Management > Report of the Directors
The Board of Directors (the “Board”) of China Telecom Corporation Limited (the “Company”) hereby presents its report together with the audited financial statements of the Company and its subsidiaries (collectively, the “Group”) prepared in accordance with International Financial Reporting Standards for the year ended 31 December 2010.
Principal Business
The principal business of the Company and the Group is the provision of basic communications services including comprehensive wireline telecommunications services, mobile telecommunications services, value-added services such as Internet access services, integrated information services and other related services within the service area of the Group.
Results
Results of the Group for the year ended 31 December 2010 and the financial position of the Company and the Group as at that date are set out in the audited financial statements on pages 90 to 146 in this annual report.
Dividend
The Board proposes a final dividend in the amount equivalent to HK$0.085 per share, totalling approximately RMB5,778 million for the year ended 31 December 2010. The dividend proposal will be submitted for consideration at the Annual General Meeting to be held on 20 May 2011. Dividends will be denominated and declared in Renminbi. Dividends on domestic shares will be paid in Renminbi, whereas dividends on H shares will be paid in Hong Kong dollars. The relevant exchange rate will be the average offer rate of Renminbi to Hong Kong dollars as announced by the People’s Bank of China for the week prior to the date of declaration of dividends at the Annual General Meeting. The final dividends are expected to be paid around 30 June 2011 after obtaining the shareholders’ approval at the Annual General Meeting.
Pursuant to the Enterprise Income Tax Law of the People’s Republic of China and the Implementation Rules of the Enterprise Income Tax Law of the People’s Republic of China implemented in 2008, the Company shall be obliged to withhold 10% enterprise income tax when it distributes the proposed 2010 final dividends to non-resident enterprise shareholders of overseas H shares, (including Hong Kong Securities Clearing Company Nominees Limited, other corporate nominees or trustees, and other entities or organisations) whose names appear on the Company’s H share register of members on 20 May 2011. The individual income tax will not be deducted from any natural person shareholders whose names appear on the Company’s H shares register of members on 20 May 2011.
Directors and Senior Management of the Company
The following table sets out certain information of the Directors and senior management of the Company as at the date of this Report:
|
Name |
Age |
Position in the Company |
Date of Appointment |
|
Wang Xiaochu |
53 |
Chairman and Chief Executive Officer |
20 December 2004 |
|
Shang Bing |
55 |
Executive Director, President and Chief Operating Officer |
9 September 2008 |
|
Wu Andi |
56 |
Executive Director, Executive Vice President and Chief Financial Officer |
10 September 2002 |
|
Zhang Jiping |
55 |
Executive Director and Executive Vice President |
10 September 2002 |
|
Zhang Chenshuang |
59 |
Executive Director and Executive Vice President |
31 August 2007 |
|
Li Ping |
57 |
Executive Vice President |
10 September 2002 |
|
Yang Xiaowei |
47 |
Executive Director and Executive Vice President |
9 September 2008 |
|
Yang Jie |
49 |
Executive Director and Executive Vice President |
20 October 2004 |
|
Sun Kangmin |
54 |
Executive Director and Executive Vice President |
20 October 2004 |
|
Li Jinming |
59 |
Non-executive Director |
20 December 2004 |
|
Wu Jichuan |
73 |
Independent Non-executive Director |
9 September 2008 |
|
Qin Xiao |
63 |
Independent Non-executive Director |
9 September 2008 |
|
Tse Hau Yin, Aloysius |
63 |
Independent Non-executive Director |
9 September 2005 |
|
Cha May Lung, Laura |
61 |
Independent Non-executive Director |
9 September 2008 |
|
Xu Erming |
61 |
Independent Non-executive Director |
9 September 2005 |
|
Yung Shun Loy, Jacky |
48 |
Assistant Chief Financial Officer, Qualified Accountant and Company Secretary |
1 February 2005 |
|
Yang Jianqing |
51 |
Financial Controller |
28 October 2010 |
On 28 October 2010, Mr. Wang Qi resigned from the position of Financial Controller due to change in job responsibility. Mr. Yang Jianqing was appointed as Financial Controller by the management on the same day.
