Work in progress on the painting commissioned by Hongkong Telecom as a gift for the people of Hong Kong and the government of the new Hong Kong Special Administrative Region, 1 July 1997. Noted architectural artist Ben Johnson spent almost two years in the creation of this showpiece, which measures 6 X 12 feet. The cover of this Report shows a portion of the original black and white working drawing. Corporate profile
Hongkong Telecom is Hong Kong’s major full service telecommunications provider, marketing a complete range of quality voice and data telecommunications services backed by a state-of-the-art fully digital fibre-optic network.
The Company has several ‘world-firsts’ for telecommunications, and is actively developing leading-edge applications for interactive multimedia services technology.
International telecommunications are facilitated by the Company’s sophisticated network of fibre-optic cable and satellite connections.
CONTENTS Hongkong Telecom is 59% owned by Cable & Wireless which is
2 Financial highlights the world’s fourth largest carrier of international traffic, provides
4 Shareholder information mobile communications in more than 30 countries and operates
6 Directors and senior management the world’s largest, most advanced cableship fleet. The
8 Chairman’s statement combination of Cable & Wireless’ worldwide expertise and
10 Chief Executive’s report Hongkong Telecom’s regional experience makes us a powerful
15 Operational review global force.
24 Financial review Hongkong Telecom shares are listed on the Hong Kong Stock 32 Directors’ report Exchange and in the form of American Depositary Receipts on 34 Notice of annual general meeting the New York and Pacific Stock Exchanges. Hongkong Telecom 35 Report of the auditors this year had turnover of some $33 billion. 36 Consolidated profit and loss account
37 Balance sheets The Company truly lives its corporate philosophy: “What can 38 Consolidated cash flow statement be imagined, can be achieved.” 39 Notes to the financial statements
55 Principal subsidiary and associated companies
56 Supplementary information for ADR holders
58 Ten-year financial review
60 Ten-year statistical review
62 Milestones
63 Glossary of terms Financial highlights
1997 1996 Growth
Turnover $M 32,578 29,405 10.8%
Operating profit $M 12,203 11,093 10.0%
Profit attributable to shareholders $M 11,178 9,939 12.5%
Earnings per share cents 97.2 88.8 9.5%
Dividend per share cents 76.3 67.8 12.5%
Dividend payout % 78.5 76.3 –
Turnover $ billion 21.6 24.3 26.9 29.4 32.6
2 ’93 ’94 ’95 ’96 ’97
Operating profit Profit attributable to shareholders $ billion $ billion 6.4 7.6 8.7 9.9 7.3 8.6 9.8 11.2 11.1 12.2 ’93 ’94 ’95 ’96 ’97 ’93 ’94 ’95 ’96 ’97 HONGKONG TELECOM ANNUAL REPORT 1997
ANALYSIS OF TURNOVER AND OPERATING PROFIT For the year ended 31 March
Turnover Operating Profit
1997 1996 1997 1996 $M $M $M $M
Telecommunications services 29,804 26,537 11,859 10,430
Equipment sales and rental 1,860 1,806 75 362
Computer, engineering and other services 914 1,062 269 301
32,578 29,405 12,203 11,093
Earnings per share cents 57.7 67.8 78.0 88.8 97.2 ’93 ’94 ’95 ’96 ’97 3
Dividend per share Dividend payout cents % 76.0 75.3 75.3 76.3 78.5 59.3 43.4 51.0 67.8 76.3 ’95 ’97 ’93 ’94 ’96 ’95 ’93 ’94 ’96 ’97 Shareholder information
FINANCIAL CALENDAR
Financial Year Ended Annual General Meeting ...... 4 July 1997 31 March 1997 Final Dividend payable on or about ...... 11 July 1997 Dividend payable to ADR holders on or about .... 25 July 1997
Financial Year Ending Interim Results announcement ...... November 1997 31 March 1998 1998 Interim Dividend payable ...... December 1997 Annual Results announcement ...... May 1998 Report and financial statements published ...... June 1998 Annual General Meeting ...... July 1998 1998 Final Dividend payable ...... July 1998
LISTINGS
Hongkong Telecom shares are listed on the Hong Kong, New York and Pacific Stock Exchanges.
The listings on the New York and Pacific Exchanges are in the form of American Depositary
Receipts (ADRs).
4 Hongkong Telecom is subject to the regulations of the United States Securities and Exchange
Commission (SEC) as they apply to foreign companies whose securities are registered with the
SEC. As required by the United States securities laws, Hongkong Telecom will file an annual
report on Form 20-F with the SEC before 30 September 1997. Once filed, a copy of the
Form 20-F may be obtained from either of the following:
Kin Yu Thomas E McDonnell Group Manager, Investor Relations Vice President, Investor Relations Hong Kong Telecommunications Limited Hong Kong Telecommunications Limited 37th Floor, Hongkong Telecom Tower 777 Third Avenue, 35th Floor TaiKoo Place, 979 King’s Road New York, NY 10017, USA Quarry Bay, Hong Kong Telephone: +212 407 2050 PO Box 9896 GPO Hong Kong Fax: +212 593 9069 Telephone: +852 2888 6373 Fax: +852 2962 5003 HONGKONG TELECOM ANNUAL REPORT 1997
DIVIDEND COMPANY SECRETARY David N Prince Subject to approval by shareholders at the forthcoming Annual General Meeting, the proposed
REGISTERED OFFICE final dividend for the year ended 31 March 1997 will be payable on or about 11 July 1997 to 39th Floor shareholders who are registered in Hong Kong with Central Registration Hong Kong Limited at Hongkong Telecom Tower TaiKoo Place, 979 King’s Road the close of business on 30 May 1997. Shareholders will again be offered a scrip alternative to Quarry Bay, Hong Kong
Telephone: 2888 2888 the cash dividend. Fax: 2877 8877
Email: [email protected]
This dividend will be payable on or about 25 July 1997 to ADR holders who are registered with Telex: 73240 HKTC HX the Company’s ADR Depositary, Citibank, N.A., at the close of business on 29 May 1997. REGISTRARS Central Registration Hong Kong Limited SUPPLEMENTARY INFORMATION FOR ADR HOLDERS Rooms 1901-5, Hopewell Centre Shares in Hongkong Telecom are listed in the United States in the form of ADRs under 183 Queen’s Road East, Hong Kong the sponsorship of its depositary agent, Citibank, N.A. Each ADR is equivalent to ADR DEPOSITARY Citibank, N.A. 10 ordinary shares of the Company. 111 Wall Street 5
New York, NY 10043, USA No tax is payable in Hong Kong by withholding or otherwise except in respect of dividends Telephone: 1 800 422 2066 (toll free) payable to certain persons carrying on a trade, profession or business in Hong Kong. ADR holders unsure of their tax position should consult their independent tax adviser.
ADR holders registered on the books of the ADR Depositary in New York at close of business on
29 May 1997 can vote by proxy at the Annual General Meeting by completing a voting instruction card which will be sent to them. Alternatively, an ADR holder may appoint a discretionary proxy, usually the Chairman of the Meeting, by marking the designated box on the voting instruction card.
Additional information and specific enquiries concerning Hongkong Telecom ADRs should be directed to the Company’s ADR Depositary at the address shown above.
Other enquiries regarding the Company should be addressed to either: Tom McDonnell,
Vice President, Investor Relations or Kin Yu, Group Manager, Investor Relations, at the addresses given on page 4. Directors and senior management
Dr N Brian Smith* CBE Linus W L Cheung JP Chairman Chief Executive Dr Brian Smith, age 69, was appointed Linus Cheung Wing Lam, age 49, has Chairman of Hongkong Telecom in been Chief Executive of Hongkong November 1995 and has also served as Telecom since March 1994 with overall Chairman of Cable and Wireless plc responsibility for the Company’s from November 1995. A Non-Executive operations in Hong Kong, China and the Director of Cable and Wireless plc for region. He is a Director of Hongkong six years, 1989-95, he has also been the Telecom and was named an Executive Non-Executive Chairman of British Director of Cable and Wireless plc in Airport Authority plc since August January 1995. Mr Cheung serves on the 1991. He is a fellow of the Chartered Governor’s Business Council and is the Institute of Marketing and a Chairman of the Management Board of Companion of the British Institute of the School of Business at the University Management. Dr Smith was appointed of Hong Kong. Prior to joining Hongkong a Commander of the British Empire in Telecom, Mr Cheung was Deputy June 1980. Managing Director of Cathay Pacific Airways Limited. Dr The Hon David K P Li* Richard H Brown* OBE, JP Non-Executive Deputy Chairman Non-Executive Deputy Chairman Richard Brown, age 50, was appointed David Li, age 58, has been Deputy Non-Executive Deputy Chairman of Chairman of Hongkong Telecom since Hongkong Telecom in August 1996 December 1987. He is also Chairman and following his appointment, in July 1996, Chief Executive of the Bank of East Asia. as Chief Executive of Cable and Dr Li represents the Finance Constituency Wireless plc. He was formerly President in the Legislative Council of Hong Kong and and Chief Executive of H & R Block, also serves on the Provisional Legislature, Inc, the parent company of which will replace the Legislative Council in CompuServe. Prior to joining H & R July 1997. He is also a Member of the Block, he was Vice Chairman of Exchange Fund Advisory Committee, Ameritech Corporation. In a Banking Advisory Committee, and Hong telecommunications career spanning 27 6 Kong Association of Banks (Executive years, he has also worked with Ohio Bell Committee), as well as Chairman of the and Sprint Corporation. Chinese Banks’ Association.
Norman K T Yuen JP Alistair R Grieve Deputy Chief Executive Deputy Chief Executive Norman Yuen Kee Tong, age 48, Alistair Grieve, age 42, was appointed a was named a Deputy Chief Executive in Director and a Deputy Chief Executive September 1995. He is responsible for of Hongkong Telecom in November maximising revenue and contribution 1995. He is responsible for maximising from local and value added services, contribution from international traffic mobile, interactive multimedia and fixed and developing new international mobile integration (FMI) in the Hong products. In addition, he is accountable Kong market and in greater China. He for the expansion of the carrier and was formerly Managing Director, wholesale markets; local network Corporate Development and operation and development; and Operations. Mr Yuen joined the regulatory and strategic planning. Prior Company in 1986 and was appointed a to this appointment, Mr Grieve was Director in 1993. President and Representative Director of Cable and Wireless (Japan) Limited.
Roy Wilson David N Prince Executive Director Finance Director Roy Wilson, age 55, was named David Prince, age 45, was named Executive Director, Customer Service Finance Director of Hongkong Telecom in March 1997. He has responsibility in December 1994. He is responsible for delivering excellent customer service for overall financial and legal functions, and enhancing the Company’s service and is the key interface with investors culture. In addition, he will work across and analysts. He is also responsible for Hongkong Telecom to improve business property development and operation. processes and productivity. Mr Wilson He is a Director of Hongkong Telecom was formerly Vice-President and and a Director of most Hongkong General Manager for Sprint North Telecom subsidiary companies as well as Central Operations. He joined Sprint in a Director of Asia Satellite 1985 where he held various positions Telecommunications (Holdings) including Vice-President for Service, Company Limited. Prior to his Operations and Consumer Markets. appointment in Hong Kong, Mr Prince Mr Wilson was previously with AT&T was Director of Marketing of Cable & International. Wireless Business Networks. HONGKONG TELECOM ANNUAL REPORT 1997
Sir S Y Chung* GBE, JP Henry H L Fan* Non-Executive Director Non-Executive Director Sir S Y Chung, age 79, has served as a Henry H L Fan, age 48, has been a Director of the Company since 1988. A Director of the Company since 1990. former Senior Member of both the Mr Fan is the Managing Director of Legislative and Executive Councils, he CITIC Pacific Limited, the listed continues to lead a distinguished life of investment arm of the CITIC Group in public service. In January 1996 he was Hong Kong. He is also a Deputy appointed to the Preparatory Committee of Chairman of Cathay Pacific Airways the Hong Kong Special Administrative Limited, a Director of China Light & Region (HKSAR) and in January 1997, he Power Company, a Non-Executive was appointed Convenor of the HKSAR Director of the Securities and Futures Executive Council, which is to play an Commission and a Member of the important role in the final months of the Standing Committee on Company Law transition and the formative years of the Reform. new HKSAR Government.
Dr Victor K K Fung* CBE Robert E Lerwill* Non-Executive Director Non-Executive Director Dr Fung, age 51, has served as a Robert E Lerwill, age 44, was appointed Director of Hongkong Telecom for five to the Board in March 1997, having years. He is Chairman of Prudential joined Cable and Wireless plc as Asia, as well as Chairman of the Hong Executive Director, Finance in January Kong Trade Development Council. Dr 1997. He was formerly Group Finance Fung also serves as Chairman of the Li Director of WPP Group plc, the world’s & Fung Group, a leading Hong Kong- largest marketing services group. Prior based regional trading company. In to that, he worked for Arthur Andersen 1996, Dr Fung was appointed by & Co. for 10 years, specialising in Government to serve as the Hong Kong corporate finance functions including Representative on the APEC Business Stock Exchange flotations and Advisory Council (ABAC). acquisitions. He is a member of the Nottingham University Interim 7 Leadership Board.
Vernon F Moore* Rodney J Olsen* Non-Executive Director Non-Executive Director Vernon Moore, age 50, was appointed a Rod Olsen, age 51, joined Cable & Director in January 1996. He is Deputy Wireless in 1977 in Hong Kong. He was Managing Director of CITIC Pacific appointed Director, Far East and Pacific Limited and Executive Director of of Cable and Wireless plc in 1986 and China International Trust & Investment Director, Finance of that Company in Corporation Hong Kong (Holdings) 1987. He played a major role in the Ltd. Mr Moore joined the CITIC corporate restructuring of that Group in Hong Kong in 1987 after 18 Company, serving in a variety of senior years in the banking and financial positions. Since July 1996 Mr Olsen has services industries. He is a Non- been Deputy Group Chief Executive of Executive Director of Cathay Pacific Cable and Wireless plc, the major Airways Limited, China Light & Power, shareholder of Hongkong Telecom. He Manhattan Card and the New Hong has been a Director of Hongkong Kong Tunnel Company. Telecom since 1987.
* Members of the Audit Committee The figures speak for themselves. Hongkong Telecom
has delivered a solid return to shareholders through
sound financial management, an adherence to the
highest quality standards and through an intense
commitment to creating and living a culture that
emphasises the importance of the customer at all
levels of the organisation.
Chairman’s statement
Following this strong performance, the directors have
recommended a final dividend of 41.7 cents, which brings the
total dividend for the year to 76.3 cents, an increase of 12.5
per cent over last year’s dividend of 67.8 cents. Once again,
shareholders will be offered a scrip alternative to the cash
dividend.
The Board has been further strengthened this year with the
DR N BRIAN SMITH appointment in August of Richard H Brown as a Director and Chairman a Deputy Chairman. Dick Brown is also Chief Executive of
Cable and Wireless plc. During a 27-year career in the
telecommunications industry, he has gained a deep knowledge I am pleased to report that, after 21 months of liberalisation of our business and has been closely involved in the 8 in the local telecommunications market, Hongkong Telecom transformation of telecommunications in the USA. He is has again recorded a satisfactory financial performance. certainly a valuable asset to the Board.
In this challenging and demanding environment, the figures In March of this year, we announced the appointment of speak for themselves. Hongkong Telecom has delivered a solid Roy A Wilson as Executive Director, Customer Service. return to shareholders through an intense commitment to Roy has had extensive knowledge and experience in customer creating and living a culture that emphasises the importance service management and in driving productivity improvements of the customer at all levels of the organisation, together with within the highly competitive US telecommunications an adherence to the highest quality standards, sound financial environment. He will build on the Company’s achievements in management and the provision of an increasingly exciting these areas. range of products.
