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China Communications Services Corporation Limited
(a joint stock company incorporated in the People's Republic of China with limited liability)

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Q1. Amid the decline in CAPEX investment of domestic telecommunications operators in 2016, what were the reasons for achieving the sound operating results in 2016, particularly the steady growth in the domestic operator market? The CAPEX investment of domestic operators is expected to decline further in 2017, what will be the business outlook for the domestic operator market this year?

In 2016, the Group assisted domestic telecommunications operators to establish high quality 4G and fiber optic broadband networks and supported their transformation and upgrade. Meanwhile, the Group also leveraged on both "CAPEX and OPEX-driven" businesses to comprehensively enhance its market expansion. Revenue from the domestic telecommunications operator customers recorded a year-on-year growth of 11.1% in 2016. Among that, the revenue from China Telecom recorded a year-on-year growth of 3.7% and accounting for 45.9% of the total revenues. Capturing the vital opportunities arising from the strategic cooperation between China Telecom and China Unicom, centralized procurement by China Mobile and strong demand from China Tower for integrated construction and maintenance services, the Group adopted innovative sales and marketing measures, proactively captured new customer demands and increased its market share. Revenue from domestic telecommunications operator customers other than China Telecom recorded a rapid year-on-year growth of 29.6% and its contribution to the total revenues recorded a year-on-year increase of 3.5 percentage points to 22.9%. Among that, revenue from China Tower recorded the fastest year-on-year growth and was the largest contributor to the incremental revenues among domestic telecommunications operators market. The increase in market share effectively mitigated the influence brought by the decline of CAPEX spending of operators.

Although the CAPEX investment of domestic operator is expected to decline further in 2017, the Group will secure its stable fundamental performance for its operation by capturing the window of opportunity from 4G network construction and the demand for building optic fiber broadband networks of the domestic telecommunications operators and penetrating traditional business with advantages, while focusing on their recurrent OPEX-driven businesses and endeavouring to develop high-end maintenance and supply chain services. Meanwhile, the Group will focus on and grasp the opportunities arising from new market demands from the transformation and upgrade of domestic telecommunications operators, the strategic cooperation between China Telecom and China Unicom, the integrated construction and maintenance services of China Tower, with a view to expanding new market, increasing its market share and reducing the impact from the change in CAPEX spending of telecommunications operators.

Q2. The favourable growth in the domestic non-operator market supported the Company's overall growth in 2016, what initiatives did the Company put forward? What is the Company's outlook in 2017 in the development for this market?

In 2016, with an increasing understanding and confidence among the Group to devote more effort to expanding into the domestic non-operator market, the Group further refined its marketing system and gradually formulated a business expansion mechanism with appropriate separation over the functions of marketing and project delivery. The commercialization of our projects, including smart industrial park, smart security and smart transportation, were accelerated, and significant breakthroughs were achieved by the Group in various sectors, including government, transportation, internet, IT and power. With proactive control of the products distribution business with low efficiency during the year, revenue from domestic non-operator market for the year recorded a year-on-year growth of 3.4%, and accounted for 26.8% of the total revenues. Excluding products distribution business in such market, revenue from the core businesses recorded a year-on-year growth of 28.7% and accounted for more than 70% of the revenue in such market. The revenue structure of domestic non-operator market was further optimized and the gross profit margin recorded a moderate increase. The favourable growth of revenue from the Core Businesses of domestic non-operator market contributed significantly to the overall increase in the total revenues of the Group, demonstrating the sound results of our innovation and transformation.

The Group believes that enormous business opportunities will be brought by the booming of cloud computing, big data and internet of things with substantial investments in the new form of ICT and strong demand in industry informatization.

Q3. How was the overall development in overseas market in 2016?

In 2016, the Group continued to promote the development of new businesses in regional market, including Africa, the Middle East and South East Asia, and shifted its focus from project hunting to project initiation. The overseas business of the Group went through the five-year bottleneck period and achieved a revenue of RMB3,846 million, representing a year-on-year growth of 19.3% and accounting for 4.4% of the total revenues. Our turnkey projects, including the national optic cable backbone network project in Tanzania (Phase 3) and the education network project in Cameroon were in progress as scheduled. The fiber network interconnection project connecting the four Eastern African countries also made meaningful progress. Besides, the Group also achieved breakthroughs in respect of the education informatization and power grid construction projects in South East Asia and Africa. The Group made further progress in respect of its "China-Africa Partnership Program in Trans Africa Information Superhighway" Project, and is trying to leverage on capital by setting up an industry investment fund with its partners to drive scale development of overseas business and control business risks.

