073.00
Jiangsu|Mobile 538.00 863.00
Fujian|Mobile 731.00
Henan|Mobile 558.00
Hainan|Mobile 373.00
China Mobile|(HK) Total 522.00 773.00
<S> <C>
as of June 30, 2000
Guangdong|Mobile 1299.00
Zhejiang|Mobile 1434.00
Jiangsu|Mobile 1208.00
Fujian|Mobile 866.00
Henan|Mobile 696.00
Hainan|Mobile 431.00
China Mobile|(HK) Total 1109.00
</TABLE>
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We provide certain employee benefits, including housing, retirement
benefits and hospital, maternity, disability and dependent medical care
benefits. Most of our employees are members of a labor association. We have not
experienced any strikes, slowdowns or labor disputes that have interfered with
our operations to date, and we believe that our relations with our employees are
good.
PROPERTIES
Our principal executive office is located in Hong Kong. Our regional
headquarters are located in Guangzhou in Guangdong, Hangzhou in Zhejiang,
Nanjing in Jiangsu, Fuzhou in Fujian, Zhengzhou in Henan and Haikou in Hainan.
We own, lease or have use rights in various properties which consist of land and
buildings for offices, administrative centers, staff quarters, retail outlets
and technical facilities. We are in the process of obtaining land use right
certificates and property title certificates for a number of these properties in
Guangdong. We believe that our use of these properties is not affected by the
fact that we have not yet obtained the relevant land use right certificates and
property title certificates. China Mobile Communications Corporation, our
ultimate controlling shareholder, has agreed to indemnify us against any loss or
damage caused by or arising from any challenge of, or interference with, our
right to use these properties. We believe that all of our owned and leased
properties are well maintained and are suitable and adequate for their present
use.
LEGAL PROCEEDINGS
We are not involved in any litigation, arbitration or administrative
proceedings relating to claims that could have a material adverse effect on our
financial condition and results of operations, taken as a whole, and, so far as
we are aware, no such litigation, arbitration or administrative proceedings are
pending or threatened.
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OUR PROPOSED STRATEGIC ALLIANCE WITH VODAFONE GROUP PLC
On October 4, 2000, we entered into a non-binding memorandum of
understanding with Vodafone Group Plc, which sets forth the principal terms for
cooperation between us in relation to mobile voice and data communications
services. The arrangements contemplated by the memorandum of understanding are
subject to the entering into of a definitive agreement or agreements not later
than February 28, 2001. The memorandum of understanding contemplates that we and
Vodafone Group Plc cooperate in various areas as may be permitted by applicable
Chinese laws and regulations, including:
- the sharing of management experience and exchange of human resources at
various levels;
- technical cooperation among the parties and exclusive licensing by
Vodafone Group Plc to us in mainland China of technologies relating to
mobile voice and data communications; and
- operational cooperation focusing on the exchange of expertise relating to
subscriber management, marketing, branding, network operations,
procurement, and research and development of advanced mobile data
applications and services.
Separately, we and Vodafone Group Plc will also explore suitable
opportunities for joint ventures and other equity-based strategic alliances,
subject to separate negotiations and agreement with other relevant parties, and
to the extent permitted by applicable Chinese laws and regulations. This will
include the areas of research and development of wireless data services,
international investment opportunities outside of China, and regional and/or
global alliances. In addition, the memorandum of understanding contemplates the
establishment of a multi-layer strategic alliance governance structure, which
could comprise an executive-level chairmen's forum consisting of our Chairman
and Chief Executive Officer, Mr. Wang Xiaochu, and Mr. Chris Gent, the Chief
Executive of Vodafone Group Plc, a steering committee of senior management who
will meet on a regular basis, and several project working groups to develop
detailed project proposals.
We intend to make Vodafone Group Plc our preferred partner for any form of
cooperation that falls within the scope of the memorandum of understanding.
According to publicly available information, Vodafone Group Plc is the
world's largest mobile telecommunications company in terms of subscribers.
Vodafone Group Plc has a global portfolio with operations in 25 countries around
the world, across five continents. At the end of September 2000, Vodafone Group
Plc reported a proportionate worldwide customer base of approximately 66
million.
We believe that, if definitive agreements are successfully concluded, this
proposed strategic alliance would enhance our strengths in the
telecommunications market in mainland China, as well as better position us for
further expansion opportunities, if appropriate, globally. Furthermore, we
believe that we would benefit from the exchange of experiences and managerial,
technical and operational resources with Vodafone Group Plc, including access to
leading technologies and the sharing of management and operational expertise.
The exchange of human resources also enhances our strategy of nurturing our
human capital. However, we cannot assure you that definitive agreements will be
successfully concluded, that any necessary government approvals for specific
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<PAGE> 114
terms would be obtained, or that, if concluded, the definitive agreements would
encompass the same scope of cooperation as that contemplated by the memorandum
of understanding.
Concurrently, we also entered into a strategic investor placing agreement
with Vodafone Group Plc, under which Vodafone Group Plc has agreed to purchase,
as part of the share offering, shares with an aggregate purchase price of
US$2,500 million based on the offering price per share set forth on the cover
page of this prospectus. For illustrative purposes only, assuming the offering
price in the share offering is HK$55.50 per share, being the closing price of
our ordinary shares on the Hong Kong Stock Exchange on October 10, 2000,
Vodafone Group Plc will purchase 351,171,171 ordinary shares, representing
38.03% of the total number of ordinary shares offered in the share offering (or
33.07% if the underwriters' option to purchase additional shares in the share
offering is exercised in full). The closing of the placement to Vodafone Group
Plc is conditional upon the underwriting agreements for the share offering being
entered into and having become unconditional by no later than December 31, 2000,
but is not conditional upon the conclusion of the definitive agreements
contemplated by the memorandum of understanding. Vodafone Group Plc has agreed
that, without our consent and that of the global coordinators, it will not
directly or indirectly offer, sell, pledge or otherwise dispose of any of such
shares for a period of at least 180 days from the date of this prospectus. See
"Underwriting" beginning on page 202.
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<PAGE> 115
THE ACQUISITION
GENERAL
On October 4, 2000, we agreed to acquire Beijing Mobile, Shanghai Mobile,
Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi
Mobile from China Mobile Hong Kong (BVI) Limited, our immediate controlling
shareholder, for a total purchase price of HK$256,021 million (US$32,840
million). The acquisition will be effected through our acquisition of the entire
issued share capital of the respective holding companies of the companies that
we have agreed to acquire. If the acquisition is completed, these companies will
become our indirect wholly-owned subsidiaries.
China International Capital Corporation (Hong Kong) Limited and Goldman
Sachs (Asia) L.L.C. are financial advisors to us in connection with this
acquisition.
In general, the scope of business of these companies, network
infrastructure and range of services are substantially similar to ours.
These companies have entered into arrangements relating to network
interconnection, roaming, transmission line leasing, marketing and distribution,
spectrum allocation, network maintenance, land and property leasing and other
key operational provisions with China Mobile Communications Corporation, China
Telecommunications Corporation and their operating subsidiaries on terms similar
to those applicable to our existing subsidiaries. These arrangements are
described in more detail in the sections entitled "Relationship with China
Mobile Communications Corporation" beginning on page 133 and "Relationship with
China Telecommunications Corporation" beginning on page 141.
The acquisition represents an attractive opportunity for us to consolidate
our strong position and further capitalize on the growth potential of the
Chinese telecommunications industry. Each of these seven companies is the
leading provider of mobile telecommunications services in its respective region.
The acquisition will further consolidate our overall market position. As of June
30, 2000, these seven companies had a weighted average market share of
approximately 80% in the seven regions.
Following the completion of this acquisition, we will have a geographically
contiguous market covering all of the coastal regions of mainland China. Based
on information as of June 30, 2000, our subscribers will increase from
approximately 21.6 million before the acquisition, or 34.3% of all cellular
subscribers in mainland China as of such date, to approximately 35.3 million
after the acquisition, or 55.9% of all cellular subscribers in mainland China as
of such date. The acquisition will increase the population under our network
coverage from approximately 326 million, or 25.7% of mainland China's total
population, to approximately 607 million people, or 48.0% of mainland China's
total population. We believe that the acquisition will provide a solid
foundation for our future growth.
These seven companies have experienced significant growth in the total
number of subscribers, from approximately 3.7 million as of December 31, 1997 to
over 13.6 million as of June 30, 2000. As of September 20, 2000, these seven
companies had a total of approximately 15.4 million subscribers. However, the
cellular penetration rates in these regions are relatively low compared to those
of other Asian and international markets. As of June 30, 2000, the cellular
penetration rate was approximately 19.7% in Beijing, 17.4% in Shanghai, 10.2% in
Tianjin, 3.7% in Hebei, 8.9% in Liaoning, 4.1% in Shandong
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<PAGE> 116
and 2.6% in Guangxi. We believe these rates indicate significant potential for
subscriber growth in these regions.
We believe that, on the bases and assumptions set forth in "-- Prospective
Financial Information -- Bases and Assumptions" beginning on page 127 and in the
absence of unforeseen circumstances, the companies that we have agreed to
acquire will have approximately 17.3 million subscribers in total by the end of
2000. This subscriber forecast necessarily is based upon a number of assumptions
and estimates that, while presented with numerical specificity and considered
reasonable by us, are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond our
control. This subscriber projection may vary materially from the actual
subscriber number of these companies. See "Forward-Looking Statements" beginning
on page 28.
FINANCING OF THE ACQUISITION
We have agreed to acquire these seven companies for a total purchase price
of HK$256,021 million (US$32,840 million). We have also agreed to assume the net
indebtedness (being long term and short term bank loans and other borrowings
less cash and cash equivalents) of these companies. Such net indebtedness
amounted to the equivalent of approximately HK$9,043 million (US$1,160 million)
as of June 30, 2000. Of the total purchase price, we have agreed to pay:
- HK$79,291 million (US$10,171 million) in cash; and
- the remaining HK$176,730 million (US$22,669 million) in the form of new
shares to be issued by us to China Mobile Hong Kong (BVI) Limited. The
number of such new shares will be determined by dividing HK$176,730
million by the initial price to public in the share offering.
We may also elect to satisfy a larger portion of the purchase price in the
form of new shares to be issued to China Mobile Hong Kong (BVI) Limited, which
will reduce the cash portion of the purchase price, provided that following the
completion of the acquisition, our immediate controlling shareholder's
shareholding in us will not exceed 76.5%.
The cash portion of the purchase price may be paid with a combination of US
dollar, Hong Kong dollars and Renminbi. Of such amount, we expect that:
- approximately US$500 million will be funded by our existing internal cash
resources;
- approximately US$1,510 million will be financed by Renminbi-denominated
syndicated bank loans as described below;
- approximately US$600 million will be financed by the proceeds from the
convertible note offering;
- approximately US$6,575 million will be financed by the proceeds of the
share offering, comprising:
- US$2,500 million from the placement to Vodafone Group Plc; and
- US$4,075 million from the offering to other investors; and
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<PAGE> 117
- the remainder, if any, will be paid from additional internal resources,
other forms of funding, or if we elect, may be funded by the issuance of
additional new shares to China Mobile Hong Kong (BVI) Limited as
described above.
In connection with the financing of the acquisition, our wholly-owned
subsidiary, China Mobile (Shenzhen), entered into two loan agreements on October
7, 2000 with a bank syndicate jointly led by Construction Bank of China and Bank
of China for the following loans:
- an RMB 5,000 million (US$604 million) loan for a six-month term with an
interest rate of 5.022% per annum, which is 10% below the six-month base
lending rate for financial institutions prevailing on October 7, 2000 as
announced by the People's Bank of China, China's central bank; and
- an RMB 7,500 million (US$906 million) loan for a three-year term with an
interest rate of 5.346% per annum for the first year, which is 10% below
the three-year base lending rate for financial institutions prevailing on
October 7, 2000 as announced by the People's Bank of China. This interest
rate will be adjusted annually on each anniversary of the drawdown date
at a rate 10% below the three-year base lending rate for financial
institutions prevailing on that date as announced by the People's Bank of
China.
Our six existing operating subsidiaries have provided joint and several
guarantees for these loans. Under these guarantees, our six existing operating
subsidiaries have agreed that they will not incur, assume or create any other
indebtedness or contingent liability without the prior written consent of the
relevant lenders if the aggregate outstanding amount of their indebtedness and
contingent liabilities exceeds 120% of their collective owners' equity.
CONDITIONS OF THE ACQUISITION
Completion of the acquisition is conditional upon, among other things, the
fulfillment of the following conditions:
- the due convening and holding of an extraordinary general meeting of our
shareholders and the passing of resolutions by our independent
shareholders to approve the acquisition, the increase in our authorized
share capital, the issuance of shares to China Mobile Hong Kong (BVI)
Limited and the connected transactions as described under "Relationship
with China Mobile Communications Corporation" beginning on page 133;
- the receipt of relevant governmental approvals;
- adequate financing for the cash portion of the total consideration being
obtained; and
- no material adverse change to the financial conditions, business
operations or prospects of any of the companies that we have agreed to
acquire.
There is no assurance that these conditions will be met and that the
acquisition will be completed.
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If any of the conditions set forth above is not fulfilled or waived by
December 31, 2000, the acquisition agreement will expire unless the parties
mutually agree to amend the conditions. Unless the entire issued share capital
of all respective holding companies of the companies that we have agreed to
acquire can be acquired, we will not proceed with the acquisition.
ACQUISITION RESTRUCTURING
In connection with the proposed acquisition, each of the companies that we
have agreed to acquire has restructured its business and renewed or entered into
a number of operational agreements, which include:
- agreements with respect to interconnection revenue and costs;
- agreements relating to transmission line leases;
- service agreements relating to collection and marketing services, and the
repair and maintenance of equipment; and
- lease agreements relating to property leases.
In addition, the acquisition restructuring will result in the occurrence of
a number of events, some of which could have a material impact on the financial
results of each of these companies. These events include:
- changes in the tax treatment of connection fees and certain surcharge
revenue; and
- the revaluation of certain fixed assets.
OPERATIONS OF THE COMPANIES THAT WE HAVE AGREED TO ACQUIRE
The companies that we have agreed to acquire are the leading providers of
mobile telecommunications services in their respective provinces, municipalities
and autonomous region. These companies offer mobile communications services
principally using GSM technology, and their networks reach all cities and
counties and most major roads and highways in their respective geographic
regions. Each of these companies is also a major provider of Internet Protocol
communications services and wireless data services in the geographic region in
which it serves.
The following table sets forth certain demographic and industry data for
Beijing, Shanghai, Tianjin, Hebei, Liaoning, Shandong and Guangxi for the
periods indicated:
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR
ENDED DECEMBER 31,
--------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Population (in thousands)(1)
Beijing.............................................. 12,400 12,460 12,570
Shanghai............................................. 14,570 14,640 14,740
Tianjin.............................................. 9,530 9,570 9,590
Hebei................................................ 65,250 65,690 66,140
Liaoning............................................. 41,380 41,570 41,710
Shandong............................................. 87,850 88,380 88,830
Guangxi.............................................. 46,330 46,750 47,130
</TABLE>
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<PAGE> 119
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR
ENDED DECEMBER 31,
--------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
GDP per capita (RMB)(1)
Beijing.............................................. 16,735 18,482 19,803
Shanghai............................................. 25,750 28,253 30,805
Tianjin.............................................. 13,796 14,808 15,932
Hebei................................................ 6,079 6,525 6,913
Liaoning............................................. 8,525 9,333 9,958
Shandong............................................. 7,590 8,120 8,648
Guangxi.............................................. 4,356 4,076 4,264
Cellular penetration (%)(2)
Beijing.............................................. 5.5 9.5 14.9
Shanghai............................................. 4.9 8.1 12.8
Tianjin.............................................. 2.9 5.1 8.7
Hebei................................................ 0.7 1.4 2.2
Liaoning............................................. 1.6 3.2 6.1
Shandong............................................. 0.9 1.7 2.8
Guangxi.............................................. 0.7 1.1 1.6
Fixed line penetration (%)(3)
Beijing.............................................. 20.2 25.1 29.9
Shanghai............................................. 26.0 29.5 32.9
Tianjin.............................................. 14.2 17.3 21.3
Hebei................................................ 5.0 6.1 7.4
Liaoning............................................. 9.5 11.5 13.9
Shandong............................................. 4.7 6.0 7.9
Guangxi.............................................. 3.0 3.6 4.5
</TABLE>
---------------
(1) Source: 1998 China Statistical Yearbook, 1999 China Statistical Yearbook and
2000 China Statistical Abstract.
(2) Calculated based on our estimate of the total number of mobile subscribers,
including subscribers of other operators.
(3) Source: the Ministry of Information Industry.
Beijing, Shanghai and Tianjin are municipalities directly administered by
the Chinese central government. They are among the most economically developed
cities in China, and have significantly higher per capita incomes. Beijing
Mobile, Shanghai Mobile and Tianjin Mobile began providing mobile
telecommunications services in the late 1980s. Cellular penetration rates in
Beijing, Shanghai and Tianjin are higher than those in Hebei, Liaoning, Shandong
and Guangxi.
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SUBSCRIBERS AND USAGE
The companies that we have agreed to acquire had a total of approximately
15.4 million cellular subscribers as of September 20, 2000. Their weighted
average market share was approximately 80% in the seven provinces,
municipalities and autonomous region in which they operate as of June 30, 2000.
The following table sets forth selected historical information about the
subscriber base (including subscribers for the prepaid services) of these
companies for the periods indicated:
SUBSCRIBER BASE AND RELATED INFORMATION
<TABLE>
<CAPTION>
AS OF OR FOR
AS OF OR FOR THE YEAR THE SIX MONTHS
ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ --------------
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Subscribers (in thousands)
Beijing................................. 613 1,007 1,565 1,994
Shanghai................................ 648 1,008 1,506 2,028
Tianjin................................. 249 430 721 824
Hebei................................... 448 865 1,367 2,021
Liaoning................................ 677 1,290 2,122 2,818
Shandong................................ 751 1,364 2,094 2,790
Guangxi................................. 312 507 747 1,169
----- ----- ------ ------
Total................................ 3,699 6,471 10,121 13,643*
===== ===== ====== ======
Average churn rate (%)(1)
Beijing................................. 3.3 8.5 8.9 4.9
Shanghai(2)............................. 7.3 7.9 11.0 2.5
Tianjin(2).............................. 3.0 5.8 12.0 12.5
Hebei................................... 12.7 12.9 11.5 5.3
Liaoning................................ 3.4 2.5 5.8 8.8
Shandong................................ 2.8 3.0 3.7 7.6
Guangxi................................. 3.0 6.6 7.2 3.4
Market share (%)(3)
Beijing................................. 90.4 85.1 83.8 80.0
Shanghai................................ 90.4 85.1 79.9 78.8
Tianjin................................. 90.9 88.7 86.8 83.7
Hebei................................... 98.3 96.5 93.7 83.3
Liaoning................................ 100.0 97.7 82.8 75.4
Shandong................................ 94.7 90.9 84.1 77.3
Guangxi................................. 99.4 99.0 98.5 95.5
Minutes of usage (in billions)
Beijing................................. 2.4 4.2 6.0 4.0
Shanghai................................ 2.9 4.1 5.3 3.3
Tianjin................................. 1.1 1.5 2.0 1.4
Hebei................................... 1.7 2.7 4.5 2.8
Liaoning................................ 2.7 4.4 6.1 4.1
Shandong................................ 2.0 4.6 6.6 4.4
Guangxi................................. 1.2 2.0 2.8 1.7
</TABLE>
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<PAGE> 121
<TABLE>
<CAPTION>
AS OF OR FOR
AS OF OR FOR THE YEAR THE SIX MONTHS
ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ --------------
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average minutes of usage per subscriber
per month(4)
Beijing................................. 446 435 398 376
Shanghai................................ 492 416 370 312
Tianjin................................. 469 376 304 299
Hebei................................... 408 343 319 289
Liaoning................................ 425 369 311 284
Shandong................................ 309 361 316 306
Guangxi................................. 424 410 382 300
Average revenue per subscriber per month
(RMB)(5)
Beijing................................. 536 448 369 310
Shanghai................................ 358 270 295 263
Tianjin................................. 326 287 249 207
Hebei................................... 353 311 264 214
Liaoning................................ 407 298 232 175
Shandong................................ 336 268 231 201
Guangxi................................. 341 258 253 212
</TABLE>
---------------
*15.4 million subscribers as of September 20, 2000.
(1) Measures the rate of subscriber disconnections from mobile telephone
service, determined by dividing (A) the sum of voluntary and involuntary
deactivations (excluding deactivations due to subscribers switching from one
of our contract services to another) during the relevant period by (B) the
average number of subscribers during the period (calculated as the average
at the beginning and end of the year (in the case of 1997 and 1998), and at
the beginning of the year and the end of each calendar month (in the case of
1999 and the six months ended June 30, 2000)). On this basis, the calculated
churn rate will be affected by the number of voluntary and involuntary
deactivations and the significant growth in subscriber base.
The upward trend in churn rate is attributable in part, to tightened credit
control policies and the compulsory termination of services where accounts
are overdue for six or more months. The companies that we have agreed to
acquire began offering prepaid services in late 1999 or 2000. Some of their
subscribers have switched from the contract services of these companies to
their prepaid service, which does not require subscriber registration.
Since the exact number of such subscribers cannot be ascertained, the above
churn rate accounts for them as churn subscribers, even though they
continue to be subscribers of these companies.
(2) In 1999, Tianjin Mobile and Shanghai Mobile deactivated services for
subscribers whose accounts had been overdue for more than six months. Those
involuntary deactivations resulted in significantly higher churn rates.
(3) Calculated based on total number of cellular subscribers in the relevant
geographic region estimated by us.
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(4) Calculated by (i) dividing the total minutes of usage during the relevant
period by the average number of subscribers during the period (calculated in
the same manner as note (1) above) and (ii) dividing the result by the
number of months in the period.
(5) Calculated by (i) dividing the operating revenue during the relevant period
by the average number of subscribers during the period (calculated in the
same manner as note (1) above) and (ii) dividing the result by the number of
months in the period.
Total minutes of usage for the companies that we have agreed to acquire
increased significantly from 1997 to 1999. However, the average monthly usage
and revenue per subscriber for these companies have declined over the last few
years as cellular penetration has increased, and the subscriber base of these
companies as a whole has extended to include more low-usage subscribers. As
connection fees for mobile communications services in mainland China have
declined significantly in recent years, the cost for mobile users to switch
among cellular networks has also decreased. This, together with increased
competition, has contributed to the increase in the churn rates of the companies
that we have agreed to acquire since 1997.
CONTRACT SUBSCRIBERS
The following table sets forth the total number of contract cellular
subscribers of the companies that we have agreed to acquire for the periods
indicated:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------- --------------
1997 1998 1999 2000
----- ----- ------ --------------
<S> <C> <C> <C> <C>
CONTRACT SUBSCRIBERS (in thousands)
Beijing............................................ 613 1,007 1,565 1,802
Shanghai........................................... 648 1,008 1,506 1,723
Tianjin............................................ 249 430 721 784
Hebei.............................................. 448 865 1,367 1,732
Liaoning........................................... 677 1,290 2,122 2,493
Shandong........................................... 751 1,364 2,094 2,596
Guangxi............................................ 312 507 747 1,150
----- ----- ------ ------
Total......................................... 3,699 6,471 10,121 12,280
===== ===== ====== ======
</TABLE>
PREPAID SERVICES
In the second half of 1999, the companies that we have agreed to acquire
introduced prepaid services that are similar to our prepaid services in terms of
scope and nature of service, tariffs and value adding capability and settlement.
As of June 30, 2000, these companies had an aggregate of approximately 1.4
million subscribers for their prepaid services, representing approximately 10.0%
of their total subscriber base as of that date. The following table sets forth
the total number of prepaid subscribers of these companies as of June 30, 2000:
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
-----------------------------------------------------------------------------
BEIJING SHANGHAI TIANJIN HEBEI LIAONING SHANDONG GUANGXI TOTAL
------- -------- ------- ----- -------- --------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Prepaid subscribers
(in thousands)....... 192 305 40 289 325 194 19 1,363
As a percentage of all
subscribers (%)...... 9.6 15.0 4.9 14.3 11.5 7.0 1.6 10.0
</TABLE>
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TARIFFS
The companies that we have agreed to acquire have tariff structures for
their services that are similar to those of our existing subsidiaries. See
"Business -- Tariffs" beginning on page 93. We and these companies are subject
to the same regulatory framework with respect to tariffs.
The following table summarizes some of the current basic charges for the
full service packages of these companies:
<TABLE>
<CAPTION>
BEIJING SHANGHAI TIANJIN HEBEI LIAONING SHANDONG GUANGXI
------- -------- ------- ----- -------- -------- -------
(IN RMB)
<S> <C> <C> <C> <C> <C> <C> <C>
CONTRACT SUBSCRIBERS
Connection fee(1)..................... 500 500 500 500 500 100 500
Monthly fee(2)........................ 50 50 50 50 50 50 50
Base usage charge(2) (per minute)..... 0.40 0.40 0.40 0.40 0.40 0.40 0.40
Domestic roaming charge (per minute).. 0.60 0.60 0.60 0.60 0.60 0.60 0.60
PREPAID SUBSCRIBERS
Base usage charge (per minute)........ 0.60 0.60 0.60 0.60 0.60 0.60 0.60
Domestic roaming charge (per minute).. 0.80 0.80 0.80 0.80 0.80 0.80 0.80
</TABLE>
---------------
(1) The companies that we have agreed to acquire offer different service
packages with different connection fee rates. From time to time and in their
respective geographic regions, they may also offer promotional connection
fee rates, which could be substantially lower than the upper limit indicated
in the table.
(2) These companies also offer certain specialized packages, in particular TACS
network packages that offer local access only service, which have lower
monthly fees and base usage charges than those indicated above.
In addition, these companies also charge long distance rates where
applicable.
Connection fees charged by these companies have been substantially reduced
in the past three years, accompanying a reduction in the guidance prices for
connection fees over that period as mobile operations in these geographic
regions developed. However, we believe that while connection fee reductions may
reduce revenue in the short term, they may help expand the subscriber base of
these companies and result in increased total subscriber usage, thereby
contributing to revenue growth in the long term. Connection fees have become an
increasingly less important source of the revenues of these companies. We expect
that their importance will continue to decline.
These companies do not charge connection fees and monthly fees for their
prepaid services.
In order to develop their WAP services, these companies also plan to charge
a preferential usage fee for their WAP services at RMB 0.15 per minute (up to
RMB 30 per month for the first 500 minutes in a month). This preferential usage
fee rate will be effective from October 21, 2000 to May 20, 2001.
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INTERCONNECTION
As with our existing networks, the networks of each of the companies that
we have agreed to acquire interconnect with China Telecommunications
Corporation's public fixed line network. Each of them has an interconnection
agreement with the relevant subsidiary of China Telecommunications Corporation
that operates the fixed line network in its region. The economic terms of these
agreements, including interconnection revenue sharing and settlement, are
substantially similar to those that apply to our existing subsidiaries. See
"Business -- Interconnection" beginning on page 95 and "Relationship with China
Telecommunications Corporation" beginning on page 141.
On May 5, 2000, we entered into an inter-provincial interconnection
agreement with China Mobile Communications Corporation, which applies to our six
existing operating subsidiaries. We have entered into a supplemental agreement
with China Mobile Communications Corporation to provide that our interconnection
agreement with China Mobile Communications Corporation will, subject to
completion of the acquisition, be extended to cover the companies that we have
agreed to acquire. See "Business -- Interconnection" beginning on page 95 and
"Relationship with China Mobile Communications Corporation" beginning on page
133.
ROAMING
Each of the companies that we have agreed to acquire provides roaming
capabilities to its subscribers. Their GSM and TACS networks offer roaming
capabilities throughout mainland China. In addition, their GSM networks offer
roaming capabilities in 56 countries and regions around the world. We have
entered into a supplemental agreement with China Mobile Communications
Corporation to provide that our existing roaming arrangements with China Mobile
Communications Corporation for domestic and international roaming will, subject
to completion of the acquisition, be extended to cover these companies. See
"Business -- Roaming" beginning on page 98 and "Relationship with China Mobile
Communications Corporation" beginning on page 133.
VALUE ADDED SERVICES AND NEW SERVICES
Each of the companies that we have agreed to acquire offers a number of
optional value added services and services based on new technology which are
similar to those offered by our operating subsidiaries to their subscribers.
These services include wireless data, Internet Protocol telephony and "172" ISP
services. See "Business -- Value Added Services and New Services" beginning on
page 99.
CUSTOMER SERVICE, BILLING AND CREDIT CONTROL
The after-sales customer support service centers of the companies that we
have agreed to acquire offer 24-hour service hotlines in their service areas,
which provide customers with billing and service information, as well as receive
customer reports of network problems.
These companies do not require subscribers to pay a deposit before the
initiation of local mobile services. Each of them has implemented subscriber
registration procedures, such as identity checks for individual customers and
background checks for corporate customers, to assist in credit control. Direct
debit services are available in each geographic region. Accounts are required to
be settled on a monthly basis, and a late
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payment fee is imposed on each subscriber whose account is not paid by the
monthly due date.
SERVICE DISTRIBUTION AND MARKETING
DISTRIBUTION CHANNELS. The companies that we have agreed to acquire market
their mobile services through an extensive network of authorized third-party
dealers and through their own retail outlets. As of June 30, 2000, these
companies had 8,495 authorized third-party dealers and owned and operated 970
retail outlets, as set forth in the following table.
<TABLE>
<CAPTION>
BEIJING SHANGHAI TIANJIN HEBEI LIAONING SHANDONG GUANGXI
------- -------- ------- ----- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Authorized third-party dealers.......... 363 857 148 1,293 871 4,574 389
Owned and operated retail outlets....... 5 35 12 233 70 270 345
--- --- --- ----- --- ----- ---
Total.......................... 368 892 160 1,526 941 4,844 734
=== === === ===== === ===== ===
</TABLE>
The authorized dealers market and sell mobile services for these companies
at prices determined by these companies. In connection with these sales, the
dealers pay to these companies all related connection fees and other
miscellaneous fees payable upon initial connection. These companies in turn pay
the dealers a fee of RMB 150 to RMB 300 per new contract subscriber acquired, as
well as a commission for each prepaid card sold.
BRAND NAME. The companies that we have agreed to acquire market their
services under the "CHINA MOBILE" brand name, which is the marketing name used
throughout mainland China by China Mobile Communications Corporation. We have
entered into a license agreement with China Mobile Communications Corporation
for the use of the "CHINA MOBILE" logo in the markets where we currently
operate. We have entered into a supplemental agreement with China Mobile
Communications Corporation to extend the arrangement under the license agreement
to these companies if we acquire them. See "Relationship with China Mobile
Communications Corporation" beginning on page 133.
CELLULAR NETWORKS
The following table sets forth certain selected information regarding the
GSM and TACS networks for each of the companies that we have agreed to acquire
as of June 30, 2000:
<TABLE>
<CAPTION>
BEIJING SHANGHAI TIANJIN HEBEI LIAONING SHANDONG GUANGXI TOTAL
------- -------- ------- ----- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Subscribers (in thousands)
GSM.......................... 1,979 1,886 791 1,712 2,713 2,380 813 12,273
TACS......................... 15 142 33 309 105 410 356 1,370
----- ----- --- ----- ----- ----- ------ ------
Total...................... 1,994 2,028 824 2,021 2,818 2,790 1,169 13,643
===== ===== === ===== ===== ===== ====== ======
Voice channels (in thousands)
GSM.......................... 79 69 41 96 202 134 47 668
TACS......................... 3 11 3 11 6 21 10 65
----- ----- --- ----- ----- ----- ------ ------
Total...................... 82 80 44 107 208 155 57 733
===== ===== === ===== ===== ===== ====== ======
</TABLE>
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<PAGE> 126
<TABLE>
<CAPTION>
BEIJING SHANGHAI TIANJIN HEBEI LIAONING SHANDONG GUANGXI TOTAL
------- -------- ------- ----- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mobile switching centers
GSM.......................... 15 21 9 40 51 44 11 191
TACS......................... 1 7 2 11 14 15 10 60
----- ----- --- ----- ----- ----- ------ ------
Total...................... 16 28 11 51 65 59 21 251
===== ===== === ===== ===== ===== ====== ======
Base station controllers(1)
GSM.......................... 88 84 27 69 111 36 18 433
Base transceiver stations
GSM.......................... 1,255 830 495 1,598 3,012 2,814 1,120 11,124
TACS......................... 67 311 66 492 212 585 487 2,220
----- ----- --- ----- ----- ----- ------ ------
Total...................... 1,322 1,141 561 2,090 3,224 3,399 1,607 13,344
===== ===== === ===== ===== ===== ====== ======
</TABLE>
---------------
(1) In a TACS system, the base transceiver stations are connected directly to
the mobile switching centers. Accordingly, TACS networks do not utilize any
base station controllers.
Similar to our existing subsidiaries, these companies are also migrating
their TACS subscribers to their GSM networks.
The TACS networks of these companies use equipment primarily supplied by
Ericsson and Motorola, while their GSM networks use equipment primarily supplied
by Motorola, Nokia, Siemens, Alcatel and Ericsson.
CAPITAL EXPENDITURES
If the acquisition is completed, we estimate that the companies that we
have agreed to acquire will require an aggregate of approximately RMB 49.7
billion for capital expenditures from 2000 through the end of 2002 for the
development, optimization and expansion of their GSM networks and the
development and trial of new technology based services.
The following sets forth the planned total capital expenditure requirements
of these companies for the periods indicated. Actual future capital expenditures
may differ from the amounts indicated below.
<TABLE>
<CAPTION>
(RMB IN BILLIONS) (US$ IN BILLIONS)
----------------- -----------------
<S> <C> <C>
2000........................................................ 14.8 1.8
2001........................................................ 16.7 2.0
2002........................................................ 18.2 2.2
---- ---
Total.................................................. 49.7 6.0
==== ===
</TABLE>
SPECTRUM
The companies that we have agreed to acquire have each been approved by the
Ministry of Information Industry to use 24 MHz of spectrum in the 900 MHz
frequency band to operate their cellular networks.
Each of these companies has also obtained permission from the Ministry of
Information Industry to use 10 MHz of spectrum in the 1800 MHz frequency band.
They have each used this spectrum to introduce Digital Cellular System 1800
systems to expand the capacity of their GSM networks by adding cell sites in
certain areas with a high density of cellular subscribers.
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TRANSMISSION INFRASTRUCTURE
The companies that we have agreed to acquire lease intra-provincial and
local transmission lines from China Telecommunications Corporation's
subsidiaries that operate the fixed line networks in their respective regions,
and pay to them fees based on tariff schedules stipulated by the relevant
regulatory authorities after adjusting for the discounts that the companies that
we have agreed to acquire have negotiated.
With respect to inter-provincial transmission lines, we have entered into a
supplemental agreement with China Mobile Communications Corporation to provide
that our agreement with China Mobile Communications Corporation entered into in
May 2000 will apply to the companies that we have agreed to acquire if they are
acquired by us. See "Business -- Transmission Infrastructure" beginning on page
105 and "Relationship with China Mobile Communications Corporation" beginning on
page 133.
COMPETITION
China Unicom operates, directly or through its subsidiaries, in the
provinces, municipalities and autonomous region in which the companies that we
have agreed to acquire operate. China Unicom is entitled to the same tariff
flexibilities in these geographic regions as described under
"Business -- Competition". As of June 30, 2000, Beijing Mobile, Shanghai Mobile,
Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi
Mobile had estimated market shares in their regions of 80.0%, 78.8%, 83.7%,
83.3%, 75.4%, 77.3% and 95.5%, respectively. These companies are facing
increasing competition from China Unicom. China Unicom's new subscribers
represent a significant portion of the number of total new subscribers in some
of these regions. However, given the relatively low cellular penetration rates
in these geographic areas, we believe that there is substantial growth potential
for mobile services in general in these markets. In addition, we believe that
these companies have significant competitive advantages that are similar to the
ones we enjoy over our competitors. See "Business -- Competition" beginning on
page 107.
EMPLOYEES
The following table sets forth information regarding employees of the
companies that we have agreed to acquire as of June 30, 2000.
<TABLE>
<CAPTION>
BEIJING SHANGHAI TIANJIN HEBEI LIAONING SHANDONG GUANGXI
------- -------- ------- ----- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management.................... 392 278 265 506 549 789 221
Technical and engineering..... 437 643 334 700 1,569 1,023 539
Sales and marketing........... 398 1,277 417 1,816 1,066 1,898 585
Financial and accounting...... 77 42 56 76 139 275 104
Others........................ 256 140 140 364 117 238 351
----- ----- ----- ----- ----- ----- -----
Total..................... 1,560 2,380 1,212 3,462 3,440 4,223 1,800
===== ===== ===== ===== ===== ===== =====
</TABLE>
PROPERTIES
The companies that we have agreed to acquire own certain buildings and real
properties, which are used for offices, administrative centers, retail outlets,
base stations and other technical facilities, and other ancillary buildings.
Chesterton Petty Limited, an independent valuer, has valued the interest of
these companies in these properties as of June 30, 2000 at approximately RMB
4,680 million. In addition, we have obtained a legal opinion from our Chinese
counsel on the validity of the title of these properties. The
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companies that we have agreed to acquire also collectively lease approximately
9,666 offices, administrative centers, retail outlets and technical facilities.
In addition, they lease from other subsidiaries of China Mobile Communications
Corporation, or otherwise have the right to use, various properties for cell
sites and switching equipment.
INDEBTEDNESS
As of June 30, 2000, the outstanding borrowings of the companies that we
have agreed to acquire were unsecured. Details of those borrowings are set forth
in note 15 and note 16 to the combined financial statements of these companies
included in this prospectus.
As of August 31, 2000, these companies had outstanding borrowings of
approximately RMB 15,667 million in aggregate. These borrowings comprise
unsecured bank loans of approximately RMB 12,238 million, other unsecured loans
of approximately RMB 173 million, bills payable of approximately RMB 26 million
and capital lease obligations of approximately RMB 3,230 million.
Approximately RMB 5,083 million of the unsecured bank loans, approximately
RMB 152 million of other unsecured loans and approximately RMB 386 million of
capital lease obligations are guaranteed by third parties.
As of August 31, 2000, these companies had provided guarantees to banks in
respect of banking facilities of approximately RMB 13 million granted to third
parties.
Except as disclosed above and apart from liabilities among these companies,
none of these companies had, as at the close of business on August 31, 2000,
outstanding liabilities or any term loans or other borrowings or indebtedness in
the nature of borrowings, including bank overdrafts and loans, debt securities
or similar indebtedness, or any hire-purchase or finance lease commitments, or
any guarantees, mortgages, charges or other material contingent liabilities.
LEGAL PROCEEDINGS
None of the companies that we have agreed to acquire is involved in or
threatened with any litigation, arbitration or administrative proceedings
relating to claims which, if the acquisition is completed, could have a material
adverse effect on our financial condition and results of operations taken as a
whole.
PROSPECTIVE FINANCIAL INFORMATION
In connection with customary practice in Hong Kong, we have prepared for
our shareholders prospective financial information relating to the seven
companies that we have agreed to acquire for the year ending December 31, 2000.
Our independent auditors have not examined this prospective financial
information.
WE DID NOT PREPARE THIS INFORMATION WITH A VIEW TOWARDS COMPLIANCE WITH
PUBLISHED GUIDELINES OF THE SECURITIES AND EXCHANGE COMMISSION AND THE AMERICAN
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS REGARDING FORECASTS OR PROJECTIONS. WE
PREPARED THE FINANCIAL FORECAST IN ACCORDANCE WITH LOCAL MARKET PRACTICE IN HONG
KONG. THIS INFORMATION NECESSARILY IS BASED UPON A NUMBER OF ASSUMPTIONS AND
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ESTIMATES THAT, WHILE PRESENTED WITH NUMERICAL SPECIFICITY AND CONSIDERED
REASONABLE BY US, ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND
COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND OUR
CONTROL, AND UPON ASSUMPTIONS WITH RESPECT TO FUTURE BUSINESS DECISIONS THAT ARE
SUBJECT TO CHANGE. ACCORDINGLY, WE CANNOT PROVIDE ANY ASSURANCE THAT THESE
RESULTS WILL BE REALIZED. THE PROSPECTIVE FINANCIAL INFORMATION MAY VARY
MATERIALLY FROM ACTUAL RESULTS. WE HAVE MADE NO REPRESENTATION THAT THOSE
RESULTS WILL BE ACHIEVED. YOU SHOULD NOT PLACE UNDUE RELIANCE ON THIS
INFORMATION.
REVENUE, PROFIT, CASH FLOW FROM OPERATING ACTIVITIES AND ADJUSTED EBITDA
FORECAST
We believe that, on the bases and the assumptions set forth below and in
the absence of unforeseen circumstances, the combined revenue, the combined net
profit, and the combined cash flow from operating activities of the companies
that we have agreed to acquire for the year ending December 31, 2000 are
unlikely to be less than RMB 33,400 million (US$4,035 million), RMB 8,300
million (US$1,003 million), and RMB 18,290 million (US$2,209 million),
respectively, under Hong Kong GAAP. No combined net cash flow from investing
activities and financing activities are provided as the companies that we have
agreed to acquire have not finalized their financing plans with respect to their
future capital expenditures.
Further, the combined adjusted EBITDA for the year ending December 31, 2000
for the companies that we have agreed to acquire is unlikely to be less than RMB
17,900 million (US$2,162 million). EBITDA is commonly used in the
telecommunications industry to analyze companies on the basis of operating
performance, leverage and liquidity. Adjusted EBITDA is not intended to
represent cash flow for the period, nor has it been presented as an alternative
to net profit as an indicator of operating performance. The items of net profit
excluded from adjusted EBITDA are significant components in understanding and
assessing the financial performance of the companies that we have agreed to
acquire, and this computation of adjusted EBITDA may not be comparable to other
similarly titled measures of other companies.
BASES AND ASSUMPTIONS
The above forecast is based on the audited combined financial statements of
the companies that we have agreed to acquire for the six months ended June 30,
2000 and a forecast of the results of these companies for the remaining six
months ending December 31, 2000. This forecast was prepared on the basis of
accounting policies consistent in all material respects with those adopted for
the purposes of the audited combined financial statements of the companies that
we have agreed to acquire and the unaudited pro forma financial information of
us and the companies that we have agreed to acquire included elsewhere in this
prospectus.
The above prospective financial information and the prospective subscriber
growth information set forth in "-- General" beginning on page 113 were prepared
on the following bases and assumptions and are subject to a number of factors,
including those set forth in "Forward-Looking Statements" beginning on page 28:
- there will be no material change in existing political, legal, fiscal,
market, economic or social conditions in mainland China or Hong Kong;
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- there will be no change in legislation, regulations or rules in mainland
China or Hong Kong which adversely affect the business of these
companies;
- there will be no material change in the bases or rates of taxation
applicable to these companies, except as otherwise disclosed in this
prospectus;
- there will be no material changes in interest rates or foreign currency
exchanges rates from those currently prevailing;
- there will be no material breakdown or malfunctioning of the network
infrastructure and equipment of these companies; and
- there will be no material adverse change in the competitive position of
any of these companies.
RECOMMENDATION OF INDEPENDENT BOARD COMMITTEE
In accordance with the Listing Rules of the Hong Kong Stock Exchange, N M
Rothschild & Sons (Hong Kong) Limited has been appointed to advise an
independent committee of our Board of Directors in respect of the acquisition,
the mechanism for the determination of the issue price of the shares to be
issued to China Mobile Hong Kong (BVI) Limited as part of the consideration for
the acquisition, and the terms of a number of other connected transactions. The
committee has recommended that our independent shareholders vote in favor of the
acquisition and these other connected transactions.
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REGULATION
The mobile communications industry in mainland China is subject to a high
degree of regulation by the Chinese government. Regulations issued or
implemented by the State Council, the Ministry of Information Industry and other
relevant government authorities, including the Ministry of Foreign Trade and
Economic Cooperation and the State Development Planning Commission, encompass
all key aspects of cellular network operations, including entry into the
telecommunications industry, scope of permissible business, interconnection and
transmission line arrangements, technology and equipment standards, tariff
standards, capital investment priorities, foreign investment policies and
spectrum and number resources allocation.
The Ministry of Information Industry, under the leadership of the State
Council, is responsible for, among other things:
- formulating and enforcing industry policy, standards and regulations;
- granting telecommunications licenses;
- formulating interconnection and settlement standards for implementation
between telecommunications networks;
- together with other relevant regulatory authorities, formulating tariff
and service charge standards for telecommunications services;
- supervising the operations of telecommunications service providers;
- maintaining fair and orderly market competition among operators; and
- allocating and administering public communications resources, such as
radio frequencies, number resources, domain names and addresses of
communications networks.
In order to provide a uniform regulatory framework to encourage the orderly
development of the telecommunications industry, the Chinese government is
currently preparing a draft telecommunications law. We expect that, if and when
the telecommunications law is adopted by the National People's Congress, it will
become the basic telecommunications statute and the legal source of
telecommunications regulations in mainland China. In addition, the State Council
has recently promulgated a set of new telecommunications regulations. These
regulations are substantially consistent with the existing rules and guidelines
for the telecommunications industry, and are primarily intended to streamline
and clarify the existing rules and guidelines. They apply in the interim period
prior to the adoption of the telecommunications law. Although we expect that the
telecommunications law would have a positive effect on the overall development
of the telecommunications industry in mainland China, we do not fully know what
the nature and scope of the telecommunications law will be.
ENTRY INTO THE INDUSTRY
The new telecommunications regulations adopt the existing regulatory
distinction between basic and value added telecommunications services and
provide a classification of those services. Cellular network operators,
providers of other basic telecommunications services, such as local and long
distance fixed line telephone services, and value added service providers whose
telecommunications services cover two or more
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provinces, municipalities or autonomous regions in China must apply for specific
permits from the Ministry of Information Industry in order to provide such
services. Granting of permits for providing basic telecommunications services
will be through a tendering process. Currently, in addition to us and other
entities controlled by China Mobile Communications Corporation which operate in
mainland China outside of our markets, China Unicom is also authorized to
provide mobile services in all provinces, municipalities and autonomous regions
in China.
Current regulations in mainland China prohibit foreign-invested enterprises
and foreign entities (including individuals) from owning, operating or
participating in the operation of telecommunications services in mainland China
without approval by the State Council. We were authorized by the State Council
to effect our initial public offering in 1997 and our subsequent acquisitions
and the related financing. China reached an agreement with the United States in
November 1999 and an agreement with the European Union in May 2000 relating to
China's entry into the World Trade Organization. As a result, we expect that the
Chinese government will gradually reduce the current restrictions on foreign
ownership in the telecommunications industry.
SPECTRUM USAGE
In coordination with the relevant provincial authorities, the Ministry of
Information Industry regulates the allocation of radio frequency. The frequency
assigned to an entity is not allowed to be leased or, without approval of the
Ministry of Information Industry, transferred by the entity. In accordance with
a joint circular from the State Development Planning Commission and the Ministry
of Finance, China Mobile Communications Corporation determines the amount of
fees to be paid to the Ministry of Information Industry for spectrum usage by
each cellular network operator under its control based on the bandwidth of the
frequency used and the number of base transceiver stations within the operator's
network, subject to the limitation that the total annual payment by all such
operators in mainland China shall equal RMB 1.0 million per MHz of frequency
allocated by the Ministry of Information Industry.
NUMBER RESOURCES
The Ministry of Information Industry is responsible for the administration
of the number resources within mainland China, including the mobile
communications network number and subscriber numbers. The use of number
resources by any telecommunications operator shall be subject to the approval by
the Ministry of Information Industry. In April 2000, the Ministry of Information
Industry implemented new provisional measures on administration of
telecommunications network number resources. In accordance with these new
measures, the telecommunications network number resources are owned by the
state, and the user of number resources is required to pay a usage fee to the
state. However, the standard for the usage fee is yet to be stipulated. It is
also not clear when the standard of the usage fee will be stipulated and when we
will be required to pay such fee. The new measures also provide for procedures
for application for the use, upgrade and adjustment of number resources by
telecommunications operators.
TARIFF SETTING
The levels and categories of our current tariffs are subject to regulation
by various government authorities, including the Ministry of Information
Industry, the State
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Development Planning Commission, and, at the local level, the relevant
provincial price regulatory authorities. Under the new telecommunications
regulations, telecommunications tariffs are categorized into market based
tariffs, government guidance tariffs and government fixed tariffs. Currently,
the connection fee is based on a guidance tariff range set by the Ministry of
Information Industry in consultation with the State Development Planning
Commission, with the actual tariff determined by the relevant provincial price
regulatory authorities. In general, basic usage charges, monthly fees, domestic
roaming usage charges and tariffs for all domestic long distance and
international calls are fixed jointly by the Ministry of Information Industry
and the State Development Planning Commission. International roaming charges are
set in accordance with agreements between China Mobile Communications
Corporation and the relevant foreign mobile operators. Under the new
telecommunications regulations, tariffs for those telecommunications businesses
that are considered fully competitive may be set by the service providers as
market based tariffs.
INTERCONNECTION ARRANGEMENTS AND LEASED LINE ARRANGEMENTS
Under the new telecommunications regulations, parties to an interconnection
arrangement must enter into an interconnection agreement and file such
interconnection agreement with the Ministry of Information Industry. Major
telecommunications service providers that have control over essential
telecommunications infrastructure and possess significant market share must
allow interconnection to their networks by other operators. They must establish
interconnection rules and procedures based on the principles of
non-discrimination and transparency and submit such rules and procedures to the
Ministry of Information Industry for approval. Such rules and procedures will be
binding upon those major telecommunications service providers. Termination of
any interconnection arrangement will require prior approval by the Ministry of
Information Industry.
The applicable regulations provide that interconnection related equipment
must conform with the technical standards approved by the Ministry of
Information Industry. See "-- Technical Standards" below. The Ministry of
Information Industry also determines the standard lease tariffs to be paid by
telecommunications operators with respect to the leasing of transmission lines
that facilitate interconnection between mobile and fixed line telecommunications
networks. The relevant provincial fixed line telecommunications companies under
China Telecommunications Corporation are responsible for the maintenance of the
transmission lines and related equipment in their respective localities.
TECHNICAL STANDARDS
The Ministry of Information Industry sets technical standards and controls
the type and quality of mobile communications equipment used in public networks
by requiring prior certification by the Ministry of Information Industry,
together with other relevant regulatory authorities, for all telecommunications
terminal equipment that are connected to the public networks, all radio
communications equipment and all interconnection related equipment. In addition,
the Provisions on the Management of Import of Radio Transmission Equipment,
jointly issued by the former State Radio Regulatory Commission, the State
Economic and Trade Commission, Ministry of Foreign Trade and
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Economic Cooperation and the General Administration of Customs, effective
January 1, 1996, provide that before radio transmission equipment (including
mobile communications equipment) may be imported into mainland China, an
importer must obtain the necessary certification from the Ministry of
Information Industry and the State Mechanical and Electrical Products Import and
Export Office.
The establishment of base transceiver stations requires the approval of the
relevant provincial regulatory authorities. A number of these approvals with
respect to the base stations of our operating subsidiaries and those of the
companies that we have agreed to acquire are currently pending. We have not
experienced and do not expect to experience difficulty in obtaining permission
to establish additional sites.
CAPITAL INVESTMENT
The State Development Planning Commission and the State Economic and Trade
Commission are empowered by the State Council to exercise responsibility over
the approval of all major investment projects, including cellular network
development projects, involving total capital investment between RMB 50 million
and RMB 200 million. Any investment projects with total capital investment in
excess of RMB 200 million must obtain approval from the State Council.
Accordingly, project proposals and feasibility study reports for these projects,
following review and approval by China Mobile Communications Corporation or the
Ministry of Information Industry, are required to be submitted for approval to
the State Development Planning Commission and the State Economic and Trade
Commission or to the State Council.
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RELATIONSHIP WITH CHINA MOBILE COMMUNICATIONS CORPORATION
As a result of the telecommunications industry restructuring, the Ministry
of Information Industry ceased to have an indirect controlling interest in China
Mobile (HK), and no longer exercises control over telecommunications operations,
except in its capacity as the industry regulator providing policy guidance as
well as exercising regulatory authority over all telecommunications services
providers in mainland China. The Ministry of Information Industry has recently
confirmed that it will continue, within its regulatory function, to honor the
undertakings it gave us in 1999 in relation to, among other things, extending
its full support to our present and future development.
As of the date of this prospectus, China Mobile Communications Corporation
indirectly owns an aggregate of approximately 75% of our issued and outstanding
share capital. Immediately upon the completion of the concurrent share offering
and convertible note offering and the acquisition, China Mobile Communications
Corporation will indirectly control approximately 75% of our outstanding shares.
China Mobile Communications Corporation has undertaken that:
- it will extend its full support to our present operations and future
development;
- we will be the only mobile communications services company operating in
mainland China under China Mobile Communications Corporation's control
that will be listed on any securities exchange in Hong Kong or outside
China;
- to the extent within China Mobile Communications Corporation's control,
we will be treated equally with any other mobile communications operators
in respect of all approvals, transactions and arrangements between us and
China Mobile Communications Corporation and other mobile communications
entities controlled by China Mobile Communications Corporation;
- China Mobile Communications Corporation and the provincial entities under
its control will not, directly or indirectly, participate in the
operation of any mobile communications services in any province in which
we currently operate or may operate in the future; and
- in the provinces in which we operate, we will have the option to operate
additional communications services that fall within China Mobile
Communications Corporation's scope of business (including the testing and
commercial operation of services using new technologies such as third
generation mobile communications technologies), and we will have the
right to acquire China Mobile Communications Corporation's interest in
such services.
We believe that the second generation Code Division Multiple Access
technology has limited commercial value to our business due to the rapid
development of mobile communications technology. As a result, we have decided
not to pursue the development of the second generation of this technology. We
intend to focus on the development and application of third generation mobile
communication technologies, including wide-band Code Division Multiple Access
technology.
We and each of the companies that we have agreed to acquire have entered
into various agreements with China Mobile Communications Corporation and other
entities
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under the control of China Mobile Communications Corporation. The principal
terms of the agreements are described below.
Certain charges for the services under these agreements are based on
tariffs set by the Chinese regulatory authorities. Those transactions where the
charges are not set by Chinese regulatory authorities are based on commercial
negotiation between the parties, in each case on an arm's length basis. In this
regard, we have the benefit of the undertaking from China Mobile Communications
Corporation that to the extent within its control, we will be treated equally
with any other mobile communications entities in respect of all approvals,
transactions and arrangements between us on the one hand and China Mobile
Communications Corporation and other mobile communications operators controlled
by China Mobile Communications Corporation on the other hand, as described
above.
ROAMING ARRANGEMENTS
We and each of the companies that we have agreed to acquire offer domestic
and international roaming services to our subscribers. Our arrangement with the
cellular networks previously controlled by the Ministry of Information Industry
for domestic and international roaming was initially entered into in September
1997 in connection with our initial public offering. In May 2000, we entered
into an interconnection and roaming agreement with China Mobile Communications
Corporation which superseded the agreement we entered into with China Mobile
Communications Corporation in October 1999. This agreement is valid for two
years from April 1, 1999, and will be automatically renewed on an annual basis
unless either party notifies the other of its intention to terminate at least
three months prior to the expiration of the term. See "Business --
Interconnection" beginning on page 95.
Under this agreement, with regard to inter-provincial roaming, 80% of the
basic roaming calling charges payable by a roaming subscriber is credited to the
visited network and the remaining 20% is retained by the roaming subscriber's
home network.
With regard to international roaming, roaming calling charges incurred by
an international cellular subscriber making or receiving a call while roaming in
the areas in mainland China where we operate are collected and credited to us by
China Mobile Communications Corporation, and we will make the necessary
settlement with the relevant telecommunications operators in mainland China.
China Mobile Communications Corporation also collects a 15% surcharge on the
roaming calling charges from the international mobile communications operators
and shares such surcharge equally with us. When our subscribers roam
internationally, we will collect the roaming calling charges together with a 15%
surcharge from our subscribers and will pay the roaming calling charges together
with half of the surcharge collected to China Mobile Communications Corporation,
which will make the necessary settlement with the international mobile
communications operators concerned.
In addition, China Mobile Communications Corporation provides
inter-provincial and international roaming clearing and settlement services,
including related data transmission services, to us. We pay to China Mobile
Communications Corporation a roaming call record processing fee of RMB 0.02 for
each domestic roaming call record processed and RMB 0.30 for each international
roaming call record processed.
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We have, subject to completion of the acquisition and independent
shareholders' approval, entered into a supplemental agreement with China Mobile
Communications Corporation in order that, among other things, our
interconnection and roaming agreement with China Mobile Communications
Corporation will apply to the companies that we have agreed to acquire after we
acquire them.
LICENSING OF TRADEMARK
China Mobile Communications Corporation is the owner of the "CHINA MOBILE"
name and logo. China Mobile Communications Corporation has applied for
registration of the "CHINA MOBILE" logo as a trademark in mainland China. In
addition, applications have been filed in Hong Kong to register the "CHINA
MOBILE and logo" as our trademark for certain goods and services. In accordance
with a non-exclusive license agreement we entered into in October 1999 with
China Mobile Communications Corporation, we have obtained the right to use the
logo for a term of six years from 8 October 1999. No license fee is payable by
us for the period up to the third anniversary of the date when the registration
of the logo in mainland China becomes effective. The parties will negotiate any
fees payable after that period, provided that the fees cannot exceed the fees
that China Mobile Communications Corporation charges its affiliates. China
Mobile Communications Corporation may terminate the license agreement if it no
longer has any interests in us. We have, subject to completion of the
acquisition and independent shareholders' approval, entered into a supplemental
agreement with China Mobile Communications Corporation to, among other things,
extend the arrangement under the existing license agreement to the companies
that we have agreed to acquire after we acquire them.
SPECTRUM FEES
The Ministry of Information Industry and the Ministry of Finance jointly
determine the standardized spectrum fees payable to the Ministry of Information
Industry by all mobile communications operators in mainland China, including us.
Based on this standardized fee scale, China Mobile Communications Corporation
determines the allocation of spectrum usage fees to be paid by each mobile
communications operator under its control and the aggregate sum payable to the
Ministry of Information Industry. In October 1999, we entered into an agreement
with China Mobile Communications Corporation, under which we have been granted
the exclusive right to use the frequency spectrum and telephone numbers
allocated to us in the respective areas in which we operate. For the usage of
the 800/900 MHz and 1800 MHz frequency bands, the charges will be shared between
our operating subsidiaries and China Mobile Communications Corporation's
operating subsidiaries. 60% of the charges will be shared on the basis of the
number of base stations at the end of the previous year and 40% of such charges
will be shared on the basis of the bandwidth of the spectrum used. The agreement
is valid for one year and will be automatically renewed on an annual basis
unless either party notifies the other of its intention to terminate at least
three months prior to the expiration of the term. We have, subject to completion
of the acquisition and independent shareholders' approval, entered into a
supplemental agreement with China Mobile Communications Corporation to, among
other things, extend the arrangement under the existing agreement to the
companies that we have agreed to acquire after we acquire them.
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<PAGE> 138
SHARING OF INTER-PROVINCIAL TRANSMISSION LINE LEASING FEES
In May 2000, we entered into an agreement with China Mobile Communications
Corporation in relation to the leasing of inter-provincial transmission lines.
See "Business -- Transmission Infrastructure" beginning on page 105. This
agreement is valid for two years from April 1, 1999 and will be automatically
renewed on an annual basis unless either party notifies the other of its
intention to terminate at least three months prior to the expiration of its
term. The provisions relating to the inter-provincial transmission line leasing
fee sharing arrangement applies to Fujian Mobile, Henan Mobile and Hainan Mobile
from April 1, 1999, and to Guangdong Mobile, Zhejiang Mobile and Jiangsu Mobile
from October 1, 1999. We have, subject to completion of the acquisition and
independent shareholders' approval, entered into a supplemental agreement with
China Mobile Communications Corporation in order that, among other things, the
existing agreement will also apply to the companies that we have agreed to
acquire after we acquire them.
INTERCONNECTION ARRANGEMENTS
Our networks and the networks of the companies that we have agreed to
acquire interconnect with the fixed line network and cellular networks of China
Mobile Communications Corporation in other regions. In May 2000, we entered into
an interconnection and roaming agreement with China Mobile Communications
Corporation. Under this agreement, with regard to inter-provincial roaming, when
the roaming subscriber places a call from a roaming location, the operator of
the visited network receives all long distance calling charges, if any, and when
the roaming subscriber receives a call at a roaming location, the network
operator with whom the subscriber is registered retains all long distance
calling charges, if any. See "Business -- Interconnection" beginning on page 95.
International long distance calling charges incurred by an international
cellular subscriber making an international long distance call while roaming in
the areas in mainland China where we operate are collected by China Mobile
Communications Corporation and are credited to us. We will make the necessary
settlement with the relevant telecommunications operators in mainland China.
China Mobile Communications Corporation also collects a 15% surcharge on such
international long distance calling charges from the international mobile
communications operators and shares such surcharge equally with us. When our
subscribers roam internationally, we will collect the international long
distance calling charges, if any, together with a 15% surcharge from our
subscribers and will pay the international long distance calling charges
together with half of the surcharge collected to China Mobile Communications
Corporation, which will make the necessary settlement with the international
mobile communications operators concerned. Where long distance charges cannot be
distinguished from basic roaming charges, such long distance charges are grouped
under roaming charges. We have, subject to completion of the acquisition and
independent shareholders' approval, entered into a supplemental agreement with
China Mobile Communications Corporation to, among other things, extend the
existing arrangement to the companies that we have agreed to acquire after we
acquire them.
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<PAGE> 139
PREPAID SERVICES
We and each of the companies that we have agreed to acquire offer prepaid
services. Prepaid subscribers can make and receive local and domestic and
international long distance calls, and most of those subscribers also enjoy
nationwide domestic roaming services. Some of such prepaid services allow
subscribers to add value to their SIM cards by purchasing value-adding cards
from any of our network operators or China Mobile Communications Corporation's
other network operators. We have, subject to independent shareholders' approval,
entered into an agreement with China Mobile Communications Corporation regarding
the sharing and settlement of revenue when prepaid subscribers purchase
value-adding cards from network operators other than their home network
operators. This agreement is for a term of one year from July 1, 2000 (the
sharing of revenue from prepaid subscribers purchasing value-adding cards from
network operators other than their home network operators commenced from
February 1, 2000) and will be automatically renewed on an annual basis unless
either party notifies the other of its intention to terminate at least three
months prior to the expiration of the term. This agreement applies to our
existing operating subsidiaries as well as the companies that we have agreed to
acquire if we acquire them. Under this agreement, the network operator which
issues the value-adding card remits 85% of the face value of the value-adding
card to the subscriber's home network operator, and keeps the remainder as a
handling charge. The arrangement for the sharing and settlement of
interconnection and roaming revenue in relation to prepaid services is the same
as the arrangement in relation to contract subscribers as described in
"Business -- Interconnection", "Business -- Roaming", "-- Roaming Arrangements"
and "-- Interconnection Arrangements" above.
PROPERTY LEASING AND MANAGEMENT SERVICES
We and each of our operating subsidiaries lease from other subsidiaries of
China Mobile Communications Corporation various properties that are used as
office space and for locating our cell sites and switching equipment. Each of
the companies that we have agreed to acquire also leases, and some of such
companies sub-lease, from other subsidiaries of China Mobile Communications
Corporation various properties for use as their business premises and offices
and for locating equipment. In relation to leased properties, the rental
payments are determined with reference to market rates. In relation to
properties sub-leased by such subsidiaries to the companies that we have agreed
to acquire (which were in turn leased to such subsidiaries by third parties),
the rental is equal to the rental payable to such third parties and such
subsidiaries do not make any gains as the intermediate lessors. Some of such
subsidiaries of China Mobile Communications Corporation also provide property
management services in relation to the properties leased or subleased (other
than for Tianjin Mobile and Guangxi Mobile). Property management fees are
determined with reference to market rates.
The initial terms of such leases and sub-leases to the companies that we
have agreed to acquire range from six months to ten years. The initial terms of
such leases and sub-leases to Guangxi Mobile are renewable on an annual basis if
Guangxi Mobile gives six months' notice of its intention to renew. Guangxi
Mobile is entitled to terminate such leases and sub-leases by giving three
months' notice at any time. The initial terms of such leases and sub-leases to
Tianjin Mobile are automatically renewable on an annual basis unless terminated
by Tianjin Mobile by three months' notice given at any
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<PAGE> 140
time or by the relevant lessor by giving notice of its intention to terminate
three months prior to expiration of the relevant term. The initial terms of such
leases and sub-leases to Shanghai Mobile are automatically renewed on an annual
basis unless terminated by Shanghai Mobile by three months' notice given at any
time or in relation to sub-leases terminated by the relevant lessor by giving
three months' notice prior to the expiration of the relevant term. In relation
to the other companies that we have agreed to acquire, the relevant lease terms
and (subject to the relevant head lease being valid or renewable for the
extended term) sub-lease terms will be automatically renewed on an annual basis
unless terminated by the relevant companies with three months' notice given at
any time and, in relation to sub-leased properties, the relevant lessor may also
terminate by giving three months' notice prior to the expiration of the relevant
term. Beijing Mobile also leases certain properties and provides property
management services to a subsidiary of China Mobile Communications Corporation
for a term of one year on terms substantially similar to those set out above.
CONSTRUCTION AND RELATED SERVICES
Beijing Mobile, Shanghai Mobile, Liaoning Mobile and Shandong Mobile
entered into agreements with certain subsidiaries of China Mobile Communications
Corporation under which such subsidiaries provide services such as construction,
design, equipment installation, testing and/or maintenance services and/or act
as general contractors in relation to construction and other projects of the
companies that we have agreed to acquire. Such agreements are for terms of
between six months and 16 months, each such term being automatically renewed on
an annual basis unless either party (in the case of Shandong Mobile, Shanghai
Mobile and Beijing Mobile) or Liaoning Mobile (in the case of Liaoning Mobile)
notifies the other of its intention to terminate in writing at least three
months prior to the expiration of the term. Beijing Mobile had also previously
entered into other agreements for the provision of certain construction and
related services which will continue to be performed according to their terms
after the acquisition. The charges payable for services rendered under such
agreements are determined according to standards laid down by relevant
governmental departments and/or by reference to market rates.
