Telecom as a gift for the people of Hong Kong and the

Work in progress on the painting commissioned by Hongkong

Telecom as a gift for the people of Hong Kong and the

government of the new Hong Kong Special Administrative

Region, 1 July 1997. Noted architectural artist Ben Johnson

spent almost two years in the creation of this showpiece,

which measures 6 X 12 feet. The cover of this Report shows a

portion of the original black and white working drawing.

CONTENTS

2 Financial highlights

4 Shareholder information

6 Directors and senior management

8 Chairman’s statement

10 Chief Executive’s report

15 Operational review

24 Financial review

32 Directors’ report

34 Notice of annual general meeting

35 Report of the auditors

36 Consolidated profit and loss account

37 Balance sheets

38 Consolidated cash flow statement

39 Notes to the financial statements

55 Principal subsidiary and associated companies

56 Supplementary information for ADR holders

58 Ten-year financial review

60 Ten-year statistical review

62 Milestones

63 Glossary of terms

Corporate profileHongkong Telecom is Hong Kong’s major full service

telecommunications provider, marketing a complete range of

quality voice and data telecommunications services backed by a

state-of-the-art fully digital fibre-optic network.

The Company has several ‘world-firsts’ for telecommunications,

and is actively developing leading-edge applications for

interactive multimedia services technology.

International telecommunications are facilitated by the

Company’s sophisticated network of fibre-optic cable and

satellite connections.

Hongkong Telecom is 59% owned by Cable & Wireless which is

the world’s fourth largest carrier of international traffic, provides

mobile communications in more than 30 countries and operates

the world’s largest, most advanced cableship fleet. The

combination of Cable & Wireless’ worldwide expertise and

Hongkong Telecom’s regional experience makes us a powerful

global force.

Hongkong Telecom shares are listed on the Hong Kong Stock

Exchange and in the form of American Depositary Receipts on

the New York and Pacific Stock Exchanges. Hongkong Telecom

this year had turnover of some $33 billion.

The Company truly lives its corporate philosophy: “What can

be imagined, can be achieved.”

2

Financial highlights

1997 1996 Growth

Turnover $M 32,578 29,405 10.8%

Operating profit $M 12,203 11,093 10.0%

Profit attributable to shareholders $M 11,178 9,939 12.5%

Earnings per share cents 97.2 88.8 9.5%

Dividend per share cents 76.3 67.8 12.5%

Dividend payout % 78.5 76.3 –

Turnover $ billion

Operating profit $ billion

Profit attributable to shareholders $ billion

’93

’94

’95

’96

’97

21.6

24.3

26.9

29.4

32.6

7.3

8.6

9.8

11.1

12.2

’93

’94

’95

’96

’97

6.4

7.6

8.7

9.9

11.2

’93

’94

’95

’96

’97

3

H O N G K O N G T E L E C O M A N N U A L R E P O R T 1 9 9 7

ANALYSIS OF TURNOVER AND OPERATING PROFIT

For the year ended 31 March

Turnover Operating Profit

1997 1996 1997 1996$M $M $M $M

Telecommunications services 29,804 26,537 11,859 10,430

Equipment sales and rental 1,860 1,806 75 362

Computer, engineering and other services 914 1,062 269 301

32,578 29,405 12,203 11,093

’93

’94

’95

’96

Dividend per share cents

43.4

51.0

59.3

67.8

Dividend payout %

75.3

75.3

76.0

76.3

Earnings per share cents

57.7

67.8

78.0

88.8

’93

’94

’95

’96

’97

76.3

’93

’94

’95

’96

’97

78.5

97.2

’97

4

Shareholder information

FINANCIAL CALENDAR

Financial Year Ended

31 March 1997

Financial Year Ending

31 March 1998

LISTINGS

Hongkong Telecom shares are listed on the Hong Kong, New York and Pacific Stock Exchanges.

The listings on the New York and Pacific Exchanges are in the form of American Depositary

Receipts (ADRs).

Hongkong Telecom is subject to the regulations of the United States Securities and Exchange

Commission (SEC) as they apply to foreign companies whose securities are registered with the

SEC. As required by the United States securities laws, Hongkong Telecom will file an annual

report on Form 20-F with the SEC before 30 September 1997. Once filed, a copy of the

Form 20-F may be obtained from either of the following:

Kin Yu

Group Manager, Investor Relations

Hong Kong Telecommunications Limited

37th Floor, Hongkong Telecom Tower

TaiKoo Place, 979 King’s Road

Quarry Bay, Hong Kong

PO Box 9896 GPO Hong Kong

Telephone: +852 2888 6373

Fax: +852 2962 5003

Thomas E McDonnell

Vice President, Investor Relations

Hong Kong Telecommunications Limited

777 Third Avenue, 35th Floor

New York, NY 10017, USA

Telephone: +212 407 2050

Fax: +212 593 9069

Annual General Meeting ...................................... 4 July 1997

Final Dividend payable on or about .....................11 July 1997

Dividend payable to ADR holders on or about .... 25 July 1997

Interim Results announcement ..................... November 1997

1998 Interim Dividend payable ......................December 1997

Annual Results announcement ............................... May 1998

Report and financial statements published .............. June 1998

Annual General Meeting ........................................ July 1998

1998 Final Dividend payable .................................. July 1998

5


COMPANY SECRETARY

David N Prince

REGISTERED OFFICE

39th Floor

Hongkong Telecom Tower

TaiKoo Place, 979 King’s Road


Telephone: 2888 2888

Fax: 2877 8877

Email: [email protected]

Telex: 73240 HKTC HX

REGISTRARS

Central Registration Hong Kong

Limited

Rooms 1901-5, Hopewell Centre

183 Queen’s Road East, Hong Kong

ADR DEPOSITARY

Citibank, N.A.

111 Wall Street

New York, NY 10043, USA

Telephone: 1 800 422 2066 (toll free)

DIVIDEND

Subject to approval by shareholders at the forthcoming Annual General Meeting, the proposed

final dividend for the year ended 31 March 1997 will be payable on or about 11 July 1997 to

shareholders who are registered in Hong Kong with Central Registration Hong Kong Limited at

the close of business on 30 May 1997. Shareholders will again be offered a scrip alternative to

the cash dividend.

This dividend will be payable on or about 25 July 1997 to ADR holders who are registered with

the Company’s ADR Depositary, Citibank, N.A., at the close of business on 29 May 1997.

SUPPLEMENTARY INFORMATION FOR ADR HOLDERS

Shares in Hongkong Telecom are listed in the United States in the form of ADRs under

the sponsorship of its depositary agent, Citibank, N.A. Each ADR is equivalent to

10 ordinary shares of the Company.

No tax is payable in Hong Kong by withholding or otherwise except in respect of dividends

payable to certain persons carrying on a trade, profession or business in Hong Kong. ADR

holders unsure of their tax position should consult their independent tax adviser.

ADR holders registered on the books of the ADR Depositary in New York at close of business on

29 May 1997 can vote by proxy at the Annual General Meeting by completing a voting

instruction card which will be sent to them. Alternatively, an ADR holder may appoint a

discretionary proxy, usually the Chairman of the Meeting, by marking the designated box on the

voting instruction card.

Additional information and specific enquiries concerning Hongkong Telecom ADRs should

be directed to the Company’s ADR Depositary at the address shown above.

Other enquiries regarding the Company should be addressed to either: Tom McDonnell,

Vice President, Investor Relations or Kin Yu, Group Manager, Investor Relations, at the

addresses given on page 4.

6

Directors and senior management

Dr N Brian Smith * CBE

Chairman

Dr Brian Smith, age 69, was appointedChairman of Hongkong Telecom inNovember 1995 and has also served asChairman of Cable and Wireless plcfrom November 1995. A Non-ExecutiveDirector of Cable and Wireless plc forsix years, 1989-95, he has also been theNon-Executive Chairman of BritishAirport Authority plc since August1991. He is a fellow of the CharteredInstitute of Marketing and aCompanion of the British Institute ofManagement. Dr Smith was appointeda Commander of the British Empire inJune 1980.

Linus W L Cheung JP

Chief Executive

Linus Cheung Wing Lam, age 49, hasbeen Chief Executive of HongkongTelecom since March 1994 with overallresponsibility for the Company’soperations in Hong Kong, China and theregion. He is a Director of HongkongTelecom and was named an ExecutiveDirector of Cable and Wireless plc inJanuary 1995. Mr Cheung serves on theGovernor’s Business Council and is theChairman of the Management Board ofthe School of Business at the Universityof Hong Kong. Prior to joining HongkongTelecom, Mr Cheung was DeputyManaging Director of Cathay PacificAirways Limited.

Dr The Hon David K P Li *OBE, JP

Non-Executive Deputy Chairman

David Li, age 58, has been DeputyChairman of Hongkong Telecom sinceDecember 1987. He is also Chairman andChief Executive of the Bank of East Asia.Dr Li represents the Finance Constituencyin the Legislative Council of Hong Kong andalso serves on the Provisional Legislature,which will replace the Legislative Council inJuly 1997. He is also a Member of theExchange Fund Advisory Committee,Banking Advisory Committee, and HongKong Association of Banks (ExecutiveCommittee), as well as Chairman of theChinese Banks’ Association.

Richard H Brown *Non-Executive Deputy Chairman

Richard Brown, age 50, was appointedNon-Executive Deputy Chairman ofHongkong Telecom in August 1996following his appointment, in July 1996,as Chief Executive of Cable andWireless plc. He was formerly Presidentand Chief Executive of H & R Block,Inc, the parent company ofCompuServe. Prior to joining H & RBlock, he was Vice Chairman ofAmeritech Corporation. In atelecommunications career spanning 27years, he has also worked with Ohio Belland Sprint Corporation.

Norman K T Yuen JP

Deputy Chief Executive

Norman Yuen Kee Tong, age 48,was named a Deputy Chief Executive inSeptember 1995. He is responsible formaximising revenue and contributionfrom local and value added services,mobile, interactive multimedia and fixedmobile integration (FMI) in the HongKong market and in greater China. Hewas formerly Managing Director,Corporate Development andOperations. Mr Yuen joined theCompany in 1986 and was appointed aDirector in 1993.

Alistair R GrieveDeputy Chief Executive

Alistair Grieve, age 42, was appointed aDirector and a Deputy Chief Executiveof Hongkong Telecom in November1995. He is responsible for maximisingcontribution from international trafficand developing new internationalproducts. In addition, he is accountablefor the expansion of the carrier andwholesale markets; local networkoperation and development; andregulatory and strategic planning. Priorto this appointment, Mr Grieve wasPresident and Representative Directorof Cable and Wireless (Japan) Limited.

Roy WilsonExecutive Director

Roy Wilson, age 55, was namedExecutive Director, Customer Servicein March 1997. He has responsibilityfor delivering excellent customer serviceand enhancing the Company’s serviceculture. In addition, he will work acrossHongkong Telecom to improve businessprocesses and productivity. Mr Wilsonwas formerly Vice-President andGeneral Manager for Sprint NorthCentral Operations. He joined Sprint in1985 where he held various positionsincluding Vice-President for Service,Operations and Consumer Markets.Mr Wilson was previously with AT&TInternational.

David N PrinceFinance Director

David Prince, age 45, was namedFinance Director of Hongkong Telecomin December 1994. He is responsiblefor overall financial and legal functions,and is the key interface with investorsand analysts. He is also responsible forproperty development and operation.He is a Director of Hongkong Telecomand a Director of most HongkongTelecom subsidiary companies as well asa Director of Asia SatelliteTelecommunications (Holdings)Company Limited. Prior to hisappointment in Hong Kong, Mr Princewas Director of Marketing of Cable &Wireless Business Networks.

7


Sir S Y Chung * GBE, JP

Non-Executive Director

Sir S Y Chung, age 79, has served as aDirector of the Company since 1988. Aformer Senior Member of both theLegislative and Executive Councils, hecontinues to lead a distinguished life ofpublic service. In January 1996 he wasappointed to the Preparatory Committee ofthe Hong Kong Special AdministrativeRegion (HKSAR) and in January 1997, hewas appointed Convenor of the HKSARExecutive Council, which is to play animportant role in the final months of thetransition and the formative years of thenew HKSAR Government.

Dr Victor K K Fung * CBE

Non-Executive Director

Dr Fung, age 51, has served as aDirector of Hongkong Telecom for fiveyears. He is Chairman of PrudentialAsia, as well as Chairman of the HongKong Trade Development Council. DrFung also serves as Chairman of the Li& Fung Group, a leading Hong Kong-based regional trading company. In1996, Dr Fung was appointed byGovernment to serve as the Hong KongRepresentative on the APEC BusinessAdvisory Council (ABAC).

Robert E Lerwill *Non-Executive Director

Robert E Lerwill, age 44, was appointedto the Board in March 1997, havingjoined Cable and Wireless plc asExecutive Director, Finance in January1997. He was formerly Group FinanceDirector of WPP Group plc, the world’slargest marketing services group. Priorto that, he worked for Arthur Andersen& Co. for 10 years, specialising incorporate finance functions includingStock Exchange flotations andacquisitions. He is a member of theNottingham University InterimLeadership Board.

Vernon F Moore *Non-Executive Director

Vernon Moore, age 50, was appointed aDirector in January 1996. He is DeputyManaging Director of CITIC PacificLimited and Executive Director ofChina International Trust & InvestmentCorporation Hong Kong (Holdings)Ltd. Mr Moore joined the CITICGroup in Hong Kong in 1987 after 18years in the banking and financialservices industries. He is a Non-Executive Director of Cathay PacificAirways Limited, China Light & Power,Manhattan Card and the New HongKong Tunnel Company.

Rodney J Olsen *Non-Executive Director

Rod Olsen, age 51, joined Cable &Wireless in 1977 in Hong Kong. He wasappointed Director, Far East and Pacificof Cable and Wireless plc in 1986 andDirector, Finance of that Company in1987. He played a major role in thecorporate restructuring of thatCompany, serving in a variety of seniorpositions. Since July 1996 Mr Olsen hasbeen Deputy Group Chief Executive ofCable and Wireless plc, the majorshareholder of Hongkong Telecom. Hehas been a Director of HongkongTelecom since 1987.

Henry H L Fan *Non-Executive Director

Henry H L Fan, age 48, has been aDirector of the Company since 1990.Mr Fan is the Managing Director ofCITIC Pacific Limited, the listedinvestment arm of the CITIC Group inHong Kong. He is also a DeputyChairman of Cathay Pacific AirwaysLimited, a Director of China Light &Power Company, a Non-ExecutiveDirector of the Securities and FuturesCommission and a Member of theStanding Committee on Company LawReform.

* Members of the Audit Committee

8

Chairman’s statement

The figures speak for themselves. Hongkong Telecom

has delivered a solid return to shareholders through

sound financial management, an adherence to the

highest quality standards and through an intense

commitment to creating and living a culture that

emphasises the importance of the customer at all

levels of the organisation.

Following this strong performance, the directors have

recommended a final dividend of 41.7 cents, which brings the

total dividend for the year to 76.3 cents, an increase of 12.5

per cent over last year’s dividend of 67.8 cents. Once again,

shareholders will be offered a scrip alternative to the cash

dividend.

The Board has been further strengthened this year with the

appointment in August of Richard H Brown as a Director and

a Deputy Chairman. Dick Brown is also Chief Executive of

Cable and Wireless plc. During a 27-year career in the

telecommunications industry, he has gained a deep knowledge

of our business and has been closely involved in the

transformation of telecommunications in the USA. He is

certainly a valuable asset to the Board.

In March of this year, we announced the appointment of

Roy A Wilson as Executive Director, Customer Service.

Roy has had extensive knowledge and experience in customer

service management and in driving productivity improvements

within the highly competitive US telecommunications

environment. He will build on the Company’s achievements in

these areas.

I am pleased to welcome Robert E Lerwill as Non-Executive

Director. Robert was appointed to the Board in March and is

also Executive Director, Finance at Cable and Wireless plc. He

was previously Group Finance Director of WPP Group plc,

the world’s largest marketing services group.

DR N BRIAN SMITHChairman

I am pleased to report that, after 21 months of liberalisation

in the local telecommunications market, Hongkong Telecom

has again recorded a satisfactory financial performance.