I am pleased to welcome Robert E Lerwill as Non-Executive This approach has delivered. During this financial year Director. Robert was appointed to the Board in March and is Hongkong Telecom’s turnover rose 10.8 per cent to $32.6 also Executive Director, Finance at Cable and Wireless plc. He billion, compared with $29.4 billion in 1996. Earnings per was previously Group Finance Director of WPP Group plc, share also increased, rising from 88.8 cents in 1996 to 97.2 the world’s largest marketing services group. cents, an improvement of some 9.5 per cent. HONGKONG TELECOM ANNUAL REPORT 1997
Jonathan Solomon stood down as a Director at the end of this Hongkong Telecom will continue to deliver on its promise to financial year. I would like to extend my deep thanks to Jonathan provide the very best — not just to shareholders and for his valuable contribution to the Board throughout his tenure. customers, but to the community of Hong Kong.
I am confident the board and the management team have the As we embark on a new financial year and a new era in Hong experience and depth to enable Hongkong Telecom to reach Kong, we remain fully committed to and engaged in delivering the ambitious goals we aim to achieve during the coming the best products, services and support to our customers, both financial year. today and in the future. Our continued success will not only
enable us to serve our customers better, but also to provide Sadly, in February this year, Malcolm Brown, our Director of tangible value to our shareholders. Legal Services & Company Secretary, died suddenly. Malcolm was appointed to his role in 1990 and made a significant After the end of the financial year, in May 1997, we were contribution to the development of Hongkong Telecom. He will advised that an agreement had been reached for the sale of all be sorely missed by all at Hongkong Telecom. of the 7.74 per cent of Hongkong Telecom shares held by 9
CITIC Pacific Limited to China Everbright Holdings One area where Non-Executive Directors are actively engaged Company Limited, a significant enterprise under the is in the Audit Committee. Established two years ago, this leadership of the State Council of the PRC. We welcome this Committee has met regularly during this past 12 months, and transaction which represents a substantial investment of continues its role of reviewing our internal controls and Chinese State capital and a demonstration of continued assuring the financial aspects of good corporate governance. confidence in Hongkong Telecom and in Hong Kong through This is done in accordance with the spirit of the influential the 1997 transition and beyond. Cadbury Report, released in the UK in 1992, which recommended the adoption of the highest standards of reporting and controls within public companies.
Today, the combined effects of strong corporate governance and a pervasive customer service culture enable Hongkong
Telecom to maintain its position as a “best in class” operator, Dr N Brian Smith delivering solid value to shareholders and exceptional products Chairman and services to an increasingly sophisticated marketplace. Chief Executive’s report
This approach has resulted in greater focus on the specific
needs of our customers, and bold moves such as introducing a
new mobile phone brand which gained more than 50,000
customers in the four months since launch.
By any standards, Hongkong Telecom’s performance this year
has been strong. When placed in the context of the rapidly
changing conditions in both the local and international markets,
LINUS W L CHEUNG these results demonstrate the success of our efforts to turn Chief Executive challenges into opportunities and to manage our own destiny.
We have achieved solid growth in turnover, profits and,
Hongkong Telecom has achieved what it set out to do last year, importantly, dividends per share compared to the previous
10 again delivering results with double-digit growth in revenues year. I am pleased to report strong growth in our core
and profits. businesses including a steady increase in our international
traffic levels. Our achievements over the last 12 months clearly show that to
succeed in today’s intensely competitive telecommunications In line with our programme of rebalancing our portfolio of
market, one must continue to develop new services and new earnings in order to reduce our dependence on IDD, turnover
revenue streams while closely monitoring costs. from telecoms services other than IDD has been increased by
18 per cent while the proportion of total revenue derived from Instead of complaining about competition, we have embraced IDD has been reduced to 53 per cent compared to 56 per cent it. And in doing so we have not only grown our business and the previous year. revenues, we have developed into a telecommunications
company that offers truly best-in-class service to all our Our financial success has been underpinned by an overriding
customers. emphasis on productivity and efficiency plus rigorous cost
control, a management programme designed to prepare and What is behind this evolution? First, we believe in our own equip our employees for the challenges of the future and, of competence. Second, we reached out to our customers — we course, by excellent customer service. A newly-formed listened, and then delivered solutions which responded to
their needs. HONGKONG TELECOM ANNUAL REPORT 1997
Directorate of Customer Service (March 1997) will continue and the region. I am pleased to report at the end of this year to build upon this solid base. that we have moved forward significantly in achieving
these goals. Let me illustrate some of the drivers behind our continued success as a world-class telecommunications company. First, we have introduced new local services which create new
For example, we: revenue streams from new customers. We have also packaged
and bundled many of our existing services in more user- • are Asia’s premier telecommunications hub, serving over friendly ways. As a result, basic local service revenues are up 500 multinational customers overall compared to last year. We have increased revenue from • have invested in and now operate an all-digital network value-added services by 26 per cent, while growing data comprising over 200,000 kilometres of fibre-optic cable services by 25 per cent and mobile by 43 per cent. We have • re-invested more than $5 billion during this year in also introduced a programme to stimulate second-line infrastructure improvements and new services penetration to support home fax and computer-based services. • operate Asia’s largest satellite earth station 11 • have fibre-optic links to more than 1,000 buildings in Second, we have achieved an increase in the use of our
Hong Kong international networks in an environment of competitive
• have IDD agreements covering 232 destinations pricing. Overall international telephone traffic volume is up 12
• generate among the highest revenue per employee of any per cent, while the network capacity delivering dedicated
telecoms company in the world access services such as International Private Leased Circuits
• have more fixed and mobile customers per employee than (IPLCs) has grown by 42 per cent. Our international hubbing
nearly any other telecoms company in the world capability has been significantly enhanced through a
• offer mobile Automatic International Roaming services to combination of expanded connectivity, reduced costs and
45 countries new products.
• have among the lowest operating expenses per customer of The third prong of the strategy was to make prudent regional any telecoms company in the world investments. This we have done, most recently with our
In last year’s Annual Report, I outlined the Company’s three- involvement in China’s Beijing-Jiujiang-Kowloon cable project. pronged strategy for growth: compete and grow Hongkong In Taiwan, we have directly invested in the TTNS
Telecom’s business locally; develop our international business telecommunications consortium. In Singapore, together with position to the full; and continue to invest prudently in China Cable & Wireless and local partners, we have continued to Chief Executive’s report
invest in the new MobileOne cellular network and are actively Communications Service (PCS) networks has ensured that the
pursuing a new fixed telecommunications network licence. mobile market in Hong Kong continues to be hotly contested.
Eventual configuration of the market has yet to unfold. OUR MARKETS
The arena in which Hongkong Telecom operates can be International
viewed as two main markets — local and international — each Key factors for continued success in the international arena
having different drivers for growth. are stimulating growth in traffic volume, managing the
downward trend in accounting rates and continuing to Local increase connectivity to the rest of the world. The scope and Key factors in the local market are the regulatory environment, nature of international liberalisation and accounting rate the ability to deliver services which add value, and remaining fluctuations, along with competition in Hong Kong, will competitive in the mobile business. continue to present new challenges for Hongkong Telecom’s
The local market is becoming more competitive, and we international revenue growth. 12 continue our efforts with the regulator to establish a level While international traffic is up 12 per cent overall, China playing field for all — in terms of both the degree of price traffic growth was steady at 6 per cent, influenced by the flexibility accorded to Hongkong Telecom and the pace of recovery of traffic inbound from the PRC to 4 per cent liberalisation, which are controlled by legislation and the compared to 1.2 per cent in 1996. Traffic growth for the rest of Office of the Telecommunications Authority (OFTA). the world was a healthy 17 per cent.
At the same time, Hongkong Telecom has leveraged the Over the past few years we have invested more than $3 billion in intelligence and sophistication of its 100 per cent digital the submarine cables that play such a vital role in maintaining switching network to tailor value-added services that meet the Hong Kong’s position as the region’s telecommunications hub requirements of specific customer groups. These efforts are of choice. geared toward helping our customers do business in their own
markets — the hotel industry, for instance — as well as toward A WORLD-CLASS INNOVATOR
growing our existing customer base. We now offer a far more flexible and better integrated range of
product mix and telecommunications services. New packaging Hongkong Telecom CSL Mobile remains the market leader, and bundling of features has helped make our products and despite increasing pressure from other cellular carriers as well services easy for customers to understand, buy and use. More as new operators. The advent of six new Personal HONGKONG TELECOM ANNUAL REPORT 1997
than ever, customers can pick and choose precisely the route is the fourth busiest in the world. China last year lowered communications combination they require. This approach will its international tariffs by 30%, which was a factor in generate new revenue streams and has already won over new encouraging 6 per cent growth in traffic between the territory customers. and the mainland. Hongkong Telecom is well placed to benefit
from this situation, and to take advantage of recent 1997 was a year of many achievements. One of the more improvements in the investment climate. outstanding successes was our Netvigator Internet service which, in only one year of operation, has become the clear We look forward to further integrating our advanced leader in one of the world’s most heavily-contested markets. infrastructure with that of the mainland and to helping China
further develop its own telecommunications capabilities Never content to rest on its laurels, Hongkong Telecom is also through partnership and joint ventures. developing a new market for broadband services, beginning with the introduction of interactive television (iTV) in July OUR BUSINESS FOCUS
1997. A ‘world-first’ product offering, this will bring Having successfully met our objectives to date, we are setting 13 interactive entertainment, education, financial services and even higher standards for ourselves. In 1997/98, we will: much more into Hong Kong’s homes. • continue to improve upon our already high levels of
The launch earlier this year of Hongkong Telecom’s Caller customer satisfaction through excellent service and
Display service added a whole new dimension to telephone- innovation based communications, putting customers in control of when, • continue to invest in value-added services and grow this where and with whom they communicate. revenue stream
• grow our international traffic and strengthen Hongkong CHINA Telecom’s position as the leading regional This year has also brought Hong Kong a step closer to telecommunications hub reunification with China. As the territory returns to Chinese • grow our leading market share in the Internet service sovereignty, all the signs indicate that the new Special provider market and offer our customers even greater Administrative Region (SAR) will continue to expand what is transmission speeds already one of the world’s greatest commercial success stories. • increase the mobile customer base and continue our focus
China is Hongkong Telecom’s single largest on the customer through further market segmentation telecommunications traffic partner, and the Hong Kong-China • launch interactive television (iTV) Chief Executive’s report
• work towards a position where market forces rather than applications and the next generation of “virtuality”
regulations determine the prices we are able to offer applications that are already on the drawing board.
customers Advanced solutions, coupled with the freedom for individuals • realise the value of our extensive property portfolio in to tailor precisely how people interact with our products, will Hong Kong allow us to deliver still higher levels of service. It will also, • continue to seek out and develop regional business quite naturally, bring us even closer to our customers. opportunities
• continue to improve our productivity through programmes And, as Hong Kong enters a new era, Hongkong Telecom will
of cost control and revenue enhancement continue to enhance its already significant regional and global
connectivity. Together with Cable & Wireless we will play a MANAGEMENT BY EXCELLENCE leading role in the development of telecommunications... not We continue to focus on efficiency in our operations and on just at home, but in the region and on the global stage. providing the best in service to our customers — judged by 14 world standards.
In our dynamic environment, having employees who are
empowered and able to manage change is critical. Operation
Excel aims to create a performance-based culture underpinned
by a sense of individual confidence and a willingness to Linus W L Cheung undertake bold new initiatives. This programme is a means for Chief Executive management to reach out to staff, to define and implement the
management style Hongkong Telecom must employ in order to
win in this fiercely competitive environment. Positive bottom-
line results will be delivered in conjunction with programmes
of revenue enhancement and cost control.
THE FUTURE
The advantages of our fully digital network should never be
underestimated. It is the key that will allow us to open the
door to evolutionary products like iTV, on-line retail HONGKONG TELECOM ANNUAL REPORT 1997
Operational review
Hongkong Telecom’s performance during this year has As the territory gears up to celebrate its return to China, demonstrated the Company’s ability to adapt to change while Hongkong Telecom is firmly on track, maintaining margins 15 simultaneously identifying and capitalising on new areas of and stimulating growth through the development of innovative opportunity. and new revenue streams.
In an increasingly competitive environment, Hongkong Telecom CREATING VALUE FOR SHAREHOLDERS AND OUR met all of the key performance objectives it set last year. CUSTOMERS
Hongkong Telecom remains deeply committed to delivering We have made good progress in rebalancing Hongkong value — to shareholders through sound financial management; Telecom’s portfolio of earnings. Local and value-added and to customers by adhering to the highest quality standards, services grew and the relative contribution of international by providing innovative and relevant products, and by offering telephone services was further reduced. excellence in all areas of customer service.
More than that, we got to know our customers better. We did An important ingredient in this approach has been the a better job of providing them with the products they really technological advances made possible by capitalising on want. We made it much easier for them to obtain and use Hongkong Telecom’s superior network. This technical edge has those products. And our customers have rewarded us with been blended with the skill and expertise of our people and the their loyalty by making Hongkong Telecom their telecoms depth of their understanding of customer needs. Living a provider of choice. Operational review
The innovations of the last year have not simply been customer
A singular blend of innovation, led. They have been customer focused — to meet needs that customers may not have realised they have. quality and service makes Hongkong Telecom a premium More weight has been placed on brand and image in the marketplace. Extending our reach into the market by telecoms provider – and one of improving sales channels and developing new ones has also the best telecoms companies in been emphasised. Our new business partners include
the world today. convenience stores, photo outlets, video rental stores, public
transport systems and even the Hong Kong Post Office.
customer service culture from top management down to each Our business customers are partners as well. What is good for customer service operator comprises a sometimes invisible yet their business is good for ours. For example, we have worked tangible competitive advantage. 16 with our hotel partners to provide innovative guest services
such as in-room Internet access, which cater more to the needs OUR CUSTOMER FOCUS
of the modern business traveller. And our leading-edge Over the last year Hongkong Telecom has more precisely
technology will be there to help them and their customers targeted the unique needs of its various customer bases,
move easily into the twenty-first century. dividing general categories into increasingly focused and
unique groupings. This allows the Company to offer a higher OUR BUSINESS ENVIRONMENT — REGULATORY ISSUES degree of personalisation in products and in customer service, During the year under review Hongkong Telecom has taken a as well as the opportunity to develop stronger relationships proactive role in working with Government on the introduction with high-value customers. of competition in Hong Kong, creating conditions intended to
give the new network operators and ourselves an opportunity to Our goal is to retain existing customers and attract new ones.
compete fairly and equally. We will continue with our efforts to A major initiative has been the move to consolidate loyalty
have the regulator adopt the level playing field which will enable programmes and points schemes that exist across our business
us to compete effectively in a contestable market. into a single master redemption plan. Through initiatives like
number one partners, this will allow all our fixed-line, mobile Callback operators, including our local competitors, have and IMS customers to enjoy greater benefits as a result of their offered deeply discounted international calls. These discounts commitment to Hongkong Telecom. HONGKONG TELECOM ANNUAL REPORT 1997
have stimulated total traffic, but have enabled our competitors Local digital data circuit capacity Mbps
to make inroads into Hongkong Telecom’s IDD revenue 284 571 864 1,159 1,454 1,957 3,149 5,124 9,161 17,566 stream and market share. We have responded successfully with ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 a range of competitive offerings including call plans and a strong focus on quality customer service. As a result, we reduced the rate of share loss in the second half of the year.
