##### 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
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 Commission file number 1-15028
 CHINA UNICOM LIMITED
  N/A
    
    Hong Kong(Translation of Registrants Name Into English)
    
    (Jurisdiction of Incorporation or Organization)
 th
  Title of Each Class
    
    Name of Each Exchange On Which RegisteredOrdinary shares, par value HK$0.10 per share
    
    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
 o þ
  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
    
    
    21Item 4A. Unresolved Staff Comments
    
    
    71Item 5. Operating and Financial Review and Prospects
    
    
    71Item 6. Directors, Senior Management and Employees
    
    
    101Item 7. Major Shareholders and Related Party Transactions
    
    
    110Item 8. Financial Information
    
    
    123Item 9. The Offer and Listing
    
    
    124Item 10. Additional Information
    
    
    125Item 11. Quantitative and Qualitative Disclosures About Market Risks
    
    
    136Item 12. Description of Securities Other than Equity Securities
    
    
    138PART II
    
    
    138Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    138Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    138Item 15. Controls and Procedures
    
    
    138Item 16A. Audit Committee Financial Expert
    
    
    139Item 16B. Code of Ethics
    
    
    139Item 16C. Principal Accountant Fees and Services
    
    
    140Item 16D. Exemptions from the Listing Standards for Audit Committees
    
    
    141
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PageItem 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    141PART III
    
    
    141Item 17. Financial Statements
    
    
    141Item 18. Financial Statements
    
    
    141Item 19. Exhibits
    
    
    141EX-10.42 ASSET TRANSFER AGREEMENTEX-10.43 SUPPLEMENT AGREEMENTEX-10.44 CDMA BUSINESS FRAMEWORK AGREEMENTEX-10.45 JOINT ANNOUNCEMENT DATED JUNE 2, 2008EX-10.46 ANNOUCEMENT DATED JUNE 2, 2008EX-12.1 CERTIFICATION OF CEOEX-12.2 CERTIFICATION OF CFOEX-13.1 CERTIFICATION OF CEOEX-13.2 CERTIFICATION OF CFO
  -ii-




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Note Regarding Forward-looking Statements
  
    
    our strategy and future plan;
    
    our restructuring 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;
    
    the proposed restructuring of the telecommunications industry
of the Peoples Republic of China, or the PRC, as announced by
the Ministry of Industry and Information, or the MII (which has assumed the regulatory
functions of the former Ministry of Information Industry), the National Development and
Reform Commission, or NDRC, and the Ministry of Finance of the PRC on May 24, 2008; and
    
    future regulatory and other developments in the Chinese telecommunications industry.
  
    
    any changes in the regulatory regime for the PRC telecommunications industry,
including changes in the structure or functions of the primary industry regulator, the
MII, or any in the regulatory policies of the MII, the State-owned Assets Supervision
and Administration Commission, or SASAC, and other relevant government authorities in
the PRC;
    
    the PRC governments decision in relation to licenses of third generation mobile
telecommunications, or 3G;
    
    the results of our ongoing restructuring;
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
    
    the results of the proposed merger between us and China Netcom Group Corporation
(Hong Kong) Limited and the proposed disposal of our CDMA business to China Telecom
Corporation Limited;
    
    any changes in 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 or
restructuring 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.
  
    
    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
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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
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As of or for the year ended December 312003(1)(2)
    
    2004(1)
    
    2005
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    US$(3)(in millions, except number of shares and per share data)Statement of Income Data:HKFRSRevenue (Turnover):Cellular service business
    
    
    58,338
    
    
    
    72,514
    
    
    
    80,707
    
    
    
    87,758
    
    
    
    90,505
    
    
    
    12,407-GSM service business
    
    
    41,586
    
    
    
    47,926
    
    
    
    52,618
    
    
    
    59,882
    
    
    
    62,775
    
    
    
    8,606-CDMA service business
    
    
    16,752
    
    
    
    24,588
    
    
    
    28,089
    
    
    
    27,876
    
    
    
    27,730
    
    
    
    3,801Paging business
    
    
    1,403
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long distance business
    
    
    2,231
    
    
    
    1,805
    
    
    
    1,472
    
    
    
    1,015
    
    
    
    1,508
    
    
    
    207Data and internet business
    
    
    3,412
    
    
    
    3,614
    
    
    
    3,000
    
    
    
    2,320
    
    
    
    2,626
    
    
    
    360Total service revenue
    
    
    65,384
    
    
    
    77,933
    
    
    
    85,179
    
    
    
    91,093
    
    
    
    94,639
    
    
    
    12,974Sales of telecommunications products
    
    
    2,258
    
    
    
    1,735
    
    
    
    2,859
    
    
    
    4,254
    
    
    
    4,900
    
    
    
    672Total revenue
    
    
    67,642
    
    
    
    79,668
    
    
    
    88,038
    
    
    
    95,347
    
    
    
    99,539
    
    
    
    13,646Costs and expenses(7)
    
    
    (61,653
    )
    
    
    (73,295
    )
    
    
    (80,945
    )
    
    
    (88,782
    )
    
    
    (86,584
    )
    
    
    (11,870
    )Income before income tax
    
    
    5,989
    
    
    
    6,373
    
    
    
    7,093
    
    
    
    6,565
    
    
    
    12,955
    
    
    
    1,776Net income
    
    
    4,060
    
    
    
    4,395
    
    
    
    4,922
    
    
    
    3,801
    
    
    
    9,301
    
    
    
    1,275-Basic net income per share(4)
    
    
    0.32
    
    
    
    0.35
    
    
    
    0.39
    
    
    
    0.30
    
    
    
    0.71
    
    
    
    0.10-Number of shares outstanding for basic net income per
share (in thousands)(4)
    
    
    12,553,010
    
    
    
    12,561,242
    
    
    
    12,570,398
    
    
    
    12,599,018
    
    
    
    13,036,566
    
    
    
    13,036,566-Diluted net income per share(4)
    
    
    0.32
    
    
    
    0.35
    
    
    
    0.39
    
    
    
    0.30
    
    
    
    0.71
    
    
    
    0.10-Number of shares outstanding for diluted net income per
share (in thousands)(4)
    
    
    12,556,728
    
    
    
    12,593,054
    
    
    
    12,607,476
    
    
    
    12,649,306
    
    
    
    13,161,089
    
    
    
    13,161,089-Basic net income per ADS(5)
    
    
    3.24
    
    
    
    3.50
    
    
    
    3.92
    
    
    
    3.02
    
    
    
    7.13
    
    
    
    0.98-Number of ADS outstanding for basic net income per ADS
(in thousands)(4)
    
    
    1,255,301
    
    
    
    1,256,124
    
    
    
    1,257,040
    
    
    
    1,259,902
    
    
    
    1,303,657
    
    
    
    1,303,657-Diluted net income per ADS(5)
    
    
    3.24
    
    
    
    3.49
    
    
    
    3.90
    
    
    
    3.00
    
    
    
    7.07
    
    
    
    0.97-Number of ADS outstanding for diluted net income per ADS
(in thousands)(4)
    
    
    1,255,673
    
    
    
    1,259,305
    
    
    
    1,260,748
    
    
    
    1,264,931
    
    
    
    1,316,109
    
    
    
    1,316,109US GAAP(6)Revenue
    
    
    72,474
    
    
    
    79,969
    
    
    
    88,244
    
    
    
    95,553
    
    
    
    99,540
    
    
    
    13,646
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As of or for the year ended December 312003(1)(2)
    
    2004(1)
    
    2005
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    US$(3)(in millions, except number of shares and per share data)Operating income from continuing operations
    
    
    10,562
    
    
    
    8,141
    
    
    
    8,162
    
    
    
    9,272
    
    
    
    10,224
    
    
    
    1,402Net income before discontinued operation
    
    
    5,870
    
    
    
    4,614
    
    
    
    5,004
    
    
    
    6,225
    
    
    
    9,866
    
    
    
    1,353Loss from discontinued operation, net of tax(2)
    
    
    1,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    4,538
    
    
    
    4,614
    
    
    
    5,004
    
    
    
    6,225
    
    
    
    9,866
    
    
    
    1,353-Basic net income per share before discontinued operation
and cumulative effect of change in accounting
policy(4)
    
    
    0.47
    
    
    
    0.37
    
    
    
    0.40
    
    
    
    0.49
    
    
    
    0.76
    
    
    
    0.10-Basic net income per ADS before discontinued operation
and cumulative effect of change in accounting
policy(5)
    
    
    4.68
    
    
    
    3.67
    
    
    
    3.98
    
    
    
    4.94
    
    
    
    7.57
    
    
    
    1.04-Basic net income per share after discontinued operation
and cumulative effect of change in accounting
policy(4)
    
    
    0.36
    
    
    
    0.37
    
    
    
    0.40
    
    
    
    0.49
    
    
    
    0.76
    
    
    
    0.10-Basic net income per ADS after discontinued operation
and cumulative effect of change in accounting
policy(5)
    
    
    3.61
    
    
    
    3.67
    
    
    
    3.98
    
    
    
    4.94
    
    
    
    7.57
    
    
    
    1.04Balance Sheet Data:HKFRSProperty, plant and equipment
    
    
    119,447
    
    
    
    120,029
    
    
    
    113,800
    
    
    
    112,796
    
    
    
    116,162
    
    
    
    15,924Total assets
    
    
    154,538
    
    
    
    151,058
    
    
    
    144,621
    
    
    
    148,297
    
    
    
    149,422
    
    
    
    20,484Short-term debt and current portion of other long-term
debt
    
    
    18,173
    
    
    
    20,978
    
    
    
    22,376
    
    
    
    11,072
    
    
    
    2,191
    
    
    
    300Obligations under finance lease-current portion
    
    
    25
    
    
    
    938
    
    
    
    468
    
    
    
    100
    
    
    
    1
    
    
    
    Obligations under finance lease-non current portion
    
    
    100
    
    
    
    537
    
    
    
    146
    
    
    
    10
    
    
    
    4
    
    
    
    1Other long-term debt
    
    
    37,263
    
    
    
    26,176
    
    
    
    12,052
    
    
    
    4,139
    
    
    
    1,661
    
    
    
    228Convertible bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,325
    
    
    
    
    
    
    
    Shareholders equity
    
    
    68,827
    
    
    
    72,835
    
    
    
    76,670
    
    
    
    79,864
    
    
    
    97,217
    
    
    
    13,327Share capital
    
    
    1,331
    
    
    
    1,332
    
    
    
    1,334
    
    
    
    1,344
    
    
    
    1,437
    
    
    
    197US GAAP(6)Property, plant and equipment
    
    
    119,755
    
    
    
    120,238
    
    
    
    113,976
    
    
    
    112,700
    
    
    
    115,977
    
    
    
    15,899Total assets
    
    
    152,145
    
    
    
    148,634
    
    
    
    141,949
    
    
    
    145,577
    
    
    
    146,431
    
    
    
    20,074Obligations under finance lease-current portion
    
    
    25
    
    
    
    938
    
    
    
    468
    
    
    
    100
    
    
    
    1
    
    
    
    Obligations under finance lease-non current portion
    
    
    100
    
    
    
    537
    
    
    
    146
    
    
    
    10
    
    
    
    4
    
    
    
    1Other long-term debt
    
    
    37,263
    
    
    
    26,176
    
    
    
    12,052
    
    
    
    4,139
    
    
    
    1,661
    
    
    
    228Convertible bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,863
    
    
    
    
    
    
    
    Shareholders equity
    
    
    65,721
    
    
    
    69,835
    
    
    
    73,649
    
    
    
    79,186
    
    
    
    93,961
    
    
    
    12,881Share capital
    
    
    1,331
    
    
    
    1,332
    
    
    
    1,334
    
    
    
    1,344
    
    
    
    1,437
    
    
    
    197Other
Financial Data:HKFRSNet cash generated from operating activities
    
    
    22,808
    
    
    
    24,319
    
    
    
    31,408
    
    
    
    36,142
    
    
    
    32,331
    
    
    
    4,432Net cash used in investing activities
    
    
    (19,237
    )
    
    
    (19,099
    )
    
    
    (16,848
    )
    
    
    (17,575
    )
    
    
    (24,967
    )
    
    
    (3,423
    )Net cash used in financing activities
    
    
    (8,767
    )
    
    
    (9,871
    )
    
    
    (13,733
    )
    
    
    (11,814
    )
    
    
    (12,933
    )
    
    
    (1,773
    )Dividend declared per share
    
    
    0.10
    
    
    
    0.10
    
    
    
    0.11
    
    
    
    0.18
    
    
    
    0.20
    
    
    
    0.03US GAAP(6)Net cash generated from operating activities
    
    
    26,243
    
    
    
    25,020
    
    
    
    32,100
    
    
    
    36,573
    
    
    
    32,605
    
    
    
    4,470Net cash used in investing activities
    
    
    (20,488
    )
    
    
    (19,819
    )
    
    
    (17,540
    )
    
    
    (18,005
    )
    
    
    (24,360
    )
    
    
    (3,339
    )Net cash used in financing activities
    
    
    (11,386
    )
    
    
    (9,910
    )
    
    
    (13,733
    )
    
    
    (11,814
    )
    
    
    (13,813
    )
    
    
    (1,894
    )Dividend declared per share
    
    
    0.10
    
    
    
    0.10
    
    
    
    0.11
    
    
    
    0.18
    
    
    
    0.20
    
    
    
    0.03
 
 (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 statement of income 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 statement of income 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 -3-




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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)
    
    The translation of RMB into US dollars has been made at the rate of RMB7.2946 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 31, 2007. 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, 2007,
2006, 2005, 2004 and 2003 are presented as if the acquisitions of Unicom New Century, Unicom
New World, Unicom International and Unicom Guizhou had been in existence since the beginning
of the earliest period presented.(7)
    
    Costs and expenses including financial gains/costs, interest income, unrealized/realized loss
on changes in fair value of derivative component of the convertible bonds and other gains.
Costs and expenses hereinafter has the same meaning in this annual report. Historical Exchange Rates Information
   Period
    
    High
    
    
    Low
    
    
    High
    
    
    Low(RMB per US$1.00)
    
    
    (HK$ per US$1.00)December 2007
    
    
    7.4120
    
    
    
    7.2946
    
    
    
    7.8073
    
    
    
    7.7879January 2008
    
    
    7.2946
    
    
    
    7.1818
    
    
    
    7.8107
    
    
    
    7.7961February 2008
    
    
    7.1973
    
    
    
    7.1100
    
    
    
    7.8012
    
    
    
    7.7807March 2008
    
    
    7.1110
    
    
    
    7.0105
    
    
    
    7.7897
    
    
    
    7.7642April 2008
    
    
    7.0185
    
    
    
    6.9840
    
    
    
    7.7963
    
    
    
    7.7863May 2008
    
    
    7.0000
    
    
    
    6.9377
    
    
    
    7.8060
    
    
    
    7.7931June 2008
(through June 19, 2008)
    
    
    6.9633
    
    
    
    6.8770
    
    
    
    7.8159
    
    
    
    7.8037
 B. Capitalization and Indebtedness
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C. Reasons for the Offer and Use of Proceeds
  D. Risk Factors
 Risks Relating to Our Business
 Our cellular businesses face competition from China Mobile Communications Corporation and
its subsidiaries, China Telecommunications Corporation and its subsidiaries, and China
Network Communications Group Corporation and its subsidiaries. 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.
     -5-




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Our proposed merger with China Netcom may not be completed and completion of the proposed
merger is subject to various risks.
    We may fail to realize the anticipated benefits of our proposed merger with China Netcom and
the proposed merger may also expose us to uncertainties and risks, any of which could
materially adversely affect our future business performance and financial condition.
   -6-




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
    
    difficulties in integrating the operations of China Netcom, including information
systems, personnel, operating and accounting policies and procedures, and overlapping operations, subsidiaries
and branch networks;
    
    unforeseen contingent risks or latent liabilities relating to the proposed merger
that may become apparent in the future;
    
    difficulties in managing a much larger business;
    
    a failure to complete or to timely complete the proposed sale of our CDMA business
to China Telecom or to achieve the benefits anticipated from such
disposal;
    
    loss of key personnel; and
    
    increase in competition in the PRC telecommunications industry resulting from the
ongoing restructuring of the PRC telecommunications industry, which among other things,
may require us to increase our marketing efforts.
  
    
    the management and development of China Netcoms fixed-line business;
    
    the integration of China Netcoms business with our existing business;
    
    the integration of existing significant accounting policies
and critical accounting estimates between China Netcom and us;
    
    unforeseen or potential liabilities and exposures associated with China Netcoms
business and financial results;
    
    the diversion of financial or other resources from our existing businesses; and
    
    potential loss of, or harm to, relationships with employees or customers.
  The contemplated disposition of our CDMA business may not be completed.
   -7-




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We may fail to realize the anticipated benefits of our proposed CDMA business disposal and
our proposed CDMA business disposal may also expose us to uncertainties and risks, any of
which could materially adversely affect our future business performance and financial
conditions.
   
    
    we may need to further strengthen our customer relationships and may also need to
further increase our marketing efforts and expenses;
    
    in connection with the completion of our proposed CDMA business disposal, a number
of our employees will be transferred to China Telecom, including employees who have
relevant GSM service related experience and existing job duties, and the completion of
the proposed CDMA business disposal may result in the loss of certain key personnel and
operational expertise;
    
    we may have to further increase capital expenditures for expanding our other
existing businesses, including GSM business; and
    
    any deterioration in our CDMA service revenue for the six months ending June 30,
2008 may result in a downward adjustment to the consideration for the proposed CDMA
business proposal pursuant to the adjustment mechanism set forth in the framework
agreement with China Telecom, and, as result, we may receive less consideration upon
completion of the CDMA business disposal than currently anticipated.
  -8-




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Our CDMA services may continue to face competition from GSM
services 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.
   -9-




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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.
    
    
    manage technology migration in an effective manner;
    
    obtain adequate financing;
    
    obtain relevant government licenses, permits and approvals;
    
    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.
  -10-




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The CDMA handset promotional packages have increased our costs and expenses and may
adversely affect our profitability.
      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;
 -11-




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
    
    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.
    -12-




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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.
  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.
  -13-




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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.
   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.
  -14-




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
    
    unifying domestic roaming charges with charges for long distance calls made during
domestic roaming;
    
    unifying the charges for pre-paid and post-paid mobile subscribers;
    
    setting different tariff caps for callers and receivers in the context of domestic
mobile roaming, with the tariff cap for callers being set at RMB0.6 per minute and the
tariff cap for receivers being set at RMB0.4 per minute; and
    
    abolishing the additional charge for use of the long distance network in the context
of domestic roaming.
    -15-




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The recent change in the regulatory authority of the PRC telecommunications industry may
introduce new regulatory initiatives and such new regulatory changes as well as the proposed
telecommunications law, once adopted, may adversely affect us.
   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.
    -16-




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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.
    -17-




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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.
  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 its foreign exchange obligations and to pay dividends to
us in foreign currencies may be restricted.
  -18-




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Fluctuations in the value of the Renminbi could adversely affect the prices of our shares
and ADSs as well as our profitability.
  -19-




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##### Table of Contents



The new provisions of the PRC Employment Contract Law may substantially increase our
labor-related costs in the future.
  Uncertainties in the PRC legal system could limit the legal protections available to us and
to foreign investors.
  Natural disasters and health hazards in China may severely disrupt our business and
operations and may have a material adverse effect on our financial condition and results of
operations.
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##### Table of Contents



Item 4. Information on the Company
 A. History and Development of the Company
 Historical Industry Restructuring
   History of Unicom Group
   -21-




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##### Table of Contents



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
     -22-




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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.
  Acquisitions of Unicom New Century, Unicom New World and Unicom Guizhou and the Sale of Guoxin
Paging
    -23-




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##### Table of Contents



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
  Incorporation of Unicom Huasheng
  Share Segregation Reform of the A Share Company
  -24-




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Conversion
of the Convertible Bonds Issued to SKT
  Recent Developments
 Proposed Restructuring of the PRC Telecommunications Industry
  Proposed
Merger between Us and China Netcom by Way of a Scheme of Arrangement
 Joint Merger Announcement
  Summary of Proposals
  -25-




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Share
Proposal
 ADS Proposal
 Option Proposal
   Undertakings
   -26-




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##### Table of Contents



Conditions to the Proposals and the Scheme
  Proposed
Disposal of Our CDMA Business to China Telecom and Related Transactions
 Proposed Disposal of CDMA Business
    -27-




---



##### Table of Contents



Related Transactions
 CDMA Network
 Option Waiver and Lease Termination Agreement
  -28-




---



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-29-




---



##### Table of Contents



Our Relationship with Unicom Group
      Capital Expenditures and Divestitures
  -30-




---



##### Table of Contents



B. Business Overview
 General
     Recent Developments
  -31-




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##### Table of Contents



Cellular Services
      GSM Cellular Services
  Post-paid Services and Pre-paid Services
  -32-




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##### Table of Contents



Subscribers and Usage
  CUCL(4)(5) as ofor for the threeCUCL(4) (5) as of or for
    
    months endedthe year ended December 31,
    
    March 31,2005
    
    2006
    
    2007
    
    2008Number of subscribers (in thousands)
    
    
    95,879
    
    
    
    106,937
    
    
    
    120,564
    
    
    
    124,225Post-paid
    
    
    48,863
    
    
    
    55,223
    
    
    
    62,474
    
    
    
    64,195Pre-paid
    
    
    47,016
    
    
    
    51,714
    
    
    
    58,090
    
    
    
    60,030Estimated market share in our service areas(1)
    
    
    23.5
    %
    
    
    23.2
    %
    
    
    22.0
    %
    
    
    22.2
    %Average minutes of usage per subscriber per month(2)
    
    
    202.9
    
    
    
    237.8
    
    
    
    250.1
    
    
    
    242.4Average revenue per subscriber per month (in RMB)(3)
    
    
    48.5
    
    
    
    49.2
    
    
    
    46.0
    
    
    
    44.3SMS Volume (in billions)
    
    
    39.79
    
    
    
    59.26
    
    
    
    72.94
    
    
    
    19.22
 
 (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 World, which merged into CUCL on September 1, 2005.(5)
    
    Includes Unicom Guizhou, which merged into CUCL on December 31, 2007. Subscriber Increase
 MOU
and ARPU
 Churn Rate
 -33-




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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 for caller
    
    0.6 for caller0.4 for receiver
    
    0.4 for receiver
 
 Source:
    
    MII.    -34-




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##### Table of Contents



CDMA Cellular Services
   Our Lease of CDMA Networks from Unicom Group
  -35-




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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
 -36-




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##### Table of Contents




    
    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)(5) as ofor for the threeCUCL(4)(5) as of or for
    
    months endedthe year ended December 31,
    
    March 31,2005
    
    2006
    
    2007
    
    2008Number of subscribers (in thousands)
    
    
    33,465
    
    
    
    37,302
    
    
    
    41,927
    
    
    
    42,809Post-paid
    
    
    30,742
    
    
    
    34,263
    
    
    
    38,622
    
    
    
    39,478Pre-paid
    
    
    2,723
    
    
    
    3,040
    
    
    
    3,305
    
    
    
    3,331Estimated market share in our service areas(1)
    
    
    8.9
    %
    
    
    8.1
    %
    
    
    7.7
    %
    
    
    7.4
    %Average minutes of usage per subscriber per month(2)
    
    
    279.3
    
    
    
    276.7
    
    
    
    263.0
    
    
    
    238.4Average revenue per subscriber per month (in RMB)(3)
    
    
    74.9
    
    
    
    65.8
    
    
    
    58.1
    
    
    
    53.3SMS Volume (in billions)
    
    
    15.24
    
    
    
    17.03
    
    
    
    19.17
    
    
    
    5.1
 
 (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 World, which merged into CUCL on September 1, 2005.(5)
    
    Includes Unicom Guizhou, which merged into CUCL on December 31, 2007.  
    
    increased brand awareness and our distribution and marketing efforts;
    
    decreased retail sale prices of and the availability of more varieties of CDMA
handsets as a result of our centralized purchasing policy;
    
    the overall 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
  -37-




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##### Table of Contents



Payment Delinquency
  Tariffs and Promotion
    Value-added Services
  -38-




---



##### 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 continuously enlarged the competitiveness of U-Net Internet access service,
actively promoted new services such as Stock in Palm stock trading services, mobile
music and point-to-point Color Mail multimedia message services and increasingly
diversified the application of our value-added services;
 -39-




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##### Table of Contents




    
    we procured through Unicom Huasheng custom-made CDMA handsets with certain features
integrated to support our differentiated value-added services, such as Stock in Palm
and U-Net;
    
    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; and
    
    through cooperation with partners in specific industries, we launched applications
such as SAIC Enforcement Horizon, Maritime
Horizon, Agriculture Horizon, Police
Horizon and Sales Tracker to extend corporate and industry applications to
governmental and various industrial customers in markets such as maritime and
agriculture. For example, we recently introduced the Sales Tracker application to
offer tailored wireless services to retail stores and suppliers. This service enables
retail stores and suppliers to timely communicate sales information through the
tailored SMS services and to efficiently manage sales, supplies logistics and other
service. In addition, we also expanded the application of our CDMA 1X data services
among institutional customers by providing wireless information solutions and extending
the application of such solutions to the mobile users.
   Cooperation with SKT
  Long Distance, Data and Internet Services
  -40-




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##### Table of Contents



As of or for the year ended December 31,2005
    
    2006
    
    2007Public switched telephony (in billions of minutes):Domestic
    
    
    10.33
    
    
    
    11.07
    
    
    
    10.98International
    
    
    0.15
    
    
    
    0.16
    
    
    
    0.18Total
    
    
    10.48
    
    
    
    11.23
    
    
    
    11.16IP telephony (in billion of minutes):Domestic
    
    
    14.60
    
    
    
    13.02
    
    
    
    12.02International
    
    
    0.13
    
    
    
    0.11
    
    
    
    0.10Total
    
    
    14.73
    
    
    
    13.13
    
    
    
    12.12Data ServicesBandwidth leased to customers (2Mbps)
    
    
    8,706
    
    
    
    7,428
    
    
    
    8,319Internet ServicesDedicated access subscribers
    
    
    38,000
    
    
    
    31,350
    
    
    
    22,586
 Public Switched Telephony Services
   As of or for the year ended on December 31,2005
    
    2006
    
    2007Number of cities reached
    
    
    330
    
    
    
    330
    
    
    
    330Minutes of outgoing long distance calls (in billions)
    
    
    10.48
    
    
    
    11.23
    
    
    
    11.16Market share of outgoing long distance call minutes (1)
    
    
    11.57
    %
    
    
    11.55
    %
    
    
    10.86
    %Minutes of incoming international calls (in billions)
    
    
    2.34
    
    
    
    2.39
    
    
    
    3.38
 
 (1)
    
    Source: the former Ministry of Information Industry. 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
 -41-




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
    
    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.
  IP Telephony Services
  As of or for the year ended December 31,2005
    
    2006
    
    2007Number of cities reached
    
    
    335
    
    
    
    337
    
    
    
    337Minutes of outgoing IP telephony calls (in billions)
    
    
    14.73
    
    
    
    13.13
    
    
    
    12.12Minutes of incoming international calls (in billions)
    
    
    0.25
    
    
    
    0.22
    
    
    
    0.42
  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 (excluding countries or
regions with an country code 1 other than
Alaska and Hawaii)
    
    2.40 per minuteTo United Kingdom, France, Italy, Germany,
South Korea, Japan, Australia, Singapore,
Malaysia, Thailand, Indonesia, Philippines and
Vietnam
    
    3.60 per minuteTo Belgium, New Zealand, Turkey, Sri Lanka,
Belarus, Poland, Tajikistan, Switzerland
    
    8 per minuteTo Pakistan, Jordan, Turks and Caicos Islands,
Tunis, Eygpt, Nicaragua, Kyrgyzstan
    
    12 per minuteTo Papua New Guinea, Qatar, Kenya, Guinea,
Mali, Marshall Islands, Greenland, North Korea
    
    15 per minuteTo other international destinations
    
    4.6 per minute
 Data Services
  -42-




---



##### Table of Contents




    
    FR services, which provide high speed and cost effective data communications
services linking remote business sites using FR technology;
    
    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 video-conferencing services by connecting to the Internet or our
video network through video-conferencing terminals or computer terminals.
  As of December 31,2005
    
    2006
    
    2007Number of cities reached
    
    
    325
    
    
    
    325
    
    
    
    325Bandwidth leased to customers (x 2Mbps)
    
    
    9,007
    
    
    
    7,428
    
    
    
    8,319
    -43-




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##### Table of Contents



FR Services Port Fee (RMB per month)Bandwidth (bps)
    
    Port Fee64k
    
    
    
    260128k
    
    
    
    300256k
    
    
    
    400384k
    
    
    
    450512k
    
    
    
    500768k
    
    
    
    6501M
    
    
    
    7502M
    
    
    
    1,000
  Bandwidth
    
    FR Services PVC Fee (RMB per month)InternationalLocal
    
    Local
    
    Domestic
    
    Hong Kong, Macau &
    
    International
    
    long distance(intra-district)
    
    (inter-district)
    
    long distance
    
    Taiwan
    
    long distance (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
  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)InternationalLocal
    
    Local
    
    Domestic
    
    Hong Kong, Macau &
    
    International
    
    long distanceBandwidth
    
    (intra-district)
    
    (inter-district)
    
    long distance
    
    Taiwan
    
    long distance (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
    
    
    
    105,400
 -44-




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##### Table of Contents



ATM Services Circuit Fee (RMB per month)InternationalLocal
    
    Local
    
    Domestic
    
    Hong Kong, Macau &
    
    International
    
    long distanceBandwidth
    
    (intra-district)
    
    (inter-district)
    
    long distance
    
    Taiwan
    
    long distance (Asia)
    
    (outside of Asia)8Mbps
    
    
    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
  
    
    Dedicated Internet Access. We offer business customers high speed Internet
access through dedicated lines. As of December 31, 2007, we had a total of 22,586
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-mail addresses. As of December 31, 2007, the
number of Ruyi Mailbox subscribers was approximately 11.97 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.
  -45-




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As of December 31,2005
    
    2006
    
    2007Number of cities reached by our dedicated Internet access
services
    
    
    325
    
    
    
    325
    
    
    
    325Number of subscribers of dedicated Internet access services
    
    
    38,000
    
    
    
    31,350
    
    
    
    22,586
  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
   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
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Sale and Lease of Other Network Elements
  Interconnection and Roaming Arrangements
 Interconnection
     
    
    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 directives of the former Ministry of
Information Industry in this area.
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
    
    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 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.
 -48-




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
    
    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
    
    
    unifying domestic roaming charges with charges for long distance calls made during
domestic roaming;
    
    unifying the charges for pre-paid and post-paid mobile subscribers;
    
    setting different tariff caps for callers and receivers in the context of domestic
mobile roaming, with the tariff cap for callers being set at RMB0.6 per minute and the
tariff cap for receivers being set at RMB0.4 per minute; and
 -49-




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
    
    abolishing the additional charge for use of the long distance network in the context
of domestic roaming.
   Networks
  Transmission Network
   
    
    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.
 -50-




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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.
  GSM Cellular Networks.
 As of December 31,2005(1)
    
    2006(1)
    
    2007(1)Network subscriber capacity (in thousands of subscribers)
    
    
    90,644
    
    
    
    106,707
    
    
    
    130,574Base stations
    
    
    96,311
    
    
    
    125,103
    
    
    
    153,885Base station controllers
    
    
    1,818
    
    
    
    2,060
    
    
    
    2,235Mobile switching centers
    
    
    513
    
    
    
    513
    
    
    537(including soft switch)
 -51-




---



##### Table of Contents



(1)
    
    Includes Unicom Guizhou, which merged into CUCL on December 31, 2007.    CDMA Cellular Network.
 Long Distance, Data and Internet Networks
  Long Distance Network.
 Data and Internet Networks.
 Internet Network.
 Broadband Video Network
 -52-




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Integrated Access Networks.
 Information Systems
  Marketing, Sales and Distribution
  Sales and Marketing
  -53-




---



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Customer Segmentation
 Cellular services
    -54-




---



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Long distance, data and Internet services
 Service Bundling and Cross-Marketing
 Distribution
  -55-




---



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Customer Service
   -56-




---



##### 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
recharge pre-paid
cards through
various channels.
They can also
recharge 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 out by our
headquarters and
17911 by our
provincial
branches.
    
    Subscribers mainly
go to our service
centers, commercial
banks and branches
of China Post for
payment.Uni-Video services
    
    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
    
    Customers mainly
pay at our service
 -57-




---



##### Table of Contents



Business Segment
    
    Billing
    
    Collectioncontractual
provisions.
    
    centers or at
commercial banks.
 Bad Debt Controls
 Cellular Services.
 Domestic and International Long Distance Services.
 Internet services.
 Research and Development
  Competition
  
    
    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.
 -58-




---



##### Table of Contents




    
    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 GPRS wireless data business, 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. We have updated our GSM
networks in 221 cities to provide GPRS services based on 2.5G technology. 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.
 However, the development of our business is also affected by certain competitive
disadvantages, including:
 
    
    Market position  As a relatively new entrant to the market, we are still
behind certain 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 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 indoor 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
  -59-




---



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-60-




---



##### Table of Contents



Long Distance Telephony Competition
    Data and Internet Competition
    -61-




---



##### 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.
 -62-




---



##### Table of Contents



Telecommunications Regulations
   Entry into the Industry
    -63-




---



##### Table of Contents




    
    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 the foreign
ownership shall be no more than 50%.
 
