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CHA China Telecom

Filed: 28 Apr 21, 6:14am
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 20-F

 

 

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

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

For the transition period from            to            

 

 

Commission file number 1-31517

 

 

中国电信股份有限公司

(Exact Name of Registrant as Specified in Its Charter)

China Telecom Corporation Limited

(Translation of Registrant’s Name into English)

People’s Republic of China

(Jurisdiction of Incorporation or Organization)

 

 

31 Jinrong Street, Xicheng District

Beijing, People’s Republic of China 100033

(Address of Principal Executive Offices)

Ms. Wong Yuk Har, Rebecca

China Telecom Corporation Limited

28/F, Everbright Centre

108 Gloucester Road

Wanchai, Hong Kong

Email: rebecca.wong@chinatelecom-h.com

Telephone: (+852) 2582 5819

Fax: (+852) 2157 0010

(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

 

Trading Symbol

 

Name of Each Exchange On Which Registered

American depositary shares

H shares, par value RMB1.00 per share

 CHA 

New York Stock Exchange, Inc.

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, each representing 100 H 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, 2020, 67,054,958,321 domestic shares and 13,877,410,000 H shares, par value RMB1.00 per share, were issued and outstanding. H shares are ordinary shares of the Company listed on The Stock Exchange of Hong Kong Limited.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐

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  ☐    No  ☒

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  ☒    Accelerated Filer  ☐    Non-Accelerated Filer  ☐    Emerging Growth Company  ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

 

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification After April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.

U.S. GAAP  ☐

International Financial Reporting Standards as issued by the International Accounting Standards Board ☒

Other  ☐

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  ☐    Item 18  ☐

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  ☐    No  ☒

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ☐    No  ☐

 

 

 


Table of Contents

CHINA TELECOM CORPORATION LIMITED

TABLE OF CONTENTS

 

      Page 

PART I

     - 2 - 

          

 

Item 1.

  

Identity of Directors, Senior Management and Advisers

   - 2 - 
 

Item 2.

  

Offer Statistics and Expected Timetable

   - 2 - 
 

Item 3.

  

Key Information

   - 2 - 
 

Item 4.

  

Information on the Company

   - 21 - 
 

Item 4A.

  

Unresolved Staff Comments

   - 44 - 
 

Item 5.

  

Operating and Financial Review and Prospects

   - 45 - 
 

Item 6.

  

Directors, Senior Management and Employees

   - 54 - 
 

Item 7.

  

Major Shareholders and Related Party Transactions

   - 62 - 
 

Item 8.

  

Financial Information

   - 70 - 
 

Item 9.

  

The Offer and Listing

   - 71 - 
 

Item 10.

  

Additional Information

   - 72 - 
 

Item 11.

  

Quantitative and Qualitative Disclosures about Market Risk

   - 82 - 
 

Item 12.

  

Description of Securities Other than Equity Securities

   - 84 - 

PART I I

     - 85 - 
 

Item 13.

  

Defaults, Dividend Arrearages and Delinquencies

   - 85 - 
 

Item 14.

  

Material Modifications to the Rights of Security Holders and Use of Proceeds

   - 85 - 
 

Item 15.

  

Controls and Procedures

   - 86 - 
 

Item 16A.

  

Audit Committee Financial Expert

   - 87 - 
 

Item 16B.

  

Code of Ethics

   - 87 - 
 

Item 16C.

  

Principal Accountant Fees and Services

   - 88 - 
 

Item 16D.

  

Exemptions from the Listing Standards for Audit Committees

   - 88 - 
 

Item 16E.

  

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

   - 88 - 
 

Item 16F.

  

Change in Registrant’s Certifying Accountant

   - 88 - 
 

Item 16G.

  

Corporate Governance

   - 89 - 
 

Item 16H.

  

Mine Safety Disclosure

   - 90 - 
 

Item 17.

  

Financial Statements

   - 90 - 
 

Item 18.

  

Financial Statements

   - 90 - 
 

Item 19.

  

Exhibits

   - 90 - 

 


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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, or the Exchange Act. These forward-looking statements are, by their nature, subject to significant risks and uncertainties, and include, without limitation, statements relating to:

 

  

our business and operating strategies and our ability to successfully execute these strategies;

 

  

our network expansion and capital expenditure plans;

 

  

our operations and business prospects;

 

  

the expected benefit of any acquisitions or other strategic transactions;

 

  

our financial condition and results of operations;

 

  

the expected impact of new services on our business, financial condition and results of operations;

 

  

the future prospects of and our ability to integrate acquired businesses and assets;

 

  

the industry regulatory environment as well as the industry outlook generally; and

 

  

future developments in the telecommunications industry in the People’s Republic of China, or the PRC.

The words “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “seek”, “will”, “would” and similar expressions, as they relate to us, are intended to identify a number of these forward-looking statements.

These forward-looking statements are subject to risks, uncertainties and assumptions, some of which are beyond our control. In addition, these forward-looking statements reflect our current views with respect to future events and are not a guarantee of future performance. We are under no obligation to update these forward-looking statements and do not intend to do so. Actual results may differ materially from the information contained in the forward-looking statements as a result of a number of factors, including, without limitation, the following:

 

  

any changes in the regulations or policies of the Ministry of Industry and Information Technology of the PRC (prior to March 2008, the Ministry of Information Industry, or the MII), or the MIIT, and other relevant government authorities relating to, among other matters:

 

  

the granting and approval of licenses;

 

  

tariff or network speed policies;

 

  

interconnection and settlement arrangements;

 

  

capital investment priorities;

 

  

the provision of telephone and other telecommunications services to rural areas in the PRC; and

 

  

spectrum and numbering resources allocation;

 

  

the effects of competition on the demand for and price of our services;

 

  

any potential further restructuring or consolidation of the PRC telecommunications industry;

 

  

changes in telecommunications and related technologies including the fifth generation mobile telecommunications, or 5G, and future generations of mobile technologies, and applications based on such technologies, including testing and monetization of 5G and future generations of mobile technologies;

 

  

the development of new technologies and applications or services affecting the PRC telecommunications industry and our current and future business;

 

  

the potential impact of restrictions, sanctions or other legal or regulatory actions under relevant laws and regulations in various jurisdictions on our suppliers and other business partners;

 

  

the impact of the COVID-19 pandemic on our operations and financial performance, the PRC economy and world economy, including disruptions to the demand for certain of our services and products such as international roaming services and services provided to corporate clients, a decline in network service quality due to the increased volume of online utilization, temporary closures of our sales outlets and a decline in new subscriber registration due to such closures, disruptions to the delivery of services or supplies, delay in network construction progress and fluctuation of labor supply and demand due to travel and other restrictions, and increased bad debts risk due to the deteriorating financial condition of certain corporate customers;

 

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the impact of Executive Order 13959 signed by the then President of the United States (as subsequently amended on January 13, 2021, the “Executive Order”), and any rules or regulations adopted, guidance issued or actions taken by U.S. regulators to implement or comply with the Executive Order, including the ongoing delisting proceedings of our ADSs;

 

  

the impact of the Holding Foreign Companies Accountable Act and any rules or regulations adopted by U.S. regulators to implement such legislation;

 

  

the completion of our proposed A share offering;

 

  

changes in political, economic, legal and social conditions in the PRC, including changes in the PRC government’s specific policies with respect to foreign investment in and entry by foreign companies into the PRC telecommunications industry, economic growth, inflation, foreign exchange and the availability of credit;

 

  

results and effects of any inspections by the relevant PRC regulatory authorities; and

 

  

the development of our mobile business is dependent on the Tower Company.

Please also see “Item 3. Key Information—D. Risk Factors”.

CERTAIN DEFINITIONS AND CONVENTIONS

As used in this annual report, references to “us”, “we”, the “Company”, “our Company” and “China Telecom” are to China Telecom Corporation Limited and its consolidated subsidiaries except where we make clear that the term means China Telecom Corporation Limited or a particular subsidiary or business group only. References to matters relating to our H shares or American depositary shares, or ADSs, or matters of corporate governance are to the H shares, ADSs and corporate governance of China Telecom Corporation Limited. All references to “China Telecom Group” are to China Telecommunications Corporation, our controlling shareholder. Unless the context otherwise requires, these references include all of its subsidiaries, including us and our subsidiaries. Unless otherwise indicated, references to and statements regarding China and the PRC in this annual report do not apply to Hong Kong Special Administrative Region, Macau Special Administrative Region or Taiwan, while references to and statements regarding “international” in this annual report apply to Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan.

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

Not Applicable.

 

B.

Capitalization and Indebtedness

Not applicable.

 

C.

Reasons for the Offer and Use of Proceeds

Not applicable.

 

-2-


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D.

Risk Factors

Risks Relating to Our Business

We face increasing competition, which may materially and adversely affect our business, financial condition and results of operations.

We operate in a highly competitive industry, and primarily compete against the other two full-service telecommunications providers in the PRC, namely, China Mobile Limited, or China Mobile, and China Unicom (Hong Kong) Limited, or China Unicom.

In mobile telecommunications services, China Mobile, China Unicom and China Broadcasting Network Corporation Ltd, or China Broadcasting Network, are our top three competitors. As of April 2021, each of China Unicom, China Mobile and us provides 4G services nationwide and has officially launched 5G commercial services in the PRC for more than one year. In June 2019, China Broadcasting Network was granted the 5G permit by the MIIT. In May 2020, China Broadcasting Network entered into a collaborative framework agreement in relation to 5G co-construction and sharing with China Mobile Communications Group Co., Ltd. (formerly known as China Mobile Communications Corporation) (“China Mobile Group”). In September 2020, China Broadcasting Network together with partners which include, among others, State Grid Information & Telecommunication Technology Group Co., Ltd. (国网信息通信产业集团有限公司) and Hangzhou Alibaba Venture Capital Management Co., Ltd. (杭州阿里巴巴创业投资管理有限公司) established China Broadcasting Network Co., Ltd to provide 5G services in partnership with China Mobile and it is also expected to offer 4G services in the future. Furthermore, in January 2021, China Mobile Communication Co., Ltd., a wholly-owned subsidiary of China Mobile, on behalf of its 31 provincial subsidiaries, entered into a series of specific collaboration agreements with China Broadcasting Network, including (i) the 5G network co-construction and sharing collaboration agreement; (ii) the 5G network maintenance collaboration agreement; (iii) the market collaboration agreement; and (iv) the network usage fee settlement agreement. Our competitors and we have been rolling out 5G tariff plans to attract customers, and some of the plans offered by our competitors may be more attractive to customers than ours. In fixed-line voice and broadband services, we primarily compete against China Unicom, China Mobile and China Broadcasting Network. While we strive to provide competitive mobile and fixed-line telecommunications services to meet our subscribers’ evolving needs, we cannot assure you that: (i) our mobile and fixed-line telecommunications services will deliver the quality and levels of services currently anticipated; (ii) we will be able to provide all planned services or we will be able to provide such services on schedule; (iii) there will be sufficient demand for our mobile and fixed-line telecommunications services for us to deliver such services profitably; (iv) our competitors’ services will not be more popular among potential subscribers; or (v) we will not encounter unexpected technological difficulties in developing our Industrial Digitalization business and future generations of mobile and fixed-line services. Any adverse developments in these respects could impede our growth, which might have a material adverse effect on our business, financial condition and results of operations.

We also face increasing competition from other competitors outside the telecommunications industry, in particular, from Internet services providers and mobile software and application developers, such as Over-the-Top messaging or voice services providers who offer contents and services on the Internet without their proprietary telecommunications network infrastructure. These competitors are competing with us in information and application or voice services. During the past few years, some of our traditional revenue streams, such as our voice services or short message services, or SMS have experienced negative growth, primarily due to the alternative means of communication offered by Over-the-Top messaging becoming increasingly popular among the subscribers. Though the increasing popularity of Over-the-Top messaging has generally contributed to the increase in our Internet data traffic and Internet services revenues, we cannot assure you that our Internet data traffic and Internet services revenue will continue to increase in the future or such increase could fully offset the negative effect of these Over-the-Top services on our voice services or SMS. In addition, in the field of Industrial Digitalization, we compete with telecommunications operators, Internet companies, software companies, equipment manufacturers, etc. Our cloud services and Internet data center (the “IDC”) business compete with domestic and international cloud service providers and IDC operators, respectively. Some of our competitors may adopt aggressive pricing policies. As a result, we may suffer from pricing pressure that would adversely affect our ability to generate revenues. Some of these competitors may also provide our target customers with additional benefits, including bundled services, and may do so in a manner that is more attractive to our potential customers. We expect that competition from competitors outside the telecommunications industry will intensify and the strategic cooperation between these competitors and telecommunications operators may reshape the competitive landscape of the telecommunications industry in which we operate. Though we strive to strengthen our competitiveness through comprehensively implementing our “Cloudification and Digital Transformation” strategy, we may encounter difficulties and challenges in addressing changing consumer needs and responding to the evolving competitive landscape.

In addition, the PRC government has taken various initiatives to encourage competition in the telecommunications industry, such as the policy encouraging private capital to enter the industry. For a series of government measures to encourage private capital to invest in telecommunications services that could compete with our services, see “Item 4. Information on the Company—B. Business Overview—Competition”. Furthermore, by the end of November 2019, the mobile number portability services have been implemented nationwide, following pilot programs in certain municipalities and provinces. On November 11, 2019, the MIIT promulgated the Regulations on the Management of Mobile Number Portability Service, which became effective on December 1, 2019. As a result, the competitive landscape in the PRC telecommunications industry may further diversify, causing more intensified competition.

 

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Increasing competition from other existing telecommunications services providers, including China Mobile and China Unicom, as well as competition from new competitors, among other factors, might force us to lower our tariffs, reduce or reverse the growth of our customer base and reduce usage of our services, which could materially and adversely affect our business and prospects. Any of these developments could materially and adversely affect our revenues and profitability. We cannot assure you that the increasingly competitive environment and any change in the competitive landscape of the telecommunications industry in the PRC would not have a material adverse effect on our business, financial condition or results of operations.

We face uncertainties in the development and operation of our 5G business, and if we fail to address such uncertainties, our business, prospects and results of operations may be materially and adversely affected.

In June 2019, the MIIT granted the 5G permit to China Telecom Group, China Mobile Group, China United Network Communications Group Company Limited (formerly known as China United Telecommunications Corporation) (“Unicom Group”) and China Broadcasting Network. The MIIT has allocated the 3400MHz-3500MHz frequency bands to China Telecom Group, the 2515MHz-2675MHz and 4800MHz-4900MHz frequency bands to China Mobile Group, the 3500MHz-3600MHz frequency bands to Unicom Group, respectively, for nationwide 5G programs, and the 4900MHz-5000MHz to China Broadcasting Network for 5G trials. In February 2020, the MIIT approved China Telecom Group, Unicom Group and China Broadcasting Network to share the 3300MHz-3400MHz spectrum to build indoor 5G. In March 2020, the MIIT repurposed the use plan for 700MHz frequency bands to mobile communications. We have been authorized by China Telecom Group to develop 5G business nationwide.

In September 2019, in order to build a 5G network on an efficient basis and to rapidly create our 5G service capabilities, we entered into a 5G Network Co-Build and Co-Share Framework Cooperation Agreement with China United Network Communications Corporation Limited (“CUCL”) (the “5G Cooperation Agreement”). For more details, see “Item 4. Information on the Company—B. Business Overview—Network System—Co-building and co-sharing with China Unicom”. Pursuant to the 5G Cooperation Agreement, both parties will delineate and designate districts, jointly co-build one 5G access network nationwide. We will rely on China Unicom’s network to provide our 5G services in the regions for which they are responsible. If the 5G network co-building and co-sharing construction progress falls behind the mutually agreed plan or our subscribers are unsatisfied with the network quality in such regions and turn to our competitors, our business and results of operations might be adversely impacted.

On October 31, 2019, we officially launched 5G commercial services in 50 cities nationwide. In 2020, leveraging “5G + e-Surfing Cloud”, we provided our subscribers with an excellent network experience as well as differentiated applications and services. As of December 31, 2020, the number of our 5G base stations in use exceeded 380,000, primarily achieving contiguous coverage in outdoor areas of all prefecture-level or above cities and some developed counties nationwide and indoor coverage of key buildings; the total number of our mobile subscribers reached 351 million, representing a net addition of 15.45 million and expanding our market share to 22.0%; the number of 5G package subscribers reached 86.50 million with a penetration rate of 24.6%. As of March 31, 2021, the number of 5G package subscribers further increased to approximately 111.23 million. For more details of our 5G operations, see “Item 4. Information on the Company—B. Business Overview”.

The network deployment, construction of infrastructure and commercialization of 5G require us to devote significant financial resources and operational efforts, and we have been exploring optimal business models for our 5G business. However, there are uncertainties in the prospects of 5G developments and operations, including the competitiveness of 5G products and services, supplies and pricing of 5G terminals, the development of 5G Standalone, or 5G SA industry chain, capital expenditures in constructing 5G base stations, our suppliers’ ability to provide 5G equipment as well as future 5G technology application scenarios. If we are unable to appropriately address such uncertainties, it may adversely impact future benefits of our 5G business, which may materially and adversely affect our business, prospects and results of operations.

Our operations and further development of our mobile business is dependent on the Tower Company.

In July 2014, the Company, CUCL and China Mobile Communication Company Limited (“CMCL”) made the decision to jointly establish China Communications Facilities Services Corporation Limited (currently known as China Tower Corporation Limited, the “Tower Company”), and carried out the establishment of Tower Company and the transfer of certain tower assets. Upon completion of the transfer of tower assets by the Company to the Tower Company, the Company and the Tower Company entered into the Lease Agreement on July 8, 2016 that sets forth the pricing and related arrangements in relation to the lease of telecommunications towers and related assets (including both acquired towers and new towers). On February 1, 2018, the Company and the Tower Company entered into a supplemental agreement, effective from January 1, 2018, on the basis of the original Lease Agreement mainly to adjust the relevant pricing arrangement of tower products under the Lease Agreement. See “Item 4. Information on the Company—A. History and Development of the Company—Establishment of the Tower Company and the Disposal and Lease of the Telecommunications Towers”.

 

 

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The Tower Company has been and will continue to be of significant importance to the operations and further development of our mobile business and our results of operations. Construction of new tower assets has been carried out by the Tower Company since the completion of the transfer of tower assets and, in principle, we expect the Tower Company will continue to carry out the construction of new tower assets in the future. Therefore, our mobile business has depended on and will continue to depend on the lease arrangement between us and the Tower Company. However, since we do not control the Tower Company, we cannot assure you that it will act in the best interests of us or the services of the Tower Company can sufficiently support our business needs and future plans.

The Lease Agreement, as may be further supplemented and amended from time to time, provides for pricing adjustment mechanism under which the fees may be further negotiated or agreed upon after considering effects of inflation, significant fluctuations in the real estate market or the steel price, many of which are beyond our control, and such pricing adjustment mechanism may result in a further adjustment of the fees charged to us by the Tower Company in the future. Furthermore, prior to the expiration of lease periods of individual towers, we have to negotiate with the Tower Company new leases of such tower, we cannot assure you that we will be able to enter into new leases at all or on favorable terms with the Tower Company. Due to our reliance on Tower Company for tower assets, if we fail to use the relevant tower assets at our desired locations and on terms and conditions that are favorable to us to maintain or expand our mobile network coverage, or if we cannot receive quality and stable services in a timely and economically viable manner from the Tower Company, the operations and further growth of our mobile business as well as our financial condition and results of operations may be materially and adversely affected.

We will continue to be controlled by China Telecom Group, which could cause us to take actions that may conflict with the best interests of our other shareholders.

China Telecom Group, a state-owned enterprise owned approximately 70.89% of our issued shares as of April 23, 2021. Accordingly, subject to our Articles of Association and applicable laws and regulations, China Telecom Group, as our controlling shareholder, will continue to be able to exercise significant influence over our management and policies by:

 

  

controlling the election of our Directors and, in turn, indirectly controlling the selection of our senior management;

 

  

determining the timing and amount of our dividend payments;

 

  

approving our annual budgets;

 

  

deciding on increases or decreases in our share capital;

 

  

determining issuance of new securities;

 

  

approving mergers and acquisitions; and

 

  

amending our Articles of Association.

The interests of China Telecom Group as our controlling shareholder could conflict with our interests or the interests of our other shareholders. As a result, China Telecom Group may take actions with respect to our business that may not be in our or our other shareholders’ best interests.

We depend on China Telecom Group and its other subsidiaries to provide certain services and facilities for which we currently have limited alternative sources of supply.

In addition to being our controlling shareholder, China Telecom Group, by itself and through its other subsidiaries, also provides us with services and facilities necessary for our business activities, including, but not limited to:

 

  

use of international gateway facilities;

 

  

provision of services in areas outside our service regions necessary to enable us to provide end-to-end services to our customers;

 

  

use of certain inter-provincial optic fibers; and

 

  

lease of properties and assets.

The interests of China Telecom Group and its other subsidiaries as providers of these services and facilities may conflict with our interests. We currently have limited alternative sources of supply for these services and facilities. Therefore, we have limited leverage in negotiating with China Telecom Group and its other subsidiaries over the terms for the provision of these services and facilities. Termination or adverse changes of the terms for the provisions of these services and facilities could materially and adversely affect our business, results of operations and financial condition. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions” for a description of the services and facilities provided by China Telecom Group and its other subsidiaries.

 

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Since our services require interconnection with networks of other operators, disruption in interconnections with those networks could have a material adverse effect on our business and results of operations.

Under the relevant telecommunications regulations, telecommunications operators are required to interconnect with networks of other operators. China Telecom Group entered into interconnection settlement agreements with other telecommunications operators, including Unicom Group and China Mobile Group. We entered into an interconnection settlement agreement, as amended, with China Telecom Group, which allows our networks to interconnect with China Telecom Group’s networks as well as networks of the other telecommunications operators, with whom China Telecom Group had interconnection arrangements. The effective provision of our voice, Internet and other services requires interconnection between our networks and those of China Telecom Group, Unicom Group, China Mobile Group and other domestic and international telecommunications operators. Any interruption in our interconnection with the networks of those domestic or international telecommunications carriers with which we interconnect due to technical or competitive reasons may affect our operations, service quality and customer satisfaction, and, in turn, our business and results of operations. In addition, any obstacles in existing interconnection arrangements and leased line agreements or any change in their terms, as a result of natural events, accidents, or for regulatory, technological, competitive or other reasons, could lead to temporary service disruptions and increased costs that may seriously jeopardize our operations and adversely affect our profitability and growth.

We may be unable to obtain sufficient financing to fund our capital requirements, which could limit our growth potential and prospects.

We believe that cash from operations, together with any necessary borrowings, will provide sufficient financial resources to meet our projected capital and other expenditure requirements. However, we may require additional funds to the extent we have underestimated our capital requirements or overestimated our future cash from operations. In addition, a significant feature of our business strategy is to transform our Company into a leading integrated intelligent information services operator, which may require additional capital resources. The cost of implementing new technologies, upgrading our networks or expanding bandwidth capacity may be significant. Furthermore, in order for us to effectively respond to technological changes and more intensive competition, we may need to make substantial investments in the future.

Financing may not be available to us on acceptable terms or at all. Our ability to obtain additional financing will depend on a number of factors, including:

 

  

our future financial condition, results of operations and cash flows;

 

  

general market conditions for financing activities by telecommunications companies; and

 

  

economic, political and other conditions in the markets where we operate or plan to operate.

We cannot assure you that we can obtain sufficient financing at commercially reasonable terms or at all. If adequate capital is not available on commercially reasonable terms, our growth potential and prospects could be materially and adversely affected. On the other hand, incurrence of debt would result in increased interest expense and could require us to agree to restrictive operating and financial covenants.

The proposed A share offering, if completed, will result in dilution of the ownership interest of our existing shareholders, and we may not be able to realize the intended benefits of the offering proceeds and there are risks relating to listing on multiple stock exchanges. There is no assurance that the proposed A share offering will proceed and complete successfully.

We currently plan to raise additional equity capital by publicly offering A shares, the number of which will be no more than 12,093,342,392 shares (namely no more than 13% of our total issued share capital upon the A share offering, without taking into account the exercise of the over-allotment option). Please see “Item 4. Information on the Company—A. History and Development of the Company—Proposed A Share Offering” for more information. Such offering, like any other issuance of equity securities, will result in dilution to our shareholders and may cause the market price of our securities to decline. In addition, if we successfully complete the A share offering and list our A shares on the Shanghai Stock Exchange, all of our shareholders (including the holders of newly issued A shares) would be entitled pro rata to our undistributed profits accumulated before the completion of our A share listing, which will dilute the interest of our existing shareholders.

We plan to apply most of the proceeds from the proposed A share offering to projects including the 5G industrial Internet construction project, the cloud-network integration new information infrastructure project, and the research and development project of sci-tech innovation. Our research and analysis on the necessity and feasibility of these projects are mainly based on current industry, technology, market and other factors, many of which are not within our control. If there are major changes in subsequent industry standards, technology trends, and market demand, the ultimate benefits generated from these projects may not meet our expectations, which will adversely affect our operating results.

 

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Upon the completion of the proposed A share offering, our shares will be listed on multiple stock exchanges at the same time. Due to the differences in domestic and overseas regulatory rules, we need to comply with different sets of laws and regulations with respect to governance structure, compliant operation, information disclosure, internal control, investor protection, etc. In particular, we need to comply with the listing rules of all relevant regulatory authorities. This poses greater challenges to our compliant operation and investor relations management. In addition, we may incur additional costs and resources in continuously complying with all sets of securities regulatory regimes in multiple jurisdictions. Upon the listing of our A shares, holders of our A shares and H shares (including our ADSs) will be treated as different classes of shareholders for the purpose of voting on certain specific matters (such as increase or decrease of the number of class shares, cancellation or reduction of the rights of class shares, etc.). The convening and voting results of A share class shareholders meetings may have impact on our H share class shareholders (including our ADS holders). Furthermore, domestic and overseas investors may have different views on the valuation of us, and the factors that affect stock prices and their sensitivity to influencing factors may also be different among markets. These may result in significant differences in our stock prices in different stock exchanges. Systematic risks in domestic capital markets and fluctuations in domestic stock prices may adversely affect our ADS and H share investors.

The proposed A share offering is subject to approvals from China Securities Regulatory Commission, or CSRC, and other relevant regulatory authorities and may or may not proceed. The completion of such offering is also subject to market condition. Therefore, there is no assurance that the offering will complete as currently planned or at all.

If we are not able to respond successfully and cost-efficiently to technological or industry developments, our business may be materially and adversely affected.

The telecommunications market is characterized by rapid advancements in technology, evolving industry standards and changes in customer needs. We cannot assure you that we will be successful in responding to these developments. In addition, new services or technologies, such as cloud computing, Internet of Things, Big Data, artificial intelligence, blockchain and quantum information, present new challenges to our existing services and technologies. In the event we do take measures to respond to technological developments and changes in industry standards, the integration of new technology or industry standards or the upgrading of our networks may require substantial time, effort and capital investment. Moreover, the successful development and application of such cutting edge technologies depend on a number of factors, including the integration of legacy networks and cloud security related challenges. We cannot assure you that we will succeed in integrating these new technologies and industry standards or adapting our network systems in a timely and cost-effective manner, or at all. Our inability to respond successfully and cost-efficiently to technological or industry developments may materially and adversely affect our business, results of operations and competitiveness.

Our ability to respond to technological developments in a cost-efficient manner may also be adversely affected by external factors, some of which are beyond our control. For example, the development in 5G technology is expected to have a major impact on our services. See “—We face uncertainties in the development and operation of our 5G business, and if we fail to address such uncertainties, our business, prospects and results of operations may be materially and adversely affected” under this Item. In addition, we have been taking the initiatives to explore the feasibility of collaborative development of 5G and 4G. If our efforts turn out to be unsuccessful, our ability to attract and retain subscribers could be adversely affected.

Transactions in and holdings of our ADSs and H shares by U.S. persons beyond specified dates are prohibited, and the continued listing of and trading in our ADSs are subject to significant uncertainty.

On November 12, 2020, the then President of the United States signed Executive Order 13959 (as subsequently amended on January 13, 2021, the “Executive Order”) to (i) prohibit (the “Prohibitions”) any transaction by any U.S. person, subject to certain divestiture and other exemptions, in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of certain Chinese companies (each, a “Restricted Company”), (ii) prohibit possession of the foregoing securities by a U.S. person after November 11, 2021 and (iii) authorize the United States Secretary of the Treasury to publicly list an entity as a Restricted Company, with respect to which the Prohibitions shall take effect on the date that is 60 days after such listing. The United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) maintains a list of companies identified as a Restricted Company (the “Restricted List”) and, on January 8, 2021, added the Company to the “Issuer Name” column of the Restricted List. According to guidance issued by OFAC (available at https://home.treasury.gov/system/files/126/ccmc_gl1a_01272021_1.pdf), the Prohibitions with respect to the Company took effect on March 9, 2021, 60 days after the Company was added to the “Issuer Name” column of the Restricted List.

 

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On December 31, 2020, the New York Stock Exchange, or the NYSE, announced that it had determined to commence proceedings to delist our ADSs on the basis that we were no longer suitable for listing in light of the Executive Order. On January 4, 2021, the NYSE announced that, in light of further consultation with relevant regulatory authorities, the NYSE no longer intended to move forward with the delisting action in relation to our ADSs. On January 6, 2021, the NYSE announced that it had determined (the “Determination”) to re-commence proceedings to delist our ADSs to comply with the Executive Order and suspended trading in our ADSs on January 11, 2021.

Separately, the Depository Trust & Clearing Corporation’s National Securities Clearing Corporation (“NSCC”) suspended trade capture activities through its Universal Trade Capture (“UTC”) and Continuous Net Settlement (“CNS”) systems for our ADSs after trading ended on January 8, 2021. As a result, our ADSs can no longer be traded in any U.S. market that relies on NSCC’s UTC and CNS systems, including the over-the-counter (“OTC”) markets. On January 20, 2021, we filed with the NYSE a written request for a review of the Determination by a Committee of the Board of Directors of the NYSE (the “Committee”). The Company requested that the Committee reverse the Determination and stay the trading suspension of the ADSs pending review of the Determination. However, there is no assurance that such request will be successful and that the Committee will reverse its Determination.

If our ADSs were delisted from the NYSE, in light of the evolving situation described above, the organizers of OTC markets in the U.S. would also likely prohibit, or be directed to prohibit, the trading of our ADSs on such markets. Subject to the terms of the deposit agreement entered into among the Company, the Bank of New York Mellon, and holders and beneficial owners of ADSs from time to time, holders of our ADSs may convert the ADSs into our H shares listed on the Hong Kong Stock Exchange but will incur costs in order to do so. See “Item 12. Description of Securities Other than Equity Securities” for further information. More importantly, pursuant to the Executive Order and the latest OFAC guidance, U.S. persons are prohibited from purchasing or selling our ADSs or H shares (subject to certain divestiture and other exemptions) beyond March 9, 2021 and holding our ADSs or H shares beyond January 8, 2022, 365 days after the Company was added to the “Issuer Name” column of the Restricted List. Furthermore, the foregoing events or any further development thereof may adversely affect investor sentiment towards our Company, regardless of our actual operating performance. As a result, the value and liquidity of our ADSs and H shares may significantly decrease.

Restrictions, sanctions and other legal or regulatory actions in various jurisdictions could adversely affect us, our suppliers, business partners and other stakeholders in the supply chain of semiconductor and telecommunications industry, which could materially and adversely affect our business operations directly and indirectly.

We procure our telecommunications network equipment, related maintenance and technical support and other equipment and services from certain PRC and overseas suppliers. See “Item 4. Information on the Company—B. Business Overview—Network System”. We also transact with our overseas branches, as well as our business partners who operate globally. Therefore, both we and our business partners are subject to the laws and regulations of various jurisdictions and international organizations. The relevant jurisdictions or international organizations include, among others, the United States, the European Union (“EU”) and the United Nations. Any restrictions, sanctions or other legal or regulatory actions in the relevant jurisdictions, such as restrictions on import and export activities, could cause disruptions or other material difficulties on the business activities of our suppliers, business partners and us. Such disruptions could prevent our suppliers from delivering equipment and services to us in accordance with the agreed terms of supply, which in turn could negatively affect our business operations. We may not be able to find suitable alternative suppliers for the affected equipment or services in a timely manner. Even if we are able to find alternative suppliers, the commercial terms may not be comparable, and we could therefore be subject to a higher procuring cost. Furthermore, if any of our suppliers raises their prices due to an increase in international trade tariffs, we could be subject to a higher cost in procuring the relevant products. We may experience a significant delay in implementing the part of our business plans that relies on delivery of the affected equipment and services and difficulties in timely improving our services that rely on those suppliers for upgrading our networks and related software and applications.

Furthermore, the significant disruptions in the supply chain of semiconductor and telecommunications industry may indirectly impact the growth of our Internet services and information and application services. For example, the sanctions against certain mobile phone manufacturers may adversely affect the availability of quality 5G smart phones for users who may wish to upgrade their handsets, which could indirectly adversely affect our 5G business as such users potentially could have been our 5G package subscribers.

Any of the above and other consequences could materially adversely affect our business, results of operations, financial condition and prospects and cause a significant volatility in and a decline in our share price.

Our business may be materially and adversely affected by the COVID-19 pandemic or future health epidemics, pandemics or outbreaks.

The World Health Organization declared the outbreak of the COVID-19 pandemic on March 13, 2020. Since then, confirmed and death cases of the COVID-19 pandemic have continued to grow globally. The COVID-19 pandemic has caused significant economic and financial impact around the world. While various COVID-19 vaccine products have been developed and distributed, at this time, we are still not able to estimate the longer-term effects that the COVID-19 pandemic could have on our business. The extent to which the COVID-19 pandemic impacts our business, financial condition, results of operations will depend on future developments which are still uncertain, including the potential resurgence of the COVID-19 pandemic from time to time, the implementation of the vaccination plans by the government, the efficacy and safety of vaccine products, and other actions taken or to be taken to restrain or resolve its impact. We are continuing to monitor the spread of the COVID-19 and related risks.

 

 

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Due to the outbreak of the COVID-19, the Chinese government implemented domestic temporary control measures in late January 2020. Since March 2020, while the Chinese government has been gradually easing such control measures on a nationwide basis, stringent control measures have been maintained in provinces or cities where COVID-19 resurged. Although the COVID-19 pandemic has been primarily controlled in China and China’s economy has gradually recovered, China’s economy still experienced a slowdown and may continue to face new difficulties and challenges due to the increasing risk of imported cases, temporary impossibility of total elimination of the pandemic domestically, and heightened volatility and uncertainties in the global economy.

In addition, the COVID-19 pandemic has been rapidly evolving globally and many countries have implemented vaccination plans, quarantine, social distancing and other mitigation measures to slow down the spread. The COVID-19 pandemic has severely impacted global economic activities and caused significant volatility and negative pressure in the financial markets.

The COVID-19 pandemic and other adverse public health developments could materially and adversely affect our business, financial condition and results of operations. The adverse impacts likely include disruptions to the demand of certain services and products such as international roaming services and services provided to corporate clients, a decline in network service quality due to the increased volume of online utilization, temporary closures of our sales outlets and a decline in new subscriber registration due to such closures, disruptions to the delivery of services or supplies, delay in network construction progress and fluctuation of labor supply and demand due to travel and other restrictions, increased bad debts risk due to the deteriorating financial condition of certain corporate customers. In addition, we have transitioned a subset of our employees to a remote work environment and allowed certain suppliers to remotely provide services in an effort to mitigate the spread of COVID-19, which may increase certain costs and risks to our business and operations, including an increased demand for information technology resources.

We may be adversely affected by future health epidemics, pandemics or outbreaks which are beyond our control. These events are impossible to forecast and difficult to mitigate. Any of these events might have a material adverse effect on our results of operations and financial condition. See “—Risks Relating to the People’s Republic of China—The PRC’s economic, political and social conditions, as well as government policies, could affect our business” under this Item.

Cyber security breaches could have a material adverse effect on our operations.

We rely on information technology systems to process, transmit, store, and protect electronic information. As a telecommunications operator, we are considered a critical information infrastructure operator under the relevant PRC law and therefore are subject to the regulations designed to protect critical information infrastructure and therefore may be more likely to be targeted by cyber attack activities. Our information technology systems may be vulnerable to a variety of interruptions due to events beyond our control, including, but not limited to, cyber attacks, computer viruses, hackers, telecommunications failures, natural disasters, terrorist attacks, and other security issues. We have technology and information security processes and disaster recovery plans in place to mitigate our risks to these vulnerabilities. However, these measures may not be adequate to ensure that our operations will not be disrupted, should such an event occur.

Increasing regulatory focus on personal information protection could impact our business and expose us to increased liability.

Regulators in various jurisdictions are increasingly scrutinizing how companies collect, process, use, store, share and transmit personal data. For example, the General Data Protection Regulation (“GDPR”), which went into effect in the EU on May 25, 2018, applies to the collection, use, retention, security, processing, and transfer of personally identifiable information of residents of EU countries. The GDPR created a range of new compliance obligations, and imposed significant fines and sanctions for violations. Although we have not been subject to any GDPR sanctions and have subscriber privacy policy in place, it is possible that the GDPR or other emerging regulations may be interpreted or applied in a manner that is adverse to us. Any failure, or perceived failure, by us to comply with any applicable regulatory requirements or orders, including but not limited to privacy, data protection, information security, or consumer protection-related privacy laws and regulations, could result in proceedings or actions against us by governmental entities or individuals, subject us to fines, penalties, and/or judgments, or otherwise adversely affect our business, as our reputation could be negatively impacted.

We face a number of risks relating to our Internet-related services.

We currently provide a range of Internet-related services, including dial-up and broadband Internet access, and Internet-related applications. We face a number of risks in providing these services.

 

 

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Our network may be vulnerable to cyber attacks, including, among others, unauthorized access, denial of service attack and malicious software attack. In addition, cyber attacks may cause equipment failures, loss of information, including confidential or otherwise protected information stored in our customers’ computer systems and mobile phone systems, failure or perceived failure to comply with applicable privacy, security, or data protection laws or regulations, as well as disruptions to our operations or our customers’ operations. We have devoted significant resources to network security, data security and other security measures to protect our systems and data, but we cannot assure you that the security measures we have implemented will not be circumvented or otherwise fail to protect the integrity of our network, including our mobile network. Furthermore, it is difficult to estimate or calculate the economic costs caused by potential cyber security incidents and maintain sufficient insurance coverage relating to them at commercially reasonable rates and terms, as the costs may differ based on the identity and motive of the programmer or hacker, which are often difficult to identify. Thus, the economic costs to us to eliminate or alleviate cyber attacks could be significant. Eliminating computer viruses and other security problems may also require interruptions, delays or suspension of our services, reduce our customer satisfaction and cause us to incur costs. Cyber attacks may also subject us to litigations, liabilities for information loss, breach of confidentiality of private information, and/or reputational damage. While, to date, we have not been subject to cyber attacks which, individually or in the aggregate, have been material to our operations or financial condition, we cannot assure you that we will not experience them in the future. Due to the evolving nature of cyber security threats, the scope and impact of any future incident cannot be predicted. While we continually work to safeguard our systems and mitigate potential risks, there is no assurance that such actions will be sufficient to prevent cyber attacks or security breaches that manipulate or improperly use our systems or networks, compromise confidential or otherwise protected information, destroy or corrupt data, or otherwise disrupt our operations. The occurrence of such events could have a material adverse effect on our financial condition and results of operations.

In addition, because we provide connections to the Internet and host websites for customers and develop Internet information and applications, we may be perceived as being associated with the content carried over our network or displayed on websites that we host. We are not able to screen all of this content and may face litigation claims due to a perceived association with this content. These types of claims have been brought against other providers of online services in the past. Regardless of the merits of the lawsuits, these types of claims can be costly to defend, divert management resources and attention, and may damage our reputation.

Furthermore, we rely on proper operation and maintenance of our equipment. Any malfunction, capacity constraint or operation interruption of our equipment may have an adverse impact on our business.

Any failure to achieve and maintain effective internal controls could have a material adverse effect on our reputation, business, results of operations and the market prices of our securities.

Effective internal controls are necessary for us to provide reasonable assurance with respect to our financial reports and to prevent fraud. We are required to comply with various PRC, U.S. and Hong Kong laws, rules and regulations on internal controls, including the Sarbanes-Oxley Act of 2002. In particular, Section 404 of the Sarbanes-Oxley Act of 2002 requires that we include a report of management on our internal control over financial reporting in our annual reports on Form 20-F that contains an assessment by our management of the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm must issue an auditor’s report on the effectiveness of our internal control over financial reporting.

Internal controls may not prevent or detect misstatements because of their inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. As a result, even effective internal controls are able to provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. Any of the possible failure in maintaining the effective internal control over financial reporting could result in a decline of investor confidence in the reliability of our consolidated financial statements, which could cause the market prices of our securities to fluctuate.

Revenues derived from our voice services may continue to decline, which may adversely affect our results of operations, financial condition and prospects.

Revenues from our voice services continued to decline during the past several years. Our revenues from voice services decreased by 11.1% from RMB50,811 million in 2018 to RMB45,146 million in 2019 and further decreased by 9.5% to RMB40,866 million in 2020. Percentage of revenues derived from our voice services out of our total operating revenues also continued to decrease, from 13.5% in 2018 to 12.0% in 2019 and 10.4% in 2020.

Of revenues from our voice services, revenues from wireline voice services decreased by 6.6% in 2019 compared to 2018 and further decreased by 13.0% in 2020 and the percentage of revenues derived from our wireline voice services out of our total operating revenues also continued to decrease, from 5.2% in 2018 to 4.9% in 2019 and 4.1% in 2020. This is primarily due to the fact that we continued to lose wireline telephone subscribers resulting from the increasing popularity of mobile services and other alternative means of communication, such as Over-the-Top messaging services. The number of our wireline telephone subscribers decreased by 4.8% at the end of 2019 compared to that at the end of 2018 and further decreased by 2.7% at the end of 2020.

Revenues from our mobile voice services decreased by 14.0% in 2019 compared to 2018 and further decreased by 7.1% in 2020 and the percentage of revenues derived from our mobile voice services out of our total operating revenues also continued to decrease, from 8.3% in 2018 to 7.1% in 2019 and 6.3% in 2020. In recent years, while the number of subscribers of our mobile services has continued to grow, due to the increasing popularity of alternative means of communication and the continued decrease in our tariffs for mobile voice services, revenues from our mobile voice services still continued to decrease.

 

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We cannot assure you that we will be successful in slowing down the decline of our revenues generated from voice services. Migration from voice services to other alternative means of communication may further intensify and tariffs for voice services may further decrease in the future, which may affect the financial performance of our voice services and thus adversely affect our results of operations, financial condition and prospects as a whole.

Revenues derived from our wireline broadband services may decline, which may adversely affect our results of operations, financial condition and prospects.

Our revenues from wireline broadband services decreased by 7.9% to RMB68,413 million in 2019. Such revenues increased by 5.1% to RMB71,872 million in 2020. However, due to increasing broadband penetration rates and fierce market competition, tariffs for wireline broadband may further decrease in the future. As such, we cannot assure you that we will be successful in maintaining the growth in our revenues generated from wireline broadband services, which may adversely affect our results of operations, financial condition and prospects.

We may suffer damage to our reputation due to communications fraud carried out on our network.

Communications fraud, in which a person defrauds another by means of telecommunications technologies including SMS, telephone, and Internet, poses a risk to us. If communications fraud is committed over our network, we may incur liability as a result of the inadequacy in our measures to prevent such fraud. On September 23, 2016, six departments including the Supreme People’s Court of the People’s Republic of China (the “Supreme People’s Court”), the Supreme People’s Procuratorate of the People’s Republic of China (the “Supreme People’s Procuratorate”), the Ministry of Public Security of the People’s Republic of China (the “Ministry of Public Security”), the MIIT, the People’s Bank of China and the China Banking Regulatory Commission (now known as China Banking and Insurance Regulatory Commission) jointly released the Announcement on Preventing and Cracking Down on Telecom and Internet Frauds (关于防范和打击电信网络诈骗犯罪的通告), on December 19, 2016, the Supreme People’s Court, the Supreme People’s Procuratorate and the Ministry of Public Security jointly issued the Opinions on Several Issues concerning the Application of Law to the Handling of Criminal Cases Involving Telecom and Internet Frauds (关于办理电信网络诈骗等刑事案件适用法律若干问题的意见), and on October 25, 2019, the Supreme People’s Court and the Supreme People’s Procuratorate released the Interpretation on Several Issues concerning the Application of Law in Handling Criminal Cases Involving Crimes of Illegally Using an Information Network or Providing Aid for Criminal Activities in Relation to Information Network (最高人民法院丶最高人民检察院关于办理非法利用信息网络丶帮助信息网络犯罪活动等刑事案件适用法律若干问题的解释).

We have implemented various measures to prevent and crack down on communications fraud. For example, we have strengthened the real identity registration of telephone users by strengthening the staff’s authentication for the real-name login system, user ID verification, portrait comparison and living body authentication. We have also adopted measures such as standardized caller transmission, abnormal traffic monitoring and interception, phishing website identification, verification of user reporting and shutdown of the numbers involved in communications fraud cases. However, there is no assurance that such measures will prevent communications fraud effectively. Communications fraud as a result of our failure in implementing the real name registration measure may result in claims being brought against us and may damage our reputation and could have an adverse effect on our business and results of operations.

Our authorizations to provide telecommunications services in the United States are subject to actions by the relevant authorities in the United States and we cannot assure you we will be able to maintain those authorizations in the future.

Our wholly owned subsidiary, China Telecom (Americas) Corporation, or CTA, provides international common carrier communications services between the United States and foreign countries pursuant to the authorizations previously issued to it by the United States Federal Communications Commission, or the FCC, under Section 214 of the Communications Act of 1934 and provides domestic interstate common carrier communications services in the United States based on the FCC’s blanket authority (collectively, the “214 Authorizations”). On April 4, 2020, the then President of the United States issued an executive order for the establishment of a committee to review foreign participation in the telecommunications services in the United States. On April 9, 2020, the U.S. Justice Department and other federal agencies recommended the FCC to revoke and terminate CTA’s international section 214 authorizations. On April 24, 2020, the FCC issued a Show Cause Order to CTA directing CTA to file a response demonstrating why the FCC should not initiate proceedings to revoke and terminate its 214 Authorizations. On June 8, 2020, CTA filed its response. On December 10, 2020, the FCC adopted an order (the “FCC Order”) that instituted proceedings to determine whether to revoke and/or terminate our 214 Authorizations.

CTA has appealed the FCC Order in accordance with relevant laws, regulations and regulatory requirements to safeguard its legitimate rights. We are cooperating with the regulators and providing additional details to support our position and address any concerns, and to defend our legitimate rights through legal proceedings. However, we cannot assure you that our 214 Authorizations will not be revoked or terminated. Despite that the revenues from the telecommunications services we provide in the United States in recent years have not been significant to our overall operations and financial results, losing our 214 Authorizations would have an adverse effect on our operations in North America and may also harm our reputation.

 

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Our success depends on the continued services of our senior management team and other qualified employees.

Our continued success and growth depends on our ability to identify, hire, train and retain suitably skilled and qualified employees, including management personnel, with relevant professional skills. The services of our Directors and members of senior management are essential to our success and future growth. As we have to compete for a limited supply of qualified employees, such as managerial, sales, administration, research and development and operating personnel with adequate skills and experience, in China, we may not be able to successfully attract, assimilate or retain all of the personnel we need. We may also need to offer superior compensation and other benefits to attract and retain key personnel and therefore cannot assure you that we will have the resources to fully achieve our staffing need. Due to the intense competition for management and other personnel and qualified employees in the telecommunications industry in mainland China, any failure to recruit and retain the necessary management personnel and other qualified employees could have a material adverse effect on our business and prospects.

We may not be able to effectively detect or prevent misconduct of our executives and other employees, which could adversely harm our reputation and negatively impact our financial conditions and results of operations as well as the trading price of our securities.

