SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F/A

Amendment No. 1

o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		Date of event requiring this shell company report _____________

Commission file number 1-15028

CHINA UNICOM (HONG KONG) LIMITED

(Exact Name of Registrant as Specified in Its Charter)

N/A		Hong Kong
(Translation of Registrant’s Name Into English)		(Jurisdiction of Incorporation or Organization)

75^th Floor, The Center
99 Queen’s Road Central
Hong Kong
(Address of Principal Executive Offices)

Chu Ka Yee
Telephone: +852 2121 3220
Facsimile: +852 2121 3232
75^th Floor, The Center
99 Queen’s Road Central
Hong Kong
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange On Which Registered
Ordinary shares, par value HK$0.10 per share		The New York Stock Exchange, Inc.*

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None
(Title of Class)

     Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

     As of December 31, 2009, 23,562,092,511 ordinary shares were issued and outstanding.

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

     If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No þ

     Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

     Large Accelerated Filer þ           Accelerated Filer o           Non-Accelerated Filer o

     Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.

     U.S. GAAP o

     International Financial Reporting Standards as issued by the International Accounting Standards Board þ Other o

     If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o Item 18 o

     If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

 

 

EXPLANATORY NOTE

     This Amendment No. 1 on Form 20-F/A (“Amendment No. 1”) is being filed to our annual report on Form 20-F for the year ended December 31, 2009, filed with the Securities and Exchange Commission (the “SEC”) on June 18, 2010 (the “Original Form 20-F”), to address comments that we received from the SEC in its comment letters from September to December 2010 (collectively, the “SEC Comments”), relating to the accounting treatment of our acquisition (the “Acquisition”) of the fixed-line business in 21 provinces in southern China (the “Acquired Business”) from our parent companies, China United Network Communications Group Company Limited (the “Unicom Group”) and China Network Communications Group Corporation (which was later merged with Unicom Group in January 2009) on January 31, 2009.

     In the Acquisition, we did not purchase the underlying telecommunication networks in southern China (“Network Assets”) but leased such assets from Unicom New Horizon, a wholly-owned subsidiary of Unicom Group, to operate the Acquired Business. In determining the accounting policy for the Acquisition, we noted that there is no guidance under the International Financial Reporting Standards (“IFRS”) on common control transactions, especially when it involves an acquisition of a business but not the underlying assets. In light of this, we followed the principles under International Accounting Standard (IAS) 8 “Accounting policies, changes in accounting estimates and errors” paragraph 10, 11 and 12 to exercise our judgment in developing and applying an accounting policy that we believed appropriate for the Acquisition. We accounted for the Acquisition using the predecessor values method in our consolidated financial statements for the years ended December 31, 2007, 2008 and 2009 (the “Financial Statements”), prepared in accordance with IFRS. We recognized the Acquired Business in the Financial Statements at historical cost or predecessor values as if such business had always been part of our company during all the periods presented, and (i) included all the assets, liabilities, revenues and charges directly related to the Acquired Business, except for the Network Assets and other associated assets and liabilities that were not acquired (“Excluded Assets and Liabilities”) and the related charges, and (ii) supplemented such information with comprehensive disclosure of the Excluded Assets and Liabilities and the related charges. We also provided disclosure on the details of the lease payments that were made following the completion of the Acquisition in Note 4.2(b) to the Financial Statements. The Financial Statements were audited by PricewaterhouseCoopers, independent registered public accounting firm, as indicated their audit report dated June 18, 2010.

     As part of its periodic review of our Original Form 20-F, the SEC staff (the “Staff”) raised questions on this accounting treatment. In response to these comments, we have had a number of discussions with the Staff, with the participation of our auditor. At the conclusion, we determined to include all Excluded Assets and Liabilities and the related charges in the Financial Statements for the historical periods prior to the completion of the Acquisition, instead of disclosing such information in the notes to the Financial Statements. Accordingly, we have amended and restated the Financial Statements (the “Restatement”). With the Restatement, upon completion of the Acquisition, the Excluded Assets and Liabilities were treated as a deemed disposal in January 2009 and recorded as a distribution from our reserves to Unicom Group. As a result, the Restatement only affects our historical financial statements prior to the completion of the Acquisition in January 2009, and has no material impact on our financial statements for the year ended December 31, 2009 and no impact on the financial statements for the year ended December 31, 2010 and thereafter.

     The Restatement would have an impact on the following financial statements accounts:

		For the year ended December 31,
		2007												2008
		As												As
		previously												previously
		reported				Adjustments				As restated				reported				Adjustments				As restated
		(in RMB millions, except per share data)
CONSOLIDATED INCOME STATEMENT DATA
Continuing operations
Depreciation and amortization			(47,625	)			(3,650	)			(51,275	)			(47,961	)			(3,886	)			(51,847	)
Other operating expenses			(36,353	)			(171	)			(36,524	)			(37,748	)			(249	)			(37,997	)
Finance costs			(3,241	)			(499	)			(3,740	)			(2,423	)			(846	)			(3,269	)
Impairment loss on property, plant and equipment			—				(323	)			(323	)			(11,837	)			(657	)			(12,494	)
Other income — net			5,100				2				5,102				2,097				44				2,141
Total costs, expenses and others			(131,856	)			(4,641	)			(136,497	)			(150,139	)			(5,594	)			(155,733	)
Income from continuing operations before tax			28,084				(4,641	)			23,443				9,653				(5,594	)			4,059
Income from continuing operations			20,909				(4,641	)			16,268				7,825				(5,594	)			2,231
Net income			21,565				(4,641	)			16,924				35,398				(5,594	)			29,804
Earnings per share for income attributable to the equity holders of the Company during the year
-Basic earnings per share (RMB)			0.93				(0.20	)			0.73				1.49				(0.24	)			1.25
-Diluted earnings per share (RMB)			0.92				(0.19	)			0.73				1.48				(0.24	)			1.24
-Basic earnings per ADS (RMB)			9.35				(2.02	)			7.33				14.90				(2.35	)			12.55
-Diluted earnings per ADS (RMB)			9.25				(1.99	)			7.26				14.79				(2.34	)			12.45
Earnings per share for income from continuing operations attributable to the equity holders of the Company during the year
-Basic earnings per share (RMB)			0.90				(0.20	)			0.70				0.33				(0.24	)			0.09
-Diluted earnings per share (RMB)			0.89				(0.19	)			0.70				0.33				(0.24	)			0.09
-Basic earnings per ADS (RMB)			9.06				(2.02	)			7.04				3.29				(2.35	)			0.94
-Diluted earnings per ADS (RMB)			8.97				(1.99	)			6.98				3.27				(2.34	)			0.93
Earnings per share for income from discontinued operations attributable to the equity holders of the Company during the year
-Basic earnings per share (RMB)			0.03				—				0.03				1.16				—				1.16
-Diluted earnings per share (RMB)			0.03				—				0.03				1.15				—				1.15
-Basic earnings per ADS (RMB)			0.29				—				0.29				11.61				—				11.61
-Diluted earnings per ADS (RMB)			0.28				—				0.28				11.52				—				11.52

The Acquisition was completed on January 31, 2009 and therefore the consolidated statement of income for the year ended December 31, 2009 would have included the related charges of approximately RMB334 million for the period from January 1, 2009 to January 31, 2009. However, considering the amounts were not material, we did not restate the consolidated statement of income for the year ended December 31, 2009.

		As of January 1, 2008(1)												As of December 31, 2008
		Before								After				As previously
		adjustments				Adjustments(2)				adjustments				reported				Adjustments				As restated
														(in RMB millions)
CONSOLIDATED BALANCE SHEET DATA
Property, plant and equipment			276,110				30,310				306,420				285,469				30,077				315,546
Lease prepayments			8,063				744				8,807				7,863				875				8,738
Other assets			12,081				659				12,740				9,087				398				9,485
Inventories and consumables			2,815				1				2,816				1,092				55				1,147
Prepayments and other current assets			4,314				867				5,181				2,715				161				2,876
Total assets			334,087				34,348				368,435				348,752				31,566				380,318
Reserves			76,275				1,106				77,381				(15,464	)			(10,494	)			(25,958	)
Long-term loans due to ultimate holding company			—				27,213				27,213				—				35,652				35,652
Accounts payable and accrued liabilities			49,312				12,019				61,331				67,509				6,345				73,854
Taxes payable			4,990				101				5,091				11,307				63				11,370
Total liabilities			155,571				39,575				195,146				141,025				42,060				183,085

		For the year ended December 31,
		2007												2008
		As previously												As previously
OTHER FINANCIAL DATA		reported				Adjustments				As restated				reported				Adjustments				As restated
										(in RMB millions)
Net cash inflow from operating activities of continuing operations			68,854				—				68,854				57,241				—				57,241
Net cash outflow from investing activities of continuing operations			(47,770	)			(6,975	)			(54,745	)			(54,742	)			(6,284	)			(61,026	)
Net cash outflow from financing activities of continuing operations			(29,805	)			6,975				(22,830	)			(35,070	)			6,284				(28,786	)
Net cash outflow from continuing operations			(8,721	)			—				(8,721	)			(32,571	)			—				(32,571	)
Net decrease in cash and cash equivalents			(7,909	)			—				(7,909	)			(2,426	)			—				(2,426	)

     The following items in the Original Form 20-F have been amended in this Amendment No. 1 as a result of the Restatement or the SEC Comments:

Part I — Item 3A — Selected Financial Data

Part I — Item 5 — Operating and Financial Review and Prospects

Part III — Item 18 — Financial Statements

Part III — Item 19 — Exhibits

     We have considered the effect of the Restatement on our assessment of disclosure controls and procedures and internal control over financial reporting. We believe that we have adequately designed procedures to account for the Acquisition and has therefore concluded that our company does not have a material weakness in the internal control over financial reporting in this respect and that our internal control over financial reporting is effective as of December 31, 2009.

     Other than as set forth herein, this Amendment No. 1 does not, and does not purport to, amend, update or restate any other information or disclosure included in the Original Form 20-F or reflect any events that have occurred after the filing date of the Original Form 20-F. Items included in the Original Form 20-F that are not included herein are not amended and remain in effect as of the date of the filing of the Original Form 20-F. Among other things, forward-looking statements contained in the Original Form 20-F have not been revised to reflect events, results or developments that occurred or facts that became known to us after the original filing date, and such forward-looking statements should be read in their historical context. This Amendment No. 1 should be read in conjunction with the Original Form 20-F and our filings made subsequent thereto, including any amendments to those filings. The filing of this Amendment No. 1 shall not be deemed an admission that the Original Form 20-F when made included any untrue statement of material fact or omitted to state a material fact necessary to make a statement not misleading.

