ZTE CORPORATION. (a joint stock limited company incorporated in the People s Republic of China with limited liability) (Stock Code: 763)

Transcription

1 ZTE CORPORATION (a joint stock limited company incorporated in the People s Republic of China with limited liability) (Stock Code: 763) 2005 THIRD QUARTERLY REPORT This announcement is published simultaneously in Shenzhen pursuant to the Rules Governing Listing of Stocks on Shenzhen Stock Exchange and in Hong Kong pursuant to the disclosure obligations under Rule of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. 1. IMPORTANT 1.1 The Board of Directors of ZTE Corporation (the Company ) and its members confirm that this report does not contain any false or misleading statements or material omissions, and collectively and individually accept responsibility for the truthfulness, accuracy and completeness of its contents. 1.2 This quarterly report has been considered and approved by the fifteenth meeting of the third session of the Board of Directors of the Company. Mr. Li Juping, Director, was unable to attend the meeting due to work reasons, and has authorised in writting Mr. Wang Zongyin, Vice Chairman of the Company to vote on his behalf. Mr. Shi Lirong, Director, was unable to attend the meeting due to work reasons, and has authorised in writing Mr. Yin Yimin, Director, to vote on his behalf. Mr. Li Jin, Independent Director, was unable to attend the meeting due to work reasons, and authorised in writing Mr. Zhu Wuxiang, Independent Director, to vote on his behalf. 1.3 The financial statements contained in this quarterly report are unaudited. The financial information contained in this report has been prepared in accordance with generally accepted accounting principles in the People s Republic of China ( PRC GAAP ). The Company has also disclosed in this quarterly report a reconciliation of net profits and shareholders equity of the Company and its subsidiaries (together referred to as the Group ) from PRC GAAP to Hong Kong accounting standards. 1.4 Mr. Hou Weigui, Chairman of the Company, Mr. Wei Zaisheng, Chief Financial Officer of the Company and Mr. Shi Chunmao, Head of Finance Division of the Company, hereby declare that they warrant the truthfulness and completeness of the financial statements contained in this quarterly report. 1

2 2. CORPORATE INFORMATION 2.1 Basic Information Abbreviation ZTE Stock Code (A shares/h shares) /763 Secretary to the Board of Directors Authorised Representatives of the Company Joint Secretaries of the Company Securities Affairs Representative Name Feng Jianxiong Yin Yimin, Feng Jianxiong Feng Jianxiong, Suen Pui Yee, Samantha Li Liuhong Correspondence address ZTE Plaza, Keji Road South, Hi-Tech Industrial Park, Nanshan District, Shenzhen, Guangdong Province, People s Republic of China Telephone Facsimile address Principal place of business in Hong Kong fengjianxiong@zte.com.cn 8/F., Gloucester Tower, the Landmark, 11 Pedder Street, Central, Hong Kong 2.2 Financial Information Major Accounting Data and Financial Indicators of the Group Item As at 2005 As at 31 December 2004 Change as at the end of the reporting period in comparison with the end of last year Total assets (RMB in thousands) 18,837,591 20,849, % Shareholders equity (excluding minority interests) (RMB in thousands) 9,764,695 9,174, % Net assets per share (RMB) % Adjusted net assets per share (RMB) % 2

3 For the three months ended 2005 Change for the reporting For the nine period in months ended comparison with the same 2005 period last year Net cashflow from operating activities (RMB in thousands) -678,322-3,266, % Earnings per share (RMB)* % Decreased by 2.44 percentage Return on net assets 1.59% 8.63% Return on net assets after extraordinary gains or losses 1.23% 8.15% points Decreased by 2.81 percentage points Note: The total share capital of the Company comprised 800,755,200 shares as at 2004 and 959,521,650 shares as at Extraordinary gain or loss items Amount (RMB in thousands) For the three months ended 2005 For the nine months ended 2005 Subsidy income 33,493 39,493 Non-operating income 4,185 15,868 Less: Non-operating expenses 3,342 8,453 Less: Investment losses arising from disposal of shareholding interests 230 Less: Effect of income tax Total 34,336 46, Income Statements (unaudited) Please refer to the part