We are exposed to the risk of misconduct by executives and other employees and we have experienced incidents of executive misconduct in the past. In May 2017, Mr. Chang Xiaobing, the former Chairman of China Telecom Group was sentenced to six years of imprisonment over corruption charges. Mr. Chang was appointed as the chief executive officer of the Company on September 1, 2015 and the director and chairman of the Company on October 23, 2015. On December 30, 2015, Mr. Chang resigned from his positions as the executive director, chairman and chief executive officer of the Company with effect from the same date. Prior to his resignation, Mr. Chang had worked at the Company for four months. In September 2017, Mr. Zhen Caiji, the former Executive Vice President of the Company was expelled from the Communist Party of China and dismissed from public service for serious disciplinary violations and was under investigation of suspected criminal violations. Mr. Zhen was appointed as an executive vice president of the Company on November 4, 2016 and resigned from the position of executive vice president of the Company on May 22, 2017. Prior to his resignation, Mr. Zhen had worked at the Company for seven months. In response to executive misconducts, we have taken various measures to identify and deter employee misconduct and have adopted a code of conducts and ethics of employees. However, we cannot assure you that these measures will be effective in detecting or preventing all employee misconduct. The publicity of the investigation and/or prosecution against our employees or former employees may harm our reputation and adversely affect our financial condition and results of operations as well as the trading price of our securities.

We enjoy certain preferential tax policies in China; any adverse change of such tax policies in the future may have an adverse effect on our cash flows and results of operations.

According to the Announcement of the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs on Deepening the Value-added Tax Reform Policy (Announcement No. 39 of the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs in 2019), from April 1, 2019 to December 31, 2021, taxpayers in the producer and consumer services sectors, including us, are allowed to deduct tax payable by adding 10% to the current deductible input tax. However, this policy may be cancelled when it expires on December 31, 2021, and in that case we will cease to benefit from this preferential tax treatment.

Applicable preferential tax policies including the above have had a positive effect on our development and business performance. Any adverse change of such tax policies in the future may have an adverse effect on our cash flows and results of operations.

Risks Relating to the Telecommunications Industry in the PRC

The current and future government regulations and policies that extensively govern the telecommunications industry may limit our flexibility in responding to market conditions as well as competition, and may have a material adverse effect on our profitability and results of operation.

Our business is subject to extensive government regulation. The MIIT, which is the primary telecommunications industry regulator under the PRC’s State Council, regulates, among other things:

 

  

industry policies and regulations;

 

  

licensing;

 

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competition;

 

  

telecommunications resource allocation;

 

  

service standards;

 

  

technical standards;

 

  

tariff policies;

 

  

interconnection and settlement arrangements;

 

  

enforcement of industry regulations;

 

  

universal service obligations;

 

  

network information security;

 

  

network access license approval for telecom equipment and terminals; and

 

  

network construction plans.

Other PRC governmental authorities also take part in regulating tariff policies, capital investment and foreign investment in the telecommunications industry. The regulatory framework within which we operate may constrain our ability to implement our business strategies and limit our flexibility to respond to market conditions. For example, the PRC governmental authorities have promulgated various regulations, rules, guidance opinions and other directives regarding network speed upgrade and tariff reduction. On May 20, 2015, the office of the State Council promulgated the Guidance Opinions Regarding Expediting the Development of the High-Speed Broadband Network and Promoting the Speed Upgrade and Tariff Reduction, calling for the telecommunications operators to reduce the data tariffs. As a result, we carried out a series of measures, including launching the upgrade service in October 2015 which allowed handset data subscribers who subscribe to our monthly data packages to rollover the unused data remaining in the monthly packages to the next month. In addition, we ceased to charge handset subscribers domestic long distance and roaming fees on and from September 1, 2017. Meanwhile, we have significantly reduced the fees of international long distance calls since May 1, 2017 and also have reduced the tariff of Internet dedicated line access for small and medium enterprises.

On March 5, 2018, the Government Work Report presented in the first plenary session of the 13th National People’s Congress of the PRC included certain policy requirements regarding network speed upgrade and tariff reduction, including requirements to: (i) increase efforts in implementing network speed upgrade and tariff reduction measures; (ii) achieve full coverage of high-speed broadband in cities and rural areas; (iii) expand the coverage of free WiFi Internet access in public areas; (iv) substantially reduce the tariffs of household broadband, corporate broadband and dedicated leased line; (v) cancel data roaming fee; and (vi) reduce mobile data tariff by at least 30% in 2018. In 2018, we implemented corresponding measures in due course to meet such policy requirements, including: (i) starting July 1, 2018, we cancelled data roaming fee within mainland China; (ii) we launched “large data traffic packages” to reduce the unit price of data traffic products; (iii) we further reduced the tariff for international roaming charges in various countries and regions; (iv) we carried out broadband upgrade by promoting Hundred-Mbps broadband; and (v) we reduced the tariff of Internet dedicated line access and commercial dedicated line access for small and medium enterprises.

On March 5, 2019, the Government Work Report presented in the second plenary session of the 13th National People’s Congress of the PRC included policy requirements regarding further promotion of network speed upgrade and tariff reduction. Such requirements include a 15% further reduction in the average broadband tariff for small and medium enterprises and a more than 20% reduction in the average tariff of mobile network in 2019. In 2019, we implemented corresponding measures in due course to meet such policy requirements, including: (i) starting January 1, 2019, we reduced out-of-package data tariff; (ii) we enhanced the promotion of large data traffic packages, enabling more subscribers to enjoy data traffic with lower unit tariff; (iii) we launched discounted traffic packages to serve the needs for specific subscribers; and (iv) starting May 1, 2019, we further reduced the tariff of Internet dedicated line access, and carried out free speed upgrade programs for qualified small and medium enterprise subscribers.

On May 22, 2020, the Government Work Report presented in the third plenary session of the 13th National People’s Congress of the PRC further required a 15% reduction in the average tariff of broadband and dedicated line. In 2020, we likewise implemented corresponding measures in due course to meet such policy requirements, including (i) carrying out optical fiber transformation and tariff discounts for our broadband subscribers that are small and medium enterprises, manufacturing enterprises and dedicated line subscribers, and (ii) implementing free speed upgrade for our qualified subscribers.

 

 

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On March 5, 2021, the Government Work Report presented in the fourth plenary session of the 13th National People’s Congress of the PRC further required a 10% reduction in the average tariff of broadband and dedicated line for small and medium enterprises. In 2021, we will take corresponding measures to meet such policy requirements, including: (i) carrying out speed upgrade and favorable initiatives for small and medium enterprises subscribers of broadband and dedicated line access to launch speed upgrades, integration upgrades and service upgrades, and upgrading speed free of charge for qualified small and medium enterprises subscribers of broadband and dedicated line access; (ii) providing cloud product discount packages for small and medium enterprises subscribers; (iii) increasing policy awareness for small and medium enterprises subscribers, especially in areas where they are concentrated, such as buildings and parks.

Though we strive to sustain our competitive advantages through various initiatives, our revenues and profitability may be affected by these requirements on network speed upgrade and tariff reduction. We may also have to devote substantial resources, incur significant expenses and make strategic adjustment of business and operation strategies in order to meet these requirements and maintain our competitive advantages. Failure to effectively respond to such evolving standards in a timely and cost-efficient manner may materially and adversely affect our business, financial condition and results of operations. In addition, we may face further policy requirements imposed by the PRC government on network speed upgrade and tariff reduction in the future. Any such requirements could materially and adversely affect our revenues, profitability and results of operations.

In China, the regulatory framework governing the collection, processing, storage and use of business information and personal data is rapidly evolving. For example, the Cyber Security Law of the People’s Republic of China (“Cyber Security Law”) came into force on June 1, 2017, which sets forth the general framework regulating network products, equipment and services, as well as the operation and maintenance of information networks, the protection of personal data, and the supervision and administration of cyber security in China. On October 1, 2020, the revised Information Security Technology—Personal Information Security Specification (信息安全技术个人信息安全规范) which superseded the previous specification published in 2018 was formally implemented, adding provisions with respect to “autonomous selection of multiple business functions”, “convergence and integration of personal information collected for different business purposes”, “usage restrictions of user portraits”, “third-party access management”, “personal information security project”, and “personal information processing activity records”, etc. It also revised “exceptions for authorization and consent”, “personal information subject cancellation accounts”, etc., which provides more privacy protection with respect to the collection, utilization and retention of personal information. If we are unable to respond to changing laws, regulations, policies and guidelines related to privacy or cyber security, our business, financial condition, results of operations and prospects may be materially and adversely affected.

Moreover, on December 1, 2016, the amended PRC Regulations on the Management of Radio Operation (中华人民共和国无线电管理条例) came into effect. The amended provision provided that a permit is required for using certain radio frequencies, which may be obtained through a bidding process or auctions. As such, we may incur additional costs in the future when we need to obtain the permit to use certain radio frequencies. In addition, the PRC government has taken various initiatives and promulgated a number of regulations to encourage private capital to invest in the telecommunications industry, all of which have intensified, and are expected to continue to intensify, the competition in the telecommunications industry in the PRC. See “—Risks Relating to our Business—We face increasing competition, which may materially and adversely affect our business, financial condition and results of operations” under this Item.

Furthermore, PRC telecommunications services providers operating in other jurisdictions are also subject to the licensing and other regulatory requirements and supervision of the relevant foreign government agencies. See “—Risks Relating to our Business—Our authorizations to provide telecommunications services in the United States are subject to actions by the relevant authorities in the United States and we cannot assure you we will be able to maintain those authorizations in the future” under this Item.

The regulations and policies that govern the telecommunications industry in the PRC have experienced continuous changes in the past several years. Any significant future changes in regulations or policies that govern the telecommunications industry may have a material adverse effect on our business and operations.

The PRC government may require us, along with other providers in the PRC, 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 the PRC are required to fulfill universal service obligations in accordance with relevant regulations to be promulgated by the PRC government. The MIIT has the authority to delineate the scope of universal service obligations. The MIIT, together with other governmental authorities, is also responsible for formulating administrative rules relating to the establishment of a universal service fund and compensation schemes for universal services. The PRC government currently uses financial resources to compensate for the expenses incurred in the universal services related projects before the establishment of a universal service fund. See “Item 4. Information on the Company—B. Business Overview—Regulatory and Related Matters—Universal Services”. However, the compensation from the PRC government may not be sufficient to cover all of our expenses for providing the telecommunications universal services.

 

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Under the Telecommunications Regulations, all PRC telecommunications operators shall provide universal services, and we expect to perform our duties thereunder accordingly. We may not be able to realize adequate return on investments for expanding networks to, and providing telecommunications services in, those economically less developed areas due to potentially higher capital expenditure requirements, lower usage by customers and lack of flexibility in setting our tariffs. If we are required to provide universal services with specified obligations without proper compensation by the government, our business and profitability may be adversely affected.

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. While we comply with applicable standards for radio frequency emissions and 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, significantly reduce mobile service and wireless communications usage or result in litigation.

Risks Relating to the People’s Republic of China

Substantially all of our assets are located in the PRC and substantially all of our revenues are derived from our operations in the PRC. Accordingly, our results of operations and prospects are subject, to a significant extent, to the economic, political and legal developments in the PRC.

The PRC’s economic, political and social conditions, as well as government policies, could affect our business.

Substantially all of our business, assets and operations are located in the PRC. The PRC’s economy differs from the economies of most developed countries in many respects, including without limitation:

 

  

government involvement;

 

  

level of development;

 

  

growth rate;

 

  

control of foreign exchange; and

 

  

allocation of resources.

While the PRC’s economy has experienced significant growth in the past 40 years, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall economy of the PRC, but may also have a negative effect on us.

Economic developments in the PRC have a significant effect on our financial condition and results of operations. Although the PRC has been one of the world’s fastest growing economies in terms of GDP growth in the past 40 years, the economic growth of the PRC has experienced a marked slowdown in the past few years and may continue to slow down. For example, the GDP growth rate of the PRC decreased from 10.6% in 2010 to 2.3% in 2020. Although the PRC’s GDP growth rate still outpaced other major economies in 2020, there is no assurance that the PRC’s economy will continue to outperform other countries.

In addition, the COVID-19 pandemic and its impact might continue to cause a decline of global economy and an evident slowdown in the economic development in many countries and China might not be able to avoid being affected by such development. As the PRC is increasingly connected with the rest of the world, any slowdown or decline of global economy might adversely impact the PRC economy in various respects, including reduction in exports, decreased consumer spending, higher unemployment levels, declined business confidence and continued volatility in financial markets. Any significant slowdown or decline in the PRC economy might have a material adverse impact on the PRC telecommunications industry as well as our business and operations, including decreased demand for, or delayed purchase of, our services and products, especially with regard to non-essential items, such as value-added or premium services.

 

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We are subject to reviews and inspections by governmental authorities and regulatory agencies.

Certain Chinese regulatory authorities may conduct compliance checks on us in accordance with relevant laws and regulations. These reviews and inspections could cover a broad range of aspects in relation to our business and operations. We cannot predict the impact of any findings of these reviews and inspections, and we cannot assure you that the outcome of any such reviews and inspections would not have a material adverse effect on our business, financial condition, results of operations and prospects.

Government restriction on currency conversion may adversely affect our financial condition.

We receive substantially all of our revenues in Renminbi, which currently is not a freely convertible currency. A portion of these revenues must be converted into other currencies to meet our foreign currency obligations. These foreign currency-denominated obligations include:

 

  

payment of interest and principal on foreign currency-denominated debt;

 

  

payment for equipment and materials purchased offshore; and

 

  

payment of dividends declared, if any, in respect of our H shares.

Under the PRC’s existing foreign exchange regulations, we will be able to pay dividends in foreign currencies without prior approval from the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, the PRC government may take measures at its discretion in the future to restrict access to foreign currencies for both current account transactions and capital account transactions. We may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs, if the PRC government restricts access to foreign currencies for current account transactions.

Foreign exchange transactions under our capital account, including but not limited to foreign currency-denominated borrowings from foreign banks, issuance of foreign currency-denominated debt securities, if any, and principal payments in respect of foreign currency-denominated obligations, continue to be subject to significant foreign exchange controls and require the approval of or registration with SAFE or certain banks designated by SAFE, as applicable. These limitations could affect our ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange to meet our payment obligations under the debt securities, if any, or to obtain foreign exchange for capital expenditures.

Fluctuation of the Renminbi could materially affect our financial condition, results of operations and cash flows.

We receive substantially all of our revenues, and our financial statements are presented, in Renminbi. The value of the Renminbi against U.S. dollar and other currencies fluctuates and is affected by, among other things, the policies of the PRC government and changes in the PRC’s and international political and economic conditions, as well as supply and demand in the local market. For example, the COVID-19 pandemic has led to disruption and volatility in the global financial markets, which has increased uncertainties in the foreign exchange markets and also fluctuations in the value of the Renminbi. On July 21, 2005, the People’s Bank of China 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. In April 2012, the People’s Bank of China expanded the daily floating band of Renminbi trading prices against the U.S. dollar in the inter-bank spot foreign currency exchange market from 0.5% to 1.0%, which was further expanded to 2.0% in March 2014. On August 11, 2015, the People’s Bank of China announced that the mid-point exchange rate for the floating range of Renminbi against the U.S. dollar will be determined based on market maker submissions that take into account the Renminbi-U.S. dollar exchange rate at the previous day’s closing of the inter-bank spot foreign exchange market, the supply and demand dynamics and the movements of other major currencies. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, we cannot assure you that the People’s Bank of China will not announce further changes to the exchange rate system and there is no guarantee that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. There is uncertainty in the exchange rate of the Renminbi against the U.S. dollar in the future.

Fluctuations in exchange rates may adversely affect the value, translated or converted into U.S. dollars or Hong Kong dollars, of our net assets, earnings and any declared dividends payable on our H shares in foreign currency terms. Our financial condition and results of operations may also be affected by changes in the value of certain currencies other than the Renminbi, in which our obligations are denominated. For further information on our foreign exchange risks and certain exchange rates, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Foreign Exchange Rate Risk”. We cannot assure you that any future movements in the exchange rate of the Renminbi against the U.S. dollar or other foreign currencies will not adversely affect our results of operations and financial condition. We do not currently engage in any foreign currency hedging activities.

 

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The PRC legal system has inherent uncertainties that could limit the legal protections available to you.

We were incorporated under the PRC Company Law and are governed by our Articles of Association. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. With the continuous development of the Chinese economy, the PRC government has promulgated laws and regulations dealing with economic matters, such as issuance and trading of securities, foreign investment, corporate organization and governance, commerce, taxation and trade, with the aim of forming a comprehensive business legal system. However, because many related laws and regulations are relatively new, and because of the rapid development in the PRC telecommunications industry, the impact of these laws and regulations on the rights and obligations of relevant persons involves uncertainties.

The ability of our shareholders to enforce their rights in respect of violations of corporate governance procedures may be limited. In this regard, our Articles of Association provide that most disputes between holders of H shares and our Company, Directors, Supervisors, officers or holders of domestic shares, arising out of our Articles of Association or the PRC Company Law and related regulations concerning the affairs of our Company, are to be resolved through arbitration by an arbitration tribunal in Hong Kong or the PRC, rather than by a court of law. Awards that are made by PRC arbitral authorities recognized under the Arbitration Ordinance of Hong Kong can be enforced in Hong Kong. Hong Kong arbitration awards are also enforceable in the PRC. However, to our knowledge, no action has been brought in the PRC by any holder of H shares to enforce an arbitral award, and we are uncertain as to the outcome of any action, if brought in the PRC to enforce an arbitral award made in favor of holders of H shares. See “Item 10. Additional Information—B. Memorandum and Articles of Association”.

To our knowledge, there has not been any published report of judicial enforcement in the PRC by holders of H shares of their rights under the Articles of Association of a PRC company or the PRC Company Law.

Unlike in the United States, the applicable PRC laws did not specifically allow shareholders to sue the directors, supervisors, senior management or other shareholders on behalf of the corporation to enforce a claim against such party or parties that the corporation has failed to enforce itself until January 1, 2006, when the amendments to the PRC Company Law passed on October 27, 2005 became effective. The amended PRC Company Law provides that shareholders, under certain circumstances, may sue the directors, supervisors and senior management on behalf of the corporation. Furthermore, the Supreme People’s Court issued judicial interpretations on the aforementioned provisions in the PRC Company Law, i.e., Provisions of the Supreme People’s Court on Issues Concerning the Application of the PRC Company Law (I) and (IV) (最高人民法院关于适用《中华人民共和国公司法》若干问题的规定(一)和(四)) in April 2006 and August 2017, respectively. However, our minority shareholders may not be able to enjoy protections to the same extent as to shareholders of companies incorporated under the state laws of the United States.

Although we are subject to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and the Hong Kong Code on Takeovers and Mergers and Share Buy-backs (the “Takeovers Code”), the holders of H shares are not able to bring actions solely on the basis of violations of the Listing Rules or the Takeovers Codes, and must rely on The Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange” or “HKSE”) and the Securities and Futures Commission of Hong Kong to enforce the Listing Rules or the Takeovers Codes, as the case may be.

You may experience difficulties in effecting service of legal process and enforcing judgments against us and our management, and the ability of U.S. authorities to bring action in China may also be limited.

We are a company incorporated under the PRC Company Law, and substantially all of our assets and our subsidiaries are located in the PRC. In addition, most of our Directors and officers reside within the PRC, and substantially all of the assets of our Directors and officers are located within the PRC. As a result, it may not be possible to effect service of process within the United States or elsewhere outside the PRC upon most of our Directors or officers, including with respect to matters arising under applicable laws and regulations. Moreover, our PRC counsel has advised us that the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States, the United Kingdom or most other Western countries. 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, you may not have the ability to seek certain legal remedies in U.S. courts as private plaintiffs. Even if you sue successfully in a U.S. court or any of the other jurisdictions mentioned above, you may not be able to collect on such judgment against the Company or our Directors and officers. You may have to rely on domestic legal remedies that are available in the PRC. Recognition and enforcement in the PRC of judgments of a court in the United States and any of the other jurisdictions mentioned above in relation to any matter not subject to a binding arbitration provision may be difficult or impossible. In addition, according to Article 177 of the amended PRC Securities Law, which became effective in March 2020, no overseas securities regulator can directly conduct investigations or evidence collection activities within the PRC and no entity or individual in China may provide documents and information relating to securities business activities to overseas regulators without Chinese government approval. Therefore, the SEC, the U.S. Department of Justice and other U.S. authorities may have difficulties in conducting investigations, or bringing and enforcing actions against us or our Directors and officers in China.

 

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Holders of H shares may be subject to PRC taxation.

Under the Enterprise Income Tax Law of the PRC, or the EIT Law, and its implementing regulations, holders of our H shares or ADSs which are “non-resident enterprises” for the EIT Law’s purpose are subject to enterprise income tax at the rate of 10.0% with respect to dividends paid by us and income derived from sale of our H shares or ADSs, unless reduced under an applicable tax treaty. In addition, a resident enterprise, including a foreign enterprise whose “de facto management body” is located in the PRC, is not subject to any PRC income tax with respect to dividends paid to it by us. The capital gains realized by such resident enterprise are subject to the PRC enterprise income tax. Specifically, according to the Notice of the PRC State Administration of Taxation Concerning the Withholding Enterprise Income Tax on Dividend Distributed by PRC Resident Enterprises to Overseas Non-Resident Enterprise Holders of H shares issued in November 2008 and the Approval of the PRC State Administration of Taxation Concerning the Collection of Enterprise Income Tax on Dividend from B-shares Received by Non-Resident Enterprise issued in July 2009, when PRC resident enterprises distribute dividend to overseas non-resident enterprise holders of H shares for the year 2008 and the years thereafter, the 10.0% enterprise income tax will be withheld. The Company will withhold the 10.0% enterprise income tax when it pays dividends to holders of H shares or ADSs who are non-resident enterprises. See “Item 10. Additional Information—E. Taxation—People’s Republic of China”.

Furthermore, dividends paid by us to holders of our H shares or ADSs who are individuals outside the PRC are subject to a withholding tax of 20.0% unless reduced by an applicable tax treaty. For example, Hong Kong and Macau individual residents are subject to a withholding tax of 10.0% on dividends paid to them. In addition, gains realized by individuals upon the sale or other disposition of our H shares or ADSs are temporarily exempted from PRC capital gains tax. If the exemptions are withdrawn in the future, holders of our H shares or ADSs who are individuals may be required to pay PRC capital gains tax upon the sale or other disposition of our H shares. See “Item 10. Additional Information—E. Taxation—People’s Republic of China”.

Natural disasters and health hazards in the PRC may severely disrupt our business and operations and may have a material adverse effect on our financial condition and results of operations.

Several natural disasters and health hazards have struck mainland China in recent years. See “—Risks Relating to Our Business—Our business may be materially and adversely affected by the COVID-19 pandemic or future health epidemics, pandemics or outbreaks” under this Item. In 2020, certain areas of mainland China suffered from natural disasters, including floods in Yangtze River and Huai River basins affecting large areas, super typhoon “Hagupit” sweeping across many provinces and cities in south China, multiple landslides in Longnan of Gansu Province and Wuxi of Chongqing Municipality, which resulted in significant damage to the telecommunications equipment in the affected areas. We have suffered damage from similar nature disasters in the past years. We are unable to predict the effect, if any, that any 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, such natural disasters and health hazards may severely restrict the level of economic activity in affected areas, which may in turn materially and adversely affect our business and prospects. As a result, any severe natural disasters or health hazards may have a material adverse effect on our financial condition and results of operations.

The audit reports included in this annual report have been prepared by our independent registered public accounting firm whose work may not be inspected fully by the Public Company Accounting Oversight Board and, as such, you may be deprived of the benefits of such inspection. In addition, legislative and regulatory developments related to U.S.-listed China-based companies due to lack of PCAOB inspection and other developments may have a material adverse impact on our listing and trading in the U.S.

Our independent registered public accounting firm, or our auditor, that issues the audit reports included in our annual reports filed with the U.S. Securities and Exchange Commission, as a firm registered with the Public Company Accounting Oversight Board (United States), or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards.

Because we have substantial operations within the PRC and the PCAOB is currently unable to conduct inspections of the work of our auditor as it relates to those operations without the approval of the Chinese authorities, our auditor is not currently inspected fully by the PCAOB. This lack of PCAOB inspections in the PRC prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

 

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On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. On November 4, 2019, the SEC announced that SEC and PCAOB had dialog with the “Big Four” accounting firms, which emphasized the need for effective and consistent global firm oversight of member firms, including those operating in China. On February 19, 2020, the SEC and the PCAOB further issued a joint statement on continued dialog with “Big Four” accounting firms on audit quality in China, highlighting that PCAOB continues to be prevented from inspecting the audit work and practices of PCAOB-registered audit firms in China on a comparable basis to other non-U.S. jurisdictions. On April 21, 2020, the SEC and the PCAOB issued another joint statement reiterating the greater risks of insufficient disclosures from companies in many emerging markets, including China, compared to those from U.S. domestic companies. In discussing the specific issues related to these risks, the statement again highlighted the PCAOB’s inability to inspect audit work and practices of accounting firms in China with respect to U.S. reporting companies. The inability of the PCAOB to conduct full inspections of auditors in the PRC makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside the PRC that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular PRC laws, on June 4, 2020, the then U.S. President issued a memorandum ordering the President’s Working Group on Financial Markets, or the PWG, to submit a report to the President within 60 days of the memorandum that includes recommendations for actions that can be taken by the executive branch and by the SEC or the PCAOB on Chinese companies listed on U.S. stock exchanges and their audit firms. On August 6, 2020, the PWG released the report. In particular, with respect to non-compliant jurisdictions that do not grant the PCAOB sufficient access to fulfill its statutory mandate, or NCJs, the PWG recommended that enhanced listing standards be applied to companies from NCJs for seeking initial listing and remaining listed on U.S. stock exchanges. Under the enhanced listing standards, if the PCAOB does not have access to work papers of the principal audit firm located in a NCJ for the audit of a U.S.-listed company as a result of governmental restrictions, the U.S.-listed company may satisfy this standard by providing a co-audit from an audit firm with comparable resources and experience where the PCAOB determines that it has sufficient access to the firm’s audit work papers and practices to inspect the co-audit. The report recommended a transition period until January 1, 2022 before the new listing standards apply to companies already listed on U.S. stock exchanges. On August 10, 2020, the SEC announced that the SEC chairman had directed the SEC staff to prepare proposals in response to the PWG report, and that the SEC was soliciting public comment and information with respect to the development of these proposals. Furthermore, the Division of Corporation Finance of the SEC issued staff guidance on Disclosure Considerations for China-Based Issuers on November 23, 2020. Any resulting actions, proceedings or new rules from these recommendations could adversely affect the listing and compliance status of China-based issuers listed in the United States, including us, and may have a material and adverse impact on the trading of the securities of such issuers, including our ADSs.

Furthermore, on December 18, 2020, the United States enacted the Holding Foreign Companies Accountable Act, or the HFCA Act. The HFCA Act includes requirements for the SEC to identify issuers whose audit reports are prepared by auditors that the PCAOB is unable to inspect or investigate completely because of a restriction imposed by a non-U.S. authority in the auditor’s local jurisdiction. The HFCA Act also requires public companies on this SEC list to certify that they are not owned or controlled by a foreign government (the “Submission Requirement”) and make certain additional disclosure in their SEC filings (the “Disclosure Requirement”). In addition, if the auditor of a U.S.-listed company is not subject to PCAOB inspections for three consecutive “non-inspection” years after December 18, 2020, the SEC is required to prohibit the securities of these issuers from being traded on a U.S. national securities exchange, such as the NYSE, on OTC markets in the U.S. or through any other method within the SEC’s jurisdiction to regulate. The HFCA Act requires the SEC to issue new rules within 90 days of the enactment to implement the HFCA Act. On December 18, 2020, the SEC then-Chairman stated that prior to enactment of the HFCA Act, the SEC staff were finalizing recommendations for proposed rules regarding enhanced listing standards for U.S. securities exchanges and auditor qualifications for the SEC’s consideration and directed the SEC staff to consider providing a single consolidated proposal for the SEC’s consideration on issues related to the PCAOB’s access to audit work papers, exchange listing standards and trading prohibitions due to the substantial overlap between the SEC staff’s proposal in response to the PWG Report’s recommendations and the HFCA Act. On March 24, 2021, the SEC issued the Interim Final Rule on HFCA Act Disclosure dated March 18, 2021 and requested for comments until May 5, 2021 when the Interim Final Rule would become effective. The Interim Final Rule would add Item 16I (Disclosure Regarding Foreign Jurisdictions that Prevent Inspections) in Form 20-F to reflect the Disclosure Requirement, which requires disclosure in a foreign issuer’s annual report regarding the audit arrangements of, and governmental influence on, such foreign issuer. The Interim Final Rule clarified that a foreign issuer that is owned or controlled by a foreign governmental entity is not required to comply with the Submission Requirement. In addition, a foreign issuer will not be required to comply with Item 16I in Form 20-F until the SEC has identified it as having a non-inspection year under a process to be subsequently established by the SEC with appropriate notice. Once identified, a foreign issuer will be required to comply with Item 16I in Form 20-F in its annual report for each fiscal year in which it is identified. The SEC plans to separately address implementation of the trading prohibitions in the HFCA Act in a future notice and comment process. While we understand that there has been dialogue among the CSRC, the SEC and the PCAOB regarding the inspection of PCAOB-registered accounting firms in China, there can be no assurance that our auditor or we will be able to comply with requirements imposed by U.S. regulators.

 

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As of the date of this annual report, we have not been identified by the SEC as having a non-inspection year. However, we cannot assure you that we will not be identified as such in the future. In addition, as a result of the enactment of the HFCA Act, trading of our ADSs in the United States may be effectively terminated if our auditor is not inspected by the PCAOB for three consecutive years. This could also result in our ADSs being delisted from the NYSE. Subject to the terms of the deposit agreement entered into among the Company, the Bank of New York Mellon, and holders and beneficial owners of ADSs from time to time, holders of our ADSs may convert the ADSs into our H shares listed on the Hong Kong Stock Exchange but will incur costs in order to do so. See “Item 12. Description of Securities Other than Equity Securities” for further information. The value and liquidity of our ADSs may therefore be materially and adversely affected.

If the settlement reached between the SEC and the Big Four PRC-based accounting firms (including the Chinese affiliate of our independent registered public accounting firm), concerning the manner in which the SEC may seek access to audit working papers from audits in China of U.S.-listed companies, is not or cannot be carried out in a manner acceptable to authorities in China and the U.S., we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the mainland Chinese affiliates of the “Big Four” accounting firms (including the mainland Chinese affiliate of our independent registered public accounting firm). A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the Chinese accounting firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the Chinese accounting firms reached a settlement with the SEC whereby the proceedings were stayed. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The Chinese accounting firms will receive requests matching those under Section 106 of the Sarbanes-Oxley Act of 2002, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the Chinese accounting firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the recently-stayed proceeding against all four firms. The SEC also reserves the right to resume those proceedings in circumstances where, notwithstanding the accounting firms’ compliance with the procedures in the settlement agreement, the SEC does not receive a production of documents which it considers satisfactory (for example because of action or inaction by the Chinese authorities). Under the terms of the settlement, the underlying proceeding against the four PRC-based accounting firms was deemed dismissed with prejudice at the end of four years starting from the settlement date, which was February 6, 2019. We cannot predict if the SEC will further challenge the four PRC-based accounting firms’ compliance with U.S. law in connection with U.S. regulatory requests for audit work papers or if the results of such a challenge would result in the SEC imposing penalties such as suspensions. If additional challenges are imposed on the Chinese affiliates of the “Big Four” accounting firms, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act. In addition, if the Chinese affiliate of our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. These could lead to possible delisting of our ADSs from the NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States, and adversely affect the value and liquidity of our ADSs in the United States. Moreover, any negative news about any such future proceedings against these accounting firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our securities may be adversely affected.

Risks Relating to Our ADSs

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.

Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities laws and regulations in the United States that are applicable to U.S. domestic issuers, including:

 

  

the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;

 

  

the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act;

 

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the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time;

 

  

the selective disclosure rules by issuers of material nonpublic information under Regulation FD; and

 

  

certain audit committee independence requirements in Rule 10A-3 of the Exchange Act.

We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, our announcements relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

 

Item 4.

Information on the Company.

A. History and Development of the Company

Our Restructuring and Initial Public Offering in 2002

We were incorporated under the PRC Company Law on September 10, 2002 as a joint stock company with limited liability under the name “China Telecom Corporation Limited”. As part of our initial restructuring, China Telecom Group’s telecommunications operations in Shanghai Municipality, Guangdong Province, Jiangsu Province and Zhejiang Province, together with the related assets and liabilities, were transferred to us in consideration of 68,317,270,803 of our shares.

Following our restructuring, China Telecom Group continues to be the holder of the licenses required for operating our telecommunications business. In accordance with the approval of the MIIT, we derive our exclusive rights to operate basic telecommunications business and the rights to operate related value-added telecommunications business from our status as a subsidiary controlled by China Telecom Group, and China Telecom Group must hold and maintain all licenses received from the MIIT in connection with our business for our benefits. The government currently does not charge license fees for the telecommunications licenses held by China Telecom Group.

In 2002, we successfully completed our initial public offering of H shares and raised approximately RMB10,659 million in aggregate net proceeds for us. Upon completion of our initial public offering, our H shares have been listed for trading on the Hong Kong Stock Exchange, and ADSs representing our H shares have been listed for trading on the NYSE.

Establishment of the Tower Company and the Disposal and Lease of the Telecommunications Towers

On July 11, 2014, the Company, CUCL and CMCL entered into a Promoters’ Agreement for China Communications Facilities Services Corporation Limited to jointly establish the Tower Company. The registered capital of the Tower Company was RMB10 billion. The Company, CUCL and CMCL subscribed for 2.99 billion shares, 3.01 billion shares and 4.00 billion shares, respectively, of the Tower Company in cash at a par value of RMB1.00 per share, representing a shareholding percentage of 29.9%, 30.1% and 40.0%, respectively. The Tower Company was registered on July 15, 2014 and was renamed as China Tower Corporation Limited on September 2, 2014. We had paid in our subscription of the registered capital of the Tower Company by December 31, 2014.

On October 14, 2015, the Company entered into a transfer agreement with (i) CMCL and related subsidiaries (together, “Mobile”), (ii) CUCL and Unicom New Horizon Telecommunications Company Limited (“New Horizon”, together with CUCL, “Unicom”), (iii) China Reform Holding Company Limited (“CRHC”) and (iv) the Tower Company (the “Transfer Agreement”). Pursuant to the Transfer Agreement, the Company agreed to sell certain telecommunications towers and related assets in an aggregate amount of RMB30,131 million and inject cash in the amount of RMB2,966 million to the Tower Company in exchange for 33,097 million new shares, with a par value of RMB1.00 per share, issued by the Tower Company. The cash injected by the Company into the Tower Company under the Transfer Agreement was funded by the Company using its internal cash resources. All conditions precedent to the completion of the transactions contemplated under this agreement were fulfilled and completion of the transactions contemplated under this agreement occurred on October 31, 2015. As a result, the Company, Mobile, Unicom and CRHC own 27.9%, 38.0%, 28.1% and 6.0%, respectively, of the share capital of the Tower Company. On January 29, 2016, the Company and the Tower Company entered into a Share Subscription Agreement to acknowledge the number and price of the shares issued by the Tower Company to the Company.

The Company realized a gain (subject to deduction of relevant expenses and taxes) from the tower assets disposal described above, which was calculated based on the surplus of the final consideration for the tower assets disposal over the book value of such assets as of the completion date. The total gain from the tower assets disposal was RMB7,231 million. As the Company holds 27.9% of the share capital of Tower Company following the completion of such tower assets disposal, 72.1% of the aforesaid gain has been recognized at the completion date of such tower assets disposal in the Company’s consolidated statement of comprehensive income for 2015 and the remaining 27.9% of the aforesaid gain is deferred over the remaining useful life of the tower assets. Upon completion of the disposal of tower assets by the Company to the Tower Company, the Company and Tower Company entered into the Lease Agreement on July 8, 2016 that sets forth the pricing and related arrangements in relation to the lease of telecommunications towers and related assets (including both acquired towers and new towers). On February 1, 2018, the Company and Tower Company entered into a supplemental agreement on the basis of the original Lease Agreement mainly to adjust the relevant pricing arrangement of tower products under the Lease Agreement and such adjustment was effective from January 1, 2018 and expiring on December 31, 2022.

 

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In August 2018, the Tower Company completed its H shares global offering and was listed on the Main Board of The Stock Exchange of Hong Kong Limited. As a result, our equity interest in the Tower Company is diluted from 27.9% to 20.5%.

The Tower Company is primarily engaged in the construction, maintenance and operation of telecommunications towers as well as ancillary facilities. The Tower Company will have a significant effect on the growth of our mobile business and our results of operations, please see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Our operations and further development of our mobile business is dependent on the Tower Company”. We have leveraged the rich towers resources of the Tower Company to promptly and effectively expand our 4G network coverage and density, and improve our network competitive strength; in the long term, we would benefit from the operations of the Tower Company in the following aspects: (i) we would enhance our long-term profitability by leveraging on the existing tower assets as well as the cooperation made possible by the Tower Company; and (ii) as one of the major shareholders of the Tower Company, we would benefit from its future earnings and value enhancement.

Disposal of Chengdu E-store Technology Co., Ltd. and Establishment of Tianyi Capital Holding Co., Ltd.

On September 25, 2017, the Company entered into a disposal agreement with Besttone Holding Co., Ltd., or Besttone Holding, a subsidiary of China Telecom Group, pursuant to which the Company agreed to sell to Besttone Holding the 100% equity interest in Chengdu E-store Technology Co., Ltd., or E-store for an initial consideration of RMB249 million, which was concluded based on the valuation of the equity interest in E-store as of March 31, 2017. In addition, an adjustment was made to the initial consideration to arrive at the final consideration based on the change in the book value of the net assets of E-store during the period from March 31, 2017 to the completion date of the disposal. The control of the equity interest in E-store was transferred to Besttone Holding on October 31, 2017. The final consideration was arrived at RMB251 million, among which the initial consideration amounting to RMB249 million was received by us on November 16, 2017.

On November 30, 2017, we set up a wholly-owned subsidiary, Tianyi Capital Holding Co., Ltd., or Tianyi Capital, which engages in capital investment activities and provision of consulting services. The registered capital of Tianyi Capital is RMB5,000 million.

Establishment of China Telecom Leasing Corporation Limited

On November 30, 2018, we and China Telecom Global Limited jointly established China Telecom Leasing Corporation Limited, which engages in telecommunications equipment procurement, financial leasing and related fund raising operations. The registered capital of China Telecom Leasing Corporation Limited is RMB5,000 million with 75% and 25% equity interest held by us and China Telecom Global Limited, respectively.

Establishment of China Telecom Group Finance Co., Ltd.

On June 22, 2018, we, China Telecommunications Corporation and China Communications Services Corporation Limited (“CCS”, a subsidiary of China Telecommunications Corporation) entered into a capital contribution agreement to jointly establish China Telecom Group Finance Co., Ltd., or China Telecom Finance. China Telecom Finance, a non-banking financial institution legally established with the approval of China Banking and Insurance Regulatory Commission, is a limited liability company incorporated in the PRC on January 8, 2019 with the purpose of providing capital and financial management services to the member units of China Telecommunications Corporation. Pursuant to the capital contribution agreement, the registered capital of China Telecom Finance is RMB5,000 million. The Company, China Telecommunications Corporation and CCS respectively contributed RMB3,500 million, RMB750 million and RMB750 million, which respectively represent 70%, 15% and 15% of the total registered capital of China Telecom Finance. Upon its establishment, China Telecom Finance became a non-wholly owned subsidiary of the Company.

On February 1, 2019, China Telecom Finance entered into financial services framework agreements with the Company, China Telecommunications Corporation and CCS, respectively, pursuant to such agreements China Telecom Finance agreed to provide financial services, including deposit services, loan services and other financial services to the Company and its subsidiaries, China Telecommunications Corporation, its associates and its commonly held entity held with the Company and/or its subsidiaries (not including the Company, CCS and their subsidiaries themselves), and CCS and its subsidiaries.

 

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Establishment of E-surfing Smart Home Technology Co., Ltd.

On February 1, 2019, we set up a wholly–owned subsidiary, E-surfing Smart Home Technology Co., Ltd., or Smart Home Company, which engages in e-Surfing HD, smart home, home gateway and Smart Home Networking services targeting the Smart Family Ecosphere. The registered capital of Smart Home Company is RMB1,000 million.

Establishment of E-surfing Internet of Things Technology Co., Ltd.

On February 2, 2019, we set up a wholly–owned subsidiary, E-surfing Internet of Things Technology Co., Ltd., or IoT Company, which engages in the Internet of Things (“IoT”) and Internet of Vehicles services targeting IoT Ecosphere. The registered capital of IoT Company is RMB1,000 million.

Delisting Proceedings of our ADSs

On January 6, 2021, the NYSE, following the reversal of a similar decision announced on December 31, 2020, announced that it had determined to commence delisting proceedings of our ADSs to comply with Executive Order signed by the then President of the United States. On January 20, 2021, we filed a written request with the NYSE for a review of its determination. See “Item 3. Key Information – Risk Factors – Risks Relating to Our Business – Transactions in and holdings of our ADSs and H shares by U.S. persons beyond specified dates are prohibited, and the continued listing of and trading in our ADSs are subject to significant uncertainty”.

Proposed A Share Offering

On March 9, 2021, the Board approved the proposal to apply for the offering and listing of our A shares on the Main Board of the Shanghai Stock Exchange, and a circular dated March 17, 2021 was sent to our shareholders. Subsequently, the proposal was proposed to and was approved by our respective shareholders at the extraordinary general meeting, the domestic shareholders’ class meeting and the H shareholders’ class meeting of the Company held on April 9, 2021, respectively. Subject to approvals from the CSRC and other relevant regulatory authorities, and compliance with the regulatory requirements of the place of listing including the minimum proportion of the issuance, the number of A shares to be publicly issued by the Company will be no more than 12,093,342,392 shares (namely no more than 13% of the total issued share capital of the Company upon the A share offering, and prior to the exercise of the over-allotment option) with a par value of RMB1.00.

Disposals of E-surfing Pay Co., Ltd and China Telecom Leasing Corporation Limited

On March 26, 2021, we entered into agreements with China Telecommunications Corporation, pursuant to which we agreed to sell, and China Telecommunications Corporation agreed to purchase all the share capital in E-surfing Pay Co., Ltd with an investment amount of RMB500,000,000 held by us for a consideration of RMB3,897 million. On the same date, we and our wholly owned subsidiary, China Telecom Global Limited, entered into agreements with China Telecommunications Corporation and its subsidiary, Guang Hua Properties Limited, pursuant to which, we and China Telecom Global Limited respectively agreed to sell, and China Telecommunications Corporation and Guang Hua Properties Limited agreed to purchase, 75% and 25% of the share capital in China Telecom Leasing Corporation Limited from us and China Telecom Global Limited for a consideration of RMB 131 million and RMB44 million, respectively. Please refer to Exhibits 4.88 and 4.89 to this annual report for more information.

Organizational Structure

Set out below is a chart illustrating our corporate structure and significant subsidiaries as of April 23, 2021:

 

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LOGO

 

 

(1)

Formerly known as China Telecom (Hong Kong) International Limited

(2)

Formerly known as China Unicom (Macau) Company Limited.

(3)

Formerly known as Unicom Huasheng Telecommunications Technology Company Limited

(4)

Formerly known as Bestpay Co., Ltd.

In addition, our Company has a branch in each of 22 provinces, five autonomous regions and four centrally administered municipalities in the PRC.

 

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General Information

Our principal executive offices are located at 31 Jinrong Street, Xicheng District, Beijing, PRC 100033 and our telephone number is (+86-10) 5850-1508. Our website address is www.chinatelecom-h.com. The information on our website is not a part of this annual report. We have appointed CT Corporation System at 28 Liberty St., New York, New York 10005 as our agent for service of process in the United States.

Our U.S. public filings are available at the website maintained by the SEC at www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

B. Business Overview

We are an integrated intelligent information service provider in the PRC with full-service capabilities. We offer a comprehensive range of telecommunications services, including Internet services, information and application services, voice services, telecommunications network resource and equipment service and other related services. We aim to provide differentiated and innovative services to create value for customers by leveraging on our integrated resources.

In December 2013 and February 2015, the MIIT issued to China Telecom Group, our controlling shareholder, the permit to operate 4G business nationwide based on TD-LTE technology and LTE FDD technology, respectively. We have been authorized by China Telecom Group to operate 4G mobile business in the PRC.

In December 2018, China Telecom Group, our controlling shareholder, was granted the approval from the MIIT to permit China Telecom Group to utilize the 3400MHz-3500MHz spectrum nationwide to conduct fifth generation (5G) mobile communication pilot programs. We have been authorized by China Telecom Group to conduct 5G system scale trial in the PRC.

In June 2019, China Telecom Group, our controlling shareholder, was granted the permit from the MIIT to operate 5G digital cellular mobile service nationwide and we have been authorized by China Telecom Group to develop 5G business nationwide. In October 2019, we officially launched the 5G commercial services in 50 cities nationwide offering 5G services to individuals, households and government and enterprise customers.

In 2020, technologies such as 5G, cloud and artificial intelligence (AI) integrated to bring about fusion with robust development in digital economy. We built up new information infrastructure with 5G and cloud as the core, and stimulated increasing and diversified customer demand for integrated intelligent information services. In particular, we pioneered 5G standalone (SA) scale commercialization and rolled out customized 5G network to meet the differentiated demands from vertical industries for low latency, wide-area connectivity and network security, among others.

Our Operation Strategy

In 2020, we comprehensively implemented the “Cloudification and Digital Transformation” strategy, the essence of which is to be customer oriented while promoting cloud and network convergence based digital upgrade, and innovating digital products and services offering, in order to provide integrated intelligent information service for customers. We established the new development pattern from an all-round perspective and strived to enhance its market competitiveness and corporate vitality. In particular:

 

  

Strengthening the landscape of cloud-network capabilities and building new infrastructure based on cloud-network integration: adhering to the strategic direction of “Cloud central, Network around, Network adaptive to cloud, Cloud and network as one”, we sped up the construction of new infrastructure based on cloud-network integration. We continued to promote 5G network co-building and co-sharing and conducted 4G network co-sharing at the same time. In line with the overall “2+4+31+X+O” deployment, we accelerated the construction of e-Surfing Cloud and IDC, and commenced the development of multi-access edge computing (MEC) and forged capabilities of cloud-edge coordination by leveraging our massive amount of exchange buildings at the edge.

 

  

Building a digitalized platform to empower digital transformation: we strengthened the development of our digitalized platform to empower the internal and external digital transformation. Internally, we pushed forward the digitalization of our operation. We explored the potential demand for 5G and Smart Family by leveraging AI and Big Data, accelerated the construction of our new-generation cloud-network operating system to support the scale commercialization of 5G SA and enhance the efficiency of service activation and product loading, while optimizing our network quality and user experience. Externally, we propelled cloud migration, the use of data and intelligence injection for our customers, and built the technological foundation for digitalized platform. Supported by our digitalized platform, we aggregated our internal fundamental capabilities including communications, security, AI, Big Data and IoT, among others, while combining external digital ecology, to inject intelligence powered by data and provide endowment for products and services, so as to propel Industrial Digitalization and intelligent transformation.

 

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Promoting sci-tech innovation to accelerate the shift towards a sci-tech company: we pushed forward our research and development system reforms and stimulated vitality for sci-tech innovation. Focusing on the technological development objectives, we increased our investment in R&D, elevated the input and output efficiency of R&D resources, and strengthened our R&D teams in key areas such as cloud-network integration and security.