In addition, this Amendment No. 1 includes currently dated Section 302 and Section 906 certifications of our Chief Executive Officer and Chief Financial Officer that are attached hereto as exhibits, as pursuant to Rule 13a-13(a) and Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended.

Explanatory Note							i
Part I							1
				Item 3.   Key Information			1
				Item 5.   Operating and Financial Review and Prospects			6
Part III							36
				Item 18.   Financial Statements			36
				Item 19.   Exhibits			36
EX-12.1
EX-12.2
EX-13.1
EX-13.2

PART I

Item 3. Key Information

A. Selected Financial Data

     The following tables present selected historical financial data of our company as of and for each of the years in the three-year period ended December 31, 2009. Except for amounts presented in U.S. dollars, the selected historical consolidated income statement data for the years ended December 31, 2007, 2008 and 2009 and the selected historical consolidated balance sheet data as of December 31, 2008 and 2009 set forth below are derived from, should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements, including the related notes, included elsewhere in this Amendment No. 1 to our annual report on Form 20-F, or Amendment No. 1. The selected historical consolidated balance sheet data as of January 1, 2008 set forth below is derived from our internal records and management accounts that are not included in this Amendment No. 1. As disclosed under “Special Note on Our Financial Information and Certain Statistical Information Presented in This Annual Report” in our annual report on Form 20-F, our consolidated statements of income for the years ended December 31, 2007, 2008 and 2009 and consolidated balance sheets as of December 31, 2008 and 2009 have been prepared and presented in accordance with IFRS/HKFRS.

     We completed (i) acquisitions of fixed-line business in 21 provinces in southern China, the local access telephone business in Tianjin Municipality, three subsidiaries (together referred to as the “Target Business”) and certain other telecommunication assets from Unicom Group and Netcom Group (which was later merged with Unicom Group in January 2009) in January 2009, and (ii) a merger with China Netcom in October 2008. See “A. History and Development of the Company—Acquisitions of Fixed-Line Business in 21 Provinces in Southern China and Other Assets from Parent Companies and Lease of Telecommunications Networks in 21 Provinces in Southern China” and “A. History and Development of the Company—Sale of CDMA Business, Merger with China Netcom and Related Transactions—Merger with China Netcom and Related Transactions” under Item 4, respectively. Because we and the Target Business were under common control of Unicom Group, both prior to and after the acquisitions, and we and China Netcom were under the common control of the PRC Government both prior to and after the merger, each of the acquisitions and the merger is considered as a business combination of entities and businesses under common control, and has been accounted for using merger accounting in accordance with Accounting Guideline 5 “Merger accounting for common control combinations”, or AG 5, issued by the HKICPA in November 2005. In addition, we completed an acquisition of assets and business of the Guizhou Province branch of Unicom Group, or Unicom Guizhou, from Unicom Group in December 2007 and prior to its merger with us, China Netcom completed an acquisition of the entire equity interest of Beijing Planning and Design Institute, or Design Institute, a wholly-owned subsidiary of Netcom Group, in December 2007. Because we and Unicom Guizhou were under the common control of Unicom Group both prior to and after our acquisition of Unicom Guizhou and China Netcom and Design Institute were under the common control of Netcom Group (which merged with, and was absorbed by, Unicom Group in January 2009) both prior to and after China Netcom’s acquisition of Design Institute, both acquisitions have been accounted for using merger accounting in accordance with AG5 issued by the HKICPA. Upon our adoption of IFRS, we adopted the accounting policy to account for business combination of entities and businesses under common control using the predecessor values method, which is consistent with HKFRS. The acquired assets and liabilities mentioned above in this paragraph are stated at historical cost, and are included in the consolidated financial statements included in this Amendment No. 1 as if these entities and their businesses acquired had always been part of our company during all the periods presented. Accordingly, the 2007 and 2008 comparative figures in the consolidated financial information included in this Form 20-F have been restated to reflect the financial position, results of operations and cash flows of these acquired businesses.

     We completed the disposal of our CDMA business in October 2008. See “A. History and Development of the Company—Sale of CDMA Business, Merger with China Netcom and Related Transactions—Disposal of CDMA Business and Related Transactions” under Item 4. In accordance with IFRS/HKFRS 5, “Non-Current Assets Held for Sale and Discontinued Operations”, we recognized the CDMA business as discontinued operations and the CDMA business was presented separately as discontinued operations in our audited consolidated statements of income and statements of cash flows for the years ended December 31, 2007 and 2008.

     Prior to our merger with China Netcom, China Netcom completed the disposal of the fixed-line

telecommunications and related services in its Guangdong and Shanghai branches in February 2007. See “A. History and Development of the Company—History and Corporate Development of China Netcom” under Item 4. After considering that we reacquired the fixed-line business in Guangdong and Shanghai branches in January 2009, we did not present the fixed-line business in Guangdong and Shanghai branches as discontinued operations and derecognized the gain on disposal previously recorded in our 2007 consolidated financial statements.

		For the year ended December 31,
		2007				2008				2009				2009
		As restated				As restated
		RMB				RMB				RMB				US$(1)
		(in millions, except for per share data)
Consolidated Income Statement Data:
CONTINUING OPERATIONS
Revenue(2)
Mobile business
Telecommunication service revenue			62,236				64,240				69,769				10,221
Information communication technology services and other revenue			187				359				252				37
Sales of mobile telecommunications products			14				532				1,970				289
Total mobile telecommunications revenue			62,437				65,131				71,991				10,547
Fixed-line business
Telecommunication service revenue (2)			91,093				88,254				79,549				11,654
Information communication technology services and other revenue			4,782				4,339				1,611				236
Sales of fixed-line telecommunications products			980				1,362				193				28
Total fixed-line telecommunications revenue			96,855				93,955				81,353				11,918
Unallocated amounts
Telecommunication service revenue (2)			420				337				275				40
Information communication technology services and other			228				364				326				48
Sales of other telecommunications products			—				5				—				—
			648				706				601				88
Total revenue			159,940				159,792				153,945				22,553
Total costs, expenses and others			(136,497	)			(155,733	)			(141,668	)			(20,754	)
Income from continuing operations before income tax			23,443				4,059				12,277				1,799
Income tax expenses			(7,175	)			(1,828	)			(2,721	)			(399	)
Income from continuing operations			16,268				2,231				9,556				1,400
DISCONTINUED OPERATIONS(3)
Income from discontinued operations			656				1,438				—				—
Gain on disposal of discontinued operations			—				26,135				—				—
Sub-total for discontinued operation			656				27,573				—				—
Net income			16,924				29,804				9,556				1,400
Earnings per share for income attributable to the equity holders of the Company during the year
-Basic earnings per share(4)			0.73				1.25				0.40				0.06
-Diluted earnings per share(4)			0.73				1.24				0.40				0.06
-Basic earnings per ADS(5)			7.33				12.55				4.02				0.59
-Diluted earnings per ADS(5)			7.26				12.45				4.00				0.59
Earnings per share for income from continuing operations attributable to the equity holders of the Company during the year
-Basic earnings per share(4)			0.70				0.09				0.40				0.06
-Diluted earnings per share(4)			0.70				0.09				0.40				0.06
-Basic earnings per ADS(5)			7.04				0.94				4.02				0.59
-Diluted earnings per ADS(5)			6.98				0.93				4.00				0.59
Earnings per share for income from discontinued operations attributable to the equity holders of the Company during the year
-Basic earnings per share(4)			0.03				1.16				—				—

		For the year ended December 31,
		2007				2008				2009				2009
		As restated				As restated
		RMB				RMB				RMB				US$(1)
		(in millions, except for per share data)
-Diluted earnings per share(4)			0.03				1.15				—				—
-Basic earnings per ADS(5)			0.29				11.61				—				—
-Diluted earnings per ADS(5)			0.28				11.52				—				—
-Number of shares outstanding for basic earnings per share(4)			23,075				23,751				23,767				23,767
-Number of shares outstanding for diluted earnings per share(4)			23,321				23,941				23,895				23,895
-Number of ADS outstanding for basic earnings per ADS(5)			2,308				2,375				2,377				2,377
-Number of ADS outstanding for diluted earnings per ADS(5)			2,332				2,394				2,389				2,389

		As of
		January 1,				As of December 31,
		2008				2008				2009				2009
Consolidated Balance Sheet Data						As restated
		RMB				RMB				RMB				US$(1)
		(in millions, except for per share data)
Cash and cash equivalent and short-term bank deposits			13,555				10,574				8,816				1,292
Property, plant and equipment			306,420				315,546				351,157				51,445
Inventories and consumables			2,816				1,147				2,412				353
Prepayments and other current assets			5,181				2,876				4,252				623
Available-for-sale financial assets			287				95				7,977				1,168
Proceeds receivable for the disposal of the CDMA business			—				13,140				5,121				750
Total assets			368,435				380,318				417,045				61,097
Liabilities
Amounts payable and accrued liabilities			61,331				73,854				104,072				15,247
Long-term loans due to ultimate holding company			27,213				35,652				—				—
Payables in relation to the disposal of the CDMA business			—				4,232				7				1
Short-term bank loans			11,850				10,780				63,909				9,363
Commercial paper			20,000				10,000				—				—
Current portion of long-term bank loans			7,413				1,216				62				9
Current portion of other obligations			3,381				3,012				2,534				371
Long-term bank loans			16,086				997				759				111
Corporate bonds			2,000				7,000				7,000				1,026
Tax payable			5,091				11,370				912				134
Total liabilities			195,146				183,085				210,578				30,850
Shareholders’ equity			173,289				197,233				206,467				30,247
Share capital			1,437				2,329				2,310				339

		For the year ended December 31,
		2007				2008				2009				2009
		As restated				As restated
		RMB				RMB				RMB				US$(1)
		(in millions, except for per share data)
Other Financial Data
CONTINUING OPERATIONS
Net cash inflow from operating activities of continuing operations			68,854				57,241				57,733				8,459
Net cash outflow from investing activities of continuing operations			(54,745	)			(61,026	)			(85,308	)			(12,498	)
Net cash (outflow)/inflow from financing activities of continuing operations			(22,830	)			(28,786	)			30,197				4,423
Net cash (outflow)/inflow from continuing operations			(8,721	)			(32,571	)			2,622				384
DISCONTINUED OPERATIONS(3)
Net cash inflow from operating activities of discontinued operations			837				656				—				—
Net cash (outflow)/inflow from investing activities of discontinued operations			(25	)			29,489				(5,039	)			(738	)
Net cash outflow from financing activities of discontinued operations			—				—				—				—

		For the year ended December 31,
		2007				2008				2009				2009
		As restated				As restated
		RMB				RMB				RMB				US$(1)
		(in millions, except for per share data)
Net cash inflow/(outflow) from discontinued operations			812				30,145				(5,039	)			(738	)
Net decrease in cash and cash equivalents			(7,909	)			(2,426	)			(2,417	)			(354	)
Dividend declared per share			0.20				0.20				0.16				0.02

Exchange Rate Information

     We publish our consolidated financial statements in Renminbi. Solely for the convenience of the reader, this Amendment No. 1 contains translations of certain Renminbi and Hong Kong dollar amounts into U.S. dollars and vice versa at RMB6.8259 = US$1.00 and HK$7.7536 = US$1.00, the noon buying rates in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2009. These translations should not be construed as representations that the Renminbi or Hong Kong dollar amounts could actually be converted into U.S. dollars at such rates or at all.