4 2.2.3 Differences in financial statements prepared in accordance with PRC GAAP and Hong Kong accounting standards The effects on the net profit and the shareholders equity arising from material differences between the consolidated financial statements prepared under PRC GAAP and Hong Kong accounting standards are summarised as follows: Net profit For the nine months ended 30 September 2005 (Unaudited) RMB in thousands Net profit from ordinary activities attributable to shareholders under PRC GAAP 842,496 Add back/(deduct): Accounting standards differences Recognition of government grants (i) (9,014) Provision for retirement benefits (ii) Deferred development costs (iii) (21,006) Amortisation of goodwill (iv) 609 Profit for the period attributable to equity holders of the parent under Hong Kong accounting standards 813,085 Shareholders equity As at 2005 (Unaudited) RMB in thousands Shareholders equity under PRC GAAP 9,764,695 Add back/(deduct): Accounting standard differences Recognition of government grants (i) (3,865) Provision for retirement benefits (ii) (28,923) Deferred development costs (iii) 45,481 Amortisation of goodwill (iv) 609 Shareholders equity under Hong Kong accounting standards 9,777,997 Note: (i) Government grants Government grants for specific research and development projects are accounted for as specific payables under PRC GAAP, whereas under Hong Kong accounting standards, such grants are accounted for as deferred income in the other payable or long-term payable accounts. 4

5 Under PRC GAAP, research and development costs are recognised as technology development costs in inventory to the extent of the granted amounts, and the specific payables thereof are transferred to the inventory account to off-set against the technology development costs upon completion of the projects. Under Hong Kong accounting standards, the deferred income is recognised as income over the periods necessary to match the grants on a systematic basis to the costs that they are intended to compensate. (ii) Provision for retirement benefits Under PRC GAAP, there is no specific standard, regulation or rules for the recognition of post-retirement benefits under defined retirement benefits plan. The costs of post-retirement benefits are expensed as incurred. Under Hong Kong accounting standards, the costs of providing these benefits under the defined retirement benefits plan are actuarially determined and recognised over the employees service period. (iii) Deferred development costs Under PRC GAAP, all research and development costs are charged to the income statement as incurred. Under Hong Kong accounting standards, expenditures incurred on projects to develop new products is capitalised and deferred only when the projects are clearly defined; the expenditure is separately identifiable and can be measured reliably; there is reasonable certainty that the projects are technically feasible; and the products have commercial value. Product development expenditure which does not meet these criteria is expensed when incurred. (iv) Goodwill Under PRC GAAP, goodwill arising from acquisition is amortised in the consolidated balance sheet over its estimated useful life of 10 years using the straight line method. Prior to the issuance of Hong Kong Financial Reporting Standard 3 (HKFRS 3), Business Combinations and HKAS 36 Impairment of Assets, goodwill arising on acquisitions was amortised on a straight-line basis over its estimated useful life and was subject to impairment testing when there was any indication of impairment. Upon the adoption of HKFRS 3 and HKAS 36, goodwill arising on acquisitions is no longer amortised but subject to annual impairment review (or more frequently if events or changes in circumstances indicate that the carrying value may be impaired). Any impairment loss recognised for goodwill is not reversed in a subsequent period. The transitional provisions of HKFRS 3 have required the Group to eliminate at 1 January 2005 the carrying amounts of accumulated amortisation with a corresponding entry to the costs of goodwill. 2.3 Total number of shareholdings and top ten holders of shares in circulation as at the end of the reporting period Total number of shareholders as at the end of the reporting period 21,992 shareholders Shareholdings of top ten holders of shares in circulation Name of shareholders HKSCC Nominees Limited Deutsche Bank Aktiengesellschaft Southern Sustaining Growth Fund Tian Yuan Securities Investment Fund CITIC Classic Securities Investment Fund Kai Yuan Securities Investment Fund Jingfu Securities Investment Fund Yu Yang Securities Investment Fund SYWG BNP Paribas Securities Investment Fund Merchants Stocks Investment Fund Number of shares in circulation held at the end of the reporting period (shares) Type 159,370,039 H shares 20,289,754 A shares 8,907,419 A shares 6,900,000 A shares 6,003,099 A shares 5,200,000 A shares 5,189,298 A shares 4,945,195 A shares 4,507,077 A shares 4,342,264 A shares 5