 

  

Deepening reforms on all fronts to inspire corporate vitality and expanding cooperation to forge ecological competitiveness: we pushed forward deepened reforms on all fronts, sped up the establishment of a new customer-oriented institutional system and built a vertically integrated business group serving government and enterprise customers. We strengthened the planning of ecosystem, continued to expand our corporate boundaries and deepened cooperation of the whole industry chain. Leveraging our core capabilities and platform, we enriched the ecology for industries such as family informatization and vertical industries for government and enterprise customers. We also strengthened cooperation and eco-aggregation with capital financing, expanded innovative cooperation in emerging areas, and gradually created an industry chain ecology with a larger scope and at a higher level.

Subscribers and Service Usage

Our operating revenues depend largely on the size of our customer base, usage volume and the structure and level of our tariffs. The following table shows our selected operating data as of the dates and for the periods indicated.

 

   As of or for the year
ended December 31,
 
   2018   2019   2020 

Mobile subscribers (in millions)

   303.0    335.6    351.0 

Mobile voice usage (in billion minutes)

   827.7    820.3    784.5 

Handset data traffic (in kTB)

   14,073.0    24,370.0    34,690.0 

Wireline broadband subscribers (in millions)

   145.8    153.1    158.5 

Wireline telephone subscribers (in millions)

   116.5    110.9    107.9 

e-Surfing HD subscribers (in millions)

   105.3    112.6    115.9 

IoT connected devices (in millions)

   106.9    157.4    237.6 

Our Products and Services

In 2020, we accelerated the progress of cloudification and actively deployed digital transformation of our business, aiming at building a new information infrastructure embedded cloud-network integration.

Internet Services

Our Internet services consist of wireline Internet access services, including dial-up and broadband services, and mobile Internet services. Internet services have become increasingly important in our revenue structure. We offer Internet services through integrated and customizable service plans along with other various business models, which creates the synergy that benefits our Internet, mobile and other services.

In 2020, we adhered to proactive marketing strategy and strengthened precision marketing capabilities empowered by data capabilities. We strengthened terminal operation by fully leveraging our sales channels and sales points to meet consumers’ demand for upgrading to 5G devices and to foster popularity of 5G terminals. As of December 31, 2020, the total number of our mobile subscribers was approximately 351.0 million with a net addition of almost 15.5 million for the full year, expanding our market share to 22.0%.

In addition, we created a new development mode of “5G + Privileges + Applications” to forge new edges in the area of individual informatization services. Leveraging “5G + e-Surfing Cloud” capabilities, we provided users with high-quality network experience and differentiated applications and services. We optimized our unique 5G member privilege system, cooperated with top application partners to launch eco-privileges and rolled out a number of applications featuring 5G, including e-Surfing Cloud Drive, e-Surfing Ultra HD, Color Ringback Tone with Video, e-Surfing Cloud VR and e-Surfing Cloud Game. Furthermore, we took the lead in the industry by launching the 5G cloud mobile phone, namely “e-Surfing One”, which leveraged the capabilities of cloud-network integration to break through performance bottlenecks for devices and facilitated the accelerating popularization of 5G devices. As of March 31, 2021, the number of 5G package subscribers was approximately 111.23 million, empowering the future growth of our mobile Internet services.

 

 

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We focused on meeting the demand for digitalization and intelligentization from family customers and comprehensively upgraded family informatization services. With the “Triple-Gigabit” access service comprising 5G + Fiber Broadband + WiFi6, we enhanced the customer experience of family services by promoting convergence of 5G and family services and accelerating the speed upgrades of family broadband and WiFi services. Furthermore, we developed the DICT products and services portfolio for Smart Family and enriched the portfolio of terminals and applications in functional use cases such as home security surveillance, living space coziness, education and entertainment to meet the needs of family life scenes. See “—Information and Application Services” below for further details. As of December 31, 2020, the number of our wireline broadband subscribers reached 158.5 million, representing a net addition of 5.4 million from 153.1 million as of December 31, 2019.

In September 2019, in order to build a 5G network on an efficient basis and to rapidly create our 5G service capabilities, we entered into the 5G Cooperation Agreement with CUCL to leverage the mutually complementary advantages in network and spectrum resources and rolled out 5G network co-building and co-sharing, effectively saving costs on network construction, operation and maintenance while enhancing the market competitiveness of 5G network and business. For more details, see “Item 4. Information on the Company—B. Business Overview—Network System—Co-building and co-sharing with China Unicom”. In 2020, we continued to promote 5G network co-building and co-sharing. By the end of 2020, the total number of 5G base stations in use exceeded 380,000. In June 2020, 5G Implementation Guidelines: SA Option 2, or the SA Guidelines, was released by GSMA which represents the interests of mobile operators worldwide, including handset and equipment manufacturers, software companies, equipment suppliers and Internet companies, as well as organizations in adjacent industry sectors. The SA Guidelines which we have been taking the lead in drafting is the world’s first systematic guidance for large-scale 5G standalone (SA) deployment. We also took a global lead in achieving scale commercialization of 5G SA network, and launched customized 5G networks including “Wide-area”, “Adjacent” and “Wingspan” to meet the differentiated demand of vertical industry customers for features such as low latency, massive number of connections, network security and cloud-edge coordination. Meanwhile, we conducted 4G network co-sharing and activated approximately 170,000 co-shared 4G base stations throughout the year.

Information and Application Services

Our information and application services include Internet protocol TV, or IPTV (e-Surfing HD), Whole-home WiFi, Family Cloud, e-Surfing Webcam, IDC, cloud computing, content delivery networks, or CDN, Big Data, digital platform and system integration related services, as well as caller display, SMS, multimedia messaging services, or MMS, email services and music related content and applications services.

In 2020, we persisted to promote household informatization services, and promoted the “Triple-Gigabit” access service comprising 5G + Fiber Broadband + WiFi6 based on our five-in-one Smart Family product and service portfolio, combining Smart Broadband, Smart Home Platform, Smart Applications, Smart Security and Smart Services, continuing to upgrade our Smart Family product and service portfolio. The number of our e-Surfing HD subscribers reached 115.9 million as of December 31, 2020 from 112.6 million as of December 31, 2019. The Smart Family applications are becoming more enriched and delivering an increasing value contribution.

Capturing opportunities emerging from the digital transformation of the economy and society, we integrated emerging information technologies such as 5G and cloud, established a digitalized platform, re-packaged our fundamental capabilities to form new services, and accelerated our technological endowment. We pioneered 5G SA scale commercialization and rolled out customized 5G network to meet the differentiated demands from vertical industries for low latency, wide-area connectivity and network security, among others. Leveraging the technical features of 5G “Super Uplink” (UL Tx switching), edge cloud and the IoT, we built a series of benchmark projects for various vertical industries such as industrial Internet, smart energy, smart healthcare and smart parks, and gradually launched 5G innovative applications such as remote control, machine vision, and Automated Guided Vehicles (AGV). As of December 31, 2020, we had signed contracts with a total of nearly 1,900 customers for our 5G industry applications, with more than 1,100 use cases being launched. Furthermore, focusing on the scenario-based demands from enterprises’ cloud migration, we continued to optimize our resource deployment for IDC and cloud. Our IoT open platform supported mainstream IoT access protocols, enabling the rapid launch of partners’ application products, and the number of IoT connected devices reached 237.6 million as of December 31, 2020, representing an increase of 50.9% over that of December 31, 2019.

 

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Voice Services

Our voice services include mobile voice services and wireline voice services.

Prior to September 1, 2017, our mobile voice services included local calls, domestic long distance calls, international long distance calls, intra-provincial roaming, inter-provincial roaming and international roaming. We ceased to charge mobile voice services subscribers the domestic long distance and intra-provincial and inter-provincial roaming fees on and from September 1, 2017. In 2018, we insisted on the multi-mode handset strategy, promoted industry chain development, and published the industry’s first white paper on multi-mode AI handsets.

Amid the intense market competition in 2020, the number of our mobile subscribers grew from 335.6 million as of December 31, 2019 to 351.0 million as of December 31, 2020. The mobile voice usage decreased to 784.5 billion minutes in 2020 from 820.3 billion minutes in 2019.

Our wireline voice services include local wireline services, domestic long distance wireline services and international long distance wireline services. The total number of wireline telephone subscribers decreased to 107.9 million as of December 31, 2020 from 110.9 million as of December 31, 2019.

The decrease in the number of wireline telephone subscribers and wireline voice service usage was primarily attributable to the increasing penetration of alternative communication means, such as Over-the-Top messaging services and the migration of certain wireline telephone subscribers to our mobile services.

In addition, we continued to enhance the scale development of industry applications to attract government and enterprise subscribers.

Telecommunications Network Resource and Equipment Services

Our telecommunications network resource and equipment services primarily include services relating to our optic fiber and circuits, such as the use of optic fiber and circuit; virtual private network, or VPN, and use of bandwidth. We offer telecommunications network resource and equipment services as certain of our overall telecommunications solutions to large enterprise customers, including government authorities, large corporations and institutions. Many of these customers choose to use our circuits to form VPNs based on various technologies, and links their local area networks at different locations. We also collaborate with a number of international telecommunications service providers to provide global communications services for multinational corporations. In addition, we provide network equipment to large enterprise customers.

In 2020, we continued to focus on government, financial and large enterprise customers. Our marketing efforts focused on providing global one-stop services, tailored services and total solutions to these customers. These customers can enjoy a full range of consulting and technical support services by contacting any of our designated account managers.

Others

Our other services primarily include sales and repairs and maintenance of equipment, resale of mobile services and property rental.

Please see “Item 5. Operating and Financial Review and Prospects” for more discussion of the revenues from our products and services.

Our Customers and Brand Management

In 2020, we continued to promote our full-service brand names under the brand “China Telecom”, and further enhanced the brand image of “China Telecom” as an integrated intelligent information service operator through, among others, promoting China Telecom broadband, e-Surfing Smart Family (including Whole-home WiFi, e-Surfing Webcam, Family Cloud and other products), Hello 5G and e-Surfing Cloud services and products. Through providing contents to our services on a multi-dimensional level and our coordinated marketing efforts, we continue to strengthen and enhance the brand recognition and market influence for “China Telecom”.

Tariffs

Prior to May 2014, the levels and categorization of most of our current tariffs were subject to regulation by various government authorities. As a result of the governmental effort to gradually ease the regulations on the tariffs, the MIIT and the National Development and Reform Commission of the People’s Republic of China (the “NDRC”) issued the Notice on Implementing the Market Based Tariffs for Telecommunications Services, pursuant to which, effective from May 10, 2014, telecommunications operators are permitted to set the tariffs of all telecommunications services based on the cost, customers’ demand and market conditions. See “—Regulatory and Related Matters—Tariff Setting” included elsewhere under this Item.

 

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Wireline Voice Services

For our local wireline telephone services, we charge usage fees based on call usage.

Currently, all domestic long distance wireline services using public switched telephone network (the “PSTN”), are charged at the unified rate with a discount rate during off-peak hours.

We offer international long distance wireline services through the international gateways of China Telecom Group. China Telecom Group negotiates bilateral settlement arrangements and rates based on the international settlement standards in the telecommunications industry, and we follow those settlement arrangements and rates.

Mobile Voice Services

Generally we charge subscribers of our mobile voice services the following categories of tariffs: local usage charges, long-distance call charges and roaming charges. However, in 2016, we waived domestic long distance call charges and roaming charges for voice services in our new 4G subscription plans. By the end of 2016, we stopped offering subscription plans with separate billing for long distance call charges and roaming charges, and all new plans had nationally uniform prices for voice services domestically. In addition, we ceased to charge handset subscribers domestic long distance and roaming fees on and from September 1, 2017.

With respect to international roaming of our mobile voice services, we provide roaming services to our customers and determine the roaming charges in accordance with roaming agreements between China Telecom Group and the international operators.

Internet Services and Information and Application Services

We determine tariffs for these services according to market conditions. In addition, pursuant to the policy requirements of the PRC government regarding network speed upgrade and tariff reduction, in 2019, we rolled out corresponding measures in due course to meet the policy requirements, including: (i) starting January 1, 2019, we reduced out-of-package data tariff; (ii) we enhanced the promotion of large data traffic packages, enabling more subscribers to enjoy data traffic with lower unit tariff; (iii) we launched discounted traffic packages to serve the needs for specific subscribers; and (iv) starting May 1, 2019, we further reduced the tariff of Internet dedicated line access, and carried out free speed upgrade programs for qualified small and medium enterprise subscribers. In 2020, we likewise implemented corresponding measures in due course to meet such policy requirements, including (i) carrying out optical fiber transformation and tariff discounts for our broadband subscribers that are small and medium enterprises, manufacturing enterprises and dedicated line subscribers, and (ii) implementing free speed upgrade actions for our qualified subscribers.

Telecommunications Network Resource and Equipment Services

We determine the tariffs for our telecommunications network resource and equipment services according to market conditions. We generally charge a fee for installation of our telecommunications network resource services and a fixed monthly fee. We offer various promotion discounts for our customers who wish to upgrade to higher bandwidth services. These promotion discounts have stimulated demand for our telecommunications network resource services in recent years. Besides, the tariff for network equipment service have generally decreased in recent years. We provide different discounts and free experience services to our customers on a case-by-case basis.

Interconnection and Roaming Arrangements

Interconnection

Interconnection refers to various arrangements that permit the connection of our networks to other mobile, wireline networks or Internet backbone networks. These arrangements provide for the sharing and settlement of revenues from the base usage charges and, if applicable, roaming charges and domestic and international long distance charges as well as the interconnection arrangement and settlement of Internet backbone networks.

 

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China Telecom Group entered into interconnection settlement agreements with other telecommunications operators, including Unicom Group, China Mobile Group and China Transport Telecommunication Information Group Co., Ltd. We entered into an interconnection settlement agreement, as amended, with China Telecom Group, which allows our networks to interconnect with China Telecom Group’s networks as well as networks of the other telecommunications operators, with whom China Telecom Group had interconnection arrangements. Our interconnection arrangements with China Telecom Group and other telecommunications operators enable our subscribers to communicate with the subscribers of those operators and to make and receive local, domestic and international long distance calls and to access the Internet backbone networks. All interconnection and settlement arrangements among public wireline telephone, mobile, and Internet networks in the PRC are governed by the Telecommunications Regulations promulgated by the State Council and the Telecommunications Regulations and the Administrative Rules on Interconnection between the Public Telecommunications Networks promulgated by the MIIT. See “—Regulatory and Related Matters—Interconnection” included elsewhere under this Item.

International Roaming

We provide international roaming services to our subscribers, which allow them to access mobile telecommunications services and use voice, SMS and data services while they are physically outside of their registered service area but in the coverage areas of other mobile telecommunications networks in other countries and regions with which we or our roaming provider have roaming arrangements.

As of December 31, 2020, subscribers of our mobile services can roam on mobile networks in more than 200 countries and regions based on international roaming agreements between China Telecom Group and the local operators or roaming service providers. A mobile service subscriber using international roaming services is charged at our roaming usage rates for both incoming and outgoing calls, plus applicable long distance tariffs. We settle roaming revenues and expenses with international telecommunications operators in accordance with roaming agreements between China Telecom Group and the international operators. China Telecom Group has also agreed to our participation in the negotiation of its future international roaming agreements.

Marketing, Sales, Distribution and Customer Services

Marketing, Sales and Distribution

Our marketing strategy is to establish our image as an intelligent full-service telecommunications service provider and utilize our comprehensive services platform and nationwide marketing and distribution network. We have devoted substantial efforts in advertisements to promote recognition of and loyalty to our products and services. Fully leveraging the advantages arising from corporate informatization, we expedited digital transformation, leading to continual improvement of the quality and efficiency of operations and management.

By pursuing the digital transformation of customer operations, we built customer operation teams comprising relevant talents, strengthened data modelling for different business scenarios, improved data-driven insight capabilities and utilized artificial intelligence for sales and marketing activities to match customer needs with high precision. By pursuing the digital transformation of sale channel operation, we took advantage of online and offline integration, accelerated the construction of a marketing service system that embedded full integration of all channels, covering all use cases and engaging the full cooperation of all ecologies.

In particular, we have adopted various sales and marketing approaches and initiatives, such as customer experience, customer relationship management, SMS, telesales, sales plans and joint promotion with our business partners such as Internet portal companies and software development companies, to promote our products and services, in particular, our information and application services.

Customer Service

In 2020, we continued to transform our physical outlet network to operate with chain store-like and experience-oriented approach, providing a continuously improving customer service perception on scenario-based experience. By pursuing the digital transformation of customer services, we established a cloud-based platform for customer service staff to provide service at home, promoted remote video service counters and fully utilized intelligent voice navigation and online service contact points to assure service quality throughout the COVID-19 pandemic.

Our customer services typically include service inquiries, service applications, customers’ complaints, product and service promotions, service initiation and termination, payment reminder services and emergency services. Through establishing and implementing our customer full-service standard, we have significantly improved our basic customer services capability, such as service processing time, request responding time and providing service related and other information to customers through text messages.

 

 

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Insisting on the customer-oriented principle, we continued to enhance service quality. In 2020, the evaluation system of “whether service is good or not, subscribers have the final say” was established. We applied indicators such as subscribers satisfaction, product recommendation net score and contact service satisfaction rate, and regarded customer reputation as a service evaluation criterion to promote the improvement of service quality. We established a sound customer perception experience and evaluation mechanism to recognize problems in network, products and services from the perspective of subscribers. In respect of broadband network, we have closely tracked and analyzed the problems identified in customer satisfaction surveys, customer complaints, malfunction and complaints throughout the year, and implemented policies and promoted the rectification of problems in different provinces. In respect of mobile network, we have carried out improvement and upgrading actions for the benchmarking experience of critical scenes in key areas and neighborhoods with weak communication quality to enhance user perception and experience. In respect of cloud-network key perception, we have promoted standard optimization, perception evaluation and targeted improvement of service capabilities. Adhering to the principle of “wherever the subscriber is, the service is”, we continued to promote the digital transformation of services and improve the smart service capabilities. During the year of 2020, we deployed and promoted the “home customer service” mode to ensure that customers could process services easily and without leaving home.

In 2020, we continued to maintain leading position in the industry in terms of overall user satisfaction according to the assessment conducted by the MIIT.

Information Technology System

We employ our information technology, or IT, system to support our voice services and other services. In recent years, through continuous upgrading, our IT system has the capability to offer full service support to our wireline, mobile and other services on an integrated basis and to support other services related operations such as account opening, billing and customer services.

Network System

Our network has extensive coverage and scale and employs a variety of advanced technologies and suitable architecture. It offers comprehensive functions and operates in a stable and reliable manner. In addition, it supports a comprehensive range of end-to-end telecommunications services and enables customized products to be delivered for a variety of telecommunications needs. Our network system is managed and operated by our experienced network management and maintenance teams and is supported by our strong research and development capabilities. In light of future advances in technology, we have formulated viable plans to migrate our network system efficiently to the next generation. Furthermore, we procure our network equipment and related maintenance and technical support mainly from a number of PRC and overseas telecommunications network equipment manufacturers and suppliers including Huawei Technologies, Ericsson, Nokia and ZTE Corporation, among others.

In addition, adhering to the strategic direction of “Cloud central, Network around, Network adaptive to cloud, Cloud and network as one”, we sped up the construction of new infrastructure based on cloud-network integration. In line with the overall “2+4+31+X+O” deployment plan (meaning two super-large data center parks and public cloud nodes in Inner Mongolia and Guizhou serving our global business; data center clusters and cloud resource pools in four key regions including Beijing-Tianjin-Hebei, Yangtze River Delta, Guangdong-Hong Kong-Macau, Shaanxi-Sichuan-Chongqing; provincial data centers and cloud nodes deployed in 31 provinces; edge data centers and cloud nodes widely distributed and deployed at the level closest to users; and overseas data centers and cloud nodes) we accelerated the construction of e-Surfing Cloud and IDC. Endeavoring to build a wide-coverage, low-latency and intelligent carrying network with cloud/IDC, we promoted the upgrade of gigabit fiber broadband networks in 280 cities, built five major regional reconfigurable optical add-drop multiplexer (ROADM) transmission backbone networks covering 31 provinces across China, and expanded the coverage of our superior optical transport network for government and enterprise customers.

Network Architecture

Our network system consists of access networks, data networks, core networks, transport networks, service networks and support networks.

 

  

Access networks: Access networks include wireline access network based on optic fibers and wireless access network, which are directly connected to customers to provide wireline and wireless data and voice services.

 

  

Data networks: Data networks include Internet network and basic data network, and provide network support for all telecommunications services based on IP.

 

  

Core networks: Core networks include our wireline telephone network, mobile core network, and support our basic telecommunications services.

 

  

Transport networks: Transport networks provide electronic transmission of various service signals for access networks, data networks and core networks.

 

  

Service networks: The service networks provide the platform and ancillary systems for a variety of value-added services and application products.

 

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Support networks: Support networks include signaling networks, digital synchronous networks and various network management systems, in order to support the safe, stable and effective operation of our networks and services at all levels.

Co-building and co-sharing with China Unicom

In September 2019, following market principles, we entered into the 5G Cooperation Agreement with CUCL. Pursuant to the 5G Cooperation Agreement, we will cooperate with CUCL to jointly co-build one 5G access network nationwide and co-share 5G spectrum and network resources. Each party will continue to operate its business and branding independently. In respect of settlement under the 5G Cooperation Agreement, based on the principle that parties shall not make a profit from such settlement, we and CUCL will formulate a reasonable and precise settlement arrangement, following fair and equitable market practices, to maximize the benefits of cooperation for both parties and maintain a sustainable cooperation. In 2020, we continued to promote 5G network co-building and co-sharing. We believe that the cooperation is beneficial to the efficient construction of 5G network and the reduction of network construction investment as well as operation and maintenance costs while enhancing efficiency in network and assets operation, which enables us to rapidly create 5G service capability and strengthen network quality and business experience so as to achieve a win-win situation for both parties. As of December 31, 2020, the number of 5G base stations in use exceeded 380,000.

In addition, in 2020, we carried out resources co-sharing with China Unicom of 4G network and collectively activated approximately 170,000 co-shared 4G base stations throughout the year, which further optimized the 4G network coverage, as well as achieved savings in investment and operations and maintenance costs. At the same time, working with industry partners, we have been actively exploring co-building, co-sharing and co-maintenance cooperation in various projects including transmission network, communication equipment rooms, emergency response and international submarine cables.

Equipment procurement

We purchase most of our network equipment from leading international and domestic suppliers. We purchase a variety of network equipment from domestic suppliers, such as transmission equipment and local switches. We make most of our purchases through competitive tenders negotiation primarily based on product and service quality, system compatibility and price of the suppliers.

Purchases from our five largest suppliers of telecommunications equipment accounted for approximately 29.2% of our total amount of annual purchases in 2020. Purchases from our single largest supplier of telecommunications equipment accounted for approximately 15.7% of our total amount of annual purchases in 2020.

Competition

Following the industry restructuring in 2008, China Unicom and our Company have full-service capabilities and compete with each other in both wireline and wireless telecommunications services. China Mobile continues to be the leading provider of mobile telecommunications services in the PRC and competes with us in mobile telecommunications services and other telecommunications services. In June 2019, the MIIT granted the 5G permit to China Telecom Group, China Mobile Group, Unicom Group and China Broadcasting Network. In December 2013 and May 2016, China Mobile and China Broadcasting Network, respectively, received a license from the MIIT to operate fixed-line businesses, leading to intensified competition in this sector. Currently, we compete against China Unicom, China Mobile and China Broadcasting Network in terms of fixed-line voice and broadband services.

Since the PRC’s accession to The World Trade Organization (the “WTO”), foreign operators have been permitted to gradually increase their investments in the telecommunications industry in the PRC. Like domestic service providers, foreign operators are subject to the licensing requirements of the MIIT. In addition, investments by foreign operators may not exceed limits set forth in the relevant laws and regulations with respect to the amount of investment and percentage of total ownership interests that foreign operators are permitted to make in telecommunications enterprises in the PRC. For example, the foreign ownership in basic telecommunications services shall be no more than 49.0%, and the foreign ownership in value-added telecommunications services (other than e-commerce services, domestic multi-party communication services, storage and forwarding services, and call center services) shall be no more than 50.0% except in the pilot free trade zones in China. See “—Regulatory and Related Matters—Licensing” included elsewhere under this Item.

 

 

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We also face increasing competition from other competitors outside the telecommunications industry, in particular, from Internet services providers and mobile software and application developers, such as Over-the-Top messaging or voice services providers who offer contents and services on the Internet without their proprietary telecommunications network infrastructure. These competitors are competing with us in information and application or voice services. In recent years, the PRC Government has taken various initiatives to encourage competition in the telecommunications industry, such as the policy encouraging private capital to enter the industry, in addition to a series of guidance to such effect. Specifically, in May 2010, the PRC State Council issued Certain Opinion on Encouraging and Guiding the Sound Development of Private Investment, encouraging private investment in industry sectors that are mainly state-owned, such as basic telecommunications services. In June 2012, the MIIT issued Opinions on Encouraging and Guiding Private Investment in the Telecommunications Industry, encouraging private-sector investment in the telecommunications industry. On April 28, 2018, the MIIT issued the Circular on Commercialization of Mobile Telecommunications Resale Business, pursuant to which the MIIT granted commercial operation approval to the mobile communications resale business, effective from May 1, 2018. As of December 31, 2020, among the 26 mobile virtual network operators who signed pilot agreements with us, 25 of them had been granted commercial resale licenses, and there were a total of approximately 19 million users of mobile virtual network through resale business in cooperation with us. In December 2019, the Opinions of the Central Committee of the Communist Party of China and the State Council on Creating a Better Development Environment to Support the Reform and Development of Private Enterprises proposed to liberalize competitive businesses in key industries and fields such as telecommunications, further introduce market competition mechanisms, and support private enterprises to carry out basic telecommunications operations in the form of equity participation.

On November 11, 2019, the MIIT promulgated the Notice of the Ministry of Industry and Information Technology on Printing and Publishing the Regulations on the Management of Mobile Number Portability Service. The Regulations on the Management of Mobile Number Portability Service (the “Portability Provisions”) became effective on December 1, 2019. The Portability Provisions specify that cellular mobile communication users (excluding the IoT users) within the same local network may apply to change the contracted fundamental service operator by keeping the same mobile numbers and users switched to the network have equal rights under the same conditions. By the end of 2020, we had net inflow of subscribers since the implementation of mobile number portability service in China. In an effort to further encourage private-sector investment in the broadband network construction and business operation, as well as encourage private capital to enter into the telecommunications market through equity investment, the State Council issued the Notice on the “Broadband China” Policy and the Implementation Plan on August 1, 2013 and Certain Opinion on Promoting Information Consumption and Stimulating Domestic Demand on August 8, 2013, and the MIIT also issued the Informatization Development Plan on September 29, 2013, the Notice on Opening the Broadband Access Market to Private Capital on December 25, 2014 and three more Notices on Further Broadening the Scope of Trial Opening of the Broadband Access Business on September 23, 2015, October 13, 2016 and September 27, 2017, respectively. By the end of 2020, the broadband access market opened up to private capital in a majority of provinces in China on a province-wide basis and also in many pilot cities.

In addition, our cloud services and IDC business compete with domestic and international cloud service providers and IDC operators, respectively. In the field of Industrial Digitalization, we compete with telecommunications operators, Internet companies, software companies, equipment manufacturers, etc.

As a result, the competitive landscape in the PRC telecommunications industry may further diversify, causing more intensified competition.

Trademarks

We conduct our business under the “China Telecom” brand name and logo. Currently, China Telecom Group owns certain trademarks in the PRC, some of which have been registered with the former Trademark Office of the PRC State Administration for Industry and Commerce, or the Trademark Office, and some of which are in the process of being registered with the Trademark Office. China Telecom Group has executed a trademark license agreement with us. Under this agreement, China Telecom Group agreed to grant to us and our subsidiaries the right to use these trademarks upon the completion of the registration on a royalty-free basis until December 31, 2021, which is automatically renewable for three more years as the parties may agree. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Ongoing Related Party Transactions between Us and China Telecom Group and Its Affiliated Companies—Trademark License Agreement”.

Regulatory and Related Matters

Overview

The PRC’s telecommunications industry is subject to extensive government regulation. A number of central government authorities have regulatory responsibilities for various aspects of the telecommunications industry. These authorities primarily include:

 

  

The MIIT, which 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 service of telecommunications service providers;

 

  

allocating and administering telecommunications resources such as spectrum and numbers;

 

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together with other relevant regulatory authorities, including the NDRC, regulating tariff charging mechanisms for telecommunications services;

 

  

formulating interconnection and settlement arrangements between telecommunications networks; and

 

  

maintaining fair and orderly market competition among service providers.

 

  

Provincial communications administrations under the MIIT, which oversee the implementation of the Ministry’s regulations and exercise regulatory authorities delegated by the Ministry within their respective provinces, autonomous regions and centrally administered municipalities.

 

  

The NDRC approves investment and finance projects exceeding certain capital expenditure amounts as well as foreign investment projects exceeding certain investment amounts.

In order to provide a uniform regulatory framework to encourage the orderly development of the telecommunications industry, the PRC government is in the process of drafting a telecommunications law. We expect that, if and when the telecommunications law is adopted by the National People’s Congress or its Standing Committee, the highest state legislative body in the PRC, it will become the basic telecommunications statute and provide a regulatory framework for the telecommunications industry in the PRC.

On June 1, 2017, the Cyber Security Law came into force. It stipulates relevant rules for personal data security protection, new types of cybercrime and network real name system; it specifies the principle of cyberspace sovereignty, the security obligations of network products and services providers as well as the security obligations of network operators; and it further enhances the protection of personal data, establishes the framework for the protection of critical information infrastructure facilities, and establishes rules regulating cross-border transmission of key data via critical information infrastructure facilities. In addition, it provides for the punishment for foreign organizations and individuals that attack and destroy China’s critical information infrastructure facilities and establishes a system for monitoring, early warning and emergency response. Telecom operators shall comply with the requirements under the Cyber Security Law in respect of network operating security and network information security. In addition, the Cyber Security Review Measures became effective on June 1, 2020. It repealed the Interim Security Review Measures for Network Products and Services and further refined the relevant provisions therein, requiring critical information infrastructure operators to make declaration when procuring network products and services that affect or may affect national security. It further clarifies the standards and procedures of review and stipulates that if the reviewers fail to be objective and fair, or are unable to undertake the obligation to retain the confidentiality of the information received during the review, the operators or network product and service providers may report this to the Cyber Security Review Office or other relevant departments.

The Cyber Security Law and the Cyber Security Review Measures require procurement of network products and services by operators in key industries and critical information infrastructure facilities that may have national security concerns to go through a cyber security review. The security review may be initiated by the enterprises or by the relevant government authorities. The security review would focus on the security and controllability of network products and services. Operators of critical information infrastructure facilities use network products or services that have not been subject to the security review or have not passed the security review, would be subject to a fine of no less than one but no more than ten times of the amount of purchase. According to the Cyber Security Law, the CAC has a central role in planning, coordination, supervision, and management of network security measures while the MIIT, the Ministry of Public Security and other relevant authorities are in charge of network security protection, supervision and management within the scope of their respective responsibilities. Several related regulations, including the Measures for the Security Review of Network Products and Services (for Trial Implementation) and the Provisions for the Administration of Internet News Information Services, published by the CAC came into effect on the same day as the Cyber Security Law. The PRC government may amend the relevant regulations or promulgate new regulations to clarify and further implement the Cyber Security Law. Although we expect that the Cyber Security Law will have a positive effect on the overall development of the telecommunications industry and enhance information protection in the PRC, we currently cannot predict the scope of any specific requirements that may be imposed on us and their implications for our operations under the Cyber Security Law and relevant regulations.

On January 1, 2018, the Measures for Monitoring and Management of Public Internet Cyber Security Threat issued by the MIIT came into force. It provided for the definition of public Internet cyber security threats, the relevant governing authorities, working principles and remedial measures in connection with the monitoring and management of public Internet cyber security threats. Telecom operators are required to strengthen the monitoring and management of public Internet cyber security threats, notify the governing authorities in a timely manner after discovery of cyber security threats, and provide technical assistance to governing authorities in relation to inquiries into IP address attribution and domain name registration.

 

 

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On May 1, 2018, the national standard on personal information protection, Information Security Technology—Personal Information Security Specification GB/T 35273-2017, came into force. It provides specific examples on the scope and types of personal information and sensitive personal information; stipulates the basic principles on personal information security and regulates the collection, retention, use, sharing, transfer and public disclosure of personal information. It puts forward specific requirements on the methods and measures to handle personal information security incidents by personal information controllers, as well as the organization and management of personal information controllers. In addition, it provides implementation methods and privacy policy forms for the right of informed consent to be exercised. On October 1, 2020, the revised Information Security Technology—Personal Information Security Specification (信息安全技术个人信息安全规范) which superseded the previous specification published in 2018 was formally implemented, adding provisions with respect to “autonomous selection of multiple business functions”, “convergence and integration of personal information collected for different business purposes”, “usage restrictions of user portraits”, “third-party access management”, “personal information security project”, “personal information processing activity records”, etc. It also revised “exceptions for authorization and consent”, “personal information subject cancellation accounts”, etc., which provides more privacy protection with respect to the collection, utilization and retention of personal information.

Telecommunications Regulations

The PRC’s State Council promulgated the Telecommunications Regulations, which became effective as of September 25, 2000 and were amended on July 29, 2014 and February 6, 2016, respectively, by the Decision of the State Council on Amending Certain Administrative Regulations. The Telecommunications Regulations are substantially consistent with, and are primarily intended to streamline and clarify, the then existing rules and policies for the telecommunications industry. The Telecommunications Regulations provide the primary regulatory framework for the PRC’s telecommunications industry in the interim period prior to the adoption of the telecommunications law.

The Telecommunications Regulations are intended to develop a transparent and fair regulatory environment to encourage fair and orderly competition and development in the telecommunications industry. The Telecommunications Regulations address all key aspects of telecommunications operations, including, among others, entry into the telecommunications industry, network interconnection, telecommunications resource allocation, tariffs and service standards.

Licensing

The Telecommunications Regulations adopt the existing regulatory distinction between basic and value-added telecommunications services, which are subject to different licensing requirements. On December 28, 2015, the MIIT promulgated the Telecommunications Service Catalog (2015 edition) which took effect on March 1, 2016 and was amended on June 6, 2019. Basic telecommunications services include, among others, wireline communications services, cellular mobile communications services, satellite communications services, data communications services, IP telephone services, trunking communications services, wireless paging services, network access facilities services, domestic communications facilities services and network hosting services. Value-added telecommunications services include, among others, IDC services, content distribution network services, domestic Internet virtual private network services, Internet access services, online data processing and transaction processing services, domestic multi-communication services, storage and forwarding services, call center services, information services and coding and procedures conversion services.

Providers of any basic telecommunications services as well as providers of value-added services in two or more provinces, autonomous regions and centrally administered municipalities in the PRC must apply for licenses from the MIIT. In accordance with the approval of the MIIT, we derive our exclusive rights to operate basic telecommunications business from our status as a subsidiary controlled by China Telecom Group, which holds the licenses required for operating the relevant telecommunications business. In December 2013, China Telecom Group, Unicom Group and China Mobile Group received permits from the MIIT to operate 4G services nationwide based on TD-LTE technology. We have been authorized by China Telecom Group to operate 4G services nationwide based on TD-LTE technology. On February 27, 2015, China Telecom Group was granted by the MIIT the permit, and authorized us, to provide 4G services based on LTE FDD technologies nationwide. In June 2019, China Telecom Group, our controlling shareholder, was granted the permit from MIIT to operate 5G digital cellular mobile service nationwide, and we have been authorized by China Telecom Group to develop 5G business nationwide.

After its accession to the WTO in December 2001, the PRC promulgated the Administrative Regulations on Telecommunications Companies with Foreign Investment, which became effective on January 1, 2002 and were subsequently amended in 2008 and 2016, implementing its commitments to the WTO. Those commitments include the gradual reduction of foreign ownership restrictions in the telecommunications industry and the step-by-step opening of the telecommunications market in the PRC to foreign operators. According to those regulations, enterprises with foreign investment may operate basic and value-added telecommunications services subject to the approval of the MIIT and the Ministry of Commerce of the People’s Republic of China (formerly the Ministry of Foreign Trade and Economic Cooperation of the People’s Republic of China). Certain limitations have been placed on the total registered capital of, and maximum foreign shareholdings in, such enterprises. However, the presence or absence of foreign investments in an applicant for telecommunications licenses will presumably bear no direct relation to the decision on whether to issue licenses, inasmuch as the issuance of new licenses is governed by a separate set of rules and regulations. In recent years, the PRC gradually fulfilled the market-opening commitments it made to the WTO and lifted many restrictions for foreign investors and service providers in respect of telecommunications services.

 

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The remaining restrictions regarding mobile services, value-added telecommunications services and fixed-line services are as follows:

 

  

For mobile voice and data services:

 

  

there is no longer any geographic restriction and the foreign ownership shall be no more than 49.0%.

 

  

For value-added telecommunications services (other than e-commerce services, domestic multi-party communication services, storage and forwarding services, and call center services):

 

  

there is no longer any geographic restriction and the foreign ownership generally shall be no more than 50.0%.

 

  

For fixed-line services:

 

  

there is no longer any geographic restriction and the foreign ownership shall be no more than 49.0%.

The MIIT has promulgated the Administrative Measures for the Licensing of Telecommunications Business, which aims to strengthen the administration of licensing of telecommunications operations permits and became effective on September 1, 2017. It provides for the establishment of an integrated management platform for telecommunications business, the promotion of online application, approval and management of business license as well as publication, queries and co-sharing of related information, and enhancement of credit management by including credit conditions as a precondition to being granted a business license. The annual business license inspection system would be adjusted to a system of publication of annual reports and announcements. An illegal operations and dishonesty list for telecommunications operators would be established and maintained and the operators on such list would be subject to enhanced supervision from relevant telecommunications regulatory bodies. If a telecommunications business operator is requested by relevant telecommunications regulatory body to suspend operations, its business license is revoked or there are certain other circumstances as stipulated by the MIIT, such operator would be included in the dishonesty list and may not apply for telecommunications business license.

Pursuant to the Circular on the Framework Plan for the China (Shanghai) Pilot Free Trade Zone issued by the State Council on September 18, 2013, qualified foreign investment enterprises will be permitted to provide certain value-added telecommunications services in specific form in the China (Shanghai) Pilot Free Trade Zone, subject to protections on Internet information security and approval by the State Council is required in case of a breakthrough in the limitations provided for under the administrative regulations. In April 2014, to further promote the pilot program of the value-added telecommunications business in the China (Shanghai) Pilot Free Trade Zone, the MIIT issued the Administrative Measures for the Pilot Operation of the Value-added Telecommunications Business by Foreign Investors in China (Shanghai) Pilot Free Trade Zone.

Tariff Setting

Prior to May 10, 2014, under the Telecommunications Regulations, telecommunications tariffs were categorized into government fixed tariffs, government guidance tariffs and market based tariffs. The telecommunications providers were permitted to set tariffs for certain services provided the tariff levels were below the tariff ceilings set by the MIIT and the NDRC.

As a result of the governmental effort to gradually ease the regulations on the tariffs, on May 5, 2014, the MIIT and the NDRC issued the Notice on Implementing the Market Based Tariffs for Telecommunications Services. Pursuant to this Notice, effective from May 10, 2014, the government fixed tariffs and the government guidance tariffs were abolished and telecommunications operators are permitted to set the tariffs of all telecommunications services based on the cost and market conditions. The Telecommunications Regulations were subsequently amended on July 29, 2014 by the Decision of the State Council on Amending Certain Administrative Regulations to reflect this policy change as well as other amendments.

On May 20, 2015, the office of the State Council promulgated the Guidance Opinions Regarding Expediting the Development of the High-Speed Broadband Network and Promoting the Speed Upgrade and Tariff Reduction, calling for the telecommunications operators to reduce the data tariffs. In addition, the Government Work Report in 2017 calls for the deepening of speed upgrade and tariff reduction, the cancellation of domestic long distance and roaming fee for handsets users, the reduction of the tariff of Internet dedicated line access for small and medium enterprises and international long distance calls. Furthermore, the Government Work Report in 2018 calls for a further promotion of network speed upgrade and tariff reduction. We were encouraged to further reduce the average tariff of broadband for small and medium enterprise subscribers and the average data tariff of mobile network to a greater extent in 2019.

 

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On August 23, 2018, the MIIT promulgated the Notice of Ministry of Industry and Information Technology on Further Regulating Marketing Activities for Telecommunications Tariff Schemes which became effective from August 23, 2018. The Notice encourages fundamental telecommunications enterprises to provide a tiered discount pricing formula for tariff plans according to the usage amount of the users and simplify the structure of tariff packages. In formulating and implementing the tariff plans of bundled packages, the tariff plans for each respective service should also be provided, and the tariff rates disclosure policy should be improved. When promoting the tariff plans, the telecommunications enterprises shall fulfill their obligation to remind the users with respect to matters they shall pay attention to, including the restrictive conditions, the validity period and the charging principles. The same type of users with the same transaction conditions should be guaranteed with equal rights to select the tariff plans.

On May 9, 2020, the MIIT and the NDRC promulgated the Notice on Cancelling the Notification Mechanism of Telecommunication Services Tariff. Since the promulgation date of such notice, the notification requirements before the implementation of the tariff plan in the Notice on Implementing the Market Based Tariffs for Telecommunications Services will be cancelled. Telecommunications operators are no longer required to notify the MIIT and NDRC of tariff plans across the country or across provinces, autonomous regions and municipalities, or to notify the telecommunications administrations in provinces, autonomous regions and municipalities level and the corresponding pricing authorities of other tariff plans. In addition, telecommunications operators should further improve the telecommunications service tariff publicity system, and publicize all tariff plans available in the public market in the form of a list through manuals or electronic display screens at business premises. The publicity and promotion of tariff plans should be comprehensive, accurate and easy to understand, and the content of the promotion should be consistent with the tariff publicity plan. When formulating a package sales tariff plan, separate tariff plans for different services that involve basic telecommunication needs should be provided at the same time for users to choose independently. For new users converted from our mobile number portability services, telecommunications operators shall ensure these users can independently choose the tariff plan available for sale in the public market.

Interconnection

Under the Telecommunications Regulations and the Administrative Rules on Interconnection between the Public Telecommunications Networks promulgated by the MII in May 2001, as amended in September 2014, major telecommunications operators in the PRC cannot refuse requests for interconnection and must enter into interconnection agreements upon request by other service providers. Telecommunications operators must ensure the smooth interconnection pursuant to the interconnection agreements as well as the applicable regulations and may not unilaterally terminate the interconnection.

The Telecommunications Regulations further provide that the technical standards and settlement methods for network interconnections be formulated by the MIIT. In accordance with these regulations, China Telecom Group has entered into various interconnection agreements with other telecommunications service providers, including China Mobile and China Unicom.

On December 30, 2013, the MIIT issued the Guidance Opinions on Building New National Internet Backbone Interconnection Points, pursuant to which seven new backbone interconnection points altogether have been built in Chengdu, Wuhan, Xi’an, Shenyang, Nanjing, Chongqing and Zhengzhou, in addition to the three existing backbone interconnection points in Beijing, Shanghai and Guangzhou. The operations of these new backbone interconnection points have significantly improved the quality and speed of interconnection between the telecommunications networks. On November 9, 2016, the MIIT approved the addition of new national Internet backbone interconnection points in Hangzhou, Fuzhou and Gui’an of Guiyang, achieving 13 Internet backbone interconnection points upon completion of such three new additions in June 2017. On December 30, 2019, the MIIT approved the addition of new Internet backbone interconnection point in Hohhot and as of December 2020, its construction had been completed.

The MIIT issued the Notice on Public Telecommunications Network Interconnection Settlement and Relay Fees Allocation in October 2003 and two Notices on Adjustment to Settlement Standards for Interconnection Fees of Wireline Local Telephone Networks in October 2006 and April 2009, respectively, which provided for interconnection settlement arrangement standards for local inter-district calls between wireline local telephone operators as well as public telecommunications network. In November 2009, the MIIT issued the Notice on Adjustment to Settlement Standards for Interconnection Fees of Public Telecommunications Network and the Notice on the Settlement Standards for Interconnection Fees of TD-SCDMA, which provided for adjustments to certain interconnections settlement standards between telecommunications operators. Effective from January 1, 2010, when a China Mobile’s TD-SCDMA 157 and 188 prefix numbers user initiated a call to a user of our Company or China Unicom within the scope of local network, China Mobile would pay a settlement charge of RMB0.012 per minute to our Company or China Unicom. Effective from June 1, 2010, when a wireline user of a basic telecommunications operator initiated a call to a mobile user of another basic telecommunications operator, the settlement charge was set uniformly at a rate of RMB0.001 per minute payable by the basic telecommunications operator originating the call to the basic telecommunications operator receiving the call. Effective from January 1, 2014, some of the settlement standards have been further adjusted pursuant to the Notice on Adjustment to Settlement Standards for Interconnection Fees of Public Telecommunications Network issued by the MIIT on December 17, 2013. Prior to January 1, 2014, when a mobile user of a basic telecommunications operator (excluding China Mobile’s TD-SCDMA 157 and 188 prefix numbers users) initiated a call to a mobile user of another basic telecommunications operator, the settlement charge was set uniformly at a rate of RMB0.06 per minute payable by the basic telecommunications operator originating the call to the basic telecommunications operator receiving the call. With effect from January 1, 2014, when a mobile users of our Company or China Unicom initiates a call to a mobile user of China Mobile (not including TD-SCDMA 157 and 188 prefix numbers users), the interconnection settlement charges payable by our Company or China Unicom to China Mobile is adjusted from then prevailing rate of RMB0.06 per minute to RMB0.04 per minute. Other existing voice interconnection settlement standards remain unchanged. Meanwhile, the SMS interconnection settlement standard is adjusted from RMB0.03 per message to RMB0.01 per message, and the MMS interconnection settlement standard is adjusted from RMB0.10 per message to RMB0.05 per message. In June 2020, the MIIT promulgated the Notice on Adjusting the TD-SCDMA Voice Inter-Network Settlement Policy, pursuant to which effective from July 1, 2020, when a China Mobile’s TD-SCDMA 157 and 188 prefix numbers user initiated a call to a user of our Company or China Unicom within the scope of local network, China Mobile would pay a settlement charge of RMB0.06 per minute to our Company or China Unicom.

 

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The following table sets forth selected interconnection revenues sharing and settlement arrangements for local calls and domestic long distance calls:

 

Network from Which Calls Originated

  

Network at Which Calls Terminated

  

Current Main Settlement Arrangement

Mobile operator  Wireline local operator or transferred through mobile operator’s long distance network to wireline local operator  

(1) Mobile operator collects the cellular usage charge from its subscribers

 

(2) Mobile operator pays RMB0.06 per minute to wireline operator

 

(3) Between January 1, 2010 and June 30, 2020, mobile operator (China Mobile) pays RMB0.012 per minute to wireline operator for calls originated from TD-SCDMA “157” or “188” prefix phone numbers in local areas. Starting July 1, 2020, mobile operator (China Mobile) pays RMB0.06 per minute to wireline operator for calls originated from TD-SCDMA “157” or “188” prefix phone numbers in local areas

Wireline local operator  Mobile local operator  

(1) Wireline operator collects the usage charge from its subscribers

 

(2) No revenue sharing or settlement prior to June 1, 2010. Wireline operator pays RMB0.001 per minute to mobile operator after June 1, 2010

Wireline operator  Transferred through wireline operator’s long distance network to mobile operator  

(1) Wireline operator collects the usage charge from its subscribers

 

(2) Wireline operator pays RMB0.06 per minute to mobile operator

 

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Network from Which Calls Originated

  

Network at Which Calls Terminated

  

Current Main Settlement Arrangement

Wireline local operator A  Wireline local operator B  

(1) Operator A collects the usage charge from its subscribers

 

(2) In the case of local calls from operator A not using operator B’s local inter-district trunk circuit, operator A pays 50.0% of usage charge to operator B

 

(3) In the case of local inter-district calls from operator A using operator B’s local inter-district trunk circuit, operator A pays no more than RMB0.06 per minute to operator B

Mobile operator A  Mobile local operator B or transferred through mobile operator A’s long distance network to 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.