Q4. How were the development of the Company's TIS, BPO and ACO businesses in 2016, and what's the change in the business mix?

In 2016, the Group achieved robust business growth amid its proactive control on the development of the products distribution business with lower efficiency. TIS services with traditional competitive edge, Core BPO Services and ACO services, all recorded favourable growth, and our business structure was further optimized.

Revenue from TIS services amounted to RMB45,887 million, representing a year-on-year growth of 17.0%, which presented the fastest growth among our three major businesses, and accounted for 51.9% of the total revenues. Revenue of TIS services from China Telecom recorded a year-on-year growth of 1.9%. During the year, we further developed our traditional businesses and expanded into new and cross-sector businesses, and continued to leverage our service capabilities to further develop the "Two New Markets", thereby achieving vigorous revenue growth of 35.3% and 46.8% from the TIS services in the domestic telecommunications operator customers other than China Telecom and domestic non-operator customers, respectively. The favourable revenue growth of TIS services from domestic non-operator customers effectively reduced the reliance of the Group's TIS services on operators' investment.

Revenue from BPO services amounted to RMB32,533 million, representing a year-on-year decrease of 1.5% and accounting for 36.8% of the total revenues. The decrease was mainly due to the Group's proactive control on the development of products distribution business with lower efficiency, and its increasing focus on transforming towards high-end businesses. Revenue of products distribution business for the year recorded a year-on-year decrease of 20.0%. Excluding the revenue from products distribution business, revenue from the Core BPO Services recorded satisfactory growth of 10.7%. Among that, revenue from network maintenance business recorded a year-on-year growth of 9.5%. After integration and the implementation of synergistic operation, the supply chain business recorded a year-on-year growth of 12.7%.

We captured business opportunities arising from the intelligentization transformation of domestic telecommunications operators and the demand for informatization construction from industry customers, and revenue from ACO services amounted to RMB10,029 million, representing a year-on-year growth of 14.8%, noticeably higher than that of last year9, and accounting for 11.3% of the total revenues. To strengthen the development momentum of the Group's high value businesses, we set up an innovation fund to facilitate the commercialization of our products. We closely monitored the development of industry sectors and set up expert committees to formulate a product ecosphere through in-house research and development and co-operation with external parties.

Q5. What were the main sources of pressure for the gross profit margin decline in 2016? How could the Company maintain the growth of net profit under the circumstance of gross margin decline?

In 2016, the Group continued to uphold the management philosophy of "value-driven, seeking steady yet progressive growth and efficient development". Affected by the decrease in service charges in certain businesses and increase in labour-related costs, the overall gross profit margin was 13.2%, representing a year-on-year decrease of 0.9 percentage point. Benefited from the economies of scale and effective enhancement of internal management, selling, general and administrative expenses for the year accounted for 10.7% of the total revenues, representing a year-on-year decrease of 0.8 percentage point. Profit attributable to equity shareholders of the Company for the year amounted to RMB2,536 million, representing a year-on-year increase of 8.6%. Net profit margin was 2.9%, which remained the same as that of last year.

Q6. After the significant increase in free cash flow over the past two years, how could the Company continued to achieve favourable growth in 2016?

The Group has always put great emphasis on working capital management and persisted to improve cash flow. In 2016, the Group continued to adhere to the effective value-driven appraisal principle and carry out working capital management initiative to strengthen management of accounts receivable, accounts payable, prepayment and project delivery. Accounts receivable turnover days dropped by 7 days to 117 days. Free cash flow trended towards a relatively more reasonable and healthy level after the significant increase in recent years. Free cash flow in 2016 reached RMB4.361 billion, and grew by 22.1% from 2015.

Q7. What's the dividend policy of the Company? What was the dividend in 2016?

The Company has been devoted to maintaining a relatively stable and sustainable dividend, and increase return to our shareholders in consideration of various factors including the results performance and the business development needs.

