Exhibit 1.1
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IMPORTANT
--------------------------------------------------------------------------------
If you are in doubt as to any aspect of this circular or as to the action to be
taken, you should consult your stockbroker or other registered dealer in
securities, bank manager, solicitor, professional accountant or other
professional adviser.
If you have sold or transferred all your shares or notes in China Mobile (Hong
Kong) Limited, you should at once hand this circular together with the
accompanying form of proxy to the purchaser or other transferee or to the bank,
stockbroker or other agent through whom the sale was effected for transmission
to the purchaser or transferee.
The Stock Exchange of Hong Kong Limited takes no responsibility for the contents
of this circular, makes no representation as to its accuracy or completeness and
expressly disclaims any liability whatsoever for any loss howsoever arising from
or in reliance upon the whole or any part of the contents of this circular.
This circular is for the sole purpose of the extraordinary general meeting of
the Company and is not an offer to sell or a solicitation of an offer to
purchase any securities.
--------------------------------------------------------------------------------
(CHINA MOBILE LOGO)
CHINA MOBILE (HONG KONG) LIMITED
(Incorporated in Hong Kong with limited liability under the Companies Ordinance)
MAJOR TRANSACTION
AND CONNECTED TRANSACTIONS
Independent Financial Adviser to the Independent Board Committee
(ROTHSCHILD LOGO)
Financial Advisers to China Mobile (Hong Kong) Limited
CHINA INTERNATIONAL CAPITAL
CORPORATION (HONG KONG) XXXXXXX XXXXX (ASIA) L.L.C.
LIMITED
--------------------------------------------------------------------------------
A letter from the independent board committee of China Mobile (Hong Kong)
Limited is set out on pages 33 to 34 of this circular. A letter from N M
Rothschild & Sons (Hong Kong) Limited containing its advice to the independent
board committee is set out on pages 35 to 57 of this circular.
A notice dated 27 May 2002 convening an extraordinary general meeting of the
Company to be held in the Conference Room, 3rd Floor, JW Marriott Hotel, Pacific
Place, 88 Queensway Road, Hong Kong, on 24 June 2002 at 11:30 a.m. (or as soon
thereafter as the annual general meeting of the Company to be convened at 11:00
a.m. at the same place and date shall have been concluded or adjourned), is set
out at the end of this circular. Whether or not you are able to attend the
meeting, you are requested to complete and return the enclosed form of proxy in
accordance with the instructions printed thereon as soon as practicable and in
any event at least 36 hours before the time appointed for holding the meeting.
Completion and return of the form of proxy will not preclude you from attending
and voting in person at the meeting or at any adjourned meeting should you so
wish.
27 May 2002
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CONTENTS
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Pages
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DEFINITIONS 1
LETTER FROM THE CHAIRMAN 10
1 Introduction 10
2 The Acquisition 11
3 The Consideration for the Acquisition 12
4 Financing of the Acquisition 16
5 Conditions of the Completion of the Acquisition 17
6 Reasons for and Benefits of the Acquisition 18
7 Prospective Financial Information 22
8 Relationship with CMCC 23
9 Connected Transactions 23
10 Extraordinary General Meeting 32
11 Recommendation of the Independent Board Committee 32
12 Additional Information 32
LETTER FROM THE INDEPENDENT BOARD COMMITTEE 33
LETTER FROM ROTHSCHILD 35
APPENDIX I - FURTHER INFORMATION ON THE TARGET COMPANIES I - 1
APPENDIX II - ACCOUNTANTS' REPORT II - 1
APPENDIX III - ADDITIONAL FINANCIAL INFORMATION OF THE TARGET GROUP III - 1
APPENDIX IV - FINANCIAL INFORMATION OF THE GROUP IV - 1
APPENDIX V - FINANCIAL INFORMATION OF THE COMBINED GROUP V - 1
APPENDIX VI - PROFIT FORECAST VI - 1
APPENDIX VII - GENERAL INFORMATION VII - 1
NOTICE OF THE EXTRAORDINARY GENERAL MEETING
i
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DEFINITIONS
--------------------------------------------------------------------------------
In this circular, unless the context otherwise requires, the following
expressions have the following meanings:
"Acquisition" the proposed acquisition by the Company of
the entire issued share capital of each of
the Target BVI Companies pursuant to the
Acquisition Agreement, as further described
in this circular
"Acquisition Agreement" the conditional sale and purchase agreement
dated 16 May 2002 made between the Company,
CMBVI and CMCC relating to the Acquisition
"adjusted EBITDA" earnings before interest income, interest
expense, non-operating income (expenses),
taxation, depreciation and amortisation,
write-down and write-off of fixed assets and
deficit on revaluation of fixed assets
"Anhui Mobile" Anhui Mobile Communication Company Limited, a
company established under the laws of the PRC
and wholly-owned by Anhui Mobile BVI
"Anhui Mobile BVI" Anhui Mobile (BVI) Limited, a company
incorporated on 10 May 2002 in the British
Virgin Islands
"Associates" as defined in the Listing Rules
"Beijing Mobile" Beijing Mobile Communication Company Limited,
a wholly foreign-owned enterprise established
under the laws of the PRC and wholly-owned by
Beijing Mobile BVI
"Beijing Mobile BVI" Beijing Mobile (BVI) Limited, a company
incorporated on 1 September 2000 in the
British Virgin Islands
"Board" the board of directors of the Company
"Business Day" a day (excluding Saturdays) on which banks
are generally open in Hong Kong and the PRC
for the transaction of normal banking
business
"CDMA" Code Division Multiple Access technology, a
digital transmission technology using various
coding sequences to mix and separate voice
and data signals for wireless transmission
"Chesterton Xxxxx" Chesterton Xxxxx Limited, a chartered
surveyor and independent property valuer to
the Company
"China Mobile (Shenzhen)" China Mobile (Shenzhen) Limited, a wholly
foreign-owned enterprise established under
the laws of the PRC and wholly-owned by the
Company
1
"China Netcom Group" China Netcom Corporation, a company
established under the laws of the PRC
"China Unicom" China United Telecommunications Corporation,
a company established under the laws of the
PRC
"Chinese Depositary Receipts" transferable depositary receipts, each
representing a specified number of Shares
which may be issued by the Company to the
public in the PRC and may be listed on a
recognised stock exchange in the PRC
"Chongqing Mobile" Chongqing Mobile Communication Company
Limited, a company established under the laws
of the PRC and wholly-owned by Chongqing
Mobile BVI
"Chongqing Mobile BVI" Chongqing Mobile (BVI) Limited, a company
incorporated on 10 May 2002 in the British
Virgin Islands
"CICC" China International Capital Corporation (Hong
Kong) Limited, a registered investment
adviser under the Securities Ordinance
(Chapter 333 of the Laws of Hong Kong) and
financial adviser to the Company in respect
of the Acquisition
"CMBVI" China Mobile Hong Kong (BVI) Limited, a
company incorporated in the British Virgin
Islands and the immediate controlling
shareholder of the Company
"CMCC" China Mobile Communications Corporation, a
state-owned enterprise established under the
laws of the PRC
"CMHKG" China Mobile (Hong Kong) Group Limited, a
company incorporated in Hong Kong and an
indirect controlling shareholder of the
Company
"Combined Group" the Company, its existing subsidiaries, the
Target BVI Companies and the Target Companies
"Companies Ordinance" the Companies Ordinance (Chapter 32 of the
Laws of Hong Kong)
"Company" or "CMHK" China Mobile (Hong Kong) Limited, a company
incorporated in Hong Kong whose Shares are
listed on the Stock Exchange, whose ADSs are
listed on the New York Stock Exchange, whose
Notes are listed on the Stock Exchange and
the Luxembourg Stock Exchange and whose
Convertible Notes are listed on the
Luxembourg Stock Exchange
2
"Connected Transactions" the transactions entered into between (a) the
Company, its subsidiaries and/or the Target
Companies on the one hand and (b) CMCC or its
subsidiaries on the other, as set out in the
section headed "Letter from the Chairman -
Connected Transactions"
"Consideration Shares" the new Shares proposed to be allotted and
issued to CMBVI as part of the total purchase
price of the Acquisition
"Convertible Noteholders" holders of the Convertible Notes
"Convertible Notes" 2.25% convertible notes due 2005 of the
Company
"CTC" China Telecommunications Corporation, a
company established under the laws of the PRC
"Directors" the directors of the Company
"Extraordinary General the extraordinary general meeting of the
Meeting" Company to be convened on 24 June 2002,
notice of which is set out at the end of this
circular, or any adjournment thereof
"First Supplemental the supplemental agreement dated 19 September
Agreement" 2000 between the Company, Beijing Mobile,
Shanghai Mobile, Tianjin Mobile, Hebei
Mobile, Liaoning Mobile, Shandong Mobile and
Guangxi Mobile and CMCC pursuant to which
certain arrangements relating to
interconnection and roaming, trademark
licensing, spectrum and number resources
usage and sharing of inter-provincial
transmission line-leasing fees between CMCC
and the Company were extended to Beijing
Mobile, Shanghai Mobile, Tianjin Mobile,
Hebei Mobile, Liaoning Mobile, Shandong
Mobile and Guangxi Mobile
"Fujian Mobile" Fujian Mobile Communication Company Limited,
a wholly foreign-owned enterprise established
under the laws of the PRC and wholly-owned by
Fujian Mobile BVI
"Fujian Mobile BVI" Fujian Mobile (BVI) Limited, a company
incorporated on 1 September 1999 in the
British Virgin Islands
"Xxxxxxx Xxxxx" Xxxxxxx Sachs (Asia) L.L.C., a registered
investment adviser under the Securities
Ordinance (Chapter 333 of the Laws of Hong
Kong) and financial adviser to the Company in
respect of the Acquisition
"Group" the Company and its existing subsidiaries
3
"GSM" Global System for Mobile Communications,
pan-European mobile telephone system based on
digital transmission and cellular network
architecture with roaming
"Guangdong Mobile" Guangdong Mobile Communication Company
Limited, a wholly foreign-owned enterprise
established under the laws of the PRC and a
wholly-owned subsidiary of the Company
"Guangxi Mobile" Guangxi Mobile Communication Company Limited,
a wholly foreign-owned enterprise established
under the laws of the PRC and wholly-owned by
Guangxi Mobile BVI
"Guangxi Mobile BVI" Guangxi Mobile (BVI) Limited, a company
incorporated on 1 September 2000 in the
British Virgin Islands
"Hainan Mobile" Hainan Mobile Communication Company Limited,
a wholly foreign-owned enterprise established
under the laws of the PRC and wholly-owned by
Hainan Mobile BVI
"Hainan Mobile BVI" Hainan Mobile (BVI) Limited, a company
incorporated on 1 September 1999 in the
British Virgin Islands
"Hebei Mobile" Hebei Mobile Communication Company Limited, a
wholly foreign-owned enterprise established
under the laws of the PRC and wholly-owned by
Hebei Mobile BVI
"Hebei Mobile BVI" Hebei Mobile (BVI) Limited, a company
incorporated on 1 September 2000 in the
British Virgin Islands
"Henan Mobile" Henan Mobile Communication Company Limited, a
wholly foreign-owned enterprise established
under the laws of the PRC and wholly-owned by
Henan Mobile BVI
"Henan Mobile BVI" Henan Mobile (BVI) Limited, a company
incorporated on 1 September 1999 in the
British Virgin Islands
"HK$" Hong Kong dollars, the lawful currency of
Hong Kong
"Hong Kong" Hong Kong Special Administrative Region of
the People's Republic of China
"Hubei Mobile" Hubei Mobile Communication Company Limited, a
company established under the laws of the PRC
and wholly-owned by Hubei Mobile BVI
"Hubei Mobile BVI" Hubei Mobile (BVI) Limited, a company
incorporated on 10 May 2002 in the British
Virgin Islands
4
"Hunan Mobile" Hunan Mobile Communication Company Limited, a
company established under the laws of the PRC
and wholly-owned by Hunan Mobile BVI
"Hunan Mobile BVI" Hunan Mobile (BVI) Limited, a company
incorporated on 10 May 2002 in the British
Virgin Islands
"Independent Board the committee of Directors, consisting of
Committee" Xxxxxx Xx Xxxx Xxxxxx and Lo Ka Shui,
Independent Non-executive Directors, formed
to advise the Independent Shareholders in
respect of the terms of the Acquisition, the
mechanism for the determination of the issue
price of the Consideration Shares and the
terms of the Connected Transactions
"Independent Shareholders" Shareholders other than CMBVI and its
Associates
"Interconnection and the inter-provincial interconnection and
Roaming Agreement" domestic and international roaming settlement
agreement dated 5 May 2000 between the
Company and CMCC
"Interest Determination Date" each of the following dates (or if that date
falls on a non-Business Day, then on the next
Business Day), the first being the date two
Business
Days next preceding the date of the
Acquisition Agreement, or 14 May 2002, and
thereafter 14 May 2004, 14 May 2006, 14 May
2008, 14 May 2010, 14 May 2012, 14 May 2014
and 14 May 2016
"Jiangsu Mobile" Jiangsu Mobile Communication Company Limited,
a wholly foreign-owned enterprise established
under the laws of the PRC and wholly-owned by
Jiangsu Mobile BVI
"Jiangsu Mobile BVI" Jiangsu Mobile (BVI) Limited, a company
incorporated on 6 March 1998 in the British
Virgin Islands
"Jiangxi Mobile" Jiangxi Mobile Communication Company Limited,
a company established under the laws of the
PRC and wholly-owned by Jiangxi Mobile BVI
"Jiangxi Mobile BVI" Jiangxi Mobile (BVI) Limited, a company
incorporated on 10 May 2002 in the British
Virgin Islands
"Latest Practicable Date" 22 May 2002, being the latest practicable
date prior to the printing of this circular
for ascertaining certain information
contained herein
5
"Liaoning Mobile" Liaoning Mobile Communication Company
Limited, a wholly foreign-owned enterprise
established under the laws of the PRC and
wholly-owned by Liaoning Mobile BVI
"Liaoning Mobile BVI" Liaoning Mobile (BVI) Limited, a company
incorporated on 1 September 2000 in the
British Virgin Islands
"Listing Rules" the Rules Governing the Listing of Securities
on the Stock Exchange
"Mainland China" China (excluding Hong Kong, Macau and Taiwan)
"MII" Ministry of Information Industry of the PRC,
or where the context so requires, its
predecessor, the former Ministry of Posts and
Telecommunications
"Noteholders" holders of the Notes
"Notes" 7 7/8% notes due 2004 of the Company
"PRC" or "China" the People's Republic of China
"Railcom" China Railcom Company Limited, a company
established under the laws of the PRC
"RMB" Renminbi, the lawful currency of the PRC
"Rothschild" or N M Rothschild & Sons (Hong Kong) Limited, an
"N M Rothschild & Sons" investment adviser registered under the
Securities Ordinance (Chapter 333 of the Laws
of Hong Kong) and independent financial
adviser to the Independent Board Committee in
respect of the terms of the Acquisition, the
mechanism for the determination of the issue
price of the Consideration Shares and the
terms of the Connected Transactions
"SDI Ordinance" the Securities (Disclosure of Interests)
Ordinance (Chapter 396 of the Laws of Hong
Kong)
6
"Second Supplemental the supplemental agreement dated 29 April
Agreement" 2002 between the Company, the Target
Companies and CMCC pursuant to which certain
existing arrangements relating to
interconnection and roaming, spectrum and
number resources usage, sharing of
inter-provincial transmission line-leasing
fees and sharing and settlement of revenue
from prepaid services were extended to the
Target Companies
"Services Companies" companies wholly owned by CMCC in the
provinces, directly-administered
municipalities and autonomous region in which
the Group or the Target Companies operate,
which conduct businesses not related to
mobile telecommunications
"Shaanxi Mobile" Shaanxi Mobile Communication Company Limited,
a company established under the laws of the
PRC and wholly-owned by Shaanxi Mobile BVI
"Shaanxi Mobile BVI" Shaanxi Mobile (BVI) Limited, a company
incorporated on 10 May 2002 in the British
Virgin Islands
"Shandong Mobile" Shandong Mobile Communication Company
Limited, a wholly foreign-owned enterprise
established under the laws of the PRC and
wholly-owned by Shandong Mobile BVI
"Shandong Mobile BVI" Shandong Mobile (BVI) Limited, a company
incorporated on 1 September 2000 in the
British Virgin Islands
"Shanghai Mobile" Shanghai Mobile Communication Company
Limited, a wholly foreign-owned enterprise
established under the laws of the PRC and
wholly-owned by Shanghai Mobile BVI
"Shanghai Mobile BVI" Shanghai Mobile (BVI) Limited, a company
incorporated on 1 September 2000 in the
British Virgin Islands
"Shanxi Mobile" Shanxi Mobile Communication Company Limited,
a company established under the laws of the
PRC and wholly-owned by Shanxi Mobile BVI
"Shanxi Mobile BVI" Shanxi Mobile Communication (BVI) Limited, a
company incorporated on 10 May 2002 in the
British Virgin Islands
"Share(s)" ordinary share(s) of HK$0.10 each in the
capital of the Company
"Shareholders" holders of Shares
7
"Sichuan Mobile" Sichuan Mobile Communication Company Limited,
a company established under the laws of the
PRC and wholly-owned by Sichuan Mobile BVI
"Sichuan Mobile BVI" Sichuan Mobile (BVI) Limited, a company
incorporated on 10 May 2002 in the British
Virgin Islands
"Stock Exchange" The Stock Exchange of Hong Kong Limited
"Target BVI Companies" Anhui Mobile BVI, Jiangxi Mobile BVI,
Chongqing Mobile BVI, Sichuan Mobile BVI,
Hubei Mobile BVI, Hunan Mobile BVI, Shaanxi
Mobile BVI and Shanxi Mobile BVI
"Target Companies" Anhui Mobile, Jiangxi Mobile, Chongqing
Mobile, Sichuan Mobile, Hubei Mobile, Hunan
Mobile, Shaanxi Mobile and Shanxi Mobile
"Target Group" the group of companies comprising the Target
Companies
"Tianjin Mobile" Tianjin Mobile Communication Company Limited,
a wholly foreign-owned enterprise established
under the laws of the PRC and wholly-owned by
Tianjin Mobile BVI
"Tianjin Mobile BVI" Tianjin Mobile (BVI) Limited, a company
incorporated on 1 September 2000 in the
British Virgin Islands
"US dollars" or "US$" United States dollars, the lawful currency of
the United States of America
"Vodafone" Vodafone Group Plc, a company incorporated
and listed in the United Kingdom
"Vodafone Holdings" Vodafone Holdings (Jersey) Limited, a company
incorporated in Jersey
"Vodafone Subscription the subscription agreement entered into
Agreement" between Vodafone, Vodafone Holdings and the
Company on 16 May 2002 pursuant to which
Vodafone agreed to subscribe, or to elect to
allow Vodafone Holdings to subscribe, for
Shares for a total of HK$5.85 billion
"Zhejiang Mobile" Zhejiang Mobile Communication Company
Limited, a wholly foreign-owned enterprise
established under the laws of the PRC and a
wholly-owned subsidiary of the Company
8
For your convenience and unless otherwise specified, this circular
contains translations between RMB and US dollars at RMB8.2766 = XXx0.00, xxxxxxx
XXX xxx Xxxx Xxxx dollars at RMB1.061 = HK$1.00, and between Hong Kong dollars
and US dollars at HK$7.7980 = US$1.00, the prevailing rates on 31 December 2001.
The translations are not representations that the RMB, Hong Kong dollar and US
dollar amounts could actually be converted into US dollars or Hong Kong dollars
at those rates, if at all.
For the purposes of this circular, mobile penetration rates represent the
estimated total number of mobile telecommunications subscribers (including
subscribers of other operators) divided by the total population.
Unless otherwise noted, the financial information presented in this
circular includes the results of the Group's subsidiaries, Fujian Mobile, Henan
Mobile and Hainan Mobile, from 12 November 1999, the date of the Group's
acquisition of Fujian Mobile, Henan Mobile and Hainan Mobile and, unless
otherwise noted, the operating information presented in this circular includes
information of Fujian Mobile, Henan Mobile and Hainan Mobile from 1 January
1999. Moreover, unless otherwise noted, the financial information presented in
this circular includes the results of the Group's subsidiaries, Beijing Mobile,
Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile
and Guangxi Mobile, from 13 November 2000, the date of the Group's acquisition
of Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning
Mobile, Shandong Mobile and Guangxi Mobile and, unless otherwise noted, the
operating information presented in this circular includes information of Beijing
Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong
Mobile and Guangxi Mobile from 1 January 1999.
9
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LETTER FROM THE CHAIRMAN
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(CHINA MOBILE LOGO)
CHINA MOBILE (HONG KONG) LIMITED
(Incorporated in Hong Kong with limited liability under the Companies Ordinance)
Executive Directors: Registered Office:
Wang Xiaochu (Chairman) 60th Floor
Li Zhenqun The Center
Ding Donghua 00 Xxxxx'x Xxxx Xxxxxxx
Xx Xxxx Xxxx Xxxx
Xu Long
He Xxxx
Xxx Ping
Xxxx Xxxxxxx
Xxx Xxxxxx
Independent Non-Executive Directors:
Xxxxxx Xx Xxxx Xxxxxx
Xxxxxxxxxxx Xxxx
Lo Ka Shui
27 May 2002
To the Shareholders and, for information only,
the Noteholders and the Convertible Noteholders
Dear Sir or Madam,
MAJOR TRANSACTION AND CONNECTED TRANSACTIONS
ACQUISITION OF ANHUI MOBILE BVI, JIANGXI MOBILE BVI,
CHONGQING MOBILE BVI, SICHUAN MOBILE BVI, HUBEI MOBILE BVI,
HUNAN MOBILE BVI, SHAANXI MOBILE BVI AND SHANXI MOBILE BVI
1 INTRODUCTION
On 16 May 2002, the Board of Directors announced that the Company had
entered into the Acquisition Agreement, pursuant to which the Company agreed to
acquire, and CMBVI, the Company's immediate controlling shareholder, agreed to
sell, the entire issued share capital of each of the Target BVI Companies,
subject to certain conditions.
The Acquisition was negotiated and entered into on an arm's length basis
and on normal commercial terms. The total purchase price of the Acquisition is
US$8,573 million (equivalent to approximately HK$66,863.4 million), and will
consist of payment of an
10
initial consideration of an aggregate of US$5,773
million (equivalent to approximately HK$45,025.4 million) on completion of the
Acquisition by payment in cash and the issuance of Consideration Shares by the
Company to CMBVI and the payment of a deferred consideration of US$2,800 million
(equivalent to approximately HK$21,838.0 million). The Company intends to
finance the cash portion of the initial consideration primarily using existing
internal cash resources and the proceeds from the issuance and allotment of
Shares for a total of
HK$5.85 billion (equivalent to approximately US$750 million) to Vodafone or its
wholly-owned subsidiary, Vodafone Holdings, and to finance the deferred
consideration using proceeds from the possible issuance of RMB denominated bonds
and/or Chinese Depositary Receipts in the PRC, internal cash resources and/or
any other forms of funding.
As at the Latest Practicable Date, CMBVI owned approximately 75.58% of the
issued share capital of the Company. The net tangible asset value of the Group
as at 31 December 2001 was approximately RMB110,303 million (equivalent to
approximately HK$103,961 million). The total purchase price for the Acquisition
is approximately 64.3% of the net tangible asset value of the Group for the
financial year ended 31 December 2001. Accordingly, under the Listing Rules, the
Acquisition constitutes both a major transaction and a connected transaction for
the Company. The Acquisition, the issue of the Consideration Shares and the
Connected Transactions require the approval of the Independent Shareholders at
the Extraordinary General Meeting at which CMBVI and its Associates will abstain
from voting.
An Independent Board Committee has been established to advise the
Independent Shareholders in respect of the terms of the Acquisition, the
mechanism for the determination of the issue price of the Consideration Shares
and the terms of the Connected Transactions. In this respect, N M Rothschild &
Sons has been retained as the independent financial adviser to the Independent
Board Committee and a copy of its letter of advice is set out on pages 35 to 57
of this circular.
CICC and Xxxxxxx Xxxxx are the financial advisers to the Company in
respect of the Acquisition.
The purpose of this circular is to provide you with further information
relating to the Acquisition, the issue of the Consideration Shares and the
Connected Transactions arising from the Acquisition and to seek your approval of
the corresponding ordinary resolutions set out in the notice of the
Extraordinary General Meeting at the end of this circular. The recommendation of
the Independent Board Committee to the Independent Shareholders is set out on
pages 33 to 34 of this circular.
2 THE ACQUISITION
The Company has agreed, subject to certain conditions, to acquire from
CMBVI the entire issued share capital of each of the Target BVI Companies for a
total purchase price of US$8,573 million (equivalent to approximately
HK$66,863.4 million). The Company will assume the net indebtedness of the Target
Companies. The aggregate amount of the net indebtedness of all eight Target
Companies amounted to approximately RMB13,467 million (equivalent to
approximately US$1,627 million or HK$12,693 million) as of 31 December 2001.
Taking into account the above net indebtedness and the total purchase price of
the Acquisition, the enterprise value of the Target Group is RMB84,426 million
(equivalent to approximately US$10,200 million or HK$79,556 million). The
Acquisition is in respect of the entire issued share capital of all eight Target
BVI Companies. Unless the entire issued share capital of all eight Target BVI
Companies can be acquired, the Acquisition will not proceed. Upon completion of
the Acquisition, each of the Target BVI Companies will become a wholly-owned
subsidiary of the Company. The only asset of each of the Target BVI Companies is
its entire interest in the respective Target Companies.
11
The Target Companies are the leading providers of mobile
telecommunications services in their respective provinces and
directly-administered municipality. As of 31 December 2001, the Target Companies
had a total of approximately 20.93 million subscribers. Their estimated weighted
average market share of mobile telecommunications subscribers was approximately
73.9% in the eight provinces and directly-administered municipality in which
they operate as of 31 December 2001. The number of subscribers and the
respective estimated market share of mobile telecommunications subscribers in
each of the provinces and directly-administered municipality as of 31 December
2001 are set out below:
ESTIMATED MARKET SHARE OF MOBILE
TELECOMMUNICATIONS SUBSCRIBERS
IN THE RESPECTIVE PROVINCE
AND DIRECTLY-ADMINISTERED
TARGET COMPANY NUMBER OF SUBSCRIBERS MUNICIPALITY (1)
-------------- --------------------- --------------------------------
(IN THOUSANDS) (%)
Anhui Mobile 2,382 68.3
Jiangxi Mobile 2,152 74.2
Chongqing Mobile 1,805 71.5
Sichuan Mobile 4,161 75.5
Hubei Mobile 3,036 75.2
Hunan Mobile 2,901 79.7
Shaanxi Mobile 2,001 65.8
Shanxi Mobile 2,490 78.7
--------------
(1) Calculated based on the total number of mobile telecommunications
subscribers in the relevant geographical regions estimated by the
Target Companies.
3 THE CONSIDERATION FOR THE ACQUISITION
The consideration for the Acquisition was determined based on various
factors, including the prospective adjusted EBITDA and prospective profit
contributions of the Target Companies to the Combined Group, the quality of the
assets being acquired, their growth prospects, earnings potential, competitive
advantages in their respective markets and other relevant valuation benchmarks.
The consideration for the Acquisition will represent a multiple of 13.1
times the combined 2001 net profit (before deduction of a one-off deficit on
revaluation) of RMB5,408 million (equivalent to approximately HK$5,097 million)
and 12.7 times the combined 2002 forecast net profit of approximately RMB5,600
million (equivalent to approximately HK$5,277 million based on the prevailing
rate at 12:00 noon (New York City time) on the day which is two Business Days
next preceding the date of the Acquisition Agreement) of the Target Group. In
addition, the enterprise value of the Target Group will represent a multiple of
6.6 times the combined 2001 adjusted EBITDA of RMB12,889 million (equivalent to
approximately HK$12,148 million) and 5.2 times the combined 2002 forecast
adjusted EBITDA of approximately RMB16,100 million (equivalent to approximately
HK$15,172 million based on the prevailing rate at 12:00 noon (New York City
time) on the day which is two Business Days next preceding the date of the
Acquisition Agreement) of the Target Group. The combined 2001 net profit (before
deduction of a one-off deficit on revaluation) and the combined 2001 adjusted
EBITDA of the Target Group are calculated from figures which can be extracted
from the accountants' report set out in Appendix II to this circular. The number
of subscribers of the Target Group is estimated to reach 28.65 million as of 31
December 2002. The forecast combined net profit and combined adjusted EBITDA of
the Target Group are based on certain prospective financial information prepared
by the Company and the Target Companies.
12
The Acquisition was negotiated and entered into on an arm's length basis
and on normal commercial terms. The total purchase price of the Acquisition is
US$8,573 million (equivalent to approximately HK$66,863.4 million), and will
consist of payment of an initial consideration and a deferred consideration.
The initial consideration of US$5,773 million (equivalent to approximately
HK$45,025.4 million) will be satisfied on completion of the Acquisition by
payment in cash and the issue of the Consideration Shares to CMBVI. The cash
portion amounts to US$3,150 million (equivalent to approximately HK$24,567.8
million) and is payable in HK dollars, RMB, US dollars or a combination of the
above currencies. The balance of the initial consideration of US$2,623 million
(equivalent to approximately
HK$20,457.6 million) will be satisfied by the issue of 827,514,446 Consideration
Shares to CMBVI (representing approximately 4.45% of the Company's existing
issued share capital), at the price of HK$24.7217 per Share. The per Share price
for the Consideration Shares is equal to the average closing price of the Shares
on the Stock Exchange for the 30 trading days prior to the date of the
Acquisition Agreement, subject to possible adjustment pursuant to the mechanism
set forth below, and is the same as the per Share price of the Shares to be
issued and allotted to Vodafone or Vodafone Holdings (as the case may be)
pursuant to the Vodafone Subscription Agreement.
The price per Consideration Share, and hence the number of Consideration
Shares to be issued to CMBVI, is subject to adjustment if the simple arithmetic
average of the volume-weighted average prices per Share on the Stock Exchange
for the 10 consecutive trading days commencing from the trading day immediately
following the date of the Acquisition Agreement ("Average VWAP") is either
higher than HK$28.4300 (being HK$24.7217 as increased by 15%) per Share or lower
than HK$21.0134 (being HK$24.7217 as decreased by 15%) per Share. If Average
VWAP is higher than HK$28.4300, then the price per Consideration Share will be
increased by 50% of the difference between Average VWAP and HK$28.4300. If
Average VWAP is lower than HK$21.0134 per Share, then the price per
Consideration Share will be decreased by 50% of the difference between
HK$21.0134 and Average VWAP. The number of Consideration Shares to be issued to
CMBVI will be adjusted accordingly using the new price per Consideration Share.
After the issuance and allotment of the Consideration Shares to CMBVI and
the issuance and allotment of new Shares to Vodafone or Vodafone Holdings (as
the case may be), and assuming that no adjustment is made to the price and
numbers of the Shares so issued, CMBVI will have approximately 75.70% of the
Company's enlarged issued share capital and the Company's minimum public float
of 23.5% as stipulated by the Stock Exchange will be maintained.
The deferred consideration represents the difference between the total
consideration and the initial consideration and amounts to US$2,800 million
(equivalent to approximately HK$21,838.0 million). The Company will pay interest
to CMBVI at half-yearly intervals on the actual amount of deferred consideration
remaining unpaid from the date of the completion of the Acquisition. Interest is
accrued daily and is calculated at the two-year US dollar LIBOR swap rate at 11
am (New York City time) on the second Business Day next preceding the date of
the Acquisition Agreement for the first two years after completion of the
Acquisition. Thereafter, the interest rate will be adjusted every two years to
equal the two-year US dollar LIBOR swap rate prevailing at 11 am (New York City
time) on the relevant Interest Determination Date. The translations above
between Hong Kong dollars and US dollars are based on the
13
prevailing rate at 12:00 noon (New York City time) on the day which is two
Business Days next preceding the date of the Acquisition Agreement, being
HK$7.7993=US$1.00.
The deferred consideration is subordinated to other senior debts owed by
the Company from time to time including, but not necessarily limited to, the
US$600 million Notes and the US$690 million Convertible Notes issued by the
Company in 1999 and 2000, respectively. The deferred consideration is payable
fifteen years after the date of completion of the Acquisition. The Company may
make early payment of all or part of the deferred consideration, from time to
time, at any time after completion of the Acquisition, without penalty. The
Company has undertaken to CMBVI to use its reasonable endeavours, subject to
market conditions and receiving all necessary regulatory and governmental
approvals, to issue RMB denominated bonds and Chinese Depositary Receipts and
has agreed to make early payment of the deferred consideration using the net
proceeds from the possible issuance of RMB denominated bonds and/or Chinese
Depositary Receipts after such proceeds are received. Should the Company decide
to make early payment of all or part of the deferred consideration other than
from the net proceeds from the issuance of RMB denominated bonds or Chinese
Depositary Receipts, such early payment can only be made if it does not have any
significant impact on the Company's ability to repay any senior debt to
which the deferred consideration is subordinated. The terms (including amounts)
of any possible issuance of RMB denominated bonds and/or Chinese Depositary
Receipts have not been finalised.
The payment of the deferred consideration and the interest payments can be
made in Hong Kong dollars, RMB or US dollars (or other currencies agreed by the
Company and CMBVI). Any payment made in currencies other than US dollars will be
accounted for based on the exchange rates between US dollars and such currencies
prevailing at 12:00 noon (New York City time) on the day which is two Business
Days next preceding the date of the Acquisition Agreement.
The Company will apply to the Stock Exchange for the listing of, and
permission to deal in, the Consideration Shares.
The Board takes the view that the consideration payable by the Company for
the Target Companies and the other terms of the Acquisition are fair and
reasonable. In particular, the Board is of the view that the terms of the
deferred consideration are more favourable than the usual terms of a commercial
bank loan of a similar size and term. The Board is of the view that the
Acquisition is in the best interests of the Company and its investors.
14
The following depicts the corporate structure of the Company, with its
principal subsidiaries, following completion of the Acquisition and the
completion of the Vodafone Subscription Agreement:
(CORPORATE STRUCTURE CHART)
15
(1) CMCC owns 100% of the economic interest in CMHKG.
(2) Based on 827,514,446 Consideration Shares being issued and allotted to
CMBVI and 236,634,212 Shares being issued to Vodafone or Vodafone
Holdings (as the case may be), on the assumption that the per Share
price of the Shares so issued is HK$24.7217 and no adjustment is made
to the per Share price and hence the number of Shares so issued.
(3) China Mobile (Shenzhen), a wholly-owned subsidiary of the Company
incorporated in Mainland China, was established in June 2000 to
improve profit monitoring and financial management of the Company's
operating subsidiaries in Mainland China, to handle roaming and
interconnection clearing and settlement among such subsidiaries and
among such subsidiaries and other enterprises of CMCC, and to conduct
research and development relating to wireless data communications.
(4) Aspire Holdings Limited is a 66.41% owned subsidiary of the Company
incorporated in the Cayman Islands in June 2000 and is engaged in the
provision of wireless data and Internet enabling technologies,
applications and service platforms including the unified Mobile
Information Service Center (MISC) platform through which the Group and
CMCC provide Monternet and other wireless data services to their
subscribers.
Further information on the Target Companies is set out in Appendix I to
this circular.
4 FINANCING OF THE ACQUISITION
The Company intends to finance the cash portion of the initial
consideration of the total purchase price of the Acquisition of US$3,150 million
primarily by:
(a) using existing internal cash resources of US$2,400 million,
representing 76.19% of the cash portion of the initial
consideration; and
(b) using the entire proceeds of the issue and allotment of Shares
totalling HK$5.85 billion (equivalent to approximately US$750
million) to Vodafone or Vodafone Holdings (as the case may be)
pursuant to the Vodafone Subscription Agreement.
The Shares to be issued and allotted to Vodafone or Vodafone Holdings (as
the case may be) will be subscribed for by Vodafone or Vodafone Holdings (as the
case may be) at a price of HK$24.7217 per Share, which is equal to the average
closing price of the Shares on the Stock Exchange for the 30 trading days prior
to the date of the Vodafone Subscription Agreement and the price at which the
Consideration Shares are issued to CMBVI. At HK$24.7217 per Share, the number of
Shares to be issued and allotted to Vodafone or Vodafone Holdings (as the case
may be) is 236,634,212 Shares (representing approximately 1.27% of the Company's
existing issued share capital). The translation above between Hong Kong dollars
and US dollars is based on the prevailing rate at 12:00 noon (New York City
time) on the day which is two Business Days next preceding the date of the
Vodafone Subscription Agreement, being HK$7.7993=US$1.00.
The price per Share and hence the number of the Shares to be issued to
Vodafone or Vodafone Holdings (as the case may be) are subject to adjustment on
the same basis as the price adjustment mechanism for the price per Consideration
Share to be issued and allotted to CMBVI.
After the issuance and allotment of the Shares to Vodafone or Vodafone
Holdings (as the case may be) under the Vodafone Subscription Agreement and the
issuance and allotment of the Consideration
16
Shares to CMBVI and assuming no adjustment is made to the price and numbers of
the Shares so issued, Vodafone's shareholding in the Company (held either
directly and/or through its wholly-owned subsidiaries) will increase to
approximately 3.27%.
The Vodafone Subscription Agreement is conditional upon, among other
things, the granting of the approval by the Stock Exchange for the listing of
and the permission to deal in the Shares to be issued to Vodafone or Vodafone
Holdings (as the case may be) pursuant to the Vodafone Subscription Agreement.
It is expected that the subscription of Shares under the Vodafone Subscription
Agreement will be completed on 18 June 2002 or such other date as the parties to
the Vodafone Subscription Agreement may agree.
The Shares will be issued to Vodafone or Vodafone Holdings (as the case
may be) in reliance on Regulation S under the United States Securities Act of
1933, as amended. The Company will apply to the Stock Exchange for the listing
of, and permission to deal in, the Shares to be issued to Vodafone or Vodafone
Holdings (as the case may be).
The Company intends to finance the deferred consideration using proceeds
from the possible issuance of RMB denominated bonds and/or Chinese Depositary
Receipts in the PRC, internal cash resources and/or other forms of funding.
5 CONDITIONS OF THE COMPLETION OF THE ACQUISITION
Completion of the Acquisition is conditional upon the fulfilment of
certain conditions on or before 30 September 2002, or such later date as CMBVI
and the Company may agree, and these conditions include:
(a) the passing of resolutions by the Independent Shareholders approving
the Acquisition, the issue of the Consideration Shares to CMBVI and
the Connected Transactions;
(b) the Company having received adequate funding or financing to satisfy
the cash portion of the initial consideration of the total purchase
price of the Acquisition;
(c) the granting by the Listing Committee of the Stock Exchange of the
listing of, and permission to deal in, the Consideration Shares to
be issued by the Company upon completion of the Acquisition;
(d) there having been no material adverse change to the financial
conditions, business operations, or prospects of any of the Target
BVI Companies or the Target Companies; and
(e) the receipt of various approvals from relevant PRC regulatory
authorities.
Certain PRC regulatory approvals have been obtained. In addition,
application has been made for approval by the relevant Chinese regulatory
authorities in relation to the change of legal status of the Target Companies to
wholly foreign-owned enterprises, and is being reviewed by the relevant Chinese
regulatory authorities.
17
Each of the Target Companies currently has a business licence as a limited
liability company. Upon approval by the relevant Chinese regulatory authorities,
the business licence of each of the Target Companies will be replaced by a new
one issued by the local Administration for Industry and Commerce to reflect its
status as a wholly foreign-owned enterprise. It is expected that the new
business licences will be obtained within six months after receiving such
approval from the relevant Chinese regulatory authorities. The businesses of the
Target Companies will not be affected by the process of issuance of their new
business licences.
The Acquisition shall be completed following the fulfilment (or waiver) of
the above conditions, and is expected to take place on the third Business Day
after the passing of the ordinary resolutions set out in this circular or such
other date as may be agreed between CMBVI and the Company following notification
by the Company to CMBVI of the fulfilment or waiver of all the conditions. If
any of the above-mentioned conditions is not fulfilled or waived by 30 September
2002, or such other date as CMBVI and the Company may agree, the Acquisition
Agreement shall lapse.
6 REASONS FOR AND BENEFITS OF THE ACQUISITION
The Acquisition represents an attractive opportunity for the Group to
consolidate its strong position and further capitalise on the growth potential
of the Chinese telecommunications industry. Each of the Target Companies is the
leading provider of mobile telecommunications services in its respective region.
The Acquisition will further consolidate the Group's overall market position.
The Target Companies have experienced significant growth in the total
number of subscribers from approximately 7.28 million as of 31 December 1999 to
approximately 20.93 million as of 31 December 2001. However, the mobile
penetration rates in these regions are relatively low compared with those of
other more mature Asian and international markets and with Mainland China's
coastal regions, which have experienced more rapid economic development. As of
31 December 2001, the mobile penetration rate was approximately 5.5% for Anhui,
6.9% for Jiangxi, 8.2% for Chongqing, 6.4% for Sichuan, 6.8% for Hubei, 5.5% for
Hunan, 8.3% for Shaanxi and 9.7% for Shanxi, with an overall weighted average of
approximately 6.8%. The Directors believe that these rates indicate significant
potential for subscriber growth in these regions.
Currently, the Group provides mobile telecommunications and related
services in Guangdong, Zhejiang, Jiangsu, Fujian, Henan, Hainan, Shandong,
Liaoning and Hebei provinces, Beijing, Shanghai and Tianjin directly-
administered municipalities and in the Guangxi autonomous region of Mainland
China. With the completion of the Acquisition, the Group will expand its
geographical coverage. Based on information as of 31 December 2001, the
subscribers of the Group will increase from approximately 69.64 million before
the Acquisition, or approximately 48% of all subscribers in Mainland China as of
such date, to approximately 90.57 million after the Acquisition or approximately
63% of all subscribers in Mainland China as of such date. In addition, the total
number of subscribers of the Combined Group has exceeded 100 million as of 20
April 2002. The Acquisition will increase the population in the areas where the
Group operates from approximately 632.8 million to approximately 1.05 billion
people, or 82.3% of Mainland China's total population as of 31 December 2001.
The Directors believe that the Acquisition will provide a solid foundation for
the Group's future growth.
18
The Directors believe that the Acquisition will enhance the Group's growth
prospects, further consolidate its leading position in the mobile
telecommunications market in Mainland China and create value for investors.
Assuming that the Acquisition had taken place on 1 January 2001, the pro
forma operating revenue, adjusted EBITDA and net profit and earnings per Share
of the Combined Group for the year ended 31 December 2001 are set out below.
FOR THE YEAR ENDED 31 DECEMBER 2001
---------------------------------------------------------------------
BEFORE ACQUISITION AFTER ACQUISITION
----------------------------- ---------------------
TARGET THE
GROUP GROUP PRO FORMA COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS NOTE GROUP
------------- ------------- ------------- ---- -------------
(RMB MILLIONS (RMB MILLIONS (RMB MILLIONS (RMB MILLIONS
EXCEPT PER EXCEPT PER EXCEPT PER EXCEPT PER
SHARE DATA) SHARE DATA) SHARE DATA) SHARE DATA)
Operating revenue 26,081 100,331 126,412
Adjusted EBITDA 12,889 60,270 73,159
Net profit before revaluation (256) (a)
deficit/amortization of
positive goodwill 5,408 28,015 (881) (b) 32,286
Deficit on revaluation of
fixed assets (2,113) -- (2,113)
Amortization of positive
goodwill -- -- (2,015) (c) (2,015)
Net profit 3,295 28,015 28,158
Basic and diluted earnings
per Share (1) XXX0.00 XXX0.00
(a) To adjust for reduction in the interest income and the related tax
effect for the cash portion of the initial consideration to be taken
from the internal resources of the Group as if the transaction had
taken place on 1 January 2001.