EQUIPMENT MAINTENANCE AND RELATED SERVICES
Beijing Mobile, Shanghai Mobile and Liaoning Mobile entered into agreements
with certain subsidiaries of China Mobile Communications Corporation under which
such subsidiaries provide equipment maintenance and related services to such
companies. Such agreements are for terms of between six months and 15 months,
each such term being automatically renewed on an annual basis unless either
party (in the case of Beijing Mobile) or Shanghai Mobile or Liaoning Mobile (in
the case of Shanghai Mobile and Liaoning Mobile, respectively) notifies the
other of its intention to terminate in writing at least three months prior to
the expiration of the term. Beijing Mobile had also previously entered into
another agreement for the provision of certain equipment maintenance services
which will continue to be performed according to its terms after the
acquisition. The charges payable for services rendered under such agreements are
determined according to standards laid down by relevant governmental departments
and/or by reference to market rates.
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<PAGE> 141
TRANSMISSION TOWER PRODUCTION, SALES AND OTHER SERVICES AND ANTENNA MAINTENANCE
SERVICES
Hebei Mobile entered into an agreement with a subsidiary of China Mobile
Communications Corporation under which such subsidiary provides transmission
tower design, production, installation and maintenance services and antenna
maintenance services to Hebei Mobile, and sells transmission towers and spare
parts to Hebei Mobile. The initial term of this agreement is for one year from
August 1, 2000 to July 31, 2001. This agreement will be automatically renewed on
an annual basis unless either party notifies the other of its intention to
terminate in writing at least three months prior to the expiration of the term.
The price of such transmission towers and spare parts and the charges payable
for services rendered under this agreement are determined according to standards
laid down by relevant governmental departments and/or by reference to market
rates.
MISCELLANEOUS
The transactions to be entered into by us and/or the companies that we have
agreed to acquire mentioned above will be entered into in the ordinary course of
business and on normal commercial terms. Under the Listing Rules of the Hong
Kong Stock Exchange, these transactions are, or will after the acquisition be,
considered to be "connected transactions" and would normally require full
disclosure and prior independent shareholders' approval on each occasion they
arise. As the transactions are expected to be continued in the normal course of
business, our directors consider that such disclosure and approval would be
impractical. Accordingly, our directors have requested the Hong Kong Stock
Exchange to grant a waiver from compliance with the normal approval and
disclosure requirements related to connected transactions under the Listing
Rules, which will be effective until December 31, 2001, on some or all of the
following conditions:
(a) the transactions as well as the respective agreements governing such
transactions will be (A) entered into in the ordinary and usual course
of business on terms that are fair and reasonable so far as our
independent shareholders are concerned, and (B) on normal commercial
terms and in accordance with the terms of the agreements governing such
transactions;
(b) details of the transactions, as required by rule 14.25(1)(A) to (D) of
the Listing Rules, shall be disclosed in our annual report;
(c) our independent non-executive directors shall review annually the
transactions and confirm in our annual report and accounts for the
relevant year that the transactions have been conducted in the manner
stated in paragraph (a) above and within the upper limits stated below;
(d) our auditors shall review annually the transactions and provide our
directors with a letter, details of which will be set out in our annual
accounts, stating that the transactions:
- received the approval of our directors;
- are in accordance with the pricing policies as stated in our annual
report; and
- have been conducted in the manner as stated in (a)(B) above; and
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<PAGE> 142
(e) details of the transactions are disclosed to our shareholders who will
be asked to vote in favor of an ordinary resolution to approve the
connected transactions and the upper limits set out below at our
extraordinary general meeting to be held.
With respect to the following types of transactions entered into and to be
entered into by us and/or the companies that we have agreed to acquire, the
waiver was applied for under the additional condition that they shall not exceed
the relevant upper limits set out below in each of our fiscal years:
- payments by the companies that we have agreed to acquire to
subsidiaries of China Mobile Communications Corporation for rental and
property management fees in any fiscal year shall not exceed RMB 85
million;
- payments by the companies that we have agreed to acquire to
subsidiaries of China Mobile Communications Corporation for
construction and related services in any fiscal year shall not exceed
0.25% of the combined total operating revenue of us and the companies
that we have agreed to acquire in that fiscal year;
- payments by the companies that we have agreed to acquire to
subsidiaries of China Mobile Communications Corporation for equipment
maintenance and related services in any fiscal year shall not exceed
0.05% of the combined total operating revenue of us and the companies
that we have agreed to acquire in that fiscal year;
- payments by Hebei Mobile to the relevant subsidiary of China Mobile
Communications Corporation for purchase of transmission towers and
transmission tower-related services and antenna maintenance services
in any fiscal year shall not exceed 0.06% of the combined total
operating revenue of us and the companies that we have agreed to
acquire in that fiscal year; and
- handling charges received from subsidiaries of China Mobile
Communications Corporation by us and the companies that we have agreed
to acquire in respect of prepaid services in any fiscal year shall not
exceed 2% of the combined total operating revenue of us and the
companies that we have agreed to acquire in that year, and handling
charges paid by us and these companies to subsidiaries of China Mobile
Communications Corporation in respect of prepaid services in any
fiscal year shall not exceed 2% of the combined total operating
revenue of us and the companies that we have agreed to acquire in that
year.
China Mobile Communications Corporation has confirmed to the Hong Kong
Stock Exchange that the auditors will be granted access to such of its and its
associates' accounting records for the purpose of reviewing the transactions
mentioned above.
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RELATIONSHIP WITH CHINA TELECOMMUNICATIONS CORPORATION
As part of the recently completed industry restructuring, China
Telecommunications Corporation was established in May, 2000 as a state-owned
company to operate the fixed line telephone and data communications networks
nationwide formerly operated by the Directorate General of Telecommunications
and its operating subsidiary in each province, municipality or autonomous
region. In each province, municipality or autonomous region, China
Telecommunications Corporation has an operating subsidiary responsible for the
fixed line network operation. We have entered into various operating, service
and other agreements with China Telecommunications Corporation and its
subsidiaries, such as those relating to interconnection with China
Telecommunications Corporation's fixed line networks and leasing of transmission
lines from China Telecommunications Corporation.
Prior to the restructuring of the companies that we have agreed to acquire
in connection with the proposed acquisition, China Mobile Communications
Corporation entered into similar arrangements with China Telecommunications
Corporation and its subsidiaries in respect of the mobile communications
businesses operated by China Mobile Communications Corporation in Beijing,
Shanghai, Tianjin, Hebei, Liaoning, Shandong and Guangxi. In connection with the
proposed acquisition, certain of the companies that we have agreed to acquire
have entered into similar arrangements with China Telecommunications Corporation
and its subsidiaries. The terms of these arrangements are similar to those
between China Mobile Communications Corporation and China Telecommunications
Corporation and its subsidiaries in these geographic areas.
The terms of these agreements are described below.
INTERCONNECTION ARRANGEMENTS
Each of our operating subsidiaries has entered into an interconnection
agreement with the subsidiary of China Telecommunications Corporation that
operates the fixed line network in its network area. A majority of calls on our
networks involve interconnection with China Telecommunications Corporation's
fixed line network. The economic terms of the interconnection arrangements are
described under "Business -- Interconnection".
The following table summarizes the terms of these interconnection
agreements:
<TABLE>
<CAPTION>
TERM EXPIRATION DATE(1)
---------------------------------- ----------------------------------
<S> <C> <C>
Guangdong Mobile One year from October 1, 1999 September 30, 2000
Zhejiang Mobile One year from October 1, 1999 September 30, 2000
Jiangsu Mobile One year from October 1, 1999 September 30, 2000
Fujian Mobile One year from October 1, 1999 September 30, 2000
Henan Mobile One year from January 1, 2000 December 31, 2000
Hainan Mobile One year from October 1, 1999 September 30, 2000
</TABLE>
---------------
(1) To be renewed automatically on an annual basis (in the case of Jiangsu
Mobile, to be renewed automatically for another year) unless either party
notifies the other of its intention to terminate at least three months prior
to the expiration of the term.
Each of the companies that we have agreed to acquire has also entered into
an interconnection agreement with the relevant subsidiary of China
Telecommunications
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<PAGE> 144
Corporation that operates the fixed line network in its geographic area. These
agreements have substantially the same economic terms as those applicable to our
subsidiaries. The following table summarizes the terms of these interconnection
agreements:
<TABLE>
<CAPTION>
TERM EXPIRATION DATE(1)
---------------------------------- ----------------------------------
<S> <C> <C>
Beijing Mobile One year from August 8, 2000 August 7, 2001
Shanghai Mobile One year from August 10, 2000 August 9, 2001
Tianjin Mobile One year from August 10, 2000 August 9, 2001
Hebei Mobile One year from August 10, 2000 August 9, 2001
Liaoning Mobile One year from August 10, 2000 August 9, 2001
Shandong Mobile One year from August 10, 2000 August 9, 2001
Guangxi Mobile One year from August 10, 2000 August 9, 2001
</TABLE>
---------------
(1) To be renewed automatically on an annual basis unless either party notifies
the other of its intention to terminate at least three months prior to the
expiration of the term.
LEASING OF INTRA-PROVINCIAL OR LOCAL TRANSMISSION LINES
Each of our operating subsidiaries leases certain transmission lines from
the relevant subsidiary of China Telecommunications Corporation in its network
area in order to link our base transceiver stations, base station controllers
and mobile switching centers and to interconnect our network to the fixed line
networks of China Telecommunications Corporation and the cellular networks of
other operators. The following table summarizes the terms of these leases:
<TABLE>
<CAPTION>
TERM EXPIRATION DATE
------------------------------------- ----------------------------------
<S> <C> <C>
Guangdong Mobile Ten years and two months from October December 19, 2007, and to be
20, 1997 renewed automatically for another
ten years(1)
Zhejiang Mobile Three years from January 1, 2000 December 31, 2002, and renewable
subject to the agreement by the
parties
Jiangsu Mobile Eight years from July 1, 1999 June 30, 2007, and to be renewed
automatically for another year(2)
Fujian Mobile One year from January 1, 2000 December 31, 2000, and to be
renewed automatically on an annual
basis(1)
Henan Mobile One year from January 1, 2000 December 31, 2000, and to be
renewed automatically on an annual
basis(1)
Hainan Mobile One year from April 2, 2000 April 1, 2001, and to be renewed
automatically on an annual
basis(1)
</TABLE>
---------------
(1) Unless either party notifies the other of its intention to terminate at
least six months (at least three months in the cases of Fujian Mobile, Henan
Mobile and Hainan Mobile) prior to the expiration of the term.
(2) Unless Jiangsu Mobile notifies the lessor of its intention to terminate at
least three months prior to the expiration of the term and, after the
renewed term, the lease is terminable at any time by either party upon three
months' prior notice.
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<PAGE> 145
Each of the companies that we have agreed to acquire has also entered into
an agreement with the relevant subsidiary of China Telecommunications
Corporation that operates the fixed line network in its network area in relation
to the leasing of local transmission lines. In addition, each of Hebei Mobile,
Liaoning Mobile, Shandong Mobile and Guangxi Mobile has also entered into an
agreement with the relevant fixed line operator in relation to the leasing of
intra-provincial long distance transmission lines, the term of which is the same
as the lease agreement for local lines. The following table summarizes the terms
of these agreements:
<TABLE>
<CAPTION>
TERM EXPIRATION DATE(1)
---------------------------------- ----------------------------------
<S> <C> <C>
Beijing Mobile One year from August 8, 2000 August 7, 2001
Shanghai Mobile One year from August 10, 2000 August 9, 2001
Tianjin Mobile One year from August 10, 2000 August 9, 2001
Hebei Mobile One year from August 10, 2000 August 9, 2001
Liaoning Mobile One year from August 10, 2000 August 9, 2001
Shandong Mobile One year from August 10, 2000 August 9, 2001
Guangxi Mobile One year from August 10, 2000 August 9, 2001
</TABLE>
---------------
(1) To be renewed automatically on an annual basis unless either party notifies
the other of its intention to terminate at least three months prior to the
expiration of the term.
LEASING OF SYNCHRONIZED CLOCK PORTS
Under a lease agreement, each of Zhejiang Mobile, Fujian Mobile, Henan
Mobile and Hainan Mobile leases synchronized clock ports from the relevant
subsidiary of China Telecommunications Corporation that operates the fixed line
network in its network area. The synchronized clocks ensure both the mobile and
the fixed line networks run simultaneously. The following table summarizes the
major terms of these lease agreements:
<TABLE>
<CAPTION>
ANNUAL LEASE PAYMENT TERM EXPIRATION DATE(1)
-------------------- ----------------------------- ------------------
(RMB/CLOCK PORT)
<S> <C> <C> <C>
Zhejiang Mobile 24,000 From October 1, 1999 to December 31, 2002
December 31, 2002
Fujian Mobile 25,000 One year from January 1, 2000 December 31, 2000
Henan Mobile 25,000 One year from January 1, 2000 December 31, 2000
Hainan Mobile 25,000 One year from April 2, 2000 April 1, 2001
</TABLE>
---------------
(1) To be renewed automatically on an annual basis unless either party notifies
the other of its intention to terminate at least three months prior to the
expiration of the term.
Each of the companies that we have agreed to acquire has also entered into
a lease agreement with the relevant subsidiary of China Telecommunications
Corporation that operates the fixed line network in its network area in
connection with its lease of
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<PAGE> 146
synchronized clock ports from the fixed line operator. The following table
summarizes the major terms of these lease agreements:
<TABLE>
<CAPTION>
ANNUAL LEASE PAYMENT TERM EXPIRATION DATE(1)
-------------------- ----------------------------- ------------------
(RMB/CLOCK PORT)
<S> <C> <C> <C>
Beijing Mobile 25,000 One year from August 8, 2000 August 7, 2001
Shanghai Mobile 25,000 One year from August 10, 2000 August 9, 2001
Tianjin Mobile 25,000 One year from August 10, 2000 August 9, 2001
Hebei Mobile 25,000 One year from August 10, 2000 August 9, 2001
Liaoning Mobile 25,000 One year from August 10, 2000 August 9, 2001
Shandong Mobile 25,000 One year from August 10, 2000 August 9, 2001
Guangxi Mobile 25,000 One year from August 10, 2000 August 9, 2001
</TABLE>
---------------
(1) To be renewed automatically on an annual basis unless either party notifies
the other of its intention to terminate at least three months prior to the
expiration of the term.
ACCOUNT PROCESSING SERVICES
Shanghai Mobile has entered into an account processing service agreement
with the subsidiary of China Telecommunications Corporation in Shanghai, under
which the China Telecommunications Corporation subsidiary in Shanghai provides
bill processing and mailing services to Shanghai Mobile. The following table
summarizes the major terms of this agreement:
<TABLE>
<CAPTION>
MONTHLY SERVICE FEE TERM EXPIRATION DATE(1)
------------------------ ------------------------ ------------------
(RMB/MOBILE PHONE NUMBER)
<S> <C> <C> <C>
Shanghai Mobile 0.86 One year from August 10, August 9, 2001
2000
</TABLE>
---------------
(1) To be renewed automatically on an annual basis unless either party notifies
the other of its intention to terminate at least three months prior to the
expiration of the term.
COLLECTION SERVICES
Zhejiang Mobile, Jiangsu Mobile and Henan Mobile handle their own payment
collection. Each of Guangdong Mobile, Fujian Mobile and Hainan Mobile has
entered into a service agreement with the relevant subsidiary of China
Telecommunications Corporation that operates the fixed line network in its
network area, under which the fixed line operator provides certain payment
collection services to the mobile communications operator. The following table
summarizes the major terms of these agreements:
<TABLE>
<CAPTION>
SERVICE FEE TERM EXPIRATION DATE(1)
-------------------------- ---------------------------- ------------------
<S> <C> <C> <C>
Guangdong Mobile Market price Three years from October 20, October 19, 2000
1997
Fujian Mobile RMB 0.01 for each RMB 1.00 One year from January 1, December 31, 2000
collected 2000
Hainan Mobile RMB 0.01 for each RMB 1.00 One year from April 2, 2000 April 1, 2001
collected
</TABLE>
---------------
(1) To be renewed automatically on an annual basis unless either party notifies
the other of its intention to terminate at least three months prior to the
expiration of the
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<PAGE> 147
term. In the case of Guangdong Mobile, the lease is terminable at any time
by Guangdong Mobile upon six months' prior notice.
Beijing Mobile, Shanghai Mobile, Hebei Mobile, Liaoning Mobile and Shandong
Mobile handle their own payment collections. Each of Tianjin Mobile and Guangxi
Mobile has entered into a collection agreement with the relevant subsidiary of
China Telecommunications Corporation that operates the fixed line network in its
network area, under which the relevant fixed line operator provides collection
services to the mobile communications operator. The following table summarizes
the major terms of these agreements:
<TABLE>
<CAPTION>
SERVICE FEE TERM EXPIRATION DATE(1)
-------------------------- ------------------------ ------------------
<S> <C> <C> <C>
Tianjin Mobile RMB 0.0075 for each RMB One year from August 10, August 9, 2001
1.00 collected 2000
Guangxi Mobile RMB 0.01 for each RMB 1.00 One year from August 10, August 9, 2001
collected 2000
</TABLE>
---------------
(1) To be renewed automatically on an annual basis unless either party notifies
the other of its intention to terminate at least three months prior to the
expiration of the term.
DISTRIBUTION AND MARKETING ARRANGEMENTS
Each of our operating subsidiaries (except Guangdong Mobile) markets and
sells its mobile communications services in part through authorized dealers
under the control of the relevant subsidiary of China Telecommunications
Corporation in its network area. The following table summarizes the major terms
of these agreements:
<TABLE>
<CAPTION>
COMMISSION TERM EXPIRATION DATE
------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
Zhejiang Mobile RMB 300 per new contract From October 1, 1999 to December 31, 2000, and
subscriber acquired December 31, 2000 renewable subject to
mutual agreement
Jiangsu Mobile RMB 300 per new contract Five years from January January 1, 2003(1)
subscriber acquired 1, 1998
Fujian Mobile Not lower than the One year from January 1, December 31, 2000, and
commission paid to 2000 renewable subject to
authorized dealers not mutual agreement
affiliated with China
Telecommunications
Corporation
Henan Mobile RMB 250 per new contract One year from January 1, December 31, 2000, and
subscriber acquired; and 2000 renewable subject to
an agency fee equal to mutual agreement
5% of the total sales
value of all prepaid
card sales
</TABLE>
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<PAGE> 148
<TABLE>
<CAPTION>
COMMISSION TERM EXPIRATION DATE
------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
Hainan Mobile RMB 250 (for bulk sales) One year from April 2, April 1, 2001, and to be
or RMB 150 (for retail 2000 renewed automatically
sales) per new contract subject to mutual
subscriber acquired, and agreement
an agency fee equal to
5% (for bulk sales) or
4% (for retail sales) of
the total sales values
of all prepaid card
sales
</TABLE>
---------------
(1) To be renewed automatically for an additional year unless either party
notifies the other of its intention to terminate at least three months prior
to the expiration of the term.
Guangxi Mobile markets its mobile communications services in part through
authorized dealers under the control of China Telecommunications Corporation
under an agency agreement with the fixed line operator in Guangxi. The following
table summarizes the major terms of this agreement:
<TABLE>
<CAPTION>
COMMISSION TERM EXPIRATION DATE(1)
------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
Guangxi Mobile RMB 200 (for bulk sales) From August 8, 2000 to December 31, 2000
or RMB 100 (for retail December 31, 2000
sales) per new contract
subscriber acquired, RMB
40 (for bulk sales) or
RMB 20 (for retail
sales) per prepaid card
subscriber acquired,
plus a service fee equal
to 12% (for bulk sales)
or 10% (for retail
sales) of the total
sales values of all
prepaid card sales
</TABLE>
---------------
(1) To be renewed automatically for an additional year unless either party
notifies the other of its intention to terminate at least three months prior
to the expiration of the term.
EQUIPMENT MAINTENANCE SERVICES
Fujian Mobile has entered into an equipment maintenance service agreement
with a subsidiary of China Telecommunications Corporation in Fujian, under which
the fixed line operator in Fujian provides maintenance services for the
operating equipment of Fujian Mobile, such as transmission equipment, electrical
equipment and other ancillary facilities. The following table summarizes the
major terms of this agreement:
<TABLE>
<CAPTION>
ANNUAL SERVICE FEE TERM EXPIRATION DATE(1)
----------------------------- ----------------------------- ------------------
<S> <C> <C> <C>
Fujian Mobile 1% of the total book value of One year from January 1, 2000 December 31, 2000
equipment maintained
</TABLE>
---------------
(1) To be renewed automatically on an annual basis unless either party notifies
the other of its intention to terminate at least three months prior to the
expiration of the term.
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Each of Beijing Mobile, Tianjin Mobile and Guangxi Mobile has entered into
an equipment maintenance service agreement with the relevant subsidiary of China
Telecommunications Corporation that operates the fixed line network in its
network area, under which the fixed line operator provides maintenance services
for the operating equipment of the mobile communications operator. The following
table summarizes the major terms of these agreements:
<TABLE>
<CAPTION>
ANNUAL SERVICE FEE TERM EXPIRATION DATE(1)
------------------------------- ----------------------------- ------------------
<S> <C> <C> <C>
Beijing Mobile 0.3% of the total book value of One year from August 8, 2000 August 7, 2001
equipment maintained
Tianjin Mobile Government rate, or rate agreed One year from August 10, 2000 August 9, 2001
by the parties if there is no
government rate
Guangxi Mobile Government rate, or rate agreed One year from August 10, 2000 August 9, 2001
by the parties if there is no
government rate
</TABLE>
---------------
(1) To be renewed automatically on an annual basis unless either party notifies
the other of its intention to terminate at least three months prior to the
expiration of the term.
Tianjin Mobile and Beijing Mobile each also provides equipment maintenance
services to the relevant fixed line operator in their respective network area
under similar terms.
LEASING OF OFFICES AND SITES FOR NETWORK EQUIPMENT
Each of our operating subsidiaries has leased certain premises from the
relevant subsidiary of China Telecommunications Corporation that operates the
fixed line network in its network area for use as offices, retail outlets,
warehouses and sites for locating equipment. Fujian Mobile also leases to the
fixed line operator in Fujian certain properties under similar terms.
Under a lease agreement, each of the companies that we have agreed to
acquire has also leased certain premises from the relevant subsidiary of China
Telecommunications Corporation that operates the fixed line network in its
network area for use as offices, retail outlets, warehouses and sites for
locating equipment. Each of Beijing Mobile, Shanghai Mobile and Tianjin Mobile
also leases to the fixed line operator in Beijing, Shanghai and Tianjin,
respectively, certain properties under similar terms.
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<PAGE> 150
MANAGEMENT
The following table sets forth certain information concerning our
directors, some of whom also serve as executive officers, as of September 30,
2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Wang Xiaochu..................................... 42 Chairman; Chief Executive Officer
Li Zhenqun....................................... 54 Vice Chairman; Chief Operating Officer
Ding Donghua..................................... 63 Director; Chief Financial Officer
Li Gang.......................................... 43 Director
Xu Long.......................................... 43 Director
He Ning.......................................... 38 Director
Liu Ping......................................... 54 Director
Yuan Jianguo..................................... 49 Director
Wei Yiping....................................... 48 Director
Arthur Li Kwok Cheung............................ 54 Independent Non-Executive Director
Antony Leung Kam Chung........................... 48 Independent Non-Executive Director
</TABLE>
Mr. Wang Xiaochu is our Chairman and our Chief Executive Officer. Mr. Wang
is in charge of our overall management. Prior to joining us, Mr. Wang served as
the Director General of the Tianjin Posts and Telecommunications Administration.
He also served as Director and Deputy Director of the Hangzhou
Telecommunications Bureau in Zhejiang Province. He was responsible for the
development of China's telephone network management systems and various other
information technology projects. Mr. Wang graduated from the Beijing University
of Posts and Telecommunications in 1980 and has over 19 years of management
experience in the telecommunications industry. Since April 2000, Mr. Wang has
been a Vice President of China Mobile Communications Corporation.
Mr. Li Zhenqun is our Vice Chairman and our Chief Operating Officer. Mr. Li
is in charge of our business operations and investor relations. He joined us on
August 11, 2000. Since 1998 and prior to joining us, Mr. Li was the Director of
the Xiamen Telecommunications Bureau. He also served as the Director of the
Xiamen Posts and Telecommunications Bureau in Fujian Province from 1984 to 1998.
He graduated from Peking University in 1970. Mr. Li Zhenqun has 28 years of
management experience in the telecommunications industry.
Mr. Ding Donghua is a Director and our Chief Financial Officer. Mr. Ding is
in charge of our overall financial management. He was previously the Chief
Economist, Chief Accountant, Deputy Chief Economist and Department Director of
the Guangdong Posts and Telecommunications Administration. He graduated from the
Beijing University of Posts and Telecommunications in 1961 and has 38 years of
management experience in the telecommunications industry, as well as in
economics and finance.
Mr. Li Gang is a Director. He is the Chairman and President of Guangdong
Mobile. Mr. Li previously served as the Chief of the Network Maintenance
Division and a Deputy Chief of the Telecommunications Division of the Guangdong
Posts and Telecommunications Administration. Mr. Li graduated from Beijing
University of Posts and Telecommunications in 1985 and has over 26 years of
experience in the telecommunications industry.
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<PAGE> 151
Mr. Xu Long is a Director. He is the Chairman and President of Zhejiang
Mobile. Mr. Xu previously served as a Deputy Director General of the Zhejiang
Posts and Telecommunications Administration, the Director of the General Office
of the Zhejiang Posts and Telecommunications Administration, the President of
Zhejiang Nantian Posts and Telecommunications Group Company and a Deputy
Director of the Shaoxing Posts and Telecommunications Bureau in Zhejiang
Province. Mr. Xu graduated from Zhejiang University of Broadcasting and
Television in 1985. He is a senior economist and has over 22 years of experience
in the telecommunications industry.
Mr. He Ning is a Director. Mr. He is the Chairman and President of Jiangsu
Mobile. Mr. He previously served as a Deputy Director General of the Jiangsu
Posts and Telecommunications Administration, the Director and Deputy Director of
the Jiangsu Mobile Communications Bureau and Deputy Director of the Zhenjiang
Posts and Telecommunications Bureau in Jiangsu Province. He graduated from the
Nanjing Institute of Posts and Telecommunications in 1983, and has 16 years of
experience in the telecommunications industry.
Mr. Liu Ping is a Director. He is the Chairman and President of Fujian
Mobile. Mr. Liu previously served as a Deputy Director General of the Fujian
Posts and Telecommunications Administration and Director of the Fuzhou Post and
Telecommunications Bureau. Mr. Liu graduated from Nanjing Institute of Posts and
Telecommunications in 1985 and has over 22 years of experience in the
telecommunications industry.
Mr. Yuan Jianguo is a Director. He is the Chairman and President of Henan
Mobile. Mr. Yuan previously served as the Deputy Director General of the Henan
Posts and Telecommunications Administration and as a Director and Deputy
Director of the Henan Mobile Communications Bureau. Mr. Yuan holds a masters
degree in Economic Law from the Chinese Academy of Social Sciences and has 29
years of experience in the telecommunications industry.
Mr. Wei Yiping is a Director. He is the Chairman and President of Hainan
Mobile. Mr. Wei previously served as the Deputy Director General of the Hainan
Posts and Telecommunications Administration and as Director of the Sanya Posts
and Telecommunications Bureau. Mr. Wei graduated from the Xi'an Foreign
Languages Institute in 1976 and has 29 years of experience in the
telecommunications industry.
Professor Arthur Li Kwok Cheung is a Director. Professor Li is the Vice
Chancellor of the Chinese University of Hong Kong, a Non-Executive Director of
Glaxo Wellcome plc, a Director of the Bank of East Asia Limited and a
Non-Executive Director and Chairman of the Board of Regal Hotel Group plc. He
holds a doctorate degree in medicine from Cambridge University and an honorary
doctorate degree in science. He previously served as a board member of the Hong
Kong Hospital Authority and President of the College of Surgeons of Hong Kong.
Professor Li was an Advisor on Hong Kong Affairs to the People's Republic of
China, a Member of the Basic Law Consultative Committee, a Member of the
Preparatory Committee of the Hong Kong Special Administrative Region of the
National People's Congress, a Member of the Selection Committee of the First
Government of the Hong Kong Special Administrative Region and was also a
Committee Member of the Ninth Annual Chinese People's Political Consultative
Conference.
Mr. Antony Leung Kam Chung is a Director. Mr. Leung is Chairman for the
Asia Pacific region of The Chase Manhattan Bank. He graduated from the
University of Hong
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<PAGE> 152
Kong and completed the Advanced Management Program at Harvard Business School.
Mr. Leung's public service appointments include Member of the Executive Council
of the Hong Kong Special Administrative Region, Chairman of the Education
Commission and Member of the Exchange Fund Advisory Committee.
There is no family relationship between any of our directors or executive
officers and any other of our directors or executive officers.
COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate amount of compensation that we paid to our directors and
executive officers during 1999 for services performed as our directors, officers
or employees was HK$10,564,347 (US$1,361,104).
The compensation paid to our directors will not be varied as a result of
the acquisition.
SHARE OPTION SCHEME
We have adopted a share option scheme under which our directors may, at
their discretion, invite our employees, including executive directors, including
those of our subsidiaries, to take up options to subscribe for ordinary shares
up to a maximum aggregate number of ordinary shares equal to 10% of our total
issued share capital. The consideration payable by a participant for the grant
of an option under the share option scheme will be HK$1.00. The price for a
share payable by a participant upon the exercise of an option will be determined
by our directors in their discretion, except that the price may not be set below
a minimum price which is the higher of (A) the nominal value of a share and (B)
80% of the average of the closing prices of ordinary shares on the Hong Kong
Stock Exchange on the five trading days immediately preceding the date of grant
of the option. The period during which an option may be exercised will be
determined by the directors in their discretion, except that no option may be
exercised later than 10 years after the adoption date of the scheme.
On April 20, 1999, Shi Cuiming, our former Chairman and Chief Executive
Officer, exercised options to purchase an aggregate of 2,900,000 shares, and
Chen Zhaobin, our former Vice Chairman and President, exercised options to
purchase an aggregate of 2,600,000 shares, each at the exercise price of
HK$11.10 per share. On September 9, 1999, each of Lu Errui and Zhu Jianhua, who
were our former Directors, exercised options to purchase 1,000,000 shares, each
at the exercise price of HK$11.10 per share.
As of October 10, 2000, options exercisable for an aggregate of 14,494,000
shares had been granted to our Directors under our share option scheme and were
outstanding.
The following options are exercisable at a price of HK$11.10 per share
through March 8, 2006:
<TABLE>
<CAPTION>
NUMBER OF SHARES
DIRECTOR COVERED BY OPTIONS
-------- ------------------
<S> <C>
Ding Donghua................................................ 2,100,000
</TABLE>
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<PAGE> 153
The following options are exercisable at a price of HK$33.91 per share
through October 7, 2007:
<TABLE>
<CAPTION>
NUMBER OF SHARES
DIRECTOR COVERED BY OPTIONS
-------- ------------------
<S> <C>
Wang Xiaochu................................................ 3,900,000
Ding Donghua................................................ 1,100,000
Li Gang..................................................... 1,000,000
He Ning..................................................... 1,000,000
</TABLE>
On April 25, 2000, options exercisable for an aggregate of 31,590,000
shares were granted to employees under our share option scheme. The options are
exercisable at a price of HK$45.04 per share through October 7, 2007. Options
exercisable for 5,394,000 shares of the 31,590,000 shares were granted to the
following directors:
<TABLE>
<CAPTION>
NUMBER OF SHARES
DIRECTOR COVERED BY OPTIONS
-------- ------------------
<S> <C>
Wang Xiaochu................................................ 200,000
Ding Donghua................................................ 200,000
Li Gang..................................................... 180,000
Xu Long..................................................... 1,170,000
He Ning..................................................... 166,000
Liu Ping.................................................... 1,162,000
Yuan Jianguo................................................ 1,160,000
Wei Yiping.................................................. 1,156,000
</TABLE>
MISCELLANEOUS
As of October 10, 2000, the following Directors had interests in our share
capital:
<TABLE>
<CAPTION>
DIRECTOR NUMBER OF ADSS
-------- --------------
<S> <C>
Wang Xiaochu................................................ 400
Ding Donghua................................................ 400
</TABLE>
Save as disclosed above, as of October 10, 2000, none of our Directors had,
or was deemed to have, any interests in our share capital or any of our
associated corporations (within the meaning of the Hong Kong Securities
(Disclosure of Interests) Ordinance) which were:
- required to be notified to us and the Hong Kong Stock Exchange in
accordance with Section 28 of the Ordinance (including interests which
they are deemed or taken to have under Section 31 of, or part 1 of the
Schedule to, the Ordinance);
- required to be entered in the register in accordance with Section 29 of
the Ordinance; or
- required to be notified to us and the Hong Kong Stock Exchange in
accordance with the Hong Kong Model Code for Securities Transactions by
Directors of Listed Companies.
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<PAGE> 154
Except as disclosed in this prospectus:
- there are no existing or proposed service contracts (excluding contracts
expiring or terminable by the employer within one year without payment of
compensation (other than statutory compensation)) between:
- China Mobile (HK), its subsidiaries and any of their respective
directors; and
- the companies that we have agreed to acquire and their respective
directors;
- none of our directors, KPMG or Chesterton Petty Limited is interested,
directly or indirectly, in any assets which have been within the two
years immediately preceding the date of this prospectus acquired or
disposed of by or leased to any of us, our subsidiaries, or any of the
companies that we have agreed to acquire or are proposed to be so
acquired, disposed of or leased; and
- none of our directors is materially interested in any contract or
arrangement subsisting at the date of this prospectus which is
significant in relation to our business or the business of the companies
that we have agreed to acquire.
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<PAGE> 155
OWNERSHIP OF CHINA MOBILE (HK)
As of October 10, 2000, China Mobile Hong Kong (BVI) Limited, a subsidiary
of China Mobile (Hong Kong) Group Limited, owned approximately 75% of our
outstanding shares. Immediately following the completion of the concurrent share
offering and convertible note offering and the acquisition, China Mobile
Communications Corporation will indirectly own approximately 75% of our
outstanding shares.
The following table sets forth certain information regarding ownership of
our capital stock as of October 10, 2000 by all persons who own more than 10% of
our shares:
- before the share offering and convertible note offering; and
- after the share offering (assuming that the underwriters' overallotment
option in the share offering is exercised in full) and the convertible
note offering and the acquisition (including the issuance of
1,062,049,225 ordinary shares in the share offering and the issuance of
3,184,312,576 ordinary shares to China Mobile Hong Kong (BVI) Limited as
part of the purchase price for the acquisition).
<TABLE>
<CAPTION>
NUMBER OF SHARES OWNED PERCENTAGE OF OUTSTANDING SHARES
------------------------------------------ ------------------------------------------
BEFORE THE OFFERINGS AFTER THE OFFERINGS BEFORE THE OFFERINGS AFTER THE OFFERINGS
SHAREHOLDER AND ACQUISITION AND ACQUISITION AND ACQUISITION AND ACQUISITION
----------- -------------------- ------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
China Mobile Hong Kong
(BVI) Limited........ 10,283,195,021 13,467,507,597 75% 75%
</TABLE>
We are not aware of any arrangement that may at a subsequent date result in
a change of control over us.
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<PAGE> 156
DESCRIPTION OF SHARE CAPITAL
As of September 30, 2000, our authorized share capital consisted of
16,000,000,000 ordinary shares, of which 13,710,261,021 ordinary shares were
outstanding. Our board of directors has proposed, subject to approval by our
shareholders, to increase our authorized share capital to HK$3,000,000,000
divided into 30,000,000,000 ordinary shares of HK$0.10 each. Many of the
following statements are summaries of certain provisions of our Memorandum of
Association and Articles of Association and the Companies Ordinance (Chapter 32)
of Hong Kong.
GENERAL
All of our issued shares are fully paid. Certificates representing the
shares are issued in registered form. Our shareholders who are non-residents of
Hong Kong for exchange control purposes may freely hold and vote their shares.
The shares are not entitled to any sinking fund or redemption rights.
VOTING RIGHTS
Under the Companies Ordinance, any action to be taken by the shareholders
in a general meeting requires the affirmative vote of either an ordinary or a
special resolution passed at the meeting. An ordinary resolution is one passed
by the majority of such shareholders as are entitled to, and do, vote in person
or by proxy at a general meeting. A special resolution is one passed by not less
than three-quarters of such shareholders as are entitled to, and do, vote in
person or by proxy at a general meeting. Generally, resolutions of shareholders
are passed by ordinary resolution. However, the Companies Ordinance stipulates
that certain matters may only be passed by special resolutions.
At any general meeting a resolution put to the vote of the meeting shall be
decided on a show of hands unless a poll is demanded by:
- the chairman of the meeting;
- at least three members present in person or by proxy and entitled to vote
at the meeting;
- any member or members present in person or by proxy and representing in
the aggregate not less than one-tenth of the total voting rights of all
members having the right to attend and vote at the meeting; or
- any member or members present in person or by proxy and holding shares
conferring a right to attend and vote at the meeting on which there have
been paid up sums in the aggregate equal to not less than one-tenth of
the total sum paid up on all shares conferring that right.
Subject to any special rights, privileges or restrictions as to voting that
may from time to time be attached to any class or classes of shares, on a show
of hands, every individual shareholder who is present in person and every
corporate shareholder who is present by a representative duly authorized under
section 115 of the Companies Ordinance has one vote.
On a poll, every shareholder present in person or, if the shareholder is a
corporation, by duly authorized representative, or by proxy has one vote for
every share of which he is the shareholder which is fully paid up or credited as
fully paid up.
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<PAGE> 157
However, no amount paid up or credited as paid up on a share in advance of calls
or installments is treated for the foregoing purposes as paid up on the share.
There are no cumulative voting rights. Accordingly, the holders of a
majority of the shares voting for the election of directors can elect all the
directors if they choose to do so.
MODIFICATION OF RIGHTS
All or any of the rights from time to time attaching to any class of shares
(unless otherwise provided for by the terms of issue of the shares of that
class) may, subject to the provisions of the Companies Ordinance, be varied or
abrogated with the consent in writing of the holders of not less than
three-fourths of the issued shares of that class or with the sanction of a
special resolution passed at a separate general meeting of the holders of shares
of that class.
ISSUE OF SHARES
Under the Companies Ordinance, our directors may, without prior approval of
the shareholders, offer to issue new shares to existing shareholders pro rata.
The directors may not issue new shares in any other manner without the prior
approval of the shareholders in a general meeting. Any such approval given in a
general meeting will continue in force until the conclusion of the following
annual general meeting or the expiration of the period within which the next
annual general meeting is required by law to be held or when revoked or varied
by an ordinary resolution of the shareholders in a general meeting, whichever
comes first. If such approval is given, the unissued shares shall be at the
disposal of the board of directors, which may offer, allot, grant options over
or otherwise dispose of them to such persons, at such times and for such
consideration and upon such terms and conditions as the directors may determine.
On June 16, 2000, our shareholders granted our directors a general mandate to
issue up to 20% of our share capital in issue as at that date (to be increased
by shares repurchased by us after that date up to a maximum of 10% of our share
capital in issue as at that date).
DIVIDENDS
Subject to the Companies Ordinance and as set out in the Articles of
Association, the shareholders in a general meeting may from time to time declare
dividends to be paid to the shareholders according to their rights and interests
in the profits available for distribution, but no dividend shall be declared in
excess of the amount recommended by the board.
In addition to any dividends declared in a general meeting upon the
recommendation of the board of directors, the board of directors may from time
to time declare and pay to the members such interim dividends as appear to the
board of directors to be justified by our reserves. The board of directors may
also pay any dividend which may be payable at a fixed rate on a particular class
of our shares, from time to time, whenever our reserves, in the opinion of the
board of directors, justify such payment.
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<PAGE> 158
WINDING UP
If we are wound up, the liquidator (whether voluntary or official) may,
with the sanction of a special resolution, divide among the shareholders in
specie or in kind the whole or any part of our assets or vest any part of our
assets in trustees upon such trusts for the benefit of the shareholders or any
of them as the resolution shall provide.
MISCELLANEOUS
The shareholders are not entitled to any redemption rights, conversion
rights or preemptive rights on the transfer of our securities.
Our registered office is located at 60th Floor, The Center, 99 Queen's Road
Central, Hong Kong, China. The transfer agent and registrar for the shares is
HKSCC Registrars Limited, 2nd Floor, Vicwood Plaza, 199 Des Voeux Road Central,
Hong Kong, China.
Since June 30, 2000, 32,000 shares have been issued to employees upon the
exercise of options at an exercise price of HK$45.04 per share, and 3,800,000
shares have been issued to one of our former directors upon the exercise of
options at exercise prices of HK$11.10 (in respect of 2,400,000 shares),
HK$33.91 (in respect of 1,200,000 shares) and HK$45.04 (in respect of 200,000
shares) per share.
156
<PAGE> 159
DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS
AMERICAN DEPOSITARY RECEIPTS
The Bank of New York will issue the ADRs. Each ADR will represent ownership
interests in five shares (or the right to receive five shares) which we will
deposit with The Hongkong and Shanghai Banking Corporation Limited (or HSBC), as
custodian, in Hong Kong. Each ADR will also represent securities, cash or other
property deposited with The Bank of New York but not distributed to ADR holders.
The Bank of New York's Corporate Trust Office is located at 101 Barclay Street,
New York, NY 10286. Its principal executive office is located at One Wall
Street, New York, New York 10286. HSBC's office is located at 1 Queen's Road
Central, Hong Kong, China.
You may hold ADRs either directly or indirectly through your broker or
other financial institution. If you hold ADRs directly, you are an ADR holder.
This description assumes you hold your ADRs directly. If you hold the ADRs
indirectly, you must rely on the procedures of your broker or other financial
institution to assert the rights of ADR holders described in this section. You
should consult with your broker or financial institution to find out what those
procedures are.
Because The Bank of New York will actually hold the shares, you must rely
on it to exercise the rights of a shareholder. The obligations of The Bank of
New York are set out in an agreement among us, The Bank of New York and you, as
an ADR holder. The deposit agreement and the ADRs are generally governed by New
York law.
The following is a summary of the deposit agreement. Because it is a
summary, it does not contain all the information that may be important to you.
For more complete information, you should read the entire agreement and the ADR.
Directions on how to obtain copies of these are provided on pages 200 and 201 of
this prospectus.
SHARE DIVIDENDS AND OTHER DISTRIBUTIONS
HOW WILL YOU RECEIVE DIVIDENDS AND OTHER DISTRIBUTIONS ON THE SHARES?
The Bank of New York has agreed to pay to you the cash dividends or other
distributions it receives on shares or other deposited securities, after
deducting its fees and expenses. You will receive these distributions in
proportion to the number of shares your ADRs represent.
- CASH. The Bank of New York will convert any cash dividend or other cash
distribution we pay on the shares into US dollars, if it can do so on a
reasonable basis and can transfer the US dollars to the United States. If
that is not possible or if any approval from the Hong Kong government is
needed and cannot be obtained, the deposit agreement allows The Bank of
New York to distribute the Hong Kong dollars only to those ADR holders to
whom it is possible to do so. It will hold the Hong Kong dollars it
cannot convert for the account of the ADR holders who have not been paid.
It will not invest the Hong Kong dollars and it will not be liable for
any interest.
Before making a distribution, any withholding taxes that must be paid
under Hong Kong law will be deducted. The Bank of New York will
distribute only whole US dollars and cents and will round fractional
cents to the nearest whole cent. If the
157
<PAGE> 160
exchange rates fluctuate during a time when The Bank of New York cannot
convert the Hong Kong dollars, you may lose some or all of the value of
the distribution.
- SHARES. The Bank of New York may (or shall upon our request) distribute
new ADRs representing any shares we distribute as a dividend or free
distribution, if we furnish it promptly with satisfactory evidence that
it is legal to do so. The Bank of New York will only distribute whole
ADRs. It will sell shares which would require it to issue a fractional
ADR and distribute the net proceeds in the same way as it does with cash.
If The Bank of New York does not distribute additional ADRs, each ADR
will also represent the new shares.
- RIGHTS TO RECEIVE ADDITIONAL SHARES. If we offer holders of our
securities any rights to subscribe for additional shares or any other
rights, The Bank of New York may (after consultation with us) make these
rights available to you. We must first instruct The Bank of New York to
do so and furnish it with satisfactory evidence that it is legal to do
so. If we do not furnish this evidence and/or give these instructions,
and The Bank of New York decides it is practical to sell the rights, The
Bank of New York will sell the rights and distribute the proceeds in the
same way as it does with cash. The Bank of New York may allow rights that
are not distributed or sold to lapse. In that case, you will receive no
value for them.
If The Bank of New York makes rights available to you, upon your
instruction it will exercise the rights and purchase the shares on your
behalf. The Bank of New York will then deposit the shares and issue ADRs
to you. It will only exercise rights if you pay it the exercise price and
any other charges the rights require you to pay.
U.S. securities laws may restrict the sale, deposit, cancellation, and
transfer of the ADRs issued after exercise of rights. For example, you
may not be able to trade the ADRs freely in the United States. In this
case, The Bank of New York may issue the ADRs under a separate restricted
deposit agreement which will contain the same provisions as the deposit
agreement, except for changes needed to put the restrictions in place.
- OTHER DISTRIBUTIONS. The Bank of New York will send to you anything else
we distribute on deposited securities by any means it thinks is legal,
fair and practical. If it cannot make the distribution in that way, The
Bank of New York has a choice. It may decide to sell what we distributed
and distribute the net proceeds, in the same way as it does with cash.
Or, it may decide to hold what we distributed, in which case ADRs will
also represent the newly distributed property.
The Bank of New York is not responsible if it decides that it is unlawful
or impractical to make a distribution available to any ADR holders. We have no
obligation to register ADRs, shares, rights or other securities under the
Securities Act. We also have no obligation to take any other action to permit
the distribution of ADRs, shares, rights or anything else to ADR holders. This
means that you may not receive the distributions we make on our shares or any
value for them if it is illegal or impractical for us to make them available to
you.
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<PAGE> 161
DEPOSIT, WITHDRAWAL AND CANCELLATION
HOW DOES THE DEPOSITARY ISSUE ADRS?
The Bank of New York will issue ADRs if you or your broker deposit shares
or evidence of rights to receive shares with HSBC. Upon payment of its fees and
expenses and of any taxes or charges, such as stamp taxes or stock transfer
taxes or fees, The Bank of New York will register the appropriate number of ADRs
in the names you request and will deliver the ADRs at its Corporate Trust Office
to the persons you request.
HOW DO ADR HOLDERS CANCEL AN ADR AND OBTAIN SHARES?
You may turn in your ADRs at The Bank of New York's Corporate Trust Office.
Upon payment of its fees and expenses and of any taxes or charges, such as stamp
taxes or stock transfer taxes or fees, The Bank of New York will deliver (1) the
underlying shares to an account designated by you and (2) any other deposited
securities underlying the ADR at the office of HSBC. Or, at your request, risk
and expense, The Bank of New York will deliver the deposited securities at its
Corporate Trust Office.
VOTING RIGHTS
HOW DO YOU VOTE?
You may instruct The Bank of New York to vote the shares underlying your
ADRs but only if we ask The Bank of New York to ask for your instructions.
Otherwise, you won't be able to exercise your right to voting unless you
withdraw the shares. However, you may not know about the meeting enough in
advance to withdraw the shares.
If we ask for your instructions, The Bank of New York will notify you of
the upcoming vote and arrange to deliver our voting materials to you. The
materials will:
- describe the matters to be voted on; and
- explain how you, on a certain date, may instruct The Bank of New York to
vote the shares or other deposited securities underlying your ADRs as you
direct.
For instructions to be valid, The Bank of New York must receive them on or
before the date specified. The Bank of New York will try, as far as practical,
subject to Hong Kong law and the provisions of our Memorandum and Articles of
Association, to vote or to have its agents vote the shares or other deposited
securities as you instruct. If The Bank of New York does not receive your valid
instruction, they will deem that you have instructed them to give a
discretionary proxy to a person designated by us to vote such deposited
securities. In the case of any proposed action that would, pursuant to our
Articles of Association, entitle the holders of shares to vote as a separate
group and we notify the depositary in writing of that fact, if the Depositary
does not receive instructions from the Owner, the Depositary will not be deemed
to have been granted a discretionary proxy and the Depositary will not vote or
attempt to exercise this right to vote that attaches to the shares or other
deposited securities.
We cannot assure you that you will receive the voting materials in time to
ensure that you can instruct The Bank of New York to vote your shares. In
addition, The Bank of New York and its agents are not responsible for failing to
carry out voting instructions
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<PAGE> 162
or for the manner of carrying out voting instructions. This means that you may
not be able to exercise your right to vote and there may be nothing you can do
if your shares are not voted as you requested.
FEES AND EXPENSES
<TABLE>
<CAPTION>
ADR HOLDERS MUST PAY: FOR:
--------------------------------------- -----------------------------------------------
<S> <C>
$5.00 (or less) per 100 ADSs - Each issuance of an ADS, including as a
result of a distribution of shares or rights
or other property
- Each cancellation of an ADS, including if the
deposit agreement terminates
- Each distribution of securities (other than
shares or ADSs), treating the securities as
if they were shares for purpose of
calculating fees
--------------------------------------- -----------------------------------------------
$.02 (or less) per ADS - Any cash distribution
--------------------------------------- -----------------------------------------------
Registration or transfer fees - Transfer and registration of shares on the
share register of our transfer agent and
registrar in Hong Kong from your name to the
name of The Bank of New York or its agent
when you deposit or withdraw shares
--------------------------------------- -----------------------------------------------
Expenses of The Bank of New York - Conversion of Hong Kong dollars to US dollars
- Cable, telex and facsimile transmission
expenses (if expressly provided in the
deposit agreement)
--------------------------------------- -----------------------------------------------
Taxes and other governmental charges - As necessary.
The Bank of New York or HSBC have to
pay on any ADR or share underlying an
ADR, for example, stock transfer taxes,
stamp duty or withholding taxes
--------------------------------------- -----------------------------------------------
</TABLE>
PAYMENT OF TAXES
You will be responsible for any taxes or other governmental charges payable
on your ADRs or on the deposited securities underlying your ADRs. The Bank of
New York may refuse to transfer your ADRs or allow you to withdraw the deposited
securities underlying your ADRs until such taxes or other charges are paid. It
may apply payments owed to you or sell deposited securities underlying your ADRs
to pay any taxes owed and you will remain liable for any deficiency. If it sells
deposited securities, it will, if appropriate, reduce the number of ADRs to
reflect the sale and pay to you any proceeds, or send to you any property,
remaining after it has paid the taxes.
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RECLASSIFICATIONS, RECAPITALIZATIONS AND MERGERS
<TABLE>
<CAPTION>
IF WE: THEN:
<S> <C>
-------------------------------------- ----------------------------------------------
- Change the nominal or par value of The cash, shares or other securities received
our shares by The Bank of New York will become deposited
- Reclassify, split up or consolidate securities. Each ADR will automatically
any of the deposited securities represent its equal share of the new deposited
securities.
- Distribute securities on the shares The Bank of New York may, and will if we ask
that are not distributed to you them to, distribute some or all of the cash,
- Recapitalize, reorganize, merge, shares or other securities it received. It may
liquidate, sell all or substantially also issue new ADRs or ask you to surrender
all of our assets, or take any your outstanding ADRs in exchange for new ADRs
similar action identifying the new deposited securities.
-------------------------------------- ----------------------------------------------
</TABLE>
AMENDMENT AND TERMINATION
HOW MAY THE DEPOSIT AGREEMENT BE AMENDED?
We may agree with The Bank of New York to amend the deposit agreement and
the ADRs without your consent for any reason. If the amendment adds or increases
fees or charges, except for taxes and other governmental charges or registration
fees, cable, telex or facsimile transmission costs, delivery costs or other such
expenses of The Bank of New York, or prejudices an important right of ADR
holders, it will only become effective 30 days after The Bank of New York
notifies you of the amendment. At the time an amendment becomes effective, you
are considered, by continuing to hold your ADR, to agree to the amendment and to
be bound by the ADRs and the deposit agreement as amended.
HOW MAY THE DEPOSIT AGREEMENT BE TERMINATED?
The Bank of New York will terminate the deposit agreement if we ask it to
do so. The Bank of New York may also terminate the deposit agreement if The Bank
of New York has told us that it would like to resign and we have not appointed a
new depositary bank within 120 days. In both cases, The Bank of New York must
notify you at least 120 days before termination.
After termination, The Bank of New York and its agents will be required to
do only the following under the deposit agreement:
- collect distributions on the deposited securities; and
- deliver shares and other deposited securities upon cancellation of ADRs.
One year after termination, The Bank of New York will, if practical, sell
any remaining deposited securities by public or private sale. After that, The
Bank of New York will hold the money it received on the sale, as well as any
other cash it is holding under the deposit agreement for the pro rata benefit of
the ADR holders that have not surrendered their ADRs. It will not invest the
money and has no liability for interest. The Bank of New York's only obligations
will be to account for the money and other cash and with respect to
indemnification. After termination our only obligations will be with respect to
indemnification and to pay certain amounts to The Bank of New York.
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<PAGE> 164
LIMITATIONS ON OBLIGATIONS AND LIABILITY TO ADR HOLDERS
LIMITS ON OUR OBLIGATIONS AND THE OBLIGATIONS OF THE DEPOSITARY; LIMITS ON
LIABILITY TO HOLDERS OF ADRS
The deposit agreement expressly limits our obligations and the obligations
of The Bank of New York. It also limits our liability and the liability of The
Bank of New York. We and The Bank of New York:
- are only obligated to take the actions specifically set forth in the
deposit agreement without negligence or bad faith;
- are not liable if either of us is prevented or delayed by law or
circumstances beyond our control from performing our obligations under
the deposit agreement;
- are not liable if either of us exercises discretion permitted under the
deposit agreement;
- have no obligation to become involved in a lawsuit or other proceeding
related to the ADRs or the deposit agreement on your behalf or on behalf
of any other party;
- may rely upon any documents we believe in good faith to be genuine and to
have been signed or presented by the proper party.
In the deposit agreement, we and The Bank of New York agree to indemnify
each other under certain circumstances.
REQUIREMENTS FOR DEPOSITARY ACTIONS
Before The Bank of New York will issue or register transfer of an ADR, make
a distribution on an ADR, or permit withdrawal of shares, The Bank of New York
may require:
- payment of stock transfer or other taxes or other governmental charges
and transfer or registration fees charged by third parties for the
transfer of any shares or other deposited securities;
- production of satisfactory proof of the identity and genuineness of any
signature or other information it deems necessary; and
- compliance with regulations it may establish, from time to time,
consistent with the deposit agreement, including presentation of transfer
documents.
The Bank of New York may refuse to deliver, transfer, or register transfers
of ADRs generally when the transfer books of The Bank of New York, China Mobile
(HK) or our transfer agent and registrar in Hong Kong are closed or at any time
if The Bank of New York or China Mobile (HK) thinks it advisable to do so.
YOUR RIGHT TO RECEIVE THE SHARES UNDERLYING YOUR ADRS
You have the right to cancel your ADRs and withdraw the underlying shares
at any time except:
- when temporary delays arise because the Bank of New York or China Mobile
(HK) has closed its transfer books, the transfer of shares is blocked to
permit voting at a shareholders' meeting or we are paying a dividend on
the shares;
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<PAGE> 165
- when you or other ADR holders seeking to withdraw shares owe money to pay
fees, taxes and similar charges; or
- when it is necessary to prohibit withdrawals in order to comply with any
laws or governmental regulations that apply to ADRs or to the withdrawal
of shares or other deposited securities.
This right of withdrawal may not be limited by any other provision of the
deposit agreement.
PRE-RELEASE OF ADRS
In certain circumstances, subject to the provisions of the deposit
agreement, The Bank of New York may execute and deliver ADRs before deposit of
the underlying shares. This is called a pre-release of the ADR. The Bank of New
York may also deliver shares upon receipt and cancellation of pre-released ADRs
(even if the ADRs are cancelled before the pre-release transaction has been
closed out). A pre-release is closed out as soon as the underlying shares are
delivered to The Bank of New York. The Bank of New York may receive ADRs instead
of shares to close out a pre-release. The Bank of New York may pre-release ADRs
only under the following conditions:
(1) before or at the time of the pre-release, the person to whom the
pre-release is being made must represent to The Bank of New York in writing
that it or its customer:
- owns the shares or ADRs to be deposited,
- assigns all beneficial interest and title in the shares or ADRs to The
Bank of New York in its capacity as depositary and for the benefit of
the owners, and
- will not take any action with respect to the shares or ADRs that is
inconsistent with the transfer of beneficial ownership including
disposing the shares or ADRs without the prior consent of The Bank of
New York (other than in satisfaction of the pre-release);
(2) the pre-release must be fully collateralized with cash or other
collateral that The Bank of New York considers appropriate; and
(3) The Bank of New York must be able to close out the pre-release on
not more than five business days' notice. The pre-release will be subject
to indemnities and applicable credit regulations that The Bank of New York
reasonably considers appropriate.
In addition, The Bank of New York will limit the number of ADRs that may be
outstanding at any time as a result of pre-release, although The Bank of New
York may disregard the limit from time to time, if it thinks it is appropriate
to do so.
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<PAGE> 166
DESCRIPTION OF THE CONVERTIBLE NOTES
The convertible notes will be issued under an indenture to be dated as of
, 2000, between us and The Bank of New York, as trustee. The Trust
Indenture Act of 1939, as amended, will govern the terms of the indenture.
References to "we", "us", "our" and "China Mobile (HK)" in this section refer
only to China Mobile (Hong Kong) Limited and its successors under the indenture
and do not include subsidiaries of China Mobile (HK).
The following description of the terms of the indenture and the convertible
notes is a summary. This summary does not restate the indenture or the
convertible notes in full and excludes certain definitions and complex legal
terminology contained in the indenture. While we believe this summary contains
all of the information about the indenture important to your decision to
purchase the convertible notes, it does not include all of the provisions of the
indenture that you may feel are important. It is the indenture, and not this
summary, that will define your rights as a holder of convertible notes. Copies
of the proposed form of indenture have been filed as an exhibit to the
registration statement of which this prospectus is a part and are available as
set forth under "Where You Can Find More Information" beginning on page 200.
GENERAL
We will issue US$600 million aggregate principal amount of convertible
notes. The convertible notes will be our unsecured, senior, unsubordinated
indebtedness, and will rank equal to our present and future unsecured, senior,
unsubordinated indebtedness, as described below under "-- Ranking" beginning on
page 165. We are required to pay the principal amount of the convertible notes
when they mature on , 2005.
Standard & Poor's and Moody's Investors Service have assigned "BBB" and
"Baa2" ratings, respectively, to the convertible notes. In addition, on October
5, 2000 Standard & Poor's confirmed the "BBB" long-term foreign currency
corporate credit rating with stable outlook on us.
The convertible notes will bear interest at the rate per annum indicated on
the cover page of this prospectus from , 2000 or from the most
recent interest payment date to which interest has previously been paid or
provided for. Starting from , 2001, the first interest payment
date, we will pay interest semiannually on and
of each year to holders of convertible notes on the or
immediately preceding such interest payment date. Interest will
be computed on the basis of a 360-day year of twelve 30-day months. If we
default on any principal payment, whether at the stated maturity or otherwise,
the convertible notes will continue to accrue interest and, to the extent
permitted by law, interest will accrue on any overdue interest at the interest
rate applicable to the convertible notes.
You may convert the convertible notes into our shares or ADSs at any time
after 30 days from the original issuance of the convertible notes and before the
close of business on the third business day prior to the earlier of (1) the
maturity date, which is , 2005 or (2) the redemption date fixed for
early redemption. The initial conversion price per share and per ADS will be as
stated on the front cover page of this prospectus, but may be subsequently
adjusted. More details about the conversion are described below under
"-- Conversion" beginning on page 169.
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<PAGE> 167
We may redeem the convertible notes at our option in whole but not in part
at any time on or after , 2002 at 100% of the principal amount
plus any accrued and unpaid interest to the redemption date, if the closing
price of our shares for each of the 30 consecutive trading days as described
below in "-- Optional Redemption by China Mobile (HK)" on page 168 exceeds the
conversion price per share by a percentage as described in that section. In
addition, the convertible notes may be subject to redemption at our option as
set forth below under "-- Optional Tax Redemption by China Mobile (HK)"
beginning on page 168. You may require us to repay the convertible notes at your
option as described below under "-- Repayment at Option of Holders" on page 175.
The convertible notes will not be entitled to the benefits of any sinking
fund.
The convertible notes will be issued only in fully registered form, in
denominations of US$1,000 and integral multiples of US$1,000.
All calculations relating to redemption and conversion, including
adjustment of conversion price, will be made to the nearest 0.01 of a share or
ADS or other property or the nearest cent; however, fractions of shares or ADSs
will not be issued upon conversion and no cash adjustment will be made in
respect of such fractions.
RANKING
The convertible notes will be our unsecured, senior and unsubordinated
obligations. The convertible notes will at all times have the same right of
payment without preference among themselves. In addition, the convertible notes
will have the same right of payment as all our other existing and future
unsecured, senior, unsubordinated obligations and will be senior in right of
payment to all of our existing and future obligations that are expressly
subordinated in right of payment to the convertible notes. The convertible
notes, however, will be effectively subordinated to any of our secured
obligations with respect to assets that secure such obligations. Subject to the
limitations discussed below, we and our subsidiaries may incur additional debt
in the future.
We are a holding company and conduct our business through our subsidiaries.
Other than cash in hand and at banks, we have no significant assets except for
the capital stock of our subsidiaries. We will be dependent on the cash flow of
our subsidiaries to meet our payment obligations, including the obligation to
make payments on the convertible notes. Our subsidiaries have no obligation to
pay any amounts due under the convertible notes or to make any funds available
to us for that purpose, whether through dividends, loans or other payments. Our
right to receive the assets of our subsidiaries upon a liquidation or
reorganization will be effectively subordinated to the rights of all existing
and future creditors of our subsidiaries.
As of June 30, 2000, we had consolidated debt (including bills payable) of
approximately RMB 10,902 million (US$1,317 million). This amount includes the
US$600 million 7 7/8% notes due 2004 we issued in November 1999 which are our
unsecured, senior, unsubordinated indebtedness, and approximately RMB 5,945
million (US$718 million) in unsecured debt (including bills payable) of our
subsidiaries. As of June 30, 2000, after giving pro forma effect to the
convertible note offering, bank borrowing by China Mobile (Shenzhen) and the
debt of the companies that we have agreed to acquire assumed by us in connection
with the acquisition, we would have had
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<PAGE> 168
consolidated debt of approximately RMB 44,496 million (US$5,375 million), of
which RMB 34,572 million (US$4,176 million) would have been debt of our
subsidiaries (including these companies). Approximately RMB 100 million (US$12
million) of this consolidated debt would have been secured debt.
GLOBAL SECURITIES AND BOOK-ENTRY SYSTEM
The convertible notes will be represented by global securities registered
in the name of Cede & Co., as nominee of the Depository Trust Company.
Beneficial interests in the global securities will be shown on, and transfers
thereof will be effected only through, records maintained by the Depository
Trust Company and its participants, including Morgan Guaranty Trust Company of
New York, Brussels Office, as operator of the Euroclear System, and Clearstream
Banking, societe anonyme.
No global security may be exchanged in whole or in part for convertible
notes in definitive registered form, and no transfer of a global security in
whole or in part may be registered in the name of any person other than the
Depository Trust Company for such global security or its nominee unless:
- the Depository Trust Company has notified us that it is unwilling or
unable to continue as securities depositary for the global security or
has ceased to be qualified to act as securities depositary under the
indenture and we do not appoint a successor depository within 90 days;
- we determine that the convertible notes will no longer be represented by
global securities; or
- there shall have occurred and be continuing an event of default with
respect to the convertible notes represented by such global security.
All convertible notes issued in exchange for a global security or any
portion thereof will be registered in the names instructed by the Depository
Trust Company.
As long as the Depository Trust Company, or its nominee is the registered
holder of a global security, the Depository Trust Company or such nominee will
be considered the sole owner and holder of the global security and the
convertible notes it represents for all purposes under the convertible notes and
the indenture. Except in the limited circumstances referred to above, owners of
beneficial interests in a global security will not be deemed to have the global
security or any convertible notes it represents registered in their names. They
also will not receive or be entitled to receive physical delivery of
certificated convertible notes and will not be considered to be the owners or
holders of the global security or any convertible notes it represents for any
purpose under the convertible notes or the indenture. All payments of principal
and interest on a global security will be made to the Depository Trust Company
or its nominee, as the holder. The laws of some jurisdictions require some
purchasers of securities to take physical delivery of securities in definitive
form. These laws may impair your ability to transfer beneficial interests in a
global security.
Ownership of beneficial interests in a global security will be limited to
institutions that have accounts with the Depository Trust Company or its nominee
(whom we refer to herein as "participants") and to persons that may hold
beneficial interests through participants. In connection with the issuance of
any global security, the Depository Trust Company will credit, on its book-entry
registration and transfer system, the principal
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<PAGE> 169
amounts of convertible notes represented by the global security to the accounts
of its participants. Ownership and transfers of beneficial interests in a global
security will be shown and effected only on and through records maintained by
the Depository Trust Company and its participants. Payments, transfers,
exchanges and other matters relating to beneficial interests in a global
security may be subject to various policies and procedures adopted by the
Depository Trust Company. Neither the trustee nor China Mobile (HK) nor any
agent of the trustee or China Mobile (HK) will have any responsibility or
liability for any aspect of the Depository Trust Company's or any participant's
records relating to, or for payments made on account of, beneficial interests in
a global security. They will also not be responsible for maintaining,
supervising or reviewing any records relating to these beneficial interests.