     The noon buying rates in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York were RMB6.8320 = US$1.00 and HK$7,7935 = US$1.00, respectively, on June 11, 2010. The following table sets forth the high and low noon buying rates between Renminbi and U.S. dollars and between Hong Kong dollars and U.S. dollars for each month during the previous six months:

Noon Buying Rate

		RMB per US$1.00								HK$ per US$1.00
		High				Low				High				Low
December 2009			6.8244				6.8299				7.7495				7.7572
January 2010			6.8258				6.8295				7.7539				7.7752
February 2010			6.8258				6.8330				7.7619				7.7716
March 2010			6.8254				6.8270				7.7574				7.7648
April 2010			6.8229				6.8275				7.7565				7.7675
May 2010			6.8310				6.8245				7.8030				7.7626
June 2010 (up to June 11, 2010)			6.8322				6.8268				7.8040				7.7903

     The following table sets forth the average noon buying rates between Renminbi and U.S. dollars and between Hong Kong dollars and U.S. dollars in 2005, 2006, 2007, 2008 and 2009, calculated by averaging the noon buying rates on the last day of each month during the relevant year.

Average Noon Buying Rate

		RMB per US$1.00				HK$ per US$1.00
2005			8.1826				7.7755
2006			7.9579				7.7685
2007			7.5806				7.8008
2008			6.9193				7.7814
2009			6.8295				7.7513

Item 5. Operating and Financial Review and Prospects

     You should read the following discussion and analysis in conjunction with the selected financial data set forth in Item 3 and our consolidated financial statements, together with the related notes, included elsewhere in this Amendment No. 1.

Acquisitions of Fixed-Line Business in 21 Provinces in Southern China and Other Assets from Parent Companies, Merger with China Netcom, Acquisitions of Unicom Guizhou and Design Institute, and Disposal of CDMA Business and Fixed-Line Business and Assets in Shanghai and Guangdong

     We completed (i) acquisitions of fixed-line business in 21 provinces in southern China, the local access telephone business in Tianjin Municipality, three subsidiaries (together referred to as the “Target Business”) and certain other telecommunication assets from Unicom Group and Netcom Group (which was later merged with Unicom Group in January 2009) in January 2009 and (ii) a merger with China Netcom in October 2008. See “A. History and Development of the Company—Acquisitions of Fixed-Line Business in 21 Provinces in Southern China and Other Assets from Parent Companies and Lease of Telecommunications Networks in 21 Provinces in Southern China” and “A. History and Development of the Company—Sale of CDMA Business, Merger with China Netcom and Related Transactions—Merger with China Netcom and Related Transactions” under Item 4, respectively. Because we and the Target Business were under common control of Unicom Group, both prior to and after the acquisitions, and we and China Netcom were under the common control of the PRC Government both prior to and after the merger, each of the acquisitions and the merger is considered as a business combination of entities and businesses under common control, and has been accounted for using merger accounting in accordance with Accounting Guideline 5 “Merger accounting for common control combinations”, or AG 5, issued by the HKICPA in November 2005. In addition, we completed an acquisition of assets and business of the Guizhou Province branch of Unicom Group, or Unicom Guizhou, from Unicom Group in December 2007 and prior to its merger with us, China Netcom completed an acquisition of the entire equity interest of Beijing Planning and Design Institute, or Design Institute, a wholly-owned subsidiary of Netcom Group, in December 2007. Because we and Unicom Guizhou were under the common control of Unicom Group both prior to and after our acquisition of Unicom Guizhou and China Netcom and Design Institute were under the common control of Netcom Group (which merged with, and was absorbed by, Unicom Group in January 2009) both prior to and after China Netcom’s acquisition of Design Institute, both acquisitions have been accounted for using merger accounting in accordance with AG5 issued by the HKICPA. Upon our adoption of IFRS, we adopted the accounting policy to account for business combination of entities and businesses under common control using the predecessor values method, which is consistent with HKFRS. The acquired assets and liabilities mentioned above in this paragraph are stated at historical cost, and are included in the consolidated financial statements included in this Amendment No. 1 as if these entities and their businesses acquired had always been part of our company during all the periods presented. Accordingly, the 2007 and 2008 comparative figures in the consolidated financial information included in this Form 20-F have been restated to reflect the financial position, results of operations and cash flows of these acquired businesses.

     We completed the disposal of our CDMA business in October 2008. See “A. History and Development of the Company—Sale of CDMA Business, Merger with China Netcom and Related Transactions—Disposal of CDMA Business and Related Transactions” under Item 4. In accordance with IFRS/HKFRS 5, “Non-Current Assets Held for Sale and Discontinued Operations”, we recognized the CDMA business as discontinued operations and the CDMA business is presented separately as discontinued operations in our audited consolidated statements of income and statements of cash flows for the years ended December 31, 2007 and 2008.

     Prior to our merger with China Netcom, China Netcom completed the disposal of the fixed-line telecommunications and related services in its Guangdong and Shanghai branches in February 2007. See “A. History and Development of the Company—History and Corporate Development of China Netcom” under Item 4. After considering that we reacquired the fixed-line business in Guangdong and Shanghai branches in January 2009, we did not present the fixed-line business in Guangdong and Shanghai branches as discontinued operations and derecognized the gain on disposal previously recorded in our 2007 consolidated financial statements.

     Overview

     As a result of our merger with China Netcom in October 2008, we have become an integrated telecommunications operator in China providing mobile voice and value-added, fixed-line voice and value-added, fixed-line broadband, data communications and other telecommunications services to our customers through our two operating segments comprised of mobile services and fixed-line services. Following our acquisition of fixed-line business in 21 provinces in southern China from our parent companies in January 2009, we have extended the coverage of all of our services nationwide. We, China Mobile and China Telecom are the three major telecommunications operators in China. See “A. History and Development of the Company—Restructurings of the Telecommunications Industry” under Item 4.

     The table below sets forth revenues from our major businesses and their respective percentage of our total revenue from continuing operations in 2007, 2008 and 2009 (excluding (i) fixed-line upfront connection fees of RMB1,517 million in 2007, RMB886 million in 2008 and RMB490 million in 2009 and (ii) interconnection revenue of RMB1.00 billion and RMB0.99 billion between certain fixed-line business and the discontinued operations of CDMA business in 2007 and 2008, respectively).

		For the Year Ended December 31,
		2007								2008								2009
		RMB in				As % of				RMB in				As % of				RMB in				As % of
		millions				Total				millions				Total				millions				Total
Continuing Operations
Total revenue (excluding fixed-line upfront connection fees and interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business)(1)			157,426				100.0				157,914				100.0				153,455				100.0
Total telecommunications service revenue (excluding fixed-line upfront connection fees and interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business)			151,235				96.1				150,953				95.6				149,103				97.2
Include: Mobile business			62,236				39.5				64,240				40.7				69,769				45.5
Fixed-line business			88,579				56.3				86,376				54.7				79,059				51.5
Out of which:
Broadband service			16,450				10.4				20,962				13.3				23,898				15.6
Information communication technology services and other revenue			5,197				3.3				5,062				3.2				2,189				1.4
Total sales of telecommunications products.			994				0.6				1,899				1.2				2,163				1.4

     Our telecommunications service revenues from continuing operations primarily consist of the following:

	•		usage fees and monthly fees for our mobile and fixed-line telephone services, which are recognized when we render the service to our customers;
	•		revenue from the provision of value-added services, which is recognized when we render the services to our customers;
	•		revenue from the provision of broadband and other Internet-related services, mainly consisting of Internet access services, and managed data services, which is recognized when we render the service to our customers;
	•		revenue from telephone cards, which is service fees received from customers for telephone services, is recognized when we render the related service upon actual usage of the telephone

			cards by customers;
	•		revenue from interconnection with other telecommunications operators for calls made from their networks to our networks. We recognize interconnection revenue when the relevant calls are made by subscribers;
	•		revenue for offerings which include the sale of mobile handsets and provision of services, the amount of revenue allocated to the handset sale is determined using the residual value method. Under such method, we determine the revenue from the sale of the mobile handsets by deducting the fair value of the service element from the total contract consideration. We recognize revenues related to sale of a handset when the title is passed to the customer whereas service revenues are recognized based upon the actual usage of mobile services. The cost of the mobile handset is expensed immediately to the statement of income.
	•		revenue from information communications technology services, are recognized when goods are delivered to the customers (which generally coincides with the time when the customers have accepted the goods and the related risks and rewards of ownership have been transferred to the customers) or when services are rendered to the customers using the percentage of completion method when the outcome of the services provide can be estimated reliably. If the outcome of the services provided cannot be estimated reliably, the treatment should be as follows: (i) if it is probable that the costs incurred for the services provided is recoverable, service revenue should be recognized only to the extent of reasonable costs incurred, and costs should be recognized as current expenses in the period in which they are incurred, (ii) if it is probable that costs incurred will not be reasonable, costs should be recognized as current expenses immediately and service revenue should not be recognized; and
	•		rental income from leases of customer-end equipment and transmission lines on our networks to business customers and other telecommunications carriers in China. We recognize leased line rental revenue on a straight-line basis over the relevant lease term.

     The following table sets forth our major costs and expenses items and income before income tax, both in terms of amount and as a percentage of total revenue from continuing operations in 2007, 2008 and 2009 (excluding (i) fixed-line upfront connection fees of RMB1,517 million in 2007, RMB886 million in 2008 and RMB490 million in 2009 and (ii) interconnection revenue of RMB1.00 billion and RMB0.99 billion between certain fixed-line business and the discontinued operations of CDMA business in 2007 and 2008, respectively).