    
    For fixed line services:
 
    
    there is no longer any geographic restriction and the ownership
shall be no more than 49%.
 Spectrum and Network Number Resources
     -64-




---



##### Table of Contents



Tariff Setting and Price Controls
         -65-




---



##### Table of Contents




    
    unifying domestic roaming charges with charges for long distance calls made during
domestic roaming;
    
    unifying the charges for pre-paid and post-paid mobile subscribers;
    
    setting different tariff caps for callers and receivers in the context of domestic
mobile roaming, with the tariff cap for callers being set at RMB0.6 per minute and the
tariff cap for receivers being set at RMB0.4 per minute; and
    
    abolishing the additional charge for use of the long distance network in the context
of domestic roaming.
    Interconnection Arrangements
  -66-




---



##### 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
operators
    
    (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
operators
    
    (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 end
 -67-




---



##### Table of Contents



Network from
    
    Network atwhich calls originated
    
    which calls terminated
    
    Settlement ArrangementUnicom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
China 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 whichcalls originated
    
    calls 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
  -68-




---



##### Table of Contents



Technical Standards
  Universal Services
    Capital Investment
  -69-




---



##### 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
    
    
    100
    %China Unicom (Macau) Company Limited
    
    Macau
    
    
    100
    %Unicom Huasheng Telecommunications
Technology Company Limited
    
    China
    
    99.5% (held through CUCL)
 -70-




---



##### Table of Contents



D. Properties
  
 Item 4A. Unresolved Staff Comments
  
 Item 5. Operating and Financial Review and Prospects
   Overview
  
    
    GSM cellular service in 22 provinces, 5 autonomous regions and 4 municipalities;
    
    CDMA cellular service in 22 provinces, 5 autonomous regions and 4 municipalities of
China and in Macau;
 -71-




---



##### Table of Contents




    
    domestic and international long distance service and other related services
nationwide in China; and
    
    data and Internet and other related services nationwide in China.
  For the year ended December 31,2005
    
    2006
    
    2007RMB in
    
    % of Total
    
    RMB in
    
    % of Total
    
    RMB in
    
    % of Totalmillions
    
    Revenue
    
    millions
    
    Revenue
    
    millions
    
    RevenueTotal revenue
    
    
    88,038
    
    
    
    100.0
    %
    
    
    95,347
    
    
    
    100.0
    %
    
    
    99,539
    
    
    
    100.0
    %Total service revenue
    
    
    85,179
    
    
    
    96.8
    %
    
    
    91,093
    
    
    
    95.5
    %
    
    
    94,639
    
    
    
    95.1
    %GSM
    
    
    52,618
    
    
    
    59.8
    %
    
    
    59,882
    
    
    
    62.8
    %
    
    
    62,775
    
    
    
    63.1
    %CDMA
    
    
    28,089
    
    
    
    31.9
    %
    
    
    27,876
    
    
    
    29.2
    %
    
    
    27,730
    
    
    
    27.9
    %Long distance revenue
    
    
    1,472
    
    
    
    1.7
    %
    
    
    1,015
    
    
    
    1.1
    %
    
    
    1,508
    
    
    
    1.5
    %Data and Internet revenue
    
    
    3,000
    
    
    
    3.4
    %
    
    
    2,320
    
    
    
    2.4
    %
    
    
    2,626
    
    
    
    2.6
    %Sales of telecommunications products
    
    
    2,859
    
    
    
    3.2
    %
    
    
    4,254
    
    
    
    4.5
    %
    
    
    4,900
    
    
    
    4.9
    %
 
 (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. We
recognize the value-added service revenue when services are rendered.
    
    Interconnection revenue from other telecommunications operators, including Unicom
Group, for calls made from their networks to our 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, or 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.
  -72-




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##### Table of Contents



For the year ended December 31,2005
    
    2006
    
    2007RMB in
    
    % of Total
    
    RMB in
    
    % of Total
    
    RMB in
    
    % of Totalmillions
    
    Revenue
    
    millions
    
    Revenue
    
    millions
    
    RevenueTotal revenue
    
    
    88,038
    
    
    
    100.0
    %
    
    
    95,347
    
    
    
    100.0
    %
    
    
    99,539
    
    
    
    100.0
    %Costs and expenses
    
    
    80,945
    
    
    
    91.9
    %
    
    
    88,782
    
    
    
    93.1
    %
    
    
    86,584
    
    
    
    87.0
    %Leased line and network capacities
    
    
    8,900
    
    
    
    10.1
    %
    
    
    8,943
    
    
    
    9.4
    %
    
    
    9,135
    
    
    
    9.2
    %Interconnection charges
    
    
    8,436
    
    
    
    9.6
    %
    
    
    9,671
    
    
    
    10.1
    %
    
    
    10,907
    
    
    
    11.0
    %Depreciation and amortization
    
    
    20,635
    
    
    
    23.4
    %
    
    
    22,686
    
    
    
    23.8
    %
    
    
    22,677
    
    
    
    22.8
    %Employee benefit expenses
    
    
    5,653
    
    
    
    6.4
    %
    
    
    6,681
    
    
    
    7.0
    %
    
    
    7,140
    
    
    
    7.2
    %Selling and marketing
    
    
    20,795
    
    
    
    23.6
    %
    
    
    19,571
    
    
    
    20.5
    %
    
    
    19,681
    
    
    
    19.8
    %General, administrative and other
expenses
    
    
    11,855
    
    
    
    13.4
    %
    
    
    13,543
    
    
    
    14.2
    %
    
    
    14,639
    
    
    
    14.5
    %Cost of telecommunications
products sold
    
    
    3,674
    
    
    
    4.2
    %
    
    
    4,915
    
    
    
    5.2
    %
    
    
    5,032
    
    
    
    5.1
    %Finance costs
    
    
    1,133
    
    
    
    1.3
    %
    
    
    660
    
    
    
    0.7
    %
    
    
    (87
    )
    
    
    -0.1
    %Unrealized/realized loss on
changes in fair value of
derivative component of the
convertible bonds
    
    
    
    
    
    
    0.0
    %
    
    
    2,397
    
    
    
    2.5
    %
    
    
    569
    
    
    
    0.6
    %Interest income
    
    
    (101
    )
    
    
    -0.1
    %
    
    
    (264
    )
    
    
    -0.3
    %
    
    
    (186
    )
    
    
    -0.2
    %Other gains, net
    
    
    (35
    )
    
    
    0.0
    %
    
    
    (21
    )
    
    
    0.0
    %
    
    
    (2,923
    )
    
    
    -2.9
    %Income before income tax
    
    
    7,093
    
    
    
    8.1
    %
    
    
    6,565
    
    
    
    6.9
    %
    
    
    12,955
    
    
    
    13.0
    %
  
    
    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, direct incremental costs for activating GSM and CDMA
subscriber services 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 for calls made by our
subscribers roaming in their networks;
 -73-




---



##### Table of Contents




    
    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;
    
    Costs of telecommunications products sold; and
    
    Unrealized/realized loss on changes in fair value of derivative component of the
convertible bonds.
  Acquisitions of Unicom New Century, Unicom New World, Unicom International and Unicom Guizhou and
Sale of Guoxin Paging
      -74-




---



##### Table of Contents



Critical Accounting Policies
  Capitalization of CDMA Customer Acquisition Costs
  -75-




---



##### Table of Contents



-76-




---



##### Table of Contents



Recognition of Upfront Non-refundable Revenue and Direct Incremental Costs
    Lease of CDMA Network Capacity
  -77-




---



##### 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;
  -78-




---



##### Table of Contents



Convertible Bonds
   -79-




---



##### Table of Contents



Depreciation on Property, Plant and Equipment
  Impairment of Non-current Assets
   -80-




---



##### Table of Contents



Provision for Doubtful Debts
   Provision for Subscriber Point Reward Program
  Income Tax and Deferred Taxation
   -81-




---



##### Table of Contents



Operating
Results
 Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
   3⁄4
 Revenue
  -82-




---



##### Table of Contents



Cellular Revenue
  GSM Cellular Business.
  2005
    
    2006
    
    2007As
    
    
    
    
    
    As
    
    
    
    
    
    AsRMB in
    
    percentage
    
    RMB in
    
    percentage
    
    RMB in
    
    percentagemillion
    
    of total
    
    million
    
    of total
    
    million
    
    of totalRevenue
    
    
    52,621
    
    
    
    100.0
    %
    
    
    59,890
    
    
    
    100.0
    %
    
    
    62,787
    
    
    
    100.0
    %Service Revenue
    
    
    52,618
    
    
    
    100.0
    %
    
    
    59,882
    
    
    
    100.0
    %
    
    
    62,775
    
    
    
    100.0
    %Usage Fee
    
    
    32,449
    
    
    
    61.7
    %
    
    
    34,067
    
    
    
    56.9
    %
    
    
    35,112
    
    
    
    55.9
    %Monthly Fee
    
    
    6,918
    
    
    
    13.1
    %
    
    
    7,437
    
    
    
    12.4
    %
    
    
    6,965
    
    
    
    11.1
    %Interconnection
Revenue
    
    
    3,459
    
    
    
    6.6
    %
    
    
    4,921
    
    
    
    8.2
    %
    
    
    6,023
    
    
    
    9.6
    %Value-added
Service Revenue
    
    
    7,998
    
    
    
    15.2
    %
    
    
    11,598
    
    
    
    19.4
    %
    
    
    13,528
    
    
    
    21.5
    %Others
    
    
    1,794
    
    
    
    3.4
    %
    
    
    1,859
    
    
    
    3.1
    %
    
    
    1,147
    
    
    
    1.9
    %Sales of
Telecommunications
Products
    
    
    3
    
    
    
    0.0
    %
    
    
    8
    
    
    
    0.0
    %
    
    
    12
    
    
    
    0.0
    %
   -83-




---



##### Table of Contents



CDMA
Cellular Business.
  2005
    
    2006
    
    2007As
    
    
    
    
    
    As
    
    
    
    
    
    AsRMB in
    
    percentage
    
    RMB in
    
    percentage
    
    RMB in
    
    percentagemillion
    
    of total
    
    million
    
    of total
    
    million
    
    of totalRevenue
    
    
    30,930
    
    
    
    100.0
    %
    
    
    32,121
    
    
    
    100.0
    %
    
    
    32,618
    
    
    
    100.0
    %Service Revenue
    
    
    28,089
    
    
    
    90.8
    %
    
    
    27,877
    
    
    
    86.8
    %
    
    
    27,730
    
    
    
    85.0
    %Usage Fee
    
    
    17,086
    
    
    
    55.2
    %
    
    
    15,086
    
    
    
    47.0
    %
    
    
    13,941
    
    
    
    42.7
    %Monthly Fee
    
    
    5,001
    
    
    
    16.2
    %
    
    
    5,122
    
    
    
    15.9
    %
    
    
    4,575
    
    
    
    14.0
    %Interconnection
Revenue
    
    
    1,408
    
    
    
    4.6
    %
    
    
    1,759
    
    
    
    5.5
    %
    
    
    2,066
    
    
    
    6.3
    %Value-added
Service Revenue
    
    
    4,156
    
    
    
    13.4
    %
    
    
    5,376
    
    
    
    16.7
    %
    
    
    6,413
    
    
    
    19.7
    %Others
    
    
    438
    
    
    
    1.4
    %
    
    
    534
    
    
    
    1.7
    %
    
    
    735
    
    
    
    2.3
    %Sales of
Telecommunications
Products
    
    
    2,841
    
    
    
    9.2
    %
    
    
    4,244
    
    
    
    13.2
    %
    
    
    4,888
    
    
    
    15.0
    %
  -84-




---



##### Table of Contents



Long Distance and Data and Internet Revenue
 Long Distance Business
 Data and Internet Business
  Costs and Expenses
   -85-




---



##### Table of Contents



For the year ended December 31,2005
    
    2006
    
    2007% of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofRMB in
    
    Total
    
    RMB in
    
    Total
    
    RMB in
    
    Totalmillion
    
    Revenue
    
    million
    
    Revenue
    
    million
    
    RevenueCosts and expenses
    
    
    80,945
    
    
    
    91.9
    %
    
    
    88,782
    
    
    
    93.1
    %
    
    
    86,584
    
    
    
    87.0
    %Leased lines and
network capacities
    
    
    8,900
    
    
    
    10.1
    %
    
    
    8,943
    
    
    
    9.4
    %
    
    
    9,135
    
    
    
    9.2
    %Interconnection
charges
    
    
    8,436
    
    
    
    9.6
    %
    
    
    9,671
    
    
    
    10.1
    %
    
    
    10,907
    
    
    
    11.0
    %Depreciation and
amortization
    
    
    20,635
    
    
    
    23.4
    %
    
    
    22,687
    
    
    
    23.8
    %
    
    
    22,677
    
    
    
    22.8
    %Employee benefit
expenses
    
    
    5,653
    
    
    
    6.4
    %
    
    
    6,681
    
    
    
    7.0
    %
    
    
    7,140
    
    
    
    7.2
    %Selling and marketing
    
    
    20,795
    
    
    
    23.6
    %
    
    
    19,571
    
    
    
    20.5
    %
    
    
    19,681
    
    
    
    19.8
    %General,
administrative and
other expenses
    
    
    11,855
    
    
    
    13.4
    %
    
    
    13,543
    
    
    
    14.2
    %
    
    
    14,639
    
    
    
    14.5
    %Cost of
telecommunications
products sold
    
    
    3,674
    
    
    
    4.2
    %
    
    
    4,915
    
    
    
    5.2
    %
    
    
    5,032
    
    
    
    5.1
    %Finance costs/(gains)
    
    
    1,133
    
    
    
    1.3
    %
    
    
    660
    
    
    
    0.7
    %
    
    
    (87
    )
    
    
    -0.1
    %Realized loss on
changes in fair
value of derivative
component of the
convertible bonds
    
    
    
    
    
    
    0.0
    %
    
    
    2,397
    
    
    
    2.5
    %
    
    
    569
    
    
    
    0.6
    %Interest income
    
    
    (101
    )
    
    
    -0.1
    %
    
    
    (265
    )
    
    
    -0.3
    %
    
    
    (186
    )
    
    
    -0.2
    %Other gains, net
    
    
    (35
    )
    
    
    0.0
    %
    
    
    (21
    )
    
    
    0.0
    %
    
    
    (2,923
    )
    
    
    -2.9
    %
 Leased Lines and Network Capacities
 Interconnection Charges
 Depreciation and Amortization
 Employee Benefit Expenses
 -86-




---



##### Table of Contents



Selling and Marketing
 General, Administrative and Other Expenses
 Cost of Telecommunications Products Sold
 Interest Income and Finance Costs
 Realized
Loss on Changes in Fair Value of the Derivative Component of Convertible Bonds and Tax
Refund on Reinvestment in a Subsidiary
 -87-




---



##### Table of Contents



Other Gains, Net.
 Segment income before income tax
  GSM Cellular Business
 CDMA Cellular Business
 Long Distance Business
 Data and Internet Business
 Net Income
 Income Tax
 -88-




---



##### Table of Contents



Net Income
 Impact of Differences between HKFRS and US GAAP
  Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
   -89-




---



##### Table of Contents



Revenue
  Cellular Revenue
  GSM Cellular Business.
  2004
    
    2005
    
    2006As
    
    
    
    
    
    As
    
    
    
    
    
    AsRMB in
    
    percentage
    
    RMB in
    
    percentage
    
    RMB in
    
    percentagemillion
    
    of total
    
    million
    
    of total
    
    million
    
    of totalRevenue
    
    
    47,930
    
    
    
    100.0
    %
    
    
    52,621
    
    
    
    100.0
    %
    
    
    59,890
    
    
    
    100.0
    %Service Revenue
    
    
    47,926
    
    
    
    100.0
    %
    
    
    52,618
    
    
    
    100.0
    %
    
    
    59,882
    
    
    
    100.0
    %Usage Fee
    
    
    32,349
    
    
    
    67.5
    %
    
    
    32,449
    
    
    
    61.7
    %
    
    
    34,067
    
    
    
    56.9
    %Monthly Fee
    
    
    7,000
    
    
    
    14.6
    %
    
    
    6,918
    
    
    
    13.1
    %
    
    
    7,437
    
    
    
    12.4
    %Interconnection
Revenue
    
    
    2,592
    
    
    
    5.4
    %
    
    
    3,459
    
    
    
    6.6
    %
    
    
    4,921
    
    
    
    8.2
    %Value-added
Service Revenue
    
    
    4,820
    
    
    
    10.1
    %
    
    
    7,998
    
    
    
    15.2
    %
    
    
    11,598
    
    
    
    19.4
    %Others
    
    
    1,165
    
    
    
    2.4
    %
    
    
    1,794
    
    
    
    3.4
    %
    
    
    1,859
    
    
    
    3.1
    %Sales of
Telecommunications
Products
    
    
    4
    
    
    
    0.0
    %
    
    
    3
    
    
    
    0.0
    %
    
    
    8
    
    
    
    0.0
    %
 -90-




---



##### Table of Contents



CDMA
Cellular Business.
  2004
    
    2005
    
    2006As
    
    
    
    
    
    As
    
    
    
    
    
    AsRMB in
    
    percentage
    
    RMB in
    
    percentage
    
    RMB in
    
    percentagemillion
    
    of total
    
    million
    
    of total
    
    million
    
    of totalRevenue
    
    
    26,301
    
    
    
    100.0
    %
    
    
    30,930
    
    
    
    100.0
    %
    
    
    32,121
    
    
    
    100.0
    %Service Revenue
    
    
    24,588
    
    
    
    93.5
    %
    
    
    28,089
    
    
    
    90.8
    %
    
    
    27,877
    
    
    
    86.8
    %Usage Fee
    
    
    16,334
    
    
    
    62.1
    %
    
    
    17,086
    
    
    
    55.2
    %
    
    
    15,086
    
    
    
    47.0
    %Monthly Fee
    
    
    4,677
    
    
    
    17.8
    %
    
    
    5,001
    
    
    
    16.2
    %
    
    
    5,122
    
    
    
    15.9
    %Interconnection
Revenue
    
    
    920
    
    
    
    3.5
    %
    
    
    1,408
    
    
    
    4.6
    %
    
    
    1,759
    
    
    
    5.5
    %Value-added
Service Revenue
    
    
    2,378
    
    
    
    9.0
    %
    
    
    4,156
    
    
    
    13.4
    %
    
    
    5,376
    
    
    
    16.7
    %Others
    
    
    279
    
    
    
    1.1
    %
    
    
    438
    
    
    
    1.4
    %
    
    
    534
    
    
    
    1.7
    %Sales of
Telecommunications
Products
    
    
    1,713
    
    
    
    6.5
    %
    
    
    2,841
    
    
    
    9.2
    %
    
    
    4,244
    
    
    
    13.2
    %
  -91-




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Long Distance and Data and Internet Revenue
 Long Distance Business
 Data and Internet Business
  Costs and expenses
   -92-




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For the year ended December 31,2004
    
    2005
    
    2006RMB in
    
    % of
    
    RMB in
    
    % of
    
    RMB in
    
    % ofmillion
    
    Total Revenue
    
    million
    
    Total Revenue
    
    million
    
    Total RevenueCosts and expenses
    
    
    73,295
    
    
    
    92.0
    %
    
    
    80,945
    
    
    
    91.9
    %
    
    
    88,783
    
    
    
    93.1
    %Leased lines and
network capacities
    
    
    7,486
    
    
    
    9.4
    %
    
    
    8,900
    
    
    
    10.1
    %
    
    
    8,943
    
    
    
    9.4
    %Interconnection
charges
    
    
    7,527
    
    
    
    9.5
    %
    
    
    8,436
    
    
    
    9.6
    %
    
    
    9,671
    
    
    
    10.1
    %Depreciation and
amortization
    
    
    19,205
    
    
    
    24.0
    %
    
    
    20,635
    
    
    
    23.4
    %
    
    
    22,687
    
    
    
    23.8
    %Employee benefit
expenses
    
    
    4,653
    
    
    
    5.8
    %
    
    
    5,653
    
    
    
    6.4
    %
    
    
    6,681
    
    
    
    7.0
    %Selling and marketing
    
    
    19,670
    
    
    
    24.7
    %
    
    
    20,795
    
    
    
    23.6
    %
    
    
    19,571
    
    
    
    20.5
    %General,
administrative and
other expenses
    
    
    10,599
    
    
    
    13.3
    %
    
    
    11,855
    
    
    
    13.4
    %
    
    
    13,543
    
    
    
    14.2
    %Cost of
telecommunications
products sold
    
    
    2,612
    
    
    
    3.3
    %
    
    
    3,674
    
    
    
    4.2
    %
    
    
    4,915
    
    
    
    5.2
    %Finance costs/(gains)
    
    
    1,751
    
    
    
    2.2
    %
    
    
    1,133
    
    
    
    1.3
    %
    
    
    660
    
    
    
    0.7
    %Unrealized loss on
changes in fair
value of the derivative
component of the
convertible bonds
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    2,397
    
    
    
    2.5
    %Interest income
    
    
    (104
    )
    
    
    -0.1
    %
    
    
    (101
    )
    
    
    -0.1
    %
    
    
    (264
    )
    
    
    -0.3
    %Other gains, net
    
    
    (104
    )
    
    
    -0.1
    %
    
    
    (35
    )
    
    
    0.0
    %
    
    
    (21
    )
    
    
    0.0
    %
 Leased Lines and Network Capacities
 Interconnection Charges
 Depreciation and Amortization
 -93-




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Employee Benefit Expenses
 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 the Derivative Component of Convertible Bonds.
 -94-




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Segment income before income tax
  GSM Cellular Business
 CDMA Cellular Business
 Long Distance Business
 Data and Internet Business
 Net Income
 Income Tax
 Net Income
 -95-




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Impact of Differences between HKFRS and US GAAP
  Liquidity and Capital Resources
 Working Capital and Cash Flows
   For the year ended December 31,2005
    
    2006
    
    2007(RMB in millions)Net cash generated from operating activities
    
    
    31,408
    
    
    
    36,142
    
    
    
    32,331Net cash used in investing activities
    
    
    (16,848
    )
    
    
    (17,574
    )
    
    
    (24,966
    )Net cash inflows before financing activities
    
    
    14,560
    
    
    
    18,568
    
    
    
    7,365Net cash used in financing activities
    
    
    (13,733
    )
    
    
    (11,814
    )
    
    
    (12,933
    )Net increase/(decrease) in cash and cash equivalents
    
    
    827
    
    
    
    6,754
    
    
    
    (5,568
    )
  -96-




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Indebtedness and Capital Structure
  As of December 31,2005
    
    2006
    
    2007(RMB in millions, except percentages)Cash and cash equivalent and short-term bank deposits
    
    
    5,772
    
    
    
    12,439
    
    
    
    7,319Total assets
    
    
    144,621
    
    
    
    148,297
    
    
    
    149,422Short-term debt
    
    
    22,844
    
    
    
    11,172
    
    
    
    2,192Short-term bonds
    
    
    9,866
    
    
    
    7,088
    
    
    
    Short-term bank loans
    
    
    7,024
    
    
    
    
    
    
    
    Current
portion of long-term bank loans
    
    
    5,486
    
    
    
    3,984
    
    
    
    2,191Current portion of obligations under finance lease
    
    
    468
    
    
    
    100
    
    
    
    1Long-term debt
    
    
    12,198
    
    
    
    14,474
    
    
    
    1,665Convertible bonds
    
    
    
    
    
    
    10,325
    
    
    
    Non current
portion of long-term bank loans
    
    
    12,052
    
    
    
    4,139
    
    
    
    1,661Non current portion of obligations under finance lease
    
    
    146
    
    
    
    10
    
    
    
    4Shareholders equity
    
    
    76,670
    
    
    
    79,864
    
    
    
    97,217Debt-to-assets ratio(1)
    
    
    31.4
    %
    
    
    24.3
    %
    
    
    3.8
    %Debt-to-equity ratio(2)
    
    
    45.7
    %
    
    
    32.1
    %
    
    
    4.0
    %
 
 (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.  -97-




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-98-




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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
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012
    
    2012Long-term bank loans(1)
    
    
    3,852
    
    
    
    2,191
    
    
    
    
    
    
    
    1,661
    
    
    
    
    
    
    
    
    
    
    
    Finance lease obligations(2)
    
    
    6
    
    
    
    2
    
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Interest payment obligations on bank loans
    
    
    315
    
    
    
    169
    
    
    
    81
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    Capital commitments(3)
    
    
    5,633
    
    
    
    5,633
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating leases(3)CDMA network capacity leasing
arrangement(4)
    
    
    7,543
    
    
    
    7,543
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Others
    
    
    4,867
    
    
    
    974
    
    
    
    827
    
    
    
    771
    
    
    
    369
    
    
    
    186
    
    
    
    1,740Other commitments(3) (5)
    
    
    2,435
    
    
    
    2,435
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total obligations
    
    
    24,651
    
    
    
    18,947
    
    
    
    910
    
    
    
    2,498
    
    
    
    369
    
    
    
    187
    
    
    
    1,740
 
 (1)
    
    See Note 17 Long-term Bank Loans to our consolidated financial statements.(2)
    
    See Note 19 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 through 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
   -99-




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Capital Expenditures
  For the years ended December 31,2006
    
    2007
    
    2008(RMB in billions)Cellular
    
    
    10.84
    
    
    
    16.49
    
    
    
    18.70Long distance, data and Internet
    
    
    1.44
    
    
    
    0.72
    
    
    
    1.10Transmission network(1)
    
    
    3.70
    
    
    
    4.25
    
    
    
    4.80Others(2)
    
    
    5.81
    
    
    
    4.26
    
    
    
    6.35Total
    
    
    21.79
    
    
    
    25.72
    
    
    
    30.95
 
 (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.(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
  -100-




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Item 6. Directors, Senior Management and Employees
 A.
    
    Directors and Senior Management
  Name
    
    Age
    
    PositionChang Xiaobing
    
    
    51
    
    
    Chairman of the Board of Directors;
Executive Director; Chief Executive
OfficerShang Bing(1)
    
    
    52
    
    
    Executive Director; PresidentTong Jilu
    
    
    50
    
    
    Executive Director; Chief Financial OfficerYang Xiaowei(2)
    
    
    44
    
    
    Executive Director; Vice PresidentLi Zhengmao(3)
    
    
    46
    
    
    Executive Director; Vice PresidentLi Gang
    
    
    50
    
    
    Executive Director; Vice PresidentZhang Junan
    
    
    51
    
    
    Executive Director; Vice PresidentMiao Jianhua(4)
    
    
    56
    
    
    Executive DirectorLu Jianguo
    
    
    62
    
    
    Non-Executive DirectorLee Suk Hwan
    
    
    47
    
    
    Non-Executive DirectorWu Jinglian
    
    
    78
    
    
    Independent Non-Executive DirectorShan Weijian
    
    
    54
    
    
    Independent Non-Executive DirectorLinus Cheung Wing Lam
    
    
    60
    
    
    Independent Non-Executive DirectorWong Wai Ming
    
    
    50
    
    
    Independent Non-Executive Director
 
 1.
    
    Mr. Shang resigned as an Executive Director and President of the Company on May 23, 2008.2.
    
    Mr. Yang resigned as an Executive Director and Vice President of the Company on May 23, 2008.3.
    
    Mr. Li resigned as an Executive Director and Vice President of the Company on May 23, 2008.4.
    
    Mr. Miao resigned as an Executive Director of the Company on May 23, 2008.  -101-




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-102-




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-103-




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-104-




---



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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 and May 11, 2007
    
    May 23, 2008
 -105-




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Name
    
    Appointment Date
    
    Re-appointment Date
    
    Resignation DateTong Jilu
    
    February 1, 2004
    
    May 12, 2004 May 12, 2006 and May 16, 2008
    
    Yang Xiaowei
    
    April 1, 2006
    
    May 12, 2006 and
    
    May 23, 2008May 11, 2007Li Zhengmao
    
    April 1, 2006
    
    May 12, 2006 andMay 16, 2008
    
    May 23, 2008Li Gang
    
    April 1, 2006
    
    May 12, 2006 andMay 16, 2008
    
    Zhang Junan
    
    April 1, 2006
    
    May 12, 2006
    
    Miao Jianhua
    
    July 12, 2007
    
    May 16, 2008
    
    May 23, 2008Lu Jianguo
    
    April 1, 2006
    
    May 12, 2006
    
    Lee Suk Hwan
    
    October 23, 2007
    
    May 16, 2008
    
    Wu Jinglian
    
    April 20, 2000
    
    May 13, 2002,May 12, 2004,May 12, 2005 andMay 11, 2007
    
    Shan Weijian
    
    May 12, 2003
    
    May 12, 2005 andMay 11, 2007
    
    Linus Cheung Wing Lam
    
    May 12, 2004
    
    May 12, 2006 andMay 16, 2008
    
    Wong Wai Ming
    
    January 19, 2006
    
    May 12, 2006
    
    Former DirectorsLi Jianguo
    
    April 1, 2006
    
    May 12, 2006 andMay 11, 2007
    
    July 9, 2007
 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;
 -106-




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##### Table of Contents




    
    discussing with the auditor any problems and reservations arising from the audit of
the interim and annual financial statements;
    
    reviewing any correspondence from the auditor to 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
    
    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
    
    
    8,965Other general administration
    
    
    8,385Marketing and sales
    
    
    20,249Technical, engineering and
network maintenance
    
    
    14,761Retail and customer service
    
    
    4,138General support
    
    
    411Total
    
    
    56,909
 Number ofBy Business Segment
    
    EmployeesCellular
    
    
    49,253GSM
    
    
    32,037CDMA
    
    
    17,216Long distance
    
    
    2,490Data and Internet
    
    
    5,166Total
    
    
    56,909
 -107-




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##### Table of Contents



E.
    
    Share Ownership
   Options granted under the share option scheme
 Compensation forCapacity and
    
    Number of
    
    
    
    
    
    Exercise
    
    Consideration
    
    2007Name
    
    Nature
    
    Shares Covered
    
    Expiration Date
    
    Price
    
    Paid
    
    (RMB)Chang Xiaobing
    
    Beneficial Owner
    
    
    526,000
    
    
    December 20, 2010
    
    HK$6.20
    
    HK$1.00
    
    
    4,713,000(Personal)
    
    
    800,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00Shang Bing(1)
    
    Beneficial Owner
    
    
    292,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00
    
    
    4,004,000(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
    
    
    3,194,000(Personal)
    
    
    92,000
    
    
    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$1.00Yang Xiaowei(2)
    
    Beneficial Owner
    
    
    292,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00
    
    
    2,567,000(Personal)
    
    
    500,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00Li Zhengmao(3)
    
    Beneficial Owner
    
    
    500,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00
    
    
    2,567,000(Personal)Li Gang
    
    Beneficial Owner
    
    
    500,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00
    
    
    2,543,000(Personal)Zhang Junan
    
    Beneficial Owner
    
    
    500,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00
    
    
    2,543,000(Personal)Miao Jianhua(4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,006,000Lu Jianguo
    
    Beneficial Owner
    
    
    292,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00
    
    
    734,000(Personal)
    
    
    500,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00Wu Jinglian
    
    Beneficial Owner
    
    
    292,000
    
    
    May 20, 2009
    
    HK$4.30
    
    HK$1.00
    
    
    408,000(Personal)
    
    
    292,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00Lee Suk Hwan(5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,000Shan Weijian
    
    Beneficial Owner
    
    
    292,000
    
    
    May 20, 2009
    
    HK$4.30
    
    HK$1.00
    
    
    370,000(Personal)
    
    
    292,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00
 -108-




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##### Table of Contents



Compensation forCapacity and
    
    Number of
    
    
    
    
    
    Exercise
    
    Consideration
    
    2007Name
    
    Nature
    
    Shares Covered
    
    Expiration Date
    
    Price
    
    Paid
    
    (RMB)Linus Cheung Wing Lam
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    389,000Wong Wai Ming
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    375,000Li Jianguo(6)
    
    Beneficial Owner
    
    
    292,000
    
    
    June 22, 2010
    
    HK$15.42
    
    HK$1.00
    
    
    900,000(Personal)
    
    
    292,000
    
    
    July 19, 2010
    
    HK$5.92
    
    HK$1.00500,000
    
    
    February 14, 2012
    
    HK$6.35
    
    HK$1.00
 
 (1)
    
    Mr. Shang resigned as an Executive Director and President of the Company on May 23, 2008.
The number of options indicated represents the number of options held by Mr. Shang as of the
date of resignation.(2)
    
    Mr. Yang resigned as an Executive Director and Vice President of the Company on May 23, 2008.
The number of options indicated represents the number of options held by Mr. Yang as of the
date of resignation.(3)
    
    Mr. Li resigned as an Executive Director and Vice President of the Company on May 23, 2008.
The number of options indicated represents the number of options held by Mr. Li as of the date
of resignation.(4)
    
    Mr. Miao was appointed as Executive Director of our company on July 12, 2007 and resigned as
an Executive Director on May 23, 2008.(5)
    
    Mr. Lee was appointed as Non-Executive Director of our company on October 23, 2007.(6)
    
    Ms. Li resigned as Executive Director of our company on July 9, 2007. The number of options
indicated represents the number of options held by Ms. Li as of the date of resignation. Options granted under the pre-global offering share option scheme
 Capacity and
    
    Number of SharesName
    
    Nature
    
    Covered
    
    
    Expiration Date
    
    
    Exercise Price
    
    
    Consideration PaidShang
Bing(1)
    
    Beneficial Owner
    
    
    204,400
    
    
    June 21, 2010
    
    HK$15.42
    
    HK$1.00(Personal)Li Zhengmao
    
    Beneficial Owner
    
    
    292,600
    
    
    June 21, 2010
    
    HK$15.42
    
    HK$1.00(Personal)Lu Jianguo
    
    Beneficial Owner
    
    
    292,600
    
    
    June 21, 2010
    
    HK$15.42
    
    HK$1.00(Personal)
 
 (1)
    
    Mr. Shang resigned as an Executive Director and President of the Company on May 23, 2008.
The number of options indicated represents the number of options held by Mr. Shang as of the
date of resignation. Stock Incentive Schemes
  Share Option Scheme.
 -109-




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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
    -110-




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B. Related Party Transactions
  
    
    leasing of CDMA network capacity by us from Unicom Group and related interconnection
arrangements;
    
    provision of ongoing telecommunications and ancillary services and premises;
    
    agreements relating to the acquisition of Unicom Guizhou from Unicom Group;
    
    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.
 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.
   -111-




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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;
   Discount for delay
    
    =
    
    Number of our CDMA 
subscribers
affected by the
delay
    
    x
    
    delay period
(number of days)
    
    x
    
    ARPU of CDMA
subscribers

the number of days
in the relevant
month
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2006 CDMA Lease
   
    
    31% of the audited service revenue generated by our CDMA business for each of the
years 2007 and 2008; or
    
    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 
subscribers
affected by the
delay
    
    x
    
    delay period
(number of days)
    
    x
    
    ARPU of CDMA
subscribers

the number of days
in the relevant
month
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Provision of Ongoing Telecommunications and Ancillary Services and Premises
     Supply of International Telecommunications Network Gateway Services
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Supply of Telephone Cards
   Supply of Equipment Procurement Services
  
    
    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.
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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
    
    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
former Ministry of Information Industry 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.
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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 the guidelines of the former Ministry of Information Industry.
 
