China Telecom Corporation Limited 28 July 2008 www.chinatelecom-h.com Business CDMA Business Acquisition and Network N Lease
Disclaimer Certain statements contained in this document may be viewed as forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933 (as amended) and Section 21E of the U.S. Securities Exchange Act of 1934 (as amended). Such forward-looking statements are subject to known and unknown risks, uncertainties and other factors, which may cause the actual performance, financial condition or results of operations of China Telecom Corporation Limited (the Company ) to be materially different from any future performance, financial condition or results of operations implied by such forward-looking statements. In addition, we do not intend to update these forward-looking statements. Further information regarding these risks, uncertainties and other factors is included in the Company s most recent Annual Report on Form 20-F filed with the U.S. Securities and Exchange Commission (the SEC ) and in the Company s other filings with the SEC. 2
Management team Name Title Mr. Wang Xiaochu Chairman & CEO Mr. Shang Bing President & COO Madam Wu Andi EVP & CFO 3
Agenda CDMA business acquisition Network lease agreement CDMA business development initiatives 4
CDMA business acquisition
Overall acquisition arrangement Implement due diligence Negotiate Acquisition Agreement details Prepare for network and business transfer Substantive Transfer Jun. 2 Framework Agreement signed Jul. 27 Acquisition Agreement Signed Sep. 16 Convene EGM Oct. 1 Completion Commencement Date Nov. 30 Completion End Date Mar. 31 2009 End of Transitional Arrangements Launching new mobile services on commercial trial for customer experience Comprehensive preparation for network, product, IT system, and value chain development Series of new mobile services under China Telecom brands 6
Acquisition Overview China Telecom Corp Ltd A Acquisition Agreement of CDMA business B New CDMA network lease agreement China Telecom Group Acquisition Agreement of CDMA network assets A Acquisition Agreement Elaborate the Framework Agreement with necessary supplement and refinement Setting out the principles of transfer of CDMA assets, business and employee Setting out the provisions for the allocation, use and collaboration of C/G shared base stations, business platform and IT support system Define detailed provisions regarding the rights and obligations of both parties during the transition period China Unicom Ltd (CUCL) China Unicom Group (New Horizon) B New lease agreement China Telecom Corp Ltd to lease the CDMA network capacity from China Telecom Group Lease fee to be 28% of audited annual CDMA business revenue The option to purchase the CDMA network 7
Key terms of the Acquisition Agreement Prepared based on the Framework Agreement with necessary elaboration, refinement & supplement The entire CDMA business owned and operated by CUCL on the Completion Commencement Date and relevant assets and customer rights & obligations Acquisition targets CDMA subscribers with prefix 133/153 and relevant customer rights and obligations Certain C/G shared base stations and other related assets as agreed between the Company and CUCL The entire equity interest in China Unicom (Macau) Company Limited and 99.5% of equity interest in Unicom Huasheng Telecommunications Technology Co. Ltd Consideration of RMB 43.8bn Acquisition consideration Price adjustment subject to first half 2008 CDMA business revenue decreasing more than 2% versus the same period in the previous year Payment by instalments after satisfaction of conditions precedent 8
Key terms of the Acquisition Agreement (cont.) Key conditions precedent No material adverse change to the operation of the CDMA business Approval by Unicom independent shareholders of the termination of the existing Unicom CDMA network lease agreement (including waiver of the option to purchase the CDMA network) and sale of CDMA Business Approval by China Telecom independent shareholders on CDMA lease agreement between China Telecom Corp Ltd and China Telecom Group Relevant regulatory approvals and all approvals that are necessary to operate the CDMA business Assets jointly used by CDMA and GSM networks China Telecom Corp Ltd and CUCL are to provide each other with necessary operational assistance and service support with respect to the assets that are used for both the CDMA and the GSM network following Completion Reciprocal use of the C/G shared base stations by China Telecom Corp Ltd and CUCL Business Transfer Transitional arrangements First payment will occur within 3 days after Completion Commencement Date To complete the substantive transfer within 60 days post the Completion Commencement Date For the period between the Completion Commencement Date to 31 March 2009, CUCL will provide those operating conditions and assurances including the reciprocal use of the information technology system and value-added service platform 9
A complete nationwide mobile network infrastructure The acquisition transaction and the network lease agreement will facilitate a seamless transition of the CDMA business and ensure an ongoing smooth mobile operation for the Company CDMA assets acquired by by China Telecom Corp Corp Ltd Ltd Relatively complete CDMA network with stand-alone operation and continuous services capability Reciprocal use of C/G shared assets owned by CUCL CDMA assets leased from China Telecom Group 10