(b) To record the interest expense of the deferred consideration at
3.801% per annum as if the Acquisition had taken place on 1 January
2001. The interest expense is not deductible for taxation purposes.
(c) To record the amortization of positive goodwill as a result of the
acquisition of the Target Companies as if the acquisition had taken
place on 1 January 2001. The amortization is calculated to write off
the cost of positive goodwill on a straight line basis over the
estimated useful life of 20 years.
----------
(1) Assuming that the Company issues and allots 236,634,212 Shares to
Vodafone or Vodafone Holdings (as the case may be) and 827,514,446
Consideration Shares to CMBVI as part of the purchase consideration
on 1 January 2001, on the basis that the per Share price of the
Shares so issued is HK$24.7217 and no adjustment is made to the per
Share price and hence the number of Shares so issued.
19
In connection with the Acquisition, certain new agreements, including an
interconnection and roaming agreement and loan agreements, were entered into by
the Target Companies with CMCC and other parties, and the Target Companies'
fixed assets were revalued at 31 December 2001. No adjustments have been
reflected on the above pro forma information of the Combined Group in respect of
these arrangement and the reduction of depreciation charges as a result of the
revaluation of Target Companies' fixed assets at 31 December 2001.
As set out above, assuming that the Acquisition had taken place on 1
January 2001, the pro forma net profit of the Combined Group for the year ended
31 December 2001 will be RMB28,158 million. After excluding the revaluation
deficit of the Target Companies' fixed assets and/or the amortization of
positive goodwill arising on Acquisition, the pro forma net profit and the
corresponding earnings per Share of the Combined Group for the year ended 31
December 2001 will be as follows:
COMBINED
GROUP
-------------
(RMB MILLIONS
EXCEPT PER
SHARE DATA)
(a) Excluding the revaluation deficit of fixed assets
Net profit 30,271
Basic and diluted earnings per Share(1) RMB1.54
(b) Excluding the amortization of positive goodwill arising on Acquisition
Net profit 30,173
Basic and diluted earnings per Share(1) RMB1.53
(c) Excluding the revaluation deficit and amortization of positive
goodwill arising on acquisition
Net profit 32,286
Basic and diluted earnings per Share(1) RMB1.64
--------------
(1) These calculations assume that the Company issues and allots
236,634,212 Shares to Vodafone or Vodafone Holdings (as the case may
be) and 827,514,446 Consideration Shares to CMBVI as part of the
purchase consideration on 1 January 2001, on the basis that the per
Share price of the Shares so issued is HK$24.7217 and no adjustment
is made to the per Share price and hence the number of Shares so
issued.
The Unaudited Combined Pro Forma Balance Sheet of the Combined Group as at
31 December 2001 is set out in Appendix V to this circular.
20
SUMMARY OPERATING AND OTHER DATA
The following table sets out certain summary operating and other
data of the Group and the Target Group.
AS OF OR FOR THE YEAR ENDED
31 DECEMBER
------------------------------------
1999 2000 2001
------ ------ ------
THE GROUP
Total population base (in millions)(1) 000 000 003
Mobile penetration rate (%)(2) 5.0 9.3 15.2
Subscribers (in thousands)
Contract 25,743 32,409 34,010
Prepaid -- 12,725 35,633
------ ------ ------
Total subscribers 25,743 45,134 69,643
====== ====== ======
Market share (%)(2) 86.6 77.5 72.4
Average usage per user per month
(minutes/user/month)(3) 366 299 233
Average revenue per user per month
(RMB/user/month)(4) 299(5) 221(5) 145
AS OF OR FOR THE YEAR ENDED
31 DECEMBER
------------------------------------
1999 2000 2001
------ ------ ------
THE TARGET GROUP
Total population base (in millions)(1) 000 000 008
Mobile penetration rate (%)(2) 1.9 3.9 6.8
Subscribers (in thousands)
Contract 7,277 9,623 12,839
Prepaid -- 3,255 8,089
------ ------ ------
Total subscribers 7,277 12,878 20,928
====== ====== ======
Market share (%)(2) 91.7 80.8 73.9
Average usage per user per month
(minutes/user/month)(3) 315 284 235
Average revenue per user per month
(RMB/user/month)(4) 226 185 129
------
(1) Source: 2000 Provincial Statistical Yearbooks, 2001 Provincial
Statistical Yearbooks and "2001-2002 PRC National Economic and
Social Development Statistical Information Abstract".
(2) Calculated according to the Group's or the Target Companies'
estimates of the total number of mobile telecommunications
subscribers, including subscribers of other operators, in the
relevant geographical regions, and the respective population numbers
from 2000 Provincial Statistical Yearbooks, 2001 Provincial
Statistical Yearbooks and "2001-2002 PRC National Economic and
Social Development Statistical Information Abstract".
(3) Calculated by (i) dividing the total minutes of usage during the
relevant period by the average number of users during the period
(calculated as the average of the number of users at the end of each
of the thirteen calendar months from the end of the previous year to
the end of the current year) and (ii) dividing the result by twelve
months.
21
(4) Calculated by (i) dividing the operating revenue during the relevant
period by the average number of users during the period (calculated
in the same manner as described in note (3) above) and (ii) dividing
the result by twelve months.
(5) Represents pro forma figure, which means it is assumed that the
Group's existing structure (including thirteen mobile
telecommunications companies) was in place from 1 January 1999.
As of 31 December 2001, the combined total population base in the areas
where the Combined Group operates was approximately 1.05 billion, with a mobile
penetration rate of approximately 11.9%, and the Combined Group had a total of
approximately 90.57 million subscribers. For the year ended 31 December 2001,
the average usage per user per month was approximately 234 minutes and the
average revenue per user per month was RMB141.
7 PROSPECTIVE FINANCIAL INFORMATION
The Company and the Target Companies have prepared certain prospective
financial information in respect of the Target Companies for the year ending 31
December 2002. There is no present intention to update this information during
the year or to publish such information in future years, although the Directors
are aware of the requirements of paragraphs 2.10 and 2.11 of the Listing
Agreement between the Company and the Stock Exchange. This information is
necessarily based upon a number of assumptions (see Appendix VI) that, while
presented with numerical specificity and considered reasonable by the Company
and the Target Companies, are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of which are
beyond the control of the Company and the Target Companies, and upon assumptions
with respect to future business decisions which are subject to change.
Accordingly, there can be no assurance that these results will be realised. The
prospective financial information presented below may vary from actual results,
and these variations may be material.
The Company and the Target Companies believe that, on the basis and the
assumptions discussed in Appendix VI and in the absence of unforeseen
circumstances, the combined net profit of the Target Group for the year ending
31 December 2002 is unlikely to be less than RMB5,600 million (equivalent to
approximately HK$5,277 million based on the prevailing rate at 12:00 noon (New
York City time) on the day which is two Business Days next preceding the date of
the Acquisition Agreement) under accounting principles generally accepted in
Hong Kong ("Hong Kong GAAP"). The texts of the letters from KPMG, CICC and
Xxxxxxx Xxxxx in respect of the profit forecast are set out in Appendix VI to
this circular.
On the same basis and assumptions for the profit forecast, the Company and
the Target Companies believe that the combined adjusted EBITDA of the Target
Group for the year ending 31 December 2002 is unlikely to be less than RMB16,100
million (equivalent to approximately HK$15,172 million based on the prevailing
rate at 12:00 noon (New York City time) on the day which is two Business Days
next preceding the date of the Acquisition Agreement). The Company and the
Target Companies are not currently aware of any extraordinary items which have
arisen or are likely to arise in respect of the year ending 31 December 2002
which would affect the prospective financial information presented.
The consolidated accounts of the Company and its subsidiaries for the year
ending 31 December 2002 will be audited by their independent auditors. The
Company's annual report for 2002 will discuss the performance of the Target
Group and will address the profit forecast of the Target Group contained
22
in this circular and provide an explanation of material differences, if any,
between such profit forecast and the audited results of the Target Group
prepared under Hong Kong GAAP.
8 RELATIONSHIP WITH CMCC
As at the Latest Practicable Date, CMCC indirectly owned an aggregate of
approximately 75.58% of the Company's issued voting share capital and economic
interest. CMCC has undertaken that:
(a) it will extend its full support to the Group's present operations
and future development;
(b) the Group will be the only mobile telecommunications services
company operating in Mainland China under CMCC's control that will
be listed on any securities exchange in Hong Kong or outside
Mainland China;
(c) to the extent within CMCC's control, the Group will be treated
equally with any other mobile telecommunications entities in respect
of all approvals, transactions and arrangements between the Group
and CMCC and other mobile telecommunications entities controlled by
CMCC;
(d) CMCC and the provincial entities under its control will not,
directly or indirectly, participate in the operation of any mobile
telecommunications services in any province in which the Group
currently operates or may operate in the future; and
(e) in the provinces in which the Group operates, it will have the
option to operate additional communications services that fall
within CMCC's scope of business (including the testing and
commercial operation of services using new technologies such as
third generation mobile telecommunications technologies), and the
Group will have the right to acquire CMCC's interest in such
services.
9 CONNECTED TRANSACTIONS
A number of transactions have been and will be entered into between (a)
the Company, its subsidiaries and/or the Target Companies on the one hand; and
(b) CMCC or its subsidiaries on the other, which will constitute connected
transactions for the Company under the Listing Rules upon the completion of the
Acquisition.
Certain charges for the services under these transactions are fixed
according to tariffs set by the Chinese regulatory authorities. These
transactions include those described under "Interconnection Arrangements",
"Roaming Arrangements", "Spectrum Fees" and "Sharing of Inter-Provincial
Transmission Line Leasing Fees" below. In respect of these transactions, the
revenue received and the payments made by the Group are dependent upon the
relevant standard tariffs or policies determined by the relevant regulatory
authorities in the PRC, and the Company is not in a position to influence such
tariffs or policies. Those transactions where the charges are not set by Chinese
regulatory authorities are based on commercial negotiations between the relevant
parties, in each case on an arm's length basis. In this regard, the Company has
the benefit of an undertaking from CMCC that, to the extent within
23
CMCC's control, the Company will be treated equally with any other mobile
telecommunications operators in respect of all approvals, transactions and
arrangements between the Company and CMCC and other mobile telecommunications
operators controlled by CMCC. This forms an important basis of the connected
transactions entered or proposed to be entered into by the Group and the Target
Group.
INTERCONNECTION ARRANGEMENTS
The networks of each of the Target Companies and the Group
interconnect with the mobile telecommunications networks of CMCC in other
regions.
In May 2000, the Company entered into the Interconnection and
Roaming Agreement with CMCC (as supplemented by the First Supplemental
Agreement entered into in September 2000) which applies to the existing
operating subsidiaries of the Company. This agreement is valid for two
years from 1 April 1999, and 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 expiration of the term. This
agreement has twice been automatically renewed, and the current term will
expire on 31 March 2003.
Pursuant to the Second Supplemental Agreement, which is subject to
the completion of the Acquisition, the Company and CMCC will, among other
things, extend the existing interconnection arrangement and roaming
arrangement (discussed in more detail under "Roaming Arrangements" below)
under the Interconnection and Roaming Agreement to the Target Companies
after the Acquisition.
Under the Interconnection and Roaming Agreement:
o with regard to inter-provincial roaming, when the roaming
subscriber places a call from a roaming location, the network
operator with whom the subscriber is registered receives all
long distance calling charges and credits such charges, if any,
to the operator of the visited network; and when the roaming
subscriber receives a call at a roaming location, the network
operator with whom the subscriber is registered receives all
long distance calling charges, if any;
o international long distance calling charges incurred by an
international mobile telecommunications subscriber making an
international long distance call while roaming in the areas in
Mainland China where the Group operates are collected by CMCC
and are credited to the Group. The Group will make the
necessary settlement with the relevant telecommunications
operators in Mainland China. CMCC also collects a 15% handling
charge on such international long distance calling charges from
the international mobile communications operators and shares
such handling charge equally with the Group; and
o when the Group's subscribers roam internationally, the Group
will collect the international long distance calling charges,
if any, together with a 15% handling charge from its
subscribers and will pay the international long distance
calling charges together with half of the handling charge
collected to CMCC, which will make the necessary settlement
with the international mobile communications operators
concerned.
24
The long distance charges applicable to roaming are those chargeable
at the place where the long distance call is made. When long distance
charges cannot be distinguished from basic roaming charges (discussed in
more detail under "Roaming Arrangements" below), such long distance
charges are grouped under roaming charges.
The aggregate interconnection revenue for the Target Group in 2000
and 2001 were RMB523,891,000 (equivalent to approximately HK$493,771,000)
and RMB519,481,000 (equivalent to approximately HK$489,615,000)
respectively. The aggregate interconnection expenses paid by the Target
Group in 2000 and 2001 were RMB572,389,000 (equivalent to approximately
HK$539,481,000) and RMB523,984,000 (equivalent to approximately
HK$493,859,000) respectively.
ROAMING ARRANGEMENTS
Each of the Target Companies and the Group offers domestic and
international roaming services to its subscribers.
Under the Interconnection and Roaming Agreement:
o with regard to inter-provincial roaming, 80% of the basic
roaming calling charges payable by a roaming subscriber is
credited to the visited network operator and the remaining 20%
is retained by the roaming subscriber's home network operator;
o with regard to international roaming, roaming calling charges
incurred by an international mobile telecommunications
subscriber making or receiving a call while roaming in the
areas within Mainland China where the Group operates are
collected and credited to the Group by CMCC, and the Group will
make the necessary settlement with the relevant
telecommunications operators in Mainland China. CMCC also
collects a 15% handling charge on the roaming calling charges
from the international mobile communications operators and
shares such handling charge equally with the Group; and
o when the subscribers of the Group roam internationally, the
Group will collect the roaming calling charges together with a
15% handling charge from its subscribers and will pay the
roaming calling charges together with half of the handling
charge collected to CMCC, which will make the necessary
settlement with the international mobile telecommunications
operators concerned.
With respect to international roaming (that is, a Mainland Chinese
mobile phone subscriber roaming in Hong Kong, Macau, Taiwan or foreign
countries or an international mobile telecommunications subscriber roaming
in Mainland China), the roaming calling charges and the calculation of the
charges are determined according to the terms agreed between CMCC and the
relevant international mobile telecommunications operators.
The Interconnection and Roaming Agreement also sets out the roaming
call record processing fee standards payable to CMCC.
The aggregate roaming revenue for the Target Group in 2000 is
RMB930,339,000 (equivalent to approximately HK$876,851,000) and the
aggregate roaming expenses (excluding roaming call
25
record processing fees) for the Target Group in 2000 is RMB982,607,000
(equivalent to approximately HK$926,114,000). The aggregate roaming
revenue for the Target Group in 2001 is RMB1,256,980,000 (equivalent to
approximately HK$1,184,713,000) and the aggregate roaming expenses
(excluding roaming call record processing fees) for the Target Group in
2001 is RMB1,244,362,000 (equivalent to approximately HK$1,172,820,000).
No roaming call record processing fee was paid by the Target Group in 2000
and 2001.
SPECTRUM FEES
All mobile communications operators in Mainland China, including the
Group, are required to pay spectrum usage fees to the MII. The spectrum
fee standards are determined by the relevant Chinese regulatory
authorities. Based on this standardised fee scale, CMCC 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 MII.
In October 1999, the Company entered into an agreement with CMCC (as
supplemented by the First Supplemental Agreement entered into in September
2000) to obtain exclusive rights to use the frequency spectrum and
telephone numbers allocated to them in the respective areas in which they
operate. Under the agreement, the charges payable by CMCC to the MII for
the use of the 900 MHz and the 1800 MHz frequency bands will be shared
between the Group's and CMCC'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 the charges will be shared on the basis of
the bandwidth of the spectrum used.
The agreement is valid for an initial term of one year from 8
October 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. The agreement has twice
been automatically renewed, and the current term will expire on 7 October
2002.
Pursuant to the Second Supplemental Agreement, which is subject to
completion of the Acquisition, the Company and CMCC will, among other
things, extend the arrangement under the existing agreement to the Target
Companies after the Acquisition.
The aggregate spectrum fees paid by the Target Group in 2000 and
2001 were RMB8,021,000 (equivalent to approximately HK$7,560,000) and
RMB8,301,000 (equivalent to approximately HK$7,824,000) respectively.
SHARING OF INTER-PROVINCIAL TRANSMISSION LINE LEASING FEES
In May 2000, the Company entered into an agreement with CMCC (as
supplemental by the First Supplemental Agreement entered into in September
2000) in relation to the leasing of inter-provincial transmission lines.
This agreement is valid for two years from 1 April 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. This agreement has twice been automatically
renewed, and the current term will expire on 31 March 2003.
26
The inter-provincial transmission line leasing fees payable by the
Group via CMCC will be equal to the amount actually payable by CMCC to the
former CTC, which amount is determined based on the standard leasing fee
after adjusting for the discount to which CMCC is entitled, and on the
basis that the mobile telecommunications network operators at both ends of
the transmission lines will share the inter-provincial transmission line
leasing fees equally. The standard leasing fees are laid down by the
relevant tariff regulatory authorities and are applicable to other mobile
communications operators in Mainland China.
Pursuant to the Second Supplemental Agreement, which is subject to
completion of the Acquisition, the Company and CMCC will, among other
things, extend the arrangement under the existing agreement to the Target
Companies after the Acquisition.
The aggregate amount of inter-provincial transmission line leasing
fees paid by the Target Group in 2000 and 2001 were RMB205,003,000
(equivalent to approximately HK$193,217,000) and RMB95,807,000 (equivalent
to approximately HK$90,299,000), respectively.
PREPAID SERVICES
Each of the Target Companies and the Group offers prepaid services.
Some of such prepaid services allow subscribers to add value to their SIM
cards. The 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. The prepaid subscribers may add
value to their cards by purchasing value-adding cards from any of the
Group's network operators or CMCC's network operators.
In October 2000, the Company entered into an agreement with CMCC
regarding the sharing and settlement of revenue when prepaid subscribers
purchase value-adding cards issued by network operators of CMCC or the
Company other than their home network operators. This agreement took
effect from 1 July 2000 and was supplemented by an agreement entered into
in May 2001 which took effect from 21 April 2001. The arrangements apply
to the thirteen existing operating subsidiaries of the Company and the
Target Companies. Under the agreement (as supplemented), the network
operator in the location which issues the value-adding cards remits 95% of
the face value of the value-adding card to the subscriber's home network
operator and keeps the remaining 5% of the face value as a handling
charge. Hence, if the Group's subscribers purchase value-adding cards
issued by CMCC's network operators, CMCC's network operators will be
entitled to 5% of the face value as the handling charge. Conversely, if
CMCC's subscribers purchase value-adding cards issued by the Group's
network operators, the Group will be entitled to 5% of the face value as
the handling charge.
Pursuant to the Second Supplemental Agreement, which is subject to
completion of the Acquisition, the Company and CMCC will, among other
things, extend the existing arrangements to the Target Companies after the
Acquisition.
The aggregate handling charges in settlement of value added through
prepaid cards sold at a visited location receivable by the Target Group in
2000 and 2001 were RMB28,820,000 (equivalent
27
to approximately HK$27,163,000) and RMB114,792,000 (equivalent to
approximately HK$108,192,000), respectively. The aggregate handling
charges payable by the Target Group in 2000 and 2001 were RMB26,698,000
(equivalent to approximately HK$25,163,000) and RMB58,296,000 (equivalent
to approximately HK$54,944,000), respectively. The estimated aggregate
handling charges in settlement of value added through prepaid cards sold
at a visited location receivable by the Target Group in 2002 is
RMB82,101,000 (equivalent to approximately HK$77,381,000). The estimated
aggregate handling charges payable by the Target Group in 2002 is
RMB61,162,000 (equivalent to approximately HK$57,646,000).
TELECOMMUNICATIONS SERVICES
In April 2002, each of the Target Companies entered into an
agreement (collectively, the "Telecommunications Services Agreements")
with the eight respective telecommunications service companies
wholly-owned by CMCC in the provinces and directly-administered
municipality in which the Target Companies operate, under which such
subsidiaries provide certain telecommunications services to the Target
Companies. These services include:
(a) telecommunications projects planning, design and construction
services and telecommunications lines and pipelines
construction services (as the case may be) which are provided
to each of the Target Companies;
(b) telecommunications lines maintenance services which are
provided to Anhui Mobile, Jiangxi Mobile, Shaanxi Mobile and
Shanxi Mobile; and
(c) property leasing and property management services which are
provided to each of the Target Companies.
The Telecommunications Services Agreements are valid from the dates
of the respective agreements to 31 December 2002 and will be automatically
renewed on an annual basis unless any of the Target Companies notifies its
respective counterparty in writing of its intention to terminate at least
60 days prior to expiration of the term.
For services described in (a) and (b) above, the charges payable for
such services are determined with reference to and cannot exceed relevant
standards laid down and revised from time to time by the PRC government.
Where there are no government standards, the charges are determined
according to market rates.
For property leasing and property management services, the charges
payable by the Target Companies in respect of properties owned by
subsidiaries of CMCC are determined with reference to market rates; whilst
the charges payable in respect of properties which subsidiaries of CMCC
lease from third parties are determined according to the actual rent
payable by the subsidiaries of CMCC to such third parties together with
the amount of any tax payable.
In a letter dated 16 May 2002 prepared for the confirmation herein,
Chesterton Xxxxx, an independent valuer, has confirmed that the charges
payable for property leasing and property
28
management services are not more than the market rates within each
respective geographical area as at the relevant dates of the
Telecommunications Services Agreements and that all other terms of such
property leasing and property management are not onerous or unusual.
The estimated aggregate charges payable for telecommunications
projects planning, design and construction services and telecommunications
lines and pipelines construction services by the Target Group in 2002 is
RMB237,120,000 (equivalent to approximately HK$223,487,000).
The estimated aggregate charges payable for telecommunications lines
maintenance services by the Target Group in 2002 is RMB33,336,000
(equivalent to approximately HK$31,419,000).
The estimated aggregate charges payable for property leasing and
property management services by the Target Group in 2002 is
RMB217,182,000(equivalent to approximately HK$204,696,000).
TRANSMISSION TOWER SALES, INSTALLATION AND MAINTENANCE
On 8 May 2002, the Company entered into an agreement with Hubei
Communication Services Company, a wholly-owned subsidiary of CMCC pursuant
to which such subsidiary will sell transmission towers and spare parts and
provide related installation and maintenance services to all operating
subsidiaries (including the Target Companies) of the Company. Previously,
the majority of the Group's purchases of transmission towers and related
services were sourced from independent third party providers. The entering
into of this agreement will enhance the efficiency of the Group's
purchases of transmission towers and related services. The agreement is
valid from 8 May 2002 to 31 December 2002 and will be automatically
renewed on an annual basis unless either party notifies the other in
writing of its intention to terminate at least three months prior to
expiration of the term. The price of such transmission towers and spare
parts and the charges payable for services rendered under the agreement
are determined according to standards laid down by the PRC government, or
where there are no government standards, by reference to market rates.
The aggregate amounts payable by the Combined Group for purchases of
transmission towers and transmission tower-related services from such
subsidiary of CMCC in 2000 and 2001 were RMB58,823,000 (equivalent to
approximately HK$55,441,000) and RMB101,370,000 (equivalent to
approximately HK$95,542,000), respectively. The estimated aggregate
amounts payable by the Combined Group for purchases of transmission towers
and transmission tower-related services from such subsidiary of CMCC in
2002 is RMB200,000,000 (equivalent to approximately HK$188,501,000).
The Connected Transactions described above constitute, or will upon
completion of the Acquisition constitute, connected transactions under
Chapter 14 of the Listing Rules. The Directors are of the view that the
Connected Transactions described above are or will be conducted in the
ordinary and usual course of business and on normal commercial terms, and
that the terms of the Connected Transactions are fair and reasonable so
far as the Shareholders are concerned. As the Connected Transactions are
expected to occur on a regular and continuous basis in the ordinary and
usual course of business, the Company has made an application to the Stock
Exchange for a waiver from compliance with the normal approval and
disclosure requirements related to connected transactions under the
Listing Rules.
29
The Stock Exchange has indicated that it will grant the waiver
applied for in relation to the above connected transactions which will be
effective until 31 December 2004, on the following conditions:
(a) Arm's length basis: The transactions as well as the respective
agreements governing such transactions shall be:
(i) entered into in the ordinary and usual course of its
business on terms that are fair and reasonable so far as
the Independent Shareholders are concerned; and
(ii) on normal commercial terms and in accordance with the
terms of the agreements governing such transactions.
(b) Disclosure: The Company shall disclose in its annual report
details of the transactions as required by Rule 14.25(1)(A) to
(D) of the Listing Rules.
(c) Independent non-executive Directors' review: The independent
non-executive Directors shall review annually the transactions
and confirm, in the Company's annual report and accounts for
the year in question, that such transactions have been
conducted in the manner as stated in sub-paragraphs (a) above
and within the upper limits set out in paragraph (g) below.
(d) Auditors' review: The auditors of the Company shall review
annually the transactions and shall provide the Directors with
a letter, details of which will be set out in the Company's
annual accounts, stating that the transactions:
(i) received the approval of the board of Directors;
(ii) are in accordance with the pricing policy as stated in
the Company's annual report;
(iii) have been conducted in the manner as stated in
sub-paragraph (a)(ii) above; and
(iv) the upper limits as set out in paragraph (g) below have
not been exceeded.
The letter of the auditors is to be addressed to the Directors
and a copy of which is to be provided to the Stock Exchange.
Where for whatever reason, the auditors decline to accept the
engagement or are unable to provide that letter, the Directors
shall contact the Stock Exchange immediately.
(e) Shareholders' approval: Details of the transactions are
disclosed to the Company's existing Shareholders who will be
asked to vote in favour of an ordinary resolution to approve
the transactions and the upper limits set out in paragraph (g)
below at the Company's Extraordinary General Meeting.
30
(f) Undertaking: For the purpose of the above review by the
auditors of the Company, CMCC has previously undertaken to the
Company that it will provide the Company's auditors with access
to its and its Associates' accounting records.
(g) Upper limits: Connected Transactions of the following types
shall not exceed the upper limits set out below in the relevant
financial year of the Combined Group:
(i) Prepaid Services - handling charges received by the
Target Group from subsidiaries of CMCC in respect of
prepaid services in any financial year shall not exceed
1% of the Combined Group's total turnover in that
financial year and handling charges paid by the Target
Group to subsidiaries of CMCC in respect of prepaid
services in any financial year shall not exceed 1% of the
Combined Group's total turnover in that financial year;
(ii) Telecommunications projects planning, design and
construction services and telecommunications lines and
pipelines construction services - payments by the Target
Group to subsidiaries of CMCC for telecommunications
projects planning, design and construction services and
telecommunications lines and pipelines construction
services in any financial year shall not exceed 0.25% of
the Combined Group's total turnover in the relevant
financial year;
(iii) Telecommunications lines maintenance services - payments
by the Target Group to subsidiaries of CMCC for
telecommunications lines maintenance services in any
financial year shall not exceed 0.04% of the Combined
Group's total turnover in the relevant financial year;
(iv) Property leasing and property management services -
payments by the Target Group to subsidiaries of CMCC for
property leasing and property management services in any
financial year shall not exceed 0.25% of the Combined
Group's total turnover in the relevant financial year;
and
(v) Purchase of transmission towers and related services -
payments by the Combined Group to the relevant subsidiary
of CMCC for purchase of transmission towers and
transmission tower-related services in any financial year
shall not exceed 0.5% of the Combined Group's turnover in
the relevant year.
The Stock Exchange has also indicated that if any of the values of the
Connected Transactions exceed the relevant upper limits or if any of the terms
of the agreements related to the Connected Transactions or the nature of the
Connected Transactions is altered (unless as provided for under the terms of the
relevant agreement) or if the Group enters into any new agreements with
connected persons in the future, the Company will need to comply fully with all
the relevant provisions of Chapter 14 of the Listing Rules dealing with
connected transactions.
31
10 EXTRAORDINARY GENERAL MEETING
A notice of the Extraordinary General Meeting to be held in the Conference
Room, 3rd Floor, JW Marriott Hotel, Pacific Place, 00 Xxxxxxxxx Xxxx, Xxxxxxx,
Xxxx Xxxx, xx 24 June 2002 at 11:30 a.m. (or as soon thereafter as the annual
general meeting of the Company to be convened at 11:00 a.m. at the same place
and date shall have been concluded or adjourned), is set out at the end of this
circular. Ordinary resolutions will be proposed to approve the Acquisition, the
issue of the Consideration Shares and the Connected Transactions.
In accordance with the Listing Rules, CMBVI, the controlling shareholder
of the Company which is beneficially interested in approximately 75.58% of the
issued share capital of the Company as at the Latest Practicable Date, and its
respective Associates, will abstain from voting on the resolutions to approve
the Acquisition, the issue of the Consideration Shares and the Connected
Transactions at the Extraordinary General Meeting.
A form of proxy for use at the Extraordinary General Meeting is enclosed.
Whether or not Shareholders are able to attend the Extraordinary General
Meeting, they are requested to complete and return the enclosed form of proxy to
the Company's registered office at 00xx Xxxxx, Xxx Xxxxxx, 00 Xxxxx'x Xxxx
Xxxxxxx, Xxxx Xxxx, as soon as practicable and in any event at least 36 hours
before the time appointed for holding the Extraordinary General Meeting.
Completion and return of the form of proxy will not preclude Shareholders from
attending and voting in person at the Extraordinary General Meeting should they
so wish.
11 RECOMMENDATION OF THE INDEPENDENT BOARD COMMITTEE
Rothschild has been retained as the independent financial adviser to
advise the Independent Board Committee in respect of the terms of the
Acquisition, the mechanism for the determination of the issue price of the
Consideration Shares and the terms of the Connected Transactions.
The Independent Board Committee, having taken into account the advice of
Rothschild, considers the terms of the Acquisition, the mechanism for the
determination of the issue price of the Consideration Shares and the terms of
the Connected Transactions, from a financial perspective, to be fair and
reasonable so far as the Independent Shareholders are concerned and the
Acquisition to be in the interest of the Group. Accordingly, the Independent
Board Committee recommends that the Independent Shareholders should vote in
favour of the ordinary resolutions to approve the Acquisition, the issue of the
Consideration Shares and the Connected Transactions at the Extraordinary General
Meeting. The letter from Rothschild containing its advice and recommendation and
the principal factors and reasons taken into account in arriving at its
recommendation is set out on pages 35 to 57 of this circular.
12 ADDITIONAL INFORMATION
Your attention is drawn to the letter of the Independent Board Committee
set out on pages 33 to 34 of this circular, the letter set out on pages 35 to 57
of this circular from Rothschild, the independent financial adviser to the
Independent Board Committee in respect of the terms of the Acquisition, the
mechanism for the determination of the issue price of the Consideration Shares
and the terms of the Connected Transactions, and to the information set out in
the appendices to this circular.
By Order of the Board
CHINA MOBILE (HONG KONG) LIMITED
WANG XIAOCHU
Chairman and Chief Executive Officer
32
--------------------------------------------------------------------------------
LETTER FROM INDEPENDENT BOARD COMMITTEE
--------------------------------------------------------------------------------
(CHINA MOBILE LOGO)
CHINA MOBILE (HONG KONG) LIMITED
(Incorporated in Hong Kong with limited liability under the Companies Ordinance)
27 May 2002
To the Independent Shareholders
Dear Sir or Madam,
MAJOR TRANSACTION AND CONNECTED TRANSACTIONS
ACQUISITION OF ANHUI MOBILE BVI, JIANGXI MOBILE BVI,
CHONGQING MOBILE BVI, SICHUAN MOBILE BVI, HUBEI MOBILE BVI,
HUNAN MOBILE BVI, SHAANXI MOBILE BVI AND SHANXI MOBILE BVI
We refer to the circular (the "Circular") dated 27 May 2002 issued by the
Company to its Shareholders and for information only, its Noteholders and
Convertible Noteholders of which this letter forms part. The terms defined in
the Circular shall have the same meanings when used in this letter, unless the
context otherwise requires.
On 16 May 2002, the Board announced that the Company had entered into the
Acquisition Agreement, pursuant to which the Company agreed to acquire, and
CMBVI agreed to sell, the entire issued share capital of each of Anhui Mobile
BVI, Jiangxi Mobile BVI, Chongqing Mobile BVI, Sichuan Mobile BVI, Hubei Mobile
BVI, Hunan Mobile BVI, Shaanxi Mobile BVI and Shanxi Mobile BVI, subject to
certain conditions.
The Independent Board Committee was formed on 16 May 2002 to make a
recommendation to the Independent Shareholders as to whether, in its view, the
terms of the Acquisition, the mechanism for the determination of the issue price
of the Consideration Shares and the terms of the Connected Transactions, from a
financial perspective, are fair and reasonable so far as the Independent
Shareholders are concerned. Rothschild has been retained as independent
financial adviser to advise the Independent Board Committee on the fairness and
reasonableness of the terms of the Acquisition, the mechanism for the
determination of the issue price of the Consideration Shares and the terms of
the Connected Transactions from a financial perspective.
The terms and the reasons for the Acquisition (including arrangements
regarding the financing of the Acquisition) are summarised in the Letter from
the Chairman set out on pages 10 to 32 of the Circular. The terms of the
Connected Transactions are also summarised in the Letter from the Chairman.
As your Independent Board Committee, we have discussed with the management
of the Company the reasons for the Acquisition, the mechanism for the
determination of the issue price of the Consideration Shares and the terms
33
of the Connected Transactions and the basis upon which their terms have been
determined. We have also considered the key factors taken into account by
Rothschild in arriving at its opinion regarding the terms of the Acquisition,
the mechanism for the determination of the issue price of the Consideration
Shares and the terms of the Connected Transactions as set out in the letter from
Rothschild on pages 35 to 57 of the Circular, which we urge you to read
carefully.
THE INDEPENDENT BOARD COMMITTEE, AFTER TAKING ADVICE FROM ROTHSCHILD,
CONCURS WITH THE VIEWS OF ROTHSCHILD AND CONSIDERS THAT THE TERMS OF THE
ACQUISITION, THE MECHANISM FOR THE DETERMINATION OF THE ISSUE PRICE OF THE
CONSIDERATION SHARES AND THE TERMS OF THE CONNECTED TRANSACTIONS, FROM A
FINANCIAL PERSPECTIVE, ARE FAIR AND REASONABLE SO FAR AS THE INDEPENDENT
SHAREHOLDERS ARE CONCERNED. THE INDEPENDENT BOARD COMMITTEE CONSIDERS THAT THE
ACQUISITION IS IN THE INTEREST OF THE GROUP. ACCORDINGLY, THE INDEPENDENT BOARD
COMMITTEE RECOMMENDS THE INDEPENDENT SHAREHOLDERS TO VOTE IN FAVOUR OF ORDINARY
RESOLUTIONS NUMBERED 1, 2 AND 3 SET OUT IN THE NOTICE OF THE EXTRAORDINARY
GENERAL MEETING AT THE END OF THE CIRCULAR.
Yours faithfully
XXXXXX XX XXXX XXXXXX
LO KA SHUI
Independent Board Committee
34
--------------------------------------------------------------------------------
LETTER FROM ROTHSCHILD
--------------------------------------------------------------------------------
(ROTTHSCHILD LOGO)
N M ROTHSCHILD & SONS (HONG KONG) LIMITED
00xx Xxxxx
Xxxxxxxxx Xxxxx
Xxxxxxx
Xxxx Xxxx
27 May 2002
To the Independent Board Committee of
China Mobile (Hong Kong) Limited
Dear Sirs,
MAJOR TRANSACTION AND CONNECTED TRANSACTIONS
ACQUISITION OF ANHUI MOBILE BVI, JIANGXI MOBILE BVI,
CHONGQING MOBILE BVI, SICHUAN MOBILE BVI, HUBEI MOBILE BVI,
HUNAN MOBILE BVI, SHAANXI MOBILE BVI AND SHANXI MOBILE BVI
We refer to the Acquisition Agreement and the Connected Transactions,
details of which are contained in the circular of the Company dated 27 May 2002
to the Shareholders and, for the latters' information only, to the Noteholders
and the Convertible Noteholders (the "Circular"), of which this letter forms
part. Rothschild has been retained as the independent financial adviser by the
Company to advise the Independent Board Committee as to whether or not the terms
of the Acquisition, the mechanism for the determination of the issue price of
the Consideration Shares and the terms of the Connected Transactions, from a
financial perspective, are fair and reasonable so far as the Independent
Shareholders are concerned.
The terms used in this letter shall have the same meanings as defined
elsewhere in the Circular unless the context otherwise requires.
As at the Latest Practicable Date, CMBVI owned approximately 75.58% of the
issued share capital of the Company. Pursuant to the Listing Rules, the
Acquisition constitutes both a major transaction and a connected transaction for
the Company. Accordingly, the Acquisition is subject to, inter alia, the
Independent Shareholders' approval at the Extraordinary General Meeting.
The Connected Transactions constitute, or will upon completion of the
Acquisition constitute, connected transactions for the Company under the Listing
Rules. As the Connected Transactions are expected to be conducted regularly and
continuously in the ordinary and usual course of business, the Company has
applied to the Stock Exchange for a waiver from compliance with the normal
approval and disclosure requirements relating to connected transactions under
the Listing Rules (the "Waiver"). The Stock Exchange has indicated that the
granting of the Waiver, which will be effective until 31
35
December 2004, will be subject to, inter alia, the Independent Shareholders'
approval of the Connected Transactions at the Extraordinary General Meeting.
In formulating our recommendation, we have relied on information and facts
supplied to us by the Board and have assumed that any representations made to us
are true, accurate and complete in all material respects as at the date hereof
and that they may be relied upon. We have also assumed that all information,
representations and opinions contained or referred to in the Circular are fair
and reasonable and have relied on them.
We have been advised by the Board that no material facts have been omitted
and we are not aware of any facts or circumstances which would render the
information provided and the representations made to us untrue, inaccurate or
misleading in every material respect. We have no reason to doubt the truth,
accuracy and completeness of the information and representations provided to us
by the Board. The Directors have collectively and individually accepted full
responsibility for the accuracy of the information contained in the Circular and
have confirmed, having made all reasonable enquiries, that to the best of their
knowledge and belief, there are no other facts the omission of which would make
any statement in the Circular misleading. We consider that we have reviewed
sufficient information to reach an informed view in order to provide a
reasonable basis for our advice. We have not, however, conducted any independent
in-depth investigation into the business and affairs of the Group and the Target
BVI Companies and their subsidiaries.
PRINCIPAL FACTORS AND REASONS
In arriving at our opinion, we have taken into consideration the following
principal factors and reasons:
1 BACKGROUND AND RATIONALE
As noted in the "Letter from the Chairman" in the Circular, the Board is
of the view that the Acquisition represents an attractive opportunity for the
Group to consolidate its strong position and further capitalise on the growth
potential of the Chinese telecommunications industry. In addition, the Directors
believe that the Acquisition will enhance the Group's growth prospects, and will
create value for investors.
In 2001, China's mobile market became the largest in the world in terms of
subscriber numbers, followed by the United States and Japan, and recorded its
highest increase in subscriber numbers in one single year. Based on the official
data from the MII, total mobile subscribers in China increased from
approximately 85.26 million at the end of 2000 to approximately 144.80 million
at the end of 2001, representing an overall net addition of 59.54 million
subscribers or an annual growth rate of approximately 69.8%. In the first three
months of 2002, the number of subscribers increased from approximately 144.80
million to approximately 161.50 million, representing a further 11.5% growth.
Despite achieving such growth, the overall mobile penetration rate in
Mainland China remains relatively low at approximately 11.2% at the end of 2001,
compared to Hong Kong, which had a mobile penetration rate of about 83.4% and
the other more developed countries in Asia such as Singapore, Japan and South
Korea, which had mobile penetration rates of about 66.4%, 52.9% and 60.6%
respectively, and other international markets such as the United States and the
United Kingdom which had mobile penetration rates of about 45.9% and about 75.3%
respectively at the end of 2001 (based on data from Global Mobile issued on 8
May 2002). As such, Mainland China's mobile market is still at an early
36
stage of development and offers significant growth potential. Furthermore,
continued rapid growth of Mainland China's economy is also expected to boost
demand for telecommunications services. Further background information on the
telecommunications industry in Mainland China is set out in Appendix I to the
Circular.
Each of the Target Companies is the leading provider of mobile
telecommunications services in its respective operating region. Market shares
for the Target Companies range from approximately 65.8% to 79.7% as of 31
December 2001, with a weighted average market share collectively of
approximately 73.9%. The Group, after completion of the Acquisition, will expand
its geographical coverage from the existing 13 provinces, municipalities and
autonomous regions to 21, out of a total 31 provinces, municipalities and
autonomous regions in Mainland China. The Acquisition would have increased the
population in the areas where the Group operates from approximately 632.8
million to approximately 1.05 billion people, or approximately 82.3% of Mainland
China's total population as of 31 December 2001. Total subscriber numbers of the
Group would have increased from approximately 69.64 million as of 31 December
2001, before the Acquisition, to about 90.57 million as of such date after the
Acquisition, representing an increase of about 30.1%. Furthermore, as of 20
April 2002, the total number of subscribers of the Combined Group would have
exceeded 100 million.
Mobile penetration rates for the regions in which the Target Companies
operate are relatively low, with a weighted average mobile penetration rate of
about 6.8% at the end of 2001, compared with those of other more mature Asian
and international regions, and the more developed coastal regions of Mainland
China. Nevertheless, the total number of subscribers of the Target Companies
increased by approximately 5.60 million and approximately 8.05 million in 2000
and 2001 respectively, or a percentage increase of approximately 77.0% and
approximately 62.5% respectively. This compares favourably with the Group's
total subscriber percentage increase of approximately 75.3% and approximately
54.3% for the same years respectively.
On the above basis, we concur with the Board's view that the Acquisition
represents an attractive opportunity for the Group to consolidate its strong
position and further capitalise on the growth potential of the Chinese
telecommunications industry. We also concur with the Board's view that this
should in turn enhance the Group's growth prospects, and ultimately create value
for investors.
2 THE ACQUISITION
(a) Assets to be acquired
The Company has conditionally agreed to acquire from CMBVI the
entire issued share capital of each of Anhui Mobile BVI, Jiangxi
Mobile BVI, Chongqing Mobile BVI, Sichuan Mobile BVI, Hubei Mobile
BVI, Hunan Mobile BVI, Shaanxi Mobile BVI and Shanxi Mobile BVI for
a total purchase price of US$8,573 million (equivalent to
approximately HK$66,863.4 million based on the prevailing Hong Kong
dollar to US dollar exchange rate at 12:00 noon (New York City time)
on the day which is two Business Days next preceding the date of the
Acquisition Agreement). The only asset of each of the Target BVI
Companies is its entire interest in Anhui Mobile, Jiangxi Mobile,
Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile,
Shaanxi Mobile and Shanxi Mobile respectively.