Callback has brought about a substantial increase in inbound traffic – and settlement payments – from the United States. A similar trend worldwide has resulted in continued pressure from the US to reduce international accounting rates, and THE LOCAL MARKET proposals by the Federal Communications Commission Hongkong Telecom has continued to rebalance its portfolio of (FCC) and the International Telecommunications Union products and services to increase revenue from local services 17 (ITU) to re-assess accounting rate levels and structures. and reduce the company’s dependence on IDD revenue.
Hongkong Telecom believes that accounting rate restructuring The PhoneMail message handling service, which was one of our is too complex an issue to be resolved quickly or through most successful products during the year, has grown revenue by unilateral initiatives and that accounting rates should be 95 per cent. And on the residential front, Homefax 3 is still negotiated in a multilateral forum such as the ITU. providing a powerful single-line solution for home phone and fax
In April 1996 OFTA confirmed Hongkong Telecom PhoneMail subscription International’s exclusive right to provide public IDD services. number of subscribers
However, it also proposed to authorise new competitive 18,356 75,273 91,109 ’95 ’96 ’97 international services including virtual private network services and the international simple resale of facsimile and data services, all of which it considers to be outside the exclusivities of Hong Kong Telecom International Limited. It is proposed that these services will be licensed shortly. Operational review
needs while providing two separate numbers. Homefax 3 has The power and capability of added 34,000 customers in the last 12 months. Hongkong Telecom’s In September, Hongkong Telecom launched the territory’s first ATM service, based on leading-edge Asynchronous Transfer
sophisticated digital Mode technology that can transmit data at an impressive network gives customers 155Mbps. A state-of-the-art solution that combines price flexibility with a tremendous capacity for expansion, this is
more control of when, part of the Business Solutions programme designed to meet where and with whom they the specialist needs of business users. communicate. The launch of Hongkong Telecom’s Datapak ISDN in October has energised the voice, data and video communications
18 markets. A next-generation ISDN solution, Datapak ISDN
delivers high-bandwidth connectivity at a new low price point
and allows any customer to make connections more quickly, to
communicate at higher speeds and pass voice, video and data
through a single medium.
Caller Display subscription Our Caller Display service has added a whole new dimension to number of subscribers telephone-based communications, giving our customers more 38,303 64,680 80,456 93,698 freedom and more flexibility in how and with whom they Jan ’97 Feb ’97 Mar ’97 Dec ’96 communicate. Over 93,000 customers have taken up the new
service since launch in December.
Hongkong Telecom’s fully digital network, which stood at
120,000 kilometres of fibre-optic cable at the end of last year,
has grown by some 65 per cent, reaching more than 200,000
kilometres at the end of this financial year. HONGKONG TELECOM ANNUAL REPORT 1997
These developments were complemented by two other that customers are able to utilise advanced new solutions now, initiatives — YY Shops and One2Free — aimed at making instead of waiting for them to arrive... eventually. technology fun and easy to use. The first in a chain of Hongkong Telecom will continue working with companies in Hongkong Telecom YY Shops — for the young and the young- other fields to develop and deliver even more innovative and at-heart — opened in Kowloon, offering an exciting and useful products and services to our customers. unique retail experience as well as exceptional value for money.
Products on sale there include Hongkong Telecom’s new mass- THE INTERNATIONAL MARKET market mobile telephone brand — One2Free (see Mobile On the international front, this past year presented a number section). of business opportunities as well as the challenges of further
competition. We have also partnered with product developers to bring services to local consumers more quickly, purchasing products In China, Hongkong Telecom successfully negotiated new from other vendors as well as developing our own — and business partnerships including the appointment of Fujian 19 thereby leading the world in the field of systems integration, Bamin Telecommunications as its agent for IT products and most notably in the area of Interactive Multimedia Services services in Fujian and in China. The commissioning of the
(IMS). Beijing-Jiujiang-Kowloon fibre-optic cable in mid 1997 will
further strengthen the Company’s links with the mainland. Examples include HongkongBank’s MONDEX electronic cash solution and Wellcome’s IMS cyber-shopping application which is featured on Netvigator, our Internet service. The benefit is Hongkong Telecom is Total capacity in invested digital cable digital voice or data 64k circuits becoming a ‘carrier’s 5,760 5,760 17,280 17,280 28,800 28,800 28,800 44,160 10,140 12,210 13,620 20,940 21,630 26,790 32,250 36,060
’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 carrier’, winning traffic from other carriers simply by combining the best service with the best connectivity at the best price.
China land cable Submarine cable Operational review
The launch of the Asia Pacific Cable Network (APCN) in Some of these international customers are in fact other
January heralded a new era in telecommunications as well as telecommunications carriers, saving money by routing some of
international co-operation. Built at a cost of more than their traffic through Hong Kong. Over the year, Hongkong
US$524 million, the project was backed by Hongkong Telecom has developed a position as a “carrier’s carrier,”
Telecom along with Cable & Wireless and 50 international winning business from other carriers through high levels of
carriers from around the globe. service, competitive pricing and excellent connectivity.
A further three new submarine cable systems are in the THE MOBILE MARKET
pipeline for Hongkong Telecom and its partners. The first is Hong Kong’s competitive mobile communications market is
FLAG, the Fibre-optic Link Around the Globe. The second is unique by any standards. The number of mobile phone users
SEA-ME-WE 3, the South East Asia-Middle East-Western in Hong Kong today exceeds 1.3 million — more than 20%
Europe system. The third, as yet unnamed, will be the first market penetration.
undersea fibre-optic cable to connect China with the United 20 Indicators suggest that the market will more than double by States, and we are pleased to be one of the primary backers of the year 2000, with the number of mobile phone users this project. reaching 2.9 million — representing some 40% market
Along with the two high-capacity fibre-optic penetration, among the highest in the world.
telecommunications cables which stretch overland to the Hongkong Telecom remains the market leader, and now territory from China, seven international submarine fibre- markets two brands — the premium 1010, which is targeted optic cables now come ashore here.
Coupled with our satellite earth station comprising 17 Continued success will antennae (making it Asia’s largest), these provide the required
international connectivity to support Hong Kong’s role as a require the full integration
regional telecommunications hub. Many of Hongkong of mobile and fixed line Telecom’s more than 500 multinational customers have no
presence in the territory other than their hub. services – customers already
During the year, our earth station and satellite business served expect this.
more than 150 customers from 50 countries around the world. HONGKONG TELECOM ANNUAL REPORT 1997
primarily at a business customer base and emphasises quality Mobile customer base number of customers (’000) 69 95 of service plus value-added features, and One2Free which is 162 270 390 ’93 ’94 ’95 ’96 ’97 aimed at the mass market. Together, the two brands serve over
390,000 customers.
Today, 1010 is the largest digital mobile phone network in
Hong Kong with 450 base stations. Owing partly to innovative marketing techniques such as stored-value SIM cards and superior coverage, 1010 continues to be an outstanding success.
The recently-introduced One2Free — with its focus on flexible customers can enjoy virtually the same mix of features as packaging, branding and meeting the individual requirements wireline customers. of people’s lifestyles — also looks sure to shine brightly. A 21 Fixed/Mobile Integration (FMI) was further enhanced this totally new concept in the mobile telephone market, One2Free year with the launch of integrated billing which consolidates is aimed at the mass market and, in the four months since the fees for a host of fixed and mobile services and presents launch, has already won over 50,000 customers. them on a single statement.
Hongkong Telecom has also invested considerable time and Hongkong Telecom has also participated in the development of effort in adding value to its cellular services. Today, mobile dual-cordless/cellular handsets and is now testing these
prototypes. These innovative devices do double duty — acting One2Free as cordless phones in the home or office and as cellular phones (First four months)
on the street. Customer number 50,000 Hongkong Telecom CSL Mobile was the first mobile operator
outside Europe to sign GSM roaming agreements which offer Retail outlets opened 123 Automatic International Roaming (AIR), and today this
service allows customers to use their phones in 45 countries Average spending per customer $560 including China, with additional services for Japan and the USA. Operational review
Hongkong Telecom CSL’s fully computerised fraud management system, first introduced in 1995, has helped Netvigator has set make a significant reduction in our bad debts for the year. new standards in And as a demonstration that innovation brings technical and
financial rewards, our intelligent underlay/overlay (IUO) Internet connection technology, developed in-house last year, has increased speed, technical support capacity by 30 per cent and has also begun to earn royalties
this year, bringing in some $2.3 million in licensing fees so far. and innovation.
INTERACTIVE MULTIMEDIA SERVICES (IMS)
Our entry into the Internet service market with Netvigator has
Netvigator customers cumulative growth been successful in attracting some 73,000 customers since customers (’000) 2 7 12 18 24 30 36 43 52 64 68 73 22 launch in April 1996. This figure represents a market-leading Jul ’96 Oct ’96 Apr ’96 Jan ’97 Feb ’97 Mar ’97 Jun ’96 Sep ’96 Dec ’96 Nov ’96 Aug ’96 May ’96 35% share of what is acknowledged to be the most competitive
Internet service market in the world.
Netvigator customers were the first in Hong Kong to be able to
shop on-line for some 3,000 products at Wellcome, the
supermarket chain. Other IMS plans continued on track
during 1996/97, including the development of double-byte
character sets required to handle Asian languages, and
pioneering work in systems integration.
The new financial year will see the launch of new multimedia home market, such as interactive home banking, electronic
services under the banner of iTV (interactive television), commerce and interactive education. Through collaboration
including video-on-demand, music-on-demand, interactive with other Cable & Wireless companies such as Cable &
shopping and interactive games. The first quarter of 1998 will Wireless Communications in the UK and Optus in Australia,
see the introduction of other innovative applications for the Hongkong Telecom will further develop the global potential of
these new multimedia services. HONGKONG TELECOM ANNUAL REPORT 1997
IMPROVED PRODUCTIVITY our popular GO!SPORT programme for an additional three
Efficiency programmes during the year have focused on years. We also provide Netvigator Internet access free of charge optimising the effective use of staff, on realising the value of to more than 70 secondary schools as well as supporting the the Company’s property portfolio, outsourcing when telecommunications needs of the Teachers of English appropriate and managing assets prudently in order to build a Language Education Centre (TELEC). And again this year, highly cost-effective, customer-focused and very successful the employees of Hongkong Telecom have distinguished organisation. themselves, raising more than one million dollars for the
Community Chest. In addition to programmes of revenue enhancement, the
Company has continued to focus closely on cost controls in all THE FUTURE areas of operation. Our plan to trim the workforce by 2,500 While advances in technology and new services will employees over three years ending March 1998 through undoubtedly improve the lives of everyone in Hong Kong, retraining, redeployment and natural turnover continues to be much of what Hongkong Telecom has achieved during this 23 successful. The number of employees is now 13,767 — a year will provide one fundamental human benefit — greater decrease of 8% during this year. freedom and more flexibility for customers in their business
and private lives. THE COMMUNITY
We see Hongkong Telecom as very much a part of economic The increased integration of fixed and mobile networks, for and social life in Hong Kong. The vitality of the business instance, means that people can stay in touch whenever they community is supported by Hongkong Telecom’s leading-edge wish and wherever they may be. And bringing broadband infrastructure and services. Quality of life in our community is services to the homes and offices of Hong Kong will truly take enhanced through our sponsorships, charitable partnerships, our customers into the all-digital future. initiatives in education and the provision of emergency Hongkong Telecom will continue to make life simpler and communications services. better for everyone, delivering on our visionary theme: “What
Through the Hongkong Telecom Foundation, established in can be imagined, can be achieved.”
1990, we have committed more than $130 million toward This commitment extends to our customers, to our education, sports, environmental awareness and support for shareholders and to the community of Hong Kong. the handicapped. In September 1996 we made an important further commitment to the youth of Hong Kong by renewing Financial review
Summary of results
The following chart provides a summary of Hongkong Telecom’s performance over
the last 12 months:
1997 1996 Growth $M $M %
Turnover 32,577.8 29,405.2 10.8%
International telephone services 17,395.2 16,528.0 5.2% Local telephone services 4,569.7 4,068.1 12.3% Other telecommunications services 7,839.1 5,940.6 32.0% Equipment sales and rental 1,859.7 1,806.5 2.9% Computer, engineering and other services 914.1 1,062.0 (13.9%)
Operating Costs 20,375.0 18,312.5 11.3%
Allocations to other telecommunications operators 8,644.5 7,810.5 10.7% 24 Salaries & related costs 3,916.6 4,013.2 (2.4%) Depreciation 2,190.5 1,940.2 12.9% Other costs 5,623.4 4,548.6 23.6%
Operating profit 12,202.8 11,092.7 10.0%
Profit before tax 12,908.9 11,478.2 12.5%
Profit attributable to the shareholders 11,177.7 9,938.8 12.5%
Capital expenditure 5,026.2 4,330.8 16.1%
Statistics: International traffic (’000 minutes) 3,679,450 3,290,161 11.8% Number of lines 3,435,312 3,275,185 4.9%
Residential 2,044,464 1,979,628 3.3% Business 1,390,848 1,295,557 7.4% Mobile customer base 390,000 270,000 44.4% HONGKONG TELECOM ANNUAL REPORT 1997
Management discussion and analysis Total international telephone traffic billion minutes
This was the first full year of fixed network competition in 2.1 2.6 3.0 3.3 3.7 ’93 ’94 ’95 ’96 ’97 Hong Kong. We have seen the benefits of earlier investments in the network, new services and efficiency come through in our results. We have focused on building up the revenues in local services and mobile while driving for volume growth in international services. Revenue from international telephone services accounted for 53 per cent of turnover compared to 63 per cent in 1993. The focus on efficiency has contained the growth in costs and enabled us to maintain net profit margins.
TURNOVER China traffic was 6 per cent and traffic with the rest of the
International telephone services world grew 17 per cent. During the year, traffic from China 25 The year-on-year growth of international telephone services began to show signs of recovery and grew by an overall average revenues increased by 5.2 per cent with overall international of 4 per cent. This growth was particularly evident in the traffic increasing by 12 per cent. The growth of both-way second half of the year, registering an 8 per cent increase
assisted by the gradual relaxation of China’s macro economic Rebalancing our portfolio proportion of revenue derived (%) measures and the reduction in IDD tariffs for international 63% 62% 61% 56% 53% calls from China. The first six months of the year saw only ’93 ’94 ’95 ’96 ’97
a 1 per cent growth in traffic from China.
During the year, our competitors continued to use callback
because of the cost advantage this gave on certain routes. The
effect of callback services has been a shift from outbound to
inbound in the traffic pattern on the North American routes. % % % % %
37 38 39 44 47 This has also caused a reduction in gross international
International Other core business telephone revenues on certain routes as the Hong Kong Financial review
outgoing call charge was replaced by a lower incoming Monthly line rental
payment from the callback country. This reduction was partly Residential $67.0
offset by a reduction in the Group’s payment to overseas Business $104.6
administrations for the delivery of outgoing IDD calls. Increased interconnect revenue from FTNS (Fixed Telephone
Local telephone services Network Services) and mobile operators was a contributing
Local telephone revenue continued to grow steadily, increasing factor and demonstrates the competitive positioning of our
by 12.3 per cent over the previous year driven in part by strong wholesale network services to other licenced carriers.
growth of 4.9 per cent in demand for new lines. Business lines Other telecommunications services grew at 7.4 per cent and residential lines at 3.3 per cent. In keeping with our stated strategic goals, we have continued Increased multiple lines in the home reflected the increasing to focus on strengthening and growing other areas of our need for additional communications such as fax, e-mail business including value-added services (VAS), mobile and through the Internet and other computer-based services. 26 business leased lines, and data services. These services
The average tariff increase for local telephone services was contributed some 24 per cent to total revenue.
approximately 3.5 per cent effective from 1 August 1996 and The take-up of VAS showed a strong performance with a was based upon the existing pricing scheme of Retail Price growth of 26 per cent. Index minus X%, as determined by Government.