The Depository Trust Company has advised the trustee and us that its
current practice is to credit the accounts of its participants with payments of
principal or interest on the date payable based on the records of the Depository
Trust Company, unless the Depository Trust Company has reason to believe that it
will not receive payment on that date. Payments by participants and indirect
participants to owners of beneficial interests in the global securities will be
governed by standing instructions and customary practices for securities held in
bearer form or registered in "street name". These payments will be the
responsibility of such participants or indirect participants.
We will send any redemption notices to Cede & Co. We understand that if
less than all of the convertible notes are being redeemed, the Depository Trust
Company's practice is to determine by lot the amount of the holdings of each
participant to be redeemed.
The Depository Trust Company has advised us that it is a limited-purpose
trust company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered pursuant to
Section 17A of the Exchange Act. The Depository Trust Company accepts securities
for deposit from participants and facilitates the clearance and settlement of
transactions in securities between participants. This is done through electronic
book-entry changes in accounts of its participants, which eliminates the need
for physical movement of certificates. Participants include securities brokers
and dealers (including the underwriters for the the convertible note offering),
banks, trust companies and clearing corporations. Indirect access to the
Depository Trust Company's systems is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant.
The Depository Trust Company has advised us that it may discontinue
providing its services as securities depository with respect to the convertible
notes at any time by giving reasonable notice to us or the trustee. Under such
circumstances, in the event that a successor securities depository is not
appointed, definitive security certificates are required to be printed and
delivered.
Euroclear and Clearstream have advised us that they hold securities for
participating organizations and facilitate the clearance and settlement of
securities transactions between their participants through electronic book-entry
changes in their accounts. Euroclear and Clearstream provide to their
participants, among other things, services for
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<PAGE> 170
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. They also interface with
domestic securities markets. Euroclear and Clearstream participants are
financial institutions, such as underwriters, securities brokers and dealers,
banks and trust companies. Participants may also include some of the
underwriters of the convertible note offering. Indirect access to Euroclear or
Clearstream is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Euroclear or Clearstream participant.
REDEMPTION ON MATURITY
Unless previously redeemed, converted or purchased and canceled, we will
redeem the convertible notes at 100% of the principal amount, plus any accrued
and unpaid interest, on , 2005.
OPTIONAL REDEMPTION BY CHINA MOBILE (HK)
On or after , 2002, we may redeem the convertible notes in whole
but not in part at any time, at 100% of the principal amount of the convertible
notes, plus any accrued and unpaid interest to the redemption date, if the
closing price (translated into US dollars at the prevailing exchange rate) of
the shares on the Hong Kong Stock Exchange for each of the 30 consecutive
trading days, the last of which occurs not more than five days prior to the date
on which notice of such redemption is given, is at least 120% of the conversion
price per share as adjusted through, and effective on, such notice date
(translated into US dollars at the fixed exchange rate of US$1.00 = HK$ ).
In addition, if at any time the aggregate principal amount of the
convertible notes outstanding is less than 5% of the aggregate principal amount
of the convertible notes originally issued (including any convertible notes
issued upon the exercise by the underwriters of their overallotment option), we
have the option to redeem such outstanding convertible notes in whole but not in
part at 100% of the principal amount plus any accrued and unpaid interest.
If we elect to redeem the convertible notes, we will give at least 30 days'
but not more than 60 days' prior notice to the holders. Notice to holders
regarding the early redemption will be published as necessary as described under
"-- Notices and Title" on page 186.
OPTIONAL TAX REDEMPTION BY CHINA MOBILE (HK)
The convertible notes are redeemable at our option, in whole but not in
part, on any date at a redemption price equal to 100% of the principal amount
plus any accrued and unpaid interest to the redemption date if we determine
that, as a result of any change in or amendment to the laws or any regulations
or rulings promulgated thereunder of Hong Kong or any political subdivision or
taxing authority thereof or therein or any change in the official application or
interpretation of such laws, regulations or rulings, or any change in the
official application or interpretation of, or any execution or amendment to, any
treaty or treaties affecting taxation to which Hong Kong is a party, which
change, execution or amendment becomes effective on or after the original issue
date of the convertible notes, we have been or will be required to pay
additional amounts with
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<PAGE> 171
respect to the convertible notes as described below under "-- Payment of
Additional Amounts" beginning on page 177.
If we elect to redeem the convertible notes, we will give at least 30 days'
but not more than 60 days' prior notice to the holders. Notice of the exercise
of our optional tax redemption will also be published as necessary as described
below under "-- Notices and Title" on page 186. Prior to any such redemption, we
will provide the trustee with a legal opinion that the conditions precedent to
such redemption have occurred.
CONVERSION
Unless otherwise specified, the reference to conversion price shall mean,
collectively, conversion price per ADS and conversion price per share.
GENERAL
You have the option to convert any portion of the principal amount of any
convertible note that is an integral multiple of US$1,000 into shares or ADSs at
any time after 30 days from the original issuance of the convertible notes and
before the close of business on the third business day prior to the earlier of
(1) the maturity date, which is , 2005 , or (2) the redemption date
fixed for early redemption. The initial conversion prices per share and per ADS
are set forth on the cover page of this prospectus, which may be adjusted as
described below in "-- Adjustment of Conversion Price" beginning on page 170.
However, unless we default in making the payment due upon redemption, your right
to convert a convertible note called for redemption will terminate at the close
of business on the third business day prior to the redemption date and will be
lost if not exercised prior to that time.
The number of shares to be issued upon conversion will be determined by
dividing the aggregate principal amount (translated into Hong Kong dollars at
the fixed exchange rate of US$1.00 = HK$ ) of all convertible notes to be
converted by a holder by the conversion price per share in effect on the date of
conversion. We will issue the shares as soon as practicable, but in no event
later than 14 days after the date of conversion, subject to applicable laws and
in accordance with the indenture. If you elect to receive ADSs instead of
shares, the shares issuable upon conversion will be deposited with the
depositary for the issuance of ADSs in accordance with the applicable terms and
conditions of our deposit agreement with the depositary. You should refer to
"Description of American Depositary Receipts" beginning on page 157 for details.
We will not issue fractional shares or fractional ADSs upon conversion, and no
cash adjustments will be made in respect of any such fraction. The shares
issuable upon conversion will be fully paid and nonassessable and will rank
equally with all our ordinary shares.
You may convert all or any of the convertible notes you hold by delivering
the convertible note or notes during normal business hours at the office of The
Bank of New York, our conversion agent, in the Borough of Manhattan, The City of
New York or the office of Banque Internationale a Luxembourg, 69, Route d'Esch,
L-1470 Luxembourg, accompanied by a duly signed and completed conversion notice,
a form of which may be obtained at these offices. The conversion date will be
the date on which the convertible note and the duly signed and completed
conversion notice are so delivered and any required expenses or taxes are paid.
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A conversion notice once given will be irrevocable and may not be withdrawn
without our written consent. We or any conversion agent on our behalf may reject
any incomplete or incorrect conversion notice. All costs and expenses incurred
by an incomplete or incorrect conversion notice will be for the account of the
relevant holder.
If you surrender a convertible note for conversion after the close of
business on any record date next preceding any interest payment date but before
the opening of business on that interest payment date, you will receive the
interest payable on the convertible note on the interest payment date
notwithstanding the conversion. Accordingly, in such cases, the convertible note
you surrender for conversion must be accompanied by payment of an amount equal
to the interest which you will receive on the interest payment date. The above
does not apply to any convertible note called for redemption on a redemption
date prior to that interest payment date. Except as described above, we will not
pay interest on converted convertible notes on any interest payment date
subsequent to the date of conversion. No other payment or adjustment for accrued
and unpaid interest or dividends on our shares will be made upon conversion
other than in limited circumstances as set forth in the Indenture. If shares are
issued upon conversion after the close of business of a record date with respect
to dividends, the holder of these shares will not be entitled to receive any
such dividends payable to our shareholders with respect to that record date.
Holders of convertible notes will not be entitled to pro rata subscription
rights with respect to future issues of shares or ADSs as referred to in
"Description of Share Capital -- Issue of Shares" on page 155 of this
prospectus, or securities or rights which are convertible into shares or ADSs,
by us or any of our subsidiaries.
Holders are required to pay to the relevant agent any taxes and capital,
stamp, issue and registration duties arising on conversion, other than any taxes
or capital or stamp duties payable in Hong Kong in respect of the allotment and
issuance of shares and listing of the shares upon conversion. In addition,
holders will be required to pay any tax or duty relating to any disposal or any
deemed disposal relating to the conversion and transfer involved in the issue or
delivery of our shares upon conversion. We will pay all other expenses arising
on the issue, allotment and delivery of the shares issuable upon conversion. If
you elect to receive ADSs instead of shares upon conversion, you will be
required to pay applicable fees and expenses, if any, of the depositary as
described in "Description of American Depositary Receipts" beginning on page
157. Certificates representing our shares or ADSs will not be issued or
delivered unless all taxes and duties, if any, payable by you have been paid.
ADJUSTMENT OF CONVERSION PRICE
The conversion price per share and the conversion price per ADS will be
adjusted upon the occurrence of certain customary dilutive events as provided in
detail in the indenture and summarized below. In each case, the adjusted
conversion price is determined by multiplying the conversion price before
adjustment, denoted as "P", by an applicable adjustment factor. The formulae for
determining the adjustment factors are set forth below. Each adjustment factor
applies to both the adjustment of the conversion price per share and the
adjustment of the conversion price per ADS. In each case, the conversion price
will be adjusted with effect from the applicable effective date as described
below.
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In the event that the share-to-ADS ratio is changed, the conversion price
before adjustment (or P) per ADS used in each adjustment calculation will be
re-set accordingly.
(1) If we:
(a) pay a dividend or make a distribution on our shares in the form
of shares, other than a cash dividend or distribution that permits the
recipient to elect to receive our shares instead of cash (all references
to dividend in this paragraph (1)(a) being a dividend other than an
extraordinary dividend described in paragraph (4) below);
(b) split or reclassify our outstanding shares into a greater
number of shares; or
(c) consolidate or reclassify our outstanding shares into a lesser
number of shares,
then the conversion price will be adjusted as follows:
<TABLE>
<S> <C>
X
Adjusted conversion price = P x ------
Y
</TABLE>
where:
"X" means the number of shares outstanding immediately prior to the
effective date for the adjustment; and
"Y" means the number of shares outstanding immediately after the
effective date for the adjustment.
The effective date for an adjustment under paragraph (1)(b) or (1)(c) is
the date on which the split, reclassification or consolidation event becomes
effective. The effective date for an adjustment under paragraph (1)(a) is the
record date we set for the relevant dividend or distribution.
(2) If we issue or distribute shares, or we or any of our subsidiaries
issue or distribute any securities or rights which are convertible into or
exchangeable for our shares, or issue or distribute any warrants or rights
to purchase or subscribe for our shares, in each case, whether or not to
our shareholders; and the applicable issue, distribution, conversion,
exchange, purchase or subscription price per share, after taking into
account any per share consideration received by us in respect of that
issuance or distribution, is below 95% of the average market price
(calculated as described below) of our shares as of the date of
announcement of details concerning that price,
the conversion price will be adjusted as follows:
<TABLE>
<S> <C>
(S + f)
Adjusted conversion price = P x ------------
(S + a)
</TABLE>
where:
"S" means the number of shares outstanding on the date of announcement
of details concerning the relevant issuance, distribution, conversion,
exchange, purchase or subscription price;
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<PAGE> 174
"f" means the number of additional shares which the aggregate applicable
issuance, distribution, conversion, exchange, purchase or subscription
price (taking into account any aggregate consideration received by us in
respect of that issuance or distribution) would purchase at the average
market price of our shares as of that date of announcement; and
"a" means the number of additional shares which are issued or are
initially issuable pursuant to the terms of the securities or rights
that are the subject of that issuance or distribution.
The effective date for an adjustment as a result of issuance or
distribution to all or substantially all holders of our shares under paragraph
(2) is the record date we set for that issuance or distribution. The effective
date for an adjustment as a result of other issuance under paragraph (2) is the
date of completion of that issuance.
In case of any adjustment as a result of issuance of our shares by way of a
rights offering to all or substantially all holders of our shares, we may elect
to defer the effectiveness of that adjustment until the subscription period
applicable to such rights offering has expired. In that case, the conversion
price should be adjusted using elements "f" and "a" in the above formula that
are calculated on the basis of the actual number of shares issued and aggregate
purchase price actually paid in the rights offering. The adjustment will take
effect retroactively from the record date we set for the rights offering.
(3) If we issue or distribute, for less than 95% of their fair market
value (as defined below), to all or substantially all holders of our
shares, any
(a) securities other than as described in (1) or (2) above,
(b) assets, other than cash dividends or dividends in kind, in each
case declared and paid in the ordinary course (as described below), but,
for the avoidance of doubt, including any dividend or portion of such
dividend which constitutes a redemption of share capital as part of a
reduction in par value of the shares, or
(c) rights to acquire those securities or assets,
then the conversion price will be adjusted as follows:
<TABLE>
<S> <C>
(M - d)
Adjusted conversion price = P x ------------
M
</TABLE>
where:
"M" means the average market price per share as of the date of
announcement of terms of the issuance or distribution; and
"d" means the fair market value of the portion of the securities, assets
or rights to acquire any of the foregoing as is attributable to one
share, minus any consideration received by us in respect of such
portion. The fair market value will be as determined by our board of
directors, which determination will be conclusive and calculated on the
last trading date preceding such date of announcement.
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For the purposes of this paragraph (3), dividends "in the ordinary
course" shall mean, with respect to any fiscal year, the declaration and
payment by us of no more than (x) an interim dividend with respect to
our interim financial results for such fiscal year and (y) a final
dividend with respect to our full year financial results for such fiscal
year.
The effective date for an adjustment under paragraph (3) is the record date
we set for that issuance or distribution.
(4) If we issue or distribute an extraordinary dividend (as described
below), the conversion price will be adjusted as follows:
<TABLE>
<S> <C>
(M - e)
Adjusted conversion price = P x ------------
M
</TABLE>
where:
"M" has the same meaning as in paragraph (3) above; and
"e" means the extraordinary dividend payable on one share.
For purpose of this paragraph (4), an extraordinary dividend occurs
if the total current dividend (as described below) equals or exceeds on
a per share basis:
(A) if we have never declared or paid any cash dividend: 2% of the
one-year average closing price (as described below) of the shares; or
(B) if we have declared and paid at least one cash dividend: the
lower of (1) twice the reference dividend (as described below) and (2)
the reference dividend plus 1% of the one-year average closing price of
the shares.
In the case of (A) above, the extraordinary dividend will be the
amount by which the total current dividend exceeds 2% of the one-year
average closing price of the shares, and in the case of (B) above, the
extraordinary dividend will be the amount by which the total current
dividend exceeds the reference dividend. For the avoidance of doubt, all
amounts are on a per share basis.
For purpose of this paragraph (4):
1. Total current dividend means any and all cash dividends
declared by us on the shares, prior to the deduction of any
withholding tax plus any corporate tax attributable to that
dividend, in the period starting from the beginning of the fiscal
year in which the record date set for the dividend that may result
in an adjustment falls and ending on and including that record date
(including the dividend that may result in an adjustment), other
than any dividend or portion thereof which previously resulted in an
adjustment under this paragraph (4).
2. The reference dividend means, at any time, the largest
aggregate amount of cash dividend(s) declared with respect to any
previous fiscal year (or any interim period of such fiscal year) on
a per share basis.
3. The one-year average closing price is the arithmetic average
of the official closing price per share quoted on the Hong Kong
Stock Exchange for each stock exchange trading day during the 365
consecutive day period
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<PAGE> 176
ending on the record date set for the dividend that may result in an
adjustment.
The effective date for an adjustment under paragraph (4) is the record date
we set for that issuance or distribution.
(5) If we determine after consultation with the trustee for the
convertible notes that any other adjustment should be made to conversion
price, we will make such adjustment which is fair and reasonable in our
opinion.
For purpose of paragraphs (2) to (4) above:
The average market price as of a date means the arithmetic mean of the
daily closing prices quoted for the shares on the Hong Kong Stock Exchange
for the 10 consecutive stock exchange trading days immediately preceding
that date.
The conversion price may not be reduced so that, on conversion, shares
would be issued at a discount to their par value. Except in the case of a
consolidation or reclassification of shares described in paragraph (1)(c) above,
the conversion price will not be increased as a result of any adjustment.
In case of an adjustment under paragraph (2) or (3) that becomes effective
on the record date of an issuance or distribution giving rise to the adjustment,
if the actual amount of adjustment cannot be determined on such record date
because certain terms of issuance or distribution have not been determined, we
may elect to defer the effectiveness of such adjustment until it can be
determined and such adjustment will take effect retroactively from the record
date set for the issuance or distribution.
If any doubt arises as to the appropriate adjustment to the conversion
price, a certificate of our auditors at the time will be conclusive and binding
on all concerned except in the case of manifest error.
No adjustment will be made to the conversion price where the adjustment,
rounded to the nearest cent as provided below, if applicable, would be less than
one percent of the conversion price then in effect. On any adjustment, the
resulting conversion price will be rounded to the nearest cent (or the smaller
of the nearest cent in the case of two equally near cents). Any adjustment not
required to be made and any amount by which the conversion price will be rounded
will be carried forward and taken into account in any subsequent adjustment.
Holders will be given notice, in the manner described in "-- Notices and Title"
on page 186, of any adjustment in accordance with the indenture and all
adjustments will be made in accordance with the provisions contained in the
indenture.
No adjustment will be made to the conversion price where shares or other
securities, options or rights to subscribe for or purchase shares or other
securities are issued to our employees, including directors holding executive
office, or employees of any of our subsidiaries or associated companies pursuant
to any stock option programs or similar arrangements for employees approved by
our shareholders.
If a conversion date falls prior to the effective date of an adjustment of
the conversion price in circumstances where the issuance of shares in respect of
the exercise of the relevant conversion right falls on or after the effective
date, we will issue to the relevant holder the additional number of shares to
which that holder would have
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<PAGE> 177
been entitled had the relevant conversion date fallen immediately following the
effective date.
CONVERSION RIGHTS IN CASE OF CONSOLIDATION, MERGER OR SALE OF ASSETS
Under the indenture, we may not consolidate with or merge into any other
corporation or, together with or through one or more of our subsidiaries,
convey, transfer or lease all or substantially all of our properties and assets
or the properties and assets of our subsidiaries on a consolidated basis to any
person, unless the corporation formed by the consolidation or into which we are
merged or the person which acquires by conveyance or transfer, or which leases,
our properties and assets substantially as an entirety will execute and deliver
to the trustee a supplemental indenture. The supplemental indenture will provide
that, among other things, the holder of each convertible note then outstanding
will have the rights, during the period such convertible notes shall be
convertible as described above under "-- General" beginning on page 164, to
convert the convertible note into the kind and amount of shares, other
securities, cash or other assets receivable upon the consolidation, merger, sale
or similar event by a holder of the number of shares into which the convertible
note might have been converted immediately prior to that consolidation, merger,
sale, transfer or similar event. The supplemental indenture will also provide
for adjustment to conversion price which, for events subsequent to the effective
date of such supplement indenture, shall be as nearly equivalent as may be
practicable to the adjustments described above under "-- Adjustment of
Conversion Price" beginning on page 170.
REPAYMENT AT OPTION OF HOLDERS
If a repayment event described below occurs, each holder of the convertible
notes will have the option to require us to repay in cash such holder's
convertible notes at a repayment price equal to 100% of the unpaid principal
amount plus any accrued and unpaid interest at the time of the repayment. Each
holder may require us to repay all or any part of the convertible notes so long
as the principal amount at maturity of the convertible notes being repaid is an
integral multiple of US$1,000.
A repayment event occurs if
(1) the People's Republic of China at any time ceases to hold, directly or
indirectly, at least 51% of our outstanding capital stock, or
(2) at any time our shares are not listed on The Stock Exchange of Hong
Kong Limited (or its successor) or our ADSs are not listed or admitted
to trade on the New York Stock Exchange, the American Stock Exchange or
the Nasdaq National Market (or their respective successors).
In addition, while a consolidation or merger involving us or a
reclassification of our shares not resulting in (1) or (2) above does not
constitute a repayment event, it will be subject to certain general restrictions
as described under "-- Restrictions on Our Consolidation, Merger, and Other
Events" on page 184, and the holders of convertible notes will be entitled to
the rights provided under the indenture, including those described under
"-- Conversion -- Conversion Rights in Case of Consolidation, Merger or Sale of
Assets" above.
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<PAGE> 178
As soon as practicable, but in no event later than five business days after
we become aware of the occurrence of a repayment event, we will mail to the
trustee and to each registered holder of the convertible notes a written notice
which identifies such event and specifies the procedures required for exercise
of a holder's right to require us to repay its convertible notes. We will fix
the date for repayment on a date that is 45 days from the notice date. Such
notice to holders will be published as necessary as specified in "-- Notice and
Title" on page 186.
Each holder electing to have any of its convertible notes repaid must
deliver a written notice to the paying agent at least 10 days prior to the
repayment date. The notice must specify the principal amount of the convertible
notes submitted for repayment. The form of such notice can be obtained at the
offices of The Bank of New York in New York, New York and Banque Internationale
a Luxembourg in Luxembourg.
PAYMENT AND PAYING AGENTS
Payment of interest on a convertible note on any interest payment date will
be made to the person in whose name the convertible note is registered at the
close of business on the record date for the interest payment.
The principal of and interest on the convertible notes shall be payable:
- so long as the convertible notes are in global form, by transfer of
immediately available funds to a bank account in the Borough of
Manhattan, The City of New York designated by the nominee of the
Depository Trust Company (that is, Cede & Co.), as the holder of the
convertible notes; or
- if the convertible notes have been issued as definitive convertible
notes, at our office or agency maintained for such purpose in The City of
New York, Hong Kong, Luxembourg (at the offices of Banque Internationale
a Luxembourg in Luxembourg), or at such other office or agency as may be
maintained by us for such purpose; provided, however, that, at our
option, interest may be paid by check mailed to addresses of the persons
entitled thereto as such addresses shall appear on the principal security
register. The payment of principal is made against presentation and
surrender of the definitive convertible notes at the office of any paying
agent.
Principal of and interest on the convertible notes will be payable at the
office of such paying agent or paying agents as we may designate for such
purpose from time to time. The corporate trust office of the trustee in The City
of New York and Banque Internationale a Luxembourg in Luxembourg will be
designated as our paying agents for payments with respect to the convertible
notes. We may at any time designate additional paying agents or rescind the
designation of any paying agent or approve a change in the office through which
any paying agent acts, except that we will be required to maintain a paying
agent in Luxembourg and in each other location where we will make payments on
the convertible notes.
All moneys paid by us to a paying agent for the payment of the principal of
or interest on any convertible note that remain unclaimed at the end of two
years after such principal or interest has become due and payable will be repaid
to us and, afterwards, the holder of that convertible note may look only to us
for payment.
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<PAGE> 179
Claims in respect of payment of principal of, and interest on, the
convertible notes will be prescribed unless made within a period of ten years,
in the case of principal, and five years, in the case of interest, from the date
when the relevant principal or interest becomes due and payable.
PAYMENT OF ADDITIONAL AMOUNTS
All payments of, or in respect of, principal of and interest on the
convertible notes shall be made without withholding or deduction for, or on
account of, any present or future taxes, duties, assessments or governmental
charges of whatever nature imposed or levied by or on behalf of Hong Kong or any
political subdivision or taxing authority thereof or therein unless these taxes,
duties, assessments or governmental charges are required to be withheld or
deducted. In that event, we will pay by way of additional interest such
additional amounts of, or in respect of, principal and interest as will result
(after deduction of such taxes, duties, assessments or governmental charges and
any additional taxes, duties, assessments or governmental charges of Hong Kong)
in the payment to each holder of a convertible note of the amounts that would
have been payable in respect of such convertible note had no withholding or
deduction been required, except that no additional amounts shall be payable for
or on account of:
- any tax, duty, assessment or other governmental charge that would not
have been imposed but for the fact that such holder
- was a resident, domiciliary or national of, or engaged in business or
maintained a permanent establishment or was physically present in,
Hong Kong or otherwise had some connection with Hong Kong other than
the mere ownership of, or receipt of payment under, such convertible
note; or
- presented such convertible note more than thirty days after the date
on which the payment in respect of such convertible note first became
due and payable or provided for, whichever is later, except to the
extent that the holder would have been entitled to such additional
amounts if it had presented such convertible note for payment on any
day within such period of thirty days;
- any estate, inheritance, gift, sale, transfer, personal property or
similar tax, assessment or other governmental charge;
- any tax, duty, assessment or other governmental charge which is payable
otherwise than by deduction or withholding from payment of principal of
or interest on the convertible notes;
- any tax, assessment or other governmental charge that is imposed or
withheld by reason of the failure to comply by the holder or the
beneficial owner of a convertible note with a request by us addressed to
the holder (a) to provide information concerning the nationality,
residence or identity of the holder or such beneficial owner or (b) to
make any declaration or other similar claim or satisfy any information or
reporting requirement, which, in the case of (a) or (b), is required or
imposed by a statute, treaty, regulation or administrative practice of
the taxing jurisdiction as a precondition to exemption from all or part
of such tax, assessment or other governmental charge; or
- any combination of the items listed above;
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<PAGE> 180
nor shall additional amounts be paid with respect to any payment of the
principal of or interest on any convertible note to any holder who is a
fiduciary or partnership or other than the sole beneficial owner of the payment
to the extent that payment would be required by the laws of Hong Kong to be
included in income for tax purposes of the fiduciary if the beneficial owner
would not otherwise have been entitled to the additional amounts.
Any reference herein to the payment of the principal of or interest on any
convertible note shall be deemed to include the payment of additional amounts
provided for in the indenture to the extent that, in such context, additional
amounts are, were or would be payable under the indenture.
PURCHASE BY CHINA MOBILE (HK)
China Mobile (HK) may, in accordance with all applicable laws and
regulations, at any time purchase the convertible notes in the open market or
otherwise at any price. All convertible notes repurchased by China Mobile (HK)
will be cancelled.
COVENANTS GIVEN BY US IN THE INDENTURE
In the indenture, we will agree to certain covenants that:
- limit our ability to pledge our assets or enter into sale and leaseback
transactions; and
- limit the ability of our subsidiaries to incur debt.
LIMITATION ON PLEDGES AND SALE AND LEASEBACK TRANSACTIONS
So long as any of the convertible notes remains outstanding, we will not,
and will procure that our subsidiaries will not, grant or permit to be
outstanding, any mortgage, charge, lien, pledge or any other security interest
on any of our or our subsidiaries' present or future assets or revenues to
secure the repayment of, or any guarantee or indemnity in respect of, any debt
unless such convertible notes are secured by a security interest equally and
ratably with such other debt. This provision, however, will not apply to any:
- security interest existing prior to the date of the indenture;
- security interest to secure the payment of all or any part of the
purchase price or construction cost of any property or asset or to secure
any debt incurred prior to, or at the time of, the acquisition or the
completion of construction of the property or asset for the purpose of
financing all or any part of that purchase price or construction cost;
- lien arising by operation of law, including but not limited to liens of a
landlord, carrier, warehouseman, mechanic or materialman incurred in the
ordinary course of business for a sum not yet due or the payment of which
is being contested in good faith;
- security interest existing on (i) any property or asset of any entity at
the time the entity becomes one of our subsidiaries or (ii) any property
or asset at the time it is acquired by us or one of our subsidiaries;
- security interests securing debt owed by one of our subsidiaries to us;
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- liens incurred or deposits made in the ordinary course of business in
connection with social security, workers' compensation, unemployment
insurance and similar types of laws or regulations;
- liens for taxes or assessments or other applicable governmental charges
or levies;
- attachment, judgment and other similar liens arising in connection with
court proceedings which are effectively stayed while the underlying
claims are being contested in good faith by appropriate proceedings;
- rights of set-off or similar rights of a financial institution with
respect to deposits or other accounts of us or any of our subsidiaries
held by such financial institution in an amount not to exceed the
aggregate amount owed to such financial institution by us or such
subsidiary, as the case may be;
- liens on documents and the goods they represent in connection with
letters of credit and similar transactions entered into in the ordinary
course of business;
- easements, rights of way and other similar restrictions or encumbrances
not materially interfering with the ordinary conduct of our business or
the business of our Subsidiaries;
- security interests securing other debt not exceeding in aggregate
principal amount at any time of determination an amount equal to 10% of
our consolidated net tangible assets; or
- renewal, extension or replacement (in whole or in part) of any security
interest permitted under the indenture.
In addition, we will not, and will not permit any of our subsidiaries to,
enter into any sale and leaseback transaction with respect to any property
unless:
- the aggregate amount of attributable debt with respect to all outstanding
sale and leaseback transactions(including such sale and leaseback
transaction) entered into by us and our subsidiaries is less than 10% of
consolidated net tangible assets; or
- the direct or indirect proceeds of the sale of the property to be leased
are at least equal to their fair value, as determined by our board of
directors, and an amount equal to the net proceeds is applied, within 180
days of the effective date of the transaction, to:
- the purchase, acquisition or commencement of the construction, of
property or assets; or
- the retirement of the convertible notes, other than at maturity; or
- the repayment of funded debt of us or one of our consolidated
subsidiaries that ranks on a parity with or senior to the convertible
notes;
subject to credits for voluntary retirement of funded debt and delivery of
convertible notes to the trustee for retirement and cancellation.
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Attributable debt means, when used in connection with a sale and leaseback
transaction, at any date as of which the amount thereof is to be determined, the
product of:
- the net proceeds from such sale and leaseback transaction, multiplied by
- a fraction, the numerator of which is the number of full years of the
term of the lease relating to the property involved in such sale and
leaseback transaction (without regard to any options to renew or extend
the term) remaining at the date of the making of such computation, and
the denominator of which is the number of full years of the term of such
lease (without regard to any options to renew or extend the term)
measured from the first day of the term.
Consolidated net tangible assets means, as of any date of determination,
the sum of the amount that would appear on our consolidated balance sheet as the
total assets (less accumulated depreciation and amortization, allowances for
doubtful receivables, other applicable provisions and other properly deductible
items), after giving effect to purchase accounting and after deducting therefrom
consolidated current liabilities and, to the extent otherwise included, the
amounts of:
- the excess of cost over fair market value of assets or businesses
acquired;
- any revaluation or other write-up in book value of assets subsequent to
the last day of the fiscal quarter immediately preceding the issue date
as a result of a change in the method of valuation in accordance with US
GAAP;
- unamortized debt discount and expenses and other unamortized deferred
charges, goodwill, patents, trademarks, service marks, trade names,
copyrights, licenses, organization or developmental expenses and other
intangible items;
- minority interests in consolidated subsidiaries held by persons other
than us or our subsidiaries;
- treasury stock; and
- cash or securities set aside and held in a sinking or other analogous
fund established for the purpose of redemption or other retirement of
capital stock to the extent such obligation is not reflected in
consolidated current liabilities.
LIMITATION ON SUBSIDIARY INDEBTEDNESS
Under the indenture, for so long as any convertible notes remain
outstanding, we will not permit any of our subsidiaries to incur any additional
debt if the aggregate debt of our subsidiaries following such incurrence exceeds
120% of our consolidated adjusted EBITDA for the most recently completed
twelve-month period. This provision, however, will not apply to debt owed by any
of our subsidiaries to us.
Adjusted EBITDA means, for any period, an amount equal to:
- the sum of consolidated net profit for such period, plus the following,
to the extent any of the following has reduced consolidated net profit
for such period:
- the provision for taxes based on income or profits or utilized in
computing net loss;
- consolidated interest expense(as described below);
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- consolidated interest income;
- depreciation;
- amortization of intangibles;
- write-down and write-off of fixed assets; and
- any other non-cash items (other than any such non-cash item to the
extent that it represents an accrual of or reserve for cash
expenditures in any future period), minus
- all non-cash items increasing consolidated net income for such period
(other than any such non-cash item to the extent that it will result in
the receipt of cash payments in any future period).
Notwithstanding the first item above, the provisions for taxes and
diminution in value of fixed assets and the depreciation, amortization and
non-cash items of a subsidiary shall be added to consolidated net profit to
compute our adjusted EBITDA only to the extent (and in the same proportion) that
the net income of such subsidiary was included in calculating our consolidated
net profit and only if a corresponding amount would be permitted at the date of
determination to be dividended to us by such subsidiary without prior approval
(that has not been obtained), pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to such subsidiary or its shareholders.
Consolidated interest expense means, for any period, total interest expense
plus, to the extent not included in such total interest expense and to the
extent incurred:
- interest expense attributable to leases constituting part of a sale and
leaseback transaction and to capitalized lease obligations;
- amortization of debt discount and debt issuance costs, including
commitment fees;
- capitalized interest;
- non-cash interest expenses;
- discounts, interest and other similar fees and charges owed with respect
to letters of credit and banker's acceptance financing;
- net costs associated with hedging debt obligations (including
amortization of fees);
- preferred stock dividends;
- interest incurred in connection with Investments in discontinued
operations; and
- interest accruing on any debt of any other person to the extent such debt
is guaranteed by the relevant entity.
For purpose of this section, debt means, with respect to any person on any
date of determination:
- the principal of and premium (if any) in respect of debt of such person
for money borrowed and debt evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such person is
responsible or liable;
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- all capitalized lease obligations of such person and all attributable
debt in respect of sale and leaseback transactions entered into by such
person;
- all obligations of such person created or arising under conditional sale
obligations or title retention agreements or similar agreements related
to the deferred purchase price of property (but excluding trade accounts
payable arising in the ordinary course of business and other short-term
accounts payable arising in connection with capital expenditures incurred
in the ordinary course of business);
- all obligations of such person for the reimbursement of any obligor on
any letter of credit or banker's acceptance (other than obligations with
respect to letters of credit securing obligations (other than obligations
described in the first three items above) entered into in the ordinary
course of business of such person to the extent such letters of credit
are not drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the third business day following receipt by such
person of a demand for reimbursement following payment on the letter of
credit);
- the amount of all obligations of such person with respect to the
repayment of any preferred stock (but excluding, in each case, any
accrued dividends);
- all obligations of the type referred to in the first five items above of
other persons and all dividends of other persons for the payment of
which, in either case, such person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
guarantee;
- all obligations of the type referred to in the first six items above of
other persons secured by any lien on any property of such person (whether
or not such obligation is assumed by such person), the amount of such
obligation being deemed to be the lesser of the value of such property
and the amount of the obligation so secured; and
- to the extent not otherwise included in this definition, obligations of
such person hedging any of the debt obligations referred to above.
The amount of debt of any person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
EVENTS OF DEFAULT
The following are events of default under the indenture with respect to the
convertible notes:
- failure to pay principal of any of the convertible notes when due;
- failure to pay any interest on any of the convertible notes within 30
days of the due date for payment;
- failure by us to perform any other covenant in the indenture continued
for 60 days after written notice as provided in the indenture;
- failure to pay upon final maturity the principal of, or acceleration of,
any debt by us or any of our material subsidiaries in an aggregate
principal amount of at least
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US$30 million, if such debt is not discharged, or such acceleration is
not annulled, within 10 days after written notice as provided in the
indenture; and
- any event of bankruptcy, insolvency or reorganization for the benefit of
our creditors involving us or any of our material subsidiaries.
Material subsidiary means any of our subsidiaries whose total assets equal
at least 5% of our consolidated net tangible assets.
If an event of default with respect to the convertible notes shall occur
and continue, either the trustee or the holders of at least 25% in aggregate
principal amount of the outstanding convertible notes may declare the principal
amount of the convertible notes to be due and payable immediately. After any
acceleration, but before a judgment or decree based on acceleration, the holders
of a majority in aggregate principal amount of the outstanding convertible notes
may, under certain circumstances, rescind and annul the acceleration if all
events of default, other than the non-payment of accelerated principal (or other
specified amount), have been cured or waived as provided in the indenture. For
information regarding waiver of defaults, see "-- Amendment and Modification"
beginning on page 184.
Subject to the provisions of the indenture relating to the duties of the
trustee in case of an event of default shall occur and continue, the trustee
will be under no obligation to exercise any of its rights or powers under the
indenture at the request or direction of any of the holders, unless the holders
shall have offered security or indemnification to the trustee.
Subject to such provisions for the security or indemnification of the
trustee, the holders of a majority in aggregate principal amount of the
outstanding convertible notes will have the right to direct the time, method and
place of:
- conducting any proceeding for any remedy available to the trustee; or
- exercising any trust or power conferred on the trustee with respect to
the convertible notes.
No holder of a convertible note will have any right to institute any
proceeding with respect to the indenture, or for the appointment of a receiver
or a trustee, or for any other remedy, unless:
- the holder has previously given to the trustee written notice of a
continuing event of default with respect to the convertible notes;
- the holders of at least 25% in aggregate principal amount of the
outstanding convertible notes have made a written request, and have
offered indemnification, to the trustee to institute a proceeding as
trustee; and
- the trustee has failed to institute a proceeding, and has not received
within 60 days of the notice of default and request for proceeding a
direction from the holders of a majority in aggregate principal amount of
the outstanding convertible notes not to institute the proceeding.
Such limitations do not apply, however, to a suit instituted by a holder of
a convertible note for the enforcement of payment of the principal of or
interest on the convertible note on or after the applicable due date.
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We will be required each year to furnish to the trustee a statement by our
officers regarding whether or not we, to our knowledge, are in default in the
performance or observance of any of the terms, provisions and conditions of the
indenture and, if so, specifying all known defaults.
RESTRICTIONS ON OUR CONSOLIDATION, MERGER AND OTHER EVENTS
Under the indenture, we may not consolidate with or merge into any other
corporation or, together with or through one or more of our subsidiaries,
convey, transfer or lease all or substantially all of our properties and assets
or the properties and assets of our subsidiaries on a consolidated basis to any
person, unless:
- the corporation formed by the consolidation or into which we are merged
or the person which acquires by conveyance or transfer, or which leases,
our properties and assets substantially as an entirety (A) shall be a
corporation, partnership or trust organized and validly existing under
the laws of Hong Kong and (B) shall expressly assume, through a
supplemental indenture, in a form satisfactory to the trustee, our
obligation for the due and punctual payment of the principal of and
interest on all the convertible notes, the obligation with respect to the
holders' conversion rights as described under "-- Conversion Rights in
Case of Merger, Consolidation and Sale of Assets" on page 175, and the
performance and observance of every convenant of the indenture to be
performed or observed on our part;
- immediately after giving effect to such transaction, no default or event
of default shall have occurred and be continuing; and
- we or the relevant person shall have delivered to the trustee an
officer's certificate and a legal opinion, each stating that the
consolidation, merger, conveyance, transfer or lease and the related
supplemental indenture comply with the relevant terms and conditions of
the indenture and that all conditions precedent relating to the
transaction have been complied with.
These conditions shall only apply to a merger or consolidation in which we
are not the surviving corporation and to conveyances, leases and transfers by us
as transferor or lessor.
Upon our consolidation with or merger into any other corporation or any
conveyance, transfer or lease of our properties and assets substantially as an
entirety to any person as described above, the successor person formed by such
consolidation or into which we are merged or to which such conveyance, transfer
or lease is made shall succeed to, and be substituted for, and may exercise
every right and power of, us under the indenture with the same effect as if the
successor person had been named in the indenture. In the event of any such
conveyance or transfer, we, except in the case of a lease, shall be discharged
of all obligations and convenants under the indenture and the convertible notes
and may be dissolved and liquidated.
AMENDMENT AND MODIFICATION
Amendments and modifications to any of the terms and conditions of the
indenture may be made by us and the trustee with the consent of the holders of a
majority in aggregate principal amount of the outstanding convertible notes;
provided, however, that
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no such modification or amendment may be made, without the consent of each
holder of the outstanding convertible notes, to, among other things:
- change the stated maturity of the principal of, or interest on, any
convertible note;
- reduce the principal amount of, or rate of interest on, any convertible
note or reduce our obligation to pay any additional amounts as described
under "-- Payment of Additional Amounts" beginning on page 177 or
increase the conversion price (except for adjustments provided under the
indenture, as described above);
- adversely affect any right of repayment at the option of any holder of
the convertible notes;
- adversely modify, cancel or adversely affect the holder's conversion
right;
- alter our optional redemption right in a manner adverse to the holder of
the convertible notes;
- change the currency or place of payment of principal of, or interest on
any convertible note or the method of calculating any such payment;
- impair the right to institute suit for the enforcement of any payment on
or with respect to any convertible note on or after the stated maturity;
- reduce the percentage in aggregate principal amount of outstanding
convertible notes, the consent of whose holders is required for
modification or amendment of the indenture or for waiver of compliance
with certain provisions of the indenture or for waiver of certain
defaults; or
- modify such provisions with respect to modification and waiver.
Any amendments and modifications to the terms of the convertible notes will
be effected through written consents obtained from holders of the convertible
notes. We do not anticipate that meetings among holders of the convertible notes
will be convened.
The holders of a majority in aggregate principal amount of the outstanding
convertible notes may, on behalf of all holders of convertible notes, waive
compliance by us with certain restrictive provisions of the indenture. The
holders of not less than a majority in aggregate principal amount of the
outstanding convertible notes may, on behalf of all holders of convertible
notes, waive any past default under the indenture, except:
- a default in the payment of principal of, or interest on, any outstanding
convertible note or any additional amounts payable; or
- a violation of a covenant or provision which under the indenture cannot
be modified or amended without the consent of the holder of each
outstanding convertible note.
Except in certain limited circumstances, we will be entitled to set any day
as a record date for the purpose of determining the holders of outstanding
convertible notes entitled to give or take any direction, notice, consent,
waiver or other action under the indenture, in the manner and subject to the
limitations provided in the indenture. If a record date is set for any action to
be taken by holders, the action may be taken only by persons who are holders of
outstanding convertible notes on the record date. To be
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effective, the action must be taken by holders of the required principal amount
of the convertible notes within a specified period following the record date.
For any particular record date, this period will be 180 days or a shorter period
as may be specified by us.
EXCHANGE; TRANSFER AGENT
At the option of the holder, subject to the terms of the indenture and the
limitations applicable to global securities (as we explain in "Global Securities
and Book-Entry System" above), convertible notes will be exchangeable for
convertible notes of any authorized denomination and of the same aggregate
principal amount.
You may present your convertible notes for exchange as provided above or
for registration of transfer at the office of the security registrar or at the
office of any transfer agent designated by us for such purpose. No service
charge will be made for any registration of transfer or exchange of convertible
notes, but we may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection with that registration. Transfers or
exchanges will become effective once the security registrar or the transfer
agent is satisfied with the documents of title and identity of the person making
the request. We have appointed the trustee as security registrar.
We may at any time designate additional transfer agents or rescind the
designation of any transfer agent or approve a change in the office through
which any transfer agent acts, except that we will be required to maintain a
transfer agent in each place of payment for the convertible notes. For so long
as any convertible notes remain outstanding, we will maintain a transfer agent
in Luxembourg. The principal security register of the convertible notes will be
kept in New York by The Bank of New York.
NOTICES AND TITLE
Notices to holders of convertible notes will be given by mail to the
addresses of such holders as they may appear in the security register. In
addition, we will publish any notices as necessary, and so long as the
convertible notes are listed on the Luxembourg Stock Exchange and the rules of
the Luxembourg Stock Exchange so require, we will publish notices to holders of
convertible notes in a leading newspaper having general circulation in
Luxembourg, which is expected to be the Luxembourger Wort.
We, the trustee and any agent of us or the trustee may treat the person in
whose name a convertible note is registered as the absolute owner thereof
(whether or not such convertible note may be overdue) for the purpose of making
payment and for all other purposes.
GOVERNING LAW
The indenture and the convertible notes will be governed by and construed
in accordance with the laws of the State of New York, except that all matters
relating to their authorization and execution by us are governed by the laws of
Hong Kong.
CONSENT TO SERVICE OF PROCESS
The indenture provides that we will irrevocably designate CT Corporation
System as our authorized agent for service of process in any legal action or
proceeding arising out
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of or in relation to the indenture or the convertible notes brought in any
federal or state court in the Borough of Manhattan, The City of New York, New
York, and that we will irrevocably submit to the non-exclusive jurisdiction of
such courts.
CONCERNING THE TRUSTEE
The Bank of New York has been appointed as trustee under the indenture. The
principal corporate trust office of the trustee is located at 101 Barclay
Street, 21th Floor, New York, New York 10286. The trustee shall generally act on
behalf of the holders of the convertible notes in accordance with the terms and
conditions of the indenture.
The indenture provides that we will indemnify the trustee against any loss,
liability or expense incurred without negligence or bad faith of the trustee in
connection with the acceptance or administration of the trust created by the
indenture.
Removal of the trustee may be initiated at any time by the holders of not
less than a majority in aggregate principal amount of the outstanding
convertible notes if, at any time:
- the trustee shall fail to comply with the provisions of Section 310(b) of
the Trust Indenture Act after written request by us or by any holder of
the convertible notes who has been a bona fide holder for at least six
months to so comply, or
- the trustee shall cease to be eligible to serve as trustee under the
conditions contained in the indenture and shall fail to resign after
written request by us or by any holder of the convertible notes who has
been a bona fide holder for at least six months, or
- the trustee shall become incapable of acting or shall be adjudged a
bankrupt or insolvent or a receiver of the trustee or of its property
shall be appointed or any public officer shall take charge or control of
the trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation.
In any such case, (i) we, by a board resolution, may remove the trustee, or (ii)
subject to Section 315(e) of the Trust Indenture Act, any holder of the
convertible notes who has been a bona fide holder for at least six months may,
on behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the removal of the trustee and the appointment of a
successor trustee.
GENERAL INFORMATION
1. The convertible notes have been accepted for clearance through the facilities
of the Depository Trust Company and its participants, including Euroclear and
Clearstream. The CUSIP number for the convertible notes is . In
addition, the convertible notes have been assigned Euroclear and Clearstream
Common Code No. and International Security Identification Number (ISIN)
.
2. We have obtained all necessary consents, approvals and authorizations in
connection with the issue and performance of the convertible notes. The issue
of the convertible notes was authorized by a resolution of our board of
directors passed on October 4, 2000.
3. Application has been made to list the convertible notes on the Luxembourg
Stock Exchange. The legal notice relating to the issue of the convertible
notes and our
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constituent documents will be registered prior to the listing with the Chief
Registrar of the District Court in Luxembourg (Greffier en Chef du Tribunal
d'Arrondissement de et a Luxembourg), where these documents are available for
inspection and where copies thereof can be obtained upon request. As long as
the convertible notes are listed on the Luxembourg Stock Exchange, we will
retain a paying and transfer agent in Luxembourg. The paying and transfer
agent in Luxembourg will be Banque Internationale a Luxembourg, 69, Route
d'Esch, L-1470, Luxembourg.
4. Except as disclosed in this prospectus, there has been no material adverse
change in our financial position or prospects since June 30, 2000.
5. We are not involved in any litigation, arbitration or administrative
proceedings relating to claims that could have a material adverse effect on
our financial condition and results of operations taken as a whole, and, so
far as we are aware, no such litigation, arbitration or administrative
proceedings are pending or threatened.
6. A copy of our constituent documents and copies of the indenture and the
underwriting agreement will, for so long as the convertible notes are listed
on the Luxembourg Stock Exchange, be available for inspection during usual
business hours on any weekday (except public holidays) at the offices of the
paying and transfer agent in Luxembourg.
7. We publish our annual reports containing our audited consolidated financial
statements usually not later than five months after the date upon which the
financial period ended. We do not prepare unconsolidated financial statements
for our annual reports on Form 20-F filed with the Securities and Exchange
Commission. We prepare unconsolidated balance sheets for our Hong Kong annual
reports. We publish unaudited consolidated interim financial statements for
the first six months of each financial year usually not later than three
months after the end of that six-month period. We do not prepare unaudited
unconsolidated interim financial statements. We have not prepared or
published any audited or unaudited financial statements for any period after
June 30, 2000. Although we have prepared audited financial statements as of
and for the six months ended June 30, 2000 for purposes of the share offering
and the convertible note offering, we generally do not publish audited
interim financial statements. Copies of the annual report on Form 20-F and
our Hong Kong annual report and the interim financial statements may be
obtained at the office of the paying and transfer agent in Luxembourg.
8. So long as the convertible notes are listed on the Luxembourg Stock Exchange
and the rules of the Luxembourg Stock Exchange so require, notices to holders
of convertible notes shall be published in a leading newspaper having general
circulation in Luxembourg (which is expected to be the Luxembourger Wort).
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TAXATION
HONG KONG
The taxation of income and capital gains of holders of ordinary shares or
ADSs or convertible notes is subject to the laws and practices of Hong Kong and
of jurisdictions in which holders of shares or ADSs or convertible notes are
resident or otherwise subject to tax. The following summary of the tax position
in Hong Kong is based on current law and practice, is subject to changes therein
and does not constitute legal or tax advice to you. The discussion is based upon
laws and relevant interpretations thereof in effect as of the date of this
prospectus, all of which are subject to change. The discussion does not deal
with all possible tax consequences relating to an investment in the ordinary
shares or ADSs or convertible notes. Accordingly, each prospective investor,
particularly those subject to special tax rules, such as banks, share dealers,
insurance companies and tax-exempt entities, should consult its own tax adviser
regarding the tax consequences of an investment in the ordinary shares or ADSs
or convertible notes.
TAX TREATIES
There is no relevant tax treaty in effect between Hong Kong and the United
States.
TAX ON DIVIDENDS
Under current practice, no tax is payable in Hong Kong in respect of
dividends, either by withholding or otherwise.
TAX ON INTEREST
No withholding tax is payable in Hong Kong in respect of payments of
interest on the convertible notes.
Interest on the convertible notes may be subject to Hong Kong tax if:
- the interest is derived from Hong Kong and is received by or accrues to a
company carrying on a trade, profession or business in Hong Kong;
- the interest is derived from Hong Kong and is received by or accrues to a
person, other than a company, carrying on a trade, profession or business
in Hong Kong and is in respect of the funds of that trade, profession or
business; or
- the interest is received by or accrues to a financial institution (as
defined in the Inland Revenue Ordinance of Hong Kong) and arises through
or from the carrying on by the financial institution of its business in
Hong Kong.
TAX ON GAINS FROM SALE
No tax is imposed in Hong Kong in respect of capital gains. However,
trading gains from the sale of property by persons carrying on a trade,
profession or business in Hong Kong where the gains arise in Hong Kong from such
trade, profession or business will be chargeable to Hong Kong profits tax which
is currently imposed at the rate of 16% on corporations and at a maximum rate of
15% on individuals. Certain categories of taxpayers are likely to be
automatically regarded as deriving trading gains rather than capital gains
(e.g., financial institutions, insurance companies and share dealers).
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Trading gains from sales of the ordinary shares effected on the Hong Kong
Stock Exchange will be considered to arise in Hong Kong.
Trading gains from sales of ADSs listed on and effected through the New
York Stock Exchange will be considered to arise outside Hong Kong and therefore
should not be taxable in any event.
The tax position of trading gains from sales of convertible notes is more
complicated. Generally, such gains will be taxable if the relevant purchase and
sale contracts are effected in Hong Kong, and not taxable if the relevant
purchase and sale contracts are effected outside Hong Kong.
STAMP DUTY
Hong Kong stamp duty, currently charged at the rate of HK$1.125 per
HK$1,000 or part thereof on the higher of the consideration for or the value of
the ordinary shares, will be payable by the purchaser on every purchase and by
the seller on every sale of ordinary shares (i.e., a total of HK$2.25 per
HK$1,000 or part thereof is currently payable on a typical sale and purchase
transaction involving ordinary shares). In addition, a fixed duty of HK$5 is
currently payable on any instrument of transfer of ordinary shares. The
withdrawal of ordinary shares upon the surrender of ADSs, and the issuance of
ADSs upon the deposit of ordinary shares, will also attract stamp duty at the
rate described above for sale and purchase transactions unless the withdrawal or
deposit does not result in a change in the beneficial ownership of the ordinary
shares under Hong Kong law, in which case only a fixed duty of HK$5 is payable
on the transfer. The issuance of the ADSs upon the deposit of ordinary shares
issued directly to the depositary or for the account of the depositary does not
attract stamp duty. Under current practice, no Hong Kong stamp duty is payable
upon the transfer of ADSs outside Hong Kong.
No Hong Kong stamp duty will be chargeable upon the transfer or conversion
of a convertible note or the allotment of the shares. However, following
conversion of a convertible bond, any sale and purchase of ordinary shares will
be chargeable with Hong Kong stamp duty as described above.
ESTATE DUTY
The ordinary shares and convertible notes are Hong Kong property under Hong
Kong law by virtue of being registered on a register in Hong Kong. Accordingly,
the ordinary shares and convertible notes may be subject to estate duty on the
death of the beneficial owner thereof (regardless of the place of the owner's
residence, citizenship or domicile). Hong Kong estate duty is imposed on a
progressive scale from 5% to 15%. The rate of and the threshold for estate duty
have, in the past, been adjusted on a fairly regular basis. No estate duty is
payable when the aggregate value of the dutiable estate does not exceed HK$7.5
million, and the maximum rate of duty of 15% applies when the aggregate value of
the dutiable estate exceeds HK$10.5 million. ADSs will not be subject to estate
duty by virtue of the fact that they will be registered on a register outside
Hong Kong.
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UNITED STATES FEDERAL INCOME TAXATION
This section describes the material United States federal income tax
consequences of the purchase, ownership and disposition of the shares or ADSs
and the purchase, ownership, disposition and conversion of the convertible
notes, subject to the limitations herein. This section applies to you only if
you acquire your shares or ADSs or convertible notes in this offering and you
hold your shares or ADSs or convertible notes as capital assets for United
States federal income tax purposes. This section addresses only convertible
notes purchased in connection with this offering at their issue price. The issue
price of a convertible note will be the first price to the public (not including
convertible note holders, brokers or similar persons or arrangements acting in
the capacity of underwriters, placement agents or wholesalers) at which a
substantial amount of convertible notes is sold for money. This section does not
discuss special rules that may apply to you if you are a member of a special
class of holders subject to special rules, including:
- a dealer in securities;
- a trader in securities that elects to use a mark-to-market method of
accounting for your securities holdings;
- a tax-exempt organization;
- a life insurance company;
- a person liable for alternative minimum tax;
- a person that actually or constructively owns 10% or more of our voting
stock;
- a person that holds shares or ADSs or convertible notes as part of a
straddle or a hedging or conversion transaction; or
- a person whose functional currency is not the US dollar.
This section is based on the Internal Revenue Code of 1986, as amended, its
legislative history, existing and proposed regulations, published rulings and
court decisions, all as currently in effect. These laws are subject to change,
possibly on a retroactive basis. In addition, this section is based in part upon
the representations of the Depositary and the assumption that each obligation in
the Deposit Agreement and any related agreement will be performed in accordance
with its terms.
You are a U.S. holder if you are a beneficial owner of shares, ADSs or
convertible notes and you are:
- a citizen or resident of the United States;
- a corporation, partnership or other entity organized under the laws of
the United States or any state thereof;
- an estate whose income is subject to United States federal income tax
regardless of its source; or
- a trust if a United States court can exercise primary supervision over
the trust's administration and one or more United States persons are
authorized to control all substantial decisions of the trust.
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A "non-U.S. holder" is a beneficial owner of shares, ADSs or convertible
notes that is not a U.S. holder.
You should consult your own tax advisor regarding the United States
federal, state and local and other tax consequences of owning and disposing of
shares and ADSs or convertible notes in your particular circumstances.
This discussion addresses only United States federal income taxation.
SHARES OR ADSs
In general, and taking into account the earlier assumptions, for United
States federal income tax purposes, if you hold ADRs evidencing ADSs, you will
be treated as the owner of the shares represented by those ADSs. Exchanges of
shares for ADSs, and ADSs for shares, generally will not be subject to United
States federal income tax.
TAXATION OF DIVIDENDS
U.S. HOLDERS. Subject to the passive foreign investment company rules
discussed below, if you are a U.S. holder, you must include in your gross income
the gross amount of any dividend paid by us out of our current or accumulated
earnings and profits (as determined for United States federal income tax
purposes). The dividend is ordinary income that you must include in income when
you, in the case of shares, or the Depositary, in the case of ADSs, receive the
dividend, actually or constructively. The dividend will not be eligible for the
dividends-received deduction generally allowed to United States corporations in
respect of dividends received from other United States corporations. The amount
of the dividend distribution that you must include in your income will be the US
dollar value of the Hong Kong dollar payments made, determined at the "spot
rate" on the date the dividend distribution is includible in your income,
regardless of whether the payment is in fact converted into US dollars.
Generally, any gain or loss resulting from currency exchange fluctuations during
the period from the date you include the dividend payment in income to the date
you convert the payment into US dollars will be treated as ordinary income or
loss. This gain or loss generally will be from sources within the United States
for foreign tax credit limitation purposes. Distributions in excess of current
and accumulated earnings and profits (as determined for United States federal
income tax purposes) will be treated as a non-taxable return of capital to the
extent of your basis in the shares or ADSs and thereafter as capital gain.
For purposes of this discussion, the "spot rate" generally means a rate
that reflects a fair market rate of exchange available to the public for
currency under a "spot contract" in a free market and involving representative
amounts. A "spot contract" is a contract to buy or sell a currency on or before
two business days following the date of the execution of the contract. If such a
spot rate cannot be demonstrated, the Internal Revenue Service has the authority
to determine the "spot rate".
Dividends will be income from sources outside the United States, but
generally will be "passive income" or "financial services income" which will be
treated separately from other types of income for purposes of computing the
foreign tax credit allowable to you.
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NON-U.S. HOLDERS. If you are a non-U.S. holder, dividends paid to you in
respect of shares or ADSs will not be subject to United States federal income
tax unless the dividends are "effectively connected" with your conduct of a
trade or business within the United States, and the dividends are attributable
to a permanent establishment that you maintain in the United States if that is
required by an applicable income tax treaty as a condition for subjecting you to
United States taxation on a net income basis. In such cases you will be taxed in
the same manner as a U.S. holder. If you are a corporate non-U.S. holder,
"effectively connected" dividends may, under certain circumstances, be subject
to an additional "branch profits tax" at a 30% rate, or at a lower rate if you
are eligible for the benefits of an income tax treaty that provides for a lower
rate.
TAXATION OF CAPITAL GAINS
U.S. HOLDERS. Subject to the passive foreign investment company rules
discussed below, if you are a U.S. holder and you sell or otherwise dispose of
your shares or ADSs, you will recognize capital gain or loss for United States
federal income tax purposes equal to the difference between the US dollar value
of the amount that you realize and your tax basis, determined in US dollars, in
your shares or ADSs. Capital gain of a noncorporate U.S. holder is generally
taxed at a maximum rate of 20% where the property is held more than one year.
The deductibility of capital losses is subject to limitations. The gain or loss
will generally be from sources within the United States for foreign tax credit
limitation purposes.
NON-U.S. HOLDERS. If you are a non-U.S. holder, you will not be subject to
United States federal income tax on gain recognized on the sale or other
disposition of your shares or ADSs unless:
- the gain is "effectively connected" with your conduct of a trade or
business in the United States and the gain is attributable to a permanent
establishment that you maintain in the United States if that is required
by an applicable income tax treaty as a condition for subjecting you to
United States taxation on a net income basis, or
- you are an individual, you are present in the United States for 183 or
more days in the taxable year of the sale and certain other conditions
exist.
If you are a corporate non-U.S. holder, "effectively connected" gains that
you recognize may, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate, or at a lower rate if you are eligible for
the benefits of an income tax treaty that provides for a lower rate.
PASSIVE FOREIGN INVESTMENT COMPANY RULES
We believe that the shares and ADSs should not be treated as stock of a
passive foreign investment company for United States federal income tax
purposes, but this conclusion is a factual determination that is made annually
and thus may be subject to change.
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In general, if you are a U.S. holder, we will be a passive foreign
investment company with respect to you if for any taxable year in which you held
our ADSs or shares:
- at least 75% of our gross income for the taxable year is "passive
income"; or
- at least 50% of the value, determined on the basis of a quarterly
average, of our assets is attributable to assets that produce or are held
for the production of passive income.
Passive income generally includes dividends, interest, royalties, rents
(other than certain rents and royalties derived in the active conduct of a trade
or business), annuities and gains from assets that produce passive income. If a
foreign corporation owns at least 25% by value of the stock of another
corporation, the foreign corporation is treated for purposes of the passive
foreign investment company tests as owning its proportionate share of the assets
of the other corporation, and as receiving directly its proportionate share of
the other corporation's income.
If we are treated as a passive foreign investment company, and you are a
U.S. holder that does not make a mark-to-market election, as described below,
you will be subject to special rules with respect to:
- any gain you realize on the sale or other disposition of your shares or
ADSs; and
- any excess distribution that we make to you (generally, any distributions
to you during a single taxable year that are greater than 125% of the
average annual distributions received by you in respect of the shares or
ADSs during the three preceding taxable years or, if shorter, your
holding period for the shares or ADSs).
Under these rules:
- the gain or excess distribution will be allocated ratably over your
holding period for the shares or ADSs;
- the amount allocated to the taxable year in which you realized the gain
or excess distribution will be taxed as ordinary income;
- the amount allocated to each prior year, with certain exceptions, will be
taxed at the highest tax rate in effect for that year; and
- the interest charge generally applicable to underpayments of tax will be
imposed in respect of the tax attributable to each such year.
Special rules apply for calculating the amount of the foreign tax credit
with respect to excess distributions by a passive foreign investment company.
If you own shares or ADSs in a passive foreign investment company that are
treated as marketable stock, you may make a mark-to-market election. If you make
this election, you will not be subject to the passive foreign investment company
rules described above. Instead, in general, you will include as ordinary income
each year the excess, if any, of the fair market value of your shares or ADSs at
the end of the taxable year over your adjusted basis in your shares or ADSs. You
will also be allowed to take an ordinary loss in respect of the excess, if any,
of the adjusted basis of your shares or ADSs over their fair market value at the
end of the taxable year (but only to the extent
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of the net amount of previously included income as a result of the
mark-to-market election). Your basis in the shares or ADSs will be adjusted to
reflect any such income or loss amounts. The mark-to-market election is made
with respect to marketable stock in a passive foreign investment company on a
shareholder-by-shareholder basis and, once made, can only be revoked with the
consent of the IRS. Under applicable Treasury regulations, the term "marketable
stock" includes stock of a passive foreign investment company that is "regularly
traded" on a qualified exchange or other market. For these purposes, a class of
stock is regularly traded on a qualified exchange or other market for any
calendar year during which such class of stock is traded (other than in de
minimis quantities) on at least 15 days during each calendar quarter. It is
expected that the shares will be treated as marketable stock for these purposes,
but no assurances can be given.
If you own shares or ADSs during any year that we are a passive foreign
investment company, you must file Internal Revenue Service Form 8621. If we are
a passive foreign investment company, U.S. holders who acquire shares from
decedents could be denied the step-up of the income tax basis for such shares
which would otherwise have been available.
CONVERTIBLE NOTES
PAYMENTS ON THE CONVERTIBLE NOTES
U.S. HOLDERS. You must include in your gross income interest paid on
convertible notes at the time such payment is received or accrued, in accordance
with your method of accounting for United States federal income tax purposes.
The amount required to be included in your gross income if you are a cash
basis holder will be the US dollar value of the amount paid (determined on the
basis of the "spot rate" on the date such payment is received) regardless of
whether the payment is in fact converted into US dollars.
Except if you make an election as described in the following paragraph, if
you are an accrual basis holder, you will be required to include in gross income
for each taxable year the US dollar value of the interest that has accrued
during such year, determined by translating such interest into US dollars at the
average rate of exchange for the period (or partial period if the period spans
two taxable years) during which such interest has accrued. The average rate of
exchange for an interest accrual period is the simple average of the exchange
rates for each business day of such period (or such other average that is
reasonably derived and consistently applied by the holder). Upon receipt of an
interest payment in foreign currency, you will recognize ordinary gain or loss
in an amount equal to the difference between the US dollar value of the foreign
currency you received (determined on the basis of the "spot rate" on the date
such payment is received) and the US dollar value of the interest income that
you previously included in income with respect to such payment. Any such gain or
loss generally will not be treated as interest income or expense except to the
extent provided by administrative pronouncements of the Internal Revenue
Service.
Alternatively, if you are an accrual basis tax payer, you may elect to
translate accrued interest into US dollars at the "spot rate" on the last day of
an accrual period for the interest, or, in the case of an accrual period that
spans two taxable years, at the "spot rate" on the last day of the taxable year.
Additionally, if a payment of interest is
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received within five business days of the last day of the accrual period and you
make such election, you may instead translate such accrued interest into US
dollars at the "spot rate" on the day of receipt. If you make such election, you
must apply it consistently to all debt instruments from year to year and cannot
change the election without the consent of the Internal Revenue Service.
NON-U.S. HOLDERS. If you are a non-U.S. holder, interest paid to you in
respect of convertible notes will not be subject to United States federal income
tax unless the interest is "effectively connected" with your conduct of a trade
or business within the United States, and the interest is attributable to a
permanent establishment that you maintain in the United States if that is
required by an applicable income tax treaty as a condition for subjecting you to
United States taxation on a net income basis. In such cases you will be taxed in
the same manner as a U.S. holder. If you are a corporate non-U.S. holder,
"effectively connected" interest may, under certain circumstances, be subject to
an additional "branch profits tax" at a 30% rate, or at a lower rate if you are
eligible for the benefits of an income tax treaty that provides for a lower
rate.
DISPOSITION OF CONVERTIBLE NOTES
U.S. HOLDERS. In general, if you are a U.S. holder and you sell, exchange,
redeem or otherwise dispose of a convertible notes (other than a conversion of
the convertible notes, which is discussed below) you will recognize capital gain
or loss for United States federal income tax purposes equal to the US dollar
value of the amount you realize, except to the extent such amount is
attributable to accrued interest, and your tax basis, determined in US dollars,
in the convertible notes. For source and character rules, see "Shares or
ADSs -- Taxation of Capital Gains -- U.S. Holders" above.
Gain or loss recognized on the sale, exchange, retirement or other
disposition of convertible notes that is attributable to changes in exchange
rates will be treated as ordinary income or loss and generally will not be
treated as interest income or expense except to the extent provided by
administrative pronouncements of the Internal Revenue Service. Gain or loss
attributable to changes in exchange rates will be recognized on the sale,
exchange, retirement or other disposition of convertible notes only to the
extent of the total gain or loss recognized on such sale, exchange, retirement
or other disposition.