37
Each of the Target Companies is the leading provider of mobile
telecommunications services in its respective operating region and
offers mobile telecommunications services using GSM technology. Each
of the Target Companies is also a major provider of wireless data
services and an important provider of Internet Protocol
telecommunications services in its operating region. The table below
sets out the respective subscriber base and market share of each of
the Target Companies and those of the Group as of 31 December 2001:
AS OF 31 DECEMBER 2001
-----------------------------------------------------
ESTIMATED MARKET SHARE
SUBSCRIBER BASE (THOUSANDS) (NOTE) (%)
--------------------------- ----------------------
Anhui Mobile 2,382 68.3
Jiangxi Mobile 2,152 74.2
Chongqing Mobile 1,805 71.5
Sichuan Mobile 4,161 75.5
Hubei Mobile 3,036 75.2
Hunan Mobile 2,901 79.7
Shaanxi Mobile 2,001 65.8
Shanxi Mobile 2,490 78.7
------ -----
Target combined 20,928 73.9
The Group 69,643 72.4
Source: Company
Note: Calculated based on the total number of mobile
telecommunications subscribers in the relevant
geographical regions estimated by the Group and the
Target Companies.
Further operational information on the Target Companies is set out
in Appendix I to the Circular.
We summarise below the historical (i) combined revenue; (ii)
combined adjusted EBITDA; (iii) combined adjusted net profit (before
deficit on revaluation of fixed assets, write-down and write-off of
network equipment net of associated taxation); and (iv) combined net
profit of the Target Group for each of the three years ended 31
December 2001, which were extracted from or calculated based on the
accountants' report on the Target Group as set out in Appendix II to
the Circular. It should be noted that the lower combined net profits
for 1999 and 2000 were mainly caused by the write-down and write-off
of analogue network equipment, and in 2001 there was a deficit
arising from the revaluation of fixed assets in relation to the
Acquisition. We understand from the Board that, in the absence of
unexpected events, they do not expect further write-downs and/or
write-offs of a similar nature going forward.
YEAR ENDED 31 DECEMBER
-----------------------------------
1999 2000 2001
------ ------ -------
REVENUE
(RMB million) 16,261 21,643 26,081
(HK$ million) 15,326 20,399 24,582
(US$ million) 1,965 2,615 3,151
38
YEAR ENDED 31 DECEMBER
-----------------------------------
1999 2000 2001
------ ------ -------
ADJUSTED EBITDA
(RMB million) 7,418 10,048 12,889
(HK$ million) 6,992 9,470 12,148
(US$ million) 896 1,214 1,557
YEAR ENDED 31 DECEMBER
-----------------------------------
1999 2000 2001
------ ------ -------
ADJUSTED NET PROFIT (BEFORE DEFICIT ON
REVALUATION OF FIXED ASSETS, WRITE-DOWN AND
WRITE-OFF OF NETWORK EQUIPMENT NET OF
ASSOCIATED TAXATION)
(RMB million) 2,632 3,776 5,408
(HK$ million) 2,481 3,559 5,097
(US$ million) 318 456 653
NET PROFIT
(RMB million) 1,921 618 3,295
(HK$ million) 1,811 582 3,106
(US$ million) 232 75 398
Based on the assumptions set out in Appendix VI to the Circular and
in the absence of unforeseen circumstances, the Board believes that
the estimated combined net profit and the combined adjusted EBITDA
of the Target Group for the year ending 31 December 2002 are
unlikely to be less than RMB5,600 million and RMB16,100 million
respectively, equivalent to about HK$5,277 million and about
HK$15,172 million respectively, representing an increase of
approximately 70% and approximately 25% respectively from 2001. The
exchange rate used above is based on the prevailing rate at 12:00
noon (New York City time) on the day which is two Business Days next
preceding the date of the Acquisition Agreement.
As at 31 December 2001, the combined net assets of the Target Group
amounted to approximately RMB30,663 million (equivalent to about
HK$28,900 million or about US$3,705 million). Please refer to
Appendix II to the Circular for additional financial information on
the Target Group.
(b) Basis of the consideration
The Acquisition Agreement was entered into after arm's length
negotiation between the Company and CMBVI and was based on normal
commercial terms. We understand that the total purchase price of
US$8,573 million (equivalent to about HK$66,863.4 million based on
the prevailing Hong Kong dollar to US dollar exchange rate at 12:00
noon (New York City time) on the day which is two Business Days next
preceding the date of the Acquisition Agreement) was determined
after having considered various factors such as the prospective
adjusted EBITDA and prospective profit contributions of the Target
Companies to the Combined Group, the quality of the assets being
acquired, their growth prospects, earnings potential, competitive
advantages in their respective markets and other relevant valuation
39
benchmarks. In addition, the Company will also assume the net
indebtedness of the Target Companies, which amounted to
approximately RMB13,467 million (equivalent to approximately
HK$12,693 million or approximately US$1,627 million) as of 31
December 2001.
(c) Financing of the Acquisition
Under the Acquisition Agreement, the total purchase price for the
Acquisition of US$8,573 million (equivalent to about HK$66,863.4
million) will be satisfied by the payment of an initial
consideration by cash and the issuance of Consideration Shares to
CMBVI of an aggregate of US$5,773 million (equivalent to about
HK$45,025.4 million) upon completion of the Acquisition and the
payment of a deferred consideration of US$2,800 million (equivalent
to about HK$21,838.0 million).
The Company intends to finance the cash portion of the initial
consideration of US$3,150 million (equivalent to approximately
HK$24,567.8 million) primarily by using existing internal cash
resources of US$2,400 million (equivalent to approximately
HK$18,718.3 million) and the entire proceeds from the issuance and
allotment of Shares of HK$5.85 billion (equivalent to approximately
US$750 million) to Vodafone or Vodafone Holdings (as the case may
be) pursuant to the Vodafone Subscription Agreement. The balance of
US$2,623 million (equivalent to approximately HK$20,457.6 million)
of the initial consideration will be satisfied by the issuance and
allotment of 827,514,446 Consideration Shares to CMBVI at an issue
price of HK$24.7217 per Consideration Share. The price per
Consideration Share is equal to the average closing price of the
Shares on the Stock Exchange for the 30 trading days prior to the
date of Acquisition Agreement, and is the same as the per Share
price of the Shares to be issued and allotted to Vodafone or
Vodafone Holdings (as the case may be). The translations above
between Hong Kong dollars and US dollars are based on the prevailing
exchange rate at 12:00 noon (New York City time) on the day which is
two Business Days next preceding the date of Acquisition Agreement.
The price per Consideration Share and hence the number of the
Consideration Shares to be issued to CMBVI are subject to adjustment
if the simple arithmetic average of the volume-weighted average
prices per Share on the Stock Exchange for the 10 consecutive
trading days commencing from the trading day immediately following
the date of the Acquisition Agreement ("Average VWAP") is either
higher than HK$28.4300 (being HK$24.7217 as increased by 15%) or
lower than HK$21.0134 (being HK$24.7217 as decreased by 15%). If the
Average VWAP is higher than HK$28.4300, then the per Consideration
Share price will be increased by 50% of the difference between the
Average VWAP and HK$28.4300. If the Average VWAP is lower than
HK$21.0134, then the per Consideration Share price will be decreased
by 50% of the difference between HK$21.0134 and the Average VWAP.
The number of Consideration Shares to be issued to CMBVI will be
adjusted accordingly using the new per Consideration Share price.
The deferred consideration is payable 15 years after the date of
completion of the Acquisition. The Company intends to finance the
deferred consideration using proceeds from the possible issue of RMB
denominated bonds and/or Chinese Depositary Receipts in the PRC,
internal cash resources and/or other forms of funding.
40
The deferred consideration is subject to interest payable
semi-annually to CMBVI on the actual amount of deferred
consideration remaining unpaid from the date of completion of the
Acquisition, calculated on a daily accrual basis and at the two-year
US dollar LIBOR swap rate at 11 am (New York City time) on the
second Business Day next preceding the date of the Acquisition
Agreement for the first two years after completion of the
Acquisition. Thereafter, interest rate is adjusted every two years
based on the two-year US dollar LIBOR swap rate prevailing at 11 am
(New York City time) on the relevant Interest Determination Date.
It is noted that the deferred consideration is subordinated to other
senior debts owed by the Company from time to time including, but
not necessarily limited to, the US$600 million Notes and the US$690
million Convertible Notes issued by the Company in 1999 and 2000
respectively.
The Company may make early payment of all or part of the deferred
consideration, from time to time, at any time after completion of
the Acquisition, without penalty. The Company has undertaken to
CMBVI to use its reasonable endeavours, subject to market conditions
and receiving all necessary regulatory and Governmental approvals,
to issue RMB denominated bonds and Chinese Depositary Receipts and
has agreed to make early payment of the deferred consideration using
the net proceeds from the possible issuance of RMB denominated bonds
and/or Chinese Depositary Receipts after such proceeds are received.
Should the Company decide to make early payment of all or part of
the deferred consideration other than from the net proceeds from the
issuance of RMB denominated bonds or Chinese Depositary Receipts,
such early payment can only be made if it does not have any
significant impact on the Company's ability to repay any senior debt
to which the deferred consideration is subordinated.
The financing structure for the Acquisition is favourable in
particular for the following reasons:
o the deferred consideration mechanism provides a 15 year payment
period for the deferred consideration, thereby ensuring the
Company considerable funding flexibility;
o the deferred consideration mechanism provides financing at more
favourable rates than financing the deferred consideration via
debt securities or bank borrowings at present market rates;
o the payment mechanism utilises the considerable cash resources
of the Company and effectively utilises available resources of
the Combined Group; and
o the financing structure offers multiple funding sources,
diversifying funding risk and provides an opportunity to
optimise the current capital structure of the Company.
We note that the Directors are of the opinion that the Combined
Group will, following the completion of the Acquisition, have
sufficient working capital for its present requirements in the
absence of unforeseen material circumstances.
On the above basis, we consider that the terms for the financing of
the Acquisition are fair and reasonable.
41
(d) Valuation of the Target Companies
The total purchase price for the Acquisition of US$8,573 million
(equivalent to approximately HK$66,863.4 million based on the
prevailing Hong Kong dollar to US dollar exchange rate at 12:00 noon
(New York City time) on the day which is two Business Days next
preceding the date of Acquisition Agreement) implies an enterprise
value ("EV") for the Target Companies of approximately US$10,200
million (equivalent to approximately HK$79,556 million), being the
equity value (the total consideration to be paid in this case) plus
net debt of the Target Group to be assumed by the Group of
approximately RMB13,467 million (equivalent to approximately
US$1,627 million or approximately HK$12,693 million).
We have analysed the acquisition price of the Target Companies using
three valuation methodologies, which are discounted cash flow
("DCF") analysis, comparable company analysis and recent merger and
acquisition transactions of mobile companies.
(i) Discounted cash flow analysis
We have used DCF analysis as the primary valuation tool as it
reflects the future cashflows of the Target Companies, taking
into account the characteristics of the market, competition in
the sector, regulatory environment, the Target Companies' cost
structure and capital expenditure requirements as well as the
profile of the subscriber bases.
Our DCF model is driven by the parameters from the long-term
business plans and forecasts of the Target Companies obtained
from the Target Companies and/or the Company. We have reviewed
the key assumptions and operating benchmarks of the Target
Companies, and compared our forecasts against the key business
assumptions provided by the Company in the context of the
overall Mainland China mobile market conditions, as well as
researching the performance of other mobile operators in
comparable markets, and based on this analysis we are
comfortable that the business plan is achievable.
The enterprise value of approximately US$10,200 million
(equivalent to approximately HK$79,556 million) for the
Acquisition implied by the consideration is within our DCF
valuation range.
(ii) Comparable company analysis
We have conducted a comparable company analysis using ratios
commonly applied in the telecommunications industry, in
particular EV/EBITDA and EV/subscriber. Price/earnings and
price/net book value ratios have not been relied upon as they
are not particularly useful in analysing companies in a high
growth and capital intensive sector such as telecommunications,
and do not take account of differences in accounting treatment
for tax and depreciation in different countries.
The enterprise value of approximately US$10,200 million
(equivalent to approximately HK$79,556 million) for the
Acquisition implies a 2002 EV/adjusted EBITDA of approximately
5.2 times, and a 2002 EV/subscriber of approximately US$356
based on
42
the Company and the Target Companies' management's forecast
EBITDA and subscriber numbers respectively for the Target
Companies at the end of 2002, as set out in the "Letter from
the Chairman" in the Circular.
Since the Target Companies share a number of characteristics
with CMHK in terms of market position, relative average revenue
per user per month ("ARPU") levels and quality of subscriber
base, and the fact that, like CMHK, they are exclusively
involved in the provision of mobile services in China, we
consider that CMHK represents the best comparable for the
Target Companies. As set out in the table below, the 2002
EV/EBITDA and EV/subscriber multiples implied by the
transaction represent a 33.3% and 47.6% discount to CMHK's
corresponding estimated multiples of 2002 respectively.
China Unicom Limited ("China Unicom"), another Hong Kong listed
telecommunications operator with a mobile business in Mainland
China, is also generally considered to be comparable to the
Target Companies. However, we believe that China Unicom is
significantly less comparable than CMHK for the purpose of
valuing the Target Companies. China Unicom trades at a
significant discount to CMHK (please refer to the table below),
in part due to the fact that China Unicom is an integrated
provider of telecommunications services, also offering paging,
long distance, data and Internet services. Also, although China
Unicom is experiencing high growth in subscribers, it currently
has lower blended ARPU (being RMB86 based on the annual report
of China Unicom for the year ended 31 December 2001 versus a
blended ARPU of RMB129 for the Target Companies for the same
period) and a smaller market share than the Target Companies. A
higher blended ARPU is generally regarded as more favourable,
as it represents greater revenue per user.
EV/FORECAST EBITDA EV/FORECAST
2002 (FULL YEAR) SUBSCRIBER
(TIMES) END OF 2002 (US$)
------------------ -----------------
CMHK 7.8 000
XXXXX UNICOM 5.5 292
discount China Unicom to CMHK 29.5% 57.0%
TARGET COMPANIES 5.2 356
discount/(premium) to CMHK 33.3% 47.6%
discount/(premium) to China Unicom 5.5% (21.9%)
Notes:
(1) Enterprise values of CMHK and China Unicom are calculated
based on their respective closing prices as at the date
of Acquisition Agreement.
(2) Forecast EBITDA 2002 (full year) and forecast subscriber
by the end of 2002 for CMHK and China Unicom are based
on consensus brokers' estimates.
We have also prepared a list of comparable mobile companies,
which are further divided into three broad categories - mobile
companies in developing Asia, developed Asia and developed
Europe/America. These operators share certain common
characteristics with the Target Companies such as mobile
penetration rate, levels of income, ARPU and growth potential,
and the valuation benchmarks implied by the purchase price
under the Acquisition Agreement are reasonable when compared to
the mean of our comparable company trading multiples set.
43
(iii)Comparable transaction analysis
Our analysis also includes research into merger and acquisition
transactions in the global mobile sector in the past 12 months.
The following table sets out our findings:
EV/FORECAST EBITDA EV/FORECAST
2002 (FULL YEAR) SUBSCRIBER
(TIMES) END OF 2002 (US$)
------------------ -----------------
MERGER AND ACQUISITION TRANSACTIONS
IN THE GLOBAL MOBILE SECTOR
IN THE LAST 12 MONTHS
High 30.5 1,277
Low 7.4 887
Mean 12.0 995
We consider that the valuation benchmarks implied by the
purchase price under the Acquisition Agreement are reasonable
when compared to recent merger and acquisition transactions in
the global mobile sector, even when adjusted for the downturn
in telecoms share prices and indices since relevant
transactions took place.
Benchmarks derived from comparable transaction analysis do not
take into account regulatory, economic and competitive
differences in various countries. Our list of mobile
transactions includes targets in developed and developing
countries with a mixture of mobile penetration rates, ARPU and
levels of income. We have taken into account relative
subscriber growth and ARPU levels in our analysis of these
valuation benchmarks, together with the telecommunications
market downturn.
We have also considered the previous transactions undertaken by
CMHK in 1999 and 2000. However, we do not consider the pricing
of these transactions to be directly comparable when
considering the Acquisition as current market valuation has
changed significantly since the previous transactions were
executed. In particular, implied EV/subscriber and EV/EBITDA
multiples are significantly lower, which reflects the re-rating
of telecommunications stocks by investors.
On the basis of the above analyses under which, in particular: (i)
the EV of the Target Companies based on the consideration of the
Acquisition is within our DCF valuation range; (ii) the implied
EV/forecast EBITDA (2002) and EV/forecast subscriber (end of 2002)
for the Acquisition represent a substantial discount to the
corresponding multiples of CMHK, the most comparable company to the
Target Group; and (iii) the EV/forecast EBITDA (2002) and
EV/forecast subscriber (end of 2002) for the Acquisition are
reasonable when compared to the corresponding multiples implied from
the mean of a broad range of comparable merger and acquisition
transactions in the global mobile sector in the past 12 months, and
to the corresponding mean trading multiples of comparable companies,
we consider the consideration payable under the Acquisition
Agreement to be fair and reasonable so far as the Independent
Shareholders are concerned.
(e) Conditions of the Acquisition
Completion of the Acquisition is conditional upon fulfillment of
various conditions including the approval of the Acquisition by the
Independent Shareholders at the Extraordinary General
44
Meeting and the Company having received adequate funding or
financing to satisfy the cash portion of the initial consideration
of the total purchase price of the Acquisition. Further details of
the other conditions to the completion of the Acquisition are set
out in the paragraph headed "Conditions of the completion of the
Acquisition" in the "Letter from the Chairman" in the Circular.
3 THE MECHANISM FOR THE DETERMINATION OF THE ISSUE PRICE OF THE
CONSIDERATION SHARES
The per Consideration Share price of HK$24.7217 is equal to the average
closing price of the Shares on the Stock Exchange for the 30 trading days prior
to the date of Acquisition Agreement and will be subject to the following
adjustment if the Average VWAP is more than 15% higher or lower than the per
Consideration Share price:
(i) if the Average VWAP is higher than HK$28.4300 (being HK$24.7217 as
increased by 15%), the per Consideration Share price will be
increased by 50% of the difference between the Average VWAP and
HK$28.4300; or
(ii) if the Average VWAP is lower than HK$21.0134 (being HK$24.7217 as
decreased by 15%), the per Consideration Share price will be
decreased by 50% of the difference between HK$21.0134 and the
Average VWAP.
The graph below shows the closing price and daily trading volumes of the
Shares on the Stock Exchange from 16 May 2001 up to the Latest Practicable Date.
(SHARE PRICE PERFORMANCE CHART)
Data source: Bloomberg
45
As illustrated in the graph above, from 16 May 2001 and up to the Latest
Practicable Date, the Shares were traded within a range of HK$19.40 and
HK$42.70, with an average price of HK$28.10. However, the Share price has been
relatively stable at an average of HK$24.20 per Share since the beginning of
2002. The recent gradual increase in Share price is in line with the overall
market trend.
Adjustment to the Consideration Share price will be required if the
Average VWAP is more than 15% higher or lower than the per Consideration Share
price, to reflect the Share price movement on the Stock Exchange immediately
after the announcement of the Acquisition. We consider it reasonable to have
such an adjustment mechanism to take into consideration the overall market's
response to the Acquisition.
4 PRO FORMA FINANCIAL EFFECTS TO CMHK
We have conducted various analyses on the potential financial effects of
the Acquisition on the Group, which were extracted from or prepared based on the
accountants' report and unaudited pro forma financial information of the
Combined Group as set out in Appendix II and Appendix V to the Circular. It
should be noted that the pro forma figures in the Circular were prepared by the
management of the Group and the Target Companies, on the basis and assumptions
as set out in the respective sections of the appendices. In addition, we have
also made various assumptions, details of which are set out below, in our
computation of the potential financial effects of the Acquisition, and
accordingly, all the figures and financial effects shown in this section are for
illustrative purposes only.
We summarise in the table below the key financial information of the
Group, before and after completion of the Acquisition, the Consideration Share
issue, cash payment portion of the initial consideration and the deferred
consideration in relation to the Acquisition, which we have used in our analysis
of the potential financial effects of the Acquisition on the Group. As discussed
above, the following pro forma figures of the Combined Group were prepared based
on various assumptions, including:
(a) for the purpose of profit and loss account analysis, the Acquisition
took place on 1 January 2001. For the purpose of balance sheet
analysis, the Acquisition took place on 31 December 2001;
(b) total consideration is approximately US$8,573 million (approximately
HK$66,863.4 million based on the prevailing rate at 12:00 noon (New
York City time) on the day which is two Business Days next preceding
the date of the Acquisition Agreement), of which approximately
US$2,400 million (approximately HK$18,718.3 million) of the initial
consideration had been paid using internal cash;
(c) the 827,514,446 Consideration Shares issued at HK$24.7217 each,
being the average closing price of the Shares on the Stock Exchange
for the 30 trading days prior to the date of Acquisition Agreement,
which resulted in a total amount of HK$20,457.6 million
(approximately US$2,623 million) of the initial consideration;
(d) the 236,634,212 Shares issued and allotted pursuant to the Vodafone
Subscription Agreement are issued at HK$24.7217 per Share, being the
same as per Consideration Share, which
46
resulted in a total net proceeds of HK$5.85 billion (approximately
US$750 million, assuming there are no issuing expenses); and
(e) the deferred consideration amounted to US$2,800 million
(approximately HK$21,838.0 million) with an interest rate payable on
the deferred consideration of 3.801% per annum, being the two year
US dollar LIBOR swap rate at 11 am (New York City time) on the day
which is the second Business Day next preceding the date of
Acquisition Agreement. The interest expense is not deductible for
taxation purposes.
YEAR ENDED 31 DECEMBER 2001
--------------------------------
THE GROUP THE COMBINED GROUP
(ACTUAL) (PRO FORMA)
------- ------------------
REVENUE
(RMB million) 100,331 126,412
(HK$ million) 94,563 119,144
(US$ million) 12,122 15,273
ADJUSTED EBITDA
(RMB million) 60,270 73,159
(HK$ million) 56,805 68,953
(US$ million) 7,282 8,839
NET PROFIT
(RMB million) 28,015 28,158
(HK$ million) 26,404 26,539
(US$ million) 3,385 3,402
ADJUSTED NET PROFIT (BEFORE DEFICIT ON REVALUATION OF FIXED ASSETS)
(RMB million) 28,015 30,271
(HK$ million) 26,404 28,531
(US$ million) 3,385 3,657
ADJUSTED EPS (BEFORE DEFICIT ON REVALUATION OF FIXED ASSETS)
(RMB) 1.51 1.54
(HK$) 1.42 1.45
(US$) 0.18 0.19
NET INTEREST EXPENSE
(RMB million) 883 2,435
(HK$ million) 832 2,295
(US$ million) 107 294
INTEREST COVERAGE(1)
(times) 68 30
Note:
(1) Adjusted EBITDA divided by net interest expense.
47
AS AT 31 DECEMBER 2001
--------------------------------
THE GROUP THE COMBINED GROUP
(ACTUAL) (PRO FORMA)
------- ------------------
NET ASSETS
(RMB million) 111,779 139,698
(HK$ million) 105,352 131,666
(US$ million) 13,505 16,879
NET ASSETS PER SHARE
(RMB) 6.01 7.10
(HK$) 5.66 6.69
(US$) 0.73 0.86
TOTAL DEBTS(1)
(RMB million) 29,300 69,328
(HK$ million) 27,615 65,342
(US$ million) 3,540 8,376
NET DEBTS/(CASH)(2)
(RMB million) (7,491) 49,016
(HK$ million) (7,060) 46,198
(US$ million) (905) 5,922
TOTAL SHAREHOLDERS' FUNDS(3)
(RMB million) 111,779 139,698
(HK$ million) 105,352 131,666
(US$ million) 13,505 16,879
TOTAL DEBTS/TOTAL CAPITALISATION 20.8% 33.2%
NET DEBTS/SHAREHOLDERS' FUNDS net cash 35.1%
Notes:
(1) Sum of bank loans and other interest-bearing borrowings, bills payable,
obligations under finance leases, and long term amounts due to
ultimate/immediate holding companies.
(2) Total debts less cash and deposit.
(3) Total capitalisation is the sum of total debts and shareholders' funds.
48
Adjusted EBITDA and earnings
As set out in the above table, the pro forma adjusted EBITDA of the
Combined Group would be approximately RMB73,159 million for the year
ended 31 December 2001, which represents an increase of about 21.4% from
the actual adjusted EBITDA of the Group (without taking into account the
Acquisition) of about RMB60,270 million for the same period. The pro
forma adjusted net profit before deficit on revaluation of fixed assets
for the Combined Group would be approximately RMB30,271 million for the
year ended 31 December 2001, which also represents an increase of about
8.1% from the actual net profit of the Group (without taking into account
the Acquisition) of about RMB28,015 million for the same period. The pro
forma adjusted earnings per Share before deficit on revaluation of fixed
assets of the Combined Group for year ended 31 December 2001 would be
RMB1.54, which would be approximately 2.0% higher than the actual
earnings per Share of the Group (without taking into account the
Acquisition) of RMB1.51 as reported for the same period.
Net assets and goodwill
The pro forma net assets of the Combined Group would be approximately
RMB139,698 million as at 31 December 2001, which is approximately 25.0%
higher than the actual net assets reported by the Group (without taking
into account the Acquisition) as of the same date. Relatively, the pro
forma net asset value per Share of the Combined Group would be
approximately RMB7.10 as at 31 December 2001, representing an increase of
18.1% from the actual net asset value per Share of the Group (without
taking into account the Acquisition) of approximately RMB6.01 as of the
same date.
Assuming the Acquisition took place on 31 December 2001, a goodwill of
approximately RMB40,296 million (approximately HK$37,979 million) would be
recorded as the difference between the total consideration of US$8,573
million (approximately HK$66,863.4 million based on the prevailing rate at
12:00 noon (New York City time) on the day which is two Business Days next
preceding the date of the Acquisition Agreement) paid for the Acquisition
and the fair value of the underlying net assets of the Target Group. This
amount would be accrued and amortised on a straight line basis over the
estimated useful life of 20 years, resulting in an annual amortisation
charge of approximately RMB2,015 million. This represents an amount of
RMB0.10 per Share, implying a pro forma pre-goodwill adjusted earnings per
Share of the Combined Group of RMB1.64 as opposed to the post-goodwill
adjusted earnings per Share of RMB1.54 mentioned above.
Gearing
As noted on the above table, the pro forma total debts of the Combined
Group would be approximately RMB69,328 million as at 31 December 2001,
representing an increase of about 136.6% from the actual total debts of
approximately RMB29,300 million reported at the same date. Pro forma net
debts would change to approximately RMB49,016 million from the net cash
position as of 31 December 2001. The pro forma gearing of the Combined
Group, defined as net debts divided by total shareholders' funds, would be
approximately 35.1% as at 31 December 2001, compared to the actual net
cash position of the Group as of the same date. As also noted in the
49
above table, the total debts/total capitalisation ratio would increase
from the existing 20.8% to approximately 33.2%. However, we consider that
the pro forma gearing level of the Combined Group remains at a comfortable
level compared to other mobile operators around the world.
Interest cover
As noted in the above table, the pro forma net interest expenses of the
Combined Group for the year ended 31 December 2001 would be approximately
RMB2,435 million, increased from the Group's actual net interest expenses
of approximately RMB883 million. This is mainly attributable to the
reduction in interest income for the cash portion of the initial
consideration and increased interest expense for the deferred
consideration as a result of the Acquisition. Accordingly, the Company's
interest cover, defined as the adjusted EBITDA over net interest expenses,
would decrease from approximately 68 times to 30 times for the year ended
31 December 2001. Although the interest cover would be decreased
significantly as a result of the Acquisition, we are of the view that such
coverage ratio for the Combined Group remains at a comfortable level.
Shareholding
It is expected that CMCC will remain as the controlling shareholder,
owning approximately 75.70% interest in the Company immediately after
completion of the Acquisition assuming no adjustment is made to the per
Share price and number of Consideration Shares issued and allotted to
CMBVI and number of Shares issued to Vodafone or Vodafone Holdings (as the
case may be). The Independent Shareholders' interest in the Company would
be diluted from approximately 24.42% as at the Latest Practicable Date to
approximately 24.30% immediately after the completion of the Acquisition.
It should be noted that CMCC has undertaken that to the extent that is
within its control, the Group will be treated equally with other mobile
telecommunications operations controlled by CMCC, and it will continue to
provide its full support to the Group after the Acquisition.
Having considered the above pro forma financial effects of the Acquisition
on the Group, and in particular: (a) the enhancement to adjusted EBITDA and
adjusted net profit before deficit on revaluation of fixed assets for the
Combined Group, both in aggregate and on a per share basis; (b) the increase in
net assets, both in aggregate and on a per share basis; (c) the comfortable
gearing and interest coverage levels implied following completion of the
Acquisition; and (d) the fact that CMCC is and will remain the controlling
Shareholder and has undertaken to continue to provide its full support to the
Group after the Acquisition, we are of the view that the Acquisition is fair and
reasonable so far as the Independent Shareholders are concerned.
5 THE CONNECTED TRANSACTIONS
The Company, its subsidiaries and the Target Companies have entered into
certain number of operating and other agreements with CMCC or its subsidiaries
which will constitute connected transactions for the Company under the Listing
Rules upon completion of the Acquisition. As these transactions are expected to
occur on a regular and continuous basis in the ordinary and usual course of
business, the Company has applied to the Stock Exchange for a Waiver. The Stock
Exchange has indicated that the Waiver, if granted, will be effective until 31
December 2004, and is subject to the satisfaction of various conditions, inter
alia, the approval of the Independent Shareholders at the Extraordinary General
Meeting.
50
It should be noted that certain services under the Connected Transactions
are charged in accordance with the tariffs set by the Chinese regulatory
authorities. In the event that the charges are not set by the Chinese regulatory
authorities, they are based on commercial agreements negotiated on an arm's
length basis between the parties involved and on normal commercial terms. As
noted in the "Letter from the Chairman" in the Circular, the Company has the
benefit of an undertaking from CMCC that to the extent that it is within CMCC's
control, the Company will be treated equally with other mobile
telecommunications operators in respect of all approvals, transactions and
arrangements between the Company and CMCC and other mobile telecommunications
operators controlled by CMCC. This forms an important basis for the Group and/or
the Target Companies in entering into these connected transactions. Furthermore,
Shareholders should note that Connected Transactions (A) to (E) below are merely
an extension of the Group's existing arrangements to cover the Target Companies
through the Second Supplemental Agreement upon completion of the Acquisition,
and Independent Shareholders' approvals have already been obtained for such
arrangements previously. Although Connected Transactions (F) and (G) are entered
into as new agreements, similar arrangements for the existing operating
subsidiary(ies) of the Group (as the case may be) already exist and have been
approved previously by Independent Shareholders. In particular, Connected
Transaction (F) involves the Target Companies only, whereas Connected
Transaction (G) involves the Combined Group.
We set out below a summary of each of the Connected Transactions.
(A) Interconnection arrangements
The networks of each of the Target Companies and the Group
interconnect with the mobile telecommunications networks of CMCC in
other regions. The Interconnection and Roaming Agreement provides
for, inter alia, (i) the sharing of long distance calling charges,
if any, in respect of inter-provincial roaming; (ii) settlement
arrangements of international long distance calling charges incurred
by international mobile subscribers making international long
distance calls while roaming in the areas in Mainland China where
the Group operates; and (iii) settlement arrangements for
international long distance calling charges, if any, when the
Group's mobile subscribers roam internationally.
The current arrangements apply to the 13 existing operating
subsidiaries of the Company. The Interconnection and Roaming
Agreement is valid for two years from 1 April 1999, renewed on an
annual basis unless either party notifies the other of its intention
to terminate in writing at least three months prior to expiration of
the term. This agreement has been automatically renewed twice and
the current term will expire on 31 March 2003. Pursuant to the
Second Supplemental Agreement, which is subject to the completion of
the Acquisition, the Company and CMCC will extend the existing
arrangement to cover the Target Companies after the Acquisition.
(B) Roaming arrangements
The Interconnection and Roaming Agreement also provides for (i) the
settlement of basic inter-provincial roaming calling charges when
roaming subscribers make or receive calls from a roaming location;
(ii) settlement arrangements for international roaming calling
charges
51
incurred by international mobile subscribers making international
long distance calls while roaming in the areas in Mainland China
where the Group operates; and (iii) settlement arrangements for
international roaming calling charges, if any, when the Group's
mobile subscribers roam internationally. The agreement also sets out
the roaming call record processing standard fees payable to CMCC.
The current arrangements apply to the 13 existing operating
subsidiaries of the Company. Subject to the completion of the
Acquisition, the Company and CMCC will extend the existing
interconnection arrangement to cover the Target Companies after the
Acquisition pursuant to the Second Supplemental Agreement.
(C) Spectrum fees
Under an agreement (as supplemented by the First Supplemental
Agreement) between the Company and CMCC entered into in October
1999, the Company has obtained an exclusive right to use the
frequency spectrum and telephone numbers allocated to them in the
respective areas in which they operate. It also provides the
mechanism by which the spectrum usage fees are shared between the
Company's operating subsidiaries and CMCC's other operating
subsidiaries. The standardised spectrum fees are payable to the MII
by all mobile telecommunications operators in Mainland China and are
jointly determined by relevant Chinese regulatory authorities.
The current agreement applies to the 13 existing operating
subsidiaries of the Company. The agreement is valid for an initial
term of one year from 8 October 1999, 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. The
agreement has been automatically renewed twice and the current term
will expire on 7 October 2002. Pursuant to the Second Supplemental
Agreement, which is subject to the completion of the Acquisition,
the Company and CMCC will, among other things, extend the existing
arrangement with respect to spectrum usage under the existing
agreement to cover the Target Companies after the Acquisition.
(D) Sharing of inter-provincial transmission line leasing fees
Under an agreement (as supplemented by the First Supplemental
Agreement) between the Company and CMCC in relation to the leasing
of inter-provincial transmission lines entered into in May 2000, the
Group leases from former CTC, via CMCC, inter-provincial
transmission lines. The rental payable by the Group is determined on
the basis that the mobile network operators at both ends of the
transmission lines will share the transmission leasing fees equally.
The fees are equal to the actual amount payable by CMCC to former
CTC, determined based on the standard leasing fee set by the
relevant tariff regulatory authorities, adjusted for the discount to
which the Group is entitled.
The current agreement applies to the 13 existing operating
subsidiaries of the Company. The agreement is valid for two years
from 1 April 1999, renewed on an annual basis unless either party
notifies the other of its intention to terminate at least three
months prior to the expiration
52
of its term. This agreement has been automatically renewed twice and
the current terms will expire on 31 March 2003. Pursuant to the
Second Supplemental Agreement, the Company and CMCC will, subject to
the completion of the Acquisition, extend the existing arrangement
under the inter-provincial transmission leased line agreement to
cover the Target Companies after the Acquisition.
(E) Prepaid services
Each of the Target Companies and the Group offers prepaid services.
Some of such prepaid services allow subscribers to add value to
their SIM cards by purchasing value-adding cards from any of the
Group's network operators or other of CMCC's network operators. In
October 2000, the Company entered into an agreement (as
supplemented) with CMCC in relation to sharing and settlement of
revenue when prepaid subscribers purchase value-adding cards issued
by network operators of CMCC or the Company other than their home
network operators.
Pursuant to the Second Supplemental Agreement, which is subject to
completion of the Acquisition, the Company and CMCC would extend the
existing arrangements to the Target Companies after the Acquisition.
(F) Telecommunication services
In April 2002, each of the Target Companies has, respectively,
entered into an agreement with the eight respective
telecommunications service companies wholly-owned by CMCC in the
provinces and directly-administered municipality in which the Target
Companies operate. Under these agreements, such subsidiaries of CMCC
will provide certain telecommunications services to the Target
Companies. These services include:
(i) telecommunications projects planning, design and constructions
services and telecommunications lines and pipelines
construction services (as the case may be) which are provided
to each of the Target Companies;
(ii) telecommunications lines maintenance services which are
provided to Anhui Mobile, Jiangxi Mobile,
Shaanxi Mobile and Shanxi Mobile; and
(iii) property leasing and property management services which are
provided to each of the Target Companies.
These agreements were entered into after arm's length negotiation
between the respective Target Companies and certain subsidiaries of
CMCC. For services described in (i) and (ii) above, the charges
payable are determined with reference to and cannot exceed relevant
standards laid down and revised from time to time by the PRC
Government. Where there are no Government standards, the charges are
determined with reference to market rates. In respect of the
property leasing and property management services described in (iii)
above and as noted in the "Letter from the Chairman" in the
Circular, Chesterton Xxxxx, an independent
53
valuer, has confirmed that the charges payable for property leasing
and property management services are not more than the market rates
within each respective geographical area as at the relevant dates of
such agreements and that all other terms of such property leasing
and property management are not onerous or unusual.
(G) Transmission tower sales, installation and maintenance
On 8 May 2002, the Company entered into an agreement with Hubei
Communication Services Company, a wholly-owned subsidiary of CMCC,
under which such subsidiary sells transmission towers and spare
parts and provides related installation and maintenance services to
the operating subsidiaries (including the Target Companies) of the
Company. The price of such transmission towers and spare parts and
the charges payable for the services rendered under the agreement
are determined either according to standards laid down by the PRC
Government, or by reference to market rates.
We understand that the Stock Exchange has indicated that it will grant the
Waiver on a number of conditions. One of the conditions for the Stock Exchange
to grant the Waiver is that the Connected Transactions of the following types
for each of the three years ending 31 December 2004 shall not exceed the upper
limits set out below:
(i) Prepaid services - handling charges received by the Target Group
from subsidiaries of CMCC in respect of prepaid services in any
financial year shall not exceed 1% of the Combined Group's total
turnover in that financial year and handling charges paid by the
Target Group to subsidiaries of CMCC in respect of prepaid services
in any financial year shall not exceed 1% of the Combined Group's
total turnover in that financial year;
(ii) Telecommunications projects planning, design and construction
services and telecommunications lines and pipelines construction
services - payments by the Target Group to subsidiaries of CMCC for
telecommunications projects planning, design and construction
services and telecommunications lines and pipelines construction
services in any financial year shall not exceed 0.25% of the
Combined Group's total turnover in the relevant financial year;
(iii) Telecommunications lines maintenance services - payments by the
Target Group to subsidiaries of CMCC for telecommunications lines
maintenance services in any financial year shall not exceed 0.04% of
the Combined Group's total turnover in the relevant financial year;
(iv) Property leasing and property management services - payments by the
Target Group to subsidiaries of CMCC for property leasing and
property management services in any financial year shall not exceed
0.25% of the Combined Group's total turnover in the relevant
financial year; and
(v) Purchase of transmission towers and related services - payments by
the Combined Group to the relevant subsidiary of CMCC for purchases
of transmission towers and transmission tower-related services in
any financial year shall not exceed 0.5% of the Combined Group's
turnover in the relevant year.
54
The table below compares the aggregated relevant charges between the
Target Group and subsidiaries of CMCC in relation to the above Connected
Transactions for 2001 and the estimated charges for 2002 with the 2001 Combined
Group's turnover.
UPPER
AGGREGATED 2001 AS A % OF ESTIMATED 2002 AS A % OF LIMIT
CHARGES 2001 CHARGES 2001 (AS A % OF
------------------ COMBINED ------------------ COMBINED COMBINED
(RMB (HK$ GROUP'S (RMB (HK$ GROUP'S GROUP'S
MILLION) MILLION) TURNOVER MILLION) MILLION) TURNOVER TURNOVER)
-------- -------- --------- -------- -------- --------- ---------
AGGREGATE HANDLING CHARGES
FOR PREPAID SERVICES
(CONNECTED TRANSACTION (E))
RECEIVABLE BY THE TARGET
GROUP 114.8 108.2 0.09% 82.1 77.4 0.06% 1.00%
PAYABLE BY THE TARGET GROUP 58.3 54.9 0.05% 61.2 57.6 0.05% 1.00%
TELECOMMUNICATION PROJECTS PLANNING,
DESIGN AND CONSTRUCTION AND
TELECOMMUNICATION LINES AND PIPELINES
CONSTRUCTION CHARGES PAYABLE BY THE
TARGET GROUP N/A N/A N/A 237.1 223.5 0.19% 0.25%
(CONNECTED TRANSACTION (F))
TELECOMMUNICATIONS LINE
MAINTENANCE SERVICES
PAYABLE BY THE TARGET
GROUP N/A N/A N/A 33.3 31.4 0.03% 0.04%
(CONNECTED TRANSACTION (F))
PROPERTY LEASING AND PROPERTY
MANAGEMENT SERVICES PAYABLE
BY THE TARGET GROUP N/A N/A N/A 217.2 204.7 0.17% 0.25%
(CONNECTED TRANSACTION (F))
PURCHASE OF TRANSMISSION TOWERS
AND TRANSMISSION TOWER-RELATED
SERVICES PAYABLE BY THE
COMBINED GROUP 101.4 95.5 0.08% 200.0 188.5 0.16% 0.50%
(CONNECTED TRANSACTION (G))
We have discussed with the management of the Company the basis for setting
the respective upper limits for these Connected Transactions, as well as the
reasons for not imposing an upper limit on certain Connected Transactions. In
particular, we note that the major reason that an upper limit for Connected
Transactions (A) to (D) above cannot reasonably be imposed is that the tariffs
and charges under these transactions are dependent upon the relevant standard
tariffs and policies determined by the relevant regulatory authorities in
Mainland China, which is beyond the control of the Group. On this basis, we
55
consider that the Company is not in a position to fix upper limits for these
transactions and, accordingly, we are of the view that it is fair and reasonable
not to impose an upper limit for the referenced Connected Transactions (A) to
(D), so far as the Independent Shareholders are concerned.
On the basis that: (i) as noted in "Letter from the Chairman" in the
Circular, the Connected Transactions are expected to be entered into in the
ordinary and usual course of business; (ii) the terms and charges of the
Connected Transactions were determined in accordance with the tariffs/standards
set by the relevant Chinese regulatory authorities and/or by reference to market
rates and/or determined after negotiation on an arm's length basis between the
parties involved; (iii) the equal treatment undertaking given by CMCC, as noted
in the "Letter from the Chairman" in the Circular; and (iv) some of the
Connected Transactions are merely an extension of the Group's existing
arrangements to cover the Target Companies after the Acquisition, and
Independent Shareholders' approvals have already been obtained for such
arrangements previously, we are of the view that the terms of the Connected
Transactions are fair and reasonable so far as the Independent Shareholders are
concerned.