		For the Year Ended December 31,
		2007 (as restated)								2008 (as restated)								2009
		RMB in								RMB in								RMB in
		millions				% of Total				millions				% of Total				millions				% of Total
Continuing Operations
Total revenue (excluding fixed-line upfront connection fees and interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business)(1)			157,426				100.0				157,914				100.0				153,455				100.0
Costs, expenses and others			136,497				86.7				155,733				98.6				141,668				92.3
Interconnection charges			12,198				7.7				13,038				8.3				12,955				8.4
Depreciation and amortization			51,275				32.5				51,847				32.8				47,587				31.0
Networks, operations and support expenses			17,877				11.4				18,736				11.9				21,728				14.2
Leasing fee for telecommunications networks in southern China			—				—				—				—				2,000				1.3
Employee benefit expenses			19,398				12.3				20,758				13.1				21,931				14.3
Selling and marketing			19,660				12.5				19,614				12.4				21,020				13.7
Cost in relation to information communication technology services			3,808				2.4				3,010				1.9				839				0.5
General, administrative and other expenses			11,947				7.6				13,217				8.4				12,175				7.9
Cost of telecommunications products sold			1,109				0.7				2,156				1.4				2,689				1.8
Finance costs, net of interest income			3,435				2.2				3,004				1.9				945				0.6
Impairment loss on property, plant and equipment			323				0.2				12,494				7.9				—				—
Realized loss on changes in fair value of derivative component of convertible bonds			569				0.4				—				—				—				—
Realized gains on changes in fair value of derivative financial instrument			—				—				—				—				(1,239	)			(0.8	)
Other income-net			(5,102	)			(3.2	)			(2,141	)			(1.4	)			(962	)			(0.6	)

Our major costs and expenses include the following:

	•		interconnection expenses, representing amounts paid to other operators for calls from our networks to their networks and for calls made by our subscribers roaming in their networks;
	•		depreciation and amortization expenses, mainly relating to our property, plant and equipment and other assets;
	•		networks, operations and support expenses, mainly relating to repair, maintenance and operations of our networks;

	•		leasing fee for telecommunications networks in southern China;
	•		employee benefit expenses, representing staff salaries and wages, bonuses and medical benefits, contributions to defined contribution pension schemes, housing benefits and share-based compensation costs amortized over the vesting period of share options;
	•		selling and marketing expenses, including commissions, promotion and advertising expenses, direct incremental costs for activating subscriber services and customer retention costs;
	•		cost in relation to information communication technology services, primarily including cost of hardware sold ;
	•		general, administrative and other expenses, primarily including provision for doubtful debts, utilities, general office expenses and travel expenses; and
	•		finance costs, net of interest income, primarily including interest expenses, net of interest income.

Critical Accounting Policies

     The preparation of our financial statements and this Amendment No. 1 requires us to make estimates and judgments that affect the reported and disclosed amounts of assets and liabilities, including contingent assets and liabilities, as of the relevant dates and revenue and expenses for the relevant periods. We have identified below the areas involving a higher degree of judgment or complexity, or areas where assumptions are significant to the accounting policies and estimates, as critical to our business operations and an understanding of our results of operations and financial position. The impact and any associated risks related to these policies on our business operations are discussed throughout this Item 5 where such policies affect our reported and expected financial results. For a discussion of the application of these and other accounting policies, see Note 4 to our consolidated financial statements included in this Amendment No. 1. There can be no assurance that actual results will not differ from those estimates and assumptions.

Significant Accounting Policies

Revenue Recognition

     Revenue comprises the fair value of the consideration received or receivable for the services and sales of goods or telecommunications products in the ordinary course of our business activities. Revenue is shown net of business tax, government surcharges, returns and discounts and after eliminating sales within our company.

     We recognize revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of our activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. We base our estimates on historical results, taking into consideration of the type of customer, the type of transaction and the specifics of each arrangement.

     Sales of services and goods

	•		Usage fees and monthly fees are recognized when the services are rendered;
	•		Revenues from the provision of broadband and other Internet-related services and managed data services are recognized when the services are provided to customers;
	•		Revenue from telephone cards, which represents service fees received from customers for telephone services, is recognized when the related service is rendered upon actual usage of the telephone cards by customers;

	•		Lease income from leasing of lines and customer-end equipment are treated as operating leases with rental income recognized on a straight-line basis over the lease term;
	•		Value-added services revenue, which mainly represents revenue from the provision of services such as SMSs, Cool Ringtone, personalized ring, caller number display and secretarial services to subscribers, is recognized when service is rendered;
	•		Standalone sales of telecommunications products, which mainly represent handsets and accessories, are recognized when title has been passed to the buyers;
	•		For offerings which include the sale of mobile handsets and provision of services, the amount of revenue allocated to the handset sale is determined using the residual value method. Under such method, we determine the revenue from the sale of the mobile handsets by deducting the fair value of the service element from the total contract consideration. We recognize revenues related to sale of a handset when the title is passed to the customer whereas service revenues are recognized based upon the actual usage of mobile services. The cost of the mobile handset is expensed immediately to the statement of income.
	•		Revenue from information communications technology services are recognized when goods are delivered to the customers (which generally coincides with the time when the customers have accepted the goods and the related risks and rewards of ownership have been transferred to the customers) or when services are rendered to the customers using the percentage of completion method when the outcome of the services provided can be estimated reliably. If the outcome of the services provided cannot be estimated reliably, the treatment should be as follows: (i) if it is probable that the costs incurred for the services provided are recoverable, services revenue should be recognized only to the extent of recoverable costs incurred, and costs should be recognized as current expenses in the period in which they are incurred; (ii) if it is probable that costs incurred will not be recoverable, costs should be recognized as current expenses immediately and services revenue should not be recognized.

     Interest income

     Interest income from deposits in banks or other financial institutions is recognized on a time proportion basis, using the effective interest method.

     Dividend income

     Dividend income is recognized when the right to receive payment is established.

Deferred Revenue, Advances from Customers and Subscriber Points Reward Program

     Deferred revenue

     Deferred revenue mainly represents upfront non-refundable revenue, including upfront connection fees and installation fees of fixed-line business and receipts from the activation of SIM/USIM cards relating to our mobile businesses, which are deferred and recognized over the expected customer service period.

     Advances from customers

     Advances from customers are amounts paid by customers for prepaid cards, other calling cards and prepaid service fees, which cover future telecommunications services (over a period of one to twelve months). Advances from customers are stated at the amount of proceeds received less the amount already recognized as revenues upon the rendering of services.

     Subscriber points reward program

     The fair value of providing telecommunications services and the subscriber points reward are allocated based on their relative fair values. The allocated portion of fair value for the subscriber points reward is recorded as deferred revenue when the rewards are granted and recognized as revenue when the points are redeemed or expired. The fair value of deferred revenue is estimated based on (i) the value of each bonus point awarded to subscribers, (ii) the number of bonus points related to subscribers who are qualified or expected to be qualified to exercise their redemption right at each balance sheet date, and (iii) the expected bonus points redemption rate. The fair value of the outstanding subscriber points reward is subject to review by management on a periodic basis.

Critical Accounting Estimates and Judgments

Recognition of Upfront Non-refundable Revenue and Direct Incremental Costs

     We defer and amortize upfront activation fees of SIM/USIM cards of the mobile business over the expected customer service period of 3 years (2007: approximately 3 years; 2008: approximately 3 years). The related direct incremental costs of acquiring and activating mobile subscribers, including costs of SIM/USIM cards and commissions, are also capitalized and amortized over the same expected customer service period of 3 years.

     We defer and amortize upfront customer connection and installation fees of the fixed-line business over the expected customer service period of 10 years (2007: approximately 10 years; 2008: approximately 10 years). The related direct incremental installation costs are deferred and amortized over the same expected customer service period of 10 years.

     We only capitalize costs to the extent that they will generate future economic benefits. The excess of the direct incremental costs over the corresponding upfront non-refundable revenue, if any, are expensed to the statement of income immediately.

     We estimate the expected customer service period based on the historical customer retention experience and after factoring in the expected level of future competition, the risk of technological or functional obsolescence to our services, technological innovation, and the expected changes in the regulatory and social environment. If our estimate of the expected customer service period changes as a result of increased competition, changes in telecommunications technology or other factors, the amount and timing of recognition of the deferred revenues and direct incremental costs may change for future periods.

The Acquisition of Target Business (“2009 Business Combination”)

     Our acquisition of Target Business, or the 2009 Business Combination, was considered as a business combination of entities and business under common control, and has been accounted for using merger accounting under HKFRS, which is consistent with the predecessor values method under IFRS.

     When applying the merger accounting/predecessor values method to restate the historical financial statements prior to the effective date of the 2009 Business Combination, we included all the assets and liabilities associated with the Acquired Business and the Telecommunications Networks in southern China in the consolidated balance sheets and all the revenue and expenses in the consolidated statements of income throughout the periods presented, including those assets not acquired and liabilities not assumed as well as the related costs and expenses. Pursuant to the agreement dated December 16, 2008, the 2009 Business Combination excluded the Telecommunications Networks in southern China, which are retained by Unicom New Horizon and are leased from Unicom New Horizon to CUCL effective from January 2009. To reflect the economic substance that we have not taken on the risks and rewards associated with the property, plant and equipment and related assets and liabilities relating to the fixed-line business in southern China, we are deemed to have disposed of the assets and liabilities associated with the Telecommunications Networks in southern China and we have recorded the deemed disposal of these assets and liabilities as a distribution from reserves by us to Unicom Group upon the completion of the 2009 Business Combination effective from January 2009.

     As of December 31, 2008, the total assets and liabilities associated with the Telecommunications Networks in southern China were approximately RMB31,566 million and RMB42,060 million, respectively, which have been included in the consolidated balance sheet as of December 31, 2008 and have been subsequently recorded as a

distribution from reserves to Unicom Group in January 2009 upon the completion of 2009 Business Combination. In addition, the depreciation and amortization, impairment loss, other operating expenses, and finance costs associated with the Telecommunications Networks in southern China for the years ended December 31, 2008 were approximately RMB3,886 million, RMB657 million, RMB249 million, and RMB846 million, respectively (2007: RMB3,650 million, RMB323 million, RMB171 million, and RMB499 million). Subsequent to the completion of the 2009 Business Combination, we recorded leasing fees amounting to approximately RMB2.0 billion charged by Unicom New Horizon for the lease of the Telecommunications Networks in southern China for the year ended December 31, 2009.

Lease of Telecommunications Networks in Southern China

     Pursuant to an agreement in relation to the lease of the fixed-line telecommunications networks in southern China entered between CUCL and Unicom Horizon, Unicom New Horizon has the legal ownership of the fixed-line telecommunications networks in southern China. We believe that we only bear the risks associated with the operation of the fixed-line business in southern China during the relevant leasing periods and are free from any ownership risks of the telecommunications networks, and the risks and rewards of ownership of the leased assets rest substantially with the lessor. The initial term of the lease is two years effective from January 2009 and the lease is renewable at the option of CUCL with at least two months’ prior notice on the same terms and conditions, except for the future lease fee which will remain subject to further negotiations between the parties, taking into account, among others, the then prevailing market conditions in southern China. Moreover, in connection with the lease, Unicom New Horizon has granted to CUCL an option to purchase the telecommunications networks in southern China and the purchase price will be referenced to the then appraised value of the networks determined by an independent appraiser. Accordingly, we have accounted for the leasing of the aforementioned telecommunications networks as an operating lease.