Supervisors of the Company
The following table sets out certain information of the supervisors of the Company as at the date of this Report:
|
Name |
Age |
Position in the Company |
Date of Appointment |
|
Miao Jianhua |
59 |
Chairman of the Supervisory Committee |
29 December 2009 |
|
Zhu Lihao |
70 |
Independent Supervisor |
10 September 2002 |
|
Ma Yuzhu |
57 |
Supervisor (Employee Representative) |
9 September 2005 |
|
Xu Cailiao |
47 |
Supervisor |
9 September 2005 |
|
Han Fang |
38 |
Supervisor |
9 September 2008 |
Share Capital
The share capital of the Company as at 31 December 2010 was RMB80,932,368,321, divided into 80,932,368,321 shares of RMB1.00 each. As at 31 December 2010, the share capital of the Company comprised:
|
Share category |
Number of shares as at 31 December 2010 |
Percentage of the total number of shares in issue as at 31 December 2010 (%) |
|
Domestic shares (total): |
67,054,958,321 |
82.85 |
|
Domestic shares held by: |
||
|
China Telecommunications Corporation |
57,377,053,317 |
70.89 |
|
Guangdong Rising Assets Management Co., Ltd. |
5,614,082,653 |
6.94 |
|
Zhejiang Financial Development Company |
2,137,473,626 |
2.64 |
|
Fujian State-owned Assets Investment Holdings Co., Ltd. |
969,317,182 |
1.20 |
|
Jiangsu Guoxin Investment Group Co., Ltd. |
957,031,543 |
1.18 |
|
Total number of H shares (including ADSs) |
13,877,410,000 |
17.15 |
|
Total |
80,932,368,321 |
100.00 |
Material Interests and Short Positions in Shares and Underlying Shares of the Company
As at 31 December 2010, the interests or short position of persons who are entitled to exercise or control the exercise of 5% or more of the voting power at any of the Company’s general meetings (excluding the Directors and Supervisors) in the shares and underlying shares of equity derivatives of the Company as recorded in the register required to be maintained under Section 336 of the Securities and Futures Ordinance (the “SFO”) are as follows:
|
Name of shareholder |
Number of shares |
Type of shares |
Percentage of the respective type of shares |
Percentage of the total number of shares in issue |
Capacity |
|
China Telecommunications Corporation |
57,377,053,317 (Long Position) |
Domestic shares |
85.57% |
70.89% |
Beneficial owner |
|
Guangdong Rising Assets Management Co., Ltd. |
5,614,082,653 (Long Position) |
Domestic shares |
8.37% |
6.94% |
Beneficial owner |
|
Commonwealth Bank of Australia |
1,538,666,000 (Long Position) |
H shares |
11.09% |
1.90% |
Interest of controlled corporation |
|
Capital Research and Management Company |
1,254,424,000 (Long Position) |
H shares |
9.04% |
1.55% |
Investment manager |
|
Blackrock, Inc. |
1,130,723,080 (Long Position) |
H shares |
8.15% |
1.40% |
Interest of controlled corporation |
|
31,103,524 (Short Position) |
H shares |
0.22% |
0.04% |
Interest of controlled corporation |
|
|
JPMorgan Chase & Co. |
971,952,626 (Long Position) |
H shares |
7.00% |
1.20% |
114,089,124 shares as beneficial owner 68,176,000 shares as investment manager 789,687,502 shares as security interest holder/ approved lending agent |
|
53,528,893 (Short Position) |
H shares |
0.39% |
0.07% |
beneficial owner |
|
|
789,687,502 (Shares available for lending) |
H shares |
5.69% |
0.98% |
Security interest holder/approved lending agent |
|
|
RFS Holdings B.V. |
907,191,530 (Long Position) |
H shares |
6.54% |
1.12% |
Interest of controlled corporation |
|
1,180,327,134 (Short Position) |
H shares |
8.51% |
1.46% |
Interest of controlled corporation |
|
|
Templeton Investment Counsel, LLC |
693,347,861 (Long Position) |
H shares |
5.00% |
0.86% |
Investment manager |
Save as stated above, as at 31 December 2010, in the register required to be maintained under Section 336 of the SFO, no other persons were recorded to hold any interests or short positions in the shares or underlying shares of the equity derivatives of the Company.
