##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE
ACT OF 1934
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
  o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 Commission file number 1-15028
 CHINA UNICOM LIMITED
  N/A
(Translation of Registrants Name Into English)
    
    Hong Kong
(Jurisdiction of Incorporation or Organization)
 th
  Title of Each ClassOrdinary shares, par value HK$0.10 per share
    
    Name of Each Exchange On Which Registered
New York Stock Exchange, Inc.*
 
 *
    
    Not for trading, but only in connection with the listing on the New York Stock Exchange,
Inc. of American depositary shares, or ADSs, each representing 10 ordinary shares.
 
   þ o
 o þ
 þ o
  þ o o
  o þ
 o þ




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##### Table of Contents



TABLE OF CONTENTS
 PageNote Regarding Forward-looking Statements
    
    iiiCertain Definitions
    
    ivPART I
    
    
    1Item 1. Identity of Directors, Senior Management and Advisers
    
    
    1Item 2. Offer Statistics and Expected Timetable
    
    
    1Item 3. Key Information
    
    
    1Item 4. Information on the Company
    
    
    15Item 4A. Unresolved Staff Comments
    
    
    60Item 5. Operating and Financial Review and Prospects
    
    
    60Item 6. Directors, Senior Management and Employees
    
    
    86Item 7. Major Shareholders and Related Party Transactions
    
    
    95Item 8. Financial Information
    
    
    110Item 9. The Offer and Listing
    
    
    110Item 10. Additional Information
    
    
    111Item 11. Quantitative and Qualitative Disclosures About Market Risks
    
    
    122Item 12. Description of Securities Other than Equity Securities
    
    
    124PART II
    
    
    124Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    124Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    125Item 15. Controls and Procedures
    
    
    125Item 16A. Audit Committee Financial Expert
    
    
    126Item 16B. Code of Ethics
    
    
    126Item 16C. Principal Accountant Fees and Services
    
    
    127Item 16D. Exemptions from the Listing Standards for Audit Committees
    
    
    128




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PageItem 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    128PART III
    
    
    128Item 17. Financial Statements
    
    
    128Item 18. Financial Statements
    
    
    128Item 19. Exhibits
    
    
    128EX-4.7 PRE-GLOBAL OFFERING SHARE OPTION SCHEMEEX-4.9 SHARE OPTION SCHEMEEX-4.38 CDMA NETWORK CAPACITY LEASE AGREEMENTEX-4.39 TRANSFER AGREEMENT OF THE CDMA NETWORKEX-4.40 COMPREHENSIVE SERVICES AGREEMENTEX-4.41 TRANSFER AGREEMENTEX-12.1 CERTIFICATION OF CEO PURSUANT TO 13A-14AEX-12.2 CERTIFICATION OF CFO PURSUANT OF 13A-14AEX-13.1 CERTIFICATION OF CEO PURSUANT TO 13A-14BEX-13.2 CERTIFICATION OF CFO PURSUANT TO 13A-14B




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Note Regarding Forward-looking Statements
  
    
    our strategy and future plan,
    
    our capital expenditure plan,
    
    our future business condition and financial results,
    
    our ability to retain existing subscribers and attract new subscribers,
    
    our ability to improve our existing services and offer and market new services,
    
    future growth of market demand for our services,
    
    our abilities to optimize, upgrade and expand our networks and increase network
efficiency,
    
    our ability to leverage our position as an integrated telecommunications operator
and expand into new businesses and new markets,
    
    our ability to upgrade and develop technology applications, and
    
    future regulatory and other developments in the Chinese telecommunications industry.
  
    
    any changes in the regulatory policies of the Ministry of Information Industry, or
MII, the State-owned Assets Supervision and Administration Commission, or SASAC, and
other relevant government authorities in the Peoples Republic of China, or the PRC,
    
    the PRC governments decision in relation to the technology standards and licenses
of third generation mobile telecommunications, or 3G,
    
    the effects of competition on the demand and price of our telecommunications
services,
    
    any changes in telecommunications and related technology and applications based on
such technology, and
    
    changes in political, economic, legal and social conditions in China including: the
PRC governments policies with respect to economic growth, consolidations of and other
structural changes in the PRC telecommunications industry, foreign exchange controls,
foreign investments in and entry by foreign companies into Chinas telecommunications
market.
 iii




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##### Table of Contents




    
    the availability of adequate financing on acceptable terms,
    
    the adequate and timely supply of equipment when required, and
    
    the adequacy of currently available spectrum and other government-controlled
telecommunications resources or availability of additional spectrum and such other
telecommunications resources.
  
 Certain Definitions
  iv




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PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 A. Selected Financial Data
    1




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As of or for the year ended December 312002(1)
    
    
    2003(1)(2)
    
    
    2004(1)
    
    
    2005
    
    
    2006
    
    
    2006RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    US$(3)(in millions, except number of shares and per share data)Statement of Income Data:HKFRS:Revenue (Turnover):Cellular Service Business
    
    
    31,112
    
    
    
    57,819
    
    
    
    71,887
    
    
    
    79,712
    
    
    
    86,584
    
    
    
    11,095-GSM Service Business
    
    
    27,890
    
    
    
    41,153
    
    
    
    47,509
    
    
    
    52,135
    
    
    
    59,291
    
    
    
    7,598-CDMA Service Business
    
    
    3,222
    
    
    
    16,667
    
    
    
    24,378
    
    
    
    27,577
    
    
    
    27,293
    
    
    
    3,497Paging Business
    
    
    2,161
    
    
    
    1,403
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long Distance Business
    
    
    2,766
    
    
    
    2,273
    
    
    
    1,848
    
    
    
    1,525
    
    
    
    1,068
    
    
    
    137Data and Internet Business
    
    
    2,793
    
    
    
    3,437
    
    
    
    3,662
    
    
    
    3,050
    
    
    
    2,375
    
    
    
    304Total service revenue
    
    
    38,832
    
    
    
    64,933
    
    
    
    77,397
    
    
    
    84,287
    
    
    
    90,027
    
    
    
    11,536Sales of telecommunications products
    
    
    1,411
    
    
    
    2,221
    
    
    
    1,690
    
    
    
    2,762
    
    
    
    4,267
    
    
    
    547Total revenue
    
    
    40,243
    
    
    
    67,154
    
    
    
    79,087
    
    
    
    87,049
    
    
    
    94,294
    
    
    
    12,083Costs and expenses
    
    
    (33,932
    )
    
    
    (60,956
    )
    
    
    (72,616
    )
    
    
    (79,947
    )
    
    
    (87,799
    )
    
    
    (11,251
    )Income before income tax
    
    
    6,311
    
    
    
    6,198
    
    
    
    6,471
    
    
    
    7,102
    
    
    
    6,495
    
    
    
    832Net income
    
    
    4,649
    
    
    
    4,269
    
    
    
    4,493
    
    
    
    4,931
    
    
    
    3,732
    
    
    
    478-Basic net income per share(4)
    
    
    0.37
    
    
    
    0.34
    
    
    
    0.36
    
    
    
    0.39
    
    
    
    0.30
    
    
    
    0.04-Number of shares outstanding for basic
net income per share (in
thousands)(4)
    
    
    12,552,996
    
    
    
    12,553,010
    
    
    
    12,561,242
    
    
    
    12,570,398
    
    
    
    12,599,018
    
    
    
    12,599,018-Diluted net income per share(4)
    
    
    0.37
    
    
    
    0.34
    
    
    
    0.36
    
    
    
    0.39
    
    
    
    0.30
    
    
    
    0.04-Number of shares outstanding for diluted
net income per share (in
thousands)(4)
    
    
    12,552,996
    
    
    
    12,556,728
    
    
    
    12,593,054
    
    
    
    12,607,476
    
    
    
    12,649,306
    
    
    
    12,649,306-Basic net income per ADS(5)
    
    
    3.69
    
    
    
    3.41
    
    
    
    3.58
    
    
    
    3.92
    
    
    
    2.96
    
    
    
    0.38-Number of ADS outstanding for basic net
income per ADS (in
thousands)(4)
    
    
    1,255,300
    
    
    
    1,255,301
    
    
    
    1,256,124
    
    
    
    1,257,040
    
    
    
    1,259,902
    
    
    
    1,259,902-Diluted net income per ADS(5)
    
    
    3.69
    
    
    
    3.41
    
    
    
    3.57
    
    
    
    3.91
    
    
    
    2.95
    
    
    
    0.38-Number of ADS outstanding for diluted net
income per ADS (in
thousands)(4)
    
    
    1,255,300
    
    
    
    1,255,673
    
    
    
    1,259,305
    
    
    
    1,260,748
    
    
    
    1,264,931
    
    
    
    1,264,931US GAAP(6):Revenue
    
    
    50,421
    
    
    
    71,980
    
    
    
    79,388
    
    
    
    87,255
    
    
    
    94,500
    
    
    
    12,109Operating income from continuing operations
    
    
    9,759
    
    
    
    10,710
    
    
    
    8,185
    
    
    
    8,142
    
    
    
    9,202
    
    
    
    1,179Net income before discontinued operation,
and cumulative effect of change in
accounting policy
    
    
    5,500
    
    
    
    6,078
    
    
    
    4,713
    
    
    
    5,013
    
    
    
    6,156
    
    
    
    789Loss from discontinued operation, net of
tax
    
    
    422
    
    
    
    1,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of change in accounting
policy (transitional adjustment of
goodwill impairment upon the adoption of
SFAS 142)
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    5,036
    
    
    
    4,736
    
    
    
    4,713
    
    
    
    5,013
    
    
    
    6,156
    
    
    
    789-Basic net income per share before
discontinued operation and cumulative
effect of change in accounting
policy(4)
    
    
    0.44
    
    
    
    0.48
    
    
    
    0.38
    
    
    
    0.40
    
    
    
    0.49
    
    
    
    0.06-Basic net income per ADS before
discontinued operation and cumulative
effect of change in accounting
policy(5)
    
    
    4.38
    
    
    
    4.84
    
    
    
    3.75
    
    
    
    3.99
    
    
    
    4.89
    
    
    
    0.63-Basic net income per share after
discontinued operation and cumulative
effect of change in accounting
policy(4)
    
    
    0.40
    
    
    
    0.38
    
    
    
    0.38
    
    
    
    0.40
    
    
    
    0.49
    
    
    
    0.06-Basic net income per ADS after
discontinued operation and cumulative
effect of change in accounting
policy(5)
    
    
    4.01
    
    
    
    3.77
    
    
    
    3.75
    
    
    
    3.99
    
    
    
    4.89
    
    
    
    0.63
 2




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As of or for the year ended December 312002(1)
    
    
    2003(1)(2)
    
    
    2004(1)
    
    
    2005
    
    
    2006
    
    
    2006RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    US$(3)(in millions, except number of shares and per share data)Balance sheet Data:HKFRS:Bank balances and cash
    
    
    14,433
    
    
    
    9,220
    
    
    
    4,655
    
    
    
    5,472
    
    
    
    12,182
    
    
    
    1,561Property, plant and equipment
    
    
    107,216
    
    
    
    117,863
    
    
    
    118,492
    
    
    
    112,373
    (7)
    
    
    111,382
    
    
    
    14,272Total assets
    
    
    152,095
    
    
    
    152,870
    
    
    
    149,038
    
    
    
    142,630
    
    
    
    146,438
    
    
    
    18,764Short-term debt and current portion of
other long-term debt
    
    
    15,330
    
    
    
    18,173
    
    
    
    20,015
    
    
    
    22,035
    
    
    
    11,072
    
    
    
    1,419Obligations under finance lease-current
portion
    
    
    17
    
    
    
    25
    
    
    
    938
    
    
    
    421
    
    
    
    100
    
    
    
    13Obligations under finance
lease-non-current portion
    
    
    101
    
    
    
    100
    
    
    
    489
    
    
    
    145
    
    
    
    10
    
    
    
    1Other long-term debt
    
    
    37,686
    
    
    
    36,213
    
    
    
    26,137
    
    
    
    11,982
    
    
    
    4,139
    
    
    
    530Convertible
bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,325
    
    
    
    1,323Shareholders equity
    
    
    66,572
    
    
    
    69,052
    
    
    
    72,442
    
    
    
    76,287
    
    
    
    79,412
    
    
    
    10,176Share capital
    
    
    1,331
    
    
    
    1,331
    
    
    
    1,332
    
    
    
    1,334
    
    
    
    1,344
    
    
    
    172US GAAP(6):Property, plant and equipment
    
    
    118,787
    
    
    
    118,171
    
    
    
    118,701
    
    
    
    112,549
    
    
    
    111,286
    
    
    
    14,260Total assets
    
    
    164,636
    
    
    
    150,477
    
    
    
    146,615
    
    
    
    139,958
    
    
    
    143,718
    
    
    
    18,416Obligations under finance lease-current
portion
    
    
    17
    
    
    
    25
    
    
    
    938
    
    
    
    421
    
    
    
    100
    
    
    
    13Obligations under finance
lease-non-current portion
    
    
    101
    
    
    
    100
    
    
    
    489
    
    
    
    145
    
    
    
    10
    
    
    
    1Other long-term debt
    
    
    45,520
    
    
    
    36,213
    
    
    
    26,137
    
    
    
    11,982
    
    
    
    4,139
    
    
    
    530Convertible
bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,863
    
    
    
    1,008Shareholders equity
    
    
    64,215
    
    
    
    65,946
    
    
    
    69,442
    
    
    
    73,265
    
    
    
    78,733
    
    
    
    10,089Share capital
    
    
    1,331
    
    
    
    1,331
    
    
    
    1,332
    
    
    
    1,334
    
    
    
    1,344
    
    
    
    172Other Financial Data:HKFRS:Net cash generated from operating
activities
    
    
    13,054
    
    
    
    22,565
    
    
    
    23,819
    
    
    
    30,804
    
    
    
    35,451
    
    
    
    4,543Net cash used in investing activities
    
    
    (5,166
    )
    
    
    (19,051
    )
    
    
    (18,958
    )
    
    
    (16,748
    )
    
    
    (17,337
    )
    
    
    (2,222
    )Net cash used in financing activities
    
    
    (11,868
    )
    
    
    (8,778
    )
    
    
    (9,401
    )
    
    
    (13,213
    )
    
    
    (11,403
    )
    
    
    (1,461
    )Dividend declared per share
    
    
    0.10
    
    
    
    0.10
    
    
    
    0.10
    
    
    
    0.11
    
    
    
    0.18
    
    
    
    0.02US GAAP(6):Net cash generated from operating
activities
    
    
    18,235
    
    
    
    25,993
    
    
    
    24,510
    
    
    
    31,486
    
    
    
    35,874
    
    
    
    4,597Net cash used in investing activities
    
    
    (10,261
    )
    
    
    (20,295
    )
    
    
    (19,668
    )
    
    
    (17,431
    )
    
    
    (17,760
    )
    
    
    (2,276
    )Net cash used in financing activities
    
    
    (12,773
    )
    
    
    (11,397
    )
    
    
    (9,440
    )
    
    
    (13,213
    )
    
    
    (11,403
    )
    
    
    (1,461
    )Dividend declared per share
    
    
    0.10
    
    
    
    0.10
    
    
    
    0.10
    
    
    
    0.11
    
    
    
    0.18
    
    
    
    0.02
 
 (1)
    
    The adoption of HKFRS on January 1, 2005 resulted in changes in certain accounting policies
which have been reflected in the financial statements either in accordance with the
transitional provisions in the applicable accounting standards or, to the extent there are no
transitional provisions, applied retrospectively. Accordingly, the comparative financial data
prior to January 1, 2005 presented herein was restated, as
applicable, in 2005 to conform to the
changed accounting policies.(2)
    
    Under HKFRS, the sale of Guoxin Paging Corporation Ltd., or Guoxin Paging, on December 31,
2003 by us to Unicom Group has been accounted for as a sale of discontinued operation. The
difference between the sale proceeds and the carrying amount of net assets of Guoxin Paging as
of December 31, 2003 was recorded as a loss on sale of discontinued operation in our
consolidated income statement for the year ended December 31, 2003. The operating results of
Guoxin Paging from January 1, 2003 to the effective date of the sale of Guoxin Paging were
included in our consolidated income statement for the year ended December 31, 2003. Under US
GAAP, the sale of Guoxin Paging to Unicom Group is considered a transfer of business between
entities under common control and accounted for at historical cost of the net assets
transferred, after reduction, if appropriate, for an indicated impairment of value. In
addition, under US GAAP, the results of operations of a component or segment of an entity that
has been disposed of should be reported in discontinued operations as a separate component of
income, separated from continuing operations, in the period in which the disposal occurred and
in prior periods. Accordingly, all the operating results of Guoxin Paging have been grouped
into and reported in the income statement as Discontinued operation  Loss from discontinued
operation under US GAAP. 
 3




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(3)
    
    The translation of RMB into US dollars has been made at the rate of RMB7.8041 to US$1.00, the
noon buying rate in New York City for cable transfer in RMB as certified for customs purposes
by the Federal Reserve Bank of New York on December 29, 2006. The translations are solely for
the convenience of the reader.
 (4)
    
    See Notes 30 and 38 to the financial statements included in this Form 20-F on how basic and
diluted net income per share are calculated under HKFRS and US GAAP, respectively.
 (5)
    
    Net income per ADS is calculated by multiplying net income per share by 10, which is the
number of shares represented by each ADS.
 (6)
    
    The US GAAP amounts as of and for each of the relevant years ended on December 31, 2006,
2005, 2004, 2003 and 2002 are presented as if the acquisitions of Unicom New Century, Unicom New
World and Unicom International had been in existence since the beginning of the earliest
period presented.
 (7)
    
    Certain assets have been reclassified for comparative purpose, see Notes 6 and 36 to our
consolidated financial statements included in this Form 20-F for detailed discussions.
 Historical Exchange Rates Information
   Period
    
    High
    
    Low
    
    High
    
    Low(RMB per US$1.00)
    
    (HK$ per US$1.00)December 2006
    
    
    7.8350
    
    
    
    7.8041
    
    
    
    7.7787
    
    
    
    7.7665January 2007
    
    
    7.8127
    
    
    
    7.7705
    
    
    
    7.8112
    
    
    
    7.7797February 2007
    
    
    7.7632
    
    
    
    7.7410
    
    
    
    7.8141
    
    
    
    7.8041March 2007
    
    
    7.7454
    
    
    
    7.7232
    
    
    
    7.8177
    
    
    
    7.8093April 2007
    
    
    7.7345
    
    
    
    7.7090
    
    
    
    7.8212
    
    
    
    7.8095May 2007
    
    
    7.7065
    
    
    
    7.6463
    
    
    
    7.8236
    
    
    
    7.8044June 2007
(through June 27, 2007)
    
    
    7.6680
    
    
    
    7.6175
    
    
    
    7.8188
    
    
    
    7.8062
 B. Capitalization and Indebtedness
  C. Reasons for the Offer and Use of Proceeds
  4




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D. Risk Factors
 Risks Relating to Our Business
 Our cellular businesses face competition from China Mobile Limited, or China Mobile, China
Telecommunications Corporation, or China Telecom, and China Network Communications Group
Corporation, or China Netcom. Such competition may intensify and result in slower
subscriber growth, lower tariffs and higher customer acquisition costs for us, which would
materially adversely affect our financial condition, results of operations and growth
prospects.
    Our CDMA services may remain in a relatively disadvantageous market position as compared to
GSM services in China.
  5




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
    
    whether we can effectively retain our existing subscribers and attract sufficient
new CDMA cellular subscribers;
    
    whether we can effectively maintain and/or improve the ARPU of our CDMA;
    
    whether we can effectively utilize our CDMA marketing expenses to accelerate the
revenue growth of our CDMA business;
    
    whether we can generate more revenues from value-added services by capitalizing on
the technological advantages of CDMA 1X wireless data services; and
    
    whether we can enhance the market image of our CDMA services among cellular users in
China.
  Our CDMA and GSM businesses compete with each other in certain areas, which may adversely
affect the growth and profitability of these businesses.
  Failure to continually optimize, expand and upgrade our networks and infrastructure or
changes in telecommunications technology and technological standards could adversely affect
our competitive position and hinder our growth.
   6




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
    
    obtain adequate financing;
    
    obtain relevant government licenses, permits and approvals;
    
    manage the technology migration in an effective manner;
    
    obtain adequate network equipment and software;
    
    retain experienced management and technical personnel;
    
    obtain sufficient spectrum frequencies, network numbers and other
telecommunications resources controlled by the PRC government;
    
    gain access to the sites for network construction or upgrade; and
    
    enter into interconnection and other arrangements with other operators.
  The CDMA handset promotional packages have increased our costs and expenses and may
adversely affect our profitability.
    7




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If we are unable to fund our capital expenditure and debt service requirements, our
financial condition and growth prospects will be adversely affected.
  
    
    our financial condition and results of operations;
    
    our creditworthiness and relationship with lenders;
    
    the condition of the economy and the telecommunications industry in China;
    
    conditions in relevant financial markets in China and elsewhere in the world; and
    
    our ability to obtain any required government approvals for our financings.
 Our long distance, data and Internet businesses remain small compared to China Telecom or
China Netcom, and competition from China Telecom, China Netcom and other telecommunications
service providers may adversely affect our profitability and growth in these businesses.
  Our churn rates and doubtful debt ratio may increase.
   8




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Obstacles in interconnection with networks of other telecommunications operators could
jeopardize our operations.
  Our controlling shareholder, Unicom Group, can exert influence on us and cause us to make
decisions that may not always be in the best interests of our other shareholders.
 3⁄4
 The internal reorganization of Unicom Group for the A Share offering has created a two-step
voting mechanism that will require the approval of the minority shareholders of both our
Company and the A Share Company for significant connected transactions between us and Unicom
Group.
  9




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3⁄4
 Investor confidence and the market prices of our shares and ADSs may be materially and
adversely impacted if we are or our independent registered public accounting firm is unable
to conclude that our internal control over financial reporting is effective in future years
as required by Section 404 of the Sarbanes-Oxley Act of 2002.
   We may incur increased costs as a result of being a public company.
  10




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The unrealized gain or loss on changes in fair value of the derivative component of our zero
coupon convertible bonds and the dilution effect resulting from the conversion of such
convertible bonds may adversely affect our share price.
   Risks Relating to the Telecommunications Industry in China
 Regulatory or policy changes relating to the PRC telecommunications industry or any future
industry restructuring may materially adversely affect our financial condition, results of
operations and growth prospects.
  11




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Issuance of additional telecommunications service licenses, including 3G licenses, may
further intensify competition in the PRC telecommunications industry and materially
adversely affect our financial condition, results of operations and growth prospects.
     12




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The telecommunications industry in China may not sustain its pace of rapid growth, which may
adversely affect the growth and profitability of our business.
  The PRC government may require us, along with other telecommunications service providers in
China, to provide universal services with specified obligations, and we may not be
compensated adequately for providing such services.
    Actual or perceived health risks associated with the use of mobile devices could impair our
ability to retain and attract customers, reduce cellular service usage or result in
litigation.
  13




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Risks Relating to Doing Business in China
 Our operations may be adversely affected by changes in Chinas economic, political and
social conditions.
  If the PRC government revises the current regulations that allow a foreign investment
enterprise to pay foreign exchange in current account transactions, our operating
subsidiarys ability to satisfy their foreign exchange obligations and to pay dividends to
us in foreign currencies may be restricted.
  Fluctuations in the value of the Renminbi could adversely affect the prices of our shares
and ADSs as well as our profitability.
  14




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Uncertainties in the PRC legal system could limit the legal protections available to us and
to foreign investors.
  
 Item 4. Information on the Company
 A. History and Development of the Company
 Historical Industry Restructuring
   15




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##### Table of Contents



3⁄4
 History of Unicom Group
   The Restructuring of Unicom Group and Our Initial Public Offering in 2000
    Further Restructuring of Unicom Group and Initial Public Offering of the A Share Company in 2002
   16




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##### Table of Contents




    
    the closing of the initial agreement would be subject to the (i) successful transfer
of all rights and obligations of the A Share Company or Unicom BVI under the initial
agreement to us or our subsidiaries, and (ii) the approval of the further agreement by
our independent shareholders, and
    
    Unicom Group or its subsidiaries (excluding the A Share Company and its
subsidiaries) would agree and acknowledge that all rights and obligations under the
initial agreement can be transferred to us or our subsidiaries without any further
consent requirements.
  17




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Acquisitions of Unicom New Century and Unicom New World and the Sale of Guoxin Paging
    Mergers of Unicom New Century and Unicom New World into CUCL
  Acquisition of China Unicom International Limited
  Establishment of Unicom Macau and the Launch of CDMA Services in Macau
  18




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Incorporation of Unicom Huasheng
  Share Segregation Reform of the A Share Company
    19




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20




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Our Relationship with Unicom Group
  
    
    its cellular networks in Guizhou province,
    
    its local telephony networks in Sichuan Province and Chongqing and Tianjin
municipalities, and
    
    the satellite transmission networks operated through Unisat.
    3⁄4
 21




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##### Table of Contents



Capital Expenditures and Divestitures
 3⁄4
 B. Business Overview
 General
    Recent Developments
  Cellular Services
  22




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GSM Cellular Services
  Post-paid Services and Pre-paid Services
  23




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Subscribers and Usage
  CUCL
(4)andUnicom New
    
    
    
    
    
    
    
    
    
    CUCL(5)as of orWorld, as of or
    
    
    
    
    
    
    
    
    
    for the threefor the year ended
    
    CUCL(5)as of or for
    
    months endedDecember 31,
    
    the year ended December 31,
    
    March 31,2004
    
    2005
    
    2006
    
    2007Number of subscribers (in thousands)
    
    
    84,267
    
    
    
    95,072
    
    
    
    105,873
    
    
    
    109,158Post-paid
    
    
    42,844
    
    
    
    48,166
    
    
    
    54,267
    
    
    
    56,158Pre-paid
    
    
    41,423
    
    
    
    46,906
    
    
    
    51,606
    
    
    
    53,000Estimated market share in our service areas(1)
    
    
    26.8
    %
    
    
    25.6
    %
    
    
    23.3
    %
    
    
    23.0
    %Average minutes of usage per subscriber per month(2)
    
    
    188.9
    
    
    
    202.2
    
    
    
    237.2
    
    
    
    237.2Average revenue per subscriber per month (in RMB)(3)
    
    
    49.4
    
    
    
    48.5
    
    
    
    49.2
    
    
    
    46.8SMS Volume (in billions)
    
    
    32.39
    
    
    
    39.51
    
    
    
    58.89
    
    
    
    17.28
 
 (1)
    
    Market share in a given area is determined by dividing the number of our GSM subscribers in
the area by the total number of cellular subscribers in the area. Source: Ministry of
Information Industry.(2)
    
    Average minutes of usage per subscriber per month is calculated by dividing the total minutes
of usage during the period by the average number of our GSM subscribers during the period,
and dividing the result by the number of months in the relevant period.(3)
    
    Average revenue per subscriber per month, or ARPU, is calculated by dividing the sum of GSM
cellular services revenue during the relevant period by the average number of our GSM
subscribers during the period, and dividing the result by the number of months in the period.(4)
    
    Includes Unicom New Century, which merged into CUCL on July 30, 2004.(5)
    
    Includes Unicom New Century and Unicom New World, which merged into CUCL on July 30, 2004 and
September 1, 2005, respectively. Subscriber Increase
 MOU and ARPU
 Churn Rate
 24




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Payment Delinquency
 Tariffs
   Post-paid Services
    
    Pre-paid ServicesRMB
    
    RMBBasic monthly fee
    
    
    50
    
    
    
    0Local usage charge (per minute)
    
    
    0.4
    
    
    
    0.6Domestic roaming charge (per minute)
    
    
    0.6
    
    
    
    0.8
 
 Source:
    
    MII.    25




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CDMA Cellular Services
   Our Lease of CDMA Networks from Unicom Group
 3⁄4
   26




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##### Table of Contents



Services
   
    
    users can switch between GSM and CDMA networks in China, thereby offering wireless
coverage in areas of the country covered by only one of these networks;
    
    when roaming in areas outside of China, users can use the cellular services of local
operators, whether they are GSM or CDMA, who signed roaming agreements with us; and
    
    our GSM users who sign up for Worldwind can continue to use the basic GSM
services, while enjoying the additional benefits of the CDMA 1X services.
 Subscriber Base
  CUCL(4)
    
    
    
    
    
    
    
    
    
    CUCL(5)and Unicom
    
    
    
    
    
    
    
    
    
    as of orNew World,
    
    
    
    
    
    
    
    
    
    for the threeas of or for the year
    
    CUCL(5)as of or for
    
    months endedended December 31,
    
    the year ended December 31,
    
    March 31,2004
    
    2005
    
    2006
    
    2007Number of subscribers (in thousands)
    
    
    27,815
    
    
    
    32,723
    
    
    
    36,493
    
    
    
    37,724Post-paid
    
    
    25,824
    
    
    
    30,010
    
    
    
    33,454
    
    
    
    34,605Pre-paid
    
    
    1,991
    
    
    
    2,713
    
    
    
    3,039
    
    
    
    3,119Estimated market share in our service areas(1)
    
    
    8.8
    %
    
    
    8.8
    %
    
    
    8.0
    %
    
    
    8.0
    %Average minutes of usage per subscriber per month(2)
    
    
    292.3
    
    
    
    276.9
    
    
    
    274.7
    
    
    
    257.4Average revenue per subscriber per month (in RMB)(3)
    
    
    85.3
    
    
    
    75.1
    
    
    
    65.9
    
    
    
    58.6SMS Volume (in billions)
    
    
    11.83
    
    
    
    15.02
    
    
    
    16.78
    
    
    
    4.52
 27




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(1)
    
    Market share in a given area is determined by dividing the number of our CDMA subscribers in
the area by the total number of cellular subscribers in the area. Source: Ministry of
Information Industry.(2)
    
    Average minutes of usage per subscriber per month is calculated by dividing the total minutes
of usage during the period by the average number of our CDMA subscribers during the period,
and dividing the result by the number of months in the relevant period.(3)
    
    Average revenue per subscriber per month, or ARPU, is calculated by dividing the sum of CDMA
cellular services revenue during the relevant period by the average number of our CDMA
subscribers during the period, and dividing the result by the number of months in the period.(4)
    
    Includes Unicom New Century, which merged into CUCL on July 30, 2004.(5)
    
    Includes Unicom New Century and Unicom New World, which merged into CUCL on July 30, 2004 and
September 1, 2005, respectively.  
    
    increased brand awareness and our distribution and marketing efforts, including our
adoption of an effective subsidizing policy that (i) offers various forms of subsidies
such as free minutes and free trials of VAS services and (ii) ties the subsidies to
subscribers ARPU;
    
    decreased retail sale prices of and the availability of more varieties of CDMA
handsets as a result of our centralized purchasing policy;
    
    the launching and promotion of our Worldwind dual-mode, dual-standby services,
which ensures our subscribers wider coverage based on both of our networks and
additional benefits of the CDMA 1X wireless data services;
    
    the competitiveness of our network coverage and quality; and
    
    the advantages of the CDMA technology, including the lower radio transmitting power
of CDMA handsets as compared to GSM handsets, better voice quality and enhanced
security.
 MOU, ARPU and Churn Rate
  28




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Payment Delinquency
  Tariffs and Promotion
   3⁄4 3⁄4
 Value-added Services
   29




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##### Table of Contents




    
    through the improvement of the value-added services, more staff training,
advertising and promotions, trial programs and our various other efforts, we
strengthened marketing efforts for our value-added services under the uniform business
brand of uni;
    
    we improved the content of our value-added services, through strengthening service
support of and cooperation with content providers and service providers, in order to
increase the appeal of these services;
    
    we improved the quality of our value-added services by strengthening certain
customer protection measures, such as requiring service providers to obtain
re-confirmation from the subscribers before they activate the service and to provide
subscribers trial periods before the service provider starts to charge for the service;
    
    we actively developed value-added services specifically catering to the youth and
campus markets to increase the market share of our U-Power services;
    
    we targeted mid- to high-end subscribers by emphasizing the technological advantages
of dual-mode, dual-standby services to facilitate the development of our Worldwind
CDMA and GSM dual mode services and our CDMA 1X data services;
    
    through cooperation with partners in specific industries, we launched applications
such as SAIC Enforcement Horizon, Maritime Horizon, Agriculture Horizon and
Police Horizon to extend corporate and industry applications to institutional and
industrial customers in markets such as maritime and agriculture. For example, we
recently introduced the SAIC Enforcement Horizon application, which aims to offer
tailored wireless services to law enforcement personnel of the State Administration of
Industries
 30




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##### Table of Contents



and Commerce. We also expanded the application of our CDMA 1X data services in
certain industries by providing information solutions to small- and medium-sized
enterprises; and
    
    we introduced push mail mobile email services, which allows our
subscribers to send and receive emails and view multimedia attachments via a mobile
device, such as a handset.
  Strategic Cooperation
  Long Distance, Data and Internet Services
   As of or for the year ended December 31,2004
    
    2005
    
    2006Public switched telephony (in billions of minutes):Domestic
    
    
    9.94
    
    
    
    10.33
    
    
    
    11.07International
    
    
    0.16
    
    
    
    0.15
    
    
    
    0.16Total
    
    
    10.10
    
    
    
    10.48
    
    
    
    11.23IP telephony (in billion of minutes):Domestic
    
    
    13.81
    
    
    
    14.60
    
    
    
    13.02International
    
    
    0.14
    
    
    
    0.13
    
    
    
    0.11Total
    
    
    13.95
    
    
    
    14.73
    
    
    
    13.13
 31




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As of or for the year ended December 31,2004
    
    2005
    
    2006Data ServicesBandwidth leased to customers (2Mbps)
    
    
    9,007
    
    
    
    8,706
    
    
    
    7,428Internet ServicesDedicated access subscribers
    
    
    61,569
    
    
    
    38,000
    
    
    
    31,350
 Public Switched Telephony Services
   As of or for the year ended on December 31,2004
    
    2005
    
    2006Number of cities reached
    
    
    332
    
    
    
    333
    
    
    
    333Minutes of outgoing long distance calls (in billions)
    
    
    10.10
    
    
    
    10.48
    
    
    
    11.23Market share of outgoing long distance call minutes (1)
    
    
    13.6
    %
    
    
    11.57
    %
    
    
    11.55
    %Minutes of incoming international calls (in billions)
    
    
    2.47
    
    
    
    2.34
    
    
    
    2.39
 
 (1)
    
    Source: MII. In calculating market share, the total minutes of outgoing long distance calls
include ours and those of the incumbent operators.  Maximum Tariff Rates
    
    Preferential RatesRMB per six seconds
    
    RMB per six secondsPublic switched Domestic Long Distance:
    
    
    0.06
    
    
    
    0.03Public switched International Long Distance:To Hong Kong, Taiwan and Macau
    
    
    0.18
    
    
    
    0.15To all other international destinations
    
    
    0.72
    
    
    
    0.38
  
    
    RMB0.04 per six seconds every day from 8pm to 10pm;
    
    RMB0.03 per six seconds every day from 10pm to 7am of the following day; and
    
    RMB0.04 per six seconds on public holidays and weekends from 7am to 8pm.
  32




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IP Telephony Services
  As of or for the year ended December 31,2004
    
    2005
    
    2006Number of cities reached
    
    
    341
    
    
    
    341
    
    
    
    343Minutes of outgoing IP telephony calls (in billions)
    
    
    13.95
    
    
    
    14.73
    
    
    
    13.13Minutes of incoming international calls (in billions)
    
    
    0.28
    
    
    
    0.25
    
    
    
    0.22
  Our Tariff Rates (RMB)IP Telephony Domestic Long Distance
    
    0.30 per minuteIP Telephony International Long DistanceTo Hong Kong, Taiwan and Macau
    
    1.50 per minuteTo U.S. and Canada
    
    2.40 per minuteTo other international destinations
    
    3.60 per minute
  Data Services
   
    
    Frame relay, or FR, services, which provide high speed and cost effective data
communications services linking remote business sites using FR technology;
    
    Asynchronous transfer mode, or ATM, services, which employ ATM technology and are
able to handle high bandwidth, integrated voice, video, data and Internet traffic; and
    
    Broadband video-conferencing and video-telephony services, which are provided under
the brand name of Uni-Video. These services currently include video-conferencing,
video-telephony, video conference room leasing and video public telephony services.
These services are based on our existing unified data network platform. Two or more
users can use our services by connecting to the Internet or our video network through
video-conferencing terminals or computer terminals.
 33




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As of December 31,2004
    
    2005
    
    2006Number of cities reached
    
    
    328
    
    
    
    328
    
    
    
    328Bandwidth leased to customers
    
    
    9,007
    
    
    
    8,706
    
    
    
    7,428
  3⁄4 3⁄4
   FR Services Port Fee (RMB per month)Bandwidth (bps)
    
    Port Fee64k
    
    260128k
    
    300256k
    
    400384k
    
    450512k
    
    500768k
    
    6501M
    
    7502M
    
    1,000
  FR Services PVC Fee (RMB per month)Hong Kong,
    
    International
    
    InternationalLocal
    
    Local
    
    Domestic
    
    Macau &
    
    long distance
    
    long distanceBandwidth
    
    (intra-district)
    
    (inter-district)
    
    long distance
    
    Taiwan
    
    (Asia)
    
    (outside of Asia)8kbps
    
    
    290
    
    
    
    440
    
    
    
    990
    
    
    
    1,550
    
    
    
    8,800
    
    
    
    9,40016kbps
    
    
    390
    
    
    
    540
    
    
    
    1,190
    
    
    
    1,800
    
    
    
    10,000
    
    
    
    10,50032kbps
    
    
    450
    
    
    
    650
    
    
    
    1,300
    
    
    
    2,000
    
    
    
    11,500
    
    
    
    11,50048kbps
    
    
    500
    
    
    
    750
    
    
    
    1,500
    
    
    
    2,300
    
    
    
    13,000
    
    
    
    13,50064kbps
    
    
    550
    
    
    
    800
    
    
    
    1,700
    
    
    
    2,600
    
    
    
    14,500
    
    
    
    14,600128kbps
    
    
    700
    
    
    
    1,000
    
    
    
    2,100
    
    
    
    3,400
    
    
    
    18,000
    
    
    
    18,400256kbps
    
    
    800
    
    
    
    1,150
    
    
    
    2,200
    
    
    
    3,500
    
    
    
    19,000
    
    
    
    19,600384kbps
    
    
    850
    
    
    
    1,350
    
    
    
    2,300
    
    
    
    3,800
    
    
    
    20,000
    
    
    
    20,500516kbps
    
    
    1,000
    
    
    
    1,450
    
    
    
    2,500
    
    
    
    4,100
    
    
    
    22,300
    
    
    
    23,100768kbps
    
    
    1,150
    
    
    
    1,600
    
    
    
    2,700
    
    
    
    4,600
    
    
    
    25,800
    
    
    
    26,5501Mbps
    
    
    1,250
    
    
    
    2,000
    
    
    
    3,000
    
    
    
    5,200
    
    
    
    28,900
    
    
    
    30,0502Mbps
    
    
    1,500
    
    
    
    2,200
    
    
    
    4,000
    
    
    
    7,000
    
    
    
    39,000
    
    
    
    39,000
 34




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ATM Services Port Fee (RMB per month)Bandwidth
    
    Port Fee256K
    
    
    400512K
    
    
    5001M
    
    
    7502M
    
    
    1,0004M
    
    
    2,0006M
    
    
    3,0008M
    
    
    4,00010M
    
    
    5,00012M
    
    
    6,00034M
    
    
    7,00045M
    
    
    8,000100M
    
    
    9,000155M
    
    
    10,000
  ATM Services Circuit Fee (RMB per month)Hong Kong,
    
    International
    
    InternationalLocal
    
    Local
    
    Domestic
    
    Macau &
    
    long distance
    
    long distanceBandwidth
    
    (intra-district)
    
    (inter-district)
    
    long distance
    
    Taiwan
    
    (Asia)
    
    (outside of Asia)256Kbps
    
    
    800
    
    
    
    1,150
    
    
    
    2,200
    
    
    
    3,500
    
    
    
    19,000
    
    
    
    19,600512Kbps
    
    
    1,000
    
    
    
    1,450
    
    
    
    2,500
    
    
    
    4,100
    
    
    
    22,300
    
    
    
    23,1001Mbps
    
    
    1,250
    
    
    
    2,000
    
    
    
    3,000
    
    
    
    5,200
    
    
    
    28,900
    
    
    
    30,0502Mbps
    
    
    1,500
    
    
    
    2,200
    
    
    
    4,000
    
    
    
    8,000
    
    
    
    39,000
    
    
    
    39,0004Mbps
    
    
    2,000
    
    
    
    3,000
    
    
    
    6,000
    
    
    
    12,900
    
    
    
    72,200
    
    
    
    72,2006Mbps
    
    
    2,500
    
    
    
    5,500
    
    
    
    9,000
    
    
    
    19,800
    
    
    
    105,400
    
    
    
    105,4008Mbps
    
    
    3,500
    
    
    
    8,500
    
    
    
    12,000
    
    
    
    26,700
    
    
    
    138,700
    
    
    
    138,70010Mbps
    
    
    5,000
    
    
    
    11,500
    
    
    
    15,500
    
    
    
    30,600
    
    
    
    157,800
    
    
    
    157,80015Mbps
    
    
    7,000
    
    
    
    15,000
    
    
    
    22,000
    
    
    
    40,000
    
    
    
    205,000
    
    
    
    205,00020Mbps
    
    
    7,500
    
    
    
    17,500
    
    
    
    29,000
    
    
    
    49,000
    
    
    
    252,300
    
    
    
    252,30025Mbps
    
    
    8,000
    
    
    
    21,000
    
    
    
    36,000
    
    
    
    59,000
    
    
    
    300,000
    
    
    
    300,00030Mbps
    
    
    9,000
    
    
    
    24,000
    
    
    
    42,000
    
    
    
    69,000
    
    
    
    348,500
    
    
    
    348,50040Mbps
    
    
    10,000
    
    
    
    29,000
    
    
    
    52,000
    
    
    
    88,500
    
    
    
    416,000
    
    
    
    416,00050Mbps
    
    
    10,500
    
    
    
    32,000
    
    
    
    60,000
    
    
    
    108,200
    
    
    
    486,600
    
    
    
    486,60060Mbps
    
    
    11,000
    
    
    
    33,000
    
    
    
    68,000
    
    
    
    122,600
    
    
    
    567,900
    
    
    
    567,90070Mbps
    
    
    11,500
    
    
    
    35,000
    
    
    
    76,000
    
    
    
    137,000
    
    
    
    649,100
    
    
    
    649,10080Mbps
    
    
    12,000
    
    
    
    36,000
    
    
    
    84,000
    
    
    
    151,300
    
    
    
    730,400
    
    
    
    730,40090Mbps
    
    
    12,500
    
    
    
    37,000
    
    
    
    92,000
    
    
    
    165,700
    
    
    
    811,600
    
    
    
    811,600100Mbps
    
    
    13,000
    
    
    
    37,500
    
    
    
    100,000
    
    
    
    180,100
    
    
    
    892,900
    
    
    
    892,900110Mbps
    
    
    13,500
    
    
    
    38,000
    
    
    
    107,500
    
    
    
    187,300
    
    
    
    933,500
    
    
    
    933,500130Mbps
    
    
    13,800
    
    
    
    38,500
    
    
    
    122,500
    
    
    
    201,600
    
    
    
    1,014,800
    
    
    
    1,014,800155Mbps
    
    
    14,500
    
    
    
    39,000
    
    
    
    130,000
    
    
    
    216,000
    
    
    
    1,096,000
    
    
    
    1,096,000
  Internet Services
  35




---



##### Table of Contents




    
    Dedicated Internet Access. We offer business customers high speed Internet
access through dedicated lines. As of December 31, 2006, we had a total of 31,350
subscribers for dedicated Internet access. We package this service with voice and data
services to provide integrated communications solutions to our business customers and
cooperate with cable operators and real estate developers to offer broadband access to
residential customers.
    
    IDC Services. We have built Internet data centers, or IDCs, in selected
cities including Shanghai, Beijing, Guangzhou and certain provincial capitals, and
provide server hosting, server rental, virtual servers and other IDC services to
commercial customers and virtual IDC operators.
    
    Ruyi Mailbox Services. This service allows our cellular subscribers to
use their cellular phone numbers as e-email addresses. As of December 31, 2006, the
number of Ruyi Mailbox subscribers was approximately 12.22 million.
    
