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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 20-F
     
o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________
OR
     
o   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report _____________
Commission file number 1-15028
CHINA UNICOM (HONG KONG) LIMITED
(Exact Name of Registrant as Specified in Its Charter)
     
N/A
(Translation of Registrant’s Name Into English)
  Hong Kong
(Jurisdiction of Incorporation or Organization)
75 th Floor, The Center
99 Queen’s Road Central
Hong Kong
(Address of Principal Executive Offices)
Chu Ka Yee
Telephone: +852 2121 3220
Facsimile: +852 2121 3232
75 th Floor, The Center
99 Queen’s Road Central
Hong Kong
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of Each Exchange On Which Registered
     
Ordinary shares, par value HK$0.10 per share   The New York Stock Exchange, Inc.*
     
*  
Not for trading, but only in connection with the listing on The New York Stock Exchange, Inc. of American depositary shares, or ADSs, each representing 10 ordinary shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
As of December 31, 2010, 23,562,176,959 ordinary shares were issued and outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No þ
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
         
Large Accelerated Filer þ   Accelerated Filer o   Non-Accelerated Filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
U.S. GAAP o
International Financial Reporting Standards as issued by the International Accounting Standards Board þ
Other o
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
 
 

 

 


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  EX-1.3
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  EX-8.1
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  EX-12.2
  EX-13.1
  EX-13.2

 

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Note Regarding Forward-Looking Statements
This annual report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements may include, without limitation, statements relating to (i) our plans and strategies, including those in connection with our restructuring and integration after our merger with China Netcom Group Corporation (Hong Kong) Limited, mergers and acquisitions and capital expenditures; (ii) our plans for network expansion, including those in connection with the build-out of third generation mobile telecommunications, or 3G, digital cellular business and network infrastructure; (iii) our competitive position, including our ability to upgrade and expand existing networks and increase network efficiency, to improve existing services and offer new services, to develop new technological applications and to leverage our position as an integrated telecommunications operator and expand into new businesses and markets; (iv) our future business condition, including our future financial results, cash flows, financing plans and dividends; (v) the future growth of market demand of, and opportunities for, our new and existing products and services, in particular, 3G services; and (vi) future regulatory and other developments in the PRC telecommunications industry.
The words “anticipate”, “believe”, “could”, “estimate”, “intend”, “may”, “seek”, “will” and similar expressions, as they relate to us, are intended to identify certain of these forward-looking statements. We do not intend to update any of these forward-looking statements.
The forward-looking statements contained in this annual report are, by their nature, subject to significant risks and uncertainties. In addition, these forward-looking statements reflect our current views with respect to future events and are not a guarantee of our future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements as a result of a number of factors, including, without limitation:
   
changes in the regulatory regime and policies for the PRC telecommunications industry, including without limitation changes in the regulatory policies of the Ministry of Industry and Information Technology, or the MIIT (which has assumed the regulatory functions of the former Ministry of Information Industry), the State-Owned Assets Supervision and Administration Commission, or the SASAC, and other relevant government authorities of the PRC;
   
changes in the PRC telecommunications industry resulting from the issuance of 3G licenses by the central government of the PRC;
   
effects of tariff reduction and other policy initiatives from the relevant PRC government authorities;
   
changes in telecommunications and related technologies and applications based on such technologies;
   
the level of demand for telecommunications services, in particular, 3G services;
   
competitive forces from more liberalized markets and our ability to retain market share in the face of competition from existing telecommunications companies and potential new market entrants;
   
effects of competition on the demand and price of our telecommunications services;
   
the availability, terms and deployment of capital and the impact of regulatory and competitive developments on capital outlays;
   
effects of our restructuring and integration following the completion of our merger with China Netcom Group Corporation (Hong Kong) Limited;
   
effects of discontinuation of the personal handyphone system, or PHS, business in response to the MIIT’s request;

 

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effects of our acquisition from our parent companies of certain telecommunications business and assets, including the fixed-line business in 21 provinces in southern China, in January 2009;
   
changes in the assumptions upon which we have prepared our projected financial information and capital expenditure plans;
   
changes in the political, economic, legal and social conditions in the PRC, including the PRC Government’s policies and initiatives with respect to economic development in light of the recent global economic downturn, foreign exchange policies, foreign investment activities and policies, entry by foreign companies into the PRC telecommunications market and structural changes in the PRC telecommunications industry; and
   
the recovery from the recent global economic downturn inside and outside the PRC.
Please also see “D. Risk Factors” under Item 3.
Certain Definitions
As used in this annual report, references to “we”, “us”, “our”, the “Company”, “our company” and “Unicom” are to China Unicom (Hong Kong) Limited (formerly known as China Unicom Limited). Unless the context otherwise requires, these references include all of our subsidiaries. In respect of any time prior to our incorporation, references to “we”, “us”, “our” and “Unicom” are to the telecommunications businesses in which our predecessors were engaged and which were subsequently assumed by us. All references to “Unicom Group” are to China United Network Communications Group Company Limited (formerly known as China United Telecommunications Corporation), our indirect controlling shareholder. Unless the context otherwise requires, these references include all of Unicom Group’s subsidiaries, including us and our subsidiaries.
All references to “China Netcom” are to China Netcom Group Corporation (Hong Kong) Limited, which merged with us in October 2008, and, as the context may require, its subsidiaries. References to “Netcom Group” mean China Network Communications Group Corporation which merged with, and was absorbed by, Unicom Group in January 2009 and, as the context may require, its subsidiaries, other than us and our subsidiaries.
As used in this annual report:
   
references to “China” or “PRC” mean the People’s Republic of China, excluding, for purposes of this annual report, Hong Kong, Macau and Taiwan, and references to the “central government” or the “PRC Government” mean the central government of the PRC;
   
references to “our fixed-line northern service region” mean the 10 municipalities, provinces and region where we operate fixed-line business in northern China, consisting of Beijing and Tianjin Municipalities, and Hebei, Henan, Shandong, Liaoning, Heilongjiang, Jilin, and Shanxi Provinces, and the Inner Mongolia Autonomous Region;

 

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references to the “21 provinces in southern China” mean Shanghai Municipality, Jiangsu Province, Zhejiang Province, Anhui Province, Fujian Province, Jiangxi Province, Hubei Province, Hunan Province, Guangdong Province, Guangxi Zhuang Autonomous Region, Hainan Province, Chongqing Municipality, Sichuan Province, Guizhou Province, Yunnan Province, Tibet Autonomous Region, Shaanxi Province, Gansu Province, Qinghai Province, Ningxia Hui Autonomous Region and Xinjiang Uygur Autonomous Region; we completed the acquisitions of certain telecommunications business and assets, including the fixed-line business in those 21 provinces in southern China, from Unicom Group and Netcom Group and/or their respective subsidiaries and branches in January 2009; see “A. History and Development of the Company — Acquisitions of Fixed-Line Business in 21 Provinces in Southern China and Other Assets from Parent Companies and Lease of Telecommunications Networks in 21 Provinces in Southern China” under Item 4;
   
references to “Hong Kong Stock Exchange” or “HKSE” mean The Stock Exchange of Hong Kong Limited, and references to “NYSE” or “New York Stock Exchange” mean The New York Stock Exchange, Inc; and
   
references to “Renminbi” or “RMB” are to the currency of the PRC, references to “U.S. dollars” or “US$” are to the currency of the United States of America, references to “HK dollars” or “HK$” are to the currency of the Hong Kong Special Administrative Region of the PRC and references to “Euro” are to the currency of the eurozone (17 of the 27 member states of the European Union).

 

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Special Note on Our Financial Information and Certain Statistical Information Presented
in This Annual Report
Our consolidated financial statements as of and for the years ended December 31, 2007, 2008, 2009 and 2010 included in this annual report on Form 20-F have been prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or the IASB. These financial statements also comply with Hong Kong Financial Reporting Standards, or HKFRS, which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards and Interpretations issued by the Hong Kong Institute of Certified Public Accountants, or HKICPA. As applied to our company, HKFRS is consistent with IFRS in all material respects.
The statistical information set forth in this annual report on Form 20-F relating to the PRC is taken or derived from various publicly available government publications that have not been prepared or independently verified by us. This statistical information may not be consistent with other statistical information from other sources within or outside the PRC.

 

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PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not Applicable.
Item 2. Offer Statistics and Expected Timetable
Not Applicable.
Item 3. Key Information
A. Selected Financial Data
The following tables present selected historical financial data of our company as of and for the years ended December 31, 2007, 2008, 2009 and 2010. Except for amounts presented in U.S. dollars, the selected historical consolidated income statement data for the years ended December 31, 2007, 2008, 2009 and 2010 and the selected historical consolidated balance sheet data as of December 31, 2008, 2009 and 2010 set forth below are derived from, should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements, including the related notes, included elsewhere in this annual report on Form 20-F. The selected historical consolidated balance sheet data as of December 31, 2007 set forth below are derived from our internal records and management accounts that are not included in this annual report on Form 20-F. As disclosed above under “Special Note on Our Financial Information and Certain Statistical Information Presented in This Annual Report”, our consolidated statements of income for the years ended December 31, 2007, 2008, 2009 and 2010 and consolidated balance sheets as of December 31, 2008, 2009 and 2010 have been prepared and presented in accordance with IFRS/HKFRS.
We completed (i) acquisitions of fixed-line business in 21 provinces in southern China, the local access telephone business in Tianjin Municipality, three subsidiaries (together referred to as the “Target Business”) and certain other telecommunication assets from Unicom Group and Netcom Group (which was later merged with Unicom Group in January 2009) in January 2009, and (ii) a merger with China Netcom in October 2008. See “A. History and Development of the Company — Acquisitions of Fixed-Line Business in 21 Provinces in Southern China and Other Assets from Parent Companies and Lease of Telecommunications Networks in 21 Provinces in Southern China” and “A. History and Development of the Company — Sale of CDMA Business, Merger with China Netcom and Related Transactions — Merger with China Netcom and Related Transactions” under Item 4, respectively. Because we and the Target Business were under common control of Unicom Group, both prior to and after the acquisitions, and we and China Netcom were under the common control of the PRC Government both prior to and after the merger, each of the acquisitions and the merger is considered as a business combination of entities and businesses under common control, and has been accounted for using merger accounting in accordance with Accounting Guideline 5 “Merger accounting for common control combinations”, or AG 5, issued by the HKICPA in November 2005. In addition, we completed an acquisition of assets and business of the Guizhou Province branch of Unicom Group, or Unicom Guizhou, from Unicom Group in December 2007 and prior to its merger with us, China Netcom completed an acquisition of the entire equity interest of Beijing Planning and Design Institute, or Design Institute, a wholly-owned subsidiary of Netcom Group, in December 2007. Because we and Unicom Guizhou were under the common control of Unicom Group both prior to and after our acquisition of Unicom Guizhou and China Netcom and Design Institute were under the common control of Netcom Group (which merged with, and was absorbed by, Unicom Group in January 2009) both prior to and after China Netcom’s acquisition of Design Institute, both acquisitions have been accounted for using merger accounting in accordance with AG5 issued by the HKICPA. Upon our adoption of IFRS, we adopted the accounting policy to account for business combination of entities and businesses under common control using the predecessor values method, which is consistent with HKFRS. The acquired assets and liabilities mentioned above in this paragraph are stated at historical cost, and are included in the consolidated financial statements included in this annual report on Form 20-F as if these entities and their businesses acquired had always been part of our company during all the periods presented.

 

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We completed the disposal of our CDMA business in October 2008. See “A. History and Development of the Company — Sale of CDMA Business, Merger with China Netcom and Related Transactions — Disposal of CDMA Business and Related Transactions” under Item 4. In accordance with IFRS/HKFRS 5, “Non-Current Assets Held for Sale and Discontinued Operations”, we recognized the CDMA business as discontinued operations and the CDMA business was presented separately as discontinued operations in our audited consolidated statements of income and statements of cash flows for the years ended December 31, 2007 and 2008.
Prior to our merger with China Netcom, China Netcom completed the disposal of the fixed-line telecommunications and related services in its Guangdong and Shanghai branches in February 2007. See “A. History and Development of the Company—History and Corporate Development of China Netcom” under Item 4. After considering that we reacquired the fixed-line business in Guangdong and Shanghai branches in January 2009, we did not present the fixed-line business in Guangdong and Shanghai branches as discontinued operations and derecognized the gain on disposal previously recorded in our 2007 consolidated financial statements.
                                         
    As of or for the year ended December 31  
    2007     2008     2009     2010     2010  
    RMB     RMB     RMB     RMB     US$ (1)  
    (in millions, except for per share data)  
Consolidated Income Statement Data:
                                       
 
                                       
CONTINUING OPERATIONS
                                       
Revenue (2)
                                       
Mobile business
                                       
Telecommunications service revenue
    62,236       64,240       69,769       82,362       12,479  
Information communication technology services and other revenue
    187       359       252       15       2  
Sales of mobile telecommunications products
    14       532       1,970       7,173       1,087  
 
                             
Total mobile telecommunications revenue
    62,437       65,131       71,991       89,550       13,568  
 
                             
Fixed-line business
                                       
Telecommunications service revenue (2)
    91,093       88,254       79,549       78,896       11,954  
Information communication technology services and other revenue
    4,782       4,339       1,611       1,046       158  
Sales of fixed-line telecommunications products
    980       1,362       193       114       17  
 
                             
Total fixed-line telecommunications revenue
    96,855       93,955       81,353       80,056       12,129  
 
                             
Unallocated amounts
                                       
Telecommunications service revenue (2)
    420       337       275       737       112  
Information communication technology services and other revenue
    228       364       326       955       145  
Sales of other telecommunications products
          5                    
 
                             
 
    648       706       601       1,692       257  
 
                             
Total revenue
    159,940       159,792       153,945       171,298       25,954  
 
                             
 
Total costs, expenses and others
    (136,497 )     (155,733 )     (141,668 )     166,525       25,231  
 
                             
 
Income from continuing operations before income tax
    23,443       4,059       12,277       4,773       723  
 
                             
Income tax expenses
    (7,175 )     (1,828 )     (2,721 )     (922 )     (140 )
 
                             
 
                                       
Income from continuing operations
    16,268       2,231       9,556       3,851       583  
 
                             
 
                                       
DISCONTINUED OPERATIONS (3)
                                       
Income from discontinued operations
    656       1,438                    
Gain on disposal of discontinued operations
          26,135                    
 
                             
Sub-total for discontinued operation
    656       27,573                    
 
                             
 
                                       
Net income
    16,924       29,804       9,556       3,851       583  
 
                             
 
                                       
Earnings per share for income attributable to owners of the parent during the year
                                       
-Basic earnings per share (4)
    0.73       1.25       0.40       0.16       0.03  
-Diluted earnings per share (4)
    0.73       1.24       0.40       0.16       0.03  
-Basic earnings per ADS (5)
    7.33       12.55       4.02       1.63       0.25  
-Diluted earnings per ADS (5)
    7.26       12.45       4.00       1.62       0.25  

 

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    As of or for the year ended December 31  
    2007     2008     2009     2010     2010  
    RMB     RMB     RMB     RMB     US$ (1)  
 
                                       
Earnings per share for income from continuing operations attributable to owners of the parent during the year
                                       
-Basic earnings per share (4)
    0.70       0.09       0.40       0.16       0.03  
-Diluted earnings per share (4)
    0.70       0.09       0.40       0.16       0.03  
-Basic earnings per ADS (5)
    7.04       0.94       4.02       1.63       0.25  
-Diluted earnings per ADS (5)
    6.98       0.93       4.00       1.62       0.25  
 
                                       
Earnings per share for income from discontinued operations attributable to owners of the parent during the year
                                       
-Basic earnings per share (4)
    0.03       1.16                    
-Diluted earnings per share (4)
    0.03       1.15                    
-Basic earnings per ADS (5)
    0.29       11.61                    
-Diluted earnings per ADS (5)
    0.28       11.52                    
-Number of shares outstanding for basic earnings per share (4)
    23,075       23,751       23,767       23,562       23,562  
-Number of shares outstanding for diluted earnings per share (4)
    23,321       23,941       23,895       23,704       23,704  
-Number of ADS outstanding for basic earnings per ADS (5)
    2,308       2,375       2,377       2,356       2,356  
-Number of ADS outstanding for diluted earnings per ADS (5)
    2,332       2,394       2,389       2,370       2,370  
 
                                       
Consolidated Balance Sheet Data:
                                       
 
                                       
Assets
                                       
Cash and cash equivalent and short-term bank deposits
    13,555       10,574       8,816       22,768       3,449  
Property, plant and equipment
    306,420       315,546       351,157       366,060       55,464  
Inventories and consumables
    2,816       1,147       2,412       3,728       565  
Prepayments and other current assets
    5,181       2,876       4,252       5,115       775  
Available-for-sale financial assets
    287       95       7,977       6,214       942  
Proceeds receivable for the disposal of the CDMA business
          13,140       5,121              
Total assets
    368,435       380,318       417,045       441,453       66,887  
 
                             
 
                                       
Liabilities
                                       
Amounts payable and accrued liabilities
    61,331       73,854       104,072       97,659       14,795  
Long-term loans due to ultimate holding company
    27,213       35,652                    
Payables in relation to the disposal of the CDMA business
          4,232       7              
Short-term bank loans
    11,850       10,780       63,909       36,727       5,565  
Commercial papers
    20,000       10,000             23,000       3,485  
Current portion of long-term bank loans
    7,413       1,216       62       58       9  
Current portion of other obligations
    3,381       3,012       2,534       2,637       400  
Long-term bank loans
    16,086       997       759       1,462       222  
Promissory notes
                      15,000       2,273  
Convertible bonds
                      11,558       1,751  
Corporate bonds
    2,000       7,000       7,000       7,000       1,061  
Tax payable
    5,091       11,370       912       1,484       225  
Total liabilities
    195,146       183,085       210,578       235,612       35,699  
 
                             
 
                                       
Shareholders’ equity
    173,289       197,233       206,467       205,841       31,188  
 
                             
Share capital
    1,437       2,329       2,310       2,310       350  
 
                                       
Other Financial Data:
                                       
 
                                       
CONTINUING OPERATIONS
                                       
Net cash inflow from operating activities of continuing operations
    68,854       57,241       57,733       66,344       10,052  
Net cash outflow from investing activities of continuing operations
    (54,745 )     (61,026 )     (85,308 )     (76,614 )     (11,608 )
Net cash (outflow)/inflow from financing activities of continuing operations
    (22,830 )     (28,786 )     30,197       19,824       3,003  
Net cash (outflow)/inflow from continuing operations
    (8,721 )     (32,571 )     2,622       9,554       1,447  
 
                                       
DISCONTINUED OPERATIONS (3)
                                       
Net cash inflow from operating activities of discontinued operations
    837       656                    
Net cash (outflow)/inflow from investing activities of discontinued operations
    (25 )     29,489       (5,039 )     5,121       776  
Net cash outflow from financing activities of discontinued operations
                             
Net cash inflow/(outflow) from discontinued operations
    812       30,145       (5,039 )     5,121       776  
 
Net (decrease)/increase in cash and cash equivalents
    (7,909 )     (2,426 )     (2,417 )     14,675       2,223  
 
                             
 
Dividend declared per share
    0.20       0.20       0.16       0.08       0.01  

 

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(1)  
The translation of RMB into US dollars has been made at the rate of RMB6.6000 to US$1.00, representing the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board on December 30, 2010. The translations are solely for the convenience of the reader.
 
(2)  
Includes fixed-line upfront connection fees for basic telephone access services that were eliminated by order of the former Ministry of Information Industry in July 2001.
 
(3)  
Results of our CDMA business have been disclosed as discontinued operations for the years ended December 31, 2007 and 2008.
 
(4)  
See Note 38 to the financial statements included in this Form 20-F on how basic and diluted earnings per share are calculated under IFRS/HKFRS.
 
(5)  
Earnings per ADS is calculated by multiplying earnings per share by 10, which is the number of shares represented by each ADS.
Exchange Rate Information
We publish our consolidated financial statements in Renminbi. Solely for the convenience of the reader, this annual report on Form 20-F contains translations of certain Renminbi and Hong Kong dollar amounts into U.S. dollars at specific rates. Prior to January 1, 2009, the exchange rate refers to the noon buying rates in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York. For January 1, 2009 and all later dates and periods, the exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board. Unless otherwise indicted, conversions of Renminbi or Hong Kong dollars into U.S. dollars in this annual report are based on the exchange rate on December 30, 2010 (RMB6.6000 to US$1.00 and HK$7.7810 to US$1.00). These translations should not be construed as representations that the Renminbi or Hong Kong dollar amounts could actually be converted into U.S. dollars at such rates or at all.
The daily exchange rates reported by the Federal Reserve Board were RMB6.4917 = US$1.00 and HK$7.7733 = US$1.00, respectively, on May 20, 2011. The following table sets forth the high and low exchange rates between Renminbi and U.S. dollars and between Hong Kong dollars and U.S. dollars for each month during the previous six months:
Exchange Rate
                                 
    RMB per US$1.00     HK$ per US$1.00  
    High     Low     High     Low  
November 2010
    6.6892       6.6330       7.7656       7.7501  
December 2010
    6.6745       6.6000       7.7833       7.7612  
January 2011
    6.6364       6.5809       7.7978       7.7683  
February 2011
    6.5965       6.5520       7.7957       7.7823  
March 2011
    6.5743       6.5483       7.8012       7.7750  
April 2011
    6.5477       6.4900       7.7784       7.7669  
May 2011 (up to May 20, 2011)
    6.5073       6.4917       7.7771       7.7652  
The following table sets forth the average exchange rates between Renminbi and U.S. dollars and between Hong Kong dollars and U.S. dollars for each of 2006, 2007, 2008, 2009 and 2010, calculated by averaging, in the case of 2006 to 2008, the noon buying rates, or in the case of 2009 and 2010, the daily exchange rate, on the last day of each month during the relevant years.

 

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Average Exchange Rate
                 
    RMB per US$1.00     HK$ per US$1.00  
 
2006
    7.9579       7.7685  
2007
    7.5806       7.8008  
2008
    6.9193       7.7814  
2009
    6.8295       7.7513  
2010
    6.7603       7.7692  
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Risks Relating to Our Business
We face intense competition in all our businesses from other telecommunications service providers, including China Mobile and China Telecom, which may materially adversely affect our financial condition, results of operations and growth prospects.
The telecommunications industry in China has been rapidly evolving. Following the restructuring of the PRC telecommunications industry in 2008, we, along with China Mobile and China Telecom, have become full-service telecommunications service providers that operate both fixed-line and mobile telecommunications networks in China. See “A. History and Development of the Company — Restructurings of the Telecommunications Industry” under Item 4. We face intense competition in each of our business lines from China Mobile and China Telecom and expect that this competition will further intensify and may also include other telecommunications service providers in the future.
For mobile business, China Mobile is the largest mobile operator in China, while China Telecom has become a new competitor after acquiring our CDMA business in the 2008 industry restructuring. In the emerging 3G mobile market, we face intense competition from the other two operators. For fixed-line business, we are a leading fixed-line operator in northern China, but remain relatively small in southern China, where China Telecom has a dominant market position. We also face increasing competition from competitors outside the telecommunications industry, such as cable television companies for fixed-line broadband business. Furthermore, the PRC Government is in the process of initiating new policies, in particular, the policies regarding the convergence of television broadcast, telecommunications and Internet access networks and the policies that would allow mobile subscribers to switch to the networks of another telecommunications operator with their existing numbers in certain areas in China. Although these new initiatives may present opportunities for us to attract new users, they also pose additional uncertainties to the competition in mobile business in China, and we cannot assure you that our business will not be adversely affected from such initiatives.

 

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Intensive competition from China Mobile and China Telecom, as well as other telecommunications service providers, could lead to slower subscriber growth, lower traffic volume of our telecommunications services, continued price pressure and higher customer acquisition costs, which may materially adversely affect our financial condition, results of operations and growth prospects.
We may further lose subscribers, in particular, fixed-line services subscribers, which may materially adversely affect our financial condition, results of operations and growth prospects.
We continue to lose fixed-line services subscribers due to the trend of mobile service substitution for fixed-line services. Consistent with trends in global markets in recent years, significant traffic from our fixed-line networks has been diverted to mobile networks, including mobile networks of other mobile operators. While we have been taking various measures to retain our fixed-line subscribers, we cannot assure you that we will be successful in mitigating the adverse impact of mobile service substitution for fixed-line telephone services. Historically, we also experienced loss of mobile subscribers, primarily due to intensified competition from other service providers. We may continue to lose fixed-line and mobile subscribers, which may in turn adversely affect our relevant market share and increase our costs of additional customer acquisitions and bad debts, which would materially adversely affect our financial condition, results of operations and growth prospects.
Competition from foreign-invested operators and other new entrants may further increase the competition for employees, exacerbate price competition and increase our operating expenses, thereby adversely affecting our financial condition, results of operations and growth prospects.
As a result of China’s accession to the World Trade Organization, or WTO in December 2001 and the adoption of the Regulations on the Administration of Foreign-Invested Telecommunications Enterprises in January 2002, which implement China’s commitments to the WTO, the PRC Government has agreed to gradually liberalize the various segments and regions of the telecommunications market in China to foreign investors. Currently, foreign investors are permitted to own up to 49% of joint ventures that offer basic telecommunications services without any geographic restrictions in China and up to 50% of joint ventures that offer value-added telecommunications services without any geographic restrictions in China. More foreign-invested operators may enter China’s telecommunications market as a result of this liberalization. They may have greater financial, managerial and technical resources and more expertise in network management and sales and marketing than we do.
Increased competition from these and other new entrants into the Chinese telecommunications market may further increase the competition for skilled and experienced employees, exacerbate price competition and increase our customer acquisition costs and other operating expenses, and thereby adversely affect our financial condition, results of operations and growth prospects.
We may not be able to fully realize the anticipated synergies of our merger with China Netcom as well as our acquisition of the fixed-line business in 21 provinces in southern China due to a number of factors, some of which are beyond our control, and may experience various difficulties in the ongoing integration process, and our future financial condition, results of operations and growth prospects may be materially adversely affected.
We believe that our merger with China Netcom represents an important transaction for us, consistent with the industry trend of convergence between fixed-line and mobile businesses within China. It allows us to benefit from increased economies of scale, reinforce our market position, improve our overall competitiveness and lay the foundation for sustainable long-term growth. Nevertheless, the scale, scope and nature of the integration and customer retention efforts required in connection with the merger present significant challenges. Although we have achieved integration in a number of areas, such as networks and personnel, we cannot assure you that we will be able to fully realize the anticipated synergies as a result of numerous factors, some of which are beyond our control. These factors include, among other things:
   
unforeseen contingent risks or latent liabilities relating to the merger that may not become apparent until the future;
   
increase in competition in the PRC telecommunications industry resulting from the recent restructuring of the PRC telecommunications industry, which, among other things, may require us to increase our marketing efforts;
   
the diversion of financial or other resources from our existing businesses; and
   
potential loss of, or harm to, relationships with customers.

 

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Any of the above could adversely impact the full realization of our anticipated synergies from the merger with China Netcom and could materially adversely affect our future business performance, results of operations and financial condition.
In addition, as the integration is ongoing, due to various potential difficulties in managing a much larger business, our management expects that further efforts will be required in the continuing integration process, which may result in a diversion of our management’s attention from the operation of our businesses and may restrain our management’s resources, thereby adversely affecting our financial condition, results of operations and growth prospects.
Following the completion of our acquisition of the fixed-line business in 21 provinces in southern China, we have been integrating our existing business with the fixed-line operations in those 21 provinces in southern China. We cannot assure you that this acquisition will meet our expectation to optimize our business and resources and enhance our overall competitive position.
Failure to respond to technological and industry developments in a timely and effective manner or failure to continually optimize, expand and upgrade our networks and infrastructure could materially adversely affect our competitive position and hinder our growth.
The telecommunications industry in China and elsewhere in the world has been experiencing rapid and significant changes in the diversity and sophistication of the technologies and services offered. Such changes may render our existing services or technologies inadequate or obsolete. As a result, we expect that we will need to constantly upgrade our telecommunications technologies and services to respond to such changes in order to maintain our competitiveness, which typically involves substantial time, costs and risk. We cannot assure you that we will be able to respond to technological and industry developments in a timely and cost-effective manner, or at all. Our inability to respond successfully to technological or industry developments may adversely affect our financial condition, results of operations and growth prospects. Furthermore, if the new technologies adopted by us do not perform as expected, or if we are unable to effectively deliver new services based on these technologies in a commercially viable manner, our revenue growth may decline and our competitive position may be adversely affected.
In addition, the growth of our business, particularly the mobile business, depends on whether we are able to continue to optimize the capacity, expand the coverage and improve the quality of, and upgrade our existing networks and infrastructure in a timely and effective manner. Our failure to do so could result in loss of our customers and thus materially adversely affect our competitive position and hinder our growth.
Our ability to expand and upgrade our networks and infrastructure is subject to a number of uncertainties, including our ability to achieve the following on a timely basis and on acceptable terms:
   
manage technology migration in an effective manner, including effectively responding to a shortage of available Internet Protocol version 4 addresses and timely developing 3GPP Long Term Evolution, or LTE;
   
obtain adequate financing;
   
obtain relevant government licenses, permits and approvals;
   
obtain adequate network equipment and software;
   
retain experienced management and technical personnel;

 

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obtain sufficient spectrum frequencies, network numbers and other telecommunications resources controlled by the PRC Government;
   
gain access to the sites for network construction or upgrade; and
   
enter into interconnection and other arrangements with other operators.
If we are not able to timely and effectively overcome the uncertainties and difficulties we may encounter in expanding and upgrading our networks and infrastructure, our competitive position, financial condition, results of operations and growth prospects may be materially adversely affected.
The successful development of our 3G business is subject to market demand, consumer acceptance, technological challenges, other uncertainties, expected benefits from investments in our 3G networks and technology may not be realized and our business may be adversely affected due to the competitive nature between 3G services and 2G mobile business and fixed-line broadband services in the industry.
We commercially launched our 3G service in October 2009. As is common with undertakings of this scale and complexity, we may experience various difficulties in the development of our 3G business, including software, network, handset and other technical issues. While we generally believe we are capable of solving these issues, we cannot assure you that we will be able to do so in a timely fashion or that we will not encounter other difficulties. Moreover, we cannot assure you that:
   
we will be able to gain access to sufficient sites for 3G network expansion;
   
there will be sufficient demand for 3G services;
   
our 3G services will be more popular among potential subscribers than those of our competitors;
   
we will not encounter unexpected technological difficulties in implementing the WCDMA technology; or
   
our 3G services will generate an acceptable or commercially viable rate of return.
Any failure or delay in completing and expanding our 3G networks, any increase in the associated costs (including the costs and expenses that may be incurred as a result of the changes of our marketing and sales policies, including handsets subsidies, to meet the market demand), or any problem encountered in our operations of 3G business could hinder the recovery of our significant capital investment in the 3G business, which could in turn have a material adverse effect on our financial condition, results of operations and growth prospects. In addition, we expect that 3G services will compete with 2G services and fixed-line broadband as an industry trend in the future. Therefore, while we continue to promote our 3G business, we cannot assure you that our 2G business and fixed-line broadband will not be adversely affected by the industry-wide competition.

 

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Because we rely on arrangements with other telecommunications operators, changes to the terms or availability of these arrangements may result in disruptions to our services and operations and may result in customer dissatisfaction and materially adversely affect our financial condition, results of operations and growth prospects.
Our ability to provide telecommunications services depends upon arrangements with other telecommunications operators. In particular, interconnection is necessary to complete all calls between our subscribers and subscribers of other telecommunications operators. We, either through ourselves or through Unicom Group, have established interconnection and transmission line leasing arrangements with other telecommunication operators, including our parent company, as required to conduct our current business. Any disruption to our interconnection with the networks of those operators or other international telecommunications carriers with which we interconnect may affect our operations, service quality and customer satisfaction, thus adversely affecting our business. Furthermore, we are generally not entitled to collect indirect or consequential damages resulting from disruptions in the networks with which we are interconnected. Any disruption in existing interconnection arrangements and leased line arrangements or any significant change of their terms, as a result of natural events or accidents or for regulatory, technical, competitive or other reasons, may lead to temporary service interruptions and increased costs that can seriously jeopardize our operations and adversely affect our financial condition, results of operations and growth prospects. Difficulties in executing alternative arrangements with other operators on a timely basis and on acceptable terms, including the inability to promptly establish additional interconnection links or increase interconnection bandwidths as required, could also materially adversely affect our financial condition, results of operations and growth prospects.
Interruptions to our networks and operating systems or to those with which we interconnect, including those caused by natural disaster and service maintenance and upgrades, may disrupt our services and operations and may result in customer dissatisfaction and materially adversely affect our financial condition, results of operations and growth prospects.
Our network infrastructure and the networks with which we interconnect are vulnerable to potential damages or interruptions from floods, wind, storms, fires, power loss, severed cables, acts of terrorism and similar events. The occurrence of a natural disaster or other unanticipated problems at our facilities or any other failure of our networks or systems, or the networks to which we are interconnected, may result in consequential interruptions in services across our telecommunications infrastructure. For example, in May 2008, an earthquake registering 8.0 on the Richter scale struck Sichuan Province and its neighboring areas in China. In 2010, another major earthquake registering 7.1 on the Richter scale struck Qinghai Province. Our network equipment, including our base stations, in the affected areas sustained extensive damage, leading to service stoppage and other disruptions in our operations in those areas. Any future natural disasters may, among other things, significantly disrupt our ability to adequately staff our business, and may generally disrupt our services and operations. Moreover, our networks and systems and the networks with which we interconnect also require regular maintenance and upgrades. Such maintenance and upgrades may cause service disruptions. Network or system failures, as well as high traffic volumes, may also affect the quality of our services and cause temporary service interruptions. Any such future occurrence may result in customer dissatisfaction and materially adversely affect our financial condition, results of operations and growth prospects.
If we fail to achieve a smooth discontinuation of PHS services or retain our PHS subscribers to use our other telecommunications services, our financial condition and results of operations may be adversely affected.
Upon the completion of our merger with China Netcom, we took over China Netcom’s PHS services, which we did not operate before the merger. PHS is a telecommunications technology that allows an operator to offer wireless local access services with mobility within an area with the same area code. PHS business has experienced dramatic declines in recent years since its tariff advantage has been diminishing as a result of intense competition in the mobile service market in China. Further, in January 2009, the MIIT announced its decision to reallocate the radio spectrum on which we currently provide our PHS services to the TD-SCDMA technology which China Mobile uses to provide its 3G services. The MIIT requested that current wireless access systems operating on 1900-1920 MHz spectrum be cleared and removed by the end of 2011. As we expected that we would experience a significant decline in revenue and profitability for our PHS business in 2009 and onwards, and that our PHS business would deteriorate significantly and discontinuing the PHS services may result in a substantial loss of our investment in this area, we recognized an impairment loss on the PHS-related assets of approximately RMB11.8 billion for the year ended December 31, 2008, leaving the carrying value of PHS-related assets of approximately RMB1.52 billion as of December 31, 2008.
We have been utilizing our full-service operations platform to provide substitute or supplemental telecommunications services to our existing PHS users together with favorable measures. However, we cannot assure you that we will be able to achieve a smooth discontinuation of PHS services within the specified time frame or effectively retain our PHS subscribers to use our other telecommunications services. As a result, our financial condition and results of operations may be adversely affected.

 

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If we are unable to fund our capital expenditure and debt service requirements, our financial condition, results of operations and growth prospects will be materially adversely affected.
We continue to have a significant level of capital expenditure and debt service requirements necessary to implement our business strategies. We plan to spend approximately RMB73.80 billion for capital expenditure in 2011. To the extent these capital expenditures exceed our cash resources, we will be required to seek additional debt or equity financing. Our wholly-owned subsidiary, CUCL, completed the issue of two tranches of commercial paper for the year of 2010 in an amount of RMB15 billion and RMB8 billion at an interest rate of 2.64% and 2.81% per annum, respectively, as well as the issue of two tranches of promissory note for the year of 2010 in an amount of RMB3 billion and RMB 12 billion at an interest rate of 3.73% and 3.31% per annum, respectively. In addition, on October 18, 2010, Billion Express Investments Limited, a wholly-owned subsidiary of our company, completed the issue of US$1,838,800,000 0.75 per cent guaranteed convertible bonds due 2015, or the 2015 Convertible Bonds, which are exchangeable into ordinary shares of our company. We cannot assure you that we will be able to obtain future financing on a timely basis and/or on acceptable terms. Even if we obtain such financing, our financing cost may increase significantly as a result of additional financing or higher interest rate. See “Liquidity and Capital Resources” under Item 5. Our failure to do so may adversely affect our financial condition, results of operations and growth prospects. Our ability to obtain acceptable financing at any time may depend on a number of factors, including, among others:
   
our financial condition and results of operations;
   
our creditworthiness and relationship with lenders;
   
changes in credit policies, other government or banking policies that may affect credit markets in China;
   
conditions of the economy and the telecommunications industry in China;
   
conditions in relevant financial markets in China and elsewhere in the world; and
   
our ability to obtain any required government approvals for our financings.
We may experience further declines in ARPU for our telecommunications services.
In 2010, the ARPU for our mobile business increased by 5.0% from 2009, primarily because (i) the ARPU for our 3G business is significantly higher than that of our 2G business and (ii) the number of our 3G subscribers has increased as a percentage of the total number of our mobile subscribers. However, we have been experiencing declining ARPU for each of our GSM mobile services, 3G mobile services and fixed-lined business, mainly due to (i) the pricing competition with other telecommunications operators in China; (ii) downward adjustments on some of the telecommunications tariffs by the PRC Government (which may continue in the future); and (iii) many new subscribers are users with lower usage of telecommunications services. Our current GSM mobile services, 3G mobile services and fixed-lined services may continue to experience declining ARPU in the foreseeable future, which could have a material adverse effect on our financial condition and results of operations. Although we have been making efforts to mitigate those effects by allocating more resources to diversify our service offerings, particularly the value-added services, to encourage more usage of our services and developing our high-end customers, we cannot assure you that these efforts will be able to achieve the anticipated results.

 

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Our controlling shareholder, Unicom Group, can exert influence on us and cause us to make decisions that may not always be in the best interests of us or our other shareholders and may fail to provide services and facilities that we rely on to operate our business.
Unicom Group indirectly controlled an aggregate of 71.02% of our issued share capital as of April 30, 2011 and all of our executive directors also serve as directors or executive officers of Unicom Group. As our controlling shareholder, subject to our articles of association and applicable laws and regulations, Unicom Group is effectively able to control our management, policies and business by controlling the composition of our board of directors and, in turn, indirectly controlling the selection of our senior management, determining the timing and amount of our dividend payments, approving significant corporate transactions, including mergers and acquisitions, and approving our annual budgets. The interests of Unicom Group as our controlling shareholder may conflict with our interests or the interests of our other shareholders. As a result, Unicom Group may cause us to enter into transactions or take (or fail to take) other actions or make decisions that may not be in our or our other shareholders’ best interests.
In addition, our operations depend on a number of services and facilities provided by Unicom Group. For example, following our acquisition of the fixed-line business in 21 provinces in southern China in January 2009, we began leasing fixed-line networks from Unicom Group for our fixed-line business operations in those provinces. Unicom Group also provides us with international gateway services, interconnection services, sales agency and collection services and provision of premises. See “B. Related Party Transactions” under Item 7 and “A. History and Development of the Company” under Item 4. The interests of Unicom Group as provider of these services and facilities may conflict with our interests. Failure by Unicom Group to fulfill its obligations under any of these arrangements may have a material adverse effect on our business operations. We currently have limited alternative sources of supply for these services and facilities and, as a result, may have limited ability to negotiate with Unicom Group regarding the terms for providing these services and facilities. Changes in the availability, pricing or quality of these services or facilities may have a material adverse effect on our business and profitability.
The previous internal reorganization of Unicom Group for the A Share offering created a two-step voting mechanism that requires the approval of the minority shareholders of both our Company and China United Network Communications Limited (formerly known as China United Telecommunications Corporation Limited), or the A Share Company, for significant related party transactions between us and Unicom Group.
In October 2002, Unicom Group completed an internal reorganization of its shareholding in our company and the initial public offering in China of its then newly established subsidiary, the A Share Company. As part of this restructuring, a portion of Unicom Group’s indirect shareholding in our company was transferred to the A Share Company, whose business is limited to indirectly holding the equity interest of our company without any other direct business operations. A voting mechanism was established to allow public shareholders of the A Share Company to indirectly participate in our shareholders’ meetings and a two-step voting mechanism was established for the approval of related party transactions. As a result, any significant related party transaction between us or our subsidiaries and Unicom Group or its other subsidiaries will require the separate approval of the independent minority shareholders of both our company and the A Share Company. Related party transactions approved by our independent minority shareholders nevertheless cannot proceed if they are not approved by the independent minority shareholders of the A Share Company. This adds another necessary step of approval process for those transactions. See “A. History and Development of the Company — Two-Step Voting Arrangements” under Item 4.
Investor confidence and the market prices of our shares and ADSs may be materially and adversely impacted if we are or our independent registered public accounting firm is unable to conclude that our internal control over financial reporting is effective in future years as required by Section 404 of the Sarbanes-Oxley Act of 2002.
We are a public company in the United States that is subject to the Sarbanes-Oxley Act of 2002. Pursuant to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we include in this annual report a report of management on our internal control over financial reporting and an attestation report of our independent registered public accounting firm on the effectiveness of our internal control over financial reporting.

 

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As of December 31, 2010, our management conducted an assessment of the effectiveness of our internal control over financial reporting and concluded that our internal control over financial reporting as of December 31, 2010 was effective. The effectiveness of our internal control over financial reporting as of December 31, 2010, has been audited by PricewaterhouseCoopers, an independent registered public accounting firm, as stated in their report appearing on page F2. However, we cannot assure you that, in the future, our management will continue to conclude that our internal control over financial reporting is effective. Even if our management concludes that our internal control over financial reporting is effective for future periods, our independent registered public accounting firm may disagree. If our independent registered public accounting firm is not satisfied with our internal control over financial reporting or the level at which our controls are documented, designed, operated, reviewed or evaluated, or if the independent registered public accounting firm interprets the relevant requirements, rules or regulations differently from us, then it may issue an adverse opinion. Any of these possible outcomes in the future could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our consolidated financial statements, which could materially adversely affect the market prices of our shares and ADSs.
Moreover, internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal control over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal control over financial reporting, including through a failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed, we could fail to meet our reporting obligations and there could be a material adverse effect on the market prices of our shares and ADSs.
If we fail to effectively rectify those improper measures and practices identified by the PRC National Audit Office in our operations, our reputation, business, financial condition and results of operations may be materially and adversely affected, which could adversely affect the prices of our shares and ADSs.
The PRC National Audit Office, or the NAO, from time to time performs audits on state-owned companies, such as Unicom Group, our controlling shareholder. The NAO issued an audit report in May 2011 that set forth the results of its routine audit on the 2009 financial information of Unicom Group and us. The NAO identified in the audit report improper measures and practices in our certain related party transactions, procurement procedures, operational management and accounting procedures. We have adopted a number of rectification measures to address these improper measures and practices. Based on our current assessment, none of these improper measures and practices has a material impact on our historical operating results, financial statements, audit opinion or internal control assessments. However, there is no assurance all of these measures can continuously and effectively rectify all the improper measures and practices. If we fail to successfully implement any of these measures or fail to effectively rectify these improper measures and practices, our reputation, business, financial condition and results of operations may be materially and adversely affected, which could adversely affect the prices of our shares and ADSs. Furthermore, the publish of these improper measures and practices in the audit report by the NAO may have a material adverse effect on our reputation.

 

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Our outstanding convertible bonds may dilute the ownership interest of existing shareholders and may adversely affect the market price of our ordinary shares.
On October 18, 2010, Billion Express Investments Limited, a wholly-owned subsidiary of our company, completed the issue of the 2015 Convertible Bonds, which are exchangeable into ordinary shares of our company. Pursuant to the subscription agreement with respect to the 2015 Convertible Bonds, the holders of the 2015 Convertible Bonds may, beginning on November 28, 2010, elect to convert its bonds into our ordinary shares at an initial conversion price of HK$15.85 per share, subject to certain adjustments. As of April 30, 2011, none of the 2015 Convertible Bonds has been converted into our ordinary shares. Assuming a full conversion of the 2015 Convertible Bonds at the initial conversion price of HK$15.85 per share, the bonds would be convertible into 899,979,487 ordinary shares, representing approximately 3.68% of our enlarged issued and outstanding share capital as of April 30, 2011.
The conversion of the 2015 Convertible Bonds, if converted in full or in part, would dilute the ownership interest of our existing shareholders and our earnings per share, and could adversely affect the market price of our shares. Even if the 2015 Convertible Bonds are not converted, their existence may encourage the short selling of our ordinary shares by the holders of the 2015 Convertible Bonds as well as other market participants, depressing the price of our ordinary shares.
Risks Relating to the Telecommunications Industry in China
Government regulation of the telecommunications industry in China may affect our ability to respond to market conditions or competition, and may have a material adverse effect on our financial condition, results of operations and growth prospects.
As a telecommunications operator in China, we are subject to regulation by, and under the supervision of, the MIIT, which is the primary regulator of the telecommunications industry in China. The MIIT is responsible for formulating policies and regulations for the telecommunications industry, granting telecommunications licenses, allocating frequency spectrum and numbers, formulating interconnection and settlement arrangements between telecommunications operators, and enforcing industry regulations. Other PRC Governmental authorities also regulate tariff policies, capital investment and foreign investment in the telecommunications industry. See “B. Business Overview — Regulatory and Related Matters” under Item 4. The regulatory framework within which we operate may constrain our ability to implement our business strategies and limit our ability to respond to market conditions or to changes in our cost structure. Moreover, we operate our businesses pursuant to approvals granted by the State Council of the PRC, or the State Council, and under licenses granted by the MIIT. If these approvals or licenses were revoked or suspended, our business and operations would be materially adversely affected. In addition, we are subject to various regulatory requirements as to service quality, pricing and other actions, and failure to comply with such requirements may subject us to mandatory penalties or other punitive measures, any of which could have a material adverse effect on our financial condition, results of operations and growth prospects.
Regulatory or policy changes relating to the PRC telecommunications industry or any future industry restructuring may materially adversely affect our financial condition, results of operations and growth prospects.
The PRC Government continues to regulate many aspects of the telecommunications industry in China. Potential changes in regulations and policies and their implementation could lead to significant changes in the overall industry environment and may have a material adverse effect on our financial condition, results of operations and growth prospects. As part of the comprehensive plan to restructure the telecommunications industry in China, the PRC Government has been adjusting and improving its regulatory oversight of the telecommunications industry, including further deregulating telecommunications tariffs.

 

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The MIIT, under the direction of the State Council, is currently preparing a telecommunications law to provide a uniform regulatory framework for the telecommunications industry in China. The proposed nature and scope of the telecommunications law have not yet been announced by the PRC Government. The telecommunications law and other new telecommunications regulations or rules, or future changes thereto, such as enforcement of existing regulations and policies, may materially adversely affect our financial condition, results of operations and growth prospects.
Issues may also arise regarding the interpretation and enforcement of China’s WTO commitments regarding telecommunications services. Any future regulatory changes, such as those relating to the issuance of additional telecommunications licenses, tariff setting, interconnection and settlement arrangements, changes in technical and service standards, universal service obligations and spectrum and number allocations, may have a material adverse effect on our business and operations.
The PRC telecommunications industry has been extensively restructured in recent years and may be subject to further restructuring. Such further industry restructuring may materially affect the operations of all telecommunications operators in China, including us. Accordingly, we cannot predict the scope and effect of any further restructuring on our financial condition, results of operations and growth prospects.
New regulations, regulatory changes or changes in enforcement policies relating to tariffs and other aspects of telecommunications services may materially adversely affect our competitiveness, business and financial condition, results of operations and growth prospects.
Tariffs are the prices we charge our customers for our telecommunications services. We are subject to extensive government regulations on tariffs, especially those relating to our basic telecommunications services, such as mobile services, local and long distance fixed-line telephone services, managed data services, leased line services and interconnection agreements. We have experienced significant downward adjustments on tariffs of telecommunications services in recent years and our revenue have been adversely affected by reductions in tariffs promulgated by the PRC Government, such as the reduction of charges for roaming services mandated by the MIIT and the National Development and Reform Commission of the PRC, or the NDRC, in February 2008.
We cannot predict with accuracy the timing, likelihood or magnitude of tariff adjustments by the PRC Government or the extent or potential impact on our business of future tariff adjustments. If the PRC Government substantially lowers the tariffs for our services, our business and our financial condition, results of operations and growth prospects may be adversely affected. In particular, monthly fees on fixed-line services have recently drawn attention from customers and the PRC Government. Revenue from some of our customers have decreased as a result of discounts on monthly fees that we offered through bundled service packages. Our revenue will be adversely affected if the PRC Government abolishes such monthly fees. In addition, the PRC Government is in the process of initiating detailed policies following the industry restructuring in 2008, including those that allow mobile subscribers to switch to the networks of another telecommunications operator with their existing numbers and those relating to the convergence of telecommunications, Internet and television broadcast networks. On November 22, 2010, Hainan Province and Tianjin City initiated trials on the switch of telecommunications operator networks with existing numbers. The potential new regulatory policies and regulations may materially adversely affect our financial condition, results of operations and growth prospects.

 

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The PRC Government may require us, along with other telecommunications service providers in China, to provide universal services with specified obligations, and we may not be compensated adequately for providing such services.
Under the Telecommunications Regulations promulgated by the State Council, telecommunications service providers in China are required to fulfill universal service obligations in accordance with relevant regulations to be promulgated by the PRC Government authorities, and the MIIT has the authority to delineate the scope of universal service obligations. The MIIT, together with government finance and pricing authorities, is also responsible for formulating administrative rules relating to the establishment of a universal service fund and compensation schemes for universal services. These rules have not yet been promulgated, and there are currently no specific regulatory requirements relating to the provision of universal services in China.
While specific universal services obligations are not yet clear, we believe that such services may include mandatory provision of basic telecommunications services in less economically developed areas in China and mandatory contribution by telecommunications service providers to a universal service fund. In addition, as part of the transitional measures prior to the formalization of a universal service obligation framework, the MIIT has required major telecommunications service providers in China, including Unicom Group, to participate in a project to provide telephone services in thousands of remote villages in China. See “B. Business Overview — Regulatory and Related Matters — Universal Services” under Item 4.
We cannot predict whether the PRC Government will specifically require us to undertake universal service obligations in the future. To the extent we are required to do so, it is currently uncertain whether we will be adequately or timely compensated by the PRC Government or by the universal service fund. We cannot assure you that we will be able to realize an adequate return on investments for expanding networks to, and providing telecommunications services in, less economically developed areas due to potentially higher capital expenditure requirements, lower usage by customers and lack of flexibility in setting our tariffs. We also cannot predict whether we will be required to make a contribution to the universal service fund. Any of these events may adversely affect our financial condition and results of operations.
Actual or perceived health risks associated with the use of mobile devices could impair our ability to retain and attract customers of our mobile services, reduce mobile service usage or result in litigation.
Concerns have been expressed in some countries that the electromagnetic signals emitted by wireless telephone handsets and base stations may pose health risks at exposure levels below existing guideline levels, and interfere with the operation of electronic equipment. In addition, mobile operators have been subject to lawsuits alleging various health consequences as a result of mobile handset usage or proximity to base stations or seeking protective or remedial measures. While we are not aware that such health risks have been substantiated, there can be no assurance that the actual, or perceived, risks associated with the transmission of electromagnetic signals will not impair our ability to retain customers and attract new customers, reduce mobile service usage or result in litigation.
Risks Relating to Doing Business in China
Our operations may be materially adversely affected by changes in China’s economic, political and social conditions.
Substantially all of our business operations are conducted in China and substantially all of our revenue are derived from our operations in China. Accordingly, our business, financial condition, results of operations and prospects are affected to a significant degree by economic, political and social conditions in China. The PRC economy differs from the economies of most developed countries in many respects, including with respect to the extent of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past three decades, growth has been uneven across different regions and among various economic sectors. The PRC Government has implemented various measures to encourage economic development and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be materially adversely affected by government control over capital investments. In addition, increased levels of inflation or increased pressure for higher social average wages in China may prompt us, or the PRC Government to request us, to increase wages for our employees, which may materially adversely affect our financial condition and results of operations. Furthermore, if China’s economic growth slows down, there may be reduced business activities and reduced demand for our services, which could materially and adversely affect our business, as well as our financial condition and results of operations.

 

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If the PRC Government revises the current regulations that allow a foreign-invested enterprise to pay foreign exchange in current account transactions, our operating subsidiary’s ability to satisfy its foreign exchange obligations and to pay dividends to us in foreign currencies may be restricted.
The ability of our major operating subsidiary, CUCL, to satisfy its foreign exchange obligations and to pay dividends to us depends on existing and future foreign exchange regulations in China. The Renminbi is currently convertible by foreign-invested enterprises in China to settle transactions under the current account, which include trade and service related foreign exchange transactions and payments of dividends. The Renminbi currently cannot be freely converted without regulatory approval for transactions under the capital account, which includes outbound foreign investment and payments on foreign loans. CUCL, which holds substantially all of our assets and through which we conduct substantially all of our business, is a foreign-invested enterprise in China. However, there is no assurance that in the future the relevant PRC government authorities will not impose any limitation on the ability of foreign-invested enterprises to purchase foreign exchange to satisfy their foreign exchange obligations or to pay dividends. In that event, CUCL’s ability to satisfy its foreign exchange obligations and to pay dividends to us in foreign currencies may be restricted and the interests of our shareholders may, in turn, be affected.
Fluctuations in the value of the Renminbi could adversely affect the prices of our shares and ADSs as well as our profitability.
Substantially all of our revenue and costs and expenses are denominated in Renminbi, while a portion of our borrowings, equipment purchases and other capital expenditures are denominated in foreign currencies. On July 21, 2005, the PRC Government changed its decade-old policy to permit Renminbi to fluctuate within a narrow and managed band against a basket of certain foreign currencies determined by the People’s Bank of China, or the PBOC. On May 19, 2007, the PBOC announced a policy to further expand the maximum daily floating range of RMB trading prices against the U.S. dollar in the inter-bank spot foreign exchange market. With the increased floating range of the Renminbi’s value against foreign currencies, the Renminbi may appreciate or depreciate significantly in value against the U.S. dollar or other foreign currencies in the long term, depending on the fluctuation of the basket of currencies against which it is currently valued, or it may be permitted to enter into a full float. Increased fluctuations of the Renminbi could adversely affect the value in foreign currency terms of cash flow generated from our operations or any dividends payable on our shares and ADSs, and therefore the price of our shares and ADSs. Any future Renminbi devaluations could also increase our equipment importation costs or lead to significant fluctuations in the exposure of our foreign-currency-denominated liabilities, thereby adversely affecting our profitability.
Uncertainties in the PRC legal system could limit the legal protections available to us and to foreign investors and materially adversely affect our financial condition, results of operations and growth prospects.
Our wholly-owned operating subsidiary, CUCL, is organized under the laws of PRC and is generally subject to laws and regulations applicable to foreign-invested enterprises in China. The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases may be cited for reference but have limited precedential value. Since 1979, the PRC Government has promulgated laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, property, taxation and trade. However, because these laws and regulations are relatively new, and because of the relatively limited volume of published cases and their non-binding nature, interpretation and/or enforcement of these laws and regulations involves uncertainties, which may limit the remedies available to you as an investor and to us in the event of any claims or disputes with third parties. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. Therefore, the protection provided by the PRC legal system may not be the same as the legal protection available to investors in the United States or elsewhere. Furthermore, various uncertainties involved in the rulemaking, interpretation and enforcement process of the laws, regulations and rules in China that are related to our business operations, in particular, those in respect of telecommunications and enterprise income tax, may also materially and adversely affect our financial condition, results of operations and growth prospects.

 

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Since we are a Hong Kong company, you will not have certain investor rights as our shareholder, such as the right to bring legal action against other shareholders on behalf of the company.
We were incorporated in Hong Kong. The Hong Kong Companies Ordinance does not provide for any right for our shareholders, including our significant shareholders, to bring legal action against any other shareholder on our behalf to enforce any claim against such party or parties if we fail to enforce such claim ourselves.
You may experience difficulties in effecting service of legal process and enforcing judgments against us and our management.
Most of our current operations are conducted in China and most of our assets are located in China. In addition, five out of eleven of our current directors and all of our current executive officers reside within China, and substantially all of the assets of these persons are located within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon these directors or executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, our PRC counsel has advised us that China does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of court judgments. Our Hong Kong counsel has also advised us that Hong Kong has no arrangement for the reciprocal enforcement of judgments with the United States. As a result, recognition and enforcement in China of judgments of a court of the United States or any other jurisdiction, including judgments against us or our directors, executive officers, underwriters or experts, may be difficult or impossible.
New provisions of the PRC Employment Contract Law and its implementation rules may substantially increase our labor-related costs in the future.
A new labor contract law in China, which we refer to as the Employment Contract Law, became effective on January 1, 2008, and its implementation rules became effective on September 18, 2008. The Employment Contract Law and its implementation rules contain a number of provisions that are more favorable to employees than the prior labor laws and regulations in China. For example, an employee may terminate the employment contract without notice if his or her employer fails to pay regulatory social insurance contributions for the employee, or the employer has a workplace policy that violates PRC law and causes harm to the employee. In such case, the employee is entitled to compensation by the employer in an amount equal to his or her average monthly salary for the prior twelve months times the number of years the employee has served the employer. An employer is also obligated to compensate an employee if the employer decides not to renew an existing employment contract, unless the employee refuses the employer’s offer to renew the expiring employment contract with the same or better terms. In addition, an employer is obligated to provide an open-ended employment contract after an employee has completed two consecutive terms of fixed-term employment, under which the employer will be liable to pay damages to an employee if the employer terminates the employment without cause, until the employee reaches an age at which he or she is eligible for pension payment. As a result of the implementation of the new Employment Contract Law and its implementation rules, we may have greater difficulty terminating under-performing employees and may incur higher levels of labor costs in order to comply with the provisions of the new law and its rules, which may adversely affect our business, financial condition and operating results.
Natural disasters and health hazards in China may severely disrupt our business and operations and may severely restrict the level of economic activities in affected areas which in turn may have a material adverse effect on our financial condition and results of operations.
In 2008, we experienced severe sleet and snowstorms in southern China and a devastating earthquake in Sichuan province. Those natural disasters resulted in significant and extensive damage to our base stations and network equipment. Moreover, certain countries and regions, including China, have encountered incidents of the H5N1 strain of bird flu, or avian flu, as well as severe acute respiratory syndrome, or SARS, over the past several years and, more recently in 2009, the outbreak of influenza A (H1N1). In 2010, another major earthquake registering 7.1 on the Richter scale struck Qinghai Province. We are also unable to predict the effect, if any, that any other future natural disasters and health hazards may have on our business. Any future natural disasters and health hazards may, among other things, significantly disrupt our ability to adequately staff our business, and may generally disrupt our operations. Furthermore, natural disasters and health hazards may severely restrict the level of economic activities in affected areas, which may in turn materially adversely affect our business and prospects. As a result, any natural disasters or health hazards in China may have a material adverse effect on our financial condition and results of operations.

 

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Risk Relating to our ADSs
Holders of our ADSs will not have the same voting rights as the holders of our shares and may not receive voting materials in time to be able to exercise their right to vote.
Except as described in this annual report and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares represented by our ADSs on an individual basis. Holders of our ADSs will receive proxy materials with respect to matters to be voted on at a meeting of shareholders through the depositary and may only exercise voting rights by appointing the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented by the ADSs. Consequently, if the materials to be forwarded to holders of ADSs by the depositary are delayed or if the depositary sets deadlines by which holders of ADSs must give their instructions regarding how to vote that fall too soon after mailing of the proxy materials, the holders of our ADSs may not receive voting materials in time to instruct the depositary to vote. Thus, it is possible that such holders, or persons who hold their ADSs through brokers, dealers or other third parties, may not have the opportunity to exercise a right to vote.
Item 4. Information on the Company
A. History and Development of the Company
We were incorporated under the laws of Hong Kong on February 8, 2000 under the Companies Ordinance as a company limited by shares under the name “China Unicom Limited.” In connection with the telecommunications industry restructuring initiated by the MIIT, the NDRC and the Ministry of Finance of the PRC in 2008 as discussed below, we merged with China Netcom and changed our name to “China Unicom (Hong Kong) Limited” with effect from October 15, 2008. Following our merger with China Netcom, we became an operator providing a full range of telecommunications services, including mobile and fixed-line services, in China.
Our registered office and principal executive offices are located at 75th Floor, The Center, 99 Queen’s Road Central, Hong Kong (telephone number: 852-2126-2018).
Restructurings of the Telecommunications Industry
Since 1993, the PRC Government has implemented a number of measures to restructure and introduce competition in the telecommunications industry. Prior to July 1994, China Telecom was the sole provider of telecommunications services in China. In July 1994, Unicom Group was established in accordance with the State Council’s approval to introduce orderly competition in the telecommunications industry. Since then, the PRC Government has approved Jitong Network Communications Company Limited, or Jitong, and China Netcom Corporation Ltd., or CNCL, to provide Internet protocol, or IP, telephony, Internet and data services. It has also approved China Tietong to provide most telecommunications services other than mobile services.
In 1999, the State Council approved a plan to restructure the former China Telecom along four business lines: fixed-line, mobile, paging and satellite communications. As a result of the restructuring, China Telecom retained the fixed-line, data and Internet businesses, while China Mobile assumed the mobile business previously operated by China Telecom. In 2002, the PRC Government further separated China Telecom into two companies, with the southern company retaining the name of China Telecom and assets and businesses in 21 provinces in southern China and the northern company retaining assets and businesses in 10 provinces in northern China and merging with CNCL and Jitong to form China Netcom. As a result of the PRC Government’s efforts to introduce competition in the telecommunications industry, there are currently more than one service providers in most of the sectors within the telecommunications industry.

 

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On May 24, 2008, the MIIT, the NDRC and the Ministry of Finance issued a joint announcement relating to the further reform of the PRC telecommunications industry. According to the joint announcement, the principal objectives of such further reform included, among others: (i) supporting the formation of three telecommunications services providers of comparable scale and standing, each with nationwide network resources, full-service capabilities and competitive strength, in order to help optimize the allocation of telecommunications resources and foster market competition; (ii) promoting homegrown innovation by telecommunications services providers; and (iii) enhancing the service capabilities and quality of, and the regulatory framework governing, the telecommunications industry. To achieve these objectives, the three ministries encouraged the following restructuring transactions: (a) the acquisition by China Telecom of the CDMA network (including both assets and subscriber base) then owned by Unicom Group along with us; (b) the merger between China Unicom and China Netcom; (c) the transfer of the basic telecommunications services business operated by China Satellite into China Telecom; and (d) the consolidation of China Tietong into China Mobile. The detailed implementation plans relating to these restructuring transactions were subsequently formulated by the relevant parties and, as a result, China Mobile, China Telecom and we became the current three major telecommunications operators in China, each providing a full range of telecommunications services nationwide.
Sale of CDMA Business, Merger with China Netcom and Related Transactions
Disposal of CDMA Business and Related Transactions
Pursuant to the 2008 telecommunications industry restructuring announcement, on June 2, 2008, we, CUCL and China Telecom entered into a CDMA business disposal framework agreement, under which CUCL agreed to sell, and China Telecom agreed to purchase, the CDMA business of CUCL, including (i) the entire CDMA business, which is owned and operated by CUCL, together with the assets of CUCL that are relevant to the CDMA operations and the rights and liabilities of CUCL relating to its CDMA subscribers; (ii) the entire equity interest in China Unicom (Macau) Company Limited, our wholly-owned subsidiary; and (iii) all of the 99.5% equity interest in Unicom Huasheng Telecommunications Technology Company Limited, a limited liability company incorporated under the laws of the PRC, held by CUCL.
On July 27, 2008, we, CUCL and China Telecom further entered into a CDMA business disposal agreement which set out the detailed terms and conditions of the CDMA business disposal. The consideration for the CDMA business disposal was RMB43.8 billion in cash, payable in three installments. While the consideration was subject to a price adjustment mechanism based on the CDMA service revenue generated by us for the six months ended June 30, 2007 and June 30, 2008, as agreed with China Telecom, there was no subsequent adjustment to the consideration as a result of the price adjustment mechanism.
On July 27, 2008, in connection with the CDMA business disposal, CUCL agreed (i) to waive its right to exercise its option to purchase the CDMA network from Unicom New Horizon Mobile Telecommunications Company Limited, or Unicom New Horizon, a wholly-owned subsidiary of Unicom Group, and (ii) to terminate the CDMA lease pursuant to which CUCL leased capacity on the CDMA network from Unicom New Horizon, in each case with effect upon the completion of the CDMA business disposal.
At our shareholders’ meeting held on September 16, 2008, our shareholders approved the CDMA business disposal and our independent shareholders approved the waiver by CUCL of the option to purchase the CDMA network and the termination of the CDMA lease. As all of the conditions of the CDMA business disposal as specified in the CDMA business disposal agreement had been satisfied or deemed to have been satisfied, the CDMA business disposal was completed on October 1, 2008. On that date, China Telecom became the legal owner of the CDMA business and all the rights, interests, obligations and liabilities in relation to the CDMA business have been borne by China Telecom with effect from October 1, 2008. We recognized in our statements of income for the year ended December 31, 2008 a gain on disposal of the CDMA business of approximately RMB26.1 billion, net of corresponding income tax of approximately RMB9.0 billion. For further details, see “Operating Results — Year Ended December 31, 2008 Compared to Year Ended December 31, 2007 — Income from Discontinued Operations” under Item 5.

 

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In connection with the CDMA business disposal, we had been notified by Unicom Group that on June 2, 2008 and July 27, 2008, Unicom Group, Unicom New Horizon and China Telecom entered into a CDMA network framework agreement and a CDMA network disposal agreement, respectively, which set out the terms and conditions, under which Unicom Group and Unicom New Horizon agreed to sell, and China Telecom agreed to purchase, the CDMA network at a consideration of RMB66.2 billion. The disposal of the CDMA network was completed concurrently with our CDMA business disposal, on October 1, 2008.
Merger with China Netcom and Related Transactions
Merger with China Netcom
On October 15, 2008, following the approval of the merger by our shareholders and the shareholders of China Netcom at shareholders meetings held on September 16, 2008 and September 17, 2008, respectively, and the satisfaction of all other conditions, the merger between China Unicom and China Netcom by way of a scheme of arrangement of China Netcom under Section 166 of the Hong Kong Companies Ordinance became effective. Upon the merger becoming effective, all ordinary shares of China Netcom outstanding at 5:00 p.m., Hong Kong time, on October 14, 2008 and all outstanding options to acquire China Netcom shares granted under the share option scheme of China Netcom were cancelled and new China Netcom shares were issued to us. As a result, China Netcom became our wholly-owned subsidiary and the listings of China Netcom’s ordinary shares and ADSs on the HKSE and the NYSE, respectively, were withdrawn.
In connection with our merger with China Netcom, each holder of China Netcom shares was entitled to receive 1.508 of our new ordinary shares for every cancelled China Netcom share and each holder of Netcom ADSs was entitled to receive 3.016 of our new ADSs for every cancelled China Netcom ADS. A total of 10,102,389,377 of our new ordinary shares (including ordinary shares underlying our newly issued ADSs) were issued to China Netcom’s shareholders as consideration for the cancellation of the China Netcom shares held by China Netcom shareholders.
Furthermore, we adopted a special purpose share option scheme, pursuant to which we have granted new Unicom options to the holders of China Netcom options in consideration for the cancellation of their outstanding Netcom options (whether vested or not). The number of Unicom options granted and the exercise price of such options were determined in accordance with a formula which ensures that the value of the Unicom options received by a holder of Netcom options is equivalent to the value determined by deducting the exercise price of the relevant Netcom option from the value of HK$27.87 per Netcom share. See “E. Share Ownership — Stock Incentive Schemes — Special Purpose Share Option Scheme” under Item 6 for further details.
As a result of our merger with China Netcom, we have become an operator providing a full range of telecommunications services, including mobile voice and value-added, fixed-line voice and value-added, fixed-line broadband, data communications and other telecommunications services, to our customers through our two business segments comprised of mobile services and fixed-line services. Following the merger, we have taken measures to combine the respective experience and technologies of Unicom and China Netcom and develop business strategies, taking into account current market developments, to promote business innovation and competitiveness and to improve operating and financial performance. By combining the resources and business strengths of Unicom and China Netcom in different areas, we seek to become a world-class provider of telecommunications services, in particular in fixed-line broadband communications and information services, establish competitive advantages in our technologies, products and services and provide professional and multi-tiered information services to satisfy the changing and diverse needs of the telecommunications market in the PRC.
Change of Company Name
Upon our merger with China Netcom becoming effective on October 15, 2008, our name changed from “China Unicom Limited” to “China Unicom (Hong Kong) Limited”. Our stock trading code on the HKSE and our ticker symbol on the NYSE remain unchanged.

 

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Related Transactions
As part of our integration with China Netcom, our wholly-owned subsidiary, CUCL, merged with China Netcom (Group) Company Limited, or CNC China, a wholly-owned subsidiary of China Netcom, in January 2009, and upon that merger becoming effective, CUCL assumed all the rights and obligations of CNC China, and all the assets, liabilities and business of CNC China were vested in CUCL. In addition, in January 2009, Unicom Group, our parent company, merged with and absorbed Netcom Group, the parent company of China Netcom. Upon completion of the merger between Unicom Group and Netcom Group, Unicom Group assumed all the rights and obligations of Netcom Group, and all the assets, liabilities and business of Netcom Group have vested in Unicom Group.
History and Corporate Development of China Netcom
China Netcom was incorporated in Hong Kong on October 22, 1999, under the Hong Kong Companies Ordinance as a company limited by shares under the name Target Strong Limited. The company changed its name to China Netcom (Hong Kong) Corporation Limited on December 9, 1999, to China Netcom Corporation (Hong Kong) Limited on August 4, 2000, and to China Netcom Group Corporation (Hong Kong) Limited on July 23, 2004 (the last name change in anticipation of its IPO in 2004).
China Netcom’s principal operating subsidiary, CNC China, which merged with, and was absorbed by, CUCL in January 2009, was incorporated as a PRC limited liability company in August 1999 by its four founders and shareholders, the Academy of Sciences, INC-SARFT, CRTC and Shanghai Alliance, as a facilities-based telecommunications operator in China. China Netcom was established in October 1999 to facilitate investments by foreign investors, including CNC Fund, L.P., in CNC China. Shortly thereafter, the four founders, using their respective equity interests in CNC China as capital contributions, established China Netcom (Holdings) Company Limited, or China Netcom Holdings, which in turn contributed its entire interests in CNC China through CNC BVI to China Netcom. China Netcom, through China Netcom Corporation International Limited, established Asia Netcom in 2002. Asia Netcom remained inactive until it acquired substantially all the assets, including cash, and most of the subsidiaries, of the former Asia Global Crossing Ltd. by the end of 2003.
China Netcom successfully completed its IPO in November 2004 with the listing of its ordinary shares on the HKSE and ADSs, each representing 20 of its ordinary shares, on the NYSE.
In October 2005, China Netcom acquired from CNC BVI the entire equity interests of China Netcom Group New Horizon Communications Corporation (BVI) Limited, or CNC New Horizon BVI, which merged into CNC China in November 2006. As a result of the merger, China Netcom acquired the fixed-line telecommunications assets and related liabilities in Heilongjiang Province, Jilin Province, the Inner Mongolia Autonomous Region and Shanxi Province. In August 2006, China Netcom sold the entire equity interest in Asia Netcom, which then provided international telecommunications services in the Asia-Pacific region, to Connect Holdings Limited. In February 2007, China Netcom sold its telecommunications assets, liabilities and business operations in Guangdong Province and Shanghai Municipality to Netcom Group. In December 2007, China Netcom’s wholly-owned subsidiary, China Netcom Group System Integration Limited Corporation, or China Netcom System Integration, acquired the entire equity interest in Design Institute from China Netcom Group Beijing Communications Corporation, a wholly-owned subsidiary of Netcom Group, in order to develop two of its key information and communication technologies, or ICT, services.
Our Parent Company and Our Initial Public Offering
Our ultimate controlling shareholder is Unicom Group, a company incorporated under the laws of the PRC and majority-owned by the PRC Government. Unicom Group was established in accordance with the State Council’s approval to introduce orderly competition in the telecommunications industry in 1994.
Unicom Group transferred certain of its telecommunications assets, rights and liabilities to CUCL (which became our wholly-owned subsidiary in China) in April 2000 in preparation for our IPO. In June 2000, we successfully completed our IPO. Our ordinary shares are listed on the HKSE and our ADSs, each representing ten of our ordinary shares, are listed on the NYSE.

 

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Unicom Acquisitions and Sales
In December 2002 and December 2003, respectively, we completed our acquisitions from Unicom Group of 100% of the equity interests in Unicom New Century and Unicom New World, both of which held mobile telecommunications operations (including GSM assets and business and CDMA business) in various provinces and autonomous regions in the PRC. Subsequent to the completion of those acquisitions, Unicom New Century and Unicom New World merged into CUCL in July 2004 and September 2005, respectively.
In March 2003, we completed the sale to Unicom Group of the entire equity interest of Guoxin Paging Corporation Ltd., which at the time of transfer was engaged in paging business.
In September 2004, we acquired from Unicom Group of 100% of the equity interest in China Unicom International Limited, or Unicom International, a limited liability company established in Hong Kong and engaged in voice wholesale business, telephone cards business, line leasing services, managed bandwidth services and mobile virtual network services. In September 2009, the name of China Unicom International Limited was changed to China Unicom (Hong Kong) Operations Limited. Unicom International’s wholly-owned U.S. subsidiary, China Unicom USA Corporation, is engaged in the wholesale business of voice traffic between the United States and PRC. In August 2009, the name of China Unicom USA Corporation changed into China Unicom (Americas) Operations Limited upon the completion of its merger with China Netcom (USA) Operations Limited, a subsidiary of China Netcom.
In October 2004, we established China Unicom (Macau) Company Limited, or Unicom Macau, in Macau, which then provided CDMA mobile services to local CDMA users in Macau. In connection with the disposal of our CDMA business in October 2008, we sold the entire equity interest in Unicom Macau to China Telecom along with our other CDMA business and certain related assets.
In July 2005, CUCL and Unicom Xingye Science and Technology Trade Co., Ltd., or Unicom Xingye, a subsidiary of Unicom Group, incorporated Unicom Huasheng. Unicom Huasheng was principally engaged in the sales of CDMA handsets and telecommunications equipment and the provision of technical services for us. In connection with the disposal of our CDMA business in October 2008, CUCL sold all of the 99.5% equity interest it held in Unicom Huasheng to China Telecom.
In December 2007, we completed the acquisition from Unicom Group of the mobile telecommunications operations (including GSM assets and business and CDMA business) of its Guizhou Province branch. As a result of the acquisitions of Unicom New Century, Unicom New World and Unicom Guizhou, we extended our GSM and CDMA mobile businesses to all provinces, autonomous regions and municipalities across China.
On August 19, 2008, CUCL established a wholly-owned subsidiary, Unicom Huakai Telecommunications Company Limited, or Unicom Huakai, as a limited liability company under the laws of the PRC. Unicom Huakai is principally engaged in the sales of handsets and telecommunications equipment and the provision of technical services. The paid-in capital of Unicom Huakai is RMB500 million. On December 26, 2008, the name of Unicom Huakai was changed to Unicom Vsens Telecommunications Company Limited.

 

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Acquisitions of Fixed-Line Business in 21 Provinces in Southern China and Other Assets from Parent Companies and Lease of Telecommunications Networks in 21 Provinces in Southern China
Following the approval by our independent shareholders and the shareholders of the A Share Company and upon the satisfaction of all other conditions, in January 2009, we completed our acquisitions, through CUCL, of certain telecommunications business and assets from Unicom Group and Netcom Group (which merged with, and was absorbed by, Unicom Group in January 2009), including:
   
the fixed-line business across 21 provinces in southern China operated by Unicom Group and Netcom Group and/or their respective subsidiaries and branches (but not the underlying fixed assets) and the local access telephone business in Tianjin Municipality operated by Unicom Group and related fixed assets (other than land and buildings) necessary for the operation of such local access telephone business and/or respective subsidiaries and branches;
   
the backbone transmission assets in 10 provinces in northern China owned by Netcom Group and/or its subsidiaries;
   
100% of the equity interest in Unicom Xingye, a limited liability company incorporated under the laws of the PRC and a wholly-owned subsidiary of Unicom Group;
   
100% of the equity interest in China Information Technology Designing & Consulting Institute Company Limited, or CITC, a limited liability company incorporated under the laws of the PRC and a wholly-owned subsidiary of Unicom Group; and
   
100% of the equity interest in New Guoxin Telecom Corporation of China Unicom, or New Guoxin, a limited liability company incorporated under the laws of the PRC and a wholly-owned subsidiary of Unicom Group.
The total consideration for the above acquisitions is approximately RMB4.43 billion, payable in cash. Following the completion of these acquisitions, the coverage of our fixed-line services expanded to all 31 provinces, autonomous regions and municipalities across China. We believe that these acquisitions will help integrate and optimize our business and resources and enhance our overall competitive position.
In addition, in order to operate the fixed-line business in the 21 provinces in southern China, on December 16, 2008, CUCL entered into a network lease agreement, or the initial lease, with Unicom Group, Netcom Group and Unicom New Horizon, a wholly-owned subsidiary of Unicom Group, to lease on an exclusive basis the telecommunications networks in those provinces, which are held by Unicom New Horizon and are necessary for the operation of the fixed-line business in southern China. The initial lease became effective in January 2009 upon the completion of our acquisitions of the fixed-line business in southern China and was for an initial term of two years effective from January 2009. On October 29, 2010, CUCL entered into a network leasing agreement or, the 2011-2012 Network Lease Agreement, with Unicom New Horizon, which became effective on January 1, 2011. The 2011-2012 Network Lease Agreement is for an initial term of two years effective from January 1, 2011 and is renewable at the option of CUCL with at least two months’ prior notice on the same terms and conditions, except for the future lease fee which will remain subject to further negotiations between the parties. The annual lease fee payable by CUCL under the initial lease for the years ending December 31, 2009 and 2010 was RMB2.0 billion and RMB2.2 billion, respectively, and the annual lease fee payable by CUCL under the 2011-2012 Network Lease Agreement for the years ending December 31, 2011 and 2012 is RMB2.4 billion and RMB2.6 billion, respectively. In connection with the 2011-2012 Network Lease Agreement, Unicom New Horizon also granted CUCL an option, but not an obligation, to purchase the telecommunications networks leased in southern China. The purchase option may be exercised, at the discretion of CUCL, at any time during the term of the lease. No premium has been paid or will be payable by CUCL for such purchase option. In the event that CUCL elects to exercise this purchase option, the parties will discuss and negotiate the purchase price with reference to the appraised value of the telecommunications networks in southern China, which is to be determined in accordance with applicable laws of Hong Kong and the PRC, after taking into account the prevailing market conditions and other factors. Under the 2011-2012 Network Lease Agreement, CUCL is responsible for the ongoing cost and expenses incurred in respect of the maintenance and management which may arise from the use of the leased telecommunications networks in southern China. See “B. Related Party Transactions — Acquisitions of Fixed-Line Business in 21 Provinces in Southern China and Other Assets from Parent Companies and Lease of Telecommunications Networks in 21 Provinces in Southern China” under Item 7.

 

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Mutual Investment with Telefónica, S.A.
On September 6, 2009, we entered into a share subscription agreement with Telefónica, S.A., or Telefónica, one of our shareholders, to strengthen our cooperation. Pursuant to this agreement, we and Telefónica agreed to make a mutual investment in the amount of the equivalent of US$1 billion in each other through acquisitions of shares in the other party. On October 21, 2009, we and Telefónica completed such mutual investments which were implemented by way of the subscription by Telefónica of 693,912,264 new ordinary shares in the capital of our company at a price of HK$11.17 each and the contribution by Telefónica of 40,730,735 treasury shares in the capital of Telefónica at a price of Euro17.24 each to us. In addition, on September 6, 2009, we entered into a strategic alliance agreement with Telefónica, pursuant to which Telefónica and we agreed to establish a strategic alliance to strengthen the business of each party by cooperation based on our respective networks, business model and experience.
On January 23, 2011, we entered into the Agreement to Enhance the Strategic Alliance with Telefónica. Pursuant to this agreement, we acquired from Telefónica 21,827,499 ordinary shares of Euro1.00 each in the capital of Telefónica for an aggregate purchase price of Euro374,559,882.84 on January 25, 2011, and Telefónica agreed to purchase ordinary shares of HK$0.10 each in the capital of our company for the aggregate consideration of US$500,000,000 through acquisitions from third parties within nine months after the date of the signing of this agreement. Pursuant to the agreement, Chang Xiaobing, our Chairman and Chief Executive Officer, as our designated representative, was appointed in May 2011 as a director on the board of directors of Telefónica.
Share Repurchase from SK Telecom
On September 25, 2009, we received a conditional irrevocable offer from SK Telecom Co., Ltd. for sale, and we repurchased from SK Telecom by way of an off-market share repurchase of 899,745,075 shares, which comprised all of our shares previously owned by SK Telecom. The consideration for this share repurchase was approximately HK$9.99 billion, HK$11.105 for each share repurchased, and was paid in cash. The share repurchase was completed on November 5, 2009 and the 899,745,075 repurchased shares were subsequently cancelled by our company.
Our Relationship with Unicom Group
Unicom Group holds the licenses required for our telecommunications businesses and we derive our rights to operate our businesses from our status as a subsidiary of Unicom Group. Unicom Group undertook to hold and maintain all licenses received from the MIIT in connection with our businesses solely for our benefit during the term of such licenses and at no cost to us. In addition, Unicom Group undertook to take all actions necessary to obtain and maintain for our benefit such governmental licenses or approvals as we shall require to continue to operate our businesses. Unicom Group also agreed not to engage in any business which competes with our businesses other than the then-existing competing businesses of Unicom Group and to grant us a right of first refusal in relation to any government authorization, license or permit, or other business opportunity to develop any new telecommunications technology, product or service. Finally, Unicom Group also gave us an undertaking not to seek an overseas listing for any of its businesses or the businesses of its subsidiaries in which we are engaged or may engage in the future, except through us.
In connection with the restructuring of Unicom Group and the acquisitions of Unicom New Century, Unicom New World and Unicom International, we entered into a number of agreements with Unicom Group pursuant to the two-step process described in “A. Development and History of the Company — Two-Step Voting Arrangements” below. These include arrangements for interconnection services between the telecommunications networks owned by us and Unicom Group and for the provision or sharing of telecommunications and ancillary services and facilities between us and Unicom Group. Unicom Group also retains its interests in its other subsidiaries that provide ancillary services to us, including the procurement of telecommunications equipment and the supply of SIM cards and calling cards. Our existing agreements with Unicom Group were entered into in August 2008. In addition, in connection with our merger with China Netcom, CUCL and Netcom Group entered into various framework agreements in August 2008 to record the principles governing, and the principal terms of, various arrangements including interconnection services and the provision and sharing of telecommunications and ancillary services and facilities between us and Netcom Group (whose rights and obligations under such framework agreements have been assumed by Unicom Group, which merged with, and absorbed, Netcom Group in January 2009). Furthermore, as a result of the merger between Unicom Group and Netcom Group, Unicom Group assumed all rights and obligations under certain existing agreements entered into between CNC China (which merged with, and was absorbed by, CUCL in January 2009) and Netcom Group relating to various arrangements, including interconnection services, settlements and the provisions and sharing of telecommunications and ancillary services and facilities between CNC China and Netcom Group. See “B. Related Party Transactions” under Item 7 for a detailed description of our agreements with Unicom Group.

 

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Set forth below is our shareholding structure and significant subsidiaries as of April 30, 2011.
(MAP)
Two-Step Voting Arrangements
As a result of a series of internal restructurings of Unicom Group’s shareholding in us following our IPO, Unicom BVI became our direct controlling shareholder, which in turn is directly controlled by the A Share Company and indirectly controlled by the Unicom Group. The A Share Company’s business is limited to indirectly holding the equity interest in Unicom without any other direct business operations. The A Share Company was listed on the Shanghai Stock Exchange in 2002. In order to allow public shareholders of the A Share Company to indirectly participate in our shareholders’ meeting, a voting mechanism was designed in accordance with the articles of association of Unicom BVI and the A Share Company. Under this voting mechanism, before Unicom BVI votes on certain proposals at our shareholders’ meeting, the A Share Company must first convene a shareholders’ meeting to consider the same proposals in order to direct Unicom BVI to vote the shares in our company indirectly held by the A Share Company through Unicom BVI. Unicom Group can similarly direct the voting in respect of its direct equity interest in Unicom BVI.

 

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The voting mechanism described above, however, will not apply to the approval process for any related party transaction between us or our subsidiaries and Unicom Group or its subsidiaries, on which Unicom BVI will not be permitted to vote under the Rules Governing the Listing of Securities on HKSE, or the HKSE Listing Rules. Those related party transactions would require the separate approvals of the public shareholders of each of our company and the A Share Company. We and the A Share Company therefore created the two-step voting arrangements, pursuant to which each related party transaction between us or our subsidiaries and Unicom Group or its subsidiaries will consist of an initial agreement and a further agreement. The initial agreement would be entered into by Unicom Group or its subsidiaries (excluding the A Share Company and its subsidiaries) on the one hand and the A Share Company or Unicom BVI on the other hand. The initial agreement would contain the following terms:
   
the closing of the initial agreement would be subject to (i) the successful transfer of all rights and obligations of the A Share Company or Unicom BVI under the initial agreement to us or our subsidiaries, and (ii) the approval of the further agreement by our independent shareholders; and
   
Unicom Group or its subsidiaries (excluding the A Share Company and its subsidiaries) would agree and acknowledge that all rights and obligations under the initial agreement can be transferred to us or our subsidiaries without any further consent requirements.
The initial agreement will constitute a related party transaction of the A Share Company and, if certain thresholds are met, will require the approval of the public or independent shareholders of the A Share Company under the rules of the Shanghai Stock Exchange. The further agreement would be entered into by the A Share Company or Unicom BVI, on the one hand, and us or our subsidiaries, on the other hand, and will provide for the transfer of all rights and obligations of the A Share Company or Unicom BVI under the initial agreement to us or our subsidiaries. The further agreement will constitute a related party transaction of our company and, if certain thresholds are met, will require the approval of our public or independent shareholders under the HKSE Listing Rules. We expect, to the extent the nature of a particular related party transaction allows, the two-step voting arrangements to apply as described above. However, when we or our subsidiaries are the providers, rather than recipients, of certain services, the two-step voting arrangements will need to be adjusted so that the process as described above is effectively reversed, such that the initial agreement is entered into by us or our subsidiaries rather than Unicom Group or its subsidiaries (excluding the A Share Company and its subsidiaries) with the A Share Company or Unicom BVI. Accordingly, Unicom Group or its subsidiaries (excluding the A Share Company and its subsidiaries), rather than us or our subsidiaries, will be a party to the further agreement. The arrangements (including the conditions) will apply correspondingly. This two-step structure will be applied in all related party transactions between us or our subsidiaries and Unicom Group or its subsidiaries and will effectively require the separate approvals of the public or independent shareholders of each of Unicom and the A Share Company for such related party transactions.
Capital Expenditures and Divestitures
See “Liquidity and Capital Resources — Capital Expenditures” under Item 5 for information concerning our principal capital expenditures for the previous two years and those planned for 2010. We currently do not have any significant divestiture in progress.

 

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B. Business Overview
General
We are an integrated telecommunications operator in China providing mobile voice and value-added, fixed-line voice and value-added, fixed-line broadband, data communications and other telecommunications services to our customers through our two business segments comprised of mobile services and fixed-line services. Following our acquisition of fixed-line business in 21 provinces in southern China from our parent companies in January 2009, we have extended the coverage of all of our services nationwide. We, China Mobile and China Telecom are the three major telecommunications operators in China. See “—A. History and Development of the Company — Restructurings of the Telecommunications Industry.”
In 2010, driven by the growth in our 3G business, which was launched in May 2009 and put into commercial operations in October 2009, we generated 50.9% of the total telecommunications service revenue from the mobile business, which for the first time exceeded that from the fixed-line business. Our fixed-line business remained stable.
Mobile Business
Our mobile business consists of GSM and 3G mobile business. Our mobile business revenue, subscribers and usage maintained growth in 2010, with those for 3G mobile business growing at a more rapid pace. As of December 31, 2010, we had a total of 167.43 million mobile subscribers, representing a 13.4% increase from 147.59 million as of December 31, 2009. Revenue from our mobile business was RMB89.55 billion in 2010, of which, telecommunications service revenue of our mobile business increased by 18.0% from RMB69.77 billion in 2009 to RMB82.36 billion in 2010, accounted for 46.8% and 50.9% of our total telecommunications service revenue from continuing operations in 2009 and 2010, respectively (excluding fixed-line upfront connection fees of RMB0.49 billion and RMB0.19 billion in 2009 and 2010, respectively).
The following table sets forth selected historical information for our mobile operations and our subscriber base for the periods indicated.
                         
    As of or for  
    the year ended December 31,  
    2008     2009 (1)     2010 (1)  
Number of subscribers (in thousands)
    133,365       147,587       167,426  
Estimated market share in our service areas (2)
    20.8 %     19.7 %     19.5 %
Average minutes of usage per subscriber per month (MOU) (3)
    246.4       253.1       280.5  
Average revenue per subscriber per month (ARPU) (in RMB) (4)
    42.3       41.6       43.7  
 
     
(1)  
Including our 3G business which we launched on a trial basis in May 2009 and began operating on a commercial basis in October 2009.
 
(2)  
Market share in a given area is determined by dividing the number of our mobile subscribers in the area by the total number of mobile subscribers in the area. Source : MIIT.
 
(3)  
MOU is calculated by dividing the total minutes of usage during the period by the average number of our mobile business subscribers during the period, and dividing the result by the number of months in the relevant period.
 
(4)  
ARPU is calculated by dividing the sum of revenue of mobile business during the relevant period by the average number of our mobile business subscribers during the period, and dividing the result by the number of months in the period.
Our total number of mobile subscribers increased by 13.4% from 147.59 million as of December 31, 2009 to 167.43 million as of December 31, 2010, which was mainly due to the increase in our GSM and 3G subscribers. The MOU of our mobile business increased from 253.1 minutes in 2009 to 280.5 minutes in 2010, which was mainly because (i) the MOU of our 3G business is significantly higher than that of our GSM business and (ii) the number of our 3G subscribers has increased as a percentage of the total number of our mobile subscribers. The ARPU of our mobile business increased by 5.0% from RMB41.6 in 2009 to RMB43.7 in 2010, which was mainly due to the change of revenue mix between our GSM business and 3G business. 3G business has a significantly higher ARPU than GSM business. Therefore, despite the ARPU of each of our GSM and 3G businesses decreased in 2010 compared to 2009, as the revenue from 3G business increased significantly as a percentage of telecommunications service revenue from the mobile business from 1.1% in 2009 to 14.1% in 2010, the overall ARPU of our mobile business increased.

 

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3G Mobile Business
In January 2009, our parent company, Unicom Group, received a 3G license to operate a 3G business based on the WCDMA technology nationwide in China and, with the approval of the MIIT, authorized our major wholly-owned subsidiary, CUCL, to operate this business. We launched our 3G operations on a trial basis in 55 cities in China under the brand “WO” in May 2009 and began commercial 3G operations in 285 cities in China on October 1, 2009. Our 3G network coverage has reached cities at county level and above throughout China as well as villages and towns in eastern developed areas of China.
In 2010, we continued to implement our unified strategies for 3G business with respect to brand, service, tariff, packaging, handset policies and customer care standards throughout China. In order to meet the changing market demand and customer needs, we initiated active sales and marketing efforts, including introducing more types of 3G tariff plans, enhancing 3G handsets subsidy models and launching a more variety of 3G handsets models. In addition, we further developed mobile Internet and mobile applications businesses for 3G business. Furthermore, we launched “WO” store, an online applications store that enriches customers’ 3G experience. We also promoted mobile music, mobile TV, mobile reading and other resource-based businesses, as well as instant communication and other interactive social communication businesses, so as to cultivate customers’ data consumption habits.
The total number of our 3G subscribers increased from 2.74 million as of December 31, 2009 to 14.06 million as of December 31, 2010. As of December 31, 2010, we had 1.35 million wireless data card subscribers, 2.41 million mobile TV subscribers and over 7 million mobile reading subscribers. In 2010, the ARPU of 3G subscribers decreased from RMB141.7 in 2009 to RMB124.0 in 2010. In 2010, the total 3G voice usage was 55.47 billion minutes and the average data usage per subscriber per month was 178M.
GSM Mobile Business
Our GSM mobile business primarily consists of GSM voice business and value-added business.
GSM Voice Business
Our mobile voice business enables our subscribers to make and receive phone calls with a mobile handset at any point within the coverage area of our mobile telecommunications networks. Our mobile voice business includes local calls, domestic long distance calls, international long distance calls, intra-provincial roaming, inter-provincial roaming and international roaming.
Subscriber Increase. Our total number of GSM mobile subscribers increased by 5.9% from 144.85 million as of December 31, 2009 to 153.37 million as of December 31, 2010. We believe that this growth was attributable to a number of factors, including, among others, (i) the continued growth of the Chinese mobile telecommunications market, driven by domestic economic growth and reduction in the cost of mobile handsets and services, and (ii) our sales and marketing efforts in retaining existing subscribers and expanding our subscriber base, including through service bundling. The increase of our GSM mobile subscribers, together with the decreasing effective tariffs, also resulted in an increase of the total voice usage of our GSM mobile services by 11.3% from 423.05 billion minutes in 2009 to 471.00 billion minutes in 2010.
MOU and ARPU . With respect to our GSM mobile business, MOU increased by 4.3% from 252.0 minutes in 2009 to 262.9 minutes in 2010, and ARPU decreased by 4.1% from RMB41.2 in 2009 to RMB39.5 in 2010. The increase in our MOU is mainly attributed to the decreasing effective tariffs. The decrease in ARPU was primarily attributable to (i) our generally decreased effective tariffs, which were caused by the further intensified competition among the telecommunications operators in China and downward adjustments on tariffs by the PRC Government and (ii) the fact that a significant portion of our new users consists of users from rural areas, many of whom tend to have less usage of telecommunications services and to be more cost-sensitive than users from urban areas.