6 3. MANAGEMENT DISCUSSION AND ANALYSIS 3.1 Brief analysis of the overall operating conditions of the Group during the reporting period During the quarter under review, domestic carriers adjusted their capital expenditure structure in line with the progress achieved in the commercialization of 3G applications. Capital expenditure in the telecommunications sector for the eight months ending 31 August 2005 amounted to RMB billion, representing a decrease of 14.4% compared to the same period last year (Source: Ministry of Information Industry). There was a notable decrease in investments in PHS, CDMA systems and switch systems. Globally, the telecommunications industry continued to enjoy stable growth. Against such a backdrop, the Company maintained stable growth in its business by actively adjusting its operating strategy. For the nine months ended 2005, the Group generated turnover of RMB15,031 million from its principal operations, representing a decrease of 7.97% compared to the same period last year. Net profit increased by 15.99% from the same period last year to RMB842 million, while earnings per share were RMB On the R&D front, the Group continued to implement a market-oriented R&D management regime underpinned by efforts to enhance R&D efficiency by consolidating R&D resources. As a result of enhanced R&D efforts in 3G, our range of 3G products has become more competitive as a whole. Our WCDMA products, for example, were put to application at a number of overseas trial stations, while we remained a market leader in terms of overall R&D standards for TD- SCDMA products. Domestically, the Group actively reinforced its dominance in existing niche markets, on the back of a proven brand name and quality services coupled with a high performance to price ratio of its products. Ongoing efforts were made to enhance the growth of service products such as intelligent networks, caller tunes and multimedia messaging services, leveraging on opportunities arising from telecommunications carriers enhancing the network intelligence of their fixed line networks and introducing novel value-added services. On the global front, the Group geared up its efforts to build and manage regional platforms in the overseas market, refining its platform management processes, with a view to promoting international marketing efforts through enhanced management standards. During the reporting period, the Group achieved satisfactory progress in its overseas marketing efforts. Looking to the fourth quarter, domestic carriers are expected to make investments in enhancing the network intelligence of its fixed line networks, value-added services as well as preliminary preparations for their 3G business. The Group intends to step up its cooperation with carriers in the areas of 3G, next generation networks, optical communications and value-added services, to facilitate its initiatives in the market in future. 6

7 3.1.1 Principal business segments or products accounting for 10% or more of revenue or profit from principal operations H Applicable & Not applicable Principal business segments accounting for 10% or more of revenue or profit from principal operations: Business segment Revenue from principal operations (RMB in thousands) As a percentage of total revenue from principal operations Cost of principal operations (RMB in thousands) Gross profit margin Telecommunications equipment 15,030, % 9,310, % Total 15,030, % 9,310, % Of which: connected transactions* 66, % 42, % Pricing principles of connected transactions Statement on the necessity and continuity of connected transactions The prices at which the connected transactions between the Company and the connected parties were conducted were comparable to market prices. The Company s sales to the connected parties represented mainly the distribution of the Company s products by the connected parties and such transactions will continue in future. Note: This refers to connected transactions under PRC laws and regulations Major products accounting for 10% or more of revenue or profit from principal operations of the Group: Product Revenue from principal operations (RMB in thousands) As a percentage of total revenue from principal operations Cost of principal operations (RMB in thousands) Gross profit margin Wireless communication systems 5,904, % 3,204, % Handsets 2,924, % 2,529, % Telecommunications software systems, services and other products 2,723, % 1,395, % Optical and data communications systems 2,124, % 1,522, % Wireline switch and access 1,353, % 657, % Seasonal or cyclical characteristics of the Group s operations & Applicable H Not applicable 7

