2008 Interim Results China Netcom Group Corporation (Hong Kong) Limited

Transcription

1 2008 Interim Results China Netcom Group Corporation (Hong Kong) Limited August 25, 2008

2 Overall Performance Zuo Xunsheng Chairman and CEO

3 Forward-Looking Statements This presentation and the presentation materials distributed herewith include forward-looking statements. All statements, other than statements of historical facts, that address activities, events or developments that China Netcom Group Corporation (Hong Kong) limited ( China Netcom ) expects or anticipates will or may occur in the future (including but not limited to projections, targets, estimates and business plans) are forward-looking statements. China Netcom s actual results or developments may differ materially from those indicated by these forward-looking statements as a result of various factors and uncertainties, including but not limited to the level of demand for telecommunications services, competitive forces in more liberalized markets, the effects of tariff reduction initiatives, changes in the regulatory policies and industrial environment, and other risks and factors beyond our control. In addition, China Netcom makes the forward-looking statements referred to herein as of today and undertakes no obligation to update these statements

4 Basis of Presentation of Financial and Operational Data On February 28, 2007 the Group completed the sale of its assets and liabilities in relation to its telecommunications operations in Guangdong and Shanghai branches. In accordance with HKFRS 5 Non-current assets held for sale and discontinued operations issued by the HKICPA, the results and cash flows of the operations of the Guangdong and Shanghai branches for the six months ended June 30, 2007 have been presented as discontinued operations. On December 31, 2007 the Group completed acquisition of the entire equity interest of Beijing Telecom P&D Institute from China Netcom Group Beijing Communications Corporation. Before the acquisition, Beijing Telecom P&D Institute was a wholly owned subsidiary of China Netcom Group Beijing Communications Corporation, which is a wholly owned subsidiary of China Netcom Group. Since China Netcom Group is the ultimate holding company of the Group, the acquisition is a business combination under common control. Therefore, the Group accounted for this acquisition using the pooling of interest method according to Accounting Guideline No. 5 - Merger Accounting for Common Control Transactions ( AG 5 ). The acquired businesses and assets are recorded at book value under HKFRS as if the businesses and assets of Beijing Telecom P&D Institute have been owned by the Group from the earliest comparative period presented. Accordingly, the financial information for six months ended June 30, 2007 has been restated. Financial and operating data that we provided did not include discontinued operations, unless otherwise specified

5 Key Operational Data 1H2007 Change Local Access Subscribers Fixed-line ( 000) PHS ( 000) Broadband Subscribers Broadband Subscribers ( 000 ) Broadband Market Share (1) Broadband Penetration (2) ARPU Local Access ARPU (RMB) (3) Broadband ARPU (RMB) Results of Strategic Transformation Broadband Services Revenue / Total Revenue ICT Revenue / Total Revenue 115, , % 86,715 83, % 28,362 25, % 17,123 23, % 88.9% 90.4% +1.5PPT 19.7% 28.1% +8.4PPT % % 15.7% 21.8% +6.1PPT 3.6% 4.6% +1.0PPT (1) CNC broadband subscribers/ total broadband subscribers in our service region (2) CNC broadband subscribers/cnc fixed-line subscribers (3) Including local voice, long distance voice and VAS - 5 -

6 Key Financial Data (Excl. Upfront Connection Fees) 1H2007 % of Revenue % of Revenue Change Revenue EBITDA 40,680 40, % 21, % 21, % -2.7% Net Profit 5, % 5, % +11.9% Adjusted profit before taxation 7, % 7, % -7.4% (1) Adjusted net Profit 5, % 5, % (1) +3.2% CAPEX Free Cash Flow 8, % 8, % 7, % -10.7% 8, % +3.7% (1) Excluding a pre-tax gain on the non-monetary asset exchanges of RMB 610 million

7 Strategic Execution Boost Growth of Broadband Services Broadband services revenue up 38.8% yoy, representing 21.8% of total revenue in, up 6.1ppt Broadband subscribers reached 23,355 thousand with a net increase of 3,587 thousand, while market share increased to 90.4% ARPU reached RMB 68.5, an increase of RMB 1.1yoy, despite rapid increase in subscribers Grow Innovative Businesses Portfolio ICT revenue up 28.5% yoy Advertising and media business revenue up 339.4% yoy Revenue from government and enterprises grew by 11.1% yoy primarily driven by the growth of innovative businesses Mitigate Decline of Traditional Businesses Family 1+ subscribers reached 9,971thousand, accounting for 36% of the broadband subscribers Family gateway was launched to enrich Family 1+ and enhance fixed-line network value Revenue from residential customers up 1.1% yoy Improve Free Cash Flow to Enhance Shareholder Value CAPEX down 10.7% and down 2.2ppt as percentage of total revenue yoy Free cash flow up 3.7% yoy, reaching RMB 8,428 million, accounting for 20.7% of total revenue - 7 -