Directors’ and Supervisors’ Interests and Short Positions in Shares, Underlying Shares and Debentures
As at 31 December 2010, none of the directors and supervisors of the Company had any interests or short positions in the shares, underlying shares of equity derivatives or debentures of the Company or its associated corporations (as defined in Part XV of the SFO) as recorded in the register required to be maintained under section 352 of the SFO or as otherwise notified to the Company and The Stock Exchange of Hong Kong Limited pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers.
As at 31 December 2010, the Company had not granted its directors or supervisors, or their respective spouses or children below the age of 18 any rights to subscribe for the shares or debentures of the Company or any of its associated corporations and none of them has ever exercised any such right.
Directors’ and Supervisors’ Interests in Contracts
For the year ended 31 December 2010, none of the directors and supervisors of the Company had any material interest, whether directly or indirectly, in any of the contracts of significance entered into by the Company, any of its holding companies or subsidiaries or subsidiaries of the Company’s holding company, apart from their service contracts. None of the directors and supervisors of the Company has entered into any service contract which is not determinable by the Company within one year without payment compensation (other than statutory compensation).
Emoluments of the Directors and Supervisors
Please refer to note 27 of the audited financial statements for details of the emoluments of all Directors and Supervisors of the Company in 2010.
Purchase, Sale and Redemption of Shares
Neither the Company nor any of its subsidiaries has purchased, sold or redeemed any securities of the Company during the reporting period.
Public Float
As at the date of this Report, based on the information that is publicly available to the Company and within the knowledge of the Directors, the Company has maintained the prescribed public float under the Listing Rules and as agreed with The Stock Exchange of Hong Kong Limited.
Summary of Financial Information
Please refer to pages 147 to 148 of this annual report for a summary of the operating results, assets and liabilities of the Group for each of the years in the five-year period ended 31 December 2010.
Bank Loans and Other Borrowings
Please refer to note 15 of the audited financial statements for details of bank loans and other borrowings of the Group.
Capitalised Interest
Please refer to note 25 of the audited financial statements for details of the Group’s capitalised interest for the year ended 31 December 2010.
Fixed Assets
Please refer to note 3 of the audited financial statements for movements in the fixed assets of the Group for the year ended 31 December 2010.
Reserves
Pursuant to Article 147 of the Company’s articles of association (the “Articles of Association”), where the financial statements prepared in accordance with PRC Accounting Standards for Business Enterprises, materially differ from those prepared in accordance with either International Financial Reporting Standards, or accounting standards at a place outside the PRC where the Company’s shares are listed, the distributable profit for the relevant accounting period shall be deemed to be the lesser of the amounts shown in those respective financial statements. Distributable reserves of the Company as at 31 December 2010, calculated on the above basis and before deducting the proposed final dividends for 2010, amounted to RMB45,403 million.
Please refer to note 20 of the audited financial statements for details of the movements in the reserves of the Company and the Group for the year ended 31 December 2010.
Donations
For the year ended 31 December 2010, the Group made charitable and other donations with a total amount of RMB21 million.
Subsidiaries and Associated Companies
Please refer to note 7 and note 8 of the audited financial statements for details of the Company’s subsidiaries and the Group’s interests in associated companies as at 31 December 2010.
Changes in Equity
Please refer to the consolidated statement of changes in equity as contained in the audited financial statements of this year (page 95 of this annual report).
Retirement Benefits
Please refer to note 36 of the audited financial statements for details of the retirement benefits provided by the Group.
