Financial Review
Summary
In 2019, the Company adhered to new development principles and continuously deepened reform and innovation, achieving remarkable results of high-quality scale development. The Company’s service revenues continued to increase and persisted to maintain at a level exceeding industry average. Meanwhile, with optimised allocation of resources, focused key areas resources, and reinforced precision management, resources utilisation effectiveness and operational efficiency were consistently enhanced while the overall operating results remained healthy and robust. Operating revenues in 2019 were RMB375,734 million, representing a decrease of 0.4% from year 2018; service revenues1 were RMB357,610 million, representing an increase of 2.0% from year 2018; operating expenses were RMB346,664 million, representing a decrease of 0.5% from year 2018; profit attributable to equity holders of the Company was RMB20,517 million, representing a decrease of 3.3%; as compared with the profit attributable to equity holders of the Company for the year 2018 excluding the one-off after-tax gain2 from the listing of China Tower Corporation Limited (“China Tower”), representing an increase of 2.0% from year 2018; basic earnings per share were RMB0.25; EBITDA3 was RMB117,215 million, representing an increase of 12.5% from year 2018 and the EBITDA margin4 was 32.8%. Excluding the impact of the application of International Financial Reporting Standard 16 (“New Lease Standard”), the EBITDA margin was 29.2%.
Operating Revenues
The Company strived to uphold the industry value, promoted value operations with customers as the focus, fully leveraged on the network and talent edges and deepened integrated operation. Revenues continued to maintain favourable growth while revenue structure was continuously optimised. Operating revenues in 2019 were RMB375,734 million, representing a decrease of 0.4% from year 2018. Service revenues were RMB357,610 million, representing an increase of 2.0% from year 2018, of which mobile service revenues were RMB175,546 million, representing an increase of 4.7% from year 2018, and wireline service revenues were RMB182,064 million, representing a decrease of 0.4% from year 2018.
The following table sets forth a breakdown of the operating revenues for 2018 and 2019, together with their respective rates of change:
| For the year ended 31 December | |||
|---|---|---|---|
| (RMB millions, except percentage data) | 2019 | 2018 | Rates of change |
| Voice | 45,146 | 50,811 | -11.1% |
| Internet | 197,244 | 190,871 | 3.3% |
| Information and application services | 87,623 | 83,478 | 5.0% |
| Telecommunications network resource and network equipment services | 21,978 | 20,211 | 8.7% |
| Others5 | 23,743 | 31,753 | -25.2% |
| Total operating revenues | 375,734 | 377,124 | -0.4% |
Voice
In 2019, having been continuously affected by the substitution of mobile Internet services such as OTT, revenue from voice services was RMB45,146 million, representing a decrease of 11.1% from year 2018 and accounting for 12.0% of operating revenues. The revenue structure was continuously optimised.
Internet
In 2019, revenue from Internet services was RMB197,244 million, representing an increase of 3.3% from year 2018, accounting for 52.5% of operating revenues. Insisting on mobile data traffic as the driving force, the Company was determined to strengthen ecological cooperation, enhanced the differentiated market competitiveness of convergence operation, continuously expanding the subscriber base. Total number of mobile subscribers of the Company was approximately 336 million, ranking second in the industry nationwide. The data traffic revenues continued to achieve rapid growth. Mobile handset Internet access revenue was RMB123,203 million, representing an increase of 10.8% from year 2018. The scale of the Company’s broadband subscribers continuously expanded and customer loyalty was persistently maintained. However, due to increasingly intensifying market competition, wireline broadband revenue was RMB68,413 million, representing a decrease of 7.9% from year 2018.
Information and Application Services
In 2019, the Company continuously developed and leveraged the advantages on cloud-network integration. Revenue from information and application services was RMB87,623 million, representing an increase of 5.0% from year 2018 and accounting for 23.3% of operating revenues which benefited from the rapid development of emerging businesses such as IDC, cloud, Internet of Things and Internet Finance.
Telecommunications Network Resource and Equipment Services
In 2019, revenue from telecommunications network resource and equipment services was RMB21,978 million, representing an increase of 8.7% from year 2018 and accounting for 5.9% of operating revenues. The growth was mainly due to favourable growth in revenues from digital circuit service and IP-VPN service.
Others
In 2019, other revenues were RMB23,743 million, representing a decrease of 25.2% from year 2018 and accounting for 6.3% of operating revenues. The decline was mainly due to the decrease in the scale of mobile terminals sold.