8 3.1.3 Profit structure for the reporting period (profit from principal operations, profit from other operations, expenses for the period, investment gains, subsidy income and net nonoperating items each as a percentage of total profit, and substantial change compared to the previous reporting period and reasons for such change) H Applicable & Not applicable Item As a percentage of total profit for the three months ended 30 September 2005 As a percentage of total profit for the six months ended 30 June 2005 Increase/decrease Profit from principal operations % % Increased by % 1 Profit from other operations 1.11% 0.32% Increased by 0.79% Expenses for the period % % Increased by % 2 Investment gains -0.12% -0.03% Decreased by 0.09% Subsidy income 53.42% 14.99% Increased by 38.43% 3 Non-operating items, net 0.46% 0.78% Decreased by 0.32% Note 1: Note 2: The increase in profit from principal operations as a percentage of total profit as compared to the first six months of 2005 was mainly attributable to a higher consolidated gross profit margin coupled with lower total profit during the reporting period. The increase in expenses for the reporting period as a percentage of total profit as compared to the first six months of 2005 was mainly attributable to the increase in expenses incurred in connection with the expansion of the Group s overseas market during the reporting period. Note 3: The increase in subsidy income for the reporting period as a percentage of total profit as compared to the first six months of 2005 was mainly attributable to tax refunds for software products and integrated circuits during the reporting period Substantial change in principal operations and its structure compared to the previous reporting period and reasons for such change & Applicable H Not applicable Substantial change in the profitability (gross profit margin) from principal operations compared to the previous reporting period and reasons for such change & Applicable H Not applicable 3.2 Analysis of significant events and their effects and proposed solutions H Applicable & Not applicable Material legal proceedings On 20 October 2005, the first formal hearing for the Group s proceedings at the Shenzhen Intermediary People s Court commenced against Fairchild Semiconductor Corporation, a company incorporated in the United States, for damages in respect of defective goods supplied to the Company (for further details of the proceedings, please refer to page 107 of the H share prospectus published on 29 November 2004 in the section headed Legal Proceedings ). The court has conducted investigations and examinations at the hearing. After the adjournment of the hearing, the court will announce a date for the second court session Ongoing connected transactions during the reporting period During the reporting period, ongoing connected transactions (as defined in the Rules Governing Listing of Stocks on Shenzhen Stock Exchange) of the Group included the purchase of raw materials from and sales of products to connected parties by the Company and its subsidiaries. Such connected transactions were conducted after arm s length 8