 

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GSM Value-Added Services
We offer a broad range of GSM value-added services nationwide, including SMS, “Cool Ringtone” (a personalized ring-back tone service), mobile Internet and other wireless information services. Our value-added services continued to grow and the contribution to our revenue from mobile services continued to increase in 2010. In particular, a total of 78.31 billion SMSs were transmitted by our GSM mobile subscribers in 2010, representing an increase of 2.4% compared to 2009. As of December 31, 2010, we had a total number of 67.26 million subscribers to our Cool Ringtone service, representing a net increase of 18.04 million, and the penetration rate increased from 34.0% at the end of 2009 to 43.9% at the end of 2010. In addition, as of December 31, 2010, we had a total number of 55.81 million mobile Internet subscribers, representing a net increase of 11.02 million from the end of 2009, up by 24.6% from 2009, and the penetration rate increased from 30.9% at the end of 2009 to 36.4% at the end of 2010.
Fixed-Line Business
We are a leading fixed-line broadband and communications operator in northern China. Following our merger with China Netcom in October 2008, which previously provided mainly fixed-line services in 10 provinces in northern China, and our acquisition of the fixed-line business in 21 provinces in southern China from our parent companies in January 2009, we offer a wide range of fixed-line services nationwide in China, including (i) fixed-line broadband services and data communications services, (ii) fixed-line voice services, include local and long distance fixed-line voice services and value-added services and (iii) other services.
In 2010, with the continuation of the mobile services substitution of fixed-line voice services, our fixed-line voice business has been negatively impacted. By accelerating our implementation of an upgrade of our fixed-line broadband network with increased access speed, developing content and application services, we achieved continued growth in 2010 in fixed-line broadband and data communications business, which partially mitigated the decline in the fixed-line voice business. Excluding fixed-line upfront connection fees of RMB0.19 billion and RMB0.49 billion in 2010 and 2009, respectively, our revenue from fixed-line business was RMB79.86 billion in 2010, of which telecommunications service revenue from our fixed-line business decreased by 0.4% from RMB79.06 billion in 2009 to RMB78.70 billion in 2010, accounted for 53.0% and 48.6% of our total telecommunications service revenue from continuing operations in 2009 and 2010, respectively.
Fixed-Line Broadband Services and Data Communications Services
Fixed-Line Broadband Services
Fixed-line broadband services are one of our emphases as part of our strategy to focus on high growth services. The growth in fixed-line broadband business has been driven by the increasing affordability and rising use of personal computers and other Internet access devices, gradual recognition by businesses of the importance of information and the proliferation of content and applications, such as online games and video-on-demand. We are a leading provider of fixed-line broadband services in our fixed-line northern service region and we seek to maintain this leading position by capitalizing on our extensive fixed-line network, large customer base, experienced sales force, established brand and strategy of multi-service bundling.
In 2010, we further upgraded our broadband network and improved access speed. As of December 31, 2010, our fixed-line broadband subscribers increased by 22.5% to 47.22 million, of which, subscribers with 2M-and-above bandwidth accounted for 86.8% of all fixed-line broadband subscribers, representing an increase of 3.6 percentage points from the end of 2009, and subscribers with 4M-and-above bandwidth accounted for 29.6% of all fixed-line broadband subscribers. We also continued implementing our marketing strategy to offer integrated broadband content, applications, access and services. The total number of our subscribers of broadband content and applications reached 18.61 million, accounting for 39.4% of all fixed-line broadband subscribers. Our broadband ARPU remained relatively stable at RMB57.1 in 2010 compared to RMB57.2 in 2009.

 

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The following table sets forth the information of our fixed-line broadband subscribers as of the dates indicated:
                         
    As of December 31,  
    2008     2009     2010  
 
Number of fixed-line broadband subscribers (in thousands)
    30,081       38,550       47,224  
 
                 
Data Communications Services
We are a leading provider of data communications services in our fixed-line northern service region. We offer managed data products, such as those based on digital data networks, or DDN, frame relay, asynchronous transfer mode, or ATM, and Internet protocol-virtual private network, or IP-VPN. We also offer leased line products, including domestic and international leased circuits. Our customers for these services include government entities, large financial institutions and other domestic and multinational businesses, Internet service providers and other telecommunications operators. As of the end of 2010, we have established business cooperation relationships with more than 160 overseas operators to provide various international data communications products and services, such as international voice and data services. In 2010, we continued to offer full-scale data communications services to international operators and domestic and international corporate customers. We have also improved our capabilities to offer cross-border data communications and integrated information services.
Fixed-Line Voice Business
Our fixed-line voice services consist of local voice, domestic long distance, international long distance, value-added, interconnection and PHS services. As domestic mobile operators launched service packages at competitive prices, mobile roaming tariffs were lowered, the migration of voice usage from fixed-line to mobile continued. In 2010, leveraging on our company’s full-service advantage, we enhanced market development in areas of customer premises network, or CPN, and rural markets, as well as strengthened the marketing of integrated services. The number of our fixed-line subscribers (including PHS subscribers) decreased by 6.0% to 96.64 million at the end of 2010. The following table sets forth the information of our fixed-line subscribers as of the dates indicated:
                         
    As of December 31,  
    2008     2009     2010  
    (in thousands)  
Number of fixed-line subscribers (1)
                       
Residential Residential
    63,824       61,733       59,681  
Business
    13,586       14,238       15,494  
PHS
    23,979       18,742       13,423  
Public telephones
    8,181       8,109       8,037  
 
                 
Total
    109,570       102,822       96,635  
 
                 
 
     
(1)  
Fixed-line subscribers consist of all local access lines in service as well as PHS subscribers. We calculate PHS subscribers based on the number of active telephone numbers for our PHS services. In cases where a PHS subscriber uses the same telephone number as an access line in service, the designation as a PHS subscriber or access line in service depends on which service is first activated. We increase our total number of fixed-line subscribers as soon as practicable after activation of the service. We remove a fixed-line subscriber from the total number of fixed-line subscribers as soon as practicable after the fixed-line subscriber deactivates the service voluntarily or three months after the date on which the fixed-line subscriber’s bill becomes overdue.
We have in the past selectively built wireless local access networks based on PHS technology to offer PHS services as a supplement to our fixed-line services. Although PHS services were once popular among subscribers due to its tariff advantage, beginning in 2006, such advantage diminished as mobile operators continued to launch attractive tariff packages. As a result, our PHS subscribers significantly decreased over the past few years. In addition, a policy was issued by the PRC Government in January, 2009, requiring the current wireless access systems operating on the spectrum used by PHS services to be cleared and removed from such spectrum within three years. See “D. Risk Factors — Risks Relating to Our Businesses — If we fail to achieve a smooth discontinuation of PHS services or retain our PHS subscribers to use our other telecommunications services, our financial condition and results of operations may be adversely affected. “ under Item 3.

 

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Local Voice Services
As a result of mobile substitution, our fixed-line local voice traffic has continued to decrease in recent years. As fixed-line broadband business further develops, our Internet dial-up usage has also continued to decrease. The following table sets forth information regarding usage of our local voice services for the periods indicated:
                         
    For the Year Ended December 31,  
    2008     2009     2010  
Usage of local calls (pulse in millions) (1)
                       
Total usage
    206,632       188,116       156,724  
Internet dial-up usage
    2,960       2,577       1,162  
Total usage excluding Internet dial-up usage
    203,672       185,539       155,562  
 
     
(1)  
Pulses are the billing units for calculating local telephone usage fees.
Long Distance Voice Services
We offer traditional long distance services and VoIP long distance services. In recent years, due to the general decline of our fixed-line business and competition from software applications that allow users to make long distance calls over the Internet, our long distance business has been adversely affected.
The following table shows the total minutes of domestic long distance calls carried through our long distance networks for the periods indicated:
                         
    For the Year Ended December 31,  
    2008     2009     2010  
Total minutes of domestic long distance calls (minutes in millions) (1)
                       
Traditional
    25,771       21,261       17,349  
VoIP
    14,643       11,698       8,879  
 
                 
Total
    40,414       32,959       26,228  
 
     
(1)  
Includes calls originated by prepaid phone cards users and VoIP subscribers that are carried over our long distance networks.
The following table sets forth certain information related to the usage of our international long distance services for the periods indicated:
                         
    For the Year Ended December 31,  
    2008     2009     2010  
International long distance outbound call minutes (minutes in millions) (1)(2)
                       
Traditional
    236       221       269  
VoIP
    456       403       290  
 
                 
Total
    692       624       559  
 
     
(1)  
Includes calls originated by prepaid phone cards users and VoIP subscribers that are carried over our international long distance networks.
 
(2)  
Includes long distance outbound calls made to Hong Kong, Macau and Taiwan.

 

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Fixed-Line Value-Added Services
In addition to fixed-line telephone voice services, we offer a wide range of value-added services on our fixed-line networks. Our value-added services generate additional usage on our networks and increase our average revenue per fixed-line subscriber. Our major fixed-line value-added services include “Personalized Ring” and caller identification services. “Personalized Ring” services enable our fixed-line subscribers to personalize the ring-back tone for incoming calls. As the number of our fixed-line subscribers continued to decrease in the past few years, the number of customers using our fixed-line value added services also decreased correspondingly. As of December 31, 2010, the number of our “Personalized Ring” subscribers reached 23.79 million, representing a decrease of approximately 10.7% from the end of 2009. The penetration rate of caller identification services amounted to 70.1%, decreasing by 1.3 percentage point over that of 2009.
Interconnection and Roaming Arrangements
Interconnection
Interconnection refers to the arrangements that permit the connection of our telecommunications networks with other networks. Our mobile and fixed-line networks interconnect with Unicom Group’s networks. Under current arrangements, settlement between Unicom Group and us is based on an internal settlement standard that takes into account either the internal costs of the relevant networks or the government standard applicable between third-party operators, whichever is the more favorable to us.
We earn interconnection fees for terminating or transiting calls that originate from other domestic telecommunications operators’ networks and pay interconnection fees to other operators for calls originating from our networks that are terminated on their networks. We earn and pay such fees in respect of mobile calls, local and domestic and international long distance calls and Internet services, except for the interconnection by fixed-line subscribers calling our mobile subscribers in the same region where no interconnection fee will be charged. We are required to pay the interconnection fees regardless of our ability or inability to collect the tariff from our subscribers. Interconnection charges are accrued on a monthly basis based on the actual call volume and applicable tariff rates.
All interconnection and settlement arrangements among domestic telecommunications operators in China are governed by the Telecommunications Regulations and the rules on interconnection arrangements and settlement promulgated by the MIIT. Most of the agreements pursuant to which we interconnect with other domestic operators were entered into by Unicom Group. We have entered into an agreement with Unicom Group pursuant to which we have agreed with Unicom Group that the costs and benefits arising under these agreements, as they relate to our operations, will be incurred to our account.
For additional information about our domestic and international interconnection arrangements, see “B. Business Overview — Regulatory and Related Matters” under Item 4 and “B. Related Party Transactions” under Item 7.
Roaming
We provide roaming services, which allow our subscribers to access our mobile services while they are physically outside of their registered service area or in the coverage areas of other mobile networks in other countries and regions with which we have roaming arrangements. As of April 30, 2011, we had roaming arrangements for (i) GSM international voice and SMS services with 242 operators in 521 countries and regions, (ii) GPRS international inbound data services with 179 operators in 400 countries and regions and for international GPRS outbound data services with 164 operators in 357 countries and regions, and (iii) 3G services with 104 WCDMA operators in 245 countries and regions.

 

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A mobile subscriber using roaming services is charged at our roaming usage rate for both incoming and outgoing calls, plus applicable long distance tariffs. With respect to international roaming, we settle roaming charges with international operators in accordance with roaming agreements between Unicom Group and each of the international operators. See “B. Related Party Transactions — Our Roaming Arrangements” under Item 7 for further information regarding prior roaming arrangements between Unicom Group and us.
Networks
We operate an advanced network system to support our integrated operations. The backbone of the system is a nationwide fiber optic transmission network, which serves as the common platform for our mobile, fixed-line telephone, broadband and data services. We generally utilize a centralized network planning and equipment selection process, which ensures uniform nationwide design and network compatibility. After our merger with China Netcom in October 2008, we have actively integrated our network resources to improve our network quality and capacity.
Mobile Networks
Our mobile network generally consists of:
   
cell sites, which are physical locations, each equipped with a base station that houses transmitters, receivers and other equipment used to communicate through radio channels with subscribers’ mobile handsets within the range of a cell;
   
base station controllers, which connect to, and control, the base stations;
   
mobile switching centers, which control the base station controllers and the routing of telephone calls; and
   
a transmission network, which links the mobile switching centers, base station controllers, base stations and the public switched telephone network.
We have deployed GSM and WCDMA mobile networks. Our GSM mobile network mainly operates at 900 MHz. We have also deployed GSM technology that operates at 1800 MHz in major metropolitan areas to supplement the capacity of our existing mobile network. We use 2x15 MHz of spectrum in the 900 frequency band for our GSM network in most of our service areas and 2x20 MHz for certain major cities in China. We use 2x15 MHz of spectrum in the 1900 frequency band for our WCDMA mobile network.
As of December 31, 2010, we had approximately 329,000 GSM base stations, representing an increase by 15.5% from December 31, 2009. The call-completion rate of our GSM service increased to 97.6% at the end of 2010 from 96.2% at the beginning of 2010 and the call-drop rate decreased to 0.34% at the end of 2010 from 0.39% at the beginning of 2010. We also completed the GPRS network upgrade and significantly improved the configuration of static packet data channels. We have devoted significant resources in developing our 3G networks and have established one of the biggest WCDMA networks in the world. As of the end of 2010, our 3G network coverage reached cities at county level and above throughout China as well as villages and towns in eastern developed area of China.
Fixed-Line Networks
We operate fixed-line networks which provide extensive coverage in China. These networks are technologically advanced and conducive to the introduction of the next generation fixed-line network and 3G technologies. These networks support a wide range of end-to-end fixed-line telecommunications services and enable customized products to be delivered to meet a variety of telecommunications needs in “real-time.”
Our fixed-line networks consist of fixed-line telephone networks, broadband Internet and data networks, transmission networks, value-added service platforms, IT support systems and related infrastructures. Our transmission networks consist primarily of fiber-optic based networks, which cover our major service regions, supplemented by satellite transmission and digital microwave links.

 

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We have integrated our resources to optimize and improve the transport capabilities of our IP networks and improved our long-distance soft-switch network capability. In addition, we have fully implemented the upgrade of broadband connection speed and our broadband network capacity was substantially enhanced. By the end of 2010, the number of fixed-line broadband access ports was 65.83 million, up by 29.3% from the end of 2009, of which the number of access ports with an access speed of 20M and above accounted for 38%. Our international Internet outbound bandwidth reached 339G, our submarine cable capacity reached 1,539G, and our international cross-continental cable capacity reached 1,893G.
Marketing, Sales and Distribution
Our marketing strategy is to establish our image as a full-service telecommunications service provider and utilize our comprehensive services platform and nationwide sales and distribution network. We implement our marketing and sales strategies under a single unified brand “WO” and distribute our services through a variety of distribution channels, consisting of (i) self-owned channels, including proprietary sales outlets and direct sales forces targeting retail and corporate customers, (ii) social channels, including cooperative sales outlets, exclusive sales outlets and agency sales outlets, and (iii) electronic distribution channels, including self-owned and third-party channels online e-stores. In recent years, we have continued developing our self-owned sales channels and strategically expanding our social channels. In particular, for our 3G services, in addition to the full use of our self-owned channels, we have also focused on using high-quality social channels, such as large brand name electronics retail chains and electronics outlets in China, to achieve better sales results. Further, we continued promoting our nationwide e-sales system, which has effectively supplemented our traditional sales channels and improve our service quality.
Customer Service
We provide customer services through our nationwide sales outlets, hotline number “10010”, online sales outlets, SMSs, Wireless Application Protocol, or WAP, and other channels. Our customer services typically include inquiries, service initiation and termination, sales, and response to customer complaints and suggestions. Since 2009, we have provided 3G-dedicated customer service and have established over 300 “WO” brand stores to enhance our customers’ experience. In 2010, we continued to improve our customer service quality and created “3G Customer Service Centers + VIP Customer Managers”, a 3G-dedicated customer service model for our 3G subscribers.
Information Systems
We have established comprehensive information systems in each province, autonomous region and municipality to support our business and management. For business support, we have established core systems composed of a customer relationship management system, a comprehensive billing and accounting system, a comprehensive settlement system and an operation analysis system to support services and marketing of our mobile and fixed-line businesses. For our management support, we have focused on developing a human resource management system and a financial management system to enhance the efficiency of our control and management over our resources. In 2010, we further improved our core customer relationship management system and billing, or BSS, system of our provincial branches and started the establishment of integrated account settlement system and integrated partner relation management system. Meanwhile, we continued to implement system integration and system upgrade with a focus on 3G business related information systems.

 

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Research and Development
We focus on technology innovation in coordination with our various business departments in order to provide technical support to the development of our various businesses. Our research and development activities are focused primarily on 3G technologies and their further development, next generation Internet technologies and businesses, operational planning and development of value-added services. In addition, part of our research and development requirements is fulfilled by our parent company, Unicom Group, in return for a service fee. See “B. Related Party Transactions” under Item 7 below. With respect to research and development for our broadband business, we mainly rely on Unicom Group’s National Laboratory of Next Generation Network in Broadband Application, which is China’s only national level engineering laboratory in the information and telecommunications industry, focusing on the research of next generation Internet IPv6, Triple-Play and 3G operating and supporting systems. We also participate in the national research project on LTE. We have applied for a number of patents and software copyrights in China.
Competition
As a result of the telecommunications industry restructuring in 2008, the Chinese telecommunications market now has three key providers of basic telecommunications service — China Telecom, China Mobile and us — in addition to thousands of value-added service providers. We compete with China Mobile and China Telecom in virtually all aspects of our business, including mobile services, fixed-line voice services, broadband services and data communications services. We believe that the telecommunications industry restructuring in 2008 has provided an opportunity for us to integrate our various resources with those of China Netcom to create business synergies for the post-merger Unicom. However, we also believe that the restructuring may cause the competition in the telecommunications industry in China to be more intensified and complex in the future. See “D. Risk Factors — Risks Relating to Our Business — We face intense competition in all our businesses from other telecommunications service providers, including China Mobile and China Telecom, which may materially adversely affect our financial condition, results of operations and growth prospects.” under Item 3.
Strategic Alliances with Telefónica
On January 30, 2009, we entered into a strategic alliance framework agreement with Telefónica. Pursuant to the framework agreement, Telefónica and we agreed to share business experience and strengthen cooperation in the areas of mobile communications, broadband applications, international business, marketing and sales and telecommunications services to corporate clients. On September 6, 2009, we entered into a strategic alliance agreement with Telefónica, pursuant to which Telefónica and we agreed to establish a strategic alliance to strengthen the business of each party by cooperation based on our respective networks, business models and experience. On October 21, 2009, we and Telefónica completed a mutual investment in the amount of the equivalent of US$1 billion in each other, which was implemented by way of the subscription by Telefónica of 693,912,264 new shares in our Company and the contribution by Telefónica of 40,730,735 treasury shares in the capital of Telefónica to us.
On January 23, 2011, we entered into the Agreement to Enhance the Strategic Alliance with Telefónica. Pursuant to this agreement, we acquired from Telefónica 21,827,499 ordinary shares of Euro1.00 each in the capital of Telefónica for an aggregate purchase price of Euro374,559,882.84 on January 25, 2011, and Telefónica agreed to purchase ordinary shares of HK$0.10 each in the capital of our company for the aggregate consideration of US$500,000,000 through acquisitions from third parties within nine months after the date of the signing of this agreement. Pursuant to the agreement, Chang Xiaobing, our Chairman and Chief Executive Officer, as our designated representative, was appointed in May 2011 as a director on the board of directors of Telefónica.
Trademarks
We conduct our businesses under the Unicom name and logo. Unicom Group is the registered proprietor in China of the “Unicom” trademark in English and the trademark bearing the Unicom logo. Unicom Group is also the registered proprietor of the trademark of the word “Unicom” in Chinese (“ (CHINESE CHARACTER) ”). Unicom Group has granted us the right to use these trademarks on a royalty-free basis with periodic renewals, and licensed us any trademark that it registers in China in the future which incorporates the word Unicom.

 

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Regulatory and Related Matters
The telecommunications industry in China is subject to a high degree of government regulation. The primary regulatory authority of the Chinese telecommunications industry is the MIIT, established in 2008 as a new ministry under the PRC State Council and the successor of the former Ministry of Information Industry. The NDRC, the Ministry of Commerce and other governmental authorities also maintain regulatory responsibilities over certain aspects of the Chinese telecommunications industry.
The MIIT, under the supervision of the State Council, is responsible for, among other things:
   
formulating and enforcing industry policies and regulations, as well as technical standards;
   
granting telecommunications service licenses;
   
supervising the operations and quality of services of telecommunications service providers;
   
allocating and administering telecommunications resources such as spectrum and number resources;
   
together with other relevant regulatory authorities, formulating tariff standards for telecommunications services;
   
formulating interconnection and settlement policies between telecommunications networks; and
   
maintaining fair and orderly market competition among service providers.
The MIIT has established a Telecommunications Administration in each province, which is mainly responsible for overseeing the implementation of the MIIT’s policies and regulations and exercising regulatory authority delegated by the MIIT within that province.
The NDRC, together with the MIIT, sets government fixed tariffs and government guidance tariffs for certain telecommunications services. See “— Tariff Setting and Price Controls” below. It also approves investment projects within the restricted sectors specified in an annually adjusted catalogue released by the State Council.
The MIIT is in the process of drafting a telecommunications law that, once adopted by the National People’s Congress of the PRC, will become the basic telecommunications statute and provide the principal legal framework for telecommunications regulations in China. It is currently uncertain when the law will be adopted and become effective. See “D. Risk Factors — Risks Relating to the Telecommunications Industry in China — Regulatory or policy changes relating to the PRC telecommunications industry or any future industry restructuring may materially adversely affect our financial condition, results of operations and growth prospects.” under Item 3.
Telecommunications Regulations
On September 25, 2000, the PRC State Council promulgated the Telecommunications Regulations of the People’s Republic of China, which came into effect on the same date. All telecommunications activities and related activities within China are subject to the Telecommunications Regulations.
According to the PRC Government, its administration and regulation of the Chinese telecommunications industry is based on the principles of the separation of governmental regulation from enterprise management, the elimination of monopolistic behavior, the encouragement of competition and the promotion of the development of the Chinese telecommunications industry, while also taking into account the principles of openness, equality and fairness. The Telecommunications Regulations regulate all major aspects of the telecommunications industry, including licensing, interconnection, tariffs, resources, services, security, facility construction and access to networks.

 

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Licensing
The PRC Government licenses telecommunications businesses in accordance with their classification. Telecommunications businesses are currently classified into two broad categories of basic services and value-added services. An appendix to the Telecommunications Regulations divides each of the two categories into further sub-categories. On March 21, 2003, the former Ministry of Information Industry amended the categorization in this appendix and the amendments took effect on April 1, 2003. According to the amended appendix:
   
basic telecommunications services are classified into Category I basic telecommunications services and Category II basic telecommunications services. Category I basic telecommunications services include fixed-line telecommunications services (including fixed-line local, domestic long distance, international long distance and IP telephone services and services related to maintaining international telecommunications facilities), mobile telecommunications services (including 900/1800MHz GSM 2G, 800MHz CDMA 2G and 3G digital cellular mobile telecommunications services), Category I satellite telecommunications services (including satellite mobile telecommunications and international satellite private-line services) and Category I data communications services (including Internet data transmission, international data telecommunications, public telegraph and telex services). Category II basic telecommunications services include trunking telecommunications services (including analogue trunking telecommunications and digital trunking telecommunications services), wireless paging services, Category II satellite telecommunications services (including lease and sales of satellite transponders and very-small-aperture-terminal, or VSAT, telecommunications services), Category II data telecommunications services (including fixed-line domestic and wireless data transmission services), network access services (including wireless network access services and network services from customer premises), services related to maintaining domestic telecommunications facilities and network hosting services.
   
value-added telecommunications services are classified into Category I value-added telecommunications services and Category II value-added telecommunications services. Category I value-added telecommunications services include on-line data processing and interchange, domestic multi-party telecommunications, IP-VPN and Internet data center, or IDC, services. Category II value-added telecommunications services include store-and-forward, call center, Internet access and information services.
On March 1, 2009, the MIIT promulgated the Measures on the Administration of Telecommunications Business Licenses, which took effect on April 10, 2009 and superseded the previous measures promulgated by the former Ministry of Information Industry on December 26, 2001.
The measures govern the application for, approval of and regulation of telecommunications business licenses in China. The operation of any basic telecommunications business is subject to the MIIT’s approval and grant of License for Operation of Basic Telecommunications Businesses. The operation of any value-added business in two or more provinces, autonomous regions or municipalities is subject to the MIIT’s approval and grant of License for Inter-Provincial Operation of Value-Added Telecommunications Businesses. The operation of value-added businesses within a single province, autonomous region or municipality is subject to the approval of the telecommunications authority of the relevant province, autonomous region or municipality and the grant of the License for Operation of Value-Added Telecommunications Businesses. The measures, among other things, lowered the minimum amount of registered capital required for an applicant to enter the basic telecommunications business in the PRC.

 

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After the PRC’s accession to the WTO, on December 11, 2001, the PRC State Council promulgated the Administrative Regulations on Telecommunications Companies with Foreign Investments, which took effect on January 1, 2002, and were amended on September 10, 2008, to implement China’s commitments to the WTO. Those commitments include the gradual reduction of restrictions on foreign ownership in telecommunications enterprises in China and the step-by-step opening up of the Chinese telecommunications market to foreign enterprises. In recent years, China gradually lifted restrictions for foreign investors in telecommunications enterprises in China and fulfilled its commitment to open up the Chinese telecommunications market. However, the following restrictions on investments in mobile, value-added telecommunications and fixed-line businesses remain:
   
for fixed-line services, there is no longer any geographic restriction and foreign ownership may be no more than 49%;
   
for mobile voice and data services, there is no longer any geographic restriction and foreign ownership may be no more than 49%; and
   
for value-added telecommunications services, there is no longer any geographic restriction and foreign ownership may be no more than 50%.
Spectrum and Network Number Resources
The MIIT is responsible for the management of the wireless radio frequency spectrum and the allocation of frequencies within the spectrum. The frequency assigned to a telecommunications operator may not be leased or transferred without the MIIT’s approval. Standard fees for usage of the frequencies assigned to cellular telecommunications are charged to telecommunications operators: (i) for the nationwide GSM network frequency, an annual rate of RMB17 million per MHz is charged for the 900MHz band and an annual rate of RMB15 million per MHz is charged for the 1800 MHz band; (ii) for the nationwide WCDMA network frequency, a standard fee at an annual rate of RMB3.75 million per MHz in 2011, RMB7.5 million per MHz in 2012, RMB11.25 million MHz in 2013 and RMB15 million per MHz in 2014 and onwards will be charged for the 2100 MHz band; (iii) for the Femtocell experimental frequency, an annual rate of 20% of RMB15 million per MHz will be charged for the 2100 MHz band from 2011; and (iv) for any local telecommunications network frequency, an annual rate of RMB1.7 million per MHz is charged for each province for the 900MHz band, an annual rate of RMB1.5 million per MHz is charged for each province for the 1800 MHz band and an annual rate of RMB1.5 million will be charged for each province for the 2100 MHz band.
The MIIT is also responsible for the administration of China’s telecommunications network number resources. The telecommunications network number resources are owned by the State, which shall charge fees for the use of such resources. Application for the use of number resources by any telecommunications operator is subject to the approval of the MIIT or the relevant provincial telecommunications authority and the payment of certain usage fees. The measures also provide for the procedures for the application, usage and record keeping for the telecommunications operators’ use of number resources.
Tariff Setting and Price Controls
The levels and categories of our current tariffs are subject to regulation by various government authorities, including the MIIT, the NDRC, and, at the local level, the relevant provincial Telecommunications Administration Bureaus and price regulatory authorities. Under the Telecommunications Regulations, telecommunications tariffs are categorized into State-fixed tariffs, State-guidance tariffs and market-based tariffs.
The monthly fee and local usage fee for mobile services are regulated as State-fixed tariffs. Leased line and data services (other than ATM service) are charged at State-guidance tariffs, which are determined jointly by the MIIT and the NDRC. Pursuant to the Notice on Adjustment to Tariff Management for Local Fixed-Line Telephone Services issued by the MIIT in 2009, the monthly fee and usage fee for local fixed-line telephone services (including PHS) as well as the long-term leasing fees for circuits leasing are subject to certain tariff ceiling. Domestic long distance services, international long distance services and Hong Kong, Macau and Taiwan long distance services are also currently subject to tariff ceiling.

 

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The Notice on Implementation of Market-Based Tariffs for Certain Telecommunications Services, promulgated jointly by the former Ministry of Information Industry and the NDRC in 2002, specifies the telecommunications businesses to which market-based tariffs are applicable, including VoIP, Internet access services, and certain value-added services provided over fixed-line telephone networks, such as telephone information, caller identification and voice mail. Market-based tariffs shall be applicable to those telecommunications services for which effective competition exists in the market. The tariffs of such telecommunications services are determined at the sole discretion of the operators, and will be implemented after filing with the MIIT or provincial Telecommunications Administration Bureaus, as applicable. There is uncertainty regarding how the MIIT determines the existence of effective competition, as the MIIT has not publicly disclosed the criteria it uses for determining whether a certain type of service should be subject to market-based tariffs. Under the Telecommunications Regulations, cost is the primary basis for tariff setting, but the tariff levels also take into account social and economic development, the development of the telecommunications industry and the purchasing power of the customers. The MIIT has not provided a timetable for tariff deregulation or indicated that operators will eventually be permitted to freely set all tariffs. We expect that increased flexibility in setting certain tariffs will allow us to better respond to changes in market demand and competitive conditions.
The PRC Government retains the ultimate authority to adopt changes to tariffs. However, the Telecommunications Regulations require the government to hold public hearings before setting or changing important State-tariff rates, which are attended by telecommunications operators, consumers and others. Operators are required to provide complete and adequate cost data and other materials for those hearings.
The following tables set forth the tariff rates of certain services provided by us, where government fixed tariffs or government guidance tariffs are applicable:
Mobile Business
Generally the categories of tariffs we charge our mobile subscribers include, among others, basic monthly fees and local usage charges, roaming charges, long-distance call charges and charges for value-added services. Mobile tariffs are set forth by the MIIT and tariff adjustments are subject to regulation by various government authorities, including the MIIT, the NDRC and the relevant provincial price regulatory authorities. The following table summarizes the current tariffs for post-paid and pre-paid mobile services:
                 
    Post-paid Services     Pre-paid Services  
    (RMB)     (RMB)  
Basic monthly fee
  45-50     0  
Local usage charge (per minute)
  0.36-0.40     0.54-0.6  
Domestic roaming charge (per minute)
  0.6 for caller   0.6 for caller
 
  0.4 for receiver   0.4 for receiver
Intensified competition in our mobile service areas has resulted in tariff discounts and service promotions offered by us and our main competitors from time to time, which may reduce the effective tariffs. These discounts and promotions have taken many forms, including promotional tariff rates, free call minutes, reduced roaming charges, off-peak discounts or discounts for high-usage subscribers and package service plans with fixed monthly fees.
We have introduced a number of package service plans. Under these plans, subscribers typically pay a fixed monthly fee for a specified number of call minutes. The plans vary at the levels of fixed monthly fee, number of specified call minutes and tariff rates for call minutes in excess of the specified call minutes. The terms of these plans also vary depending on the local markets.
In 1997, the PRC Government granted us preferential treatment by allowing us to reduce our tariffs by up to 10% below the State-guidance tariff rates. In the past, this preferential treatment has helped us capture a significant number of mobile subscribers by allowing us to market our mobile services at discounted rates. As we and our main competitors introduced various package service plans and other promotional programs, the tariff structure has become more complex, which, to some extent, has made our price advantages less obvious to subscribers compared to previous tariffs that were largely based on simple per-minute charges.

 

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Fixed-Line Voice Business
For our local voice services, we charge a registration fee for initial installation that varies depending on whether the subscriber is a residential or a business customer, a fixed monthly fee, local call usage fees based on call duration and fees for certain value-added services. For our domestic long distance services, our revenue from domestic long distance services consist of charges based on the duration, time of day and day of the week a call is placed. In addition, we currently charge RMB0.30 per minute in addition to a long distance fee for our VoIP domestic long distance services. For our international long distance services, our charges are subject to the maximum tariffs regulated by the MIIT.
The following table sets forth our current tariffs for (i) local voice services provided on our traditional and PHS network, (ii) domestic long distance telephone services using our traditional network and (iii) our international long distance telephone services using our traditional network:
     
    Tariff
Local Voice Services   (RMB)
Monthly fee:
   
Residential subscribers in:
   
Provincial capitals
  20.00 to 25.00
Other cities and counties
  12.00 to 18.00
Rural areas
  10.00 to 15.00
Business subscribers
  25.00 to 35.00
Usage fee:
   
Intra-district
  0.18 to 0.22 for the first two pulses (first three minutes or less) and 0.09 to 0.11 for each additional pulse (one minute intervals)
Inter-district
  up to 0.30 per pulse (one minute intervals)
Communication fee:
   
Internet dial-up
  0.02 per pulse (one minute intervals)
Domestic long distance services on our traditional network (1)
  0.07 per six seconds
International long distance services on our traditional network (1) :
   
To Hong Kong, Macau and Taiwan
  0.20 per six seconds
To all international destinations
  0.80 per six seconds
 
     
(1)  
Subject to filing with the provincial telecommunications administrations, our provincial level headquarters may apply a 10% to 50% discount rate to calls made during off-peak hours.
Managed Data Services
The PRC Government publishes guidance tariffs for certain managed data services, including DDN and frame relay services, provided by operators in China. Tariffs for our ATM services are determined at our discretion, subject to approval by the MIIT. An initial fee is generally charged for installation and testing for our data services, as well as a fixed monthly fee for each of the services.
DDN services . The following table sets forth the monthly fees for DDN services at the bandwidths of 64kbps, 128kbps, 512kbps and 1Mbps:
                                 
    Monthly Fee  
    64kbps     128kbps     512kbps     1Mbps  
    (RMB)  
Intra-district
    1,500       2,000       3,800       5,000  
Inter-district
    2,000       2,500       5,200       7,500  
Domestic long distance
    3,500       5,000       7,000       9,000  

 

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Frame relay services . The following tables set forth the monthly fees for frame relay services, which include monthly fees for port access and permanent virtual circuits, or PVCs (1) :
                                 
    Monthly Fee  
    64kbps     256kbps     512kbps     1Mbps  
    (RMB)  
Port access
                               
Monthly fees
    260       400       500       750  
PVC
                               
Intra-district
    550       800       1,000       1,250  
Inter-district
    800       1,150       1,450       2,000  
Domestic long distance
    1,700       2,200       2,500       3,000  
 
     
(1)  
One-way tariff for PVCs frame relay services.
Leased Line Services
We charge monthly fees for subscribers to our leased line services based on guidance tariffs set by the PRC Government, which vary based on bandwidth and whether the leased line is local or long distance. Leased line tariffs have generally decreased in recent years.

 

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The following table sets forth the tariffs for 2Mbps, 8Mbps, 34Mbps and 155Mbps digital circuits:
                                 
    Monthly Fee  
    2Mbps     8Mbps     34Mbps     155Mbps  
    (RMB)  
Intra-district
    2,000       6,000       16,000       44,000  
Inter-district
    4,000       11,000       31,000       88,000  
Domestic long distance (1)
    6,000       17,000       47,000       132,000  
 
     
(1)  
Does not include the tariffs for local digital circuits and access lines.
Interconnection Arrangements
In October 2003, the former Ministry of Information Industry issued Measures on Settlement of Interconnection between Public Telecommunications Networks and Sharing of Relaying Fees, which superseded the Measures on the Settlement of Call Charges between Telecommunications Networks issued by the former Ministry of Information Industry in 2001. These regulations contain specific provisions regarding, among other things, revenue sharing methods and settlement mechanisms and interconnection agreements among telecommunications service providers. Since November 2005, the former Ministry of Information Industry (or the MIIT after March 2008) has issued a number of administrative measures to adjust the settlement arrangement standards with respect to interconnection fees for certain network interconnections between telecommunications operators. In accordance with various administrative measures, Unicom Group has entered into agreements on interconnection with other telecommunications operators, including China Telecom and China Mobile.
The following table sets forth selected interconnection revenue sharing and settlement arrangements for local calls:
         
Operator from Whose Network Calls are   Operator at Whose Network   Current Main Settlement
Originated   Calls are Terminated   Arrangement
Mobile operator
  Local fixed-line operator   (1) Mobile operator collects the usage fees from its subscribers;
 
      (2) Mobile operator pays RMB0.06 per minute to local fixed-line operator. For calls originated from “157” or “188” prefix phone numbers (TD users) during the period from January 1, 2010 to December 31, 2010, mobile operator (China Mobile) pays RMB0.012 per minute to fixed-line operator. From January 1, 2011, for calls originated from “157” or “188” prefix phone numbers (TD users), mobile operator (China Mobile) continues to pay RMB0.012 per minute to fixed-line operator.
Local fixed-line operator
  Mobile operator   (1) Local fixed-line operator collects the usage charge from its subscribers;
 
      (2) No revenue sharing or settlement prior to June 1, 2010. Local fixed-line operator pays RMB0.001 per minute to mobile operator after June 1, 2010.
Mobile operator A
  Mobile operator B   (1) Mobile operator A collects the cellular usage charge from its subscribers;
 
      (2) Mobile operator A pays RMB0.06 per minute to mobile operator B. For calls originated from “157” or “188” prefix phone numbers (TD users) during the period from January 1, 2010 to December 31, 2010, mobile operator A (China Mobile) pays RMB0.012 per minute to mobile operator B. For calls originated from “157” or “188” prefix phone numbers (TD users) during the period from January 1, 2011, mobile operator A (China Mobile) pays RMB0.012 per minute to mobile operator B.
Local fixed-line operator A
  Local fixed-line operator B   (1) Operator A collects the usage fees from its subscribers;
(2) In the case of Intra-district calls, operator A pays operator B 50% of the intra-district usage fees;
(3) (i) In the case of local inter-district calls from operator A using operator B’s local inter-district trunk circuit, operator A collects the usage charge from its subscribers and pay RMB0.06 per minute to operator B; (ii) In the case of local inter-district calls from operator A not using operator B’s local inter-district trunk circuit, operator A collects the usage charge from its subscribers and pays operator B 50% of the intra-district usage fees.

 

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The following table sets forth selected current major main interconnection revenue sharing and settlement arrangements for domestic long distance calls:
         
Operator at Whose Network Calls are   Operator at Whose Network Calls are   Current Main Settlement
Originated   Terminated   Arrangement
Local fixed-line or mobile operator A (through the long distance network of operator A)
  Local fixed-line or mobile operator B   Operator A pays RMB0.06 per minute to operator B
Fixed-line or mobile operator A
  Domestic long distance calls made without using the carrier identity code of operator B (through the long distance network of operator B)   (1) Operator A collects the tariff from the subscribers;
(2) If Operator A is a fixed-line operator, operator A retains RMB0.06 per minute; if operator A is a mobile operator, operator A retains local usage fee and RMB0.06 per minute; and
(3) Operator A pays operator B the rest of the domestic long distance tariff. Note: Domestic long distance calls shall be charged at the domestic long distance call tariff of operator B.
Local fixed-line or mobile operator A
  Domestic long distance calls made by using the carrier identity code of operator B (through the long distance network of operator B)   (1) Operator B collects the tariff from the subscribers; and
(2) Operator B pays operator A RMB0.06 per minute.
The following table sets forth selected current main interconnection revenue sharing and settlement arrangements for public switched telephone network international long distance calls, including calls originated from and terminated in Hong Kong, Macau and Taiwan:
         
Operator at Whose Network Calls are   Operator at Whose Network Calls are   Current Main Settlement
Originated   Terminated   Arrangement
Local fixed-line or mobile operator A
  International long distance calls (including to Hong Kong, Macau and Taiwan) made without using the carrier identity code of operator B and directed by operator A from the originating network to operator B.   (1) Operator A collects the tariff from the subscribers;
(2) If operator A is a fixed-line operator, operator A retains no more than RMB0.54 per minute with the remaining paid to operator B; and
(3) If operator A is local usage fees and a mobile operator, operator A retains local usage fees and no more than RMB0.54 per minute with the remaining paid to operator B. Note: International long distance calls shall be charged at the international long distance call tariff of operator B.
Local fixed-line or mobile operator A
  International long distance calls made by using the carrier identity code of operator B and through the domestic and international long distance networks of operator B.   (1) Operator B collects the tariff from the subscribers; and
(2) Operator B pays operator A RMB0.06 per minute.

 

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The following table sets forth selected current main interconnection revenue sharing and settlement arrangements for VoIP long distance calls:
         
Operator from Whose Network Calls   Operator at Whose Network Calls are   Current Main Settlement
are Originated   Terminated   Arrangement
Fixed-line or mobile operator A
  Fixed-line or mobile operator B through the VoIP network of operator C   (1) Operator A collects local usage fees;
(2) Operator C collects the VoIP long distance usage fees from its subscribers;
(3) Operator C pays RMB0.06 per minute to operator B on the terminating end;
 
      (4) No settlement between operator C and operator A on the originating end.
The following table sets forth selected current main interconnection revenue sharing and settlement arrangements for SMS:
         
Network from Which   Network at Which   Current Main Settlement
SMS Originated   SMS Terminated   Arrangement
 
Fixed-line or mobile operator A
  Fixed-line or mobile operator B   (1) Operator A collects the tariff from its subscribers;
 
      (2) Operator A pays RMB0.03 (RMB0.05 prior to January 1, 2010) per SMS to Operator B
The following table sets forth selected current main interconnection revenue sharing and settlement arrangements for MMS:
         
Network from Which   Network at Which   Current Main Settlement
MMS Originated   MMS Terminated   Arrangement
Fixed-line or mobile operator A
  Fixed-line or mobile operator B   (1) Operator A collects the tariff from its subscribers;
 
      (2) Operator A pays RMB0.10 (RMB0.15 prior to January 1, 2010) per MMS to Operator B
Technical Standards
The MIIT is responsible for promulgating the technical standards for China’s telecommunications industry and establishing the technical requirements and testing parameters for telecommunications equipment (including network and end user equipment). The MIIT is also responsible for designating qualified institutes to test telecommunications equipment, which would grant network access licenses for the equipment that has successfully passed the relevant tests. Only telecommunications equipment for which a license has been granted may be sold and used in China.
Most of the standards used in the Chinese telecommunications industry are generally based on the standards issued by the International Telecommunication Union, or ITU, 3rd Generation Partnership Project, Open Mobile Alliance, World Wide Web Consortium, and other international organizations for telecommunications standards, with more specific requirements made in light of China’s particular telecommunications industry. On the basis of the technical standards used in China’s telecommunications industry, we may formulate our own technical standards based on our own needs and issue additional requirements for telecommunications equipment in order to meet our operational needs. All telecommunications equipment purchased by China’s telecommunication operators must have been granted a network access license issued by the MIIT and must meet the standards set forth by the relevant operators.

 

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Quality of Service
Under the Telecommunications Regulations, the MIIT and the relevant provincial telecommunications administrations are responsible for supervising and monitoring the quality of services provided by telecommunications operators in China. Under the Telecommunications Regulations, customers of telecommunications operators have the right to submit their complaints to the MIIT and the relevant provincial telecommunications administrations or other relevant government authorities. In addition, the MIIT, together with other governmental authorities, has taken measures to prompt telecommunications operators to screen indecent contents carried through their networks.
Universal Services
Telecommunications service providers in China are required to fulfill universal service obligations in accordance with relevant regulations to be promulgated by the PRC Government, and the MIIT has the authority to delineate the scope of its universal service obligations. The MIIT may also select universal service providers through a tendering process. The MIIT, together with the finance and pricing authorities, is also responsible for formulating administrative rules relating to the establishment of a universal service fund and compensation schemes for universal services. Under the Telecommunications Regulations, all PRC telecommunications operators shall provide universal services, and we expect to perform our duties thereunder accordingly.
The MIIT has required major Chinese telecommunications service providers, including Unicom Group and former Netcom Group, to participate in a project to provide telecommunications services in a number of remote villages in certain designated provinces in China as transitional measures prior to the formalization of a universal service obligation framework. In participating in this project, Unicom Group has undertaken the universal service obligation to extend telecommunications service coverage to all administrative-level villages primarily through its transmission networks. Currently, with our assistance, Unicom Group is further extending telecommunications service coverage to natural villages in remote areas in China as designated by the MIIT. We have been assisting Unicom Group in providing mobile telecommunications services to these remote villages and are responsible for the operation and maintenance of the relevant network facilities in our service areas. See “D. Risk Factors — Risks Relating to the Telecommunications Industry in China — The PRC Government may require us, along with other telecommunications service providers in China, to provide universal services with specified obligations, and we may not be compensated adequately for providing such services.” under Item 3.
Convergence Policy of Telecom, Broadcasting and Internet Networks
In January 2010, the PRC government announced its decision to accelerate the advancement of convergence of television broadcast, telecommunications and Internet access networks to realize interconnection and resource sharing among the three networks and further develop the provision of voice, data, television and other services. Specifically, the three-network convergence policy will be initially carried out on a trial basis in selective geographic locations during the period from 2010 to 2012 and further implemented across-the-board in the following three years. The PRC government may amend relevant policies or promulgate new regulations corresponding to the implementation of the three-network convergence policy in the future.
Others
As a company with substantially all of our operations in China, we, along with our controlling shareholder, Unicom Group, are subject to various regulations of the PRC Government in addition to those regulating the telecommunications industry. PRC regulatory authorities, such as the State Bureau of Taxation, National Audit Office, SAIC and local price bureaus, exercise extensive control over various aspects of our businesses and conduct various regular inspections, examinations and/or audits on us and Unicom Group. As required by the relevant PRC laws and regulations, Unicom Group, as one of the key State-owned enterprises under the direct supervision of the SASAC, is also subject to routine audits by the National Audit Office, or the NAO, including the senior management departure audit which involves a mandatory review by the NAO of the economic responsibilities of a departing senior management member of Unicom Group.

 

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In addition, SASAC has an indirect influence over us as our controlling shareholder, Unicom Group, is under the direct supervision of SASAC. In particular, SASAC may designate certain nominees and request Unicom Group to propose the appointment of such nominees as our directors and senior management. SASAC may also request Unicom Group to remove our directors and senior management in accordance with relevant procedures provided by applicable law and our articles of association.
C. Organizational Structure
We are incorporated in Hong Kong and as of April 30, 2011, we were 41.27% owned by Unicom BVI, which was 17.90% owned by Unicom Group and 82.10% owned by the A Share Company, which in turn was 61.05% owned by Unicom Group, 29.74% owned by Netcom BVI, which in turn was 100% owned by Unicom Group, 20.62% owned by public shareholders and 8.37% owned by Telefónica. See “A. History and Development of the Company” above. Set forth below are details of our directly wholly owned significant subsidiaries:
                   
Name of Subsidiary   Country of Incorporation   Ownership Interest  
China United Network Communications Corporation Limited
  China     100 %
China Netcom Group Corporation (Hong Kong) Limited
  Hong Kong     100 %
China Unicom (Hong Kong) Operations Limited
  Hong Kong     100 %
China Unicom (Americas) Operations Limited
  United States     100 %
China Unicom (Singapore) Operations Pte. Ltd.
  Singapore     100 %
China Unicom (Europe) Operations Limited
  United Kingdom     100 %
China Unicom (Japan) Operations Corporation
  Japan     100 %
Billion Express Investments Limited
  British Virgin Islands     100 %
D. Properties
Our principal executive offices are located in Hong Kong. We also maintain executive offices in Beijing. We own and lease a large number of offices, retail outlets, equipment rooms and base stations throughout China. In some cases, we have not entered into formal lease agreements with the lessors or the lessors may not possess requisite title certificates. We believe that it is unlikely that we would be denied our right to use a large number of these properties at any given time.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
You should read the following discussion and analysis in conjunction with the selected financial data set forth in Item 3 and our consolidated financial statements, together with the related notes, included elsewhere in this annual report on Form 20-F.

 

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Acquisitions of Fixed-Line Business in 21 Provinces in Southern China and Other Assets from Parent Companies, Merger with China Netcom, Acquisitions of Unicom Guizhou and Design Institute, and Disposal of CDMA Business and Fixed-Line Business and Assets in Shanghai and Guangdong
We completed (i) acquisitions of fixed-line business in 21 provinces in southern China, the local access telephone business in Tianjin Municipality, three subsidiaries (together referred to as the “Target Business”) and certain other telecommunication assets from Unicom Group and Netcom Group (which was later merged with Unicom Group in January 2009) in January 2009 and (ii) a merger with China Netcom in October 2008. See “A. History and Development of the Company — Acquisitions of Fixed-Line Business in 21 Provinces in Southern China and Other Assets from Parent Companies and Lease of Telecommunications Networks in 21 Provinces in Southern China” and “A. History and Development of the Company — Sale of CDMA Business, Merger with China Netcom and Related Transactions — Merger with China Netcom and Related Transactions” under Item 4, respectively. Because we and the Target Business were under common control of Unicom Group, both prior to and after the acquisitions, and we and China Netcom were under the common control of the PRC Government both prior to and after the merger, each of the acquisitions and the merger is considered as a business combination of entities and businesses under common control, and has been accounted for using merger accounting in accordance with AG 5. In addition, we completed an acquisition of assets and business of the Guizhou Province branch of Unicom Group, or Unicom Guizhou, from Unicom Group in December 2007 and prior to its merger with us, China Netcom completed an acquisition of the entire equity interest of Beijing Planning and Design Institute, or Design Institute, a wholly-owned subsidiary of Netcom Group, in December 2007. Because we and Unicom Guizhou were under the common control of Unicom Group both prior to and after our acquisition of Unicom Guizhou and China Netcom and Design Institute were under the common control of Netcom Group (which merged with, and was absorbed by, Unicom Group in January 2009) both prior to and after China Netcom’s acquisition of Design Institute, both acquisitions have been accounted for using merger accounting in accordance with AG5 issued by the HKICPA. Upon our adoption of IFRS, we adopted the accounting policy to account for business combination of entities and businesses under common control using the predecessor values method, which is consistent with HKFRS. The acquired assets and liabilities mentioned above in this paragraph are stated at historical cost, and are included in the consolidated financial statements included in this annual report on Form 20-F as if these entities and their businesses acquired had always been part of our company during all the periods presented.
We completed the disposal of our CDMA business in October 2008. See “A. History and Development of the Company — Sale of CDMA Business, Merger with China Netcom and Related Transactions — Disposal of CDMA Business and Related Transactions” under Item 4. In accordance with IFRS/HKFRS 5, “Non-Current Assets Held for Sale and Discontinued Operations”, we recognized the CDMA business as discontinued operations and the CDMA business is presented separately as discontinued operations in our audited consolidated statements of income and statements of cash flows for the years ended December 31,2007 and 2008.
Prior to our merger with China Netcom, China Netcom completed the disposal of the fixed-line telecommunications and related services in its Guangdong and Shanghai branches in February 2007. See “A. History and Development of the Company—History and Corporate Development of China Netcom” under Item 4. After considering that we reacquired the fixed-line business in Guangdong and Shanghai branches in January 2009, we did not present the fixed-line business in Guangdong and Shanghai branches as discontinued operations and derecognized the gain on disposal previously recorded in our 2007 consolidated financial statements.
Overview
We are an integrated telecommunications operator in China providing mobile voice and value-added, fixed-line voice and value-added, fixed-line broadband, data communications and other telecommunications services to our customers through our two operating segments comprised of mobile services and fixed-line services. Following our acquisition of fixed-line business in 21 provinces in southern China from our parent companies in January 2009, we have extended the coverage of all of our services nationwide. We, China Mobile and China Telecom are the three major telecommunications operators in China. See “A. History and Development of the Company — Restructurings of the Telecommunications Industry” under Item 4.

 

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The table below sets forth revenue from our major businesses and their respective percentage of our total revenue from continuing operations in 2008, 2009 and 2010 (excluding (i) fixed-line upfront connection fees of RMB886 million in 2008, RMB490 million in 2009 and RMB192 million in 2010 and (ii) interconnection revenue of RMB992 million between certain fixed-line business and the discontinued operations of CDMA business in 2008).
                                                 
    For the Year Ended December 31,  
    2008     2009     2010  
    RMB in     As % of     RMB in     As % of     RMB in     As % of  
    millions     Total     millions     Total     millions     Total  
Continuing Operations
                                               
Total revenue (excluding fixed-line upfront connection fees and interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business) (1)
    157,914       100.0       153,455       100.0       171,106       100.0  
Total telecommunications service revenue (excluding fixed-line upfront connection fees and interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business)
    150,953       95.6       149,103       97.2       161,803       94.6  
Include: Mobile business
    64,240       40.7       69,769       45.5       82,362       48.1  
Fixed-line business
    86,376       54.7       79,059       51.5       78,704       46.0  
Out of which:
                                               
Broadband service
    20,962       13.3       23,898       15.6       29,822       17.4  
Information communication technology services and other revenue
    5,062       3.2       2,189       1.4       2,016       1.2  
Total sales of telecommunications products
    1,899       1.2       2,163       1.4       7,287       4.2  
 
     
(1)  
Fixed-line upfront connection fees represent the amortization of deferred upfront connection fees received from the customers before July 1, 2001. No upfront connection fee was received from the customers since then. In addition, upon disposal of the CDMA business in 2008, interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business will not be recognized anymore. Therefore, we consider that analyses of our operating results excluding upfront connection fees and interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business are more relevant to the readers of this report.
Our telecommunications service revenue from continuing operations primarily consist of the following:
   
usage fees and monthly fees for our mobile and fixed-line telephone services, which are recognized when we render the service to our customers;
   
revenue from the provision of value-added services, which is recognized when we render the services to our customers;
   
revenue from the provision of broadband and other Internet-related services, mainly consisting of Internet access services, and managed data services, which is recognized when we render the service to our customers;
   
revenue from telephone cards, which is service fees received from customers for telephone services, is recognized when we render the related service upon actual usage of the telephone cards by customers;
   
revenue from interconnection with other telecommunications operators for calls made from their networks to our networks. We recognize interconnection revenue when the relevant calls are made by subscribers;

 

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revenue for offerings which include the bundled sale of mobile handsets and provision of services. We recognize revenue allocated to the sale of handset when the title of the handset is passed to the customer and recognize revenue allocated to the service element based upon the actual usage of mobile services. The cost of the mobile handset sold is expensed immediately to the statement of income. Prior to the fourth quarter of 2010, we determined the amount of revenue allocated to the handset using the residual value method. Under the residual value method, we determined the revenue allocated to the sale of the mobile handset by deducting the fair value of the service element from the total contract consideration. In the fourth quarter of 2010, we determined to adopt the accounting policy of relative fair value method to account for the bundled sale of mobile handsets and provision of services retrospectively from January 1, 2010. Under the relative fair value method, the total revenue from such bundled sale is allocated to service revenue and sales of handsets based on their relative fair values. The change in accounting policy resulted in (i) an increase of our revenue, income before income tax, net income and earnings per share of RMB3,208 million, RMB3,208 million, RMB2,406 million and RMB0.11, respectively for the year ended December 31, 2010; and (ii) a decrease in advance from customers of RMB3,317 million as of December 31, 2010. The above change in accounting policy did not have a significant impact on the financial statements for the years ended December 31, 2009 and 2008, and accordingly, we did not restate the comparative figures;
   
revenue from information communications technology services are recognized when goods are delivered to the customers (which generally coincides with the time when the customers have accepted the goods and the related risks and rewards of ownership have been transferred to the customers) or when services are rendered to the customers using the percentage of completion method when the outcome of the services provide can be estimated reliably. If the outcome of the services provided cannot be estimated reliably, the treatment should be as follows: (i) if it is probable that the costs incurred for the services provided is recoverable, service revenue should be recognized only to the extent of reasonable costs incurred, and costs should be recognized as current expenses in the period in which they are incurred, or (ii) if it is probable that costs incurred will not be recoverable, costs should be recognized as current expenses immediately and service revenue should not be recognized;
   
revenue from sales of telecommunications products (which mainly represent handsets and accessories) that are not bundled with mobile services are recognized when title of such products has been passed to the buyers; and
   
rental income from leases of customer-end equipment and transmission lines on our networks to business customers and other telecommunications carriers in China. We recognize leased line rental revenue on a straight-line basis over the relevant lease term.

 

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The following table sets forth our major costs and expenses items and income before income tax, both in terms of amount and as a percentage of total revenue from continuing operations in 2008, 2009 and 2010 (excluding (i) fixed-line upfront connection fees of RMB886 million in 2008, RMB490 million in 2009 and RMB192 million in 2010 and (ii) interconnection revenue of RMB992 million between certain fixed-line business and the discontinued operations of CDMA business 2008).
                                                 
    For the Year Ended December 31,  
    2008     2009     2010  
    RMB in             RMB in             RMB in        
    millions     % of Total     millions     % of Total     millions     % of Total  
Continuing Operations
                                               
Total revenue (excluding fixed-line upfront connection fees and interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business) (1)
    157,914       100.0       153,455       100.0       171,106       100.0  
Costs, expenses and others
    155,733       98.6       141,668       92.3       166,525       97.3  
Interconnection charges
    13,038       8.3       12,955       8.4       13,727       8.0  
Depreciation and amortization
    51,847       32.8       47,587       31.0       54,433       31.8  
Networks, operations and support expenses
    18,736       11.9       23,728       15.5       26,383       15.4  
Employee benefit expenses
    20,758       13.1       21,931       14.3       23,327       13.6  
Selling and marketing
    19,614       12.4       21,020       13.7       23,733       13.9  
Cost in relation to information communication technology services
    3,010       1.9       839       0.5       895       0.5  
General, administrative and other expenses
    13,217       8.4       12,175       7.9       12,953       7.6  
Cost of telecommunications products sold
    2,156       1.4       2,689       1.8       10,688       6.3  
Finance costs, net of interest income
    3,004       1.9       945       0.6       1,607       0.9  
Impairment loss on property, plant and equipment
    12,494       7.9                          
Realized gains on changes in fair value of derivative financial instrument
                (1,239 )     (0.8 )            
Other income-net
    (2,141 )     (1.4 )     (962 )     (0.6 )     (1,221 )     (0.7 )
 
     
(1)  
Fixed-line upfront connection fees represent the amortization of deferred upfront connection fees received from the customers before July 1, 2001. No upfront connection fee was received from the customers since then. In addition, upon disposal of the CDMA business in 2008, interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business will no longer be recognized. Therefore, we consider that analyses of our operating results excluding upfront connection fees and interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business are more relevant to the readers of this report.
Our major costs and expenses include the following:
   
interconnection expenses, representing amounts paid to other operators for calls from our networks to their networks and for calls made by our subscribers roaming in their networks;
   
depreciation and amortization expenses, mainly relating to our property, plant and equipment and other assets;
   
networks, operations and support expenses, mainly relating to repair, maintenance and operations of our networks;
   
leasing fee for telecommunications networks in southern China;
   
employee benefit expenses, representing staff salaries and wages, bonuses and medical benefits, contributions to defined contribution pension schemes, housing benefits and share-based compensation costs amortized over the vesting period of options;
   
selling and marketing expenses, including commissions, promotion and advertising expenses, direct incremental costs for activating subscriber services and customer retention costs;

 

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cost in relation to information communication technology services, primarily including cost of hardware sold;
   
general, administrative and other expenses, primarily including provision for doubtful debts, utilities, general office expenses and travel expenses;
   
cost of telecommunications products sold; and
   
finance costs, net of interest income, primarily including interest expenses, net of interest income.
Critical Accounting Policies
The preparation of our financial statements and this annual report on Form 20-F requires us to make estimates and judgments that affect the reported and disclosed amounts of assets and liabilities, including contingent assets and liabilities, as of the relevant dates and revenue and expenses for the relevant periods. We have identified below the areas involving a higher degree of judgment or complexity, or areas where assumptions are significant to the accounting policies and estimates, as critical to our business operations and an understanding of our results of operations and financial position. The impact and any associated risks related to these policies on our business operations are discussed throughout this Item 5 where such policies affect our reported and expected financial results. For a discussion of the application of these and other accounting policies, see Note 4 to our consolidated financial statements included in this annual report. There can be no assurance that actual results will not differ from those estimates and assumptions.
Significant Accounting Policies
Revenue Recognition
Revenue comprises the fair value of the consideration received or receivable for the services and sales of goods or telecommunications products in the ordinary course of our business activities. Revenue is shown net of business tax, government surcharges, returns and discounts and after eliminating sales within our company.
We recognize revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of our activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. We base our estimates on historical results, taking into consideration of the type of customer, the type of transaction and the specifics of each arrangement.
Sales of services and goods
   
Usage fees and monthly fees are recognized when the services are rendered;
   
Revenue from the provision of broadband and other Internet-related services and managed data services are recognized when the services are provided to customers;
   
Revenue from telephone cards, which represents service fees received from customers for telephone services, is recognized when the related service is rendered upon actual usage of the telephone cards by customers;
   
Lease income from leasing of lines and customer-end equipment are treated as operating leases with rental income recognized on a straight-line basis over the lease term;

 

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Value-added services revenue, which mainly represents revenue from the provision of services such as SMSs, Cool Ringtone, personalized ring, caller number display and secretarial services to subscribers, is recognized when service is rendered;
   
Standalone sales of telecommunications products, which mainly represent handsets and accessories, are recognized when title has been passed to the buyers;
   
For offerings which include the bundled sale of mobile handsets and provision of services, prior to the fourth quarter of 2010, we determined the amount of revenue allocated to the handset using the residual value method. Under the residual value method, we determined the revenue allocated to the sale of the mobile handset by deducting the fair value of the service element from the total contract consideration. We recognize revenue related to the sale of handset when the title of the handset is passed to the customer and recognize revenue allocated to the service element based upon the actual usage of mobile services. The cost of the mobile handset sold is expensed immediately to the statement of income. In 2010, we have offered promotional packages for the bundled sale of mobile handsets and provision of services with more attractive terms to new subscribers, and more new subscribers were developed under such preferential packages during the year. In the fourth quarter of 2010, we determined to adopt the accounting policy to use relative fair value method to account for the bundled sale of mobile handsets and provision of services retrospectively from January 1, 2010. The purpose of the change in this accounting policy is to provide reliable and more relevant information for users of the financial statements given that each of the handset and service elements in a bundled sale has stand-alone value to the customer and there is objective and reliable evidence of the fair value of the handset and service elements in a bundled sale. Under the relative fair value method, the total revenue from such bundled sale is allocated to service revenue and sales of handsets based on their relative fair values. The change in accounting policy resulted in (i) an increase of our revenue, income before income tax, net income and earnings per share of RMB3,208 million, RMB3,208 million, RMB2,406 million and RMB0.11, respectively for the year ended December 31, 2010; and (ii) a decrease in advance from customers of RMB3,317 million as of December 31, 2010. The above change in accounting policy did not have a significant impact on the financial statements for the years ended December 31, 2009 and 2008, and accordingly, we did not restate the comparative figures; and
   
Revenue from information communications technology services are recognized when goods are delivered to the customers (which generally coincides with the time when the customers have accepted the goods and the related risks and rewards of ownership have been transferred to the customers) or when services are rendered to the customers using the percentage of completion method when the outcome of the services provided can be estimated reliably. If the outcome of the services provided cannot be estimated reliably, the treatment should be as follows: (i) if it is probable that the costs incurred for the services provided are recoverable, services revenue should be recognized only to the extent of recoverable costs incurred, and costs should be recognized as current expenses in the period in which they are incurred; or (ii) if it is probable that costs incurred will not be recoverable, costs should be recognized as current expenses immediately and services revenue should not be recognized.
Interest income
Interest income from deposits in banks or other financial institutions is recognized on a time proportion basis, using the effective interest method.
Dividend income
Dividend income is recognized when the right to receive payment is established.
Deferred Revenue, Advances from Customers and Subscriber Points Reward Program

 

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Deferred revenue
Deferred revenue mainly represents upfront non-refundable revenue, including upfront connection fees and installation fees of fixed-line business and receipts from the activation of SIM/USIM cards relating to our mobile businesses, which are deferred and recognized over the expected customer service period.
Advances from customers
Advances from customers are amounts paid by customers for prepaid cards, other calling cards and prepaid service fees, which cover future telecommunications services (over a period of one to twelve months). Advances from customers are stated at the amount of proceeds received less the amount already recognized as revenue upon the rendering of services.
Subscriber points reward program
The fair value of providing telecommunications services and the subscriber points reward are allocated based on their relative fair values. The allocated portion of fair value for the subscriber points reward is recorded as deferred revenue when the rewards are granted and recognized as revenue when the points are redeemed or expired. The fair value of deferred revenue is estimated based on (i) the value of each bonus point awarded to subscribers, (ii) the number of bonus points related to subscribers who are qualified or expected to be qualified to exercise their redemption right at each balance sheet date, and (iii) the expected bonus points redemption rate. The fair value of the outstanding subscriber points reward is subject to review by management on a periodic basis.
Critical Accounting Estimates and Judgments
Recognition of Upfront Non-Refundable Revenue and Direct Incremental Costs
We defer and amortize upfront activation fees of SIM/USIM cards of the mobile business over the expected customer service period of 3 years (2008: approximately 3 years; 2009: approximately 3 years). The related direct incremental costs of acquiring and activating mobile subscribers, including costs of SIM/USIM cards and commissions, are also capitalized and amortized over the same expected customer service period of 3 years.
We defer and amortize upfront customer connection and installation fees of the fixed-line business over the expected customer service period of 10 years (2008: approximately 10 years; 2009: approximately 10 years). The related direct incremental installation costs are deferred and amortized over the same expected customer service period of 10 years.

 

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We only capitalize costs to the extent that they will generate future economic benefits. The excess of the direct incremental costs over the corresponding upfront non-refundable revenue, if any, are expensed to the statement of income immediately.
We estimate the expected customer service period based on the historical customer retention experience and after factoring in the expected level of future competition, the risk of technological or functional obsolescence to our services, technological innovation, and the expected changes in the regulatory and social environment. If our estimate of the expected customer service period changes as a result of increased competition, changes in telecommunications technology or other factors, the amount and timing of recognition of the deferred revenue and direct incremental costs may change for future periods.
The Acquisition of Target Business (“2009 Business Combination”)
Our acquisition of Target Business, or the 2009 Business Combination, was considered as a business combination of entities and business under common control, and has been accounted for using merger accounting under HKFRS, which is consistent with the predecessor values method under IFRS.

 

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When applying the merger accounting/predecessor values method to account for the 2009 Business Combination, we included all the assets and liabilities, revenue and expenses associated with the Target Business and the fixed-line telecommunications networks of the 21 provinces in southern China, or the Telecommunications Networks in Southern China, in the consolidated balance sheet and the consolidated statement of income throughout the periods presented. Pursuant to the agreement dated December 16, 2008, the 2009 Business Combination excluded the Telecommunications Networks in Southern China, which are retained by Unicom New Horizon and are leased from Unicom New Horizon to CUCL effective from January 2009. To reflect the economic substance that we have not taken on the risks and rewards associated with the property, plant and equipment and related assets and liabilities relating to the fixed-line business in southern China, we are deemed to have disposed of the assets not acquired and liabilities not assumed and have recorded the deemed disposal of these assets and liabilities as a distribution from reserves by us to Unicom Group upon the completion of the 2009 Business Combination effective from January 2009.
Subsequent to the completion of the 2009 Business Combination, we recorded leasing fees amounting to approximately RMB2.2 billion (2009: RMB2.0 billion) charged by Unicom New Horizon for the lease of the Telecommunications Networks in Southern China for the year ended December 31, 2010 (Note 4.2(c) to our consolidated financial statements).
Lease of Telecommunications Networks in Southern China
Pursuant to an agreement in relation to the lease of the Telecommunications Networks in Southern China between CUCL and Unicom Horizon dated December 16, 2008, Unicom New Horizon has the legal ownership of the Telecommunications Networks in Southern China. We believe we only bear the risks associated with the operation of the fixed-line business in southern China during the relevant leasing periods and are free from any ownership risks of the telecommunications networks, and the risks and rewards of ownership of the leased assets rest substantially with the lessor. In addition, at the inception of the lease agreement, there was a high degree of uncertainty related to the market condition and operating results of the fixed-line business in southern China. It was highly uncertain whether we would continue to lease the network in the future, and were also unable to determine whether or not we would exercise the purchase option in future. Given these uncertainties and due to the fact that the risks associated with the ownership of the Telecommunications Networks in Southern China substantially remained with Unicom New Horizon, accordingly, we accounted for the leasing of the Telecommunications Networks in Southern China as an operating lease. The operating lease expense was recorded in the consolidated statement of income for the years ended December 31, 2009 and 2010, but the carrying value of the Telecommunications Networks in Southern China and the related liabilities were not reflected in the consolidated balance sheets as of December 31, 2009 and 2010.
At the beginning of each lease term, we assess the appropriate classification based on the relevant factors and circumstances at that time. On October 29, 2010, CUCL entered into the 2011-2012 Network Lease Agreement with Unicom New Horizon. The 2011-2012 Network Lease Agreement has an initial term of two years, effective from January 1, 2011 and expiring on December 31, 2012, which is renewable at the option of CUCL with at least two months’ prior notice on the same terms and conditions as the network lease agreement dated December 16, 2008, except that the annual fee payable by CUCL for such lease for the two years ending December 31, 2011 and 2012 is RMB2.4 billion and RMB2.6 billion, respectively. At the time of entering into the 2011-2012 Network Lease Agreement, we still believed the uncertainties of the fixed-line business in southern China continue to exist, particularly due to the fact that (i) the growth of the fixed-line business in southern China was not significant; (ii) the future success of the fixed-line business in southern China remained uncertain, in light of the keen market competition; and (iii) the technology, technological standards and government regulatory environment in respect of the relevant business are still subject to uncertainties. Accordingly, we were not in a position to determine whether we would renew the lease after the initial two-year lease term or whether we would exercise the purchase option upon the entering into the 2011-2012 Network Lease Agreement. As a result, we considered the risks associated with the ownership of the Telecommunications Networks in Southern China still substantially remain with Unicom New Horizon, and therefore accounted for the leasing of Telecommunications Networks in Southern China under the 2011-2012 Network Lease Agreement as an operating lease.

 

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Accounting to Available-for-Sale Assets
Available-for-sale financial assets are carried at fair value. Changes in the fair value of available-for-sale assets are recognized in other comprehensive income or loss until impairment. We assess at the end of each reporting period whether there is objective evidence that available-for-sale financial assets are impaired. For equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is evidence that the assets are impaired. Prior to our adoption of IFRS/HKFRS 9 “Financial Instruments” in January 2011, if available-for-sale equity investments are impaired, the accumulated reduction in fair value will be reclassified from equity to the statement of income as impairment loss of available-for-sale financial assets. We consider all available relevant factors, including the fair value of the shares, the period of the decline of fair value, exchange rate and share price volatility and future business prospects, when determining whether there is any impairment.
As of December 31, 2010, our available-for-sale financial assets are principally the equity investment in Telefónica. The net decline in fair value during 2010 was partially due to the depreciation of Euro against RMB of approximately 10% in 2010. In addition, the quoted Euro market price of Telefónica shares experienced fluctuations as a result of the credit rating downgrades for certain Euro zone countries in the middle of 2010. The Euro share price of Telefónica increased and exceeded the initial Euro share value in a certain period during the third quarter of 2010 but it had decreased on a net basis by approximately 13% for the year 2010. Subsequently, during the period from January 1, 2011 to May 24, 2011, there was an appreciation of Euro against RMB of approximately 4%, and a decrease in share price in Euro of approximately 2%, as compared to December 31, 2010.
In addition, we received cash dividends of RMB209 million and RMB480 million from this strategic investment for the years ended December 31, 2009 and 2010, respectively. Based on our judgment , the observed decline in the fair value below the cost of the equity investments in Telefónica was not considered to be significant or prolonged, in light of the ongoing exchange rate and share price volatility, the solid operating results and business prospects of Telefónica, its regular dividend distribution and strategic relationships with us, and therefore did not indicate any impairment as of December 31, 2010.
On January 1, 2011, we early adopted IFRS/HKFRS 9 “Financial Instruments”. Upon adoption of this standard, the balance of available-for-sale fair value reserve was transferred to investment revaluation reserve. In addition, we have made an irrevocable election upon initial adoption of the standard to recognize changes in fair value of available-for-sale financial assets only through other comprehensive income or loss. Thus, there will be no subsequent recycling of fair value gains and losses to the statement of income. Upon adoption, IFRS/HKFRS 9 will be applied retrospectively to all periods presented.
Depreciation on Property, Plant and Equipment
Depreciation on our property, plant and equipment is calculated using the straight-line method to allocate cost or revalued amounts up to residual values over the estimated useful lives of the assets. We review the useful lives and residual values periodically to ensure that the method and rates of depreciation are consistent with the expected pattern of realization of economic benefits from property, plant and equipment. We estimate the useful lives of property, plant and equipment based on historical experience, taking into account anticipated technological changes. If there are significant changes from previously estimated useful lives, the amount of depreciation expenses may change.
Revaluation of Property, Plant and Equipment
Property, plant and equipment other than buildings and telecommunications equipment of the mobile business is carried at revalued amounts, being the fair value at the date of revaluation, less subsequent accumulated depreciation and accumulated impairment losses. Such equipment is revalued on a depreciated replacement cost or open market value approach, as appropriate, by an independent valuer on a regular basis.

 

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During the intervals of independent revaluations, management performs the analysis and assessment annually to determine whether the fair values of property, plant and equipment are materially different from their carrying amounts. If the revalued amounts differ significantly from the carrying amounts of the equipment in the future, the carrying amounts will be adjusted to the revalued amounts. The key assumptions made to determine the revalued amounts include the estimated replacement costs and the estimated useful lives of the equipment. This will have an impact on our future results, since any subsequent decreases in valuation are first set off against increases on earlier valuations in respect of the same item and thereafter are charged as an expense to the statement of income and any subsequent increases are credited as income to the statement of income up to the amount previously charged to the statement of income and thereafter are credited to equity. In addition, the depreciation expenses in future periods will change as the carrying amounts of such equipment change as a result of the revaluation.
Most of our property, plant and equipment which are carried at revalued amounts were revaluated as at December 31, 2006 by an independent valuation firm. We believe that the fair values of these revalued property, plant and equipment were not materially different from their carrying values as of December 31, 2010.
Impairment of Non-Financial Assets
We test whether non-financial assets have suffered from any impairment, in accordance with the accounting policy stated in Note 2.11 to the audited consolidated financial statements contained elsewhere in this annual report. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. Management estimates value in use based on estimated discounted pre-tax future cash flows of the cash generating unit at the lowest level to which the asset belongs. If there is any significant change in management’s assumptions, including discount rates or growth rates in the future cash flow projection, the estimated recoverable amounts of the non-financial assets and our results would be significantly affected. Such impairment losses are recognized in the statement of income, except where the asset is carried at valuation and the impairment loss does not exceed the revaluation surplus for that same asset, in which case the impairment loss is treated as a revaluation decrease and charged to the revaluation reserve. Accordingly, there will be an impact to the future results if there is a significant change in the recoverable amounts of the non-financial assets.
During 2008, we conducted the impairment test for the PHS service related assets, after considering the expected significant decline in revenue and profitability in 2009 and onwards. The impaired PHS business related assets were written down to their recoverable amount, which was determined based on their estimated value in use as there is no active market transaction for PHS business related assets . Estimated value in use was determined based on the present value of estimated future net cash flows expected to arise from the continuing use of the PHS business related assets. In estimating the future net cash flows, we made key assumptions and estimates on the appropriate discount rate of 15%, the period covered by the cash flow forecast of 3 years, the future loss of customers at an annual rate of declining ranging from 60% to 80%, and the decrease in average revenue per subscriber at an annual rate of decline at 15%.
These assumptions and estimates were made after considering the historical trends, the prevailing market trends and the physical conditions of the PHS business related assets. Changes in these assumptions and estimates could have a significant impact on the estimated recoverable amount. Based on above, we recognized RMB11.84 billion of impairment loss on PHS services related assets at the end of 2008.
No impairment loss on property, plant and equipment was recognized for the years ended December 31, 2009 and 2010.
Provision for Doubtful Debts
Accounts receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. We evaluate specific accounts receivable where there are indications that the receivable may be doubtful or is not collectible. We record a provision based on our best estimates to reduce the receivable balance to the amount that is expected to be collected. For the remaining receivable balances as at each reporting date, we make a provision based on observable data indicating that there is a measurable decrease in the estimated future cash flows from the remaining balances. We make such estimates based on our past experience, historical collection patterns, subscribers’ creditworthiness and collection trends. For general subscribers, we make a full provision for receivables aged over 3 months, which is consistent with our credit policy with respect to the relevant subscribers.

 

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Our estimate described above is based on past experience, historical collection patterns, subscribers’ creditworthiness and collection trends. If circumstances change (e.g., due to factors including developments in our business and the external market environment), we may need to re-evaluate our policies on doubtful debts, and make additional provisions in the future.
Income Tax and Deferred Taxation
We estimate our income tax provision and deferred taxation in accordance with the prevailing tax rules and regulations, taking into account any special approvals obtained from relevant tax authorities and any preferential tax treatment to which we are entitled in each location or jurisdiction in which we operate. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. We recognize liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
For temporary differences which give rise to deferred tax assets, we have assessed the likelihood that the deferred tax assets could be recovered. Major deferred tax assets relate to impairment loss on property, plant and equipment, unrecognized revaluation surplus on property, plant and equipment under PRC tax regulations, and provision for doubtful debts. Due to the effects of these temporary differences on income tax, we have recorded deferred tax assets amounting to approximately RMB4,840 million as at December 31, 2010 (2009: approximately RMB5,202 million). Deferred tax assets are recognized based on our estimates and assumptions that they will be recovered from taxable income arising from continuing operations in the foreseeable future.
We believe we have recorded adequate income tax provision and deferred taxes based on the prevailing tax rules and regulations and our current best estimates and assumptions. In the event that future tax rules and regulations or related circumstances change, adjustments to income tax and deferred taxation may be necessary which would impact our results or financial position.
Recently Issued International Financial Reporting Standards/Hong Kong Financial Reporting Standards
The IASB has issued a number of new and revised IFRSs and interpretations that are first effective for the current accounting period commencing January 1, 2010 or are available for early adoption. The equivalent new and revised HKFRSs and interpretations consequently issued by the HKICPA have the same effective date as those issued by the IASB and are in all material respects identical to the pronouncements issued by the IASB. There have been no other material changes to HKFRSs.
Up to the date of issue of our 2010 financial statements, the following new interpretation to existing standard has been issued but not yet effective for the annual accounting period ended December 31, 2010 and has not been adopted by us:
         
    Effective for annual  
    accounting period  
    beginning on or after  
IFRIC/(HK)IFRIC Int 19 “Extinguishing financial liabilities with equity instruments”
  July 1, 2010
On January 1, 2011, we early adopted IFRS/HKFRS 9 “Financial instruments”. Upon adoption of this standard, the balance of available-for-sale fair value reserve is transferred to investment revaluation reserve. In addition, we have made an irrevocable election upon initial adoption of the standard to recognize changes in fair value of available-for-sale financial assets only through other comprehensive income/loss. Thus, there will be no subsequent recycling of fair value gains and losses to the statement of income. IFRS/HKFRS 9 will be applied retrospectively to all periods presented.

 

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Operating Results
Acquisition of Fixed-Line Telecommunications Business in 21 Provinces in Southern China
In the 2009 Business Combination, we did not purchase the underlying fixed-line network assets in southern China, but subsequently leased such assets from Unicom New Horizon, a wholly-owned subsidiary of Unicom Group, to operate the acquired fixed-line business. To account for this transaction, we recorded all assets, liabilities, revenue and costs and expenses associated with the acquired fixed-line business in southern China and the underlying network assets in our consolidated financial statements for the historical periods prior to the completion of the transaction in January 2009. Following the completion of this transaction, as we started to lease the fixed-line network assets in southern China, which were retained by the lessor, the assets and liabilities associated with these network assets were treated as a distribution by us to Unicom Group from other reserve using the merger accounting under HKFRS and predecessor values method under IFRS. Accordingly, we no longer include any assets, liabilities, depreciation, finance costs or other costs relating to such assets, but record only revenue generated from the acquired fixed-line business in southern China and the leasing fee for the relevant network assets in our consolidated financial statements for the subsequent periods.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Revenue
2010 is the second year that we had a full-year operation following our merger with China Netcom. Although China’s economy experienced recovery from the global financial crisis, we continue to face various challenges, including intensified telecommunications market competition, further downward adjustments in tariffs and decline of fixed-line voice business. We continued to actively develop full-service operation with a focus on mobile and fixed-line broadband businesses. Revenue from our continuing operations for 2010 was RMB171.30 billion, an increase of 11.3% from RMB153.95 billion for 2009. Excluding the effects of fixed-line upfront connection fees of RMB0.19 billion and RMB0.49 billion in 2010 and 2009 respectively, our revenue from continuing operations for 2010 would have been RMB171.11 billion, representing an increase of 11.5% from RMB153.46 billion in 2009, of which our telecommunications service revenue would have been RMB161.80 billion in 2010, up by 8.5% from 2009.
Mobile Business Revenue
Revenue from our mobile business increased by 24.4% from RMB71.99 billion in 2009 to RMB89.55 billion in 2010. Of the revenue from our mobile business in 2009 and 2010, RMB69.77 billion and RMB82.36 billion, respectively, was from telecommunications service. Telecommunications service revenue from our mobile business as a percentage of our total telecommunications service revenue (excluding fixed-line upfront connection fees of RMB0.19 billion and RMB0.49 billion in 2010 and 2009 respectively) increased from 46.8% in 2009 to 50.9% in 2010. The growth in revenue from our mobile business is primarily due to the continued increase in the total number of our mobile subscribers, as well as an increase in our subscribers’ ARPU. The increase in ARPU was due to the change of revenue mix between our GSM business and 3G business. 3G business has a significantly higher ARPU than GSM business. Therefore, despite the ARPU of each of our GSM and 3G businesses decreased in 2010 compared to 2009, as the revenue from 3G business increased significantly as a percentage of total telecommunications service revenue from mobile business from 1.1% in 2009 to 14.1% in 2010, the overall ARPU of our mobile business increased. In 2010, revenue from 3G business was RMB11.59 billion.
Our total number of mobile subscribers was 167.43 million as of December 31, 2010, with a net addition of 19.84 million subscribers (including 11.32 million 3G subscribers) from the end of 2009. ARPU of our GSM mobile business was RMB39.5 in 2010, a decrease of 4.1% from RMB41.2 in 2009. ARPU of our 3G business was RMB124.0 in 2010, a decrease of 12.5% from RMB141.7 in 2009.

 

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The table below sets forth the revenue composition of our mobile business and each revenue item’s respective share of total revenue for the years ended December 31, 2009 and 2010.
                                 
    2009     2010  
    RMB in millions     As % of total     RMB in millions     As % of total  
Total revenue from mobile business
    71,991       100.0       89,550       100.0  
Telecommunications service revenue
    69,769       97.0       82,362       92.0  
Usage fees and monthly fees
    42,297       58.8       47,004       52.5  
Value-added service revenue
    19,070       26.5       25,852       28.9  
Interconnection revenue
    8,220       11.4       9,022       10.1  
Other service revenue
    182       0.3       484       0.5  
Other revenue
    252       0.3       15        
Sales of mobile telecommunications products
    1,970       2.7       7,173       8.0  
Usage Fees and Monthly Fees . As a result of an increase in mobile subscribers, partially offset by the decrease in effective tariffs, usage fees and monthly fees for our mobile services were RMB47.00 billion in 2010, an increase of 11.1% from RMB42.30 billion in 2009.
Value-Added Service Revenue . In 2010, we continued to actively promote mobile value-added services and mobile data business, and improved the penetration of SMS, “Cool Ringtone” and mobile Internet services. As a result, revenue from our mobile value-added services amounted to RMB25.85 billion in 2010, representing an increase of 35.6% from RMB19.07 billion in 2009 and as a percentage of total mobile revenue increased from 26.5% in 2009 to 28.9% in 2010. Of the total revenue from mobile value-added services, revenue from our SMS services increased by 1.8% from RMB7.92 billion in 2009 to RMB8.07 billion in 2010, revenue from “Cool Ringtone” services increased by 6.8% from RMB2.88 billion in 2009 to RMB3.08 billion in 2010 and revenue from mobile Internet services increased by 174.6% from RMB2.80 billion in 2009 to RMB7.70 billion in 2010.
Interconnection Revenue . Our interconnection revenue increased by 9.8% from RMB8.22 billion in 2009 to RMB9.02 billion in 2010, and represented 10.1% of total mobile revenue in 2010 as compared with 11.4% in 2009. This increase is primarily as a result of the increased total usage of our mobile services due to the increased total number of our mobile subscribers.
Sales of Telecommunications Products . Revenue from our sale of mobile telecommunications products increased from RMB1,970 million in 2009 to RMB7,173 million in 2010, mainly due to our continuing efforts in promoting our bundled sale of 3G mobile handsets and provision of 3G mobile services.
Fixed-Line Business Revenue
In 2010, as mobile substitution further intensified and the declining trend of the fixed-line voice business continued, we further developed our fixed-line broadband services and promoted our mobile and fixed-line bundled services. Excluding fixed-line upfront connection fees of RMB0.49 billion and RMB0.19 billion in 2009 and 2010, respectively, our revenue from fixed-line business would have decreased by 1.2% from RMB80.86 billion in 2009 to RMB79.86 billion in 2010, of which telecommunications service revenue would have decreased by 0.4% from RMB79.06 billion in 2009 to RMB78.70 billion in 2010. See “D. Risk Factors — We may further lose fixed-line and mobile subscribers and our doubtful debt ratios may increase, which may materially adversely affect our financial condition, results of operations and growth prospects” under Item 3.

 

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The table below sets forth the revenue composition of our fixed-line business and each revenue item’s respective share of total revenue from our fixed-line business for the years ended December 31, 2009 and 2010.
                                 
    For the Year Ended December 31,  
    2009     2010  
    RMB in millions     As % of Total     RMB in millions     As % of Total  
Total revenue from fixed-line business (1)
    80,863       100.0       79,864       100.0  
Telecommunications service revenue (1)
    79,059       97.8       78,704       98.6  
Usage fee and monthly fee (1)
    34,369       42.5       29,085       36.4  
Fixed-line broadband, managed data and other Internet-related services revenue
    26,364       32.6       32,595       40.8  
Interconnection revenue
    5,599       6.9       5,243       6.6  
Value-added service revenue
    5,238       6.5       4,860       6.1  
Leased line service revenue
    5,683       7.0       5,589       7.0  
Others
    1,806       2.3       1,332       1.7  
Information communication technology services and other revenue
    1,611       2.0       1,046       1.3  
Sales of fixed-line telecommunications products
    193       0.2       114       0.1  
 
     
(1)  
Excluding fixed-line upfront connection fees of RMB0.49 billion in 2009 and RMB0.19 billion in 2010. Fixed-line upfront connection fees represent the amortization of deferred upfront connection fees received from the customers before July 1, 2001. No upfront connection fee was received from the customers since then. Therefore, we consider that analyses of our operating results excluding upfront connection fees are more relevant to the readers of this report.
Usage Fees and Monthly Fees. Usage fees include local usage fees charged for local telephone calls and VoIP long distance calls, long distance usage fees for domestic and international long distance calls originated by our fixed-line subscribers, users of our pre-paid phone cards and certain other customers. Monthly fees represent the fixed amount of service charges to our customers for using our fixed-line telephone services.
As a result of further implementation of the “Calling-Party-Pays” tariff policy for mobile services and continuing downward adjustments of tariffs for fixed-line services, the substitution effect of fixed-line local services by mobile services became more intense. We experienced significant decline in the number of our fixed-line local telephone subscribers and substantial decline in revenue. Our local telephone subscribers decreased in 2010 by 6.0% from 102.82 million at the end of 2009 to 96.64 million at the end of 2010. ARPU of the local telephone business decreased by 8.0% from 2009 to RMB28.9 in 2010. Total usage of local calls decreased by 16.2% from 2009 to 155.56 billion pulses in 2010 (excluding Internet dial-up usage) and total usage of long distance calls decreased by 20.2% from 33.58 billion minutes in 2009 to 26.79 billion minutes in 2010. As a result, revenue from our usage fees and monthly fees in 2010 decreased by 15.4% from RMB34.37 billion in 2009 to RMB29.09 billion in 2010.
Fixed-Line Broadband, managed data and other Internet-related services revenue. Revenue from our fixed-line broadband, managed data and other internet-related service include revenue generated from DSL, LAN, and broadband-related value-added services, fees that we charge for our DDN, frame relay, ATM, MPLS-VPN and X.25 services and revenue from the provision of Internet dial-up services (other than communication fees) and dedicated Internet access services. Revenue from our fixed-line broadband, managed data and other internet-related service increased by 23.6% from RMB26.36 billion in 2009 to RMB32.60 billion in 2010, as a result of increases in both revenue from fixed-line broadband services and from managed data and other Internet-related services services.
In 2010, our fixed-line broadband business continued to maintain a rapid growth as a result of our efforts in improving broadband access speed, adopting multi-service bundling strategy, enriching application contents and implementing diversified sales strategies. The number of our fixed-line broadband subscribers increased by 22.5% from 2009 to 47.22 million in 2010. ARPU of our fixed-line broadband business remained stable at RMB57.2 in 2009 and RMB57.1 in 2010. However, revenue from our fixed-line broadband service increased significantly by 24.8% from 2009 to RMB29.82 billion in 2010, and as a percentage of the total fixed-line revenue, increased from 29.6% in 2009 to 37.3% in 2010. Fixed-line broadband service has become the main factor in counteracting the effect of mobile substitution in the decline of our fixed-line voice business. Revenue from our managed data services and other Internet-related services increased by 12.4% from RMB2.47 billion in 2009 to RMB2.77 billion in 2010.

 

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Interconnection Revenue . Revenue from our interconnection services consists of interconnection fees charged to other domestic telecommunications operators, principally China Mobile and China Telecom, for both local and long distance calls. Revenue from our interconnection services decreased by 6.4% from RMB5.60 billion in 2009 to RMB5.24 billion in 2010. The decrease in interconnection revenue was mainly due to a decrease in voice traffic from other telecommunications operators as a result of the mobile substitution effect.
Value-Added Service Revenue . Revenue from our value-added services consists of fees that we charge our customers for the provision of caller identification, personalized ring, telephone information services, video- and tele-conferencing and other value-added services. Revenue from our value-added services decreased by 7.2% from RMB5.24 billion in 2009 to RMB4.86 billion in 2010, mainly due to the decrease in the usage of our caller identification, Personalized Ring, and PHS SMS services as a result of the significant reduction of our fixed-line telephone subscribers, including PHS subscribers.
Leased Line Service Revenue . Revenue from our leased line services consists of fees that we receive from our government, corporate and carrier customers for leasing circuit capacity to them, including the lease of digital circuits, digital trunk lines and optic fibers. Revenue from our leased line services decreased by 1.7% from RMB5.68 billion in 2009 to RMB5.59 billion in 2010.
Others . Other fixed-line related revenue mainly consists of miscellaneous revenue items. Other fixed-line related revenue decreased by 26.2% from RMB1.81 billion in 2009 to RMB1.33 billion in 2010.
Information Communication Technology Services and Other Revenue. Information communication technology services and other revenue decreased by 35.1% from RMB1.61 billion in 2009 to RMB1.05 billion in 2010, mainly due to the decrease in other revenue in 2010.
Sales of Telecommunications Products . Revenue from our sales of fixed-line telecommunications products decreased by 40.9% from RMB0.19 billion in 2009 to RMB0.11 billion in 2010, mainly due to the decrease in sales of telecommunications terminal products such as telephone sets associated with local voice services in 2010.
Costs, Expenses and Others
Total costs, expenses and others for our continuing operations in 2010 were RMB166.53 billion, representing an increase of 17.5% from RMB141.67 billion in 2009. Excluding the effects of the realized gains of RMB1.24 billion on changes in fair value of derivative financial instrument in 2009, our total costs, expenses and others for our continuing operations in 2010 increased by 16.5% from RMB142.91 billion in 2009.
The table below sets forth the major items of costs, expenses and others from continuing operations and their respective percentage of the total telecommunications services revenue from continuing operations for the years 2009 and 2010:
                                 
    For the Year Ended December 31,  
    2009     2010  
    RMB in millions     % of Total     RMB in millions     % of Total  
Total telecommunications services revenue (1)
    149,103       100.0       161,803       100.0  
Costs, expenses and others
    141,668       95.0       166,525       102.9  
Interconnection charges
    12,955       8.7       13,727       8.5  
Depreciation and amortization
    47,587       31.9       54,433       33.6  
Networks, operations and support expenses
    23,728       15.9       26,383       16.3  
Employee benefit expenses
    21,931       14.7       23,327       14.4  
Selling and marketing
    21,020       14.1       23,733       14.7  
Cost in relation to information communication technology services
    839       0.6       895       0.6  
General, administrative and other expenses
    12,175       8.2       12,953       8.0  
Cost of telecommunications products sold
    2,689       1.8       10,688       6.6  
Finance costs, net of interest income
    945       0.6       1,607       1.0  
Realized gains on changes in fair value of derivative financial instrument
    (1,239 )     (0.8 )            
Other income-net
    (962 )     (0.7 )     (1,221 )     (0.8 )
 
   
(1) Excludes fixed-line upfront connection fees of RMB0.49 billion in 2009 and RMB0.19 billion in 2010.

 

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Interconnection Charges . Interconnection charges were RMB13.73 billion in 2010, up by 6.0% from 2009, primarily due to an increase in mobile interconnection traffic volume resulting from the increase of total usage of our mobile services. The increase in interconnection charges is consistent with the increase in interconnection revenues. Interconnection charges as a percentage of telecommunications service revenue (excluding fixed-line upfront connection fees) was 8.5% and 8.7% in 2010 and 2009, respectively.
Depreciation and Amortization . Our depreciation and amortization expenses were RMB54.43 billion in 2010, up by 14.4% from 2009. The increase was primarily because we focused on improving our 3G network capacity and expanding the 3G network coverage. Meanwhile, we continued to optimize our GSM network and expedited the broadband upgrade. As a percentage of telecommunications service revenue (excluding fixed-line upfront connection fees), our depreciation and amortization expenses increased from 31.9% in 2009 to 33.6% in 2010.
Networks, Operations and Support Expenses . Due to various factors, including the expansion of networks, facilities and base stations and the increases in utilities charges and rental expenses, we incurred networks, operations and support expenses of RMB26.38 billion in 2010, up by 11.2% from 2009. Networks, operations and support expenses, as a percentage of telecommunications service revenue (excluding fixed-line upfront connection fees), increased from 15.9% in 2009 to 16.3% in 2010. As a result of an increase in the lease of underlying telecommunications networks from other telecommunications operators, the related line leasing fees was RMB1.54 billion, up by 29.4% from 2009. We completed an acquisition of fixed-line business of 21 provinces in southern China in January 2009. As the underlying telecommunications networks for such business are retained by Unicom Group, we operated those networks through an operating lease from Unicom Group from January 2009. As a result, we incurred a lease fee of RMB2.20 billion for leasing those telecommunications networks in 2010.
Employee Benefit Expenses . Due to various factors, such as increased employee insurance premium expenses and housing fund resulting from new regulations and generally improved social average wages in China, our employee benefit expenses increased by 6.4% from 2009 to RMB23.33 billion in 2010, and as a percentage of telecommunications service revenue (excluding fixed-line upfront connection fees), decreased from 14.7% in 2009 to 14.4% in 2010.
Selling and Marketing Expenses . Due to various factors, including the increased promotion of our key businesses such as 3G and broadband services and the increased costs of customer retention and channel subsidies, in 2010, our total selling and marketing expenses reached RMB23.73 billion, up by 12.9% from 2009, and as a percentage of telecommunications service revenue (excluding fixed-line upfront connection fees), increased from 14.1% in 2009 to 14.7% in 2010.
Cost in Relation to Information Communication Technology Services . Cost in relation to information communication technology in 2010 was RMB0.90 billion, up by 6.7% from last year. Correspondingly, revenue from ICT services in 2010 was RMB1.05 billion, up by 1.3% from last year.
General, Administrative and Other Expenses . We continued to closely control the growth of general and administrative expenses. Our general, administrative and other expenses was RMB12.95 billion in 2010, up by 6.4% compared with last year, and as a percentage of telecommunications service revenue (excluding fixed-line upfront connection fees), slightly decreased from 8.2% in 2009 to 8.0% in 2010.