In this challenging and demanding environment, the figures

speak for themselves. Hongkong Telecom has delivered a solid

return to shareholders through an intense commitment to

creating and living a culture that emphasises the importance

of the customer at all levels of the organisation, together with

an adherence to the highest quality standards, sound financial

management and the provision of an increasingly exciting

range of products.

This approach has delivered. During this financial year

Hongkong Telecom’s turnover rose 10.8 per cent to $32.6

billion, compared with $29.4 billion in 1996. Earnings per

share also increased, rising from 88.8 cents in 1996 to 97.2

cents, an improvement of some 9.5 per cent.

9


Jonathan Solomon stood down as a Director at the end of this

financial year. I would like to extend my deep thanks to Jonathan

for his valuable contribution to the Board throughout his tenure.

I am confident the board and the management team have the

experience and depth to enable Hongkong Telecom to reach

the ambitious goals we aim to achieve during the coming

financial year.

Sadly, in February this year, Malcolm Brown, our Director of

Legal Services & Company Secretary, died suddenly. Malcolm

was appointed to his role in 1990 and made a significant

contribution to the development of Hongkong Telecom. He will

be sorely missed by all at Hongkong Telecom.

One area where Non-Executive Directors are actively engaged

is in the Audit Committee. Established two years ago, this

Committee has met regularly during this past 12 months, and

continues its role of reviewing our internal controls and

assuring the financial aspects of good corporate governance.

This is done in accordance with the spirit of the influential

Cadbury Report, released in the UK in 1992, which

recommended the adoption of the highest standards of

reporting and controls within public companies.

Today, the combined effects of strong corporate governance

and a pervasive customer service culture enable Hongkong

Telecom to maintain its position as a “best in class” operator,

delivering solid value to shareholders and exceptional products

and services to an increasingly sophisticated marketplace.

Hongkong Telecom will continue to deliver on its promise to

provide the very best — not just to shareholders and

customers, but to the community of Hong Kong.

As we embark on a new financial year and a new era in Hong

Kong, we remain fully committed to and engaged in delivering

the best products, services and support to our customers, both

today and in the future. Our continued success will not only

enable us to serve our customers better, but also to provide

tangible value to our shareholders.

After the end of the financial year, in May 1997, we were

advised that an agreement had been reached for the sale of all

of the 7.74 per cent of Hongkong Telecom shares held by

CITIC Pacific Limited to China Everbright Holdings

Company Limited, a significant enterprise under the

leadership of the State Council of the PRC. We welcome this

transaction which represents a substantial investment of

Chinese State capital and a demonstration of continued

confidence in Hongkong Telecom and in Hong Kong through

the 1997 transition and beyond.

Dr N Brian Smith

Chairman

10

Chief Executive’s report

This approach has resulted in greater focus on the specific

needs of our customers, and bold moves such as introducing a

new mobile phone brand which gained more than 50,000

customers in the four months since launch.

By any standards, Hongkong Telecom’s performance this year

has been strong. When placed in the context of the rapidly

changing conditions in both the local and international markets,

these results demonstrate the success of our efforts to turn

challenges into opportunities and to manage our own destiny.

We have achieved solid growth in turnover, profits and,

importantly, dividends per share compared to the previous

year. I am pleased to report strong growth in our core

businesses including a steady increase in our international

traffic levels.

In line with our programme of rebalancing our portfolio of

earnings in order to reduce our dependence on IDD, turnover

from telecoms services other than IDD has been increased by

18 per cent while the proportion of total revenue derived from

IDD has been reduced to 53 per cent compared to 56 per cent

the previous year.

Our financial success has been underpinned by an overriding

emphasis on productivity and efficiency plus rigorous cost

control, a management programme designed to prepare and

equip our employees for the challenges of the future and, of

course, by excellent customer service. A newly-formed

LINUS W L CHEUNGChief Executive

Hongkong Telecom has achieved what it set out to do last year,

again delivering results with double-digit growth in revenues

and profits.

Our achievements over the last 12 months clearly show that to

succeed in today’s intensely competitive telecommunications

market, one must continue to develop new services and new

revenue streams while closely monitoring costs.

Instead of complaining about competition, we have embraced

it. And in doing so we have not only grown our business and

revenues, we have developed into a telecommunications

company that offers truly best-in-class service to all our

customers.

What is behind this evolution? First, we believe in our own

competence. Second, we reached out to our customers — we

listened, and then delivered solutions which responded to

their needs.

11


Directorate of Customer Service (March 1997) will continue

to build upon this solid base.

Let me illustrate some of the drivers behind our continued

success as a world-class telecommunications company.

For example, we:

• are Asia’s premier telecommunications hub, serving over

500 multinational customers

• have invested in and now operate an all-digital network

comprising over 200,000 kilometres of fibre-optic cable

• re-invested more than $5 billion during this year in

infrastructure improvements and new services

• operate Asia’s largest satellite earth station

• have fibre-optic links to more than 1,000 buildings in

Hong Kong

• have IDD agreements covering 232 destinations

• generate among the highest revenue per employee of any

telecoms company in the world

• have more fixed and mobile customers per employee than

nearly any other telecoms company in the world

• offer mobile Automatic International Roaming services to

45 countries

• have among the lowest operating expenses per customer of

any telecoms company in the world

In last year’s Annual Report, I outlined the Company’s three-

pronged strategy for growth: compete and grow Hongkong

Telecom’s business locally; develop our international business

position to the full; and continue to invest prudently in China

and the region. I am pleased to report at the end of this year

that we have moved forward significantly in achieving

these goals.

First, we have introduced new local services which create new

revenue streams from new customers. We have also packaged

and bundled many of our existing services in more user-

friendly ways. As a result, basic local service revenues are up

overall compared to last year. We have increased revenue from

value-added services by 26 per cent, while growing data

services by 25 per cent and mobile by 43 per cent. We have

also introduced a programme to stimulate second-line

penetration to support home fax and computer-based services.

Second, we have achieved an increase in the use of our

international networks in an environment of competitive

pricing. Overall international telephone traffic volume is up 12

per cent, while the network capacity delivering dedicated

access services such as International Private Leased Circuits

(IPLCs) has grown by 42 per cent. Our international hubbing

capability has been significantly enhanced through a

combination of expanded connectivity, reduced costs and

new products.

The third prong of the strategy was to make prudent regional

investments. This we have done, most recently with our

involvement in China’s Beijing-Jiujiang-Kowloon cable project.

In Taiwan, we have directly invested in the TTNS

telecommunications consortium. In Singapore, together with

Cable & Wireless and local partners, we have continued to

12


Communications Service (PCS) networks has ensured that the

mobile market in Hong Kong continues to be hotly contested.

Eventual configuration of the market has yet to unfold.

International

Key factors for continued success in the international arena

are stimulating growth in traffic volume, managing the

downward trend in accounting rates and continuing to

increase connectivity to the rest of the world. The scope and

nature of international liberalisation and accounting rate

fluctuations, along with competition in Hong Kong, will

continue to present new challenges for Hongkong Telecom’s

international revenue growth.

While international traffic is up 12 per cent overall, China

traffic growth was steady at 6 per cent, influenced by the

recovery of traffic inbound from the PRC to 4 per cent

compared to 1.2 per cent in 1996. Traffic growth for the rest of

the world was a healthy 17 per cent.

Over the past few years we have invested more than $3 billion in

the submarine cables that play such a vital role in maintaining

Hong Kong’s position as the region’s telecommunications hub

of choice.

A WORLD-CLASS INNOVATOR

We now offer a far more flexible and better integrated range of

product mix and telecommunications services. New packaging

and bundling of features has helped make our products and

services easy for customers to understand, buy and use. More

invest in the new MobileOne cellular network and are actively

pursuing a new fixed telecommunications network licence.

OUR MARKETS

The arena in which Hongkong Telecom operates can be

viewed as two main markets — local and international — each

having different drivers for growth.

Local

Key factors in the local market are the regulatory environment,

the ability to deliver services which add value, and remaining

competitive in the mobile business.

The local market is becoming more competitive, and we

continue our efforts with the regulator to establish a level

playing field for all — in terms of both the degree of price

flexibility accorded to Hongkong Telecom and the pace of

liberalisation, which are controlled by legislation and the

Office of the Telecommunications Authority (OFTA).

At the same time, Hongkong Telecom has leveraged the

intelligence and sophistication of its 100 per cent digital

switching network to tailor value-added services that meet the

requirements of specific customer groups. These efforts are

geared toward helping our customers do business in their own

markets — the hotel industry, for instance — as well as toward

growing our existing customer base.

Hongkong Telecom CSL Mobile remains the market leader,

despite increasing pressure from other cellular carriers as well

as new operators. The advent of six new Personal

13


than ever, customers can pick and choose precisely the

communications combination they require. This approach will

generate new revenue streams and has already won over new

customers.

1997 was a year of many achievements. One of the more

outstanding successes was our Netvigator Internet service

which, in only one year of operation, has become the clear

leader in one of the world’s most heavily-contested markets.

Never content to rest on its laurels, Hongkong Telecom is also

developing a new market for broadband services, beginning

with the introduction of interactive television (iTV) in July

1997. A ‘world-first’ product offering, this will bring

interactive entertainment, education, financial services and

much more into Hong Kong’s homes.

The launch earlier this year of Hongkong Telecom’s Caller

Display service added a whole new dimension to telephone-

based communications, putting customers in control of when,

where and with whom they communicate.

CHINA

This year has also brought Hong Kong a step closer to

reunification with China. As the territory returns to Chinese

sovereignty, all the signs indicate that the new Special

Administrative Region (SAR) will continue to expand what is

already one of the world’s greatest commercial success stories.

China is Hongkong Telecom’s single largest

telecommunications traffic partner, and the Hong Kong-China

route is the fourth busiest in the world. China last year lowered

its international tariffs by 30%, which was a factor in

encouraging 6 per cent growth in traffic between the territory

and the mainland. Hongkong Telecom is well placed to benefit

from this situation, and to take advantage of recent

improvements in the investment climate.

We look forward to further integrating our advanced

infrastructure with that of the mainland and to helping China

further develop its own telecommunications capabilities

through partnership and joint ventures.

OUR BUSINESS FOCUS

Having successfully met our objectives to date, we are setting

even higher standards for ourselves. In 1997/98, we will:

• continue to improve upon our already high levels of

customer satisfaction through excellent service and

innovation

• continue to invest in value-added services and grow this

revenue stream

• grow our international traffic and strengthen Hongkong

Telecom’s position as the leading regional

telecommunications hub

• grow our leading market share in the Internet service

provider market and offer our customers even greater

transmission speeds

• increase the mobile customer base and continue our focus

on the customer through further market segmentation

• launch interactive television (iTV)

14

• work towards a position where market forces rather than

regulations determine the prices we are able to offer

customers

• realise the value of our extensive property portfolio in

Hong Kong

• continue to seek out and develop regional business

opportunities

• continue to improve our productivity through programmes

of cost control and revenue enhancement

MANAGEMENT BY EXCELLENCE

We continue to focus on efficiency in our operations and on

providing the best in service to our customers — judged by

world standards.

In our dynamic environment, having employees who are

empowered and able to manage change is critical. Operation

Excel aims to create a performance-based culture underpinned

by a sense of individual confidence and a willingness to

undertake bold new initiatives. This programme is a means for

management to reach out to staff, to define and implement the

management style Hongkong Telecom must employ in order to

win in this fiercely competitive environment. Positive bottom-

line results will be delivered in conjunction with programmes

of revenue enhancement and cost control.

THE FUTURE

The advantages of our fully digital network should never be

underestimated. It is the key that will allow us to open the

door to evolutionary products like iTV, on-line retail


applications and the next generation of “virtuality”

applications that are already on the drawing board.

Advanced solutions, coupled with the freedom for individuals

to tailor precisely how people interact with our products, will

allow us to deliver still higher levels of service. It will also,

quite naturally, bring us even closer to our customers.

And, as Hong Kong enters a new era, Hongkong Telecom will

continue to enhance its already significant regional and global

connectivity. Together with Cable & Wireless we will play a

leading role in the development of telecommunications... not

just at home, but in the region and on the global stage.

Linus W L Cheung

Chief Executive

15


Operational review

Hongkong Telecom’s performance during this year has

demonstrated the Company’s ability to adapt to change while

simultaneously identifying and capitalising on new areas of

opportunity.

In an increasingly competitive environment, Hongkong Telecom

met all of the key performance objectives it set last year.

We have made good progress in rebalancing Hongkong

Telecom’s portfolio of earnings. Local and value-added

services grew and the relative contribution of international

telephone services was further reduced.

More than that, we got to know our customers better. We did

a better job of providing them with the products they really

want. We made it much easier for them to obtain and use

those products. And our customers have rewarded us with

their loyalty by making Hongkong Telecom their telecoms

provider of choice.

As the territory gears up to celebrate its return to China,

Hongkong Telecom is firmly on track, maintaining margins

and stimulating growth through the development of innovative

and new revenue streams.

CREATING VALUE FOR SHAREHOLDERS AND OUR

CUSTOMERS

Hongkong Telecom remains deeply committed to delivering

value — to shareholders through sound financial management;

and to customers by adhering to the highest quality standards,

by providing innovative and relevant products, and by offering

excellence in all areas of customer service.

An important ingredient in this approach has been the

technological advances made possible by capitalising on

Hongkong Telecom’s superior network. This technical edge has

been blended with the skill and expertise of our people and the

depth of their understanding of customer needs. Living a

16

Operational review

A singular blend of innovation,

quality and service makes

Hongkong Telecom a premium

telecoms provider – and one of

the best telecoms companies in

the world today.

The innovations of the last year have not simply been customer

led. They have been customer focused — to meet needs that

customers may not have realised they have.

More weight has been placed on brand and image in the

marketplace. Extending our reach into the market by

improving sales channels and developing new ones has also

been emphasised. Our new business partners include

convenience stores, photo outlets, video rental stores, public

transport systems and even the Hong Kong Post Office.

Our business customers are partners as well. What is good for

their business is good for ours. For example, we have worked

with our hotel partners to provide innovative guest services

such as in-room Internet access, which cater more to the needs

of the modern business traveller. And our leading-edge

technology will be there to help them and their customers

move easily into the twenty-first century.

OUR BUSINESS ENVIRONMENT — REGULATORY ISSUES

During the year under review Hongkong Telecom has taken a

proactive role in working with Government on the introduction

of competition in Hong Kong, creating conditions intended to

give the new network operators and ourselves an opportunity to

compete fairly and equally. We will continue with our efforts to

have the regulator adopt the level playing field which will enable

us to compete effectively in a contestable market.

Callback operators, including our local competitors, have

offered deeply discounted international calls. These discounts

customer service culture from top management down to each

customer service operator comprises a sometimes invisible yet

tangible competitive advantage.

OUR CUSTOMER FOCUS

Over the last year Hongkong Telecom has more precisely

targeted the unique needs of its various customer bases,

dividing general categories into increasingly focused and

unique groupings. This allows the Company to offer a higher

degree of personalisation in products and in customer service,

as well as the opportunity to develop stronger relationships

with high-value customers.

Our goal is to retain existing customers and attract new ones.

A major initiative has been the move to consolidate loyalty

programmes and points schemes that exist across our business

into a single master redemption plan. Through initiatives like

number one partners, this will allow all our fixed-line, mobile

and IMS customers to enjoy greater benefits as a result of their

commitment to Hongkong Telecom.

17


have stimulated total traffic, but have enabled our competitors

to make inroads into Hongkong Telecom’s IDD revenue

stream and market share. We have responded successfully with

a range of competitive offerings including call plans and a

strong focus on quality customer service. As a result, we

reduced the rate of share loss in the second half of the year.

Callback has brought about a substantial increase in inbound

traffic – and settlement payments – from the United States. A

similar trend worldwide has resulted in continued pressure

from the US to reduce international accounting rates, and

proposals by the Federal Communications Commission

(FCC) and the International Telecommunications Union

(ITU) to re-assess accounting rate levels and structures.