NON-U.S. HOLDERS. If you are a non-U.S. holder, you will not be subject to
United States federal income tax on gain recognized on the sale, other
disposition or conversion of your convertible notes unless:
- the gain is "effectively connected" with your conduct of a trade or
business in the United States and the gain is attributable to a permanent
establishment that you maintain in the United States if that is required
by an applicable income tax treaty as a condition for subjecting you to
United States taxation on a net income basis, or
- if you are an individual, you are present in the United States for 183 or
more days in the taxable year of the sale or other disposition and
certain other conditions exist.
If you are a corporate non-U.S. holder, "effectively connected" gains that
you recognize may, under certain circumstances, be subject to an additional
"branch profits
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tax" at a 30% rate, or at a lower rate if you are eligible for the benefits of
an income tax treaty that provides for a lower rate.
CONVERSION OF CONVERTIBLE NOTES
If you are a U.S. holder, you generally will not recognize any income, gain
or loss upon conversion of convertible notes into shares or ADSs except (i) to
the extent the shares or ADSs received are considered attributable to accrued
interest not previously included in income (which will be taxable as ordinary
income), (ii) with respect to cash received in lieu of a fractional share of the
shares or ADSs, and (iii) with respect to foreign currency gain or loss realized
upon the conversion (as described below). Your tax basis in the shares or ADSs
received on conversion of convertible notes generally will be the same as your
adjusted tax basis in the convertible notes at the time of conversion (reduced
by any basis allocable to a fractional share interest) and adjusted to take into
account the amount of any foreign currency gain or loss realized upon the
conversion as described below, and the holding period for the shares or ADSs
received on conversion will generally include the holding period of the
convertible notes converted. However, your tax basis in shares or ADSs
attributable to accrued interest as described above generally will equal the
amount of such accrued interest included in income, and the holding period for
such shares or ADSs will begin on the date of conversion.
Cash received in lieu of a fractional share upon conversion will be treated
as a payment in exchange for the fractional share. Accordingly, the receipt of
cash in lieu of a fractional share generally will result in capital gain or loss
(measured by the difference between the cash received for the fractional share
and your tax basis attributable to the fractional share).
Upon the conversion of convertible notes into shares, you will recognize
foreign currency gain or loss, but only to the extent of the total gain or loss
realized on the convertible notes, with respect to the principal and, in the
case of an accrual method holder, accrued interest on the convertible notes.
ADJUSTMENTS TO CONVERSION RATE TREATED AS CONSTRUCTIVE DIVIDEND
If at any time (i) we make a distribution of cash or property to our
shareholders (which includes distributions of our evidences of indebtedness or
assets, but generally not share dividends or rights to subscribe for shares) or
repurchase shares and such distribution or repurchase would be taxable to such
shareholders as a dividend for United States federal income tax purposes and,
pursuant to the antidilution provisions contained in the convertible notes, the
conversion rate of the convertible notes is increased, or (ii) the conversion
rate of the convertible notes is increased at our discretion, such increase in
conversion rate may be deemed to be the payment of a taxable dividend to you.
Under such circumstances, you could have taxable income even though you received
no cash or property.
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BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, payment on the bonds, dividend payments with respect to the
shares and ADSs or other taxable distributions, made within the United States to
you will be subject to information reporting requirements and backup withholding
tax at the rate of 31% if you are a non-corporate United States person and you:
- fail to provide an accurate taxpayer identification number;
- are notified by the Internal Revenue Service that you have failed to
report all interest or dividends required to be shown on your federal
income tax returns; or
- in certain circumstances, fail to comply with applicable certification
requirements.
Persons that are not U.S. persons may be required to establish their
exemption from information reporting and backup withholding by certifying their
status on Internal Revenue Service Forms W-8 (or successor form).
If you sell your shares or ADSs or convertible notes to or through a United
States office of a broker, the payment of the proceeds is subject to both United
States backup withholding and information reporting unless you certify that you
are a non-U.S. person, under penalties of perjury, or you otherwise establish an
exemption, provided that the broker does not have actual knowledge that you are
a U.S. person or that the conditions of any such exemption are not satisfied. If
you sell your shares or ADSs or convertible notes outside the United States
through a non-U.S. office of a non-U.S. broker, and the sales proceeds are paid
to you outside the United States, then United States backup withholding and
information reporting requirements generally will not apply to that payment.
However, United States information reporting, but not backup withholding, will
apply to a payment of sales proceeds, even if that payment is made outside the
United States, if you sell your shares or ADSs or convertible notes through a
non-U.S. office of a broker that:
- is a U.S. person;
- derives 50% or more of its gross income for a specified three-year period
from the conduct of a trade or business in the United States;
- is a "controlled foreign corporation" as to the United States; or
- with respect to payments made after December 31, 2000, is a foreign
partnership, if at any time during its tax year:
- one or more of its partners are U.S. persons, as defined in U.S.
Treasury regulations, who in the aggregate hold more than 50% of the
income or capital interest in the partnership; or
- at any time during its tax year the foreign partnership is engaged
in a United States trade or business;
unless the broker has documentary evidence in its records that you are a
non-U.S. person and does not have actual knowledge that you are a U.S. person or
you otherwise establish an exemption.
You generally may obtain a refund of any amounts withheld under the backup
withholding rules that exceed your income tax liability by filing a refund claim
with the United States Internal Revenue Service.
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LEGAL MATTERS
The validity of the ADSs and the convertible notes is being passed upon for
us by Shearman & Sterling and for the underwriters by Sullivan & Cromwell with
respect to New York law. The validity of the shares and the convertible notes is
being passed upon for us by Linklaters and for the underwriters by Baker &
McKenzie with respect to Hong Kong law. Certain legal matters as to Chinese law
are being passed upon for us by Commerce & Finance Law Office and for the
underwriters by Haiwen & Partners.
EXPERTS
Our consolidated financial statements as of December 31, 1998 and 1999 and
June 30, 1999 and 2000, and for each of the three years ended December 31, 1997,
1998 and 1999 and the six months ended June 30, 2000 and the combined financial
statements of Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile,
Liaoning Mobile, Shandong Mobile and Guangxi Mobile as of December 31, 1998 and
1999, June 30, 2000 and for each of the three years ended December 31, 1997,
1998 and 1999 and for the six months ended June 30, 2000 have been included in
this prospectus in reliance upon the reports of KPMG, independent public
accountants, appearing elsewhere in this prospectus, and upon the authority of
KPMG as experts in accounting and auditing.
In connection with our proposed acquisition of Beijing Mobile, Shanghai
Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and
Guangxi Mobile, Chesterton Petty Limited, an independent valuer, has valued the
interest of these seven companies in certain buildings and real properties as of
June 30, 2000.
MISCELLANEOUS
A certificate of exemption in relation to the requirements of Section 38(1)
of the Companies Ordinance of Hong Kong has been granted by the Hong Kong
Securities and Futures Commission pursuant to Section 38A of the Companies
Ordinance. As a result, this prospectus is exempt from certain prospectus
content requirements under Hong Kong law, including the requirement to provide a
translation of this prospectus in Chinese.
For purposes of complying with Section 38C of the Companies Ordinance of
Hong Kong, KPMG has given and has not withdrawn its written consent to the issue
of this prospectus with inclusion of its report and reference to its name in the
form and context in which they are included. This means that KPMG has consented
to the use of its report and to the reference to KPMG in this prospectus.
Chesterton Petty Limited has given and has not withdrawn its written
consent to the reference to its name in the form and context in which it is
included.
ENFORCEABILITY OF CIVIL LIABILITIES
We are a company organized under the laws of Hong Kong, and substantially
all of our assets are located outside the United States. We have appointed CT
Corporation System, 111 Eighth Avenue, 13th Floor, New York, NY 10011, as our
agent to receive service of process with respect to any action brought against
us in the United States
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District Court for the Southern District of New York under the securities laws
of the United States or of any state of the United States, or any action brought
against us in the Supreme Court of the State of New York in the County of New
York under the securities laws of the State of New York. However, it may be
difficult for investors to enforce outside the United States judgments against
us obtained in the United States in any such actions, including actions
predicated upon the civil liability provisions of the federal securities laws of
the United States or of the securities laws of any state of the United States.
In addition, all of our directors and officers and certain of the experts named
herein are resident outside the United States (principally in Hong Kong and
mainland China), and all or a substantial portion of the assets of such persons
are or may be located outside the United States. As a result, it may not be
possible for investors to effect service of process within the United States
upon such persons, or to enforce against them or us judgments obtained in United
States courts, including judgments predicated upon the civil liability
provisions of the federal securities laws of the United States or of the
securities laws of any state of the United States. We have been advised by our
Hong Kong counsel, Linklaters, and our Chinese counsel, Commerce & Finance Law
Office, that in the opinion of such counsel there is doubt as to the
enforceability in Hong Kong and mainland China, respectively, in original
actions or in actions for enforcement of judgments of United States courts, of
civil liabilities predicated solely upon the federal securities laws of the
United States or the securities laws of any state of the United States.
WHERE YOU CAN FIND MORE INFORMATION
As required by the Securities Act of 1933, we have filed a registration
statement on Form F-3 (No. 333-47256) relating to the securities offered by this
prospectus with the Securities and Exchange Commission. This prospectus is a
part of that registration statement, which includes additional information.
In addition, we file annual reports on Form 20-F and periodic reports on
Form 6-K with the Commission. You may read and copy any materials we file with
the Commission at the Commission's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Commission's regional offices in New
York, New York and Chicago, Illinois. You can also request copies of the
documents we file with the Commission, upon payment of a duplicating fee, by
writing to the Public Reference Section of the Commission. Please call the
Commission at 1-800-SEC-0330 for further information on the operation of the
Public Reference Room.
The Commission maintains an Internet site that contains our registration
statement on Form F-3 (No. 333-47256) which has been filed electronically with
the Commission. The address of that site is http://www.sec.gov.
The Commission allows us to "incorporate by reference" the information we
file with the Commission. This means that we can disclose important information
to you by referring you to another document filed separately with the
Commission. The information incorporated by reference is considered to be part
of this prospectus. Any information that we file later with the Commission and
that is deemed incorporated by reference will automatically update information
in this prospectus. In all such cases, you should rely on the later information
over different information included in this prospectus.
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This prospectus will be deemed to incorporate by reference the following
documents:
- our annual report on Form 20-F, dated June 20, 2000, to the extent the
information in that Form has not been updated by this prospectus;
- any annual report on Form 20-F, including any amendments thereto, filed
subsequent to the date hereof and prior to the termination of the share
offering and convertible note offering; and
- our interim report on Form 6-K submitted by us to the SEC on September 1,
2000 and any other report on Form 6-K submitted by us to the SEC prior to
the termination of the share offering and the convertible note offering
and identified by us as being incorporated by reference into this
prospectus.
We will provide to you (including any beneficial owner, to whom this
prospectus is delivered), upon your written or oral request and at no cost to
you, a copy of any or all of the information that has been incorporated by
reference in this prospectus but not delivered with this prospectus.
You may request a copy of these filings, at no cost, by writing or
telephoning us at 60th Floor, The Center, 99 Queen's Road Central, Hong Kong,
China, Attention: Corporate Affairs Department, telephone number: 852-3121-8888.
You may also obtain a copy of the filings referred to above, at no cost, at
the offices of Banque Internationale a Luxembourg in Luxembourg.
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UNDERWRITING
The offerings made pursuant to this prospectus include the share offering
and the convertible note offering. The closing of one offering is not
conditional upon the closing of the other offering. The following sections
describe the respective underwriting arrangements for the two separate
offerings.
THE SHARE OFFERING
The share offering consists of (1) an international offering of an
aggregate of ADSs, in the form of shares or ADSs, in the United States and
internationally outside of Asia, Australasia and the Middle East, and (2) an
Asia offering of an aggregate of ADSs, in the form of shares or ADSs, in
Asia, Australasia and the Middle East, including shares offered to
Vodafone Group Plc. China International Capital Corporation Limited, Goldman
Sachs (Asia) L.L.C. and Merrill Lynch Far East Limited are the joint global
coordinators and joint bookrunners of the share offering. Shares may be
delivered instead of ADSs at the option of the purchasers.
China Mobile (HK) and the underwriters for the international offering named
below have entered into an underwriting agreement with respect to the shares and
ADSs being offered in the international offering. Subject to certain conditions,
each international underwriter has severally agreed to purchase the number of
ADSs indicated in the following table. China International Capital Corporation
Limited, Goldman Sachs (Asia) L.L.C. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated are the representatives of the international underwriters.
<TABLE>
<CAPTION>
International Underwriters Number of ADSs
-------------------------- --------------
<S> <C>
China International Capital Corporation Limited.............
Goldman Sachs (Asia) L.L.C..................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
----------
Total.............................................
==========
</TABLE>
If the international underwriters sell more ADSs than the total number set
forth in the table above, in order to cover such sales, the international
underwriters have an option to purchase from China Mobile (HK) up to such number
of additional ADSs equal to 15% of the number of the ADSs initially offered in
the international offering. They may exercise that option within 28 days of the
date of this prospectus. If any ADSs or ordinary shares are purchased pursuant
to this option, the international underwriters will severally purchase ADSs in
approximately the same proportion as set forth in the table above.
The following table shows the per ADS, per share and total underwriting
discounts and commissions to be paid to the international underwriters by China
Mobile (HK).
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These amounts are shown assuming both no exercise and full exercise of the
international underwriters' option to purchase additional ADSs and shares.
<TABLE>
<CAPTION>
Paid by China Mobile (HK)
----------------------------
No exercise Full exercise
----------- -------------
<S> <C> <C>
Per ADS.................................................... US$ US$
Per share.................................................. HK$ HK$
Total, as ADSs................................... US$ US$
</TABLE>
Shares or ADSs sold by the international underwriters to the public will
initially be offered at the initial price to public set forth on the cover of
this prospectus. Any shares or ADSs sold by the international underwriters to
securities dealers may be sold at a discount of up to HK$ per share or
US$ per ADS from the initial price to public. If all the shares and ADSs are
not sold at the initial price to public, the representatives may change the
offering price and the other selling terms.
China Mobile (HK) has also entered into an underwriting agreement with the
underwriters for the Asia offering for the sale of shares and ADSs in Asia.
China International Capital Corporation Limited, Goldman Sachs (Asia) L.L.C. and
Merrill Lynch Far East Limited are the representatives of the Asia underwriters.
The international offering is conditional upon the Asia offering, and vice
versa. The initial price to public and underwriting commission per share and per
ADS for the international offering and for the Asia offering are identical.
China Mobile (HK) has granted the Asia underwriters a similar option to purchase
additional ADSs.
Under the strategic investor placing agreement among Vodafone Group Plc,
China Mobile (HK) and the global coordinators, Vodafone Group Plc has agreed to
purchase an aggregate of US$2,500 million of shares as part of the Asia offering
at the initial price to public set forth on the cover of this prospectus. The
sale of the shares to Vodafone Group Plc will be underwritten solely by the
global coordinators. Vodafone Group Plc has agreed that, without the consent of
China Mobile (HK) and the global coordinators, it will not directly or
indirectly offer, sell, pledge or otherwise dispose of any of such shares for a
period of at least 180 days from the date of this prospectus.
The underwriters for the international offering and the Asia offering have
entered into an agreement in which they agree to restrictions on where and to
whom they and any dealer purchasing from them may offer shares and ADSs as part
of the distribution. The underwriters also have agreed that they may sell shares
and ADSs between the underwriting groups.
China Mobile (HK) has been advised by the representatives for the
international offering, on behalf of the international underwriters, that
Goldman Sachs (Asia) L.L.C. is expected to make offers and sales in the United
States through its selling agent, Goldman, Sachs & Co. China International
Capital Corporation Limited is not a U.S.-registered broker-dealer and therefore
intends to effect sales of shares and ADSs in the United States through one or
more U.S.-registered broker-dealers.
Application has been made for the listing of and permission to deal in the
shares being offered in the share offering on The Stock Exchange of Hong Kong
Limited.
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THE CONVERTIBLE NOTE OFFERING
China Mobile (HK) and the underwriters for the convertible note offering
named below have entered into an underwriting agreement with respect to the
convertible notes being offered. Subject to certain conditions, each underwriter
has severally agreed to purchase the principal amount of convertible notes
indicated in the following table.
<TABLE>
<CAPTION>
Principal amount
Underwriters of convertible notes (US$)
------------ --------------------------
<S> <C>
China International Capital Corporation Limited.............
Goldman Sachs (Asia) L.L.C. ................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
---------
Total.............................................
=========
</TABLE>
If the underwriters sell more convertible notes than the total amount set
forth in the table above, in order to cover such sales, the underwriters have an
option to purchase from China Mobile (HK) up to an additional principal amount
of convertible notes equal to 15% of the aggregate principal amount of the
convertible notes initially offered. They may exercise that option within 28
days of the date of this prospectus. If any convertible notes are purchased
pursuant to this option, the underwriters will severally purchase convertible
notes in approximately the same proportion as set forth in the above table.
The following table shows the total underwriting discounts and commissions
to be paid to the underwriters in the convertible note offering by China Mobile
(HK). These amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional convertible notes.
<TABLE>
<CAPTION>
Paid by China Mobile (HK)
----------------------------
No exercise Full exercise
----------- -------------
<S> <C> <C>
Per Note................................................... % %
Total............................................ US$ US$
</TABLE>
Convertible notes sold by the underwriters to the public will initially be
offered at the initial price to public set forth on the cover of this
prospectus. Any convertible notes sold by the underwriters to securities dealers
may be sold at a discount from the initial price to public of up to % of the
principal amount of the convertible notes. If all the convertible notes are not
sold at the initial price to public, the underwriters may change the offering
price and the other selling terms.
China Mobile (HK) has been advised by the underwriters that Goldman Sachs
(Asia) L.L.C. is expected to make offers and sales in the United States through
its selling agent, Goldman, Sachs & Co. China International Capital Corporation
Limited is not a U.S.-registered broker-dealer and therefore intends to effect
the sale of the convertible notes in the United States through one or more
U.S.-registered broker-dealers.
The convertible notes are a new issue of securities with no established
trading market. China Mobile (HK) has applied for listing of the convertible
notes on the Luxembourg Stock Exchange. China Mobile (HK) does not intend to
apply for listing of the convertible notes on any national securities exchange
in the United States. China Mobile (HK) has been advised by the underwriters
that the underwriters intend to make a market in the convertible notes but are
not obligated to do so and may discontinue
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market making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the convertible notes.
CERTAIN TERMS AND ARRANGEMENTS APPLICABLE TO THE OFFERINGS
Each of China Mobile (HK) and China Mobile Hong Kong (BVI) Limited has
agreed with the underwriters for the share offering not to dispose of or hedge
any of their shares, ADSs, convertible notes or any other securities convertible
into or exchangeable for shares or ADSs during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of the global coordinators for
the share offering. Each of China Mobile (HK) and China Mobile Hong Kong (BVI)
Limited has also agreed with the underwriters for the convertible note offering
not to dispose of or hedge any of the above mentioned securities during the same
period except with the prior written consent of the underwriters for the
convertible note offering. In addition, each of China Mobile Communications
Corporation and China Mobile (HK) Group has executed a lock-up agreement for
each of the two offerings, the effect of which is to similarly limit during such
period direct or indirect sales of any of their interests in China Mobile (HK).
These agreements do not apply to any existing employee benefit plans of China
Mobile (HK).
In connection with each of the share offering and the convertible note
offering, the underwriters may purchase and sell shares/ADSs or convertible
notes, as the case may be, in the open market. These transactions may include
short sales, stabilizing transactions and purchases to cover positions created
by short sales. Short sales involve the sale by the respective underwriters of a
greater number of shares/ADS or convertible notes, as the case may be, than they
are required to purchase in the relevant offerings. "Covered" short sales are
sales made in an amount not greater than the respective underwriters' option to
purchase additional shares/ADSs or additional convertible notes, as the case may
be, from China Mobile (HK) in the respective offerings. The respective
underwriters may close out any covered short position by either exercising their
option to purchase additional shares/ADSs or convertible notes, as the case may
be, or purchasing shares/ADSs or convertible notes, as the case may be, in the
open market. In determining the source of shares/ADSs or convertible notes, as
the case may be, to close out the covered short position, the respective
underwriters will consider, among other things, the price of shares/ADS or
convertible notes, as the case may be, available for purchase in the open market
as compared to the price at which they may purchase shares/ADSs or convertible
notes, as the case may be, through the relevant overallotment option. "Naked"
short sales are any sales in excess of such option. The respective underwriters
must close out any naked short position by purchasing shares/ADSs or convertible
notes, as the case may be, in the open market. A naked short position is more
likely to be created if the respective underwriters are concerned that there may
be downward pressure on the price of the shares/ADSs or the convertible notes,
as the case may be, in the open market after pricing that could adversely affect
investors who purchase in the respective offerings. Stabilizing transactions
consist of various bids for or purchases of shares/ADSs or convertible notes, as
the case may be, made by the respective underwriters in the open market prior to
the completion of the respective offerings.
The underwriters may also impose a penalty bid in the respective offerings.
This occurs when a particular underwriter repays to the underwriters for the
same offering a
205
<PAGE> 208
portion of the underwriting discount received by it because the representatives
(in the case of the share offering) or the other underwriters (in the case of
the convertible note offering) have repurchased shares/ADSs or convertible
notes, as the case may be, sold by or for the account of such underwriter in
stabilizing or short covering transactions.
Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of China
Mobile (HK)'s shares/ADSs or convertible notes, as the case may be, and together
with the imposition of the penalty bid, may stabilize, maintain or otherwise
affect the market price of the shares/ADSs or the convertible notes, as the case
may be. As a result, the price of the shares/ADSs or the convertible notes, as
the case may be, may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued at any
time. These transactions may be effected on the New York Stock Exchange in the
case of the shares/ADSs, on the Luxembourg Stock Exchange in the case of the
convertible notes, in the over-the-counter market or otherwise.
Stabilization is not a practice commonly associated with the distribution
of securities in Hong Kong. In Hong Kong, such stabilization activities on the
Hong Kong Stock Exchange are restricted to cases where underwriters genuinely
purchase securities on the secondary market solely for the purpose of covering
over-allocations in an offering. The relevant provisions of the Securities
Ordinance (Chapter 333 of the Laws of Hong Kong) prohibit market manipulation in
the form of pegging or stabilizing the price of securities in certain
circumstances. Each underwriter for the share offering and each underwriter for
the convertible note offering has agreed to comply with the requirements of
Regulation M under the Exchange Act to the extent applicable to it.
Each international underwriter in the share offering has represented and
agreed that it is purchasing shares and ADSs only for the account of persons
outside Asia. Each international underwriter has also represented and agreed
that it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares or ADSs offered by this prospectus or distribute this
prospectus or any other offering document or material relating to the shares or
ADSs offered by this prospectus in Asia.
Each international underwriter in the share offering and each underwriter
in the convertible note offering has represented and agreed that (1) it has not
offered or sold, and prior to the date six months after the issue of the
shares/ADSs or the convertible notes, as the case may be, will not, offer or
sell any shares/ADSs or any convertible notes, as the case may be, to persons in
the United Kingdom, except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or agent)
for the purposes of their businesses or otherwise in circumstances that have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995; (2) it
has complied, and will comply with, all applicable provisions of the Financial
Services Act 1986 of the United Kingdom with respect to anything done by it in
relation to the shares/ADSs or the convertible notes, as the case may be, in,
from or otherwise involving the United Kingdom; and (3) it has only issued or
passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issuance of the shares/ADSs or the
convertible notes, as the case may be, to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986
206
<PAGE> 209
(Investment Advertisements) (Exemptions) Order 1996 (as amended) of the United
Kingdom or is a person to whom the document may lawfully be issued or passed on.
Each international underwriter in the share offering and each underwriter
in the convertible note offering has also represented and agreed that it has not
offered or sold, and has agreed not to offer or sell any shares/ADSs or any
convertible notes, as the case may be, directly or indirectly, in Canada in
contravention of the securities laws of Canada or any province or territory
thereof and has represented that any offer of shares/ADSs or any convertible
notes, as the case may be, in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of Canada
in which such offer is made. Each respective underwriter has also represented
and agreed that it will send to any dealer who purchases from it any shares
/ADSs or any convertible notes, as the case may be, a notice stating in
substance that, by purchasing such shares/ADSs or such convertible notes, as the
case may be, such dealer represents and agrees that it has not offered or sold,
and will not offer or sell, directly or indirectly, any such shares/ADSs or any
such convertible notes, as the case may be, in Canada or any province or
territory thereof and that any offer of shares/ADSs or convertible notes, as the
case may be, in Canada or to, or for the benefit of, any resident of Canada in
contravention of the securities laws of Canada or any province or territory
thereof and that any offer of shares/ADSs or convertible notes, as the case may
be, in Canada will be made only pursuant to an exemption from the requirement to
file a prospectus in the province of Canada in which such offer is made, and
that such dealer will deliver to any other dealer to whom it sells any such
shares/ADSs or any such convertible notes, as the case may be, a notice to the
foregoing effect.
The shares/ADSs and the convertible notes, as the case may be, may not be
offered, sold, transferred or delivered in or from The Netherlands, as part of
their initial distribution or as part of any re-offering, and neither this
prospectus nor any other document in respect of the share offering or the
convertible note offering, as the case may be, may be distributed or circulated
in The Netherlands, other than to individuals or legal entities which include,
but are not limited to, banks, brokers, dealers, institutional investors and
undertakings with a treasury department, who or which trade or invest in
securities in the conduct of a business or profession.
Solicitations and sales may not be made to investors in France prior to the
approval of the French Tresor under Article 10 of Decree No 89-938 of December
29, 1989.
No action has been or will be taken in any jurisdiction other than the
United States and Hong Kong, that would permit a public offering of the
shares/ADSs or the convertible notes, as the case may be, or the possession,
circulation or distribution of this prospectus in any jurisdiction where action
for that purpose is required. Accordingly, the shares/ADSs and the convertible
notes, as the case may be, may not be offered or sold, directly or indirectly,
and neither this prospectus nor any other offering material or advertisements in
connection with the shares/ADSs or the convertible notes, as the case may be,
may be distributed or published in or from any other country or jurisdiction
except under circumstances that will result in compliance with any applicable
rules and regulations of any such country or jurisdiction.
The initial price of the shares/ADSs to public and the initial price of the
convertible notes to public will be negotiated between China Mobile (HK) and the
underwriters for
207
<PAGE> 210
the respective offerings. Among the factors to be considered in determining the
respective initial prices to public, in addition to the market price of the
shares/ADSs and prevailing market conditions, will be China Mobile (HK)'s
historical performance, estimates of the business potential and earnings
prospects of China Mobile (HK), an assessment of China Mobile (HK)'s management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
China Mobile (HK) estimates that its share of the total expenses of the two
separate offerings, excluding underwriting discounts and commissions, will be
approximately US$ million, including approximately US$ million for
the share offering and approximately US$ million for the convertible note
offering.
China Mobile (HK) has agreed to indemnify the several underwriters in each
offering against certain liabilities, including liabilities under the Securities
Act of 1933.
This prospectus may be used by the underwriters and other dealers in
connection with offers and sales of the shares/ADSs or the convertible notes (as
the case may be), including sales of shares/ADSs or the convertible notes (as
the case may be) initially sold outside of the United States by the underwriters
in the share offering and by the underwriters in the convertible note offering
(as the case may be), to persons located in the United States.
Purchasers of the shares/ADSs or the convertible notes, as the case may be,
offered hereby may be required to pay stamp taxes and other charges in
accordance with the laws and practices of the country of purchase in addition to
the respective offering price set forth on the cover page of this prospectus.
Each of Goldman Sachs (Asia) L.L.C. and China International Capital
Corporation (Hong Kong) Limited has acted as financial advisor to China Mobile
(HK) in connection with the acquisition and may receive compensation from China
Mobile (HK) for such services.
208
<PAGE> 211
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CHINA MOBILE (HONG KONG) LIMITED AND ITS SUBSIDIARIES (THE
"GROUP")
Independent Auditors' Report................................ F-3
Consolidated Statements of Income for each of the three
years ended December 31, 1997, 1998 and 1999 and the six
months ended June 30, 1999 and 2000....................... F-4
Consolidated Statements of Recognized Gains and Losses for
each of the three years ended December 31, 1997, 1998 and
1999 and the six months ended June 30, 1999 and 2000...... F-5
Consolidated Balance Sheets as of December 31, 1998 and 1999
And June 30, 1999 and 2000................................ F-6
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1997, 1998 and 1999 and the six
months ended June 30, 1999 and 2000....................... F-7
Consolidated Statements of Shareholders' Equity for each of
the three years ended December 31, 1997, 1998 and 1999 and
the six months ended June 30, 1999 and 2000............... F-14
Notes to Consolidated Financial Statements.................. F-16
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI
MOBILE, LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI
MOBILE (THE "TARGET")
Independent Auditors' Report................................ F-74
Combined Statements of Income for each of the three years
ended December 31, 1997, 1998 and 1999 and the six months
ended June 30, 1999 and 2000.............................. F-76
Combined Statements of Recognized Gains and Losses for each
of the three years ended December 31, 1997, 1998, 1999 and
the six months ended June 30, 1999 and 2000............... F-77
Combined Balance Sheets as of December 31, 1998 and 1999 and
June 30, 2000............................................. F-78
Combined Statements of Cash Flows for each of the three
years ended December 31, 1997, 1998 and 1999 and the six
months ended June 30, 1999 and 2000....................... F-79
Combined Statements of Owner's Equity for each of the three
years ended December 31, 1997, 1998 and 1999 and the six
months ended June 30, 2000................................ F-84
Notes to Combined Financial Statements...................... F-85
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF THE
GROUP AND THE TARGET
Introduction to Unaudited Pro Forma Combined Financial
Information............................................... F-127
Unaudited Pro Forma Combined Balance Sheet under HK GAAP as
of June 30, 2000.......................................... F-129
Unaudited Pro Forma Combined Statement of Income under HK
GAAP for the six months ended June 30, 2000............... F-130
Unaudited Pro Forma Combined Statement of Income under HK
GAAP for the year ended December 31, 1999................. F-131
Notes to Unaudited Pro Forma Combined Balance Sheet and
Statements of Income under HK GAAP........................ F-132
Unaudited Pro Forma Combined Statement of Income under US
GAAP for the six months ended June 30, 2000............... F-135
Unaudited Pro Forma Combined Statement of Income under US
GAAP for the year ended December 31, 1999................. F-136
</TABLE>
F-1
<PAGE> 212
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Unaudited Pro Forma Combined Statement of Income under US
GAAP for the six months ended June 30, 1999............... F-137
Unaudited Pro Forma Combined Statement of Income under US
GAAP for the year ended December 31, 1998................. F-138
Unaudited Pro Forma Combined Statement of Income under US
GAAP for the year ended December 31, 1997................. F-139
Notes to Unaudited Pro Forma Combined Statements of Income
Under US GAAP............................................. F-140
</TABLE>
F-2
<PAGE> 213
INDEPENDENT AUDITORS' REPORT
The Board of Directors
China Mobile (Hong Kong) Limited:
We have audited the accompanying consolidated balance sheets of China
Mobile (Hong Kong) Limited (previously known as "China Telecom (Hong Kong)
Limited") and subsidiaries (the "Group") as of December 31, 1998, 1999 and June
30, 1999 and 2000 and the related consolidated statements of income, recognized
gains and losses, shareholders' equity and cash flows for each of the years in
the three-year period ended December 31, 1999 and the six-month periods ended
June 30, 1999 and 2000, all expressed in Renminbi. These consolidated financial
statements are the responsibility of the Group's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America and Hong Kong. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of China Mobile
(Hong Kong) Limited and subsidiaries as of December 31, 1998, 1999 and June 30,
1999 and 2000 and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1999 and the six-month
periods ended June 30, 1999 and 2000 in conformity with accounting principles
generally accepted in Hong Kong.
Accounting principles generally accepted in Hong Kong vary in certain
material respects from accounting principles generally accepted in the United
States of America. Application of accounting principles generally accepted in
the United States of America would have affected results of operations for each
of the years in the three-year period ended December 31, 1999 and the six-month
periods ended June 30, 1999 and 2000 and shareholders' equity as of December 31,
1998 and 1999 and June 30, 1999 and 2000 to the extent summarized in Note 28 to
the consolidated financial statements.
The accompanying consolidated financial statements as of and for the year
ended December 31, 1999 and six-month period ended June 30, 2000 have been
translated into United States dollars solely for the convenience of the reader.
We have audited the translation, and in our opinion, the consolidated financial
statements expressed in Renminbi have been translated into United States dollars
on the basis set forth in Note 1 to the consolidated financial statements.
KPMG
Hong Kong,
October 4, 2000
F-3
<PAGE> 214
CHINA MOBILE (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------- --------------------------------------
NOTE 1997 1998 1999 1999 1999 2000 2000
---- ---- ---- ---- ---- ---- ---- ----
RMB RMB RMB US$ RMB RMB US$
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE
Usage fees................ 8,718 16,346 25,812 3,118 11,012 20,143 2,433
Monthly fees.............. 2,692 4,347 4,981 602 2,081 4,250 513
Connection fees........... 3,174 3,323 4,319 522 2,417 1,532 185
Other operating revenue... 904 2,329 3,511 424 1,430 2,972 359
--------- ---------- ---------- ------- ---------- ---------- -------
TOTAL OPERATING
REVENUE......... 3 15,488 26,345 38,623 4,666 16,940 28,897 3,490
--------- ---------- ---------- ------- ---------- ---------- -------
OPERATING EXPENSES
Leased lines.............. 3,134 3,917 3,723 450 2,014 2,714 328
Interconnection........... 1,214 4,752 6,453 779 2,775 3,604 435
Depreciation.............. 2,681 4,598 7,411 895 3,297 4,165 503
Personnel................. 756 1,595 2,256 273 852 1,476 178
Other operating expenses.. 2,289 3,548 5,140 621 1,991 4,616 558
--------- ---------- ---------- ------- ---------- ---------- -------
TOTAL OPERATING
EXPENSES........ 4 10,074 18,410 24,983 3,018 10,929 16,575 2,002
--------- ---------- ---------- ------- ---------- ---------- -------
OPERATING PROFIT.......... 5,414 7,935 13,640 1,648 6,011 12,322 1,488
WRITE-DOWN AND WRITE-OFF
OF TACS NETWORK
EQUIPMENT............... 5 -- (282) (8,242) (996) (500) -- --
OTHER INCOME.............. 6 85 336 552 66 270 330 40
NON-OPERATING
(EXPENSES)/INCOME....... 7 (27) (51) 70 8 11 (12) (1)
INTEREST INCOME........... 8 656 1,609 767 93 289 437 53
FINANCE COSTS............. 16 (175) (160) (343) (41) (107) (335) (40)
--------- ---------- ---------- ------- ---------- ---------- -------
PROFIT BEFORE TAX......... 5,953 9,387 6,444 778 5,974 12,742 1,540
INCOME TAX................ 9 (991) (2,486) (1,647) (199) (1,970) (4,018) (485)
--------- ---------- ---------- ------- ---------- ---------- -------
PROFIT AFTER TAX.......... 4,962 6,901 4,797 579 4,004 8,724 1,055
MINORITY INTERESTS........ (7) (1) -- -- -- -- --
--------- ---------- ---------- ------- ---------- ---------- -------
PROFIT ATTRIBUTABLE TO
SHAREHOLDERS............ 4,955 6,900 4,797 579 4,004 8,724 1,055
========= ========== ========== ======= ========== ========== =======
BASIC NET PROFIT PER
SHARE................... 2(q) 52 cents 59 cents 40 cents 5 cents 34 cents 64 cents 8 cents
========= ========== ========== ======= ========== ========== =======
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN
CALCULATING BASIC NET
PROFIT PER SHARE
(THOUSANDS)............. 9,534,365 11,780,788 12,069,108 11,782,885 13,706,310
========= ========== ========== ========== ==========
DILUTED NET PROFIT PER
SHARE................... 2(q) 59 cents 40 cents 5 cents 34 cents 64 cents 8 cents
========== ========== ======= ========== ========== =======
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN
CALCULATING DILUTED NET
PROFIT PER SHARE
(THOUSANDS)............. 11,782,521 12,072,383 11,785,447 13,716,377
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 215
CHINA MOBILE (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF RECOGNIZED GAINS AND LOSSES
(AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------- ---------------------------------
1997 1998 1999 1999 1999 2000 2000
---- ---- ---- ---- ---- ---- ----
RMB RMB RMB US$ RMB RMB US$
<S> <C> <C> <C> <C> <C> <C> <C>
Net profit for the year/
period.................... 1,513 6,900 4,797 579 4,004 8,724 1,055
Capital reserve arising on
consolidation/elimination
of goodwill arising on the
acquisition of
subsidiaries against
reserves.................. 1,132 (15,622) (42,440) (5,126) -- -- --
----- ------- ------- ------ ----- ----- -----
2,645 (8,722) (37,643) (4,547) 4,004 8,724 1,055
===== ======= ======= ====== ===== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 216
CHINA MOBILE (HONG KONG) LIMITED
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------ ------------------------
NOTE 1998 1999 1999 1999 2000 2000
---- ---- ---- ---- ---- ---- ----
RMB RMB US$ RMB RMB US$
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............... 17,481 19,349 2,337 17,557 19,767 2,388
Deposits with banks..................... 1,311 8,227 994 5,234 14,455 1,746
Accounts receivable..................... 10 2,482 4,957 599 3,244 5,526 668
Other receivables....................... 326 549 66 449 1,038 125
Inventories............................. 101 207 25 86 307 37
Prepaid expenses and other current
assets............................... 1,046 517 62 296 443 54
Amount due from ultimate holding
company.............................. 13 -- 92 11 -- 234 28
Amounts due from related parties........ 14 287 1,700 205 353 -- --
Amounts due from China
Telecommunications Corporation....... 14 -- -- -- -- 506 61
------ ------ ------ ------ ------ ------
Total current assets............ 23,034 35,598 4,299 27,219 42,276 5,107
Fixed assets.............................. 11 33,986 42,699 5,158 35,297 44,399 5,363
Construction in progress.................. 7,339 6,735 814 5,750 7,919 956
Interest in associates.................... 12 30 46 6 30 46 6
Deferred tax assets....................... 15 152 2,306 279 313 1,938 234
Deferred expenses......................... 17 -- 51 6 -- 46 6
------ ------ ------ ------ ------ ------
TOTAL ASSETS.............................. 64,541 87,435 10,562 68,609 96,624 11,672
====== ====== ====== ====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable........................ 5,963 6,026 728 4,855 5,142 622
Bills payable........................... -- 1,779 215 -- 1,212 146
Bank and other loans.................... 16 5,337 4,351 526 4,995 2,615 316
Taxes payable........................... 1,299 2,868 346 2,107 3,889 470
Obligations under capital lease
-- current portion................... 19 -- 68 8 -- 68 8
Amount due to ultimate
holding company...................... 13 -- 664 80 -- 463 56
Amounts due to related parties.......... 14 596 1,696 205 548 -- --
Amounts due to China Telecommunications
Corporation.......................... 14 -- -- -- -- 2,405 291
Accrued expenses and other payables..... 18 2,756 4,115 497 3,364 6,417 775
------ ------ ------ ------ ------ ------
Total current liabilities....... 15,951 21,567 2,605 15,869 22,211 2,684
Bank and other loans...................... 16 991 2,225 269 1,200 1,982 239
Obligations under capital lease -- long
term portion............................ 19 -- 107 13 -- 68 8
Deferred revenue.......................... 21 1,757 1,492 180 1,640 1,583 191
Fixed rate notes.......................... 20 -- 4,952 598 -- 4,957 599
------ ------ ------ ------ ------ ------
TOTAL LIABILITIES......................... 18,699 30,343 3,665 18,709 30,801 3,721
Minority interests........................ 15 -- -- -- -- --
SHAREHOLDERS' EQUITY...................... 45,827 57,092 6,897 49,900 65,823 7,951
------ ------ ------ ------ ------ ------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.................................. 64,541 87,435 10,562 68,609 96,624 11,672
====== ====== ====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 217
CHINA MOBILE (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- -------------------------
NOTE 1997 1998 1999 1999 1999 2000 2000
---- ---- ---- ---- ---- ---- ---- ----
RMB RMB RMB US$ RMB RMB US$
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET CASH INFLOWS FROM OPERATING
ACTIVITIES....................... (a) 8,825 13,567 21,662 2,617 9,801 19,566 2,364
------ ------- ------- ------ ------ ------- ------
RETURNS ON INVESTMENTS AND
SERVICING OF FINANCE
Interest received.................. 414 1,815 934 113 296 500 60
Interest paid...................... (268) (352) (445) (54) (191) (383) (46)
Distributions...................... (222) -- -- -- -- -- --
------ ------- ------- ------ ------ ------- ------
NET CASH INFLOW/(OUTFLOW) FROM
RETURNS ON INVESTMENTS AND
SERVICING OF FINANCE............. (76) 1,463 489 59 105 117 14
------ ------- ------- ------ ------ ------- ------
TAXATION
Hong Kong profits tax refunded/
(paid)........................... -- (11) 1 -- -- -- --
PRC income tax paid................ (546) (1,575) (2,479) (299) (1,324) (2,630) (318)
------ ------- ------- ------ ------ ------- ------
TAX PAID........................... (546) (1,586) (2,478) (299) (1,324) (2,630) (318)
------ ------- ------- ------ ------ ------- ------
INVESTING ACTIVITIES
Payment for acquisition of minority
interests........................ -- -- (15) (2) (11) -- --
Payment for acquisition of
subsidiaries (net of cash and
cash equivalents acquired)....... (b) -- (24,114) (18,187) (2,197) -- -- --
Capital expenditures............... (5,807) (11,040) (11,708) (1,414) (4,591) (8,498) (1,027)
Investment in associates........... (31) -- -- -- -- -- --
Proceeds from sale of fixed
assets........................... 13 36 709 86 87 102 12
Decrease in amounts due from
related parties.................. 498 72 -- -- -- -- --
Increase in deposits with banks.... -- (1,311) (6,916) (836) (3,923) (6,228) (752)
------ ------- ------- ------ ------ ------- ------
NET CASH OUTFLOW FROM INVESTING
ACTIVITIES....................... (5,327) (36,357) (36,117) (4,363) (8,438) (14,624) (1,767)
------ ------- ------- ------ ------ ------- ------
NET CASH INFLOW/(OUTFLOW) BEFORE
FINANCING ACTIVITIES............. 2,876 (22,913) (16,444) (1,986) 144 2,429 293
------ ------- ------- ------ ------ ------- ------
FINANCING ACTIVITIES
Proceeds from issue of shares, net
of expenses...................... 33,570 -- 16,223 1,959 65 7 1
Proceeds from issue of fixed rates
notes, net of discount........... (c) -- -- 4,952 598 -- -- --
Expenses on issue of fixed rate
notes............................ -- -- (53) (6) -- -- --
Proceeds from bank and other
loans............................ (c) 710 3,754 6,868 830 4,500 1,760 213
</TABLE>
F-7
<PAGE> 218
CHINA MOBILE (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- -------------------------
NOTE 1997 1998 1999 1999 1999 2000 2000
---- ---- ---- ---- ---- ---- ---- ----
RMB RMB RMB US$ RMB RMB US$
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Repayments of bank and other
loans............................ (c) (524) (3,207) (9,653) (1,166) (4,633) (3,739) (451)
(Decrease)/increase in amounts due
to related parties............... 216 (222) -- -- -- -- --
Repayments of obligation under
capital lease.................... -- -- -- -- -- (39) (5)
Proceeds from capital
contribution..................... 246 -- -- -- -- -- --
------ ------- ------- ------ ------ ------- ------
NET CASH (OUTFLOW)/INFLOW FROM
FINANCING ACTIVITIES............. 34,218 325 18,337 2,215 (68) (2,011) (242)
------ ------- ------- ------ ------ ------- ------
INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS................. 37,094 (22,588) 1,893 229 76 418 51
EFFECT OF CHANGES IN FOREIGN
EXCHANGE RATES................... 1 (1) (25) (3) -- -- --
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR/PERIOD......... 2,975 40,070 17,481 2,111 17,481 19,349 2,337
------ ------- ------- ------ ------ ------- ------
CASH AND CASH EQUIVALENTS AT END OF
YEAR/PERIOD...................... 40,070 17,481 19,349 2,337 17,557 19,767 2,388
====== ======= ======= ====== ====== ======= ======
ANALYSIS OF THE BALANCES OF CASH
AND CASH EQUIVALENTS
Deposits with banks with maturity
period within three months when
placed........................... 33,913 7,538 6,986 844 8,046 5,674 685
Cash and bank balances............. 6,157 9,943 12,363 1,493 9,511 14,093 1,703
------ ------- ------- ------ ------ ------- ------
40,070 17,481 19,349 2,337 17,557 19,767 2,388
====== ======= ======= ====== ====== ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 219
CHINA MOBILE (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
(a) THE RECONCILIATION OF PROFIT BEFORE TAX AND MINORITY INTERESTS TO NET CASH
INFLOWS FROM OPERATING ACTIVITIES IS AS FOLLOWS:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- ----------------------
1997 1998 1999 1999 1999 2000 2000
---- ---- ---- ---- ---- ---- ----
RMB RMB RMB US$ RMB RMB US$
<S> <C> <C> <C> <C> <C> <C> <C>
Profit from ordinary activities before
taxation............................. 5,953 9,387 6,444 778 5,974 12,742 1,539
Depreciation of fixed assets........... 2,681 4,598 7,411 895 3,297 4,165 503
Write-down and write-off of TACS
network equipment.................... -- 282 8,242 996 500 -- --
Provision for doubtful accounts........ 449 558 771 93 191 647 78
Amortization of deferred expenses...... -- -- 2 -- -- 5 1
Loss on sale of fixed assets........... 13 59 1 -- -- 24 3
Interest income........................ (656) (1,609) (767) (93) (289) (437) (53)
Interest expenses and capital lease
charges.............................. 175 160 343 41 107 335 40
Unrealized exchange loss/(gain), net... (1) 1 25 3 -- 18 2
Increase in accounts receivable........ (954) (1,080) (2,167) (262) (953) (1,216) (147)
(Increase)/decrease in other
receivables.......................... (30) 392 (245) (29) (131) (150) (17)
(Increase)/decrease in inventories..... 157 49 (43) (5) 15 (100) (12)
(Increase)/decrease in amount due from
ultimate holding company............. -- -- 14 2 -- (142) (17)
Decrease/(increase) in prepaid expenses
and other current assets............. (86) (932) 781 94 750 101 12
Decrease/(increase) in amounts due from
related parties...................... -- (55) (127) (15) (66) 792 96
Decrease in accounts payable........... (7) (117) (36) (4) (26) (117) (14)
(Decrease)/increase in amount due to
ultimate holding company............. -- -- 329 40 -- (201) (25)
Increase/(decrease) in amounts due to
related parties...................... 32 548 426 52 (48) 1,391 168
Increase/(decrease) in accrued expenses
and other payables................... (55) 922 523 63 597 1,618 196
Increase/(decrease) in deferred
revenue, net......................... 1,154 404 (265) (32) (117) 91 11
----- ------ ------ ----- ----- ------ -----
Net cash inflows from operating
activities........................... 8,825 13,567 21,662 2,617 9,801 19,566 2,364
===== ====== ====== ===== ===== ====== =====
</TABLE>
F-9
<PAGE> 220
CHINA MOBILE (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
(b) ACQUISITION OF SUBSIDIARIES
<TABLE>
<CAPTION>
1998 1999
---- ----
RMB RMB
<S> <C> <C>
NET ASSETS ACQUIRED:
Fixed assets................................................ 7,443 11,186
Construction in progress.................................... 1,488 1,060
Interest in an associate.................................... -- 16
Deferred tax assets......................................... 1 3
Inventories................................................. 73 63
Amount due from ultimate holding company.................... -- 106
Amounts due from related parties............................ 233 1,286
Accounts receivable......................................... 367 1,079
Other receivables........................................... 137 145
Prepaid expenses and other current assets................... 9 181
Cash and bank balances...................................... 6 2,081
Bank and other loans........................................ (683) (1,267)
Bills payable............................................... -- (310)
Amount due to ultimate holding company...................... -- (335)
Amounts due to related parties.............................. (4) (674)
Accounts payable............................................ (333) (1,121)
Accrued expenses and other payables......................... (158) (796)
Taxation.................................................... -- (249)
Long-term bank and other loans.............................. (81) (1,766)
Obligations under capital lease............................. -- (175)
------ ------
8,498 10,513
Goodwill arising on acquisition............................. 15,622 42,440
------ ------
24,120 52,953
====== ======
Satisfied by: Cash paid..................................... 24,120 20,268
Issue of ordinary shares..................... -- 32,685
------ ------
24,120 52,953
====== ======
</TABLE>
The subsidiaries acquired during the year ended December 31, 1999
contributed RMB 1,439 to the Group's net operating cash flows, paid RMB 44 in
respect of the net returns on investments and servicing of finance, utilized RMB
657 for investing activities and contributed RMB 717 for financing activities.
The subsidiaries acquired during the year ended December 31, 1998
contributed RMB 1,340 to the Group's net operating cash flows, paid RMB 44 in
respect of the net returns on investments and servicing of finance, utilized RMB
2,533 for investing activities and contributed RMB 2,208 for financing
activities.
F-10
<PAGE> 221
CHINA MOBILE (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
ANALYSIS OF NET OUTFLOW OF CASH AND CASH EQUIVALENTS IN RESPECT OF THE
ACQUISITION OF SUBSIDIARIES
<TABLE>
<CAPTION>
1998 1999
---- ----
RMB RMB
<S> <C> <C>
Cash consideration.......................................... 24,120 20,268
Cash and bank balances acquired............................. (6) (2,081)
------ ------
Net outflow of cash and cash equivalents in respect of the
acquisition of subsidiaries............................... 24,114 18,187
====== ======
</TABLE>
F-11
<PAGE> 222
CHINA MOBILE (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
(c) ANALYSIS OF CHANGES IN FINANCING DURING THE YEARS:
<TABLE>
<CAPTION>
OBLIGATION
BANK AND FIXED RATES UNDER CAPITAL
OTHER LOANS NOTES LEASE
----------- ----------- -------------
RMB RMB RMB
<S> <C> <C> <C>
Balance at January 1, 1997............................. 3,450 -- --
Proceeds from bank and other loans..................... 710 -- --
Loan from a related party (Note (d))................... 1,382 -- --
Repayments of bank and other loans..................... (524) -- --
Effect of foreign exchange rates....................... (1) -- --
------ ----- ---
Balance at December 31, 1997........................... 5,017 -- --
====== ===== ===
Balance at January 1, 1998............................. 5,017 -- --
Acquired on acquisition of subsidiaries (Note (b))..... 764 -- --
Proceeds from bank and other loans..................... 3,754 -- --
Repayments of bank and other loans..................... (3,207) -- --
------ ----- ---
Balance at December 31, 1998........................... 6,328 -- --
====== ===== ===
Balance at January 1, 1999............................. 6,328 -- --
Acquired on acquisition of subsidiaries (Note (b))..... 3,033 -- 175
Proceeds from bank and other loans..................... 6,868 -- --
Repayments of bank and other loans..................... (9,653) -- --
Issue of fixed rates notes............................. -- 4,952 --
------ ----- ---
Balance at December 31, 1999........................... 6,576 4,952 175
====== ===== ===
ANALYSIS OF CHANGES IN FINANCING DURING THE PERIODS
Balance at January 1, 1999............................. 6,328 -- --
Proceeds from bank and other loans..................... 4,500 -- --
Repayments of bank and other loans..................... (4,633) -- --
------ ----- ---
Balance at June 30, 1999............................... 6,195 -- --
====== ===== ===
Balance at January 1, 2000............................. 6,576 4,952 175
Proceeds from bank and other loans..................... 1,760 -- --
Repayments of bank and other loans..................... (3,739) -- --
Effect of foreign exchange rates....................... -- 4 --
Amortization of discount arising on issuance of
notes................................................ -- 1 --
Repayment of capital lease payable..................... -- -- (39)
------ ----- ---
Balance at June 30, 2000............................... 4,597 4,957 136
====== ===== ===
</TABLE>
(d) SIGNIFICANT NON-CASH TRANSACTIONS:
The Group incurred payables of RMB 3,658 and RMB 3,374, and RMB 888 and RMB
1,486, to equipment suppliers and banks, respectively,
F-12
<PAGE> 223
CHINA MOBILE (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
(d) SIGNIFICANT NON-CASH TRANSACTIONS (CONTINUED)
for additions of construction in progress during the six months ended June 30,
2000 and the year ended December 31, 1999, respectively.
During the six months ended June 30, 2000, the balances of amounts due
from/to provincial posts and telecommunications administration (the "PTAs") and
China Telecommunications Corporation ("CTC") were reclassified from amounts due
from/to related parties to amounts due from/to CTC. (See Note 24).
The Group incurred payables of RMB551 to equipment suppliers for additions
of construction in progress during the six months ended June 30, 1999.
The Group incurred payables of RMB 3,977 and RMB13 to equipment suppliers
and related parties respectively for additions of construction in progress
during the year ended December 31, 1998.
In addition, the Group incurred payables of RMB 1,530 to equipment
suppliers and a loan of RMB 1,382 from a related party for additions of
construction in progress during the year ended December 31, 1997.
In November 1999, the Group issued new shares to China Mobile Hong Kong
(BVI) Limited ("CMHK (BVI)") (previously known as China Telecom Hong Kong (BVI)
Limited) at HK$30,684 (RMB equivalent 32,685) as part of the consideration for
the acquisition of Fujian Mobile (BVI) Limited ("Fujian Mobile BVI"), Henan
Mobile (BVI) Limited ("Henan Mobile BVI") and Hainan Mobile (BVI) Limited
("Hainan Mobile BVI").
F-13
<PAGE> 224
CHINA MOBILE (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS:
<TABLE>
NUMBER OF CAPITAL
ORDINARY SHARE SUBSIDIARIES' SHARE RESERVE/ GENERAL
SHARES CAPITAL CAPITAL PREMIUM (GOODWILL) RESERVE
-------------- ------- ------------- ------- ---------- -------
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C> <C>
Owner's equity at January 1, 1997..................... -- -- 480 -- -- --
Capital contribution.................................. -- -- -- -- -- --
Revaluation surplus................................... -- -- -- -- -- --
Transfer from statement of income to September 26,
1997................................................ -- -- -- -- -- --
Distribution to owner................................. -- -- -- -- -- --
Transfer to capital of Guangdong Mobile and Zhejiang
Mobile.............................................. -- -- 7,232 -- -- --
-------------- ----- ------ ------ ------- --
Owner's equity at September 27, 1997.................. -- -- 7,712 -- -- --
Effect of Restructuring............................... 9,010,000,000 965 (7,712) 17,369 1,132 --
-------------- ----- ------ ------ ------- --
Shareholders' equity at September 27, 1997 after
Restructuring....................................... 9,010,000,000 965 -- 17,369 1,132 --
Issue of ordinary shares, net of expenses............. 2,770,788,000 296 -- 33,274 -- --
Transfer from statement of income from September 27,
1997................................................ -- -- -- -- -- --
Appropriations........................................ -- -- -- -- -- 72
-------------- ----- ------ ------ ------- --
Shareholders' equity at December 31, 1997............. 11,780,788,000 1,261 -- 50,643 1,132 72
Goodwill arising on acquisition of Jiangsu Mobile..... -- -- -- -- (15,622) --
Transfer from statement of income..................... -- -- -- -- -- --
Appropriation......................................... -- -- -- -- -- --
-------------- ----- ------ ------ ------- --
Shareholders' equity at December 31, 1998............. 11,780,788,000 1,261 -- 50,643 (14,490) 72
============== ===== ====== ====== ======= ==
Shareholders' equity at January 1, 1999............... 11,780,788,000 1,261 -- 50,643 (14,490) 72
Goodwill arising on acquisition of Fujian Mobile,
Henan Mobile and Hainan Mobile...................... -- -- -- -- (42,440) --
Transfer from statement of income..................... -- -- -- -- -- --
Shares issued under share option scheme............... 7,500,000 1 -- 88 -- --
Issue of new shares to the professional and
institutional investors............................. 644,804,000 69 -- 16,484 -- --
Issue of consideration shares for acquisition of
subsidiaries........................................ 1,273,195,021 136 -- 32,549 -- --
Expenses incurred in connection with the issue of new
shares to professional and institutional
investors........................................... -- -- -- (419) -- --
Appropriation......................................... -- -- -- -- -- --
-------------- ----- ------ ------ ------- --
Shareholders' equity at December 31, 1999............. 13,706,287,021 1,467 -- 99,345 (56,930) 72
============== ===== ====== ====== ======= ==
PRC
REVALUATION STATUTORY RETAINED
RESERVE RESERVES EARNINGS TOTAL
----------- --------- -------- -------
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Owner's equity at January 1, 1997..................... 223 3,041 8,727 12,471
Capital contribution.................................. -- 246 -- 246
Revaluation surplus................................... 3,529 -- -- 3,529
Transfer from statement of income to September 26,
1997................................................ -- -- 3,442 3,442
Distribution to owner................................. -- (36) (186) (222)
Transfer to capital of Guangdong Mobile and Zhejiang
Mobile.............................................. -- -- (7,232) --
------ ------ ------ -------
Owner's equity at September 27, 1997.................. 3,752 3,251 4,751 19,466
Effect of Restructuring............................... (3,752) (3,251) (4,751) --
------ ------ ------ -------
Shareholders' equity at September 27, 1997 after
Restructuring....................................... -- -- -- 19,466
Issue of ordinary shares, net of expenses............. -- -- -- 33,570
Transfer from statement of income from September 27,
1997................................................ -- -- 1,513 1,513
Appropriations........................................ -- 111 (183) --
------ ------ ------ -------
Shareholders' equity at December 31, 1997............. -- 111 1,330 54,549
Goodwill arising on acquisition of Jiangsu Mobile..... -- -- -- (15,622)
Transfer from statement of income..................... -- -- 6,900 6,900
Appropriation......................................... -- 2,092 (2,092) --
------ ------ ------ -------
Shareholders' equity at December 31, 1998............. -- 2,203 6,138 45,827
====== ====== ====== =======
Shareholders' equity at January 1, 1999............... -- 2,203 6,138 45,827
Goodwill arising on acquisition of Fujian Mobile,
Henan Mobile and Hainan Mobile...................... -- -- -- (42,440)
Transfer from statement of income..................... -- -- 4,797 4,797
Shares issued under share option scheme............... -- -- -- 89
Issue of new shares to the professional and
institutional investors............................. -- -- -- 16,553
Issue of consideration shares for acquisition of
subsidiaries........................................ -- -- -- 32,685
Expenses incurred in connection with the issue of new
shares to professional and institutional
investors........................................... -- -- -- (419)
Appropriation......................................... -- 3,524 (3,524) --
------ ------ ------ -------
Shareholders' equity at December 31, 1999............. -- 5,727 7,411 57,092
====== ====== ====== =======
</TABLE>
F-14
<PAGE> 225
CHINA MOBILE (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE PERIODS:
<TABLE>
<CAPTION>
CAPITAL PRC
NUMBER OF SHARE SUBSIDIARIES' SHARE RESERVE/ GENERAL REVALUATION STATUTORY
ORDINARY SHARES CAPITAL CAPITAL PREMIUM (GOODWILL) RESERVE RESERVE RESERVES
--------------- ------- ------------- ------- ---------- ------- ----------- ---------
RMB RMB RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shareholders' equity at
January 1, 1999........... 11,780,788,000 1,261 -- 50,643 (14,490) 72 -- 2,203
Transfer from statement of
income.................... -- -- -- -- -- -- -- --
Issue of ordinary shares.... 5,500,000 1 -- 65 -- -- -- --
Purchase of minority
interest.................. -- -- -- -- 3 -- -- --
-------------- ----- ------ ------ ------- -- ------ ------
Shareholders' equity at June
30, 1999.................. 11,786,288,000 1,262 -- 50,708 (14,487) 72 -- 2,203
============== ===== ====== ====== ======= == ====== ======
Shareholders' equity at
January 1, 2000........... 13,706,287,021 1,467 -- 99,345 (56,930) 72 -- 5,727
Transfer from statement of
income.................... -- -- -- -- -- -- -- --
Shares issued under share
option scheme............. 142,000 -- -- 7 -- -- -- --
-------------- ----- ------ ------ ------- -- ------ ------
Shareholders' equity at June
30, 2000.................. 13,706,429,021 1,467 -- 99,352 (56,930) 72 -- 5,727
============== ===== ====== ====== ======= == ====== ======
<CAPTION>
RETAINED
EARNINGS TOTAL
-------- -----
RMB RMB
<S> <C> <C>
Shareholders' equity at
January 1, 1999........... 6,138 45,827
Transfer from statement of
income.................... 4,004 4,004
Issue of ordinary shares.... -- 66
Purchase of minority
interest.................. -- 3
------ -------
Shareholders' equity at June
30, 1999.................. 10,142 49,900
====== =======
Shareholders' equity at
January 1, 2000........... 7,411 57,092
Transfer from statement of
income.................... 8,724 8,724
Shares issued under share
option scheme............. -- 7
------ -------
Shareholders' equity at June
30, 2000.................. 16,135 65,823
====== =======
</TABLE>
See accompanying notes to consolidated financial statements
F-15
<PAGE> 226
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
1 ORGANIZATION, PRINCIPAL ACTIVITIES AND BASIS OF PRESENTATION
China Mobile (Hong Kong) Limited ("the Company") (previously known as China
Telecom (Hong Kong) Limited) and its subsidiaries (hereinafter collectively
referred to as the "Group") are principally engaged in the provision of cellular
telephone and related services in Guangdong, Zhejiang, Jiangsu, Henan, Fujian
and Hainan provinces of the People's Republic of China ("PRC") and market their
services under the "China Mobile" logo, which is a registered trademark owned by
China Mobile Communications Corporation ("China Mobile"), a company incorporated
in the PRC in July 1999 to hold and operate the cellular telecommunications
networks nationwide as a result of restructuring of the telecommunications
industry in the PRC. The telecommunications operations in the PRC previously
controlled by the Ministry of Information Industry ("MII") have been separated
into four business lines: fixed line communications, mobile communications,
paging services and satellite communications. Since then, the MII act
exclusively as the industry regulator and are not involved in managing the
day-to-day operations of telecommunications service providers in the PRC.
Prior to the restructuring (as described below, the "Restructuring"), the
Group's Total Access Communications Systems ("TACS") and Global System for
Mobile Communications ("GSM") cellular networks in Guangdong were owned by
Guangdong Mobile Communication Corporation (together with the successor
wholly-owned foreign enterprise formed in connection with the Restructuring,
"Guangdong Mobile"), an enterprise formed in September 1988 and wholly owned by
the MII on behalf of the State. Prior to the Restructuring, the Group's GSM
cellular network in Zhejiang was owned by Zhejiang GSM Mobile Communication
Company Limited (together with the successor sino-foreign joint venture company
formed in connection with the Restructuring, "Zhejiang Mobile"), a company
formed in February 1996 and 98.55% owned by the Zhejiang Provincial Posts and
Telecommunications Administration ("Zhejiang PTA"), while the Group's TACS
cellular networks in Zhejiang were owned and operated directly by the Zhejiang
PTA.
RESTRUCTURING
Pursuant to the Restructuring, the Company was established as a
wholly-owned subsidiary of CMHK (BVI), a company incorporated with limited
liability in the British Virgin Islands. CMHK (BVI) is controlled by China
Mobile (Hong Kong) Group Limited ("CMHKG"), which in turn is 51% owned by Telpo
Communications (Group) Limited ("Telpo"), a Hong Kong company wholly owned by
the MII, and as to 49% by the China Telecommunications Corporation (previously
known as the Directorate General of Telecommunications, or the DGT). At December
31, 1999, the percentages of equity interests of CMHK (BVI), which in turn were
owned by Telpo and DGT were changed to 57% and 43%, respectively. On May 12,
2000, China Mobile acquired a 100% controlling interest in CMHKG. As a result of
this, China Mobile now indirectly holds approximately 75% equity interest in the
Company. Guangdong Mobile was formed as a wholly foreign-owned enterprise
whereas Zhejiang Mobile was formed as a sino-foreign joint venture company. The
Company is the sole equity owner in Guangdong Mobile and was initially
F-16
<PAGE> 227
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
1 ORGANIZATION, PRINCIPAL ACTIVITIES AND BASIS OF PRESENTATION (CONTINUED)
the 99.63% joint venture partner in Zhejiang Mobile, with the remaining
interests held by various local investors. The Company acquired the remaining
0.37% interest in Zhejiang Mobile in April 1999. Subsequent to the acquisition,
Zhejiang Mobile became a wholly foreign-owned enterprise.
In connection with the Restructuring and in anticipation of the initial
offering of the Company's ordinary shares, the fixed assets of Guangdong Mobile
and Zhejiang Mobile were revalued as of May 31, 1997, by a firm of independent
valuers and approved by the China State-owned Assets Administration Bureau. The
value of fixed assets of Guangdong Mobile and Zhejiang Mobile pursuant to the
valuation, based on a depreciated replacement cost basis, was determined at RMB
15,630. Upon the transfer of interests in Guangdong Mobile and Zhejiang Mobile
by the MII and the DGT to the Company, 9,010,000,000 ordinary shares of HK$0.10
each were issued by the Company to CMHK (BVI) for consideration valued at RMB
19,466. Such amount was based on the net asset value of Guangdong Mobile and
Zhejiang Mobile as at May 31, 1997, the effective date of the Restructuring,
adjusted for additional earnings to September 26, 1997, the completion date of
the Restructuring, of RMB 1,132, which is reflected as capital reserve.
EQUITY OFFERING
Subsequent to the Restructuring, in October 1997, the Company completed an
initial public offering (the "Offering") of an aggregate of 2,770,788,000
ordinary shares. Net proceeds to the Company for the Offering, after deduction
of offering expenses, were approximately RMB 33,570.