    
    If our cellular subscribers roam in the service areas of Unicom
Group, we will be entitled to receive the roaming fees, which will be
apportioned in the following way: (i) RMB0.40 per minute (the rate for local
call charges under the guidelines of the former Ministry of Information
Industry) will be paid to Unicom Group; and (ii) the remaining RMB0.20 per
minute will be withheld by us;
    
    If the cellular subscribers of Unicom Group roam in our service
areas, Unicom Group will be entitled to receive the roaming fees, which will be
apportioned in the following way: (i) RMB0.56 per minute will be paid to us;
and (ii) RMB0.04 per minute will be withheld by Unicom Group; and
    
    If our cellular business expands to cover all regions
throughout the PRC, the arrangements set out above will be terminated
automatically.
 
    
    If the network of a third party cellular network operator is made available to the
cellular subscribers of Unicom Group pursuant to the international roaming arrangements
of Unicom Group, or if the network of Unicom Group is made available to the subscribers
of any third party cellular network operator pursuant to such arrangements, we will
receive 50% of all roaming revenue to be received under such international roaming
arrangements.
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Leasing of Transmission Line Capacity
   Supply of Operator-based Value-added Services to Cellular Subscriber
   Supply of Value-added Services for Cellular Subscribers
  Supply of Customer Services
  -119-




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Supply of Agency Services
   Mutual Provision of Premises
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Engineering design and technical services
  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 former
Ministry of Information Industry in connection with any of our businesses for
our benefit, and to allocate spectrum and to provide other resources to us;
    
    subject to applicable Chinese laws and regulations in effect at
the relevant time, to take all actions necessary to obtain, maintain, renew and
otherwise extend to or for our benefit such governmental or regulatory
licenses, consents, permits or other approvals as we shall require to continue
to operate our businesses;
    
    to arrange for us to participate in its international roaming
arrangements;
    
    not to engage in any business which competes with our
businesses except for the existing competing businesses of Unicom Group;
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
    
    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;
    
    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 Unicom BVI, Unicom BVIs agreement to issue shares
to Unicom HK and Unicom HK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.
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Trademark Agreement
   Asset Transfer Agreement Relating to the Acquisition of Unicom Guizhou
  
    
    Unicom Groups agreement to sell and CUCLs agreement to purchase the Guizhou
Business as described under A. History and Development of the Company 
Acquisitions of Unicom New Century, Unicom New World and Unicom Guizhou and the Sale of
Guoxin Paging under Item 4.
    
    CUCLs agreement to pay Unicom Group a cash consideration in the amount of RMB$880
million;
    
    The profit or loss of Unicom Guizhou for the period from December 31, 2006 to
December 31, 2007, the effective date of the transfer, was transferred to Unicom Group;
and
    
    Representations and warranties given Unicom Group in relation to Unicom Guizhou.
 C. Interests of Experts and Counsel
  
 Item 8. Financial Information
  Legal Proceedings
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Policy on Dividend Distribution
   
 Item 9. The Offer and Listing
 Market Price Information
   Price per Ordinary Share (HK$)
    
    Price per ADS (US$)High
    
    Low
    
    High
    
    LowAnnual:2003
    
    
    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
    
    
    
    8.032007
    
    
    18.80
    
    
    
    9.18
    
    
    
    24.25
    
    
    
    11.75Quarterly:First 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
    
    
    
    9.84First Quarter, 2007
    
    
    11.78
    
    
    
    9.18
    
    
    
    15.09
    
    
    
    11.75Second Quarter, 2007
    
    
    13.64
    
    
    
    11.06
    
    
    
    17.47
    
    
    
    14.39Third Quarter, 2007
    
    
    16.08
    
    
    
    11.28
    
    
    
    21.03
    
    
    
    14.35Fourth Quarter, 2007
    
    
    18.80
    
    
    
    14.08
    
    
    
    24.52
    
    
    
    17.63Monthly:January 2008
    
    
    18.68
    
    
    
    14.70
    
    
    
    23.67
    
    
    
    19.96February 2008
    
    
    19.58
    
    
    
    17.80
    
    
    
    25.07
    
    
    
    21.23March 2008
    
    
    18.00
    
    
    
    15.70
    
    
    
    23.94
    
    
    
    20.39April 2008
    
    
    17.18
    
    
    
    15.96
    
    
    
    22.17
    
    
    
    20.09May 2008(1)
    
    
    18.48
    
    
    
    16.48
    
    
    
    22.79
    
    
    
    20.73June 2008
(through June 19)
    
    
    18.48
    
    
    
    13.92
    
    
    
    22.79
    
    
    
    17.49
 -124-




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(1)
    
    Trading was suspended from May 23 to and including
June 2, 2008 on the Hong Kong Stock
Exchange and on the New York Stock Exchange. 
 Item 10. Additional Information
 A. Share Capital
  B. Memorandum and Articles of Association
 General
  Directors
 Material Interests and Voting
 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
 -125-




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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
   Borrowing Powers
  Qualification of Directors
  Rotation of Directors
  -126-




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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
    
    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
  -127-




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Dividends
    Winding Up
   Miscellaneous
   Modification of Rights
  -128-




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Annual General and Extraordinary General Meetings
   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;
 -129-




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
    
    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.
    
    CDMA Business Transfer Framework Agreement between us, CUCL and China Telecom, dated June 2,
2008, relating to a proposed sale of our CDMA business, and its related assets and
liabilities to China Telecom.
 D. Exchange Controls
   -130-




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E. Taxation
  Hong Kong
 Tax on Dividends
  Profits
  Stamp Duty
   Estate Duty
  -131-




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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.
   
    
    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.
    -132-




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Taxation of Dividends
 
    -133-




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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.
  
    
    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
 -134-




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
    
    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
 1-800-SEC-0330
 -135-




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I. Subsidiary Information
  
 Item 11. Quantitative and Qualitative Disclosures About Market Risks
  Interest Rate Risk
     -136-




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As of DecemberExpected Maturity Date
    
    
    31, 2007There-2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    after
    
    
    Total
    
    
    Fair Value(RMB equivalent in million, except interest rate)Variable rate bank and other loans
(U.S. dollars)
    
    
    2,191
    
    
    
    
    
    
    
    1,461
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,652
    
    
    
    3,652Average interest rate(1)
    
    
    5.03
    %
    
    
    5.07
    %
    
    
    5.11
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    The interest rates for variable rate bank and other loans are calculated based on the weighed
interest rates at the end of 2007.  Exchange Rate Risk
  -137-




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Expected Maturity DateThere-
    
    
    As of December 31, 20072008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    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
    
    
    569
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    569
    
    
    
    569in Hong Kong dollars
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66
    
    
    
    66Bank balances and cash:in U.S. dollars
    
    
    301
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    301
    
    
    
    301in Hong Kong dollars
    
    
    369
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    369
    
    
    
    369in EUR
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    28Debts:Variable rate bank and other loans
(U.S. dollars)
    
    
    2,191
    
    
    
    
    
    
    
    1,461
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,652
    
    
    
    3,652Average interest rate(1)
    
    
    5.03
    %
    
    
    5.07
    %
    
    
    5.11
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Off-balance sheet commitments:Capital commitments authorized and
contracted for in U.S. dollars
    
    
    153
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    153
    
    
    
    153
 
 (1)
    
    The interest rates for variable rate bank and other loans are calculated based on the
weighted average interest rates at the end of 2007.  
 Item 12. Description of Securities Other than Equity Securities
  
 PART II
 
 Item 13. Defaults, Dividend Arrearages and Delinquencies
  
 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
 13a-15(e)
 Managements Report on Internal Control Over Financial Reporting
 13a-15(f)
 -138-




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Internal Control 
Integrated Framework
  Changes in Internal Control Over Financial Reporting
   
 Item 16A. Audit Committee Financial Expert
  
 Item 16B. Code of Ethics
  -139-




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Item 16C. Principal Accountant Fees and Services
  For the years endedDecember 31,2006
    
    
    2007(in U.S. dollars)Audit fees
    
    
    15,418,000
    
    
    
    9,401,000Audit-related fees
    
    
    1,445,000
    
    
    
    130,000Tax fees
    
    
    11,000
    
    
    
    7,000All other fees
    
    
    5,000
    
    
    
    5,000Total
    
    
    16,879,000
    
    
    
    9,543,000
     Audit Committees Pre-approval Policies and Procedures
   -140-




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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
 Exhibit Number
    
    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).8.1
    
    List of our significant subsidiaries(7).10.1
    
    CDMA Network Capacity Lease Agreement among CUCL, Unicom Group and Unicom New Horizon, dated
November 22, 2001(4).10.2
    
    Reorganization Agreement between Unicom Group and CUCL (together with English
translation)(1).10.3
    
    Services Agreement between Unicom Group and CUCL (together with English translation)(1).10.4
    
    Lease Agreement between CUCL and Unicom Xingye Science and Technology Trade Co. Ltd. (together
with English translation)(1).10.5
    
    Transmission Line Lease and Services Agreement between Unicom Group, CUCL and Guoxin Paging
(together with English translation)(1).10.6
    
    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).10.7
    
    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(9).10.8
    
    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).
 -141-




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##### Table of Contents



Exhibit Number
    
    Description of Exhibit10.9
    
    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(9).10.10
    
    Service Agreements between executive directors of Unicom and Unicom(3).10.11
    
    Reorganization Agreement between Unicom Group and Unicom New Century, dated November 18, 2002.
(English translation)(5).10.12
    
    Form of Conditional Sale and Purchase Agreement between Unicom BVI and our company, dated November
20, 2002(5).10.13
    
    Comprehensive Services Agreement between Unicom Group and A Share Company, dated November 20,
2002. (English translation)(5).10.14
    
    Transfer Agreement with respect to the Comprehensive Services Agreement between A Share Company
and Unicom New Century, dated November 20, 2002. (English translation)(5).10.15
    
    Form of CDMA Network Capacity Lease Agreement among Unicom New Horizon, A Share Company and Unicom
Group, dated November 20, 2002(5).10.16
    
    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).10.17
    
    Reorganization Agreement between Unicom Group and Unicom New World, dated November 4, 2003.
(English translation)(6).10.18
    
    Conditional Sale and Purchase Agreement between Unicom BVI and our Company, dated November 20,
2003(6).10.19
    
    Conditional Sale and Purchase Agreement between CUCL and A Share Company, dated November 20, 2003.
(English translation)(6).10.20
    
    Comprehensive Services Agreement between Unicom Group and A Share Company, dated November 20,
2003. (English translation)(6).10.21
    
    Transfer Agreement with respect to the Comprehensive Services Agreement between A Share Company
and Unicom New World, dated November 20, 2003. (English translation)(6).10.22
    
    CDMA Network Capacity Lease Agreement among Unicom New Horizon, A Share Company and Unicom Group,
dated November 20, 2003(6).10.23
    
    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).10.24
    
    Comprehensive Operator Services Agreement between Unicom Group and A Share Company, dated November
20, 2003. (English translation)(6).10.25
    
    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).10.26
    
    Service Agreement between Mr. William Lo Wing Yan, executive director of Unicom, and Unicom.
(English translation)(6).10.27
    
    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).10.28
    
    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).10.29
    
    CDMA Network Capacity Lease Agreement between Unicom New Horizon, A Share Company and Unicom
Group, dated March 24, 2005(7).
 -142-




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##### Table of Contents



Exhibit Number
    
    Description of Exhibit10.30
    
    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).10.31
    
    Comprehensive Services Agreement between A Share Company and Unicom Group, dated March 24, 2005.
(English translation)(7).10.32
    
    Transfer Agreement of the Comprehensive Services Agreement between A Share Company, CUCL and
Unicom New World, dated March 24, 2005. (English translation)(7).10.33
    
    Operator-based Comprehensive Services Agreement between Unicom New Guoxin and A Share Company,
dated March 24, 2005. (English translation)(7).10.34
    
    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).10.35
    
    Premise Leasing Agreement between CUCL, Unicom New World and A Share Company, dated March 24,
2005. (English translation)(7).10.36
    
    Transfer Agreement of the Premise Leasing Agreement between A Share Company and Unicom New Guoxin,
dated March 24, 2005. (English translation)(7).10.37
    
    Subscription Agreement between Unicom and SK Telecom Co., Ltd., dated June 20, 2006(8).10.38
    
    CDMA Network Capacity Lease Agreement among Unicom New Horizon, A Share Company and Unicom Group,
dated October 26, 2006(9).10.39
    
    Transfer Agreement of The CDMA Network Capacity Lease Agreement between A Share Company and CUCL,
dated October 26, 2006. (English translation)(9).10.40
    
    Comprehensive Services Agreement between A Share Company and Unicom Group, dated October 26, 2006.
(English translation)(9).10.41
    
    Transfer Agreement of the Comprehensive Services Agreement between A Share Company and CUCL, dated
October 26, 2006. (English translation)(9).10.42
    
    Asset Transfer Agreement in connection with the acquisition of Unicom Guizhou between CUCL and
Unicom Group, dated November 16, 2007. (English translation)*10.43
    
    Supplement Agreement in connection with the acquisition of Unicom Guizhou and the 2006 CDMA
Network Capacity Lease Agreement, between Unicom New Horizon, Unicom Group, CUCL and the A Share
Company.*10.44
    
    CDMA Business Transfer Framework Agreement between us, CUCL and China Telecom dated as of June 2, 2008.
(English translation)*10.45
    
    Joint Announcement dated June 2, 2008 in respect of (1) Proposed Merger of Unicom and China Netcom
by way of a Scheme of Arrangement by China Netcom under Section 166 of the Hong Kong Companies
Ordinance, (2) Possible very Substantial Acquisition for Unicom, (3) Mandate to Issue New Unicom
Shares, (4) adoption of Special Purpose Unicom Share Option Scheme and (5) Resumption of Trading
of Unicom and China Netcom*.10.46
    
    Announcement dated June 2, 2008 in respect of (1) Proposed Disposal of the CDMA Business to China
Telecom, (2) Proposed Major Transaction, (3) Possible Connected Transaction and (4) Resumption of
Trading of China Unicom Limited*.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)*.
 -143-




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##### Table of Contents



Exhibit Number
    
    Description of Exhibit13.2
    
    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.(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.(9)
    
    Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year
ended December 31, 2006.*
    
    Filed herewith. -144-




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##### Table of Contents



SIGNATURE
   CHINA UNICOM LIMITEDBy:
    /s/ Chang XiaobingName:
    Chang XiaobingTitle:
    Chairman and Chief Executive Officer -145-




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##### Table of Contents



INDEX OF CONSOLIDATED FINANCIAL STATEMENTS
 CHINA UNICOM LIMITED AND ITS SUBSIDIARIES
 Report of Independent Registered Public Accounting FirmConsolidated balance sheets as of December 31, 2006 and 2007Consolidated statements of income for the years ended December 31, 2005, 2006 and 2007Consolidated statements of changes in equity for the years ended December 31, 2005, 2006 and 2007Consolidated statements of cash flows for the years ended December 31, 2005, 2006 and 2007Notes to the consolidated financial statements




---



##### 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)
 Internal Control  Integrated Framework
   F-2




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##### Table of Contents



PricewaterhouseCoopers
 Certified Public Accountants
 
 F-3




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##### Table of Contents



CHINA UNICOM LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2006 AND 2007
(Expressed in thousands)
 2006As restatedNote
    
    (Note 2.1)
    
    2007
    
    2007RMB
    
    RMB
    
    US$ASSETSNon-current assetsProperty, plant and equipment
    
    
    6
    
    
    
    112,795,627
    
    
    
    116,162,165
    
    
    
    15,924,405Goodwill
    
    
    7
    
    
    
    3,143,983
    
    
    
    3,143,983
    
    
    
    431,001Other assets
    
    
    8
    
    
    
    11,356,812
    
    
    
    12,855,199
    
    
    
    1,762,290Deferred income tax assets
    
    
    9
    
    
    
    309,668
    
    
    
    426,902
    
    
    
    58,523127,606,090
    
    
    
    132,588,249
    
    
    
    18,176,219Current assetsInventories
    
    
    10
    
    
    
    2,373,871
    
    
    
    2,528,364
    
    
    
    346,607Accounts receivable, net
    
    
    11
    
    
    
    3,442,211
    
    
    
    3,211,154
    
    
    
    440,210Prepayments and other current assets
    
    
    12
    
    
    
    2,039,840
    
    
    
    3,516,279
    
    
    
    482,038Amounts due from related parties
    
    
    33.1
    
    
    
    257,170
    
    
    
    109,096
    
    
    
    14,956Amounts due from Domestic Carriers
    
    
    33.2
    
    
    
    138,521
    
    
    
    149,736
    
    
    
    20,527Short-term bank deposits
    
    
    13
    
    
    
    195,820
    
    
    
    644,016
    
    
    
    88,287Cash and cash equivalents
    
    
    14
    
    
    
    12,243,191
    
    
    
    6,675,476
    
    
    
    915,12620,690,624
    
    
    
    16,834,121
    
    
    
    2,307,751Total assets
    
    
    
    
    
    
    148,296,714
    
    
    
    149,422,370
    
    
    
    20,483,970EQUITYCapital and reserves attributable to the
Companys equity holdersShare capital
    
    
    15
    
    
    
    1,344,440
    
    
    
    1,436,908
    
    
    
    196,982Share premium
    
    
    15
    
    
    
    53,222,976
    
    
    
    64,320,066
    
    
    
    8,817,490Reserves
    
    
    16
    
    
    
    4,007,437
    
    
    
    3,968,515
    
    
    
    544,035Retained profits Proposed final dividend
    
    
    31
    
    
    
    2,282,578
    
    
    
    2,726,858
    
    
    
    373,819 Others
    
    
    
    
    
    
    19,003,893
    
    
    
    24,760,833
    
    
    
    3,394,40679,861,324
    
    
    
    97,213,180
    
    
    
    13,326,732Minority interest in equity
    
    
    22
    
    
    
    2,841
    
    
    
    3,914
    
    
    
    536Total equity
    
    
    
    
    
    
    79,864,165
    
    
    
    97,217,094
    
    
    
    13,327,268
  F-4




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##### Table of Contents



2006As restatedNote
    
    (Note 2.1)
    
    2007
    
    2007RMB
    
    RMB
    
    US$LIABILITIESNon-current liabilitiesLong-term bank loans
    
    
    17
    
    
    
    4,139,349
    
    
    
    1,660,921
    
    
    
    227,692Convertible bonds
    
    
    18
    
    
    
    10,324,949
    
    
    
    
    
    
    
    Obligations under finance leases
    
    
    19
    
    
    
    10,230
    
    
    
    3,882
    
    
    
    532Deferred income tax liabilities
    
    
    9
    
    
    
    5,879
    
    
    
    5,864
    
    
    
    804Deferred revenue
    
    
    4.2
    (b)
    
    
    2,260,728
    
    
    
    1,303,015
    
    
    
    178,62716,741,135
    
    
    
    2,973,682
    
    
    
    407,655Current liabilitiesPayables and accrued liabilities
    
    
    20
    
    
    
    26,543,904
    
    
    
    32,031,307
    
    
    
    4,391,098Taxes payable
    
    
    
    
    
    
    1,634,316
    
    
    
    1,239,512
    
    
    
    169,922Amounts due to Unicom Group
    
    
    33.1
    
    
    
    1,088,297
    
    
    
    820,699
    
    
    
    112,508Amounts due to related parties
    
    
    33.1
    
    
    
    328,702
    
    
    
    769,558
    
    
    
    105,497Amounts due to Domestic Carriers
    
    
    33.2
    
    
    
    854,885
    
    
    
    600,283
    
    
    
    82,291Short-term bonds
    
    
    21
    
    
    
    7,087,217
    
    
    
    
    
    
    
    Current portion of long-term bank loans
    
    
    17
    
    
    
    3,984,350
    
    
    
    2,191,382
    
    
    
    300,412Current portion of obligations under finance leases
    
    
    19
    
    
    
    100,004
    
    
    
    1,448
    
    
    
    199Advances from customers
    
    
    
    
    
    
    10,069,739
    
    
    
    11,577,405
    
    
    
    1,587,12051,691,414
    
    
    
    49,231,594
    
    
    
    6,749,047Total liabilities
    
    
    
    
    
    
    68,432,549
    
    
    
    52,205,276
    
    
    
    7,156,702Total equity and liabilities
    
    
    
    
    
    
    148,296,714
    
    
    
    149,422,370
    
    
    
    20,483,970Net current liabilities
    
    
    
    
    
    
    (31,000,790
    )
    
    
    (32,397,473
    )
    
    
    (4,441,296
    )Total assets less current liabilities
    
    
    
    
    
    
    96,605,300
    
    
    
    100,190,776
    
    
    
    13,734,923
  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, 2005, 2006 AND 2007
(Expressed in thousands, except per share data)
 2005
    
    2006As restated
    
    As restatedNote
    
    (Note 2.1)
    
    (Note 2.1)
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    US$Revenue (Turnover)GSM Business
    
    
    5, 23, 33
    
    
    
    52,618,111
    
    
    
    59,882,238
    
    
    
    62,775,304
    
    
    
    8,605,723CDMA Business
    
    
    5, 23, 33
    
    
    
    28,088,642
    
    
    
    27,876,475
    
    
    
    27,730,240
    
    
    
    3,801,475Data and Internet Business
    
    
    5, 23, 33
    
    
    
    3,000,107
    
    
    
    2,320,392
    
    
    
    2,625,853
    
    
    
    359,972Long Distance Business
    
    
    5, 23, 33
    
    
    
    1,471,773
    
    
    
    1,014,550
    
    
    
    1,507,501
    
    
    
    206,660Total service revenue
    
    
    
    
    
    
    85,178,633
    
    
    
    91,093,655
    
    
    
    94,638,898
    
    
    
    12,973,830Sales of telecommunications
products
    
    
    5, 23
    
    
    
    2,859,300
    
    
    
    4,253,660
    
    
    
    4,900,489
    
    
    
    671,797Total revenue
    
    
    5, 23
    
    
    
    88,037,933
    
    
    
    95,347,315
    
    
    
    99,539,387
    
    
    
    13,645,627Leased lines and network capacities
    
    
    25, 33
    
    
    
    (8,900,485
    )
    
    
    (8,942,999
    )
    
    
    (9,135,497
    )
    
    
    (1,252,364
    )Interconnection charges
    
    
    33
    
    
    
    (8,436,133
    )
    
    
    (9,671,225
    )
    
    
    (10,906,819
    )
    
    
    (1,495,191
    )Depreciation and amortization
    
    
    25
    
    
    
    (20,634,519
    )
    
    
    (22,686,568
    )
    
    
    (22,677,167
    )
    
    
    (3,108,761
    )Employee benefit expenses
    
    
    26, 27, 28
    
    
    
    (5,653,020
    )
    
    
    (6,680,679
    )
    
    
    (7,139,988
    )
    
    
    (978,805
    )Selling and marketing
    
    
    25, 33
    
    
    
    (20,794,815
    )
    
    
    (19,571,330
    )
    
    
    (19,681,372
    )
    
    
    (2,698,074
    )General, administrative and other
expenses
    
    
    25, 33
    
    
    
    (11,855,028
    )
    
    
    (13,543,391
    )
    
    
    (14,639,362
    )
    
    
    (2,006,877
    )Cost of telecommunications
products sold
    
    
    25
    
    
    
    (3,673,833
    )
    
    
    (4,914,876
    )
    
    
    (5,031,706
    )
    
    
    (689,785
    )Financial (costs)/gains
    
    
    25
    
    
    
    (1,133,238
    )
    
    
    (659,632
    )
    
    
    87,008
    
    
    
    11,928Interest income
    
    
    
    
    
    
    100,807
    
    
    
    263,542
    
    
    
    186,243
    
    
    
    25,532Unrealized/realized loss on
changes in fair value of
derivative component of
convertible bonds
    
    
    18
    
    
    
    
    
    
    
    (2,396,592
    )
    
    
    (568,860
    )
    
    
    (77,984
    )Other gains  net
    
    
    24
    
    
    
    35,063
    
    
    
    21,347
    
    
    
    2,923,160
    
    
    
    400,729Income before income tax
    
    
    
    
    
    
    7,092,732
    
    
    
    6,564,912
    
    
    
    12,955,027
    
    
    
    1,775,975Income tax expenses
    
    
    9
    
    
    
    (2,170,411
    )
    
    
    (2,763,885
    )
    
    
    (3,654,170
    )
    
    
    (500,942
    )Net income
    
    
    
    
    
    
    4,922,321
    
    
    
    3,801,027
    
    
    
    9,300,857
    
    
    
    1,275,033Attributable to:Equity holders of the Company
    
    
    
    
    
    
    4,922,087
    
    
    
    3,800,920
    
    
    
    9,299,784
    
    
    
    1,274,886Minority interest
    
    
    
    
    
    
    234
    
    
    
    107
    
    
    
    1,073
    
    
    
    1474,922,321
    
    
    
    3,801,027
    
    
    
    9,300,857
    
    
    
    1,275,033Proposed final dividend
    
    
    31
    
    
    
    1,383,169
    
    
    
    2,282,578
    
    
    
    2,726,858
    
    
    
    373,819Dividend paid during the year
    
    
    31
    
    
    
    1,256,924
    
    
    
    1,384,146
    
    
    
    2,284,942
    
    
    
    313,237
  F-6




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##### Table of Contents



2005
    
    2006As restated
    
    As restatedNote
    
    (Note 2.1)
    
    (Note 2.1)
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    US$Earnings per share for
income attributable to
the equity holders of the
Company during the yearBasic earnings per share
    
    
    30
    
    
    
    0.39
    
    
    
    0.30
    
    
    
    0.71
    
    
    
    0.10Diluted earnings per share
    
    
    30
    
    
    
    0.39
    
    
    
    0.30
    
    
    
    0.71
    
    
    
    0.10Number of shares
outstanding for basic
earnings (in thousands)
    
    
    30
    
    
    
    12,570,398
    
    
    
    12,599,018
    
    
    
    13,036,566
    
    
    
    13,036,566Number of shares
outstanding for diluted
earnings (in thousands)
    
    
    30
    
    
    
    12,607,476
    
    
    
    12,649,306
    
    
    
    13,161,089
    
    
    
    13,161,089Basic earnings per ADS
    
    
    30
    
    
    
    3.92
    
    
    
    3.02
    
    
    
    7.13
    
    
    
    0.98Diluted earnings per ADS
    
    
    30
    
    
    
    3.90
    
    
    
    3.00
    
    
    
    7.07
    
    
    
    0.97Number of ADS outstanding
for basic earnings (in
thousands)
    
    
    30
    
    
    
    1,257,040
    
    
    
    1,259,902
    
    
    
    1,303,657
    
    
    
    1,303,657Number of ADS outstanding
for diluted earnings (in
thousands)
    
    
    30
    
    
    
    1,260,748
    
    
    
    1,264,931
    
    
    
    1,316,109
    
    
    
    1,316,109
  F-7




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##### Table of Contents



CHINA UNICOM LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
(Expressed in thousands of RMB)
 Employeeshare-basedShare
    
    
    Share
    
    
    compensation
    
    
    Revaluation
    
    
    Statutory
    
    
    Other
    
    
    Retained
    
    
    
    
    
    
    Minority
    
    
    Totalcapital
    
    
    premium
    
    
    reserve
    
    
    reserve
    
    
    reserve
    
    
    reserve
    
    
    profits
    
    
    Total
    
    
    interest
    
    
    equityBalance at January 1, 2005
(As previously reported)
    
    
    1,332,487
    
    
    
    52,546,294
    
    
    
    110,664
    
    
    
    176,853
    
    
    
    1,971,778
    
    
    
    
    
    
    
    16,311,590
    
    
    
    72,449,666
    
    
    
    
    
    
    
    72,449,666Adjusted for Business Combination under
common control (Note 1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    392,376
    
    
    
    
    
    
    
    392,376
    
    
    
    
    
    
    
    392,376Balance at January 1, 2005 (As restated)
    
    
    1,332,487
    
    
    
    52,546,294
    
    
    
    110,664
    
    
    
    176,853
    
    
    
    1,971,778
    
    
    
    392,376
    
    
    
    16,311,590
    
    
    
    72,842,042
    
    
    
    
    
    
    
    72,842,042Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,922,087
    
    
    
    4,922,087
    
    
    
    234
    
    
    
    4,922,321Subscription of shares of a subsidiary by
minority shareholder
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    52,134Transfer of retained profits to other
reserve due to Business Combination under
common control (Note 1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,965
    )
    
    
    8,965
    
    
    
    
    
    
    
    
    
    
    
    Appropriation to statutory reserve (Note
16)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    463,339
    
    
    
    
    
    
    
    (463,339
    )
    
    
    
    
    
    
    
    
    
    
    Dividends relating to 2004 (Note 31)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,256,924
    )
    
    
    (1,256,924
    )
    
    
    
    
    
    
    (1,256,924
    )Balance at December 31, 2005 (As restated)
    
    
    1,333,621
    
    
    
    52,601,014
    
    
    
    215,361
    
    
    
    176,853
    
    
    
    2,435,117
    
    
    
    383,411
    
    
    
    19,522,379
    
    
    
    76,667,756
    
    
    
    2,734
    
    
    
    76,670,490Balance at January 1, 2006
(As previously reported)
    
    
    1,333,621
    
    
    
    52,601,014
    
    
    
    215,361
    
    
    
    176,853
    
    
    
    2,435,117
    
    
    
    
    
    
    
    19,522,379
    
    
    
    76,284,345
    
    
    
    2,734
    
    
    
    76,287,079Adjusted for Business Combination under
common control (Note 1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    383,411
    
    
    
    
    
    
    
    383,411
    
    
    
    
    
    
    
    383,411Balance at January 1, 2006 (As restated)
    
    
    1,333,621
    
    
    
    52,601,014
    
    
    
    215,361
    
    
    
    176,853
    
    
    
    2,435,117
    
    
    
    383,411
    
    
    
    19,522,379
    
    
    
    76,667,756
    
    
    
    2,734
    
    
    
    76,670,490Revaluation of buildings  gross (Note 6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,330
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,330
    
    
    
    
    
    
    
    200,330Revaluation of buildings  tax (Note 6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (105,129
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (105,129
    )
    
    
    
    
    
    
    (105,129
    )Net income and expense recognized
directly in equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95,201
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95,201
    
    
    
    
    
    
    
    95,201Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,800,920
    
    
    
    3,800,920
    
    
    
    107
    
    
    
    3,801,027Total recognized income and expense for
2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95,201
    
    
    
    
    
    
    
    
    
    
    
    3,800,920
    
    
    
    3,896,121
    
    
    
    107
    
    
    
    3,896,228Employee 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
    
    
    
    
    
    
    
    535,299Transfer of retained profits to other
reserve due to Business Combination under
common control (Note 1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69,096
    
    
    
    (69,096
    )
    
    
    
    
    
    
    
    
    
    
    Appropriation to statutory reserve (Note
16)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    583,586
    
    
    
    
    
    
    
    (583,586
    )
    
    
    
    
    
    
    
    
    
    
    Dividends relating to 2005 (Note 31)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,384,146
    )
    
    
    (1,384,146
    )
    
    
    
    
    
    
    (1,384,146
    )Balance at December 31, 2006 (As restated)
    
    
    1,344,440
    
    
    
    53,222,976
    
    
    
    264,173
    
    
    
    272,054
    
    
    
    3,018,703
    
    
    
    452,507
    
    
    
    21,286,471
    
    
    
    79,861,324
    
    
    
    2,841
    
    
    
    79,864,165Balance at January 1, 2007
(As previously reported)
    
    
    1,344,440
    
    
    
    53,222,976
    
    
    
    264,173
    
    
    
    272,054
    
    
    
    3,018,703
    
    
    
    
    
    
    
    21,286,471
    
    
    
    79,408,817
    
    
    
    2,841
    
    
    
    79,411,658Adjusted for Business Combination under
common control (Note 1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    452,507
    
    
    
    
    
    
    
    452,507
    
    
    
    
    
    
    
    452,507Balance at January 1, 2007 (As restated)
    
    
    1,344,440
    
    
    
    53,222,976
    
    
    
    264,173
    
    
    
    272,054
    
    
    
    3,018,703
    
    
    
    452,507
    
    
    
    21,286,471
    
    
    
    79,861,324
    
    
    
    2,841
    
    
    
    79,864,165Revaluation of buildings  tax (Note 6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,482
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,482
    
    
    
    
    
    
    
    29,482Net income and expense recognized
directly in equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,482
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,482
    
    
    
    
    
    
    
    29,482Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,299,784
    
    
    