Operating Expenses
The Company insisted on valuable scale development and continuously enhanced its capabilities development and investment in R&D system, laying out plans for sustainable development in the future. At the same time, with a focus on key resources and multi-dimensional subdivision, the effectiveness and efficiency of resource utilisation was continuously improved. In 2019, operating expenses were RMB346,664 million, representing a decrease of 0.5% from year 2018. Operating expenses accounted for 92.3% of operating revenues, representing a decrease of 0.1 percentage point from year 2018.
The following table sets forth a breakdown of the operating expenses in 2018 and 2019 and their respective rates of change:
| For the year ended 31 December | |||
|---|---|---|---|
| (RMB millions, except percentage data) | 2019 | 2018 | Rates of change |
| Depreciation and amortisation | 88,145 | 75,493 | 16.8% |
| Network operations and support | 109,799 | 116,062 | -5.4% |
| Selling, general and administrative | 57,361 | 59,422 | -3.5% |
| Personnel expenses | 63,567 | 59,736 | 6.4% |
| Other operating expenses | 27,792 | 37,697 | -26.3% |
| Total operating expenses | 346,664 | 348,410 | -0.5% |
Depreciation and Amortisation
In 2019, depreciation and amortisation was RMB88,145 million, representing an increase of 16.8% from year 2018, accounting for 23.5% of operating revenues. Excluding the impact of the application of the New Lease Standard, depreciation and amortisation increased by 1.4% from year 2018. The main reason for the increase was that in order to strengthen the competitive advantages of the network in recent years, the Company maintained a relatively high level of capital expenditure.
Network Operations and Support
In 2019, network operations and support expenses were RMB109,799 million, representing a decrease of 5.4% from year 2018 and accounting for 29.2% of operating revenues. Excluding the impact of the application of the New Lease Standard, network operations and support expenses increased by 5.2% from year 2018 and such increase rate was significantly lower than that of year 2018. The increase was mainly due to the Company’s continuous optimisation and enhancement of network capabilities and quality to support rapid development of emerging businesses and thus resulting in appropriate increase in resource investment.
Selling, General and Administrative
In 2019, selling, general and administrative expenses amounted to RMB57,361 million, representing a decrease of 3.5% from year 2018 and accounting for 15.3% of operating revenues. Selling expenses were RMB48,472 million, representing a decrease of 4.6% from year 2018, which was mainly due to the Company’s continuous optimisation of its sales and marketing model and reinforcement in its precision management of sales and marketing resources resulting in enhancement of the effectiveness of sales and marketing resources. General and administrative expenses amounted to RMB8,889 million, representing an increase of 3.0% from year 2018 as a result of the increase in research and development expenditure to promote high quality development and strengthen the building of core capabilities.
Personnel Expenses
In 2019, personnel expenses were RMB63,567 million, representing an increase of 6.4% from year 2018 and accounting for 16.9% of operating revenues, which was mainly due to the Company’s increased incentives for high-tech talents and frontline employees. For details of the number of employees, remuneration policies and training schemes, please refer to the Environmental, Social and Governance Report in this annual report.
Other Operating Expenses
In 2019, other operating expenses were RMB27,792 million, representing a decrease of 26.3% from year 2018 and accounting for 7.4% of operating revenues. It was mainly due to the decrease in the sales of mobile terminals.
Net Finance Costs
Seizing favourable market opportunities, the Company appropriately increased the allocation of bond products with favourable costs and continued to improve the capability of internal capital centralisation, effectively controlling the scale of indebtedness and financing costs and further enhancing the capital turnover rate and utilisation efficiency. In 2019, net finance costs were RMB3,639 million, representing an increase of 34.4%, and a decline of 25.0% from year 2018 excluding the impact of the application of the New Lease Standard. Net exchange loss amounted to RMB41 million in year 2019 which was mainly due to the depreciation of the exchange rate of RMB against USD.
Profitability Level
Income Tax
The Company’s statutory income tax rate is 25%. In 2019, income tax expenses were RMB6,322 million while the effective income tax rate was 23.4%. The difference between the effective income tax rate and the statutory income tax rate was mainly due to the low tax rates enjoyed by some subsidiaries and some branches located in the western region of China and the preferential tax policies enjoyed by the Company such as additional tax deduction on expenses for research and development proactively implemented by the Company. Meanwhile, income from investment in the associate company, China Tower, was not subject to tax during the period when the investment is held.