8 Encouraging Progress in Strategic Transformation Since 2005, innovative businesses revenue as percent of total revenue increased from 19.9% to 40.6% Exposure to fixed-line voice business significantly reduced Ratio of Innovative Businesses Revenue to Total Revenue Kept Increasing Traditional Businesses 80.1% 74.8% 65.3% 67.9% 59.4% -8.5PPT Innovative Businesses (1) 19.9% 25.2% 34.7% 32.1% 40.6% +8.5PPT H2007 (1) Including broadband and other Internet-related services, ICT, VAS, advertising and media business, business & data communications services - 8 -

9 Innovative Businesses Delivered Substantial Growth Innovative businesses revenue was up 26.2% from the same period last year Broadband services remained the key driver of innovative businesses. ICT and advertising and media business gathered momentum Innovative Businesses Revenue Innovative Businesses Revenue Breakdown 15,998 X1.8 20,581 28,656 13, % 16,480 13,056 2, (42) , H2007 1H2007 Broadband & Internetrelated VAS (1) ICT & Data Communications Advertising (2) (1) Excluding revenue from Phone Navigation (2) Including revenue from Phone Navigation, online advertising and yellow pages - 9 -

10 Sustained Rapid Growth in Broadband Services Broadband Subscribers Broadband Services Revenue & ARPU (in thousands) 11,036 88% X2.1 19,768 14,429 88% 89% 17,123 89% 36.4% 23,355 90% 7, X1.9 9, , , % 8, H2007 Subscriber Market Share(1) H2007 Revenue ARPU (in thousands) 3, % Broadband Growth Opportunity 5, % 7, % Average Broadband population penetration of main countries and regions in 2007 was 64.5 % (2) Proportion of Broadband Subscribers at Access Rate 2Mbps and Above 46.0% 55.8% E Net broadband subscribers of CNC Broadband population penetration in northern 10 provinces(1) 2006 (1) Source: Ministry of Industry and Information Technology (MIIT) and National Bureau of Statistics (2) Source: Gartner. Main countries and regions include USA, Japan, Korea, France, Australia, Hong Kong

11 Strong Strategic Execution in Broadband Content and Applications Services Integrated Content Expanded Applications Continue to enrich content & applications, and diversify access terminals Objective Development model of content & applications + access 2008 Revenue of content & applications to total revenue rises notably 2007 Revenue of content & applications services increased rapidly Upgraded CNC MAX Client: 8.05 million users and 2.37 million active users by end of June 2008 Initiated Net Vision Plan Broadband Content and Applications Services Revenue 461 X , % 1,270 + Initiated video monitoring service CNC Eye with more than 40 thousand monitoring points in place Expanded network information security business Initiated internet ID card ipass Broadband Content and Applications Services ARPU (RMB) 3.8 X % H H

12 Other Innovative Businesses Developed Strong Growth Potential ICT Building up ICT capabilities to serve key segments Breakthroughs in government, environmental protection, transportation, and other key sectors Key contracts include Minimum Living Standard Allowance information system for MCA, pollution monitoring in Neimenggu, and electronic monitoring system for police in Shenyang City Extending up value chain Established call center operating company and Beijing Call Center base in conjunction with local government Haier outsourcing services project 1,465 1H2007 ICT Revenue 28.5% 1,882 Revenue from Government and Enterprises 12, % 13,994 Enriching media resources Advertising and Media Business Revenue 31.0% 34.5% Advertising and Media Business Navigation by phone Billing Internet Olympic Yellow Pages % 413 1H2007 Revenue % of Total Revenue Telephone booths Outdoors 1H