 

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Cost of Telecommunications Products Sold . In 2010, we launched more than one hundred models of custom-made 3G handsets (including iPhone 4), proactively implemented handsets subsidies packages and developed 3G contracting subscribers. As a result, the cost of telecommunications products sold amount to RMB10.69 billion, up by 297.5% from 2009. Correspondingly, revenue from sale of telecommunications products in 2010 amounted to RMB7.29 billion, up by 236.9% from 2009.
Finance Costs, Net of Interest Income . In 2010, we adopted low cost fund raising strategy including the issuance of commercial papers, promissory notes and convertible bonds to decrease our overall cost of capital to 3.2% from 4.1% in 2009. However, due to various factors including the increase in our interest-bearing debt, our finance costs, net of interest income, increased by 70.1% from RMB0.94 billion in 2009 to RMB1.61 billion in 2010.
Realized Gain on Changes in Fair Value of Derivative Financial Instrument . In order to strengthen our cooperation with Telefónica, we entered into a subscription agreement with Telefónica on September 6, 2009, pursuant to which each party completed the mutual investment of an equivalent of US$1 billion in each other through an acquisition of the other party’s shares on October 21, 2009. At the inception of the subscription agreement on September 6, 2009, our agreement to undertake the above mutual investment with Telefónica was accounted for as a derivative financial instrument in accordance with IAS/HKAS 39 “Financial instrument: Recognition and measurement”, as it represents a forward contract for the purchase of shares by Telefónica and us in each other at predetermined fixed prices and is denominated in a foreign currency. The derivative financial instrument was derecognized upon completion of the transaction on October 21, 2009. The changes in the fair value of the derivative financial instrument during the period from September 6, 2009 to October 21, 2009 resulted in a fair value gain of approximately RMB1.24 billion, which has been recorded in the consolidated statement of income for the year ended December 31, 2009.
Other Income-Net . In 2010, other income-net was RMB1.22 billion, up by 26.9% from 2009, of which, dividend received from investment in Telefónica was RMB0.48 billion, up by RMB0.27 billion from 2009.
Income Before Income Tax
In 2010, our income before income tax was RMB4.77 billion, down by 61.2% from 2009, mainly due to our initial development of the 3G business, in respect of which the related revenue is not yet sufficient to cover the increased costs and expenses, including depreciation and amortization charges, networks, operations and support expenses and selling and marketing expenses related to 3G handset subsidy cost.
In order to ensure the comparability of income before income tax and income for the year, we exclude the following non-comparable factors that are reflected in the figures of 2009 and 2010 for additional analysis purpose:
  (1)  
deferred fixed-line upfront connection fees of RMB0.19 billion for 2010 and RMB0.49 billion for 2009; and
  (2)  
realized gain of RMB1.24 billion on changes in fair value of derivative financial instrument in 2009.
After excluding the above factors, our income before income tax would have been RMB4.58 billion, down by 56.6% from 2009.
Income Tax
Our income tax was RMB0.92 billion in 2010, down by 66.1% from 2009, and our effective tax rate in 2010 was 19.3%. Such decrease is mainly due to various factors, including the utilization of tax loss from the previous years of a subsidiary of our company against the current year taxable income and other favorable tax treatments. After excluding the factors discussed under Income Before Income Tax above, our effective tax rate in 2009 and 2010 would have been 22.9% and 20.1%, respectively.

 

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Net Income for the Year
In 2010, our net income reached RMB3.85 billion, down by 59.7% from 2009. Our basic earnings per share was RMB0.163 in 2010. After excluding the factors discussed under the subsection Income Before Income Tax above, our net income from continuing operations would be RMB3.66 billion, down by 55.0% from 2009.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenue
2009 is the first year that we had a full-year operation following our merger with China Netcom. Despite various challenges, including global financial crisis, intensified telecommunications market competition, further downward adjustments in tariffs and decline of fixed-line voice business, we actively developed full-service operation with a focus on mobile and fixed-line broadband businesses. Revenue from our continuing operations for 2009 amounted to RMB153.95 billion, a decrease of 3.7% from RMB159.79 billion for 2008. Excluding the effects of fixed-line upfront connection fees of RMB0.49 billion and RMB0.89 billion in 2009 and 2008 respectively, and interconnection revenue of RMB0.99 billion between our certain fixed-line business and the discontinued operations of CDMA business in 2008, our revenue from continuing operations for 2009 would amount to RMB153.46 billion, a decrease of 2.8% from RMB157.91 billion in 2008, of which our telecommunications service revenue would be RMB149.10 billion, down by 1.2% from 2008.
Mobile Business Revenue
Revenue from our mobile business was RMB71.99 billion in 2009, of which telecommunications service revenue accounted for RMB69.77 billion, up by 8.6% compared with 2008. Telecommunications service revenue from our mobile business, as a percentage of our total telecommunications service revenue (excluding fixed-line upfront connection fees of RMB0.49 billion and RMB0.89 billion in 2009 and 2008 respectively, and interconnection revenue of RMB0.99 billion between our certain fixed-line business and the discontinued operations of CDMA business in 2008), increased from 42.6% in 2008 to 46.8% in 2009. The growth in revenue from our mobile business is primarily due to the continued increase in the total number of our mobile subscribers, partially offset by the decrease in our subscribers’ ARPU.
Our total number of mobile subscribers was 147.59 million as of December 31, 2009, with a net addition of 14.22 million subscribers (including 2.74 million 3G subscribers) from the end of 2008. ARPU of our GSM mobile business was RMB41.2 in 2009, a decrease of 2.64% from RMB42.3 in 2008. ARPU of our 3G business was RMB141.7 in 2009.
The table below sets forth the revenue composition of our mobile business and each revenue item’s respective share of total revenue for the years ended December 31, 2008 and 2009.
                                 
    2008     2009  
    RMB in millions     As % of total     RMB in millions     As % of total  
Total revenue from mobile business
    65,131       100.0       71,991       100.0  
Telecommunications service revenue
    64,240       98.6       69,769       97.0  
Usage fees and monthly fees
    40,462       62.1       42,297       58.8  
Value-added service revenue
    16,263       25.0       19,070       26.5  
Interconnection revenue
    6,775       10.4       8,220       11.4  
Other service revenue
    740       1.1       182       0.3  
Other revenue
    359       0.6       252       0.3  
Sales of mobile telecommunications products
    532       0.8       1,970       2.7  
Usage Fees and Monthly Fees . As a result of increase of mobile subscribers, partially offset by the decrease in effective tariffs, usage fees and monthly fees for our mobile services were RMB42.30 billion in 2009, an increase of 4.5% from RMB40.46 billion in 2008.

 

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Value-Added Service Revenue . In 2009, we continued to actively promote mobile value-added services and mobile data business, and improved the penetration of SMS and “Cool Ringtone” services. As a result, revenue from our mobile value-added services amounted to RMB19.07 billion in 2009, an increase of 17.3% from RMB16.26 billion in 2008 and as a percentage of total mobile revenue increased from 25.0% in 2008 to 26.5% in 2009. Of the total revenue from mobile value-added services, revenue from our SMS services decreased by 8.2% from RMB6.52 billion in 2008 to RMB5.98 billion in 2009 and revenue from “Cool Ringtone” services increased by 15.7% from RMB2.49 billion in 2008 to RMB2.88 billion in 2009.
Interconnection Revenue . Our interconnection revenue increased by 21.3% from RMB6.78 billion in 2008 to RMB8.22 billion in 2009, and represented 11.4% of total mobile revenue in 2009 as compared with 10.4% in 2008. This increase is primarily due to the increased total usage of our mobile services.
Sales of Telecommunications Products . Revenue from our sale of mobile telecommunications products increased 270.3% from RMB532 million in 2008 to RMB1,970 million in 2009, mainly due to our efforts in sales of 3G mobile handsets.
Fixed-Line Business Revenue
In 2009, as mobile substitution further intensified and the declining trend of the fixed-line voice business continued, we further adjusted our business structure and continued to focus on the development of fixed-line broadband services and innovative business services. Excluding fixed-line upfront connection fees of RMB0.49 billion and RMB0.89 billion in 2009 and 2008 respectively, and interconnection revenue of RMB0.99 billion between our certain fixed-line business and the discontinued operations of CDMA business in 2008, our revenue from fixed-line business would have decreased by 12.2% from RMB92.08 billion in 2008 to RMB80.86 billion in 2009, of which telecommunications service revenue would have decreased by 8.5% from RMB86.38 billion in 2008 to RMB79.06 billion in 2009. See “D. Risk Factors—We may further lose fixed-line and mobile subscribers and our doubtful debt ratios may increase, which may materially adversely affect our financial condition, results of operations and growth prospects” under Item 3.
The table below sets forth the revenue composition of our fixed-line business and each revenue item’s respective share of total revenue from our fixed-line business for the years ended December 31, 2008 and 2009.
                                 
    For the Year Ended December 31,  
    2008     2009  
    RMB in millions     As % of Total     RMB in millions     As % of Total  
Total revenue from fixed-line business (1)
    92,077       100.0       80,863       100.0  
Telecommunications service revenue (1)
    86,376       93.8       79,059       97.8  
Usage fee and monthly fee (1)
    40,497       44.0       34,369       42.5  
Fixed-line broadband, managed data and other internet-related service revenue
    23,624       25.6       26,364       32.6  
Interconnection revenue
    7,342       8.0       5,599       6.9  
Value-added service revenue
    7,074       7.7       5,238       6.5  
Leased line service revenue
    5,492       6.0       5,683       7.0  
Others
    2,347       2.5       1,806       2.3  
Information communication technology services and other revenue
    4,339       4.7       1,611       2.0  
Sales of fixed-line telecommunications products
    1,362       1.5       193       0.2  
 
(1)  
Excludes fixed-line upfront connection fees of RMB0.49 billion in 2009 and RMB0.89 billion in 2008 and interconnection revenue of RMB0.99 billion between certain fixed-line business and the discontinued operations of CDMA business in 2008. Fixed-line upfront connection fees represent the amortization of deferred upfront connection fees received from the customers before July 1, 2001. No upfront connection fee was received from the customers since then. In addition, upon disposal of the CDMA business in 2008, interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business will not be recognized anymore. Therefore, we consider that analyses of our operating results excluding upfront connection fees and interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business are more relevant to the readers of this report.

 

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Usage Fees and Monthly Fees. Usage fees include local usage fees charged for local telephone calls and VoIP long distance calls, long distance usage fees for domestic and international long distance calls originated by our fixed-line subscribers, users of our pre-paid phone cards and certain other customers. Monthly fees represent the fixed amount of service charges to our customers for using our fixed-line telephone services.
As a result of further implementation of the “Calling-Party-Pays” tariff policy for mobile services and continuing downward adjustments of tariffs for fixed-line services, the substitution effect of fixed-line local services by mobile services became more intense. We experienced significant decline in the number of our fixed-line local telephone subscribers and substantial decline in revenue. Our local telephone subscribers decreased in 2009 by 6.2% from 109.57 million at the end of 2008 to 102.82 million at the end of 2009. ARPU of the local telephone business decreased by 11.3% from 2008 to RMB31.4 in 2009. Total usage of local calls decreased by 8.9% from 2008 to 185.54 billion pulses in 2009 (excluding Internet dial-up usage) and total usage of long distance calls decreased by 18.3% from 41.11 billion minutes in 2008 to 33.58 billion minutes in 2009. As a result, revenue from our usage fees and monthly fees in 2009 decreased by 15.1% from RMB40.50 billion in 2008 to RMB34.37 billion in 2009.
Fixed-Line Broadband, managed data and other Internet-related services revenue. Revenue from our fixed-line broadband, managed data and other internet-related service include revenue generated from DSL, LAN, and broadband-related value-added services, fees that we charge for our DDN, frame relay, ATM, MPLS-VPN and X.25 services and revenue from the provision of Internet dial-up services (other than communication fees) and dedicated Internet access services. Revenue from our fixed-line broadband, managed data and other internet-related service increased by 11.6% from RMB23.62 billion in 2008 to RMB26.36 billion in 2009, as a result of an increase in revenue from fixed-line broadband services, partially offset by a decrease in revenue from managed data and other Internet-related services services.
In 2009, our fixed-line broadband business continued to maintain a rapid growth as a result of our efforts in improving broadband access speed, enriching application contents and implementing diversified sales strategies. Our fixed-line broadband subscribers increased by 28.2% from 2008 to 38.55 million in 2009. ARPU of our fixed-line broadband business decreased from RMB63.6 in 2008 to RMB57.2 in 2009, mainly because: (i) a significant portion of our new broadband subscribers consist of users from rural areas in China who tend to have limited usage of broadband services, and (ii) the general decreasing tariff resulted from intensified market competition. However, revenue from our fixed-line broadband service increased significantly by 14.0% from 2008 to RMB23.90 billion in 2009, and as a percentage of the fixed-line service revenue, increased from 22.8% in 2008 to 29.6% in 2009. Fixed-line broadband service has become the main factor in counteracting the effect of mobile substitution in the decline of our fixed-line voice business. Revenue from our managed data services increased by 3.7% from RMB1.41 billion in 2008 to RMB1.46 billion in 2009. Revenue from other Internet-related services decreased by 19.8% from RMB1.25 billion in 2008 to RMB1.01 billion in 2009.
Interconnection Revenue . Revenue from our interconnection services consists of interconnection fees charged to other domestic telecommunications operators, principally China Mobile and China Telecom, for both local and long distance calls. Revenue from our interconnection services decreased by 23.7% from RMB7.34 billion in 2008 to RMB5.60 billion in 2009. The decrease in interconnection revenue was mainly due to a decrease in voice traffic from other telecommunications operators as a result of the mobile substitution effect.
Value-Added Service Revenue . Revenue from our value-added services consists of fees that we charge our customers for the provision of caller identification, personalized ring, telephone information services, video- and tele-conferencing and other value-added services. Revenue from our value-added services decreased by 26.0% from RMB7.07 billion in 2008 to RMB5.24 billion in 2009, mainly due to the decrease in usage of our caller identification and PHS SMS services as a result of the significant reduction of our fixed-line telephone subscribers, including PHS subscribers.

 

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Leased Line Service Revenue . Revenue from our leased line services consists of fees that we receive from our government, corporate and carrier customers for leasing circuit capacity to them, including the lease of digital circuits, digital trunk lines and optic fibers. Revenue from our leased line services increased by 3.5% from RMB5.49 billion in 2008 to RMB5.68 billion in 2009, mainly due to the increased demand of leased line services by our government and SME customers.
Others . Other fixed-line related revenue mainly consists of miscellaneous revenue items. Other fixed-line related revenue decreased by 23.1% from RMB2.35 billion in 2008 to RMB1.81 billion in 2009.
Information communication technology services and other revenue. Information communication technology services and other revenue decreased by 62.9% from RMB4.34 billion in 2008 to RMB1.61 billion in 2009. This decrease was mainly due to the decrease in our ICT service revenue as a result of the change in our ICT business strategy which is changed to focus on the provision of technology/services and reducing hardware sales. In 2009, we reduced sales of third-party products in connection with the provision of our ICT services, which, despite reducing our direct revenue, helped enhance the profit margin, of our ICT services.
Sales of Telecommunications Products . Revenue from our sales of fixed-line telecommunications products decreased by 85.8% from RMB1.36 billion in 2008 to RMB0.19 billion in 2009, mainly due to the decrease in sales of computers bundled with our fixed-line broadband services in 2008.
Costs, Expenses and Others
Total costs, expenses and others for our continuing operations in 2009 were RMB141.67 billion, representing a decrease of 9.0% from RMB155.73 billion in 2008. Excluding the effects of the following non-comparable items: (i) realized gains of RMB1.24 billion on changes in fair value of derivative financial instrument in 2009; (ii) impairment loss of RMB11.84 billion on PHS services related equipment in 2008; and (iii) gain of RMB0.04 billion from the non-monetary assets exchange in 2009 and RMB1.31 billion in 2008, our total costs, expenses and others for our continuing operations in 2009 would have been RMB142.95 billion, representing a decrease of 1.6% from RMB145.20 billion in 2008.
The table below sets forth the major items of costs, expenses and others from continuing operations and their respective percentage of the total telecommunications services revenue from continuing operations for the years 2008 and 2009:
                                 
    For the Year Ended December 31,  
    2008     2009  
    RMB in millions     % of Total     RMB in millions     % of Total  
Continuing Operations
                               
Total telecommunications services revenue (1)
    150,953       100.0       149,103       100.0  
Costs, expenses and others
    155,733       103.2       141,668       95.0  
Interconnection charges
    13,038       8.6       12,955       8.7  
Depreciation and amortization
    51,847       34.3       47,587       31.9  
Networks, operations and support expenses
    18,736       12.4       23,728       15.9  
Employee benefit expenses
    20,758       13.8       21,931       14.7  
Selling and marketing
    19,614       13.0       21,020       14.1  
Cost in relation to information communication technology services
    3,010       2.0       839       0.6  
General, administrative and other expenses
    13,217       8.8       12,175       8.2  
Cost of telecommunications products sold (1)
    2,156       1.4       2,689       1.8  
Finance costs, net of interest income
    3,004       2.0       945       0.6  
Impairment loss on property, plant and equipment
    12,494       8.3              
Realized gains on changes in fair value of derivative financial instrument
                (1,239 )     (0.8 )
Other income-net
    (2,141 )     (1.4 )     (962 )     (0.7 )
 
(1)  
Excludes fixed-line upfront connection fees of RMB0.49 billion in 2009 and RMB0.89 billion in 2008 and interconnection revenue of RMB0.99 billion between certain fixed-line business and the discontinued operations of CDMA business in 2008.

 

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Interconnection Charges . Interconnection charges were RMB12.96 billion in 2009, down by 0.6% from 2008 and as a percentage of telecommunications service revenue (excluding fixed-line upfront connection fees and interconnection revenue between our certain fixed-line business and the discontinued operations of CDMA business in 2008) would remain stable in 2009.
Depreciation and Amortization . Our depreciation and amortization expenses were RMB47.59 billion in 2009, down by 8.2% from 2008. The decrease was primarily due to the following factors (i) we no longer record any depreciation of the fixed-line network assets in southern China as a result of our acquisition from Unicom Group of the telecommunications business in 21 provinces in southern China in 2009 (see “—Acquisition of Fixed-Line Telecommunications Business in 21 Provinces in Southern China” above), (ii) our full provision of the impairment loss on the PHS service related equipment in 2008, and (iii) to a lesser extent, the full depreciation of certain property, plant and equipment (other than the fixed-line network assets in southern China) in 2008. This decrease was partially offset by the increase in the depreciation and amortization expenses of 3G network assets of RMB0.65 billion in the fourth quarter of 2009. As a percentage of telecommunications service revenue (excluding fixed-line upfront connection fees and interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business in 2008), our depreciation and amortization expenses decreased from 34.3% in 2008 to 31.9% in 2009.
Networks, Operations and Support Expenses . We completed an acquisition of fixed-line business of 21 provinces in southern China in January 2009. As the underlying telecommunications networks for such business are retained by Unicom Group, we operated those networks through an operating lease from Unicom Group from January 2009. As a result, we incurred a lease fee of RMB2.00 billion for leasing those telecommunications networks in 2009. In addition, due to various factors, including the launch of 3G services, the expansion of GSM networks facilities and base stations and the increases in utilities charges and repair and maintenance expenses, we incurred networks, operations and support expenses of RMB23.73 billion in 2009, up by 26.6% from 2008. Networks, operations and support expenses, as a percentage of telecommunications service revenue (excluding fixed-line upfront connection fees and interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business in 2008), increased by 2.2% from 2008 to 15.9% in 2009. As a result of network resources sharing and utilization of synergies, the related line leasing fees was RMB1.19 billion, down by 22.7% from 2008.
Employee Benefit Expenses . Due to various factors, such as increased employee insurance premium expenses and housing fund resulting from new regulations and generally improved social average wages in China, our employee benefit expenses increased by 5.7% from 2008 to RMB21.93 billion in 2009, and as a percentage of telecommunications service revenue (excluding fixed-line upfront connection fees and interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business in 2008), increased from 13.8% in 2008 to 14.7% in 2009.
Selling and Marketing Expenses . Since the commercial launch of 3G business on October 1, 2009, we have been engaged in active advertising campaigns and marketing promotion activities, which resulted in a total selling and marketing expenses for the fourth quarter of 2009 of RMB1.17 billion. In 2009, our total selling and marketing expenses reached RMB21.02 billion, up by 7.2% from 2008, and as a percentage of telecommunications service revenue (excluding fixed-line upfront connection fees and interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business in 2008), increased from 13.0% in 2008 to 14.1% in 2009.
Cost in Relation to Information Communication Technology Services . We adjusted the development strategy in relation to our ICT business by focusing on the provision of technology services and reducing hardware sales. As a result, cost in relation to information communication technology in 2009 was RMB0.84 billion, down by 72.1% from last year. Correspondingly, revenue from ICT services in 2009 was RMB1.04 billion, down by 71.9% from last year.

 

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General, Administrative and Other Expenses . As we continued to benefit from the post-merger synergies and to closely control the growth of general and administrative expenses, our general, administrative and other expenses was RMB12.18 billion in 2009, down by 7.9% compared with last year, and as a percentage of telecommunications service revenue (excluding fixed-line upfront connection fees and interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business in 2008), slightly decreased from 8.8% in 2008 to 8.2% in 2009.
Cost of Telecommunications Products Sold . As a result of the increase in the number of mobile handsets sold after the commercial launch of 3G business, the cost of telecommunications products sold amount to RMB2.69 billion, up by 24.7% from 2008. Correspondingly, revenue from sale of telecommunications products in 2009 amounted to RMB2.16 billion, up by 13.9% from 2008.
Finance Costs, Net of Interest Income . In 2009, we further improved our debt structure by enhancing the centralization of fund management and fund operation and obtained low-cost financing. In addition, due to the following factors: (i) reduction of base lending rate and the increase in the amount of capitalized interest related to the construction we undertook in 2009, and (ii) we no longer record any finance costs associated with the fixed-line network assets in southern China as a result of our acquisition from Unicom Group of the telecommunications business in 21 provinces in southern China in 2009 (see “—Acquisition of Fixed-Line Telecommunications Business in 21 Provinces in Southern China” above), our finance costs, net of interest income, decreased by 68.5% from RMB3.00 billion in 2008 to RMB0.95 billion in 2009.
Impairment Loss on Property, Plant and Equipment
Our impairment loss on property, plant and equipment was nil in 2009 and RMB12.49 billion in 2008, mainly consisting of impairment loss on PHS services related equipment and fixed-line network assets in southern China.
Upon the completion of our merger with China Netcom, we reconsidered our strategy relating to the PHS business. As we expected that the economic performance of the PHS business would deteriorate significantly, we prepared an updated analysis and forecast accordingly to determine if there had been an impairment of assets. After considering the expected significant decline in revenue and profitability in 2009 and onwards, we conducted an impairment test for the PHS business related assets. See “D. Risk Factors—Risks Relating to Our Business—If we fail to achieve a smooth discontinuation of PHS services or retain our PHS subscribers to use our other telecommunications services, our financial condition and results of operations may be adversely affected.” under Item 3. Accordingly, we recognized an impairment loss on PHS business related equipment of approximately RMB11.84 billion for the year ended December 31, 2008. As of December 31, 2009, we updated the impairment analysis for the PHS business related equipment and concluded that there was no need for additional recognition or reversal of the previously recognized impairment loss. In addition, we no longer record any impairment loss associated with the fixed-line network assets in southern China as a result of our acquisition from Unicom Group of the telecommunications business in 21 provinces in southern China in 2009 (see “—Acquisition of Fixed-Line Telecommunications Business in 21 Provinces in Southern China” above).
Realized Gain on Changes in Fair Value of Derivative Financial Instrument . In order to strengthen our cooperation with Telefónica, we entered into a subscription agreement with Telefónica on September 6, 2009, pursuant to which each party completed the mutual investment of an equivalent of US$1 billion in each other through an acquisition of the other party’s shares on October 21, 2009. At the inception of the subscription agreement on September 6, 2009, our agreement to undertake the above mutual investment with Telefónica was accounted for as a derivative financial instrument in accordance with IAS/HKAS 39 “Financial instrument: Recognition and measurement”, as it represents a forward contract for the purchase of shares by Telefónica and us in each other at predetermined fixed prices and is denominated in a foreign currency. The derivative financial instrument was derecognized upon completion of the transaction on October 21, 2009. The changes in the fair value of the derivative financial instrument during the period from September 6, 2009 to October 21, 2009 resulted in a fair value gain of approximately RMB1.24 billion, which has been recorded in the consolidated statement of income for the year ended December 31, 2009.

 

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Other Income-Net . In 2009, other income-net was RMB0.96 billion, down by 55.1% from 2008, of which, gain on non-monetary assets exchanged in connection with our replacement of copper cables in some of our fixed-line network regions with optical fibers was RMB0.04 billion, down by RMB1.27 billion from 2008.
Income Before Income Tax
In 2009, our income before income tax was RMB12.28 billion, up by 202.5% from 2008, mainly due to (i) we had provision for impairment loss on PHS business related equipment for 2008 but none for 2009 and (ii) a significant decrease in costs and expenses because (A) we no longer record depreciation, finance or other costs associated with the fixed-line assets in southern China as a result of our acquisition from Unicom Group of the telecommunications business in 21 provinces in southern China in 2009, and (B) the resulting decrease in depreciation, finance or other costs is greater than the amount of the leasing fee that we started to incur in 2009 with respect to such fixed-line assets (see “—Acquisition of Fixed-Line Telecommunications Business in 21 Provinces in Southern China” above).
In order to ensure the comparability of income before income tax and income for the year, we exclude the following non-comparable factors that are reflected in the figures of 2008 and 2009 for additional analysis purpose:
  (1)  
deferred fixed-line upfront connection fees of RMB0.49 billion for 2009 and RMB0.89 billion for 2008;
  (2)  
gain of RMB0.04 billion from the non-monetary assets exchange for 2009 and RMB1.31 billion for 2008;
  (3)  
realized gain of RMB1.24 billion on changes in fair value of derivative financial instrument in 2009; and
(4) impairment loss of RMB11.84 billion on PHS services related equipment in 2008.
After excluding the above factors, our income from continuing operations before income tax would be RMB10.51 billion, down by 23.3% from 2008. Such decrease is mainly due to two reasons: (i) the decline of fixed-line voice business, which has been a consistent trend in recent years due to further intensified mobile substitution and contraction of PHS industry; and (ii) the initial development stage of our 3G business, during which we incurred significant costs in connection with 3G network operations and business development increased in a much more rapid rate than the increase of our revenue from the 3G business. Such decrease in income from continuing operations before income tax was partially offset by the decrease in our total costs and expenses in 2009 as discussed above.
Income Tax
Our income tax for continuing operations was RMB2.72 billion in 2009, up by 48.9% from 2008, and our effective tax rate in 2009 was 22.2%. After excluding the factors discussed under Income Before Income Tax above, our effective tax rate in 2008 and 2009 would be 32.6% and 22.9%, respectively.
Net Income for the Year
In 2009, our net income from continuing operations reached RMB9.56 billion, up by 328.3% from 2008. Our basic earnings per share was RMB0.402 in 2009. After excluding the factors discussed under the subsection Income Before Income Tax above, our net income from continuing operations would be RMB8.11 billion, down by 12.3% from 2008.

 

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Liquidity and Capital Resources
Working Capital and Cash Flows
As of December 31, 2010, we had RMB22.50 billion of cash and cash equivalents, as compared with RMB7.82 billion as of December 31, 2009 and RMB10.24 billion as of December 31, 2008. As of December 31, 2010, we had RMB0.27 billion of short-term bank deposits, as compared with RMB1.00 billion as of December 31, 2009. As of December 31, 2010, we had a working capital deficit (current liabilities less current assets) of RMB156.03 billion, representing a decrease by 7.8% from the working capital deficit of RMB169.21 billion as of December 31, 2009. The decrease in working capital deficit in 2010 primarily resulted from the increase in our cash and cash equivalents.
A global financial crisis that unfolded in 2008 and has continued during 2009 has widely and adversely affected the financing markets of a number of countries where the banks and other financial institutions are reluctant to lend and impose stricter terms in their lending. Changes in the macroeconomic environment arising from the current global financial crisis had a material adverse impact on economic activity in the PRC in 2008 and 2009. However, under a series of economic stimulus packages launched by the PRC Government, we, due to our enterprise nature and our good credit records with PRC banks, generally have not experienced and do not expect to experience in the foreseeable future significant difficulties in obtaining bank financing in the PRC. As of December 31, 2010, we had revolving banking facilities of RMB114.0 billion, of which, RMB88.4 billion was unutilized. Meanwhile, we will continue to optimize our fund raising strategy from short, medium and long-term perspectives and maintain reasonable financing costs through appropriate financing portfolio. Therefore, we believe that we will be able to fund our anticipated capital and liquidity needs with our access to debt and equity financing, in particular bank financing in the PRC, and net cash inflows from our operations.
The following table sets forth cash inflows and outflows in 2008, 2009 and 2010.
                         
    For the Year Ended December 31,  
    2008     2009     2010  
    RMB in millions     RMB in millions     RMB in millions  
Net cash inflow from operating activities of continuing operations
    57,241       57,733       66,344  
Net cash outflow from investing activities of continuing operations
    (61,026 )     (85,308 )     (76,614 )
Net cash (outflow)/inflow from financing activities of continuing operations
    (28,786 )     30,197       19,824  
 
                 
Net cash (outflow)/inflow from continuing operations
    (32,571 )     2,622       9,554  
Net cash inflow/(outflow) from discontinued operations
    30,145       (5,039 )     5,121  
 
                 
Net (decrease)/increase in cash and cash equivalents
    (2,426 )     (2,417 )     14,675  
 
                 
Our net cash inflow from operating activities of continuing operations increased by 0.9% from RMB57.24 billion in 2008 to RMB57.73 billion in 2009, and further increased by 14.9% to RMB66.34 billion in 2010. The increase in net cash inflow from operating activities in 2010 was mainly due to an increase in cash generated from operations as a result of 3G business development and a decrease in the amount of income tax paid as a result of the lower income before income tax.
Our net cash outflow from investing activities of continuing operations increased by 39.8% from RMB61.03 billion in 2008 to RMB85.31 billion in 2009, and decreased by 10.2% to RMB76.61 billion in 2010. The increase in 2009 was mainly due to the significant increase in our capital expenditure attributable to 3G network construction, partially offset by the effect that we no longer have any cash outflow from investing activities associated with the construction of fixed-line network assets in southern China, as a result of our acquisition from Unicom Group of the telecommunications business in 21 provinces in southern China in 2009 (see “—Acquisition of Fixed-Line Telecommunications Business in 21 Provinces in Southern China” above). The decrease in 2010 was mainly due to the effect that we no longer have any cash outflow from investing activities associated with the consideration for purchase of entities and businesses under common control.
Our net cash outflow from financing activities changed from RMB28.79 billion in 2008 to net cash inflow from financing activities of RMB30.20 billion in 2009, primarily due to the increase in our short-term bank loans in 2009, partially offset by the effect that we no longer have any cash inflow from intercompany loans associated with the construction of fixed-line network assets, as a result of our acquisition from Unicom Group of the telecommunications business in 21 provinces in southern China in 2009 (see “—Operating Results” above). Our net cash inflow from financing activities decreased to RMB19.82 billion in 2010, primarily as a result of a decrease in the net increase of our indebtedness in 2010 from 2009, reflecting our decreased needs for new financings, primarily due to the increase in our net cash inflow from operating activities and the decrease in our net cash outflow from investing activities.

 

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Our net cash inflow from discontinued operations changed from RMB30.15 billion in 2008 to net cash outflow of RMB5.04 billion in 2009, and further changed to net cash inflow of RMB5.12 billion in 2010, mainly resulting from our receipt of proceeds in 2008 in relation to the sale of our CDMA business, our payment made in 2009 of the income tax in relation to the sale of our CDMA business in 2008, and our receipt of proceeds in 2010 in relation to the disposal of our CDMA business in 2008.
Indebtedness and Capital Structure
The following table sets forth the amount of cash, assets, short-term and long-term debt and equity as well as debt-to-capitalization and debt-to-equity ratios as of the end of 2008, 2009 and 2010.
                         
    As of December 31,  
    2008     2009     2010  
    (RMB in millions, except percentages)  
Cash and cash equivalent and short-term bank deposits
    10,652       8,816       22,768  
Total assets
    380,318       417,045       441,453  
Short-term debt
    21,996       66,601       61,944  
Short-term bank loans
    10,780       63,909       36,727  
Commercial papers
    10,000             23,000  
Current portion of long-term bank loans
    1,216       62       58  
Amounts due to related parties
          2,104       2,033  
Notes payables included in accounts payable and accrued liabilities
          500        
Current portion of obligations under finance lease included in other obligations
          26       126  
Long-term debt
    43,649       7,862       35,098  
Long-term loans due to ultimate holding company
    35,652              
Promissory notes
                15,000  
Corporate bonds
    7,000       7,000       7,000  
Convertible bonds
                11,558  
Non-current portion of long-term bank loans
    997       759       1,462  
Non-current portion of obligations under finance lease
          103       78  
Equity attributable to owners of the parent
    197,233       206,467       205,841  
Debt-to-capitalization ratio (1)
    25.0 %     26.5 %     32.0 %
Debt-to-equity ratio (2)
    33.3 %     36.1 %     47.1 %
 
     
(1)  
Debt-to-capitalization ratio = (long-term interest-bearing debt + short-term interest-bearing debt)/(long-term interest-bearing debt + short-term interest-bearing debt + equity attributable to owners of the parent).
(2)  
Debt-to-equity ratio = (long-term interest-bearing debt + short-term interest-bearing debt)/equity attributable to owners of the parent.
Our debt-to-capitalization ratio was 32.0% at the end of 2010, compared to 26.5% at the end of 2009, and 25.0% at the end of 2008. Our debt-to-equity ratio was 47.1% at the end of 2010, compared to 36.1% at the end of 2009, and 33.3% at the end of 2008. The sum of our long-term and short-term interest-bearing debt exceeds the amount of our cash and cash equivalents and short-term bank deposits by RMB74.27 billion as of December 31, 2010, compared to 65.65 billion as of December 31, 2009 and RMB54.99 billion as of December 31, 2008. We continue to seek to optimize our capital structure, develop multiple financing sources and reduce overall financing costs.
Our outstanding short-term and long-term bank loans, denominated in RMB, U.S. dollar, HK dollar and Euro, was RMB38.25 billion at the end of 2010, compared to RMB64.73 billion at the end of 2009 and RMB12.99 billion at the end of 2008. The decrease in 2010 resulted primarily from a decrease in the borrowings of short-term bank loans. The increase in 2009 resulted primarily from the borrowings of short-term bank loans to finance the telecommunications network construction and the off-market share repurchase completed during the year. The loan agreement does not include financial performance or other covenants which may materially restrict our operations or those of CUCL, our principal operating subsidiary in China. As of December 31, 2010, no short-term bank loans or long-term bank loans were guaranteed by Unicom Group.

 

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In order to further rationalize our debt structure and reduce our interest expense, we may continue to finance a portion of our business operations and capital expenditures through short-term borrowings. Our liquidity in the future will primarily depend on our ability to maintain adequate cash inflow from operations and obtain adequate external financing to meet our debt service obligations and planned capital expenditures. Our operating cash flows could be adversely affected by numerous factors beyond our control, including, but not limited to, changes in telecommunications tariffs, decreased demand for our telecommunications services and further intensified competition. Our ability to obtain external financing also depends on numerous factors, including, but not limited to, our financial condition and creditworthiness as well as our relationship with lenders. See “D. Risk Factors — Risks Relating to Our Business — If we are unable to fund our capital expenditure and debt service requirements, our financial condition, results of operations and growth prospects will be adversely affected” under Item 3.
On June 8, 2007, we issued RMB2 billion 10-year corporate bonds, bearing interest at 4.5% per annum. The corporate bonds are secured by a guarantee issued by Bank of China Limited. On September 3, 2008, we issued another RMB5 billion 5-year corporate bonds, bearing interest at 5.29% per annum. The corporate bonds are secured by a guarantee issued by State Grid Corporation of China.
In addition, prior to our merger with China Netcom, China Netcom’s wholly-owned subsidiary, CNC China (which merged with, and was absorbed by, our wholly-owned subsidiary, CUCL, in January 2009), issued two tranches of RMB10 billion unsecured commercial papers in the PRC capital market with repayment periods of 365 days and 270 days on April 30, 2007 and September 18, 2007, respectively. The effective interest rates were 3.34% and 3.93% per annum, respectively. These commercial papers were fully repaid on May 9, 2008 and June 16, 2008, respectively. On October 6, 2008, CNC China also issued RMB10 billion unsecured commercial paper in the PRC capital market with payment period of 365 days. The effective interest rate is 4.47% per annum. The commercial paper was fully repaid in October 2009.
On April 1, 2010, CUCL completed the issue of the first tranche of commercial paper for the year 2010 in an amount of RMB15 billion, with a maturity period of 365 days and at an interest rate of 2.64% per annum. On April 2, 2010, CUCL completed the issue of the first tranche of promissory note for the year 2010 in an amount of RMB3 billion, with a maturity period of 3 years and at an interest rate of 3.73% per annum.
On September 20, 2010, CUCL completed the issue of the second tranche of commercial paper for the year 2010 in an amount of RMB8 billion, with a maturity period of 365 days and at an interest rate of 2.81% per annum. On the same date, CUCL completed the issue of the second tranche of promissory note for the year 2010 in an amount of RMB12 billion, with a maturity period of 3 years and at an interest rate of 3.31% per annum.
On October 18, 2010, Billion Express Investments Limited, a wholly-owned subsidiary of our company, issued the 2015 Convertible Bonds, which are guaranteed by our company and are exchangeable into ordinary shares of our company. Pursuant to the subscription agreement with respect to the 2015 Convertible Bonds, the holders of the 2015 Convertible Bonds may, beginning on November 28, 2010, elect to convert its bonds into our ordinary shares at an initial conversion price of HK$15.85 per share, subject to certain adjustments. As of April 30, 2011, none of the 2015 Convertible Bonds has been converted into our ordinary shares.

 

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Contractual Obligations and Commercial Commitments
The following table sets forth the amounts of our outstanding contractual cash obligations as of December 31, 2010.
                                         
            Less than 1     Between 1 and     Between 2 and        
    Total     year     2 years     5 years     Over 5 years  
Short-term bank loans (1) *
    37,319       37,319                    
Commercial papers (2) *
    23,621       23,621                    
Long-term bank loans (3) *
    1,734       103       94       1,004       533  
Corporate bonds (4) *
    8,425       355       355       5,535       2,180  
Convertible bonds (5) *
    12,634       91       91       12,452        
Promissory notes (6) *
    16,528       509       509       15,510        
Other obligations
    2,806       2,640       92       27       47  
Capital commitments (7)
    8,383       5,792       811       456       1,324  
Operating leases commitments (7)
                                       
Telecommunications networks leasing arrangement in 21 provinces in southern China
    5,000       2,400       2,600              
Other commitments
    6,403       1,846       1,331       2,276       950  
 
                             
Total obligations
    122,853       74,676       5,883       37,260       5,034  
 
                             
 
     
*  
Interest included
 
(1)  
See Note 27 “Short-Term Bank Loans” to our consolidated financial statements.
 
(2)  
See Note 26 “Commercial Papers” to our consolidated financial statements.
 
(3)  
See Note 20 “Long-Term Bank Loans” to our consolidated financial statements.
 
(4)  
See Note 23 “Corporate Bonds” to our consolidated financial statements.
 
(5)  
See Note 22 “Convertible Bonds” to our consolidated financial statements.
 
(6)  
See Note 21 “Promissory Notes” to our consolidated financial statements.
 
(7)  
See Note 41 “Contingencies and Commitments” to our consolidated financial statements.
Trend Information
Please refer to the discussion in sections headed “—Overview” and “—Operating Results” under this Item 5.
Off-Balance Sheet Arrangements
As of December 31, 2010, except for the operating lease of the telecommunications networks in 21 provinces in southern China set forth above in “—Contractual Obligations and Commercial Commitments”, we did not have any other off-balance sheet arrangement.
Capital Expenditures
The following table sets forth our historical and planned capital expenditure requirements for the periods indicated. Actual future capital expenditures may differ from the amounts indicated below.
                                                 
    For the Year Ended December 31,  
    2009     2010     2011  
    (RMB in     As a     (RMB in     As a     (RMB in     As a  
    billions)     percentage     billions)     Percentage     billions)     Percentage  
Mobile business
    56.98       50.7 %     23.17       33.0 %     22.88       31.0 %
Broadband and data business
    18.80       16.7 %     22.45       32.0 %     18.75       25.4 %
Infrastructure and transmission network
    25.01       22.2 %     16.96       24.2 %     19.48       26.4 %
Others (1)
    11.68       10.4 %     7.61       10.8 %     12.69       17.2 %
 
                                   
Total
    112.47       100.0 %     70.19       100.0 %     73.80       100.0 %
 
                                   
 
     
(1)  
Other expenditures consist of innovation and value-added platform, IT system, fixed-line business and procurement of miscellaneous assets, equipment and spare parts.
Our capital expenditure totaled RMB70.19 billion in 2010, which mainly consisted of investment in mobile business, broadband and data business, and infrastructure and transmission networks. In 2010, capital expenditure attributable to mobile business was RMB23.17 billion; capital expenditure attributable to broadband and data business was RMB22.45 billion; capital expenditure attributable to infrastructure and transmission networks was RMB16.96 billion.

 

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Our projected capital expenditure for 2011 is estimated to be approximately RMB73.80 billion, a significant portion of which will continue to be used for investments in our mobile business, fixed-line broadband and data business and infrastructure and networks.
We expect to fund our capital expenditure needs through a combination of cash generated from operating activities, granted and unused banking facilities and other available financing sources. See “D. Risk Factors — Risks Relating to Our Business — If we are unable to fund our capital expenditure and debt service requirements, our financial condition, results of operations and growth prospects will be adversely affected.” under Item 3.
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The following table sets forth certain information concerning our current directors and executive officers.
             
Name   Age   Position
Chang Xiaobing
    54     Chairman of the Board of Directors and Chief Executive Officer
Lu Yimin
    47     Executive Director and President
Tong Jilu (1)
    53     Executive Director and Senior Vice President
Li Fushen (2)
    48     Executive Director and Chief Financial Officer
Cesareo Alierta Izuel
    66     Non-Executive Director
Cheung Wing Lam Linus
    62     Independent Non-Executive Director
Wong Wai Ming
    53     Independent Non-Executive Director
John Lawson Thornton
    57     Independent Non-Executive Director
Timpson Chung Shui Ming
    59     Independent Non-Executive Director
Cai Hongbin (3)
    43     Independent Non-Executive Director
Li Jianguo
    57     Senior Vice President
Li Gang
    53     Senior Vice President
Zhang Junan
    54     Senior Vice President
Jiang Zhengxin
    54     Senior Vice President
Shao Guanglu (4)
    47     Senior Vice President
 
     
(1)  
Mr. Tong Jilu resigned as the Chief Financial Officer of our company and was appointed as a Senior Vice President of our company, each on March 30, 2011. Mr. Zuo Xunsheng resigned as an Executive Director and a Senior Vice President of our company on March 30, 2011. Each of Mr. Pei Aihua and Mr. Zhao Jidong resigned as a Senior Vice President of our company on March 30, 2011.
 
(2)  
Mr. Li Fushen resigned as a Senior Vice President of our company and was appointed as an Executive Director and the Chief Financial Officer of our company, each on March 30, 2011.
 
(3)  
Mr. Cai Hongbin was appointed as an Independent Non-Executive Director of our company on May 13, 2010.
 
(4)  
Mr. Shao Guanglu was appointed as a Senior Vice President of our company on April 26, 2011.
Mr. Chang Xiaobing was appointed in December 2004 as an Executive Director, Chairman and Chief Executive Officer of the Company. Mr. Chang, a professor level senior engineer, graduated in 1982 from the Nanjing Institute of Posts and Telecommunications with a bachelor’s degree in telecommunications engineering and received a master’s degree in business administration from Tsinghua University in 2001. He received a doctor’s degree in business administration from the Hong Kong Polytechnic University in 2005. Prior to joining China United Telecommunications Corporation, Mr. Chang served as a Deputy Director of the Nanjing Municipal Posts and Telecommunications Bureau of Jiangsu Province and a Deputy Director General of the Directorate General of Telecommunications of the Ministry of Posts and Telecommunications and a Deputy Director General and Director General of the Department of Telecommunications Administration of the former Ministry of Information Industry, Vice President of China Telecommunications Corporation, as well as Executive Director and President of China Telecom Corporation Limited. Mr. Chang was appointed the Chairman of China United Telecommunications Corporation in November 2004. In December 2008, China United Telecommunications Corporation changed its company name to China United Network Communications Group Company Limited (Unicom Group). Mr. Chang has served as a Director of Telefónica since May 2011. He also serves as the Chairman of Unicom Group, A Share Company and CUCL, respectively. Mr. Chang has extensive operational and managerial experience in the telecommunications industry.

 

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Mr. Lu Yimin was appointed as an Executive Director of the Company in October 2008 and President of the Company in February 2009. Mr. Lu, a researcher level senior engineer, graduated from Shanghai Jiao Tong University with a bachelor’s degree in computer science in 1985 and then was awarded a master’s degree in public administration by the John F. Kennedy School of Government at Harvard University. Mr. Lu joined Netcom Group in December 2007, serving as senior management. Mr. Lu has served as a Non-Executive Director of PCCW Limited (listed on the Hong Kong Stock Exchange with an American Depositary Receipt trading on the Pink Sheets’ OTC Market in the U.S.) since May 2008. Prior to joining the Netcom Group, Mr. Lu was a member of the Secretary Bureau of the General Office of the Chinese Communist Party Central Committee, serving as the Deputy Director and the Director of the Information Processing Office since 1992, Secretary at deputy director general level since 2001 and Secretary at director general level since 2005. Mr. Lu is Vice Chairman and President of Unicom Group. Mr. Lu is also a Director and President of A Share Company, and a Director and President of CUCL. Mr. Lu has extensive experience in government administration and business management.
Mr. Tong Jilu was appointed as an Executive Director of the Company in February 2004 and Senior Vice President of the Company in March 2011. Mr. Tong graduated in 1987 from the Department of Economic Management at the Beijing University of Posts and Telecommunications. He received a doctor’s degree in management from the Hong Kong Polytechnic University in 2009. Mr. Tong was Deputy Director General of the Posts and Telecommunications Administration of Liaoning Province, as well as the Posts Office of Liaoning Province. Mr. Tong joined China United Telecommunications Corporation in July 2000. He served first as Chief Accountant and later a Vice President and, from September 2003, a Director of China United Telecommunications Corporation. In December 2008, China United Telecommunications Corporation changed its company name to China United Network Communications Group Company Limited (Unicom Group). From February 2004 to March 2011, Mr. Tong served as Chief Financial Officer of the Company. Mr. Tong now serves as a Director and Vice President of Unicom Group. He is also a Director of A Share Company, and a Director and Senior Vice President of CUCL. Mr. Tong has extensive operation and financial management experience in telecommunications companies.
Mr. Li Fushen was appointed in March 2011 as an Executive Director and Chief Financial Officer of the Company. Mr. Li graduated from the Jilin Engineering Institute with a degree in engineering management in 1988, and from the Australian National University with a master’s degree in management in 2004. From November 2001 to October 2003, Mr. Li served as Deputy General Manager of the former Jilin Provincial Telecommunications Company and Jilin Communications Company. From October 2003 to August 2005, Mr. Li served as General Manager of the Finance Department of Netcom Group. Since October 2005, he has served as the Chief Accountant of Netcom Group. He has served as Chief Financial Officer of China Netcom since September 2005 and has served as Executive Director of China Netcom since January 2007. From December 2006 to March 2008, Mr. Li served as Joint Company Secretary of China Netcom. From February 2009 to March 2011, Mr. Li served as a Senior Vice President of the Company. In addition, Mr. Li has served as a Non-Executive Director of PCCW Limited (listed on the Hong Kong Stock Exchange with an American Depositary Receipt trading on the Pink Sheets’ OTC Market in the U.S.) since July 2007. Mr. Li is a Vice President of Unicom Group, a Director of A Share Company, as well as Director and Senior Vice President of CUCL. Mr. Li has worked in the telecommunications industry for a long period of time and has extensive management experience.

 

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Mr. Cesareo Alierta Izuel was appointed in October 2008 as a Non-Executive Director of the Company. Mr. Alierta has been a member of the Board of Directors of Telefónica (listed on various stock exchanges including Madrid, New York and London) from January 1997 and has been Chairman of Telefónica since July 2000. Mr. Alierta is a member of the Board of Directors of Telecom Italia (listed on the stock exchange of Milan) and of International Consolidated Airlines Group (IAG, listed on the stock exchanges of Madrid and London). He is also the Chairman of the Social Board of the UNED (National Long Distance Spanish University) and a member of the Columbia Business School Board of Overseers. Between 1970 and 1985, he was the General Manager of the Capital Markets division at Banco Urquijo in Madrid. He has been the founder and Chairman of Beta Capital. As from 1991, he has also acted as the Chairman of the Spanish Financial Analysts’ Association. He has also been a member of the Board of Directors and the Standing Committee of the Madrid Stock Exchange. Between 1996 and 2000, he held the post of Chairman of Tabacalera, S.A., and subsequently Altadis following the company’s merger with the French group Seita. Mr. Alierta served as a Non-Executive Director of China Netcom during the period from December 2007 to November 2008. In September 2005, Mr. Alierta received “The Global Spanish Entrepreneur” award from the Spanish/US Chamber of Commerce. Mr. Alierta holds a degree in law from the University of Zaragoza and received a master’s degree of business administration at the University of Columbia (New York) in 1970.
Mr. Cheung Wing Lam Linus was appointed in May 2004 as an Independent Non-Executive Director of the Company. Mr. Cheung is Chairman of the University of Hong Kong School of Professional and Continuing Education. Besides, Mr. Cheung is an independent Non-Executive Director of Taikang Life Insurance Company Limited and a Non-Executive Director of HKR International Limited (listed on the Hong Kong Stock Exchange). Mr. Cheung also serves as President of the Chartered Institute of Marketing (Hong Kong Region) and Adjunct Professor of the Chinese University of Hong Kong. Mr. Cheung was Chairman of Asia Television Limited and Deputy Chairman of PCCW Limited. Prior to the merger of Pacific Century Cyberworks Limited and Cable & Wireless HKT Limited, or Hongkong Telecom, Mr. Cheung was the Chief Executive of Hongkong Telecom and an Executive Director of Cable & Wireless plc in the United Kingdom. Mr. Cheung also worked at Cathay Pacific Airways for 23 years, before departing as Deputy Managing Director. He was appointed an Official Justice of the Peace in 1990 and a Non-official Justice of the Peace in 1992. Mr. Cheung received a bachelor’s degree in social sciences and a diploma in management studies from the University of Hong Kong. He is also an Honorary Fellow of the University of Hong Kong and of The Chartered Institute of Marketing in the United Kingdom.
Mr. Wong Wai Ming was appointed in January 2006 as an Independent Non-Executive Director of the Company. Mr. Wong is Senior Vice President and Chief Financial Officer of Lenovo Group Limited (listed on the Hong Kong Stock Exchange and the New York Stock Exchange). Besides, Mr. Wong is an Independent Non-Executive Director of I.T Limited (listed on the Hong Kong Stock Exchange) and a Non-Executive Director of Linmark Group (listed on the Hong Kong Stock Exchange). Prior to his current executive position at Lenovo Group Limited, Mr. Wong was a Chief Executive Officer and Executive Director of Roly International Holdings Limited and an Executive Director of Linmark Group. Mr. Wong was also a Non-Executive Director of Kingsoft Corporation Limited. Mr. Wong was previously an investment banker with over 15 years of experience in investment banking business in Greater China and was a member of the Listing Committee of The Stock Exchange of Hong Kong Limited. Mr. Wong is a chartered accountant and holds a bachelor’s degree (with Honors) in management science from the Victoria University of Manchester in the United Kingdom.
Mr. John Lawson Thornton was appointed in October 2008 as an Independent Non-Executive Director of the Company and is currently a Professor and Director of the Global Leadership Program at the Tsinghua University School of Economics and Management in Beijing. He is also the Chairman of the Board of Trustees of the Brookings Institution in Washington, D.C. He is a Director and Non-Executive Chairman of HSBC North America Holdings Inc., as well as a Director of HSBC Holdings plc (listed on the Hong Kong Stock Exchange, London Stock Exchange, New York Stock Exchange, Paris Stock Exchange and Bermuda Stock Exchange). He is also a Director of the Ford Motor Company (listed on the New York Stock Exchange) and News Corporation, Inc. (listed on the NASDAQ Global Select Market and the Australian Stock Exchange). Mr. Thornton is a trustee, advisory board member or member of the Asia Society, China Foreign Affairs University, China Institute, China Investment Corporation, China Reform Forum, China Securities Regulatory Commission, Council on Foreign Relations, General Atlantic, The Hotchkiss School, McKinsey Knowledge Council, Morehouse College, and the National Committee on U.S.-China Relations. He is the Chairman of the Advisory Board of the Tsinghua University School of Economics and Management. Mr. Thornton served as a Director of Intel Corporation from July 2003 to May 2010, an Independent Non-Executive Director of China Netcom from October 2004 to November 2008 and as an Independent Non-Executive Director of Industrial and Commercial Bank of China from October 2005 to November 2008. Mr. Thornton retired in July 2003 as President, Co-Chief Operating Officer and a Director of The Goldman Sachs Group, Inc. Mr. Thornton received an A.B. in history from Harvard College in 1976, a B.A. and M.A. in jurisprudence from Oxford University in 1978 and an M.P.P.M. from the Yale School of Management in 1980.

 

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Mr. Timpson Chung Shui Ming was appointed in October 2008 as an Independent Non-Executive Director of the Company. Mr. Chung is currently a member of the National Committee of the 11th Chinese People’s Political Consultative Conference. He is also the Chairman of the Advisory Committee on Arts Development. Besides, Mr. Chung is an Independent Non-Executive Director of Glorious Sun Enterprises Limited, The Miramar Hotel & Investment Co. Limited, Nine Dragons Paper (Holdings) Limited and China Overseas Grand Oceans Group Limited (all listed on the Hong Kong Stock Exchange). Mr. Chung is also an Independent Director of China State Construction Eng. Corp. Ltd. and China Everbright Bank Company Limited (both listed on the Shanghai Stock Exchange). From October 2004 to November 2008, Mr. Chung served as an Independent Non-Executive Director of China Netcom. Formerly, he was the Chairman of China Business of Jardine Fleming Holdings Limited, the Deputy Chief Executive Officer of BOC International Limited and the Independent Non-Executive Director of Tai Shing International (Holdings) Limited. He was also the Director General of Democratic Alliance for the Betterment and Progress of Hong Kong, the Chairman of the Council of the City University of Hong Kong, the Chairman of the Hong Kong Housing Society, a member of the Executive Council of the Hong Kong Special Administrative Region, the Vice Chairman of the Land Fund Advisory Committee of Hong Kong Special Administrative Region Government, a member of the Managing Board of the Kowloon-Canton Railway Corporation, a member of the Hong Kong Housing Authority and a member of the Disaster Relief Fund Advisory Committee. Mr. Chung holds a bachelor of science degree from the University of Hong Kong and a master’s degree of business administration from the Chinese University of Hong Kong. Mr. Chung also received an honorary doctoral degree in Social Science from the City University of Hong Kong in 2010. Mr. Chung is a fellow member of the Hong Kong Institute of Certified Public Accountants.
Mr. Cai Hongbin was appointed in May 2010 as an Independent Non-Executive Director of the Company. Mr. Cai is currently the Dean of and a Professor in Applied Economics at Guanghua School of Management at Peking University, a Director of J. Mirrlees Institute of Economic Policy Research at Peking University and an Associate Director of Center of Poverty Research at Peking University. Besides, Mr. Cai is Independent Non-Executive Director of Concord Medical Services Holdings Limited (listed on the New York Stock Exchange), China Everbright Bank Company Limited (listed on the Shanghai Stock Exchange) and Beijing Venustech Inc. (listed on the Shenzhen Stock Exchange). Prior to joining Guanghua School of Management at Peking University, Mr. Cai served as an Assistant Professor of the Economics Department at University of California, Los Angeles, from 1997 to 2005. Mr. Cai received a bachelor’s degree in Mathematics from Wuhan University in 1988, a master’s degree in Economics from Peking University in 1991, and a doctoral degree in Economics from Stanford University in 1997. In addition, Mr. Cai was awarded New Century Excellent Talents in University from Ministry of Education of the PRC, or the Ministry of Education in 2006, the National Outstanding Young Researcher from National Science Foundation of China in 2007 and the National Changjiang Scholar from the Ministry of Education in 2008. Mr. Cai has carried out extensive research in the areas of, among others, game theory, industrial organization, corporate finance and Chinese economy, and has published many academic papers in top international and national journals.
Ms. Li Jianguo was appointed as Senior Vice President of the Company in February 2009. Ms. Li graduated from the Xiangtan University with a bachelor’s degree in Chemical Engineering in 1982 and received a master’s degree in business administration from the Hong Kong Polytechnic University in 2006. From June 2000 to July 2007, Ms. Li held various senior positions in China United Telecommunications Corporation, including serving as a Director and Chairperson of the Labour Union. Ms. Li also served as the Chairperson of the Board of Supervisors of A Shares Company from December 2001 to July 2007 and as Executive Director of the Company from April 2006 to July 2007. Ms. Li served as Senior Management in Netcom Group since July 2007. She has also served as Executive Director of China Netcom since July 2007. Ms. Li holds a senior managerial position in Unicom Group. Ms. Li is the Chairman of the Supervisory Board of A Share Company, as well as Director and Senior Vice President of CUCL. Ms. Li held leading positions in various enterprises, local governments and state ministries and committees for long period of time, and she has extensive working and management experiences in government, authorities and enterprises.

 

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Mr. Li Gang was appointed as Vice President of the Company in April 2006 and Senior Vice President of the Company in February 2009. Mr. Li graduated from Beijing University of Posts and Telecommunications in 1985 and received a master’s degree in business administration from the Department of Advanced Business Administration of Jinan University in 2004. Mr. Li previously served as a Deputy Director of the Telecommunications Division, a Deputy Director of the Telecommunications Department, a Deputy Director of the Rural Telephone Bureau, a Deputy Director and a Director of the Telecommunications Operation and Maintenance Department of the Posts and Telecommunications Administration Bureau in Guangdong Province and as a Director of the Mobile Communication Bureau in Guangdong Province. From 1999 to 2005, he served as the Deputy Chairman, General Manager and Chairman of Guangdong Mobile Communication Co., Limited and as the Chairman and General Manager of Beijing Mobile Communication Co., Limited. From 2000 to 2005, he also served as an Executive Director of China Mobile (Hong Kong) Limited. Mr. Li joined China United Telecommunications Corporation in December 2005 and served as Vice President. In December 2008, China United Telecommunications Corporation changed its company name to China United Network Communications Group Company Limited (Unicom Group). From April 2006 to October 2008, Mr. Li served as an Executive Director of the Company. Mr. Li is a Deputy General Manager of Unicom Group, Director and Senior Vice President of CUCL. Mr. Li has worked in the telecommunications industry for a long period of time and has extensive management experience.
Mr. Zhang Junan was appointed as Vice President of the Company in April 2006 and Senior Vice President of the Company in February 2009. Mr. Zhang graduated from the Nanjing University of Posts and Telecommunications majoring in carrier communication in 1982. He received a master’s degree in business administration from the Australian National University in 2002 and a doctor’s degree in business administration from the Hong Kong Polytechnic University in 2008. He previously served as a Director of the Bengbu Municipal Posts and Telecommunications Bureau in Anhui Province and a Deputy Director of the Anhui Provincial Posts and Telecommunications Bureau. From 2000 to 2005, he served as a Deputy General Manager and General Manager of the Anhui Provincial Telecommunications Company and the Chairman and General Manager of the Anhui Provincial Telecommunications Co., Limited. Mr. Zhang joined the China United Telecommunications Corporation in December 2005 and served as Vice President. In December 2008, China United Telecommunications Corporation changed its company name to China United Network Communications Group Company Limited (Unicom Group). From April 2006 to October 2008, Mr. Zhang served as the Executive Director of the Company. In addition, Mr. Zhang serves as a Non-Executive Director of China Communications Services Corporation Limited. Mr. Zhang also serves as Vice President of Unicom Group, as well as Director and Senior Vice President of CUCL. Mr. Zhang has worked in the telecommunications industry for a long period of time and has extensive management experience.
Mr. Jiang Zhengxin was appointed as Senior Vice President of the Company in February 2009. Mr. Jiang is a senior engineer of professor level. He received a bachelor’s degree in radio engineering from Beijing University of Posts and Telecommunications in 1982, a master’s degree in business administration from Jilin University in 2001, and a PhD in political economy from Jilin University in 2006. Mr. Jiang served as Deputy Director of the Bureau of Telecommunications Administration in Changchun of Jilin Province from February 1998 to July 1999. He was the Deputy General Manager of Jilin Mobile Communication Company from July 1999 to March 2004. He served as the Deputy General Manager of South Communication Co. Limited of Netcom Group from March 2004 to June 2004, and he was the General Manager of Zhejiang Branch of Netcom Group from June 2004 to September 2007. He has served as Deputy General Manager of Netcom Group since September 2007. Mr. Jiang is a Deputy General Manager of Unicom Group, as well as Director and Senior Vice President of CUCL. Mr. Jiang has worked in the telecommunications industry for a long period of time and has extensive management experience.
Mr. Shao Guanglu was appointed as Senior Vice President of the Company in April 2011. Mr. Shao is a senior engineer. He received a bachelor’s degree from Harbin Institute of Technology in 1985, a master’s degree in engineering and a master’s degree in economics from Harbin Institute of Technology in 1988 and 1990, respectively, a master’s degree in management from BI Norwegian Business School in 2002 and a doctor’s degree in management from Nankai University in 2009. Mr. Shao joined China United Telecommunications Corporation in February 1995. In December 2008, China United Telecommunications Corporation changed its company name to China United Network Communications Group Company Limited (Unicom Group). Mr. Shao was Deputy General Manager of Tianjin Branch, Deputy General Manager of Henan Branch, General Manager of Guangxi Branch, as well as General Manager of Human Resource Department of Unicom Group. Mr. Shao also serves as a Vice President of Unicom Group. Mr. Shao has worked in the telecommunications industry for a long period of time and has extensive management experience.

 

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B. Compensation
The aggregate compensation and other benefits paid by us to our directors as a group in 2010 was approximately RMB12.66 million, while retirement benefits paid by us were approximately RMB112,000. Each of our executive directors participated in a bonus scheme with us that ties the amount of bonus he or she will receive at the end of a year to our operating results of the year and his or her job performance. Some of our directors also hold options to purchase shares in our company. See “E. Share Ownership” below for detailed descriptions of our share option schemes and options granted to our directors as well as compensation for the year 2010.
C. Board Practices
General
Pursuant to our articles of association, at each annual general meeting, one-third of our directors retire from office by rotation. The retiring directors are eligible for re-election. The Board may at any time appoint a new director to fill a vacancy or as an additional director. The Board may also appoint and remove our executive officers. No benefits are payable to our directors or executive officers upon termination of their service with us in accordance with the provisions of their service agreements, except certain statutory compensation. The following table sets forth certain information concerning our current directors and former directors who served as directors in 2010.
                 
            Resignation or  
Name   Appointment Date   Re-appointment Date   Retirement Date  
Current Directors
               
 
Chang Xiaobing
  December 21, 2004   May 12, 2006 and May 26, 2009      
Lu Yimin
  October 15, 2008   May 26, 2009 and May 24, 2011      
Tong Jilu
  February 1, 2004   May 12, 2004, May 12, 2006, May 16, 2008 and May 12, 2010      
Li Fushen
  March 30, 2011   May 24, 2011      
Cesareo Alierta Izuel
  October 15, 2008   May 26, 2009 and May 24, 2011      
Cheung Wing Lam Linus
  May 12, 2004   May 12, 2006, May 16, 2008 and May 12, 2010      
Wong Wai Ming
  January 19, 2006   May 12, 2006, May 26, 2009 and May 24, 2011      
John Lawson Thornton
  October 15, 2008   May 26, 2009      
Timpson Chung Shui Ming
  October 15, 2008   May 26, 2009      
Cai Hongbin
  May 13, 2010   May 24, 2011      
 
Former Directors
               
 
Zuo Xunsheng
  October 15, 2008   May 26, 2009 and May 12, 2010   March 30, 2011
Wu Jinglian
  April 20, 2000   May 13, 2002,May 12, 2004, May 12, 2005 and May 11, 2007   May 12, 2010
Audit Committee
The audit committee reviews and supervises our financial reporting process and internal controls. The duties of the audit committee include, among others:
   
considering and approving the appointment, resignation and removal of our external auditor and the auditor’s fees;
   
reviewing our interim and annual financial statements and disclosures before submission to the board of directors;
   
discussing with the auditor any problems and reservations arising from the audit of the interim and annual financial statements;
   
reviewing any correspondence from the auditor to our management and the responses of our management;
   
reviewing the relevant reports concerning our internal controls and procedures;
   
discussing with our management our internal control system to ensure that our management discharge their duties to have an effective internal control system in place;
   
pre-approving the audit and non-audit services to be provided by the external auditor, and determining whether any non-audit services would affect the independence of the auditor;
   
discussing with our management the timing and procedures for the rotation of the partner of the auditing firm responsible for the audit of our company and the partner responsible for the review of audit-related documents;
   
supervising the internal audit department, which will directly report to the committee; and
   
having the right to approve the appointment or removal of the head of internal audit department.
As of April 30, 2011, the members of the audit committee are Mr. Wong Wai Ming (Chairman of the audit committee), Mr. Cheung Wing Lam Linus, Mr. John Lawson Thornton, Mr. Timpson Chung Shui Ming and Mr. Cai Hongbin.

 

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Remuneration Committee
The remuneration committee meets regularly to consider human resources issues, issuance of options and other matters relating to compensation. In particular, the remuneration committee makes recommendations to the Board on directors’ compensation. The primary duties of the remuneration committee are to make recommendations to the Board regarding the remuneration structure of the executive directors and senior management and to determine specific remuneration packages for the executive directors and senior management on behalf of the Board. The remuneration committee is also responsible for operating our employee share option scheme and any other incentive scheme as they apply to the executive directors, including determining the granting of options to executive directors. As of April 30, 2011, the members of the remuneration committee are Mr. Cheung Wing Lam Linus (Chairman of the remuneration committee), Mr. Wong Wai Ming, Mr. John Lawson Thornton, Mr. Timpson Chung Shui Ming and Mr. Cai Hongbin.
D. Employees
As of December 31, 2008, 2009 and 2010, we had a total number of 204,615, 321,772 and 310,030 employees, respectively. The employees as of December 31, 2010 are classified by function as follows:
         
By Function   Number of Employees  
Employees
    215,815  
Management and administration
    23,211  
Sales and customer service
    63,380  
Product and Marketing
    18,282  
Network construction and maintenance
    81,021  
Support
    27,392  
Others
    2,529  
Temporary employees
    94,215  
 
     
Total
    310,030  
E. Share Ownership
As of April 30, 2011, our directors who own shares in our company are listed as follows:
                         
            Ordinary     Percentage of Total  
Name   Capacity and Nature     Shares Held     Issued Shares  
Cheung Wing Lam Linus
  Beneficial Owner (Personal)     400,000       0.0017 %
Timpson Chung Shui Ming
  Beneficial Owner (Personal)     6,000       0.0000 %
Apart from those disclosed herein, as of April 30, 2011, our other directors as a group do not own any shares in our company.

 

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As of April 30, 2011, our directors as a group hold options for 2,911,840 shares, or approximately 0.012% of our issued and outstanding share capital, including the following options granted under our pre-global offering share option scheme, share option scheme, and special purpose share option scheme:
                                         
        Number of                            
    Capacity and   Shares         Exercise     Consideration     Compensation  
Name   Nature   Covered (1)     Expiration Date   Price     Paid     for 2010  
 
                              (RMB in
thousands)
 
Directors
                                 
Chang Xiaobing
  Beneficial Owner     526,000     December 20, 2012 (3)   HK$6.20   HK$1.00       3,206  
 
  (Personal)     746,000     February 14, 2013 (3)   HK$6.35   HK$1.00          
Lu Yimin
                          2,637  
Tong Jilu
  Beneficial Owner     292,000     June 22, 2011 (3)   HK$15.42   HK$1.00       2,408  
 
  (Personal)     92,000     July 19, 2012 (3)   HK$5.92   HK$1.00          
 
        460,000     February 14, 2013 (3)   HK$6.35   HK$1.00          
 
  Beneficial Owner     32,000     July 19, 2012 (3)   HK$5.92   HK$1.00          
 
  (Spouse)     40,000     February 14, 2013 (3)   HK$6.35   HK$1.00          
Li Fushen
  Beneficial Owner (Personal)     723,840     November 16, 2012 (3)   HK$5.57           2,225  
Cesareo Alierta Izuel
                          261  
Cheung Wing Lam Linus
                          351  
Wong Wai Ming
                          366  
John Lawson Thornton
                          340  
Timpson Chung Shui Ming
                          340  
Cai Hongbin
                          217  
Employees (2)
        4,058,000     June 22, 2011 (3)   HK$15.42   HK$1.00          
 
        8,956,000     May 20, 2012 (3)   HK$4.30   HK$1.00          
 
        40,900,000     July 19, 2012 (3)   HK$5.92   HK$1.00          
 
        128,000     December 20, 2012 (3)   HK$6.20   HK$1.00          
 
        150,310,000     February 14, 2013 (3)   HK$6.35   HK$1.00          
 
        99,131,916     November 16, 2012 (3)   HK$5.57   HK$1.00          
 
        88,929,468     December 5, 2012 (3)   HK$8.26   HK$1.00          
 
     
(1)  
Each option gives the holder the right to subscribe for one share.
 
(2)  
In 2009, the exercise periods of approximately 25,000,000 options were extended by one year by the Board pursuant to the terms of the Pre-Global Offering Share Option Scheme and the Share Option Scheme. The reasons for such extension were that (i) the holders of those options were determined by the Board as “Transferred Personnel” under the respective terms of the Pre-Global Offering Share Option Scheme and the Share Option Scheme due to the transfers of those option holders to other telecommunications operators as part of the 2008 industry restructuring and (ii) those options were not exercisable due to a “Mandatory Moratorium” under the respective terms of the Pre-Global Offering Share Option Scheme and the Share Option Scheme. Due to the “Mandatory Moratorium” continuing to be in force, the Board further extended the exercise periods of certain options by one year in March 2010 and March 2011 under the respective terms of the Share Option Scheme. As of December 31, 2010, approximately 23,600,000 share options held by Transferred Personnel remained valid.
 
(3)  
In March 2010 and March 2011, the expiry dates for certain options were extended by one year by the Board pursuant to the terms of each of the Share Option Scheme and the Special Purpose Share Option Scheme, because those options were not exercisable due to a “Mandatory Moratorium”, which is still in force, under the respective terms of each of the Share Option Scheme and the Special Purpose Share Option Scheme.

 

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Stock Incentive Schemes
Share Option Scheme. We adopted a share option scheme on June 1, 2000, and amended the scheme on each of May 13, 2002, May 11, 2007 and May 26, 2009. The amended scheme provides for the grant of options to our employees, including executive directors and non-executive directors. Any grant of options to a “connected person” (as defined in the HKSE Listing Rules) of Unicom requires approval by our independent non-executive directors, excluding any independent non-executive director who is the grantee of the option. The option period commences on any date after the date on which an option is offered, but may not exceed 10 years from the offer date. The subscription price of a share in respect of any particular option granted under this share option scheme will be determined by our board of directors in its discretion at the grant date, which shall be no less than the higher of: (i) the nominal value of the shares; (ii) the closing price of the shares on the HKSE on the grant date of such option; and (iii) the average closing price of the shares on the HKSE for the five trading days immediately preceding the grant date. As of April 30, 2011, 206,540,000 options granted by us under the share option scheme were outstanding and held by 2 directors and approximately 2,800 of our employees. The share option scheme expired on June 21, 2010. Following the expiry of the share option scheme, no further option may be granted under the share option scheme, but the provisions of the share option scheme will remain in full force and effect to the extent necessary to give effect to the exercise of the options granted prior to the expiry or otherwise as may be required in accordance with the provisions of the share option scheme. As of April 30, 2011, 1,766,000 options (with an exercise price of HK$15.42), 34,131,200 options (with an exercise price of HK$6.18), 92,398,800 options (with an exercise price of HK$4.3), 366,000 options (with an exercise price of HK$4.66), 67,084,000 options (with an exercise price of HK$5.92) and 10,652,000 options (with an exercise price of HK$6.35) had been exercised.
Pre-Global Offering Share Option Scheme. We adopted a pre-global offering share option scheme on June 1, 2000, and amended the scheme on each of May 13, 2002, May 11, 2007 and May 26, 2009. The pre-global offering share option scheme expired on may June 21, 2010. Following the expiry of the pre-global offering share option scheme, no further option may be granted under the pre-global offering share option scheme, but the provisions of the pre-global offering share option scheme will remain in full force and effect to the extent necessary to give effect to the exercise of the options granted prior thereto or otherwise as may be required in accordance with the provisions of the pre-global offering share option scheme. On June 21, 2010, 16,977,600 options, representing all options validly granted and remaining valid under the pre-global offering share option scheme, lapsed. No such option was held by the directors. The amended terms of the pre-global offering share option scheme are substantially the same as the share option scheme, except for the following:
   
The subscription price of a share in respect of any particular option granted under the pre-global offering share option scheme is HK$15.42, the offer price in the Hong Kong public offering portion of our initial public offering, excluding brokerage fees and transaction levy.
   
The period during which an option may be exercised commences two years from the date of grant and ends 10 years from June 22, 2000.
During the period from January 1, 2010 to June 21, 2010, no option granted under this scheme had been exercised.
Special Purpose Share Option Scheme. We also adopted a special purpose share option scheme on September 16, 2008, in connection with our merger with China Netcom and amended the scheme on May 26, 2009. The special purpose share option scheme provides for the grant of options to the optionholders of China Netcom, in consideration for the cancellation of their outstanding China Netcom options (whether vested or not) on October 14, 2008. There are two exercise periods for the options granted under the special purpose share option scheme, one of which commenced on October 15, 2008, and will end on November 16, 2012 (as extended by the Board), with an exercise price of HK$5.57 and the other commenced on October 15, 2008, and will end on December 5, 2012 (as extended by the Board), with an exercise price of HK$8.26. No amount was payable on acceptance of the grant of options under the special purpose share option scheme. As of April 30, 2011, 189,472,118 options granted under this scheme were outstanding and held by one director and approximately 690 of our employees. As of April 30, 2011, 84,448 options granted under the Special Purpose Share Option Scheme were exercised at an exercise price of HK$5.57 for each option.
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
As of April 30, 2011, our controlling shareholder, Unicom Group, through its 17.90% direct interest in Unicom BVI, 61.05% direct interest in the A Share Company (which in turn holds 82.10% of Unicom BVI) and 100% direct interest in Netcom BVI, indirectly and beneficially owned approximately 16.7 billion shares of Unicom, or 71.02% of our total outstanding shares. See “A. History and Development of the Company” under Item 4. Unicom Group’s shares are held by the SASAC and a group of companies, most of which are state-owned enterprises in China. Shares beneficially owned by Unicom Group do not carry voting rights different from our other issued shares. In addition, Telefónica held 8.37% of our total outstanding shares.

 

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As of April 30, 2011, most of our shareholders of record were located outside of the United States. In addition, as of April 30, 2011, there were approximately 52,300,000 ADSs outstanding, each representing 10 shares and together representing 2.22% of our total outstanding shares or 7.66% of our total outstanding shares not beneficially owned by our controlling shareholder.
B. Related Party Transactions
Prior to our merger with China Netcom, Netcom BVI and Netcom Group (which was the 100% owner of Netcom BVI) did not have any shareholding interest in us. Upon completion of the merger, China Netcom became one of our wholly-owned subsidiaries and Netcom BVI currently owns 29.74% of our total outstanding shares. Accordingly, the related party transactions between China Netcom and its subsidiaries, namely, CNC China (which merged with, and was absorbed by, CUCL in January 2009 after the completion of our merger with China Netcom) and China Unicom System Integration (formerly known as “China Netcom System Integration”, which became one of our wholly-owned subsidiaries upon the completion of our merger with China Netcom), on one hand and Netcom Group (which merged with, and was absorbed by, Unicom Group in January 2009 after the completion of our merger with China Netcom) on the other hand in effect before our merger with China Netcom became our related party transactions upon the completion of the merger.
There were transactions between certain of our subsidiaries and Netcom Group in existence before our merger with China Netcom. Upon completion of the merger, these transactions became our related party transactions. On August 12, 2008, CUCL and Netcom Group entered into various framework agreements to record the principles governing, and the principal terms of, these continuing transactions that would take effect upon the completion of our merger with China Netcom. All of these framework agreements expired by the end of 2010.
In addition, before our merger with China Netcom, we had entered into a number of service arrangements with Unicom Group and/or its subsidiaries (other than us and our subsidiaries) with respect to the provision of ongoing telecommunications and ancillary services between Unicom Group and us. On October 26, 2006, we entered into a comprehensive services agreement with Unicom Group to record such related party transactions. In order to include CNC China as a party to the service arrangements and to facilitate our business and operations after our merger with China Netcom, Unicom Group and the A Share Company entered into a comprehensive services agreement on August 12, 2008, and the A Share Company, CUCL and CNC China entered into a transfer agreement on August 12, 2008, to amend the terms of the continuing related party transactions between us and Unicom Group in existence before our merger with China Netcom, with effect upon the completion of the merger. On October 29, 2010, CUCL and Unicom Group entered into a new comprehensive services agreement, or the 2010 comprehensive services agreement, to renew certain continuing related party transactions for a term of three years commencing on January 1, 2011 and expiring on December 31, 2013.
Our related party transactions in connection with the lease of and the option to purchase the CDMA network from Unicom Group were terminated upon the disposal of our CDMA business.
In January 2009, subsequent to our merger with China Netcom and the disposal of our CDMA business, we completed our acquisitions, through CUCL, of certain telecommunications business and assets from Unicom Group and Netcom Group, including the telecommunications business across 21 provinces in southern China.
The effects of certain of our and China Netcom’s related party transactions that occurred before 2008 (including, for example, those in relation to our and China Netcom’s initial public offerings) were not substantially affected by either our merger with China Netcom or the disposal of our CDMA business.

 

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Continuing Related Party Transactions under the 2010 Comprehensive Services Agreement
Under the two-step approach described under “A. History and Development of the Company—Two-Step Voting Arrangements” of Item 4, the continuing transactions between CUCL and Unicom Group under the comprehensive services agreement entered into in 2006 were amended, or the amended comprehensive services agreement, effective upon the completion of our merger with China Netcom, with CNC China added as party to such transactions. In January 2009, CNC China merged into CUCL. Pursuant to the amended comprehensive services agreement, Unicom Group agreed to provide certain services to CUCL and CNC China, being the supply of telephone cards, the provision of equipment procurement services, interconnection arrangements, the mutual provision of premises, the provision of international telecommunications network gateway, the provision of operator-based value-added services, the provision of value-added telecommunications services, the provision of “10010/10011” customer services, the provision of agency services and the provision of engineering design and technical services, until December 31, 2010. The total amount paid by CUCL to Unicom Group (or its subsidiaries, other than us and our subsidiaries) under the 2006 comprehensive services agreement and the new comprehensive services agreement was approximately RMB2.21 billion and RMB0.31 billion for continuing operations and discontinued operations, respectively, in 2008. Unicom Group paid RMB0.18 million to CUCL in 2008.
On October 29, 2010, CUCL and Unicom Group entered into the 2010 comprehensive services agreement to renew certain continuing connected transactions for a term of three years commencing on January 1, 2011 and expiring on December 31, 2013. Unless CUCL notifies Unicom Group at least 60 days prior to the expiration of such agreement of their intention not to renew the 2010 comprehensive services agreement, such agreement shall automatically be renewed for a further period of three years.
Details of the continuing related party transactions under the 2010 comprehensive services agreement are summarized below.
Telecommunications Resources Leasing
Unicom Group agrees to lease to CUCL certain international telecommunications resources and certain other telecommunications facilities required by CUCL for its operations.
The rental charges for the leasing of international telecommunications resources and other telecommunications facilities are based on the annual depreciation charges of such resources and telecommunications facilities provided that such charges would not be higher than market rates. CUCL will be responsible for the on-going maintenance of the leased international telecommunications resources. CUCL and Unicom Group will determine and agree which party is to provide maintenance service to the leased telecommunications facilities. Unless otherwise agreed by CUCL and Unicom Group, such maintenance service charges would be borne by CUCL. If Unicom Group is responsible for maintaining any leased telecommunications facilities, CUCL will pay to Unicom Group the relevant maintenance service charges which will be determined with reference to market rates, or where there are no market rates, be agreed between the parties and determined on a cost-plus basis. The net rental charges and service charges due to Unicom Group for the provision of the leased telecommunications resources leasing will be settled between CUCL and Unicom Group on a quarterly basis.
Property Leasing
CUCL and Unicom Group agree to lease to each other properties and ancillary facilities belonging to CUCL or Unicom Group (including their respective branch companies and subsidiaries).
The rental charges payable by CUCL or Unicom Group are based on market rates or the depreciation charges and taxes in respect of each property, provided that such rental charges will not be higher than the market rates. The rental charges are payable quarterly in arrears and are subject to review every year to take into account the then prevailing market rates of the properties leased in that year.

 

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Provision of Value-added Telecommunications Services
Unicom Group (or its subsidiaries) agrees to provide the customers of CUCL with various types of value-added telecommunications services.
CUCL will settle the revenue generated from the value-added telecommunications services with the branches of Unicom Group (or its subsidiaries) on the condition that such settlement will be based on the average revenue for independent value-added telecommunications content providers who provide value-added telecommunications content to CUCL in the same region. The revenue will be settled on a monthly basis.
Provision of Equipment Procurement Services
Unicom Group agrees to provide comprehensive procurement services for imported and domestic telecommunications equipment and other domestic non-telecommunications equipment to CUCL. Unicom Group also agrees to provide services on management of tenders, verification of technical specifications, installation, consulting and agency services.
In addition, Unicom Group will sell cable, modem and other materials operated by itself to CUCL and will also provide storage and logistics services in relation to the above equipment and materials procurement.
Charges for the provision of equipment procurement services are calculated at the rate of:
  (a)  
up to 3% of the contract value of those procurement contracts in the case of domestic equipment procurement; and
  (b)  
up to 1% of the contract value of those procurement contracts in the case of imported equipment procurement.
The charges for the provision of materials operated by Unicom Group are determined by reference to the following pricing principles:
  (A)  
the government fixed price;
  (B)  
where there is no government fixed price but a government guidance price exists, the government guidance price;
  (C)  
where there is neither a government fixed price nor a government guidance price, the market price; or
  (D)  
where none of the above is applicable, the price to be agreed between the parties and determined on a cost-plus basis.
The charges for the provision of storage and logistics services are determined by reference to the market price, which is determined by reference to the following:
  (I)  
the price charged by an independent third party providing the services in the same or nearby location in an ordinary business transaction; or
  (II)  
the price charged by an independent third party providing the services in mainland China in an ordinary business transaction.
The service charges due to Unicom Group will be settled on a monthly basis.

 

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Provision of Engineering Design and Construction Services
Unicom Group agrees to provide engineering design, construction and supervision services and IT services to CUCL. Engineering design services include planning and design, engineering inspection, telecommunications electronic engineering, telecommunications equipment engineering and corporate telecommunications engineering. Construction services include services relating to telecommunications equipment, telecommunications routing, power supplies, telecommunications conduit, and technical support systems. IT services include services relating to office automation, software testing, network upgrading, research and development of new business, and development of support systems.
The charges for the provision of engineering design and construction services are determined by reference to the market price, which is determined by reference to the following:
  (a)  
the price charged by an independent third party providing the services in the same or nearby location in an ordinary business transaction; or
  (b)  
the price charged by an independent third party providing the services in mainland China in an ordinary business transaction.
The service charges will be settled between CUCL and Unicom Group as and when the relevant services are provided.
Provision of Ancillary Telecommunications Services
Unicom Group agrees to provide ancillary telecommunications services to CUCL. These services include certain telecommunications pre-sale, on-sale and after-sale services such as assembling and repairing of certain telecommunications equipment, sales agency services, printing and invoice delivery services, maintenance of telephone booths, customers acquisitions and servicing and other customers’ services.
The charges payable for the provision of ancillary telecommunications services are determined by reference to the following pricing principles:
  (a)  
the government fixed price;
  (b)  
where there is no government fixed price but a government guidance price exists, the government guidance price;
  (c)  
where there is neither a government fixed price nor a government guidance price, the market price; or
  (d)  
where none of the above is applicable, the price to be agreed between the parties and determined on a cost-plus basis.
The service charges will be settled between CUCL and Unicom Group as and when the relevant services are provided.

 

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Provision of Comprehensive Support Services
Unicom Group and CUCL agree to provide comprehensive support services to each other, including dining services, facilities leasing services (excluding those facilities which are provided under the paragraph headed “Provision of Telecommunications Resources Leasing” above), vehicle services, health and medical services, labour services, security services, hotel and conference services, gardening services, decoration and renovation services, sales services, construction agency, equipment maintenance services, market development, technical support services, research and development services, sanitary services, parking services, staff trainings, storage services, advertising services, marketing, property management services, information and communications technology services (including construction and installation services, system integration services, software development, product sales and agent services, operation and maintenance services, and consultation services).
The service charges are determined by reference to the following pricing principles:
  (a)  
the government fixed price;
  (b)  
where there is no government fixed price but a government guidance price exists, the government guidance price;
  (c)  
where there is neither a government fixed price nor a government guidance price, the market price; or
  (d)  
where none of the above is applicable, the price to be agreed between the parties and determined on a cost-plus basis.
The service charges will be settled between CUCL and Unicom Group as and when the relevant services are provided.
Provision of Shared Services
Unicom Group and CUCL agree to provide shared services to each other, including, but not limited to, the following:
  (a)  
CUCL will provide headquarter human resources services to Unicom Group;
  (b)  
Unicom Group and CUCL will provide central business support services to each other;
  (c)  
CUCL will provide trust services related to the services referred to in paragraphs (a) and (b) above to Unicom Group; and
  (d)  
Unicom Group will provide premises to CUCL and other shared services requested by its headquarters.
In relation to the central business support services Unicom Group and CUCL will provide to each other, CUCL will provide support services, such as billing and settlement services provided by the business support centre and operational statistics reports. Unicom Group will provide support services, including telephone card production, development and related services, maintenance and technical support and management services in relation to the telecommunications card operational system.
Unicom Group and CUCL will share the costs related to the shared services proportionately in accordance with their respective total assets value, except that the total assets value of the overseas subsidiaries and the listed company of Unicom Group will be excluded from the total asset value of Unicom Group, and the shared costs proportion will be agreed between Unicom Group and CUCL in accordance with the total assets value set out in the financial statements provided to each other, as adjusted in accordance with their respective total assets value on an annual basis.

 

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Historical Related Party Transactions between China Unicom’s Subsidiaries and Unicom Group
Certain subsidiaries of China Unicom and Unicom Group entered into a number of framework agreements, all of which expired by the end of 2010. Details of the related party transactions under such agreements are summarized below.
Domestic Interconnection Settlement Agreement
CNC China and Netcom Group entered into a domestic interconnection settlement agreement on November 6, 2007, which renewed a previous similar agreement, for a term of three years commencing on January 1, 2008. As CNC China and Netcom Group were merged into CUCL and Unicom Group, respectively, in January 2009, the parties to the agreement became CUCL and Unicom Group. If CUCL notifies Unicom Group at least three months prior to the expiration of the domestic interconnection settlement agreement of its intention to renew the agreement, it can be renewed with the same terms for further three-year periods.
Pursuant to the domestic interconnection settlement agreement, the parties agree to interconnect the networks of Unicom Group and CUCL and settle the charges received in respect of domestic long distance voice services within their respective service regions on a quarterly basis.
For domestic long distance voice services between Unicom Group and CUCL, the telephone operator in the location of the calling party makes a settlement payment to the telephone operator in the location of the called party at the rate of RMB0.06 per minute, irrespective of whether the call terminates within the network of either Unicom Group or CUCL or outside the network of either Unicom Group or CUCL. The rate of RMB0.06 per minute is adjustable with reference to the relevant standards, tariffs or policies promulgated by the relevant regulatory authorities in the PRC from time to time. In the case where the call terminates outside the network of either Unicom Group or CUCL, the settlement payment is at the rate of RMB0.06 per minute.
International Long Distance Voice Services Settlement Agreement
CNC China and Netcom Group entered into an international long distance voice services settlement agreement on November 6, 2007, which renewed a previous similar agreement, for a term of three years commencing on January 1, 2008. As CNC China and Netcom Group were merged into CUCL and Unicom Group, respectively, in January 2009, the parties to the agreement became CUCL and Unicom Group. If CUCL notifies Unicom Group at least three months prior to the expiration of the international long distance voice services settlement agreement of its intention to renew the agreement, it can be renewed with the same terms for further three-year periods.
Pursuant to the international long distance voice services settlement agreement, the parties agree to interconnect the networks of Unicom Group and CUCL and settle the charges received in respect of international long distance voice services on a quarterly basis.
For outbound international calls from the PRC, Unicom Group reimburses CUCL for any amount CUCL pays to overseas telecommunications operators. The revenue received by Unicom Group less the amount paid to overseas telecommunications operators are shared between Unicom Group and CUCL in proportion to the estimated costs incurred by Unicom Group and CUCL in connection with the provision of outbound international long distance voice services.
For inbound international calls into the PRC, the revenue received by CUCL from overseas telecommunications operators (other than China Netcom and entities under its control) less the amount paid to Unicom Group at the rate of RMB0.06 per minute (irrespective of whether the call terminates within the network of Unicom Group or within the network of other telecommunications operators) are shared between Unicom Group and CUCL in proportion to the estimated costs incurred by Unicom Group and CUCL in connection with the provision of inbound international long distance voice services. The rate of RMB0.06 per minute is adjustable with reference to the relevant standards, tariffs or policies promulgated by the relevant regulatory authorities in the PRC from time to time.
In the case where an inbound international call terminates within the network of telecommunications operators other than Unicom Group, an amount calculated at the rate of RMB0.06 per minute is paid to Unicom Group by CUCL.

 

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Framework Agreement for Interconnection Settlement
CUCL and Unicom Group entered into a framework agreement for interconnection settlement on August 12, 2008, to record the principles governing, and the principal terms of, the then-existing continuing transactions between the parties whereby the parties agreed to interconnect the networks of Unicom Group and CUCL and settle charges received in respect of domestic long distance voice services within their respective service regions and international long distance voice services.
Pursuant to the framework agreement for interconnection settlement, within the local networks, when a CUCL mobile telephone customer calls a Unicom Group fixed-line customer, or when customers of the two operators make inter-network calls to various call centers, the telephone operator in the location of the calling party makes a settlement payment to the telephone operator in the location of the called party at the rate of RMB0.06 per minute. When a Unicom Group fixed-line customer calls a CUCL mobile telephone customer, there shall be no settlement provisionally.
When a CUCL mobile telephone user chooses to use Unicom Group’s domestic or international long distance call services, or when a Unicom Group local fixed-line user chooses to use CUCL’s domestic or international long distance call services, the telephone operator in the location of the receiver makes a settlement payment to the telephone operator in the location of the calling party at the rate of RMB0.06 per minute.
For domestic long distance voice services and Internet protocol voice services from one operator to another or for international voice services and international Internet protocol voice services from one operator to another, the telephone operator in the location of the calling party makes a settlement payment to the telephone operator in the location of the receiver at the rate of RMB0.06 per minute.
However, for domestic long distance voice services between the parties where the calling party is unable to choose to use a third-party operator, the settlement payment rate will be RMB0.34 per minute if the call is made between 0:00 and 07:00 hours and RMB0.54 per minute if the call is made between 07:00 and 23:59 hours. For calls that need to be transferred to a third-party operator, the settlement rate for the transfer is RMB0.03 per minute.
Engineering and Information Technology Services Agreement and Framework Agreement for Engineering and Information Technology Services
CNC China and Netcom Group entered into an engineering and information technology services agreement on November 6, 2007, which renewed a previous similar agreement, for a term of three years commencing on January 1, 2008. As CNC China and Netcom Group were merged into CUCL and Unicom Group, respectively, in January 2009, the parties to the agreement became CUCL and Unicom Group. If CUCL notifies Unicom Group at least three months prior to the expiration of the engineering and information technology services agreement of its intention to renew the agreement, it can be renewed with the same terms for further three-year periods.
CUCL and Unicom Group entered into a framework agreement for engineering and information technology services on August 12, 2008 to record the principles governing, and the principal terms of, the then-existing continuing transactions between the parties relating to the provision of certain engineering and information technology-related services to CUCL by Unicom Group.
Under the engineering and information technology services agreement and framework agreement for engineering and information technology services, Unicom Group agrees to provide to CUCL certain engineering and information technology-related services, which include planning, surveying, design, construction and supervision services in relation to telecommunications engineering projects and information technology services, including office automation, software testing, network upgrade, new business development and support system development.
The charges payable for engineering and information technology-related services described above are determined with reference to the relevant market rates. In addition, where the value of any single item of engineering design or supervision-related services is expected to exceed RMB0.5 million or where the value of any single item of engineering construction-related services is expected to exceed RMB2 million, the award of such services will be subject to competitive bidding. The charges are settled between CUCL and Unicom Group as and when the relevant services are provided.

 

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Master Sharing Agreement
CNC China and Netcom Group entered into a master sharing agreement on November 6, 2007, which renewed a previous similar agreement, for a term of three years commencing on January 1, 2008. As CNC China and Netcom Group were merged into CUCL and Unicom Group, respectively, in January 2009, the parties to the agreement became CUCL and Unicom Group. If CUCL notifies Unicom Group at least three months prior to the expiration of the master sharing agreement of its intention to renew the agreement, it can be renewed with the same terms for further three-year periods.
Pursuant to the master sharing agreement:
  (a)  
CUCL agrees to provide customer relationship management services for large enterprise customers of Unicom Group;
  (b)  
CUCL agrees to provide network management services to Unicom Group;
  (c)  
CUCL agrees to share with Unicom Group the services provided by administrative and managerial staff in respect of central management of the business operations, financial control, human resources and other related matters of both CUCL and Unicom Group;
  (d)  
CUCL agrees to provide to Unicom Group supporting services, such as billing and settlement provided by CUCL’s business support center;
  (e)  
Unicom Group agrees to provide to CUCL supporting services, including telephone card production, development and certain related services;
  (f)  
Unicom Group agrees to provide to CUCL certain other shared services, including advertising, publicity, research and development, business hospitality, maintenance and property management;
  (g)  
Unicom Group agrees to provide certain office space in its headquarters to CUCL for use as CUCL’s principal executive office; and
  (h)  
CUCL and Unicom Group agree to share the revenue received by Unicom Group from other telecommunications operators whose networks interconnect with the Internet backbone network of Unicom Group and share the monthly connection fee that Unicom Group pays to the State Internet Switching Center.
CUCL and Unicom Group co-own certain equipment and facilities that form the Internet backbone network of the PRC. This Internet backbone network interconnects with the networks of other telecommunications operators. Such interconnection arrangements generate revenue which other telecommunications operators settle with Unicom Group, and such revenue are shared between Unicom Group and CUCL under the master sharing agreement.
The services referred to in clauses (a) to (g) above are provided by CUCL or Unicom Group and the revenue and fees referred to in clause (h) above are shared between CUCL and Unicom Group on an ongoing basis from time to time. The aggregate costs incurred by CUCL or Unicom Group for the provision of the services referred to in clauses (a) to (g) above and the revenue and fees receivable and payable by CUCL or Unicom Group as referred to in clause (h) above are apportioned between CUCL and Unicom Group according to their respective total asset values as shown in their respective financial statements on an annual basis.