SUMMARY
Having considered the above principal factors and reasons, we would draw
your attention to the following key factors in arriving at our conclusion:
(a) the Acquisition will consolidate the Company's strong position,
further capitalise on the growth potential of the Chinese
telecommunications industry, and should ultimately create value for
investors;
(b) the purchase price was negotiated on arm's length basis. The
financing structure of the Acquisition provides favourable terms,
ensures considerable funding flexibility to the Company, and
effectively utilises available resources of the Combined Group;
(c) the valuation of the Target Companies implied by the consideration
of the Acquisition (i) is within the range of our DCF analysis; (ii)
represents a significant discount to CMHK's relevant trading
multiples; and (iii) is reasonable in the context of the market
valuation of the comparable companies and multiples implied by
recent merger and acquisition transactions in the global mobile
sector in the past 12 months;
(d) the mechanism for determining the price per Consideration Share is
based on the market prices of the Company's Shares traded on the
Stock Exchange prior to the date of Acquisition Agreement;
(e) the net profit adjusted for deficit on revaluation of fixed assets
of the Group would have been enhanced on a per Share basis if the
Acquisition had taken place on 1 January 2001;
(f) the net asset value of the Combined Group would be increased on both
total and on a per Share basis, the Combined Group would have had a
higher gearing ratio and a lower interest cover, but both would
still have been within a comfortable level;
56
(g) CMCC will remain as the controlling shareholder and continue to
provide full support to CMHK; and
(h) the terms and charges of the Connected Transactions were determined
based on the tariffs/standards set by the Chinese regulatory
authorities and/or by reference to market rates and/or after arm's
length negotiation and based on normal commercial terms.
Furthermore, some of these agreements are merely an extension of the
Group's existing arrangements to cover the Target Companies after
the Acquisition.
RECOMMENDATION
Having considered the above principal factors and reasons and the terms of
the Acquisition Agreement (including the mechanism for determination of the
issue price of the Consideration Shares) and the agreements for the Connected
Transactions, we consider that their terms, from a financial perspective, are
fair and reasonable so far as the Independent Shareholders are concerned.
Accordingly, we advise the Independent Board Committee to recommend that the
Independent Shareholders vote in favour of ordinary resolutions numbered 1 to 3
as detailed in the notice of the Extraordinary General Meeting set out at the
end of the Circular.
Yours very truly,
For and on behalf of
N M ROTHSCHILD & SONS (HONG KONG) LIMITED
XXXXXX XXXX
Director
57
--------------------------------------------------------------------------------
APPENDIX I FURTHER INFORMATION ON THE TARGET COMPANIES
--------------------------------------------------------------------------------
INDUSTRY BACKGROUND
The telecommunications industry in Mainland China has experienced rapid
growth over the last three years. According to the MII, fixed line subscribers
increased from approximately 108.81 million at the end of 1999 to approximately
180.39 million at the end of 2001 with an average compound growth rate of
approximately 28.8% per annum. Over the same period, mobile telecommunications
subscribers increased from 43.24 million to 144.80 million with an average
compound growth rate of approximately 83.0% per annum. The mobile
telecommunications sector is one of the fastest growing sectors within the
telecommunications industry in Mainland China.
At xxx xxx xx 0000, Xxxxxxxx Xxxxx became the world's largest mobile
telecommunications market in terms of the overall number of subscribers. Even
though there has been a rapid growth in the number of mobile telecommunications
subscribers in recent years, the mobile penetration rate in Mainland China is
still relatively low compared with other developed international markets. Given
the rapid growth of the economy in Mainland China, the mobile telecommunications
market has significant potential for continued growth.
In the first half of 2000, the Chinese government separated the
government's regulatory function from its business management function in
respect of the telecommunications industry. As a result, the MII ceased to
participate in telecommunications operations but continues to exercise its
authority as the industry regulator.
As a state-owned company, CMCC is primarily engaged in the business of
mobile telecommunications. As a state-owned company, the former CTC was
primarily engaged in the business of fixed line telecommunications. In December
2001, the State Council approved a plan for the reform of the telecommunications
system and conducted a restructuring of the former CTC, China Netcom Corporation
Limited and Jitong Network Communications Company Limited. After the
restructuring, China Netcom Group consists of ten provincial telecommunications
companies originally owned by the former CTC in Beijing and nine other provinces
and directly-administered municipality, China Netcom Corporation Limited and
Jitong Network Communications Company Limited. After the restructuring, CTC
retains the telecommunications companies originally owned by the former CTC in
the remaining provinces, directly-administered municipalities and autonomous
regions, under its corporate mantle.
Currently, apart from CMCC (which includes the Group), the principal
operators in the telecommunications industry in Mainland China also include CTC,
China Netcom Group, China Unicom, China Satellite Communications Corporation and
Railcom. Providers of mobile telecommunications services are CMCC (which
includes the Group) and China Unicom. Providers of fixed line services are CTC,
China Netcom Group, China Unicom and Railcom.
MARKET ENVIRONMENT OF THE TARGET COMPANIES
As of 31 December 2001, the total population in the eight provinces and
directly-administered municipality in which the Target Companies operate was
approximately 418 million, the GDP per capita was approximately RMB5,724, and
the weighted average fixed line and mobile penetration rates were approximately
10.3% and 6.8%, respectively. The following table sets forth certain market
environment data for Anhui, Jiangxi, Chongqing, Sichuan, Hubei, Hunan, Shaanxi
and Shanxi for the periods indicated:
I-1
AS OF OR FOR THE YEAR ENDED
31 DECEMBER
-------------------------------
1999 2000 2001
------- ------- -------
Population (in thousands) (1)
Anhui 62,060 62,780 63,280
Jiangxi 42,312 41,485 41,858
Chongqing 30,723 30,911 30,970
Sichuan 83,586 84,075 86,396
Hubei 59,380 59,600 59,746
Hunan 65,320 65,620 65,959
Shaanxi 35,191 35,721 36,586
Shanxi 32,036 32,478 32,716
------- ------- -------
Total 410,608 412,670 417,511
======= ======= =======
GDP per capita (RMB) (1)
Anhui 4,687 4,840 5,199
Jiangxi 4,402 4,851 5,199
Chongqing 4,826 5,157 5,651
Sichuan 4,441 4,770 5,118
Hubei 6,588 7,174 7,804
Hunan 5,098 5,638 6,039
Shaanxi 4,137 4,647 5,033
Shanxi 4,703 5,015 5,424
------- ------- -------
Weighted average 4,912 5,312 5,724
======= ======= =======
Fixed line penetration rate (%) (2)
Anhui 5.5 7.7 10.1
Jiangxi 6.3 8.9 10.3
Chongqing 6.4 8.7 10.9
Sichuan 4.6 6.6 7.9
Hubei 7.5 9.2 10.2
Hunan 7.5 10.5 11.6
Shaanxi 6.7 10.4 11.6
Shanxi 6.1 9.7 12.7
------- ------- -------
Weighted average 6.2 8.7 10.3
======= ======= =======
I-2
AS OF OR FOR THE YEAR ENDED
31 DECEMBER
-------------------------------
1999 2000 2001
------- ------- -------
Mobile penetration rate (%) (3)
Anhui 1.6 3.3 5.5
Jiangxi 1.7 3.4 6.9
Chongqing 2.7 5.2 8.2
Sichuan 2.0 3.9 6.4
Hubei 1.9 3.5 6.8
Hunan 1.9 3.8 5.5
Shaanxi 2.0 4.3 8.3
Shanxi 2.1 4.5 9.7
------- ------- -------
Weighted average 1.9 3.9 6.8
======= ======= =======
------------
(1) Source: 2000 Provincial Statistical Yearbooks, 2001 Provincial Statistical
Yearbooks and "2001-2002 PRC National Economic and Social Development
Statistical Information Abstract".
(2) Source: the MII/the respective Provincial Telecommunications Administration
Bureau.
(3) Calculated by dividing the Target Companies' estimate of the total number
of mobile subscribers, including subscribers of other operators, by the
respective population numbers from 2000 Provincial Statistical Yearbooks,
2001 Provincial Statistical Yearbooks and "2001-2002 PRC National Economic
and Social Development Statistical Information Abstract".
OPERATIONS OF THE TARGET COMPANIES
The Target Companies are the leading providers of mobile telecommunications
services in their respective provincial and directly-administered municipal
markets. The Target Companies currently offer mobile telecommunications services
using GSM technology, and their networks effectively reach all cities and
counties and major roads and highways within their respective geographic
regions. Each of the Target Companies is also a major provider of wireless data
services and an important provider of Internet Protocol ("IP")
telecommunications services within the geographical region in which it operates.
1 KEY OPERATING DATA
The Target Companies had a total of approximately 20.93 million mobile
telecommunications subscribers as of 31 December 2001. Their estimated weighted
average market share of mobile telecommunications subscribers was approximately
73.9% in the regions in which they operate as of 31 December 2001.
The following table sets out certain summary operating and other data of
the Target Group:
I-3
AS OF OR FOR THE YEAR ENDED
31 DECEMBER
------------------------------
1999 2000 2001
------ ------ ------
Subscribers (in thousands) 7,277 12,878 20,928
Contract 7,277 9,623 12,839
Prepaid -- 3,255 8,089
Market share (%)(1) 91.7 80.8 73.9
Minutes of usage (in millions) 22,683 33,257 47,498
Average usage per user per month
(minutes/user/month)(2) 315 284 235
Contract 315 307 308
Prepaid -- 108 101
Average revenue per user per month
(RMB/user/month)(3) 226 185 129
Contract 226 198 160
Prepaid -- 83 71
-----------
(1) Calculated based on the total number of mobile telecommunications
subscribers in the relevant geographical region estimated by the Target
Companies.
(2) Calculated by (i) dividing the total minutes of usage during the relevant
period by the average number of users during the period (calculated as the
average of the number of users at the end of each of the thirteen calendar
months from the end of the previous year to the end of the current year);
and (ii) dividing the result by twelve months.
(3) Calculated by (i) dividing the operating revenue during the relevant period
by the average number of users during the period (calculated in the same
manner as note (2) above); and (ii) dividing the result by twelve months.
The following table sets forth the respective number of subscribers and
market share of the Target Companies for the dates indicated:
AS OF 31 DECEMBER
--------------------------------
1999 2000 2001
------ ------ ------
Subscribers (in thousands)
Anhui 866 1,482 2,382
Jiangxi 638 1,121 2,152
Chongqing 738 1,263 1,805
Sichuan 1,546 2,560 4,161
Hubei 1,081 1,833 3,036
Hunan 1,166 2,125 2,901
Shaanxi 601 1,232 2,001
Shanxi 641 1,262 2,490
I-4
AS OF 31 DECEMBER
------------------------------
1999 2000 2001
---- ---- ----
Market share (%) (1)
Anhui 86.1 72.2 68.3
Jiangxi 90.0 80.1 74.2
Chongqing 90.4 78.6 71.5
Sichuan 92.7 78.0 75.5
Hubei 95.7 88.5 75.2
Hunan 95.4 84.4 79.7
Shaanxi 83.9 80.7 65.8
Shanxi 96.5 85.7 78.7
------------
(1) Calculated based on the total number of mobile telecommunications
subscribers in the relevant geographical region estimated by the Target
Companies.
The market demand for mobile telecommunications services in the regions in
which the Target Companies operate has continuously increased, and the number of
subscribers of each of the Target Companies has grown significantly during the
period from 1999 to 2001. However, due to increased competition during the
period from 1999 to 2001, there has been a decrease in each Target Company's
respective market share of mobile telecommunications subscribers within the
region in which it operates. Nonetheless, each of the Target Companies continues
to be the leading provider of mobile telecommunications services in its
respective region.
The following table sets forth other selected key operating data of the
Target Companies for the periods indicated:
YEAR ENDED 31 DECEMBER
----------------------
1999 2000 2001
------ ------ ------
Minutes of usage (in millions)
Anhui 2,700 3,358 5,491
Jiangxi 2,270 2,910 4,668
Chongqing 2,215 3,152 3,934
Sichuan 4,956 6,933 9,775
Hubei 3,462 4,976 6,890
Hunan 3,014 5,360 7,399
Shaanxi 1,940 3,410 4,982
Shanxi 2,126 3,158 4,359
Average usage per user per month (minutes/user/month) (1)
Anhui 293 268 245
Jiangxi 362 280 240
Chongqing 341 273 204
Sichuan 360 290 254
Hubei 283 296 229
Hunan 265 273 246
Shaanxi 327 308 256
Shanxi 316 288 193
I-5
YEAR ENDED 31 DECEMBER
----------------------
1999 2000 2001
------ ------ ------
Average revenue per user per month (RMB/user/month) (2)
Anhui 204 182 122
Jiangxi 240 185 124
Chongqing 224 166 123
Sichuan 257 185 136
Hubei 206 212 137
Hunan 207 168 132
Shaanxi 255 195 131
Shanxi 225 190 119
------------
(1) Calculated by (i) dividing the total minutes of usage during the relevant
period by the average number of users during the period (calculated as the
average of the number of users at the end of each of the thirteen calendar
months from the end of the previous year to the end of the current year);
and (ii) dividing the result by twelve months.
(2) Calculated by (i) dividing the operating revenue during the relevant period
by the average number of users during the period (calculated in the same
manner as note (1) above); and (ii) dividing the result by twelve months.
I-6
As the penetration rate of mobile subscribers increases, the subscriber
base of each of the Target Companies has grown rapidly. Although there has been
an increase in the portion of low-usage subscribers in the subscriber base,
resulting in a decline in the average usage and revenue per user per month for
the Target Companies, the total minutes of usage and the total operating income
of the Target Companies have increased significantly from 1999 to 2001.
The weighted average churn rates (excluding internal switching between
different services offered by the Target Companies) of the Target Companies for
2000 and 2001 were approximately 7.0% and 7.7%, respectively. As connection fees
for mobile telecommunications services in Mainland China have declined
significantly in recent years and were eventually cancelled altogether on 1 July
2001, the cost to mobile users to switch among mobile telecommunications
networks has correspondingly decreased. This, together with increased
competition, has contributed to the increase in the Target Companies' churn
rates.
2 SERVICES AND PRODUCTS
(1) TYPES OF SERVICES
The services of the Target Companies primarily include voice-related
services and data services.
(i) VOICE-RELATED SERVICES OF THE TARGET COMPANIES
The voice-related services of the Target Companies include basic
voice-related services and value-added voice services. Basic
voice-related services enable subscribers to make and receive
calls with a mobile phone at any point within the coverage area
of the mobile telecommunications network. Such services include
local calls, domestic long distance calls, international long
distance calls, intra-provincial roaming, domestic roaming and
international roaming. Value-added voice services mainly include
caller identity display, call waiting, call forwarding, call
holding, "Quanqiuhu" paging service, voice mail and others.
(ii) DATA SERVICES OF THE TARGET COMPANIES
(a) MOBILE DATA BUSINESSES
Currently, the mobile data businesses of the Target
Companies primarily include short message services and
"Monternet".
o SHORT MESSAGE SERVICES. Short message services refer to
services which employ the existing resources of GSM
telecommunications networks and the corresponding
functions of mobile telecommunications terminals to
deliver and receive text or pictorial messages,
including subscriber-to-subscriber messages,
information on demand (which include stock price
quotations, sports news and weather forecasts) and
others. Short message services offer the virtues of
convenience and multi-functionality. This business has
grown rapidly since its initial launching. The usage
volume of short message services of the Target
Companies has increased from 82 million messages in
2000 to 1.17 billion messages in 2001, representing a
thirteen-fold increase and has experienced
I-7
rapid growth. As of 31 December 2001, the total number
of users of short message services of the Target
Companies reached an approximate of 5.62 million,
accounting for approximately 26.9% of the total number
of subscribers of the Target Companies.
o MONTERNET. In order to speed up the development of
mobile data businesses, pursuant to arrangements
co-ordinated by CMCC, the Target Companies launched the
"Monternet" project in the fourth quarter of 2000 with
a view to developing a unified Mobile Information
Services Center platform. The Target Companies
co-operated with key members throughout the wireless
data value chain on joint product development, and
have, in conjunction with other leading market
participants, cultivated a community of Internet
Service Providers ("ISPs") to develop rich and
innovative content and applications. These have
fostered the development of data businesses and have
made the services more appealing to customers.
From a technical standpoint, mobile data services provided
by the Target Companies also utilise WAP and GPRS. WAP, or
Wireless Application Protocol, provides a wireless
connection to the Internet that allows users to access the
Internet utilising mobile handsets with WAP functionality.
GPRS, or General Packet Radio Service technology, enhances
the wireless data transmission rate over existing GSM
networks and enables network operators to provide more
information and applications via a wireless connection.
(b) IP-BASED LONG DISTANCE CALL SERVICES
From the end of 1999, the Target Companies began providing
IP-based long distance call services, which allow users to
make domestic and international long distance calls at
relatively lower cost. The IP-based long distance call
services of the Target Companies cover their entire
respective service areas. For the year ended 31 December
2001, the total usage of IP-based long distance call
services of the Target Companies was approximately 1.283
billion minutes.
(c) ISP SERVICES
The ISP services offered by the Target Companies to mobile
and fixed-line subscribers enable subscribers to connect to
the Internet via the networks of the Target Companies by
dialling the prefix "172XX". The Target Companies also offer
private integrated voice-related and Internet connection
services to corporate subscribers.
(2) SUBSCRIBER TYPES
(i) CONTRACT SUBSCRIBERS
Contract subscribers are required to pay monthly fees, basic
local usage charges and long distance usage charges (where
applicable) and roaming charges (when they use roaming services).
Most contract subscribers opt to pay these fees in arrears.
Contract subscribers are able to use international roaming
services upon registration. As of 31 December 2001, the Target
Companies had an aggregate of approximately 12.84 million
contract subscribers, representing approximately 61% of the total
subscriber base of the Target
I-8
Companies.
The following table sets forth the total number of contract
subscribers of the Target Companies as of the dates indicated:
AS OF 31 DECEMBER
------------------------------------------------
1999 2000 2001
-------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
Anhui 866 1,292 1,991
Jiangxi 638 805 1,671
Chongqing 738 720 476
Sichuan 1,546 1,645 2,263
Hubei 1,081 1,291 1,548
Hunan 1,166 1,972 2,377
Shaanxi 601 1,006 1,680
Shanxi 641 892 833
------ ------ ------
Total 7,277 9,623 12,839
====== ====== ======
(ii) PREPAID SUBSCRIBERS
In 2000, the Target Companies commenced the gradual introduction
of prepaid services that are virtually identical to the prepaid
services offered by the Group in terms of scope and nature of
service, tariff rates and value adding capability and settlement
mechanics. No monthly fee is payable by prepaid services users.
Prepaid subscribers are able to control their usage charges and
can begin using the services immediately where sufficient value
has been added to the prepaid cards. As of 31 December 2001, the
Target Companies had an aggregate of approximately 8.09 million
subscribers for their prepaid services, representing
approximately 39% of the total subscriber base of the Target
Companies.
The following table sets forth the total number of prepaid
subscribers of the Target Companies as of the dates indicated:
I-9
AS OF 31 DECEMBER
--------------------------------
2000 2001
-------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
Anhui 190 391
Jiangxi 316 481
Chongqing 543 1,329
Sichuan 915 1,898
Hubei 542 1,488
Hunan 153 524
Shaanxi 226 321
Shanxi 370 1,657
----- -----
Total 3,255 8,089
===== =====
3 TARIFFS
(i) BASIC TARIFFS
Except under circumstances where promotional discounts are offered,
the tariff structures and rates charged by the Target Companies for
their services are similar to those of the Group. The Group and the
Target Companies are subject to the same regulatory framework with
respect to tariffs.
From 1 July 2001, the requirement that connection fees be paid for
services activation by mobile subscribers on initial subscription was
discontinued. As the connection fee tariffs had been repeatedly
reduced in recent years in response to market conditions, and new
subscribers of the Target Companies include a certain portion of
prepaid services subscribers, the portion of the total operating
revenue represented by connection fees was low. Accordingly, the
cancellation of connection fees has not had a significant impact on
the revenue of the Target Companies. The discontinuance of connection
fees promotes subscriber growth, which leads to an expansion of the
subscriber base of the Target Companies and results in an increase in
total minutes of usage.
(ii) TARIFF PACKAGES
All of the Target Companies offer tariff packages. Tariff packages are
designed to leverage upon the basic usage covered by the monthly fee
and the usage charges per minute exceeding the covered basic usage in
order to adjust the positioning of the subscribers within the tariff
package scheme. In broad terms, the higher the monthly fee of a tariff
package, the greater is the concession, which is an illustration of
the principle of "call more, save more". The tariff packages also come
with different complimentary value-added services packages.
I-10
(iii) DISCOUNTS AND PROMOTIONS
Given the rapid growth in mobile penetration rates and increased
competition, in order to remain competitive in terms of price and
performance with other mobile telecommunications operators, the Target
Companies provide certain discounts and promotional offers in and
during corresponding regions and call periods. Such discounts and
promotional offers include monthly fee discounts for specific periods
and complimentary minutes of usage for high-usage subscribers at
various locations and times.
4 SALES AND CUSTOMER SERVICES
SALES CHANNELS. The Target Companies sell their mobile services
through an extensive network of proprietary sales outlets, franchise stores
and retail outlets. As of 31 December 2001, the Target Companies had 1,311
proprietary sales outlets and 20,966 franchised stores and retail outlets,
as set forth in the following table:
ANHUI JIANGXI CHONGQING SICHUAN HUBEI HUNAN SHAANXI SHANXI
----- ------- --------- ------- ----- ----- ------- ------
Proprietary sales outlets 111 186 49 230 187 204 158 186
Franchise stores and
Retail outlets 4,153 1,978 2,141 2,475 2,252 2,830 978 4,159
----- ----- ----- ----- ----- ----- ----- -----
Total 4,264 2,164 2,190 2,705 2,439 3,034 1,136 4,345
===== ===== ===== ===== ===== ===== ===== =====
In addition to various retail consumer and network connection
services, most of the proprietary sales outlets owned by the Target
Companies also provide subscribers with services such as billing
information and payment collection, services consultation, handset repair
and other customer services. In addition, most of the proprietary sales
outlets owned by the Target Companies provide training and service
demonstrations to franchise stores and retail outlets.
The franchise stores and retail outlets sell mobile services for the
Target Companies according to the instructions of the Target Companies. In
connection with these sales, all applicable fees payable after initial
connection are paid to the Target Companies. The Target Companies in turn
pay a fee averaging approximately RMB100 per new subscriber acquired (based
on the year ended 31 December 2001). In addition to the sale of services,
franchise stores also perform other services for subscribers, such as
providing tariff information, payment collection and other customer
services, whereas retail outlets focus mainly on providing sales services
through their widespread network.
MARKET SEGMENTATION STRATEGY. As subscriber demand for mobile
telecommunications becomes more varied and complex, each of the Target
Companies has conducted research into market segmentation and has launched
products which cater to the specific needs of different subscriber groups.
Each of the Target Companies has introduced VPMN services to its
corporate subscribers. VPMN, or Virtual Private Mobile Network services,
feature a "virtual" private telecommunications network provided to
corporate subscribers as an overlay upon the basic public
telecommunications network, which enables corporate internal
telecommunications functions such as speed dial and broadcast information
announcements. VPMN has been implemented in certain market segments with a
targeted approach. The Target Companies provide comprehensive solutions to
corporate customers through VPMN, which not only enhances the loyalty of
corporate customers and stimulates usage, but also attracts potential
customers to switch over to the services of the Target Companies.
I-11
TRADEMARK AND BRAND NAME. The Target Companies market their services
under the "CHINA MOBILE" trademark, which is the trademark used throughout
Mainland China by CMCC. The Company has entered into a licence agreement
with CMCC for the use of the "CHINA MOBILE" trademark in the regions and in
connection with businesses which the Group currently operates in Mainland
China. The licence agreement also permits the Company to authorise third
parties to use the "CHINA MOBILE" trademark within specified regions and in
connection with specified businesses. Subject to completion of the
Acquisition, the arrangement under the licence agreement will be extended
to the Target Companies. The primary brand names which are used by the
Target Companies are "GoTone", "Shenzhouxing" and "Monternet".
CUSTOMER SERVICES. The after-sales customer support service centres of
the Target Companies offer 24-hour staff-answering and automatic-answering
service hotlines in their respective service areas, which provide customers
with consultation, service, billing and other information, as well as
customer reports relating to the network and services. In order to retain
high-value and corporate customers and enhance customer satisfaction, all
of the Target Companies offer a series of after-sale services targeted at
high-value and corporate customers, including dedicated account executives,
on-site visits and systems for collecting comments and handling complaints.
CREDIT CONTROL. Each of the Target Companies has implemented
subscriber registration procedures, such as identity checks for individual
customers and corresponding information checks for corporate customers, to
assist in credit control. In certain situations, the Target Companies
require contract subscribers to pay a deposit representing a certain amount
of usage charges before local mobile services are initiated. The actual
usage charges incurred are verified against the balance of the amount
deposited on a daily basis and if there are unusual circumstances,
appropriate and effective control measures will be implemented. Direct
debit services are available in each geographical region. Accounts of
contract subscribers are required to be settled on a monthly basis, and a
late payment fee is imposed on each subscriber whose account is not paid by
the monthly due date. If the subscriber's account remains overdue, the
subscriber's services will be deactivated (i.e., involuntarily
deactivated). Subscribers whose services have been involuntarily
deactivated must pay all overdue amounts, including applicable late payment
fees, to reactivate services.
5 INTERCONNECTION
As with the Group's existing networks, the networks of each of the
Target Companies interconnect with the public fixed line network of the
former CTC. Each of the Target Companies has an interconnection agreement
with the relevant subsidiary of the former CTC that operates the fixed line
network in its region.
Each of the Target Companies has entered into an interconnection and
settlement agreement with the relevant subsidiary or branch of China Unicom
and achieved interconnection with China Unicom's telecommunications
network.
Amongst the Target Companies, Anhui Mobile, Jiangxi Mobile, Chongqing
Mobile, Sichuan Mobile, Hubei Mobile and Shanxi Mobile have each entered
into an interconnection and settlement agreement with the relevant branch
of Railcom and each has achieved interconnection with Railcom's
telecommunications network.
On 5 May 2000, the Company entered into the Interconnection and
Roaming Agreement with CMCC (which was supplemented by the First
Supplemental Agreement dated 19 September 2000), which applies to its
thirteen existing operating subsidiaries. The Company has entered into the
Second
I-12
Supplemental Agreement with CMCC to provide that the Interconnection and
Roaming Agreement with CMCC will, subject to completion of the Acquisition,
be extended to cover the Target Companies. See "Letter from the Chairman -
Connected Transactions - Interconnection Arrangement" for other
information.
6 ROAMING
Each of the Target Companies provides its subscribers with roaming
capabilities throughout Mainland China. In addition, contract subscribers
can obtain roaming services in 90 countries and regions around the world
connecting 152 operators as of 31 December 2001. The Company has entered
into the Second Supplemental Agreement with CMCC to provide that its
existing roaming arrangements with CMCC for domestic and international
roaming will, subject to completion of the Acquisition, be extended to
cover the Target Companies. See "Letter from the Chairman - Connected
Transactions - Roaming Arrangement" for other information.
7 NETWORKS, SPECTRUM, NUMBER RESOURCES AND CAPITAL EXPENDITURES
MOBILE TELECOMMUNICATIONS NETWORKS. Similar to the existing
subsidiaries of the Company, the operation of the analog mobile
telecommunications networks of the Target Companies was discontinued prior
to the end of 2001. Virtually all of the original analog mobile
telecommunications subscribers of the Target Companies have migrated to
become subscribers of the GSM digital mobile telecommunications networks of
the Target Companies. Each of the Target Companies is now operating an
efficient, quality, unified and all-digital network.
As of 31 December 2001, the networks of the Target Companies
effectively reached all cities and counties and major roads and highways
within their respective geographic regions, and the average population
coverage rate was approximately 90%.
As of 31 December 2001, the Target Companies had an aggregate of 257
mobile switching centres, 22,688 base stations, an aggregate wireless
network capacity of 32.18 million subscribers, and an aggregate average
utilisation rate of approximately 65%.
The networks of the Target Companies primarily use Ericsson, Motorola,
Siemens, Nokia and Nortel Networks' equipment.
TRANSMISSION INFRASTRUCTURE. The Target Companies have acquired and
constructed transmission networks in certain high-traffic areas after
carrying out a cost-benefit analysis, in order to bolster the
competitiveness, operational flexibility and long-term profitability of the
Target Companies. In addition, the Target Companies lease intra-provincial
and local transmission lines, and pay fees based on tariff schedules
stipulated by the relevant regulatory authorities, with a discount in
certain cases.
With respect to inter-provincial transmission lines, the Company has
entered into the Second Supplemental Agreement with CMCC to extend the
Company's agreement with CMCC entered into in May 2000 (which was
supplemented by the First Supplemental Agreement dated 19 September 2000)
to the Target Companies subject to completion of the Acquisition. See
"Letter from the Chairman - Connected Transactions - Sharing of
Inter-provincial Transmission Line Leasing Fees" for other information.
SPECTRUM. The Target Companies have each been approved by the Mll to
use a total of 34 MHz of spectrum in the 900 MHz frequency band and the
1800 MHz frequency band to operate their mobile telecommunications
networks. The Target Companies have expanded the capacity of their overall
I-13
networks by adding cell sites in certain areas with a high density of
mobile telecommunications subscribers. See "Letter from the Chairman -
Connected Transactions - Spectrum Fees" for other information.
NUMBER RESOURCES. According to the "Interim Measures for
Administration of Number Resources for Telecommunications Networks"
promulgated by the MII, the MII is responsible for the administration of
the number resources nationwide. The Target Companies have been approved by
the MII to use "135", "136", "137", "138" and "139" as the network number
codes for their GSM mobile telecommunications networks, "17950" and "17951"
as the network number codes for their IP telephone networks, and "172XX" as
the network number codes for their Internet access services. The MII may
impose charges for number resources assigned to telecommunications
operators, but currently such has not yet been promulgated.
CAPITAL EXPENDITURE. The Company estimates that the Target Companies
will require an aggregate of approximately US$5.2 billion for capital
expenditures from 2002 through the end of 2004 primarily for the
development, optimisation and expansion of their networks and the
development and trial of new technologies and new businesses.
The following sets forth the planned total capital expenditure
requirements of the Target Companies for the periods indicated. Actual
future capital expenditures may differ from the amounts indicated below.
(RMB IN BILLIONS) (US$ IN BILLIONS)
----------------- -----------------
2002 16.7 2.0
2003 14.2 1.7
2004 12.4 1.5
---- ----
Total 43.3 5.2
==== ====
Note: Minimal capital expenditure is currently budgeted annually for third
generation mobile telecommunications technologies monitoring and
experimentation.
8 EMPLOYEES
The following table sets forth information regarding employees of the
Target Companies as of 31 December 2001:
ANHUI JIANGXI CHONGQING SICHUAN HUBEI HUNAN SHAANXI SHANXI
----- ------- --------- ------- ----- ----- ------- ------
Management 106 213 158 199 160 210 134 136
Technical and engineering 601 656 539 974 1,265 893 393 556
Sales and marketing 931 843 325 1,629 1,407 1,235 737 1,144
Financial and accounting 132 146 76 286 213 242 82 80
Others 382 230 268 202 178 520 396 284
----- ----- ----- ----- ----- ----- ----- -----
Total 2,152 2,088 1,366 3,290 3,223 3,100 1,742 2,200
===== ===== ===== ===== ===== ===== ===== =====
I-14
9 PROPERTIES
The Target Companies own certain buildings and real properties, which are
used for offices, retail outlets, base stations and other technical facilities,
and other ancillary buildings. The Target Companies have also leased various
properties for offices, sales outlets, technical facilities, cell sites and
switching equipment from other subsidiaries of CMCC under the Telecommunications
Services Agreements described in "Letter from the Chairman - Connected
Transactions - Telecommunications Services".
10 COMPETITION
China Unicom operates through its subsidiaries or branches in the regions
in which the Target Companies operate. The Chinese government currently allows
China Unicom to set its mobile service tariffs at levels that are as much as 10%
below the government guidance rates.
CMCC (including the Company) and the Target Companies provide mobile
telecommunications services over a unified GSM network. China Unicom provides
mobile telecommunications services over GSM and CDMA networks. As there are
vastly more mobile telecommunications services providers using GSM networks than
there are using CDMA networks, operators employing GSM networks provide broader
international roaming services to subscribers. Currently in Mainland China,
services provided over GSM networks are more widely-accepted by subscribers than
those provided over CDMA networks.
At present, given the relatively low mobile penetration rates in the
geographical areas where the Target Companies operate, there is substantial
growth potential for mobile services in general in these markets. Although the
Target Companies are facing increasing competition from other operators in
winning new subscribers, the Target Companies have significant competitive
advantages over other operators in terms of the quality of their mobile
telecommunications networks, their financial resources, the experience and
quality of their management and employees, their widely-recognised trademark and
brand names, their broad distribution networks and their focus on customer
services and their extensive range of value added services. It is expected that
the Target Companies will remain the telecommunications market leaders in the
regions in which they operate.
The former CTC offers "Xiaolingtong" services in the regions in which the
Target Companies operate. "Xiaolingtong" services are local telecom services
based on a limited mobility, limited coverage wireless access technology.
Although "Xiaolingtong" services offer lower prices, the mobility and roaming
capabilities of "Xiaolingtong" are limited. Therefore, although "Xiaolingtong"
services have to some extent affected the low-end markets in certain
geographical areas, its overall impact on the Target Companies' development has
not been significant.
11 LEGAL PROCEEDINGS
None of the Target Companies is involved in or threatened with any
litigation or claims of material importance.
I-15
--------------------------------------------------------------------------------
APPENDIX II ACCOUNTANTS' REPORT
--------------------------------------------------------------------------------
The following is the text of a report, prepared for the purpose of
inclusion in this circular, received from the independent reporting accountants,
KPMG, Certified Public Accountants, Hong Kong. As described in the section
headed "Documents available for inspection" in Appendix VII, a copy of the
following accountants' report is available for inspection.
[KPMG LOGO] Xxxxxx'x Xxxxxxxx
00 Xxxxxx Xxxx
Xxxx Xxxx
27 May 2002
The Directors
China Mobile (Hong Kong) Limited
00/X Xxx Xxxxxx
00 Xxxxx'x Xxxx Xxxxxxx
Xxxxxxx
Xxxx Xxxx
Dear Sirs,
We set out below our report on the combined financial information relating
to Anhui Mobile Communication Company Limited ("Anhui Mobile"), Jiangxi Mobile
Communication Company Limited ("Jiangxi Mobile"), Chongqing Mobile Communication
Company Limited ("Chongqing Mobile"), Sichuan Mobile Communication Company
Limited ("Sichuan Mobile"), Hubei Mobile Communication Company Limited ("Hubei
Mobile"), Hunan Mobile Communication Company Limited ("Hunan Mobile"), Shaanxi
Mobile Communication Company Limited ("Shaanxi Mobile") and Shanxi Mobile
Communication Company Limited ("Shanxi Mobile"), for each of the three years
ended 31 December 2001 (the "relevant period"), for inclusion in the
shareholders' circular of China Mobile (Hong Kong) Limited ("the Company") dated
27 May 2002 (the "circular").
Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei
Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi Mobile are principally engaged
in the provision of cellular telephone and related services in Anhui province,
Jiangxi province, Chongqing municipality, Sichuan province, Hubei province,
Hunan province, Shaanxi province and Shanxi province, of the People's Republic
of China ("PRC") respectively and market their services under the "CHINA MOBILE"
logo, which is a registered trademark owned by the China Mobile Communications
Corporation ("China Mobile"), a company incorporated in the PRC.
Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei
Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi Mobile were incorporated in the
PRC on 30 January 2002, 31 January 2002, 7 February 2002, 4 February 2002, 1
February 2002, 6 February 2002, 3 February 2002 and 4 February 2002,
respectively. References to the "Target Group" are to these companies, which
have been formed to hold the cellular service operations in Anhui province,
Jiangxi province, Chongqing municipality, Sichuan province, Hubei province,
Hunan province, Shaanxi province and Shanxi province, or in respect of
references to any time prior to the incorporation of these companies, the
cellular telecommunications businesses in Anhui province, Jiangxi province,
Chongqing municipality, Sichuan province, Hubei province, Hunan province,
Shaanxi province and Shanxi province ultimately to be acquired by the Company
pursuant to the Acquisition.
II-1
The cellular service operations in Anhui province, Jiangxi province,
Chongqing municipality, Sichuan province, Hubei province, Hunan province,
Shaanxi province and Shanxi province were operated and controlled by China
Mobile. China Mobile was established in July 1999, pursuant to the PRC State
Council's approval in February 1999 to restructure the telecommunications
industry in the PRC, to hold the mobile telecommunications assets and operate
mobile telecommunications networks nationwide.
Prior to the Acquisition, China Mobile transferred the cellular telephone
service operations in Anhui province, Jiangxi province, Chongqing municipality,
Sichuan province, Hubei province, Hunan province, Shaanxi province and Shanxi
province into the Target Group. The equity interests of the Target Group were
then transferred to respective new companies incorporated in the British Virgin
Islands, namely Anhui Mobile (BVI) Limited ("Anhui Mobile BVI"), Jiangxi Mobile
(BVI) Limited ("Jiangxi Mobile BVI"), Chongqing Mobile (BVI) Limited ("Chongqing
Mobile BVI"), Sichuan Mobile (BVI) Limited ("Sichuan Mobile BVI"), Hubei Mobile
(BVI) Limited ("Hubei Mobile BVI"), Hunan Mobile (BVI) Limited ("Hunan Mobile
BVI"), Shaanxi Mobile (BVI) Limited ("Shaanxi Mobile BVI") and Shanxi Mobile
Communication (BVI) Limited ("Shanxi Mobile BVI").
Pursuant to the Acquisition Agreement, as described more fully in the
section headed "The Acquisition" in the Letter from the Chairman contained in
the circular, the Company will acquire the entire issued share capital of Anhui
Mobile BVI, Jiangxi Mobile BVI, Chongqing Mobile BVI, Sichuan Mobile BVI, Hubei
Mobile BVI, Hunan Mobile BVI, Shaanxi Mobile BVI and Shanxi Mobile BVI.
Following the Acquisition, Anhui Mobile, Jiangxi Mobile, Chongqing Mobile,
Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi Mobile
will become wholly foreign-owned enterprises.
No financial statements have been prepared for Anhui Mobile, Jiangxi
Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi
Mobile and Shanxi Mobile since the date of their incorporation. For the purpose
of this report, we have audited the financial statements of the cellular service
operations in Anhui province, Jiangxi province, Chongqing municipality, Sichuan
province, Hubei province, Hunan province, Shaanxi province and Shanxi province
now comprising the Target Group for the relevant period to 31 December 2001 in
accordance with Auditing Standards and Guidelines issued by the Hong Kong
Society of Accountants. We have not audited any financial statements of the
Target Group in respect of any period subsequent to 31 December 2001.
We have prepared this report on the basis set out in Section 1 below in
accordance with the Auditing Guideline "Prospectuses and the Reporting
Accountant" issued by the Hong Kong Society of Accountants.
The combined financial information of the Target Group set out below,
comprising the combined profit and loss accounts and the combined cash flow
statements of the Target Group for the relevant period and the combined balance
sheets of the Target Group as of 31 December 1999, 2000 and 2001, together with
notes thereto, are prepared based on the audited financial statements of the
cellular service operations in Anhui province, Jiangxi province, Chongqing
municipality, Sichuan province, Hubei province, Hunan province, Shaanxi province
and Shanxi province now comprising the Target Group on the basis set out in
Section 1 below.
The directors of the Company are responsible for preparing the combined
financial information set out below which gives a true and fair view. In
preparing this combined financial information which gives a true and fair view,
it is fundamental that appropriate accounting policies are selected and applied
consistently, that judgements and estimates are made which are prudent and
reasonable and that the reasons for any significant departure from applicable
accounting standards are stated.
II-2
It is our responsibility to form an independent opinion on the combined
financial information. In our opinion, the combined financial information set
out below together with the notes thereto, for the purpose of this report and on
the basis of presentation set out in Section 1, give a true and fair view of the
combined results and cash flows of the Target Group for each of the three years
ended 31 December 1999, 2000 and 2001 and of their combined state of affairs as
at 31 December 1999, 2000 and 2001.
1 BASIS OF PRESENTATION
The combined profit and loss accounts and combined cash flow statements of
the Target Group for the relevant period set out below have been prepared as if
the current structure had been in existence throughout the relevant period. The
combined balance sheets of the Target Group as at 31 December 1999, 2000 and
2001 have been prepared to present the state of affairs of the Target Group as
if the current structure had been in existence as at these dates.
All significant intercompany transactions and balances have been eliminated
on combination.
2 PRINCIPAL ACCOUNTING POLICIES
(a) BASIS OF PREPARATION
The financial information set out below has been prepared in
accordance with the principal accounting policies set out below. These
principal accounting policies conform with all applicable Statements
of Standard Accounting Practice and Interpretations issued by the Hong
Kong Society of Accountants, accounting principles generally accepted
in Hong Kong and the disclosure requirements of the Listing Rules of
the Stock Exchange of Hong Kong Limited as applicable to Accountants'
Reports included in Listing Documents.
The measurement basis used in the preparation of the combined
financial information is historical cost modified by the revaluation
of fixed assets, as explained in the accounting policies set out
below.
(b) FIXED ASSETS AND DEPRECIATION
(i) Fixed assets are stated at cost or revalued amount less
accumulated depreciation and impairment losses (see Section
2(d)). The circumstances and basis under which the revalued
amount is arrived at are set out in details in Section 5(a).
(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. Expenditure incurred
after the fixed asset has been put into operation, such as
repairs and maintenance and overhaul costs, is normally charged
to the combined profit and loss account 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 capitalised 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 estimated net
disposal proceeds and the carrying amount of the asset and are
recognised in the combined profit and loss accounts on the date
of retirement or disposal.
II-3
(iv) 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:
DEPRECIABLE LIFE RESIDUAL VALUE
------------------------ --------------
Land use rights Over the period of grant --
Buildings 8-35 years 3%
Telecommunications transceivers, switching centres
and other network equipment 7 years 3%
Office equipment, furniture and fixtures and others 4-18 years 3%
(c) LEASED ASSETS
Leases of assets under which the lessee assumes substantially all the
risks and benefits of ownership are classified as finance leases.
Leases of assets under which the lessor has not transferred all the
risks and benefits of ownership are classified as operating leases.
(i) Assets acquired under finance leases
Where the Target Group acquires the use of assets under finance
leases, the amounts representing the fair value of the leased
asset, or, if lower, the present value of the minimum lease
payments, of such assets are included in the fixed assets and the
corresponding liabilities, net of finance charges, are recorded
as obligations under finance leases. Depreciation is provided at
rates which write off the cost of the assets in equal annual
amounts over the term of the relevant lease or, where it is
likely the Target Group will obtain ownership of the assets, the
estimated useful lives of the assets as set out in Section
2(b)(iv) above. Impairment losses are accounted for in accordance
with the accounting policy as set out in Section 2(d). Finance
charges implicit in the lease payments are charged to the
combined profit and loss accounts 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.
(ii) Operating lease charges
Where the Target Group has the use of assets under operating
leases, payments made under the leases are charged to the
combined profit and loss accounts in equal instalments over the
accounting periods covered by the lease term, except where an
alternative basis is more representative of the pattern of
benefits to be derived from the leased asset. Lease incentives
received are recognised in the combined profit and loss accounts
as an integral part of the aggregate net lease payments made.
Contingent rentals are charged to the combined profit and loss
accounts in the accounting period in which they are incurred.