Our key VAS include:
Total exchange lines in service ’000 lines Starline Services
1,043 1,777 1,142 1,850 1,229 1,920 1,296 1,980 1,391 2,044 • Call Forwarding ’93 ’94 ’95 ’96 ’97 • Call Waiting
• Follow-me
• Conference Call
• Abbreviated Dialling
PhoneMail
Caller Display
Business Residential HONGKONG TELECOM ANNUAL REPORT 1997
Competition in the mobile market continued to be intense this 1995/96. There was also a reduction in related costs this year. year. However, aggressive marketing delivered growth in our The new partnership resulted in a lower cost base and mobile customer base of some 120,000 for the year. This therefore an improved operating margin. increase was supported by a priority focus on quality mobile OPERATING COSTS voice and message services, which enabled Hongkong Telecom Our total operating costs for the financial year increased 11.3 CSL Mobile to register strong revenue growth of 43 per cent. per cent. The cost increase was contained through continued
Leased line sales and data services revenues grew 25.5 per process improvement, outsourcing of non-critical activities and cent. This was partly due to an increased number of customers tight cost control programmes. Excluding the revenue related expanding into the region and existing customers upgrading costs, which include Allocations to Telecommunications their requirements for high-speed and high-bandwidth data Operators, Cost of Sales and Services and Royalty to services. These revenues more than offset the anticipated Government, total overhead expense only grew by 5 per cent. decline in telex and telegram revenues which now represent Mainly due to a reduction in accounting rates with other 27 just 1.1 per cent of our turnover. international telecommunications administrations, growth of
Equipment sales and rental Operating profit per employee $’000 Equipment sales and rental revenues showed a 2.9 per cent 463 539 608 714 848 ’93 ’94 ’95 improvement despite a drop of 10.2 per cent in the first half of ’96 ’97 the year. Although we achieved significant growth in sales of mobile phones, overall revenues were affected by lower prices for handsets which were subsidised to enhance our competitive position. The handset subsidies are being written off over an average of two years consistent with prevailing conditions in the market.
Computer, engineering and other services
Revenues declined 13.9 per cent mainly due to a change in our directory advertising business partner in the financial year Financial review
outpayments for international telephone services was kept Exchange lines per employee
below the growth rate for outgoing traffic revenues. In 180 187 196 211 239 ’93 ’94 ’95 ’96 ’97 addition, adoption of more efficient traffic management
techniques contributed to further reductions in costs.
Delivery fees payable by Hongkong Telecom International to
the FTNS operators were higher this year as the competitors
have been originating and terminating more international
telephone traffic as their market share has increased. With the
successful launch of a range of competitive packages, the rate
of loss of market share slowed in the second half of the year.
The launch of new international services in April 1997 has are well on track to meet our target. In addition we were
helped the Group regain market share. successful in outsourcing parts of our information technology 28 operation to deliver savings in the year under review and for Our staff costs declined by 2.4 per cent as a result of our three- future years. year job reduction programme started two years ago. Our
target is to reduce total staff numbers from 16,000 to 13,500 Depreciation levels increased, mainly due to additional
by 31 March 1998. The current staff number is 13,767 and we exchange and transmission equipment being brought into
service for the expansion and enhancement of our local and Turnover per employee $’000 international network. 1,381 1,521 1,677 1,892 2,263 ’93 ’94 ’95 ’96 ’97 The cost of sales and services increased by 59.7 per cent. This
was mainly due to our higher sales of mobile phones and other
products and services.
As part of its customer service improvements, the Company
has increased the number of mobile cell sites and retail
outlets during the year. This has resulted in an increase in
rent and rates. HONGKONG TELECOM ANNUAL REPORT 1997
The management fees paid to Cable and Wireless plc were CAPITAL EXPENDITURE reduced slightly due to exchange differences in favour of the Capital expenditure of $5 billion was incurred to meet
Hong Kong dollar. The overall level of service provided under increased demand for existing services and to develop new the management agreement was similar to the previous services such as IMS. The major areas of investment were: financial year. fixed line network capacity; new VAS such as Netvigator;
enhanced mobile switch capacity; leased circuit capability; Other operating costs rose 8.9 per cent mainly due to and new submarine cables. increased marketing programmes and the service fees in respect of the outsourcing of our computer data processing Return on fixed assets employed % centre arranged in June 1996 which were more than offset by 44 45 46 47 47 ’93 ’94 ’95 savings in staff costs. Our state-of-the-art Fraud Management ’96 ’97
Information System has helped to reduce our level of bad debts across the Group. 29
Through rebalancing of revenue and tight cost control, we have been able to maintain a healthy operating margin.
Operating margin % 33.5 35.5 36.3 37.7 37.5 ’93 ’94 ’95 ’96 ’97
Working capital ratio 0.68 0.70 0.68 0.87 1.19 ’93 ’94 ’95 ’96 ’97 Financial review
FINANCE Hongkong Telecom maintained a healthy cash position. The
Cash management established funding facilities more than meet with the near
Interest income increased by 96.6 per cent and, at 31 March term requirements. With such a strong balance sheet, the
1997, the Group had cash and bank deposits of $14.5 billion Group is extremely well placed to access both the local and
and outstanding borrowings of $5.2 billion. The increase in international capital markets should there be substantial
cash was primarily due to the take-up level of scrip dividend funding requirements in future.
during the year and to improved working capital performance. The Group maintains a continual review of its capital structure
Financial policies taking into account new investment opportunities, long and
Our treasury risk management activities are carried out in short term funding requirements, and known contingency
accordance with Board approved policies and authorities. Our needs. This is with a view to achieving capital efficiency and
internal treasury procedures and guidelines are reviewed on a maximising shareholder value.
regular basis. As a matter of policy, we continue to manage 30 currency or interest rate risks associated with the transactions
directly related to our operations.
The hedging of foreign exchange related risks is primarily
managed by using forward foreign exchange contracts and the
use of derivatives or related products is strictly controlled.
We have in place committed funding lines of $4.0 billion and
uncommitted lines of $7.7 billion to support our capital
expenditure programmes. As at 31 March 1997, the Group
had utilised $1.3 billion of the available committed lines
of credit.
The investment of our surplus cash is managed on a
conservative basis. Investments are restricted to maximum
duration of one year to maintain an optimal level of liquidity. HONGKONG TELECOM ANNUAL REPORT 1997
HOW DO WE COMPARE ?
Hongkong Telecom compares very well when
benchmarked against other international
telecommunications companies — one of the reasons we
are considered to be among the best in our industry.
Mobile + fixed lines per employee 83 304 284 278 233 226 220 215 165 156 141 BT NTT PLDT RBOC Telstra (Mar 96) (Mar 97) (Mar 96) (Jun 96) (Dec 96) (Dec 96) (Dec 96) (Dec 96) Average Singapore Telecom New France Telecom Zealand (Mar 96) Telecom (Mar 96) Telekom Malaysia Deutsche Telekom Hongkong Telecom
31
Sales per employee US$’000 85 64 322 239 225 219 214 203 193 153 151 BT NTT PLDT RBOC Telstra (Mar 96) (Mar 96) (Jun 96) (Mar 97) (Dec 96) (Dec 96) (Dec 96) (Dec 96) Average Singapore Telecom New France Telecom Zealand (Mar 96) Telecom (Mar 96) Telekom Malaysia Deutsche Telekom Hongkong Telecom
Source: most recently published data from companies concerned Directors’ report
The Directors present their Report, together with the financial statements, for the year ended 31 March 1997. PRINCIPAL ACTIVITIES The principal activities of the Company and its subsidiaries (the Group), which were carried out mainly in Hong Kong, continued to be the provision of telecommunications services, the sale and rental of telecommunications equipment and the provision of computer, engineering and other services. RESULTS AND DIVIDENDS The profit of the Group for the year ended 31 March 1997 and the state of the Company’s and the Group’s affairs at that date are set out in the financial statements on pages 36 to 55. Profit attributable to shareholders for the year was $11,177.7 million. Analysis of turnover and operating profit is shown on page 3. An interim dividend of 34.6 cents per share was paid to shareholders on 30 December 1996 (with shareholders being given the option to elect to receive new shares in lieu of part or all of their cash entitlements). The Directors recommend a final dividend of 41.7 cents per share to be paid on or about 11 July 1997 to shareholders who are on the Register of Members of the Company at the close of business on 30 May 1997. Shareholders will again be offered a scrip alternative to the cash dividend. RESERVES The Group’s retained profit for the year was $2,322.3 million. Movements in its reserves during the year are set out in note 20 to the financial statements. FIXED ASSETS Particulars of the movements in fixed assets are set out in note 12 to the financial statements. SHARE CAPITAL Particulars of the movements in share capital are set out in note 19 to the financial statements. PURCHASE, SALE OR REDEMPTION OF SHARES During the year neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company’s shares. 32 DIRECTORS AND THEIR INTERESTS The present Directors of the Company are listed on pages 6 and 7. Mr Richard H Brown was appointed as a Director and Deputy Chairman with effect from 1 August 1996. Mr Roy A Wilson and Mr Robert E Lerwill were appointed Directors and Mr Jonathan H M Solomon resigned as a Director, all with effect from 6 March 1997. All other Directors served throughout the year. In accordance with Article 105 of the Company’s Articles of Association, Mr Rodney J Olsen and Dr David K P Li will retire by rotation at the forthcoming Annual General Meeting and, being eligible, offer themselves for re-election. Mr Richard H Brown, Mr Roy A Wilson and Mr Robert E Lerwill will retire in accordance with Article 96 and, being eligible, offer themselves for re-election. No Director being proposed for re-election has a service contract with Hongkong Telecom which cannot be determined within one year without payment of non-statutory compensation. No Director has, or had during the year, a material interest in any contract of significance to which the Company or any of its subsidiaries or its holding company or any subsidiary of such holding company is or was a party. The following Directors had interests in the ordinary shares of the Company and of its associated companies (within the meaning of the Securities (Disclosure of Interests) Ordinance) at 31 March 1997, as recorded in the register of share interests:
Cable and Wireless plc Hong Kong Telecommunications Limited Personal Family Share Personal Corporate Interests Interests Options Interests Interests
Dr N B Smith 2,552 17,552 - - - Dr The Hon D K P Li - - - 3,292,350 - R H Brown 10,000 - 618,311 - - L W L Cheung - - 380,653 - - N K T Yuen - - 104,000 3,533 - A R Grieve 5,246 6,793 89,329 - - R A Wilson 200 500 - 100 - D N Prince 3,370 11,662 88,575 - - Sir S Y Chung - - - - 320,268 (A) R E Lerwill 12,500 - 232,853 - - V F Moore 516 - - - - R J Olsen 65,320 - 506,326 - -
(A) Interests held by Honfam Company Limited, an associated company of Sir S Y Chung. Apart from the foregoing, at no time during the year was the Company, any of its holding company, subsidiaries or fellow subsidiaries a party to any arrangement to enable the Directors or Chief Executive or any of their spouses or children under HONGKONG TELECOM ANNUAL REPORT 1997
18 years of age to acquire benefits by means of the acquisition of shares in or debentures of the Company or any other body corporate. SUBSTANTIAL SHAREHOLDINGS At 31 March 1997 and in accordance with the Securities (Disclosure of Interests) Ordinance (the Ordinance), the Company had been notified of certain interests in its ordinary shares. Cable and Wireless plc and its subsidiary companies (together Cable & Wireless) had notified a beneficial interest in a total of 6,918,020,553 shares (approximately 59.2 per cent). China International Trust & Investment Corporation Hong Kong (Holdings) Limited and various companies associated with it (together CITIC) had notified a beneficial interest in a total of 904,686,181 shares (approximately 7.7 per cent). Furthermore, by virtue of sections 9 and 10 of the Ordinance, Cable & Wireless is deemed to be interested not only in the shares in which it is beneficially interested but also in those in which CITIC is beneficially interested and vice versa in the case of CITIC. This arises from the fact that a sale/purchase agreement entered into on 20 March 1990 under which Cable & Wireless sold certain shares in the Company to CITIC contained restrictions on the disposal of the Company’s shares and for that reason such agreement falls within the terms of section 9 of the Ordinance. DONATIONS Cash donations to charities by the Group during the year amounted to $4.9 million. MANAGEMENT AGREEMENT WITH CWPLC The Company has a Management Agreement with Cable and Wireless plc (CWPLC) in respect of the provision of management and technical services and trademarks from CWPLC to the Group, details of which are given in note 26 to the financial statements. MAJOR CUSTOMERS AND SUPPLIERS The aggregate amount of turnover attributable to the Group’s five largest customers represented less than 30 per cent of the Group’s total turnover and the aggregate amount of purchases (not including purchases of capital nature) attributable to the 33 Group’s five largest suppliers did not exceed 30 per cent of the Group’s total purchases for the year ended 31 March 1997. CONNECTED TRANSACTIONS On 10 September 1996, Hongkong Telecom Finance Limited, a wholly-owned subsidiary of the Company, granted a loan of $9,850,000 (the Loan) to Mr Norman K T Yuen, who is a Director and a Deputy Chief Executive of the Company. The Loan was made under the Hongkong Telecom Housing Loan Scheme which was approved by the Board of the Company in 1994. The purpose of the Loan, which had the prior approval of the independent Non-Executive Directors of the Company, was to facilitate the purchase of a property for use as Mr Yuen’s main residence. Further details of the Loan are given in note 6 to the financial statements. On 2 April 1996, the Company entered into and completed an agreement with Bay Properties Limited, a wholly-owned subsidiary of CWPLC, for the acquisition of a residential house at 24 Middle Gap Road (the Property) at a cash consideration of $58 million. The Property had hitherto been leased to the Company and used as the residence of the Chief Executive of the Company, and has continued to be used for such purpose since the purchase. The purchase of the Property is a long term investment. Details of these connected transactions have previously been announced in the press. COMPLIANCE WITH CODE OF BEST PRACTICE Throughout the year, the Company has complied with the Code of Best Practice as set out in Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. AUDITORS The auditors of the Company, KPMG Peat Marwick, have indicated their willingness to continue in office and a resolution proposing their re-appointment will be put to the Annual General Meeting.