9 negotiation on the basis of normal commercial terms. The prices paid by the Group to the connected parties for the purchases were not more than the prices at which the products were sold by the connected parties to other users for similar products in similar quantities. The prices charged by the Group to the connected parties for the sales were not less than the prices at which the products were sold by the Group to other users for similar products in similar quantities. Moreover, such connected transactions would not have any adverse impact on the Group s profit. Details of the implementation of the Group s ongoing connected transactions during the reporting period are set out in the following table (for basic information on the connected parties, their connected relationships with the Group, basic terms of the connected transaction agreements between the Group and the connected parties, estimated transaction amounts for 2005 under each agreement, impact of the connected transactions on the Group and review of the connected transactions by the general meeting and board of directors of the Company, please refer to the announcements on ongoing connected transactions published by the Company on 11 April 2005 in China Securities Journal, Securities Times and Shanghai Securities News, South China Morning Post and Hong Kong Economic Times.) Classification of connected transactions Subject matter Member of the Group (asapartytothe connected transactions) Connected parties (as the counterparty to the connected transactions) Pricing basis Transaction amount (in RMB ten thousands) (exclusive of VAT) for the nine months ended 30 September 2005 As a percentage of transactions in the same classification Settlement Whether different from estimated conditions Purchases of raw materials Telecommunications products such as cabinets and boxes, distribution frames, soft circuit boards and other raw materials ZTE Kangxun Telecom Company, Limited Shenzhen Zhongxingxin Telecommunications Equipment Company, Limited and its subsidiaries Shenzhen Zhongxing Xindi Telecommunications Equipment Company, Limited and Shenzhen Zhongxing Xinyu FPC Company, Limited Consistent with market prices (as per contract) 30, % Banker s acceptance bill No Circuit protectors and ZTE Kangxun Telecom other electronic Company, Limited products Xi an Microelectronics Technology Research Institute Consistent with market prices (as per contract) % Banker s acceptance bill No Printers and other electronic products ZTE Kangxun Telecom Company, Limited Chung Hing (Hong Kong) Development Limited Consistent with market prices (as per contract) % Banker s acceptance bill Exceeded by RMB6.712 million* Soft circuit boards and other products Shenzhen Communications Company, Limited Lead Shenzhen Zhongxing Xinyu FPC Company, Limited Consistent with market prices (as per contract) % Banker s acceptance bill Exceeded by RMB2.283 million* IC, connector assemblies, optical devices, modules and other ancillary equipment ZTE Kangxun Telecom Company, Limited Shenzhen Zhongxing WXT Equipment Company, Ltd. and its investee company Shenzhen Gaodonghua Communication Technique Co., Ltd Consistent with market prices (as per contract) 11, % Banker s acceptance bill No Sales of products Handsets and other products The Company Xi an Microelectronics Consistent with market Technology Research prices (as per contract) Institute % Banker s acceptance bill No Electronic components and other products ZTE Kangxun Telecom Company, Limited Shenzhen Zhongxing WXT Equipment Company, Ltd. Consistent with market prices (as per contract) % Banker s acceptance bill No Note: The excess was mainly attributable to the rapid expansion of the Group s overseas business resulting in an increase of the transaction amount relating to the Group s purchase of certain electronic equipment from Chung Hing (Hong Kong) Development Limited and soft circuit boards and other products from Shenzhen Zhongxing Xinyu FPC Company, Limited, both of which were connected parties. However, the gross amount of connected transactions for the Group under the purchases of raw materials category as a whole did not exceed the original estimate. 3.3 Accounting policies, accounting estimates, change in scope of consolidation, significant accounting errors and reasons H Applicable & Not applicable 9

10 3.3.1 Accounting policies, accounting estimates, significant accounting errors and reasons & Applicable H Not applicable Change in scope of consolidation H Applicable & Not applicable Changes in the scope of consolidation of the Group during the period were as follows: Name of Company Change Reasons Shenzhen Zhongxing Liwei Technology Company, Ltd. Included Incorporation as new company ZTE Hrvatska d.o.o. Included Incorporation as new company ZTE Deutschland GmbH Included Incorporation as new company ZTE CORPORATION BULGARIA Ltd. Included Incorporation as new company Anhui Yalong Communications Technology Company, Ltd. Included Incorporation as new company Congo China Telecom International Network Included Incorporation as new company ZTE POLAND Sp.zo.o. Included Incorporation as new company 3.4 Declarations by the Board of Directors and the Supervisory Committee in respect of any qualified opinion in the auditor s report & Applicable H Not applicable 3.5 Warnings of and reasons for any expected accumulated net loss from the beginning of the year to the end of the next reporting period or substantial change compared to the same period last year & Applicable H Not applicable 3.6 Rolling adjustments to published annual operational plans or budgets made by the Group & Applicable H Not applicable 3.7 Special undertakings made by former holders of shares not in circulation in relation to the conversion of shares not in circulation and their performance status. & Applicable H Not applicable 3.8 This quarterly report is published in both Chinese and English. The Chinese version shall prevail in case of discrepancy. 10