    Other Internet Services. Other Internet services we offer include
international Internet Protocol-Virtual Private Network (or IP-VPN), Virtual Private
Data Network (or VPDN), Virtual Internet Service Provider (or VISP), Uninet
international roaming and corporate e-mail services.
  As of December 31,2004
    
    2005
    
    2006Number of cities reached by our dedicated Internet access
services
    
    
    327
    
    
    
    334
    
    
    
    334Number of subscribers of dedicated Internet access services
    
    
    61,569
    
    
    
    38,000
    
    
    
    31,350
  Bandwidth
    
    Standard network usage fees (RMB per month)R£64Kbps
    
    
    2,700-3,60064Kbps<R£128Kbps
    
    
    3,600-4,900128Kbps<R£256Kbps
    
    
    4,800-6,600384Kbps <R£512Kbps
    
    
    8,500-12,0001024Kbps<R£2Mbps
    
    
    18,000-27,0008Mbps <R£10Mbps
    
    
    59,400-70,00020Mbps<R£34Mbps
    
    
    165,900-195,20034Mbps <R£45Mbps
    
    
    210,000-250,00045Mbps<R£100Mbps
    
    
    428,400-504,000100Mbps<R£155Mbps
    
    
    664,100-781,200
  36




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##### Table of Contents



Leased Line Services
   State Tariff Rates (RMB per month)Local (intra-district)
    
    Local (inter-district)
    
    Long distanceDigital Line (2 Mbps)
    
    
    2,000
    
    
    
    4,000
    
    
    
    6,000Digital Line (34 Mbps)
    
    
    16,000
    
    
    
    31,000
    
    
    
    47,000Digital Line (155 Mbps)
    
    
    44,000
    
    
    
    88,000
    
    
    
    132,000
 
 Source:
    
    MII.  Sale and Lease of Other Network Elements
 3⁄4 3⁄4
 Interconnection and Roaming Arrangements
 Interconnection
   37




---



##### Table of Contents



3⁄4 3⁄4
  
    
    Framework interconnection and settlement agreement between Unicom Group and the
former China Telecom, dated September 30, 2001, the rights and obligations of which
were divided and continued after the former China Telecom was split into China Telecom
and China Netcom pursuant to an agreement among Unicom Group, China Telecom and China
Netcom, dated April 23, 2003. These interconnection and settlement agreements with
China Telecom and China Netcom were superseded by the interconnection and settlement
agreement between Unicom Group and China Telecom, dated March 29, 2004 and the
interconnection and settlement agreement between Unicom Group and China Netcom, dated
April 2, 2004. The 2004 agreements contained more detailed provisions relating to
interconnection quality, pursuant to new MII directives in this area.
    
    Interconnection and settlement agreements between Unicom Group and China Mobile
relating to the interconnection between Unicom Groups GSM and CDMA cellular networks
and China Mobiles GSM cellular networks, both dated November 14, 2001, which were
subsequently amended and supplemented by the respective parties on December 31, 2003.
    
    Interconnection and settlement agreement between Unicom Group and China Mobile
regarding the interconnection of point-to-point short messaging services, dated April
1, 2002.
    
    Interconnection and settlement agreement between Unicom Group and China Mobile
regarding the interconnection between China Mobiles GSM cellular networks and Unicoms
telecommunications networks, including its local fixed line telephony networks,
cellular networks, domestic long distance telephony networks, international telephony
networks and IP telephony network, and the interconnection between China Mobiles
international gateways and IP telephony network and Unicom Groups cellular networks
and local fixed line telephony networks, dated December 31, 2003.
    
    Agreement between Unicom Group and China Mobile regarding the mutual provision of
open service platforms, dated November 5, 2003.
    
    Agreement between Unicom Group and China Mobile regarding the mutual provision of
open multimedia messaging service and interconnection and settlement business, dated
April 6, 2007.
  
    
    Interconnection and settlement agreements between Unicom Group and China Railcom
relating to the interconnection of Unicom Groups cellular networks and local fixed
line telephony networks and China Railcoms local fixed line telephony networks,
domestic
 38




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##### Table of Contents



long distance networks and IP telephony networks, dated January 25, 2002 and April
9, 2002.
    
    Supplemental agreements between Unicom Group and China Railcom, which allow each
party to offer its domestic and international long distance telephony services and IP
telephony services to the cellular or fixed line telephony service subscribers of the
other party, dated April 23, 2003.
    
    Interconnection and settlement agreement between Unicom Group and China Satcom
relating to the interconnection between Unicom Groups networks and China Satcoms
Global Star satellite mobile communications network, dated September 27, 2003.
    
    Framework interconnection and settlement agreement between Unicom Group and China
Satcom relating to the interconnection between Unicom Groups cellular networks and
China Satcoms IP telephony networks, dated September 24, 2003.
    
    Interconnection agreement among major Internet operators, including Unicom Group,
and three national Internet switching centers relating to the interconnection of
Internet backbone networks, dated December 20, 2001.
    
    Interconnection and settlement agreement between Unicom Group and China Telecom
relating to the provision of point-to-point SMS services between Unicom Groups and
China Telecoms networks, dated October 10, 2004.
    
    Interconnection and settlement agreement between Unicom Group and China Netcom
relating to the provision of point-to-point SMS services between Unicom Groups and
China Netcoms networks, dated October 11, 2004.
  Roaming
   39




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##### Table of Contents



Paid to UnicomFor our subscribers roaming on Unicom Groups networks
    
    Roaming Tariff
    
    Group
    
    Retained by UsGSM pre-paid users (RMB/minute)
    
    
    0.60
    
    
    
    0.40
    
    
    
    0.20GSM post-paid users (RMB/minute)
    
    
    0.60
    
    
    
    0.40
    
    
    
    0.20CDMA users (RMB/minute)
    
    
    0.60
    
    
    
    0.40
    
    
    
    0.20
 Retained byFor Unicom Groups subscribers roaming on our networks
    
    Roaming Tariff
    
    Paid to Us
    
    Unicom GroupGSM pre-paid users (RMB/minute)
    
    
    0.60
    
    
    
    0.56
    
    
    
    0.04GSM post-paid users (RMB/minute)
    
    
    0.60
    
    
    
    0.56
    
    
    
    0.04CDMA users (RMB/minute)
    
    
    0.60
    
    
    
    0.56
    
    
    
    0.04
   Networks
  Transmission Network
   40




---



##### Table of Contents




    
    synchronous digital hierarchy, or SDH, architecture with protective two- or
four-fiber rings, a self-healing system that allows for instantaneous rerouting,
automatically protects service circuits and minimizes down time in the event of a fiber
cut or equipment malfunction;
    
    dense wave division multiplexing, or DWDM, technology, a means of increasing
transmission capacity by transmitting signals over multiple wavelengths through a
single fiber; and
    
    a digital cross connection, or DXC, system, a specialized high-speed data channel
exchange and connection system that effectively manages the routing and channeling of
our services.
    Cellular Networks
  
    
    cell sites, which are physical locations, each equipped with a base station that
houses transmitters, receivers and other equipment used to communicate through radio
channels with subscribers cellular handsets within the range of a cell;
    
    base station controllers, which connect to, and control, the base stations;
    
    mobile switching centers, which control the base station controllers and the routing
of telephone calls; and
    
    transmission lines, which link the mobile switching centers, base station
controllers, base stations and the public switched telephone network.
 41




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##### Table of Contents



GSM Cellular Networks.
 As of December 31,2004
    
    2005
    
    2006Network subscriber capacity (in thousands of subscribers)
    
    
    84,552
    
    
    
    89,461
    
    
    
    105,464Base stations
    
    
    81,819
    
    
    
    94,444
    
    
    
    122,205Base station controllers
    
    
    1,653
    
    
    
    1,781
    
    
    
    2,020Mobile switching centers
    
    
    477
    
    
    
    502
    
    
    
    502
    CDMA Cellular Network.
 Long Distance, Data and Internet Networks
  Long Distance Network.
 Data and Internet Networks.
 42




---



##### Table of Contents



Internet Network.
 Broadband Video Network
 Integrated Access Networks.
 Integrated Management and Network Support Systems
  Marketing, Sales and Distribution
  Sales and Marketing
  43




---



##### Table of Contents



Customer Segmentation
 Cellular services
 44




---



##### Table of Contents



Long distance, data and Internet services
 Service Bundling and Cross-Marketing
 45




---



##### Table of Contents



Distribution
   Customer Service
  46




---



##### Table of Contents



Billing and Collection
  Business Segment
    
    Billing
    
    CollectionPost-paid GSM and CDMA
services
    
    Centralized at the provincial level
and generally by monthly billing.
    
    Subscribers may pre-deposit their
service charges with us or
commercial banks or China Post
that
collect payment for us, make
payment in person at our service
centers or branches of China
Post, or
through commercial banks.Pre-paid GSM and CDMA services
    
    Centralized on our nationwide
intelligent network
    
    Subscribers can purchase and/or
re-charge pre-paid cards through
various channels. They can also
re-charge cards by telephone.PSTN long distance telephony 
services
    
    Settlement through centralized
system at our headquarters with
billing handled at the provincial
branch level
    
    Subscribers mainly go to our
service
centers, commercial banks and
branches of China Post for
payment.IP telephony services
    
    Settlement through centralized
system at our headquarters with
billing for 17910 business carried
    
    Subscribers mainly go to our
service
centers, commercial banks and
branches of China Post for
payment.
 47




---



##### Table of Contents



Business Segment
    
    Billing
    
    CollectionUni-Video services
    
    out by our headquarters and 17911
by our provincial branches Centralized at our headquarters
except that our Guangdong
provincial branch is in charge of
the billing of pre-paid
subscribers to our video-telephony
services in Guangdong Province.
    
    Our corporate customers can pay
either at the local service
centers in the locations of the
branches of such customer or at
one local service center
designated by the customer.Internet services
    
    Centralized at the provincial
level. Billing methods include
monthly billing, volume-based
billing and billing according to
contractual provisions.
    
    Subscribers may go to our
service centers, commercial
banks, and branches of China
Post or use the Internet for
payment.Unicoms Internet Plaza
    
    Customers of the Internet cafes
either pay by membership or pay
hourly rates.
    
    N/ALeased lines
    
    Monthly billing in accordance with
contractual provisions
    
    Customers mainly pay at our
service centers or at commercial
banks.
 Bad Debt Controls
 Cellular Services.
 Domestic and International Long Distance Services.
 Internet services.
 Research and Development
  48




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##### Table of Contents



Competition
 The Chinese telecommunications market has six basic telecommunications service providers 
China Telecom, Unicom Group, China Mobile, China Netcom, China Satcom and China Railcom  and
thousands of value-added service providers. As a relatively new entrant into this highly
competitive landscape, we believe following strengths have contributed to the development and
growth of our business in recent years:
 
    
    Integrated service offerings and a uniform and advanced telecommunications
network  We offer integrated cellular, domestic and international long distance,
data and Internet services, and have a nationwide, uniform communications network that
supports voice, data and Internet communications and allows us to provide integrated
services to our customers and utilize our network resources in a cost-effective manner.
    
    Unique service offerings  Through our advanced integrated network platform
and the implementation of our innovative marketing strategies, we introduced
Worldwind CDMA and GSM dual-mode cellular services and a series of value-added
services such as CDMA 1X wireless data services, uni value-added services and Unicom
Horizon industry specific services, in order to satisfy the differentiated demand of
our various customer segments.
    
    Advanced technologies  CDMA technology offers high bandwidth utilization,
better voice quality, high data transmission capabilities, better security and lower
handset radio transmitting power, and can be relatively cost-effectively and timely
upgraded to 3G cellular telecommunications. We are the only provider for CDMA services
in our service areas in China, and our CDMA network has been upgraded to CDMA 1X
technology, which has higher data transmission capabilities. Our GSM services utilize
2G technology that is widely accepted internationally and we believe our GSM network
coverage and voice quality meet international standards. Our uniform network platform
(Unione) utilizes ATM+IP technology solutions to offer quality support to our voice,
data, Internet, video conference, video telephony and mobile data services.
    
    Professional and quality customer service  Using the customer service
resources of Unicom Group, we have built up a strong brand image in customer service
that can be characterized as professional, differentiated and one-stop service under
our uniform service brand of Unicom 10010.
  
    
    Market position  As a relatively new entrant to the market, we are still
behind the traditional operators in such areas as market share and branding. Due to
our late entry, we still need to strengthen our market position through expenditures to
capture mid- to
 49




---



##### Table of Contents



high-end customers. In addition, we are reliant on the dominant operators in terms
of interconnection and settlement.
    
    Financial resources  Compared to the dominant operators such as China
Mobile, our capital scale is relatively small, our debt ratio is relatively high, and
our share of the market revenue and profit is relatively low.
    
    Network coverage and upgrade  While we have made significant improvements
in network construction in recent years, network coverage in certain in-door or remote
areas still needs improvement. In addition, we are still in the process of upgrading
our GSM networks to launch more GPRS services in selected cities.
 Cellular Competition
     50




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##### Table of Contents



Long Distance Telephony Competition
    Data and Internet Competition
   51




---



##### Table of Contents



Trademarks
  Regulatory and Related Matters
   
    
    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
number resources,
    
    together with other relevant regulatory authorities, formulating tariff standards
for telecommunications services,
    
    formulating interconnection and settlement arrangements between telecommunications
networks, and
    
    maintaining fair and orderly market competition among service providers.
   Telecommunications Regulations
  52




---



##### Table of Contents



Entry into the Industry
    
    
    For mobile voice and data services:
 §
    
    there is no longer any geographic restriction and the foreign
ownership shall be no more than 49%.
 
    
    For value-added telecommunications services:
 §
    
    there is no longer any geographic restriction and foreign
ownership shall be no more than 50%.
 
    
    For fixed line services:
 §
    
    the services areas have been expanded to include services in
and between 17 cities of Shanghai, Guangzhou, Beijing, Chengdu, Chongqing,
Dalian, Fuzhou,
 53




---



##### Table of Contents



Spectrum and Network Number Resources
     Tariff Setting and Price Controls
  54




---



##### Table of Contents



Interconnection Arrangements
   55




---



##### Table of Contents



Network from
    
    Network atwhich calls originated
    
    which calls terminated
    
    Settlement ArrangementUnicoms cellular network
    
    Fixed line operators public
fixed line network
    
    (1) Unicom collects the local
cellular usage charge from its
subscribers
(2) Unicom pays RMB0.06 per
minute to fixed line operatorsFixed line operators
public fixed line
network
    
    Unicoms cellular network
    
    No revenue sharing or settlementUnicoms cellular network
    
    China Mobiles cellular network
    
    (1) Each of Unicom and China
Mobile collects the cellular
usage charge from its
subscribers
(2) Unicom pays RMB0.06 per
minute to China MobileChina Mobiles cellular 
network
    
    Unicoms cellular network
    
    (1) Each of Unicom and China
Mobile collects the cellular
usage charge from its
subscribers
(2) China Mobile pays RMB0.06
per minute to Unicom
  Network from
    
    Network atwhich calls originated
    
    which calls terminated
    
    Settlement ArrangementUnicoms cellular
network at area A
    
    Fixed line operators
public fixed line
network at area B, if
through the long
distance network of
such fixed line
operator
    
    (1) Unicom collects
the domestic long
distance tariff and
local call tariff
from its subscribers
(2) Unicom keeps
RMB0.06 per minute
and pays the rest of
the domestic long
distance tariff to
fixed line operatorsUnicoms cellular
network at area A
    
    Fixed line operators
public fixed line
network at area B, if
through the long
distance network of
Unicom
    
    (1) Unicom collects
the domestic long
distance tariff and
local call tariff
from its subscribers
(2) Unicom pays
RMB0.06 per minute to
fixed line operators,
and keeps the rest of
the domestic long
distance tariffFixed line operators
public fixed line
network at area A
    
    Unicoms cellular
network at area B, if
through the long
distance network of
Unicom
    
    (1) Fixed line
operators collect the
domestic long
distance tariff from
their subscribers
(2) Fixed line
operators keep
RMB0.06 per minute
and pay the rest to
UnicomFixed line operators
public fixed line
network at area A
    
    Unicoms cellular
network at area B, if
through the long
distance network of
such fixed line
operator
    
    (1) Fixed line
operators collect the
domestic long
distance tariff from
their subscribers
(2) Fixed line
operators pay RMB0.06
per minute to Unicom
and keep the restFixed line operators
public fixed line
network at area A
    
    Fixed line operators
public fixed line
network at area B, if
through the long
distance network of
Unicom
    
    (1) Fixed line
operators on the
originating end
collect the domestic
long distance tariff
from their
subscribers
(2) Fixed line
operators keep
RMB0.06 per minute
and pay the rest to
Unicom
(3) Unicom then pays
RMB0.06 per minute to
fixed line operators
on the receiving endUnicoms cellular
network at area A
    
    China Mobiles
cellular network at
area B, if through
the long distance
network of China
Mobile
    
    (1) Unicom collects
the domestic long
distance tariff and
local call tariff
from its subscribers
(2) Unicom keeps
RMB0.06 per minute
and pays the rest of
the domestic long
distance tariff to
 56




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##### Table of Contents



Network from
    
    Network atwhich calls originated
    
    which calls terminated
    
    Settlement ArrangementChina MobileChina Mobiles
cellular network at
area A
    
    Unicoms cellular
network at area B, if
through the long
distance network of
Unicom
    
    (1) China Mobile
collects the domestic
long distance tariff
and local call tariff
from its subscribers
(2) China Mobile
keeps RMB0.06 per
minute and pays the
rest of the domestic
long distance tariff
to Unicom
  Type of calls
    
    Settlement ArrangementsOutgoing calls from Unicoms
cellular network, if through the
international long distance
network of fixed line operators
    
    (1) Unicom collects the international
long distance tariff and local call
tariff from its subscribers
(2) Unicom keeps RMB0.06 or RMB0.54
per minute (depending on whether
through Unicoms domestic long
distance network) and pays the rest
of the international long distance
tariff to fixed line operatorsIncoming calls to Unicoms
cellular network, if through the
international long distance
network of fixed line operators
    
    (1) Unicom receives RMB0.06 or
RMB0.54 per minute from fixed line
operators (depending on whether
through Unicoms domestic long
distance network)
  Network from which
    
    Network at which callscalls originated
    
    terminated
    
    Settlement ArrangementUnicoms cellular
network at area A
    
    Other operators
public
telecommunications
network at area B (if
through Unicoms IP
telephony network)
    
    (1) Unicom collects
the IP telephony long
distance charges and
local call tariff
from its subscribers
(2) Unicom pays
RMB0.06 per minute to
other operators on
the receiving endOther operators
public
telecommunications
network at area A
    
    Other operators
public
telecommunications
network at area B (if
through Unicoms IP
telephony network)
    
    (1) Unicom collects
the IP telephony long
distance charges from
its subscribers
(2) Unicom pays
RMB0.06 per minute to
other operators on
the receiving end
(3) No settlement
between Unicom and
other operators on
the originating end
  57




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Technical Standards
  Universal Services
    Capital Investment
  58




---



##### Table of Contents




    
    domestic backbone transmission networks (including broadcasting and television
networks);
    
    international telecommunications transmission circuits;
    
    international gateways;
    
    international telecommunications facilities for dedicated telecommunications
networks; and
    
    other telecommunications infrastructure projects involving information security.
 Others
   C. Organizational Structure
  Name of Subsidiary
    
    Country of Incorporation
    
    Ownership InterestChina Unicom Corporation Limited
    
    China
    
    100%China Unicom International Limited
    
    Hong Kong SAR
    
    100%China Unicom (Macau) Company Limited
    
    Macau SAR
    
    100%
 D. Properties
  59




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##### Table of Contents



Item 4A. Unresolved Staff Comments
  
 Item 5. Operating and Financial Review and Prospects
  3⁄4
 Overview
  
    
    GSM cellular service in 21 provinces, 5 autonomous regions and 4 municipalities;
    
    CDMA cellular service in 21 provinces, 5 autonomous regions and 4 municipalities of
China and in Macau;
    
    domestic and international long distance service and other related services
nationwide in China; and
    
    data and Internet and other related services nationwide in China.
 60




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For the year ended December 31,2004(1)
    
    2005
    
    2006RMB in
    
    % of Total
    
    RMB in
    
    % of Total
    
    RMB in
    
    % of Totalmillions
    
    Revenue
    
    millions
    
    Revenue
    
    millions
    
    RevenueTotal revenue
    
    
    79,087
    
    
    
    100.0
    %
    
    
    87,049
    
    
    
    100.0
    %
    
    
    94,294
    
    
    
    100.0
    %Total service revenue
    
    
    77,397
    
    
    
    97.9
    %
    
    
    84,287
    
    
    
    96.8
    %
    
    
    90,027
    
    
    
    95.5
    %GSM
    
    
    47,509
    
    
    
    60.1
    %
    
    
    52,135
    
    
    
    59.9
    %
    
    
    59,291
    
    
    
    62.9
    %CDMA
    
    
    24,378
    
    
    
    30.9
    %
    
    
    27,577
    
    
    
    31.7
    %
    
    
    27,293
    
    
    
    28.9
    %Long distance revenue
    
    
    1,848
    
    
    
    2.3
    %
    
    
    1,525
    
    
    
    1.7
    %
    
    
    1,068
    
    
    
    1.2
    %Data and Internet revenue
    
    
    3,662
    
    
    
    4.6
    %
    
    
    3,050
    
    
    
    3.5
    %
    
    
    2,375
    
    
    
    2.5
    %Sales of telecommunications products
    
    
    1,690
    
    
    
    2.1
    %
    
    
    2,762
    
    
    
    3.2
    %
    
    
    4,267
    
    
    
    4.5
    %
 
 (1)
    
    The adoption of HKFRS on January 1, 2005 resulted in changes in certain accounting
policies which have been reflected in the financial statements either in accordance with the
transitional provisions in the applicable accounting standards, or to the extent there are no
transitional provisions, applied retrospectively. Accordingly, the comparative financial data
prior to January 1, 2005 presented herein was restated, as
applicable, in 2005 to conform to the
changed accounting policies.  
    
    Usage fees for our GSM, CDMA, long distance and data and Internet services,
including, for our cellular subscribers, roaming-out fees for calls made by them
outside their local service areas. We recognize usage fee revenue when the service is
rendered.
    
    Monthly fees, of fixed amounts, charged to certain of our GSM, CDMA, data and
Internet subscribers for access to the relevant service. We recognize monthly fee
revenue in the month during which the services are rendered.
    
    Value-added service revenue from the provision of value-added services, such as
short message services, personalized ring-back tone services, CDMA 1X wireless data
services and certain receptionist services to subscribers.
    
    Interconnection revenue from other telecommunications operators, including Unicom
Group, for calls made from their networks to our networks and roaming-in fees for calls
made by cellular subscribers of other operators using our cellular networks. We
recognize interconnection revenue when the relevant calls are made by subscribers.
    
    Rental income from leases of transmission lines on our networks and indefeasible
rights of use (IRU) to Unicom Group, business customers and other telecommunications
carriers in China. We recognize leased line rental revenue on a straight-line basis
over the relevant lease term, except for the lease of specific and identified network
assets that transfer substantially all the risks and rewards incidental to ownership to
the lessee, which is recognized as capacity sales.
  61




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For the year ended December 31,2004
    
    2005
    
    2006RMB in
    
    % of Total
    
    RMB in
    
    % of Total
    
    RMB in
    
    % of Totalmillions
    
    Revenue
    
    millions
    
    Revenue
    
    millions
    
    RevenueTotal Revenue
    
    
    79,087
    
    
    
    100.0
    %
    
    
    87,049
    
    
    
    100.0
    %
    
    
    94,294
    
    
    
    100.0
    %Costs and expenses
    
    
    72,616
    
    
    
    91.8
    %
    
    
    79,947
    
    
    
    91.8
    %
    
    
    87,799
    
    
    
    93.1
    %Leased line and network capacities
    
    
    7,398
    
    
    
    9.4
    %
    
    
    8,748
    
    
    
    10.0
    %
    
    
    8,764
    
    
    
    9.3
    %Interconnection charges
    
    
    7,517
    
    
    
    9.5
    %
    
    
    8,372
    
    
    
    9.6
    %
    
    
    9,595
    
    
    
    10.2
    %Depreciation and amortization
    
    
    19,011
    
    
    
    24.0
    %
    
    
    20,368
    
    
    
    23.4
    %
    
    
    22,423
    
    
    
    23.8
    %Employee benefit expenses
    
    
    4,615
    
    
    
    5.8
    %
    
    
    5,616
    
    
    
    6.5
    %
    
    
    6,649
    
    
    
    7.1
    %Selling and marketing
    
    
    19,523
    
    
    
    24.7
    %
    
    
    20,558
    
    
    
    23.6
    %
    
    
    19,252
    
    
    
    20.4
    %General, administrative and other
expenses
    
    
    10,500
    
    
    
    13.3
    %
    
    
    11,742
    
    
    
    13.5
    %
    
    
    13,415
    
    
    
    14.2
    %Cost of telecommunications
products sold
    
    
    2,563
    
    
    
    3.2
    %
    
    
    3,575
    
    
    
    4.1
    %
    
    
    4,930
    
    
    
    5.2
    %Finance costs
    
    
    1,696
    
    
    
    2.1
    %
    
    
    1,099
    
    
    
    1.2
    %
    
    
    654
    
    
    
    0.7
    %Unrealized loss on changes in
fair value of derivative
component of the convertible
bonds
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    2,397
    
    
    
    2.5
    %Interest income
    
    
    -103
    
    
    
    -0.1
    %
    
    
    -96
    
    
    
    -0.1
    %
    
    
    -259
    
    
    
    -0.3
    %Other gains, net
    
    
    -104
    
    
    
    -0.1
    %
    
    
    -35
    
    
    
    -0.0
    %
    
    
    -21
    
    
    
    -0.0
    %Income before income tax
    
    
    6,471
    
    
    
    8.2
    %
    
    
    7,102
    
    
    
    8.2
    %
    
    
    6,495
    
    
    
    6.9
    %
  
    
    Depreciation and amortization expenses, mainly relating to our property, plant and
equipment and other assets;
    
    Selling and marketing expenses, including commissions, promotion and advertising
expenses, amortization of capitalized customer acquisition costs of certain CDMA
contractual subscribers and customer retention costs;
    
    General, administrative and other expenses, primarily including operating lease
expenses, repair and maintenance costs and provision for doubtful debts. Other
components of general, administrative and other expenses include utilities, general
office expenses and travel expenses;
    
    Leased line and network capacities charges, representing lease expenses for
transmission capacity from other operators and CDMA network capacities from Unicom
Group;
    
    Interconnection expenses, representing amounts paid to other operators, including
Unicom Group, for calls from our networks to their networks and roaming-out fees paid
to other
operators, including Unicom Group, for calls made by our subscribers roaming in
their networks;
    
    Employee benefit expenses, representing staff salaries and wages, bonuses and
medical benefits, contributions to defined contribution pension schemes and housing
benefits, share-based compensation costs amortized over the vesting period of share
options;
 62




---



##### Table of Contents




    
    Costs of telecommunications products sold; and
    
    Unrealized loss on changes in fair value of derivative component of the convertible
bonds.
  Acquisitions of Unicom New Century, Unicom New World and Unicom International and Sale of Guoxin
Paging
      63




---



##### Table of Contents



Critical Accounting Policies
  Capitalization of CDMA Customer Acquisition Costs
    64




---



##### Table of Contents



Recognition of Upfront Non-refundable Revenue and Direct Incremental Costs
   Lease of CDMA Network Capacity
  65




---



##### Table of Contents




    
    31% of the audited CDMA service revenue of the lessee for each of the
years 2007 and 2008; or
    
    30% of the audited CDMA service revenue of the lessee for the year 2007 or
2008, where the audited CDMA income before taxation of the lessee for the relevant year
is less than the audited CDMA income before taxation of the lessee for the year 2006 as
set out in the relevant annual audited financial statements of the lessee;
  66




---



##### Table of Contents



Convertible Bonds
    67




---



##### Table of Contents



Depreciation on Property, Plant and Equipment
  Impairment of Non-current Assets
   Provision for Doubtful Debts
   68




---



##### Table of Contents



Provision for Subscriber Point Reward Program
  Income Tax and Deferred Taxation
    Operating Results
 Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
  69




---



##### Table of Contents



3⁄4 3⁄4
 Revenue
  Cellular Revenue
  GSM Cellular Business.
  2004
    
    2005
    
    2006RMB in
    
    As percentage
    
    RMB in
    
    As percentage
    
    RMB in
    
    As percentagemillion
    
    of total
    
    million
    
    of total
    
    million
    
    of totalRevenue
    
    
    47,513
    
    
    
    100.0
    %
    
    
    52,139
    
    
    
    100.0
    %
    
    
    59,298
    
    
    
    100.0
    %Service Revenue
    
    
    47,509
    
    
    
    100.0
    %
    
    
    52,136
    
    
    
    100.0
    %
    
    
    59,290
    
    
    
    100.0
    %Usage Fee
    
    
    31,997
    
    
    
    67.3
    %
    
    
    32,077
    
    
    
    61.5
    %
    
    
    33,609
    
    
    
    56.7
    %Monthly Fee
    
    
    6,922
    
    
    
    14.6
    %
    
    
    6,841
    
    
    
    13.1
    %
    
    
    7,370
    
    
    
    12.4
    %Interconnection Revenue
    
    
    2,614
    
    
    
    5.5
    %
    
    
    3,466
    
    
    
    6.6
    %
    
    
    4,915
    
    
    
    8.3
    %Value-added Service Revenue
    
    
    4,819
    
    
    
    10.1
    %
    
    
    7,967
    
    
    
    15.3
    %
    
    
    11,543
    
    
    
    19.5
    %
 70




---



##### Table of Contents



2004
    
    2005
    
    2006RMB in
    
    As percentage
    
    RMB in
    
    As percentage
    
    RMB in
    
    As percentagemillion
    
    of total
    
    million
    
    of total
    
    million
    
    of totalOthers
    
    
    1,157
    
    
    
    2.5
    %
    
    
    1,785
    
    
    
    3.5
    %
    
    
    1,853
    
    
    
    3.1
    %Sales of Telecommunications Products
    
    
    4
    
    
    
    0.0
    %
    
    
    3
    
    
    
    0.0
    %
    
    
    8
    
    
    
    0.0
    %
   CDMA Cellular Business.
  2004
    
    2005
    
    2006RMB in
    
    As percentage
    
    RMB in
    
    As percentage
    
    RMB in
    
    As percentagemillion
    
    of total
    
    million
    
    of total
    
    million
    
    of totalRevenue
    
    
    26,046
    
    
    
    100.0
    %
    
    
    30,320
    
    
    
    100.0
    %
    
    
    31,550
    
    
    
    100.0
    %Service Revenue
    
    
    24,378
    
    
    
    93.6
    %
    
    
    27,577
    
    
    
    91.0
    %
    
    
    27,293
    
    
    
    86.5
    %Usage Fee
    
    
    16,165
    
    
    
    62.1
    %
    
    
    16,727
    
    
    
    55.2
    %
    
    
    14,696
    
    
    
    46.6
    %Monthly Fee
    
    
    4,638
    
    
    
    17.8
    %
    
    
    4,905
    
    
    
    16.2
    %
    
    
    5,025
    
    
    
    15.9
    %Interconnection Revenue
    
    
    927
    
    
    
    3.6
    %
    
    
    1,399
    
    
    
    4.6
    %
    
    
    1,732
    
    
    
    5.5
    %Value-added Service Revenue
    
    
    2,371
    
    
    
    9.1
    %
    
    
    4,116
    
    
    
    13.6
    %
    
    
    5,314
    
    
    
    16.8
    %Others
    
    
    277
    
    
    
    1.0
    %
    
    
    430
    
    
    
    1.4
    %
    
    
    526
    
    
    
    1.7
    %Sales of Telecommunications Products
    
    
    1,668
    
    
    
    6.4
    %
    
    
    2,743
    
    
    
    9.0
    %
    
    
    4,257
    
    
    
    13.5
    %
  71




---



##### Table of Contents



Long Distance and Data and Internet Revenue
 Long Distance Business
 Data and Internet Business
  Costs and expenses
  72




---



##### Table of Contents



For the year ended December 31,2004
    
    2005
    
    2006% of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofRMB in
    
    Total
    
    RMB in
    
    Total
    
    RMB in
    
    Totalmillion
    
    Revenue
    
    million
    
    Revenue
    
    million
    
    RevenueCosts and expenses
    
    
    72,616
    
    
    
    91.8
    %
    
    
    79,947
    
    
    
    91.8
    %
    
    
    87,799
    
    
    
    93.1
    %Leased lines and network capacities
    
    
    7,398
    
    
    
    9.4
    %
    
    
    8,748
    
    
    
    10.0
    %
    
    
    8,764
    
    
    
    9.3
    %Interconnection charges
    
    
    7,517
    
    
    
    9.5
    %
    
    
    8,372
    
    
    
    9.6
    %
    
    
    9,595
    
    
    
    10.2
    %Depreciation and amortization
    
    
    19,011
    
    
    
    24.0
    %
    
    
    20,368
    
    
    
    23.4
    %
    
    
    22,423
    
    
    
    23.8
    %Employee benefit expenses
    
    
    4,615
    
    
    
    5.8
    %
    
    
    5,616
    
    
    
    6.5
    %
    
    
    6,649
    
    
    
    7.1
    %Selling and marketing
    
    
    19,523
    
    
    
    24.7
    %
    
    
    20,558
    
    
    
    23.6
    %
    
    
    19,252
    
    
    
    20.4
    %General, administrative and other
expenses
    
    
    10,500
    
    
    
    13.3
    %
    
    
    11,742
    
    
    
    13.5
    %
    
    
    13,415
    
    
    
    14.2
    %Cost of telecommunications
products sold
    
    
    2,563
    
    
    
    3.2
    %
    
    
    3,575
    
    
    
    4.1
    %
    
    
    4,930
    
    
    
    5.2
    %Finance costs
    
    
    1,696
    
    
    
    2.1
    %
    
    
    1,099
    
    
    
    1.2
    %
    
    
    654
    
    
    
    0.7
    %Unrealized loss on changes in fair
value of derivative component of
the convertible bonds
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    2,397
    
    
    
    2.5
    %Interest income
    
    
    -103
    
    
    
    -0.1
    %
    
    
    -96
    
    
    
    -0.1
    %
    
    
    -259
    
    
    
    -0.3
    %Other gains, net
    
    
    -104
    
    
    
    -0.1
    %
    
    
    -35
    
    
    
    -0.0
    %
    
    
    -21
    
    
    
    -0.0
    %
 Leased Lines and Network Capacities
 Interconnection Charges
 Depreciation and Amortization
 Employee Benefit Expenses
 73




---



##### Table of Contents



Selling and Marketing
 General, Administrative and Other Expenses
 Cost of Telecommunications Products Sold
 Interest Income and Finance Costs
 Unrealized Loss on Changes in Fair Value of Derivative Component of Convertible Bonds.
 74




---



##### Table of Contents



Segment income before income tax
  GSM Cellular Business
 CDMA Cellular Business
 Long Distance Business
 Data and Internet Business
 Net Income
 Income Tax
  75




---



##### Table of Contents



Net Income
 Impact of Differences between HKFRS and US GAAP
  Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
    Revenue
  76




---



##### Table of Contents



Cellular Revenue
  GSM Cellular Business.
  2003
    
    2004
    
    2005RMB in
    
    As percentage
    
    RMB in
    
    As percentage
    
    RMB in
    
    As percentagemillion
    
    of total
    
    million
    
    of total
    
    million
    
    of totalRevenue
    
    
    41,201
    
    
    
    100.0
    %
    
    
    47,513
    
    
    
    100.0
    %
    
    
    52,139
    
    
    
    100.0
    %Service Revenue
    
    
    41,153
    
    
    
    99.9
    %
    
    
    47,509
    
    
    
    100.0
    %
    
    
    52,136
    
    
    
    100.0
    %Usage Fee
    
    
    29,072
    
    
    
    70.6
    %
    
    
    31,997
    
    
    
    67.3
    %
    
    
    32,077
    
    
    
    61.5
    %Monthly Fee
    
    
    7,042
    
    
    
    17.1
    %
    
    
    6,922
    
    
    
    14.6
    %
    
    
    6,841
    
    
    
    13.1
    %Interconnection Revenue
    
    
    1,927
    
    
    
    4.7
    %
    
    
    2,614
    
    
    
    5.5
    %
    
    
    3,466
    
    
    
    6.6
    %Value-added Service Revenue
    
    
    1,978
    
    
    
    4.8
    %
    
    
    4,819
    
    
    
    10.1
    %
    
    
    7,967
    
    
    
    15.3
    %Others
    
    
    1,134
    
    
    
    2.7
    %
    
    
    1,157
    
    
    
    2.5
    %
    
    
    1,785
    
    
    
    3.5
    %Sales of Telecommunications Products
    
    
    48
    
    
    
    0.1
    %
    
    
    4
    
    
    
    0.0
    %
    
    
    3
    
    
    
    0.0
    %
   77




---



##### Table of Contents



CDMA Cellular Business.
  2003
    
    2004
    
    2005RMB in
    
    As percentage
    
    RMB in
    
    As percentage
    
    RMB in
    
    As percentagemillion
    
    of total
    
    million
    
    of total
    
    million
    
    of totalRevenue
    
    
    18,063
    
    
    
    100.0
    %
    
    
    26,046
    
    
    
    100.0
    %
    
    
    30,320
    
    
    
    100.0
    %Service Revenue
    
    
    16,667
    
    
    
    92.3
    %
    
    
    24,378
    
    
    
    93.6
    %
    
    
    27,577
    
    
    
    91.0
    %Usage Fee
    
    
    11,672
    
    
    
    64.6
    %
    
    
    16,165
    
    
    
    62.1
    %
    
    
    16,727
    
    
    
    55.2
    %Monthly Fee
    
    
    3,488
    
    
    
    19.3
    %
    
    
    4,638
    
    
    
    17.8
    %
    
    
    4,905
    
    
    
    16.2
    %Interconnection Revenue
    
    
    608
    
    
    
    3.4
    %
    
    
    927
    
    
    
    3.6
    %
    
    
    1,399
    
    
    
    4.6
    %Value-added Service Revenue
    
    
    700
    
    
    
    3.9
    %
    
    
    2,371
    
    
    
    9.1
    %
    
    
    4,116
    
    
    
    13.6
    %Others
    
    
    199
    
    
    
    1.1
    %
    
    
    277
    
    
    
    1.0
    %
    
    
    430
    
    
    
    1.4
    %Sales of Telecommunications Products
    
    
    1,396
    
    
    
    7.7
    %
    
    
    1,668
    
    
    
    6.4
    %
    
    
    2,743
    
    
    
    9.0
    %
   Long Distance and Data and Internet Revenue
 Long Distance Business
 Data and Internet Business
 78




---



##### Table of Contents



Costs and expenses
    For the year ended December 31,2003
    
    2004
    
    2005% of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofRMB in
    
    Total
    
    RMB in
    
    Total
    
    RMB in
    
    Totalmillion
    
    Revenue
    
    million
    
    Revenue
    
    million
    
    RevenueCosts and expenses
    
    
    60,956
    
    
    
    90.8
    %
    
    
    72,616
    
    
    
    91.8
    %
    
    
    79,947
    
    
    
    91.8
    %Leased lines and network capacities
    
    
    4,320
    
    
    
    6.4
    %
    
    
    7,398
    
    
    
    9.4
    %
    
    
    8,748
    
    
    
    10.0
    %Interconnection charges
    
    
    5,921
    
    
    
    8.8
    %
    
    
    7,517
    
    
    
    9.5
    %
    
    
    8,372
    
    
    
    9.6
    %Depreciation and amortization
    
    
    16,359
    
    
    
    24.4
    %
    
    
    19,011
    
    
    
    24.0
    %
    
    
    20,368
    
    
    
    23.4
    %Employee benefit expenses
    
    
    4,596
    
    
    
    6.8
    %
    
    
    4,615
    
    
    
    5.8
    %
    
    
    5,616
    
    
    
    6.5
    %Selling and marketing
    
    
    15,264
    
    
    
    22.7
    %
    
    
    19,523
    
    
    
    24.7
    %
    
    
    20,558
    
    
    
    23.6
    %General, administrative and other expenses
    
    
    9,139
    
    
    
    13.7
    %
    
    
    10,500
    
    
    
    13.3
    %
    
    
    11,742
    
    
    
    13.5
    %Include: Impairment loss and assets
write-off of the Paging Business
    
    
    557
    
    
    
    0.8
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %Cost of telecommunications products sold
    
    
    2,939
    
    
    
    4.4
    %
    
    
    2,563
    
    
    
    3.2
    %
    
    
    3,575
    
    
    
    4.1
    %Loss on sale of discontinued operation
(Guoxin Paging)
    
    
    663
    
    
    
    1.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %Finance costs
    
    
    1,946
    
    
    
    2.9
    %
    
    
    1,696
    
    
    
    2.1
    %
    
    
    1,099
    
    
    
    1.2
    %Interest income
    
    
    -173
    
    
    
    -0.3
    %
    
    
    -103
    
    
    
    -0.1
    %
    
    
    -96
    
    
    
    -0.1
    %Other gains, net
    
    
    -18
    
    
    
    -0.0
    %
    
    
    -104
    
    
    
    -0.1
    %
    
    
    -35
    
    
    
    -0.0
    %
 Leased Lines and Network Capacities
 Interconnection Charges
 79




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Depreciation and Amortization
 Employee Benefit Expenses
 Selling and Marketing
 General, Administrative and Other Expenses
 Cost of Telecommunications Products Sold
 Interest Income and Finance Costs
 80




---



##### Table of Contents



Segment income (loss) before income tax
  GSM Cellular Business
 CDMA Cellular Business
 Long Distance Business
 Data and Internet Business
 Net Income
 Income Tax
 Net Income
 Impact of Differences between HKFRS and US GAAP
  81




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##### Table of Contents



Liquidity and Capital Resources
 Working Capital and Cash Flows
   For the year ended December 31,2004
    
    
    2005
    
    
    2006(RMB in millions)Net cash generated from operating activities
    
    
    23,819
    
    
    
    30,804
    
    
    
    35,451Net cash used in investing activities
    
    
    (18,958
    )
    
    
    (16,748
    )
    
    
    (17,337
    )Net cash inflows before financing activities
    
    
    4,861
    
    
    
    14,056
    
    
    
    18,114Net cash used in financing activities
    
    
    (9,401
    )
    
    
    (13,213
    )
    
    
    (11,403
    )Net (decrease)/increase in cash and cash equivalents
    
    
    (4,540
    )
    
    
    843
    
    
    
    6,711
    Indebtedness and Capital Structure
  82




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##### Table of Contents



As of December 31,2004
    
    2005
    
    2006(RMB in millions, except percentages)Cash and cash equivalent and short-term bank deposits
    
    
    5,317
    
    
    
    5,754
    
    
    
    12,378Total assets
    
    
    149,038
    
    
    
    142,630
    
    
    
    146,438Short-term debt
    
    
    20,953
    
    
    
    22,456
    
    
    
    11,171Long-term debt
    
    
    26,626
    
    
    
    12,127
    
    
    
    14,475Shareholders equity
    
    
    72,442
    
    
    
    76,287
    
    
    
    79,412Debt-to-assets ratio(1)
    
    
    39.6
    %
    
    
    31.2
    %
    
    
    24.4
    %Debt-to-equity ratio(2)
    
    
    65.7
    %
    
    
    45.3
    %
    
    
    32.3
    %
 
 (1)
    
    Debt-to-assets ratio = (long-term interest bearing debt + short-term interest bearing
debt)/(long-term interest bearing debt + short-term interest bearing debt + shareholders
equity).(2)
    
    Debt-to-equity ratio = (long-term interest bearing debt + short-term interest bearing
debt)/shareholders equity.      83




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##### Table of Contents



Contractual Obligations and Commercial Commitments
  Payments Due by Period (RMB in millions)Due in
    
    Due in
    
    Due in
    
    Due in
    
    Due in
    
    Due afterContractual Obligations
    
    Total
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    2011Long-term bank loans(1)
    
    
    8,124
    
    
    
    3,984
    
    
    
    2,378
    
    
    
    
    
    
    
    1,762
    
    
    
    
    
    
    
    Convertible bonds
    
    
    8,137
    
    
    
    
    
    
    
    
    
    
    
    8,137
    
    
    
    
    
    
    
    
    
    
    
    Finance lease obligations(2)
    
    
    115
    
    
    
    105
    
    
    
    8
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    Interest payment obligations on bank loans
    
    
    628
    
    
    
    270
    
    
    
    198
    
    
    
    94
    
    
    
    66
    
    
    
    
    
    
    
    Capital commitments(3)
    
    
    3,642
    
    
    
    3,642
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 84




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##### Table of Contents



Payments Due by Period (RMB in millions)Due in
    
    Due in
    
    Due in
    
    Due in
    
    Due in
    
    Due afterContractual Obligations
    
    Total
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    2011Operating leases(3)CDMA network capacity leasing
arrangement(4)
    