Profit Attributable to Equity Holders of the Company
In 2019, profit attributable to equity holders of the Company was RMB20,517 million, representing a decrease of 3.3%. Excluding the one-off after-tax gain from the listing of China Tower recognised in 2018, the profit attributable to equity holders of the Company increased by 2.0% from year 2018.
Capital Expenditure and Cash Flows
Capital Expenditure
In 2019, the Company continued to optimise network experience, deploying targeted coverage and dynamic capacity expansion for 4G network resulting in strengthening of the comprehensive competitive advantage of networks. Meanwhile, the Company steadily promoted the construction of 5G network to gear up the potential for the future development of 5G. In 2019, capital expenditure was RMB77,557 million, representing an increase of 3.5% from year 2018.
Cash Flows
The net increase in cash and cash equivalents for year 2019 was RMB4,098 million while the net decrease in cash and cash equivalents for year 2018 was RMB2,939 million.
The following table sets forth the cash flow position in 2019 and 2018:
| For the year ended 31 December | |||
|---|---|---|---|
| (RMB millions) | 2019 | 2018 | |
| Net cash flow from operating activities | 112,600 | 99,298 | |
| Net cash flow used in investing activities | (77,214) | (85,954) | |
| Net cash flow used in financing activities | (31,288) | (16,283) | |
| Net increase/(decrease) in cash and cash equivalents | 4,098 | (2,939) | |
In 2019, the net cash inflow from operating activities was RMB112,600 million, representing an increase of 13.4% from year 2018. Upon the application of the New Lease Standard, the principal portion of the rental expenses paid was adjusted from operating activities to financing activities which was a structural adjustment.
In 2019, the net cash outflow used in investing activities was RMB77,214 million, representing a decrease of 10.2% from year 2018. The main reason was that the Company withdrew certain short-term bank deposits investments which were due during the year.
In 2019, the net cash outflow used in financing activities was RMB31,288 million, representing an increase of 92.2% from year 2018. The main reason was that upon the application of the New Lease Standard, part of the cash outflow from operating activities was reflected in the financing activities during the year. Meanwhile, the Company repaid certain interest-bearing debts during the year.
Working Capital
The Company consistently upheld stable and prudent financial principles and stringent fund management policies. At the end of 2019, the working capital (total current assets minus total current liabilities) deficit was RMB191,479 million, representing an increase in deficit of RMB5,564 million from year 2018. It was mainly due to the recognition of lease liabilities as a result of the application of the New Lease Standard. As at 31 December 2019, the unutilised credit facilities were RMB245,847 million (2018: RMB150,693 million). Given the stable net cash inflow from operating activities and sound credit record, the Company has sufficient working capital to satisfy operational needs. At the end of 2019, cash and cash equivalents amounted to RMB20,791 million, among which cash and cash equivalents denominated in Renminbi accounted for 78.0% (2018: 64.0%).
Assets and Liabilities
In 2019, the Company continued to maintain a solid financial position. At the end of 2019, the total assets increased by 6.0% to RMB703,131 million from RMB663,382 million at the end of 2018. Excluding the impact of the New Lease Standard, the total assets were comparable with that of last year. Total indebtedness6 decreased to RMB79,022 million from RMB95,744 million at the end of 2018. Gearing ratio7 decreased to 18.3% from 21.8% at the end of 2018.
Indebtedness
The indebtedness analysis as at the end of 2019 and 2018 is as follows:
| For the year ended 31 December | |||
|---|---|---|---|
| (RMB millions) | 2019 | 2018 | |
| Short-term debt | 42,527 | 49,537 | |
| Long-term debt maturing within one year | 4,444 | 1,139 | |
| Long-term debt | 32,051 | 44,852 | |
| Finance lease obligations (including current portion) | - | 216 | |
| Total indebtedness | 79,022 | 95,744 | |
By the end of 2019, the total indebtedness was RMB79,022 million, representing a decrease of RMB16,722 million from the end of 2018, which was mainly due to the continuous enhancement of centralised management of interestbearing debt and precision management in daily control, effectively improving the efficiency of capital utilisation and reducing the scale of interest-bearing debt. Of the total indebtedness, loans denominated in Renminbi, US Dollars and Euro accounted for 99.4% (2018: 99.4%), 0.4% (2018: 0.4%) and 0.2% (2018: 0.2%), respectively. 82.9% (2018: 99.8%) of the indebtedness are loans with fixed interest rates while the remaining portion of the indebtedness represented loans with floating interest rates.
