CTEL Hong Kong Television Network Ltd. (MM)

CONFORMED COPY

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For November 25 2008

CITY TELECOM (H.K.) LIMITED

(Translation of registrant’s name into English)

Level 39
Tower I, Metroplaza
No. 223 Hing Fong Road
Kwai Chung
New Territories
Hong Kong
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F þ       Form 40-F o

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes o       No þ

 

 

City Telecom (H.K.) Limited (the “Company”) is furnishing under cover of Form 6-K the Company’s annual report and audited consolidated financial statements for the year ended August 31, 2008.

SIGNATURE

Pursuant to the requirements of section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November 25, 2008

FINANCIAL HIGHLIGHTS

In thousands of Hong Kong dollars except for per share amounts and ratios

		For the year ended
		31 August				31 August
		2008				2007
		HK$’000				HK$’000
Turnover			1,302,981				1,141,270
Earnings before interest, tax, depreciation and amortization (EBITDA 1 )			377,964				353,827
EBITDA margin			29.0	%			31.0	%
Profit attributable to shareholders			125,190				28,865
Earnings per share
– Basic (HK Cents)			19.7				4.7
– Diluted (HK Cents)			19.0				4.6
Total dividend declared per share (HK cents) 2			6.0				8.0
Capital expenditures			211,684				132,250
Adjusted free cash flow 3			106,739				156,744

		As at				As at
		31 August				31 August
		2008				2007
		HK$’000				HK$’000
Cash position 4			421,610				547,309
Total equity attributable to equity shareholders			1,032,607				903,882
Shares in issue (in thousands)			650,622				616,503
Net assets per share (HK$)			1.59				1.47
Gearing ratio			0.25				0.45

FINANCIAL REVIEW

For the year ended 31 August 2008, our consolidated turnover grew by 14.2% year-on-year to HK$1,303.0 million, the strongest turnover growth since FY2000. This solid growth was primarily contributed by our increase in Fixed Telecommunications Network Service business (FTNS) of 23.8% to HK$1,011.0 million, which more than compensated for the decline in International Telecommunications Service business (IDD) of 10.0% year-on-year to HK$292.0 million.

Our FTNS business continues to be our core focus, contributing 77.6% of our total turnover. The FTNS business growth is sustained by across the broad increase in our broadband, voice and IPTV subscription base and higher average revenue per user (ARPU) of our ultra-high speed broadband Internet access service.

Our consolidated EBITDA increased by 6.8% year-on-year to HK$378.0 million, while our EBITDA margin fell to 29.0% from 31.0% in last year. This mild margin contraction is mainly due to higher advertising and marketing expenses as we invested in our brand development and one-off upfront customer acquisition costs, which in turn is a variable cost component of our strong growth in subscriptions during the year.

We have bought back a total principal value of approximately US$35.6 million of the 8.75% 10-year senior notes during the year, which has reduced our net finance costs by 8.2% to HK$59.5 million for the year.

For FY2008 overall, we are now harvesting the benefits of a shift in business mix towards the more sustainable FTNS services, growing recurrent subscription base, interest savings from senior notes buyback, tax benefit from recognition of deferred tax assets on tax loss in prior years and the first full year depreciation impact of a change in our assets’ estimated useful lives. Profits attributable to our shareholders increased by 333.2% to HK $125.2 million with basic earnings per share reaching HK19.7 cents.

LIQUIDITY AND CAPITAL RESOURCES

As of 31 August 2008, the Group continued to be in a strong financial position for the year under review with cash at bank and in hand of HK$421.6 million and pledged bank deposit of HK$87.3 million (31 August 2007: cash at bank and in hand of HK$532.9 million, long term bank deposit of HK$14.4 million and pledged bank deposit of HK$87.2 million) and outstanding borrowing of HK$683.6 million (31 August 2007: HK$953.8 million). Our long term liability consisted mainly of our outstanding 8.75% 10-year senior notes which amounted to HK$683.2 million (31 August 2007: HK$952.6 million). Our normal trading operations were well supported by HK$87.3 million banking facilities, out of which only HK$29.9 million was utilised.

The debt maturity profiles of the Group as at 31 August 2008 and 31 August 2007 were as follows:

		2008				2007
		HK$’000				HK$’000
Repayable within one year			121				835
Repayable in the second year			129				121
Repayable in the third to fifth year			126				254
Repayable after the fifth year			683,242				952,593
Total			683,618				953,803

As at 31 August 2008, all outstanding borrowings bear fixed interest rate and are denominated in United States dollars or Hong Kong dollars. The Group’s net debt to net asset gearing ratio for the year is 0.25 times which is calculated as below:

		2008				2007
		HK$’000				HK$’000
Net Debt (note)			262,008				406,494
Net Assets			1,032,607				903,882
Gearing (times)			0.25				0.45

Note:		Net debt is total long term debt and other liabilities and obligations under finance leases less cash at bank and in hand and long term bank deposits but excluded pledged bank deposits

Our capital expenditure for FY2008 was HK$211.7 million, compared to last year of HK$132.3 million. This capital expenditure level was in line with our three-year HK$850 million network expansion plan set in FY2007 and our policy to maintain capital expenditure to below our EBITDA. During the year, the Group generated adjusted free cash flow, which is defined as EBITDA less capital expenditure and less net finance costs, of HK$106.7 million (2007: HK$156.7 million).

The on-going capital expenditure on our network development will be met by internally generated cash flow and the proceeds from senior notes issued in January 2005. Our capital expenditure outlook for FY2009 – FY2010 is expected to be about HK$650 million in order to reach our continuous network expansion target towards 2.0 million residential homes pass by 2010.

CHARGE ON GROUP ASSETS

At 31 August 2008, the Group had pledged deposits of HK$87.3 million (31 August 2007: HK$87.2 million) for securing bank facilities of equivalent amount for issuing bank guarantees, letter of credits, hedging arrangements, bank loan and overdraft facilities. As of 31 August 2008, the Group has utilised HK$29.9 million (31 August 2007: HK$11.2 million) banking facilities primarily for providing bank guarantees to suppliers and to utility vendors in lieu of payment of utility deposits.

EXCHANGE RATES

All the Group’s monetary assets and liabilities are primarily denominated in either Hong Kong dollars or United States dollars. Given the exchange rate of the Hong Kong dollar to the United States dollar has remained close to the current pegged rate of HKD7.80 = USD1.00 since 1983, management does not expect significant foreign exchange gains or losses between the two currencies.

The Group is also exposed to a certain amount of foreign exchange risk based on fluctuations between the Hong Kong dollars and the Renminbi arising from its operations in the PRC. In order to limit this foreign currency risk exposure, the Group maintained Renminbi cash balance that approximate three months’ of operating cash flows.