ACQUISITION OF JIANGSU MOBILE COMMUNICATION COMPANY LIMITED ("JIANGSU MOBILE")
Pursuant to the ordinary resolution passed by the Company's shareholders on
June 3, 1998, the Company acquired the entire issued share capital of China
Telecom Jiangsu Mobile (BVI) Limited ("Jiangsu Mobile BVI") from CMHK (BVI) by a
total cash consideration of HK$22,475 (RMB equivalent 24,120) (hereinafter
referred to as the "Jiangsu Acquisition"). The only asset of Jiangsu Mobile BVI
is its interest in the entire equity of Jiangsu Mobile. Subsequent to the
Jiangsu Acquisition, Jiangsu Mobile became a wholly foreign-owned enterprise.
In connection with the Jiangsu Acquisition, the fixed assets of Jiangsu
Mobile were revalued as of December 31, 1997, by a firm of independent valuers
and approved by the China State-owned Assets Administration Bureau. The value of
fixed assets of Jiangsu Mobile pursuant to the valuation, based on a depreciated
replacement cost basis, was determined at RMB 7,879.
Goodwill arising on the acquisition of Jiangsu Mobile BVI and Jiangsu
Mobile (RMB 15,622), being the excess of the cost of investments (RMB 24,120)
over the fair value of the Group's share of the separable net assets acquired
(RMB 8,498), was
F-17
<PAGE> 228
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
1 ORGANIZATION, PRINCIPAL ACTIVITIES AND BASIS OF PRESENTATION (CONTINUED)
eliminated against reserves immediately on acquisition. The fair value of the
Group's share of the separable net assets acquired was based on the net asset
value of Jiangsu Mobile at December 31, 1997 (RMB 8,009), adjusted for
additional earnings to June 3, 1998, the completion date of the Jiangsu
Acquisition, of RMB 489.
ACQUISITION OF FUJIAN MOBILE COMMUNICATION COMPANY LIMITED ("FUJIAN MOBILE"),
HENAN MOBILE COMMUNICATION COMPANY LIMITED ("HENAN MOBILE") AND HAINAN MOBILE
COMMUNICATION COMPANY LIMITED ("HAINAN MOBILE").
Pursuant to an ordinary resolution passed by the Company's shareholders on
November 11, 1999, the Company acquired the entire issued share capital of
Fujian Mobile (BVI), Henan Mobile (BVI) and Hainan Mobile (BVI) from CMHK (BVI)
for a total consideration of HK$49,715 (RMB equivalent 52,953) (hereinafter
referred to as the "Acquisition"). The consideration was satisfied by cash of
HK$19,031 (RMB equivalent 20,268) and an allotment of 1,273,195,021 ordinary
shares of HK$0.1 each to CMHK (BVI) amounting to HK$30,684 (RMB equivalent
32,685). The only assets of each of Fujian Mobile BVI, Henan Mobile BVI and
Hainan Mobile BVI are their interests in the entire equity of Fujian Mobile,
Henan Mobile and Hainan Mobile, respectively.
In connection with the Acquisition, the fixed assets of Fujian Mobile,
Henan Mobile and Hainan Mobile were revalued as of June 30, 1999, by a firm of
independent valuers and approved by the Ministry of Finance. The value of fixed
assets of Fujian Mobile, Henan Mobile and Hainan Mobile pursuant to the
valuation, based on a depreciated replacement cost basis, was determined at RMB
10,684.
Goodwill arising on the acquisition of Fujian Mobile, Henan Mobile and
Hainan Mobile (RMB 42,440), being the excess of the cost of investments (RMB
52,953) over the fair value of the Group's share of the separable net assets
acquired (RMB 10,513), was eliminated against reserves immediately on
acquisition. The fair value of the Group's share of the separable net assets
acquired was based on the net assets of Fujian Mobile, Henan Mobile and Hainan
Mobile at June 30, 1999 (RMB 9,524), adjusted for additional earnings to
November 11, 1999, the completion date of the Acquisition, of RMB 989.
EQUITY OFFERING AND DEBT OFFERING
In order to finance the acquisition consideration, the Company completed an
international offering of an aggregate of 644,804,000 ordinary shares and debt
offering with a principal amount of US$600 with maturity due on November 2,
2004. Further the Company issued totalling 1,273,195,021 consideration shares to
CMHK(BVI), credited as fully paid as part of the acquisition consideration. Net
proceeds to the Company for such equity offering and debt offering, after
deduction of offering expenses and discount, were approximately RMB 16,134 and
RMB 4,899, respectively.
F-18
<PAGE> 229
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
1 ORGANIZATION, PRINCIPAL ACTIVITIES AND BASIS OF PRESENTATION (CONTINUED)
BASIS OF PREPARATION
The consolidated financial statements have been prepared on a consolidated
basis to reflect the financial position and results of operations of the
Company, Guangdong Mobile and Zhejiang Mobile from the date of the Restructuring
and of Jiangsu Mobile, Fujian Mobile, Henan Mobile and Hainan Mobile from their
respective dates of acquisition. The consolidated statement of income for the
six months ended June 30, 2000 includes the results of the Company, Guangdong
Mobile, Zhejiang Mobile, Jiangsu Mobile, Fujian Mobile, Henan Mobile and Hainan
Mobile for the same period ended June 30, 2000. The consolidated statements of
income for the year ended December 31, 1999 includes the results of the Company,
Guangdong Mobile, Zhejiang Mobile and Jiangsu Mobile for the twelve months ended
December 31, 1999 and the post-acquisition results of Fujian Mobile, Henan
Mobile and Hainan Mobile for the period from November 12, 1999 to December 31,
1999. The consolidated statements of income for the year ended December 31, 1998
includes the results of the Company, Guangdong Mobile and Zhejiang Mobile for
the year ended December 31, 1998 and the post-acquisition results of Jiangsu
Mobile for the period from June 4, 1998 to December 31, 1998. The consolidated
results of operations prior to September 27, 1997 represent the former combined
operations of Guangdong Mobile and Zhejiang Mobile.
The financial statements have been prepared in accordance with accounting
principles generally accepted in Hong Kong ("HK GAAP"). Significant differences
between HK GAAP and accounting principles generally accepted in the United
States ("US GAAP") are set forth in Note 28.
The consolidated financial statements are expressed in Renminbi. Solely for
the convenience of the reader, for each of the December 31, 1999 and June 30,
2000 financial statements have been translated into United States dollars at the
noon buying rate in New York City on June 30, 2000 for cable transfer in
Renminbi as certified for customs purposes by the Federal Reserve Bank of New
York of US$1.00 = RMB 8.2782. No representation is made that the Renminbi
amounts could have been, or could be, converted into United States dollars at
that rate or at any other certain rate on December 31, 1999 and June 30, 2000,
or any other certain date.
2 PRINCIPAL ACCOUNTING POLICIES
(a) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries (see Note 27 for details of the Company's principal
subsidiaries). The results of subsidiary companies are included in the
consolidated statements of income, and the share attributable to minority
interests is deducted from or added to the consolidation income after taxation.
All significant inter-company balances and transactions have been eliminated.
F-19
<PAGE> 230
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
2 PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(b) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are short-term, highly liquid investments which
are readily convertible into known amounts of cash without notice and which are
within three months of maturity when acquired. For the purposes of the statement
of cash flows, cash equivalents would also include advances from banks repayable
within three months from the date of the advance. None of the Group's cash and
cash equivalents is restricted as to withdrawal.
(c) ASSOCIATES
An associate is a company in which the Group has significant influence, but
not control or joint control, over its management, including participation in
the financial and operating policy decisions.
The Group's share of the results of its associates is included in the
consolidated statements of income. Such amounts were immaterial for the periods
presented. In the consolidated balance sheets, interest in associates is stated
at cost adjusted for post-acquisition retained results of operations, less any
provisions for diminution in value which is other than temporary as determined
by the directors for each associate individually. Any such provisions are
recognized as an expense in the consolidated statements of income.
(d) FIXED ASSETS AND DEPRECIATION
(i) Fixed assets are stated at cost/revalued amount less accumulated
depreciation. The circumstances and basis under which the revalued
amount is arrived at are set out in details in Note 11.
(ii) The cost of fixed assets comprises the purchase price and any
directly attributable costs of bringing the asset to its working
condition and location for its intended use. Expenditures incurred
after the fixed asset has been put into operation, such as repairs
and maintenance and overhaul costs, are normally charged to the
consolidated statements of income in the year/period incurred. In
situations where it can be clearly demonstrated that the expenditure
has resulted in an increase in the future economic benefits expected
to be obtained from the use of the fixed asset, the expenditure is
capitalized as an additional cost of the fixed asset.
(iii) Gains or losses arising from the retirement or disposal of fixed
assets are determined as the difference between the net disposal
proceeds and the carrying amount of the asset and are recognized as
income or expense in the consolidated statements of income on the
date of retirement or disposal.
(iv) The carrying amount of fixed assets recorded at depreciated cost is
reviewed periodically in order to assess whether the recoverable
amount has declined
F-20
<PAGE> 231
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
2 PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
below the carrying amount. When such a decline has occurred, the
carrying amount is reduced to the recoverable amount. The amount of
the reduction is recognized as an expense in the consolidated
statements of income. In determining the recoverable amount, expected
future cash flows generated by the fixed assets are discounted to
their present values.
A subsequent increase in the recoverable amount of an asset carried
at depreciated cost is written back to the consolidated statements of
income when the circumstances and events that led to the write-down
or write-off cease to exist. The amount written back is reduced by
the amount that would have been recognized as depreciation had the
write-down or write-off not occurred. No amounts were written back
for the years/periods presented.
(v) Depreciation is calculated to write off the cost, or revalued amount
where appropriate, of fixed assets on a straight-line basis over their
estimated useful lives, to residual values, as follows:
<TABLE>
<CAPTION>
DEPRECIABLE LIFE RESIDUAL VALUE
---------------- --------------
<S> <C> <C>
Land use rights................................... Over the period of grant --
Buildings......................................... 8-35 years 3%
Telecommunication transceivers, switching centers
and other network equipment..................... 7 years 3%
Office equipment, furniture and fixtures and
others.......................................... 4-18 years 3%
</TABLE>
(e) LEASED ASSETS
Where assets are acquired under capital leases, the amounts representing
the outright purchase price, which approximate the present value of the minimum
lease payments, of such assets are included in fixed assets and the
corresponding liabilities, net of finance charges, are recorded as obligations
under capital lease. Depreciation is provided at rates which write off the cost
of the assets in equal annual amounts over the shorter of the period of the
leases or the estimated useful lives of the assets as set out in note 2(d)
above. Finance charges implicit in the lease payments are charged to the
consolidated statements of income over the period of the leases so as to produce
an approximately constant periodic rate of charge on the remaining balance of
the obligations for each accounting year/period.
(f) CONSTRUCTION IN PROGRESS
Construction in progress is stated at cost. Cost comprises direct costs of
construction as well as interest expense and exchange differences capitalized
during the years/periods of construction and installation. Capitalization of
these costs ceases and the construction in progress is transferred to fixed
assets when substantially all the activities necessary to prepare the assets for
their intended use are completed. No depreciation is provided in respect of
construction in progress until it is completed and ready for its intended use.
F-21
<PAGE> 232
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
2 PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(g) INVENTORIES
Inventories, which consist primarily of handsets, SIM cards and
accessories, are stated at the lower of cost and net realizable value. Cost
represents purchase cost of goods calculated using the weighted average cost
method. Net realizable value is determined by reference to the sales proceeds of
items sold in the ordinary course of business after the balance sheet date or to
management's estimates based on prevailing market conditions.
When inventories are sold, the carrying amount of those inventories is
recognized as a deduction of other income due to its insignificance. The amount
of any write-down of inventories to net realizable value and all losses of
inventories are recognized as an expense in the year/period the write-down or
loss occurs. The amount of any reversal of any write-down of inventories,
arising from an increase in net realizable value, is recognized as a reduction
in the amount of inventories recognized as an expense in the year/period in
which the reversal occurs. No amounts were written back for the years/ periods
presented.
(h) DEFERRED REVENUE
Deferred revenue, which consists of deferred revenue from prepaid service
fees received from subscribers and deferred revenue from assignment of rights to
income from subscribers with distributors of telecommunications services are
stated in the balance sheet at the amount of consideration received according to
the relevant assignment contracts if applicable, less income recognized in the
consolidated statements of income up to the balance sheet date.
Income from assignment of rights is deferred and recognized on a
straight-line basis over the relevant assignment period. For assignment
contracts which the distributors surrender for early cancellation, the balance
of the Group's deferred revenue in respect of those contracts is recognized as
non-operating income in the consolidated statements of income when the
assignment contracts are cancelled.
Revenue from prepaid service fees is recognized when the cellular services
are rendered.
(i) FIXED RATE NOTES
Fixed rate notes are stated on the consolidated balance sheets at face
value, less unamortized discount arising on issuance of notes. The discount is
amortized on a straight-line basis over the period from the date of issue to the
date of maturity.
(j) DEFERRED EXPENSES
Deferred expenses comprise incidental costs incurred in relation to the
issue of the Company's fixed rate notes and are amortized on a straight-line
basis over the period
F-22
<PAGE> 233
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
2 PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
from the date of issue to the date of maturity. In the event that the notes are
redeemed prior to the maturity date, the unamortized expenses are charged
immediately to the consolidated statements of income.
(k) BORROWING COSTS
Borrowing costs are expensed in the consolidated statements of income in
the year/period in which they are incurred, except to the extent that such costs
are capitalized as being directly attributable to the acquisition or
construction of an asset which necessarily takes a substantial period of time to
get ready for its intended use.
(l) REVENUE RECOGNITION
Revenue is recognized when it is probable that the economic benefits will
accrue to the Group and when the revenue can be measured reliably on the
following basis:
(i) usage fees are recognized as revenue when the service is rendered;
(ii) monthly fees are recognized as revenue in the month during which the
service is rendered;
(iii) connection fees are recognized as revenue when received;
(iv) deferred revenue from assignment of rights to income from subscribers
is recognized on a straight-line basis over the duration of the
assignment period;
(v) interest income is recognized on a time proportion basis on the
principal outstanding and at the rate applicable; and
(vi) sales of handsets and SIM cards are recognized on delivery of goods to
the buyer. Such revenue, net of cost of goods sold, is included in
other income due to its insignificance.
(m) ALLOWANCE FOR DOUBTFUL ACCOUNTS
An allowance for doubtful accounts is provided based upon evaluation of the
recoverability of the receivables at the balance sheet date.
(n) TRANSLATION OF FOREIGN CURRENCIES
The functional currency of the Group's operations is Renminbi. See Note 26.
Foreign currency transactions are recorded at the applicable rates of exchange
prevailing on the transaction dates. Monetary assets and liabilities denominated
in currencies other than the functional currency are translated at the exchange
rates ruling at the balance sheet date. Exchange differences attributable to the
translation of borrowings denominated in currencies other than the functional
currency, and used for financing the construction of fixed assets, are included
in the cost of the related construction in progress. Exchange differences
capitalized to construction in progress
F-23
<PAGE> 234
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
2 PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
are immaterial for the years/periods presented. Other exchange gains and losses
are recognized in the consolidated statements of income.
(o) DEFERRED TAXATION
Deferred taxation is provided under liability method in respect of the tax
effect arising from all material timing differences between the accounting and
tax treatment of income and expenditure, which are expected with reasonable
probability to crystallize in the foreseeable future. Future deferred tax
benefits are not recognized unless their realization is assured beyond
reasonable doubt.
(p) RETIREMENT BENEFITS
Contributions to retirement schemes are charged to the consolidated
statements of income as and when incurred. See Note 23.
(q) NET PROFIT PER SHARE
The calculation of basic net profit per share for the year ended December
31, 1997 has been computed by dividing net profit by the weighted average number
of shares outstanding as if the shares issued in the Restructuring were
outstanding for the year shown. The calculation of basic net profit per share
for the years ended December 31, 1998 and 1999 and the six months ended June 30,
1999 and 2000 are based on the net profit and the weighted average number of
shares in issue during the years/periods.
The calculation of diluted net profit per share for the years ended
December 31, 1998 and 1999 and the six months ended June 30, 1999 and 2000 have
been computed after adjusting for the effects of all dilutive potential ordinary
shares. All dilutive potential ordinary shares arise from the share options
granted to the directors under the share option scheme which, if converted to
ordinary shares, would decrease net profit per share. No diluted net profit per
share for the year ended December 31, 1997 is calculated as the share options to
the directors were initially granted in March 1998.
(r) OPERATING LEASES
Rental payable under operating lease are accounted for in the consolidated
statements of income on a straight-line basis over the periods of the respective
leases.
(s) RELATED PARTIES
For the purposes of these accounts, parties are considered to be related to
the Group if the Group has the ability, directly or indirectly, to control the
party or exercise significant influence over the party in making financial and
operating decisions, or vice versa, or where the Group and the party are subject
to common control or common significant influence. Related parties may be
individuals or other entities.
F-24
<PAGE> 235
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
2 PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(t) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the years/periods reported. Actual
results could differ from those estimates. Estimates are used when accounting
for allowance for doubtful accounts, the length of fixed assets' lives, and
write-down and write-off of long-lived assets. Actual results may differ from
these estimates.
3 OPERATING REVENUE
The principal activities of the Group are the provision of cellular
telephone and related services in Guangdong, Zhejiang, Jiangsu, Fujian, Henan
and Hainan provinces of the PRC. The principal activity of the Company is
investment holding.
Operating revenue primarily represents usage fees, monthly fees and
connection fees for the use of the Group's cellular telephone networks, net of
PRC business tax and government surcharges and central irrigation construction
levy. Business tax and government surcharges are charged at approximately 3% to
3.65% of the corresponding revenue and central irrigation construction levy was
charged at approximately 3% of certain connection and surcharge revenue.
Operating revenue is further analyzed as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- ---------------------
NOTE 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C> <C>
GUANGDONG MOBILE:
Usage fees...................... (i) 6,206 10,424 14,811 6,719 10,041
Monthly fees.................... (ii) 2,200 3,071 2,436 1,035 1,802
Connection fees................. (iii) 2,061 1,887 2,894 1,609 1,185
Other operating revenue......... (iv) 608 1,247 1,681 693 1,528
------ ------ ------ ------ ------
11,075 16,629 21,822 10,056 14,556
------ ------ ------ ------ ------
ZHEJIANG MOBILE:
Usage fees...................... (i) 2,512 3,815 5,386 2,362 3,371
Monthly fees.................... (ii) 492 870 1,230 574 825
Connection fees................. (iii) 1,113 1,009 806 439 187
Other operating revenue......... (iv) 296 712 869 388 516
------ ------ ------ ------ ------
4,413 6,406 8,291 3,763 4,899
------ ------ ------ ------ ------
</TABLE>
F-25
<PAGE> 236
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
3 OPERATING REVENUE (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- ---------------------
NOTE 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C> <C>
JIANGSU MOBILE:
Usage fees...................... (i) -- 2,107 4,236 1,931 2,653
Monthly fees.................... (ii) -- 406 1,008 472 666
Connection fees................. (iii) -- 427 529 369 45
Other operating revenue......... (iv) -- 370 796 349 418
------ ------ ------ ------ ------
-- 3,310 6,569 3,121 3,782
------ ------ ------ ------ ------
FUJIAN MOBILE:
Usage fees...................... (i) -- -- 764 -- 2,224
Monthly fees.................... (ii) -- -- 141 -- 444
Connection fees................. (iii) -- -- 68 -- 39
Other operating revenue......... (iv) -- -- 94 -- 230
------ ------ ------ ------ ------
-- -- 1,067 -- 2,937
------ ------ ------ ------ ------
HENAN MOBILE:
Usage fees...................... (i) -- -- 520 -- 1,567
Monthly fees.................... (ii) -- -- 144 -- 443
Connection fees................. (iii) -- -- 16 -- 60
Other operating revenue......... (iv) -- -- 51 -- 203
------ ------ ------ ------ ------
-- -- 731 -- 2,273
------ ------ ------ ------ ------
HAINAN MOBILE:
Usage fees...................... (i) -- -- 95 -- 287
Monthly fees.................... (ii) -- -- 22 -- 70
Connection fees................. (iii) -- -- 6 -- 16
Other operating revenue......... (iv) -- -- 20 -- 77
------ ------ ------ ------ ------
-- -- 143 -- 450
------ ------ ------ ------ ------
Total operating
revenue............. 15,488 26,345 38,623 16,940 28,897
====== ====== ====== ====== ======
</TABLE>
---------------
NOTES:
(i) Usage fees represent standard local usage fee for airtime and, where
applicable, Domestic Direct Dial ("DDD") charges and International Direct
Dial ("IDD") charges receivable from subscribers for the use of the Group's
cellular communication networks and facilities; revenue from assignment of
rights to income from subscribers, and fees in respect of roaming out
calls. Roaming out calls are those made by the Group's subscribers outside
the local service area. See Note 4(ii).
For Guangdong Mobile and Zhejiang Mobile, prior to October 20, 1997, IDD
and certain DDD call charges receivable from subscribers are not reflected
as revenue. Pursuant to the interconnection agreements, with effect from
October 20, 1997, Guangdong Mobile and Zhejiang Mobile reflect IDD and DDD
calls charges receivable from subscribers and the amounts payable by
relevant PTAs to the Group for inbound calls to the Group's subscribers
which originate from the public switched fixed line network ("PSTN") as
F-26
<PAGE> 237
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
3 OPERATING REVENUE (CONTINUED)
revenue. The public switched fixed line network is operated by CTC, a
company established to hold and operate the fixed line telephone and data
communications services in the PRC.
(ii) Monthly fees represent fixed amounts charged to subscribers each month for
their entitlement to use the Group's cellular telephone and related
services.
(iii) Connection fees represent amounts charged to subscribers for the initial
connection to the Group's cellular telecommunications network.
(iv) Other operating revenue mainly represents telephone number selection fees,
charges for value added services, interconnection revenue and roaming in
fees. Roaming in fees are received from China Mobile (previously the MII)
in respect of calls made by non-subscribers using the Group's cellular
telecommunications networks. With effect from April 1, 2000, all
settlements of inter-provincial roaming and corresponding interconnection
revenues are made through China Mobile (previously the MII).
4 OPERATING EXPENSES
Operating expenses consist of:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- ---------------------
NOTE 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C> <C>
GUANGDONG MOBILE:
Leased lines......... (i) 2,374 2,280 1,634 970 1,012
Interconnection...... (ii) 705 3,177 3,849 1,770 1,945
Depreciation......... 1,854 2,533 3,307 1,556 1,486
Personnel............ (iii) 634 1,182 1,661 646 854
Other operating
expenses........... (iv) 1,449 2,386 2,895 1,291 2,632
------ ------ ------ ------ ------
7,016 11,558 13,346 6,233 7,929
------ ------ ------ ------ ------
ZHEJIANG MOBILE:
Leased lines......... (i) 760 962 915 505 618
Interconnection...... (ii) 509 1,055 1,285 541 549
Depreciation......... 826 1,250 1,796 806 858
Personnel............ (iii) 116 234 273 118 154
Other operating
expenses........... (iv) 825 748 1,235 374 746
------ ------ ------ ------ ------
3,036 4,249 5,504 2,344 2,925
------ ------ ------ ------ ------
JIANGSU MOBILE:
Leased lines......... (i) -- 675 996 539 502
Interconnection...... (ii) -- 520 1,012 464 522
Depreciation......... -- 814 1,925 934 613
Personnel............ (iii) -- 160 220 76 155
Other operating
expenses........... (iv) -- 359 651 312 410
------ ------ ------ ------ ------
-- 2,528 4,804 2,325 2,202
------ ------ ------ ------ ------
</TABLE>
F-27
<PAGE> 238
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
4 OPERATING EXPENSES (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- ---------------------
NOTE 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C> <C>
FUJIAN MOBILE:
Leased lines......... (i) -- -- 81 -- 333
Interconnection...... (ii) -- -- 157 -- 301
Depreciation......... -- -- 237 -- 713
Personnel............ (iii) -- -- 39 -- 138
Other operating
expenses........... (iv) -- -- 160 -- 358
------ ------ ------ ------ ------
-- -- 674 -- 1,843
------ ------ ------ ------ ------
HENAN MOBILE:
Leased lines......... (i) -- -- 86 -- 213
Interconnection...... (ii) -- -- 114 -- 213
Depreciation......... -- -- 113 -- 397
Personnel............ (iii) -- -- 30 -- 137
Other operating
expenses........... (iv) -- -- 138 -- 394
------ ------ ------ ------ ------
-- -- 481 -- 1,354
------ ------ ------ ------ ------
HAINAN MOBILE:
Leased lines......... (i) -- -- 11 -- 36
Interconnection...... (ii) -- -- 36 -- 74
Depreciation......... -- -- 30 -- 96
Personnel............ (iii) -- -- 5 -- 24
Other operating
expenses........... (iv) -- -- 22 -- 49
------ ------ ------ ------ ------
-- -- 104 -- 279
------ ------ ------ ------ ------
THE HOLDING COMPANY:
Depreciation......... 1 1 3 1 2
Personnel............ (iii) 6 19 28 12 14
Other operating
expenses........... (iv) 15 55 39 14 27
------ ------ ------ ------ ------
22 75 70 27 43
------ ------ ------ ------ ------
Total operating
expenses........... 10,074 18,410 24,983 10,929 16,575
====== ====== ====== ====== ======
</TABLE>
---------------
NOTES:
(i) Leased line charges represent expenses paid for the use of leased lines
between the main switches, base transceiver stations, base station
controllers, base stations, fixed line network connectors and long distance
network connectors.
(ii) Interconnection charges represent amounts paid in respect of call made
between the Group's cellular networks, the fixed line networks in the
relevant provinces and other GSM
F-28
<PAGE> 239
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
4 OPERATING EXPENSES (CONTINUED)
network operators in other provinces in the PRC. Prior to October 20,
1997, no interconnection charge was payable by Guangdong Mobile for either
the TACS or GSM network or by Zhejiang Mobile for the TACS network.
Pursuant to the interconnection agreements, Guangdong Mobile and Zhejiang
Mobile recorded the amounts payable to PTAs for calls which interconnect
with the fixed line network as interconnection charges with effect from
October 20, 1997. Included in the amounts are also charges in respect of
the Group's subscribers roaming outside the service areas of Guangdong
Mobile, Zhejiang Mobile, Jiangsu Mobile, Fujian Mobile, Henan Mobile or
Hainan Mobile (see Note 3(i)).
(iii) Personnel expenses represent staff salaries, bonuses and medical benefits,
provision for staff welfare expenses and contributions to staff retirement
scheme.
(iv) Other operating expenses consist of:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- --------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
Selling and promotion..... 623 995 1,582 799 1,831
Maintenance............... 339 448 499 219 416
Provision for doubtful
accounts (Note 10)...... 449 558 771 191 647
Operating lease charges... 228 301 539 181 427
Other expenses (Note
(a)).................... 650 1,246 1,749 601 1,295
----- ----- ----- ----- -----
2,289 3,548 5,140 1,991 4,616
===== ===== ===== ===== =====
</TABLE>
These items are further analyzed as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------- ---------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
GUANGDONG MOBILE:
Selling and promotion....................... 309 626 901 540 1,211
Maintenance................................. 209 373 315 196 249
Provision for doubtful accounts............. 386 360 441 93 301
Operating lease charges..................... 145 113 247 58 225
Other expenses (Note (a))................... 400 914 991 404 646
----- ----- ----- ----- -----
1,449 2,386 2,895 1,291 2,632
----- ----- ----- ----- -----
ZHEJIANG MOBILE:
Selling and promotion....................... 314 271 443 175 297
Maintenance................................. 130 52 99 16 43
Provision for doubtful accounts............. 63 124 131 8 115
Operating lease charges..................... 82 133 148 75 63
Other expenses (Note (a))................... 236 168 414 100 228
----- ----- ----- ----- -----
825 748 1,235 374 746
----- ----- ----- ----- -----
</TABLE>
F-29
<PAGE> 240
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
4 OPERATING EXPENSES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------- ---------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
JIANGSU MOBILE:
Selling and promotion....................... -- 90 151 83 94
Maintenance................................. -- 23 41 7 12
Provision for doubtful accounts............. -- 74 132 90 118
Operating lease charges..................... -- 50 113 45 59
Other expenses (Note (a))................... -- 122 214 87 127
----- ----- ----- ----- -----
-- 359 651 312 410
----- ----- ----- ----- -----
FUJIAN MOBILE:
Selling and promotion....................... -- -- 35 -- 74
Maintenance................................. -- -- 25 -- 71
Provision for doubtful accounts............. -- -- 30 -- 24
Operating lease charges..................... -- -- 14 -- 41
Other expenses (Note (a))................... -- -- 56 -- 148
----- ----- ----- ----- -----
-- -- 160 -- 358
----- ----- ----- ----- -----
HENAN MOBILE:
Selling and promotion....................... -- -- 44 -- 142
Maintenance................................. -- -- 15 -- 38
Provision for doubtful accounts............. -- -- 38 -- 80
Operating lease charges..................... -- -- 12 -- 33
Other expenses (Note (a))................... -- -- 29 -- 101
----- ----- ----- ----- -----
-- -- 138 -- 394
----- ----- ----- ----- -----
HAINAN MOBILE:
Selling and promotion....................... -- -- 5 -- 12
Maintenance................................. -- -- 4 -- 3
Provision for doubtful accounts............. -- -- (1) -- 9
Operating lease charges..................... -- -- 2 -- 4
Other expenses (Note (a))................... -- -- 12 -- 21
----- ----- ----- ----- -----
-- -- 22 -- 49
----- ----- ----- ----- -----
THE HOLDING COMPANY:
Selling and promotion....................... -- 8 3 1 1
Operating lease charges..................... 1 5 3 3 2
Other expenses (Note (a))................... 14 42 33 10 24
----- ----- ----- ----- -----
15 55 39 14 27
----- ----- ----- ----- -----
2,289 3,548 5,140 1,991 4,616
===== ===== ===== ===== =====
</TABLE>
(a) Other expenses consist of office expenses, utilities charges,
travelling expenses, entertainment expenses, spectrum charges,
insurance expenses, consumables and supplies, debt collection fees and
other miscellaneous expenses.
F-30
<PAGE> 241
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
5 WRITE-DOWN AND WRITE-OFF OF TACS NETWORK EQUIPMENT
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------- ---------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
Write-down of TACS network equipment (a)..... -- 282 6,720 471 --
Write-off of TACS network equipment (b)...... -- -- 1,522 29 --
-- --- ----- --- --
-- 282 8,242 500 --
== === ===== === ==
</TABLE>
TACS represents Total Assess Communication System, a European standard for
analog mobile telephone transmissions in the 800 and 900 MHz frequency bands.
(a) In light of the gradual opening of the telecommunications market in the
PRC and the rapid change of technology, the Group reviewed the carrying
value of all TACS network and related equipment in 1999. Based on the
estimated recoverable value of these assets, a write-down of RMB 6,720
has been made in 1999.
(b) This represents the write-off of certain TACS network equipment which
have been removed from service.
6 OTHER INCOME
Other income primarily consists of gross margin from sales of cellular
telephone handsets and SIM cards.
7 NON-OPERATING (EXPENSES)/INCOME
Non-operating (expenses)/income consists of:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------------- ---------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
Exchange (loss)/gain........................... (61) 19 (9) (9) (43)
Loss on sale of other fixed assets............. (13) (59) (1) -- (24)
Penalty income on overdue accounts............. 93 64 72 30 61
Others......................................... (46) (75) 8 (10) (6)
--- --- -- --- ---
Total non-operating (expenses)/income.......... (27) (51) 70 11 (12)
=== === == === ===
</TABLE>
8 INTEREST INCOME
Interest income earned by the Group amounted to RMB656, RMB1,609 and RMB767
for the years ended December 31, 1997, 1998 and 1999 and RMB289 and RMB437 for
each of the six months ended June 30, 1999 and 2000, respectively, of which
RMB570, RMB1,426 and RMB410 for the years ended December 31, 1997, 1998 and 1999
and RMB189 and RMB188 for each of the six months ended June 30, 1999 and 2000,
respectively, relates to the interest income earned by the Company.
F-31
<PAGE> 242
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
9 INCOME TAX
(i) No provision has been made for Hong Kong profits tax as there was no
estimated assessable profits for the year ended December 31, 1999 and
for each of the six months ended June 30, 1999 and 2000. The provision
for Hong Kong profits tax is calculated at 16.5% and 16% of the
estimated assessable profits of the holding company's unconsolidated
financial statements for the years ended December 31, 1997 and 1998,
respectively.
(ii) Pursuant to the income tax rules and regulations of the PRC, the
Group's subsidiaries in the PRC are subject to the statutory income
tax rate of 33% for the year ended December 31, 1999 and the six
months ended June 30, 2000, except Hainan Mobile, which is assessed at
a tax rate of 15%. According to notices from the PRC Ministry of
Finance, connection fees and certain surcharges, which were previously
not subject to income tax, are subject to an income tax rate of 33%
with effect from January 1, 2000 for Fujian Mobile and January 27,
2000 for Henan Mobile and 15% with effect from January 19, 2000 for
Hainan Mobile.
Income tax in the consolidated statements of income represents:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------- --------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
Provision for Hong Kong profits tax for the
year/period.............................. 8 3 -- -- --
Overprovision in respect of Hong Kong
profits tax for prior year/period........ -- -- (2) (1) --
--- ----- ------ ----- -----
8 3 (2) (1) --
(Over)/under provision in respect of PRC
income tax for prior year/
period................................... -- -- 24 (13) (23)
Provision for PRC income tax on the
estimated taxable profits for the year/
period................................... 985 2,609 3,776 2,145 3,673
Deferred tax (assets)/liabilities (Note
15)...................................... (2) (126) (2,151) (161) 368
--- ----- ------ ----- -----
991 2,486 1,647 1,970 4,018
=== ===== ====== ===== =====
</TABLE>
F-32
<PAGE> 243
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
9 INCOME TAX (CONTINUED)
The provision for income tax differs from the amount computed by applying
the PRC statutory income tax rate of 33% to profit before tax for the following
reasons:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------- -------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
Expected PRC taxation at statutory tax rates.... 1,965 3,098 2,127 1,971 4,206
Non-taxable items
-- Connection fee............................. (803) (65) (29) -- (1)
-- Surcharge.................................. (118) (87) (37) -- --
-- Interest income............................ (86) (225) (66) (30) (30)
Non-deductible expenses......................... 37 124 150 60 139
Rate differential on PRC operations............. -- -- (371) -- (384)
Rate differential on Hong Kong operations....... (81) (233) (45) (26) 17
Non-recognition of deferred taxes
-- Generation of timing difference............ 43 76 254 46 193
-- Reversal of timing difference.............. -- (187) (265) -- (23)
Others.......................................... 34 (15) (71) (51) (99)
----- ----- ----- ----- -----
Income tax...................................... 991 2,486 1,647 1,970 4,018
===== ===== ===== ===== =====
</TABLE>
10 ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------- ---------------
1998 1999 1999 2000
---- ---- ---- ----
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Accounts receivable................................. 3,383 6,313 4,309 7,461
Less: Allowance for doubtful accounts............... (901) (1,356) (1,065) (1,935)
----- ------ ------ ------
2,482 4,957 3,244 5,526
===== ====== ====== ======
</TABLE>
F-33
<PAGE> 244
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
10 ACCOUNTS RECEIVABLE (CONTINUED)
Allowance for doubtful accounts for the years is analyzed as follows:
<TABLE>
<CAPTION>
RMB
---
<S> <C>
At January 1, 1997.......................................... 250
Provision for the year...................................... 449
Written-off................................................. (5)
-----
At December 31, 1997........................................ 694
Acquired on acquisition of subsidiaries..................... 182
Provision for the year...................................... 558
Written-off................................................. (533)
-----
At December 31, 1998........................................ 901
Acquired on acquisition of subsidiaries..................... 517
Provision for the year...................................... 771
Written-off................................................. (833)
-----
At December 31, 1999........................................ 1,356
=====
</TABLE>
Allowance for doubtful accounts for the six months periods is analyzed as
follows:
<TABLE>
<CAPTION>
RMB
---
<S> <C>
At January 1, 1999.......................................... 901
Provision for the period.................................... 191
Written-off................................................. (27)
-----
At June 30, 1999............................................ 1,065
=====
At January 1, 2000.......................................... 1,356
Provision for the period.................................... 647
Written-off................................................. (68)
-----
At June 30, 2000............................................ 1,935
=====
</TABLE>
11 FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------- ---------------
1998 1999 1999 2000
---- ---- ---- ----
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Land use rights and buildings...................... 1,761 2,878 1,722 3,104
Telecommunication transceivers, switching centers
and other network equipment...................... 38,320 58,173 42,800 63,454
Office equipment, furniture and fixtures and
others........................................... 843 1,797 999 2,127
------ ------ ------ ------
40,924 62,848 45,521 68,685
Less: accumulated depreciation..................... 6,938 20,149 10,224 24,286
------ ------ ------ ------
33,986 42,699 35,297 44,399
====== ====== ====== ======
</TABLE>
All of the Group's buildings are located outside Hong Kong.
F-34
<PAGE> 245
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
11 FIXED ASSETS (CONTINUED)
The carrying value of fixed assets of the Group includes an amount of RMB
431 and RMB 395 in respect of assets held under capital lease as at December 31,
1999 and June 30, 2000, respectively.
In connection with the Restructuring, pursuant to an approval document
dated September 5, 1997 issued by China State-owned Assets Administration
Bureau, the fixed assets of Guangdong Mobile and Zhejiang Mobile as of May 31,
1997 were valued by Zhongqihua Assets Appraisal Company ("ZAAC"), a firm of
independent valuers registered in the PRC, on a depreciated replacement cost
basis. The value of fixed assets of Guangdong Mobile and Zhejiang Mobile has
been determined at RMB 15,630 reflecting a surplus on revaluation of
approximately RMB 3,529. Such revalued amount for fixed assets of Guangdong
Mobile and Zhejiang Mobile has been reflected as of May 31, 1997 in the
accompanying consolidated financial statements.
In connection with the acquisition of Jiangsu Mobile, and pursuant to an
approval document dated April 7, 1998 issued by China State-owned Assets
Administration Bureau, the fixed assets of Jiangsu Mobile as of December 31,
1997 were valued by ZAAC on a depreciated replacement cost basis. The value of
fixed assets of Jiangsu Mobile has been determined at RMB 7,879 reflecting a
surplus on revaluation of approximately RMB 2,443.
In connection with the acquisition of Fujian Mobile, Henan Mobile and
Hainan Mobile, and pursuant to an approval document dated September 27, 1999
issued by the Ministry of Finance, the fixed assets of Fujian Mobile, Henan
Mobile and Hainan Mobile as of June 30, 1999 were valued by China International
Engineering Consulting Corporation ("CIECC") on a depreciated replacement cost
basis. The aggregate value of fixed assets of Fujian Mobile, Henan Mobile and
Hainan Mobile has been determined at RMB 10,684 reflecting a surplus on
revaluation of approximately RMB 391.
The Group's land and buildings in Guangdong Mobile and Zhejiang Mobile,
Jiangsu Mobile and Fujian Mobile, Henan Mobile and Hainan Mobile were also
valued separately by Chesterton Petty Limited, independent qualified valuers in
Hong Kong, as of May 31, 1997, December 31, 1997 and June 30, 1999 respectively.
The values of such reports have been determined at approximately the same
amounts as the ZAAC and CIECC reports.
Other than revaluations carried out in compliance with relevant PRC rules
and regulations, the Group has no plan to revalue its fixed assets on a regular
basis.
The effect of the above three revaluations is to increase annual
depreciation charges by approximately RMB 1,113 (1998: approximately RMB 1,041).
F-35
<PAGE> 246
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
11 FIXED ASSETS (CONTINUED)
The historical cost net book value of the fixed assets of Guangdong Mobile
and Zhejiang Mobile in the Group's financial statements as of May 31, 1997 and
the revalued basis of these fixed assets are as follows:
<TABLE>
<CAPTION>
REVALUED
NET BOOK VALUE AMOUNT
-------------- --------
RMB RMB
<S> <C> <C>
Land use rights and buildings............................... 444 552
Telecommunication transceivers, switching centers and other
network equipment......................................... 11,186 14,591
Office equipment, furniture and fixtures and others......... 471 487
------ ------
12,101 15,630
====== ======
</TABLE>
The historical cost net book value of the fixed assets of Jiangsu Mobile as
of December 31, 1997 and the revalued basis of these fixed assets are as
follows:
<TABLE>
<CAPTION>
REVALUED
NET BOOK VALUE AMOUNT
-------------- --------
RMB RMB
<S> <C> <C>
Land use rights and buildings............................... 15 25
Telecommunication transceivers, switching centers and other
network equipment......................................... 5,409 7,842
Office equipment, furniture and fixtures and others......... 12 12
----- -----
5,436 7,879
===== =====
</TABLE>
The historical cost net book value of the fixed assets of Fujian Mobile,
Henan Mobile and Hainan Mobile as of June 30, 1999 and the revalued basis of
these fixed assets are as follows:
<TABLE>
<CAPTION>
REVALUED
NET BOOK VALUE AMOUNT
-------------- --------
RMB RMB
<S> <C> <C>
Land use rights and buildings............................... 152 159
Telecommunication transceivers, switching centers and other
network equipment......................................... 9,931 10,322
Office equipment, furniture and fixtures and others......... 210 203
------ ------
10,293 10,684
====== ======
</TABLE>
12 INTEREST IN ASSOCIATES
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ -----------
1998 1999 1999 2000
---- ---- ---- ----
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Unlisted shares, at cost................................... 21 37 21 37
Capital contributions, at cost............................. 9 9 9 9
-- -- -- --
30 46 30 46
== == == ==
</TABLE>
F-36
<PAGE> 247
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
12 INTEREST IN ASSOCIATES (CONTINUED)
Details of the associates, all of which are unlisted corporate entities,
are as follows:
<TABLE>
<CAPTION>
PLACE OF ATTRIBUTABLE
INCORPORATION INTEREST HELD
AND BY THE PRINCIPAL
NAME OF ASSOCIATE OPERATION GROUP ACTIVITIES
----------------- ------------- ------------- ----------
<S> <C> <C> <C>
China Motion United Telecom Hong Kong 30% Provision of
Limited telecommunication services
Shenzhen China Motion Telecom PRC 30% Provision of
United Limited telecommunication services
Fujian Nokia Mobile PRC 50% Network planning and
Communication Technology optimizing
Company Limited construction-testing and
supervising, technology
support, development and
training of Nokia GSM
900/1800 Mobile Communication
system
</TABLE>
13 AMOUNTS DUE FROM/TO ULTIMATE HOLDING COMPANY
Amounts due from/to ultimate holding company are unsecured, non-interest
bearing, repayable on demand and arose in the ordinary course of business.
14 AMOUNTS DUE FROM/TO RELATED PARTIES AND CTC
Amounts due from/to related parties and CTC are unsecured, non-interest
bearing and repayable on demand and arose in the ordinary course of business. As
of June 30, 2000, balance of amount due from/to CTC were separately disclosed
from amounts due from/to related parties. (See note 24).
15 DEFERRED TAX ASSETS
Movements on deferred tax assets comprise:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------- -------------
1998 1999 1999 2000
---- ---- ---- ----
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Balance at beginning of year/period.................. 24 152 152 2,306
Acquired on acquisition of subsidiaries.............. 2 3 -- --
Transferred from consolidated statements of income
(Note 9)........................................... 126 2,151 161 (368)
--- ----- --- -----
Balance at end of year/period........................ 152 2,306 313 1,938
=== ===== === =====
</TABLE>
F-37
<PAGE> 248
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
15 DEFERRED TAX ASSETS (CONTINUED)
Deferred tax assets of the Group provided for are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------- -------------
1998 1999 1999 2000
---- ---- ---- ----
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Provision for obsolete inventories................... 26 51 22 14
Write-down of fixed assets relating to TACS network
equipment.......................................... 44 2,182 208 1,857
Amortization of deferred revenue..................... 82 73 83 67
--- ----- --- -----
152 2,306 313 1,938
=== ===== === =====
</TABLE>
Deferred tax assets of the Group not provided for are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------- -------------
1998 1999 1999 2000
---- ---- ---- ----
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Provision for doubtful accounts...................... 283 402 330 572
=== ===== === =====
</TABLE>
As described in Note 11, in connection with the Restructuring, the fixed
assets of Guangdong Mobile and Zhejiang Mobile were revalued on May 31, 1997. As
a result of such valuation, the fixed assets basis differences that gave rise to
the potential deferred tax liabilities of Guangdong Mobile and Zhejiang Mobile
were eliminated (RMB 547 as of May 31, 1997).
In connection with the acquisition of Jiangsu Mobile, the fixed assets of
Jiangsu Mobile were revalued on December 31, 1997. As a result of such
valuation, the fixed assets basis differences that gave rise to the potential
deferred tax liabilities of Jiangsu Mobile were eliminated (RMB 149 as of
December 31, 1997).
In connection with the acquisition of Fujian Mobile, Henan Mobile and
Hainan Mobile, the fixed assets of Fujian Mobile, Henan Mobile and Hainan Mobile
were revalued on June 30, 1999. As a result of such valuation, the fixed assets
basis differences that give rise to the potential deferred tax liabilities were
eliminated (RMB 825 as of June 30, 1999).
16 BANK AND OTHER LOANS
SHORT-TERM
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------- --------------
1998 1999 1999 2000
---- ---- ---- ----
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Bank loans...................................... 4,112 3,957 4,710 2,330
Current portion of long-term
bank and other loans.......................... 1,225 394 285 285
----- ----- ----- -----
5,337 4,351 4,995 2,615
===== ===== ===== =====
</TABLE>
F-38
<PAGE> 249
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
16 BANK AND OTHER LOANS (CONTINUED)
As of December 31, 1999 and June 30, 2000 included in the short-term loans
is an amount of RMB100 which is secured by cash at bank amounting to RMB100. All
other short-term loans are unsecured. As at December 31, 1998 and June 30, 1999,
all short-term loans are unsecured.
The Group's borrowings under short-term loans are used primarily to finance
construction projects and generally consist of unsecured loans and are repayable
in full on respective due dates with interest rates ranging from 5.81% to 6.57%
at December 31, 1998, from 5.02% to 7.11% at December 31, 1999, from 5.30% to
6.58% at June 30, 1999 and from 5.02% to 7.02% at June 30, 2000. The Group's
weighted average interest rate on short-term loans was 6.18%, 5.85%, 6.00% and
5.45% at December 31, 1998, 1999 and June 30, 1999 and 2000, respectively.
LONG-TERM
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------- -------------
INTEREST RATE AND FINAL MATURITY 1998 1999 1999 2000
-------------------------------- ---- ---- ---- ----
RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
RENMINBI DENOMINATED BANK LOANS:
For construction of Floating interest rate at 5.94% per
Telecommunications annum as of June 30, 2000 with
Network maturities through 2002............ -- 383 -- 122
Floating interest rate at 5.94% per
annum as of June 30, 2000 with
maturities through 2002(a)......... -- 595 -- 595
Fixed interest rate at 7.56% per
annum with maturity through
2003(c)............................ -- 650 -- 650
Fixed interest rates ranging from
7.67% to 9.5% per annum with
maturities through 1999............ 34 -- -- --
For working capital Fixed interest rate at 6.327% per
annum with maturities through
2001(d)............................ -- -- 300 --
US DOLLAR DENOMINATED BANK LOANS:
For construction of Floating interest rate of LIBOR
Telecommunications with maturities through 2001(b).... 311 207 311 207
Network
RENMINBI DENOMINATED LOANS FROM RELATED PARTIES:
For construction of Fixed interest rate at 10.98% per
Telecommunications annum, with maturities through
Network 1999............................... 800 -- -- --
</TABLE>
F-39
<PAGE> 250
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
16 BANK AND OTHER LOANS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------- -------------
INTEREST RATE AND FINAL MATURITY 1998 1999 1999 2000
-------------------------------- ---- ---- ---- ----
RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
US DOLLAR DENOMINATED OTHER LOANS:
For construction of Fixed interest rate at 7.5% per
Telecommunications annum with maturity through
Network 2004............................... 1,016 744 827 661
For construction of Floating interest rate of LIBOR
Telecommunications plus 0.45% per annum with
Network maturities through 2001(b)......... 55 40 47 32
----- ----- ----- -----
Total long-term loans 2,216 2,619 1,485 2,267
Less: current portion 1,225 394 285 285
----- ----- ----- -----
991 2,225 1,200 1,982
===== ===== ===== =====
</TABLE>
---------------
(a) Guaranteed by the Fujian PTA.
(b) Guaranteed by the Guangdong PTA.
(c) Guaranteed by the Hebei PTA.
(d) Guaranteed by the Jiangsu PTA.
At June 30, 2000, LIBOR was approximately 6.65%.
The aggregate maturities of long-term bank and other loans subsequent to
June 30, 2000 are as follows:
<TABLE>
<CAPTION>
RMB
---
<S> <C>
2000 -- Subsequent to June 30............................... 194
2001........................................................ 664
2002........................................................ 1,112
2003........................................................ 216
2004........................................................ 81
2005........................................................ --
Thereafter.................................................. --
-----
2,267
=====
</TABLE>
F-40
<PAGE> 251
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
16 BANK AND OTHER LOANS (CONTINUED)
Interest expense, net of the amounts capitalized, is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- ------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
Interest incurred.................................... 287 307 421 203 198
Interest element of capital lease.................... -- -- 1 -- 2
Interest capitalized................................. (112) (147) (143) (96) (61)
---- ---- ---- --- ---
175 160 279 107 139
Interest expense of fixed rate notes................. -- -- 64 -- 196
---- ---- ---- --- ---
Interest expense..................................... 175 160 343 107 335
==== ==== ==== === ===
</TABLE>
17 DEFERRED EXPENSES
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
-------------- --------------------
1998 1999 1999 2000
---- ---- ---- ----
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Balance at beginning of year/period.......... -- -- -- 51
Additions during the year/period............. -- 53 -- --
Less: Amortization for the year/period....... -- (2) -- (5)
----- ----- ----- -----
Balance at end of year/period................ -- 51 -- 46
===== ===== ===== =====
</TABLE>
18 ACCRUED EXPENSES AND OTHER PAYABLES
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------- --------------
1998 1999 1999 2000
---- ---- ---- ----
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Other payables.................................... 1,144 1,954 1,383 3,742
Accrued salaries, wages and benefits.............. 1,274 1,549 1,473 2,120
Accrued expenses.................................. 338 612 508 555
----- ----- ----- -----
2,756 4,115 3,364 6,417
===== ===== ===== =====
</TABLE>
F-41
<PAGE> 252
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
19 OBLIGATIONS UNDER CAPITAL LEASE
(i) In 1998, Hainan Mobile entered into a capital lease agreement to
finance the purchase of telecommunications equipment. The lease is
denominated in United States dollars and the lease term is for 4
years expiring in 2002. The legal title of the equipment will be
transferred to Hainan Mobile when all outstanding lease payments are
paid.
(ii) The following is a schedule by years of future minimum lease payments
under capital lease together with the present value of the net
minimum lease payments as of June 30, 2000:
<TABLE>
<CAPTION>
RMB
---
<S> <C>
2000 -- Subsequent to June 30............................... 34
2001........................................................ 73
2002........................................................ 35
---
Total minimum lease payments................................ 142
Less: Amount representing interest.......................... 6
---
Present value of net minimum lease payments................. 136
Less: Obligations under capital lease -- current portion.... 68
---
68
===
</TABLE>
(iii) The capital lease is guaranteed by Hainan PTA.
20 FIXED RATES NOTES
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------- --------------------
1998 1999 1999 2000
---- ---- ---- ----
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
US dollar 7.875% fixed rate notes due 2004... -- 4,952 -- 4,957
===== ===== ===== =====
</TABLE>
On November 2, 1999, the company issued unsecured fixed rates notes (the
"notes") with a principal amount of US$600 due on November 2, 2004. The notes
bear interest at the rate of 7.875% per annum and such interest is payable
semi-annually on May 2 and November 2 of each year, commencing May 2, 2000.
F-42
<PAGE> 253
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
21 DEFERRED REVENUE
Deferred revenue from assignment of rights to income from subscribers
represents the unamortized portion of proceeds received by Guangdong Mobile from
certain distributors of telecommunications services pursuant to agreements under
which Guangdong Mobile sold certain mobile phone numbers to these distributors
at RMB 0.0092 each, in return for assigning to such distributors the rights to
certain revenue such as usage fees, monthly fees, connection fees, telephone
number selection fees and 50% value-added services fees from those subscribers
over a period of seven years. The distributors have no recourse to the Group
under the relevant agreements and the Group maintains no credit risk from such
subscribers during the seven-years period. The proceeds received by Guangdong
Mobile have been accounted for as deferred revenue and are amortized over a
period of seven years. After the expiration of the relevant agreements, the
rights to income from these subscribers will revert to the Group. Deferred
revenue also includes the prepaid services fee received from subscribers which
is recognized as income when the cellular telephone services are rendered upon
actual usage by subscribers.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------- --------------
1998 1999 1999 2000
---- ---- ---- ----
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Balance at beginning of year/period............... 1,353 1,757 1,757 1,492
Additions during the year/period.................. 689 48 39 1,039
Recognized in the consolidated statements of
income.......................................... (285) (313) (156) (948)
----- ----- ----- -----
Balance at end of year/period..................... 1,757 1,492 1,640 1,583
===== ===== ===== =====
</TABLE>
22 COMMITMENTS AND CONTINGENCIES
(A) OPERATING LEASES
Future minimum lease payments as of June 30, 2000 under non-cancellable
operating leases having initial or remaining lease terms of more than one year
are as follows:
<TABLE>
<CAPTION>
RMB
---
<S> <C>
2000 -- Subsequent to June 30............................... 2,641
2001........................................................ 3,973
2002........................................................ 3,776
2003........................................................ 2,875
2004........................................................ 2,736
2005........................................................ 2,568
Thereafter.................................................. 5,588
------
24,157
======
</TABLE>
F-43
<PAGE> 254
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
22 COMMITMENTS AND CONTINGENCIES (CONTINUED)
(B) CAPITAL COMMITMENTS
As of June 30, 2000, the Group had capital commitments as follows:
<TABLE>
<CAPTION>
RMB
---
<S> <C>
Authorized and contracted for............................... 4,961
Authorized but not contracted for........................... 15,289
------
20,250
======
</TABLE>
23 EMPLOYEE AND RETIREMENT BENEFITS
The employees of the subsidiaries participate in defined benefit retirement
plans managed by the local government authorities whereby the subsidiaries are
required to contribute to the schemes at fixed rate of the employees' salary
costs. The subsidiaries have no obligation for the payment of retirement and
other post-retirement benefits of staff other than the contributions described
above. Expenses incurred by the subsidiaries in connection with the retirement
scheme were RMB 101, RMB 209, RMB 251, RMB 67 and RMB 148 respectively, for
three years ended December 31, 1997, 1998 and 1999 and the six months ended June
30, 1999 and 2000 respectively.
Pursuant to PRC regulation and prior to the Restructuring and the
subsequent acquisitions, the subsidiaries were required to provide staff
quarters to eligible employees and their immediate families. The Group has
established separate employee housing reform schemes in order to comply with the
regulation at the provincial level. Under such schemes, the Group is required to
either purchase or build housing which is to be sold or rented to eligible
employees. Through May 31, 1997, housing provided under the schemes was shared
between Guangdong Mobile and the Guangdong PTA in Guangdong Mobile's case, and
purchased or built entirely by the Zhejiang PTA in Zhejiang Mobile's case.
Through December 31, 1997, housing provided under the schemes was purchased or
built entirely by the Jiangsu PTA in Jiangsu Mobile's case. Through June 30,
1999, housing provided under the schemes were purchased or built entirely by the
Fujian PTA, Henan PTA and Hainan PTA in the cases of Fujian Mobile, Henan Mobile
and Hainan Mobile, respectively.
Following the Restructuring and the subsequent acquisitions, management
intends to continue with the housing schemes previously in place for existing
employees. The Group estimates the total cost of the subsidy to be provided for
such housing schemes in respect of employees to be approximately RMB 440, of
which RMB 193 had been accrued through June 30, 2000. All previous costs
incurred by the relevant PTAs have not been charged to the Group.
24 RELATED PARTY TRANSACTIONS
(a) The Group's operations are subject to extensive regulation by the PRC
government. The MII, pursuant to the authority delegated to it by the PRC State
Council,
F-44
<PAGE> 255
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
24 RELATED PARTY TRANSACTIONS (CONTINUED)
directly or indirectly regulates licensing, competition, interconnection,
technology and equipment standards, and other aspects of the PRC
telecommunications industry. The MII, together with other PRC government
entities, also regulates tariff policy, foreign investment and spectrum
allocation and spectrum usage fees. Specifically, the Group's tariffs are
subject to the regulation by various Government authorities, including the State
Development Planning Commission ("SDPC"), the MII, the PTAs and the relevant
provincial price regulatory authorities. Connection fees charged by the Group
are based on a guidance price range set jointly by the MII and SDPC, with each
actual fee determined by the Group in consultation with the relevant provincial
price regulatory authorities. In general, the Group's base usage charges and
domestic roaming usage charges are set by the MII and SDPC. International
roaming charges are determined pursuant to agreements formed between the DGT or
China Mobile and other cellular operators. In May 2000, the Chinese government
substantially completed the restructuring of the telecommunications industry in
the PRC. As a result, the MII ceased to have controlling interests in China
Mobile and CTC, and no longer exercises control over the telecommunications
operations in the PRC, but continues in its capacity as the industry regulator.
CTC is a stated owned company established to hold and operate the fixed line
telephone and data communications services in the PRC. Accordingly, MII, the
PTAs, CTC or entities under the control of the CTC since its formation are
considered to be no longer related parties of the Group and the transactions
entered into with these entities are therefore not related party transactions.
F-45
<PAGE> 256
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
24 RELATED PARTY TRANSACTIONS (CONTINUED)
The principal recurring and non-recurring related party transactions, which were
entered into by the Group with the MII, the PTAs, CTC or entities under the
control of the CTC prior to May 2000 and the China Mobile or its subsidiaries,
are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------- -------------
NOTE 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C> <C>
Interconnection revenue................... (i) 28 752 1,242 417 932
Interconnection charges................... (ii) 739 3,925 5,275 2,268 2,157
Leased line charges....................... (iii) 3,134 3,917 3,723 2,014 2,094
Roaming revenue........................... (iv) 470 1,053 1,497 639 1,249
Roaming expenses.......................... (v) 475 827 1,178 507 816
Spectrum fees............................. (vi) 20 12 12 4 6
Operating lease charges................... (vii) 152 227 280 132 153
Sales commission.......................... (viii) 152 264 378 279 247
Debt collection service fees.............. (viii) 60 133 143 108 84
Billing service fees...................... (viii) 1 1 2 -- --
Roaming billing processing fees........... (viii) -- -- -- -- 89
Equipment maintenance service fees........ (ix) -- -- -- -- 1
Rental charges of synchronized clock
ports................................... (x) -- -- 2 -- 2
Purchase of mobile phones and equipment... 1,743 -- -- -- --
Interest paid/payable..................... (xi) 106 83 18 18 --
Interest received......................... 3 -- -- -- --
Capital contributions..................... (xii) 246 -- -- -- --
Distributions............................. (xiii) 222 -- -- -- --
</TABLE>
---------------
NOTES:
(i) Interconnection revenue represents the amounts received or receivable
from the Guangdong PTA, the Zhejiang PTA, the Jiangsu PTA, the Fujian
PTA, the Henan PTA and the Hainan PTA ("the relevant PTAs") or MII or
China Mobile since its formation in respect of long distance calls made
by non-subscribers in Guangdong, Zhejiang, Jiangsu, Fujian, Henan and
Hainan provinces ("the relevant provinces") and from the relevant PTAs in
respect of calls made between the Group's cellular networks, the fixed
line networks in the relevant provinces and other GSM network operators
in other provinces in the PRC. Prior to October 1, 1999, no
interconnection revenue was received by the Group in respect of
inter-provincial outbound calls made from the fixed line networks in the
relevant provinces to other GSM networks in other provinces in the PRC.
Pursuant to the interconnection agreement dated October 8, 1999 and with
effect from October 1, 1999, the Group records the amounts receivable
from the relevant PTAs for inter-provincial outbound calls originating
from the fixed line networks in the relevant provinces, which terminate
on GSM networks in other provinces in the PRC as interconnection revenue.
(ii) Interconnection charges represent the amounts paid or payable to the
relevant PTAs or MII or China Mobile since its formation in respect of
long distance calls made by the Group's subscribers roaming outside their
registered provinces and in respect of calls
F-46
<PAGE> 257
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
24 RELATED PARTY TRANSACTIONS (CONTINUED)
made between the Group's cellular networks, the fixed line networks in
the relevant provinces and other GSM network operators in other provinces
in the PRC. Prior to October 1, 1999, no interconnection charges were
paid/payable in respect of inter-provincial outbound calls made from the
fixed line networks in the relevant provinces to other GSM networks in
other provinces in the PRC. Pursuant to the interconnection agreement
dated October 8, 1999 and with effect from October 1, 1999, the Group
records the amounts payable to China Mobile for inter-provincial outbound
calls originating from the fixed line networks in the relevant provinces,
which terminate on other GSM networks in other provinces in the PRC as
interconnection charges. Pursuant to the interconnection agreement dated
May 5, 2000, no interconnection charges were paid/payable in respect of
inter-provincial outbound calls made from the fixed line networks in the
relevant provinces to other GSM networks in other provinces of PRC.
(iii) Leased line charges represent expenses paid or payable to China Mobile or
the relevant PTAs for the use of leased lines between the base
transceiver stations, base station controllers, base stations, fixed line
network connectors, long distance network connectors and main switches.
(iv) A cellular telephone user using roaming services is charged at the
respective roaming usage rate for roaming in calls, in addition to
applicable long distance charges. Roaming revenue represents domestic and
international roaming in usage charges from non-subscribers received or
receivable from the relevant domestic and international cellular telephone
operators through the MII or China Mobile. With effect from April 1, 1999,
all settlements of inter-provincial roaming and corresponding
interconnection revenues are made through China Mobile (previously the
MII).
(v) A cellular telephone user using roaming services is charged at the
respective roaming usage rate for roaming out calls, in addition to
applicable long distance charges. Roaming expenses represent the amount of
domestic and international roaming out charges received or receivable from
subscribers which is to be remitted to the relevant domestic and
international cellular telephone operators for their share of the roaming
revenue through the MII or China Mobile. With effect from April 1, 1999,
all settlements of inter-provincial roaming and corresponding
interconnection charges are made through China Mobile (previously the
MII).
(vi) Spectrum fees represent the spectrum usage fees paid or payable to the MII
through China Mobile for the usage of the frequency bands allocated to the
Company's subsidiaries in the PRC.
(vii) Operating lease charges represent the rental paid or payable to the
relevant PTAs for operating leases in respect of land and buildings and
others.
(viii) With effect from October 20, 1997 for Guangdong Mobile and Zhejiang
Mobile, January 1, 1998 for Jiangsu Mobile, April 1, 1999 for Fujian
Mobile and Hainan Mobile and July 1, 1999 for Henan Mobile, each of these
subsidiaries entered into certain services agreements in respect of
marketing services with authorized dealers, debt collection services and
billing services with the relevant PTAs.
Sales commission represents the amounts paid or payable to the relevant
PTAs for their marketing of the cellular services in the relevant
provinces.
F-47
<PAGE> 258
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
24 RELATED PARTY TRANSACTIONS (CONTINUED)
Debt collection service fees represent the amounts paid or payable to the
relevant PTAs for their provision of debt collection services to the
Company's subsidiaries.
Billing service fees for periods ended December 31, 1999 represent the
amounts paid or payable to the Fujian PTA and Henan PTA for their
provision of the billing services to Fujian Mobile and Henan Mobile.
Roaming billing processing fees for the six month period ended June 30,
2000 represent the amounts paid or payable to China Mobile for their
provision of the roaming billing processing services to the Group.
(ix) Equipment maintenance service fees represent the amount paid or payable to
the Fujian PTA for its provision of the maintenance services to Fujian
Mobile.
(x) Rental charges of synchronized clock ports represent expenses paid or
payable to the relevant PTAs for leasing of synchronized clock ports by
the Company's subsidiaries.
(xi) Interest paid/payable represents the interest incurred on loans borrowed
from Zhejiang PTA and Telpo.
(xii) Capital contributions in 1997 represent capital contributions in the form
of cash received from the Zhejiang PTA upon the establishment of Zhejiang
Mobile and cash received from the Guangdong PTA.
(xiii) Distributions represent cash payments by the Group to acquire assets
transferred to the Guangdong PTA for business unrelated to the Group, and
the cash effects of the effective settlement of an intercompany account
balance arising in the ordinary course of business related to Zhejiang
Mobile's TACS operations.
(b) Pursuant to the ordinary resolution passed by the Company's
shareholders on November 11, 1999, the Company acquired the entire issued share
capital of Fujian Mobile BVI, Henan Mobile BVI and Hainan Mobile BVI from CMHK
(BVI), the immediate holding company of the Company, for a total consideration
of HK$49,715 (RMB equivalent 52,953). The consideration was satisfied by a cash
of HK$19,031 (RMB equivalent 20,268) and allotment of shares to CMHK (BVI)
amounted to HK$30,684 (RMB equivalent 32,685). The only assets of each of Fujian
Mobile BVI, Henan Mobile BVI and Hainan Mobile BVI are their interests in the
entire equity of Fujian Mobile, Henan Mobile and Hainan Mobile, respectively.
Pursuant to the ordinary resolution passed by the Company's shareholders on June
3, 1998, the Company acquired the entire issued share capital of Jiangsu Mobile
BVI from CMHK (BVI), for a total cash consideration of HK$22,475 (RMB equivalent
24,120). The only asset of Jiangsu Mobile BVI is its interest in the entire
equity of Jiangsu Mobile.