Stock Appreciation Rights
Please refer to note 37 of the audited financial statements for details of the stock appreciation rights offered by the Company.
Pre-Emptive Rights
There are no provisions for pre-emptive rights in the Articles of Association requiring the Company to offer new shares to the existing shareholders in proportion to their shareholdings.
Major Customers and Suppliers
For the year ended 31 December 2010, sales to the five largest customers of the Group accounted for an amount no more than 30% of the operating revenues of the Group.
For the year ended 31 December 2010, purchases from the five largest suppliers of the Group accounted for an amount no more than 30% of the total annual purchases of the Group.
To the knowledge of the Board, no director of the Company, their associates, or any person holding more than 5% of the issued share capital in the Company has any interests in such suppliers.
Continuing Connected Transactions
The following table sets out the amounts of continuing connected transactions of the Group for the year ended 31 December 2010:
|
Transactions |
Transaction Amounts |
Annual monetary cap for continuing connected transactions |
|
(RMB millions) |
(RMB millions) |
|
|
Net transaction amount of centralised services |
466 |
800 |
|
Net expenses for interconnection settlement |
516 |
N/A1 |
|
Mutual leasing of properties |
413 |
510 |
|
Provision of IT services by China Telecommunications Corporation and its subsidiaries (except for the Group) (the “China Telecom Group”)2 |
556 |
850 |
|
Provision of IT services to China Telecom Group |
295 |
300 |
|
Provision of Supplies Procurement services by China Telecom Group |
2,215 |
2,600 |
|
Provision of Supplies Procurement services to China Telecom Group |
993 |
1,150 |
|
Provision of engineering services by China Telecom Group |
6,415 |
7,052 |
|
Provision of community services by China Telecom Group |
2,185 |
2,900 |
|
Provision of ancillary telecommunications services by China Telecom Group |
6,838 |
7,700 |
|
CDMA network capacity lease fee |
11,5653 |
35,000 |
1 According to the waiver letter issued to the Company by The Stock Exchange of Hong Kong Limited on 31 July 2008, the Company is not required to set an annual monetary cap for the total amount under interconnection settlement agreements.
2 China Telecommunications Corporation is a controlling shareholder of the Company. Each of China Telecommunications Corporation and its subsidiaries (except for the Group) constitutes a connected person of the Company under the Listing Rules.
3 The CDMA network capacity lease fee has already deducted the capacity maintenance related costs of CDMA network payable to the Company by China Telecommunications Corporation amounted to RMB1,755 million.
Centralised Services Agreement
Pursuant to the Centralised Services Agreement signed between the Company and China Telecommunications Corporation on 10 September 2002 and the supplemental agreements subsequently entered into between the two parties (collectively, the “Centralised Services Agreement”), centralised services include the provision of centralised services such as the business management and operational services in relation to key corporate customers, its network management centre, business support centre, and also the provision of certain premises by the China Telecommunications Corporation to the Company. In addition, centralised services also include the common use of international telecommunications facilities between both parties. The aggregate costs incurred by the Company and China Telecommunications Corporation for the provision of management and operation services in relation to key corporate customers, its network management centre and business support centre will be apportioned between the Company and China Telecommunications Corporation on a pro rata basis according to the revenues generated by each party. Where the Company uses the premises provided by China Telecommunications Corporation, the Company shall pay premises usage fees to China Telecommunications Corporation on a pro rata basis according to the actual apportioned used areas on the venues. The premises usage fees shall be determined through negotiation between the two parties based on comparable market rates. In the situation where both parties use third-party international telecommunications facilities and accept third-party services such as the costs of restoration maintenance, the annual utilisation fee shall be determined on a pro rata basis according to the actual costs each year. In the situation where both parties use the international telecommunications facilities of China Telecommunications Corporation, the associated costs shall be determined on a pro rata basis according to volume of the inbound and outbound voice calls to and from international regions, Hong Kong, Macau and Taiwan originating from each party divided by the aggregate volume of the inbound and outbound voice calls to and from international regions, Hong Kong, Macau and Taiwan originating from both parties and the utilisation fee shall be determined through negotiation between the two parties based on market rates.