CONTINGENT LIABILITIES

At 31 August 2008, the Group had total contingent liabilities in respect of guarantees provided to suppliers of HK$24.6 million (31 August 2007: HK$5.9 million) and to utility vendors in lieu of payment of utility deposits of HK$5.3 million (31 August 2007: HK$5.3 million).

Save as disclosed above, the Group had no material contingent liabilities or off-balance-sheet obligations.

BUSINESS REVIEW

Fixed Telecommunications Network Services (FTNS)

FTNS business continued its strong growth momentum in a competitive environment. During the year ended 31 August 2008, FTNS segment, as the top revenue stream of the Group, recorded an increase of 23.8% growth year-on-year to HK$1,011.0 million, delivering our objective of increasing both subscription base and ARPU.

As of 31 August 2008, our subscription base was up 17.3% year-on-year with 118,000 net subscriptions across our broadband, voice and IPTV services to 801,000 subscriptions. The subscription growth was mainly driven by the consumer recognition of our branding through our Network Differentiation marketing campaign launched during the year, and also on our improving customer service reputation.

During the year, a key milestone was overtaking the Cable TV operator to become the largest alternative residential broadband Internet service provider in Hong Kong. This was achieved by broadband subscription growth of 27.9% to 316,000 versus total market growth of 4.8% to 1.93 million. Furthermore, we were recognised with “The Best of The Best” Awards 2007-2008 – “Best Brand for Internet Service Provider” presented by Hi-Tech Weekly, the leading PC & Digital weekly magazine in the Hong Kong Market. With growing demand for ultra-high bandwidth services and our rising brand positioning, we were able to deliver subscriber growth, higher ARPU and lower churn rate. Particularly, our new contracts and renewals for broadband Internet service reached a new blended ARPU high of HK$191 per month in August 2008 versus HK$175 in August 2007, whilst our churn rate fell to well below 1% per month by the end of FY2008.

The combined results mentioned above reflected the Group’s success in winning market share through its high service quality and enhanced service offerings. With the introduction of direct Fibre-To-The-Home (FTTH) using Gigabit Passive Optical Network (GPON) technology during the year and coupled with our Metro Ethernet foundation, we extended our service suite with FibreHome100, FibreHome200 and FibreHome1000, widening our position as the most comprehensive range of broadband Internet services in the territory, ranging from 25 Mbps up to 1Gbps.

On voice business, although the voice market remained competitive due to the modest growth environment and incumbent’s strategic retention campaign to maintain stable market share, we managed to have a moderate growth in our subscription base by 6.8% to 329,000 as of 31 August 2008.

On IPTV business, we had an increase in subscriptions by 21.9% to 156,000 as of 31 August 2008 as a result of our bundling service strategy as well as our launch of dual mode High Definition Terrestrial TV Receiver and IPTV set-top-box to all customers in Hong Kong during the year. Going forward, we will continue to position IPTV as an ancillary service to our broadband and voice services.

International Telecom Services (IDD)

IDD service revenue, contributed 22.4% of the Group’s total revenue, showed a continuous decline as a result of intensive competition from traditional IDD alternatives, substitution from Voice-Over-IP (VoIP) calling options, and also from our own proactive migration of IDD customers to FTNS 2b VoIP services. However, the decline has been moderated over the past 24 months. During the year, our IDD traffic volume fell by 12.9% to 574 million minutes but our revenue fell at a slightly slower pace of 10.0% to HK$292.0 million. On IDD, our strategy is to focus on cash flow rather than market share.

PROSPECTS

Our solid FY2008 result is strong encouragement for our long term vision that fibre is the future. We are also seeing the long term benefits of significant investment in our brand which helps to turn our vision into shareholder returns.

Over-time, we envision that the open Internet will be the preferred source of multi-media content for entertainment, and this will drive demand for more and more bandwidth in our daily lives. Recent developments evidence this change. For example, for the recent Wimbledon Tennis Championship held from 23 June to 6 July 2008, it was possible to pay US$24.99 for full live Internet access to all games, together with a comprehensive archive of past games. This practical example shows how simple it is to bypass traditional Pay-TV options and source content directly from the Internet. As the largest alternative Internet service provider in Hong Kong providing unmatched mass scale ultra high speed broadband Internet services, we expect this competitive edge will lead to steady improvement growth and profitability outlook.

The current global financial crisis aroused by the sub-prime issue has already had a dampening effect on consumer sentiment and business activities across the globe. Although we are not immune from this macro economic downturn, our underlying broadband and voice services as “semi-utility” services should be relatively insulated. Furthermore, our standard 24-month subscription contract helps reduce short term variation. However, if the global economic conditions remain difficult for a long period of time, we will actively try to minimise any resultant negative impact through offsetting savings on operating and capital expenditures.

In short, whilst we are confident of the future, we are also fully aware of the challenges that we face in turbulent economic times and balancing between harvesting our existing presence and re-investing for continued growth.

DIVIDEND

For cash management, we consider adjusted free cash flow is a better indicator of cash generation than net profit. As such, after reviewing operating results for FY2008 and considering our long-term development plans and recent economic downturn, the Board recommended a final dividend of HK2 cents per ordinary share based on the percentage of adjusted free cash flow rather than on the percentage of net profit. Together with the interim dividend of HK4 cents per ordinary share declared and paid for 1H2008, a total dividend of HK6 cents per ordinary share is recommended by the Board for FY2008. Nevertheless, we will review our dividend policy on a time-to-time basis.

EMPLOYEE REMUNERATION

Including the directors of the Group, as at 31 August 2008, the Group had 3,051 permanent full-time employees versus 2,692 as of 31 August 2007. The total talent related cost was HK$471.8 million in FY2008 versus HK$383.8 million in FY2007 which was mainly due to the increase in resources for network expansion and for sales related talent. The Group provides remuneration package consisting of basic salary, bonus and other benefits. Bonus payments are discretionary and dependent by reference to both the Group’s and individual performances. The Group also provides comprehensive medical insurance coverage, competitive retirement benefits schemes, talent training programs and share option schemes.

EXECUTIVE DIRECTORS

Mr. WONG Wai Kay, Ricky, aged 46, is the co-founder and Chairman of the Group. He is responsible for our overall strategic planning and management. Mr. Wong has over 20 years’ experience in the telecommunications and computer industries. He had worked at a major US-listed computer company as a marketing representative and was responsible for marketing and distribution of computer products in Hong Kong from 1985 to 1989. He was also a co-founder and director of a company principally engaged in import and distribution of computer systems in Canada prior to co- founding of the Group. Mr. Wong holds a Bachelor’s Degree in Science and a Master of Business Administration Degree (Executive MBA Programme) from The Chinese University of Hong Kong. He is a first cousin of Mr. Cheung Chi Kin, Paul, the Vice Chairman of the Group. Currently, Mr. Wong is a member of Commission on Youth, a member of Zhejiang Committee, Chinese People’s Political Consultative Conference, an independent non-executive director of Bossini International Holdings Limited and a member of the Board of Trustees, United College, The Chinese University of Hong Kong.