PRC Tax Resident Enterprise

     Pursuant to the PRC enterprise income tax law, a 10% withholding income tax is levied on dividends declared on or after January 1, 2008 by foreign investment enterprises to their foreign enterprise shareholders unless the enterprise investor is deemed as a PRC Tax Resident Enterprise (“TRE”). On April 22, 2009, the PRC State Administration of Taxation issued a notice regarding the determination of PRC TRE status and provided implementation guidance in withholding income tax for non-TRE enterprise shareholders. We performed an assessment and concluded that we meet the definition of PRC TRE. Therefore, as of December 31, 2008 and 2009, our subsidiaries in the PRC did not accrue for withholding tax on dividends distributed to us and there has been no deferred tax liability accrued in our consolidated financial statements for the undistributed income of our subsidiaries in the PRC.

     If the results of our assessment change, the amount of current income tax and deferred income tax will change in future periods.

Depreciation on Property, Plant and Equipment

     Depreciation on our property, plant and equipment is calculated using the straight-line method to allocate cost or revalued amounts up to residual values over the estimated useful lives of the assets. We review the useful lives and residual values periodically to ensure that the method and rates of depreciation are consistent with the expected pattern of realization of economic benefits from property, plant and equipment. We estimate the useful lives of property, plant and equipment based on historical experience, taking into account anticipated technological changes. If there are significant changes from previously estimated useful lives, the amount of depreciation expenses may change.

Revaluation of Property, Plant and Equipment

     Property, plant and equipment other than buildings and telecommunications equipment of the mobile business is carried at revalued amounts, being the fair value at the date of revaluation, less subsequent accumulated

depreciation and accumulated impairment losses. Such equipment is revalued on a depreciated replacement cost or open market value approach, as appropriate, by an independent valuer on a regular basis.

     During the intervals of independent revaluations, management performs the analysis and assessment annually to determine whether the fair values of property, plant and equipment carried at revalued amounts are materially different from their carrying amounts. If the revalued amounts differ significantly from the carrying amounts of such property, plant and equipment in the future, the carrying amounts will be adjusted to the revalued amounts. The key assumptions made to determine the revalued amounts include the estimated replacement costs and the estimated useful lives of the property, plant and equipment. This will have an impact on our future results, since any subsequent decreases in valuation are first set off against increases on earlier valuations in respect of the same item and thereafter are charged as an expense to the statement of income and any subsequent increases are credited as income to the statement of income up to the amount previously charged to the statement of income and thereafter are credited to equity. In addition, the depreciation expenses in future periods will change as the carrying amounts of such property, plant and equipment change as a result of the revaluation.

     Most of our property, plant and equipment which are carried at revalued amounts were revaluated as at December 31, 2006 by an independent valuation firm. We believe that the fair values of these revalued property, plant and equipment were not materially different from their carrying values as of December 31, 2009.

Impairment of Non-Current Assets

     We test whether non-current assets have suffered from any impairment, in accordance with the accounting policy stated in Note 2.11 to the audited consolidated financial statements contained elsewhere in this Amendment No. 1. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. Management estimates value in use based on estimated discounted pre-tax future cash flows of the cash generating unit at the lowest level to which the asset belongs. If there is any significant change in management’s assumptions, including discount rates or growth rates in the future cash flow projection, the estimated recoverable amounts of the non-current assets and our results would be significantly affected. Such impairment losses are recognized in the statement of income, except where the asset is carried at valuation and the impairment loss does not exceed the revaluation surplus for that same asset, in which case the impairment loss is treated as a revaluation decrease and charged to the revaluation reserve. Accordingly, there will be an impact to the future results if there is a significant change in the recoverable amounts of the non-current assets.

     During 2008, we conducted the impairment test for the PHS service related assets, after considering the expected significant decline in revenue and profitability in 2009 and onwards. The impaired PHS business related assets were written down to their recoverable amount, which was determined based on their estimated value in use as there is no active market transaction for PHS business related assets. Estimated value in use was determined based on the present value of estimated future net cash flows expected to arise from the continuing use of the PHS business related assets. In estimating the future net cash flows, we made key assumptions and estimates on the appropriate discount rate of 15%, the period covered by the cash flow forecast of 3 years, the future loss of customers at an annual rate of declining ranging from 60% to 80%, and the decrease in average revenue per subscriber at an annual rate of decline at 15%.

     These assumptions and estimates were made after considering the historical trends, the prevailing market trends and the physical conditions of the PHS business related assets. Changes in these assumptions and estimates could have a significant impact on the estimated recoverable amount. Based on above, we recognized RMB11.84 billion of impairment loss on PHS services related assets at the end of 2008. Our total impairment loss on property, plant and equipment was RMB0.32 billion, RMB12.49 billion and nil for the years ended December 31, 2007, 2008 and 2009, respectively.

Provision for Doubtful Debts

     Accounts receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. We evaluate specific accounts receivable where there are indications that the receivable may be doubtful or is not collectible. We record a provision based on our best estimates to reduce the receivable balance to the amount that is expected to be collected. For the remaining

receivable balances as at each reporting date, we make a provision based on observable data indicating that there is a measurable decrease in the estimated future cash flows from the remaining balances. We make such estimates based on our past experience, historical collection patterns, subscribers’ creditworthiness and collection trends. For general subscribers, we make a full provision for receivables aged over 3 months, which is consistent with our credit policy with respect to the relevant subscribers.

     Our estimate described above is based on past experience, historical collection patterns, subscribers’ creditworthiness and collection trends. If circumstances change (e.g., due to factors including developments in our business and the external market environment), we may need to reevaluate our policies on doubtful debts, and make additional provisions in the future.

Income Tax and Deferred Taxation

     We estimate our income tax provision and deferred taxation in accordance with the prevailing tax rules and regulations, taking into account any special approvals obtained from relevant tax authorities and any preferential tax treatment to which we are entitled in each location or jurisdiction in which we operate. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. We recognize liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

     For temporary differences which give rise to deferred tax assets, we have assessed the likelihood that the deferred tax assets could be recovered. Major deferred tax assets relate to impairment loss on property, plant and equipment, unrecognized revaluation surplus on property, plant and equipment under PRC tax regulations, and provision for doubtful debts. Due to the effects of these temporary differences on income tax, we have recorded deferred tax assets amounting to approximately RMB5,202 million as at December 31, 2009 (2008: approximately RMB5,334 million). Deferred tax assets are recognized based on our estimates and assumptions that they will be recovered from taxable income arising from continuing operations in the foreseeable future.

     We believe we have recorded adequate income tax provision and deferred taxes based on the prevailing tax rules and regulations and our current best estimates and assumptions. In the event that future tax rules and regulations or related circumstances change, adjustments to income tax and deferred taxation may be necessary which would impact our results or financial position.

Recently Issued International Financial Reporting Standards/Hong Kong Financial Reporting Standards

     The IASB has issued a number of new and revised IFRSs and interpretations that are first effective for the current accounting period commencing January 1, 2009 or are available for early adoption. The equivalent new and revised HKFRSs and interpretations consequently issued by the HKICPA have the same effective date as those issued by the IASB and are in all material respects identical to the pronouncements issued by the IASB. There have been no other material changes to HKFRSs.

     Up to the date of issue of our 2009 financial statements, the following new standards and amendments or revisions to existing standards have been issued but not yet effective for the annual accounting period ended December 31, 2009 and have not been adopted by us:

		Effective for annual
		accounting period
		beginning on or after
IFRS/HKFRS 2 (amendments), “Group cash-settled share-based payment transactions”		January 1, 2010
IFRS/HKFRS 3 (revised), “Business combinations”		July 1, 2009
IFRS/HKFRS 9 “Financial instrument”		January 1, 2013
IAS/HKAS 27 (revised), “Consolidated and separate financial statements”		July 1, 2009

		Effective for annual
		accounting period
		beginning on or after
IASB’s improvements to IFRS/HKICPA’s improvements to HKFRS:
IFRS/HKFRS 3 “Business combinations”		July 1, 2010
IFRS/HKFRS 7 “Financial instruments: disclosures”		January 1, 2011
IAS/HKAS 7 (Amendment), “Cash flow statements”		January 1, 2010
IAS/HKAS 17 (Amendment), “Leases”		January 1, 2010
IAS/HKAS 34 “Interim financial reporting”		January 1, 2011
IAS/HKAS 36 (Amendment), “Impairment of assets”		January 1, 2010
IAS/HKAS 38 (Amendment), “Intangible assets”		July 1, 2009
IFRIC/(HK)IFRIC 13 “Customer loyalty programmes”		January 1, 2011

     There are a number of new interpretations including IFRIC/HK (IFRIC) 17 “Distribution of non-cash assets to owners”, IFRIC/HK (IFRIC) 18 “Transfer of assets from customers” and IFRIC/HK(IFRIC) 19 “Extinguishing financial liabilities with equity instruments” as well as the amendment to IFRIC/HK(IFRIC) 14 “Prepayments of a minimum funding requirement” which are not listed above as the interpretations and the amendment are not relevant to our operation and consolidated financial statements. In addition, there are also a number of amendments to IFRS/HKFRS 5, “Non-current assets held for sale and discontinued operations”, IFRS /HKFRS 8, “Operating segments”, IAS/HKAS 1, “Presentation of financial statements” and IAS/HKAS 18, “Revenue” under IASB’s improvements to IFRS/HKICPA’s improvements to HKFRS which are not listed above as the amendments are also not relevant to our operation and consolidated financial statements.

     We are currently in the process of making an assessment of the expected impact of these new standards, and amendments/revisions to existing standards in the period of initial application.