 

(3) Starting January 1, 2014, mobile operator A (China Telecom or China Unicom) pays RMB0.04 per minute to mobile operator B (China Mobile) for calls originated from a mobile user of operator A (China Telecom or China Unicom) to a mobile user of operator B (China Mobile) (not including TD-SCDMA 157 and 188 prefix numbers)

 

(4) Between January 1, 2010 and June 30, 2020, mobile operator A (China Mobile) pays RMB0.012 per minute to mobile operator B for calls originated from TD-SCDMA “157” or “188” prefix phone numbers users in local areas. Starting July 1, 2020, mobile operator A (China Mobile) pays RMB0.06 per minute to mobile operator B for calls originated from TD-SCDMA “157��� or “188” prefix phone numbers users in local areas

The following table sets forth selected current main interconnection revenues sharing and settlement arrangements for PSTN international long distance calls, including calls originated from and terminated in any international region:

 

Network from Which Calls Originated

  

Network at Which Calls Terminated

  

Current Main Settlement Arrangement

Domestic wireline local or mobile

operator A

  Without using the carrier identity code of operator B, through the domestic and international long distance network of operator B  

(1) Operator A collects the tariff from the subscribers

 

(2) Operator A retains RMB0.06 per minute, and operator B gets the rest of the international long distance tariff.

  Using the carrier identity code of operator B, through the domestic and international long distance network of operator B  

(1) Operator B collects the tariff from the subscribers

 

(2) Operator B pays operator A RMB0.06 per minute

 

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Network from Which Calls Originated

  

Network at Which Calls Terminated

  

Current Main Settlement Arrangement

International long distance operator  Operator B through domestic long distance network of operator C and international gateway of domestic operator A  (1) Operator A pays not more than RMB0.54 per minute to operator C, operator C pays not more than RMB0.06 per minute to operator B, where operator A and operator C, or operator B and operator C can be the same operator

The following table sets forth selected current main interconnection revenues sharing and settlement arrangements for SMS:

 

Network from Which SMS Originated

  

Network at Which SMS Terminated

  

Current Main Settlement Arrangement

Wireline or mobile operator A  Wireline or mobile operator B  

(1) Operator A collects the tariff from its subscribers

 

(2) Starting January 1, 2014, operator A pays RMB0.01 per SMS to operator B

The following table sets forth selected current main interconnection revenues sharing and settlement arrangements for MMS:

 

Network from Which MMS Originated

  

Network at Which MMS Terminated

  

Current Main Settlement Arrangement

Mobile operator A  Mobile operator B  

(1) Operator A collects the tariff from its subscribers

 

(2) Starting January 1, 2014, operator A pays RMB0.05 per MMS to operator B

The interconnection settlement arrangement for the Internet backbone networks in China is the interconnection settlement through the network access points, or the NAPs, and backbone interconnection points. The price of NAP settlement is determined by the MIIT, and the price of backbone interconnection points is decided by the Internet backbone networks participants with reference to the NAP settlement standards. Since 2013, the MIIT reduced the interconnection settlement charges for the Internet backbone networks each year and the interconnection settlement charges for the NAPs was reduced by the MIIT to RMB80,000 per gigabyte per month starting from November 1, 2018. The one-way payment of interconnection settlement charges for the Internet backbone networks between China Mobile Group and China Telecom Group or Unicom Group will be ceased and replaced by a peer-to-peer interconnection arrangement without settlement charges from July 1, 2020.

The MII promulgated the Measures on the Supervision and Administration of Quality of Service of the Public Telecommunications Networks, or the Measures on Quality of Service, effective August 1, 2005. The Measures on Quality of Service provide the supervision and administration of services of public telecommunications networks, including, among others, wireline local telephone networks, domestic long distance telephone networks, international telephone networks, IP telephone networks, land cellular mobile communication networks, satellite mobile communication networks, Internet backbone networks (access) and other telecommunications networks regulated by the MII. Under the Measures on Quality of Service, telecommunications operators are required to set up interconnection-related working units to be responsible for the management of quality of services of the public telecommunications networks.

Technical Standards

The MIIT sets industry technical standards for telecommunications terminal and interconnection related equipment used in the public telecommunications networks. A network access license from the MIIT and other relevant regulatory authorities is required for all such equipment. Most of the standards set by the MIIT conform to standards recommended by the International Telecommunications Union and other international telecommunications standards organizations.

Telecommunications Resources

The MIIT is responsible for the administration and allocation of telecommunications resources in the PRC, including radio frequencies and telecommunications network numbers. The use of these resources by telecommunications service providers is subject to the approval of the MIIT or the relevant provincial communications administrations and a usage fee for telecommunications resources payable to the PRC government.

 

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In 2020, we paid approximately RMB109 million of usage fees for the telecommunications network numbers and approximately RMB1,513 million of frequency usage fees, respectively.

Quality of Service

Under the Telecommunications Regulations, the MIIT and the relevant provincial communications administration have the responsibility of supervising and monitoring the quality of services provided by telecommunications service providers in the PRC. Under the Telecommunications Regulations, customers of telecommunications service providers have the right to submit complaints to the MIIT and the relevant provincial communications administration or other relevant government authorities.

On March 13, 2005, the MII promulgated the Telecommunications Services Standards which were amended in September 2014. The Telecommunications Services Standards aim to protect the rights of the customers of telecommunications services and sets forth minimum quality requirements for telecommunications services provided by telecommunications operators.

Under the PRC Consumer Protection Law, Consumers’ Associations can participate in the inspection and examination of goods and services by relevant governmental authorities; and customers can lodge their complaints with Consumers’ Associations, which can investigate the goods or services involved in the complaints, and mediate the complaints.

On December 28, 2016, the MIIT promulgated the Notice on Matters Relating to the Regulating of Telecommunications Services Agreements, effective on February 1, 2017, which specifies the standard of signing and record-keeping of telecommunication services agreements and emphasizes that the telecommunications operators should inform the subscribers and carry out remedial work when some or all of the terms under the telecommunications services agreements could not be observed due to force majeure or adjustment of national policies.

Universal Services

Under the Telecommunications Regulations, telecommunications service providers in the PRC are required to fulfill universal service obligations in accordance with relevant regulations promulgated by the PRC government, and the MIIT has been given authority by the PRC government to delineate the scope of its universal service obligations. The MIIT, together with other regulatory authorities, is also responsible for formulating administrative rules relating to the establishment of a universal service fund and compensation schemes for universal services. The State Council issued the Notice on the “Broadband China” Policy and the Implementation Plan on August 1, 2013, which included the provision of broadband services to villages as part of the universal service obligations of telecommunications service providers and mentioned improving the compensation scheme for the expenses incurred in the “Broadband China” projects undertaken by telecommunications service providers in the villages. In addition, the Ministry of Finance of the People’s Republic of China, or the MOF and the MIIT jointly issued the Notice of Implementation of Telecommunications Universal Services Pilot Work in December 2015, which provided that the telecommunications universal services should take a market-oriented approach and that the telecommunications universal services providers should be selected through a public bidding process. This notice sets up certain goals for the telecommunications operators, including broadband coverage in 98% of the administrative villages and over 12Mbps broadband access capacity in rural villages, by 2020. Pursuant to the notice, the central government subsidies will be granted to the pilot areas determined by the MOF and the MIIT and the universal services providers will be selected through an open bidding process.

The PRC government used financial resources to compensate the expenses incurred in the universal services related projects before the implementation of universal services pilot projects in 2016. We, together with other telecommunications operators, have undertaken the “Coverage to All Villages” project since 2004. Since 2016, we have undertaken universal services pilot projects in accordance with the requirements of the Chinese government and initially in aggregate won the bids to undertake and completed the construction of broadband networks in approximately 50,000 administrative villages. Since 2018, the PRC government included 4G network coverage into the scope of pilot projects for universal services. By the end of 2019, we had won the bids to undertake 4G base stations constructions in approximately 12,000 administrative villages in remote rural areas. We have continuously promoted the construction of communication networks in rural areas and remote rural villages and strive to improve the fixed-line and wireless broadband Internet access capacities in rural areas. In addition, we have set up local service points for rural villages, actively promoted the development of e-commerce in rural areas, and strived to contribute to the informatization upgrade and revitalization of rural areas in various regions. The compensation from the PRC government may not be sufficient to cover all of our expenses for providing the telecommunications universal services. However, we believe the expenses for such operation and maintenance will not have a material effect on our financial condition.

 

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State-Owned Assets Supervision

Under the PRC Company Law, PRC Enterprise State-Owned Assets Law, Interim Measures for the Supervision and Administration of State-Owned Assets of the Enterprises, and other administrative regulations, the State-owned Assets Supervision and Administration Commission of the State Council, or the SASAC, among others, supervises the preservation of the value of state-owned assets, guides the reform and restructuring of state-owned enterprises, and evaluates the performance of management executives of state-owned enterprises through legal procedures. Our controlling shareholder, China Telecom Group, is a state-owned enterprise owned by the SASAC and subject to the SASAC’s supervision.

Three-Network Convergence Policy

In January 2010, the PRC government announced its decision to accelerate the advancement of convergence of telecommunications, television broadcast and Internet access networks to realize interconnection and resource co-sharing among the three networks and further develop the provision of voice, data, television and other services. Specifically, the three-network convergence policy would 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. In June 2010, the State Council issued the Trial Plan for Three-Network Convergence and called for 12 regions (cities) and enterprises for the first trial. Following the completion of the first trial in December 2011, the State Council announced 42 additional regions (cities) for the second phase of the trial. In September 2012, we received the Information Network Communicated Audio-Video Program License from the State Administration of Press, Publication, Radio, Film and Television (the “SARFT”, formerly, the State Administration of Radio, Film and Television). In August 2015, the General Office of the State Council issued the Notice of Plan of Furthering the Three-Network Convergence, which marked the completion of the trial plan of the three-network convergence and called for further promotion of the three-network convergence nationwide.

Mobile Telecommunications Resale Business

On May 17, 2013, the MIIT issued the Trial Plan of Resale of Mobile Telecommunications Services, pursuant to which the MIIT would grant qualified companies mobile telecommunications resale business approvals on a pilot basis which would allow them to purchase mobile telecommunications services in bulk from mobile networks operators or resell such services to customers. On January 6, 2016, the MIIT issued the Guidance on the Wholesale Price Adjustments of Mobile Telecommunications Resale Business (关于移动通信转售业务批发价格调整的指导意见), pursuant to which the MIIT required that the wholesale price for resale of mobile telecommunications services should be lower than the per unit price (or package price) for similar services of the mobile networks operators. On April 28, 2018, the MIIT issued the Circular on Commercialization of Mobile Telecommunications Resale Business, pursuant to which the MIIT granted commercial operation approval to mobile communication resale business, effective from May 1, 2018. For a series of government measures to encourage private capital to invest in telecommunications services that could compete with our services, see “Item 4. Information on the Company—B. Business Overview—Competition”.

VAT Reform Applicable to the Telecommunications Industry

On November 16, 2011, the MOF and the State Administration of Taxation of the People’s Republic of China, or the SAT, introduced a pilot tax program under which the PRC business tax would be replaced with a value-added tax (“VAT”). On April 29, 2014, the MOF and the SAT announced that the pilot program would be extended to cover the telecommunications industry. Effective from June 1, 2014, the pilot tax rate for basic telecommunications services is 11% and the pilot tax rate for value-added telecommunications services is 6%. On March 18, 2016, the State Council standing committee meeting resolved to expand the VAT pilot program to all other industries which were previously subject to the PRC business tax starting from May 1, 2016. On March 23, 2016, the MOF and the SAT issued the Notice on Expanding the Pilot Program of Replacing the Business Tax with VAT, promulgating the relevant implementing rules. On April 4, 2018, the MOF and the SAT issued the Notice on Adjustment of VAT Rates pursuant to which the 11% VAT rate applicable to basic telecommunications services would be reduced to 10% and the 17% VAT rate applicable to sales of goods would be reduced to 16%, with effect from May 1, 2018. On March 20, 2019, the MOF, the SAT, the General Administration of Customs of the People’s Republic of China issued the Notice on Deepening the Policies Related to Value-Added Tax Reform, pursuant to which the 10% VAT rate applicable to basic telecommunications services would be reduced to 9% and the 16% VAT rate applicable to sales of goods would be reduced to 13%, with effect from April 1, 2019.

 

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Sharing of Telecommunications Infrastructure

In April 2019, the MIIT and the SASAC jointly issued the 2019 Implementation Opinions of the Ministry of Industry and Information Technology and the State-owned Assets Supervision and Administration Committee of the State Council on Promoting the Joint Construction and Sharing of Telecommunications Infrastructure, or the Opinions. The Opinions require that the supporting facilities for base stations, such as the telecommunications towers, and the passive indoor distribution systems for key areas of public transportation and buildings, shall generally be coordinated with respect to construction needs, constructed and delivered by the Tower Company, except that certain facilities may be constructed by a telecommunications operator if serving only such operators’ demand. The Opinions also set forth the sharing requirements in the construction of Fiber To The Home (FTTH) infrastructure facilities. The construction of supporting facilities, such as transmission poles, pipelines, and equipment rooms, in newly-built residential and commercial properties must strictly observe the applicable national and local standards. Telecommunications operators are prohibited from entering into any agreement which contains exclusivity arrangement with commercial property owners, their agents and/or property management companies. Moreover, the existing telecommunications infrastructure (transmission poles, pipelines, base station sites, and equipment rooms, etc.) must be co-shared whenever conditions so allow, and new transmission poles or pipes covering the same operation routes must be jointly constructed by the operators.

Anti-Unfair Competition Law

On April 23, 2019, the Standing Committee of the National People’s Congress (the “NPCSC”) promulgated the amended Anti-Unfair Competition Law of the People’s Republic of China (the “Anti-Unfair Competition Law”), which was formally implemented on the same day. The amendments to the Anti-Unfair Competition Law mainly involve the provisions regarding the trade secrets of intellectual property rights. First, the scope of trade secrets has been expanded through the incorporation of a catch-all description, which is no longer limited to “technical” or “business operation” information. Second, the scope of the trade secret infringer has been expanded. Apart from business operators, other natural persons, legal persons and non-legal entities have been included in the scope of the subject of liability for trade secret infringement. Third, given the practical situation of evolving infringement means and conducts, it has been clarified that misappropriation of trade secrets through electronic intrusion or indirect means, such as instigating, inducing and aiding others to acquire the right holder’s trade secrets, will constitute trade secret infringement. Fourth, the penalty on trade secret infringement has been increased. Fifth, in relation to the allocation of burden of proof for trade secret infringement in the civil trial procedure, it stipulates that the right holder may only need to provide preliminary evidences which can prove that the right holder has taken confidentiality measures and can reasonably indicate that the trade secret has been infringed. The amendments to the Anti-Unfair Competition Law strengthened the protection of intellectual property rights in China and had a positive impact on the establishment of a fair market order and protection of the legitimate interests of the right holders.

Mobile Number Portability

On November 11, 2019, the MIIT promulgated the Notice of the Ministry of Industry and Information Technology on Printing and Publishing the Regulations on the Management of Mobile Number Portability Service. The Regulations on the Management of Mobile Number Portability Service (the “Regulations”) became effective on December 1, 2019. The Regulations expressly allow the cellular mobile telecommunication users (excluding the users of Internet of Things) to apply for a change of the contracted fundamental business operator within the same local network area whilst retaining their phone numbers unchanged. Telecommunications business operators should strictly implement the relevant provisions on the real-name registration of users of mobile number portability service and ensure that the users whose mobile numbers have been transferred from other networks should be entitled to the same rights under the same conditions. Providing an important basis for the supervision and inspection of the telecommunications regulators, the Regulations explicitly require that in the course of providing the mobile number portability service telecommunications business operators should not engage in nine types of prohibited conducts including to refuse, prevent or delay the provision of mobile number portability service to users without justifiable reasons, to restrict the users from switching to another network by means of expanding the scope of the agreement in relation the terms of service, to affect the quality of telecommunications service provided to the mobile number portability service users through technical measures such as interception and restriction, to conduct a comparative promotion, fabricate or disseminate false or misleading information or discredit other telecommunication business operators when promoting the mobile number portability service and the relevant tariff plans, to design special tariff plans and marketing schemes for mobile number portability service users, continue to occupy the mobile numbers transferred-in while the users have exited the network and to hinder or disrupt the normal operation of mobile number portability service by means of handling the mobile number transfer maliciously on behalf of the users, making complaints maliciously on behalf of the users, etc.

E-Commerce Law

In August 2018, the NPCSC approved the E-Commerce Law of the People’s Republic of China, which was formally implemented on January 1, 2019. The E-Commerce Law consists of seven chapters and 89 articles which further regulate e-commerce activities conducted by relevant parties including e-commerce platform operators (“e-commerce platforms”). The E-Commerce Law defines and confirms, for the first time, the obligation of e-commerce platforms to protect the consumers’ security, and requires them to bear the corresponding responsibility when the obligation is breached. It further refines the regulation for the responsibility of intellectual property infringement on the e-commerce platforms, regulates the industrial and commercial registration and tax collection and management of e-commerce operators, requires e-commerce operators to publish information when terminating transactions at their own discretion, prohibits fabricating transactions and user comments to defraud and mislead consumers, prohibits the e-commerce platforms from abusing the dominant market position to exclude and restrict competition, regulates the rules of deposits collection and refund, requests the products participating in bidding ranking with the results marked therein.

 

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Civil Code

On May 28, 2020, the third session of the 13th National People’s Congress passed the Civil Code of the People’s Republic of China (the “Civil Code”), which was formally implemented on January 1, 2021. The Civil Code, for the first time, codifies the right of privacy as an independent personality right, stipulates a series of specific rules and formulates a framework of fundamental rights and obligations between natural persons and information processors. When conducting businesses, enterprises shall effectively strengthen the awareness of privacy rights of natural persons and personal data protection and strictly adhere to the principles of legality, justification and necessity. Enterprises shall collect and process personal information in strict compliance with the conditions as stipulated by laws and definitive agreements with the data subject concerned, and shall not over collect or process the data. The Civil Code provides principle provisions on the protection of data and online virtual assets. The Company should continue to strengthen the protection of intangible assets such as proprietary data, online virtual assets and intellectual property and enhance the compliance on the usage of such intangible assets.

Disclosure of Iranian Activities under Section 13(r) of the Exchange Act

Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Exchange Act, as amended. Section 13(r) requires an issuer to disclose in its annual or quarterly reports, as applicable, if it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction. Disclosure is required even where the activities, transactions or dealings are conducted outside the U.S. by non-U.S. affiliates in compliance with applicable law, and whether or not the activities are sanctionable under U.S. law.

As of the date of this report, we are not aware of any activity, transaction or dealing by us or any of our affiliates in 2020 that requires disclosure in this annual report under Section 13(r) of the Exchange Act, as amended.

 

C.

Organization Structure

See “—A. History and Development of the Company—Organizational Structure” included elsewhere under this Item.

 

D.

Property, Plants and Equipment

Properties

Executive Offices

Our principal executive offices are located in Beijing and we obtained the right to occupy and use these offices pursuant to an agreement we entered into with China Telecom Group in September 2002 and supplemental agreements on October 26, 2003, April 13, 2004, December 15, 2005, December 26, 2007, March 31, 2008, August 25, 2010, August 22, 2012, September 23, 2015 and August 20, 2018, respectively. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Ongoing Related Party Transactions between Us and China Telecom Group and Its Affiliated Companies—Centralized Services Agreement���.

Properties

We conduct our business on land and premises either owned by ourselves or leased from China Telecom Group and/or its affiliates and third parties. As to our owned properties, land and building titles to very few of the properties are still registered in the name of China Telecom Group and/or its affiliates. China Telecom Group has agreed to indemnify us against any loss or damage incurred by us caused by or arising from any challenge to, or interference with, our right to use these properties. As to our leased properties, China Telecom Group has undertaken to us that it will indemnify us against any loss or damage caused by or arising from any challenge to, or interference with, such right. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Ongoing Related Party Transactions between Us and China Telecom Group and Its Affiliated Companies—Property Leasing Framework Agreement”.

 

Item 4A.

Unresolved Staff Comments.

None.

 

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Item 5.

Operating and Financial Review and Prospects.

You should read the following discussion and analysis in conjunction with the consolidated financial statements and their related notes included in this annual report, in each case included elsewhere in this annual report. Our consolidated financial statements have been prepared in accordance with IFRS, as issued by the International Accounting Standards Board. The information included in the following discussion and analysis provides details on the information for the years ended December 31, 2020 and December 31, 2019. Information related to the year ended December 31, 2018 has not been included and can be found on the Company’s previously filed annual report on Form 20-F for the year ended December 31, 2019.

Our consolidated financial statements included elsewhere in this annual report reflect the establishment of China Telecom Leasing Corporation Limited in 2018, and the establishments of China Telecom Finance, Smart Home Company and IoT Company in 2019, described under “Item 4. Information on the Company—A. History and Development of the Company—Establishment of China Telecom Leasing Corporation Limited”, “—Establishment of China Telecom Group Finance Co., Ltd.”, “—Establishment of E-surfing Smart Home Technology Co., Ltd.” and “—Establishment of E-surfing Internet of Things Technology Co., Ltd.”.

Overview

We are an integrated intelligent information service provider in the PRC. We offer a comprehensive range of telecommunications services, including Internet services, information and application services, voice services, telecommunications network resource and equipment services and other related services. We will continue to leverage our full-service capabilities to further enhance our integrated and differentiated development of operation of wireline, mobile and Internet services to achieve steady growth of our business.

Financial Overview

Our operating revenues increased by 4.7%, from RMB375,734 million in 2019 to RMB393,561 million in 2020. The increase was mainly attributable to the increases of revenues from Internet services and information and application services. Our operating expenses increased by 5.3% from RMB346,664 million in 2019 to RMB364,921 million in 2020. The increase in operating expenses was primarily due to the increases in network operations and support expenses as well as impairment loss on property, plant and equipment. Our operating income in 2019 and 2020 was RMB29,070 million and RMB28,640 million, respectively. The profit attributable to equity holders of the Company increased by 1.6%, from RMB20,517 million in 2019 to RMB20,850 million in 2020.

The table below sets forth a breakdown of our operating revenues in terms of amount and as a percentage of our total operating revenues for the periods indicated:

 

   Year Ended December 31, 
   2019  2020 
   Amount   Percentage
of
Operating
Revenues
  Amount   Percentage
of
Operating
Revenues
 
   (RMB in millions, except percentage data) 

Operating Revenues:

       

Voice services(1)

   45,146    12.0  40,866    10.4

Internet services(2)

   197,244    52.5  208,019    52.9

Information and application services(3)

   87,623    23.3  96,885    24.6

Telecommunications network resource and equipment services(4)

   21,978    5.9  22,623    5.7

Others(5)

   23,743    6.3  25,168    6.4
  

 

 

   

 

 

  

 

 

   

 

 

 
  

 

 

   

 

 

  

 

 

   

 

 

 

Total operating revenues

   375,734    100.0  393,561    100.0
  

 

 

   

 

 

  

 

 

   

 

 

 

 

(1)

Represent the aggregate amount of voice usage fees, installation fees and interconnections fees charged to customers for the provision of telephony services.

(2)

Represent amounts charged to customers for the provision of Internet access services.

(3)

Represent primarily the aggregate amount of fees charged to customers for the provision of IDC service, digitalized platform services, Smart Family, caller ID service and short messaging service and etc.

(4)

Represent amounts charged to other domestic telecommunications operators and enterprise customers for the provision of telecommunications network resource and equipment services.

(5)

Represent primarily revenues from sales, and repair and maintenance of telecommunications equipment as well as the resale of mobile services (MVNO), and revenue from property rental and other revenues.

 

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The following table sets forth a breakdown of our operating expenses in terms of amount and as a percentage of our total operating revenues for the periods indicated:

 

   Year Ended December 31, 
   2019  2020 
   Amount   Percentage
of
Operating
Revenues
  Amount   Percentage
of
Operating
Revenues
 
   (RMB in millions, except percentage data) 

Operating Expenses:

  

Depreciation and amortization

   88,145    23.5  90,240    22.9

Network operations and support expenses

   109,799    29.2  119,517    30.3

Selling, general and administrative expenses

   57,361    15.3  55,059    14.0

Personnel expenses

   63,567    16.9  65,989    16.8

Other operating expenses

   27,792    7.4  29,074    7.4

Impairment loss on property, plant and equipment

   —      —     5,042    1.3
  

 

 

   

 

 

  

 

 

   

 

 

 
  

 

 

   

 

 

  

 

 

   

 

 

 

Total operating expenses

   346,664    92.3  364,921    92.7

The following table sets forth our operating revenues, operating expenses, operating income and profit attributable to equity holders of the Company in terms of amount and as a percentage of our total operating revenues, and cash flows from operating activities for the periods indicated:

 

   Year Ended December 31, 
   2019  2020 
   Amount   Percentage
of
Operating
Revenues
  Amount   Percentage
of
Operating
Revenues
 
   (RMB in millions, except percentage data) 

Operating revenues

   375,734    100.0  393,561    100.0

Operating expenses

   346,664    92.3  364,921    92.7

Operating income

   29,070    7.7  28,640    7.3

Profit attributable to equity holders of the Company

   20,517    5.5  20,850    5.3

Net cash flow from operating activities

   112,600    —     132,260    —   

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations contained elsewhere in this annual report are based on our consolidated financial statements include elsewhere in this annual report which have been prepared in accordance with IFRS. Our reported financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of our consolidated financial statements. We base our assumptions and estimates on historical experience and on various other assumptions that we believe to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources. On an ongoing basis, our management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.

The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our financial statements. Our principal accounting policies are set forth in detail in Note 3 to our consolidated financial statements included elsewhere in this annual report. We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

Revenue from contract with customers

We recognize revenue when (or as) a performance obligation is satisfied, i.e., when “control” of the goods or services underlying the particular performance obligation is transferred to the customer.

A performance obligation represents a good or service (or a bundle of goods or services) that is distinct or a series of distinct goods or services that are substantially the same.

Control is transferred over time and revenue is recognized over time by reference to the progress towards complete satisfaction of the relevant performance obligation if one of the following criteria is met:

 

  

the customer simultaneously receives and consumes the benefits provided by our performance as we perform;

 

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our performance creates and enhances an asset that the customer controls as we perform; or

 

  

our performance does not create an asset with an alternative use to us and we have an enforceable right to payment for performance completed to date.

As such, revenues from contracts with customers of telecommunications services, including voice, Internet, information and application and telecommunications network resource and equipment services, resale of mobile services (MVNO) and repair and maintenance of equipment are generally recognized over time during which the services are provided to customers.

Otherwise, revenue is recognized at a point in time when the customer obtains control of the distinct good or service. As such, revenues from sales of equipment are recognized at a point in time when the equipment is delivered to the customers and when the control over the equipment have been transferred to the customers.

A contract asset represents our right to consideration in exchange for goods or services that we have transferred to a customer but the right is conditioned on our future performance. A contract asset is transferred to accounts receivable when the right becomes unconditional. A contract asset is assessed for impairment in accordance with IFRS 9. In contrast, a receivable represents our unconditional right to consideration, i.e. only the passage of time is required before payment of that consideration is due.

A contract liability represents our obligation to transfer goods or services to a customer for which we have received consideration (or an amount of consideration is due) from the customer. When we receive an advance payment before the performance obligation is satisfied, this will give rise to a contract liability, until the operating revenues recognized on the relevant contract exceed the amount of the advance payment.

A contract asset and a contract liability relating to the same contract are accounted for and presented on a net basis.

Contracts with multiple performance obligations (including allocation of transaction price)

For contracts that contain more than one performance obligations, such as our direct sales of promotional packages bundling terminal equipment, e.g. mobile handsets, and the telecommunications services, we allocate the transaction price to each performance obligation on a relative standalone selling price basis.

The standalone selling price of the distinct good or service underlying each performance obligation is determined at contract inception. It represents the price at which we would sell a promised good or service separately to a customer. If a standalone selling price is not directly observable, we estimate it using appropriate techniques such that the transaction price ultimately allocated to any performance obligation reflects the amount of consideration to which we expect to be entitled in exchange for transferring the promised goods or services to the customer.

Over time revenue recognition: measurement of progress towards complete satisfaction of a performance obligation

The progress towards complete satisfaction of a performance obligation is generally measured based on output method, which is to recognize revenue on the basis of direct measurements of the value of the goods or services transferred to the customer to date relative to the remaining goods or services promised under the contract.

Principal versus agent

When another party is involved in providing goods or services to a customer, we determine whether the nature of our promise is a performance obligation to provide the specified goods or services ourselves (i.e. we are a principal) or to arrange for those goods or services to be provided by the other party (i.e. we are an agent).

We are a principal if we control the specified good or service before that good or service is transferred to a customer.

We are an agent if our performance obligation is to arrange for the provision of the specified good or service by another party. In this case, we do not control the specified good or service provided by another party before that good or service is transferred to the customer. When we act as an agent, we recognize revenue in the amount of any fee or commission to which we expect to be entitled in exchange for arranging for the specified goods or services to be provided by the other party.

Consideration payable to a customer

Consideration payable to a customer includes cash amounts that we pay, or expect to pay, to the customer, and also includes credit or other items that can be applied against amounts owed to us. We account for such consideration payable to a customer as a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to us and the fair value of the good or service received from the customer can be reasonably estimated.

 

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Certain subsidies payable to third party agent incurred by us in respect of customer contracts, which will be ultimately enjoyed by end customers, and other subsidies incurred by us directly payable to our customers, are qualified as consideration payable to a customer and accounted for as a reduction of operating revenues.

Incremental costs of obtaining a contract

Incremental costs of obtaining a contract are those costs that we incur to obtain a contract with a customer that we would not have incurred if the contract had not been obtained.

Certain commissions incurred by us paid or payable to third party agents, whose selling activities result in customers entering into sale agreements for our telecommunications services, are qualified as incremental costs. We recognize such costs as an asset, included in other assets, if we expect to recover these costs. The asset so recognized is subsequently amortized to profit or loss on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the assets relate. The asset is subject to impairment review.

We apply the practical expedient of expensing all incremental costs to obtain a contract if these costs would otherwise have been fully amortized to profit or loss within one year.

Costs to fulfill a contract

When we incur costs to fulfill a contract, we first assess whether these costs qualify for recognition as an asset in terms of other relevant standards, failing which we recognize an asset for these costs only if they meet all of the following criteria:

 

  

the costs relate directly to a contract or to an anticipated contract that we can specifically identify;

 

  

the costs generate or enhance our resources that will be used in satisfying (or in continuing to satisfy) performance obligations in the future; and

 

  

the costs are expected to be recovered.

The asset so recognized is subsequently amortized to profit or loss on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the assets relate. The asset is subject to impairment review.

Accounting for goodwill and long-lived assets

Depreciation. Property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets after taking into account their estimated residual value. The following estimated useful lives are used for depreciation purposes. These estimated useful lives are based on our historical experience with similar assets and take into account anticipated technological changes.

 

   Depreciable lives
primarily range from
Buildings and improvements  8 - 30 years
Telecommunications network plant and equipment  5 - 10 years
Furniture, fixture, motor vehicles and other equipment  5 - 10 years

We review the estimated useful lives of the assets regularly in order to determine the amount of depreciation expense to be recorded during any reporting period. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.

Impairment. The carrying amounts of long-lived assets, including property, plant and equipment, right-of-use assets, intangible assets with finite useful lives, construction in progress and contract costs included in other assets are reviewed periodically in order to determine whether there is any indication of impairment. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. For goodwill, the impairment testing is performed annually at each year end.

Before we recognize an impairment loss for assets capitalized as contract costs under IFRS 15, we assess and recognize any impairment loss on other assets related to the relevant contracts in accordance with applicable standards. Then, impairment loss, if any, for assets capitalized as contract costs is recognized to the extent the carrying amounts exceed the remaining amount of consideration that we expect to receive in exchange for related goods or services less the costs which relate directly to providing those goods or services that have not been recognized as expenses. The assets capitalized as contract costs are then included in the carrying amount of the cash-generating unit to which they belong for the purpose of evaluating impairment of that cash-generating unit.

 

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The recoverable amount of an asset or a cash-generating unit is the greater of its fair value less costs of disposal and value in use. The recoverable amount of a tangible and an intangible asset is estimated individually. When an asset does not generate cash flows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash generating unit). In determining the value in use, expected future cash flows generated by the assets are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. The goodwill arising from a business combination, for the purpose of impairment testing, is allocated to cash generating units that are expected to benefit from the synergies of the combination.

An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment loss is recognized as an expense in profit or loss. Impairment loss recognized in respect of cash-generating units is allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis.

We assess at the end of each reporting period whether there is any indication that an impairment loss recognized for an asset in prior years may no longer exist. An impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount. A subsequent increase in the recoverable amount of an asset, when the circumstances and events that led to the write-down cease to exist, is recognized as an income in profit or loss. The reversal is reduced by the amount that would have been recognized as depreciation and amortization had the write-down not occurred. An impairment loss in respect of goodwill is not reversed. For the years presented, no reversal of impairment loss was recognized in profit or loss.

For the year ended December 31, 2020, provision for impairment losses of RMB5,042 million were made against the carrying value of long-lived assets mainly based on the impairment test on the 3G specific mobile network assets (“3G Assets”) on the basis of each individual asset. For the years ended December 31, 2019 and 2018, no provision for impairment losses were made against the carrying value of long-lived assets.

Provision of expected credit losses (“ECL”) for accounts receivable

We use provision matrix to calculate ECL for the accounts receivable. The provision rates are based on customer’s past history of making payments when due and current ability to pay by groupings of various debtors that have similar loss patterns. The provision matrix is based on our historical credit loss experience taking into consideration reasonable and supportable forward-looking information that is available without undue cost or effort. The historical loss rates are reassessed annually, and changes in the forward-looking information are considered. In addition, accounts receivable with significant balances and credit-impaired are assessed for ECL individually.

Recently Issued International Financial Reporting Standards

Up to the date of issue of our 2020 financial statements, the International Accounting Standards Board, or the IASB, has issued the following new and amendments to standards which are not yet effective and not early adopted for the annual accounting period ended December 31, 2020:

 

   Effective for
accounting period
beginning on or after
 

Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 “Interest Rate Benchmark Reform – Phase 2

   January 1, 2021 

Amendments to IFRS 3, “Reference to the Conceptual Framework

   January 1, 2022 

Amendments to IAS 16, “Property, Plant and Equipment: Proceeds before Intended Use

   January 1, 2022 

Amendments to IAS 37, “Onerous Contracts – Cost of Fulfilling a Contract

   January 1, 2022

Amendments to IFRS Standards, “Annual Improvements to IFRS Standards 2018-2020

   January 1, 2022 

IFRS 17, “Insurance Contracts and the related Amendments

   January 1, 2023 

Amendments to IAS 1 “Classification of Liabilities as Current or Non-current

   January 1, 2023 

Amendments to IAS 1 and IFRS Practice Statement 2, “Disclosure of Accounting Policies

   January 1, 2023 

Amendments to IAS 8, “Definition of Accounting Estimates

   January 1, 2023 

Amendments to IFRS 10 and IAS 28, “Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

   To be determined 

We are in the process of making an assessment of the impact that will result from adopting the new and amendments to standards issued by the IASB, which are not yet effective for the accounting period ended on December 31, 2020. So far we believe that the adoption of these new and amendments to standards is unlikely to have a significant impact on our financial position and the results of operations.

 

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A.

Operating Results

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Operating Revenues

Our operating revenues increased by RMB17,827 million, or 4.7% from RMB375,734 million in 2019 to RMB393,561 million in 2020. This increase was primarily because our revenues from Internet services and information and application services increased, which was partially offset by the revenue decline in voice services.

Voice Services. Revenues from our voice services decreased by 9.5% from RMB45,146 million in 2019 to RMB40,866 million in 2020, representing 10.4% of our operating revenues in 2020. Among such revenues, revenues from our wireline voice services decreased by 13.0% from RMB18,425 million in 2019 to RMB16,034 million in 2020 and revenues from our mobile voice services decreased by 7.1% from RMB26,721 million in 2019 to RMB24,832 million in 2020. The decrease in revenue from our voice services was primarily due to the effect of the cannibalization of our mobile Internet services, in combination with alternative means of communication such as Over-the-Top messaging services.

Internet Services. Revenues from our Internet services increased by 5.5% from RMB197,244 million in 2019 to RMB208,019 million in 2020, representing 52.9% of our operating revenues in 2020. This increase was primarily due to our achievement of a valuable scale expansion in the mobile subscriber market leveraging the promising start for our 5G consumer services. The number of our mobile subscribers continued to rise. As of December 31, 2020, the number of our mobile subscribers increased to 351 million, representing a net addition of 15.5 million and expanding its market share to 22.0%. The revenue attributable to handset Internet access was RMB130,655 million in 2020, representing an increase of 6.0% from 2019. In addition, the number of our wireline broadband subscribers increased to 158.5 million as of December 31, 2020, representing an increase of approximately 5.4 million, or 3.5%, from 153.1 million as of December 31, 2019. Due to our comprehensive promotion of the upgrade of family informatization services, and reshaping of the value of broadband access business, the wireline broadband revenue was RMB71,872 million in 2020, representing an increase of 5.1% from RMB68,413 million in 2019.

Information and Application Services. Revenues from our information and application services increased by 10.6% from RMB87,623 million in 2019 to RMB96,885 million in 2020, representing 24.6% of our operating revenues in 2020. This increase was primarily due to the rapid growth of our emerging businesses such as IDC, Industry Cloud, Smart Family and Internet Finance.

Telecommunications Network Resource and Equipment Services. Revenues from our telecommunications network resource and equipment services increased by 2.9% from RMB21,978 million in 2019 to RMB22,623 million in 2020, representing 5.7% of our operating revenues in 2020. This increase was primarily due to the growth in revenues from cloud dedicated lines and IP-VPN service.

Others. Other revenues increased by 6.0% from RMB23,743 million in 2019 to RMB25,168 million in 2020, representing 6.4% of our operating revenues in 2020. The increase in other revenues was primarily due to the increase in the scale of mobile terminals sold.

Operating Expenses

Our operating expenses increased by 5.3% from RMB346,664 million in 2019 to RMB364,921 million in 2020. The increase in operating expenses was primarily due to increases in network operations and support expenses as well as impairment loss on property, plant and equipment, which were partially offset by the decrease in selling, general and administrative expenses.

Depreciation and Amortization. Our depreciation and amortization expenses increased by 2.4% from RMB88,145 million in 2019 to RMB90,240 million in 2020. The depreciation and amortization expenses as a percentage of our operating revenues decreased from 23.5% in 2019 to 22.9% in 2020. The increase in our depreciation and amortization expenses is primarily attributable to our increase in capital expenditure in order to support the scale construction of 5G network and constantly strengthen our competitive advantages in network.

Network Operations and Support Expenses. Our network operations and support expenses increased by 8.9% from RMB109,799 million in 2019 to RMB119,517 million in 2020. This is mainly attributable to our continuous optimization in network quality while improving user perception, actively providing support for 5G and Industrial Digitalization (which primarily includes Industry Cloud, IDC, digitalized platform, Network Dedicated Line, IoT and other services) service, and appropriately increasing the deployment in network operation expenditures.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses decreased by 4.0% from RMB57,361 million in 2019 to RMB55,059 million in 2020. The selling expenses were RMB45,447 million in 2020, representing an decrease of 6.2% from 2019, primarily due to our persistent high-quality development, acceleration of the transformation of our sales model and the online and offline synergistic development, enhancement in channel management and precision marketing capabilities and continuous improvement in the input efficiency of marketing resources. Our general and administrative expenses were RMB9,612 million in 2020, representing an increase of 8.1% from 2019, primarily due to our active promotion of sci-tech innovation, accelerated transformation to a sci-tech company and increase in the expenditure in research and development.

 

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Personnel Expenses. Personnel expenses increased by 3.8% from RMB63,567 million in 2019 to RMB65,989 million in 2020, primarily due to our continued introduction of high-tech talents and increased incentives for front-line employees and high performance team, so as to enhance employees’ vitality. Increase in personnel expenses is in line with our transformation towards a sci-tech company in the future. The personnel expenses as a percentage of our operating revenues remained stable at 16.8% in 2020 compared to 16.9% in 2019.

Other Operating Expenses. Our other operating expenses primarily consist of interconnection charges, cost of goods sold, donations and other expenses. Our other operating expenses were RMB29,074 million in 2020, which increased by 4.6% from RMB27,792 million in 2019. The increase was primarily due to the increase in the scale of mobile terminals sold.

Impairment loss on property, plant and equipment. Following the network evolution and the full coverage of 4G and 5G scale deployment, the data traffic carried by our 3G network was rapidly shrinking and the cash flow from the continual use of 3G Assets is expected to be so small and even become negligible. Given we have made a commitment in the year to gradually terminate our use of 3G Assets in the near future, in accordance with the relevant requirements of IFRS, we conducted an impairment test on the 3G Assets on the basis of each individual asset, and recognized an impairment loss of RMB5,042 million at the end of 2020. The impairment loss on property, plant and equipment as a percentage of our operating revenues was 1.3% in 2020.

Net Finance Costs

Our net finance costs decreased by 17.2% from RMB3,639 million in 2019 to RMB3,014 million in 2020. This is primarily attributable to our implementation of low-cost financing and reduction in financing costs, continuous improvement in the capability of funds management, sophisticated management on financing, and competent control of the scale of indebtedness by seizing favorable market opportunities.

The net exchange loss was RMB163 million in 2020, compared to a net exchange loss of RMB41 million in 2019, which was primarily due to fluctuation of the Renminbi exchange rate against the U.S. dollars in 2020. According to the exchange rates published by the People’s Bank of China on December 31, 2020, the exchange rate of Renminbi appreciated by 6.5% against the U.S. dollars from December 31, 2019.

Income Tax

In 2020, our income tax expense was RMB6,307 million with an effective tax rate of 23.0%. Our expected income tax expense at our statutory tax rate of 25.0% in 2020 would be RMB6,847 million. The difference between our effective income tax rate and the statutory income tax rate was primarily due to the low tax rates enjoyed by some subsidiaries and some branches located in the western region of China and the preferential income tax policies enjoyed by us such as additional tax deduction on expenses for research and development proactively implemented by us. Furthermore, our income from investments in associate company, Tower Company, is not subject to income tax in the current year. See Note 32 to our consolidated financial statements included elsewhere in this annual report for further details in respect of the reconciliation of the expected tax expense with the actual tax expense.

Profit Attributable to Equity Holders of the Company

As a result of the foregoing, the profit attributable to equity holders of the Company was RMB20,850 million in 2020, representing an increase of 1.6% from the profit attributable to equity holders of the Company of RMB20,517 million in 2019.

 

B.

Liquidity and Capital Resources

Cash Flows and Working Capital

The following table summarizes our cash flows for the periods indicated:

 

   Year Ended
December 31,
 
   2019  2020 
   (RMB in millions) 

Net cash flow from operating activities

   112,600   132,260 

Net cash used in investing activities

   (77,214  (87,077

Net cash used in financing activities

   (31,288  (42,107
  

 

 

  

 

 

 

Net increase in cash and cash equivalents

   4,098   3,076 

Cash and cash equivalents increased by 13.9% from RMB20,791 as of December 31, 2019, of which 78.0% was denominated in RMB, to RMB23,684 million as of December 31, 2020, of which 73.0% was denominated in RMB. Our net cash inflow was RMB3,076 million in 2020, as compared with the net cash inflow of RMB4,098 million in 2019.

 

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Our principal source of liquidity is net cash inflow from operating activities, which was RMB132,260 million in 2020, representing an increase of RMB19,660 million from RMB112,600 million of net cash inflow in 2019, primarily because we strengthened the management of accounts receivable and more subscribers applied the pre-paid method.

Net cash outflow used in investing activities increased by RMB9,863 million from RMB77,214 million in 2019 to RMB87,077 million in 2020, primarily attributable to the increase in capital expenditure on supporting the development of 5G and Industrial Digitalization service.

Net cash outflow used in financing activities was RMB42,107 million in 2020 compared to RMB31,288 million in 2019, primarily because we controlled the scale of indebtedness within a reasonable level, resulting in decline in the cash inflow from loans.

Our working capital (defined as current assets minus current liabilities) was a deficit of RMB187,126 million as of December 31, 2020, representing a decrease of deficit of RMB4,353 million, compared to a deficit of RMB191,479 million as of December 31, 2019.

We estimate that our current cash and cash equivalents, together with our existing credit facilities from domestic commercial banks, cash flows from operating activities, as well as funds available from short-term and long-term bank borrowings and debt financing, will be sufficient to satisfy our future working capital requirements and capital expenditures through the end of 2021. We have established and maintained high credit ratings in domestic major financing markets, which have facilitated our ability to obtain short-term and long-term credit on favorable terms to meet our financing requirements. As of December 31, 2020, we had unutilized credit facilities of RMB244,326 million with major domestic commercial banks, from which we can draw upon.

Indebtedness

Our indebtedness as of the dates indicated was as follows:

 

   As of
December 31,
 
   2019   2020 
   (RMB in millions) 

Short-term debt

   42,527    27,994 

Long-term debt maturing within one year

   4,444    1,126 

Long-term debt

   32,051    24,222 
  

 

 

   

 

 

 

Total debt

   79,022    53,342 
  

 

 

   

 

 

 

 

Our total debt decreased by RMB25,680 million from RMB79,022 million as of December 31, 2019 to RMB53,342 million as of December 31, 2020, primarily due to our continuous enhancement of funds management, improvement in the centralized funds management and appropriate control of the scale of indebtedness. Our debt-to-asset ratio (total debt divided by total assets) decreased from 11.2% as of December 31, 2019 to 7.5% as of December 31, 2020. We believe that our Company has maintained a solid capital structure.

Our short-term debt constituted 52.5% of our total debt as of December 31, 2020. The weighted average interest rate of our short-term debt was 2.8% as of December 31, 2020, representing a decrease of 0.1 percentage point from that as of December 31, 2019.

Our long-term debt (including current portion) decreased from RMB36,495 million as of December 31, 2019 to RMB25,348 million as of December 31, 2020.

Of our total debt as of December 31, 2020, 99.3%, 0.4% and 0.3% were denominated in Renminbi, U.S. dollars and Euros, respectively, and 90.1% and 9.9% were with fixed interest rate and floating interest rate, respectively.

Our short-term and long-term debt does not contain any financial covenants.

 

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Contractual Obligations and Commercial Commitments

The following table sets forth our contractual obligations as of December 31, 2020:

 

   Payable in 
   Total   2021   2022   2023   2024   2025   After
2025
 
   (RMB in millions) 

Contractual Obligations(1):

              

Short-term debt

   27,994    27,994    —      —      —      —      —   

Long-term debt

   25,348    1,126    17,081    3,009    984    952    2,196 

Lease liabilities

   40,647    13,192    12,585    5,104    3,564    2,470    3,732 

Interest payable

   6,129    1,964    1,535    664    506    466    994 

Capital commitments

   20,199    20,199    —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual obligations

   120,317    64,475    31,201    8,777    5,054    3,888    6,922 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

See “Item 11. Quantitative and Qualitative Disclosures about Market Risk” for the contractual obligations relating to interest payments.

Capital Expenditure

The following table sets forth our historical and planned capital expenditure requirements for the periods indicated. Actual future capital expenditures for the period after December 31, 2020 may differ from the amounts indicated below.

 

   Year Ended December 31, 
   2019   2020   2021
(Planned)
 
   (RMB in millions) 

Total capital expenditure

   77,557    84,800    87,000 

In 2020, we continually promoted the 5G network co-building and co-sharing, sped up investment in 5G network construction, and continuously improved 5G network coverage. Meanwhile, we accelerated the construction of e-Surfing Cloud and IDC. In 2020, our capital expenditure was RMB84,800 million, representing an increase of 9.3% from RMB77,557 million in 2019.