    9,299,784
    
    
    
    1,073
    
    
    
    9,300,857Total recognized income and expense for
2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,482
    
    
    
    
    
    
    
    
    
    
    
    9,299,784
    
    
    
    9,329,266
    
    
    
    1,073
    
    
    
    9,330,339Employee share option scheme:-Value of employee services
    
    
    
    
    
    
    
    
    
    
    157,262
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    157,262
    
    
    
    
    
    
    
    157,262-Recognition of shares issued on exercise
of options (Note 29)
    
    
    5,206
    
    
    
    366,324
    
    
    
    (58,268
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    313,262
    
    
    
    
    
    
    
    313,262Conversion of convertible bonds (Note 18)
    
    
    87,262
    
    
    
    10,730,766
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,818,028
    
    
    
    
    
    
    
    10,818,028Consideration for purchase of entity
under common control (Note 1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (880,000
    )
    
    
    
    
    
    
    (880,000
    )
    
    
    
    
    
    
    (880,000
    )Transfer of retained profits to other
reserve due to Business Combination
under common control (Note 1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95,277
    
    
    
    (95,277
    )
    
    
    
    
    
    
    
    
    
    
    Transfer of net income of entity under
common control to Unicom Group
(Note 1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (101,020
    )
    
    
    
    
    
    
    (101,020
    )
    
    
    
    
    
    
    (101,020
    )Appropriation to statutory reserve (Note
16)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    718,345
    
    
    
    
    
    
    
    (718,345
    )
    
    
    
    
    
    
    
    
    
    
    Dividends relating to 2006 (Note 31)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,284,942
    )
    
    
    (2,284,942
    )
    
    
    
    
    
    
    (2,284,942
    )Balance at December 31, 2007
    
    
    1,436,908
    
    
    
    64,320,066
    
    
    
    363,167
    
    
    
    301,536
    
    
    
    3,737,048
    
    
    
    (433,236
    )
    
    
    27,487,691
    
    
    
    97,213,180
    
    
    
    3,914
    
    
    
    97,217,094
  F-8




---



##### Table of Contents



CHINA UNICOM LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
(Expressed in thousands)
 2005
    
    
    2006As restated
    
    
    As restatedNote
    
    
    (Note 2.1)
    
    
    (Note 2.1)
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Cash flows from operating activitiesCash generated from operations
    
    
    (a
    )
    
    
    34,610,910
    
    
    
    39,217,031
    
    
    
    36,836,129
    
    
    
    5,049,781Interest received
    
    
    
    
    
    
    100,342
    
    
    
    251,222
    
    
    
    188,555
    
    
    
    25,849Interest paid
    
    
    
    
    
    
    (1,828,646
    )
    
    
    (1,212,745
    )
    
    
    (498,080
    )
    
    
    (68,281
    )Income tax paid
    
    
    
    
    
    
    (1,474,423
    )
    
    
    (2,113,144
    )
    
    
    (4,195,111
    )
    
    
    (575,098
    )Net cash generated from operating activities
    
    
    
    
    
    
    31,408,183
    
    
    
    36,142,364
    
    
    
    32,331,493
    
    
    
    4,432,251Cash flows from investing activitiesPurchase of property, plant and equipment
    
    
    
    
    
    
    (16,739,196
    )
    
    
    (16,977,370
    )
    
    
    (21,501,863
    )
    
    
    (2,947,641
    )Proceeds from sale of property, plant and equipment
    
    
    
    
    
    
    91,935
    
    
    
    59,455
    
    
    
    82,029
    
    
    
    11,245Consideration for purchase of entity under common
control
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    (880,000
    )
    
    
    (120,637
    )Decrease/(increase) in short-term bank deposits
    
    
    
    
    
    
    379,568
    
    
    
    86,637
    
    
    
    (448,196
    )
    
    
    (61,442
    )Purchase of other assets
    
    
    
    
    
    
    (580,787
    )
    
    
    (743,336
    )
    
    
    (2,218,552
    )
    
    
    (304,136
    )Net cash used in investing activities
    
    
    
    
    
    
    (16,848,480
    )
    
    
    (17,574,614
    )
    
    
    (24,966,582
    )
    
    
    (3,422,611
    )Cash flows from financing activitiesProceeds from exercise of share options
    
    
    
    
    
    
    52,134
    
    
    
    535,299
    
    
    
    313,262
    
    
    
    42,944Proceeds 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
    
    
    
    
    
    
    
    Proceeds from short-term bank loans
    
    
    
    
    
    
    12,532,071
    
    
    
    2,143,000
    
    
    
    
    
    
    
    Proceeds from long-term bank loans
    
    
    
    
    
    
    6,103,657
    
    
    
    1,345,050
    
    
    
    
    
    
    
    Proceeds from issuance of convertible bonds
    
    
    
    
    
    
    
    
    
    
    7,993,500
    
    
    
    
    
    
    
    Repayment of short-term bonds
    
    
    
    
    
    
    
    
    
    
    (9,731,800
    )
    
    
    (6,969,700
    )
    
    
    (955,460
    )Repayment of short-term bank loans
    
    
    
    
    
    
    (20,104,146
    )
    
    
    (8,905,858
    )
    
    
    
    
    
    
    Repayment of long-term bank loans
    
    
    
    
    
    
    (20,752,887
    )
    
    
    (10,758,599
    )
    
    
    (3,991,246
    )
    
    
    (547,151
    )Dividends paid to the Companys equity holders
    
    
    31
    
    
    
    (1,256,924
    )
    
    
    (1,384,146
    )
    
    
    (2,284,942
    )
    
    
    (313,237
    )Net cash used in financing activities
    
    
    
    
    
    
    (13,732,795
    )
    
    
    (11,813,854
    )
    
    
    (12,932,626
    )
    
    
    (1,772,904
    )Net increase /(decrease) in cash and cash equivalents
    
    
    
    
    
    
    826,908
    
    
    
    6,753,896
    
    
    
    (5,567,715
    )
    
    
    (763,264
    )Cash and cash equivalents, beginning of year
    
    
    
    
    
    
    4,662,387
    
    
    
    5,489,295
    
    
    
    12,243,191
    
    
    
    1,678,390Cash and cash equivalents, end of year
    
    
    14
    
    
    
    5,489,295
    
    
    
    12,243,191
    
    
    
    6,675,476
    
    
    
    915,126Analysis of the balances of cash and cash equivalents:Cash balances
    
    
    
    
    
    
    9,601
    
    
    
    4,549
    
    
    
    4,155
    
    
    
    570Bank balances
    
    
    
    
    
    
    5,479,694
    
    
    
    12,238,642
    
    
    
    6,671,321
    
    
    
    914,5565,489,295
    
    
    
    12,243,191
    
    
    
    6,675,476
    
    
    
    915,126
 F-9




---



##### Table of Contents



(a)
    
    The reconciliation of income before income tax to cash generated from operations is as
follows:
 2005
    
    
    2006As restated
    
    
    As restated(Note 2.1)
    
    
    (Note 2.1)
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Income before income tax
    
    
    7,092,732
    
    
    
    6,564,912
    
    
    
    12,955,027
    
    
    
    1,775,975Adjustments for:Depreciation and amortization
    
    
    20,634,519
    
    
    
    22,686,568
    
    
    
    22,677,167
    
    
    
    3,108,761Amortization of customer acquisition costs of
contractual CDMA subscribers
    
    
    6,065,479
    
    
    
    4,375,353
    
    
    
    4,000,358
    
    
    
    548,400Interest income
    
    
    (100,807
    )
    
    
    (263,542
    )
    
    
    (186,243
    )
    
    
    (25,532
    )Financial costs/(gains)
    
    
    1,087,757
    
    
    
    460,003
    
    
    
    (256,794
    )
    
    
    (35,203
    )Loss on disposal of property, plant and equipment
    
    
    25,133
    
    
    
    144,950
    
    
    
    109,021
    
    
    
    14,945Share-based compensation costs
    
    
    108,417
    
    
    
    146,294
    
    
    
    157,262
    
    
    
    21,559Provision for doubtful debts
    
    
    1,518,699
    
    
    
    1,753,915
    
    
    
    1,727,009
    
    
    
    236,752Unrealized/realized loss on changes in fair value
of derivative component of convertible bonds
    
    
    
    
    
    
    2,396,592
    
    
    
    568,860
    
    
    
    77,984Changes in working capital:Increase in accounts receivable
    
    
    (901,295
    )
    
    
    (591,235
    )
    
    
    (1,495,952
    )
    
    
    (205,077
    )Decrease/(increase) in inventories
    
    
    1,033,859
    
    
    
    (214,437
    )
    
    
    (154,493
    )
    
    
    (21,179
    )Increase in other assets
    
    
    (2,875,139
    )
    
    
    (1,877,314
    )
    
    
    (3,103,991
    )
    
    
    (425,519
    )Increase in prepayments and other current assets
    
    
    (512,564
    )
    
    
    (415,625
    )
    
    
    (2,165,549
    )
    
    
    (296,870
    )Decrease/(increase) in amounts due from Domestic
Carriers
    
    
    131,434
    
    
    
    (36
    )
    
    
    (11,215
    )
    
    
    (1,537
    )Decrease in amounts due from Unicom Group
    
    
    61,401
    
    
    
    
    
    
    
    
    
    
    
    (Increase)/decrease in amounts due from related
parties
    
    
    (202,703
    )
    
    
    220,750
    
    
    
    148,074
    
    
    
    20,299Increase in payables and accrued liabilities
    
    
    698,777
    
    
    
    2,300,159
    
    
    
    1,499,999
    
    
    
    205,632Increase in advances from customers
    
    
    792,466
    
    
    
    2,097,677
    
    
    
    1,507,666
    
    
    
    206,682Decrease in deferred revenue
    
    
    (494,393
    )
    
    
    (1,106,934
    )
    
    
    (957,713
    )
    
    
    (131,291
    )(Decrease)/increase in amounts due to Domestic
Carriers
    
    
    (127,908
    )
    
    
    18,017
    
    
    
    (254,602
    )
    
    
    (34,903
    )Increase/(decrease) in amounts due to Unicom Group
    
    
    463,456
    
    
    
    308,883
    
    
    
    (368,618
    )
    
    
    (50,533
    )Increase in amounts due to related parties
    
    
    111,590
    
    
    
    212,081
    
    
    
    440,856
    
    
    
    60,436Cash generated from operations
    
    
    34,610,910
    
    
    
    39,217,031
    
    
    
    36,836,129
    
    
    
    5,049,781
 (b)
    
    Major non-cash transactions:
 (i)
    
    Payables to equipment suppliers for construction-in-progress during 2007 increased by
approximately RMB4.0 billion (2005: approximately RMB0.7 billion; 2006: approximately
RMB5.1 billion).(ii)
    
    On August 20, 2007, the USD1 billion convertible bonds were fully converted into
899,745,075 ordinary shares of HKD0.1 each of the Company. Please refer to Note 18 for
details.
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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 interest in A Share Company is 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.Purchase of assets and business of Guizhou branch of Unicom Group (hereinafter referred to as
Business Combination)Pursuant to an asset transfer agreement entered between China Unicom Corporation Limited
(CUCL, a subsidiary of the Company) and Unicom Group on November 16, 2007, CUCL agreed to
purchase the GSM cellular telecommunication assets and business, and the CDMA cellular
telecommunication business (operated through a leasing of CDMA network capacity from Unicom
New Horizon Mobile Telecommunications Company Limited (Unicom New Horizon, a wholly-owned
subsidiary of Unicom Group)) of Guizhou branch of Unicom Group (Guizhou Business) at a cash
consideration of RMB880 million. The consideration for the Business Combination was determined
with reference to the results of a business valuation using methods commonly used in capital
market transactions in the telecommunications industry and by the negotiations between the
parties. In addition, pursuant to the asset transfer agreement, the income or loss of the
Guizhou Business for the period from December 31, 2006 to the effective date of the Business
Combination was transferred to Unicom Group.The aforementioned Business Combination became effective on December 31, 2007, when all the
conditions to the Business Combination were satisfied and cash consideration was settled by
CUCL. Upon the completion of the Business Combination, the cellular telecommunications
business operations of CUCL have been expanded to all provinces, cities and autonomous regions
in the PRC. The Company has adopted merger accounting to account for this business combination
of entities and businesses under the common control of Unicom Group. Please refer to Note 2.1
for details.
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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.
 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), which collective term includes all applicable individual Hong Kong Financial
Reporting Standards, Hong Kong Accounting Standards (HKAS) and Interpretations issued by
the Hong Kong Institute of Certified Public Accountants (HKICPA), and the requirements
of the Hong Kong Companies Ordinance. They also comply with the applicable disclosure
provisions of the Rules Governing the Listing of Securities on the SEHK. The consolidated
financial statements prepared by the PRC subsidiaries for PRC statutory reporting purposes
are based on the Chinese Accounting Standards for Business Enterprises (CAS) issued by
the Ministry of Finance, which were effective from January 1, 2007 with certain
transitional provisions. There are certain differences between the Groups HKFRS financial
statements and PRC statutory financial statements. The principal adjustments made on PRC
statutory financial statements 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 prior to January 1, 2007;
    
    recognition of goodwill associated with the acquisition of subsidiaries prior to
2005;
    
    capitalization of the direct costs associated with the acquisition of subsidiaries
prior to 2005;
    
    additional capitalization of borrowing costs prior to the adoption of CAS on
January 1, 2007;
    
    capitalization and amortization of upfront non-refundable revenue and the related
direct incremental costs for activating cellular subscribers prior to the adoption of
CAS on January 1, 2007; and
    
    adjustments on deferred taxation in relation to HKFRS adjustments.
 Since the Group and Guizhou Business were both under the common control of Unicom Group
prior to the Business Combination, the purchase of Guizhou Business is considered as a
business combination of entities and businesses under common control, which has been
accounted for using merger accounting in accordance with the Accounting Guideline 5
Merger Accounting For Common Control Combinations (AG 5) issued by HKICPA in November
2005. The acquired assets and liabilities of Guizhou Business are stated at historical
costs, and are included in the consolidated financial statements from the beginning of the
earliest period presented as if the Guizhou Business had always been part of the Group. As
a result, the 2005 and 2006 comparative figures of the consolidated financial statements
have been restated accordingly.The following tables summarizes the combined results of operations and the financial
positions of the Group and Guizhou Business as of December 31, 2006 and 2007, and for the
years ended December 31, 2005, 2006 and 2007 to reflect the impact of the effect of the
Business Combination under common control:
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The Group (before
    
    
    
    
    
    
    
    
    
    The Group (afterthe Business
    
    
    
    
    
    
    
    
    
    the BusinessCombination)
    
    Guizhou Business
    
    Elimination
    
    Combination)For the year ended
December 31, 2005Results of operations:Revenue (Turnover)
    
    
    87,048,831
    
    
    
    1,204,051
    
    
    
    (214,949
    )
    
    
    88,037,933Net income/(loss)
    
    
    4,931,286
    
    
    
    (8,965
    )
    
    
    
    
    
    
    4,922,321Basic earnings per share (RMB)
    
    
    0.39
    
    
    
    
    
    
    
    
    
    
    
    0.39
 The Group (before
    
    
    
    
    
    
    
    
    
    The Group (afterthe Business
    
    
    
    
    
    
    
    
    
    the BusinessCombination)
    
    Guizhou Business
    
    Elimination
    
    Combination)For the year ended/as of
December 31, 2006Results of operations:Revenue (Turnover)
    
    
    94,294,493
    
    
    
    1,352,867
    
    
    
    (300,045
    )
    
    
    95,347,315Net income
    
    
    3,731,931
    
    
    
    69,096
    
    
    
    
    
    
    
    3,801,027Basic earnings per share (RMB)
    
    
    0.30
    
    
    
    
    
    
    
    
    
    
    
    0.30Financial position:Non-current assets
    
    
    126,011,725
    
    
    
    1,594,365
    
    
    
    
    
    
    
    127,606,090Current assets
    
    
    20,426,261
    
    
    
    303,215
    
    
    
    (38,852
    )
    
    
    20,690,624Total assets
    
    
    146,437,986
    
    
    
    1,897,580
    
    
    
    (38,852
    )
    
    
    148,296,714Non-current liabilities
    
    
    16,723,791
    
    
    
    17,344
    
    
    
    
    
    
    
    16,741,135Current liabilities
    
    
    50,302,537
    
    
    
    1,427,729
    
    
    
    (38,852
    )
    
    
    51,691,414Total liabilities
    
    
    67,026,328
    
    
    
    1,445,073
    
    
    
    (38,852
    )
    
    
    68,432,549Net assets
    
    
    79,411,658
    
    
    
    452,507
    
    
    
    
    
    
    
    79,864,165
 The Group (before
    
    
    
    
    
    
    
    
    
    The Group (afterthe Business
    
    
    
    
    
    
    
    
    
    the BusinessCombination)
    
    Guizhou Business
    
    Elimination
    
    Combination)For the year ended/as of
December 31, 2007Results of operations:Revenue (Turnover)
    
    
    98,515,372
    
    
    
    1,407,223
    
    
    
    (383,208
    )
    
    
    99,539,387Net income
    
    
    9,205,580
    
    
    
    95,277
    
    
    
    
    
    
    
    9,300,857Basic earnings per share (RMB)
    
    
    0.71
    
    
    
    
    
    
    
    
    
    
    
    0.71Financial position:Non-current assets
    
    
    130,763,519
    
    
    
    1,824,730
    
    
    
    
    
    
    
    132,588,249Current assets
    
    
    16,857,746
    
    
    
    165,824
    
    
    
    (189,449
    )
    
    
    16,834,121Total assets
    
    
    147,621,265
    
    
    
    1,990,554
    
    
    
    (189,449
    )
    
    
    149,422,370Non-current liabilities
    
    
    2,960,312
    
    
    
    13,370
    
    
    
    
    
    
    
    2,973,682Current liabilities
    
    
    47,890,623
    
    
    
    1,530,420
    
    
    
    (189,449
    )
    
    
    49,231,594Total liabilities
    
    
    50,850,935
    
    
    
    1,543,790
    
    
    
    (189,449
    )
    
    
    52,205,276Net assets
    
    
    96,770,330
    
    
    
    446,764
    
    
    
    
    
    
    
    97,217,094
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As of December 31, 2007, the current liabilities of the Group had exceeded the current
assets by approximately RMB32.4 billion (December 31, 2006: approximately RMB31.0
billion). Taking into account of available sources of financing and continuous net cash
inflows from operating activities, the Group has sufficient funds to meet its working
capital requirements and debt obligations. As a result, the consolidated financial
statements of the Group for the year ended December 31, 2005, 2006 and 2007 have been
prepared under the going concern basis.The preparation of the consolidated financial statements in conformity with HKFRS requires
the use of certain critical accounting estimates. It also requires management to exercise
its judgment in the process of applying the Groups accounting policies. The areas
involving a higher degree of judgment or complexity, or areas where assumptions and
estimates are significant to the consolidated financial statements are disclosed in Note
4.
 (a)
    
    Standards, amendments and interpretations effective in 2007 that are
relevant and are applicable to the Groups operation
 
    
    HKFRS 7, Financial instruments: Disclosures, and the complementary
amendment to HKAS 1, Presentation of financial statements  Capital
disclosures, introduce new disclosures relating to financial instruments and
capital management which do not have any significant impact on the
classification and valuation of the Groups financial instruments.
    
    HK(IFRIC)-Int 8, Scope of HKFRS 2, 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 in order to establish whether or not they fall within the scope of HKFRS
2. This interpretation does not have any significant impact on the Groups
consolidated financial statements.
    
    HK(IFRIC)-Int 9, Reassessment of embedded derivatives, 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 did not change the terms of these kinds of contracts,
this interpretation does not have any impact on the Groups consolidated
financial statements.
    
    HK(IFRIC)-Int 10, Interim financial reporting and impairment, 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. This interpretation does not have
any significant impact on the Groups consolidated financial statements.
 (b)
    
    Interpretation to existing standards effective in 2007 and not relevant to
the Groups operation
 
    
    HK(IFRIC)-Int 7, Applying the restatement approach under HKAS 29, Financial
reporting in hyperinflationary economies, 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 hyperinflationary economy as its functional
currency, this interpretation is not relevant to the Groups operation.
 F-14




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(c)
    
    Standards, amendments and interpretations to existing standards that are
not yet effective in 2007 and have not been early adopted by the Group
 
    
    HKFRS 2 (Amendment), Share-based Payment Vesting Conditions and
Cancellations (effective for annual periods beginning on or after January 1,
2009). The amendment clarifies the definition of vesting conditions and
specifies the accounting treatment of cancellations by the counterparty to a
share-based payment arrangement. Vesting conditions are service conditions
(which require a counterparty to complete a specified period of service) and
performance conditions (which require a specified period of service and
specified performance targets to be met) only. All non-vesting conditions and
vesting conditions that are market conditions shall be taken into account when
estimating the fair value of the equity instruments granted. All cancellations
are accounted for as an acceleration of vesting and the amount that would
otherwise have been recognized over the remainder of the vesting period is
recognized immediately. The Group will apply HKFRS 2 (Amendment) from January
1, 2009, but it is not expected to have significant impact on the Groups
consolidated financial statements.
    
    HKFRS 8, Operating segments (effective for annual periods beginning on or
after January 1, 2009), replaces HKAS 14 and aligns segment reporting with the
requirements of the US Standard SFAS 131, Disclosures about segments of an
enterprise and related information. The new standard requires a management
approach, under which segment information is presented on the same basis as
that used for internal reporting purposes. The Group will apply HKFRS 8 from
January 1, 2009. This standard is not expected to have any significant impact
on the classification and presentation of the Groups consolidated financial
statements.
    
    (Revised) HKFRS 3 Business Combination (effective for business
combinations with acquisition date on or after the beginning of the first
annual reporting period beginning on or after July 1, 2009). The amendment may
bring more transactions into acquisition accounting as combinations by contract
alone and combinations of mutual entities are brought into the scope of the
standard and the definition of a business has been amended slightly. It now
states that the elements of a business are capable of being conducted rather
than are conducted and managed. It requires consideration (including
contingent consideration), each identifiable asset and liability to be measured
at its acquisition-date fair value, except leases and insurance contracts,
reacquired right, indemnification assets as well as some assets and liabilities
required to be measured in accordance with other HKFRS including income taxes,
employee benefits, share-based payment and non current assets held for sale and
discontinued operations. Any non-controlling interest in an acquiree is
measured either at fair value or at the non-controlling interests
proportionate share of the acquirees net identifiable assets. The Group will
apply (Revised) HKFRS 3 from January 1, 2010.
    
    (Revised) HKAS 1, Presentation of financial statements (effective for
annual periods beginning on or after January 1, 2009). The revised HKAS 1
affects the presentation of owner changes in equity and of comprehensive
income. It does not change the recognition, measurement or disclosures of
specific transactions and other events required by other HKFRS. Management is
currently assessing the impact of (Revised) HKAS 1 on the Groups consolidated
financial statements but the probable key impact will be on the manner in which
the Group presents its financial statements.
    
    HKAS 23 (Amendment), Borrowing costs (applied to borrowing cost related to
qualifying assets for which the commencement date for capitalization is on or
after January 1, 2009). The amendment requires an entity to capitalize
borrowing costs directly attributable to the acquisition, construction or
production of a qualifying asset
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(one that takes a substantial period of time to get ready for use or sale) as
part of the cost of that asset. The option of immediately expensing those
borrowing costs will be removed. HKAS 23 (Amendment) is not expected to have a
material impact on the Groups consolidated financial statements.
    
    HK(IFRIC)-Int 11, Group and treasury share transactions (effective for
annual periods beginning on or after March 1, 2007), provides guidance on
whether share-based transactions involving treasury shares or involving group
entities (for example, options over parents shares) should be accounted for as
equity-settled or cash-settled share-based payment transactions in the
stand-alone accounts of the parent and group companies. Management is currently
assessing the impact of HK(IFRIC)-Int 11 on the Groups and the Companys
financial statements.
    
    HK(IFRIC)-Int 13, Customer loyalty programmes (effective for annual
periods beginning on or after July 1, 2008), clarifies that where goods or
services are sold together with a customer loyalty incentive (for example,
loyalty points or free services/ products), the arrangement is a
multiple-element arrangement and the consideration received or receivable from
the customer is allocated between the components of the arrangement using fair
values. Management is currently assessing the impact of HK(IFRIC)-Int 13 on the
Groups operations and consolidated financial statements.
    
    (Revised) HKAS 27 Consolidated and Separate Financial Statements
(effective for annual periods beginning on or after July 1, 2009). The
amendment requires non-controlling interests (i.e. minority interests) to be
presented in the consolidated statement of financial position within equity,
separately from the equity of the owners of the parent. Total comprehensive
income must be attributed to the owners of the parent and to the
non-controlling interests even if this results in the non-controlling interests
having a deficit balance. Changes in a parents ownership interest in a
subsidiary that do not result in the loss of control are accounted for within
equity. When control of a subsidiary is lost, the assets and liabilities and
related equity components of the former subsidiary are derecognized, with any
gain or loss recognized in income or loss. Any investment retained in the
former subsidiary is measured at its fair value at the date when control is
lost. The Group will apply (Revised) HKAS 27 from January 1, 2010.
 (d)
    
    Interpretations to existing standards that are not yet effective and not
relevant for the Groups operations
 
    
    HK(IFRIC)-Int 12, Service concession arrangements (effective for annual
periods beginning on or after January 1, 2008). HK(IFRIC)-Int 12 applies to
contractual arrangements whereby a private sector operator participates in the
development, financing, operation and maintenance of infrastructure for public
sector services. HK(IFRIC)-Int 12 is not relevant to the Groups operations
because the Group did not involve in such arrangements.
    
    HK(IFRIC)-Int 14, The limit on a defined benefit asset, minimum funding
requirements and their interaction (effective for annual periods beginning on
or after January 1, 2008). HK(IFRIC)-Int 14 provides guidance on assessing the
limit in HKAS 19 on the amount of the surplus that can be recognized as an
asset. It also explains how the pension asset or liability may be affected by a
statutory or contractual minimum funding requirement. HK(IFRIC)-Int 14 is not
relevant to the Groups operations because none of the Groups companies have
defined benefit assets.
 F-16




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2.2
    
    ConsolidationThe consolidated financial statements include the financial statements of the Company and
all of its subsidiaries made up to December 31.
 (a)
    
    SubsidiariesSubsidiaries 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). Prior to the adoption of HKFRS in 2005, the Group
accounted for the acquisition of subsidiaries under common control in accordance
with the original HK SSAP 27 Accounting for Group Reconstructions (HK SSAP 27)
under the previous accounting principles generally accepted in Hong Kong and the
requirement of the Hong Kong Companies Ordinance. Since the criteria for applying
merger accounting under the HK SSAP 27 was not satisfied, the purchase method of
accounting was used to account for the acquisitions of those subsidiaries (including
common control transactions) by the Group prior to 2005.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 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 Groups share of the identifiable net assets of the subsidiary
acquired, the difference is recognized directly in the statement of income.Upon the adoption of HKFRS in 2005, merger accounting is used by the Group to
account for the business combination of entities and businesses under common control
in accordance with AG 5 issued by the HKICPA. The results of operations and
financial position of such entities or businesses are included in the consolidated
financial statements as if the businesses were always part of the Group from the
beginning of the earliest period presented or since the date when the combining
entities or businesses first came under the common control, where there is a shorter
period, regardless of the date of the common control combination.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 in the consolidated
financial statements to ensure consistency with the policies adopted by the Group.
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(b)
    
    Minority interestsMinority interests at the balance sheet date, being the portion of the net assets of
subsidiaries attributable to interests that are not owned by the Company, whether
directly or indirectly through subsidiaries, are presented in the consolidated
balance sheets and statements of changes in equity within equity, separately from
equity attributable to 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
shareholders 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.The Group applies a policy of treating transactions with minority interests as
transactions with parties external to the Group. Disposals to minority interests
result in gains or losses for the Group that are recorded in the consolidated
financial statements. Purchases from minority interests result in goodwill, being
the difference of any consideration paid and the relevant share of the carrying
value of the net assets of the subsidiary acquired.
 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, unrealized/realized loss on
changes in fair value of derivative component of convertible bonds and income tax expense,
whilst unallocated income represents interest income and other gains (including the tax
refund on reinvestment in a subsidiary) 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 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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For the convenience of the reader, translation of amounts for RMB into United States
dollars (US$) has been made at the noon buying rate in New York city for cable transfer
payables in foreign currencies as certified for customers purposes by the Federal Reserve
Bank of New York on December 31, 2007 of US$1.00=RMB7.2946.
 2.5
    
    Property, Plant and EquipmentBuildings are stated at fair value, based on periodic valuations by external independent
valuers, less subsequent depreciation for buildings. The last external independent
valuations were performed on buildings 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. Other property, plant and
equipment, comprising leasehold improvements, 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 are charged to the statement of income
during the financial period in which they are incurred.Increases in the carrying amount arising from revaluation of buildings are credited to the
revaluation reserve in shareholders equity. Decreases that offset previous increases on
the same asset are charged against the revaluation reserve directly in equity, all other
decreases are charged to the statement of income. Upon the disposal or retirement of
revaluated buildings, the realized portion of the revaluation reserve is transferred from
the revaluation reserve to retained profits.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
    
    5  15 years
    
    
    3
    %Office furniture, fixtures and others
    
    5  7 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.
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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).Gain or loss on disposal of a property, plant or equipment are determined by comparing the
net sales proceeds with the carrying amounts, and are recognized within general,
administrative and other expenses in the statement of income. When revalued assets are
sold, the amounts included in the revaluation reserve are transferred to retained profits.
 2.6
    
    Goodwill
 Goodwill represents the excess of the cost of an acquisition over the fair value of the
Groups share of the net identifiable assets of the acquired subsidiaries at the date of
acquisition. Goodwill is tested annually for impairment and carried at cost less
accumulated impairment losses. Impairment losses on goodwill are not reversed. Gain or
loss on the disposal of an entity includes the carrying amount of goodwill relating to the
entity sold.Goodwill is allocated to cash-generating units for the purpose of impairment testing. The
allocation is made to those cash-generating units or groups of cash-generating units that
are expected to benefit from the business combination in which the goodwill arose. The
Group has allocated goodwill to the GSM Business and the CDMA Business which it operates
(Note 2.8).
 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 rental for premises and leased lines; and
(v) prepayment for land use right.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 prepayment for land use rights are amortized over the period of the lease on a
straight-line basis.
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2.8
    
    Impairment of Non-Financial 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
are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. An impairment loss is recognized for the amount by
which the assets carrying amount exceeds its recoverable amount. The recoverable amount
is the higher of (i) an assets fair value less costs to sell and (ii) value in use. For
the purposes of assessing impairment, assets are grouped at the lowest levels for which
there are separately identifiable cash flows (cash-generating units). Assets other than
goodwill that suffered from impairment are reviewed for possible reversal of the
impairment at each reporting date.
 2.9
    
    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 CDMA handsets 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 initially at fair value and
subsequently measured at amortized cost using the effective interest method, 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 within
general, administrative and other expenses in the statement of income. When a receivable
is proven to be uncollectible with sufficient evidence, it is written off against the
provision account for receivables. Subsequent recoveries of amounts previously written off
are credited against general, administrative and other expenses in 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 3 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 did 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, was 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
occurred. The remainder of the proceeds was allocated to the debt element of the bonds,
net of transaction costs, and was recorded as the liability component. The liability
component was subsequently carried at amortized cost until extinguished on conversion or
redemption. Interest expense was calculated using the effective interest method by
applying the effective interest rate to the liability component through the maturity date.On August 20, 2007, all of the convertible bonds were converted (Note 18). When the
convertible bonds were converted, the carrying amounts of the derivative and liability
components were transferred to share capital and share premium as consideration for the
shares issued.2.14
    
    Deferred Revenue and Advance 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, other calling cards and 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.
 2.15
    
    BorrowingsBorrowings are recognized initially at fair value, net of transaction costs incurred.
Borrowings are subsequently stated at amortized cost, any difference between the proceeds
(net of transaction costs) and the redemption value is recognized in the statement of
income over the period of the borrowings using the effective interest method.Borrowings are classified as current liabilities unless the Group has an unconditional
right to defer settlement of the liability for at least 12 months after the balance sheet
date.
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2.16
    
    Employee Benefits
 (a)
    
    Retirement benefitsThe Group participates in defined contribution pension schemes. For 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). However, non-market vesting conditions are considered in determining the
number of options that are expected to vest. At each balance sheet date, the Group
revises its estimates of the number of share options that are expected to 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. The corresponding employee share-based compensation reserve is
transferred to share premium.
 2.17
    
    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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2.18
    
    Revenue RecognitionRevenue 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 sales within the Group.The Group recognizes revenue when the amount of revenue can be reliably measured, it is
probable that future economic benefits will flow to the entity and specific criteria have
been met for each of the Groups activities as described below. The amount of revenue is
not considered to be reliably measurable until all contingencies relating to the sale have
been resolved. The Group bases its estimates on historical results, taking into
consideration the type of customer, the type of transaction and the specifics of each
arrangement.
 (a)
    
    Sales of services and goods
 
    
    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, CDMA 1X wireless
data services and secretarial services to subscribers, are recognized when
service is rendered;
    
    Standalone sales of telecommunications products, which mainly represent
handsets and accessories, are recognized when title has been passed to the
buyers; and
    
    For CDMA promotional package where CDMA handsets are provided to subscribers
for their use during a specified contract period (Note 4.2(a)), since the
commercial substance of the transaction is to develop new contractual
subscribers by offering handsets, the two elements of CDMA cellular services
and handsets are considered as a linked transaction. Service revenues from such
promotional package are recognized based upon actual usage of cellular service
at the tariffs set out in the contracts. The costs of CDMA handsets are
considered as subscriber acquisition costs, which are deferred and amortized
over the specified contract period (refer to Note 2.7).
 (b)
    