By Order of the Board
David N Prince Finance Director and Company Secretary
8 May 1997 Notice of annual general meeting
Notice is hereby given that the 10th Annual General Meeting of Hong Kong Telecommunications Limited ( ) will be held on 4 July 1997 at 11:00 am in the Conference Room, 14th Floor, Hongkong Telecom Tower, TaiKoo Place, 979 King’s Road, Quarry Bay, Hong Kong, for the following purposes: As Ordinary Business: 1. To receive and consider the financial statements for the year ended 31 March 1997 and the Reports of the Directors and the Auditors. 2. To declare a final dividend. 3. To re-elect retiring Directors. 4. To re-appoint Auditors and authorise the Directors to fix their remuneration. And as Special Business, to consider and, if thought fit, to pass the following as ordinary resolutions:
ORDINARY RESOLUTIONS 5. “THAT: (a) the exercise by the Directors during the Relevant Period of all the powers of the Company to purchase shares of HK$0.50 each in the capital of the Company including any form of depositary receipt representing the right to receive such shares (“Shares”) be and is hereby generally and unconditionally approved; (b) the aggregate nominal amount of Shares which may be purchased on The Stock Exchange of Hong Kong Limited or any other stock exchange recognised for this purpose by the Securities and Futures Commission of Hong Kong and The Stock Exchange of Hong Kong Limited under the Hong Kong Code on Share Repurchases pursuant to the approval in paragraph (a) above shall not exceed or represent more than 10 per cent of the aggregate nominal amount of the share capital of the Company in issue at the date of passing this Resolution, and the said approval shall be limited accordingly; (c) for the purpose of the Resolution “Relevant Period” means the period from the passing of this Resolution until whichever is the earlier of: (aa) the conclusion of the next Annual General Meeting of the Company; and (bb) the revocation or variation of the authority given under this Resolution by ordinary resolution of the shareholders 34 in general meeting.” 6. “THAT a general mandate be and is hereby unconditionally given to the Directors to exercise full powers of the Company to allot shares in the Company (including making and granting offers, agreements and options which might require shares to be allotted whether during the continuance of such mandate or thereafter) provided that, otherwise than pursuant to a rights issue where shares are offered to shareholders on a fixed record date in proportion to their then holdings of shares (subject to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or having regard to any restrictions or obligations under the laws of or the requirements of any recognised regulatory body or stock exchange in any territory outside Hong Kong) or any shares issued pursuant to any scrip dividend scheme of the Company, the aggregate nominal amount of the shares allotted shall not exceed the aggregate of: (a) 10 per cent of the aggregate nominal amount of the share capital of the Company in issue at the date of passing this Resolution, plus (b) (if the Directors are so authorised by a separate ordinary resolution of the shareholders of the Company) the nominal amount of the share capital of the Company repurchased by the Company subsequent to the passing of this Resolution (up to a maximum equivalent to 10 per cent of the aggregate nominal amount of the share capital of the Company in issue at the date of passing this Resolution). Such mandate shall expire at the earlier of the conclusion of the next Annual General Meeting of the Company and revocation of the mandate by shareholders in general meeting.” 7. “THAT the Directors of the Company be and they are hereby authorised to exercise the powers of the Company referred to in the resolution set out in item 6 in the notice of this meeting in respect of the share capital of the Company referred to in paragraph (b) of such resolution.”
By Order of the Board
David N Prince Finance Director and Company Secretary
8 May 1997
Notes: 1. Any shareholder entitled to attend and vote may appoint one or more proxies to attend and, on a poll, vote instead of him. A proxy need not be a shareholder of the Company. 2. To be effective, the proxy form together with the power of attorney or other authority, if any, under which it is signed or a notarially certified copy of that power or authority, must be deposited at the offices of the Company’s Share Registrars, Central Registration Hong Kong Limited, Rooms 1901-5, Hopewell Centre, 183 Queen’s Road East, Hong Kong, not later than 11:00 am on 2 July 1997. HONGKONG TELECOM ANNUAL REPORT 1997
Report of the auditors
To the shareholders of Hong Kong Telecommunications Limited (incorporated in Hong Kong with limited liability)
We have audited the financial statements on pages 36 to 55 which have been prepared in accordance with accounting principles generally accepted in Hong Kong.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The Companies Ordinance requires the directors to prepare financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently, that judgements and estimates are made which are prudent and reasonable and that the reasons for any significant departure from applicable accounting standards are stated. It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion to you.
BASIS OF OPINION We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company’s and the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the 35 financial statements. We believe that our audit provides a reasonable basis for our opinion.
OPINION In our opinion, the financial statements give a true and fair view, in all material respects, of the state of the affairs of the Company and of the Group as at 31 March 1997 and of the Group’s profit and cash flows for the year then ended and have been properly prepared in accordance with the Companies Ordinance.
KPMG Peat Marwick Certified Public Accountants
Hong Kong, 8 May 1997 Consolidated profit and loss account For the year ended 31 March 1997
1997 1996 Note $M $M
3 Turnover 32,577.8 29,405.2 4 Operating costs 20,375.0 18,312.5 Operating profit 12,202.8 11,092.7 7 Net interest and other income 706.1 385.5 Profit before taxation 12,908.9 11,478.2 8 Taxation 1,690.4 1,515.1 Profit after taxation 11,218.5 9,963.1 Minority interests 40.8 24.3 9 Profit attributable to shareholders 11,177.7 9,938.8
Appropriations 10 Dividends 8,855.4 7,619.1 20 Retained profit for the year 2,322.3 2,319.7
11 Earnings per share 97.2¢ 88.8¢
36 HONGKONG TELECOM ANNUAL REPORT 1997
Balance sheets As at 31 March 1997
Group Company 1997 1996 1997 1996 Note $M $M $M $M
12 Fixed assets 25,405.0 22,255.7 63.8 – 13 Interest in subsidiaries – - 7,734.9 7,734.9 14 Other investments 517.5 401.3 221.1 85.4 15 Other non current assets 2,053.4 2,057.9 – – 16 Current assets 19,689.4 11,839.8 18,244.1 10,934.4 47,665.3 36,554.7 26,263.9 18,754.7 17 Current liabilities 16,588.2 13,666.4 17,636.9 9,294.7 Total assets less current liabilities 31,077.1 22,888.3 8,627.0 9,460.0 18 Deferred taxation 716.5 709.0 – – Net assets 30,360.6 22,179.3 8,627.0 9,460.0
Financed by 19 Share capital 5,846.7 5,654.3 5,846.7 5,654.3 20 Reserves 24,441.0 16,492.9 2,780.3 3,805.7 Shareholders’ funds 30,287.7 22,147.2 8,627.0 9,460.0 Minority interests 72.9 32.1 – – 37 30,360.6 22,179.3 8,627.0 9,460.0
The financial statements on pages 36 to 55 were approved by the Board of Directors on 8 May 1997 and were signed on their behalf by:
Linus W L Cheung Director
David N Prince Director Consolidated cash flow statement For the year ended 31 March 1997
1997 1996 Note $M $M
24 Net cash inflow from operating activities 13,321.8 12,317.4 Returns on investments and servicing of finance Interest received 624.2 372.9 Interest paid (259.5) (112.6) Dividends received from associated companies 13.7 8.1 Dividends paid (2,987.9) (4,950.2) Income from investments 76.4 63.1 Net cash outflow from returns on investments and servicing of finance (2,533.1) (4,618.7) Taxation Profits tax paid (1,477.6) (1,672.4) Investing activities Purchase of fixed assets (4,463.1) (4,104.5) Proceeds on disposal of fixed assets 385.3 137.6 Proceeds on disposal of investments 39.2 39.4 Purchase of investments (76.4) (63.1) 38 Investment in associated companies (135.7) (37.7) Lease rentals received 10.9 116.3 Decrease in long-term deposits – 3.7 Net cash outflow from investing activities (4,239.8) (3,908.3) Net cash inflow before financing 5,071.3 2,118.0 Financing 25 Repayment of loans (144.9) (2,698.3) Drawdown of loans – 2,651.7 Minority interests – 6.5 Net cash outflow from financing (144.9) (40.1)
Increase in cash and cash equivalents 4,926.4 2,077.9 Cash and cash equivalents at 1 April 4,335.5 2,257.6 Cash and cash equivalents at 31 March 9,261.9 4,335.5
Analysis of the balances of cash and cash equivalents Term deposits 14,220.1 7,824.1 Bank and cash balances 266.4 173.4 Bills of exchange – (40.0) Bank loans and overdrafts repayable within three months (5,224.6) (3,622.0) 9,261.9 4,335.5 HONGKONG TELECOM ANNUAL REPORT 1997
Notes to the financial statements For the year ended 31 March 1997
1. General The Company is a public limited company incorporated in Hong Kong. The ultimate holding company is Cable and Wireless plc, incorporated in England.
2. Principal accounting policies (a) Basis of accounting The financial statements have been prepared in Hong Kong dollars using the historical cost basis of accounting as modified for the revaluation of investment properties. (b) Basis of consolidation The consolidation accounts include accounts of the Company and all its subsidiaries made up to 31 March each year. The result of subsidiaries acquired or disposed of during the year are included in the consolidated profit and loss account from or to the date of their acquisition or disposal, as appropriate. All material intragroup transactions and balances are eliminated on consolidation. Goodwill arising on the acquisition of subsidiaries, being the excess of the cost over the fair value of the Group’s share of the separable net assets acquired, is charged directly to reserves on consolidation. The excess of the Group’s share of the fair value of the separable net assets of subsidiaries acquired over the cost of investment in these companies is credited to capital reserves. On disposal of a subsidiary during the year, any attributable amount of purchased goodwill which has previously been dealt with as a movement on Group reserves is included in the calculation of the profit or loss on disposal. (c) Investments in subsidiaries and associated companies The consolidated profit and loss account includes the Group’s share of the post-acquisition results of its associated companies for the year. In the consolidated balance sheet, investments in associated companies are stated at the Group’s share of their net assets. The goodwill arising on the acquisition of associated companies is charged directly to reserves on consolidation. 39 The results of subsidiaries and associated companies are included in the Company’s profit and loss account to the extent of dividends received and receivable, providing the dividend is in respect of a period ending on or before that of the Company and the Company’s right to receive the dividend is established before the accounts of the company are approved by the directors. In the Company’s balance sheet, investments in subsidiaries and associated companies are stated at cost less any provisions for permanent diminution in value as determined by the directors. (d) Other investments Other investments are held for long term purposes and are stated at cost less provision where the directors consider there has been a permanent diminution in the underlying value of the investment. (e) Revenue recognition Revenues are recognised as they are earned. Telecommunications revenues based on usage of the Group’s network and facilities are recognised when the services are rendered. Telecommunications revenues for services provided for fixed periods are recognised on a straight line basis over the respective periods. Other revenues are recognised when products are delivered or services are rendered to customers. Interest income from bank deposits is accrued on a time-apportioned basis on the principal outstanding and the applicable rate. (f) Fixed assets Investment properties with an unexpired lease term of more than 20 years are stated at the balance sheet date at their open market value. They are valued at intervals of not more than three years by independent professionally qualified valuers and in each intervening year valuations are undertaken by professionally qualified executives of the Group. Surpluses arising on revaluation are credited to the profit and loss account to the extent of any deficit arising on revaluation previously charged to the profit and loss account and are thereafter taken to the investment properties revaluation reserve; deficits arising on revaluation are firstly set off against any previous revaluation surpluses and thereafter charged to the profit and loss account. Investment properties with an unexpired lease term of 20 years or less are stated at valuation less accumulated depreciation. Projects under construction are stated at cost. Certain costs relating to projects under construction are capitalised and included in the costs of fixed assets; these costs include staff costs, materials, interest and overheads. Notes to the financial statements
2. Principal accounting policies (continued) Fixed assets other than investment properties and projects under construction are stated at cost less accumulated depreciation. Upon retirement or disposal of a fixed asset, the difference between the estimated net disposal proceeds and the carrying amount of the asset is recognised as income or expense in the profit and loss account on the date of retirement or disposal. On disposal of an investment property, the related portion of surpluses or deficits previously taken to the investment properties revaluation reserve is also transferred to the profit and loss account. (g) Depreciation No depreciation is charged on projects under construction or investment properties with an unexpired lease term of more than 20 years. Depreciation is provided to write off the cost of other fixed assets over their estimated useful lives in equal annual instalments as follows: Leasehold land term of the lease Investment properties with unexpired lease term of less than 20 years remaining term of lease Buildings 50 years or term of lease, if less Exchange equipment 5 to 15 years International transmission plant 5 to 33 years Local transmission plant 6 to 25 years Other plant and equipment 2 to 16 years (h) Retirement scheme costs The regular cost of providing retirement benefits is charged to the profit and loss account over the service lives of the members of the schemes on the basis of constant percentages of pensionable pay. Variations from regular cost arising from periodic actuarial valuations are allocated to the profit and loss account over the expected remaining service lives of the members. (i) Consumable stores, trading stocks and work in progress 40 Consumable stores, held for use in the maintenance and expansion of the Group’s telecommunications systems, are stated at cost less provision for deterioration and obsolescence. Trading stocks are stated at the lower of cost and net realisable value and are valued on an average cost basis. In both cases, cost comprises materials, freight and insurance. Work in progress is stated at cost, which comprises labour, materials and overheads where appropriate. Net realisable value is determined by reference to the sales proceeds of items sold in the ordinary course of business subsequent to the balance sheet date or to management estimates based on prevailing market conditions. (j) Deferred taxation The Group does not provide for deferred tax unless there is a reasonable probability that the liability will arise in the foreseeable future. Where deferred tax is provided the liability method is used. (k) Foreign currencies Monetary assets and liabilities in foreign currencies are translated into Hong Kong dollars at the rates of exchange ruling on the balance sheet date. Transactions in foreign currencies during the year are translated into Hong Kong dollars at the exchange rate ruling on the dates of the transactions. All foreign exchange gains and losses are included in the profit and loss account. (l) Operating leases Rental income and expenses under operating leases are accounted for in the profit and loss account on a straight line basis over the periods of the respective leases. (m) Finance leases The total net investment in finance leases included in the balance sheet represents total lease payments receivable net of finance charges relating to future accounting periods. Finance charges are allocated to accounting periods so as to give a constant rate of return on the net cash investment in the lease. (n) Borrowing costs Borrowing costs are expensed in the profit and loss account in the period in which they are incurred, except to the extent that they are capitalised as being directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale. (o) Mobile telephone customer acquisition costs The direct costs of acquiring new mobile telephone customers, relating primarily to equipment subsidies and connection commissions, are deferred. Deferred customer acquisition costs are amortised on a straight line basis over the shorter of the average subscription lives of the customers or two years. HONGKONG TELECOM ANNUAL REPORT 1997
3. Turnover Turnover is stated on a gross basis before allocations to other telecommunications operators and comprises the following: i) Telecommunications services – gross amounts accruing to the Group derived from international and local telecommunications, including fixed line and mobile telephone, telex, leased circuits, facsimile and telegram. ii) Equipment sales and rental – the proceeds from the sale, leasing, rental and maintenance of terminals, communications systems and associated activities. iii) Computer, engineering and other services.
Turnover is analysed as follows:
1997 1996 $M $M
International telephone services 17,395.2 16,528.0 Local telephone services 4,569.7 4,068.1 Other telecommunications services 7,839.1 5,940.6 Total telecommunications services 29,804.0 26,536.7 Equipment sales and rental 1,859.7 1,806.5 Computer, engineering and other services 914.1 1,062.0 32,577.8 29,405.2 41 Equipment sales and rental includes rental income in respect of operating leases for customer equipment of $145.7 million (1996: $179.7 million).
4. Operating costs
1997 1996 $M $M
Allocations to other telecommunications operators – International telephone services 8,421.3 7,511.0 – Others 223.2 299.5 Salaries and related costs 3,916.6 4,013.2 Depreciation 2,190.5 1,940.2 Cost of sales and services 2,125.8 1,331.4 Rent, rates and utilities 601.8 517.6 Royalty to Hong Kong Government 523.2 501.9 Management fees to Cable and Wireless plc 209.6 211.2 Other operating costs 2,163.0 1,986.5 20,375.0 18,312.5
The Group capitalised salaries and related costs of $709.5 million during the year (1996: $777.0 million). Notes to the financial statements
4. Operating costs (continued)
1997 1996 $M $M
Included in the above are the following charges: Auditors’ remuneration 3.8 3.6 Directors’ remuneration (Note 5) 32.3 27.4 Rental expenses under operating leases: Land and buildings 195.7 172.3 Plant and machinery 168.7 134.2
5. Directors’ and senior management’s remuneration (a) Directors’ remuneration 1997 1996 $M $M
Directors’ fees 2.1 1.2 Basic salaries and other emoluments 23.7 22.1 Discretionary bonuses 3.7 2.9 42 Pension contributions 1.3 1.2 Commencement of service payment 1.5 – 32.3 27.4
Housing costs accounted for 33% (1996: 38%) of remuneration.