The Company and China Telecommunications Corporation have entered into a supplemental agreement on 25 August 2010 to renew the Centralised Services Agreement with expiration on 31 December 2012. The parties agree that the Company may renew the Centralised Services Agreement for such further periods as the parties may agree, by 30 days’ written notification to China Telecommunications Corporation.
Interconnection Settlement Agreement
Pursuant to the Interconnection Settlement Agreement signed between the Company and China Telecommunications Corporation on 10 September 2002 and the supplemental agreements subsequently entered into between the two parties (collectively, the “Interconnection Settlement Agreement”), the telephone operator terminating a telephone call made to its local access network under the agreement shall be entitled to receive from the operator from which the telephone call originated, a fee of RMB0.06 per minute. When originating a telephone call, the Company shall pay RMB0.06 per minute to China Telecommunications Corporation. The settlement regions include Beijing city, Tianjin city, Hebei province, Heilongjiang province, Jilin province, Liaoning province, Shanxi province, Henan province, Shandong province, Inner Mongolia Autonomous Region and Tibet Autonomous Region. Other interconnection settlement will comply with the settlement standard set out by the Ministry of Industry and Information Technology from time to time.
The Company and China Telecommunications Corporation have entered into a supplement agreement on 25 August 2010 to renew the Interconnection Settlement Agreement with expiration on December 31, 2012. The parties agree that the Company may renew the Interconnection Settlement Agreement for such further periods as the parties may agree, be 30 days’ written notification to China Telecommunications Corporation. In addition, the Company and China Telecommunications Corporation have agreed that settlement of interconnection will be at a fee prescribed by the rules and regulations of the relevant telecommunications regulators. If the telecommunications regulators should amend or promulgate new rules or regulations in respect of interconnection settlement, the parties shall apply such rules and regulations as acknowledged by both parties.
Property Leasing Framework Agreement
Pursuant to the Property Leasing Framework Agreement signed between the Company and China Telecommunications Corporation on 30 August 2006, the Group and China Telecommunications Corporation and/or its associates can enter into the lease of property mutually. The rental charges under the Property Leasing Framework Agreement were determined according to market rates, with reference to the fees standards of the local price authority. The rental charges are subject to review every three years.
The Company and China Telecommunications Corporation have entered into a supplemental agreement on 25 August 2010 to renew the Property Leasing Framework Agreement with expiration on 31 December 2012. The parties agree that the Company may renew the Property Leasing Framework Agreement for such further periods as the parties may agree, by 30 days’ written notification to China Telecommunications Corporation.
IT Services Framework Agreement
Pursuant to the IT Services Framework Agreement signed between the Company and China Telecommunications Corporation on 30 August 2006 and the supplemental agreements subsequently entered into between the two parties (collectively, the “IT Services Framework Agreement”), the provision of information technology services by China Telecommunications Corporation and/or its associates provided to the Group and vice versa, including office automation and software testing. Each of the Group and China Telecommunications Corporation and/or its associates is entitled to participate in bidding for the right to provide services to the other party under the agreement. The charges payable for such services shall be determined by reference to market rates obtained through the tender process. If the terms of an offer from the Group or China Telecommunications Corporation and/or its associates are at least as favourable as those offered by an independent third-party provider, the Group or China Telecommunications Corporation and/or its associates may give priority to using the services provided by the other party.
The Company and China Telecommunications Corporation have entered into a supplemental agreement on 25 August 2010 to renew the IT Services Framework Agreement with expiration on 31 December 2012. The parties agree that the Company may renew the IT Services Framework Agreement for such further periods as the parties may agree, by 30 days’ written notification to China Telecommunications Corporation.