Hongkong Telecom believes that accounting rate restructuring

is too complex an issue to be resolved quickly or through

unilateral initiatives and that accounting rates should be

negotiated in a multilateral forum such as the ITU.

In April 1996 OFTA confirmed Hongkong Telecom

International’s exclusive right to provide public IDD services.

However, it also proposed to authorise new competitive

international services including virtual private network services

and the international simple resale of facsimile and data

services, all of which it considers to be outside the exclusivities

of Hong Kong Telecom International Limited. It is proposed

that these services will be licensed shortly.

THE LOCAL MARKET

Hongkong Telecom has continued to rebalance its portfolio of

products and services to increase revenue from local services

and reduce the company’s dependence on IDD revenue.

The PhoneMail message handling service, which was one of our

most successful products during the year, has grown revenue by

95 per cent. And on the residential front, Homefax 3 is still

providing a powerful single-line solution for home phone and fax

PhoneMail subscription number of subscribers

18,3

56

75,2

73

91,1

09

’95

’96

’97

Local digital data circuit capacity Mbps

284

571

864

1,15

9

1,45

4

1,95

7

3,14

9

5,12

4

9,16

1

17,5

66

’89

’90

’91

’92

’93

’94

’95

’96

’97

’88

18

needs while providing two separate numbers. Homefax 3 has

added 34,000 customers in the last 12 months.

In September, Hongkong Telecom launched the territory’s first

ATM service, based on leading-edge Asynchronous Transfer

Mode technology that can transmit data at an impressive

155Mbps. A state-of-the-art solution that combines price

flexibility with a tremendous capacity for expansion, this is

part of the Business Solutions programme designed to meet

the specialist needs of business users.

The launch of Hongkong Telecom’s Datapak ISDN in October

has energised the voice, data and video communications

markets. A next-generation ISDN solution, Datapak ISDN

delivers high-bandwidth connectivity at a new low price point

and allows any customer to make connections more quickly, to

communicate at higher speeds and pass voice, video and data

through a single medium.

Our Caller Display service has added a whole new dimension to

telephone-based communications, giving our customers more

freedom and more flexibility in how and with whom they

communicate. Over 93,000 customers have taken up the new

service since launch in December.

Hongkong Telecom’s fully digital network, which stood at

120,000 kilometres of fibre-optic cable at the end of last year,

has grown by some 65 per cent, reaching more than 200,000

kilometres at the end of this financial year.

Operational review

Caller Display subscription number of subscribers

38,3

03

64,6

80

80,4

56

93,6

98

Dec

’96

Jan

’97

Feb

’97

Mar

’97

The power and capability of

Hongkong Telecom’s

sophisticated digital

network gives customers

more control of when,

where and with whom they

communicate.

19


that customers are able to utilise advanced new solutions now,

instead of waiting for them to arrive... eventually.

Hongkong Telecom will continue working with companies in

other fields to develop and deliver even more innovative and

useful products and services to our customers.

THE INTERNATIONAL MARKET

On the international front, this past year presented a number

of business opportunities as well as the challenges of further

competition.

In China, Hongkong Telecom successfully negotiated new

business partnerships including the appointment of Fujian

Bamin Telecommunications as its agent for IT products and

services in Fujian and in China. The commissioning of the

Beijing-Jiujiang-Kowloon fibre-optic cable in mid 1997 will

further strengthen the Company’s links with the mainland.

These developments were complemented by two other

initiatives — YY Shops and One2Free — aimed at making

technology fun and easy to use. The first in a chain of

Hongkong Telecom YY Shops — for the young and the young-

at-heart — opened in Kowloon, offering an exciting and

unique retail experience as well as exceptional value for money.

Products on sale there include Hongkong Telecom’s new mass-

market mobile telephone brand — One2Free (see Mobile

section).

We have also partnered with product developers to bring

services to local consumers more quickly, purchasing products

from other vendors as well as developing our own — and

thereby leading the world in the field of systems integration,

most notably in the area of Interactive Multimedia Services

(IMS).

Examples include HongkongBank’s MONDEX electronic cash

solution and Wellcome’s IMS cyber-shopping application which

is featured on Netvigator, our Internet service. The benefit is

Hongkong Telecom is

becoming a ‘carrier’s

carrier’, winning traffic from

other carriers simply by

combining the best service

with the best connectivity

at the best price.

Total capacity in invested digital cable digital voice or data 64k circuits

10,1

40

12,2

10

13,6

20

20,9

40

21,6

30

26,7

90

32,2

50

36,0

60

’90

’91

’92

’93

’94

’95

’96

’97

China land cable Submarine cable

5,76

0

5,76

0

17,2

80

17,2

80

28,8

00

28,8

00

28,8

00

44,1

60

20

The launch of the Asia Pacific Cable Network (APCN) in

January heralded a new era in telecommunications as well as

international co-operation. Built at a cost of more than

US$524 million, the project was backed by Hongkong

Telecom along with Cable & Wireless and 50 international

carriers from around the globe.

A further three new submarine cable systems are in the

pipeline for Hongkong Telecom and its partners. The first is

FLAG, the Fibre-optic Link Around the Globe. The second is

SEA-ME-WE 3, the South East Asia-Middle East-Western

Europe system. The third, as yet unnamed, will be the first

undersea fibre-optic cable to connect China with the United

States, and we are pleased to be one of the primary backers of

this project.

Along with the two high-capacity fibre-optic

telecommunications cables which stretch overland to the

territory from China, seven international submarine fibre-

optic cables now come ashore here.

Coupled with our satellite earth station comprising 17

antennae (making it Asia’s largest), these provide the required

international connectivity to support Hong Kong’s role as a

regional telecommunications hub. Many of Hongkong

Telecom’s more than 500 multinational customers have no

presence in the territory other than their hub.

During the year, our earth station and satellite business served

more than 150 customers from 50 countries around the world.

Operational review

Some of these international customers are in fact other

telecommunications carriers, saving money by routing some of

their traffic through Hong Kong. Over the year, Hongkong

Telecom has developed a position as a “carrier’s carrier,”

winning business from other carriers through high levels of

service, competitive pricing and excellent connectivity.

THE MOBILE MARKET

Hong Kong’s competitive mobile communications market is

unique by any standards. The number of mobile phone users

in Hong Kong today exceeds 1.3 million — more than 20%

market penetration.

Indicators suggest that the market will more than double by

the year 2000, with the number of mobile phone users

reaching 2.9 million — representing some 40% market

penetration, among the highest in the world.

Hongkong Telecom remains the market leader, and now

markets two brands — the premium 1010, which is targeted

Continued success will

require the full integration

of mobile and fixed line

services – customers already

expect this.

21


primarily at a business customer base and emphasises quality

of service plus value-added features, and One2Free which is

aimed at the mass market. Together, the two brands serve over

390,000 customers.

Today, 1010 is the largest digital mobile phone network in

Hong Kong with 450 base stations. Owing partly to innovative

marketing techniques such as stored-value SIM cards and

superior coverage, 1010 continues to be an outstanding

success.

The recently-introduced One2Free — with its focus on flexible

packaging, branding and meeting the individual requirements

of people’s lifestyles — also looks sure to shine brightly. A

totally new concept in the mobile telephone market, One2Free

is aimed at the mass market and, in the four months since

launch, has already won over 50,000 customers.

Hongkong Telecom has also invested considerable time and

effort in adding value to its cellular services. Today, mobile

Mobile customer base number of customers (’000)

69 95 162

270

390

’93

’94

’95

’96

’97

customers can enjoy virtually the same mix of features as

wireline customers.

Fixed/Mobile Integration (FMI) was further enhanced this

year with the launch of integrated billing which consolidates

the fees for a host of fixed and mobile services and presents

them on a single statement.

Hongkong Telecom has also participated in the development of

dual-cordless/cellular handsets and is now testing these

prototypes. These innovative devices do double duty — acting

as cordless phones in the home or office and as cellular phones

on the street.

Hongkong Telecom CSL Mobile was the first mobile operator

outside Europe to sign GSM roaming agreements which offer

Automatic International Roaming (AIR), and today this

service allows customers to use their phones in 45 countries

including China, with additional services for Japan and the

USA.

One2Free(First four months)

Customer number50,000

Retail outlets opened123

Average spending per customer$560

22

Operational review

Hongkong Telecom CSL’s fully computerised fraud

management system, first introduced in 1995, has helped

make a significant reduction in our bad debts for the year.

And as a demonstration that innovation brings technical and

financial rewards, our intelligent underlay/overlay (IUO)

technology, developed in-house last year, has increased

capacity by 30 per cent and has also begun to earn royalties

this year, bringing in some $2.3 million in licensing fees so far.

INTERACTIVE MULTIMEDIA SERVICES (IMS)

Our entry into the Internet service market with Netvigator has

been successful in attracting some 73,000 customers since

launch in April 1996. This figure represents a market-leading

35% share of what is acknowledged to be the most competitive

Internet service market in the world.

Netvigator customers were the first in Hong Kong to be able to

shop on-line for some 3,000 products at Wellcome, the

supermarket chain. Other IMS plans continued on track

during 1996/97, including the development of double-byte

character sets required to handle Asian languages, and

pioneering work in systems integration.

The new financial year will see the launch of new multimedia

services under the banner of iTV (interactive television),

including video-on-demand, music-on-demand, interactive

shopping and interactive games. The first quarter of 1998 will

see the introduction of other innovative applications for the

Netvigator customers cumulative growth customers (’000)

2 7 12 18 24 30 36 43 52 64 68 73

May

’96

Jun

’96

Jul ’

96

Au

g ’9

6

Sep

’96

Oct

’96

No

v ’9

6

Dec

’96

Jan

’97

Ap

r ’9

6

Feb

’97

Mar

’97

Netvigator has set

new standards in

Internet connection

speed, technical support

and innovation.

home market, such as interactive home banking, electronic

commerce and interactive education. Through collaboration

with other Cable & Wireless companies such as Cable &

Wireless Communications in the UK and Optus in Australia,

Hongkong Telecom will further develop the global potential of

these new multimedia services.

23


IMPROVED PRODUCTIVITY

Efficiency programmes during the year have focused on

optimising the effective use of staff, on realising the value of

the Company’s property portfolio, outsourcing when

appropriate and managing assets prudently in order to build a

highly cost-effective, customer-focused and very successful

organisation.

In addition to programmes of revenue enhancement, the

Company has continued to focus closely on cost controls in all

areas of operation. Our plan to trim the workforce by 2,500

employees over three years ending March 1998 through

retraining, redeployment and natural turnover continues to be

successful. The number of employees is now 13,767 — a

decrease of 8% during this year.

THE COMMUNITY

We see Hongkong Telecom as very much a part of economic

and social life in Hong Kong. The vitality of the business

community is supported by Hongkong Telecom’s leading-edge

infrastructure and services. Quality of life in our community is

enhanced through our sponsorships, charitable partnerships,

initiatives in education and the provision of emergency

communications services.

Through the Hongkong Telecom Foundation, established in

1990, we have committed more than $130 million toward

education, sports, environmental awareness and support for

the handicapped. In September 1996 we made an important

further commitment to the youth of Hong Kong by renewing

our popular GO!SPORT programme for an additional three

years. We also provide Netvigator Internet access free of charge

to more than 70 secondary schools as well as supporting the

telecommunications needs of the Teachers of English

Language Education Centre (TELEC). And again this year,

the employees of Hongkong Telecom have distinguished

themselves, raising more than one million dollars for the

Community Chest.

THE FUTURE

While advances in technology and new services will

undoubtedly improve the lives of everyone in Hong Kong,

much of what Hongkong Telecom has achieved during this

year will provide one fundamental human benefit — greater

freedom and more flexibility for customers in their business

and private lives.

The increased integration of fixed and mobile networks, for

instance, means that people can stay in touch whenever they

wish and wherever they may be. And bringing broadband

services to the homes and offices of Hong Kong will truly take

our customers into the all-digital future.

Hongkong Telecom will continue to make life simpler and

better for everyone, delivering on our visionary theme: “What

can be imagined, can be achieved.”

This commitment extends to our customers, to our

shareholders and to the community of Hong Kong.

24

Summary of results

The following chart provides a summary of Hongkong Telecom’s performance over

the last 12 months:

1997 1996 Growth$M $M %

Turnover 32,577.8 29,405.2 10.8%

International telephone services 17,395.2 16,528.0 5.2%

Local telephone services 4,569.7 4,068.1 12.3%

Other telecommunications services 7,839.1 5,940.6 32.0%

Equipment sales and rental 1,859.7 1,806.5 2.9%

Computer, engineering and other services 914.1 1,062.0 (13.9%)

Operating Costs 20,375.0 18,312.5 11.3%

Allocations to other telecommunications

operators 8,644.5 7,810.5 10.7%

Salaries & related costs 3,916.6 4,013.2 (2.4%)

Depreciation 2,190.5 1,940.2 12.9%

Other costs 5,623.4 4,548.6 23.6%

Operating profit 12,202.8 11,092.7 10.0%

Profit before tax 12,908.9 11,478.2 12.5%

Profit attributable to the shareholders 11,177.7 9,938.8 12.5%

Capital expenditure 5,026.2 4,330.8 16.1%

Statistics:

International traffic (’000 minutes) 3,679,450 3,290,161 11.8%

Number of lines 3,435,312 3,275,185 4.9%

Residential 2,044,464 1,979,628 3.3%

Business 1,390,848 1,295,557 7.4%

Mobile customer base 390,000 270,000 44.4%

Financial review

25


Management discussion and analysis

This was the first full year of fixed network competition in

Hong Kong. We have seen the benefits of earlier investments in

the network, new services and efficiency come through in our

results. We have focused on building up the revenues in local

services and mobile while driving for volume growth in

international services. Revenue from international telephone

services accounted for 53 per cent of turnover compared to 63

per cent in 1993. The focus on efficiency has contained the

growth in costs and enabled us to maintain net profit margins.

TURNOVER

International telephone services

The year-on-year growth of international telephone services

revenues increased by 5.2 per cent with overall international

traffic increasing by 12 per cent. The growth of both-way

Total international telephone traffic billion minutes

2.1

2.6

3.0

3.3

3.7

’93

’94

’95

’96

’97

China traffic was 6 per cent and traffic with the rest of the

world grew 17 per cent. During the year, traffic from China

began to show signs of recovery and grew by an overall average

of 4 per cent. This growth was particularly evident in the

second half of the year, registering an 8 per cent increase

assisted by the gradual relaxation of China’s macro economic

measures and the reduction in IDD tariffs for international

calls from China. The first six months of the year saw only

a 1 per cent growth in traffic from China.

During the year, our competitors continued to use callback

because of the cost advantage this gave on certain routes. The

effect of callback services has been a shift from outbound to

inbound in the traffic pattern on the North American routes.

This has also caused a reduction in gross international

telephone revenues on certain routes as the Hong Kong

63%

62%

61%

56%

53%

’93

’94

’95

’96

’97

37%

38%

39%

44%

47%

International Other core business

Rebalancing our portfolio proportion of revenue derived (%)

26

Financial review

Monthly line rental

Residential $67.0

Business $104.6

Increased interconnect revenue from FTNS (Fixed Telephone

Network Services) and mobile operators was a contributing

factor and demonstrates the competitive positioning of our

wholesale network services to other licenced carriers.

Other telecommunications services

In keeping with our stated strategic goals, we have continued

to focus on strengthening and growing other areas of our

business including value-added services (VAS), mobile and

business leased lines, and data services. These services

contributed some 24 per cent to total revenue.

The take-up of VAS showed a strong performance with a

growth of 26 per cent.

Our key VAS include:

Starline Services

• Call Forwarding

• Call Waiting

• Follow-me

• Conference Call

• Abbreviated Dialling

PhoneMail

Caller Display

outgoing call charge was replaced by a lower incoming

payment from the callback country. This reduction was partly

offset by a reduction in the Group’s payment to overseas

administrations for the delivery of outgoing IDD calls.

Local telephone services

Local telephone revenue continued to grow steadily, increasing

by 12.3 per cent over the previous year driven in part by strong

growth of 4.9 per cent in demand for new lines. Business lines

grew at 7.4 per cent and residential lines at 3.3 per cent.