The number of directors whose remuneration fell within the bands set out below is as follows:
Number of Directors $ $ 1997 1996 Nil — 1,000,000 10 11 1,500,001 — 2,000,000 1 – 2,500,001 — 3,000,000 – 1 4,000,001 — 4,500,000 – 1 4,500,001 — 5,000,000 – 2 6,000,001 — 6,500,000 2 – 6,500,001 — 7,000,000 1 – 9,000,001 — 9,500,000 1 1
No directors waived the right to receive emoluments during the year. The directors’ fees above includes $0.9 million (1996: $0.7 million) paid to the independent non-executive directors. They received no other emoluments from the Company or any of its subsidiaries. HONGKONG TELECOM ANNUAL REPORT 1997
5. Directors’ and senior management’s remuneration (continued) (b) Directors’ share options In addition to the above emoluments, certain directors were granted options to acquire ordinary shares of Cable and Wireless plc pursuant to the terms of the Cable and Wireless plc discretionary share option schemes. The details of share options granted to respective directors during the year are as follow:
Share Date of Option price Exercisable Name options grant £ from to
R H Brown 7,134 3 Jul 1996 4.205 3 Jul 1999 2 Jul 2006 R H Brown 611,177 3 Jul 1996 4.205 3 Jul 1999 2 Jul 2003 L W L Cheung 141,653 3 Jul 1996 4.205 3 Jul 1999 2 Jul 2003 N K T Yuen 40,000 3 Jul 1996 4.205 3 Jul 1999 2 Jul 2003 A R Grieve 40,000 3 Jul 1996 4.205 3 Jul 1999 2 Jul 2003 D N Prince 40,000 3 Jul 1996 4.205 3 Jul 1999 2 Jul 2003 R E Lerwill 6,500 8 Jan 1997 4.724 8 Jan 2000 7 Jan 2007 R E Lerwill 226,353 8 Jan 1997 4.724 8 Jan 2000 7 Jan 2004 R J Olsen 124,445 3 Jul 1996 4.205 3 Jul 1999 2 Jul 2003 (c) Senior management’s remuneration The six highest paid individuals in the Group included four directors (1996: four) whose total emoluments are included above. The emoluments of the other two individuals were:
1997 1996 $M $M
Basic salaries and other emoluments 6.8 6.7 43 Discretionary bonuses 2.0 1.1 Pension contributions 0.4 0.4 9.2 8.2
The total emoluments of these two individuals fell within the following bands:
Number of employees $ $ 1997 1996 4,000,001 — 4,500,000 1 2 4,500,001 — 5,000,000 1 –
6. Loan to officer The loan made to an officer of the Company disclosed pursuant to section 161B of the Companies Ordinance is as follows:
Maximum balance Balance at Balance at outstanding 1 April 1996 31 March 1997 during the year $M $M $M
Norman K T Yuen – 9.5 9.9
There was no interest due but unpaid nor any provision made against this loan at 31 March 1997. The loan was made under the Hongkong Telecom Housing Loan Scheme to facilitate the purchase of a property for use as Mr Yuen’s main residence. The loan is repayable over 120 months, carries an interest rate based on the costs of funds to the Hongkong Telecom Group from time to time plus 1% and is secured by a legal charge on the property. Notes to the financial statements
7. Net interest and other income
1997 1996 $M $M
Interest earned on bank deposits 687.0 374.5 Interest received on finance leases 0.5 2.9 Less: Interest payable on bank overdrafts and other loans wholly repayable within 5 years (69.1) (62.8) Net interest earned 618.4 314.6 Share of profits of associated companies 11.3 7.8 Income from unlisted investments 76.4 63.1 706.1 385.5
The Group incurred total interest expenses of $233.7 million during the year (1996: $145.0 million) of which $164.6 million was capitalised (1996: $82.2 million). Interest expenses have been capitalised at rates of the cost of funds to the Group which varied from 5.1% to 6.3% for capital projects under construction.
8. Taxation
1997 1996 $M $M
44 Hong Kong profits tax at 16.5% Current year provision 1,675.4 1,510.2 Tax charges from leasing partnerships 5.8 4.3 1,681.2 1,514.5 Deferred taxation (Note 18) 7.5 (0.8) Share of associated companies’ taxation 1.7 1.4 1,690.4 1,515.1
9. Profit attributable to shareholders The profit attributable to shareholders of $11,177.7 million (1996: 9,938.8 million), includes a profit of $2,858.1 million (1996: $8,059.3 million) which has been dealt with in the accounts of the Company.
10. Dividends
1997 1996 $M $M
Interim dividend 34.6¢ per share (1996: 30.9¢) 3,979.3 3,446.2 Proposed final dividend 41.7¢ per share (1996: 36.9¢) 4,876.1 4,172.9 8,855.4 7,619.1
Shareholders were given the option to receive new fully paid shares in lieu of the final cash dividend for the year ended 31 March 1996 and the interim cash dividend for the year ended 31 March 1997 (see Note 19). A similar option is to be proposed in respect of the final dividend for the year ended 31 March 1997. HONGKONG TELECOM ANNUAL REPORT 1997
11. Earnings per share The calculation of earnings per share is based on the profit attributable to shareholders of $11,177.7 million (1996: $9,938.8 million) and the weighted average number of shares of 11,495,713,724 in issue throughout the year (1996: 11,195,469,683 shares).
12. Fixed assets
Group
Leasehold International Local Other Projects land & Investment Exchange transmission transmission plant & under buildings properties equipment plant plant equipment construction Total $M $M $M $M $M $M $M $M
Cost/Valuation At 1 April 1996 2,971.5 – 9,248.0 4,596.5 7,281.6 6,063.3 2,884.1 33,045.0 Additions 66.4 – 1,296.7 460.7 567.5 477.3 2,157.6 5,026.2 Disposals – – (26.6) (7.7) (13.8) (696.8) – (744.9) Surplus on revaluation – 682.3 – – – – – 682.3 Transfers (229.4) 354.0 1,551.3 298.8 (366.8) 527.0 (2,134.9) – At 31 March 1997 2,808.5 1,036.3 12,069.4 5,348.3 7,468.5 6,370.8 2,906.8 38,008.6 Representing Cost 2,808.5 – 12,069.4 5,348.3 7,468.5 6,370.8 2,906.8 36,972.3 45 Valuation – 1,036.3 – – – – – 1,036.3 2,808.5 1,036.3 12,069.4 5,348.3 7,468.5 6,370.8 2,906.8 38,008.6
Depreciation At 1 April 1996 382.0 – 3,224.2 1,831.8 2,123.5 3,227.8 – 10,789.3 Charge for the year 62.6 – 787.3 366.8 340.0 633.8 – 2,190.5 Disposals – – (9.9) (3.9) (8.2) (330.0) – (352.0) Surplus on revaluation – (24.2) – – – – – (24.2) Transfers (8.6) 24.2 302.6 – (304.9) (13.3) – – At 31 March 1997 436.0 – 4,304.2 2,194.7 2,150.4 3,518.3 – 12,603.6 Net book values At 31 March 1997 2,372.5 1,036.3 7,765.2 3,153.6 5,318.1 2,852.5 2,906.8 25,405.0
At 31 March 1996 2,589.5 – 6,023.8 2,764.7 5,158.1 2,835.5 2,884.1 22,255.7 Notes to the financial statements
12. Fixed assets (continued) Investment properties of the Group were revalued at 31 January 1997 by an independent firm of surveyors, Brooke Hillier Parker, on an open market value basis, taking into account their existing use, subject to existing tenancies or with vacant possession and free from encumbrances. The revaluation surplus of $706.5 million has been transferred to the investment properties revaluation reserve. Gross rental receivable from the Group’s investment properties amounted to $40.0 million. (1996: Nil) The analysis of net book value of the Group’s land all of which is situated in Hong Kong comprises:
1997 1996 Leasehold Investment Leasehold land properties land $M $M $M
Long-term leasehold – not less than 50 years 839.4 399.0 1,121.1 Medium-term leasehold – less than 50 years but not less than 10 years 203.4 35.6 107.9 1,042.8 434.6 1,229.0
The Group leases equipment to customers on operating leases. The net book value of such equipment, which is included in other plant and equipment, is as follows:
1997 1996 $M $M
46 Customer equipment at cost 543.0 458.8 Less: Accumulated depreciation 411.8 386.5 Net book value 131.2 72.3
Company Other plant Building & equipment Total $M $M $M
Cost Additions 59.6 5.3 64.9 At 31 March 1997 59.6 5.3 64.9 Depreciation Charge for the year 0.9 0.2 1.1 At 31 March 1997 0.9 0.2 1.1 Net book values At 31 March 1997 58.7 5.1 63.8 HONGKONG TELECOM ANNUAL REPORT 1997
13. Interest in subsidiaries
Company 1997 1996 $M $M
Unlisted shares, at cost 7,734.9 7,734.9
Details of principal subsidiary companies are set out on page 55.
14. Other investments
Group Company 1997 1996 1997 1996 $M $M $M $M
Associated companies Unlisted shares, at cost – – 219.2 83.5 Share of net assets of associated companies 178.7 99.7 – – Other unlisted investments at cost 338.8 301.6 1.9 1.9 Net book value 517.5 401.3 221.1 85.4 47 Details of principal associated companies are set out on page 55.
15. Other non current assets Other non current assets are amounts falling due after more than one year:
Group 1997 1996 $M $M
Staff housing loans 864.4 879.9 Net investment in finance leases 506.5 510.5 Other debtors and prepayments 682.5 667.5 2,053.4 2,057.9
A company within the Group is a limited partner in a number of limited partnerships which own and lease assets to third parties. Notes to the financial statements
15. Other non current assets (continued)
Group 1997 1996 $M $M
The net investment in these finance leases comprises: Total lease payments receivable 506.5 517.9 Less: Finance charges allocated to future periods – 0.5 506.5 517.4
Total rentals received during the year in respect of finance leases 10.9 19.7
Non-recourse finance of $3,264.6 million (1996: $2,241.6 million) has been offset against net rentals receivable in arriving at the above balances.
16. Current assets
Group Company 1997 1996 1997 1996 $M $M $M $M
Consumable stores 68.7 86.7 – – 48 Trading stocks 267.2 131.7 – – Work in progress 172.0 200.3 – – Trade debtors 3,644.5 2,752.2 – – Other debtors and prepayments 854.0 582.5 517.8 312.0 Staff housing loans 47.3 48.6 – – Amounts due from holding company and fellow subsidiaries 149.2 33.4 187.8 39.3 Amounts due from subsidiaries – – 3,310.8 2,825.7 Net investment in finance leases (Note 15) – 6.9 – – Term deposits 14,220.1 7,824.1 14,146.0 7,713.2 Bank and cash balances 266.4 173.4 81.7 44.2 19,689.4 11,839.8 18,244.1 10,934.4 HONGKONG TELECOM ANNUAL REPORT 1997
17. Current liabilities
Group Company 1997 1996 1997 1996 $M $M $M $M
Trade creditors 2,261.9 2,751.2 – – Customer deposits 378.5 211.6 – – Accrued charges — purchase of fixed assets 1,066.8 668.3 – – — others 1,314.6 983.8 127.8 158.5 Other creditors 159.1 113.5 63.3 86.0 Deferred revenue 674.3 622.7 – – Amounts due to holding company and fellow subsidiaries 138.8 45.6 73.5 14.3 Amounts due to subsidiaries – – 12,366.9 4,799.3 Provision for profits tax 493.5 289.9 – – Proposed dividend (Note 10) 4,876.1 4,172.9 4,876.1 4,172.9 Bills of exchange – 40.0 – – Bank loans and overdrafts 5,224.6 3,766.9 129.3 63.7 49 16,588.2 13,666.4 17,636.9 9,294.7
At 31 March 1997, the Group had unutilised borrowing facilities of $8,117 million (1996: $9,044 million). The Group, through its subsidiaries, arranged bills of exchange and short-term bank loans to finance the purchase of fixed assets. Notes to the financial statements
18. Deferred taxation Group 1997 1996 $M $M
Movements on deferred taxation comprise: Opening balance 709.0 709.8 Transfer from/(to) profit and loss account (Note 8) 7.5 (0.8) Closing balance 716.5 709.0
Deferred taxation provided at the current tax rate of 16.5% in the Group’s financial statements is as follows:
1997 1996 $M $M
Tax effect of timing differences due to: Leasing partnerships 685.3 700.3 Others 31.2 8.7 716.5 709.0
50 No provision for deferred taxation has been made in respect of the revaluation surplus arising on investment properties as the disposal of these assets at their carrying value would result in capital gains which the directors consider are not subject to any liability. Unprovided deferred tax at the current tax rate of 16.5% is $2,646.5 million (1996: $2,398.8 million) and principally relates to timing differences arising from tax depreciation allowances on fixed assets. This has not been recognised in the financial statements as it is considered that no liability will arise in the foreseeable future.
Company There is no significant deferred tax liability not provided for. HONGKONG TELECOM ANNUAL REPORT 1997
19. Share capital
1997 1996 $M $M
Authorised 12,500,000,000 (1996: 12,500,000,000) ordinary shares of HK$0.50 each 6,250.0 6,250.0
Issued and fully paid 11,693,399,577 (1996: 11,308,581,801) ordinary shares of HK$0.50 each 5,846.7 5,654.3
On 12 July 1996, 192,397,172 shares were issued as fully paid new shares in lieu of final cash dividends for the year ended 31 March 1996, at a value of $13.54 per share. On 30 December 1996, 192,420,604 shares were issued as fully paid new shares in lieu of interim cash dividends for the year ended 31 March 1997, at a value of $13.30 per share. An amount of $192.4 million standing to the credit of the share premium account was applied in paying up the shares.
20. Reserves
Investment properties Share Capital revaluation Retained premium reserves reserve profit Total $M $M $M $M $M 51
Group: At 1 April 1996 364.9 10.5 – 16,117.5 16,492.9 Shares issued in lieu of cash dividends (Note 19) (192.4) – – 5,164.3 4,971.9 Goodwill on acquisition of associated company – – – (52.6) (52.6) Surplus arising on revaluation – – 706.5 – 706.5 Transfer from profit and loss account – – – 2,322.3 2,322.3 At 31 March 1997 172.5 10.5 706.5 23,551.5 24,441.0
Company: At 1 April 1996 364.9 – – 3,440.8 3,805.7 Shares issued in lieu of cash dividends (Note 19) (192.4) – – 5,164.3 4,971.9 Transfer to profit and loss account – – – (5,997.3) (5,997.3) At 31 March 1997 172.5 – – 2,607.8 2,780.3
Included in the figure for the retained profit is an amount of $1.6 million (1996: $5.7 million), being the retained profit attributable to associated companies. At 31 March 1997, the aggregate amount of reserves available for distribution to the shareholders of the Company was $2,607.8 million (1996: $3,440.8 million). Notes to the financial statements
21. Capital commitments
Group Company 1997 1996 1997 1996 $M $M $M $M
Capital expenditure contracted for but not provided in the financial statements 443.7 652.4 – –
Capital expenditure authorised but not contracted for 2,034.9 1,739.9 – 58.0
22. Contingent liabilities and financial commitments The Group has issued a guarantee in the amount of $126.1 million (1996: Nil) in respect of an investment commitment of an associated company. The Company has committed to provide up to $216.0 million (1996: $413.0 million) to fund telecommunications projects being undertaken by business partners. Annual operating lease commitments payable within one year, analysed according to the period in which the leases expire, are as follows:
Group Company 1997 1996 1997 1996 $M $M $M $M Land Land Land Land 52 and Other and Other and Other and Other buildings assets buildings assets buildings assets buildings assets
Leases expiring within one year 47.6 5.9 36.3 7.1 6.3 3.0 14.6 3.2 Leases expiring between one and five years 160.8 43.7 93.1 74.3 15.8 0.6 19.4 38.7 Leases expiring after five years 1.9 87.1 2.1 46.1 – 37.4 –– 210.3 136.7 131.5 127.5 22.1 41.0 34.0 41.9 HONGKONG TELECOM ANNUAL REPORT 1997
23. Retirement schemes The Group’s principal retirement scheme covers substantially all the permanent staff in the Group. The scheme is established under trust and is administered by an independent trustee. The scheme is defined benefit in nature whereby the retirement benefits are based on the employees’ remuneration and length of service. The funding policy in respect of the scheme is based on valuations prepared periodically by an independent actuary, on an on-going basis and is to fund the scheme in accordance with the actuary’s recommendation. The actuary, Mr A G Stott, of Watson Wyatt Hong Kong Limited, Fellow of the Faculty of Actuaries of the United Kingdom, carried out a valuation as at 30 April 1996 using the attained age method. The valuation assumes: that the retirement scheme will continue in existence and allow for changes in membership and earnings and for expected future returns on scheme assets; and that the average long term rate of return earned by the scheme assets will be 2% p.a. higher than the rate of salary escalation. The actuary is of the opinion that the value of the scheme assets was sufficient to cover 108% of the aggregate vested liability as at 30 April 1996, that is, the total value of the benefits which would be payable had the scheme been discontinued at that date. For the purpose of determining the profit and loss charge in accordance with the accounting policy described in Note 2(h) above to these accounts, an actuarial valuation was also carried out at 30 April 1996. The assumptions adopted were the same as those described above but scheme assets were valued using a three year quarterly moving average method. Retirement scheme costs for the year were $398.0 million (1996: $399.0 million).