Mr. CHEUNG Chi Kin, Paul, aged 51, is the co-founder and Vice Chairman of the Group. Mr. Cheung is responsible for overall strategic planning and management of the Group. Prior to that, Mr. Cheung was appointed as the Chief Executive Officer and was responsible for our day-to-day operations and technological research, development and support activities. Mr. Cheung has more than 27 years’ experience in the telecommunications and computer industries. He had worked in companies engaged in application software development and computer consultancy prior to co-founding of the Group. Mr. Cheung graduated with a Diploma of Advanced Programming and System Concepts Design from Herzing Institute, Canada. Mr. Cheung is a first cousin of Mr. Wong Wai Kay, Ricky, the Chairman of the Group.

Mr. YEUNG Chu Kwong, William, aged 47, was appointed Executive Director and Chief Executive Officer of the Group on 1 November 2008 with the responsibilities for developing corporate strategies and overseeing the operations of the entire Group. Before that, Mr. Yeung joined the Group as Chief Operating Officer in October 2005. He was responsible to head our Customer Engagement Department to oversee customer relationship management. Mr. Yeung was also responsible to head Network Development Department. Mr. Yeung has more than 17 years’ experience in the telecommunications industry. Prior to joining the Group, Mr. Yeung was the Director of Customers Division in Smartone-Vodafone, the General Manager of Personal Communications and Retail Division in Tricom Telecom Limited, and was also an Inspector of Police in the Hong Kong Police Force. He holds a Bachelor of Arts Degree from Hong Kong Baptist University, a Master of Business Administration Degree from University of Strathclyde, UK and a Master of Science Degree in Electronic Commerce and Internet Computing from The University of Hong Kong.

Mr. LAI Ni Quiaque, aged 38, is Chief Financial Officer, Company Secretary and Head of Staff Engagement. Mr. Lai joined the Group in May 2004. Mr. Lai has extensive experience in telecommunications industry, research and finance, being highly rated in this field. Prior to joining the Group, Mr. Lai was a Director and Head of Asia Telecom Research for Credit Suisse, he was involved in global fund raisings for a wide range of Asian Telecom carries such as China Mobile, China Telecom, China Unicom, China Netcom, SK Telecom, PCCW, Telekom Malaysia, etc. Before that, Mr. Lai held positions with Hongkong Telecom and Kleinwort Benson Securities (Asia). Mr. Lai holds a Bachelor of Commerce degree from the University of Western Australia, is a Fellow member of HKICPA and CPA Australia and is a Member of the Hong Kong Institute of Directors. Mr. Lai has been currently in the Kellogg-HKUST EMBA program with expected completion in 2009. Mr. Lai has also been appointed as a member of the Remuneration Committee of the Company.

NON-EXECUTIVE DIRECTOR

Mr. CHENG Mo Chi, Moses, aged 58, was re-designated as a Non-executive Director of the Group with effect from 30 September 2004. He was appointed as an Independent Non-executive Director of the Group since 17 June 1997. Mr. Cheng is the senior partner of P.C. Woo & Co., a firm of solicitors and notaries in Hong Kong, the Founder Chairman of the Hong Kong Institute of Directors of which he is now the Honorary President and Chairman Emeritus and the Chairman of the Betting and Lotteries Commission. Mr. Cheng was appointed as a member of the Legislative Council of Hong Kong from 1991 to 1995. Mr. Cheng currently also services as an independent non-executive director of another six companies listed on the Main Board, namely China COSCO Holdings Company Limited, China Mobile Limited, China Resources Enterprise, Limited, Hong Kong Exchanges and Clearing Limited, Liu Chong Hing Investment Limited and Towngas China Company Limited. He currently also services as a non-executive director of another four companies listed on the Main Board, namely Galaxy Entertainment Group Limited, Guangdong Investment Limited, Kader Holdings Company Limited and Tian An China Investments Company Limited. Mr. Cheng has also been appointed as a member of the Remuneration Committee of the Company.

INDEPENDENT NON-EXECUTIVE DIRECTORS

Mr. LEE Hon Ying, John, aged 62, is the managing director of Cyber Networks Consultants Company in Hong Kong. He was the Regional Director, Asia Pacific of Northrop Grumman –Canada, Ltd. He was previously the director of network services of Digital Equipment (HK) Limited and prior to that, worked for Cable & Wireless HKT and Hong Kong Telecom. He is a chartered engineer and a member of each of Institution of Engineering and Technology, the United Kingdom, and the Hong Kong Institution of Engineers and the Hong Kong Computer Society. He received a Master’s Degree in Information System from the Hong Kong Polytechnic University in 1992. In addition, he is the Territory Vice-president of the Society of St. Vincent de Paul of Asia and Oceania, which is an international charity body. He is the Commission member of Catholic Diocese of Hong Kong Diocesan for Hospital Pastoral Care. Mr. Lee has been a Director since June 1997. Mr. Lee is also the chairman of the Audit Committee and Remuneration Committee of the Company.

Dr. CHAN Kin Man, aged 49, is Director of Centre for Civil Society Studies and Associate Professor of the Department of Sociology of The Chinese University of Hong Kong. He received a Bachelor of Social Science Degree from The Chinese University of Hong Kong in 1983 and a Doctor of Philosophy Degree from Yale University in the U.S. in 1995. Dr. Chan has been a Director since June 1997. Dr. Chan has also been appointed as a member of the Audit Committee and Remuneration Committee of the Company.

Mr. PEH Jefferson Tun Lu, aged 49, is a Certified Public Accountant of the Hong Kong Institute of Certified Public Accountants and a Certified Practicing Accountant of CPA Australia. Mr. Peh holds a Master Degree in Business from the University of Technology, Sydney. He has over 26 years of experience in finance, accounting and management from listed and private companies in Hong Kong and Australia. Mr. Peh has been a Director of the Group since September 2004. Mr. Peh has also been appointed as a member of the Audit Committee and Remuneration Committee of the Company.