Our capital expenditure for 2021 is expected to be approximately RMB87,000 million. The investment in mobile networks will be mainly used for continuously expanding 5G network coverage, co-sharing and co-building 4G base stations as well as redeploying under-utilized 4G base stations to busy or blind-spot areas. The investment in broadband networks will be mainly used for modifying and constructing fiber-to-the-home ports, and adding new 10G passive optical networks ports. The investment in Industrial Digitalization, which primarily includes IDC, Industry Cloud, digitalized platform, Network Dedicated Line, IoT and other services, will be mainly used for building 100,000 servers and scale deployment of multi-access edge computing (MEC)/edge cloud business as well as focusing on four key regions of China to build 52,000 newly commissioned cabinets. The remaining budget is expected to be mainly used for the construction and upgrade of our operating systems, business platforms and infrastructure facilities.

Capital Resources

The main sources of our capital resources are cash generated from operating activities, bank borrowings and other indebtedness. Furthermore, we also plan to raise additional capital by publicly offering A shares. Please see “Item 4. Information on the Company—A. History and Development of the Company—Proposed A Share Offering” for more information. We expect that we will have sufficient funding sources to meet our capital resources requirements in the future.

Off-Balance Sheet Arrangements

As of December 31, 2020, we did not have any off-balance sheet arrangements or guarantees.

 

C.

Research and Development, Patents and Licenses, etc.

Our emphasis on research and development has contributed to the development of our advanced network, system, and the rollout of our new applications and services. Our research and development personnel focuses on cloud-network integration, cyber security, network planning and support, new technology trials, market evaluation, investment-related financial analysis and other key areas. Specific areas of research include 5G mobile communications technology, ultra-high-speed optic fiber transmission technology, cloud computing, Big Data, artificial intelligence technology, IoT, broadband access, operation and service support systems and development of value-added services.

 

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D.

Trend Information

Please refer to our discussion in each section of “—Overview” and “—A. Operating Results” included elsewhere under this Item.

 

E.

Critical Accounting Estimates

Please refer to our discussion in each section of “—Overview—Critical Accounting Policies” included elsewhere under this Item.

 

Item 6.

Directors, Senior Management and Employees.

 

A.

Directors and Senior Management

Directors and Senior Officers

Pursuant to our Articles of Association, our Directors must be elected by our shareholders at a general meeting. Our Directors are generally elected for a term of three years and may serve consecutive terms if re-elected. The term of office for the current seventh session of the Board is three years, starting from May 26, 2020 on which the Company’s annual general meeting for the year 2019, or 2019 AGM, was held until the date of the Company’s annual general meeting for the year 2022 expected to be held in the year 2023, upon which the eighth session of the Board will be elected. At the 2019 AGM, the shareholders of the Company approved the re-election of Mr. Ke Ruiwen, Mr. Chen Zhongyue, Mr. Liu Guiqing, Madam Zhu Min, Mr. Wang Guoquan and Mr. Chen Shengguang as Directors of the seventh session of the Board, and approved the re-election of Mr. Tse Hau Yin, Aloysius, Mr. Xu Erming, Madam Wang Hsuehming and Mr. Yeung Chi Wai, Jason as Independent Directors of the seventh session of the Board. Meanwhile, the shareholders of the Company approved the election of Mr. Li Zhengmao, the President and Chief Operating Officer of the Company and Mr. Shao Guanglu as Directors of the seventh session of the Board at the 2019 AGM. As of December 31, 2020, the Board comprised eleven Directors with six Executive Directors, one Non-Executive Director and four Independent Non-Executive Directors. Our Board currently consists of ten Directors with five Executive Directors, one Non-Executive Director and four Independent Non-Executive Directors.

On January 17, 2020, Mr. Gao Tongqing resigned from his positions as an Executive Director and Executive Vice President of the Company due to change in work arrangement.

On March 23, 2020, Mr. Li Zhengmao was appointed as the President and Chief Operating Officer of the Company and on the same date, Mr. Ke Ruiwen, an Executive Director, Chairman and Chief Executive Officer of the Company, ceased to act as the President and Chief Operating Officer of the Company.

On December 4, 2020, Mr. Wang Guoquan resigned from his positions as an Executive Director and Executive Vice President of the Company due to change in work arrangement.

On January 19, 2021, Mr. Chen Zhongyue resigned from his positions as an Executive Director and Executive Vice President of the Company due to change in work arrangement.

The following table sets forth certain information concerning our current Directors and executive officers. The business address of each of our Directors and executive officers is 31 Jinrong Street, Xicheng District, Beijing, PRC 100033.

 

Name

  Age   

Position

Ke Ruiwen

   57   Executive Director, Chairman and Chief Executive Officer

Li Zhengmao

   58   Executive Director, President and Chief Operating Officer

Shao Guanglu

   57   Executive Director

Zhang Zhiyong

   55   Executive Vice President

Liu Guiqing

   54   Executive Director and Executive Vice President

Zhu Min

   56   Executive Director, Executive Vice President, Chief Financial Officer and Secretary of the Board

Chen Shengguang

   57   Non-Executive Director

Tse Hau Yin, Aloysius

   73   Independent Non-Executive Director

 

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Name

  Age   

Position

Xu Erming

   71   Independent Non-Executive Director

Wang Hsuehming

   71   Independent Non-Executive Director

Yeung Chi Wai, Jason

   66   Independent Non-Executive Director

Ke Ruiwen, age 57, is an Executive Director, the Chairman of the Board and Chief Executive Officer of the Company. He joined the Board of the Company in May 2012. Mr. Ke obtained a doctorate degree in business administration (DBA) from the ESC Rennes School of Business. Mr. Ke served as Deputy Director General of Jiangxi Posts and Telecommunications Administration, Deputy General Manager of Jiangxi Telecom, Managing Director of the Marketing Department of the Company and China Telecommunications Corporation, General Manager of Jiangxi Telecom, Managing Director of the Human Resources Department of the Company and China Telecommunications Corporation, Executive Vice President, President and Chief Operating Officer of the Company, Vice President and President of China Telecommunications Corporation and the Chairman of Supervisory Committee of China Tower Corporation Limited. He is also the Chairman of China Telecommunications Corporation. Mr. Ke has extensive experience in management and the telecommunications industry.

Li Zhengmao, age 58, is an Executive Director, the President and Chief Operating Officer of the Company. He joined the Board of the Company in May 2020. Mr. Li graduated from Sichuan University with a major in radio electronics and received a master degree in radio technology from Chengdu Telecommunications Engineering Institute and a doctorate degree in communication and electronic system of radio engineering from Southeast University. Mr. Li served as an Executive Director and Vice President of China Unicom Limited, a Director and Vice President of China United Telecommunications Corporation, a Vice President of China Mobile Limited which is listed on the Main Board of the HKSE, a Vice President and General Counsel of China Mobile Communications Group Co., Ltd. and a Director and Vice President of China Mobile Communication Co., Ltd., a Non-Executive Director of China Communications Services Corporation Limited which is listed on the Main Board of the HKSE and a Vice Chairman of True Corporation Public Company Limited which is listed on the Stock Exchange of Thailand. Mr. Li is also a Director and the President of China Telecommunications Corporation. Mr. Li has extensive experience in management and the telecommunications industry.

Shao Guanglu, age 57, is an Executive Director of the Company. He joined the Board of the Company in May 2020. Mr. Shao is a professor-level senior engineer. He graduated and received master degrees in engineering and economics from Harbin Institute of Technology and a doctorate degree in management from Nankai University. Mr. Shao served as a Deputy General Manager of China United Network Communications Group Company Limited, an Executive Director and Senior Vice President of China Unicom (Hong Kong) Limited, which is listed on the Main Board of the HKSE, a Senior Vice President of China United Network Communications Limited, which is listed on the Shanghai Stock Exchange, a Director and Senior Vice President of China United Network Communications Corporation Limited, a Non-Executive Director of China Communications Services Corporation Limited, China Tower Corporation Limited and PCCW Limited, all of which are listed on the Main Board of the HKSE, a member of the board of directors of Open Networking Foundation, a member of the strategy committee of GSM Association and a Vice President of China Information Technology Industry Federation. Mr. Shao is currently a Director of China Telecommunications Corporation and a Deputy Director of Communications Science and Technology Committee of the Ministry of Industry and Information Technology of the People’s Republic of China. Mr. Shao has extensive experience in management and the telecommunications industry.

Zhang Zhiyong, age 55, was appointed as an Executive Vice President of the Company on July 10, 2018. Mr. Zhang is a senior engineer. He graduated from the Changchun Institute of Posts and Telecommunications with a bachelor degree in radio engineering. He also received a master degree in control engineering from Yanshan University and a master of management degree from BI Norwegian School of Management. Mr. Zhang served as Managing Director of the Sideline Industrial Management Department of China Telecommunications Corporation, President and Executive Director of China Communications Services Corporation Limited which is listed on the Main Board of the HKSE, General Manager of Xinjiang branch and Beijing branch of China Telecom Corporation Limited. He is also a Vice President and Chief Network Security Officer of China Telecommunications Corporation, the Chairman of the board of directors and an Executive Director of China Communications Services Corporation Limited and a Non-Executive Director of China Tower Corporation Limited, both of which are listed on the Main Board of the HKSE. Mr. Zhang has extensive experience in management and the telecommunications industry.

Liu Guiqing, age 54, is an Executive Director and Executive Vice President of the Company. He joined the Board of the Company in August 2019. Mr. Liu is a professor-level senior engineer. He received a doctorate degree in engineering science from National University of Defense Technology. Mr. Liu served as Deputy General Manager and General Manager of China Unicom Hunan branch and General Manager of China Unicom Jiangsu provincial branch. He is also a Vice President of China Telecommunications Corporation, a Deputy Director General of China Institute of Communications and a Director of Global System for Mobile communications Association (GSMA). Mr. Liu has extensive experience in management and the telecommunications industry.

 

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Zhu Min, age 56, is an Executive Director, Executive Vice President, Chief Financial Officer and Secretary of the Board of the Company. She joined the Board of the Company in October 2018. Madam Zhu is a senior accountant. She received a master degree in system engineering from the Faculty of Management Engineering at the Beijing Institute of Posts and Telecommunications and a doctorate degree in business administration from the Hong Kong Polytechnic University. Madam Zhu served as Managing Director of Finance Department of China Telecom (Hong Kong) Limited, Managing Director of Finance Department of China Mobile (Hong Kong) Group Limited, Deputy Chief Financial Officer and Managing Director of Finance Department of China Mobile Limited, which is listed on the Main Board of the HKSE, Director General of Finance Department of China Mobile Communications Corporation, Deputy Chief Accountant and Director General of Finance Department of China Mobile Communications Group Co., Ltd. and a Director of Shanghai Pudong Development Bank Co., Ltd., which is listed on the Shanghai Stock Exchange. She is currently the Chief Accountant of China Telecommunications Corporation. Madam Zhu has extensive experience in finance, management and the telecommunications industry.

Chen Shengguang, age 57, is a Non-Executive Director of the Company. He joined the Board of the Company in May 2017. Mr. Chen graduated from Zhongnan University of Economics with a major in finance and accounting, and obtained a postgraduate degree in economics from Guangdong Academy of Social Sciences and a master degree in business administration (MBA) from Lingnan College of Sun Yat-sen University. Mr. Chen is currently the Director and General Manager of Guangdong Rising Holdings Group Co., Ltd. (one of the domestic shareholders of the Company). Mr. Chen served as the Manager of Finance Department and Deputy General Manager of Guangdong Foreign Trade Import & Export Corporation, Head of Finance Department, Assistant to General Manager and Chief Accountant of Guangdong Guangxin Foreign Trade Group Co., Limited, a Director of FSPG Hi-Tech Co., Ltd. which is listed on the Shenzhen Stock Exchange, a Non-Executive Director of Xingfa Aluminium Holdings Limited, which is listed on the Main Board of the HKSE, a Director of Guangdong Silk-Tex Group Co., Ltd., the Chief Accountant and Deputy General Manager of Guangdong Guangxin Holdings Group Ltd. Mr. Chen has extensive experience in finance and corporate management.

Tse Hau Yin, Aloysius, age 73, is an Independent Non-Executive Director of the Company. He joined the Board of the Company in September 2005. Mr. Tse is currently an Independent Non-Executive Director of CNOOC Limited, China Huarong Asset Management Co., Ltd. (which Mr. Tse sent a letter of resignation on March 23, 2021 and shall continue to perform his duties until the commencement of term of office of a new Independent Non-Executive Director and Chairman of the Audit Committee of the Board), Sinofert Holdings Limited and SJM Holdings Limited, all of which are listed on the Main Board of the HKSE. Mr. Tse is also an Independent Non-Executive Director of OCBC Wing Hang Bank Limited (formerly known as “Wing Hang Bank Limited”, which was listed on the Main Board of the HKSE until October 2014). From 2004 to 2010, he was an Independent Non-Executive Director of China Construction Bank Corporation, which is listed on the Main Board of the HKSE. From 2005 to 2016, Mr. Tse was also an Independent Non-Executive Director of Daohe Global Group Limited (formerly known as “Linmark Group Limited”), which is listed on the Main Board of the HKSE. Mr. Tse was appointed as an Independent Non-Executive Director of CCB International (Holdings) Limited, a wholly owned subsidiary of China Construction Bank Corporation in March 2013. He is also a member of the International Advisory Council of the People’s Municipal Government of Wuhan. Mr. Tse is a fellow of the Institute of Chartered Accountants in England and Wales, and the Hong Kong Institute of Certified Public Accountants (“HKICPA”). Mr. Tse is a past President and a former member of the Audit Committee of the HKICPA. He joined KPMG in 1976, became a partner in 1984 and retired in March 2003. Mr. Tse was a Non-Executive Chairman of KPMG’s operations in China and a member of the KPMG China advisory board from 1997 to 2000. Mr. Tse is a graduate of the University of Hong Kong.

Xu Erming, age 71, is an Independent Non-Executive Director of the Company. He joined the Board of the Company in September 2005. Professor Xu is a Vice Chairman of the Chinese Enterprise Management Research Association. He is entitled to the State Council’s special government allowances. Professor Xu served as a professor, Ph.D. supervisor of the Graduate School and Dean of Business School at the Renmin University of China, a professor and Dean of Business School of Shantou University, and was an Independent Supervisor of Harbin Electric Company Limited and an Independent Non-Executive Director of Comtec Solar Systems Group Limited, both of which are listed on the Main Board of the HKSE. Over the years, Professor Xu has conducted research in areas related to strategic management, innovation and entrepreneurship management, and has been responsible for research on many subjects put forward by the National Natural Science Foundation, the National Social Science Foundation, and other authorities at provincial and ministry level. He has received many awards such as the Ministry of Education’s Class One Excellent Higher Education Textbook Award, the State-Level Class Two Teaching Award and the National Excellent Course Award. Professor Xu has been awarded the Fulbright Scholar of U.S.A. twice and the visiting scholar of McGill University, Canada. Professor Xu was previously a lecturer at the New York State University at Buffalo, U.S.A., the University of Scranton, U.S.A., the University of Technology, Sydney, the Kyushu University, Japan, Panyapiwat Institute of Management, Thailand and the Hong Kong Polytechnic University.

Wang Hsuehming, age 71, is an Independent Non-Executive Director of the Company. She joined the Board of the Company in May 2014. Madam Wang received a bachelor of arts degree from the University of Massachusetts and attended Columbia University. She was a Senior Advisor and former Chairman of BlackRock China. She was also the former Chairman of China at Goldman Sachs Asset Management. She joined Goldman Sachs in 1994, became a Partner in 2000 and an Advisory Director from 2010 to 2011. With nearly 30 years of experience in financial services, she participated in pioneering efforts in China’s economic reform and development. She was instrumental in advising Ministry of Posts and Telecommunications and Ministry of Information Industry (now known as Ministry of Industry and Information Technology) in the privatizations and listings of its mobile and fixed-line businesses. She also participated in advising appropriate operators in strategic investments by international telecom companies. The early cross-border financings of aircraft and other capital equipment in China’s aviation sector, as well as the separate listings of national airlines, and important provincial and municipal credit restructurings also formed part of Madam Wang’s understanding of China’s economic growth in the past three decades.

 

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Yeung Chi Wai, Jason, age 66, is an Independent Non-Executive Director of the Company. He joined the Board of the Company in October 2018. Mr. Yeung is currently the Group Chief Compliance and Risk Management Officer of Fung Holdings (1937) Limited and its listed companies in Hong Kong, an Independent Non-Executive Director of Bank of Communications Co., Ltd, which is listed on the Main Board of the HKSE and the Shanghai Stock Exchange and a member of Hospital Authority Board of Hong Kong. Mr. Yeung has extensive experience in handling legal, compliance and regulatory matters and previously worked in the Securities and Futures Commission of Hong Kong, law firms and enterprises practising corporate, commercial and securities laws. Mr. Yeung served as a Director and the General Counsel of China Everbright Limited, which is listed on the Main Board of the HKSE and was also a partner of Woo, Kwan, Lee, & Lo. He acted as the Board Secretary of BOC Hong Kong (Holdings) Limited, which is listed on the Main Board of the HKSE, from 2001 to 2011 and concurrently acted as the Board Secretary of Bank of China Limited, which is listed on the Main Board of the HKSE and the Shanghai Stock Exchange, from 2005 to 2008. He also served as the Deputy Chief Executive (Personal Banking) of Bank of China (Hong Kong) Limited from April 2011 to February 2015. Mr. Yeung received a bachelor degree in social sciences from the University of Hong Kong. He then graduated from The College of Law, United Kingdom and received a bachelor degree in law and a master degree in business administration from the University of Western Ontario, Canada.

There is no family relationship between any of our Directors or executive officers.

Supervisors

The PRC Company Law requires a joint stock company with limited liability to establish a supervisory committee. Our Supervisory Committee has five Supervisors. Two members of our Supervisory Committee are employee representatives elected by our employees. The remaining members are appointed by shareholders at a general meeting. Our Supervisors are generally elected for a term of three years and may serve consecutive terms if re-elected. The term of office for the seventh session of our Supervisory Committee is three years, starting from May 26, 2020 until the annual general meeting of the Company for the year 2022 to be held in the year 2023, upon which the eighth session of the Supervisory Committee will be elected. At the 2019 AGM, the shareholders of the Company approved the re-election of the current Shareholder Representative Supervisors, Mr. Sui Yixun and Mr. Xu Shiguang and the election of Mr. You Mingqiang as members of the seventh session of the Supervisory Committee. Due to their age, Mr. Yang Jianqing, an Employee Representative Supervisor, and Mr. Ye Zhong, a Shareholder Representative Supervisor, in each case of the sixth session of the Supervisory Committee, retired from their positions as Supervisors of the Company upon the expiry of their term of office at the 2019 AGM. Meanwhile, Mr. Zhang Jianbin and Mr. Dai Bin have been elected by the employees of the Company democratically as the Employee Representative Supervisors of the seventh session of the Supervisory Committee.

The following table sets forth certain information concerning our current Supervisors:

 

Name

  Age   

Position

Sui Yixun

   57   Supervisor (Chairman of the Supervisory Committee and Shareholder Representative)

Zhang Jianbin

   55   Supervisor (Employee Representative)

Dai Bin

   52   Supervisor (Employee Representative)

Xu Shiguang

   41   Supervisor (Shareholder Representative)

You Minqiang

   47   Supervisor (Shareholder Representative)

Sui Yixun, age 57, is a Shareholder Representative Supervisor and the Chairman of the Supervisory Committee of the Company. He joined the Supervisory Committee of the Company in May 2015. Mr. Sui is currently a Supervisor of Tianyi Telecom Terminals Company Limited and a Supervisor of China Tower Corporation Limited, which is listed on the Main Board of the HKSE. Mr. Sui received a bachelor degree from Beijing Institute of Posts and Telecommunications and a master degree in business administration from Tsinghua University. Mr. Sui served as Deputy General Manager of China Telecom Shandong branch, Deputy General Manager of the Northern Telecom of China Telecommunications Corporation, General Manager of China Telecom Inner Mongolia Autonomous Region branch and the Managing Director of audit department of the Company. Mr. Sui is a senior economist and has extensive experience in operational and financial management in the telecommunications industry.

 

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Zhang Jianbin, age 55, is an Employee Representative Supervisor of the Company. He joined the Supervisory Committee of the Company in October 2012. Mr. Zhang is currently the Deputy Managing Director of the Legal Department (Compliance Management Department) of the Company and the Deputy General Counsel of China Telecommunications Corporation. Mr. Zhang graduated from the Law School of Peking University in 1989 and received a LLM degree. He also had an EMBA degree from the Guanghua School of Management at Peking University in 2006. He previously worked at the Department of Policy and Regulation of the Ministry of Posts and Telecommunications (“MPT”) and the Directorate General of Telecommunications of the MPT. Mr. Zhang has extensive experience in corporate legal affairs.

Dai Bin, age 52, is an Employee Representative Supervisor of the Company. He joined the Supervisory Committee of the Company in May 2020. Mr. Dai serves as the Vice Chairman of the Labour Union of China Telecommunications Corporation. Mr. Dai is a senior economist. He graduated from Xiamen University and received a bachelor degree in Chinese language and literature. He also obtained an EMBA degree from the Guanghua School of Management at Peking University. He served as a Deputy Managing Director of the Office of the Board of Directors of the Company and the Deputy Managing Director of the General Affairs Office (Office of the Board of Directors and Security Department) of China Telecommunications Corporation. Mr. Dai has extensive experience in operational management in the telecommunications industry.

Xu Shiguang, age 41, is a Shareholder Representative Supervisor of the Company. He joined the Supervisory Committee of the Company in October 2018. Mr. Xu is currently the Deputy General Manager of Inner Mongolia Autonomous Region branch of the Company. Mr. Xu received a bachelor degree in auditing and a master degree in accounting from the Nankai University. Mr. Xu served at various positions in internal control and auditing at China Telecommunications Corporation for many years and was the Director of general office of audit department of the Company. Mr. Xu is a member of the Chinese Institute of Certified Public Accountants and a Certified Internal Auditor with extensive experience in internal control and auditing.

You Minqiang, age 47, is a Shareholder Representative Supervisor of the Company. He joined the Supervisory Committee of the Company in May 2020. Mr. You serves as a Deputy Director of the Organisation Department (Human Resources Department) of Zhejiang Provincial Financial Development Co., Ltd. (one of the domestic shareholders of the Company) and the Supervisory Chairman of Zhejiang Nongdu Agricultural Products Co., Ltd.. Mr. You is a senior economist. He graduated from Hangzhou University and received a bachelor degree in education. Mr. You served in Armed Police Hangzhou Command School and Zhejiang Provincial Financial Holdings Co., Ltd.. He has extensive experience in the field of human resources.

B. Compensation

Compensation of Key Management Personnel

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company and its subsidiaries, directly or indirectly, including Directors, Supervisors and Executive Vice Presidents of the Company and its subsidiaries. The aggregate amount of compensation we paid to our key management personnel was approximately RMB9.355 million for the year ended December 31, 2020.

Our Directors and Supervisors receive compensation in the form of fees, salaries, allowances and benefits in kind, including our contribution to the pension plans for our Directors and Supervisors. The aggregate amount of compensation we paid to our Directors and Supervisors as a group for the year ended December 31, 2020 was approximately RMB8.512 million. The following table sets forth the compensation received or receivable by our Company’s Directors and Supervisors(1)(2):

 

   Directors’/
supervisors’
fees
   Salaries,
allowances
and benefits
in kind
   Discretionary
bonuses(3)
   Share-
based

payments
   Retirement
scheme
contributions
   Total 
   RMB thousands 

2020

            

Executive Directors

            

Ke Ruiwen

   —      221    527    —      73    821 

Li Zhengmao(4)

   —      129    434    —      48    611 

Shao Guanglu(5)

   —      116    436    —      46    598 

Liu Guiqing

   —      197    464    —      59    720 

Zhu Min

   —      197    464    —      52    713 

Chen Zhongyue(6)

   —      199    468    —      71    738 

Wang Guoquan(7)

   —      181    447    —      42    670 

 

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   Directors’/
supervisors’
fees
   Salaries,
allowances
and benefits
in kind
   Discretionary
bonuses(3)
   Share-
based

payments
   Retirement
scheme
contributions
   Total 
   RMB thousands 

Gao Tongqing(8)

   —      17    16    —      8    41 

Non-Executive Director

            

Chen Shengguang

   —      —      —      —      —      —   

Independent Non-Executive Directors(2)

            

Tse Hau Yin, Aloysius

   477    —      —      —      —      477 

Xu Erming

   250    —      —      —      —      250 

Wang Hsuehming

   261    —      —      —      —      261 

Yeung Chi Wai, Jason

   261    —      —      —      —      261 

Supervisors

            

Sui Yixun

   —      227    494    —      49    770 

Zhang Jianbin

   —      214    494    —      49    757 

Dai Bin(9)

   —      110    202    —      26    338 

Xu Shiguang

   —      118    335    —      33    486 

You Minqiang(10)

   —      —      —      —      —      —   

Yang Jianqing(11)

   —      —      —      —      —      —   

Ye Zhong(12)

   —      —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   1,249    1,926    4,781    —      556    8,512 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

The remuneration of all Directors and Supervisors was calculated based on their respective actual terms of office within this year. None of the Directors or Supervisors received any inducements for joining the Company or compensation for loss of office, or waived or agreed to waive any emoluments during this year.

(2)

The Independent Non-Executive Directors’ remuneration was for their services as Directors of the Company.

(3)

The discretionary bonuses of the Executive Directors and Supervisors were determined based on the performance of the Company and its subsidiaries for the year.

(4)

Mr. Li Zhengmao was appointed as an Executive Director of the Company on May 26, 2020.

(5)

Mr. Shao Guanglu was appointed as an Executive Director of the Company on May 26, 2020.

(6)

Mr. Chen Zhongyue resigned as an Executive Director of the Company on January 19, 2021.

(7)

Mr. Wang Guoquan resigned as an Executive Director of the Company on December 4, 2020.

(8)

Mr. Gao Tongqing resigned as an Executive Director of the Company on January 17, 2020.

(9)

Mr. Dai Bin was elected as a Supervisor of the Company on May 26, 2020.

(10)

Mr. You Minqiang was appointed as a Supervisor of the Company on May 26, 2020.

(11)

Mr. Yang Jianqing retired as a Supervisor of the Company on May 26, 2020.

(12)

Mr. Ye Zhong retired as a Supervisor of the Company on May 26, 2020.

Discretionary Bonuses for Executive Directors

Compensation of our Executive Directors is determined pursuant to our director compensation plans thereof approved and adopted by the Board and the Remuneration Committee. Under the director compensation plan, Executive Directors receive discretionary bonuses subject to achievement of certain performance targets. The amounts of discretionary bonuses are reviewed and determined annually, with reference to certain financial indicators of the preceding year. Independent Non-Executive Directors and Non-Executive Directors do not receive any discretionary bonus.

Discretionary Bonuses for Employee Supervisors

Certain of our Supervisors are also our employees. Mr. You Minqiang is a non-employee Supervisor. Such employee supervisors are entitled to receive discretionary bonuses under our compensation policies that are generally applicable to all employees. The amounts of such discretionary bonuses are determined with reference to the performance of the department in which an employee serves as well as his or her individual performance. The amounts of discretionary bonuses are reviewed and determined annually, based on the review of performance in the preceding year. Non-employee supervisors do not receive any discretionary bonus from our Company.

 

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Share Appreciation Rights

We implemented a plan of share appreciation rights for members of our management in order to provide incentives for these employees. Under this plan, share appreciation rights were granted in units with each unit representing one H share. No shares will be issued under the share appreciation rights plan. Upon exercise of the share appreciation rights, a recipient will receive, subject to any applicable withholding tax, a cash payment in Renminbi, translated from the Hong Kong dollar amount equal to the product of the number of share appreciation rights exercised and the difference between the exercise price and market price of our Company’s H shares at the date of exercise based on the applicable exchange rate between Renminbi and Hong Kong dollars at the date of the exercise. We recognize compensation expense of the share appreciation rights over the applicable vesting period.

In November 2018, we approved the granting of 2,394 million share appreciation right units to eligible employees. Under the terms of this grant, all share appreciation rights had a contractual life of five years from date of grant and an exercise price of HK$3.81 per unit. A recipient of share appreciation rights may exercise the rights in stages commencing November 2020. As at each of the third, fourth and fifth anniversary of the date of grant, the total number of share appreciation rights exercisable may not in aggregate exceed 33.3%, 66.7% and 100.0%, respectively, of the total share appreciation rights granted to such person.

During the years ended December 31, 2020 and 2019, no share appreciation right units were exercised. For the year ended December 31, 2020, compensation expense of RMB101 million was reversed by us in respect of share appreciation rights. For the year ended December 31, 2019, compensation expense of RMB136 million was recognized by us in respect of share appreciation rights. As of December 31, 2020, the carrying amount of the liability arising from share appreciation rights was RMB65 million. As of December 31, 2019, the carrying amount of the liability arising from share appreciation rights was RMB166 million.

In March 2021, we approved the granting of approximately 2,412 million share appreciation right units to eligible employees. Under the terms of this grant, all share appreciation rights had a contractual life of five years from date of grant and an exercise price of HK$2.686 per unit. A recipient of share appreciation rights may exercise the rights in stages commencing in March 2023.

C. Board Practices

General

Pursuant to our Articles of Association, our Directors must be elected by our shareholders at a general meeting. Our Directors are generally elected for a term of three years and may serve consecutive terms if re-elected. On May 26, 2020, election of members of the Board was conducted and this election generated the seventh session of the Board consisting of twelve Directors with seven Executive Directors, one Non-Executive Director and four Independent Non-Executive Directors. The term of office for the seventh session of the Board lasts for three years, starting from May 26, 2020 until the date of the Company’s annual general meeting for the year 2022 expected to be held in the year 2023, upon which the eighth session of the Board will be elected. We determine the Directors’ remuneration with reference to factors such as their respective responsibilities and duties in the Company, as well as their experiences and market conditions at the relevant time. None of the service contracts with our Directors provides benefits to them upon termination.

On December 4, 2020, Mr. Wang Guoquan resigned from his positions as an Executive Director and Executive Vice President of the Company due to change in work arrangement. On January 19, 2021, Mr. Chen Zhongyue resigned from his positions as an Executive Director and Executive Vice President of the Company due to change in work arrangement. Our Board currently consists of ten Directors with five Executive Directors, one Non-Executive Director and four Independent Non-Executive Directors.

The Board holds at least four meetings in each year. Additional Board meetings will be held in accordance with practical needs. In 2020, the Board played a pivotal role in the Company’s operation, supervision, internal control, risk management and other significant decisions and corporate governance. Specifically, the Board reviewed matters including, but not limited to, our annual and interim financial statements, quarterly financial results, risk management and internal control implementation and assessment report, annual proposal for profit distribution, amendments to the Articles of Association, approval and authorization of the issuance of debentures, our budget for the years 2020 and 2021, review of the structure and operations of the Board, proposal for directors and senior management liabilities insurance, proposal for election or re-election of the Directors of the seventh session of the Board, election or re-election of the senior management, chairman and members of the Board Committees, remuneration proposal for the Directors of the seventh session of the Board, report on relevant situations under the global epidemic environment, re-appointment and remuneration of auditors, and the progress report on the preparation of the Environmental, Social and Governance Report. During the year, the Company convened four Board meetings and completed various written resolutions. In 2020, the Chairman held a meeting to independently communicate with Independent Non-Executive Directors (without the presence of any other Directors) to ensure their opinions can be fully expressed, further facilitating the exchange of different views within the Board.

 

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Audit Committee

The Audit Committee was established in 2002. It currently consists of four members, Mr. Tse Hau Yin, Aloysius (as the Chairman), Mr. Xu Erming, Madam Wang Hsuehming and Mr. Yeung Chi Wai, Jason, all of whom are Independent Non-executive Directors. The Audit Committee is accountable to the Board and reports to it periodically. The Committee meets at least twice each year. The Charter of the Audit Committee was approved by our Board in March 2005 and amended in March 2009, in December 2011, in March 2015 and in December 2018, respectively, pursuant to which the principal responsibilities of our Audit Committee include supervision of our Company to ensure authenticity and completeness of our financial statements and effectiveness and completeness of the internal control and risk management system. The Audit Committee also supervises our internal audit department, and is responsible for the review and supervision of the qualifications, independence, selection and appointment of external independent auditors, and approval of services provided by the external independent auditors. In addition, the Audit Committee is responsible for ensuring that the management performs its duty to establish and maintain an effective risk management and internal control system including the adequacy of resources, qualifications and experience of staff fulfilling the accounting, internal control and financial reporting functions of the Company together with the adequacy of the staff’s training programs and related budget. The Audit Committee has established a mechanism for receiving and handling complaints or anonymous reports in respect of our accounting, internal control and audit matters.

In 2020, the Audit Committee held four meetings and passed two written resolutions, in which it reviewed matters including but not limited to our annual and interim financial statements and quarterly financial results, assessment of the qualifications, independence and performance, appointments and remuneration of the external auditors, effectiveness of risk management and internal control systems, internal audit, implementation of continuing connected transactions, selection of external auditors, the progress work report of the change of external auditors, review of the operations in 2019 and the Charter of the Audit Committee, and the progress report on the preparation of the Environmental, Social and Governance Report. The Audit Committee reviewed the annual auditor’s report, interim review report and quarterly agreed-upon procedures reports prepared by the external auditors, communicated with the management and the external auditors in regard to the regular financial reports and proposed them for the Board’s approval after review and approval. The Audit Committee regularly received quarterly reports in relation to the internal audit and continuing connected transactions and provided guidance to the Internal Audit Department. Additionally, the Audit Committee reviewed the internal control assessment and the attestation report, followed up with the implementation procedures of the recommendations proposed by the external auditors, reviewed the U.S. annual report, and communicated independently with the external auditors twice a year.

Remuneration Committee

The Remuneration Committee was established in 2003, and currently consists of three members, Mr. Xu Erming (as the Chairman), Mr. Tse Hau Yin, Aloysius and Madam Wang Hsuehming, all of whom are Independent Non-Executive Directors. The Remuneration Committee is accountable to the Board and reports to it on its work periodically. The Remuneration Committee meets when necessary. The Charter of the Remuneration Committee was approved by our Board in March 2005 and amended in December 2011 and in December 2018, pursuant to which the Remuneration Committee’s principal responsibilities include making recommendations to the Board on our overall remuneration policies and structure relating to compensation of Directors and senior management and the establishment of a formal and transparent procedure for developing remuneration policy, and determining, with delegated responsibility by the Board, the remuneration packages of individual Executive Directors and senior management including benefits in kind, pension rights and compensation payments (including any compensation payable for loss or termination of their office or appointment).

The Remuneration Committee held one meeting in 2020, in which it reviewed and discussed the remuneration proposals for the Directors of the seventh session of the Board.

Nomination Committee

The Nomination Committee was established in 2005. It currently consists of three members, Madam Wang Hsuehming (as the Chairlady), Mr. Tse Hau Yin, Aloysius and Mr. Xu Erming, all of whom are Independent Non-Executive Directors. The Nomination Committee is accountable to the Board and regularly reports to the Board on its work. The Nomination Committee meets at least once a year. The Charter of the Nomination Committee was approved by our Board in September 2005 and amended in December 2011 and August 2013, respectively, pursuant to which the Nomination Committee’s principal responsibilities include reviewing the structure, size, composition and diversity of the Board on a regular basis; identifying candidates and advising the Board with the appropriate qualifications for the position of Directors; reviewing the Board Diversity Policy as appropriate to ensure its effectiveness; assessing the independence of the Independent Non-Executive Directors; and making recommendations to the Board on the appointment or re-appointment of Directors and succession planning for Directors (especially Chairman and Chief Executive Officer).

 

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The Nomination Committee held one meeting in 2020, where it performed a review of the structure and operations of the Board and considered the recommendation of the proposed candidates for the Directors of the seventh session of the Board.

Independent Board Committee

The Independent Board Committee consists of four Independent Non-Executive Directors. Meetings of the Independent Board Committee are convened to review certain connected transactions on a case-by-case basis pursuant to the Listing Rules.

The Independent Board Committee did not hold any meeting or pass any written resolution in 2020.

D. Employees

General

As of December 31, 2020, we had 281,192 employees. The table below sets forth the numbers of our employees according to their functions as of December 31, 2018, 2019 and 2020:

 

   As of December 31, 
   2018  2019  2020 
   Number of
Employees
   Percentage
of Total
  Number of
Employees
   Percentage
of Total
  Number of
Employees
   Percentage
of Total
 

Management, finance and administrative

   45,045    16.0  46,521    16.5  47,743    17.0

Sales and marketing

   138,001    49.2  135,797    48.3  135,135    48.1

Operations and maintenance

   87,512    31.2  87,943    31.3  86,347    30.7

Research and development

   10,189    3.6  10,954    3.9  11,967    4.2
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total

   280,747    100.0  281,215    100.0  281,192    100.0
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

The primary components of an employee’s remuneration include basic salary, a performance-based bonus and compensation based on length of service. In addition, we also emphasize the importance of employee training and use various means of training to improve the quality and capability of our key employees. We have not been subjected to any material labor disturbances that have interfered with our operations, and we believe that the relationship between our management and the labor union of our Company is good.

E. Share Ownership

As of December 31, 2020, none of our Directors, Supervisors or other senior executives was a legal or beneficial owner of any shares of our share capital.

 

Item 7.

Major Shareholders and Related Party Transactions.

A. Major Shareholders

The table below sets forth information regarding the ownership of our share capital as of April 23, 2021 by all persons who are known to us to be the beneficial owners of 5.0% or more of each class of our voting securities.

 

Title of Shares

  Identity of Person or Group  Amount Owned   Nature of Interest   Percentage of
the Respective
Type of Shares
  Percentage of
Total Shares
 

Domestic shares

  China Telecom Group   57,377,053,317    long position    85.57  70.89

Domestic shares

  Guangdong Rising
Holdings Group Co., Ltd.
   5,614,082,653    long position    8.37  6.94

 

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Title of Shares

  Identity of Person or Group  Amount Owned   Nature of Interest   Percentage of
the Respective
Type of Shares(1)
  Percentage of
Total Shares(1)
 

H shares

  GIC Private Limited   1,394,433,475    long position    10.05  1.72

 

(1)

The percentage figures above have been rounded down to the nearest second decimal place.

(2)

Information disclosed hereby is based on the information available on the website of the Hong Kong Stock Exchange at www.hkexnews.hk.

China Telecom Group, located at 31 Jinrong Street, Xicheng District, Beijing, PRC 100033, is our controlling shareholder and is a state-owned enterprise. Guangdong Rising Holdings Group Co., Ltd., located at 50-58/F, The Pinnacle Plaza, 17 Zhujiang West Road, Tianhe District, Guangzhou, Guangdong Province, PRC, is a state-owned enterprise owned by the provincial governments in Guangdong Province. GIC Private Limited is located at 168 Robinson Road, Capital Tower #37-01, Singapore 068912.

None of our major shareholders has voting rights that differ from the voting rights of other shareholders. We are not aware of any arrangement which may at a subsequent date result in a change of control of our Company.

B. Related Party Transactions

The details of the related party arrangements are described below.

Ongoing Related Party Transactions between Us and China Telecom Group and Its Affiliated Companies

The following table sets out the amounts of ongoing related party transactions between our Company and China Telecom Group (as defined as China Telecom Group and its subsidiaries other than our Company under this section) for the year ended December 31, 2020:

 

Transactions  

Transaction

Amounts
(RMB millions)

 

Net transaction amount of centralized services

   268 

Net expenses for interconnection settlement

   69 

Property lease income

   45 

Property lease related expenses

   581 

Addition to right-of-use assets

   335 

Interest expense on lease liabilities

   16 

Provision of IT services by China Telecom Group

   2,653 

Provision of IT services to China Telecom Group

   556 

Provision of supplies procurement services by China Telecom Group

   3,567 

Provision of supplies procurement services to China Telecom Group

   2,070 

Provision of engineering services by China Telecom Group

   15,046 

Provision of community services by China Telecom Group

   3,682 

Provision of ancillary telecommunications services by China Telecom Group

   18,903 

Provision of Internet applications channel services to China Telecom Group

   73 

Interest on loans from China Telecom Group

   975 

Others*

   243 

Net deposit by China Telecom Group with China Telecom Finance

   5,728 

Interest expense on the deposit by China Telecom Group with China Telecom Finance

   82 

 

*

Represent usage of CDMA network facilities, usage of inter-provincial transmission optic fibers, and usage of land use rights from China Telecom Group.

 

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Centralized Services Agreement

Pursuant to the centralized services agreement signed between the Company and China Telecommunications Corporation on September 10, 2002 and the related supplemental agreements subsequently entered into between the two parties (collectively, the “Centralized Services Agreement”), centralized services include centralized business management and operational services provided by the Company to China Telecommunications Corporation in relation to key corporate customers, its network management center and business support center. Centralized services also include the provision of certain premises by China Telecommunications Corporation to the Company and the common use of international telecommunications facilities by both parties. The aggregate costs incurred by the Company and China Telecommunications Corporation for the provision of management and operation services 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 will pay premises usage fees to China Telecommunications Corporation on a pro rata basis according to the apportioned actual area allocated to the Company. The premises usage fees shall be determined through negotiation between the two parties based on comparable market rates. When both parties use international telecommunications facilities provided by third parties and accept services by such third parties (for example, restoration maintenance costs, the annual utilization fee and related service costs) and when both parties use the international telecommunications facilities of China Telecommunications Corporation, the associated costs shall be shared on a pro rata basis according to volume of the inbound and outbound voice calls to and from international regions originating from each party divided by the proportion of the aggregate volume of the inbound and outbound voice calls to and from international regions originating from both parties. When the two parties use international telecommunications facilities provided by a third party and accept restoration maintenance costs, such fees shall be determined according to the actual utilization fee each year. The utilization fee associated with the shared use of the international telecommunications facilities provided by China Telecommunications Corporation shall be determined through negotiation between the two parties based on market rates. Market rates shall mean the rates at which the same or similar type of products or services are provided by independent third parties in the ordinary course of business and under normal commercial terms. When determining whether the transaction price for any transaction under the agreement represents market rates, to the extent practicable, management of the Company shall take into account the rates of at least two similar and comparable transactions entered into with or carried out by independent third parties in the ordinary course of business in the corresponding period for reference.

On August 20, 2018, the Company and China Telecommunications Corporation entered into a supplemental agreement and renewed the Centralized Services Agreement pursuant to the terms thereof for a further term of three years from January 1, 2019 to December 31, 2021. No later than 30 days prior to the expiry of the Centralized Services Agreement, the Company is entitled to serve a written notice to China Telecommunications Corporation to renew the Centralized Services Agreement, and the parties shall consult and decide on matters relating to such renewal.

Interconnection Settlement Agreement

Pursuant to the interconnection settlement agreement signed between the Company and China Telecommunications Corporation on September 10, 2002 and the related supplemental agreements subsequently entered into between the two parties (collectively, the “Interconnection Settlement Agreement”), the telephone operator connecting a telephone call made to its local access network shall be entitled to receive from the operator from which the telephone call originated a fee prescribed by the MIIT of the PRC from time to time. Interconnection charges are currently RMB0.06 per minute for local calls originated from the Company to China Telecommunications Corporation. The interconnection settlement charges will be calculated according to the “Notice Concerning the Issue of the Measures on Interconnection Settlement between Public Telecommunications Networks and Sharing of Relaying Fees (Xin Bu Dian [2003] No. 454)” promulgated by the MIIT of the PRC. The MIIT of the PRC may, from time to time, take into account the relevant regulatory rules and market conditions, amend or promulgate new rules or regulations in respect of interconnection settlement which will be announced on its official website at www.miit.gov.cn. If the MIIT of the PRC amends the existing, or promulgates, new rules or regulations in respect of interconnection settlement, the parties shall apply such amended or new rules and regulations as acknowledged by both parties. The settlement regions include Beijing Municipality, Tianjin Municipality, Hebei Province, Heilongjiang Province, Jilin Province, Liaoning Province, Shanxi Province, Henan Province, Shandong Province, Inner Mongolia Autonomous Region and Xizang Autonomous Region.

On August 20, 2018, the Company and China Telecommunications Corporation entered into a supplemental agreement and renewed the Interconnection Settlement Agreement pursuant to the terms thereof for a further term of three years from January 1, 2019 to December 31, 2021. No later than 30 days prior to the expiry of the Interconnection Settlement Agreement, the Company is entitled to serve a written notice to China Telecommunications Corporation to renew the Interconnection Settlement Agreement, and the parties shall consult and decide on matters relating to such renewal.

Property Leasing Framework Agreement

Pursuant to the property leasing framework agreement signed between the Company and China Telecommunications Corporation on August 30, 2006 and the related supplemental agreement subsequently entered into between the two parties (collectively, the “Property Leasing Framework Agreement”), the Company and China Telecommunications Corporation and/or its associates can lease properties from the other party for use as business premises, offices, equipment storage facilities and sites for network equipment installation. The rental charges under the Property Leasing Framework Agreement shall be determined according to comparable market rates. Market rates shall mean the rental charges at which the same or similar types of properties or adjacent properties are leased by independent third parties in the ordinary course of business and on normal commercial terms. When determining whether the rental charges for any property under the agreement represent market rates, to the extent practicable, management of the Company shall take into account the rental charges of at least two similar and comparable transactions entered into with or carried out by independent third parties in the ordinary course of business in the corresponding period for reference. The rental charges are subject to review every three years.

 

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On August 20, 2018, the Company and China Telecommunications Corporation have entered into a supplemental agreement and renewed the Property Leasing Framework Agreement pursuant to the terms thereof for a further term of three years from January 1, 2019 to December 31, 2021. No later than 30 days prior to the expiry of the Property Leasing Framework Agreement, the Company is entitled to serve a written notice to China Telecommunications Corporation to renew the Property Leasing Framework Agreement, and the parties shall consult and decide on matters relating to such renewal.

IT Services Framework Agreement

Pursuant to the IT services framework agreement signed between the Company and China Telecommunications Corporation on August 30, 2006 and the related supplemental agreements subsequently entered into between the two parties (collectively, the “IT Services Framework Agreement”), the Company and China Telecommunications Corporation and/or its associates can provide the other party with information technology services, including office automation and software testing. Each of the Company and China Telecommunications Corporation and/or its associates is entitled to participate in bidding for the right to provide information technology services to the other party in accordance with the IT Services Framework Agreement. The charges payable for such services shall be determined by reference to the market rates. Market rates shall mean the rates at which the same or similar type of products or services are provided by independent third parties in the ordinary course of business and on normal commercial terms. When determining whether the transaction price for any transaction under the agreement represents market rates, to the extent practicable, management of the Company shall take into account the rates of at least two similar and comparable transactions entered into with or carried out by independent third parties in the ordinary course of business in the corresponding period for reference.

In those circumstances where the relevant laws or regulations in the PRC specify that the prices and/or the fee standards for particular services to be provided pursuant to such agreement are to be determined by a tender process, the charges payable for such services shall be finally determined in accordance with the “Bidding Law of the PRC” and the “Regulations on the Implementation of the Bidding Law of the PRC” or the relevant tender procedures. The Company shall solicit at least three tenderers for the tender process. If the terms offered by the Company or China Telecommunications Corporation and/or its associates are no less favorable than those offered by an independent third-party provider, the Company or China Telecommunications Corporation and/or its associates may award the tender to the other party.

On August 20, 2018, the Company and China Telecommunications Corporation entered into a supplemental agreement and renewed the IT Services Framework Agreement pursuant to the terms thereof for a further term of three years from January 1, 2019 to December 31, 2021. No later than 30 days prior to the expiry of the IT Services Framework Agreement, the Company is entitled to serve a written notice to China Telecommunications Corporation to renew the IT Services Framework Agreement, and the parties shall consult and decide on matters relating to such renewal.