 

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Property Leasing Agreement and Framework Agreement for Property Leasing
CNC China and Netcom Group entered into a property leasing agreement on November 6, 2007, which renewed a previous similar agreement, for a term of three years commencing on January 1, 2008. As CNC China and Netcom Group were merged into CUCL and Unicom Group, respectively, in January 2009, the parties to the agreement became CUCL and Unicom Group. If CUCL notifies Unicom Group at least three months prior to the expiration of the property leasing agreement of its intention to renew the agreement, it can be renewed on the same terms for further three-year periods.
CUCL and Unicom Group entered into a framework agreement for property leasing on August 12, 2008 to record the principles governing, and the principal terms of, the then-existing continuing transactions between the parties relating to the leasing of properties (including offices and storage facilities) by CUCL from Unicom Group.
Pursuant to the property leasing agreement and the framework agreement for property leasing, CUCL agrees to lease to Unicom Group certain properties located throughout CUCL’s service regions for Unicom Group’s use as offices and for other ancillary purposes, and Unicom Group agrees to lease to CUCL certain properties located throughout CUCL’s service regions for CUCL’s use as offices and telecommunications equipment sites and for other ancillary purposes.
The charges payable by CUCL and by Unicom Group under the property leasing agreement are based on the relevant market rates or the depreciation charges and taxes in respect of each property, provided that such depreciation charges and taxes shall not be higher than the market rates. The charges are payable quarterly in arrears and are subject to review every year to take into account the then-prevailing market rates of the properties leased in that year.
Materials Procurement Agreement
CNC China and Netcom Group entered into a materials procurement agreement on November 6, 2007, which renewed a previous similar agreement, for a term of three years commencing on January 1, 2008. As CNC China and Netcom Group were merged into CUCL and Unicom Group, respectively, in January 2009, the parties to the agreement became CUCL and Unicom Group. If CUCL notifies Unicom Group at least three months prior to the expiration of the materials procurement agreement of its intention to renew the agreement, it can be renewed on the same terms for further three-year periods.
Pursuant to the materials procurement agreement:
  (a)  
CUCL may request Unicom Group to act as its agent for the procurement of imported and domestic telecommunications equipment and other domestic non-telecommunications equipment;
  (b)  
CUCL may purchase from Unicom Group certain products, including cables, modems and telephone directories; and
  (c)  
Unicom Group agrees to provide to CUCL storage and transportation services related to the procurement and purchase of materials or equipment under the agreement.
Under the materials procurement agreement, commissions and/or charges for the domestic materials procurement services referred to in clause (a) above cannot exceed 3% of the value of the relevant contract. Commissions and/or charges for the imported materials procurement services referred to in clause (a) above cannot exceed 1% of the value of the relevant contract. The price for the purchases of Unicom Group’s products referred to in clause (b) above is determined with reference to the following pricing principles and limits:
   
the price fixed by the PRC Government;
   
where there is no price fixed by the PRC Government but there is a price recommended by the PRC Government, the government-recommended price;
   
where there is neither a government-fixed price nor a government-recommended price, the market price; or
   
where none of the above is applicable, the price to be agreed between the relevant parties and determined on a cost-plus basis.

 

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Commission and/or charges for the storage and transportation services referred to in clause (c) above are to be determined with reference to the relevant market rates. Payments under the materials procurement agreement will be made as and when the relevant equipment or products are procured and delivered.
Ancillary Telecommunications Services Agreement and Framework Agreement for Ancillary Telecommunications Services
CNC China and Netcom Group entered into an ancillary telecommunications services agreement on November 6, 2007, which renewed a previous similar agreement, for a term of three years commencing on January 1, 2008. As CNC China and Netcom Group were merged into CUCL and Unicom Group, respectively, in January 2009, the parties to the agreement became CUCL and Unicom Group. If CUCL notifies Unicom Group at least three months prior to the expiration of the ancillary telecommunications services agreement of its intention to renew the agreement, it can be renewed on the same terms for further three-year periods.
CUCL and Unicom Group entered into a framework agreement for ancillary telecommunications services on August 12, 2008 to record the principles governing, and the principal terms of, the then-existing continuing transactions between the parties relating to the provision of ancillary telecommunications services to CUCL by Unicom Group.
Under the ancillary telecommunications services agreement and the framework agreement for ancillary telecommunications services, Unicom Group agrees to provide certain ancillary telecommunications services to CUCL. These services include certain pre-sale, on-sale and after-sale telecommunications services, such as assembling and repairing of telecommunications equipment, sales agency services, printing and invoice delivery services, maintenance of telephone booths, customer acquisition and servicing, and other customer services.
The charges payable for the services described above are determined with reference to the following pricing principles and limits:
   
the price fixed by the PRC Government;
   
where there is no price fixed by the PRC Government but there is a price recommended by the PRC Government, the government-recommended price;
   
where there is neither a government-fixed price nor a government-recommended price, the market price; or
   
where none of the above is applicable, the price to be agreed between the relevant parties and determined on a cost-plus basis.
The service charges are settled between CUCL and Unicom Group as and when the relevant services are provided.

 

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Support Services Agreement and Framework Agreement for Support Services
CNC China and Netcom Group entered into a support services agreement on November 6, 2007, which renewed a previous similar agreement, for a term of three years commencing on January 1, 2008. As CNC China and Netcom Group were merged into CUCL and Unicom Group, respectively, in January 2009, the parties to the agreement became CUCL and Unicom Group. If CUCL notifies Unicom Group at least three months prior to the expiration of the support services agreement of its intention to renew the agreement, it can be renewed on the same terms for further three-year periods.
CUCL and Unicom Group entered into a framework agreement for support services on August 12, 2008 to record the principles governing, and the principal terms of, the then-existing continuing transactions between the parties relating to the provision of various support services to CUCL by Unicom Group, including equipment leasing and maintenance services, motor vehicle services, security services, basic construction agency services, research and development services, employee training services, advertising services and other support services.
Pursuant to the support services agreement and the framework agreement for support services, Unicom Group agrees to provide CUCL with various support services, including equipment leasing (other than equipment covered under the telecommunications facilities leasing agreement discussed below) and maintenance services, motor vehicle services, security services, basic construction agency services, research and development services, employee training services, advertising services and other support services.
The charges payable for the services described above are determined with reference to the following pricing principles and limits:
   
the price fixed by the PRC Government;
   
where there is no price fixed by the PRC Government but there is a price recommended by the PRC Government, the government-recommended price;
   
where there is neither a government-fixed price nor a government-recommended price, the market price; or
   
where none of the above is applicable, the price to be agreed between the relevant parties and determined on a cost-plus basis.
The service charges are settled between CUCL and Unicom Group as and when the relevant services are provided.
Telecommunications Facilities Leasing Agreement and Framework Agreement for Telecommunication Facilities Leasing
CNC China and Netcom Group entered into a telecommunications facilities leasing agreement on November 6, 2007, which renewed a previous similar agreement, for a term of three years commencing on January 1, 2008. As CNC China and Netcom Group were merged into CUCL and Unicom Group, respectively, in January 2009, the parties to the agreement became CUCL and Unicom Group. If CUCL notifies Unicom Group at least three months prior to the expiration of the telecommunications facilities leasing agreement of its intention to renew the agreement, such agreement can be renewed on the same terms for further three-year periods.
CUCL and Unicom Group entered into a framework agreement for telecommunications facilities leasing on August 12, 2008 to record the principles governing, and the principal terms of, the then-existing continuing transactions between the parties relating to the lease by Unicom Group of certain international telecommunications resources and certain other telecommunications facilities to CUCL.

 

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Pursuant to the telecommunications facilities leasing agreement and the framework agreement for telecommunications facilities leasing:
  (a)  
Unicom Group agrees to lease certain inter-provincial fiber optic cables within CUCL’s service regions to CUCL;
  (b)  
Unicom Group agrees to lease certain international telecommunications resources (including international telecommunications channel gateways, international telecommunications service gateways, international submarine cable capacity, international land cables and international satellite facilities) to CUCL; and
  (c)  
Unicom Group agrees to lease to CUCL certain other telecommunications facilities required by CUCL for its operations.
The rental charges for the leasing of the inter-provincial fiber optic cables, international telecommunications resources and other telecommunications facilities are based on the annual depreciation charges of such fiber optic cables, resources and telecommunications facilities, provided that such charges would not be higher than the relevant market rates. CUCL is responsible for the ongoing maintenance of such inter-provincial fiber optic cables and international telecommunications resources. CUCL and Unicom Group shall determine and agree which party is to provide maintenance service to the telecommunications facilities referred to in clause (c) above. Unless otherwise agreed by CUCL and Unicom Group, such maintenance service charges would be borne by CUCL. If Unicom Group shall be responsible for maintaining any telecommunications facilities referred to in clause (c) above, CUCL shall pay to Unicom Group the relevant maintenance service charges, which shall be agreed between the parties and determined on a cost-plus basis. The net rental charges and service charges due to Unicom Group under the telecommunications facilities leasing agreement are settled between CUCL and Unicom Group on a quarterly basis.
Information and Communications Technology Agreement
China Netcom System Integration Limited Corporation, which also became one of our subsidiaries upon the completion of our merger with China Netcom and changed its name to China Unicom System Integration Limited Corporation, and Unicom Group entered into an information and communications technology agreement on November 6, 2007, which replaced a previous similar agreement, for a term of three years commencing on January 1, 2008. If both parties agree, the agreement can be renewed with the same terms for further three-year periods.
Pursuant to the information and communications technology agreement:
  (a)  
China Unicom System Integration (and its subsidiaries) agrees to provide information and communications technology services to Unicom Group (and its subsidiaries, other than China Unicom and its subsidiaries), which include system integration services, software development services, operational maintenance services, consultancy services, equipment leasing-related services and product sales-and distribution-related services; and
  (b)  
China Unicom System Integration agrees to subcontract services ancillary to the provision of information and communications technology services referred to in clause (a) above, namely, system installation and configuration services, to the subsidiaries and branches of Unicom Group (other than China Unicom and its subsidiaries) in Unicom Group’s southern service regions in the PRC.
The charges payable for the services provided under the information and communications technology agreement are determined with reference to the following pricing principles and limits:
   
the price fixed by the PRC Government;
   
where there is no price fixed by the PRC Government but there is a price recommended by the PRC Government, the government-recommended price; or
   
where there is neither a government-fixed price nor a government-recommended price, the market price.

 

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In relation to the charges payable for the services provided under the information and communications technology agreement that are to be determined with reference to the market price:
   
if the value of any single item of system installation and configuration services provided by Unicom Group (and its subsidiaries, other than China Unicom and its subsidiaries) to China Unicom System Integration (and its subsidiaries) is expected to exceed RMB0.3 million, the award of such services will be subject to competitive bidding; or
   
if the value of any single item of system integration, software development, operational maintenance, consultancy and equipment leasing-related services is expected to exceed RMB0.5 million, or where the value of any single item of product sales and distribution related services is expected to exceed RMB2 million, the award of such services will be subject to competitive bidding.
Leasing of CDMA Network Capacity
Prior to our sale of CDMA business in 2008, we had leased all of the constructed CDMA network capacity from Unicom Group and operated these CDMA networks in our cellular service areas on an exclusive basis and received all revenue generated from the operation. We paid a lease fee of RMB8.4 billion and RMB6.0 billion for 2007 and 2008, respectively. In addition to leasing network capacity, we also had the option, exercisable at any time during the lease period and for an additional year thereafter, to purchase the CDMA network in our cellular service areas. See “A. History and Development of the Company — Sale of CDMA Business, Merger with China Netcom and Related Transactions” under Item 4.
Acquisitions of Fixed-Line Business in 21 Provinces in Southern China and Other Assets from Parent Companies and Lease of Telecommunications Networks in 21 Provinces in Southern China
Under the two-step voting mechanism described in “A. History and Development of the Company—Two-Step Voting Arrangements” under Item 4, we completed our acquisitions, through CUCL, of certain telecommunications business and assets, including the telecommunications business across 21 provinces in southern China, from Unicom Group and Netcom Group pursuant to (1) an acquisition agreement entered into among Unicom Group, Netcom Group and the A Share Company on December 16, 2008, under which the A Share Company agreed to acquire the relevant business and assets and (2) a transfer agreement entered into between the A Share Company and CUCL on December 16, 2008, under which the A Share Company agreed to transfer all of its rights and obligations under the acquisition agreement to CUCL. In addition, in order to operate the fixed-line business in the 21 provinces in southern China, on December 16, 2008, CUCL entered into a network lease agreement, or the initial lease, with Unicom Group, Netcom Group and Unicom New Horizon, a wholly-owned subsidiary of Unicom Group, to lease on an exclusive basis the telecommunications networks in those provinces, which are held by Unicom New Horizon and are necessary for the operation of the fixed-line business in southern China. The initial lease became effective in January 2009 upon the completion of our acquisitions of the fixed-line business in southern China and was for an initial term of two years effective from January 2009. In connection with the lease, Unicom New Horizon also granted CUCL an option, but not an obligation, to purchase the telecommunications networks leased in southern China. See “A. History and Development — Acquisitions of Fixed-Line Business in 21 Provinces in Southern China and Other Assets from Parent Companies and Lease of Telecommunications Networks in 21 Provinces in Southern China” under Item 4.

 

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On October 29, 2010, CUCL entered into the 2011-2012 Network Lease Agreement, with Unicom New Horizon, which became effective on January 1, 2011. The 2011-2012 Network Lease Agreement is for an initial term of two years effective from January 1, 2011 and is renewable at the option of CUCL with at least two months’ prior notice on the same terms and conditions, except for the future lease fee which will remain subject to further negotiations between the parties. The annual lease fee payable by CUCL under the initial lease for the years ending December 31, 2009 and 2010 was RMB2.0 billion and RMB2.2 billion, respectively, and the annual lease fee payable by CUCL under the 2011-2012 Network Lease Agreement for the years ending December 31, 2011 and 2012 is RMB2.4 billion and RMB2.6 billion, respectively. In connection with the 2011-2012 Network Lease Agreement, Unicom New Horizon also granted CUCL an option, but not an obligation, to purchase the telecommunications networks leased in southern China. The purchase option may be exercised, at the discretion of CUCL, at any time during the term of the lease. No premium has been paid or will be payable by CUCL for such purchase option. In the event that CUCL elects to exercise this purchase option, the parties will discuss and negotiate the purchase price with reference to the appraised value of the telecommunications networks in southern China, which is to be determined in accordance with applicable laws of Hong Kong and the PRC, after taking into account the prevailing market conditions and other factors. Under the 2011-2012 Network Lease Agreement, CUCL is responsible for the ongoing cost and expenses incurred in respect of the maintenance and management which may arise from the use of the leased telecommunications networks in southern China.
Mergers of Parent Companies and Subsidiaries
As part of our integration with China Netcom, our wholly-owned subsidiary, CUCL, merged with CNC China, a wholly-owned subsidiary of China Netcom, with effect from January 2009, and upon such merger becoming effective, CUCL assumed all the rights and obligations of CNC China, and all the assets, liabilities and business of CNC China were vested in CUCL. In addition, China Netcom’s parent, Netcom Group, also merged with our parent, Unicom Group, with effect from January 2009, and upon such merger becoming effective, Unicom Group assumed all the rights and obligations of Netcom Group, and all the assets, liabilities and business of Netcom Group were vested in Unicom Group.
Certain Agreements Relating to Our Initial Public Offering
The Reorganization Agreement
In relation to the restructuring in connection with our initial public offering, our wholly-owned subsidiary, CUCL, entered into a reorganization agreement with Unicom Group, dated April 21, 2000. This agreement includes the following terms:
   
Unicom Group’s agreement to transfer to CUCL certain assets and liabilities;
   
mutual warranties and indemnities given by Unicom Group and CUCL in relation to the assets and liabilities transferred to CUCL and in relation to the restructuring;
   
undertakings by Unicom Group in favor of CUCL, including, among other things:
   
to hold and maintain all licenses received from the former Ministry of Information Industry in connection with any of our businesses for our benefit, and to allocate spectrum and to provide other resources to us;
   
subject to applicable Chinese laws and regulations in effect at the relevant time, to take all actions necessary to obtain, maintain, renew and otherwise extend to or for our benefit such governmental or regulatory licenses, consents, permits or other approvals as we shall require to continue to operate our businesses;
   
to arrange for us to participate in its international roaming arrangements;
   
not to engage in any business that competes with our businesses, except for the existing competing businesses of Unicom Group;
   
to grant us a right of first refusal in relation to any governmental authorization, license or permit, or other business opportunity to develop any new telecommunications technology, product or service;

 

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to ensure that we can continue to use the premises for which title documentation cannot be obtained at this time, for a period of three years following the restructuring;
   
not to dispose of any of our shares it beneficially owns or to take or permit any other actions, including primary issuances of securities by us or CUCL, which would result in us or CUCL no longer constituting majority-owned subsidiaries of Unicom Group; and
   
not to seek an overseas listing for any of its businesses or the businesses of its subsidiaries in which we are engaged or may engage in the future except through us;
   
an option granted by Unicom Group to us to acquire Unicom Group’s interest in any telecommunications interest, such as Unicom Paging, Unicom Xingye and Unicom Group’s CDMA telephony license and business; and
   
a commitment by Unicom Group that it will provide continuous financial support to us when necessary.
The new comprehensive services agreement entered into in 2008 provides that the determination of whether we or CUCL would constitute majority-owned subsidiaries of the Unicom Group shall be made in accordance with the PRC Enterprise Accounting Standards, as amended by the Ministry of Finance from time to time.
Trademark Agreement
Unicom Group is the registered owner of the Unicom trademark in English, the trademark bearing the Unicom logo and the trademark of the word “Unicom” in Chinese (“ (CHINESE CHARACTER) ”), which are registered at the PRC State Trademark Bureau. Under a PRC trademark license agreement entered into on May 25, 2000 between Unicom Group and CUCL, CUCL and our affiliates were granted the right to use these trademarks on a royalty-free basis for an initial period of five years, renewable at the option of CUCL. Under the terms of this agreement, we and our affiliates are the exclusive licensees of these trademarks, provided that Unicom Group may also license these trademarks to any of its existing or future subsidiaries. Unicom Group also agreed to license to CUCL any trademark that it registers in China in the future that incorporates the word “Unicom.”
Our Roaming Arrangements
Prior to the acquisition of Unicom Guizhou, we and Unicom Group provided roaming services to each other. In addition, we made our long distance network available to Unicom Group in its implementation of its roaming arrangements with other operators. CUCL previously entered into two services agreements with Unicom Group, dated May 25, 2000 and November 22, 2001, respectively, and each of Unicom New Century and Unicom New World previously entered into a services agreement with Unicom Group, dated November 20, 2002 and November 20, 2003, respectively. These four services agreements provided for our roaming arrangements with Unicom Group, under which charges for these roaming services between us and Unicom Group were based on our respective internal costs of providing these services, and would be on no less favorable terms than those available to any third-party. We received 50% of Unicom Group’s international roaming revenue from third-party cellular international operators for calls using our long distance network.

 

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Under the 2006 comprehensive services agreement between Unicom Group and us, the roaming fee arrangements between Unicom Group and us are as follows:
   
The cellular subscribers using roaming services will pay roaming fees at the agreed rate of RMB0.60 per minute of roaming usage for both incoming and outgoing calls, based on the guidelines of the former Ministry of Information Industry.
   
If our cellular subscribers roam in the service areas of Unicom Group, we will be entitled to receive the roaming fees, which will be apportioned in the following way: (i) RMB0.40 per minute (the rate for local call charges under the guidelines of the former Ministry of Information Industry) will be paid to Unicom Group; and (ii) the remaining RMB0.20 per minute will be withheld by us;
   
If the cellular subscribers of Unicom Group roam in our service areas, Unicom Group will be entitled to receive the roaming fees, which will be apportioned in the following way: (i) RMB0.56 per minute will be paid to us; and (ii) RMB0.04 per minute will be withheld by Unicom Group; and
   
If our cellular business expands to cover all regions throughout the PRC, the arrangements set out above will be terminated automatically.
   
If the network of a third-party cellular network operator is made available to the cellular subscribers of Unicom Group pursuant to the international roaming arrangements of Unicom Group, or if the network of Unicom Group is made available to the subscribers of any third-party cellular network operator pursuant to such arrangements, we will receive 50% of all roaming revenue to be received under such international roaming arrangements.
Prior to our acquisition of Unicom Guizhou, Unicom Guizhou operated the only CDMA cellular network of Unicom Group that we did not lease and the only GSM cellular network of Unicom Group. Upon the completion of such acquisition in December 2007, our cellular networks covered all regions in China and Unicom Group no longer operated any cellular networks in China. As a result of such acquisition, all transactions, including roaming arrangements, between Unicom Guizhou and us were eliminated and not treated as related party transactions retroactively. Similarly, the roaming arrangements for cellular networks between Unicom Group and us became no longer applicable. See “A. History and Development of the Company — Unicom Acquisitions and Sales” under Item 4.
C. Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
See Item 18 “Financial Statements.” Other than as disclosed elsewhere in this annual report, no significant change has occurred since the date of the annual financial statements.
Legal Proceedings
We are not involved in any material litigation, arbitration or administrative proceedings. We are not aware of any pending or threatened litigation, arbitration or administrative proceedings expected to have a material effect on our financial condition and results of operations.
Policy on Dividend Distribution
The objective of our dividend policy is to achieve a long-term, sustainable and steadily increasing dividend, with a view to maximize our shareholders’ value. The declaration and payment of future dividends will depend upon, among other things, financial condition, business prospects, future earnings, cash flow, liquidity level and cost of capital. We believe such policy will provide our shareholders with a stable return in the long term along with the growth of our company. We may only pay dividends out of our distributable profits.

 

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Based on the Company’s financial position in 2010 and taking into account the development needs of the mobile and fixed-line broadband businesses, our board of directors recommended the payment of a final dividend of RMB0.08 per share for the year ended December 31, 2010, compared to RMB0.16 per share for the fiscal year ended December 31, 2009.
Item 9. The Offer and Listing
Market Price Information
Our ADSs, each representing ten ordinary shares, are listed and traded on the NYSE. Our ordinary shares are listed and traded on the HKSE. The NYSE and the HKSE are the principal trading markets for our ADSs and ordinary shares, which are not listed on any other exchanges in or outside the United States.
The high and low closing prices of our ordinary shares on the HKSE and of our ADSs on the NYSE since listing are as follows:
                                 
    Price per Ordinary Share        
    (HK$)     Price per ADS (US$)  
    High     Low     High     Low  
Annual:
                               
2006
    12.44       6.25       15.46       8.03  
2007
    18.80       9.18       24.52       11.75  
2008
    19.58       8.53       25.07       10.27  
2009
    12.34       6.84       15.75       8.72  
2010
    12.16       8.31       15.54       10.58  
 
                               
Quarterly:
                               
First Quarter, 2009
    10.86       6.84       14.06       8.72  
Second Quarter, 2009
    11.86       7.46       15.50       9.86  
Third Quarter, 2009
    12.34       9.91       15.75       12.61  
Fourth Quarter, 2009
    11.22       9.63       14.47       12.46  
First Quarter, 2010
    10.40       8.31       13.41       10.58  
Second Quarter, 2010
    10.76       8.84       13.55       11.09  
Third Quarter, 2010
    12.16       9.96       15.54       12.55  
Fourth Quarter, 2010
    11.68       10.32       15.06       13.34  
First Quarter, 2011
    13.58       11.04       17.49       14.11  
 
                               
Monthly:
                               
November 2010
    11.46       10.32       14.58       13.17  
December 2010
    11.68       10.44       15.00       13.52  
January 2011
    13.00       11.04       16.52       14.11  
February 2011
    13.50       12.40       17.49       15.99  
March 2011
    13.58       12.34       17.32       15.30  
April 2011
    16.14       13.40       20.46       17.26  
May 2011(through May 25, 2011)
    16.64       15.12       21.24       19.50  

 

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Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
General
Under our Articles of Association, we have the capacity, rights, powers, liabilities and privileges of a natural person and, in addition to and without limiting the forgoing, we may do anything which is permitted or required to be done by any enactment or rule of law. The following is a summary of selected provisions of our Articles of Association:
Directors
Material Interests and Voting
A director shall not vote (or be counted in the quorum) on any resolution of our board of directors in respect of any contract or arrangement or proposal in which he or any of his associates (as defined in the HKSE Listing Rules) is, to his knowledge, materially interested, and if he shall do so, his vote shall not be counted (nor shall he be counted in the quorum for that resolution), but this prohibition does not apply to any contract, arrangement or other proposal for or concerning:
   
the giving of any security or indemnity either (i) to the director or any of his associates (as defined in the HKSE Listing Rules) in respect of money lent or obligations incurred or undertaken by him or any of them at the request of or for the benefit of Unicom or any of its subsidiaries or (ii) to a third-party in respect of a debt or obligation of Unicom or any of its subsidiaries for which the director or any of his associates has assumed responsibility in whole or in part and whether alone or jointly under a guarantee or indemnity or by the giving of security;
   
an offer of shares or debentures or other securities of or by Unicom (or any other company which Unicom may promote or be interested in) where the director or any of his associates is or will be an interested participant in the underwriting or sub-underwriting of the offer;
   
any contract or arrangement in which the director or any of his associates is interested in the same manner as other holders of shares or debentures or other securities of Unicom by virtue only of his interest in shares or debentures or other securities of Unicom;
   
any other company in which the director or any of his associates is interested only, whether directly or indirectly, as an officer or shareholder or in which the director or any of his associates is beneficially interested in shares of that company, provided that he, together with any of his associates, is not beneficially interested in 5% or more of (i) the issued shares of any class of such company (or of any third company through which such interest is derived), or (ii) the voting rights attached to such issued shares or securities (excluding for the purpose of calculating such 5% interest, any indirect interest of such director or any of his associates by virtue of Unicom’s interest in such company); or
   
the benefit of employees of Unicom or any of its subsidiaries, including (i) the adoption, modification or operation of a pension fund or retirement, death or disability benefits scheme which relates to directors, their associates and employees of Unicom or any of its subsidiaries and does not provide in respect of the director or any of his associates any privilege or advantage not generally accorded to the class of persons to which such scheme or fund relates; or (ii) the adoption, modification or operation of any employee share scheme involving the issue or grant of options over shares or other securities by Unicom to, or for the benefit of, the employees of Unicom or its subsidiaries under which the director or any of his associates may benefit.

 

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Remuneration and Pensions
The directors of Unicom are entitled to receive by way of remuneration for their services such sum as is from time to time determined by Unicom in a general meeting. The directors are also entitled to have reimbursed all traveling, hotel and other expenses reasonably incurred by them in or about the performance of their duties as directors. The board of directors may grant special remuneration to any director who performs services that, in the opinion of the board, are outside the scope of the ordinary duties of a director.
The board may establish and maintain any contributory or non-contributory pension or superannuation funds for the benefit of, or give donations, gratuities, pensions, allowances or emoluments to, any persons (i) who are or were at any time in the employment or service of Unicom, or of any company which is a subsidiary of Unicom, or is allied or associated with Unicom or with any such subsidiary company, or (ii) who are or were at any time directors or officers of Unicom or of any such other company above, and have or who have had any salaried employment or had held office in Unicom or such other company, and the wives, widows, families and dependents of any such persons. The board may also establish and subsidize or subscribe to any institutions, associations, clubs or funds calculated to be for the benefit of or to advance the interests and well being of Unicom or of any such other company above or of any such persons above, and may make payments for or towards the insurance of any such persons, and subscribe or guarantee money for charitable or benevolent objects or for any exhibition or for any public, general or useful object. Any director holding any such employment or office is entitled to participate in, and retain for his own benefit, any such donation, gratuity, pension, allowance or emolument.
Borrowing Powers
The directors may exercise all the powers of Unicom to borrow money and to mortgage or charge all or any part of the undertaking, property and assets (present and future) and uncalled capital of Unicom and to issue debentures, debenture stocks, bonds and other securities, whether outright or as collateral security for any debt, liability or obligation of Unicom or of any third-party.
Qualification of Directors
A director of Unicom is not required to hold any qualification shares.
Rotation of Directors
At every annual general meeting, one-third of the directors for the time being, or, if the number is not three or a multiple of three, then the number nearest one-third, shall retire from office by rotation, except for any director holding office as chairman or chief executive officer. The directors to retire in every year shall be those who have been in office the longest since their last election. In addition, a director appointed by the board to fill in a casual vacancy or as an addition to the board shall retire at the next following annual general meeting and shall then be eligible for re-election, but shall not be taken into account in determining the number of directors who are to retire by rotation at each annual general meeting. The retiring directors shall be eligible for re-election.

 

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Rights Attached to Ordinary Shares
Voting Rights
Under the Companies Ordinance, any action to be taken by the shareholders at a general meeting requires an affirmative vote by either an ordinary or a special resolution passed at the meeting. An ordinary resolution is one passed by the majority of such shareholders as are entitled to, and do, vote in person or by proxy at a general meeting. A special resolution is one passed by not less than three-quarters of such shareholders as are entitled to, and do, vote in person or by proxy at a general meeting. Most shareholders’ decisions are passed by ordinary resolutions. However, the Companies Ordinance and our articles of association stipulate that certain matters may only be passed by special resolutions.
In accordance with the HKSE Listing Rules, any vote of shareholders at a general meeting will be taken by poll.
In a poll, every shareholder present in person or, if the shareholder is a corporation, by duly authorized representative, or by proxy has one vote for every share of which he or she is the shareholder, and which is fully paid up or credited as fully paid up. However, no amount paid up or credited as paid up on a share in advance of calls or installments is treated for the foregoing purposes as paid up on the share.
Any action to be taken by the shareholders requires the affirmative vote of a majority of the shares at a meeting of shareholders. There are no cumulative voting rights. Accordingly, the holders of a majority of the shares voting for the election of directors can elect all the directors if they choose to do so.
Issue of Shares
Under the Companies Ordinance, our board of directors may, without prior approval of our shareholders, offer to issue new shares to existing shareholders proportionately according to their shareholdings. Our board of directors may not offer to issue new shares in any other manner without the prior approval of our shareholders at a general meeting. Any such approval given at a general meeting will continue in force until the conclusion of the following annual general meeting or the expiration of the period within which the next annual general meeting is required by law to be held or when revoked or varied by an ordinary resolution of our shareholders in a general meeting, whichever comes first. If such approval is given, the unissued shares shall be at the disposal of our board of directors, which may offer, allot, grant options over or otherwise dispose of them to such persons at such times and for such consideration and upon such terms and conditions as our board of directors may determine.
In accordance with the HKSE Listing Rules, any such approval given by the shareholders must be limited to shares with an aggregate nominal value not exceeding 20 per cent of the aggregate nominal value of our share capital in issue plus the aggregate nominal amount of share capital repurchased by us since the granting of such approval.
Dividends
Subject to the Companies Ordinance and as set out in our articles of association, our shareholders at a general meeting may from time to time by ordinary resolution declare dividends to be paid to our shareholders according to their rights and interests in the profits available for distribution, but no dividend shall be declared in excess of the amount recommended by our board of directors.
In addition to any dividends declared at a general meeting upon the recommendation of the board of directors, our board of directors may, as they deem appropriate, from time to time resolve to pay to our shareholders such interim dividends as appear to our board of directors to be justified by our financial position. Our board of directors may also pay any fixed dividend that is payable on any of our shares on any other dates, whenever our financial position, in the opinion of our board of directors, justifies such payments.
All dividends or bonuses unclaimed for one year after having become payable may be invested or otherwise made use of by the board for the benefit of Unicom until claimed. All dividends or bonuses unclaimed for six years after having been declared may be forfeited by the board and will revert to Unicom.

 

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Winding Up
If we are wound up, the surplus assets remaining after payment to all creditors shall be divided among the shareholders in proportion to the capital paid up on the shares held by them, subject to the rights of the holders of any shares that may be issued on special terms or conditions.
If we are wound up, the liquidator may, with the sanction of a special resolution, divide among our shareholders in specie or in kind the whole or any part of our assets or vest any part of our assets in trustees upon such trusts for the benefit of our shareholders or any of them as the resolution shall provide.
Miscellaneous
Shareholders are not entitled to any redemption rights, conversion rights or preemptive rights on the transfer of ordinary shares.
The transfer agent and registrar for the shares is Hong Kong Registrars Limited, 46th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong.
Modification of Rights
Subject to the Companies Ordinance, any of the rights from time to time attaching to any class of shares may, subject to the provisions of the Companies Ordinance, be varied or abrogated with the consent in writing of the holders of not less than three-fourths of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of shares of that class. The provisions of our Articles of Association relating to general meetings apply to such separate general meetings, except that the necessary quorum is not less than two persons holding or representing by proxy one-third in nominal value of the issued shares of that class, and that any holder of the shares of the class present in person or by proxy may demand a poll.
Annual General and Extraordinary General Meetings
We must hold in each year a general meeting as our annual general meeting in addition to any other meetings in that year. The annual general meeting is held at such time (within a period of not more than fifteen months, or such longer period as the Registrar of Companies of Hong Kong may authorize in writing, after the holding of the last preceding annual general meeting) and place as may be determined by the board of directors. All other general meetings are called extraordinary general meetings. The board of directors may call an extraordinary general meeting at any time or upon request in accordance with the Hong Kong Companies Ordinance.
Subject to the Companies Ordinance and the HKSE Listing Rules, an annual general meeting and a meeting called for the passing of a special resolution can be called by not less than 21 days’ notice in writing, and any other general meeting can be called by not less than fourteen days’ notice in writing. The notice must specify the place, date and time of the meeting, and, in the case of special business, the general nature of that business. The HKSE Listing Rules provide that notice shall be given to shareholders at least 20 clear business days before an annual general meeting and at least 10 clear business days before all other general meetings.
Limitations on Rights to Own Securities
There are no limitations on the rights to own securities, including the rights of non-resident or foreign shareholders to hold or exercise voting rights on the securities, imposed by Hong Kong law or by our Memorandum of Association or our Articles of Association.

 

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Changes in Capital
We may exercise any powers conferred or permitted by the Companies Ordinance to purchase or otherwise acquire our own shares and warrants at any price or to give, directly or indirectly, by means of a loan, guarantee, the provision of security or otherwise, financial assistance for the purpose of or in connection with a purchase made by any person of any shares or warrants in Unicom. Repurchases of our own shares may be made either by way of a general offer to all shareholders in proportion to their shareholdings, by purchasing our shares on a stock exchange or by an off-market contract with individual shareholders. Any such purchase or other acquisition or financial assistance must be made or given in accordance with any relevant rules or regulations issued by the HKSE or the Securities and Futures Commission of Hong Kong.
We may, in a general meeting, from time to time, by ordinary resolution increase our authorized share capital by the creation of new shares, and prescribe the amount of new capital and number of new shares. We may, from time to time, by ordinary resolution:
   
consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares;
   
divide our shares into several classes and attach to them any preferential, deferred, qualified or special rights, privileges or conditions;
   
cancel any shares that at the date of the passing of the resolution have not been taken or agreed to be taken by any person, and diminish the amount of our share capital by the amount of the shares so cancelled;
   
sub-divide our shares or any of them into shares of a smaller amount than is fixed by our Memorandum of Association, subject nevertheless to the provisions of the Companies Ordinance; and
   
make provision for the issue and allotment of shares which do not carry any voting rights.
Miscellaneous
We keep our share register with our share registrar, which is Hong Kong Registrars Limited, Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong. In addition, we also file certain documents with the Registrar of Companies, Hong Kong, in accordance with the requirements of the Companies Ordinance. Our company number is 703499.
C. Material Contracts
In addition to the contracts described in “B. Related Party Transactions” under Item 7, Unicom Group, we or our subsidiaries have entered into the following contracts that are not in the ordinary course of business within the two years preceding the date of this annual report that are or may be material:
   
Share subscription agreement between us and Telefónica, dated September 6, 2009, relating to the mutual investment of an equivalent of US$1 billion by the parties in each other.
   
Strategic Alliance Agreement between us and Telefónica, dated September 6, 2009, relating to strengthening the business of each of the companies by cooperation based on the network, business model and experience of each other.
   
Irrevocable Offer by SK Telecom, dated September 25, 2009, to the Company, for the sale of our shares held by SK Telecom to us.
   
Irrevocable voting undertaking from China Netcom Group Corporation (BVI) Limited in favor of SK Telecom, dated September 25, 2009.

 

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Share Repurchase Agreement, dated November 3, 2009, entered into between the Company and SK Telecom.
   
Amendment Agreement to Share Repurchase Agreement, dated November 3, 2009, entered into between the Company and SK Telecom.
   
Network Leasing Agreement, dated October 29, 2010, entered into between CUCL and Unicom New Horizon.
   
Comprehensive Services Agreement, dated October 20, 2010, entered into between CUCL and Unicom Group.
   
Agreement to Enhance the Strategic Alliance, dated January 23, 2011, entered into between the Company and Telefónica.
D. Exchange Controls
The ability of our operating subsidiary, CUCL, to satisfy its foreign exchange obligations and to pay dividends to us depends on existing and future exchange control regulations in China. Under the current relevant regulations, Renminbi is convertible under the current account, which includes trade-and service-related foreign exchange transactions, but is not convertible under the capital account, which includes foreign direct investment. CUCL, our wholly-owned subsidiary that holds substantially all of our assets, is a foreign investment enterprise. The foreign investment enterprise status will allow it to purchase foreign exchange at designated foreign exchange banks for settlement of current account transactions without the approval of the State Administration for Foreign Exchange of the PRC, or the SAFE. These current account transactions include payment of dividends. However, the relevant PRC Government authorities may in the future limit or eliminate the authorizations for a foreign investment enterprise to retain its foreign exchange to satisfy its foreign exchange obligations or to pay dividends in the future. Furthermore, certain foreign exchange transactions of CUCL under the capital account still require approvals from the SAFE. This requirement affects our subsidiary’s ability to obtain foreign exchange through equity financing, including by means of capital contributions from us.
Under existing Hong Kong law, (i) there are no foreign exchange controls or other laws that restrict the import or export of capital and that would affect the availability of cash and cash equivalents for our use, (ii) there are no foreign exchange controls or other laws, decrees or regulations that affect the remittance of interest, dividends or other payments on our outstanding debt and equity securities to U.S. residents and (iii) there are no limitations on the rights of non-resident or foreign owners to hold our debt or equity securities.
E. Taxation
The taxation of income and capital gains of holders of ordinary shares or ADSs is subject to the laws and practices of the PRC, Hong Kong and jurisdictions in which holders of ordinary shares or ADSs are resident or otherwise subject to tax. The following summary of certain relevant taxation provisions is based on current law and practice, is subject to change and does not constitute legal or tax advice. The discussion does not deal with all possible tax consequences relating to an investment in the ordinary shares or ADSs. In particular, the discussion does not address the tax consequences under state, local and other laws, such as non-PRC, non-Hong Kong and non-U.S. federal laws. The discussion is based upon laws and relevant interpretations in effect as of the date of this annual report.

 

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People’s Republic of China
This section describes certain PRC tax consequences of the ownership and disposition of our ordinary shares or ADSs. This section does not address all possible PRC tax considerations that may be relevant to an investment in our ordinary shares or ADSs in light of an investor’s specific circumstances, and is based on PRC tax laws and relevant interpretations as in effect as of the date of this annual report on Form 20-F, which are subject to change, possibly with retroactive effect. Accordingly, each prospective investor should consult its own tax advisor regarding the PRC and other tax consequences of an investment in our ordinary shares or ADSs applicable under its particular circumstances.
Taxation of Dividends
Under the PRC Enterprise Income Tax, or the EIT, Law and its implementing rules that became effective on January 1, 2008, a non-resident enterprise is generally subject to PRC enterprise income tax with respect to PRC-sourced income, including dividends received from an enterprise that is domiciled in the PRC. The PRC enterprise income tax with respect to such dividends is currently required to be withheld at the rate of 10%, unless there is an applicable tax treaty between the PRC and the jurisdiction in which such non-resident enterprise resides that reduces or exempts the tax.
On April 22, 2009, the PRC State Administration of Taxation, or the SAT, issued the Notice Regarding the Determination of Tax Residence Status of Chinese-Controlled Offshore-Incorporated Enterprises on the Basis of De Facto Management Bodies, or the 2009 Notice, which was retroactively effective as of January 1, 2008. Pursuant to the 2009 Notice, an enterprise incorporated under the laws of a jurisdiction outside the PRC but controlled by a PRC enterprise or enterprise group may be determined to be a PRC resident enterprise with its de facto management bodies located within the PRC for PRC tax purposes if certain criteria specified under the 2009 Notice are met. Under the 2009 Notice, dividends paid by such an off-shore incorporated enterprise are deemed to be PRC-sourced income and subject to PRC enterprise income tax. On November 11, 2010, we were notifed by the SAT that we are determined to be a PRC resident enterprise since January 1, 2008 for PRC tax purposes. Accordingly, we are required to withhold the 10% EIT when we distribute dividends to our non-resident enterprise shareholders.
Accordingly, we will withhold the 10% EIT when we distribute our final dividend for the fiscal year ended December 31, 2010 in respect of the non-resident enterprise shareholders for PRC tax purposes whose names appear on our register of members as of the record date for such dividends, and who are not individuals, unless such non-individual shareholders are able to provide documents from the relevant PRC tax authorities confirming that we are not required to withhold the 10% EIT in respect of the dividends that such shareholders are entitled to, on the basis that dividend income between two PRC resident enterprises is exempted from enterprise income tax, subject to certain conditions, under the EIT Law. In addition, certain investors hold our shares or ADSs through custodians, nominees, corporate trustees or other intermediaries and the names of these investors do not appear on our register of members. Payments of dividends to such investors are also subject to the 10% EIT withholding. These investors should enquire about the relevant procedures with the relevant custodians, nominees, trustees or other intermediaries if they wish to change the identities of the shareholders on our register of members.
Taxation of Capital Gains
Under the new PRC EIT Law, a non-resident enterprise is generally subject to PRC enterprise income tax with respect to PRC-sourced income. Because the new EIT Law has only recently taken effect, there remain substantial uncertainties as to its interpretation and application by the relevant PRC tax authorities. We intend to comply with any interpretation or notice in relation to the taxation of capital gains issued by the PRC tax authorities in the future.
Additional PRC Tax Considerations
Stamp duty . Under the Provisional Regulations of the PRC Concerning Stamp Duty and its implementing rules, both of which became effective on October 1, 1988, PRC stamp duty should not apply to acquisitions or dispositions of our ordinary shares or ADSs outside of the PRC as the PRC stamp duty is imposed only on documents executed or received within the PRC that are legally binding in the PRC and protected under PRC law.
Estate tax . The PRC does not currently levy estate tax.

 

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Hong Kong
Taxation of Dividends
Under the current practices of the Hong Kong Inland Revenue Department, no tax is payable in Hong Kong in connection with dividends paid by us, either by withholding or otherwise, unless such dividends are attributable to a trade, profession or business carried on in Hong Kong.
Profits
No tax is imposed in Hong Kong in respect of capital gains from the sale of shares and ADSs. Trading gains from the sale of shares or ADSs by persons carrying on a trade, profession or business in Hong Kong where such gains are derived from or arise in Hong Kong from such trade, profession or business will be chargeable to Hong Kong income tax rates of 16.5% on corporations and 15.0% on individuals. Gains from sales of shares effected on the HKSE will be considered to be derived from or arise in Hong Kong. Liability for Hong Kong profits tax would thus arise in respect of trading gains from sales of shares or ADSs realized by persons carrying on a business of trading or dealing in securities in Hong Kong.
Stamp Duty
Hong Kong stamp duty, currently charged at the rate of 0.1% of the higher of the consideration for or the value of the shares, will be payable by the purchaser on every purchase and by the seller on every sale of shares. In addition, a fixed duty of HK$5 is currently payable on any instrument of transfer of shares. If one of the parties to the sale is a non-resident of Hong Kong and does not pay the required stamp duty, the duty not paid will be assessed on the instrument of transfer (if any) and the transferee will be liable for payment of such duty.
The withdrawal of shares upon the surrender of American Depository Receipts, or ADRs, and the issuance of ADRs upon the deposit of shares, will also attract stamp duty at the rate described above unless such withdrawal or deposit does not result in a change in the beneficial ownership of the shares under Hong Kong law. The issuance of the ADRs upon the deposit of shares issued directly to The Bank of New York, as depositary of the ADSs, or for the account of The Bank of New York does not attract stamp duty. No Hong Kong stamp duty is payable upon the transfer of ADSs outside Hong Kong.
Estate Duty
The Revenue (Abolition of Estate Duty) Ordinance 2005 became effective on February 11, 2006 in Hong Kong. No Hong Kong estate duty is payable and no estate duty clearance papers are needed for an application for a grant of representation in respect of a holder of the shares whose death occurs on or after February 11, 2006.
United States
United States Federal Income Taxation
This section describes the material United States federal income tax consequences to a U.S. holder (as defined below) of owning shares or ADSs. It applies to you only if you hold your shares or ADSs as capital assets for tax purposes. This section does not apply to you if you are a member of a special class of holders subject to special rules, including:
   
a dealer in securities or currencies,
   
a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings,

 

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a tax-exempt organization,
   
an insurance company,
   
a person liable for alternative minimum tax,
   
a person that actually or constructively owns 10% or more of our voting stock,
   
a person that holds shares or ADSs that are a hedge or as part of a straddle or a conversion transaction, or
   
a person whose functional currency is not the U.S. dollar.
This section is based on the Internal Revenue Code of 1986, as amended, or the Code, its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. In addition, this section is based in part upon the representations of the Depositary and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms.
You are a U.S. holder if you are a beneficial owner of shares or ADSs and you are:
   
a citizen or resident of the United States,
   
a corporation organized under the laws of the United States, any States thereof, or the District of Columbia,
   
an estate whose income is subject to United States federal income tax regardless of its source, or
   
a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust.
If a partnership holds the shares or ADSs, the United States federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. A partner in a partnership holding the shares or ADSs should consult its tax advisor with regard to the United States federal income tax treatment of its investment in the shares or ADSs.
You should consult your own tax advisor regarding the United States federal, state and local tax consequences of owning and disposing of shares and ADSs in your particular circumstances.
This discussion addresses only United States federal income taxation.
In general, taking into account the earlier assumptions, for United States federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the shares represented by those ADRs. Exchanges of shares for ADRs, and ADRs for shares, generally will not be subject to United States federal income tax.
Taxation of Dividends
Under the United States federal income tax laws, and subject to the passive foreign investment company rules discussed below, if you are a U.S. holder, the gross amount of any dividend we pay out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes) is subject to United States federal taxation. If you are a non-corporate U.S. holder, dividends paid to you in taxable years beginning before January 1, 2013 that constitute qualified dividend income will be taxable to you at a maximum tax rate of 15%, provided that you hold the shares or ADSs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements. Dividends we pay with respect to the shares or ADSs will be qualified dividend income, provided that, in the year that you receive the dividend, the shares or ADSs are readily tradable on an established securities market in the United States.

 

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The dividend is taxable to you when you, in the case of shares, or the Depositary, in the case of ADSs, receive the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. The amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the Hong Kong Dollar payments made, determined at the spot Hong Kong/U.S. dollar rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your basis in the shares or ADSs and thereafter as capital gain.
Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate. Dividends will be income from sources outside the United States and, depending on your circumstances, will be either passive income or general income for purposes of computing the foreign tax credit allowable to you. If you are subject to PRC withholding tax (as discussed in “People’s Republic of China — Taxation of Dividends,” above), you must include any such tax withheld from the dividend payment in your gross income, even though you do not in fact receive it. The PRC tax withheld and paid over to the PRC will be creditable against your United States federal income tax liability. To the extent a refund of the tax withheld is available under PRC law, the amount of tax withheld that is refundable will not be eligible for credit against your United States federal income tax liability.
Taxation of Capital Gains
Subject to the passive foreign investment company rules discussed below, if you are a U.S. holder and you sell or otherwise dispose of your shares or ADSs, you will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your shares or ADSs. Capital gain of a non-corporate U.S. holder is generally taxed at preferential rates where the property is held for more than one year. Subject to the paragraph immediately below regarding gain subject to PRC tax, the gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes. Your ability to deduct capital losses is subject to limitations. Any Hong Kong stamp duty that you pay will not be a creditable tax for United States federal income tax purposes, but you may be able to deduct such stamp duty subject to limitations under the Code.
However, in the event we are deemed to be a Chinese “resident enterprise” under PRC tax law, we may be eligible for the benefits of the income tax treaty between the United States and the PRC. Under that treaty, if PRC tax were to be imposed on any gain from the disposition of your shares or ADSs (as discussed above in “People’s Republic of China — Taxation of Capital Gains”), the gain may be treated as PRC source income. U.S. Holders should consult their tax advisors regarding the tax consequences if a foreign withholding tax is imposed on a disposition of shares or ADSs, including the availability of the foreign tax credit under your particular circumstances.
Passive Foreign Investment Company Rules . We believe that we should not be treated as a passive foreign investment company, or PFIC, for United States federal income tax purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change.

 

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In general, if you are a U.S. holder, we will be a PFIC with respect to you if for any taxable year in which you held our ADSs or shares:
   
at least 75% of our gross income for the taxable year is passive income; or
   
at least 50% of the value, determined on the basis of a quarterly average, of our assets is attributable to assets that produce or are held for the production of passive income.
Passive income generally includes dividends, interest, royalties, rents (other than certain rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. If a foreign corporation owns, directly or indirectly, at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation, and as receiving directly its proportionate share of the other corporation’s income.
If we are treated as a PFIC and you are a U.S. holder that does not make a mark-to-market election, as described below, you will be subject to special rules with respect to:
   
any gain you realize on the sale or other disposition of your shares or ADSs; and
   
any excess distribution that we make to you (generally, any distributions to you during a single taxable year that are greater than 125% of the average annual distributions received by you in respect of the shares or ADSs during the three preceding taxable years or, if shorter, your holding period for the shares or ADSs).
Under these rules:
   
the gain or excess distribution will be allocated ratably over your holding period for the shares or ADSs;
   
the amount allocated to the taxable year in which you realized the gain or excess distribution will be taxed as ordinary income;
   
the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year; and
   
the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year.
Special rules apply for calculating the amount of the foreign tax credit with respect to excess distributions by a PFIC.
If you own shares or ADSs in a PFIC that are treated as marketable stock, you may make a mark-to-market election. If you make this election, you will not be subject to the PFIC rules described above. Instead, in general, you will include as ordinary income each year the excess, if any, of the fair market value of your shares or ADSs at the end of the taxable year over your adjusted basis in your shares or ADSs. You will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of your shares or ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). Your basis in the shares or ADSs will be adjusted to reflect any such income or loss amounts. Your gain, if any, recognized upon the sale of your shares or ADSs will be taxed as ordinary income.

 

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In addition, notwithstanding any election you make with regard to the shares or ADSs, dividends that you receive from us will not constitute qualified dividend income to you if we are a PFIC either in the taxable year of the distribution or the preceding taxable year. Moreover, your shares or ADSs will be treated as stock in a PFIC if we were a PFIC at any time during your holding period in your shares or ADSs, even if we are not currently a PFIC. For purposes of this rule, if you make a mark-to-market election with respect to your shares or ADSs, you will be treated as having a new holding period in your shares or ADSs beginning on the first day of the first taxable year beginning after the last taxable year for which the mark-to-market election applies. Dividends that you receive that do not constitute qualified dividend income, are not eligible for taxation at the 15% maximum rate applicable to qualified dividend income. Instead, you must include the gross amount of any such dividend paid by us out of our accumulated earnings and profits (as determined for United States federal income tax purposes) in your gross income, and it will be subject to tax at rates applicable to ordinary income.
If you own shares or ADSs during any year that we are a PFIC, you must file Internal Revenue Service Form 8621. In addition, pursuant to recently enacted legislation, if you are a U.S. person that is a shareholder in a PFIC, you will generally be required to file an annual report with the Internal Revenue Service. The content of this required statement and potential exemptions to this requirement are under development by the Internal Revenue Service.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
You can read and copy documents referred to in this annual report that have been filed with the U.S. Securities and Exchange Commission at the SEC’s public reference room located at 100 Fifth Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. The SEC also maintains a web site at http://www.sec.gov that contains reports, proxy statements and other information regarding registrants that are filed electronically with the SEC.
The SEC allows us to “incorporate by reference” the information we file with the SEC. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this annual report on Form 20-F.
I. Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures about Market Risks
Our exposure to financial market risks relates primarily to changes in interest rates and currency exchange rates.
Interest Rate Risk
The People’s Bank of China has the sole authority in China to establish the official interest rates for Renminbi-denominated loans. Financial institutions in China set their effective interest rates within the range established by the People’s Bank of China. Interest rates and payment methods in the PRC on loans denominated in foreign currencies are set by the financial institutions based on interest rate changes in the international financial market, cost of funds, risk levels and other factors. The fair value of our borrowings is approximately the same as the carrying value. These bank loans, denominated in Renminbi, are borrowed from domestic banks at interest rates that vary in accordance with the standard guidance interest rates announced by relevant PRC Government authorities.

 

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We are subject to risks arising from interest-bearing borrowings, including bank loans, corporate bonds, commercial paper and related party loans. The majority of our interest-bearing borrowings are loans from banks in the PRC, the majority of which bear fixed interest rates. A rise in interest rates will increase the cost of new borrowings and interest expenses of outstanding floating rate debt. Accordingly, fluctuations in interest rates can lead to significant fluctuations in the fair value of these instruments, and, therefore, could have a material adverse effect on our financial position. To mitigate our exposure to interest rate risks in connection with our borrowings denominated in foreign currencies, we may enter into designed interest rate swap agreements from time to time in the future.
The following table provides information, by maturity date, regarding our interest rate-sensitive financial instruments, which consist of short-term and long-term debt obligations, as well as the expected maturity profile of such obligations as of December 31, 2010.
                                                                 
                                                            As of  
                                                            December  
    Expected Maturity     31, 2010  
    2011     2012     2013     2014     2015     Thereafter     Total     Fair Value  
    (RMB equivalent in millions, except interest rates)  
Liabilities:
                                                               
RMB-denominated loans
                                                               
Fixed rate
    2,610                                     2,610       2,610  
Average rate (1)
    2.21 %                                          
Variable rate
    23,225             800                         24,025       24,025  
Average rate
    2.34 %     4.59 %     4.59 %                              
 
                                                               
HK dollar-denominated loans
                                                               
Variable rate
    12,925                                     12,925       12,925  
Average rate
    0.37 %                                          
 
                                                               
U.S. dollar-denominated loans
                                                               
Fixed rate
    30       25       25       25       25       325       455       314  
Average rate
    0.53 %     0.47 %     0.47 %     0.46 %     0.46 %     0.45 %            
 
                                                               
Euro-denominated loans
                                                               
Fixed rate
    28       25       25       25       25       137       265       255  
Average rate
    2.21 %     2.20 %     2.18 %     2.17 %     2.14 %     1.56 %            
 
                                                               
RMB-denominated commercial papers
                                                               
Fixed rate
    23,000                                     23,000       23,000  
Average rate
    2.70 %                                          
 
                                                               
RMB-denominated promissory notes
                                                               
Fixed rate
                15,000                         15,000       14,881  
Average rate
    3.39 %     3.39 %     3.39 %                              
 
                                                               
RMB-denominated corporate bonds
                                                               
Fixed rate
                5,000                   2,000       7,000       7,205  
Average rate
    5.06 %     5.06 %     5.06 %     4.50 %     4.50 %     4.50 %            
 
                                                               
U.S. dollar-denominated convertible bonds
                                                               
Fixed rate
                            12,178             12,178       11,558  
Average rate
    1.90 %     1.90 %     1.90 %     1.90 %     1.90 %                  
 
                                                               
U.S. dollar-denominated finance lease
                                                               
Fixed rate
    129       82                               211       204  
Average rate
    2.41 %     2.51 %                                    
 
     
(1)  
The average interest rates for variable rate loans are calculated based on the rates reported as of December 31, 2010.

 

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For the year ended December 31, 2010, if interest rates on the floating rate borrowings had been 10% higher/lower while all other variables were held constant, our interest expenses would have increased/decreased by approximately RMB27 million (2009: approximately RMB3 million).
Exchange Rate Risk
We conduct our business primarily in Renminbi, which is also our functional and reporting currency. The Renminbi is not a fully convertible currency. From 1994 to July 20, 2005, the official exchange rate for the conversion of Renminbi to U.S. dollars was generally stable. On July 21, 2005, the PRC government introduced a managed floating exchange rate system to allow the value of the Renminbi to fluctuate within a regulated band based on market supply and demand and by reference to a basket of currencies. On the same day, the value of the Renminbi appreciated by 2% against the U.S. dollar. The PRC Government has since made and in the future may make further adjustments to the exchange rate system. Fluctuations in exchange rates may adversely affect the value, translated or converted into United States dollars or Hong Kong dollars (which are pegged to the U.S. dollar), of our net assets, earnings and any declared dividends. For a detailed description of the unitary managed floating rate system used by the PRC Government to set foreign exchange rates, see “Key Information — Selected Financial Data — Exchange Rate Information” under Item 3.
We are exposed to foreign currency risk primarily because we receive some of our revenue from our international operations and pay-related expenses in foreign currencies. As a result, our foreign currency exposure relates to our foreign currency-denominated debt and, to a limited extent, cash and cash equivalents denominated in foreign currencies.
The following table provides information regarding our foreign currency-sensitive financial instruments, which consist of cash and cash equivalents, short-term bank deposits, short-term and long-term debt obligations and capital commitments as of December 31, 2010 and the expected maturity profile of these debt obligations and capital commitments.
                                                                 
                                                            As of  
                                                            December  
    Expected Maturity     31, 2010  
    2011     2012     2013     2014     2015     Thereafter     Total     Fair Value  
    (RMB equivalent in millions)  
Assets:
                                                               
Cash and cash equivalents
                                                               
U.S. dollars
    11,661                                     11,661       11,661  
HK dollars
    393                                     393       393  
Japanese yen
    1                                     1       1  
Euro dollars
    213                                     213       213  
GBP
    8                                     8       8  
Short-term bank deposits
                                                               
U.S. dollars
    148                                     148       148  
HK dollars
    43                                     43       43  
Liabilities:
                                                               
U.S. dollar-denominated loans
    30       25       25       25       25       325       455       284  
Euro-denominated loans
    28       25       25       25       25       137       265       227  
HK dollars-denominated loans
    12,925                                     12,925       12,925  
U.S. dollar-denominated convertible bonds
                            12,178             12,178       11,558  
U.S. dollar-denominated finance lease
    129       82                               211       204  
Off-balance sheet commitments:
                                                               
Capital commitments authorized and contracted for in U.S. dollars
                                               

 

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If the RMB had strengthened/weakened by 10% against the foreign currencies, relative to December 31, 2010, primarily with respect to US dollars, HK dollars and Euro, while all other variables were held constant, we would have recognized additional exchange gains/losses of approximately RMB1.29 billion (2009: exchange losses/gains of approximately RMB1.03 billion; 2008: exchange losses/gains of approximately RMB22 million) for foreign currencies-denominated cash and cash equivalents, short-term bank deposits, borrowings, convertible bonds and other obligations under finance lease included in other obligations.
Risk Relating to Available-for-Sale Financial Assets
The investments we hold are classified in the consolidated balance sheet as available-for-sale financial assets. These investments are subject to equity price risk, which results primarily from changes in the level or volatility of underlying equity prices. One of our significant investments is denominated in Euro and the fair value of such investment is also subject to risks associated with fluctuations of foreign exchange rate between Euro and Renminbi (our functional currency). If either (i) the share price of our invested equity securities (in Euro) had increased/decreased by 10% or (ii) the exchange rate between Euro and Renminbi had changed by 10%, in each case, relative to December 31, 2010, while all other variables are held constant, we would have recorded additional change in fair value of approximately RMB456.53 million, net of tax, in our available-for-sale fair value reserve. As of April 30, 2011, the change in the foreign exchange rate between Euro and Renminbi and, the change of the underlying equity price denominated in Euro, to a lesser extent, resulted in a depreciation of the fair value of our relevant investment by over 10%, from October 21, 2009. If Euro-related uncertainty remains, we may suffer from further loss in the fair value of our investments denominated in Euro and our financial condition may be materially adversely affected.
Item 12. Description of Securities Other than Equity Securities
The Bank of New York Mellon, as the depositary of our ADSs, collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
     
ADR holders must pay:   For:
 
   
   US$5.00 (or less) per 100 ADRs (or portion thereof)
 
    Each issuance of an ADR, including as a result of a distribution of shares or rights or other property
 
   
 
 
    Each cancellation of an ADR, including if the deposit agreement terminates
 
   
 
 
    Each distribution of securities, other than shares or ADRs, treating the securities as if they were shares for purpose of calculating fees
 
   
   US$0.02 (or less) per ADR
 
    Any cash distribution (not including
cash dividend distribution)
 
   
   Registration or transfer fees
 
    Transfer and registration of shares on the share register of our transfer agent and the registrar in Hong Kong from an ADR holder’s name to the name of the depositary or its agent when the ADR holder deposits or withdraws shares

 

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ADR holders must pay:   For:
 
   
    Expenses of the depositary
 
   Conversion of Hong Kong dollars to U.S. dollars
 
   
 
 
   Cable, telex and facsimile transmission expenses
 
   
    Taxes and other governmental charges the depositary or the custodian has to pay on any ADR or share underlying an ADR, for example, stock transfer taxes, stamp duty or withholding taxes
 
   As necessary
From January 1, 2010 to December 31, 2010, we received from the Bank of New York Mellon a total of US$251,246, net of withholding tax, reimbursement for the expenses we incurred, including but not limited to, annual stock exchange listing fee, investor relations reimbursement, non-standard out-of-pocket maintenance costs for the ADR, charges incurred in connection with services provided for by third party vendors, charges and out-of-pocket expenses for the servicing of non-registered holders. The Bank of New York Mellon also waived certain costs of US$136,316 in connection with the administration of the ADR program, investor relationship programs (including investor relationship intelligence services) and other services provided to our registered shareholders. In addition, the Bank of New York Mellon has agreed to reimburse us annually for our expenses incurred in connection with administration and maintenance of the depositary receipt facility in the future. The amount of such reimbursements is subject to certain limits and conditions.

 

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PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 15. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act of 1934, as amended) as of December 31, 2010, the end of the period covered by this annual report, have concluded that, as of such date, our disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act of 1934, as amended) for the Company. Our internal control over financial reporting is a process designed under the supervision of our chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with applicable generally accepted accounting principles. Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with applicable generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As of December 31, 2010, our management conducted an assessment of the effectiveness of our internal control over financial reporting, based on the framework established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Based on this assessment, our management has concluded that our Company’s internal control over financial reporting as of December 31, 2010 was effective.
The effectiveness of our internal control over financial reporting as of December 31, 2010, has been audited by PricewaterhouseCoopers, an independent registered public accounting firm, as stated in their report appearing on page F2.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this annual report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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We are fully aware of the importance of maintaining and improving our controls and procedures in relation to internal control over financial reporting. Our management, with the oversight of our audit committee and board of directors, is committed to having proper internal control over financial reporting.
Item 16A. Audit Committee Financial Expert
Our board of directors has determined that Mr. Wong Wai Ming is an audit committee financial expert in accordance with the terms of Item 16.A of Form 20-F. Mr. Wong satisfies the “independence” requirements of Section 303A of the NYSE Manual. For Mr. Wong’s biographical information, see “A. Directors and Senior Management” under Item 6.
Item 16B. Code of Ethics
In 2003, we adopted a code of ethics that applies to our chief executive officer, chief financial officer, president, vice-presidents, controller and other senior officers. A copy of our Code of Ethics for Senior Officers was filed as Exhibit 11.1 to our annual report on Form 20-F for the fiscal year ended December 31, 2003. In February 2006, we adopted another code of ethics that applies to our employees generally. A copy of our Code of Ethics for Employees was filed as Exhibit 11.2 to our annual report on Form 20-F for the fiscal year ended December 31, 2005. Copies of our Code of Ethics for Senior Officers and Code of Ethics for Employees may also be downloaded from our website at http://www.chinaunicom.com.hk. Information on that website is not a part of this annual report on Form 20-F.
Item 16C. Principal Accountant Fees and Services
The following table sets forth the aggregate audit fees, audit-related fees, tax fees and other fees our principal accountant billed for audit services, audit-related services, tax services and other services for each of the fiscal years 2009 and 2010:
                 
    For the Year Ended  
    December 31,  
    2009     2010  
    (in RMB thousands)  
Audit services
    73,200       67,700  
Audit-related services
    2,200       2,154  
Tax services
    560       223  
Other
    472       401  
 
           
Total
    76,432       70,478  
 
           
Audit services include the standard audit work that needs to be performed each year in order to issue an opinion on the consolidated financial statements of the Company and its subsidiaries. Audit services in 2009 and 2010 also include audit work in connection with the audit of the Company’s internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. They also include performing agreed-upon procedures on quarterly financial statements and pre-issuance reviews of interim financial statements.
Audit-related services include other assurance and related services that can be reasonably provided by the independent auditor. In 2010, audit-related services mainly include the agreed-upon procedures in relation to the issue of convertible bonds and the implementation of Extensible Business Reporting Language (XBRL).
Tax services include the assistance with compliance and filing of income taxes.
Other services include translation service and providing the Company with access to an online database of global financial reporting literature regarding new pronouncements and guidance.

 

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Audit Committee’s Pre-approval Policies and Procedures
The Audit Committee of our Board of Directors is responsible, among other things, for the oversight of the external auditor subject to the requirements of the Hong Kong Companies Ordinance and our Articles of Association. The Audit Committee has adopted a policy regarding pre-approval of audit and permissible non-audit services to be provided by our independent accountants. Under the policy, proposed services either (i) may be pre-approved by the Audit Committee without consideration of specific case-by-case services; or (ii) require the specific pre-approval of the Audit Committee. General approval applies to services of a recurring and predictable nature. These types of services, once approved by the Audit Committee, will not require further approval in the future.
Specific pre-approval applies to all other services. These services must be approved by the Audit Committee on a case-by-case basis after an application including proposed budget and scope of services to be provided by our independent auditors is submitted to the Audit Committee.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Not applicable.
Item 16F. Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
As a company listed on both the HKSE and the NYSE, we are subject to applicable Hong Kong laws and regulations, including the HKSE Listing Rules, and the Hong Kong Companies Ordinance, as well as applicable U.S. federal securities laws, including the Exchange Act and the Sarbanes-Oxley Act of 2002. In addition, we are subject to the listing standards of the NYSE to the extent they apply to non-U.S. issuers. As a non-U.S. issuer, we are not required to comply with all of the corporate governance listing standards of the NYSE.
The following is a summary of the significant differences between our corporate governance practices and those required to be followed by U.S. companies under the listing standards of the NYSE.
Section 303A.01 of the NYSE Listed Company Manual provides that listed companies must have a majority of independent directors on its board of directors. As a listed company in Hong Kong, we are subject to the requirement under the HKSE Listing Rules that at least three members of our board of directors be independent as determined under the HKSE Listing Rules. The standards for establishing independence under the HKSE Listing Rules differ from those set forth in the NYSE Listed Company Manual. We currently have five independent directors out of a total of 10 directors.

 

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Section 303A.03 of the NYSE Listed Company Manual provides that listed companies must schedule regular executive sessions in which non-management directors meet without management participation. Under the applicable Hong Kong law, our board of directors is required to meet regularly and at least four times a year, involving active participation by a majority of the directors and affording all directors an opportunity to include matters on the agenda. In addition, when a board meeting considers a matter in which a substantial shareholder or a director has a conflict of interest, the independent directors with no material interest in such matter must be present. Furthermore, it has been our practice to organize exclusive meetings for our independent non-executive directors at least annually.
Section 303A.04 of the NYSE Listed Company Manual provides that (i) a listed company must have a nominating/corporate governance committee that consists entirely of independent directors and (ii) the nominating/corporate governance committee of a listed company must have a written charter that addresses the committee’s purpose and responsibilities, which shall include, among others, the development and recommendation of corporate governance guidelines to the board of directors. The HKSE Listing Rules also contain a recommended best practice that the listed companies are recommended to establish a nomination committee which consists of a majority of independent non-executive directors. We currently do not have a nomination or corporate governance committee. Our board of directors is directly in charge of developing our corporate governance guidelines.
Section 303A.07 of the NYSE Listed Company Manual also provides that if an audit committee member simultaneously serves on the audit committee of more than three public companies, and the listed company does not limit the number of audit committees on which its audit committee members serve to three or less, then, the board of directors of the listed company must (i) determine that such simultaneous service would not impair the ability of such member to effectively serve on the audit committee of the listed company and (ii) disclose such determination. We are not required, under applicable Hong Kong laws, to make such determination.
Section 303A.10 of the NYSE Listed Company Manual provides that listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees. While we are not required to adopt any similar code under the HKSE Listing Rules, we, as required under the Sarbanes-Oxley Act, have adopted a code of ethics that is applicable to our chief executive officer, president, vice presidents, chief financial officer, principal accounting officer and general managers and deputy general managers of each of our departments, provincial branches and local branches or persons performing similar functions. We have also adopted a code of ethics that is applicable to all of our employees.
PART III
Item 17. Financial Statements
We have elected to provide the financial statements and related information specified in Item 18 in lieu of Item 17.
Item 18. Financial Statements
See “Index to Consolidated Financial Statements” for a list of all financial statements filed as part of this annual report.

 

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Item 19. Exhibits
         
Exhibit    
Number   Description of Exhibit
       
 
  1.1    
Memorandum of Association of Unicom, dated January 27, 2000. (1)
  1.2    
Amended Articles of Association of Unicom (as amended on September 16, 2008). (12)
  1.3    
Amended Articles of Association of Unicom (as amended on May 24, 2011). *
  2.1    
Deposit Agreement, among Unicom, The Bank of New York, as Depositary, and Owners and Beneficial Owners of American Depositary Receipts issued thereunder, including the form of American Depositary Receipt. (2)
  2.2    
Form of specimen certificate for the shares. (1)
  4.1    
Reorganization Agreement between Unicom Group and CUCL, dated April 21, 2000 (together with English translation). (1)
  4.2    
Equity Transfer Agreement among Unicom Group, Unicom HK, Unicom BVI and Unicom, dated April 21, 2000. (1)
  4.3    
Trademark License Agreement between Unicom Group and CUCL, dated May 25, 2000 (together with English translation). (1)
  4.4    
Transmission Line Lease and Services Agreement between Unicom Group, CUCL and Guoxin Paging, dated August 1, 2001 (together with English translation). (1)
  4.5    
Reorganization Agreement between Unicom Group and Unicom New Century, dated November 18, 2002. (English translation) (3)
  4.6    
Conditional Sale and Purchase Agreement between Unicom BVI and us in connection with the sale of Unicom New Century, dated November 20, 2002. (English translation) (3)
  4.7    
Reorganization Agreement between Unicom Group and Unicom New World, dated November 4, 2003. (English translation) (4)
  4.8    
Conditional Sale and Purchase Agreement between Unicom BVI and us in connection with the sale of Unicom New World, dated November 20, 2003. (English translation) (4)
  4.9    
Conditional Sales and Purchase Agreement between China Unicom (Hong Kong) Group Limited and our Company with respect to the acquisition of Unicom International, dated July 28, 2004. (5)
  4.10    
Subscription Agreement between Unicom and SK Telecom, dated June 20, 2006. (6)
  4.11    
CDMA Network Capacity Lease Agreement among Unicom New Horizon, the A Share Company and Unicom Group, dated October 26, 2006. (7)
  4.12    
Transfer Agreement of the CDMA Network Capacity Lease Agreement between the A Share Company and CUCL, dated October 26, 2006. (English translation) (7)
  4.13    
Asset Transfer Agreement between CUCL and Unicom Group in connection with the acquisition of Unicom Guizhou, dated November 16, 2007. (English translation) (8)
  4.14    
Supplement Agreement among Unicom New Horizon, Unicom Group, CUCL and the A Share Company in connection with the acquisition of Unicom Guizhou and the 2006 CDMA Network Capacity Lease Agreement, dated November 16, 2007. (8)
  4.15    
CDMA Business Transfer Framework Agreement between us, CUCL and China Telecom dated as of June 2, 2008. (English translation) (8)
  4.16    
CDMA Business Disposal Agreement among Unicom, CUCL and China Telecom, dated July 27, 2008. (English summary) (12)
  4.17    
Business and Assets Transfer Agreement among Unicom Parent, Netcom Parent and the A Share Company, relating to acquisitions of certain business and assets, including the fixed-line business in 21 provinces in southern China, dated December 16, 2008. (English translation) (9)

 

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Exhibit    
Number   Description of Exhibit
       
 
  4.18    
Transfer Agreement between the A Share Company and CUCL, relating to acquisitions of certain business and assets, including the fixed-line business in 21 provinces in southern China, dated December 16, 2008. (English translation) (9)
  4.19    
Network Lease Agreement between CUCL and Unicom New Horizon, relating to the lease of telecommunications networks in 21 provinces in southern China by CUCL from Unicom New Horizon, dated December 16, 2008. (English translation) (9)
  4.20    
Assets and Liabilities Transfer Agreement between CNC China and Netcom Group, dated June 23, 2004. (English translation) (10)
  4.21    
Asset Injection Agreement among Netcom Group, Netcom BVI, CNC China and China Netcom, dated June 29, 2004. (English translation) (10)
  4.22    
Letter of Undertakings by Netcom Group, dated September 5, 2005. (English translation) (10)
  4.23    
Restructuring Agreement among CNC China, Netcom Group and China Netcom, dated September 6, 2004. (English translation) (10)
  4.24    
Non-Competition Agreement among CNC China, Netcom Group and China Netcom, dated September 6, 2004. (English translation) (10)
  4.25    
Trademark Licensing Agreement among CNC China, Netcom Group and China Netcom, dated October 8, 2004. (English translation) (10)
  4.26    
Conditional Sale and Purchase Agreement among China Netcom, Netcom BVI and Netcom Group, relating to the acquisition of CNC New Horizon BVI, dated September 12, 2005. (12)
  4.27    
Asset Transfer Agreement between China Netcom and Netcom Group, relating to the sale of China Netcom’s telecommunications assets, liabilities and business operations in Guangdong Province and Shanghai Municipality, dated January 15, 2007. (12)
  4.28    
Domestic Interconnection Settlement Agreement between CNC China and Netcom Group, dated November 6, 2007. (English translation) (12)
  4.29    
International Long Distance Voice Services Settlement Agreement between CNC China and Netcom Group, dated November 6, 2007. (English translation) (12)
  4.30    
Engineering and Information Technology Services Agreement between CNC China and Netcom Group, dated November 6, 2007. (English translation) (12)
  4.31    
Master Sharing Agreement between CNC China and Netcom Group, dated November 6, 2007. (English translation) (12)
  4.32    
Property Leasing Agreement between CNC China and Netcom Group, dated November 6, 2007. (English translation) (12)
  4.33    
Materials Procurement Agreement between CNC China and Netcom Group, dated November 6, 2007. (English translation) (12)
  4.34    
Ancillary Telecommunications Services Agreement between CNC China and Netcom Group, dated November 6, 2007. (English translation) (12)
  4.35    
Support Services Agreement between CNC China and Netcom Group, dated November 6, 2007. (English translation) (12)
  4.36    
Telecommunications Facilities Leasing Agreement between CNC China and Netcom Group, dated November 6, 2007. (English translation) (12)
  4.37    
Information and Communications Technology Agreement between China Netcom System Integration and Netcom Group, dated November 6, 2007. (English translation) (12)

 

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Exhibit    
Number   Description of Exhibit
       
 
  4.38    
Equity Interest Transfer Agreement between China Netcom Group System Integration and China Netcom Group Beijing Communications Corporation, relating to the acquisition of Design Institute, dated December 5, 2007. (English translation) (11)
  4.39    
Framework Agreement for Interconnection Settlement between CUCL and Netcom Group, dated August 12, 2008. (English translation) (12)
  4.40    
Framework Agreement for Engineering and Information Technology Services between CUCL and Netcom Group, dated August 12, 2008. (English translation) (12)
  4.41    
Framework Agreement for Property Leasing Services between CUCL and Netcom Group, dated August 12, 2008. (English translation) (12)
  4.42    
Framework Agreement for Ancillary Telecommunications Services between CUCL and Netcom Group, dated August 12, 2008. (English translation) (12)
  4.43    
Framework Agreement for Support Services between CUCL and Netcom Group, dated August 12, 2008. (English translation) (12)
  4.44    
Framework Agreement for Telecommunications Facilities Leasing between CUCL and Netcom Group, dated August 12, 2008. (English translation) (12)
  4.45    
Comprehensive Services Agreement between Unicom Group and the A Share Company, dated August 12, 2008. (English translation) (12)
  4.46    
Transfer Agreement among the A Share Company, CUCL and CNC China, in connection with the Comprehensive Services Agreement, dated August 12, 2008. (English translation) (12)
  4.47    
Merger Agreement between CUCL and CNC China, relating to the merger between CUCL and CNC China, dated October 15, 2008. (English translation) (12)
  4.48    
Pre-Global Offering Share Option Scheme, adopted by ordinary resolution of the Company on June 1, 2000 and amended by ordinary resolutions of the Company on May 13, 2002, May 11, 2007 and May 26, 2009. (12)
  4.49    
Share Option Scheme, adopted by ordinary resolution of the Company on June 1, 2000 and amended by ordinary resolutions of the Company on May 13, 2002, May 11, 2007 and May 26, 2009. (12)
  4.50    
Special Purpose Share Option Scheme, adopted by ordinary resolution of the Company on September 16, 2008 and amended by ordinary resolutions of the Company on May 26, 2009. (12)
  4.51    
Subscription Agreement between China Unicom (Hong Kong) Limited and Telefónica, dated September 6, 2009. (13)
  4.52    
Strategic Alliance Agreement between us and Telefónica, dated September 6, 2009. (13)
  4.53    
Irrevocable Offer by SK Telecom, dated September 25, 2009. (13)
  4.54    
Irrevocable voting undertaking from China Netcom Group Corporation (BVI) Limited in favor of SK Telecom, dated September 25, 2009. (13)
  4.55    
Share Repurchase Agreement, dated November 3, 2009. (13)
  4.56    
Amendment Agreement to Share Repurchase Agreement, dated November 3, 2009. (13)
  4.57    
2011-2012 Network Lease Agreement between Unicom New Horizon and CUCL, dated October 29, 2010. (English translation) *
  4.58    
2011-2013 Comprehensive Services Agreement between Unicom Group and CUCL, dated October 29, 2010. (English translation) *

 

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Exhibit    
Number   Description of Exhibit
       
 
  4.59    
Agreement to Enhance the Strategic Alliance between China Unicom (Hong Kong) Limited and Telefónica, dated January 23, 2011. *
  8.1    
List of our significant subsidiaries. *
  11.1    
Code of Ethics for Senior Officers. (4)
  11.2    
Employee Code of Ethics. (English translation) (6)
  12.1    
Certification of Chief Executive Officer pursuant to Rule 13a-14(a). *
  12.2    
Certification of Chief Financial Officer pursuant to Rule 13a-14(a). *
  13.1    
Certification of Chief Executive Officer pursuant to Rule 13a-14(b). *
  13.2    
Certification of Chief Financial Officer pursuant to Rule 13a-14(b). *
We have not included as exhibits certain instruments with respect to our long-term debt, the amount of debt authorized under each of which does not exceed 10% of our total assets, and we agree to furnish a copy of any such instrument to the Securities Exchange Commission upon request.
 
     
(1)  
Incorporated by reference to our Registration Statement on Form F-1 (File No. 333-11938) filed with the SEC in connection with our initial public offering in June 2000.
 
(2)  
Incorporated by reference to the Registration Statement on Form F-6 (File No. 333-11952) filed with the SEC with respect to American Depositary Shares representing our shares.
 
(3)  
Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year ended December 31, 2002.
 
(4)  
Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year ended December 31, 2003.
 
(5)  
Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year ended December 31, 2004.
 
(6)  
Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year ended December 31, 2005.
 
(7)  
Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year ended December 31, 2006.
 
(8)  
Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year ended December 31, 2007.
 
(9)  
Incorporated by reference to Schedule 13D/A (File No. 5-51154) filed by China Netcom Group Corporation (BVI) Limited, China Network Communications Group Corporation, China United Network Communications Group Company Limited, China United Telecommunications Corporation Limited, and China Unicom (BVI) Limited, filed on December 24, 2008.
 
(10)  
Incorporated by reference to China Netcom’s Registration Statement on Form F-1 (File No. 333-119786) filed with the SEC in connection with its initial public offering in November 2004.
 
(11)  
Incorporated by reference to China Netcom’s Annual Report on Form 20-F (File No. 1-32332) for the year ended December 31, 2007.
 
(12)  
Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year ended December 31, 2008.
 
(13)  
Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year ended December 31, 2009.
 
*  
Filed herewith.

 

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SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Date: May 26, 2011
         
  CHINA UNICOM (HONG KONG) LIMITED
 
 
  By:   /s/ Chang Xiaobing   
    Name:   Chang Xiaobing   
    Title:   Chairman and Chief Executive Officer   

 

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INDEX OF CONSOLIDATED FINANCIAL STATEMENTS
         
       
 
       
       
 
       
       
 
       
       
 
       
       
 
       
       
 
       
       

 

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Report of Independent Registered Public Accounting Firm
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
CHINA UNICOM (HONG KONG) LIMITED
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, changes in equity and cash flows present fairly, in all material respects, the financial position of China Unicom (Hong Kong) Limited and its subsidiaries (together, the “Group”) at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants. Also in our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Group’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Management’s Annual Report on Internal Control Over Financial Reporting included in Item 15 of this Annual Report on Form 20-F. Our responsibility is to express opinions on these financial statements and on the Group’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 2.25 (a) to the consolidated financial statements, the Group adopted the accounting policy of relative fair value method when accounting for its preferential promotional service packages retrospectively on January 1, 2010.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
Hong Kong
May 24, 2011

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CHINA UNICOM (HONG KONG) LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2009 AND 2010
(All amounts in Renminbi (“RMB”) millions)
                             
        As of December 31  
    Note   2009     2010     2010  
        RMB     RMB     US$  
ASSETS
                           
Non-current assets
                           
Property, plant and equipment
  6     351,157       366,060       55,464  
Lease prepayments
  7     7,729       7,607       1,153  
Goodwill
  8     2,771       2,771       420  
Deferred income tax assets
  9     5,202       4,840       733  
Available-for-sale financial assets
  10     7,977       6,214       942  
Other assets
  12     11,596       11,753       1,780  
 
                     
 
                           
 
        386,432       399,245       60,492  
 
                     
 
                           
Current assets
                           
Inventories and consumables
  13     2,412       3,728       565  
Accounts receivable, net
  14     8,825       9,286       1,407  
Prepayments and other current assets
  15     4,252       5,115       775  
Amounts due from related parties
  40.1     53       50       8  
Amounts due from domestic carriers
  40.2     1,134       1,261       191  
Proceeds receivable for disposal of the CDMA business
  36, 40.2     5,121              
Short-term bank deposits
  16     996       273       41  
Cash and cash equivalents
  17     7,820       22,495       3,408  
 
                     
 
                           
 
        30,613       42,208       6,395  
 
                     
 
                           
Total assets
        417,045       441,453       66,887  
 
                     
 
                           
EQUITY
                           
Equity attributable to owners of the parent
                           
Share capital
  18     2,310       2,310       350  
Share premium
  18     173,435       173,436       26,278  
Reserves
  19     (18,088 )     (18,273 )     (2,769 )
Retained profits
                           
- Proposed final dividend
  37     3,770       1,885       286  
- Others
        45,038       46,483       7,043  
 
                     
 
                           
 
        206,465       205,841       31,188  
 
                     
 
                           
Non-controlling interests
        2              
 
                     
 
                           
Total equity
        206,467       205,841       31,188  
 
                     
The accompanying notes are an integral part of the consolidated financial statements.

 

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CHINA UNICOM (HONG KONG) LIMITED
CONSOLIDATED BALANCE SHEETS (Continued)
AS OF DECEMBER 31, 2009 AND 2010
(All amounts in RMB millions)
                             
        As of December 31  
    Note   2009     2010     2010  
        RMB     RMB     US$  
LIABILITIES
                           
Non-current liabilities
                           
Long-term bank loans
  20     759       1,462       222  
Promissory notes
  21           15,000       2,273  
Convertible bonds
  22           11,558       1,751  
Corporate bonds
  23     7,000       7,000       1,061  
Deferred income tax liabilities
  9     245       22       3  
Deferred revenue
        2,562       2,171       328  
Other obligations
  24     187       162       25  
 
                     
 
                           
 
        10,753       37,375       5,663  
 
                     
 
                           
Current liabilities
                           
Accounts payable and accrued liabilities
  25     104,072       97,659       14,795  
Taxes payable
        912       1,484       225  
Amounts due to ultimate holding company
  40.1     308       229       35  
Amounts due to related parties
  40.1     5,438       5,191       787  
Amounts due to domestic carriers
  40.2     1,136       873       132  
Payables in relation to disposal of the CDMA business
  40.2     7              
Commercial papers
  26           23,000       3,485  
Short-term bank loans
  27     63,909       36,727       5,565  
Current portion of long-term bank loans
  20     62       58       9  
Dividend payable
  37     331       431       65  
Current portion of deferred revenue
        1,397       1,042       158  
Current portion of other obligations
  24     2,534       2,637       400  
Advances from customers
        19,719       28,906       4,380  
 
                     
 
                           
 
        199,825       198,237       30,036  
 
                     
 
                           
Total liabilities
        210,578       235,612       35,699  
 
                     
 
                           
Total equity and liabilities
        417,045       441,453       66,887  
 
                     
 
                           
Net current liabilities
        (169,212 )     (156,029 )     (23,641 )
 
                     
 
                           
Total assets less current liabilities
        217,220       243,216       36,851  
 
                     
The accompanying notes are an integral part of the consolidated financial statements.

 

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CHINA UNICOM (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(All amounts in RMB millions, except per share data)
                                     
        Year ended December 31  
    Note   2008     2009     2010     2010  
        RMB     RMB     RMB     US$  
Continuing operations
                                   
Revenue
  5, 28, 40     159,792       153,945       171,298       25,954  
 
                                   
Interconnection charges
        (13,038 )     (12,955 )     (13,727 )     (2,082 )
Depreciation and amortization
        (51,847 )     (47,587 )     (54,433 )     (8,247 )
Networks, operations and support expenses
  29, 43     (18,736 )     (23,728 )     (26,383 )     (3,997 )
Employee benefit expenses
  30     (20,758 )     (21,931 )     (23,327 )     (3,534 )
Other operating expenses
  31     (37,997 )     (36,723 )     (48,269 )     (7,313 )
Finance costs
  32     (3,269 )     (1,036 )     (1,749 )     (265 )
Interest income
        265       91       142       22  
Impairment loss on property, plant and equipment
  6     (12,494 )                  
Realized gain on changes in fair value of derivative financial instrument
  33           1,239              
Other income — net
  34     2,141       962       1,221       185  
 
                           
 
                                   
Income from continuing operations before income tax
        4,059       12,277       4,773       723  
Income tax expenses
  9     (1,828 )     (2,721 )     (922 )     (140 )
 
                           
 
                                   
Income from continuing operations
        2,231       9,556       3,851       583  
 
                                   
Discontinued operations
                                   
Income from discontinued operations
  36     1,438                    
Gain on disposal of discontinued operations
  36     26,135                    
 
                           
 
                                   
Net income
        29,804       9,556       3,851       583  
 
                           
 
                                   
Attributable to:
                                   
Owners of the parent
        29,804       9,556       3,851       583  
Non-controlling interests
                           
 
                           
 
                                   
 
        29,804       9,556       3,851       583  
 
                           
The accompanying notes are an integral part of the consolidated financial statements.

 

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CHINA UNICOM (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF INCOME (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(All amounts in RMB millions, except per share data)
                                     
        Year ended December 31  
    Note   2008     2009     2010     2010  
        RMB     RMB     RMB     US$  
Earnings per share for income attributable to owners of the parent during the year
                                   
 
                                   
Basic earnings per share (RMB)
  38     1.25       0.40       0.16       0.03  
 
                           
 
                                   
Diluted earnings per share (RMB)
  38     1.24       0.40       0.16       0.03  
 
                           
 
                                   
Earnings per ADS for income attributable to owners of the parent during the year
                                   
 
                                   
Basic earnings per ADS (RMB)
  38     12.55       4.02       1.63       0.25  
 
                           
 
                                   
Diluted earnings per ADS (RMB)
  38     12.45       4.00       1.62       0.25  
 
                           
 
                                   
Earnings per share for income from continuing operations attributable to owners of the parent during the year
                                   
 
                                   
Basic earnings per share (RMB)
  38     0.09       0.40       0.16       0.03  
 
                           
 
                                   
Diluted earnings per share (RMB)
  38     0.09       0.40       0.16       0.03  
 
                           
 
                                   
Earnings per ADS for income from continuing operations attributable to owners of the parent during the year
                                   
 
                                   
Basic earnings per ADS (RMB)
  38     0.94       4.02       1.63       0.25  
 
                           
 
                                   
Diluted earnings per ADS (RMB)
  38     0.93       4.00       1.62       0.25  
 
                           
 
                                   
Earnings per share for income from discontinued operations attributable to owners of the parent during the year
                                   
 
                                   
Basic earnings per share (RMB)
  38     1.16                    
 
                           
 
                                   
Diluted earnings per share (RMB)
  38     1.15                    
 
                           
 
                                   
Earnings per ADS for income from discontinued operations attributable to owners of the parent during the year
                                   
 
                                   
Basic earnings per ADS (RMB)
  38     11.61                    
 
                           
 
                                   
Diluted earnings per ADS (RMB)
  38     11.52                    
 
                           
Details of dividends attributable to owners of the parent for the years ended December 31, 2008, 2009 and 2010 are set out in Note 37.
The accompanying notes are an integral part of the consolidated financial statements.

 

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CHINA UNICOM (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(All amounts in RMB millions)
                                 
    Year ended December 31  
    2008     2009     2010     2010  
    RMB     RMB     RMB     US$  
 
                               
Net income
    29,804       9,556       3,851       583  
 
                       
 
                               
Other comprehensive loss
                               
Changes in fair value on available-for-sale financial assets
    (188 )     (71 )     (1,777 )     (269 )
Tax effect on changes in fair value on available-for-sale financial assets
    47       33       437       66  
 
                       
Changes in fair value on available-for-sale financial assets, net of tax
    (141 )     (38 )     (1,340 )     (203 )
Currency translation differences
    (29 )           6       1  
 
                       
 
                               
Other comprehensive loss for the year, net of tax
    (170 )     (38 )     (1,334 )     (202 )
 
                       
 
                               
Total comprehensive income for the year
    29,634       9,518       2,517       381  
 
                       
 
                               
Total comprehensive income attributable to:
                               
Owners of the parent
    29,634       9,518       2,517       381  
Non-controlling interests
                       
 
                       
 
                               
 
    29,634       9,518       2,517       381  
 
                       
The accompanying notes are an integral part of the consolidated financial statements.

 

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Table of Contents

CHINA UNICOM (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(All amounts in RMB millions)
                                                                                         
    Attributable to owners of the parent              
                    Employee             Available-                                              
                    share-based             for-sale fair                                     Non-        
    Share     Share     compensation     Revaluation     value     Statutory     Other     Retained             controlling     Total  
    capital     premium     reserve     reserve     reserve     reserves     reserve     profits     Total     interests     equity  
 
                                                                                       
Balance at January 1, 2008
    1,437       64,320       516       1,145       185       18,765       56,770       30,144       173,282       7       173,289  
 
                                                                 
 
                                                                                       
Total comprehensive (loss)/income for the year
                            (141 )           (29 )     29,804       29,634             29,634  
Effect of 2009 Business Combination
                                  (201 )     (3,532 )     3,733                    
Transfer to retained profits in respect of depreciation on revalued assets
                      (984 )                 (70 )     1,054                    
Transfer to statutory reserves
                                  886             (886 )                  
Appropriation to statutory reserves
                                  3,542             (3,542 )                  
Equity-settled share option schemes:
                                                                                       
-Value of employee services
                96                                     96             96  
-Issuance of shares upon exercise of options (Note 35)
    3       252       (72 )                       267             450             450  
Issuance of shares in connection with 2008 Business Combination (Note 1)
    889       102,212                               (103,101 )                        
Transfer out upon disposal of the CDMA business
                                                          (5 )     (5 )
Dividends relating to 2007 (Note 37)
                                              (6,231 )     (6,231 )           (6,231 )
 
                                                                 
 
                                                                                       
Balance at December 31, 2008
    2,329       166,784       540       161       44       22,992       (49,695 )     54,076       197,231       2       197,233  
 
                                                                 
The accompanying notes are an integral part of the consolidated financial statements.

 

F-8


Table of Contents

CHINA UNICOM (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(All amounts in RMB millions)
                                                                                                 
    Attributable to owners of the parent              
                            Employee             Available-                                              
                    Capital     share-based             for-sale fair                                     Non-        
    Share     Share     redemption     compensation     Revaluation     value     Statutory     Other     Retained             controlling     Total  
    capital     premium     reserve     reserve     reserve     reserve     reserves     reserve     profits     Total     interests     equity  
 
                                                                                               
Balance at January 1, 2009
    2,329       166,784             540       161       44       22,992       (49,695 )     54,076       197,231       2       197,233  
 
                                                                       
 
                                                                                               
Total comprehensive (loss)/income for the year
                                  (38 )                 9,556       9,518             9,518  
Transfer of profit of entities under common control to Unicom Group in relation to 2009 Business Combination
                                                    (64 )     (64 )           (64 )
Transfer of assets and liabilities under common control to Unicom Group in relation to 2009 Business Combination
                                              10,494             10,494             10,494  
Consideration for 2009 Business Combination under common control (Note 1)
                                              (3,896 )           (3,896 )           (3,896 )
Transfer to retained profits in respect of depreciation on revalued assets
                            (55 )                       55                    
Transfer to statutory reserves
                                        490             (490 )                  
Appropriation to statutory reserves
                                        769             (769 )                  
Equity-settled share option schemes:
                                                                                               
-Value of employee services
                      27                                     27             27  
Issuance of shares for mutual investment by the Company and Telefónica (Note 18 & Note 33)
    60       6,651                                                 6,711             6,711  
Off-market share repurchase (Note 18)
    (79 )           79                                     (8,802 )     (8,802 )           (8,802 )
Dividends relating to 2008 (Note 37)
                                                    (4,754 )     (4,754 )           (4,754 )
 
                                                                       
 
                                                                                               
Balance at December 31, 2009
    2,310       173,435       79       567       106       6       24,251       (43,097 )     48,808       206,465       2       206,467  
 
                                                                       
The accompanying notes are an integral part of the consolidated financial statements.

 

F-9


Table of Contents

CHINA UNICOM (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(All amounts in RMB millions)
                                                                                                         
    Attributable to owners of the parent              
                            Employee                                                                  
                    Capital     share-based             Available-             Convertible                             Non-        
    Share     Share     redemption     compensation     Revaluation     for-sale fair     Statutory     bonds     Other     Retained             controlling     Total  
    capital     premium     reserve     reserve     reserve     value reserve     reserves     reserve     reserve     profits     Total     interests     equity  
 
                                                                                                       
Balance at January 1, 2010
    2,310       173,435       79       567       106       6       24,251             (43,097 )     48,808       206,465       2       206,467  
 
                                                                             
 
                                                                                                       
Total comprehensive (loss)/income for the year
                                  (1,340 )                 6       3,851       2,517             2,517  
Transfer to retained profits in respect of depreciation on revalued assets
                            (50 )                             50                    
Transfer to statutory reserves
                                        192                   (192 )                  
Appropriation to statutory reserves
                                        379                   (379 )                  
Equity-settled share option schemes:
                                                                                                     
-Value of employee services
                      56                                           56             56  
-Issuance of shares upon exercise of options
          1                                                       1             1  
Disposal of non-controlling interests
                                                                      (2 )     (2 )
Issuance of convertible bonds (Note 22)
                                              572                   572             572  
Dividends relating to 2009 (Note 37)
                                                          (3,770 )     (3,770 )           (3,770 )
 
                                                                             
 
                                                                                                       
Balance at December 31, 2010
    2,310       173,436       79       623       56       (1,334 )     24,822       572       (43,091 )     48,368       205,841             205,841  
 
                                                                             
The accompanying notes are an integral part of the consolidated financial statements.