SENIOR MANAGEMENT

Mr. CHONG Kin Chun, John , aged 46, is the Director of the Corporate Division. He is responsible for sales, marketing and servicing development of the Group’s international telecommunications services and fixed telecommunications network services for business and corporate customers. Mr. Chong joined the Group in February 1996 and holds a Bachelor’s Degree in Arts from The University of Hong Kong. Mr. Chong worked as a general manager overseeing product management and the sales force of a listed telecommunications products company in Hong Kong from 1987 to 1996.

Mr. LO Sui Lun, aged 44, is the Director of Hong Kong Broadband Network Limited (“HKBN”), the wholly-owned subsidiary of the Company. He is now in charge of the Group’s Infrastructure Development and is responsible for engaging in development of the Group’s infrastructure network. Before that, Mr. Lo was in charge of regulatory, carrier business, international business, network operation and network development for HKBN. Mr. Lo joined the Group in September 1998. Prior to that, Mr. Lo worked for PCCW (formerly known as “Hong Kong Telecom”) for 9 years, gaining experience in network planning and undersea cable investment. Mr. Lo holds a Bachelor’s Degree in Sciences in Electronics from The Chinese University of Hong Kong and a Master’s Degree in Business Administration from the University of Strathclyde, U.K.

Dr. TAM Ming Chit, aged 42, is the Chief Technology Officer of the Group. He is responsible for the Group’s network, information system development and operations including broadband networking, IPTV, wireless applications, as well as VoIP networks. Prior to joining the Group in 2008, Dr. Tam held various technical positions in various institutions in Hong Kong and overseas, such as Alcatel-Lucent, Citibank and SRA. He has over 15 years of operational experience in the information technologies and telecom industry. Dr. TAM holds a Bachelor of Science (Hons) in Computer Science from Imperial College, University of London, U.K. and a Doctor of Philosophy in Computer Science from the University of Pennsylvania, U.S.A.

Ms. TO Wai Bing, aged 46, is the Managing Director of Business Development of the Group. Ms. To is also in charge of International Business Department and Carrier Business Department. She is responsible for the control of cost of services, carrier relations, sales of carrier business, explore and secure business partnerships to strengthen the Group’s business operations and development. Before joining the Group, Ms. To had worked in the Hong Kong Telecom Group for 16 years after graduating from the Hong Kong Polytechnic University with a Diploma in Electronic Engineering and subsequently a Higher Certificate in Electronic Engineering. Ms. To rejoined the Group in May 2007 after her previous service with the Group from September 1998 to July 2006.

The Board of Directors (the “Board”) of the Company is pleased to present the Corporate Governance Report of the Company for the year ended 31 August 2008.

COMMITMENT TO CORPORATE GOVERNANCE

The Board recognises the importance of corporate governance and have made continued efforts enhance or management structures and internal control procedures.

The Company has applied the principles in and complied with the code provisions of the Code on Corporate Governance Practices (the “Code”) set out in Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) throughout the year ended 31 August 2008.

Directors’ Securities Transactions

The Company has adopted the Model Code for Securities Transactions by Directors of Listed Issuers (the “Model Code”) contained in Appendix 10 to the Listing Rules as the code of conduct for securities transactions by Directors of the Company (the “Company Code”).

Based on the specific enquiry made, all Directors have confirmed that they have complied with the required standard as set out in the Company Code throughout the year, except for the following deviation:–

Model Code Provision B.8

This code provision stipulates that a director must not deal in any securities of the listed issuer without first notifying in writing the chairman or a director designated by the board and receiving a dated written acknowledgement. The relevant date of the dealing was 17 October 2007 on which Mr. Lai Ni Quiaque had duly notified the chairman before the dealing but the written acknowledgement was dated after the relevant date of the said dealing by Mr. Lai Ni Quiaque. As such, it is regarded as a deviation of the Model Code Provision B.8, which requires the receipt of the written acknowledgement to be dated before the dealing in securities.

THE BOARD

(i)		Responsibilities
		The Board has the responsibility for the oversight of the Company, which includes establishing the strategic direction of the Company, setting the long-term objectives of the Company, monitoring the performance of management, protecting and maximizing the interests of the Company and its shareholders, reviewing, considering and approving the annual budget, management results and performance update against annual budget, together with business reports from the management. The Board has focused on making broad policy decisions and has delegated the responsibility for the implementation of business strategy and management of the day-today operations of the Company’s business to the management.
		All Directors have full and timely access to all relevant information as well as advice and services of the Company Secretary, with a view to ensuring that Board procedures and all applicable rules and regulations are followed. Upon making request to the Board, all Directors may obtain independent professional advice at the Company’s expense for carrying out their functions.
(ii)		Board Composition
		As at the date of the 2008 Annual Report, the Board consists of eight Directors, including four Executive Directors, one Non-executive Director and three Independent Non-executive Directors. The Board believes that the balance between Executive and Non-Executive Directors is reasonable and adequate to provide sufficient checks and balances that safeguard the interests of shareholders of the Company (the “Shareholders ”) and the Company.
		During the year and up to the date of the 2008 annual report, the following changes in the Board composition of the Company took place:

	(i)		Mr. Yeung Chu Kwong, William was appointed as an Executive Director and Chief Executive Officer with effect from 1 November 2008.
	(ii)		Mr. Cheung Chi Kin, Paul resigned as the Chief Executive Officer and was appointed the Vice Chairman with effect from 1 November 2008.