Significance and benefits of the acquisition To benefit from the Next Generation mobile opportunity and favorable operating environment post restructuring Immediate entry into and benefit from the fast growing, profitable Chinese mobile market Increased competitiveness through integrated and differentiated service offerings Driving value growth of CDMA business by leveraging CT s brand, sales and operational strength Synergies from complementary operations and resources Seize mobile and full service development opportunity to enhance shareholders value 11
Network lease agreement
Strategic rationale and benefits of the lease agreement 1 2 Exclusive right to use and operate an existing nationwide CDMA network with abundant capacity to support the Company s immediate entry into and benefit from the fastgrowing, profitable Chinese mobile market Further investment by China Telecom Group to increase network capacity and improve network quality and functionality to support competition in the highly competitive telecom market in China 3 Having lease fee being a proportion of CDMA business revenue will avoid CDMA network investment and reduce operating risks during the initial period of CDMA operation 4 Savings of operating cost (lease fee vs. depreciation and finance charges) during the initial period of operation 5 Favorable lease fee rate of 28% of CDMA business revenue vs. 31% under Unicom CDMA Lease with other terms and conditions broadly in line with Unicom CDMA Lease 6 Lease renewable at the option of the Company together with the option by the Company to purchase the CDMA network affords great flexibility to the Company to enhance its value 13
Key terms of the network lease agreement Lease of the CDMA network capacity with exclusive right to use and operate Lease fee Lease fee to be 28% of the audited CDMA business revenue for each of 2008, 2009 and 2010 No minimum lease fee for 2008 and 2009. Minimum lease fee for 2010 shall not be lower than 90% of 2009 lease fee Term of lease The initial CDMA lease period will start from Completion Commencement Date (1 October 2008) to 31 December 2010 The lease can be renewed at the option of China Telecom Corp Ltd on the same terms, except for the lease term, lease fee, and minimum annual lease fee which need to be agreed between China Telecom Corp Ltd and China Telecom Group Purchase option China Telecom Corp Ltd has the option to purchase the CDMA network from China Telecom Group Purchase price to be determined with reference to the appraised value of the CDMA network The purchase price shall not be greater than the amount which enables China Telecom Group to recover the network investment costs together with an internal rate of return on investment of 8% Network investment All costs incurred in relation to any network re configuration, upgrade, enhancement or modification shall be borne by China Telecom Group The operation and management costs of the CDMA network shall be borne by China Telecom Corp Ltd The network related maintenance costs will be proportionally shared between China Telecom Corp Ltd and China Telecom Group according to the use of network capacity 14
Favorable lease fee rate Pre transaction Post transaction China Unicom Group (New Horizon) All assets owned by New Horizon China Telecom Group 31% of CDMA business revenue 28% of CDMA business revenue China Unicom Ltd (CUCL) China Telecom Corp Ltd Favorable lease fee rate of 28% of CDMA business revenue (vs. 31% under Unicom CDMA Lease) with other terms and conditions broadly in line with Unicom CDMA Lease 15
Network investment by China Telecom Group RMB China Telecom Group CDMA network investment Acquisition consideration of CDMA network 66.2 bn 3 years CAPEX plan > 80.0 bn 1st 2008 phase 年第一期投资总额 investment: 279 27.9 亿元 bn Year 0 Year 1-3 CDMA network construction targets in 3 years Wireless network: realize CDMA1X enhanced system in the urban areas Core network: introduce mobile IMS across the network to achieve broadband and IP capabilities Business platform: achieve ISMP-based group and provincial 2-tier business platform and introduce IMS business (IP-based tripleplay service) Network capacity to exceed 200 million subscribers with industry leading network quality in urban areas Exclusive use of CDMA network to reduce investment requirement and operating risk during initial period of operation 16
Enhance operating profitability and flexibility The CDMA lease provides operating cost savings and great flexibility to enhance value Through the lease agreement, the company will achieve savings of operating cost during the initial period of operation Lease fee Depreciation and finance charges Avoids depreciation and finance charges related to the CDMA network Reduces operating risk as lease fee being directly proportional to CDMA business revenue The lease agreement provides operating and financial flexibility to the company Lease fee = 28% of CDMA business revenue Years (t) The lease agreement is renewable on expiry The purchase option under the lease agreement allows the Company to purchase the CDMA network from China Telecom Group when the company decides beneficial to do so in the future 17
CDMA business development initiatives