 

F-10


Table of Contents

CHINA UNICOM (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(All amounts in RMB millions)
                                     
        Year ended December 31  
    Note   2008     2009     2010     2010  
        RMB     RMB     RMB     US$  
Cash flows from operating activities
                                   
Cash generated from continuing operations
  (a)     67,794       63,990       69,260       10,494  
Interest received
        269       93       148       22  
Interest paid
        (3,011 )     (1,681 )     (2,025 )     (307 )
Income tax paid
        (7,811 )     (4,669 )     (1,039 )     (157 )
 
                           
 
                                   
Net cash inflow from operating activities of continuing operations
        57,241       57,733       66,344       10,052  
Net cash inflow from operating activities of discontinued operations
  36     656                    
 
                           
 
                                   
Net cash inflow from operating activities
        57,897       57,733       66,344       10,052  
 
                           
 
                                   
Cash flows from investing activities
                                   
Purchase of property, plant and equipment
        (54,496 )     (78,130 )     (75,555 )     (11,448 )
Proceeds from disposal of property, plant and equipment and other assets
        573       611       375       57  
Dividends received from available-for-sale financial assets
        3       177       416       63  
Consideration for purchase of entities and businesses under common control
        (5,880 )     (3,896 )            
Decrease/(increase) in short-term bank deposits
        415       (659 )     723       110  
Purchase of other assets
        (1,641 )     (3,411 )     (2,573 )     (390 )
 
                           
 
                                   
Net cash outflow from investing activities of continuing operations
        (61,026 )     (85,308 )     (76,614 )     (11,608 )
Net cash inflow/(outflow) from investing activities of discontinued operations
  36     29,489       (5,039 )     5,121       776  
 
                           
 
                                   
Net cash outflow from investing activities
        (31,537 )     (90,347 )     (71,493 )     (10,832 )
 
                           
The accompanying notes are an integral part of the consolidated financial statements.

 

F-11


Table of Contents

CHINA UNICOM (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(All amounts in RMB millions)
                                         
            Year ended December 31  
    Note     2008     2009     2010     2010  
            RMB     RMB     RMB     US$  
Cash flows from financing activities
                                       
Proceeds from exercise of share options
            450                    
Proceeds from commercial papers
            10,000             22,928       3,474  
Proceeds from short-term bank loans
            50,714       96,204       114,182       17,300  
Proceeds from long-term bank loans
            2,888             800       120  
Proceeds from issuance of promissory notes
                        14,954       2,266  
Proceeds from issuance of convertible bonds
                        12,145       1,840  
Proceeds from issuance of corporate bonds
            5,000                    
Proceeds from related party loan
            6,284       2,114              
Repayment of commercial papers
            (20,000 )     (10,000 )            
Repayment of short-term bank loans
            (51,784 )     (43,075 )     (141,364 )     (21,418 )
Repayment of long-term bank loans
            (23,832 )     (1,406 )     (51 )     (8 )
Repayment of capital element of finance lease payments
            (101 )           (36 )     (5 )
Repayment of related party loan
            (2,222 )                  
Payment of prior year profit transfer
            (101 )     (266 )     (64 )     (10 )
Consideration for off-market share repurchase
                  (8,802 )            
Dividends paid to owners of the parent
    37       (6,082 )     (4,572 )     (3,670 )     (556 )
 
                               
 
                                       
Net cash (outflow)/inflow from financing activities of continuing operations
            (28,786 )     30,197       19,824       3,003  
Net cash outflow from financing activities of discontinued operations
                               
 
                               
 
                                       
Net cash (outflow)/inflow from financing activities
            (28,786 )     30,197       19,824       3,003  
 
                               
 
                                       
Net cash (outflow)/inflow from continuing operations
            (32,571 )     2,622       9,554       1,447  
Net cash inflow/(outflow) from discontinued operations
    36       30,145       (5,039 )     5,121       776  
 
                               
 
                                       
Net (decrease)/ increase in cash and cash equivalents
            (2,426 )     (2,417 )     14,675       2,223  
Cash and cash equivalents, beginning of year
            12,663       10,237       7,820       1,185  
 
                               
 
                                       
Cash and cash equivalents, end of year
    17       10,237       7,820       22,495       3,408  
 
                               
 
                                       
Analysis of the balances of cash and cash equivalents:
                                       
 
                                       
Cash balances
            8       7       6       1  
Bank balances
            10,229       7,813       22,489       3,407  
 
                               
 
                                       
 
            10,237       7,820       22,495       3,408  
 
                               
The accompanying notes are an integral part of the consolidated financial statements.

 

F-12


Table of Contents

CHINA UNICOM (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(All amounts in RMB millions)
(a)  
The reconciliation of income from continuing operations before income tax to cash generated from continuing operations is as follows:
                                 
    Year ended December 31  
    2008     2009     2010     2010  
    RMB     RMB     RMB     US$  
Income from continuing operations before income tax
    4,059       12,277       4,773       723  
Adjustments for:
                               
Depreciation and amortization
    51,847       47,587       54,433       8,247  
Interest income
    (265 )     (91 )     (142 )     (22 )
Finance costs
    2,999       828       1,736       263  
Loss/(gain) on disposal of property, plant and equipment and other assets
    239       (91 )     (11 )     (2 )
Gain on non-monetary assets exchange
    (1,305 )     (38 )     (10 )     (2 )
Share-based compensation costs
    84       27       56       8  
Provision for doubtful debts
    3,025       2,355       2,583       391  
Impairment loss on property, plant and equipment
    12,494                    
Realized gain on changes in fair value of derivative financial instruments
          (1,239 )            
Dividends from available-for-sale financial assets
    (3 )     (215 )     (485 )     (73 )
 
                               
Changes in working capital:
                               
Increase in accounts receivable
    (2,044 )     (1,839 )     (3,044 )     (461 )
Increase in inventories and consumables
    (126 )     (1,320 )     (1,316 )     (199 )
Decrease/(increase) in other assets
    834       (125 )     755       114  
Decrease/(increase) in prepayments and other current assets
    1,000       (1,539 )     (868 )     (132 )
Decrease in amounts due from related parties
    116       75       3        
Decrease/(increase) in amounts due from domestic carriers
    267       (160 )     (127 )     (19 )
(Decrease)/increase in accounts payable and accrued liabilities
    (1,935 )     3,480       1,616       248  
(Decrease)/increase in taxes payable
    (265 )     1,179       1,328       201  
Increase in advances from customers
    1,653       4,805       9,187       1,392  
Decrease in deferred revenue
    (2,993 )     (1,639 )     (746 )     (113 )
Decrease in other obligations
    (767 )     (2,101 )            
(Decrease)/increase in amounts due to ultimate holding company
    (1,733 )     413       (79 )     (12 )
(Decrease)/increase in amounts due to related parties
    (551 )     1,942       (112 )     (17 )
Increase/(decrease) in amounts due to domestic carriers
    396       180       (263 )     (40 )
Increase/(decrease) in payables in relation to disposal of the CDMA business
    768       (761 )     (7 )     (1 )
 
                       
 
                               
Cash generated from continuing operations
    67,794       63,990       69,260       10,494  
 
                       

 

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CHINA UNICOM (HONG KONG) LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(All amounts in RMB millions)
(b)  
Major non-cash transactions:
  (i)  
On October 15, 2008, the Company issued 10,102,389,377 ordinary shares of HKD0.10 each at a price of HKD11.60 per share with fair value or total price of approximately RMB103.1 billion (equivalent to approximately HKD117.2 billion) in exchange for the entire issued share capital of China Netcom Group Corporation (Hong Kong) Limited. Please refer to Note 1 for details.
  (ii)  
On October 21, 2009, the Company and Telefónica S.A. (“Telefónica”) completed the mutual investment of the equivalent of USD1 billion in each other, which was implemented by way of the subscription by Telefónica for 693,912,264 new shares of the Company at a price of HKD11.17 each, satisfied by the contribution by Telefónica of 40,730,735 Telefónica treasury shares at a price of Euro17.24 each to the Company. Please refer to Note 18 and Note 33 for details.
  (iii)  
For the years ended December 31, 2008, 2009 and 2010, the Group replaced copper cables in some fixed-line network infrastructure with optical fibers and related equipment. Some of this replacement was done through non-monetary assets exchanges with suppliers, through which optical fibers and related equipment were received in exchange for the Group’s own copper cables. The cost of the assets received was recorded at the fair value of the assets surrendered. In 2010, the net book value and fair value of copper cables surrendered were RMB18 million (2008: RMB805 million; 2009: RMB60 million) and RMB24 million (2008: RMB2,110 million; 2009:RMB98 million), respectively. A gain on the non-monetary assets exchange of RMB6 million (2008: RMB1,305 million; 2009:RMB38 million) was recognized in the statement of income for the year ended December 31, 2010.
(c)  
Payables to equipment suppliers for construction-in-progress during 2010 decreased by approximately RMB8.9 billion (2008: increased approximately RMB14.1 billion; 2009: increased approximately RMB26.8 billion).

 

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CHINA UNICOM (HONG KONG) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in RMB millions unless otherwise stated)
1.  
ORGANISATION AND PRINCIPAL ACTIVITIES
   
China Unicom (Hong Kong) Limited (the “Company”) was incorporated as a limited liability company in the Hong Kong Special Administrative Region (“Hong Kong”), the People’s Republic of China (the “PRC”) on February 8, 2000. The principal activities of the Company are investment holding. After disposal of the CDMA business to China Telecom Corporation Limited (“China Telecom”) on October 1, 2008, the merger with China Netcom Group Corporation (Hong Kong) Limited (“China Netcom”) on October 15, 2008 and the launch of WCDMA mobile business on October 1, 2009, the principal activities of the Company’s subsidiaries are the provision of cellular and fixed-line voice and related value-added services, broadband and other Internet-related services, information communications technology services, and business and data communications services in the PRC. The GSM cellular voice, WCDMA cellular voice and related value-added services is referred to as the “Mobile business”, the services aforementioned other than the Mobile business is hereinafter collectively referred to as the “Fixed-line business”. The Company and its subsidiaries are hereinafter referred to as the “Group”. The address of its registered office is 75th Floor, The Center, 99 Queen’s Road Central, Hong Kong.
   
The shares of the Company were listed on the Stock Exchange of Hong Kong Limited (“SEHK”) on June 22, 2000 and the American Depositary Shares (“ADS”) of the Company were listed on the New York Stock Exchange on June 21, 2000.
   
On November 15, 2008, the Company was notified by its substantial shareholders, namely China Unicom (BVI) Limited (“Unicom BVI”) and China Netcom Group Corporation (BVI) Limited (“Netcom BVI”), that their respective parent companies, namely, China United Network Communications Group Company Limited (a state-owned enterprise established in the PRC, the parent company of Unicom BVI, hereinafter referred to as “Unicom Group”) and China Network Communications Group Corporation (a state-owned enterprise established in the PRC, the parent company of Netcom BVI, hereinafter referred to as “Netcom Group”), had agreed to undertake a merger (the “Parent Merger”). On January 6, 2009, the Company was notified by its substantial shareholders that the Parent Merger, through the absorption of Netcom Group by Unicom Group, had been approved by the State-owned Assets Supervision and Administration Commission of the State Council (“SASAC”) and had become effective. As a result of the Parent Merger, Unicom Group has assumed all the rights and obligations of Netcom Group, all the assets, liabilities and business of Netcom Group including the connected transaction agreements with the Group have vested in Unicom Group and Unicom Group remains the ultimate holding company of the Company.
   
The substantial shareholders of the Company are Unicom BVI and Netcom BVI. The majority of equity interests in Unicom BVI is owned by China United Network Communications Limited (“A Share Company”, a joint stock company incorporated in the PRC on December 31, 2001, with its A shares listed on the Shanghai Stock Exchange on October 9, 2002). The majority of the equity interest in A Share Company is owned by Unicom Group. Netcom BVI is a wholly-owned subsidiary of Unicom Group. As a result, the directors of the Company consider Unicom Group to be the ultimate holding company.

 

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1.  
ORGANISATION AND PRINCIPAL ACTIVITIES (Continued)
  (a)  
Acquisitions of certain assets and businesses from Unicom Group and Netcom Group in 2009
     
On January 31, 2009, China United Network Communications Corporation Limited (“CUCL”, a wholly-owned subsidiary of the Company) completed the acquisition from Unicom Group and Netcom Group of (i) the fixed-line business, but not the underlying telecommunications networks, across the 21 provinces in Southern China and related non-current assets and liabilities (hereinafter referred to as the “Fixed-line Business in Southern China”) and the local access telephone business and related assets in Tianjin Municipality operated by Netcom Group and Unicom Group and/or their respective subsidiaries and branches; (ii) the backbone transmission assets in Northern China owned by Netcom Group and/or its subsidiaries (“Target Assets”); (iii) a 100% equity interest in Unicom Xingye Science and Technology Trade Company Limited (“Unicom Xingye”) owned by Unicom Group; (iv) a 100% equity interest in China Information Technology Designing & Consulting Institute Company Limited (“CITDCI”) owned by Unicom Group and (v) a 100% equity interest in New Guoxin Telecom Corporation of China Unicom (“New Guoxin”) owned by Unicom Group at a consideration of approximately RMB4.43 billion. The businesses and assets described in (i), (iii), (iv) and (v) above are hereinafter collectively referred to as the “Target Business” and the acquisition of the Target Business is referred to as the “2009 Business Combination”.
  (b)  
Lease of telecommunications networks in Southern China from Unicom New Horizon Mobile Telecommunications Company Limited in 2009
     
In connection with the 2009 Business Combination, on December 16, 2008, CUCL, Unicom Group, Netcom Group and Unicom New Horizon Mobile Telecommunications Company Limited (“Unicom New Horizon”, a wholly-owned subsidiary of Unicom Group) entered into an agreement (the “Network Lease Agreement”) in relation to the lease (the “Lease”) of the fixed-line telecommunications networks of the 21 provinces in Southern China (“Telecommunications Networks in Southern China”) by CUCL from Unicom New Horizon on an exclusive basis immediately following and subject to the completion of the 2009 Business Combination. Under the Network Lease Agreement, CUCL shall pay annual leasing fees of RMB2.0 billion and RMB2.2 billion for the two financial years ended December 31, 2009 and December 31, 2010, respectively. The initial term of the Lease is two years effective from January 2009 and the Lease is renewable at the option of CUCL with at least two months’ prior notice on the same terms and conditions, except for the future lease fee which will remain subject to further negotiations between the parties, taking into account, among others, the then prevailing market conditions in Southern China. Moreover, in connection with the Lease, Unicom New Horizon has granted CUCL an option to purchase the Telecommunications Networks in Southern China and the purchase price will be referenced to the then appraised value of the networks determined by an independent appraiser.
     
On October 29, 2010, CUCL and Unicom New Horizon entered into a new network lease agreement (“2011-2012 Network Lease Agreement”) to renew the Lease for a term of two years expiring on December 31, 2012 on the same terms and conditions as the Network Lease Agreement dated December 16, 2008, except that the annual fee payable by CUCL for the Lease for the two financial years ending December 31, 2011 and 2012 is RMB2.4 billion and RMB2.6 billion, respectively.

 

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1.  
ORGANISATION AND PRINCIPAL ACTIVITIES (Continued)
  (c)  
Merger between CUCL and China Netcom (Group) Company Limited in 2009
     
On January 1, 2009, as part of the Company’s integration with China Netcom, the Company completed the reorganization of its wholly-owned subsidiaries, namely (i) CUCL and (ii) China Netcom (Group) Company Limited (“CNC China”, a wholly-owned foreign enterprise established in the PRC and a wholly-owned subsidiary of China Netcom), pursuant to which CUCL merged with, and absorbed, CNC China. The merged company retains the name of China United Network Communications Corporation Limited and remains a wholly-owned subsidiary of the Company. The CNC China mentioned below represents CNC China before the merger with CUCL on January 1, 2009.
     
The merger between CUCL and CNC China does not have any impact on the consolidated financial statements.
  (d)  
2008 disposal and business combination activities
   
Disposal of the Group’s CDMA business to China Telecom in 2008
     
On October 1, 2008, the Company completed disposal of the CDMA business to China Telecom in accordance with the CDMA business framework agreement (“the Framework Agreement”) and the CDMA business disposal agreement (“the Disposal Agreement”) entered into among the Company, CUCL and China Telecom.
   
Merger between the Company and China Netcom by way of a scheme of arrangement of China Netcom in 2008 (hereinafter referred to as the “2008 Business Combination”)
     
On October 15, 2008, the Company completed its merger with China Netcom by way of a scheme of arrangement of China Netcom (the “Scheme”) under Section 166 of the Hong Kong Companies Ordinance. The consideration for the 2008 Business Combination was approximately HKD117.2 billion which was satisfied by the issuance of 10,102,389,377 ordinary shares of HKD0.10 each of the Company to the shareholders of China Netcom.

 

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2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
   
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
  2.1  
Statement of Compliance
     
These financial statements have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board (“IASB’’), which collective term includes all applicable individual International Financial Reporting Standards, International Accounting Standards (“IASs’’) and Interpretations issued by the IASB. Hong Kong Financial Reporting Standards (“HKFRSs’’), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs’’) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA’’), are consistent with IFRSs. These financial statements also comply with HKFRSs.
  2.2  
Basis of Preparation
     
The consolidated financial statements have been prepared under the historical cost convention, modified by the revaluation of property, plant and equipment (other than buildings and telecommunications equipment of the Mobile business), available-for-sale financial assets and derivative financial instrument at fair value through income or loss. The consolidated financial statements prepared by the PRC subsidiaries for PRC statutory reporting purposes are based on the Chinese Accounting Standards for Business Enterprises (“CAS”) issued by the Ministry of Finance of the PRC, which became effective from January 1, 2007 with certain transitional provisions. There are certain differences between the Group’s IFRSs/HKFRSs financial statements and PRC statutory financial statements. The principal adjustments made to the PRC statutory financial statements to conform to IFRSs/HKFRSs include the following:
   
reversal of the revaluation surplus or deficit and related depreciation and amortization charges arising from the revaluation of assets (mainly property, plant and equipment) performed by independent valuers for the purpose of reporting to relevant PRC government authorities;
   
recognition of the revaluation surplus or deficit and related depreciation charges for the purpose of reporting the property, plant and equipment (other than buildings and telecommunications equipment of the Mobile business) at revalued amounts under IFRSs/HKFRSs;
   
recognition of goodwill associated with the acquisition of certain subsidiaries prior to 2005;
   
additional capitalization of borrowing costs and corresponding impact on depreciation prior to the adoption of CAS on January 1, 2007; and
   
adjustments for deferred taxation in relation to IFRSs/HKFRSs adjustments.

 

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2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.2  
Basis of Preparation (Continued)
  (a)  
Business Combination of Entities and Businesses under Common Control and Purchase of Target Assets
     
The 2009 Business Combination was considered a business combination of entities and businesses under common control as the Target Business before and after the acquisition was both under the control of Unicom Group, the Group’s ultimate holding company.
     
The merger between the Company and China Netcom in 2008 was considered a business combination of entities under common control as their respective ultimate holding companies, namely Unicom Group and Netcom Group, were both under the common control of SASAC. Further, the 2008 Business Combination was carried out by reference to the Announcement on Deepening the Reform of the Structure of the Telecommunications Sector dated May 24, 2008 jointly issued by the Ministry of Industry and Information Technology (“MIIT”), the National Development and Reform Commission (“NDRC”) and the Ministry of Finance of the PRC. As set out in Note 1, Unicom Group and Netcom Group had merged on January 6, 2009 following the merger between the Company and China Netcom.
     
Under HKFRSs, the above transactions were accounted for using merger accounting in accordance with the Accounting Guideline 5 “Merger accounting for common control combinations” (“AG 5”) issued by the HKICPA. Upon the adoption of IFRSs by the Group in 2008, the Group adopted the accounting policy to account for business combinations of entities and businesses under common control using the predecessor values method, which is consistent with HKFRSs. Accordingly, the acquired assets and liabilities are stated at predecessor values, and were included in the consolidated financial statements from the beginning of the earliest period presented as if the entities and businesses acquired had always been part of the Group.
     
Under IFRSs/HKFRSs, the purchase of the Target Assets in 2009 of approximately RMB0.53 billion was accounted for as an asset purchase in accordance with IAS/HKAS 16 “Property, plant and equipment” in the period of purchase.

 

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2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.2  
Basis of Preparation (Continued)
  (b)  
Discontinued Operations
     
On June 2, 2008, the Company, CUCL and China Telecom entered into the Framework Agreement to dispose of the assets and liabilities in relation to the CDMA business and the disposal was completed on October 1, 2008. In accordance with IFRS/HKFRS 5 “Non-current assets held for sale and discontinued operations” issued by the IASB/HKICPA (“IFRS/HKFRS 5”), the results and cash flows of the operations of the CDMA operating segment of the Group have been presented as discontinued operations in the consolidated statements of income and statements of cash flows of the Group for the year ended December 31, 2008. The difference between the consideration received and receivable and the book value of net assets disposed of is recorded as “gain on disposal of discontinued operations” in the consolidated statement of income for the year ended December 31, 2008.
     
For details, please refer to Note 36.
  (c)  
Going Concern Assumption
     
As of December 31, 2010, current liabilities of the Group exceeded current assets by approximately RMB156.0 billion (2009: approximately RMB169.2 billion). Given the current global economic conditions and the Group’s expected capital expenditures in the foreseeable future, management has comprehensively considered the Group’s available sources of funds as follows:
   
The Group’s continuous net cash inflows from operating activities;
   
Revolving banking facilities of approximately RMB114.0 billion, of which approximately RMB88.4 billion was unutilized as of December 31, 2010; and
   
Other available sources of financing from domestic banks and other financial institutions given the Group’s credit history.
     
In addition, the Group will continue to optimize its fund raising strategy from the short, medium and long-term perspectives and maintain reasonable financing costs through appropriate financing portfolio.
     
Based on the above considerations, the Board of Directors is of the opinion that the Group has sufficient funds to meet its working capital requirements and debt obligations. As a result, the consolidated financial statements of the Group for the year ended December 31, 2010 have been prepared under the going concern basis.
  (d)  
Critical Accounting Estimates and Judgment
     
The preparation of the consolidated financial statements in conformity with IFRSs/HKFRSs requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates significant to the consolidated financial statements are disclosed in Note 4.

 

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Table of Contents

2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.2  
Basis of Preparation (Continued)
  (e)  
New Accounting Standards, Amendments and Interpretations Pronouncements
  (i)  
The following new and amended IFRSs/HKFRSs are adopted by the Group as of January 1, 2010
   
IFRS/HKFRS 3 (revised), “Business Combinations”. The revised standard continues to apply the acquisition method to business combinations with some significant changes compared with IFRS/HKFRS 3. For example, all payments to purchase a business are recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the statement of comprehensive income. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interests in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed. The revised standard does not have any significant impact on the Group’s financial statements, as it will be applied prospectively.
   
IAS/HKAS 27 (revised), “Consolidated and separate financial statements”. The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is remeasured to fair value, and the resulting gain or loss is recognized in income or loss. The revised standard does not have any significant impact on the Group’s financial statements.

 

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2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.2  
Basis of Preparation (Continued)
  (e)  
New Accounting Standards, Amendments and Interpretations Pronouncements (Continued)
  (i)  
The following new and amended IFRSs/HKFRSs are adopted by the Group as of January 1, 2010 (Continued)
   
IASB’s annual improvement project published in April 2009/HKICPA’s improvements to HKFRS published in May 2009
   
IAS/HKAS 1 (Amendment), “Presentation of financial statements”. Regarding the liability component of convertible instruments, it clarifies that the holder’s option which will result in the settlement by the issuance of equity instruments, is not relevant to its classification as current or non-current. By amending the definition of current liability, the amendment permits a liability to be classified as non-current (provided that the entity has an unconditional right to defer settlement by transfer of cash or other assets for at least 12 months after the accounting period) notwithstanding the fact that the entity could be required by the counterparty to settle in shares at any time.
   
IAS/HKAS 17 (Amendment), “Leases”. The amendment deletes specific guidance regarding classification of leases of land, so as to eliminate inconsistency with the general guidance on lease classification. As a result, leases of land should be classified as either finance lease or operating lease using the general principles of IAS/HKAS 17.
   
IAS/HKAS 36 (Amendment), “Impairment of assets”. The amendment clarifies that the largest cash-generating unit (or group of units) to which goodwill should be allocated for the purposes of impairment testing is an operating segment as defined by paragraph 5 of IFRS/HKFRS 8, “Operating segments” (that is, before the aggregation of segments with similar economic characteristics permitted by paragraph 12 of IFRS/HKFRS 8).
   
IAS/HKAS 38 (Amendment), “Intangible assets”. The amendment clarifies that the description of the valuation techniques commonly used to measure intangible assets acquired in a business combination when they are not traded in an active market. In addition, an intangible asset acquired in a business combination might be separable but only together with a related contract, identifiable asset or liability. In such cases, the intangible asset is recognized separately from goodwill but together with the related item.
     
The adoption of the IASB’s/HKICPA’s improvements does not have a significant impact on the Group’s consolidated financial statements.

 

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2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.2  
Basis of Preparation (Continued)
  (e)  
New Accounting Standards, Amendments and Interpretations Pronouncements (Continued)
  (ii)  
The following new and amended IFRSs/HKFRSs are not yet effective and have not been early adopted by the Group
   
IFRIC/HK (IFRIC) — Int 19, “Extinguishing financial liabilities with equity instruments” (effective for annual periods beginning on or after July 1, 2010). The interpretation clarifies the accounting by an entity when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of the financial liability (debt for equity swap). It requires a gain or loss to be recognized in income or loss, which is measured as the difference between the carrying amount of the financial liability and the fair value of the equity instruments issued. If the fair value of the equity instruments issued cannot be reliably measured, the equity instruments should be measured to reflect the fair value of the financial liability extinguished. The Group will apply the interpretation from January 1, 2011 and is currently evaluating the impact of adopting such interpretation on the Group’s consolidated financial statements.
   
IFRS/HKFRS 9, “Financial instruments: Classification and measurement” (effective January 1, 2013). It replaces the parts of IAS/HKAS 39 that relate to the classification and measurement of financial assets. IFRS/HKFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. In addition, classification and measurement requirements for financial liabilities and the derecognition requirements for financial instruments has been relocated from IAS/HKAS 39 without change, except for financial liabilities that are designated at fair value through income or loss and the cost exemption is removed for derivative liabilities linked to unquoted equity instruments. The Group early adopted this standard in 2011. Upon adoption of this standard, the balance of available-for-sale fair value reserve was transferred to investment revaluation reserve. The Company made an irrevocable election upon initial adoption of the standard to recognize changes in fair value of available-for-sale financial assets only through other comprehensive income/loss, there will be no subsequent recycling of fair value gains and losses to the statement of income. Upon adoption, IFRS/HKFRS 9 will be applied retrospectively to all periods presented.

 

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2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.3  
Consolidation
     
The consolidated financial statements include the financial statements of the Company and all of its subsidiaries made up to December 31.
  (a)  
Subsidiaries
     
Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.
     
Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. Upon the disposal of subsidiaries, the difference between the consideration received and receivable and the book value of net assets disposed of is recorded as gain/loss on disposal in the consolidated statement of income in the year of disposal.
     
Under the purchase method of accounting, the cost of an acquisition is measured at the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the Group’s share of the identifiable net assets of the subsidiary acquired, the difference is recognized directly in the statement of income.
     
Upon the adoption of IFRSs in 2008, the Group adopted the accounting policy to account for business combination of entities and businesses under common control using the predecessor values method which is consistent with HKFRS.
     
Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries would be changed where necessary in the consolidated financial statements to ensure consistency with the policies adopted by the Group.

 

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2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.3  
Consolidation (Continued)
  (b)  
Non-controlling interests
     
Non-controlling interests at the balance sheet date, being the portion of the net assets of subsidiaries attributable to interests that are not owned by the Company, whether directly or indirectly through subsidiaries, are presented in the consolidated balance sheets and statements of changes in equity within equity, separately from equity attributable to owners of the parent. Non-controlling interests in the results of the Group are presented on the face of the consolidated statement of incomes as an allocation of the total income or loss for the year between non-controlling interests and owners of the parent.
     
The Group treats transactions with non-controlling interests as transactions with equity owners of the Group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.
     
When the Group ceases to have control or significant influence, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognized in income or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized in other comprehensive income are reclassified to income or loss.
     
The Group has changed its accounting policy for transactions with non-controlling interests and the accounting for loss of control or significant influence from January 1, 2010 when revised IAS/HKAS 27, “Consolidated and separate financial statements”, became effective. The revision to IAS/HKAS 27 contained consequential amendments to IAS/HKAS 28, “Investments in associates”, and IAS/HKAS 31, “Interests in joint ventures”.
     
Previously, transactions with non-controlling interests were treated as transactions with parties external to the Group. Disposals therefore resulted in gains or losses in income or loss and purchases resulted in the recognition of goodwill. On disposal or partial disposal, a proportionate interest in reserves attributable to the subsidiary was reclassified to income or loss or directly to retained profits.
     
Previously, when the Group ceased to have control or significant influence over an entity, the carrying amount of the investment at the date of loss of control or significant influence became its cost for the purposes of subsequently accounting for the retained interests as associates, jointly controlled entity or financial assets.
     
The Group has applied the new policy prospectively to transactions occurring on or after January 1, 2010. As a consequence, no adjustments were necessary to any of the amounts previously recognized in the financial statements.

 

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2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.4  
Segment Reporting
     
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker (“CODM”). The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments regularly, has been identified as the Board of Directors that makes strategic decisions.
  2.5  
Foreign Currency Translation
  (a)  
Functional and presentation currency
     
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entities operate (“the functional currency”). The consolidated financial statements are presented in RMB, which is the Company’s functional and presentation currency.
  (b)  
Transactions and balances
     
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of income.
  (c)  
Group companies
     
The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
   
Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
   
Income and expenses for each statement of income are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and
   
All resulting exchange differences are recognized as a separate component of equity into other reserve.
     
On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is sold, such exchange differences are recognized in the statement of income as part of the gain or loss on disposal.
     
For the convenience of the reader, the translation of RMB into United States dollars (“US$”) has been made at the rate of RMB6.6000 to US$1.00, representing the rate as certified by the H.10 weekly statistical release of Federal Reserve Board on December 31, 2010.

 

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Table of Contents

2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.6  
Property, Plant and Equipment
  (a)  
Construction-in-progress
     
Construction-in-progress (“CIP”) represents buildings, plant and equipment under construction and pending installation, and is stated at cost less accumulated impairment losses. Costs include construction and acquisition costs, and interest charges arising from borrowings used to finance the assets during the construction period. No provision for depreciation is made on construction-in-progress until such time as the assets are completed and ready for use. When the asset being constructed becomes available for use, the CIP is transferred to the appropriate category of property, plant and equipment.
  (b)  
Buildings
     
Buildings held by the Group are stated at cost less accumulated depreciation and accumulated impairment losses, and are depreciated over their expected useful lives.
  (c)  
Other property, plant and equipment
     
Other property, plant and equipment comprise telecommunications equipment, leasehold improvements, office furniture, fixtures, motor vehicles and others. The cost of an asset, except for those acquired in exchange for a non-monetary asset or assets, comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.
     
If an item of property, plant and equipment is acquired in exchange for another item of property, plant and equipment, the cost of such an item of property, plant and equipment is measured at fair value unless (i) the exchange transactions lacks commercial substance or (ii) the fair value of neither the asset received nor the asset given up is reliably measurable. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up.
     
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable at the time the costs are incurred that future economic benefits associated with the item will flow to the Group, and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the statement of income during the financial period in which they are incurred.
     
Telecommunications equipment of the Mobile business are stated at cost less accumulated depreciation and accumulated impairment losses. All other property, plant and equipment are stated at revalued amounts less accumulated depreciation and accumulated impairment losses.

 

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Table of Contents

2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.6  
Property, Plant and Equipment (Continued)
  (c)  
Other property, plant and equipment (Continued)
     
When an item of fixed asset is revalued, any accumulated depreciation at the date of the revaluation is restated proportionately together with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount. Increases in valuation are credited to the revaluation reserve. Decreases in valuation are first set off against any revaluation surplus on earlier valuations in respect of the same item and thereafter are debited to statement of income. Any subsequent increases are credited to the statement of income up to the amount previously debited. Each year the difference between depreciation based on the revalued carrying amount of the asset expensed in the statement of income and depreciation based on the asset’s original cost is transferred from the revaluation reserve to retained profits.
     
Revaluations on fixed assets will be performed with sufficient regularity by independent valuers and in each of the intervening years, valuations are reviewed by directors of the Group. The revalued amount is the fair value at the date of revaluation.
  (d)  
Depreciation
     
Depreciation on property, plant and equipment is calculated using the straight-line method to allocate their costs or revalued amounts less their residual values over their estimated useful lives, as follows:
                 
    Depreciable life     Residual rate  
 
               
Buildings
  10 – 30 years     3 – 5 %
Telecommunications equipment of Mobile business
  5 – 10 years     3 – 5 %
Telecommunications equipment of Fixed-line business
  5 – 10 years     3 – 5 %
Office furniture, fixtures, motor vehicles and others
  5 – 10 years     3 – 5 %
     
Leasehold improvements are depreciated over the shorter of their estimated useful lives and the lease periods.
     
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
     
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2.11).
  (e)  
Gain or loss on disposal of property, plant or equipment
     
Gains or losses on disposal of property, plant or equipment are determined by comparing the net sales proceeds with the carrying amounts, and are recognized in the statement of income. When revalued assets are sold, the residual amounts included in the revaluation reserve are transferred to retained profits.

 

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Table of Contents

2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.7  
Goodwill
     
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiaries at the date of acquisition. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gain or loss on the disposal of an entity includes the carrying amount of goodwill relating to the entity sold.
     
Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose.
  2.8  
Lease Prepayments
     
Lease prepayments represent payments for land use rights. Lease prepayments for land use rights are stated at cost initially and expensed on a straight line basis over the lease period.
  2.9  
Other Assets
     
Other assets mainly represent (i) capitalized direct incremental costs for activating mobile subscribers; (ii) capitalized installation costs of Fixed-line business; (iii) computer software and (iv) prepaid rental for premises and leased lines.
  (i)  
Capitalized direct incremental costs for activating mobile subscribers, including costs of SIM/USIM cards and commissions which are directly associated with upfront non-refundable revenue received upon activation of mobile services, are deferred and amortized over the expected customer service periods of 3 years except when the direct incremental costs exceed the corresponding upfront non-refundable revenue. In such cases, the excess of the direct incremental costs over the non-refundable revenue are recorded immediately as expenses in the statement of income.
  (ii)  
Capitalized installation costs of Fixed-line business are deferred and expensed to the statement of income over the expected customer service period of 10 years except when the direct incremental costs exceed the corresponding upfront installation fees. In such cases, the excess of the direct incremental costs over the installation fees are recorded immediately as expenses in the statement of income.
  (iii)  
Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortized over their estimated useful lives on a straight-line basis.
  (iv)  
Long-term prepaid rental for premises and leased lines are amortized using a straight-line method over the lease period.

 

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Table of Contents

2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.10  
Financial Assets
  2.10.1  
Classification
 
     
The Group classifies its financial assets in the following categories: loans and receivables and available-for-sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.
  (a)  
Loans and receivables
     
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified as non-current assets. The Group’s loans and receivables comprise “accounts receivable and other receivables”, “short-term bank deposits” and “cash and cash equivalents” in the balance sheet (Note 2.14, 2.15 and 2.16).
  (b)  
Available-for-sale financial assets
     
Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the investment matures or management intends to dispose of it within 12 months of the end of the reporting period.
  2.10.2  
Recognition and measurement
     
Available-for-sale financial assets are carried at fair value. Loans and receivables are recognized initially at fair value and subsequently carried at amortized cost using the effective interest method.
     
The translation differences on non-monetary securities are recognized in other comprehensive income/loss. Changes in the fair value of non-monetary securities classified as available-for-sale are recognized in other comprehensive income/loss until impairment.
     
When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognized in equity are included in the statement of income as “gains and losses from investment securities”.
     
Interest on available-for-sale securities calculated using the effective interest method is recognized in the statement of income as part of other income. Dividends on available-for-sale equity instruments are recognized in the statement of income as part of other income when the right to receive payments is established.

 

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Table of Contents

2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.11  
Impairment of Non-Financial Assets
     
Assets that have an indefinite useful life or are not yet available for use are not subject to amortization and are tested for impairment at each balance sheet date. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of (i) an asset’s fair value less costs to sell and (ii) value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Assets other than goodwill that suffered from impairment are reviewed for possible reversal of the impairment at each reporting date.
  2.12  
Impairment of Financial Assets
  (a)  
Accounts receivable and other receivables
     
The Group assesses at the end of each reporting period whether there is objective evidence that accounts receivable and other receivable are impaired. A provision for impairment of accounts receivable and other receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the assets’ carrying amount and the present value of estimated future cash flows which is discounted at the original effective interest rate. The carrying amount of the assets is reduced through the use of a provision account, and the amount of the loss is recognized in the statement of income. When a receivable is proven to be uncollectible with sufficient evidence, it is written off against the provision account for receivables. Subsequent recoveries of amounts previously written off are credited in the statement of income.
  (b)  
Available-for-sale financial assets
     
The Group assesses at the end of each reporting period whether there is objective evidence that available-for-sale financial assets are impaired. For equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is evidence that the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in income or loss is removed from equity and recognized in the statement of income. Impairment losses recognized in the statement of income on equity instruments are not reversed.

 

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Table of Contents

2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.13  
Inventories and Consumables
     
Inventories, which primarily comprise handsets, SIM/USIM cards and accessories, are stated at the lower of cost and net realizable value. Cost is based on the first-in-first-out method and comprises all costs of purchase and other costs incurred in bringing the inventories to their present location and condition. Net realizable value for all the inventories is determined on the basis of anticipated sales proceeds less estimated selling expenses.
     
Consumables consist of materials and supplies used in maintaining the Group’s telecommunication networks and are charged to the statement of income when brought into use. Consumables are stated at cost less any provision for obsolescence.
  2.14  
Accounts Receivable and Other Receivables
     
Accounts receivable are amounts due from customers for services performed in the ordinary course of business. If collection of accounts receivable and other receivables is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets.
  2.15  
Short-term Bank Deposits
     
Short-term bank deposits are cash invested in fixed-term deposits with original maturities ranging from more than 3 months to 1 year.
  2.16  
Cash and Cash Equivalents
     
Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of 3 months or less.
  2.17  
Convertible Bonds
     
Compound financial instruments issued by the Group comprise convertible bonds that can be converted to share capital at the option of the holder, and the number of shares to be issued does not vary with changes in their fair value.
     
The liability component of convertible bonds is recognized initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognized initially at the difference between the fair value of the convertible bonds as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts.
     
Subsequent to initial recognition, the liability component of convertible bonds is measured at amortized cost using the effective interest method. The equity component of a convertible bond is not re-measured subsequent to initial recognition except on conversion or expiry.

 

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Table of Contents

2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.18  
Deferred Revenue, Advances from Customers and Subscriber Point Rewards Program
  (a)  
Deferred revenue
     
Deferred revenue mainly represents upfront non-refundable revenue, including upfront connection fees and installation fees of Fixed-line business and receipts from the activation of SIM/USIM cards relating to the Mobile business, which are deferred and recognized over the expected customer service period.
  (b)  
Advances from customers
     
Advances from customers are amounts paid by customers for prepaid cards, other calling cards and prepaid service fees, which cover future telecommunications services. Advances from customers are stated at the amount of proceeds received less the amount already recognized as revenue upon the rendering of services.
  (c)  
Subscriber point rewards program
     
The fair value of providing telecommunications services and the subscriber points reward are allocated based on their relative fair values. The allocated portion of fair value for the subscriber points reward is recorded as deferred revenue when the rewards are granted and recognized as revenue when the points are redeemed or expired. The fair value of deferred revenue is estimated based on (i) the value of each bonus point awarded to subscribers, (ii) the number of bonus points related to subscribers who are qualified or expected to be qualified to exercise their redemption right at each balance sheet date, and (iii) the expected bonus points redemption rate. The fair value of the outstanding subscriber points reward is subject to review by management on a periodic basis.
  2.19  
Borrowings
     
Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost, any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the statement of income over the period of the borrowings using the effective interest method.
     
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

 

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Table of Contents

2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.20  
Share Capital
     
Ordinary shares are classified as equity.
     
Incremental costs directly attributable to the issuance of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.
     
Where any group company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of tax) is deducted from equity attributable to owners of the parent and no gain or loss shall be recognized in the statement of income. The par value of the Company’s shares cancelled is transferred from share capital to the capital redemption reserve.
  2.21  
Employee Benefits
  (a)  
Retirement benefits
     
The Group participates in defined contribution pension schemes. For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognized as employee benefit expenses when they are due. Prepaid contributions are recognized as an asset to the extent that a reduction in the future payments is available.
  (b)  
Early retirement benefits
     
Early retirement benefits are recognized as expenses when the Group reaches agreement with the relevant employees for early retirement.
  (c)  
Housing benefits
     
One-off cash housing subsidies paid to PRC employees are charged to the statement of income in the year in which it is determined that the payment of such subsidies is probable and the amounts can be reasonably estimated.
     
The Group’s contributions to the housing fund, special monetary housing benefits and other housing benefits are expensed as incurred. The Group has no further payment obligations once the contributions have been paid.
  (d)  
Share-based compensation costs
     
The Group operates an equity-settled, share-based compensation plan. The fair value of the employee services received in exchange for the grant of the share options is recognized as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the share options granted at the grant date excluding the impact of any non-market vesting conditions (for example, revenue and profit targets) and is not subsequently remeasured. However, non-market vesting conditions are considered in determining the number of options that are expected to vest. At each balance sheet date, the Group revises its estimates of the number of share options that are expected to vest. The Group recognizes the impact of the revision of original estimates, if any, in the statement of income of the period in which the revision occurs, with a corresponding adjustment to equity.

 

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Table of Contents

2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.21  
Employee Benefits (Continued)
  (d)  
Share-based compensation costs (Continued)
     
The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the share options are exercised. The corresponding employee share-based compensation reserve is transferred to share premium.
     
In connection with the 2008 Business Combination (Note 1), the exchange of China Netcom’s options to the Company’s options was accounted for as a modification in accordance with IFRS/HKFRS 2 “Share-based payment” issued by the IASB/HKICPA (“IFRS/HKFRS 2”). The incremental fair value of the exchanged options measured before and after the modification is to be recognized as follows:
   
For vested options, the incremental share-based compensation costs are recognized in the statement of income immediately;
   
For non-vested options, the incremental share-based compensation costs are recognized in the statement of income over the remaining vesting period.
  2.22  
Accounts Payable
     
Accounts payable are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities.
     
Accounts payable are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.
  2.23  
Provisions
     
Provisions are recognized when the Group has present legal or constructive obligations as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
     
Provisions are measured at the present value of the pre-tax amount of expenditures expected to be required to settle the obligation that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.

 

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Table of Contents

2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.24  
Discontinued Operations
     
A discontinued operation is a component of the Group that may be a major line of business or geographical area of operations that has been disposed of or is held for sale. The results and cash flows of that component are separately reported as “discontinued operations” in the statement of income and statement of cash flows, respectively. The difference between the consideration received and receivable and the book value of net assets disposed of is recorded as gain/loss on disposal in the consolidated statement of income in the year of disposal. The comparative statement of income and statement of cash flows are also reclassified as “discontinued operations”. The assets and liabilities of such component classified as “held for sale” is presented separately in assets and liabilities, respectively, of the consolidated balance sheet, from the date it is first determined to be discontinued operations or assets/liabilities held for sale, and are de-recognized upon the completion of the disposal.
  2.25  
Revenue Recognition
     
Revenue comprises the fair value of the consideration received or receivable for the services and sales of goods or telecommunications products in the ordinary course of the Group’s activities. Revenue is shown net of business tax, government surcharges, returns and discounts and after eliminating sales within the Group.
     
The Group recognizes revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group’s activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The Group bases its estimates on historical results, taking into consideration of the type of customer, the type of transaction and the specifics of each arrangement.
  (a)  
Sales of services and goods
   
Usage fees and monthly fees are recognized when the service are rendered;
   
Revenue from the provision of broadband, data and other Internet-related services are recognized when the services are provided to customers;
   
Revenue from telephone cards, which represents service fees received from customers for telephone services, is recognized when the related service is rendered upon actual usage of the telephone cards by customers;
   
Lease income from leasing of lines and customer-end equipment are treated as operating leases with rental income recognized on a straight-line basis over the lease term;
   
Value-added services revenue, which mainly represents revenue from the provision of services such as short message, cool ringtone, personalized ring, caller number display and secretarial services to subscribers, is recognized when service is rendered;
   
Standalone sales of telecommunications products, which mainly represent handsets and accessories, are recognized when title has been passed to the buyers;

 

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Table of Contents

2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.25  
Revenue Recognition (Continued)
  (a)  
Sales of services and goods (Continued)
   
The Group offers promotional packages to the customers which include the bundled sale of mobile handset and provision of service. Prior to the fourth quarter of 2010, the Group determined the amount of revenue allocated to the handset using the residual value method. Under such method, the Group determined the revenue from the sale of the mobile handset by deducting the fair value of the service element from the total contract consideration. The Group recognised revenue related to the sale of the handset when the title is passed to the customer whereas service revenue was recognized based upon the actual usage of mobile services. The cost of the mobile handset sold was expensed immediately to the statement of income.
     
During 2010, the Group has offered preferential promotional packages with more attractive terms to new subscribers, and more new subscribers were developed under such preferential packages during the year. In order to provide reliable and more relevant information to users of the financial statements, starting from the fourth quarter of 2010, the Group determined to adopt the accounting policy of relative fair value method retrospectively from January 1, 2010 to account for such preferential promotional packages, considering that each deliverable in the promotional packages has standalone value to the customer and there is objective and reliable evidence of the fair value regarding each deliverable in the services packages. Under the relative fair value method, the total contract consideration of such preferential packages is allocated to service revenue and sales of handsets based on their relative fair values. The Group recognizes revenue relating to the sale of the handset when the title is passed to the customer whereas service revenue is recognised based upon the actual usage of mobile services. The cost of the mobile handset sold is expensed immediately to the statement of income upon revenue recognition.
     
This change in accounting policy resulted in an increase in the Group’s revenue, income before income tax, net income and earnings per share of RMB3,208 million, RMB3,208 million, RMB2,406 million and RMB0.11, respectively, for the year ended December 31, 2010; and a decrease in advance from customers of RMB3,317 million as of December 31, 2010. In addition, this change in accounting policy resulted in an increase in the Group’s revenue, income before income tax, income for the period and earnings per share of RMB527 million, RMB527 million, RMB396 million and RMB0.02, respectively, for the six months ended June 30, 2010 (unaudited); and a decrease in advance from customers of RMB545 million as of June 30, 2010 (unaudited). The above change in accounting policy did not have significant impact on the financial statements for the years ended December 31, 2009 and 2008, and accordingly, the Group did not restate the comparative figures.

 

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Table of Contents

2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.25  
Revenue Recognition (Continued)
  (a)  
Sales of services and goods (Continued)
   
Revenue from information communications technology services are recognized when goods are delivered to the customers (which generally coincides with the time when the customers have accepted the goods and the related risks and rewards of ownership have been transferred to the customers) or when services are rendered to the customers using the percentage of completion method when the outcome of the services provided can be estimated reliably. If the outcome of the services provided cannot be estimated reliably, the treatment should be as follows: (i) if it is probable that the costs incurred for the services provided is recoverable, services revenue should be recognized only to the extent of recoverable costs incurred, and costs should be recognized as current expenses in the period in which they are incurred; (ii) if it is probable that costs incurred will not be recoverable, costs should be recognized as current expenses immediately and services revenue should not be recognized.
  (b)  
Interest income
     
Interest income from deposits in banks or other financial institutions is recognized on a time proportion basis, using the effective interest method.
  (c)  
Dividend income
     
Dividend income is recognized when the right to receive payment is established.
  2.26  
Leases (as the lessee)
  (a)  
Operating lease
     
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor), including long-term prepayment for land use rights, are expensed in the statement of income on a straight-line basis over the period of the lease.
  (b)  
Finance lease
     
Leases of assets where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the commencement of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate of interest on the liability balance outstanding. The corresponding liabilities, net of finance charges, are recorded as obligations under finance leases. The interest element implicit in the lease payment is recognized in the statement of income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

 

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Table of Contents

2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.27  
Borrowing Costs (Continued)
     
Borrowing costs are expensed as incurred, except for interest directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use, in which case they are capitalized as part of the cost of that asset. Capitalization of borrowing costs commences when expenditures for the asset and borrowing costs are being incurred and the activities to prepare the asset for its intended use are in progress. Borrowing costs are capitalized up to the date when the project is completed and ready for its intended use.
     
To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization is determined at the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings.
     
To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization is determined by applying a capitalization rate to the expenditures on that asset. The capitalization rate is the weighted average of the borrowing costs applicable to the borrowings of the Group that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs capitalized during a period should not exceed the amount of borrowing cost incurred during that period. Other borrowing costs are recognized as expenses when incurred.
  2.28  
Taxation
  (a)  
Current income tax
     
The current income tax charge is calculated on the basis of the tax laws enacted or substantially enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of the amount expected to be paid to the tax authorities.
  (b)  
Deferred income tax
     
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable income or loss, it is not accounted for. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.
     
Deferred income tax assets are recognized only to the extent that it is probable that future taxable income will be available against which the temporary differences can be utilized.
     
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

 

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Table of Contents

2.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.29  
Dividend Distribution
     
Dividend distribution to the Company’s shareholders is recognized as a liability in the Company’s financial statements in the period in which the dividends are approved by the Company’s shareholders.
  2.30  
Contingent Liabilities and Contingent Assets
     
A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognized because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably.
     
A contingent liability is not recognized but is disclosed in the notes to the financial statements. When a change in the probability of an outflow occurs so that outflow is probable, the liability will then be recognized as a provision.
     
A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group.
     
Contingent assets are not recognized but are disclosed in the notes to the financial statements when an inflow of economic benefits is probable. When an inflow is virtually certain, an asset is recognized.
  2.31  
Earnings per Share and per American Depositary Share (“ADS”)
     
Basic earnings per share is computed by dividing the income attributable to owners of the parent by the weighted average number of ordinary shares outstanding during the year.
     
Diluted earnings per share is computed by dividing the income attributable to owners of the parent by the weighted average number of ordinary shares, after adjusting for the effects of the dilutive potential ordinary shares.
     
Basic and diluted earnings per ADS are computed by multiplying earnings per share by 10, which is the number of shares represented by each ADS.

 

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3.  
FINANCIAL RISK MANAGEMENT
  3.1  
Financial risk factors
     
The Group’s operating activities expose it to a variety of financial risks: market risk (including foreign exchange risk, price risk, cash flow risk and fair value interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance.
     
Financial risk management is carried out by the Group’s finance department at its headquarters, following the overall direction determined by the Board of Directors. The Group’s finance department identifies and evaluates financial risks in close co-operation with the Group’s operating units.
  (a)  
Market risk
  (i)  
Foreign exchange risk
     
The Group’s major operational activities are carried out in Mainland China and a majority of the transactions are denominated in RMB. The Group is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to US dollars, HK dollars and Euro. Exchange risk mainly exists with respect to the repayment of indebtedness to foreign lenders and payables to equipment suppliers and contractors.
     
The Group’s finance department at its headquarters is responsible for monitoring the amount of monetary assets and liabilities denominated in foreign currencies. From time to time, the Group may consider entering into forward exchange contracts or currency swap contracts to mitigate the foreign exchange risk. During the year, the Group had not entered into any forward exchange contracts or currency swap contracts.
     
As of December 31, 2010 and 2009, the Group had cash and cash equivalents and short-term bank deposits denominated in foreign currencies amounting to RMB12,467 million and RMB1,545 million, respectively. As of December 31, 2010 and 2009, the Group had borrowings, convertible bonds and other obligations under finance lease included in other obligations denominated in foreign currencies amounting to RMB25,407 million and RMB11,859 million, respectively.
     
As of December 31, 2010, if the RMB had strengthened/weakened by 10% against foreign currencies, primarily with respect to US dollars, HK dollars and Euro, while all other variables are held constant, the Group would have recognized additional exchange gains/losses of approximately RMB1,294 million (2009: exchange losses/gains of approximately RMB1,031 million; 2008: exchange losses/gains of approximately RMB22 million) for cash and cash equivalents, short-term bank deposits, borrowings, convertible bonds and other obligations under finance lease included in other obligations denominated in foreign currencies.

 

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3.  
FINANCIAL RISK MANAGEMENT (Continued)
  3.1  
Financial risk factors (Continued)
  (a)  
Market risk (Continued)
  (ii)  
Price risk
     
The Group is exposed to equity securities price risk because investments held by the Group are classified in the consolidated balance sheet as available-for-sale financial assets.
     
The available-for-sale financial assets comprise primarily equity securities of Telefónica. As of December 31, 2010, if the share price of Telefónica had changed by 10%, while all other variables are held constant, the Group would have recorded additional change in fair value of approximately RMB609 million in available-for-sale fair value reserve.
  (iii)  
Cash flow and fair value interest rate risk
     
The Group’s interest-bearing assets are mainly represented by bank deposits. Management does not expect the changes in market deposit interest rates will have significant impact on the financial statements as the deposits are all short-term in nature and the interest involved will not be significant.
     
The Group’s interest rate risk mainly arises from interest-bearing borrowings including bank loans, commercial papers, promissory notes, convertible bonds, corporate bonds,and related party loan. Borrowings issued at floating rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group determines the amount of its fixed rate or floating rate borrowings depending on the prevailing market conditions. During 2010 and 2009, the Group’s borrowings were mainly at fixed rates and denominated in RMB.
     
Increases in interest rates will increase the cost of new borrowing and the interest expense with respect to the Group’s outstanding floating rate borrowings, and therefore could have a material adverse effect on the Group’s financial position. Management continuously monitors the interest rate position of the Group and makes decisions with reference to the latest market conditions. From time to time, the Group may enter into interest rate swap agreements designed to mitigate its exposure to interest rate risks in connection with the floating rate borrowings, although the Group did not consider it was necessary to do so in 2010 and 2009.
     
As of December 31, 2010, the Group had approximately RMB60,092 million (2009: approximately RMB62,925 million) of bank loans, commercial papers, promissory notes, convertible bonds, corporate bonds and other obligations under finance lease included in other obligations at fixed rates and approximately RMB36,950 million (2009: approximately RMB10,909 million) of bank loans and related party loan at floating rates.
     
For the year ended December 31, 2010, if interest rates on the floating rate borrowings had been 10% higher/lower while all other variables are held constant, the interest expenses would have increased/decreased by approximately RMB27 million (2008: approximately RMB125 million; 2009: approximately RMB3 million).

 

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3.  
FINANCIAL RISK MANAGEMENT (Continued)
  3.1  
Financial risk factors (Continued)
  (b)  
Credit risk
     
Credit risk is managed on a group basis. Credit risk arises from cash and cash equivalents and short-term bank deposits with banks, as well as credit exposures to corporate customers, individual subscribers, related parties and other operators.
     
The table below shows the bank deposits and cash and cash equivalents balances held at the major banks by the Group as of December 31, 2009 and 2010:
                 
    2009     2010  
 
               
Short-term bank deposits
               
State-owned banks in the PRC
    861       131  
Other banks
    135       142  
 
           
 
    996       273  
 
           
 
               
Cash and cash equivalents
               
State-owned banks in the PRC
    7,485       21,937  
Other banks
    335       558  
 
           
 
    7,820       22,495  
 
           
     
The Group expects that there is no significant credit risk associated with the bank deposits and cash and cash equivalents since the state-owned banks have support from the government and other banks are medium or large size listed banks. Management does not expect that there will be any significant losses from non-performance by these counterparties.
     
In addition, the Group has no significant concentrations of credit risk with respect to corporate customers and individual subscribers. The extent of the Group’s credit exposure is mainly represented by the fair value of accounts receivable for services. The Group has policies to limit the credit exposure on accounts receivable for services. The Group assesses the credit quality of and sets credit limits on all its customers by taking into account their financial position, the availability of guarantee from third parties, their credit history and other factors such as current market conditions. The normal credit period granted by the Group is on average between 30 days to 90 days from the date of billing. The utilization of credit limits and the settlement pattern of the customers are regularly monitored by the Group.
     
Credit risk relating to amounts due from related parties and other operators is not considered to be significant as these companies are reputable and their receivables are settled on a regular basis.

 

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3.  
FINANCIAL RISK MANAGEMENT (Continued)
  3.1  
Financial risk factors (Continued)
  (c)  
Liquidity risk
     
Prudent liquidity risk management includes maintaining sufficient cash and availability of funds including raising of bank loans, and issuance of commercial papers, promissory notes, corporate bonds and convertible bonds. Due to the dynamic nature of the underlying businesses, the Group’s finance department at its headquarters maintains flexibility in funding through having adequate amount of cash and cash equivalents and utilizing different sources of financing when necessary.
     
The following tables show the undiscounted balances of the financial liabilities (including interest expense) categorized by time period from the balance sheet date to the contractual maturity date.
                                 
    Less than 1     Between 1     Between 2     Over 5  
    year     and 2 years     and 5 years     years  
 
                               
At December 31, 2009
                               
Long-term bank loans
    72       62       185       562  
Corporate bonds
    355       355       5,726       2,229  
Other obligations
    2,537       111       18       60  
Accounts payable and accrued liabilities
    101,551                    
Amounts due to related parties
    5,448                    
Amounts due to ultimate holding company
    308                    
Amounts due to domestic carriers
    1,136                    
Payables in relation to disposal of the CDMA business
    7                    
Short-term bank loans
    64,752                    
 
                       
 
                               
 
    176,166       528       5,929       2,851  
 
                       
At December 31, 2010
                               
Long-term bank loans
    103       94       1,004       533  
Corporate bonds
    355       355       5,535       2,180  
Convertible bonds
    91       91       12,452        
Promissory notes
    509       509       15,510        
Other obligations
    2,640       92       27       47  
Accounts payable and accrued liabilities
    94,928                    
Amounts due to related parties
    5,191                    
Amounts due to ultimate holding company
    229                    
Amounts due to domestic carriers
    873                    
Commercial papers
    23,621                    
Short-term bank loans
    37,319                    
 
                       
 
                               
 
    165,859       1,141       34,528       2,760  
 
                       
     
Regarding the Group’s use of the going concern basis for the preparation of its financial statements, please refer to Note 2.2(c) for details.

 

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3.  
FINANCIAL RISK MANAGEMENT (Continued)
  3.2  
Capital risk management
 
     
The Group’s objectives when managing capital are:
   
To safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders.
   
To support the Group’s stability and growth.
   
To provide capital for the purpose of strengthening the Group’s risk management capability.
     
In order to maintain or adjust the capital structure, the Group reviews and manages its capital structure actively and regularly to ensure optimal capital structure and shareholder returns, taking into account the future capital requirements of the Group and capital efficiency, prevailing and projected profitability, projected operating cash flows, projected capital expenditures and projected strategic investment opportunities.
     
The Group monitors capital on the basis of the debt-to-capitalization ratio. This ratio is calculated as interest bearing debts plus non-controlling interests over interest bearing debts plus total equity. Interest bearing debts represent commercial papers, short-term bank loans, long-term bank loans, promissory notes, convertible bonds, corporate bonds, obligations under finance lease included in other obligations, notes payables (included in accounts payable and accrued liabilities) and certain amounts due to related parties, as shown in the consolidated balance sheet. Total equity represents equity attributable to owners of the parent plus non-controlling interests as shown in the consolidated balance sheet.

 

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3.  
FINANCIAL RISK MANAGEMENT (Continued)
  3.2  
Capital risk management (Continued)
     
The Group’s debt-to-capitalization ratios at December 31, 2009 and 2010 are as follows:
                 
    2009     2010  
Interest bearing debts:
               
- Commercial papers
          23,000  
- Short-term bank loans
    63,909       36,727  
- Promissory notes
          15,000  
- Long-term bank loans
    759       1,462  
- Convertible bonds
          11,558  
- Corporate bonds
    7,000       7,000  
- Obligation under finance lease
    103       78  
- Amounts due to related parties
    2,104       2,033  
- Notes payables included in accounts payable and accrued liabilities
    500        
- Current portion of long-term bank loans
    62       58  
- Current portion of obligation under finance lease
    26       126  
 
           
 
    74,463       97,042  
 
               
Non-controlling interests
    2        
 
           
 
               
Interest bearing debts plus non-controlling interests
    74,465       97,042  
 
           
 
               
Total equity:
               
- Equity attributable to owners of the parent
    206,465       205,841  
- Non-controlling interests
    2        
 
           
 
    206,467       205,841  
 
               
Interest bearing debts plus total equity
    280,930       302,883  
 
           
 
               
Debt-to-capitalization ratio
    26.5 %     32.0 %
 
           
     
The increase in debt-to-capitalization ratio during 2010 resulted primarily from the issuance of commercial papers, promissory notes and convertible bonds to finance the telecommunications networks construction which partially offset by repayment of short-term bank loans.

 

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3.  
FINANCIAL RISK MANAGEMENT (Continued)
  3.3  
Fair value estimation
     
The table below analyzes financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:
   
Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
   
Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).
   
Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
     
The following table presents the Group’s assets that are measured at fair value at December 31, 2009:
                                 
    Level 1     Level 2     Level 3     Total  
 
                               
Available-for-sale financial assets
                               
- Equity securities
    7,977                   7,977  
 
                       
     
The following table presents the Group’s assets that are measured at fair value at December 31, 2010:
                                 
    Level 1     Level 2     Level 3     Total  
 
                               
Available-for-sale financial assets
                               
- Equity securities
    6,214                   6,214  
 
                       
     
The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market price used for financial assets held by the Group is the current bid price. These instruments are included in level 1 and comprise primarily equity securities of Telefónica which are classified as available-for-sale.
     
During the years ended December 31, 2009 and 2010, there were no transfers of financial instruments between Level 1 and Level 2 of the fair value hierarchy.

 

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4.  
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
 
   
Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
  4.1  
Critical accounting estimates and assumptions
     
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates may not be equal to the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
  (a)  
Depreciation on property, plant and equipment
     
Depreciation on the Group’s property, plant and equipment is calculated using the straight-line method to allocate cost or revalued amounts up to residual values over the estimated useful lives of the assets. The Group reviews the useful lives and residual values periodically to ensure that the method and rates of depreciation are consistent with the expected pattern of realization of economic benefits from property, plant and equipment. The Group estimates the useful lives of property, plant and equipment based on historical experience, taking into account anticipated technological changes. If there are significant changes from previously estimated useful lives, the amount of depreciation expenses may change.
  (b)  
Revaluation of property, plant and equipment
     
Property, plant and equipment other than buildings and telecommunications equipment of the Mobile business (Note 2.6 (c)) is carried at revalued amounts, being the fair value at the date of revaluation, less subsequent accumulated depreciation and accumulated impairment losses. Such equipment is revalued on a depreciated replacement cost or open market value approach, as appropriate, by an independent valuer on a regular basis.
     
During the intervals of independent revaluations, management performs the analysis and assessment annually to determine whether the fair value of revalued property, plant and equipment are materially different from their carrying amounts. If the revalued amounts differ significantly from the carrying amounts of such equipment in the future, the carrying amounts will be adjusted to the revalued amounts. The key assumptions made to determine the revalued amounts include the estimated replacement costs and the estimated useful lives of the equipment. This will have an impact on the Group’s future results, since any subsequent decreases in valuation are first set off against increases on earlier valuations in respect of the same item and thereafter are charged as an expense to the statement of income and any subsequent increases are credited as income to the statement of income up to the amount previously charged to the statement of income and thereafter are credited to equity. In addition, the depreciation expenses in future periods will change as the carrying amounts of such equipment change as a result of the revaluation.
     
Most of the Group’s property, plant and equipment which are carried at revalued amounts were revaluated as of December 31, 2006 by an independent valuation firm. The directors of the Company consider the fair values of these revalued property, plant and equipment were not materially different from their carrying values as of December 31, 2010.

 

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4.  
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Continued)
  4.1  
Critical accounting estimates and assumptions (Continued)
  (c)  
Impairment of non-financial assets
     
The Group tests whether non-financial assets have suffered from any impairment, in accordance with the accounting policy stated in Note 2.11. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. Management estimates value in use based on estimated discounted pre-tax future cash flows of the cash generating unit at the lowest level to which the asset belongs. If there is any significant change in management’s assumptions, including discount rates or growth rates in the future cash flow projection, the estimated recoverable amounts of the non-financial assets and the Group’s results would be significantly affected. Such impairment losses are recognized in the statement of income, except where the asset is carried at valuation and the impairment loss does not exceed the revaluation surplus for that same asset, in which case the impairment loss is treated as a revaluation decrease and charged to the revaluation reserve. Accordingly, there will be an impact to the future results if there is a significant change in the recoverable amounts of the non-financial assets.
     
Impairment loss on property, plant and equipment of RMB12,494 was recognized for the year ended December 31, 2008. No impairment loss was recognized for the years ended December 31, 2008 and 2009. For details, please refer to Note 6.
  (d)  
Provision for doubtful debts
     
Accounts receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. The Group evaluates specific accounts receivable where there are indications that the receivable may be doubtful or is not collectible. The Group records a provision based on its best estimates to reduce the receivable balance to the amount that is expected to be collected. For the remaining receivable balances as of each reporting date, the Group makes a provision based on observable data indicating that there is a measurable decrease in the estimated future cash flows from the remaining balances. The Group makes such estimates based on its past experience, historical collection patterns, subscribers’ creditworthiness and collection trends. For general subscribers, the Group makes a full provision for receivables aged over 3 months, which is consistent with its credit policy with respect to the relevant subscribers.
     
The Group’s estimates described above are based on past experience, historical collection patterns, subscribers’ creditworthiness and collection trends. If circumstances change (e.g. due to factors including developments in the Group’s business and the external market environment), the Group may need to re-evaluate its policies on doubtful debts, and make additional provisions in the future.

 

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4.  
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Continued)
  4.1  
Critical accounting estimates and assumptions (Continued)
  (e)  
Income tax and deferred taxation
     
The Group estimates its income tax provision and deferred taxation in accordance with the prevailing tax rules and regulations, taking into account any special approvals obtained from relevant tax authorities and any preferential tax treatment to which it is entitled in each location or jurisdiction in which the Group operates. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
     
For temporary differences which give rise to deferred tax assets, the Group has assessed the likelihood that the deferred tax assets could be recovered. Major deferred tax assets relate to unrecognized revaluation surplus on property, plant and equipment under PRC regulations, impairment loss on property, plant and equipment, and provision for doubtful debts. Due to the effects of these temporary differences on income tax, the Group has recorded deferred tax assets amounting to approximately RMB4,840 million as of December 31, 2010 (2009: approximately RMB5,202 million). Deferred tax assets are recognized based on the Group’s estimates and assumptions that they will be recovered from taxable income arising from continuing operations in the foreseeable future.
     
The Group believes it has recorded adequate current tax provision and deferred taxes based on the prevailing tax rules and regulations and its current best estimates and assumptions. In the event that future tax rules and regulations or related circumstances change, adjustments to current and deferred taxation may be necessary which would impact the Group’s results or financial position.

 

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4.  
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Continued)
  4.2  
Critical judgments in applying the Group’s accounting policies
  (a)  
Recognition of upfront non-refundable revenue and direct incremental costs
     
The Group defers and amortizes upfront activation fees of SIM/USIM cards of the Mobile business over the expected customer service period of 3 years (2008: approximately 3 years; 2009: approximately 3 years). The related direct incremental costs of acquiring and activating mobile subscribers, including costs of SIM/USIM cards and commissions, are also capitalized and amortized over the same expected customer service period of 3 years.
     
The Group defers and amortizes upfront customer connection and installation fees of the Fixed-line business over the expected customer service period of 10 years (2008: approximately 10 years; 2009: approximately 10 years). The related direct incremental installation costs are deferred and amortized over the same expected customer service period of 10 years.
     
The Group only capitalizes costs to the extent that they will generate future economic benefits. The excess of the direct incremental costs over the corresponding upfront non-refundable revenue, if any, are expensed to the statement of income immediately.
     
The Group estimates the expected customer service period based on the historical customer retention experience and after factoring in the expected level of future competition, the risk of technological or functional obsolescence to the Group’s services, technological innovation, and the expected changes in the regulatory and social environment. If the Group’s estimate of the expected customer service period changes as a result of increased competition, changes in telecommunications technology or other factors, the amount and timing of recognition of the deferred revenue and direct incremental costs may change for future periods.

 

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4.  
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Continued)
  4.2  
Critical judgments in applying the Group’s accounting policies (Continued)
  (b)  
2009 Business Combination
     
The 2009 Business Combination was considered as a business combination of entities and business under common control, and has been accounted for using merger accounting under HKFRS, which is consistent with the predecessor values method under IFRS.
     
When applying the merger accounting/predecessor values method to account for 2009 Business Combination, the Group included all the assets and liabilities, revenue and expenses associated with the Target Business and the Telecommunications Networks in Southern China in the consolidated balance sheet and the consolidated statement of income throughout the periods presented. Pursuant to the agreement dated December 16, 2008, the 2009 Business Combination excluded the Telecommunications Networks in Southern China, which are retained by Unicom New Horizon and are leased from Unicom New Horizon to CUCL effective from January 2009. To reflect the economic substance that the Group has not taken on the risks and rewards associated with the property, plant and equipment and related assets and liabilities relating to the Fixed-line business in Southern China, the Group is deemed to have disposed of the assets not acquired and liabilities not assumed and has recorded the deemed disposal of these assets and liabilities as a distribution from reserves by the Group to Unicom Group upon the completion of the 2009 Business Combination effective from January 2009.
     
Subsequent to the completion of the 2009 Business Combination, the Group recorded leasing fees amounting to approximately RMB2.2 billion (2009: RMB2.0 billion) charged by Unicom New Horizon for the lease of the Telecommunications Networks in Southern China for the year ended December 31, 2010 (Note 4.2(c)).

 

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4.  
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Continued)
  4.2  
Critical judgments in applying the Group’s accounting policies (Continued)
  (c)  
Lease of Telecommunications Networks in Southern China
     
Pursuant to the Network Lease Agreement dated December 16, 2008 (Note 1(b)), Unicom New Horizon has the legal ownership of the Telecommunications Networks in Southern China. The Group believes it only bears the risks associated with the operation of the Fixed-line business in Southern China during the relevant leasing periods and is free from any ownership risks of the telecommunications networks, and the risks and rewards of ownership of the leased assets rest substantially with the lessor. In addition, at the inception of the Network Lease Agreement, there was a high degree of uncertainty related to the market condition and operating results of the fixed line business in Southern China. It was highly uncertain whether the Group would continue to lease the network in the future, and was also unable to determine whether or not it would exercise the purchase option in future. Given these uncertainties and due to the fact that the risks associated with the ownership of the Telecommunications Networks in Southern China substantially remained with Unicom New Horizon, accordingly, the Group accounted for the leasing of the Telecommunications Networks in Southern China as an operating lease. The operating lease expense was recorded in the consolidated statement of income for the years ended December 31, 2009 and 2010, but the carrying value of the Telecommunications Networks in Southern China and the related liabilities were not reflected in the consolidated balance sheets as of December 31, 2009 and 2010.
     
At the beginning of each lease term, the Group assesses the appropriate classification based on the relevant factors and circumstances at that time. The 2011-2012 Network Lease Agreement has a term of two years expiring on December 31, 2012 on the same terms and conditions as the Network Lease Agreement, except that the annual fee payable by CUCL for such lease for the two years ending December 31, 2011 and 2012 is RMB2.4 billion and RMB2.6 billion, respectively. At the time of entering the 2011-2012 Network Lease Agreement, the Group still believed the uncertainties of the fixed line business in Southern China continue to exist, particularly due to the fact that (i) the growth of the fixed line business in Southern China was not significant; (ii) the uncertainty of the future success of the Fixed-line business in Southern China arising from keen market competition; and (iii) the uncertainty in the future changes in technology, technological standards and government regulatory environment. Accordingly, at the inception of the 2011-2012 Network Lease Agreement, the Group was still unable to determine whether it would renew the lease after the initial two-year lease term or whether it would exercise the purchase option. As a result, the Group considered the risks associated with the ownership of the Telecommunications Networks in Southern China still substantially remain with Unicom New Horizon, and concluded the leasing of Telecommunications Networks in Southern China in accordance with the 2011-2012 Network Lease Agreement will be accounted for as an operating lease.

 

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4.  
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Continued)
  4.2  
Critical judgments in applying the Group’s accounting policies (Continued)
  (d)  
Impairment of available-for-sale financial assets
     
The Group assesses at the end of each reporting period whether there is objective evidence that available-for-sale financial assets are impaired. For equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is evidence that the assets are impaired. If available-for-sale equity investments are impaired, the accumulated reduction in fair value will be reclassified from equity to the statement of income as impairment loss of available-for-sale financial assets. The Group considers all available relevant factors, including the fair value of the shares, the period of the decline of fair value, exchange rate and share price volatility and future business prospects, when determining whether there is any impairment.
     
As of December 31, 2010, the Group’s available-for-sale financial assets are principally the equity investment in Telefónica (Refer to Note 33 for details). The net decline in fair value during 2010 was partially due to the depreciation of Euro against RMB of approximately 10% in 2010. In addition, the quoted Euro market price of Telefónica shares experienced fluctuations as a result of the credit rating downgrades for certain Euro zone countries in the middle of 2010. The Euro share price of Telefónica increased and exceeded the initial Euro share value in a certain period during the third quarter of 2010 but it had decreased on a net basis by approximately 13% for the year 2010. Subsequently, during the period from January 1, 2011 to May 24, 2011, there was an appreciation of Euro against RMB of approximately 4%, and a decrease in share price in Euro of approximately 2%, as compared to December 31, 2010.
     
In addition, the Group received cash dividends of RMB209 million and RMB480 million from this strategic investment for the years ended December 31, 2009 and 2010, respectively. Based on the judgment of the Group, the observed decline in the fair value below the cost of the equity investments in Telefónica was not considered to be significant or prolonged, in light of the ongoing exchange rate and share price volatility, the solid operating results and business prospects of Telefónica, its regular dividend distribution and strategic relationships with the Group, and therefore did not indicate any impairment as of December 31, 2010.

 

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5.  
SEGMENT INFORMATION
   
The CODM has been identified as the Board of Directors (“the BOD”) of the Company which regularly reviews the Group’s internal reporting in order to assess performance and allocate resources, and determines the operating segments based on these reports. The BOD considers the business from the provision of services perspective instead of the geographic perspective. Accordingly, the Group’s continuing operations comprise two operating segments based on the various types of telecommunications services, mainly provided to customers in Mainland China.
   
The major operating segments of the Group are classified as follows:
   
Continuing operations:
   
Mobile business — the provision of GSM and WCDMA cellular and related services in all 31 provinces, municipalities and autonomous regions in Mainland China;
   
Fixed-line business — the provision of fixed-line telecommunications and related services, domestic and international data and Internet related services, and domestic and international long distance and related services in all 31 provinces, municipalities and autonomous regions in Mainland China.
   
Discontinued operations:
   
CDMA business — the provision of the CDMA telephone and related services, through a leasing arrangement for the CDMA network capacity from Unicom New Horizon. The CDMA business was disposed of in October 2008.
   
The CODM evaluates results of each operating segment based on revenue and costs that are directly attributable to the operating segments. The unallocated amounts primarily represent corporate and shared service expenses that are not directly allocated to one of the aforementioned operating segments. The unallocated amounts also included other statement of income items such as employee benefit expenses, interest income, income tax expenses, finance costs and other income, which cannot be directly identified to specific operating segments. Segment assets primarily comprise property, plant and equipment, other assets, inventories and receivables. Segment liabilities primarily comprise operating liabilities.
   
Revenues between segments are carried out on terms comparable to those transactions conducted with third parties or at standards promulgated by relevant government authorities. Revenue from external customers reported to the CODM is measured in a manner consistent with that in the consolidated statement of income.

 

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5.  
SEGMENT INFORMATION (Continued)
  5.1  
Operating Segments (Continued)
                                                                 
    2008  
    Continuing operations     Discontinued operations
(up to effective date of disposal)
       
                            Reconciling items                      
    Mobile     Fixed-line             Unallocated             Total            
    business     business     Subtotal     amounts     Eliminations     continuing operations     CDMA business     Total  
 
                                                               
Telecommunications service revenue
    64,240       88,254       152,494       337             152,831       18,951       171,782  
Information communication technology services and other revenue
    359       4,339       4,698       364             5,062       92       5,154  
Sales of telecommunications products
    532       1,362       1,894       5             1,899       3,253       5,152  
 
                                               
Total revenue from external customers
    65,131       93,955       159,086       706             159,792       22,296       182,088  
Intersegment revenue
    265       3,407       3,672       1,214       (4,886 )                  
 
                                               
Total revenue
    65,396       97,362       162,758       1,920       (4,886 )     159,792       22,296       182,088  
 
                                                               
Interconnection charges
    (10,753 )     (5,776 )     (16,529 )           3,491       (13,038 )     (1,661 )     (14,699 )
Depreciation and amortization
    (18,551 )     (31,668 )     (50,219 )     (1,628 )           (51,847 )     (411 )     (52,258 )
Networks, operations and support expenses
    (2,279 )     (5,757 )     (8,036 )     (10,873 )     173       (18,736 )     (7,777 )     (26,513 )
Employee benefit expenses
                      (20,967 )     209       (20,758 )     (1,600 )     (22,358 )
Other operating expenses
    (9,054 )     (14,150 )     (23,204 )     (15,746 )     953       (37,997 )     (8,966 )     (46,963 )
Finance costs
                      (3,983 )     714       (3,269 )     (6 )     (3,275 )
Interest income
                      979       (714 )     265       10       275  
Impairment loss on property, plant and equipment
          (12,494 )     (12,494 )                 (12,494 )           (12,494 )
Other income — net
                      2,141             2,141       22       2,163  
 
                                               
 
                                                               
Segment income/(loss) before income tax
    24,759       27,517       52,276       (48,157 )     (60 )     4,059       1,907       5,966  
 
                                                     
Income tax expenses
                                            (1,828 )     (469 )     (2,297 )
 
                                                               
Gain on disposal of the CDMA business
                                                  26,135       26,135  
 
                                                         
 
                                                               
Net income
                                            2,231       27,573       29,804  
 
                                                         
 
                                                               
Attributable to:
                                                               
Owners of the parent
                                            2,232       27,572       29,804  
Non-controlling interests
                                            (1 )     1        
 
                                                         
 
                                                               
 
                                            2,231       27,573       29,804  
 
                                                         
 
                                                               
Other information:
                                                               
Provision for doubtful debts
    (1,371 )     (1,639 )     (3,010 )     (15 )           (3,025 )     (383 )     (3,408 )
 
                                               
 
                                                               
Capital expenditures for segment assets (a)
    33,852       37,774       71,626       5,471             77,097             77,097  
 
                                               

 

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5.  
SEGMENT INFORMATION (Continued)
  5.1  
Operating Segments (Continued)
                                                 
    2009  
                            Reconciling items        
    Mobile     Fixed-line             Unallocated              
    business     business     Subtotal     amounts     Eliminations     Total  
 
                                               
Telecommunications service revenue
    69,769       79,549       149,318       275             149,593  
Information communication technology services and other revenue
    252       1,611       1,863       326             2,189  
Sales of telecommunications products
    1,970       193       2,163                   2,163  
 
                                   
Total revenue from external customers
    71,991       81,353       153,344       601             153,945  
Intersegment revenue
    219       4,237       4,456       1,587       (6,043 )      
 
                                   
Total revenue
    72,210       85,590       157,800       2,188       (6,043 )     153,945  
 
                                               
Interconnection charges
    (13,104 )     (4,292 )     (17,396 )           4,441       (12,955 )
Depreciation and amortization
    (17,847 )     (28,264 )     (46,111 )     (1,505 )     29       (47,587 )
Networks, operations and support expenses
    (2,496 )     (7,780 )     (10,276 )     (13,471 )     19       (23,728 )
Employee benefit expenses
                      (22,104 )     173       (21,931 )
Other operating expenses
    (11,671 )     (8,783 )     (20,454 )     (17,465 )     1,196       (36,723 )
Finance costs
                      (1,214 )     178       (1,036 )
Interest income
                      269       (178 )     91  
Realized gain on changes in fair value of derivative financial instrument
                      1,239             1,239  
Other income — net
                      962             962  
 
                                   
 
                                               
Segment income/(loss) before income tax
    27,092       36,471       63,563       (51,101 )     (185 )     12,277  
 
                                     
Income tax expenses
                                            (2,721 )
 
                                             
 
                                               
Net income
                                            9,556  
 
                                             
 
                                               
Attributable to:
                                               
Owners of the parent
                                            9,556  
Non-controlling interests
                                             
 
                                             
 
                                               
 
                                            9,556  
 
                                             
 
                                               
Other information:
                                               
Provision for doubtful debts
    (1,494 )     (858 )     (2,352 )     (3 )           (2,355 )
 
                                   
 
                                               
Capital expenditures for segment assets (a)
    56,984       46,494       103,478       8,996             112,474  
 
                                   

 

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5.  
SEGMENT INFORMATION (Continued)
  5.1  
Operating Segments (Continued)
                                                 
    2010  
                            Reconciling items        
    Mobile     Fixed-line             Unallocated              
    business     business     Subtotal     amounts     Eliminations     Total  
 
                                               
Telecommunications service revenue
    82,362       78,896       161,258       737             161,995  
Information communication technology services and other revenue
    15       1,046       1,061       955             2,016  
Sales of telecommunications products
    7,173       114       7,287                   7,287  
 
                                   
Total revenue from external customers
    89,550       80,056       169,606       1,692             171,298  
Intersegment revenue
    205       4,233       4,438       742       (5,180 )      
 
                                   
Total revenue
    89,755       84,289       174,044       2,434       (5,180 )     171,298  
 
                                               
Interconnection charges
    (14,452 )     (3,706 )     (18,158 )           4,431       (13,727 )
Depreciation and amortization
    (23,358 )     (28,830 )     (52,188 )     (2,317 )     72       (54,433 )
Networks, operations and support expenses
    (3,102 )     (9,409 )     (12,511 )     (13,876 )     4       (26,383 )
Employee benefit expenses
                      (23,517 )     190       (23,327 )
Other operating expenses
    (22,056 )     (8,491 )     (30,547 )     (18,032 )     310       (48,269 )
Finance costs
                      (1,985 )     236       (1,749 )
Interest income
                      378       (236 )     142  
Other income — net
                      1,221             1,221  
 
                                   
 
                                               
Segment income/(loss) before income tax
    26,787       33,853       60,640       (55,694 )     (173 )     4,773  
 
                                     
Income tax expenses
                                            (922 )
 
                                             
 
                                               
Net income
                                            3,851  
 
                                             
 
                                               
Attributable to:
                                               
Owners of the parent
                                            3,851  
Non-controlling interests
                                             
 
                                             
 
                                               
 
                                            3,851  
 
                                             
 
                                               
Other information:
                                               
Provision for doubtful debts
    (1,927 )     (649 )     (2,576 )     (7 )           (2,583 )
 
                                   
 
                                               
Capital expenditures for segment assets (a)
    29,620       34,393       64,013       6,176             70,189  
 
                                   

 

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5.  
SEGMENT INFORMATION (Continued)
  5.1  
Operating Segments
                                                 
    December 31, 2009  
            Fixed-             Reconciling items        
    Mobile     line             Unallocated              
    business     business     Subtotal     amounts     Eliminations     Total  
 
                                               
Total segment assets
    170,577       213,172       383,749       34,470       (1,174 )     417,045  
 
                                   
Total segment liabilities
    74,411       51,066       125,477       85,948       (847 )     210,578  
 
                                   
                                                 
    December 31, 2010  
            Fixed-             Reconciling items        
    Mobile     line             Unallocated              
    business     business     Subtotal     amounts     Eliminations     Total  
 
                                               
Total segment assets
    170,839       225,769       396,608       46,446       (1,601 )     441,453  
 
                                   
Total segment liabilities
    74,141       48,386       122,527       114,184       (1,099 )     235,612  
 
                                   
(a)  
Capital expenditures under “unallocated amounts” represent capital expenditures on common facilities, which benefit all operating segments.

 

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6.  
PROPERTY, PLANT AND EQUIPMENT
 
   
The movement of property, plant and equipment for the years ended December 31, 2009 and 2010 is as follows:
                                                         
    2009  
                            Office                    
                    Tele-     furniture,                    
            Tele-     communications     fixtures,                    
            communications     equipment of     motor                    
            equipment of     Fixed-line     vehicles and     Leasehold     Construction-        
    Buildings     Mobile business     business     others     improvements     in-progress     Total  
Cost or valuation:
                                                       
Beginning of year
    48,160       163,279       382,091       39,035       1,975       44,995       679,535  
Additions
    644       430       1,518       503       208       109,171       112,474  
Transfer from CIP
    3,329       54,031       24,565       3,674       271       (85,870 )      
Disposals
    (297 )     (10,817 )     (2,203 )     (957 )     (251 )           (14,525 )
Effect of 2009 Business Combination
    (2,472 )           (36,948 )     (841 )     (317 )     (4,124 )     (44,702 )
 
                                         
 
                                                       
End of year
    49,364       206,923       369,023       41,414       1,886       64,172       732,782  
 
                                         
 
                                                       
Representing:
                                                       
At cost
    49,364       206,923                         64,172       320,459  
At valuation
                369,023       41,414       1,886             412,323  
 
                                         
 
                                                       
 
    49,364       206,923       369,023       41,414       1,886       64,172       732,782  
 
                                         
 
                                                       
Accumulated depreciation and impairment:
                                                       
Beginning of year
    (13,561 )     (95,942 )     (230,949 )     (22,406 )     (1,021 )     (110 )     (363,989 )
Charge for the year
    (1,859 )     (12,286 )     (27,693 )     (4,077 )     (327 )           (46,242 )
Disposals
    286       10,387       1,969       930       251             13,823  
Effect of 2009 Business Combination
    476             13,467       416       188       78       14,625  
Impairment transfer out
                151                   7       158  
 
                                         
 
                                                       
End of year
    (14,658 )     (97,841 )     (243,055 )     (25,137 )     (909 )     (25 )     (381,625 )
 
                                         
 
                                                       
Net book value:
                                                       
End of year
    34,706       109,082       125,968       16,277       977       64,147       351,157  
 
                                         
 
                                                       
Beginning of year
    34,599       67,337       151,142       16,629       954       44,885       315,546  
 
                                         

 

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6.  
PROPERTY, PLANT AND EQUIPMENT (Continued)
                                                         
    2010  
                            Office                    
                    Tele-     furniture,                    
            Tele-     communications     fixtures,                    
            communications     equipment of     motor                    
            equipment of     Fixed-line     vehicles and     Leasehold     Construction-        
    Buildings     Mobile business     business     others     improvements     in-progress     Total  
Cost or valuation:
                                                       
Beginning of year
    49,364       206,923       369,023       41,414       1,886       64,172       732,782  
Additions
    147       536       1,260       82       114       65,778       67,917  
Transfer from CIP
    4,336       33,505       30,199       2,087       578       (70,705 )      
Disposals
    (65 )     (1,360 )     (2,142 )     (689 )     (257 )           (4,513 )
 
                                         
 
                                                       
End of year
    53,782       239,604       398,340       42,894       2,321       59,245       796,186  
 
                                         
 
                                                       
Representing:
                                                       
At cost
    53,782       239,604                         59,245       352,631  
At valuation
                398,340       42,894       2,321             443,555  
 
                                         
 
                                                       
 
    53,782       239,604       398,340       42,894       2,321       59,245       796,186  
 
                                         
 
                                                       
Accumulated depreciation and impairment:
                                                       
Beginning of year
    (14,658 )     (97,841 )     (243,055 )     (25,137 )     (909 )     (25 )     (381,625 )
Charge for the year
    (2,075 )     (16,345 )     (29,519 )     (4,315 )     (408 )           (52,662 )
Disposals
    62       1,236       1,940       656       257             4,151  
Impairment transfer out
                1                   9       10  
 
                                         
 
                                                       
End of year
    (16,671 )     (112,950 )     (270,633 )     (28,796 )     (1,060 )     (16 )     (430,126 )
 
                                         
 
                                                       
Net book value:
                                                       
End of year
    37,111       126,654       127,707       14,098       1,261       59,229       366,060  
 
                                         
 
                                                       
Beginning of year
    34,706       109,082       125,968       16,277       977       64,147       351,157  
 
                                         

 

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6.  
PROPERTY, PLANT AND EQUIPMENT (Continued)
   
The last valuation was performed as of December 31, 2006 by an independent valuation firm on a depreciated replacement cost basis. As of December 31, 2010, the carrying value of all the revalued property, plant and equipment would have been approximately RMB147,148 million (2009: approximately RMB149,960 million) had they been stated at cost less accumulated depreciation and accumulated impairment losses. The directors of the Company consider the fair values of these revalued property, plant and equipment were not materially different from their carrying values as of December 31, 2010.
   
As of December 31, 2010, the net book value of assets held under finance leases was approximately RMB219 million (2009: approximately RMB128 million).
   
For the year ended December 31, 2010, interest expense of approximately RMB804 million (2008: approximately RMB430 million; 2009: approximately RMB806 million) was capitalized to construction-in-progress. The capitalized borrowing rate represents the cost of capital for raising the related borrowings externally and varied from 3.60% to 4.56% for the year ended December 31, 2010 (2008: 3.51% to 6.80%; 2009: 4.27% to 4.80%).
   
For the year ended December 31, 2010, the Group recognized a loss on disposal of property, plant and equipment of approximately RMB17 million (2008: a loss of approximately RMB273 million; 2009: a gain of approximately RMB79 million).
   
After the completion of the merger with China Netcom (Note 1) in 2008, management reconsidered the Group’s strategy regarding the Personal Handyphone System (“PHS”) services business at the end of 2008 and expected to gradually phase out this operation over the subsequent 3 years. Accordingly, it was expected that the economic performance of PHS services business would deteriorate significantly. The test for impairment was conducted for the PHS services related equipment, after considering the expected significant decline in revenue and profitability in 2009 and onwards. The impaired PHS services related equipment was written down to their recoverable values, which was determined based on their estimated value in use. Estimated value in use was determined based on the present value of estimated future net cash flows expected to arise from the continuing use of the PHS services related equipment. In estimating the future net cash flows, the Group has made key assumptions and estimates on the appropriate discount rate of 15%, the period covered by the cash flow forecast of 3 years, the future loss of customers at an annual rate of decline ranging from 60% to 80%, and the decrease in average revenue per subscriber at an annual rate of decline of 15%.
   
These assumptions and estimates are made after considering the historical trends, the prevailing market trends, expected remaining life of the PHS services business and the physical conditions of the PHS services related equipment. Based on the above, the Group recognized an impairment loss on PHS services related equipment of approximately RMB11,837 million for the year ended December 31, 2008.
   
As of December 31, 2009 and 2010, management updated the impairment analysis for the PHS services related equipment and concluded there was no need for additional recognition or reversal of the impairment provision on PHS services related equipment.

 

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7.  
LEASE PREPAYMENTS
   
The Group’s long-term prepayment for land use rights represents prepaid operating lease payments for land use rights in Mainland China and their net book value is analyzed as follows:
                 
    2009     2010  
Held on:
               
Leases of between 10 to 50 years
    7,653       7,533  
Leases of less than 10 years
    76       74  
 
           
 
               
 
    7,729       7,607  
 
           
   
For the year ended December 31, 2010, the long-term prepayment for land use rights expensed in the statement of income amounted to approximately RMB249 million (2008: approximately RMB253 million; 2009: approximately 224 million).
8.  
GOODWILL
   
Goodwill arising from the acquisitions of Unicom New Century Telecommunications Co., Ltd. and Unicom New World Telecommunications Co., Ltd. by the Group in 2002 and 2003, respectively, represented the excess of the purchase consideration over the Group’s shares of the fair values of the separately identifiable net assets acquired prior to the adoption of HKFRS and AG 5 in 2005.
   
Goodwill is allocated to the Group’s cash-generating units (“CGU”). As of December 31, 2009 and 2010, all the carrying value of goodwill was attributable to the Mobile business. The recoverable amount of goodwill is determined based on value in use calculations. These calculations use pre-tax cash flow projections for 5 years based on financial budgets approved by management, including revenue annual growth rate of 6% and the applicable discount rate of 12%. Management determined expected operation results based on past performance and its expectations in relation to market developments. The expected growth rates used are consistent with the forecasts of the operating segments. The discount rate used is pre-tax and reflects specific risks relating to the CGU. Based on management’s assessment results, there was no impairment of goodwill as of December 31, 2009 and 2010 and no reasonable change to the assumptions would lead to an impairment charge.

 

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9.  
TAXATION
   
Hong Kong income tax has been provided at the rate of 16.5% (2008: 16.5%; 2009: 16.5%) on the estimated assessable income for the year. Taxation on income from outside Hong Kong has been calculated on the estimated assessable income for the year at the rates of taxation prevailing in the countries in which the Group operates, the Company’s subsidiaries mainly operated in the PRC and the applicable standard enterprise income tax rate is 25% (2008: 25%; 2009: 25%).
                         
    2008     2009     2010  
 
                       
Provision for income tax on the estimated taxable income for the year
                       
- Hong Kong
    24       45       18  
- Outside Hong Kong
    4,661       2,282       328  
 
                 
 
    4,685       2,327       346  
 
                       
Deferred taxation
    (2,857 )     394       576  
 
                 
 
                       
Income tax expense
    1,828       2,721       922  
 
                 
   
Reconciliation between applicable statutory tax rate and the effective tax rate:
                                 
    Note     2008     2009     2010  
 
                               
Applicable PRC statutory tax rate
            25.0 %     25.0 %     25.0 %
Non-deductible expenses
            5.2 %     1.7 %     1.7 %
Tax effect of 2009 Business Combination
    (a)       26.1 %            
Non-taxable income
                               
- Upfront installation fees arising from Fixed-line business
            (7.8 %)     (1.4 %)     (1.9 %)
Impact of PRC preferential tax rates and tax holiday
            (2.1 %)     (1.1 %)     (2.1 %)
Utilization of previously unrecognized tax losses
                  (0.6 %)     (1.7 %)
Others
            (1.4 %)     (1.4 %)     (1.7 %)
 
                         
 
                               
Effective tax rate
            45.0 %     22.2 %     19.3 %
 
                         
(a):  
The income tax of Fixed-line business in Southern China, local access telephone business in Tianjin Municipality and New Guoxin was reported on a consolidated basis with Netcom Group and Unicom Group prior to the 2009 Business Combination and no separate tax returns were prepared. No income tax expenses/benefits were therefore recorded for the Fixed-line Business in Southern China, local access telephone business in Tianjin Municipality and New Guoxin in 2008 or prior years in accounting for the Fixed-line business in Southern China, local access telephone business in Tianjin Municipality and New Guoxin using merger accounting/predecessor values method.