24. Reconciliation of operating profit to net cash inflow from operating activities 1997 1996 1997 1996 $M $M $M $M Long-term Short-term Long-term Short-term loans loans loans loans (including repayable (including repayable Operating profit 12,202.8 11,092.7 53 current after three Minority current after three Minority portion) months Interests portion) months Interests Depreciation 2,190.5 1,940.2 Loss/(Gain) on disposal of fixed assets 7.6 (28.3) Movements in working capital Increase in stocks (89.2) (32.8) Increase in debtors (1,214.5) (1,180.7) Increase in creditors 224.6 526.3 Net cash inflow from operating activities 13,321.8 12,317.4
25. Analysis of changes in financing during the year
Loans repayable after three months $M
Balance at 1 April 144.9 Net cash outflow from financing (144.9) Balance at 31 March – Notes to the financial statements
26. Connected transactions The Company entered into an agreement with its holding company, Cable and Wireless plc, on 28 December 1994. The agreement, which replaced the previous agreements between Cable and Wireless plc and the Company’s franchised subsidiaries with effect from 1 April 1994, relates to the provision by Cable and Wireless plc of management and technical services and trade marks. The agreement is expected to continue and can be terminated by either party giving not less than two years’ prior written notice to the other. Under the agreement the amount payable by the Company is primarily based on a sum equal to the cost of services provided plus an uplift figure, currently at 7.2% (1996: 7.2%). The charge for the year ended 31 March 1997 was $209.6 million (1996: $211.2 million). At 31 March 1997, neither party had given written notice to terminate the agreement. On 2 April 1996, the Group acquired a residential property from Bay Properties Limited, a wholly owned subsidiary of Cable and Wireless plc, for a cash consideration of $58 million.
27. Financial instruments The Group operates international telecommunication services giving rise to some exposure to risks from changes in foreign exchange rates on its settlement with overseas administrations. Financial instruments are utilised by the Group to reduce those risks, as explained in this note. In addition, the Group has entered into interest rate swaps to manage its interest rate risk. The Group does not hold or issue financial instruments for trading purposes. (a) Interest rate risk management From time to time the Group enters into interest rate swaps to manage its interest rate risk. At 31 March 1997, the total notional principal amount of such swaps was $325.4 million (1996: $288.4 million). The Group does not have significant market risk with respect to interest rate movements. 54 (b) Foreign exchange risk management The Group enters into forward exchange contracts to hedge certain existing assets and liabilities denominated in foreign currencies (principally Pound sterling, Deutschmark, French franc and Japanese yen) and particular anticipated but not yet committed transactions expected to be denominated in these currencies. The term of the forward exchange contracts is never more than one year. The main purpose of the Group’s foreign currency hedging activities is to protect the Group from the risk arising from the changes in exchange rates for settlement with overseas administrations. In addition, the Group uses foreign exchange hedging instruments to manage exposures arising from capital expenditure contracts denominated in foreign currencies. The Group does not anticipate any material adverse effect on its financial position resulting from its involvement in these instruments, nor does it anticipate non- performance by any of its counterparties. There were no outstanding forward exchange contracts as at 31 March 1997 (contractual amount at 31 March 1996: $802.4 million). (c) Monitoring and control of financial instruments The Group has established treasury policies, guidelines, and control procedures and uses a treasury reporting system to record and monitor its treasury position. The level of hedging is determined in the light of commercial commitments and is reviewed regularly by the Finance Director and senior finance executives. Counterparties to forward exchange contracts are major financial institutions and the Group does not require collateral or security on off balance sheet instruments. The Group continually monitors its positions and the credit ratings of its counterparties and limits the amount of contracts with any one party. The Group does not consider that it has a significant exposure to risk from any individual counterparty or group of counterparties. HONGKONG TELECOM ANNUAL REPORT 1997
Principal subsidiary and associated companies At 31 March 1997
All companies are incorporated and operate in Hong Kong, with the exception of Great Eastern Telecommunications Limited which is incorporated in the Cayman Islands, Hongkong Telecom Finance Limited which is incorporated in the British Virgin Islands and MobileOne (Asia) Pte Ltd which is incorporated in Singapore.
Percentage of issued share Name Issued share capital capital held Principal activities Direct Indirect
Subsidiaries Hong Kong Telephone 2,163,783,209 100.0 Provision of Company Limited shares of HK$1 each telecommunications services Hong Kong Telecom 100 ordinary shares 100.0 Provision of International Limited of HK$10 each and telecommunications 90,000,000 non-voting services deferred shares of HK$10 each Hong Kong Telecom 80,008,000 shares 100.0 Sale of telecommunications CSL Limited of HK$1 each products and provision of services Computasia Limited 1,200 shares of HK$1 each 100.0 Provision of computer services Monance Limited 2 shares of 100.0 Property development HK$10 each Hongkong Telecom 1 share of 100.0 Financing 55 Finance Limited US$1 each One2Free 2 shares of 100.0 Sale of telecommunications PersonalCom Limited HK$1 each products and provision of services Hong Kong Telecom 2 shares of 100.0 Provision of Interactive IMS Limited HK$1 each Multimedia Services Hong Kong 2 shares of 100.0 Provision of Telecommunications HK$10 each telecommunications (Pacific) Limited services Mobile One Limited 10,000,000 shares 60.0 Sale of telecommunications of HK$1 each products and provision of services Telecom Directories 10,000 shares of 51.0 Publication of directories Limited HK$1 each
Associated companies Great Eastern 31,327,000 shares 49.0 Investment Telecommunications of US$1 each Limited Abacus Distribution 15,600,000 shares 37.0 Provision of a Systems (Hong Kong) of HK$1 each computerised airline Limited reservations system PHS International Limited 248,000 shares 23.0 Promotion of PHS services of US$10 each MobileOne (Asia) Pte Ltd 85,000,100 shares 14.7 Provision of mobile telephone of S$1 each services
Certain subsidiary and associated companies which do not materially affect the results or assets of the Group are not included. Supplementary information for ADR holders
The Group’s financial statements are prepared in accordance with generally accepted accounting principles applicable in Hong Kong (HK GAAP), which differ in certain significant respects from those applicable in the United States (US GAAP). The significant differences relate principally to the following items and the adjustments considered necessary to restate profit attributable to shareholders (net income) and shareholders’ funds (shareholders’ equity) in accordance with US GAAP are shown in the tables set out below. (a) Deferred taxation The Group provides for deferred taxation using the liability method for timing differences only to the extent that there is a reasonable probability that a liability will arise in the foreseeable future. US GAAP requires full provision for deferred taxation under the asset and liability method on all temporary differences. For US GAAP purposes, the Group has complied with US FASB Statement No. 109 “Accounting for Income Taxes”.
(b) Proposed final dividend Under HK GAAP, dividends proposed after the end of the accounting period in respect of that accounting period are deducted in arriving at retained earnings at the end of the period. US GAAP does not recognise a proposed final dividend as a reduction of retained earnings as it is declared after year end.
(c) Retirement scheme costs The Group’s policy is that the regular cost of providing retirement benefits is charged to the profit and loss account over the service lives of the members of the schemes on the basis of level percentages of pensionable pay. Variations from regular cost arising from periodic actuarial valuations are allocated to the profit and loss account over the expected remaining service lives of the members. US GAAP requires that retirement scheme expense be recorded in accordance with US FASB Statement No. 87, “Employers’ Accounting for Pensions” which recognises in each accounting period the cost of providing retirement benefits earned by employees in that period.
(d) Investment properties Under HK GAAP investment properties are stated on the basis of appraisal values and depreciation expense is not provided 56 on investment properties. Under US GAAP such investment properties are not permitted. Accordingly the investment properties of the Group have been restated at historical cost less accumulated depreciation. HONGKONG TELECOM ANNUAL REPORT 1997
The following table summarises the effect on profit attributable to shareholders (net income) of differences between HK GAAP and US GAAP.
Year ended 31 March 1997 1997 1996 1995 US$# HK$ HK$ HK$ (in millions, except per share and per ADS data which are stated in dollars)
Profit attributable to shareholders (net income) as reported under HK GAAP 1,433.0 11,177.7 9,938.8 8,698.7 US GAAP adjustments Deferred taxation (32.5) (253.6) (333.8) (284.4) Retirement scheme costs (7.8) (60.6) (92.2) 155.1 Depreciation on investment property (1.3) (10.3) –– Profit attributable to shareholders (net income) under US GAAP 1,391.4 10,853.2 9,512.8 8,569.4
Earnings per share under US GAAP 0.121 0.944 0.850 0.768
Earnings per ADS under US GAAP* 1.21 9.44 8.50 7.68
The following table summarises the effect on shareholders’ funds (shareholders’ equity) of the differences between HK GAAP and US GAAP. 57 31 March 1997 1997 1996 US$M# HK$M HK$M
Shareholders’ funds (shareholders’ equity) as reported under HK GAAP 3,883.0 30,287.7 22,147.2 US GAAP adjustments Deferred taxation (341.9) (2,666.5) (2,412.9) Proposed final dividend 625.1 4,876.1 4,172.9 Retirement scheme costs 15.6 121.5 182.1 Property revaluation reserves (90.6) (706.5) – Accumulated depreciation on investment property (1.3) (10.3) – Shareholders’ funds (shareholders’ equity) under US GAAP 4,089.9 31,902.0 24,089.3
* One ADS is equivalent to 10 shares. # An exchange rate of US$1 = HK$7.8 has been used to translate HK$ to US$. Such translations are for convenience only and should not be construed as representations that HK$ amounts could be converted into US$ at that or any other rate. Ten-year financial review Year ended 31 March
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 $M $M $M $M $M $M $M $M $M $M
PROFIT & LOSS ACCOUNT* Turnover International telephone services 17,395.2 16,528.0 16,310.5 15,164.8 13,588.9 11,083.6 9,610.7 7,968.0 6,452.1 4,848.0 Local telephone services 4,569.7 4,068.1 3,668.7 3,281.4 2,890.9 2,664.0 2,310.8 2,049.0 1,739.0 1,572.5 Other telecommunications services 7,839.1 5,940.6 4,443.2 3,587.9 3,045.2 2,751.3 2,442.4 2,303.9 2,161.9 2,164.2 Equipment sales and rental 1,859.7 1,806.5 1,624.5 1,405.8 1,280.5 1,212.3 1,212.3 1,202.9 1,048.7 927.4 Computer, engineering & other services 914.1 1,062.0 862.7 839.9 839.8 659.6 689.9 610.5 435.4 403.3
Total turnover 32,577.8 29,405.2 26,909.6 24,279.8 21,645.3 18,370.8 16,266.1 14,134.3 11,837.1 9,915.4
Operating costs Allocations to other administrations – International telephone services 8,421.3 7,511.0 7,367.8 6,780.8 6,100.0 4,996.6 4,551.7 3,745.5 3,129.3 2,307.5 – Others 223.2 299.5 298.7 324.5 372.0 401.4 477.7 528.5 579.2 644.8 Salaries and related costs 3,916.6 4,013.2 3,661.5 3,228.6 3,159.9 2,722.2 2,696.1 2,277.9 1,880.0 1,610.7 Depreciation 2,190.5 1,940.2 1,710.4 1,468.9 1,332.1 1,034.9 961.4 779.0 670.1 635.6 Cost of sales 2,125.8 1,331.4 888.6 925.8 808.4 654.7 583.2 604.3 420.5 301.9 Rent, rates and utilities 601.8 517.6 565.8 516.7 538.7 455.2 445.0 352.2 244.2 187.0 Royalty to Hong Kong Government 523.2 501.9 543.8 495.1 438.9 370.6 319.5 284.4 216.6 171.3 Management fees to Cable and Wireless plc 209.6 211.2 217.2 306.3 306.3 267.3 233.2 204.7 176.3 156.0 Other operating costs 2,163.0 1,986.5 1,894.6 1,624.3 1,334.0 1,129.6 852.7 916.6 754.1 658.3
Total operating costs 20,375.0 18,312.5 17,148.4 15,671.0 14,390.3 12,032.5 11,120.5 9,693.1 8,070.3 6,673.1
Operating profit 12,202.8 11,092.7 9,761.2 8,608.8 7,255.0 6,338.3 5,145.6 4,441.2 3,766.8 3,242.3 Net interest and other income 706.1 385.5 276.2 151.6 194.0 160.9 226.8 201.9 187.3 115.0
Profit before taxation 12,908.9 11,478.2 10,037.4 8,760.4 7,449.0 6,499.2 5,372.4 4,643.1 3,954.1 3,357.3 58 Taxation 1,690.4 1,515.1 1,338.7 1,202.8 1,018.9 833.4 420.0 351.5 289.2 317.9
Profit after taxation 11,218.5 9,963.1 8,698.7 7,557.6 6,430.1 5,665.8 4,952.4 4,291.6 3,664.9 3,039.4 Minority interests (40.8) (24.3) – 0.1 (0.2) 7.4 5.7 2.0 (4.5) (4.2) Development Fund transfer – ––––– 110.4 66.5 (29.9) (43.4)
Profit before extraordinary items 11,177.7 9,938.8 8,698.7 7,557.7 6,429.9 5,673.2 5,068.5 4,360.1 3,630.5 2,991.8 Extraordinary items – ––––– (729.9) –––
Profit attributable to shareholders 11,177.7 9,938.8 8,698.7 7,557.7 6,429.9 5,673.2 4,338.6 4,360.1 3,630.5 2,991.8
Total turnover Operating profit $ million $ million 9,915.4 3,242.3 3,766.8 4,441.2 5,145.6 6,338.3 7,255.0 8,608.8 9,761.2 11,837.1 14,134.3 16,266.1 18,370.8 21,645.3 24,279.8 26,909.6 29,405.2 32,577.8 11,092.7 12,202.8 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 HONGKONG TELECOM ANNUAL REPORT 1997
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 $M $M $M $M $M $M $M $M $M $M