Operating Results

Acquisition of Fixed-Line Telecommunications Business in 21 Provinces in Southern China

     The 2008 and 2007 figures have been restated to reflect the effect of our acquisition of the fixed-line telecommunications business in 21 provinces in southern China from Unicom Group in January 2009, which had been accounted for using merging accounting under HKFRS and predecessor values method under IFRS, which is consistent with HKFRS. In this acquisition, we did not purchase the underlying fixed-line network assets in southern China, but subsequently leased such assets from Unicom New Horizon, a wholly-owned subsidiary of Unicom Group, to operate the acquired fixed-line business. To account for this transaction, we recorded all assets, liabilities, revenue and costs and expenses associated with the acquired fixed-line business in southern China and the underlying network assets in our consolidated financial statements for the historical periods prior to the completion of the transaction in January 2009. Following the completion of this transaction, as we started to lease the fixed-line network assets in southern China, which were retained by the lessor, the assets and liabilities associated with these network assets were treated as a distribution by us to Unicom Group from other reserve using the merger accounting under HKFRS and predecessor values method under IFRS. Accordingly, we no longer include any assets, liabilities, depreciation, finance costs or other costs relating to such assets, but record only revenue generated from the acquired fixed-line business in southern China and the leasing fee for the relevant network assets in our consolidated financial statements for the subsequent periods.

     Please refer to “Explanatory Note” above for the impact of the acquired fixed-line business and the underlying network assets in southern China on assets, liabilities, depreciation, finance costs or other costs for the historical periods in our consolidated financial statements.

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Revenue

     2009 is the first year that we had a full-year operation following our merger with China Netcom. Despite various challenges, including global financial crisis, intensified telecommunications market competition, further downward adjustments in tariffs and decline of traditional fixed-line business, we actively developed full-service operation with a focus on mobile and fixed-line broadband businesses. Revenues from our continuing operations for 2009 amounted to RMB153.95 billion, a decrease of 3.7% from RMB159.79 billion for 2008. Excluding the effects of fixed-line upfront connection fees of RMB0.49 billion and RMB0.89 billion in 2009 and 2008 respectively, and interconnection revenue of RMB0.99 billion between our certain fixed-line business and the discontinued operations of CDMA business in 2008, our revenues from continuing operations for 2009 would amount to RMB153.46 billion, a decrease of 2.8% from RMB157.91 billion in 2008, of which our telecommunications service revenue would be RMB149.10 billion, down by 1.2% from 2008.

Mobile Business Revenue

     Revenue from our mobile business was RMB71.99 billion in 2009, of which telecommunications service revenue accounted for RMB69.77 billion, up by 8.6% compared with 2008. Telecommunications service revenue from our mobile business, as a percentage of our total telecommunications service revenues (excluding fixed-line upfront connection fees of RMB0.49 billion and RMB0.89 billion in 2009 and 2008 respectively, and interconnection revenue of RMB0.99 billion between our certain fixed-line business and the discontinued operations of CDMA business in 2008), increased from 42.6% in 2008 to 46.8% in 2009. The growth in revenue from our mobile business is primarily due to the continued increase in the total number of our mobile subscribers, partially offset by the decrease in our subscribers’ ARPU.

     Our total number of mobile subscribers was 147.59 million as of December 31, 2009, with a net addition of 14.22 million subscribers (including 2.74 million 3G subscribers) from the end of 2008. ARPU of our GSM mobile business was RMB41.2 in 2009, a decrease of 2.64% from RMB42.3 in 2008. ARPU of our 3G business was RMB141.7 in 2009.

     The table below sets forth the revenue composition of our mobile business and each revenue item’s respective share of total revenue for the years ended December 31, 2008 and 2009.

		2008								2009
		RMB in millions				As % of total				RMB in millions				As % of total
Total revenue from mobile business			65,131				100.0				71,991				100.0
Telecommunications service revenue			64,240				98.6				69,769				97.0
Usage fees and monthly fees			40,462				62.1				42,297				58.8
Value-added service revenue			16,263				25.0				19,070				26.5
Interconnection revenue			6,775				10.4				8,220				11.4
Other service revenue			740				1.1				182				0.3
Other revenue			359				0.6				252				0.3
Sales of mobile telecommunications products			532				0.8				1,970				2.7

     Usage Fees and Monthly Fees. As a result of increase of mobile subscribers, partially offset by the decrease in effective tariffs, usage fees and monthly fees for our mobile services were RMB42.30 billion in 2009, an increase of 4.5% from RMB40.46 billion in 2008.

     Value-Added Service Revenue. In 2009, we continued to actively promote mobile value-added services and mobile data business, and improved the penetration of SMS and “Cool Ringtone” services. As a result, revenues from our mobile value-added services amounted to RMB19.07 billion in 2009, an increase of 17.3% from RMB16.26 billion in 2008 and as a percentage of total mobile revenue increased from 25.0% in 2008 to 26.5% in 2009. Of the total revenue from mobile value-added services, revenue from our SMS services decreased by 8.2% from RMB6.52 billion in 2008 to RMB5.98 billion in 2009 and revenue from “Cool Ringtone” services increased by 15.7% from RMB2.49 billion in 2008 to RMB2.88 billion in 2009.

     Interconnection Revenue. Our interconnection revenue increased by 21.3% from RMB6.78 billion in 2008 to RMB8.22 billion in 2009, and represented 11.4% of total mobile revenue in 2009 as compared with 10.4% in 2008. This increase is primarily due to the increased total usage of our mobile services.

     Sales of Telecommunications Products. Revenues from our sale of mobile telecommunications products increased 270.3% from RMB532 million in 2008 to RMB1,970 million in 2009, mainly due to our efforts in sales of 3G mobile handsets.

Fixed-Line Business Revenue

     In 2009, as mobile substitution further intensified and the declining trend of the fixed-line voice business continued, we further adjusted our business structure and continued to focus on the development of fixed-line broadband services and innovative business services. Excluding fixed-line upfront connection fees of RMB0.49 billion and RMB0.89 billion in 2009 and 2008 respectively, and interconnection revenue of RMB0.99 billion between our certain fixed-line business and the discontinued operations of CDMA business in 2008, our revenue from fixed-line business would have decreased by 12.2% from RMB92.08 billion in 2008 to RMB80.86 billion in 2009, of which telecommunication service revenue would have decreased by 8.5% from RMB86.38 billion in 2008 to RMB79.06 billion in 2009. See “D. Risk Factors—We may further lose fixed-line and mobile subscribers and our doubtful debt ratios may increase, which may materially adversely affect our financial condition, results of operations and growth prospects” under Item 3.

     The table below sets forth the revenue composition of our fixed-line business and each revenue item’s respective share of total revenue from our fixed-line business for the years ended December 31, 2008 and 2009.

		For the Year Ended December 31,
		2008								2009
		RMB in millions				As % of Total				RMB in millions				As % of Total
Total revenue from fixed-line business(1)			92,077				100.0				80,863				100.0
Telecommunications service revenue(1)			86,376				93.8				79,059				97.8
Usage fee and monthly fee(1)			40,497				44.0				34,369				42.5
Fixed-line broadband service revenue			20,962				22.8				23,898				29.6
Interconnection revenue			7,342				8.0				5,599				6.9
Value-added service revenue			7,074				7.7				5,238				6.5
Leased line service revenue			5,492				6.0				5,683				7.0
Managed data, other internet-related service revenue			2,662				2.8				2,466				3.0
Others			2,347				2.5				1,806				2.3
Information communication technology services and other revenue			4,339				4.7				1,611				2.0
Sales of fixed-line telecommunications products			1,362				1.5				193				0.2

     Usage Fees and Monthly Fees. Usage fees include local usage fees charged for local telephone calls and VoIP long distance calls, long distance usage fees for domestic and international long distance calls originated by our fixed-line subscribers, users of our pre-paid phone cards and certain other customers. Monthly fees represent the fixed amount of service charges to our customers for using our fixed-line telephone services.

     As a result of further implementation of the “Calling-Party-Pays” tariff policy for mobile services and continuing downward adjustments of tariffs for fixed-line services, the substitution effect of fixed-line local services by mobile services became more intense. We experienced significant decline in the number of our fixed-line local telephone subscribers and substantial decline in revenue. Our local telephone subscribers decreased in 2009 by 6.2%

from 109.57 million at the end of 2008 to 102.82 million at the end of 2009. ARPU of the local telephone business decreased by 11.3% from 2008 to RMB31.4 in 2009. Total usage of local calls decreased by 8.9% from 2008 to 185.54 billion pulses in 2009 (excluding Internet dial-up usage) and total usage of long distance calls decreased by 18.3% from 41.11 billion minutes in 2008 to 33.58 billion minutes in 2009. As a result, revenues from our usage fees and monthly fees in 2009 decreased by 15.1% from RMB40.50 billion in 2008 to RMB34.37 billion in 2009.

     Fixed-Line Broadband Service Revenue. Revenue from our fixed-line broadband services consists of revenue generated from DSL, LAN, and broadband-related value-added services. In 2009, our fixed-line broadband business continued to maintain a rapid growth as a result of our efforts in improving broadband access speed, enriching application contents and implementing diversified sales strategies. Our fixed-line broadband subscribers increased by 28.2% from 2008 to 38.55 million in 2009. ARPU of our fixed-line broadband business decreased from RMB63.6 in 2008 to RMB57.2 in 2009, mainly because: (i) a significant portion of our new broadband subscribers consist of users from rural areas in China who tend to have limited usage of broadband services, and (ii) the general decreasing tariff resulted from intensified market competition. However, revenues from our fixed-line broadband service increased significantly by 14.0% from 2008 to RMB23.90 billion in 2009, and as a percentage of the fixed-line service revenue, increased from 22.8% in 2008 to 29.6% in 2009. Fixed-line broadband service has become the main factor in counteracting the effect of mobile substitution in the decline of our fixed-line voice business.

     Interconnection Revenue. Revenue from our interconnection services consists of interconnection fees charged to other domestic telecommunications operators, principally China Mobile and China Telecom, for both local and long distance calls. Revenue from our interconnection services decreased by 23.7% from RMB7.34 billion in 2008 to RMB5.60 billion in 2009. The decrease in interconnection revenue was mainly due to a decrease in voice traffic from other telecommunications operators as a result of the mobile substitution effect.

     Value-Added Service Revenue. Revenue from our value-added services consists of fees that we charge our customers for the provision of caller identification, personalized ring, telephone information services, video- and tele-conferencing and other value-added services. Revenue from our value-added services decreased by 26.0% from RMB7.07 billion in 2008 to RMB5.24 billion in 2009, mainly due to the decrease in usage of our caller identification and PHS SMS services as a result of the significant reduction of our fixed-line telephone subscribers, including PHS subscribers.

     Leased Line Service Revenue. Revenue from our leased line services consists of fees that we receive from our government, corporate and carrier customers for leasing circuit capacity to them, including the lease of digital circuits, digital trunk lines and optic fibers. Revenue from our leased line services increased by 3.5% from RMB5.49 billion in 2008 to RMB5.68 billion in 2009, mainly due to the increased demand of leased line services by our government and SME customers.