 

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9.  
TAXATION (Continued)
   
The analysis of deferred tax assets and deferred tax liabilities are as follow:
                 
    2009     2010  
Deferred tax assets:
               
- Deferred tax asset to be recovered after 12 months
    3,254       4,364  
- Deferred tax asset to be recovered within 12 months
    2,913       1,211  
 
           
 
               
 
    6,167       5,575  
 
           
Deferred tax liabilities:
               
- Deferred tax liabilities to be settled after 12 months
    (699 )     (505 )
- Deferred tax liabilities to be settled within 12 months
    (266 )     (230 )
 
           
 
               
 
    (965 )     (735 )
 
           
 
               
Net deferred tax assets after offsetting
    5,202       4,840  
 
           
 
               
Deferred tax assets:
               
- Deferred tax asset to be recovered after 12 months
    6       18  
- Deferred tax asset to be recovered within 12 months
    59       7  
 
           
 
               
 
    65       25  
 
           
Deferred tax liabilities:
               
- Deferred tax liabilities to be settled after 12 months
    (16 )     (43 )
- Deferred tax liabilities to be settled within 12 months
    (294 )     (4 )
 
           
 
               
 
    (310 )     (47 )
 
           
 
               
Net deferred tax liabilities after offsetting
    (245 )     (22 )
 
           
   
There were no material unrecognized deferred tax assets and liabilities as of December 31, 2009 and 2010.

 

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9.  
TAXATION (Continued)
   
The movement of the net deferred tax assets/liabilities is as follows:
                         
    2008     2009     2010  
Net deferred tax assets after offsetting:
                       
- Beginning of year
    2,473       5,334       5,202  
- Deferred tax credited/(charged) to the statement of income
                       
- Continuing operations
    2,856       (132 )     (519 )
- Discontinued operations
    (35 )            
- Deferred tax credited to other comprehensive income
    46             157  
- Disposal of discontinued operation
    (6 )            
 
                 
 
                       
- End of year
    5,334       5,202       4,840  
 
                 
 
                       
Net deferred tax liabilities after offsetting:
                       
- Beginning of year
    (18 )     (16 )     (245 )
- Deferred tax credited/(charged) to the statement of income
    1       (262 )     (57 )
- Deferred tax credited to other comprehensive income
    1       33       280  
 
                 
 
                       
- End of year
    (16 )     (245 )     (22 )
 
                 

 

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9.  
TAXATION (Continued)
   
Deferred taxation as of year-end represents the taxation effect of the following temporary differences, taking into consideration the offsetting of balances related to the same tax authority:
                         
    Note     2009     2010  
 
                       
Net deferred tax assets after offsetting:
                       
Deferred tax assets:
                       
Provision for doubtful debts
            1,064       1,047  
Impairment loss on property, plant and equipment
            2,034       1,093  
Unrecognized revaluation surplus on property, plant and equipment under PRC regulations
    i       1,917       1,835  
Revaluation deficit on property, plant and equipment
    ii       116       67  
Accruals of expenses not yet deductible for tax purpose
            418       709  
Deferral and amortization of upfront non-refundable revenue
            142       126  
Deferred revenue on subscriber points reward programme
            48       63  
Deferred revenue in relation to the provision of supporting services upon the disposal of the CDMA business
            32       28  
Accruals of retirement benefits
            25       13  
Unrealized profit for the inter-company transactions
            214       224  
Deductible tax losses
                  203  
Changes in fair value on available-for-sale financial assets
    33             467  
Others
            157       42  
 
                   
 
                       
 
            6,167       5,917  
 
                   
Deferred tax liabilities:
                       
Capitalization and amortization of direct incremental costs
            (108 )     (106 )
Capitalized interest already deducted for tax purpose
            (528 )     (392 )
Revaluation surplus on property, plant and equipment
    ii       (299 )     (242 )
Realized gain on changes in fair value of derivative financial instrument
    33             (310 )
Others
            (30 )     (27 )
 
                   
 
                       
 
            (965 )     (1,077 )
 
                   
 
                       
 
            5,202       4,840  
 
                   
Net deferred tax liabilities after offsetting:
                       
Deferred tax assets:
                       
Deductible tax losses carried forward
            37        
Changes in fair value on available-for-sale financial assets
    33       41        
Others
            28       25  
 
                   
 
            106       25  
 
                   
 
                       
Deferred tax liabilities:
                       
Realized gain on changes in fair value of derivative financial instrument
    33       (310 )      
Changes in fair value on available-for-sale financial assets
            (23 )     (12 )
Accelerated depreciation for tax purpose
            (18 )     (35 )
 
                   
 
            (351 )     (47 )
 
                   
 
                       
 
            (245 )     (22 )
 
                   

 

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9.  
TAXATION (Continued)
  (i)  
The prepayments for the leasehold land and buildings held by China Netcom were revalued for PRC tax purposes as of December 31, 2003 and 2004. However, the resulting revaluations of the prepayments for the leasehold land and buildings were not recognized under IFRSs/HKFRSs. Accordingly, deferred tax assets were recorded by the Group under IFRSs/HKFRSs.
 
  (ii)  
The property, plant and equipment other than buildings and telecommunications equipment of Mobile business are carried at revalued amount under IFRSs/HKFRSs, which are not used for PRC tax reporting purposes. As a result, the Group recorded the deferred tax assets or liabilities arising from the revaluation deficit or surplus under IFRSs/HKFRSs.
10.  
AVAILABLE-FOR-SALE FINANCIAL ASSETS
                         
    Note     2009     2010  
 
                       
Equity securities issued by corporates
            7,977       6,214  
 
                   
 
                       
Analyzed by place of listing:
                       
Listed in the PRC
            188       127  
Listed outside the PRC
    33       7,789       6,087  
 
                 
 
                       
 
            7,977       6,214  
 
                   
   
For the year ended December 31, 2010, changes in fair value of available-for-sale financial assets amounted to approximately RMB1,777 million (2008: approximately RMB188 million; 2009: approximately RMB71 million). The changes in fair value, net of tax impact of approximately RMB437 million (2008: approximately RMB47 million; 2009: approximately RMB33 million) were recorded in the consolidated statement of comprehensive income.
11.  
SUBSIDIARIES
   
As of December 31, 2010, the details of the Company’s subsidiaries are as follows:
                         
        Percentage        
    Place and date of   of equity   Particulars   Principal activities
    incorporation and   interests held   of issued   and place of
Name   nature of legal entity   Direct Indirect   share capital   operation
 
                       
China United Network Communications Corporation Limited (merge with China Netcom (Group) Company Limited (“CNC China”) on January 1, 2009)
  The PRC,
April 21, 2000,
lilimited liability company
    100 %     RMB
138,091,677,828
  Telecommunications
operation in the
PRC
 
                       
China Netcom Group
Corporation (Hong
Kong) Limited
  Hong Kong,
October 22, 1999,
limited company
    100 %     6,699,197,200 ordinary shares,
USD0.04 each
  Investment holding
in Hong Kong

 

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11.  
SUBSIDIARIES (Continued)
                             
        Percentage          
    Place and date of   of equity     Particulars   Principal activities
    incorporation and   interests held     of issued   and place of
Name   nature of legal entity   Direct Indirect     share capital   operation
 
                           
Unicom New World (BVI) Limited
  British Virgin
Islands (“BVI”),
November 5, 2003,
limited company
    100 %         1,000 shares,
HKD1 each
  Dormant
 
                           
China Unicom (Hong
Kong) Operations
Limited
  Hong Kong,
May 24, 2000,
limited company
    100 %         60,100,000 ordinary
shares,
HKD1 each
  Telecommunications
service in Hong
Kong
 
                           
China Netcom (Hong
Kong) Operations
Limited
  Hong Kong,
May 2, 2001,
limited company
          100 %   1,000 ordinary
shares,
HKD1 each
  Dormant
 
                           
China Unicom
(Americas)
Operations Limited
  The United States of America (the “USA”),
May 24, 2002, limited company
    100 %         5,000 shares,
USD100 each
  Telecommunications
service in the USA
 
                           
China Unicom
(Europe) Operations
Limited
  United Kingdom,
November 8, 2006,
limited company
    100 %         4,861,000 shares,
GBP1 each
  Telecommunications
operation in the
United Kingdom
 
                           
China Unicom
(Japan) Operations
Corporation
  Japan,
January 25, 2007,
limited company
    100 %         1,000 shares,
JPY366,000 each
  Telecommunications
operation in Japan
 
                           
China Unicom
(Singapore)
Operations Pte
Limited
  Singapore,
August 5, 2009,
limited company
    100 %         1 share,
USD1 each and 15,000,000 shares,
RMB1 each
  Telecommunications
operation in
Singapore

 

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11.  
SUBSIDIARIES (Continued)
                             
        Percentage          
    Place and date of   of equity     Particulars   Principal activities
    incorporation and   interests held     of issued   and place of
Name   nature of legal entity   Direct Indirect     share capital   operation
 
                           
Billion Express Investments Limited (“Billion Express”)
  British Virgin Islands,
August 15, 2007,
limited company
    100 %         1 share,
USD1 each
  Investment holding and financing subsidiary of the Company
 
                           
China Unicom Limited
  Hong Kong,
August 31, 2007,
limited company
    100 %         2 ordinary shares,
HKD1 each
  Dormant
 
                           
Unicom Vsens
Telecommunications
Company Limited
  The PRC,
August 19, 2008,
limited liability company
          100 %   RMB
500,000,000
  Sales of handsets, telecommunication equipment and provision of technical services in the PRC
 
                           
China Unicom Mobile
Network Company
Limited
  The PRC,
December 31, 2008,
limited liability company
          100 %   RMB
500,000,000
  Dormant
 
                           
China Unicom System
Integration Limited
Corporation
  The PRC,
April 30, 2006,
limited liability company
          100 %   RMB
550,000,000
  Provision of information communications technology services in the PRC
 
                           
China Unicom
Broadband Online
Limited Corporation
  The PRC,
March 29, 2006,
limited liability company
          100 %   RMB
30,000,000
  Provision of internet information services and value-added telecommunications services in the PRC
 
                           
Beijing Telecommunications Planning and Designing Institute Corporation Limited
  The PRC,
June 1, 2007
limited liability company
          100 %   RMB
264,227,115
  Provision of telecommunications network construction, planning and technical consulting services in the PRC

 

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11.  
SUBSIDIARIES (Continued)
                         
        Percentage          
    Place and date of   of equity     Particulars   Principal activities
    incorporation and   interests held     of issued   and place of
Name   nature of legal entity   Direct Indirect     share capital   operation
 
                       
Zhongrong
Information Service
Limited Corporation
  The PRC,
March 31, 2008
limited liability company
      100 %   RMB
50,000,000
  Provision of information consulting and technology development outsourcing services in the PRC
 
                       
China Information
Technology
Designing &
Consulting
Institute Company
Limited
  The PRC,
September 27, 2008
limited liability company
      100 %   RMB
430,000,000
  Provision of consultancy, survey, design and contract services relating to information projects and construction projects in the telecommunications industry in the PRC
 
                       
Unicom Xingye Science and Technology Trade Company Limited
  The PRC,
October 30, 2000,
limited liability company
      100 %   RMB
30,000,000
  Provision of technical support, manufacturing, research and design services for SIM/USIM cards and other telecommunication cards in the PRC
 
                       
New Guoxin Telecom Corporation of China Unicom
  The PRC,
September 17, 1998,
limited liability company
      100 %   RMB
6,825,087,800
  Provision of customer services in the PRC

 

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11.      SUBSIDIARIES (Continued)
                         
        Percentage          
    Place and date of   of equity     Particulars   Principal activities
    incorporation and   interests held     of issued   and place of
Name   nature of legal entity   Direct Indirect     share capital   operation
 
                       
Huaxia P&T Project Consultation and Management Company Limited
  The PRC,
March 5, 1998,
limited liability company
      100 %   RMB
10,000,000
  Provision of project consultation and management services in the PRC
 
                       
Zhengzhou Kaicheng
Industrial Company
Limited
  The PRC,
December 21, 2005,
limited liability company
      100 %   RMB
2,200,000
  Provision of property management services in the PRC
 
                       
Zhengzhou Information and Design Technology Publishing Company
  The PRC,
February 17, 2003,
limited liability company
      100 %   RMB
300,000
  Provision of magazine publishing services in the PRC

 

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12.  
OTHER ASSETS
                 
    2009     2010  
 
               
Direct incremental costs for activating mobile subscribers
    433       423  
Installation costs of Fixed-line business
    1,732       1,309  
Prepaid rental for premises and leased lines
    3,454       3,521  
Purchased software
    3,954       4,440  
Others
    2,023       2,060  
 
           
 
               
 
    11,596       11,753  
 
           
13.  
INVENTORIES AND CONSUMABLES
                 
    2009     2010  
 
               
Handsets and other customer end products
    1,637       2,461  
Telephone cards
    264       308  
Consumables
    449       860  
Others
    62       99  
 
           
 
               
 
    2,412       3,728  
 
           

 

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14.  
ACCOUNTS RECEIVABLE, NET
                 
    2009     2010  
 
               
Accounts receivable for Mobile business
    3,850       5,022  
Accounts receivable for Fixed-line business
    8,783       8,042  
Accounts receivable for other business
    262       202  
 
           
Sub-total
    12,895       13,266  
 
               
Less: Provision for doubtful debts for Mobile business
    (1,874 )     (2,074 )
Provision for doubtful debts for Fixed-line business
    (2,115 )     (1,829 )
Provision for doubtful debts for other business
    (81 )     (77 )
 
           
 
               
 
    8,825       9,286  
 
           
   
The aging analysis of accounts receivable is as follows:
                 
    2009     2010  
 
               
Within one month
    6,384       6,625  
More than one month to three months
    1,235       1,316  
More than three months to one year
    2,936       3,054  
More than one year
    2,340       2,271  
 
           
 
               
 
    12,895       13,266  
 
           
   
The normal credit period granted by the Group is on average between 30 days to 90 days from the date of billing.
   
There is no significant concentration of credit risk with respect to customer receivables, as the Group has a large number of customers.
   
As of December 31, 2010, accounts receivable of approximately RMB2,661 million (2009: approximately RMB2,441 million) were past due but not impaired. These relate to customers for which there is no recent history of default. The aged analysis of these receivables was as follows:
                 
    2009     2010  
 
               
More than one month to three months
    1,235       1,316  
More than three months to one year
    882       1,056  
More than one year
    324       289  
 
           
 
               
 
    2,441       2,661  
 
           

 

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14.  
ACCOUNTS RECEIVABLE, NET (Continued)
   
As of December 31, 2010, accounts receivable of approximately RMB3,980 million (2009: approximately RMB4,070 million) were impaired. The individually impaired receivables mainly relate to subscriber service fees. The aging of these receivables is as follows:
                 
    2009     2010  
 
               
More than three months to one year
    2,054       1,998  
More than one year
    2,016       1,982  
 
           
 
               
 
    4,070       3,980  
 
           
   
Provision for doubtful debts is analyzed as follows:
                 
    2009     2010  
 
               
Balance, beginning of year
    3,462       4,070  
Provision for the year
    2,334       2,573  
Written-off during the year
    (1,726 )     (2,663 )
 
           
 
               
Balance, end of year
    4,070       3,980  
 
           
   
The creation and release of provisions for impaired receivables have been recognized in the statement of income. Amounts charged to the allowance account are generally written-off when there is reliable evidence to indicate no expectation of recovering additional cash.
   
The maximum exposure to credit risk at the reporting date is the carrying value of accounts receivable mentioned above. The Group does not hold any collateral as security.

 

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15.  
PREPAYMENTS AND OTHER CURRENT ASSETS
                 
    2009     2010  
 
               
Prepaid rental
    845       1,318  
Deposits and prepayments
    1,379       2,006  
Prepaid income taxes
    1,060       620  
Advances to employees
    274       321  
Others
    694       850  
 
           
 
               
 
    4,252       5,115  
 
           
   
The aging analysis of prepayments and other current assets is as follows:
                 
    2009     2010  
 
               
Within one year
    3,806       4,629  
More than one year
    446       486  
 
           
 
               
 
    4,252       5,115  
 
           
   
As of December 31, 2010, there was no impairment for the prepayments and other current assets.
16.  
SHORT-TERM BANK DEPOSITS
                 
    2009     2010  
 
               
Bank deposits with maturity exceeding three months
    970       254  
Restricted bank deposits
    26       19  
 
           
 
               
 
    996       273  
 
           
   
As of December 31, 2010, restricted bank deposits primarily represented deposits that were subject to externally imposed restrictions as requested by contractors in relation to payables owed to the contractors.

 

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17.  
CASH AND CASH EQUIVALENTS
                 
    2009     2010  
 
               
Cash at bank and in hand
    7,210       12,520  
Bank deposits with original maturities of three months or less
    610       9,975  
 
           
 
               
 
    7,820       22,495  
 
           
18.      SHARE CAPITAL
                 
    2009     2010  
    HKD millions     HKD millions  
Authorized:
               
30,000,000,000 ordinary shares of HKD0.10 each
    3,000       3,000  
 
           
                                         
            Ordinary                    
            shares, par                    
    Number of     value of                    
    shares     HKD0.1 each     Share     Share        
Issued and fully paid:   millions     HKD millions     capital     premium     Total  
 
                                       
At January 1, 2009
    23,768       2,376       2,329       166,784       169,113  
Issuance of shares for mutual investment by the Company and Telefónica (Note a)
    694       69       60       6,651       6,711  
Off-market share repurchase (Note b)
    (900 )     (90 )     (79 )           (79 )
 
                             
 
                                       
At December 31, 2009
    23,562       2,355       2,310       173,435       175,745  
Issuance of shares upon exercise of options (Note 35)
                      1       1  
 
                             
 
                                       
At December 31, 2010
    23,562       2,355       2,310       173,436       175,746  
 
                             
Note a :  
On October 21, 2009, the Company issued 693,912,264 ordinary shares of HKD0.10 each at a price of HKD11.17 per share in exchange for 40,730,735 Telefónica treasury shares at a price of Euro17.24 each. Please refer to Note 33 for details.
 
Note b:  
Pursuant to a special resolution passed at the extraordinary general meeting held on November 3, 2009, the Company repurchased 899,745,075 shares, being all the shares owned by SK Telecom Co., Ltd, by way of an off-market share repurchase. The total consideration of HKD9,991,669,058, being HKD11.105 for each share, was satisfied in cash upon completion. The total consideration of HKD9,991,669,058 (equivalent to RMB8,801,661,273) was charged to retained profits. The repurchased shares were cancelled subsequently.
 
   
In addition, pursuant to Section 49H of the Hong Kong Companies Ordinance, an amount equivalent to the par value of the shares cancelled of HKD89,974,508 (equivalent to RMB79,258,544) was transferred from share capital to the capital redemption reserve.

 

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19.  
RESERVES
  (i)  
Statutory reserves
 
     
CUCL and CNC China are registered as foreign investment enterprises in the PRC. In accordance with the respective Articles of Association, they are required to provide for certain statutory reserves, namely, general reserve fund and staff bonus and welfare fund, which are appropriated from income after tax and non-controlling interests but before dividend distribution.
 
     
CUCL and CNC China are required to allocate at least 10% of their income after tax and non-controlling interests determined under the PRC Company Law to the general reserve fund until the cumulative amounts reach 50% of the registered capital. The statutory reserve can only be used, upon approval obtained from the relevant authority, to offset accumulated losses or increase capital.
 
     
Accordingly, CUCL appropriated approximately RMB379 million (2008: approximately RMB3,523 million and RMB19 million by CUCL and CNC China, respectively; 2009: approximately RMB769 million) to the general reserve fund for the year ended December 31, 2010.
 
     
Appropriation to the staff bonus and welfare fund is at the discretion of the directors. The staff bonus and welfare fund can only be used for special bonuses or the collective welfare of the employees and cannot be distributed as cash dividends. Under IFRSs/HKFRSs, the appropriations to the staff bonus and welfare fund will be charged to the statement of income as expenses incurred since any assets acquired through this fund belong to the employees. For the years ended December 31, 2008, 2009 and 2010, no appropriation to staff bonus and welfare fund has been made by CUCL nor CNC China.
 
     
According to the PRC tax approval document issued by the Ministry of Finance and State Administration of Taxation to the Group, the Group’s upfront connection fees in respect of the Fixed-line business are not subject to the PRC enterprise income tax and an amount equal to the upfront connection fees recognized in the retained profits should be transferred from retained profits to the statutory reserve. Up to December 31, 2010, the Group has made an accumulated appropriation of approximately RMB12,274 million to the statutory reserve (Up to December 31, 2008 : approximately RMB11,592 million; up to December 31, 2009: approximately RMB12,082 million;).

 

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19.  
RESERVES (Continued)
  (ii)  
Share premium and capital redemption reserve
 
     
The application of the share premium account and the capital redemption reserve is governed by Sections 48B and 49H, respectively, of the Hong Kong Companies Ordinance and these reserves cannot be distributed to shareholders by way of dividend.
 
  (iii)  
Available-for-sale fair value reserve
 
     
The available-for-sale fair value reserve represents the changes in the fair value of available-for-sale financial assets, net of tax, until the financial assets are derecognized or impaired.
 
  (iv)  
Convertible bonds reserve
 
     
The convertible bonds reserve represents the equity component of the convertible bonds at initial recognition.

 

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20.  
LONG-TERM BANK LOANS
                     
    Interest rates and final maturity   2009     2010  
 
                   
RMB denominated
bank loans
  Floating interest rate, 15% downward on the benchmark interest rate issued by the People’s Bank of China for three years bank borrowings on quarterly basis with maturity through 2013                
- secured
              800  
 
               
 
                   
USD denominated
bank loans
  Fixed interest rates ranging from Nil to 5.00% (2009: Nil to 5.00%) per annum with maturity through 2039 (2009: maturity through 2039)                
- secured
        137       128  
- unsecured
        357       327  
 
               
 
        494       455  
 
               
 
                   
Euro denominated
bank loans
  Fixed interest rates ranging from 1.10% to 2.50% (2009: 1.10% to 2.50%) per annum with maturity through 2034 (2009: maturity through 2034)                
- unsecured
        327       265  
 
               
 
                   
Sub-total
        821       1,520  
Less: Current portion
        (62 )     (58 )
 
               
 
                   
 
        759       1,462  
 
               
   
The repayment schedule of the long-term bank loans is as follows:
                 
    2009     2010  
 
               
Balances due:
               
- not later than one year
    62       58  
- later than one year and not later than two years
    54       50  
- later than two years and not later than five years
    165       950  
- later than five years
    540       462  
 
           
 
    821       1,520  
 
               
Less: Portion classified as current liabilities
    (62 )     (58 )
 
           
 
               
 
    759       1,462  
 
           

 

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20.  
LONG-TERM BANK LOANS (Continued)
  (a)  
The fair values of the Group’s non-current portion of long-term bank loans at December 31, 2009 and 2010 were as follows:
                 
    2009     2009  
 
               
Long-term bank loans
    552       1,311  
 
           
   
The fair value is based on cash flows discounted using rates based on the market rates ranging from 4.28% to 4.97% (2009: 4.48% to 4.72%) per annum.
  (b)  
As of December 31, 2010, bank loans of approximately RMB128 million (2009: approximately RMB137 million) were secured by corporate guarantees granted by third parties.
21.  
PROMISSORY NOTES
   
On April 2, 2010, CUCL issued tranche one of a promissory note in the amount of RMB3 billion, with a maturity date of 3 years from the date of issue and carries interests at 3.73% per annum.
   
On September 20, 2010, CUCL issued tranche two of a promissory note in the amount of RMB12 billion, with a maturity date of 3 years from the date of issue and carries interests at 3.31% per annum.
   
The fair value of the Group’s promissory notes at December 31, 2010 amounted to approximately RMB14,881 million. The fair value is computed based on the expected cash flows discounted on market rates ranging from 4.15% to 4.25% per annum.
22.  
CONVERTIBLE BONDS
   
On October 18, 2010, Billion Express, a wholly-owned subsidiary of the Company, issued 0.75% guaranteed convertible bonds in an aggregate principal amount of USD1,838,800,000 (at the fixed exchange rate of USD1 equivalent to HKD7.7576) which are due in October 2015 at a redemption price of 100% of the principal amount. The bonds are guaranteed by the Company as to repayments, and are convertible into ordinary shares of HKD0.10 per share of the Company at an initial conversion price of HKD15.85 per share. The conversion price is subject to adjustment in certain events set out in the Trust deed dated October 18, 2010. The bondholders may exercise conversion rights at any time on or after November 28, 2010 up to the close of business on October 8, 2015 or, if such convertible bonds shall have been called for redemption by the Company before October 18, 2015, then up to the close of business on a date not later than seven days prior to the date fixed for redemption thereof. Billion Express will, at the option of a bondholder, redeem all and not some only of such bondholder’s convertible bonds on October 18, 2013 at their principal amount together with interest accrued and unpaid to the date fixed for redemption. In addition, on or at any time after October 18, 2013 and prior to October 18, 2015, Billion Express may redeem all and not some only of the convertible bonds for the time being outstanding at their principal amount together with interest accrued and unpaid to the date fixed for redemption.
   
During the year ended December 31, 2010, there was no conversion of the convertible bonds into shares of the Company by the bondholders and no redemption of the convertible bonds made by Billion Express.
   
The fair value of the liability component, which was calculated using market interest rate for a bond with the same tenure but with no conversion features, was determined upon the issuance of the convertible bonds. The difference between the face value (net of direct issue costs) and the fair value of the liability component represented the equity component, which was credited to the convertible bonds reserve under equity attributable to owners of the parent.

 

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22.  
CONVERTIBLE BONDS (Continued)
   
The convertible bonds recognized in the consolidated balance sheet are calculated as follows:
         
    2010  
 
       
Face value of convertible bonds at issue date
    12,236  
Less: direct issue costs
    (96 )
 
     
Face value of convertible bonds at issue date, net
    12,140  
 
     
 
       
Including:
       
Equity component on initial recognition
    572  
Liability component on initial recognition
    11,568  
 
     
 
    12,140  
 
     
 
       
Movement of liability component:
       
Liability component on initial recognition
    11,568  
Less: effect of exchange gain on liability component
    (55 )
Add: imputed finance cost
    45  
 
     
 
       
Liability component at December 31, 2010
    11,558  
 
     
   
The liability component of the convertible bonds at December 31, 2010 amounted to approximately RMB11,558 million (equivalent to USD1,745 million) and was calculated using cash flows discounted at a rate based on the borrowing rate of 1.90% per annum taking into the effect of direct issue costs.

 

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23.  
CORPORATE BONDS
   
On June 8, 2007, the Group issued RMB2 billion 10-year corporate bonds, bearing interest at 4.5% per annum. The corporate bonds are secured by a corporate guarantee granted by Bank of China Limited.
   
On September 3, 2008, the Group issued another RMB5 billion 5-year corporate bonds, bearing interest at 5.29% per annum. The corporate bonds are secured by a corporate guarantee granted by State Grid Corporation of China.
   
The fair values of the Group’s corporate bonds at December 31, 2009 and 2010 were as follows:
                 
    2009     2010  
 
               
Corporate bonds
    7,143       7,205  
 
           
   
The fair value is based on cash flows discounted using rates based on the market rates ranging from 4.28% to 5.01% (2009: 4.18% to 4.86%) per annum.
24.  
OTHER OBLIGATIONS
                         
    Note     2009     2010  
 
                       
One-off cash housing subsidies
    (a)       2,502       2,502  
Obligations under finance lease
    (b)       129       204  
Others
            90       93  
 
                   
 
                       
Sub-total
            2,721       2,799  
 
                       
Less: Current portion
            (2,534 )     (2,637 )
 
                   
 
                       
 
            187       162  
 
                   

 

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24.  
OTHER OBLIGATIONS (Continued)
(a)  
The movement of early retirement benefits and one-off cash housing subsidies is as follows:
                 
    Early retirement benefits     One-off cash housing subsidies  
    Note (ii)     Note (i) & (ii)  
 
               
As of January 1, 2009
    2,109       2,502  
Additions during the year
           
Payments during the year
    (2,109 )      
 
           
 
               
As of December 31, 2009
          2,502  
 
           
 
               
As of January 1, 2010 and December 31, 2010
          2,502  
 
           
(i)  
Certain staff quarters, prior to 1998, have been sold to certain of the Group’s employees at preferential prices, subject to a number of eligibility requirements. In 1998, the State Council issued a circular which stipulated that the sale of quarters to employees at preferential prices should be terminated. In 2000, the State Council issued a further circular stating that cash subsidies should be made to certain eligible employees following the withdrawal of the allocation of staff quarters. However, the specific timetable and procedures for the implementation of these policies were to be determined by individual provincial or municipal governments based on the particular situation of the provinces or municipality.
 
   
Based on the relevant detailed local government regulations promulgated, certain entities within the Group have adopted cash housing subsidy plans. In accordance with these plans, for those eligible employees who had not been allocated with quarters or who had not been allocated with quarters up to the prescribed standards before the discounted sales of quarters were terminated, the Group has determined to pay them one-off cash housing subsidies based on their years of service, positions and other criteria. Based on the available information, the Group estimated the required provision for these cash housing subsidies amounted to RMB4,142 million, which was charged to the statement of income for the year ended December 31, 2000 (the year in which the Council circular in respect of cash subsidies was issued).
 
(ii)  
Pursuant to the reorganization undertaken on June 30, 2004 between China Netcom, China Netcom (Holding) Company Limited and Netcom Group and the acquisition of the principal telecommunications operations, assets and liabilities in the four Northern provinces/autonomous region, namely Shanxi province, Neimenggu autonomous region, Jilin province and Heilongjiang province from Netcom Group (the “Acquisition of New Horizon”) in 2005, if the actual payments required for housing subsidies and early retirement benefits differ from the amount provided as of June 30, 2004 and June 30, 2005, Netcom Group would bear any additional payments required or would be paid the difference if the actual payments are lower than the amount provided. Upon the completion of the Parent Merger, Unicom Group has assumed all the rights and obligations of Netcom Group. In 2009, the Group fully repaid the amount in relation to early retirement benefits to Unicom Group.

 

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24.  
OTHER OBLIGATIONS (Continued)
(b)  
Obligations under finance lease
 
   
The obligations under finance lease represent the payables for the finance lease of telecommunications equipment. The lease payments under finance lease are analyzed as follows:
                 
    2009     2010  
 
               
Total minimum lease payments under finance lease:
               
- not later than one year
    29       129  
- later than one year and not later than two years
    105       82  
 
           
 
    134       211  
 
               
Less: Future finance charges
    (5 )     (7 )
 
           
 
               
Present value of minimum obligations
    129       204  
 
           
 
               
Representing obligations under finance lease:
               
- current liabilities
    26       126  
 
           
- non-current liabilities
    103       78  
 
           

 

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25.  
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
                 
    2009     2010  
 
               
Payables to contractors and equipment suppliers
    85,941       76,534  
Payables to telecommunications product suppliers
    3,193       3,189  
Customer/contractor deposits
    2,522       3,200  
Repair and maintenance expense payables
    1,900       2,449  
Salary and welfare payables
    1,364       1,017  
Interest payable
    212       740  
Amounts due to services providers / content providers
    1,069       1,034  
Accrued expenses
    4,268       5,394  
Others
    3,603       4,102  
 
           
 
               
 
    104,072       97,659  
 
           
   
The aging analysis of payables and accrued liabilities is as follows:
                 
    2009     2010  
 
               
Less than six months
    90,983       85,485  
Six months to one year
    4,031       3,866  
More than one year
    9,058       8,308  
 
           
 
               
 
    104,072       97,659  
 
           

 

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26.  
COMMERCIAL PAPERS
   
CNC China issued RMB10 billion unsecured commercial paper with repayment periods of 365 days on October 6, 2008 in the PRC capital market. The effective interest rate is 4.47% per annum. The net cash proceeds raised in the PRC capital market were RMB10 billion. The commercial paper was fully repaid on October 8, 2009.
   
On April 1, 2010, CUCL issued tranche one of a commercial paper in the amount of RMB15 billion, with a maturity date of 365 days from the date of issue and carries interests at 2.64% per annum.
   
On September 20, 2010, CUCL issued tranche two of a commercial paper in the amount of RMB8 billion, with a maturity date of 365 days from the date of issue and carries interests at 2.81% per annum.
27.  
SHORT-TERM BANK LOANS
                     
    Interest rates and final maturity   2009     2010  
 
                   
RMB denominated
bank loans
  Fixed interest rates ranging from 2.88% to 4.59% (2009: 3.50% to 4.37%) per annum with maturity through 2011 (2009: maturity through 2010)                
- unsecured
        55,104       2,610  
 
               
 
                   
RMB denominated
bank loans
  Floating interests rates, 10% downward on the benchmark interest rate issued by the People’s Bank of China with maturity through 2011                
- unsecured
              23,195  
- secured
              30  
 
               
 
              23,225  
 
               
 
                   
HKD denominated
bank loans
  Floating interest rates of HKD HIBOR plus interest margin from 0.4% to 1.0% (2009: plus 0.42%) per annum with maturity through 2011 (2009: maturity through 2010)                
- unsecured
      8,805       10,892  
 
               
 
                   
Total
        63,909       36,727  
 
               
(i)  
The carrying values of short-term bank loans approximate their fair values as of the balance sheet date.

 

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28.  
REVENUE
   
The tariffs for the services provided by the Group are subject to regulations by various government authorities, including the NDRC, the MIIT and the provincial price regulatory authorities.
   
Revenue from continuing operations is presented net of business tax and government surcharges. Relevant business tax and government surcharges amounted to approximately RMB4,870 million for the year ended December 31, 2010 (2008: approximately RMB4,598 million; 2009: approximately RMB4,487 million).
   
The major components of revenue for continuing operations are as follows:
                         
    2008     2009     2010  
 
Continuing operations:
                       
Mobile business
                       
- Usage and monthly fees
    40,462       42,297       47,004  
- Value-added services revenue
    16,263       19,070       25,852  
- Interconnection fees
    6,775       8,220       9,022  
- Other service revenue
    740       182       484  
 
                 
 
                       
Total mobile telecommunications service revenue
    64,240       69,769       82,362  
 
                 
 
                       
Fixed-line business
                       
- Usage and monthly fees
    41,489       34,369       29,085  
- Broadband, data and other Internet-related services revenue
    23,624       26,364       32,595  
- Interconnection fees
    7,342       5,599       5,243  
- Value-added services revenue
    7,074       5,238       4,860  
- Leased line income
    5,492       5,683       5,589  
- Upfront connection fees
    886       490       192  
- Other service revenue
    2,347       1,806       1,332  
 
                 
 
                       
Total fixed-line telecommunications service revenue
    88,254       79,549       78,896  
 
                 
 
                       
Unallocated telecommunications service revenue
    337       275       737  
 
                 
 
                       
Total telecommunications service revenue
    152,831       149,593       161,995  
Information communication technology services and other revenue
    5,062       2,189       2,016  
Sales of telecommunications products
    1,899       2,163       7,287  
 
                 
 
                       
Total revenue from external customers
    159,792       153,945       171,298  
 
                 

 

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29.  
NETWORKS, OPERATIONS AND SUPPORT EXPENSES
                         
    2008     2009     2010  
Continuing operations:
                       
Repair and maintenance
    7,761       8,606       8,781  
Power and water charges
    5,901       7,414       8,884  
Operating leases for networks, premises, equipment and facilities
    4,362       6,778       7,848  
Others
    712       930       870  
 
                 
 
                       
Total networks, operations and support expenses
    18,736       23,728       26,383  
 
                 
30.  
EMPLOYEE BENEFIT EXPENSES
                                 
    Note     2008     2009     2010  
Continuing operations:
                               
Salaries and wages
            17,115       17,842       18,993  
Contributions to defined contribution pension schemes
            2,288       2,558       2,670  
Contributions to housing fund
            1,099       1,321       1,422  
Other housing benefits
            172       183       186  
Share-based compensation
    35       84       27       56  
 
                         
 
                               
Total employee benefit expenses
            20,758       21,931       23,327  
 
                         
31.  
OTHER OPERATING EXPENSES
                         
    2008     2009     2010  
Continuing operations:
                       
Provision for doubtful debts
    3,025       2,355       2,583  
Cost of telecommunications products sold
    2,156       2,689       10,688  
Cost in relation to information communications technology services
    3,010       839       895  
Commission expenses
    11,773       11,994       13,776  
Advertising and promotion expenses
    3,036       4,290       3,931  
Customer installation cost
    2,256       2,449       2,435  
Customer acquisition and retention cost
    2,549       2,287       3,591  
Auditors’ remuneration
    131       73       68  
Property management fee
    1,186       1,434       1,503  
Office and administrative expenses
    2,831       2,915       3,422  
Transportation expense
    1,892       1,825       1,805  
Miscellaneous taxes and fees
    607       583       653  
Others
    3,545       2,990       2,919  
 
                 
 
                       
Total other operating expenses
    37,997       36,723       48,269  
 
                 

 

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32.  
FINANCE COSTS
                                 
    Note     2008     2009     2010  
 
                               
Continuing operations:
                               
Finance costs:
                               
- Interest on bank loans repayable within 5 years
            1,787       911       1,726  
- Interest on long-term loans due to ultimate holding company
    40.1(c)       1,016              
- Interest on corporate bonds, promissory notes and commercial papers repayable within 5 years
            580       607       824  
- Interest on convertible bonds repayable within 5 years
                        45  
- Interest on related party loan repayable within 5 years
                  16       25  
- Interest on bank loans repayable over 5 years
            54       5       4  
- Interest on corporate bonds repayable over 5 years
            90       90       90  
- Interest on deferred consideration
    (a)       224              
- Less: Amounts capitalized in construction-in-progress
    6       (430 )     (806 )     (804 )
 
                         
 
                               
Total interest expense
            3,321       823       1,910  
- Exchange (gain)/loss, net
            (270 )     15       (388 )
- Others
            218       198       227  
 
                         
 
                               
Total finance costs
            3,269       1,036       1,749  
 
                         
(a):  
In 2005, China Netcom completed the Acquisition of New Horizon. The consideration for the Acquisition of New Horizon was RMB12,800 million which consisted of an initial cash payment of RMB3,000 million and deferred payments of RMB9,800 million. The deferred payments were being settled in half-yearly installments over five years. The interest charged on the deferred payments was calculated at 5.265% per annum. In 2008, the Group fully repaid the amount.

 

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33.  
MUTUAL INVESTMENT OF THE COMPANY AND TELEFÓNICA IN EACH OTHER
   
On September 6, 2009, the Company announced that in order to strengthen the cooperation between the Company and Telefónica, the parties entered into a subscription agreement (“Subscription Agreement”), pursuant to which each party conditionally agreed to invest an equivalent of USD1 billion in each other through an acquisition of each other’s shares. On October 21, 2009 (“Completion Date”), the Company and Telefónica completed the mutual investment of the equivalent of USD1 billion in each other, which was implemented by way of the subscription by Telefónica for 693,912,264 new shares of the Company at a price of HKD11.17 each, satisfied by the contribution by Telefónica of 40,730,735 Telefónica treasury shares at a price of Euro17.24 each to the Company.
   
At the inception of the subscription agreement on September 6, 2009, the Company’s agreement to undertake the above mutual investment with Telefónica is treated as a derivative financial instrument in accordance with IAS/HKAS 39 “Financial instrument: Recognition and measurement” as it represents a forward contract for the purchase of shares by the Company and Telefónica in each other at predetermined fixed prices and is denominated in a foreign currency. The derivative financial instrument would be remeasured at fair value at each balance sheet date with all subsequent changes in fair value being charged or credited to the statement of income in the period when the change occurs until the completion of the mutual investment by the Company and Telefónica in each other at the Completion Date. On October 21, 2009, the derivative financial instrument was derecognized and an available-for-sale financial asset, representing the investment in the Telefónica shares, was recognized correspondingly at the then fair value of the Telefónica shares.
   
As of the Completion Date, October 21, 2009, the fair value of the Telefónica shares was determined to be approximately RMB7,952 million and the changes in the fair value of the derivative financial instrument during the period from September 6, 2009 to October 21, 2009 resulted in a fair value gain of approximately RMB1,239 million, which has been recorded as “Realized gain on changes in fair value of derivative financial instrument” in the consolidated statement of income for the year ended December 31, 2009.
   
As of December 31, 2010, the related available-for-sale financial asset amounted to approximately RMB6,087 million (2009: approximately RMB7,789 million). For the year ended December 31, 2010, changes in fair value of available-for-sale financial asset amounted to approximately RMB1,702 million (2009: approximately RMB163 million). The changes in fair value, net of tax impact of approximately RMB426 million (2009: approximately RMB41 million), was recorded in the consolidated statement of comprehensive income.
34.  
OTHER INCOME — NET
                         
    2008     2009     2010  
Continuing operations:
                       
Dividend income from available-for-sale financial assets
    3       215       485  
Gain on the non-monetary assets exchange
    1,305       38       10  
Others
    833       709       726  
 
                 
 
                       
 
    2,141       962       1,221  
 
                 

 

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35.  
EQUITY-SETTLED SHARE OPTION SCHEMES
  35.1  
Fixed award pre-global offering share option scheme (the “Pre-Global Offering Share Option Scheme”)
 
     
Pursuant to the resolution passed by the Board of Directors in June 2000, the Company adopted the Pre-Global Offering Share Option Scheme on June 1, 2000 for the granting of share options to qualified employees on the following terms:
  (i)  
the exercise price is equivalent to the share issue price of the Global Offering of HKD15.42 per share (excluding the brokerage fee and SEHK transaction levy); and
 
  (ii)  
the share options are vested and exercisable after 2 years from the grant date and expire 10 years from the date of grant.
     
No further options can be granted under the Pre-Global Offering Option Scheme.
 
     
The Pre-Global Offering Option Scheme had been amended in conjunction with the amended terms of the share option scheme (Note 35.2) in May 2002, May 2007 and May 2009, respectively. Apart from the above two terms, the principal terms are substantially the same as the amended Share Option Scheme in all material aspects.
  35.2  
Share option scheme (the “Share Option Scheme”)
     
On June 1, 2000, the Company adopted the 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 share options to subscribe for shares up to a maximum aggregate number of shares (including those that could be subscribed for under the Pre-Global Offering Share Option Scheme as described above) not exceeding 10% of the total issued share capital of the Company. Pursuant to the Share Option Scheme, the nominal consideration payable by a participant for the grant of share options will be HKD1.00. The exercise price payable by a participant upon the exercise of an option will be determined by the directors at their discretion at the date of grant, except that such price may not be set below a minimum price which is the higher of:
  (i)  
the nominal value of the share; and
 
  (ii)  
80% of the average of the closing prices of shares on the SEHK on the five trading days immediately preceding the date of grant of the option on which there were dealings in the shares on the SEHK.
     
The period during which an option may be exercised will be determined by the Board of Directors at their discretion, except that no option may be exercised later than 10 years from June 22, 2000.

 

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35.  
EQUITY-SETTLED SHARE OPTION SCHEMES (Continued)
  35.2  
Share option scheme (the “Share Option Scheme”) (Continued)
     
The terms of the Share Option Scheme were amended on May 13, 2002 to comply with the requirements set out in the Chapter 17 of the Listing Rules of SEHK which came into effect on September 1, 2001 with the following major amendments:
  (i)  
share options may be granted to employees including executive directors of the Group or any of the non-executive directors;
 
  (ii)  
the option period commences on a day after the date on which an option is offered but not later than 10 years from the offer date; and
 
  (iii)  
minimum subscription price shall not be less than the higher of:
 
   
the nominal value of the shares;
 
   
the closing price of the shares of the stock exchange as stated in the stock exchange’s quotation sheets on the offer date in respect of the share options; and
 
   
the average closing price of the shares on the stock exchange’s quotation sheets for the five trading days immediately preceding the offer date.
     
In May 2007 and May 2009, the Company further amended the Share Option Scheme with major amendments related to the exercise period.
     
All of the share options granted under Note 35.1 and 35.2 are governed by the amended terms of the Pre-Global Share Option Scheme and the Share Option Scheme as mentioned above.

 

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35.  
EQUITY-SETTLED SHARE OPTION SCHEMES (Continued)
  35.3  
Special purpose Unicom share option scheme (the “Special Purpose Share Option Scheme”)
     
Prior to the 2008 Business Combination, China Netcom granted share options to its directors and employees (including employees of its subsidiaries) in years 2004 (“First Grant”) and 2005 (“Second Grant”) pursuant to a shareholders’ resolution passed on September 30, 2004.
 
     
Pursuant to the ordinary resolution passed by the shareholders on September 16, 2008, the Company adopted the Special Purpose Share Option Scheme in connection with the merger of the Company and China Netcom by way of a scheme of arrangement of China Netcom under Section 166 of the Companies Ordinance for the granting of options to holders of China Netcom options outstanding at October 14, 2008 (“Eligible Participants”). Pursuant to this scheme, no fractional options can be granted and the maximum number of shares which may be issued upon the exercise of all options granted under this scheme and any other share options schemes of the Company must not in aggregate exceed 10% of the issued share capital of the Company as of the date of approval of this scheme.
 
     
The number of options and exercise price of options granted under the Special Purpose Share Option Scheme are as follows:
  (i)  
The exercise price of options under this scheme is equal to (a) the exercise price of an outstanding China Netcom option held by the Eligible Participants divided by (b) the share exchange ratio 1.508.
 
  (ii)  
The total number of options granted by the Company to all Eligible Participants under this scheme shall be equal to the product of (a) the share exchange ratio and (b) the number of China Netcom options outstanding as of October 14, 2008.
     
The above formula ensures that the value of options granted under this scheme received by a holder of China Netcom options is equivalent to the “see-through” price of that holder’s outstanding China Netcom options.
     
In May 2009, the Company amended the Special Purpose Share Option Scheme relating to the exercise period.
     
No further options can be granted under the Special Purpose Share Option Scheme.

 

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35.  
EQUITY-SETTLED SHARE OPTION SCHEMES (Continued)
  35.3  
Special purpose Unicom share option scheme (the “Special Purpose Share Option Scheme”) (Continued)
     
Details of share options granted and outstanding by China Netcom, immediately prior to the merger between the Company and China Netcom (i.e. October 14, 2008) are as follows:
                 
    For the period from January 1, 2008 to  
    October 14, 2008  
    Average exercise        
    price     Number of share  
    in HKD per share     options involved  
 
               
Balance, beginning of the year
    10.32       150,844,560  
Granted
           
Forfeited/cancelled
    9.55       (139,620 )
Cancelled in exchange for the Company’s options
    10.30       (125,836,140 )
Exercised
    10.45       (24,868,800 )
 
           
 
               
Balance, end of the period
           
 
           

 

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35.  
EQUITY-SETTLED SHARE OPTION SCHEMES (Continued)
     
Details of share options of China Netcom exercised during the period from January 1, 2008 to October 14, 2008 is as follows:
                                 
            Weighted average              
            closing price per              
            share at respective              
            days immediately              
            before date of              
    Exercise price     exercise of options     Proceeds received     Number of  
Grant   HKD     HKD     HKD     shares involved  
 
                               
First Grant
    8.40       26.17       103,316,640       12,299,600  
Second Grant
    12.45       25.46       156,486,540       12,569,200  
 
                           
 
                               
 
                    259,803,180       24,868,800  
 
                           
     
The Group accounted for the exchange of options based on the estimated fair value of share options at the modification date by using the Black-Scholes valuation model. Because the Black-Scholes valuation model requires the input of subjective assumptions, including the volatility of share price, change in subjective input assumptions can materially affect the fair value estimate. Accordingly, the weighted average fair values of 2004 and 2005 Special Purpose Share Options granted under the Special Purpose Share Option Scheme was HKD6.01 and HKD4.00, respectively. The significant assumptions used and the numbers of options granted are as follows:
                 
    2004     2005  
    Special Purpose     Special Purpose  
    Share Option     Share Option  
Stock price
  HKD11.60     HKD11.60  
Exercise price
  HKD5.57     HKD8.26  
Volatility
    55 %     49 %
Dividend yield
    2 %     2 %
Risk-free rate
    0.24-1.06 %     0.28-1.54 %
Expected life
  0.30-1.09 years     0.32-2.32 years  
Weighted average option value
  HKD6.01     HKD4.00  
Number of options granted
    100,831,432       88,929,468  
     
The volatility measured at the standard deviation of expected share price returns was based on statistical analysis of daily share prices over the last 2 to 3 years. Expected dividends were based on historical dividends. Risk-free rate was by reference to the yield of Hong Kong Exchange Fund Notes with a term similar to the expected option life.
 
     
The total incremental fair value of the exchanged options was determined to be RMB21 million which was measured by reference to the incremental fair value of the options granted under the Special Purpose Share Option Scheme as of October 15, 2008 (the modification date) over the fair value of China Netcom options as of October 15, 2008. For the year ended December 31, 2010, share-based compensation expense of approximately RMB2 million (2008: approximately RMB9 million; 2009: approximately RMB10 million) was recorded by the Group as a result of this modification.

 

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35.  
EQUITY-SETTLED SHARE OPTION SCHEMES (Continued)
  35.4  
Share option information
     
Movements in the number of share options outstanding and their related weighted average exercise prices are as follows:
                                                 
    2008     2009     2010  
    Average             Average             Average        
    exercise             exercise     Number of     exercise        
    price     Number of     price     share     price     Number of  
    in HKD     share options     in HKD     options     in HKD     share options  
    per share     involved     per share     involved     per share     involved  
 
                                               
Balance, beginning of year
    7.12       257,279,600       6.95       413,074,166       6.95       413,074,166  
Granted
    6.83       189,760,900                          
Forfeited/lapsed
    6.37       (2,720,334 )                 15.42       (16,977,600 )
Exercised
    7.62       (31,246,000 )                 5.57       (84,448 )
 
                                   
 
                                               
Balance, end of year
    6.95       413,074,166       6.95       413,074,166       6.59       396,012,118  
 
                                   
 
                                               
Exercisable at end of year
    7.14       245,359,027       6.88       390,841,799       6.59       396,012,118  
 
                                   
     
Exercise of share options during the year ended December 31, 2010 resulted in 84,448 shares being issued (2008: 31,246,000 shares; 2009: nil), with exercise proceeds of approximately RMB0.41 million (2008: approximately RMB216 million; 2009: nil).

 

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35.  
EQUITY-SETTLED SHARE OPTION SCHEME (Continued)
  35.4  
Share option information (Continued)
     
As of balance sheet date, information of outstanding share options is summarized as follows:
                             
            The price   Number of     Number of  
            per share to   share options     share options  
            be paid on   outstanding as     outstanding as  
        Exercisable period   exercise of   of December     of December  
Date of options grant   Vesting period   (Note i)   options   31, 2009     31, 2010  
 
                           
Share options granted under the Pre-Global Offering Share Option Scheme (Note iii):            
 
                           
June 22, 2000
  June 22, 2000 to
June 21, 2002
  June 22, 2002 to
June 21, 2010
  HKD15.42     16,977,600        
 
                           
Share options granted under the Share Option Scheme (Note ii):                
 
                           
June 30, 2001
  June 30, 2001   June 30, 2001 to June 22, 2011   HKD15.42     4,350,000       4,350,000  
 
                           
May 21, 2003
  May 21, 2003 to May 21, 2006   May 21, 2004 to May 20, 2011   HKD4.30     8,956,000       8,956,000  
 
                           
July 20, 2004
  July 20, 2004 to July 20, 2007   July 20, 2005 to July 19, 2011   HKD5.92     41,024,000       41,024,000  
 
                           
December 21, 2004
  December 21, 2004 to
December 21, 2007
  December 21, 2005 to
December 20, 2011
  HKD6.20     654,000       654,000  
 
                           
February 15, 2006
  February 15, 2006 to February 15, 2009   February 15, 2008 to February 14, 2012   HKD6.35     151,556,000       151,556,000  
 
                           
Share options granted under the Special Purpose Share Option Scheme (Note ii):                
 
                           
October 15, 2008 (“2004 Special Purpose Share Options”)
  October 15, 2008 to May 17, 2009   October 15, 2008 to November 16, 2011   HKD5.57     100,627,098       100,542,650  
 
                           
October 15, 2008 (“2005 Special Purpose Share Options”)
  October 15, 2008 to December 6, 2010   October 15, 2008 to December 5, 2011   HKD8.26     88,929,468       88,929,468  
 
                       
 
                           
 
                413,074,166       396,012,118  
 
                       
     
The options outstanding as of December 31, 2010 had a weighted average remaining contractual life of 0.93 years (2009: 1.50 years).

 

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35.  
EQUITY-SETTLED SHARE OPTION SCHEME (Continued)
  35.4  
Share option information (Continued)
Note i:  
In 2009, the exercise periods of approximately 25,000,000 share options were extended by one year by the Board of Directors pursuant to the terms of each of the Pre-Global Offering Share Option Scheme and the Share Option Scheme. The reasons for such extension were that (i) the holders of those share options were determined by the Board of Directors as “Transferred Personnel” under the respective terms of the Pre-Global Offering Share Option Scheme and the Share Option Scheme due to the transfers of those option holders to other telecommunications operators as part of the 2008 industry restructuring, and (ii) those share options were not exercisable due to a “Mandatory Moratorium” under the respective terms of each of the Pre-Global Offering Share Option Scheme and the Share Option Scheme. Due to the “Mandatory Moratorium” continuing to be in force, the Board of Directors further extended the exercise periods of certain share options by one year in each of March 2010 and March 2011 under the respective terms of the Share Option Scheme. As of December 31, 2010, approximately 23,600,000 share options held by Transferred Personnel remained valid.
Note ii:  
In each of March 2010 and March 2011, the expiry dates for certain share options were extended by one year by the Board of Directors pursuant to the terms of each of the Share Option Scheme and the Special Purpose Share Option Scheme, because those share options were not exercisable due to a “Mandatory Moratorium”, which is still in effect, under the respective terms of each of the Share Option Scheme and the Special Purpose Share Option Scheme. The modifications did not expect to have significant impact on the consolidated statement of income for the year ending December 31, 2011.
Note iii:  
All share options remained outstanding on June 21, 2010 have been expired on the same date.

 

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35.  
EQUITY-SETTLED SHARE OPTION SCHEME (Continued)
   
No option was exercised for the year ended December 31, 2009.
   
Details of share options exercised for the years ended December 31, 2008 and 2010 are as follows:
   
For the year ended December 31, 2008:
                                 
            Weighted average              
            closing price per              
            share at respective              
            days immediately              
            before days of              
    Exercise price     exercise of options     Proceeds received     Number of  
Grant date   HKD     HKD     HKD     shares involved  
 
                               
June 22, 2000
    15.42       18.73       63,980,664       4,149,200  
June 30, 2001
    15.42       18.38       18,781,560       1,218,000  
July 10, 2002
    6.18       15.88       20,443,440       3,308,000  
May 21, 2003
    4.30       16.90       8,947,440       2,080,800  
July 20, 2004
    5.92       17.81       58,240,960       9,838,000  
February 15, 2006
    6.35       17.62       67,640,200       10,652,000  
 
                           
 
                               
 
                    238,034,264       31,246,000  
 
                           
   
For the year ended December 31, 2010:
                                 
            Weighted average              
            closing price per              
            share at respective              
            days immediately              
            before days of              
    Exercise price     exercise of options     Proceeds received     Number of  
Grant date   HKD     HKD     HKD     shares involved  
 
                               
October 15, 2008
    5.57       11.76       470,375       84,448  
 
                           
 
                               
 
                    470,375       84,448  
 
                           
   
For the year ended December 31, 2010, employee share-based compensation expense recorded for continuing operations amounted to approximately RMB56 million (2008: approximately RMB84 million; 2009: approximately RMB27 million).

 

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36  
DISPOSAL GROUP AND DISCONTINUED OPERATIONS
   
On June 2, 2008 and July 27, 2008, the Company, CUCL and China Telecom entered into the Framework Agreement and the Disposal Agreement, respectively, to sell the CDMA business to China Telecom. The disposal was completed on October 1, 2008. The gain on disposal, net of corresponding income tax of approximately RMB9.0 billion, amounted to approximately RMB26.1 billion.
   
The net assets of the CDMA business as of the effective date of disposal of the CDMA business were as listed below:
                 
            As of  
Net assets disposed of:   Note     October 1, 2008  
Cash and cash equivalents
    (a)       4,612  
Property, plant and equipment
            2,997  
Goodwill
            373  
Deferred tax assets
            6  
Other assets
            3,958  
Inventories
            525  
Accounts receivable, net
            690  
Prepayments and other current assets
            808  
Deferred revenue
            (444 )
Accounts payable and accrued liabilities
            (1,144 )
Advances from customers
            (4,428 )
Non-controlling interests
            (5 )
 
             
 
            7,948  
 
Fair value of future service agreed in the Disposal Agreement
    40.2(c)       517  
Transaction cost and taxation
            184  
 
Income tax expense arising from the disposal of the CDMA business
            9,016  
Gain on disposal of the CDMA business recognized in the statement of income
            26,135  
 
             
 
               
Cash consideration on disposal of the CDMA business
            43,800  
Less: Cash consideration receivable from disposal of the CDMA business
            (13,140 )
Cash and cash equivalents transferred
            (1,148 )
 
             
 
               
Net cash inflow
            29,512  
 
             
Note a:  
The balance represents cash and cash equivalent of approximately RMB1,148 million transferred and RMB3,464 million to be transferred to China Telecom in accordance with the Disposal Agreement. For details, please refer to Note 40.2(c).

 

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36  
DISPOSAL GROUP AND DISCONTINUED OPERATIONS (Continued)
   
Discontinued operations
   
The results and cash flows of the CDMA business for the period from January 1, 2008 to September 30, 2008 are presented as discontinued operations as follows:
         
    For the period from  
    January 1, 2008 to  
    September  
    30, 2008  
Revenue
    22,296  
Expenses
    (20,389 )
 
     
 
       
Income from discontinued operations before income tax
    1,907  
Income tax expenses
    (469 )
 
     
 
       
Income for the period from discontinued operations
    1,438  
 
     
 
       
Gain on disposal of discontinued operations before income tax
    35,151  
Income tax expenses
    (9,016 )
 
     
 
       
Gain on disposal of discontinued operations after income tax
    26,135  
 
     
 
       
Income for the period from discontinued operations
    27,573  
 
     

 

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36  
DISPOSAL GROUP AND DISCONTINUED OPERATIONS (Continued)
   
Discontinued operations (Continued)
         
    For the period  
    from  
    January 1, 2008  
    to September  
    30, 2008  
 
       
Net cash inflow from operating activities
    656  
 
     
 
       
Net cash outflow from investing activities
    (23 )
Cash inflow from disposal of discontinued operations
    29,512  
 
     
 
       
Net cash inflow from investing activities
    29,489  
 
     
 
       
Net cash inflow from financing activities
     
 
     
 
       
Net cash inflow from discontinued operations
    30,145  
 
     
   
The net cash outflow of approximately RMB5,039 million for discontinued operations for the year ended December 31, 2009 represents the income tax paid on the gain on disposal of the CDMA business in 2008 and related professional service fees paid totaling RMB9,329 million, offset by proceeds received of approximately RMB4,290 million from the disposal of the CDMA business.
   
In addition, for the year ended December 31, 2009, proceeds receivable from disposal of the CDMA business of approximately RMB3,729 million was offset against payables in relation to disposal of the CDMA business in accordance with a settlement agreement entered into in 2009.
   
For the year ended December 31, 2010, the Group received the proceeds of approximately RMB5,121 million from China Telecom in relation to disposal of the CDMA business.

 

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37.  
DIVIDENDS
   
At the annual general meeting held on May 26, 2009, the shareholders of the Company approved the payment of a final dividend of RMB0.20 per ordinary share for the year ended December 31, 2008 totaling approximately RMB4,754 million which has been reflected as a reduction of retained profits for the year ended December 31, 2009. As of December 31, 2009, such dividends have been paid by the Company, except for dividends payable of approximately RMB307 million and RMB24 million due to Unicom BVI and Netcom BVI, respectively.
   
At the annual general meeting held on May 12, 2010, the shareholders of the Company approved the payment of a final dividend of RMB0.16 per ordinary share for the year ended December 31, 2009 totaling approximately RMB3,770 million which has been reflected as a reduction of retained profits for the year ended December 31, 2010. As of December 31, 2010, such dividends have been paid by the Company, except for dividends payable of approximately RMB431 million due to Unicom BVI.
   
At a meeting held on March 29, 2011, the Board of Directors of the Company proposed the payment of a final dividend of RMB0.08 per ordinary share to the shareholders for the year ended December 31, 2010 totaling approximately RMB1,885 million. This proposed dividend has not been reflected as a dividend payable in the financial statements as of December 31, 2010, but will be reflected as an appropriation of retained profits in the financial statements for the year ending December 31, 2011.
                         
    2008     2009     2010  
Proposed final dividend:
                       
RMB0.08 (2008: RMB0.20; 2009:RMB0.16) per ordinary share by the Company
    4,754       3,770       1,885  
 
                 
 
                       
Dividend paid:
                       
By the Company
    2,732       4,754       3,770  
By China Netcom (Note a)
    3,499              
 
                 
 
    6,231       4,754       3,770  
 
                 
Note a :  
Since the 2008 Business Combination is accounted for as a business combination of entities under common control, accordingly, the proposed final dividend and dividend paid include the proposed final dividend and dividend paid by China Netcom as if it had always been part of the Group.
   
Pursuant to the PRC enterprise income tax law, a 10% withholding income tax is levied on dividends declared on or after January 1, 2008 by foreign investment enterprises to their foreign enterprise shareholders unless the enterprise investor is deemed as a PRC Tax Resident Enterprise (“TRE”). On November 11, 2010, the Company obtained an approval from State Administration of Taxation, pursuant to which the Company qualifies as a PRC TRE from January 1, 2008. Therefore, as of December 31, 2010, the Company’s subsidiaries in the PRC did not accrue for withholding tax on dividends distributed to the Company and there has been no deferred tax liability accrued in the Group’s consolidated financial statements for the undistributed income of the Company’s subsidiaries in the PRC.
   
For the Company’s non-TRE enterprise shareholders, the Company would distribute dividends after deducting the amount of enterprise income tax payable by these non-TRE enterprise shareholders thereon and reclassify the related dividend payable to withholding tax payable upon the declaration of such dividends. The requirement to withhold tax does not apply to the Company’s shareholders appearing as individuals in its share register.

 

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38.  
EARNINGS PER SHARE AND ADS
   
Basic earnings per share for the years ended December 31, 2008, 2009 and 2010 were computed by dividing the income attributable to owners of the parent by the weighted average number of ordinary shares outstanding during the years, as adjusted by the number of ordinary shares in issue had the merger with China Netcom been completed on January 1, 2008.
   
Diluted earnings per share for the years ended December 31, 2008, 2009 and 2010 were computed by dividing the income attributable to owners of the parent by the weighted average number of ordinary shares outstanding during the years, as adjusted by the number of ordinary shares in issue had the merger with China Netcom been completed on January 1, 2008, after adjusting for the effects of the dilutive potential ordinary shares. All potential ordinary shares for the year ended December 31, 2010 arose from (i) share options granted under the amended Share Option Scheme, (ii) share options granted under the amended Special Purpose Share Option Scheme, and (iii) the convertible bonds, while all potential ordinary shares for the years ended December 31, 2008 and 2009 arose from (i) share options granted under the amended Pre-Global Offering Share Option Scheme; (ii) share options granted under the amended Share Option Scheme, (iii) share options granted under the amended Special Purpose Share Option Scheme.
   
The potential ordinary shares which are not dilutive for the year ended December 31, 2010 arose from (i) share options with exercise price of HKD15.42 granted under the amended Share Option Scheme and (ii) the convertible bonds with initial conversion price of HKD15.85, while the potential ordinary shares which are not dilutive for the years ended December 31, 2008 and 2009 arose from share options with exercise price of HKD15.42 granted under the amended Pre-Global Offering Share Option Scheme and amended Share Option Scheme, which are excluded from the weighted average number of ordinary shares for the purpose of computation of diluted earnings per share.

 

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38.  
EARNINGS PER SHARE AND ADS (Continued)
   
The following table sets forth the computation of basic and diluted earnings per share and ADS:
                         
    2008     2009     2010  
Numerator (in RMB millions):
                       
Income attributable to owners of the parent
                       
- Continuing operations
    2,231       9,556       3,851  
- Discontinued operations
    27,573              
 
                 
 
                       
 
    29,804       9,556       3,851  
 
                 
Denominator (in millions):
                       
Weighted average number of ordinary shares outstanding used in computing basic earnings per share
    23,751       23,767       23,562  
Dilutive equivalent shares arising from share options
    190       128       142  
 
                 
 
                       
Shares used in computing diluted earnings per share
    23,941       23,895       23,704  
 
                 
 
                       
Basic earnings per share (in RMB)
                       
- Continuing operations
    0.09       0.40       0.16  
- Discontinued operations
    1.16              
 
                 
 
                       
 
    1.25       0.40       0.16  
 
                 
Basic earnings per ADS (in RMB)
                       
- Continuing operations
    0.94       4.02       1.63  
- Discontinued operations
    11.61              
 
                 
 
                       
 
    12.55       4.02       1.63  
 
                 
Diluted earnings per share (in RMB)
                       
- Continuing operations
    0.09       0.40       0.16  
- Discontinued operations
    1.15              
 
                 
 
                       
 
    1.24       0.40       0.16  
 
                 
Diluted earnings per ADS (in RMB)
                       
- Continuing operations
    0.93       4.00       1.62  
- Discontinued operations
    11.52              
 
                 
 
                       
 
    12.45       4.00       1.62  
 
                 
   
Basic and diluted earnings per ADS have been computed by multiplying the earnings per share by 10, which is the number of shares represented by each ADS.

 

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39.  
FAIR VALUE OF FINANCIAL INSTRUMENTS
   
Financial assets of the Group mainly include cash and cash equivalents, short-term bank deposits, available-for-sale financial assets, accounts receivable, amounts due from related parties and domestic carriers. Financial liabilities of the Group mainly include accounts payable and accrued liabilities, short-term bank loans, commercial papers, corporate bonds, promissory notes, long-term bank loans, convertible bonds, other obligations and amounts due to ultimate holding company, related parties and domestic carriers.
   
Cash and cash equivalents, short-term bank deposits and available-for-sale financial assets denominated in foreign currencies, as summarized below, have been translated to RMB at the applicable rates prevailing as of December 31, 2009 and 2010.
                                                 
    2009     2010  
    Original             RMB     Original             RMB  
    currency             equivalent     currency             equivalent  
    millions     Exchange rate     millions     millions     Exchange rate     millions  
 
                                               
Cash and cash equivalents:
                                               
- denominated in HK dollars
    324       0.88       285       462       0.85       393  
- denominated in US dollars
    86       6.83       585       1,761       6.62       11,661  
- denominated in Euro
    26       9.80       258       24       8.81       213  
- denominated in Japanese Yen
    14       0.07       1       12       0.08       1  
- denominated in GBP
    0.4       10.98       4       0.8       10.22       8  
 
                                           
 
                                               
Sub-total
                    1,133                       12,276  
 
                                           
 
                                               
Short-term bank deposits:
                                               
- denominated in HK dollars
    86       0.88       76       51       0.85       43  
- denominated in US dollars
    49       6.83       336       22       6.62       148  
 
                                           
 
                                               
Sub-total
                    412                       191  
 
                                           
 
                                               
Available-for-sale financial assets:
                                               
- denominated in Euro
    795       9.80       7,789       691       8.81       6,087  
 
                                           
 
                                               
Total
                    9,334                       18,554  
 
                                           

 

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39.  
FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
   
The Group did not have and does not believe it will have any difficulties in exchanging its foreign currency cash into RMB. The carrying amounts of the Group’s cash and cash equivalents, short-term bank deposits, available-for-sale financial assets, other current financial assets and liabilities approximated their fair values as of December 31, 2009 and 2010 due to the nature or short maturity of those instruments.
   
The carrying amounts of receivables and payables which are all subject to normal trade credit terms approximated their fair values as of the balance sheet date.
   
In connection with the fair values of the Group’s non-current portion of long-term bank loans, promissory notes, corporate bonds and the convertible bonds, please refer to respective notes for details.

 

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40.  
RELATED PARTY TRANSACTIONS
   
Unicom Group is a state-owned enterprise directly controlled by the PRC government. The PRC government is the Company’s ultimate controlling party. Neither Unicom Group nor the PRC government publishes financial statements available for public use.
   
The PRC government controls a significant portion of the productive assets and entities in the PRC. The Group provides telecommunications services as part of its retail transactions, thus, is likely to have extensive transactions with the employees of other state-controlled entities, including their key management personnel and their close family members. These transactions are carried out on commercial terms that are consistently applied to all customers.
   
Management considers certain state-owned enterprises, which mainly include other telecommunications service operators, have material transactions with the Group in its ordinary course of business. These transactions are mainly carried out on terms comparable to those conducted with third parties or standards promulgated by relevant government authorities and have been reflected in the financial statements. The Group’s telecommunications networks depend, in large part, on interconnection with the networks and on transmission lines leased from other domestic carriers. Management believes that meaningful information relating to related party transactions has been disclosed below.

 

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40.  
RELATED PARTY TRANSACTIONS (Continued)
  40.1  
Transactions with Unicom Group and its subsidiaries
  (a)  
Recurring transactions
     
The following is a summary of significant recurring transactions carried out by the Group with Unicom Group and its subsidiaries. In the directors’ opinion, these transactions were carried out in the ordinary course of business.
                             
    Note   2008     2009     2010  
Transactions with Unicom Group, Netcom Group and their subsidiaries:
                           
 
Continuing operations:
                           
Leasing fee of Telecommunications Networks in Southern China
  (ii)           2,000       2,200  
Charges for mobile subscriber value-added service
  (i), (iii)     153       122       103  
Rental charges for premises, equipment and facilities
  (i), (iv)     678       820       867  
Charges for the international gateway services
  (i), (v)     7       5       2  
Agency fee incurred for procurement of telecommunications equipment
  (i), (vi)     21       12        
Charge for engineering and information technology-related services
  (i), (vii)     2,603       2,786       2,248  
Common corporate services income
  (viii)     140       3       3  
Charges for common corporate services
  (viii)     563       266       308  
Charges for purchases of materials
  (ix)     516       375       382  
Charges for ancillary telecommunications support services
  (x)     558       689       953  
Charges for support services
  (xi)     461       273       162  
Charges for lease of telecommunications facilities
  (xii)     306       148       149  
Income from information communication technologies services
  (i), (xiii)     118       70       8  
Interest expenses for long-term loans due to ultimate holding company
  40.1(c)     1,016              

 

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40.  
RELATED PARTY TRANSACTIONS (Continued)
  40.1  
Transactions with Unicom Group and its subsidiaries (Continued)
  (a)  
Recurring transactions (Continued)
                                 
    Note     2008     2009     2010  
Transactions with Unicom Group, Netcom Group and their subsidiaries:
                               
 
Discontinued operations:
                               
Charges for mobile subscriber value-added services
  (i), (iii)     46              
CDMA network capacity lease rental charges
  (xiv)     6,009              
Constructed capacity related cost of the CDMA network
  (xv)     234              

 

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40.  
RELATED PARTY TRANSACTIONS (Continued)
  40.1  
Transactions with Unicom Group and its subsidiaries (Continued)
  (a)  
Recurring transactions (Continued)
  (i)  
On October 26, 2006, CUCL entered into a new agreement “2006 Comprehensive Services Agreement” to continue to carry out related party transactions. The new agreement was approved by the independent shareholders of the Company on December 1, 2006, and become effective from January 1, 2007.
 
     
Pursuant to the ordinary resolution passed at the extraordinary general meeting held on September 16, 2008, the independent shareholders of the Company approved the amendment of the 2006 Comprehensive Services Agreement with effect from October 15, 2008 to include CNC China as a party (“the Second 2006 Comprehensive Services Agreement”).
 
     
Also, the independent shareholders of the Company approved the following agreements:
   
Framework Agreement for Engineering and Information Technology Services dated August 12, 2008
 
   
Engineering and Information Technology Services Agreement 2008-2010
 
   
Domestic Interconnection Settlement Agreement 2008-2010
 
   
International Long Distance Voice Services Settlement Agreement 2008-2010
 
   
Framework Agreement for Interconnection Settlement dated August 12, 2008
  (ii)  
On December 16, 2008, CUCL, Unicom Group, Netcom Group and Unicom New Horizon entered into the Network Lease Agreement in relation to the Lease of the Telecommunications Networks in Southern China by CUCL from Unicom New Horizon on an exclusive basis immediately following and subject to the completion of the 2009 Business Combination. Under the Network Lease Agreement, CUCL shall pay annual leasing fees of RMB2.0 billion and RMB2.2 billion for the years ended December 31, 2009 and 2010, respectively. The Lease became effective in January 2009.

 

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40.  
RELATED PARTY TRANSACTIONS (Continued)
  40.1  
Transactions with Unicom Group and its subsidiaries (Continued)
  (a)  
Recurring transactions (Continued)
  (iii)  
Pursuant to 2006 Comprehensive Services Agreement and the Second 2006 Comprehensive Services Agreement, UNISK (Beijing) Information Technology Corporation Limited (“UNISK”) and Unicom NewSpace Corporation Limited (“Unicom NewSpace”) agreed to provide the mobile subscribers of CUCL with various types of value-added services through its cellular communication network and data platform. The Group retains a portion of the revenue generated from the value-added services provided to the Group’s subscribers (and actually received by the Group) and allocates a portion of such fees to UNISK and Unicom NewSpace for settlement, on the condition that such proportion allocated to UNISK and Unicom NewSpace does not exceed the average proportion allocated to independent value-added telecommunications content providers who provide value-added telecommunications content to the Group in the same region. The percentage of revenue to be allocated to UNISK and Unicom NewSpace by the Group varies depending on the types of value-added service provided to the Group.
 
  (iv)  
Pursuant to 2006 Comprehensive Services Agreement and the Second 2006 Comprehensive Services Agreement, CUCL and Unicom Group agreed to mutually lease premises, equipment and facilities from each other. Rentals are based on the lower of depreciation costs and market rates.
 
  (v)  
Pursuant to 2006 Comprehensive Services Agreement and the Second 2006 Comprehensive Services Agreement, charges for international gateway services represent the amounts paid or payable to Unicom Group for international gateway services provided for the Group’s international long distance networks. The charge for this service is based on the cost of operation and maintenance of the international gateway facilities incurred by Unicom Group, including depreciation, together with a margin of 10% over cost.
 
  (vi)  
Pursuant to 2006 Comprehensive Services Agreement and the Second 2006 Comprehensive Services Agreement, Unicom Import and Export Company Limited (“Unicom I/E Co”) agreed to provide equipment procurement services to the Group. Unicom I/E Co. charges the Group 0.55% (for contracts up to an amount of USD30 million (inclusive)) and 0.35% (for contracts with an amount of more than USD30 million) of the value of imported equipment, and 0.25% (for contracts up to an amount of RMB200 million (inclusive)) and 0.15% (for contracts with an amount of more than RMB200 million) of the value of domestic equipment for such services.

 

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40.  
RELATED PARTY TRANSACTIONS (Continued)
  40.1  
Transactions with Unicom Group and its subsidiaries (Continued)
  (a)  
Recurring transactions (Continued)
  (vii)  
Pursuant to the Framework Agreement for Engineering and Information Technology Services dated August 12, 2008 and Engineering and Information Technology Services Agreement 2008-2010 entered between CUCL and Unicom Group, the charges payable by CUCL for the above services are determined with reference to market rates and are settled when the relevant services are provided.
 
  (viii)  
Pursuant to Master Sharing Agreement 2008-2010 entered between CUCL and Unicom Group, expenses associated with common corporate services is allocated between CUCL and Unicom Group based on total assets as appropriate.
 
  (ix)  
Pursuant to Materials Procurement Agreement 2008-2010 entered between CUCL and Unicom Group, the charges payable by CUCL to Unicom Group are based on market rates or cost-plus basis.
 
  (x)  
Pursuant to the Framework Agreement for Ancillary Telecommunications Services dated August 12, 2008 and Ancillary Telecommunications Services Agreement 2008-2010 entered between CUCL and Unicom Group, Unicom Group agreed to provide services including certain telecommunications pre-sale, on-sale and after-sale services, certain sales agency services, the printing and delivery of invoice services, the maintenance of certain air-conditioning, fire alarm equipment and telephone booths and other customer services. The charges are based on market rates and are settled as and when the relevant services are provided.
 
  (xi)  
Pursuant to the Framework Agreement for Support Services dated August 12, 2008 and Support Services Agreement 2008-2010 entered between CUCL and Unicom Group, Unicom Group agreed to provide services including equipment leasing services, motor vehicles services, safety and security services, conference services, basic construction agency services, equipment maintenance services, employee training services, advertising services, printing services and other support services. The charges are based on market rates and are settled as and when the relevant services are provided.
 
  (xii)  
Pursuant to the Framework Agreement for Telecommunications Facilities Leasing dated August 12, 2008 and Telecommunications Facilities Leasing Agreement 2008-2010 entered between CUCL and Unicom Group, CUCL agreed to lease the international telecommunications facilities and inter-provincial transmission optic fibers from Unicom Group. The lease payment is based on the depreciation charge of the leased assets.

 

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40.  
RELATED PARTY TRANSACTIONS (Continued)
  40.1  
Transactions with Unicom Group and its subsidiaries (Continued)
  (a)  
Recurring transactions (Continued)
  (xiii)  
Pursuant to Information and Communications Technology Agreement 2008-2010 entered between System Integration Corporation and Unicom Group, System Integration Corporation, agreed to provide information communications technology services to Unicom Group and also to subcontract services ancillary to the provision of information communications technology services, namely, the system installation and configuration services, to the subsidiaries and branches of Unicom Group in Unicom Group’s southern service region in the PRC. The charges payable by Unicom Group are based on market value.
 
  (xiv)  
On October 26, 2006, CUCL entered into the new agreement “2006 CDMA Lease Agreement” with Unicom Group and Unicom New Horizon to continue to lease the CDMA networks. The new agreement was approved by the independent shareholders of the Company on December 1, 2006, and became effective from January 1, 2007. The Group accounted for the lease of the CDMA networks as an operating lease. As disclosed in the announcement dated July 28, 2008, the Company, CUCL and China Telecom agreed on the CDMA business disposal and the Company agreed to waive the CDMA network purchase option and terminate the 2006 CDMA Lease Agreement, in each case with effect from the completion of the CDMA business disposal. During the Company’s extraordinary general meeting of shareholders held on September 16, 2008, the Company’s independent shareholders approved the waiver of the CDMA network purchase option and the termination of the 2006 CDMA Lease Agreement. Upon the completion of the CDMA business disposal on October 1, 2008, the 2006 CDMA Lease Agreement was terminated.
 
  (xv)  
Pursuant to 2006 CDMA Lease Agreement, the constructed capacity related costs in connection with the CDMA network capacity used by the Group, including the rentals for the exchange centers and the base stations, water and electricity charges, heating charges and fuel charges for the relevant equipment etc., as well as the maintenance costs of a non-capital nature, are charged to the Group. The proportion of the constructed capacity related costs to be borne by the Group is calculated on a monthly basis by reference to the actual number of cumulative CDMA subscribers of the Group at the end of the month prior to the occurrence of the costs divided by 90%, as a percentage of the total capacity available on the CDMA network.
 
  (xvi)  
Unicom Group is the registered proprietor of the “Unicom” trademark in English and the trademark bearing the “Unicom” logo, which are registered at the PRC State Trademark Bureau. Pursuant to an exclusive PRC trademark licence agreement between Unicom Group and the Group, the Group has been granted the right to use these trademarks on a royalty free and periodic renewal basis.

 

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40.  
RELATED PARTY TRANSACTIONS (Continued)
  40.1  
Transactions with Unicom Group and its subsidiaries (Continued)
  (b)  
None-recurring transaction
 
     
In January 2009, CUCL completed the acquisitions of the Target Business and the Target Assets from Unicom Group and Netcom Group while in 2008, the Company completed the merger with China Netcom by way of a scheme of arrangement. For details, please refer to Note 1.
 
  (c)  
Amounts due from and to related parties/Unicom Group and its subsidiaries
 
     
Amounts due to related parties as of December 31, 2010 included an unsecured short-term loan from Netcom BVI of approximately HKD2,390 million (equivalent to RMB2,033 million) (2009: HKD2,390 million (equivalent to RMB2,104 million)) obtained for the purpose of payment of the 2008 final dividend of the Company. The loan carries an interest rate of six-month HIBOR plus 0.8% per annum and is repayable on June 16, 2010. The loan was extended for another one year on June 12, 2010 and is repayable on June 16, 2011 with an interest rate of HIBOR plus 0.8% per annum.
 
     
Long-term loans due to ultimate holding company primarily represented the long-term intercompany loans for the financing of the construction of the Telecommunications Networks in Southern China, amounting to approximately RMB35,652 million as of December 31, 2008. The loans are unsecured, interest bearing, and repayable on demand after the period of twelve months from the balance sheet date as of December 31, 2008. The interest expenses in relation to the long-term loans due to ultimate holding company were calculated based on the interest rate of 5.40% per annum for the years ended December 31, 2008. Upon the completion of the 2009 Business Combination effective from January 2009, the long-term loans have been treated as a distribution from reserves by the Group to ultimate holding company. For details, please refer to note 4.2(b).
 
     
Apart from the short-term loan from Netcom BVI and long-term loans due to ultimate holding company as aforementioned, amounts due from and to related parties, Unicom Group, and its subsidiaries are unsecured, interest-free, repayable on demand/on contract terms and arise in the ordinary course of business in respect of transactions with related parties/Unicom Group and its subsidiaries as described in (a) and (b) above.

 

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40.  
RELATED PARTY TRANSACTIONS (Continued)
  40.1  
Transactions with Unicom Group and its subsidiaries (Continued)
  (d)  
Renewal of continuing connected transactions in October 2010
 
     
The agreements governing the recurring related party transactions disclosed in (a) above between the Group and Unicom Group and its subsidiaries were expired on December 31, 2010. Accordingly, on October 29, 2010, CUCL entered into the new agreements, “2011-2012 Network Lease Agreement” with Unicom New Horizon, and “2011 Comprehensive Services Agreement” with Unicom Group to renew certain continuing connected transactions. Major changes of the key terms between the new agreements and the previous agreements are set out as follows:
 
   
  2011-2012 Network Lease Agreement
 
     
Pursuant to 2011-2012 Network Lease Agreement, the Lease has extended to another two years effective from January 1, 2011 to December 31, 2012 and is renewable at the option of CUCL with at least two months’ prior notice on the same terms and conditions, except for the future lease fee which will remain subject to further negotiations between the parties, taking into account, among others, the then prevailing market conditions in Southern China. The annual fee payable by CUCL for the Lease for the two years ending December 31, 2011 and 2012 is RMB2.4 billion and RMB2.6 billion, respectively.
 
   
  2011 Comprehensive Services Agreement
 
   
2011 Comprehensive Services Agreement has a term of three years commencing on January 1, 2011 and expiring on December 31, 2013, and the service fees payable shall be calculated on the same basis as under previous agreements. In addition, as a result of the 2009 Business Combination, certain connected transactions under previous agreements are not regarded as related party transactions under 2011 Comprehensive Services Agreement, but as inter-company transactions within the Group.

 

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40.  
RELATED PARTY TRANSACTIONS (Continued)
  40.2  
Domestic carriers
  (a)  
Significant recurring transactions with domestic carriers
 
     
The following is a summary of significant transactions with domestic carriers in the ordinary course of business for the continuing operations:
                             
        The Group  
    Note   2008     2009     2010  
 
Interconnection revenue
  (i)     11,135       12,083       12,165  
Interconnection charges
  (i)     10,901       11,740       12,564  
Leased line revenue
  (ii)     608       433       346  
Leased line charges
  (ii)     252       102       113  
Engineering design and technical service revenue
  (iii)     197       287       208  
(i)  
The interconnection revenue and charges mainly represent the amounts due from or to domestic carriers for telephone calls made between the Group’s networks and the networks of domestic carriers. The interconnection settlements are calculated in accordance with interconnection agreements reached between the branches of the Group and domestic carriers on a provincial basis. The terms of these agreements are set in accordance with the standard settlement arrangement stipulated by the MIIT.
 
(ii)  
Leased line charges are paid or payable to domestic carriers by the Group for the provision of transmission lines. At the same time, the Group leases transmission lines to domestic carriers in return for leased line rental income. The charges are calculated at a fixed charge per line, depending on the number of lines being used by the Group and domestic carriers.
 
(iii)  
Engineering design and technical service revenue mainly represents the amounts due from domestic carriers for the provision of engineering design and technical services based on their demands and requirements. The prices are determined based on standards promulgated by the relevant government authorities.

 

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40.  
RELATED PARTY TRANSACTIONS (Continued)
  40.2  
Domestic carriers
  (b)  
Amounts due from and to domestic carriers
                 
    2009     2010  
 
Amounts due from domestic carriers
               
- Receivables for interconnection revenue, leased line revenue and engineering design and technical service revenue
    1,205       1,296  
 
               
- Less: Provision for doubtful debts
    (71 )     (35 )
 
           
 
               
 
    1,134       1,261  
 
           
Amounts due to domestic carriers
               
- Payables for interconnection charges and leased lines charges
    1,136       873  
 
           
   
All amounts due from and to domestic carriers are unsecured, interest-free and repayable within one year.

 

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40.  
RELATED PARTY TRANSACTIONS (Continued)
  40.2  
Domestic carriers (Continued)
  (c)  
Disposal of the Group’s CDMA business to China Telecom
 
     
In 2008, the Company completed disposal of the CDMA business to China Telecom. For details, please refer to Note 1 and Note 36.
 
     
Pursuant to the Disposal Agreement, the Group is committed to providing certain supporting services to China Telecom at no consideration during the transitional period. Such services include providing the use of certain telecommunications equipment, properties and information technology services in certain regions. The value of such services are estimated by the Group based on the costs of the underlying equipment or properties plus a margin. A portion of the consideration for disposal of the CDMA business equal to the estimated value of such services has been deferred and will be recognized over the expected service period.
 
     
In addition, pursuant to the Disposal Agreement, upon the completion of the CDMA business disposal, CUCL and China Telecom entered into agreements with respect to the swapping and operation of certain jointly used network assets in accordance with the terms set out in the Disposal Agreement. Based on the agreements, the Group concluded that the swapping and operation of these jointly used network assets would not have a significant impact on the consolidated financial statements.
 
     
As of December 31, 2009 and 2010, the balances due (to)/from China Telecom in relation to disposal of the CDMA business are as follows:
                 
    2009     2010  
 
Payables
               
- Advances from customers received on behalf of China Telecom
    (7 )      
 
           
 
               
Proceeds receivable
    5,121        
 
           

 

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41.  
CONTINGENCIES AND COMMITMENTS
  41.1  
Capital commitments
     
As of December 31, 2009 and 2010, the Group had capital commitments, mainly in relation to the construction of telecommunications networks, as follows:
                                 
    2009     2010  
            Land and              
    Total     buildings     Equipment     Total  
 
                               
Authorized and contracted for
    8,810       393       5,687       6,080  
Authorized but not contracted for
    4,030       180       2,123       2,303  
 
                       
 
                               
Total
    12,840       573       7,810       8,383  
 
                       
     
As of December 31, 2009 and 2010, no capital commitments were denominated in US dollars.

 

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41.  
CONTINGENCIES AND COMMITMENTS (Continued)
  41.2  
Operating lease commitments
     
As of December 31, 2009 and 2010, the Group had total future aggregate minimum lease payments under non-cancellable operating leases as follows:
                                         
    2009     2010  
                            Tele-        
                            communications        
                            networks in        
            Land and             Southern China        
    Total     buildings     Equipment     (Note 1(b))     Total  
 
                                       
Leases expiring:
                                       
- not later than one year
    4,109       1,713       133       2,400       4,246  
- later than one year and not later than five years
    3,615       3,401       206       2,600       6,207  
- later than five years
    1,179       907       43             950  
 
                             
 
                                       
Total
    8,903       6,021       382       5,000       11,403  
 
                             
  41.3  
Contingent liabilities
     
As aforementioned in Note 28, the tariffs for the services provided by the Group are subject to regulations by various government authorities. In 2008, the NDRC investigated the compliance with tariffs regulations of several branches of CUCL and CNC China. Based on management’s assessment and continuous discussions with MIIT and NDRC, management considered that the Group complied with the regulations issued by the relevant government authorities, and the likelihood of material future cash outflow as a result of the investigation is remote. Accordingly, no provisions were recorded as of December 31, 2009 and 2010.
  41.4  
Guarantee
     
The Company provides guarantee in favour of the convertible bondholders in respect of the outstanding convertible bonds issued by Billion Express amounted to USD1,838,800,000 as of December 31, 2010 (Note 22).

 

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42.  
EVENTS AFTER THE REPORTING PERIOD
  (a)  
Proposed dividend
     
After the reporting period, the Board of Directors proposed a final dividend for 2010. For details, please refer to Note 37.
 
  (b)  
Agreement of additional investments between the Company and Telefónica
     
On January 23, 2011, the Company entered into a strategic agreement with Telefónica that: (a) Telefónica would purchase ordinary shares of the Company for a consideration of USD500 million through acquisition from third parties; and (b) the Company would acquire from Telefónica 21,827,499 ordinary shares of Telefónica held in treasury (“Telefónica Treasury Shares”) for an aggregate purchase price of Euro374,559,882.84. On January 25, 2011, the Company completed the purchase of Telefónica Treasury Shares in accordance with the strategic agreement.
 
  (c)  
Issue of super and short-term commercial papers
     
On March 10, 2011, CUCL issued two tranches of super and short-term commercial papers in the amount of RMB8 billion for each tranche. The paper has a maturity period of 180 days and carries interests at 3.88% per annum.

 

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43.  
COMPARATIVE FIGURES
   
The comparative figure has been reclassified to conform to current year presentation by including “Leasing fee for telecommunications networks in Southern China” of RMB2.0 billion into “Networks, operations and support expenses” in the consolidated statement of income for the year ended December 31, 2009.
44.  
APPROVAL OF FINANCIAL STATEMENTS
   
The financial statements were approved by the Board of Directors on May 24, 2011.

 

F-124

Exhibit 1.3
THE COMPANIES ORDINANCE (CHAPTER 32)
Company Limited by Shares
ARTICLES OF ASSOCIATION
(inclusive amendments up to 24 May 2011)
OF
CHINA UNICOM (HONG KONG) LIMITED

(CHINESE CHARACTER)
PRELIMINARY
1.  
The regulations in Table A in the First Schedule to the Ordinance shall not apply to the Company.
INTERPRETATION
2.  
(a) In these Articles save where the context otherwise requires:
associate in relation to any Director, has the meaning ascribed to it under the Listing Rules;
Auditors means the Auditors of the Company for the time being;
Chairman means the Chairman presiding at any meeting of members or the Board;
Company means the above-named Company;
Board and Directors means the directors for the time being of the Company or the Directors present at a duly convened meeting of directors at which a quorum is present;
call includes any instalment of a call and, in the application of provisions of these Articles to forfeiture of shares, a sum which, by the terms of issue of a share, is payable at a fixed time either in respect of the nominal value of the share or by way of premium;
capital means the share capital from time to time of the Company;
Clearing House shall mean a recognised clearing house within the meaning of Schedule 1 to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong);
Dividend includes distributions in specie or in kind, capital distributions and capitalisation issues;
Dollars & $ means dollars in the lawful currency of Hong Kong;
Hong Kong means the Hong Kong Special Administrative Region of the People’s Republic of China;
Listing Rules means the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited;
month means calendar month;
Office means the registered office of the Company for the time being;

 


 

paid up includes credited as paid up;
Ordinance means the Companies Ordinance (Chapter 32 of the Laws of Hong Kong), and includes every other ordinance incorporated therewith or substituted therefor, and in the case of any such substitution the references in these Articles to the provisions of the Ordinance shall be read as references to the provisions substituted therefor in the new ordinance;
Register means the register of members of the Company kept pursuant to the Ordinance and includes any branch register kept pursuant to the Ordinance;
Seal means the common seal of the Company or any official seal that the Company may have as permitted by the Ordinance;
Secretary means the person or persons appointed for the time being to perform for the Company the duties of a secretary;
share means a share in the capital of the Company and includes stock except where a distinction between stock and shares is expressed or implied;
Stock Exchange means The Stock Exchange of Hong Kong Limited;
these Articles means these Articles of Association in their present form or as altered from time to time;
in writing and written shall include printing, lithograph, xerography, photography or other modes of representing or reproducing words in a permanent visible form or, to the extent permitted by and in accordance with the Ordinance and any other applicable laws, rules and regulations, any visible substitute for writing (including a communication sent by electronic transmission in any form through any medium), or modes of representing or reproducing words partly in one visible form and partly in another visible form.
  (b)  
In these Articles, if not inconsistent with the subject or context, words importing the singular number only shall include the plural number and vice versa, words importing any gender shall include all other genders and references to persons shall include corporations (acting, where applicable, by their duly authorised representatives).
  (c)  
Subject as aforesaid, any words defined in the Ordinance shall, if not inconsistent with the subject or context, bear the same meaning in these Articles.
  (d)  
The headings and any marginal notes are inserted for convenience only and shall not affect the construction of these Articles.
THE OFFICE
3.  
The Office shall be at such place in Hong Kong as the Directors shall from time to time appoint.
SHARES
4.  
Shares may be issued with a preferential or qualified right to dividends and in the distribution of assets of the Company and with a special, or without any right of voting.

 

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5.  
Without prejudice to any special rights, privileges or restrictions for the time being attached to any issued shares, any unissued or forfeited shares may be issued or re-issued upon such terms and conditions, and with such rights, privileges and restrictions attached thereto, whether in regard to dividends, voting, repayment or redemption of share capital, or otherwise, as the Company may, subject to the Ordinance, from time to time determine or, in the absence of any such determination, as the Directors shall determine.
6.  
The Board may, subject to the approval by the shareholders in general meeting, issue warrants to subscribe for any class of shares or securities of the Company on such terms as the Board may from time to time determine. Where warrants are issued to bearer, no certificate thereof shall be issued to replace one that has been lost unless the Board is satisfied beyond reasonable doubt that the original certificate thereof has been destroyed and the Company has received an indemnity in such form as the Board shall think fit with regard to the issue of any such replacement certificate.
7.  
Save as provided by contract or the Ordinance or these Articles to the contrary, all unissued shares shall be at the disposal of the Directors who may allot, grant options over or otherwise deal with or dispose of the same to such persons, at such times, for such consideration and generally upon such terms and conditions as they shall in their absolute discretion think fit, provided that no shares of any class shall be issued at a discount except in accordance with section 50 of the Ordinance.
8.  
The Company may make arrangements on the issue of shares for a difference between the holders of such shares in the amount of calls to be paid and the time of payment of such calls.
9.  
If by the conditions of allotment of any shares the whole or part of the issue price thereof shall be payable by instalments, every such instalment shall, when due, be paid to the Company by the person who for the time being and from time to time shall be the registered holder of the shares, or his legal personal representative.
10.  
Subject to the provisions of section 49 of the Ordinance, any preference share may, with the sanction of a special resolution, be issued on the terms that it is, or at the option of the Company is liable, to be redeemed.
11.  
Subject to the provisions of these Articles, except as required by law or ordered by a court of competent jurisdiction, no person shall be recognised by the Company as holding any share upon any trust, and except as aforesaid, the Company shall not be bound by or required in any way to recognise any contingent, future, partial or equitable interest in any share or in any fractional part of a share or any other right in respect of any share or any other claim to or in respect of any such share on the part of any person (even when having notice thereof) except an absolute right to the entirety thereof in the registered holder.
12.  
The Company may in connection with the issue of any shares exercise all powers of paying interest out of capital and of paying commission and brokerage conferred or permitted by the Ordinance.
13.  
No person shall become a member until his name shall have been entered into the Register.

