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Financial Review

In 2017, with persistent efforts to drive ahead with the integrated development of the “four growth engines”, the Group achieved encouraging results in the personal mobile market, household market, corporate customer market and emerging business. Business transformation has also yielded significant results, with revenue structure continuously optimized. Revenue from the telecommunications services business has overall demonstrated a favorable growth momentum with a growth rate above the industry average. The Group’s position as a leading operator in the industry has been further consolidated.

The Group has continued to actively promote its low-cost, high-efficiency operation model, conducted resources utilization evaluation in key areas, and optimized its strategies, budget and performance-based salary management. The Group’s operational efficiency has remained favorable with its net profit ratio increasing, thereby maintaining its profitability at the international first-class operators’ level and continuously creating value for shareholders.

2016 2017 Change
Operating revenue (RMB million) 708,421 740,514 4.5%
    Revenue from telecommunications services (RMB million) 623,422 668,351 7.2%
    Revenue from sales of products and others (RMB million) 84,999 72,163 -15.1%
EBITDA (RMB million) 256,677 270,421 5.4%
EBITDA margin 36.2% 36.5% 0.3pp
Profit attributable to equity shareholders (RMB million) 108,741 114,279 5.1%
Margin of profit attributable to equity shareholders 15.3% 15.4% 0.1pp
Basic earnings per share (RMB) 5.31 5.58 5.1%

In 2017, operating revenue reached RMB740.5 billion, up by 4.5% compared to the previous year, of which revenue from telecommunications services was RMB668.4 billion, up by 7.2% compared to the previous year. The growth rate of revenue from telecommunications services reached a 6-year high.

Revenue from Voice Services

Due to the substitution effect of mobile Internet, the cancellation of handset domestic long-distances roaming tariffs and other factors, revenue from voice services continued to decline to RMB156.9 billion, down by an ever-accelerating rate of 25.3% compared to the previous year, representing 23.5% of revenue from telecommunications services, down by 10.2 percentage points compared to the previous year.

Revenue from Data Services

Revenue from data services was RMB493.4 billion, up by 24.9% compared to the previous year, representing 73.8% of revenue from telecommunications services, up by 10.5 percentage points compared to the previous year. The Group’s revenue structure was further optimized.

As a result of the Group’s continuous enrichment of its data products, enhancement of its precise marketing and deepening of its data traffic refined operation, data traffic business maintained a rapid growth. Revenue from wireless data traffic reached RMB364.9 billion, up by 26.6% 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 54.6%, exceeding 50% on a full-year basis for the first time. SMS/MMS services revenue was RMB28.1 billion, down by 1.7% compared to the previous year.

The Group firmly adhered to the “higher speed, better quality and orientation” strategy, steadily improved the quality of its wireline broadband products and enhanced its market competitiveness, and generated growth in both customer base and value. Revenue from wireline broadband services reached RMB39.7 billion, up by 55.1% compared to the previous year, and became the main source of growth for the Group’s revenue.

The applications and information services made a breakthrough, with a rapid growth in dedicated lines, IDC, Internet of things, “and-video” and other businesses. Revenue from applications and information services was RMB60.7 billion, up by 15.3% compared to the previous year, representing a further substantiated scale of operation.

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, so its sales of handsets continued to decrease. Revenue from the sales of products and others was RMB72.2 billion, down by 15.1% compared to the previous year. The Group’s terminal sale business mainly serves to facilitate the expansion of the core telecommunications services, and hence its profit contribution is relatively low.

The Group continued to adhere to the principles of “forward-looking planning, effective resources allocation, rational investment and refined management” in cost control, strived to increase income and reduce expenditure, and maintained a favorable profitability.

In 2017, the Group’s operating expenses were RMB620.4 billion, up by 5.1% compared to the previous year. Operating expenses represented 83.8% of operating revenue, and remained flat compared to the previous year after excluding the effects of increasing write-off and impairment of assets.

2016
RMB million
2017
RMB million
Change
%
Operating  expenses 590,333 620,388 5.1
Leased lines and network assets 39,083 46,336 18.6
Interconnection 21,779 21,762 -0.1
Depreciation 138,090 149,780 8.5
Employee benefit and related expenses 79,463 85,513 7.6
Selling expenses 57,493 61,086 6.2
Cost of products sold 87,352 73,668 -15.7
Other operating expenses 167,073 182,243 9.1
Leased Lines and Network Assets

Leased lines and network assets expenses were RMB46.3 billion, up by 18.6% compared to the previous year and representing 6.3% of operating revenue. To maintain the Group’s advantages in the quality and coverage of its networks, the towers leasing fee increased relatively rapidly to RMB36.9 billion, up by 31.3% compared to the previous year, and was the main reason for the increased leased lines fees. The leasing fees for TD-SCDMA network capacity were RMB1 billion, down by 61.2% compared to the previous year. The leasing fees of “Village Connect” assets were RMB2.5 billion, down by 8.9% compared to the previous year.