(d) IMPAIRMENT OF ASSETS
Internal and external sources of information are reviewed at each
balance sheet date to identify indications that the following assets
may be impaired or an impairment loss previously recognised no longer
exists or may have increased:
o fixed assets; and
o construction in progress.
II-4
If any such indication exists, the asset's recoverable amount is
estimated. An impairment loss is recognised whenever the carrying
amount of an asset exceeds its recoverable amount.
(i) Calculation of recoverable amount
The recoverable amount of an asset is the greater of its net
selling price and value in use. In assessing value in use, the
estimated future cash flows are discounted to their present value
using a pre-tax discount rate that reflects current market
assessments of time value of money and the risks specific to the
asset. Where an asset does not generate cash inflows largely
independent of those from other assets, the recoverable amount is
determined for the smallest group of assets that generates cash
inflows independently (i.e. a cash-generating unit).
(ii) Reversal of impairment losses
An impairment loss is reversed if there has been a change in the
estimates used to determine the recoverable amount.
A reversal of impairment losses is limited to the asset's
carrying amount that would have been determined had no impairment
loss been recognised in prior years. Reversals of impairment
losses are credited to the combined profit and loss accounts in
the year in which the reversals are recognised.
(e) CONSTRUCTION IN PROGRESS
Construction in progress is stated in the balance sheet at cost less
impairment losses (see Section 2(d)). Cost comprises direct costs of
construction as well as interest expense and exchange differences
capitalised during the periods of construction and installation.
Capitalisation 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) INVENTORIES
Inventories, which consist primarily of handsets, SIM cards and
accessories, are stated at the lower of cost and net realisable value.
Cost represents purchase cost of goods calculated using the weighted
average cost method. Net realisable 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
recognised as a deduction of other net income due to its
insignificance. The amount of any write-down of inventories to net
realisable value and all losses of inventories are recognised 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 realisable value, is recognised as a reduction in the amount of
inventories recognised as an expense in the period in which the
reversal occurs.
(g) DEFERRED REVENUE
Deferred revenue, which consists primarily of deferred revenue from
prepaid service fees received from subscribers, less revenue
recognised in the combined profit and loss accounts up
II-5
to respective balance sheet dates. Revenue from prepaid service fees
is recognised when the cellular services are rendered.
(H) BORROWING COSTS
Borrowing costs are expressed in the combined profit and loss accounts
in the period in which they are incurred, except to the extent that
they are capitalised 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
Provided it is probable that the economic benefits will flow to the
Target Group and the revenue and costs, if applicable, can be measured
reliably, revenue is recognised in the combined profit and loss
accounts as follows:
(i) usage fees are recognised as revenue when the service is
rendered;
(ii) monthly fees are recognised as revenue in the month during which
the service is rendered;
(iii) connection fees are recognised as revenue when receivable;
(iv) deferred revenue from prepaid service is recognised as income
when the cellular telephone services are rendered upon actual
usage by subscribers;
(v) interest income is recognised on a time proportion basis by
reference to the principal outstanding and the rate applicable;
and
(vi) sales of SIM cards and handsets are recognised on delivery of
goods to the buyer. Such revenue, net of cost of goods sold, is
included in other net 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 Group's operations is the
Renminbi. Foreign currency transactions are translated into Renminbi
at the applicable rates of exchange ruling at the transaction dates.
Monetary assets and liabilities denominated in foreign currencies are
translated into Renminbi at the exchange rates ruling at the balance
sheet date. Exchange differences attributable to the translation of
borrowings denominated in foreign currencies used for financing the
construction of fixed assets, are included in the cost of the related
construction in progress. Exchange differences capitalised to
construction in progress are immaterial for the periods presented.
Other exchange gains and losses are recognised in the combined profit
and loss accounts.
(L) DEFERRED TAXATION
II-6
Deferred taxation is provided using the liability method in respect of
the taxation effect arising from all material timing differences
between the accounting and tax treatment of income and expenditure,
which are expected with reasonable probability to crystallise in the
foreseeable future. Future deferred tax benefits are not recognised
unless their realisation is assured beyond reasonable doubt.
(M) PROVISIONS AND CONTINGENT LIABILITIES
Provisions are recognised for liabilities of uncertain timing or
amount when the Target Group has a legal or constructive obligation
arising as a result of a past event, it is probable that an outflow of
economic benefits will be required to settle the obligation and a
reliable estimate can be made. Where the time value of money is
material, provisions are stated at the present value of the
expenditures expected to settle the obligation.
Where it is not probable that an outflow of economic benefits will be
required, or the amount cannot be estimated reliably, the obligation
is disclosed as a contingent liability, unless the probability of
outflow of economic benefits is remote. Possible obligations, whose
existence will only be confirmed by the occurrence or non-occurrence
of one or more future events are also disclosed as contingent
liabilities unless the probability of outflow of economic benefits is
remote.
(N) RETIREMENT BENEFITS
The Target Group's contributions to retirement schemes are charged to
the combined profit and loss accounts as and when incurred (see
Section 3(j)).
(O) RELATED PARTIES
For the purposes of the financial information set out below, parties
are considered to be related to the Target Group if the Target 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 Target Group and the
party are subject to common control or common significant influence.
Related parties may be individuals or other entities.
(P) CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid investments which are
readily convertible into known amounts of cash without notice and
which were within three months of maturity when acquired. For the
purposes of the cash flow statement, cash equivalents would also
include advances from banks repayable within three months from the
date of the advance.
(Q) SEGMENT REPORTING
A segment is a distinguishable component of the Target Group that is
engaged either in providing products or services (business segment),
or in providing products or services within a particular economic
environment (geographical segment), which is subject to risks and
rewards that are different from those of other segments.
No analysis of the Target Group's turnover and contribution to profit
from operations by geographical segment or business segment has been
presented as the Target Group is only engaged in the provision of
cellular telephone and related services in the PRC. There is no
II-7
other geographical or business segment with segment assets equal to or
greater than 10 per cent. of the Target Group's total assets.
3 COMBINED PROFIT AND LOSS ACCOUNTS
The following are the combined profit and loss accounts of the Target Group
for the relevant period, prepared on the basis set out in Section 1 above:
YEAR ENDED 31 DECEMBER
-------------------------------------
NOTE 1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
OPERATING REVENUE (TURNOVER) (a)
Usage fees 10,437 14,998 19,020
Monthly fees 3,051 3,972 4,152
Connection fees 1,146 345 43
Other operating revenue 1,627 2,328 2,866
------- ------- -------
TOTAL OPERATING REVENUE 16,261 21,643 26,081
------- ------- -------
OPERATING EXPENSES
Leased lines 2,464 2,187 1,393
Interconnection 2,350 3,022 3,286
Depreciation 3,860 4,959 5,841
Personnel 750 1,467 1,527
Other operating expenses (b) 3,437 5,049 7,107
------- ------- -------
TOTAL OPERATING EXPENSES 12,861 16,684 19,154
------- ------- -------
PROFIT FROM OPERATIONS 3,400 4,959 6,927
WRITE-DOWN AND WRITE-OFF OF NETWORK
EQUIPMENT (c) (927) (3,952) --
DEFICIT ON REVALUATION OF FIXED ASSETS 5(a) -- -- (2,113)
OTHER NET INCOME (d) 158 130 121
NON-OPERATING NET EXPENSES (e) (35) (37) (22)
INTEREST INCOME 22 42 89
FINANCE COSTS (f) (729) (889) (394)
------- ------- -------
PROFIT FROM ORDINARY ACTIVITIES BEFORE TAXATION (f) 1,889 253 4,608
TAXATION (g) 32 365 (1,313)
------- ------- -------
NET PROFIT 1,921 618 3,295
======= ======= =======
(A) OPERATING REVENUE (TURNOVER)
The principal activities of the Target Group are the provision of
cellular telephone and related services in Anhui province, Jiangxi
II-8
province, Chongqing municipality, Sichuan province, Hubei province,
Hunan province, Shaanxi province and Shanxi province of the PRC.
Operating revenue primarily represents usage fees, monthly fees and
connection fees for the use of the Target 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 3.3% of the corresponding
revenue; central irrigation construction levy is charged at
approximately 3% of certain connection and surcharge revenue.
Other operating revenue mainly represents charges for wireless data
and value added services, telephone number selection fees,
interconnection revenue and roaming in fees. Roaming in fees are
received from China Mobile in respect of calls made by non-subscribers
using the Target Group's cellular telecommunications networks. All
settlements of inter-provincial roaming and corresponding
interconnection revenues are made through China Mobile.
(B) OTHER OPERATING EXPENSES
Other operating expenses primarily comprise selling and promotion
expenses, provision for doubtful accounts, operating lease charges,
maintenance charges, debt collection fees, spectrum charges, offices
expenses, utilities charges, travelling expenses, entertainment
expenses, insurance expenses, consumables and supplies, and other
miscellaneous expenses.
(C) WRITE-DOWN AND WRITE-OFF OF NETWORK EQUIPMENT
YEAR ENDED 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Write-down of analog network equipment (i) 650 3,366 --
Write-off of network equipment (ii) 277 586 --
----- ----- -----
927 3,952 --
===== ===== =====
(i) In light of the gradual opening of the telecommunications market
in the PRC and the rapid change of digital technology, the Target
Group has reviewed the carrying value of all analog network
equipment during the relevant period. Based on the expected net
cash position of the analog network, provision has been made
against the carrying amounts of the analog network equipment as
at 31 December 1999 and 31 December 2000 and recognised as
expenses in the combined profit and loss accounts during the
relevant period. As at 31 December 2001, all analog network
equipment had been removed from service.
(ii) This represents the write-off of certain network equipment which
has been removed from service.
(D) OTHER NET INCOME
Other net income consists of the gross margin from sales of cellular
telephone SIM cards and handsets.
YEAR ENDED 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Sales of SIM cards and handsets 673 542 735
Cost of SIM cards and handsets (515) (412) (614)
----- ----- -----
158 130 121
===== ===== =====
II-9
(E) NON-OPERATING NET EXPENSES
Non-operating net expenses consists of:
YEAR ENDED 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Penalty income on overdue accounts 18 45 43
Loss on disposal of fixed assets (41) (44) (75)
Exchange gain -- 2 2
Others (12) (40) 8
----- ----- -----
(35) (37) (22)
===== ===== =====
(F) PROFIT FROM ORDINARY ACTIVITIES BEFORE TAXATION
Profit from ordinary activities before taxation is arrived at after
charging:
(i) Finance costs
YEAR ENDED 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Interest on bank loans and other
borrowings repayable within
five years 956 1,106 505
Finance charges on obligations under
finance leases 38 33 18
----- ----- -----
Total borrowing costs 994 1,139 523
Less: Amount capitalised as construction
in progress (Note) (265) (250) (129)
----- ----- -----
729 889 394
===== ===== =====
Note: Borrowing costs have been capitalised at the following rates per
annum:
1999 2000 2001
-------- -------- --------
For the year ended 31 December 5.00% to 4.97% to 3.80% to
11.70% 10.98% 8.10%
(ii) Other items
II-10
YEAR ENDED 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Depreciation
- owned assets 3,794 4,852 5,793
- assets held under finance leases 66 107 48
Operating lease charges in respect of
- properties 68 114 154
- leased lines 2,464 2,187 1,393
- others 33 60 72
Contribution to retirement plans 78 108 152
Provision for doubtful accounts 743 599 499
Provision for obsolete inventories 27 53 53
Auditors' remuneration -- -- --
===== ===== =====
(G) TAXATION
Taxation in the combined profit and loss accounts represents:
YEAR ENDED 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Provision for PRC enterprise income tax 185 657 693
Transfer (to)/from deferred tax assets
(Note 5(c)) (217) (1,022) 620
----- ----- -----
(32) (365) 1,313
===== ===== =====
The Target Group is subject to the PRC enterprise income tax rate of
33% for each of the years ended 31 December 1999, 2000 and 2001,
except for Chongqing Mobile, Sichuan Mobile and Shaanxi Mobile, which
are located in the Western Region of the PRC, and are subject to a
preferential tax rate of 15% for the year ended 31 December 2001.
The provision for enterprise income tax differs from the amount
computed by applying the PRC enterprise income tax rate of 33% to
profit from ordinary activities before taxation for the following
reasons:
YEAR ENDED 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Expected PRC taxation at statutory
tax rates 623 83 1,521
Non-taxable items
- Connection fees (378) (114) (9)
- Surcharges (71) (102) (5)
- Others -- (1) (3)
Non-deductible expenses 131 305 548
Rate differential -- -- (308)
Non-recognition of deferred taxes
- Non-recognition of net operating losses 141 9 117
- Generation of timing difference (236) -- (403)
- Reversal of timing difference (243) (552) (291)
Effect on deferred taxation due to change
of tax rate -- -- 145
Others 1 7 1
----- ----- -----
Taxation (32) (365) 1,313
===== ===== =====
II-11
(H) DIRECTORS' REMUNERATION
The number of directors whose remuneration from the Target Group falls
within the following band is set out below:
YEAR ENDED 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
RMB Nil - RMB 1,000,000 -- -- --
===== ===== =====
The aggregate of the emoluments in respect of the directors during the
relevant period is as follows:
YEAR ENDED 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Fees -- -- --
Salaries, allowance and benefits in kind -- -- --
Retirement benefits -- -- --
Bonuses -- -- --
----- ----- -----
-- -- --
===== ===== =====
There was no arrangement under which a director waived or agreed to
waive any remuneration during each of the relevant periods.
(I) SENIOR MANAGEMENT REMUNERATION
The number of employees who were not directors during the relevant
period and who were amongst the five highest paid employees of the
Target Group falls within the following band, is set out below:
YEAR ENDED 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX Xxx - XXX 0,000,000 0 0 0
===== ===== =====
The aggregate of the emoluments in respect of these employees during
the relevant period is as follows:
YEAR ENDED 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
(i) Salaries, allowance and benefits
in kind 1 1 1
(ii) Retirement benefits -- -- --
(iii) Bonuses 1 1 1
----- ----- -----
2 2 2
===== ===== =====
There was no arrangement under which an employee waived or agreed to
waive any remuneration during each of the relevant periods.
II-12
(J) EMPLOYEE AND RETIREMENT BENEFITS
The employees of the Target Group participate in defined benefit
retirement plans managed by the local government authorities whereby
the Target Group is required to contribute to the schemes at fixed
rates of the employees' salary costs. The Target Group has no
obligation for the payment of retirement and other post-retirement
benefits of staff other than the contributions described above.
Pursuant to PRC regulations, the Target Group is required to provide
staff quarters to eligible employees and their immediate families. The
Target Group has established separate employee housing reform schemes
in order to comply with the regulations at the provincial level. Under
such schemes, the Target Group is required to either purchase or build
housing which is to be sold or rented to eligible employees.
Subsequent to 31 December 2000, the housing program previously in
place has been terminated. The costs of the subsidy incurred by the
Target Group for the year ended 31 December 1999 and 31 December 2000
were XXX 00 xxxxxxx xxx XXX 269 million, respectively. In addition,
certain costs incurred by the former Provincial Telecommunications
Administrations (the "former PTAs"), or Provincial Telecommunications
Companies (the "former PTCs") since their formation in respect of the
housing program for the year ended 31 December 1999 and 31 December
2000 which have not been charged to the Target Group were Rmb58
million and Rmb182 million respectively.
(K) RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability,
directly or indirectly, to control the other party or exercise
significant influence over the other party in making financial and
operating decisions. Parties are also considered to be related if they
are subject to common control or common significant influence.
The operations of the Target Group are subject to extensive
regulations by the PRC Government. Prior to the industry
restructuring, public telecommunications networks and services in the
PRC were controlled and operated by the Ministry of Information
Industry ("MII") through the former Directorate General of
Telecommunications (the "former DGT") and the former PTAs or the
former PTCs since their formation, and their city and country level
bureaus. The Target Group's tariff are also subject to regulation by
various government authorities.
The majority of the Target Group's business activities are conducted
with China Mobile and its subsidiaries ("China Mobile Group") and the
former China Telecommunications Corporation (the "former China
Telecom") and its subsidiaries (the "former China Telecom Group"). As
part of the PRC telecommunications restructuring in May 2000, the MII
ceased to have controlling interests in China Mobile, the former DGT
and the former PTCs. However, the MII continues in its capacity as the
industry regulator providing policy guidance and exercising regulatory
authority over all telecommunications services providers in the PRC.
As such, the MII or entities previously under control of MII including
the former DGT and the relevant former PTCs, and the former China
Telecom Group since its formation, are no longer considered to be
related parties of the Target Group and the transactions entered into
with these entities are therefore not considered to be related party
transactions since May 2000. The former China Telecom was a state
owned company which is engaged in operating principally the fixed line
telephone networks in the PRC previously operated by the former DGT
and the former PTCs. In December 2001, the State Council approved a
plan for the reform of the telecommunications system and conducted a
restructuring of the former China Telecom. After the restructuring,
China Telecommunications Corporation retains the telecommunications
companies originally owned by the former China Telecom in twenty one
provinces, directly-administered municipalities and autonomous
regions, under its corporate mantle.
The principal recurring and non-recurring related party transactions
of the Target Group during the relevant period are summarised as
follows:
YEAR ENDED 31 DECEMBER
-------------------------------------
NOTE 1999 2000 2001
---- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
RECURRING TRANSACTIONS
Interconnection revenue (i) 711 716 519
Interconnection charges (ii) 1,548 1,108 524
Leased line charges (iii) 2,464 811 96
Roaming revenue (iv) 705 930 1,257
Roaming expenses (v) 802 983 1,244
Spectrum usage fees (vi) 9 8 8
Operating lease charges (vii) 36 18 12
Sales commission (viii) 10 7 19
II-13
YEAR ENDED 31 DECEMBER
-------------------------------------
NOTE 1999 2000 2001
---- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Billing service fees (viii) 1 -- --
Debt collection service fees (viii) 2 3 5
Equipment and telecommunications lines maintenance
service fees (ix) 20 6 26
Rental charges of synchronised clock ports (x) 4 2 --
Interest paid/payable (xi) 70 9 37
Construction and related service fees (xii) 97 401 2,260
Purchase of transmission tower and transmission
tower-related service fees (xiii) -- 59 101
Prepaid card sales commission income (xiv) -- 29 115
Prepaid card sales commission expenses (xiv) -- 27 58
Notes:
(i) Interconnection revenue represents the amounts received or
receivable from the relevant former PTAs, or China Mobile since its
formation, in respect of long distance calls made by non-subscribers
and from the relevant former PTAs in respect of calls which
interconnect with the fixed line networks in Anhui province, Jiangxi
province, Chongqing municipality, Sichuan province, Hubei province,
Hunan province, Shaanxi province and Shanxi province. Prior to 1
April 1999, interconnection charges receivable from the relevant
former PTAs were not reflected as interconnection revenue by the
Target Group. Pursuant to the interconnection agreements, with
effect from 1 April 1999, the Target Group records the amounts
receivable from the relevant former PTAs in respect of calls made
between the Target Group's cellular networks and the fixed line
networks in the relevant provinces and outbound calls originating
from the fixed line networks in the relevant provinces which
terminate on GSM network operators in other provinces in the PRC.
(ii) Interconnection charges represent the amounts paid or payable to the
relevant former PTAs or China Mobile since its formation in respect
of long distance calls made between the Target Group's subscribers
roaming outside their respective registered provinces or
municipality and to the relevant former PTAs in respect of calls
which interconnect with fixed line networks or other cellular
telephone operators in Anhui province, Jiangxi province, Chongqing
municipality, Sichuan province, Hubei province, Hunan province,
Shaanxi province and Shanxi province. Prior to 1 April 1999,
interconnection charges payable to the relevant former PTAs were not
reflected as interconnection charges of the Target Group. Pursuant
to the interconnection agreements, with effect from 1 April 1999,
the Target Group records the amounts payable by the Target Group for
outbound calls from the subscribers which terminate on the fixed
line network or the networks of other cellular telephone operators
as interconnection charges.
(iii) Leased line charges represent expenses paid or payable to the
relevant former 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 1 April 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 (previously the
MII). With effect from 1 April 1999, all settlements of
inter-provincial roaming and corresponding interconnection expenses
are made through China Mobile (previously the MII).
(vi) Spectrum usage 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 Target Group in the PRC.
(vii) Operating lease charges represent the rental and property management
fees paid or payable to the relevant former PTAs or the subsidiaries
of China Mobile for operating leases in respect of land and
buildings and others.
(viii) The Target Group entered into certain service agreements in respect
of marketing services with authorised dealers, debt collection
services and billing services with the relevant former PTAs or the
subsidiaries of China Mobile.
II-14
Sales commission represents the amounts paid or payable to the
subsidiaries of China Mobile for their marketing of the cellular
services in the relevant provinces or municipality.
Billing service fees represent the amounts paid or payable to the
relevant former PTAs for their provision of the billing services to
the Target Group.
Debt collection service fees represent the amounts paid or payable
to the subsidiaries of China Mobile for their provision of debt
collection services to the Target Group.
(ix) Equipment and telecommunications lines maintenance service fees
represent the amounts paid or payable to the relevant former PTAs or
the subsidiaries of China Mobile for their provision of the
maintenance services to the Target Group.
(x) Rental charges of synchronised clock ports represent expenses paid
or payable to the relevant former PTAs for the leasing of
synchronised clock ports by the Target Group.
(xi) Interest paid/payable represents the interest incurred on unsecured
loans borrowed from the relevant former PTAs with interest rates
ranging from 4.88% to 10.98% per annum prior to May 2000, or on
indirect loans borrowed from China Mobile with interest rates
ranging from 3.63% to 3.86% per annum during the year ended 31
December 2001 (see Note 5(h)).
(xii) Construction and related service fees represent the amount paid or
payable to the subsidiaries of China Mobile for the provision of
telecommunications projects construction and related services to the
Target Group.
(xiii) This represents the amount paid or payable to the subsidiaries of
China Mobile for acquiring transmission towers and the provision of
transmission tower related services.
(xiv) Prepaid card sales commission income and expenses represent handling
charges received or receivable from China Mobile to the Target Group
or paid/payable by the Target Group to China Mobile in respect of
prepaid card services.
The directors of Anhui Mobile, Jiangxi Mobile, Chongqing Mobile,
Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi
Mobile are of the opinion that the above transactions with related
parties were conducted on normal commercial terms and have confirmed
that the above transactions, except for those set out in note (viii)
above, will continue after the Acquisition.
NON-RECURRING TRANSACTIONS
YEAR ENDED 31 DECEMBER
-------------------------------------
Note 1999 2000 2001
---- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Capital contributions (i) 1,084 6,222 9,839
Distributions (ii) (631) (569) (795)
(i) Capital contributions represent cash received from the relevant
former PTAs or China Mobile.
(ii) Distributions represent cash payments by the Target Group to the
relevant former PTAs or China Mobile.
(L) DIVIDENDS
No dividends have been declared or paid by Anhui Mobile, Jiangxi
Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile,
Shaanxi Mobile and Shanxi Mobile, since their incorporation.
II-15
4 COMBINED STATEMENTS OF RECOGNISED GAINS AND LOSSES
YEAR ENDED 31 DECEMBER
-------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Surplus on revaluation of fixed assets -- -- 1,280
----- ----- -----
NET GAINS NOT RECOGNISED IN THE COMBINED
PROFIT AND LOSS ACCOUNTS -- -- 1,280
Net profit for the year 1,921 618 3,295
----- ----- -----
TOTAL RECOGNISED GAINS 1,921 618 4,575
===== ===== =====
5 COMBINED BALANCE SHEETS
The following are the combined balance sheets of the Target Group as at 31
December 1999, 2000 and 2001, prepared on the basis set out in Section 1 above:
YEAR ENDED 31 DECEMBER
-------------------------------------
NOTE 1999 2000 2001
---- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
NON-CURRENT ASSETS
Fixed assets (a) 24,867 28,061 39,499
Construction in progress (b) 2,469 4,303 10,448
Deferred tax assets (c) 232 1,254 634
------- ------- -------
27,568 33,618 50,581
======= ======= =======
CURRENT ASSETS
Inventories 96 320 442
Amounts due from ultimate holding company (d) 1,180 1,725 2,493
Amounts due from related parties (e) 2,789 -- --
Accounts receivable (f) 1,736 1,687 1,441
Other receivables (g) 231 1,110 323
Prepaid expenses and other current assets 192 522 491
Deposits with banks 1 -- 25
Cash and cash equivalents 3,570 3,225 3,360
------- ------- -------
9,795 8,589 8,575
======= ======= =======
II-16
YEAR ENDED 31 DECEMBER
-------------------------------------
NOTE 1999 2000 2001
---- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
CURRENT LIABILITIES
Bank loans and other interest-bearing borrowings (h) 5,874 4,919 4,766
Bills payable -- 107 328
Current instalments of obligations under
finance leases (i) 238 266 86
Amounts due to ultimate holding company (d) 1,074 594 418
Amounts due to related parties (e) 3,325 -- --
Accounts payable (j) 3,986 7,788 7,182
Accrued expenses and other payables 1,433 2,099 2,901
Taxation -- -- 85
------- ------- -------
15,930 15,773 15,766
======= ======= =======
NET CURRENT LIABILITIES (6,135) (7,184) (7,191)
======= ======= =======
TOTAL ASSETS LESS CURRENT LIABILITIES 21,433 26,434 43,390
NON-CURRENT LIABILITIES
Bank loans and other interest-bearing borrowings (h) (10,354) (8,954) (2,922)
Amount due to ultimate holding company (d) -- -- (8,750)
Obligations under finance leases,
excluding current instalments (i) (306) (86) --
Deferred revenue (k) -- (350) (1,055)
------- ------- -------
NET ASSETS 10,773 17,044 30,663
======= ======= =======
CAPITAL AND RESERVES (l) 10,773 17,044 30,663
======= ======= =======
(A) FIXED ASSETS
TELECOMMUNICATIONS
TRANSCEIVERS, OFFICE
SWITCHING CENTRES EQUIPMENT,
LAND USE AND OTHER FURNITURE AND
RIGHTS AND NETWORK FIXTURES AND
BUILDINGS EQUIPMENT OTHERS TOTAL
----------- ------------------ ------------- -----------
XXX XXXXXXX XXX XXXXXXX XXX XXXXXXX XXX MILLION
COST:
At 1 January 1999 1,140 21,646 709 23,495
Additions 251 1,539 239 2,029
Transferred from construction in progress 138 8,629 84 8,851
Disposals (90) (126) (39) (255)
Assets written-off -- (429) -- (429)
------- ------- ------- -------
At 31 December 1999 1,439 31,259 993 33,691
REPRESENTING:
Cost 1,439 31,259 993 33,691
======= ======= ======= =======
ACCUMULATED DEPRECIATION:
At 1 January 1999 120 4,322 159 4,601
II-17
TELECOMMUNICATIONS
TRANSCEIVERS, OFFICE
SWITCHING CENTRES EQUIPMENT,
LAND USE AND OTHER FURNITURE AND
RIGHTS AND NETWORK FIXTURES AND
BUILDINGS EQUIPMENT OTHERS TOTAL
----------- ------------------ ------------- -----------
XXX XXXXXXX XXX XXXXXXX XXX XXXXXXX XXX MILLION
Charge for the year 62 3,660 138 3,860
Additional provision -- 650 -- 650
Written back on disposals (18) (90) (27) (135)
Assets written-off -- (152) -- (152)
At 31 December 1999 164 8,390 270 8,824
======= ======= ======= =======
NET BOOK VALUE:
At 31 December 1999 1,275 22,869 723 24,867
======= ======= ======= =======
TELECOMMUNICATIONS
TRANSCEIVERS, OFFICE
SWITCHING CENTRES EQUIPMENT,
LAND USE AND OTHER FURNITURE AND
RIGHTS AND NETWORK FIXTURES AND
BUILDINGS EQUIPMENT OTHERS TOTAL
----------- ------------------ ------------- -----------
XXX XXXXXXX XXX XXXXXXX XXX XXXXXXX XXX MILLION
COST:
At 1 January 2000 1,439 31,259 993 33,691
Additions 223 881 338 1,442
Transferred from construction in progress 253 10,326 165 10,744
Disposals (43) (108) (56) (207)
Assets written-off -- (1,455) -- (1,455)
------- ------- ------- -------
At 31 December 2000 1,872 40,903 1,440 44,215
------- ------- ------- -------
REPRESENTING:
Cost 1,872 40,903 1,440 44,215
======= ======= ======= =======
ACCUMULATED DEPRECIATION:
At 1 January 2000 164 8,390 270 8,824
Charge for the year 67 4,689 203 4,959
Additional provision -- 3,366 -- 3,366
Written back on disposals (22) (59) (45) (126)
Assets written-off -- (869) -- (869)
At 31 December 2000 209 15,517 428 16,154
======= ======= ======= =======
NET BOOK VALUE:
At 31 December 2000 1,663 25,386 1,012 28,061
======= ======= ======= =======
II-18
TELECOMMUNICATIONS
TRANSCEIVERS, OFFICE
SWITCHING CENTRES EQUIPMENT,
LAND USE AND OTHER FURNITURE AND
RIGHTS AND NETWORK FIXTURES AND
BUILDINGS EQUIPMENT OTHERS TOTAL
----------- ------------------ ------------- -----------
XXX XXXXXXX XXX XXXXXXX XXX XXXXXXX XXX MILLION
COST OR VALUATION:
At 1 January 2001 1,872 40,903 1,440 44,215
Additions 312 573 250 1,135
Transferred from construction in progress 949 15,754 417 17,120
Disposals (71) (4,449) (80) (4,600)
Assets written-off -- (3,925) (1) (3,926)
Revaluation surplus/(deficit) 774 (14,472) (747) (14,445)
------- ------- ------- -------
At 31 December 2001 3,836 34,384 1,279 39,499
------- ------- ------- -------
REPRESENTING:
Valuation - 2001 3,836 34,384 1,279 39,499
======= ======= ======= =======
ACCUMULATED DEPRECIATION:
At 1 January 2001 209 15,517 428 16,154
Charge for the year 112 5,474 255 5,841
Written back on disposals (25) (4,392) (40) (4,457)
Assets written-off -- (3,925) (1) (3,926)
Written back on revaluation (296) (12,674) (642) (13,612)
------- ------- ------- -------
At 31 December 2001 -- -- -- --
======= ======= ======= =======
NET BOOK VALUE:
At 31 December 2001 3,836 34,384 1,279 39,499
======= ======= ======= =======
The analysis of net book value of land use rights and buildings are as
follows:
AT 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Long leases 120 129 352
Medium-term leases 1,155 1,534 3,484
----- ----- -----
1,275 1,663 3,836
===== ===== =====
All of the Target Group's buildings are located outside Hong Kong.
II-19
In connection with the Acquisition and pursuant to an approval document
dated 15 May 2002 issued by the Ministry of Finance, the fixed assets of
the Target Group as at 31 December 2001 were valued by China Enterprise
Appraisals ("CEA") on a depreciated replacement cost basis. The values of
fixed assets of the Target Group at 31 December 2001 have been determined
at RMB 39,499 million. Surplus arising from revaluation of certain fixed
assets totalling RMB 1,280 million has been credited to the revaluation
reserve while deficit arising from revaluation of certain fixed assets
totalling RMB 2,113 million has been recognised as expenses for the year
ended 31 December 2001. The net deficit on revaluation of approximately XXX
000 million has been incorporated in the combined balance sheet of the
Target Group as at 31 December 2001.
The Target Group's land and buildings were also valued separately by
Chesterton Xxxxx Limited as at 31 December 2001, independent qualified
valuers in Hong Kong, at approximately the same amount as the CEA
valuation.
Other than revaluations carried out in compliance with relevant PRC rules
and regulations, the Target Group has no plan to revalue their fixed assets
on a regular basis.
The effect of the above revaluation is to reduce annual depreciation
charges by approximately XXX 000 million for future periods commencing on 1
January 2002. Had the fixed assets been stated at cost less accumulated
depreciation, the net book value of fixed assets of the Target Group as at
31 December 2001 would have been RMB 40,332 million, made up as follows:
AT 31 DECEMBER 2001
-------------------
RMB MILLION
Land use rights and buildings 2,766
Telecommunication transceivers, switching centers
and other network equipment 36,182
Office equipment, furniture and fixtures and others 1,384
------
40,332
======
The net book value of fixed assets includes amounts of XXX 000 xxxxxxx, XXX
291 million and RMB 243 million in respect of assets held under finance
leases as at 31 December 1999, 2000 and 2001 respectively.
The Target Group leases certain telecommunications equipment under finance
leases. None of the leases includes contingent rentals.
(b) CONSTRUCTION IN PROGRESS
Construction in progress comprises expenditure incurred on the network
expansion projects and construction of office buildings not yet
completed at the balance sheet dates.
(c) DEFERRED TAX ASSETS
Movements on deferred tax assets comprise:
AT 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Balance at 1 January 15 232 1,254
Transferred from/(to) combined profit
and loss accounts (Note 3(g)) 217 1,022 (620)
------ ------ ------
Balance at 31 December 232 1,254 634
====== ====== ======
II-20
Deferred tax assets of the Target Group provided for are as follows:
AT 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Write-down of fixed assets relating
to network equipment 216 921 --
Income recognition on prepaid service
fees -- 294 558
Others 16 39 76
------ ------ ------
232 1,254 634
====== ====== ======
Deferred tax assets and liabilities of the Target Group not provided
for are as follows:
AT 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Deferred tax assets:
- Provision for doubtful accounts 840 479 243
- Write-down and write-off of fixed
assets relating to network equipment 90 551 --
- Tax losses carried forward 293 302 --
------ ------ ------
1,223 1,332 243
Deferred tax liabilities:
- Fixed assets basis differences (1,276) (1,928) --
------ ------ ------
Net potential deferred tax
(liabilities)/assets (53) (596) 243
====== ====== ======
As described in Note 5(a), in connection with the Acquisition, the
fixed assets of Anhui Mobile, Jiangxi Mobile, Chongqing Mobile,
Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and Shanxi
Mobile have been revalued at 31 December 2001. As a result of such
valuation, the fixed assets basis differences that gave rise to the
potential deferred tax liabilities, amounting to RMB 2,086 million at
31 December 2001, were eliminated. Additionally, the tax losses
carried forward, amounting to XXX 000 million as at 31 December 2001,
were eliminated.
(d) AMOUNTS DUE FROM/TO ULTIMATE HOLDING COMPANY
Amounts due from/to ultimate holding company under current liabilities
are unsecured, non-interest bearing and repayable on demand and arose
in the ordinary course of business (see Note 3(k)). Amount due to
ultimate holding company under non-current liabilities represents
unsecured, interest-free loans provided by China Mobile which are
repayable over 1 year. (see Note 8).
(e) AMOUNTS DUE FROM/TO RELATED PARTIES
The balances of amounts due from/to related parties at 31 December
1999 represents the balances due from/to the MII and entities under
the control of MII. As a result of the industry restructuring in May
2000 (see Note 3(k)), all balances due from/to the MII and entities
previously under the control of MII at 31 December 2000 and 2001 are
included in other receivables and accounts payable, respectively (see
Notes (g) and (j)). The balances of amounts due from/to related
parties at 31 December 1999 were unsecured, non-interest bearing,
repayable on demand and arose in the ordinary course of business.
II-21
(f) ACCOUNTS RECEIVABLE
Accounts receivable, net of provision for doubtful accounts, are all
outstanding for less than three months with the following ageing
analysis:
AT 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Within 30 days 1,462 1,411 1,253
31-60 days 132 130 121
61-90 days 142 146 67
------ ------ ------
1,736 1,687 1,441
====== ====== ======
Balances are due for payment within one month from the date of
billing. Customers with balances that are overdue or exceed credit
limits are required to settle all outstanding balances before any
further phone calls can be made.
(g) OTHER RECEIVABLES
Included in other receivables as at 31 December 2000 and 2001 are
amounts due from the former China Telecom Group amounting to XXX 000
xxxxxxx xxx XXX 111 million respectively (see Note (e)), representing
primarily revenue collected on behalf of the Target Group. The
balances with the former China Telecom Group were unsecured,
non-interest bearing and repayable within one year.
(h) BANK LOANS AND OTHER INTEREST-BEARING BORROWINGS
(i) Short-term
AT 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Bank and other loans 2,671 1,831 185
Loans from related parties 90 -- 4,200
Current portion of long-term bank
loans and other interest-bearing
borrowings 3,113 3,088 381
------ ------ ------
5,874 4,919 4,766
====== ====== ======
Loans from related parties at 31 December 1999 represent loans from
the relevant former PTAs. Loans from related parties at 31 December
2001 represent indirect loans of RMB 4,200 million advanced from China
Mobile through a bank in the PRC. These loans are interest bearing and
repayable within one year (see Note 3(k)(xi)).
II-22
At 31 December 1999, 2000 and 2001 certain short term loans were
guaranteed by the following parties:
AT 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Former PTAs/PTCs 279 208 --
Third party 32 -- --
------ ------ ------
311 208 --
====== ====== ======
At 31 December 2000, a short term loan of XXX 00 million was secured
by Shanxi Mobile's buildings and equipment with an aggregate carrying
value of RMB 80 million. The loan was fully repaid during the year
ended 31 December 2001. At 31 December 1999 and 31 December 2001, all
bank loans and other interest-bearing borrowings were unsecured.
The Target Group's borrowings under short-term loans are used
primarily to finance construction projects and are repayable in full
on respective due dates with annual interest rates ranging from 5.00%
to 10.98% at 31 December 1999, from 4.97% to 10.27% at 31 December
2000 and from 3.63% to 5.94% at 31 December 2001. The Target Group's
weighted average interest rates on short-term loans were 6.30%, 6.06%
and 3.95% at 31 December 1999, 2000 and 2001 respectively.
(ii) Long-term
Details of interest rates and maturity dates of long-term bank loans
and other interest-bearing borrowings are as follows:
AT 31 DECEMBER
INTEREST RATE AND -------------------------------------
FINAL MATURITY 1999 2000 2001
----------------- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
RENMINBI DENOMINATED
BANK LOANS:
For construction of Fixed interest rates ranging
telecommunications from 6.03% to 10.30% per annum
network with maturities through 2001 1,381 1,300 --
For construction of Floating interest rates ranging
telecommunications from 5.43% to 6.03% per annum
network as of 31 December 2001
with maturities through 2004 9,034 9,454 1,303
US DOLLAR DENOMINATED
BANK LOANS:
For construction of Fixed interest rate of 7.88% per
telecommunications annum with maturity through 2001 149 50 --
network
For construction of Floating interest rates of 8% per
telecommunications annum as of 31 December 2001 with
network maturities through 2003 1,507 681 318
US DOLLAR DENOMINATED
OTHER LOANS:
For construction of Fixed interest rate of 4.30%
telecommunications per annum with maturity
network through 2002 51 21 10
II-23
AT 31 DECEMBER
INTEREST RATE AND -------------------------------------
FINAL MATURITY 1999 2000 2001
----------------- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
For construction of Floating interest rates of LIBOR+1.5%
telecommunications per annum as of 31 December 2001
network with maturities through 2002 353 184 83
RENMINBI DENOMINATED
BANK LOANS:
For general purposes Floating interest
rates ranging from 5.85% to 7.82%
per annum as of 31 December 2000
with maturities through 2001 941 352 --
AT 31 DECEMBER
INTEREST RATE AND -------------------------------------
FINAL MATURITY 1999 2000 2001
----------------- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
RENMINBI DENOMINATED LOANS FROM
RELATED PARTIES:
For construction of Floating interest rates of 3.86%
telecommunications per annum as of 31 December 2001
network with maturities through 2004 -- -- 864
For general purposes Floating interest rates of 3.86%
per annum as of 31 December 2001
with maturities through 2004 51 -- 725
------ ------ ------
Total long-term loans 13,467 12,042 3,303
Less: Current portion
(Note (h)(i)) (3,113) (3,088) (381)
------ ------ ------
10,354 8,954 2,922
====== ====== ======
Loans from related parties at 31 December 1999 represent loans
advanced by the relevant former PTAs. Loans from related parties at 31
December 2001 represent indirect loans advanced by China Mobile
through a bank in the PRC (see note (h)(i)).
At 31 December 1999, 2000 and 2001, LIBOR was approximately 6.13%,
6.20% and 1.98% respectively.
As at 31 December 1999, 2000 and 2001, certain long-term loans were
guaranteed by the following parties:
AT 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Former PTAs/PTCs 1,655 1,859 433
Jointly guaranteed by the former Hubei
PTA and a third party 293 -- --
China Mobile 379 59 --
------ ------ ------
2,327 1,918 433
====== ====== ======
II-24
The Target Group's long-term bank loans and other interest-bearing
borrowings were repayable as follows:
AT 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Balance due:
On demand or within one year
(Note (h)(i)) 3,113 3,088 381
------ ------ ------
After one year but within two years 4,530 3,833 1,034
After two years but within five years 5,824 5,121 1,888
------ ------ ------
10,354 8,954 2,922
------ ------ ------
13,467 12,042 3,303
====== ====== ======
The current portion of long term bank loans and other interest-bearing
borrowings are included under current liabilities in the combined
balance sheet as set out in Note (h)(i) above.
(I) OBLIGATIONS UNDER FINANCE LEASES
The Target Group had obligations under finance leases repayable as
follows:
AT 31 DECEMBER 1999
------------------------------------------------
PRESENT INTEREST
VALUE OF THE EXPENSE TOTAL
MINIMUM RELATING TO MINIMUM
LEASE PAYMENTS FUTURE PERIODS LEASE PAYMENTS
-------------- -------------- --------------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Within 1 year 238 38 276
------ ------ ------
After 1 year but within 2 years 220 19 239
After 2 years but within 5 years 86 2 88
306 21 327
------ ------ ------
544 59 603
====== ====== ======
II-25
AT 31 DECEMBER 2000
------------------------------------------------
PRESENT INTEREST
VALUE OF THE EXPENSE TOTAL
MINIMUM RELATING TO MINIMUM
LEASE PAYMENTS FUTURE PERIODS LEASE PAYMENTS
-------------- -------------- --------------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Within 1 year 266 27 293
After 1 year but within 2 years 86 2 88
------ ------ ------
352 29 381
====== ====== ======
AT 31 DECEMBER 2001
------------------------------------------------
PRESENT INTEREST
VALUE OF THE EXPENSE TOTAL
MINIMUM RELATING TO MINIMUM
LEASE PAYMENTS FUTURE PERIODS LEASE PAYMENTS
-------------- -------------- --------------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Within 1 year 86 2 88
====== ====== ======
As at 31 December 1999, 2000 and 2001, certain finance leases were
guaranteed by the following parties:
AT 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Former Shanxi PTA/PTC 188 117 41
Third party 283 200 45
------ ------ ------
471 317 86
====== ====== ======
(j) ACCOUNTS PAYABLE
Included in accounts payable as at 31 December 2000 and 2001 are
amounts due to the former China Telecom Group amounting to RMB 2,494
million and RMB 974 million respectively (see Note (e)), representing
primarily payables for leased lines and interconnection expenses.