Increased multiple lines in the home reflected the increasing

need for additional communications such as fax, e-mail

through the Internet and other computer-based services.

The average tariff increase for local telephone services was

approximately 3.5 per cent effective from 1 August 1996 and

was based upon the existing pricing scheme of Retail Price

Index minus X%, as determined by Government.

Total exchange lines in service ’000 lines

1,77

7

1,85

0

1,92

0

1,98

0

2,04

4

’93

’94

’95

’96

’97

1,04

3

1,14

2

1,22

9

1,29

6

1,39

1

Business Residential

27


Competition in the mobile market continued to be intense this

year. However, aggressive marketing delivered growth in our

mobile customer base of some 120,000 for the year. This

increase was supported by a priority focus on quality mobile

voice and message services, which enabled Hongkong Telecom

CSL Mobile to register strong revenue growth of 43 per cent.

Leased line sales and data services revenues grew 25.5 per

cent. This was partly due to an increased number of customers

expanding into the region and existing customers upgrading

their requirements for high-speed and high-bandwidth data

services. These revenues more than offset the anticipated

decline in telex and telegram revenues which now represent

just 1.1 per cent of our turnover.

Equipment sales and rental

Equipment sales and rental revenues showed a 2.9 per cent

improvement despite a drop of 10.2 per cent in the first half of

the year. Although we achieved significant growth in sales of

mobile phones, overall revenues were affected by lower prices

for handsets which were subsidised to enhance our competitive

position. The handset subsidies are being written off over an

average of two years consistent with prevailing conditions in

the market.

Computer, engineering and other services

Revenues declined 13.9 per cent mainly due to a change in our

directory advertising business partner in the financial year

1995/96. There was also a reduction in related costs this year.

The new partnership resulted in a lower cost base and

therefore an improved operating margin.

OPERATING COSTS

Our total operating costs for the financial year increased 11.3

per cent. The cost increase was contained through continued

process improvement, outsourcing of non-critical activities and

tight cost control programmes. Excluding the revenue related

costs, which include Allocations to Telecommunications

Operators, Cost of Sales and Services and Royalty to

Government, total overhead expense only grew by 5 per cent.

Mainly due to a reduction in accounting rates with other

international telecommunications administrations, growth of

Operating profit per employee $’000

463

539

608

714

848

’93

’94

’95

’96

’97

28

Financial review

Exchange lines per employee

180

187

196

211

239

’93

’94

’95

’96

’97

are well on track to meet our target. In addition we were

successful in outsourcing parts of our information technology

operation to deliver savings in the year under review and for

future years.

Depreciation levels increased, mainly due to additional

exchange and transmission equipment being brought into

service for the expansion and enhancement of our local and

international network.

The cost of sales and services increased by 59.7 per cent. This

was mainly due to our higher sales of mobile phones and other

products and services.

As part of its customer service improvements, the Company

has increased the number of mobile cell sites and retail

outlets during the year. This has resulted in an increase in

rent and rates.

outpayments for international telephone services was kept

below the growth rate for outgoing traffic revenues. In

addition, adoption of more efficient traffic management

techniques contributed to further reductions in costs.

Delivery fees payable by Hongkong Telecom International to

the FTNS operators were higher this year as the competitors

have been originating and terminating more international

telephone traffic as their market share has increased. With the

successful launch of a range of competitive packages, the rate

of loss of market share slowed in the second half of the year.

The launch of new international services in April 1997 has

helped the Group regain market share.

Our staff costs declined by 2.4 per cent as a result of our three-

year job reduction programme started two years ago. Our

target is to reduce total staff numbers from 16,000 to 13,500

by 31 March 1998. The current staff number is 13,767 and we

Turnover per employee $’000

1,38

1

1,52

1

1,67

7

1,89

2

2,26

3

’93

’94

’95

’96

’97

29


The management fees paid to Cable and Wireless plc were

reduced slightly due to exchange differences in favour of the

Hong Kong dollar. The overall level of service provided under

the management agreement was similar to the previous

financial year.

Other operating costs rose 8.9 per cent mainly due to

increased marketing programmes and the service fees in

respect of the outsourcing of our computer data processing

centre arranged in June 1996 which were more than offset by

savings in staff costs. Our state-of-the-art Fraud Management

Information System has helped to reduce our level of bad

debts across the Group.

Through rebalancing of revenue and tight cost control, we

have been able to maintain a healthy operating margin.

CAPITAL EXPENDITURE

Capital expenditure of $5 billion was incurred to meet

increased demand for existing services and to develop new

services such as IMS. The major areas of investment were:

fixed line network capacity; new VAS such as Netvigator;

enhanced mobile switch capacity; leased circuit capability;

and new submarine cables.

Return on fixed assets employed %

44 45 46 47 47

’93

’94

’95

’96

’97

Working capital ratio

0.68

0.70

0.68

0.87

1.19

’93

’94

’95

’96

’97

Operating margin %

33.5

35.5

36.3

37.7

37.5

’93

’94

’95

’96

’97

30

Hongkong Telecom maintained a healthy cash position. The

established funding facilities more than meet with the near

term requirements. With such a strong balance sheet, the

Group is extremely well placed to access both the local and

international capital markets should there be substantial

funding requirements in future.

The Group maintains a continual review of its capital structure

taking into account new investment opportunities, long and

short term funding requirements, and known contingency

needs. This is with a view to achieving capital efficiency and

maximising shareholder value.

FINANCE

Cash management

Interest income increased by 96.6 per cent and, at 31 March

1997, the Group had cash and bank deposits of $14.5 billion

and outstanding borrowings of $5.2 billion. The increase in

cash was primarily due to the take-up level of scrip dividend

during the year and to improved working capital performance.

Financial policies

Our treasury risk management activities are carried out in

accordance with Board approved policies and authorities. Our

internal treasury procedures and guidelines are reviewed on a

regular basis. As a matter of policy, we continue to manage

currency or interest rate risks associated with the transactions

directly related to our operations.

The hedging of foreign exchange related risks is primarily

managed by using forward foreign exchange contracts and the

use of derivatives or related products is strictly controlled.

We have in place committed funding lines of $4.0 billion and

uncommitted lines of $7.7 billion to support our capital

expenditure programmes. As at 31 March 1997, the Group

had utilised $1.3 billion of the available committed lines

of credit.

The investment of our surplus cash is managed on a

conservative basis. Investments are restricted to maximum

duration of one year to maintain an optimal level of liquidity.

Financial review

31


HOW DO WE COMPARE ?

Hongkong Telecom compares very well when

benchmarked against other international

telecommunications companies — one of the reasons we

are considered to be among the best in our industry.

Source: most recently published data from companies concerned

Mobile + fixed lines per employee

304

284

278

233

226

220

215

165

156

141 83

NTT

(M

ar 9

6)

Hon

gkon

g Te

leco

m

(Mar

97)

Deu

tsch

e Te

leko

m

(Dec

96)

Tele

com

New

Ze

alan

d (M

ar 9

6) BT

(Mar

96)

Fran

ce T

elec

om

(Dec

96)

Tels

tra

(Jun

96)

Sin

gapo

re

Tele

com

(Mar

96)

Tele

kom

Mal

aysi

a (D

ec 9

6)

RB

OC

A

vera

ge

PLD

T (D

ec 9

6)

Sales per employee US$’000

322

239

225

219

214

203

193

153

151 85 64

Tele

com

New

Ze

alan

d (M

ar 9

6)

Hon

gkon

g Te

leco

m

(Mar

97)

Deu

tsch

e Te

leko

m

(Dec

96)

Sin

gapo

re

Tele

com

(Mar

96)

RB

OC

A

vera

ge

Fran

ce T

elec

om

(Dec

96) BT

(Mar

96)

Tels

tra

(Jun

96)

Tele

kom

Mal

aysi

a (D

ec 9

6)

NTT

(M

ar 9

6)

PLD

T (D

ec 9

6)

32

Directors’ report

The Directors present their Report, together with the financial statements, for the year ended 31 March 1997.

PRINCIPAL ACTIVITIESThe principal activities of the Company and its subsidiaries (the Group), which were carried out mainly in Hong Kong,continued to be the provision of telecommunications services, the sale and rental of telecommunications equipment and theprovision of computer, engineering and other services.

RESULTS AND DIVIDENDSThe profit of the Group for the year ended 31 March 1997 and the state of the Company’s and the Group’s affairs at that dateare set out in the financial statements on pages 36 to 55. Profit attributable to shareholders for the year was $11,177.7 million.Analysis of turnover and operating profit is shown on page 3. An interim dividend of 34.6 cents per share was paid toshareholders on 30 December 1996 (with shareholders being given the option to elect to receive new shares in lieu of part orall of their cash entitlements). The Directors recommend a final dividend of 41.7 cents per share to be paid on or about 11July 1997 to shareholders who are on the Register of Members of the Company at the close of business on 30 May 1997.Shareholders will again be offered a scrip alternative to the cash dividend.

RESERVESThe Group’s retained profit for the year was $2,322.3 million. Movements in its reserves during the year are set out in note 20to the financial statements.

FIXED ASSETSParticulars of the movements in fixed assets are set out in note 12 to the financial statements.

SHARE CAPITALParticulars of the movements in share capital are set out in note 19 to the financial statements.

PURCHASE, SALE OR REDEMPTION OF SHARESDuring the year neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company’s shares.

DIRECTORS AND THEIR INTERESTSThe present Directors of the Company are listed on pages 6 and 7. Mr Richard H Brown was appointed as a Director andDeputy Chairman with effect from 1 August 1996. Mr Roy A Wilson and Mr Robert E Lerwill were appointed Directors andMr Jonathan H M Solomon resigned as a Director, all with effect from 6 March 1997. All other Directors served throughoutthe year.

In accordance with Article 105 of the Company’s Articles of Association, Mr Rodney J Olsen and Dr David K P Li will retireby rotation at the forthcoming Annual General Meeting and, being eligible, offer themselves for re-election. Mr Richard HBrown, Mr Roy A Wilson and Mr Robert E Lerwill will retire in accordance with Article 96 and, being eligible, offer themselvesfor re-election. No Director being proposed for re-election has a service contract with Hongkong Telecom which cannot bedetermined within one year without payment of non-statutory compensation.

No Director has, or had during the year, a material interest in any contract of significance to which the Company or any of itssubsidiaries or its holding company or any subsidiary of such holding company is or was a party.

The following Directors had interests in the ordinary shares of the Company and of its associated companies (within themeaning of the Securities (Disclosure of Interests) Ordinance) at 31 March 1997, as recorded in the register of share interests:

Cable and Wireless plc Hong Kong Telecommunications Limited

Personal Family Share Personal CorporateInterests Interests Options Interests Interests

Dr N B Smith 2,552 17,552 - - -Dr The Hon D K P Li - - - 3,292,350 -R H Brown 10,000 - 618,311 - -L W L Cheung - - 380,653 - -N K T Yuen - - 104,000 3,533 -A R Grieve 5,246 6,793 89,329 - -R A Wilson 200 500 - 100 -D N Prince 3,370 11,662 88,575 - -Sir S Y Chung - - - - 320,268 (A)R E Lerwill 12,500 - 232,853 - -V F Moore 516 - - - -R J Olsen 65,320 - 506,326 - -

(A) Interests held by Honfam Company Limited, an associated company of Sir S Y Chung.

Apart from the foregoing, at no time during the year was the Company, any of its holding company, subsidiaries or fellowsubsidiaries a party to any arrangement to enable the Directors or Chief Executive or any of their spouses or children under

33


18 years of age to acquire benefits by means of the acquisition of shares in or debentures of the Company or any other bodycorporate.

SUBSTANTIAL SHAREHOLDINGSAt 31 March 1997 and in accordance with the Securities (Disclosure of Interests) Ordinance (the Ordinance), the Companyhad been notified of certain interests in its ordinary shares.

Cable and Wireless plc and its subsidiary companies (together Cable & Wireless) had notified a beneficial interest in a total of6,918,020,553 shares (approximately 59.2 per cent).

China International Trust & Investment Corporation Hong Kong (Holdings) Limited and various companies associated withit (together CITIC) had notified a beneficial interest in a total of 904,686,181 shares (approximately 7.7 per cent).

Furthermore, by virtue of sections 9 and 10 of the Ordinance, Cable & Wireless is deemed to be interested not only in theshares in which it is beneficially interested but also in those in which CITIC is beneficially interested and vice versa in the caseof CITIC. This arises from the fact that a sale/purchase agreement entered into on 20 March 1990 under which Cable &Wireless sold certain shares in the Company to CITIC contained restrictions on the disposal of the Company’s shares and forthat reason such agreement falls within the terms of section 9 of the Ordinance.

DONATIONSCash donations to charities by the Group during the year amounted to $4.9 million.

MANAGEMENT AGREEMENT WITH CWPLCThe Company has a Management Agreement with Cable and Wireless plc (CWPLC) in respect of the provision ofmanagement and technical services and trademarks from CWPLC to the Group, details of which are given in note 26 to thefinancial statements.

MAJOR CUSTOMERS AND SUPPLIERSThe aggregate amount of turnover attributable to the Group’s five largest customers represented less than 30 per cent of theGroup’s total turnover and the aggregate amount of purchases (not including purchases of capital nature) attributable to theGroup’s five largest suppliers did not exceed 30 per cent of the Group’s total purchases for the year ended 31 March 1997.

CONNECTED TRANSACTIONSOn 10 September 1996, Hongkong Telecom Finance Limited, a wholly-owned subsidiary of the Company, granted a loan of$9,850,000 (the Loan) to Mr Norman K T Yuen, who is a Director and a Deputy Chief Executive of the Company. TheLoan was made under the Hongkong Telecom Housing Loan Scheme which was approved by the Board of the Company in1994. The purpose of the Loan, which had the prior approval of the independent Non-Executive Directors of the Company,was to facilitate the purchase of a property for use as Mr Yuen’s main residence. Further details of the Loan are given in note6 to the financial statements.

On 2 April 1996, the Company entered into and completed an agreement with Bay Properties Limited, a wholly-ownedsubsidiary of CWPLC, for the acquisition of a residential house at 24 Middle Gap Road (the Property) at a cash considerationof $58 million.

The Property had hitherto been leased to the Company and used as the residence of the Chief Executive of the Company, andhas continued to be used for such purpose since the purchase. The purchase of the Property is a long term investment.

Details of these connected transactions have previously been announced in the press.

COMPLIANCE WITH CODE OF BEST PRACTICEThroughout the year, the Company has complied with the Code of Best Practice as set out in Appendix 14 to the RulesGoverning the Listing of Securities on The Stock Exchange of Hong Kong Limited.

AUDITORSThe auditors of the Company, KPMG Peat Marwick, have indicated their willingness to continue in office and a resolutionproposing their re-appointment will be put to the Annual General Meeting.

By Order of the Board

David N PrinceFinance Director and Company Secretary

8 May 1997

34

Notice of annual general meeting

Notice is hereby given that the 10th Annual General Meeting of Hong Kong Telecommunications Limited ( )will be held on 4 July 1997 at 11:00 am in the Conference Room, 14th Floor, Hongkong Telecom Tower, TaiKoo Place, 979King’s Road, Quarry Bay, Hong Kong, for the following purposes:

As Ordinary Business:1. To receive and consider the financial statements for the year ended 31 March 1997 and the Reports of the Directors and

the Auditors.2. To declare a final dividend.3. To re-elect retiring Directors.4. To re-appoint Auditors and authorise the Directors to fix their remuneration.

And as Special Business, to consider and, if thought fit, to pass the following as ordinary resolutions:

ORDINARY RESOLUTIONS5. “THAT:

(a) the exercise by the Directors during the Relevant Period of all the powers of the Company to purchase shares ofHK$0.50 each in the capital of the Company including any form of depositary receipt representing the right to receivesuch shares (“Shares”) be and is hereby generally and unconditionally approved;

(b) the aggregate nominal amount of Shares which may be purchased on The Stock Exchange of Hong Kong Limited orany other stock exchange recognised for this purpose by the Securities and Futures Commission of Hong Kong andThe Stock Exchange of Hong Kong Limited under the Hong Kong Code on Share Repurchases pursuant to theapproval in paragraph (a) above shall not exceed or represent more than 10 per cent of the aggregate nominal amountof the share capital of the Company in issue at the date of passing this Resolution, and the said approval shall be limitedaccordingly;

(c) for the purpose of the Resolution “Relevant Period” means the period from the passing of this Resolution untilwhichever is the earlier of:(aa) the conclusion of the next Annual General Meeting of the Company; and(bb) the revocation or variation of the authority given under this Resolution by ordinary resolution of the shareholders

in general meeting.”