			Mr. Wong Wai Kay, Ricky, Chairman of the Company, is a first cousin of Mr. Cheung Chi Kin, Paul, Vice Chairman of the Company. Save as disclosed above, there are no financial, business, family, other material and relevant relationships among members of the Board as at the date of 2008 Annual Report.
	(iii)		Appointment, re-election and removal of directors
			Nominations for members to the Board result from consultations among the Chairman, Chief Executive Officer and other Directors as the Board considers appropriate.
			Pursuant to the Articles of Association of the Company, any director appointed by the Board for filling a casual vacancy or as an addition to the existing Board shall hold office only until the next following general meeting of the Company, and shall be eligible for re-election. Every director, including the non-executive director, is subject to retirement by rotation at least once every three years. One-third of the directors must retire from office at each annual general meeting and their re-election is subject to the approval of Shareholders.
			In compliance with the provisions of the Articles of Association of the Company, Mr. Wong Wai Kay, Ricky, Mr. Cheung Chi Kin, Paul and Mr. Yeung Chu Kwong, William shall retire by rotation at the coming 2008 Annual General Meeting and, being eligible, will offer themselves for re-election.
	(iv)		Chairman and Chief Executive Officer
			As at the date of the 2008 Annual Report, the Chairman and the Chief Executive Officer of the Company are Mr. Wong Wai Kay, Ricky and Mr. Yeung Chu Kwong, William respectively. The roles of the Chairman and the Chief Executive Officer are segregated. We believe this segregation of duties helps to provide check and balances and as well as provides for balance of power and authority.
	(v)		Non-executive Director and Independent Non-executive Directors
			The term of office of all Non-executive Director and Independent Non-executive Directors has been fixed for a specific term of one year. They are subject to retirement by rotation and re-election at the Company’s annual general meeting in accordance with the Articles and Association of the Company.
			During the year ended 31 August 2008, the Board at all times met the requirements of the Listing Rules relating to the appointment of at least three Independent Non-executive Directors with at least one of them possessing appropriate professional qualifications or accounting or related financial management expertise.
			The appointment of Independent Non-executive Directors strictly adheres to the guidelines for assessing independence set out in Rule 3.13 of the Listing Rules. The Company has received written confirmation of their independence from each of the Independent Non-executive Directors and considers them to be independent of the Company and free of any relationship that could materially interfere with the exercise of their independent judgments.
	(vi)		Number of Meetings and Directors’ Attendance
			The Board meets from time to time, a no less than four times a year, to discuss and exchange ideas on the affairs of the Company. During the year ended 31 August 2008, the Board held six meetings to approve interim and final results announcement, financial reports, to recommend or declare dividends and to discuss significant issues and general operation of the Company. Individual attendance records of each Director at the respective Board and committee meetings are set out in the table on page 40 of this annual report.
	(vii)		Practices and Conduct of Meetings
			Notices of regular Board meetings together with all relevant information and reports prepared by management are given to all Directors at least 14 days before the meetings. For other Board and Board Committee meetings, reasonable notice is generally given. The Company Secretary is responsible to take and keep minutes of all Board and committee meetings. Draft version of minutes is normally circulated to the Directors for comment within a reasonable time after each meeting and the final version of which is sent to all Directors for their records and is opened for Directors’ inspection.

	(viii)		Training for Directors
			In case there is any newly appointed Director, he/she will be provided with an induction course so as to ensure that he/she has appropriate understanding of the business and operations of the Company and that he/she is fully aware of his/her responsibilities and obligations under the Listing Rules and the relevant regulatory requirements.
			There are also arrangements in place for providing continuing briefing and professional development to Directors’ whenever necessary.
			To assist their continuous professional development, the Company Secretary recommends Directors to attend relevant seminars and courses. The costs for such training are borne by the Company.
			In October 2008, the Group has arranged a professional training workshop the Directors and the senior management in order to keep them abreast of the up-to-date knowledge.

BOARD COMMITTEES

The Board has set up two board committees, namely, Audit Committee and Remuneration Committee (collectively the “Board Committees”), for overseeing particular aspects of the Company’s affairs.

The Board Committees are provided with sufficient resources to discharge their duties and, upon reasonable request, are able to seek independent professional advice in appropriate circumstances, at the Company’s expenses.

(i)		Audit Committee
		The Board has established the Audit Committee in March 1999 and set out details of its overall objectives, authority, roles and responsibilities.
		The Audit Committee comprises Mr. Lee Hon Ying, John, Dr. Chan Kin Man and Mr. Peh Jefferson Tun Lu, who are Independent Non-executive Directors and one of whom possess the appropriate professional qualifications or accounting or related financial management expertise as required under Rule 3.10(2) of the Listing Rules. Mr. Lee Hon Ying, John is the Chairman for the Audit Committee. The Audit Committee is provided with sufficient resources to discharge its duties.
		The major roles and functions of the Audit Committee are set out clearly in the Audit Committee Charter are made available on the website of the Company at www.ctigroup.com.hk. The Audit Committee is responsible for, inter alia, the appointment, compensation, retention and overseeing the accounting and financial reporting processes of the Group and the audits of the Group’s financial statements on behalf of the Board of Directors, and reviewing and discussing the internal audit plans and reports of the audit activities, examinations and results thereof of the Internal Audit Department of the Company.
		The Audit Committee held four meetings during the year ended 31 August 2008. Executive Directors, representative from the internal audit department of the Company and the external auditor of the Company were invited to join the discussions at the meetings.
		Following is a summary of works performed by the Audit Committee during the year ended 31 August 2008:–

	(i)		Reviewed the Company’s financial statements for the year ended 31 August 2007 and for the six months ended 29 February 2008;
	(ii)		Reviewed the internal audit progress, especially on the compliance of the Sarbanes-Oxley Act;
	(iii)		Review the external auditor’s report on the review of the Company’s interim financial report for the six months ended 29 February 2008 and the Company’s audited consolidated financial statements for the year ended 31 August 2007; and
	(iv)		Pre-approved the audit and non-audit services provided by the Company’s external auditor.

(ii)		Remuneration Committee
		The Board had established the Remuneration Committee in August 2001.
		The Remuneration Committee comprises six members, namely Mr. Lee Hon Ying, John, Dr. Chan Kin Man, Mr. Peh Jefferson Tun Lu, Mr. Cheng Mo Chi, Moses, Mr. Lai Ni Quiaque and Ms. Choy Mei Yuk, Mimi. Mr. Lee Hon Ying, John is the Chairman for the Remuneration Committee. The Remuneration Committee is provided with sufficient resources to discharge its duties. The Remuneration Committee’s objectives are as follows:

	(i)		Establish a formal, fair and transparent procedures for developing policy and structure of all remuneration of directors and senior management;
	(ii)		Review and consider the Company’s policy for remuneration of directors and senior management; and
	(iii)		Recommend the remuneration packages of non-executive directors (including independent non-executive directors).

The role and authorities of the Remuneration Committee, including those set out in code provision B.1.3 of the Code, were clearly set out in its terms of reference which are available at the Company’s website at www.ctigroup.com.hk. The Remuneration Committee is responsible to review and determine the remuneration policy and packages of the Executive Directors and senior management.

The Remuneration Committee held two meetings during the year ended 31 August 2008. Following is a summary of works performed by the Remuneration Committee during the year ended 31 August 2008:–

	(i)		Reviewed and approved the proposed discretionary performance bonus for the management committee members;
	(ii)		Review and approved the remuneration packages for management committee members;
	(iii)		Review and approved the remuneration for the Directors.

