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Financial Review

In 2016, the Group continued to maintain its leading position in 4G business, developed vigorously its wireline broadband business, and achieved an encouraging growth in its revenue. The growth rate of the Group's telecommunications services revenue ranked No.1 in the industry and the Group continued to consolidate its position as a leading operator in the industry.

At the same time, the Group actively promoted its low-cost, high-efficiency operation model, conducted resources utilization evaluation in key areas, and optimized its strategies, budget and performance-based salary management. Operational efficiency increased favorably, with operating expenses as a proportion of operating revenue decreasing for the first time since 2008, thereby maintaining its leading profitability and continuously creating value for shareholders.

2015 2016 Change
Operating revenue (RMB million) 668,335 708,421 6.0%
    Revenue from telecommunications services (RMB million) 584,089 623,422 6.7%
    Revenue from sales of products and others (RMB million) 84,246 84,999 0.9%
EBITDA (RMB million) 240,028 256,677 6.9%
EBITDA margin 35.9% 36.2% 0.3pp
Profit attributable to equity shareholders (RMB million) 108,539 108,741 0.2%
Margin of profit attributable to equity shareholders 16.2% 15.3% -0.9pp
Basic earnings per share (RMB) 5.30 5.31 0.2%

In 2016, operating revenue reached RMB708.4 billion, up by 6.0% compared to the previous year, of which revenue from telecommunications services was RMB623.4 billion, up by 6.7% compared to the previous year. The growth rate of revenue from telecommunications services reached a five-year high.

Revenue from Voice Services

Due to the substitution effect of mobile Internet and other factors, as well as the Group's anticipation of policy changes in advance which resulted in the proactive promotion of customers' migration to flat rate packages and accelerated the mitigation of risks associated with long-distance roaming tariffs, revenue from voice services continued to decline to RMB209.9 billion, down by an ever-accelerating rate of 19.8% compared to the previous year, representing 33.7% of telecommunications services revenue, down by 11.1 percentage points compared to the previous year.

Revenue from Data Services

Revenue from data services was RMB394.9 billion, up by 30.2% compared to the previous year, representing 63.3% of revenue from telecommunications services, up by 11.3 percentage points compared to the previous year. The revenue structure further optimized.

As a result of the Group continued to focus on its 4G business, deepened its data traffic operation and enriched its various applications, data traffic business recorded a rapid growth. Revenue from wireless data traffic reached RMB288.2 billion, up by 43.5% compared to the previous year, and was the main engine of revenue growth. Wireless data traffic revenue as a proportion of revenue from telecommunications services rose to 46.2%, which was higher than the total of voice services revenue and SMS/MMS services revenue of the year and became the largest source of revenue of our Group. SMS/MMS services revenue was RMB28.6 billion, down by 8.6% compared to the previous year.

The Group firmly adhered to the “higher speed, better quality and orientation” strategy, steadily promoted the development of its wireline broadband business, perfected its quality service system for broadband products and achieved a satisfactory outcome. Revenue from wireline broadband services reached RMB25.6 billion, up by 39.7% compared to the previous year.

Revenue from applications and information services was RMB52.6 billion, down by a reduced 0.8% compared to the previous year. The Group's digital services business is at a stage of active exploration and will see more room for development in the future.

In order to provide customers with a broader offering of terminals with more diversified functions, the Group actively promoted the sale of handsets through open channels. Revenue from the sales of products and others was RMB85.0 billion, up by a falling 0.9% compared to the previous year.

The Group continued to adhere to the principles of forward-looking planning, effective resources allocation, rational investment and refined management in cost allocation, further strengthened the cost control and made a concrete progress.

In 2016, the Group's operating expenses were RMB590.3 billion, up by 4.4% compared to the previous year. Operating expenses represented 83.3% of operating revenue, down by 1.3 percentage points compared to the previous year, which was a decrease for the first time since 2008 and continued to be industry-leading. Of all operating expenses, selling expenses declined by 3.9%, maintenance expenses, operating lease charges and utilities expenses totally declined by 1.6%, administrative expenses remained flat, representing a further improved cost management level.

2015
RMB million
2016
RMB million
Change
%
Operating  expenses 565,413 590,333 4.4
Leased lines and network assets 20,668 39,083 89.1
Interconnection 21,668 21,779 0.5
Depreciation 136,832 138,090 0.9
Employee benefit and related expenses 74,805 79,463 6.2
Selling expenses 59,850 57,493 -3.9
Cost of products sold 89,297 87,352 -2.2
Other operating expenses 162,293 167,073 2.9
Leased Lines and Network Assets

Leased lines and network assets expenses were RMB39.1 billion, up by 89.1% compared to the previous year and representing 5.5% of operating revenue. The Group paid RMB28.1 billion for charges for use of tower assets in accordance with the price stated in tower leasing agreements and the actual quantity of rented towers, being the main reason for the increased leasing fees. With customers' migration from 3G to 4G, the utilization rate of TD-SCDMA network kept falling and the leasing fees for TD-SCDMA network capacity were RMB2.7 billion, down by 43.3% compared to the previous year. Because of the transfer of tower related assets and the original cost decreased on the scale of leased assets, the leasing fees of “Village Connect” assets were RMB2.7 billion, down by 37.4% compared to the previous year.

Interconnection

Interconnection expenses were RMB21.8 billion, up by 0.5% compared to the previous year and representing 3.1% of operating revenue.