6. “THAT a general mandate be and is hereby unconditionally given to the Directors to exercise full powers of the Companyto allot shares in the Company (including making and granting offers, agreements and options which might require sharesto be allotted whether during the continuance of such mandate or thereafter) provided that, otherwise than pursuant to arights issue where shares are offered to shareholders on a fixed record date in proportion to their then holdings of shares(subject to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to fractionalentitlements or having regard to any restrictions or obligations under the laws of or the requirements of any recognisedregulatory body or stock exchange in any territory outside Hong Kong) or any shares issued pursuant to any scrip dividendscheme of the Company, the aggregate nominal amount of the shares allotted shall not exceed the aggregate of:(a) 10 per cent of the aggregate nominal amount of the share capital of the Company in issue at the date of passing this

Resolution, plus(b) (if the Directors are so authorised by a separate ordinary resolution of the shareholders of the Company) the nominal

amount of the share capital of the Company repurchased by the Company subsequent to the passing of this Resolution(up to a maximum equivalent to 10 per cent of the aggregate nominal amount of the share capital of the Company inissue at the date of passing this Resolution).

Such mandate shall expire at the earlier of the conclusion of the next Annual General Meeting of the Company andrevocation of the mandate by shareholders in general meeting.”

7. “THAT the Directors of the Company be and they are hereby authorised to exercise the powers of the Company referredto in the resolution set out in item 6 in the notice of this meeting in respect of the share capital of the Company referred toin paragraph (b) of such resolution.”

By Order of the Board

David N PrinceFinance Director and Company Secretary

8 May 1997

Notes:1. Any shareholder entitled to attend and vote may appoint one or more proxies to attend and, on a poll, vote instead of him. A proxy need not be a

shareholder of the Company.2. To be effective, the proxy form together with the power of attorney or other authority, if any, under which it is signed or a notarially certified copy

of that power or authority, must be deposited at the offices of the Company’s Share Registrars, Central Registration Hong Kong Limited, Rooms1901-5, Hopewell Centre, 183 Queen’s Road East, Hong Kong, not later than 11:00 am on 2 July 1997.

35


Report of the auditors

To the shareholders ofHong Kong Telecommunications Limited(incorporated in Hong Kong with limited liability)

We have audited the financial statements on pages 36 to 55 which have been prepared in accordance with accounting principlesgenerally accepted in Hong Kong.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORSThe Companies Ordinance requires the directors to prepare financial statements which give a true and fair view. In preparingfinancial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected andapplied consistently, that judgements and estimates are made which are prudent and reasonable and that the reasons for anysignificant departure from applicable accounting standards are stated.

It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report ouropinion to you.

BASIS OF OPINIONWe conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Society ofAccountants. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financialstatements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparationof the financial statements, and of whether the accounting policies are appropriate to the Company’s and the Group’scircumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary inorder to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free frommaterial misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in thefinancial statements. We believe that our audit provides a reasonable basis for our opinion.

OPINIONIn our opinion, the financial statements give a true and fair view, in all material respects, of the state of the affairs of theCompany and of the Group as at 31 March 1997 and of the Group’s profit and cash flows for the year then ended andhave been properly prepared in accordance with the Companies Ordinance.

KPMG Peat MarwickCertified Public Accountants

Hong Kong, 8 May 1997

36

Consolidated profit and loss accountFor the year ended 31 March 1997

1997 1996Note $M $M

3 Turnover 32,577.8 29,405.2

4 Operating costs 20,375.0 18,312.5

Operating profit 12,202.8 11,092.7

7 Net interest and other income 706.1 385.5

Profit before taxation 12,908.9 11,478.2

8 Taxation 1,690.4 1,515.1

Profit after taxation 11,218.5 9,963.1

Minority interests 40.8 24.3

9 Profit attributable to shareholders 11,177.7 9,938.8

Appropriations

10 Dividends 8,855.4 7,619.1

20 Retained profit for the year 2,322.3 2,319.7

11 Earnings per share 97.2¢ 88.8¢

37


Balance sheetsAs at 31 March 1997

Group Company

1997 1996 1997 1996Note $M $M $M $M

12 Fixed assets 25,405.0 22,255.7 63.8 –

13 Interest in subsidiaries – - 7,734.9 7,734.9

14 Other investments 517.5 401.3 221.1 85.4

15 Other non current assets 2,053.4 2,057.9 – –

16 Current assets 19,689.4 11,839.8 18,244.1 10,934.4

47,665.3 36,554.7 26,263.9 18,754.7

17 Current liabilities 16,588.2 13,666.4 17,636.9 9,294.7

Total assets less current liabilities 31,077.1 22,888.3 8,627.0 9,460.0

18 Deferred taxation 716.5 709.0 – –

Net assets 30,360.6 22,179.3 8,627.0 9,460.0

Financed by

19 Share capital 5,846.7 5,654.3 5,846.7 5,654.3

20 Reserves 24,441.0 16,492.9 2,780.3 3,805.7

Shareholders’ funds 30,287.7 22,147.2 8,627.0 9,460.0

Minority interests 72.9 32.1 – –

30,360.6 22,179.3 8,627.0 9,460.0

The financial statements on pages 36 to 55 were approved by the Board of Directors on 8 May 1997 and were signedon their behalf by:

Linus W L CheungDirector

David N PrinceDirector

38

Consolidated cash flow statementFor the year ended 31 March 1997

1997 1996Note $M $M

24 Net cash inflow from operating activities 13,321.8 12,317.4

Returns on investments and servicing of finance

Interest received 624.2 372.9

Interest paid (259.5) (112.6)

Dividends received from associated companies 13.7 8.1

Dividends paid (2,987.9) (4,950.2)

Income from investments 76.4 63.1

Net cash outflow from returns on investments and servicing of finance (2,533.1) (4,618.7)

Taxation

Profits tax paid (1,477.6) (1,672.4)

Investing activities

Purchase of fixed assets (4,463.1) (4,104.5)

Proceeds on disposal of fixed assets 385.3 137.6

Proceeds on disposal of investments 39.2 39.4

Purchase of investments (76.4) (63.1)

Investment in associated companies (135.7) (37.7)

Lease rentals received 10.9 116.3

Decrease in long-term deposits – 3.7

Net cash outflow from investing activities (4,239.8) (3,908.3)

Net cash inflow before financing 5,071.3 2,118.0

Financing

25 Repayment of loans (144.9) (2,698.3)

Drawdown of loans – 2,651.7

Minority interests – 6.5

Net cash outflow from financing (144.9) (40.1)

Increase in cash and cash equivalents 4,926.4 2,077.9

Cash and cash equivalents at 1 April 4,335.5 2,257.6

Cash and cash equivalents at 31 March 9,261.9 4,335.5

Analysis of the balances of cash and cash equivalents

Term deposits 14,220.1 7,824.1

Bank and cash balances 266.4 173.4

Bills of exchange – (40.0)

Bank loans and overdrafts repayable within three months (5,224.6) (3,622.0)

9,261.9 4,335.5

39


1. General

The Company is a public limited company incorporated in Hong Kong. The ultimate holding company is Cable andWireless plc, incorporated in England.

2. Principal accounting policies

(a) Basis of accountingThe financial statements have been prepared in Hong Kong dollars using the historical cost basis of accounting asmodified for the revaluation of investment properties.

(b) Basis of consolidationThe consolidation accounts include accounts of the Company and all its subsidiaries made up to 31 March each year.The result of subsidiaries acquired or disposed of during the year are included in the consolidated profit and lossaccount from or to the date of their acquisition or disposal, as appropriate. All material intragroup transactions andbalances are eliminated on consolidation.

Goodwill arising on the acquisition of subsidiaries, being the excess of the cost over the fair value of the Group’s shareof the separable net assets acquired, is charged directly to reserves on consolidation. The excess of the Group’s shareof the fair value of the separable net assets of subsidiaries acquired over the cost of investment in these companies iscredited to capital reserves.

On disposal of a subsidiary during the year, any attributable amount of purchased goodwill which has previously beendealt with as a movement on Group reserves is included in the calculation of the profit or loss on disposal.

(c) Investments in subsidiaries and associated companiesThe consolidated profit and loss account includes the Group’s share of the post-acquisition results of its associatedcompanies for the year. In the consolidated balance sheet, investments in associated companies are stated at theGroup’s share of their net assets. The goodwill arising on the acquisition of associated companies is charged directlyto reserves on consolidation.

The results of subsidiaries and associated companies are included in the Company’s profit and loss account to theextent of dividends received and receivable, providing the dividend is in respect of a period ending on or before thatof the Company and the Company’s right to receive the dividend is established before the accounts of the companyare approved by the directors.

In the Company’s balance sheet, investments in subsidiaries and associated companies are stated at cost less anyprovisions for permanent diminution in value as determined by the directors.

(d) Other investmentsOther investments are held for long term purposes and are stated at cost less provision where the directors considerthere has been a permanent diminution in the underlying value of the investment.

(e) Revenue recognitionRevenues are recognised as they are earned. Telecommunications revenues based on usage of the Group’s networkand facilities are recognised when the services are rendered. Telecommunications revenues for services provided forfixed periods are recognised on a straight line basis over the respective periods. Other revenues are recognised whenproducts are delivered or services are rendered to customers.

Interest income from bank deposits is accrued on a time-apportioned basis on the principal outstanding and theapplicable rate.

(f) Fixed assetsInvestment properties with an unexpired lease term of more than 20 years are stated at the balance sheet date at theiropen market value. They are valued at intervals of not more than three years by independent professionally qualifiedvaluers and in each intervening year valuations are undertaken by professionally qualified executives of the Group.Surpluses arising on revaluation are credited to the profit and loss account to the extent of any deficit arising onrevaluation previously charged to the profit and loss account and are thereafter taken to the investment propertiesrevaluation reserve; deficits arising on revaluation are firstly set off against any previous revaluation surpluses andthereafter charged to the profit and loss account.

Investment properties with an unexpired lease term of 20 years or less are stated at valuation less accumulateddepreciation.

Projects under construction are stated at cost. Certain costs relating to projects under construction are capitalised andincluded in the costs of fixed assets; these costs include staff costs, materials, interest and overheads.

Notes to the financial statementsFor the year ended 31 March 1997

40

Fixed assets other than investment properties and projects under construction are stated at cost less accumulateddepreciation.

Upon retirement or disposal of a fixed asset, the difference between the estimated net disposal proceeds and thecarrying amount of the asset is recognised as income or expense in the profit and loss account on the date of retirementor disposal. On disposal of an investment property, the related portion of surpluses or deficits previously taken to theinvestment properties revaluation reserve is also transferred to the profit and loss account.

(g) DepreciationNo depreciation is charged on projects under construction or investment properties with an unexpired lease term ofmore than 20 years. Depreciation is provided to write off the cost of other fixed assets over their estimated useful livesin equal annual instalments as follows:

Leasehold land term of the leaseInvestment properties with unexpired lease term of less than 20 years remaining term of leaseBuildings 50 years or term of lease, if lessExchange equipment 5 to 15 yearsInternational transmission plant 5 to 33 yearsLocal transmission plant 6 to 25 yearsOther plant and equipment 2 to 16 years

(h) Retirement scheme costsThe regular cost of providing retirement benefits is charged to the profit and loss account over the service lives of themembers of the schemes on the basis of constant percentages of pensionable pay. Variations from regular cost arisingfrom periodic actuarial valuations are allocated to the profit and loss account over the expected remaining service livesof the members.

(i) Consumable stores, trading stocks and work in progressConsumable stores, held for use in the maintenance and expansion of the Group’s telecommunications systems, arestated at cost less provision for deterioration and obsolescence. Trading stocks are stated at the lower of cost and netrealisable value and are valued on an average cost basis. In both cases, cost comprises materials, freight and insurance.Work in progress is stated at cost, which comprises labour, materials and overheads where appropriate.

Net realisable value is determined by reference to the sales proceeds of items sold in the ordinary course of businesssubsequent to the balance sheet date or to management estimates based on prevailing market conditions.

(j) Deferred taxationThe Group does not provide for deferred tax unless there is a reasonable probability that the liability will arise in theforeseeable future. Where deferred tax is provided the liability method is used.

(k) Foreign currenciesMonetary assets and liabilities in foreign currencies are translated into Hong Kong dollars at the rates of exchangeruling on the balance sheet date. Transactions in foreign currencies during the year are translated into Hong Kongdollars at the exchange rate ruling on the dates of the transactions. All foreign exchange gains and losses are includedin the profit and loss account.

(l) Operating leasesRental income and expenses under operating leases are accounted for in the profit and loss account on a straight linebasis over the periods of the respective leases.

(m) Finance leasesThe total net investment in finance leases included in the balance sheet represents total lease payments receivable netof finance charges relating to future accounting periods. Finance charges are allocated to accounting periods so as togive a constant rate of return on the net cash investment in the lease.

(n) Borrowing costsBorrowing costs are expensed in the profit and loss account in the period in which they are incurred, except to theextent that they are capitalised as being directly attributable to the acquisition, construction or production of an assetwhich necessarily takes a substantial period of time to get ready for its intended use or sale.

(o) Mobile telephone customer acquisition costsThe direct costs of acquiring new mobile telephone customers, relating primarily to equipment subsidies andconnection commissions, are deferred. Deferred customer acquisition costs are amortised on a straight line basis overthe shorter of the average subscription lives of the customers or two years.

Notes to the financial statements

2. Principal accounting policies (continued)

41


3. Turnover

Turnover is stated on a gross basis before allocations to other telecommunications operators and comprises the following:

i) Telecommunications services – gross amounts accruing to the Group derived from international and localtelecommunications, including fixed line and mobile telephone, telex, leased circuits, facsimile and telegram.

ii) Equipment sales and rental – the proceeds from the sale, leasing, rental and maintenance of terminals, communicationssystems and associated activities.

iii) Computer, engineering and other services.

Turnover is analysed as follows:

1997 1996$M $M

International telephone services 17,395.2 16,528.0

Local telephone services 4,569.7 4,068.1

Other telecommunications services 7,839.1 5,940.6

Total telecommunications services 29,804.0 26,536.7

Equipment sales and rental 1,859.7 1,806.5

Computer, engineering and other services 914.1 1,062.0

32,577.8 29,405.2

Equipment sales and rental includes rental income in respect of operating leases for customer equipment of $145.7 million(1996: $179.7 million).

4. Operating costs

1997 1996$M $M

Allocations to other telecommunications operators

– International telephone services 8,421.3 7,511.0

– Others 223.2 299.5

Salaries and related costs 3,916.6 4,013.2

Depreciation 2,190.5 1,940.2

Cost of sales and services 2,125.8 1,331.4

Rent, rates and utilities 601.8 517.6

Royalty to Hong Kong Government 523.2 501.9

Management fees to Cable and Wireless plc 209.6 211.2

Other operating costs 2,163.0 1,986.5

20,375.0 18,312.5

The Group capitalised salaries and related costs of $709.5 million during the year (1996: $777.0 million).

42


1997 1996$M $M

Included in the above are the following charges:

Auditors’ remuneration 3.8 3.6

Directors’ remuneration (Note 5) 32.3 27.4

Rental expenses under operating leases:

Land and buildings 195.7 172.3

Plant and machinery 168.7 134.2

5. Directors’ and senior management’s remuneration

(a) Directors’ remuneration1997 1996$M $M

Directors’ fees 2.1 1.2

Basic salaries and other emoluments 23.7 22.1

Discretionary bonuses 3.7 2.9

Pension contributions 1.3 1.2

Commencement of service payment 1.5 –

32.3 27.4

Housing costs accounted for 33% (1996: 38%) of remuneration.