    
    7,271
    
    
    
    7,271
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Others
    
    
    4,141
    
    
    
    1,066
    
    
    
    679
    
    
    
    534
    
    
    
    416
    
    
    
    338
    
    
    
    1,108Other commitments(3) (5)
    
    
    1,237
    
    
    
    1,237
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total obligations
    
    
    33,295
    
    
    
    17,575
    
    
    
    3,263
    
    
    
    8,765
    
    
    
    2,245
    
    
    
    339
    
    
    
    1,108
 
 (1)
    
    See Note 16 Long-term Bank Loans to our consolidated financial statements.(2)
    
    See Note 18 Obligations Under Finance Leases to our consolidated financial statements.(3)
    
    See Note 34 Contingencies and Commitments to our consolidated financial statements.(4)
    
    We entered into the CDMA network capacity leasing arrangement with Unicom Group and its
subsidiary Unicom New Horizon by our wholly-owned subsidiaries, CUCL (including Unicom New
Century, which was merged into CUCL on July 20, 2004, and Unicom New World, which was merged
into CUCL on September 1, 2005) in our cellular service areas. See Note 34.2 Contingencies
and Commitments  Operating Lease Commitments to our consolidated financial statements for
details.(5)
    
    Other commitments represented our commitment to purchase CDMA handsets from vendors. See
Note 34.3 Contingencies and Commitments  Commitment to purchase CDMA Handsets to our
consolidated financial statements for details. Off-balance Sheet Arrangements
   Capital Expenditures
  For the years ended December 31,2005
    
    2006
    
    2007(RMB in billions)Cellular
    
    
    7.33
    
    
    
    10.58
    
    
    
    13.60Long distance, data and Internet
    
    
    1.18
    
    
    
    1.44
    
    
    
    1.00Transmission network(1)
    
    
    2.95
    
    
    
    3.70
    
    
    
    3.90Others(2)
    
    
    6.15
    
    
    
    5.83
    
    
    
    7.50Total
    
    
    17.61
    
    
    
    21.55
    
    
    
    26.00
 
 (1)
    
    Expenditures on transmission network refer to investment in the inter-province and
intra-province backbone transmission network, the local network and the access network. 85




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##### Table of Contents



(2)
    
    Other expenditures represent investment in billing, customer service and information systems,
office buildings, construction of integrated access network and miscellaneous items.    US GAAP Reconciliation
  
 Item 6. Directors, Senior Management and Employees
 A. Directors and Senior Management
  Name
    
    Age
    
    PositionChang Xiaobing
    
    
    50
    
    
    Chairman of the Board of Directors;
Executive Director; Chief Executive OfficerShang Bing
    
    
    51
    
    
    Executive Director; PresidentTong Jilu
    
    
    49
    
    
    Executive Director; Chief Financial OfficerLi Jianguo
    
    
    53
    
    
    Executive DirectorYang Xiaowei
    
    
    43
    
    
    Executive Director; Vice President
 86




---



##### Table of Contents



Name
    
    Age
    
    PositionLi Zhengmao
    
    
    45
    
    
    Executive Director; Vice PresidentLi Gang
    
    
    49
    
    
    Executive Director; Vice PresidentZhang Junan
    
    
    50
    
    
    Executive Director; Vice PresidentLu Jianguo
    
    
    61
    
    
    Non-Executive DirectorWu Jinglian
    
    
    77
    
    
    Independent Non-Executive DirectorShan Weijian
    
    
    53
    
    
    Independent Non-Executive DirectorLinus Cheung Wing Lam
    
    
    59
    
    
    Independent Non-Executive DirectorWong Wai Ming
    
    
    49
    
    
    Independent Non-Executive Director
    87




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88




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##### Table of Contents



89




---



##### Table of Contents



B. Compensation
  C. Board Practices
 General
  Name
    
    Appointment Date
    
    Re-appointment Date
    
    Resignation DateCurrent DirectorsChang Xiaobing
    
    December 21, 2004
    
    May 12, 2006
    
    Shang Bing
    
    November 5, 2004

    
    May 12, 2005 andMay 11, 2007
    
    Tong Jilu
    
    February 1, 2004

    
    May 12, 2004 andMay 12, 2006
    
    Li Jianguo
    
    April 1, 2006

    
    May 12, 2006 andMay 11, 2007
    
    Yang Xiaowei
    
    April 1, 2006
    
    May 12, 2006 andMay 11, 2007
    
    
 90




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##### Table of Contents



Name
    
    Appointment Date
    
    Re-appointment Date
    
    Resignation DateLi Zhengmao
    
    April 1, 2006
    
    May 12, 2006
    
    Li Gang
    
    April 1, 2006
    
    May 12, 2006
    
    Zhang Junan
    
    April 1, 2006
    
    May 12, 2006
    
    Lu Jianguo
    
    April 1, 2006
    
    May 12, 2006
    
    Wu Jinglian
    
    April 20, 2000
    
    May 13, 2002,
    
    May 12, 2004,May 12, 2005 andMay 11, 2007Shan Weijian
    
    May 12, 2003
    
    May 12, 2005 andMay 11, 2007
    
    Linus Cheung Wing Lam
    
    May 12, 2004
    
    May 12, 2006
    
    Wong Wai Ming
    
    January 19, 2006
    
    May 12, 2006
    
    Former DirectorsLi Qiuhong
    
    July 19, 2005
    
    
    
    April 1, 2006William Lo Wing Yan
    
    
    
    
    
    April 1, 2006Ye Fengping
    
    
    
    
    
    April 1, 2006Liu Yunjie
    
    
    
    
    
    April 1, 2006
 Audit Committee
  
    
    considering and approving the appointment, resignation and removal of our external
auditor and the auditors fees;
    
    reviewing our interim and annual financial statements and disclosures before
submission to the board of directors;
    
    discussing with the auditor any problems and reservations arising from the audit of
the interim and final results;
    
    reviewing any correspondence from the auditor to the management and the responses of
the management;
    
    reviewing the relevant reports concerning our internal controls and procedures;
    
    pre-approving the audit and non-audit services to be provided by the external
auditor, and determining whether any non-audit services would affect the independence
of the auditor;
    
    discussing with the management the timing and procedures for the rotation of the
partner of the auditing firm responsible for the audit of our company and the partner
responsible for the review of audit related documents;
    
    supervising the internal audit department, which will directly report to the
committee; and
 91




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##### Table of Contents




    
    having the right to approve the appointment or removal of the head of internal audit
department.
  Remuneration Committee
  D. Employees
  Number ofBy Function
    
    EmployeesManagement and administration
    
    
    8,410Other general administration
    
    
    7,866Marketing and sales
    
    
    18,996Technical, engineering and
network maintenance
    
    
    13,847Retail and customer service
    
    
    3,882General support
    
    
    386Total
    
    
    53,387
 Number ofBy Business Segment
    
    EmployeesCellular
    
    
    46,205GSM
    
    
    30,055CDMA
    
    
    16,150Long distance
    
    
    2,336Data and Internet
    
    
    4,846Total
    
    
    53,387
  E. Share Ownership
   Options granted under the share option scheme
 CompensationCapacity and
    
    Number of
    
    
    
    
    
    
    Exercise

    
    Consideration

    
    for 2006Name
    
    Nature
    
    Shares Covered
    
    
    Expiration Date

    
    Price

    
    Paid

    
    (RMB)Chang Xiaobing
    
    Beneficial Owner
    
    
    526,000
    
    
    December 20, 2010
    
    HK$6.20
    
    HK$1.00
    
    
    4,571,000(Personal)
    
    
    800,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00
 92




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##### Table of Contents



CompensationCapacity and
    
    Number of
    
    
    
    
    
    
    Exercise

    
    Consideration

    
    for 2006Name
    
    Nature
    
    Shares Covered
    
    
    Expiration Date

    
    Price

    
    Paid

    
    (RMB)Shang Bing
    
    Beneficial Owner
    
    
    292,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00
    
    
    4,771,000(Personal)
    
    
    128,000
    
    
    December 20, 2010
    
    HK$6.20
    
    HK$1.00700,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00Tong Jilu
    
    Beneficial Owner
    
    
    292,000
    
    
    June 22, 2010
    
    HK$15.42
    
    HK$1.00
    
    
    4,020,000(Personal)
    
    
    292,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00500,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00Beneficial  Owner
    
    
    32,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00(Spouse)
    
    
    40,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00Li Jianguo(1)
    
    Beneficial Owner
    
    
    176,000
    
    
    July 9, 2008
    
    HK$6.18
    
    HK$1.00
    
    
    2,756,000(Personal)
    
    
    80,000
    
    
    May 20, 2009
    
    HK$4.30
    
    HK$1.00292,000
    
    
    June 22, 2010
    
    HK$15.42
    
    HK$1.00292,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00500,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00Yang Xiaowei(2)
    
    Beneficial Owner
    
    
    122,000
    
    
    July 9, 2008
    
    HK$6.18
    
    HK$1.00
    
    
    2,686,000(Personal)
    
    
    292,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00500,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00Li Zhengmao(3)
    
    Beneficial Owner
    
    
    176,000
    
    
    July 9, 2008
    
    HK$6.18
    
    HK$1.00
    
    
    2,257,000(Personal)
    
    
    292,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00500,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00Li Gang(4)
    
    Beneficial Owner(Personal)
    
    
    500,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00
    
    
    1,791,000Zhang Junan(5)
    
    Beneficial Owner(Personal)
    
    
    500,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00
    
    
    1,791,000Lu Jianguo(6)
    
    Beneficial Owner
    
    
    292,000
    
    
    July 9, 2008
    
    HK$6.18
    
    HK$1.00
    
    
    1,525,000(Personal)
    
    
    292,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00500,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00Wu Jinglian
    
    Beneficial Owner
    
    
    292,000
    
    
    July 9, 2008
    
    HK$6.18
    
    HK$1.00
    
    
    420,000(Personal)
    
    
    292,000
    
    
    May 20, 2009
    
    HK$4.30
    
    HK$1.00292,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00Shan Weijian
    
    Beneficial Owner
    
    
    292,000
    
    
    May 20, 2009
    
    HK$4.30
    
    HK$1.00
    
    
    379,000(Personal)
    
    
    292,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00Cheung Wing Lam, Linus
    
    Beneficial Owner(Personal)
    
    
    204,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00
    
    
    400,000Wong Wai Ming(7)
    
    Beneficial Owner(Personal)
    
    

3⁄4
    
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    

    
    3⁄4
    
    
    390,000Li Qiuhong(8)(12)
    
    Beneficial Owner
    
    
    204,000
    
    
    July 9, 2008
    
    HK$6.18
    
    HK$1.00
    
    
    584,000(Personal)
    
    
    204,000
    
    
    May 20, 2009
    
    HK$4.30
    
    HK$1.00204,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00280,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00Lo Wing Yan,
    
    Beneficial Owner
    
    
    88,000
    
    
    May 20, 2009
    
    HK$4.30
    
    HK$1.00
    
    
    611,000William(9)(12)
    
    (Personal)
    
    
    262,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00280,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00Ye Fengping(10)(12)
    
    Beneficial Owner
    
    
    132,000
    
    
    July 9, 2008
    
    HK$6.18
    
    HK$1.00
    
    
    349,000(Personal)
    
    
    204,000
    
    
    May 20, 2009
    
    HK$4.30
    
    HK$1.00136,000
    
    
    June 22, 2010
    
    HK$15.42
    
    HK$1.00262,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00280,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00Liu Yunjie(11)(12)
    
    Beneficial Owner
    
    
    292,000
    
    
    May 20, 2009
    
    HK$4.30
    
    HK$1.00
    
    
    81,000(Personal)
    
    
    292,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00
 
 (1)
    
    Ms. Li was appointed as Executive Director of our company on April 1, 2006.(2)
    
    Mr. Yang was appointed as Executive Director and Vice President of our company on April 1, 2006.(3)
    
    Mr. Li was appointed as Executive Director and Vice President of our company on April 1, 2006.(4)
    
    Mr. Li was appointed as Executive Director and Vice President of our company on April 1, 2006.(5)
    
    Mr. Zhang was appointed as Executive Director and Vice President of our company on April 1, 2006.(6)
    
    Mr. Lu was appointed as Non-Executive Director of our company on April 1, 2006.(7)
    
    Mr. Wong was appointed as Independent Non-Executive Director of our company on January 19, 2006.(8)
    
    Mr. Li was appointed as Executive Director and Vice President of our company on July 19, 2005
and resigned as Executive Director of our company on April 1, 2006.(9)
    
    Mr. Lo resigned as Executive Director and Vice President of our company on April 1, 2006. 93




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##### Table of Contents



(10)
    
    Mr. Ye resigned as Executive Director and Vice President of our company on April 1, 2006.(11)
    
    Mr. Liu resigned as Non-Executive Director of our company on April 1, 2006.(12)
    
    For the directors who resigned during the year 2006, the numbers of options indicated
represent the numbers of options held by those respective directors as of their dates of
resignation. Options granted under the pre-global offering share option scheme
 Capacity and
    
    
    Number of Shares
    
    
    
    
    
    
    
    
    
    
    ConsiderationName
    
    Nature
    
    
    Covered
    
    
    Expiration Date
    
    
    Exercise Price
    
    
    PaidShang Bing
    
    Beneficial Owner(Personal)
    
    
    204,400
    
    
    June 21, 2010
    
    HK$15.42
    
    HK$1.00Li Zhengmao(1)
    
    Beneficial Owner(Personal)
    
    
    292,600
    
    
    June 21, 2010
    
    HK$15.42
    
    HK$1.00Lu Jianguo(2)
    
    Beneficial Owner(Personal)
    
    
    292,600
    
    
    June 21, 2010
    
    HK$15.42
    
    HK$1.00Li Qiuhong(3)
    
    Beneficial Owner(Personal)
    
    
    204,400
    
    
    June 21, 2010
    
    HK$15.42
    
    HK$1.00Liu Yunjie(4)
    
    Beneficial Owner(Personal)
    
    
    292,600
    
    
    June 21, 2010
    
    HK$15.42
    
    HK$1.00
 
 (1)
    
    Mr. Li was appointed as Executive Director and Vice President of our company on April 1,
2006.(2)
    
    Mr. Lu was appointed as Non-Executive Director of our company on April 1, 2006.(3)
    
    Mr. Li was appointed as Executive Director and Vice President of our company on July 19, 2005
and resigned as Executive Director on April 1, 2006.(4)
    
    Mr. Liu resigned as Non-Executive Director of our company on April 1, 2006. Stock Incentive Schemes
  Share Option Scheme.
 94




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##### Table of Contents



Pre-Global Offering Share Option Scheme.
 
    
    The subscription price of a share in respect of any particular option
granted under the pre-global offering share option scheme is HK$15.42, the offer price
in the Hong Kong public offering portion of our initial public offering, excluding
brokerage fees and transaction levy.
    
    The period during which an option may be exercised commences two years from the date
of grant and ends 10 years from June 22, 2000.
  
 Item 7. Major Shareholders and Related Party Transactions
 A. Major Shareholders
   B. Related Party Transactions
  
    
    leasing of CDMA network capacity by us from Unicom Group and related interconnection
and roaming arrangements;
    
    provision of ongoing telecommunications and ancillary services and premises;
    
    agreements relating to the acquisition of Unicom International from Unicom Group;
    
    agreements relating to the acquisition of Unicom New World from Unicom Group and the
sale of Guoxin Paging to Unicom Group;
    
    agreements relating to the restructuring in connection with the acquisition of
Unicom New Century from Unicom Group; and
    
    agreements relating to the restructuring in connection with our initial public
offering.
 95




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##### Table of Contents



Leasing of CDMA Network Capacity
 Old CDMA Leases
   
    
    construction, installation and equipment procurement costs and expenses,
    
    survey and design costs,
    
    investment in technology, software and other intangible assets,
    
    insurance premiums and capitalized interest on loans,
    
    any taxes levied or paid in respect of the procurement of equipment and
the construction of the CDMA network, including import taxes and custom duties, and
    
    all costs incurred in relation to any upgrade of technology.
    96




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2005 CDMA Lease
   
    
    in 2005, 29% of the audited annual service revenue generated by our CDMA business;
and
    
    in 2006, 30% of the audited annual service revenue generated by our CDMA business;
 97




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##### Table of Contents



Discount for delay
    
    =
    
    Number of our CDMA
    
    x
    
    delay period
    
    x
    
    ARPU of CDMAsubscribers affected by
    
    
    
    (number of days)
    
    
    
    subscribersthe delay
    
    
    
    
    
    
    
    the number of days inthe relevant month
    2006 CDMA Lease
   
    
    31% of the audited service revenue generated by our CDMA business for each
of the years 2007 and 2008; or
 98




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##### Table of Contents




    
    30% of the audited service revenue generated by our CDMA business for the
year 2007 or 2008, where our audited CDMA income before taxation for the relevant year
is less than our audited CDMA income before taxation for the year 2006;
   Discount for delay
    
    =
    
    Number of our CDMA
    
    x
    
    delay period
    
    x
    
    ARPU of CDMAsubscribers affected by
    
    
    
    (number of days)
    
    
    
    subscribersthe delay
    
    
    
    
    
    
    
    the number of days inthe relevant month
    Provision of Ongoing Telecommunications and Ancillary Services and Premises
   99




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##### Table of Contents



Supply of International Telecommunications Network Gateway Services
   Supply of Telephone Cards
   Supply of Equipment Procurement Services
  100




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
    
    0.7% of the contract value in the case of imported equipment, or
    
    0.5% of the contract value in the case of domestic equipment.
  
    
    0.55% of the contract value of those contracts under US$30 million (including US$30
million) and 0.35% of the contract value of those procurement contracts over US$30
million, in the case of imported equipment, or
    
    0.25% of the contract value of those contracts under RMB200 million (including RMB
200 million) and 0.15% of the contract value of those contracts over RMB 200 million,
in the case of domestic equipment.
   Interconnection Arrangements
    
    
    the cellular network from which the outgoing calls originate and the cellular
network which receives the incoming calls will each retain 4% of the long distance call
fee incurred and the remaining 92% of the long distance call fee will be credited to
us; or
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
    
    pursuant to the settlement standard stipulated in the Notice Concerning the Issue of
the Measures on Settlement of Interconnection between Public Telecommunications
Networks and Sharing of Relaying Fees (Xin Bu Dian [2003]No. 454) promulgated by the
MII on October 28, 2003, the cellular network from which the outgoing calls originate
and the cellular network which receives the incoming calls will each retain RMB0.06
from the long distance call fee. The remaining long distance call fee will be credited
to us.
  Roaming Arrangements
   
    
    The cellular subscribers using roaming services will pay roaming fees at the agreed
rate of RMB0.60 per minute of roaming usage for both incoming and outgoing calls based
on MII guidelines.
 §
    
    If our cellular subscribers roam in the service areas of Unicom
Group, we will be entitled to receive the roaming fees, which will be
apportioned in the following way: (i) RMB0.40 per minute (the rate for local
call charges under MII guidelines) will be paid to Unicom Group; and (ii) the
remaining RMB0.20 per minute will be withheld by us; and§
    
    If the cellular subscribers of Unicom Group roam in our service
areas, Unicom Group will be entitled to receive the roaming fees, which will be
apportioned in the following way: (i) RMB0.56 per minute will be paid to us;
and (ii) RMB0.04 per minute will be withheld by Unicom Group; and§
    
    If our cellular business expands to cover all regions
throughout the PRC, the arrangements set out above will be terminated
automatically; and
 
    
    If the network of a third party cellular network operator is made available to the
cellular subscribers of Unicom Group pursuant to the international roaming arrangements
of Unicom Group, or if the network of Unicom Group is made available to the subscribers
of
 102




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any third party cellular network operator pursuant to such arrangements, we will
receive 50% of all roaming revenue to be received under such international roaming
arrangements.
 Leasing of Transmission Line Capacity
   Supply of Operator-based Value-added Services to Cellular Subscriber
   Supply of Value-added Services for Cellular Subscribers
  103




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Supply of Customer Services
   Supply of Agency Services
   Mutual Provision of Premises
  104




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Engineering design and technical services
  Procurement of CDMA Handsets
  Agreements relating to the Acquisition of Unicom International from Unicom Group
  
    
    China Unicom (Hong Kong) Group Limiteds agreement to transfer all of its equity
interest in Unicom International to us;
    
    our agreement to pay China Unicom (Hong Kong) Group Limited a cash consideration in
the amount of HK$37,159,995.77; and
    
    warranties given by China Unicom (Hong Kong) Group Limited to us in relation to
Unicom International.
 105




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##### Table of Contents



Agreements relating to the Acquisition of Unicom New World from Unicom Group and the Sale of Guoxin
Paging to Unicom Group
 The Reorganization Agreement
  
    
    Unicom Groups agreement to transfer to Unicom New World the assets and liabilities
attributable to the businesses as described under A. History and Development of the
Company - Acquisitions of Unicom New Century and Unicom New World and the Sale of
Guoxin Paging under Item 4;
    
    mutual warranties and indemnities given by Unicom Group and Unicom New World in
relation to the assets and liabilities transferred to Unicom New World and in relation
to the restructuring; and
    
    undertakings by Unicom Group in favor of Unicom New World, including undertakings:
 §
    
    to hold and maintain all licenses received from the MII in
connection with any of the transferred businesses for the benefit of Unicom New
World, and to allocate spectrum and to provide other resources to Unicom New
World;§
    
    subject to applicable Chinese laws and regulations in effect at
the relevant time, to take all actions necessary to obtain, maintain, renew and
otherwise extend to or for the benefit of Unicom New World such governmental or
regulatory licenses, consents, permits or other approvals as Unicom New World
may require to continue to operate its businesses; and§
    
    not to engage in any business which competes with our
businesses except for the existing competing businesses of Unicom Group.
 Conditional Sale and Purchase Agreement with respect to Unicom New World
  
    
    Unicom BVIs agreement to transfer all of its equity interest in Unicom New World
(BVI) Limited, which holds 100% of the equity interest in Unicom New World, to us;
    
    our agreement to pay Unicom BVI a cash consideration in the amount of
HK$3,014,886,000 (approximately RMB3.2 billion); and
    
    warranties given by Unicom BVI to us in relation to Unicom New World.
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Conditional Sale and Purchase Agreement with respect to Guoxin Paging
  
    
    CUCLs agreement to sell to the A Share Company, and the A Share Companys agreement
to acquire from CUCL, all of CUCLs equity interest in Guoxin Paging;
    
    the A Share Companys agreement to pay CUCL a cash consideration in the amount of
HK$2,590,917,656 (approximately RMB2.75 billion); and
    
    warranties given by CUCL to the A Share Company in relation to Guoxin Paging.
 Agreements relating to the Restructuring in connection with Acquisition of Unicom New Century from
Unicom Group
 The Reorganization Agreement
  
    
    Unicom Groups agreement to transfer to Unicom New Century the assets and
liabilities attributable to the businesses as described in A. History and Development
of the Company - Acquisitions of Unicom New Century and Unicom New World and the
Sale of Guoxin Paging under Item 4;
    
    mutual warranties and indemnities given by Unicom Group and Unicom New Century in
relation to the assets and liabilities transferred to Unicom New Century and in
relation to the restructuring; and
    
    undertakings by Unicom Group in favor of Unicom New Century, including undertakings:
 §
    
    to hold and maintain all licenses received from the MII in
connection with any of the transferred businesses for the benefit of Unicom New
Century, and to allocate spectrum and to provide other resources to Unicom New
Century;§
    
    subject to applicable Chinese laws and regulations in effect at
the relevant time, to take all actions necessary to obtain, maintain, renew and
otherwise extend to or for the benefit of Unicom New Century such governmental
or regulatory licenses, consents, permits or other approvals as Unicom New
Century may require to continue to operate its businesses; and§
    
    not to engage in any business which competes with our
businesses except for the existing competing businesses of Unicom Group.
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##### Table of Contents



Conditional Sale and Purchase Agreement
  
    
    Unicom BVIs agreement to transfer all of its equity interest in Unicom New Century
(BVI) Limited, which holds 100% of the equity interest in Unicom New Century, to us;
    
    our agreement to pay Unicom BVI a cash consideration in the amount of
HK$4,523,181,304 (approximately RMB4.8 billion); and
    
    warranties given by Unicom BVI to us in relation to Unicom New Century.
 Agreements Relating to the Restructuring in Connection with Our Initial Public Offering
 The Reorganization Agreement
  
    
    Unicom Groups agreement to transfer to CUCL the assets and liabilities attributable
to the businesses as described in A. History and Development of the Company - The
Restructuring of Unicom Group and Our Initial Public Offering in 2000 under Item 4,
    
    mutual warranties and indemnities given by Unicom Group and CUCL in relation to the
assets and liabilities transferred to CUCL and in relation to the restructuring,
    
    undertakings by Unicom Group in favor of CUCL, including, among others:
 §
    
    to hold and maintain all licenses received from the MII in
connection with any of our businesses for our benefit, and to allocate spectrum
and to provide other resources to us;§
    
    subject to applicable Chinese laws and regulations in effect at
the relevant time, to take all actions necessary to obtain, maintain, renew and
otherwise extend to or for our benefit such governmental or regulatory
licenses, consents, permits or other approvals as we shall require to continue
to operate our businesses;§
    
    to arrange for us to participate in its international roaming
arrangements;§
    
    not to engage in any business which competes with our
businesses except for the existing competing businesses of Unicom Group;§
    
    to grant us a right of first refusal in relation to any
government authorization, license or permit, or other business opportunity to
develop any new telecommunications technology, product or service;
 108




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##### Table of Contents



§
    
    to ensure that we can continue to use premises for which title
documentation cannot be obtained at this time for a period of three years
following the restructuring;§
    
    not to dispose of any of our shares it beneficially owns or to
take or permit any other actions, including primary issuances of securities by
us or CUCL, which would result in us or CUCL no longer constituting majority
owned subsidiaries of Unicom Group; and§
    
    not to seek an overseas listing for any of its businesses or
the businesses of its subsidiaries in which we are engaged or may engage in the
future except through us;
 
    
    an option granted by Unicom Group to us to acquire Unicom Groups interest in any
telecommunications interest such as Unicom Paging, Unicom Xingye and Unicom Groups
CDMA telephony license and business; and
    
    a commitment by Unicom Group that it will provide continuous financial support to us
when necessary.
  Equity Transfer Agreement
  
    
    Unicom Groups agreement to transfer all of its equity interest in CUCL to us;
    
    our agreement to issue shares to China Unicom (BVI) Limited, China Unicom (BVI)
Limiteds agreement to issue shares to China Unicom (Hong Kong) Group Limited and China
Unicom (Hong Kong) Group Limiteds agreement to issue shares to Unicom Group;
    
    Unicom Groups and our agreement that:
 §
    
    we shall be entitled to apply in Hong Kong, Macau, Taiwan and
in all places outside of China for all trademarks incorporating the word Unicom
in English and Chinese and for the Unicom logo; and§
    
    once these trademarks have been registered, we will sublicense
these trademarks to Unicom Group, CUCL, Guoxin Paging and Guoxin Pagings
subsidiaries on a royalty-free basis; and
 
    
    warranties and indemnities given by Unicom Group to us in relation to
CUCL.
 109




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Trademark Agreement
   C. Interests of Experts and Counsel
  
 Item 8. Financial Information
  Legal Proceedings
  Policy on Dividend Distribution
   
 Item 9. The Offer and Listing
 Market Price Information
  110




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Price per Ordinary Share (HK$)
    
    Price per ADS (US$)High
    
    Low
    
    High
    
    LowAnnual:2002
    
    
    8.90
    
    
    
    4.15
    
    
    
    11.54
    
    
    
    5.352003
    
    
    8.00
    
    
    
    3.92
    
    
    
    10.55
    
    
    
    5.022004
    
    
    10.20
    
    
    
    5.20
    
    
    
    13.18
    
    
    
    6.782005
    
    
    7.20
    
    
    
    5.65
    
    
    
    9.19
    
    
    
    7.302006
    
    
    12.44
    
    
    
    6.25
    
    
    
    15.46
    
    
    
    8.03Quarterly:First Quarter, 2005
    
    
    7.20
    
    
    
    5.65
    
    
    
    9.19
    
    
    
    7.30Second Quarter, 2005
    
    
    6.65
    
    
    
    5.90
    
    
    
    8.42
    
    
    
    7.61Third Quarter, 2005
    
    
    6.95
    
    
    
    6.15
    
    
    
    9.08
    
    
    
    7.83Fourth Quarter, 2005
    
    
    6.65
    
    
    
    5.90
    
    
    
    8.55
    
    
    
    7.54First Quarter, 2006
    
    
    7.00
    
    
    
    6.25
    
    
    
    9.12
    
    
    
    8.03Second Quarter, 2006
    
    
    7.80
    
    
    
    6.40
    
    
    
    10.33
    
    
    
    8.10Third Quarter, 2006
    
    
    7.80
    
    
    
    6.60
    
    
    
    9.91
    
    
    
    8.53Fourth Quarter, 2006
    
    
    12.44
    
    
    
    7.76
    
    
    
    15.46
    
    
    
    9.84Monthly:January 2007
    
    
    11.78
    
    
    
    9.51
    
    
    
    15.09
    
    
    
    12.80February 2007
    
    
    10.78
    
    
    
    9.90
    
    
    
    13.82
    
    
    
    12.22March 2007
    
    
    11.32
    
    
    
    9.10
    
    
    
    14.34
    
    
    
    11.75April 2007
    
    
    11.86
    
    
    
    11.18
    
    
    
    15.24
    
    
    
    14.42May 2007
    
    
    12.00
    
    
    
    11.12
    
    
    
    15.50
    
    
    
    14.41June 2007 (through June 27)
    
    
    13.48
    
    
    
    11.06
    
    
    
    17.33
    
    
    
    14.39
 
 Item 10. Additional Information
 A. Share Capital
  B. Memorandum and Articles of Association
 General
  Directors
 Material Interests and Voting
  111




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not
 
    
    the giving of any security or indemnity either (i) to the director or any of his
associates (as defined in the Hong Kong Stock Exchange Listing Rules) in respect of
money lent or obligations incurred by him or any of them at the request of or for the
benefit of Unicom or any of its subsidiaries or (ii) to a third party in respect of a
debt or obligation of Unicom or any of its subsidiaries for which the director or any
of his associates has himself assumed responsibility or guaranteed or secured in whole
or in part;
    
    an offer of shares or debentures or other securities of or by Unicom (or any other
company which Unicom may promote or be interested in) where the director or any of his
associates is a participant in the underwriting or sub-underwriting of the offer;
    
    any other company in which the director or any of his associates is interested only,
whether directly or indirectly, as an officer or shareholder or in which the director
is beneficially interested in shares of that company, provided that he, together with
any of his associates, is not beneficially interested in 5% or more of (i) the issued
shares of any class of such company (or of any third company through which such
interest is derived) or (ii) the voting rights attached to such issued shares or
securities (excluding for the purpose of calculating such 5% interest, any indirect
interest of such director or any of his associates by virtue of an interest of Unicom
in such company);
    
    the benefit of employees of Unicom or any of its subsidiaries including (i) the
adoption, modification or operation of any employees share scheme under which the
director or any of his associates may benefit or (ii) the adoption, modification or
operation of a pension fund or retirement, death or disability benefits scheme which
relates both to directors, their associates and employees of Unicom or any of its
subsidiaries and does not provide in respect of the director or any of his associates,
any privilege or advantage not generally accorded to the class of persons to which such
scheme or fund relates; or
    
    any contract or arrangement in which the director or any of his associates is
interested in the same manner as other holders of shares or debentures or other
securities of Unicom by virtue only of his interest in shares or debentures or other
securities of Unicom.
 Remuneration and Pensions
   112




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Borrowing Powers
  Qualification of Directors
  Rotation of Directors
  Rights Attached to Ordinary Shares
 Voting Rights
   
    
    the chairman of the meeting,
    
    at least three shareholders present in person or by proxy and entitled to vote at
the meeting,
    
    any shareholder or shareholders present in person or by proxy and representing in
the aggregate not less than one-tenth of the total voting rights of all shareholders
having the right to attend and vote at the meeting, or
 113




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
    
    any shareholder or shareholders present in person or by proxy and holding shares
conferring a right to attend and vote at the meeting on which there have been paid up
sums in the aggregate equal to not less than one-tenth of the total sum paid up on all shares conferring that right.
    Issue of Shares
   Dividends
   114




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Winding Up
   Miscellaneous
   Modification of Rights
  Annual General and Extraordinary General Meetings
   115




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##### Table of Contents



Limitations on Rights to Own Securities
  Changes in Capital
   
    
    consolidate and divide all or any of our share capital into shares of a larger
amount than our existing shares;
    
    divide our shares into several classes and attach to them any preferential,
deferred, qualified or special rights, privileges or conditions;
    
    cancel any shares which at the date of the passing of the resolution have not been
taken or agreed to be taken by any person, and diminish the amount of our share capital
by the amount of the shares so canceled;
    
    sub-divide our shares or any of them into shares of a smaller amount than is fixed
by our Memorandum of Association, subject nevertheless to the provisions of the
Companies Ordinance; and
    
    make provision for the issue and allotment of shares which do not carry any voting
rights.
 C. Material Contracts
  
    
    Subscription Agreement between our Company and SK Telecom Co., Ltd., dated June 20,
2006, relating to US$1 billion zero coupon convertible bonds due 2009. See B.
Liquidity and Capital Resources  Indebtedness and Capital Structure under Item 5.
 116




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##### Table of Contents



D. Exchange Controls
   E. Taxation
  Hong Kong
 Tax on Dividends
  Profits
  117




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Stamp Duty
   Estate Duty
  United States
 United States Federal Income Taxation
  
    
    a dealer in securities,
    
    a trader in securities that elects to use a mark-to-market method of
accounting for your securities holdings,
    
    a tax-exempt organization,
    
    an insurance company,
    
    a person liable for alternative minimum tax,
    
    a person that actually or constructively owns 10% or more of our voting stock,
    
    a person that holds shares or ADSs that are a hedge or that are hedged
against currency risks or as part of a straddle or a conversion transaction, or
    
    a person whose functional currency is not the U.S. dollar.
  118




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
    
    a citizen or resident of the United States,
    
    a corporation organized under the laws of the United States or any States,
    
    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.
    Taxation of Dividends
 
  119




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Taxation of Capital Gains
  Passive Foreign Investment Company Rules
  
    
    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.
   
    
    any gain you realize on the sale or other disposition of your shares or ADSs; and
    
    any excess distribution that we make to you. Generally, any distributions to you
during a single taxable year that are greater than 125% of the average annual
distributions received by you in respect of the shares or ADSs during the three
preceding taxable years or, if shorter, your holding period for the shares or ADSs.
 120




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##### Table of Contents




    
    the gain or excess distribution will be allocated ratably over your holding period
for the shares or ADSs;
    
    the amount allocated to the taxable year in which you realized the gain or excess
distribution will be taxed as ordinary income;
    
    the amount allocated to each prior year, with certain exceptions, will be taxed at
the highest tax rate in effect for that year; and
    
    the interest charge generally applicable to underpayments of tax will be imposed in
respect of the tax attributable to each such year.
     F. Dividends and Paying Agents
  G. Statement by Experts
  H. Documents on Display
  121




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##### Table of Contents



I. Subsidiary Information
  
 Item 11. Quantitative and Qualitative Disclosures About Market Risks
  Interest Rate Risk
      122




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As of DecemberExpected Maturity Date
    
    
    31, 2006There-2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    after
    
    
    Total
    
    
    Fair Value(RMB equivalent in million, except interest rate)Variable rate bank and other
loans (RMB)
    
    
    80
    
    
    
    35
    
    
    
    
    
    
    
    200
    
    
    
    
    
    
    
    
    
    
    
    315
    
    
    
    315Average interest rate(1)
    
    
    4.14
    %
    
    
    3.62
    %
    
    
    3.50
    %
    
    
    3.67
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Variable rate bank and other loans
(U.S. dollars)
    
    
    
    
    
    
    3,904
    
    
    
    2,343
    
    
    
    1,562
    
    
    
    
    
    
    
    
    
    
    
    7,809
    
    
    
    7,809Average interest rate(2)
    
    
    5.74
    %
    
    
    5.77
    %
    
    
    5.57
    %
    
    
    5.39
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    The interest rates for variable rate bank and other loans are calculated based on the
weighted average interest rates at the end of 2006.(2)
    
    The interest rates are the implied future LIBOR rates calculated based on U.S. swap as a
proxy.  Exchange Rate Risk
  123




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Expected Maturity Date
    
    
    As of December 31, 2006There-2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    after
    
    
    Total
    
    
    Fair Value(RMB equivalent in millions, except interest rate)On-balance sheet financial
instruments:Short-term deposits with banks:in U.S. dollars
    
    
    174
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    174
    
    
    
    174in Hong Kong dollars
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    13Bank balances and cash:in U.S. dollars
    
    
    3,736
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,736
    
    
    
    3,736in Hong Kong dollars
    
    
    655
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    655
    
    
    
    655in EUR
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    17Debts:Variable rate bank and other loans
(U.S. dollars)
    
    
    
    
    
    
    3,904
    
    
    
    2,343
    
    
    
    1,562
    
    
    
    
    
    
    
    
    
    
    
    7,809
    
    
    
    7,809Average interest rate(1)
    
    
    5.74
    %
    
    
    5.77
    %
    
    
    5.57
    %
    
    
    5.39
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Convertible bonds (U.S. dollars)
    
    
    
    
    
    
    
    
    
    
    8,137
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,137
    
    
    
    10,325Average interest rate
    
    
    5.53
    %
    
    
    5.53
    %
    
    
    5.53
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Off-balance sheet commitments:Capital commitments authorized and
contracted for in U.S. dollars
    
    
    203
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    203
    
    
    
    203
 
 (1)
    
    The interest rates are the implied future LIBOR rates calculated based on U.S. swap as a
proxy. 
 Item 12. Description of Securities Other than Equity Securities
  
 PART II
 
 Item 13. Defaults, Dividend Arrearages and Delinquencies
  124




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##### Table of Contents



Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
  
 Item 15. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control Over Financial Reporting
  Internal Control 
Integrated Framework
  125




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##### Table of Contents



Changes in Internal Control Over Financial Reporting
   
    
    standardizing control procedures for monitoring the financial reporting
and period-end financial closing procedures at branch level and upgrading our business
performance review processes and controls;
    
    expanding accounting manuals to clearly document key controls and
processes for preparing consolidated financial statements in accordance with applicable
accounting standards;
    
    hiring additional accounting professionals with experience in financial
reporting and familiarity with international accounting practices and increasing
technical training for our finance and accounting personnel in respect of relevant
accounting standards;
    
    enhancing monitoring controls over branches by assessing the effectiveness
of internal controls at branch-level based on our enterprise risk assessment results;
and
    
    continuing to improve the policies and standards for the control
environment within The Committee of Sponsoring Organizations of the Treadway Commission
risk control framework.
  
 Item 16A. Audit Committee Financial Expert
  
 Item 16B. Code of Ethics
  126




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##### Table of Contents



Item 16C. Principal Accountant Fees and Services
  For the years endedDecember 31,2005
    
    
    2006(in U.S. dollars)Audit fees
    
    
    7,350,000
    
    
    
    15,418,000Audit-related fees
    
    
    3,704,800
    
    
    
    1,445,000Tax fees
    
    
    4,300
    
    
    
    11,000All other fees
    
    
    
    
    
    
    5,000Total
    
    
    11,059,100
    
    
    
    16,879,000
     Audit Committees Pre-approval Policies and Procedures
  127




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##### Table of Contents



Item 16D. Exemptions from the Listing Standards for Audit Committees
  
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  
 PART III
 
 Item 17. Financial Statements
  
 Item 18. Financial Statements
  
 Item 19. Exhibits
 ExhibitNumber
    
    Description of Exhibit1.1
    
    Memorandum of Association of Unicom, dated January 27, 2000(1).1.2
    
    Amended Articles of Association of Unicom (as amended)(1).1.3
    
    Amended Articles of Association of Unicom (as amended on May 12, 2004)(6).2.1
    
    Deposit Agreement, among Unicom, The Bank of New York, as Depositary, and Owners and Beneficial
Owners of American Depositary Receipts issued thereunder, including the form of American
Depositary Receipt(2).2.2
    
    Form of specimen certificate for the shares(1).4.1
    
    CDMA Network Capacity Lease Agreement among CUCL, Unicom Group and Unicom New Horizon, dated
November 22, 2001(4).4.2
    
    Reorganization Agreement between Unicom Group and CUCL (together with English
translation)(1).4.3
    
    Services Agreement between Unicom Group and CUCL (together with English translation)(1).4.4
    
    Lease Agreement between CUCL and Unicom Xingye Science and Technology Trade Co. Ltd. (together
with English translation)(1).4.5
    
    Transmission Line Lease and Services Agreement between Unicom Group, CUCL and Guoxin Paging
(together with English translation)(1).4.6
    
    Pre-Global Offering Share Option Scheme, adopted by ordinary resolution of the Company on June 1,
2000 and amended by ordinary resolution of the Company on May 13, 2002(4).
 128




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit4.7
    
    Pre-Global Offering Share Option Scheme, adopted by ordinary resolution of the Company on June 1,
2000 and amended by ordinary resolutions of the Company on May 13, 2002 and May 11, 2007*.4.8
    
    Share Option Scheme, adopted by ordinary resolution of the Company on June 1, 2000 and amended by
ordinary resolutions of the Company on May 13, 2002(4).4.9
    
    Share Option Scheme, adopted by ordinary resolution of the Company on June 1, 2000 and amended by
ordinary resolutions of the Company on May 13, 2002 and May 11, 2007*.4.10
    
    Service Agreements between executive directors of Unicom and Unicom(3).4.11
    
    Reorganization Agreement between Unicom Group and Unicom New Century, dated November 18, 2002.
(English translation)(5).4.12
    
    Form of Conditional Sale and Purchase Agreement between Unicom BVI and our company, dated November
20, 2002(5).4.13
    
    Comprehensive Services Agreement between Unicom Group and A Share Company, dated November 20,
2002. (English translation)(5).4.14
    
    Transfer Agreement with respect to the Comprehensive Services Agreement between A Share Company
and Unicom New Century, dated November 20, 2002. (English translation)(5).4.15
    
    Form of CDMA Network Capacity Lease Agreement among Unicom New Horizon, A Share Company and Unicom
Group, dated November 20, 2002(5).4.16
    
    Transfer Agreement with respect to the CDMA Network Capacity Lease Agreement between A Share
Company and Unicom New Century, dated November 20, 2002. (English translation)(5).4.17
    
    Reorganization Agreement between Unicom Group and Unicom New World, dated November 4, 2003.
(English translation)(6).4.18
    
    Conditional Sale and Purchase Agreement between Unicom BVI and our Company, dated November 20,
2003(6).4.19
    
    Conditional Sale and Purchase Agreement between CUCL and A Share Company, dated November 20, 2003.
(English translation)(6).4.20
    
    Comprehensive Services Agreement between Unicom Group and A Share Company, dated November 20,
2003. (English translation)(6).4.21
    
    Transfer Agreement with respect to the Comprehensive Services Agreement between A Share Company
and Unicom New World, dated November 20, 2003. (English translation)(6).4.22
    
    CDMA Network Capacity Lease Agreement among Unicom New Horizon, A Share Company and Unicom Group,
dated November 20, 2003(6).4.23
    
    Transfer Agreement with respect to the CDMA Network Capacity Lease Agreement between A Share
Company and Unicom New World, dated November 20, 2003. (English translation)(6).4.24
    
    Comprehensive Operator Services Agreement between Unicom Group and A Share Company, dated November
20, 2003. (English translation)(6).4.25
    
    Transfer Agreement with respect to the Comprehensive Operator Services Agreement between A Share
Company, CUCL, Unicom New Century and Unicom New World, dated November 20, 2003. (English
translation)(6).4.26
    
    Service Agreement between Mr. William Lo Wing Yan, executive director of Unicom, and Unicom.
(English translation)(6).4.27
    
    Letter Agreement between Mr. Wang Jianzhou, executive director of Unicom, and Unicom with respect
to the Extension of the Service Agreement between Mr. Wang and Unicom. (English
translation)(6).
 129




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit4.28
    
    Conditional Sales and Purchase Agreement between China Unicom (Hong Kong) Group Limited and our
Company with respect to the acquisition of Unicom International, dated July 28,
2004(7).4.29
    
    CDMA Network Capacity Lease Agreement between Unicom New Horizon, A Share Company and Unicom
Group, dated March 24, 2005(7).4.30
    
    Transfer Agreement of The CDMA Network Capacity Lease Agreement between A Share Company, CUCL and
Unicom New World, dated March 24, 2005. (English translation)(7).4.31
    
    Comprehensive Services Agreement between A Share Company and Unicom Group, dated March 24, 2005.
(English translation)(7).4.32
    
    Transfer Agreement of the Comprehensive Services Agreement between A Share Company, CUCL and
Unicom New World, dated March 24, 2005. (English translation)(7).4.33
    
    Operator-based Comprehensive Services Agreement between Unicom New Guoxin and A Share Company,
dated March 24, 2005. (English translation)(7).4.34
    
    Transfer Agreement of the Operator-based Comprehensive Services Agreement between A Share Company
and CUCL and Unicom New World, dated March 24, 2005. (English translation)(7).4.35
    
    Premise Leasing Agreement between CUCL, Unicom New World and A Share Company, dated March 24,
2005. (English translation)(7).4.36
    
    Transfer Agreement of the Premise Leasing Agreement between A Share Company and Unicom New Guoxin,
dated March 24, 2005. (English translation)(7).4.37
    
    Subscription Agreement between Unicom and SK Telecom Co., Ltd., dated June 20, 2006(8).4.38
    
    CDMA Network Capacity Lease Agreement among Unicom New Horizon, A Share Company and Unicom Group,
dated October 26, 2006*.4.39
    
    Transfer Agreement of The CDMA Network Capacity Lease Agreement between A Share Company and CUCL,
dated October 26, 2006. (English translation)*.4.40
    
    Comprehensive Services Agreement between A Share Company and Unicom Group, dated October 26, 2006.
(English translation)*.4.41
    
    Transfer Agreement of the Comprehensive Services Agreement between A Share Company and CUCL, dated
October 26, 2006. (English translation)*.8.1
    
    List of our significant subsidiaries(7).11.1
    
    Code of Ethics for Senior Officers(6).11.2
    
    Employee Code of Ethics (English translation)(8).12.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)*.12.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)*.13.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(b)*.13.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(b)*.
 