    Interest incomeInterest income from deposits in banks or other financial institutions is recognized
on a time proportion basis, using the effective interest method.
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(c)
    
    Dividend incomeDividend income is recognized when the right to receive payment is established.
 2.19
    
    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), including
long-term prepayment for land use rights, are expensed in the statement of income on
a straight-line basis over the period of the lease.(b)
    
    Finance leaseLeases of assets where the Group has substantially all the risks and rewards of
ownership are classified as finance leases. Finance leases are capitalized at the
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
implicit in the lease payment is recognized in the statement of income over the
lease period so as to produce a constant periodic rate of interest on the remaining
balance of the liability for each period.
 2.20
    
    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.2.21
    
    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.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.
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The amount of borrowing costs capitalized during a period should not exceed the amount of
borrowing cost incurred during that period. Other borrowing costs are recognized as
expenses when incurred.
 2.22
    
    Taxation
 (a)
    
    Current income taxThe current income tax charge is calculated on the basis of the tax laws enacted or
substantively enacted at the balance sheet date in the countries where the Company
and its subsidiaries operate and generate taxable income. Management periodically
evaluates positions taken in tax returns with respect to situations in which
applicable tax regulation is subject to interpretation and establishes provisions
where appropriate on the basis of the amount expected to be paid to the tax
authorities.(b)
    
    Deferred income 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.
 2.23
    
    Government GrantsGovernment grants are recognized at their fair values where there is a reasonable
assurance that the grant will be received and the Group will comply with all attached
conditions. Grants relating to assets are included in non-current liabilities, which are
credited to the statement of income on a straight-line basis over the expected lives of
the related assets. Grants relating to costs are deferred and recognized in the statement
of income over the period necessary to match them with the costs that they are intended to
compensate.2.24
    
    Dividend DistributionDividend distribution to the Companys shareholders is recognized as a liability in the
Companys financial statements in the period in which the dividends are approved by the
Companys shareholders.2.25
    
    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.
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2.26
    
    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 earnings 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 risk), credit
risk and liquidity risk. The Groups overall risk management program focuses on the
unpredictability of financial markets and seeks to minimize potential adverse effects on
the Groups financial performance.Financial risk management is carried out by the Groups finance department at its
headquarters, following the overall 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).
The Group is exposed to foreign exchange risk arising from various currency
exposures, primarily with respect to US dollars and HK dollars. Exchange risk
exists with respect to the repayment of indebtedness to foreign lenders,
payables to equipment suppliers and contractors and dividends to equity
holders.
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The Groups finance department at its headquarters is responsible for
monitoring the amount of monetary assets and liabilities denominated in foreign
currencies. As of December 31, 2007, the Group had only approximately USD0.5
billion (2006: approximately USD1.0 billion) bank loans after having repaid
long-term bank borrowings amounting to approximately USD0.5 billion during
2007. The Group also had cash and cash equivalents and short-term bank deposits
of approximately USD119 million (2006: approximately USD501 million) and
approximately HKD465 million (2006: approximately HKD664 million). Considering
the gradual appreciation of RMB against both HK dollars and US dollars which is
expected to continue and the amount of foreign monetary liabilities were
greater than that of foreign monetary assets as of December 31, 2007, the
management is of the view that the foreign exchange risk is not significant.
  ii)
    
    Cash flow and fair value interest rate riskThe Groups interest-bearing assets are mainly represented by bank deposits,
management does not expect the changes in market deposit interest rates will
have significant impact on the financial statements as the deposits are all
short-term in nature and the interest involved will not be significant.The Groups interest rate risk arises from long-term bank loans and liability
component of convertible bonds (which was fully converted on August 20, 2007).
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. The
Group determines the amount of its fixed rate or floating rate borrowings
depending on the prevailing market conditions. During 2006 and 2007, the
Groups borrowings were mainly at variable rates and were mainly denominated in
US dollars (refer to Note 17).Increases in interest rates will increase the cost of new borrowing and the
interest expense with respect to the Groups outstanding floating rate
borrowings, and therefore could have a material adverse effect on the Groups
financial position. From time to time, the Group may enter into interest rate
swap agreements designed to mitigate its exposure to interest rate risks in
connection with the floating rate borrowings, although the Group did not
consider it necessary to do so in 2006 and 2007.As of December 31, 2007, the Group had approximately RMB200 million (2006:
approximately RMB315 million) of long-term bank loans at fixed rates and while
approximately RMB3,652 million (2006: approximately RMB7,809 million) of
long-term bank loans at floating rates. There were no balances outstanding for
short-term bonds (2006: approximately RMB7,087 million) and the liability
component of convertible bonds (2006: approximately RMB7,117 million) as of
December 31, 2007.For the year ended December 31, 2007, if interest rates on the floating rate
borrowings had been 10% higher/lower while all other variables are held
constant, the interest expenses would have been increased/decreased by
approximately RMB49 million (2006: approximately RMB59 million).
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(b)
    
    Credit riskCredit risk is managed on a group basis. Credit risk arises from cash and cash
equivalents and short-term bank deposits with banks in Hong Kong, as well as credit
exposures to corporate customers, individual subscribers, related parties and other
operators.The table below shows the bank deposits and cash and cash equivalents balances held
at the major banks as of December 31, 2006 and 2007:
 2006
    
    2007Short-term bank depositsState-owned banks
    
    
    21,432
    
    
    
    527,885Other banks
    
    
    174,388
    
    
    
    116,131195,820
    
    
    
    644,016Cash and cash equivalentsState-owned banks
    
    
    12,055,646
    
    
    
    6,525,506Other banks
    
    
    187,545
    
    
    
    149,97012,243,191
    
    
    
    6,675,476
    (c)
    
    Liquidity riskPrudent liquidity risk management includes maintaining sufficient cash and
availability of funds including short-term bank loans and the issuance of bonds. Due
to the dynamic nature of the underlying businesses, the Groups finance department
at its headquarters maintains flexibility in funding through having adequate amount
of cash and cash equivalents and utilizing different sources of financing when
necessary.
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The table below analyses the Groups bank loans, convertible bonds and obligations
under finance lease (including interest to be accrued) into relevant maturity
groupings based on the remaining period from the balance sheet to the contractual
maturity date. The amounts disclosed in the table are the contractual undiscounted
cash flows. Balances due within 12 months approximated the carrying balances, as the
impact of discounting is not significant. Except for the amounts presented below,
all other financial liabilities are due within 12 months.
 Between 1 and 2
    
    Between 2 and 5Less than 1 year
    
    years
    
    years
    
    Over 5 yearsAt December 31, 2006Bank loans
    
    
    4,272,004
    
    
    
    2,583,182
    
    
    
    1,936,621
    
    
    
    Convertible bonds
    
    
    
    
    
    
    
    
    
    
    8,141,351
    
    
    
    Obligations under finance lease
    
    
    105,101
    
    
    
    8,059
    
    
    
    2,639
    
    
    
    584,377,105
    
    
    
    2,591,241
    
    
    
    10,080,611
    
    
    
    58At December 31, 2007Bank loans
    
    
    2,360,140
    
    
    
    80,830
    
    
    
    1,726,022
    
    
    
    Obligations under finance lease
    
    
    1,520
    
    
    
    1,824
    
    
    
    2,264
    
    
    
    2,361,660
    
    
    
    82,654
    
    
    
    1,728,286
    
    
    
    
 3.2
    
    Capital risk managementThe Groups objectives when managing capital are:
 
    
    To safeguard the Groups ability to continue as a going concern in order to
provide returns for shareholders and benefits for other stakeholders.
    
    To support the Groups stability and growth.
    
    To provide capital for the purpose of strengthening the Groups risk management
capability.
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2006(As restated)
    
    2007Interest bearing debts:- Short-term bonds
    
    
    7,087,217
    
    
    
    - Long-term bank loans
    
    
    4,139,349
    
    
    
    1,660,921- Convertible bonds
    
    
    10,324,949
    
    
    
    - Obligations under finance leases
    
    
    10,230
    
    
    
    3,882- Current portion of long-term bank loans
    
    
    3,984,350
    
    
    
    2,191,382- Current portion of obligations under finance leases
    
    
    100,004
    
    
    
    1,44825,646,099
    
    
    
    3,857,633Minority interest
    
    
    2,841
    
    
    
    3,914Interest bearing debts plus minority interest
    
    
    25,648,940
    
    
    
    3,861,547Total equity:- Capital and reserves attributable to
the Companys equity holders
    
    
    79,861,324
    
    
    
    97,213,180- Minority interest
    
    
    2,841
    
    
    
    3,914Interest bearing debts plus total equity
    
    
    105,510,264
    
    
    
    101,074,727Debt-to-capitalization ratio
    
    
    24.3
    %
    
    
    3.8
    %
  3.3
    
    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 and conversion date, refer to Note 18 for details.The carrying value of trade receivables (net of impairment provision) and payables 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 judgments are continually evaluated and are based on historical experience and
other factors, including expectations of future events that are believed to be reasonable under
the circumstances.
 4.1
    
    Critical accounting estimates and assumptionsThe Group makes estimates and assumptions concerning the future. The resulting accounting
estimates 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, 2007
amounted to approximately RMB231.1 billion (2006: approximately RMB208.3 billion)
and approximately RMB114.9 billion (2006: approximately RMB95.6 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 any significant change in managements assumptions, including discount
rates or growth rates in the future cash flow projection, the estimated recoverable
amounts of the non-current assets and the Groups results would be significantly
affected.(c)
    
    Provision for doubtful debtsAccounts receivables are recognized initially at fair value and subsequently
measured at amortized cost using the effective interest method, less provision for
impairment. The Group evaluates specific accounts receivable where there are
indications that the receivable may be doubtful or is not collectible. The Group
records a provision based on its best estimates to reduce the receivable balance to
the amount that is expected to be collected. For the remaining receivable balances
as of each reporting date, the Group makes a provision based on observable data
indicating that there is a measurable decrease in the estimated future cash flows
from the remaining balances. The Group makes such estimates based on its past
experience, historical collection patterns, subscribers 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.
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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, rather than
as 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 approximately RMB634
million as of December 31, 2007 (2006: approximately RMB556 million). As the Group
has no adequate stabilized and reliable historical redemption statistics in the
past, the Group may need to re-assess the method for accounting for the bonus point
reward program when they are available in future or upon the adoption of
HK(IFRIC)-Int 13 which is effective from January 1, 2009.(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 temporary differences which give rise to deferred tax assets, the Group has
assessed the likelihood that the deferred tax assets could be recovered. Major
deferred tax assets relate to provision for doubtful debts, accruals of expenses not
yet deductible for tax purpose and write-down of inventory to net realizable value.
Due to the effects of these temporary differences on income tax, the Group has
recorded net deferred tax assets amounting to approximately RMB427 million as of
December 31, 2007 (2006: approximately RMB310 million). 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.
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(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 bond was
issued with a conversion price of HKD8.63 and was fully converted into the Companys shares on August 20, 2007. The embedded conversion option of the convertible bonds
has been separated from the host debt contract and accounted for as a derivative
liability carried at fair value through profit or loss (Note 18). 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 judgment to select an appropriate
valuation method and makes assumptions that are mainly based on market conditions
existing at each balance sheet date and conversion 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. From December 31, 2006 to August 20, 2007, the realized loss resulting
from changes in fair value of the conversion option of the convertible bonds was
approximately RMB569 million (2006: unrealized loss of approximately RMB2,397
million).
 4.2
    
    Critical judgements in applying the Group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 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 to them 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 relatively 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 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
reviews of historical subscriber churn rates and estimated default rates. Based on
the Groups current assessment and evaluation, the Group believes that the carrying
amounts of the deferred customer acquisition costs as of the balance sheet date
could be recovered.
  (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, telecommunications technology or regulatory environment, the amount and
timing of recognition of these deferred direct incremental costs and deferred
revenue would also be changed.The weighted average customer service period of Cellular Business based on current
estimation after considering the prevailing market environment is approximately 3
years from January 1, 2007 onwards (2006: approximately 4 years). The effects of the
change of accounting estimate in expected weighted average customer service period
is to decrease both the deferred revenue and other assets by approximately RMB506
million each as of December 31, 2007 and increase both the amortization of deferred
revenue and the amortization of other assets by approximately RMB506 million each
for the year ended December 31, 2007.
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(c)
    
    Lease of CDMA network capacityPursuant to a CDMA lease agreement signed by the Group with Unicom Group and 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 Agreement, 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 the 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 with reference to 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 conditions 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 it would exercise the purchase
option in future. Given these uncertainties and due to the fact that the risks
associated with the ownership of the 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 expected 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. The lease period under 2005 CDMA Lease Agreement was effective
from January 1, 2005 to December 31, 2006. 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 at that time still considered the risks
associated with the ownership of the CDMA assets substantially remained with Unicom
Group and Unicom New Horizon, and concluded the leasing of the CDMA network 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 business income before taxation of the lessee for
the relevant year is less than the audited CDMA business income before
taxation of the lessee for the year 2006 as set out in the relevant annual
audited financial statements of the lessee.
    F-37




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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 capacity 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.
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5.1
    
    Business Segments
 20062007
    
    (As restated)Data 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
    
    
    35,111,665
    
    
    
    13,941,247
    
    
    
    1,712,831
    
    
    
    352,081
    
    
    
    
    
    
    
    
    
    
    
    51,117,824
    
    
    
    34,067,003
    
    
    
    15,085,577
    
    
    
    1,769,012
    
    
    
    63,340
    
    
    
    
    
    
    
    
    
    
    
    50,984,932Monthly fee
    
    
    6,965,329
    
    
    
    4,574,887
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,540,216
    
    
    
    7,437,095
    
    
    
    5,122,008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,559,103Interconnection revenue
    
    
    6,022,826
    
    
    
    2,066,187
    
    
    
    36,300
    
    
    
    476,803
    
    
    
    
    
    
    
    
    
    
    
    8,602,116
    
    
    
    4,921,363
    
    
    
    1,759,293
    
    
    
    39,758
    
    
    
    389,375
    
    
    
    
    
    
    
    
    
    
    
    7,109,789Leased lines rental
    
    
    
    
    
    
    
    
    
    
    535,832
    
    
    
    670,866
    
    
    
    
    
    
    
    
    
    
    
    1,206,698
    
    
    
    
    
    
    
    
    
    
    
    472,475
    
    
    
    557,270
    
    
    
    
    
    
    
    
    
    
    
    1,029,745Value-added service revenue
    
    
    13,528,197
    
    
    
    6,413,204
    
    
    
    331,133
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,272,534
    
    
    
    11,597,432
    
    
    
    5,375,579
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,973,011Other revenue
    
    
    1,147,287
    
    
    
    734,715
    
    
    
    9,757
    
    
    
    7,751
    
    
    
    
    
    
    
    
    
    
    
    1,899,510
    
    
    
    1,859,345
    
    
    
    534,018
    
    
    
    39,147
    
    
    
    4,565
    
    
    
    
    
    
    
    
    
    
    
    2,437,075Total services revenue
    
    
    62,775,304
    
    
    
    27,730,240
    
    
    
    2,625,853
    
    
    
    1,507,501
    
    
    
    
    
    
    
    
    
    
    
    94,638,898
    
    
    
    59,882,238
    
    
    
    27,876,475
    
    
    
    2,320,392
    
    
    
    1,014,550
    
    
    
    
    
    
    
    
    
    
    
    91,093,655Sales of telecommunications products
    
    
    11,521
    
    
    
    4,888,282
    
    
    
    677
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    4,900,489
    
    
    
    8,166
    
    
    
    4,243,594
    
    
    
    1,900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,253,660Total revenue from external
customers
    
    
    62,786,825
    
    
    
    32,618,522
    
    
    
    2,626,530
    
    
    
    1,507,510
    
    
    
    
    
    
    
    
    
    
    
    99,539,387
    
    
    
    59,890,404
    
    
    
    32,120,069
    
    
    
    2,322,292
    
    
    
    1,014,550
    
    
    
    
    
    
    
    
    
    
    
    95,347,315Intersegment revenue
    
    
    
    
    
    
    
    
    
    
    2,186,120
    
    
    
    1,705,045
    
    
    
    
    
    
    
    (3,891,165
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,033,392
    
    
    
    1,836,887
    
    
    
    
    
    
    
    (4,870,279
    )
    
    
    Total revenue
    
    
    62,786,825
    
    
    
    32,618,522
    
    
    
    4,812,650
    
    
    
    3,212,555
    
    
    
    
    
    
    
    (3,891,165
    )
    
    
    99,539,387
    
    
    
    59,890,404
    
    
    
    32,120,069
    
    
    
    5,355,684
    
    
    
    2,851,437
    
    
    
    
    
    
    
    (4,870,279
    )
    
    
    95,347,315Leased lines and network capacities
    
    
    (235,722
    )
    
    
    (8,486,539
    )
    
    
    (396,148
    )
    
    
    (49,195
    )
    
    
    
    
    
    
    32,107
    
    
    
    (9,135,497
    )
    
    
    (244,896
    )
    
    
    (8,348,151
    )
    
    
    (303,858
    )
    
    
    (64,785
    )
    
    
    
    
    
    
    18,691
    
    
    
    (8,942,999
    )Interconnection charges
    
    
    (10,021,694
    )
    
    
    (3,553,441
    )
    
    
    (319,282
    )
    
    
    (871,460
    )
    
    
    
    
    
    
    3,859,058
    
    
    
    (10,906,819
    )
    
    
    (9,580,077
    )
    
    
    (3,533,740
    )
    
    
    (481,528
    )
    
    
    (927,468
    )
    
    
    
    
    
    
    4,851,588
    
    
    
    (9,671,225
    )Depreciation and amortization
    
    
    (19,057,783
    )
    
    
    (630,829
    )
    
    
    (2,286,406
    )
    
    
    (701,779
    )
    
    
    (370
    )
    
    
    
    
    
    
    (22,677,167
    )
    
    
    (18,877,780
    )
    
    
    (718,467
    )
    
    
    (2,419,598
    )
    
    
    (670,191
    )
    
    
    (532
    )
    
    
    
    
    
    
    (22,686,568
    )Employee benefit expenses
    
    
    (4,411,785
    )
    
    
    (1,777,553
    )
    
    
    (509,627
    )
    
    
    (245,845
    )
    
    
    (195,178
    )
    
    
    
    
    
    
    (7,139,988
    )
    
    
    (4,160,376
    )
    
    
    (1,537,816
    )
    
    
    (527,358
    )
    
    
    (272,653
    )
    
    
    (182,476
    )
    
    
    
    
    
    
    (6,680,679
    )Selling and marketing
    
    
    (9,878,991
    )
    
    
    (8,912,742
    )
    
    
    (631,987
    )
    
    
    (257,625
    )
    
    
    (27
    )
    
    
    
    
    
    
    (19,681,372
    )
    
    
    (9,415,055
    )
    
    
    (9,248,734
    )
    
    
    (683,402
    )
    
    
    (224,078
    )
    
    
    (61
    )
    
    
    
    
    
    
    (19,571,330
    )General, administrative and other
expenses
    
    
    (10,098,930
    )
    
    
    (3,263,971
    )
    
    
    (744,068
    )
    
    
    (504,450
    )
    
    
    (27,943
    )
    
    
    
    
    
    
    (14,639,362
    )
    
    
    (9,562,494
    )
    
    
    (2,896,574
    )
    
    
    (797,130
    )
    
    
    (259,900
    )
    
    
    (27,293
    )
    
    
    
    
    
    
    (13,543,391
    )Cost of telecommunications products sold
    
    
    (229,199
    )
    
    
    (4,800,842
    )
    
    
    (1,651
    )
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    (5,031,706
    )
    
    
    (189,692
    )
    
    
    (4,718,968
    )
    
    
    (6,197
    )
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    
    (4,914,876
    )Finance gains/(costs)
    
    
    134,162
    
    
    
    (15,159
    )
    
    
    20,236
    
    
    
    15,325
    
    
    
    (723,868
    )
    
    
    656,312
    
    
    
    87,008
    
    
    
    (475,571
    )
    
    
    (51,656
    )
    
    
    (35,512
    )
    
    
    (54,229
    )
    
    
    (467,026
    )
    
    
    424,362
    
    
    
    (659,632
    )Interest income
    
    
    107,060
    
    
    
    14,865
    
    
    
    16,863
    
    
    
    5,286
    
    
    
    698,481
    
    
    
    (656,312
    )
    
    
    186,243
    
    
    
    127,046
    
    
    
    6,903
    
    
    
    12,483
    
    
    
    2,323
    
    
    
    539,149
    
    
    
    (424,362
    )
    
    
    263,542Realized/unrealized loss on changes in
fair value of derivate component of
convertible bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (568,860
    )
    
    
    
    
    
    
    (568,860
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,396,592
    )
    
    
    
    
    
    
    (2,396,592
    )Other gains (loss)  net
    
    
    131,582
    
    
    
    7,197
    
    
    
    950
    
    
    
    2,194
    
    
    
    2,781,237
    
    
    
    
    
    
    
    2,923,160
    
    
    
    23,513
    
    
    
    982
    
    
    
    246
    
    
    
    (3,409
    )
    
    
    15
    
    
    
    
    
    
    
    21,347Segment income (loss) before income tax
    
    
    9,225,525
    
    
    
    1,199,508
    
    
    
    (38,470
    )
    
    
    604,992
    
    
    
    1,963,472
    
    
    
    
    
    
    
    12,955,027
    
    
    
    7,535,022
    
    
    
    1,073,848
    
    
    
    113,830
    
    
    
    377,028
    
    
    
    (2,534,816
    )
    
    
    
    
    
    
    6,564,912Income tax expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,654,170
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,763,885
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,300,857
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,801,027Attributable to:Equity holders of the Company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,299,784
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,800,920Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,073
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1079,300,857
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,801,027Other information:Provision for doubtful debts
    
    
    1,257,670
    
    
    
    395,263
    
    
    
    45,916
    
    
    
    28,160
    
    
    
    
    
    
    
    
    
    
    
    1,727,009
    
    
    
    1,133,690
    
    
    
    460,515
    
    
    
    106,883
    
    
    
    52,827
    
    
    
    
    
    
    
    
    
    
    
    1,753,915Capital expenditures for segment
assets (a)
    
    
    16,492,453
    
    
    
    
    
    
    
    2,223,724
    
    
    
    2,744,467
    
    
    
    4,257,277
    
    
    
    
    
    
    
    25,717,921
    
    
    
    10,822,935
    
    
    
    
    
    
    
    2,500,814
    
    
    
    2,640,789
    
    
    
    5,827,151
    
    
    
    
    
    
    
    21,791,689December 31, 2006December 31, 2007
    
    (As restated)Data 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
    
    TotalTotal segment assets
    
    
    107,735,724
    
    
    
    9,885,462
    
    
    
    7,985,260
    
    
    
    17,573,749
    
    
    
    56,499,840
    
    
    
    (50,257,665
    )
    
    
    149,422,370
    
    
    
    108,993,645
    
    
    
    7,876,684
    
    
    
    8,300,155
    
    
    
    16,810,768
    
    
    
    56,477,257
    
    
    
    (50,161,795
    )
    
    
    148,296,714Total segment liabilities
    
    
    32,947,282
    
    
    
    9,100,579
    
    
    
    2,526,811
    
    
    
    3,831,729
    
    
    
    3,798,875
    
    
    
    
    
    
    
    52,205,276
    
    
    
    39,529,979
    
    
    
    8,137,358
    
    
    
    2,801,914
    
    
    
    3,673,741
    
    
    
    14,289,557
    
    
    
    
    
    
    
    68,432,549
 F-39




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##### Table of Contents



2005(As restated)Data and
    
    LongGSM
    
    CDMA
    
    Internet
    
    Distance
    
    UnallocatedBusiness
    
    Business
    
    Business
    
    Business
    
    Amounts
    
    Elimination
    
    TotalRevenue (Turnover):Usage fee
    
    
    32,449,378
    
    
    
    17,085,257
    
    
    
    2,539,310
    
    
    
    598,455
    
    
    
    
    
    
    
    
    
    
    
    52,672,400Monthly fee
    
    
    6,918,294
    
    
    
    5,001,299
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,919,593Interconnection revenue
    
    
    3,459,137
    
    
    
    1,408,114
    
    
    
    55,626
    
    
    
    408,112
    
    
    
    
    
    
    
    
    
    
    
    5,330,989Leased lines rental
    
    
    
    
    
    
    
    
    
    
    392,426
    
    
    
    464,430
    
    
    
    
    
    
    
    
    
    
    
    856,856Value-added service revenue
    
    
    7,997,417
    
    
    
    4,155,779
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,153,196Other revenue
    
    
    1,793,885
    
    
    
    438,193
    
    
    
    12,745
    
    
    
    776
    
    
    
    
    
    
    
    
    
    
    
    2,245,599Total services revenue
    
    
    52,618,111
    
    
    
    28,088,642
    
    
    
    3,000,107
    
    
    
    1,471,773
    
    
    
    
    
    
    
    
    
    
    
    85,178,633Sales of telecommunications
products
    
    
    3,116
    
    
    
    2,840,868
    
    
    
    7,226
    
    
    
    8,090
    
    
    
    
    
    
    
    
    
    
    
    2,859,300Total revenue from external
customers
    
    
    52,621,227
    
    
    
    30,929,510
    
    
    
    3,007,333
    
    
    
    1,479,863
    
    
    
    
    
    
    
    
    
    
    
    88,037,933Intersegment revenue
    
    
    
    
    
    
    
    
    
    
    2,603,102
    
    
    
    1,242,331
    
    
    
    
    
    
    
    (3,845,433
    )
    
    
    Total revenue
    
    
    52,621,227
    
    
    
    30,929,510
    
    
    
    5,610,435
    
    
    
    2,722,194
    
    
    
    
    
    
    
    (3,845,433
    )
    
    
    88,037,933Leased lines and network
capacities
    
    
    (267,703
    )
    
    
    (8,201,561
    )
    
    
    (369,644
    )
    
    
    (88,349
    )
    
    
    
    
    
    
    26,772
    
    
    
    (8,900,485
    )Interconnection charges
    
    
    (7,283,120
    )
    
    
    (3,408,834
    )
    
    
    (600,462
    )
    
    
    (962,378
    )
    
    
    
    
    
    
    3,818,661
    
    
    
    (8,436,133
    )Depreciation and amortization
    
    
    (17,578,502
    )
    
    
    (617,342
    )
    
    
    (1,886,178
    )
    
    
    (551,045
    )
    
    
    (1,452
    )
    
    
    
    
    
    
    (20,634,519
    )Employee benefits expenses
    
    
    (3,570,445
    )
    
    
    (1,193,545
    )
    
    
    (492,376
    )
    
    
    (297,160
    )
    
    
    (99,494
    )
    
    
    
    
    
    
    (5,653,020
    )Selling and marketing
    
    
    (7,604,010
    )
    
    
    (11,488,224
    )
    
    
    (1,386,790
    )
    
    
    (315,791
    )
    
    
    
    
    
    
    
    
    
    
    (20,794,815
    )General, administrative and
other expenses
    
    
    (8,120,711
    )
    
    
    (2,585,071
    )
    
    
    (867,670
    )
    
    
    (259,705
    )
    
    
    (21,871
    )
    
    
    
    
    
    
    (11,855,028
    )Cost of telecommunications
products sold
    
    
    (81,302
    )
    
    
    (3,575,782
    )
    
    
    (16,315
    )
    
    
    (434
    )
    
    
    
    
    
    
    
    
    
    
    (3,673,833
    )Finance costs
    
    
    (970,737
    )
    
    
    (48,762
    )
    
    
    (37,043
    )
    
    
    (66,787
    )
    
    
    (223,682
    )
    
    
    213,773
    
    
    
    (1,133,238
    )Interest income
    
    
    69,005
    
    
    
    9,190
    
    
    
    2,915
    
    
    
    3,807
    
    
    
    229,663
    
    
    
    (213,773
    )
    
    
    100,807Other gains (loss), net
    
    
    25,708
    
    
    
    9,064
    
    
    
    65
    
    
    
    229
    
    
    
    (3
    )
    
    
    
    
    
    
    35,063Segment income (loss) before
income tax
    
    
    7,239,410
    
    
    
    (171,357
    )
    
    
    (43,063
    )
    
    
    184,581
    
    
    
    (116,839
    )
    
    
    
    
    
    
    7,092,732Income tax expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,170,411
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,922,321Attributable to:Equity holders of the Company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,922,087Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2344,922,321Other information:Provision for doubtful debts
    
    
    882,335
    
    
    
    463,169
    
    
    
    139,327
    
    
    
    33,868
    
    
    
    
    
    
    
    
    
    
    
    1,518,699Capital expenditures for
segment assets (a)
    
    
    7,471,634
    
    
    
    
    
    
    
    1,962,796
    
    
    
    2,162,637
    
    
    
    6,154,335
    
    
    
    
    
    
    
    17,751,402December 31, 2005(As restated)Data and
    
    LongGSM
    
    CDMA
    
    Internet
    
    Distance
    
    UnallocatedBusiness
    
    Business
    
    Business
    
    Business
    
    Amounts
    
    Elimination
    
    TotalTotal segment assets
    
    
    109,392,304
    
    
    
    4,409,969
    
    
    
    7,518,912
    
    
    
    17,794,349
    
    
    
    55,667,580
    
    
    
    (50,161,795
    )
    
    
    144,621,319Total segment liabilities
    
    
    46,749,117
    
    
    
    6,185,964
    
    
    
    2,519,018
    
    
    
    4,973,134
    
    
    
    7,523,596
    
    
    
    
    
    
    
    67,950,829
 
 (a)
    
    Capital expenditures classified under Unallocated amounts represent capital expenditures
on common facilities, which benefit all business segments. F-40




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##### Table of Contents



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 headquarters 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 2005, 2006 and 2007, 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
 20062007
    
    (As restated)OfficeTele-
    
    furniture,communications
    
    fixtures and
    
    Leasehold
    
    Construction-Buildings
    
    equipment
    
    others
    
    Improvements
    
    in-progress
    
    Total
    
    TotalCost or valuation:Beginning of year
    
    
    14,803,953
    
    
    
    168,812,268
    
    
    
    9,674,505
    
    
    
    1,388,443
    
    
    
    13,670,239
    
    
    
    208,349,408
    
    
    
    189,027,732Additions
    
    
    171,943
    
    
    
    206,103
    
    
    
    364,650
    
    
    
    
    
    
    
    24,975,225
    
    
    
    25,717,921
    
    
    
    21,791,689Transfer from CIP
    
    
    1,461,030
    
    
    
    20,609,388
    
    
    
    1,181,800
    
    
    
    427,006
    
    
    
    (23,679,224
    )
    
    
    
    
    
    
    Revaluation surplus
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,330Reclassification
to other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (528,428
    )Disposals
    
    
    (75,865
    )
    
    
    (2,487,221
    )
    
    
    (237,219
    )
    
    
    (203,846
    )
    
    
    
    
    
    
    (3,004,151
    )
    
    
    (2,141,915
    )End of year
    
    
    16,361,061
    
    
    
    187,140,538
    
    
    
    10,983,736
    
    
    
    1,611,603
    
    
    
    14,966,240
    
    
    
    231,063,178
    
    
    
    208,349,408Representing:At cost
    
    
    3,829,030
    
    
    
    187,140,538
    
    
    
    10,983,736
    
    
    
    1,611,603
    
    
    
    14,966,240
    
    
    
    218,531,147
    
    
    
    195,817,377At valuation
    
    
    12,532,031
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,532,031
    
    
    
    12,532,03116,361,061
    
    
    
    187,140,538
    
    
    
    10,983,736
    
    
    
    1,611,603
    
    
    
    14,966,240
    
    
    
    231,063,178
    
    
    
    208,349,408Accumulated
depreciation and
impairment:Beginning of year
    
    
    3,568,448
    
    
    
    86,137,955
    
    
    
    5,031,750
    
    
    
    801,321
    
    
    
    14,307
    
    
    
    95,553,781
    
    
    
    75,227,572Charge for the year
    
    
    321,038
    
    
    
    19,866,791
    
    
    
    1,691,176
    
    
    
    281,328
    
    
    
    
    
    
    
    22,160,333
    
    
    
    22,263,719Disposals
    
    
    (62,917
    )
    
    
    (2,328,303
    )
    
    
    (218,035
    )
    
    
    (203,846
    )
    
    
    
    
    
    
    (2,813,101
    )
    
    
    (1,937,510
    )End of year
    
    
    3,826,569
    
    
    
    103,676,443
    
    
    
    6,504,891
    
    
    
    878,803
    
    
    
    14,307
    
    
    
    114,901,013
    
    
    
    95,553,781Net book value:End of year
    
    
    12,534,492
    
    
    
    83,464,095
    
    
    
    4,478,845
    
    
    
    732,800
    
    
    
    14,951,933
    
    
    
    116,162,165
    
    
    
    112,795,627Beginning of year
    
    
    11,235,505
    
    
    
    82,674,313
    
    
    
    4,642,755
    
    
    
    587,122
    
    
    
    13,655,932
    
    
    
    112,795,627
    
    
    
    113,800,160
 For the year ended December 31, 2007, interest expense of approximately RMB274 million (2005:
approximately RMB691 million; 2006: approximately RMB431 million) was capitalized to
construction-in-progress. The capitalized borrowing rate represents the cost of capital for
raising the related borrowings externally and varied from 3.60% to 5.80% for the year ended
December 31, 2007 (2005: 3.60% to 5.58%; 2006: 3.60% to 5.83%).
 F-41




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##### Table of Contents



Buildings of the Group were revalued at March 31, 2000 and August 31, 2006 respectively by
independent property valuation firms, using the replacement cost or open market value approach,
as appropriate. As of December 31, 2007, the accumulated revaluation surplus on the buildings
resulting from all previous revaluations of the buildings amounted to approximately RMB377
million. The revaluation surplus net of the related deferred income tax of approximately RMB76
million (2006: approximately RMB105 million) was credited to revaluation reserve in
shareholders equity. The additional depreciation attributable to the revaluation surplus
amounted to approximately RMB18.5 million for 2007 (2005: approximately RMB8.8 million; 2006:
approximately RMB8.8 million). As of December 31, 2007, the carrying value of buildings would
have been approximately RMB12,236 million (2006: approximately RMB10,989 million) had they been
stated at historical cost less accumulated depreciation. The directors of the Company consider
the fair values of these buildings were not materially different from their carrying values as
of December 31, 2007.Telecommunications equipment held under finance leases represents wireless public phone
equipment. As of December 31, 2007, net book value of wireless public phone equipment under
finance leases amounted to approximately RMB189 million (2006: approximately RMB231 million)
(Note 19).For the year ended December 31, 2007, the Group recognized loss on disposal of property, plant
and equipment of approximately RMB109 million (2005: approximately RMB25 million; 2006:
approximately RMB145 million).7.
    