F-48
<PAGE> 259
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
25 SHAREHOLDERS' EQUITY
SHARE CAPITAL
<TABLE>
<CAPTION>
NOMINAL
NUMBER OF AMOUNT OF
ORDINARY EACH ORDINARY
SHARES SHARE AMOUNT
--------- ------------- ------
HK$
<S> <C> <C> <C>
AUTHORIZED:
Balance at December 31, 1998 and 1999 and June
30, 1999 and 2000............................ 16,000,000,000 HK$0.1 1,600
============== =====
ISSUED AND FULLY PAID:
Balance at January 1, 1998 and December 31,
1998......................................... 11,780,788,000 HK$0.1 1,178
============== =====
RMB 1,261
equivalent
=====
Balance at January 1, 1999..................... 11,780,788,000 HK$0.1 1,178
Issue of new shares to the professional and
institutional investors...................... 644,804,000 HK$0.1 65
Issue of consideration shares for acquisition
of subsidiaries.............................. 1,273,195,021 HK$0.1 127
Shares issued under share option scheme........ 7,500,000 HK$0.1 1
-------------- -----
Balance at December 31, 1999................... 13,706,287,021 1,371
============== =====
RMB 1,467
equivalent
=====
Balance at January 1, 1999..................... 11,780,788,000 HK$0.1 1,178
Shares issued under share option scheme........ 5,500,000 HK$0.1 1
-------------- -----
Balance at June 30, 1999....................... 11,786,288,000 1,179
============== =====
RMB 1,262
equivalent
=====
Balance at January 1, 2000..................... 13,706,287,021 HK$0.1 1,371
Shares issued under share option scheme........ 142,000 HK$0.1 --
-------------- -----
Balance at June 30, 2000....................... 13,706,429,021 1,371
============== =====
RMB 1,467
equivalent
=====
</TABLE>
The Company was established in Hong Kong on September 3, 1997 as a limited
company, with a registered share capital of HK$10,000 divided into 100,000
shares of HK$0.10 each, two of which were issued and credited as fully paid.
At an extraordinary general meeting of the Company held on September 27,
1997,
(i) the authorised share capital of the Company was increased from
HK$10,000 to HK$1,600,000,000 by the creation of an additional
15,999,900,000 shares of HK$0.10 each; and
F-49
<PAGE> 260
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
25 SHAREHOLDERS' EQUITY (CONTINUED)
(ii) 9,009,999,998 shares were credited as fully paid and issued to CMHK
(BVI) for the transfer of interests in Guangdong Mobile and Zhejiang
Mobile to the Company.
Pursuant to the resolutions passed on October 21, 1997, the Company issued
2,600,000,000 shares of HK$0.1 each at HK$11.68 per share and the shares were
listed on the New York Stock Exchange and The Stock Exchange of Hong Kong
Limited on October 22, 1997 and October 23, 1997, respectively. On November 7,
1997, the Company issued 170,788,000 shares of HK$0.1 each at HK$11.68 per share
by way of a placing among professional and institutional investors.
Pursuant to ordinary resolutions passed at directors' meetings held on
November 1, 1999 and November 3, 1999 respectively, the Company issued
560,700,000 and 84,104,000 ordinary shares of HK$0.1 each to professional and
institutional investors, at a consideration of HK$24.1 per share, for financing
the acquisition of Fujian Mobile BVI, Henan Mobile BVI and Hainan Mobile BVI.
Pursuant to an ordinary resolution passed at an extraordinary general
meeting held on November 11, 1999, 1,273,195,021 ordinary shares of HK$0.1 each
were issued and credited as fully paid to CMHK (BVI), at a consideration of
HK$24.1 per share as part of the consideration for the acquisition of Fujian
Mobile BVI, Henan Mobile BVI and Hainan Mobile BVI.
RESERVES
CAPITAL RESERVE
As mentioned in Note 1, this amount represents the total of the following:
- the additional earnings of Guangdong Mobile and Zhejiang Mobile from June
1, 1997 to September 26, 1997, the completion date of the Restructuring
(RMB 1,132); and
- goodwill arising on the acquisition of Jiangsu Mobile BVI and Jiangsu
Mobile on June 3, 1998 (RMB 15,622), which has been eliminated against
capital reserve immediately upon acquisition.
- goodwill arising on the acquisition of Fujian Mobile BVI, Henan Mobile
BVI, Hainan Mobile BVI, Fujian Mobile, Henan Mobile and Hainan Mobile on
November 11, 1999 (RMB 42,440), which has been eliminated against capital
reserve immediately upon acquisition.
PRC STATUTORY RESERVES
PRC statutory reserves include general reserve, enterprise expansion fund,
statutory surplus reserve and statutory public welfare fund.
F-50
<PAGE> 261
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
25 SHAREHOLDERS' EQUITY (CONTINUED)
At December 31, 1999, Guangdong Mobile, Zhejiang Mobile, Jiangsu Mobile and
Fujian Mobile are wholly-foreign owned enterprises. In accordance with
Accounting Regulations for PRC Enterprises with Foreign Investment, they are
required to transfer at least 10% of their profit after taxation, as determined
under accounting principles generally accepted in the PRC ("PRC GAAP") to the
general reserve until the balance of the general reserve is equal to 50% of
their registered capital. Moreover, they are required to transfer a certain
percentage of their profit after taxation, as determined under PRC GAAP, to the
enterprise expansion fund. During the year, appropriations were made by each of
the above subsidiaries to the general reserve and the enterprise expansion fund
at 10% and 30%, respectively, of their profits after taxation determined under
PRC GAAP.
The general reserve can be used to make good losses and to increase the
capital of the subsidiaries while enterprise expansion fund can be used to
increase the capital of the subsidiaries, to acquire fixed assets and to
increase current assets.
As Henan Mobile and Hainan Mobile were only registered as wholly-foreign
owned enterprises on January 27, 2000 and January 19, 2000, respectively, they
are not required to make the above transfers for the year ended December 31,
1999. According to their Articles of Association and Regulations on Posts and
Telecommunications Enterprises, Henan Mobile and Hainan Mobile are required to
transfer a certain percentage of profit after taxation, as determined under PRC
GAAP, to the statutory surplus reserve and statutory public welfare fund. During
the year, appropriations were made by Henan Mobile and Hainan mobile to the
statutory surplus reserve and the statutory public welfare fund at 10% and 9%,
respectively, of their profit after taxation determined under PRC GAAP.
Statutory surplus reserve can be used to make good previous years' losses,
if any, and may be converted into paid-up capital, provided that the balance
after such offset is not less than 25% of the registered capital of the
subsidiaries. Statutory public welfare reserve can only be utilized on capital
items for the collective benefits of the employees such as the construction of
staff quarters and other staff welfare facilities. This reserve is
non-distributable other than in liquidation.
At June 30, 1999 and 2000, the balances of the general reserve, enterprise
expansion fund, statutory surplus reserve and statutory public welfare fund were
RMB 523 and RMB 1,400, RMB 1,569 and RMB 4,198, RMB 74 and RMB 83, and RMB 37
and RMB 46, respectively.
At December 31, 1998 and 1999, the balances of the general reserve,
enterprise expansion fund, statutory surplus reserve and statutory public
welfare fund were RMB 523 and RMB 1,400, RMB 1,569 and RMB 4,198, RMB 74 and RMB
83 and RMB 37 and RMB 46, respectively.
F-51
<PAGE> 262
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
25 SHAREHOLDERS' EQUITY (CONTINUED)
DISTRIBUTABLE RESERVES
At June 30, 1999 and 2000, the amount of distributable reserves of the
Company amounted to RMB 2,004 and RMB 2,996.
At December 31, 1998 and 1999, the amount of distributable reserves of the
Company amounted to RMB 1,849 and RMB 3,082.
SHARE OPTION SCHEME
On October 8, 1997, the Company adopted a share option scheme pursuant to
which the directors of the Company may, at their discretion, invite employees,
including executive directors, of the Company or any of its subsidiaries, to
take up options to subscribe for shares up to a maximum aggregate number of
shares equal to 10% of the total issued share capital of the Company. According
to the share option scheme, the consideration payable by a participant for the
grant of an option under the share option scheme will be HK$1.00. The price of a
share payable by a participant upon the exercise of an option will be determined
by the directors of the Company at their discretion, except that such price may
not be set below a minimum price which is the higher of:
(i) the nominal value of a share; and
(ii) 80% of the average of the closing prices of shares on The Stock
Exchange of Hong Kong Limited on the five trading days immediately
preceding the date of grant of the option.
The period during which an option may be exercised will be determined by
the directors at their discretion, except that no option may be exercised later
than 10 years after the adoption date of the scheme.
On March 9, 1998, November 26, 1999 and April 25, 2000, a total number of
share options of 51,790,000 were granted under the share option scheme to
certain directors of the Company. During the six months ended June 30, 2000,
options were exercised to subscribe for 142,000 ordinary shares of HK$0.1 each
at a consideration of HK$45.04 per share.
F-52
<PAGE> 263
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
25 SHAREHOLDERS' EQUITY (CONTINUED)
At December 31, 1999 and 1998, the outstanding options were:
<TABLE>
<CAPTION>
PERIOD DURING NUMBER OF OPTIONS
WHICH OPTIONS EXERCISE OUTSTANDING AT
DATE OPTIONS GRANTED EXERCISABLE PRICE THE YEAR END
-------------------- ------------- -------- -----------------
<S> <C> <C> <C>
AT DECEMBER 31, 1999
March 9, 1998 March 9, 1998 HK$11.1 4,500,000
to March 8, 2006
November 26, 1999 November 26, 1999 HK$33.91 4,100,000
to October 7, 2007
November 26, 1999 November 26, 2002 HK$33.91 4,100,000
to October 7, 2007
AT DECEMBER 31, 1998
March 9, 1998 March 9, 1998 HK$11.1 12,000,000
to March 8, 2006
</TABLE>
At 30 June 2000 and 1999, the outstanding options were:
<TABLE>
<CAPTION>
PERIOD DURING NUMBER OF OPTIONS
WHICH OPTIONS EXERCISE OUTSTANDING AT
DATE OPTIONS GRANTED EXERCISABLE PRICE THE PERIOD END
-------------------- ------------- -------- -----------------
<S> <C> <C> <C>
AT JUNE 30, 2000
March 9, 1998 March 9, 1998 HK$11.1 4,500,000
to March 8, 2006
November 26, 1999 November 26, 1999 to HK$33.91 4,100,000
October 7, 2007
November 26, 1999 November 26, 2002 HK$33.91 4,100,000
to October 7, 2007
April 25, 2000 April 25, 2002 HK$45.04 15,653,000
to October 7, 2007
April 25, 2000 April 25, 2005 HK$45.04 15,795,000
to October 7, 2007
AT JUNE 30, 1999
March 9, 1998 March 9, 1998 HK$11.1 6,500,000
to March 8, 2006
</TABLE>
26 FOREIGN CURRENCY EXCHANGE
The Renminbi is not freely convertible into foreign currencies. All foreign
exchange transactions involving Renminbi must take place through the People's
Bank of China or other institutions authorized to buy and sell foreign exchange
or at a swap center.
Currently the Company's subsidiaries established in the PRC are able to
purchase foreign exchange for settlement of "current account transactions" (as
defined in the applicable regulations), including payment of dividends without
the approval of the State Administration of Foreign Exchange ("SAFE"). However,
there can be no assurance that the current authorization for Foreign Investment
Enterprises to retain their foreign exchange to satisfy foreign exchange
liabilities or to pay dividends in the future will not be limited or eliminated
or that the subsidiaries of the Company will be able to obtain sufficient
foreign exchange to pay dividends or satisfy their foreign exchange
requirements. Foreign exchange transactions under the capital account continue
to be subject to limitations and require approvals of the State Administration
for Foreign Exchange, which could affect the ability of the Company's
subsidiaries established in the
F-53
<PAGE> 264
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
26 FOREIGN CURRENCY EXCHANGE (CONTINUED)
PRC to obtain foreign exchange through debt or equity financing, including by
means of loans or capital contribution from the Company.
27 PRINCIPAL SUBSIDIARIES
Details of the Company's principal subsidiaries are as follows:
<TABLE>
<CAPTION>
AUTHORIZED, ISSUED AND
PLACE AND DATE OF PAID UP CAPITAL ATTRIBUTABLE
INCORPORATION/ --------------------------------- EQUITY
NAME OF COMPANY ESTABLISHMENT AUTHORIZED ISSUED AND PAID UP INTEREST % PRINCIPAL ACTIVITIES
--------------- ------------------ ------------- ------------------ ------------ --------------------
<S> <C> <C> <C> <C> <C>
Guangdong Mobile PRC -- RMB 5,595 100% Cellular telephone
September 28, 1988 operator
Zhejiang Mobile PRC -- RMB 2,118 100% Cellular telephone
February 2, 1996 operator
Jiangsu Mobile BVI BVI 10,000 shares 1 share at HK$1 100% Investment holding
March 6, 1998 at HK$1 company
Jiangsu Mobile PRC -- RMB 2,800 100% Cellular telephone
December 10, 1992 operator
Fujian Mobile BVI BVI 10,000 shares 1 share at HK$1 100% Investment holding
September 1, 1999 at HK$1 company
Fujian Mobile PRC -- RMB 5,247 100% Cellular telephone
September 7, 1999 operator
Henan Mobile BVI BVI 10,000 shares 1 share at HK$1 100% Investment holding
September 1, 1999 at HK$1 company
Henan Mobile PRC -- RMB 4,368 100% Cellular telephone
August 6, 1999 operator
Hainan Mobile BVI BVI 10,000 shares 1 share at HK$1 100% Investment holding
September 1, 1999 at HK$1 company
Hainan Mobile PRC -- RMB 643 100% Cellular telephone
August 19, 1999 operator
</TABLE>
Total dividend declared by the Company's subsidiaries for the financial
year ended December 31, 1999 amounted to RMB 985. No dividend was declared for
the financial year ended December 31, 1998 and six months periods ended June 30,
1999 and 2000.
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP
The Group's accounting policies conform with HK GAAP which differ in
certain material respects from US GAAP. The significant differences relate
principally to the following items and the adjustments considered necessary to
present the net profit and shareholders' equity in accordance with US GAAP are
shown in the tables set out below.
(A) EFFECT OF COMBINATION OF ENTITIES UNDER COMMON CONTROL
Under HK GAAP, the Group adopted the acquisition method to account for the
purchase of Jiangsu Mobile, Fujian Mobile, Henan Mobile and Hainan Mobile. Under
the acquisition method, the acquired results are included in the results of
operations from the date of their acquisition. Goodwill arising on the
acquisition, being the excess of the
F-54
<PAGE> 265
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
cost over the fair value of the Group's share of the separable net assets
acquired, is eliminated against reserves immediately on acquisition.
As a result of the Group, Jiangsu Mobile, Fujian Mobile, Henan Mobile and
Hainan Mobile being under common control prior to the acquisition, such
acquisitions under US GAAP are considered "combinations of entities under common
control". Under US GAAP, combinations of entities under common control are
accounted for under the "as if pooling-of-interests" method, whereby assets and
liabilities are accounted for at historical cost and the financial statements of
previously separate companies for periods prior to the combination generally are
restated on a combined basis. The cash consideration paid by the Group has been
treated as an equity transaction in the year of acquisition for US GAAP
purposes.
(B) CAPITALIZATION OF INTEREST
Under HK GAAP, the Group capitalizes interest costs to the extent that the
related borrowings are directly attributable to the acquisition or construction
of an asset which necessarily takes a substantial period of time to get ready
for its intended use.
Under US GAAP, interest costs capitalized are determined based on specific
borrowings related to the acquisition or construction of an asset, if an
entity's financing plans associate a specific new borrowing with a qualifying
asset. If average accumulated expenditures for the asset exceed the amounts of
specific new borrowings associated with an asset, additional interest costs
capitalized are based on the weighted average interest rate applicable to other
borrowings of the entity.
(C) REVALUATION AND IMPAIRMENT OF FIXED ASSETS
For certain periods prior to May 31, 1997 under HK GAAP, the fixed assets
of the subsidiaries were revalued in compliance with PRC rules and regulations,
resulting in an increase in shareholders' equity.
Additionally under HK GAAP, the fixed assets of Guangdong Mobile and
Zhejiang Mobile were revalued as of May 31, 1997 as a result of the
Restructuring that occurred in 1997. The fixed assets of Jiangsu Mobile were
revalued as of December 31, 1997 upon its acquisition by the Group on June 3,
1998. The fixed assets of Fujian Mobile, Henan Mobile and Hainan Mobile were
revalued as of June 30, 1999 upon their acquisition by the Group on November 11,
1999. These fixed asset revaluations result in an increase in shareholders'
equity with respect to the increase in carrying amount of certain fixed assets
above their historical cost bases.
The carrying amount of fixed assets under Hong Kong GAAP is reviewed
periodically in order to assess whether the recoverable amount has declined
below the carrying amount. When such a decline occurs, the carrying amount is
reduced to the recoverable amount based on the expected future cash flows
generated by the fixed assets, discounted to their present values. A subsequent
increase in the recoverable
F-55
<PAGE> 266
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
amount is written back to the statement of income when circumstances and events
that led to the write-down or write-off cease to exist.
Under US GAAP, fixed assets are stated at their historical cost, less
accumulated depreciation. However, as a result of the tax deductibility of the
revaluation reserve, a deferred tax asset related to the reversal of the
revaluation reserve is created under US GAAP with a corresponding increase in
shareholders' equity.
Under US GAAP, fixed assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amounts of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
(D) EMPLOYEE HOUSING SCHEME
The Group provides staff quarters under its employee housing schemes at
below market prices. Under HK GAAP, employee housing scheme costs borne by the
corresponding PTA and not charged to the subsidiaries are not recognized by the
subsidiaries.
Under US GAAP, employee housing scheme costs borne by the corresponding
PTAs and not charged to the subsidiaries are reflected as an expense in the
statement of income and a corresponding capital contribution. Additionally,
under US GAAP, the costs to be borne by the subsidiaries are accrued over the
term of the program.
(E) DEFERRED TAXATION
Under HK GAAP, the Group provides for deferred tax liabilities only to the
extent that there is a reasonable probability that such deferred tax liabilities
will become payable in the foreseeable future. Deferred tax assets are not
recognized unless their realization is assured beyond reasonable doubt.
Under US GAAP, provisions are made for all deferred taxes as they arise,
except a valuation allowance is provided against deferred tax assets when
realization of such amounts does not meet the criterion of "more likely than
not".
(F) SHARE OPTION SCHEME
The Group grants share options to directors and employees. Under HK GAAP,
the proceeds received are recognized as an increase to capital upon the exercise
of the share options.
F-56
<PAGE> 267
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
Under US GAAP, the Group determines compensation expense based upon the
excess, if any, of the quoted market price of the shares on the date of grant
over the exercise price of the options and amortizes this amount over the
vesting period of the option concerned.
(G) REVENUE RECOGNITION
Until June 30, 1999, under both Hong Kong GAAP and US GAAP, connection fee
revenue and telephone number selection fee revenue were recognized as received.
Under US GAAP, effective July 1, 1999, net connection fees and telephone number
selection fees received in excess of direct costs are deferred and recognized
over the estimated customer usage period for the related service.
(H) INTERCONNECTION, ROAMING AND LEASED LINE AGREEMENTS
In May 2000, the Group entered into new agreements with China Mobile for
inter-provincial interconnection and domestic and international roaming
services, and inter-provincial long distance transmission leased line
arrangement with retrospective effect from October 1, 1999 for Guangdong Mobile,
Zhejiang Mobile and Jiangsu Mobile and from April 1, 1999 for Fujian Mobile,
Henan Mobile and Hainan Mobile. Under HK GAAP, the net savings refunded to the
Group as a result of the two agreements taking retrospective effect were
recorded in operations for the period ended June 30, 2000. Under US GAAP, such
net savings are deferred and amortized on a straight-line basis over seven
years.
(I) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and the type
of hedge transaction. SFAS 133, as amended, is effective for fiscal years
beginning after June 15, 2000. The Company has not yet assessed the impact of
the adoption of SFAS 133.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements ("SAB 101")." SAB 101 provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. On June 26, 2000, the SEC issued Staff Accounting Bulletin No. 101B
"Amendment: Revenue Recognition in Financial Statements". SAB 101B allows
companies to defer the reporting of a change in accounting principle, as
required by SAB 101, until the fourth
F-57
<PAGE> 268
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
quarter of the current fiscal year. Management continues to analyze this
bulletin and has not determined the impact of adoption.
The effect on net profit of significant differences between HK GAAP and US
GAAP is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
----------------------- --------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
Net profit under HK GAAP.................. 4,955 6,900 4,797 4,004 8,724
Adjustments:
Effect of combination of entities under
common control....................... 3,219 2,774 2,204 1,214 --
Capitalized interest.................... 59 58 7 7 (6)
Revaluation of fixed assets............. 411 1,250 3,781 723 120
Employee housing scheme................. (186) (45) (57) (63) 23
Deferred taxation....................... (155) (188) (267) (60) 170
Share option scheme..................... -- (32) (22) -- (28)
Amortization of net connection fees and
telephone number selection fees...... -- -- (1,214) -- (575)
Interconnection, roaming and leased line
agreements........................... -- -- -- -- (586)
Deferred tax effects of US GAAP
Adjustments.......................... (155) (432) (995) (241) 316
----- ------ ------ ----- -----
Net profit under US GAAP.................. 8,148 10,285 8,234 5,584 8,158
===== ====== ====== ===== =====
Basic and diluted net profit per share in
accordance with US GAAP................. 0.75 0.79 0.63 0.43 0.6
===== ====== ====== ===== =====
</TABLE>
F-58
<PAGE> 269
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
The effect on shareholders' equity of significant differences between HK
GAAP and US GAAP is as follows:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF JUNE 30,
--------------- ---------------
1998 1999 1999 2000
---- ---- ---- ----
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Shareholders' equity under HK GAAP................. 45,827 57,092 49,900 65,823
Adjustments:
Effect of combination of entities under common
control....................................... 8,902 -- 9,524 --
Capitalized interest............................. 294 301 301 295
Revaluation of fixed assets
-- Cost....................................... (6,195) (6,586) (6,586) (6,586)
-- Accumulated depreciation and other......... 1,725 5,506 2,448 5,626
Deferred tax adjustments on revaluations......... 1,475 304 1,365 266
Employee housing scheme.......................... (553) (610) (616) (588)
Deemed capital contribution for employee housing
scheme........................................ 442 525 521 525
Interconnection, roaming and leased line
agreements.................................... -- -- -- (586)
Amortization of net connection fees and Telephone
number selection fees......................... -- (1,214) -- (1,789)
Recognition of deferred taxes.................... (155) 402 609 572
Deferred tax effects of US GAAP adjustments...... (97) 207 (99) 562
------ ------ ------ ------
Shareholders' equity under US GAAP................. 51,665 55,927 57,367 64,120
====== ====== ====== ======
</TABLE>
The following are condensed consolidated balance sheets of the Group as of
December 31, 1998 and 1999 and June 30, 1999 and 2000, and the related condensed
consolidated statements of income, total shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1999 and each of
the six-month ended June 30, 1999 and 2000, restated to reflect the impact of
the differences between HK GAAP and US GAAP.
F-59
<PAGE> 270
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ ---------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE
Usage fees............................. 13,379 22,169 31,441 14,173 20,143
Monthly fees........................... 3,707 5,755 6,371 2,898 4,250
Connection fees........................ 5,509 4,753 3,071 2,715 511
Other operating revenue................ 1,258 2,839 4,057 1,697 2,930
------ ------ ------ ------ ------
TOTAL OPERATING REVENUE................ 23,853 35,516 44,940 21,483 27,834
------ ------ ------ ------ ------
OPERATING EXPENSES
Leased lines........................... 4,518 5,165 4,690 2,561 2,543
Interconnection........................ 1,589 5,511 7,683 3,426 4,355
Depreciation........................... 3,783 5,463 8,152 3,694 4,078
Personnel.............................. 1,089 1,844 2,555 994 1,482
Other operating expenses............... 3,888 5,642 5,971 2,873 4,148
Write-down and write-off of TACS
network equipment.................... -- 136 5,267 322 --
------ ------ ------ ------ ------
TOTAL OPERATING EXPENSES............... 14,867 23,761 34,318 13,870 16,606
------ ------ ------ ------ ------
OPERATING PROFITS...................... 8,986 11,755 10,622 7,613 11,228
OTHER INCOME........................... 52 321 619 293 330
NON-OPERATING INCOME/(EXPENSES)........ (12) (1) (136) 21 2
INTEREST INCOME........................ 664 1,615 773 293 437
FINANCE COSTS.......................... (119) (142) (396) (176) (307)
------ ------ ------ ------ ------
PROFIT BEFORE TAX...................... 9,571 13,548 11,482 8,044 11,690
INCOME TAX............................. (1,416) (3,262) (3,248) (2,460) (3,532)
------ ------ ------ ------ ------
PROFIT AFTER TAX....................... 8,155 10,286 8,234 5,584 8,158
MINORITY INTERESTS..................... (7) (1) -- -- --
------ ------ ------ ------ ------
NET PROFIT............................. 8,148 10,285 8,234 5,584 8,158
====== ====== ====== ====== ======
</TABLE>
F-60
<PAGE> 271
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------- ---------------
1998 1999 1999 2000
---- ---- ---- ----
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................ 17,683 19,349 19,181 19,767
Deposits with banks.............................. 1,311 8,227 5,234 14,455
Accounts receivable.............................. 3,300 4,957 4,176 5,526
Other receivables................................ 408 549 543 636
Inventories...................................... 199 207 176 307
Prepaid expenses and other current assets........ 1,081 517 307 443
Amount due from ultimate holding company......... -- 92 -- 234
Amounts due from related parties................. 1,737 1,700 1,824 908
------ ------ ------ ------
Total current assets..................... 25,719 35,598 31,441 42,276
Fixed assets....................................... 39,930 41,618 42,144 43,439
Construction in progress........................... 8,021 7,036 7,475 8,214
Interest in associates............................. 46 46 46 46
Deferred tax assets................................ 1,382 3,221 2,202 3,338
Deferred expenses.................................. -- 51 -- 46
------ ------ ------ ------
TOTAL ASSETS....................................... 75,098 87,570 83,308 97,359
====== ====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable................................. 6,620 6,026 6,365 5,142
Bills payable.................................... -- 1,779 -- 1,212
Bank and other loans............................. 6,724 4,351 6,852 2,615
Obligation under capital lease -- current
portion....................................... 63 68 68 68
Taxes payable.................................... 1,299 2,868 2,231 3,889
Amounts due to related parties................... 1,143 1,696 1,509 3,087
Accrued expenses and other payables.............. 3,340 4,200 4,154 5,799
Amount due to ultimate holding company........... -- 664 -- 463
------ ------ ------ ------
Total current liabilities................ 19,189 21,652 21,179 22,275
Bank and other loans............................... 2,295 2,226 2,981 1,982
Deferred revenue................................... 1,757 2,706 1,640 3,957
Obligation under capital lease -- long term
portion.......................................... 177 107 141 68
Fixed rates notes.................................. -- 4,952 -- 4,957
------ ------ ------ ------
TOTAL LIABILITIES.................................. 23,418 31,643 25,941 33,239
Minority interests................................. 15 -- -- --
SHAREHOLDERS' EQUITY............................... 51,665 55,927 57,367 64,120
------ ------ ------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... 75,098 87,570 83,308 97,359
====== ====== ====== ======
</TABLE>
F-61
<PAGE> 272
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF TOTAL SHAREHOLDERS' EQUITY FOR THE
FOLLOWING YEARS:
<TABLE>
<CAPTION>
RMB
---
<S> <C>
Owner's equity at January 1, 1997........................... 20,871
Net profit for the year ended December 31, 1997............. 8,148
Capital contribution........................................ 246
Distribution to owner....................................... (809)
Contribution by owner....................................... 1,871
Issue of ordinary shares.................................... 33,570
Tax effect of revaluations.................................. 2,666
Deemed capital contribution for employee housing scheme..... 152
-------
Shareholders' equity at December 31, 1997................... 66,715
Net profit for the year ended December 31, 1998............. 10,285
Deemed capital distribution................................. (24,121)
Distribution to owner....................................... (1,528)
Contribution by owner....................................... 207
Deemed capital contribution for employee housing scheme..... 75
Stock-based compensation.................................... 32
-------
Shareholders' equity at December 31, 1998................... 51,665
Net profit for the year ended December 31, 1999............. 8,234
Issue of ordinary shares.................................... 48,908
Deemed capital distribution................................. (52,953)
Distribution to owner....................................... (1,336)
Contribution by owner....................................... 351
Deemed capital contribution for employee housing scheme..... 82
Tax effect of revaluation................................... 954
Stock-based compensation.................................... 22
-------
Shareholders' equity at December 31, 1999................... 55,927
=======
</TABLE>
F-62
<PAGE> 273
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF TOTAL SHAREHOLDERS' EQUITY FOR THE
FOLLOWING PERIODS:
<TABLE>
<CAPTION>
RMB
---
<S> <C>
Shareholders' equity at January 1, 1999..................... 51,665
Net profit for the six months ended June 30, 1999........... 5,584
Issue of ordinary shares.................................... 66
Distribution to owner....................................... (1,336)
Contribution by owner....................................... 351
Deemed capital contribution for employee housing scheme..... 83
Tax effect of revaluation................................... 954
-------
Shareholders' equity at June 30, 1999....................... 57,367
=======
Shareholders' equity at January 1, 2000..................... 55,927
Net profit for the six months ended June 30, 2000........... 8,158
Issue of ordinary shares.................................... 7
Stock-based compensation.................................... 28
-------
Shareholders' equity at June 30, 2000....................... 64,120
=======
</TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
The Group applies Hong Kong Statement of Standard Accounting Practice No.
15 "Cash Flow Statements" ("HK SSAP 15"). Its objectives and principles are
similar to those set out in Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows" ("SFAS 95"). The principal differences between the
standards relate to classification. Under HK SSAP 15, the Group presents its
cash flows for (a) operating activities; (b) returns on investments and
servicing of finance; (c) taxation; (d) investing activities; and (e) financing
activities. Cash flows from taxation and returns on investments and servicing of
finance shown herein would be included as operating activities under SFAS 95,
with the exception of distributions, which under SFAS 95 would be classified as
financing activities. Summarized cash flow data by operating, investing and
financing activities in accordance with SFAS 95 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
Net cash inflow from
Operating activities............... 13,252 17,110 23,500 11,826 17,053
Investing activities............... (11,590) (17,694) (19,245) (10,193) (14,624)
Financing activities............... 35,440 (22,017) (2,589) (135) (2,011)
------- ------- ------- ------- -------
Increase/(decrease) in cash and cash
equivalents........................ 37,102 (22,601) 1,666 1,498 418
</TABLE>
F-63
<PAGE> 274
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
28 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents at
beginning of year/period........... 3,182 40,284 17,683 17,683 19,349
------- ------- ------- ------- -------
Cash and cash equivalents at end of
year/period........................ 40,284 17,683 19,349 19,181 19,767
======= ======= ======= ======= =======
Interest paid (net of amounts
capitalized)....................... 159 244 352 165 295
======= ======= ======= ======= =======
Income taxes paid.................... 666 1,744 3,222 1,394 2,630
======= ======= ======= ======= =======
</TABLE>
SIGNIFICANT NON-CASH TRANSACTIONS
The Group incurred payables of RMB 3,658 and RMB 888, and RMB 3,773 and RMB
1,779, to equipment suppliers and banks respectively for additions of
construction in progress during the six months ended June 30, 2000 and the year
ended December 31, 1999.
The Group incurred payables of RMB 1,451 to equipment suppliers for
additions of construction in progress during the six months ended June 30, 1999.
The Group incurred payables of RMB 4,319 and RMB 13 to equipment suppliers
and related parties respectively for additions of construction in progress
during the year ended December 31, 1998.
In addition, the Group incurred payables of RMB 2,193 to equipment
suppliers and a loan of RMB 1,382 from a related party for additions of
construction in progress during the year ended December 31, 1997.
29 ADDITIONAL INFORMATION REQUIRED BY US GAAP
The following additional financial statement disclosures are required under
US GAAP and are presented on a US GAAP basis.
WRITE-DOWN AND WRITE-OFF OF TACS NETWORK EQUIPMENT
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
-------------------- ------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
Write-down of TACS network equipment............. -- 136 4,359 298 --
Write-off of TACS network equipment.............. -- -- 908 24 --
----- --- ----- --- -----
-- 136 5,267 322 --
===== === ===== === =====
</TABLE>
F-64
<PAGE> 275
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
29 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
During the periods, in light of the gradual opening of the
telecommunication market in the PRC and the rapid change of technology, the
Company has re-assessed the recoverability of the carrying amount of the TACS
network equipment which are held for use at December 31, 1998 and 1999. The
Company determined the existence of impairment by comparing the carrying amount
of these equipment to their future undiscounted net cash flows expected to be
generated over the economic life of each TACS network in service at December 31,
1998 and 1999. The Company has recognized impairment write downs of RMB 136 and
RMB 4,359 on these equipment in 1998 and 1999, respectively. Such amount of loss
is measured by the amount by which the carrying amounts of the individual TACS
network assets exceed their fair value determined based on the discounted net
cash flow expected to be generated by each TACS network. Additionally, the
Company has written-off RMB 908 of certain TACS network equipment which had
removed from service at December 31, 1999.
INCOME TAX
The Company is subject to Hong Kong profits tax at 16% for the years ended
December 31, 1998 and 1999 and each of the six months ended June 30, 1999 and
2000.
The Group's PRC subsidiaries are subject to the statutory income tax rate
of 33%, except Hainan Mobile, which is assessed at a tax rate of 15%.
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------- -------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
Current......................................... 1,113 2,770 4,134 2,326 3,650
Deferred........................................ 303 492 (886) 134 (118)
----- ----- ----- ----- -----
1,416 3,262 3,248 2,460 3,532
===== ===== ===== ===== =====
</TABLE>
F-65
<PAGE> 276
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
29 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
The provision for income tax differs from the amount computed by applying
the PRC statutory income tax rate of 33% to profit before tax for the following
reasons:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
---------------------- -------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
Expected PRC taxation at statutory tax
rates...................................... 3,158 4,471 3,789 2,655 3,858
Non-taxable items
-- Connection fee......................... (1,574) (537) (107) (99) (1)
-- Surcharge.............................. (375) (337) (168) (69) --
-- Interest income........................ (86) (225) (66) (30) (30)
Non-deductible expenses...................... 341 152 191 80 141
Rate differential on PRC operations.......... -- -- (385) -- (354)
Rate differential on Hong Kong operations.... (81) (233) (46) (26) 17
Reversal of deferred taxation due to change
of income tax rate......................... -- -- 84 -- --
Others....................................... 33 (29) (44) (51) (99)
------ ----- ----- ----- -----
Income tax................................... 1,416 3,262 3,248 2,460 3,532
====== ===== ===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------- -------------
1998 1999 1999 2000
---- ---- ---- ----
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Deferred tax assets:
Provision for obsolete inventories.................. 34 51 36 14
Provision for doubtful accounts..................... 514 402 609 572
Revaluation of fixed assets......................... 1,518 2,488 1,574 2,123
Amortization of deferred items...................... 82 370 82 717
----- ----- ----- -----
Gross deferred tax assets............................. 2,148 3,311 2,301 3,426
Deferred tax liabilities:
Capitalized interest................................ (97) (90) (99) (88)
Fixed assets basis difference....................... (669) -- -- --
----- ----- ----- -----
Net deferred tax assets............................... 1,382 3,221 2,202 3,338
===== ===== ===== =====
</TABLE>
ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------- ----------------
1998 1999 1999 2000
---- ---- ---- ----
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Accounts receivable........................ 4,899 6,313 6,089 7,461
Less: Allowance for doubtful accounts...... (1,599) (1,356) (1,913) (1,935)
------ ------ ------ ------
3,300 4,957 4,176 5,526
====== ====== ====== ======
</TABLE>
F-66
<PAGE> 277
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
29 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
Allowance for doubtful accounts for the years is analyzed as follows:
<TABLE>
<CAPTION>
RMB
---
<S> <C>
At January 1, 1997.......................................... 472
Provision for the year...................................... 767
Written-off................................................. (6)
------
At December 31, 1997........................................ 1,233
Provision for the year...................................... 978
Written-off................................................. (612)
------
At December 31, 1998........................................ 1,599
Provision for the year...................................... 1,102
Written-off................................................. (1,345)
------
At December 31, 1999........................................ 1,356
======
</TABLE>
Allowance for doubtful accounts for the six months periods is analyzed as
follows:
<TABLE>
<CAPTION>
RMB
---
<S> <C>
At January 1, 1999.......................................... 1,599
Provision for the period.................................... 372
Written-off................................................. (58)
-----
At June 30, 1999............................................ 1,913
=====
At January 1, 2000.......................................... 1,356
Provision for the period.................................... 647
Written-off................................................. (68)
-----
At June 30, 2000............................................ 1,935
=====
</TABLE>
FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------ ------------------
1998 1999 1999 2000
---- ---- ---- ----
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Land use rights and buildings.......... 1,851 2,810 1,816 3,046
Telecommunication transceivers,
switching centers and other network
equipment............................ 48,479 48,605 50,644 53,851
Office equipment, furniture and
fixtures and others.................. 1,133 1,844 1,204 2,200
------- ------- ------- -------
51,463 53,259 53,664 59,097
Less: accumulated depreciation......... (11,533) (11,641) (11,520) (15,658)
------- ------- ------- -------
39,930 41,618 42,144 43,439
======= ======= ======= =======
</TABLE>
F-67
<PAGE> 278
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
29 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
DEFERRED REVENUE AND OTHER ITEMS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------- ---------------
1998 1999 1999 2000
---- ---- ---- ----
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Balance at beginning of year/period........... 1,353 1,757 1,757 2,706
Addition during the year/period............... 689 1,533 39 2,432
Recognized in the condensed consolidated
statements of income........................ (285) (584) (156) (1,181)
----- ----- ----- ------
Balance at end of year/period................. 1,757 2,706 1,640 3,957
===== ===== ===== ======
</TABLE>
Deferred revenue comprises:
(i) the unamortized portion of proceeds received by Guangdong Mobile from
certain distributors of telecommunications services which are
amortized over a period of seven years;
(ii) the unamortized portion of connection fees and telephone number
selection fees received in excess of direct costs which are
recognized over the estimated subscriber usage period for the related
services;
(iii) the prepaid services fee received from subscribers which is
recognized as income when the cellular telephone services are
rendered upon actual usage by subscribers; and
(iv) the unamortized portion of net savings attributable to the Group as a
result of the provincial interconnection, roaming and leased line
agreements.
STOCK OPTION PLAN
Details of the Company's stock option plan and options granted under the
plan are contained in Note 21. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions used for grants: no dividend yield for all years; expected
volatility of 66.0 percent, 75.0 percent and 90.0 percent for the share option
granted during 1998, 1999 and 2000 respectively; risk-free interest rate of 9.5
percent; and expected life of 8 years. The per share fair value of stock options
granted during 1998 and 1999 were HK$10.85 and HK$31.48 on the date of grant,
respectively. The per share fair value of stock options granted during 2000 was
HK$48.92 on the date of grant.
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations, in accounting for its plan.
As such, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price. The
compensation cost that has been charged against income for US GAAP for the
Company's stock option plan was RMB 32 for 1998, RMB 22 for 1999 and RMB 28 for
2000. Had compensation cost for
F-68
<PAGE> 279
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
29 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
the Company's stock option plan been determined based on the fair value at the
grant date for it stock options under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", the Company's net
profit and net profit per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 30, JUNE 30,
1998 1999 1999 2000
---- ---- -------- --------
RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
Net profit As reported 10,285 8,234 5,584 8,158
Pro forma 10,178 8,113 5,584 8,058
Basic net profit per share As reported 0.79 0.63 0.43 0.60
Pro forma 0.78 0.62 0.43 0.59
Diluted net profit per share As reported 0.79 0.63 0.43 0.60
Pro forma 0.78 0.62 0.43 0.59
</TABLE>
NET PROFIT PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted net profit per share computations prepared under US GAAP.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
--------------------------------------- ---------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Basic net profit per
share................ 10,285 13,054 0.79 8,234 13,165 0.63
==== ====
Effect of dilutive
Securities
Stock options......... 2 3
------ ------
Diluted net profit per
share................ 10,285 13,056 0.79 8,234 13,168 0.63
====== ====== ==== ===== ====== ====
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 2000
--------------------------------------- ---------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Basic net profit per
share................ 5,584 13,056 0.43 8,158 13,706 0.60
==== ====
Effect of dilutive
Securities
Stock options......... 3 10
------ ------
Diluted net profit per
share................ 5,584 13,059 0.43 8,158 13,716 0.60
===== ====== ==== ===== ====== ====
</TABLE>
FAIR VALUE
Financial assets of the Group include cash and cash equivalents, accounts
receivable, other receivables and due from related parties. Financial
liabilities of the Group include accounts payable, bank and other loans, other
payables and due to related parties. It is not practicable to estimate the fair
value of the amounts due from and due to related parties without incurring
excessive cost.
F-69
<PAGE> 280
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
29 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
The following table presents the carrying amounts and fair values of the
Group's bank and other loans as of December 31, 1998 and 1999:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------ -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Fixed rate bank and other loans............ 6,303 6,134 6,330 6,364
Variable rate bank and other loans......... 2,716 2,716 247 247
Fixed rate notes........................... -- -- 4,952 4,965
----- ----- ------ ------
Total bank and other loans........ 9,019 8,850 11,529 11,576
===== ===== ====== ======
</TABLE>
The following table presents the carrying amounts and fair values of the
Group's bank and other loans as of June 30, 1999 and 2000:
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 2000
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Fixed rate bank and other loans.................. 7,248 7,111 3,111 3,159
Variable rate bank and other loans............... 2,585 2,585 1,486 1,486
Fixed rate notes................................. -- -- 4,957 4,984
----- ----- ----- -----
Total bank and other loans.............. 9,833 9,696 9,554 9,629
===== ===== ===== =====
</TABLE>
The fair values of all other financial instruments approximate their
carrying amounts due to the nature or short maturity of these instruments.
F-70
<PAGE> 281
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
29 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------- -------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
Interconnection revenue......................... 38 868 1,474 496 1,170
Interconnection charges......................... 774 4,301 6,176 2,727 3,539
Leased line charges............................. 4,518 5,165 4,690 2,561 2,543
Roaming revenue................................. 750 1,379 1,771 799 1,249
Roaming expenses................................ 815 1,210 1,506 699 816
Spectrum fees................................... 25 17 14 6 6
Operating lease charges......................... 222 352 385 194 186
Sales commission................................ 176 308 412 298 301
Debt collection service fees.................... 60 170 170 120 109
Billing service fees............................ 1 2 9 2 --
Roaming billing processing fees................. -- -- -- -- 109
Equipment maintenance service fees.............. -- -- -- 2 1
Rental charges of synchronized clock parts...... -- -- 3 -- 3
Purchase of mobile phones and equipment......... 2,529 24 -- 1 --
Interest paid/payable........................... 106 84 18 18 --
Interest received............................... 3 -- -- -- --
Capital contributions........................... 5,521 207 -- 351 --
Distributions................................... 4,213 1,528 -- 1,336 --
</TABLE>
Descriptions of the nature of the related party transactions are set forth
in Note 24.
SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", established standards for
reporting information about operating segments in financial statements.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance.
The Company's operating segments are comprised of its cellular businesses
operated within the Guangdong, Zhejiang, Jiangsu, Fujian, Henan and Hainan
provinces of the PRC. The operating segments are managed separately because each
operating segment represents a strategic business unit that serves different
markets. All operating segments provide cellular services to individual
customers within their geographic market. The Company's operating segments have
been aggregated into a single operating segment as they are expected to exhibit
similar future economic characteristics.
F-71
<PAGE> 282
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
29 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
BUSINESS RISKS
The Group conducts its principal operations in the PRC and accordingly is
subject to special considerations and significant risks not typically associated
with investments in equity securities of United States and Western European
companies. These include risks associated with, among others, the political,
economic and legal environment, extensive government regulations and competition
in the cellular telephone industry (see Note 24).
NEW TELECOMMUNICATIONS LAW
In order to provide a uniform regulatory framework for the
telecommunications industry in the PRC, the MII, pursuant to the direction of
the PRC State Council, is currently preparing a draft of the Telecommunications
Law of the PRC (the "Telecommunications Law"). The draft law, when formulated,
will be submitted to the National People's Congress for review and adoption. It
is unclear if and when the Telecommunications Law will be adopted, and the
nature and scope of regulation envisaged by the Telecommunications Law are not
fully known. There can be no assurance that the Telecommunications Law, if
adopted, would not have a material adverse effect on the Group's business,
financial condition and results of operations.
AMOUNT OF SPECTRUM AVAILABILITY
The Group's cellular system's subscriber capacity is limited by the amount
of spectrum available for use by the system. The former State Radio Regulatory
Commission, now a department within the MII is responsible for the overall
allocation of radio frequency spectrum in the PRC. There can be no assurance
that the Group would be granted additional spectrum when and if required, and
any resulting levels of system congestion could result in subscriber
dissatisfaction, decreased system usage by subscribers and increased churn rate.
DEPENDENCE ON THE PSTN AND INTERCONNECTION ARRANGEMENT
The Group's cellular services depend in large part upon access to the fixed
line network. Limitations on the fixed line network would lower local,
long-distance and international call completion rates for the Group's
subscribers. There can be no assurance that increasing usage of the network
would not result in additional strain on the fixed line network switching
capacity, or that the existing quality of the fixed line network will remain
adequate.
In addition, the Group's operating revenues and expenses are affected by
the terms of its interconnection arrangements. A material increase in
interconnection charges payable by the Group could have a material adverse
effect on the Group's results of operations. There can be no assurance that the
commercial terms of future interconnection arrangements will be acceptable to
the Group.
F-72
<PAGE> 283
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
29 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
SELF INSURANCE RISK
The Group does not maintain any insurance policies to cover its assets.
INTEREST RATE RISK
The interest rates and terms of repayment of the bank and other loans
payable of the Group are disclosed in Note 16.
FOREIGN CURRENCY RISK
The Group has foreign currency risk as certain loans and cash and cash
equivalents are denominated in foreign currencies, principally US dollars and
Hong Kong dollars. Depreciation or appreciation of the Renminbi against foreign
currencies affects the Group's results of operations.
CREDIT RISK
Substantially all of the Group's cash and cash equivalents are deposited
with Hong Kong and PRC financial institutions. The accounts receivable of the
Group are spread among a number of customers.
30 SUBSEQUENT EVENT
On October 4, 2000 the Company entered into a conditional sale and purchase
agreement with China Mobile Hong Kong (BVI) Limited in relation to the
acquisition of the cellular telephone operations in Beijing, Shanghai, Tianjin,
Hebei, Liaoning, Shandong and Guangxi of the PRC.
31 COMPARATIVE FIGURES
The presentation and classification of items in the accounts have been
changed due to adoption of the requirement of HKSSAP 1 (revised) "Presentation
of financial statements". As a result, additional line items have been included
on the face of the consolidated statements of income and the balance sheet as
required by HKSSAP 1 (revised). Comparative figures have been reclassified to
conform with the current year's presentation.
F-73
<PAGE> 284
INDEPENDENT AUDITORS' REPORT
The Board of Directors
China Mobile (Hong Kong) Limited:
We have audited the accompanying combined balance sheets of Beijing Mobile
Communication Company Limited ("Beijing Mobile"), Shanghai Mobile Communication
Company Limited ("Shanghai Mobile"), Tianjin Mobile Communication Company
Limited ("Tianjin Mobile"), Hebei Mobile Communication Company Limited ("Hebei
Mobile"), Liaoning Mobile Communication Company Limited ("Liaoning Mobile"),
Shandong Mobile Communication Company Limited ("Shandong Mobile") and Guangxi
Mobile Communication Company Limited ("Guangxi Mobile")(the "Target") as of
December 31, 1998 and 1999 and June 30, 2000 and the related combined statements
of income, recognized gains and losses, owner's equity and cash flows for each
of the years in the three-year period ended December 31, 1999, and the six
months ended June 30, 2000 all expressed in Renminbi. These combined financial
statements are the responsibility of the management of the Target. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America and Hong Kong. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 21 to the combined financial statements, the Target's
operations of cellular telecommunication business in the People's Republic of
China ("PRC") are subject to extensive regulation and supervision by the PRC
government. In connection with the restructuring of cellular telecommunication
business in the PRC (as discussed in Note 1 to the combined financial
statements), the Target received certain directives from the PRC regulatory
authorities and entered into certain arrangements with effect from April 1, 1999
and June 30, 2000, the effects of which have been presented prospectively in the
combined financial statements.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Target
as of December 31, 1998 and 1999 and June 30, 2000 and the combined results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 and the six months ended June 30, 2000 in
conformity with accounting principles generally accepted in Hong Kong.
Accounting principles generally accepted in Hong Kong vary in certain
material respects from accounting principles generally accepted in the United
States of America. Application of accounting principles generally accepted in
the United States of America would have affected results of operations for each
of the years in the three-year period
F-74
<PAGE> 285
ended December 31, 1999 and the six months ended June 30, 2000 and owner's
equity as of December 31, 1998 and 1999 and June 30, 2000 to the extent
summarized in Note 23 to the combined financial statements.
The accompanying combined financial statements as of and for the year ended
December 31, 1999 and the six months ended June 30, 2000 have been translated
into United States dollars solely for the convenience of the reader. We have
audited the translation, and in our opinion, the combined financial statements
expressed in Renminbi have been translated into United States dollars on the
basis set forth in Note 1 to the combined financial statements.
KPMG
Hong Kong
October 4, 2000
F-75
<PAGE> 286
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE, LIAONING MOBILE,
SHANDONG MOBILE AND GUANGXI MOBILE
COMBINED STATEMENTS OF INCOME
(AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------------
NOTE 1997 1998 1999 1999 1999 2000 2000
---- ---- ---- ---- ---- ---- ---- ----
RMB
RMB RMB RMB US$ (UNAUDITED) RMB US$
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE
Usage fees...................... 6,815 11,278 16,285 1,967 7,224 10,218 1,234
Monthly fees.................... 1,609 3,051 4,564 551 2,066 2,780 336
Connection fees................. 3,277 2,793 2,113 255 1,139 548 66
Other operating revenue......... 1,276 1,737 3,422 414 1,398 2,160 261
------ ------- ------- ------ ------ ------ ------
TOTAL OPERATING REVENUE......... 3 12,977 18,859 26,384 3,187 11,827 15,706 1,897
------ ------- ------- ------ ------ ------ ------
OPERATING EXPENSES
Leased lines.................... (2,191) (3,763) (3,309) (400) (1,801) (1,532) (185)
Interconnection................. (1,850) (2,753) (4,867) (588) (2,082) (2,749) (332)
Depreciation.................... (1,822) (3,073) (4,793) (579) (2,166) (2,652) (320)
Personnel....................... (276) (415) (546) (66) (232) (326) (39)
Other operating expenses........ (2,054) (3,404) (4,349) (525) (1,902) (2,697) (326)
------ ------- ------- ------ ------ ------ ------
TOTAL OPERATING EXPENSES........ 4 (8,193) (13,408) (17,864) (2,158) (8,183) (9,956) (1,202)
------ ------- ------- ------ ------ ------ ------
OPERATING PROFIT................ 4,784 5,451 8,520 1,029 3,644 5,750 695
WRITE-DOWN AND WRITE-OFF OF TACS
NETWORK EQUIPMENT............. 5 -- -- (4,508) (545) -- -- --
OTHER INCOME/(EXPENSES)......... 6 (86) (115) 9 1 (6) 50 6
NON-OPERATING INCOME, NET....... 7 77 68 123 15 57 52 6
FINANCE COSTS................... 15 (123) (181) (638) (77) (241) (396) (48)
------ ------- ------- ------ ------ ------ ------
PROFIT BEFORE TAX............... 4,652 5,223 3,506 423 3,454 5,456 659
INCOME TAX...................... 8 (316) (640) (824) (100) (595) (1,002) (121)
------ ------- ------- ------ ------ ------ ------
NET PROFIT...................... 4,336 4,583 2,682 323 2,859 4,454 538
====== ======= ======= ====== ====== ====== ======
</TABLE>
See accompanying notes to combined financial statements.
F-76
<PAGE> 287
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE, LIAONING MOBILE,
SHANDONG MOBILE AND GUANGXI MOBILE
COMBINED STATEMENTS OF RECOGNIZED GAINS AND LOSSES
(AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- ---------------------------------------
1997 1998 1999 1999 1999 2000 2000
---- ---- ---- ---- ---- ---- ----
RMB
RMB RMB RMB US$ (UNAUDITED) RMB US$
<S> <C> <C> <C> <C> <C> <C> <C>
Net profit for the
year/period.................. 4,336 4,583 2,682 323 2,859 4,454 538
Revaluation surplus............ -- -- -- -- -- 4,823 582
Capital reserve arising on
acquisition of a
subsidiary................... -- -- -- -- -- 29 4
----- ----- ----- --- ----- ----- -----
4,336 4,583 2,682 323 2,859 9,306 1,124
===== ===== ===== === ===== ===== =====
</TABLE>
See accompanying notes to combined financial statements.
F-77
<PAGE> 288
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE, LIAONING MOBILE,
SHANDONG MOBILE AND GUANGXI MOBILE
COMBINED BALANCE SHEETS
(AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------- -------------------------
NOTE 1998 1999 1999 2000 2000
---- ---- ---- ---- ---- ----
RMB RMB US$ RMB US$
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........ 557 4,641 561 6,467 781
Deposits with banks.............. -- 25 3 75 9
Accounts receivable.............. 9 2,267 2,685 325 2,823 341
Other receivables................ 338 406 49 354 43
Inventories...................... 305 152 18 143 17
Prepaid expenses and other
current assets................ 288 451 54 519 63
Amounts due from ultimate holding
company....................... 10 7 450 55 -- --
Amounts due from related
parties....................... 11 315 1,302 157 -- --
Amounts due from China
Telecommunications
Corporation................... 11 -- -- -- 783 94
------ ------ ----- ------ -----
Total current assets..... 4,077 10,112 1,222 11,164 1,348
Fixed assets....................... 12 24,069 29,999 3,624 37,252 4,500
Construction in progress........... 7,570 5,060 611 4,856 587
Investment securities.............. 13 51 88 10 35 4
Deferred tax assets................ 14 24 452 55 451 55
------ ------ ----- ------ -----
TOTAL ASSETS....................... 35,791 45,711 5,522 53,758 6,494
====== ====== ===== ====== =====
LIABILITIES AND OWNER'S EQUITY
Current liabilities
Accounts payable................. 2,785 3,272 395 2,788 337
Bank and other loans............. 15 3,427 4,828 583 3,727 450
Obligations under capital
lease -- current portion...... 16 1,565 1,685 204 1,613 195
Amounts due to ultimate holding
company....................... 10 -- -- -- 64 7
Amounts due to related parties... 11 513 1,947 235 -- --
Amounts due to China
Telecommunications
Corporation................... 11 -- -- -- 2,700 326
Accrued expenses and other
payables...................... 17 998 1,950 236 2,508 303
------ ------ ----- ------ -----
Total current
liabilities............ 9,288 13,682 1,653 13,400 1,618
Bank and other loans............... 15 4,354 8,857 1,070 8,850 1,069
Obligations under capital lease --
long-term portion................ 16 3,556 2,142 259 1,937 234
Deferred revenue................... 18 -- -- -- 254 31
------ ------ ----- ------ -----
TOTAL LIABILITIES.................. 17,198 24,681 2,982 24,441 2,952
OWNER'S EQUITY..................... 18,593 21,030 2,540 29,317 3,542
------ ------ ----- ------ -----
TOTAL LIABILITIES AND OWNER'S
EQUITY........................... 35,791 45,711 5,522 53,758 6,494
====== ====== ===== ====== =====
</TABLE>
See accompanying notes to combined financial statements.
F-78
<PAGE> 289
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- ---------------------------------------
NOTE 1997 1998 1999 1999 1999 2000 2000
---- ---- ---- ---- ---- ---- ---- ----
RMB US$
RMB RMB RMB US$ (UNAUDITED) RMB
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET CASH INFLOWS FROM OPERATING
ACTIVITIES......................... (a) 5,813 7,810 13,428 1,622 6,245 10,823 1,307
------ ------ ------- ------ ------ ------ -----
RETURNS ON INVESTMENTS AND SERVICING
OF FINANCE
Interest received.................... 11 9 36 4 13 39 5
Interest paid (including interest of
capital lease)..................... (230) (444) (956) (115) (423) (524) (63)
Distributions to owner............... (457) (1,292) (849) (103) (785) (1,297) (157)
------ ------ ------- ------ ------ ------ -----
NET CASH OUTFLOW FROM RETURNS ON
INVESTMENTS AND SERVICING OF
FINANCE............................ (676) (1,727) (1,769) (214) (1,195) (1,782) (215)
------ ------ ------- ------ ------ ------ -----
TAXATION
PRC income tax paid.................. (329) (645) (871) (105) (487) (799) (97)
------ ------ ------- ------ ------ ------ -----
TAX PAID............................. (329) (645) (871) (105) (487) (799) (97)
------ ------ ------- ------ ------ ------ -----
INVESTING ACTIVITIES
Net inflow of cash and cash
equivalents in respect of the
acquisition of a subsidiary........ (d) -- -- -- -- -- 4 1
Capital expenditures................. (6,346) (9,868) (11,385) (1,375) (5,180) (4,580) (553)
Purchase of investment securities.... (7) -- -- -- -- -- --
Proceeds from disposal of investment
securities......................... -- 1 -- -- -- -- --
Proceeds from sale of fixed assets... 1 3 9 1 1 12 1
Increase in deposits with banks...... -- -- (25) (3) -- (60) (7)
Maturity of deposits with banks...... -- -- -- -- -- 10 1
------ ------ ------- ------ ------ ------ -----
NET CASH OUTFLOW FROM INVESTING
ACTIVITIES......................... (6,352) (9,864) (11,401) (1,377) (5,179) (4,614) (557)
------ ------ ------- ------ ------ ------ -----
NET CASH (OUTFLOW)/INFLOW BEFORE
FINANCING ACTIVITIES............... (1,544) (4,426) (613) (74) (616) 3,628 438
------ ------ ------- ------ ------ ------ -----
FINANCING ACTIVITIES
Repayments of obligation under
capital lease...................... (b) (293) (759) (1,811) (219) (942) (942) (114)
Proceeds from bank and other loans... (b) 392 7,212 10,482 1,266 4,636 1,911 231
Repayments of bank and other loans... (b) (985) (2,082) (4,578) (553) (1,552) (3,049) (368)
Proceeds from capital contribution... 2,246 218 604 73 1,251 278 33
------ ------ ------- ------ ------ ------ -----
NET CASH INFLOW/(OUTFLOW) FROM
FINANCING ACTIVITIES............... 1,360 4,589 4,697 567 3,393 (1,802) (218)
------ ------ ------- ------ ------ ------ -----
(DECREASE)/INCREASE IN CASH AND CASH
EQUIVALENTS........................ (184) 163 4,084 493 2,777 1,826 220
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR/PERIOD........... 578 394 557 68 557 4,641 561
------ ------ ------- ------ ------ ------ -----
CASH AND CASH EQUIVALENTS AT END OF
YEAR/PERIOD........................ 394 557 4,641 561 3,334 6,467 781
====== ====== ======= ====== ====== ====== =====
ANALYSIS OF THE BALANCES OF CASH AND
CASH EQUIVALENTS...................
Deposits with banks with maturity
period within three months when
placed............................. -- -- 4 1 -- -- --
Cash and bank balances............... 394 557 4,637 560 3,334 6,467 781
------ ------ ------- ------ ------ ------ -----
394 557 4,641 561 3,334 6,467 781
====== ====== ======= ====== ====== ====== =====
</TABLE>
See accompanying notes to combined financial statements.
F-79
<PAGE> 290
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
COMBINED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
(A) THE RECONCILIATION OF PROFIT BEFORE TAX TO NET CASH INFLOWS FROM OPERATING
ACTIVITIES IS AS FOLLOWS:
<TABLE>
<CAPTION>
SIX MONTHS END
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- ---------------------------------------
1997 1998 1999 1999 1999 2000 2000
---- ---- ---- ---- ---- ---- ----
RMB
RMB RMB RMB US$ (UNAUDITED) RMB US$
<S> <C> <C> <C> <C> <C> <C> <C>
Profit before tax............ 4,652 5,223 3,506 423 3,454 5,456 659
Depreciation of fixed
assets..................... 1,822 3,073 4,793 579 2,166 2,652 320
Write-down and write-off of
TACS network equipment..... -- -- 4,508 545 -- -- --
Provision for doubtful
accounts................... 469 1,021 971 117 556 434 52
Loss on sale of fixed
assets..................... 1 8 13 2 9 51 6
Interest income.............. (11) (9) (36) (4) (13) (39) (5)
Interest expense............. 123 181 638 77 241 396 48
Unrealized exchange loss,
net........................ -- -- -- -- -- 15 2
Increase in accounts
receivable................. (1,096) (1,707) (1,389) (168) (918) (572) (69)
Decrease/(increase) in other
receivables................ 156 (178) (68) (8) (245) 193 23
(Increase)/decrease in
inventories................ (21) 44 153 18 107 9 1
Increase in prepaid expenses
and other current assets... (61) (186) (163) (20) (110) (68) (8)
Decrease/(increase) in
amounts due from ultimate
holding company............ 10 (16) (824) (100) 28 312 38
(Increase)/decrease in
amounts due from related
parties.................... (130) (13) (987) (119) (652) 440 53
Increase/(decrease) in
accounts payable........... 84 41 21 3 7 (35) (4)
Increase in amounts due to
related parties............ 2 78 1,398 169 1,032 782 94
(Decrease)/increase in
accrued expenses and other
payables................... (187) 250 894 108 583 543 66
Increase in deferred revenue,
net........................ -- -- -- -- -- 254 31
------ ------ ------ ----- ----- ------ -----
Net cash inflows from
operating activities....... 5,813 7,810 13,428 1,622 6,245 10,823 1,307
====== ====== ====== ===== ===== ====== =====
</TABLE>
F-80
<PAGE> 291
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE SHANDONG MOBILE AND GUANGXI MOBILE
COMBINED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
(B) ANALYSIS OF CHANGES IN FINANCING DURING THE YEARS:
<TABLE>
<CAPTION>
BANK AND OBLIGATIONS UNDER
OTHER LOANS CAPITAL LEASE
----------- -----------------
RMB RMB
<S> <C> <C>
Balance at January 1, 1997.............................. 2,453 227
Proceeds from bank and other loans...................... 392 --
Inception of capital lease contracts (Note (e))......... -- 2,128
Repayments of bank and other loans...................... (985) --
Repayments of obligation under capital lease............ -- (293)
Payables for additions of construction in progress...... 487 --
------ ------
Balance at December 31, 1997............................ 2,347 2,062
====== ======
Balance at January 1, 1998.............................. 2,347 2,062
Proceeds from bank and other loans...................... 7,212 --
Inception of capital lease contracts (Note (e))......... -- 3,818
Repayments of bank and other loans...................... (2,082) --
Repayments of obligation under capital lease............ -- (759)
Payables for additions of construction in progress...... 304 --
------ ------
Balance at December 31, 1998............................ 7,781 5,121
====== ======
Balance at January 1, 1999.............................. 7,781 5,121
Proceeds from bank and other loans...................... 10,482 --
Inception of capital lease contracts (Note (e))......... -- 517
Repayments of bank and other loans...................... (4,578) --
Repayments of obligation under capital lease............ -- (1,811)
------ ------
Balance at December 31, 1999............................ 13,685 3,827
====== ======
</TABLE>
ANALYSIS OF CHANGES IN FINANCING DURING THE PERIODS:
<TABLE>
<CAPTION>
BANK AND OBLIGATIONS UNDER
OTHER LOANS CAPITAL LEASE
----------- -----------------
RMB RMB
<S> <C> <C>
Balance at January 1, 1999.............................. 7,781 5,121
Proceeds from bank and other loans (unaudited).......... 4,636 --
Inception of capital lease contracts (unaudited) (Note
(e)).................................................. -- 486
Repayments of bank and other loans (unaudited).......... (1,552) --
Repayments of obligation under capital lease
(unaudited)........................................... -- (942)
------ ------
Balance at June 30, 1999................................ 10,865 4,665
====== ======
Balance at January 1, 2000.............................. 13,685 3,827
Acquired on acquisition of a subsidiary................. 15 --
Proceeds from bank and other loans...................... 1,911 --
Inception of capital lease contracts(Note (e)).......... -- 665
Repayments of bank and other loans...................... (3,049) --
</TABLE>
F-81
<PAGE> 292
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE SHANDONG MOBILE AND GUANGXI MOBILE
COMBINED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
BANK AND OBLIGATIONS UNDER
OTHER LOANS CAPITAL LEASE
----------- -----------------
RMB RMB
<S> <C> <C>
Repayments of obligation under capital lease............ -- (942)
Effect of foreign exchange rates........................ 15 --
------ ------
Balance at June 30, 2000................................ 12,577 3,550
====== ======
</TABLE>
(c) ACQUISITION OF A SUBSIDIARY
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 2000
----------------
RMB
<S> <C>
NET ASSETS ACQUIRED:
Cash and bank balances...................................... 4
Other receivables........................................... 62
Fixed assets................................................ 34
Bank and other loans........................................ (15)
Accrued expenses and other payables......................... (3)
---
82
Capital reserve arising on acquisition...................... (29)
Amount previously recognised whilst held as investment
securities up to the date of acquisition.................. (53)
---
--
===
Satisfied by: Cash.......................................... Nil
===
</TABLE>
(d) ANALYSIS OF NET INFLOW OF CASH AND CASH EQUIVALENTS IN RESPECT OF THE
ACQUISITION OF A SUBSIDIARY
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 2000
----------------
RMB
<S> <C>
Cash and bank balances acquired............................. 4
===
</TABLE>
(e) SIGNIFICANT NON-CASH TRANSACTIONS:
The Target incurred payables of RMB 4,181, RMB 7,289 and RMB 3,864 from
equipment suppliers for additions of construction in progress during the years
ended December 31, 1997, 1998 and 1999 respectively.
The Target also acquired equipment of RMB 2,128, RMB 3,818 and RMB 517
under capital lease during the years ended December 31, 1997, 1998 and 1999
respectively.
The Target incurred payables of RMB 2,564 (unaudited) and RMB 3,447 from
equipment suppliers for additions of construction in progress during the six
months ended June 30, 1999 and 2000 respectively.