ATTENDANCE RECORDS AT THE BOARD AND COMMITTEES MEETINGS

The attendance records of the individual Directors except for Mr. Yeung Chu Kwong, William, who was appointed on 1 November 2008, at the Board, audit committee and remuneration committee meetings for the year ended 31 August 2008 are set out in the following table:

Meetings Attended/Held

Audit

Remuneration

Board

Committee

Committee

meeting

meeting

meeting

Executive Directors:

Mr. Wong Wai Kay, Ricky

6/6

N/A

N/A

Mr. Cheung Chi Kin, Paul

5/6

N/A

N/A

Mr. Lai Ni Quiaque #

6/6

N/A

2/2

Non-Executive Director:

Mr. Cheng Mo Chi, Moses #

6/6

N/A

2/2

Independent Non-Executive Directors:

Mr. Lee Hon Ying, John * #

5/6

4/4

2/2

Dr. Chan Kin Man * #

5/6

3/4

1/2

Mr. Peh Jefferson Tun Lu * #

5/6

4/4

2/2

Director, Talent Management:

Ms. Choy Mei Yuk, Mimi #

N/A

N/A

2/2

DIRECTORS’ RESPONSIBILITY FOR THE FINANCIAL STATEMENTS

The Directors acknowledge their responsibility for the preparation and the true and fair presentation of the financial statements of the Company and of the Group for the year ended 31 August 2008 on the going concern basis in accordance with the statutory requirements and applicable reporting standards.

The statement of the auditor of the Company about their reporting responsibilities and opinion on the financial statements of the Company for the year ended 31 August 2008 is set out in the Independent Auditor’s Report on page 55 of this annual report.

DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE AND INDEMNITY

The Company has purchased insurance to cover the Directors’ and Officers’ liability. The insurance policy contains the following separate insurance contracts: Directors’ and Officers’ Liability Contract; Company Reimbursement Contract; and Legal Representation Expenses Contract. Throughout the financial year 2008, no claim has been made against the directors and officers.

AUDITOR’S REMUNERATION

KPMG has been re-appointed as the independent auditor of the Company by the Shareholders at the last annual general meeting.

For the year ended 31 August 2008, KPMG received approximately HK$3,191,000 (2007: HK$2,600,000) for audit services and HK$Nil (2007: HK$Nil) for non-audit services.

The statement of the responsibilities of the independent auditor with respect to the 2008 financial statements is set out in the Independent Auditor’s Report on page 55 of this annual report.

INTERNAL CONTROL

(I)		Internal Control Environment
		Internal control system is designed to assist the achievement of business objectives, safeguard assets against unauthorized use or disposition, ensure maintenance of proper accounting records for the provision of reliable financial information for internal use or for publication, and ensure the Group is in compliance with relevant legislation and regulations. This internal control system is designed to provide reasonable assurance against material misstatements, losses and fraud. The Board is responsible for maintaining and reviewing the effectiveness of the Group’s internal control system which adopts a top-down risk-based approach to continuously improve the control system in a more effective and timely manner.
(II)		Internal Audit Function
		Internal Audit Department is established to conduct independent reviews on the Group’s internal control based on a risk-and-control approach. The audit plan is reviewed and approved by the Audit Committee on an annual basis. According to the audit plan, Internal Audit Department reviews the management’s control regarding reliability of financial information, operations and procedures of various departments through systematic audit procedures to ensure that the internal controls are effective and in compliance with applicable laws and regulations. In addition, other reviews and investigations are carried out on an ad hoc basis. During the course of audit, Internal Audit Department has unrestricted access to all departments, assets, records and personnel of the Group.
		Upon completion of audits, the key control deficiencies and corresponding recommendations are discussed and agreed with related department heads. Implementation of recommendations will be followed up in due course. At least twice a year, the significant audit findings and corrective action plans are reported directly to the Chairman and Audit Committee. Copies of internal audit reports are sent to the Chief Financial Officer and external auditors for attention.

(III)		Internal Control Assessment
		The Group continues to improve its comprehensive internal control and risk management regime with reference to the COSO framework (The Committee of Sponsoring Organizations of the Treadway Commission), namely, control environment, risk assessment, control activities, information and communication and monitoring. These include systems for identifying, monitoring and managing risks associated with its business activities as follows:

	1.		An organizational structure with operating policies and procedures, lines of responsibility and delegated authority has been established;
	2.		Code of Business Conduct and Ethics, which is applicable to the Directors, management and all other employees of the Group, is adopted to promote honest and ethical conducts;
	3.		Corruption and Conflicts of Interest Policy is established to ensure reputation of the Group not to be tarnished by employees’ dishonesty or corruption, and maintain integrity and effectiveness of the Group as a whole;
	4.		Members of the Board and Management Committee who have access to price-sensitive and specific information are bound by the Model Code for Securities Transactions by Directors of Listed Issuers;
	5.		Remuneration Committee is established to ensure there is a fair and transparent procedures for developing policy and structure of all remuneration of the Directors and senior management;
	6.		Corporate Social Responsibility Report is launched in 2008 to demonstrate the Group’s active embracement of Corporate Citizenship;
	7.		6-month rolling budgets for all capital and operating expenditures are prepared and approved by senior management before being adopted;
	8.		Monthly management reports on the financial results and key operating statistics of each business segment are reviewed by the Executive Directors. Regular meetings are held with senior management of each business unit to review the actual performance against budget;
	9.		A quarterly review of the Group’s financial performance is performed by the Board;
	10.		Self-Assessment Questionnaires are issued to business units for completion as a basis for evaluating the general system control environment and risks;
	11.		Information technology is used to build an automatic control in our computer systems;
	12.		Whistleblower policy is established to facilitate the reporting of any improper activities relating to fraud, questionable accounting or internal control matters;
	13.		Internal Audit Department produces a monthly video to share with all staff about the global best practices, knowledge on common Hong Kong Ordinance and demonstrate how such controls can improve operational performance;
	14.		Engagement of independent professionals and provision of appropriate trainings are used to ensure compliance with applicable laws and regulations; and
	15.		External consultants are engaged to provide advisory services as the Directors consider appropriate.

With the assistance of Internal Auditor and other external consultants, the Directors have conducted a review of the effectiveness of the Group’s internal control system and consider that such system is reasonably effective and adequate this year. The review covers all material controls including financial, operational and compliance controls and risk management functions.

(IV)		Compliance with U.S. Sarbanes-Oxley Act 2002
		As the Company is listed on the Nasdaq Stock Market in the U.S., it is bound by the provision of the U.S. Sarbanes – Oxley Act 2002 (the “SOX Act”), which is a legislation seeking to enhance the transparency and accountability of the companies in the areas of corporate governance and financial reporting. Under Section 404(a) of the SOX Act, management of the Group is required to include its assessment of the effectiveness of the Group’s internal control procedures over financial reporting in the annual report on Form 20-F to be filed with the U.S. Securities and Exchange Commission beginning in the fiscal year ended 31 August 2008, while no external auditors’ attestation report on such assessment is required in this fiscal year according to Section 404(b) of the SOX Act.
		Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles (“GAAP”). With the assistance of Internal Audit Department and external consultants, management of the Group organizes and conducts a comprehensive assessment of internal control over financial reporting based on the control criteria in COSO framework. As of the date of this annual report, management is not aware of any instances of material weaknesses on its internal control over financial reporting.
		Nevertheless, the Group has performed an annual review of the effectiveness of its disclosure controls and procedures in 2008. Based on the review, management considers that the Group’s disclosure controls and procedures are effective in providing reasonable assurance that all material information is promptly recorded, processed and disclosed.