Interconnection

Interconnection expenses were RMB21.8 billion, down by 0.1% compared to the previous year and representing 2.9% of operating revenue.

Depreciation

Depreciation was RMB149.8 billion, up by 8.5% compared to the previous year and representing 20.2% of operating revenue, mainly because the Group has continued to maintain its high level of investments in recent years and has expanded its assets scale.

Employee Benefit and Related Expenses

Employee benefit and related expenses were RMB85.5 billion, up by 7.6% compared to the previous year and representing 11.5% of operating revenue. The Group adjusted and optimized its personnel structure, and reallocated its compensation and incentives in favor of primary frontline employees, leading to an increase in employee benefit and related expenses.

Selling Expenses

Selling expenses were RMB61.1 billion, up by 6.2% compared to the previous year and representing 8.3% of operating revenue. The Group actively promoted the transformation of its marketing model, enhanced its precision marketing to customers, and endeavored to improve the efficiency of its utilization of marketing resources. The ratio of selling expenses to telecommunications services revenue remained industry-leading.

Cost of Products Sold

Cost of products sold was RMB73.7 billion, down by 15.7% compared to the previous year, of which handset subsidies were RMB9.7 billion, down by 4.1% compared to the previous year. With the Group’s promotion of the sale of handsets through open channels, cost of products sold decreased.

Other Operating Expenses

Other operating expenses were RMB182.2 billion, up by 9.1% compared to the previous year and representing 24.6% of operating revenue. Among these, maintenance expenses, operating lease charges and utilities expenses totaled RMB101.4 billion, up by 2.2% compared to the previous year, due mainly to the expansion of assets scale and increase in resources prices. In order to support network transformation, business innovation and implementation, the Group increased its expenses in operation support, research & development and related cost, which totaled RMB38.0 billion, up by 17.7% compared to the previous year. Administrative expenses such as conference, office, travelling and business entertainment expenses were RMB3.2 billion, remaining flat. Besides, according to the change of 2G network utility and volume of VoLTE, the Group has made provisions for the impairment of 2G wireless network equipment amounting to RMB10.45 billion.

Thanks to favorable revenue growth and cost management, in 2017, the Group’s profitability continued to be industry-leading. Profit from operations was RMB120.1 billion, up by 1.7% compared to the previous year. EBITDA was RMB270.4 billion and EBITDA margin was 36.5%, up by 0.3 percentage points compared to the previous year. Profit attributable to equity shareholders was RMB114.3 billion and its margin was 15.4%.

2016
RMB million
2017
RMB million
Change
%
Profit from operations 118,088 120,126 1.7
Other gains 1,968 2,389 21.4
Interest income 16,005 15,883 -0.8
Finance costs 235 210 -10.6
Share of profit for investments accounted for using the equity method 8,636 9,949 15.2
Taxation 35,623 33,723 -5.3
Profit attributable to equity shareholders 108,741 114,279 5.1

The Group’s financial position continued to remain steady. As at the end of 2017, total assets and total liabilities were RMB1,522.1 billion and RMB533.2 billion respectively. Liabilities-to-assets ratio was 35.0%.

The Group redeemed the RMB guaranteed bonds issued by Guangdong Mobile in October 2017. The Group consistently and firmly adhered to its prudent financial risk management policies and maintained sound repayment capabilities. The effective average interest rate of borrowings was 4.50% and the effective interest coverage multiple was 631 times.

As at 31 Dec 2016
RMB million
As at 31 Dec 2017
RMB million
Change
%
Current assets 586,645 558,196 -4.8
Non-current assets 934,349 963,917 3.2
Total assets 1,520,994 1,522,113 0.1
Current liabilities 536,389 529,982 -1.2
Non-current liabilities 2,467 3,250 31.7
Total liabilities 538,856 533,232 -1.0
Non-controlling interests 3,117 3,245 4.1
Total equity attributable to equity shareholders 979,021 985,636 0.7
Total equity 982,138 988,881 0.7

The Group consistently and 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 2017, 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 RMB245.5 billion, RMB106.5 billion and RMB108.2 billion, respectively. Free cash flow was RMB68.0 billion, up by 2.4% compared to the previous year. As at the end of 2017, the Group’s cash and bank balances were RMB407.2 billion, of which 97.5%, 1.4% and 1.1% 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.

2016
RMB million
2017
RMB million
Change
%
Net cash inflow from operating activities 253,701 245,514 -3.2
Net cash outflow from investing activities 194,523 106,533 -45.2
Net cash outflow from financing activities 48,958 108,231 121.1
Free cash flow 66,410 67,981 2.4

Currently, the Company’s corporate credit ratings are equivalent to China’s sovereign credit ratings, namely, A+/Outlook Stable from Standard & Poor’s and A1/Outlook Stable from Moody’s. These ratings reflect that the Group’s sound financial strength, favorable business potential and solid financial management are highly recognized by the market.

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