13 Traditional Businesses Remained under Pressure Traditional Businesses Revenue Local Access Subscribers 64,524 61,207 53,832 (in thousands) 114, , , , ,510 27,329 27,316 26,189 28,362 25,378 27,624 24,140 87,330 86,656 84,631 86,715 83, H H2007 Fixed line PHS (RMB) Local Access ARPU (1) 27,624 (2,828) (581) (252) , % H2007 Local voice Long Interconnection Other distance fees business 1H2007 (1) Includes local voice, long distance voice, and VAS

14 Family 1+ Enhancing Fixed-line Network Value Customer Base Number of Family 1+ Subscribers (000) 4, % 9,971 Broadband Subscriber Structure 36% are Family 1+ subscribers Satisfying the need of residential customers for multimedia information services 1H2007 Terminal Voice Internet access Education Content Sports Movie Security Applications Daily Life Home Informationization Family Gateway Initiated in May Functions included multi-pc hub, content filtering, wireless internet access, family video monitoring, storage, printing and etc. Fixed Phone Aim to become intelligent platform for Family Informationization PC TV Mobile Established advantage Rapidly growing capability Initial stage To be provided Customer Service Ranked first in MIIT s survey for overall satisfaction four times in the last five years Raising customer s awareness for using fixed-line as comprehensive information services integrating communications, entertainment, applications, etc

15 Merger with Unicom Will Accelerate Our Strategic Goal Strategic Goal Strategic goal established in 2004 Broadband Service Provider Converged Communications Service Provider Narrow Service Provider and beyond Strategic execution Traditional businesses accounted for 80.1% of revenue in 2005 Innovative businesses accounted for 40.6% of revenue in Broadband Subscriber ( 000) 11,036 X2.1 23,355 Innovative businesses accounting for above 60% of revenue (1) MIIT forecast of mobile users (mm) 532 1, E The merger with Unicom will enable the company to meet evolving and diversified customer needs based on multiple networks and terminals and accelerate our strategic goal. (1) Innovative businesses include mobile business, data taken from 2007 pro forma financial statement of the new company

16 2008 Interim Financial Data Li Fushen Chief Financial Officer

17 Revenue Breakdown (RMB mn) 1H07 (1) 1H08 (1) YoY Revenue Growth by Customer Local voice Long distance 17,631 4,882 14,803 4, % 1.1% Interconnection fees Other services Broadband services & other Internet-related services Business & data communication services Value-added services 4, ,632 1,830 3,035 3,951 1,085 9,160 2,032 2,993 Government & Enterprises Residentials -22.2% Individuals Revenue Breakdown by Customer 11.6% 34.5% ICT Advertising & media business 1, , % Government & Enterprises Individuals 9.6% Total 40,680 40,620 Residentials Others (1) Excludes upfront connection fees

18 Operating Expenses OPEX/Revenue Incremental Operating Expense Breakdown 31, % 2.8% 32, % 16.3% 15.7% 31, (343) (249) , % 11.1% 14.1% 15.3% 31.0% 31.9% 1H2007 D&A Staff costs SG&A Network operation & support costs Others 1H2007 Depreciation and amortization SG&A Others Staff costs Network operation & support costs D&A rose by 2.73%. Growth rate expected to decline in future as a result of effective CAPEX control Staff costs increased due to new labor law and increase in social security cost Increase in ICT cost led to rise in other operating expenses

19 Profitability EBITDA Adjusted profit before taxation 7, % 7,046 (1) -2.7% 21,719 21,126 1H % 52.0% Adjusted net profit 5, % 5,420 (1) 12.9% 13.3% 1H2007 EBITDA EBITDA margin (1) Excluding a pre-tax gain on the non-monetary asset exchanges of RMB 610 million. 1H2007 Net profit Net profit margin

20 Debt and Financial Cost Total Debt & Debt-To-Capital Ratio Financial Cost 1, % 82, % 79,154 1, % 50.0% 47.3% 61,726 64,094 55,190 1H % 41.8% 36.6% Total Debt/EBITDA 3.0x 2.6x H2007 1H

21 Capex Decreased CAPEX and More Effective CAPEX Structure 8, % Broadband & Data 7,527 Support System 31.0% Transmission Network 7.2% 56.8% Communications Infrastructure & Others 29.6% 4.2% PHS Fixed-line 14.6% 5.0% 12. 6% 1.0% 3.4% 21.1% 13.5% 1H