The ageing analysis of accounts payable as at 31 December 1999, 2000
and 2001 is as follows:
II-26
AT 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Accounts payable in the next
1 month or on demand 1,809 3,835 4,358
2-3 months 745 1,229 695
4-6 months 341 349 801
7-9 months 318 1,478 72
10-12 months 773 897 1,256
------ ------ ------
3,986 7,788 7,182
====== ====== ======
(k) DEFERRED REVENUE
Deferred revenue includes primarily prepaid service fees received from
subscribers which are recognised as income when the cellular telephone
services are rendered upon actual usage by subscribers.
AT 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Balance at 1 January -- -- 350
Additions during the year -- 1,225 4,211
Recognised in the combined profit
and loss accounts -- (875) (3,506)
------ ------ ------
Balance at 31 December -- 350 1,055
====== ====== ======
(l) CAPITAL AND RESERVES
Movements in capital and reserves of the Target Group during the
relevant period were as follows:
AT 31 DECEMBER
---------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
(i) Capital contributions
Balance brought forward 6,600 7,684 13,906
Movement during the year 1,084 6,222 9,839
------ ------ ------
Balance carried forward 7,684 13,906 23,745
------ ------ ------
(ii) Revaluation reserves
Balance brought forward -- - -
Revaluation surplus -- - 1,280
------ ------ ------
Balance carried forward -- - 1,280
------ ------ ------
(iii) Retained profits
Balance brought forward 1,799 3,089 3,138
Transfer from combined profit and
loss accounts 1,921 618 3,295
Distributions to owner (631) (569) (795)
------ ------ ------
Balance carried forward 3,089 3,138 5,638
====== ====== ======
Total 10,773 17,044 30,663
====== ====== ======
II-27
As at 31 December 2001, Anhui Mobile, Jiangxi Mobile, Chongqing
Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile, Shaanxi Mobile and
Shanxi Mobile had not been incorporated and hence there were no
reserves available for distribution as at 31 December 1999, 2000 and
2001.
(M) OPERATING LEASE COMMITMENTS
The total future minimum lease payments payable by the Target Group
under non-cancellable operating leases are payable as follows:
AT 31 DECEMBER 1999
-----------------------------------------------------
LAND AND LEASED
BUILDINGS LINES OTHERS TOTAL
----------- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX XXXXXXX XXX MILLION
Within 1 year 44 1,406 6 1,456
After 1 year but within 5 years 125 691 16 832
After 5 years 50 17 1 68
------ ------ ------ ------
219 2,114 23 2,356
====== ====== ====== ======
AT 31 DECEMBER 2000
-----------------------------------------------------
LAND AND LEASED
BUILDINGS LINES OTHERS TOTAL
----------- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX XXXXXXX XXX MILLION
Within 1 year 81 983 8 1,072
After 1 year but within 5 years 176 421 12 609
After 5 years 79 11 2 92
------ ------ ------ ------
336 1,415 22 1,773
====== ====== ====== ======
AT 31 DECEMBER 2001
-----------------------------------------------------
LAND AND LEASED
BUILDINGS LINES OTHERS TOTAL
----------- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX XXXXXXX XXX MILLION
Within 1 year 77 817 8 902
After 1 year but within 5 years 178 112 10 300
After 5 years 83 25 2 110
------ ------ ------ ------
338 954 20 1,312
====== ====== ====== ======
The Target Group leases certain land and buildings, leased lines and
other equipment under operating lease. None of the leases includes
contingent rentals.
II-28
(n) CAPITAL COMMITMENTS
Capital commitments outstanding at 31 December 1999, 2000 and 2001 not
provided for were summarised as follows:
AT 31 DECEMBER
-------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Commitments in respect of land and buildings
- authorised and contracted for 247 328 538
- authorised but not contracted for 1,355 1,825 2,022
------ ------ ------
1,602 2,153 2,560
====== ====== ======
Commitments in respect of telecommunications
equipment
- authorised and contracted for 4,680 3,374 3,975
- authorised but not contracted for 8,646 13,164 13,120
------ ------ ------
13,326 16,538 17,095
====== ====== ======
Total commitments
- authorised and contracted for 4,927 3,702 4,513
- authorised but not contracted for 10,001 14,989 15,142
------ ------ ------
14,928 18,691 19,655
====== ====== ======
(o) CONTINGENT LIABILITIES
Details of guarantees given to banks in respect of banking facilities
granted to related parties and third parties as at 31 December 1999,
2000 and 2001 were as follows:
AT 31 DECEMBER
-------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Banking facilities granted to:
Former Shaanxi PTA/PTC 200 650 950
Third party 90 90 90
------ ------ ------
290 740 1,040
====== ====== ======
II-29
6 COMBINED CASH FLOW STATEMENTS
The following are the combined cash flow statements of the Target Group for
the years ended 31 December 1999, 2000 and 2001, which are prepared on the basis
set out in Section 1 above:
YEAR ENDED 31 DECEMBER
--------------------------------------
NOTE 1999 2000 2001
---- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
NET CASH INFLOW FROM OPERATING ACTIVITIES (a) 8,070 10,518 13,453
------- ------- -------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 22 42 89
Interest paid (including interest element
of finance leases) (958) (1,116) (533)
Distributions to owner (631) (569) (795)
------- ------- -------
NET CASH OUTFLOW FROM RETURNS ON
INVESTMENTS AND SERVICING OF FINANCE (1,567) (1,643) (1,239)
------- ------- -------
TAXATION
PRC enterprise income tax paid (111) (450) (1,249)
------- ------- -------
TAX PAID (111) (450) (1,249)
------- ------- -------
INVESTING ACTIVITIES
Capital expenditures (9,973) (12,483) (23,011)
Proceeds from disposal of fixed assets 79 37 68
Increase in deposits with banks (1) -- (25)
Maturity of deposits with banks -- 1 --
------- ------- -------
NET CASH OUTFLOW FROM INVESTING ACTIVITIES (9,895) 12,445) (22,968)
======= ======= =======
NET CASH OUTFLOW BEFORE FINANCING ACTIVITIES (3,503) (4,020) (12,003)
======= ======= =======
YEAR ENDED 31 DECEMBER
--------------------------------------
NOTE 1999 2000 2001
---- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
FINANCING ACTIVITIES
New loans from ultimate holding company (b) -- -- 8,750
New bank loans and other interest-bearing
borrowings (b) 9,102 5,995 6,688
Repayment of capital elements of finance
leases rental (b) (181) (192) (266)
II-30
YEAR ENDED 31 DECEMBER
--------------------------------------
NOTE 1999 2000 2001
---- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Repayments of bank and other loans (b) (3,236) (8,350) (12,873)
Proceeds from capital contributions 1,084 6,222 9,839
------- ------- -------
NET CASH INFLOW FROM FINANCING ACTIVITIES 6,769 3,675 12,138
------- ------- -------
INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS 3,266 (345) 135
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 304 3,570 3,225
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR 3,570 3,225 3,360
======= ======= =======
ANALYSIS OF THE BALANCES OF CASH AND CASH
EQUIVALENTS
Deposits with banks with maturity period within
three months when placed -- 10 --
Cash and bank balances 3,570 3,215 3,360
------- ------- -------
3,570 3,225 3,360
======= ======= =======
(a) RECONCILIATION OF PROFIT FROM ORDINARY ACTIVITIES BEFORE TAXATION TO
NET CASH INFLOW FROM OPERATING ACTIVITIES:
YEAR ENDED 31 DECEMBER
-------------------------------------
1999 2000 2001
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Profit from ordinary activities before taxation 1,889 253 4,608
Depreciation of fixed assets 3,860 4,959 5,841
Write-down and write-off of network equipment 927 3,952 --
Deficit on revaluation of fixed assets -- -- 2,113
Loss on disposal of fixed assets 41 44 75
Provision for doubtful accounts 743 599 499
Interest income (22) (42) (89)
Interest expense 729 889 394
Decrease/(increase) in inventories 76 (224) (122)
Increase in amounts due from ultimate holding company (1,122) (555) (198)
(Increase)/decrease in amounts due from related parties (2,021) 2,789 --
Increase in accounts receivable (1,238) (550) (253)
Decrease/(increase) in other receivables 82 (879) 787
(Increase)/decrease in prepaid expenses and other current assets (28) (330) 31
Increase/(decrease) in amounts due to ultimate holding company 917 (676) (104)
Increase/(decrease) in amounts due to related parties 2,418 (3,325) -
Increase/(decrease) in accounts payable 8 2,621 (1,645)
Increase in accrued expenses and other payables 811 643 811
Increase in deferred revenue -- 350 705
------- ------- -------
Net cash inflow from operating activities 8,070 10,518 13,453
======= ======= =======
II-31
(b) ANALYSIS OF CHANGES IN FINANCING DURING THE YEARS:
BANK LOANS
LOAN FROM AND OTHER OBLIGATIONS
ULTIMATE INTEREST- UNDER
HOLDING BEARING FINANCE
COMPANY BORROWINGS LEASES
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
Balance at 1 January 1999 -- 10,362 505
New bank loans and other interest-bearing borrowings -- 9,102 --
Inception of finance lease contracts (Note (c)) -- -- 220
Repayments of bank loans and other interest-bearing borrowings -- (3,236) --
Repayments of capital elements of finance leases -- -- (181)
------- ------- -------
Balance at 31 December 1999 -- 16,228 544
======= ======= =======
Balance at 1 January 2000 -- 16,228 544
New bank loans and other interest-bearing borrowings -- 5,995 --
Repayments of bank loans and other interest-bearing borrowings -- (8,350) --
Repayments of capital elements of finance leases -- -- (192)
------- ------- -------
Balance at 31 December 2000 -- 13,873 352
======= ======= =======
Balance at 1 January 2001 -- 13,873 352
New loans from ultimate holding company 8,750 -- --
New bank loans and other interest-bearing borrowings -- 6,688 --
Repayments of bank loans and other interest-bearing borrowings -- (12,873) --
Repayments of capital elements under finance leases -- -- (266)
------- ------- -------
Balance at 31 December 2001 8,750 7,688 86
======= ======= =======
(c) SIGNIFICANT NON-CASH TRANSACTIONS:
The Target Group incurred payables of RMB 3,490 million, RMB 4,263
million and RMB 5,326 million from equipment suppliers for additions
of construction in progress during the years ended 31 December 1999,
2000 and 2001 respectively.
The Target Group also acquired equipment of XXX 000 million under
finance leases during the year ended 31 December 1999 (2000 and 2001:
Nil).
7 ULTIMATE HOLDING COMPANY
The directors consider the ultimate holding company of Anhui Mobile,
Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile,
Shaanxi Mobile and Shanxi Mobile to be China Mobile, a Company incorporated in
the PRC.
8 SUBSEQUENT EVENT
The following significant event took place in respect of the Target Group
subsequent to 31 December 2001.
Subsequent to 31 December 2001, the Target Group has entered into
agreements with certain banks and China Mobile, pursuant to which China Mobile
provided indirect interest bearing loans of RMB 8,750 million to the Target
Group through banks.
II-32
9 DIRECTORS' REMUNERATION
Save as disclosed herein, no remuneration has been paid or is payable in
respect of the relevant period by the Target Group, to the directors of the
Target Group.
10 SUBSEQUENT FINANCIAL STATEMENTS
No audited financial statements have been prepared by the Target Group in
respect of any period subsequent to 31 December 2001.
Yours faithfully
KPMG
Certified Public Accountants
II-33
--------------------------------------------------------------------------------
APPENDIX III ADDITIONAL FINANCIAL INFORMATION OF THE TARGET GROUP
--------------------------------------------------------------------------------
INTRODUCTION TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF THE TARGET
GROUP
In connection with the Acquisition, the Target Group's fixed assets were
revalued at 31 December 2001 and certain new agreements including
interconnection and roaming agreement and loan agreements were entered into by
the Target Group with CMCC and banks. The Target Group expects that the
revaluation of fixed assets and these agreements will have a material impact on
its overall results of operations. The accompanying Unaudited Pro Forma Combined
Profit and Loss Account of the Target Group for the year ended 31 December 2001
has been adjusted to give effect to the above as if they had been consummated on
31 December 2000 or 1 January 2001.
The Unaudited Pro Forma Combined Profit and Loss Account of the Target
Group is based upon the historical combined financial statements of the Target
Group after giving effect to the Pro Forma adjustments described in the
accompanying notes.
THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF THE TARGET GROUP
DOES NOT PURPORT TO REPRESENT WHAT THE RESULTS OF OPERATIONS OF THE TARGET GROUP
WOULD ACTUALLY HAVE BEEN IF THE EVENTS DESCRIBED ABOVE HAD IN FACT OCCURRED AT
31 DECEMBER 2000 OR THE BEGINNING OF 2001, OR ANY OTHER DATE, OR TO PROJECT THE
COMBINED NET PROFIT OF THE TARGET GROUP FOR ANY FUTURE PERIOD. THE ADJUSTMENTS
ARE BASED ON CURRENTLY AVAILABLE INFORMATION AND CERTAIN ESTIMATES AND
ASSUMPTIONS. HOWEVER, MANAGEMENT BELIEVES THAT THESE ASSUMPTIONS PROVIDE A
REASONABLE BASIS FOR PRESENTING THE SIGNIFICANT EFFECTS OF THE EVENT AS
CONTEMPLATED AND THAT THE PRO FORMA ADJUSTMENTS GIVE EFFECT TO THOSE ASSUMPTIONS
AND ARE PROPERLY APPLIED IN THE PRO FORMA COMBINED FINANCIAL INFORMATION.
The Unaudited Pro Forma Combined Profit and Loss Account of the Target
Group should be read in conjunction with Accountants' Report set out in Appendix
II to this Circular.
III-1
UNAUDITED PRO FORMA COMBINED PROFIT AND LOSS ACCOUNT OF THE TARGET GROUP
FOR THE YEAR ENDED 31 DECEMBER 2001
TARGET GROUP PRO FORMA ADJUSTED
HISTORICAL ADJUSTMENTS NOTE BALANCE
------------- ------------- ------------- -------------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
OPERATING REVENUE
Usage fees 19,020 19,020
Monthly fees 4,152 4,152
Connection fees 43 43
Other operating revenue 2,866 2,866
------ ------
TOTAL OPERATING REVENUE 26,081 26,081
------ ------
OPERATING EXPENSES
Leased lines 1,393 1,393
Interconnection 3,286 3,286
Depreciation 5,841 (347) (a) 5,494
Personnel 1,527 1,527
Other operating expenses 7,107 38 (b) 7,145
------ ------
TOTAL OPERATING EXPENSES 19,154 18,845
====== ======
PROFIT FROM OPERATIONS 6,927 7,236
DEFICIT ON REVALUATION OF FIXED ASSETS (2,113) 2,113 (a) --
OTHER NET INCOME 121 121
NON-OPERATING NET EXPENSES (22) (22)
INTEREST INCOME 89 89
FINANCE COSTS (394) (312) (c) (706)
------ ------
PROFIT FROM ORDINARY ACTIVITIES
BEFORE TAXATION 4,608 6,718
TAXATION (1,313) (9) (d) (1,322)
------ ------
NET PROFIT 3,295 5,396
====== ======
III-2
NOTES TO UNAUDITED PRO FORMA COMBINED PROFIT AND LOSS ACCOUNT OF THE TARGET
GROUP
1 DESCRIPTION OF PRO FORMA ADJUSTMENTS
(a) The Target Companies' fixed assets were revalued as at 31 December
2001, resulting in a net revaluation deficit recorded on such date.
The adjustment records the reduction in depreciation charges resulting
from the revaluation of the fixed assets and the reversal of the
deficit on revaluation of fixed assets recorded during the year ended
31 December 2001 as if the revaluation had been made on 31 December
2000.
(b) The Target Companies entered into agreements with CMCC, requiring the
Target Companies to pay processing fees in respect of the roaming
clearing and settlement services provided by CMCC. The adjustment
records the charges as if the new agreements had been in place since 1
January 2001.
(c) The Target Companies entered into agreements with certain banks and
CMCC, pursuant to which CMCC provided indirect interest bearing loans
of RMB 8,750 million to the Target Companies through banks. The
longest remaining terms of these loans are two years. The loans are
interest bearing at an annual rate which is 35% below the prevailing
PRC government prescribed market bank lending rate applicable to the
relevant loan term. The adjustment records the interest expenses of
these loans at interest rate of 3.57% per annum as if the loan
agreements had been in place since 1 January 2001.
(d) The adjustment records the tax effect of the above Pro Forma
adjustments.
III-3
--------------------------------------------------------------------------------
APPENDIX IV FINANCIAL INFORMATION OF THE GROUP
--------------------------------------------------------------------------------
1. SUMMARY OF AUDITED CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE THREE YEARS ENDED 31 DECEMBER 2001
The following is a summary of the audited results of the Group for each of
the three years ended 31 December 2001:
2001 2000 1999
-------- -------- --------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
OPERATING REVENUE (TURNOVER)
Usage fees 73,458 46,287 25,812
Monthly fees 14,085 9,623 4,981
Connection fees 711 2,213 4,319
Other operating revenue 12,077 6,861 3,511
-------- -------- --------
100,331 64,984 38,623
-------- -------- --------
OPERATING EXPENSES
Leased lines 5,005 5,501 3,723
Interconnection 13,055 8,329 6,453
Depreciation 17,664 9,759 7,411
Personnel 5,325 3,991 2,256
Other operating expenses 18,270 10,578 5,140
-------- -------- --------
59,319 38,158 24,983
-------- -------- --------
PROFIT FROM OPERATIONS 41,012 26,826 13,640
WRITE-DOWN AND WRITE-OFF OF ANALOG
NETWORK EQUIPMENT - (1,525) (8,242)
OTHER NET INCOME 1,594 915 552
NON-OPERATING NET (EXPENSES)/INCOME (6) (5) 70
INTEREST INCOME 857 1,006 767
FINANCE COSTS (1,740) (824) (343)
-------- -------- --------
PROFIT FROM ORDINARY ACTIVITIES BEFORE TAXATION 41,717 26,393 6,444
TAXATION (13,703) (8,366) (1,647)
-------- -------- --------
IV-1
2001 2000 1999
-------- -------- --------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
PROFIT FROM ORDINARY ACTIVITIES AFTER TAXATION 28,014 18,027 4,797
MINORITY INTEREST 1 - -
-------- -------- --------
PROFIT ATTRIBUTABLE TO SHAREHOLDERS 28,015 18,027 4,797
Transfer to PRC statutory reserves (5,033) (6,916) (3,524)
-------- -------- --------
RETAINED PROFITS FOR THE YEAR 22,982 11,111 1,273
======== ======== ========
EARNINGS PER SHARE
BASIC RMB 1.51 XXX 0.00 XXX 0.40
======== ======== ========
DILUTED RMB 1.51 XXX 0.00 XXX 0.40
======== ======== ========
2. EXTRACTS OF THE AUDITED FINANCIAL INFORMATION OF THE GROUP
Set out below is a summary of the audited financial information of the
Group for the two years ended 31 December 2001, with relevant notes, as
extracted from the Group's annual report for the year ended 31 December 2001.
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31 DECEMBER 2001
NOTE 2001 2000
---- -------- --------
RMB MILLION RMB MILLION
OPERATING REVENUE (TURNOVER) 3
Usage fees 73,458 46,287
Monthly fees 14,085 9,623
Connection fees 711 2,213
Other operating revenue 12,077 6,861
-------- --------
100,331 64,984
-------- --------
IV-2
NOTE 2001 2000
---- -------- --------
RMB MILLION RMB MILLION
OPERATING EXPENSES
Leased lines 5,005 5,501
Interconnection 13,055 8,329
Depreciation 17,664 9,759
Personnel 5,325 3,991
Other operating expenses 4 18,270 10,578
-------- --------
59,319 38,158
-------- --------
PROFIT FROM OPERATIONS 41,012 26,826
WRITE-DOWN AND WRITE-OFF OF ANALOG NETWORK EQUIPMENT 5 - (1,525)
OTHER NET INCOME 6 1,594 915
NON-OPERATING NET EXPENSES 7 (6) (5)
INTEREST INCOME 857 1,006
FINANCE COSTS 8(a) (1,740) (824)
-------- --------
PROFIT FROM ORDINARY ACTIVITIES BEFORE TAXATION 8 41,717 26,393
TAXATION 11(a) (13,703) (8,366)
-------- --------
PROFIT FROM ORDINARY ACTIVITIES AFTER TAXATION 28,014 18,027
MINORITY INTEREST 1 -
-------- --------
PROFIT ATTRIBUTABLE TO SHAREHOLDERS 28,015 18,027
Transfer to PRC statutory reserves 31 (5,033) (6,916)
-------- --------
RETAINED PROFITS FOR THE YEAR 22,982 11,111
======== ========
EARNINGS PER SHARE
BASIC 13(a) XXX 0.00 XXX 1.25
======== ========
DILUTED 13(b) XXX 0.00 XXX 1.25
======== ========
IV-3
CONSOLIDATED STATEMENT OF RECOGNISED GAINS AND LOSSES
FOR THE YEAR ENDED 31 DECEMBER 2001
NOTE 2001 2000
---- -------- --------
RMB MILLION RMB MILLION
NET PROFIT FOR THE YEAR 28,015 18,027
ELIMINATION OF GOODWILL ARISING ON THE ACQUISITION OF
SUBSIDIARIES AGAINST RESERVES 31 - (239,540)
-------- --------
28,015 (221,513)
======== ========
CONSOLIDATED BALANCE SHEET
AT 31 DECEMBER 2001
NOTE 2001 2000
---- -------- --------
RMB MILLION RMB MILLION
NON-CURRENT ASSETS
Fixed assets 14 105,208 87,465
Construction in progress 15 19,981 13,527
Interest in associates 17 16 46
Investment securities 18 77 61
Deferred tax assets 19 1,476 3,046
Deferred expenses 20 180 164
-------- --------
126,938 104,309
-------- --------
CURRENT ASSETS
Inventories 1,029 828
Amount due from ultimate holding company 21 503 557
Accounts receivable 22 5,728 7,252
Other receivables 23 1,189 2,297
Prepayments and other current assets 1,571 1,289
Deposits with banks 14,970 12,204
Cash and cash equivalents 24 21,821 27,702
-------- --------
46,811 52,129
-------- --------
CURRENT LIABILITIES
Bank loans and other interest-bearing borrowings 25 4,531 10,471
Bills payable 1,458 1,005
IV-4
NOTE 2001 2000
---- -------- --------
XXX XXXXXXX XXX XXXXXXX
Xxxxxxx instalments of obligations under finance leases 26 908 1,624
Amount due to immediate holding company 21 - 4,136
Amount due to ultimate holding company 21 241 678
Accounts payable 27 11,317 11,581
Accrued expenses and other payables 10,840 8,408
Taxation 11(b) 6,003 6,735
-------- --------
35,298 44,638
======== ========
NET CURRENT ASSETS 11,513 7,491
======== ========
TOTAL ASSETS LESS CURRENT LIABILITIES CARRIED FORWARD 138,451 111,800
CONSOLIDATED BALANCE SHEET (CONTINUED)
AT 31 DECEMBER 2001
NOTE 2001 2000
---- -------- --------
RMB MILLION RMB MILLION
TOTAL ASSETS LESS CURRENT LIABILITIES BROUGHT FORWARD 138,451 111,800
-------- --------
NON-CURRENT LIABILITIES
Bank loans and other interest-bearing borrowings 25 (21,591) (23,134)
Obligations under finance leases, excluding
current instalments 26 (812) (1,235)
Deferred revenue 28 (4,237) (3,654)
-------- --------
(26,640) (28,023)
-------- --------
MINORITY INTERESTS (32) (17)
======== ========
NET ASSETS 111,779 83,760
======== ========
IV-5
NOTE 2001 2000
---- -------- --------
XXX XXXXXXX XXX XXXXXXX
XXXXXXX XXX XXXXXXXX
Share capital 29 1,986 1,986
Reserves 31 109,793 81,774
-------- --------
111,779 83,760
======== ========
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2001
NOTE 2001 2000
---- -------- --------
RMB MILLION RMB MILLION
NET CASH INFLOWS FROM OPERATING ACTIVITIES (a) 63,890 41,401
-------- --------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 867 994
Interest paid (2,008) (863)
Dividend received from associate 14 --
-------- --------
NET CASH (OUTFLOW)/INFLOW FROM RETURNS ON INVESTMENTS
AND SERVICING OF FINANCE (1,127) 131
-------- --------
TAXATION
PRC income tax paid (12,865) (5,952)
-------- --------
TAX PAID (12,865) (5,952)
-------- --------
INVESTING ACTIVITIES
Payment of amount due to immediate holding company
in respect of acquisition of subsidiaries (4,136) --
Payment for acquisition of subsidiaries
(net of cash and cash equivalents acquired) -- (67,299)
Capital expenditure (39,500) (21,964)
Proceeds from disposal of fixed assets 204 264
Increase in deposits with banks (2,766) (3,881)
-------- --------
NET CASH OUTFLOW FROM INVESTING ACTIVITIES (46,198) (92,880)
======== ========
NET CASH INFLOW/(OUTFLOW) BEFORE FINANCING ACTIVITIES 3,700 (57,300)
-------- --------
FINANCING ACTIVITIES
Proceeds from issue of shares, net of expenses (c) 4 55,812
IV-6
NOTE 2001 2000
---- -------- --------
RMB MILLION RMB MILLION
New bank and other loans (c) 5,407 12,736
Repayments of bank and other loans (c) (17,897) (8,130)
Capital elements of finance leases rental (c) (2,055) (362)
Proceeds from issue of convertible notes (c) - 5,708
Expenses on issue of convertible notes - (128)
Proceeds from issue of bonds (c) 5,000 -
Expenses on issue of bonds (55) -
Increase in amounts due to minority interests (c) 15 17
-------- --------
NET CASH (OUTFLOW)/INFLOW FROM FINANCING ACTIVITIES (9,581) 65,653
======== ========
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (5,881) 8,353
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 27,702 19,349
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR (b) 21,821 27,702
======== ========
NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
(a) RECONCILIATION OF PROFIT FROM ORDINARY ACTIVITIES BEFORE TAXATION TO NET
CASH INFLOWS FROM OPERATING ACTIVITIES
2001 2000
-------- --------
RMB MILLION RMB MILLION
Profit from ordinary activities before taxation 41,717 26,393
Depreciation of fixed assets 17,664 9,759
Write-down and write-off of analog network equipment - 1,525
Provision for interest in associates 30 -
Loss on disposal of fixed assets 275 126
Provision for doubtful accounts 1,737 1,346
Amortisation of deferred expenses 39 15
Interest income (857) (1,006)
Interest expense and finance lease charges 1,740 824
Dividend income (43) (26)
Unrealised exchange loss/(gain), net 4 (2)
Increase in inventories (124) (408)
Decrease in amount due from ultimate holding company 54 409
Decrease in amounts due from related parties - 1,700
Increase in accounts receivable (213) (985)
Decrease in other receivables 1,111 54
Increase in prepayments and other current assets (282) (262)
(Decrease)/increase in amount due to ultimate holding company (437) 14
Decrease in amounts due to related parties - (1,696)
(Decrease)/increase in accounts payable (1,724) 1,179
Increase in accrued expenses and other payables 2,616 1,319
Increase in deferred revenue 583 1,123
-------- --------
IV-7
2001 2000
-------- --------
RMB MILLION RMB MILLION
Net cash inflows from operating activities 63,890 41,401
======== ========
(b) ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS
2001 2000
-------- --------
RMB MILLION RMB MILLION
Deposits with banks maturing within three months when placed 3,818 6,457
Cash and bank balances 18,003 21,245
-------- --------
21,821 27,702
======== ========
NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (CONTINUED)
(c) ANALYSIS OF CHANGES IN FINANCING DURING THE YEAR
SHARE CAPITAL OBLIGATIONS
(INCLUDING UNDER
SHARE BANK AND FINANCE CONVERTIBLE MINORITY
PREMIUM) OTHER LOANS LEASES NOTES BONDS INTERESTS
------------- ----------- ----------- ----------- ------- ---------
XXX XXX XXX XXX XXX XXX
MILLION MILLION MILLION MILLION MILLION MILLION
Balance at 1 January 2000 100,812 6,576 175 -- -- --
Acquired on acquisition of subsidiaries -- 11,762 3,011 -- -- --
------- ------- ------- ------- ------- -------
100,812 18,338 3,186 -- -- --
Inception of finance lease contracts -- -- 35 -- -- --
Changes in financing:
Cash flows from financing 55,812 12,736 -- 5,708 -- 17
Repayments of bank and other loans -- (8,130) -- -- -- --
Repayments of capital elements of
finance leases -- -- (362) -- -- --
------- ------- ------- ------- ------- -------
156,624 22,944 2,859 5,708 -- 17
Non-cash transaction:
Issue of shares as consideration for acquisition
of subsidiaries 192,369 -- -- -- -- --
------- ------- ------- ------- ------- -------
Balance at 31 December 2000 348,993 22,944 2,859 5,708 -- 17
======= ======= ======= ======= ======= =======
Balance at 1 January 2001 348,993 22,944 2,859 5,708 -- 17
Inception of finance lease contracts -- -- 916 -- -- --
Effect of foreign exchange difference -- 4 -- -- -- --
Changes in financing:
Cash flows from financing 4 5,407 -- -- 5,000 15
Repayments of bank and other loans -- (17,897) -- -- -- --
IV-8
SHARE CAPITAL OBLIGATIONS
(INCLUDING UNDER
SHARE BANK AND FINANCE CONVERTIBLE MINORITY
PREMIUM) OTHER LOANS LEASES NOTES BONDS INTERESTS
------------- ----------- ----------- ----------- ------- ---------
XXX XXX XXX XXX XXX XXX
MILLION MILLION MILLION MILLION MILLION MILLION
Repayments of capital elements of
finance leases -- -- (2,055) -- -- --
------- ------- ------- ------- ------- -------
Balance at 31 December 2001 348,997 10,458 1,720 5,708 5,000 32
======= ======= ======= ======= ======= =======
(d) SIGNIFICANT NON-CASH TRANSACTIONS
The Group incurred payables of RMB 8,679,000,000 (2000: RMB 5,555,000,000)
and RMB 1,337,000,000 (2000: RMB 1,005,000,000) to equipment suppliers and
banks respectively for additions of construction in progress during the
year ended 31 December 2001.
NOTES TO THE ACCOUNTS
1 PRINCIPAL ACCOUNTING POLICIES
(a) STATEMENT OF COMPLIANCE
These accounts have been prepared in accordance with all applicable
Statements of Standard Accounting Practice and Interpretations
issued by the Hong Kong Society of Accountants, accounting
principles generally accepted in Hong Kong and the requirements of
the Hong Kong Companies Ordinance. These accounts also comply with
the applicable disclosure provisions of the Rules Governing the
Listing of Securities on The Stock Exchange of Hong Kong Limited
(the "Listing Rules"). A summary of the principal accounting
policies adopted by the Group is set out below.
(b) BASIS OF PREPARATION OF THE ACCOUNTS
The measurement basis used in the preparation of the accounts is
historical cost.
(c) SUBSIDIARIES
A subsidiary, in accordance with the Hong Kong Companies Ordinance,
is a company in which the Group, directly or indirectly, holds more
than half of the issued share capital, or controls more than half of
the voting power, or controls the composition of the board of
directors. Subsidiaries are considered to be controlled if the
Company has the power, directly or indirectly, to govern the
financial and operating policies, so as to obtain benefits from
their activities.
An investment in a controlled subsidiary is consolidated into the
consolidated accounts, unless it is acquired and held exclusively
with a view to subsequent disposal in the near future or operates
under severe long-term restrictions which significantly impair its
ability to transfer funds to the Group, in which case, it is stated
in the consolidated balance sheet at fair value with changes in fair
value recognised in the consolidated profit and loss account as they
arise.
Material intra-group balances and transactions, and any unrealised
profit arising from intra-group transactions, are eliminated in
preparing the consolidated accounts. Unrealised losses resulting
from intra-group transactions are eliminated in the same way as
unrealised gains, but only to the extent that there is no evidence
of impairment.
(d) ASSOCIATES
An associate is an entity 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 post-acquisition results of its associates
for the year is not considered material and therefore is not
included in the consolidated profit and loss account. In the
consolidated balance sheet, interest in associates is stated at cost
less impairment losses (see note 1(i)), unless it is acquired and
held exclusively with a view to subsequent disposal in the near
future or operates under severe long-term restrictions that
significantly impair its ability to transfer funds to the investor,
in which case, it is stated at fair value with changes in fair value
recognised in the profit and loss account as they arise.
IV-9
(e) GOODWILL
Positive goodwill arising on consolidation represents the excess of
the cost of the acquisition over the Group's share of the fair value
of the identifiable assets and liabilities acquired. In respect of
controlled subsidiaries:
- for acquisitions before 1 January 2001, positive goodwill is
eliminated against reserves and is reduced by impairment
losses (see note 1(i)); and
- for acquisitions on or after 1 January 2001, positive goodwill
is amortised to the consolidated profit and loss account on a
straight-line basis over its estimated useful life of not
exceeding 20 years. Positive goodwill is stated in the
consolidated balance sheet at cost less any accumulated
amortisation and any impairment losses (see note 1(i)).
In respect of acquisitions of associates, positive goodwill is
amortised to the consolidated profit and loss account on a
straight-line basis over its estimated useful life. The cost of
positive goodwill less any accumulated amortisation and any
impairment losses (see note 1(i)) is included in the carrying amount
of the interest in associates.
Negative goodwill arising on acquisitions of controlled subsidiaries
and associates represents the excess of the Group's share of the
fair value of the identifiable assets and liabilities acquired over
the cost of the acquisition. Negative goodwill is accounted for as
follows:
- for acquisitions before 1 January 2001, negative goodwill is
credited to a capital reserve; and
- for acquisitions on or after 1 January 2001, to the extent
that negative goodwill relates to an expectation of future
losses and expenses that are identified in the plan of
acquisition and can be measured reliably, but which have not
yet been recognised, it is recognised in the consolidated
profit and loss account when the future losses and expenses
are recognised. Any remaining negative goodwill, but not
exceeding the fair values of the non-monetary assets acquired,
is recognised in the consolidated profit and loss account over
the weighted average useful life of those non-monetary assets
that are depreciable/amortisable. Negative goodwill in excess
of the fair values of the non-monetary assets acquired is
recognised immediately in the consolidated profit and loss
account.
In respect of any negative goodwill not yet recognised in the
consolidated profit and loss account:
- for controlled subsidiaries, such negative goodwill is shown
in the consolidated balance sheet as a deduction from assets
in the same balance sheet classification as positive goodwill;
and
- for associates, such negative goodwill is included in the
carrying amount of the interests in associates.
(f) OTHER INVESTMENTS IN SECURITIES
The Group's policies for investments in securities other than
investments in subsidiaries and associates are as follows:
(i) Investments held on a continuing basis for an identified
long-term purpose are classified as investment securities.
Investment securities are stated in the balance sheet at cost
less any provisions for diminution in value. Provisions are
made when the fair values have declined below the carrying
amounts, unless there is evidence that the decline is
temporary, and are recognised as an expense in the profit and
loss account, such provisions being determined for each
investment individually.
(ii) Profits or losses on disposal of investments in securities are
determined as the difference between the estimated net disposal
proceeds and the carrying amount of the investments and are
accounted for in the profit and loss account as they arise.
IV-10
(g) FIXED ASSETS AND DEPRECIATION
(i) Fixed assets are stated at cost less accumulated depreciation
and impairment losses (see note 1(i)).
(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.
Expenditure incurred after the fixed asset has been put into
operation, such as repairs and maintenance and overhaul costs,
are normally charged to the profit and loss account 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
capitalised as an additional cost of the fixed asset.
(iii) Gains or losses arising from the retirement or disposal of a
fixed asset are determined as the difference between the
estimated net disposal proceeds and the carrying amount of the
asset and are recognised in the profit and loss account on the
date of retirement or disposal.
(iv) Depreciation is calculated to write-off the cost of fixed
assets on a straight-line basis over their estimated useful
lives, to residual values, as follows:
DEPRECIABLE LIFE RESIDUAL VALUE
---------------- --------------
Land use rights Over the period of grant --
Buildings 8 - 35 years 3%
Telecommunications transceivers, switching centres and
other network equipment 7 years 3%
Office equipment, furniture and fixtures and others 4 - 18 years 3%
(h) LEASED ASSETS
Leases of assets under which the lessee assumes substantially all
the risks and benefits of ownership are classified as finance
leases.
Where the Group acquires the use of assets under finance leases, the
amounts representing the fair value of the leased asset, or, if
lower, the present value of the minimum lease payments, of such
assets are included in the fixed assets and the corresponding
liabilities, net of finance of charges, are recorded as obligations
under finance leases. Depreciation is provided at rates which write
off the cost of the assets in equal annual amounts over the term of
the relevant lease or, where it is likely the Group will obtain
ownership of the asset, the life of the asset, as set out in note
1(g). Impairment losses are accounted for in accordance with the
accounting policy as set out in note 1(i). Finance charges implicit
in the lease payments are charged to the profit and loss account
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.
(i) IMPAIRMENT OF ASSETS
Internal and external sources of information are reviewed at each
balance sheet date to identify indications that the following assets
may be impaired or an impairment loss previously recognised no
longer exists or may have decreased:
- fixed assets;
- construction in progress;
- investments in subsidiaries and associates; and
- positive goodwill (whether taken initially to reserves or
recognised as an asset).
If any such indication exists, the asset's recoverable amount is
estimated. An impairment loss is recognised whenever the carrying
amount of an asset exceeds its recoverable amount.
(i) Calculation of recoverable amount
IV-11
The recoverable amount of an asset is the greater of its net
selling price and value in use. In assessing value in use, the
estimated future cash flows are discounted to their present
value using a pre-tax discount rate that reflects current
market assessments of time value of money and the risks
specific to the asset. Where an asset does not generate cash
inflows largely independent of those from other assets, the
recoverable amount is determined for the smallest group of
assets that generates cash inflows independently (i.e. a
cash-generating unit).
(ii) Reversals of impairment losses
In respect of assets other than goodwill, an impairment loss
is reversed if there has been a change in the estimates used
to determine the recoverable amount. An impairment loss in
respect of goodwill is reversed only if the loss was caused by
a specific external event of an exceptional nature that is not
expected to recur, and the increase in recoverable amount
relates clearly to the reversal of the effect of that specific
event.
A reversal of impairment losses is limited to the asset's
carrying amount that would have been determined had no
impairment loss been recognised in prior years. Reversals of
impairment losses are credited to the profit and loss account
in the year in which the reversals are recognised.
(j) CONSTRUCTION IN PROGRESS
Construction in progress is stated at cost. Cost comprises direct
costs of construction as well as interest expense and exchange
differences capitalised during the periods of construction and
installation. Capitalisation 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.
(k) INVENTORIES
Inventories, which consist primarily of handsets, SIM cards and
accessories, are stated at the lower of cost and net realisable
value. Cost represents purchase cost of goods calculated using the
weighted average cost method. Net realisable 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 recognised as a deduction of other income due to its
insignificance. The amount of any write-down of inventories to net
realisable value and all losses of inventories are recognised 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 realisable value, is recognised as a reduction in
the amount of inventories recognised as an expense in the period in
which the reversal occurs.
(l) DEFERRED REVENUE
Deferred revenue, which consists primarily of deferred revenue from
prepaid service fees received from subscribers and deferred revenue
from assignment of rights to income from subscribers with
distributions 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
recognised in the profit and loss account up to the balance sheet
date.
Revenue from prepaid service fees is recognised when the cellular
services are rendered.
Income from assignment of rights is deferred and recognised on a
straight-line basis over the relevant assignment period. For
assignment contract which the distributors surrender for early
cancellation, the balance of the Group's deferred revenue in respect
of those contracts is recognised as non-operating income in the
profit and loss account when the assignment contracts are cancelled.
(m) FIXED RATE NOTES, BONDS AND CONVERTIBLE NOTES
Fixed rate notes, bonds and convertible notes are stated in the
balance sheet at face value, less unamortised discount arising
thereon, if any. The discount is amortised on a straight-line basis
over the period from the date of issue to the date of maturity.
(n) DEFERRED EXPENSES
IV-12
Deferred expenses comprise incidental costs incurred in relation to
the issue of the fixed rate notes, bonds and convertible notes of
the Group and are amortised on a straight-line basis over the
periods from the date of issue to the date of maturity. In the event
that the notes are redeemed prior to the maturity date, the
unamortised expenses are charged immediately to the profit and loss
account.
(o) BORROWING COSTS
Borrowing costs are expressed in the profit and loss account in the
period in which they are incurred, except to the extent that they
are capitalised 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.
(p) REVENUE RECOGNITION
Provided it is probable that the economic benefits will flow to the
Group and the revenue and costs, if applicable, can be measured
reliably, revenue is recognised in the profit and loss account as
follows:
(i) usage fees are recognised as revenue when the service is
rendered;
(ii) monthly fees are recognised as revenue in the month during
which the service is rendered;
(iii) connection fees are recognised as revenue when receivable;
(iv) deferred revenue from prepaid service is recognised as income
when the cellular telephone services are rendered upon actual
usage by subscribers;
(v) deferred revenue from assignment of rights to income from
subscribers is recognised on a straight-line basis over the
duration of the assignment period;
(vi) interest income is recognised on a time proportion basis by
reference to the principal outstanding and the rate
applicable; and
(vii) sales of SIM cards and handsets are recognised on delivery of
goods to the buyer. Such revenue, net of cost of goods sold,
is included in other net income due to its insignificance.
(q) 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.
(r) TRANSLATION OF FOREIGN CURRENCIES
Foreign currency transactions during the year are translated into
Renminbi at the exchange rates ruling at the transaction dates.
Monetary assets and liabilities denominated in foreign currencies
are translated into Renminbi at the exchange rates ruling at the
balance sheet date. Exchange differences attributable to the
translation of borrowings denominated in foreign currencies and used
for financing the construction of fixed assets, are included in the
cost of the related construction in progress. Exchange differences
capitalised to construction in progress are immaterial for the
periods presented. Other exchange gains and losses are recognised in
the profit and loss account.
(s) DEFERRED TAXATION
Deferred taxation is provided using the liability method in respect
of the taxation effect arising from all material timing differences
between the accounting and tax treatment of income and expenditure,
which are expected with reasonable probability to crystallise in the
foreseeable future. Future deferred tax benefits are not recognised
unless their realisation is assured beyond reasonable doubt.
(t) PROVISIONS AND CONTINGENT LIABILITIES
Provisions are recognised for liabilities of uncertain timing or
amount when the Group has a legal or constructive obligation
IV-13
arising as a result of a past event, it is probable that an outflow
of economic benefits will be required to settle the obligation and a
reliable estimate can be made. Where the time value of money is
material, provisions are stated at the present value of the
expenditures expected to settle the obligation.
Where it is not probable that an outflow of economic benefits will
be required, or the amount cannot be estimated reliably, the
obligation is disclosed as a contingent liability, unless the
probability of outflow of economic benefits is remote. Possible
obligations, whose existence will only be confirmed by the
occurrence or non-occurrence of one or more future events are also
disclosed as contingent liabilities unless the probability of
outflow of economic benefits is remote.
(u) 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
rates of the employees' salary costs. The Group's contributions to
the schemes are charged to the profit and loss account when
incurred. The subsidiaries have no obligation for the payment of
retirement and other post-retirement benefits of staff other than
the contributions described above.