Existing CDMA business Subscribers and ARPU Business Revenue Subscribers (m) 60 45 30 15 0 172 41.9 42.8 43.2 126 27.8 32.7 36.5 16.9 85 75 4.5 66 58 53 2002 2003 2004 2005 2006 2007 1Q08 1H08 Subs ARPU 1 180 120 60 0 ARPU (RMB) Business revenue (RMB bn) 30 20 10 0 27.6 27.9 27.7 24.4 16.6 6.8 3.2 2002 2003 2004 2005 2006 2007 1Q08 Business revenue 1 EBITDA- Before Lease Payment Profit Before Tax EBITDA (RMB bn) 12 7 2 (3) 10.1 10.2 50 8.4 6.4 30 3.2 (0.1) 10 2002 2003 2004 2005 2006 2007 EBITDA EBITDA margin (10) (%) PBT (RMB bn) 1.5 0.5 (0.5) (1.5) Source: China Unicom company filings, 20F filings Note: 1 Restated to include the results of the Guizhou business, acquired by China Unicom in 2007 1 1.07 1.20 0.24 (0.31) (0.20) (0.56) (1.03) 2002 2003 2004 2005 2006 2007 1Q08 1 19
Mobile business development strategies Customer focused Informatization + Innovation Integrated information services provider Focus on mid-to-high end customers Add mobile services for government & enterprise and household customer brands; Innovate new products and services leveraging CDMA network strengths Realize synergies to improve operating profitability Differentiated services offering Satisfy customers diverse needs by providing differentiated and integrated information services based on mobile internet and fixed-mobile convergence Profitable scale development Leverage the effective utilization of the existing fixed line and CDMA network resources to drive synergy Focus on return on capital and cost effectiveness to enhance CDMA profitability 20
Differentiated operation Leveraging customer brands to stimulate mobile services penetration and to enrich customer experience Innovative mobile communication in the Internet era to provide seamless information experience Individual customer brand Add-in mobile service Promote mobile Internet applications Leveraging CDMA technology strength (high data speed and spectrum efficiency, security and environmental friendly) & customer segmentation, develop differentiated products and services to satisfy customers communication and informatization needs 21
Enhance network coverage, quality and functionality Investment Strategies of China Telecom Group 1 Focus resources in urban area to increase network capacity and improve network quality; Appropriate investment in rural area to optimize mobile network 2 Dual emphasis on network expansion & optimization effectively leveraging CDMA and existing fixed line network resources to enhance customer experience and investment efficiency 3 Implement CDMA 1X enhanced system in key cities in 2-3 years to increase coverage for wireless high-speed data transmission and achieve industry leading network access capability 22
Realize synergies R&D and IT system Promptly launch new mobile products and services leveraging market changes Fully support mobile services with CRM and unified billing system Brand and customer resources Utilize customer brands & resources to rapidly expand mobile customer base Leverage customer-focused operation to provide targeted & integrated communication and information services Synergies Customer service system Network resources To achieve complementary operation of CDMA network with existing fixed-line transmission, access, international gateways, CN2, IP metro network to enhance overall efficiency Utilize PAS in-building distribution points, WiFi hot spots and local transmission infrastructure buildings to support the ongoing development of the mobile network Efficient direct sales channel for government & enterprise customers High quality 10000 customer service system Extensive sales outlets 23
Enhancing value through full services offering Enriching customer experience Enhancing the company s competitiveness Realizing significant synergies Creating shareholders value CDMA acquisition Undertake CDMA business Relatively comprehensive customer services system A relatively complete CDMA network with stand alone operation and continuous services capability Comprehensive preparation for mobile operation Stable development of fixed-line business Full services offering Fixed-line + Mobile + + Media + Data CDMA acquisition Comprehensive preparation for mobile operation Network transfer and optimization IT system construction and revamp Equipment procurement and network construction Integration and enhancement of fixed-line and mobile products Distribution & marketing, international roaming arrangement Stable development of fixed-line business Target key customer segments like government & enterprise and household customers Strengthen development of transformation businesses such as broadband, value-added and integrated information services Consolidate traditional business via effective bundling and integration with transformation businesses 24
Mobile operation key targets Present: Prepare for network transfer Enhance network quality Innovate new products and services Near term: Integrate fixed-line and mobile resources and strengths Differentiated & integrated services for different customer segments Next 2~3 years: Achieve significant subscriber base and economies of scale in mobile business Subscriber base to exceed 100m with market share ~ 15% Stable ARPU on upward trajectory with VAS revenue accounting for 35% 25
Summary Immediate entry into and benefit from the fast-growing, profitable mobile market in China Benefits from the CDMA network lease agreement Increased competitiveness through full services offerings Value creation with operation synergies Increase shareholders value Sustained operational and financial flexibility 26
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