The number of directors whose remuneration fell within the bands set out below is as follows:

Number of Directors

$ $ 1997 1996

Nil — 1,000,000 10 11

1,500,001 — 2,000,000 1 –

2,500,001 — 3,000,000 – 1

4,000,001 — 4,500,000 – 1

4,500,001 — 5,000,000 – 2

6,000,001 — 6,500,000 2 –

6,500,001 — 7,000,000 1 –

9,000,001 — 9,500,000 1 1

No directors waived the right to receive emoluments during the year.

The directors’ fees above includes $0.9 million (1996: $0.7 million) paid to the independent non-executive directors.They received no other emoluments from the Company or any of its subsidiaries.

4. Operating costs (continued)

43


(b) Directors’ share optionsIn addition to the above emoluments, certain directors were granted options to acquire ordinary shares of Cable andWireless plc pursuant to the terms of the Cable and Wireless plc discretionary share option schemes. The details ofshare options granted to respective directors during the year are as follow:

Share Date of Option price ExercisableName options grant £ from to

R H Brown 7,134 3 Jul 1996 4.205 3 Jul 1999 2 Jul 2006R H Brown 611,177 3 Jul 1996 4.205 3 Jul 1999 2 Jul 2003L W L Cheung 141,653 3 Jul 1996 4.205 3 Jul 1999 2 Jul 2003N K T Yuen 40,000 3 Jul 1996 4.205 3 Jul 1999 2 Jul 2003A R Grieve 40,000 3 Jul 1996 4.205 3 Jul 1999 2 Jul 2003D N Prince 40,000 3 Jul 1996 4.205 3 Jul 1999 2 Jul 2003R E Lerwill 6,500 8 Jan 1997 4.724 8 Jan 2000 7 Jan 2007R E Lerwill 226,353 8 Jan 1997 4.724 8 Jan 2000 7 Jan 2004R J Olsen 124,445 3 Jul 1996 4.205 3 Jul 1999 2 Jul 2003

(c) Senior management’s remunerationThe six highest paid individuals in the Group included four directors (1996: four) whose total emoluments areincluded above. The emoluments of the other two individuals were:

1997 1996$M $M

Basic salaries and other emoluments 6.8 6.7

Discretionary bonuses 2.0 1.1

Pension contributions 0.4 0.4

9.2 8.2

The total emoluments of these two individuals fell within the following bands:

Number of employees

$ $ 1997 1996

4,000,001 — 4,500,000 1 2

4,500,001 — 5,000,000 1 –

6. Loan to officer

The loan made to an officer of the Company disclosed pursuant to section 161B of the Companies Ordinance is as follows:

Maximumbalance

Balance at Balance at outstanding1 April 1996 31 March 1997 during the year

$M $M $M

Norman K T Yuen – 9.5 9.9

There was no interest due but unpaid nor any provision made against this loan at 31 March 1997.

The loan was made under the Hongkong Telecom Housing Loan Scheme to facilitate the purchase of a property for useas Mr Yuen’s main residence. The loan is repayable over 120 months, carries an interest rate based on the costs of fundsto the Hongkong Telecom Group from time to time plus 1% and is secured by a legal charge on the property.

5. Directors’ and senior management’s remuneration (continued)

44


7. Net interest and other income

1997 1996$M $M

Interest earned on bank deposits 687.0 374.5

Interest received on finance leases 0.5 2.9

Less: Interest payable on bank overdrafts and other loans wholly repayable within 5 years (69.1) (62.8)

Net interest earned 618.4 314.6

Share of profits of associated companies 11.3 7.8

Income from unlisted investments 76.4 63.1

706.1 385.5

The Group incurred total interest expenses of $233.7 million during the year (1996: $145.0 million) of which $164.6million was capitalised (1996: $82.2 million). Interest expenses have been capitalised at rates of the cost of funds to theGroup which varied from 5.1% to 6.3% for capital projects under construction.

8. Taxation

1997 1996$M $M

Hong Kong profits tax at 16.5%

Current year provision 1,675.4 1,510.2

Tax charges from leasing partnerships 5.8 4.3

1,681.2 1,514.5

Deferred taxation (Note 18) 7.5 (0.8)

Share of associated companies’ taxation 1.7 1.4

1,690.4 1,515.1

9. Profit attributable to shareholders

The profit attributable to shareholders of $11,177.7 million (1996: 9,938.8 million), includes a profit of $2,858.1 million(1996: $8,059.3 million) which has been dealt with in the accounts of the Company.

10. Dividends

1997 1996$M $M

Interim dividend 34.6¢ per share (1996: 30.9¢) 3,979.3 3,446.2

Proposed final dividend 41.7¢ per share (1996: 36.9¢) 4,876.1 4,172.9

8,855.4 7,619.1

Shareholders were given the option to receive new fully paid shares in lieu of the final cash dividend for the year ended 31March 1996 and the interim cash dividend for the year ended 31 March 1997 (see Note 19). A similar option is to beproposed in respect of the final dividend for the year ended 31 March 1997.

45


11. Earnings per share

The calculation of earnings per share is based on the profit attributable to shareholders of $11,177.7 million (1996:$9,938.8 million) and the weighted average number of shares of 11,495,713,724 in issue throughout the year (1996:11,195,469,683 shares).

12. Fixed assets

Group

Leasehold International Local Other Projects

land & Investment Exchange transmission transmission plant & under

buildings properties equipment plant plant equipment construction Total

$M $M $M $M $M $M $M $M

Cost/Valuation

At 1 April 1996 2,971.5 – 9,248.0 4,596.5 7,281.6 6,063.3 2,884.1 33,045.0

Additions 66.4 – 1,296.7 460.7 567.5 477.3 2,157.6 5,026.2

Disposals – – (26.6) (7.7) (13.8) (696.8) – (744.9)

Surplus on revaluation – 682.3 – – – – – 682.3

Transfers (229.4) 354.0 1,551.3 298.8 (366.8) 527.0 (2,134.9) –

At 31 March 1997 2,808.5 1,036.3 12,069.4 5,348.3 7,468.5 6,370.8 2,906.8 38,008.6

Representing

Cost 2,808.5 – 12,069.4 5,348.3 7,468.5 6,370.8 2,906.8 36,972.3

Valuation – 1,036.3 – – – – – 1,036.3

2,808.5 1,036.3 12,069.4 5,348.3 7,468.5 6,370.8 2,906.8 38,008.6

Depreciation

At 1 April 1996 382.0 – 3,224.2 1,831.8 2,123.5 3,227.8 – 10,789.3

Charge for the year 62.6 – 787.3 366.8 340.0 633.8 – 2,190.5

Disposals – – (9.9) (3.9) (8.2) (330.0) – (352.0)

Surplus on revaluation – (24.2) – – – – – (24.2)

Transfers (8.6) 24.2 302.6 – (304.9) (13.3) – –

At 31 March 1997 436.0 – 4,304.2 2,194.7 2,150.4 3,518.3 – 12,603.6

Net book values

At 31 March 1997 2,372.5 1,036.3 7,765.2 3,153.6 5,318.1 2,852.5 2,906.8 25,405.0

At 31 March 1996 2,589.5 – 6,023.8 2,764.7 5,158.1 2,835.5 2,884.1 22,255.7

46


12. Fixed assets (continued)

Investment properties of the Group were revalued at 31 January 1997 by an independent firm of surveyors, Brooke HillierParker, on an open market value basis, taking into account their existing use, subject to existing tenancies or with vacantpossession and free from encumbrances. The revaluation surplus of $706.5 million has been transferred to the investmentproperties revaluation reserve.

Gross rental receivable from the Group’s investment properties amounted to $40.0 million. (1996: Nil)

The analysis of net book value of the Group’s land all of which is situated in Hong Kong comprises:

1997 1996

Leasehold Investment Leaseholdland properties land

$M $M $M

Long-term leasehold – not less than 50 years 839.4 399.0 1,121.1

Medium-term leasehold – less than 50 years but not less than 10 years 203.4 35.6 107.9

1,042.8 434.6 1,229.0

The Group leases equipment to customers on operating leases. The net book value of such equipment, which is includedin other plant and equipment, is as follows:

1997 1996$M $M

Customer equipment at cost 543.0 458.8

Less: Accumulated depreciation 411.8 386.5

Net book value 131.2 72.3

Company

Other plantBuilding & equipment Total

$M $M $M

Cost

Additions 59.6 5.3 64.9

At 31 March 1997 59.6 5.3 64.9

Depreciation

Charge for the year 0.9 0.2 1.1

At 31 March 1997 0.9 0.2 1.1

Net book values

At 31 March 1997 58.7 5.1 63.8

47


13. Interest in subsidiaries

Company

1997 1996$M $M

Unlisted shares, at cost 7,734.9 7,734.9

Details of principal subsidiary companies are set out on page 55.

14. Other investments

Group Company

1997 1996 1997 1996$M $M $M $M

Associated companies

Unlisted shares, at cost – – 219.2 83.5

Share of net assets of associated companies 178.7 99.7 – –

Other unlisted investments at cost 338.8 301.6 1.9 1.9

Net book value 517.5 401.3 221.1 85.4

Details of principal associated companies are set out on page 55.

15. Other non current assets

Other non current assets are amounts falling due after more than one year:

Group

1997 1996$M $M

Staff housing loans 864.4 879.9

Net investment in finance leases 506.5 510.5

Other debtors and prepayments 682.5 667.5

2,053.4 2,057.9

A company within the Group is a limited partner in a number of limited partnerships which own and lease assets to thirdparties.

48


15. Other non current assets (continued)

Group

1997 1996$M $M

The net investment in these finance leases comprises:

Total lease payments receivable 506.5 517.9

Less: Finance charges allocated to future periods – 0.5

506.5 517.4

Total rentals received during the year in respect of finance leases 10.9 19.7

Non-recourse finance of $3,264.6 million (1996: $2,241.6 million) has been offset against net rentals receivable in arrivingat the above balances.

16. Current assets

Group Company

1997 1996 1997 1996$M $M $M $M

Consumable stores 68.7 86.7 – –

Trading stocks 267.2 131.7 – –

Work in progress 172.0 200.3 – –

Trade debtors 3,644.5 2,752.2 – –

Other debtors and prepayments 854.0 582.5 517.8 312.0

Staff housing loans 47.3 48.6 – –

Amounts due from holding companyand fellow subsidiaries 149.2 33.4 187.8 39.3

Amounts due from subsidiaries – – 3,310.8 2,825.7

Net investment in finance leases (Note 15) – 6.9 – –

Term deposits 14,220.1 7,824.1 14,146.0 7,713.2

Bank and cash balances 266.4 173.4 81.7 44.2

19,689.4 11,839.8 18,244.1 10,934.4

49


17. Current liabilities

Group Company

1997 1996 1997 1996$M $M $M $M

Trade creditors 2,261.9 2,751.2 – –

Customer deposits 378.5 211.6 – –

Accrued charges

— purchase of fixed assets 1,066.8 668.3 – –

— others 1,314.6 983.8 127.8 158.5

Other creditors 159.1 113.5 63.3 86.0

Deferred revenue 674.3 622.7 – –

Amounts due to holding companyand fellow subsidiaries 138.8 45.6 73.5 14.3

Amounts due to subsidiaries – – 12,366.9 4,799.3

Provision for profits tax 493.5 289.9 – –

Proposed dividend (Note 10) 4,876.1 4,172.9 4,876.1 4,172.9

Bills of exchange – 40.0 – –

Bank loans and overdrafts 5,224.6 3,766.9 129.3 63.7

16,588.2 13,666.4 17,636.9 9,294.7

At 31 March 1997, the Group had unutilised borrowing facilities of $8,117 million (1996: $9,044 million).

The Group, through its subsidiaries, arranged bills of exchange and short-term bank loans to finance the purchase of fixedassets.

50


18. Deferred taxation

Group

1997 1996$M $M

Movements on deferred taxation comprise:

Opening balance 709.0 709.8

Transfer from/(to) profit and loss account (Note 8) 7.5 (0.8)

Closing balance 716.5 709.0

Deferred taxation provided at the current tax rate of 16.5% in the Group’s financial statements is as follows:

1997 1996$M $M

Tax effect of timing differences due to:

Leasing partnerships 685.3 700.3

Others 31.2 8.7

716.5 709.0

No provision for deferred taxation has been made in respect of the revaluation surplus arising on investment properties asthe disposal of these assets at their carrying value would result in capital gains which the directors consider are not subjectto any liability.

Unprovided deferred tax at the current tax rate of 16.5% is $2,646.5 million (1996: $2,398.8 million) and principallyrelates to timing differences arising from tax depreciation allowances on fixed assets. This has not been recognised in thefinancial statements as it is considered that no liability will arise in the foreseeable future.

CompanyThere is no significant deferred tax liability not provided for.

51


19. Share capital

1997 1996$M $M

Authorised

12,500,000,000 (1996: 12,500,000,000)ordinary shares of HK$0.50 each 6,250.0 6,250.0

Issued and fully paid

11,693,399,577 (1996: 11,308,581,801)ordinary shares of HK$0.50 each 5,846.7 5,654.3

On 12 July 1996, 192,397,172 shares were issued as fully paid new shares in lieu of final cash dividends for the year ended31 March 1996, at a value of $13.54 per share. On 30 December 1996, 192,420,604 shares were issued as fully paid newshares in lieu of interim cash dividends for the year ended 31 March 1997, at a value of $13.30 per share. An amount of$192.4 million standing to the credit of the share premium account was applied in paying up the shares.

20. Reserves

Investmentproperties

Share Capital revaluation Retainedpremium reserves reserve profit Total

$M $M $M $M $M

Group:

At 1 April 1996 364.9 10.5 – 16,117.5 16,492.9

Shares issued in lieu of cash dividends (Note 19) (192.4) – – 5,164.3 4,971.9

Goodwill on acquisition of associated company – – – (52.6) (52.6)

Surplus arising on revaluation – – 706.5 – 706.5

Transfer from profit and loss account – – – 2,322.3 2,322.3

At 31 March 1997 172.5 10.5 706.5 23,551.5 24,441.0

Company:

At 1 April 1996 364.9 – – 3,440.8 3,805.7

Shares issued in lieu of cash dividends (Note 19) (192.4) – – 5,164.3 4,971.9

Transfer to profit and loss account – – – (5,997.3) (5,997.3)

At 31 March 1997 172.5 – – 2,607.8 2,780.3

Included in the figure for the retained profit is an amount of $1.6 million (1996: $5.7 million), being the retained profitattributable to associated companies.

At 31 March 1997, the aggregate amount of reserves available for distribution to the shareholders of the Company was$2,607.8 million (1996: $3,440.8 million).

52


21. Capital commitments

Group Company

1997 1996 1997 1996$M $M $M $M

Capital expenditure contracted for but not providedin the financial statements 443.7 652.4 – –

Capital expenditure authorised but not contracted for 2,034.9 1,739.9 – 58.0

22. Contingent liabilities and financial commitments

The Group has issued a guarantee in the amount of $126.1 million (1996: Nil) in respect of an investment commitmentof an associated company.

The Company has committed to provide up to $216.0 million (1996: $413.0 million) to fund telecommunications projectsbeing undertaken by business partners.

Annual operating lease commitments payable within one year, analysed according to the period in which the leases expire,are as follows:

Group Company

1997 1996 1997 1996$M $M $M $M

Land Land Land Landand Other and Other and Other and Other

buildings assets buildings assets buildings assets buildings assets

Leases expiringwithin one year 47.6 5.9 36.3 7.1 6.3 3.0 14.6 3.2

Leases expiringbetween one andfive years 160.8 43.7 93.1 74.3 15.8 0.6 19.4 38.7

Leases expiringafter five years 1.9 87.1 2.1 46.1 – 37.4 – –

210.3 136.7 131.5 127.5 22.1 41.0 34.0 41.9

53


1997 1996$M $M

Long-term Short-term Long-term Short-termloans loans loans loans

(including repayable (including repayablecurrent after three Minority current after three Minority

portion) months Interests portion) months Interests

23. Retirement schemes

The Group’s principal retirement scheme covers substantially all the permanent staff in the Group. The scheme isestablished under trust and is administered by an independent trustee. The scheme is defined benefit in nature wherebythe retirement benefits are based on the employees’ remuneration and length of service.