     Managed Data Service and Other Internet-Related Service Revenue. Revenue from our managed data services consists of fees that we charge for our DDN, frame relay, ATM, MPLS-VPN and X.25 services. Revenue from our managed data services increased by 3.7% from RMB1.41 billion in 2008 to RMB1.46 billion in 2009. Revenue from other Internet-related services consists of revenue from the provision of Internet dial-up services (other than communication fees) and dedicated Internet access services. Revenue from other Internet-related services decreased by 19.8% from RMB1.25 billion in 2008 to RMB1.01 billion in 2009.

     Others. Other fixed-line related revenue mainly consists of miscellaneous revenue items. Other fixed-line related revenue decreased by 23.1% from RMB2.35 billion in 2008 to RMB1.81 billion in 2009.

     Information communication technology services and other revenue. Information communication technology services and other revenue decreased by 62.9% from RMB4.34 billion in 2008 to RMB1.61 billion in 2009. This decrease was mainly due to the decrease in our ICT service revenue as a result of the change in our ICT business strategy which is changed to focus on the provision of technology/services and reducing hardware sales. In 2009, we reduced sales of third-party products in connection with the provision of our ICT services, which, despite reducing our direct revenue, helped enhance the profit margin, of our ICT services.

     Sales of Telecommunications Products. Revenue from our sales of fixed-line telecommunications products decreased by 85.8% from RMB1.36 billion in 2008 to RMB0.19 billion in 2009, mainly due to the decrease in sales

of computers bundled with our fixed-line broadband services in 2008.

Costs, Expenses and Others

     Total costs, expenses and others for our continuing operations in 2009 were RMB141.67 billion, representing a decrease of 9.0% from RMB155.73 billion in 2008. Excluding the effects of the following non-comparable items: (i) realized gains of RMB1.24 billion on changes in fair value of derivative financial instrument in 2009; (ii) impairment loss of RMB11.84 billion on PHS services related equipment in 2008; and (iii) gain of RMB0.04 billion from the non-monetary assets exchange in 2009 and RMB1.31 billion in 2008, our total costs, expenses and others for our continuing operations in 2009 would have been RMB142.95 billion, representing a decrease of 1.6% from RMB145.20 billion in 2008.

     The table below sets forth the major items of costs, expenses and others from continuing operations and their respective percentage of the total telecommunications services revenue from continuing operations for the years 2008 and 2009:

		For the Year Ended December 31,
		2008 (as restated)								2009
		RMB in millions				% of Total				RMB in millions				% of Total
Continuing Operations
Total telecommunications services revenue(1)			150,953				100.0				149,103				100.0
Costs, expenses and others			155,733				103.2				141,668				95.0
Interconnection charges			13,038				8.6				12,955				8.7
Depreciation and amortization			51,847				34.3				47,587				31.9
Networks, operations and support expenses			18,736				12.4				21,728				14.6
Leasing fee for telecommunications networks in southern China			—				—				2,000				1.3
Employee benefit expenses			20,758				13.8				21,931				14.7
Selling and marketing			19,614				13.0				21,020				14.1
Cost in relation to information communication technology services			3,010				2.0				839				0.6
General, administrative and other expenses			13,217				8.8				12,175				8.2
Cost of telecommunications products sold(1)			2,156				1.4				2,689				1.8
Finance costs, net of interest income			3,004				2.0				945				0.6
Impairment loss on property, plant and equipment			12,494				8.3				—				—
Realized gains on changes in fair value of derivative financial instrument			—				—				(1,239	)			(0.8	)
Other income-net			(2,141	)			(1.4	)			(962	)			(0.7	)

     Interconnection Charges. Interconnection charges were RMB12.96 billion in 2009, down by 0.6% from 2008 and as a percentage of telecommunications service revenue (excluding fixed-line upfront connection fees and interconnection revenue between our certain fixed-line business and the discontinued operations of CDMA business in 2008) would remain stable in 2009.

     Depreciation and Amortization. Our depreciation and amortization expenses were RMB47.59 billion in 2009, down by 8.2% from 2008. The decrease was primarily due to the following factors (i) we no longer record any depreciation of the fixed-line network assets in southern China as a result of our acquisition from Unicom Group of the telecommunications business in 21 provinces in southern China in 2009 (see “—Acquisition of Fixed-Line Telecommunications Business in 21 Provinces in Southern China” above), (ii) our full provision of the impairment loss on the PHS service related equipment in 2008, and (iii) to a lesser extent, the full depreciation of certain property, plant and equipment (other than the fixed-line network assets in southern China) in 2008. This decrease was partially offset by the increase in the depreciation and amortization expenses of 3G network assets of RMB0.65

billion in the fourth quarter of 2009. As a percentage of telecommunications service revenue (excluding fixed-line upfront connection fees and interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business in 2008), our depreciation and amortization expenses decreased from 34.3% in 2008 to 31.9% in 2009.

     Networks, Operations and Support Expenses. Due to various factors, including the launch of 3G services, the expansion of GSM networks facilities and base stations and the increases in utilities charges and repair and maintenance expenses, we incurred networks, operations and support expenses of RMB21.73 billion in 2009, up by 16.0% from 2008. Networks, operations and support expenses, as a percentage of telecommunications service revenue (excluding fixed-line upfront connection fees and interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business in 2008), increased by 2.2% from 2008 to 14.6% in 2009. As a result of network resources sharing and utilization of synergies, the related line leasing fees was RMB1.19 billion, down by 22.7% from 2008.

     Leasing Fee for Telecommunications Networks in Southern China. We completed an acquisition of fixed-line business of 21 provinces in southern China in January 2009. As the underlying telecommunications networks for such business are retained by Unicom Group, we operated those networks through an operating lease from Unicom Group from January 2009. As a result, we incurred a lease fee of RMB2.00 billion for leasing those telecommunications networks in 2009.

     Employee Benefit Expenses. Due to various factors, such as increased employee insurance premium expenses and housing fund resulting from new regulations and generally improved social average wages in China, our employee benefit expenses increased by 5.7% from 2008 to RMB21.93 billion in 2009, and as a percentage of telecommunications service revenue (excluding fixed-line upfront connection fees and interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business in 2008), increased from 13.8% in 2008 to 14.7% in 2009.

     Selling and Marketing Expenses. Since the commercial launch of 3G business on October 1, 2009, we have been engaged in active advertising campaigns and marketing promotion activities, which resulted in a total selling and marketing expenses for the fourth quarter of 2009 of RMB1.17 billion. In 2009, our total selling and marketing expenses reached RMB21.02 billion, up by 7.2% from 2008, and as a percentage of telecommunications service revenue (excluding fixed-line upfront connection fees and interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business in 2008), increased from 13.0% in 2008 to 14.1% in 2009.

     Cost in Relation to Information Communication Technology Services. We adjusted the development strategy in relation to our ICT business by focusing on the provision of technology services and reducing hardware sales. As a result, cost in relation to information communication technology in 2009 was RMB0.84 billion, down by 72.1% from last year. Correspondingly, revenue from ICT services in 2009 was RMB1.04 billion, down by 71.9% from last year.

     General, Administrative and Other Expenses. As we continued to benefit from the post-merger synergies and to closely control the growth of general and administrative expenses, our general, administrative and other expenses was RMB12.18 billion in 2009, down by 7.9% compared with last year, and as a percentage of telecommunications service revenue (excluding fixed-line upfront connection fees and interconnection revenue between certain fixed-line business and the discontinued operations of CDMA business in 2008), slightly decreased from 8.8% in 2008 to 8.2% in 2009.

     Cost of Telecommunications Products Sold. As a result of the increase in the number of mobile handsets sold after the commercial launch of 3G business, the cost of telecommunications products sold amount to RMB2.69 billion, up by 24.7% from 2008. Correspondingly, revenue from sale of telecommunications products in 2009 amounted to RMB2.16 billion, up by 13.9% from 2008.

     Finance Costs, Net of Interest Income. In 2009, we further improved our debt structure by enhancing the centralization of fund management and fund operation and obtained low-cost financing. In addition, due to the following factors: (i) reduction of base lending rate and the increase in the amount of capitalized interest related to

the construction we undertook in 2009, and (ii) we no longer record any finance costs associated with the fixed-line network assets in southern China as a result of our acquisition from Unicom Group of the telecommunications business in 21 provinces in southern China in 2009 (see “—Acquisition of Fixed-Line Telecommunications Business in 21 Provinces in Southern China” above), our finance costs, net of interest income, decreased by 68.5% from RMB3.00 billion in 2008 to RMB0.95 billion in 2009.

     Impairment Loss on Property, Plant and Equipment

     Our impairment loss on property, plant and equipment was nil in 2009 and RMB12.49 billion in 2008, mainly consisting of impairment loss on PHS services related equipment and fixed-line network assets in southern China.

     Upon the completion of our merger with China Netcom, we reconsidered our strategy relating to the PHS business. As we expected that the economic performance of the PHS business would deteriorate significantly, we prepared an updated analysis and forecast accordingly to determine if there had been an impairment of assets. After considering the expected significant decline in revenue and profitability in 2009 and onwards, we conducted an impairment test for the PHS business related assets. See “D. Risk Factors—Risks Relating to Our Business—If we fail to achieve a smooth discontinuation of PHS services or retain our PHS subscribers to use our other telecommunications services, our financial condition and results of operations may be adversely affected.” under Item 3. Accordingly, we recognized an impairment loss on PHS business related equipment of approximately RMB11.84 billion for the year ended December 31, 2008. As of December 31, 2009, we updated the impairment analysis for the PHS business related equipment and concluded that there was no need for additional recognition or reversal of the previously recognized impairment loss. In addition, we no longer record any impairment loss associated with the fixed-line network assets in southern China as a result of our acquisition from Unicom Group of the telecommunications business in 21 provinces in southern China in 2009 (see “—Acquisition of Fixed-Line Telecommunications Business in 21 Provinces in Southern China” above).

     Realized Gain on Changes in Fair Value of Derivative Financial Instrument. In order to strengthen our cooperation with Telefónica, we entered into a subscription agreement with Telefónica on September 6, 2009, pursuant to which each party completed the mutual investment of an equivalent of USD1 billion in each other through an acquisition of the other party’s shares on October 21, 2009. At the inception of the subscription agreement on September 6, 2009, our agreement to undertake the above mutual investment with Telefónica was accounted for as a derivative financial instrument in accordance with IAS/HKAS 39 “Financial instrument: Recognition and measurement”, as it represents a forward contract for the purchase of shares by Telefónica and us in each other at predetermined fixed prices and is denominated in a foreign currency. The derivative financial instrument was derecognized upon completion of the transaction on October 21, 2009. The changes in the fair value of the derivative financial instrument during the period from September 6, 2009 to October 21, 2009 resulted in a fair value gain of approximately RMB1.24 billion, which has been recorded in the consolidated statement of income for the year ended December 31, 2009.