Community Services Framework Agreement
Pursuant to the Community Services Framework Agreement signed between the Company and China Telecommunications Corporation on 30 August 2006 and the supplemental agreements subsequently entered into between the two parties (collectively, the “Community Services Framework Agreement”), China Telecommunications Corporation and/or its associates provide community services such as culture, education, property management, vehicle service, health and medical care, hotel and conference service, community and sanitary service to the Group. The community services under the Community Services Framework Agreement are provided at:
(1) the government-prescribed prices;
(2) where there are no government-prescribed prices but where there are government-guided prices, the government-guided prices apply;
(3) where there are neither government-prescribed prices nor government-guided prices, the market prices apply. The market price is defined as the price at which the same type of services are provided by independent third parties in the ordinary course of business; or
(4) where none of the above is applicable, the prices are to be agreed between the relevant parties for the provision of the above services, which shall be the reasonable costs incurred in providing the same services plus reasonable profit margin (for this purpose, “reasonable costs” means such costs as confirmed by both parties after negotiations).
The Company and China Telecommunications Corporation have entered into a supplemental agreement on 25 August 2010 to renew the Community Services Framework Agreement with expiration on 31 December 2012. The parties agree that the Company may renew the Community Services Framework Agreement for such further periods as the parties may agree, by 30 days’ written notification to China Telecommunications Corporation.
Supplies Procurement Services Framework Agreement
Pursuant to the Supplies Procurement Services Framework Agreement signed between the Company and China Telecommunications Corporation on 30 August 2006 and the supplemental agreements subsequently entered into between the two parties (collectively, the “Supplies Procurement Services Framework Agreement”), the provision of supplies procurement services by the China Telecommunications Corporation and/or its associates to the Group and vice versa, including the comprehensive procurement services, the sale of proprietary telecommunication equipment, resale of third party equipment, management of tenders, verification of technical specification, storage, transport and installation services. The charges payable for the above services are calculated at: where payments made in relation to the agency services for the provision of supplies procurement are in the form of commissions:
(1) procurement services in respect of imported telecommunications supplies are provided at 1% of the contract value at the maximum;
(2) procurement services in respect of domestic telecommunications supplies and other domestic non-telecommunications materials are provided at 3% of the contract value at the maximum.
The pricing basis for the services for the provision of supplies procurement other than agency services under the Supplies Procurement Services Framework Agreement is the same as those set out in the Community Services Framework Agreement.
The Company and China Telecommunications Corporation have entered into a supplemental agreement on 25 August 2010 to renew the Supplies Procurement Services Framework Agreement with expiration on 31 December 2012. The parties agree that the Company may renew the Supplies Procurement Services Framework Agreement for such further periods as the parties may agree, by 30 days’ written notification to China Telecommunications Corporation.
Engineering Framework Agreement
Pursuant to the Engineering Framework Agreement signed between the Company and China Telecommunications Corporation on 30 August 2006 and the supplemental agreements subsequently entered into between the two parties (collectively, the “Engineering Framework Agreement”), China Telecommunications Corporation and/or its associates through bids provide to the Group supervision and management of services relating to construction, design, equipment installation and testing and/or services as the main contractors for the construction and supervision of engineering projects. The charges payable for such engineering services shall be determined by reference to the market rates. The charges payable for the design or supervision of engineering projects with a value over RMB500,000, or any construction of engineering projects with a value over RMB2 million shall be determined by referring to the tender price.
The Company and China Telecommunications Corporation have entered into a supplemental agreement on 25 August 2010 to renew the Engineering Framework Agreement with expiration on 31 December 2012. The parties agree that the Company may renew the Engineering Framework Agreement for such further periods as the parties may agree, by 30 days’ written notification to China Telecommunications Corporation.
Ancillary Telecommunications Services Framework Agreement
Pursuant to the Ancillary Telecommunications Services Framework Agreement signed between the Company and China Telecommunications Corporation on 30 August 2006 and the supplemental agreements subsequently entered into between the two parties (collectively, the “Ancillary Telecommunications Services Framework Agreement”), China Telecommunications Corporation and/or its associates provide repair and maintenance services, including repair of telecommunications equipment, maintenance of fire equipment and telephone booths, as well as other customer services to the Group. The pricing terms for ancillary telecommunications services in the Ancillary Telecommunications Services Framework Agreement are the same as those set out in the Community Services Framework Agreement.