 (1)
    
    Incorporated by reference to our Registration Statement on Form F-1 (File No. 333-11938)
filed with the SEC in connection with our initial public offering in June 2000.(2)
    
    Incorporated by reference to the Registration Statement on Form F-6 (File No. 333-11952)
filed with the SEC with respect to American Depositary Shares representing our shares.(3)
    
    Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year
ended December 31, 2000.(4)
    
    Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year
ended December 31, 2001.(5)
    
    Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year
ended December 31, 2002. 130




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##### Table of Contents



(6)
    
    Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year
ended December 31, 2003.(7)
    
    Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year
ended December 31, 2004.(8)
    
    Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year
ended December 31, 2005.*
    
    Filed herewith. 131




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SIGNATURE
   CHINA UNICOM LIMITEDBy:
    /s/ Chang XiaobingName:
    Chang XiaobingTitle:
    Chairman and Chief Executive Officer 132




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INDEX OF CONSOLIDATED FINANCIAL STATEMENTS
 CHINA UNICOM LIMITED AND ITS SUBSIDIARIES
 Report of Independent Registered Public Accounting FirmConsolidated balance sheets as of December 31, 2005 and 2006Consolidated statements of income for the years ended December 31, 2004, 2005 and 2006Consolidated statements of changes in equity for the years ended December 31, 2004, 2005 and 2006Consolidated statements of cash flows for the years ended December 31, 2004, 2005 and 2006Notes to the consolidated financial statements




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CHINA UNICOM LIMITED (Incorporated in the Hong Kong
Special Administrative Region of the Peoples Republic of China (Hong Kong) with limited
liability)
  Consolidated financial statements
    Internal control over financial reporting
 Internal Control  Integrated Framework Internal Control  Integrated Framework
 F - 2




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PricewaterhouseCoopers
 Certified Public Accountants
 
 F - 3




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CHINA UNICOM LIMITED AND ITS SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 AS OF DECEMBER 31, 2005 AND 2006
 (Expressed in thousands)
 Note
    
    2005
    
    2006
    
    2006RMB
    
    RMB
    
    US$ASSETSNon-current assetsProperty, plant and equipment
    
    6, 36
    
    
    112,373,285
    
    
    
    111,381,505
    
    
    
    14,272,178Goodwill
    
    7
    
    
    3,143,983
    
    
    
    3,143,983
    
    
    
    402,863Other assets
    
    8, 36
    
    
    11,501,730
    
    
    
    11,176,569
    
    
    
    1,432,141Deferred income tax assets
    
    9
    
    
    335,234
    
    
    
    309,668
    
    
    
    39,680127,354,232
    
    
    
    126,011,725
    
    
    
    16,146,862Current assetsInventories
    
    10
    
    
    2,107,812
    
    
    
    2,333,902
    
    
    
    299,061Accounts receivable, net
    
    11
    
    
    4,548,429
    
    
    
    3,419,343
    
    
    
    438,147Prepayments and other current assets
    
    12
    
    
    2,342,467
    
    
    
    1,988,019
    
    
    
    254,740Amounts due from related parties
    
    33.1
    
    
    384,531
    
    
    
    168,548
    
    
    
    21,597Amounts due from Domestic Carriers
    
    33.2
    
    
    138,485
    
    
    
    138,521
    
    
    
    17,750Short-term bank deposits
    
    13
    
    
    282,457
    
    
    
    195,820
    
    
    
    25,092Cash and cash equivalents
    
    14
    
    
    5,471,576
    
    
    
    12,182,108
    
    
    
    1,560,98815,275,757
    
    
    
    20,426,261
    
    
    
    2,617,375Total assets
    
    
    
    
    142,629,989
    
    
    
    146,437,986
    
    
    
    18,764,237EQUITYCapital and reserves attributable to the
Companys equity holdersShare capital
    
    15
    
    
    1,333,621
    
    
    
    1,344,440
    
    
    
    172,273Share premium
    
    15
    
    
    52,601,014
    
    
    
    53,222,976
    
    
    
    6,819,874Reserves
    
    
    
    
    2,827,331
    
    
    
    3,554,930
    
    
    
    455,521Retained profits- Proposed final dividend
    
    31
    
    
    1,383,169
    
    
    
    2,282,578
    
    
    
    292,484- Others
    
    
    
    
    18,139,210
    
    
    
    19,003,893
    
    
    
    2,435,11776,284,345
    
    
    
    79,408,817
    
    
    
    10,175,269Minority interest
    
    22(a)
    
    
    2,734
    
    
    
    2,841
    
    
    
    364Total equity
    
    
    
    
    76,287,079
    
    
    
    79,411,658
    
    
    
    10,175,633
  F - 4




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##### Table of Contents



Note
    
    2005
    
    2006
    
    2006RMB
    
    RMB
    
    US$LIABILITIESNon-current liabilitiesLong-term bank loans
    
    16
    
    
    11,981,518
    
    
    
    4,139,349
    
    
    
    530,407Convertible bonds
    
    17
    
    
    
    
    
    
    10,324,949
    
    
    
    1,323,016Obligations under finance leases
    
    18
    
    
    145,367
    
    
    
    10,230
    
    
    
    1,311Deferred income tax liabilities
    
    9
    
    
    5,613
    
    
    
    5,879
    
    
    
    753Deferred revenue
    
    
    
    
    3,348,232
    
    
    
    2,243,384
    
    
    
    287,46215,480,730
    
    
    
    16,723,791
    
    
    
    2,142,949Current liabilitiesPayables and accrued liabilities
    
    19
    
    
    18,526,628
    
    
    
    26,290,074
    
    
    
    3,368,751Taxes payable
    
    
    
    
    1,016,128
    
    
    
    1,632,195
    
    
    
    209,146Amounts due to Unicom Group
    
    33.1
    
    
    38,094
    
    
    
    45,081
    
    
    
    5,777Amounts due to related parties
    
    33.1
    
    
    116,621
    
    
    
    325,308
    
    
    
    41,684Amounts due to Domestic Carriers
    
    33.2
    
    
    822,006
    
    
    
    850,975
    
    
    
    109,042Short-term bonds
    
    20
    
    
    9,865,900
    
    
    
    7,087,217
    
    
    
    908,140Short-term bank loans
    
    21
    
    
    7,024,358
    
    
    
    
    
    
    
    Current portion of long-term bank loans
    
    16
    
    
    5,145,190
    
    
    
    3,984,350
    
    
    
    510,546Current portion of obligations under finance leases
    
    18
    
    
    420,631
    
    
    
    99,566
    
    
    
    12,758Advances from customers
    
    
    
    
    7,886,624
    
    
    
    9,987,771
    
    
    
    1,279,81150,862,180
    
    
    
    50,302,537
    
    
    
    6,445,655Total liabilities
    
    
    
    
    66,342,910
    
    
    
    67,026,328
    
    
    
    8,588,604Total equity and liabilities
    
    
    
    
    142,629,989
    
    
    
    146,437,986
    
    
    
    18,764,237Net current liabilities
    
    
    
    
    (35,586,423
    )
    
    
    (29,876,276
    )
    
    
    (3,828,280
    )Total assets less current liabilities
    
    
    
    
    91,767,809
    
    
    
    96,135,449
    
    
    
    12,318,582
  F - 5




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##### Table of Contents



CHINA UNICOM LIMITED AND ITS SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
 FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (Expressed in thousands, except per share data)
 Note
    
    2004
    
    2005
    
    2006
    
    2006RMB
    
    RMB
    
    RMB
    
    US$Revenue (Turnover)GSM Business
    
    5, 23, 33
    
    
    47,508,952
    
    
    
    52,135,528
    
    
    
    59,290,421
    
    
    
    7,597,343CDMA Business
    
    5, 23, 33
    
    
    24,377,674
    
    
    
    27,576,936
    
    
    
    27,293,142
    
    
    
    3,497,282Data and Internet Business
    
    5, 23, 33
    
    
    3,662,734
    
    
    
    3,049,967
    
    
    
    2,375,316
    
    
    
    304,368Long Distance Business
    
    5, 23, 33
    
    
    1,848,009
    
    
    
    1,524,573
    
    
    
    1,068,422
    
    
    
    136,905Total service revenue
    
    
    
    
    77,397,369
    
    
    
    84,287,004
    
    
    
    90,027,301
    
    
    
    11,535,898Sales of telecommunications
products
    
    5, 23, 33
    
    
    1,689,755
    
    
    
    2,761,827
    
    
    
    4,267,192
    
    
    
    546,7885, 23Total revenue
    
    
    
    
    79,087,124
    
    
    
    87,048,831
    
    
    
    94,294,493
    
    
    
    12,082,686Leased lines and network capacities
    
    24, 33
    
    
    (7,398,128
    )
    
    
    (8,747,317
    )
    
    
    (8,763,865
    )
    
    
    (1,122,982
    )Interconnection charges
    
    33
    
    
    (7,516,586
    )
    
    
    (8,372,370
    )
    
    
    (9,595,622
    )
    
    
    (1,229,562
    )Depreciation and amortization
    
    24
    
    
    (19,011,074
    )
    
    
    (20,368,181
    )
    
    
    (22,422,812
    )
    
    
    (2,873,209
    )Employee benefit expenses
    
    25, 26, 27
    
    
    (4,615,057
    )
    
    
    (5,616,312
    )
    
    
    (6,648,699
    )
    
    
    (851,949
    )Selling and marketing
    
    24, 33
    
    
    (19,523,280
    )
    
    
    (20,557,878
    )
    
    
    (19,251,704
    )
    
    
    (2,466,871
    )General, administrative and other
expenses
    
    24, 33
    
    
    (10,500,241
    )
    
    
    (11,741,560
    )
    
    
    (13,415,568
    )
    
    
    (1,719,041
    )Cost of telecommunications
products sold
    
    24, 33
    
    
    (2,562,645
    )
    
    
    (3,575,316
    )
    
    
    (4,929,988
    )
    
    
    (631,718
    )Unrealized loss on changes in fair
value of derivative component of
convertible bonds
    
    17
    
    
    
    
    
    
    
    
    
    
    (2,396,592
    )
    
    
    (307,094
    )Finance costs
    
    24
    
    
    (1,696,075
    )
    
    
    (1,099,321
    )
    
    
    (654,220
    )
    
    
    (83,830
    )Interest income
    
    
    
    
    102,907
    
    
    
    96,196
    
    
    
    259,040
    
    
    
    33,193Other gains  net
    
    
    
    
    103,647
    
    
    
    34,925
    
    
    
    21,353
    
    
    
    2,736Income before income tax
    
    
    
    
    6,470,592
    
    
    
    7,101,697
    
    
    
    6,495,816
    
    
    
    832,359Income tax expenses
    
    9
    
    
    (1,977,141
    )
    
    
    (2,170,411
    )
    
    
    (2,763,885
    )
    
    
    (354,158
    )Net income
    
    
    
    
    4,493,451
    
    
    
    4,931,286
    
    
    
    3,731,931
    
    
    
    478,201Attributable to:Equity holders of the Company
    
    
    
    
    4,493,451
    
    
    
    4,931,052
    
    
    
    3,731,824
    
    
    
    478,187Minority interest
    
    
    
    
    
    
    
    
    234
    
    
    
    107
    
    
    
    144,493,451
    
    
    
    4,931,286
    
    
    
    3,731,931
    
    
    
    478,201Proposed final dividend
    
    31
    
    
    1,256,349
    
    
    
    1,383,169
    
    
    
    2,282,578
    
    
    
    292,484Dividend paid during the year
    
    31
    
    
    1,256,160
    
    
    
    1,256,924
    
    
    
    1,384,146
    
    
    
    177,361
  F - 6




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##### Table of Contents



Note
    
    2004
    
    2005
    
    2006
    
    2006RMB
    
    RMB
    
    RMB
    
    US$Earnings per share for
income attributable to
the equity holders of the
Company during the yearBasic earnings per share
    
    30
    
    
    0.36
    
    
    
    0.39
    
    
    
    0.30
    
    
    
    0.04Diluted earnings per share
    
    30
    
    
    0.36
    
    
    
    0.39
    
    
    
    0.30
    
    
    
    0.04Number of shares
outstanding for basic
earnings (in thousands)
    
    30
    
    
    12,561,242
    
    
    
    12,570,398
    
    
    
    12,599,018
    
    
    
    12,599,018Number of shares
outstanding for diluted
earnings (in thousands)
    
    30
    
    
    12,593,054
    
    
    
    12,607,476
    
    
    
    12,649,306
    
    
    
    12,649,306Basic earnings per ADS
    
    30
    
    
    3.58
    
    
    
    3.92
    
    
    
    2.96
    
    
    
    0.38Diluted earnings per ADS
    
    30
    
    
    3.57
    
    
    
    3.91
    
    
    
    2.95
    
    
    
    0.38Number of ADS outstanding
for basic earnings (in
thousands)
    
    30
    
    
    1,256,124
    
    
    
    1,257,040
    
    
    
    1,259,902
    
    
    
    1,259,902Number of ADS outstanding
for diluted earnings (in
thousands)
    
    30
    
    
    1,259,305
    
    
    
    1,260,748
    
    
    
    1,264,931
    
    
    
    1,264,931
  F - 7




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##### Table of Contents



CHINA UNICOM LIMITED
 
 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (Expressed in thousands of RMB)
 Employeeshare-basedShare
    
    Share
    
    compensation
    
    Revaluation
    
    Statutory
    
    Retained
    
    
    
    
    
    Minority
    
    Totalcapital
    
    premium
    
    reserve
    
    reserve
    
    reserve
    
    profits
    
    Total
    
    interest
    
    equityBalance at December 31, 2003
    
    
    1,331,390
    
    
    
    52,483,266
    
    
    
    21,707
    
    
    
    176,853
    
    
    
    1,542,478
    
    
    
    13,496,174
    
    
    
    69,051,868
    
    
    
    
    
    
    
    69,051,868Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,493,451
    
    
    
    4,493,451
    
    
    
    
    
    
    
    4,493,451Employees share option scheme:- Value of employee services
    
    
    
    
    
    
    
    
    
    
    88,957
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,957
    
    
    
    
    
    
    
    88,957- Recognition of shares issued
on exercise of options (Note
29)
    
    
    1,097
    
    
    
    63,028
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,125
    
    
    
    
    
    
    
    64,125Appropriation to statutory
reserve (Note 28)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    429,300
    
    
    
    (429,300
    )
    
    
    
    
    
    
    
    
    
    
    Dividends relating to 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,256,160
    )
    
    
    (1,256,160
    )
    
    
    
    
    
    
    (1,256,160
    )Derecognition of negative
goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,425
    
    
    
    7,425
    
    
    
    
    
    
    
    7,425Balance at December 31, 2004
    
    
    1,332,487
    
    
    
    52,546,294
    
    
    
    110,664
    
    
    
    176,853
    
    
    
    1,971,778
    
    
    
    16,311,590
    
    
    
    72,449,666
    
    
    
    
    
    
    
    72,449,666Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,931,052
    
    
    
    4,931,052
    
    
    
    234
    
    
    
    4,931,286Subscription of shares of a
subsidiary by minority
shareholder (Note 22(a))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,500
    
    
    
    2,500Employee share option scheme:-Value of employee services
    
    
    
    
    
    
    
    
    
    
    108,417
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108,417
    
    
    
    
    
    
    
    108,417-Recognition of shares issued
on exercise of options (Note
29)
    
    
    1,134
    
    
    
    54,720
    
    
    
    (3,720
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,134
    
    
    
    
    
    
    
    52,134Appropriation to statutory
reserve (Note 28)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    463,339
    
    
    
    (463,339
    )
    
    
    
    
    
    
    
    
    
    
    Dividends relating to 2004

(Note 31)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,256,924
    )
    
    
    (1,256,924
    )
    
    
    
    
    
    
    (1,256,924
    )Balance at December 31, 2005
    
    
    1,333,621
    
    
    
    52,601,014
    
    
    
    215,361
    
    
    
    176,853
    
    
    
    2,435,117
    
    
    
    19,522,379
    
    
    
    76,284,345
    
    
    
    2,734
    
    
    
    76,287,079Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,731,824
    
    
    
    3,731,824
    
    
    
    107
    
    
    
    3,731,931Revaluation of buildings  gross
(Note 6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,330
    
    
    
    
    
    
    
    
    
    
    
    200,330
    
    
    
    
    
    
    
    200,330Revaluation of buildings  tax
(Note 6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (105,129
    )
    
    
    
    
    
    
    
    
    
    
    (105,129
    )
    
    
    
    
    
    
    (105,129
    )Employee share option scheme:-Value of employee services
    
    
    
    
    
    
    
    
    
    
    146,294
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146,294
    
    
    
    
    
    
    
    146,294-Recognition of shares issued
on exercise of options (Note
29)
    
    
    10,819
    
    
    
    621,962
    
    
    
    (97,482
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    535,299
    
    
    
    
    
    
    
    535,299Appropriation to statutory
reserve (Note 28)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    583,586
    
    
    
    (583,586
    )
    
    
    
    
    
    
    
    
    
    
    Dividends relating to 2005

(Note 31)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,384,146
    )
    
    
    (1,384,146
    )
    
    
    
    
    
    
    (1,384,146
    )Balance at December 31, 2006
    
    
    1,344,440
    
    
    
    53,222,976
    
    
    
    264,173
    
    
    
    272,054
    
    
    
    3,018,703
    
    
    
    21,286,471
    
    
    
    79,408,817
    
    
    
    2,841
    
    
    
    79,411,658
  F - 8




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##### Table of Contents



CHINA UNICOM LIMITED
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (Expressed in thousands)
 Note
    
    2004
    
    2005
    
    2006
    
    2006RMB
    
    RMB
    
    RMB
    
    US$Cash flows from operating activitiesCash generated from operations
    
    (a)
    
    
    27,703,311
    
    
    
    33,974,778
    
    
    
    38,522,310
    
    
    
    4,936,163Interest received
    
    
    
    
    106,365
    
    
    
    95,731
    
    
    
    248,924
    
    
    
    31,897Interest paid
    
    
    
    
    (2,310,270
    )
    
    
    (1,792,398
    )
    
    
    (1,206,933
    )
    
    
    (154,654
    )Tax paid
    
    
    
    
    (1,680,111
    )
    
    
    (1,474,423
    )
    
    
    (2,113,144
    )
    
    
    (270,774
    )Net cash generated from operating activities
    
    
    
    
    23,819,295
    
    
    
    30,803,688
    
    
    
    35,451,157
    
    
    
    4,542,632Cash flows from investing activitiesPurchase of property, plant and equipment
    
    
    
    
    (18,939,138
    )
    
    
    (16,643,005
    )
    
    
    (16,744,789
    )
    
    
    (2,145,640
    )Proceeds from sale of property, plant and equipment
    
    
    
    
    53,970
    
    
    
    91,851
    
    
    
    59,341
    
    
    
    7,604Decrease in short-term bank deposits
    
    
    
    
    250,769
    
    
    
    379,568
    
    
    
    86,637
    
    
    
    11,101Payment of direct acquisition cost of
Unicom New Century
    
    
    
    
    (4,566
    )
    
    
    
    
    
    
    
    
    
    
    Payment of direct acquisition cost of
Unicom New World
    
    
    
    
    (14,039
    )
    
    
    
    
    
    
    
    
    
    
    Purchase of Unicom International, net of cash
acquired
    
    
    
    
    44,267
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from of sale of Guoxin Paging, net of
cash disposed
    
    
    
    
    450,000
    
    
    
    
    
    
    
    
    
    
    
    Purchase of other assets
    
    
    
    
    (799,866
    )
    
    
    (576,755
    )
    
    
    (738,500
    )
    
    
    (94,630
    )Net cash used in investing activities
    
    
    
    
    (18,958,603
    )
    
    
    (16,748,341
    )
    
    
    (17,337,311
    )
    
    
    (2,221,565
    )Cash flows from financing activitiesProceeds from exercise of share options
    
    
    
    
    64,125
    
    
    
    52,134
    
    
    
    535,299
    
    
    
    68,592Proceeds from minority interest of a subsidiary
in respect of share capital contribution
    
    
    
    
    
    
    
    
    2,500
    
    
    
    
    
    
    
    Proceeds from short-term bonds
    
    
    
    
    
    
    
    
    9,690,800
    
    
    
    6,949,700
    
    
    
    890,519Proceeds from short-term bank loans
    
    
    
    
    10,224,971
    
    
    
    12,532,071
    
    
    
    2,143,000
    
    
    
    274,599Proceeds from long-term bank loans
    
    
    
    
    11,083,383
    
    
    
    5,798,657
    
    
    
    1,345,050
    
    
    
    172,352Proceeds from issuance of convertible bonds
    
    
    
    
    
    
    
    
    
    
    
    
    7,993,500
    
    
    
    1,024,269Repayment of short-term bonds
    
    
    
    
    
    
    
    
    
    
    
    
    (9,731,800
    )
    
    
    (1,247,011
    )Repayment of short-term bank loans
    
    
    
    
    (12,271,753
    )
    
    
    (20,104,146
    )
    
    
    (8,905,858
    )
    
    
    (1,141,177
    )Repayment of long-term bank loans
    
    
    
    
    (17,245,641
    )
    
    
    (19,928,416
    )
    
    
    (10,348,059
    )
    
    
    (1,325,977
    )Dividends paid
    
    31
    
    
    (1,256,160
    )
    
    
    (1,256,924
    )
    
    
    (1,384,146
    )
    
    
    (177,361
    )Net cash used in financing activities
    
    
    
    
    (9,401,075
    )
    
    
    (13,213,324
    )
    
    
    (11,403,314
    )
    
    
    (1,461,195
    )Net (decrease)/increase in cash and cash equivalents
    
    
    
    
    (4,540,383
    )
    
    
    842,023
    
    
    
    6,710,532
    
    
    
    859,872Cash and cash equivalents, beginning of year
    
    
    
    
    9,169,936
    
    
    
    4,629,553
    
    
    
    5,471,576
    
    
    
    701,116Cash and cash equivalents, end of year
    
    14
    
    
    4,629,553
    
    
    
    5,471,576
    
    
    
    12,182,108
    
    
    
    1,560,988Analysis of the balances of cash and cash equivalents:Cash balances
    
    
    
    
    4,756
    
    
    
    9,319
    
    
    
    4,458
    
    
    
    571Bank balances
    
    
    
    
    4,650,708
    
    
    
    5,462,257
    
    
    
    12,177,650
    
    
    
    1,560,417Less: Restricted bank deposits
    
    (i)
    
    
    (25,911
    )
    
    
    
    
    
    
    
    
    
    
    4,629,553
    
    
    
    5,471,576
    
    
    
    12,182,108
    
    
    
    1,560,988
 
 Note (i): As of December 31, 2006, no bank balances (2004: RMB26 million; 2005: Nil) were restricted by the bank as
collateral for long-term bank loans. F - 9




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##### Table of Contents



(a)
    
    The reconciliation of income before income tax to cash generated from operations was as follows:
 2004
    
    2005
    
    2006
    
    2006RMB
    
    RMB
    
    RMB
    
    US$Income before income tax
    
    
    6,470,592
    
    
    
    7,101,697
    
    
    
    6,495,816
    
    
    
    832,359Adjustments for:Depreciation and amortization
    
    
    19,011,074
    
    
    
    20,368,181
    
    
    
    22,422,812
    
    
    
    2,873,209Amortization of customer acquisition costs of
contractual CDMA subscribers
    
    
    6,120,737
    
    
    
    5,947,631
    
    
    
    4,205,253
    
    
    
    538,852Interest income
    
    
    (102,907
    )
    
    
    (96,196
    )
    
    
    (259,040
    )
    
    
    (33,193
    )Interest expense
    
    
    1,668,467
    
    
    
    1,060,271
    
    
    
    454,742
    
    
    
    58,270Loss on disposal of property, plant and equipment
    
    
    10,537
    
    
    
    25,134
    
    
    
    144,644
    
    
    
    18,534Share-based compensation costs
    
    
    88,957
    
    
    
    108,417
    
    
    
    146,294
    
    
    
    18,746Provision for doubtful debts
    
    
    2,191,820
    
    
    
    1,498,510
    
    
    
    1,741,765
    
    
    
    223,186Unrealized loss on changes in fair value of
derivative component of convertible bonds
    
    
    
    
    
    
    
    
    
    
    2,396,592
    
    
    
    307,094Changes in working capital:Increase in accounts receivable
    
    
    (1,915,496
    )
    
    
    (816,959
    )
    
    
    (612,679
    )
    
    
    (78,507
    )(Increase)/decrease in inventories
    
    
    (939,899
    )
    
    
    1,006,820
    
    
    
    (226,090
    )
    
    
    (28,970
    )Increase in other assets
    
    
    (5,536,980
    )
    
    
    (2,738,580
    )
    
    
    (1,748,235
    )
    
    
    (224,015
    )Increase in prepayments and other current assets
    
    
    (792,416
    )
    
    
    (477,665
    )
    
    
    (451,215
    )
    
    
    (57,818
    )(Increase)/decrease in amounts due from Domestic
Carriers
    
    
    (85,306
    )
    
    
    131,434
    
    
    
    (36
    )
    
    
    (5
    )Decrease in amounts due from Unicom Group
    
    
    
    
    
    
    61,401
    
    
    
    
    
    
    
    Decrease/(increase) in amounts due from related
parties
    
    
    70,516
    
    
    
    (191,483
    )
    
    
    215,983
    
    
    
    27,676Increase in payables and accrued liabilities
    
    
    1,835,813
    
    
    
    604,410
    
    
    
    2,354,762
    
    
    
    301,734Increase in advances from customers
    
    
    367,431
    
    
    
    851,629
    
    
    
    2,101,147
    
    
    
    269,236Increase/(decrease) in deferred revenue
    
    
    244,486
    
    
    
    (492,261
    )
    
    
    (1,104,848
    )
    
    
    (141,573
    )Increase/(decrease) in amounts due to Domestic
Carriers
    
    
    169,733
    
    
    
    (126,568
    )
    
    
    28,969
    
    
    
    3,712(Decrease)/increase in amounts due to Unicom Group
    
    
    (943,448
    )
    
    
    38,094
    
    
    
    6,987
    
    
    
    895(Decrease)/increase in amounts due to related parties
    
    
    (230,400
    )
    
    
    110,861
    
    
    
    208,687
    
    
    
    26,741Cash generated from operations
    
    
    27,703,311
    
    
    
    33,974,778
    
    
    
    38,522,310
    
    
    
    4,936,163
 (b)
    
    Supplemental information:Payables to equipment suppliers for construction-in-progress
during 2006 increased by approximately RMB5.0 billion (2004:
decreased by approximately RMB775 million; 2005: increased by
approximately RMB633 million).
  F - 10




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##### Table of Contents



CHINA UNICOM LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in RMB thousands unless otherwise stated)
 1.
    
    ORGANISATION AND PRINCIPAL ACTIVITIESChina Unicom Limited (the Company) was incorporated as a limited liability company in the
Hong Kong Special Administrative Region (Hong Kong), the Peoples Republic of China (the
PRC) on February 8, 2000. The principal activities of the Company are investment holding and
the Companys subsidiaries are principally engaged in the provision of GSM and CDMA cellular,
long distance, data and Internet services in the PRC. The GSM and
CDMA businesses are hereinafter
collectively referred to as the Cellular Business. The Company and its subsidiaries are
hereinafter referred to as the Group. The address of its registered office is 75th Floor,
The Center, 99 Queens Road Central, Hong Kong.The shares of the Company were listed on the Stock Exchange of Hong Kong Limited (SEHK) on
June 22, 2000 and the American Depositary Shares of the Company were listed on the New York
Stock Exchange on June 21, 2000.The immediate holding company of the Company is China Unicom (BVI) Limited (Unicom BVI). The
majority of the equity interests in Unicom BVI is owned by China United Telecommunications
Corporation Limited (A Share Company, a joint stock company incorporated in the PRC on
December 31, 2001, with its A shares listed on the Shanghai Stock Exchange on October 9,
2002). The majority of the equity interests in A Share Company are owned by China United
Telecommunications Corporation (a state-owned enterprise established in the PRC, hereinafter
referred to as Unicom Group). The directors of the Company consider Unicom Group to be the
ultimate holding company.2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESThe principal accounting policies applied in the preparation of these consolidated financial
statements are set out below. These policies have been consistently applied to all the years
presented, unless otherwise stated.
 F - 11




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##### Table of Contents



2.1
    
    Basis of PreparationThe consolidated financial statements have been prepared under the historical cost
convention, modified by the revaluation of buildings, financial assets and financial
liabilities (including derivative financial instruments) at fair value through profit or
loss. They have been prepared in accordance with Hong Kong Financial Reporting Standards
(HKFRS) issued by the Hong Kong Institute of Certified Public Accountants (HKICPA).
These accounting standards differ from that used in the preparation of statutory financial
statements for PRC statutory reporting purposes, which are based on the accounting
principles and financial regulations applicable to enterprises established in the PRC
(PRC GAAP).The principal adjustments made to conform to HKFRS include the following:
 
    
    reversal of revaluation surplus and related depreciation and amortization charges
arising from the revaluation of assets performed by independent valuers for the
purpose of reporting to relevant PRC government authorities;
    
    additional capitalization of borrowing costs;
    
    capitalization of the direct costs associated with the acquisition of subsidiaries;
    
    recognition of employee share-based compensation costs;
    
    reversal of goodwill amortization and recognition of negative goodwill in opening
retained earnings;
    
    separation of the conversion option of convertible bond from
the host debt contract
and accounting for it as a derivative component at fair value through profit or loss;
    
    capitalization and amortization of upfront non-refundable revenue and the related
direct incremental costs for activating cellular subscribers; and
    
    provision for deferred taxation on HKFRS adjustments.
   F - 12




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##### Table of Contents



(a)
    
    New accounting pronouncements in 2006:
 (i)
    
    The following are the series of amendments, new standards and
interpretations issued by the HKICPA to existing standards that are not yet
effective and have not been early adopted by the Group:
 
    
    HKFRS 7, Financial instruments: Disclosures (effective for annual periods
beginning on or after January 1, 2007). HKFRS 7 introduces new disclosures
relating to financial instruments. This standard is not expected to have any
impact on the classification and valuation of the Groups financial
instruments;
    
    HKFRS 8, Operating segments (effective for annual periods beginning on or
after January 1, 2009). HKFRS 8 sets out requirements for disclosure of
information about an entitys operating segments and also about the entitys
products and services, the geographical areas in which it operates and its
major customers. This standard is not expected to have any impact on the
classification and presentation of the Groups consolidated financial
statements;
    
    Amendment to HKAS 1, Presentation of financial statements  Capital
Disclosure (effective for annual periods beginning on or after January 1,
2007). The amendment introduces new disclosures for managing capital. This
amendment is not expected to have any impact on the classification and
presentation of the Groups consolidated financial statements;
    
    HK(IFRIC)-Int 8, Scope of HKFRS 2 (effective for annual periods beginning
on or after May 1, 2006). HK(IFRIC)-Int 8 requires consideration of
transactions involving the issuance of equity instruments  where the
identifiable consideration received is less than the fair value of the equity
instruments issued  to establish whether or not they fall within the scope
of HKFRS 2. HK(IFRIC)-Int 8 is not expected to have any impact on the Groups
consolidated financial statements;
    
    HK(IFRIC)-Int 9, Reassessment of embedded derivatives (effective for
annual periods beginning on or after June 1, 2006). HK(IFRIC)-Int 9 requires
an entity to assess whether an embedded derivative is required to be
separated from the host contract and accounted for as a derivative when the
entity first becomes a party to the contract. Subsequent reassessment is
prohibited unless there is a change in the terms of the contract that
significantly modifies the cash flows that otherwise would be required under
the contract, in which case reassessment is required. As the Groups entities
have not changed the terms of their contracts, HK(IFRIC)-Int 9 is not
expected to have any impact on the Groups consolidated financial statements;
    
    HK(IFRIC)-Int 10, Interim financial reporting and impairment (effective
for annual periods beginning on or after November 1, 2006). HK(IFRIC)-Int 10
prohibits the impairment losses recognized in an interim period on goodwill,
investments in equity instruments and investments in financial assets carried
at cost to be reversed at a subsequent balance sheet date. The Group will
apply HK(IFRIC)-Int 10 from January 1, 2007, but it is not expected to have
any significant impact on the Groups consolidated financial statements; and
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
    
    HK(IFRIC)-Int 11, Group and treasury share transaction (effective for annual
periods beginning on or after March 1, 2007). HK(IFRIC)-Int 11 requires a
share-based payment arrangement in which an entity receives goods or services as
consideration for its own equity-instruments to be accounted for as an
equity-settled share-based payment transaction, regardless of how the equity
instruments needed are obtained. HK(IFRIC)-Int 11 also provides guidance on
whether share-based payment arrangements, in which suppliers of goods or services
of an entity are provided with equity instruments of the entitys parent, should
be accounted for as cash-settled or equity-settled in the entitys financial
statements. HK(IFRIC)-Int 11 is not expected to have a material impact on the
Groups consolidated financial statements.
 (ii)
    
    Interpretations to existing standards issued by the HKICPA that are
not yet effective and not relevant for the Groups operations:
 
    
    HK(IFRIC)-Int 7, Applying the restatement approach under HKAS 29, Financial
reporting in hyperinflationary economies (effective from March 1, 2006).
HK(IFRIC)-Int 7 provides guidance on how to apply requirements of HKAS 29 in a
reporting period in which an entity identifies the existence of hyperinflation
in the economy of its functional currency, when the economy was not
hyperinflationary in the prior period. As none of the group entities have a
currency of a hyperinflationary economy as its functional currency,
HK(IFRIC)-Int 7 is not relevant to the Groups operations; and
    
    HK(IFRIC)-Int 12, Service concession arrangements (effective for annual
periods beginning on or after January 1, 2008). HK(IFRIC)-Int 12 provides
guidance on the accounting by operators for public-to-private service
concession arrangements. As the Group does not have any public-to-private
service concession arrangement, HK(IFRIC)-Int 12 is not relevant to the
Groups operations.
 (b)
    
    Adoption of HKFRS in 2005:In 2005, the Group adopted the new/revised standards and interpretations of HKFRS as
listed below, which are relevant to the operations of the Group. The 2004 comparatives
have been amended as required, in accordance with the relevant requirements.
 HKAS 1 Presentation of Financial StatementsHKAS 2 InventoriesHKAS 7 Cash Flow StatementsHKAS 8 Accounting Policies, Changes in Accounting Estimates and
ErrorsHKAS 10 Events after the Balance Sheet DateHKAS 16 Property, Plant and EquipmentHKAS 17 LeasesHKAS 21 The Effects of Changes in Foreign Exchange RatesHKAS 23 Borrowing CostsHKAS 24 Related Party DisclosuresHKAS 27 Consolidated and Separate Financial StatementsHKAS 28 Investments in AssociatesHKAS 31 Investments in Joint VenturesHKAS 32 Financial Instruments: Disclosures and PresentationHKAS 33 Earnings per ShareHKAS 36 Impairment of AssetsHKAS 38 Intangible AssetsHKAS 39 Financial Instruments: Recognition and MeasurementHKAS Int 15 Operating Leases  IncentivesHKFRS 2 Share-based PaymentsHKFRS 3 Business Combinations
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(i)
    
    The adoption of new/revised HKAS 1, 2, 7, 8, 10, 16, 21, 23, 27, 28, 31, 32,
33, 39 and HKAS Int 15 did not result in substantial changes to the Groups
accounting policies.(ii)
    
    The adoption of revised HKAS 17 has resulted in a change in the
accounting policy relating to the reclassification of leasehold land and land use
rights from property, plant and equipment to other assets  long-term prepayment
for lease of land. The upfront prepayments made for the leasehold land and land
use rights are expensed in the statements of income on a straight-line basis over
the period of the lease. In prior years, the leasehold land was accounted for at
cost less accumulated depreciation.The effects of adoption of revised HKAS 17 on the consolidated statements of income
were:
 2004
    
    2005RMB in millions
    
    RMB in millionsDecrease in depreciation and amortization
    
    
    (26
    )
    
    
    (28
    )Increase in general, administrative and
other expenses
    
    
    26
    
    
    
    28
 (iii)
    
    HKAS 24 extended the identification of related parties and disclosure of
related parties to include state-owned enterprises. Related parties include Unicom
Group and its related parties, other state-owned enterprises and their
subsidiaries directly or indirectly controlled by the PRC government (other than
those shown on the face of balance sheets as related parties), other entities and
corporations in which the Company is able to control, jointly control or exercise
significant influence and key management personnel of the Company and Unicom Group
as well as their close family members. Details of transactions with other major
state-owned enterprises for the years ended December 31, 2004,
2005 and 2006 are set forth in Note 33.3.
 (iv)
    
    The adoption of HKFRS 2 resulted in a change in the accounting
policy for share-based payments. Until December 31, 2004, the provision of share
options to employees did not result in an expense in the statements of income.
Effective on January 1, 2005, the Group expenses the cost of share options in the
statements of income over the vesting period of the options. As a transitional
provision, the cost of share options granted after November 7, 2002 and not yet
vested on January 1, 2005 was expensed retrospectively in the statements of income
of the respective periods. The adoption of HKFRS 2 resulted in a decrease in the
retained earnings as of January 1, 2005 by approximately RMB111 million.The effects of adoption of HKFRS 2 on the consolidated statements of income were:
 2004
    
    2005RMB in millions
    
    RMB in millionsIncrease in employee benefit expenses
    
    
    89
    
    
    
    108Decrease in basic earnings per share (RMB)
    
    
    0.007
    
    
    
    0.009Decrease in diluted earnings per share (RMB)
    
    
    0.007
    
    
    
    0.009
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(v)
    
    The adoption of HKFRS 3, HKAS 36 and HKAS 38 resulted in a change in the
accounting policy for goodwill/ negative goodwill. Until December 31, 2004,
goodwill was amortized on a straight-line basis over 20 years, and assessed for
any indication of impairment at each balance sheet date. In accordance with the
provisions of HKFRS 3, the Group ceased amortization of goodwill from January 1,
2005, and the accumulated amortization as of December 31, 2004
was eliminated
with a corresponding decrease in the cost of goodwill. Starting from January 1,
2005 onwards, goodwill is no longer amortized but is tested for impairment on an
annual basis, as well as when there is indication of impairment.Had the previous accounting policy for goodwill been applied in 2005, the effects
of adoption of HKFRS 3 and HKAS 38 on the consolidated statements of
income would have been:
 2004
    
    2005RMB in millions
    
    RMB in millionsImpact on depreciation and amortization
(decrease)
    
        
    

    
    
    171Increase in basic earnings per share (RMB)
    
        
    

    
    
    0.014Increase in diluted earnings per share
(RMB)
    
        
    
    
    

    0.014
 In addition, in accordance with HKFRS 3, from January 1, 2005, if the fair
value of the net identifiable assets and liabilities acquired exceed the purchase
consideration (i.e. an amount arising which would have been recorded as negative
goodwill under the previous accounting policy), the excess is recognized
immediately in the consolidated statement of income as it arises. Negative
goodwill previously recognized has been derecognized at January 1, 2005, with a
corresponding adjustment to the balance of retained earnings
as of January 1, 2005 of the Group
amounting to approximately RMB7 million.(vi)
    
    Upon the adoption of HKFRS on January 1, 2005, the Group changed its
accounting policy for recognition of upfront non-refundable revenue (i.e.
connection fee and receipts from SIM/UIM cards), which had previously been
recognized upon the completion of activation services. Effective from January 1,
2005, upfront non-refundable revenue and the related direct incremental costs for
activating cellular subscribers (including costs of SIM/UIM cards and commissions)
are capitalized and amortized over the expected customer service periods. Direct
incremental costs are capitalized only to the extent expected to be recoverable.
The expected customer service period for the Cellular Business is estimated based
on the expected stabilized churn rates of subscribers. Management judges that this
change of accounting policy provides reliable and more relevant information
because it better reflects the economic effects of the transactions. These changes
in accounting policy for recognition of upfront and non-refundable revenue and
direct incremental costs resulted in a decrease in the retained earnings as of
December 31, 2005 by approximately RMB368 million.The following table summarizes the effects of adoption of this accounting policy on
the consolidated statements of income:
 2004
    
    2005RMB in millions
    
    RMB in millions(Decrease)/increase in revenue
    
    
    (244
    )
    
    492Increase in selling and marketing expenses
    
    
    579
    
    
    1,140Decrease in costs of telecommunications
products sold
    
    
    917
    
    
    786Decrease in income tax expenses
    
    
    102
    
    
    40Increase in basic earnings per share (RMB)
    
    
    0.016
    
    
    0.014Increase in diluted earnings per share
(RMB)
    
    
    0.016
    
    
    0.014
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All changes in the accounting policies have been made in accordance with the
transitional provisions in the respective standards, wherever
applicable. All of the new/revised standards
adopted by the Group require retrospective application other than:
    
    HKFRS 2  only retrospective application for all equity instruments granted
after November 7, 2002 and not vested at January 1, 2005; and
    
    HKFRS 3  prospectively from January 1, 2005.
 2.2
    
    ConsolidationThe consolidated financial statements include the financial statements of the Company and
its subsidiaries made up to December 31.Subsidiaries are all entities (including special purpose entities) over which the Group
has the power to govern the financial and operating policies generally accompanying a
shareholding of more than one half of the voting rights. The existence and effect of
potential voting rights that are currently exercisable or convertible are considered when
assessing whether the Group controls another entity.Subsidiaries are fully consolidated from the date on which control is transferred to the
Group. They are de-consolidated from the date that control ceases.The Group has acquired the equity interests of certain
subsidiaries prior to 2005 (refer to Note 7 for details). The
purchase method of accounting was used to account for the acquisition
of those subsidiaries
(including common control transactions) by the Group. Under the
purchase method of accounting, the cost of an acquisition is
measured at the fair value of the assets given, equity instruments issued and liabilities
incurred or assumed at the date of exchange, plus costs directly attributable to the
acquisition. Identifiable assets acquired and liabilities and contingent liabilities
assumed in a business combination are measured initially at their fair values at the
acquisition date, irrespective of the extent of any minority interest. The excess of the
cost of acquisition over the fair value of the Groups share of the identifiable net
assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair
value of the net assets of the subsidiary acquired, the difference is recognized directly
in the statement of income.Inter-company transactions, balances and unrealized gains on transactions between group
companies are eliminated. Unrealized losses are also eliminated unless the transaction
provides evidence of an impairment of the asset transferred. Accounting policies of
subsidiaries would be changed when necessary to ensure consistency with the policies
adopted by the Group.Minority interest at the balance sheet date, being the portion of the net assets of
subsidiaries attributable to interests that are not owned by the Company whether
directly or indirectly through subsidiaries, are presented in the consolidated balance
sheets and statements of changes in equity within equity, separately from equity
attributable to the equity holders of the Company. Minority interests in the results of
the Group are presented on the face of the consolidated statements of income as an
allocation of the total income or loss for the year between minority interests and the
equity holders of the Company.Where losses applicable to the minority exceed the minoritys interest in the equity of a
subsidiary, the excess, and any further losses applicable to the minority, are charged
against the Groups interest except to the extent that the minority has a binding
obligation to, and is able to, make additional investment to cover the losses. If the
subsidiary subsequently reports income, the Groups interest is allocated all such income
until the minoritys share of losses previously absorbed by the Group has been recovered.
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2.3
    