The funding policy in respect of the scheme is based on valuations prepared periodically by an independent actuary, on anon-going basis and is to fund the scheme in accordance with the actuary’s recommendation. The actuary, Mr A G Stott,of Watson Wyatt Hong Kong Limited, Fellow of the Faculty of Actuaries of the United Kingdom, carried out a valuationas at 30 April 1996 using the attained age method. The valuation assumes: that the retirement scheme will continue inexistence and allow for changes in membership and earnings and for expected future returns on scheme assets; and thatthe average long term rate of return earned by the scheme assets will be 2% p.a. higher than the rate of salary escalation.The actuary is of the opinion that the value of the scheme assets was sufficient to cover 108% of the aggregate vestedliability as at 30 April 1996, that is, the total value of the benefits which would be payable had the scheme beendiscontinued at that date.

For the purpose of determining the profit and loss charge in accordance with the accounting policy described in Note 2(h)above to these accounts, an actuarial valuation was also carried out at 30 April 1996. The assumptions adopted were thesame as those described above but scheme assets were valued using a three year quarterly moving average method.Retirement scheme costs for the year were $398.0 million (1996: $399.0 million).

24. Reconciliation of operating profit to net cash inflow from operating activities

1997 1996$M $M

Operating profit 12,202.8 11,092.7

Depreciation 2,190.5 1,940.2

Loss/(Gain) on disposal of fixed assets 7.6 (28.3)

Movements in working capital

Increase in stocks (89.2) (32.8)

Increase in debtors (1,214.5) (1,180.7)

Increase in creditors 224.6 526.3

Net cash inflow from operating activities 13,321.8 12,317.4

25. Analysis of changes in financing during the year

Loansrepayable

after threemonths

$M

Balance at 1 April 144.9

Net cash outflow from financing (144.9)

Balance at 31 March –

54


26. Connected transactions

The Company entered into an agreement with its holding company, Cable and Wireless plc, on 28 December 1994. Theagreement, which replaced the previous agreements between Cable and Wireless plc and the Company’s franchisedsubsidiaries with effect from 1 April 1994, relates to the provision by Cable and Wireless plc of management and technicalservices and trade marks.

The agreement is expected to continue and can be terminated by either party giving not less than two years’ prior writtennotice to the other. Under the agreement the amount payable by the Company is primarily based on a sum equal to thecost of services provided plus an uplift figure, currently at 7.2% (1996: 7.2%). The charge for the year ended 31 March1997 was $209.6 million (1996: $211.2 million). At 31 March 1997, neither party had given written notice to terminatethe agreement.

On 2 April 1996, the Group acquired a residential property from Bay Properties Limited, a wholly owned subsidiary ofCable and Wireless plc, for a cash consideration of $58 million.

27. Financial instruments

The Group operates international telecommunication services giving rise to some exposure to risks from changes in foreignexchange rates on its settlement with overseas administrations. Financial instruments are utilised by the Group to reducethose risks, as explained in this note. In addition, the Group has entered into interest rate swaps to manage its interest raterisk. The Group does not hold or issue financial instruments for trading purposes.

(a) Interest rate risk managementFrom time to time the Group enters into interest rate swaps to manage its interest rate risk. At 31 March 1997, thetotal notional principal amount of such swaps was $325.4 million (1996: $288.4 million). The Group does not havesignificant market risk with respect to interest rate movements.

(b) Foreign exchange risk managementThe Group enters into forward exchange contracts to hedge certain existing assets and liabilities denominated inforeign currencies (principally Pound sterling, Deutschmark, French franc and Japanese yen) and particular anticipatedbut not yet committed transactions expected to be denominated in these currencies. The term of the forward exchangecontracts is never more than one year. The main purpose of the Group’s foreign currency hedging activities is toprotect the Group from the risk arising from the changes in exchange rates for settlement with overseasadministrations. In addition, the Group uses foreign exchange hedging instruments to manage exposures arising fromcapital expenditure contracts denominated in foreign currencies. The Group does not anticipate any material adverseeffect on its financial position resulting from its involvement in these instruments, nor does it anticipate non-performance by any of its counterparties. There were no outstanding forward exchange contracts as at 31 March 1997(contractual amount at 31 March 1996: $802.4 million).

(c) Monitoring and control of financial instrumentsThe Group has established treasury policies, guidelines, and control procedures and uses a treasury reporting systemto record and monitor its treasury position. The level of hedging is determined in the light of commercial commitmentsand is reviewed regularly by the Finance Director and senior finance executives. Counterparties to forward exchangecontracts are major financial institutions and the Group does not require collateral or security on off balance sheetinstruments. The Group continually monitors its positions and the credit ratings of its counterparties and limits theamount of contracts with any one party. The Group does not consider that it has a significant exposure to risk fromany individual counterparty or group of counterparties.

55


Principal subsidiary and associated companiesAt 31 March 1997

All companies are incorporated and operate in Hong Kong, with the exception of Great Eastern Telecommunications Limitedwhich is incorporated in the Cayman Islands, Hongkong Telecom Finance Limited which is incorporated in the British VirginIslands and MobileOne (Asia) Pte Ltd which is incorporated in Singapore.

Percentage ofissued share

Name Issued share capital capital held Principal activities

Direct Indirect

Subsidiaries

Hong Kong Telephone 2,163,783,209 100.0 Provision ofCompany Limited shares of HK$1 each telecommunications

services

Hong Kong Telecom 100 ordinary shares 100.0 Provision ofInternational Limited of HK$10 each and telecommunications

90,000,000 non-voting servicesdeferred sharesof HK$10 each

Hong Kong Telecom 80,008,000 shares 100.0 Sale of telecommunicationsCSL Limited of HK$1 each products and provision

of services

Computasia Limited 1,200 shares of HK$1 each 100.0 Provision of computer services

Monance Limited 2 shares of 100.0 Property developmentHK$10 each

Hongkong Telecom 1 share of 100.0 FinancingFinance Limited US$1 each

One2Free 2 shares of 100.0 Sale of telecommunicationsPersonalCom Limited HK$1 each products and provision

of services

Hong Kong Telecom 2 shares of 100.0 Provision of InteractiveIMS Limited HK$1 each Multimedia Services

Hong Kong 2 shares of 100.0 Provision ofTelecommunications HK$10 each telecommunications(Pacific) Limited services

Mobile One Limited 10,000,000 shares 60.0 Sale of telecommunicationsof HK$1 each products and provision of

services

Telecom Directories 10,000 shares of 51.0 Publication of directoriesLimited HK$1 each

Associated companies

Great Eastern 31,327,000 shares 49.0 InvestmentTelecommunications of US$1 eachLimited

Abacus Distribution 15,600,000 shares 37.0 Provision of aSystems (Hong Kong) of HK$1 each computerised airlineLimited reservations system

PHS International Limited 248,000 shares 23.0 Promotion of PHS servicesof US$10 each

MobileOne (Asia) Pte Ltd 85,000,100 shares 14.7 Provision of mobile telephoneof S$1 each services

Certain subsidiary and associated companies which do not materially affect the results or assets of the Group are not included.

56

The Group’s financial statements are prepared in accordance with generally accepted accounting principles applicable in HongKong (HK GAAP), which differ in certain significant respects from those applicable in the United States (US GAAP). Thesignificant differences relate principally to the following items and the adjustments considered necessary to restate profitattributable to shareholders (net income) and shareholders’ funds (shareholders’ equity) in accordance with US GAAP areshown in the tables set out below.

(a) Deferred taxationThe Group provides for deferred taxation using the liability method for timing differences only to the extent that there isa reasonable probability that a liability will arise in the foreseeable future. US GAAP requires full provision for deferredtaxation under the asset and liability method on all temporary differences. For US GAAP purposes, the Group hascomplied with US FASB Statement No. 109 “Accounting for Income Taxes”.

(b) Proposed final dividendUnder HK GAAP, dividends proposed after the end of the accounting period in respect of that accounting period arededucted in arriving at retained earnings at the end of the period. US GAAP does not recognise a proposed final dividendas a reduction of retained earnings as it is declared after year end.

(c) Retirement scheme costsThe Group’s policy is that the regular cost of providing retirement benefits is charged to the profit and loss account overthe service lives of the members of the schemes on the basis of level percentages of pensionable pay. Variations from regularcost arising from periodic actuarial valuations are allocated to the profit and loss account over the expected remainingservice lives of the members. US GAAP requires that retirement scheme expense be recorded in accordance with US FASBStatement No. 87, “Employers’ Accounting for Pensions” which recognises in each accounting period the cost of providingretirement benefits earned by employees in that period.

(d) Investment propertiesUnder HK GAAP investment properties are stated on the basis of appraisal values and depreciation expense is not providedon investment properties. Under US GAAP such investment properties are not permitted. Accordingly the investmentproperties of the Group have been restated at historical cost less accumulated depreciation.

Supplementary information for ADR holders

57


The following table summarises the effect on profit attributable to shareholders (net income) of differences betweenHK GAAP and US GAAP.

Year ended 31 March

1997 1997 1996 1995US$# HK$ HK$ HK$

(in millions, except per share and per ADS datawhich are stated in dollars)

Profit attributable to shareholders (net income)as reported under HK GAAP 1,433.0 11,177.7 9,938.8 8,698.7

US GAAP adjustments

Deferred taxation (32.5) (253.6) (333.8) (284.4)

Retirement scheme costs (7.8) (60.6) (92.2) 155.1

Depreciation on investment property (1.3) (10.3) – –

Profit attributable to shareholders (net income)under US GAAP 1,391.4 10,853.2 9,512.8 8,569.4

Earnings per share under US GAAP 0.121 0.944 0.850 0.768

Earnings per ADS under US GAAP* 1.21 9.44 8.50 7.68

The following table summarises the effect on shareholders’ funds (shareholders’ equity) of the differences betweenHK GAAP and US GAAP.

31 March

1997 1997 1996US$M# HK$M HK$M

Shareholders’ funds (shareholders’equity) as reported under HK GAAP 3,883.0 30,287.7 22,147.2

US GAAP adjustments

Deferred taxation (341.9) (2,666.5) (2,412.9)

Proposed final dividend 625.1 4,876.1 4,172.9

Retirement scheme costs 15.6 121.5 182.1

Property revaluation reserves (90.6) (706.5) –

Accumulated depreciation on investment property (1.3) (10.3) –

Shareholders’ funds(shareholders’ equity) under US GAAP 4,089.9 31,902.0 24,089.3

* One ADS is equivalent to 10 shares.# An exchange rate of US$1 = HK$7.8 has been used to translate HK$ to US$. Such translations are for convenience

only and should not be construed as representations that HK$ amounts could be converted into US$ at that or anyother rate.

58

Ten-year financial reviewYear ended 31 March

1997 1996 1995 1994 1993 1992 1991 1990 1989 1988$M $M $M $M $M $M $M $M $M $M

PROFIT & LOSS ACCOUNT*Turnover

International telephone services 17,395.2 16,528.0 16,310.5 15,164.8 13,588.9 11,083.6 9,610.7 7,968.0 6,452.1 4,848.0Local telephone services 4,569.7 4,068.1 3,668.7 3,281.4 2,890.9 2,664.0 2,310.8 2,049.0 1,739.0 1,572.5Other telecommunications services 7,839.1 5,940.6 4,443.2 3,587.9 3,045.2 2,751.3 2,442.4 2,303.9 2,161.9 2,164.2Equipment sales and rental 1,859.7 1,806.5 1,624.5 1,405.8 1,280.5 1,212.3 1,212.3 1,202.9 1,048.7 927.4Computer, engineering &

other services 914.1 1,062.0 862.7 839.9 839.8 659.6 689.9 610.5 435.4 403.3

Total turnover 32,577.8 29,405.2 26,909.6 24,279.8 21,645.3 18,370.8 16,266.1 14,134.3 11,837.1 9,915.4

Operating costsAllocations to other administrations– International telephone services 8,421.3 7,511.0 7,367.8 6,780.8 6,100.0 4,996.6 4,551.7 3,745.5 3,129.3 2,307.5– Others 223.2 299.5 298.7 324.5 372.0 401.4 477.7 528.5 579.2 644.8Salaries and related costs 3,916.6 4,013.2 3,661.5 3,228.6 3,159.9 2,722.2 2,696.1 2,277.9 1,880.0 1,610.7Depreciation 2,190.5 1,940.2 1,710.4 1,468.9 1,332.1 1,034.9 961.4 779.0 670.1 635.6Cost of sales 2,125.8 1,331.4 888.6 925.8 808.4 654.7 583.2 604.3 420.5 301.9Rent, rates and utilities 601.8 517.6 565.8 516.7 538.7 455.2 445.0 352.2 244.2 187.0Royalty to Hong Kong Government 523.2 501.9 543.8 495.1 438.9 370.6 319.5 284.4 216.6 171.3Management fees to

Cable and Wireless plc 209.6 211.2 217.2 306.3 306.3 267.3 233.2 204.7 176.3 156.0Other operating costs 2,163.0 1,986.5 1,894.6 1,624.3 1,334.0 1,129.6 852.7 916.6 754.1 658.3

Total operating costs 20,375.0 18,312.5 17,148.4 15,671.0 14,390.3 12,032.5 11,120.5 9,693.1 8,070.3 6,673.1

Operating profit 12,202.8 11,092.7 9,761.2 8,608.8 7,255.0 6,338.3 5,145.6 4,441.2 3,766.8 3,242.3Net interest and other income 706.1 385.5 276.2 151.6 194.0 160.9 226.8 201.9 187.3 115.0

Profit before taxation 12,908.9 11,478.2 10,037.4 8,760.4 7,449.0 6,499.2 5,372.4 4,643.1 3,954.1 3,357.3Taxation 1,690.4 1,515.1 1,338.7 1,202.8 1,018.9 833.4 420.0 351.5 289.2 317.9

Profit after taxation 11,218.5 9,963.1 8,698.7 7,557.6 6,430.1 5,665.8 4,952.4 4,291.6 3,664.9 3,039.4Minority interests (40.8) (24.3) – 0.1 (0.2) 7.4 5.7 2.0 (4.5) (4.2)Development Fund transfer – – – – – – 110.4 66.5 (29.9) (43.4)

Profit before extraordinary items 11,177.7 9,938.8 8,698.7 7,557.7 6,429.9 5,673.2 5,068.5 4,360.1 3,630.5 2,991.8Extraordinary items – – – – – – (729.9) – – –

Profit attributable to shareholders 11,177.7 9,938.8 8,698.7 7,557.7 6,429.9 5,673.2 4,338.6 4,360.1 3,630.5 2,991.8

Total turnover $ million

Operating profit $ million

’88

’89

’90

’91

’92

’93

’94

’95

’96

’97

9,91

5.4

11,8

37.1

14,1

34.3

16,2

66.1

18,3

70.8

21,6

45.3

24,2

79.8

26,9

09.6

29,4

05.2

32,5

77.8

’88

’89

’90

’91

’92

’93

’94

’95

’96

’97

3,24

2.3

3,76

6.8

4,44

1.2

5,14

5.6

6,33

8.3

7,25

5.0

8,60

8.8

9,76

1.2

11,0

92.7

12,2

02.8

59


1997 1996 1995 1994 1993 1992 1991 1990 1989 1988$M $M $M $M $M $M $M $M $M $M

BALANCE SHEET*@

Other non-current assets 2,053.4 2,057.9 1,765.6 1,535.8 1,368.0 1,385.5 1,381.6 1,563.2 1,189.1 509.8Current assets 19,689.4 11,839.8 7,824.5 7,160.2 5,653.0 4,397.3 3,545.1 3,281.8 2,947.8 3,188.5Total assets 47,665.3 36,554.7 29,906.1 26,656.0 22,952.4 19,593.5 17,600.4 15,496.0 12,995.5 10,605.3Current liabilities 16,588.2 13,666.4 11,437.1 10,190.5 8,240.9 6,093.1 5,498.0 4,654.4 3,777.2 2,776.5Long-term liabilities – – 39.9 119.4 200.7 516.1 632.2 647.3 206.3 412.0Shareholders’ funds 30,287.7 22,147.2 17,718.0 15,632.9 13,763.1 12,173.5 10,738.4 10,080.2 8,840.1 7,282.8Total liabilities and

shareholders’ funds 47,665.3 36,554.7 29,906.1 26,656.0 22,952.4 19,593.5 17,600.4 15,496.0 12,995.5 10,605.3

Capital expenditure* $M 5,026 4,331 4,045 3,532 3,620 2,204 3,018 2,676 2,387 1,576Leasehold land and buildings $M 163 88 396 342 876 71 205 144 224 148Exchange equipment $M 1,856 1,278 1,007 888 886 830 1,420 1,273 1,152 903International transmission plant $M 555 549 393 604 457 299 248 419 413 118Local transmission plant $M 1,366 1,195 1,010 838 771 356 335 285 185 152Other plant and equipment $M 1,086 1,221 1,239 860 630 648 810 555 413 255

Earnings per share* + cents 97.2 88.8 78.0 67.8 57.7 50.9 45.4 39.1 32.7 27.1

Increase in earnings per share % 9.5 13.8 15.1 17.5 13.3 11.9 16.1 19.6 20.7 26.6

Dividend per share cents 76.3 67.8 59.3 51.0 43.4 38.0 33.0 28.0 22.5 5.0++

Shareholders 17,583 18,176 20,104 19,953 25,439 27,679 29,293 39,560 48,273 25,274

Staff 13,767 15,022 16,054 16,039 15,888 15,449 16,279 17,800 17,261 16,755

* The proforma figures for the year to 31 March 1988 are calculated on the basis that Hongkong Telephone and Hongkong Telecom International had beensubsidiaries of the Group throughout the year.