    GOODWILL
 2006
    
    2007Cost:Goodwill arising from acquisitions
    
    
    3,143,983
    
    
    
    3,143,983
 Goodwill arising from the acquisitions of Unicom New Century Telecommunications Co., Ltd. and
Unicom New World Telecommunications Co., Ltd. in 2002 and 2003 respectively represented the
excess of the purchase considerations over the Groups shares of the fair values of the
separately identifiable net assets acquired prior to the adoption of HKFRS and AG 5 in 2005
(refer to Note 2.2(a)).Goodwill is allocated to the Groups cash-generating units (CGU) identified according to
business segments. The recoverable amount of goodwill is determined based on value in use
calculations. These calculations use discounted pre-tax cash flow projections based on financial
budgets approved by management, including expected profit margins, growth rates and the
applicable discount rates. Management determined expected profit margins based on past
performance and its expectations in relation to market developments. The expected growth rates
used are consistent with the forecasts of the business segments. The discount rates used are
pre-tax and reflect specific risks relating to the business. Based on managements assessment
results, there was no impairment of goodwill as of December 31, 2006 and 2007.
 F-42




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##### Table of Contents



8.
    
    OTHER ASSETS
 2006Note
    
    (As restated)
    
    2007Direct incremental costs for activating subscribers
    
    (a)
    
    
    2,260,728
    
    
    
    1,301,112Customer acquisition costs of contractual CDMA
subscribers
    
    (b)
    
    
    1,712,426
    
    
    
    2,349,225Long-term prepayment for land use rights
    
    (c)
    
    
    4,933,290
    
    
    
    5,881,167Purchased software
    
    (d)
    
    
    681,712
    
    
    
    1,020,673Prepaid rental for premises and leased lines
    
    
    
    
    1,006,252
    
    
    
    1,233,019Others
    
    (d)
    
    
    762,404
    
    
    
    1,070,00311,356,812
    
    
    
    12,855,199
 
 (a)
    
    For the year ended December 31, 2007, amortization of direct incremental costs for
activating GSM and CDMA subscribers amounted to approximately RMB1,527 million (2005:
approximately RMB1,595 million; 2006: approximately RMB1,829 million) (Note 25), which has
been included in selling and marketing expenses.(b)
    
    For the year ended December 31, 2007, amortization of the customer acquisition costs
of contractual CDMA subscribers amounted to approximately RMB4,000 million (2005:
approximately RMB6,065 million; 2006: approximately RMB4,375 million) (Note 25), which was
recorded in selling and marketing expenses. As of December 31, 2007, the carrying
amount of unamortized customer acquisition costs of contractual CDMA subscribers totaled
approximately RMB2,857 million (2006: approximately RMB2,170 million), with approximately
RMB2,349 million (2006: approximately RMB1,712 million) recorded in other assets (for
contracts expiring over 1 year) and approximately RMB508 million (2006: approximately
RMB458 million) recorded in prepayments and other current assets (for contracts expiring
within 1 year) (Note 12).(c)
    
    The Groups long-term prepayment for land use rights represents prepaid operating
lease payments for land use rights in Mainland China and their net book value is analyzed
as follows: 2006(As restated)
    
    2007Held on:Leases of between 10 to 50 years
    
    
    4,898,461
    
    
    
    5,836,838Leases of less than 10 years
    
    
    34,829
    
    
    
    44,3294,933,290
    
    
    
    5,881,167
 
 For the year ended December 31, 2007, the long-term prepayment for land use rights
expensed in the statement of income amounted to approximately RMB174 million (2005:
approximately RMB29 million; 2006: approximately RMB171 million), which was recorded in
general, administrative and other expenses.(d)
    
    For the year ended December 31, 2007, the amortization of purchased software and
others of other assets amounted to approximately RMB517 million (2005: approximately
RMB448 million; 2006: approximately RMB423 million) (Note 25). 
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##### Table of Contents



9.
    
    TAXATIONProvision for taxation represents:
 2005
    
    2006(As restated)
    
    (As restated)
    
    2007Provision for enterprise income tax on the estimated
taxable income for the year- Hong Kong
    
    
    1,063
    
    
    
    4,817
    
    
    
    5,916- Outside Hong Kong
    
    
    2,033,457
    
    
    
    2,838,365
    
    
    
    3,736,0212,034,520
    
    
    
    2,843,182
    
    
    
    3,741,937Deferred taxation
    
    
    135,891
    
    
    
    (79,297
    )
    
    
    (87,767
    )2,170,411
    
    
    
    2,763,885
    
    
    
    3,654,170
 (a)
    
    The Company did not have any assessable income sourced from Hong Kong for the years
ended December 31, 2005, 2006 and 2007.(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% (2005:
17.5%; 2006: 17.5%). The income tax liability of Unicom International amounted to
approximately RMB5.92 million for the year ended December 31, 2007 (2005: approximately
RMB1.06 million; 2006: approximately RMB4.82 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,
2005, 2006 and 2007 as there were no assessable income in these years.(d)
    
    Various provincial/municipal branches of CUCL 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, 2005, 2006 and 2007. The remaining
provincial branches were assessed at the statutory tax rate of 33%.(e)
    
    For the years ended December 31, 2005, 2006 and 2007, Unicom Huasheng
Telecommunications Technology Company Limited (Unicom Huasheng, a subsidiary of CUCL)
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.(f)
    
    Before the Business Combination became effective on December 31, 2007, Guizhou Busines
was operated by Guizhou branch of Unicom Group. The income tax of Guizhou branch of Unicom
Group was reported on a consolidated basis with Unicom Group and no separate tax return
was prepared. The accumulated tax losses incurred by Guizhou Business have not been fully
utilized by Unicom Group, therefore no income tax expenses were recognized for the Guizhou
Business in 2007 or prior years in accounting for the Guizhou Business using merger
accounting.In addition, in accordance with the relevant PRC tax laws and regulations, the accumulated
tax losses and other temporary differences associated with Guizhou Business carried
forward from prior years could not be utilized by CUCL upon the completion of the Business
Combination. Accordingly, deferred tax assets and liabilities were not recognized by CUCL
in the relevant periods presented in applying merger accounting to the Business
Combination of Guizhou Business.
 F-44




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##### Table of Contents



(g)
    
    Pursuant to the new PRC enterprise income tax law passed by the Tenth National
Peoples Congress of the PRC on March 16, 2007, the new enterprise income tax rates for
domestic and foreign enterprises established in Mainland China are unified at 25% and are
effective from January 1, 2008. However, for entities operating in special economic zones
that previously enjoyed preferential tax rates, the applicable tax rate will be increased
progressively to 25% over a five year period. As a result, the deferred tax balance has
been adjusted to reflect the tax rates that are expected to apply to the respective
periods when the asset is expected to be realized or the liability is expected to be
settled, resulting in a decrease of approximately RMB130 million of net deferred tax
assets in the balance sheet as of December 31, 2007 and approximately RMB154 million of
deferred taxation charged to the statement of income and approximately RMB24 million
deferred taxation credited to equity for the year ended December 31, 2007.(h)
    
    On December 6, 2007, the State Council issued the detail implementation regulations of
the new PRC enterprise income tax law. Pursuant to the regulations, a 5% withholding
income tax will be levied on dividends declared on or after January 1, 2008 by foreign
investment enterprises established in Mainland China to their foreign shareholders in Hong
Kong. Pursuant to a notice jointly issued by the Ministry of Finance and the State
Administration of Taxation on February 22, 2008, where foreign investment enterprises
declare dividends in 2008 and beyond out of their cumulative retained profits as of
December 31, 2007, such dividends are exempted from withholding income tax. For dividends
paid out of profits earned by foreign investment enterprises after January 1, 2008, the 5%
withholding income tax will be applicable, unless the investor is deemed as a PRC Tax
Resident Enterprise. Management is currently assessing the PRC Tax Resident Enterprises
status of the Company and the impact of this tax regulation on the Groups operations and
financial position effective from 2008.
 Reconciliation between applicable statutory tax rate and the effective tax rate:
 2005
    
    2006Note
    
    (As restated)
    
    (As restated)
    
    2007PRC statutory tax rate of 33%
    
    
    
    
    33.0
    %
    
    
    33.0
    %
    
    
    33.0
    %Non-deductible expenses
    
    
    
    
    1.8
    %
    
    
    1.8
    %
    
    
    1.1
    %Unrealized/Realized loss on changes in fair
value of derivative component of convertible
bonds
    
    
    
    
    
    
    
    
    12.0
    %
    
    
    1.4
    %Non-taxable income- Tax refund on reinvestment in a subsidiary
    
    24
    
    
    
    
    
    
    
    
    
    
    (7.1
    %)- Interest income
    
    
    
    
    
    
    
    
    (0.6
    %)
    
    
    (0.1
    %)- Connection fee
    
    
    
    
    (1.2
    %)
    
    
    (1.3
    %)
    
    
    - Line leasing income
    
    
    
    
    (0.1
    %)
    
    
    
    
    
    
    Accumulated tax losses and other temporary
differences of Guizhou Business not recognized
by the Group
    
    (f)
    
    
    
    
    
    
    (0.3
    %)
    
    
    (0.2
    %)Impact of PRC preferential tax rates
    
    
    
    
    (2.2
    %)
    
    
    (2.3
    %)
    
    
    (1.1
    %)Investment tax credits for domestic equipment
    
    
    
    
    (0.7
    %)
    
    
    (0.2
    %)
    
    
    Effect of change of tax rate under the new PRC
enterprise income tax law
    
    (g)
    
    
    
    
    
    
    
    
    
    
    1.2
    %Effective tax rate
    
    
    
    
    30.6
    %
    
    
    42.1
    %
    
    
    28.2
    %
 Tax effect of preferential tax rate is as follows:
 2005
    
    2006
    
    2007Aggregate amount (RMB in millions)
    
    
    155
    
    
    
    150
    
    
    
    148Per share effect (RMB)
    
    
    0.012
    
    
    
    0.012
    
    
    
    0.011
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##### Table of Contents



Deferred tax assets and liabilities are offset when there is a legally enforceable right to
offset tax assets against tax liabilities and when the deferred income taxes relate to the same
fiscal authority. The offset amounts are as follows:
 2006
    
    2007Deferred tax assets:- Deferred tax asset to be recovered after 12 months
    
    
    787,991
    
    
    
    461,902- Deferred tax asset to be recovered within 12 months
    
    
    887,636
    
    
    
    680,4521,675,627
    
    
    
    1,142,354Deferred tax liabilities:- Deferred tax liabilities to be settled after 12 months
    
    
    (1,051,774
    )
    
    
    (448,620
    )- Deferred tax liabilities to be settled within 12 months
    
    
    (314,185
    )
    
    
    (266,832
    )(1,365,959
    )
    
    
    (715,452
    )Net deferred tax assets after offsetting
    
    
    309,668
    
    
    
    426,902Deferred tax liabilities that cannot be offset
    
    
    (5,879
    )
    
    
    (5,864
    )
 There were no material unrecognized deferred tax assets as of December 31, 2006 and 2007.The movement of the net deferred tax assets/liabilities is as follows:
 2005
    
    2006
    
    2007Net deferred tax assets after offsetting :- Beginning of year
    
    
    468,774
    
    
    
    335,234
    
    
    
    309,668- Deferred tax (charged)/credited to the statement of income
    
    
    (133,540
    )
    
    
    79,563
    
    
    
    87,752- Deferred tax (charged)/credited to equity
    
    
    
    
    
    
    (105,129
    )
    
    
    29,482- End of year
    
    
    335,234
    
    
    
    309,668
    
    
    
    426,902The deferred tax liabilities that cannot be offset:- Beginning of year
    
    
    (3,262
    )
    
    
    (5,613
    )
    
    
    (5,879
    )- Deferred tax (charged)/credited to the statement of income
    
    
    (2,351
    )
    
    
    (266
    )
    
    
    15- End of year
    
    
    (5,613
    )
    
    
    (5,879
    )
    
    
    (5,864
    )
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Deferred taxation as of year-end represents the taxation effect of the following temporary
differences, taking into consideration the offsetting of balances related to the same fiscal
authority:
 Note
    
    2006
    
    2007Mainland ChinaDeferred tax assets:Interest on loans from CCF joint ventures
    
    (i)
    
    
    45,463
    
    
    
    23,129Loss arising from terminations of CCF
Arrangements
    
    (i)
    
    
    20,636
    
    
    
    Provision for doubtful debts
    
    
    
    
    492,920
    
    
    
    411,274Write-down of inventories to net realizable value
    
    
    
    
    32,858
    
    
    
    39,833Accruals of retirement benefits
    
    
    
    
    18,137
    
    
    
    12,993Additional depreciation deductible for tax in
future years
    
    
    
    
    6,315
    
    
    
    Monetary housing benefits
    
    
    
    
    12,607
    
    
    
    8,595Net amount of deferral and amortization of
upfront non-refundable revenue
    
    
    
    
    740,429
    
    
    
    321,936Accruals of expenses not yet deductible for tax
purpose
    
    
    
    
    232,863
    
    
    
    257,145Others
    
    
    
    
    73,399
    
    
    
    67,4491,675,627
    
    
    
    1,142,354Deferred tax liabilities:Net amount of capitalization and amortization of
direct incremental costs
    
    
    
    
    (740,429
    )
    
    
    (321,936
    )Capitalized interest already deducted for tax
purpose
    
    
    
    
    (520,401
    )
    
    
    (317,869
    )Revaluation of buildings
    
    6
    
    
    (105,129
    )
    
    
    (75,647
    )(1,365,959
    )
    
    
    (715,452
    )309,668
    
    
    
    426,902Hong KongDeferred tax liabilities:Accelerated depreciation for tax purpose
    
    
    
    
    (5,879
    )
    
    
    (5,864
    )
 
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##### Table of Contents



(i)
    
    Prior to 2000, in the process of developing its cellular networks, the GSM Business
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 were 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
 2006(As restated)
    
    2007Handsets
    
    
    1,489,132
    
    
    
    1,587,124Telephone cards
    
    
    531,407
    
    
    
    584,742Others
    
    
    353,332
    
    
    
    356,4982,373,871
    
    
    
    2,528,364
 The cost of inventories recognized as expense and included in cost of telecommunications
products sold amounted to approximately RMB5,032 million (2005: approximately RMB3,677 million;
2006: approximately RMB4,915 million).For the year ended December 31, 2007, the write-down of inventories to net realizable value
amounted to approximately RMB163 million (2005: approximately RMB19 million; 2006:
approximately RMB47 million), which was mainly due to the decline of market values of certain
handsets.
 F-48




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##### Table of Contents



11.
    
    ACCOUNTS RECEIVABLE, NET
 2006(As restated)
    
    
    2007Accounts receivable for GSM services
    
    
    3,486,610
    
    
    
    2,558,757Accounts receivable for CDMA services
    
    
    2,248,486
    
    
    
    1,637,100Accounts receivable for Data and Internet services
    
    
    323,369
    
    
    
    203,623Accounts receivable for Long Distance services
    
    
    458,402
    
    
    
    440,615Sub-total
    
    
    6,516,867
    
    
    
    4,840,095Less: Provision for doubtful debts for GSM services
    
    
    (1,864,775
    )
    
    
    (1,027,899
    )Provision for doubtful debts for CDMA services
    
    
    (912,892
    )
    
    
    (442,192
    )Provision for doubtful debts for Data and Internet services
    
    
    (77,006
    )
    
    
    (104,218
    )Provision for doubtful debts for Long Distance services
    
    
    (219,983
    )
    
    
    (54,632
    )3,442,211
    
    
    
    3,211,154
  2006(As restated)
    
    
    2007Within one month
    
    
    2,343,254
    
    
    
    1,968,344More than one month to three months
    
    
    935,798
    
    
    
    944,300More than three months to one year
    
    
    1,719,787
    
    
    
    1,519,487More than one year
    
    
    1,518,028
    
    
    
    407,9646,516,867
    
    
    
    4,840,095
    2006(As restated)
    
    
    2007More than one month to three months
    
    
    935,798
    
    
    
    944,300More than three months to one year
    
    
    102,196
    
    
    
    282,379More than one year
    
    
    60,963
    
    
    
    16,1311,098,957
    
    
    
    1,242,810
 F-49




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##### Table of Contents



2006(As restated)
    
    
    2007More than three months to one year
    
    
    1,617,591
    
    
    
    1,237,108More than one year
    
    
    1,457,065
    
    
    
    391,8333,074,656
    
    
    
    1,628,941
  2006(As restated)
    
    
    2007Balance, beginning of year
    
    
    3,132,660
    
    
    
    3,074,656Provision for the year
    
    
    1,753,915
    
    
    
    1,727,009Written-off during the year
    
    
    (1,811,919
    )
    
    
    (3,172,724
    )Balance, end of year
    
    
    3,074,656
    
    
    
    1,628,941
   F-50




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##### Table of Contents



12.
    
    PREPAYMENTS AND OTHER CURRENT ASSETS
 2006Note
    
    
    (As restated)
    
    
    2007Prepaid rental
    
    
    
    
    
    
    375,269
    
    
    
    488,001Deposits and prepayments
    
    
    
    
    
    
    760,629
    
    
    
    682,206Advances to employees
    
    
    
    
    
    
    162,830
    
    
    
    132,407Customer acquisition costs of contractual CDMA subscribers
    
    
    8
    (b)
    
    
    458,095
    
    
    
    508,340Tax refund on reinvestment in a subsidiary
    
    
    24
    
    
    
    
    
    
    
    1,458,715Others
    
    
    
    
    
    
    283,017
    
    
    
    246,6102,039,840
    
    
    
    3,516,279
  2006(As restated)
    
    
    2007Within one year
    
    
    1,943,711
    
    
    
    3,371,984More than one year
    
    
    96,129
    
    
    
    144,2952,039,840
    
    
    
    3,516,279
 13.
    
    SHORT-TERM BANK DEPOSITS
 2006
    
    
    2007Bank deposits with maturity exceeding three months
    
    
    187,449
    
    
    
    635,645Restricted bank deposits
    
    
    8,371
    
    
    
    8,371195,820
    
    
    
    644,016
   14.
    
    CASH AND CASH EQUIVALENTS
 2006(As restated)
    
    
    2007Cash at bank and in hand
    
    
    11,241,559
    
    
    
    6,119,784Bank deposits with original maturities of three months or less
    
    
    1,001,632
    
    
    
    555,69212,243,191
    
    
    
    6,675,476
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15.
    
    SHARE CAPITAL
 2006
    
    
    2007HKD000
    
    
    HKD000Authorized:30,000,000,000 ordinary shares of HKD0.1 each
    
    
    3,000,000
    
    
    
    3,000,000
 Ordinary shares,par value ofNumber of
    
    
    HKD0.1 each
    
    
    Share
    
    
    Shareshares 000
    
    
    HKD000
    
    
    capital
    
    
    premium
    
    
    TotalIssued and fully paid:At January 1, 2006
    
    
    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
    
    
    
    54,567,416Employee share option scheme- Recognition of shares
issued on exercise of
options (Note 29)
    
    
    53,556
    
    
    
    5,356
    
    
    
    5,206
    
    
    
    366,324
    
    
    
    371,530Conversion of convertible bonds
(Note 18)
    
    
    899,745
    
    
    
    89,975
    
    
    
    87,262
    
    
    
    10,730,766
    
    
    
    10,818,028At December 31, 2007
    
    
    13,634,290
    
    
    
    1,363,429
    
    
    
    1,436,908
    
    
    
    64,320,066
    
    
    
    65,756,974
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##### Table of Contents



16.
    
    RESERVES
 (a)
    
    Statutory reservesCUCL has registered as foreign investment enterprises in Mainland China. 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 the PRC Company Law to the general reserve fund until the
cumulative amounts reach 50% of the registered capital. The statutory reserve can
only be used, upon approval obtained from the relevant authority, to offset
accumulated losses or increase capital.CUCL appropriated approximately RMB718 million (2005: approximately RMB463
million; 2006: approximately RMB584 million) to the general reserve fund for the year
ended December 31, 2007.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 years ended December 31, 2005, 2006 and
2007, no appropriation to staff bonus and welfare fund has been made by CUCL.(b)
    
    Other reserveOther reserve reflects the effect of the Business Combination which includes the
consideration paid, net assets acquired and income transferred to Unicom Group
pursuant to the asset transfer agreement for the Business Combination.
 F-53




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##### Table of Contents



17.
    
    LONG-TERM BANK LOANS
 Interest rates and final maturity
    
    2006
    
    2007RMB denominated bank loans
    
    Fixed interest rates of 3.60% (2006: 3.60% to 5.58%) per annum with maturity through 2010 (2006: maturity through 2010)- unsecured
    
    
    
    
    315,000
    
    
    
    200,000315,000
    
    
    
    200,000USD denominated bank loans
    
    Floating interest rates of USD LIBOR plus interest margin of 0.35% to 0.44% (2006: 0.35% to 0.44%)
 per annum with maturity through 2010 (2006: maturity through 2010) (a)- unsecured
    
    
    
    
    7,808,699
    
    
    
    3,652,303Sub-total
    
    
    
    
    8,123,699
    
    
    
    3,852,303Less: Current portion
    
    
    
    
    (3,984,350
    )
    
    
    (2,191,382
    )4,139,349
    
    
    
    1,660,921
 The repayment schedule of the long-term bank loans is as follows:
 2006
    
    2007Balances due:2007
    
    
    3,984,350
    
    
    
    2008
    
    
    2,377,609
    
    
    
    2,191,3822010
    
    
    1,761,740
    
    
    
    1,660,9218,123,699
    
    
    
    3,852,303Less: Portion classified as current liabilities
    
    
    (3,984,350
    )
    
    
    (2,191,382
    )Total
    
    
    4,139,349
    
    
    
    1,660,921
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##### Table of Contents



(a)
    
    On September 26, 2003, the Company signed an agreement with 13 financial institutions
for a long-term syndicated loan of USD700 million. This facility was split into 3 tranches
(i) USD200 million 3-year loan; (ii) USD300 million 5-year loan; and (iii) USD200 million
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. The Company has fully repaid the USD200 million 3-year loan in 2006.In addition, on February 25, 2004, CUCL signed an agreement with various financial
institutions for a long-term syndicated loan of USD500 million 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
fully repaid the USD500 million loan.(b)
    
    The effective interest rate of long-term bank loans denominated in RMB at December 31,
2007 was 3.60% (December 31, 2006: 4.22%), and the effective interest rates of long-term
bank loans denominated in USD at December 31, 2007 ranged from 4.95% to 5.04% (December 31,
2006: from 5.72% to 5.81%).(c)
    
    The carrying amount of long-term bank loans approximated their fair values as of
balance sheet date.
 18.
    
    CONVERTIBLE BONDSThere were no outstanding convertible bonds as of December 31, 2007. The carrying values of the
derivative component and liability component of convertible bonds outstanding as of December 31,
2006 were as follows:
 2006
    


 2007Liability component
    
    
    7,117,035
    
    
    
    Derivative component
    
    
    3,207,914
    
    
    
    Carrying value of convertible bonds
    
    
    10,324,949
    
    
    
    Number of conversion shares at the issuance date (shares)
    
    
    899,745,075
    
    
    
    
  F-55




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##### Table of Contents



August 20, 2007December 31, 2006
    
    (Conversion date)Stock price
    
    HKD11.40
    
    HKD12.16Exercise price
    
    HKD8.63
    
    HKD8.63Volatility
    
    
    31%

    
    
    37%Dividend yield
    
    
    2%
    
    2%Risk free rate
    
    3.51-3.55%
    
    
    3.89%Expected life
    
    1.76-2.51 years
    
    1.13-1.88 yearsOption value
    
    HKD3.56
    
    HKD4.20
  F-56




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##### Table of Contents



19.
    
    OBLIGATIONS UNDER FINANCE LEASESObligations under finance leases are analyzed as follows:
 2006(As restated)
    
    2007Total minimum lease payments under finance leases:- 2007
    
    
    105,101
    
    
    
    - 2008
    
    
    8,059
    
    
    
    1,520- 2009
    
    
    423
    
    
    
    1,824- 2010
    
    
    1,396
    
    
    
    510- 2011
    
    
    820
    
    
    
    465- 2012
    
    
    58
    
    
    
    1,289115,857
    
    
    
    5,608Less: Future finance charges
    
    
    (5,623
    )
    
    
    (278
    )Present value of minimum obligations
    
    
    110,234
    
    
    
    5,330Representing obligations under finance leases:- current liabilities
    
    
    100,004
    
    
    
    1,448- non-current liabilities
    
    
    10,230
    
    
    
    3,882The present value of obligations under finance leases:- 2007
    
    
    100,004
    
    
    
    - 2008
    
    
    7,666
    
    
    
    1,448- 2009
    
    
    399
    
    
    
    1,727- 2010
    
    
    1,335
    
    
    
    485- 2011
    
    
    776
    
    
    
    446- 2012
    
    
    54
    
    
    
    1,224110,234
    
    
    
    5,330Less: Portion classified as current liabilities
    
    
    (100,004
    )
    
    
    (1,448
    )10,230
    
    
    
    3,882
  F-57




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##### Table of Contents



For the year ended December 31, 2007, interest rates of obligations under finance leases ranged
from 4% to 5% (2005: 4% to 6%; 2006: 4% to 5%) per annum.The carrying amounts of obligations under finance leases approximated their fair values as of
balance sheet date.20.
    
    PAYABLES AND ACCRUED LIABILITIES
 2006Note
    
    (As restated)
    
    2007Payables to contractors and equipment suppliers
    
    
    
    
    
    
    16,355,649
    
    
    
    20,357,177Accrued expenses
    
    
    
    
    
    
    2,251,746
    
    
    
    2,681,173Payables to telecommunications product suppliers
    
    
    
    
    
    
    1,879,017
    
    
    
    1,863,724Customer deposits
    
    
    
    
    
    
    1,887,661
    
    
    
    2,188,244Maintenance expense payables
    
    
    
    
    
    
    1,214,163
    
    
    
    1,394,671Salary and welfare payables
    
    
    
    
    
    
    608,122
    
    
    
    731,062Amounts due to services providers/content providers
    
    
    
    
    
    
    800,756
    
    
    
    1,073,820Provision for subscriber points expenses
    
    
    4.1
    (d)
    
    
    555,586
    
    
    
    633,608Others
    
    
    (a
    )
    
    
    991,204
    
    
    
    1,107,82826,543,904
    
    
    
    32,031,307
 (a)
    
    Others included miscellaneous accruals for housing fund and other government
surcharges.
 The aging analysis of payables and accrued liabilities is as follows:
 2006(As restated)
    
    2007Less than six months
    
    
    
    




    
    
    20,390,910
    
    
    
    24,077,455Six months to one year
    
    
    
    


    
    
    3,993,082
    
    
    
    5,063,993More than one year
    
    
    
    


    
    
    2,159,912
    
    
    
    2,889,85926,543,904
    
    
    
    32,031,307
 21.
    
    SHORT-TERM BONDSIn March 2006, CUCL completed an offering of short-term bonds of RMB1.0 billion with a maturity
period of 365 days carrying at interest rate of 3.12% per annum, which was fully repaid in March
2007.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 interest rates of the bonds ranged from 3.05%
to 3.35% per annum. The bonds were also fully repaid in 2007.
 F-58




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##### Table of Contents



22.
    
    INVESTMENT IN SUBSIDIARIESAs of December 31, 2007, the details of the Companys subsidiaries are as follows:
 Placeand date ofincorporation and
    
    Percentage of equity
    
    
    
    
    Principal activitiesnature of legal
    
    interests held
    
    
    Particular of issued
    
    and place ofName
    
    entity
    
    Direct
    
    
    Indirect
    
    
    share capital
    
    operationChina Unicom
    
    The PRC,
    
    
    100
    %
    
    
    
    
    
    RMB64,721,120,000
    
    TelecommunicationsCorporation Limited
    
    April 21, 2000,
    
    
    
    
    
    
    
    
    
    (Note (i))
    
    operation in thelimited liability
    
    
    
    
    
    
    
    
    
    
    
    PRCcompanyUnicom New World
    
    British Virgin
    
    
    100
    %
    
    
    
    
    
    1,000 shares,
    
    Investment holding(BVI) Limited
    
    Islands,
    
    
    
    
    
    
    
    
    
    HKD1 each
    
    in BVINovember 5, 2003,limited companyChina Unicom
    
    Hong Kong,
    
    
    100
    %
    
    
    
    
    
    60,100,000 shares,
    
    TelecommunicationsInternational Limited
    
    May 24, 2000,
    
    
    
    
    
    
    
    
    
    HKD1 each
    
    service inlimited company
    
    
    
    
    
    
    
    
    
    (Note (ii))
    
    Hong KongChina Unicom USA Co.
    
    USA,
    
    
    
    
    
    
    100
    %
    
    USD500,000
    
    TelecommunicationsMay 24, 2002,
    
    
    
    
    
    
    
    
    
    (Note (iii))
    
    service in USAcorporationChina Unicom (Macau)
    
    Macau,
    
    
    99
    %
    
    
    1
    %
    
    MOP60,000,000
    
    TelecommunicationsCompany Limited
    
    October 15, 2004,
    
    
    
    
    
    
    
    
    
    
    
    operation in Macaulimited companyBillion Express
    
    British Virgin
    
    
    100
    %
    
    
    
    
    
    1 share,
    
    Investment holdingInvestments Limited
    
    Islands,
    
    
    
    
    
    
    
    
    
    USD1 each
    
    in BVIAugust 15, 2007,limited companyCentral Link
    
    Hong Kong,
    
    
    
    
    
    
    100
    %
    
    2 shares,
    
    DormantInvestment Limited
    
    August 31, 2007,
    
    
    
    
    
    
    
    
    
    HKD1 eachlimited companyUnicom Huasheng
    
    The PRC,
    
    
    
    
    
    
    99.5
    %
    
    RMB500,000,000
    
    Sales of telecomTelecommunications
    
    July 1, 2005,
    
    
    
    
    
    
    
    
    
    
    
    products in the PRCTechnology
    
    limited liabilityCompany Limited
    
    company
 Note (i):
    
    Pursuant to a resolution by the Board of Directors on July 31, 2007, the Company
approved CUCL to increase its share capital from approximately RMB47.43 billion to
approximately RMB64.72 billion.Note (ii):
    
    Pursuant to a resolution by the Board of Directors on March 28, 2007, the Company
approved Unicom International to increase its share capital from HKD100,000 to HKD60.1
million.Note (iii):
    
    China Unicom USA Co. increased its share capital from USD10,000 to USD500,000
during 2007.
 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 approximately RMB2,369 million for the year ended December
31, 2007 (2005: approximately RMB2,195 million; 2006: approximately RMB2,316 million).The major components of revenue are as follows:
 2005
    
    2006Note
    
    (As restated)
    
    (As restated)
    
    2007GSM BusinessUsage fee
    
    
    (a) (i)
    
    
    
    32,449,378
    
    
    
    34,067,003
    
    
    
    35,111,665Monthly fee
    
    
    (b
    )
    
    
    6,918,294
    
    
    
    7,437,095
    
    
    
    6,965,329Interconnection revenue
    
    
    (c
    )
    
    
    3,459,137
    
    
    
    4,921,363
    
    
    
    6,022,826Value-added services revenue
    
    
    (e
    )
    
    
    7,997,417
    
    
    
    11,597,432
    
    
    
    13,528,197Other revenue
    
    
    
    
    
    
    1,793,885
    
    
    
    1,859,345
    
    
    
    1,147,287Total GSM service revenue
    
    
    
    
    
    
    52,618,111
    
    
    
    59,882,238
    
    
    
    62,775,304CDMA BusinessUsage fee
    
    
    (a) (i)
    
    
    
    17,085,257
    
    
    
    15,085,577
    
    
    
    13,941,247Monthly fee
    
    
    (b
    )
    
    
    5,001,299
    
    
    
    5,122,008
    
    
    
    4,574,887Interconnection revenue
    
    
    (c
    )
    
    
    1,408,114
    
    
    
    1,759,293
    
    
    
    2,066,187Value-added services revenue
    
    
    (e
    )
    
    
    4,155,779
    
    
    
    5,375,579
    
    
    
    6,413,204Other revenue
    
    
    
    
    
    
    438,193
    
    
    
    534,018
    
    
    
    734,715Total CDMA service revenue
    
    
    
    
    
    
    28,088,642
    
    
    
    27,876,475
    
    
    
    27,730,240Data and Internet BusinessUsage fee
    
    (a) (ii)
    
    
    2,539,310
    
    
    
    1,769,012
    
    
    
    1,712,831Interconnection revenue
    
    
    (c
    )
    
    
    55,626
    
    
    
    39,758
    
    
    
    36,300Leased lines rental income
    
    
    (d
    )
    
    
    392,426
    
    
    
    472,475
    
    
    
    535,832Value-added services revenue
    
    
    (e
    )
    
    
    
    
    
    
    
    
    
    
    331,133Other revenue
    
    
    
    
    
    
    12,745
    
    
    
    39,147
    
    
    
    9,757Total Data and Internet service revenue
    
    
    
    
    
    
    3,000,107
    
    
    
    2,320,392
    
    
    
    2,625,853Long Distance BusinessUsage fee
    
    (a) (ii)
    
    
    598,455
    
    
    
    63,340
    
    
    
    352,081Interconnection revenue
    
    
    (c
    )
    
    
    408,112
    
    
    
    389,375
    
    
    
    476,803Leased lines rental income
    
    
    (d
    )
    
    
    464,430
    
    
    
    557,270
    
    
    
    670,866Other revenue
    
    
    
    
    
    
    776
    
    
    
    4,565
    
    
    
    7,751Total Long Distance service revenue
    
    
    
    
    
    
    1,471,773
    
    
    
    1,014,550
    
    
    
    1,507,501Total service revenue
    
    
    
    
    
    
    85,178,633
    
    
    
    91,093,655
    
    
    
    94,638,898Sales of telecommunications products
    
    
    
    
    
    
    2,859,300
    
    
    
    4,253,660
    
    
    
    4,900,489Total revenue
    
    
    
    
    
    
    88,037,933
    
    
    
    95,347,315
    
    
    
    99,539,387
 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, for calls made by their subscribers using
the Groups cellular networks (Notes 33.1(a) and 33.2(a)).(d)
    
    Leased lines rental income represents rentals received for leasing of transmission
lines and IRU to 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, CDMA 1X wireless data services and secretarial
services to subscribers.
 24.
    