    Segment ReportingA business segment is a group of assets and operations engaged in providing products or
services that are subject to risks and returns that are different from those of other
business segments. The Group has not presented geographical segments as the Group operates
primarily in one geographical segment. This is also consistent with the Groups internal
financial reporting.Unallocated costs primarily represent corporate expenses, income tax expense and
unrealized loss on changes in fair value of derivative component of convertible bonds,
whilst unallocated income represents interest income that cannot be identified to
different operating segments. Segment assets consist primarily of property, plant and
equipment, other assets, prepayments, inventories, receivables and operating cash. Segment
liabilities primarily comprise operating liabilities. Capital expenditure mainly comprises
additions to property, plant and equipment.2.4
    
    Foreign Currency Translation
 (a)
    
    Functional and presentation currencyItems included in the financial statements of each of the Groups entities are
measured using the currency of the primary economic environment in which the
entities operate (the functional currency). The consolidated financial statements
are presented in Renminbi (RMB), which is the Companys functional and
presentation currency.(b)
    
    Transactions and balancesForeign currency transactions are translated into the functional currency using the
exchange rates prevailing at the dates of the transactions. Foreign exchange gains
and losses resulting from the settlement of such transactions and from the
translation at year-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognized in the statement of income.
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2.5
    
    Property, Plant and EquipmentBuildings are stated at valuation. Independent valuations are performed periodically with
the last valuation being performed on values as of August 31, 2006. In the intervening
years, the directors review the carrying value of buildings and adjustment is made where
in the directors opinion there has been a material change in value. Any increase in the
values of the buildings is credited to the revaluation reserve; any decrease is first
offset against the increase on earlier valuations recorded in the revaluation reserve, in
respect of the same asset and is thereafter charged to the statement of income. Upon the
disposal of revalued buildings, the realized portion of the revaluation reserve is
transferred from the revaluation reserve to retained earnings.Other property, plant and equipment, comprising leasehold improvements, plant,
telecommunications equipment, office furniture, fixtures and others, are stated at
historical cost less accumulated depreciation and accumulated impairment losses. The cost
of an asset comprises its purchase price and any directly attributable costs of bringing
the asset to its working condition and location for its intended use.Subsequent costs are included in the assets carrying amount or recognized as a separate
asset, as appropriate, only when it is probable at the time the costs
are incurred that future
economic benefits associated with the item will flow to the Group, and the cost of the
item can be measured reliably. The carrying amount of the replaced part is derecognized.
All other repairs and maintenance costs are charged to the statement of income during the
financial period in which they are incurred.Depreciation on property, plant and equipment is calculated using the straight-line method
to allocate their costs or revalued amounts less their residual values over their estimated
useful lives, as follows:
 Depreciable life
    
    Residual rateBuildings
    
    1040 years
    
    
    3
    %Telecommunications equipment
    
    315 years
    
    
    3
    %Office furniture, fixtures and others
    
    515 years
    
    
    3
    %
 Leasehold improvements are depreciated over the shorter of their estimated useful lives
and the lease periods.The assets residual values and useful lives are reviewed, and adjusted if
appropriate, at each balance sheet date.Construction-in-progress (CIP) represents buildings, plant and equipment under
construction and pending installation, and is stated at cost less accumulated impairment
losses. Costs include construction and acquisition costs, and interest charges arising
from borrowings used to finance the assets during the construction period. No provision
for depreciation is made on construction-in-progress until such time as the assets are
completed and ready for use.An assets carrying amount is written down immediately to its recoverable amount if
the assets carrying amount is greater than its estimated recoverable amount (Note 2.8).The gain or loss on disposal of a property, plant or equipment is the differences
between the net sales proceeds and the carrying amount of the relevant asset, and is
recognized in the statement of income. Any revaluation reserve balance remaining
attributable to the relevant asset is transferred to retained earnings and is shown as a
movement in reserves.
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2.6
    
    Goodwill/Negative GoodwillGoodwill represents the excess of the cost of an acquisition over the fair value of
the Groups share of the net identifiable assets of the acquired subsidiary at the date of
acquisition. Prior to the adoption of HKFRS 3 on January 1, 2005, goodwill was carried at
cost less accumulated amortization and accumulated impairment losses. In year 2004,
goodwill was amortized using the straight-line method over the estimated economic lives of
the acquired business. Goodwill arising on major strategic acquisitions of the Group to
expand its geographical market coverage was amortized over 20 years.Negative goodwill represents the excess of the fair value of the Groups share of the
net identifiable assets and liabilities of the acquired subsidiary over the cost of acquisition at the date of acquisition. Prior to the adoption of HKFRS on January 1, 2005,
negative goodwill was recognized using the straight-line method over the remaining
weighted average useful life of acquired identifiable non-monetary assets.The adoption of HKFRS 3, HKAS 36 and HKAS 38 resulted in a change in the accounting
policy for goodwill/negative goodwill. Effective from January 1, 2005, the Group ceased
amortization of goodwill, and the accumulated amortization as of
December 31, 2004 was eliminated with a corresponding decrease in the cost of goodwill. Goodwill is tested
annually for impairment and carried at cost less accumulated impairment losses. Impairment
losses on goodwill are not reversed. Gain or loss on the disposal of an entity includes
the carrying amount of goodwill relating to the entity sold.In addition, in accordance with HKFRS 3, from January 1,
2005 onwards, if the fair value of
the net identifiable assets and liabilities acquired exceed the cost of an acquisition
(i.e. an amount arising which would have been known as negative goodwill under the previous
accounting policy), the excess is recognized immediately in the consolidated statement of
income as it arises. Negative goodwill recognized prior to
January 1, 2005 was derecognized at
January 1, 2005, with a corresponding adjustment to the balance of retained
earnings as of January 1, 2005 of the Group.Goodwill is allocated to cash-generating units for the purpose of impairment testing. The
allocation is made to those cash-generating units or groups of cash-generating units that
are expected to benefit from the business combination in which the goodwill arose. The
Group has allocated goodwill to the GSM Business and the CDMA Business which it operates
(Note 2.8).
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2.7
    
    Other AssetsOther assets mainly represent (i) capitalized direct incremental costs for activating GSM
and CDMA subscribers; (ii) customer acquisition costs under contractual CDMA subscriber
packages; (iii) computer software; (iv) prepaid rentals for premises and leased lines;
and (v) prepayment for lease of land.Capitalized direct incremental costs for activating GSM and CDMA subscribers, including
costs of SIM/UIM cards and commissions which are directly associated with upfront
non-refundable revenue received upon activation of cellular services, are amortized over
the expected customer service periods. The expected customer service periods are
estimated based on the expected stabilized churn rates of subscribers.Customer acquisition costs under contractual CDMA subscriber packages represent the cost
of CDMA handsets given to contractual subscribers under special promotional packages.
Such customer acquisition costs, to the extent recoverable, are amortized over the
contractual period (not exceeding 2 years) during which the minimum contract revenue is
expected to flow to the Group. Customer acquisition costs of contractual CDMA subscribers
are included in prepayment and other current assets when the customer contract is
within 1 year of expiry, whereas they are recorded as other assets when the unexpired
contract period is over 1 year.Acquired computer software licences are capitalized on the basis of the costs incurred to
acquire and bring to use the specific software. These costs are amortized over their
estimated useful lives.Long-term prepaid rental for premises and leased lines are amortized using a
straight-line method over the lease period.Long-term prepayments for lease of land are amortized over the period of the lease on a
straight-line basis.2.8
    
    Impairment of AssetsAssets that have an indefinite useful life or are not yet available for use are not
subject to amortization and are tested for impairment at each balance sheet date. Assets
that are subject to amortization are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. An impairment
loss is recognized for the amount by which the assets carrying amount exceeds its
recoverable amount. The recoverable amount is the higher of an assets fair value less
costs to sell and value in use. For the purposes of assessing impairment, assets are
grouped at the lowest levels for which there are separately identifiable cash flows
(cash-generating units). Assets other than goodwill that suffered from impairment are
reviewed for possible reversal of the impairment at each reporting date.
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2.9
    
    InventoriesInventories, which principally comprise handsets, SIM cards, UIM cards and accessories,
are stated at the lower of cost and net realizable value. Cost is based on the weighted
average method and comprises all costs of purchase and other costs incurred in bringing
the inventories to their present location and condition. Net realizable value for all the
inventories including those CDMA handsets for promotional package purpose is determined
on the basis of anticipated sales proceeds less estimated selling expenses.2.10
    
    Accounts Receivable and Other ReceivablesAccounts receivable and other receivables are recognized at fair value, less provision
for impairment. A provision for impairment of accounts receivable and other receivables
is established when there is objective evidence that the Group will not be able to
collect all amounts due according to the original terms of the receivables. The amount of
the provision is the difference between the assets carrying amount and the present value
of estimated future cash flows. The carrying amount of the assets is reduced through the
use of a provision account, and the amount of the loss is recognized in the statement of
income. When a receivable is uncollectible, it is written off against the provision
account for receivables. Subsequent recoveries of amounts previously written off are
credited to the statement of income.2.11
    
    Short-term Bank DepositsShort-term bank deposits are cash invested in fixed-term deposits with original
maturities ranging from more than 3 months to 1 year.2.12
    
    Cash and Cash EquivalentsCash and cash equivalents include cash in hand, deposits held at call with banks and
other short-term highly liquid investments with original maturities of three months or
less.
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2.13
    
    Convertible BondsAs the functional currency of the Group is RMB, the conversion of the convertible bonds
denominated in Hong Kong Dollars will not result in settlement by the exchange of a fixed
amount of cash in RMB, the functional currency of the Group, for a fixed number of the
Companys shares. In accordance with the requirements of HKAS 39, Financial Instruments
  Recognition and Measurement, the convertible bond contract must be separated into two
component elements: a derivative component consisting of the conversion option and a
liability component consisting of the straight debt element of the bonds.On the issue of the convertible bonds, the fair value of the embedded conversion option
was calculated using the Binomial model. The derivative component, the embedded
conversion option, is carried at fair value on the balance sheet with any changes in fair
value being charged or credited to the statement of income in the period when the change
occurs. The remainder of the proceeds is allocated to the debt element of the bonds, net of
transaction costs, and is recorded as the liability component. The liability component is
subsequently carried at amortized cost until extinguished on conversion or redemption.
Interest expense is calculated using the effective interest method by applying the
effective interest rate to the liability component through the maturity date.If the convertible bonds are converted, the carrying amounts of the derivative and
liability components are transferred to share capital and share premium as consideration
for the shares issued. If the convertible bonds are redeemed, any difference between the
amount paid and the carrying amounts of both components is recognized in the statement of
income.2.14
    
    Deferred Revenue and Advances from Customers
 (a)
    
    Deferred revenueDeferred revenue represents upfront non-refundable revenue, including connection
fee and receipts from activation of SIM/UIM cards relating to GSM and CDMA
businesses, which are deferred and recognized over the expected service period.(b)
    
    Advances from customersAdvances from customers are amounts paid by customers for GSM and CDMA prepaid
cards, Internet protocol (IP) telephone cards and other calling cards, GSM and
CDMA prepaid service fees which cover future telecommunications services (over a
period of one to twelve months). Advances from customers are stated at the amount
of proceeds received less the amount already recognized as revenues upon the
rendering of services.
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2.15
    
    Employee Benefits
 (a)
    
    Retirement benefitsFor defined contribution plan, the Group pays contributions to publicly or
privately administered pension insurance plans on a mandatory, contractual or
voluntary basis. The Group has no further payment obligations once the
contributions have been paid. The contributions are recognized as employee benefit
expenses when they are due. Prepaid contributions are recognized as an asset to the
extent that a reduction in the future payments is available.(b)
    
    Housing benefitsThe Groups contributions to the housing fund, special monetary housing benefits
and other housing benefits are expensed as incurred.(c)
    
    Share-based compensation costsThe Group operates an equity-settled share-based compensation plan. The fair value
of the employee services received in exchange for the grant of the share options is
recognized as an expense. The total amount to be expensed over the vesting period
is determined by reference to the fair value of the share options granted excluding
the impact of any non-market vesting conditions (for example, revenue and profit
targets). Non-market vesting conditions are included in assumptions about the
number of options that are expected to vest. At each balance sheet date, the Group
revises its estimates of the number of share options that are expected to become
exercisable. The Group recognizes the impact of the revision of original estimates,
if any, in the statement of income, and a corresponding adjustment to equity.The proceeds received net of any directly attributable transaction costs are
credited to share capital (nominal value) and share premium when the share options
are exercised.
 2.16
    
    ProvisionsProvisions are recognized when the Group has present legal or constructive obligations as
a result of past events, it is probable that an outflow of resources will be required to
settle the obligation, and the amount has been reliably estimated. Where there are a
number of similar obligations, the likelihood that an outflow will be required in
settlement is determined by considering the class of obligations as a whole. A provision
is recognized even if the likelihood of an outflow with respect to any one item included
in the same class of obligations may be small.Provisions are measured at the present value of the pre-tax amount of expenditures
expected to be required to settle the obligation that reflects current market assessments
of the time value of money and the risks specific to the obligation. The increase in the
provision due to passage of time is recognized as interest expense.
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2.17
    
    Revenue Recognition
 (a)
    
    Revenue comprises the fair value of the consideration received or receivable
for the services and sales of telecommunications products in the ordinary course of
the Groups activities. Revenue is shown net of business tax, government surcharges,
returns and discounts and after eliminating revenue within the Group.Revenue is recognized when it is probable that the economic benefits associated with
a transaction will flow to the Group and when the revenue and cost can be
measured reliably, on the following basis:
 
    
    usage fees are recognized when the service is rendered;
    
    monthly fees are recognized as revenue in the month during which the
services are rendered;
    
    revenue from telephone cards, which represent service fees received from
customers for telephone services, is recognized when the related service is
rendered upon actual usage of the telephone cards by customers;
    
    leased lines and indefeasible rights of use (IRU) are treated as
operating leases with rental income recognized on a straight-line basis over
the lease term, except for the lease of specific and identified network assets
that transfer substantially all the risks and rewards incidental to the
ownership to the lessee, which is recognized as capacity sales;
    
    value-added services revenue, which mainly represents revenue from the
provision of services such as short message, cool ringtone, CDMA1X wireless
data services and secretarial services to subscribers, is recognized when
service is rendered; and
    
    sales of telecommunications products, which mainly represent handsets and
accessories, are recognized when title has been passed to the buyers.
 (b)
    
    Interest incomeInterest income from deposits in banks or other financial institutions is recognized
on a time proportion basis, using the effective interest method.(c)
    
    Dividend incomeDividend income is recognized when the rights to receive payment is established.
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2.18
    
    Leases (as the lessee)
 (a)
    
    Operating leaseLeases in which a significant portion of the risks and rewards of ownership are
retained by the lessor are classified as operating leases. Payments made under
operating leases (net of any incentives received from the lessor) are expensed in
the statement of income on a straight-line basis over the period of the lease.(b)
    
    Finance leaseLeases of assets where the Group have substantially all the risks and rewards of
ownership are classified as finance leases. Finance leases are capitalized at the
leases commencement at the lower of the fair value of the leased property and the
present value of the minimum lease payments. Each lease payment is allocated between
the liability and finance charges so as to achieve a constant rate of interest on
the liability balance outstanding. The corresponding liabilities, net of finance
charges, are recorded as obligations under finance leases. The interest element
implicits in the lease payment is recognized in the statement of income over the
lease period so as to produce a constant periodic rate of interest on the remaining
balance of the liability for each period.
 2.19
    
    Costs under Subscriber Point Reward ProgramThe estimated costs of providing telecommunications services or providing non-cash gifts
under the subscriber point reward program are calculated based on the value of bonus
points awarded to subscribers, and are recognized as selling and marketing expenses when
subscribers accumulate bonus points. The value of a bonus point and the criteria for
awarding bonus points are established by the Group at the inception of the program.2.20
    
    Borrowing CostsBorrowing costs are expensed as incurred, except for interest directly attributable to the
acquisition, construction or production of an asset that necessarily takes a substantial
period of time to get ready for its intended use, in which case they are capitalized as
part of the cost of that asset. Capitalization of borrowing costs commences when
expenditures for the asset and borrowing costs are being incurred and the activities to
prepare the asset for its intended use are in progress. Borrowing costs are capitalized up
to the date when the project is completed and ready for its intended use.To the extent that funds are borrowed specifically for the purpose of obtaining a
qualifying asset, the amount of borrowing costs eligible for capitalization is determined
at the actual borrowing costs incurred on that borrowing during the period less any
investment income on the temporary investment of those borrowings.
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To the extent that funds are borrowed generally and used for the purpose of obtaining a
qualifying asset, the amount of borrowing costs eligible for capitalization is determined
by applying a capitalization rate to the expenditures on that asset. The capitalization
rate is the weighted average of the borrowing costs applicable to the borrowings of the
Group that are outstanding during the period, other than borrowings made specifically for
the purpose of obtaining a qualifying asset. The amount of borrowing costs capitalized
during a period should not exceed the amount of borrowing costs incurred during that
period. Other borrowing costs are recognized as expenses when incurred.The capitalized borrowing rate represents the cost of capital for raising the related
borrowings externally and varies from 3.60% to 5.83% for the year ended December 31, 2006
(2004: 4.78% to 5.73%; 2005: 3.60% to 5.58%).2.21
    
    Taxation
 (a)
    
    Income taxIncome tax is provided on the basis of income for statutory financial reporting
purposes, adjusted for income and expense items, which are not assessable or
deductible for tax purposes.(b)
    
    Deferred income taxDeferred income tax is provided in full, using the liability method, on temporary
differences arising between the tax bases of assets and liabilities and their
carrying amounts in the consolidated financial statements. However, if the deferred
income tax arises from initial recognition of an asset or liability in a transaction
other than a business combination that at the time of the transaction affects
neither accounting nor taxable income or loss, it is not accounted for. Deferred
income tax is determined using tax rates (and laws) that have been enacted or
substantially enacted by the balance sheet date and are expected to apply when the
related deferred income tax asset is realized or the deferred income tax liability
is settled.Deferred income tax assets are recognized to the extent that it is probable that
future taxable income will be available against which the temporary differences can
be utilized.
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2.22
    
    Dividend DistributionDividend distribution to the Companys shareholders is recognized as a liability in the
Groups financial statements in the period in which the dividends are approved by the
Companys shareholders.2.23
    
    Related PartiesEntities are considered to be related if one has the ability to control the other,
directly or indirectly, or has the ability to exercise significant influence over the
financial and operating decisions of the other. Entities are also considered to be related
if they are subject to common control or common significant influence.2.24
    
    Contingent Liabilities and Contingent AssetsA contingent liability is a possible obligation that arises from past events and whose
existence will only be confirmed by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the Group. It can also be a
present obligation arising from past events that is not recognized because it is not
probable that outflow of economic resources will be required or the amount of obligation
cannot be measured reliably.A contingent liability is not recognized but is disclosed in the notes to the financial
statements. When a change in the probability of an outflow occurs so that outflow is
probable, the liability will then be recognized as a provision.A contingent asset is a possible asset that arises from past events and whose existence
will be confirmed only by the occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the Group.Contingent assets are not recognized but are disclosed in the notes to the financial
statements when an inflow of economic benefits is probable. When an inflow is virtually
certain, an asset is recognized.
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2.25
    
    Earnings per Share and per American Depositary Share (ADS)Basic earnings per share is computed by dividing the income attributable to equity holders
by the weighted average number of ordinary shares outstanding during the year.Diluted earnings per share is computed by dividing the income attributable to equity
holders by the weighted average number of ordinary shares, after adjusting for the effects
of the dilutive potential ordinary shares.Basic and diluted earnings per ADS are computed by multiplying the net income per share by
10, which is the number of shares represented by each ADS.
 3. FINANCIAL RISK MANAGEMENT
 3.1
    
    Financial risk factorsThe Groups activities expose it to a variety of financial risks: market risk (including
currency risk, cash flow interest rate risk and fair value interest rate risks), credit
risk and liquidity risk. The Groups overall risk management program focuses on the
unpredictability of financial markets and seeks to minimize potential adverse effects on
the Groups financial performance.Financial risk management is carried out by the Groups finance department in headquarter,
following the overall directions determined by the Board of Directors. The Groups finance
department identifies and evaluates financial risks in close co-operation with the Groups
operating units.
 (a)
    
    Market risk
 (i)
    
    Foreign exchange riskThe Groups businesses are mainly conducted in RMB, except
for certain subsidiaries located in Hong Kong, Macau and United States of
America (USA). Dividends to equity holders are declared in RMB and paid in
HK dollars. The Group is exposed to foreign exchange risk arising from
various currency exposures, primarily with respect to US dollars and HK
dollars. As of December 31, 2006, the Group had approximately USD1.0 billion
bank loans and a USD1.3 billion convertible bonds recorded in the financial
statements. The Group also had cash and cash equivalents and short-term bank
deposits of USD501 million and HKD664 million in total. The Group has not
used any forward contracts or foreign currency swap arrangements to hedge
its exposure to currency risk. However, the Groups finance department in
headquarter continuously monitors the foreign exchange risk regarding loans
and deposits denominated in foreign currency.
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(ii)
    
    Cash flow and fair value interest rate riskThe Groups interest-bearing assets are mainly represented by bank deposits.
Apart from this, the Groups income and operating cash flows are substantially
independent of changes in market interest rates.The Groups interest rate risk arises from long-term bank loans and liability
component of convertible bonds. Bank loans issued at floating rates expose the
Group to cash flow interest-rate risk. Bank loans, short-term bonds and
liability component of convertible bonds issued at fixed rates expose the Group
to fair value interest rate risk. As of December 31, 2006, RMB315 million
(2005: RMB7,442 million) of long-term bank loans and RMB7,087 million (2005:
RMB9,866 million) of short-term bonds and RMB7,117 million
(2005: Nil) of liability
component of convertible bonds were at fixed rates, while RMB7,809
million (2005: RMB9,684 million) of long-term bank loans were at floating
rates.The Group does not expect any significant changes in interest rates which might
materially affect the Groups results of operations.
 (b)
    
    Credit riskThe Group has no significant concentrations of credit risk. The extent of the
Groups credit exposure is mainly represented by the aggregate balance of accounts
receivable for services and amounts due from related parties and other operators.The Group has policies that limit the amount of credit exposure to accounts
receivable for services and amounts due from related parties and other operators.
The normal credit period granted by the Group is on an average 30 days from the
date of invoice. The utilization of credit limits is regularly monitored by the
Group.(c)
    
    Liquidity riskPrudent liquidity risk management implies maintaining sufficient cash and the
availability of funding through an adequate amount of available financing,
including short-term bank loans and issuance of bonds. Due to the dynamic nature of
the underlying businesses, the Groups finance department in headquarter maintains
adequate amount of cash and cash equivalents and flexibility in funding through
having available sources of financing.
 3.2
    
    Fair value estimationThe estimate of the fair value of the conversion option of the convertible
bonds, that is separated from the host debt contract and accounted for as a
derivative liability, is determined by using valuation techniques. The Group selects
an appropriate valuation method and makes assumptions with reference to market
conditions existing at each balance sheet date. Please refer to Note 17 for details.The carrying value of trade receivables (net of impairment provision) and
payable are a reasonable approximation of their fair values. The fair value of
financial liabilities for disclosure purposes is estimated by discounting the future
contractual cash flows at the current market interest rate that is available to the
Group for similar financial instruments.
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4.
    
    CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTSEstimates and judgements are continually evaluated and are based on historical experience and
other factors, including expectations of future events that are believed to be reasonable
under the circumstances.
 4.1
    
    Critical accounting estimates and assumptionsThe Group makes estimates and assumptions concerning the future. The resulting
accounting estimates will, by definition, may not equal to the related actual
results. The estimates and assumptions that have a significant risk of causing a
material adjustment to the carrying amounts of assets and liabilities within the next
financial year are discussed below.
 (a)
    
    Depreciation on property, plant and equipmentDepreciation on the Groups property, plant and equipment is calculated using the
straight-line method to allocate cost or revalued amounts to residual values over
the estimated useful lives. The Group reviews the useful lives and residual values
periodically to ensure that the method and rates of depreciation are consistent with
the expected pattern of realization of economic benefits from property, plant and
equipment. The Group estimates the useful lives of property, plant and equipment
based on historical experience, taking into account of anticipated technological
changes. If there are significant changes from previously estimated useful lives,
the amount of depreciation expenses may change. The cost or revalued amount and
accumulated depreciation of property, plant and equipment as of December 31, 2006
amounted to RMB205.8 billion (2005: RMB186.7 billion) and RMB94.4 billion (2005:
RMB74.3 billion), respectively.(b)
    
    Impairment of non-current assetsThe Group tests whether non-current assets have suffered from any impairment, in
accordance with the accounting policy stated in Note 2.8. The recoverable amount of
an asset is the higher of its fair value less costs to sell and its value in use.
Management estimates value in use based on estimated discounted pre-tax future cash
flows of the cash generating unit at the lowest level to which the asset belongs. If
there is a significant change in managements assumptions and the estimated
recoverable amounts of the non-current assets, the Groups future results would be
significantly affected.
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(c)
    
    Provision for doubtful debtsAccounts receivables are stated at costs, less provision for doubtful debts. The
Group evaluates specific accounts receivable where there are indications that the
receivable may be doubtful or is not collectible. The Group records a provision
based on its best estimates to reduce the receivable balance to the amount that is
expected to be collected. For the remaining receivable balances as of each reporting
date, the Group makes a provision based on observable data indicating that there is
a measurable decrease in the estimated future cash flows from the remaining
balances. The Group makes such estimates based on its past experience, historical
collection patterns, subscribers credibility and collection trends. For general
subscribers of Cellular, Long Distance, Data and Internet businesses, the Group
makes a full provision for receivables aged over 3 months, which is consistent with
its credit policy with respect to relevant subscribers.The Groups estimates described above are based on past experience, subscribers
credibility and collection trends. If circumstances change (e.g. due to factors
including developments in the Groups business and the external market environment),
the Group may need to re-evaluate its policies on doubtful debts, and make additional provisions in the
future.(d)
    
    Provision for subscriber point reward programThe Group has implemented a subscriber point reward program, which is a bonus point
based scheme that rewards subscribers according to their service consumption,
loyalty and payment history. The cost of the subscriber point reward program is
charged to the statement of income as selling and marketing expenses, instead of a
reduction of revenue. The estimated liability is recognized based on (i) the value
of each bonus point awarded to subscribers, and (ii) the number of bonus points
related to subscribers who are qualified or expected to be qualified to exercise
their redemption right at each balance sheet date. If subscribers redeem rewards or
their entitlements expire, the provision is adjusted accordingly. The Group has
recognized a liability for this program amounting to RMB556 million as of December
31, 2006 (2005: RMB337 million). As the Group has not had much historical incentive
redemption experience in the past, the Group may need to re-assess the method for
accruing for the potential bonus point liability when there is a more stabilized and
reliable historical redemption statistics in future.
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(e)
    
    Income tax and deferred taxationThe Group estimates its income tax provision and deferred taxation in accordance
with the prevailing tax rules and regulations, taking into account any special
approvals obtained from relevant tax authorities and any preferential tax treatment
to which it is entitled in each location or jurisdiction in which the Group
operates. There are many transactions and calculations for which the ultimate tax
determination is uncertain during the ordinary course of business. The Group
recognizes liabilities for anticipated tax audit issues based on estimates of
whether additional taxes will be due. Where the final tax outcome of these matters
is different from the amounts that were initially recorded, such differences will
impact the income tax and deferred tax provisions in the period in which such
determination is made.For the evaluation of temporary differences, the Group has assessed the likelihood
that the deferred tax assets could be recovered. Major deferred tax assets relate to
interest on loans from China-China-Foreign (CCF) joint ventures, loss arising from
terminations of CCF arrangements (Note 9(g)), provisions for doubtful debts and
write-down of inventory to net realizable value and additional depreciation
deductible for tax purposes. Due to the effects of these temporary differences on
income tax, the Group has recorded deferred tax assets amounting to RMB0.31 billion
as of December 31, 2006 (2005: RMB0.34 billion). Deferred tax assets are recognized
based on the Groups estimates and assumptions that they will be recovered from
taxable income arising from the continuing operations in the foreseeable future.The Group believes it has recorded adequate current tax provision and deferred taxes
based on the prevailing tax rules and regulations and its current best estimates and
assumptions. In the event that future tax rules and regulations or related
circumstances change, adjustments to current and deferred taxation may be necessary.(f)
    
    Fair value of conversion optionOn July 5, 2006, the Company issued a zero coupon convertible bonds with an
aggregate principal amount of USD1 billion. The three-year convertible bonds was
issued with a conversion price of HKD8.63 and will mature on July 5, 2009. The
embedded conversion option has been separated from the host debt contract and
accounted for as a derivative liability carried at fair value through profit or loss
(Note 17). The fair value of this conversion option which is not traded in an active
market is determined by using valuation techniques. The Group uses its judgement to
select an appropriate valuation method and makes assumptions that are mainly based
on market conditions existing at each balance sheet date. The valuation model
requires the input of subjective assumptions, including the volatility of share
price, stock closing price, dividend yield, risk-free rate, and expected option
life. Changes in subjective input assumptions can materially affect the fair value
estimate. For the year ended December 31, 2006, the unrealized loss resulting from
changes in fair value of the conversion option of the convertible bonds was
approximately RMB2.4 billion.
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4.2
    
    Critical judgements in applying the entitys accounting policies
 (a)
    
    Capitalization of CDMA customer acquisition costsThe Group has been operating the CDMA business since the beginning of 2002. In order
to accelerate the development of the CDMA business and subscriber growth, the Group
offers certain promotional packages. As part of the contractual arrangements with
certain CDMA contractual subscribers under these special promotional packages, CDMA
handsets were provided to the subscribers for their use at no additional charge
during the specified contract period ranging from six months to two years. In
return, the subscribers are required to incur a minimum amount of service fees
during the contract period. If the contractual subscribers can fulfill the minimum
contract spending amounts by the end of the contract period, they will not be
obliged to repay the remaining costs of the CDMA handsets given for their use. In
addition, to secure contract performance, these subscribers are required under their
contracts to (1) prepay certain amounts of service fees or deposits, (2) maintain a
bank deposit in one of the designated commercial banks to secure their minimum
contract amounts, or (3) provide a guarantor who will compensate the Group for any
loss in the event of the subscribers non-performance of related contractual
obligations.The Group considers the costs of the CDMA handsets provided to contractual
subscribers under these promotional packages as customer acquisition costs for the
development of these new CDMA contractual subscribers. Such customer acquisition
costs are deferred to the extent expected to be recoverable, and amortized over the
contractual periods (not exceeding two years), over which future economic benefits
are expected to flow to the Group in the form of minimum contract revenue.The Group determined its accounting policy for capitalization of customer
acquisition costs of contractual CDMA subscribers after a careful evaluation of
specific facts and circumstances, and believes that the capitalization of such costs
is appropriate because future economic benefits are expected to flow to the Group in
the form of future contractual revenues, taking into consideration (1) the
historically high ARPUs and low churn rate, and low default or bad debt rates of
these subscribers; (2) the Groups established procedures in and the relative low
cost of enforcement of contracts in default; and (3) the existence of specified
contract periods with minimum contract spending amounts and built-in contractual
safeguarding measures such as non-refundable prepayments, bank deposits, and
guarantees received, as well as penalty clauses imposed on subscribers.
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Therefore, the Group believes that the customer acquisition costs are recoverable
from future revenue to be derived from these promotional packages, and the
capitalization and amortization of these customer acquisition costs is an
appropriate accounting policy. Furthermore, the Group continuously assesses and
evaluates the recoverability of these customer acquisition costs, based on detailed
review of historical subscriber churn rates and estimated default rate. Based on the
Groups current assessment and evaluation, the Group believes that there is no
significant problem in recovering the carrying amounts of the customer acquisition
costs as of the balance sheet date.The Group has made the above recoverability assessments based on the current legal
and operating environment relating to the subscribers contract performance and
other information currently available. Actual results may differ significantly from
the current situation and the Groups current estimates. If the situation changes
significantly in the future, the Group may need to accelerate the amortization of
customer acquisition costs based on conditions at that time.(b)
    
    Recognition of upfront non-refundable revenue and direct incremental costsThe Group defers and amortizes upfront non-refundable revenue, including
connection fees and activation fees of SIM cards or UIM cards from cellular
subscribers over the expected customer service period. Accordingly, the related
direct incremental costs of acquiring and activating GSM and CDMA subscribers,
including costs of SIM or UIM cards and commissions which are directly associated
with upfront non-refundable revenue received upon activation of cellular services,
are also capitalized and amortized over the same expected customer service period.
The Group only capitalizes costs to the extent that they will generate future
economic benefits. The excess of the direct incremental costs over the corresponding
upfront non-refundable revenue, if any, are expensed to the statement of income
immediately.The expected customer service period for the cellular business is estimated based on
the expected stabilized churn rates of subscribers after taking into consideration
factors such as customer retention experience, the expected level of competition,
the risk of technological or functional obsolescence of our services and the current
regulatory environment. If the estimate of the expected stabilized churn rate
changes for future periods as a result of unexpected changes in competition
environment, telecommunication technology or regulatory environment, the amount and
timing of recognition of these direct incremental costs and our deferred revenue
would also change.
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(c)
    
    Lease of CDMA network capacityPursuant to a CDMA lease agreement signed by the Group and Unicom Groups
wholly-owned subsidiary, Unicom New Horizon Mobile Telecommunications Company
Limited (Unicom New Horizon) in 2002 ( Original CDMA Lease Agreement), Unicom
New Horizon agreed to lease the capacity of the CDMA network to the Group.According to the terms of the Original CDMA Lease Agreements, the initial lease
period is for one year, renewable for additional one-year term at the Groups
option. The Group has the exclusive right to lease and operate the CDMA network
capacity in the relevant regions. Also, the Group has the option to add or reduce
the capacity leased by giving specified period of advance notice. The lease fee per
unit of capacity is calculated on a basis that if full capacity is leased, it would
permit Unicom New Horizon to recover its investment in constructing the CDMA network
in 7 years, together with an internal return rate of 8%. The Group has the option to
purchase the network assets based on the appraised value of the network determined
by an independent appraiser.Unicom New Horizon has the legal ownership of the CDMA network, is directly
responsible for the planning, financing and construction of the CDMA network, and
directly enters into all construction contracts with suppliers and constructors. The
Group believes it only bears the risks associated with the operation of the CDMA
business during the relevant leasing periods and is free from any ownership risks of
the CDMA network and the risks and rewards of ownership of the leased assets rest
substantially with the lessor.At the inception of the Original CDMA Lease Agreement, there was a high degree of
uncertainty related to the market condition and operating results of the CDMA
business. It was highly uncertain whether the Group would continue to lease the
network in the future or to estimate the future network capacity to be leased. The
Group was also unable to determine whether or not they would exercise the purchase
option in future. Given these uncertainties and due to the fact that the risks
associated with the ownership of the CDMA assets substantially remained with Unicom
Group and Unicom New Horizon, the Group accounted for the leasing of the CDMA
network as operating leases for the initial three-year lease period, so as to
reflect the respective rights and obligations of the relevant parties to the
Original CDMA Lease Agreement.On March 24, 2005, the Group entered into another CDMA Lease Agreement ( 2005 CDMA
Lease Agreement) with Unicom Group and Unicom New Horizon to replace the Original
CDMA Lease Agreement. Key terms of the 2005 CDMA Lease Agreement, including
exclusive operating rights and purchase option, are substantially similar to those
contained in the Original CDMA Lease Agreement except that the CDMA lease has an
initial term of two years and the lease fee of the CDMA Network is to be determined
on the basis of the audited CDMA service revenue. Given that the uncertainties
continued, the Group considered the risks associated with the ownership of the CDMA
assets still substantially remain with Unicom Group and Unicom New Horizon, and has
concluded the leasing of the CDMA network continues to be an operating lease.
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On October 26, 2006, the Group entered into a new CDMA Lease Agreement (the 2006
CDMA Lease Agreement) with Unicom Group and Unicom New Horizon to renew the 2005
CDMA Lease Agreement effective from January 1, 2007. Pursuant to the 2006 CDMA Lease
Agreement, the initial lease period is for one year, renewable for an additional
one-year term at the Groups option. The lease fee of the CDMA network for 2007 and
2008 is as follows:
 
    
    31% of the audited CDMA service revenue of the lessee for each of the years
2007 and 2008; or
    
    30% of the audited CDMA service revenue of the lessee for the year 2007 or
2008, where the audited CDMA income before taxation of the lessee for the
relevant year is less than the audited CDMA income before taxation of the
lessee for the year 2006 as set out in the relevant annual audited financial
statements of the lessee.
 Under the 2006 CDMA Lease Agreement, the annual lease fee of the CDMA network shall
not be less than a certain minimum level (the Minimum Lease Fee) regardless of the
amount of CDMA service revenue for that year. The Minimum Lease Fee for 2007 shall
be 90% of the total amount of lease fee paid by the Group to Unicom New Horizon for
2006 pursuant to the 2005 CDMA Lease Agreement. The Minimum Lease Fee for 2008 shall
be 90% of the total amount of lease fee paid by the Group to Unicom New Horizon for
2007 pursuant to the 2006 CDMA Lease Agreement. The level of lease fee under the
2006 CDMA Lease Agreement has been set by reference to the Groups view of the
industry trends, including factors such as CDMA subscribers and average revenue per
user per month levels.At the inception of the 2006 CDMA Lease Agreement, the Group believes the
uncertainties of the CDMA business continue to exist, particularly due to the fact
that (i) the service revenue of CDMA business was stagnant in 2006; (ii) the
uncertainty of the future success of CDMA business arising from keen market
competition; and (iii) the uncertainty of the future changes in technology,
technological standards and government regulatory environment. Moreover, at the
inception of the 2006 CDMA Lease Agreement, the Group was still unable to determine
whether it would renew the lease after the initial one-year lease term or whether it
would exercise the purchase option. As a result, the Group considered the risks
associated with the ownership of the CDMA assets still substantially remain with
Unicom Group and Unicom New Horizon, and has concluded the leasing of the CDMA
network will still be accounted for as an operating lease in 2007. At the beginning
of each future lease term, the Group will reassess the appropriate classification
based on the relevant factors and circumstances at that time.Based on the above accounting judgement made, the operating lease expense for the
leasing of CDMA network has been recorded in the statement of income, and the
carrying value of the CDMA assets and the related liabilities have not been
reflected in the balance sheets. For the year ended December 31, 2006, the lease
expense of approximately RMB8.08 billion (2004: 6.59 billion; 2005: RMB7.92 billion)
was recorded under leased lines and network capacities in the statement of income.
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5.
    