11 4. FINANCIAL STATEMENTS 4.1 Balance sheet (unaudited) Currency unit: RMB in thousands Assets December 2004 Consolidated Company Consolidated Company Current assets: Cash in banks and on hand 2,553,031 1,561,451 7,598,223 6,463,165 Short-term investments Notes receivables 1,749,838 1,746,412 2,258,088 2,240,530 Dividends receivables 9,667 1,371 Accounts receivables 4,472,794 5,419,581 3,652,506 4,016,330 Other receivables 306,954 1,151, , ,183 Prepayments 97,447 82, ,398 58,380 Inventories 2,251,392 1,168,669 1,882,808 1,738,023 Contract amounts receivables 4,455,962 4,379,412 2,614,250 2,923,536 Technology development cost 278, , , ,700 Prepaid expenses 478 Total current assets 16,166,028 15,797,329 18,556,046 18,326,218 Long-term investments: Long-term equity investments 90,959 3,616,641 67,176 2,992,995 Long-term bond investments Total long-term investments 90,959 3,616,641 67,176 2,992,995 Fixed assets: Fixed assets cost 3,219,480 2,194,127 2,725,769 1,877,501 Less: accumulated depreciation 1,030, , , ,997 Net fixed assets 2,188,489 1,545,576 1,932,446 1,407,504 Less: provision for fixed asset impairment 94,980 87,002 94,980 87,002 Fixed assets net book value 2,093,509 1,458,574 1,837,466 1,320,502 Construction in progress 248, , ,677 98,100 Total fixed assets 2,342,318 1,671,803 1,952,143 1,418,602 Intangible and other assets: Intangible assets 155,883 80, ,214 94,358 Long-term prepaid expenses 5,289 5,289 23,785 13,376 Total intangible and other assets 161,172 85, , ,734 Deferred taxation: Deferred tax assets 77,114 76, ,625 76,419 Total assets 18,837,591 21,247,841 20,849,989 22,921,968 Legal representative: Hou Weigui Person in charge of accounting function: Wei Zaisheng Person in charge of accounting department: Shi Chunmao 11

12 Currency unit: RMB in thousands Liabilities and owner s equity December 2004 Consolidated Company Consolidated Company Current liabilities: Short-term loans 38, , ,344 Notes payables 1,670,031 1,769,676 1,422,401 1,453,282 Accounts payables 3,893,255 6,387,742 2,919,483 5,295,321 Advances from customers 684, ,794 2,630,721 2,455,494 Accrued payroll 590, ,942 1,031, ,925 Welfare benefits payables 400, , , ,467 Dividends payables 21, , Taxation payables (553,197) (647,979) 52,459 (175,111) Other levies 10,485 3,900 13, Other payables 433,453 1,281, ,727 1,078,453 Accruals 408, , , ,486 Anticipated liabilities 20,000 20,000 20,000 20,000 Long-term loans maturing within one year 16,000 16,900 Total current liabilities 7,633,363 10,356,413 9,958,288 11,744,481 Long-term liabilities: Long-term loans 564, ,000 1,025, ,000 Specific amount payables 321, , , ,800 Total long-term liabilities 885, ,610 1,252,583 1,127,800 Deferred taxation: Deferred tax liabilities Total liabilities 8,519,039 11,135,023 11,210,871 12,872,281 Minority interests: Minority interests 553, ,679 Owner s equity: Share capital 959, , , ,522 Capital reserve 5,501,066 5,527,538 5,491,658 5,515,822 Surplus reserve 985, , , ,718 Comprising: Statutory welfare reserve 252, , , ,836 Undistributed profits 2,337,927 2,976,866 1,495,431 2,682,269 Exchange difference (19,176) (1,826) 2,592 1,476 Cash dividends declared 239, ,880 Total owner s equity 9,764,695 10,112,818 9,174,439 10,049,687 Total liabilities and owner s liabilities 18,837,591 21,247,841 20,849,989 22,921,968 Legal representative: Hou Weigui Person in charge of accounting function: Wei Zaisheng Person in charge of accounting department: Shi Chunmao 12