COMPANY POLICIES

The Group has adopted a number of company policies to ensure good corporate governance practices and high standard of business conducts and ethics of the Group, including Company Policies and Procedures, Code of Business Conduct and Ethics and individual departmental charters. The Group will conduct and review regularly an evaluation of the adequacy of these Company policies.

COMMUNICATION WITH SHAREHOLDERS

The Board is committed to providing clear and full information on the Group to Shareholders through the publication of notices, announcements, circulars, interim and annual reports. The Company maintains a websites at www.ctigroup.com.hk where the Company’s announcements, circulars, notices, financial reports, business developments, corporate governance practices and other information are posted.

Procedures for and the rights of shareholders to demand a poll voting on resolutions at Shareholders’ meetings are included in all circulars to Shareholders and will be explained during the proceedings of Shareholders’ meetings. In case of poll voting being conducted, the poll results will be posted on the websites of The Stock Exchange of Hong Kong Limited and the Company on the business day following the Shareholders’ meeting.

During this year, the Board confirmed that there were no significant changes made in the Company’s Articles
of Association.

INVESTOR RELATIONS AND PUBLIC RELATIONS

The Company considers investor transparency as an important element of our corporate governance. In the past year, we participated in numerous investor conferences and have held regular meetings with the wide base of institutions and investors, in Hong Kong and overseas. Furthermore, we also engage in relevant industry conferences around to world to exchange industry best practices, which helps us to refine and improve upon our long term strategic development.

PARTICIPATION IN INVESTOR AND INDUSTRY CONFERENCES

Date		Activities		Speaker		Position		Venue
2008
NOV		DigiWorld Summit 2008		Alice Wong		Financial Controller		Montpellier, France
		Broadband World Australia 2008		Henry Yeung		Senior Manager, Network Development (Local Network)		Sydney, Australia
SEP		Asian Telecom Tour by Citigroup		NiQ Lai		CFO		Hong Kong
		2008 FTTH Conference & Expo		Mike Ng		Senior Manager, Infrastructure Development		Nashville, Tennessee, USA
AUG		Sales & Excellence World 2008		William Yeung		COO*		Singapore
		The CFO Reengineered		Alice Wong		Financial Controller		Kuala Lumpur, Malaysia
JUL		FTTH Council Asia Pacific 2008 Conference		Henry Yeung		Senior Manager, Network Development (Local Network)		Kuala Lumpur, Malaysia
MAY		ROTH 3rd Annual China Discovery Tour		Alice Wong		Financial Controller		Sanya, PRC
		The Next Generation CFOs & Finance Directors' Conference		NiQ Lai		CFO		Singapore
		Asian Telecom Tour by Merrill Lynch		NiQ Lai		CFO		Hong Kong
		Goldman Sachs Underexplored Telcos Corporate Day		NiQ Lai		CFO		Hong Kong
APR		Next Generation Networks 2008		Alice Wong/ Daniel Lo		Financial Controller/ Manager, Finance		Shanghai, PRC
MAR		10th Annual Carriers World Asia 2008		Mike Ng		Senior Manager, Infrastructure Development		Hong Kong
FEB		FTTH Council Europe Conference 2008		Alice Wong		Financial Controller		Paris, France
		ROTH 20th Annual OC Growth Stock Conference		NiQ Lai		CFO		California, USA
JAN		UBS Greater China Conference 2008		NiQ Lai		CFO		Shanghai, PRC
		Fifth Annual Citi Asia Pacific Fixed Income Investor Conference		Ricky Wong		Chairman		Singapore
2007
DEC		IPTV World Forum Asia		Ricky Wong		Chairman		Singapore
		IMS Global Congress 2007		Daniel Lo		Manager, Finance		Amsterdam, Netherlands
NOV		ROTH China - Phoenix Conference		NiQ Lai		CFO		Phoenix, USA
		HR Directors’ Forum 2007		Mimi Choy/ Lurlee Leung		Director, Talent Management/ Management Trainee		Guangzhou, PRC
		2nd Annual CFO Forum		NiQ Lai		CFO		Manila, Philippines
		Best Practice Award		Thomas Mok		Director, Learning & Development		Hong Kong
		Asia Pacific Compensation and Benefits Forum		NiQ Lai/ Mimi Choy		CFO/ Director, Talent Management		Hong Kong
OCT		NGN Summit 2007		Ricky Wong		Chairman		Singapore
		3rd Annual VoIP Conference		Mike Ng		Senior Manager,		Kuala Lumpur, Malaysia
		India International Summit 2007 - Telecommunications		NiQ Lai		Infrastructure Development CFO		India
		Innovation at Work		William Yeung		COO*		Hong Kong
SEP		Submarine Networks World Asia 2007		S.L.Lo		Director, Infrastructure Development		Singapore

CORPORATE SOCIAL RESPONSIBILITY REPORT

In the summer of 2008, we launched our inaugural corporate social responsibility report. At the Company, we believe in Corporate Social Investment (CSI) rather than Corporate Social Responsibility, as we see the benefits of investing in the community in which we operate. The full report is available for download at http://www.ctigroup.com.hk/en/csr_report.html

The Directors have pleasure in submitting their annual report together with the audited financial statements for the year ended 31 August 2008.

PRINCIPAL ACTIVITIES AND GEOGRAPHICAL ANALYSIS OF OPERATIONS

The principal activities of City Telecom (H.K.) Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”) are the provision of international telecommunications services and fixed telecommunications network services to customers in Hong Kong and Canada.

An analysis of the Group’s performance for the year by business and geographical segments is set out in note 3 to the financial statements.

RESULTS AND APPROPRIATIONS

The results of the Group for the year is set out in the consolidated income statement on page 56 of this annual report.

RESERVES

Movements in the reserves of the Group and the Company during the year are set out in note 23 to the financial statements.

An interim dividend of HK4 cents per ordinary share with a scrip dividend option (2007: HK4 cents per ordinary share with no scrip dividend option) and a final dividend in respect of the previous financial year of HK4 cents per ordinary share with a scrip dividend option were paid on 23 July 2008 and 4 February 2008 respectively.