Community Services Framework Agreement

Pursuant to the community services framework agreement signed between the Company and China Telecommunications Corporation on August 30, 2006 and the related supplemental agreements subsequently entered into between the two parties (collectively, the “Community Services Framework Agreement”), China Telecommunications Corporation and/or its associates provide the Company with community services such as culture, education, property management, vehicle service, health and medical care, hotel and conference service, community and sanitary service. The community services under the Community Services Framework Agreement are provided in accordance with the following pricing terms:

(1) market prices, which shall mean the prices at which the same or similar types of products or services are provided by independent third parties in the ordinary course of business and on normal commercial terms. When determining whether the transaction price for any transaction under the agreement represents market prices, to the extent practicable, management of the Company shall take into account the prices of at least two similar and comparable transactions entered into with or carried out by independent third parties in the ordinary course of business over the corresponding period for reference;

(2) where there are no or it is not possible to determine the market prices, the prices are to be agreed between the parties based on the reasonable costs incurred in providing the services plus the amount of the relevant taxes and reasonable profit margin. For this purpose, “reasonable profit margin” is to be fairly determined by negotiations between the parties in accordance with the internal policies of the Company. When determining the relevant “reasonable profit margin” for any transaction under the agreement, to the extent practicable, management of the Company shall take into account the profit margin of at least two similar and comparable transactions entered into with independent third parties in the corresponding period or the relevant industry profit margin for reference.

 

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On August 20, 2018, the Company and China Telecommunications Corporation entered into a supplemental agreement and renewed the Community Services Framework Agreement pursuant to the terms thereof for a further term of three years from January 1, 2019 to December 31, 2021. No later than 30 days prior to the expiry of the Community Services Framework Agreement, the Company is entitled to serve a written notice to China Telecommunications Corporation to renew the Community Services Framework Agreement, and the parties shall consult and decide on matters relating to such renewal.

Supplies Procurement Services Framework Agreement

Pursuant to the supplies procurement services framework agreement signed between the Company and China Telecommunications Corporation on August 30, 2006 and the related supplemental agreements subsequently entered into between the two parties (collectively, the “Supplies Procurement Services Framework Agreement”), China Telecommunications Corporation and/or its associates and the Company provide each other with supplies procurement services, including the comprehensive procurement services, the sale of proprietary telecommunications equipment, resale of third-party equipment, management of tenders, verification of technical specifications, storage, transportation and installation services.

Where the procurement services are provided on an agency basis, the maximum commission for such procurement services shall be calculated at: (1) not more than 1% of the contract value for procurement of imported telecommunications supplies; or (2) not more than 3% of the contract value for the procurement of domestic telecommunications supplies and domestic non-telecommunications supplies.

The pricing basis of the services for the provision of supplies procurement other than on an agency basis under the Supplies Procurement Services Framework Agreement is the same as those set out in the Community Services Framework Agreement.

On August 20, 2018, the Company and China Telecommunications Corporation entered into a supplemental agreement and renewed the Supplies Procurement Services Framework Agreement pursuant to the terms thereof for a further term of three years from January 1, 2019 to December 31, 2021. No later than 30 days prior to the expiry of the Supplies Procurement Services Framework Agreement, the Company is entitled to serve a written notice to China Telecommunications Corporation to renew the Supplies Procurement Services Framework Agreement, and the parties shall consult and decide on matters relating to such renewal.

Engineering Framework Agreement

Pursuant to the engineering framework agreement signed between the Company and China Telecommunications Corporation on August 30, 2006 and the related 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 Company services such as construction, design, equipment installation and testing and/or engineering project supervision services. The charges payable for such engineering services shall be determined by reference to market rates. Market rates shall mean the rates at which the same or similar type of products or services are provided by independent third parties in the ordinary course of business and on normal commercial terms. When determining whether the transaction price for any transaction under the agreement represents the market rate, to the extent practicable, management of the Company shall take into account the rates of at least two similar and comparable transactions entered into with or carried out by independent third parties in the ordinary course of business in the corresponding period for reference. The charges payable for the design or supervision of engineering projects with a value of over RMB1 million or engineering construction projects with a value of over RMB4 million shall be determined by the tender award price, which is determined in accordance with the “Bidding Law of the PRC” and the “Regulations on the Implementation of the Bidding Law of the PRC” or the final confirmed price in the relevant tender process. The Company shall solicit at least three tenderers for the tender process.

In the circumstances there are amended rules or regulations in respect of tender scope and scale of the engineering construction projects promulgated by PRC laws and regulations during the term of the agreement, both parties agreed to apply such amended rules and regulations and no amendment to the supplemental agreement is required. The Company does not accord any priority to China Telecommunications Corporation and/or its associates to provide such services, and the tender may be awarded to an independent third party. However, if the terms of an offer from China Telecommunications Corporation and/or its associates are at least as favorable as those offered by other tenderers, the Company may award the tender to China Telecommunications Corporation and/or its associates.

On August 20, 2018, the Company and China Telecommunications Corporation entered into a supplemental agreement and renewed the Engineering Framework Agreement on the same terms for a further term of three years from January 1, 2019 to December 31, 2021, excepting the pricing terms updates. No later than 30 days prior to the expiry of the Engineering Framework Agreement, the Company is entitled to serve a written notice to China Telecommunications Corporation to renew the Engineering Framework Agreement, and the parties shall consult and decide on matters relating to such renewal.

 

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Ancillary Telecommunications Services Framework Agreement

Pursuant to the ancillary telecommunications services framework agreement signed between the Company and China Telecommunications Corporation on August 30, 2006 and the related supplemental agreements subsequently entered into between the two parties (collectively, the “Ancillary Telecommunications Services Framework Agreement”), China Telecommunications Corporation and/or its associates provide the Company with certain repair and maintenance services, including repair of telecommunications equipment, maintenance of fire equipment and telephone booths, as well as other customer services. The pricing terms for such services are the same as those set out in the Community Services Framework Agreement.

On August 20, 2018, the Company and China Telecommunications Corporation entered into a supplemental agreement and renewed the Ancillary Telecommunications Services Framework Agreement pursuant to the terms thereof for a further term of three years from January 1, 2019 to December 31, 2021. No later than 30 days prior to the expiry of the Ancillary Telecommunications Services Framework Agreement, the Company is entitled to serve a written notice to China Telecommunications Corporation to renew the Ancillary Telecommunications Services Framework Agreement, and the parties shall consult and decide on matters relating to such renewal.

Optic Fiber Leasing Agreement

The Company leases from China Telecom Group the inter-provincial transmission optic fibers in Shanghai Municipality, Guangdong Province, Jiangsu Province and Zhejiang Province, which the Company’s telecommunications services are dependent upon, under the Optic Fiber Leasing Agreement dated September 10, 2002 and the related supplemental agreements (collectively, the “Optic Fiber Leasing Agreement”). The rent payable by the Company to China Telecom Group to lease the relevant parts of the inter-provincial transmission optic fibers will be based on negotiations between the parties with reference to the market price. Market rates shall mean the rental charge at which the same or similar type of properties or adjacent properties are leased by independent third parties in the ordinary course of business and on normal commercial terms. When determining the relevant market rates, to the extent practicable, management of the Company shall take into account the rental charges of at least two similar and comparable transactions entered into with or carried out by independent third parties in the ordinary course of business in the corresponding period for reference. In addition, The Company agreed to be responsible for the maintenance of these optic fibers within those service regions.

On August 20, 2018, the Company and China Telecommunications Corporation entered into a supplemental agreement and renewed the Optic Fiber Leasing Agreement pursuant to the terms thereof for a further term of three years from January 1, 2019 to December 31, 2021. The Company may renew the Optic Fiber Leasing Agreement for such further periods as the parties may agree, by 30 days’ written notification to China Telecommunications Corporation.

Internet Applications Channel Services Framework Agreement

Pursuant to the Internet applications channel services framework agreement signed between the Company and China Telecommunications Corporation on December 16, 2013 and the related supplemental agreement subsequently entered into between the two parties (collectively, the “Internet Applications Channel Services Framework Agreement”), the Company provides Internet applications channel services to China Telecommunications Corporation and/or its associates. The channel services mainly include the provision of telecommunications channel and applications support platform, provision of billing and deduction services, coordination of sales promotion and development of customers services, etc. The pricing terms for such services are the same as those set out in the Community Services Framework Agreement.

On August 20, 2018, the Company and China Telecommunications Corporation entered into a supplemental agreement and renewed the Internet Applications Channel Services Framework Agreement pursuant to the terms thereof for a further term of three years from January 1, 2019 to December 31, 2021. No later than 30 days prior to the expiry of the Internet Applications Channel Services Framework Agreement, the Company is entitled to serve a written notice to China Telecommunications Corporation to renew the Internet Applications Channel Services Framework Agreement, and the parties shall consult and decide on matters relating to such renewal.

Trademark License Agreement

China Telecommunications Corporation has registered a number of trademarks, and is in the process of registering other trademarks with the Trademark Office. Under the trademark license agreement, dated September 10, 2002, and the related supplemental agreements (collectively, the “Trademark License Agreement”), China Telecommunications Corporation has granted to the Company a right to use its registered trademarks and its trademarks pending registration on a royalty-free basis.

 

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On August 20, 2018, the Company and China Telecommunications Corporation entered into a supplemental agreement and renewed the Trademark License Agreement pursuant to the terms thereof for a further term of three years from January 1, 2019 to December 31, 2021. The Company may renew the Trademark License Agreement for such further periods as the parties may agree, by 30 days’ written notification to China Telecommunications Corporation.

Transactions between China Telecom Finance and the Parent Group and the CCS Group Respectively

On February 1, 2019, China Telecom Finance entered into the financial services framework agreement with China Telecommunications Corporation and CCS, respectively, pursuant to such agreements China Telecom Finance agreed to provide financial services, including deposit services, loan services and other financial services to (i) China Telecommunications Corporation, its associates and its commonly held entity held with our Company, excluding our Company and the CCS Group (“Parent Group”), and (ii) CCS and its subsidiaries (“CCS Group”).

China Telecommunications Corporation Financial Services Framework Agreement Entered into between China Telecom Finance and China Telecommunications Corporation

On February 1, 2019, China Telecom Finance and China Telecommunications Corporation entered into a financial services framework agreement (the “China Telecommunications Corporation Financial Services Framework Agreement”), pursuant to which China Telecom Finance agreed to provide financial services, including deposit services, loan services and other financial services, to the Parent Group. The pricing policy under the China Telecommunications Corporation Financial Services Framework Agreement is set out below:

(i) Deposit Services

The deposit interest rates offered by China Telecom Finance to the Parent Group shall comply with the relevant requirements of the People’s Bank of China and be with reference to the deposit benchmark interest rates promulgated by the People’s Bank of China from time to time (if any) and the deposit interest rates of the same type of deposit services for the same period offered by the major cooperative commercial banks of the Parent Group and are conducted on normal commercial terms or better. The deposit interest rates offered shall be equivalent to or higher than those offered by the major cooperative commercial banks of the Parent Group. Under the same conditions, the interest rates and terms for the deposit services offered by China Telecom Finance to the Parent Group shall be the same as those interest rates and terms of the same type of deposit services for the same period offered by China Telecom Finance to other member units.

(ii) Loan Services

The loan interest rates offered by China Telecom Finance to the Parent Group shall comply with the relevant requirements of the People’s Bank of China and be with reference to the loan benchmark interest rates promulgated by the People’s Bank of China from time to time (if any) and the loan interest rates of the same type of loan services for the same period offered by the major cooperative commercial banks of the Parent Group and are conducted on normal commercial terms or better. The loan interest rates offered shall be equivalent to or lower than those offered by the major cooperative commercial banks of the Parent Group. Under the same conditions, the interest rates and terms for the loan services offered by China Telecom Finance to the Parent Group shall be the same as those interest rates and terms of the same type of loan services for the same period offered by China Telecom Finance to other member units.

The above loan services provided by China Telecom Finance to the Parent Group do not require the Parent Group to pledge any security over its assets or make other arrangements for the loan services as guarantee.

(iii) Other Financial Services

China Telecom Finance provides other financial services (other than deposit and loan services) including financial and financing advice, credit authentication, guarantees, acceptance of bills and discounted bills, internal fund transfer and settlement and designs of relevant settlement and clearance arrangement proposals to the Parent Group under the China Telecommunications Corporation Financial Services Framework Agreement.

The fees charged for other financial services provided by China Telecom Finance to the Parent Group mentioned above shall comply with the fees standard promulgated by regulatory departments including the People’s Bank of China or China Banking and Insurance Regulatory Commission (including its designated institution) (“CBIRC”) (if applicable), and be with reference to the handling fees standard for the same type of other financial services charged by the major cooperative commercial banks of the Parent Group and are conducted on normal commercial terms or better. The handling fees standard shall be equivalent to or lower than those charged by the major cooperative commercial banks of the Parent Group. Under the same conditions, the fees standard charged to the Parent Group by China Telecom Finance shall be the same as those fees standard for the same type of other financial services charged by China Telecom Finance to other member units.

 

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For the respective specific transactions under the China Telecommunications Corporation Financial Services Framework Agreement, under the same conditions, the Parent Group should, in principle, choose the services provided by China Telecom Finance. If the Parent Group considers it is appropriate and beneficial to the Parent Group, the Parent Group has the discretion to engage one or more major cooperative commercial banks of the Parent Group as its financial services providers.

The China Telecommunications Corporation Financial Services Framework Agreement became effective from February 1, 2019 and will expire on December 31, 2021. Subject to the compliance of relevant laws and regulations and relevant regulatory requirements, both parties will negotiate and agree on the renewal arrangement.

CCS Financial Services Framework Agreement Entered into between China Telecom Finance and CCS

On February 1, 2019, China Telecom Finance and CCS entered into a financial services framework agreement (the “CCS Financial Services Framework Agreement”), pursuant to which China Telecom Finance agreed to provide financial services, including deposit services, loan services and other financial services to the CCS Group. The pricing policy under the CCS Financial Services Framework Agreement is set out below:

(i) Deposit Services

The deposit interest rates offered by China Telecom Finance to the CCS Group shall comply with the relevant requirements of the People’s Bank of China and be with reference to the deposit benchmark interest rates promulgated by the People’s Bank of China from time to time (if any) and the deposit interest rates of the same type of deposit services for the same period offered by the major cooperative commercial banks of the CCS Group and are conducted on normal commercial terms or better. The deposit interest rates offered shall be equivalent to or higher than those offered by the major cooperative commercial banks of the CCS Group. Under the same conditions, the interest rates and terms for the deposit services offered by China Telecom Finance to the CCS Group shall be the same as those interest rates and terms of the same type of deposit services for the same period offered by China Telecom Finance to other member units.

(ii) Loan Services

The loan interest rates offered by China Telecom Finance to the CCS Group shall comply with the relevant requirements of the People’s Bank of China and be with reference to the loan benchmark interest rates promulgated by the People’s Bank of China from time to time (if any) and the loan interest rates of the same type of loan services for the same period offered by the major cooperative commercial banks of the CCS Group and are conducted on normal commercial terms or better. The loan interest rates offered shall be equivalent to or lower than those offered by the major cooperative commercial banks of the CCS Group. Under the same conditions, the interest rates and terms for the loan services offered by China Telecom Finance to the CCS Group shall be the same as those interest rates and terms of the same type of loan services for the same period offered by China Telecom Finance to other member units. The above loan services provided by China Telecom Finance to the CCS Group do not require the CCS Group to pledge any security over its assets or make other arrangements for the loan services as guarantee.

(iii) Other Financial Services

China Telecom Finance provides other financial services (other than deposit and loan services) including financial and financing advice, credit authentication, guarantees, acceptance of bills and discounted bills, internal fund transfer and settlement and designs of relevant settlement and clearance arrangement proposals to the CCS Group under the CCS Financial Services Framework Agreement.

The fees charged for other financial services provided by China Telecom Finance to the CCS Group mentioned above shall comply with the fees standard promulgated by regulatory departments including the People’s Bank of China or the CBIRC (if applicable), and be with reference to the handling fees standard for the same type of other financial services charged by the major cooperative commercial banks of the CCS Group and are conducted on normal commercial terms or better. The handling fees standard shall be equivalent to or lower than those charged by the major cooperative commercial banks of the CCS Group. Under the same conditions, the fees standard charged to the CCS Group by China Telecom Finance shall be the same as those fees standard for the same type of other financial services charged by China Telecom Finance to other member units.

 

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For the respective specific transactions under the CCS Financial Services Framework Agreement, provided that it is in compliance with the terms and conditions of the CCS Financial Services Framework Agreement, China Telecom Finance was appointed as one of the financial institutions providing financial services to the CCS Group. Prior to the signing of any specific agreement with China Telecom Finance in respect of respective transactions under the CCS Financial Services Framework Agreement, the CCS Group will compare the interest rates and terms or fees charged and other relevant transactions terms offered by China Telecom Finance with those interest rates and terms of the same type of deposit or loan services for the same period or fees charged and other relevant transaction terms for the same type of financial services offered by the major cooperative commercial banks of the CCS Group. Only when the interest rates and terms or fees charged or other relevant transactions terms offered by China Telecom Finance are equivalent to or better than those interest rates and terms offered or fees charged or other relevant transactions terms (e.g. transaction approval terms, procedures or time limit, etc.) offered by the major cooperative commercial banks of the CCS Group, the CCS Group has the discretion to enter into the transactions with China Telecom Finance. Under the circumstances which the CCS Group considers appropriate, the CCS Group may engage additional or other financial institutions other than China Telecom Finance to provide financial services.

The CCS Financial Services Framework Agreement became effective from February 1, 2019 and will expire on December 31, 2021. Subject to the compliance of relevant laws and regulations and relevant regulatory requirements, both parties will negotiate and agree on the renewal arrangement.

Our Transfer of Assets to and Tower Lease Arrangements with the Tower Company

See “Item 4. Information on the Company—A. History and Development of the Company—Establishment of the Tower Company and the Disposal and Lease of the Telecommunications Towers”. Furthermore, during 2016 and 2017, the SEC issued comment letters relating to the Company’s previously filed annual reports on Form 20-F for the fiscal years ended December 31, 2015 and 2016. The comment letters inquired mainly about the background, execution process, and accounting treatment in relation to the Company’s disposal and lease of telecommunications towers and related assets with the Tower Company. The Company responded to these comment letters and was notified by the SEC in its letter dated October 20, 2017 that it has completed its review of such previously filed annual reports of the Company. The SEC did not in its October 2017 letter require us to make any amendment to those previously filed annual reports.

Disposal of E-store to Besttone Holding

See “Item 4. Information on the Company—A. History and Development of the Company—Disposal of Chengdu E-store Technology Co., Ltd. and Establishment of Tianyi Capital Holding Co., Ltd.”.

Establishment of China Telecom Finance

See “Item 4. Information on the Company—A. History and Development of the Company—Establishment of China Telecom Group Finance Co., Ltd.”.

Disposals of E-surfing Pay Co., Ltd and China Telecom Leasing Corporation Limited

See “Item 4. Information on the Company—A. History and Development of the Company—Disposals of E-surfing Pay Co., Ltd and China Telecom Leasing Corporation Limited”.

Our Borrowings from China Telecom Group

We from time to time borrow short-term unsecured loans from China Telecom Group to supplement our working capital needs. As of December 31, 2020, the aggregate outstanding principal amount of such loans was RMB11,164 million, which bear interest at a fixed rate of 3.1% per annum. On December 25, 2017, we obtained long-term unsecured loans from China Telecom Group to meet our long-term funding needs. As of December 31, 2020, the aggregate outstanding principal amount of such loans was RMB11,000 million, which bear interest at a fixed rate of 3.8% per annum and are payable within one to two years. See Note 19 to our audited financial statements included elsewhere in this report for details.

C. Interests of Experts and Counsel

Not applicable.

 

Item 8.

Financial Information.

Our consolidated financial statements are set forth beginning on page F-1. No significant change has occurred since the date of the annual financial statements.

 

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Legal Proceedings

On December 10, 2020, the FCC adopted an order (the “FCC Order”) that instituted proceedings to determine whether to revoke and/or terminate our 214 Authorizations. CTA has appealed the FCC Order in accordance with relevant laws, regulations and regulatory requirements to safeguard its legitimate rights. See “Item 3. Key Information – Risk Factors – Risks Relating to Our Business – Our authorizations to provide telecommunications services in the United States are subject to actions by the relevant authorities in the United States and we cannot assure you we will be able to maintain those authorizations in the future”.

On January 6, 2021, the NYSE, following reversal of a similar decision announced on December 31, 2020, announced that it had determined to commence delisting proceedings of our ADSs to comply with Executive Order signed by the then President of the United States. On January 20, 2021, we filed a written request with the NYSE for a review of its determination. See “Item 3. Key Information – Risk Factors – Risks Relating to Our Business – Transactions in and holdings of our ADSs and H shares by U.S. persons beyond specified dates are prohibited, and the continued listing of and trading in our ADSs are subject to significant uncertainty”.

We are the defendant in certain lawsuits and a named party in other legal proceedings arising in the ordinary course of business. While the outcomes of such contingencies, lawsuits or other legal proceedings cannot be determined at present, we believe that the outcomes of such contingencies, lawsuits or other legal proceedings will not likely result in any material adverse effect on our financial position, results of operations or cash flows.

Policy on Dividend Distributions

Pursuant to the shareholders’ approval at the annual general meeting held on May 26, 2020, a final dividend of RMB9,262 million (RMB0.114441 per share equivalent to HK$0.125 per share, pre-tax) for the year ended December 31, 2019 was declared, all of which has been fully paid. Pursuant to a resolution passed at the Directors’ meeting on March 9, 2021, a final dividend of approximately RMB8,403 million (RMB0.10515 per share equivalent to HK$0.125 per share, pre-tax) for the year ended December 31, 2020 was proposed for shareholders’ approval at the annual general meeting for the year of 2020.

The Company attaches great importance to the investment returns of shareholders, strives to maintain the continuity and stability of the dividend policy taking into the consideration the long-term interest and sustainable development of the Company. The following factors will be considered by the Company when formulating the dividend distribution plan:

 

  

the operating results and cash flow level of the Company;

 

  

the Company’s future business development position and the capital expenditure requirements;

 

  

capital needs and gearing ratio;

 

  

the expectation from shareholders and investors; and

 

  

other factors that the Board deems appropriate.

Our Board is responsible for formulating the dividend distribution plan and will execute the relevant approval procedures in accordance with relevant laws, rules, regulations and Articles of Association of the Company before proceeding with the distribution. In the future, we will strive for improvement on profitability and at the same time continue to deliver favorable dividend return for the shareholders. Our Board will declare dividends, if any, with respect to our H shares and domestic shares on a per-share basis and will pay such dividends in Hong Kong dollars and in Renminbi respectively. Any final dividend for a fiscal year will be subject to shareholders’ approval. Under the PRC Company Law and our Articles of Association, all of our shareholders have equal rights to dividends and distributions. The holders of our H shares will share proportionately on a per-share basis in all dividends and other distributions declared by our Company.

The Bank of New York Mellon, as depositary, will convert the Hong Kong dollar dividend payment and distribute it to holders of ADSs in U.S. dollars, less related fees and expenses and any withholding tax.

 

Item 9.

The Offer and Listing.

In connection with our initial public offering, our ADSs were listed and commenced trading on the NYSE on November 14, 2002 under the symbol “CHA”. Our H shares were listed and commenced trading on the Hong Kong Stock Exchange on November 15, 2002 under the symbol “728”. Prior to these listings, there was no public market for our equity securities. The NYSE and the Hong Kong Stock Exchange are the principal host markets for our ADSs and H shares, which are not listed on any other exchanges in or outside the United States.

 

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On January 6, 2021, the NYSE, following reversal of a similar decision announced on December 31, 2020, announced that it had determined to commence delisting proceedings of our ADSs to comply with Executive Order signed by the then President of the United States. See “Item 8. Financial Information – Legal Proceedings” and “Item 3. Key Information – Risk Factors – Risks Relating to Our Business – Transactions in and holdings of our ADSs and H shares by U.S. persons beyond specified dates are prohibited, and the continued listing of and trading in our ADSs are subject to significant uncertainty”.

As of December 31, 2020 and April 23, 2021, there were 13,877,410,000 H shares issued and outstanding. As of December 31, 2020 and April 23, 2021, there were, respectively, 30 and 28 registered holders of American depositary receipts evidencing 4,606,994 and 1,152,450 ADSs. Since certain of the ADSs are held by nominees, the above number may not be representative of the actual number of U.S. beneficial holders of ADSs or the number of ADSs beneficially held by U.S. persons. The depositary for the ADSs is The Bank of New York Mellon.

 

Item 10.

Additional Information.

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

The following is a summary of certain provisions of our Articles of Association, as amended. Such summary does not purport to be complete. For further information, you and your advisors should refer to the text of our Articles of Association, as amended, and to the texts of applicable laws and regulations. A copy of our Articles of Association is filed as an exhibit to this annual report, which is incorporated herein by reference.

Holders of our domestic shares and H shares are deemed to be shareholders of different classes for various matters, which affect their respective interests. For instance, if we propose an increase in domestic shares, holders of H shares would be entitled to vote on that proposal as a separate class. See “—Voting Rights and Shareholders’ Meetings” included elsewhere under this Item.

Objects and Purposes

We are a joint stock limited company established in accordance with the PRC Company Law, the State Council’s Special Regulations Regarding the Issue of Shares Overseas and the Listing of Shares Overseas by Companies Limited by Shares and other relevant laws and regulations of the State. We registered with the State Administration for Industry and Commerce of the People’s Republic of China. Article 14 of our Articles of Association provides that our scope of business includes, among other things, operation of basic and value-added telecommunications businesses.

Directors

Our Articles of Association provide that each of our Directors is obligated to each shareholder to act honestly in our Company’s best interests; not to exploit corporate assets for personal gain; and not to expropriate the rights of our shareholders.

Where a director, supervisor, general manager or other senior officer of the Company is materially interested, directly or indirectly, in a contract, transaction or arrangement (including any proposed contract, transaction or arrangement) with us, he or she shall declare the nature and extent of his or her interests to the Board at the earliest opportunity, whether or not such contract, transaction or arrangement is otherwise subject to the approval of the Board. A director shall not vote, and shall not be counted in the quorum of the meeting, on any resolution concerning any contract, transaction or arrangement where the director owns material rights or interests therein. A director is deemed to be interested in a contract, transaction or arrangement in which his or her associate (as defined in the Listing Rules) is interested.

Unless the interested director, supervisor, general manager or other senior officer of the Company discloses his or her interests to the board and the contract, transaction or arrangement in which the director is materially interested is approved by the board of directors at a meeting in which the director neither votes nor is counted in the quorum, such contract, transaction or arrangement may be revoked by us except with respect to a bona fide party thereto who does not have notice of the breach of duty by the interested director, supervisor, general manager or other senior officer.

Furthermore, we may not make loans or provide guarantees to a director, supervisor, general manager or other senior officer of the Company or of the Company’s holding company or any of their respective associates, except where such loan or guarantee is made or provided under a service contract as approved by shareholders at the shareholders’ general meeting and to meet expenditure requirements incurred or for the purpose of enabling the director, supervisor, general manager or other senior officer of the Company to perform his or her duties properly or made in the ordinary course of business.

 

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All decisions relating to the compensation of directors are made at shareholders’ meetings.

There are no provisions under our Articles of Association which relate to:

 

  

the retirement or non-retirement of directors under any age limit requirement;

 

  

directors’ borrowing power; or

 

  

number of shares required for director’s qualification.

Dividends

Our Board may propose dividend distributions at any time. Our Board may declare interim and special dividends under general authorization by a shareholders’ ordinary resolution. A distribution of final dividends for any fiscal year is subject to shareholders’ approval. Dividends may be distributed in the form of cash or shares. A distribution of shares, however, must be approved by special resolution of the shareholders.

We may only distribute dividends from our retained earnings as determined in accordance with the accounting principles of the PRC or IFRS, whichever is lower, after allowance has been made for:

 

  

recovery of losses, if any;

 

  

allocations to the statutory common reserve fund of 10.0% of our profit; and

 

  

allocations to a discretionary common reserve fund if approved by the shareholders.

Our Articles of Association require us to appoint on behalf of the holders of H shares a receiving agent that is registered as a trust company under the Trustee Ordinance of Hong Kong to receive dividends declared by us in respect of the H shares on behalf of such shareholders. Our Articles of Association require that cash dividends in respect of H shares be declared in Renminbi and paid by us in Hong Kong dollars. The Bank of New York Mellon, as the ADS depositary, will convert these proceeds into U.S. dollars and will remit the converted proceeds to holders of our ADSs after deduction of related fees and expenses and any withholding tax.

Dividends payments may be subject to the PRC withholding tax. See “—E. Taxation—People’s Republic of China—Taxation of Dividends” included elsewhere under this Item.

Voting Rights and Shareholders’ Meetings

Our Board will convene a shareholders’ annual general meeting once every year and within six months from the end of the preceding fiscal year. Our Board must convene an extraordinary general meeting within two months of the occurrence of any of the following events:

 

  

where the number of directors is less than the number stipulated in the PRC Company Law or two-thirds of the number specified in our Articles of Association;

 

  

where our unrecovered losses reach one-third of the total amount of our share capital;

 

  

where shareholder(s) holding 10.0% or more of our issued and outstanding voting shares so request(s) in writing;

 

  

whenever our Board deems necessary or our supervisory committee so requests; or

 

  

whenever two or more of our independent directors so request.

Resolutions proposed by shareholder(s) holding 3% or more of the total voting shares shall be included in the agenda for the relevant annual general meeting if they are within the functions and powers of shareholders in general meetings.

When the Company convenes a shareholders’ general meeting, written notice of the meeting shall be given at least 20 clear business days before the date of the meeting in the case of an annual general meeting, or at least 10 clear business days or 15 days, whichever is longer, in the case of an extraordinary general meeting to notify all of the shareholders whose names appear in the share register of the matters to be considered and the date and place of the meeting.

 

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Shareholders at meetings have the power, among other matters, to approve or reject our profit distribution plans, annual budget, financial statements, increases or decreases in share capital, issuances of debentures, mergers, liquidation and any amendment to our Articles of Association. In addition, the rights of a class of shareholders may not be modified or abrogated, unless approved by a special resolution of shareholders at a general shareholders’ meeting and by a special resolution of shareholders of that class of shares at a separate meeting. Our Articles of Association enumerate various amendments which would be deemed to be a modification or abrogation of the rights of a class of shareholders, including, among others, increasing or decreasing the number of shares of a class disproportionate to increases or decreases of other classes of shares, removing or reducing rights to receive dividends in a particular currency or creating shares with voting or equity rights superior to those of shares of that class. There are no restrictions under PRC law or our Articles of Association on the ability of investors that are not PRC residents to hold H shares and exercise voting rights.

Each share is entitled to one vote on all matters submitted for vote at all shareholders’ meetings, except for meetings of a special class of shareholders where only holders of shares of the affected class are entitled to vote on the basis of one vote per share of the affected class.

Shareholders are entitled to attend and vote at general meetings either in person or by proxy. Proxies must be in writing and deposited at our legal address or such other place as is specified in the meeting notice, not less than 24 hours before the time for holding the meeting at which the proxy proposes to vote or the time appointed for the passing of the relevant resolution(s). When the instrument appointing a proxy is executed by the shareholder’s attorney-in-fact, such proxy when deposited must be accompanied by a notary-certified copy of the relevant power of attorney or other authority under which the proxy was executed.

Resolutions on any of the following matters must be approved by more than two-thirds of the voting rights held by shareholders who are present in person or by proxy:

 

  

an increase or decrease in our share capital or the issuance of shares, warrants and other similar securities;

 

  

issuance of debentures;

 

  

our division, merger, dissolution or liquidation as well as material acquisition or disposal;

 

  

amendments to our Articles of Association;

 

  

amendment of shareholders’ rights of any class of shares; and

 

  

any other matters resolved by way of an ordinary resolution by shareholders in general meeting which the shareholders consider may have a material impact on the Company and should be adopted by a special resolution.

All other actions taken by the shareholders will be approved by a majority of the voting rights held by shareholders.

Any shareholder resolution that is in violation of any PRC laws or regulations or the Articles of Association will be null and void.

Pursuant to the Reply of the State Council on the Adjustment of the Notice Period of the General Meeting and Other Matters Applicable to the Overseas Listed Companies (Guo Han [2019] No. 97) (《国务院关于调整适用在境外上市公司召开股东大会通知期限等事项规定的批覆》(国函〔2019〕97号)) to amend the requirements with respect to notice period, shareholders’ proposal rights and convening procedures for general meetings applicable to joint stock companies incorporated in the People’s Republic of China and listed overseas, the Board proposed to amend the relevant provisions of the Articles of Association regarding the procedures convening general meetings accordingly. At the 2019 AGM held on May 26, 2020, the shareholders of the Company approved the amendments to the Articles of Association. We filed a Form 6-K with the SEC on March 25, 2020 in relation to the proposed amendments and a Form 6-K with the SEC on May 27, 2020 in relation to poll results of the 2019 AGM and the amended Articles of Association.

Liquidation Rights

In the event of our liquidation, the H shares will rank pari passu with the domestic shares, and any of our assets remaining after payment (in order of priority) of (a) the costs of liquidation, (b) wages and social insurance fees payable to or for our employees, (c) outstanding taxes and (d) bank loans, and company bonds and other debts, will be divided among our shareholders in accordance with the class of shares and their proportional shareholdings.

 

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Increases in Share Capital

Under our Articles of Association, issuance of new securities, including ordinary shares, securities convertible into ordinary shares, options, warrants or similar rights to subscribe for any ordinary shares or convertible securities, must be approved by votes representing more than two-thirds of the voting rights represented by the shareholders present at the shareholders meeting, votes representing more than two-thirds of the voting rights represented by the domestic shareholders present at the class meeting of domestic shareholders and votes representing more than two-thirds of the voting rights represented by the H shareholders present at the class meeting of H shareholders, respectively. No such approval is required if, but only to the extent that, we issue domestic shares and H shares, either separately or concurrently, in numbers not exceeding 20.0% of the number of domestic shares and H shares then outstanding, respectively, in any 12-month period, as already approved by votes representing more than two-thirds of the voting rights represented by the shareholders (including proxies) present at the shareholders meeting. New issues of shares must also be approved by relevant PRC authorities.

Shareholders are not liable to make any further contribution to the share capital other than according to the terms that were agreed upon by the subscriber of the relevant shares at the time of subscription.

Shareholders do not have preemptive rights with respect to new issues of shares of the Company.

Decrease in Share Capital and Repurchase

We may reduce our registered share capital only upon obtaining the approval of votes representing more than two-thirds of the voting rights represented by the shareholders (including proxies) present at the shareholders meeting and, in certain circumstances, of relevant PRC authorities. The number of H shares that may be repurchased is subject to the Takeovers Code.

Ownership Threshold

There are no provisions under our Articles of Association which relate to ownership thresholds above which shareholder ownership is required to be disclosed.

Restrictions on Large or Controlling Shareholders

Our Articles of Association define a controlling shareholder as any person who acting alone or in concert with others:

 

  

is in a position to elect more than one-half of the Board;

 

  

has the power to exercise, or to control the exercise of, 30.0%or more of our voting rights;

 

  

holds 30.0% or more of our issued and outstanding shares; or

 

  

has de facto control of us in any other way.

As of the date of this annual report, China Telecom Group, a state-owned enterprise, is our only controlling shareholder.

Our Articles of Association provide that, in addition to any obligation imposed by laws and administrative regulations or required by the Listing Rules, a controlling shareholder shall not exercise its voting rights in a manner prejudicial to the interests of all or some shareholders:

 

  

to relieve a director or supervisor from his or her duty to act honestly in our best interests;

 

  

to approve the appropriation by a director or supervisor (for his or her own benefit or for the benefit of any other person) of our assets in any way, including, without limitation, opportunities which may benefit us; or

 

  

to approve the appropriation by a director or supervisor (for his or her own benefit or for the benefit of any other person) of the individual rights of any other shareholders, including, without limitation, rights to distributions and voting rights (except in accordance with a restructuring of our company which has been submitted for approval by the shareholders at a general meeting in accordance with our Articles of Association).

If a controlling shareholder exercises its voting rights in violation of the provisions set forth above, a shareholder can sue such controlling shareholder and enforce its rights through arbitration in the PRC or Hong Kong.

Sources of Shareholders’ Rights

Currently, the primary sources of shareholders’ rights are our Articles of Association, the PRC Company Law and the Listing Rules that, among other things, impose certain standards of conduct, fairness and disclosure on us, our directors and our controlling shareholder. Our Articles of Association have incorporated the provisions set forth in the Mandatory Provisions for the Articles of Association of Companies Listed Overseas, or the Mandatory Provisions, adopted in 1994, pursuant to the requirement of the China Securities Regulatory Commission. Any amendment to those provisions will only become effective after approval by the relevant governmental department authorized by the State Council and the China Securities Regulatory Commission. The Listing Rules of the Hong Kong Stock Exchange require a number of additional provisions to the Mandatory Provisions to be included in our Articles of Association.

 

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The listing agreement between us and the Hong Kong Stock Exchange provides that we may not amend certain provisions of our Articles of Association that have been mandated by the Hong Kong Stock Exchange. These provisions relate to:

 

  

varying the rights of existing classes of shares;

 

  

voting rights;

 

  

our power to purchase our own shares;

 

  

rights of minority shareholders; and

 

  

liquidation procedures.

In addition, for so long as our H shares are listed on the Hong Kong Stock Exchange, we will be subject to the relevant ordinances, rules and regulations applicable to companies listed on the Hong Kong Stock Exchange, including, among other things, the Listing Rules, the Securities and Futures Ordinance and the Takeovers Code.

Unless otherwise specified, all rights, obligations and protection discussed below are derived from our Articles of Association and the PRC Company Law.

Enforceability of Shareholders’ Rights

Enforceability of our shareholders’ rights may be limited. See “Item 3. Key Information—D. Risk Factors—Risks Relating to the People’s Republic of China—The PRC legal system has inherent uncertainties that could limit the legal protections available to you”.

Restrictions on Transferability and the Share Register

Under our Articles of Association, in order for any PRC shareholder to sell its domestic shares to persons outside the PRC who will receive H shares upon the sale, such sales must be approved by votes representing more than two-thirds of the voting rights represented by the shareholders present at the shareholders meeting, votes representing more than two-thirds of the voting rights represented by the domestic shareholders present at the class meeting of domestic shareholders and votes representing more than two-thirds of the voting rights represented by the H shareholders present at the class meeting of H shareholders. Such sales are also subject to approval by the SASAC, the China Securities Regulatory Commission and other relevant governmental authorities.

We are required to keep a register of our shareholders which shall be comprised of various parts, including one part which is to be maintained in Hong Kong in relation to holders of H shares. Shareholders have the right to inspect and, for a reasonable charge, to copy the share register. No change may be made to the register of shareholders as a result of a transfer of shares within 20 days prior to the date of a shareholders’ general meeting or within five days before the record date for the Company’s distribution of dividends. However, in the event that there is any other relevant provision applicable to the registration of changes of the Company’s register of shareholders as promulgated and stipulated by the PRC laws, administrative regulations or the listing rules of the stock exchange on which the Company’s shares are listed, such provision shall prevail.

We have appointed Computershare Hong Kong Investor Services Limited to act as the registrar of our H shares. This registrar maintains our register of holders of H shares at our offices in Hong Kong and enters transfers of H shares in such register upon the presentation of the documents described above.

 

C.

Material Contracts

See “Item 4. Information on the Company—A. History and Development of the Company” and “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions” for certain arrangements we have entered into with China Telecom Group and/or other entities.

In addition, we entered into the 5G Cooperation Agreement with CUCL in relation to the co-building and co-sharing of 5G network on September 9, 2019. See “Item 4. Information on the Company—B. Business Overview—Network System—Co-building and co-sharing with China Unicom”.

 

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D.

Exchange Controls

We conduct our business primarily in Renminbi, which is also our functional and reporting currency. The Renminbi is not a fully convertible currency. Under the existing PRC foreign exchange regulations, we will be able to pay dividends in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, the PRC government may take measures at its discretion in the future to restrict access to foreign currencies for both current account transactions and capital account transactions if foreign currencies become scarce in the PRC. We may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs, if the PRC government restricts access to foreign currencies for current account transactions.

Foreign exchange transactions under our capital account, including but not limited to foreign currency-denominated borrowings from foreign banks, issuance of foreign currency-denominated debt securities and principal payments in respect of foreign currency-denominated obligations, continue to be subject to significant foreign exchange controls and require the approval of or registration with SAFE or certain banks designated by SAFE, as applicable. These limitations could affect our ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange to meet our payment obligations under the debt securities or foreign exchange for capital expenditures.

There are no limitations on the right of non-resident or foreign owners to remit dividends or to hold or vote the ordinary shares or the ADSs imposed by Hong Kong law or by our Articles of Association or other constituent documents.

 

E.

Taxation

The taxation of income and capital gains of holders of H shares or ADSs is subject to the PRC laws and practices and of jurisdictions in which holders of H 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 H shares or ADSs. In particular, the discussion does not address the tax consequences under state, local and other laws, such as non-U.S. federal laws. Accordingly, you should consult your own tax adviser regarding the tax consequences of an investment in the H shares and ADSs.

The discussion is based upon laws and relevant interpretations in effect as of the date of this annual report, all of which are subject to change.

People’s Republic of China

The following is a summary of certain PRC tax provisions relating to the ownership and disposition of H shares or ADSs held by the investors as capital assets. This summary does not purport to address all material tax consequences of the ownership of H shares, and does not take into account the specific circumstances of any particular investors. This summary is based on the PRC tax laws as in effect on the date of this annual report, as well as on the Agreement between the United States of America and the PRC for the Avoidance of Double Taxation, or the PRC-US Treaty, all of which are subject to change (or changes in interpretation), possibly with retroactive effect.

This discussion does not address any aspects of PRC taxation other than income taxation, capital taxation, stamp taxation and estate taxation. Prospective investors are urged to consult their tax advisors regarding Chinese, Hong Kong and other tax consequences of owning and disposing of H shares.

Taxation of Dividends

Individual Investors. According to the PRC Individual Income Tax Law and its implementing regulations, dividends paid by PRC companies are ordinarily subject to a PRC withholding tax levied at a flat rate of 20.0%. For a foreign individual who is not a PRC resident, the receipt of dividends from a PRC company is normally subject to a withholding tax of 20.0% unless reduced by an applicable tax treaty. For example, Hong Kong and Macau individual residents are subject to a withholding tax of 10.0% on dividends paid to them. According to the Notice on Taxation Policies for Shanghai-Hong Kong Stock Connect Pilot Program (Cai Shui [2014] No. 81) and Notice on Taxation Policies for Shenzhen-Hong Kong Stock Connect Pilot Program (Cai Shui [2016] No. 127), the Company shall withhold individual income tax at the rate of 20.0% with respect to dividends received by the mainland individual investors for investing in our H shares through the Southbound Trading Link. The tax levied on dividends derived from the investment by mainland securities investment funds in our H shares through the Southbound Trading Link shall be ascertained by reference to the rules applicable to the individual investors. We are not required to withhold income tax on dividends derived by the mainland enterprise investors through the Southbound Trading Link, and such enterprises shall report the income and make tax payment by themselves.

 

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Enterprises. According to the EIT Law and its implementing regulations, dividends paid by a PRC company to a foreign enterprise which is a “non-resident enterprise”, which is established under the law of a non-PRC jurisdiction and has no establishment or residence in the PRC or whose dividends from the PRC do not relate to its establishment or residence in the PRC, are subject to a 10.0% tax, unless reduced by an applicable tax treaty. A resident enterprise, including an enterprise which is established under the law of a non-PRC jurisdiction but whose “de facto management body” is located in the PRC, is not subject to any PRC withholding tax with respect to dividends paid to it by a PRC company.

Tax Treaties. Investors who do not reside in the PRC and reside in countries that have entered into double-taxation treaties with the PRC may be entitled to a reduction of the withholding tax imposed on the payment of dividends to investors of our Company who do not reside in the PRC. The PRC currently has double-taxation treaties with a number of other countries, which include but are not limited to:

 

  

Australia;

 

  

Canada;

 

  

France;

 

  

Germany;

 

  

Japan;

 

  

Malaysia;

 

  

the Netherlands;

 

  

Singapore;

 

  

the United Kingdom; and

 

  

the United States.

Under the PRC-US Treaty, the PRC may tax a dividend paid by us to an Eligible U.S. Holder up to a maximum of 10.0% of the gross amount of such dividend. It is arguable that under the PRC-US Treaty, the PRC may only tax gains from the sale or disposition by an Eligible U.S. Holder of H shares or ADSs representing an interest in the Company of 25.0% or more, but this position is uncertain and the PRC authorities may take a different position. For the purposes of this discussion, an “Eligible U.S. Holder” is a U.S. holder that (i) is a resident of the United States for the purposes of the PRC-US Treaty, (ii) does not maintain a permanent establishment or fixed base in the PRC to which H shares or ADSs are attributable and through which the beneficial owner carries on or has carried on business (or, in the case of an individual, performs or has performed independent personal services) and (iii) is not otherwise ineligible for benefits under the PRC-US Treaty with respect to income and gains derived in connection with the H shares or ADSs.

Taxation of Capital Gains

With respect to individual holders of H shares or ADSs, the PRC Individual Income Tax Law and its implementation regulations stipulate that gains realized on the sale of equity shares would be subject to income tax at a rate of 20.0%, and empower the MOF to draft detailed tax rules on the mechanism for collecting such tax subject to approval of the State Council. However, as of the date of this annual report, no such tax rules have been enacted and no income tax on gains realized on the sale of equity shares has been collected. Gains on the sale of shares issued by listed companies by individuals were temporarily exempted from individual income tax pursuant to notices issued by the SAT dated March 30, 1998. In the event this temporary exemption is withdrawn or ceases to be effective, individual holders of H shares or ADSs may be subject to capital gains tax at the rate of 20.0% unless such tax is reduced or eliminated by an applicable double-taxation treaty. If tax on capital gains from the sale of H shares or ADSs become applicable, it is arguable that under the PRC-US Treaty, the PRC may only tax gains from the sale or disposition by an Eligible U.S. Holder of H shares or ADSs representing an interest in our Company of 25.0% or more, but this position is uncertain and the PRC authorities may take a different position.

Under the EIT Law and its implementing regulations, capital gains realized by a foreign enterprise which is a “non-resident enterprise” upon the sale of the overseas-listed shares of a PRC company are subject to a 10.0% tax, unless reduced by an applicable double-taxation treaty. Capital gains realized by a resident enterprise, including an enterprise which is established under the law of a non-PRC jurisdiction but whose “de facto management body” is located in the PRC, are subject to the PRC enterprise income tax.

Additional PRC Tax Considerations

PRC Stamp Duty. PRC stamp duty imposed on the transfer of shares of PRC publicly traded companies under the PRC Provisional Regulations Concerning Stamp Duty, or the Provisional Regulations, which became effective on October 1, 1988 and were amended on January 8, 2011, should not apply to the acquisition and disposal by non-PRC investors of H shares or ADSs outside of the PRC by virtue of the Provisional Regulations, which provide that PRC stamp duty is imposed only on documents executed or received within the PRC that are legally binding in the PRC and are protected under the PRC law.

 

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Estate Tax. No liability for estate tax under PRC law will arise from non-PRC nationals holding H shares or ADSs.

Hong Kong

Tax on Dividends

Under the current practice of the Hong Kong Inland Revenue Department, no tax is payable in Hong Kong in respect of dividends paid by us.

Profits

No tax is imposed in Hong Kong in respect of capital gains from the sale of H shares. Trading gains from the sale of shares 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 profits tax, which is currently (for the year of assessment 2008-2009 onwards) imposed at the rate of 16.5% on corporations and 15.0% on unincorporated businesses, unless such gains are chargeable under the respective half-rates of 8.25% and 7.5% that may apply for the first HK$2 million of assessable profits for years of assessment beginning on or after April 1, 2018. Gains from sales of H shares effected on the Hong Kong Stock Exchange will be considered by the Hong Kong Inland Revenue Department 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 H shares realized by persons carrying on a business of trading or dealing in securities in Hong Kong. There is no tax treaty in effect between the United States and Hong Kong, and the PRC-US Treaty does not apply to Hong Kong.