13 4.2 Income statements and statements of income distribution (unaudited) Currency unit: RMB in thousands Nine months ended 2005 Nine months ended 2004 Consolidated Company Consolidated Company 1. Revenue from principal operations 15,030,591 14,383,785 16,333,139 15,867,649 Less: Cost of principal operations 9,310,241 11,479,043 10,088,183 11,558,343 Tax and levies on principal operations 76,851 35,139 67,622 32, Profit from principal operations 5,643,499 2,869,603 6,177,334 4,277,032 Add: profit from other operations 4,742 3,061 35,869 21,950 Less: Selling and distribution 2,426,461 2,026,167 2,032,735 1,918,070 expenses Administrative expenses 2,249, ,785 3,253,776 2,030,652 Finance expenses 176, , , , Operating profit 795,082 (298,069) 729, ,177 Add: Investment income (507) 588,513 10, ,793 Subsidies income 223, ,874 9,219 Non-operating income 15,868 6,769 12,831 4,125 Less: Non-operating expenses 8,453 2,616 44,354 42, Total profit 1,025, , , ,876 Less: Income tax 74, , ,033 Minority interests 108, , Net profits 842, , , ,843 Add: Undistributed profits at beginning of year 1,495,431 2,682,269 1,188,497 2,106, Appropriated profit 2,337,927 2,976,866 1,914,851 2,917,456 Less: Statutory surplus reserve Statutory welfare reserve 7. Profit available for distribution to equity owners 2,337,927 2,976,866 1,914,851 2,917,456 Less: Discretionary surplus reserve Dividends payables in respect of ordinary shares Dividends for ordinary share capitalized 133, , Undistributed profit 2,337,927 2,976,866 1,781,392 2,783,997 13

14 Supplemental information: Items Nine months ended 2005 Nine months ended Gains arising from the sale or disposal of business departments or associated companies 2. Losses arising from natural disasters 3. Total amount of profit increase (or decrease) as a result of 176,896 changes in accounting policies 4. Total amount of profit increase (or decrease) as a result of (387,034) changes in accounting estimates 5. Losses arising from debt restructuring Legal representative: Hou Weigui Person in charge of accounting function: Wei Zaisheng Person in charge of accounting department: Shi Chunmao Items Currency unit: RMB in thousands Three months ended Three months ended Consolidated Company Consolidated Company 1. Revenue from principal operations 4,727,593 4,431,296 4,558,880 4,555,636 Less: Cost of principal operations 2,886,758 3,369,127 2,649,271 3,134,705 Tax and levies on principal operations 40,408 23,665 35,386 9, Profit from principal operations 1,800,427 1,038,504 1,874,223 1,411,911 Add: profit from other operations 2,007 (1,117) 11,473 2,773 Less: Selling and distribution 979, , , ,879 expenses Administrative expenses 661, , , ,660 Finance expenses 78,231 81,504 94,392 95, Operating profit 83,838 (185,275) 194,858 33,028 Add: Investment income (218) 332,241 (554) 223,104 Subsidies income 96,856 90,765 Non-operating income 4,185 2,078 6,102 1,093 Less: Non-operating expenses 3,342 1,599 10,876 9, Total profit 181, , , ,885 Less: Income tax 34,334 37,139 Minority interests 26,486 32, Net profits 154, , , ,746 14

15 Supplemental information: Items Three months ended 2005 Three months ended Gains arising from the sale or disposal of business departments or investee companies 2. Losses arising from natural disasters 3. Total amount of profit increase (or decrease) as a result of changes in accounting policies 4. Total amount of profit increase (or decrease) as a result of changes in accounting estimates 5. Losses arising from debt restructuring Legal representative: Hou Weigui Person in charge of accounting function: Wei Zaisheng Person in charge of accounting department: Shi Chunmao 4.3 Cashflow statements (unaudited) Items Currency unit: RMB in thousands Nine months ended 2005 Consolidated Company I. Cash flow from operating activities Cash received from sale of goods or provision of services 12,867,610 11,554,319 Tax refund received 190,476 Cash received from other operating activities 183, ,319 Sub-total of cash inflow 13,241,241 11,706,638 Cash paid for the purchase of goods and services 10,407,952 10,718,410 Cash paid to and on behalf of employees 2,401,928 1,465,866 Taxes and levies paid 964, ,974 Cash paid in other operating activities 2,733,546 2,362,233 Sub-total of cash outflow 16,507,436 14,943,483 Net cash flow from operating activities (3,266,195) (3,236,845) II. Cash flow from investing activities Cash received from disinvestment Cash received from investment gains 1,638 1,515 Cash received from disposal of fixed assets and intangible assets 6,763 6,665 Cash received from other investing activities Sub-total of cash inflow 8,732 8,511 Cash paid for the acquisition of fixed assets and intangible 618, ,249 assets Cash paid for investments 13,531 37,775 Cash paid for other investing activities 15