BALANCE SHEET*@ Other non-current assets 2,053.4 2,057.9 1,765.6 1,535.8 1,368.0 1,385.5 1,381.6 1,563.2 1,189.1 509.8 Current assets 19,689.4 11,839.8 7,824.5 7,160.2 5,653.0 4,397.3 3,545.1 3,281.8 2,947.8 3,188.5 Total assets 47,665.3 36,554.7 29,906.1 26,656.0 22,952.4 19,593.5 17,600.4 15,496.0 12,995.5 10,605.3 Current liabilities 16,588.2 13,666.4 11,437.1 10,190.5 8,240.9 6,093.1 5,498.0 4,654.4 3,777.2 2,776.5 Long-term liabilities – – 39.9 119.4 200.7 516.1 632.2 647.3 206.3 412.0 Shareholders’ funds 30,287.7 22,147.2 17,718.0 15,632.9 13,763.1 12,173.5 10,738.4 10,080.2 8,840.1 7,282.8 Total liabilities and shareholders’ funds 47,665.3 36,554.7 29,906.1 26,656.0 22,952.4 19,593.5 17,600.4 15,496.0 12,995.5 10,605.3
Capital expenditure* $M 5,026 4,331 4,045 3,532 3,620 2,204 3,018 2,676 2,387 1,576 Leasehold land and buildings $M 163 88 396 342 876 71 205 144 224 148 Exchange equipment $M 1,856 1,278 1,007 888 886 830 1,420 1,273 1,152 903 International transmission plant $M 555 549 393 604 457 299 248 419 413 118 Local transmission plant $M 1,366 1,195 1,010 838 771 356 335 285 185 152 Other plant and equipment $M 1,086 1,221 1,239 860 630 648 810 555 413 255
Earnings per share* + cents 97.2 88.8 78.0 67.8 57.7 50.9 45.4 39.1 32.7 27.1
Increase in earnings per share % 9.5 13.8 15.1 17.5 13.3 11.9 16.1 19.6 20.7 26.6
Dividend per share cents 76.3 67.8 59.3 51.0 43.4 38.0 33.0 28.0 22.5 5.0++
Shareholders 17,583 18,176 20,104 19,953 25,439 27,679 29,293 39,560 48,273 25,274
Staff 13,767 15,022 16,054 16,039 15,888 15,449 16,279 17,800 17,261 16,755
* The proforma figures for the year to 31 March 1988 are calculated on the basis that Hongkong Telephone and Hongkong Telecom International had been subsidiaries of the Group throughout the year. @ Amounts falling due after more than one year are reclassified to other non-current assets from current assets. + Earnings per share figures have been adjusted to reflect the bonus issue of 3 for 20 in August 1988. ++ First final dividend since incorporation on 17 June 1987. 59
Capital expenditure Earnings per share Dividend per share $ million cents cents 5.0 27.1 32.7 39.1 45.4 50.9 57.7 67.8 78.0 88.8 97.2 22.5 28.0 33.0 38.0 43.4 51.0 59.3 67.8 76.3 1,576 2,387 2,676 3,018 2,204 3,620 3,532 4,045 4,331 5,026 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 Ten-year statistical review Year ended 31 March
CUSTOMER STATISTICS 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Exchange capacity * 3,497,850 3,363,702 3,294,472 3,175,298 3,026,869 2,841,161 2,729,922 2,519,630 2,396,886 2,226,759
Exchange lines in service Business lines 1,085,260 1,033,031 991,803 926,159 854,673 773,015 698,593 659,338 607,183 541,068 Datel lines 100,701 67,331 50,705 41,900 34,064 27,159 23,950 19,497 15,595 11,993 Business faxlines 204,887 195,195 186,290 173,919 153,951 126,755 111,239 88,550 65,384 38,411
1,390,848 1,295,557 1,228,798 1,141,978 1,042,688 926,929 833,782 767,385 688,162 591,472
Residential lines 2,019,790 1,955,016 1,896,592 1,828,796 1,758,892 1,703,624 1,641,216 1,577,851 1,502,835 1,429,922 Residential faxlines 24,674 24,612 23,890 21,282 18,217 11,861 0# 0# 0# 0#
2,044,464 1,979,628 1,920,482 1,850,078 1,777,109 1,715,485 1,641,216 1,577,851 1,502,835 1,429,922
Total exchange lines in service 3,435,312 3,275,185 3,149,280 2,992,056 2,819,797 2,642,414 2,474,998 2,345,236 2,190,997 2,021,394
Growth in exchange lines in service (%) Business lines 5.1 4.2 7.1 8.4 10.6 10.7 6.0 8.6 12.2 10.4 Datel lines 49.6 32.8 21.0 23.0 25.4 13.4 22.8 25.0 30.0 49.9 Business faxlines 5.0 4.8 7.1 13.0 21.5 13.9 25.6 35.4 70.2 153.8 Residential lines 3.3 3.1 3.7 4.0 3.2 3.8 4.0 5.0 5.1 4.8
Telephones in service + 4,484,700 4,267,600 4,094,200 3,898,800 3,694,000 3,508,500 3,314,100 3,157,400 2,944,000 2,708,000 Telephones per 100 population 69.8 67.7 66.6 65.9 63.6 61.0 57.1 54.3 51.3 48.3
IDD connections 2,272,802 2,217,065 2,136,040 2,021,037 1,849,325 1,636,388 1,417,235 1,151,219 875,084 621,884 Business 630,277 608,108 576,624 531,790 462,434 388,014 327,584 276,284 215,571 147,258 Residential 1,642,525 1,608,957 1,559,416 1,489,247 1,386,891 1,248,374 1,089,651 874,935 659,513 474,626
Homefax 2 connections 21,151 36,007 46,777 38,345 24,704 0 0 0 0 0
Homefax 3 connections 63,127 29,033 0 0 0 0 0 0 0 0
Telex lines 6,241 8,714 11,870 15,052 17,700 19,859 21,502 23,075 26,757 29,316 60 Datapak lines 88,925 77,839 69,349 58,243 45,756 37,333 29,568 19,831 11,359 5,985
International leased circuits capacity (Mbps)** 382.0 269.6 186.1 130.4 87.9 67.0 41.8 26.1 17.7 11.3
Faxlines World fax penetration Teledensity (installed line penetration) per 100 business lines % 11 18 22 23 31 1.1 2.0 3.4 6.6 17.1 40.1 41.7 48.6 49.6 57.3 38,411 65,384 88,550 UK 111,239 138,616 172,168 195,201 210,180 219,807 229,561 USA Japan India China Japan ’97 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 Australia Taiwan S Korea Thailand Malaysia Hong Kong Singapore Philippines Hong Kong HONGKONG TELECOM ANNUAL REPORT 1997
TELECOMMUNICATIONS TRAFFIC STATISTICS 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
International telephone (‘000 minutes) Outgoing voice IDD 1,492,920 1,393,699 1,267,268 1,091,190 892,507 715,690 564,578 437,507 326,582 234,549 Operator-assisted 51,825 70,473 86,244 87,760 77,456 55,847 48,057 49,201 47,999 40,207 Outgoing fax and data 193,868 227,658 224,910 197,908 166,685 141,638 116,723 95,460 66,874 42,095
Total outgoing 1,738,613 1,691,830 1,578,422 1,376,858 1,136,648 913,175 729,358 582,168 441,455 316,851 Total incoming 1,940,837 1,598,331 1,446,350 1,260,325 1,009,375 782,989 645,527 537,776 427,259 315,387
Total 3,679,450 3,290,161 3,024,772 2,637,183 2,146,023 1,696,164 1,374,885 1,119,944 868,714 632,238
Growth in total outgoing (%) 2.7 7.2 14.6 21.1 24.5 25.2 25.3 31.9 39.3 43.6 Growth in total incoming (%) 21.4 10.5 14.8 24.9 28.9 21.3 20.0 25.9 35.5 29.7
Percentage of Outgoing Traffic China 57 54 52 50 47 42 36 31 29 25 USA 5 6 6 7 7 8 9 11 12 13 Taiwan 4 5 5 6 6 7 8 9 9 9 Canada 3 3 4 4 5 5 5 5 5 4 Japan 4 4 4 4 4 5 6 7 8 9 UK 3 4 4 4 4 5 5 6 6 7 Macau 3 2 3 3 3 4 4 4 4 5 Singapore 3 3 3 3 3 4 4 4 4 4 Australia 2 3 3 3 3 3 4 4 4 4 Philippines 4 3 3 3 3 3 3 3 3 3 Others 12 13 13 13 15 14 16 16 16 17
Telex (‘000 minutes) Local 18,025 20,317 20,749 21,202 21,506 23,917 26,195 29,697 32,109 37,828 International outgoing 18,501 22,504 25,178 28,776 30,562 34,682 37,435 41,548 46,526 51,743 International incoming 10,580 12,507 14,158 17,689 19,376 22,714 26,572 31,401 38,340 44,756
International telegram (‘000 messages) 61 Outgoing 65 84 113 153 212 277 360 529 711 784 Incoming 44 69 100 150 217 286 379 534 744 819
* Includes Direct Dialling In lines, Faxlines and Datel lines # No distinction of faxlines between residential and business was made for the years up to 31 March 1991. All faxlines are assumed to be business lines + Estimated figures only ** Megabits per second
Comparison of telephone charges International leased circuits capacity HK$ per 3-minute call (March 1997) Mbps** 6.3 7.3 11.3 17.7 26.1 41.8 67.0 87.9 11.1 10.4 20.1 13.2 20.7 20.1 26.4 22.0 21.6 23.0 23.7 23.1 23.7 33.7 23.7 38.6 20.4 45.4 130.4 186.1 269.6 382.0 UK ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 USA Japan Macau Taiwan Canada Australia Singapore Philippines China (Guangzhou)
From Hong Kong To Hong Kong Milestones
1871 The first British submarine telegraph cable was laid 1993 Great Eastern Telecommunications Limited, a joint into Hong Kong. venture between Cable & Wireless and Hongkong Telecom, was formed to invest in telecom business 1876 Alexander Graham Bell invented the telephone. opportunities in Asia including China.
1877 The telephone was introduced into Hong Kong. 1993 Hongkong Telecom’s ‘Customer Service Commitment’ was published – first of its kind for a 1925 The interests of the China and Japan Telephone & telecom company in Southeast Asia. Electric Company were taken over by newly-formed
Hongkong Telephone. 1993 World’s first underground digital mobile network, 1010 GSM, was launched by Hongkong Telecom 1931 Telephone service was inaugurated to Guangzhou. CSL to provide mobile coverage on moving trains on Hong Kong’s MTR (Mass Transit Railway). 1953 International leased circuits were introduced.
Hongkong Telecom celebrated the installation of its 1969 Hong Kong I satellite antenna was inaugurated, and 1994 international television reception / transmission three millionth telephone line, providing one line became available in Hong Kong for the first time. for every two people in the territory.
1977 The Directory Enquiry service was computerised. 1994 A third office in China was opened, in Shanghai, complementing the Beijing and Guangzhou offices. 62 1985 Introduction of Starline services, with features such as Call Waiting and Call Forwarding. 1994 Hongkong Telecom launched G-FORCE, Asia’s first telecommunications service guarantee plan. 1988 Hongkong Telecom was formed by a merger of Hongkong Telephone and Hongkong Telecom 1995 Our 17th satellite antenna was inaugurated at International, and became a publicly listed Stanley Earth Station, providing Hong Kong with company with shares traded on the Hong Kong and the largest teleport in Asia. New York stock exchanges. 1995 New offices began operation in Malaysia and
1989 Hongkong Telecom was listed on the Pacific Stock Canada, bringing our total to 10 overseas offices in Exchange, complementing the SEHK and NYSE seven countries. listings. 1996 Launch of Netvigator, a new interactive Internet service from Hongkong Telecom IMS. 1990 The Hongkong Telecom Foundation was set up to support education-related projects and activities. 1996 Hongkong Telecom became the world’s first
1991 First high-speed private leased circuit between provider of GSM Automatic International Roaming Shenzhen and Hong Kong came into service. (AIR) services in China.
1993 Hong Kong’s local telephone network was fully 1997 Inauguration of the Asia Pacific Cable Network digitalised, a ‘world-first’ for a major urban market. (APCN), giving Hong Kong a total of nine international fibre-optic connections. HONGKONG TELECOM ANNUAL REPORT 1997
Glossary of terms
Analogue GSM The traditional telecommunications signal which at all times ‘Global System for Mobile (Groupe Système Mobile),’ a represents the pitch and volume of the speaker’s voice. This is standard for digital mobile telephony first developed in being replaced by digital technology. Europe but now in use in many other countries around the world. Asynchronous Transfer Mode (ATM) ATM is a technology designed to transport and switch (or Hubbing route) digital telecom signals in the form of small cells of 53 Acting as a hub or transfer point for international bytes. Operating at very high transmission rates, ATM can telecommunications traffic from an operator in another carry any type of digital telecom signal including delay- country. Apart from these traffic-handling arrangements sensitive services such as voice and video. ATM is the between carriers, hubbing can also refer to the process of preferred switching technology for future broadband and multinational companies basing their regional or global multimedia telecom networks using fibre optic cables. telecoms and IT centres in a country, linking to their sub- offices in the region through international leased circuits. Bandwidth The range of frequencies, expressed in Hertz (Hz), that can Integrated Services Digital Network (ISDN) pass over a given transmission line or channel. The bandwidth Integrated Services Digital Network provides sufficient determines the rate at which information can be transmitted bandwidth for simultaneous transmission of voice, video and through a channel. The greater the bandwidth, the more data signals at the office or at home. information that can be carried in a given amount of time. Intelligent Network (IN) Bit Rate (Bits/second, bps) A network which is controlled by powerful computers and The bit rate of a transmission line or modem (MOdulator/ sophisticated software, allowing it to offer advanced, highly DEModulator) is the number of bits per second which it can individualised services to its customers, including re-routing transmit, and is often synonymous with bandwidth. calls or setting up complex billing arrangements in many cases controlled by the customer. Broadband 63 The family of powerful technologies that comprise the new Interactive Multimedia Services (IMS) platform for telecommunications networks and services. In A term which describes an important development in most respects the information superhighway is a description telecommunications, as the capacity and flexibility of digital of the broadband networks that are now under construction. networks increasingly allows them to carry not just voice and These pave the way for the next generation of high and data, but video films selected by the individual customer variable bandwidth networks capable of handling all types of (‘video-on-demand’), interactive services such as home voice, data and video services faster, more flexibly and more shopping or banking, videoconferencing and many others. efficiently. Broadband is the technological platform for the growing multimedia industry. Internet The world’s largest network of interconnected computers with Convergence millions of people worldwide using it for communication from The coming together of telecommunications with other personal computers. Users can access information stored on industries such as computing, information dissemination and other computers and databases around the Internet and even broadcasting. create individual database sites.
Digital Signal Narrowband A signal with only two values, normally 0 and 1, during Usually describes networks or services based on the PSTN transmission, unlike an analogue signal where values (Public Switched Telephone Network), which can be accessed constantly vary. This binary notation can represent an infinite virtually everywhere. Designed for telephony, narrowband range of values, but can also easily be represented data transfer is limited to about 28,800 bits/second. electronically by two voltage levels. Personal Communications Network (PCN) Fibre Optics The latest generation in digital mobile telephone networks, Technology which uses light travelling along a glass fibre to generally characterised by low cost and the ability to serve a carry the ‘on’ or ‘off’ signals of digital information. Almost all very large number of customers. new telecommunications networks use optical fibre cable. What can be imagined, can be achieved.
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