There will be no liability for Hong Kong profits tax in respect of profits from the sale of ADSs, where purchases and sales of ADSs are effected outside Hong Kong, e.g., on the NYSE.

Stamp Duty

Hong Kong stamp duty will be payable by the purchaser on every purchase and by the seller on every sale of H shares registered on the Hong Kong branch register. The duty is charged at the ad valorem rate of 0.1% (subject to the completion of the legislative process to increase the stamp duty rate, the rate will be increased to 0.13% with effect from 1 August 2021) of the consideration for, or (if greater) the value of, the H shares transferred on each of the seller and the purchaser. In other words, a total 0.2% (subject to the completion of the legislative process to increase the stamp duty rate, the rate will be increased to 0.26% with effect from 1 August 2021) is currently payable on a typical sale and purchase transaction of H shares. In addition, a fixed duty of HK$5 is currently payable on any instrument of transfer of shares.

The withdrawal of H shares upon the surrender of American Depositary Receipts, or ADRs, and the issuance of ADRs upon the deposit of H shares, will also attract stamp duty at the rate described above for sale and purchase transactions unless such withdrawal or deposit does not result in a change in the beneficial ownership of the H shares under Hong Kong law, in which case only a fixed duty of HK$5 is payable on the transfer. The issuance of the ADRs upon the deposit of H shares issued directly to the Depositary, as depositary of the ADSs, or for the account of the Depositary, will not be subject to any stamp duty. No Hong Kong stamp duty is payable upon the transfer of ADSs outside Hong Kong.

Estate Duty

No Hong Kong estate duty is currently payable.

United States

Material United States Federal Income Taxation

This section describes the material United States federal income tax consequences to a U.S. holder of the acquisition, ownership and disposition of H shares or ADSs. It applies to you only if you hold your H shares or ADSs as capital assets for United States federal income tax purposes. This discussion address only United States federal income taxation and does not discuss all of the tax consequences that may be relevant to you in light of your individual circumstances, including foreign, state or local tax consequences, estate and gift tax consequences, and tax consequences arising under the Medicare contribution tax on net investment income or the alternative minimum tax. 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;

 

  

a tax-exempt organization;

 

  

an insurance company;

 

  

a person that actually or constructively owns 10.0% or more of the combined voting power of our voting stock or of the total value of our stock;

 

  

a person that holds H shares or ADSs as part of a straddle or a hedging or conversion transaction;

 

  

a person that purchases or sells H shares or ADSs as part of a wash sale for tax purposes; or

 

  

a person whose functional currency is not the U.S. dollar.

 

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This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect, as well as the PRC-US Treaty. These authorities 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 H shares or ADSs and you are, for United States federal income tax purposes:

 

  

a citizen or resident of the United States;

 

  

a domestic corporation;

 

  

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 an entity or arrangement that is treated as a partnership for United States federal income tax purposes holds the H shares or ADSs, the United States federal income tax treatment of a partner will generally depend on the status of the partner and the tax treatment of the partnership. If you are a partner in a partnership that holds the H shares or ADSs, you should consult your tax advisor with regard to the United States federal income tax treatment of an investment in the H 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 H shares and ADSs in your particular circumstances.

In general, and taking into account the earlier assumptions, for United States federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of H shares represented by those ADSs. Exchanges of H shares for ADRs, and ADRs for H shares, generally will not be subject to United States federal income tax.

The tax treatment of your H shares or ADSs will depend in part on whether or not we are classified as a passive foreign investment company, or PFIC, for United States federal income tax purposes. Except as discussed below under “-PFIC Rules”, this discussion assumes that we are not classified as a PFIC for United States federal income tax purposes.

Taxation of Dividends

The gross amount of any distribution we pay out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes), other than certain pro-rata distributions of our shares, will be treated as a dividend that is subject to United States federal income taxation. If you are a noncorporate U.S. holder, dividends that constitute qualified dividend income will be taxable to you at the preferential rates applicable to long-term capital gains, provided that you hold H 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 H shares or ADSs generally will be qualified dividend income, provided that, in the year that you receive the dividend, we are eligible for the benefits of the PRC-US Treaty. We believe that we are currently eligible for the benefits of the PRC-US Treaty and we therefore expect that dividends on the shares and ADSs will be qualified dividend income, but there can be no assurance that we will continue to be eligible for the benefits of the PRC-US Treaty.

Furthermore, even if we are not eligible for the benefits of the PRC-US Treaty in a taxable year, dividends on the ADSs will nevertheless be treated as qualified dividend income if the ADSs are readily tradable on an established securities market in the United States. However, as discussed above in “Key Information—Risk Factors—Risks Relating to Our Business—Transactions in and holdings of our ADSs and H shares by U.S. persons beyond specified dates are prohibited, and the continued listing of and trading in our ADSs are subject to significant uncertainty”, our ADSs cannot currently be traded on the NYSE. As a result, as long as that is the case, dividends paid with respect to ADSs will only be qualified dividend income if we are eligible for the benefits of the PRC-U.S. Treaty.

 

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You must include any PRC tax withheld from the dividend payment in this gross amount even though you do not in fact receive it. The dividend is taxable to you when you, in the case of H 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. Subject to certain limitations, the PRC tax withheld and paid over to the PRC will be creditable or deductible against your United States federal income tax liability. To the extent a refund of the tax withheld is available under PRC law or under the PRC-US Treaty, the amount of tax withheld that is refundable will not be creditable against your United States federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the preferential tax rates.

The amount of the dividend distribution that you must include in your income will be the U.S. dollar value of the Hong Kong dollar payments made, determined at the Hong Kong dollar/U.S. dollar spot 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 preferential tax rates 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 H shares or ADSs and thereafter as capital gain. However, we do not expect to calculate earnings and profits in accordance with United States federal income tax principles. Accordingly, you should expect to generally treat distributions we make as dividends.

For foreign tax credit purposes, dividends will generally be income from sources outside the United States and will generally be “passive” income for purposes of computing the foreign tax credit allowable to you.

Taxation of Capital Gains

If you are a U.S. holder and you sell or otherwise dispose of your H 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 H shares or ADSs. Capital gain of a noncorporate U.S. holder is generally taxed at preferential rates where the property is held for more than one year. 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.

However, under the PRC-US Treaty, if PRC tax were to be imposed on any gain from the disposition of your H shares or ADSs (as discussed above in “People’s Republic of China—Taxation of Capital Gains”) in accordance with the PRC-US Treaty, then such gain will generally be treated as PRC source income if you are an Eligible U.S. Holder (as defined above in “People’s Republic of China—Taxation of Dividends—Tax Treaties”). Subject to certain limitations, any such PRC tax will be creditable against your United States federal income tax liability. U.S. holders should consult their tax advisors regarding the tax consequences if a PRC tax were to be imposed on a disposition of H shares or ADSs, including the availability of the foreign tax credit under your particular circumstances.

Hong Kong Stamp Duty

Any Hong Kong stamp duty that you pay will not be a creditable tax for United States federal income tax purposes, but would generally increase your basis in your H Shares or ADSs (in the case of stamp duty paid in respect of a purchase) or reduce your amount realized (in the case of stamp duty paid in respect of a sale).

PFIC Rules

We believe that H shares and ADSs should not currently be treated as stock of a PFIC for United States federal income tax purposes and we do not expect to become a PFIC in the foreseeable future. However, this conclusion is a factual determination that is made annually and thus may be subject to change. 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 H 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, gains from the sale or exchange of investment property rents and royalties (other than certain rents and royalties derived in the active conduct of a trade or business) and certain other specified categories of income. If a foreign corporation owns at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the 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.

 

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If we were to be treated as a PFIC, gain realized on the sale or other disposition of your H shares or ADSs would in general not be treated as capital gain. Instead, unless you elect to be taxed annually on a mark-to-market basis with respect to your H shares or ADSs, you would be treated as if you had realized such gain and certain “excess distributions” ratably over your holding period for the H shares or ADSs and would generally be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. With certain exceptions, your H 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 H shares or ADSs. Dividends that you receive from us will not be eligible for the special tax rates applicable to qualified dividend income if we are a PFIC (or are treated as a PFIC with respect to you) either in the taxable year of the distribution or the preceding taxable year, but instead will be taxable at rates applicable to ordinary income.

 

F.

Dividends and Paying Agents.

Not applicable.

 

G.

Statement by Experts.

Not applicable.

 

H.

Documents on Display

You may read and copy documents referred to in this annual report on Form 20-F that have been filed with the SEC, at its public reference room located at 100 F Street, NW, 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 maintains a website at http://www.sec.gov that contains reports, proxy statements and other information regarding registrants that file 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 Risk.

Our primary market risk exposures are fluctuations in exchange rates and interest rates.

Foreign 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. The value of the Renminbi against the U.S. dollar and other foreign currencies fluctuates and is affected by, among other things, changes in the PRC’s and international political and economic conditions. Fluctuations in exchange rates may adversely affect the value, translated or converted into United States dollars or Hong Kong dollars, of our net assets, earnings and any declared dividends. We cannot give any assurance that any future movements in the exchange rate of the Renminbi against the United States dollar or other foreign currencies will not adversely affect our results of operations and financial condition. See “Item 3. Key Information—D. Risk Factors—Risks Relating to the People’s Republic of China—Government restriction on currency conversion may adversely affect our financial condition” and “—Fluctuation of the Renminbi could materially affect our financial condition, results of operations and cash flows”. 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 tables provide information regarding our financial instruments that are sensitive to foreign exchange rates as of December 31, 2020 and 2019, respectively. For debt obligations, the tables present principal cash flows and related weighted average interest rates by expected maturity dates.

 

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As of December 31, 2020:

 

   Expected Maturity 
   2021  2022  2023  2024  2025  Thereafter  Total   Fair
Value
 
   (RMB equivalent in millions, except interest rates) 

Assets:

          

Cash and cash equivalents

          

United States dollars

   5,004   —     —     —     —     —     5,004    5,004 

Japanese yen

   11   —     —     —     —     —     11    11 

Euro

   53   —     —     —     —     —     53    53 

Hong Kong dollars

   833   —     —     —     —     —     833    833 

Other currencies

   490   —     —     —     —     —     490    490 

Short-term bank deposits

          

United States dollars

   1,593   —     —     —     —     —     1,593    1,593 

Liabilities:

          

Debts in United States dollars

          

Fixed rate

   35   22   19   17   17   114   224    190 

Average interest rate

   1.8  1.8  1.8  1.8  1.8  1.8   

Debts in Euro

          

Fixed rate

   26   26   26   11   10   53   152    134 

Average interest rate

   2.3  2.3  2.3  2.3  2.3  2.3   

As of December 31, 2019:

 

   Expected Maturity 
   2020  2021  2022  2023  2024  Thereafter  Total   Fair
Value
 
   (RMB equivalent in millions, except interest rates) 

Assets:

          

Cash and cash equivalents

          

United States dollars

   3,055   —     —     —     —     —     3,055    3,055 

Japanese yen

   27   —     —     —     —     —     27    27 

Euro

   75   —     —     —     —     —     75    75 

Hong Kong dollars

   327   —     —     —     —     —     327    327 

Other currencies

   1,092   —     —     —     —     —     1,092    1,092 

Short-term bank deposits

          

United States dollars

   2,724   —     —     —     —     —     2,724    2,724 

Liabilities:

          

Debts in United States dollars

          

Fixed rate

   48   37   24   20   18   141   288    235 

Average interest rate

   1.7  1.7  1.7  1.7  1.7  1.7   

Debts in Euro

          

Fixed rate

   25   25   25   25   11   62   173    157 

Average interest rate

   2.3  2.3  2.3  2.3  2.3  2.3   

Interest Rate Risk

The People’s Bank of China has the sole authority in the PRC to establish the official interest rates for Renminbi-denominated loans. Financial institutions in the PRC set their effective interest rates within the range established by the People’s Bank of China. Interest rates and payment methods on loans denominated in foreign currencies are set by financial institutions based on interest rate changes in the international financial market, cost of funds, risk levels and other factors.

 

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We are exposed to interest rate risk resulting from fluctuations in interest rates on our short-term and long-term debts. Increases in interest rates will increase the cost of new borrowing and the interest expense with respect to outstanding floating rate debt. As of December 31, 2019 and 2020, our debt consisted of fixed and variable rate debt obligations with maturities from 2020 to 2036 and from 2021 to 2036, respectively.

The following tables present cash flows and related weighted average interest rates by expected maturity dates of our interest rate sensitive financial instruments as of December 31, 2020 and 2019, respectively.

As of December 31, 2020:

 

   Expected Maturity 
   2021  2022  2023  2024  2025  Thereafter  Total   Fair
Value
 
   (RMB equivalent in millions, except interest rates) 

Liabilities:

          

Debts in Renminbi

          

Fixed rate

   23,784   17,033   2,964   956   925   2,029   47,691    47,689 

Average interest rate

   2.8  2.8  1.2  1.2  1.2  1.2   

Variable rate

   5,275   —     —     —     —     —     5,275    5,275 

Average interest rate(1)

   3.3  —     —     —     —     —      

Debts in United States dollars

          

Fixed rate

   35   22   19   17   17   114   224    190 

Average interest rate

   1.8  1.8  1.8  1.8  1.8  1.8   

Debts in Euro

          

Fixed rate

   26   26   26   11   10   53   152    134 

Average interest rate

   2.3  2.3  2.3  2.3  2.3  2.3   

 

(1) 

The average interest rates for variable rate debts are calculated based on the rates reported as of December 31, 2020.

As of December 31, 2019:

 

   Expected Maturity 
   2020  2021  2022  2023  2024  Thereafter  Total   Fair
Value
 
   (RMB equivalent in millions, except interest rates) 

Liabilities:

          

Debts in Renminbi

          

Fixed rate

   33,393   1,016   25,983   920   911   2,833   65,056    64,410 

Average interest rate

   2.8  2.8  2.8  1.2  1.2  1.2   

Variable rate

   13,505   —     —     —     —     —     13,505    13,505 

Average interest rate(1)

   3.8  —     —     —     —     —      

Debts in United States dollars

          

Fixed rate

   48   37   24   20   18   141   288    235 

Average interest rate

   1.7  1.7  1.7  1.7  1.7  1.7   

Debts in Euro

          

Fixed rate

   25   25   25   25   11   62   173    157 

Average interest rate

   2.3  2.3  2.3  2.3  2.3  2.3   

 

(1) 

The average interest rates for variable rate debts are calculated based on the rates reported as of December 31, 2019.

 

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.

 

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  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 (if applicable)    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 deposit or withdraw shares
  Expenses of the depositary    Conversion of foreign currency 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
  Any other charge incurred by the depository or its agents (including the custodian) for servicing of the deposited securities    As necessary

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. The amount of such reimbursements is subject to certain conditions and limits. From April 24, 2020 to April 23, 2021, with respect to certain expenses incurred by us in connection with our depositary facility, including listing and legal fees and expenses related to our attendance at the annual ADR training seminar, we received from the Bank of New York Mellon a total of US$70,000 reimbursement, net of withholding tax. The Bank of New York Mellon also waived certain costs of US$110,556.19 in connection with the administration of the ADR program and other services provided to our registered shareholders for the year 2020.

PART II

 

Item 13.

Defaults, Dividend Arrearages and Delinquencies.

None.

 

Item 14.

Material Modifications to the Rights of Security Holders and Use of Proceeds.

Material Modifications to the Rights of Security Holders

None.

Use of Proceeds

Not applicable.

 

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Item 15.

Controls and Procedures.

Disclosure Controls and Procedures

Our management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this annual report. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of the fiscal year covered by this annual report, our disclosure controls and procedures were designed, and were effective, to give reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and were also effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is 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.

Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and/or our Board; and (3) 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.

As of December 31, 2020, our management, with the participation of the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the effectiveness of the internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2020.

The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by Deloitte Touche Tohmatsu, an independent registered public accounting firm, as stated in their report which is included herein.

Report of Independent Registered Public Accounting Firm

To the shareholders and the Board of Directors of China Telecom Corporation Limited:

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of China Telecom Corporation Limited and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Tread way Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company, and our report dated March 9, 2021, expressed an unqualified opinion on those consolidated financial statements, and included an explanatory paragraph regarding the Company’s change in its method of accounting for leases in 2019 due to the adoption of International Financial Reporting Standard 16, “Leases”.

 

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Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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/ Deloitte Touche Tohmatsu

Deloitte Touche Tohmatsu

Hong Kong, the People’s Republic of China

March 9, 2021

Changes in Internal Control Over Financial Reporting

During the fiscal year ended December 31, 2020, there was no change to our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 16A.

Audit Committee Financial Expert.

Our Audit Committee currently consists of four members, Mr. Tse Hau Yin, Aloysius, Mr. Xu Erming, Madam Wang Hsuehming and Mr. Yeung Chi Wai, Jason. They are all Independent Non-Executive Directors. See “Item 6. Directors, Senior Management and Employees—C. Board Practices—Audit Committee”. Our Board has determined that Mr. Tse Hau Yin, Aloysius, our Independent Non-executive Director, is qualified as an “audit committee financial expert”, as defined in Item 16A of Form 20-F.

 

Item 16B.

Code of Ethics.

We have adopted a code of ethics that applies to the Chief Executive Officer, President, Chief Operating Officer, Chief Financial Officer, Vice Presidents, controllers and other senior officers of our Company. We have filed this code of ethics as an exhibit to our annual report for the fiscal year ended December 31, 2003 and we hereby incorporate that exhibit into this annual report. The text of this code of ethics is also posted on our Internet website at http://www.chinatelecom-h.com/en/cg/pdf/gaoguan.pdf.

 

 

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Item 16C.

Principal Accountant Fees and Services.

The following table sets forth the aggregate audit fees, audit-related fees, tax fees of our principal accountants and all other fees billed for products and services provided by our principal accountants other than the audit fees, audit-related fees and tax fees for each of the fiscal years 2019 and 2020:

 

   Audit Fees
(including VAT)
   Audit-Related Fees  Tax Fees  Other Fees 

2019

   RMB81.46 million    RMB0.70 million   RMB1.70 million   RMB0.82 million 

2020

   RMB76.83 million    RMB0.72 million(1)   RMB1.50 million(2)   RMB0.91 million(3) 

 

(1)

Audit-related fees in the amount of RMB0.72 million were primarily paid for the advisory services provided to us regarding our internal control and the assurance service provided to us regarding our environmental, social and governance report.

(2)

Tax fees in the amount of RMB1.50 million were primarily paid for profit tax filing assistance services.

(3)

Other fees in the amount of RMB0.91 million were primarily paid for other operating advisory services.

Before our principal accountants were engaged by our Company or our subsidiaries to render audit or non-audit services, the engagements were approved by our 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.

None.

 

Item 16F.

Change in Registrant’s Certifying Accountant.

On March 9, 2021, the Board resolved, as recommended by our Audit Committee, not to re-appoint our principal accountants, Deloitte Touche Tohmatsu, or Deloitte, after their completion of the audit of our consolidated financial statements for the year ended December 31, 2020 and the effectiveness of our internal control over financial reporting as of December 31, 2020. They will retire effective upon the close of the 2020 annual general meeting of the Company. On the same date, the Board resolved, pursuant to the open selection process and as recommended by our Audit Committee, to appoint PricewaterhouseCoopers Zhong Tian LLP, as our new principal accountants, subject to the approval by our shareholders at the annual general meeting of the Company scheduled to be held on May 7, 2021. Such change in our principal accountants is due to the relevant regulations issued by the MOF and the SASAC, under which there are restrictions on the number of years of audit services that an accounting firm can continuously provide to a state-owned enterprise and its subsidiaries. The Company is a subsidiary of China Telecommunications Corporation, which is a state-owned enterprise under the supervision of the SASAC.

During the fiscal years ended December 31, 2019 and 2020, and the subsequent interim period through April 28, 2021, there were no: (1) disagreements with Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to the subject matter of the disagreement (as defined in Item 16F(a)(1)(iv) of Form 20-F and related instructions to that item), or (2) reportable events (as defined in Item 16F(a)(1)(v) of Form 20-F).

The audit reports of Deloitte on the consolidated financial statements of the Company and its subsidiaries as of and for the years ended December 31, 2019 and 2020 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. The audit reports of Deloitte on the effectiveness of our internal control over financial reporting as of December 31, 2019 and 2020 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.

We have provided Deloitte with a copy of the foregoing disclosure and have requested that Deloitte furnish to us a letter addressed to the SEC stating whether or not Deloitte agrees with such disclosure. A copy of the letter is filed as Exhibit 15.1 to this annual report on Form 20-F.

 

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During the two fiscal years ended December 31, 2019 and 2020 and through April 28, 2021, neither we nor any person on our behalf consulted with PricewaterhouseCoopers Zhong Tian LLP regarding either (i) the application of accounting principles to a specific completed or proposed transaction or regarding the type of audit opinion that might be rendered on our consolidated financial statements and no written or oral advice was provided that PricewaterhouseCoopers Zhong Tian LLP concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issues, or (ii) any matter being the subject of disagreement (as defined in Item 16F(a)(1)(iv) of Form 20-F and related instructions to that item) or reportable events (as defined in Item 16F(a)(1)(v) of Form 20-F).

 

Item 16G.

Corporate Governance.

Our Company was incorporated under the PRC Company Law on September 10, 2002 as a joint stock company with limited liability. Our ADSs are listed on the NYSE. Our H shares are listed on the Hong Kong Stock Exchange. As a foreign private issuer, in respect of its listing on the NYSE, we are not required to comply with all corporate governance rules of Section 303A of the Listed Company Manual of the NYSE. However, we are required to disclose the significant differences between our corporate governance practices and the listing standards followed by NYSE-listed U.S. companies.

Pursuant to the requirements of Section 303A.01 of the Listed Company Manual of the NYSE, the Board of Directors of all NYSE-listed U.S. companies must be made up by a majority of independent directors. Under applicable PRC and Hong Kong laws and regulations, our Board is not required to be formed with a majority of independent directors. As a listed company on the Hong Kong Stock Exchange, we need to comply with the Listing Rules, which require that at least one-third of the board of directors of a listed company in Hong Kong be independent non-executive directors. Our Board currently consists of ten Directors, of which four are Independent Directors, making the number of Independent Directors exceeds one-third of the total number of Directors on the Board, in compliance with the requirements of the Listing Rules. These independent directors satisfy the requirements on “independence” under the Listing Rules, which, however, differ from the requirements in Section 303A.02 of the Listed Company Manual of the NYSE.

Section 303A.03 of the Listed Company Manual of the NYSE provides that listed companies must schedule regular executive sessions in which non-management directors meet without management participation. As a listed company on the Hong Kong Stock Exchange, the Company is subject to the requirement under the Listing Rules that the chairman of the board should hold meetings at least annually with the independent non-executive directors without the presence of other directors. It has been our practice that our Chairman holds a meeting to communicate with Independent Non-Executive Directors without the presence of other Directors at least annually to ensure the views and opinions of Independent Non-Executive Directors are expressed. 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.

Section 303A.04 of the Listed Company Manual of the NYSE provides that a listed company must have a nominating/corporate governance committee that consists entirely of independent directors and 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, and an annual performance evaluation of the committee. The Listing Rules also contain a code provision that the listed companies should establish a nomination committee which is chaired by the chairman of the board or an independent non-executive director and consists of a majority of independent non-executive directors. The Company’s Nomination Committee was established in 2005 with a written charter that specifies its duties and authorities. In addition, our Board is in charge of developing our corporate governance guidelines.

Section 303A.05 of the Listed Company Manual of the NYSE provides that a listed company must have a compensation committee that consists entirely of independent directors and the compensation committee must have a written charter that addresses the committee’s purpose and responsibilities and an annual performance evaluation of the compensation committee. The Listing Rules require that the listed companies should establish a remuneration committee which is chaired by an independent non-executive director and consists of a majority of independent non-executive directors. The Company’s Remuneration Committee has a written charter that specifies its duties and authorities.

Section 303A.07 of the Listed Company Manual of the NYSE 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 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 disclose such determination. The Company is not required, under applicable PRC laws or the Listing Rules to make such determination, and the Company has not made such determination.

 

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Section 303A.10 of the Listed Company Manual of the NYSE provides that listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees. While the Company is not required to adopt any similar code under the applicable PRC laws or the Listing Rules, the Company, as required under the Sarbanes-Oxley Act, has adopted a code of ethics that is applicable to the Chief Executive Officer, President, Chief Operating Officer, Chief Financial Officer, Vice Presidents, general managers, controller and other senior officers of the Company. We also adopted a code of ethics for our employees.

Section 303A.12(a) of the Listed Company Manual of the NYSE provides that each listed company’s chief executive officer must certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards. The Chief Executive Officer of the Company is not required, under the applicable PRC laws or the Listing Rules, to make similar certifications.

 

Item 16H.

Mine Safety Disclosure.

Not applicable.

 

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.

 

Item 19.

Exhibits.

 

 (a)

See Item 18 for a list of the financial statements filed as part of this annual report.

 

 (b)

Exhibits to this annual report:

 

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Exhibits

  

Description

1.1  Articles of Association (as amended) (English translation)
2.1  Form of H Share Certificate.(1)(P)
2.2  Form of Deposit Agreement among the Registrant, the Bank of New York, as depositary, and Owners and Beneficial Owners from time to time of American Depositary Shares evidenced by American Depositary Receipts issued thereunder, including the form of American Depositary Receipt.(2)(P)
2.3  We agree to provide the Securities and Exchange Commission, upon request, copies of instruments defining the rights of holders of our long-term debt.
2.4  Description of rights of each class of securities registered under Section 12 of the Securities Exchange Act of 1934.
4.1  Supplemental Trademark License Agreement, dated October 26, 2003, between the Registrant and China Telecommunications Corporation (English translation). (3)
4.2  Sale and Purchase Agreement, dated October 26, 2003, between the Registrant and China Telecommunications Corporation (English translation).(3)
4.3  Supplemental Connected Transactions Agreement, dated October 26, 2003, between the Registrant and China Telecommunications Corporation (English translation).(3)
4.4  Form of Underwriting Agreement.(4)
4.5  Supplemental Trademark License Agreement, dated April 13, 2004, between the Registrant and China Telecommunications Corporation (English translation). (5)
4.6  Supplemental Connected Transactions Agreement, dated April 13, 2004, between the Registrant and China Telecommunications Corporation (English translation). (6)
4.7  Conditional Sale and Purchase Agreement, dated April 13, 2004, between the Registrant and China Telecommunications Corporation (English translation). (7)
4.8  Supplemental Conditional Sale and Purchase Agreement, dated June 9, 2004, between the Registrant and China Telecommunications Corporation (English summary). (8)
4.9  Supplemental Centralized Services Agreement, dated December 15, 2005, between the Registrant and China Telecommunications Corporation (English summary). (9)
4.10  Property Leasing Framework Agreement, dated August 30, 2006, between the Registrant and China Telecommunications Corporation (English summary).(10)
4.11  IT Services Framework Agreement, dated August 30, 2006, between the Registrant and China Telecommunications Corporation (English summary).(10)
4.12  Equipment Procurement Services Framework Agreement, dated August 30, 2006, between the Registrant and China Telecommunications Corporation (English summary).(10)
4.13  Engineering Framework Agreement, dated August  30, 2006, between the Registrant and China Telecommunications Corporation (English summary). (10)
4.14  Community Services Framework Agreement, dated August 30, 2006, between the Registrant and China Telecommunications Corporation (English summary). (10)
4.15  Ancillary Telecommunications Service Framework Agreement, dated August 30, 2006, between the Registrant and China Telecommunications Corporation (English summary). (10)
4.16  Strategic Agreement, dated August 30, 2006, between the Registrant and China Communications Services Corporation Limited (English summary). (10)
4.17  Supplemental Agreement to the Strategic Agreement, dated June 15, 2007, between the Registrant and the China Communications Services Corporation Limited (English Summary). (10)
4.18  Supplemental Agreement to the Strategic Agreement, dated October 29, 2009, between the Registrant and the China Communications Services Corporation Limited (English Summary). (13)
4.19  Master Agreement for sales and purchase of equity interests in China Telecom (Hong Kong) International Limited, China Telecom System Group Integration Co., Ltd. and China Telecom (USA) Corporation, dated June 15, 2007, between China Telecommunications Corporation and China Telecom Corporation Limited. (10)
4.20  Stock Purchase Agreement in respect of sales and purchase of shares in China Telecom (USA) Corporation, dated June 15, 2007, between China Telecommunications Corporation and China Telecom Corporation Limited. (10)

 

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Exhibits

  

Description

4.21  Share Purchase Agreement in respect of sales and purchase of shares in China Telecom (Hong Kong) International Limited, dated June 15, 2007, between China Telecommunications Corporation and China Telecom Corporation Limited. (10)
4.22  Share Transfer Agreement in respect of transfer of shareholdings in China Telecom System Integration Co., Limited, dated June 15, 2007, among China Telecommunications Corporation, China Huaxin Post and Telecommunications Economy Development Center and China Telecom Corporation Limited. (10)
4.23  Agreement on the Transfer of the Entire Equity Interests in China Telecom Group Beijing Corporation, dated March 31, 2008, between the Registrant and China Telecommunications Corporation (English Translation). (11)
4.24  Form Merger Agreement, dated January 10, 2008, between the Registrant and each of certain subsidiaries wholly owned by the Registrant (English Translation). (11)
4.25  Supplemental Agreement to the Centralized Services Agreement, dated December 26, 2007, between the Registrant and China Telecommunications Corporation (English Summary). (11)
4.26  Supplemental Agreement to the Centralized Services Agreement, dated March 31, 2008, between the Registrant and China Telecommunications Corporation (English Summary). (11)
4.27  Framework Agreement for Transfer of CDMA Business, dated June 2, 2008, among the Registrant, China Unicom Limited and China Unicom Corporation Limited (English Summary). (11)
4.28  Supplemental Agreement to the Interconnection Settlement Agreement, dated July 27, 2008, between the Registrant and China Telecommunications Corporation (English summary). (12)
4.29  Supplemental Agreement to the IT Services Framework Agreement, dated December 15, 2008, between the Registrant and China Telecommunications Corporation (English summary). (12)
4.30  Supplemental Agreement to the Supplies Procurement Services Framework Agreement, dated December 15, 2008, between the Registrant and China Telecommunications Corporation (English summary). (12)
4.31  Supplemental Agreement to the Engineering Framework Agreement, dated July 27, 2008, between the Registrant and China Telecommunications Corporation (English summary). (12)
4.32  Supplemental Agreement to the Community Services Framework Agreement, dated December 15, 2008, between the Registrant and China Telecommunications Corporation (English summary). (12)
4.33  Supplemental Agreement to the Ancillary Telecommunications Services Framework Agreement, dated July 27, 2008, between the Registrant and China Telecommunications Corporation (English summary). (12)
4.34  CDMA Network Capacity Lease Agreement, dated July 27, 2008, between the Registrant and China Telecommunications Corporation (English translation). (12)
4.35  Agreement for Transfer of CDMA Business, dated July 27, 2008, between the Registrant, China Unicom Limited and China Unicom Corporation Limited (English summary). (12)
4.36  Merger Agreement, dated November 14, 2008, between the Registrant and China Telecommunications Corporation Beijing Corporation (English translation). (12)
4.37  Supplemental Agreement to the Optic Fiber Leasing Agreement, dated July 10, 2008, between the Registrant and China Telecommunications Corporation (English summary). (12)
4.38  Underwriting Agreement regarding Medium Term Notes of China Telecom Corporation Limited in 2008, dated April 15, 2008, among the Registrant, Industrial and Commercial Bank of China Limited and CITIC Securities Company Limited (English summary), and its Supplemental Agreement, dated December 15, 2008 (English summary). (12)
4.39  Underwriting Agreement regarding the First Tranche of Short-Term Commercial Paper of China Telecom Corporation Limited in 2008, dated July 7, 2008, among the Registrant, Bank of Communications Co., Ltd. and China Development Bank (English summary). (12)
4.40  Underwriting Agreement regarding the First Tranche of Medium Term Notes of China Telecom Corporation Limited in 2009, dated September 8, 2009 (as supplemented on September 9, 2009), among the Registrant, Bank of Communications Co., Ltd. and Agricultural Bank of China Limited (English summary). (13)

 

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Exhibits

  

Description

4.41  Underwriting Agreement regarding the Second Tranche of Medium Term Notes of China Telecom Corporation Limited in 2009, dated October 19, 2009 (as supplemented respectively on October 20, 2009 and December 4, 2009), among the Registrant, Agriculture Bank of China Limited and China Merchants Bank Co., Ltd. (English summary). (13)
4.42  Underwriting Agreement regarding the Third Tranche of Medium Term Notes of China Telecom Corporation Limited in 2009, dated October 19, 2009 (as supplemented respectively on October 20, 2009 and December 4, 2009), among the Registrant, China Construction Bank Corporation and Industrial and Commercial Bank of China Ltd. (English summary). (13)
4.43  Supplemental Agreement to the Centralized Services Agreement, dated August 25, 2010, between the Registrant and China Telecommunications Corporation (English summary) (14)
4.44  Supplemental Agreement to the Interconnection Settlement Agreement, dated August 25, 2010, between the Registrant and China Telecommunications Corporation (English summary) (14)
4.45  Supplemental Agreement to the Property Leasing Framework Agreement, dated August 25, 2010, between the Registrant and China Telecommunications Corporation (English summary) (14)
4.46  Supplemental Agreement to the IT services Framework Agreement, dated August 25, 2010, between the Registrant and China Telecommunications Corporation (English summary) (14)
4.47  Supplemental Agreement to the Community Services Framework Agreement, dated August 25, 2010, between the Registrant and China Telecommunications Corporation (English summary) (14)
4.48  Supplemental Agreement to the Supplies Procurement Services Framework Agreement, dated August 25, 2010, between the Registrant and China Telecommunications Corporation (English summary) (14)
4.49  Supplemental Agreement to the Engineering Framework Agreement, dated August 25, 2010, between the Registrant and China Telecommunications Corporation (English summary) (14)
4.50  Supplemental Agreement to the Ancillary Telecommunications Services Framework Agreement, dated August 25, 2010, between the Registrant and China Telecommunications Corporation (English summary) (14)
4.51  Supplemental Agreement to the CDMA Network Capacity Lease Agreement, dated August 25, 2010, between the Registrant and China Telecommunications Corporation (English summary) (14)
4.52  Supplemental Agreement to the Trademark License Agreement, dated August 25, 2010, between the Registrant and China Telecommunications Corporation (English summary) (14)
4.53  Supplemental Agreement to the Optic Fiber Leasing Agreement, dated August 25, 2010, between the Registrant and China Telecommunications Corporation (English summary) (14)
4.54  Agreement on the Acquisition of CDMA Network Assets and Associated Liabilities, dated August 20, 2012, between the Registrant and China Telecommunications Corporation (English summary) (15)
4.55  Agreement on the Disposal of Equity Interest in E-surfing Media Co., Ltd., dated April 26, 2013, between the Registrant and China Telecommunications Corporation (English Summary) (15)
4.56  Agreement on the Acquisition of China Telecom (Europe) Limited, dated December 16, 2013, between the Registrant and China Telecommunications Corporation (16)
4.57  Internet Applications Channel Services Framework Agreement, dated December 16, 2013, between the Registrant and China Telecommunications Corporation (English Summary) (16)

 

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Table of Contents

Exhibits

  

Description

4.58  Promoters’ Agreement for China Communications Facilities Services Corporation Limited (currently known as China Tower Corporation Limited) dated July 11, 2014, among the Registrant, China United Network Communications Corporation Limited and China Mobile Communication Company Limited (17)
4.59  Agreement on Purchase of Stock Tower-related Assets by Issuance of Shares and Payment of Cash, dated October 14, 2015, among the Registrant, the Tower Company, CUCL, CMCL, CRHC and other parties thereto (English translation) (18)
4.60  Share Subscription Agreement, dated January 29, 2016, between the Registrant and the Tower Company (English translation) (18)
4.61  Supplemental Agreement to the Centralized Services Agreement, dated September 23, 2015, between the Registrant and China Telecommunications Corporation (English summary) (18)
4.62  Supplemental Agreement to the Interconnection Settlement Agreement, dated September 23, 2015, between the Registrant and China Telecommunications Corporation (English summary) (18)
4.63  Supplemental Agreement to the Property Leasing Framework Agreement, dated September 23, 2015, between the Registrant and China Telecommunications Corporation (English summary) (18)
4.64  Supplemental Agreement to the IT Services Framework Agreement, dated September 23, 2015, between the Registrant and China Telecommunications Corporation (English summary) (18)
4.65  Supplemental Agreement to the Community Services Framework Agreement, dated September 23, 2015, between the Registrant and China Telecommunications Corporation (English summary) (18)
4.66  Supplemental Agreement to the Supplies Procurement Services Framework Agreement, dated September 23, 2015, between the Registrant and China Telecommunications Corporation (English summary) (18)
4.67  Supplemental Agreement to the Engineering Framework Agreement, dated September 23, 2015, between the Registrant and China Telecommunications Corporation (English summary) (18)
4.68  Supplemental Agreement to the Ancillary Telecommunications Services Framework Agreement, dated September 23, 2015, between the Registrant and China Telecommunications Corporation (English summary) (18)
4.69  Supplemental Agreement to the Internet Applications Channel Services Framework Agreement, dated September 23, 2015, between the Registrant and China Telecommunications Corporation (English summary) (18)
4.70  Supplemental Agreement to the Optic Fiber Leasing Agreement, dated September 23, 2015, between the Registrant and China Telecommunications Corporation (English summary) (18)
4.71  Lease Agreement, dated July 8, 2016, between the Registrant and the Tower Company (English translation) (19)
4.72  Supplemental Lease Agreement, dated February 1, 2018, between the Registrant and the Tower Company (English translation)(20)
4.73  Supplemental Agreement to the Centralized Services Agreement, dated August 20, 2018, between the Registrant and China Telecommunications Corporation (English summary) (21)
4.74  Supplemental Agreement to the Interconnection Settlement Agreement, dated August 20, 2018, between the Registrant and China Telecommunications Corporation (English summary) (21)
4.75  Supplemental Agreement to the Property Leasing Framework Agreement, dated August 20, 2018, between the Registrant and China Telecommunications Corporation (English summary) (21)

 

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Exhibits

  

Description

4.76  Supplemental Agreement to the IT Services Framework Agreement, dated August 20, 2018, between the Registrant and China Telecommunications Corporation (English summary) (21)
4.77  Supplemental Agreement to the Community Services Framework Agreement, dated August 20, 2018, between the Registrant and China Telecommunications Corporation (English summary) (21)
4.78  Supplemental Agreement to the Supplies Procurement Services Framework Agreement, dated August 20, 2018, between the Registrant and China Telecommunications Corporation (English summary) (21)
4.79  Supplemental Agreement to the Engineering Framework Agreement, dated August 20, 2018, between the Registrant and China Telecommunications Corporation (English summary) (21)
4.80  Supplemental Agreement to the Ancillary Telecommunications Services Framework Agreement, dated August 20, 2018, between the Registrant and China Telecommunications Corporation (English summary) (21)
4.81  Supplemental Agreement to the Internet Applications Channel Services Framework Agreement, dated August 20, 2018, between the Registrant and China Telecommunications Corporation (English summary) (21)
4.82  Supplemental Agreement to the Optic Fiber Leasing Agreement, dated August 20, 2018, between the Registrant and China Telecommunications Corporation (English summary) (21)
4.83  Supplemental Agreement to the Trademark License Agreement, dated August 20, 2018, between the Registrant and China Telecommunications Corporation (English summary) (21)
4.84  China Telecommunications Corporation Financial Services Framework Agreement, dated February 1, 2019, between China Telecommunications Corporation and China Telecom Group Finance Co., Ltd. (English summary) (21)
4.85  China Telecom Financial Services Framework Agreement, dated February 1, 2019, between the Registrant and China Telecom Group Finance Co., Ltd. (English summary) (21)
4.86  CCS Financial Services Framework Agreement, dated February 1, 2019, between China Communications Services Corporation Limited and China Telecom Group Finance Co., Ltd. (English summary) (21)
4.87  5G Network Co-Build and Co-Share Framework Cooperation Agreement, dated September 9, 2019, between the Registrant and China United Network Communications Corporation Limited (English translation)(22)
4.88  Agreement on the Disposal of Equity Interest in E-surfing Pay Co., Ltd, dated March  26, 2021, between the Registrant and China Telecommunications Corporation (English Summary)
4.89  Agreements on the Disposal of Equity Interest in China Telecom Leasing Corporation Limited, dated March  26, 2021, among the Registrant, China Telecom Global Limited, China Telecommunications Corporation and Guang Hua Properties Limited (English Summary)
8.1  List of Significant Subsidiaries of the Registrant as of December 31, 2020
11.1  Code of Ethics (English translation).(3)
12.1  Certification of CEO pursuant to Rule 13a-14(a)
12.2  Certification of CFO pursuant to Rule 13a-14(a)
13.1  Certification of CEO pursuant to Rule 13a-14(b)
13.2  Certification of CFO pursuant to Rule 13a-14(b)
15.1  Letter to SEC from Deloitte

 

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Table of Contents

Exhibits

  

Description

101.INS  XBRL Instance Document
101.SCH  XBRL Taxonomy Extension Schema Document
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF  XBRL Taxonomy Extension Definition Linkbase Document
101.LAB  XBRL Taxonomy Extension Label Linkbase Document
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document

 

(1)

Incorporated by reference to our Registration Statement on Form F-1 (File No. 333-100042), filed with the Securities and Exchange Commission on November 5, 2002.

(2)

Incorporated by reference to our Registration Statement on Form F-6 (File No. 333-100617), filed with the Securities and Exchange Commission with respect to American Depositary Shares representing our H shares.

(3)

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2003 (File No. 001-31517), filed with the Securities and Exchange Commission.

(4)

Incorporated by reference to Exhibit 1.1 to our Form 6-K filed on April 29, 2004

(5)

Incorporated by reference to Exhibit 1.2 to our Form 6-K filed on April 29, 2004.

(6)

Incorporated by reference to Exhibit 1.3 to our Form 6-K filed on April 29, 2004.

(7)

Incorporated by reference to Exhibit 1.5 to our Form 6-K filed on April 29, 2004.

(8)

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2004 (File No. 001-31517), filed with the Securities and Exchange Commission.

(9)

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2005 (File No. 001-31517), filed with the Securities and Exchange Commission.

(10)

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2006 (File No. 001-31517), filed with the Securities and Exchange Commission.

(11)

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2007 (File No. 001-31517), filed with the Securities and Exchange Commission.

(12)

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2008 (File No. 001-31517), filed with the Securities and Exchange Commission.

(13)

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2009 (File No. 001-31517), filed with the Securities and Exchange Commission.

(14)

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2010 (File No. 001-31517), filed with the Securities and Exchange Commission.

(15)

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2012 (File No. 001-31517), filed with the Securities and Exchange Commission.

(16)

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2013 (File No. 001-31517), filed with the Securities and Exchange Commission.

(17)

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2014 (File No. 001-31517), filed with the Securities and Exchange Commission.

(18)

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2015 (File No. 001-31517), filed with the Securities and Exchange Commission.

(19)

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2016 (File No. 001-31517), filed with the Securities and Exchange Commission.

(20)

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2017 (File No. 001-31517), filed with the Securities and Exchange Commission.

(21)

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2018 (File No. 001-31517), filed with the Securities and Exchange Commission.

(22)

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2019 (File No. 001-31517), filed with the Securities and Exchange Commission.

(P)

Paper filing.

 

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Table of Contents

SIGNATURES

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.

 

CHINA TELECOM CORPORATION LIMITED
By: 

/s/ Ke Ruiwen

Name: Ke Ruiwen
Title: Executive Director, Chairman and Chief Executive Officer

Date: April 28, 2021

 


Table of Contents


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of China Telecom Corporation Limited:

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of financial position of China Telecom Corporation Limited and subsidiaries (the “Company”) as of December 31, 2019 and 2020, the related consolidated statements of comprehensive income, changes in equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2021, expressed an unqualified opinion on the Company’s internal control over financial reporting.

Changes in Accounting Policies

As discussed in Note 3(n) to the consolidated financial statements, the Company has changed its method of accounting for leases in 2019 due to adoption of International Financial Reporting Standard 16, “Leases”.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (continued)

To the Shareholders and Board of Directors of China Telecom Corporation Limited:

 

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition—Refer to Notes 3(m) and 27 to the consolidated financial statements

Critical Audit Matter Description

Revenues from the provision of telecommunications services are, in general, recognized as performance obligations are satisfied. Fees for telecommunications packages are recognized for each service type in the packages. The data records are captured and the revenue transactions are recorded by the IT billing systems.

We identified revenue recognition as a critical audit matter because there is an inherent industry risk around the accuracy of revenue recorded by the IT billing systems given the complexity of the systems and the large volumes of data processed by the systems. This required an increased extent of effort, including the need for us to involve our IT specialists, to identify, test, and evaluate the Company’s systems, software applications, and automated controls.

How the Critical Audit Matter Was Addressed in the Audit

Our procedures in relation to revenue recognition, comprising both control testing and substantive procedures on a sample basis, included the following, among others:

 

With the assistance of our IT specialist, we tested:

 

 -

the IT environment in which the billing systems reside, including interface controls between different IT applications.

 

 -

the key controls over the calculation of the amounts billed to customers and the capturing and recording of the revenue transactions.

 

 -

the key controls over the authorization of the rate changes and the input of such rates to the billing systems.

 

 -

the end-to-end reconciliations from data records to the billing systems and to the general ledger.

 

 -

the material journals processed between the billing systems and the general ledger.

 

 -

the accuracy of customer bill calculations and the respective revenue transactions recorded.

 

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (continued)

To the Shareholders and Board of Directors of China Telecom Corporation Limited:

 

Critical Audit Matters (continued)

 

Impairment of goodwill and long-lived assets within the cash-generating unit—Refer to Notes 3(h), 12 and 43 to the consolidated financial statements

Critical Audit Matter Description

The Company’s evaluation of cash-generating unit for impairment involves the comparison of the recoverable amount of the cash-generating unit, which is the greater of its value in use and fair value less costs of disposal, to its carrying value. In determining the value in use, expected future cash flows generated by the asset are discounted to their present value, which requires significant judgment relating to level of revenue, amount of operating costs and applicable discount rate. Changes in these estimates could have a significant impact on the carrying value of the assets and could result in additional impairment charge or reversal of impairment in future periods.

We identified the impairment of goodwill and long-lived assets within the cash-generating unit as a critical audit matter because the impairment assessment of cash-generating unit requires the management to exercise significant judgments. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our valuation specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the estimation of level of revenue, amount of operating costs and applicable discount rate.

How the Critical Audit Matter Was Addressed in the Audit

Our procedures in relation to the impairment of goodwill and long-lived assets within the cash-generating unit included, among others:

 

We tested the effectiveness of controls over management’s impairment assessment of cash-generating unit, such as controls related to management’s selection of the discount rate and key inputs to the projected cash flows, which include the number of subscribers, the average revenue per subscriber and amount of operating costs.

 

With the assistance of our valuation specialists, we assessed the discount rate and assumptions used by the management in the value in use model and compared the discount rate used by the management to externally derived data and our own assessments of key inputs used in deriving the discount rate.

 

With the assistance of our valuation specialists, we compared the key inputs to the projected cash flows, such as the number of subscribers, the average revenue per subscriber and amount of operating costs, with corresponding historical data to evaluate the reasonableness of the management’s projections.

 

We assessed and challenged the significant judgments and estimates used in the management’s impairment assessment and evaluated the sensitivity analysis performed by the management.

/s/ Deloitte Touche Tohmatsu

Deloitte Touche Tohmatsu

Hong Kong, the People’s Republic of China

March 9, 2021

We have served as the Company’s auditor since 2013.

