China Telecom, the country's biggest fixed-line operator, plans to issue a total of 30 billion yuan (US$3.6 billion) in bonds to fund diversified business development in the face of a saturated core business, the company chief revealed yesterday.

Chairman and Chief Executive Officer Wang Xiaochu said the company will apply to regulators to initially raise 10 billion yuan in six to 12 months.

The new debt will lower overall financial costs and bring greater financing flexibility for the company to exercise various business models. The first tranche of bonds is expected to be offered at an interest rate of 3.5-4 per cent.

The company announced yesterday that first-half earnings edged up 7.8 per cent to 11.29 billion yuan (US$1.36 billion) from 10.47 billion (US$1.26 billion) during the same period last year. Cash flow amounted to 15.1 billion yuan (US$1.8 billion).

The company declined to pay interim dividends this year. But it kept its options open, saying it would consider proposals for final dividend payment and may raise the dividend payout ratio if the company still has not obtained a 3G mobile-phone licence by the time it announces its full-year results next year.

"Through our long-term persistent efforts, we will progressively become an integrated information services provider, an aggregator of internet applications and a leader in system integration," Wang said in the company statement.

The telecom giant has been suffering from shrinking profit margins in its core fixed-line business because of slower penetration rate; and is looking for new growth drivers such as low-end wireless services, broadband internet and cyber television.

For the first six months ended June, profits from its core fixed-line telecommunications recorded a steady growth with local telephone subscribers growing 8.4 per cent to reach 202 million.

Non-voice services, which accounted for 23.6 per cent of total operating revenue, on the other hand, fuelled the company's performance. Broadband subscribers increased 25.5 per cent to 3.53 million while revenue from value-added services jumped 56 per cent to 4.6 billion yuan.

"The results are generally in line with market expectation, as fixed-line telephony is a sunset business. But I think the management has done a good job as the core business is still growing," said Francis Cheung, head of telecom research at CLSA.

But he is cautious about the company's future earnings: "Non-voice services are still not big enough to drive the whole company, they are not yet mature," Cheung explained.

He expects China Telecom to face a tougher time next year as it would probably have a tighter budget for its 3G development when a license is obtained.

(China Daily September 1, 2005)