The Company and China Telecommunications Corporation have entered into a supplemental agreement on 25 August 2010 to renew the Ancillary Telecommunications Services Framework Agreement with expiration on 31 December 2012. The parties agree that the Company may renew the Ancillary Telecommunications Services Framework Agreement for such further periods as the parties may agree, by 30 days’ written notification to China Telecommunications Corporation.
CDMA Network Capacity Lease Agreement
Pursuant to the CDMA Network Capacity Lease Agreement signed between the Company and China Telecommunications Corporation on 27 July 2008, China Telecommunications Corporation agreed to lease its CDMA network capacity under the CDMA network to the Company and the Company shall have the exclusive right to use and operate the CDMA network to provide CDMA services in its service areas. The leasing fee is based on 28% of the CDMA service revenue (which is calculated by the total revenue from the CDMA services operations minus any upfront non-refundable revenue arising out of the CDMA operations and any revenue from sale of telecommunication products in connection with the CDMA operations) per year. Regardless the revenue of the CDMA operations, the minimum annual lease fee shall be 90% of the total amount of the lease fee paid by the Company to China Telecommunications Corporation in the previous year. As the Company started to pay the lease fee from 1 October 2008, for the year ended 2008 and for the year ended 2009, there is no minimal annual leasing fee. The cost of network construction shall be borne by China Telecommunications Corporation, while the maintenance-related costs shall be shared as agreed between the two parties.
Pursuant to the CDMA Network Capacity Lease Agreement, China Telecommunications Corporation has granted the Company an option to purchase the CDMA network. The option may be exercised, at the discretion of the Company, at any time during the term of the lease or within one year after the expiry of the lease. No premium has been paid or will be payable by the Company for the grant of the option.
The Company and China Telecommunications Corporation have entered into a supplemental agreement on 25 August 2010 to renew the Telecom CDMA Lease with expiration on 31 December 2012.
Strategic Agreement between Our Company and China Communications Services Corporation Limited
Pursuant to the Strategic Agreement signed between the Company and China Communications Services Corporation Limited (“China Communications Services”) on 30 August 2006 and a supplemental agreement (“Strategic Agreement and its Supplemental Agreement”) signed on 15 June 2007, the Company agreed that, in the period between 1 January 2007 and 31 December 2009, if service terms related to the design, implementation and supervision of the communications engineering provided by China Communications Services are basically the same as those of other service providers, the provincial branches of the Company in the service area of China Communication Services shall annually receive such services from the related wholly-owned subsidiaries of China Communications Services with total value no less than 10.6% of total annual capital expenditure of the related provincial branches of the Company in that year. China Communications Services will offer at least 5% price discount to the Company based on the applicable standard prices for the services in connection with the design, construction, project supervision and management of communication engineering projects. Meanwhile, pursuant to the Strategic Agreement and its Supplemental Agreement, the Company pledged that, in the period between 1 January 2007 and 31 December 2009, if the terms related to certain maintenance management services provided by China Communications Services are basically the same as those of other service providers, the provincial branches of the Company in the service area of China Communication Services shall annually receive such services from the wholly-owned subsidiaries of China Communications Services with total value no less than RMB1,780 million.
The business areas of the strategic alliance between the two parties governed by the terms and conditions in the Strategic Agreement and its Supplemental Agreement include: design, implementation and supervision of the communications engineering, maintenance management service, contents application service, sales channel service, usage of telecommunications and other new businesses arising from time to time which are appropriate for the collaboration between the two parties. China Communications Services pledges its support to the strategic transformation of the Company from a traditional basic telecommunications operator to an integrated information service provider, its active support to the Company’s business development, and its active use of the Company’s products and services in its own business. Such services shall comply with the related standards of China or the standards agreed by both parties, and shall be on terms no less favourable than those available to any third parties to which the same or similar services are provided by either party. Without breaching the requirements governed by PRC laws, in respect of the same services, where the terms and conditions of services provided by either party to the Strategic Agreement and its Supplemental Agreement are the same as those provided by an independent third party, the party under the Strategic Agreement and its Supplemental Agreement shall have the priority to be appointed as the service provider by the other party.