    SEGMENT INFORMATIONThe Group comprises four business segments based on the various types of telecommunications
services mainly provided to customers in Mainland China. The major business segments operated
by the Group are classified as below:
 
    
    GSM Business  the provision of GSM telephone and related services;
    
    CDMA Business  the provision of CDMA telephone and related services, through a
leasing arrangement for CDMA network from Unicom New Horizon;
    
    Data and Internet Business  the provision of domestic and international data,
Internet and other related services; and
    
    Long Distance Business  the provision of domestic and international long
distance and other related services.
 The Groups primary measure of segment results is based on segment income or loss before income
tax. Unallocated costs primarily represent corporate expenses, income tax expense and
unrealized loss on change in fair value of derivative component of convertible bonds, whilst
unallocated income represents interest income that cannot be identified to different operating
segments.
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5.1 Business Segments
 2006
    
    
    2005Data and
    
    
    Long
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Data and
    
    
    LongGSM
    
    
    CDMA
    
    
    Internet
    
    
    Distance
    
    
    Unallocated
    
    
    
    
    
    
    
    
    
    
    GSM
    
    
    CDMA
    
    
    Internet
    
    
    Distance
    
    
    UnallocatedBusiness
    
    
    Business
    
    
    Business
    
    
    Business
    
    
    amounts
    
    
    Elimination
    
    
    Total
    
    
    Business
    
    
    Business
    
    
    Business
    
    
    Business
    
    
    amounts
    
    
    Elimination
    
    
    TotalRevenue (Turnover):Usage fee
    
    
    33,609,094
    
    
    
    14,695,758
    
    
    
    1,770,321
    
    
    
    64,337
    
    
    
    
    
    
    
    
    
    
    
    50,139,510
    
    
    
    32,077,305
    
    
    
    16,726,678
    
    
    
    2,540,574
    
    
    
    599,251
    
    
    
    
    
    
    
    
    
    
    
    51,943,808Monthly fee
    
    
    7,370,440
    
    
    
    5,025,422
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,395,862
    
    
    
    6,840,720
    
    
    
    4,905,538
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,746,258Interconnection revenue
    
    
    4,914,964
    
    
    
    1,732,360
    
    
    
    92,140
    
    
    
    424,792
    
    
    
    
    
    
    
    
    
    
    
    7,164,256
    
    
    
    3,466,067
    
    
    
    1,398,577
    
    
    
    102,989
    
    
    
    434,577
    
    
    
    
    
    
    
    
    
    
    
    5,402,210Leased lines rental
    
    
    
    
    
    
    
    
    
    
    473,708
    
    
    
    574,728
    
    
    
    
    
    
    
    
    
    
    
    1,048,436
    
    
    
    
    
    
    
    
    
    
    
    393,659
    
    
    
    489,969
    
    
    
    
    
    
    
    
    
    
    
    883,628Value-added service revenue
    
    
    11,543,343
    
    
    
    5,314,118
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,857,461
    
    
    
    7,966,629
    
    
    
    4,115,542
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,082,171Other revenue
    
    
    1,852,580
    
    
    
    525,484
    
    
    
    39,147
    
    
    
    4,565
    
    
    
    
    
    
    
    
    
    
    
    2,421,776
    
    
    
    1,784,807
    
    
    
    430,601
    
    
    
    12,745
    
    
    
    776
    
    
    
    
    
    
    
    
    
    
    
    2,228,929Total services revenue
    
    
    59,290,421
    
    
    
    27,293,142
    
    
    
    2,375,316
    
    
    
    1,068,422
    
    
    
    
    
    
    
    
    
    
    
    90,027,301
    
    
    
    52,135,528
    
    
    
    27,576,936
    
    
    
    3,049,967
    
    
    
    1,524,573
    
    
    
    
    
    
    
    
    
    
    
    84,287,004Sales of telecommunications
products
    
    
    8,174
    
    
    
    4,257,118
    
    
    
    1,900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,267,192
    
    
    
    3,174
    
    
    
    2,743,337
    
    
    
    7,226
    
    
    
    8,090
    
    
    
    
    
    
    
    
    
    
    
    2,761,827Total revenue from external
customers
    
    
    59,298,595
    
    
    
    31,550,260
    
    
    
    2,377,216
    
    
    
    1,068,422
    
    
    
    
    
    
    
    
    
    
    
    94,294,493
    
    
    
    52,138,702
    
    
    
    30,320,273
    
    
    
    3,057,193
    
    
    
    1,532,663
    
    
    
    
    
    
    
    
    
    
    
    87,048,831Intersegment revenue
    
    
    
    
    
    
    
    
    
    
    2,978,468
    
    
    
    1,783,015
    
    
    
    
    
    
    
    (4,761,483
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,553,242
    
    
    
    1,189,531
    
    
    
    
    
    
    
    (3,742,773
    )
    
    
    Total revenue
    
    
    59,298,595
    
    
    
    31,550,260
    
    
    
    5,355,684
    
    
    
    2,851,437
    
    
    
    
    
    
    
    
    
    
    
    94,294,493
    
    
    
    52,138,702
    
    
    
    30,320,273
    
    
    
    5,610,435
    
    
    
    2,722,194
    
    
    
    
    
    
    
    
    
    
    
    87,048,831Leased lines and network
capacities
    
    
    (235,033
    )
    
    
    (8,160,189
    )
    
    
    (303,858
    )
    
    
    (64,785
    )
    
    
    
    
    
    
    
    
    
    
    (8,763,865
    )
    
    
    (253,790
    )
    
    
    (8,035,534
    )
    
    
    (369,644
    )
    
    
    (88,349
    )
    
    
    
    
    
    
    
    
    
    
    (8,747,317
    )Interconnection charges
    
    
    (9,498,433
    )
    
    
    (3,449,676
    )
    
    
    (481,528
    )
    
    
    (927,468
    )
    
    
    
    
    
    
    4,761,483
    
    
    
    (9,595,622
    )
    
    
    (7,207,123
    )
    
    
    (3,345,180
    )
    
    
    (600,462
    )
    
    
    (962,378
    )
    
    
    
    
    
    
    3,742,773
    
    
    
    (8,372,370
    )Depreciation and amortization
    
    
    (18,614,663
    )
    
    
    (717,828
    )
    
    
    (2,419,598
    )
    
    
    (670,191
    )
    
    
    (532
    )
    
    
    
    
    
    
    (22,422,812
    )
    
    
    (17,315,209
    )
    
    
    (614,297
    )
    
    
    (1,886,178
    )
    
    
    (551,045
    )
    
    
    (1,452
    )
    
    
    
    
    
    
    (20,368,181
    )Employee benefit expenses
    
    
    (4,136,669
    )
    
    
    (1,529,543
    )
    
    
    (527,358
    )
    
    
    (272,653
    )
    
    
    (182,476
    )
    
    
    
    
    
    
    (6,648,699
    )
    
    
    (3,550,780
    )
    
    
    (1,176,502
    )
    
    
    (492,376
    )
    
    
    (297,160
    )
    
    
    (99,494
    )
    
    
    
    
    
    
    (5,616,312
    )Selling and marketing
    
    
    (9,336,325
    )
    
    
    (9,007,838
    )
    
    
    (683,402
    )
    
    
    (224,078
    )
    
    
    (61
    )
    
    
    
    
    
    
    (19,251,704
    )
    
    
    (7,546,848
    )
    
    
    (11,308,449
    )
    
    
    (1,386,790
    )
    
    
    (315,791
    )
    
    
    
    
    
    
    
    
    
    
    (20,557,878
    )General, administrative and
other expenses
    
    
    (9,481,491
    )
    
    
    (2,849,754
    )
    
    
    (797,130
    )
    
    
    (259,900
    )
    
    
    (27,293
    )
    
    
    
    
    
    
    (13,415,568
    )
    
    
    (8,054,364
    )
    
    
    (2,537,950
    )
    
    
    (867,670
    )
    
    
    (259,705
    )
    
    
    (21,871
    )
    
    
    
    
    
    
    (11,741,560
    )Cost of telecommunications
products sold
    
    
    (188,239
    )
    
    
    (4,735,533
    )
    
    
    (6,197
    )
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    
    (4,929,988
    )
    
    
    (80,674
    )
    
    
    (3,477,893
    )
    
    
    (16,315
    )
    
    
    (434
    )
    
    
    
    
    
    
    
    
    
    
    (3,575,316
    )Unrealized loss on changes in
fair value of derivative
component of convertible bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,396,592
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Finance costs
    
    
    (475,456
    )
    
    
    (46,359
    )
    
    
    (35,512
    )
    
    
    (54,229
    )
    
    
    (467,026
    )
    
    
    424,362
    
    
    
    (654,220
    )
    
    
    (943,214
    )
    
    
    (42,368
    )
    
    
    (37,043
    )
    
    
    (66,787
    )
    
    
    (223,682
    )
    
    
    213,773
    
    
    
    (1,099,321
    )Interest income
    
    
    122,601
    
    
    
    6,846
    
    
    
    12,483
    
    
    
    2,323
    
    
    
    539,149
    
    
    
    (424,362
    )
    
    
    259,040
    
    
    
    64,626
    
    
    
    8,958
    
    
    
    2,915
    
    
    
    3,807
    
    
    
    229,663
    
    
    
    (213,773
    )
    
    
    96,196Other gains (loss)  net
    
    
    23,474
    
    
    
    1,027
    
    
    
    246
    
    
    
    (3,409
    )
    
    
    15
    
    
    
    
    
    
    
    21,353
    
    
    
    25,591
    
    
    
    9,043
    
    
    
    65
    
    
    
    229
    
    
    
    (3
    )
    
    
    
    
    
    
    34,925Segment income (loss) before
income tax
    
    
    7,478,361
    
    
    
    1,061,413
    
    
    
    113,830
    
    
    
    377,028
    
    
    
    (138,224
    )
    
    
    
    
    
    
    6,495,816
    
    
    
    7,276,917
    
    
    
    (199,899
    )
    
    
    (43,063
    )
    
    
    184,581
    
    
    
    (116,839
    )
    
    
    
    
    
    
    7,101,697Income tax expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,763,885
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,170,411
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,731,931
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,931,286Attributable to:Equity holders of the Company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,731,824
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,931,052Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    107
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2343,731,931
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,931,286Other information:Provision for doubtful debts
    
    
    1,124,113
    
    
    
    457,942
    
    
    
    106,883
    
    
    
    52,827
    
    
    
    
    
    
    
    
    
    
    
    1,741,765
    
    
    
    867,154
    
    
    
    458,161
    
    
    
    139,327
    
    
    
    33,868
    
    
    
    
    
    
    
    
    
    
    
    1,498,510Capital expenditures for
segment assets (a)
    
    
    10,577,010
    
    
    
    
    
    
    
    2,500,814
    
    
    
    2,640,789
    
    
    
    5,827,151
    
    
    
    
    
    
    
    21,545,764
    
    
    
    7,333,030
    
    
    
    
    
    
    
    1,962,796
    
    
    
    2,162,637
    
    
    
    6,154,335
    
    
    
    
    
    
    
    17,612,798
 December 31, 2006
    
    
    December 31, 2005Data and
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Data andGSM
    
    
    CDMA
    
    
    Internet
    
    
    Long Distance
    
    
    Unallocated
    
    
    
    
    
    
    
    
    
    
    GSM
    
    
    CDMA
    
    
    Internet
    
    
    Long Distance
    
    
    UnallocatedBusiness
    
    
    Business
    
    
    Business
    
    
    Business
    
    
    amounts
    
    
    Elimination
    
    
    Total
    
    
    Business
    
    
    Business
    
    
    Business
    
    
    Business
    
    
    amounts
    
    
    Elimination
    
    
    TotalTotal segment assets
    
    
    107,288,975
    
    
    
    7,722,626
    
    
    
    8,300,155
    
    
    
    16,810,768
    
    
    
    56,477,257
    
    
    
    (50,161,795
    )
    
    
    146,437,986
    
    
    
    107,723,037
    
    
    
    4,087,906
    
    
    
    7,518,912
    
    
    
    17,794,349
    
    
    
    55,667,580
    
    
    
    (50,161,795
    )
    
    
    142,629,989Total segment liabilities
    
    
    38,594,177
    
    
    
    7,666,939
    
    
    
    2,801,914
    
    
    
    3,673,741
    
    
    
    14,289,557
    
    
    
    
    
    
    
    67,026,328
    
    
    
    45,706,440
    
    
    
    5,620,722
    
    
    
    2,519,018
    
    
    
    4,973,134
    
    
    
    7,523,596
    
    
    
    
    
    
    
    66,342,910
 F - 39




---



##### Table of Contents



2004GSM
    
    
    CDMA
    
    
    Data and Internet
    
    
    Long Distance
    
    
    UnallocatedBusiness
    
    
    Business
    
    
    Business
    
    
    Business
    
    
    amounts
    
    
    Elimination
    
    
    TotalRevenue (Turnover):Usage fee
    
    
    31,997,020
    
    
    
    16,164,333
    
    
    
    2,685,083
    
    
    
    879,281
    
    
    
    
    
    
    
    
    
    
    
    51,725,717Monthly fee
    
    
    6,922,400
    
    
    
    4,638,024
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,560,424Interconnection revenue
    
    
    2,614,268
    
    
    
    927,288
    
    
    
    131,371
    
    
    
    454,383
    
    
    
    
    
    
    
    
    
    
    
    4,127,310Leased lines rental
    
    
    
    
    
    
    
    
    
    
    344,014
    
    
    
    512,134
    
    
    
    
    
    
    
    
    
    
    
    856,148Value-added service revenue
    
    
    4,818,822
    
    
    
    2,370,872
    
    
    
    461,492
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,651,186Other revenue
    
    
    1,156,442
    
    
    
    277,157
    
    
    
    40,774
    
    
    
    2,211
    
    
    
    
    
    
    
    
    
    
    
    1,476,584Total services revenue
    
    
    47,508,952
    
    
    
    24,377,674
    
    
    
    3,662,734
    
    
    
    1,848,009
    
    
    
    
    
    
    
    
    
    
    
    77,397,369Sales of telecommunications
products
    
    
    4,128
    
    
    
    1,668,444
    
    
    
    14,782
    
    
    
    2,401
    
    
    
    
    
    
    
    
    
    
    
    1,689,755Total revenue from
external customers
    
    
    47,513,080
    
    
    
    26,046,118
    
    
    
    3,677,516
    
    
    
    1,850,410
    
    
    
    
    
    
    
    
    
    
    
    79,087,124Intersegment revenue
    
    
    135,521
    
    
    
    107,477
    
    
    
    2,059,881
    
    
    
    1,264,140
    
    
    
    
    
    
    
    (3,567,019
    )
    
    
    Total revenue
    
    
    47,648,601
    
    
    
    26,153,595
    
    
    
    5,737,397
    
    
    
    3,114,550
    
    
    
    
    
    
    
    
    
    
    
    79,087,124Leased lines and network
capacities
    
    
    (284,092
    )
    
    
    (6,685,059
    )
    
    
    (361,412
    )
    
    
    (67,565
    )
    
    
    
    
    
    
    
    
    
    
    (7,398,128
    )Interconnection charges
    
    
    (6,452,988
    )
    
    
    (2,794,843
    )
    
    
    (917,294
    )
    
    
    (918,480
    )
    
    
    
    
    
    
    3,567,019
    
    
    
    (7,516,586
    )Depreciation and amortization
    
    
    (16,118,746
    )
    
    
    (438,957
    )
    
    
    (1,795,499
    )
    
    
    (530,695
    )
    
    
    (127,177
    )
    
    
    
    
    
    
    (19,011,074
    )Employee benefits expenses
    
    
    (2,917,299
    )
    
    
    (861,614
    )
    
    
    (443,466
    )
    
    
    (279,664
    )
    
    
    (113,014
    )
    
    
    
    
    
    
    (4,615,057
    )Selling and marketing
    
    
    (6,324,638
    )
    
    
    (11,347,712
    )
    
    
    (1,387,453
    )
    
    
    (463,477
    )
    
    
    
    
    
    
    
    
    
    
    (19,523,280
    )General, administrative and
other expenses
    
    
    (7,068,838
    )
    
    
    (2,206,458
    )
    
    
    (865,889
    )
    
    
    (320,115
    )
    
    
    (38,941
    )
    
    
    
    
    
    
    (10,500,241
    )Cost of telecommunications
products sold
    
    
    (135,172
    )
    
    
    (2,399,360
    )
    
    
    (22,371
    )
    
    
    (5,742
    )
    
    
    
    
    
    
    
    
    
    
    (2,562,645
    )Finance costs
    
    
    (1,606,741
    )
    
    
    (36,755
    )
    
    
    (17,569
    )
    
    
    (36,962
    )
    
    
    (112,429
    )
    
    
    114,381
    
    
    
    (1,696,075
    )Interest income
    
    
    67,526
    
    
    
    11,093
    
    
    
    5,504
    
    
    
    3,653
    
    
    
    129,512
    
    
    
    (114,381
    )
    
    
    102,907Other gains (loss), net
    
    
    22,382
    
    
    
    42,695
    
    
    
    (1,195
    )
    
    
    140
    
    
    
    39,625
    
    
    
    
    
    
    
    103,647Segment income (loss) before
income tax
    
    
    6,829,995
    
    
    
    (563,375
    )
    
    
    (69,247
    )
    
    
    495,643
    
    
    
    (222,424
    )
    
    
    
    
    
    
    6,470,592Income tax expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,977,141
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,493,451Attributable to:Equity holders of the
Company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,493,451Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,493,451Other information:Provision for doubtful debts
    
    
    1,317,374
    
    
    
    645,470
    
    
    
    164,514
    
    
    
    64,462
    
    
    
    
    
    
    
    
    
    
    
    2,191,820Capital expenditures for
segment assets (a)
    
    
    6,396,406
    
    
    
    
    
    
    
    2,444,623
    
    
    
    1,949,202
    
    
    
    7,373,877
    
    
    
    
    
    
    
    18,164,108
 December 31, 2004GSM
    
    
    CDMA
    
    
    Data and Internet
    
    
    Long Distance
    
    
    UnallocatedBusiness
    
    
    Business
    
    
    Business
    
    
    Business
    
    
    amounts
    
    
    Elimination
    
    
    TotalTotal segment assets
    
    
    102,693,857
    
    
    
    7,119,115
    
    
    
    9,470,980
    
    
    
    18,042,840
    
    
    
    62,101,761
    
    
    
    (50,390,158
    )
    
    
    149,038,395Total segment liabilities
    
    
    51,493,461
    
    
    
    8,624,230
    
    
    
    4,437,311
    
    
    
    5,408,689
    
    
    
    6,632,463
    
    
    
    
    
    
    
    76,596,154
 
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5.2
    
    Geographical SegmentsThe customers of the Groups services are mainly in mainland China. There is no other
geographical segment with segment revenue from external customers equal to or greater than
10% of total revenue.In addition, although the Group has its corporate headquarter in Hong Kong, a substantial
portion of the Groups non-current assets (including property, plant and equipment and
other assets) are situated in mainland China, as the Groups principal activities are
conducted in mainland China. For 2004, 2005 and 2006, substantially all capital
expenditures were incurred to acquire assets located in mainland China and less than 10% of
the Groups assets and operations are located outside mainland China. Accordingly, no
geographical segment information is presented.
 6. PROPERTY, PLANT AND EQUIPMENT
 2006
    
    2005OfficeTele-
    
    furniture,communications
    
    fixtures and
    
    Leasehold
    
    Construction-Buildings
    
    equipment
    
    others
    
    improvements
    
    in-progress
    
    Total
    
    TotalCost or valuation:Beginning of year
    
    
    13,614,937
    
    
    
    144,752,704
    
    
    
    8,370,669
    
    
    
    1,120,171
    
    
    
    18,826,688
    
    
    
    186,685,169
    
    
    
    173,835,655Revaluation surplus
    
    
    200,330
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,330
    
    
    
    Additions
    
    
    566,212
    
    
    
    348,077
    
    
    
    139,036
    
    
    
    
    
    
    
    20,492,439
    
    
    
    21,545,764
    
    
    
    17,612,798Transfer from CIP
    
    
    737,505
    
    
    
    23,240,505
    
    
    
    1,532,868
    
    
    
    477,166
    
    
    
    (25,988,044
    )
    
    
    
    
    
    
    Reclassification
to other assets
(Note 36)
    
    
    (528,428
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (528,428
    )
    
    
    (4,194,413
    )Disposals
    
    
    (22,296
    )
    
    
    (1,478,238
    )
    
    
    (425,924
    )
    
    
    (214,304
    )
    
    
    
    
    
    
    (2,140,762
    )
    
    
    (568,871
    )End of year
    
    
    14,568,260
    
    
    
    166,863,048
    
    
    
    9,616,649
    
    
    
    1,383,033
    
    
    
    13,331,083
    
    
    
    205,762,073
    
    
    
    186,685,169Representing:At cost
    
    
    2,036,229
    
    
    
    166,863,048
    
    
    
    9,616,649
    
    
    
    1,383,033
    
    
    
    13,331,083
    
    
    
    193,230,042
    
    
    
    184,314,396At valuation
    
    
    12,532,031
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,532,031
    
    
    
    2,370,77314,568,260
    
    
    
    166,863,048
    
    
    
    9,616,649
    
    
    
    1,383,033
    
    
    
    13,331,083
    
    
    
    205,762,073
    
    
    
    186,685,169Accumulated
depreciation:Beginning of year
    
    
    3,110,261
    
    
    
    66,942,910
    
    
    
    3,502,469
    
    
    
    741,937
    
    
    
    14,307
    
    
    
    74,311,884
    
    
    
    55,343,535Charge for the year
    
    
    454,958
    
    
    
    19,524,750
    
    
    
    1,753,763
    
    
    
    271,990
    
    
    
    
    
    
    
    22,005,461
    
    
    
    19,931,501Reclassification
to other assets
(Note 36)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (511,266
    )Disposals
    
    
    (16,473
    )
    
    
    (1,418,541
    )
    
    
    (287,459
    )
    
    
    (214,304
    )
    
    
    
    
    
    
    (1,936,777
    )
    
    
    (451,886
    )End of year
    
    
    3,548,746
    
    
    
    85,049,119
    
    
    
    4,968,773
    
    
    
    799,623
    
    
    
    14,307
    
    
    
    94,380,568
    
    
    
    74,311,884Net book value:End of year
    
    
    11,019,514
    
    
    
    81,813,929
    
    
    
    4,647,876
    
    
    
    583,410
    
    
    
    13,316,776
    
    
    
    111,381,505
    
    
    
    112,373,285Beginning of year
    
    
    10,504,676
    
    
    
    77,809,794
    
    
    
    4,868,200
    
    
    
    378,234
    
    
    
    18,812,381
    
    
    
    112,373,285
    
    
    
    118,492,120
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7.
    
    GOODWILL
 2005
    
    
    2006Cost:Goodwill arising from acquisitions
    
    
    3,143,983
    
    
    
    3,143,983
   8.
    
    OTHER ASSETS
 Note
    
    
    2005
    
    
    2006Direct incremental costs for activating
cellular subscribers
    
    
    (a)
    
    
    
    3,191,853
    
    
    
    2,243,384Customer acquisition costs of contractual
CDMA subscribers
    
    
    4.2(a),(b)
    
    
    
    2,416,224
    
    
    
    1,643,623Long-term prepayment for lease of land
    
    
    (c), 6, 36
    
    
    
    4,189,326
    
    
    
    4,867,840Purchased software
    
    
    (d)
    
    
    
    276,803
    
    
    
    677,187Prepaid rental for premises and leased lines
    
    
    
    
    
    
    858,661
    
    
    
    1,005,514Others
    
    
    (d)
    
    
    
    568,863
    
    
    
    739,02111,501,730
    
    
    
    11,176,569
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##### Table of Contents



(a)
    
    For the year ended December 31, 2006, amortization of direct incremental costs for
activating GSM and CDMA subscribers amounted to RMB1,817 million (2004: RMB936 million;
2005: RMB1,582 million) (Note 24), which has been included in selling and marketing
expenses.
 (b)
    
    For the year ended December 31, 2006, amortization of the customer acquisition costs
of contractual CDMA subscribers amounted to approximately RMB4,205 million (2004: RMB6,121
million; 2005: RMB5,948 million) (Note 24) which was recorded in selling and marketing
expenses. As of December 31, 2006, the carrying amount of unamortized customer acquisition
costs of contractual CDMA subscribers totaled approximately RMB2,102 million (2005:
RMB2,944 million), with approximately RMB1,644 million (2005: RMB2,416 million) recorded
in other assets (for contracts expiring over 1 year) and approximately RMB458 million
(2005: RMB528 million) recorded in prepayments and other current assets (for contracts
expiring within 1 year) (Note 12).
 (c)
    
    The Groups long-term prepayment for lease of land represents prepaid operating lease
payments for land use rights in Mainland China and their net book value is analyzed as
follows:
 2005
    
    
    2006Held on:Leases of between 10 to 50
years
    
    
    4,174,864
    
    
    
    4,833,011Leases of less than 10 years
    
    
    14,462
    
    
    
    34,8294,189,326
    
    
    
    4,867,840
   (d)
    
    For the year ended December 31, 2006, the amortization of purchased software and
others of other assets amounted to approximately RMB417 million (2004: RMB664 million;
2005: RMB437 million) (Note 24).
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##### Table of Contents



9.
    
    TAXATIONProvision for taxation represents:
 2004
    
    
    2005
    
    
    2006Provision for income tax on the estimated
taxable income for the year- Hong Kong
    
    
    
    
    
    
    1,063
    
    
    
    4,817- Outside Hong Kong
    
    
    1,422,635
    
    
    
    2,033,457
    
    
    
    2,838,3651,422,635
    
    
    
    2,034,520
    
    
    
    2,843,182Deferred taxation
    
    
    554,506
    
    
    
    135,891
    
    
    
    (79,297
    )1,977,141
    
    
    
    2,170,411
    
    
    
    2,763,885
 (a)
    
    The Company did not have any assessable income sourced from Hong Kong for the years
ended December 31, 2004, 2005 and 2006.(b)
    
    China Unicom International Limited (Unicom International, a subsidiary of the
Company) assessed its income tax liability in Hong Kong using the tax rate of 17.5% (2004:
17.5%; 2005: 17.5%). The income tax liability of Unicom International amounted to
approximately RMB4.82 million for the year ended December 31, 2006 (2004: nil, 2005:
RMB1.06 million).(c)
    
    China Unicom (Macau) Company Limited (Unicom Macau, a subsidiary of the Company)
assessed its income tax liability in Macau, using progressive tax rates from 3% to 12%.
There is no Macau income tax liability of Unicom Macau for the years ended December 31,
2004, 2005 and 2006 as there were no assessable income in these years.(d)
    
    Unicom Huasheng Telecommunications Technology Company Limited (Unicom Huasheng, a
subsidiary of the Company) and its branches are subject to income tax at the statutory
enterprise income tax rate of 33% in Mainland China. The income tax liabilities of Unicom
Huasheng and its branches were assessed separately by relevant local tax authorities.(e)
    
    Various provincial/municipal branches of China Unicom Corporation Limited (CUCL, a
subsidiary of the Company) were granted preferential tax treatment by relevant tax
authorities to assess their enterprise income tax at the rates of 13% or 18% in mainland
China for the years ended December 31, 2004, 2005 and 2006. The remaining provincial
branches were assessed at the standard tax rate of 33%.
 F - 45




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Note
    
    
    2004
    
    
    2005
    
    
    2006Mainland China statutory tax rate of 33%
    
    
    
    
    
    
    33.0
    %
    
    
    33.0
    %
    
    
    33.0
    %Non-deductible expenses
    
    
    
    
    
    
    3.2
    %
    
    
    1.9
    %
    
    
    1.7
    %Unrealized loss on changes in fair value of
derivative component of convertible bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12.2
    %Non-taxable income- Connection fee
    
    
    
    
    
    
    (2.1
    %)
    
    
    (1.2
    %)
    
    
    (1.3
    %)- Interest income
    
    
    
    
    
    
    (0.7
    %)
    
    
    (0.1
    %)
    
    
    (0.6
    %)- Line leasing income
    
    
    
    
    
    
    (0.1
    %)
    
    
    (0.1
    %)
    
    
    Impact of PRC preferential tax rates
    
    
    
    
    
    
    (2.1
    %)
    
    
    (2.2
    %)
    
    
    (2.3
    %)Increase in opening deferred tax assets
resulting from an increase in tax rate
    
    
    
    
    
    
    (0.4
    %)
    
    
    
    
    
    
    Investment tax credits for domestic equipment
    
    
    (f
    )
    
    
    (0.2
    %)
    
    
    (0.7
    %)
    
    
    (0.2
    %)Effective tax rate
    
    
    
    
    
    
    30.6
    %
    
    
    30.6
    %
    
    
    42.5
    %
  2004
    
    2005
    
    2006Aggregate amount (RMB in millions)
    
    
    135
    
    
    
    155
    
    
    
    150Per share effect (RMB)
    
    
    0.011
    
    
    
    0.012
    
    
    
    0.012
 
 (f)
    
    For the years ended December 31, 2004, 2005 and 2006, tax credits represented
investment tax credits relating to the additions of certain domestic equipment that were
deductible against current income tax.
 F - 46




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##### Table of Contents



2005
    
    
    2006Deferred tax assets:- Deferred tax asset to be recovered after 12 months
    
    
    1,004,323
    
    
    
    787,991- Deferred tax asset to be recovered within 12 months
    
    
    737,740
    
    
    
    887,6361,742,063
    
    
    
    1,675,627Deferred tax liabilities:- Deferred tax liabilities to be settled after 12 months
    
    
    (1,278,531
    )
    
    
    (1,051,774
    )- Deferred tax liabilities to be settled within 12 months
    
    
    (128,298
    )
    
    
    (314,185
    )(1,406,829
    )
    
    
    (1,365,959
    )Net deferred tax assets after offsetting
    
    
    335,234
    
    
    
    309,668Deferred tax liabilities that cannot be offset
    
    
    (5,613
    )
    
    
    (5,879
    )
   2004
    
    
    2005
    
    
    2006Net deferred tax assets after offsetting :- Beginning of year
    
    
    1,022,108
    
    
    
    468,774
    
    
    
    335,234- Deferred tax (charged) /credited to the
statement of income
    
    
    (553,334
    )
    
    
    (133,540
    )
    
    
    79,563- Deferred tax charged to equity (Note 6)
    
    
    
    
    
    
    
    
    
    
    (105,129
    )- End of year
    
    
    468,774
    
    
    
    335,234
    
    
    
    309,668The deferred tax liabilities that can not be offset:- Beginning of year
    
    
    
    
    
    
    (3,262
    )
    
    
    (5,613
    )- Acquisition of a subsidiary
    
    
    (2,090
    )
    
    
    
    
    
    
    - Deferred tax charged to the statement of income
    
    
    (1,172
    )
    
    
    (2,351
    )
    
    
    (266
    )- End of year
    
    
    (3,262
    )
    
    
    (5,613
    )
    
    
    (5,879
    )
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##### Table of Contents



Note
    
    
    2005
    
    
    2006Mainland China EnterprisesDeferred tax assets:Interest on loans from CCF joint ventures
    
    
    (g
    )
    
    
    96,012
    
    
    
    45,463Loss arising from terminations of CCF
Arrangements
    
    
    (g
    )
    
    
    111,003
    
    
    
    20,636Provision for doubtful debts
    
    
    
    
    
    
    399,590
    
    
    
    492,920Write-down of inventories to net realizable value
    
    
    
    
    
    
    43,780
    
    
    
    32,858Accruals of retirement benefits
    
    
    
    
    
    
    4,670
    
    
    
    18,137Additional depreciation deductible for tax in
future years
    
    
    
    
    
    
    12,361
    
    
    
    6,315Monetary housing benefits
    
    
    
    
    
    
    11,784
    
    
    
    12,607Differences on tax basis for the residual value
of property, plant and equipment
    
    
    
    
    
    
    10,045
    
    
    
    Net amount of deferral and amortization of
upfront non-refundable revenue
    
    
    
    
    
    
    891,467
    
    
    
    740,429Accruals of expenses not yet deductible for tax
purpose
    
    
    
    
    
    
    137,279
    
    
    
    232,863Others
    
    
    
    
    
    
    24,072
    
    
    
    73,3991,742,063
    
    
    
    1,675,627Deferred tax liabilities:Net amount of capitalization and amortization of
direct incremental costs
    
    
    
    
    
    
    (925,462
    )
    
    
    (740,429
    )Capitalized interest already deducted for tax
purpose
    
    
    
    
    
    
    (481,367
    )
    
    
    (520,401
    )Revaluation of buildings (Note 6)
    
    
    
    
    
    
    
    
    
    
    (105,129
    )(1,406,829
    )
    
    
    (1,365,959
    )335,234
    
    
    
    309,668Hong Kong EnterprisesDeferred tax liabilities:Accelerated depreciation for tax purpose
    
    
    
    
    
    
    (5,613
    )
    
    
    (5,879
    )
 F - 48




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##### Table of Contents



(g)
    
    Prior to 2000, in the process of developing its cellular networks, the GSM
Business has entered into cooperation agreements with certain contractual joint ventures
(the CJVs) established in Mainland China. Each CJV was established by one or more
Chinese enterprises and one or more foreign parties. The aforementioned cooperation
arrangements are referred to as the China-China-Foreign Arrangement (the CCF
Arrangements). Pursuant to the CCF Arrangements, the CJVs extended funding to the GSM
Business for the construction of telecommunications systems and network equipment in
Mainland China. Based on the terms of the cooperation agreements, the CCF Arrangements
had been accounted for as secured financing arrangements to the GSM Business, and
interest had been accrued by the GSM Business based on the funds provided by the CJVs at
the then prevailing market borrowing rates. All CCF Arrangements had been terminated in
1999 and 2000, the related loss on the termination of CCF Arrangements was charged to the
statement of income as incurred. Pursuant to the approval of relevant tax authorities,
all the interest costs and the loss on termination of these CCF Arrangements are to be
deducted against current taxable income over 7 years. The resulting deferred tax assets
were recognized accordingly.
 10.
    
    INVENTORIES
 2005
    
    
    2006Handsets
    
    
    1,121,288
    
    
    
    1,462,210Telephone cards
    
    
    592,490
    
    
    
    522,161Others
    
    
    394,034
    
    
    
    349,5312,107,812
    
    
    
    2,333,902
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##### Table of Contents



11.
    
    ACCOUNTS RECEIVABLE, NET
 2005
    
    
    2006Accounts receivable for GSM services
    
    
    4,021,887
    
    
    
    3,416,679Accounts receivable for CDMA services
    
    
    2,648,504
    
    
    
    2,264,188Accounts receivable for Data and Internet services
    
    
    522,579
    
    
    
    323,369Accounts receivable for Long Distance services
    
    
    444,010
    
    
    
    458,402Sub-total
    
    
    7,636,980
    
    
    
    6,462,638Less: Provision for doubtful debts for GSM services
    
    
    (1,821,057
    )
    
    
    (1,841,212
    )Provision for doubtful debts for CDMA services
    
    
    (954,185
    )
    
    
    (905,094
    )Provision for doubtful debts for Data and Internet services
    
    
    (83,711
    )
    
    
    (77,006
    )Provision for doubtful debts for Long Distance services
    
    
    (229,598
    )
    
    
    (219,983
    )4,548,429
    
    
    
    3,419,343
  2005
    
    
    2006Within one month
    
    
    2,884,068
    
    
    
    2,349,963More than one month to three months
    
    
    1,062,895
    
    
    
    906,221More than three months to one year
    
    
    1,636,529
    
    
    
    1,709,954More than one year
    
    
    2,053,488
    
    
    
    1,496,5007,636,980
    
    
    
    6,462,638
    2005
    
    
    2006Balance, beginning of year
    
    
    3,933,507
    
    
    
    3,088,551Provision for the year
    
    
    1,498,510
    
    
    
    1,741,765Written-off during the year
    
    
    (2,343,466
    )
    
    
    (1,787,021
    )Balance, end of year
    
    
    3,088,551
    
    
    
    3,043,295
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##### Table of Contents



12.
    
    PREPAYMENTS AND OTHER CURRENT ASSETS
 Note
    
    
    2005
    
    
    2006Prepaid rental
    
    
    
    
    
    
    322,243
    
    
    
    364,622Deposits and prepayments
    
    
    
    
    
    
    973,698
    
    
    
    732,774Advances to employees
    
    
    
    
    
    
    163,838
    
    
    
    154,866Customer acquisition costs of contractual CDMA subscribers
    
    
    8(b)
    
    
    
    527,577
    
    
    
    458,095Others
    
    
    
    
    
    
    355,111
    
    
    
    277,6622,342,467
    
    
    
    1,988,019
  2005
    
    
    2006Within one year
    
    
    2,249,097
    
    
    
    1,892,558More than one year
    
    
    93,370
    
    
    
    95,4612,342,467
    
    
    
    1,988,019
 13.
    
    SHORT-TERM BANK DEPOSITS
 2005
    
    
    2006Bank deposits with maturity exceeding three months
    
    
    282,457
    
    
    
    187,449Restricted bank deposits
    
    
    
    
    
    
    8,371282,457
    
    
    
    195,820
  14.
    
    CASH AND CASH EQUIVALENTS
 2005
    
    
    2006Cash at bank and in hand
    
    
    5,110,716
    
    
    
    11,180,476Bank deposits with original maturities of three months or less
    
    
    360,860
    
    
    
    1,001,6325,471,576
    
    
    
    12,182,108
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##### Table of Contents



15.
    
    SHARE CAPITAL
 2005
    
    
    2006HKD000
    
    
    HKD000Authorized:30,000,000,000 ordinary shares of HKD0.10 each
    
    
    3,000,000
    
    
    
    3,000,000
 Ordinary shares,Number of
    
    
    par value of
    
    
    Share
    
    
    Shareshares
    
    
    HKD0.1 each
    
    
    capital
    
    
    premium
    
    
    Total000
    
    
    HKD000At January 1, 2005
    
    
    12,563,492
    
    
    
    1,256,349
    
    
    
    1,332,487
    
    
    
    52,546,294
    
    
    
    53,878,781Employee share option scheme Recognition of shares
issued on exercise of
options (Note 29)
    
    
    10,773
    
    
    
    1,077
    
    
    
    1,134
    
    
    
    54,720
    
    
    
    55,854At December 31, 2005
    
    
    12,574,265
    
    
    
    1,257,426
    
    
    
    1,333,621
    
    
    
    52,601,014
    
    
    
    53,934,635Employee share option scheme Recognition of shares
issued on exercise of
options (Note 29)
    
    
    106,724
    
    
    
    10,672
    
    
    
    10,819
    
    
    
    621,962
    
    
    
    632,781At December 31, 2006
    
    
    12,680,989
    
    
    
    1,268,098
    
    
    
    1,344,440
    
    
    
    53,222,976
    
    
    
    54,567,416
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##### Table of Contents



16.
    
    LONG-TERM BANK LOANS
 Interest rates and final maturity
    
    2005
    
    
    2006RMB denominated bank loans
    
    Fixed interest rates ranging from
3.60% to 5.58% (2005: 3.60% to 5.58%)
per annum with maturity through 2010
(2005: maturity through 2010) (a)- secured
    
    
    
    
    755,000
    
    
    
    - unsecured
    
    
    
    
    6,687,468
    
    
    
    315,0007,442,468
    
    
    
    315,000USD denominated bank loans
    
    Floating interest rates of USD LIBOR
plus interest margin of 0.35% to
0.44% (2005: 0.28% to 0.44%) per
annum with maturity through 2010
(2005: maturity through 2010) (b)
    
    
    9,684,240
    
    
    
    7,808,699Sub-total
    
    
    
    
    17,126,708
    
    
    
    8,123,699Less: Current portion
    
    
    
    
    (5,145,190
    )
    
    
    (3,984,350
    )11,981,518
    
    
    
    4,139,349
  2005
    
    
    2006Balances due:2006
    
    
    5,145,190
    
    
    
    2007
    
    
    6,137,608
    
    
    
    3,984,3502008
    
    
    3,501,800
    
    
    
    2,377,6092009
    
    
    353,070
    
    
    
    2010
    
    
    1,989,040
    
    
    
    1,761,74017,126,708
    
    
    
    8,123,699Less: Portion classified as current liability
    
    
    (5,145,190
    )
    
    
    (3,984,350
    )Total
    
    
    11,981,518
    
    
    
    4,139,349
 F - 53




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##### Table of Contents



(a)
    
    As of December 31, 2006, no long-term bank loans (2005: RMB755 million) were secured by
the future service fee revenue to be generated by the cellular operations of the relevant
branches who borrowed the long-term bank loans.(b)
    
    On September 26, 2003, the Company signed an agreement with 13 financial institutions
for a long-term syndicated loan of USD0.7 billion. This facility was split into 3 tranches
(i) USD0.2 billion 3-year loan; (ii) USD0.3 billion 5-year loan; and (iii) USD0.2 billion
7-year loan and carried an interest rate of 0.28%, 0.35% and 0.44% over US dollar LIBOR per
annum for each tranche, respectively. In October 2003, the Company and CUCL entered into an
agreement to re-lend such funds to CUCL with similar terms to finance the network
construction of CUCL. During 2006, the Company has fully repaid the USD0.2 billion 3-year
loan.In addition, on February 25, 2004, CUCL signed an agreement with various financial
institutions for a long-term syndicated loan of USD0.5 billion to finance its working
capital and network construction expenditure. This facility is repayable in 3 years and
carries an interest rate of 0.40% over US dollar LIBOR per annum. In February 2007, CUCL
has fully repaid the USD0.5 billion loan.(c)
    
    The effective interest rate of long-term bank loans denominated in RMB at December 31,
2006 was 4.22% (December 31, 2005: 5.25%), and the effective interest rates of long-term
bank loans denominated in USD at December 31, 2006 ranged from 5.72% to 5.81% (December 31,
2005: from 4.94% to 5.14%).(d)
    
    The carrying amount of long-term bank loans approximated their fair value.
 17.
    
    CONVERTIBLE BONDS
  Liability component
    
    
    7,117,035Derivative component
    
    
    3,207,914Carrying value of convertible bonds
    
    
    10,324,949Number of conversion shares at the issuance date (shares)
    
    
    899,745,075
  F - 54




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##### Table of Contents



July 5, 2006
    
    
    December 31, 2006Stock price
    
    HKD6.95
        
    HKD11.40Exercise price
    
    HKD8.63    
    
    HKD8.63Volatility
    
    
    31
    %
    
    
    31
    %Dividend yield
    
    
    2
    %
    
    
    2
    %Risk-free rate
    
    
    4.57-4.63
    %
    
    
    3.51-3.55
    %Expected life
    
    2.25-3 years    
    
    1.76-2.51 yearsOption value
    
    HKD0.96    
    
    HKD3.56
 F - 55




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##### Table of Contents



18.
    
    OBLIGATIONS UNDER FINANCE LEASES
  2005
    
    
    2006Total minimum lease payments under finance leases:- 2006
    
    
    443,400
    
    
    
    - 2007
    
    
    152,058
    
    
    
    104,663- 2008
    
    
    875
    
    
    
    8,059- 2009
    
    
    
    
    
    
    423- 2010
    
    
    
    
    
    
    1,396- 2011
    
    
    
    
    
    
    820- Thereafter
    
    
    
    
    
    
    58596,333
    
    
    
    115,419Less: Future finance charges
    
    
    (30,335
    )
    
    
    (5,623
    )Present value of minimum obligations
    
    
    565,998
    
    
    
    109,796Representing obligations under finance leases:- current liabilities
    
    
    420,631
    
    
    
    99,566- non-current liabilities
    
    
    145,367
    
    
    
    10,230The present value of obligations under finance leases:- 2006
    
    
    420,631
    
    
    
    - 2007
    
    
    144,541
    
    
    
    99,566- 2008
    
    
    826
    
    
    
    7,666- 2009
    
    
    
    
    
    
    399- 2010
    
    
    
    
    
    
    1,335- 2011
    
    
    
    
    
    
    776- Thereafter
    
    
    
    
    
    
    54565,998
    
    
    
    109,796Less: Portion classified as current liabilities
    
    
    (420,631
    )
    
    
    (99,566
    )145,367
    
    
    
    10,230
  F - 56




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##### Table of Contents



19.
    
    PAYABLES AND ACCRUED LIABILITIES
 Note
    
    
    2005
    
    
    2006Payables to contractors and equipment suppliers
    
    
    
    
    
    
    11,156,462
    
    
    
    16,184,898Accrued expenses
    
    
    
    
    
    
    1,835,353
    
    
    
    2,236,137Payables to telecommunications product suppliers
    
    
    
    
    
    
    1,372,853
    
    
    
    1,875,356Customer deposits
    
    
    
    
    
    
    1,456,601
    
    
    
    1,857,849Maintenance expense payables
    
    
    
    
    
    
    542,540
    
    
    
    1,208,902Salary and welfare payables
    
    
    
    
    
    
    464,372
    
    
    
    601,270Amounts due to services providers / content providers
    
    
    
    
    
    
    716,180
    
    
    
    797,586Provision for subscriber bonus point expenses
    
    
    4.1
    (d)
    
    
    337,414
    
    
    
    555,586Others
    
    
    (a
    )
    
    
    644,853
    
    
    
    972,49018,526,628
    
    
    
    26,290,074
 
 (a)
    
    Others included miscellaneous accruals for housing fund and other government
surcharges.
  2005
    
    
    2006Less than six months
    
    
    11,260,366
    
    
    
    20,162,555Six months to one year
    
    
    4,766,400
    
    
    
    3,981,712More than one year
    
    
    2,499,862
    
    
    
    2,145,80718,526,628
    
    
    
    26,290,074
 20.
    
    SHORT-TERM BONDSOn July 19, 2005, CUCL completed an offering of short-term bonds, consisting of two
tranches, in the PRC interbank debenture market. The first tranche of the bonds was issued in an
aggregate amount of RMB9.0 billion with a maturity period of 365 days and was repaid in July
2006. The second tranche of the bonds was issued in an aggregate amount of RMB1.0 billion with a
maturity period of 180 days and was repaid in January 2006.In March 2006, CUCL completed an offering of short-term bonds of RMB1.0 billion with a maturity
period of 365 days. In July 2006, CUCL completed another offering of short-term bonds in an
aggregate amount of RMB6.0 billion, consisting of three tranches of RMB2.0 billion each, with a
maturity period of 180 days, 270 days and 365 days, respectively. The weighted average effective
interest rate of these short-term bonds as of December 31, 2006 was 3.19% (2005: 2.89%).
 F - 57




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##### Table of Contents



21.
    
    SHORT-TERM BANK LOANSSupplemental information with respect to short-term bank loans is as follows:
 AverageWeighted average
    
    
    Maximum
    
    
    amount
    
    
    Weighted averageinterest rate at
    
    
    amount
    
    
    outstanding
    
    
    interest rateBalance at
    
    
    year end
    
    
    outstanding
    
    
    during the
    
    
    during the yearyear end
    
    
    Per annum
    
    
    during the year
    
    
    year*
    
    
    Per annum**December 31, 2005RMB denominated bank
loans:- secured
    
    
    1,000,000- unsecured
    
    
    4,302,6615,302,661
    
    
    
    4.86
    %
    
    
    10,046,495
    
    
    
    6,767,046
    
    
    
    4.86
    %HKD denominated
bank loans (Note
(a)):- unsecured
    
    
    1,721,697
    
    
    
    3.10
    %
    
    
    1,761,748
    
    
    
    1,209,342
    
    
    
    2.00
    %7,024,358December 31, 2006RMB denominated bank
loans:- secured
    
    
    - unsecured
    
    
    
    
    
    
    
    
    
    
    5,302,661
    
    
    
    2,651,331
    
    
    
    4.34
    %HKD denominated
bank loans:- unsecured
    
    
    
    
    
    
    
    
    
    
    1,721,697
    
    
    
    860,849
    
    
    
    1.55
    %
 
  (a)
    
    As of December 31, 2005, HKD denominated short-term bank loans of approximately
HK$1,665 million (equivalent to approximately RMB1,722 million) were borrowed by the
Company to finance the working capital of the Group. The bank loans were repayable in 1
year and carried at interest rate of 0.22% to 0.25% over HIBOR per annum. The loan has
been fully repaid in 2006.(b)
    
    The carrying amounts of short-term loans approximated their fair value.*
    
    The average amount outstanding is computed by dividing the total of outstanding
principal balance as of January 1 and December 31, as applicable, by 2.**
    
    The weighted average interest rate is computed by dividing the total of weighted
average interest rates as of January 1 and December 31, as applicable, by 2.
 F - 58




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##### Table of Contents



22.
    
    INVESTMENT IN SUBSIDIARIESAs of December 31, 2006, the details of the Companys subsidiaries are as follows:
 Place
    
    
    Percentage of
    
    
    Particularand date of
    
    
    equity interests
    
    
    of issued
    
    
    Principal activitiesincorporation and
    
    
    held
    
    
    share
    
    
    and place ofName
    
    nature of legal entity
    
    
    Direct
    
    
    Indirect
    
    
    capital
    
    
    operationThe PRC,April 21, 2000,
    
    
    
    
    
    
    
    
    
    
    
    
    
    TelecommunicationsChina Unicom
    
    limited liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    operation in theCorporation Limited
    
    company
    
    
    100
    %
    
    
    
    
    
    47,425,763
    
    
    PRCBritish Virgin Islands,November 5, 2003,Unicom New World
    
    limited liability
    
    
    
    
    
    
    
    
    
    11,000 shares,
    
    Investment holding(BVI) Limited
    
    company
    
    
    100
    %
    
    
    
    
    
    HKD1 each
    
    in BVIHong Kong,China Unicom
    
    May 24, 2000,
    
    
    
    
    
    
    
    
    
    
    
    
    
    TelecommunicationsInternational 
Limited
    
    limited liability 
company
    
    
    100
    %
    
    
    
    
    
    100,000 shares, 
HKD1 each
    
    service in Hong
     KongUSA,May 24, 2002,
    
    
    
    
    
    
    
    
    
    USD
    
    TelecommunicationsChina Unicom USA Co.
    
    corporation
    
    
    
    
    
    
    100
    %
    

    10,000
    
    
    service in USAMacau,China Unicom (Macau)
    
    October 15, 2004,Company Limited
    
    limited liability
    
    
    
    
    
    
    
    
    
    MOP
    
    Telecommunicationscompany
    
    
    99
    %
    
    
    1
    %
    

    60,000,000
    
    


    operation in MacauUnicom Huasheng
    
    The PRC,Telecommunications
    
    July 1, 2005,
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sales ofTechnology Company
    
    limited liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    telecommunicationLimited (i)
    
    company
    
    
    
    
    
    
    99.5
    %
    

    500,000
    
    
    products in the PRC
 
 (i)
    
    On July 1, 2005, CUCL together with Unicom Xingye Science and Technology Trade Co.
(Unicom Xingye, a subsidiary of Unicom Group) set up Unicom Huasheng. The paid-in capital
of Unicom Huasheng as of December 31, 2005 was RMB50 million, CUCL had contributed capital
of RMB47.5 million, whereas the minority shareholder Unicom Xingye contributed the
remaining capital of RMB2.5 million, thus CUCL effectively held 95% in the entire issued
capital of Unicom Huasheng. In August 2006, CUCL increased its investment in Unicom
Huasheng by RMB450 million, and the paid-in capital of Unicom Huasheng was then increased
to RMB500 million. As of December 31, 2006, CUCL held 99.5% in the entire issued capital of
Unicom Huasheng whereas Unicom Xingye held the remaining 0.5%.
 F - 59




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##### Table of Contents



23.
    