F-82
<PAGE> 293
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE SHANDONG MOBILE AND GUANGXI MOBILE
COMBINED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
The Target also acquired equipment of RMB 486 (unaudited) and RMB 665 under
capital lease during the six months ended June 30, 1999 and 2000, respectively.
During the six months ended June 30, 2000, balances of amounts due from/to
provincial posts and telecommunications administration (the "PTA") and China
Telecommunications Corporation ("CTC") were reclassified from amounts due
from/to related parties to amounts due from/to CTC (See Note 21).
F-83
<PAGE> 294
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
COMBINED STATEMENTS OF OWNERS' EQUITY
(AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
CONTRIBUTED REVALUATION CAPITAL
CAPITAL RESERVES RESERVE RETAINED TOTAL
----------- ----------- ------- EARNINGS -----
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
Owner's equity at January 1, 1997........... 7,686 -- -- 1,273 8,959
Contribution from owner..................... 2,246 -- -- -- 2,246
Transfer from statement of income........... -- -- -- 4,336 4,336
Distribution to owner....................... -- -- -- (457) (457)
------ ----- -- ------ ------
Owner's equity at December 31, 1997......... 9,932 -- -- 5,152 15,084
Contribution from owner..................... 218 -- -- -- 218
Transfer from statement of income........... -- -- -- 4,583 4,583
Distribution to owner....................... -- -- -- (1,292) (1,292)
------ ----- -- ------ ------
Owner's equity at December 31, 1998......... 10,150 -- -- 8,443 18,593
Contribution from owner..................... 604 -- -- -- 604
Transfer from statement of income........... -- -- -- 2,682 2,682
Distribution to owner....................... -- -- -- (849) (849)
------ ----- -- ------ ------
Owner's equity at December 31, 1999......... 10,754 -- -- 10,276 21,030
Contribution from owner..................... 278 -- -- -- 278
Capital reserve arising on acquisition of a
subsidiary................................ -- -- 29 -- 29
Revaluation surplus......................... -- 4,823 -- -- 4,823
Transfer from statement of income........... -- -- -- 4,454 4,454
Distribution to owner....................... -- -- -- (1,297) (1,297)
------ ----- -- ------ ------
Owner's equity at June 30, 2000............. 11,032 4,823 29 13,433 29,317
====== ===== == ====== ======
</TABLE>
See accompanying notes to combined financial statements.
F-84
<PAGE> 295
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN MILLIONS)
1 ORGANIZATION, PRINCIPAL ACTIVITIES AND BASIS OF PRESENTATION
China Mobile (Hong Kong) Limited ("China Mobile (HK)") will enter into a
conditional sale and purchase agreement ("the Acquisition Agreement") to acquire
the entire issue share capital of Beijing Mobile (BVI) Limited ("Beijing Mobile
BVI"), Shanghai Mobile (BVI) Limited ("Shanghai Mobile BVI"), Tianjin Mobile
(BVI) Limited ("Tianjin Mobile BVI"), Hebei Mobile (BVI) Limited ("Hebei Mobile
BVI"), Liaoning Mobile (BVI) Limited ("Liaoning Mobile BVI"), Shandong Mobile
(BVI) Limited ("Shandong Mobile BVI") and Guangxi Mobile (BVI) Limited ("Guangxi
Mobile BVI") from China Mobile Hong Kong (BVI) Limited ("CMBVI"), its immediate
holding company, (the "Acquisition"). The Acquisition is subject to the receipt
of regulatory and shareholders' approvals. The only assets of each of Beijing
Mobile BVI, Shanghai Mobile BVI, Tianjin Mobile BVI, Hebei Mobile BVI, Liaoning
Mobile BVI, Shandong Mobile BVI and Guangxi Mobile BVI are their entire
ownership interests in the cellular service operations in Beijing, Shanghai and
Tianjin municipalities, Hebei, Liaoning and Shandong provinces and Guangxi
autonomous regions in the People's Republic of China ("PRC"), respectively.
References to the "Target" are to the companies which have been formed to hold
the cellular service operations in Beijing, Shanghai, Tianjin, Hebei, Liaoning,
Shandong and Guangxi or in respect of references to any time prior to the
incorporation of those companies, the cellular telecommunications businesses in
Beijing, Shanghai, Tianjin, Hebei, Liaoning, Shandong and Guangxi ultimately
acquired by China Mobile (HK) pursuant to the Acquisition.
The cellular service operations in Beijing, Shanghai, Tianjin, Hebei,
Liaoning, Shandong and Guangxi were operated and controlled by the China Mobile
Communications Corporation ("China Mobile"), since its formation in July 1999,
pursuant to the PRC State Council's approval in February 1999 to restructure the
telecommunications industry in the PRC, as a state-owned company to hold the
mobile communications assets and operate mobile telecommunications networks
nationwide (the "Restructuring").
Prior to the Restructuring, the cellular networks of the Target in Beijing,
Shanghai, Tianjin, Hebei, Liaoning, Shandong and Guangxi were owned and operated
directly by Beijing Telecommunications Administration ("TA"), the Shanghai Posts
and Telecommunications Administration ("PTA"), the Tianjin PTA, the Hebei PTA,
the Liaoning PTA, the Shandong PTA and the Guangxi PTA ("the relevant PTAs")
respectively, and ultimately under the control of the Ministry of Information
Industry ("MII").
Prior to the Acquisition, Beijing Mobile Communication Company Limited
("Beijing Mobile"), Shanghai Mobile Communication Company Limited ("Shanghai
Mobile"), Tianjin Mobile Communication Company Limited ("Tianjin Mobile"), Hebei
Mobile Communication Company Limited ("Hebei Mobile"), Liaoning Mobile
Communication Company Limited ("Liaoning Mobile"), Shandong Mobile Communication
Company Limited ("Shandong Mobile") and Guangxi Mobile Communication Company
Limited
F-85
<PAGE> 296
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
1 ORGANIZATION, PRINCIPAL ACTIVITIES AND BASIS OF PRESENTATION (CONTINUED)
("Guangxi Mobile") were incorporated in the PRC on July 26, 2000, August 4,
2000, July 24, 2000, July 31, 2000, August 7, 2000, August 7, 2000 and August 3,
2000, respectively. Through a series of transfers, the equity interests of
Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile,
Shandong Mobile and Guangxi Mobile were then transferred to Beijing Mobile BVI,
Shanghai Mobile BVI, Tianjin Mobile BVI, Hebei Mobile BVI, Liaoning Mobile BVI,
Shandong Mobile BVI and Guangxi Mobile BVI, companies incorporated with limited
liability in the British Virgin Islands, respectively.
Pursuant to the Acquisition Agreement, China Mobile (HK) will acquire the
entire share capital of Beijing Mobile BVI, Shanghai Mobile BVI, Tianjin Mobile
BVI, Hebei Mobile BVI, Liaoning Mobile BVI, Shandong Mobile BVI and Guangxi
Mobile BVI. Following the acquisition, Beijing Mobile, Shanghai Mobile, Tianjin
Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi Mobile will
become wholly foreign-owned enterprises.
BASIS OF PREPARATION
The combined financial statements reflect the combined financial condition,
results of operations and cash flows of businesses under common control in a
manner similar to a pooling of interests. Accordingly, the combined financial
statements have been prepared on the basis of historical costs and as if the
business activities of the predecessor operations had been conducted by Beijing
Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong
Mobile and Guangxi Mobile throughout the relevant periods.
Prior to the formation of Beijing Mobile, Shanghai Mobile, Tianjin Mobile,
Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi Mobile, the
operations were financed through operating cash flows and advances from the
relevant PTAs or China Mobile. For this reason, the historical financial
statements include interest expense on the combined external debt of the PTAs or
China Mobile to be assumed upon formation and such debt is reflected as
outstanding for all relevant periods. Additionally, the combined financial
statements include an allocation of certain previously unallocated general and
administrative expenses totalling RMB 441, RMB 660, RMB 154 and RMB 151
(unaudited) and RMB 4 for each of the years ended December 31, 1997, 1998, 1999
and the six months ended June 30, 1999 and 2000, respectively. General and
administrative expenses which specific identification method was not practical
included primarily rental and other office expenses and were allocated based on
floor area and revenue, respectively. For periods prior to the formation, income
taxes were calculated as if prepared on a stand-alone basis.
Management believes that the method of allocation of interest and general
and administrative expenses were reasonable and that the combined financial
statements include all revenues and costs directly and indirectly attributable
to the Target for those
F-86
<PAGE> 297
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
1 ORGANIZATION, PRINCIPAL ACTIVITIES AND BASIS OF PRESENTATION (CONTINUED)
periods. Additionally, management believes that it is not practicable to
estimate what expenses would have been on a stand-alone basis if the Target had
operated as an unaffiliated entity as the majority of such expenses incurred
were general in nature and were incurred at various locations. However, with
effect from April 1, 1999, the Target entered into interconnection, leased line
and service agreements with the relevant PTAs that will have a material effect
on the results of operations in future periods (see Note 21).
The financial data and accompanying notes for the six months ended June 30,
1999 are unaudited but reflect all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary to present such
information on a basis consistent with that applied to the audited financial
statements.
The combined financial statements have been prepared in accordance with
accounting principles generally accepted in Hong Kong ("HK GAAP"). Significant
differences between HK GAAP and accounting principles generally accepted in the
United States ("US GAAP") are set forth in Note 23.
The combined financial statements are expressed in Renminbi. Solely for the
convenience of the reader, for each of the December 31, 1999 and June 30, 2000
financial statements have been translated into United States dollars at the noon
buying rate in New York City on June 30, 2000 for cable transfers in Renminbi as
certified for customs purposes by Federal Reserve Bank of New York of US$1.00 =
RMB 8.2782. No representation is made that the Renminbi amounts could have been,
or could be, converted into United States dollars at the rate or at any other
certain rate on December 31, 1999, June 30, 2000 or any other certain date.
2 PRINCIPAL ACCOUNTING POLICIES
(a) BASIS OF COMBINATION
The combined financial statements include the accounts of the Target. All
significant inter-company balances and transactions have been eliminated.
(b) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are short-term, highly liquid investments which
are readily convertible into known amounts of cash without notice and which are
within three months of maturity when acquired. For the purposes of the statement
of cash flows, cash equivalents would also include advances from banks repayable
within three months from the date of the advance. None of the Target's cash and
cash equivalents is restricted as to withdrawal.
F-87
<PAGE> 298
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
2 PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(c) INVESTMENT SECURITIES
Investments held on a continuing basis for an identified long-term purpose
are classified as "investment securities". Investment securities are stated in
the combined balance sheet at cost less any provisions for diminution in value.
(d) FIXED ASSETS AND DEPRECIATION
(i) Fixed assets are stated at cost/revalued amount less accumulated
depreciation. The circumstances and basis under which the revalued
amount is arrived at are set out in details in Note 12.
(ii) The cost of fixed assets comprises the purchase price and any
directly attributable costs of bringing the asset to its working
condition and location for its intended use. Expenditures incurred
after the fixed asset has been put into operation, such as repairs
and maintenance and overhaul costs, are normally charged to the
combined statements of income in the period in which it is incurred.
In situations where it can be clearly demonstrated that the
expenditure has resulted in an increase in the future economic
benefits expected to be obtained from the use of the fixed asset, the
expenditure is capitalized as an additional cost of the fixed asset.
(iii) Gains or losses arising from the retirement or disposal of fixed
assets are determined as the difference between the net disposal
proceeds and the carrying amount of the asset and are recognized as
income or expense in the combined statements of income on the date of
retirement or disposal.
(iv) The carrying amount of fixed assets recorded at depreciated cost is
reviewed periodically in order to assess whether the recoverable
amount has declined below the carrying amount. When such a decline has
occurred, the carrying amount is reduced to the recoverable amount.
The amount of the reduction is recognized as an expense in the
combined statements of income. In determining the recoverable amount,
expected future cash flows generated by the fixed assets are
discounted to their present values.
A subsequent increase in the recoverable amount of an asset carried at
depreciated cost is written back to the combined statements of income
when the circumstances and events that led to the write-down or
write-off cease to exist. The amount written back is reduced by the
amount that would have been recognized as depreciation had the
write-down or write-off not occurred. No amounts were written back for
the years/periods presented.
F-88
<PAGE> 299
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
2 PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(v) Depreciation is calculated to write off the cost, or revalued amount
where appropriate, of fixed assets on a straight-line basis over their
estimated useful lives, to residual values, as follows:
<TABLE>
<CAPTION>
DEPRECIABLE LIFE RESIDUAL VALUE
---------------- --------------
<S> <C> <C>
Land use rights..................... Over the period of grant --
Buildings........................... 8-35 years 3%
Telecommunication transceivers,
switching centers and other
network equipment................. 7 years 3%
Office equipment, furniture and
fixtures and others............... 4-18 years 3%
</TABLE>
(e) LEASED ASSETS
Where assets are acquired under capital leases, the amounts representing
the outright purchase price, which approximate the present value of the minimum
lease payments, of such assets are included in fixed assets and the
corresponding liabilities, net of finance charges, are recorded as obligations
under capital lease. Depreciation is provided at rates which write off the cost
of the assets in equal annual amounts over the shorter of the period of the
leases or the estimated useful lives of the assets as set out in Note 2(d)
above. Finance charges implicit in the lease payments are charged to the
combined statements of income over the period of the leases so as to produce an
approximately constant periodic rate of charge on the remaining balance of the
obligations for each accounting period.
(f) CONSTRUCTION IN PROGRESS
Construction in progress is stated at cost. Cost comprises direct costs of
construction as well as interest expense and exchange differences capitalized
during the periods of construction and installation. Capitalization of these
costs ceases and the construction in progress is transferred to fixed assets
when substantially all the activities necessary to prepare the assets for their
intended use are completed. No depreciation is provided in respect of
construction in progress until it is completed and ready for its intended use.
(g) INVENTORIES
Inventories, which consist primarily of handsets, SIM cards and
accessories, are stated at the lower of cost and net realizable value. Cost
represents purchase cost of goods calculated using the weighted average cost
method. Net realizable value is determined by reference to the sales proceeds of
items sold in the ordinary course of business after the balance sheet date or to
management's estimates based on prevailing market conditions.
F-89
<PAGE> 300
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
2 PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
When inventories are sold, the carrying amount of those inventories is
recognized as a deduction of other income due to its insignificance. The amount
of any write-down of inventories to net realizable value and all losses of
inventories are recognized as an expense in the period the write-down or loss
occurs. The amount of any reversal of any write-down of inventories, arising
from an increase in net realizable value, is recognized as a reduction in the
amount of inventories recognized as an expense in the period in which the
reversal occurs. No amounts were written back for the periods presented.
(h) BORROWING COSTS
Borrowing costs are expensed in the combined statements of income in the
period in which they are incurred, except to the extent that such costs are
capitalized as being directly attributable to the acquisition or construction of
an asset which necessarily takes a substantial period of time to get ready for
its intended use.
(i) REVENUE RECOGNITION
Revenue is recognized when it is probable that the economic benefits will
accrue to the Target and when the revenue can be measured reliably on the
following bases:
(i) usage fees are recognized as revenue when the service is rendered;
(ii) monthly fees are recognized as revenue in the month during which the
service is rendered;
(iii) connection fees are recognized as revenue when received;
(iv) revenue from prepaid card sales is recognized when the cellular
service is rendered;
(v) interest income is recognized on a time proportion basis on the
principal outstanding and at the rate applicable; and
(vi) sales of handsets and SIM cards are recognized on delivery of goods to
the buyer. Such revenue, net of cost of goods sold, is included in
other income due to its insignificance.
(j) ALLOWANCE FOR DOUBTFUL ACCOUNTS
An allowance for doubtful accounts is provided based upon evaluation of the
recoverability of the receivables at the balance sheet date.
(k) TRANSLATION OF FOREIGN CURRENCIES
The functional currency of the Target's operations is Renminbi. See Note
22. Foreign currency transactions are recorded at the applicable rates of
exchange prevailing on the transaction dates. Monetary assets and liabilities
denominated in
F-90
<PAGE> 301
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
2 PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
currencies other than the functional currency are translated at the exchange
rates ruling at the balance sheet date. Exchange differences attributable to the
translation of borrowings denominated in currencies other than the functional
currency, and used for financing the construction of fixed assets, are included
in the cost of the related construction in progress. Exchange differences
capitalized to construction in progress are immaterial for the years/periods
presented. Other exchange gains and losses are recognized in the combined
statements of income.
(l) DEFERRED TAXATION
Deferred taxation is provided under the liability method in respect of the
tax effect arising from all material timing differences between the accounting
and tax treatment of income and expense, which are expected with reasonable
probability to crystallize in the foreseeable future. Future deferred tax
benefits are not recognized unless their realization is assured beyond
reasonable doubt.
(m) RETIREMENT BENEFITS
Contributions to retirement schemes are charged to the combined statements
of income as and when incurred. See Note 20.
(n) OPERATING LEASES
Rental payable under operating lease are accounted for in the combined
statements of income on a straight-line basis over the periods of the respective
leases.
(o) RELATED PARTIES
For the purposes of these accounts, parties are considered to be related to
the Target if the Target has the ability, directly or indirectly, to control the
party or exercise significant influence over the party in making financial and
operating decisions, or vice versa, or where the Target and the party are
subject to common control or common significant influence. Related parties may
be individuals or other entities.
(p) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the periods reported. Actual results
could differ from those estimates. Estimates are used when accounting for
allowance for doubtful accounts, the length of fixed assets' lives, and
write-down and write-off of long-lived assets. Actual results may differ from
these estimates.
F-91
<PAGE> 302
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
3 OPERATING REVENUE
The principal activities of the Target are the provision of cellular
telephone and related services in Beijing, Shanghai, Tianjin, Hebei, Liaoning,
Shandong and Guangxi of the PRC.
Operating revenue primarily represents usage fees, monthly fees and
connection fees for the use of the Target's cellular telephone networks, net of
PRC business tax and government surcharges and central irrigation construction
levy. Business tax and government surcharges are charged at approximately 3.3%
to 3.65% of the corresponding revenue, and central irrigation construction levy
was charged at approximately 3% of certain connection and surcharge revenue.
Operating revenue is further analyzed as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- --------------------------
NOTE 1997 1998 1999 1999 2000
----- ---- ---- ---- ---- ----
RMB
RMB RMB RMB (UNAUDITED) RMB
<S> <C> <C> <C> <C> <C> <C>
BEIJING MOBILE:
Usage fees................... (i) 1,541 2,634 3,360 1,543 2,077
Monthly fees................. (ii) 250 476 749 334 488
Connection fees.............. (iii) 660 661 615 319 185
Other operating revenue...... (iv) 465 584 872 385 507
------ ------ ------ ------ ------
2,916 4,355 5,596 2,581 3,257
------ ------ ------ ------ ------
SHANGHAI MOBILE:
Usage fees................... (i) 966 1,487 2,507 1,087 1,756
Monthly fees................. (ii) 272 483 690 313 478
Connection fees.............. (iii) 664 455 344 165 122
Other operating revenue...... (iv) 209 262 680 277 430
------ ------ ------ ------ ------
2,111 2,687 4,221 1,842 2,786
------ ------ ------ ------ ------
TIANJIN MOBILE:
Usage fees................... (i) 417 691 955 430 587
Monthly fees................. (ii) 115 195 289 126 190
Connection fees.............. (iii) 148 169 156 78 42
Other operating revenue...... (iv) 89 113 210 79 146
------ ------ ------ ------ ------
769 1,168 1,610 713 965
------ ------ ------ ------ ------
</TABLE>
F-92
<PAGE> 303
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
3 OPERATING REVENUE (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- --------------------------
NOTE 1997 1998 1999 1999 2000
----- ---- ---- ---- ---- ----
RMB
RMB RMB RMB (UNAUDITED) RMB
<S> <C> <C> <C> <C> <C> <C>
HEBEI MOBILE:
Usage fees................... (i) 815 1,469 2,153 962 1,313
Monthly fees................. (ii) 197 402 628 290 399
Connection fees.............. (iii) 394 451 450 252 61
Other operating revenue...... (iv) 65 132 486 162 320
------ ------ ------ ------ ------
1,471 2,454 3,717 1,666 2,093
------ ------ ------ ------ ------
LIAONING MOBILE:
Usage fees................... (i) 1,363 2,128 2,872 1,329 1,623
Monthly fees................. (ii) 293 550 895 406 511
Connection fees.............. (iii) 650 556 281 168 79
Other operating revenue...... (iv) 236 287 480 191 336
------ ------ ------ ------ ------
2,542 3,521 4,528 2,094 2,549
------ ------ ------ ------ ------
SHANDONG MOBILE:
Usage fees................... (i) 1,129 2,059 3,210 1,351 2,069
Monthly fees................. (ii) 350 707 975 441 497
Connection fees.............. (iii) 529 350 135 91 24
Other operating revenue...... (iv) 164 287 508 230 293
------ ------ ------ ------ ------
2,172 3,403 4,828 2,113 2,883
------ ------ ------ ------ ------
GUANGXI MOBILE:
Usage fees................... (i) 584 810 1,228 522 793
Monthly fees................. (ii) 132 238 338 156 217
Connection fees.............. (iii) 232 151 132 66 35
Other operating revenue...... (iv) 48 72 186 74 128
------ ------ ------ ------ ------
996 1,271 1,884 818 1,173
------ ------ ------ ------ ------
Total operating
revenue.......... 12,977 18,859 26,384 11,827 15,706
====== ====== ====== ====== ======
</TABLE>
NOTES:
(i) Usage fees represent standard local usage fee for airtime and, where
applicable, International Direct Dial ("IDD") and Domestic Direct Dial
("DDD") charges receivable from subscribers for the use of the Target's
cellular communication networks and facilities; and fees in respect of
roaming out calls. Roaming out calls are those made by the Target's
subscribers outside the local service areas. See Note 4(ii).
F-93
<PAGE> 304
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
3 OPERATING REVENUE (CONTINUED)
Prior to April 1, 1999, IDD and certain DDD call charges receivable from
subscribers, for which the Target was not entitled to retain any amounts,
were not reflected as revenue except for Liaoning Mobile and Beijing
Mobile. Pursuant to the interconnection agreements, with effect from April
1, 1999, the Target reflects IDD and DDD calls charges receivable from
subscribers and the amounts payable by relevant PTAs to the Target for
inbound calls to the Target's subscribers which originate from the public
switched fixed line network ("PSTN") and other cellular telephone
operators, as revenue. The public switched fixed line network previously
operated by the Directorate General of Telecommunications ("DGT") is now
operated by CTC, a company established to hold and operate the fixed line
telephone and data communication services in the PRC.
(ii) Monthly fees represent fixed amounts charged to subscribers each month for
their entitlement to use the Target's cellular telephone and related
services.
(iii) Connection fees represent amounts charged to subscribers for the initial
connection to the Target's cellular telecommunications network.
(iv) Other operating revenue mainly represents telephone number selection fees,
charges for value added services, interconnection revenue and roaming in
fees. Roaming in fees are received from China Mobile (previously the MII)
in respect of calls made by non-subscribers using the Target's cellular
telecommunications networks. All settlements of inter-provincial roaming
and corresponding interconnection revenues are made through China Mobile
(previously the MII).
F-94
<PAGE> 305
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
4 OPERATING EXPENSES
Operating expenses consist of:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------- -------------------------
NOTE 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ----
RMB
RMB RMB RMB (UNAUDITED) RMB
<S> <C> <C> <C> <C> <C> <C>
BEIJING MOBILE:
Leased lines.................... (i) 210 411 403 190 212
Interconnection................. (ii) 992 1,550 1,536 758 761
Depreciation.................... (iii) 232 401 514 244 262
Personnel....................... (iv) 22 29 38 18 26
Other operating expenses........ (v) 274 629 618 289 375
----- ------ ------ ----- -----
1,730 3,020 3,109 1,499 1,636
----- ------ ------ ----- -----
SHANGHAI MOBILE:
Leased lines.................... (i) 318 453 340 159 173
Interconnection................. (ii) 118 199 948 360 594
Depreciation.................... (iii) 359 563 855 366 404
Personnel....................... (iv) 45 71 111 50 57
Other operating expenses........ (v) 240 463 638 264 338
----- ------ ------ ----- -----
1,080 1,749 2,892 1,199 1,566
----- ------ ------ ----- -----
TIANJIN MOBILE:
Leased lines.................... (i) 124 183 166 93 73
Interconnection................. (ii) 115 166 308 127 179
Depreciation.................... (iii) 85 199 315 159 152
Personnel....................... (iv) 28 31 33 15 16
Other operating expenses........ (v) 219 395 399 178 223
----- ------ ------ ----- -----
571 974 1,221 572 643
----- ------ ------ ----- -----
HEBEI MOBILE:
Leased lines.................... (i) 309 578 493 254 207
Interconnection................. (ii) 78 119 589 231 325
Depreciation.................... (iii) 159 283 562 244 377
Personnel....................... (iv) 50 54 92 38 60
Other operating expenses........ (v) 301 508 770 356 461
----- ------ ------ ----- -----
897 1,542 2,506 1,123 1,430
----- ------ ------ ----- -----
LIAONING MOBILE:
Leased lines.................... (i) 414 729 657 373 381
Interconnection................. (ii) 386 421 575 262 348
Depreciation.................... (iii) 490 680 1,086 514 643
Personnel....................... (iv) 25 87 92 38 69
Other operating expenses........ (v) 268 271 756 284 488
----- ------ ------ ----- -----
1,583 2,188 3,166 1,471 1,929
----- ------ ------ ----- -----
</TABLE>
F-95
<PAGE> 306
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
4 OPERATING EXPENSES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------- -------------------------
NOTE 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ----
RMB
RMB RMB RMB (UNAUDITED) RMB
<S> <C> <C> <C> <C> <C> <C>
SHANDONG MOBILE:
Leased lines.................... (i) 548 975 886 506 353
Interconnection................. (ii) 128 239 632 243 365
Depreciation.................... (iii) 307 632 937 404 507
Personnel....................... (iv) 81 115 137 54 75
Other operating expenses........ (v) 491 789 777 376 541
----- ------ ------ ----- -----
1,555 2,750 3,369 1,583 1,841
----- ------ ------ ----- -----
GUANGXI MOBILE:
Leased lines.................... (i) 268 434 364 226 133
Interconnection................. (ii) 33 59 279 101 177
Depreciation.................... (iii) 190 315 524 235 307
Personnel....................... (iv) 25 28 43 19 23
Other operating expenses........ (v) 261 349 391 155 271
----- ------ ------ ----- -----
777 1,185 1,601 736 911
----- ------ ------ ----- -----
Total operating expenses........ 8,193 13,408 17,864 8,183 9,956
===== ====== ====== ===== =====
</TABLE>
NOTES:
(i) Leased line charges represent expenses paid for the use of leased lines
between the main switches, base transceiver stations, base station
controllers, base stations, and fixed line network connectors. With effect
from April 1, 1999, the Target also leased inter-provincial transmission
lines between the mobile main switching centers with each of the Target's
and China Mobile's mobile switching centers in other provinces in the PRC.
(ii) Interconnection charges represent amounts paid for the use of the fixed
line network for facilitating the completion of calls that originate from
the Target's cellular telecommunications networks. Prior to April 1, 1999,
Interconnection charges payable to the relevant PTAs were not reflected as
interconnection charges of the Target except for Beijing Mobile and
Liaoning Mobile. Pursuant to the interconnection agreements, Beijing
Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile,
Shandong Mobile and Guangxi Mobile recorded the amounts payable to PTAs
for calls which interconnect with the fixed line network or other cellular
telephone operators as interconnection charges with effect from April 1,
1999. Also included in the amounts are charges in respect of the Target's
subscribers roaming outside the service areas of Beijing Mobile, Shanghai
Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and
Guangxi Mobile. See Note 3(i).
(iii) Personnel expenses represent staff salaries, bonuses and medical benefits,
provision for staff welfare expenses and contributions to the staff
retirement scheme.
F-96
<PAGE> 307
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
4 OPERATING EXPENSES (CONTINUED)
(iv) Other operating expenses consist of:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------- -------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB
RMB RMB RMB (UNAUDITED) RMB
<S> <C> <C> <C> <C> <C>
Selling and promotion............... 302 613 1,381 467 1,007
Maintenance......................... 343 468 498 207 354
Provision for doubtful accounts
(Note 9).......................... 469 1,021 971 556 434
Operating lease charges............. 212 280 395 176 250
Other expenses (Note (a))........... 728 1,022 1,104 496 652
----- ----- ----- ----- -----
2,054 3,404 4,349 1,902 2,697
===== ===== ===== ===== =====
</TABLE>
These items are further analyzed as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------- -------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB
RMB RMB RMB (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BEIJING MOBILE:
Selling and promotion....................... 87 157 237 109 134
Maintenance................................. 37 49 57 31 71
Provision for doubtful accounts............. 85 322 165 71 93
Operating lease charges..................... 21 36 58 29 24
Other expenses (Note (a))................... 44 65 101 49 53
----- ----- ----- ----- -----
274 629 618 289 375
----- ----- ----- ----- -----
SHANGHAI MOBILE:
Selling and promotion....................... 67 117 211 61 141
Maintenance................................. 17 40 42 20 24
Provision for doubtful accounts............. 30 120 179 94 75
Operating lease charges..................... 41 52 62 29 35
Other expenses (Note (a))................... 85 134 144 60 63
----- ----- ----- ----- -----
240 463 638 264 338
----- ----- ----- ----- -----
TIANJIN MOBILE:
Selling and promotion....................... 16 63 119 29 49
Maintenance................................. 11 29 26 12 12
Provision for doubtful accounts............. 38 80 89 62 39
Operating lease charges..................... 77 81 84 42 45
Other expenses (Note (a))................... 77 142 81 33 78
----- ----- ----- ----- -----
219 395 399 178 223
----- ----- ----- ----- -----
</TABLE>
F-97
<PAGE> 308
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
4 OPERATING EXPENSES (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------- -------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB
RMB RMB RMB (UNAUDITED)
<S> <C> <C> <C> <C> <C>
HEBEI MOBILE:
Selling and promotion....................... 29 56 214 57 235
Maintenance................................. 32 38 60 23 37
Provision for doubtful accounts............. 92 160 178 131 34
Operating lease charges..................... 33 55 79 30 50
Other expenses (Note (a))................... 115 199 239 115 105
----- ----- ----- ----- -----
301 508 770 356 461
----- ----- ----- ----- -----
LIAONING MOBILE:
Selling and promotion....................... 14 44 306 101 177
Maintenance................................. 44 25 84 13 72
Provision for doubtful accounts............. 64 65 111 82 80
Operating lease charges..................... 25 35 56 23 30
Other expenses (Note (a))................... 121 102 199 65 129
----- ----- ----- ----- -----
268 271 756 284 488
----- ----- ----- ----- -----
SHANDONG MOBILE:
Selling and promotion....................... 63 139 206 89 161
Maintenance................................. 137 183 130 65 76
Provision for doubtful accounts............. 110 215 181 88 86
Operating lease charges..................... 10 16 49 20 60
Other expenses (Note (a))................... 171 236 211 114 158
----- ----- ----- ----- -----
491 789 777 376 541
----- ----- ----- ----- -----
GUANGXI MOBILE:
Selling and promotion....................... 26 37 88 21 110
Maintenance................................. 65 104 99 43 62
Provision for doubtful accounts............. 50 59 68 28 27
Operating lease charges..................... 5 5 7 3 6
Other expenses (Note (a))................... 115 144 129 60 66
----- ----- ----- ----- -----
261 349 391 155 271
----- ----- ----- ----- -----
2,054 3,404 4,349 1,902 2,697
===== ===== ===== ===== =====
</TABLE>
(a) Other expenses consist of offices expenses, utilities charges, travelling
expenses, entertainment expenses, spectrum charges, insurance expenses,
consumables and supplies, debt collection fees and other miscellaneous
expenses.
F-98
<PAGE> 309
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
5 WRITE-DOWN AND WRITE-OFF OF TACS NETWORK EQUIPMENT
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------- ------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB
RMB RMB RMB (UNAUDITED) RMB
<S> <C> <C> <C> <C> <C>
Write-down of TACS network equipment (a)................... -- -- 4,482 -- --
Write-off of TACS network equipment (b).................... -- -- 26 -- --
-- -- ----- -- ---
-- -- 4,508 -- --
== == ===== == ===
</TABLE>
TACS represents Total Assess Communication System, a European standard for
analog mobile telephone transmissions in the 800 and 900 MHz frequency bands.
(a) In light of the gradual opening of the telecommunications market in the
PRC and the rapid change of digital technology, the Target has reviewed
the carrying value of all TACS network and related equipment in 1999.
Based on the estimated recoverable value of these assets, a write-down
of RMB 4,482 has been made for the year ended December 31, 1999.
(b) This represents the write-off of certain TACS network equipment which
has been removed from service.
6 OTHER INCOME/(EXPENSES)
Other income/(expenses) primarily consists of gross margin from sales of
cellular telephone handsets and SIM cards.
7 NON-OPERATING INCOME, NET
Non-operating income consists of:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------ ------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB
RMB RMB RMB (UNAUDITED) RMB
<S> <C> <C> <C> <C> <C>
Interest income................................... 11 9 36 13 39
Exchange loss..................................... (1) (1) (1) (1) (1)
Loss on sale of fixed assets...................... (1) (8) (13) (9) (51)
Penalty income on overdue accounts................ 79 79 70 31 56
Others............................................ (11) (11) 31 23 9
--- --- --- -- ---
Total non-operating income.............. 77 68 123 57 52
=== === === == ===
</TABLE>
8 INCOME TAX
Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning
Mobile, Shandong Mobile and Guangxi Mobile are subject to the statutory income
tax rate of
F-99
<PAGE> 310
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
8 INCOME TAX (CONTINUED)
33% for each of the years ended December 31, 1997, 1998 and 1999 and for each of
the six months ended June 30, 1999 and 2000.
Income tax in the combined statements of income represents:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB
RMB RMB RMB (UNAUDITED) RMB
<S> <C> <C> <C> <C> <C>
Provision for PRC income tax................... 329 645 1,252 601 1,001
Deferred tax (assets)/liabilities (Note 14).... (13) (5) (428) (6) 1
--- --- ----- --- -----
316 640 824 595 1,002
=== === ===== === =====
</TABLE>
The provision for income tax differs from the amount computed by applying
the PRC statutory income tax rate of 33% to profit before tax for the following
reasons:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
---------------------- -------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB
RMB RMB RMB (UNAUDITED) RMB
<S> <C> <C> <C> <C> <C>
Expected PRC taxation at statutory tax
rates.................................... 1,535 1,724 1,158 1,140 1,801
Non-taxable items
-- Connection fees....................... (1,081) (922) (697) (376) (181)
-- Surcharge............................. (89) (169) (262) (113) (129)
-- Others................................ -- -- (6) -- (1)
Non-deductible expenses.................... 3 8 16 11 3
Non-recognition of deferred taxes
-- Non-recognition of net operating
losses................................ 36 81 7 8 27
-- Generation of timing difference....... (84) (73) 835 (72) (506)
-- Reversal of timing difference......... (4) (9) (223) (1) (45)
Others..................................... -- -- (4) (2) 33
------ ----- ----- ----- -----
Income tax................................. 316 640 824 595 1,002
====== ===== ===== ===== =====
</TABLE>
Connection fee revenue and certain surcharge revenue of the Target will be
taxable at the income tax rate of 33% when Beijing Mobile, Shanghai Mobile,
Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi
Mobile are registered as wholly foreign-owned enterprises.
F-100
<PAGE> 311
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
9 ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------- --------
1998 1999 2000
---- ---- ----
RMB RMB RMB
<S> <C> <C> <C>
Accounts receivable........................................ 4,001 4,713 5,146
Less: Allowance for doubtful accounts...................... (1,734) (2,028) (2,323)
------ ------ ------
2,267 2,685 2,823
====== ====== ======
</TABLE>
Allowance for doubtful accounts is analyzed as follows:
<TABLE>
<CAPTION>
RMB
---
<S> <C>
At January 1, 1997.......................................... 281
Provision for the year...................................... 469
Written-off................................................. (11)
-----
At December 31, 1997........................................ 739
Provision for the year...................................... 1,021
Written-off................................................. (26)
-----
At December 31, 1998........................................ 1,734
Provision for the year...................................... 971
Written-off................................................. (677)
-----
At December 31, 1999........................................ 2,028
Provision for the period.................................... 434
Written-off................................................. (139)
-----
At June 30, 2000............................................ 2,323
=====
</TABLE>
10 AMOUNTS DUE FROM/TO ULTIMATE HOLDING COMPANY
Amounts due from ultimate holding company are unsecured, non-interest
bearing, repayable on demand and arose in the ordinary course of business. See
Note 21.
11 AMOUNTS DUE FROM/TO RELATED PARTIES AND CTC
Amounts due from/to related parties and CTC are unsecured, non-interest
bearing, repayable on demand and arose in the ordinary course of business. As of
June 30, 2000, balances of amounts due from/to CTC were separately disclosed
from amounts due from/to related parties. See Note 21.
F-101
<PAGE> 312
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
12 FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------- --------
1998 1999 2000
---- ---- ----
RMB RMB RMB
<S> <C> <C> <C>
Land use rights and buildings............................. 1,329 1,914 3,515
Telecommunication transceivers, switching centers and
other network equipment................................. 28,695 42,742 32,951
Office equipment, furniture and fixtures and others....... 692 956 786
------ ------- ------
30,716 45,612 37,252
Less: Accumulated depreciation............................ (6,647) (15,613) --
------ ------- ------
24,069 29,999 37,252
====== ======= ======
</TABLE>
All of the Target's buildings are located outside Hong Kong.
In connection with the Acquisition, the fixed assets of the Target as of
June 30, 2000 were valued by China Assets Appraisal Corporation Ltd. ("CAAC") on
a depreciated replacement cost basis. The value of fixed assets of the Target
has been determined at RMB 37,252. The surplus on revaluation of approximately
RMB 4,823 has been incorporated in the financial statements of the Target as of
June 30, 2000.
The Target's land and buildings were also valued separately by Chesterton
Petty Limited as of June 30, 2000, independent qualified valuers in Hong Kong.
The value of such report has been determined at approximately the same amount as
the CAAC report.
Other than revaluations carried out in compliance with relevant PRC rules
and regulations, the Target has no plan to revalue its fixed assets on a regular
basis.
The effect of the above revaluation is to increase annual depreciation
charges by approximately RMB 814 for future years commencing in 2001.
The historical cost net book value of the fixed assets in the Target's
financial statements as of June 30, 2000 and the revalued basis of these fixed
assets are as follows:
<TABLE>
<CAPTION>
REVALUED
NET BOOK VALUE AMOUNT
-------------- --------
RMB RMB
<S> <C> <C>
Land use rights and buildings............................... 2,197 3,515
Telecommunication transceivers, switching centers and other
network equipment......................................... 29,468 32,951
Office equipment, furniture and fixtures and others......... 764 786
------ ------
32,429 37,252
====== ======
</TABLE>
F-102
<PAGE> 313
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
12 FIXED ASSETS (CONTINUED)
The Target is obligated under certain capital leases for telecommunication
transceivers, switching centers and other network equipment. The gross amount of
equipment and related accumulated depreciation recorded under capital leases are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------- --------
1998 1999 2000
---- ---- ----
RMB RMB RMB
<S> <C> <C> <C>
Telecommunication transceivers, switching centers and other
network equipment......................................... 4,986 8,473 7,507
Less: accumulated depreciation.............................. (521) (1,469) --
----- ------ -----
4,465 7,004 7,507
===== ====== =====
</TABLE>
13 INVESTMENT SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1998 1999 2000
---- ---- ----
RMB RMB RMB
<S> <C> <C> <C>
Unlisted equity securities in the PRC, at cost.............. 51 88 35
== == ==
</TABLE>
14 DEFERRED TAX ASSETS
Movements on deferred tax assets comprise:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1998 1999 2000
---- ---- ----
RMB RMB RMB
<S> <C> <C> <C>
Balance at beginning of year/period......................... 19 24 452
Transferred from combined statements of income (Note 8)..... 5 428 (1)
--- --- ---
Balance at end of year/period............................... 24 452 451
=== === ===
</TABLE>
Deferred tax assets of the Target provided for are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1998 1999 2000
---- ---- ----
RMB RMB RMB
<S> <C> <C> <C>
Provision for obsolete inventories.......................... 24 22 21
Write-down and write-off of TACS network equipment.......... -- 430 430
--- --- ---
24 452 451
=== === ===
</TABLE>
F-103
<PAGE> 314
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
14 DEFERRED TAX ASSETS (CONTINUED)
Deferred tax assets and liabilities not provided for consist of the
following components:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------- --------
1998 1999 2000
---- ---- ----
RMB RMB RMB
<S> <C> <C> <C>
Deferred tax assets:
Provision for doubtful accounts.......................... 576 675 777
Write-down and write-off of TACS network equipment....... -- 1,049 --
Tax losses carried forward............................... 38 45 --
---- ------ ---
614 1,769 777
Deferred tax liabilities:
Fixed assets basis differences........................... (802) (1,338) --
---- ------ ---
Net potential deferred tax (liabilities)/assets.......... (188) 431 777
==== ====== ===
</TABLE>
As described in Note 12, in connection with the Acquisition, the fixed
assets of Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile,
Liaoning Mobile, Shandong Mobile and Guangxi Mobile have been revalued at June
30, 2000. As a result of such valuation, the fixed assets basis differences that
gave rise to the potential deferred tax liabilities were eliminated (RMB 1,809
in total as of June 30, 2000). Additionally, the tax losses carried forward were
eliminated (RMB 72 as of June 30, 2000).
15 BANK AND OTHER LOANS
SHORT-TERM
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------- --------
1998 1999 2000
---- ---- ----
RMB RMB RMB
<S> <C> <C> <C>
Bank loans............................................... 2,372 3,769 1,938
Loans from related parties............................... 72 -- --
----- ----- -----
2,444 3,769 1,938
Current portion of long-term bank and other loans........ 983 1,059 1,789
----- ----- -----
3,427 4,828 3,727
===== ===== =====
</TABLE>
Loans from related parties as of December 31, 1998 bore interest at various
rates between 5.85% to 7.62% with maturities in 1999.
F-104
<PAGE> 315
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
15 BANK AND OTHER LOANS (CONTINUED)
As of June 30, 2000, certain short-term loans were guaranteed by the
following parties:
<TABLE>
<CAPTION>
RMB
---
<S> <C>
Tianjin PTA................................................. 15
Hebei PTA................................................... 93
Liaoning PTA................................................ 400
Shandong PTA................................................ 13
---
521
===
</TABLE>
The Target's borrowings under short-term loans are used primarily to
finance construction projects and generally consist of unsecured loans and are
repayable in full on respective due dates with interest rates ranging from 5.87%
to 12.10% at December 31, 1998, from 5.58% to 12.06% at December 31, 1999 and
from 5.56% to 9.00% at June 30, 2000. The Target's weighted average interest
rate on short-term loans was 7.28%, 6.34% and 6.05% at December 31, 1998 and
1999 and June 30, 2000, respectively.
LONG-TERM
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------- --------
INTEREST RATE AND FINAL MATURITY 1998 1999 2000
-------------------------------- ---- ---- ----
RMB RMB RMB
<S> <C> <C> <C> <C>
RENMINBI DENOMINATED BANK LOANS:
For construction of Fixed interest rates ranging from 5.88%
telecommunications to 11.7% per annum with maturities
network through 2004 3,394 6,561 6,978
For construction of Floating interest rates of 5.94% per
telecommunications annum as of June 30, 2000 with
network maturities through 2003 400 2,265 2,515
US DOLLAR DENOMINATED BANK LOANS:
For construction of Fixed interest rates ranging from 5.25%
telecommunications to 9.90% per annum with maturities
network through 2005 486 412 372
For construction of Floating interest rates ranging from
telecommunications 5.94% to LIBOR plus 1.5% per annum as
network of December 31, 1999 with maturities
through 2000 227 99 --
RENMINBI DENOMINATED LOANS FROM RELATED PARTIES:
For construction of Fixed interest rates ranging from 7.11%
telecommunications to 9.36% per annum with maturities
network through 2000 318 6 6
</TABLE>
F-105
<PAGE> 316
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
15 BANK AND OTHER LOANS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------- --------
INTEREST RATE AND FINAL MATURITY 1998 1999 2000
-------------------------------- ---- ---- ----
RMB RMB RMB
<S> <C> <C> <C> <C>
US DOLLAR DENOMINATED OTHER LOANS:
For construction of Majority at fixed interest rate of
telecommunications 6.36% per annum as of June 30, 2000
network with maturities through 2000 220 86 43
For construction of Floating interest rate of LIBOR plus
telecommunications 1.5% per annum as of June 30, 2000
network with maturities through 2002 265 189 152
RENMINBI DENOMINATED BANK LOANS:
For general purpose Fixed interest rates ranging from 5.94%
to 8.53% per annum with maturities
through 2001 27 298 573
----- ------ ------
Total long-term loans 5,337 9,916 10,639
Less: current portion (983) (1,059) (1,789)
----- ------ ------
4,354 8,857 8,850
===== ====== ======
</TABLE>
At June 30, 2000, LIBOR was approximately 6.65%.
As of June 30, 2000, certain long-term loans were guaranteed by the
following parties:
<TABLE>
<CAPTION>
RMB
---
<S> <C>
Beijing TA.................................................. 250
Hebei PTA................................................... 1,102
Liaoning PTA................................................ 3,186
Shandong PTA................................................ 320
-----
4,858
=====
</TABLE>
The aggregate maturities of long-term bank and other loans subsequent to
June 30, 2000 are as follows:
<TABLE>
<CAPTION>
RMB
---
<S> <C>
2000 -- Subsequent to June 30............................... 819
2001........................................................ 2,834
2002........................................................ 3,968
2003........................................................ 1,695
2004........................................................ 1,262
2005........................................................ 61
------
10,639
======
</TABLE>
F-106
<PAGE> 317
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
15 BANK AND OTHER LOANS (CONTINUED)
Interest expense, net of the amounts capitalized, is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31, JUNE 30,
------------------ ------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB
RMB RMB RMB (UNAUDITED) RMB
<S> <C> <C> <C> <C> <C>
Interest incurred............................. 192 298 751 322 402
Interest element of capital lease............. 73 140 262 129 108
Interest capitalized.......................... (142) (257) (375) (210) (114)
---- ---- ---- ---- ----
Interest expense.............................. 123 181 638 241 396
==== ==== ==== ==== ====
</TABLE>
16 OBLIGATIONS UNDER CAPITAL LEASE
(i) During the relevant period, the Target entered into certain capital
lease agreements to finance the purchase of telecommunications
equipment. The leases are denominated in United States dollars and
Renminbi and the lease term is expiring through 2003. The legal title
of the equipment will be transferred to the Target when all
outstanding lease payments are paid.
(ii) The following is a schedule by years of future minimum lease payments
under capital lease together with the present value of the net
minimum lease payments as of June 30, 2000:
<TABLE>
<CAPTION>
RMB
---
<S> <C>
2000 -- Subsequent to June 30............................... 841
2001........................................................ 1,718
2002........................................................ 1,001
2003........................................................ 206
------
Total minimum lease payments...................... 3,766
Less: Amount representing interest.......................... (216)
------
Present value of net minimum lease payments................. 3,550
Less: Obligations under capital lease -- current portion.... (1,613)
------
1,937
======
</TABLE>
(iii) As of June 30, 2000, certain capital lease is guaranteed by the
following parties:
<TABLE>
<CAPTION>
RMB
---
<S> <C>
Hebei PTA................................................... 59
Liaoning PTA................................................ 308
---
367
===
</TABLE>
F-107
<PAGE> 318
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
17 ACCRUED EXPENSES AND OTHER PAYABLES
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------- --------
1998 1999 2000
---- ---- --------
RMB RMB RMB
<S> <C> <C> <C>
Other payables........................................... 815 1,546 2,183
Accrued salaries, wages and benefits..................... 107 280 222
Accrued expenses......................................... 58 66 62
Capital lease interest payable........................... 18 58 41
--- ----- --------
998 1,950 2,508
=== ===== ========
</TABLE>
18 DEFERRED REVENUE
Deferred revenue includes the prepaid services fee received from
subscribers which is recognized as income when the cellular telephone services
are rendered upon actual usage by subscribers.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1998 1999 2000
---- ---- --------
RMB RMB RMB
<S> <C> <C> <C>
Additions during the year/period.......................... -- -- 540
Recognized in the combined statements of income........... -- -- (286)
-- -- ----
Balance at end of year/period............................. -- -- 254
== == ====
</TABLE>
19 COMMITMENTS AND CONTINGENCIES
(A) OPERATING LEASES
Future minimum lease payments as of June 30, 2000 under non-cancellable
operating leases having initial or remaining lease terms of more than one year
are as follows:
<TABLE>
<CAPTION>
RMB
---
<S> <C>
2000 -- Subsequent to June 30............................... 1,543
2001........................................................ 1,343
2002........................................................ 220
2003........................................................ 188
2004........................................................ 135
2005........................................................ 99
Thereafter.................................................. 143
-----
3,671
=====
</TABLE>
(B) CAPITAL COMMITMENTS
As of June 30, 2000, the Target had capital commitments as follows:
<TABLE>
<CAPTION>
RMB
---
<S> <C>
Authorized and contracted for............................... 4,454
Authorized but not contracted for........................... 3,278
-----
7,732
=====
</TABLE>
F-108
<PAGE> 319
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
19 COMMITMENTS AND CONTINGENCIES (CONTINUED)
(C) CONTINGENT LIABILITIES
As of June 30, 2000, guarantees given to banks in respect of banking
facilities granted to related parties and third parties were RMB 13 and RMB 378,
respectively.
20 EMPLOYEE AND RETIREMENT BENEFITS
The employees of the Target participate in defined benefit retirement plans
managed by the local government authorities whereby the Target is required to
contribute to the schemes at fixed rate of the employees' salary costs. The
Target has no obligation for the payment of retirement and other post-retirement
benefits of staff other than the contributions described above. Expenses
incurred by the Target in connection with the retirement scheme were RMB 36, RMB
45 and RMB 63 respectively for three years ended December 31, 1997, 1998 and
1999 and RMB 33 (unaudited) and RMB 36 for the six months ended June 30, 1999
and 2000 respectively.
Pursuant to PRC regulation, the Target is required to provide staff
quarters to eligible employees and their immediate families. The Target has
established separate employee housing reform schemes in order to comply with the
regulation at the provincial level. Under such schemes, the Target is required
to either purchase or build housing which is to be sold or rented to eligible
employees. Prior to the Acquisition, housing was provided directly by the
relevant PTAs except Liaoning Mobile. The cost of the subsidy incurred by
Liaoning Mobile for each of the three years ended December 31, 1999 and the six
months ended June 30, 1999 and 2000 were RMB NIL, RMB 40, RMB 21, RMB 8
(unaudited) and RMB 14, respectively. The previous costs incurred by the
relevant PTAs for each of the three years ended December 31, 1999 and the six
months ended June 30, 1999 and 2000 which have not been charged to the Target
are RMB 41, RMB 301, RMB 170, RMB 92 (unaudited) and RMB 84 respectively.
Subsequent to June 30, 2000, the housing program previously in place for the
Target has been terminated.
21 RELATED PARTY TRANSACTIONS
The operations of the Target are subject to extensive regulation by the PRC
government. The MII, pursuant to the authority delegated to it by the PRC State
Council, directly or indirectly regulates licensing, competition,
interconnection, technology and equipment standards, and other aspects of the
PRC telecommunications industry. The MII, together with other PRC government
entities, also regulates tariff policy, foreign investment and spectrum
allocation and spectrum usage fees. Specifically, the Target's tariffs are
subject to the regulation by various Government authorities, including the State
Development Planning Commission ("SDPC"), the MII, the relevant PTAs and the
relevant provincial price regulatory authorities. Connection fees charged by the
Target are based on a guidance price range set jointly by the MII and SDPC, with
each actual fee determined by the Target in consultation with the relevant
provincial price regulatory
F-109
<PAGE> 320
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
21 RELATED PARTY TRANSACTIONS (CONTINUED)
authorities. In general, the Target's base usage charges and domestic roaming
usage charges are set by the MII and SDPC. International roaming charges are
determined pursuant to agreements formed between the Directorate General of
Telecommunications or China Mobile and other cellular operators. In May 2000,
the Chinese government substantially completed the restructuring of the
telecommunications industry in the PRC. As a result, the MII ceased to have
controlling interests in China Mobile and CTC, and no longer exercises control
over the telecommunications operations in the PRC, but continues in its capacity
as the industry regulator. CTC is a state-owned company established to hold and
operate the fixed line telephone and data communications services in the PRC.
Accordingly, the MII, the PTAs, CTC or entities under the control of the CTC
since its formation are considered to be no longer related parties of the Target
and the transactions entered into with these entities are therefore not related
party transactions.
The principal recurring and non-recurring related party transactions, which
were entered into by the Target with the MII, the PTAs, CTC or entities under
the control of the CTC prior to May 2000 and with China Mobile or its
subsidiaries, are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------- -------------------
NOTE 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ----
RMB
RMB RMB RMB (UNAUDITED) RMB
<S> <C> <C> <C> <C> <C> <C>
RECURRING TRANSACTIONS
Interconnection revenue.............. (i) 318 488 1,003 371 649
Interconnection charges.............. (ii) 1,247 1,781 3,340 1,390 1,521
Leased line charges.................. (iii) 2,191 3,763 3,309 1,801 1,194
Roaming revenue...................... (iv) 703 963 1,625 707 906
Roaming expenses..................... (v) 603 972 1,527 692 874
Spectrum fees........................ (vi) 8 10 14 7 8
Operating lease charges.............. (vii) 65 95 155 65 76
Sales commission..................... (viii) 52 2 14 5 6
Debt collection service fees......... (viii) 4 6 11 4 7
Billing service fees................. (viii) 5 9 14 6 4
Equipment maintenance service fees... (ix) -- -- 2 1 3
Rental charges of synchronized clock
ports.............................. (x) -- -- 2 1 2
Purchase of mobile phones and
equipment.......................... 183 304 -- -- --
Interest paid/payable................ (xi) -- 3 5 2 --
NON-RECURRING TRANSACTIONS
Capital contributions................ (xii) 2,246 218 604 1,251 278
Distributions........................ (xiii) 457 1,292 849 785 1,297
</TABLE>
F-110
<PAGE> 321
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
21 RELATED PARTY TRANSACTIONS (CONTINUED)
---------------
NOTES:
(i) Interconnection revenue represents the amounts received or receivable
from the relevant PTAs or China Mobile in respect of long distance calls
made by non-subscribers and from the relevant PTAs in respect of calls
which interconnect with the fixed line networks in Beijing, Shanghai,
Tianjin, Hebei, Liaoning, Shandong and Guangxi. Prior to April 1, 1999,
interconnection charges receivable from the relevant PTAs were not
reflected as interconnection revenue by the Target except for Beijing
Mobile and Liaoning Mobile. Pursuant to the interconnection agreements,
with effect from April 1, 1999, the Target records the amounts receivable
from the relevant PTAs for inbound calls which originate from the fixed
line network and other cellular telephone operators and terminate on the
Target's networks as interconnection revenue.
(ii) Interconnection charges represent the amounts paid or payable to the
relevant PTAs or China Mobile in respect of long distance calls made by
the Target's subscribers roaming outside their respective registered
municipalities, provinces or autonomous region and to the relevant PTAs
in respect of calls which interconnect with the fixed line networks or
other cellular telephone operators in Beijing, Shanghai, Tianjin, Hebei,
Liaoning, Shandong and Guangxi. Prior to April 1, 1999, Interconnection
charges payable to the relevant PTAs were not reflected as
interconnection charges of the Target except for Beijing Mobile and
Liaoning Mobile. Pursuant to the interconnection agreements, with effect
from April 1, 1999, the Target records the amounts payable by the Target
for outbound calls from the subscribers which terminate on the fixed line
network and other cellular telephone operators as interconnection
charges.
(iii) Leased line charges represent expenses paid or payable to the relevant
PTAs or China Mobile for the use of leased lines between the base
transceiver stations, base station controllers, base stations, fixed line
network connectors, long distance network connectors and main switches.
(iv) A cellular telephone user using roaming services is charged at the
respective roaming usage rate for roaming in calls, in addition to
applicable long distance charges. Roaming revenue represents domestic and
international roaming in usage charges from non-subscribers received or
receivable from the relevant domestic and international cellular telephone
operators through China Mobile (previously the MII). With effect from
April 1, 1999, all settlements of inter-provincial roaming and
corresponding interconnection revenues are made through China Mobile
(previously the MII).
(v) A cellular telephone user using roaming services is charged at the
respective roaming usage rate for roaming out calls, in addition to
applicable long distance charges. Roaming expenses represent the amount of
domestic and international roaming out charges received or receivable from
subscribers which is to be remitted to the relevant domestic and
international cellular telephone operators for their share of the roaming
revenue through China Mobile. With effect from April 1, 1999, all
settlements of inter-provincial roaming and corresponding interconnection
charges are made through China Mobile (previously the MII).
F-111
<PAGE> 322
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
21 RELATED PARTY TRANSACTIONS (CONTINUED)
(vi) Spectrum fees represent the spectrum usage fees paid or payable to MII
through China Mobile for the usage of the frequency bands allocated to the
Target.
(vii) Operating lease charges represent the rental paid or payable to the
relevant PTAs for operating leases in respect of land and buildings and
others.
(viii) Sales commission represents the amounts paid or payable to the relevant
PTAs for their marketing of the cellular services in the relevant
provinces/cities.
Debt collection service fees represent the amounts paid or payable to the
relevant PTAs for their provision of debt collection services to the
Target.
Billing service fees represent the amounts paid or payable to the relevant
PTAs for their provision of the billing services to the Target.
(ix) Equipment maintenance service fees represent the amount paid or payable to
the relevant PTAs for their provision of the maintenance services to the
Target.
(x) Rental charges of synchronized clock ports represent expenses paid or
payable to the relevant PTAs for leasing of synchronized clock ports by
the Target.
(xi) Interest paid/payable represents the interest incurred on loans borrowed
from the relevant PTAs.
(xii) Capital contributions represent capital contributions in the form of cash
received from the relevant PTAs or China Mobile.
(xiii) Distributions represent cash payments by the Target to the relevant PTAs
or China Mobile.
22 FOREIGN CURRENCY EXCHANGE
The Renminbi is not freely convertible into foreign currencies. All foreign
exchange transactions involving Renminbi must take place through the People's
Bank of China or other institutions authorized to buy and sell foreign exchange
or at a swap center.
Based on the current regulations, the Target will be able to purchase
foreign exchange for settlement of "current account transactions" (as defined in
the applicable regulations), including payment of dividends without the approval
of the State Administration of Foreign Exchange ("SAFE"). However, there can be
no assurance that the current authorization for Foreign Investment Enterprises
to retain their foreign exchange to satisfy foreign exchange liabilities or to
pay dividends in the future will not be limited or eliminated or that these
companies will be able to obtain sufficient foreign exchange to pay dividends or
satisfy their foreign exchange requirements. Foreign exchange transactions under
the capital account continue to be subject to limitations and require approvals
of the State Administration for Foreign Exchange, which could affect the ability
of these companies to obtain foreign exchange through debt or equity financing,
including by means of loans or capital contribution.
23 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP
The Target's accounting policies conform with HK GAAP which differ in
certain material respects from US GAAP. The significant differences relate
principally to the
F-112
<PAGE> 323
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
23 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
following items and the adjustments considered necessary to present the net
profit and owner's equity in accordance with US GAAP are shown in the tables set
out below.
(A) CAPITALIZATION OF INTEREST
Under HK GAAP, the Target capitalizes interest costs to the extent that the
related borrowings are directly attributable to the acquisition or construction
of an asset which necessarily takes a substantial period of time to get ready
for its intended use.
Under US GAAP, interest costs capitalized are determined based on specific
borrowings related to the acquisition or construction of an asset, if an
entity's financing plans associate a specific new borrowing with a qualifying
asset. If average accumulated expenditures for the asset exceed the amounts of
specific new borrowings associated with an asset, additional interest costs
capitalized are based on the weighted average interest rate applicable to other
borrowings of the entity.
(B) REVALUATION AND IMPAIRMENT OF FIXED ASSETS
In connection with the Acquisition, the fixed assets of the Target were
revalued as of June 30, 2000. These fixed asset revaluations result in an
increase in owner's equity with respect to the increase in carrying amount of
certain fixed assets above their historical cost bases.
The carrying amount of fixed assets under HK GAAP is reviewed periodically
in order to assess whether the recoverable amount has declined below the
carrying amount. When such a decline occurs, the carrying amount is reduced to
the recoverable amount based on the expected future cash flows generated by the
fixed assets, discounted to their present values. A subsequent increase in the
recoverable amount is written back to the statement of income when circumstances
and events that led to the write-down or write-off cease to exist.
Under US GAAP, fixed assets are stated at their historical cost, less
accumulated depreciation. However, as a result of the tax deductibility of the
revaluation reserve, a deferred tax asset related to the reversal of the
revaluation reserve is created under US GAAP with a corresponding increase in
owner's equity.
Under US GAAP, fixed assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amounts of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
F-113
<PAGE> 324
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
23 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
(C) EMPLOYEE HOUSING SCHEME
The Target provides staff quarters under its employee housing schemes at
below market prices. Under HK GAAP, employee housing scheme costs borne by the
corresponding PTA and not charged to the Target are not recognized by the
Target.
Under US GAAP, employee housing scheme costs borne by the corresponding PTA
and not charged to the Target are reflected as an expense in the combined
statements of income and a corresponding capital contribution.
(D) DEFERRED TAXATION
Under HK GAAP, the Target provides for deferred tax liabilities only to the
extent that there is a reasonable probability that such deferred tax liabilities
will become payable in the foreseeable future. Deferred tax assets are not
recognized unless their realization is assured beyond reasonable doubt.
Under US GAAP, provisions are made for all deferred taxes as they arise,
except a valuation allowance is provided against deferred tax assets when
realization of such amounts does not meet the criterion of "more likely than
not".
(E) REVENUE RECOGNITION
Until June 30, 1999, under both HK GAAP and US GAAP, connection fee and
telephone number selection fees revenue were recognized as received. Under US
GAAP, effective July 1, 1999, net connection fees and telephone number selection
fees received in excess of direct costs are deferred and recognized over the
estimated customer usage period for the related service.
(F) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and the type
of hedge transaction. SFAS 133, as amended, is effective for fiscal years
beginning after June 15, 2000. The Target has not yet assessed the impact of the
adoption of SFAS 133.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements ("SAB 101")." SAB 101 provides
guidance on the
F-114
<PAGE> 325
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
23 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
recognition, presentation and disclosure of revenue in financial statements. On
June 26, 2000, the SEC issued Staff Accounting Bulletin No. 101B "Amendment:
Revenue Recognition in Financial Statements". SAB 101B allows companies to defer
the reporting of a change in accounting principle, as required by SAB 101, until
the fourth quarter of the current fiscal year. Management continues to analyze
this bulletin and has not determined the impact of adoption.
The effect on net profit of significant differences between HK GAAP and US
GAAP is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------- --------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB
RMB RMB RMB (UNAUDITED) RMB
<S> <C> <C> <C> <C> <C>
Net profit under HK GAAP................ 4,336 4,583 2,682 2,859 4,454
Adjustments:
Capitalized interest.................. 40 26 89 18 17
Employee housing scheme............... (41) (301) (170) (92) (84)
Deferred taxation..................... (52) (1) 619 (65) (525)
Amortization of net connection fees
and telephone number selection
fees............................... -- -- (297) -- (71)
Deferred tax effects of US GAAP
adjustments........................ (13) (9) (164) (6) (57)
----- ------ ------ ----- -----
Net profit under US GAAP................ 4,270 4,298 2,759 2,714 3,734
===== ====== ====== ===== =====
</TABLE>
The effect on owner's equity of significant differences between HK GAAP and
US GAAP is as follows:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF JUNE 30,
---------------- --------------
1998 1999 2000
---- ---- ----
RMB RMB RMB
<S> <C> <C> <C>
Owner's equity under HK GAAP.............................. 18,593 21,030 29,317
Adjustments:
Capitalized interest.................................... 85 174 191
Revaluation of fixed assets -- Cost..................... -- -- (4,823)
Deferred tax adjustments on revaluations................ -- -- 1,592
Employee housing scheme................................. (415) (585) (669)
Deemed capital contribution for employee housing
scheme............................................... 415 585 669
Recognition of deferred taxes........................... (188) 431 783
Amortization of net connection fees and telephone number
selection fees....................................... -- (297) (368)
Deferred tax effects of US GAAP adjustments............. (28) (192) (249)
------ ------ ------
Owner's equity under US GAAP.............................. 18,462 21,146 26,443
====== ====== ======
</TABLE>
F-115
<PAGE> 326
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
23 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
The following are condensed combined balance sheets of the Target as of
December 31, 1998 and 1999 and June 30, 2000, and the related condensed combined
statements of income and cash flows for each of the years in the three-year
period ended December 31, 1999, and each of the six-month periods ended June 30,
1999 and 2000 and total owner's equity for each of the years in the three-year
period ended December 31, 1999 and of the six-month period ended June 30, 2000
restated to reflect the impact of the differences between HK GAAP and US GAAP.