     Other Income-Net. In 2009, other income-net was RMB0.96 billion, down by 55.1% from 2008, of which, gain on non-monetary assets exchanged in connection with our replacement of copper cables in some of our fixed-line network regions with optical fibers was RMB0.04 billion, down by RMB1.27 billion from 2008.

Income Before Income Tax

     In 2009, our income before income tax was RMB12.28 billion, up by 202.5% from 2008, mainly due to (i) we had provision for impairment loss on PHS business related equipment for 2008 but none for 2009 and (ii) a significant decrease in costs and expenses because (A) we no longer record depreciation, finance or other costs associated with the fixed-line assets in southern China as a result of our acquisition from Unicom Group of the telecommunications business in 21 provinces in southern China in 2009, and (B) the resulting decrease in depreciation, finance or other costs is greater than the amount of the leasing fee that we started to incur in 2009 with respect to such fixed-line assets (see “—Acquisition of Fixed-Line Telecommunications Business in 21 Provinces in Southern China” above).

     In order to ensure the comparability of income before tax and income for the year, we exclude the

following non-comparable factors that are reflected in the figures of 2008 and 2009 for additional analysis purpose:

	(1)		deferred fixed-line upfront connection fees of RMB0.49 billion for 2009 and RMB0.89 billion for 2008;
	(2)		gain of RMB0.04 billion from the nonmonetary assets exchange for 2009 and RMB1.31 billion for 2008;
	(3)		realized gain of RMB1.24 billion on changes in fair value of derivative financial instrument in 2009; and
	(4)		impairment loss of RMB11.84 billion on PHS services related equipment in 2008.

     After excluding the above factors, our income from continuing operations before income tax would be RMB10.51 billion, down by 23.3% from 2008. Such decrease is mainly due to two reasons: (i) the decline of fixed-line voice business, which has been a consistent trend in recent years due to further intensified mobile substitution and contraction of PHS industry; and (ii) the initial development stage of our 3G business, during which we incurred significant costs in connection with 3G network operations and business development increased in a much more rapid rate than the increase of our revenues from the 3G business. Such decrease in income from continuing operations before income tax was partially offset by the decrease in our total costs and expenses in 2009 as discussed above.

Income Tax

     Our income tax for continuing operations was RMB2.72 billion in 2009, up by 48.9% from 2008, and our effective tax rate in 2009 was 22.2%. After excluding the factors discussed under Income Before Income Tax above, our effective tax rate in 2008 and 2009 would be 32.6% and 22.9%, respectively.

Net Income for the Year

     In 2009, our net income from continuing operations reached RMB9.56 billion, up by 328.3% from 2008. Our basic earnings per share was RMB0.402 in 2009. After excluding the factors discussed under the subsection Income Before Income Tax above, our net income from continuing operations would be RMB8.11 billion, down by 12.3% from 2008.

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Revenue

     In 2008, we experienced various challenges, including changes in the economic environment, a further intensified trend of mobile substitution in our fixed-line business and downward adjustments in mobile roaming tariffs, as well as the telecommunications industry restructuring. By improving customer value, promoting bundling of fixed-line and mobile services and the application of value-added services, we maintained stable revenue from continuing operations. Revenues from continuing operations for 2008 amounted to RMB159.79 billion, a decrease from RMB159.94 billion for 2007. Excluding fixed-line upfront connection fees of RMB0.89 billion and RMB1.52 billion in 2008 and 2007, respectively, and interconnection revenue of RMB0.99 billion and RMB1.00 billion between our certain fixed-line business and the discontinued operations of CDMA business in 2008 and 2007 respectively, our revenues from continuing operations for 2008 would amount to RMB157.91 billion, representing a increase of 0.3% from RMB157.43 billion in 2007, of which our telecommunications service revenue was RMB150.95 billion, representing a decrease of 0.2% from RMB151.24 billion in 2007, and revenue from sale of telecommunications products was RMB1.90 billion, representing an increase of 91.1% from RMB0.99 billion in 2007.

Mobile Business Revenue

     Revenue from our mobile business grew in 2008. Revenue from our mobile business increased by 4.3% from RMB62.44 billion in 2007 to RMB65.13 billion in 2008. Telecommunication service revenue from our mobile business, as a percentage of our total telecommunication service revenues (excluding fixed-line upfront connection fees of RMB0.89 billion and RMB1.52 billion in 2008 and 2007, respectively, and interconnection revenue of RMB0.99 billion and RMB1.00 billion between our certain fixed-line business and the discontinued operations of CDMA business in 2008 and 2007 respectively), from continuing operations, increased from 41.2% in 2007 to 42.6% in 2008. The growth in revenue from our mobile business is primarily due to the continued increase in the total number of our total mobile subscribers, partially offset by the decrease in our subscribers’ ARPU.

     Our total number of mobile subscribers was 133.37 million as of December 31, 2008, an increase of 10.6% from 120.56 million as of December 31, 2007. Total usage of our mobile services was 376.67 billion minutes, an increase of 10.3% from 2007. ARPU from our mobile business was RMB42.3 in 2008, a decrease of 7.4% from RMB45.7 in 2007. This decrease was primarily due to (i) our decreasing effective tariffs, which mainly resulted from pricing competition with other telecommunication operators in China and downward adjustments on tariffs by the PRC Government (which may continue in the future); and (ii) the fact that a significant portion of our incremental market consists of users from rural areas in China, many of whom tend to have less usage of telecommunications services (mobile services, in particular) and are more cost-sensitive than users from urban areas. The average MOU decreased by 1.3%, from 249.7 minutes in 2007 to 246.4 minutes in 2008, primarily due to the fact that a significant portion of our incremental market consists of users from rural areas in China, many of whom tend to have less usage of telecommunications services than urban users. See “D. Risk Factors—We may further lose subscribers in particular, fixed-line subscribers, which may materially adversely affect our financial condition, results of operations and growth prospects” under Item 3.

     The table below sets forth the revenue composition of our mobile business and each revenue item’s respective share of total mobile revenue for the years ended December 31, 2007 and 2008.

		2007								2008
		RMB in millions				As % of total				RMB in millions				As % of total
Total revenue from mobile business			62,437				100.0				65,131				100.0
Telecommunications service revenue			62,236				99.7				64,240				98.6
Usage fees and monthly fees			42,077				67.4				40,462				62.1
Value-added service revenue			13,528				21.7				16,263				25.0
Interconnection revenue			5,767				9.2				6,775				10.4
Other services revenue			864				1.4				740				1.1
Other revenue			187				0.3				359				0.6
Sales of mobile telecommunications products			14				0.0				532				0.8

     Usage Fees and Monthly Fees. As a result of our tariff adjustments in response to intense market competition and the MIIT’s roaming charges adjustment in 2008, usage fees and monthly fees for our mobile services were RMB40.46 billion in 2008, a decrease of 3.8% from RMB42.08 billion in 2007, and as a percentage of our total mobile revenue, decreased from 67.4% in 2007 to 62.1% in 2008.

     Value-Added Service Revenue. As a result of our promotion of the value-added business, revenues from our mobile value-added services amounted to RMB16.26 billion in 2008, an increase of 20.2% from RMB13.53 billion in 2007 and as a percentage of total mobile revenue increased from 21.7% in 2007 to 25.0% in 2008. Of the total revenue from value-added mobile services, revenue from our SMS services increased by 8.8% from RMB5.99 billion in 2007 to RMB6.52 billion in 2008; revenue from “Cool Ringtone” services increased by 34.6% from RMB1.85 billion in 2007 to RMB 2.49 billion in 2008; and revenue from caller identification services increased by 15.0% from RMB3.26 billion in 2007 to RMB3.75 billion in 2008. In addition, as we further expanded the coverage of our GPRS services and improved the quality of our GPRS network in 2008, our GPRS services grew significantly in 2008, and revenue from our GPRS services increased by 705.8% from RMB155 million in 2007 to RMB1,249 million in 2008 and its share of total mobile service revenue increased from 0.2% in 2007 to 1.9% in 2008.

     Interconnection Revenue. Our interconnection revenue increased by 17.5% from RMB5.77 billion in 2007 to RMB6.78 billion in 2008, and represented 10.4% of total mobile revenue in 2008 as compared with 9.2% in 2007. This increase is primarily due to the increased total usage of our mobile services.

     Sales of Telecommunications Products. Revenues from our sale of mobile telecommunications products increased 3,700% from RMB14 million in 2007 to RMB532 million in 2008, mainly due to the establishment of our subsidiary, Unicom Vsens Telecommunications Company Limited, in August 2008, which was principally engaged in sales of mobile handsets and telecommunications equipment and provision of technical services.

Fixed-Line Business Revenue

     In 2008, as mobile substitution further intensified and the declining trend of the fixed-line voice business continued, we further adjusted our business structure and continued to focus on the development of fixed-line broadband services. Excluding fixed-line upfront connection fees of RMB0.89 billion and RMB1.52 billion in 2008 and 2007, respectively, and interconnection revenue of RMB0.99 billion and RMB1.00 billion between our certain fixed-line business and the discontinued operations of CDMA business in 2008 and 2007 respectively, our revenue from fixed-line business would have decreased by 2.4% from RMB94.34 billion in 2007 to RMB92.08 billion in 2008, of which telecommunications service revenue would have decreased by 2.5% from RMB88.58 billion in 2007 to RMB86.38 billion in 2008. See “D. Risk Factors—We may further lose subscribers in particular, fixed-line subscribers, which may materially adversely affect our financial condition, results of operations and growth prospects” under Item 3.

     The table below sets forth the revenue composition of our fixed-line business and each revenue item’s respective share of total revenue from our fixed-line business for the years ended December 31, 2007 and 2008.

		For the Year Ended December 31,
		2007								2008
		RMB in millions				As % of Total				RMB in millions				As % of Total
Total revenue from fixed-line business(1)			94,341				100.0				92,077				100.0
Telecommunications service revenue(1)			88,579				93.9				86,376				93.8
Usage fee and monthly fee(1)			47,908				50.8				40,497				44.0
Fixed-line broadband service revenue			16,450				17.4				20,962				22.8
Interconnection revenue			7,799				8.3				7,342				8.0
Value-added service revenue			7,084				7.5				7,074				7.7
Leased line service revenue			4,433				4.7				5,492				6.0
Managed data, other internet-related service revenue.			2,363				2.5				2,662				2.8
Others			2,542				2.7				2,347				2.5
Information communication technology services and other revenue			4,782				5.1				4,339				4.7
Sales of fixed-line telecommunications products			980				1.0				1,362				1.5