16 Sub-total of cash outflow 632, ,024 Net cash flow from investing activities (623,794) (571,513) III. Cash flow from financial activities Cash received from investments 9,779 Cash received from borrowings 76,025 11,967 Cash received from other financing activities Sub-total of cash inflow 85,804 11,967 Cash paid in repayment of debts 849, ,813 Cash paid in dividends distributions or interest payments 378, ,955 Cash paid in other financing activities 543 Sub-total of cash outflow 1,228,918 1,090,768 Net cash flow from financial activities (1,143,114) (1,078,801) IV. Effect of foreign exchange rate fluctuations on cash position (12,089) (14,555) V. Net increase in cash and cash equivalents (5,045,192) (4,901,714) Legal representative: Hou Weigui Items Person in charge of accounting function: Wei Zaisheng Person in charge of accounting department: Shi Chunmao Currency unit: RMB in thousands Nine months ended 2005 Consolidated Company I. Investing and financing activities not involving cash Debt conversion into capital Convertible bonds maturing within one year Fixed assets under finance lease II. Net profit reconciled to cash flow from operating activities Net profit 842, ,597 Add: Minority interests 108,498 Provision for assets impairment 41,601 30,143 Depreciation of fixed assets 258, ,977 Amortisation of intangible assets 40,485 32,209 Amortisation of long-term prepaid expenses 27,651 8,849 Decrease in prepaid expenses 478 Increase in accruals 140,458 11,949 Losses on disposal of fixed assets and intangible assets 12 Losses on retirement of fixed assets 4,357 3,115 Finance expenses 133, ,334 Loss on investment 507 (588,513) Decrease in deferred tax assets 27,511 Decrease in inventories (29,419) 521,420 Decrease in amounts receivables in operation (2,546,504) (2,952,813) 16

17 Increase in amounts payable in operation (2,316,329) (881,112) Net cash flow from operating activities (3,266,195) (3,236,845) III. Net increase in cash and cash equivalents Balance of cash at end of period 2,553,031 1,561,451 Less: Balance of cash brought forward 7,598,223 6,463,165 Add: Balance of cash equivalent at end of period Less: Balance of cash equivalent brought forward Net increase in cash and cash equivalents (5,045,192) (4,901,714) Legal representative: Hou Weigui Person in charge of accounting function: Wei Zaisheng Person in charge of accounting department: Shi Chunmao 5. DOCUMENTS FOR INSPECTION 5.1 Full text of the 2005 third quarterly report signed by the Chairman of the Company; 5.2 Financial statements duly signed with seals affixed by the Company s legal representative, chief financial officer and head of finance division; 5.3 Original copies of all of the Company s announcements published in China Securities Journal, Securities Times, Shanghai Securities News, South China Morning Post and Hong Kong Economic Times during the reporting period. By order of the Board Hou Weigui Chairman Shenzhen, PRC 25 October 2005 As at the date of this announcement, the executive directors of the Company are Yin Yimin, Shi Lirong and He Shiyou; the non-executive directors of the Company are Hou Weigui, Wang Zongyin, Xie Weiliang, Zhang Junchao, Li Juping and Dong Lianbo; and the independent non-executive directors of the Company are Zhu Wuxiang, Chen Shaohua, Qiao Wenjun, Mi Zhengkun and Li Jin. Please also refer to the published version of this announcement in South China Morning Post. 17