The Board has proposed to distribute a final dividend of RMB0.1098 per share for the financial year ended 31 December 2016, representing a dividend payout ratio of 30%. Moreover, in view of the Group's outstanding operating results and free cash flow for the year, the Board has proposed to distribute a special dividend of RMB0.0220 per share for 2016. Taking into consideration of the above factors, the Company's total dividend for 2016 is RMB0.1318 per share, representing a year-on-year growth of 18.5% and a total dividend payout ratio of 36%. (Please refer to "Dividend History" for more details)

Basic Information

Q1. What kind of Company is China Comservice?

China Comservice (China Communications Services Corporation Limited) is a leading service provider in the informatization sector in the PRC, in commitment of "building world-class networks for the informatization services", providing integrated support services in the informatization sector. It is also the largest telecommunications infrastructure service provider in the PRC. Our services include telecommunications infrastructure services (TIS) covering design, construction, and project supervision and management; business outsourcing services (BPO) covering management of infrastructure for information technology, general facilities management, supply chain and products distribution; applications, content and other services (ACO) covering system integration, software development and system support, value-added services and other services. (Please refer to "Corporate Profile" and "History" for more details)

Q2. When was China Comservice listed?

The Company was listed on the Stock Exchange of Hong Kong on December 8, 2006. The offering price was HK$2.20 per share. (Please refer to "Share Information Overview" for more details)

Q3. Who are the major customers of China Comservice?

All major telecommunications operators in China, namely, China Telecommunications Corporation, China Mobile Communications Corporation, China United Network Communications Group Company Limited, and China Tower Corporation Limited are our customers. We also provide services to domestic non-operator customers and overseas customers. In 2016, revenue from domestic telecommunications operator customers accounted for 68.8% of total revenues, revenue from domestic non-operator customers accounted for 26.8% of total revenues and revenue from overseas customers accounted for 4.4% of total revenues.

While further developing domestic telecommunications operator market, the Group has also endeavored to expand the domestic non-operator market. The Group proactively provides services, such as smart cities solutions, municipal infrastructure, intelligence building and cloud computing data center construction, to key customers such as government agencies and customers in the industries of construction and property, transportation, electricity etc.

Other than China, the Group's business also covers dozens of countries and regions globally, and its overseas customers are mainly located in the emerging markets including Africa, the Middle East and Southeast Asia. (Please refer to "Our Business" for more details)

Q4. Who are the major shareholders of China Comservice?

China Telecommunications Corporation is our controlling shareholder which holds 3,559 million domestic shares, representing 51.4% of our total issued shares. In addition, China Mobile Communications Corporation, China United Network Communications Group Company Limited and China National Postal and Telecommunications Appliances Corporation hold 608 million, 236 million and 131 million domestic shares, representing 8.8%, 3.4% and 1.9% of total issued shares respectively. The public holding is 2,391 million H share, representing 34.5% of our total issued shares. (Please refer to "Shareholding Structure" for more details)

Q5. What are the businesses under Telecommunications Infrastructure (TIS) Services of the Company?

The Group is the largest telecommunications infrastructure service group in the PRC, providing a full range of telecommunications infrastructure services to telecommunications operators in China and overseas. These services include planning, design, construction and project supervision for fixed line, mobile, broadband and support systems. The Group also provides integrated solutions for ancillary communications networks and integrated informatization solutions for domestic non-operator customers such as government agencies, industrial customers and SME's, as well as overseas customers. (Please refer to "Our Business" for more details)

Q6. What are the businesses under Business Process Outsourcing (BPO) Services of the Company?

The Group is the largest integrated provider of business process outsourcing services in the communications industry in China. The Company can provide customers with all-round quality outsourcing services including management of infrastructure for information technology ("network maintenance"), general facilities management, supply chain and products distribution services. The target of our services includes domestic and overseas telecommunications operator customers, government agencies and enterprises customers. The Group focused on OPEX-driven business of domestic telecommunications operators, and strengthened the synergistic operation and brand building of OPEX-driven business. (Please refer to "Our Business" for more details)

Q7. What are the businesses under Applications, Content and Other (ACO) Services of the Company?

ACO means Applications, Content and Other services. The Group provides system integration, software development, system operation and maintenance support, value-added services to the domestic telecommunications operators, industrial customers and etc. (Please refer to "Our Business" for more details)

updated 31st May, 2017


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