The Company's contributions to the Mandatory Provident Funds as
required under the Hong Kong Mandatory Provident Fund Schemes
Ordinance are charged to the profit and loss account when incurred.
(v) OPERATING LEASES
Leases of assets under which the lessor has not transferred all the
risks and benefits of ownership are classified as operating leases.
Where the Group has the use of assets under operating lease,
payments made under the leases are charged to the profit and loss
account in equal instalments over the accounting periods covered by
the lease term, except where an alternative basis is more
representative of the pattern of benefits to be derived from the
leased asset. Lease incentives received are recognised in the profit
and loss account as an integral part of the aggregate net lease
payments made. Contingent rentals are charged to the profit and loss
account in the accounting period in which they are incurred.
(w) 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.
(x) CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid investments which are
readily convertible into known amounts of cash without notice and
which were within three months of maturity when acquired. For the
purposes of the cash flow statement, cash equivalents would also
include advances from banks repayable within three months from the
date of the advance.
(y) SEGMENT REPORTING
A segment is a distinguishable component of the group that is
engaged either in providing products or services (business segment),
or in providing products or services within a particular economic
environment (geographical segment), which is subject to risks and
rewards that are different from those of other segments.
No analysis of the Group's turnover and contribution to profit from
operations by geographical segment or business segment has been
presented as all the Group's operating activities are carried out in
the People's Republic of China (the "PRC") and less than 10 per
cent. of the Group's turnover and contribution to profit from
operations were derived from activities outside the Group's cellular
telephone and related services activities. There is no other
geographical or business segment with segment assets equal to or
greater than 10 per cent. of the Group's total assets.
IV-14
2 CHANGES IN ACCOUNTING POLICIES
(i) GOODWILL
In prior years, positive or negative goodwill arising on acquisition of
subsidiaries was eliminated against reserves or was credited to a capital
reserve respectively. With effect from 1 January 2001, in order to comply
with Statement of Standard Accounting Practice 30 ("SSAP 30") issued by
the Hong Kong Society of Accountants, the Group adopted a new accounting
policy for goodwill as set out in note 1(e).
The Group has adopted the transitional provisions set out in paragraph
88 of SSAP 30 with the effect that the new accounting policy has been
adopted prospectively and no adjustments have been made to the opening
balances of retained profits and reserves and comparative information.
The new accounting policy has no impact on the Group's net assets as at
the year ends and on the Group's profit attributable to shareholders for
the years presented.
3 TURNOVER
The principal activities of the Group are the provision of cellular
telephone and related services in Guangdong, Zhejiang, Jiangsu, Fujian, Henan,
Hainan, Shandong, Liaoning and Hebei provinces, Beijing, Shanghai and Tianjin
municipalities and Guangxi autonomous region of the PRC. The principal activity
of the Company is investment holding.
Turnover 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. Business tax and government surcharges are charged at
approximately 3 to 3.33 per cent. of the corresponding revenue.
Other operating revenue mainly represents charges for wireless data and
value added services, telephone number selection fees, interconnection revenue
and roaming in fees. Roaming in fees are received from China Mobile
Communications Corporation ("China Mobile") in respect of calls made by
non-subscribers using the Group's cellular telecommunications networks.
4 OTHER OPERATING EXPENSES
Other operating expenses primarily comprise selling and promotion
expenses, provision for doubtful accounts, operating lease charges, maintenance
charges, debt collection fees, spectrum charges and other miscellaneous
expenses.
5 WRITE-DOWN AND WRITE-OFF OF ANALOG NETWORK EQUIPMENT
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Write-down of analog network equipment (Note (a)) - 1,330
Write-off of analog network equipment (Note (b)) - 195
----------- -----------
- 1,525
=========== ===========
Notes:
(a) In 2000, based on the operations and net cash flow position of the
analog network, the Group considered that the recoverable amount of
the analog network equipment had declined below its carrying amount.
Based on the expected future cash flows to be generated by the
analog network, a full provision was made against the carrying
amount of the analog network equipment at 31 December 2000. The
amount of the write-down of RMB 1,330 million was recognised as an
expenses in the profit and loss account. At 31 December 2001, all
analog network equipment which had been written down in previous
years had been removed from service.
IV-15
(b) This represents the write-off of certain analog network equipment
which had been removed from service.
6 OTHER NET INCOME
Other net income consists of the gross margin from sales of cellular
telephone SIM cards and handsets.
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Sales of SIM cards and handsets 3,338 1,928
Cost of SIM cards and handsets (1,744) (1,013)
----------- -----------
1,594 915
=========== ===========
7 NON-OPERATING NET EXPENSES
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Exchange loss (39) (60)
Loss on disposal of fixed assets (275) (126)
Penalty income on overdue accounts 165 149
Others 143 32
----------- -----------
(6) (5)
=========== ===========
8 PROFIT FROM ORDINARY ACTIVITIES BEFORE TAXATION
Profit from ordinary activities before taxation is arrived at after
charging/(crediting):
2001 2000
----------- -----------
RMB MILLION RMB MILLION
(a) Finance costs:
Interest on bank loans and other borrowings repayable within five years 1,064 403
Interest on bank loans and other borrowings repayable after five years 4 74
Interest on fixed rate notes 394 393
Interest on bonds 108 -
Interest on convertible notes 129 21
Finance charges on obligations under finance leases 129 52
----------- -----------
Total borrowings costs 1,828 943
Less: Amount capitalised as construction in progress (Note) (88) (119)
----------- -----------
IV-16
1,740 824
=========== ===========
Note:Borrowing costs have been capitalised at a rate of 4.57 per cent. to
8.16 per cent. (2000: 5.02 per cent. to 7.6 per cent.) per annum for
construction in progress.
2001 2000
----------- -----------
RMB MILLION RMB MILLION
(b) Other items:
Depreciation
- owned assets 16,494 9,486
- assets held under finance leases 1,170 273
Amortisation of deferred expenses 39 15
Exchange loss on foreign currency borrowings less deposits - 217
Operating lease charges in respect of
- properties 890 602
- leased lines 5,005 5,501
- others 457 471
Contribution to retirement scheme 287 335
Provision for doubtful accounts 1,737 1,346
Provision for obsolete inventories - 25
Auditors' remuneration 26 26
Dividend income from unlisted associate (43) (26)
=========== ===========
9 DIRECTORS' REMUNERATION
Directors' remuneration disclosed pursuant to section 161 of the Hong Kong
Companies Ordinance is as follows:
2001 2000
----------- -----------
XXX XXXXXXX XXX XXXXXXX
Xxxx 0 0
Salaries, allowances and benefits in kind 8 8
Retirement benefits 1 -
Performance related bonuses 3 2
----------- -----------
14 12
=========== ===========
Included in the directors' remuneration were fees of RMB 543,000 (2000:
RMB 382,000) paid to the independent non-executive directors during the year.
In addition to the above emoluments, certain directors were granted share
options under the Company's share option scheme. The details of these benefits
in kind are disclosed under the paragraph "Share option scheme" in the report of
the directors.
IV-17
The number of directors whose remuneration from the Group falls within the
following bands is set out below:
2001 2000
----------- -----------
HK$ equivalent
Nil to 1,000,000 9 10
1,000,001 to 1,500,000 1 1
2,000,001 to 2,500,000 1 2
2,500,001 to 3,000,000 2 -
=========== ===========
10 FIVE HIGHEST PAID INDIVIDUALS
Of the five highest paid individuals in this year, three (2000: three) are
directors of the Company and their remuneration has been included in Note 9
above. The remuneration of each of the remaining two highest paid individuals
falls within the band from HK$1,500,001 to HK$2,500,000 (2000: from HK$1,500,001
up to HK$2,000,000) and their aggregate remuneration is as follows:
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Salaries, allowances and benefits in kind 3 3
Performance related bonuses 1 1
----------- -----------
4 4
=========== ===========
During the year, no emoluments were paid by the Group to the five highest
paid individuals, including directors, as an inducement to join or upon joining
the Group or as compensation for loss of office.
11 TAXATION
(a) Taxation in the consolidated profit and loss account represents:
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Provision for PRC enterprise income tax on the estimated
taxable profits for the year 12,153 8,371
(Over)/under-provision in respect of PRC enterprise income tax for prior year (20) 12
----------- -----------
12,133 8,383
Transfer from/(to) deferred tax assets (Note 19(a)) 1,570 (17)
----------- -----------
13,703 8,366
=========== ===========
(i) No provision has been made for Hong Kong profits tax as there
were no estimated Hong Kong assessable profits for the years
ended 31 December 2001 and 2000.
(ii) The provision for the PRC enterprise income tax is based on a
statutory rate of 33 per cent. of the assessable profit of the
Group as determined in accordance with the relevant income tax
rules and regulations of the PRC during the year, except for
certain subsidiaries of the Company and certain operations of
the subsidiaries located within special economic zones in the
PRC, which enjoy a preferential rate of 30 per cent. and 15
per cent., respectively.
IV-18
(b) Taxation in the balance sheets represents:
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Provision for PRC enterprise income tax for the year 12,153 8,371
Balance of PRC enterprise income tax payable relating to prior year 455 478
Balance of PRC enterprise income tax payable arising on acquisition of subsidiaries - 1,405
PRC enterprise income tax paid (6,605) (3,519)
----------- -----------
6,003 6,735
=========== ===========
12 DIVIDENDS
The board of directors of the Company does not recommend the payment of
any dividends for the year ended 31 December 2001 (2000: RMB Nil).
13 EARNINGS PER SHARE
(a) BASIC EARNINGS PER SHARE
The calculation of basic earnings per share for the year is based on
the profit attributable to shareholders of RMB 28,015,000,000 (2000:
RMB 18,027,000,000) and the weighted average of 18,605,371,320
shares (2000: 14,394,312,587 shares) in issue during the year.
(b) DILUTED EARNINGS PER SHARE
The calculation of diluted earnings per share for the year is based
on the adjusted profit attributable to shareholders of RMB
28,144,000,000 (2000: RMB 18,027,000,000), after adding back the
interest expense on the convertible notes, and the weighted average
number of 18,698,023,159 shares (2000: 14,409,503,167 shares) issued
and issuable after adjusting for the effects of all dilutive
potential ordinary shares, as if all the outstanding share options
and convertible notes issued by the Company had been exercised or
converted into ordinary shares at the date of issue. In 2000, since
all potential ordinary shares arising from the convertible notes, if
converted to ordinary shares, would increase profit attributable to
shareholders per share as a result of the savings on the interest
payable on the convertible notes, the effects of anti-dilutive
potential ordinary shares were ignored in calculating diluted
earnings per share.
(c) RECONCILIATIONS
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Profit attributable to shareholders used in calculating basic earnings per share 28,015 18,027
Interest expense on the convertible notes 129 -
----------- -----------
Profit attributable to shareholders used in calculating diluted earnings per share 28,144 18,027
=========== ===========
IV-19
2001 2000
-------------- --------------
NUMBER NUMBER
OF SHARES OF SHARES
Weighted average number of ordinary shares used in calculating
basic earnings per share 18,605,371,320 14,394,312,587
Deemed issue of ordinary shares for no consideration 92,651,839 15,190,580
-------------- --------------
Weighted average number of ordinary shares used in calculating
diluted earnings per share 18,698,023,159 14,409,503,167
============== ==============
14 FIXED ASSETS
TELECOMMUNICATIONS
TRANSCEIVERS, OFFICE
SWITCHING CENTRES EQUIPMENT,
LAND USE AND OTHER FURNITURE AND
RIGHTS AND NETWORK FIXTURES AND
BUILDINGS EQUIPMENT OTHERS TOTAL
----------- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX XXXXXXX XXX MILLION
COST:
At 1 January 2001 7,996 107,911 3,702 119,609
Additions 517 851 520 1,888
Transferred from construction in progress 2,297 29,697 2,004 33,998
Disposals (216) (690) (131) (1,037)
Assets written-off - (10,377) - (10,377)
-------- -------- --------- --------
At 31 December 2001 10,594 127,392 6,095 144,081
-------- -------- --------- --------
ACCUMULATED DEPRECIATION:
At 1 January 2001 315 30,885 944 32,144
Charge for the year 379 15,883 1,402 17,664
Written back on disposals (55) (427) (76) (558)
Assets written-off - (10,377) - (10,377)
-------- -------- --------- --------
At 31 December 2001 639 35,964 2,270 38,873
======== ======== ========= ========
NET BOOK VALUE:
At 31 December 2001 9,955 91,428 3,825 105,208
======== ======== ========= ========
At 31 December 2000 7,681 77,026 2,758 87,465
======== ======== ========= ========
(a) The analysis of net book value of land use rights and
buildings is as follows:
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Long leases 1,638 2,482
Medium-term leases 8,247 5,103
Short-term leases 70 96
----------- -----------
9,955 7,681
=========== ===========
IV-20
All of the Group's buildings are located outside Hong Kong.
(b) The net book value of fixed assets of the Group includes an
amount of RMB 6,836,000,000 (2000: RMB 7,046,000,000) in
respect of assets held under finance leases.
(c) The Group leases certain telecommunications equipment under
finance leases. None of the leases includes contingent
rentals.
15 CONSTRUCTION IN PROGRESS
Construction in progress comprises expenditure incurred on the network
expansion projects and construction of office buildings not yet completed at 31
December 2001.
16 INVESTMENTS IN SUBSIDIARIES
Details of the subsidiaries are as follows:
PROPORTION OF
OWNERSHIP INTEREST
PLACE OF PARTICULARS ------------------
INCORPORATION OF ISSUED AND HELD BY THE HELD BY
NAME OF COMPANY AND OPERATION PAID UP CAPITAL COMPANY SUBSIDIARY PRINCIPAL ACTIVITY
--------------- ------------- --------------- ------- ---------- ------------------
Guangdong Mobile* PRC RMB 5,594,840,700 100% - Cellular telephone
operator
Zhejiang Mobile Communication PRC RMB 2,117,790,000 100% - Cellular telephone
Company Limited* operator
Jiangsu Mobile (BVI) Limited BVI 1 share at HK$1 100% - Investment holding
company
Jiangsu Mobile Communication PRC RMB 2,800,000,000 - 100% Cellular telephone
Company Limited* operator
Fujian Mobile (BVI) Limited BVI 1 share at HK$1 100% - Investment holding
company
Fujian Mobile Communication PRC RMB 5,247,488,000 - 100% Cellular telephone
Company Limited* operator
Henan Mobile (BVI) Limited BVI 1 share at HK$1 100% - Investment holding
company
Xxxxx Xxxxxx Xxxxxxxxxxxxx XXX XXX 4,367,733,000 - 100% Cellular telephone
Company Limited* operator
Hainan Mobile (BVI) Limited* BVI 1 share at HK$1 100% - Investment holding
company
Hainan Mobile Communication PRC RMB 643,000,000 - 100% Cellular telephone
Company Limited* operator
Beijing Mobile (BVI) Limited BVI 1 share at HK$1 100% - Investment holding
company
Beijing Mobile Communication PRC RMB 5,357,539,000 - 100% Cellular telephone
Company Limited* operator
("Beijing Mobile")
Shanghai Mobile (BVI) BVI 1 share at HK$1 100% - Investment holding
Limited company
IV-21
16 INVESTMENTS IN SUBSIDIARIES (CONTINUED)
PROPORTION OF
OWNERSHIP INTEREST
PLACE OF PARTICULARS ------------------
INCORPORATION OF ISSUED AND HELD BY THE HELD BY
NAME OF COMPANY AND OPERATION PAID UP CAPITAL COMPANY SUBSIDIARY PRINCIPAL ACTIVITY
--------------- ------------- --------------- ------- ---------- ------------------
Shanghai Mobile Communication PRC RMB 5,404,715,000 - 100% Cellular telephone
Company Limited* operator
("Shanghai Mobile")
Tianjin Mobile (BVI) Limited BVI 1 share at HK$1 100% - Investment holding
company
Tianjin Mobile Communication PRC RMB 1,856,720,000 - 100% Cellular telephone
Company Limited* operator
Hebei Mobile (BVI) Limited BVI 1 share at HK$1 100% - Investment holding
company
Hebei Mobile Communication PRC RMB 4,015,276,000 - 100% Cellular telephone
Company Limited* operator
("Hebei Mobile")
Liaoning Mobile (BVI) Limited BVI 1 share at HK$1 100% - Investment holding
company
Liaoning Mobile Communication PRC RMB 4,758,431,000 - 100% Cellular telephone
Company Limited* operator
("Liaoning Mobile")
Shandong Mobile (BVI) Limited BVI 1 share at HK$1 100% - Investment holding
company
Shandong Mobile Communication PRC RMB 5,772,040,000 - 100% Cellular telephone
Company Limited* operator
("Shandong Mobile")
Guangxi Mobile (BVI) Limited BVI 1 share at HK$1 100% - Investment holding
company
Guangxi Mobile Communication PRC RMB 2,094,590,000 - 100% Cellular telephone
Company Limited* operator
China Mobile (Shenzhen) PRC US$30,000,000 100% - Corporate operation
Limited* controller
Aspire Holdings Limited Cayman HK$79,348,932 78.64% - Investment holding
Islands company
Aspire (BVI) Limited BVI US$1,000 - 100% Investment holding
company
Aspire Technologies (Shenzhen) PRC US$1,500,000 - 100% Technology platform
Limited* development and
maintenance
* Companies registered as wholly-foreign owned enterprises in the PRC.
IV-22
17 INTEREST IN ASSOCIATES
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Unlisted shares, at cost 37 37
Capital contributions, at cost 9 9
----------- -----------
46 46
Less: Provision for impairment (30) -
----------- -----------
16 46
=========== ===========
Details of the associates, all of which are unlisted corporate entities,
are as follows:
PLACE OF PROPORTION OF
INCORPORATION OWNERSHIP INTEREST
NAME OF ASSOCIATE AND OPERATION HELD BY SUBSIDIARY PRINCIPAL ACTIVITY
----------------- ------------- ------------------ ------------------
China Motion United Telecom Hong Kong 30% Provision of telecommunication services
Limited
Shenzhen China Motion Telecom PRC 30% Provision of telecommunication services
United Limited
Fujian Nokia Mobile PRC 50% Network planning and optimising construction-
Communication Technology testing and supervising, technology support,
Company Limited development and training of Nokia GSM 900/1800
Mobile Communication System
18 INVESTMENT SECURITIES
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Unlisted equity securities in the PRC, at cost 77 61
=========== ===========
IV-23
19 DEFERRED TAX ASSETS
(a) Movements on deferred taxation comprise:
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Balance at 1 January 3,046 2,306
Acquired on acquisition of subsidiaries - 723
Transfer (to)/from the profit and loss account (Note 11(a)) (1,570) 17
----------- -----------
Balance at 31 December 1,476 3,046
=========== ===========
(b) Deferred tax assets of the Group provided for are as follows:
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Provision for obsolete inventories 4 12
Write-down of fixed assets relating to analog network equipment 171 2,102
Amortisation of deferred revenue 140 60
Income recognition on prepaid service fees 1,161 872
----------- -----------
1,476 3,046
=========== ===========
(c) Deferred tax asset of the Group not provided for is as follows:
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Provision for doubtful accounts 1,204 989
=========== ===========
IV-24
20 DEFERRED EXPENSES
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Balance at 1 January 164 51
Additions during the year 55 128
Less: Amortisation for the year (39) (15)
----------- -----------
Balance at 31 December 180 164
=========== ===========
21 AMOUNTS DUE FROM/TO ULTIMATE HOLDING COMPANY AND AMOUNT DUE TO IMMEDIATE
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 (see
note 32).
At 31 December 2000, amount due to immediate holding company primarily
represented the balance of the purchase consideration for acquisition of
subsidiaries, which was unsecured, non-interest bearing and was repaid during
the year.
22 ACCOUNTS RECEIVABLE
Accounts receivable, net of provision for doubtful accounts, are all
outstanding for less than three months with the following ageing analysis:
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Within 30 days 5,100 6,451
31 - 60 days 443 524
61 - 90 days 185 277
----------- -----------
5,728 7,252
=========== ===========
Balances are due for payment within one month from date of billing.
Customers with balances that are overdue or exceed credit limits are required to
settle all outstanding balances before any further phone calls can be made.
23 OTHER RECEIVABLES
Included in other receivables as at 31 December 2001 are amounts due from
the China Telecommunications Corporation ("China Telecom") and its subsidiaries
(collectively the "China Telecom Group") amounting to RMB 108,000,000 (2000: RMB
998,000,000), representing primarily revenue collected on behalf of the Group.
The balances with China Telecom Group were unsecured, non-interest bearing and
repayable within one year.
IV-25
24 CASH AND CASH EQUIVALENTS
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Deposits with banks 3,818 6,457
Cash at banks and in hand 18,003 21,245
----------- -----------
21,821 27,702
=========== ===========
25 BANK LOANS AND OTHER INTEREST-BEARING BORROWINGS
2001 2000
------------------------------------- ---------------------------------
NON- NON-
CURRENT CURRENT CURRENT CURRENT
LIABILITIES LIABILITIES TOTAL LIABILITIES LIABILITIES TOTAL
----------- ----------- ----- ----------- ----------- -----
XXX XXX XXX XXX XXX XXX
NOTE MILLION MILLION MILLION MILLION MILLION MILLION
Bank loans (a) 4,319 5,680 9,999 10,267 12,014 22,281
Other loans (a) 212 247 459 204 459 663
Fixed rate notes (b) - 4,956 4,956 - 4,953 4,953
Convertible notes (c) - 5,708 5,708 - 5,708 5,708
Bonds (d) - 5,000 5,000 - - -
----- ----- ----- ------ ------ ------
4,531 21,591 26,122 10,471 23,134 33,605
===== ===== ===== ====== ====== ======
The short-term bank and other loans as at 31 December 2001 are unsecured.
Included in the current liabilities as at 31 December 2000 are short-term bank
and other loans amounting to RMB 100,000,000 which are secured by cash at banks
amounting to RMB 113,000,000. All other short-term bank and other loans are
unsecured.
All of the above bank and other loans under non-current liabilities are
unsecured.
Other loans bear interest at various rates between 4.36 per cent. to 8.24
per cent. (2000: 6.03 per cent. to 8.24 per cent.) with maturities in 2002 to
2004.
IV-26
(a) The Group's long-term bank and other loans were repayable as
follows:
BANK LOANS OTHER LOANS TOTAL
----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX MILLION
At 31 December 2001:
On demand or within one year (Note 25) 2,617 212 2,829
----------- ----------- -----------
After one year but within two years 3,377 165 3,542
After two years but within five years 2,233 82 2,315
After five years 70 - 70
----------- ----------- -----------
5,680 247 5,927
=========== =========== ===========
8,297 459 8,756
=========== =========== ===========
At 31 December 2000:
On demand or within one year (Note 25) 3,560 204 3,764
----------- ----------- -----------
After one year but within two years 5,071 211 5,282
After two years but within five years 6,873 248 7,121
After five years 70 - 70
----------- ----------- -----------
12,014 459 12,473
=========== =========== ===========
15,574 663 16,237
=========== =========== ===========
The current portion of long-term bank and other loans are included in the
current liabilities of bank and other loans as set out in note 25 above.
25 BANK LOANS AND OTHER INTEREST-BEARING BORROWINGS (CONTINUED)
(b) Fixed rate notes
On 2 November 1999, the Company issued unsecured fixed rate notes (the
"notes") with a principal amount of US$600,000,000 at an issue price equal
to 99.724 per cent. of the principal amount of the notes, due on 2
November 2004. The notes bear interest at the rate of 7.875 per cent. per
annum and such interest is payable semi-annually on 2 May and 2 November
of each year, commencing 2 May 2000.
(c) Convertible notes
(i) On 3 November 2000, the Company issued convertible notes (the
"Notes") in an aggregate principal amount of US$690,000,000 at
an issue price equal to 100 per cent. of the principal amount
of the Notes. The Notes bear interest at the rate of 2.25 per
cent. per annum, payable semi-annually on 3 May and 3 November
of each year commencing 3 May 2001. Unless previously
redeemed, converted or purchased and cancelled, the Notes will
be redeemed at 100 per cent. of the principal amount, plus any
accrued and unpaid interest on 3 November 2005. The Notes are
unsecured, senior and unsubordinated obligations of the
Company.
(ii) The Notes are convertible at any time on or after 3 December
2000 and before the close of business on the third
IV-27
business day prior to the earlier of (1) the maturity date of
3 November 2005 or (2) the redemption date fixed for early
redemption, at an initial conversion price, subject to
adjustment in certain events, of HK$59.04 per share.
(iii) During the year, no Notes were converted into ordinary shares
of the Company.
(d) Bonds
On 18 June 2001, Guangdong Mobile issued guaranteed bonds (the
"Bonds") with a principal amount of RMB 5,000,000,000 at an issue
price equal to the face value of the Bonds.
The Bonds bear interest at a floating rate, adjusted annually from
the first day of each interest payable year and payable annually.
The first annual interest rate of the Bonds is 4 per cent. The
Bonds, redeemable at 100 per cent. of the principal amount, will
mature on 18 June 2011 and the interest will be accrued up to 17
June 2011. Incidental costs incurred in relation to the issue of the
Bonds are amortised on a straight-line basis over the period from
the date of issue to the date of maturity.
The Company has issued a joint and irrevocable guarantee (the
"Guarantee") for the performance of the Bonds. China Mobile has also
issued a further guarantee in relation to the performance by the
Company of its obligations under the Guarantee.
26 OBLIGATIONS UNDER FINANCE LEASES
As at 31 December 2001, the Group had obligations under finance leases
repayable as follows:
2001 2000
--------------------------------------- --------------------------------------
PRESENT PRESENT
VALUE INTEREST VALUE INTEREST
OF THE EXPENSE TOTAL OF THE EXPENSE TOTAL
MINIMUM RELATING MINIMUM MINIMUM RELATING MINIMUM
LEASE TO FUTURE LEASE LEASE TO FUTURE LEASE
PAYMENTS PERIODS PAYMENTS PAYMENTS PERIODS PAYMENTS
---------- ---------- ---------- ---------- ---------- ----------
XXX XXX XXX XXX XXX XXX
MILLION MILLION MILLION MILLION MILLION MILLION
Within 1 year 908 61 969 1,624 154 1,778
---------- ---------- ---------- ---------- ---------- ----------
After 1 year but within 2 years 506 24 530 1,023 54 1,077
After 2 years but within 5 years 306 5 311 212 4 216
---------- ---------- ---------- ---------- ---------- ----------
812 29 841 1,235 58 1,293
========== ========== ========== ========== ========== ==========
1,720 90 1,810 2,859 212 3,071
========== ========== ========== ========== ========== ==========
27 ACCOUNTS PAYABLE
Included in accounts payable as at 31 December 2001 are amounts due to
China Telecom Group amounting to RMB 1,725,000,000 (2000: RMB 3,449,000,000),
representing primarily payables for leased lines and interconnection expenses.
The ageing analysis of accounts payable as at 31 December is as follows:
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Amounts payable in the next:
1 month or on demand 5,964 6,614
XX-00
0 - 0 xxxxxx 0,000 000
0 - 0 months 1,022 1,672
7 - 9 months 1,049 827
10 - 12 months 1,648 1,908
----------- -----------
11,317 11,581
=========== ===========
28 DEFERRED REVENUE
Deferred revenue includes primarily prepaid service fees received from
subscribers which is recognised as income when the cellular telephone services
are rendered upon actual usage by subscribers.
Deferred revenue also includes income from assignment of rights. The
balance at year end represents the unamortised 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 9,167 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 per cent. of 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 retains no credit risk from such subscribers during the seven-year period.
28 DEFERRED REVENUE (CONTINUED)
The proceeds received by Guangdong Mobile have been accounted for as deferred
revenue and are amortised 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.
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Balance at 1 January 3,654 1,492
Additions on acquisition of subsidiaries - 1,039
Additions during the year 23,191 5,689
Recognised in profit and loss account (22,608) (4,566)
----------- -----------
Balance at 31 December 4,237 3,654
=========== ===========
29 SHARE CAPITAL
2001 2000
----------- -----------
HK$ MILLION HK$ MILLION
Authorised:
30,000,000,000 ordinary shares of HK$0.10 each 3,000 3,000
=========== ===========
IV-29
Issued and fully paid:
2001 2000
------------------------------------- ----------------------------------
RMB RMB
EQUIVALENT EQUIVALENT
------------------------------------- ----------------------------------
HK$ RMB HK$ RMB
NO. OF SHARES MILLION MILLION NO. OF SHARES MILLION MILLION
At 1 January 18,605,312,241 1,861 1,986 13,706,287,021 1,371 1,467
Issue of new shares to the professional and
institutional investors - - - 1,115,643,845 112 119
Issue of consideration shares for acquisition
of subsidiaries - - - 3,779,407,375 378 400
Shares issued under share option scheme
(Note 30) 93,000 - - 3,974,000 - -
-------------- ----- ----- -------------- ----- -----
At 31 December 18,605,405,241 1,861 1,986 18,605,312,241 1,861 1,986
============== ===== ===== ============== ===== =====
30 SHARE OPTION SCHEME
On 8 October 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 per cent. 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 is
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 per cent. of the average of the closing prices of the 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.
During the year, share options involving a total number of 76,773,000
(2000: 31,590,000) ordinary shares were granted under the share option scheme to
certain directors and employees of the Company. During the year, options were
exercised to subscribe for 93,000 (2000: 3,974,000) ordinary shares of HK$0.10
each at a total consideration of HK$3,451,140 (equivalent to RMB3,661,000)
(2000: HK$84,000,000 (equivalent to RMB89,000,000)).
IV-30
PRICE PER SHARE NO. OF SHARES
DATE OF NORMAL PERIOD DURING TO BE PAID ON INVOLVED IN THE OPTIONS
OPTIONS GRANTED WHICH OPTIONS EXERCISABLE EXERCISE OF OPTIONS OUTSTANDING AT THE YEAR END
--------------- ------------------------- ------------------- ---------------------------
2001 2000
9 March 1998 9 March 1998 to 8 March 2006 HK$11.10 2,100,000 2,100,000
26 November 1999 26 November 1999 to 7 October 2007 HK$33.91 3,500,000 3,500,000
26 November 1999 26 November 2002 to 7 October 2007 HK$33.91 3,500,000 3,500,000
25 April 2000 25 April 2002 to 7 October 2007 HK$45.04 15,264,000 15,608,000
25 April 2000 25 April 2005 to 7 October 2007 HK$45.04 15,264,000 15,608,000
22 June 2001 22 June 2003 to 7 October 2007 HK$32.10 38,111,500 -
22 June 2001 22 June 2006 to 7 October 2007 HK$32.10 38,111,500 -
----------- ----------
115,851,000 40,316,000
=========== ==========
31 RESERVES
PRC
SHARE CAPITAL GENERAL STATUTORY RETAINED
PREMIUM RESERVE RESERVE RESERVES PROFITS TOTAL
------- ------- ------- -------- ------- -------
XXX XXX XXX XXX XXX XXX
MILLION MILLION MILLION MILLION MILLION MILLION
At 1 January 2000 99,345 (56,930) 72 5,727 7,411 55,625
Issue of new shares to professional and
institutional investors 56,694 - - - - 56,694
Issue of consideration shares for acquisition
of subsidiaries 191,969 - - - - 191,969
Expenses incurred in connection with the issue
of new shares to professional and institutional
investors (1,090) - - - - (1,090)
Goodwill arising on acquisition of subsidiaries - (239,540) - - - (239,540)
Shares issued under share option scheme 89 - - - - 89
Net profit for the year - - - - 18,027 18,027
Transfer to PRC statutory reserves - - - 6,916 (6,916) -
------- -------- -------- ------ ------ ------
At 31 December 2000 347,007 (296,470) 72 12,643 18,522 81,774
======= ======== ======== ====== ====== ======
At 1 January 2001 347,007 (296,470) 72 12,643 18,522 81,774
Shares issued under share option scheme
(Note 30) 4 - - - - 4
Net profit for the year - - - - 28,015 28,015
Transfer to PRC statutory reserves - - - 5,033 (5,033) -
------- -------- -------- ------ ------ ------
At 31 December 2001 347,011 (296,470) 72 17,676 41,504 109,793
======= ======== ======== ====== ====== ======
IV-31
SHARE PREMIUM
The application of the share premium account is governed by
section 48B of the Hong Kong Companies Ordinance.
CAPITAL RESERVE
At 31 December 2001, debit balance of capital reserve is
primarily due to the elimination of goodwill arising on the
acquisition of subsidiaries in previous years.
PRC STATUTORY RESERVES
PRC statutory reserves include general reserve, enterprise
expansion fund, statutory surplus reserve and statutory public
welfare fund.
In accordance with Accounting Regulations for PRC Enterprises
with Foreign Investment, foreign investment enterprises in the PRC
are required to transfer at least 10 per cent. 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 per cent. 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 each at 10 per
cent. of their profit 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 the enterprise
expansion fund can be used to increase the capital of the
subsidiaries, to acquire fixed assets and to increase current
assets.
At 31 December 2000, Shanghai Mobile has not yet registered as
a wholly-foreign owned enterprise. As a result, appropriations were
made by Shanghai Mobile, according to its Articles of Association to
the statutory surplus reserve and the statutory public welfare fund
both at 10 per cent. of its profit after taxation determined under
PRC GAAP during the year ended 31 December 2000.
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 conversion is not less than 25
per cent. of the registered capital of the subsidiaries. Statutory
public welfare fund can only be utilised 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 31 December 2001, the balances of the general reserve,
enterprise expansion fund, statutory surplus reserve and
statutory public welfare fund were RMB 5,766,000,000 (2000:
XXX 0,000,000,000), XXX 11,590,000,000 (2000: XXX 0,000,000,000),
XXX 181,000,000 (2000: RMB 175,000,000) and RMB 139,000,000
(2000: RMB138,000,000) respectively.
32 RELATED PARTY TRANSACTIONS
Parties are considered to be related if the one party has the ability,
directly or indirectly, to control the other party or exercise significant
influence over the other party in making financial and operating decisions.
Parties are also considered to be related if they are subject to common control
or common significant influence.
The majority of the Group's business activities are conducted with China
Mobile (the Company's ultimate holding company) and its subsidiaries, other than
the Group, (the "China Mobile Group") and the China Telecom Group.
As a result of the restructuring in May 2000, the Ministry of Information
Industry (the "MII") ceased to have controlling interests in China Mobile, the
Directorate General of Telecommunications (the "DGT") and the Provincial
Telecommunications Companies (the "PTCs"). However, the MII continues in its
capacity as the industry regulator providing policy guidance and exercising
regulatory authority over all telecommunications services providers in the PRC.
China Telecom was set up as a result of the restructuring to operate the fixed
line telephone networks in the PRC previously operated by the DGT and the PTCs,
and is owned by the PRC government. As such, the MII or entities under control
of MII including the DGT and the PTCs, and the China Telecom Group since its
formation, are no longer considered to be related parties of the Group since May
2000.
IV-32
32 RELATED PARTY TRANSACTIONS (CONTINUED)
The following is a summary of principal related party transactions of the
Group for the years ended 31 December 2001 and 2000.
NOTE 2001 2000
---- ----------- -----------
RMB MILLION RMB MILLION
Interconnection revenue (i) 1,793 1,744
Interconnection charges (ii) 1,772 2,864
Leased line charges (iii) 278 2,464
Roaming revenue (iv) 4,688 2,674
Roaming expenses (v) 4,559 2,076
Spectrum fees (vi) 18 15
Operating lease charges (vii) 138 226
Sales commission (viii) - 248
Debt collection service fees (viii) - 91
Roaming billing processing fees (viii) 201 148
Equipment maintenance service fees (ix) 46 1
Rental charges of synchronised clock ports (x) - 3
Construction and related service fees (xi) 161 20
Purchase of transmission tower and transmission tower-related service
and antenna maintenance service fees (xii) 55 16
Prepaid card sales commission income (xiii) 241 114
Prepaid card sales commission expenses (xiii) 315 99
===== =====
Notes:
(i) Interconnection revenue represents the amounts received or
receivable from the China Mobile Group in respect of long distance
calls made by non-Group's subscribers.
For the year ended 31 December 2000, interconnection revenue also
included amounts received or receivable from the DGT in respect of
long distance calls made by non-subscribers in Guangdong, Zhejiang,
Jiangsu, Fujian, Henan and Hainan provinces ("the relevant
provinces") and amounts received or receivable from the Guangdong
PTC, the Zhejiang PTC, the Jiangsu PTC, the Fujian PTC, the Henan
PTC and the Hainan PTC ("the relevant PTCs") in respect of long
distance calls made between the Group's cellular networks and the
fixed line networks in the relevant provinces and outbound calls
originating from the fixed line networks in the relevant provinces
which terminate on GSM network operators in other provinces in the
PRC.
(ii) Interconnection charges represent the amounts paid or payable to the
China Mobile Group in respect of long distance calls made by the
Group's subscribers roaming outside their registered provinces.
For the year ended 31 December 2000, interconnection expenses also
included amounts paid or payable to the DGT in respect of long
distance calls made by the Group's subscribers in the relevant
provinces roaming outside their registered provinces and amounts
paid or payable to the relevant PTCs in respect of calls made
between the Group's cellular network, the fixed line networks in the
relevant provinces and other GSM network operators in other
provinces in the PRC.
(iii) Leased line charges represent expenses paid or payable to the China
Mobile Group for the use of inter-provincial leased lines which link
the Group's mobile switching centres together and with other mobile
switching centres of the China Mobile Group.
For the year ended 31 December 2000, leased line charges also
included expenses paid or payable to the relevant PTCs for the use
of leased line.
(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 China
Mobile Group.
IV-33
(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 China Mobile Group.
(vi) Spectrum fees represent the spectrum usage fees paid or payable to
the China Mobile Group for the usage of the frequency bands
allocated to the Company's subsidiaries in the PRC.
(vii) Operating lease charges represent the rental and property management
fees paid or payable to the subsidiaries of China Mobile for
operating leases in respect of land and buildings and others.
For the year ended 31 December 2000, operating lease charges also
included rental and property management fee paid or payable to the
relevant PTCs prior to May 2000.
(viii)The Group entered into certain services agreements in respect of
marketing services with authorised dealers, debt collection services
and roaming billing processing with subsidiaries of China Mobile or
the relevant PTCs prior to May 2000.
Debt collection service fees represent the amounts paid or payable
to subsidiaries of China Mobile for their provision of debt
collection services to the Company's subsidiaries.
Roaming billing processing fees represent the amounts paid or
payable to the China Mobile Group for the provision of the roaming
billing processing services to the Company's subsidiaries.
For the year ended 31 December 2000, sales commission, debt
collection service fees and roaming billing processing fees also
included amounts paid or payable to the relevant PTCs for services
rendered in the relevant provinces.
(ix) Equipment maintenance service fees represent the amount paid or
payable to subsidiaries of China Mobile for the provision of the
maintenance services to Beijing Mobile, Shanghai Mobile and Liaoning
Mobile.
For the year ended 31 December 2000, equipment maintenance service
fees included amounts paid or payable to Fujian PTC for services
rendered in the relevant province.
(x) Rental charges of synchronised clock ports represent expenses paid
or payable to the relevant PTCs for leasing of synchronised clock
ports by the Company's subsidiaries.
(xi) Construction and related service fees represent the amount paid or
payable to subsidiaries of China Mobile for the provision of
construction services to Beijing Mobile, Shanghai Mobile, Liaoning
Mobile and Shandong Mobile.
(xii) This represents payment made by Hebei Mobile to acquire transmission
towers from relevant subsidiaries of China Mobile and expenses paid
or payable to relevant subsidiaries of China Mobile for the
provision of transmission tower related services and antenna
maintenance services provided to Hebei Mobile.
(xiii)Prepaid card sales commission income and commission expenses
represent handling charges received/receivable from subsidiaries of
China Mobile to the Company's subsidiaries or paid/payable by the
Company's subsidiaries to subsidiaries of China Mobile in respect of
prepaid card services.
33 COMMITMENTS
(a) CAPITAL COMMITMENTS
Capital commitments outstanding at 31 December 2001 not provided for in
the accounts were as follows:
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Commitments in respect of land and buildings
- authorised and contracted for 1,447 1,632
- authorised but not contracted for 3,915 3,275
----------- -----------
5,362 4,907
=========== ===========
IV-34
2001 2000
----------- -----------
RMB MILLION RMB MILLION
Commitments in respect of telecommunications equipment
- authorised and contracted for 8,919 9,080
- authorised but not contracted for 31,419 30,781
----------- -----------
40,338 39,861
=========== ===========
Total commitments
- authorised and contracted for 10,366 10,712
- authorised but not contracted for 35,334 34,056
----------- -----------
45,700 44,768
=========== ===========
(b) OPERATING LEASE COMMITMENTS
At 31 December 2001, the total future minimum lease payments under
non-cancellable operating leases are payable as follows:
LAND AND LEASED
BUILDINGS LINES OTHERS TOTAL
--------- --------- --------- ---------
RMB XXX XXX XXX
XXXXXXX XXXXXXX XXXXXXX XXXXXXX
Xx 31 December 2001:
Within one year 647 4,013 397 5,057
After one year but within five years 1,588 4,746 788 7,122
After five years 1,170 919 438 2,527
--------- --------- --------- ---------
3,405 9,678 1,623 14,706
========= ========= ========= =========
At 31 December 2000:
Within one year 611 4,119 289 5,019
After one year but within five years 1,654 8,891 757 11,302
After five years 1,495 2,051 305 3,851
--------- --------- --------- ---------
3,760 15,061 1,351 20,172
========= ========= ========= =========
The Group leases certain land and buildings, leased lines and other
equipment under operating leases. None of the leases includes
contingent rentals.
34 ULTIMATE HOLDING COMPANY
The directors consider the ultimate holding company at 31 December 2001 to
be China Mobile, a company incorporated in the PRC.
3 INDEBTEDNESS
At the close of business on 28 February 2002 being the latest practicable
date for the purpose of this indebtedness statement, the Group had outstanding
borrowings of approximately RMB27,697 million in aggregate. These borrowings
comprise unsecured bank loans of approximately RMB8,880 million, other unsecured
loans of approximately RMB577 million, bills payable of approximately RMB987
million, finance lease obligations of approximately
XX-00
XXX0,000 million, unsecured fixed rate notes of approximately RMB4,956 million,
unsecured convertible notes of approximately RMB5,708 million and bonds of
RMB5,000 million.
In respect of the above borrowings, approximately RMB1,950 million of the
unsecured bank loans, approximately RMB8 million of other unsecured loans and
approximately RMB68 million of finance lease obligations are guaranteed by third
parties and the bonds of RMB5,000 million are guaranteed by China Mobile.
Save as aforesaid and apart from intra-group liabilities, none of the
companies in the Group had outstanding at the close of business on 28 February
2002 any mortgages, charges or debentures, loan capital, bank overdrafts, loans
and other similar indebtedness, hire purchase commitments, liabilities under
acceptances, guarantees or other material contingent liabilities.