Depreciation

Depreciation was RMB138.1 billion, up by 0.9% compared to the previous year and representing 19.5% of operating revenue. On one hand, the Group continued to maintain its investments and expanded its assets scale which resulted in an increase in depreciation; on the other hand, due to the change in tower operating model, the transfer of existing towers helped offset the increase in depreciation.

Employee Benefit and Related Expenses

Employee benefit and related expenses were RMB79.5 billion, up by 6.2% compared to the previous year and representing 11.2% of operating revenue. The Group adjusted and optimized its personnel structure, and increased the compensation allocation and motivation in favor of primary frontline employees. Together with the increase in social insurance expense standard, employee benefit and related expenses increased accordingly.

Selling Expenses

Selling expenses were RMB57.5 billion, down by 3.9% compared to the previous year and representing 8.1% of operating revenue. The Group actively promoted the transformation of its marketing model and enhanced its precision marketing to customers, resulting in a further improvement in the efficiency of its use of marketing resources.

Cost of Products Sold

Cost of products sold were RMB87.4 billion, down by 2.2% compared to the previous year, of which subsidies for handset sales were RMB10.1 billion, down by 9.0% compared to the previous year. With the Group's promotion of the sale of handsets through open channels, cost of products sold decreased and subsidies for handset sales were further reduced.

Other Operating Expenses

Other operating expenses were RMB167.1 billion, up by 2.9% compared to the previous year and representing 23.6% of operating revenue. Maintenance expenses, operating lease charges and utilities expenses constituted the majority of other operating expenses, totaling RMB99.2 billion, down by 1.6% compared to the previous year, mainly due to changes in tower operating model and refined cost management. Administrative expenses such as conference, office, travelling and business entertainment expenses were RMB3.2 billion, remaining flat and representing a further decreased proportion of operating revenue.

As a result of revenue growth and cost management, the Group's profitability in 2016 continued to be industry-leading. Profit from operations was RMB118.1 billion, up by 14.7% compared to the previous year. EBITDA was RMB256.7 billion and EBITDA margin was 36.2%, up by 0.3 percentage points compared to the previous year. Profit attributable to equity shareholders was RMB108.7 billion and its margin was 15.3%. Excluding the one-off gain on the transfer of Tower Assets in 2015, net profit increased by 10.5%.

2015
RMB million
2016
RMB million
Change
%
Profit from operations 102,922 118,088 14.7%
Gain on the transfer of Tower Assets 15,525
Other gains 1,800 1,968 9.3
Interest income 15,852 16,005 1.0
Finance costs 455 235 -48.4
Share of profit for investments accounted for using the equity method 8,090 8,636 6.7
Taxation 35,079 35,623 1.6
Profit attributable to equity shareholders 108,539 108,741 0.2

The Group's financial position continued to remain steady. As at the end of 2016, total assets grew from RMB1,427.9 billion as at the end of the previous year to RMB1,521.0 billion. Total liabilities changed from RMB507.5 billion as at the end of the previous year to RMB538.9 billion. Liabilities-to-assets ratio changed from 35.5% at the end of the previous year to 35.4%.

Total borrowings was RMB5.0 billion, representing 0.5% of total book capitalization (being the sum of total debt and total equity attributable to equity shareholders). The borrowings represented the fixed-interest guaranteed RMB bonds issued by Guangdong Mobile, which will mature and be redeemed in October 2017. The Group firmly adhered to its prudent financial risk management policies and maintained sound repayment capabilities. The effective average interest rate of borrowings was 4.70% and its effective interest coverage multiple was 548 times.

As at 31 Dec 2015
RMB million
As at 31 Dec 2016
RMB million
Change
%
Current assets 488,697 586,645 20.0
Non-current assets 939,198 934,349 -0.5
Total assets 1,427,895 1,520,994 6.5
Current liabilities 501,038 536,389 7.1
Non-current liabilities 6,489 2,467 -62.0
Total liabilities 507,527 538,856 6.2
Non-controlling interests 3,032 3,117 2.8
Total equity attributable to equity shareholders 917,336 979,021 6.7
Total equity 920,368 982,138 6.7

The Group firmly adhered to its sound and prudent financial policies and stringent fund management systems and strived to maintain a healthy cash flow level, thereby ensuring the safety and integrity of its funds through its highly centralized management of investing and financing activities. Meanwhile, the Group continued to reinforce its centralized fund management efforts and made appropriate allocations of its funds, thereby enhancing the efficiency of funds utilization.

In 2016, the Group's cash flow remained healthy. Net cash inflow from operating activities, net cash outflow from investing activities and net cash outflow from financing activities were RMB253.7 billion, RMB194.5 billion and RMB49.0 billion respectively. Free cash flow was RMB66.4 billion, up by 68.1% compared to the previous year. As at the end of 2016, the Group's cash and bank balances were RMB430.4 billion, of which 98.8%, 0.4% and 0.8% were denominated in Renminbi, U.S. dollars and Hong Kong dollars, respectively. The steady fund management and healthy cash flow provided a solid foundation for the sustainable healthy development of the Group.

2015
RMB million
2016
RMB million
Change
%
Net cash inflow from operating activities 235,089 253,701 7.9
Net cash outflow from investing activities 142,743 194,523 36.3
Net cash outflow from financing activities 86,510 48,958 -43.4
Free cash flow 39,512 66,410 68.1

Currently, the Company's corporate credit ratings are equivalent to China's sovereign credit ratings, namely, AA–/Outlook Negative from Standard & Poor's and Aa3/Outlook Negative from Moody's. These ratings reflect that the Group's sound financial strength, favourable business potential and solid financial management are highly recognized by the market.

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