 

F-4


Table of Contents

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF DECEMBER 31, 2019 AND 2020

(Amounts in millions)

 

   Notes   December 31,
2019
   December 31,
2020
 
       RMB   RMB 

ASSETS

      

Current assets

      

Cash and cash equivalents

   4    20,791    23,684 

Short-term bank deposits and restricted cash

     3,628    9,408 

Accounts receivable, net

   5    21,489    21,502 

Contract assets

   6    474    604 

Inventories

   7    2,880    3,317 

Prepayments and other current assets

   8    22,219    25,167 

Financial assets at fair value through profit or loss

     39    —   

Income tax recoverable

     1,662    334 
    

 

 

   

 

 

 

Total current assets

     73,182    84,016 

Non-current assets

      

Property, plant and equipment, net

   9    410,008    418,605 

Construction in progress

   10    59,206    48,425 

Right-of-use assets

   11    61,549    59,457 

Goodwill

   12    29,923    29,920 

Intangible assets

   13    16,349    18,508 

Interests in associates

   14    39,192    40,303 

Financial assets at fair value through profit or loss

     —      73 

Equity instruments at fair value through other comprehensive income

   15    1,458    1,073 

Deferred tax assets

   16    7,577    8,164 

Other assets

   17    4,687    6,552 
    

 

 

   

 

 

 

Total non-current assets

     629,949    631,080 
    

 

 

   

 

 

 

Total assets

     703,131    715,096 
    

 

 

   

 

 

 

LIABILITIES AND EQUITY

      

Current liabilities

      

Short-term debt

   19    42,527    27,994 

Current portion of long-term debt

   19    4,444    1,126 

Accounts payable

   20    102,616    107,578 

Accrued expenses and other payables

   21    48,516    56,775 

Contract liabilities

   22    54,388    63,849 

Income tax payable

     243    350 

Current portion of lease liabilities

   23    11,569    13,192 

Current portion of deferred revenues

   24    358    278 
    

 

 

   

 

 

 

Total current liabilities

     264,661    271,142 

Non-current liabilities

      

Long-term debt

   19    32,051    24,222 

Lease liabilities

   23    30,577    27,455 

Deferred revenues

   24    1,097    861 

Deferred tax liabilities

   16    19,078    24,208 

Other non-current liabilities

     627    1,033 
    

 

 

   

 

 

 

Total non-current liabilities

     83,430    77,779 
    

 

 

   

 

 

 

Total liabilities

     348,091    348,921 

Equity

      

Share capital

   25    80,932    80,932 

Reserves

   26    271,578    282,524 
    

 

 

   

 

 

 

Total equity attributable to equity holders of the Company

     352,510    363,456 

Non-controlling interests

     2,530    2,719 
    

 

 

   

 

 

 

Total equity

     355,040    366,175 
    

 

 

   

 

 

 

Total liabilities and equity

     703,131    715,096 
    

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020

(Amounts in millions, except per share data)

 

       Year ended December 31, 
   Notes   2018  2019  2020 
       RMB  RMB  RMB 

Operating revenues

   27    377,124   375,734   393,561 

Operating expenses

      

Depreciation and amortization

     (75,493  (88,145  (90,240

Network operations and support

   28    (116,062  (109,799  (119,517

Selling, general and administrative

     (59,422  (57,361  (55,059

Personnel expenses

   29    (59,736  (63,567  (65,989

Other operating expenses

   30    (37,697  (27,792  (29,074

Impairment loss on property, plant and equipment

   9    —     —     (5,042
    

 

 

  

 

 

  

 

 

 

Total operating expenses

     (348,410  (346,664  (364,921
    

 

 

  

 

 

  

 

 

 

Operating income

     28,714   29,070   28,640 

Net finance costs

   31    (2,708  (3,639  (3,014

Investment income

     38   30   60 

Income from investments in associates

     2,104   1,573   1,701 
    

 

 

  

 

 

  

 

 

 

Earnings before income tax

     28,148   27,034   27,387 

Income tax

   32    (6,810  (6,322  (6,307
    

 

 

  

 

 

  

 

 

 

Profit for the year

     21,338   20,712   21,080 
    

 

 

  

 

 

  

 

 

 

Other comprehensive income for the year

      

Items that will not be reclassified subsequently to profit or loss:

      

Change in fair value of investments in equity instruments at fair value through other comprehensive income

     (324  604   (385

Deferred tax on change in fair value of investments in equity instruments at fair value through other comprehensive income

     82   (147  97 
    

 

 

  

 

 

  

 

 

 
     (242  457   (288
    

 

 

  

 

 

  

 

 

 

Items that may be reclassified subsequently to profit or loss:

      

Exchange difference on translation of financial statements of subsidiaries outside mainland China

     154   102   (312

Share of other comprehensive income of associates

     (7  (2  (4
    

 

 

  

 

 

  

 

 

 
     147   100   (316
    

 

 

  

 

 

  

 

 

 

Other comprehensive income for the year, net of tax

     (95  557   (604
    

 

 

  

 

 

  

 

 

 

Total comprehensive income for the year

     21,243   21,269   20,476 
    

 

 

  

 

 

  

 

 

 

Profit attributable to

      

Equity holders of the Company

     21,210   20,517   20,850 

Non-controlling interests

     128   195   230 
    

 

 

  

 

 

  

 

 

 

Profit for the year

     21,338   20,712   21,080 
    

 

 

  

 

 

  

 

 

 

Total comprehensive income attributable to

      

Equity holders of the Company

     21,115   21,074   20,244 

Non-controlling interests

     128   195   232 
    

 

 

  

 

 

  

 

 

 

Total comprehensive income for the year

     21,243   21,269   20,476 
    

 

 

  

 

 

  

 

 

 

Basic earnings per share

   34    0.26   0.25   0.26 
    

 

 

  

 

 

  

 

 

 

Number of shares (in millions)

   34    80,932   80,932   80,932 
    

 

 

  

 

 

  

 

 

 

See accompanying notes to consolidated financial statements.

 

F-6


Table of Contents

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020

(Amounts in millions)

 

     Attributable to equity holders of the Company       
  Notes  Share
capital
  Capital
reserve
  Share
premium
  Surplus
reserves
  General
risk
reserve
  Other
reserves
  Exchange
reserve
  Retained
earnings
  Total  Non-
controlling
interests
  Total
Equity
 
     RMB  RMB  RMB  RMB  RMB  RMB  RMB  RMB  RMB  RMB  RMB 

Balance as of January 1, 2018

   80,932   17,126   10,746   74,599   —     414   (881  145,906   328,842   829   329,671 

Profit for the year

   —     —     —     —     —     —     —     21,210   21,210   128   21,338 

Other comprehensive income for the year

   —     —     —     —     —     (249  154   —     (95  —     (95
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income for the year

   —     —     —     —     —     (249  154   21,210   21,115   128   21,243 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Disposal of investments in equity instruments at fair value through other comprehensive income

   —     —     —     —     —     (5  —     5   —     —     —   

Disposal of a subsidiary

   —     —     —     —     —     —     —     —     —     5   5 

Contribution from non-controlling interests

   —     680   —     —     —     —     —     —     680   265   945 

Reduction of capital by non-controlling interests

   —     —     —     —     —     —     —     —     —     (20  (20

Distribution to non-controlling interests

   —     —     —     —     —     —     —     —     —     (177  (177

Dividends

  33   —     —     —     —     —     —     —     (7,568  (7,568  —     (7,568

Appropriations to statutory surplus reserve

  26   —     —     —     1,875   —     —     —     (1,875  —     —     —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance as of December 31, 2018

   80,932   17,806   10,746   76,474   —     160   (727  157,678   343,069   1,030   344,099 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Change in accounting policy

   —     —     —     (243  —     —     —     (2,197  (2,440  (3  (2,443
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance as of January 1, 2019, as restated

   80,932   17,806   10,746   76,231   —     160   (727  155,481   340,629   1,027   341,656 

Profit for the year

   —     —     —     —     —     —     —     20,517   20,517   195   20,712 

Other comprehensive income for the year

   —     —     —     —     —     455   102   —     557   —     557 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income for the year

   —     —     —     —     —     455   102   20,517   21,074   195   21,269 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Contribution from non-controlling interests

   —     —     —     —     —     —     —     —     —     1,500   1,500 

Acquisition of non-controlling interests

   —     3   —     —     —     —     —     —     3   (11  (8

Distribution to non-controlling interests

   —     —     —     —     —     —     —     —     —     (181  (181

Share of an associate’s other changes in reserves

   —     (305  —     —     —     —     —     —     (305  —     (305

Dividends

  33   —     —     —     —     —     —     —     (8,891  (8,891  —     (8,891

Appropriations to statutory surplus reserve

  26   —     —     —     1,812   —     —     —     (1,812  —     —     —   

Appropriations to general risk reserve

  26   —     —     —     —     23   —     —     (23  —     —     —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance as of December 31, 2019

   80,932   17,504   10,746   78,043   23   615   (625  165,272   352,510   2,530   355,040 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Profit for the year

   —     —     —     —     —     —     —     20,850   20,850   230   21,080 

Other comprehensive income for the year

   —     —     —     —     —     (294  (312  —     (606  2   (604
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income for the year

   —     —     —     —     —     (294  (312  20,850   20,244   232   20,476 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Acquisition of non-controlling interests

   —     —     —     —     —     —     —     —     —     (1  (1

Distribution to non-controlling interests

   —     —     —     —     —     —     —     —     —     (42  (42

Share of associates’ other changes in reserves

   —     (36  —     —     —     —     —     —     (36  —     (36

Dividends

  33   —     —     —     —     —     —     —     (9,262  (9,262  —     (9,262

Appropriations to statutory surplus reserve

  26   —     —     —     1,811   —     —     —     (1,811  —     —     —   

Appropriations to general risk reserve

  26   —     —     —     —     33   —     —     (33  —     —     —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance as of December 31, 2020

   80,932   17,468   10,746   79,854   56   321   (937  175,016   363,456   2,719   366,175 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

See accompanying notes to consolidated financial statements.

 

F-7


Table of Contents

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020

(Amounts in millions)

 

      Year ended December 31, 
   Notes  2018  2019  2020 
      RMB  RMB  RMB 

Net cash from operating activities

   (a  99,298   112,600   132,260 
   

 

 

  

 

 

  

 

 

 

Cash flows used in investing activities

     

Capital expenditure

    (83,835  (82,853  (88,748

Payments for lease prepayments / right-of-use assets

    (20  (310  (220

Purchase of investments

    (328  (478  (74

Proceeds from disposal of property, plant and equipment

    1,866   2,514   863 

Proceeds from disposal of lease prepayments / right-of-use assets

    45   115   24 

Proceeds from disposal of investments

    96   296   47 

Net cash outflow from disposal of subsidiaries

    (1  —     —   

Purchase of short-term bank deposits

    (7,726  (5,119  (4,664

Maturity of short-term bank deposits

    3,949   8,621   5,695 
   

 

 

  

 

 

  

 

 

 

Net cash used in investing activities

    (85,954  (77,214  (87,077
   

 

 

  

 

 

  

 

 

 

Cash flows used in financing activities

     

Repayments of principal of finance lease obligations / lease liabilities

    (73  (10,699  (12,738

Proceeds from bank debt and other loans

    97,829   103,315   81,049 

Repayments of bank debt and other loans

    (106,923  (120,107  (106,982

Payment of the acquisition price of the Eighth Acquisition (Note 1)

    (87  —     —   

Payment of dividends

    (7,568  (8,891  (9,262

Cash distributions to non-controlling interests

    (177  (181  (42

Payment for the acquisition of non-controlling interests

    (119  (8  (1

Contribution from non-controlling interests

    855   1,590   —   

Advanced payment received in respect of contribution from non-controlling interest

    —     —     978 

Net deposits with Finance Company

   (b  —     4,098   5,728 

Increase in statutory reserve deposits placed by Finance Company

   (b  —     (405  (837

Reduction of capital by non-controlling interests

    (20  —     —   
   

 

 

  

 

 

  

 

 

 

Net cash used in financing activities

    (16,283  (31,288  (42,107
   

 

 

  

 

 

  

 

 

 

Net (decrease) / increase in cash and cash equivalents

    (2,939  4,098   3,076 

Cash and cash equivalents at beginning of year

    19,410   16,666   20,791 

Effect of changes in foreign exchange rate

    195   27   (183
   

 

 

  

 

 

  

 

 

 

Cash and cash equivalents at end of year

    16,666   20,791   23,684 
   

 

 

  

 

 

  

 

 

 

See accompanying notes to consolidated financial statements.

 

F-8


Table of Contents

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020

(Amounts in millions)

 

(a) Reconciliation of earnings before income tax to net cash from operating activities

 

   Year ended December 31, 
   2018  2019  2020 
   RMB  RMB  RMB 

Earnings before income tax

   28,148   27,034   27,387 

Adjustments for:

    

Depreciation and amortization

   75,493   88,145   90,240 

Impairment loss on property, plant and equipment

   —     —     5,042 

Impairment losses for financial assets and other items, net of reversal

   2,050   1,695   1,512 

Write down of inventories, net of reversal

   66   61   35 

Investment income

   (38  (30  (60

Income from investments in associates

   (2,104  (1,573  (1,701

Interest income

   (306  (492  (582

Interest expense

   3,093   4,090   3,433 

Net foreign exchange (gain) / loss

   (79  41   163 

Net loss on retirement and disposal of long-lived assets

   1,757   2,710   3,827 

Increase in accounts receivable

   (1,848  (2,601  (1,771

Decrease / (increase) in contract assets

   170   4   (132

(Increase) / decrease in inventories

   (622  1,891   (474

(Increase) / decrease in prepayments and other current assets

   (1,412  1,045   (116

Decrease / (increase) in restricted cash

   63   89   (6,097

Decrease / (increase) in other assets

   271   414   (2,971

(Decrease) / increase in accounts payable

   (3,181  (2,657  5,689 

Increase in accrued expenses and other payables

   9,842   614   1,934 

(Decrease) / increase in contract liabilities

   (6,414  (1,412  9,516 

Decrease in deferred revenues

   (138  (90  (55
  

 

 

  

 

 

  

 

 

 

Cash generated from operations

   104,811   118,978   134,819 

Interest received

   306   474   594 

Interest paid

   (3,094  (4,200  (3,524

Investment income received

   34   133   603 

Income tax paid

   (2,759  (2,785  (232
  

 

 

  

 

 

  

 

 

 

Net cash from operating activities

   99,298   112,600   132,260 
  

 

 

  

 

 

  

 

 

 

 

(b)

“Finance Company” refers to China Telecom Group Finance Co., Ltd., a subsidiary of the Company established on January 8, 2019, providing capital and financial management services to the member units of China Telecommunications Corporation.

See accompanying notes to consolidated financial statements.

 

F-9


Table of Contents

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(All Renminbi amounts in millions, except per share data and except otherwise stated)

 

1.

PRINCIPAL ACTIVITIES, ORGANIZATION AND BASIS OF PRESENTATION

Principal activities

China Telecom Corporation Limited (the “Company”) and its subsidiaries (hereinafter, collectively referred to as the “Group”) offers a comprehensive range of wireline and mobile telecommunications services including voice, Internet, telecommunications network resource and equipment services, information and application services and other related services. The Group provides wireline telecommunications services and related services in Beijing Municipality, Shanghai Municipality, Guangdong Province, Jiangsu Province, Zhejiang Province, Anhui Province, Fujian Province, Jiangxi Province, Guangxi Zhuang Autonomous Region, Chongqing Municipality, Sichuan Province, Hubei Province, Hunan Province, Hainan Province, Guizhou Province, Yunnan Province, Shaanxi Province, Gansu Province, Qinghai Province, Ningxia Hui Autonomous Region and Xinjiang Uygur Autonomous Region of the People’s Republic of China (the “PRC”). The Group also provides mobile telecommunications and related services in the mainland China and Macau Special Administrative Region (“Macau”) of the PRC. The Group also provides international telecommunications services, including network equipment services, international Internet access and transit, Internet data center and mobile virtual network services in certain countries and regions of the Asia Pacific, Europe, Africa, South America and North America. The operations of the Group in the mainland China are subject to the supervision by the PRC government and relevant regulations.

Organization

As part of the reorganization (the “Restructuring”) of China Telecommunications Corporation, the Company was incorporated in the PRC on September 10, 2002. In connection with the Restructuring, China Telecommunications Corporation transferred to the Company the wireline telecommunications business and related operations in Shanghai Municipality, Guangdong Province, Jiangsu Province and Zhejiang Province together with the related assets and liabilities in consideration for 68,317 ordinary domestic shares of the Company. The shares issued to China Telecommunications Corporation have a par value of RMB1.00 each and represented the entire registered and issued share capital of the Company at that date.

On December 31, 2003, the Company acquired the entire equity interests in Anhui Telecom Company Limited, Fujian Telecom Company Limited, Jiangxi Telecom Company Limited, Guangxi Telecom Company Limited, Chongqing Telecom Company Limited and Sichuan Telecom Company Limited (collectively the “First Acquired Group”) and certain network management and research and development facilities from China Telecommunications Corporation for a total purchase price of RMB46,000 (hereinafter, referred to as the “First Acquisition”).

On June 30, 2004, the Company acquired the entire equity interests in Hubei Telecom Company Limited, Hunan Telecom Company Limited, Hainan Telecom Company Limited, Guizhou Telecom Company Limited, Yunnan Telecom Company Limited, Shaanxi Telecom Company Limited, Gansu Telecom Company Limited, Qinghai Telecom Company Limited, Ningxia Telecom Company Limited and Xinjiang Telecom Company Limited (collectively the “Second Acquired Group”) from China Telecommunications Corporation for a total purchase price of RMB27,800 (hereinafter, referred to as the “Second Acquisition”).

On June 30, 2007, the Company acquired the entire equity interests in China Telecom System Integration Co., Ltd. (“CTSI”), China Telecom Global Limited (“CT Global”) and China Telecom (Americas) Corporation (“CT Americas”) (collectively the “Third Acquired Group”) from China Telecommunications Corporation for a total purchase price of RMB1,408 (hereinafter, referred to as the “Third Acquisition”).

On June 30, 2008, the Company acquired the entire equity interest in China Telecom Group Beijing Corporation (“Beijing Telecom” or the “Fourth Acquired Company”) from China Telecommunications Corporation for a total purchase price of RMB5,557 (hereinafter, referred to as the “Fourth Acquisition”).

On August 1, 2011 and December 1, 2011, the subsidiaries of the Company, E-surfing Pay Co., Ltd (“E-surfing Pay”) and E-surfing Media Co., Ltd. (“E-surfing Media”), acquired the e-commerce business and video media business (collectively the “Fifth Acquired Group”) from China Telecommunications Corporation and its subsidiaries for a total purchase price of RMB61 (hereinafter, referred to as the “Fifth Acquisition”). The Company disposed the equity interest in E-surfing Media to China Telecommunications Corporation in 2013.

On April 30, 2012, the Company acquired the digital trunking business (the “Sixth Acquired Business”) from Besttone Holding Co., Ltd. (“Besttone Holding”), a subsidiary of China Telecommunications Corporation, at a purchase price of RMB48 (hereinafter, referred to as the “Sixth Acquisition”).

On December 31, 2013, CT Global, a subsidiary of the Company, acquired 100% equity interest in China Telecom (Europe) Limited (“CT Europe” or the “Seventh Acquired Company”), a wholly owned subsidiary of China Telecommunications Corporation, from China Telecommunications Corporation for a total purchase price of RMB278 (hereinafter, referred to as the “Seventh Acquisition”).

On October 31, 2017, the Company disposed of the 100% equity interest in Chengdu E-store Technology Co., Ltd (“E-store”), a subsidiary of the Company, to Besttone Holding. The final consideration for the disposal of the equity interest in E-store amounted to RMB251, among which RMB249 was received on November 16, 2017 and the remaining balance of RMB2 was received in 2018.

In December 2017, the Company acquired the satellite communications business (the “Satcom Business”) from China Telecom Satellite Communication Co., Ltd., a wholly owned subsidiary of China Telecommunications Corporation, at a purchase price of RMB70. In the same month, E-surfing Pay acquired a 100% interest in Shaanxi Zhonghe Hengtai Insurance Agent Limited (currently known as Orange Insurance Agent Limited (“Orange Insurance”), a wholly owned subsidiary of Shaanxi Communications Services Company Limited (“Shaanxi Comservice”, a company ultimately held by China Telecommunications Corporation), from Shaanxi Comservice, at a purchase price of RMB17. The acquisitions of the Satcom Business and Orange Insurance (collectively referred to as the “Eighth Acquired Group”) are two separate transactions, which are collectively referred to as the “Eighth Acquisition”. The total final consideration of the Eighth Acquisition was paid by June 30, 2018.

 

F-10


Table of Contents

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(All Renminbi amounts in millions, except per share data and except otherwise stated)

 

1.

PRINCIPAL ACTIVITIES, ORGANIZATION AND BASIS OF PRESENTATION (continued)

 

Organization (continued)

 

Hereinafter, the First Acquired Group, the Second Acquired Group, the Third Acquired Group, the Fourth Acquired Company, the Fifth Acquired Group, the Sixth Acquired Business, the Seventh Acquired Company and the Eighth Acquired Group are collectively referred to as the “Acquired Groups”.

Basis of presentation

Since the Group and the Acquired Groups are under common control of China Telecommunications Corporation, the Group’s acquisitions of the Acquired Groups have been accounted for as a combination of entities under common control in a manner similar to a pooling-of-interests. Accordingly, the assets and liabilities of these entities have been accounted for at historical amounts and the consolidated financial statements of the Group prior to the acquisitions are combined with the financial statements of the Acquired Groups. The considerations for the acquisition of the Acquired Groups are accounted for as an equity transaction in the consolidated statement of changes in equity.

Merger with subsidiaries

Pursuant to the resolution passed by the Company’s shareholders at an Extraordinary General Meeting held on February 25, 2008, the Company entered into merger agreements with each of the following subsidiaries: Shanghai Telecom Company Limited, Guangdong Telecom Company Limited, Jiangsu Telecom Company Limited, Zhejiang Telecom Company Limited, Anhui Telecom Company Limited, Fujian Telecom Company Limited, Jiangxi Telecom Company Limited, Guangxi Telecom Company Limited, Chongqing Telecom Company Limited, Sichuan Telecom Company Limited, Hubei Telecom Company Limited, Hunan Telecom Company Limited, Hainan Telecom Company Limited, Guizhou Telecom Company Limited, Yunnan Telecom Company Limited, Shaanxi Telecom Company Limited, Gansu Telecom Company Limited, Qinghai Telecom Company Limited, Ningxia Telecom Company Limited and Xinjiang Telecom Company Limited. In addition, the Company entered into merger agreements with Beijing Telecom on July 1, 2008. Pursuant to these merger agreements, the Company merged with these subsidiaries and the assets, liabilities and business operations of these subsidiaries were transferred to the Company’s branches in the respective regions.

 

2.

APPLICATION OF NEW AND AMENDMENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRSs”)

In the current year, the Group has applied, for the first time, the Amendments to References to the Conceptual Framework in IFRS Standards and the following amendments to IFRSs issued by the International Accounting Standards Board (the “IASB”) that are mandatorily effective for the current year:

 

  

Amendments to IAS 1 and IAS 8, “Definition of Material”

 

  

Amendments to IFRS 3, “Definition of a Business”

 

  

Amendments to IFRS 9, IAS 39 and IFRS 7, “Interest Rate Benchmark Reform”

In addition, the Group has early applied the Amendment to IFRS 16, “Covid-19-Related Rent Concessions”.

Except as described below, the application of the Amendments to References to the Conceptual Framework in IFRS Standards and the above amendments to IFRSs in the current year has had no material effect on the Group’s consolidated financial statements.

 

2.1

Impacts on early application of Amendment to IFRS 16, “Covid-19-Related Rent Concessions

The Group has applied the amendment for the first time in the current year. The amendment introduces a new practical expedient for lessees to elect not to assess whether a Covid-19-related rent concession is a lease modification. The practical expedient only applies to rent concessions occurring as a direct consequence of Covid-19 that meets all of the following conditions:

 

  

the change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change;

 

  

any reduction in lease payments affects only payments originally due on or before June 30, 2021; and

 

  

there is no substantive change to other terms and conditions of the lease.

 

F-11


Table of Contents

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(All Renminbi amounts in millions, except per share data and except otherwise stated)

 

2.

APPLICATION OF NEW AND AMENDMENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRSs”) (continued)

 

2.1

Impacts on early application of Amendment to IFRS 16, “Covid-19-Related Rent Concessions” (continued)

As a result of applying the practical expedient, the Group accounts for changes in lease payments resulting from rent concessions the same way it would account for the changes applying IFRS 16, “Leases” (“IFRS 16”) if the changes were not a lease modification. Forgiveness or waiver of lease payments are accounted for as variable lease payments. The related lease liabilities are adjusted to reflect the amounts forgiven or waived with a corresponding adjustment recognised in the profit or loss in the period in which the event occurs.

The application has no impact to the opening reserves as of January 1, 2020. The amounts related to changes in lease payments that resulted from rent concessions in the profit or loss for the current year was not material to the consolidated financial statements.

 

3.

SIGNIFICANT ACCOUNTING POLICIES

 

(a)

Basis of preparation

The accompanying consolidated financial statements have been prepared in accordance with IFRSs as issued by the IASB. For the purpose of preparation of the consolidated financial statements, information is considered material if such information is reasonably expected to influence decisions made by primary users. The consolidated financial statements of the Group have been prepared on a going concern basis. These consolidated financial statements were approved and authorized by the Board of Directors on March 9, 2021.

The consolidated financial statements are prepared on the historical cost basis as modified by the revaluation of certain financial instruments measured at fair value (Note 3(k)).

The preparation of consolidated financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The estimates and associated assumptions are based on historical experience and various other factors that management believes are reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

Judgments made by management in the application of IFRSs that have significant effect on the consolidated financial statements and major sources of estimation uncertainty are discussed in Note 43.

 

(b)

Basis of consolidation

The consolidated financial statements comprise the Company and its subsidiaries and the Group’s interests in associates.

A subsidiary is an entity controlled by the Company. When fulfilling the following conditions, the Company has control over an entity: (a) has power over the investee, (b) has exposure, or rights, to variable returns from its involvement with the investee, and (c) has the ability to use its power over the investee to affect the amount of the investor’s returns.

When assessing whether the Company has power over that entity, only substantive rights (held by the Company and other parties) are considered.

 

F-12


Table of Contents

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(All Renminbi amounts in millions, except per share data and except otherwise stated)

 

3.

SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(b)

Basis of consolidation (continued)

 

The financial results of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases, and the profit attributable to non-controlling interests is separately presented on the face of the consolidated statement of comprehensive income as an allocation of the profit or loss for the year between the non-controlling interests and the equity holders of the Company. Non-controlling interests represent the equity in subsidiaries not attributable directly or indirectly to the Company. For each business combination, other than business combination under common control, the Group measures the non-controlling interests at the proportionate share, of the acquisition date, of fair value of the subsidiary’s net identifiable assets. Non-controlling interests at the end of the reporting period are presented in the consolidated statement of financial position within equity and consolidated statement of changes in equity, separately from the equity of the Company’s equity holders. Changes in the Group’s interests in a subsidiary that do not result in a loss of control are accounted for as equity transactions, whereby adjustments are made to the amounts of controlling and non-controlling interests within consolidated equity to reflect the change in relative interests, but no adjustments are made to goodwill and no gain or loss is recognized. When the Group loses control of a subsidiary, it is accounted for as a disposal of the entire interest in that subsidiary, with a resulting gain or loss being recognized in profit or loss. Any interest retained in that former subsidiary at the date when control is lost is recognized at fair value and this amount is regarded as the fair value on initial recognition of a financial asset or, when appropriate, the cost on initial recognition of an investment in an associate or a joint venture.

An associate is an entity, not being a subsidiary, in which the Group exercises significant influence, but not control, over its management. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

An investment in an associate is accounted for in the consolidated financial statements under the equity method and is initially recorded at cost, adjusted for any excess of the Group’s share of the acquisition-date fair values of the investee’s net identifiable assets over the cost of the investment (if any) after reassessment. Thereafter, the investment is adjusted for the Group’s equity share of the post-acquisition changes in the associate’s net assets and any impairment loss relating to the investment. When the Group ceases to have significant influence over an associate, it is accounted for as a disposal of the entire interest in that investee, with a resulting gain or loss being recognized in profit or loss. Any interest retained in that former investee at the date when significant influence is lost is recognized at fair value and this amount is regarded as the fair value on initial recognition of a financial asset.

All significant intercompany balances and transactions and unrealized gains arising from intercompany transactions are eliminated on consolidation. Unrealized gains arising from transactions with associates are eliminated to the extent of the Group’s interest in the entity. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.

 

(c)

Foreign currencies

The accompanying consolidated financial statements are presented in Renminbi (“RMB”). The functional currency of the Company and its subsidiaries in mainland China is RMB. The functional currency of the Group’s foreign operations is the currency of the primary economic environment in which the foreign operations operate. Transactions denominated in currencies other than the functional currency during the year are translated into the functional currency at the applicable rates of exchange prevailing on the transaction dates. Foreign currency monetary assets and liabilities are translated into the functional currency using the applicable exchange rates at the end of the reporting period. The resulting exchange differences, other than those capitalized as construction in progress (Note 3(e)), are recognized as income or expense in profit or loss. For the periods presented, no exchange differences were capitalized.

When preparing the Group’s consolidated financial statements, the results of operations of the Group’s foreign operations are translated into RMB at average rate prevailing during the year. Assets and liabilities of the Group’s foreign operations are translated into RMB at the foreign exchange rates ruling at the end of the reporting period. The resulting exchange differences are recognized in other comprehensive income and accumulated separately in equity in the exchange reserve.

 

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CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(All Renminbi amounts in millions, except per share data and except otherwise stated)

 

3.

SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(d)

Property, plant and equipment

Property, plant and equipment are initially recorded at cost, less subsequent accumulated depreciation and impairment losses (Note 3(h)). The cost of an asset comprises its purchase price, any directly attributable costs of bringing the asset to working condition and location for its intended use and the cost of borrowed funds used during the periods of construction. Expenditure incurred after the asset has been put into operation, including cost of replacing part of such an item, is capitalized only when it increases the future economic benefits embodied in the item of property, plant and equipment and the cost can be measured reliably. All other expenditure is expensed as it is incurred.

Gains or losses arising from retirement or disposal of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the respective asset and are recognized as income or expense in the profit or loss on the date of disposal.

Depreciation is provided to write off the cost of each asset over its estimated useful life on a straight-line basis, after taking into account its estimated residual value, as follows:

 

   Depreciable lives
primarily range from

Buildings and improvements

  8 to 30 years

Telecommunications network plant and equipment

  5 to 10 years

Furniture, fixture, motor vehicles and other equipment

  5 to 10 years

Where parts of an item of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value are reviewed annually.

 

(e)

Construction in progress

Construction in progress represents buildings, telecommunications network plant and equipment and other equipment and intangible assets under construction and pending installation, and is stated at cost less impairment losses (Note 3(h)). The cost of an item comprises direct costs of construction, capitalization of interest charge, and foreign exchange differences on related borrowed funds to the extent that they are regarded as an adjustment to interest charges during the periods of construction. Capitalization of these costs ceases and the construction in progress is transferred to property, plant and equipment and intangible assets when the asset is substantially ready for its intended use.

No depreciation is provided in respect of construction in progress.

 

(f)

Goodwill

Goodwill represents the excess of the cost over the Group’s interest in the fair value of the net assets acquired in the CDMA business (as defined in Note 12) acquisition.

Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment (Note 3(h)). On disposal of a cash generating unit during the year, any attributable amount of the goodwill is included in the calculation of the profit or loss on disposal.

 

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CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(All Renminbi amounts in millions, except per share data and except otherwise stated)

 

3.

SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(g)

Intangible assets

The Group’s intangible assets are primarily software.

Software that is not an integral part of any tangible assets, is recorded at cost less subsequent accumulated amortization and impairment losses (Note 3(h)). Amortization of software is mainly calculated on a straight-line basis over the estimated useful lives, which range from 3 to 5 years.

 

(h)

Impairment of goodwill and long-lived assets

The carrying amounts of the Group’s long-lived assets, including property, plant and equipment, right-of-use assets, intangible assets with finite useful lives, construction in progress and contract costs included in other assets are reviewed periodically to determine whether there is any indication of impairment. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. For goodwill, the impairment testing is performed annually at each year end.

Before the Group recognizes an impairment loss for assets capitalized as contract costs under IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”), the Group assesses and recognizes any impairment loss on other assets related to the relevant contracts in accordance with applicable standards. Then, impairment loss, if any, for assets capitalized as contract costs is recognized to the extent the carrying amounts exceeds the remaining amount of consideration that the Group expects to receive in exchange for related goods or services less the costs which relate directly to providing those goods or services that have not been recognized as expenses. The assets capitalized as contract costs are then included in the carrying amount of the cash-generating unit to which they belong for the purpose of evaluating impairment of that cash-generating unit.

The recoverable amount of an asset or cash-generating unit is the greater of its fair value less costs of disposal and value in use. The recoverable amount of a tangible and an intangible asset is estimated individually. When an asset does not generate cash flows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit). In determining the value in use, expected future cash flows generated by the assets are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. The goodwill arising from a business combination, for the purpose of impairment testing, is allocated to cash-generating units that are expected to benefit from the synergies of the combination.

An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment loss is recognized as an expense in profit or loss. Impairment loss recognized in respect of cash-generating units is allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis.

The Group assesses at the end of each reporting period whether there is any indication that an impairment loss recognized for an asset in prior years may no longer exist. An impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount. A subsequent increase in the recoverable amount of an asset, when the circumstances and events that led to the write-down cease to exist, is recognized as an income in profit or loss. The reversal is reduced by the amount that would have been recognized as depreciation and amortization had the write-down not occurred. An impairment loss in respect of goodwill is not reversed. For the years presented, no reversal of impairment loss was recognized in profit or loss.

 

(i)

Interests in joint operations

A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have the rights to the assets, and obligation for the liabilities, relating to the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.

 

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CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(All Renminbi amounts in millions, except per share data and except otherwise stated)

 

3.

SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(i)

Interests in joint operations (continued)

 

The Group accounts for the assets, liabilities, revenues and expenses relating to its interest in a joint operation in accordance with the IFRSs applicable to the particular assets, liabilities, revenues and expenses.

When a group entity transacts with a joint operation in which a group entity is a joint operator (such as a sale or contribution of assets), the Group is considered to be conducting the transaction with the other parties to the joint operation, and gains and losses resulting from the transactions are recognised in the consolidated financial statements only to the extent of other parties’ interests in the joint operation.

When a group entity transacts with a joint operation in which a group entity is a joint operator (such as a purchase of assets), the Group does not recognise its share of the gains and losses until it resells those assets to a third party.

 

(j)

Inventories

Inventories consist of materials and supplies used in maintaining the telecommunications network and goods for resale. Inventories are valued at cost using the specific identification method or the weighted average cost method, less a provision for obsolescence.

Inventories are stated at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion, the estimated costs to make the sale and the related tax expenses.

 

(k)

Financial instruments

Financial assets and financial liabilities are recognized when the Group becomes a party to the contractual provisions of the instrument. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the market place.

Financial assets and financial liabilities are initially measured at fair value except for accounts receivable arising from contracts with customers which are initially measured in accordance with IFRS 15. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities, other than financial assets or financial liabilities at fair value through profit or loss (“FVTPL”) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at FVTPL are recognized immediately in profit or loss.

The effective interest method is a method of calculating the amortized cost of a financial asset or financial liability and of allocating interest income and interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts and payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset or financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.

Financial assets

Classification and subsequent measurement of financial assets

 

(i)

Financial assets measured subsequently at amortized cost

Financial assets that meet the following conditions are subsequently measured at amortized cost:

 

  

the financial asset is held within a business model whose objective is to collect contractual cash flows; and

 

  

the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

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CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(All Renminbi amounts in millions, except per share data and except otherwise stated)

 

3.

SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(k)

Financial instruments (continued)

 

Financial assets (continued)

 

Classification and subsequent measurement of financial assets (continued)

 

(i)

Financial assets measured subsequently at amortized cost (continued)

 

Interest income is recognized using the effective interest method for financial assets measured subsequently at amortized cost. Interest income is calculated by applying the effective interest rate to the gross carrying amount of a financial asset, except for financial assets that have subsequently become credit-impaired (see below). For financial assets that have subsequently become credit-impaired, interest income is recognized by applying the effective interest rate to the amortized cost of the financial asset from the next reporting period. If the credit risk on the credit-impaired financial instrument improves so that the financial asset is no longer credit-impaired, interest income is recognized by applying the effective interest rate to the gross carrying amount of the financial asset from the beginning of the reporting period following the determination that the asset is no longer credit-impaired.

 

(ii)

Equity instruments designated as of fair value through other comprehensive income (“FVTOCI”)

At initial recognition of a financial asset, the Group may irrevocably elect to present subsequent changes in fair value of an equity investment in OCI, and accumulate in other reserves, if that equity investment is neither held for trading nor contingent consideration recognized by an acquirer in a business combination to which IFRS 3, “Business Combinations” applies. These equity instruments are not subject to impairment assessment. The cumulative gain or loss will not be reclassified to profit or loss on disposal of the equity investments, and will be transferred to retained earnings.

Dividend from these investments in equity instruments are recognized in profit or loss when the Group’s right to receive the dividends is established, unless the dividends clearly represent a recovery of part of the cost of the investment. Dividends are included in the “investment income” line item in profit or loss.

 

(iii)

Financial assets at FVTPL

Financial assets that do not meet the criteria for being measured at amortized cost or FVTOCI or designated as FVTOCI are measured at FVTPL.

Financial assets at FVTPL are measured at fair value at the end of each reporting period, with any fair value gains or losses recognized in profit or loss. The net gain or loss recognized in profit or loss includes any dividend or interest earned on the financial asset and is included in the “investment income” line item.

Impairment of financial assets and other items subject to impairment assessment under IFRS 9, “Financial Instruments” (“IFRS 9”)

The Group performs impairment assessment under ECL model on financial assets (including accounts receivable, financial assets included in prepayments and other current assets, short-term bank deposit, restricted cash, cash and cash equivalents) and other items (contract assets) which are subject to impairment assessment under IFRS 9. The amount of ECL is updated at each reporting date to reflect changes in credit risk since initial recognition.

Lifetime ECL represents the ECL that will result from all possible default events over the expected life of the relevant instrument. In contrast, 12-month ECL (“12m ECL”) represents the portion of lifetime ECL that is expected to result from default events that are possible within 12 months after the reporting date. Assessments are done based on the Group’s historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current conditions at the reporting date as well as the forecast of future conditions.

 

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Table of Contents

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(All Renminbi amounts in millions, except per share data and except otherwise stated)

 

3.

SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(k)

Financial instruments (continued)

 

Financial assets (continued)

 

(iii)

Financial assets at FVTPL (continued)

 

Impairment of financial assets and other items subject to impairment assessment under IFRS 9, “Financial Instruments” (“IFRS 9”) (continued)

 

The Group always recognizes lifetime ECL for accounts receivable and contract assets. The ECL on these assets are assessed individually for debtors with significant balances or credit-impaired debtors, and collectively using a provision matrix with appropriate groupings based on shared credit risk characteristics, nature of services provided as well as type of customers, such as receivable from telephone and Internet subscribers and from enterprise customers.

For all other instruments, the Group measures the loss allowance equal to 12m ECL, unless when there has been a significant increase in credit risk since initial recognition, the Group recognizes lifetime ECL. The assessment of whether lifetime ECL should be recognized is based on significant increases in the likelihood or risk of a default occurring since initial recognition.

 

(i)

Significant increase in credit risk

In assessing whether the credit risk has increased significantly since initial recognition, the Group compares the risk of a default occurring on the financial instrument as of the reporting date with the risk of a default occurring on the financial instrument as of the date of initial recognition. In making this assessment, the Group considers both quantitative and qualitative information that is reasonable and supportable, including historical experience and forward-looking information that is available without undue cost or effort.

In particular, the following information is taken into account when assessing whether credit risk has increased significantly:

 

  

failure to make payments of principal or interest on their contractually due dates;

 

  

an actual or expected significant deterioration in a financial instrument’s external or internal credit rating (if available);

 

  

an actual or expected significant deterioration in the operating results of the debtor; and

 

  

existing or forecast changes in the technological, market, economic or legal environment that have a significant adverse effect on the debtor’s ability to meet its obligation to the Group.

 

(ii)

Definition of default

For internal credit risk management, the Group considers an event of default occurs when information developed internally or obtained from external sources indicates that the debtor is unlikely to pay its creditors, including the Group, in full (without taking into account any collaterals held by the Group).

 

(iii)

Credit-impaired financial assets

A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired includes observable data about the following events:

 

  

significant financial difficulty of the issuer or the borrower;

 

  

a breach of contract, such as a default or past due event;

 

  

the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider;

 

  

it is becoming probable that the borrower will enter bankruptcy or other financial reorganization; or

 

  

the disappearance of an active market for that financial asset because of financial difficulties.

 

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Table of Contents

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(All Renminbi amounts in millions, except per share data and except otherwise stated)

 

3.

SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(k)

Financial instruments (continued)

 

Financial assets (continued)

 

Impairment of financial assets and other items subject to impairment assessment under IFRS 9, “Financial Instruments” (“IFRS 9”) (continued)

 

(iv)

Write-off policy

The Group writes off a financial asset when there is information indicating that the counterparty is in severe financial difficulty and there is no realistic prospect of recovery, for example, when the counterparty has been placed under liquidation or has entered into bankruptcy proceedings. Financial assets written off may still be subject to enforcement activities under the Group’s recovery procedures, taking into account legal advice where appropriate. A write-off constitutes a derecognition event. Any subsequent recoveries are recognized in profit or loss.

 

(v)

Measurement and recognition of ECL

The measurement of ECL is a function of the probability of default, loss given default (i.e. the magnitude of the loss if there is a default) and the exposure at default. The assessment of the probability of default and loss given default is based on the historical data and forward-looking information. The Group uses a practical expedient in estimating ECL on accounts receivable using a provision matrix taking into consideration historical credit loss experience, adjusted for forward-looking information that is available without undue cost or effort.

Generally, the ECL is the difference between all contractual cash flows that are due to the Group in accordance with the contract and all the cash flows that the Group expects to receive, discounted at the effective interest rate determined at initial recognition.

Lifetime ECL for accounts receivable and contract assets are considered on a collective basis taking into consideration past due information and relevant credit information such as forward-looking macroeconomic information.

For collective assessment, the Group takes into consideration the following characteristics when formulating the grouping:

 

  

Past-due status;

 

  

Nature, size and industry of debtors; and

 

  

External credit ratings where available.

The grouping is regularly reviewed by management to ensure the constituents of each group continue to share similar credit risk characteristics.

The Group recognizes an impairment gain or loss in profit or loss for all financial instruments measured at amortized cost by adjusting their carrying amount, with the exception of accounts receivable and other receivables where the corresponding adjustment is recognized through a loss allowance account.

 

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Table of Contents

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(All Renminbi amounts in millions, except per share data and except otherwise stated)

 

3.

SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(k)

Financial instruments (continued)

 

Financial assets (continued)

 

Derecognition of financial assets

The Group derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity.

On derecognition of a financial asset measured at amortized cost, the difference between the asset’s carrying amount and the sum of the consideration received and receivable is recognized in profit or loss.

On derecognition of an investment in equity instrument which the Group has elected on initial recognition / initial application to measure at FVTOCI upon application of IFRS 9, the cumulative gain or loss previously accumulated in other reserves is not reclassified to profit or loss, but is transferred to retained earnings.

Financial liabilities and equity

Classification as debt or equity

Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument.

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recognized at the proceeds received, net of direct issue costs.

Financial liabilities

All financial liabilities are subsequently measured at amortized cost using the effective interest method.

Financial liabilities including short-term and long-term debt, accounts payable, and financial liabilities included in accrued expenses and other payables are subsequently measured at amortized cost, using the effective interest method.

Offsetting a financial asset and a financial liability

A financial asset and a financial liability are offset and the net amount presented in the consolidated statement of financial position when, and only when, the Group currently has a legally enforceable right to set off the recognized amounts; and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

 

(l)

Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and in hand and time deposits with original maturities of three months or less when purchased. Cash equivalents are stated at cost, which approximates fair value.

 

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Table of Contents

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(All Renminbi amounts in millions, except per share data and except otherwise stated)

 

3.

SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(m)

Revenue from contract with customers

The Group recognizes revenue when (or as) a performance obligation is satisfied. i.e. when “control” of the goods or services underlying the particular performance obligation is transferred to the customer.

A performance obligation represents a good or service (or a bundle of goods or services) that is distinct or a series of distinct goods or services that are substantially the same.

Control is transferred over time and revenue is recognized over time by reference to the progress towards complete satisfaction of the relevant performance obligation if one of the following criteria is met:

 

  

the customer simultaneously receives and consumes the benefits provided by the Group’s performance as the Group performs;

 

  

the Group’s performance creates or enhances an asset that the customer controls as the Groups performs; or

 

  

the Group’s performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date.

As such, revenues from contracts with customers of telecommunications services, including voice, Internet, information and application and telecommunications network resource and equipment services, resale of mobile services (MVNO) and repair and maintenance of equipment are generally recognized over time during which the services are provided to customers.

Otherwise, revenue is recognized at a point in time when the customer obtains control of the distinct good or service. As such, revenues from sales of equipment are recognize at a point in time when the equipment is delivered to the customers and when the control over the equipment have been transferred to the customers.

A contract asset represents the Group’s right to consideration in exchange for goods or services that the Group has transferred to a customer but the right is conditioned on the Group’s future performance. A contract asset is transferred to accounts receivable when the right becomes unconditional. A contract asset is assessed for impairment in accordance with IFRS 9. In contrast, a receivable represents the Group’s unconditional right to consideration, i.e. only the passage of time is required before payment of that consideration is due.

A contract liability represents the Group’s obligation to transfer goods or services to a customer for which the Group has received consideration (or an amount of consideration is due) from the customer. When the Group receives an advance payment before the performance obligation is satisfied, this will give rise to a contract liability, until the operating revenues recognized on the relevant contract exceed the amount of the advance payment.

A contract asset and a contract liability relating to the same contract are accounted for and presented on a net basis.

Contracts with multiple performance obligations (including allocation of transaction price)

For contracts that contain more than one performance obligations, such as the Group’s direct sales of promotional packages bundling terminal equipment, e.g. mobile handsets, and the telecommunications services, the Group allocates the transaction price to each performance obligation on a relative stand-alone selling price basis.

The stand-alone selling price of the distinct good or service underlying each performance obligation is determined at contract inception. It represents the price at which the Group would sell a promised good or service separately to a customer. If a stand-alone selling price is not directly observable, the Group estimates it using appropriate techniques such that the transaction price ultimately allocated to any performance obligation reflects the amount of consideration to which the Group expects to be entitled in exchange for transferring the promised goods or services to the customer.

 

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Table of Contents

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(All Renminbi amounts in millions, except per share data and except otherwise stated)

 

3.

SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(m)

Revenue from contract with customers (continued)

 

Over time revenue recognition: measurement of progress towards complete satisfaction of a performance obligation

The progress towards complete satisfaction of a performance obligation is generally measured based on output method, which is to recognize revenue on the basis of direct measurements of the value of the goods or services transferred to the customer to date relative to the remaining goods or services promised under the contract.

Principal versus agent

When another party is involved in providing goods or services to a customer, the Group determines whether the nature of its promise is a performance obligation to provide the specified goods or services itself (i.e. the Group is a principal) or to arrange for those goods or services to be provided by the other party (i.e. the Group is an agent).

The Group is a principal if it controls the specified good or service before that good or service is transferred to a customer.

The Group is an agent if its performance obligation is to arrange for the provision of the specified good or service by another party. In this case, the Group does not control the specified good or service provided by another party before that good or service is transferred to the customer. When the Group acts as an agent, it recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified goods or services to be provided by the other party.

Consideration payable to a customer

Consideration payable to a customer includes cash amounts that the Group pays, or expects to pay, to the customer, and also includes credit or other items that can be applied against amounts owed to the Group. The Group accounted for such consideration payable to a customer as a reduction of the transaction price and,