IV-36
--------------------------------------------------------------------------------
APPENDIX V FINANCIAL INFORMATION OF THE COMBINED GROUP
--------------------------------------------------------------------------------
1 INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE COMBINED
GROUP
The accompanying Unaudited Pro Forma Profit and Loss Account for the year
ended 31 December 2001 of the Combined Group gives effect to the following
transactions as if such transactions had taken place on 1 January 2001. A
description of the transactions is as follows:
(i) Acquisition of the interests in Anhui Mobile, Jiangxi Mobile,
Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile,
Shaanxi Mobile and Shanxi Mobile at a consideration of US$8,573
million (equivalent to approximately RMB70,959 million). The
consideration will be satisfied by the payment of an initial
consideration and the payment of a deferred consideration. The
initial consideration of US$5,773 million (equivalent to
approximately RMB47,783 million) will be satisfied by the payment of
cash and the issuance of Consideration Shares to CMBVI. The deferred
consideration of US$2,800 million (equivalent to approximately
RMB23,176 million), being the difference between the consideration
and the initial consideration, is interest bearing and repayable
within 15 years.
(ii) the issuance of Consideration Shares by the Company to CMBVI,
credited as fully paid, as part of the initial consideration; and
(iii) the issuance and allotment of Shares to Vodafone or Vodafone
Holdings (as the case may be) resulting in gross cash proceeds of
approximately HK$5,850 million (equivalent to approximately RMB6,208
million), the proceeds of which will be used to finance part of the
cash portion of the initial consideration.
The accompanying Unaudited Pro Forma Balance Sheet of the Combined Group
as at 31 December 2001 gives effect to the Acquisition and the financing
transactions described above as if they had been consummated on 31 December
2001.
The Unaudited Pro Forma Financial Information of the Combined Group is
based upon the historical combined financial statements of the Target Group and
the consolidated financial statements of the Group after giving effect to Pro
Forma adjustments described in the accompanying notes.
THE UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE COMBINED GROUP DOES
NOT PURPORT TO REPRESENT WHAT THE RESULTS OF OPERATIONS OF THE COMBINED GROUP
WOULD ACTUALLY HAVE BEEN IF THE EVENTS DESCRIBED ABOVE HAD IN FACT OCCURRED AT
THE BEGINNING OF 2001, OR ANY OTHER DATE, OR TO PROJECT THE NET PROFIT OF THE
COMBINED GROUP FOR ANY FUTURE PERIOD. HOWEVER, NO ADJUSTMENT HAS BEEN REFLECTED
IN RESPECT OF THE EVENTS THAT WOULD AFFECT THE TARGET GROUP AS DESCRIBED IN
APPENDIX III OF THIS CIRCULAR.
The Unaudited Pro Forma Financial Information of the Combined Group should
be read in conjunction with other financial information included elsewhere in
this circular.
V-1
UNAUDITED PRO FORMA PROFIT AND LOSS ACCOUNT OF THE COMBINED GROUP
FOR THE YEAR ENDED 31 DECEMBER 2001
TARGET
GROUP THE GROUP PRO FORMA ADJUSTED
HISTORICAL HISTORICAL ADJUSTMENTS NOTE BALANCE
----------- ----------- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX XXXXXXX XXX MILLION
OPERATING REVENUE
Usage fees 19,020 73,458 92,478
Monthly fees 4,152 14,085 18,237
Connection fees 43 711 754
Other operating revenue 2,866 12,077 14,943
--------- --------- ----------
26,081 100,331 126,412
--------- --------- ----------
OPERATING EXPENSES
Leased lines 1,393 5,005 6,398
Interconnection 3,286 13,055 16,341
Depreciation 5,841 17,664 23,505
Personnel 1,527 5,325 6,852
Other operating expenses 7,107 18,270 25,377
--------- --------- ----------
19,154 59,319 78,473
========= ========= ==========
PROFIT FROM OPERATIONS 6,927 41,012 47,939
DEFICIT ON REVALUATION OF FIXED ASSETS (2,113) -- (2,113)
AMORTIZATION OF GOODWILL -- -- (2,015) (a) (2,015)
OTHER NET INCOME 121 1,594 1,715
NON-OPERATING NET EXPENSES (22) (6) (28)
INTEREST INCOME 89 857 (366) (b) 580
FINANCE COSTS (394) (1,740) (881) (c) (3,015)
--------- --------- ----------
PROFIT FROM ORDINARY ACTIVITIES
BEFORE TAXATION 4,608 41,717 43,063
TAXATION (1,313) (13,703) 110 (d) (14,906)
--------- --------- ----------
PROFIT FROM ORDINARY ACTIVITIES
AFTER TAXATION 3,295 28,014 28,157
MINORITY INTERESTS -- 1 1
--------- --------- ----------
NET PROFIT 3,295 28,015 28,158
========= ========= ==========
Basic and diluted earnings per share/
pro forma share RMB 1.51 (j) RMB 1.43
========= ==========
Shares or pro forma shares utilised in
basic calculations (millions) 18,605 (j) 19,669
========= ==========
Shares or pro forma shares utilised in
diluted calculation (millions) 18,698 (j) 19,762
========= ==========
INFORMATION FOR REFERENCE:
Excluding the revaluation deficit of fixed assets
Net profit 30,271
==========
Basic and diluted earnings per share (j) RMB 1.54
==========
V-2
TARGET
GROUP THE GROUP PRO FORMA ADJUSTED
HISTORICAL HISTORICAL ADJUSTMENTS NOTE BALANCE
----------- ----------- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX XXXXXXX XXX MILLION
Excluding the amortization of positive goodwill
arising on acquisition
Net profit 30,173
==========
Basic and diluted earnings per share (j) RMB 1.53
==========
Excluding the revaluation deficit and amortization
of positive goodwill arising on acquisition
Net profit 32,286
==========
Basic and diluted earnings per share (j) RMB 1.64
==========
UNAUDITED PRO FORMA BALANCE SHEET OF THE COMBINED GROUP AT 31 DECEMBER 2001
TARGET
GROUP THE GROUP PRO FORMA ADJUSTED
HISTORICAL HISTORICAL ADJUSTMENTS NOTE BALANCE
----------- ----------- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX XXXXXXX XXX MILLION
NON-CURRENT ASSETS
Fixed assets 39,499 105,208 144,707
Construction in progress 10,448 19,981 30,429
Goodwill -- -- 40,296 (e) 40,296
Interest in associates -- 16 16
Investment securities -- 77 77
Deferred tax assets 634 1,476 2,110
Deferred expenses -- 180 180
------- ------- -------
50,581 126,938 217,815
------- ------- -------
CURRENT ASSETS
Inventories 442 1,029 1,471
Amounts due from ultimate
holding company 2,493 503 2,996
Accounts receivable 1,441 5,728 7,169
Other receivables 323 1,189 1,512
Prepaid expenses and other
current assets 491 1,571 2,062
Deposits with banks 25 14,970 14,995
Cash and cash equivalents 3,360 21,821 (19,864) (f) 5,317
------- ------- -------
8,575 46,811 35,522
------- ------- -------
CURRENT LIABILITIES
Bank loans and other interest-bearing
borrowings 4,766 4,531 9,297
Bills payable 328 1,458 1,786
Current instalments of obligations
under finance leases 86 908 994
V-3
TARGET
GROUP THE GROUP PRO FORMA ADJUSTED
HISTORICAL HISTORICAL ADJUSTMENTS NOTE BALANCE
----------- ----------- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX XXXXXXX XXX MILLION
Amounts due to ultimate holding
company 418 241 659
Accounts payable 7,182 11,317 18,499
Accrued expenses and other
payables 2,901 10,840 13,741
Taxation 85 6,003 6,088
------- ------- -------
15,766 35,298 51,064
======= ======= =======
Net current (liabilities)/assets (7,191) 11,513 (15,542)
======= ======= =======
TOTAL ASSETS LESS CURRENT LIABILITIES
CARRIED FORWARD 43,390 138,451 202,273
======= ======= =======
TARGET
GROUP THE GROUP PRO FORMA ADJUSTED
HISTORICAL HISTORICAL ADJUSTMENTS NOTE BALANCE
----------- ----------- ----------- ----------- -----------
XXX XXXXXXX XXX XXXXXXX XXX XXXXXXX XXX MILLION
TOTAL ASSETS LESS CURRENT
LIABILITIES BROUGHT FORWARD 43,390 138,451 202,273
NON-CURRENT LIABILITIES
Bank loans and other interest-
bearing borrowings (2,922) (21,591) (24,513)
Amount due to ultimate
holding company (8,750) -- (8,750)
Obligations under finance leases,
excluding current instalments -- (812) (812)
Amounts due to immediate
holding company -- -- (23,176) (g) (23,176)
Deferred revenue (1,055) (4,237) (5,292)
------- ------- -------
(12,727) (26,640) (62,543)
------- ------- -------
MINORITY INTERESTS -- (32) (32)
------- ------- -------
NET ASSETS 30,663 111,779 139,698
======= ======= =======
27,919 (h)
CAPITAL AND RESERVES 30,663 111,779 (30,663) (i) 139,698
======= ======= =======
DESCRIPTION OF PRO FORMA ADJUSTMENTS
(a) To record the amortization of positive goodwill as a result of the
Acquisition of the Target Group as if the acquisition had taken
place on 1 January 2001. The amortization is calculated to write off
the cost of goodwill on a straight line basis over the estimated
useful life of 20 years.
(b) To adjust for reduction in the interest income for the cash portion
of the initial consideration to be taken from the internal resources
of the Group as if the transaction had taken place on 1 January
2001.
(c) To record the interest expense of the deferred consideration at
3.801% per annum as if the Acquisition had taken place on 1 January
2001. The interest expense is not deductible for
V-4
taxation purposes.
(d) To record the tax effect of the pro forma adjustment described in
note (b) above.
(e) To record positive goodwill as a result of the acquisition of the
Target Group as if the Acquisition had taken place on 31 December
2001. Positive goodwill represents the excess of the total purchase
consideration of US$8,573 million (equivalent to approximately
RMB70,959 million ) and the estimated fair value of the underlying
net assets of the Target Group as of 31 December 2001.
(f) To record the cash portion of the initial consideration for the
Target Group to be taken from the internal resources of the Group as
at 31 December 2001.
(g) To record the deferred consideration payable to CMBVI in connection
with the Acquisition of the Target Group as at 31 December 2001.
(h) To record the additional share capital arising from the issuance and
allotment of Shares to Vodafone or Vodafone Holdings (as the case
may be) and the issuance of Consideration Shares to CMBVI as at 31
December 2001.
(i) To eliminate the owners' equity of the Target Group as of 31
December 2001.
(j) It is assumed that the Company issues and allots 236,634,212 Shares
to Vodafone or Vodafone Holdings (as the case may be) and
827,514,446 Consideration Shares to CMBVI as part of the purchase
consideration on 1 January 2001. The number of Shares allotted and
issued is based on the per Share price of HK$24.7217 and no
adjustment is made to the per Share price and hence the number of
Shares so issued.
2 WORKING CAPITAL
The Directors are of the opinion that the Combined Group will, following
the completion of the Acquisition, have sufficient working capital for its
present requirements in the absence of unforeseen material circumstances.
3 INDEBTEDNESS
At the close of business on 28 February 2002, being the latest practicable
date for the purpose of this indebtedness statement, the Combined Group had
outstanding borrowings of approximately RMB44,341 million in aggregate. These
borrowings comprise unsecured bank loans of approximately RMB10,621 million,
other unsecured loans of approximately RMB15,251 million, bills payable of
approximately RMB1,171 million, finance lease obligations of approximately
RMB1,634 million, unsecured fixed rate notes of approximately RMB4,956 million,
unsecured convertible notes of approximately RMB5,708 million and bonds of
RMB5,000 million.
In respect of the above borrowings, approximately RMB2,333 million of the
unsecured bank loans, approximately RMB8 million of other unsecured loans and
approximately RMB113 million of finance lease obligations are guaranteed by
third parties and the bonds of RMB5,000 million are guaranteed by CMCC.
As at 28 February 2002, the Combined Group had provided guarantees to
banks in respect of banking facilities of approximately RMB1,040 million granted
to third parties.
V-5
Save as aforesaid and apart from intra-group liabilities, none of the
companies in the Combined Group had outstanding at the close of business on 28
February 2002 any mortgages, charges or debentures, loan capital, bank
overdrafts, loans and other similar indebtedness, hire purchase commitments,
liabilities under acceptances, guarantees or other material contingent
liabilities.
4 NET TANGIBLE ASSET VALUE
The net tangible asset value and the net tangible asset value per Share of
the Group as at 31 December 2001 was approximately RMB110,303 million and
RMB5.93 respectively. The calculation of the net tangible asset value per Share
was based on the weighted average of 18,605,371,320 Shares in issue during 2001.
Taking into account the Pro Forma adjustments described in this Appendix V
and assuming that the Company issues and allots 236,634,212 Shares to Vodafone
or Vodafone Holdings (as the case may be) and 827,514,446 Consideration Shares
to CMBVI on 1 January 2001 (on the basis that the per Share price of the Shares
so issued is HK$24.7217 and no adjustment is made to the per Share price and
hence the number of Shares so issued), the unaudited pro forma adjusted net
tangible asset value and net tangible asset value per Share of the Combined
Group as at 31 December 2001 was approximately RMB97,292 million and RMB4.95
respectively.
V-6
--------------------------------------------------------------------------------
APPENDIX VI PROFIT FORECAST
--------------------------------------------------------------------------------
The forecast combined profit after taxation but before extraordinary items
of the Target Group for the year ending 31 December 2002 is set out in the
section headed "Prospective Financial Information" in the Letter from the
Chairman.
(A) BASES AND ASSUMPTIONS
The management of the Company and the Target Companies have prepared the
forecast combined profit after taxation but before extraordinary items of the
Target Group for the year ending 31 December 2002. The management of the Company
and the Target Companies are not currently aware of any extraordinary items
which have arisen or are likely to arise in respect of the year ending 31
December 2002. The forecast has been prepared on a basis consistent in all
material respects with the accounting policies currently adopted by the Target
Group as summarised in Appendix II on the following principal assumptions:
(1) there will be no material changes in existing political, legal,
regulatory, fiscal or economic conditions in Hong Kong and the PRC;
(2) there will be no material changes in legislation or regulations
governing the telecommunications industry in the PRC which would
materially affect the business or operations of the Target
Companies;
(3) inflation, interest rates and RMB exchange rates will not differ
materially from those prevailing as at the date of this circular;
and
(4) there will be no material changes in the bases or rates of taxation
appropriate to the Target Companies, except as otherwise disclosed
in this circular.
(B) LETTERS
Set out below are the text of the letters received from the reporting
accountants, KPMG, and from the Company's financial advisers in connection with
the profit forecast and prepared for the purpose of inclusion in this circular.
(KPMG LETTERHEAD) 0xx Xxxxx
Xxxxxx'x Xxxxxxxx
00 Xxxxxx Xxxx
Xxxx Xxxx
27 May 2002
The Directors
China Mobile (Hong Kong) Limited
China International Capital
Corporation (Hong Kong) Limited
Xxxxxxx Xxxxx (Asia) L.L.C.
VI-1
Dear Sirs
We have reviewed the accounting policies and calculations adopted in
arriving at the forecast of the combined profit after taxation but before
extraordinary items of Anhui Mobile Communication Company Limited ("Anhui
Mobile"), Jiangxi Mobile Communication Company Limited ("Jiangxi Mobile"),
Chongqing Mobile Communication Company Limited ("Chongqing Mobile"), Sichuan
Mobile Communication Company Limited ("Sichuan Mobile"), Hubei Mobile
Communication Company Limited ("Hubei Mobile"), Hunan Mobile Communication
Company Limited ("Hunan Mobile"), Shaanxi Mobile Communication Company Limited
("Shaanxi Mobile") and Shanxi Mobile Communication Company Limited ("Shanxi
Mobile") (the "Target Group") for the year ending 31 December 2002, for which
the management of China Mobile (Hong Kong) Limited (the "Company") and Anhui
Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan
Mobile, Shaanxi Mobile and Shanxi Mobile, are solely responsible, as set out in
the circular dated 27 May 2002 issued by the Company.
In our opinion so far as the accounting policies and calculations are
concerned, the forecast has been properly compiled on the bases and the
assumptions made by the respective management of the Company and Anhui Mobile,
Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile, Hunan Mobile,
Shaanxi Mobile and Shanxi Mobile, as set out in Part A of Appendix VI of the
above-mentioned circular and is presented on a basis consistent in all material
respects with the accounting policies adopted by the Target Group as set out in
our accountants' report dated 27 May 2002 the text of which is set out in
Appendix II of the said circular.
Yours faithfully
KPMG
Certified Public Accountants
China International Capital Corporation Xxxxxxx Sachs (Asia) L.L.C.
(Hong Kong) Limited 00xx Xxxxx
Xxxxx 0000, 00xx Xxxxx Xxxxxx Kong Center
One International Finance Centre 0 Xxxxx'x Xxxx Xxxxxxx
0 Xxxxxxx Xxxx Xxxxxx Xxxx Xxxx
Xxxxxxx
Xxxx Xxxx
27 May 2002
The Directors
China Mobile (Hong Kong) Limited
00xx Xxxxx, Xxx Xxxxxx
00 Xxxxx'x Xxxx Xxxxxxx
Xxxx Xxxx
Dear Sirs
We refer to the forecast of the combined profit after taxation but before
extraordinary items of Anhui Mobile Communication Company Limited ("Anhui
Mobile"), Jiangxi Mobile Communication Company Limited ("Jiangxi Mobile"),
Chongqing Mobile Communication Company Limited ("Chongqing Mobile"), Sichuan
Mobile Communication Company Limited ("Sichuan Mobile"), Hubei Mobile
Communication Company Limited ("Hubei Mobile"), Hunan Mobile Communication
Company Limited ("Hunan Mobile"), Shaanxi Mobile Communication Company Limited
("Shaanxi Mobile") and Shanxi Mobile Communication Company Limited ("Shanxi
Mobile"), for the year ending 31 December 2002 as set out in the circular issued
by China Mobile (Hong Kong) Limited (the "Company"), dated 27 May 2002.
VI-2
We have discussed with you the bases and assumptions upon which the profit
forecast has been made. We have also considered the letter dated 27 May 2002
addressed to you and us from KPMG regarding the accounting policies and
calculations upon which the forecast has been made.
On the basis of the assumptions made by the management of the Company and
Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile,
Hunan Mobile, Shaanxi Mobile and Shanxi Mobile, respectively, and on the bases
of the accounting policies and calculations reviewed by KPMG, we are of the
opinion that the profit forecast, for which the management of the Company and
Anhui Mobile, Jiangxi Mobile, Chongqing Mobile, Sichuan Mobile, Hubei Mobile,
Hunan Mobile, Shaanxi Mobile and Shanxi Mobile are solely responsible, has been
made after due and careful enquiry.
Yours faithfully, Yours faithfully,
For and on behalf of For and on behalf of
CHINA INTERNATIONAL CAPITAL XXXXXXX SACHS (ASIA) L.L.C.
CORPORATION (HONG KONG) LIMITED
BI XXXXXXXX XXXX XXXXX-XXXX
Managing Director Managing Director
VI-3
--------------------------------------------------------------------------------
APPENDIX VII GENERAL INFORMATION
--------------------------------------------------------------------------------
1 RESPONSIBILITY STATEMENT
This circular includes particulars given in compliance with the Listing
Rules for the purpose of giving information with regard to the Company. The
Directors collectively and individually accept full responsibility for the
accuracy of the information contained in this circular and confirm, having made
all reasonable enquiries, that to the best of their knowledge and belief there
are no other facts the omission of which would make any statement herein
misleading.
2 DISCLOSURE OF INTERESTS
(i) As at the Latest Practicable Date, the interests of the directors
and the chief executive of the Company in the equity or debt
securities of the Company or any of its associated corporations as
defined in the SDI Ordinance as recorded in the register required to
be kept under section 29 of the SDI Ordinance were as follows:
NAME OF DIRECTORS PERSONAL INTEREST
----------------- -----------------
Wang Xiaochu 500 ADSs (1)
Li Zhenqun 100 ADSs (1)
Ding Donghua 500 ADSs (1)
(1) One American depositary share represents five ordinary shares
of HK$0.10 each of the Company
(ii) As at the Latest Practicable Date, options exercisable for an
aggregate of 16,389,000 Shares had been granted to the following
Directors under the Company's share option scheme:
NUMBER OF SHARES
NAME OF DIRECTORS COVERED BY OPTIONS
----------------- ------------------
Wang Xiaochu 4,220,000
Li Zhenqun 1,120,000
Ding Donghua 3,520,000
Li Gang 1,280,000
Xu Long 1,265,000
He Ning 1,256,000
Liu Ping 1,242,000
Yuan Jianguo 1,250,000
Xxx Xxxxxx 1,236,000
Save as disclosed above, as at the Latest Practicable Date, none of the
Directors had or was deemed to have any interests in the equity or debt
securities of the Company or any of its associated corporations (within the
meaning of the SDI Ordinance) which were required to be notified to the Company
and the Stock Exchange pursuant to section 28 of the SDI Ordinance (including
interests which they are deemed or taken to have under section 31 of, or part 1
of the Schedule to, the SDI Ordinance) or which are required, pursuant to
section 29 of the SDI Ordinance to be entered in the register referred to
therein or which are required, pursuant to the Model Code for Securities
Transactions by Directors of Listed Companies, to be notified to the Company and
the Stock Exchange.
VII-1
Save as disclosed herein, none of the Directors is materially interested
in any contract or arrangement subsisting at the date hereof which is
significant in relation to the business of the Combined Group taken as a whole.
Since 31 December 2001, the date to which the latest published audited
financial statements of the Company were prepared, none of the Directors nor any
experts named in paragraph 8 of this Appendix has any direct or indirect
material interest in any assets which have been acquired or disposed of by or
leased to any member of the Combined Group, or are proposed to be acquired or
disposed of by or leased to any member of the Combined Group.
3 SUBSTANTIAL SHAREHOLDERS
As at the Latest Practicable Date, so far as is known to the Directors,
the following persons were, directly or indirectly, interested in 10% or more of
the issued share capital carrying rights to vote at general meetings of the
Company:
PERCENTAGE OF TOTAL
ISSUED SHARE CAPITAL
NO. OF SHARES OF THE COMPANY
--------------- ------------------
CMCC 14,062,602,396 75.58%
CMHKG 14,062,602,396 75.58%
CMBVI 14,062,602,396 75.58%
Note: In light of the fact that CMCC and CMHKG directly or indirectly
control one-third or more of the voting rights at the shareholders'
meetings of CMBVI, in accordance with the SDI Ordinance, the
interests of CMBVI are deemed to be, and have therefore been
included in, the interests of CMCC and CMHKG.
Save as disclosed above, there is no person known to the Directors who, as
at the Latest Practicable Date, was, directly or indirectly, interested in 10%
or more of the nominal value of the issued share capital carrying rights to vote
in all circumstances at general meetings of any member of the Combined Group.
4 LITIGATION
There is no litigation or claim of material importance known to the
Directors to be pending or threatened against any member of the Combined Group.
5 SERVICE CONTRACTS
As at the Latest Practicable Date, none of the Directors had entered into
any service contracts with the Company or any member of the Combined Group
(excluding contracts expiring or determinable by the employer within one year
without payment of compensation (other than statutory compensation)).
The aggregate of the remuneration payable to and benefits in kind
receivable by the Directors of the Company will not be varied in consequence of
the Acquisition.
6 MATERIAL ADVERSE CHANGE
The Directors are not aware of any material adverse change in the
financial or trading position of the Group since 31 December 2001, being the
date of the latest published audited financial statements of the
VII-2
Company.
7 CONSENT
Chesterton Xxxxx, CICC, Xxxxxxx Xxxxx, KPMG and Rothschild have given and
have not withdrawn their respective written consents to the issue of this
circular with the inclusion of their reports and letters (if any), as the case
may be, and references to their names in the form and context in which they
respectively appear.
None of Chesterton Xxxxx, CICC, Xxxxxxx Sachs, KPMG and Rothschild is
beneficially interested in the share capital of any member of the Group and none
of them has any right, whether legally enforceable or not, to subscribe for or
to nominate persons to subscribe for securities in any member of the Group.
8 QUALIFICATIONS OF EXPERTS
The following are the qualifications of the professional advisers who have
given opinions or advice contained in this circular:
NAMES QUALIFICATIONS
----------- --------------
Chesterton Xxxxx Chartered surveyor
CICC Registered investment adviser
Xxxxxxx Sachs Registered investment adviser
KPMG Certified public accountants
Rothschild Registered investment adviser
9 MISCELLANEOUS
(a) The company secretary of the Company is Yung Shun Xxx, Xxxxx (FCCA,
FHKSA, CPA (Australia) ).
(b) The registered office and head office of the Company is at 60th
Floor, The Center, 99 Queen's Road Central, Hong Kong.
(c) HKSCC Registrars Limited, the share registrar of the Company, is at
0/X Xxxxxxx Xxxxx, 000 Xxx Xxxxx Xxxx Xxxxxxx, Xxxx Xxxx.
(d) The English text of this circular and form of proxy shall prevail
over the Chinese text.
10 MATERIAL CONTRACTS
The following contracts (including contracts for the Connected
Transactions and contracts not entered into in the ordinary course of business)
have been entered into by members of the Combined Group within the two years
immediately preceding the date of this circular, and are or may be material:
(a) Agreement Regarding the Assignment of Personnel, Assets and
Properties Not Directly Related to Mobile Telecommunications
Business dated 30 August 2000 between CMCC, Beijing Mobile and the
Services Company in Beijing, pursuant to which the parties confirmed
that selected assets, investments, real estate properties, staff
employment contracts and liabilities not directly related to the
mobile telecommunications services in Beijing were owned by the
Services Company in Beijing.
VII-3
(b) Investment Agreement dated 30 August 2000 between CMCC, Beijing
Mobile and the Services Company in Beijing, pursuant to which CMCC
injected all assets, liabilities, licences and permits in relation
to its mobile telecommunications services in Beijing into Beijing
Mobile.
(c) Confirmation of the Transfer of Personnel, Assets and Properties and
Related Rights and Liabilities dated 30 August 2000 signed by
Beijing Mobile and the Services Company in Beijing to confirm the
assets, liabilities, personnel, real estate properties, licences and
permits and investments respectively held by them.
(d) Agreement Regarding the Assignment of Personnel, Assets and
Properties Not Directly Related to Mobile Telecommunications
Business dated 30 August 2000 between CMCC, Shanghai Mobile and the
Services Company in Shanghai, pursuant to which the parties
confirmed that selected assets, investments, real estate properties,
staff employment contracts and liabilities not directly related to
the mobile telecommunications services in Shanghai were owned by the
Services Company in Shanghai.
(e) Investment Agreement dated 30 August 2000 between CMCC, Shanghai
Mobile and the Services Company in Shanghai, pursuant to which CMCC
injected all assets, liabilities, licences and permits in relation
to its mobile telecommunications services in Shanghai into Shanghai
Mobile.
(f) Confirmation of the Transfer of Personnel, Assets and Properties and
Related Rights and Liabilities dated 30 August 2000 signed by
Shanghai Mobile and the Services Company in Shanghai to confirm the
assets, liabilities, personnel, real estate properties, licences and
permits and investments respectively held by them.
(g) Agreement Regarding the Assignment of Personnel, Assets and
Properties Not Directly Related to Mobile Telecommunications
Business dated 30 August 2000 between CMCC, Tianjin Mobile and the
Services Company in Tianjin, pursuant to which the parties confirmed
that selected assets, investments, real estate properties, staff
employment contracts and liabilities not directly related to the
mobile telecommunications services in Tianjin were owned by the
Services Company in Tianjin.
(h) Investment Agreement dated 30 August 2000 between CMCC, Tianjin
Mobile and the Services Company in Tianjin, pursuant to which CMCC
injected all assets, liabilities, licences and permits in relation
to its mobile telecommunications services in Tianjin into Tianjin
Mobile.
(i) Confirmation of the Transfer of Personnel, Assets and Properties and
Related Rights and Liabilities dated 30 August 2000 signed by
Tianjin Mobile and the Services Company in Tianjin to confirm the
assets, liabilities, personnel, real estate properties, licences and
permits and investments respectively held by them.
(j) Agreement Regarding the Assignment of Personnel, Assets and
Properties Not Directly Related to Mobile Telecommunications
Business dated 30 August 2000 between CMCC, Hebei Mobile and the
Services Company in Hebei, pursuant to which the parties confirmed
that selected assets, investments, real estate properties, staff
employment contracts and liabilities not directly related to the
mobile telecommunications services in Hebei were owned by the
Services Company in Hebei.
(k) Investment Agreement dated 30 August 2000 between CMCC, Hebei Mobile
and the Services Company in Hebei, pursuant to which CMCC injected
all assets, liabilities, licences and
VII-4
permits in relation to its mobile telecommunications services in
Hebei into Hebei Mobile.
(l) Confirmation of the Transfer of Personnel, Assets and Properties and
Related Rights and Liabilities dated 30 August 2000 signed by Hebei
Mobile and the Services Company in Hebei to confirm the assets,
liabilities, personnel, real estate properties, licences and permits
and investments respectively held by them.
(m) Agreement Regarding the Assignment of Personnel, Assets and
Properties Not Directly Related to Mobile Telecommunications
Business dated 30 August 2000 between CMCC, Liaoning Mobile and the
Services Company in Liaoning, pursuant to which the parties
confirmed that selected assets, investments, real estate properties,
staff employment contracts and liabilities not directly related to
the mobile telecommunications services in Liaoning were owned by the
Services Company in Liaoning.
(n) Investment Agreement dated 30 August 2000 between CMCC, Liaoning
Mobile and the Services Company in Liaoning, pursuant to which CMCC
injected all assets, liabilities, licences and permits in relation
to its mobile telecommunications services in Liaoning into Liaoning
Mobile.
(o) Confirmation of the Transfer of Personnel, Assets and Properties and
Related Rights and Liabilities dated 30 August 2000 signed by
Liaoning Mobile and the Services Company in Liaoning to confirm the
assets, liabilities, personnel, real estate properties, licences and
permits and investments respectively held by them.
(p) Agreement Regarding the Assignment of Personnel, Assets and
Properties Not Directly Related to Mobile Telecommunications
Business dated 30 August 2000 between CMCC, Shandong Mobile and the
Services Company in Shandong, pursuant to which the parties
confirmed that selected assets, investments, real estate properties,
staff employment contracts and liabilities not directly related to
the mobile telecommunications services in Shandong were owned by the
Services Company in Shandong.
(q) Investment Agreement dated 30 August 2000 between CMCC, Shandong
Mobile and the Services Company in Shandong, pursuant to which CMCC
injected all assets, liabilities, licences and permits in relation
to its mobile telecommunications services in Shandong into Shandong
Mobile.
(r) Confirmation of the Transfer of Personnel, Assets and Properties and
Related Rights and Liabilities dated 30 August 2000 signed by
Shandong Mobile and the Services Company in Shandong to confirm the
assets, liabilities, personnel, real estate properties, licences and
permits and investments respectively held by them.
(s) Agreement Regarding the Assignment of Personnel, Assets and
Properties Not Directly Related to Mobile Telecommunications
Business dated 30 August 2000 between CMCC, Guangxi Mobile and the
Services Company in Guangxi, pursuant to which the parties confirmed
that selected assets, investments, real estate properties, staff
employment contracts and liabilities not directly related to the
mobile telecommunications services in Guangxi were owned by the
Services Company in Guangxi.
(t) Investment Agreement dated 30 August 2000 between CMCC, Guangxi
Mobile and the Services Company in Guangxi, pursuant to which CMCC
injected all assets, liabilities, licences and permits in relation
to its mobile telecommunications services in Guangxi into Guangxi
VII-5
Mobile.
(u) Confirmation of the Transfer of Personnel, Assets and Properties and
Related Rights and Liabilities dated 30 August 2000 signed by
Guangxi Mobile and the Services Company in Guangxi to confirm the
assets, liabilities, personnel, real estate properties, licences and
permits and investments respectively held by them.
(v) Conditional Sale and Purchase Agreement dated 4 October 2000 between
the Company, CMBVI and CMCC pursuant to which the Company acquired
the entire issued share capital in Beijing Mobile BVI, Shanghai
Mobile BVI, Tianjin Mobile BVI, Hebei Mobile BVI, Liaoning Mobile
BVI, Shandong Mobile BVI and Guangxi Mobile BVI at a total purchase
price of HK$256,021 million.
(w) Strategic Investor Placing Agreement dated 4 October 2000 between,
inter alia, the Company and Vodafone in relation to the subscription
of Shares with an aggregate subscription price of US$2,500 million
by Vodafone.
(x) RMB5 billion Syndicated Loan Agreement dated 7 October 2000 between
China Mobile (Shenzhen) as borrower, Bank of China, China
Construction Bank and other syndicate members as lenders, and
Guangdong Mobile, Zhejiang Mobile, Jiangsu Mobile, Fujian Mobile,
Henan Mobile and Hainan Mobile as guarantors.
(y) RMB7.5 billion Syndicated Loan Agreement dated 7 October 2000
between China Mobile (Shenzhen) as borrower, Bank of China, China
Construction Bank and other syndicate members as lenders, and
Guangdong Mobile, Zhejiang Mobile, Jiangsu Mobile, Fujian Mobile,
Henan Mobile and Hainan Mobile as guarantors.
(z) Investment Agreement dated 15 May 2002 between CMCC, Anhui Mobile
and the Services Company in Anhui, pursuant to which CMCC injected
all interests, assets, liabilities, personnel and businesses in
relation to its mobile telecommunications services in Anhui into
Anhui Mobile.
(aa) Confirmation of Rights and Obligations dated 15 May 2002 signed by
Anhui Mobile and the Services Company in Anhui to confirm the rights
and obligations in respect of the interests, assets, liabilities,
personnel and business transferred under the Investment Agreement.
(bb) Investment Agreement dated 15 May 2002 between CMCC, Jiangxi Mobile
and the Services Company in Jiangxi, pursuant to which CMCC injected
all interests, assets, liabilities, personnel and businesses in
relation to its mobile telecommunications services in Jiangxi into
Jiangxi Mobile.
(cc) Confirmation of Rights and Obligations dated 15 May 2002 signed by
Jiangxi Mobile and the Services Company in Jiangxi to confirm the
rights and obligations in respect of the interests, assets,
liabilities, personnel and businesses transferred under the
Investment Agreement.
(dd) Investment Agreement dated 15 May 2002 between CMCC, Chongqing
Mobile and the Services Company in Chongqing, pursuant to which CMCC
injected all interests, assets, liabilities, personnel and
businesses in relation to its mobile telecommunications services in
Chongqing into Chongqing Mobile.
VII-6
(ee) Confirmation of Rights and Obligations dated 15 May 2002 signed by
Chongqing Mobile and the Services Company in Chongqing to confirm
the rights and obligations in respect of the interests, assets,
liabilities, personnel and businesses transferred under the
Investment Agreement.
(ff) Investment Agreement dated 15 May 2002 between CMCC, Sichuan Mobile
and the Services Company in Sichuan, pursuant to which CMCC injected
all interests, assets, liabilities, personnel and businesses in
relation to its mobile telecommunications services in Sichuan into
Sichuan Mobile.
(gg) Confirmation of Rights and Obligations dated 15 May 2002 signed by
Sichuan Mobile and the Services Company in Sichuan to confirm the
rights and obligations in respect of the interests, assets,
liabilities, personnel and businesses transferred under the
Investment Agreement.
(hh) Investment Agreement dated 15 May 2002 between CMCC, Hubei Mobile
and the Services Company in Hubei, pursuant to which CMCC injected
all interests, assets, liabilities, personnel and businesses in
relation to its mobile telecommunications services in Hubei into
Hubei Mobile.
(ii) Confirmation of Rights and Obligations dated 15 May 2002 signed by
Hubei Mobile and the Services Company in Hubei to confirm the rights
and obligations in respect of the interests, assets, liabilities,
personnel and businesses transferred under the Investment Agreement.
(jj) Investment Agreement dated 15 May 2002 between CMCC, Hunan Mobile
and the Services Company in Hunan, pursuant to which CMCC injected
all interests, assets, liabilities, personnel and businesses in
relation to its mobile telecommunications services in Hunan into
Hunan Mobile.
(kk) Confirmation of Rights and Obligations dated 15 May 2002 signed by
Hunan Mobile and the Services Company in Hunan to confirm the rights
and obligations in respect of the interests, assets, liabilities,
personnel and businesses transferred under the Investment Agreement.
(ll) Investment Agreement dated 15 May 2002 between CMCC, Shaanxi Mobile
and the Services Company in Shaanxi, pursuant to which CMCC injected
all interests, assets, liabilities, personnel and businesses in
relation to its mobile telecommunications services in Shaanxi into
Shaanxi Mobile.
(mm) Confirmation of Rights and Obligations dated 15 May 2002 signed by
Shaanxi Mobile and the Services Company in Shaanxi to confirm the
rights and obligations in respect of the interests, assets,
liabilities, personneland businesses transferred under the
Investment Agreement.
(nn) Investment Agreement dated 15 May 2002 between CMCC, Shanxi Mobile
and the Services Company in Shanxi, pursuant to which CMCC injected
all interests, assets, liabilities, personnel and businesses in
relation to its mobile telecommunications services in Shanxi into
Shanxi Mobile.
(oo) Confirmation of Rights and Obligations dated 15 May 2002 signed by
Shanxi Mobile and the Services Company in Shanxi to confirm the
rights and obligations in respect of the interests, assets,
liabilities, personneland businesses transferred under the
Investment Agreement.
(pp) Acquisition Agreement.
VII-7
(qq) Vodafone Subscription Agreement.
(rr) Each of the agreements described in the section headed "Connected
Transactions" in this circular.
11 DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents will be available for inspection at
Linklaters, 00xx Xxxxx, Xxxxxxxxx Xxxxx, Xxxxxx Xxxx, Xxxx Xxxx during normal
business hours on any business day from the date of this circular until 9 June
2002:
(a) the Acquisition Agreement;
(b) the memorandum and articles of association of the Company;
(c) the consolidated audited financial statements of the Group for the
years ended 31 December 2000 and 2001;
(d) the letters of consent referred to in this circular;
(e) the letter from Rothschild dated 27 May 2002, the text of which is
set out on pages 35 to 57 of this circular;
(f) the letter from Chesterton Xxxxx dated 16 May 2002, referred to on
page 28 of this circular;
(g) the accountants' report from KPMG dated 27 May 2002, the text of
which is set out in Appendix II to this circular;
(h) the letters from KPMG and the Company's financial advisers both
dated 27 May 2002, the texts of which are set out in Appendix VI to
this circular;
(i) the material contracts referred to under the paragraph headed
"Material Contracts" in this Appendix and each other agreement
referred to in this circular; and
(j) a copy of the circular issued by the Company dated 14 May 2001 in
relation to certain connected transactions of the Company.
VII-8
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NOTICE OF THE EXTRAORDINARY GENERAL MEETING
--------------------------------------------------------------------------------
(CHINA MOBILE LOGO)
CHINA MOBILE (HONG KONG) LIMITED
(Incorporated in Hong Kong with limited liability under the Companies Ordinance)
NOTICE IS HEREBY GIVEN that an Extraordinary General Meeting of the shareholders
of China Mobile (Hong Kong) Limited (the "Company") will be held at 11:30 a.m.
(or as soon thereafter as the annual general meeting of the Company to be
convened at 11:00 a.m. at the same place and date shall have been concluded or
adjourned) on 24 June 2002, in the Conference Room, 3rd Floor, JW Marriott
Hotel, Pacific Place, 00 Xxxxxxxxx Xxxx, Xxxx Xxxx for the purposes of
considering and, if thought fit, passing, with or without modifications, the
following resolutions as Ordinary Resolutions:
ORDINARY RESOLUTIONS
1 "THAT the conditional sale and purchase agreement dated 16 May 2002 (the
"Acquisition Agreement") between the Company, China Mobile Hong Kong (BVI)
Limited ("CMBVI") and China Mobile Communications Corporation, a copy of
which has been initialled by the chairman of this meeting and for the
purpose of identification marked "A", pursuant to which, inter alia, CMBVI
has agreed as legal and beneficial owner to sell, and the Company has
agreed to purchase, the entire issued share capital of each of Anhui
Mobile (BVI) Limited, Jiangxi Mobile (BVI) Limited, Chongqing Mobile (BVI)
Limited, Sichuan Mobile (BVI) Limited, Hubei Mobile (BVI) Limited, Hunan
Mobile (BVI) Limited, Shaanxi Mobile (BVI) Limited and Shanxi Mobile
Communication (BVI) Limited, which holds 100% of each of Anhui Mobile
Communication Company Limited, Jiangxi Mobile Communication Company
Limited, Chongqing Mobile Communication Company Limited, Sichuan Mobile
Communication Company Limited, Hubei Mobile Communication Company Limited,
Hunan Mobile Communication Company Limited, Shaanxi Mobile Communication
Company Limited and Shanxi Mobile Communication Company Limited (the
"Target Companies"), respectively, at a consideration of US$8,573 million
comprising:
(a) an initial consideration of US$5,773 million of which US$3,150
million is payable in cash and an amount of US$2,623 million is to
be satisfied by the allotment by the Company to CMBVI on completion
of the Acquisition Agreement of the number of ordinary shares of
HK$0.10 each in the share capital of the Company (the "Consideration
Shares") as determined in accordance with the Acquisition Agreement,
credited as fully paid; and
(b) a deferred consideration of US$2,800 million payable within fifteen
years after completion of the Acquisition Agreement,
is hereby generally and unconditionally approved and the directors of the
Company are hereby authorised to do all such further acts and things and
execute such further documents and take all such steps which in their
opinion may be necessary, desirable or expedient to implement and/or give
effect to the terms of the Acquisition Agreement."
2 "THAT subject to the passing of Ordinary Resolution No. 1 set out in the
notice convening the Extraordinary General Meeting at which this
Resolution is proposed, the allotment by the Company to CMBVI pursuant to
the terms of the Acquisition Agreement of the Consideration Shares is
hereby approved."
3 "THAT subject to the passing of Ordinary Resolutions No. 1 and 2 set out
in the notice convening the Extraordinary General Meeting at which this
Resolution is proposed, the Connected Transactions as described in the
paragraph headed "Connected Transactions" under the section "Letter from
the Chairman" of the circular of the Company dated 27 May 2002, which the
Company expects to occur on a regular and continuous basis in the ordinary
and usual course of business of the Company, its subsidiaries and the
Target Companies, as the case may be, together with the relevant upper
limits are hereby approved and the directors of the Company are hereby
authorised to do all such further acts and things and execute such further
documents and take all such steps which in their opinion may be necessary,
desirable or expedient to implement and/or give effect to the terms of the
Connected Transactions."
By Order of the Board
YUNG SHUN XXX, XXXXX
Company Secretary
Hong Kong, 27 May 2002
Notes:
1. A member entitled to attend and vote at the Extraordinary General Meeting
is entitled to appoint one or more proxies to attend and, on a poll, vote
in his stead. A proxy need not be a member of the Company.
2. In order to be valid, a form of proxy together with any power of attorney
or other authority, if any, under which it is signed, or a notarially
certified copy of such power of authority, must be deposited at the
Company's registered office at 00xx Xxxxx, Xxx Xxxxxx, 00 Xxxxx'x Xxxx
Xxxxxxx, Xxxx Xxxx, at least 36 hours before the time appointed for
holding the Extraordinary General Meeting. Completion and return of the
form of proxy will not preclude you from attending and voting in person at
the meeting or at any adjourned meeting should you so wish.