    OTHER GAINS  NET
 2005
    
    2006Note
    
    (As restated)
    
    (As restated)
    
    2007Tax refund on reinvestment in a subsidiary
    
    
    (a
    )
    
    
    
    
    
    
    
    
    
    
    2,780,682Others
    
    
    
    
    
    
    35,063
    
    
    
    21,347
    
    
    
    142,47835,063
    
    
    
    21,347
    
    
    
    2,923,160
 Note (a):
    
    During 2007, the Company reinvested the undistributed income into a subsidiary
and was granted a refund of a portion of the taxes previously paid by this subsidiary as
permitted under the tax law effective until December 31, 2007. This tax refund on
reinvestment in a subsidiary was recorded as other gains.
 F-61




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##### Table of Contents



25.
    
    EXPENSES BY NATUREThe following expenses are analyzed by nature:
 2005
    
    2006Note
    
    (As restated)
    
    (As restated)
    
    2007Depreciation on property, plant and equipment
    
    
    6
    
    
    
    20,186,229
    
    
    
    22,263,719
    
    
    
    22,160,333Amortization of other assets
    
    
    8
    (d)
    
    
    448,290
    
    
    
    422,849
    
    
    
    516,834Total depreciation and amortization
    
    
    
    
    
    
    20,634,519
    
    
    
    22,686,568
    
    
    
    22,677,167Amortization of direct incremental costs for
activating cellular subscribers
    
    
    8
    (a)
    
    
    1,594,592
    
    
    
    1,828,784
    
    
    
    1,527,459Amortization of customer acquisition costs of
contractual CDMA subscribers
    
    
    8
    (b)
    
    
    6,065,479
    
    
    
    4,375,353
    
    
    
    4,000,358Provision for doubtful debts:- GSM Business
    
    
    
    
    
    
    882,335
    
    
    
    1,133,690
    
    
    
    1,257,670- CDMA Business
    
    
    
    
    
    
    463,169
    
    
    
    460,515
    
    
    
    395,263- Data and Internet Business
    
    
    
    
    
    
    139,327
    
    
    
    106,883
    
    
    
    45,916- Long Distance Business
    
    
    
    
    
    
    33,868
    
    
    
    52,827
    
    
    
    28,160Total provision for doubtful debts
    
    
    11
    
    
    
    1,518,699
    
    
    
    1,753,915
    
    
    
    1,727,009Write-down of inventories to net realizable value
    
    
    10
    
    
    
    18,737
    
    
    
    46,795
    
    
    
    163,268Cost of inventories
    
    
    10
    
    
    
    3,676,833
    
    
    
    4,914,876
    
    
    
    5,031,706Auditors remuneration
    
    
    
    
    
    
    59,884
    
    
    
    120,323
    
    
    
    68,578Operating lease charges:- Leased lines
    
    
    
    
    
    
    850,661
    
    
    
    686,376
    
    
    
    753,859- CDMA network capacities
    
    
    4.2
    (c)
    
    
    8,076,596
    
    
    
    8,256,623
    
    
    
    8,381,638- Others
    
    
    
    
    
    
    1,170,067
    
    
    
    1,483,828
    
    
    
    1,724,877Total operating lease expenses
    
    
    
    
    
    
    10,097,324
    
    
    
    10,426,827
    
    
    
    10,860,374Other expenses:- Repair and maintenance
    
    
    
    
    
    
    2,416,541
    
    
    
    2,954,132
    
    
    
    3,125,440- Traveling, entertainment and meeting
    
    
    
    
    
    
    674,125
    
    
    
    791,046
    
    
    
    878,585- Power and water charges
    
    
    
    
    
    
    2,236,416
    
    
    
    2,674,195
    
    
    
    3,009,933- Vehicle usage
    
    
    
    
    
    
    470,387
    
    
    
    588,653
    
    
    
    701,841- Office and administration expenses
    
    
    
    
    
    
    994,339
    
    
    
    1,131,779
    
    
    
    1,214,775Financial costs/(gains):- Interest on bank loans repayable over 5 years
    
    
    
    
    
    
    18,033
    
    
    
    956
    
    
    
    - Interest on bank loans and bonds repayable
within 5 years
    
    
    
    
    
    
    1,991,478
    
    
    
    1,170,599
    
    
    
    367,952- Interest element of finance lease
    
    
    
    
    
    
    49,063
    
    
    
    33,895
    
    
    
    4,735- Interest expense on convertible bonds
    
    
    18
    
    
    
    
    
    
    
    193,123
    
    
    
    241,535Less: Amounts capitalized in
construction-in-progress
    
    
    6
    
    
    
    (691,352
    )
    
    
    (430,814
    )
    
    
    (273,551
    )Total interest expense
    
    
    
    
    
    
    1,367,222
    
    
    
    967,759
    
    
    
    340,671- Exchange gain, net
    
    
    
    
    
    
    (273,647
    )
    
    
    (372,691
    )
    
    
    (480,322
    )- Others
    
    
    
    
    
    
    39,663
    
    
    
    64,564
    
    
    
    52,643Total financial costs/(gains)
    
    
    
    
    
    
    1,133,238
    
    
    
    659,632
    
    
    
    (87,008
    )
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##### Table of Contents



26.
    
    EMPLOYEE BENEFIT EXPENSES
 2005
    
    2006Note
    
    (As restated)
    
    (As restated)
    
    2007Employee benefit expenses:- Salaries and wages
    
    
    
    
    
    
    4,300,804
    
    
    
    5,184,865
    
    
    
    5,635,509- Contributions to defined
contribution pension schemes
    
    
    27
    
    
    
    416,094
    
    
    
    478,305
    
    
    
    542,894- Contributions to supplementary
defined contribution pension schemes
    
    
    27
    
    
    
    58,222
    
    
    
    54,037
    
    
    
    72,011- Contributions to state-sponsored fund
    
    
    28
    
    
    
    280,996
    
    
    
    286,785
    
    
    
    287,184- Monetary housing benefits
    
    
    28
    
    
    
    41,136
    
    
    
    35,528
    
    
    
    32,588- Other housing benefits
    
    
    28
    
    
    
    447,351
    
    
    
    494,865
    
    
    
    412,540- Share-based compensation
    
    
    29
    
    
    
    108,417
    
    
    
    146,294
    
    
    
    157,262Total
    
    
    
    
    
    
    5,653,020
    
    
    
    6,680,679
    
    
    
    7,139,988
 27.
    
    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 20% of the employees basic salaries for the
year ended December 31, 2007 (2005 and 2006: 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 4% to 16% (2005 and 2006: 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:
 2005
    
    2006(As restated)
    
    (As restated)
    
    2007Contributions to defined contribution pension schemes
    
    
    416,094
    
    
    
    478,305
    
    
    
    542,894Contributions to supplementary defined contribution
pension schemes
    
    
    58,222
    
    
    
    54,037
    
    
    
    72,011
 28.
    
    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 2007
(2005 and 2006: approximately RMB14.9 million).
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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% (2005 and 2006: 10%) of the employees basic
salaries.According to the central government policy on housing reform based on a State Council circular
issued in 1998, monetary housing subsidies in the form of special cash payments are to be made
by certain Mainland China enterprises to their employees in order to enable them to purchase
living quarters. Under this general policy, enterprises are allowed to establish their own
housing reform schemes, taking into consideration the actual financial capability of the
enterprises.The Group finalized its monetary housing benefit scheme as a special employee incentive scheme
for all qualified employees in 2001. According to the scheme, the total amount of monetary
housing benefit for each employee is determined based on the working age of the employee and the
property market price prevailing in the relevant location. The total monetary housing benefit is
divided into three annual payments in the proportion of 40%, 30% and 30% respectively. In order
to be included in the incentive scheme, employees are required to sign a service contract with a
minimum service period. The employees will be entitled to the first 40% payment only when the
following criteria are met in a particular year:
 (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.
 Similarly, the employees will only be entitled to the second and then the third annual payments
when and only when the above two conditions are also fulfilled in subsequent years.For the years ended December 31, 2005, 2006 and 2007, certain provinces achieved the annual
performance budget and were thus approved by management to distribute and pay out such monetary
housing benefits. The provision for special monetary housing benefits for qualified employees
of these provinces for the years ended December 31, 2005, 2006 and 2007 amounted to
approximately RMB41 million, RMB36 million and RMB33 million, respectively, based on the
aforementioned distribution plan. The remaining provinces were not entitled to the special
monetary housing benefits in 2007 since they did not achieve their annual performance budget in
2007 and accordingly, no provision for such benefits was made.The expenses incurred by the Group in relation to the housing benefits described above are as
follows:
 2005
    
    2006(As restated)
    
    (As restated)
    
    2007Contributions to state-sponsored fund
    
    
    280,996
    
    
    
    286,785
    
    
    
    287,184Special monetary housing benefits
    
    
    41,136
    
    
    
    35,528
    
    
    
    32,588Other housing benefits
    
    
    447,351
    
    
    
    494,865
    
    
    
    412,540769,483
    
    
    
    817,178
    
    
    
    732,312
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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 and May 11, 2007.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:
 2005
    
    2006
    
    2007Average
    
    
    
    
    
    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
    
    
    6.45
    
    
    
    274,063,400
    
    
    
    6.51
    
    
    
    257,602,000
    
    
    
    6.95
    
    
    
    314,256,000Granted
    
    
    
    
    
    
    
    
    
    
    6.35
    
    
    
    167,466,000
    
    
    
    
    
    
    
    Forfeited
    
    
    7.15
    
    
    
    (5,688,200
    )
    
    
    6.92
    
    
    
    (4,088,000
    )
    
    
    8.43
    
    
    
    (3,420,800
    )Exercised
    
    
    4.60
    
    
    
    (10,773,200
    )
    
    
    4.95
    
    
    
    (106,724,000
    )
    
    
    6.03
    
    
    
    (53,555,600
    )Balance, end of year
    
    
    6.51
    
    
    
    257,602,000
    
    
    
    6.95
    
    
    
    314,256,000
    
    
    
    7.12
    
    
    
    257,279,600
 Employee share options exercised for the year ended December 31, 2007 resulted in 53,555,600
shares being issued (2005: 10,773,200 shares; 2006: 106,724,000 shares), with exercise proceeds
of approximately RMB313 million (2005: approximately RMB52 million; 2006: approximately RMB535
million).As of December 31, 2007, out of the 257,279,600 outstanding share options (2005: 257,602,000
options; 2006: 314,256,000 options), 92,713,600 share options (2005: 162,981,160 options; 2006:
115,683,600 options) were exercisable, and the weighted average exercise price was HKD8.48
(2005: HKD7.12; 2006: HKD8.09).
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As of December 31, 2007, information of outstanding share options is summarized as follows:
 Number of share
    
    Number of shareThe period during
    
    The price per share
    
    options outstanding
    
    options outstandingwhich an option may
    
    to be paid on
    
    as of December 31,
    
    as of December 31,Date of options grant
    
    be exercised
    
    exercise of options
    
    2006
    
    2007Share options granted under the Pre-Global Offering Share Option Scheme:June 22, 2000 (a)
    
    June 22, 2002 to
June 21, 2010
    
    HKD15.42
    
    
    24,178,000
    
    
    
    21,126,800Share options granted under the Share Option Scheme:June 30, 2001 (b)
    
    June 30, 2001 to 
June 22, 2010
    
    HKD15.42
    
    
    6,292,000
    
    
    
    5,608,000July 10, 2002 (c)
    
    July 10, 2003 to
July 9, 2008
    
    HKD6.18
    
    
    11,540,400
    
    
    
    3,308,000May 21, 2003 (d)
    
    May 21, 2004 to
May 20, 2009
    
    HKD4.30
    
    
    25,611,600
    
    
    
    11,092,800July 20, 2004 (e)
    
    July 20, 2005 to
July 19, 2010
    
    HKD5.92
    
    
    80,224,000
    
    
    
    50,924,000December 21, 2004 (f)
    
    December 21, 2005 to
December 20, 2010
    
    HKD6.20
    
    
    654,000
    
    
    
    654,000February 15, 2006 (g)
    
    February 15, 2008 to
February 14, 2012
    
    HKD6.35
    
    
    165,756,000
    
    
    
    164,566,000314,256,000
    
    
    
    257,279,600
 (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.
 No further option can be granted under the Pre-Global Offering Option Scheme.The Pre-Global Offering Option Scheme had been amended in conjunction with the amended
terms of the Share Option Scheme on May 13, 2002 and May 11, 2007, respectively. Apart
from the above two terms, the principal terms are substantially the same as the amended
Share Option Scheme in all material aspects.
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##### Table of Contents



(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.
 The period during which an option may be exercised will be determined by the directors at
their discretion, except that no option may be exercised later than 10 years from June
22, 2000. According to a resolution of the Board of Directors in June 2001, the Company
has granted 6,724,000 share options under the Share Option Scheme which represent, on
their full exercise, 6,724,000 shares to certain employees of the Group under the
following terms:
 (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.
 The terms of the Share Option Scheme were amended on May 13, 2002 to comply with the
requirements set out in the Chapter 17 of the Listing Rules which came into effect on
September 1, 2001 with the following major amendments:
 (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.
 On May 11, 2007, the Company further amended the Share Option Scheme with major amendments
related to the exercise of options upon cessation of employment. These amendments are made
in order to reduce the administrative burden on the Company to monitor outstanding options
for grantees whose employment has been terminated.
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(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
    %
 (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
    %
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##### Table of Contents



(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)
    
    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
    %
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##### Table of Contents



(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 Group 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
    %
 The Group recognized share-based employee compensation costs based on the estimated fair
value of share options at the grant date by using the Black-Scholes valuation model.
Because the Black-Scholes valuation model requires the input of subjective assumptions,
including the volatility of share price, change in subjective input assumptions can
materially affect the fair value estimate. Accordingly, the fair value of share options
granted under the above scheme in 2006 was HKD2.10 per option. The significant
assumptions used was the closing price of HKD6.35 at the grant date, exercise price of
HKD6.35 per share, volatility of 39%, expected life of share options of 5 years, expected
dividend yield of 2% and annual risk-free interest rate of 4%. The volatility measured at
the standard deviation of expected share price returns is based on statistical analysis
of daily share prices over the last 5 years.For the year ended December 31, 2007, employee share-based compensation costs amortized
over the vesting periods of the share options amounted to approximately RMB157 million
(2005: approximately RMB108 million; 2006: approximately RMB146 million).
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(h)
    
    Details of share options exercised during 2005, 2006 and 2007 are as follows:For the year ended December 31, 2005:Weighted averageclosing price pershare at respectivedays immediatelybefore days ofExercise price
    
    exercise of options
    
    Proceeds received
    
    Number ofGrant date
    
    HKD
    
    HKD
    
    HKD
    
    shares involvedJuly 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
    
    
    
    10,773,200For the year ended December 31, 2006:Weighted averageclosing price pershare at respectivedays immediatelybefore days ofExercise price
    
    exercise of options
    
    Proceeds received
    
    Number ofGrant date
    
    HKD
    
    HKD
    
    HKD
    
    shares involvedJuly 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
    
    
    
    106,724,000For the year ended December 31, 2007:Weighted averageclosing price pershare at respectivedays immediatelybefore days ofExercise price
    
    exercise of options
    
    Proceeds received
    
    Number ofGrant date
    
    HKD
    
    HKD
    
    HKD
    
    shares involvedJune 22, 2000
    
    
    15.42
    
    
    
    17.56
    
    
    
    34,657,992
    
    
    
    2,247,600June 30, 2001
    
    
    15.42
    
    
    
    17.62
    
    
    
    8,450,160
    
    
    
    548,000July 10, 2002
    
    
    6.18
    
    
    
    12.96
    
    
    
    49,793,496
    
    
    
    8,057,200May 21, 2003
    
    
    4.30
    
    
    
    12.95
    
    
    
    60,057,240
    
    
    
    13,966,800July 20, 2004
    
    
    5.92
    
    
    
    13.77
    
    
    
    170,117,120
    
    
    
    28,736,000323,076,008
    
    
    
    53,555,600
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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, 2005, 2006 and 2007 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, 2005, 2006 and 2007 were computed
by dividing the income attributable to equity holders by the weighted average number of
ordinary shares outstanding 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 computation of diluted earnings
per share.
 2005
    
    
    2006(As restated)
    
    
    (As restated)
    
    
    2007Income
    
    
    
    
    
    
    
    
    
    
    Income
    
    
    
    
    
    
    
    
    
    
    Incomeattributable
    
    
    
    
    
    
    Per
    
    
    attributable
    
    
    
    
    
    
    Per
    
    
    attributable
    
    
    
    
    
    
    Perto equity
    
    
    
    
    
    
    share
    
    
    to equity
    
    
    
    
    
    
    share
    
    
    to equity
    
    
    
    
    
    
    shareholders
    
    
    Shares in
    
    
    Amount
    
    
    holders
    
    
    Shares in
    
    
    amount
    
    
    holders
    
    
    Shares in
    
    
    amountRMB000
    
    
    thousands
    
    
    RMB
    
    
    RMB000
    
    
    thousands
    
    
    RMB
    
    
    RMB000
    
    
    thousands
    
    
    RMBBasic earnings
    
    
    4,922,087
    
    
    
    12,570,398
    
    
    
    0.39
    
    
    
    3,800,920
    
    
    
    12,599,018
    
    
    
    0.30
    
    
    
    9,299,784
    
    
    
    13,036,566
    
    
    
    0.71Effect of
conversion of share
options
    
    
    
    
    
    
    37,078
    
    
    
    
    
    
    
    
    
    
    
    50,288
    
    
    
    
    
    
    
    
    
    
    
    124,523
    
    
    
    Diluted earnings
    
    
    4,922,087
    
    
    
    12,607,476
    
    
    
    0.39
    
    
    
    3,800,920
    
    
    
    12,649,306
    
    
    
    0.30
    
    
    
    9,299,784
    
    
    
    13,161,089
    
    
    
    0.71
 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 11, 2007, the shareholders of the Company approved
the payment of a final dividend of RMB0.18 per ordinary share for the year ended December 31,
2006, totaling approximately RMB2,285 million, which has been reflected as an appropriation of
retained profits during the year ended December 31, 2007. As of December 31, 2007, such
dividends have been fully paid by the Company.At a meeting held on March 27, 2008, the Board of Directors of the Company proposed the payment
of a final dividend of RMB0.20 per ordinary share to the shareholders for the year ended
December 31, 2007, totaling approximately RMB2,727 million. This proposed dividend has not been
reflected as a dividend payable in the financial statements as of December 31, 2007, but will be
reflected as an appropriation of retained profits in the financial statements for the year
ending December 31, 2008.
 2005
    
    
    2006
    
    
    2007Proposed final dividend of RMB0.20
(2005: RMB0.11 and 2006: RMB0.18)
per ordinary share
    
    
    1,383,169
    
    
    
    2,282,578
    
    
    
    2,726,858
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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 Unicom Group, 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, 2006 and 2007.
 2006
    
    
    2007Original currency
    
    
    
    
    
    
    RMB equivalent
    
    
    Original currency
    
    
    
    
    
    
    RMB equivalent000
    
    
    Exchange rate
    
    
    RMB000
    
    
    000
    
    
    Exchange rate
    
    
    RMB'000Cash and cash equivalents:- denominated in HK dollars
    
    
    651,551
    
    
    
    1.00
    
    
    
    654,613
    
    
    
    394,439
    
    
    
    0.94
    
    
    
    369,345- denominated in US dollars
    
    
    478,937
    
    
    
    7.81
    
    
    
    3,735,659
    
    
    
    41,179
    
    
    
    7.30
    
    
    
    300,797- denominated in MOP
    
    
    
    
    
    
    0.98
    
    
    
    
    
    
    
    64
    
    
    
    0.91
    
    
    
    58- denominated in EURO
    
    
    1,700
    
    
    
    10.27
    
    
    
    17,457
    
    
    
    2,603
    
    
    
    10.67
    
    
    
    27,767Sub-total
    
    
    
    
    
    
    
    
    
    
    4,407,729
    
    
    
    
    
    
    
    
    
    
    
    697,967Short-term bank deposits:- denominated in HK dollars
    
    
    13,000
    
    
    
    1.00
    
    
    
    13,060
    
    
    
    70,884
    
    
    
    0.94
    
    
    
    66,375- denominated in US dollars
    
    
    22,333
    
    
    
    7.81
    
    
    
    174,389
    
    
    
    77,933
    
    
    
    7.30
    
    
    
    569,270Sub-total
    
    
    
    
    
    
    
    
    
    
    187,449
    
    
    
    
    
    
    
    
    
    
    
    635,645Total
    
    
    
    
    
    
    
    
    
    
    4,595,178
    
    
    
    
    
    
    
    
    
    
    
    1,333,612
 The Group did not have and does not believe it will have any difficulties 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, 2006
and 2007 due to the nature or short maturity of those instruments.The carrying amounts of receivables and payables which are all subject to normal trade credit
terms approximated their fair values as of balance sheet date.The carrying amounts of long-term bank loans approximated their fair values as of balance sheet
date based on prevailing market borrowing rates available for comparable bank loans with
similar terms and maturities.
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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
networks and on transmission lines leased from other Domestic Carriers.
 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 the nature of relationship with the Group as of December
31, 2007:
 Nature of relationship withName of related parties
    
    the CompanyChina United Telecommunications Corporation (Unicom Group)
    
    Ultimate holding companyUnicom NewSpace Corporation Limited (Unicom NewSpace)
    
    A subsidiary of Unicom GroupUnicom Xingye Science and Technology Trade Company Limited
(Unicom Xingye)
    
    A subsidiary of Unicom GroupUnicom Import and Export Company Limited ( Unicom I/E Co)
    
    A subsidiary of Unicom GroupUnicom New Horizon Mobile Telecommunications Company 
Limited (Unicom 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)
    
    A subsidiary of Unicom GroupUNISK (Beijing) Information Technology Corporation Limited
(UNISK)
    
    A joint venture enterprise
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.
 2005
    
    
    2006Note
    
    
    (As restated)
    
    
    (As restated)
    
    
    2007Transactions with Unicom Group and its subsidiaries:Interconnection revenues
    
    (ii), (iv)
    
    
    65,370
    
    
    
    60,744
    
    
    
    37,257Interconnection charges
    
    (iii), (iv)
    
    
    17,699
    
    
    
    15,701
    
    
    
    6,329Rental income for premises and facilities
    
    
    (i), (v)
    
    
    
    18,662
    
    
    
    16,257
    
    
    
    17,017Charge for operator-based subscriber value-added
services by New Guoxin
    
    (i), (vi)
    
    
    427,962
    
    
    
    374,035
    
    
    
    378,462Charge for customer services by New Guoxin
    
    (i), (vii)
    
    
    566,826
    
    
    
    681,162
    
    
    
    860,653Agency fee incurred for subscriber development
services by New Guoxin
    
    (i), (viii)
    
    
    15,312
    
    
    
    58,982
    
    
    
    115,610CDMA network capacity lease rental
    
    (i), (ix)
    
    
    8,076,596
    
    
    
    8,256,623
    
    
    
    8,381,638Constructed capacity related cost of CDMA network
    
    
    (i), (x)
    
    
    
    193,632
    
    
    
    188,656
    
    
    
    215,080Charges for cellular subscriber value-added service
by UNISK and Unicom NewSpace
    
    (i), (xi)
    
    
    28,418
    
    
    
    45,618
    
    
    
    54,491Rental charges for premises, equipment and facilities
    
    (i), (xii)
    
    
    21,059
    
    
    
    27,931
    
    
    
    30,958Charges for the international gateway services
    
    (i), (xiii)
    
    
    19,797
    
    
    
    17,143
    
    
    
    15,213Purchase of telecom cards
    
    (i), (xiv)
    
    
    680,130
    
    
    
    712,098
    
    
    
    697,285Agency fee incurred for procurement of
telecommunications equipment
    
    (i), (xv)
    
    
    15,870
    
    
    
    13,166
    
    
    
    18,073Charge for engineering design and technical services
by CITDCI
    
    (i), (xvi)
    
    
    
    
    
    
    
    
    
    
    58,003Charges for leasing of satellite transmission capacity
    
    (xvii)
    
    
    11,794
    
    
    
    
    
    
    
    
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##### Table of Contents



(i)
    
    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. Upon completion of Business Combination, the 2006
Comprehensive Services Agreement and 2006 CDMA Lease Agreement were amended
where necessary so that the service area of CUCL is extended to include
Guizhou province. In addition, the rights and obligations of Guizhou branch of
Unicom Group under the framework agreement entered with Guizhou branch of
Unicom Huasheng for the procurement of CDMA mobile handsets on December 19,
2006 were assigned to and assumed by CUCL.The purchase of Guizhou Business has been accounted for using merger
accounting in accordance with AG 5. Accordingly, the transactions between
Guizhou branch of Unicom Group and the Group were eliminated and not
considered as related party transactions in the consolidated financial
statements.(ii)
    
    Interconnection revenues represent the amounts received or
receivable from Unicom Group for calls from its networks to the Groups
networks.(iii)
    
    Interconnection charges are for calls made from the Groups
networks to Unicom Groups networks.(iv)
    
    Interconnection settlement between Unicom Groups network and
the Groups network is based on standards established from time to time by the
MII.(v)
    
    Pursuant to 2006 Comprehensive Services Agreement, the Group
agreed to provide premises to New Guoxin. The rental amount is based on the
lower of depreciation costs and market prices for similar premises in that
locality.(vi)
    
    Pursuant to 2006 Comprehensive 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.(vii)
    
    Pursuant to 2006 Comprehensive 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. In addition,
Guangdong has been added as one of the economically developed metropolises in
determining the cost per operator seat.
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(viii)
    
    Pursuant to 2006 Comprehensive 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.(ix)
    
    Pursuant to 2006 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).(x)
    
    Pursuant to 2006 CDMA Lease Agreement, the constructed
capacity related costs in connection with the CDMA network capacity used by
the Group, including the rentals for the exchange centers and the base
stations, water and electricity charges, heating charges and fuel charges for
the relevant equipment etc., as well as the maintenance costs of a non-capital
nature, are charged to the Group. The proportion of the constructed capacity
related costs to be borne by the Group 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.(xi)
    
    Pursuant to 2006 Comprehensive Services Agreement, UNISK and
Unicom NewSpace agreed to provide the cellular subscribers of CUCL various
types of value-added services through its cellular communication network and
data platform. The Group should retain a portion of the revenue generated from
the value-added service provided to the Groups subscribers (and actually
received by the Group) and allocate a portion of such fees to UNISK and Unicom
NewSpace for settlement, on the condition that such proportion allocated to
UNISK and Unicom NewSpace should not exceed the average proportion for
independent value-added telecommunications content providers who provide
value-added telecommunications content to the Group in the same region. The
percentage of revenue to be allocated to UNISK and Unicom NewSpace by the
Group varies depending on the types of value-added service provided to the
Group.(xii)
    
    Pursuant to 2006 Comprehensive Services Agreement, CUCL and
Unicom Group agreed to mutually lease premises, equipment and facilities from
each other. Rentals are based on the lower of depreciation costs and market
rates.(xiii)
    
    Pursuant to 2006 Comprehensive Services Agreement, charges for international
gateway services represent the amounts paid or payable to Unicom Group for
international gateway services provided for the Groups international long
distance networks. The charge for this service is based on the cost of
operation and maintenance of the international gateway facilities incurred by
Unicom Group, including depreciation, together with a margin of 10% over cost.(xiv)
    
    Pursuant to 2006 Comprehensive Services Agreement, the Group
agreed 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. Prices and volumes
are subject to review by the parties on an annual basis.
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(xv)
    
    Pursuant to 2006 Comprehensive Services Agreement, 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.(xvi)
    
    Pursuant to 2006 Comprehensive Services Agreement, CITDCI
agreed to provide engineering design and technical services to the Group based
on its demands and requirements. 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 should not be
higher than those adopted by an independent third party providing similar
services in the same industry.(xvii)
    
    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.(xviii)
    
    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.
 (b)
    
    Purchase of assets and business of Guizhou branch of Unicom GroupPursuant to an asset transfer agreement entered between CUCL and Unicom Group on
November 16, 2007, CUCL agreed to purchase the Guizhou Business at a cash
consideration of RMB880 million. The consideration for the Business Combination was
determined with reference to the results of a business valuation using methods
commonly used in capital market transactions in the telecommunications industry and
the negotiations between the parties. In addition, pursuant to the asset transfer
agreement, the income or loss of the Guizhou Business for the period from December
31, 2006 to the effective date of the Business Combination was transferred to Unicom
Group.The aforementioned Business Combination became effective on December 31, 2007, when
all the conditions to the Business Combination were satisfied and cash consideration
was settled by CUCL. Please refer to Note 1 for details.(c)
    
    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.
 F-78




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(d)
    
    Amount due to/(from) Unicom Group
 2005
    
    2006(As restated)
    
    (As restated)
    
    2007Due to Unicom Group, beginning of year
    
    
    254,557
    
    
    
    779,414
    
    
    
    1,088,297Interconnection revenues
    
    
    (65,370
    )
    
    
    (60,744
    )
    
    
    (37,257
    )Interconnection charges
    
    
    17,699
    
    
    
    15,701
    
    
    
    6,329Revenue for leasing of premises and facilities
    
    
    (18,662
    )
    
    
    (16,257
    )
    
    
    (17,017
    )Rental charges for premises, equipment and facilities
    
    
    21,059
    
    
    
    27,931
    
    
    
    30,958Charges for the international gateway services
    
    
    19,797
    
    
    
    17,143
    
    
    
    15,213Transfer of income of Guizhou Business to Unicom
Group under terms of the Business Combination
    
    
    
    
    
    
    
    
    
    
    101,020Net receipt/(payment) during the year
    
    
    550,334
    
    
    
    325,109
    
    
    
    (366,844
    )Due to Unicom Group, end of year
    
    
    779,414
    
    
    
    1,088,297
    
    
    
    820,699
 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:
 2005
    
    2006Note
    
    (As restated)
    
    (As restated)
    
    2007Interconnection revenue
    
    
    (i
    )
    
    
    4,035,374
    
    
    
    5,557,246
    
    
    
    6,985,782Interconnection charges
    
    
    (i
    )
    
    
    7,989,001
    
    
    
    9,237,341
    
    
    
    10,394,740Leased line revenue
    
    (ii)
    
    
    62,865
    
    
    
    54,912
    
    
    
    34,756Leased line charges
    
    (ii)
    
    
    549,697
    
    
    
    329,983
    
    
    
    403,863
 
 (i)
    
    The interconnection revenue and charges mainly represent the
amounts due from or to Domestic Carriers for telephone calls made between the
Groups networks and the networks of Domestic Carriers. The interconnection
settlements are calculated in accordance with interconnection agreements
reached between the branches of the Group and Domestic Carriers on a provincial
basis. The terms of these agreements are set in accordance with the standard
settlement arrangement stipulated by the 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. F-79




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(b)
    
    Amounts due from and to Domestic Carriers
 2006(As restated)
    
    2007Amounts due from Domestic Carriers- Receivables for interconnection revenue and leased line
revenue
    
    
    158,894
    
    
    
    170,231- Less: Provision for doubtful debts
    
    
    (20,373
    )
    
    
    (20,495
    )138,521
    
    
    
    149,736Amounts due to Domestic Carriers- Payables for interconnection charges and leased lines charges
    
    
    854,885
    
    
    
    600,283
 All amounts due from and to Domestic Carriers were unsecured, interest-free and
repayable within one year.
 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:
 2005
    
    2006(As restated)
    
    (As restated)
    
    2007Purchase of CDMA handsets
    
    
    1,795,009
    
    
    
    1,144,181
    
    
    
    1,151,048Construction and installation fee
    
    
    291,663
    
    
    
    220,086
    
    
    
    220,698Purchase of equipment
    
    
    3,591,246
    
    
    
    1,660,562
    
    
    
    1,136,038Line leasing revenue
    
    
    153,837
    
    
    
    166,559
    
    
    
    178,502Finance income/costs, include:- Interest income
    
    
    96,789
    
    
    
    226,788
    
    
    
    172,415- Interest expense
    
    
    1,619,489
    
    
    
    840,698
    
    
    
    10,593Short-term bank loan received
    
    
    11,946,716
    
    
    
    2,070,000
    
    
    
    Long-term bank loan received
    
    
    6,077,746
    
    
    
    1,315,000
    
    
    
    Short-term bank loan repaid
    
    
    14,363,131
    
    
    
    7,372,661
    
    
    
    Long-term bank loan repaid
    
    
    26,694,002
    
    
    
    8,853,008
    
    
    
    115,000
 F-80




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##### Table of Contents



(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 are listed as follows:
 2006(As restated)
    
    2007Current assetsPrepayment and other current assets
    
    
    288,930
    
    
    
    53,418Short-term bank deposits
    
    
    21,432
    
    
    
    527,885Cash and cash equivalents
    
    
    12,055,646
    
    
    
    6,525,506Non-current liabilitiesLong-term bank loans
    
    
    235,000
    
    
    
    200,000Current liabilitiesPayables and accrued liabilities
    
    
    666,726
    
    
    
    667,749Current portion of long-term bank loans
    
    
    80,000
    
    
    
    
 34.
    