    REVENUE (TURNOVER)Revenue primarily comprises usage fees, monthly fees, interconnection revenue, leased line
rental income, value-added services revenue and sales of telecommunications products earned by
the Group. Tariffs for these services are subject to regulations by various government
authorities, including the State Development and Reform Commission, the Ministry of Information
Industry (MII) and the provincial price regulatory authorities.Revenue is presented net of business tax and government surcharges. Relevant business tax and
government surcharges amounted to RMB2,285 million for the year ended December 31, 2006 (2004:
RMB2,051 million; 2005: RMB2,166 million).The major components of revenue are as follows:
 Note

    
    2004
    
    
    2005
    
    
    2006GSM BusinessUsage fee
    
    
    (a
    ) (i)
    
    
    31,997,020
    
    
    
    32,077,305
    
    
    
    33,609,094Monthly fee
    
    
    (b
    )
    
    
    6,922,400
    
    
    
    6,840,720
    
    
    
    7,370,440Interconnection revenue
    
    
    (c
    )
    
    
    2,614,268
    
    
    
    3,466,067
    
    
    
    4,914,964Value-added service revenue
    
    
    (e
    )
    
    
    4,818,822
    
    
    
    7,966,629
    
    
    
    11,543,343Other revenue
    
    
    
    
    
    
    1,156,442
    
    
    
    1,784,807
    
    
    
    1,852,580Total GSM service revenue
    
    
    
    
    
    
    47,508,952
    
    
    
    52,135,528
    
    
    
    59,290,421CDMA BusinessUsage fee
    
    
    (a
    ) (i)
    
    
    16,164,333
    
    
    
    16,726,678
    
    
    
    14,695,758Monthly fee
    
    
    (b
    )
    
    
    4,638,024
    
    
    
    4,905,538
    
    
    
    5,025,422Interconnection revenue
    
    
    (c
    )
    
    
    927,288
    
    
    
    1,398,577
    
    
    
    1,732,360Value-added service revenue
    
    
    (e
    )
    
    
    2,370,872
    
    
    
    4,115,542
    
    
    
    5,314,118Other revenue
    
    
    
    
    
    
    277,157
    
    
    
    430,601
    
    
    
    525,484Total CDMA service revenue
    
    
    
    
    
    
    24,377,674
    
    
    
    27,576,936
    
    
    
    27,293,142Data and Internet BusinessUsage fee
    
    
    (a
    ) (ii)
    
    
    2,685,083
    
    
    
    2,540,574
    
    
    
    1,770,321Interconnection revenue
    
    
    (c
    )
    
    
    131,371
    
    
    
    102,989
    
    
    
    92,140Leased lines rental
    
    
    (d
    )
    
    
    344,014
    
    
    
    393,659
    
    
    
    473,708Other revenue
    
    
    
    
    
    
    502,266
    
    
    
    12,745
    
    
    
    39,147Total Data and Internet service revenue
    
    
    
    
    
    
    3,662,734
    
    
    
    3,049,967
    
    
    
    2,375,316Long Distance BusinessUsage fee
        
    (a
    ) (ii)
    
    
    879,281
    
    
    
    599,251
    
    
    
    64,337Interconnection revenue
    
    
    (c
    )
    
    
    454,383
    
    
    
    434,577
    
    
    
    424,792Leased lines rental
    
    
    (d
    )
    
    
    512,134
    
    
    
    489,969
    
    
    
    574,728Other revenue
    
    
    
    
    
    
    2,211
    
    
    
    776
    
    
    
    4,565Total Long Distance service revenue
    
    
    
    
    
    
    1,848,009
    
    
    
    1,524,573
    
    
    
    1,068,422Total service revenue
    
    
    
    
    
    
    77,397,369
    
    
    
    84,287,004
    
    
    
    90,027,301Sales of telecommunications products
    
    
    
    
    
    
    1,689,755
    
    
    
    2,761,827
    
    
    
    4,267,192Total revenue
    
    
    
    
    
    
    79,087,124
    
    
    
    87,048,831
    
    
    
    94,294,493
 F - 60




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##### Table of Contents



(a)
    
    Usage fees comprise:
 (i)
    
    charges for incoming and outgoing calls made by cellular subscribers
including charges for local calls, domestic direct dial (DDD) and international
direct dial (IDD) as well as roaming fees for calls made by cellular subscribers
outside their local service areas; and(ii)
    
    charges for IP telephone calls, data and Internet services and fixed line
long distance calls.
 (b)
    
    Monthly fees represent fixed amounts charged to cellular subscribers on a monthly
basis for maintaining their access to the related services.(c)
    
    Interconnection revenue represents amounts received from other operators, including
Unicom Group, for calls from their networks to the Groups networks. It also includes
roaming-in fees received from other operators, including Unicom Group, for calls made by
their subscribers using the Groups cellular networks (Notes 33.1(a) and 33.2(a)).(d)
    
    Rental income represents rentals received for leasing of transmission lines and IRU
to Unicom Group, business customers and other major telecommunications service operators
in Mainland China. Other major telecommunications service operators include China
Telecommunications Corporation and its subsidiaries, China Mobile Communications
Corporation and its subsidiaries and China Network Communication Group Corporation and its
subsidiaries. These entities are collectively referred to as Domestic Carriers.(e)
    
    Value-added services revenue mainly represents revenue from the provision of services
such as short message, cool ringtone, CDMA1X wireless data services and secretarial
services to subscribers.
 F - 61




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##### Table of Contents



24.
    
    EXPENSES BY NATUREThe following expenses are analyzed by nature:
 Note

    
    2004
    
    
    2005
    
    
    2006Depreciation of property, plant and equipment
    
    
    6
    
    
    
    18,175,605
    
    
    
    19,931,501
    
    
    
    22,005,461Amortization of goodwill
    
    
    7
    
    
    
    171,184
    
    
    
    
    
    
    
    Amortization of other assets
    
    
    8
    (d)
    
    
    664,285
    
    
    
    436,680
    
    
    
    417,351Total depreciation and amortization
    
    
    
    
    
    
    19,011,074
    
    
    
    20,368,181
    
    
    
    22,422,812Amortization of direct incremental costs for
activating cellular subscribers
    
    
    8
    (a)
    
    
    936,105
    
    
    
    1,582,282
    
    
    
    1,817,220Amortization of customer acquisition costs of
contractual CDMA subscribers
    
    
    8
    (b)
    
    
    6,120,737
    
    
    
    5,947,631
    
    
    
    4,205,253Provision for doubtful debts:- GSM Business
    
    
    
    
    
    
    1,317,374
    
    
    
    867,154
    
    
    
    1,124,113- CDMA Business
    
    
    
    
    
    
    645,470
    
    
    
    458,161
    
    
    
    457,942- Data and Internet Business
    
    
    
    
    
    
    164,514
    
    
    
    139,327
    
    
    
    106,883- Long Distance Business
    
    
    
    
    
    
    64,462
    
    
    
    33,868
    
    
    
    52,827Total provision for doubtful debts
    
    
    11
    
    
    
    2,191,820
    
    
    
    1,498,510
    
    
    
    1,741,765Write-down of inventories to net realizable value
    
    
    10
    
    
    
    69,475
    
    
    
    20,392
    
    
    
    42,886Cost of inventories
    
    
    10
    
    
    
    2,524,483
    
    
    
    3,575,316
    
    
    
    4,929,988Auditors remuneration
    
    
    
    
    
    
    57,522
    
    
    
    59,884
    
    
    
    120,323Operating lease charges:- Leased lines
    
    
    
    
    
    
    809,202
    
    
    
    822,673
    
    
    
    685,093- CDMA network capacities
    
    
    4.2
    (c)
    
    
    6,588,926
    
    
    
    7,924,644
    
    
    
    8,078,772- Others
    
    
    
    
    
    
    1,068,020
    
    
    
    1,157,518
    
    
    
    1,476,406Total operating lease expenses
    
    
    
    
    
    
    8,466,148
    
    
    
    9,904,835
    
    
    
    10,240,271Other expenses:- Repair and maintenance
    
    
    
    
    
    
    1,648,986
    
    
    
    2,397,501
    
    
    
    2,925,717- Traveling, entertainment and meeting
    
    
    
    
    
    
    1,322,438
    
    
    
    663,774
    
    
    
    779,220- Power and water charges
    
    
    
    
    
    
    1,763,766
    
    
    
    2,219,480
    
    
    
    2,652,960- Office expenses
    
    
    
    
    
    
    706,892
    
    
    
    986,502
    
    
    
    1,120,756Finance costs:- Interest on bank loans repayable over 5 years
    
    
    
    
    
    
    537,261
    
    
    
    18,033
    
    
    
    956- Interest on bank loans and bonds repayable
within 5 years
    
    
    
    
    
    
    1,750,209
    
    
    
    1,955,231
    
    
    
    1,162,582- Interest element of finance lease
    
    
    
    
    
    
    28,848
    
    
    
    42,697
    
    
    
    28,633- Interest expense on convertible bonds
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    193,123Less: Amounts capitalized in
construction-in-progress
    
    
    
    
    
    
    (647,851
    )
    
    
    (682,590
    )
    
    
    (422,797
    )Total interest expense
    
    
    
    
    
    
    1,668,467
    
    
    
    1,333,371
    
    
    
    962,497- Exchange loss/(gain), net
    
    
    
    
    
    
    7,657
    
    
    
    (273,647
    )
    
    
    (372,691
    )- Bank charges
    
    
    
    
    
    
    19,951
    
    
    
    39,597
    
    
    
    64,414Total finance costs
    
    
    
    
    
    
    1,696,075
    
    
    
    1,099,321
    
    
    
    654,220
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##### Table of Contents



25.
    
    EMPLOYEE BENEFIT EXPENSES
 Note
    
    
    2004
    
    
    2005
    
    
    2006Employee benefit expenses:- Salaries and wages
    
    
    
    
    
    
    3,647,629
    
    
    
    4,268,004
    
    
    
    5,158,789- Contributions to defined
contribution pension schemes
    
    
    26
    
    
    
    244,397
    
    
    
    412,825
    
    
    
    474,831- Contributions to supplementary
defined contribution pension schemes
    
    
    26
    
    
    
    41,596
    
    
    
    58,222
    
    
    
    54,037- Monetary housing benefits
    
    
    27
    
    
    
    21,907
    
    
    
    41,136
    
    
    
    35,528- Contributions to other housing fund
    
    
    27
    
    
    
    224,686
    
    
    
    280,393
    
    
    
    286,253- Other housing benefits
    
    
    27
    
    
    
    345,885
    
    
    
    447,315
    
    
    
    492,967- Share-based compensation
    
    
    29
    
    
    
    88,957
    
    
    
    108,417
    
    
    
    146,294Total
    
    
    
    
    
    
    4,615,057
    
    
    
    5,616,312
    
    
    
    6,648,699
 26.
    
    RETIREMENT BENEFITSFull time employees in Mainland China are covered by a state-sponsored defined contribution
pension scheme under which the employees are entitled to an annual pension equal to a fixed
proportion of their basic salaries at their retirement dates. The PRC government is responsible
for the pension liability to these retired employees. The Group was required to make defined
contributions to the pension scheme at the rate of 19% of the employees basic salaries for the
year ended December 31, 2006 (2004 and 2005: 19%). Under this scheme, the Group has no
obligation for post-retirement benefits beyond the annual contributions.In addition, effective from August 11, 1998, a supplementary defined contribution pension plan
managed by an independent insurance company was established. Under this plan, the Group makes a
monthly defined contribution of 2% to 16% (2004: 2% to 24%; 2005: 2% to 16%) of the monthly
salaries of the relevant employees. There were no vested benefits attributable to past services
upon adoption of the plan.Retirement benefits charged to the statement of income are as follows:
 2004
    
    2005
    
    2006Contributions to defined contribution pension schemes
    
    
    244,397
    
    
    
    412,825
    
    
    
    474,831Contributions to supplementary defined contribution pension schemes
    
    
    41,596
    
    
    
    58,222
    
    
    
    54,037
 27.
    
    HOUSING BENEFITSUnder housing reform schemes in accordance with government regulations at the provincial level
in Mainland China, the Group provided benefits to certain qualified employees to enable them to
purchase living quarters at a discount. For GSM Business, certain of these living quarters were
provided by Unicom Group and the related benefits were not charged to the Group. Housing
benefits which were not charged to the Group amounted to approximately RMB14.9 million for 2006
(2004 and 2005: RMB14.9 million).In addition, full time employees in Mainland China are entitled to participate in a
state-sponsored housing fund. The fund can be used for the construction of living quarters or
may be withdrawn upon the retirement of the employees. The Group is required to make annual
contributions to the housing fund at a rate of 10% (2004 and 2005: 10%) of the employees basic
salaries.
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##### Table of Contents



(i)
    
    the provincial branch in which the employees are working has achieved the annual
performance budget set by head office management; and(ii)
    
    the employees continue to be under the employment of the Group at the time of the
payment.
    2004
    
    
    2005
    
    
    2006Special monetary housing benefits
    
    
    21,907
    
    
    
    41,136
    
    
    
    35,528Contributions to other housing fund
    
    
    224,686
    
    
    
    280,393
    
    
    
    286,253Other housing benefits
    
    
    345,885
    
    
    
    447,315
    
    
    
    492,967592,478
    
    
    
    768,844
    
    
    
    814,748
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##### Table of Contents



28.
    
    NET INCOME ATTRIBUTABLE TO EQUITY HOLDERS
 (a)
    
    CUCL has registered as foreign investment enterprises in the PRC. In accordance with
the Articles of Association of CUCL, it is required to provide for certain statutory
reserves, namely, general reserve fund and staff bonus and welfare fund, which are
appropriated from income after tax and minority interests but before dividend
distribution.CUCL is required to allocate at least 10% of its income after tax and minority interests
determined under PRC GAAP to the general reserve fund until the cumulative amounts reach
50% of the registered capital. The statutory reserve can only be used, upon approval
obtained from the relevant authority, to offset accumulated losses or increase capital.CUCL appropriated approximately RMB584 million (2004: RMB429 million; 2005: RMB463
million) to the general reserve fund for the year ended December 31, 2006.Appropriation to the staff bonus and welfare fund is at the discretion of the directors.
The staff bonus and welfare fund can only be used for special bonuses or the collective
welfare of the employees and are not distributable as cash dividends. Under HKFRS, the
appropriations to the staff bonus and welfare fund will be charged to
the statement of income
as expenses incurred since any assets acquired through this fund belong to the employees.
For the year ended December 31, 2006, no appropriation to staff bonus and welfare fund has
been made (2004 and 2005: Nil).
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##### Table of Contents



29.
    
    SHARE OPTION SCHEMEThe Company adopted a share option scheme (the Share Option Scheme) and a fixed award
pre-global offering share options scheme (Pre-Global Offering Share Option Scheme) on June 1,
2000 for the granting of share options to qualified employees, with terms amended on May 13,
2002 to comply with the requirements set out in the Chapter 17 to the Rules Governing the
Listing of Securities on SEHK.All of the share options granted are governed by the amended terms of the Share Option Scheme
and Pre-Global Offering Share Option Scheme as mentioned below.Movements in the number of share options outstanding and their related weighted average
exercise prices are as follows:
 2004
    
    
    2005
    
    
    2006Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Averageexercise
    
    
    
    
    
    
    exercise
    
    
    
    
    
    
    exerciseprice in
    
    
    Number of
    
    
    price in
    
    
    Number of
    
    
    price in
    
    
    Number ofHKD per
    
    
    share options
    
    
    HKD per
    
    
    share options
    
    
    HKD per
    
    
    share optionsshare
    
    
    involved
    
    
    share
    
    
    involved
    
    
    share
    
    
    involvedBalance, beginning of year
    
    
    6.72
    
    
    
    172,367,400
    
    
    
    6.45
    
    
    
    274,063,400
    
    
    
    6.51
    
    
    
    257,602,000Granted
    
    
    5.92
    
    
    
    113,322,000
    
    
    
    
    
    
    
    
    
    
    
    6.35
    
    
    
    167,466,000Forfeited
    
    
    4.30
    
    
    
    (1,306,000
    )
    
    
    7.15
    
    
    
    (5,688,200
    )
    
    
    6.92
    
    
    
    (4,088,000
    )Exercised
    
    
    5.85
    
    
    
    (10,320,000
    )
    
    
    4.60
    
    
    
    (10,773,200
    )
    
    
    4.95
    
    
    
    (106,724,000
    )Balance, end of year
    
    
    6.45
    
    
    
    274,063,400
    
    
    
    6.51
    
    
    
    257,602,000
    
    
    
    6.95
    
    
    
    314,256,000
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##### Table of Contents



Number of share
    
    
    Number of shareThe period during
    
    
    The price per
    
    
    options outstanding
    
    
    options outstandingwhich an option may
    
    
    share to be paid on
    
    
    as of December 31,
    
    
    as of December 31,Date of options grant
    
    be exercised
    
    
    exercise of options
    
    
    2005
    
    
    2006Share options granted under the Pre-Global Offering Share Option Scheme:June 22, 2002 toJune 22, 2000 (a)
    
    June 21, 2010
    
    HKD15.42
    
    
    24,309,600
    
    
    
    24,178,000Share options granted under the Share Option Scheme:June 30, 2001 toJune 30, 2001 (b)
    
    June 22, 2010
    
    HKD15.42
    
    
    6,508,000
    
    
    
    6,292,000July 10, 2003 toJuly 10, 2002 (c)
    
    July 9, 2008
    
    HKD6.18
    
    
    25,012,800
    
    
    
    11,540,400May 21, 2004 toMay 21, 2003 (d)
    
    May 20, 2009
    
    HKD4.30
    
    
    91,381,600
    
    
    
    25,611,600May 21, 2004 toMay 30, 2003 (d)
    
    May 20, 2009
    
    HKD4.66
    
    
    212,000
    
    
    
    July 20, 2005 toJuly 20, 2004 (e)
    
    July 19, 2010
    
    HKD5.92
    
    
    109,524,000
    
    
    
    80,224,000December 21, 2005 toDecember 21, 2004 (f)
    
    December 20, 2010
    
    HKD6.20
    
    
    654,000
    
    
    
    654,000February 15, 2008 toFebruary 15, 2006 (g)
    
    February 14, 2012
    
    HKD6.35
    
    
    
    
    
    
    165,756,000257,602,000
    
    
    
    314,256,000
 F - 67




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##### Table of Contents



(a)
    
    Pursuant to the resolution passed by the Board of Directors in June 2000, a total of
the 27,116,600 share options were granted on June 22, 2000 to the senior management,
including directors, and certain other employees (which represent, on their full exercise,
27,116,600 shares of the Company) under the fixed award Pre-Global Offering Share Option
Scheme adopted by the Company on June 1, 2000 in the following terms:
 (i)
    
    the exercise price is equivalent to the share issue price of the Global
Offering of HKD15.42 per share (excluding the brokerage fee and SEHK transaction
levy); and(ii)
    
    the share options are vested and exercisable after 2 years from the grant
date and expire 10 years from the date of grant.
   (b)
    
    On June 1, 2000, the Company adopted the Share Option Scheme pursuant to which the
directors of the Company may, at their discretion, invite employees, including executive
directors, of the Company or any of its subsidiaries, to take up share options to
subscribe for shares up to a maximum aggregate number of shares (including those that
could be subscribed for under the Pre-Global Offering Share Option Scheme as described
above) equal to 10% of the total issued share capital of the Company. Pursuant to the
Share Option Scheme, the nominal consideration payable by a participant for the grant of
share options will be HKD1.00. The exercise price payable by a participant upon the
exercise of an option will be determined by the directors at their discretion at the date
of grant, except that such price may not be set below a minimum price which is the higher
of:
 (i)
    
    the nominal value of a share; and(ii)
    
    80% of the average of the closing prices of shares on the SEHK on the
five trading days immediately preceding the date of grant of the option on which
there were dealings in the shares on the SEHK.
  (i)
    
    the price of a share payable by a participant upon the exercise of an
option shall be HKD15.42 (excluding the brokerage fee and SEHK transaction levy);
and(ii)
    
    the share options are vested on the date of grant and exercisable from
the date of grant to June 22, 2010.
 F - 68




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##### Table of Contents



(i)
    
    share option may be granted to employees including executive directors of
the Group or any of the non-executive directors;(ii)
    
    the option period commences on a day after the date on which an option is
offered but not later than 10 years from the offer date; and(iii)
    
    minimum subscription price shall not be less than the higher of:
 
    
    the nominal value of the shares;
    
    the closing price of the shares of the stock exchange as stated in the stock
exchanges quotation sheets on the offer date in respect of the share options;
and
    
    the average closing price of the shares on the stock exchanges quotation
sheets for the five trading days immediately preceding the offer date.
 (c)
    
    Pursuant to the resolution passed by the Board of Directors and the Independent
Non-Executive Directors of the Company dated July 10, 2002, a total of 36,028,000 share
options were granted to eligible individuals including directors, independent
non-executive directors, and the non-executive directors of the Company under the amended
Share Option Scheme in the following terms:
 (i)
    
    aggregate of 2,802,000 share options were granted to the executive
directors, non-executive directors and independent non-executive directors of the
Company;(ii)
    
    the exercise price per share option is HKD6.18; and(iii)
    
    the vesting dates and exercisable periods of the share options are as
follows:
 Vesting dates
    
    Exercisable periods
    
    PortionsJuly 10, 2003
    
    July 10, 2003 to July 9, 2008
    
    
    40
    %July 10, 2004
    
    July 10, 2004 to July 9, 2008
    
    
    30
    %July 10, 2005
    
    July 10, 2005 to July 9, 2008
    
    
    30
    %
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##### Table of Contents



(d)
    
    Pursuant to the resolution passed by the Board of Directors and the Independent
Non-Executive Directors of the Company dated May 21, 2003 and May 30, 2003, a total of
105,590,000 share options and 366,000 share options were granted to eligible individuals
(including directors, independent non-executive directors, non-executive directors, middle
to senior management of the Group) respectively, under the amended Share Option Scheme in
the following terms:
 (i)
    
    an aggregate of 2,772,000 share options were granted to the executive
directors, non-executive directors and independent non-executive directors of the
Company;(ii)
    
    the exercise prices per share option are HKD4.30 and HKD4.66,
respectively; and(iii)
    
    the vesting dates and exercisable periods of the share options are as
follows:
 Vesting dates
    
    Exercisable periods
    
    PortionsMay 21, 2004
    
    May 21, 2004 to May 20, 2009
    
    
    40
    %May 21, 2005
    
    May 21, 2005 to May 20, 2009
    
    
    30
    %May 21, 2006
    
    May 21, 2006 to May 20, 2009
    
    
    30
    %
 (e)
    
    Pursuant to the resolution passed by the Board of Directors and the
Independent Non-Executive Directors of the Company dated July 20, 2004, a total of
112,668,000 share options were granted to eligible individuals (including directors,
independent non-executive directors, non-executive directors, middle to senior management
of the Group), under the amended Share Option Scheme in the following terms:
 (i)
    
    an aggregate of 3,366,000 share options were granted to the executive
directors, non-executive directors and independent non-executive directors of the
Company;(ii)
    
    the exercise price per share option is HKD5.92; and(iii)
    
    the vesting dates and exercisable periods of the share options are as
follows:
 Vesting dates
    
    Exercisable periods
    
    PortionsJuly 20, 2005
    
    July 20, 2005 to July 19, 2010
    
    
    40
    %July 20, 2006
    
    July 20, 2006 to July 19, 2010
    
    
    30
    %July 20, 2007
    
    July 20, 2007 to July 19, 2010
    
    
    30
    %
 F - 70




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##### Table of Contents



(f)
    
    Pursuant to the resolution passed by the Board of Directors and the Independent
Non-Executive Directors of the Company dated December 21, 2004, a total of 654,000 share
options were granted to the executive directors of the Company, under the amended Share
Option Scheme in the following terms:
 (i)
    
    the exercise price per share option is HKD6.20; and(ii)
    
    the vesting dates and exercisable periods of the share options are as
follows:
 Vesting dates
    
    Exercisable periods
    
    PortionsDecember 21, 2005
    
    December 21, 2005 to December 20, 2010
    
    
    40
    %December 21, 2006
    
    December 21, 2006 to December 20, 2010
    
    
    30
    %December 21, 2007
    
    December 21, 2007 to December 20, 2010
    
    
    30
    %
 (g)
    
    Pursuant to the resolution passed by the Board of Directors and the Independent
Non-Executive Directors of the Company dated February 15, 2006, a total of 167,466,000
share options were granted to eligible individuals (including directors and middle to
senior management of the Group) under the amended Share Option Scheme in the following
terms:
 (i)
    
    this grant comprises basic and conditional portions. The criterion
for the exercise of the conditional portion of share options are based on the
achievement of revenue and profit targets of the 2006 budget of the Company and
respective provincial branches. Under this scheme, out of the total of
167,446,000 share options granted, 37,762,000 share options were granted with
performance conditions;(ii)
    
    an aggregate of 2,840,000 share options were granted to the then
executive directors of the Company;(iii)
    
    the exercise price per share option is HKD6.35; and(iv)
    
    the vesting dates and exercisable periods of the share options are as
follows:
 Vesting dates
    
    Exercisable periods
    
    PortionsFebruary 15, 2008
    
    February 15, 2008 to February 14, 2012
    
    
    50
    %February 15, 2009
    
    February 15, 2009 to February 14, 2012
    
    
    50
    %
   F - 71




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##### Table of Contents



(h)
    
    Details of share options exercised during 2005 and 2006 were as follows:For the year ended December 31, 2005:
 Weighted averageclosing price pershare at respectivedays immediatelybefore the exercise
    
    
    
    
    
    
    Number ofGrant date
    
    Exercise price
    
    
    of options
    
    
    Proceeds received
    
    
    shares involvedHKD
    
    
    HKD
    
    
    HKDJuly 10, 2002
    
    
    6.18
    
    
    
    7.69
    
    
    
    5,821,560
    
    
    
    942,000May 21, 2003
    
    
    4.30
    
    
    
    7.76
    
    
    
    37,793,560
    
    
    
    8,789,200May 30, 2003
    
    
    4.66
    
    
    
    7.80
    
    
    
    716,870
    
    
    
    154,000July 20, 2004
    
    
    5.92
    
    
    
    6.90
    
    
    
    5,256,960
    
    
    
    888,00049,588,950
    
    
    
    10,773,200
  Weighted averageclosing price pershare at respectivedays immediatelybefore the exercise
    
    
    
    
    
    
    Number ofGrant date
    
    Exercise price
    
    
    of options
    
    
    Proceeds received
    
    
    shares involvedHKD
    
    
    HKD
    
    
    HKDJuly 10, 2002
    
    
    6.18
    
    
    
    8.82
    
    
    
    81,180,480
    
    
    
    13,136,000May 21, 2003
    
    
    4.30
    
    
    
    8.35
    
    
    
    282,742,200
    
    
    
    65,754,000May 30, 2003
    
    
    4.66
    
    
    
    8.51
    
    
    
    986,860
    
    
    
    212,000July 20, 2004
    
    
    5.92
    
    
    
    8.80
    
    
    
    163,522,240
    
    
    
    27,622,000528,431,780
    
    
    
    106,724,000
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##### Table of Contents



30.
    
    EARNINGS PER SHAREEarnings per Share and ADS:Basic earnings per share for the years ended December 31, 2004, 2005 and 2006 were computed by
dividing the income attributable to equity holders by the weighted average number of ordinary
shares outstanding during the years.Diluted earnings per share for the years ended December 31, 2004, 2005 and 2006 were computed
by dividing the income attributable to equity holders by the weighted average number of
ordinary shares in issue during the years, after adjusting for the effects of the dilutive
potential ordinary shares. All potential ordinary shares arose from (i) share options granted
under the amended Pre-Global Offering Share Option Scheme; (ii) share options granted under the
amended Share Option Scheme and (iii) the Convertible Bonds. The potential ordinary shares
which are not dilutive mainly arose from share options granted under the amended Pre-Global
Offering Share Option Scheme and the Convertible Bonds and are therefore excluded from the
weighted average number of ordinary shares for the purpose of diluted earnings per share.
 2004
    
    
    2005
    
    
    2006Income
    
    
    
    
    
    
    
    
    
    
    Income
    
    
    
    
    
    
    
    
    
    
    Incomeattributable
    
    
    
    
    
    
    
    
    
    
    attributable
    
    
    
    
    
    
    
    
    
    
    attributableto equity
    
    
    
    
    
    
    Per share
    
    
    to equity
    
    
    
    
    
    
    Per share
    
    
    to equity
    
    
    
    
    
    
    Per shareholders
    
    
    Shares
    
    
    amount
    
    
    holders
    
    
    Shares
    
    
    amount
    
    
    holders
    
    
    Shares
    
    
    amountRMB000
    
    
    000
    
    
    RMB
    
    
    RMB000
    
    
    000
    
    
    RMB
    
    
    RMB000
    
    
    000
    
    
    RMBBasic earnings
    
    
    4,493,451
    
    
    
    12,561,242
    
    
    
    0.36
    
    
    
    4,931,052
    
    
    
    12,570,398
    
    
    
    0.39
    
    
    
    3,731,824
    
    
    
    12,599,018
    
    
    
    0.30Effect of
conversion of share
options
    
    
    
    
    
    
    31,812
    
    
    
    
    
    
    
    
    
    
    
    37,078
    
    
    
    
    
    
    
    
    
    
    
    50,288
    
    
    
    Diluted earnings
    
    
    4,493,451
    
    
    
    12,593,054
    
    
    
    0.36
    
    
    
    4,931,052
    
    
    
    12,607,476
    
    
    
    0.39
    
    
    
    3,731,824
    
    
    
    12,649,306
    
    
    
    0.30
 Basic and diluted earnings per ADS have been computed by multiplying the earnings per
share by 10, which is the number of shares represented by each ADS.31.
    
    DIVIDENDSAt the annual general meeting held on May 12, 2006, the shareholders of the Company approved
the payment of a final dividend of RMB0.11 per ordinary share for the year ended December 31,
2005 totaling approximately RMB1.4 billion which has been reflected as an appropriation of
retained profits in 2006. As of December 31, 2006, such dividends have been fully paid by the
Company.At a meeting held on March 29, 2007, the Board of Directors of the Company proposed the payment
of a final dividend of RMB0.18 per ordinary share to the shareholders for the year ended
December 31, 2006 totaling approximately RMB2.3 billion. This proposed dividend has not been
reflected as a dividend payable in the financial statements as of December 31, 2006, but will
be reflected as an appropriation of retained profits in the financial statements for the year
ending December 31, 2007.
 2004
    
    
    2005
    
    
    2006Proposed final dividend of RMB0.18
(2004 RMB0.10 and 2005: RMB0.11)
per ordinary share
    
    
    1,256,349
    
    
    
    1,383,169
    
    
    
    2,282,578
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##### Table of Contents



32.
    
    FAIR VALUE OF FINANCIAL INSTRUMENTSFinancial assets of the Group mainly include cash and cash equivalents, short-term bank
deposits, accounts receivable, amounts due from related parties and Domestic Carriers.
Financial liabilities of the Group mainly include payables and accrued liabilities, bank loans,
convertible bonds, short-term bonds, lease payables and amounts due to related parties and
Domestic Carriers.Cash and cash equivalents and short-term bank deposits denominated in foreign currencies, as
summarized below, have been translated to RMB at the applicable rates quoted by the Peoples
Bank of China as of December 31, 2005 and 2006.
 2005
    
    
    2006Original
    
    
    
    
    
    
    RMB
    
    
    Original
    
    
    
    
    
    
    RMBcurrency
    
    
    Exchange rate
    
    
    equivalent
    
    
    currency
    
    
    Exchange rate
    
    
    equivalent000
    
    
    
    
    
    RMB000
    
    
    000
    
    
    
    
    
    RMB000Cash and cash equivalents:- denominated in HK dollars
    
    
    45,791
    
    
    
    1.04
    
    
    
    47,636
    
    
    
    651,551
    
    
    
    1.00
    
    
    
    654,613- denominated in US dollars
    
    
    83,023
    
    
    
    8.07
    
    
    
    670,010
    
    
    
    478,397
    
    
    
    7.81
    
    
    
    3,735,659- denominated in MOP
    
    
    92
    
    
    
    1.01
    
    
    
    93
    
    
    
    
    
    
    
    0.98
    
    
    
    - denominated in EURO
    
    
    87
    
    
    
    9.90
    
    
    
    861
    
    
    
    1,700
    
    
    
    10.27
    
    
    
    17,457Sub-total
    
    
    
    
    
    
    
    
    
    
    718,600
    
    
    
    
    
    
    
    
    
    
    
    4,407,729Short-term bank deposits:- denominated in HK dollars
    
    
    
    
    
    
    1.04
    
    
    
    
    
    
    
    13,000
    
    
    
    1.00
    
    
    
    13,060- denominated in US dollars
    
    
    35,000
    
    
    
    8.07
    
    
    
    282,457
    
    
    
    22,333
    
    
    
    7.81
    
    
    
    174,389Sub-total
    
    
    
    
    
    
    
    
    
    
    282,457
    
    
    
    
    
    
    
    
    
    
    
    187,449Total
    
    
    
    
    
    
    
    
    
    
    1,001,057
    
    
    
    
    
    
    
    
    
    
    
    4,595,178
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The Group did not have and does not believe it will have any difficulty in exchanging its
foreign currency cash into RMB at the exchange rates quoted by the Peoples Bank of China. The
carrying amounts of the Groups cash and cash equivalents, short-term bank deposits, other
current financial assets and liabilities approximated their fair values as of December 31, 2005
and 2006 due to the nature or short maturity of those instruments.The carrying amounts of receivables and payables which are all subject to normal trade credit
terms approximated their fair values.The derivative component of convertible bonds is carried at fair value with any changes in fair
value reflected through profit or loss in the period when such changes occur. The liability
component of convertible bonds is carried at amortized cost, which approximates their fair
values (Note 17).The carrying amounts of long-term bank loans approximated their fair values based on prevailing
market borrowing rates available for comparable bank loans with similar terms and maturities.33.
    
    RELATED PARTY TRANSACTIONSUnicom Group is a state-owned enterprise directly controlled by the PRC government. The PRC
government is the Companys ultimate controlling party. State-owned enterprises and their
subsidiaries, in addition to Unicom Group, directly or indirectly controlled by the PRC
government are also considered to be related parties of the Group. Neither Unicom Group nor the
PRC government publishes financial statements available for public use.The PRC government also controls a significant portion of the productive assets and entities in
the PRC. The Group provides telecommunications services as part of its retail transactions,
thus, is likely to have extensive transactions with the employees of other state-controlled
entities, including their key management personnel and their close family members. These
transactions are carried out on commercial terms that are consistently applied to all
customers. Management considers other state-owned enterprises that have other material
transactions with the Group include other telecommunications service operators, equipment
vendors, construction vendors and state-owned banks in the PRC. Management believes that
meaningful information relative to related party transactions has been adequately disclosed
below.The Groups telecommunications networks depend, in large part, on interconnection with the
public switched telephone network and on transmission lines leased from other Domestic
Carriers.
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33.1
    
    Unicom Group and its subsidiariesThe table set forth below summarizes the names of significant related parties (excluding
Domestic Carriers and other major state-owned enterprises which are summarized in Note
33.2 and 33.3 respectively) and nature of relationship with the Group as of December 31,
2006:
 Nature of relationship with theName of related parties
    
    CompanyChina United Telecommunications Corporation (Unicom Group)
    
    Ultimate holding companyUnicom NewSpace Co., Limited (Unicom NewSpace)
    
    A subsidiary of Unicom GroupUnicom Xingye Science and Technology Trade Co., Limited
(Unicom Xingye)
    
    A subsidiary of Unicom GroupBeijing Unicom Xingye Science and Technology Company Limited
(Beijing Xingye)
    
    A subsidiary of Unicom GroupUnicom Import and Export Company Limited ( Unicom I/E Co)
    
    A subsidiary of Unicom GroupUnicom New Horizon Mobile Telecommunications Corporation
Limited (New Horizon)
    
    A subsidiary of Unicom GroupUnicom New Guoxin Telecommunications Corporation Limited
(New Guoxin)
    
    A subsidiary of Unicom GroupChina Information Technology Designing & Consulting Institute (CITDCI)(Newly became a wholly-owned subsidiary
of Unicom Group in December 2006)
    
    A subsidiary of Unicom GroupUNISK (Beijing) Information Technology Co., Limited (UNISK)
    
    A joint venture company of
Unicom Group
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(a)
    
    Transactions with Unicom Group and its subsidiariesThe following is a summary of significant recurring transactions carried out by the
Group with Unicom Group and its subsidiaries. In the directors opinion, these
transactions were carried out in the ordinary course of business.
 Note
    
    2004
    
    2005
    
    2006Transactions with Unicom Group and its subsidiaries:Interconnection and roaming revenues
    
    (i), (iii)
    
    
    220,174
    
    
    
    207,526
    
    
    
    212,178Interconnection and roaming charges
    
    (ii), (iii)
    
    
    63,891
    
    
    
    57,902
    
    
    
    59,125Rental income for premises and facilities
    
    (iv)
    
    
    19,475
    
    
    
    18,662
    
    
    
    16,257Charge for operator-based subscriber value-added
services by New Guoxin
    
    
    (v
    )
    
    
    858,778
    
    
    
    412,549
    
    
    
    365,076Charge for customer services by New Guoxin
    
    (vi)
    
    
    524,718
    
    
    
    562,003
    
    
    
    675,373Agency fee incurred for subscriber development
services by New Guoxin
    
    (vii)
    
    
    9,054
    
    
    
    15,312
    
    
    
    58,982CDMA network capacity lease rental
    
    (viii)
    
    
    6,588,926
    
    
    
    7,924,644
    
    
    
    8,078,772Constructed capacity related cost of CDMA network
    
    (ix)
    
    
    305,903
    
    
    
    176,130
    
    
    
    167,367Sales of CDMA handsets
    
    
    (x
    )
    
    
    
    
    
    
    2,921
    
    
    
    84,190Charges for cellular subscriber value-added services
by UNISK and Unicom NewSpace
    
    (xi)
    
    
    4,228
    
    
    
    28,418
    
    
    
    45,618Rental charges for premises, equipment and facilities
    
    (xii)
    
    
    25,528
    
    
    
    21,059
    
    
    
    27,931Charges for the international gateway services
    
    (xiii)
    
    
    17,062
    
    
    
    19,797
    
    
    
    17,143Charges for leasing of satellite transmission capacity
    
    (xiv)
    
    
    14,152
    
    
    
    11,794
    
    
    
    Revenue for leasing of transmission line capacity
    
    (xv)
    
    
    38,853
    
    
    
    25,841
    
    
    
    17,682Purchase of telephone cards
    
    (xvi)
    
    
    1,087,498
    
    
    
    671,715
    
    
    
    702,409Agency fee incurred for procurement of
telecommunications equipment
    
    (xvii)
    
    
    17,759
    
    
    
    15,791
    
    
    
    13,148Purchase of CDMA handsets
    
    (xviii)
    
    
    14,655
    
    
    
    
    
    
    
    Commission expenses for sales agency services
incurred for telephone cards
    
    (xix)
    
    
    16,023
    
    
    
    
    
    
    
    
 
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(i)
    
    Interconnection revenues represent the amounts received or
receivable from Unicom Group for calls from its networks to the Groups
networks. Roaming revenues represent revenue from calls made by Unicom Groups
subscribers using the Groups networks.(ii)
    
    Interconnection charges are for calls made from the Groups
networks to Unicom Groups networks. Roaming expenses represent expenses for
calls made by the Groups subscribers using Unicom Groups networks.(iii)
    
    Interconnection settlement between Unicom Groups network and
the Groups network is based on standards established from time to time by the
MII. In the case of calls between cellular subscribers in different provinces,
settlement is based on either the standards established by the MII or an
internal settlement arrangement applied by Unicom Group based on their
respective internal costs of providing this service. Also, charges for roaming
services between the Group and Unicom Group are based on the respective
internal costs of providing these services.(iv)
    
    Pursuant to the premises leasing agreement signed between the
Group and New Guoxin in 2005 (the 2005 Guoxin Premises Leasing Agreement),
the Group agreed to provide premises to New Guoxin. The rental amount is based
on the higher of depreciation costs and market price for similar premises in
that locality.(v)
    
    Pursuant to the agreement signed between the Group and New
Guoxin in 2005 (the 2005 Comprehensive Operator Services Agreement), the
Group shall retain 40% of the actually received revenue generated from the
value-added services provided by New Guoxin to the Groups subscribers and
allocate 60% of such revenue to New Guoxin. The settlement should be made
among branches of the Group and New Guoxin respectively.(vi)
    
    Pursuant to the 2005 Comprehensive Operator Services
Agreement, New Guoxin provides business inquiries, tariff inquiries, account
maintenance, complaints handling, and customer interview and subscriber
retention services to the Groups customers. The service fee payable by the
Group shall be calculated on the basis of the customer service costs plus a
profit margin, which shall not exceed 10%. The customer service costs were
determined by the actual cost per operator seat and the number of effective
operator seats.(vii)
    
    Pursuant to the 2005 Comprehensive Operator Services
Agreement, New Guoxin provides subscriber development services to the Group
through telephone or other channels by utilizing its own network, equipment
and operators. The agency fee chargeable to the Group does not exceed the
average of agency fees chargeable by any independent third party agent in the
same region.(viii)
    
    Pursuant to the 2005 CDMA Lease Agreement entered among CUCL, Unicom Group
and Unicom New Horizon, Unicom New Horizon agreed to lease the capacity of
CDMA network to CUCL. Details please refer to Note 4.2(c).
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(ix)
    
    Pursuant to the 2005 CDMA Lease Agreement, the constructed
capacity related costs in connection with the CDMA network capacity used by
the Group, including the rentals for the exchange centers and the base
stations, water and electricity charges, heating charges and fuel charges for
the relevant equipment etc., as well as the maintenance costs of a non-capital
nature, are charged to the Group as part of the 2005 CDMA Lease Arrangement.
The proportion of the constructed capacity related costs to be borne by the
Group shall be calculated on a monthly basis by reference to the actual number
of cumulative CDMA subscribers of the Group at the end of the month prior to
the occurrence of the costs divided by 90%, as a percentage of the total
capacity available on the CDMA network.(x)
    
    Pursuant to the framework agreement for the procurement of
CDMA mobile handsets entered between the Guizhou branch of Unicom Huasheng and
the Guizhou branch of Unicom Group on December 19, 2006, the Guizhou branch of
Unicom Huasheng agreed to sell CDMA mobile handsets to the Guizhou branch of
Unicom Group from January 1, 2006 to December 31, 2008. The selling price of
the CDMA mobile handsets are determined based on the factors including without
limitation on the cost of handsets acquired by the Guizhou branch of Unicom
Huasheng for sale and the cost in distributing those handsets to recipients
designated by the Guizhou branch of Unicom Group.(xi)
    
    Pursuant to the Cellular Subscriber Value-Added Services
Agreements (the Agreements) entered among CUCL, UNISK and Unicom NewSpace
respectively in March 2004, CUCL agreed to provide its telecommunications
channel and network subscriber resources to UNISK and Unicom NewSpace, enable
them to provide value-added services to subscribers through CUCLs cellular
telecommunications network and data platform. The Agreements also stipulate
that the content service fees paid by subscribers for using UNISKs or Unicom
NewSpaces value-added services are shared between CUCL and UNISK, or CUCL and
Unicom NewSpace based on an agreed proportion. The content service fees are
collected from subscribers by CUCL and the relevant portion is paid to UNISK
and Unicom NewSpace on a regular basis.(xii)
    
    CUCL signed service agreements with Unicom Group to mutually
lease premises, equipment and facilities from each other. Rentals are based on
the lower of depreciation costs and market rates.(xiii)
    
    Charges for international gateway services represent the amounts paid or
payable to Unicom Group for international gateway services provided for the
Groups international long distance networks. The charge for this service is
based on the cost of operation and maintenance of the international gateway
facilities incurred by Unicom Group, including depreciation, together with a
margin of 10% over cost.(xiv)
    
    Satellite transmission capacity leasing fees represented the
amounts paid or payable to Unicom NewSpace for the use of satellite
transmission capacity. The charges were based on the MII regulations then in
effect less the applicable discount up to 10% as agreed with Unicom NewSpace.
The leasing agreement was terminated at the end of year 2005.
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(xv)
    
    Unicom Group leases transmission line capacity from the Group
in accordance with the relevant provision of the services agreement. Revenue
for leasing of transmission line capacity is based on tariffs stipulated by
MII from time to time less a discount of up to 10%.(xvi)
    
    The Group signed a service agreement with Unicom Group to
purchase telephone cards from Unicom Group (to be imported by Unicom Xingye)
at cost plus a margin to be agreed from time to time, but not to exceed 20%,
and subject to appropriate volume discounts.(xvii)
    
    The Group signed a service agreement with Unicom I/E Co., in which Unicom
I/E Co. agreed to provide equipment procurement services to the Group. Unicom
I/E Co. charges the Group 0.55% (for contract up to an amount of USD30 million
(inclusive)) and 0.35% (for contract with an amount of more than USD30
million) of the value of imported equipment, and 0.25% (for contract up to an
amount of RMB200 million (inclusive)) and 0.l5% (for contract with an amount
of more than RMB200 million) of the value of domestic equipment for such
services.(xviii)
    
    In 2004, according to the purchase of CDMA handset agreement entered into
between Unicom NewSpace and certain subsidiaries of the Group, the Group
agreed to purchase CDMA handsets from Unicom NewSpace.(xix)
    
    Unicom International provided sales agency services such as
selling of telecommunications cards, leased lines and transfer calls to the
Group.Prior to September 2004, the Groups transactions with Unicom International
(previously a subsidiary of Unicom Group) were treated as related party
transactions, and had been included in the related party transactions
described above for the period before its acquisition by the Group in 2004.
Subsequent to its acquisition, such transactions become inter-group
transactions and have been eliminated in the Groups consolidated financial
statements starting from September 2004.(xx)
    
    In 2006, State-owned Assets Supervision and Administration
Commission of the State Council (SASAC) transferred 100% equity interest in
CITDCI to Unicom Group, CITDCI became a wholly-owned subsidiary of Unicom
Group effective from December 28, 2006 upon obtaining relevant approvals from
the government authorities. Accordingly, CUCL entered into a new agreement,
2006 Comprehensive Services Agreement with Unicom Group and CITDCI on
October 26, 2006, in which CITDCI agreed to provide engineering design and
technical services to the Group based on the pricing terms agreed among CUCL,
Unicom Group and CITDCI. The service fee standards for the engineering design
and technical services are determined based on standards promulgated by the
relevant government authorities. In addition, such prices shall not be higher
than those adopted by an independent third party providing services in the
same industry.(xxi)
    
    Unicom Group is the registered proprietor of the Unicom
trademark in English and the trademark bearing the Unicom logo, which are
registered at the PRC State Trademark Bureau. Pursuant to an exclusive PRC
trademark licence agreement entered into between Unicom Group and CUCL, CUCL
and its affiliates are granted the right to use these trademarks on a royalty
free basis for an initial period of 5 years, renewable at CUCLs option.
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(b)
    
    Amounts due from and to related parties/Unicom GroupAmounts due from and to related parties or Unicom Group and its subsidiaries are
unsecured, interest free, repayable on demand/on contract terms and arise in the
ordinary course of business in respect of transactions with Unicom Group or its
subsidiaries as described in (a) above.(c)
    
    Amount due to/ (from) Unicom Group
 2004
    
    
    2005
    
    
    2006Due to/(from) Unicom Group, beginning of year
    
    
    432,047
    
    
    
    (61,401
    )
    
    
    38,094Interconnection and roaming revenues
    
    
    (220,174
    )
    
    
    (207,526
    )
    
    
    (212,178
    )Interconnection and roaming charges
    
    
    63,891
    
    
    
    57,902
    
    
    
    59,125Revenue for leasing of transmission line capacity,
premises and facilities
    
    
    (38,853
    )
    
    
    (25,841
    )
    
    
    (17,682
    )Rental charges for premises, equipment and facilities
    
    
    25,528
    
    
    
    21,059
    
    
    
    27,931Charges for the international gateway services
    
    
    17,062
    
    
    
    19,797
    
    
    
    17,143Leasing of satellite transmission capacity
    
    
    7,076
    
    
    
    11,794
    
    
    
    Proceeds received/receivable from sale of New Guoxin
    
    
    450,000
    
    
    
    
    
    
    
    Net (settlement)/receipt during the year
    
    
    (797,978
    )
    
    
    222,310
    
    
    
    132,648Due (from)/to Unicom Group, end of year
    
    
    (61,401
    )
    
    
    38,094
    
    
    
    45,081
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(d)
    
    Renewal of continuing connected transactions in 2006 year-endThe significant related party transactions disclosed in (a) above between the Group
and Unicom Group and its subsidiaries had expired by
December 31, 2006. On October 26,
2006, CUCL entered into the new agreements, 2006 Comprehensive Services Agreement
and 2006 CDMA Lease Agreement, with Unicom Group and Unicom New Horizon to
continue to carry out the related party transactions. The new agreements have been
approved by the minority shareholders of the Company on December 1, 2006, and
become effective from January 1, 2007. Major changes of the key terms between the
new agreements and the previous agreements are set out as follows:
 
    
    2006 CDMA Lease AgreementPursuant to 2006 CDMA Lease Agreement, the CDMA lease has an initial term of one
year. The lease fee has been determined based on the same pricing mechanism as
under the 2005 CDMA Lease Agreement, but with a conditional increase in the lease
fee of 1% from 30% to 31% if the audited CDMA income before taxation of CUCL for
the relevant year is not less than the audited CDMA income before taxation of
CUCL for the year 2006 as set out in the relevant annual audited financial
statements of CUCL. The key terms of 2006 CDMA Lease Agreement are disclosed in
Note 4.2(c).
    