As at 31 December 2019, neither the Company nor any of its subsidiaries pledged any assets as collateral for debt (2018: Nil).
Most of the revenues received and expenses paid in the course of our business were denominated in Renminbi, therefore there were no significant risk exposures arising from foreign exchange fluctuations.
Changes in Accounting Policies
On 1 January 2019, the Company applied, for the first time, the New Lease Standard and the major impacts of the application of the New Lease Standard were already stated above. For details of the impacts specifically, please refer to note 2 of the audited consolidated financial statements for the year.
Significant Investment
As at 31 December 2019, the Company’s external investments included interests in associates and equity instruments at fair value through other comprehensive income, the carrying amounts of which were RMB39,192 million and RMB1,458 million, respectively. The Company’s investment in China Tower, an associate of the Company, constituted its significant investment. Details of such investment were set out below:
| As at 31 December 2019 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Company name and stock code | Principal businesses | Place of incorporation | Investment cost
(RMB millions) | Number of shares held | Percentage of shares held | Carrying amount
(RMB millions) | Fair value
(RMB millions) | Size of fair value relative to total assets of the Group |
| China Tower
(0788.HK) |
Include the tower business and indoor Distributed Antenna System (DAS) business for telecommunications industry, and the Trans-sector Site Application and Information (TSSAI) business and energy operation business for customers from various industries across wider society | China | 36,087 | 36,087,147,592 | 20.5% | 36,560 | 55,601 | 7.9% |
As at 31 December 2019, the carrying amount of the Group’s interests in China Tower, an associate of the Company, was RMB36,560 million, accounting for 5.2% of the Group’s total assets. In 2019, share of unrealised profits of China Tower recognised by the Company amounted to RMB1,219 million, and dividends received amounted to RMB81 million. In the future, the Company can enjoy more fundamental network resources through China Tower. As one of the shareholders of China Tower, it is expected that the Company can benefit from the enhancement of profits and values from China Tower.
Contractual Obligation
Contractual obligations as at 31 December 2019 are as follows:
| (RMB millions) | Total | Within 1 year | Between 1 to 2 years | Between 2 to 5 years | Thereafter |
|---|---|---|---|---|---|
| Short-term debt | 43,697 | 43,697 | - | - | - |
| Long-term debt | 40,791 | 4,625 | 1,184 | 30,824 | 4,158 |
| Lease liabilities | 45,535 | 12,846 | 11,794 | 17,266 | 3,629 |
| Capital commitments | 20,941 | 20,941 | - | - | - |
| Total contractual obligations | 150,964 | 82,109 | 12,978 | 48,090 | 7,787 |
Note: Amounts of short-term debt, long-term debt and lease liabilities include recognised and unrecognised interest payable, and are not discounted.
1 Service revenues are calculated based on operating revenues minus sales of mobile terminals (2019: RMB9,364 million; 2018: RMB18,836 million), sales of wireline equipment (2019: RMB5,226 million; 2018: RMB5,659 million) and other non-service revenues (2019: RMB3,534 million; 2018: RMB2,195 million).
2 In 2018, a one-off after-tax gain from the listing of China Tower amounting to approximately RMB1.1 billion was recognised by the Company.
3 EBITDA is calculated based on operating revenues minus operating expenses plus depreciation and amortisation. As the telecommunications business is a capital intensive industry, capital expenditure, the level of gearing and finance costs may have a significant impact on the net profit of companies with similar operating results. Therefore, we believe EBITDA may be helpful in analysing the operating results of a telecommunications service provider such as the Company. Although EBITDA has been widely applied in the global telecommunications industry as a benchmark to reflect operating performance, debt raising ability and liquidity, it is not regarded as a measure of operating performance and liquidity under generally accepted accounting principles. It also does not represent net cash from operating activities. In addition, our EBITDA may not be comparable to similar indicators provided by other companies.
4 EBITDA margin is calculated based on EBITDA divided by service revenues.
5 Other revenues in 2019 refers to the aggregate amount of sales of goods and others, included in revenues from contracts with customers, and revenues from other sources.
6 Total indebtedness refers to interest-bearing debts excluding lease liabilities.
7 Gearing ratio is calculated based on total indebtedness divided by total capital, while total capital is calculated based on total equity attributable to equity holders of the Company plus total indebtedness.