 

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13A.  
Whenever any fractions arise as a result of an issue of shares by the Company, the Board may, on behalf of the members, deal with the fractional shares in such manner as it thinks fit. In particular, without limitation, the Board may sell the fractional share to which any members would otherwise become entitled to any person and may retain the net proceeds of sale for the benefit of the Company or distribute the net proceeds of sale in due proportion among those members so entitled. For this purpose, the Board may authorise any person to execute and deliver as transferor a form of transfer or other instrument or instruction of transfer of the fractional shares to the purchaser thereof, who shall not be bound to see to the application of the purchase money.
JOINT HOLDERS OF SHARES
14.  
Where two or more persons are registered as the holders of any share they shall be deemed to hold the same as joint tenants with benefit of survivorship, subject to the following provisions:
  (a)  
the Company shall not be bound to register more than four persons as the holders of any shares except in the case of the legal personal representatives of a deceased member;
  (b)  
the joint holders of any shares shall be liable severally as well as jointly in respect of all payments which ought to be made in respect of such shares;
  (c)  
on the death of any one of such joint holders the survivor or survivors shall be the only person or persons recognised by the Company as having any title to such shares, but the Directors may require such evidence of death as they may deem fit;
  (d)  
any one of such joint holders may give effectual receipts for any dividend, bonus or return of capital payable to such joint holders; and
  (e)  
the Company shall be at liberty to treat the person whose name stands first in the Register as one of the joint holders of any shares as solely entitled to delivery of the certificate relating to such shares, or to receive notices from the Company, or to attend or vote at general meetings of the Company, and any notice given to such person shall be deemed notice to all the joint holders; but any one of such joint holders may be appointed the proxy of the persons entitled to vote on behalf of such joint holders, and as such proxy to attend and vote at general meetings of the Company, but if more than one of such joint holders be present at any meeting personally or by proxy that one so present whose name stands first in the Register in respect of such shares shall alone be entitled to vote in respect thereof.
SHARE CERTIFICATES
15.  
Every person whose name is entered as a member in the Register shall be entitled without payment to receive within two months after allotment or lodgment of an instrument of transfer duly stamped, or within such other period as the conditions of issue shall provide, one certificate for all his shares of any particular class, or if he shall so request, upon payment of a fee (not exceeding HK$2.50 or such greater sum as the Stock Exchange may from time to time permit) for every certificate after the first, as the Directors shall from time to time determine, such number of certificates for shares in Stock Exchange board lots or multiples thereof as he shall request and one for the balance (if any) of the shares in question, provided that in the event of a member transferring part of the shares represented by a certificate in his name a new certificate in respect of the balance thereof shall be issued in his name without payment and, in the case of a share or shares held jointly by several persons the Company shall not be bound to issue a certificate or certificates to each such person, and the issue and delivery of a certificate or certificates to one of several joint holders shall be sufficient delivery to all such holders.

 

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16.  
Every share certificate shall be issued under the Seal (which for this purpose may be any official seal as permitted by section 73A of the Ordinance) and shall specify the number and class of shares and, if required, the distinctive numbers thereof, to which the certificate relates, and the amount paid up thereon and may otherwise be in such form as the Board may from time to time determine. If at any time the share capital of the Company is divided into different classes of shares, every share certificate issued at that time shall comply with section 57A of the Ordinance, and no certificate shall be issued in respect of more than one class of shares.
17.  
Subject to section 71A of the Ordinance, if any share certificate shall be worn out, defaced, destroyed or lost, it may be replaced on payment of such fee, if any (not exceeding HK$2.50 or such greater sum as the Stock Exchange may from time to time permit), on such evidence being produced as the Directors shall require, and in case of wearing out or defacement, on delivery up of the old certificate, and in case of destruction or loss, on the execution of such indemnity (if any), as the Directors may require. In case of destruction or loss, the person to whom such replacement certificate is given shall also bear and pay to the Company all expenses incidental to the investigation by the Company of the evidence of such destruction or loss and of the production of such indemnity.
CALLS ON SHARES
18. (a)
 The Directors may from time to time make calls upon the members in respect of all moneys unpaid on their shares whether on account of the nominal value of the shares or by way of premium but subject always to the terms of issue of such shares, and any such call may be made payable by instalments.
  (b)  
Each member shall, subject to receiving at least fourteen days’ notice specifying the time or times and place of payment, pay to the Company the amount called on his shares and at the time or times and place so specified. The non-receipt of a notice of any call by, or the accidental omission to give notice of a call to, any of the members shall not invalidate the call.
19.  
A call shall be deemed to have been made at the time when the resolution of the Directors authorising such call was passed. A call may be revoked, varied or postponed as to all or any of the members liable therefor as the Directors may determine. A person on whom a call is made will remain liable for calls made upon him notwithstanding the subsequent transfer of the shares in respect whereof the call was made.
20.  
If any part of a call is not paid before or on the day appointed for payment thereof, the person from whom the payment is due shall be liable to pay all costs, charges and expenses that the Company may have incurred by reason of such non-payment together with interest on the outstanding part thereof at such rate as the Directors shall determine (not exceeding twenty per cent. per annum) from the day appointed for the payment of such call or instalment to the time of discharge thereof in full; but the Directors may, if they shall think fit, waive the payment of such costs, charges, expenses or interest or any part thereof.
21.  
If, by the terms of the issue of any shares or otherwise, any amount is made payable upon allotment or at any fixed time, whether on account of the nominal amount of the shares or by way of premium, every such amount shall be payable as if it were a call duly made and payable on the date on which by the terms of issue the same becomes payable; and all the provisions hereof with respect to the payment of calls and interest thereon, or to the forfeiture of shares for non-payment of calls shall apply to every such amount and the shares in respect of which it is payable in the case of non-payment thereof.

 

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22.  
The Directors may, if they shall think fit, receive from any member willing to advance the same (either in money or money’s worth) all or any part of the moneys uncalled and unpaid or instalments payable upon any shares held by him; and upon all or any of the moneys so paid in advance the Directors may (until the same would, but for such payment in advance, become presently payable) pay interest at such rate as may be agreed upon between the member paying the moneys in advance and the Directors (not exceeding twenty per cent. per annum). But a payment in advance of a call shall not entitle the shareholder to receive any dividend or to exercise any other rights or privileges as a shareholder in respect of the share or the due portion of the shares upon which payment has been advanced by such shareholder before it is called. The Directors may also at any time repay the amount so advanced upon giving to such member one month’s notice in writing unless before the expiration of such notice the amount so advanced shall have been called up on the shares in respect of which it was advanced.
23.  
On the trial or hearing of any action for the recovery of any money due for any call, it shall be sufficient to prove that the name of the member sued is entered in the Register as the holder, or one of the holders, of the shares in respect of which such money is due; that the resolution making the call is duly recorded in the minute book of the Company; and that notice of such call was duly given to the member sued in pursuance of these Articles, and it shall not be necessary to prove the appointment of the Directors who made such call, nor any other matter whatsoever, but the proof of the matters aforesaid shall be conclusive evidence that the money is due.
24.  
No member shall, unless the Directors otherwise determine, be entitled to receive any dividend or bonus, or to receive notice of or to be present or vote at any general meeting, either personally or (save as proxy for another member) by proxy, or to exercise any privileges as a member, or be reckoned in a quorum, until he shall have paid all calls or other sums for the time being due and payable on every share held by him, whether alone or jointly with any other person, together with interest and expenses (if any).
FORFEITURE
25.  
If any member fails to pay in full any call or any instalment of a call on the day appointed for payment thereof, the Directors may at any time thereafter, during such time as any part of the call remains unpaid without prejudice to the provisions of Article 24, serve a notice on him requiring him to pay so much of the call as is unpaid together with interest accrued and any expenses incurred by reason of such non-payment.
26.  
The notice shall name a further day (not being less than fourteen days from the date of the notice) on or before which such call or part thereof and all interest accrued and expenses incurred by reason of such non-payment are to be paid, and it shall also name the place where payment is to be made, such place being either the Office, or some other place at which calls of the Company are usually made payable. The notice shall also state that, in the event of non-payment at or before the time and at the place appointed, the shares in respect of which such call is payable will be liable to forfeiture.
27.  
If the requirements with regard to payment of any such notice as aforesaid be not complied with, any shares in respect of which such notice has been given may, at any time thereafter and before the payment required by the notice has been made, be forfeited by a resolution of the Directors to that effect, and any such forfeiture shall extend to all dividends and bonuses declared in respect of the shares so forfeited but not payable until after such forfeiture. The Directors may accept surrender of any shares liable to be forfeited hereunder and in such cases references in the Articles to forfeiture shall include surrender.

 

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28.  
Any shares so forfeited shall be deemed for the purposes of this Article to be the property of the Company and may be sold, re-allotted or otherwise disposed of either subject to or discharged from all calls made prior to the forfeiture, to any person, upon such terms as to subscription price and otherwise and in such manner and at such time or times as the Directors think fit. For the purpose of giving effect to any such sale or other disposition the Directors may authorise the transfer of the shares so sold or otherwise disposed of to the purchaser thereof or any other person becoming entitled thereto. The Directors shall account to the person whose shares have been forfeited with the balance (if any) of monies received by the Company in respect of those shares after deduction of expenses of forfeiture, sale or disposal of the shares and any amount due to the Company in respect of the shares.
29.  
The Directors may, at any time before any shares so forfeited shall have been sold, re-allotted or otherwise disposed of, annul the forfeiture thereof upon such conditions as they think fit or permit the share forfeited to be redeemed upon the terms of payment of all calls and interest due thereon and all expenses incurred in respect of the share, and upon such further terms (if any) it thinks fit.
30.  
Any person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares but shall notwithstanding the forfeiture be and remain liable to pay to the Company all moneys which, at the date of forfeiture, were payable by him to the Company in respect of the shares, together with interest thereon from the date of forfeiture until payment at such rate as the Directors may prescribe (not exceeding twenty per cent. per annum), and the Directors may enforce the payment of such moneys or any part thereof and without any deduction or allowance for the value of the shares at the date of forfeiture, but his liability shall cease if and when the Company shall have received payment in full of all such moneys in respect of the shares. For the purposes of this Article any sum which, by the terms of issue of a share payable thereon at a fixed time which is subsequent to the date of forfeiture, whether on account of the nominal value of the share or by way of premium, shall notwithstanding that that time has not yet arrived be deemed to be payable at the date of forfeiture, and the same shall become due and payable immediately upon the forfeiture, but interest thereon shall only be payable in respect of any period between the said fixed time and the date of actual payment.
31.  
When any shares have been forfeited, notice of the resolution shall be given to the member in whose name it stood immediately prior to the forfeiture and an entry shall be made in the Register recording the forfeiture and the date thereof but no forfeiture shall be in any manner invalidated by any omission or neglect to give such notice or make any such entry, and so soon as the shares so forfeited have been sold or otherwise disposed of an entry shall also be made of the manner and date of the sale or disposal thereof.
LIEN
32.  
The Company shall have a first and paramount lien on every share (not being a fully paid-up share) for all moneys outstanding in respect of such share whether presently payable or not, and the Company shall also have a first and paramount lien on every share (other than fully paid-up shares) standing registered in the name of a member, whether singly or jointly with any other person or persons, for all the debts and liabilities of such member or his estate to the Company, whether the same shall have been incurred before or after notice has been given to the Company of any interest of any person other than such member, and whether the time for the payment or discharge of the same shall have already arrived or not, and notwithstanding that the same are joint debts or liabilities of such member or his estate and any other person, whether a member or not. The Company’s lien on a share shall extend to all dividends payable thereon. The Directors may at any time either generally or in any particular case waive any lien that has arisen, or declare any share to be wholly or in part exempt from the provisions of this Article.

 

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33.  
The Company may sell in such manner as the Directors think fit any share on which the Company has a lien, but no sale shall be made unless some sum in respect of which the lien exists is presently payable or the liability or engagement in respect of such lien exists is liable to be presently fulfilled or discharged, nor until the expiration of fourteen days after a notice in writing stating and demanding payment of the sum presently payable and giving notice of intention to sell in default shall have been given to the holder for the time being of the share or the person entitled thereto by reason of his death, bankruptcy or winding-up or otherwise by operation of law or court order.
34.  
The net proceeds of such sale after payment of the costs of such sale shall be applied in or towards payment or satisfaction of the debts or liabilities in respect whereof the lien exists so far as the same are presently payable and any residue shall (subject to a like lien for debts or liabilities not presently payable as existed upon the shares prior to the sale) be paid to the person entitled to the shares at the time of the sale. For giving effect to any such sale the Directors may authorise some person to transfer the shares so sold to the purchaser thereof and may enter the purchaser’s name in the Register as holder of the shares, and the purchaser shall not be bound to see to the application of the purchase money, nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings in reference to the sale.
35.  
A statutory declaration in writing that the declarant is a Director or the Secretary of the Company and that a share has been duly forfeited or surrendered or sold on a date stated in the declaration shall be conclusive evidence of the facts therein stated as against all persons claiming to be entitled to the share. Such declaration and the receipt of the Company for the consideration (if any) given for the share on the sale, re-allocation or disposal thereof together with the share certificate delivered to a purchaser or allottee thereof shall (subject to the execution of a transfer if the same be required) constitute a good title to the share and the person to whom the share is sold, re-allotted or disposed of shall be registered as the holder of the share and shall not be bound to see to the application of the purchase money (if any) nor shall his title to the share be affected by any irregularity or invalidity in the proceedings in reference to the forfeiture, surrender, sale, re-allotment or disposal of the share.
TRANSFER OF SHARES
36.  
The instrument of transfer of any shares in the Company shall be in writing in the usual common form or in such other form as the Board may accept and may be under hand only or, if the transferor or transferee is a Clearing House (or its nominee), by hand or by machine imprinted signature or by such other manner of execution as the Board may approve from time to time and shall be executed by or on behalf of the transferor and by or on behalf of the transferee. The transferor shall remain the holder of the shares concerned until the name of the transferee is entered in the Register in respect thereof. Nothing in these Articles shall preclude the Board from recognising a renunciation of the allotment or provisional allotment of any share by the allottee in favour of some other person.
37.  
Every instrument of transfer shall be lodged at the Office for registration (or at such other place the Board may appoint for such purpose) accompanied by the certificate relating to the shares to be transferred and such other evidence as the Directors may require in relation thereto. All instruments of transfer which shall be registered shall be retained by the Company, but save where fraud is suspected any instrument of transfer which the Directors may decline to register shall, on demand, be returned to the person depositing the same.
38.  
There shall be paid to the Company in respect of the registration of a transfer and of any Grant of Probate or Letters of Administration, Certificate of Marriage or Death, Power of Attorney or other document relating to or affecting the title to any share or for making of any entry in the Register affecting the title to any share such fee (if any) as the Directors may from time to time require or prescribe (but not exceeding HK$2.50 or such greater sum as the Stock Exchange may from time to time permit).

 

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39.  
The registration of transfers may be suspended at such times and for such periods as the Directors may, in accordance with section 99 of the Ordinance, from time to time determine and either generally or in respect of any class of shares.
40.  
The Directors may, subject to section 69 of the Ordinance, at any time in their absolute discretion and without assigning any reason therefor decline to register any transfer of any share (not being a fully paid-up share). If the Directors refuse to register a transfer they shall, within two months after the date on which the transfer was lodged with the Company, send to the transferor and transferee notice of the refusal.
 
41.  
The Directors may also decline to register any transfer unless:
  (a)  
the instrument of transfer is in respect of only one class of share;
  (b)  
in the case of a transfer to joint holders, the number of transferees does not exceed four;
 
  (c)  
the shares concerned are free of any lien in favour of the Company;
 
  (d)  
the instrument of transfer is properly stamped;
  (e)  
such other conditions as the Directors may from time to time impose for the purpose of guarding against losses arising from forgery are satisfied;
  (f)  
a fee not exceeding the maximum fee prescribed or permitted from time to time by the Stock Exchange is paid to the Company in respect thereof;
  (g)  
the instrument of transfer is accompanied by the certificate of the shares to which it relates, and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer.
42.  
No transfer may be made to an infant or to a person of unsound mind or under other legal disability.
TRANSMISSION OF SHARES
43.  
In the case of the death of a member, the survivor or survivors where the deceased was a joint holder, and the legal personal representatives of the deceased where he was a sole or only surviving holder, shall be the only persons recognised by the Company as having any title to his shares; but nothing herein contained shall release the estate of a deceased holder, whether sole or joint, from any liability in respect of any share solely or jointly held by him.
44.  
Any person becoming entitled to shares in the Company in consequence of the death, bankruptcy or winding-up of any member or otherwise by operation of law or by court order shall, upon procuring such evidence of his title as the Directors may require, have the right either to be registered himself as the holder of the shares upon giving to the Company notice in writing of such his desire or to transfer such shares to some other person. All the limitations, restrictions and provisions of these Articles and the Ordinance relating to the right to transfer and the registration of transfers of shares shall be applicable to any such notice or transfer as if the same were a transfer of shares by a member, including the Directors’ right to refuse or suspend registration.

 

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45.  
A person becoming entitled to shares in the Company in consequence of the death, bankruptcy or winding-up of any member or otherwise by operation of law or by court order shall have the right to receive and give a discharge for any dividends or other moneys payable in respect of the shares, provided always that the Directors may at any time give notice requiring any such person to elect to be registered himself or to transfer the shares, and if the notice is not complied with within sixty days, the Directors may thereafter withhold payment of all dividends or other moneys payable in respect of the shares until the requirements of the notice have been complied with but subject to the requirements of Article 76 being met, such a person may vote at meetings.
STOCK
46.  
The Company may from time to time by ordinary resolution convert any fully paid-up shares into stock and may reconvert any stock into fully paid-up shares of any denomination. After the passing of any resolution converting all the fully paid-up shares of any class in the capital of the Company into stock, any shares of that class which subsequently become fully paid-up and rank pari passu in all other respects with such shares shall, by virtue of this Article and such resolution, be converted into stock transferable in the same units as the shares already converted.
47.  
The holders of stock may transfer the same or any part thereof in the same manner and subject to the same regulations as the shares from which the stock arose might prior to conversion have been transferred or as near thereto as circumstances admit. The Directors may from time to time fix the minimum amount of stock transferable and restrict or forbid the transfer of fractions of such minimum, but the minimum shall not, without the sanction of an ordinary resolution of the Company, exceed the nominal amount of each of the shares from which the stock arose. No warrants to bearer shall be issued in respect of any stock.
48.  
The holders of stock shall, according to the amount of the stock held by them, have the same rights as regards dividends, participation in assets on a winding-up, voting at general meetings of the Company and other matters as if they held the shares from which the stock arose, but no such right (except as to participation in dividends, profits and in assets on a reduction of capital or a winding-up) shall be conferred by an amount of stock which would not, if existing in shares, have conferred such right.
49.  
Such of these Articles as are applicable to fully paid-up shares shall apply mutatis mutandis to stock, and the words “share” and “shareholder” shall include “stock” and “stockholder”.
INCREASE OF CAPITAL AND PURCHASE OF OWN SHARES
50.  
The Company may, from time to time, by ordinary resolution increase its authorised capital by such sum divided into shares of such amounts as the resolution shall prescribe.

 

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51.  
The general meeting resolving upon the creation of any new shares may direct that the same or any of them shall be offered in the first instance, and either at par or at a premium or (subject to the provisions of the Ordinance) at a discount, to all the holders for the time being of any class of shares in the capital of the Company, in proportion to the number of shares of such class held by them respectively, or make any other provisions as to the issue and allotment of the new shares, and in default of any such direction, or so far as the same shall not extend, the new shares shall be at the disposal of the Directors, and Article 7 shall apply thereto. The Company may exercise any powers conferred or permitted by the Ordinance or any other ordinance from time to time to purchase or otherwise acquire its own shares and warrants (including any redeemable shares) at any price or to give, directly or indirectly, by means of a loan, guarantee, the provision of security or otherwise, financial assistance for the purpose of or in connection with a purchase or other acquisition made or to be made by any person of any shares or warrants in the Company and should the Company purchase or otherwise acquire its own shares or warrants neither the Company nor the Board shall be required to select the shares or warrants to be purchased or otherwise acquired ratably or in any other particular manner as between the holders of shares or warrants of the same class or as between them and the holders of shares or warrants of any other class or in accordance with the rights as to dividends or capital conferred by any class of shares provided always that (a) purchases not made through the market or by tender shall be limited to a maximum price, and (b) if purchases are by tender, tenders shall be available to all shareholders alike and provided further that any such purchase or other acquisition or financial assistance shall only be made or given in accordance with any relevant rules or regulations issued by the Stock Exchange or the Securities and Futures Commission from time to time in force.
52.  
Subject to any direction or determination that may be given or made in accordance with the powers contained in these Articles, all new shares created pursuant to Article 50 shall be subject to the same provisions herein contained with reference to the payment of calls, transfer, transmission, forfeiture, lien and otherwise as the existing shares of the Company.
ALTERATIONS OF SHARE CAPITAL
53.  
The Company may by ordinary resolution:
  (a)  
subdivide its existing shares or any of them into shares of smaller amount than is fixed by the Memorandum of Association of the Company, provided that in the subdivision of an existing share the proportion between the amount paid and the amount (if any) unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived, and so that the resolution whereby any share is subdivided may determine that as between the holders of the shares resulting from such subdivision one or more of the shares may, as compared with the others, have any such preferred, deferred or other special rights or be subject to any such restrictions as the Company has power to attach to unissued or new shares;
  (b)  
divide its shares into several classes and attach thereto respectively any preferential, deferred, qualified or special rights, privileges or conditions;
  (c)  
consolidate and divide its capital or any part thereof into shares of larger amount than its existing shares;
  (d)  
cancel any shares which at the date of the passing of the resolution have not been taken or agreed to be taken by any person and diminish the amount of its authorised capital by the amount of the shares so cancelled; or
  (e)  
make provision for the issue and allotment of shares which do not carry any voting rights.

 

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54.  
The Company may by special resolution reduce its share capital and any capital redemption reserve fund or any share premium account in any manner allowed by law.
55.  
Where any difficulty arises in regard to any consolidation and division under paragraph (c) of Article 53, the Directors may settle the same as they think expedient and in particular may arrange for the sale of the shares representing fractions and the distribution of the net proceeds of sale in due proportion amongst the members who would have been entitled to the fractions, and for this purpose the Directors may authorise some person to transfer the shares representing fractions to the purchaser thereof, who shall not be bound to see to the application of the purchase money nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings relating to the sale.
MODIFICATION OF RIGHTS
56.  
All or any of the special rights attached to any class or shares (unless otherwise provided for by the terms of issue of the shares of that class) for the time being in issue may subject to the provisions of the Ordinance, at any time, as well before as during liquidation, be altered or abrogated either with the consent in writing of the holders of not less than three-fourths of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of shares of that class, and all the provisions contained in these Articles relating to general meetings shall mutatis mutandis apply to every such meeting but so that the quorum thereof shall be not less than two persons holding or representing by proxy one-third in nominal value of the issued shares of the class, and that any holder of shares of that class present in person or by proxy may demand a poll.
57.  
The provisions of the foregoing Article shall apply to the variation or abrogation of the special rights attached to some only of the shares of any class as if each group of shares of the class differently treated formed a separate class the rights whereof are to be varied.
58.  
The special rights concurred upon the holders of the shares or class of shares shall not unless otherwise expressly provided in the rights attaching to or the terms of issue of such shares, be deemed to be altered by the creation or issue of further shares ranking pari passu therewith.
GENERAL MEETINGS
59.  
The Company shall in each year hold a general meeting as its annual general meeting in addition to any other meetings in that year. The annual general meeting shall be held at such time (within a period of not more than fifteen months, or such longer period as the Registrar of Companies may authorise in writing, after the holding of the last preceding annual general meeting) and place as may be determined by the Directors. All other general meetings shall be called extraordinary general meetings.
60.  
The Directors may wherever they think fit, and shall on requisition in accordance with the Ordinance, proceed to convene an extraordinary general meeting.

 

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NOTICE OF GENERAL MEETINGS
61.  
Subject to section 116C of the Ordinance, an annual general meeting and a meeting called for the passing of a special resolution shall be called by not less than twenty-one days’ notice in writing, and any other general meeting shall be called by not less than fourteen days’ notice in writing. The notice shall specify the place, date and time of meeting, and, in the case of special business, the general nature of that business. The notice convening an annual general meeting shall specify the meeting as such, and the notice convening a meeting to pass a special resolution shall specify the intention to propose the resolution as a special resolution. There shall appear on every such notice with reasonable prominence a statement that a member entitled to attend and vote is entitled to appoint one or more proxies to attend and vote instead of him and that a proxy need not be a member of the Company.
62.  
Notwithstanding that a meeting of the Company is called by shorter notice than that specified in these Articles or required by the Ordinance, it shall be deemed to have been duly called if it is so agreed:
  (a)  
in the case of a meeting called as the annual general meeting, by all the members entitled to attend and vote thereat; and
  (b)  
in the case of any other meeting, by a majority in number of the members having the right to attend and vote at the meeting, being a majority together holding not less than 95 per cent. in nominal value of the shares giving that right.
63.  
The accidental omission to give notice of a meeting or (in cases where instruments of proxy are sent out with the notice) the accidental omission to send such instrument of proxy to, or the non-receipt of notice of a meeting or such instrument of proxy by, any person entitled to receive such notice shall not invalidate the proceedings at that meeting.
PROCEEDINGS AT GENERAL MEETINGS
64.  
All business shall be deemed special that is transacted at an extraordinary general meeting and at an annual general meeting with the exception of:
  (a)  
the receipt of the accounts and balance sheet and the reports of the Directors and other documents required to be annexed to the accounts;
 
  (b)  
the declaration and sanction of dividends;
 
  (c)  
the election of Directors in place of those retiring (if any);
 
  (d)  
the election or re-election of the Auditors of the Company; and
 
  (e)  
the fixing of, or the determination of the method of fixing, the remuneration or extra remuneration of the Directors and of the Auditors of the Company.
65.  
No business save the election of a chairman of the meeting shall be transacted at any general meeting unless a quorum is present when the meeting proceeds to business. Two members present in person or by proxy and entitled to vote shall be a quorum for all purposes.

 

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66.  
If, within thirty minutes from the time appointed for the meeting a quorum be not present, the meeting, if convened upon requisition in accordance with the Ordinance, shall be dissolved; but in any other case it shall stand adjourned to the same day in the next week at the same time and place, or to such other day, time and place as the Chairman of the meeting may determine. If at such adjourned meeting a quorum be not present within thirty minutes from the time appointed for the meeting, the member or members present in person or by proxy shall be a quorum and may transact the business for which the meeting is called.
67.  
The Chairman (if any) of the Board or, in his absence, a Deputy Chairman (if any) shall preside as Chairman at every general meeting. If there is no such Chairman or Deputy Chairman, or if at any meeting neither the Chairman nor a Deputy Chairman is present within fifteen minutes after the time appointed for holding the meeting, or if neither of them is willing to act as Chairman, the Directors present shall choose one of their number to act, or if one Director only is present he shall preside as Chairman if willing to act. If no Director is present, or if each of the Directors present declines to act as Chairman, the persons present and entitled to vote shall elect one of their number to be Chairman of the meeting.
68.  
The Chairman of any general meeting at which a quorum is present may, with the consent of the meeting, and shall, if so directed by the meeting, adjourn the meeting from time to time and from place to place or sine die; but no business shall be transacted at any adjourned meeting other than business which might have been transacted at the meeting from which the adjournment took place unless due notice thereof is given or such notice is waived in the manner prescribed by these Articles. When a meeting is adjourned for thirty days or more, or sine die, notice of the adjourned meeting shall be given as in the case of an original meeting. Save as aforesaid, it shall not be necessary to give any notice of an adjourned meeting or the business to be transacted thereat. Where a meeting is adjourned sine die the time and place for the adjourned meeting shall be fixed by the Directors.
VOTING
69.  (a)  
 At any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded by:
  (i)  
the Chairman of the meeting; or
 
  (ii)  
at least three members present in person (or in the case of a member being a corporation, by its duly authorised representative) or by proxy and entitled to vote at the meeting; or
 
  (iii)  
any member or members present in person (or in the case of a member being a corporation, by its duly authorised representative) or by proxy and representing in the aggregate not less than one-tenth of the total voting rights of all members having the right to attend and vote at the meeting; or
 
  (iv)  
any member or members present in person (or in the case of a member being a corporation, by its duly authorised representative) or by proxy and holding shares conferring a right to attend and vote at the meeting on which there have been paid up sums in the aggregate equal to not less than one-tenth of the total sum paid up on all shares conferring that right.
  (b)  
Unless a poll is so demanded and the demand is not withdrawn, a declaration by the Chairman that a resolution has, on a show of hands, been carried unanimously or by a particular majority or lost shall be final and conclusive, and an entry to that effect in the minute book of the Company shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded for or against such resolution.

 

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70.  
A demand for a poll may be withdrawn only with the approval of the Chairman of the meeting, at any time before the close of the meeting or the taking of the poll, whichever is earlier. If a poll be directed or demanded in the manner (including the use of ballot or voting papers or tickets) above mentioned it shall (subject to the provisions of Article 72 hereof) be taken at such time (being not later than thirty days after the date of the demand) and in such manner as the Chairman of the meeting may appoint. No notice need be given of a poll not taken immediately. The result of such poll shall be deemed for all purposes to be the resolution of the meeting at which the poll was so directed or demanded.
71.  
In the case of an equality of votes at any general meeting, whether upon a show of hands or on a poll, the Chairman of the meeting shall be entitled to a second or casting vote.
72.  
A poll demanded upon the election of a Chairman or upon a question of adjournment shall be taken forthwith. Any business, other than that upon which a poll has been demanded, may be proceeded with pending the taking of the poll.
73. (a)  
Save as expressly provided in these Articles, no person other than a member duly registered and who shall have paid everything for the time being due from him payable to the Company in respect of his shares shall be entitled to be present or to vote (save as proxy for another member) either personally or by proxy, or to be reckoned in a quorum at any general meeting.
  (b)  
No objection shall be made to the validity of any vote except at a meeting at which such vote shall be tendered and every vote whether given personally or by proxy not disallowed at such meeting shall be deemed valid for all purposes whatsoever of such meeting or poll.
  (c)  
In case of any dispute as to voting the Chairman shall determine the same, and such determination shall be final and conclusive.
74.  
Subject to the provisions of the Ordinance, a resolution in writing signed by all the members for the time being entitled to receive notice of and to attend and vote at general meetings shall be as valid and effective as if the same had been passed at a general meeting of the Company duly convened and held. A written notice of confirmation of such resolution in writing signed by or on behalf of a member shall be deemed to be his signature to such resolution in writing for the purposes of this Article. Such resolution in writing may consist of several documents each signed by or on behalf of one or more members.
VOTES OF MEMBERS
75.  
Subject to Article 85 and to any special rights, privileges or restrictions as to voting for the time being attached to any class or classes of shares, every member who (being an individual) is present in person or (being a corporation) is present by a representative duly authorised under section 115 of the Ordinance at any general meeting shall be entitled, on a show of hands, to one vote only and, on a poll, to one vote for every fully paid-up share of which he is the holder.
76.  
Any person entitled under Article 45 to be registered as the holder of any shares may vote at any general meeting in respect thereof in the same manner as if he were the registered holder of such shares, provided that at least 48 hours before the time of the holding of the meeting or adjourned meeting (as the case may be) at which he proposes to vote, he shall satisfy the Board of his right to be registered as the holder of such shares or the Board shall have previously admitted his right to vote at such meeting in respect thereof.
77.  
On a poll, votes may be given either personally or by proxy and a member entitled to more than one vote need not use all his votes or cast all the votes he uses in the same way.

 

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78.  
A member of unsound mind, or in respect of whom an order has been made by any court having jurisdiction in lunacy, may vote, whether on a show of hands or on a poll, by his committee, curator bonis or other person in the nature of a committee or curator bonis appointed by that court, and such committee, curator bonis or other person may on a poll, vote by proxy. If any member be a minor he may vote by his guardian or one of his guardians who may give their votes personally or by proxy.
78A.  
Where any member is, under the Listing Rules, required to abstain from voting on any particular resolution or restricted to voting only for or only against any particular resolution, any votes cast by or on behalf of such member in contravention of such requirement or restriction shall not be counted.
PROXIES
79. (a)  
A proxy need not be a member of the Company.
  (b)  
An instrument appointing a proxy shall be in writing in any usual or common form or in any other form which the Directors may accept, and shall be deemed, subject to the proviso hereinafter contained, to confer authority upon the proxy to vote on any resolution (or amendment thereto) put to the meeting for which it is given as the proxy thinks fit.
Provided that any form issued to a member for use by him for appointing a proxy to attend and vote at an extraordinary general meeting or at an annual general meeting at which special business (determined as provided in Article 64) is to be transacted shall be such as to enable the member according to his intention to instruct the proxy to vote in favour of or against (or, in default of instructions, to exercise his discretion in respect of) each resolution dealing with any such special business and shall, unless the contrary is stated therein, be valid as well for any adjournment of the meeting as for the meeting to which it relates.
80.  
The instrument appointing a proxy shall be signed by the appointor, or his duly authorised attorney, of if such appointor be a corporation, under its common seal or signed by some officer, attorney or other person duly authorised in that behalf.
81.  
The instrument appointing a proxy and the power of attorney or other authority (if any) under which it is signed, or a notarially certified copy of such power or authority, shall be deposited at the Office at least forty-eight hours before the time fixed for holding the meeting at which the person named in such instrument proposes to attend and vote or, in the case of a poll, at least thirty-six hours before the time appointed for the taking of the poll; otherwise the person so named shall not be entitled to vote at that meeting (or as the case may be) except with the approval of the Chairman of the meeting. No instrument appointing a proxy shall be valid after the expiration of twelve months from the date of its execution, except at an adjourned meeting or on a poll demanded at a meeting or an adjourned meeting in cases where the meeting was originally held within twelve months from such date. Delivery of an instrument appointing a proxy shall not preclude a member from attending and voting in person at the meeting or poll concerned and, in such event, the instrument appointing a proxy shall be deemed to be revoked.
82.  
Any member may by power of attorney appoint any person to be his attorney for the purpose of attending and voting at any meeting, and such power may be a special power limited to any particular meeting or a general power extending to all meetings at which such member is entitled to vote. Every such power shall be deposited at the Office at least thirty-six hours before the time fixed for holding the meeting at which such attorney proposes to attend and vote or, in the case of a poll, at least twenty-four hours before the time appointed for the taking of the poll; otherwise the attorney shall not be entitled to vote at that meeting (or as the case may be) except with the approval of the Chairman of the meeting.

 

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83. (a)  
An instrument of proxy may be revoked by forwarding to the Office written notification of such revocation signed by or on behalf of the person who issued or authorised the issue of the instrument of proxy.
  (b)  
A vote given in accordance with the terms of an instrument of proxy or power of attorney or by the duly authorised representative of a corporation shall be valid notwithstanding the previous death or insanity of the principal, or revocation of the proxy or power of attorney or other authority, or transfer of the shares in respect of which the proxy is given, provided no intimation in writing of the death, insanity, revocation or transfer shall have been received at the Office twenty-four hours at least before the time fixed for holding the meeting, or adjourned meeting, or the taking of the poll, at which the instrument of proxy is used.
84.  
Any corporation which is a member of the Company may, by resolution of its Directors or other governing body or by power of attorney, authorise such persons at it thinks fit to act as its representative at any meeting of the Company or of any class of members of the Company, and the person so authorised shall be entitled to exercise the same powers on behalf of the corporation which he represents as that corporation could exercise if it were an individual member of the Company. References in these Articles to a member present in person at a meeting shall, unless the context otherwise requires, include a corporation which is a member represented at the meeting by such duly authorised representative.
85.  
Without prejudice to the generality of Article 84 if a Clearing House (or its nominee) is a member of the Company, it (or, as the case may be, its nominee) may authorise such person or persons as it thinks fit to act as its proxy and proxies or representative or representatives at any meeting of the Company or at any meeting of any class of member of the Company provided that, if more than one person is so authorised, the proxy form or authorisation shall specify the number and class of shares in respect of which each such person is so authorised. A person so authorised under the provisions of this Article shall be entitled to exercise the same powers on behalf of the Clearing House (or its nominee) which he represents as that Clearing House (or its nominee) could exercise if it were an individual member of the Company and, on a show of hands, each such person shall be entitled to a separate vote.
DIRECTORS
86.  
Unless and until otherwise determined by an ordinary resolution of the Company, the Directors shall be not fewer than two in number, and there shall be no maximum number of Directors.
87.  
The Company shall keep in accordance with the Ordinance a register containing the names and addresses and occupations of its Directors and shall from time to time notify to the Registrar of Companies any change that takes place in such Directors as required by the Ordinance.
88.  
A Director need not hold any shares in the Company. A Director who is not a member of the Company shall nevertheless be entitled to attend and speak at general meetings.

 

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DIRECTORS’ REMUNERATION
89. (a)  
The Directors shall be entitled to receive by way of remuneration for their services such sum as is from time to time determined by the Company in general meeting, such sum (unless otherwise directed by resolution by which it is voted) is to be divided amongst the Directors in such proportions and in such manner as the Board may agreed, or failing agreement, equally, except that in such event any Director holding office for less than the whole of the relevant period in respect of which the remuneration is paid shall only rank in such division in proportion to the time during such period for which he has held office. The foregoing shall not apply to a Director who holds any salaried employment or office in the Company in the case of sums paid in respect of directors’ fees.
  (b)  
The Directors shall also be entitled to be repaid their reasonable travelling, hotel and other expenses incurred by them in or about the performance of their duties as Directors, including their expenses of travelling to and from board meetings, committee meetings or general meetings or otherwise incurred whilst engaged on the business of the Company or on the discharge of their duties as directors.
90.  
The Directors may award special remuneration out of the funds of the Company (by way of salary, commission or otherwise as the Directors may determine) to any Director who performs services which in the opinion of the Directors are outside the scope of the ordinary duties of a Director.
POWERS OF DIRECTORS
91.  
The Directors may establish any local boards or agencies for managing any of the affairs of the Company, either in Hong Kong or elsewhere, and may appoint any persons to be members of such local boards, or any managers or agents for the Company, and may fix their remuneration, and may delegate (with or without power to sub-delegate as the Directors shall determine) to any local board, manager or agent any of the powers, authorities and discretions vested in the Directors, and may authorise the members of any local boards, or any of them, to fill any vacancies therein, and to act notwithstanding vacancies, and such appointment or delegation may be made upon such terms and subject to such conditions as the Directors may think fit, and the Directors may remove any person so appointed and may annul or vary any such delegation, but no person dealing in good faith and without notice of any such annulment or variation shall be affected thereby.
92.  
The Directors may from time to time and at any time by power of attorney or other instrument appoint any company, firm or person or any fluctuating body of persons, whether nominated directly or indirectly by the Board, to be the attorney or attorneys of the Company for such purposes and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Directors under these Articles) and for such period and subject to such conditions as they may think fit, and any such power of attorney or other instrument may contain such provisions for the protection and convenience of persons dealing with any such attorney as the Directors may think fit, and may also authorise any such attorney to sub-delegate all or any of the powers, authorities and discretions vested in him. The Company may, by writing under its seal, empower any person, either generally or in respect of any specified matter, as its attorney to execute deeds and instruments on its behalf and to enter into contracts and sign the same on its behalf and every deed signed by such attorney on behalf of the Company and under his seal shall bind the Company and have the same effect as if it were under the seal of the Company.

 

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93.  
Subject to and to the extent permitted by the Ordinance, the Company or the Directors on behalf of the Company, may cause to be kept in any territory a Branch Register of members resident in such territory, and the Directors may make and vary such regulations as they may think fit respecting the keeping of any such Branch Register.
94.  
All cheques, promissory notes, drafts, bills of exchange, and other negotiable or transferable instruments, and all receipts for moneys paid to the Company, shall be signed, drawn, accepted, endorsed, or otherwise executed, as the case may be, in such manner as the Directors shall from time to time by resolution determine. The Company’s bank accounts shall be kept with such banker or bankers as the Board shall from time to time determine.
95. (a)  
The Directors may exercise all the powers of the Company to borrow money and to mortgage or charge all or any part of the undertaking, property and assets (present and future) and uncalled capital of the Company and to issue debentures, debenture stocks, bonds and other securities, whether outright or as collateral security for any debt, liability or obligation of the Company or of any third party. Debentures, debenture stocks, bonds and other securities of the Company may be made assignable free from any equities between the Company and the person to which the same may be issued, and may be issued at a discount, premium or otherwise and with any special privileges as to redemption, surrender, drawings, allotment of shares, attending and voting at general meetings of the Company, appointment of Directors and otherwise.
  (b)  
The Directors shall cause a proper register to be kept, in accordance with the provisions of the Ordinance, of all mortgages and charges affecting the property of the Company and shall duly comply with the requirements of the Ordinance in regard to the registration of mortgages and charges therein specified and otherwise. Where any uncalled capital of the Company is charged, all persons taking any subsequent charge thereon shall take the same subject to such prior charge, and shall not be entitled, by notice to the members or otherwise, to obtain priority over such prior charge.
96.  
The Board may establish and maintain or procure the establishment and maintenance of any contributory or non-contributory pension or superannuation funds for the benefit of, or give or procure the giving of donations, gratuities, pensions, allowances or emoluments to any persons who are or were at any time in the employment or service of the Company, or of any company which is a subsidiary of the Company, or is allied or associated with the Company or with any such subsidiary company, or who are or were at any time directors or officers of the Company or of any such other company as aforesaid, and holding or who have held any salaried employment or office in the Company or such other company, and the wives, widows, families and dependants of any such persons. The Board may also establish and subsidise or subscribe to any institutions, associations, clubs or funds calculated to be for the benefit of or to advance the interests and well being of the Company or of any such other company as aforesaid or of any such persons as aforesaid, and may make payments for or towards the insurance of any such persons as aforesaid, and subscribe or guarantee money for charitable or benevolent objects or for any exhibition or for any public, general or useful object. The Board may do any of the matters aforesaid, either alone or in conjunction with any such other company as aforesaid. Any Director holding any such employment or office shall be entitled to participate in and retain for his own benefit any such donation, gratuity, pension, allowance or emolument.

 

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APPOINTMENT AND REMOVAL OF DIRECTORS
97.  
At each annual general meeting one-third of the Directors for the time being, or, if their number is not three or a multiple of three, then the number nearest one-third, shall retire from office by rotation save any Director holding office as Chairman or Chief Executive Officer. The Directors to retire in every year shall be those who have been longest in office since their last election but as between persons who became Directors on the same day shall (unless they otherwise agree between themselves) be determined by lot. The retiring Directors shall be eligible for re-election. The Company at any general meeting at which any Directors retire may fill the vacated offices. No person other than a Director retiring at the meeting shall, unless recommended by the Directors for election, be eligible for election as a Director at any general meeting unless during a period of not less than seven (7) days commencing no earlier than the day after the dispatch of the notice of the meeting appointed for such election and ending no later than seven (7) days before the date appointed for the meeting there shall have been lodged at the Office or at the head office of the Company a Notice signed by a Member (other than the person to be proposed) duly qualified to attend and vote at the meeting for which such notice is given of his intention to propose such person for election and also a Notice signed by the person to be proposed of his willingness to be elected.
98.  
If at any general meeting at which an election of Directors ought to take place the places of the retiring Directors are not filled, the retiring Directors or such of them as have not had their places filled shall be deemed to have been re-elected and shall, if willing, continue in office until the next annual general meeting and so on from year to year until their places are filled, unless:
  (i)  
it shall be determined at such meeting to reduce the number of Directors;
 
  (ii)  
it is expressly resolved at such meeting not to fill such vacated offices;
 
  (iii)  
in any such case the resolution for re-election of a Director is put to the meeting and lost; or
 
  (iv)  
such Director has given notice in writing to the Company that he is not willing to be re-elected.
99.  
The Company may, from time to time, by ordinary resolution elect any person to be a Director either to fill a casual vacancy or as an addition to the Board.
100.  
The Company may by ordinary resolution remove any Director notwithstanding anything in these Articles or in any agreement between him and the Company (but without prejudice to any right to damages for termination of such agreement not in accordance with the terms thereof), and may, if thought fit, by ordinary resolution appoint another person in his stead. Any person so elected shall hold office for such time only as the Director in whose place he is elected would have held the same if he had not been removed.
101.  
The Directors shall have power, exercisable at any time and from time to time, to appoint any other person as a Director, either to fill a casual vacancy or as an addition to the Board but so that the number of Directors so appointed shall not exceed the maximum number determined from time to time (if any) by the shareholders in general meeting and any directors so appointed shall hold office only until the next following annual general meeting of the Company and shall then be eligible for re-election, but shall not be taken into account in determining the Directors or the number of Directors who are to retire by rotation at each annual general meeting.

 

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102.  
The continuing Directors may act notwithstanding any vacancy in their body, but if and so long as the number of Directors is reduced below the number fixed by or pursuant to these Articles as the necessary quorum of Directors, the continuing Directors may act for the purpose of increasing the number of Directors to that number, or of summoning a general meeting of the Company, but for no other purpose. If there shall be no Directors able or willing to act, then any two members may summon a general meeting for the purpose of appointing Directors.
103.  
No person other than a retiring Director shall, unless recommended by the Board for re-election, be eligible for election to the office of Director at any annual general meeting unless notice in writing for the intention to propose that person for election as a Director and notice in writing by that person of his consent to be elected, shall have been lodged at the Office or head office of the Company at least seven days before the date of the annual general meeting.
ALTERNATE DIRECTORS
104.  
Each Director may by written notification to the Company nominate any other person to act as alternate Director in his place and at his discretion in similar manner remove such alternate Director. If such person is not another Director, such appointment, unless previously approved by the Board, shall have effect only upon and subject to being so approved. The alternate Director shall (except as regards the power to appoint an alternate) be subject in all respects to the terms and conditions existing with reference to the other Directors of the Company; and each alternate Director, whilst acting as such, shall exercise and discharge all the functions, powers and duties of the Director he represents, but shall look to such Director solely for his remuneration as alternate Director. Every person acting as an alternate Director shall (except when absent from Hong Kong) be entitled to receive notices of meetings of the Board and shall have one vote for each Director for whom he acts as alternate at any such meeting at which the Director appointing him is not personally present (in addition to his own vote if he is also a Director). The signature of an alternate Director to any resolution in writing of the Board or a committee of the Board shall, unless the notice of his appointment provides to the contrary, be as effective as the signature of his appointor. Any person appointed as an alternate Director shall vacate his office as such alternate Director if and when the Director by whom he has been appointed removes him or vacates office as Director. Every person acting as an alternate Director shall be deemed to be the agent of and for the Director appointing him and shall, without prejudice to any liability which he may cause to his appointor under the Ordinance or otherwise, be responsible to the Company for his own acts and defaults. To such extent as the Board may from time to time determine in relation to any committee of the Board, the foregoing provisions of this paragraph shall also apply mutatis mutandis to any meeting of any committee of which his appointor is a member. An alternate Director shall not, save as aforesaid, have power to act as a Director nor shall he be deemed to be a Director for the purposes of these Articles.
DISQUALIFICATION OF DIRECTORS
105. The office of a Director shall ipso facto be vacated:
  (a)  
if he becomes prohibited by law or court order from being a Director;
 
  (b)  
if a receiving order is made against him or he makes any arrangement or composition with his creditors;
 
  (c)  
if he becomes of unsound mind;

 

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  (d)  
if he absents himself from the meetings of the Board during a continuous period of six months, without special leave of absence from the Board, and his alternate Director (if any) shall not during such period have attended in his stead, and the Board passes a resolution that he has by reason of such absence vacated his office;
 
  (e)  
if he shall be removed from office by notice in writing served upon him signed by all his co-directors;
 
  (f)  
if he resigns his office;
 
  (g)  
if he is removed by an ordinary resolution of the Company; or
 
  (h)  
if he is convicted of an indictable offence.
DIRECTORS’ INTERESTS
106.  
If a Director or any of his associates is in any way, whether directly or indirectly, interested in a contract, transaction or arrangement or proposed contract, transaction or arrangement with the Company, the Director shall declare the nature of his interest or the interest of any of his associates at the earliest meeting of the Board at which it is practicable for him so to do notwithstanding that the question of entering into the contract, transaction or arrangement is not taken into consideration at that meeting. A general notice given to the Board by a Director stating that, by reason of facts specified in the notice, he or any of his associates is to be regarded as interested in a contract, transaction or arrangement of any description which may subsequently be made by the Company, that notice shall be a sufficient declaration of his interest or the interest of such of his associates, so far as attributable to those facts, in relation to any contract, transaction or arrangement of that description which may subsequently be made by the Company; but no such general notice shall have effect in relation to any contract, transaction or arrangement unless it is given before the date on which the question of entering into the contract, transaction or arrangement is first taken into consideration on behalf of the Company. Without prejudice to the generality of the foregoing, a Director shall give notice to the Company of such matters relating to himself as may be necessary for the purposes of sections 155B, 158, 161 and 161B of the Ordinance.
107.  
A Director may hold any other office or place of profit under the Company (other than the office of Auditor), and he or any firm of which he is a member may act in a professional capacity for the Company in conjunction with his office of Director, for such period and on such terms (as to remuneration and otherwise) as the Directors may determine and such extra remuneration shall be in addition to any remuneration provided for by or pursuant to any other Article. No Director or intended Director shall be disqualified by his office from contracting with the Company, nor shall any contract or arrangement entered into by or on behalf of the Company with any Director or any firm or company in which any Director is in any way interested be liable to be avoided, nor shall any Director so contracting or being so interested be liable to account to the Company for any profit, remuneration or other benefits realised by any such contract or arrangement by reason only of such Director holding that office or of any fiduciary relationship thereby established, provided that such Director shall disclose the nature of his interest in any contract or arrangement in which he is interested at the meeting of the board at which the question of entering into the contract or arrangement is first taken into consideration, if he knows his interest then exists, or in any other case at the first meeting of the Board after he knows that he is or has become so interested.

 

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108.  
A Director shall not vote (nor shall he be counted in the quorum) on any resolution of the Board approving any contract or arrangement or proposal in which he or any of his associates is to his knowledge materially interested, and if he shall do so his vote shall not be counted (nor shall he be counted in the quorum for that resolution), but this prohibition shall not apply to any of the following matters, namely:
  (i)  
any contract or arrangement for the giving by the Company of any security or indemnity to the Director or any of his associates in respect of money lent or obligations incurred or undertaken by him or any of them at the request of or for the benefit of the Company or any of its subsidiaries;
  (ii)  
any contract or arrangement for the giving by the Company of any security to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which the Director or any of his associates has assumed responsibility in whole or in part and whether alone or jointly under a guarantee or indemnity or by the giving of security;
  (iii)  
any proposal concerning an offer of the shares or debentures or other securities of or by the Company or any other company which the Company may promote or be interested in for subscription or purchase where the Director or any of his associates is or is to be interested as a participant in the underwriting or sub-underwriting of the offer;
  (iv)  
any contract or arrangement in which the Director or any of his associates is interested in the same manner as other holders of shares or debentures or other securities of the Company by virtue only of his or their interest in shares or debentures or other securities of the Company;
  (v)  
any proposal concerning any other company in which the Director or any of his associates is interested only, whether directly or indirectly, as an officer or a shareholder or in which the Director or any of his associates is beneficially interested in shares of that company other than a company in which the Director and any of his associates are in aggregate beneficially interested in five per cent. or more of the issued shares of any class of the equity share capital of such company (or of any third company through which such interest is derived) or of the voting rights (excluding for the purpose of calculating such five per cent. interest any indirect interest of such Director or any of his associates by virtue of an interest of the Company in such company);
  (vi)  
any proposal or arrangement for the benefit of employees of the Company or its subsidiaries including the adoption, modification or operation of a pension fund or retirement, death or disability benefit scheme which relates to Directors, their associates and employees of the Company or of any of its subsidiaries and does not give in respect of any such Director or any of his associates any privilege or advantage not generally accorded to the class of persons to whom such scheme or fund relates;
  (vii)  
any proposal or arrangement concerning the adoption, modification or operation of any employees’ share scheme involving the issue or grant of options over shares or other securities by the Company to, or for the benefit of, the employees of the Company or its subsidiaries under which the Director or any of his associates may benefit.

 

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If any question shall arise at any meeting of the Board as to the materiality of the interest of a Director (other than the Chairman of the meeting) or any of his associates or as to the entitlement of any Director (other than such Chairman) to vote or be counted in the quorum and such question is not resolved by his voluntarily agreeing to abstain from voting or not to be counted in the quorum, such question shall be referred to the Chairman of the meeting and his ruling in relation to such other Director or any of his associates shall be final and conclusive except in a case where the nature or extent of the interest of the Director concerned or any of his associates as known to such Director has not been fairly disclosed to the Board. If any question as aforesaid shall arise in respect of the Chairman of the meeting or any of his associates such question shall be decided by a resolution of the Board (for which purpose such Chairman shall not be counted in the quorum and shall not vote thereon) and such resolution shall be final and conclusive except in a case where the nature or extent of the interest of such Chairman or any of his associates as known to such chairman has not been fairly disclosed to the Board.
109.  
A Director may continue to be or become a director, managing director, joint managing director, executive director, chief executive officer or manager or other officer or member of any other company in which the Company is interested, and (unless otherwise agreed) shall not be liable to account to the Company for any remuneration or other benefits received by him as a director, managing director, joint managing director, executive director, chief executive officer, manager or other officer or member of any such other company. The Board may exercise the voting powers conferred by the shares in any other company held or owned by the Company or exercisable by it as directors of such other company in such manner as in all respects as the Board thinks fit (including the exercise thereof in favour of any resolution appointing themselves or any of them directors, chief executive officers, managing directors, joint managing directors, deputy managing directors, executive directors, managers or other officers of such company) and any director may vote in favour of the exercise of such voting rights in manner aforesaid notwithstanding that he may be, or be about to be, appointed a director, managing director, joint managing director, deputy managing director, executive director, chief executive officer, manager or other officer of such a company, and that as such he is or may become interested in the exercise of such voting rights in manner aforesaid. A Director of the Company may be or become a director of any company promoted by the Company or in which it may be interested as a vendor, shareholder or otherwise and no such Director will be accountable for any benefits received as a director or member of such company. A Director of the Company or his firm may not act as auditor of the Company.
CHIEF EXECUTIVE OFFICERS AND OTHER APPOINTMENTS
110.  
The Directors may, from time to time, appoint one or more of their number to be Chief Executive Officer or Joint Chief Executive Officer of the Company, or to hold such office in the management, administration or conduct of the business of the Company as they may decide, and for such period and upon such terms and for such remuneration as the Directors shall think fit, and the Directors may also, from time to time (subject to the provisions of any agreement between him or them and the Company) remove him or them from office, and appoint another or others in his or their place or places.
111.  
A Chief Executive Officer or a Joint Chief Executive Officer (subject to the provisions of any agreement between him and the Company) shall be subject to the same provisions as to resignation and removal as the other Directors of the Company, and shall ipso facto and immediately cease to be Chief Executive Officer or Joint Chief Executive Officer if he shall cease to hold the office of Director.

 

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112.  
The Directors may, from time to time, entrust to and confer upon any Chief Executive Officer, Joint Chief Executive Officer or Director, holding any other office in the management, administration or conduct of the business of the Company, such of the powers exercisable under these Articles by the Directors as they may think fit, and may confer such powers for such time, and to be exercised for such objects and purposes, and upon such terms and conditions and with such restrictions as they may consider expedient, and may from time to time revoke, withdraw, alter or vary all or any of such powers.
PROCEEDINGS OF DIRECTORS
113.  
The Directors may meet together for the despatch of business, adjourn and otherwise regulate their meetings as they think fit, and determine the quorum necessary for the transaction of business. Until otherwise determined by the Board, two Directors shall constitute a quorum. For the purpose of this Article an alternate Director shall be counted in a quorum but, notwithstanding that an alternate Director is also a Director or is an alternate for more than one Director, he shall for quorum purposes count as only one Director. Matters arising at any meeting shall be decided by a majority of votes. In case of an equality of votes the Chairman of the meeting shall have a second or casting vote. A Director or the Secretary may, at any time, summon a meeting of the Directors. A meeting of the Board or any committee of the Board may be held by means of such telephone, electronic or other communication facilities as permit all persons participating in the meeting to communicate with each other simultaneously and instantaneously, and participation in such a meeting shall constitute presence in person at such meeting.
114.  
Notice of a meeting of Directors shall be deemed to be duly given to a Director if it is given to him personally, in writing or by word of mouth, or sent to him at his last known address or any other address given by him to the Company for this purpose provided that notice need not be given to any Director or alternate Director for the time being absent from Hong Kong. A Director may consent to short notice of and may waive notice of any meeting and any such waiver may be retrospective.
115.  
The Directors may elect a Chairman of the Board and determine the period for which he is to hold office; but if no such Chairman be elected, or if at any meeting the Chairman be not present within five minutes after the time appointed for holding the same, the Directors present shall choose one of their number to be Chairman of such meeting.
116.  
A resolution in writing signed by all the Directors except such as are absent from Hong Kong or temporarily unable to act through ill health or disability (or their alternate Directors) shall (so long as they constitute a quorum) be as effective for all purposes as a resolution of the Directors passed at a meeting duly convened, held and constituted. A written notification of confirmation of such resolution in writing signed by a Director shall be deemed to be his signature to such resolution in writing for the purposes of this Article. Such resolution in writing may consist of several documents, each signed by one or more Directors.
117.  
A meeting of the Directors at which a quorum is present shall be competent to exercise all the powers, authorities and discretions for the time being vested in or exercisable by the Board generally.

 

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118.  
The Directors may, from time to time, appoint committees consisting of such one or more persons as they think fit, and may delegate any of their powers to any such committee and, from time to time, revoke any such delegation and discharge any such committee wholly or in part. Any committee so appointed shall, in the exercise of the powers so delegated, conform to any regulations that may, from time to time, be imposed upon it by the Directors. All acts done by any such committee in conformity with such regulations and in fulfilment of the purposes for which it is appointed, but not otherwise, shall have the like force and effect as if done by the Board, and the Board shall have power, with the consent of the Company in general meeting, to remunerate the members of any special committee, and charge such remuneration to the current expenses of the Company.
119.  
The meetings and proceedings of any such committee consisting of two or more members shall be governed mutatis mutandis by the provisions of these Articles regulating the meetings and proceedings of the Directors, insofar as the same are not superseded by any regulations made by the Directors under the last preceding Article.
120.  
All acts done bona fide by any meeting of the Directors or of a committee of Directors, or by any persons acting as Directors, shall, notwithstanding that there was some defect in the appointment of any such Directors or persons acting as aforesaid, or that they or any of them were disqualified, or had vacated office, be as valid as if every such person had been duly appointed and was qualified and continued to be a Director.
MINUTES
121.  
The Directors shall cause to be entered and kept in books provided for the purpose minutes of the following:
  (a)  
all appointments of officers;
  (b)  
all the names of the Directors and any alternate Director who is not also a Director present at each meeting of the Directors and of any committee; and
  (c)  
all resolutions and proceedings of general meetings and of meetings of the Directors and committees.
Any such minutes of any meeting of the Directors, or of any committee, or of the Company, if purporting to be signed by the Chairman of such meeting, or by the Chairman of the next succeeding meeting shall be receivable as evidence of the proceedings of such meeting.
THE SEAL
122.  
The Directors shall procure a common seal to be made for the Company, and shall provide for the safe custody thereof. The Seal shall not be affixed to any instrument except by the authority of the Directors or a committee authorised by the Board in that behalf, and every instrument to which the Seal shall be affixed shall be signed by one Director or some other person nominated by the Directors for the purpose, provided that the Board may either generally or in any particular case or cases resolve (subject to such restrictions as to the manner in which the seal may be affixed as the Board may determine) that such signature may be affixed to certificates for shares or debentures or representing any other form of security by some mechanical means other than autographic to be specified in such resolution or that such certificates needs not be signed by any person. Every instrument executed in manner provided by this Article shall be deemed to be sealed and executed with the authority of the Directors previously given.

 

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123.  
The Company may have an official seal for use for sealing certificates for shares or other securities issued by the Company as permitted by section 73A of the Ordinance (and no signature of any Director, officer or other person and no mechanical reproduction thereof shall be required on any such certificates or other document to which such official seal is affixed and such certificates or other document shall be valid and deemed to have been sealed and executed with the authority of the Board notwithstanding the absence of any such signature or mechanical reproduction as aforesaid) and an official seal for use abroad under the provisions of the Ordinance where and as the Board shall determine, and the Company may be writing under the seal appoint any agents or agent, committees or committee abroad to be the duly authorised agents of the Company for the purpose of affixing and using such official seal and may impose such restrictions on the use thereof as may be thought fit. Wherever in these Articles reference is made to the seal, the reference shall, when and so far as may be applicable, be deemed to include any such official seal as aforesaid.
124.  
The Company may exercise all the powers of having official seals conferred by the Ordinance and such powers shall be vested in the Directors.
SECRETARY
125.  
The Directors shall appoint such person, persons or entities to be Secretary or Joint Secretaries of the Company for such period, at such remuneration and upon such conditions as they may think fit, and any Secretary or Joint Secretaries so appointed may be removed by them. Anything by the Ordinance or these Articles required or authorised to be done by or to the Secretary or Joint Secretaries, if the office is vacant or there is for any other reason no person capable of acting in the capacity as Secretary or Joint Secretaries, may be done by or to any assistant or deputy Secretary, or if there is no assistant or deputy Secretary capable of acting, by or to any officer of the Company authorised generally or specially in that behalf by the Board.
DIVIDENDS AND RESERVES
126.  
The Company may by ordinary resolution declare dividends but no such dividend shall exceed the amount recommended by the Directors.
127.  
Unless and to the extent that the rights attached to any shares or the terms of issue thereof otherwise provide, all dividends shall (as regards any shares not fully paid throughout the period in respect of which the dividend is paid) be apportioned and paid pro rata according to the amounts paid on the shares during any portion or portions of the period in respect of which the dividend is paid. For the purposes of this Article no amount paid on a share in advance of calls shall be treated as paid on the share.
128.  
The Directors may retain any dividend or other monies payable on or in respect of a share on which the Company has a lien, and may apply the same in or towards satisfaction of the debts and liabilities in respect of which the lien exists. The Board may deduct from any dividend or bonus payable to any member all sums of money (if any) presently payable by him to the Company on account of calls, instalments or otherwise.

 

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129.  
Any resolution declaring a dividend on shares of any class, whether a resolution of the Company in general meeting or a resolution of the Directors, may specify that the same shall be payable to the persons registered as the holders of such shares at the close of business on a particular date, notwithstanding that it may be a date prior to that on which the resolution is passed, and thereupon the dividend shall be payable to them in accordance with their respective holdings so registered, but without prejudice to the rights inter se in respect of such dividend of transferors and transferees of any such shares. The provisions of this Article shall mutatis mutandis apply to capitalisations to be effected in pursuance of these Articles.
130.  
Any general meeting sanctioning a dividend may make a call on the members of such amount as the meeting fixes, but so that the call on each member shall not exceed the dividend payable to him, and so that the call shall be made payable at the same time as the dividend, and the dividend may, if so arranged between the Company and the member, be set off against the call.
131. (a)   
In respect of any dividend which the Board has resolved to pay or any dividend declared or sanctioned or proposed to be declared or sanctioned by the Board or by the Company in general meeting, the Board may determine and announce, prior to or contemporaneously with the announcement, declaration or sanction of the dividend in question:
 
     
either
  (i)  
that shareholders entitled thereto will receive in lieu of such dividend (or such part thereof as the Board may think fit) an allotment of shares credited as fully paid provided that the shareholders are at the same time accorded the right to elect to receive such dividend (or part thereof as the case may be) in cash in lieu of such allotment. In such case, the following provisions shall apply:
  (A)  
the basis of any such allotment shall be determined by the Board;
 
  (B)  
the Board, after determining the basis of allotment and notwithstanding that the number of shares to be allotted may not be calculated until after notice to the shareholders has been given as required by the provisions of this sub-paragraph and subject to the provisions of sub-paragraph (D) below, shall give notice in writing to the shareholders of the right of election accorded to them and shall send with such notice forms of election and specify the procedure to be followed and the place at which and the latest date and time by which duly completed forms of election must be lodged in order to be effective which shall be not less than two weeks from the date on which the notice above referred to was despatched to the shareholders;
 
  (C)  
the right of election accorded to shareholders as aforesaid may be exercised in whole or in part;
 
  (D)  
the Board may resolve:
  (I)  
that the right of election accorded to shareholders as aforesaid may be exercised so as to take effect on all future occasions (if any) when the Board makes a determination pursuant to sub-paragraph (i) of this paragraph (a); and/or

 

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  (II)  
that a shareholder who does not exercise the right of election accorded to him as aforesaid either in whole or in part may notify the Company that he will not exercise the right of election accorded to him in respect of all future occasions (if any) when the Board makes a determination pursuant to sub-paragraph (i) of this paragraph (a) of this Article.
Provided that a shareholder may exercise such election or give such notice in respect of all but not some of the shares held by him and may at any time give seven days notice in writing to the Company of the revocation of such an election or such a notice which revocation shall take effect at the expiry of such seven days, and until such revocation has taken effect, the Board shall not be obligated to give to such shareholder notice of the right of election accorded to him or send to him any form of election;
  (E)  
the dividend (or that part of the dividend in lieu of which an allotment of shares is to be made as aforesaid) shall not be payable in cash on shares in respect whereof the cash election has not been duly exercised (the “Non-Elected Shares”) and in lieu thereof shares shall be allotted credited as fully paid to the holders of the Non-Elected Shares on the basis of allotment determined as aforesaid and for such purpose the Board shall capitalise and apply out of the amount standing to the credit of share premium account or out of any part of the undivided profits of the Company (including profits carried and standing to the credit of any reserve or reserves or other special account) as the Board may determine, a sum equal to the aggregate nominal amount of shares to be allotted on such basis and apply the same in paying up in full the appropriate number of unissued shares for allotment and distribution to and amongst the holders of the Non-Elected Shares on such basis;
  (F)  
the Board may resolve that the shares to be allotted shall be allotted at a premium provided that the premium is credited as fully paid up and in such case the Board shall in addition to the amount to be capitalised and applied pursuant to sub-paragraph (E) above, and for the purposes therein set out, capitalise and apply out of the amount standing to the credit of the share premium account or out of any part of the undivided profits of the Company (including profits carried and standing to the credit of any reserve or reserves or other special account) as the Directors may determine, a sum equal to the aggregate amount of the premium on the shares to be allotted and shall apply the same together with the sum to be applied pursuant to sub-paragraph (E) above and on the basis therein set out in paying up in full the appropriate number of unissued shares for allotment and distribution to and amongst the holders of the Non-Elected Shares;
or
  (ii)  
that shareholders entitled to such dividend be entitled to elect to receive an allotment of shares credited as fully paid in lieu of the whole or such part of the dividend as the Board may think fit. In such case, the following provisions shall apply:
  (A)  
the basis of any such allotment shall be determined by the Board;

 

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  (B)  
the Board, after determining the basis of allotment and notwithstanding that the number of shares to be allotted may not be calculated until after notice to the shareholders has been given as required by the provisions of this sub-paragraph and subject to the provisions of sub-paragraph (D) below, shall give notice in writing to the shareholders of the right of election accorded to them and shall send with such notice forms of election and specify the procedure to be followed and the place at which and the latest date and time by which duly completed forms of election must be lodged in order to be effective which shall be not less than two weeks from the date on which the notice above referred to was despatched to the shareholders;
  (C)  
the right of election accorded to shareholders as aforesaid may be exercised in whole or in part;
 
  (D)  
the Board may resolve;
  (I)  
that the right of election accorded to shareholders as aforesaid may be exercised so as to take effect on all future occasions (if any) when the Board makes a determination pursuant to sub-paragraph (ii) of this paragraph (a); and/or
  (II)  
that a shareholder who does not exercise the right of election accorded to him as aforesaid either in whole or in part may notify the Company that he will not exercise the right of election accorded to him in respect of all future occasions (if any) when the Board makes determination pursuant to sub-paragraph (ii) of paragraph (a).
Provided that a shareholder may exercise such election or give such notice in respect of all but not some of the shares held by him and may at any time give seven days notice in writing to the Company of the revocation of such an election or such a notice which revocation shall take effect at the expiry of such seven days, and until revocation has taken effect, the Board shall not be obliged to give to such member notice of the right of election accorded to him or send to him any form of election;
  (E)  
the dividend (or that part of the dividend in respect of which a right of election has been accorded) shall not be payable on shares in respect whereof the share election has been duly exercised (the Elected Shares ) and in lieu thereof shares shall be allotted credited as fully paid to the holders of the Elected Shares on the basis of allotment determined as aforesaid and for such purpose the Board shall capitalise and apply out of the amount standing to the credit of share premium account or out of any part of the undivided profits of the Company (including profits carried and standing to the credit of any reserve or reserves or other special account) as the Board may determine, a sum equal to the aggregate nominal amount of shares to be allotted on such basis and apply the same in paying up in full the appropriate number of unissued shares for allotment and distribution to and amongst the holders of the Elected Shares on such basis;

 

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  (F)  
the Board may resolve that the shares to be allotted shall be allotted at a premium provided that the premium is credited as fully paid up and in such case the Board shall in addition to the amount to be capitalised and applied pursuant to sub-paragraph (E) above, and for the purpose therein set out, capitalise and apply out of the amount standing to the credit of the share premium account or out of any part of the undivided profits of the Company (including profits carried and standing to the credit of any reserve or reserves or other special account) as the Board may determine, a sum equal to the aggregate amount of the premium on the shares to be allotted and shall apply the same together with the sum to be applied pursuant to sub-paragraph (E) above and on the basis therein set out in paying up in full the appropriate number of unissued shares for allotment and distribution to and amongst holders of the Elected Shares.
  (b)  
The shares allotted pursuant to the provisions of paragraph (a) of this Article shall rank pari passu in all respects with the fully paid shares then in issue save only as regards participation:
  (i)  
in the relevant dividend (or the right to receive or to elect to receive an allotment of shares in lieu thereof as aforesaid); or
  (ii)  
in any other distributions, bonuses or rights paid, made, declared or announced prior to or contemporaneously with the payment or declaration of the relevant dividend
unless, contemporaneously with the announcement by the Board of its proposal to apply the provisions of sub-paragraph (i) or (ii) of paragraph (a) of this Article in relation to the relevant dividend or contemporaneously with their announcement of the distribution, bonus or rights in question, the Board shall specify that the shares to be allotted pursuant to the provisions of paragraph (a) of this Article shall rank for participation in such distribution, bonus or rights.
  (c)  
The Board may do all acts and things considered necessary or expedient to give effect to any capitalisation pursuant to the provisions of paragraph (a) of this Article with full power to the Board to make such provisions as they think fit in the case of shares becoming distributable in fractions (including provisions whereby, in whole or in part, fractional entitlements are aggregated and sold and the net proceeds distributed to those entitled, or are disregarded or rounded up or down or whereby the benefit of fractional entitlements accrues to the Company rather than to the members concerned). The Board may authorise any person to enter into on behalf of all members interested, an agreement with the Company providing for such capitalisation and matters incidental thereto and any agreement made pursuant to such authority shall be effective and binding on all concerned.
  (d)  
The Company may upon the recommendation of the Board by ordinary resolution resolve in respect of any one particular dividend of the Company that notwithstanding the provisions of paragraph (a) of this Article a dividend may be satisfied wholly in the form of an allotment of shares credited as fully paid up without offering any right to shares to elect such dividend in cash in lieu of such allotment.

 

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  (e)  
The Board may on any occasion when it makes a determination pursuant to paragraph (a) of this Article, resolve that no allotment of shares or rights of election for shares to be issued pursuant to such determination shall be made available or made to any shareholders with registered addresses in any particular territory or territories or to a Depositary where the allotment of shares or the circulation of an offer of such rights of election would or might, in the opinion of the Board, be unlawful or would or might, in the opinion of the Board, be unlawful in the absence of a registration statement or other special formalities, and in such event the provision aforesaid shall be read and construed subject to such resolution and the only entitlement of shareholders in any such territory or territories shall be to receive in cash the relevant dividend resolved to be paid or declared. “Depositary” means a custodian or other person (or a nominee for such custodian or other person) appointed under contractual arrangements with the Company or other arrangements approved by the Board whereby such custodian or other person or nominee holds or is interested in shares of the Company or rights or interests in shares of the Company and issues securities or other documents of title or otherwise evidencing the entitlement of the holder thereof to or to receive such shares, rights or interests, provided and to the extent that such arrangements have been approved by the Board for the purpose of these Articles and shall include, where approved by the Board, the trustees (acting in their capacity as such) of any employees’ share scheme established by the Company or any other scheme or arrangements principally for the benefit of employees of the Company and/or its subsidiaries which have been approved by the Board.
  (f)  
The Board may at any time resolve to cancel all (but not some only) of the elections made and the notices given by the shareholders pursuant to sub-paragraphs (i)(D) and (ii)(D) of paragraph (a) of this Article by giving seven days notice in writing to the relevant shareholders.
  (g)  
The Board may on any occasion determine that rights of election under paragraph (a) of this Article shall not be made available to shareholders who are registered in the register of shareholders, or in respect of shares the transfer of which is registered, after a date fixed by the Board and in such event the provisions aforesaid shall be read and construed subject to such determination.
132.  
No dividend shall be payable except out of the profits or other distributable reserves of the Company, and no dividend shall bear interest as against the Company.
133.  
The Directors may, if they think fit, from time to time, resolve to pay to the members such interim dividends as appear to the Directors to be justified by the reserves of the Company. If at any time the share capital of the Company is divided into different classes the Directors may resolve to pay such interim dividends in respect of those shares in the capital of the Company which confer on the holders thereof deferred or non-preferred rights as well as in respect of those shares which confer on the holders thereof preferential or special rights in regard to dividend, and provided that the Directors act bona fide they shall not incur any responsibility to the holders of shares conferring a preference for any damage that they may suffer by reason of the payment of an interim dividend on any shares having deferred or non-preferred rights. The Directors may also resolve to pay at half-yearly or at other suitable intervals to be settled by them any dividend which may be payable at a fixed rate if they are of the opinion that the reserves of the Company justify the payment.
134.  
All dividends unclaimed for one year after having become payable may be invested or otherwise made use of by the Directors for the benefit of the Company until claimed, and all dividends unclaimed for six years after having become payable may be forfeited by the Directors and shall revert to the Company. The payment into a separate account of any monies payable in respect of a dividend shall not constitute the Company a trustee in respect thereof for any person.

 

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135.  
Unless otherwise directed any dividend or other monies payable in cash on or in respect of a share may be paid by cheque or warrant sent through the post to the registered address of the member or person entitled, or, in the case of joint holders, to the registered address of that one whose name stands first on the Register in respect of the joint holding, or addressed to such person at such address as the holder or joint holders shall direct. The Company shall not be liable or responsible for any cheque or warrant lost in transmission nor for any dividend or other monies lost to the member or person entitled thereto by the forged endorsement of any cheque or warrant. Payment of the cheque or warrant by the banker on whom it is drawn shall be a good discharge to the Company.
136.  
The Directors may distribute in specie or in kind among the members in satisfaction in whole or in part of any dividend any of the assets of the Company, and in particular any shares or securities of other companies to which the Company is entitled and where any difficulty arises in regard to the distribution the Board may settle the same as it thinks expedient, and in particular may issue fractional certificates, disregard fractional entitlements or round the same up or down, and may fix the value for distribution of such specific assets, or any part thereof, and may determine that cash payments shall be made to any members upon the footing of the value so fixed in order to adjust the rights of all parties, and may vest any such specific assets in trustees as may seem expedient to the Board and may appoint any person to sign any requisite instruments of transfer and other documents on behalf of the persons entitled to the dividend and such appointment shall be effective. Where required, a contract shall be filed in accordance with the provisions of the Ordinance and the Board may appoint any person to sign such contract on behalf of the persons entitled to the dividend and such appointment shall be effective.
137.  
Before recommending a dividend the Directors may set aside any part of the net profits of the Company to one or more reserves, and may apply the same either by employing it in the business of the Company or by investing it in such manner as they shall think fit and the income arising from such reserves shall be treated as part of the profits of the Company. Such reserves may be applied for the purpose of maintaining the property of the Company, replacing wasting assets, meeting contingencies, forming an insurance fund, equalising dividends, paying special dividends, or for any other purpose for which the undivided profits of the Company may lawfully be used, and until the same shall be so applied it shall be deemed to remain undivided profit. The Directors may also carry forward as undivided profit any profit or balance of profit which they shall not think fit to recommend as dividend or to place to reserve.
AUTHENTICATION OF DOCUMENTS
138.  
Any Director or the Secretary or other authorised officer of the Company shall have power to authenticate any documents affecting the constitution of the Company and any resolutions passed by the Company or the Directors or any committee, and any books, records, documents and accounts relating to the business of the Company, and to certify copies thereof or extracts therefrom as true copies of extracts; and where any books, records, documents or accounts are elsewhere than at the Office, the local manager or such other officer of the Company having the custody thereof shall be deemed to be the authorised officer of the Company as aforesaid. A document purporting to be a copy of a resolution or an extract from the minutes of a meeting of the Company or of the Directors or any local board or committee which is certified as aforesaid shall be conclusive evidence in favour of all persons dealing with the Company upon the faith thereof that such resolution has been duly passed or, as the case may be, that any minute so extracted is a true and accurate record of proceedings at a duly constituted meeting.

 

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CAPITALISATION OF RESERVES ETC.
139.  
The Company in general meeting may upon the recommendation of the Directors resolve to capitalise any part of the Company’s reserves or undivided profits not required for the payment or provision of the dividend on any shares with a preferential right to a dividend, and accordingly that such part be divided amongst the members who would have been entitled thereto if distributed by way of dividend and in the same proportions, on condition that the same be not paid in cash but be applied as a capitalisation issue either in or towards paying up any amounts for the time being unpaid on any shares held by such members respectively or paying up in full unissued shares or debentures or other securities of the Company to be allotted and distributed credited as fully paid to and amongst such members in the proportion aforesaid, or partly in one way and partly in the other: provided that any amount standing to the credit of a share premium account or a capital redemption reserve fund may, for the purposes of this Article, only be applied in the paying up of unissued shares to be issued to members of the Company as fully paid-up shares.
140.  
Whenever such a resolution as aforesaid shall have been passed the Directors shall make all appropriations and applications of the reserves and undivided profits resolved to be capitalised thereby, and all allotments and issues of fully paid-up shares, debentures or other securities and generally shall do all acts and things required to give effect thereto.
141.  
For the purpose of giving effect to any resolution under Articles 136 and 139 hereof the Directors may settle any difficulty which may arise in regard to the distribution or capitalisation issue as they think expedient, and in particular may issue fractional certificates, and may fix the value for distribution of any specific assets, and may determine that cash payments shall be made to any members based upon the value so fixed or that fractions of such value as the Directors may determine may be disregarded in order to adjust the rights of all parties, and may vest any such cash or specific assets in trustees upon such trusts for the persons entitled to the distribution or capitalisation issue as may seem expedient to the Directors. The provisions of the Ordinance in relation to the filing of contracts for allotment shall be observed, and the Directors may appoint any person to sign such contract on behalf of the persons entitled to share in the distribution or capitalisation issue, and such appointment shall be effective and binding upon all concerned, and the contract may provide for the acceptance by such persons of the shares, debentures or other securities to be allotted and distributed to them respectively in satisfaction of their claims in respect of the sum so capitalised.
ACCOUNTS AND AUDITORS
142.  
The Directors shall cause proper books of account to be kept with respect to:
  (a)  
all sums of money received and expended by the Company and the matters in respect of which such receipt and expenditure take place; and
 
  (b)  
the assets and liabilities of the Company.
Proper book shall not be deemed to be kept if there are not kept such books of accounts as are necessary to give a true and fair view of the transactions.
143. (a)
 The Directors shall, from time to time, in accordance with the Ordinance, cause to be prepared and to be laid before its annual general meeting the relevant financial documents required by the Ordinance. The Directors may also cause to be prepared a summary financial report if they think fit, which may be provided to members and/or debenture holders instead of the relevant financial documents in circumstances permitted by the Ordinance, the Listing Rules and any other applicable laws, rules and regulations.
  (b)  
A copy of the relevant financial documents or the summary financial report shall, not less than 21 days before the meeting, be sent to the registered address of every member and debenture holder of the Company, or in the case of a joint holding to the member or debenture holder (as the case may be) whose name stands first in the appropriate Register in respect of the joint holding. No accidental non-compliance with the provisions of this Article shall invalidate the proceedings at the meeting.

 

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144.  
For the purpose of Article 143, “relevant financial documents” and “summary financial report” shall have the meaning ascribed to them in the Ordinance.
145.  
Auditors shall be appointed and their duties regulated in the manner provided by the Ordinance.
146.  
Subject as otherwise provided by the Ordinance the remuneration of the Auditors shall be fixed by the Company in general meeting provided always that in respect of any particular year the Company in general meeting may delegate the fixing of such remuneration to the Board.
147.  
Every statement of accounts audited by the Company’s Auditors and presented by the Board at a general meeting shall after approval at such meeting be conclusive except as regards any error discovered therein within three months of the approval thereof. Whenever any such error is discovered within that period, it shall forthwith be corrected, and the statement of accounts amended in respect of the error shall be conclusive.
COMMUNICATIONS
148.  
Any notice or document to be given or issued under these Articles shall be in writing, except that any such notice or document to be given or issued by or on behalf of the Company under these Articles (including any “corporate communication” within the meaning ascribed thereto in the Listing Rules) shall be in writing which may or may not be in a transitory form and may be recorded or stored in any digital, electronic, electrical, magnetic or other retrievable form or medium and information in visible form (including an electronic communication and communication made available on a website) whether having physical substance or not may be served on or delivered or sent by the Company by any of the following means subject to and to such extent permitted by and in accordance with the Ordinance, the Listing Rules and any other applicable laws, rules and regulations:
  (i)  
personally;
  (ii)  
by sending it through the post in a properly prepaid letter, envelope or wrapper addressed to a member at his registered address as appearing in the Register of Members or in the case of another entitled person, to such address as he may provide;
 
  (iii)  
by delivering or leaving it at such address as aforesaid;
  (iv)  
by advertisement in an English language newspaper and a Chinese language newspaper in Hong Kong in accordance with the Listing Rules;
  (v)  
by transmitting it as an electronic communication to the entitled person at such electronic address as he may have provided; or
  (vi)  
by making it available on a website.

 

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149.  
Any notice or document (including any “corporate communication” within the meaning ascribed thereto in the Listing Rules) given or issued by or on behalf of the Company:
  (i)  
if sent by post, shall be deemed to have been served or delivered on the working day following that on which the envelope or wrapper containing the same is put into a post office situated within Hong Kong and in proving such service it shall be sufficient to prove that the envelope or wrapper containing the notice or document was properly prepaid, addressed and put into such post office (airmail if posted from Hong Kong to an address outside Hong Kong) and a certificate in writing signed by the Secretary or other person appointed by the Board that the envelope or wrapper containing the notice or document was so properly prepaid, addressed and put into such post office shall be conclusive evidence thereof;
  (ii)  
if not sent by post but delivered or left at a registered address by the Company, shall be deemed to have been served or delivered on the day it was so left;
  (iii)  
if published by way of a newspaper advertisement, shall be deemed to have been served or delivered on the date on which it is advertised in one English language newspaper and one Chinese language newspaper in Hong Kong;
  (iv)  
if sent as an electronic communication, shall be deemed to have been served 48 hours after it has been sent by electronic means, provided that no notification that the electronic communication has not reached its recipient has been received by the sender, except that any failure in transmission beyond the sender’s control shall not invalidate the effectiveness of the notice or document being served; and
  (v)  
if made available on a website, shall be deemed to have been served 48 hours after the later of the time when it is first made available on the website and the time when the entitled person receives a notification that such notice or document has been made available on the website.
149A.  
Subject to any applicable laws, rules and regulations, any notice or document, including but not limited to the documents referred to in Article 143 and any “corporate communication” within the meaning ascribed thereto in the Listing Rules, may be given in the English language only, in the Chinese language only or in both the English language and the Chinese language.
149B.  
For the purpose of Article 148 and 149, “entitled person” shall have the meaning ascribed to them in the Ordinance.
150.  
Any person who, by operation of law, transfer or other means whatsoever, shall become entitled to any share shall be bound by every notice in respect of such share which, previously to his name and address being entered in the Register, shall be duly given to the person from whom he derives his title to such share.
151.  
Any notice or document served in accordance with these Articles shall, notwithstanding such member be then deceased or bankrupt, and whether or not the Company has notice of his decease or bankruptcy, be deemed to have been duly served in respect of any shares held by such member, whether held solely or jointly with other persons by such member, until some other person be registered in his stead as the holder or joint holder thereof, and such service shall for all purposes of these Articles be deemed a sufficient service of such notice or document on his executors, administrators or assigns and all persons (if any) jointly interested with him in any such share.

 

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152.  
Any summons, notice, order or other document required to be sent to or served upon the Company, or upon any officer of the Company, may be sent or served by leaving the same or sending it through the post in a prepaid letter, envelope or wrapper, addressed to the Company or to such officer at the Office.
153.  
The signature to any notice to be given by the Company may be written, typed, printed or made electronically.
154.  
Subject to any special provisions contained in these Articles or in the Ordinance, all notices required to be given by advertisement shall be advertised in at least one daily Chinese and one daily English newspaper circulating in Hong Kong.
155.  
In reckoning the period for any notice given under these Articles, the day on which notice is served, or deemed to be served, and the day for which such notice is given shall be excluded.
WINDING UP
156.  
If the Company shall be wound up, the surplus assets remaining after payment to all creditors shall be divided among the members in proportion to the capital paid up on the shares held by them respectively, and if such surplus assets shall be insufficient to repay the whole of the paid-up capital, they shall be distributed so that, as nearly as may be, the losses shall be borne by the members in proportion to the capital paid upon on the shares held by them respectively. This Article is, however, subject to the rights of the holders of any shares which may be issued on special terms or conditions.
157.  
If the Company shall be wound up, the liquidator (whether voluntary or official) may, with the sanction of a special resolution, divide among the members in specie or kind the whole or any part of the assets of the Company or vest any part of the assets of the Company in trustees upon such trusts for the benefit of the members or any of them as the resolution shall provide. Any such resolution may provide for and sanction a distribution of any specific assets amongst different classes of members otherwise than in accordance with their existing rights, but each member shall in that event have a right of dissent and other ancillary rights in the same manner as if such resolution were a special resolution passed pursuant to section 237 of the Ordinance.
158.  
In the event of a winding-up of the Company in Hong Kong, every member of the Company who is not for the time being in Hong Kong shall be bound, within fourteen days after the passing of an effective resolution to wind up the Company voluntarily, or within the like period after the making of an order for the winding up of the Company, to serve notice in writing on the Company appointing some person resident in Hong Kong upon whom all summonses, notices, processes, orders and judgements in relation to or under the winding up of the Company may be served and, in default of such nomination, the liquidator of the Company shall be at liberty on behalf of such member to appoint some such person, and service upon any such appointee shall be deemed to be a good personal service on such member for all purposes, and where the liquidator makes any such appointment he shall, with all convenient speed, give notice thereof to such member by advertising in such English language daily newspaper circulating in Hong Kong as he shall deem appropriate or by a registered letter sent through the post and addressed to such member at his address as appearing in the Register, and such notice shall be deemed to be served on the day on which the advertisement appears or the letter is posted.

 

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INDEMNITY
159.  
Subject to the provisions of the Ordinance, every Director or other officer of the Company shall be indemnified out of the assets of the Company against all costs, charges, expenses, losses and liabilities which he may sustain or incur in or about the execution of his office or otherwise in relation thereto and in particular and without prejudice to the generality of the foregoing every Director and other officer of the Company shall be indemnified by the Company against, and it shall be the duty of the Directors out of the funds of the Company to pay all costs, losses and expenses which any such Director and other officer may incur or become liable for by reason of any contract entered into, or act or thing done by him or them as such Director and other officer, or in any way in the discharge of their or his duties, including travelling expenses; and the amount for which such indemnity is provided shall immediately attach as a lien on the property of the Company, and have priority as between the members over all other claims. Any person who is a Director or other officer of the Company shall not be liable (except in consequence of his own dishonesty) for the acts, receipts, neglects or defaults of any other Director or other officer of the Company or for any losses or expenses incurred by the Company through the insufficiency or deficiency of title to any property acquired by order of the Directors for or on behalf of the Company, or for the insufficiency or deficiency of any security in or upon which any of the moneys of the Company shall be invested, or for any loss or damage arising from the bankruptcy, insolvency or tortious act of any person with whom any moneys, securities or effects of the Company shall be deposited or for any loss occasioned by any error of judgement, omission, default or oversight on their or his part, or for any other loss, damage or misfortune whatever which shall happen in the execution of the duties of his office or in relation thereto.
DESTRUCTION OF DOCUMENTS
160.  
Subject to the Ordinance, the Company may destroy:
  (a)  
any share certificate which has been cancelled at any time after the expiry of one year from the date of such cancellation;
  (b)  
any dividend mandate or any variation or cancellation thereof or any notification of change of name or address at any time after the expiry of two years from the date on which such mandate, variation, cancellation or notification was recorded by the Company;
  (c)  
any instrument of transfer of shares which has been registered at any time after the expiry of six years from the date of registration; and
  (d)  
any other document, on the basis of which any entry in the register is made, at any time after the expiry of six years from the date on which an entry in the register was first made in respect of it;
and it shall conclusively be presumed in favour of the Company that every share certificate so destroyed was a valid certificate duly and properly cancelled and that every instrument of transfer so destroyed was a valid and effective instrument duly and properly registered and that every other document destroyed hereunder was a valid and effective document in accordance with the recorded particulars thereof in the books or records of the Company. Provided always that:
  (i)  
the foregoing provisions of this Article shall apply only to the destruction of a document in good faith and without express notice to the Company that the preservation of such document was relevant to a claim;

 

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  (ii)  
nothing contained in this Article shall be construed as imposing upon the Company any liability in respect of the destruction of any such document earlier than as aforesaid or in any case where the conditions of proviso (i) above are not fulfilled; and
  (iii)  
references in this Article to the destruction of any document include reference to its disposal in any manner.
UNTRACEABLE SHAREHOLDERS
161.  
Without prejudice to the rights of the Company, the Company may cease sending such cheques for dividend entitlements or dividend warrants by post if such cheques or warrants have been left uncashed on two consecutive occasions. However, the Company may exercise the power to cease sending cheques for dividend entitlements or dividend warrants after the first occasion on which such a cheque or warrant is returned undelivered.
162.  
The Company shall have the power to sell, in such manner as the Board thinks fit, any shares of a shareholder who is untraceable, but no such sale shall be made unless:
  (i)  
all cheques or warrants, being not less than three in total number, for any sum payable in cash to the holder of such shares in respect of them sent during the relevant period in the manner authorised by the Articles of Association of the Company have remained uncashed;
  (ii)  
so far as it is aware at the end of the relevant period, the Company has not at any time, during the relevant period received any indication of the existence of the shareholder who is the holder of such shares or of a person entitled to such shares by death, bankruptcy or operation of law;
  (iii)  
the Company has caused an advertisement to be inserted in English in one English language daily newspaper and in Chinese in one Chinese language daily newspaper (provided that the aforesaid daily newspapers shall be included in the list of newspaper issued and published in the Hong Kong Government Gazette for the purpose of section 71A of the Ordinance) advertising its intention to sell such shares and a period of three months has elapsed since the date of such advertisement; and
  (iv)  
the Company has notified the stock exchange in the relevant territory of its intention to effect such sale.
For the purpose of the foregoing, “relevant period” means the period commencing twelve years before the date of publication of the advertisement referred to in paragraph (iii) of this Article and ending at the expiry of the period referred to in that paragraph.
The manner, timing and terms of any sale of shares pursuant to this Article (including but not limited to the price or prices at which the same is made) shall be such as the Board determines, based upon advice from such bankers, brokers or other persons as the Board considers appropriate consulted by it for the purposes, to be reasonably practicable having regard to all the circumstances including the number of shares to be disposed of and the requirement that the disposal be made without delay and the Board shall not be liable to any person for any of the consequences of reliance on such advice.

 

- 39 -


 

163.  
To give effect to any such sale pursuant to Article 162 the Board may authorise any person to transfer the said shares and the instrument of transfer signed or otherwise executed by or on behalf of such person shall be as effective as if it had been executed by the registered holder or the person entitled by transmission to such shares, and the purchaser shall not be bound to see to the application of the purchase money nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings relating to the sale. The net proceeds of the sale will belong to the Company and, upon receipt by the Company of such proceeds, it shall become indebted to the former shareholder by carrying all moneys in respect thereof to a separate account for an amount equal to such net proceeds. No trusts shall be created in respect of such debt and no interest shall be payable in respect of it and the Company shall not be required to account for any money earned from the net proceeds which may be employed in the business of the Company or as it thinks fit. Any sale under this Article shall include any additional shares which during the relevant period or during any period ending on the date when all the requirements of sub-paragraphs (i) to (iii) of Article 162 have been satisfied have been issued in respect of those held at the beginning of such relevant period and shall be valid and effective notwithstanding that the shareholder holding the shares sold is dead, bankrupt or otherwise under any legal disability or incapacity.

 

- 40 -

Exhibit 4.57
CU(01) — Finance — 2010 — 65 — 1463
The 2011-2012 Network Lease Agreement for the 21 Southern Provinces
Signed between
Unicom New Horizon Telecommunications Company Limited
And
China United Network Communications Corporation Limited
October 29, 2010

 

 


 

Table of Contents
         
Article 1 Definition
    4  
Article 2 Principles and Major Contents of the Lease
    5  
Article 3 Lease Term
    5  
Article 4 Delay of Lease
    6  
Article 5 Lease Fee and Payment
    7  
Article 6 Ownership and Risk Sharing
    7  
Article 7 Liabilities of the Parties to the Agreement
    8  
Article 8 Statement, representation and guarantee
    9  
Article 9 Purchase Option
    10  
Article 10 Liability for Breach
    11  
Article 11 Force Majeure
    11  
Article 12 Confidentiality
    12  
Article 13 Termination
    12  
Article 14 Expenses
    13  
Article 15 Waiver, Rights and Remedies
    13  
Article 16 Severability
    14  
Article 17 Notices
    14  
Article 18 Governing Law and Arbitration
    14  
Article 19 Effectiveness and Amendment
    15  
Article 20 Supplementary Provisions
    16  

 

2


 

   
This Agreement is signed between the following two Parties on October 29, 2010 in Beijing of the People’s Republic of China:
The Leasing Party: Unicom New Horizon Telecommunications Company Limited (“Unicom New Horizon”)
Address: Room 610 of Office Build 3, No.18, Jianguomennei Street, Dongcheng District, Beijing
The Renting Party: China United Network Communications Corporation Limited (“CUCL”)
Address: No. 21 Financial Street,
Xicheng District, Beijing
Whereas:
(1) CUCL is a foreign investment company established under the laws of the PRC, which is 100% owned by China Unicom (Hong Kong) Limited (“Unicom Red Chip Company”). The major business of CUCL in China include: fixed-line local telephone service ( including local wireless loop service), public telegraph and telex services, domestic telecom facility services, fixed-line domestic long distance call service, fixed-line international long distance call service, IP telephone service (limited to Phone-to-Phone service), 900/1800MHz GSM 2G digital cellular mobile telecommunications service, WCDMA 3G digital cellular mobile telecommunications service, satellite international private line service, Internet data transmission service, international data telecommunications service, 26GHz radio access services; and mobile communications services in 31 provinces (autonomous regions and municipalities) such as Beijing, Tianjin, Shanghai, Liaoning, Hebei, Shandong, Jiangsu, Zhejiang, Fujian, Guangdong, Hubei, Anhui, Sichuan, Guizhou, Xinjiang, Chongqing, Shaanxi, Guangxi, Henan, Heilongjiang, Jilin, Jiangxi, Shanxi, Inner Mongolia, Hunan, Hainan, Yunnan, Ningxia, Gansu, Qinghai and Tibet;
(2) Unicom New Horizon is a limited company established and validly existing under the law of PRC, whose shares are 100% held by China United Network Communications Group Company Limited (“Unicom Group”). Unicom New Horizon owns the fixed networks assets of the 21 southern provinces and cities (regions);

 

3


 

Based on equality and mutual benefits, the Parties have reached the following agreement through friendly consultations:
Article 1 Definition
1.1  
In this Agreement, unless the context (including “whereas” provisions and the annex of this Agreement) otherwise requires, the following expressions have the meanings defined below:
     
Unicom New Horizon (the Leasing Party)
  Refers to Unicom New Horizon Telecommunications Company Limited
CUCL (the Renting Party)
  Refers to China United Network Communications Corporation Limited
The target area/ 21 southern provinces and cities (regions)
  Shanghai Municipality, Jiangsu Province, Zhejiang Province, Anhui Province, Fujian Province, Jiangxi Province, Hubei Province, Hunan Province, Guangdong Province, Guangxi Zhuang Autonomous Region, Hainan Province, Chongqing Municipality, Sichuan Province, Guizhou Province, Yunnan Province, Tibet Autonomous Region, Shaanxi Province, Gansu Province, Qinghai Province, Ningxia Hui Autonomous Region and Xinjiang Uygur Autonomous Region
Fixed communications network
  For the purpose of this Agreement, it refers to various domestic and international fixed telecom networks, facilities and their affiliated equipment that are owned or succeeded by the leasing Party.
Fixed network services
  It refers to the operation of various domestic and international fixed telecom network, facilities; provision of voice, data, image, and multimedia communications and information services based on fixed telecom network
The fixed network assets in 21 provinces and cities (regions)
  It refers to the communications equipment and facilities related to the operation of the fixed communications network in the 21 southern provinces and cities (regions)
Lease term
  It refers to the period agreed under 3.1 of this Agreement
Purchase options
  It refers to the communications network purchasing option owned by the rent Party under Article 9 of this Agreement
1.2  
Any article or clause mentioned in this Agreement, unless otherwise explicitly specified, shall be an article or clause under this Agreement.
1.3  
Any party mentioned in this Agreement or other agreements or documents shall include the successor or permitted transferee.
1.4  
Any law or any provision of the law mentioned in this Agreement shall include the modification and reenactment of the law and provision, the alternative provisions or all rules and legal documentations published according to the above-mentioned laws and provisions.