The Company and China Communications Services has entered into a supplemental agreement (“2009 Supplemental Agreement”) on 29 October 2009 to renew the Strategic Agreement and its Supplemental Agreement in accordance with their provisions for a further term of three years expiring on 31 December 2012. Upon expiration, both parties may negotiate the renewal of Strategic Agreement which is subject to the requirements of Chapter 14A of the Listing Rules (including disclosure and independent shareholders’ approval requirements).
Neither the Strategic Agreement nor Supplemental Agreement nor the 2009 Supplemental Agreement sets out any annual caps for the transactions thereunder as China Telecommunications Corporation, the holding company of China Communications Services, has signed certain framework agreements for continuing connected transactions with the Company and the transactions contemplated under the Strategic Agreement, Supplemental Agreements and 2009 Supplemental Agreement are covered by these framework agreements. These frameworks agreements are already subject to annual caps and the proposed annual caps for the transactions under the Strategic Agreement and the Supplemental Agreement (as amended by the 2009 Supplemental Agreement) are subsumed under the annual caps of those framework agreements between the Company and China Telecommunications Corporation (including the Engineering Framework Agreement, the Ancillary Telecommunications Services Framework Agreement and the Community Services Framework Agreement).
The Company confirms that it has complied with the disclosure requirements in accordance with Chapter 14A of the Listing Rules in respect of the above connected transactions.
The Independent Non-Executive directors of the Company have confirmed that all continuing connected transactions for the year ended 31 December 2010 to which the Group was a party:
1. had been entered into, and the agreements governing those transactions were entered into, by the Group in the ordinary and usual course of business;
2. had been entered into either:
(i) on normal commercial terms; or
(ii) if there are not sufficient comparable transactions to judge whether they are on normal commercial terms, on terms no less favourable to the Company than those available to or (if applicable) from independent third parties; and
3. had been entered into in accordance with the relevant terms that are fair and reasonable and in the overall interests of the shareholders of the Company as a whole.
The Independent Non-Executive directors have further confirmed that:
The values of continuing connected transactions entered into between the Group and its connected persons which are subject to annual caps have not exceeded their respective annual caps.
The auditors of the Group have reviewed the continuing connected transactions of the Group and have confirmed to the Board that the transactions:
1. have received the approval of the Board;
2. have been entered into in accordance with the pricing policies as stated in the relevant agreements; and
3. have been entered into in accordance with the terms of the agreements governing such transactions; and the values of continuing connected transactions entered into between the Group and its connected persons which are subject to annual caps have not exceeded their respective annual caps.
Compliance with Code on Corporate Governance Practices
Please refer to the “Corporate Governance Report” set out in page 56 of this 2010 annual report of the Company for details of our compliance with the Code on Corporate Governance Practices.
Material Legal Proceedings
As at 31 December 2010, the Company was not involved in any material litigation or arbitration, and as far as the Company is aware, no material litigation or claims were pending or threatened or made against the Company.
Auditors
KPMG and KPMG Huazhen were appointed as the international and domestic auditors of the Company for the year ended 31 December 2010. KPMG has audited the accompanying financial statements, which have been prepared in accordance with International Financial Reporting Standards. The Company has engaged KPMG and KPMG Huazhen since the date of its listing. A resolution for the reappointment of KPMG and KPMG Huazhen as the international and domestic auditors of the Company for the year ending 31 December 2011 will be proposed at the Annual General Meeting of the Company to be held on 20 May 2011.
By Order of the Board
Wang Xiaochu
Chairman and Chief Executive Officer
Beijing, PRC
22 March 2011