@ Amounts falling due after more than one year are reclassified to other non-current assets from current assets.+ Earnings per share figures have been adjusted to reflect the bonus issue of 3 for 20 in August 1988.++ First final dividend since incorporation on 17 June 1987.

Capital expenditure $ million

Earnings per share cents

’88

’89

’90

’91

’92

’93

’94

’95

’96

’97

1,57

6

2,38

7

2,67

6

3,01

8

2,20

4

3,62

0

3,53

2

4,04

5

4,33

1

5,02

6

’88

’89

’90

’91

’92

’93

’94

’95

’96

’97

27.1

32.7

39.1

45.4

50.9

57.7

67.8

78.0

88.8

97.2

Dividend per share cents

’89

’90

’91

’92

’93

’94

’95

’96

’97

’88

22.5

28.0

33.0

38.0

43.4

51.0

59.3

67.8

76.35.0

60

Ten-year statistical reviewYear ended 31 March

CUSTOMER STATISTICS 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988

Exchange capacity * 3,497,850 3,363,702 3,294,472 3,175,298 3,026,869 2,841,161 2,729,922 2,519,630 2,396,886 2,226,759

Exchange lines in service

Business lines 1,085,260 1,033,031 991,803 926,159 854,673 773,015 698,593 659,338 607,183 541,068

Datel lines 100,701 67,331 50,705 41,900 34,064 27,159 23,950 19,497 15,595 11,993

Business faxlines 204,887 195,195 186,290 173,919 153,951 126,755 111,239 88,550 65,384 38,411

1,390,848 1,295,557 1,228,798 1,141,978 1,042,688 926,929 833,782 767,385 688,162 591,472

Residential lines 2,019,790 1,955,016 1,896,592 1,828,796 1,758,892 1,703,624 1,641,216 1,577,851 1,502,835 1,429,922

Residential faxlines 24,674 24,612 23,890 21,282 18,217 11,861 0# 0# 0# 0#

2,044,464 1,979,628 1,920,482 1,850,078 1,777,109 1,715,485 1,641,216 1,577,851 1,502,835 1,429,922

Total exchange lines in service 3,435,312 3,275,185 3,149,280 2,992,056 2,819,797 2,642,414 2,474,998 2,345,236 2,190,997 2,021,394

Growth in exchange lines in service (%)

Business lines 5.1 4.2 7.1 8.4 10.6 10.7 6.0 8.6 12.2 10.4

Datel lines 49.6 32.8 21.0 23.0 25.4 13.4 22.8 25.0 30.0 49.9

Business faxlines 5.0 4.8 7.1 13.0 21.5 13.9 25.6 35.4 70.2 153.8

Residential lines 3.3 3.1 3.7 4.0 3.2 3.8 4.0 5.0 5.1 4.8

Telephones in service + 4,484,700 4,267,600 4,094,200 3,898,800 3,694,000 3,508,500 3,314,100 3,157,400 2,944,000 2,708,000

Telephones per 100 population 69.8 67.7 66.6 65.9 63.6 61.0 57.1 54.3 51.3 48.3

IDD connections 2,272,802 2,217,065 2,136,040 2,021,037 1,849,325 1,636,388 1,417,235 1,151,219 875,084 621,884

Business 630,277 608,108 576,624 531,790 462,434 388,014 327,584 276,284 215,571 147,258

Residential 1,642,525 1,608,957 1,559,416 1,489,247 1,386,891 1,248,374 1,089,651 874,935 659,513 474,626

Homefax 2 connections 21,151 36,007 46,777 38,345 24,704 0 0 0 0 0

Homefax 3 connections 63,127 29,033 0 0 0 0 0 0 0 0

Telex lines 6,241 8,714 11,870 15,052 17,700 19,859 21,502 23,075 26,757 29,316

Datapak lines 88,925 77,839 69,349 58,243 45,756 37,333 29,568 19,831 11,359 5,985

International leased circuits

capacity (Mbps)** 382.0 269.6 186.1 130.4 87.9 67.0 41.8 26.1 17.7 11.3

Teledensity (installed line penetration) %

Ind

ia

Ph

ilip

pin

es

Ch

ina

Th

aila

nd

Mal

aysi

a

Tai

wan

S K

ore

a

Jap

an

Sin

gap

ore

Ho

ng

Ko

ng

1.1

2.0

3.4

6.6

17.1

40.1

41.7

48.6

49.6

57.3

World fax penetration per 100 business lines

US

A

Au

stra

lia

Ho

ng

Ko

ng

UK

Jap

an

11 18 22 23 31

Faxlines

38,4

11

65,3

84

88,5

50

111,

239

138,

616

172,

168

195,

201

210,

180

219,

807

’88

’89

’90

’91

’92

’93

’94

’95

’96

229,

561

’97

61


TELECOMMUNICATIONSTRAFFIC STATISTICS 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988

International telephone (‘000 minutes)

Outgoing voice

IDD 1,492,920 1,393,699 1,267,268 1,091,190 892,507 715,690 564,578 437,507 326,582 234,549

Operator-assisted 51,825 70,473 86,244 87,760 77,456 55,847 48,057 49,201 47,999 40,207

Outgoing fax and data 193,868 227,658 224,910 197,908 166,685 141,638 116,723 95,460 66,874 42,095

Total outgoing 1,738,613 1,691,830 1,578,422 1,376,858 1,136,648 913,175 729,358 582,168 441,455 316,851

Total incoming 1,940,837 1,598,331 1,446,350 1,260,325 1,009,375 782,989 645,527 537,776 427,259 315,387

Total 3,679,450 3,290,161 3,024,772 2,637,183 2,146,023 1,696,164 1,374,885 1,119,944 868,714 632,238

Growth in total outgoing (%) 2.7 7.2 14.6 21.1 24.5 25.2 25.3 31.9 39.3 43.6

Growth in total incoming (%) 21.4 10.5 14.8 24.9 28.9 21.3 20.0 25.9 35.5 29.7

Percentage of Outgoing Traffic

China 57 54 52 50 47 42 36 31 29 25

USA 5 6 6 7 7 8 9 11 12 13

Taiwan 4 5 5 6 6 7 8 9 9 9

Canada 3 3 4 4 5 5 5 5 5 4

Japan 4 4 4 4 4 5 6 7 8 9

UK 3 4 4 4 4 5 5 6 6 7

Macau 3 2 3 3 3 4 4 4 4 5

Singapore 3 3 3 3 3 4 4 4 4 4

Australia 2 3 3 3 3 3 4 4 4 4

Philippines 4 3 3 3 3 3 3 3 3 3

Others 12 13 13 13 15 14 16 16 16 17

Telex (‘000 minutes)

Local 18,025 20,317 20,749 21,202 21,506 23,917 26,195 29,697 32,109 37,828

International outgoing 18,501 22,504 25,178 28,776 30,562 34,682 37,435 41,548 46,526 51,743

International incoming 10,580 12,507 14,158 17,689 19,376 22,714 26,572 31,401 38,340 44,756

International telegram (‘000 messages)

Outgoing 65 84 113 153 212 277 360 529 711 784

Incoming 44 69 100 150 217 286 379 534 744 819

* Includes Direct Dialling In lines, Faxlines and Datel lines

# No distinction of faxlines between residential and business was made for the years up to 31 March 1991. All faxlines are assumed to be business lines

+ Estimated figures only

** Megabits per second

Ch

ina

(Gu

ang

zho

u)

Can

ada

Sin

gap

ore UK

Au

stra

lia

Tai

wan

Ph

ilip

pin

es

Jap

an

US

A

Mac

au

11.1

10

.4

20.1

13

.2

20.7

20

.1

26.4

22

.0

21.6

23

.0

23.7

23

.1

23.7

33

.7

23.7

38

.6

20.4

45

.46.3

7.3

From Hong Kong To Hong Kong

Comparison of telephone charges HK$ per 3-minute call (March 1997)

International leased circuits capacity Mbps**

11.3

17.7

26.1

41.8

67.0

87.9

130.

4

186.

1

269.

6

382.

0

’88

’89

’90

’91

’92

’93

’94

’95

’96

’97

62

1871 The first British submarine telegraph cable was laid

into Hong Kong.

1876 Alexander Graham Bell invented the telephone.

1877 The telephone was introduced into Hong Kong.

1925 The interests of the China and Japan Telephone &

Electric Company were taken over by newly-formed

Hongkong Telephone.

1931 Telephone service was inaugurated to Guangzhou.

1953 International leased circuits were introduced.

1969 Hong Kong I satellite antenna was inaugurated, and

international television reception / transmission

became available in Hong Kong for the first time.

1977 The Directory Enquiry service was computerised.

1985 Introduction of Starline services, with features such

as Call Waiting and Call Forwarding.

1988 Hongkong Telecom was formed by a merger of

Hongkong Telephone and Hongkong Telecom

International, and became a publicly listed

company with shares traded on the Hong Kong and

New York stock exchanges.

1989 Hongkong Telecom was listed on the Pacific Stock

Exchange, complementing the SEHK and NYSE

listings.

1990 The Hongkong Telecom Foundation was set up to

support education-related projects and activities.

1991 First high-speed private leased circuit between

Shenzhen and Hong Kong came into service.

1993 Hong Kong’s local telephone network was fully

digitalised, a ‘world-first’ for a major urban market.

1993 Great Eastern Telecommunications Limited, a joint

venture between Cable & Wireless and Hongkong

Telecom, was formed to invest in telecom business

opportunities in Asia including China.

1993 Hongkong Telecom’s ‘Customer Service

Commitment’ was published – first of its kind for a

telecom company in Southeast Asia.

1993 World’s first underground digital mobile network,

1010 GSM, was launched by Hongkong Telecom

CSL to provide mobile coverage on moving trains

on Hong Kong’s MTR (Mass Transit Railway).

1994 Hongkong Telecom celebrated the installation of its

three millionth telephone line, providing one line

for every two people in the territory.

1994 A third office in China was opened, in Shanghai,

complementing the Beijing and Guangzhou offices.

1994 Hongkong Telecom launched G-FORCE, Asia’s

first telecommunications service guarantee plan.

1995 Our 17th satellite antenna was inaugurated at

Stanley Earth Station, providing Hong Kong with

the largest teleport in Asia.

1995 New offices began operation in Malaysia and

Canada, bringing our total to 10 overseas offices in

seven countries.

1996 Launch of Netvigator, a new interactive Internet

service from Hongkong Telecom IMS.

1996 Hongkong Telecom became the world’s first

provider of GSM Automatic International Roaming

(AIR) services in China.

1997 Inauguration of the Asia Pacific Cable Network

(APCN), giving Hong Kong a total of nine

international fibre-optic connections.

Milestones

63


Glossary of terms

GSM‘Global System for Mobile (Groupe Système Mobile),’ astandard for digital mobile telephony first developed inEurope but now in use in many other countries around theworld.

HubbingActing as a hub or transfer point for internationaltelecommunications traffic from an operator in anothercountry. Apart from these traffic-handling arrangementsbetween carriers, hubbing can also refer to the process ofmultinational companies basing their regional or globaltelecoms and IT centres in a country, linking to their sub-offices in the region through international leased circuits.

Integrated Services Digital Network (ISDN)Integrated Services Digital Network provides sufficientbandwidth for simultaneous transmission of voice, video anddata signals at the office or at home.

Intelligent Network (IN)A network which is controlled by powerful computers andsophisticated software, allowing it to offer advanced, highlyindividualised services to its customers, including re-routingcalls or setting up complex billing arrangements in many casescontrolled by the customer.

Interactive Multimedia Services (IMS)A term which describes an important development intelecommunications, as the capacity and flexibility of digitalnetworks increasingly allows them to carry not just voice anddata, but video films selected by the individual customer(‘video-on-demand’), interactive services such as homeshopping or banking, videoconferencing and many others.

InternetThe world’s largest network of interconnected computers withmillions of people worldwide using it for communication frompersonal computers. Users can access information stored onother computers and databases around the Internet and evencreate individual database sites.

NarrowbandUsually describes networks or services based on the PSTN(Public Switched Telephone Network), which can be accessedvirtually everywhere. Designed for telephony, narrowbanddata transfer is limited to about 28,800 bits/second.

Personal Communications Network (PCN)The latest generation in digital mobile telephone networks,generally characterised by low cost and the ability to serve avery large number of customers.

AnalogueThe traditional telecommunications signal which at all timesrepresents the pitch and volume of the speaker’s voice. This isbeing replaced by digital technology.

Asynchronous Transfer Mode (ATM)ATM is a technology designed to transport and switch (orroute) digital telecom signals in the form of small cells of 53bytes. Operating at very high transmission rates, ATM cancarry any type of digital telecom signal including delay-sensitive services such as voice and video. ATM is thepreferred switching technology for future broadband andmultimedia telecom networks using fibre optic cables.

BandwidthThe range of frequencies, expressed in Hertz (Hz), that canpass over a given transmission line or channel. The bandwidthdetermines the rate at which information can be transmittedthrough a channel. The greater the bandwidth, the moreinformation that can be carried in a given amount of time.

Bit Rate (Bits/second, bps)The bit rate of a transmission line or modem (MOdulator/DEModulator) is the number of bits per second which it cantransmit, and is often synonymous with bandwidth.

BroadbandThe family of powerful technologies that comprise the newplatform for telecommunications networks and services. Inmost respects the information superhighway is a descriptionof the broadband networks that are now under construction.These pave the way for the next generation of high andvariable bandwidth networks capable of handling all types ofvoice, data and video services faster, more flexibly and moreefficiently. Broadband is the technological platform for thegrowing multimedia industry.

ConvergenceThe coming together of telecommunications with otherindustries such as computing, information dissemination andbroadcasting.

Digital SignalA signal with only two values, normally 0 and 1, duringtransmission, unlike an analogue signal where valuesconstantly vary. This binary notation can represent an infiniterange of values, but can also easily be representedelectronically by two voltage levels.

Fibre OpticsTechnology which uses light travelling along a glass fibre tocarry the ‘on’ or ‘off ’ signals of digital information. Almost allnew telecommunications networks use optical fibre cable.

What can be imagined, can be achieved.

Prin

ted

on

recy

cled

pap

er.

Des

ign:

For

mat

Lim

ited

Hongkong Telecom

39th Floor

Hongkong Telecom Tower

TaiKoo Place

979 King’s Road


Tel: +852 2888 2888

Fax: +852 2877 8877

Email: [email protected]

Telex: 73240 HKTC HX

Documents

Telecom as a gift for the people of Hong Kong and the