    CONTINGENCIES AND COMMITMENTS
 34.1
    
    Capital CommitmentsAs of December 31, 2006 and 2007, the Group had capital commitments, mainly in relation
to the construction of telecommunications networks, as follows:
 20062007
    
    (As restated)Land and buildings
    
    Equipment
    
    Total
    
    TotalAuthorized and contracted for
    
    
    837,103
    
    
    
    2,415,361
    
    
    
    3,252,464
    
    
    
    2,729,602Authorized but not contracted for
    
    
    611,294
    
    
    
    1,768,886
    
    
    
    2,380,180
    
    
    
    943,280Total
    
    
    1,448,397
    
    
    
    4,184,247
    
    
    
    5,632,644
    
    
    
    3,672,882
 As of December 31, 2007, approximately RMB153 million (2006: approximately RMB203 million)
of capital commitment outstanding was denominated in US dollars, equivalent to
approximately USD21 million (2006: approximately USD26 million).
 F-81




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34.2
    
    Operating Lease CommitmentsAs of December 31, 2006 and 2007, the Group had total future aggregate minimum operating
lease payments under operating leases as follows:
 2007
    
    2006Land and
    
    
    
    
    
    CDMA
    
    
    
    
    
    (As restated)buildings
    
    Equipment
    
    network capacity (a)
    
    Total
    
    TotalLeases expiring:- 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,503,568- 2008
    
    
    942,544
    
    
    
    31,284
    
    
    
    7,543,474
    
    
    
    8,517,302
    
    
    
    683,289- 2009
    
    
    784,561
    
    
    
    41,956
    
    
    
    
    
    
    
    826,517
    
    
    
    536,908- 2010
    
    
    734,657
    
    
    
    36,352
    
    
    
    
    
    
    
    771,009
    
    
    
    417,513- 2011
    
    
    368,105
    
    
    
    1,266
    
    
    
    
    
    
    
    369,371
    
    
    
    338,765- 2012
    
    
    184,541
    
    
    
    1,405
    
    
    
    
    
    
    
    185,946
    
    
    
    279,766- Thereafter
    
    
    1,690,041
    
    
    
    50,303
    
    
    
    
    
    
    
    1,740,344
    
    
    
    828,025Total
    
    
    4,704,449
    
    
    
    162,566
    
    
    
    7,543,474
    
    
    
    12,410,489
    
    
    
    11,587,834
 
 (a)
    
    In relation to the above CDMA network capacity commitment, it is
estimated based on the Minimum Lease Fee pursuant to 2006 CDMA Lease Agreement
(see Note 4.2(c) for details). 34.3
    
    Commitment to purchase CDMA handsetsAs of December 31, 2007, the Group committed to purchase CDMA handsets from third party
vendors amounting to approximately RMB2,435 million (2006: approximately RMB1,237
million).
 35.
    
    EVENTS AFTER BALANCE SHEET
 35.1
    
    Proposed final dividendAfter the balance sheet date, the Board of Directors proposed a final dividend for 2007.
For details, see Note 31.35.2
    
    Proposed restructuring of the PRC telecommunications industryOn May 24, 2008, the Ministry of Industry and Information (which has assumed the
regulatory functions of the former Ministry of Information Industry), the National
Development and Reform Commission and the Ministry of Finance of the PRC jointly issued
the Announcement on Deepening the Reform of the Structure of the Telecommunications
Sector. This announcement states, among other things, that (i) the PRC government will
deepen the reform of the structure of the telecommunications sector of the PRC, and
encourage the formation of three market competitors where each has nationwide network
resources, relatively comparable strength and scale, as well as full service operation
capabilities, (ii) the allocation of telecommunications resources will be further
optimized and the competition structure will be improved, and (iii) three 3G licences
will be granted once the contemplated restructuring of the PRC telecommunications
industry has been completed.
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35.3
    
    Proposed merger between the Group and China Netcom Group Corporation (Hong Kong) Limited
(China Netcom) by way of a scheme of arrangementOn June 2, 2008, the Company and China Netcom jointly
announced that the Company had
formally presented the share proposal, the ADS proposal, and the option proposal to the
board of directors of China Netcom, and requested the China Netcoms Board of Directors
to put forward the proposals to the shareholders of China Netcom to consider a merger of
the Group and China Netcom by way of a scheme of arrangement of China Netcom (the
Scheme) under Section 166 of the Hong Kong Companies Ordinance.Pursuant to the aforementioned share proposal and ADS proposal, each holder of China
Netcom shares and ADSs will be entitled to receive 1.508 new ordinary shares and 3.016
new ADS of the Company respectively for every China Netcom share and
ADS. For the option
proposal, the Company will establish a new option plan, and each holder of China Netcom
options will be entitled to receive new options to acquire the Companys shares in
exchange for their outstanding China Netcom options (whether vested or not). The grant
of these options will be based on a formula that values the new options of the Company
received by a holder of China Netcom options equivalent to the see-through price of
that holders outstanding China Netcom options. The effectiveness of the above
proposals and the Scheme is subject to the various conditions, including, among other
things: (i) the approval of our shareholders for (a) the proposals, (b) the allotment
and issue by the Company's shares pursuant to the share proposal and the ADS proposal
and (c) the adoption of a new option scheme for issuance of options under the
option proposal; (ii) the approval of the Scheme by the requisite majority of
shareholders of China Netcom at a meeting of the shareholders of China Netcom to be
convened at the direction of the High Court of Hong Kong for the approval of the Scheme.35.4
    
    Proposed disposal of the Groups CDMA business to China Telecom Corporation Limited
(China Telecom) and related transactionsOn June 2, 2008, the Company, CUCL and China Telecom entered into the CDMA Business
Framework Agreement, which sets out the terms and conditions on which the Company, CUCL
and China Telecom will proceed with the CDMA business disposal whereby CUCL will sell,
and China Telecom will purchase, the CDMA business operated by the
Group. Pursuant to the framework
agreement, the consideration for the proposed CDMA business disposal is RMB43.8 billion
and will be payable by China Telecom to the Group in cash in three installments and the
consideration will be subject to an adjustment mechanism. The completion of the proposed
CDMA business disposal is subject to various conditions as set forth in the CDMA
Business Framework Agreement.In addition, the Group has been notified by Unicom Group that, on June 2, 2008, Unicom
Group, Unicom New Horizon and China Telecom entered into a framework agreement which
sets out the key terms and conditions on which Unicom Group and Unicom New Horizon will
sell their CDMA cellular telecommunications network to China Telecom for a consideration
of RMB66.2 billion. It is expected that this proposed CDMA network disposal will be
completed concurrent with the proposed CDMA business disposal.In connection with the above proposed CDMA business disposal by the Group and the
proposed CDMA network disposal by Unicom Group and Unicom New Horizon, it is expected
that an agreement will be entered into between Unicom Group, Unicom New Horizon and the
A Share Company pursuant to which the A Share Company will waive or procure CUCL to
waive the right to exercise CUCLs option granted to it under the 2006 CDMA Lease
Agreement, dated October 26, 2006, to purchase the CDMA network
at any time before December 31, 2008, and the parties will agree to terminate or procure the
termination of that lease.
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The aforementioned proposed disposal of CDMA business is subject to various conditions,
including, among other things: (i) approval by the shareholders of
the A Share Company for the proposed disposal of CDMA business and
approval by the independent shareholders of the A Share Company for
the waiver of CDMA network purchase option and the termination of
2006 CDMA Lease Agreement; (ii) approval by the shareholders of the
Company for the proposed disposal of CDMA business; (iii) completion of the disposal by Unicom Group and Unicom New
Horizon of their CDMA network on the same date as the completion of
the disposal of the Company's CDMA
business; (iv) receipt of any other regulatory or corporate approvals that are
necessary for the completion of the proposed disposition of the CDMA
business; and (v)
execution of detailed transaction agreements for the proposed
disposition of the CDMA
business, including any transitional arrangements. If these conditions are not
satisfied or waived on or before December 31, 2008, or such
other date as the Company, CUCL and
China Telecom may agree that the framework agreement will automatically terminate.
 36.
    
    COMPARATIVE FIGURESAs stated in Note 2.1, comparative figures have been restated to reflect the effects of Business
Combination under common control, which is accounted for using merger accounting in accordance
with AG 5.37.
    
    APPROVAL OF FINANCIAL STATEMENTSThe financial statements were approved by the Board of Directors on June 19, 2008.
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38.
    
    SIGNIFICANT DIFFERENCES BETWEEN HKFRS AND US GAAPThe consolidated financial statements of the Group prepared under HKFRS differ in certain
material respects from those prepared under generally accepted accounting principles in the
United States of America (US GAAP). Significant differences between HKFRS and US GAAP relating
to the Group are summarized below:(A)
    
    Effect of the acquisitions of entities under common controlThe Company has acquired the equity interests of certain subsidiaries prior to 2005 from
Unicom Group. Prior to the adoption of HKFRS in 2005, the Group adopted the purchase method
of accounting to account for the acquisitions of those subsidiaries (including common
control transactions) in accordance with the original HK SSAP 27 under the previous HKGAAP
and the requirements of the Hong Kong Companies Ordinance.Under the purchase method of accounting, the operating results of those acquired
subsidiaries were included in the consolidated financial statements 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 in 2005, 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. In addition, previously recognized negative goodwill has been derecognized at January
1, 2005, with a corresponding adjustment to the balance of retained profits as of January
1, 2005 of the Group.Under US GAAP, the above acquisitions are considered as a transfer of businesses under
common control and accounted for in a manner similar to pooling-of-interests. Accordingly,
the acquired assets and liabilities are accounted for at historical costs under US GAAP.
The consolidated financial statements prepared under US GAAP for all periods presented have
been retroactively restated as if those subsidiaries were always part of the Group. The
cash considerations paid in excess of the carrying values of the net assets acquired by the
Company are treated as capital distribution in the respective years of those acquisitions.
Goodwill/negative goodwill arising from those acquisitions and the related amortization of
goodwill/negative goodwill recognized under HKFRS has been reversed under US GAAP.
Transaction costs directly related to those acquisitions, which are capitalized as part of
the costs of investment under HKFRS, have been expensed in full under US GAAP. Upfront
non-refundable revenue and direct incremental costs of those 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.In 2007, CUCL purchased the assets and business of Guizhou branch of Unicom Group (Guizhou
Business), details of which were set out in Note 1 and Note 2.1. After the adoption of
HKFRS in 2005, the Company has adopted merger accounting to account for this business
combination of entities and businesses under the common control of Unicom Group in
accordance with HKFRS and AG5. The acquired assets and liabilities of Guizhou Business are
stated at historical costs, and are included in the consolidated financial statements from
the beginning of the earliest period presented as if the Guizhou Business had always been
part of the Group. As a result, the 2005 and 2006 comparative figures in the consolidated
financial statements have been restated accordingly. This accounting treatment under HKFRS
did not differ from that under US GAAP.
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(B)
    
    Revenue recognition from CDMA promotional packages with multiple deliverablesUnder HKFRS, as mentioned in Notes 2.18(a) and Note 4.2(a), for CDMA promotional packages
where CDMA handsets are provided to subscribers for their use during a specified contract
period, since the commercial substance of the transaction is to attract new contractual
subscribers by offering handsets, the two elements of CDMA cellular services and handsets
are considered as a linked transaction. The costs of CDMA handsets are treated as
subscriber acquisition costs, which are deferred and amortized over the contract period to
match with minimum service revenue. Service revenues from such promotional packages are
recognized based upon actual usage of cellular service at the tariffs set out in the
contracts.Under US GAAP, the Groups accounting policy for revenue recognition in instances where
multiple deliverables are bundled together and provided to the same counterparty is in
accordance with EITF issue No. 00-21, Revenue arrangements with Multiple Deliverables.
Accordingly, the Group is required to evaluate all deliverables in the arrangement to
determine whether they represent separate units of accounting. A delivered item is
considered a separate unit of accounting if (1) it has value to the customer on a
standalone basis and (2) there is objective and reliable evidence of the fair value of the
undelivered item(s). The total fixed or determinable amount of the arrangement is allocated
to the separate units of accounting based on their relative fair values. However, when an
amount allocated to a delivered item is contingent upon the delivery of additional items or
meeting specified performance conditions, the amount allocated to that delivered item is
limited to the non contingent amount. For the above CDMA promotional packages, since CDMA
handsets have standalone values, they are considered as a separate unit of accounting under
EITF 00-21. However, no non-contingent contract amounts are allocated to the CDMA handsets
under these CDMA promotional packages since they are contingent upon the provision of
future cellular services to subscribers. Accordingly, the whole amount of minimum contract
revenue is allocated to the service revenues, which are recognized based upon actual usage
of cellular service at the tariff set out in the contracts. The resulting accounting impact
for such CDMA promotional package arrangements under US GAAP is the same as that under
HKFRS and did not result in any differences from the Groups HKFRS consolidated financial
statements.(C)
    
    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 ultimate 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 audited CDMA service
revenue of the lessee. 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
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Horizons expected losses (through its ownership of 100% of Unicom New Horizons equity
interests and an unconditional guarantee of 100% of Unicom New Horizon debts) and is
indirectly associated with the operations of the leased CDMA assets through its majority
ownership of the Group. The Group did not consolidate the financial statements of Unicom
New Horizon and the lease of CDMA network has been accounted for as an operating lease. As
such, the adoption of FIN 46R did not result in any differences from the Groups HKFRS
consolidated financial statements.(D)
    
    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.(E)
    
    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.(F)
    
    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, only 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, the Group adopted Statement of Financial Accounting Standards No. 123(R)
Share-Based Payment (SFAS 123R) and relevant implementation guidance. The SFAS 123R 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. SFAS 123(R) is effective for all
stock-based awards granted on or after June 15, 2005. The Group used the Modified Prospective
Application (MPA) method to account for the share-based payments granted in prior periods.
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 had been
recognized in the reconciliation of net income to US GAAP for the relevant years. 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 year ended 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 year ended December 31, 2005 were as
follows:
 2005(As restated)Net income under US GAAP:As reported
    
    
    5,003,847Less: Total stock-based employee compensation expense determined under
fair value based method
    
    
    (108,950
    )Pro forma
    
    
    4,894,897Basic earnings per share:As reported (RMB)
    
    
    0.40Pro forma (RMB)
    
    
    0.39Diluted earnings per share:As reported (RMB)
    
    
    0.40Pro forma (RMB)
    
    
    0.39Basic earnings per ADS:As reported (RMB)
    
    
    3.98Pro forma (RMB)
    
    
    3.89Diluted earnings per ADS:As reported (RMB)
    
    
    3.97Pro forma (RMB)
    
    
    3.88
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(G)
    
    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 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 and accounted for
as operating lease under US GAAP since the title to the asset is not
transferred.(H)
    
    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. The derivative component, which represented
the embedded conversion option, was initially recognized and
subsequently 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 occurred. The remainder of the
proceeds was allocated to the debt element of the bonds at initial
recognition, net of transaction costs, and was recorded as the
liability component. The liability component was subsequently carried
at amortized cost until extinguished on conversion or redemption.
Interest expense was calculated using the effective interest method by
applying the effective interest rate to the liability component
through the maturity date. When the Convertible Bonds were converted,
the carrying amounts of the derivative and liability components were
transferred to share capital and share premium as consideration for
the shares issued. Refer to Note 2.13 and Note 18 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 was not separated from the bond contract as
it did 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 were attributed to
the bond contract and were recorded as a long-term liability on the amortized cost
basis until extinguished on conversion or redemption. Interest expense was 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
were amortized over 2 years through the first put date, July 5, 2008 until extinguished
on conversion or redemption. Upon the conversion of the Convertible Bonds, the carrying
amounts of the bonds including any unamortized debt discount or premium or debts
issuance costs, were credited to the capital accounts to reflect the shares issued and
no gain or loss was recognized.On August 20, 2007, the Convertible Bonds were fully converted into the Companys
shares and therefore the GAAP differences ceased to exist from that date.
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(I)
    
    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.(J)
    
    Deferred taxationThe adjustment related to deferred taxation represents the deferred tax effects of other US
GAAP adjustments.(K)
    
    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 Statement of Financial
Accounting Standards No.157, Fair Value Measurements (SFAS 157), Statement of Financial
Accounting Standards No.159, The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159), Statement of Financial Accounting Standards No.141(R), Business
Combinations (SFAS 141(R)), Statement of Financial Accounting Standards No.160,
Noncontrolling Interests in Consolidated Financial Statements  an amendment of ARB
No.51"(SFAS 160), and Statement of Financial Accounting Standards No.161, Disclosure about
Derivative Instruments and Hedging Activities  an amendment of FASB Statement No.133 (SFAS
161).
 (a)
    
    In September 2006, the FASB issued Statement of Financial Accounting Standards
No.157, Fair Value Measurements (SFAS 157), which defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157 applies under other
accounting pronouncements that require or permit fair value measurements, the Board
having previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair
value measurements. However, for some entities, the application of this statement will
change current practice. 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. On February 12, 2008, the FASB further issued
FASB Staff Position No. FAS 157-2 Effective Date of FASB Statement No.157 (FSP
157-2), this FSP 157-2 defers the effective date of SFAS 157 for nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis. This FSP 157-2 defers the
effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years for items within the scope of this FSP. FSP
157-2 is effective upon issuance. 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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(b)
    
    In February 2007, the FASB issued Statement of Financial Accounting Standards No.159,
The Fair Value Option for Financial Assets and Financial Liabilities, including an
amendment of FASB Statement No. 115 (SFAS 159), which permits entities to choose to
measure many financial instruments and certain other items at fair value. The objective
is to improve financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions. SFAS 159 is
expected to expand the use of fair value measurement, which is consistent with the
Boards long-term measurement objectives for accounting for financial instruments. SFAS
159 is effective for fiscal years beginning after November 15, 2007. The Group does not
expect the adoption of SFAS 159 will have a material impact on the consolidated
financial statements of the Group.(c)
    
    In December 2007, the FASB issued Statement of Financial Accounting Standards
No.141 (revised 2007), Business Combinations (SFAS 141(R)), which is to improve the
relevance, representational faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a business combination and its
effects. SFAS 141(R) applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. The Group does not expect the adoption of SFAS
141(R) will have a material impact on the consolidated financial statements of the
Group.(d)
    
    In December 2007, the FASB released Statement of Financial Accounting Standards
No.160, Noncontrolling Interests in Consolidated Financial Statements  an amendment of
ARB No.51 (SFAS 160), which is to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides in its
consolidated financial statements. This Statement is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15, 2008. The
Group believes the adoption of SFAS 160 will not have a material impact on the
consolidated financial statements of the Group.(e)
    
    In March 2008, the FASB released Statement of Financial Accounting Standards
No.161, Disclosures about Derivative Instruments and Hedging Activities  an amendment
of FASB Statement No. 133 (SFAS 161), which requires enhanced disclosures about an
entitys derivative and hedging activities and thereby improves the transparency of
financial reporting. This Statement is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008. The Group believes
the adoption of SFAS 161 will not have a material impact on the consolidated financial
statements of the Group.
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2005
    
    2006Note
    
    (As restated)
    
    (As restated)
    
    2007Net income under HKFRS
    
    
    2.1
    
    
    
    4,922,087
    
    
    
    3,800,920
    
    
    
    9,299,784Impact of US GAAP adjustments:- Recognition of depreciation expenses based on
historical cost of property, plant and
equipment of subsidiaries
    
    
    (A
    )
    
    
    (48,053
    )
    
    
    (48,053
    )
    
    
    (48,053
    )- Upfront non-refundable revenue and direct
incremental costs not recognized under the
purchase method of accounting under the
previous HK GAAP
    
    
    (A
    )
    
    
    21,001
    
    
    
    21,001
    
    
    
    - Employee housing benefits
    
    
    (D
    )
    
    
    (14,942
    )
    
    
    (14,942
    )
    
    
    (14,922
    )- Reversal of depreciation for revalued
property, plant and equipment
    
    
    (E
    )
    
    
    4,127
    
    
    
    4,127
    
    
    
    13,843- Reversal of employee compensation costs for
share option scheme under HKFRS
    
    
    (F
    )
    
    
    108,417
    
    
    
    
    
    
    
    - Effect on sale of indefeasible right-of-use
    
    
    (G
    )
    
    
    (3,747
    )
    
    
    (142
    )
    
    
    (142
    )- Adjustment of differences on Convertible
Bonds between HKFRS and US GAAP:(i) Reversal of unrealized/realized loss
on changes in fair value of derivative
component of Convertible Bonds
    
    
    (H
    )
    
    
    
    
    
    
    2,396,592
    
    
    
    568,860(ii) Amortization of transaction costs on
Convertible Bonds
    
    
    (H
    )
    
    
    
    
    
    
    (3,540
    )
    
    
    (4,295
    )(iii) Difference in provision for interest
expense on Convertible Bonds under HKFRS
    
    
    (H
    )
    
    
    
    
    
    
    137,973
    
    
    
    174,312(iv) Difference in exchange gain on
Convertible Bonds under HKFRS
    
    
    (H
    )
    
    
    
    
    
    
    (58,090
    )
    
    
    (84,511
    )- Effect on the capitalized rental cost
during the construction period under HKFRS
    
    
    (I
    )
    
    
    
    
    
    
    (25,935
    )
    
    
    (53,857
    )- Deferred tax effects of US GAAP adjustments
    
    
    (J
    )
    
    
    14,957
    
    
    
    14,957
    
    
    
    13,928Net income under US GAAP
    
    
    
    
    
    
    5,003,847
    
    
    
    6,224,868
    
    
    
    9,864,947
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The Group2006Note
    
    (As restated)
    
    2007Shareholders equity under HKFRS
    
    
    2.1
    
    
    
    79,861,324
    
    
    
    97,213,180Impact of US GAAP adjustments:- Effect of acquisition of subsidiaries
    
    
    (A
    )
    
    
    (2,998,532
    )
    
    
    (2,998,532
    )- Transaction costs for the acquisition of subsidiaries
    
    
    (A
    )
    
    
    (158,924
    )
    
    
    (158,924
    )- Recognition of depreciation expenses based on historical
cost of property, plant and equipment of subsidiaries
    
    
    (A
    )
    
    
    107,246
    
    
    
    59,193- Upfront non-refundable revenue and direct incremental
costs not recognized under purchase method of accounting
under the previous HK GAAP
    
    
    (A
    )
    
    
    90,776
    
    
    
    90,776- Reversal of revaluation surplus of property, plant and
equipment:- Cost
    
    
    (E
    )
    
    
    (282,861
    )
    
    
    (282,861
    )- Accumulated depreciation
    
    
    (E
    )
    
    
    27,732
    
    
    
    41,575- Effect on sale of indefeasible right-of-use
    
    
    (G
    )
    
    
    (3,889
    )
    
    
    (4,031
    )- Adjustment of differences on Convertible Bonds between
HKFRS and US GAAP:(i) Reversal of unrealized/realized loss on changes in
fair value of derivative component of Convertible Bonds
    
    
    (H
    )
    
    
    2,396,592
    
    
    
    2,965,452(ii) Amortization of transaction costs on Convertible Bonds
    
    
    (H
    )
    
    
    (3,540
    )
    
    
    (7,835
    )(iii) Difference in provision for interest expense on
Convertible Bonds under HKFRS
    
    
    (H
    )
    
    
    137,973
    
    
    
    312,285(iv) Difference in exchange gain on Convertible Bonds
under HKFRS
    
    
    (H
    )
    
    
    (58,090
    )
    
    
    (142,601
    )(v) Conversion of Convertible Bonds under US GAAP
    
    
    (H
    )
    
    
    
    
    
    
    (3,127,301
    )- Effect on the capitalized rental cost during a
construction period under HKFRS
    
    
    (I
    )
    
    
    (25,935
    )
    
    
    (79,792
    )- Deferred tax effects of US GAAP adjustments
    
    
    (J
    )
    
    
    96,082
    
    
    
    80,528Shareholders equity under US GAAP
    
    
    
    
    
    
    79,185,954
    
    
    
    93,961,112
 F-93




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##### Table of Contents



Condensed Statements of Income under US GAAP
 2005
    
    2006(As restated)
    
    (As restated)
    
    2007Revenue (Turnover):
    
    
    88,243,626
    
    
    
    95,553,006
    
    
    
    99,540,453Operating expenses:Leased lines and network capacities
    
    
    (8,900,485
    )
    
    
    (8,942,999
    )
    
    
    (9,135,497
    )Interconnection charges
    
    
    (8,436,133
    )
    
    
    (9,671,225
    )
    
    
    (10,906,819
    )Depreciation and amortization
    
    
    (20,678,547
    )
    
    
    (22,731,703
    )
    
    
    (22,710,733
    )Employee benefit expenses
    
    
    (5,559,545
    )
    
    
    (6,695,621
    )
    
    
    (7,154,910
    )Selling and marketing
    
    
    (20,958,811
    )
    
    
    (19,735,426
    )
    
    
    (19,681,372
    )General, administrative and other expenses
    
    
    (11,855,027
    )
    
    
    (13,569,325
    )
    
    
    (14,695,072
    )Cost of telecommunications products sold
    
    
    (3,693,361
    )
    
    
    (4,934,404
    )
    
    
    (5,031,706
    )Total operating expenses
    
    
    (80,081,909
    )
    
    
    (86,280,703
    )
    
    
    (89,316,109
    )Operating income
    
    
    8,161,717
    
    
    
    9,272,303
    
    
    
    10,224,344Interest income
    
    
    100,807
    
    
    
    263,542
    
    
    
    186,243Finance (costs)/gains
    
    
    (1,133,238
    )
    
    
    (583,289
    )
    
    
    172,515Other gains  net
    
    
    30,249
    
    
    
    21,347
    
    
    
    2,923,160Net income before taxation and minority interests
    
    
    7,159,535
    
    
    
    8,973,903
    
    
    
    13,506,262Taxation
    
    
    (2,155,454
    )
    
    
    (2,748,928
    )
    
    
    (3,640,242
    )Net income before minority interests
    
    
    5,004,081
    
    
    
    6,224,975
    
    
    
    9,866,020Minority interests
    
    
    (234
    )
    
    
    (107
    )
    
    
    (1,073
    )Net income
    
    
    5,003,847
    
    
    
    6,224,868
    
    
    
    9,864,947
 F-94




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##### Table of Contents



2005
    
    2006Note
    
    (As restated)
    
    (As restated)
    
    2007Basic earnings per share (RMB):
    
    
    (1
    )
    
    
    0.40
    
    
    
    0.49
    
    
    
    0.76Diluted earnings per share (RMB):
    
    
    (2
    )
    
    
    0.40
    
    
    
    0.47
    
    
    
    0.71Basic earnings per ADS (RMB):
    
    
    (1
    )
    
    
    3.98
    
    
    
    4.94
    
    
    
    7.57Diluted earnings per ADS (RMB):
    
    
    (2
    )
    
    
    3.97
    
    
    
    4.68
    
    
    
    7.07
 
  (1)
    
    Basic earnings per share for the years ended December 31, 2005, 2006 and 2007 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, 2005, 2006 and 2007 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 18. For 2007, the dilutive potential ordinary shares
arose from additional share options granted in 2002, 2003, 2004 and 2006 under the amended
Share Option Scheme (see Note 29) and the Convertible Bonds before conversion.
 F-95




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##### Table of Contents



Condensed Balance Sheets under US GAAP
 2006(As restated)
    
    2007AssetsCurrent assets:Bank balances and cash
    
    
    12,243,191
    
    
    
    6,675,476Short-term bank deposits
    
    
    195,820
    
    
    
    644,016Amounts due from related parties
    
    
    257,170
    
    
    
    109,096Amounts due from Domestic Carriers
    
    
    138,521
    
    
    
    149,736Accounts receivable
    
    
    6,516,867
    
    
    
    4,840,094Less: Provision for doubtful debts
    
    
    (3,074,656
    )
    
    
    (1,628,940
    )Accounts receivable, net
    
    
    3,442,211
    
    
    
    3,211,154Inventories
    
    
    2,373,871
    
    
    
    2,528,364Current portion of deferred tax assets
    
    
    819,118
    
    
    
    764,162Prepayments and other current assets
    
    
    2,039,840
    
    
    
    3,516,279Total current assets
    
    
    21,509,742
    
    
    
    17,598,283Non-current assets:Property, plant and equipment, net
    
    
    112,700,043
    
    
    
    115,977,305Other assets
    
    
    11,367,407
    
    
    
    12,855,199Total assets
    
    
    145,577,192
    
    
    
    146,430,787Liabilities and equityCurrent liabilities:Payables and accrued liabilities
    
    
    26,543,904
    
    
    
    32,031,307Taxes payable
    
    
    1,634,316
    
    
    
    1,239,512Amounts due to Unicom Group
    
    
    1,088,297
    
    
    
    820,699Amounts due to related parties
    
    
    328,702
    
    
    
    769,558Amounts due to Domestic Carriers
    
    
    854,885
    
    
    
    600,283Short-term bonds
    
    
    7,087,217
    
    
    
    Current portion of long-term bank loans
    
    
    3,984,350
    
    
    
    2,191,382Current portion of obligations under finance leases
    
    
    100,004
    
    
    
    1,448Advances from customers
    
    
    10,069,739
    
    
    
    11,577,405Total current liabilities
    
    
    51,691,414
    
    
    
    49,231,594Non-current liabilities:Long-term bank loans
    
    
    4,139,349
    
    
    
    1,660,921Convertible bonds
    
    
    7,862,609
    
    
    
    Obligations under finance leases
    
    
    10,230
    
    
    
    3,882Deferred tax liabilities
    
    
    410,201
    
    
    
    253,550Deferred revenue
    
    
    2,274,594
    
    
    
    1,315,814Total non-current liabilities
    
    
    14,696,983
    
    
    
    3,234,167Minority interests
    
    
    2,841
    
    
    
    3,914Shareholders equity
    
    
    79,185,954
    
    
    
    93,961,112Total liabilities and shareholders equity
    
    
    145,577,192
    
    
    
    146,430,787
 F-96




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##### Table of Contents



Condensed Statements of Changes in Shareholders Equity under US GAAP
 Balance of shareholders equity as of January 1, 2005, as previously reported
before adjusting for the Business Combination under common control
    
    
    69,442,322Adjustment for the Business Combination under common control
    
    
    392,376Balance of shareholders equity as of January 1, 2005, as restated
    
    
    69,834,698Net income for the year ended December 31, 2005
    
    
    5,003,847Deemed 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
    
    
    73,648,697Balance of shareholders equity as of January 1, 2006, as previously reported
before adjusting for the Business Combination under common control
    
    
    73,265,286Adjustment for the Business Combination under common control
    
    
    383,411Balance of shareholders equity as of January 1, 2006, as restated
    
    
    73,648,697Net income for the year ended December 31, 2006
    
    
    6,224,868Deemed 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
    
    
    79,185,954Balance of shareholders equity as of January 1, 2007, as previously reported
before adjusting for the Business Combination under common control
    
    
    78,733,447Adjustment for the Business Combination under common control
    
    
    452,507Balance of shareholders equity as of January 1, 2007, as restated
    
    
    79,185,954Net income for the year ended December 31, 2007
    
    
    9,864,947Deemed capital contribution from owner for employee housing benefits
    
    
    14,922Dividend paid
    
    
    (2,284,942
    )Value of employee services
    
    
    157,262Exercise of share options
    
    
    313,262Deemed capital distribution relating to the consideration for purchase of
business under common control
    
    
    (880,000
    )Distribution of income of Guizhou Business under common control to Unicom Group
    
    
    (101,020
    )Conversion of Convertible Bonds
    
    
    7,690,727Balance of shareholders equity as of December 31, 2007
    
    
    93,961,112
 F-97




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##### Table of Contents



Condensed Cash Flow Statements under US GAAP
 2005
    
    2006(As restated)
    
    (As restated)
    
    2007Net cash inflows (outflows) from:Operating activities
    
    
    32,099,535
    
    
    
    36,573,178
    
    
    
    32,605,044Investing activities
    
    
    (17,539,832
    )
    
    
    (18,005,428
    )
    
    
    (24,360,133
    )Financing activities
    
    
    (13,732,795
    )
    
    
    (11,813,854
    )
    
    
    (13,812,626
    )Net increase (decrease) in cash and cash equivalents
    
    
    826,908
    
    
    
    6,753,896
    
    
    
    (5,567,715
    )Cash and cash equivalents, beginning of year
    
    
    4,662,387
    
    
    
    5,489,295
    
    
    
    12,243,191Cash and cash equivalents, end of year
    
    
    5,489,295
    
    
    
    12,243,191
    
    
    
    6,675,476Interest paid (net of amount capitalized)
    
    
    (1,137,294
    )
    
    
    (781,931
    )
    
    
    (224,531
    )
 F-98