    2006 Comprehensive Services AgreementPursuant to 2006 Comprehensive Services Agreement, the customer service fees
payable shall be calculated on the same basis as under previous agreements,
except Guangdong has been added as one of the economically developed metropolises
in determining the cost per operator seat.
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33.2
    
    Domestic Carriers
 (a)
    
    Transactions with Domestic CarriersThe following is a summary of significant transactions with Domestic Carriers in the
ordinary course of business:
 Note
    
    2004
    
    2005
    
    2006Interconnection revenue
    
    
    (i
    )
    
    
    2,889,497
    
    
    
    3,964,977
    
    
    
    5,460,211Interconnection charges
    
    
    (i
    )
    
    
    7,003,262
    
    
    
    7,886,395
    
    
    
    9,118,314Leased line revenue
    
    
    (ii
    )
    
    
    247,676
    
    
    
    62,865
    
    
    
    54,912Leased line charges
    
    
    (ii
    )
    
    
    628,173
    
    
    
    548,481
    
    
    
    328,701
 
 (i)
    
    The interconnection revenue and charges mainly represent the amounts due
from or to Domestic Carriers for telephone calls made between the Groups
networks and the public switched telephone network of Domestic Carriers. The
interconnection settlements are calculated in accordance with interconnection
agreements reached between the branches of the Group and Domestic Carriers on a
provincial basis. The terms of these agreements are set in accordance with the
standard settlement arrangement stipulated by the MII.(ii)
    
    Leased line charges are paid or payable to Domestic Carriers by
the Group for the provision of transmission lines. At the same time, the Group
leases transmission lines to Domestic Carriers in return for leased line rental
income. The charges are calculated at a fixed charge per line, depending on the
number of lines being used by the Group and Domestic Carriers.
 (b)
    
    Amounts due from and to Domestic Carriers
 2005
    
    
    2006Amounts due from Domestic Carriers- Receivables for interconnection revenue and leased line revenue
    
    
    139,099
    
    
    
    158,894- Less: Provision for doubtful debts
    
    
    (614
    )
    
    
    (20,373
    )138,485
    
    
    
    138,521Amounts due to Domestic Carriers- Payables for interconnection charges and leased lines charges
    
    
    822,006
    
    
    
    850,975
 All amounts due from and to Domestic Carriers were unsecured, non-interest
bearing and repayable within one year.
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##### Table of Contents



33.3
    
    Other major state-owned enterprises
 (a)
    
    Transactions with other major state-owned enterprisesThe following is a summary of significant transactions with other major state-owned
enterprises in the ordinary course of business:
 2004
    
    2005
    
    2006Purchase of CDMA handsets
    
    
    1,818,500
    
    
    
    1,795,009
    
    
    
    1,144,181Construction and installation fee
    
    
    707,829
    
    
    
    290,170
    
    
    
    218,904Purchase of equipment
    
    
    5,757,356
    
    
    
    3,588,153
    
    
    
    1,654,891Line leasing revenue
    
    
    179,450
    
    
    
    153,837
    
    
    
    166,559Finance income/costs, include:- Interest income
    
    
    102,907
    
    
    
    96,196
    
    
    
    226,065- Interest expense
    
    
    1,994,986
    
    
    
    1,587,260
    
    
    
    832,681Short-term bank loan received
    
    
    10,151,971
    
    
    
    11,946,716
    
    
    
    2,070,000Long-term bank loan received
    
    
    6,893,990
    
    
    
    5,772,746
    
    
    
    1,315,000Short-term bank loan repaid
    
    
    12,271,753
    
    
    
    14,363,131
    
    
    
    7,372,661Long-term bank loan repaid
    
    
    17,245,367
    
    
    
    25,869,531
    
    
    
    8,442,468
 (b)
    
    Amounts due from and to other major state-owned enterprisesThe balances with other major state-owned enterprises in various line items of the
consolidated balance sheets were listed as follows:
 2005
    
    2006Current assetsPrepayment and other current assets
    
    
    160,681
    
    
    
    288,930Short-term bank deposits
    
    
    282,457
    
    
    
    21,432Cash and cash equivalents
    
    
    5,191,067
    
    
    
    11,994,563Non-current liabilitiesLong-term bank loans
    
    
    7,946,418
    
    
    
    235,000Current liabilitiesPayables and accrued liabilities
    
    
    341,446
    
    
    
    661,403Short-term bank loans
    
    
    6,431,208
    
    
    
    Current portion of long-term bank loans
    
    
    5,145,190
    
    
    
    80,000
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34.
    
    CONTINGENCIES AND COMMITMENTS
 34.1
    
    Capital CommitmentsAs of December 31, 2005 and 2006, the Group had capital commitments, mainly in relation
to the construction of telecommunications networks, as follows:
 2006
    
    2005Land andbuildings
    
    Equipment
    
    Total
    
    TotalAuthorized and contracted for
    
    
    499,280
    
    
    
    2,199,345
    
    
    
    2,698,625
    
    
    
    3,879,666Authorized but not contracted for
    
    
    63,993
    
    
    
    879,287
    
    
    
    943,280
    
    
    
    329,258Total
    
    
    563,273
    
    
    
    3,078,632
    
    
    
    3,641,905
    
    
    
    4,208,924
 As of December 31, 2006, approximately RMB203 million (2005: RMB218 million) of
capital commitment outstanding was denominated in US dollars, equivalent to USD26
million (2005: USD27 million).
 34.2
    
    Operating Lease CommitmentsAs of December 31, 2005 and 2006, the Group had total future aggregate minimum operating
lease payments under operating leases as follows:
 2006
    
    2005CDMALand and
    
    
    
    
    
    networkbuildings
    
    Equipment
    
    capacity (a)
    
    Total
    
    TotalLeases expiring:- 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,873,407- 2007
    
    
    935,718
    
    
    
    129,951
    
    
    
    7,270,895
    
    
    
    8,336,564
    
    
    
    586,064- 2008
    
    
    654,349
    
    
    
    24,397
    
    
    
    
    
    
    
    678,746
    
    
    
    500,276- 2009
    
    
    512,527
    
    
    
    21,647
    
    
    
    
    
    
    
    534,174
    
    
    
    469,502- 2010
    
    
    399,639
    
    
    
    16,431
    
    
    
    
    
    
    
    416,070
    
    
    
    434,837- 2011
    
    
    323,432
    
    
    
    15,333
    
    
    
    
    
    
    
    338,765
    
    
    
    - Thereafter
    
    
    1,082,987
    
    
    
    24,804
    
    
    
    
    
    
    
    1,107,791
    
    
    
    1,168,106Total
    
    
    3,908,652
    
    
    
    232,563
    
    
    
    7,270,895
    
    
    
    11,412,110
    
    
    
    11,032,192
 
 (a)
    
    In relation to the above CDMA network capacity commitment, it is estimated
based on 90% of the total amount of lease fee paid by the Group to Unicom New
Horizon in 2006 pursuant to 2006 CDMA Lease Agreement (See Note 4.2(c) for
details).
 34.3
    
    Commitment to purchase CDMA handsetsAs of December 31, 2006, the Group committed to purchase CDMA handsets from third party
vendors amounting to approximately RMB1,237 million (2005: RMB1,232 million).
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35.
    
    EVENTS AFTER BALANCE SHEET
 35.1
    
    Non-adjusting post balance sheet eventPursuant to the PRC enterprise income tax law passed by the Tenth National
Peoples Congress on March 16, 2007, the new enterprise income tax rates for domestic
and foreign enterprises are unified at 25% and will be effective from January 1, 2008.
The impact of this change in enterprise income tax rates on the Groups consolidated
financial statements will depend on detailed implementation pronouncements that are to
be issued subsequently. The Group is currently assessing the impact on the Groups
results of operations and financial position of this change in enterprise income tax
rates.35.2
    
    Proposed final dividendAfter the balance sheet date, the Board of Directors proposed a final dividend. For
details, see Note 31.
 36.
    
    COMPARATIVE FIGURESFor comparative purposes, the carrying value of land use rights underlying the buildings
acquired from third parties was reclassified from Property, plant and equipment to Other
assets on the 2005 comparative consolidated balance sheet. Please refer to Note 6 for details.
 37.
    
    APPROVAL OF FINANCIAL STATEMENTSThe financial statements were approved by the Board of Directors on June 21, 2007.
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38.
    
    SIGNIFICANT DIFFERENCES BETWEEN HKFRS AND US GAAP
  (A)
    
    Effect of the acquisitions of entities under common controlIn 2002, 2003 and 2004, the Company acquired the entire equity interests in (i) Unicom
New Century (which was merged into CUCL and legally dissolved on June 30, 2004); (ii)
Unicom New World (which was merged into CUCL and legally dissolved on September 1, 2005);
and (iii) Unicom International, respectively.Prior to the adoption of HKFRS in 2005, the Group had adopted the purchase method of
accounting to account for the acquisitions of Unicom New Century, Unicom New World and
Unicom International (the Acquisitions) under the previous accounting principles
generally accepted in Hong Kong (HK GAAP). Under the purchase method, the operating
results of these acquired subsidiaries were included in the consolidated statements of
income of the Group after the Acquisitions were effective. The differences between the
costs of the Acquisitions and the fair values of the separately identifiable net assets
acquired were recorded as goodwill/negative goodwill. Upon the adoption of HKFRS,
under HKFRS 3 Business Combinations, goodwill is no longer amortized but is instead
subject to impairment testing on an annual basis or when there are indications of impairment.
This policy is applied prospectively from January 1, 2005. Upon the adoption of HKFRS 3,
negative goodwill has been derecognized at January 1, 2005, with a corresponding adjustment
to the balance of retained earnings as of January 1, 2005 of the Group.As the Group, Unicom New Century, Unicom New World and Unicom International were under the
common control of Unicom Group prior to the Acquisitions, these Acquisitions are considered
as a transfer of businesses under common control and accounted for in a manner similar to a
pooling of interests under US GAAP. Accordingly, the acquired assets and liabilities are accounted for at
historical cost under US GAAP. The consolidated financial statements prepared under US GAAP
for all periods presented have been retroactively restated as if Unicom New Century, Unicom
New World and Unicom International were always part of the Group. The cash considerations
paid by the Company are treated as capital distribution in the respective years of the
Acquisitions. Goodwill/negative goodwill arising from the Acquisitions and the related
amortization of goodwill/negative goodwill in prior periods has been reversed under US
GAAP. Transaction costs, which are capitalized as part of the cost of investment under
HKFRS, have been expensed in full under US GAAP. Upfront non-refundable revenue and direct
incremental costs of these subsidiaries occurring prior to the Acquisitions were not recognized as assets and
liabilities under the purchase method of accounting in the financial statements prepared
under HKFRS, whereas as a transfer of business under common control under US GAAP, such
assets and liabilities have been recognized as if the subsidiaries had always been part of
the Group.
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(B)
    
    Consolidation of variable interest entitiesUnder HKFRS, consolidation of business enterprises is based on voting control. In addition,
special purpose entities (SPE) are consolidated where the substance of the relationship
indicates that an entity controls the SPE. Indicators of control mainly arise where: (i)
the SPE conducts its activities on behalf of the entity; (ii) the entity has the
decision-making power to obtain the majority of the benefits of the SPE; (iii) the entity
has other rights to obtain the majority of the benefits of the SPE; or (iv) the entity has
the majority of the residual or ownership risks of the SPE or its assets.Under US GAAP, pursuant to Financial Accounting Standard Board (FASB) Interpretation No.
46 (revised in December 2003), Consolidation of Variable Interest Entities (FIN 46R),
consolidation by business enterprises is based on an economic risks and rewards model
rather than a traditional voting interest model. Entities subject to consolidation under
the economic risks and rewards model is called a Variable Interest Entity (VIE). In
accordance with the provision of FIN 46R, the Group has identified one VIE, Unicom New
Horizon, in which it holds a variable interest in the form of lease renewal options. Unicom
New Horizon is a 100% owned subsidiary of the Groups controlling shareholder, from which
the Group leases its CDMA assets under operating leases subject to indefinite renewal
options. Lease fees are calculated based on a percentage of
CUCLs CDMA service revenues. The
Group has concluded that its ultimate controlling shareholder, Unicom Group, is the primary
beneficiary of Unicom New Horizon, since it absorbs all of Unicom New Horizons expected
losses (through its ownership of 100% of Unicom New Horizons equity and an unconditional
guarantee of 100% of Unicom New Horizon debt) and is indirectly associated with the
operations of the leased CDMA assets through its majority ownership of the Group. As such,
the adoption of FIN 46R did not result in any differences from the Groups HKFRS
consolidated financial statements.(C)
    
    Employee housing schemesPrior to April 2000, Unicom Group provided housing benefits to qualified employees of the
Group to enable them to purchase living quarters at a discount. Under HKFRS, housing
benefits incurred and borne by Unicom Group for these employees were not recognized by the
Group. Under US GAAP, the amount of such housing benefits is being recognized as part of
the Groups operating expenses over the estimated average
service period of the participating
employees. The corresponding credits are being accounted for as capital contributions.
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(D)
    
    Revaluation of property, plant and equipmentUnder HKFRS, revaluation surplus in relation to buildings is recorded
by the Group as part of the property, plant and equipment. Thereafter,
depreciation is provided based on the revalued amounts.Under US GAAP, all property, plant and equipment are stated at
historical cost less accumulated depreciation.(E)
    
    Share option schemeUnder HKFRS, the fair value of the employee services received in
exchange for share options is recognized as an expense. The total
amount to be expensed over the vesting period is determined by
reference to the fair value of the options granted. The proceeds
received net of any directly attributable transaction costs are
credited to share capital (nominal value) and share premium when the
options are exercised. Upon the adoption of HKFRS 2 effective on
January 1, 2005, the Group expenses the cost of share options in the
statements of income. As a transitional provision, the cost of share
options granted after November 7, 2002 and not yet vested on January
1, 2005 was expensed retrospectively in the statements of income of
the respective periods. Refer to Note 29 for details of share option
schemes adopted by the Company.Under US GAAP, in December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123(R) Share-Based Payment (SFAS 123R), which is a revision of Statement of
Financial Accounting Standard for Stock-Based Compensation (SFAS 123) and supersedes Accounting
Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (APB 25). SFAS
123(R) requires all share-based payments to employees, including
grants of employee stock
options, to be valued at fair value on the date of grant, and to be expensed over the
applicable vesting periods. Under SFAS 123 (R), the pro forma disclosures of the statements
of income effects of share-based payments are no longer an alternative. In March 2005, the
SEC issued Staff Accounting Bulletin No. 107 regarding the SECs Interpretation of SFAS
123(R) and the valuation of share-based payment for public companies. SFAS 123(R) is
effective for all stock-based awards granted on or after June 15, 2005. In addition,
companies must also recognize compensation expense relating to any awards that are not fully
vested as of June 15, 2005. Compensation expense for the unvested awards will be measured
based on the fair value of the awards previously calculated in developing the pro forma
disclosures in accordance with the provisions of SFAS 123 and will be amortized over the
remaining vesting period.The Group adopted SFAS 123(R) and relevant implementation guidances on January 1, 2006 using
the Modified Prospective Application (MPA) method. By using the MPA method, the Group will
not restate its prior period financial statements. Instead, the Group applies SFAS 123(R)
for any unvested options as of and for new options granted after June 15, 2005.
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Prior to adopting the provision of SFAS 123(R), the Company
applied APB 25 to account for
its fixed award stock options issued to employees. Under APB 25, compensation expense is
recorded in the amount of the excess, if any, of the quoted market price of the shares on
the date of grant over the exercise price of the options, which is amortized over the
vesting period of the option. Since the market price of the underlying stock on the date of
grant did not exceed the exercise price of the options granted, no compensation cost for
options has been recognized in the reconciliation of net income for the relevant years to
US GAAP. For purposes of pro forma disclosure under SFAS 123, as further amended by
Statement of Financial Accounting Standards, No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure(SFAS 148), for the years ended December 31, 2004
and December 31, 2005, the estimated fair values of the share options were assumed to be
amortized to expense over the share options vesting periods. The pro forma effects of
recognizing estimated compensation expense under the fair value method on net income and
earnings per share for the years ended December 31, 2004 and December 31, 2005 were as
follows:
 2004
    
    2005Net income under US GAAP:As reported (RMB000)
    
    
    4,712,687
    
    
    
    5,012,812Less: Total stock-based employee
compensation expense determined
under fair value based method
    
    
    (146,541
    )
    
    
    (108,950
    )Pro forma
    
    
    4,566,146
    
    
    
    4,903,862Basic earnings per share:As reported (RMB)
    
    
    0.38
    
    
    
    0.40Pro forma (RMB)
    
    
    0.36
    
    
    
    0.39Diluted earnings per share:As reported (RMB)
    
    
    0.37
    
    
    
    0.40Pro forma (RMB)
    
    
    0.36
    
    
    
    0.39Basic earnings per ADS:As reported (RMB)
    
    
    3.75
    
    
    
    3.99Pro forma (RMB)
    
    
    3.64
    
    
    
    3.90Diluted earnings per ADS:As reported (RMB)
    
    
    3.74
    
    
    
    3.97Pro forma (RMB)
    
    
    3.62
    
    
    
    3.89
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(F)
    
    Capacity transactionUnder HKFRS, sales of indefeasible right-of-use (IRU) are
recognized at the time of delivery and acceptance where the
following conditions are met: (i) the purchasers right of use is
exclusive and irrevocable; (ii) the asset is specific and
separable; (iii) the term of the contract is for the major part
of the assets useful economic life; (iv) the attributable carrying value can be measured reliably; and (v) no
significant risks are retained by the Group.Under US GAAP, sales of IRUs are evaluated under the guidance in
FASB Interpretations No. 43 Real Estates Sales as
the leased
asset is considered as real estate. The title of the leased
assets must be transferred to the lessee in order to be
classified and accounted for as a sales-type lease such that the
sale can be recognized. Accordingly, such sales of IRUs are not
recognized under US GAAP as the title to the asset is not
transferred.(G)
    
    Convertible bondsUnder HKFRS, the Convertible Bonds contract must be separated
into two component elements: a derivative component consisting of
the conversion option and a liability component consisting of the
straight debt element of the bonds. Since the functional currency
of the Group is RMB, the conversion option of the Convertible
Bonds denominated in Hong Kong Dollars will not result in
settlement by the exchange of a fixed amount of cash in RMB
(functional currency of the Group) for a fixed number of the
Companys shares. The derivative component, the embedded
conversion option, is carried at fair value on the balance sheet
with any changes in fair value being charged or credited to the
statement of income in the period when the change occurs. The
remainder of the proceeds is allocated to the debt element of the
bonds, net of transaction costs, and is recorded as the liability
component. The liability component is subsequently carried at
amortized cost until extinguished on conversion or redemption.
Interest expense is calculated using the effective interest
method by applying the effective interest rate to the liability
component through the maturity date. Refer to Note 2.13 and Note
17 for details of the Convertible Bonds.Under US GAAP, pursuant to Statement of Financial Accounting Standards No.133,
Accounting for derivative instruments and hedging activities (SFAS 133), the
conversion option of the Convertible Bonds is not separated from the bond contract as
it does not satisfy the net settlement characteristic of a derivative instrument and no
portion of the proceeds from the issuance of the Convertible Bonds should be accounted
for as attributable to the conversion feature. All of the proceeds
are attributed to
the bond contract and is carried as a long-term liability on the amortized cost basis until
extinguished on conversion or redemption. Interest expense is
calculated at the effective
interest rate of 1.40% to the host contract through the maturity date. The transaction
costs of the Convertible Bonds with puts at the option of the holder are amortized at 2
years through the first put date, July 5, 2008.(H)
    
    Rental costUnder HKFRS, the rental costs associated with ground or building operating leases that are
incurred during the construction period are capitalized as these costs are considered as
necessary costs of the construction which are directly attributable costs of bringing the
asset to its working condition and location for its intended use.Under US GAAP, effective from January 1, 2006, the Group
applies FASB Staff Position (FSP) 13-1, Accounting for
Rental Costs Incurred During a Construction Period, which requires that rental cost
associated with ground or building operating leases that are incurred during the
construction period be recognized as rental expense.
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(I)
    
    Deferred taxationThe adjustment related to deferred taxation represents the deferred tax effects of other US
GAAP adjustments.(J)
    
    New Accounting PronouncementsThe following are new accounting pronouncements not yet effective, but may be applicable to
the Group.The Financial Accounting Standards Board (FASB) recently issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109
(FIN 48), and Statement of Financial Accounting Standards No.157, Fair Value
Measurements (SFAS 157). The FASB ratified Emerging Issue Task Force (EITF) No. 06-03,
How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement(EITF 06-03). Also, EITF issued No. 06-01, Accounting
for Consideration Given by a Service Provider to Manufacturers or Resellers of Equipment
Necessary for an End-Customer to Receive Service from the Service Provider(EITF 06-01).
U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements(SAB 108).
 (a)
    
    In June 2006, the EITF issued No. 06-03, How
Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (EITF 06-03). EITF 06-03 requires disclosure of the
presentation of taxes on either a gross or a net basis as an accounting policy
decision. The provisions are effective for interim and annual reporting periods
beginning after December 15, 2006. The Group does not expect the adoption of EITF 06-03
will have a material impact on the consolidated financial statements of the Group.(b)
    
    In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109 (FIN 48),
which clarifies the accounting for uncertainty in tax positions. This Interpretation
requires that the Company recognize in its financial statements the impact of a tax
position if that position is more likely than not of being sustained on tax audit,
based on the technical merits of the position. The provisions of FIN 48 are effective
for fiscal year beginning after December 15, 2006, with the cumulative effect of the
change in accounting principle, if any, recorded as an adjustment to opening retained
earnings. The Group does not expect the adoption of FIN 48 will have a material impact
on the consolidated financial statements of the Group.(c)
    
    In September 2006, the FASB issued Statement of Financial Accounting Standards
No.157, Fair Value Measurements (SFAS 157), which defines fair value, establishes
guidelines for measuring fair value and expands disclosures regarding fair value
measurements. SFAS 157 does not require any new fair value measurements but rather
eliminates inconsistencies in guidance found in various prior accounting
pronouncements. SFAS 157 is effective for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. Earlier adoption is permitted,
provided the company has not yet issued financial statements, including for interim
periods, for that fiscal year. The Group does not expect the adoption of SFAS 157 will
have a material impact on the consolidated financial statements of the Group.
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(d)
    
    In September 2006, the Staff of the SEC issued Staff Accounting Bulletin No.
108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements
in Current Year Financial Statements (SAB 108). SAB 108 provides guidance on the
consideration of the effects of prior year misstatements in quantifying current year
misstatements for the purpose of determining whether the current years financial
statements are materially misstated. SAB 108 is effective for fiscal years beginning
after November 15, 2006. The Group does not expect the adoption of SAB 108 will have a
material impact on the consolidated financial statements of the Group.(e)
    
    In September 2006, EITF issued No. 06-01, Accounting for Consideration Given by
a Service Provider to Manufacturers or Resellers of Equipment Necessary for an
End-Customer to Receive Service from the Service Provider (EITF 06-01). EITF 06-01
provides guidance regarding whether the consideration given by a service provider to a
manufacturer or reseller of specialized equipment should be characterized as a
reduction of revenue or an expense. This Issue is effective for fiscal years beginning
after June 15, 2007. The Group believes the adoption of EITF 06-01 will not have
significant impact on its consolidated financial statements.
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Note
    
    2004
    
    2005
    
    2006Net income under HKFRS
    
    
    
    
    
    
    4,493,451
    
    
    
    4,931,052
    
    
    
    3,731,824Impact of US GAAP adjustments:- Reversal of goodwill amortization of Unicom New
Century
    
    
    (A
    )
    
    
    114,237
    
    
    
    
    
    
    
    - Recognition of depreciation expenses based on
historical cost of property, plant and equipment of
Unicom New Century
    
    
    (A
    )
    
    
    (28,761
    )
    
    
    (28,761
    )
    
    
    (28,761
    )- Reversal of goodwill amortization of Unicom New World
    
    
    (A
    )
    
    
    57,247
    
    
    
    
    
    
    
    - Recognition of depreciation expenses based on
historical cost of property, plant and equipment of
Unicom New World
    
    
    (A
    )
    
    
    (20,740
    )
    
    
    (20,740
    )
    
    
    (20,740
    )- Effect of acquisition of Unicom International
    
    
    (A
    )
    
    
    6,106
    
    
    
    
    
    
    
    - Transaction costs for the acquisition of Unicom
International
    
    
    (A
    )
    
    
    (325
    )
    
    
    
    
    
    
    - Recognition of depreciation expenses based on
historical cost of property, plant and equipment of
Unicom International
    
    
    (A
    )
    
    
    61
    
    
    
    1,448
    
    
    
    1,448- Upfront non-refundable revenue and direct
incremental costs not recognized under purchase method
of accounting under HKFRS
    
    
    (A
    )
    
    
    19,807
    
    
    
    21,001
    
    
    
    21,001- Employee housing benefits
    
    
    (C
    )
    
    
    (14,942
    )
    
    
    (14,942
    )
    
    
    (14,942
    )- Reversal of depreciation for revalued property,
plant and equipment
    
    
    (D
    )
    
    
    4,127
    
    
    
    4,127
    
    
    
    4,127- Reversal of employee compensation costs for share
option scheme under HKFRS
    
    
    (E
    )
    
    
    88,957
    
    
    
    108,417
    
    
    
    - Effect on sale of indefeasible right-of-use
    
    
    (F
    )
    
    
    
    
    
    
    (3,747
    )
    
    
    (142
    )- Adjustment of differences on Convertible Bonds
between HKFRS and US GAAP:(i) Reversal of unrealized loss on changes in
fair value of derivative component of Convertible
Bonds
    
    
    (G
    )
    
    
    
    
    
    
    
    
    
    
    2,396,592(ii) Amortization of transaction costs on
Convertible Bonds
    
    
    (G
    )
    
    
    
    
    
    
    
    
    
    
    (3,540
    )(iii) Difference in provision for interest
expense on Convertible Bonds under HKFRS
    
    
    (G
    )
    
    
    
    
    
    
    
    
    
    
    137,973(iv) Difference in exchange gain on Convertible
Bonds under HKFRS
    
    
    (G
    )
    
    
    
    
    
    
    
    
    
    
    (58,090
    )- Expense the capitalized rental cost under HKFRS
    
    
    (H
    )
    
    
    
    
    
    
    
    
    
    
    (25,935
    )- Deferred tax effects of US GAAP adjustments
    
    
    (I
    )
    
    
    (6,538
    )
    
    
    14,957
    
    
    
    14,957Net income under US GAAP
    
    
    
    
    
    
    4,712,687
    
    
    
    5,012,812
    
    
    
    6,155,772
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The GroupNote
    
    2005
    
    2006Shareholders equity under HKFRS
    
    
    
    
    
    
    76,284,345
    
    
    
    79,408,817Impact of US GAAP adjustments:- Effect of acquisition of Unicom New Century
    
    
    (A
    )
    
    
    (2,052,554
    )
    
    
    (2,052,554
    )- Transaction costs for the acquisition of Unicom New Century
    
    
    (A
    )
    
    
    (109,221
    )
    
    
    (109,221
    )- Reversal of goodwill amortization and recognition of
depreciation expenses based on historical cost of property,
plant and equipment of Unicom New Century
    
    
    (A
    )
    
    
    145,509
    
    
    
    116,748- Effect of acquisition of Unicom New World
    
    
    (A
    )
    
    
    (946,370
    )
    
    
    (946,370
    )- Transaction costs for the acquisition of Unicom New World
    
    
    (A
    )
    
    
    (49,378
    )
    
    
    (49,378
    )- Reversal of goodwill amortization and recognition of
depreciation expenses based on historical cost of property,
plant and equipment of Unicom New World
    
    
    (A
    )
    
    
    15,767
    
    
    
    (4,973
    )- Effect of acquisition of Unicom International
    
    
    (A
    )
    
    
    392
    
    
    
    392- Transaction costs for the acquisition of Unicom International
    
    
    (A
    )
    
    
    (325
    )
    
    
    (325
    )- Reversal of goodwill amortization and recognition of
depreciation expenses based on historical cost of property,
plant and equipment of Unicom International
    
    
    (A
    )
    
    
    (5,977
    )
    
    
    (4,529
    )- Upfront non-refundable revenue and direct incremental costs
not recognized under purchase method of accounting under HKFRS
    
    
    (A
    )
    
    
    69,775
    
    
    
    90,776- Reversal of revaluation surplus of property, plant and
equipment:- Cost
    
    
    (D
    )
    
    
    (82,531
    )
    
    
    (282,861
    )- Accumulated depreciation
    
    
    (D
    )
    
    
    23,605
    
    
    
    27,732- Effect on sale of indefeasible right-of-use
    
    
    (F
    )
    
    
    (3,747
    )
    
    
    (3,889
    )- Adjustment of differences on Convertible Bonds between HKFRS
and US GAAP:(i) Reversal of unrealized loss on changes in fair value of
derivative component of Convertible Bonds
    
    
    (G
    )
    
    
    
    
    
    
    2,396,592(ii) Amortization of transaction costs on Convertible Bonds
    
    
    (G
    )
    
    
    
    
    
    
    (3,540
    )(iii) Difference in provision for interest expense on
Convertible Bonds under HKFRS
    
    
    (G
    )
    
    
    
    
    
    
    137,973(iv) Difference in exchange gain on Convertible Bonds under
HKFRS
    
    
    (G
    )
    
    
    
    
    
    
    (58,090
    )- Expense the capitalized rental cost under HKFRS
    
    
    (H
    )
    
    
    
    
    
    
    (25,935
    )- Deferred tax effects of US GAAP adjustments
    
    
    (I
    )
    
    
    (24,004
    )
    
    
    96,082Shareholders equity under US GAAP
    
    
    
    
    
    
    73,265,286
    
    
    
    78,733,447
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Condensed Statements of Income
 2004
    
    2005
    
    2006Revenue (Turnover):
    
    
    79,388,314
    
    
    
    87,254,524
    
    
    
    94,500,184Operating expenses:Leased lines and network capacities
    
    
    (7,398,429
    )
    
    
    (8,747,317
    )
    
    
    (8,763,865
    )Interconnection charges
    
    
    (7,508,866
    )
    
    
    (8,372,370
    )
    
    
    (9,595,622
    )Depreciation and amortization
    
    
    (18,944,473
    )
    
    
    (20,412,108
    )
    
    
    (22,467,946
    )Employee benefit expenses
    
    
    (4,547,892
    )
    
    
    (5,522,837
    )
    
    
    (6,663,641
    )Selling and marketing
    
    
    (18,989,186
    )
    
    
    (20,721,974
    )
    
    
    (19,415,800
    )General, administrative and other expenses
    
    
    (10,471,208
    )
    
    
    (11,741,560
    )
    
    
    (13,441,503
    )Cost of telecommunications products sold
    
    
    (3,342,797
    )
    
    
    (3,594,844
    )
    
    
    (4,949,516
    )Total operating expenses
    
    
    (71,202,851
    )
    
    
    (79,113,010
    )
    
    
    (85,297,893
    )Operating income
    
    
    8,185,463
    
    
    
    8,141,514
    
    
    
    9,202,291Interest income
    
    
    103,441
    
    
    
    96,196
    
    
    
    259,040Finance costs
    
    
    (1,688,418
    )
    
    
    (1,099,321
    )
    
    
    (577,877
    )Other gains  net
    
    
    95,932
    
    
    
    30,111
    
    
    
    21,353Net income before taxation and minority interests
    
    
    6,696,418
    
    
    
    7,168,500
    
    
    
    8,904,807Taxation
    
    
    (1,983,731
    )
    
    
    (2,155,454
    )
    
    
    (2,748,928
    )Net income before minority interests
    
    
    4,712,687
    
    
    
    5,013,046
    
    
    
    6,155,879Minority interests
    
    
    
    
    
    
    (234
    )
    
    
    (107
    )Net income
    
    
    4,712,687
    
    
    
    5,012,812
    
    
    
    6,155,772
 F - 96




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##### Table of Contents



Note
    
    2004
    
    2005
    
    2006Basic earnings per share (RMB):
    
    
    (1
    )
    
    
    0.38
    
    
    
    0.40
    
    
    
    0.49Diluted earnings per share (RMB):
    
    
    (2
    )
    
    
    0.37
    
    
    
    0.40
    
    
    
    0.46Basic earnings per ADS (RMB):
    
    
    (1
    )
    
    
    3.75
    
    
    
    3.99
    
    
    
    4.89Diluted earnings per ADS (RMB):
    
    
    (2
    )
    
    
    3.74
    
    
    
    3.97
    
    
    
    4.62
 
 Notes(1)
    
    Basic earnings per share for the years ended December 31, 2004, 2005 and 2006 were computed
by dividing the net income for the financial years under US GAAP by the weighted average
number of ordinary shares in issue during the years.(2)
    
    Diluted earnings per share for the years ended December 31, 2004, 2005 and 2006 were computed
by dividing the net income for the financial years under US GAAP by the weighted average
number of ordinary shares in issue during the years, after adjusting for the cumulative
effects of the dilutive potential ordinary shares. The dilutive potential ordinary shares
arose from share options granted (i) under the amended Pre-Global Offering Share Option
Scheme; (ii) under the amended Share Option Scheme as described in Note 29 and (iii) the
Convertible Bonds as described in Note 17. For 2006, the dilutive potential ordinary shares
arose from additional share options granted in 2002, 2003 and 2004 under the amended Share
Option Scheme (see Note 29) and the Convertible Bonds, which if converted to
ordinary shares would decrease earnings per share. F - 97




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##### Table of Contents



Condensed Balance Sheets
 2005
    
    2006AssetsCurrent assets:Bank balances and cash
    
    
    5,471,576
    
    
    
    12,182,108Short-term bank deposits
    
    
    282,457
    
    
    
    195,820Amounts due from related parties
    
    
    384,531
    
    
    
    168,548Amounts due from Domestic Carriers
    
    
    138,485
    
    
    
    138,521Accounts receivable
    
    
    7,636,980
    
    
    
    6,462,638Less: Provision for doubtful debts
    
    
    (3,088,551
    )
    
    
    (3,043,295
    )Accounts receivable, net
    
    
    4,548,429
    
    
    
    3,419,343Inventories
    
    
    2,107,812
    
    
    
    2,333,902Current portion of deferred tax assets
    
    
    447,556
    
    
    
    819,118Prepayments and other current assets
    
    
    2,342,467
    
    
    
    1,988,019Total current assets
    
    
    15,723,313
    
    
    
    21,245,379Non-current assets:Property, plant and equipment, net
    
    
    112,549,099
    
    
    
    111,285,921Other assets
    
    
    11,685,354
    
    
    
    11,187,164Total assets
    
    
    139,957,766
    
    
    
    143,718,464Liabilities and equityCurrent liabilities:Payables and accrued liabilities
    
    
    18,526,628
    
    
    
    26,290,074Taxes payable
    
    
    1,016,128
    
    
    
    1,632,195Amounts due to Unicom Group
    
    
    38,094
    
    
    
    45,081Amounts due to related parties
    
    
    116,621
    
    
    
    325,308Amounts due to Domestic Carriers
    
    
    822,006
    
    
    
    850,975Short-term bonds
    
    
    9,865,900
    
    
    
    7,087,217Short-term bank loans
    
    
    7,024,358
    
    
    
    Current portion of long-term bank loans
    
    
    5,145,190
    
    
    
    3,984,350Current portion of obligations under finance leases
    
    
    420,631
    
    
    
    99,566Advances from customers
    
    
    7,886,624
    
    
    
    9,987,771Total current liabilities
    
    
    50,862,180
    
    
    
    50,302,537Non-current liabilities:Long-term bank loans
    
    
    11,981,518
    
    
    
    4,139,349Convertible bonds
    
    
    
    
    
    
    7,862,609Obligations under finance leases
    
    
    145,367
    
    
    
    10,230Deferred tax liabilities
    
    
    132,892
    
    
    
    410,201Deferred revenue
    
    
    3,567,789
    
    
    
    2,257,250Total non-current liabilities
    
    
    15,827,566
    
    
    
    14,679,639Minority interests
    
    
    2,734
    
    
    
    2,841Shareholders equity
    
    
    73,265,286
    
    
    
    78,733,447Total liabilities and shareholders equity
    
    
    139,957,766
    
    
    
    143,718,464
 F - 98




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##### Table of Contents



Condensed Statements of Changes in Shareholders Equity
 Balance of shareholders equity as of December 31, 2003
    
    
    65,946,144Net income for the year ended December 31, 2004
    
    
    4,712,687Deemed capital contribution from owner for employee housing benefits
    
    
    14,942Deemed capital distribution relating to the payment to Unicom Group
for the transfer of Unicom International
    
    
    (39,416
    )Dividend paid
    
    
    (1,256,160
    )Exercise of share options
    
    
    64,125Balance of shareholders equity as of December 31, 2004
    
    
    69,442,322Net income for the year ended December 31, 2005
    
    
    5,012,812Deemed capital contribution from owner for employee housing benefits
    
    
    14,942Dividend paid
    
    
    (1,256,924
    )Exercise of share options
    
    
    52,134Balance of shareholders equity as of December 31, 2005
    
    
    73,265,286Net income for the year ended December 31, 2006
    
    
    6,155,772Deemed capital contribution from owner for employee housing benefits
    
    
    14,942Dividend paid
    
    
    (1,384,146
    )Value of employee services
    
    
    146,294Exercise of share options
    
    
    535,299Balance of shareholders equity as of December 31, 2006
    
    
    78,733,447
 Condensed Cash Flow Statements
 2004
    
    2005
    
    2006Net cash inflows (outflows) from:Operating activities
    
    
    24,510,430
    
    
    
    31,486,278
    
    
    
    35,873,954Investing activities
    
    
    (19,668,070
    )
    
    
    (17,430,931
    )
    
    
    (17,760,108
    )Financing activities
    
    
    (9,440,491
    )
    
    
    (13,213,324
    )
    
    
    (11,403,314
    )Net (decrease) increase in cash and cash equivalents
    
    
    (4,598,131
    )
    
    
    842,023
    
    
    
    6,710,532Cash and cash equivalents, beginning of year
    
    
    9,227,684
    
    
    
    4,629,553
    
    
    
    5,471,576Cash and cash equivalents, end of year
    
    
    4,629,553
    
    
    
    5,471,576
    
    
    
    12,182,108Interest paid (net of amount capitalized)
    
    
    (1,662,419
    )
    
    
    (1,109,808
    )
    
    
    (784,136
    )
 F - 99