22 Merger Update Zuo Xunsheng Chairman and CEO

23 Merger with China Unicom Acquisition Method Scheme of arrangement New Unicom shares, ADSs, and Special Unicom Options to be issued in exchange of Netcom shares, ADSs and options, respectively Exchange Ratio 1 Netcom share = Unicom shares 1 Netcom ADS = Unicom ADSs Enlarged Group Name Chinese full name: 中国联合网络通信 ( 香港 ) 股份有限公司 ( 中国联通 ) English full name: China Unicom (Hong Kong) Limited ( China Unicom ) New Management Team Mr. Chang Xiaobing to become Chairman and CEO of the Enlarged Group Management team mainly to be drawn from existing management of Unicom and Netcom Integration Plan A joint working team led by Mr. Chang has been established Majority of the integration work is expected to be completed within one year

24 2007 Pro forma Financials RMB, mm - CDMA Business + = Enlarged Group Revenue (1) (1) 99,539 32,618 82, ,059 EBITDA 33,005 1,471 41,244 72,001 EBITDA Margin 33.2% 4.5% 50.0% 48.3% Total Assets 149,422 12, , ,541 Net Assets 97,217 4,673 82, ,907 Source: Scheme document, Unicom Red chip and Netcom Red chip 2007 annual reports (1) RMB1.517bn instillation fees of fixed-line telephone of Netcom red chip has been deducted

25 Rapid Growth of the China Telecommunications Industry It is expected that good macro economic environment and relatively low penetration rate will enable China s telecom sector to maintain strong growth momentum in the next few years Rapidly increasing telecom subscribers Relatively low penetration rate (Millions) CAGR=18.7% % 105% 70% 35% 84% 122% 57% 56% 82% 69% 90% 48% 41% 28% Fixed Line Subscribers Mobile Subscribers Source: Ministry of Industry and Information Technology Strong growth of broadband market 0% US UK Japan Korea China Mobile Penetration Fixed Line Penetration Source: Research reports Considerable potential of 3G market (Millions) 8,000 6,000 4,000 2,000 2,385 CAGR=40.7% 3,750 5,190 6, % 60.0% 30.0% 75.6% 59.5% 35.4% 26.0% 23.0% 17.4% Broadband Subscribers 0.0% (1) Japan Korea Australia HK US Europe China 3G Subscribers as % of Total Mobile Subscribers Source: Ministry of Industry and Information Technology Source: Research reports; data as of 1Q 08 Note 1:Europe includes France, Germany, Italy, and UK

26 Major Competitiveness of Enlarged Group Full service capability in the 10 Northern provinces Most balanced full service operation Leading broadband and fixed-line businesses Abundant backbone, metropolitan area network and gateway network resources Radiation effect of Beijing business Well positioned for 3G leadership WCDMA license expected to establish the 3G leadership WCDMA s advantages: The most widely used technology globally Rationalized quality-price ratio of handsets Mature applications Accelerated growth in number of users Comprehensive resources for international business expansion Most affluent telecom operator in international network Most comprehensive international network assets in China 26 international submarine cable systems 25 cross-border road cable systems 13 overseas POPs Collaborations with over 400 global operators

27 Business Strategies 1 Establish market leadership in 3G market 2 Leverage on full service platform 3 Develop broadband business and transform to an information services provider 4 Rationalize investments 5 Integrate customer and distribution resources to enhance marketing efficiency 6 Reinforce the customer-centric culture

28 Development Objectives A world-class broadband telecommunications and information services provider Mobile Stable increase in overall market share - 3G: leading position - 2G: maintain stable Continued enhancement of customer value - Stable growth of overall ARPU driven by leading 3G ARPU level Establishment of leadership in value added businesses - The proportion of revenue from value-added service takes the lead in the market Fixed-line Customer value maximization - Bundling, terminal integration, services revolution and stabilization of growth in fixed-line subscriber and voice service Optimization of return from future investments - Centralized planning to optimize return on investmentsand service upgrading Broadband Network Further business growth - Reinforce planned development of broadband network and integration with data, contents, applications and multimedia Consolidation of the leading market position in the 10 Northern provinces Steadily expand the market in southern China - Effective utilization of customer and network resources in the Southern market to expand the business Integrated full-service operation

29 Merger is Instrumental in Enhancing Comprehensive Competitiveness and Shareholders Value of the Company 1 Acquire mobile business; add growth drivers 2 Full-service Platform 3 Enhanced Company Profile 4 Resource sharing

30 Q & A China Netcom Group Corporation (Hong Kong) Limited August 25, 2008