 

4


 

1.5  
The titles of the articles and annex of this Agreement are only for the convenience of reading, which would not have any legal effect when explaining the contract.
Article 2 Principles and Major Contents of the Lease
2.1  
The Leasing Party agrees to lease the fixed network assets of 21 southern provinces and cities (regions) according to the terms and conditions set forth in this Agreement.
2.2  
The Parties confirm that the lease takes effect as of Jan 1, 2011 (including the day).
2.3  
The Parties hereby agree that unless otherwise arranged, the Renting Party shall be the sole user of the fixed network assets of 21 southern provinces and cities (regions), upon which the Renting Party could operate its fixed-line services in the target areas pursuant to applicable laws and regulations of PRC.
2.4  
As the consideration for the Leasing Party’s fulfillment of its obligations under this Agreement, the Renting Party shall pay the rent fee agreed under Article 5 of this Agreement.
2.5  
All the business operation revenue generated by the fixed network services in the target areas, including but not limited to voice traffic fee, monthly rent fee, interconnection settlement income and other revenue generated by or related to network operation shall be collected by and belong to the Renting Party.
 
2.6  
The costs for operation, management and maintenance of the fixed communications network shall be borne by the Renting Party.
Article 3 Lease Term
3.1  
The expiration period of this Agreement and the lease term herein are two (2) years, starting from Jan 1, 2011 and ending on Dec 31, 2012.
3.2  
Subject to the compliance of the laws and relevant state regulations, when the term of this Agreement or its extension expires, the Renting Party is entitled to, with at least two month prior notice to the Leasing Party, extend the renting of the fixed network assets of 21 southern provinces and cities (regions) according to the terms and conditions(except the rate of renting) set forth in this Agreement.

 

5


 

Article 4 Delay of Lease
4.1  
If due to any incident or situation, the Leasing Party fails to provide any of the relevant telecom network facilities within the fixed network assets of 21 southern provinces and cities (regions), which may influence the Renting Party’s provision of fixed network services to its customers, the Leasing Party shall, as soon as possible (under any circumstances, within 5 working days after the Leasing Party being aware of the incident or situation), notify the Renting Party in writing. Such notification shall list the following:
  4.1.1  
The nature of the incident or situation and if it is caused by the reasons listed in provision 4.4;
 
  4.1.2  
If the Leasing Party believes that certain measures need to be taken for correcting the matter or enabling the network to operate as soon as possible, the Leasing Party must specify the measures; and
  4.1.3  
The impacts that such incident or situation might have on the Renting Party’s provision of fixed network service, including the number of possible affected fixed network users.
4.2  
Once the Renting Party receives any notification based on Clause 4.1, it shall discuss possible corrective action with the Leasing Party in good faith.
4.3  
In addition to the situation mentioned in Clause 4.4 of this Agreement, if the Leasing Party fails to provide any of the fixed networks assets in the 21 southern provinces and cities (regions) and thus affects the Renting Party’s provision of fixed networks services, the Leasing Party shall give a discount on the lease fee (hereinafter called “Delay Discount”). It is calculated as follows:
     
Delay Discount =
 
the number of Renting Party’s fixed network users affected by the delay × time of delay (number of days)× the ARPU of fixed network users(including basic communications and value-added services)/ number of days of corresponding months
   
In the above formula, “the number of Renting Party’s fixed network users affected by the delay” shall be confirmed in accordance with the Renting Party’s report and the actual proof provided; “the ARPU of fixed network users (including basic communications and value-added services)” shall be the average monthly ARPU of the fixed network users in affected areas during the period of three months before the delay, an figure which is confirmed by the Renting Party.
 
   
The Delay Discount shall be deducted from the lease fee (to be paid by the Renting Party to the Leasing Party) of the next term.
4.4  
If any incident or situation notified by the Leasing Party to the Renting Party based on Clause 4.1 falls in the following category or caused by the following items:
  4.4.1  
Force Majeure;
 
  4.4.2  
The Renting Party materially fails to fulfill its substantial obligations under this Agreement, or prevents the Leasing Party from carrying out its duties under this Agreement; or

 

6


 

  4.4.3  
The need to abide by any applicable laws, any compulsory requirements set by the governmental authorities or other applicable compulsory stipulations;
unless such incident (only limited to the incidents stipulated in Clause 4.4.3) is caused by the Leasing Party’s violation of this Agreement, the Leasing Party is not responsible for giving any delay discount, liquidated damages or other compensations due to the inability (caused by such incidents) to lease the telecom network facilities to the Renting Party according to the terms and conditions of this Agreement; however, the Leasing Party shall resume the provision of related telecom network facilities which are interrupted due to such incidents at the earliest date possible.
Article 5 Lease Fee and Payment
5.1  
The lease fee during the lease term is:
  5.1.1  
The lease fee for 2011 is 2.4 billion Yuan;
 
  5.1.2  
The lease fee for 2012 is 2.6 billion Yuan. Unless otherwise specified in writing between the two Parties, all payable lease fees shall be paid in RMB.
5.2  
The lease fee shall be paid by quarter based on the standards listed in Clause 5.1 and transferred to the Leasing Party within 30 days after each quarter.
5.3  
If, according to Clause 3.2 of this Agreement, both Parties agree to extend the lease term, the related lease fee shall be separately discussed between the two Parties.
Article 6 Ownership and Risk Sharing
6.1  
Both Parties agree, the fixed communications network leased under this Agreement shall be owned by the Leasing Party. The Renting Party could, after the lease taking effect, build or expand related fixed communications network according to its business development needs, and ownership of those newly built and expanded network facilities and equipment (paid by the Renting Party itself) belong solely to the Renting Party. Pursuant to the applicable laws and regulations, the Parties shall underwrite their own network equipment and facilities respectively and enjoy the benefits of such insurances.
6.2  
During the lease term, the Leasing Party shall be responsible for the risk of loss, theft, damage or destruction of the assets of fixed communication network, while the Renting Party is responsible for the loss of damage caused by the operation of fixed communication network within its target areas.

 

7


 

Article 7 Liabilities of the Parties to the Agreement
7.1  
Liabilities of the Leasing Party
Without limiting the liabilities of the Leasing Party under other provisions of this Agreement, the Leasing Party shall hold the following liabilities to the Renting Party:
  7.1.1  
Obtaining and maintaining all the necessary government approval/authorization, license and other documents required for network operation, maintenance and upgrade;
 
  7.1.2  
Ensuring the fixed assets of the 21 southern provinces and cities (regions) could be delivered to the Renting Party for use during the lease term;
  7.1.3  
Trying its best to make sure the network quality indicators’ compliance with the agreed standards set by the two Parties;
  7.1.4  
If the Renting Party requires the Leasing Party to upgrade its network software or hardware, the Leasing Party shall try its best to meet the requirements as soon as possible;
 
  7.1.5  
Unless agreed in writing by the Renting Party, any part of the fixed communications network of the target areas shall not be rent or sold to any third party, or any third party shall not be allowed to use or operate the network for telecom service provision in any form;
 
  7.1.6  
Without the prior written consent of the Renting Party, the Leasing Party shall not, in any form, use or operate the fixed communications network of the target areas to provide telecom service to any third party, or compete with the listed Group in any other form;
 
  7.1.7  
If any part of the fixed communications network in the target areas breaks down, the Leasing Party shall provide all the necessary cooperation to the Renting Party, including contacting the network equipment providers and coordinating among the parties.
7.2  
Liabilities of the Renting Party
Without limiting liabilities of the Renting Party under other provisions of this Agreement, the Renting Party shall hold the following liabilities to the Leasing Party:
  7.2.1  
Providing the information and materials about the network status, usage and operation as reasonably required by the Leasing Party from time to time;

 

8


 

  7.2.2  
Allowing the representative of the Leasing Party to examine the network during normal working time after a reasonable notification has been sent;
 
  7.2.3  
Being responsible for the maintenance and security of the network, and in charge of the maintenance of all the databases related to the network;
 
  7.2.4  
Allowing the Leasing Party to use the premise of the Renting Party for the purpose of fulfilling the Leasing Party’s duties under this Agreement;
 
  7.2.5  
(i) Taking all the necessary or favorable steps to protect all parts of network, trying to keep the network in a good state (excluding normal wear and tear), and (ii) maintaining the network according to the best practice commonly recognized by other fixed network service operators in China.
Article 8 Statement, Representation and Guarantee
8.1  
Statement, representation and guarantee of the Renting Party to the Leasing Party:
  8.1.1  
The Renting Party is a legal entity formally registered and validly existing pursuant to the Chinese laws, and is operating with limited liability. It is entitled to own and use its capital to continue its ongoing services;
  8.1.2  
The Renting Party is capable of executing this Agreement, fulfilling the obligations under this Agreement and carrying out the transactions contemplated in this Agreement. In addition, it has taken all the necessary actions to approve the execution, fulfillment and delivery of this Agreement and carry out the transactions contemplated in this Agreement.
  8.1.3  
This Agreement becomes an integral part of the Renting Party’s legal, valid and binding liabilities;
  8.1.4  
The Renting Party’s execution and fulfillment of this Agreement and the performance of the transaction contemplated herein, is not and will not (i) be in contradiction with the incorporation documents of the Renting Party; or (ii) be in contraction with any document which has binding effects on the Renting Party or any of its assets or lead to violation of such documents, nor will it lead to any guarantee on any of its assets;
  8.1.5  
The Renting Party abides by the civil and commercial laws relating to its liabilities under this Agreement; neither the Renting Party nor any of its assets is entitled to exemption of any sort, and the Renting Party’s executing and fulfilling of this Agreement is a private commercial act; and
  8.1.6  
There is no pending or possible law suit, arbitration or administrative procedure, the failing of which will lead to major unfavorable impact on the Renting Party’s financial status or services, or on its capability to fulfill the liabilities under this Agreement.

 

9


 

8.2  
Statement, representation and guarantee of the Leasing Party to the Renting Party:
  8.2.1  
The Leasing Party is a legal entity formally registered according to the Chinese law, and is operating with limited liability. It is entitled to own and use its capital to continue the services it is providing;
  8.2.2  
The Leasing Party is capable of executing this agreement, fulfilling the obligations under this Agreement and carrying out the transactions contenplated in this agreement. In addition, it has taken all the necessary actions to approve the execution, fulfillment and delivery of this Agreement and carry out the transactions contenplated in this Agreement.
 
  8.2.3  
This agreement becomes an integral part of the Leasing Party’s legal, valid and binding liabilities;
  8.2.4  
The Leasing Party’s execution and fulfillment of this Agreement and the performance of the transaction contemplated herein, is not and will not (i) be in contradiction with the incorporation documents of the Leasing Party; or (ii) be in contraction with any document which has binding effects on the Leasing Party or its assets or lead to violation of such documents, nor will it lead to any guarantee on any of its assets;
  8.2.5  
All approvals, consents, registration and notification with regard to the Leasing Party’s execution, fulfillment, legal effect and performance of this Agreement under the PRC laws and those necessary for the transaction contemplated herein, the obtaining or completion of which are the liability of the Leasing Party (depend on which is applicable), shall be already obtained or completed and must be in full validity;
  8.2.6  
The Renting Party’s usage of the network under this Agreement will not cause the Renting Party to violate any law, rule, order, license, waiver, consent, registration, approval or other authorization; and
  8.2.7  
The Leasing Party abides by the civil and commercial laws relating to its liabilities under this Agreement; neither the Leasing Party nor any of its asset is entitled to exemption of any sort, and the Leasing Party’s execution and fulfillment of this Agreement constitutes a private commercial act.
Article 9 Purchase Option
9.1  
The Leasing Party hereby grants the purchase option for the fixed-line communication network of the target areas to the Renting Party. The Renting Party may exercise the purchase option during the lease term upon the delivery of a written notice to the Leasing Party.
9.2  
The Leasing Party and the Renting Party shall in good faith conduct a negotiation on and sign a transfer agreement in relation to the fixed-line communication network of the target areas once it becomes practical. The purchasing price of the fixed-line communication network of the target areas shall be determined by a consultation between the Leasing Party and the Renting Party by taking into consideration of the evaluation results concluded under the applicable laws and regulations of China in combination with the fair value of such network.

 

10


 

9.3  
The Renting Party shall exercise the purchase option in compliance with all applicable laws, regulations and regulatory rules (including the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited).
Article 10 Liability for Breach
10.1  
Any untrue, inaccurate, incomplete statement and/or guarantee, any false statement, omission or misrepresentation, any violence of the commitment under this Agreement or any provisions thereof by either party shall be deemed as breach of this Agreement. Unless otherwise specified, the defaulting Party shall make complete and full compensations to the non-defaulting Party for the actual damages caused.
Article 11 Force Majeure
Force Majeure events shall mean any event that occurs after this Agreement takes effect and adversely affects the performance by a Party of its obligations under this Agreement in whole or in part, but only if and to the extent that such events are unforeseeable and the occurrence and effect could not be prevented or overcome. Should either the Leasing Party or the Renting Party (“affected Party”) be prevented, impeded or delayed from performing any of its obligations under this Agreement due to the Force Majeure event, then:
11.1  
The affected Party may, subject to a notice of the Force Majeure event(s) delivered to the other Party in accordance with Clause 11.2 of this Agreement, suspend the performance of its obligations under this Agreement which is prevented, impeded or delayed by any Force Majeure event during the period for which such event lasts.
11.2  
The affected Party shall immediately give the other Party a written notice of the Force Majeure event(s) after its occurrence, providing reasonable details on such Force Majeure event(s), including the occurrence, time as well as the effects of such event(s) on the affected Party’s ability to perform its obligations under this Agreement.
11.3  
The affected Party shall use all reasonable efforts to mitigate the effects of the Force Majeure event(s) on its ability to perform the obligations under this Agreement.
11.4  
The affected Party shall notify the other Party in writing of the termination or elimination of the Force Majeure event(s) and the duration of such event(s) after the cease of such event(s) without any delay. Both Parties shall recommence performance of their obligations under this Agreement.

 

11


 

Article 12 Confidentiality
12.1  
The Parties shall, and shall ensure that their directors, senior officers, employees and agents, hold in confidence this Agreement, all terms and provisions thereof, and all documents and information in relation to this Agreement supplied by or on behalf of the other Party and shall not disclose this Agreement, any terms and provisions thereof or any above-mentioned documents and information to the third party without the prior written consent from the other Party. However, either Party shall be entitled to the following disclosure subjecting to a prior notice to the other Party:
  12.1.1  
any disclosure by either Party for the purpose of protecting its rights and benefits in any lawsuit or legal actions arising out of this Agreement or in respect thereof; or
  12.1.2  
any disclosure required by an order of a court of the competent jurisdiction (to be performed either in accordance with any disclosing procedures or in a pattern otherwise specified) or by any laws or any rules and regulations of any stock exchange or securities regulators; or
  12.1.3  
any disclosure made by either Party to its auditor, legal counselor or other professional consultants; or
  12.1.4  
any disclosure by either Party to any banks or other financing institutions, or potential financing institutions; or
  12.1.5  
any disclosure required by any applicable law or made by either Party for the performance of its obligations under this Agreement.
12.2  
Nothing set forth in Clause 12.1 shall preclude the disclosure of materials, documents or other information relating to this Agreement by the Renting Party to China United Network Communications Limited (“Unicom A Share Company”) and its subsidiaries.
Article 13 Termination
13.1  
The Renting Party may terminate this Agreement at any time by giving written notice at least ninety (90) day prior to the desired termination date.

 

12


 

13.2  
In case of any continuing or material breach of any provisions of this Agreement by either the Leasing Party or the Renting Party (except the deliberate breach of this Agreement by either Party for the purpose of termination), should the defaulting Party fail to make any remedies for the breach within ninety (90) days after the receipt of a written notice containing information on details of breach and demanding remedies while such breach is remediable, the non-breaching Party shall be entitled to terminate this Agreement at any time, but to the extent that such termination will not affect any other rights hereunder of the Parties or the remedies.
13.3  
If the defaulting Party only violates the provisions on time of performance rather than any other subject (in addition, the time of performance is not an essential element), such breach shall be deemed remediable.
13.4  
The right to terminate this Agreement stipulated in this Article shall not infringe on any other right or remedy of either Party result from or arise out of the relevant breach (if any) or any other breach.
13.5  
On termination of this Agreement due to any reason, the Parties shall have no further obligations hereunder except for rights or obligations otherwise specified or already properly accrued prior to such termination.
13.6  
Notwithstanding Clause 13.1, this Agreement may be terminated at any time subject to the mutual consent in writing.
13.7  
Upon the termination of this Agreement, the Renting Party shall return to the Leasing Party in good faith the fixed-line communication network and properly deal with the subsequent matters including customer service.
Article 14 Expenses
14.1  
Save as otherwise provided herein, each Party shall bear its own expenses and expenditures (including legal fees and expenses) in connection with the negotiation, preparation and performance of this Agreement.
14.2  
All stamp duties and other taxes payable in respect of this Agreement and any previous transactions hereto shall be borne by the Parties in equal share.
Article 15 Waiver, Rights and Remedies
Unless otherwise expressly provided herein, the waiver, failure or delay by either Party to exercise any right, power or remedy under this Agreement or any other transaction document shall not thereby act as a waiver of such right, power or remedy, nor shall the waiver, failure or delay affect the Party’s subsequent performance of such right, power or remedy, or any other right, power or remedy. Any single or partial exercise of any right, power or remedy shall not preclude any further exercise of such right, power or remedy. No waiver shall be effective unless made in writing and duly signed by an authorized representative of the waiving Party.

 

13


 

Article 16 Severability
All provisions under this Agreement and any other transaction documents shall be deemed severable. In the event that any provision contained herein shall be held to be invalid or unenforceable by reason of any law in any jurisdiction, such invalidity or unenforceability shall attach to such provision; and the Parties shall make all reasonable efforts to replace such provision with one that is valid and enforceable and which achieves, to the extent possible, the purpose of the original provision.
Article 17 Notices
17.1  
All notices made under the provisions of this Agreement shall be in writing and duly signed by the sender of such notice (or an authorized representative), and shall be given by hand-delivery, postage prepaid recorded mail, express mail or registered mail, or facsimile transmission to the Parties with a specified recipient at the address or facsimile number set forth hereunder. Such notice shall be deemed officially delivered
  (1)  
at the time personally delivered, when delivered by hand;
 
  (2)  
upon transmission thereof, if by facsimile transmission; and
 
  (3)  
at the time actually delivered, if sent by postage prepaid recorded mail, express mail or registered mail.
Should any notice given by hand-delivery or facsimile transmission be delivered at non-working hour of the recipient, such notice shall be deemed received by such recipient at the working hour of the next working day thereafter.
All the time specified in this Article shall refer to the local time at which the receiving Party is located.
Article 18 Governing Law and Arbitration
18.1  
This Agreement shall be governed by and construed in accordance with the laws of China.
18.2  
The Parties shall put in good effort to resolve any dispute, conflict or claim (“Dispute”) arising under, out of, in connection with or relating to the interpretation or performance of this Agreement through amicable consultation. If such Dispute has not been resolved within sixty (60) days after the receipt by a Party of a request requiring consultations between the Parties to resolve the Dispute, such Dispute shall be submitted for arbitration.

 

14


 

18.3  
Any Dispute shall be resolved by means of arbitration in accordance with the effective arbitration rule of China International Economic and Trade Arbitration Commission (“CIETAC”) when such Dispute is submitted. The Dispute shall be decided by three arbitrators, one appointed by each Party and the third appointed by the two chosen. In case the two arbitrators chosen by the Parties fail to determine the third arbitrator, CIETAC shall make the appointment of the third arbitrator.
18.4  
The arbitration proceedings shall be conducted by CIETAC in Beijing and in the Chinese language, unless otherwise agreed by the Parties to the arbitration.
18.5  
The award rendered by arbitration conducted pursuant to the foregoing proceedings shall be final and binding upon both Parties, and may be enforced in accordance with the terms and conditions thereof.
18.6  
The arbitration fees shall be borne by the losing party. The Parties agree that, if one Party shall enforce the award rendered by any legal proceedings, the Party subject to such legal proceedings shall bear all reasonable fees, expenses and attorney fees.
18.7  
During dispute settlement, the Parties shall continue to perform this Agreement except for the provisions in dispute.
Article 19 Effectiveness and Amendment
19.1  
This Agreement shall not become effective unless reviewed and approved by the board of directors of the Unicom A Share Company and Unicom Red Chip Company, and duly signed by the legal representatives or their authorized representatives of the Parties with the official seals or special seals for contractual use stamped. Upon signature of this Agreement, any amendment to this Agreement (or any other transaction documents) shall be binding only if made in writing and duly signed by the legal representatives or their authorized representatives of the Parties with the official seals or special seals for contractual use stamped.
19.2  
Except as expressly agreed, no amendment shall be construed as a general waiver of any provisions under this Agreement, nor shall it affect any rights, obligations or liabilities under or pursuant to this Agreement which have already accrued up to the date of amendment, and such rights and obligations shall remain in full force and effect, except and only to the extent that they are so modified or varied.
19.3  
No right or privilege under this Agreement shall be assigned by either Party or its successors except with the prior written consent of the other Party.

 

15


 

Article 20 Supplementary Provisions
20.1  
(For the Parties entering into this Agreement) In case of any conflict between any provisions of this Agreement and any other agreements, the former shall prevail, unless (a) such other agreement expressly states its priority over this Agreement in such conflict; and (b) such other agreement is entered into by Parties to this Agreement, or such other agreement prevails over this Agreement in such conflict as otherwise agreed in writing.
20.2  
This Agreement together with its attached annexures shall constitute all legal documents in connection with the leasing matter hereof and supersede all prior oral discussions and written agreements on this subject matter, except otherwise agreed by the Parties.
20.3  
This Agreement shall be signed in ten (10) originals, each Party holding two (2) and others for the use of information disclosure, and review by and/or registration at the government authorities (if required), each of which shall be equally authentic.
(The next page is the signature page of this Agreement with no main text on it.)

 

16


 

(This page is the signature page for the 2011-2012 Network Lease Agreement for the 21 Southern Provinces and there is no main text on it.)
Unicom New Horizon Telecommunications Company Limited (Seal)
Signature of the legal representative or authorized representative
     
/s/ Zhao Yujun
 
   
China United Network Communications Corporation Limited (Seal)
Signature of the legal representative or authorized representative
     
/s/ Tong Jilu
 
   

 

17

Exhibit 4.58
CU(01) – FIN – 2010–64 – 1459
2011-2013 Comprehensive Service Agreement
between
CHINA UNITED NETWORK
COMMUNICATIONS GROUP
COMPANY LIMITED
and
CHINA UNITED NETWORK
COMMUNICATIONS
CORPORATION LIMITED
October 29, 2010

 


 

Table of Contents
         
1. Basic Principles
    4  
2. The Components of Integrated Services
    6  
3. Pricing Principle and Payment
    6  
4. Validity
    7  
5. Representations, Warranties and Commitments
    7  
6. Coming Into Force
    9  
7. Force Majeure
    9  
8. Confidentiality
    9  
9. Non Waiver
    9  
10. Notice
    10  
11. Applicable Laws
    10  
12. Dispute Resolution
    10  
13. Other
    10  
Annex I: Lease of Telecommunication Resources
    12  
Annex II: Premises Leasing
    14  
Annex III: Telecom Value-added Services
    16  
Annex IV: Materials Procurement
    17  
Annex V: Project Design and Construction
    19  
Annex VI: Auxiliary Telecommunication Services
    21  
Annex VII: Integrated Services
    23  
Annex VIII: Shared Services
    25  

 

2


 

The Comprehensive Service Agreement (hereinafter referred to as “the Agreement”) is signed by the following Parties on October 29, 2010 in Beijing, People’s Republic of China (hereinafter referred to as “China”):
(1) Party A: China United Network Communications Group Company Limited (hereinafter referred to as “the Unicom Group”)
Address: 21 Financial Street, Xicheng District, Beijing
Legal Representative: CHANG Xiaobing
(2) Party B: China United Network Communications Corporation Limited (hereinafter referred to as “CUCL”)
Address: 21 Financial Street, Xicheng District, Beijing
Legal Representative: CHANG Xiaobing
Each of the Parties to the Agreement is individually called “the Party” and collectively “the Parties”.
Whereas:
(1) Duly organized and validly existing under the laws of China, the Unicom Group is an integrated telecom service carrier with limited liability. Duly organized and validly existing under the laws of China, China United Network Communications Limited (hereinafter referred to as “the Unicom A Share Company”) is a company limited by shares and traded on the Shanghai Stock Exchange (hereinafter referred to as “the SHSE”) starting from October 9, 2002. The Unicom Group is the controlling shareholder of the Unicom A Share Company;
(2) The Unicom A Share Company exercises indirect share-holding of China Unicom (Hong Kong) Limited (hereinafter referred to as “the Unicom Red-chip Company”) through China Unicom (BVI) Limited (“the Unicom BVI Company”). Registered in the Hong Kong SAR, China (hereinafter referred to as “Hong Kong”), the Unicom Red-chip Company is a company limited by shares and traded on Hong Kong and the U. S. exchanges;
(3) CUCL is a foreign-invested company duly organized and validly existing under the laws of China, with the Unicom Red-chip Company holding 100% of its stake. CUCL mainly operates fixed-line local telephone services nationwide (including wireless local loop service), public telegraph and telex services, domestic communications infrastructure services, domestic long-distance fixed-line telephone services, international long-distance fixed-line telephone services, IP telephone services (Phone-to-Phone only), 900/1800MHz GSM second-generation digital cellular mobile communications services, WCDMA third-generation digital cellular mobile communications services, international satellite private line services, Internet data transmission services, international data communication services, 26GHz wireless access services as well as mobile communications services in 31 provinces (autonomous regions and municipalities), including Beijing, Tianjin, Shanghai, Liaoning, Hebei, Shandong, Jiangsu, Zhejiang, Fujian, Guangdong, Hubei, Anhui, Sichuan, Guizhou, Xinjiang, Chongqing, Shaanxi, Guangxi, Henan, Heilongjiang, Jilin, Jiangxi , Shanxi, Inner

 

3


 

Mongolia, Hunan, Hainan, Yunnan, Ningxia, Gansu, Qinghai and Tibet;
(4) On May 24, 2008, Ministry of Industry and Information Technology (MIIT), National Development and Reform Commission (NDRC) and Ministry of Finance jointly issued a <Circular on Deepening the Reform of China’s Telecom System>. Accordingly, the Chinese government moved to deepen the reform of the telecom system by endorsing the formation of three leading market players that feature nationwide network resources, roughly equivalent power and size and the capacity to run fully-integrated services, as well as by encouraging China Telecom to acquire China Unicom’s CDMA facilities and the merger of China Unicom and China Netcom. In response to the call for deepening reform and implementing restructuring in the telecom sector, the Unicom Red-chip Company and China Netcom Group Corporation (Hong Kong) Limited (a company organized as per the laws of Hong Kong and listed on the Hong Kong Stock Exchange and the New York Stock Exchange, hereinafter referred to as “the Netcom Red-chip Company”) intended to merge by scheme of arrangement (“the Merger Transaction”). Following the merger, the Netcom Red-chip Company was delisted from the Hong Kong Stock Exchange and the New York Stock Exchange to become a wholly owned subsidiary of the Unicom Red-chip Company; and
(5) For the purpose of enabling the Unicom Red-chip Company and its subsidiaries to run telecom businesses and in conformity with the relevant provisions of the <Shanghai Stock Exchange Listing Rules> (hereinafter referred to as “< The SHSE Rules>”) applicable from time to time and the <Hong Kong Stock Exchange Listing Rules> (hereinafter referred to as “<THE HKSE Rules>”) applicable from time to time, the Unicom Group and its subsidiaries (excluding the Unicom A Share Company and its subsidiaries) have established a series of arrangements with CUCL for continuing connected transactions (hereinafter referred to as the “Arrangement for Continuing Connected Transactions”). As per <The SHSE Rules> and <The HKSE Rules>, such continuing connected transactions shall be made public by the Unicom A Share Company and the Unicom Red-chip Company in conformity with their respective listing Rules as applicable, without the necessity to seek approval from their respective General Meetings of Shareholders. The Arrangements for the above continuing connected transactions will be valid for 3 years, starting from 1 January 2011 and ending on December 31, 2013.
As per the specific implementation of the relevant continuing connected transactions, following joint research and discussions as well as based on equality and mutual benefit, the Parties have reached the following agreement:
1. Basic Principles
1.1 The “Integrated Services” under the Agreement refers to certain services and facilities provided from one Party to the other Party or mutually provided between the Parties, with the receiving Party paying the associated costs (hereinafter referred to as “the Service Fee”). Unless otherwise agreed to, the Parties keep the right to allow its controlled subsidiaries (to be determined in light of the <Corporate Accounting Standards> as revised by Ministry of Finance from time to time) to provide or receive as well as charge or pay for services as per the terms and conditions of the Agreement.
1.2 The services and/or facilities from any Party to the other Party as per the Agreement shall be regarded as paid transactions in the business exchanges between companies, where the former Party has the right to charge a reasonable amount of fees for the service and/or facilities it provides pursuant to the fair market principle and the latter Party shall fulfill the corresponding payment obligations.

 

4


 

1.3 The conditions and quality of services and/or facilities provided by either Party to the other Party shall not be any worse than those of the same or similar services and/or facilities it provides to any third party. While exercising rights or fulfilling obligations under the Agreement, the Parties shall observe the principle of fair trade.
1.4 In case that either Party requires the other Party to increase the services and/or facilities provided under the Agreement, the other Party shall make its best efforts to provide the requested services and/or facilities, with conditions of such services and/or facilities no worse than those provided to any third party.
1.5 In case that the services and/or facilities under the Agreement cannot be provided in whole or in part by one Party due to its own reasons, the Party in question shall promptly notify the other Party, and do its best to help the other Party to get the same or similar services and/or facilities from other sources.
1.6 The services and/or facilities provided under the Agreement shall comply with the purpose of usage as agreed upon by the Parties and the standards prescribed by the State.
1.7 For any losses inflicted upon the counterParty as a result of breach of the Agreement by any Party, the inflicting Party shall bear the corresponding liabilities to the other Party for the breach (including but not limited to direct and indirect losses inflicted upon the other Party for breach of the Agreement). However, the inflicting Party shall not be held liable for losses caused by force majeure.
1.8 While either Party is fulfilling its obligations under the Agreement, the other Party shall provide reasonable assistance where necessary.
1.9 Pursuant to the premise of Clause 1.3 of the Agreement and on condition that the charges from one Party do not exceed those from an independent third party, the Party that receives the services and/or facilities (hereinafter referred to as “the receiving Party”) agrees to opt for the counterParty as its preferred service provider.
1.10 If there is an independent third party within the jurisdiction of one Party where the services are provided, and the third party: (i) provides higher quality of services; or (ii) provides the same level of services but charges less; then the receiving Party keeps the right to terminate the services provided by the counterParty within the jurisdiction following a written notice to the counterParty, for which the receiving Party shall bear no liability.

 

5


 

2. The Components of Integrated Services
2.1 The integrated services mutually provided between the Parties under the Agreement and the associated arrangements are set out in the following annexes:
Annex I: Lease of Telecommunication Resources (provided from Party A to Party B);
Annex II: Premises Leasing (mutually provided);
Annex III: Telecom Value-added Services (provided from Party A to Party B);
Annex IV: Materials Procurement (provided from Party A to Party B);
Annex V: Project Design and Construction (provided from Party A to Party B);
Annex VI: Auxiliary Telecommunication Services (provided from Party A to Party B);
Annex VII: Integrated Services (mutually provided);
Annex VIII: Shared Services (mutually provided)
3. Pricing Principle and Payment
3.1 The pricing principles and/or service fee under the Agreement are set out in the Annexes to the Agreement.
3.2 Calculation of the exact amount of service fee under the Agreement is subject to the relevant Chinese accounting standards applicable from time to time.
3.3 In case that the Parties cannot agree upon the amount of service fee under the Agreement, they shall jointly submit the matter to the competent department for the latter to determine the level of fees with reference to the spirit and provisions of the Agreement and in accordance with price-related national policies and regulations. The decision of that department shall be deemed final and binding on the Parties.
3.4 As per the pricing principles and standards contained in the Agreement and the annex herewith, either Party shall pay the other Party in a timely fashion for the corresponding services it receives.
3.5 In case that either Party does not pay the service fee as agreed upon by the Parties in due course, then for each day exceeding the time limit, the defaulting Party shall pay the other Party a late fee of 0.05% of the amount overdue; in case that the time limit is exceeded by 60 days and above, the receiving Party may opt to terminate the corresponding services following a written notice to the defaulting Party. If the defaulting Party still does not pay the service fee 30 days after receipt of the notice, the receiving Party may declare termination of the corresponding services. However, the suspension or termination of such services shall not affect any prior rights or obligations of the Parties that have already occurred or arisen under the Agreement.
3.6 In October each year, the Parties shall carry out a review of the pricing standards and terms and conditions for the next fiscal year in regard to the services and facilities provided as per the Agreement, for which a supplementary agreement is to be signed. If the Parties do not arrive at a consensus prior to the above deadline in regard to the provisions of the supplementary agreement, then the pricing standards and relevant provisions for the current year shall apply in the next fiscal year before the Parties arrive at a consensus or the discrepancies between the Parties are duly addressed pursuant to Clause 3.3 of the Agreement.

 

6


 

4. Validity
4.1 The Agreement is valid for 3 years (“the Effective Period”), with immediate effect the next day following satisfaction of the conditions contained in Clause 6 of the Agreement.
4.2 Unless Party B informs Party A via a written notice at least 60 days in advance, the Agreement shall be automatically renewed for another effective period at the expiry of the Agreement or its extension period as long as the relevant laws, regulations or regulatory rules are applied.
5. Representations, Warranties and Commitments
5.1 The Parties make the following representations, warranties and commitments to each other:
5.1.1 It has full power and authority (including but not limited to the approval, consent or permission from competent government departments) to sign the Agreement and its annexes;
5.1.2 The Agreement and its annexes are valid and binding upon signing and sealing in the manner provided in the Agreement, with compulsory execution permissible as per its terms and conditions;
5.1.3 Any provisions in the Agreement and its annexes are not in violation of the laws and regulations of China.
5.2 As per relevant laws, regulations and Listing Rules, the Unicom Group agrees to continue to support the Unicom Red-chip Company and its subsidiary companies (collectively referred to as “the Relevant Operating Subsidiaries”) in their sustainable development, including:
5.2.1 All the current or future business-related licenses, consents, permissions and approvals (including the Unicom Group’s operating license for engaging in telecom businesses, the same below) and other distributed and/or acquired resources (including but not limited to spectrum, frequency, numbers, trademarks, names and other resources, the same below) from national communications regulators (e.g., MIIT) and other competent departments that are associated with the CUCL’s listed businesses will also apply to the relevant operating subsidiaries. The Unicom Group will continue to hold, retain and update such licenses, consents, permissions, approvals and other resources pursuant to laws for the exclusive benefit of the relevant operating subsidiaries’ engagement in listed businesses, and will not conduct any act or omission that may adversely affect the legality, validity or renewability of such licenses, consents, permissions, approvals and other resources or the ability of the relevant operating subsidiaries to engage in listed businesses pursuant to laws and regulations; and will conduct all acts or omissions for obtaining, maintaining, retaining, updating or extending the legality, validity or renewability of such licenses, consents, permissions, approvals and other resources as well as the ability of the relevant operating subsidiaries to engage in listed businesses pursuant to laws and regulations;

 

7


 

5.2.2 To enable the relevant operating subsidiaries to engage in listed businesses, the Unicom Group will provide assistance to relevant operating subsidiaries to involve them in its existing or future roaming arrangements with third parties on normal commercial terms;
5.2.3 With regard to the equity/shares of the listed group that is/are in the beneficial ownership of the Unicom Group, the Unicom Group will not engage in any acts that may lead to the Unicom Group losing the right of control of the relevant operating subsidiaries. For the avoidance of doubt, the provisions of the <Accounting Standards> as revised by Ministry of Finance from time to time shall prevail in the determination of the above right of control. Subject to relevant laws, regulations and Listing Rules, the Unicom Group will not approve or agree to the occurrence or implementation of the foregoing acts either;
5.2.4 In case that there are any connected transactions between the relevant operating subsidiaries and the Unicom Group, the accountants (or auditors, the same below) appointed by the relevant operating subsidiaries are needed to audit the relevant accounting records of such connected transactions as per the laws or Listing Rules of the jurisdictions where the shares of the listed company are traded. For the purpose of carrying out such audits, the Unicom Group agrees to facilitate the full access by the accountants appointed by the relevant operating subsidiaries to the accounting records (including the accounting records of the Unicom Group and/or its contacts);
5.2.5 Except through the Unicom Red-chip Company, the Unicom Group will not seek overseas listing for itself or its affiliated enterprises in regard to any present or future businesses that are similar to those offered or to be offered by the listed group;
5.2.6 The Unicom Group is committed to the following: as long as the shares of the Unicom A Share Company and the Unicom Red-chip Company are traded on the stock market, and the Unicom Group is considered as the controlling shareholder of the Unicom A Share Company and the Unicom Red-chip Company as well as the contact of the controlling shareholder as per the laws or Listing Rules of the jurisdictions where the shares are traded, then: (1) the Unicom Group will not engage or participate in any competitive businesses in China in any form (including but not limited to sole proprietorship, joint venture or cooperative operation as well as direct or indirect ownership of the stock or other interests of other companies, but excluding those through the relevant operating subsidiaries, the same below), and will prevent and keep any of its affiliated enterprises from doing so; (2) If the Unicom Group and/or any of its affiliated enterprises participates or engages in any businesses or activities that evolves to competitive businesses at any time, in any form or in any place in China, the Unicom Group will promptly terminate and/or enable the termination of the participation, management or operation of such competitive businesses by its respective affiliated enterprises;
5.2.7 If the Unicom Group or any of its affiliate enterprises obtains any government approval, authorization or permission to develop any new telecom technologies, products or services, or wishes to develop any new telecom technologies, products or services, or is allowed to engage in any other business opportunities, the Unicom Group shall directly notify and/or urge its respective affiliated enterprise to notify the situation to the relevant operating subsidiary in a timely fashion, and above all provide such government approvals, authorizations or permissions as well as such rights to develop new telecom technologies, products and services or to exploit business opportunities to CUCL or its subsidiaries in view of the needs of the relevant operating subsidiaries after going through necessary formalities;

 

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5.2.8 The Parties agree that the above representations, warranties and commitments of the Unicom Group will replace the relevant representations, warranties and commitments contained in subsections (13), (14), (16), (17) and (18) of Clause 3.2 as well as Clause 5.1 and 5.2 of the <Restructuring Agreement> signed between the Unicom Group and CUCL on April 21, 2000, while the rest of the provisions in the <Restructuring Agreement> remain unchanged.
6. Coming Into Force
The agreement shall come into force from the date appearing atop the main text of the Agreement subject to the review and approval by the Board of Directors of the Unicom A Share Company and the Unicom Red-chip Company as well as signatures and seals by the Parties.
7. Force Majeure
In the event that one Party cannot fulfill its obligations as per the agreed conditions contained in the Agreement and its Annexes due to unforeseen force majeure of which the occurrences and consequences are unavoidable and insuperable, the Party shall promptly inform the situation to the other Party, and present to the other Party within 15 days the details and valid documents supporting its inability to fulfill in whole or in part its obligations under the Agreement and its annexes or listing the reasons for its delayed execution of such obligations. As per the magnitude of influence of force majeure on the execution of such obligations, the Parties shall decide whether to suspend, partially exempt or delay the execution of such obligations.
8. Confidentiality
Unless otherwise provided for by laws or regulatory authorities or for the purpose of information disclosure by Party B to regulatory authorities, without written permission from the counterParty, neither Party shall provide or disclose any material or information relating to the businesses of the other Party to any company, enterprise, organization or individual.
9. Non Waiver
Unless otherwise provided for by laws, failure by either Party to exercise or delay the exercise of its rights, power or privilege under the Agreement shall not be deemed waiver of such rights, power or privilege, and the exercise of such rights, power or privilege in part shall not hinder future exercise of such rights, power or privilege.

 

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10. Notice
Any notice in relation to the Agreement shall be made in writing and delivered by hand, fax or post from one Party to the other Party. Notices shall be regarded as delivered when signed by the recipient (hand delivery), when the sender’s fax machine displays “sent” (facsimile) or on the third working day in the wake of mailing (postal delivery, in which case the date shall be automatically extended when coinciding with legal holidays). Notices shall take immediate effect upon delivery.
11. Applicable Laws
Governed by the laws of China, interpretation and implementation of the Agreement is also subject to the laws of China.
12. Dispute Resolution
Except for the situation provided for in Clause 3.3 of the Agreement, all disputes arising out of implementation of the Agreement or relating to the Agreement shall be resolved through friendly consultations between the Parties. In case that no consensus is reached within thirty (30) days after one Party makes the request to resolve the dispute through consultations, either Party may submit the dispute to China International Economic and Trade Arbitration Commission (CIETAC), in which case three (3) arbitrators are required to resolve the dispute in Beijing by arbitration as per the then effective arbitration rules. With Chinese as the arbitration language, the arbitration award shall be final and binding on the Parties. Unless otherwise provided by the arbitral tribunal, the arbitration costs shall be borne by the losing Party.
13. Other
13.1 Once the Agreement enters into force, the original arrangement of continuing connected transactions shall be terminated.
13.2 Annex I to Annex VIII of the Agreement forms an integral part of the Agreement and bears the same effect as the main text of the Agreement. In case that the text of the annexes is inconsistent with that of the Agreement, the text of the annexes shall prevail.
13.3 As agreed by the Parties, the Parties may opt to amend or supplement the Agreement and its annexes. All amendments or supplements shall enter into force following signatures and seals in writing by legal representatives or authorized representatives of the Parties.
13.4 The Agreement is severable, i.e., if any provision of the Agreement or its annexes is determined as illegal or unenforceable, the effectiveness and implementation of other provisions of the Agreement and its annexes shall not be affected accordingly.
13.5 The Agreement is made in four original copies, with each Party holding two copies and all the four copies bearing the same legal effect.

 

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China United Network Communications Group Company Limited (Seal)
Legal representative or authorized representative:
     
/s/ Zhao Yujun
 
   
China United Network Communications Corporation Limited (Seal)
Legal representative or authorized representative:
     
/s/ Tong Jilu
   

 

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Annex I: Lease of Telecommunication Resources
1. Lease of Telecommunication Resources
The two Parties agree that Party B lease Party A’s international telecommunications channel gateways (including international submarine cable landing stations, international land cable entry points, landing stations or entry extension terminal stations, as well as international satellite earth stations), international telecommunications service gateways (including international voice exchanges, the STPs, international ATM/FR nodes, international transmission/DDN, international nodes for IP networks and international internet gateways (IIGs)), the international submarine cable capacity, international land cables and other international telecommunications resources (in short the “International Telecommunications Resources”), as well as other telecommunications facilities owned by Party A but needed by Party B in its service operations (“Telecommunications Resources and Facilities”).
2. Contents of the Lease of Telecommunications Resources and Facilities
2.1 Party B leases international telecommunications resources owned by Party A.
2.2 Party B leases other telecommunications resources and facilities owned by Party A.
2.3 The two Parties shall make adjustments where necessary to the scope, type and quantity of telecommunications resources and facilities at any time. Such adjustments shall be confirmed once a year.
3. Obligations
3.1 Party B shall be responsible for maintaining the leased international telecommunications resources at its own expense in accordance with relevant regulations and specifications.
3.2 The two Parties shall determine through consultation which Party is to undertake the maintenance task in part or in full for the telecommunications facilities, in which case the relevant costs shall be borne by Party B (unless otherwise agreed by the two Parties); if Party A undertakes the maintenance task in part or in full for the telecommunications facilities, Party B shall make compensations to Party A for the costs arising therefrom.
3.3 Party B shall make proper use of the leased telecommunications resources and facilities. In the validity of this Annex and to the extent permitted by the laws where applicable, Party B shall be entitled to lease the telecommunications resources and facilities to any of the third parties as part of its normal Network Elements (NE) lease services, for which the rates shall be based on relevant state regulations and the principles of equality and fairness.
3.4 If Party B deems it necessary to suspend the telecommunications resources and facilities for the sake of maintenance and other reasons, a prior notice shall be issued to Party A within a reasonable period of time.

 

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4. Quality Assurance
4.1 Party A shall ensure that the quality of its telecommunications resources and facilities to be leased are in line with national standards and regulations.
4.2 Party B shall ensure that its telecommunications equipment connected to the telecommunications resources and facilities is in line with the quality standards and technical requirements provided by the competent national authorities.
5. Fees and Payment
5.1 The rental fee to be paid by Party B for the telecommunications resources and facilities shall be equal to the annual depreciation of such resources and facilities and no higher than the market price.
5.2 Within three months after the end of each calendar year, the two Parties shall carry out a review of the rental fee of the telecommunications resources and facilities (if necessary) provided pursuant to this Annex. Adjustments shall be made in the next year with regard to the rental fee errors (if any) identified in the review process.
5.3 The expenses to be paid under Clause 3.2 of this Annex shall be determined with reference to the market price. In case that no market price is available, the price shall be worked out by the two Parties through negotiation. However, the price shall be negotiated on a “cost plus” basis, and the “cost acceptable” means the cost to be determined by the two Parties through negotiation.
5.4 Within ten working days following the end of each quarter, Party B shall provide to Party A a list of rental charges of the previous quarter, as well as a list of the charges and fees provided pursuant to aforementioned Clause 5.3 of this Annex. Meanwhile, Party B shall pay Party A the balance of rental charges after deduction of the relevant charges provided pursuant to Clause 5.3 hereinbefore. After the receipt of the payment, Party A shall issue a statement of payment to Party B. Where dispute arises, adjustments shall be made in the next quarter upon confirmation by the two Parties.
5.5 The two Parties shall pay rental charges and fees in light of the articles heretofore. In the event of overdue payment, a penalty charge of 0.05% of the amount due will be imposed on the Party owing the payment for each day (1 day) of outstanding payment.

 

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Annex II: Premises Leasing
1. Scope and Purposes of Leasing
1.1 Party A and Party B agree to lease premises and related attached equipment owned respectively by their branches, subsidiaries, affiliated companies or holding enterprises or units (“subsidiary companies”) to each other for the purpose of production and operation. Both Parties confirm that subsidiary companies hereinbefore have agreed to entrust Party A and Party B with the rights to lease the premises under this Annex.
Party A agrees to lease its own premises and related attached equipment under this Annex (“Party A’s Premises) to Party B; Party B agrees to rent Party A’s Premises and pay the consideration accordingly. Meanwhile, Party B agrees to lease its own premises and related attached equipment under this Annex (“Party B’s Premises) to Party A; Party A agrees to rent Party B’s Premises and pay the consideration accordingly.
1.2 Party A and Party B agree that the premises leased from each other are to be used for business operation in accordance with the law within the scope permitted. One Party may re-lease the other Party’s premises to the third parties upon the written permission of the other Party herein. However, the sub-lessee shall still bear the responsibilities and obligations hereunder for the leased premises.
2. Lease Term
2.1 The lease term of the premises under the Annex shall be determined by the two Parties in accordance with the specific leasing circumstances of each leased premise, but shall be subject to the provisions of Clause 2.2 of this Annex.
2.2 If the Lessee commits one of the acts described hereinafter, the Lessor is entitled to terminate the lease of the premises under this Annex:
(1) The Lessee subleases or lends the Lessor’s premises to other Parties without the Lessor’s consent (excluding subleasing or lending to the affiliated companies or associated companies of the Lessee);
(2) The Lessee breaches the agreed articles of lease purposes, or uses the Lessor’s premises to carry out unlawful or illegal activities and infringes upon the interests of the public.
2.3 On the expiry of this Annex, if the Lessee waives the right to renew the lease according to this Annex, but is unable to actually return the rental premises to the Lessor due to business operation, the Lessor shall extend, as appropriate, the lease term, and shall be entitled to charge the Lessee for the extended rent. The specific amount shall be determined by the Lessee and the Lessor through consultation.
3. Rents and Payment
3.1 Party A and Party B agree that the specific rent of the premises and attached equipment leased to each other shall be determined by both Parties based on the market price or the depreciation as well as the tax with reference to the rent standard provided by local pricing authorities and taking into consideration of the specific needs of the two Parties. The rents shall be no higher than the market price.

 

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3.2 Party A and Party B agree that the leasing of each Party’s specific premises may be stipulated in separate execution documents otherwise signed in order to provide the applicable terms and conditions. However, the execution documents shall be in line with the principles, guidelines, terms and conditions provided by this Annex.
3.3 A review of the rent provided in this Article hereto shall be carried out once a year, and whether adjustments are needed as well as the specific rental prices after adjustments shall be determined by both Parties through consultations. Only the adjusted rent shall be no higher than the market price.
3.4 The rent shall be settled once every quarter, and the settlement date shall be the last day of each quarter. Should the last day be Saturday, Sunday or public holiday, the settlement date shall be postponed to the first working day after the end of holidays.
3.5 All administrative fees and other fees arising from the lease of Party A and Party B’s premises charged by the state and local government shall be borne by the Lessor, unless otherwise expressly stipulated in this Annex.
3.6 The Lessee shall pay the rent to the Lessor in light of the Article hereof. In the event of overdue payment, a penalty charge of 0.05% of the amount due will be charged by the Lessor for each day (1 calendar day, similarly hereinafter) of outstanding payment.
4. Repairing and Refurbishment during Lease Term
The Lessor shall undertake the obligations of repairing and refurbishing the premises during the lease term and bear the costs arising therefrom. Unless otherwise provided by this Annex, the Lessee shall consult the Lessor and both Parties shall reach written agreements before carrying out any necessary decoration construction in the leased premises, such as transformation of the main structure of the premise. However, the Lessor shall not reject or delay the Lessee’s request for the transformation of the main structure of the premise without reasonable grounds. With the main structure of the premises remaining untouched, the Lessee can make alteration and addition at its own expenses without informing the Lessor or obtaining its consent. The additions or values arising from the decoration, alteration or addition made by the Lessee or the Lessor during the lease term shall belong to the Lessor.
5. Change of Lessor
5.1 In the event that the Lessor transfers the ownership of its rental premises to the third parties, this Annex shall remain valid for the new owner of the premises.
5.2 The Lessor shall inform the Lessee three months prior to the sale of the ownership of the leased premises. Under the same terms the Lessee has the right of preemption to the Premises.

 

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Annex III: Telecom Value-added Services
1. General Description of Service Contents
Party A (or its holding subsidiaries) as a Provider offers various value-added services to Party B’s subscribers through all kinds of telecommunications networks and data platforms.
2. Settlement
2.1 With regard to the actual cash revenue generated from the value-added services described in this Annex offered by the Provider to Party B, the settlement shall be made between the respective branches of Party B and the Provider in line with the average proportion of revenue sharing between Party B and the CPs/SPs of the same kind who are independent from the Provider in the same market area.
2.2 Settlement shall be based on Party B’s billing information.
2.3 Both Parties agree that the settlement should be made once a month directly by each Party’s relevant subordinated bodies in light of the settlement principles provided by this Annex.
3. Obligations
3.1 Where the services under this Annex may be affected due to one Party’s network construction (including but not limited to capacity expansion or renovation), the Party carrying out the construction work shall inform the other Party six months in advance.
3.2 Both Parties shall conduct network maintenance in line with related regulations provided by competent national telecommunications authorities at any time so as to guarantee the normal operation of the whole network.
3.3 Without the consent of the other Party, neither Party shall suspend the telecommunications generated from services under this Annex. Where telecommunications were suspended or severely impeded, both Parties shall take effective measures immediately to recover the telecommunications service.

 

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Annex IV: Materials Procurement
1. Scope of Materials Procurement Services
1.1 Materials procurement service items provided by Party A to Party B under this Annex include but not limited to:
(1)  
Procurement of imported telecom materials;
 
(2)  
Procurement of domestic telecom materials;
 
(3)  
Procurement of domestic non-telecom materials.
Abovementioned procurement services also include management of bidding and tendering, review of technical specifications, installation, inquiry, and agent services.
1.2 The proprietary materials sold by Party A directly to Party B mainly include cables, modems and so on.
1.3 Party A also provides Party B with storage, transportation and other services related to material procurement services and direct materials procurement.
2. Service Fees and Payment
2.1 Party B shall pay service fees to Party A for purchasing equipment:
(1) The pricing and/or charging standard of the commission on the domestic material procurement services under this Annex shall not exceed 3% of the material procurement contract amount.
(2) The pricing and/or charging standard of the commission on the imported material procurement services under this Annex shall not exceed 1% of the material procurement contract amount.
(3) The pricing standard of part of Party A’s proprietary materials sold to Party B under this Annex shall be determined pursuant to principles and order provided hereinafter: the government price shall be adopted where it is available; the government-guided price shall be adopted where it is available; in case that neither government price nor government-guided price is available yet market price is available, the standard shall be worked out with reference to the market price; in the event that no government price, government-guided price or market price is available, the standard shall be worked out by the two Parties through negotiation. However, the price shall be negotiated on a cost-plus basis, and the “cost acceptable” to the two Parties shall also be determined through negotiation.

 

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(4) The pricing and/or charging standard of the commission on storage, transportation and other services related to material procurement services and direct materials procurement under this Annex shall be determined with reference to the market price. The “market price” herein means price that is set by the proprietor independently and formed through market competition. The market price shall be determined pursuant to the following order: (1) the price charged by the independent third parties offering such services under normal trading in the area where the service is provided or in the vicinity; or (2) the price charged by the independent third parties offering such services under normal trading within China’s territory.
2.2 Party B agrees to pay service fees to Party A each month.
In the event of overdue payment, Party B shall pay Party A a penalty at the rate of 0.05% of the amount overdue for each day (1 day).

 

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Annex V: Project Design and Construction
1. Main contents
Under this annex, Party A shall provide the following services for Party B in terms of project design and construction:
(1) Project design, including:
Planning and design, project investigation and survey, communication circuit engineering (including pipeline projects, fiber and cable projects, and overhead pole line projects), communication equipment projects (including phone switching project, transmission projects, data and multimedia projects, communication power and air-conditioning projects, microwave communication projects and technical support system projects) and corporate communication projects;
(2) Project construction, including:
Communication equipment, communication lines, communication power (including air conditioners for communication), communication pipelines and technical business support system;
(3) Project supervision
(4) IT services, including:
Office automation, software testing, network upgrading, R&D of new services and support systems.
2. Pricing principles
Except the situation described in the Clause 2 (2), the service pricing and/or charging standards for project design and construction under this annex, shall be set in accordance with the market price. The “market price” under this Article, refers to the price offered by the operators in the market and formed through market competition. The market price will be determined in the following order: (1) the price offered by the independent third party for the service under the normal transaction around the places or areas where the service is provided; or (2) the price offered by the independent third party of service provider under the normal transaction within the Chinese territory.
Agreed by the two Parties, the receiving Party shall decide the specific provider for project design service and technical service by means of bidding. The qualifications and conditions of the provider shall be no lower than an independent party, and is in the equal position with the independent third party to engage in the bidding.

 

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3.  
Service payments
3.1 Party B shall pay Party A or Party A’s fiduciaries for service fees in a timely manner in accordance with the pricing and charging standards defined in this annex, the supplementary agreements of this annex (if any) and the execution documents.
3.2 If Party B fails to pay the relevant service fees as scheduled according to the provisions in this annex, the supplementary agreements of this annex (if any) and the execution documents, Party B shall pay Party A 0.05% of the overdue amount as fine for delaying payment every one (1) day (calendar day, hereinafter inclusive); if the payment is deferred for sixty (60) days, Party A may inform Party B in written form of the suspension of the service; if Party B fails to pay the relevant service fees within thirty (30) days upon the receipt of the written notification, Party A may declare the termination of the relevant services. However, the suspension or termination of the services will not affect the rights and obligations underway between the two Parties under this annex.
4. Priority
4.1 Unless otherwise provided, for the same service, if the clauses and conditions provided by independent third party for Party B are not superior to those provided by Party A, Party B shall give priority to Party A.
4.2 Party A shall make commitment to Party B that the conditions that Party A provide for the third party will not be superior to Party B concerning the same or similar services under this annex.
4.3 Party A has rights to provide services for the third party under the circumstances that services provided by Party A for Party B under this annex will not be affected.

 

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Annex VI: Auxiliary Telecommunication Services
1. Main contents
The auxiliary telecom services provided by Party A for Party B under this annex include: the provision of the auxiliary telecom services including pre-sale, sale and after-sale of various communication services, such as installation, disassembly, transfer and repair of customers’ communication equipment, agential sales of certain communication products, bills printing and mailing, collecting telephone charges, making telephone cards and developing new customers; market and customers information collection and feedback; maintenance of auxiliary equipment of communication bureaus or rooms (such as air conditioners and firefighting equipment) and telephone booths.
2. Pricing principles
2.1 The pricing and/or charging standards for auxiliary telecom services under this annex shall be set based on the principles and order defined in this article: the services with prices set by the government shall follow the governmental prices; the services with prices guided by the government shall refer to the guidance price offered by the government; those services without government’s price or guidance price but with the market price will follow the market price; the services without a government’s price, a guide price or a market price, the two Parties will decide the price through consultation, which shall be based on the reasonable costs and profits, among which the reasonable costs refer to the costs consulted and decided by both Party A and Party B.
The government’s price under this article refers to the price set by the competent price agency or other competent agencies of the government based on the extent of pricing power and scope in accordance with the Price Law of P.R.C.
The government’s guidance price under this article refers to the benchmark price and floating range set by the competent price agency or other competent agencies of the government as a guide for the market operators based on the extent of pricing power and scope in accordance with the Price Law of P.R.C.
The market price under this article refers to the price set by the operators in the market via the market competition. The market price will be set in the following order: (1) the price offered by the independent third party for the service under the normal transaction around the place or areas where the service is provided; or (2) the price offered by the independent third party of service provider under the normal transaction within the Chinese territory.
2.2 The specific amount of service fees under this annex shall be calculated pursuant to the relevant accounting principles in China (if applicable).
2.3 Party A and Party B shall examine and verify (if necessary) every service and facility provided under this annex and the pricing standards set for the next accounting year before December 31 of every year.

 

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2.4 Party A and Party B are expected to sign specific execution documents as needed concerning the services provided. The execution documents shall specify the services required by Party B and the binding principles, criteria and clauses and conditions under this annex.
3. Service payments
3.1 Party B shall pay Party A or Party A’s fiduciaries for service fees in a timely manner in accordance with the pricing and charging standards defined in this annex, the supplementary agreements of this annex (if any) and the execution documents.
3.2 If Party B fails to pay the relevant service fees as scheduled according to the provisions in this annex, the supplementary agreements of this annex (if any) and the execution documents, Party B shall pay Party A 0.05% of the overdue amount as fine for delaying payment every one (1) day (calendar day, hereinafter inclusive); if the payment is deferred for sixty (60) days, Party A may inform Party B in written form of the suspension of the service; if Party B fails to pay the relevant service fees within thirty (30) days upon the receipt of the written notification, Party A may declare the termination of the relevant services. However, the suspension or termination of the services will not affect the rights and obligations underway between the two Parties under this annex.
4. Priority
4.1 For the same service, if the clauses and conditions provided by independent third party for Party B are not superior to those provided by Party A, Party B shall give priority to Party A.
4.2 Party A shall make commitment to Party B that the conditions that Party A provide for the third party will not be superior to Party B concerning the same or similar services under this annex.
4.3 Party A has rights to provide services for the third party under the circumstances that services provided by Party A for Party B under this annex will not be affected.

 

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Annex VII: Integrated Services
1. Main contents
Party A and Party B agree to provide or receive the services from each other in accordance with the clauses and conditions under this annex, including catering service, equipment leasing (except the facilities/equipment covered by the Framework Agreement on Leasing of Communication Resources ), vehicle service, medical care, labor service, security, hotel service, meeting service, gardening (afforestation), decoration, products sale, infrastructure agents, equipment maintenance, market development, technical support, R&D, cleaning service, parking service, employment training, warehousing (such as storage of telecom equipment, including parts and circuits), advertisements (such as those made by Party B and published on the media of Party A) and publication/printing, property management and ICT services (including support services such as construction and installation, system integration service, software development, products sales and agency service, operation and maintenance service and consultancy service).
2. Pricing principles
2.1 The pricing and/or charging standards for auxiliary telecom services under this annex shall be set based on the principles and order defined in this article: the services with prices set by the government shall follow the governmental prices; the services with prices guided by the government shall refer to the guidance price offered by the government; those services without government’s price or guidance price but with the market price will follow the market price; the services without a government’s price, a guide price or a market price, the two Parties will decide the price through consultation, which shall be based on the reasonable costs and profits, among which the reasonable costs refer to the costs consulted and decided by both Party A and Party B.
2.2 The specific amount of service fees under this annex shall be calculated pursuant to the relevant accounting principles in China (if applicable).
2.3 Party A and Party B shall examine and verify (if necessary) every service and facility provided under this annex and the pricing standards set for the next accounting year before December 31 of every year.
2.4 Party A and Party B are expected to sign specific execution documents as needed concerning the services provided. The execution documents shall specify the services required by Party B and the binding principles, criteria and clauses and conditions under this annex.
3. Service payments
3.1 Party B shall pay Party A or Party A’s fiduciaries for service fees in a timely manner in accordance with the pricing and charging standards defined in this annex, the supplementary agreements of this annex (if any) and the execution documents.

 

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3.2 If Party B fails to pay the relevant service fees as scheduled according to the provisions in this annex, the supplementary agreements of this annex (if any) and the execution documents, Party B shall pay Party A 0.05% of the overdue amount as fine for delaying payment every one (1) day (calendar day, hereinafter inclusive); if the payment is deferred for sixty (60) days, Party A may inform Party B in written form of the suspension of the service; if Party B fails to pay the relevant service fees within thirty (30) days upon the receipt of the written notification, Party A may declare the termination of the relevant services. However, the suspension or termination of the services will not affect the rights and obligations underway between the two Parties under this annex.
4. Priority
4.1 For the same service, if the clauses and conditions provided by independent third party for Party B are not superior to those provided by Party A, Party B shall give priority to Party A.
4.2 Party A shall make commitment to Party B that the conditions that Party A provide for the third party will not be superior to Party B concerning the same or similar services under this annex.
4.3 Party A has rights to provide services for the third party under the circumstances that services provided by Party A for Party B under this annex will not be affected.

 

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Annex VIII: Shared Services
1. Contents of services
Party A and Party B agree to provide or receive relevant services from each other based on the clauses and conditions agreed upon under this annex, including (but not limited to): (1) the Headquarter HR service provided by Party B for Party A; (2) the services of business support center (BSC) provided by the two Parties for each other and the hosting service related to the services in the Article 1 (1) and (2) provided by Party B for Party A; (3) other shared services such as sites and the Headquarters’ listed service provided by Party A for Party B.
2. Headquarter HR service
The HR services offered by Party B for Party A include shared service of administrative personnel and business operational management personnel at the Headquarter and the hosting management of Party A’s businesses, finance and personnel.
3. BSC Services
3.1 BSC services provided by Party B for Party A include:
(1) Collecting the data on international communication services, billing and generation of the monthly account and account checking and settlement with overseas operators;
(2) Collecting and distributing the roaming data about the whole network-based services, including but not limited to the smart network (such as 300 and 800), IP cards, PHS SMS and generation the inter-province roaming statement of accounting;
(3) Settlement with other domestic operators or settlement entities for the whole network;
(4) Intra-network settlement;
(5) Providing statistical reports on business data for the associated units of Party A;
(6) VoIP and 167 billing for the original Jitong Network Communications Company Limited ;
3.2 BSC services provided by Party A for Party B include:
(1) Producing and issuing telephone cards and IC cards on the backbone smart networks of Party A (hereinafter referred to as telecommunication cards), including identifying qualifications of, evaluating and managing card providers and relevant raw materials providers; organizing the bidding among card providers and signing framework agreement on telecommunication cards procurement; overseeing the contracts execution by manufacturers and provincial companies; formulating the annual theme plan of telecommunication cards; according to the theme plan, organizing the subscription and production of telecom cards by provincial companies; signing, executing the contracts on code cards of Party A and organizing their production.

 

25


 

(2) Managing telecom cards service, including development of the regulations on production of telecom cards and graphic design; gathering statistical data on cards business for operational analysis.
3.3 Obligations of the Parties
(1) Party B is obligated to complete the international settlement, inter-network settlement and inter-province settlement of all services in a timely and accurate manner pursuant to the rules about international settlement, inter-network settlement and inter-province settlement introduced by the competent agency of communication industry of the State Council and report to Party A as required.
(2) Party A is obligated to complete the design, production and management of the valued cards according to the required time limit, quantity and quality, which are agreed upon between the two Parties.
(3) Party A shall meet and complete other business demands presented by Party B on time based on the business system and network capabilities.
4. Use of site
4.1 Purpose of site use
(1) Party A agrees to provide its site, No. 21 office building located at the Financial Street, Xicheng District, Beijing (including air conditioners, power supply, utilities equipment and other relevant auxiliary facilities within), for Party B according to Party B’s demand.
(2) Party B takes the above-mentioned site as its main working place.
4.2 Commitment and guarantee. Party A guarantees that it has right to provide the above-mentioned site for use (including air conditioners, power supply, utilities equipment and other relevant auxiliary facilities within) for Party B. If any third party, in any condition and for any reason, takes objection to Party A’s ownership and/or right of use with the above-mentioned site or assets, and hence Party B’s rights under this annex cannot be fulfilled or are subject to any harm, Party A agrees to undertake and pay all the losses incurred to Party B. Party A promises to provide Party B’s auditors with the accounting records about Party A and its associated personnel concerning the associated transaction.
5. Other shared services listed by the Headquarter
Party A provides Party B with other shared services listed by the Headquarter, such as advertisements, publicity, R&D, business reception, maintenance and repair as well as property management.
6. Cost sharing of shared services
Party A and Party B agree that costs incurred by the HR service provided for Party A from Party B, BSC services provided for each other, and sites and other shared services listed by the Headquarter (including depreciation of equipment and assets added for the shared service under this agreement and the actual rental fee, property management fee and labor cost) will be shared between the two Parties based on each other’s ratio of total assets (Among which, Party A’s total assets exclude those of its overseas subsidiaries and listed companies, the sharing ratio will be decided upon consultation after the two Parties offer total assets listed the their financial statements to each other and will be adjusted every year based on the change of the two Parties’ total assets ). The specific settlements will be jointly worked out by the two Parties.

 

26

Exhibit 4.59
 
 
DATED          January 23,          2011
CHINA UNICOM (HONG KONG) LIMITED
AND
TELEFÓNICA S.A.
AGREEMENT TO ENHANCE THE
STRATEGIC ALLIANCE

 

 


 

CONTENTS
         
Clause   Page  
 
       
1. Interpretation
    1  
2. Enhancement of Strategic Alliance
    3  
3. Acquisition of China Unicom Ordinary Shares by Telefónica
    4  
4. Acquisition of Treasury Shares in Telefónica by China Unicom
    4  
5. Deliverables by the Parties
    4  
6. Warranties
    5  
7. Commitment to appoint China Unicom Nominee Director to the Telefónica Board
    5  
8. Announcements
    6  
9. General
    6  
10. Notices
    7  
11. Governing Law and Dispute Resolution
    8  
12. Counterparts
    9  

 

- i -


 

THIS AGREEMENT is made on           January 23,           2011
BETWEEN:
(1)  
CHINA UNICOM (HONG KONG) LIMITED , a company incorporated in Hong Kong and having its registered office at 75th Floor, The Center, 99 Queen’s Road Central, Hong Kong (“ China Unicom ”); and
(2)  
TELEFÓNICA, S.A. , a company incorporated in Spain, whose registered office is at Gran Via 28, 28013 Madrid, Spain (“ Telefónica ”).
WHEREAS:
(A)  
China Unicom is a leading company in the global telecommunications providing full service telecommunications services in the People’s Republic of China (the “ PRC ”) and is listed on the New York Stock Exchange and the Hong Kong Stock Exchange. Through its Affiliates, China Unicom is engaged in GSM and WCDMA cellular business in 31 provinces, autonomous regions and municipalities in the PRC, the provision of international and domestic long distance calls, domestic telephone services, Internet services, data communications, and other related value-added telecommunications services. China Unicom has also established business organisations engaging in related international businesses in Hong Kong, the United States, Japan and Europe.
(B)  
Telefónica is a leading integrated telecommunications company providing fixed and mobile services with presence in 25 countries and is listed on the Spanish Stock Exchange, the New York Stock Exchange, the London Stock Exchange, the Tokyo Stock Exchange, the Buenos Aires Stock Exchange, the Sao Paulo Stock Exchange and the Lima Stock Exchange.
(C)  
As at the date of this Agreement, Telefónica owns 1,972,315,708 shares in China Unicom, representing approximately 8.37% of China Unicom’s issued share capital.
(D)  
As at the date of this Agreement, China Unicom owns 40,730,735 shares in Telefónica, representing approximately 0.892% of Telefónica’s issued share capital which China Unicom acquired pursuant to the Subscription Agreement entered into by Telefónica and China Unicom on 6 September 2009.
(E)  
On 6 September 2009 China Unicom and Telefónica entered into the Strategic Alliance Agreement (the “ Strategic Alliance Agreement ”). The parties are satisfied with the development of their strategic alliance and cooperation and desire to further enhance their strategic alliance and cooperation through a further mutual investment in the shares of each other on the terms provided herein.
THE PARTIES AGREE as follows:
1.  
INTERPRETATION
 
1.1  
In this Agreement:
Affiliate ” means, with respect to a Party, any person which directly or indirectly controls, is controlled by or is under common control with such party, where “ control ” means the power to direct the management and policies of the controlled person through the holding of the majority of the voting rights of the controlled person or the ability to appoint more than half of the members of the board of directors (or its equivalent) of the controlled person;

 

- 1 -


 

Business Day ” means a day other than a Saturday, Sunday or public holiday in Hong Kong, Beijing and Madrid;
China Unicom Acquisition ” has the meaning given to that term in Clause 4.1;
China Unicom Board ” means the board of directors of China Unicom from time to time;
China Unicom Board Approval Date ” means 21 January 2011, the date on which the China Unicom Board passes a resolution approving the China Unicom Acquisition;
China Unicom Nominee Director ” has the meaning given to that term in Clause 7.1;
China Unicom Ordinary Shares ” means the ordinary shares of HK$0.10 each in the capital of China Unicom and listed on the Hong Kong Stock Exchange;
Date of Completion ” means the date specified in Clause 4.2;
Dispute ” has the meaning given to that term in Clause 11.2;
EUR ” and means Euro, the single currency of member states of the European Communities that adopt or have adopted the Euro as their lawful currency under the legislation of the European Community for Economic Monetary Union;
HK$ ” means Hong Kong dollars, the lawful currency of Hong Kong;
Hong Kong ” means the Hong Kong Special Administrative Region of the PRC;
Hong Kong Stock Exchange ” means The Stock Exchange of Hong Kong Limited;
Listing Rules ” means the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, as amended from time to time;
Notice ” means a notice to be given pursuant to the terms of this Agreement, and shall be construed in accordance with Clause 10;
Parties ” means China Unicom and Telefónica and “ Party ” means either of them;
Spanish Stock Exchange ” means the Madrid, Barcelona, Bilbao and Valencia Stock Exchanges as connected through Spanish Continuous Market ( Mercado Continuo );
Telefónica Acquisition ” has the meaning given that in Clause 3.1;
Telefónica Board ” means the board of directors of Telefónica from time to time;
Telefónica Ordinary Shares ” means the ordinary shares of EUR1.00 each in the capital of Telefónica and listed on the Spanish Stock Exchange;

 

- 2 -


 

Telefónica Price Per Share ” means EUR 17.16, being the arithmetic average (rounded to two decimal places) of each of the closing prices per Telefónica Ordinary Share, as shown on the Bloomberg Screen by the ticker “TEF SM Equity HP” for the 30 consecutive days in which the Telefónica Ordinary Shares are traded on the Madrid Stock Exchange immediately preceding (and including) 14 January 2011;
Telefónica Shares ” means Telefónica Ordinary Shares and/or Telefónica Treasury Shares, as the case may be;
Telefónica Treasury Shares ” means Telefónica Ordinary Shares repurchased by and held in treasury by Telefónica itself; and
USD ” means United States dollars, the lawful currency of the United States.
1.2  
In this Agreement, a reference to:
  1.2.1  
a “ person ” includes, without limitation, a reference to any individual, firm, company, corporation or other body corporate, government, state or agency of a state or any joint venture, association or partnership, trade union or employee representative body (whether or not having a separate legal personality);
  1.2.2  
a “ Clause ” or “ Schedule ”, unless the context otherwise requires, is a reference to a clause of, or a schedule to, this Agreement;
  1.2.3  
unless the context otherwise requires, the singular shall include the plural and vice versa; and
  1.2.4  
any legal term under the laws of Hong Kong for any action, remedy, method of judicial proceeding, legal document, legal status, court, official or any legal concept or thing shall in respect of any jurisdiction other than Hong Kong be deemed to include what most nearly approximates in that jurisdiction to the Hong Kong legal term and a reference to any Hong Kong statute or ordinance shall be construed so as to include equivalent or analogous laws of any other jurisdiction.
1.3  
The headings in this Agreement do not affect its interpretation.
 
2.  
ENHANCEMENT OF STRATEGIC ALLIANCE
2.1  
Since signing of Strategic Alliance Agreement in September 2009, Telefónica and China Unicom have made progress in the areas of cooperation, in particular, the procurement, expansion of and service to MNCs, coordination and cooperation in international telecommunications organisations, network design and optimization, joint management training.
2.2  
By signing this Agreement, both Parties have agreed to enhance their Strategic Alliance, and to deepen the cooperation in procurement, mobile service platforms, service to MNCs, wholesale carriers, roaming, technology/R&D, international business development, cooperation and Sharing of Best Practices.

 

- 3 -


 

3.  
ACQUISITION OF CHINA UNICOM ORDINARY SHARES BY TELEFÓNICA
 
3.1  
Telefónica shall, directly or through any of its Affiliates, purchase such number of China Unicom Ordinary Shares for the aggregate consideration of USD 500,000,000, executed at such price(s), at such time(s), in such manner and in such number of transaction(s) as Telefónica may in its absolute discretion determine (the “ Telefónica Acquisition ”), provided that the Telefónica Acquisition shall be completed within a nine-month period after the date hereof.
 
4.  
ACQUISITION OF TREASURY SHARES IN TELEFÓNICA BY CHINA UNICOM
4.1  
China Unicom shall acquire from Telefónica, and Telefónica shall sell to China Unicom, 21,827,499 Telefónica Treasury Shares, free and clear of all encumbrances and executed in one transaction (the “ China Unicom Acquisition ”).
4.2  
Completion of the China Unicom Acquisition shall take place as soon as practicable after the date hereof, on the date agreed by the Parties but in any event no later than on 27 January 2011 (the “ Date of Completion ” or “ T ”). Before 16:00 (Madrid time) of the Date of Completion, China Unicom and Telefónica shall deliver a joint instruction to Banco Bilbao Vizcaya Argentaria, S.A., along with an executed copy of this Agreement, instructing Banco Bilbao Vizcaya Argentaria, S.A. as member of the Spanish Stock Exchanges to communicate the sale on behalf of Telefónica and the acquisition on behalf of China Unicom of the number of Telefónica Treasury Shares stipulated in Clause 4.1 above to the Spanish Stock Exchanges. On the Date of Completion, China Unicom shall irrevocably instruct Iberclear participant acting on its behalf to accept the settlement of the purchase and sale of the Telefónica Treasury Shares communicated to the Spanish Stock Exchanges by Banco Bilbao Vizcaya Argentaria, S.A., on behalf of Telefónica. Settlement of the purchase and sale of the Telefónica Treasury Shares shall occur in accordance with market practice three settlement business days (“ T+3 ”) after it has been communicated to the Spanish Stock Exchanges and through Iberclear. Telefónica shall make available to Banco Bilbao Vizcaya Argentaria, S.A. the Telefónica Treasury Shares. China Unicom shall make available to the Iberclear participant acting on its behalf the funds in the amount of EUR 374,559,882.84, which corresponds to the number of Telefónica Treasury Shares to be sold by Telefónica to China Unicom, multiplied by the Telefónica Price Per Share (the “ Aggregate Purchase Price ”). In the event that any administrative approval is required in order to proceed with the closing of the China Unicom Acquisition, if such approval is not obtained, both Parties will agree in good faith alternative procedures and timing to effect completion of the China Unicom Acquisition.
 
5.  
DELIVERABLES BY THE PARTIES
 
5.1  
At the Date of Completion:
  5.1.1  
Telefónica shall deliver to China Unicom:
  (a)  
a written confirmation duly signed by the Secretary of the Telefónica Board certifying that all statements contained in Schedule 1 are true and accurate in all respects as at the date of this Agreement and as at the Date of Completion; and

 

- 4 -


 

  (b)  
a copy (certified as true copy by the secretary of the Telefónica Board) of the resolutions of the Telefónica Board approving the Telefónica Acquisition, the China Unicom Acquisition, the execution by Telefónica of this Agreement and performance of all of its obligations contemplated hereunder;
  5.1.2  
China Unicom shall deliver to Telefónica:
  (a)  
a written confirmation duly signed by a director of China Unicom certifying that all statements contained in Schedule 2 are true and accurate in all respects as at the date of this Agreement and as at the Date of Completion; and
  (b)  
a copy (certified as true copy by an officer of China Unicom) of the resolutions of the China Unicom Board approving the China Unicom Acquisition and execution by China Unicom of this Agreement and performance of all of its obligations contemplated hereunder, including acknowledgement of the Telefónica Acquisition.
6.  
WARRANTIES
6.1  
As at the date of this Agreement, Telefónica warrants to China Unicom that each warranty set out in Schedule 1 is true, accurate, complete and not misleading. Likewise, on the Date of Completion, Telefónica is deemed to warrant to China Unicom that each of the warranties set out in Schedule 1 is true, accurate, complete and not misleading by reference to the facts and circumstances as at the Date of Completion. For this purpose only, where there is an express or implied reference in any of these warranties to the “date of this Agreement”, that reference is to be construed as a reference to the Date of Completion.
6.2  
As at the date of this Agreement, China Unicom warrants to Telefónica that each warranty set out in Schedule 2 is true, accurate, complete and not misleading. Likewise, on the Date of Completion, China Unicom is deemed to warrant to Telefónica that each of the warranties set out in Schedule 2 is true, accurate, complete and not misleading by reference to the facts and circumstances as at the Date of Completion. For this purpose only, where there is an express or implied reference in any of these warranties to the “date of this Agreement”, that reference is to be construed as a reference to the Date of Completion.
 
7.  
COMMITMENT TO APPOINT CHINA UNICOM NOMINEE DIRECTOR TO THE TELEFÓNICA BOARD
7.1  
To the extent not prohibited under the applicable laws and the by-laws of Telefónica, Telefónica irrevocably and unconditionally undertakes to propose at the next general shareholders’ meeting of Telefónica the appointment of an individual designated by China Unicom as a new director of the Telefónica Board (the “ China Unicom Nominee Director ”).
7.2  
Telefónica’s obligation under Clause 7.1 above shall be subject to completion of the China Unicom Acquisition and to China Unicom maintaining on the date of appointment of the China Unicom Nominee Director the aggregate number of Telefónica Shares held (and acquired) by China Unicom as a result of the China Unicom Acquisition and the closing of the Subscription Agreement entered into by Telefónica and China Unicom on 6 September 2009 (the “ Aggregate Participation ”).

 

- 5 -


 

7.3  
China Unicom shall ensure that the China Unicom Nominee Director possesses the necessary qualifications and experience to act as a director of Telefónica as required under applicable rules and regulations, including the rules of the relevant stock exchanges to which Telefónica is subject or submits, except for the requirement set forth in Telefónica’s by-laws that requires that new directors held, for more than three years prior to the appointment, a number of shares of Telefónica representing a nominal value of at least EUR3,000; such requirement shall be waived by the Telefónica Board in relation to the China Unicom Nominee Director prior to the next general shareholders’ meeting of Telefónica. Telefónica undertakes that a copy (certified as true copy by the secretary of the Telefónica Board) of the resolutions of the Telefónica Board approving such waiver shall be delivered to China Unicom as soon as practicable after such Telefónica Board meeting, and in any event, no later that the appointment of China Unicom Nominee Director to the Telefónica Board.
7.4  
Telefónica further undertakes that upon the expiry of the term of office of the China Unicom Nominee Director and provided that China Unicom continues to maintain the Aggregate Participation in Telefónica, the Telefónica Board shall evaluate to propose the appointment of a China Unicom Nominee Director at any subsequent general shareholders’ meeting of Telefónica.
8.  
ANNOUNCEMENTS
8.1  
Subject to Clause 8.2, no announcement or communication concerning the transactions contemplated by this Agreement shall be made or issued by either Party without the prior written consent of the other Party.
 
8.2  
Clause 8.1 does not apply to an announcement or communication:
  8.2.1  
previously consented to, which may be repeated by either Party provided that the prevailing facts and circumstances in respect of the announcement or communication previously consented to were not materially different; or
  8.2.2  
required by law, by a rule of a stock exchange or by a governmental authority or other authority with relevant powers to which a Party is subject or submits, whether or not the requirement has the force of law, provided that such announcement or communication shall only be made after consultation with the other Party and after taking into account the other Party’s reasonable requirements as to its timing, content and manner of making or despatch.
9.  
GENERAL
9.1  
The consummation of the Telefónica Acquisition and the China Unicom Acquisition contemplated herein does not affect the validity and enforceability of the Subscription Agreement entered into by Telefónica and China Unicom on 6 September 2009 and the Strategic Alliance Agreement, both of which shall remain in full force and effect.
9.2  
A variation of this Agreement is only valid if it is in writing and signed by or on behalf of each Party.

 

- 6 -


 

9.3  
The failure to exercise or delay in exercising a right or remedy provided by this Agreement or by law does not impair or constitute a waiver of the right or remedy or an impairment of or a waiver of other rights or remedies. No single or partial exercise of a right or remedy provided by this Agreement or by law prevents further exercise of the right or remedy or the exercise of another right or remedy.
9.4  
Either Party’s rights and remedies contained in this Agreement are cumulative and not exclusive of any rights or remedies provided by law.
9.5  
Except to the extent that they have been performed and except where this Agreement expressly provides otherwise, the warranties, representations, obligations and undertakings contained in this Agreement remain in force after completion of the China Unicom Acquisition and of the Telefónica Acquisition.
9.6  
The invalidity, illegality or unenforceability of any provision of this Agreement does not affect the continuation in force of the remainder of this Agreement.
9.7  
This Agreement shall be binding upon and enure to the benefit of each Party and its or any subsequent successors.
9.8  
Each Party agrees to take all such actions or procure that all such actions be taken as are reasonable in order to implement the terms of this Agreement or any transaction, matter or thing contemplated by this Agreement.
9.9  
Each Party shall pay its own costs relating to the negotiation, preparation, execution and performance by it of this Agreement and of each document referred to in it.
9.10  
A Party shall, on reasonable request from the other Party, do and execute or cause to be done and executed all such further acts, deeds, things and documents as may be necessary to give effect to the terms of this Agreement.
9.11  
Each Party may not, without the prior written consent of the other Party, assign, transfer, declare a trust for the benefit of or in any other way alienate any of its obligations or rights under this Agreement whether in whole or in part except that Telefónica or China Unicom, as the case may be, may designate any of its subsidiaries to be the registered holder of the China Unicom Ordinary Shares or the Telefónica Treasury Shares, as the case may be, to be acquired as contemplated hereunder provided always that such Party shall remain fully liable for all obligations, covenants and undertakings set out herein.
10.  
NOTICES
 
10.1  
A Notice under or in connection with this Agreement shall be:
  10.1.1  
in writing and in English; and
  10.1.2  
delivered personally, sent by fax with confirmation receipt followed by mail posted within 24 hours or sent by courier to the Party due to receive the Notice at the address referred to in Clause 10.2 or such other address as a Party may specify by notice in writing to the other Party received before the Notice was despatched.

 

- 7 -


 

10.2  
For the purposes of this Clause 10.2, a Notice shall be sent to the addresses and for the attention of those persons set out below:
  10.2.1  
in the case of China Unicom:
     
Address:
  21 Jin Rong Street, Xicheng District, Beijing 100140, PRC
Fax Number:
  +8610 6625 9544
Attention:
  Wang Xia
  10.2.2  
in the case of Telefónica:
     
Address:
  Gran Via 28, 28013 Madrid, Spain
Fax Number:
  +34 91 727 1405
Attention:
  Ramiro Sánchez de Lerín García-Ovies
 
  Group General Counsel
or to such other address or fax number as the relevant Party may have notified to the other by not less than five (5) days’ written notice to the other Party before the Notice was despatched.
10.3  
Unless there is evidence that it was received earlier, a Notice is deemed given if:
  10.3.1  
delivered personally, when left at the address referred to in Clause 10.1; or
 
  10.3.2  
sent by courier, five (5) Business Days after posting it; or
  10.3.3  
sent by fax, when confirmation of its transmission has been recorded on the sender’s fax machine.
11.  
GOVERNING LAW AND DISPUTE RESOLUTION
11.1  
This Agreement is governed by and shall be construed in accordance with the laws of Hong Kong.
11.2  
Any dispute, controversy or claim arising from, out of or in connection with this Agreement, including any question regarding its existence, validity, interpretation, breach or termination (a “ Dispute ”) shall be determined in accordance with this Clause 11.
11.3  
Any Dispute shall be referred to and finally resolved by arbitration under the UNCITRAL Arbitration Rules (the “ Rules ”) which Rules are deemed to be incorporated by reference into this Clause and as may be amended by the rest of this Clause.
11.4  
The seat of arbitration shall be Hong Kong and the appointing authority shall be the Hong Kong International Arbitration Centre (the “ HKIAC ”). The language to be used in the arbitration proceedings shall be English.
11.5  
The arbitration tribunal shall consist of three arbitrators, one of whom shall be appointed by Telefónica, the other of whom shall be appointed by China Unicom and the third presiding arbitrator shall be appointed by China Unicom and Telefónica jointly, or failing agreement between the Parties within twenty (20) Business Days, by the HKIAC.

 

- 8 -


 

11.6  
No person shall be nominated or appointed as an arbitrator under Clause 11.5 unless that person has substantial experience in the conduct of commercial disputes and is fluent in English.
11.7  
The arbitration award shall be final and binding on the Parties from the day it is made and the Parties agree to be bound thereby and to act accordingly.
11.8  
Judgment upon any award rendered by the arbitral tribunal may be entered in, and application for judicial confirmation, recognition or enforcement of the award may be made by or in, any court of competent jurisdiction, and each Party irrevocably submits to the jurisdiction of such court for the purposes of this Clause 11 and for the confirmation, recognition or enforcement of any award rendered by the arbitral tribunal, whether in accordance with the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 or otherwise.
12.  
COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which when executed and delivered is an original and all of which together evidence the same agreement.

 

- 9 -


 

EXECUTED by the Parties on the date and year stated above
     
SIGNED by
   )
for and on behalf of
   ) /s/ Chang Xiaobing
CHINA UNICOM (HONG KONG) LIMITED
   )
 
   
SIGNED by
   )
for and on behalf of
   ) /s/ Cesareo Alierta Izuel
TELEFÓNICA S.A.
   )

 

- 10 -


 

SCHEDULE 1
TELEFÓNICA WARRANTIES
1.  
CAPACITY AND AUTHORITY
1.1  
Telefónica has full corporate power, authority and capacity, has taken all actions necessary, to enter into, execute, deliver, exercise its rights and perform its obligations under this Agreement and to carry out the transactions contemplated hereby.
1.2  
No action or thing is required to be taken, fulfilled or done and no approvals, filings or notifications are required for Telefónica to enter into, execute, deliver, exercise its rights and perform its obligations under this Agreement, or in relation to the Telefónica Acquisition, the China Unicom Acquisition, or the carrying out of the other transactions contemplated by this Agreement, as the case may be, except for the public disclosure regarding the execution of this Agreement, the Telefónica Acquisition and/or the China Unicom Acquisition, as required under the securities regulations of Spain or any other relevant jurisdictions.
1.3  
Telefónica’s obligations under this Agreement and each document to be executed at or before the Completion of the China Unicom Acquisition constitutes, or when the relevant document is executed will constitute, valid, legal and binding obligations of Telefónica enforceable in accordance with their respective terms.
 
2.  
SHARES
2.1  
Telefónica has full title to the Telefónica Treasury Shares and has existing authority to transfer the Telefónica Treasury Shares to China Unicom in accordance with the terms of this Agreement.
2.2  
The Telefónica Treasury Shares will be transferred pursuant to this Agreement free and clear from all encumbrances and will rank pari passu in all respects with the existing Telefónica Ordinary Shares, together with all rights and entitlements accruing after the date of the China Unicom Acquisition and the right to receive all dividends or other distributions declared, paid or made or proposed to be made on such Telefónica Shares after the date of the China Unicom Acquisition.
2.3  
The transfer of the Telefónica Treasury Shares to China Unicom in accordance with the terms of this Agreement will comply with all statutory requirements and all relevant laws of Spain, and with the rules and regulations of the Spanish Stock Exchange, including all applicable disclosure requirements in respect of share transfers.
2.4  
The transfer of the Telefónica Treasury Shares pursuant to this Agreement will not cause any breach of any agreement to which Telefónica and/or any of its subsidiaries is a party or by which it is or any of them is bound and will not infringe or exceed any limits on, powers of, or restrictions on or the terms of any contract, obligation or commitment whatsoever of, Telefónica and/or any of its subsidiaries.
2.5  
The transfer of the Telefónica Treasury Shares will not be subject to any pre-emptive or similar rights or restrictions on voting and transfers.

 

- 11 -


 

3.  
EFFECT OF AGREEMENT AND SUBSCRIPTION
Neither this Agreement nor the transfer of the Telefónica Treasury Shares will:
3.1  
constitute or give rise to a breach of or default under: (a) any law, rule, regulation, judgment, order, authorisation or decree of any government, governmental or regulatory body, arbitrator, administrative agency or court, domestic or foreign, having jurisdiction over Telefónica or its properties or assets; or (b) the constitutional documents of Telefónica; or
3.2  
give rise to any rights of any third party in respect of any assets of Telefónica.

 

- 12 -


 

SCHEDULE 2
CHINA UNICOM WARRANTIES
1.  
CAPACITY AND AUTHORITY
1.1  
China Unicom has full corporate power, authority and capacity, and has taken all actions necessary, to enter into, execute, deliver, exercise its rights and perform its obligations under this Agreement and to carry out the transactions contemplated hereby.
1.2  
No action or thing is required to be taken, fulfilled or done and no approvals, filings or notifications are required for China Unicom to enter into, execute, deliver, exercise its rights and perform its obligations under this Agreement, or in relation to the China Unicom Acquisition or the carrying out of the other transactions contemplated by this Agreement, as the case may be, except for the public disclosure regarding the execution of this Agreement and the acquisition of the Telefónica Treasury Shares as required under the Listing Rules.
1.3  
China Unicom’s obligations under this Agreement and each document to be executed at or before the completion of the China Unicom Acquisition constitutes, or when the relevant document is executed will constitute, valid, legal and binding obligations of China Unicom enforceable in accordance with their respective terms.
2.  
EFFECT OF AGREEMENT AND SUBSCRIPTION
This Agreement will not:
2.1  
constitute or give rise to a breach of or default under: (a) any law, rule, regulation, judgment, order, authorisation or decree of any government, governmental or regulatory body, arbitrator, administrative agency or court, domestic or foreign, having jurisdiction over China Unicom or any of its properties or assets; or (b) the constitutional documents of China Unicom; or
2.2  
give rise to any rights of any third party in respect of any assets of China Unicom.

 

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Exhibit 8.1
List of Significant Subsidiaries
             
Name of Subsidiary   Country of Incorporation   Ownership Interest  
China United Network Communications Corporation Limited
  China     100%  
China Netcom Group Corporation (Hong Kong) Limited
  Hong Kong     100%  
China Unicom (Hong Kong) Operations Limited
  Hong Kong     100%  
China Unicom (Americas) Operations Limited
  United States     100%  
China Unicom (Singapore) Operations Pte. Ltd.
  Singapore     100%  
China Unicom (Europe) Operations Limited
  United Kingdom     100%  
China Unicom (Japan) Operations Corporation
  Japan     100%  
Billion Express Investments Limited
  British Virgin Islands     100%  

 

Exhibit 12.1
Certification
I, Chang Xiaobing, certify that:
1.   I have reviewed this annual report on Form 20-F of China Unicom (Hong Kong) Limited;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
 
4.   The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5.   The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.
         
     
Date: May 26, 2011  By:   /s/ Chang Xiaobing  
    Name:   Chang Xiaobing   
    Title:   Chief Executive Officer   

 

         
Exhibit 12.2
Certification
I, Li Fushen, certify that:
1.   I have reviewed this annual report on Form 20-F of China Unicom (Hong Kong) Limited;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
 
4.   The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5.   The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.
         
     
Date: May 26, 2011  By:   /s/ Li Fushen   
    Name:   Li Fushen   
    Title:   Chief Financial Officer   

 

         
Exhibit 13.1
Certification
     Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. § 1350, the undersigned officer of China Unicom (Hong Kong) Limited (the “Company”), hereby certifies that the Company’s Annual Report on Form 20-F for the year ended December 31, 2010 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Exchange Act and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
     
Dated: May 26, 2011  By:   /s/ Chang Xiaobing   
    Name:   Chang Xiaobing   
    Title:   Chief Executive Officer   
 
     The foregoing certification is being furnished solely pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C § 1350 and will not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section.

 

Exhibit 13.2
Certification
     Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. § 1350, the undersigned officer of China Unicom (Hong Kong) Limited (the “Company”), hereby certifies that the Company’s Annual Report on Form 20-F for the year ended December 31, 2010 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Exchange Act and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
     
Dated: May 26, 2011  By:   /s/ Li Fushen   
    Name:   Li Fushen   
    Title:   Chief Financial Officer   
 
     The foregoing certification is being furnished solely pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C § 1350 and will not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section.