CONDENSED COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------------- ---------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
RMB
RMB RMB RMB (UNAUDITED) RMB
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE
Usage fees........................... 6,815 11,278 16,285 7,224 10,218
Monthly fees......................... 1,609 3,051 4,564 2,066 2,780
Connection fees...................... 3,277 2,793 1,408 1,139 317
Other operating revenue.............. 1,276 1,737 3,406 1,398 2,152
------ ------- ------- ------ ------
TOTAL OPERATING REVENUE.............. 12,977 18,859 25,663 11,827 15,467
------ ------- ------- ------ ------
OPERATING EXPENSES
Leased lines......................... (2,191) (3,763) (3,309) (1,801) (1,532)
Interconnection...................... (1,850) (2,753) (4,867) (2,082) (2,749)
Depreciation......................... (1,824) (3,076) (4,800) (2,169) (2,658)
Personnel............................ (317) (716) (716) (324) (410)
Other operating expense.............. (2,054) (3,404) (3,925) (1,902) (2,529)
Write-down and write-off of TACS
network equipment.................. -- -- (4,508) -- --
------ ------- ------- ------ ------
TOTAL OPERATING EXPENSES............. (8,236) (13,712) (22,125) (8,278) (9,878)
------ ------- ------- ------ ------
OPERATING PROFIT..................... 4,741 5,147 3,538 3,549 5,589
OTHER INCOME/(EXPENSES).............. (86) (115) 9 (6) 50
NON-OPERATING INCOME, NET............ 77 68 123 57 52
FINANCE COSTS........................ (81) (152) (542) (220) (373)
------ ------- ------- ------ ------
PROFIT BEFORE TAX.................... 4,651 4,948 3,128 3,380 5,318
INCOME TAX........................... (381) (650) (369) (666) (1,584)
------ ------- ------- ------ ------
NET PROFIT........................... 4,270 4,298 2,759 2,714 3,734
====== ======= ======= ====== ======
</TABLE>
F-116
<PAGE> 327
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
23 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------- -----------
1998 1999 2000
---- ---- ----
RMB RMB RMB
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents....................... 557 4,641 6,467
Deposits with banks............................. -- 25 75
Accounts receivable............................. 2,267 2,685 2,823
Other receivables............................... 338 406 275
Inventories..................................... 305 152 143
Prepaid expenses and other current assets....... 288 451 519
Amounts due from ultimate holding company....... 7 450 --
Amounts due from related parties................ 315 1,302 862
------ ------ ------
TOTAL CURRENT ASSETS.................... 4,077 10,112 11,164
FIXED ASSETS...................................... 24,154 30,173 32,620
CONSTRUCTION IN PROGRESS.......................... 7,570 5,060 4,856
INVESTMENT SECURITIES............................. 51 88 35
DEFERRED TAX ASSETS............................... 638 2,221 2,820
------ ------ ------
TOTAL ASSETS...................................... 36,490 47,654 51,495
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
LIABILITIES AND OWNER'S EQUITY
Current liabilities
Accounts payable................................... 2,785 3,272 2,788
Bank and other loans............................... 3,427 4,828 3,727
Obligations under capital lease -- current
portion......................................... 1,565 1,685 1,613
Amounts due to ultimate holding company............ -- -- 64
Amounts due to related parties..................... 513 1,947 2,729
Accrued expenses and other payables................ 998 1,950 2,479
------ ------ ------
TOTAL CURRENT LIABILITIES.................. 9,288 13,682 13,400
</TABLE>
F-117
<PAGE> 328
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
23 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
BANK AND OTHER LOANS................................. 4,354 8,857 8,850
OBLIGATIONS UNDER CAPITAL LEASE -- LONG-TERM
PORTION............................................ 3,556 2,142 1,937
DEFERRED TAX LIABILITIES............................. 830 1,530 243
DEFERRED REVENUE..................................... -- 297 622
------ ------ ------
TOTAL LIABILITIES.................................... 18,028 26,508 25,052
OWNER'S EQUITY....................................... 18,462 21,146 26,443
------ ------ ------
TOTAL LIABILITIES AND OWNER'S EQUITY................. 36,490 47,654 51,495
====== ====== ======
</TABLE>
CONDENSED COMBINED STATEMENTS OF TOTAL OWNER'S EQUITY FOR THE FOLLOWING
PERIODS:
<TABLE>
<CAPTION>
RMB
---
<S> <C>
Owner's equity at January 1, 1997........................... 8,837
Net profit for the year ended December 31, 1997............. 4,270
Distribution to owner....................................... (457)
Contribution by owner....................................... 2,246
Deemed capital contribution for employee housing scheme..... 41
------
Owner's equity at December 31, 1997......................... 14,937
Net profit for the year ended December 31, 1998............. 4,298
Distribution to owner....................................... (1,292)
Contribution by owner....................................... 218
Deemed capital contribution for employee housing scheme..... 301
------
Owner's equity at December 31, 1998......................... 18,462
Net profit for the year ended December 31, 1999............. 2,759
Distribution to owner....................................... (849)
Contribution by owner....................................... 604
Deemed capital contribution for employee housing scheme..... 170
------
Owner's equity at December 31, 1999......................... 21,146
Net profit for the six months ended June 30, 2000........... 3,734
Distribution to owner....................................... (1,297)
Contribution by owner....................................... 278
Deemed capital contribution for employee housing scheme..... 84
Tax effect of revaluation................................... 2,469
Others...................................................... 29
------
Owner's equity at June 30, 2000............................. 26,443
======
</TABLE>
F-118
<PAGE> 329
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
23 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
The Target applies Hong Kong Statement of Standard Accounting Practice No.
15 "Cash Flow Statements" ("HK SSAP 15"). Its objectives and principles are
similar to those set out in Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows" ("SFAS 95"). The principal difference between the
standards relates to classification. Under HK SSAP 15, the Target presents its
cash flows for (a) operating activities; (b) returns on investments and
servicing of finance; (c) taxation; (d) investing activities; and (e) financing
activities. Cash flows from taxation and returns on investments and servicing of
finance shown herein would be included as operating activities under SFAS 95,
with the exception of distributions, which under SFAS 95 would be classified as
financing activities. Summarized cash flow data by operating, investing and
financing activities in accordance with SFAS 95 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- --------------------
1997 1998 1999 1999 2000
RMB RMB RMB RMB RMB
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash inflow/(outflow) from:
Operating activities.......... 5,265 6,730 11,637 5,348 9,539
Investing activities.......... (6,352) (9,864) (11,401) (5,179) (4,614)
Financing activities.......... 903 3,297 3,848 2,608 (3,099)
------ ------ ------- ------ ------
(Decrease)/increase in cash and
cash equivalents.............. (184) 163 4,084 2,777 1,826
Cash and cash equivalents at
beginning of year/period...... 578 394 557 557 4,641
------ ------ ------- ------ ------
Cash and cash equivalents at end
of year/period................ 394 557 4,641 3,334 6,467
====== ====== ======= ====== ======
Interest paid (net of amounts
capitalized).................. 48 161 492 195 393
====== ====== ======= ====== ======
Income taxes paid............... 329 645 871 487 799
====== ====== ======= ====== ======
</TABLE>
SIGNIFICANT NON-CASH TRANSACTIONS
The Target incurred payables of RMB 4,181, RMB 7,289 and RMB 3,864 from
equipment suppliers for additions of construction in progress during the years
ended December 31, 1997, 1998 and 1999 respectively.
The Target also acquired equipment of RMB 2,128, RMB 3,818 and RMB 517
under capital lease during the years ended December 31, 1997, 1998 and 1999
respectively.
F-119
<PAGE> 330
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
23 SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP (CONTINUED)
The Target incurred payables of RMB 2,564 (unaudited) and RMB 3,447 from
equipment suppliers for additions of construction in progress during the six
months ended June 30, 1999 and 2000 respectively.
The Target also acquired equipment of RMB 486 (unaudited) and RMB 665 under
capital lease during the six months ended June 30, 1999 and 2000 respectively.
24 ADDITIONAL INFORMATION REQUIRED BY US GAAP
The following additional financial statement disclosures are required under
US GAAP and are presented on a US GAAP basis.
WRITE-DOWN AND WRITE-OFF OF TACS NETWORK EQUIPMENT
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- --------------------
1997 1998 1999 1999 2000
RMB RMB RMB RMB RMB
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Write-down of TACS network
equipment....................... -- -- 4,482 -- --
Write-off of TACS network
equipment....................... -- -- 26 -- --
----- ----- ----- ----- -----
-- -- 4,508 -- --
===== ===== ===== ===== =====
</TABLE>
In light of the gradual opening of the telecommunication market in the PRC
and the rapid change of technology, the Target has re-assessed the
recoverability of the carrying amount of the TACS network equipment which are
held for use at December 31, 1999. The Target determined the existence of
impairment by comparing the carrying amount of these equipment to their future
undiscounted net cash flows expected to be generated over the economic life of
each TACS network in service at December 31, 1999. The Target has recognized an
impairment write-down of RMB 4,482 on these equipment for the year ended
December 31, 1999. Such amount of loss is measured by the amount by which the
carrying amounts of the individual TACS network assets exceed their fair value
determined based on the discounted net cash flow expected to be generated by
each TACS network. Additionally, the Target has written-off RMB 26 of certain
TACS network equipment which have been removed from service at December 31,
1999.
INCOME TAX
Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning
Mobile, Shandong Mobile and Guangxi Mobile are subject to the statutory income
tax rate of 33%.
F-120
<PAGE> 331
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
24 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
INCOME TAX (CONTINUED)
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- --------------------
1997 1998 1999 1999 2000
RMB RMB RMB RMB RMB
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current tax........................ 329 645 1,252 601 1,001
Deferred tax....................... 52 5 (883) 65 583
--- --- ----- --- -----
381 650 369 666 1,584
=== === ===== === =====
</TABLE>
The provision for income tax differs from the amount computed by applying
the PRC statutory income tax rate of 33% to profit before tax for the following
reasons:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ --------------------
1997 1998 1999 1999 2000
RMB RMB RMB RMB RMB
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expected PRC taxation at statutory tax
rates.................................. 1,535 1,633 1,033 1,116 1,755
Non-taxable items
-- Connection fees..................... (1,081) (922) (464) (376) (105)
-- Surcharge........................... (89) (169) (262) (113) (129)
-- Others.............................. -- -- (6) -- (1)
Non-deductible expenses.................. 16 108 72 41 31
Others................................... -- -- (4) (2) 33
------ ----- ----- ----- -----
Income tax............................... 381 650 369 666 1,584
====== ===== ===== ===== =====
</TABLE>
F-121
<PAGE> 332
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
24 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------- --------
1998 1999 2000
---- ---- ----
RMB RMB RMB
<S> <C> <C> <C>
Deferred tax assets:
Provision for obsolete inventories........................ 24 22 21
Provision for doubtful accounts........................... 576 675 777
Revaluation of fixed assets............................... -- -- 1,592
Write-down and write-off of TACS network equipment........ -- 1,479 430
Tax loss carried forward.................................. 38 45 --
---- ------ ------
638 2,221 2,820
==== ====== ======
Deferred tax liabilities:
Fixed assets basis differences............................ (802) (1,338) --
Capitalized interest...................................... (28) (57) (63)
Deferral net connection fees and telephone number
selection fees......................................... -- (135) (180)
---- ------ ------
(830) (1,530) (243)
==== ====== ======
Net deferred tax (liabilities)/assets....................... (192) 691 2,577
==== ====== ======
</TABLE>
FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------- --------
1998 1999 2000
---- ---- ----
RMB RMB RMB
<S> <C> <C> <C>
Land use rights and buildings............................. 1,322 1,907 2,197
Telecommunication transceivers, switching centers and
other network equipment................................. 28,796 42,941 29,659
Office equipment, furniture and fixtures and others....... 692 960 764
------ ------- ------
30,810 45,808 32,620
Less: Accumulated depreciation............................ (6,656) (15,635) --
------ ------- ------
24,154 30,173 32,620
====== ======= ======
</TABLE>
DEFERRED REVENUE
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1998 1999 2000
---- ---- ----
RMB RMB RMB
<S> <C> <C> <C>
Balance at beginning of year/period......................... -- -- 297
Addition during the year/period............................. -- 317 660
Recognized in condensed combined statements of income....... -- (20) (335)
--- --- ----
Balance at end of year/period............................... -- 297 622
=== === ====
</TABLE>
F-122
<PAGE> 333
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
24 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
Deferred revenue comprises:
(i) the unamortized portion of net connection fees and telephone number
selection fees received in excess of direct costs which are recognized
over the estimated subscribers usage period for the related services;
and
(ii) the prepaid services fee received from subscribers which is recognized
as income when the cellular telephone services are rendered upon
actual usage by subscribers.
FAIR VALUE
Financial assets of the Target include cash and cash equivalents, deposits
with banks, accounts receivable, other receivables and due from related parties.
Financial liabilities of the Target include accounts payable, bank and other
loans, other payables and due to related parties. It is not practicable to
estimate the fair value of the amounts due from and due to related parties
without incurring excessive cost.
The following table presents the carrying amounts and fair values of the
Target's bank and other loans as of December 31, 1998 and 1999 and June 30,
2000:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999 JUNE 30, 2000
---------------- ----------------- -----------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- ----- -------- -----
RMB RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C> <C>
Fixed rate bank and other loans... 6,538 6,674 10,147 10,171 9,182 9,173
Variable rate bank and other
loans........................... 1,243 1,243 3,538 3,538 3,395 3,395
----- ----- ------ ------ ------ ------
Total bank and other
loans................. 7,781 7,917 13,685 13,709 12,577 12,568
===== ===== ====== ====== ====== ======
</TABLE>
The fair values of all other financial instruments approximate their
carrying amounts due to the nature or short maturity of these instruments.
F-123
<PAGE> 334
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
24 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------- --------------------------
NOTE 21 1997 1998 1999 1999 2000
------- ----- ----- ----- ----------- -----------
RMB RMB
RMB RMB RMB (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
RECURRING TRANSACTIONS
Interconnection revenue....... (i) 318 488 1,003 371 719
Interconnection charges....... (ii) 1,247 1,781 3,340 1,390 1,875
Leased line charges........... (iii) 2,191 3,763 3,309 1,801 1,532
Roaming revenue............... (iv) 703 963 1,625 707 906
Roaming expenses.............. (v) 603 972 1,527 692 874
Spectrum fees................. (vi) 8 10 14 7 8
Operating lease charges....... (vii) 65 95 155 65 101
Sales commission.............. (viii) 52 2 14 5 9
Debt collection service
fees........................ (viii) 4 6 11 4 9
Billing service fees.......... (viii) 5 9 14 6 6
Equipment maintenance service
fees........................ (ix) -- -- 2 1 4
Rental charges of synchronized
clock ports................. (x) -- -- 2 1 2
Purchase of mobile phones and
equipment................... 183 304 -- -- --
Interest paid/payable......... (xi) -- 3 5 2 --
NON-RECURRING TRANSACTIONS
Capital contributions......... (xii) 2,246 218 604 1,251 278
Distributions................. (xiii) 457 1,292 849 785 1,297
</TABLE>
Description of the nature of the related party transactions are set forth
in Note 21.
SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", established standards for
reporting information about operating segments in financial statements.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance.
The operating segments of the Target are comprised of its cellular
businesses operated within the Beijing, Shanghai, Tianjin, Hebei, Liaoning,
Shandong and Guangxi of the PRC. The operating segments are managed separately
because each operating segment represents a strategic business unit that serves
different markets. All operating segments provide cellular services to
individual customers within their geographic
F-124
<PAGE> 335
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
24 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
market. The Target's operating segments have been aggregated into a single
operating segment as they are expected to exhibit similar future economic
characteristics.
BUSINESS RISKS
The Target conducts its principal operations in the PRC and accordingly is
subject to special considerations and significant risks not typically associated
with investments in equity securities of United States and Western European
companies. These include risks associated with, among others, the political,
economic and legal environment, extensive government regulations and competition
in the cellular telephone industry (see Note 21).
NEW TELECOMMUNICATIONS LAW
In order to provide a uniform regulatory framework for the
telecommunications industry in the PRC, the MII, pursuant to the direction of
the PRC State Council, is currently preparing a draft of the Telecommunications
Law of the PRC (the "Telecommunications Law"). The draft law, when formulated,
will be submitted to the National People's Congress for review and adoption. It
is unclear if and when the Telecommunications Law will be adopted, and the
nature and scope of regulation envisaged by the Telecommunications Law are not
fully known. There can be no assurance that the Telecommunications Law, if
adopted, would not have a material adverse effect on the Target's business,
financial condition and results of operations.
AMOUNT OF SPECTRUM AVAILABILITY
The Target's cellular system's subscriber capacity is limited by the amount
of spectrum available for use by the system. The former State Radio Regulatory
Commission, now a department within the MII is responsible for the overall
allocation of radio frequency spectrum in the PRC. There can be no assurance
that the Target would be granted additional spectrum when and if required, and
any resulting levels of system congestion could result in subscriber
dissatisfaction, decreased system usage by subscribers and increased churn rate.
DEPENDENCE ON THE PSTN AND INTERCONNECTION ARRANGEMENT
The Target's cellular services depend in large part upon access to the
fixed line network. Limitations on the fixed line network would lower local,
long-distance and international call completion rates for the Target's
subscribers. There can be no assurance that increasing usage of the network
would not result in additional strain on the fixed line network switching
capacity, or that the existing quality of the fixed line network will remain
adequate.
F-125
<PAGE> 336
BEIJING MOBILE, SHANGHAI MOBILE, TIANJIN MOBILE, HEBEI MOBILE,
LIAONING MOBILE, SHANDONG MOBILE AND GUANGXI MOBILE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN MILLIONS)
24 ADDITIONAL INFORMATION REQUIRED BY US GAAP (CONTINUED)
In addition, the Target's operating revenues and expenses are affected by
the terms of its interconnection arrangements. A material increase in
interconnection charges payable by the Target could have a material adverse
effect on the Target's results of operations. There can be no assurance that the
commercial terms of future interconnection arrangements will be acceptable to
the Target.
SELF INSURANCE RISK
The Target does not maintain any insurance policies to cover its assets.
INTEREST RATE RISK
The interest rates and terms of repayment of the bank and other loans
payable of the Target are disclosed in Note 15.
FOREIGN CURRENCY RISK
The Target has foreign currency risk as certain loans and cash and cash
equivalents are denominated in foreign currencies, principally US dollars and
Hong Kong dollars. Depreciation or appreciation of the Renminbi against foreign
currencies affects the Target's results of operations.
CREDIT RISK
Substantially all of the Target's cash and cash equivalents are deposited
with PRC financial institutions. The accounts receivable of the Target are
spread among a number of customers.
F-126
<PAGE> 337
CHINA MOBILE (HONG KONG) LIMITED
INTRODUCTION TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The accompanying Unaudited Pro Forma Combined Financial Information has
been prepared giving effect to (i) the proposed acquisition of Beijing Mobile,
Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile
and Guangxi Mobile (the "Target") at consideration of HK$ 256,021 million in the
form of cash and shares, and (ii) the issuance of certain shares and convertible
notes and RMB bank loan borrowings by the Company, the proceeds of which will be
used to finance the cash portion of the acquisition consideration.
PRO FORMA ADJUSTMENTS FOR CERTAIN EVENTS
In connection with the proposed acquisition, the Target's fixed assets were
revalued as of June 30, 2000 and connection fee revenue and certain surcharge
revenue, previously not taxable under PRC regulations, will become subject to
enterprise income tax at a 33% rate when the Targets are registered as wholly
foreign-owned enterprises.
The accompanying Unaudited Pro Forma Combined Statements of Income under HK
GAAP for the year ended December 31, 1999 and for the six months ended June 30,
2000 have been adjusted to give effect to the above as if they had been
consummated on January 1, 1999.
PRO FORMA ADJUSTMENTS FOR THE ACQUISITION AND FINANCINGS
The acquisition of the Target will be accounted for as a purchase under HK
GAAP. In order to finance the acquisition consideration, the Company expects to
complete the following financing transactions:
(a) the issuance of shares to China Mobile Hong Kong (BVI) Limited,
credited as fully paid, as part of the acquisition consideration;
(b) the issuance of shares by the Company pursuant to an international
offering resulting in gross cash proceeds of approximately RMB 54,426
million;
(c) the issuance of convertible notes of the Company resulting in
gross cash proceeds of approximately RMB 4,967 million; and
(d) raising of a total of RMB 12,500 million in bank loans.
The accompanying Unaudited Pro Forma Combined Balance Sheet under HK GAAP
as of June 30, 2000 gives effect to the acquisition and the financing
transactions described above as if they had been consummated on June 30, 2000.
The accompanying Unaudited Pro Forma Combined Statements of Income under HK GAAP
for the year ended December 31, 1999 and for the six-month period ended June 30,
2000 have been further adjusted to give effect to the acquisition and the
financing transactions described above as if they had been consummated on
January 1, 1999.
For US GAAP, as a result of both the Target and the Company being under
common control prior to the acquisition, such acquisition will be considered a
"combination of entities under common control" and accounted for under the "as
if
F-127
<PAGE> 338
CHINA MOBILE (HONG KONG) LIMITED
INTRODUCTION TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION -- (CONTINUED)
pooling-of-interests method", whereby assets and liabilities will be accounted
for at historical cost and the financial statements of the Company and the
Target for periods prior to the combination will be restated on a combined
basis. The cash portion of the purchase consideration paid by the Company will
be treated as an equity transaction at the acquisition date. For the purposes of
complying with Article 11 of Regulation S-X of the U.S. Securities and Exchange
Commission, Unaudited Pro Forma Combined Statements of Income have been prepared
under US GAAP for each of the three years ended December 31, 1999, 1998 and
1997, and for each of the six-month periods ended June 30, 2000 and 1999 to
reflect the combined results as if the combination had been consummated for all
periods. The Unaudited Pro Forma Combined Statements of Income under US GAAP for
the year ended December 31, 1999 and for the six months ended June 30, 2000,
have been further adjusted for the financing transactions, and certain events as
if consummated on January 1, 1999.
In addition, separate Unaudited Pro Forma Combined Statements of Income
under US GAAP for the Target for the year ended December 31, 1999 and for the
six months ended June 30, 2000 have been prepared to give effect to certain
events affecting the Target as if they had been consummated on January 1, 1999.
GENERAL
The Unaudited Pro Forma Combined Financial Information is based upon the
historical combined financial statements of the Target and the consolidated
financial statements of the Company after giving effect to pro forma adjustments
described in the accompanying notes.
The Unaudited Pro Forma Combined Financial Information does not purport to
represent what the results of operations of the Target and the Company would
actually have been if the events described above had in fact occurred at the
beginning of 1999, or any other date, or to project the net profit of the Target
and the Company for any future period. The adjustments are based on currently
available information and certain estimates and assumptions. However, management
believes that the assumptions provide a reasonable basis for presenting the
significant effects of the events as contemplated and that the pro forma
adjustments give effect to those assumptions and are properly applied in the pro
forma financial information. The Unaudited Pro Forma Combined Financial
Information should be read in conjunction with other financial information
included elsewhere in this Prospectus.
F-128
<PAGE> 339
CHINA MOBILE (HONG KONG) LIMITED
UNAUDITED PRO FORMA COMBINED BALANCE SHEET UNDER HK GAAP
AS OF JUNE 30, 2000
(AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA CHINA
CHINA ADJUSTMENTS FOR MOBILE
MOBILE THE ACQUISITION (HK)
TARGET (HK) AND FINANCING PRO FORMA
HISTORICAL HISTORICAL TRANSACTIONS COMBINED
---------- ---------- --------------- ---------
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Cash and cash equivalents................... 6,467 19,767 (4,139)(a) 22,095
Other current assets........................ 4,697 22,509 27,206
Fixed assets................................ 37,252 44,399 81,651
Other assets................................ 5,342 9,949 15,291
------ ------ -------
TOTAL ASSETS.............................. 53,758 96,624 146,243
====== ====== =======
Current liabilities......................... 13,400 22,211 5,000(b) 40,611
Long-term bank and other loans.............. 10,787 2,050 7,500(b) 20,337
Deferred revenue............................ 254 1,583 1,837
Fixed rate notes............................ -- 4,957 4,957
Convertible notes........................... -- -- 4,967(b) 4,967
------ ------ -------
TOTAL LIABILITIES......................... 24,441 30,801 72,709
250,250(c)
(29,317)(d)
SHAREHOLDERS' EQUITY........................ 29,317 65,823 (242,539)(e) 73,534
------ ------ -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY................................. 53,758 96,624 146,243
====== ====== =======
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Balance Sheet and
Statements of Income under HK GAAP.
F-129
<PAGE> 340
CHINA MOBILE (HONG KONG) LIMITED
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME UNDER HK GAAP
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS CHINA
CHINA FOR THE MOBILE
PRO FORMA MOBILE ACQUISITION (HK)
TARGET ADJUSTMENTS FOR TARGET (HK) AND FINANCING PRO FORMA
HISTORICAL CERTAIN EVENTS PRO FORMA HISTORICAL TRANSACTIONS COMBINED
---------- --------------- --------- ---------- ------------- ----------
RMB RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE
Usage fees.................. 10,218 10,218 20,143 30,361
Monthly fees................ 2,780 2,780 4,250 7,030
Connection fees............. 548 548 1,532 2,080
Other operating revenue..... 2,160 2,160 2,972 5,132
------ ------ ------ ----------
Total operating revenue....... 15,706 15,706 28,897 44,603
------ ------ ------ ----------
OPERATING EXPENSES
Leased lines................ 1,532 1,532 2,714 4,246
Interconnection............. 2,749 2,749 3,604 6,353
Depreciation................ 2,652 305(f) 2,957 4,165 7,122
Personnel................... 326 326 1,476 1,802
Other operating expenses.... 2,697 2,697 4,616 7,313
------ ------ ------ ----------
Total operating expenses...... 9,956 10,261 16,575 26,836
------ ------ ------ ----------
OPERATING PROFIT.............. 5,750 5,445 12,322 17,767
OTHER INCOME.................. 50 50 330 380
NON-OPERATING
INCOME/(EXPENSES)........... 52 52 (12) 40
INTEREST INCOME............... -- -- 437 (125)(i) 312
FINANCE COSTS................. (396) (396) (335) (421)(j) (1,152)
------ ------ ------ ----------
PROFIT BEFORE TAX............. 5,456 5,151 12,742 17,347
101(g)
INCOME TAX.................... (1,002) (310)(h) (1,211) (4,018) (5,229)
------ ------ ------ ----------
NET PROFIT.................... 4,454 3,940 8,724 12,118
====== ====== ====== ==========
BASIC AND DILUTED NET PROFIT
PER PRO FORMA SHARE......... 0.68
==========
PRO FORMA SHARES UTILIZED IN
BASIC CALCULATION
(THOUSANDS)................. 17,952,672
==========
PRO FORMA SHARES UTILIZED IN
DILUTED CALCULATION
(THOUSANDS)................. 17,962,739
==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Balance Sheet and
Statements of Income under HK GAAP.
F-130
<PAGE> 341
CHINA MOBILE (HONG KONG) LIMITED
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME UNDER HK GAAP
FOR THE YEAR ENDED DECEMBER 31, 1999
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS CHINA
PRO FORMA FOR THE MOBILE
ADJUSTMENTS CHINA ACQUISITION (HK)
TARGET FOR TARGET MOBILE (HK) AND FINANCING PRO FORMA
HISTORICAL CERTAIN EVENTS PRO FORMA HISTORICAL TRANSACTIONS COMBINED
---------- -------------- --------- ----------- ------------- ----------
RMB RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE
Usage fees................. 16,285 16,285 25,812 42,097
Monthly fees............... 4,564 4,564 4,981 9,545
Connection fees............ 2,113 2,113 4,319 6,432
Other operating revenue.... 3,422 3,422 3,511 6,933
------ ------ ------ ----------
Total operating revenue...... 26,384 26,384 38,623 65,007
------ ------ ------ ----------
OPERATING EXPENSES
Leased lines............... 3,309 3,309 3,723 7,032
Interconnection............ 4,867 4,867 6,453 11,320
Depreciation............... 4,793 518(f) 5,311 7,411 12,722
Personnel.................. 546 546 2,256 2,802
Other operating expenses... 4,349 4,349 5,140 9,489
------ ------ ------ ----------
Total operating expenses..... 17,864 18,382 24,983 43,365
------ ------ ------ ----------
OPERATING PROFIT............. 8,520 8,002 13,640 21,642
WRITE-DOWN AND WRITE-OFF OF
TACS NETWORK EQUIPMENT..... (4,508) (4,508) (8,242) (12,750)
OTHER INCOME................. 9 9 552 561
NON-OPERATING INCOME......... 123 123 70 193
INTEREST INCOME.............. -- -- 767 (207)(i) 560
FINANCE COSTS................ (638) (638) (343) (841)(j) (1,822)
------ ------ ------ ----------
PROFIT BEFORE TAX............ 3,506 2,988 6,444 8,384
171(g)
INCOME TAX................... (824) (959)(h) (1,612) (1,647) (3,259)
------ ------ ------ ----------
NET PROFIT................... 2,682 1,376 4,797 5,125
====== ====== ====== ==========
BASIC AND DILUTED NET PROFIT
PER PRO FORMA SHARE........ 0.31
==========
PRO FORMA SHARES UTILIZED IN
BASIC CALCULATION
(THOUSANDS)................ 16,315,469
==========
PRO FORMA SHARES UTILIZED IN
DILUTED CALCULATION
(THOUSANDS)................ 16,318,744
==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Balance Sheet and
Statements of Income under HK GAAP.
F-131
<PAGE> 342
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AND STATEMENTS OF INCOME UNDER HK GAAP
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
DESCRIPTION OF PRO FORMA ADJUSTMENTS UNDER HK GAAP
(a) To record the cash portion of the purchase consideration for the Target
to be taken from the internal resources of the Company as at June 30, 2000.
(b) To record the liability arising from the issuance of convertible notes
and raising of the RMB bank loans for financing the Acquisition of the Target as
at June 30, 2000.
(c) To record the additional share capital arising from the issuance of
shares pursuant to an international offering and to China Mobile Hong Kong (BVI)
for financing the Acquisition of the Target as at June 30, 2000.
(d) To eliminate the owners' equity of the Target as of June 30, 2000.
(e) To record goodwill as a result of the acquisition of the Target as if
the acquisition had taken place on June 30, 2000. The goodwill has been
eliminated against reserves of the Company. Goodwill represents the difference
between the purchase consideration of HK$ 256,021 million and the estimated fair
value of the underlying net assets of the Target as of June 30, 2000.
(f) The Target's fixed assets were revalued as of June 30, 2000, resulting
in a revaluation surplus recorded on such date. The adjustment records the
additional depreciation resulting from the revaluation of the fixed assets as if
the revaluation surplus had been recorded on January 1, 1999.
(g) The adjustment records the tax effect of the pro forma adjustment
described in Note (f) above.
(h) Previously, the connection fee revenue and certain surcharge revenue of
the Target were not subject to enterprise income tax and, accordingly, no tax
expense was included in the determination of the historical results of
operations for the year ended December 31, 1999 and for the six-month period
ended June 30, 2000. Upon the completion of the registration of the Target as
wholly foreign-owned enterprises, in accordance with the Ministry of Finance
ruling, such revenue will be taxable at an enterprise income tax rate of 33%.
The adjustment records the applicable additional tax expense as if such revenue
was taxable since January 1, 1999.
(i) To adjust for the interest income for the cash portion of the purchase
consideration to be taken from the internal resources of the Company as if the
transaction had taken place on January 1, 1999. This interest income is not
subject to income tax.
(j) To record the interest expense of the convertible notes and the RMB
bank loans at interest rates of 3.8125% per annum (being the mid point of a
range from 2.875% to 4.750%, which range is shown for illustrative purpose only,
and is determined from recent market transactions.) and 5.346% per annum for the
RMB 7,500 million bank loan and 5.022% per annum for the RMB 5,000 million bank
loan, respectively, as if the issuance of convertible notes and the RMB bank
loan borrowings were
F-132
<PAGE> 343
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AND STATEMENTS OF INCOME UNDER HK GAAP -- (CONTINUED)
consummated on January 1, 1999. The interest expense of the convertible notes
and the RMB bank loan are not deductible for income tax purposes. Had the
interest rate on the convertible notes varied by 1/8%, the effect on the net
profit would have been approximately RMB 6 million and RMB 3 million for the
year ended December 31, 1999 and the six months ended June 30, 2000,
respectively.
SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP
The effect of US GAAP on the Company's pro forma combined shareholders'
equity as of June 30, 2000 under HK GAAP, is as follows:
<TABLE>
<CAPTION>
CHINA
MOBILE (HK)
PRO FORMA
COMBINED
-----------
RMB
<S> <C>
PRO FORMA COMBINED SHAREHOLDERS' EQUITY UNDER HK GAAP....... 73,534
US GAAP ADJUSTMENTS:
Historical adjustments (i):
Capitalized interest........................................ 486
Revaluation of fixed assets
-- cost................................................... (11,409)
-- accumulated depreciation and other..................... 5,626
Deferred tax adjustments on revaluations.................... 1,858
Employee housing scheme..................................... (1,257)
Deemed capital contribution for employee housing scheme..... 1,194
Interconnection, roaming and leased line agreements......... (586)
Recognition of deferred taxes............................... 1,355
Amortization of net connection fees and telephone number
selection fees............................................ (2,157)
Deferred tax effects of US GAAP adjustments................. 313
-------
PRO FORMA COMBINED SHAREHOLDERS' EQUITY UNDER US GAAP....... 68,957
=======
</TABLE>
---------------
(i) To record the historical US GAAP adjustments described in Note 23 to the
Combined Financial Statements of the Target and Note 28 to the Consolidated
Financial Statements of the Company.
F-133
<PAGE> 344
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AND STATEMENTS OF INCOME UNDER HK GAAP -- (CONTINUED)
SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP
The effect of US GAAP on the Company's pro forma combined net profit under
HK GAAP for the year ended December 31, 1999 and the six-month period ended June
30, 2000, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1999 JUNE 30, 2000
----------------- ----------------
RMB RMB
<S> <C> <C>
PRO FORMA COMBINED NET PROFIT UNDER HK GAAP................. 5,125 12,118
US GAAP ADJUSTMENTS:
Historical adjustments(i):
Effect of combination of entities under common control.... 2,204 --
Capitalized interest...................................... 96 11
Revaluation of fixed assets............................... 3,781 120
Employee housing scheme................................... (227) (61)
Interconnection, roaming and leased line agreements....... -- (586)
Deferred taxation......................................... 352 (355)
Share option scheme....................................... (22) (28)
Amortization of net connection fees and telephone number
selection fees......................................... (1,511) (646)
Deferred tax effects of US GAAP adjustments............... (1,159) 259
---------- ----------
8,639 10,832
Further US GAAP adjustments:
Revaluation of fixed assets (ii).......................... 518 305
Deferred tax effects of US GAAP adjustments (iii)......... (171) (101)
---------- ----------
PRO FORMA COMBINED NET PROFIT UNDER US GAAP................. 8,986 11,036
========== ==========
PRO FORMA BASIC AND DILUTED NET PROFIT PER SHARE............ 0.55 0.65
========== ==========
PRO FORMA SHARES UTILIZED IN BASIC CALCULATION
(THOUSANDS)............................................... 16,487,245 17,029,151
========== ==========
PRO FORMA SHARES UTILIZED IN DILUTED CALCULATION
(THOUSANDS)............................................... 16,490,520 17,039,218
========== ==========
</TABLE>
---------------
(i) To record the historical US GAAP adjustments described in Note 23 to the
Combined Financial Statements of the Target and Note 28 to the Consolidated
Financial Statements of the Company.
(ii) The adjustment records the reversal of additional depreciation resulting
from revaluation of the Target's fixed assets described in Note (f) above.
(iii) The adjustment records the tax effect of the pro forma adjustment
described in Note (ii) above.
F-134
<PAGE> 345
CHINA MOBILE (HONG KONG) LIMITED
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME UNDER US GAAP
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA CHINA
ADJUSTMENTS TARGET MOBILE
TARGET FOR CERTAIN US GAAP TARGET (HK) PRO FORMA PRO FORMA US GAAP
HISTORICAL EVENTS PRO FORMA HISTORICAL HISTORICAL COMBINED ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ---------- ---------- ----------- ----------
RMB RMB RMB RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE
Usage fees.......... 10,218 10,218 10,218 20,143 30,361 30,361
Monthly fees........ 2,780 2,780 2,780 4,250 7,030 7,030
Connection fees..... 317 317 317 511 828 828
Other operating
revenue........... 2,152 2,152 2,152 2,930 5,082 5,082
------ ------ ------ ------ ---------- ----------
Total operating
revenue........... 15,467 15,467 15,467 27,834 43,301 43,301
------ ------ ------ ------ ---------- ----------
OPERATING EXPENSES
Leased lines.......... 1,532 1,532 1,532 2,543 4,075 4,075
Interconnection....... 2,749 2,749 2,749 4,355 7,104 7,104
Depreciation.......... 2,658 2,658 2,658 4,078 6,736 6,736
Personnel............. 410 410 410 1,482 1,892 1,892
Other operating
expenses............ 2,529 2,529 2,529 4,148 6,677 6,677
Write-down and write-
off of TACS network
equipment........... -- -- -- -- -- --
------ ------ ------ ------ ---------- ----------
Total operating
expenses............ 9,878 9,878 9,878 16,606 26,484 26,484
------ ------ ------ ------ ---------- ----------
OPERATING PROFIT...... 5,589 5,589 5,589 11,228 16,817 16,817
OTHER INCOME.......... 50 50 50 330 380 380
NON-OPERATING
INCOME.............. 52 52 52 2 54 54
INTEREST INCOME....... -- -- -- 437 437 (125) (b) 312
FINANCE COSTS......... (373) (373) (373) (307) (680) (421) (c) (1,101)
------ ------ ------ ------ ---------- ----------
PROFIT BEFORE TAX..... 5,318 5,318 5,318 11,690 17,008 16,462
INCOME TAX............ (1,584) (310)(a) (1,894) (1,584) (3,532) (5,116) (310) (a) (5,426)
------ ------ ------ ------ ---------- ----------
NET PROFIT............ 3,734 3,424 3,734 8,158 11,892 11,036
====== ====== ====== ====== ========== ==========
BASIC AND DILUTED NET
PROFIT PER PRO FORMA
SHARE............... 0.70 0.65
========== ==========
PRO FORMA SHARES
UTILIZED IN BASIC
CALCULATION
(THOUSANDS)......... 17,029,151 17,029,151
========== ==========
PRO FORMA SHARES
UTILIZED IN DILUTED
CALCULATION
(THOUSANDS)......... 17,039,218 17,039,218
========== ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Statements of Income
under US GAAP.
F-135
<PAGE> 346
CHINA MOBILE (HONG KONG) LIMITED
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME UNDER US GAAP
FOR THE YEAR ENDED DECEMBER 31, 1999
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA CHINA
ADJUSTMENTS TARGET MOBILE
TARGET FOR CERTAIN US GAAP TARGET (HK) PRO FORMA PRO FORMA US GAAP
HISTORICAL EVENTS PRO FORMA HISTORICAL HISTORICAL COMBINED ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ---------- ---------- ----------- ----------
RMB RMB RMB RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE
Usage fees.......... 16,285 16,285 16,285 31,441 47,726 47,726
Monthly fees........ 4,564 4,564 4,564 6,371 10,935 10,935
Connection fees..... 1,408 1,408 1,408 3,071 4,479 4,479
Other operating
revenue........... 3,406 3,406 3,406 4,057 7,463 7,463
------ ------ ------ ------ ---------- ----------
Total operating
revenue........... 25,663 25,663 25,663 44,940 70,603 70,603
------ ------ ------ ------ ---------- ----------
OPERATING EXPENSES
Leased lines.......... 3,309 3,309 3,309 4,690 7,999 7,999
Interconnection....... 4,867 4,867 4,867 7,683 12,550 12,550
Depreciation.......... 4,800 4,800 4,800 8,152 12,952 12,952
Personnel............. 716 716 716 2,555 3,271 3,271
Other operating
expenses............ 3,925 3,925 3,925 5,971 9,896 9,896
Write-down and write-
off of TACS network
equipment........... 4,508 4,508 4,508 5,267 9,775 9,775
------ ------ ------ ------ ---------- ----------
Total operating
expenses............ 22,125 22,125 22,125 34,318 56,443 56,443
------ ------ ------ ------ ---------- ----------
OPERATING PROFIT...... 3,538 3,538 3,538 10,622 14,160 14,160
OTHER INCOME.......... 9 9 9 619 628 628
NON-OPERATING
INCOME/(EXPENSES)... 123 123 123 (136) (13) (13)
INTEREST INCOME....... -- -- -- 773 773 (207)(b) 566
FINANCE COSTS......... (542) (542) (542) (396) (938) (841)(c) (1,779)
------ ------ ------ ------ ---------- ----------
PROFIT BEFORE TAX..... 3,128 3,128 3,128 11,482 14,610 13,562
INCOME TAX............ (369) (959)(a) (1,328) (369) (3,248) (3,617) (959)(a) (4,576)
------ ------ ------ ------ ---------- ----------
NET PROFIT............ 2,759 1,800 2,759 8,234 10,993 8,986
====== ====== ====== ====== ========== ==========
BASIC AND DILUTED NET
PROFIT PER PRO FORMA
SHARE............... 0.67 0.55
========== ==========
PRO FORMA SHARES
UTILIZED IN BASIC
CALCULATION
(THOUSANDS)......... 16,487,245 16,487,245
========== ==========
PRO FORMA SHARES
UTILIZED IN DILUTED
CALCULATION
(THOUSANDS)......... 16,490,520 16,490,520
========== ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Statements of Income
under US GAAP.
F-136
<PAGE> 347
CHINA MOBILE (HONG KONG) LIMITED
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME UNDER US GAAP
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CHINA
MOBILE
TARGET (HK) PRO FORMA
HISTORICAL HISTORICAL COMBINED
---------- ---------- ---------
RMB RMB RMB
<S> <C> <C> <C>
OPERATING REVENUE
Usage fees.......................................... 7,224 14,173 21,397
Monthly fees........................................ 2,066 2,898 4,964
Connection fees..................................... 1,139 2,715 3,854
Other operating revenue............................. 1,398 1,697 3,095
---------- ------ ----------
Total operating revenue.......................... 11,827 21,483 33,310
---------- ------ ----------
OPERATING EXPENSES
Leased lines........................................ 1,801 2,561 4,362
Interconnection..................................... 2,082 3,426 5,508
Depreciation........................................ 2,169 3,694 5,863
Personnel........................................... 324 994 1,318
Other operating expenses............................ 1,902 2,873 4,775
Write-down and write-off of TACS network
equipment........................................ -- 322 322
---------- ------ ----------
Total operating expenses......................... 8,278 13,870 22,148
---------- ------ ----------
OPERATING PROFIT...................................... 3,549 7,613 11,162
OTHER INCOME/(EXPENSES)............................... (6) 293 287
NON-OPERATING INCOME, NET............................. 57 21 78
INTEREST INCOME....................................... -- 293 293
FINANCE COSTS......................................... (220) (176) (396)
---------- ------ ----------
PROFIT BEFORE TAX..................................... 3,380 8,044 11,424
INCOME TAX............................................ (666) (2,460) (3,126)
---------- ------ ----------
NET PROFIT............................................ 2,714 5,584 8,298
========== ====== ==========
BASIC AND DILUTED NET PROFIT PER PRO FORMA SHARE...... 0.51
==========
PRO FORMA SHARES UTILIZED IN BASIC CALCULATION
(THOUSANDS)......................................... 16,378,921
==========
PRO FORMA SHARES UTILIZED IN DILUTED CALCULATION
(THOUSANDS)......................................... 16,381,483
==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Statements of Income
under US GAAP.
F-137
<PAGE> 348
CHINA MOBILE (HONG KONG) LIMITED
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME UNDER US GAAP
FOR THE YEAR ENDED DECEMBER 31, 1998
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CHINA
MOBILE
TARGET (HK) PRO FORMA
HISTORICAL HISTORICAL COMBINED
---------- ---------- ---------
RMB RMB RMB
<S> <C> <C> <C>
OPERATING REVENUE
Usage fees.......................................... 11,278 22,169 33,447
Monthly fees........................................ 3,051 5,755 8,806
Connection fees..................................... 2,793 4,753 7,546
Other operating revenue............................. 1,737 2,839 4,576
---------- ------ ----------
Total operating revenue.......................... 18,859 35,516 54,375
---------- ------ ----------
OPERATING EXPENSES
Leased lines........................................ 3,763 5,165 8,928
Interconnection..................................... 2,753 5,511 8,264
Depreciation........................................ 3,076 5,463 8,539
Personnel........................................... 716 1,844 2,560
Other operating expenses............................ 3,404 5,642 9,046
Write-down and write-off of TACS network
equipment........................................ -- 136 136
---------- ------ ----------
Total operating expenses......................... 13,712 23,761 37,473
---------- ------ ----------
OPERATING PROFIT...................................... 5,147 11,755 16,902
OTHER INCOME/(EXPENSES)............................... (115) 321 206
NON-OPERATING INCOME/(EXPENSES)....................... 68 (1) 67
INTEREST INCOME....................................... -- 1,615 1,615
FINANCE COSTS......................................... (152) (142) (294)
---------- ------ ----------
PROFIT BEFORE TAX AND MINORITY INTERESTS.............. 4,948 13,548 18,496
INCOME TAX............................................ (650) (3,262) (3,912)
---------- ------ ----------
PROFIT BEFORE MINORITY INTERESTS...................... 4,298 10,286 14,584
MINORITY INTERESTS.................................... -- (1) (1)
---------- ------ ----------
NET PROFIT............................................ 4,298 10,285 14,583
========== ====== ==========
BASIC AND DILUTED NET PROFIT PER PRO FORMA SHARE...... 0.89
==========
PRO FORMA SHARES UTILIZED IN BASIC CALCULATION
(THOUSANDS)......................................... 16,376,824
==========
PRO FORMA SHARES UTILIZED IN DILUTED CALCULATION
(THOUSANDS)......................................... 16,378,557
==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Statements of Income
under US GAAP.
F-138
<PAGE> 349
CHINA MOBILE (HONG KONG) LIMITED
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME UNDER US GAAP
FOR THE YEAR ENDED DECEMBER 31, 1997
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CHINA
MOBILE
TARGET (HK) PRO FORMA
HISTORICAL HISTORICAL COMBINED
---------- ---------- ----------
RMB RMB RMB
<S> <C> <C> <C>
OPERATING REVENUE
Usage fees............................................. 6,815 13,379 20,194
Monthly fees........................................... 1,609 3,707 5,316
Connection fees........................................ 3,277 5,509 8,786
Other operating revenue................................ 1,276 1,258 2,534
------ ------ ----------
Total operating revenue............................. 12,977 23,853 36,830
------ ------ ----------
OPERATING EXPENSES
Leased lines........................................... 2,191 4,518 6,709
Interconnection........................................ 1,850 1,589 3,439
Depreciation........................................... 1,824 3,783 5,607
Personnel.............................................. 317 1,089 1,406
Other operating expenses............................... 2,054 3,888 5,942
Write-down and write-off of TACS network equipment..... -- -- --
------ ------ ----------
Total operating expenses............................ 8,236 14,867 23,103
------ ------ ----------
OPERATING PROFIT......................................... 4,741 8,986 13,727
OTHER INCOME/(EXPENSES).................................. (86) 52 (34)
NON-OPERATING INCOME/(EXPENSES).......................... 77 (12) 65
INTEREST INCOME.......................................... -- 664 664
FINANCE COSTS............................................ (81) (119) (200)
------ ------ ----------
PROFIT BEFORE TAX AND MINORITY INTERESTS................. 4,651 9,571 14,222
INCOME TAX............................................... (381) (1,416) (1,797)
------ ------ ----------
PROFIT BEFORE MINORITY INTERESTS......................... 4,270 8,155 12,425
MINORITY INTERESTS....................................... -- (7) (7)
------ ------ ----------
NET PROFIT............................................... 4,270 8,148 12,418
====== ====== ==========
BASIC AND DILUTED NET PROFIT PER PRO FORMA SHARE......... 0.88
==========
PRO FORMA SHARES UTILIZED IN BASIC AND DILUTED
CALCULATION (THOUSANDS)................................ 14,130,401
==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Statements of Income
under US GAAP.
F-139
<PAGE> 350
CHINA MOBILE (HONG KONG) LIMITED
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
UNDER US GAAP
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
DESCRIPTION OF PRO FORMA ADJUSTMENTS
(a) Previously, the connection fee revenue and certain surcharge revenue of
the Target were not subject to enterprise income tax and, accordingly, no tax
expense was included in the determination of the historical results of
operations for the year ended December 31, 1999 and for the six-month period
ended June 30, 2000. Upon the completion of the registration of the Target
companies as wholly foreign-owned enterprises, in accordance with the Ministry
of Finance ruling, such revenue will be taxable at an enterprise income tax rate
of 33%. The adjustment records the applicable additional tax expense as if such
revenue was taxable since January 1, 1999.
(b) To adjust for the interest income for the cash portion of the purchase
consideration to be taken from the internal resources of the Company as if the
transaction had taken place on January 1, 1999. This interest income is not
subject to income tax.
(c) To record the interest expense of the convertible notes and the RMB
bank loan at interest rates of 3.8125% per annum (being the mid point of a range
from 2.875% to 4.750%, which range is shown for illustrative purpose only, and
is determined from recent market transactions) and 5.346% per annum for the RMB
7,500 million bank loan and 5.022% per annum for the RMB 5,000 million bank
loan, respectively as if the issuance of the convertible note and the RMB bank
borrowings were consummated at January 1, 1999. The interest expense for the
convertible notes and the RMB bank loan are not deductible for income tax
purposes. Had the interest rates on the convertible notes varied by 1/8%, the
effect on the net profit would have been approximately RMB 6 million and RMB 3
million for the year ended December 31, 1999 and the six months ended June 30,
2000, respectively.
No tax effect has been taken for the interest expense of the RMB bank Loan
and the convertible notes as they are not deductible for income tax purposes.
F-140
<PAGE> 351
----------------------------------------------------------
----------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the securities offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The information
contained in this prospectus is current only as of its date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................ 1
Risk Factors.................................. 19
Forward-Looking Statements.................... 28
Our Company................................... 31
Use of Proceeds............................... 34
Dividends and Dividend Policy................. 34
Ratio of Earnings to Fixed Charges............ 35
Capitalization................................ 35
Exchange Rate Information..................... 37
Market Price Information...................... 38
Our Selected Historical Consolidated Financial
Information................................. 40
Selected Historical Combined Financial
Information of the Companies................ 44
Selected Pro Forma Financial Information...... 47
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 56
The Telecommunications Industry in China...... 78
Business...................................... 83
Our Proposed Strategic Alliance with Vodafone
Group Plc................................... 111
The Acquisition............................... 113
Regulation.................................... 129
Relationship with China Mobile Communications
Corporation................................. 133
Relationship with China Telecommunications
Corporation................................. 141
Management.................................... 148
Ownership of China Mobile (HK)................ 153
Description of Share Capital.................. 154
Description of American Depositary Receipts... 157
Description of the Convertible Notes.......... 164
Taxation...................................... 189
Legal Matters................................. 199
Experts....................................... 199
Miscellaneous................................. 199
Enforceability of Civil Liabilities........... 199
Where You Can Find More Information........... 200
Underwriting.................................. 202
Index to Financial Statements................. F-1
</TABLE>
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
CHINA MOBILE
(HONG KONG) LIMITED
184,704,213 American Depositary
Shares
Representing
923,521,065 Ordinary Shares
and
US$600,000,000 % Convertible
Notes due 2005
-------------------------------
[CHINA MOBILE (HK) LOGO]
-------------------------------
CHINA INTERNATIONAL CAPITAL CORPORATION LIMITED
GOLDMAN SACHS (ASIA) L.L.C.
MERRILL LYNCH & CO.
----------------------------------------------------------
----------------------------------------------------------
<PAGE> 352
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses, other than the
underwriting discounts and commission, payable by the registrant in connection
with the offering described in the registration statement (all amounts are
estimated except the SEC registration fee):
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $1,188,000
NYSE subsequent listing fee................................. 500,000
Printing costs.............................................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Property valuation expenses................................. *
Miscellaneous............................................... *
----------
Total Expenses.................................... $ *
==========
</TABLE>
---------------
* To be provided by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to the Articles of Association of China Mobile (HK) as qualified
by the provisions of the Companies Ordinance of Hong Kong, every director and
officer of China Mobile (HK) is indemnified out of the assets of China Mobile
(HK) against all costs, charges, expenses, losses and liabilities which may be
sustained or incurred in the execution of, or in relation to, the office of a
director or officer (except for such costs, charges, expenses, losses and
liabilities which may arise as a result of any negligence, default, breach of
duty or breach of trust of which such director or officer may be guilty).
ITEM 16. EXHIBITS
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1 Form of U.S./International Equity Underwriting Agreement.
1.2 Form of Asia Equity Underwriting Agreement.
1.3 Form of Convertible Note Underwriting Agreement.
2.1 Conditional Sale and Purchase Agreement, dated October 4,
2000, among China Mobile Communications Corporation, China
Mobile Hong Kong (BVI) Limited and China Mobile (HK).(4)
4.1 Deposit Agreement among the registrant, The Bank of New
York, as depositary, and owners and beneficial owners of
American depositary receipts issued thereunder, including
the form of American depositary receipt.(1)
4.2 Form of Indenture between the registrant and The Bank of New
York, as trustee.
4.3 Form of Global Notes.
</TABLE>
II-1
<PAGE> 353
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
5.1 Opinion of Linklaters, Hong Kong counsel to the registrant,
as to the validity of the ordinary shares.*
5.2 Opinion of Emmet, Marvin & Martin, LLP, United States
counsel to the depositary, as to the validity of the
American depositary receipts.(1)
5.3 Opinion of Linklaters, Hong Kong counsel to the registrant,
as to the validity of the convertible notes.*
5.4 Opinion of Shearman & Sterling, United States counsel to the
registrant as to the validity of the convertible notes.*
8.1 Hong Kong tax opinion of Linklaters.*
10.1 Agreement Regarding the Use of Frequency/Number Resources,
dated October 8, 1999, between China Mobile (HK) and China
Mobile Communications Corporation.(2)
10.2 Agreement on Trademark Use, dated October 8, 1999, between
China Mobile (HK) and China Mobile Communications
Corporation.(2)
10.3 Inter-Provincial Long-Distance Transmission Leased Line Fee
Sharing Agreement, dated May 5, 2000, between China Mobile
Communications Corporation and China Mobile (HK).(3)
10.4 Inter-Provincial Network Interconnection, Domestic and
International Roaming and Settlement Agreement, dated May 5,
2000, between China Mobile Communications Corporation and
China Mobile (HK).(3)
10.5 Supplemental Agreement to Spectrum/Number Resources Use
Agreement, Trademark License Contract, Inter-provincial Long
Distance Transmission Lines Fee Sharing Agreement and
Inter-provincial Interconnection and Domestic and
International Roaming Settlement Agreement, dated September
19, 2000, among China Mobile Communications Corporation,
China Mobile (HK), Beijing Mobile, Tianjin Mobile, Shanghai
Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and
Guangxi Mobile.
10.6 Agreement Regarding the Roaming Settlement of "Shenzhonxing"
Prepaid Services "Shenzhouxing" and Revenues Sharing for
Sales of Stored Value for Stored Value Cards, dated October
4, 2000, between China Mobile Communications Corporation and
China Mobile (HK).
10.7 Contract on Termination of the Trademark Licensing, dated
September 15, 2000, between China Telecommunications
Corporation and China Mobile (HK).
10.8 Tenancy Agreement, dated June 7, 2000, between Fu Hao
Properties Limited and China Mobile (HK).(3)
10.9 Building Leasing and Property Management Agreement, dated
September 18, 2000, between Beijing Mobile and Beijing
Communications Service Company ("Beijing Service").
10.10 Building Leasing and Property Management Agreement, dated
September 18, 2000, between Beijing Mobile and Beijing
Service (Leasing by Beijing Mobile to Beijing Service).
10.11 Agreement on Mobile Communications Equipment Maintenance and
Modulation, dated September 18, 2000, between Beijing Mobile
and Beijing Huarui Wireless Communications Equipment
Installation Company ("Beijing Huarui").
10.12 Agreement on Communications Projects Design and
Construction, dated September 18, 2000, between Beijing
Mobile and Beijing Huarui.
</TABLE>
II-2
<PAGE> 354
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.13 Capital Contribution Agreement, dated August 30, 2000, among
China Mobile Communications Corporation, Beijing Mobile and
Beijing Service.
10.14 Agreement Regarding the Transfer of Personnel, Finances and
Assets Not Directly Related to Mobile Communication
Services, dated August 30, 2000, among China Mobile
Communications Corporation, Beijing Mobile and Beijing
Service.
10.15 Agreement on the Confirmation of the Transfer of Personnel,
Finances and Assets and the Related Rights and Obligations,
dated August 30, 2000, between Beijing Mobile and Beijing
Service.
10.16 Agreement on Mobile Communications Equipment Maintenance,
dated September 20, 2000, between Shanghai Mobile and
Shanghai Long-distance Telecommunications Engineering
Company ("Shanghai Engineering").
10.17 Agreement on Contracting Mobile Communications Projects,
dated September 20, 2000, between Shanghai Mobile and
Shanghai Engineering.
10.18 Building Leasing and Property Management Agreement, dated
September 20, 2000, between Shanghai Mobile and Shanghai
Communications Service Company ("Shanghai Service").
10.19 Capital Contribution Agreement, dated August 30, 2000, among
China Mobile Communications Corporation, Shanghai Mobile and
Shanghai Service.
10.20 Agreement Regarding the Transfer of Personnel, Finances and
Assets Not Directly Related to Mobile Communication
Services, dated August 30, 2000, among China Mobile
Communications Corporation, Shanghai Mobile and Shanghai
Service.
10.21 Agreement on the Confirmation of the Transfer of Personnel,
Finances and Assets and the Related Rights and Obligations,
dated August 30, 2000, between Shanghai Mobile and Shanghai
Service.
10.22 Building Leasing Agreement, dated August 1, 2000, between
Tianjin Mobile and Tianjin Communications Service Company
("Tianjin Service").
10.23 Capital Contribution Agreement, dated August 30, 2000, among
China Mobile Communications Corporation, Tianjin Mobile and
Tianjin Service.
10.24 Agreement Regarding the Transfer of Personnel, Finances and
Assets Not Directly Related to Mobile Communication
Services, dated August 30, 2000, among China Mobile
Communications Corporation, Tianjin Mobile and Tianjin
Service.
10.25 Agreement on the Confirmation of the Transfer of Personnel,
Finances and Assets and the Related Rights and Obligations,
dated August 30, 2000, between Tianjin Mobile and Tianjin
Service.
10.26 Building Leasing and Property Management Agreement, dated
August 1, 2000, between Hebei Mobile and Hebei
Communications Service Company ("Hebei Service").
10.27 Agreement on the Sales and Maintenance of Masts and
Maintenance of Antennas and Feeder Lines, dated August 1,
2000, between Hebei Mobile and Hebei Provincial Posts and
Telecommunications Equipment and Machinery Plant.
10.28 Capital Contribution Agreement, dated August 30, 2000, among
China Mobile Communications Corporation, Hebei Mobile and
Hebei Service.
</TABLE>
II-3
<PAGE> 355
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.29 Agreement Regarding the Transfer of Personnel, Finances and
Assets Not Directly Related to Mobile Communication
Services, dated August 30, 2000, among China Mobile
Communications Corporation, Hebei Mobile and Hebei Service.
10.30 Agreement on the Confirmation of the Transfer of Personnel,
Finances and Assets and the Related Rights and Obligations,
dated August 30, 2000, between Hebei Mobile and Hebei
Service.
10.31 Building Leasing and Property Management Agreement, dated
August 10, 2000, between Liaoning Mobile and Liaoning
Communications Service Company ("Liaoning Service").
10.32 Agreement on Communications Equipment Maintenance, dated
September 8, 2000, between Liaoning Mobile and Liaoning
Provincial Posts and Telecommunications Engineering Bureau
("Liaoning Engineering").
10.33 Agreement on Mobile Communications Projects Construction,
dated September 8, 2000, between Liaoning Mobile and
Liaoning Engineering.
10.34 Capital Contribution Agreement, dated August 30, 2000, among
China Mobile Communications Corporation, Liaoning Mobile and
Liaoning Service.
10.35 Agreement Regarding the Transfer of Personnel, Finances and
Assets Not Directly Related to Mobile Communication
Services, dated August 30, 2000, among China Mobile
Communications Corporation, Liaoning Mobile and Liaoning
Service.
10.36 Agreement on the Confirmation of the Transfer of Personnel,
Finances and Assets and the Related Rights and Obligations,
dated August 30, 2000, between Liaoning Mobile and Liaoning
Service.
10.37 Building Leasing and Property Management Agreement, dated
September 1, 2000, between Shandong Mobile and Shandong
Communications Service Company ("Shandong Service").
10.38 Agreement on Contracting Mobile Communications Projects,
dated September 1, 2000, between Shandong Mobile and
Shandong Mobile Communications Engineering Bureau.
10.39 Capital Contribution Agreement, dated August 30, 2000, among
China Mobile Communications Corporation, Shandong Mobile and
Shandong Service.
10.40 Agreement Regarding the Transfer of Personnel, Finances and
Assets Not Directly Related to Mobile Communication
Services, dated August 30, 2000, among China Mobile
Communications Corporation, Shandong Mobile and Shandong
Service.
10.41 Agreement on the Confirmation of the Transfer of Personnel,
Finances and Assets and the Related Rights and Obligations,
dated August 30, 2000, between Shandong Mobile and Shandong
Service.
10.42 Building Leasing Agreement, dated August 26, 2000, between
Guangxi Mobile and Guangxi Communications Service Company
("Guangxi Service").
10.43 Capital Contribution Agreement, dated August 30, 2000, among
China Mobile Communications Corporation, Guangxi Mobile and
Guangxi Service.
10.44 Agreement Regarding the Transfer of Personnel, Finances and
Assets Not Directly Related to Mobile Communication
Services, dated August 30, 2000, among China Mobile
Communications Corporation, Guangxi Mobile and Guangxi
Service.
</TABLE>
II-4
<PAGE> 356
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.45 Agreement on the Confirmation of the Transfer of Personnel,
Finances and Assets and the Related Rights and Obligations,
dated August 30, 2000, between Guangxi Mobile and Guangxi
Service.
10.46 Strategic Investor Placing Agreement among China Mobile
(Hong Kong), Vodafone Group Plc, China International Capital
Corporation, Goldman Sachs (Asia) L.L.C. and Merrill Lynch
Far East Limited.
10.47 Syndicated loan agreement for RMB 7,500,000,000 among China
Mobile (Shenzhen) Limited, Construction Bank of China, Bank
of China, State Development Bank, Agriculture Bank of China,
Industrial and Commercial Bank of China, Bank of
Communications, Hong Kong & Shanghai Banking Corporation
Ltd., China Merchants Bank and Construction Bank of China,
Shenzhen Branch, dated October 7, 2000.*
10.48 Syndicated loan agreement for RMB 5,000,000,000 among China
Mobile (Shenzhen) Limited, Construction Bank of China, Bank
of China, State Development Bank, Agriculture Bank of China,
Industrial and Commercial Bank of China, Bank of
Communications, Hong Kong & Shanghai Banking Corporation
Ltd., China Merchants Bank and Construction Bank of China,
Shenzhen Branch, dated October 7, 2000.*
12.1 Statement regarding Computation of Ratios.*
13.1 Annual Report of China Mobile (HK) on Form 20-F (Commission
File
Number 1-14696) dated June 20, 2000.
13.2 Interim Report of China Mobile (HK) on Form 6-K submitted to
the Commission on September 1, 2000.
23.1 Consent of Linklaters (included in Exhibits 5.1, 5.3 and
8.1).*
23.2 Consent of Emmet, Marvin & Martin, LLP (included in Exhibit
5.2).
23.3 Consent of Commerce & Finance Law Office.(4)
23.4 Consent of KPMG.
23.5 Consent of Chesterton Petty Limited.(4)
23.6 Consent of N M Rothschild & Sons (Hong Kong) Limited.(4)
23.7 Consent of China Mobile Communications Corporation.(4)
23.8 Consent of Shearman & Sterling (included in Exhibit 5.4)*
24.1 Powers of attorney.(4)
25.1 Form T-1 Statement of Eligibility and Qualification under
the Trust Indenture Act of 1939 of the Bank of New York.(4)
99.1 Officer's Certificate of Translation.
</TABLE>
---------------
(1) Incorporated by reference to the depositary's Registration Statement on Form
F-6 (File No. 333-12688), filed with the SEC on October 4, 2000.
(2) Incorporated by reference to our Registration Statement on Form F-3 (File
No. 333-10956) filed with the SEC.
(3) Incorporated by reference to our Annual Report on Form 20-F (File No.
1-14696) filed with the SEC.
(4) Previously filed.
* To be filed by amendment.
II-5
<PAGE> 357
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions of Item 15, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-6
<PAGE> 358
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-3 and has duly caused this amendment to the
registration statement to be signed on its behalf by the undersigned, hereunto
duly authorized, in the City of New York, State of New York, U.S.A. on October
25, 2000.
CHINA MOBILE (HONG KONG) LIMITED
By: /s/ WANG XIAOCHU
------------------------------------
Name: Wang Xiaochu
Title: Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
following capacities on October 25, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ WANG XIAOCHU Chairman and Chief Executive Officer
--------------------------------------------------- (Principal Executive Officer)
Wang Xiaochu
* Vice Chairman and Chief Operating Officer
---------------------------------------------------
Li Zhenqun
* Director and Chief Financial Officer
--------------------------------------------------- (Principal Financial and Accounting Officer)
Ding Donghua
* Director
---------------------------------------------------
Li Gang
* Director
---------------------------------------------------
Xu Long
* Director
---------------------------------------------------
He Ning
* Director
---------------------------------------------------
Liu Ping
* Director
---------------------------------------------------
Yuan Jianguo
* Director
---------------------------------------------------
Wei Yiping
</TABLE>
II-7
<PAGE> 359
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Non-Executive Director
---------------------------------------------------
Arthur Li Kwok Cheung
* Non-Executive Director
---------------------------------------------------
Antony Leung Kam Chung
* By: /s/ WANG XIAOCHU
-------------------------------------------
Wang Xiaochu
as attorney-in-fact
</TABLE>
II-8
<PAGE> 360
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF THE REGISTRANT
Pursuant to the Securities Act of 1933, the undersigned, the duly
authorized representative in the United States of China Mobile (Hong Kong)
Limited, has signed this registration statement or amendment thereto in the City
of Newark, State of Delaware, on October 25, 2000.
PUGLISI & ASSOCIATES
By: /s/ DONALD J. PUGLISI
------------------------------------
Name: Donald J. Puglisi
Title: Managing Director
II-9