At a board meeting held on 17 November 2008, the Directors have recommended to pay a final dividend of HK2 cents per ordinary share with a scrip dividend option offered to all shareholders excluding shareholders with registered addresses outside Hong Kong. Subject to the approval of the shareholders at the forthcoming Annual General Meeting, the final dividend will be distributed on or about 25 February 2009 to shareholders whose names appear on the register of members of the Company as at the close of business on 16 December 2008.

The Register of Members of ordinary shares of the Company will be closed from 17 December 2008 to
19 December 2008, both dates inclusive, during which period, no transfer of ordinary shares will be registered. In order to qualify for the proposed final dividend, all properly completed transfer forms accompanied by the relevant share certificates must be lodged with the Company’s share registrar not later than 4:30 p.m. on 16 December 2008.

DONATIONS

Charitable and other donations made by the Group during the year amounted to HK$295,000 (2007: HK$43,000).

FIXED ASSETS

Details of the movements in fixed assets of the Group are set out in note 14 to the financial statements.

SHARE CAPITAL AND SHARE OPTIONS

Details of the movements in share capital and share options of the Company are set out in note 23 to the financial statements.

DISTRIBUTABLE RESERVES

Distributable reserves of the Company as at 31 August 2008, calculated in accordance with section 79B of the Hong Kong Companies Ordinance, amounted to approximately HK$159,400,000 (2007: HK$193,047,000).

FIVE-YEAR FINANCIAL SUMMARY

A summary of the results of the assets and liabilities of the Group for the last five financial years is set out on page 108 of this annual report.

PURCHASE, SALE OR REDEMPTION OF LISTED SECURITIES

During the year ended 31 August 2008, the Company has bought back a total principal value of US$35,647,000 of the Company’s 8.75% 10-year Senior Notes due 2015 which are listed on Singapore Exchange Securities Trading Limited. Details of the buybacks are as follows:

						Total
		Principal				Consideration
		Value				Paid
Month		US$				US$
December 2007 (note (i))			16,850,000				17,062,269.10
January 2008 (note (ii))			5,000,000				4,995,312.50
February 2008 (note (ii))			13,797,000				13,295,126.98
			35,647,000				35,352,708.58

Notes:

Save as disclosed above, during the year ended 31 August 2008, the Company has not redeemed any of its listed securities. In addition, neither the Company nor any of its subsidiaries has purchased or sold any of the Company’s listed securities.

GROUP’S BORROWINGS

The Group’s borrowings as at 31 August 2008 are repayable in the following periods:

		2008				2007
		HK$’000				HK$’000
On demand or not exceeding one year			121				835
More than one year but not exceeding two years			129				121
More than two years			683,368				952,847
			683,618				953,803

DIRECTORS

The Directors during the year and up to the date of this report were:

Executive Directors

Mr. Wong Wai Kay, Ricky (Chairman)
Mr. Cheung Chi Kin, Paul (note (i)) (Vice Chairman)
Mr. Yeung Chu Kwong, William (note (ii)) (Chief Executive Officer)
Mr. Lai Ni Quiaque ^* (Chief Financial Officer)

Non-executive Director

Mr. Cheng Mo Chi, Moses ^*

Independent Non-executive Directors
Mr. Lee Hon Ying, John ^{# *}
Dr. Chan Kin Man ^{# *}
Mr. Peh Jefferson Tun Lu ^{# *}

#		Audit Committee members
*		Remuneration Committee members

Notes:

(i)		Mr. Cheung Chi Kin, Paul resigned as the Chief Executive Officer and was appointed the Vice Chairman with effect from 1 November 2008.
(ii)		Mr. Yeung Chu Kwong, William was appointed as an Executive Director and Chief Executive Officer with effect from 1 November 2008.

In accordance with Article 92 of the Company’s Articles of Association, Mr. Yeung Chu Kwong, William, shall retire from office at the forthcoming annual general meeting and, being eligible, offer himself for re-election at the forthcoming annual general meeting.

In accordance with Articles 96 and 99 of the Company’s Articles of Association, Mr. Wong Wai Kay, Ricky and Mr. Cheung Chi Kin, Paul shall retire by rotation and, being eligible, offer themselves for re-election at the forthcoming annual general meeting.

The Company received confirmation of independence from each of the independent non-executive directors pursuant to Rule 3.13 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and the Company still considers the independent non-executive directors to be independent.

DIRECTORS’ SERVICE CONTRACTS

There is no unexpired service contract which is not determinable by the Company within one year without payment of compensation (other than statutory compensation) of the directors proposed for re-election and re-appointment at the forthcoming annual general meeting.

DIRECTORS’ INTERESTS IN CONTRACTS OF SIGNIFICANCE

No contract of significance in relation to the Group’s business to which the Company or any of its subsidiaries was a party and in which a Director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year.

BIOGRAPHICAL DETAILS OF DIRECTORS AND SENIOR MANAGEMENT

Brief biographical details of the Directors and senior management are set out on pages 32 to 35 of this annual report.

DIRECTORS’ INTERESTS IN SHARES AND UNDERLYING SHARES

Directors’ interests or short positions in shares and in share options

At 31 August 2008, the interests or short positions of the Company’s Directors, chief executives and their associates in the shares and underlying shares of the Company and its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (the “SFO”)), as recorded in the register maintained by the Company required to be kept under Section 352 of the SFO or as otherwise notified to the Company and The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) pursuant to the Model Code were as follows:

Long position in ordinary shares and underlying shares of the Company

Approximate

percentage

interests

Interests in

in the

underlying

Company’s

shares

issued

Interest in shares

Total

pursuant

share

Personal

Corporate

Family

interests

to share

Aggregate

capital

Name of Director

interests

interests

interests

in shares

options

interests

Note (1)

Mr. Wong Wai Kay, Ricky

366,684

331,637,811 Note (2)(i)

—

332,004,495

14,093,586

346,098,081

53.19

%

Mr. Cheung Chi Kin, Paul

11,021,389

24,324,620 Note (2)(ii)

—

35,346,009

14,093,586

49,439,595

7.60

%

Mr. Lai Ni Quiaque

—

—

10,142,446 Note (3)

10,142,446

8,029,678

18,172,124

2.79

%

Notes:

(1)		This percentage is based on 650,621,823 ordinary shares of the Company issued as at 31 August 2008.
(2)		The corporate interests of Mr. Wong Wai Kay, Ricky and Mr. Cheung Chi Kin, Paul arise through their respective interests in the following companies:

	(i)		331,637,811 shares are held by Top Group International Limited (“Top Group”) which is 42.12% owned by Mr. Wong Wai Kay, Ricky; the interests of Top Group in the Company is also disclosed under the section “Substantial Shareholders” of this annual report.
	(ii)		24,324,620 shares are held by Worship Limited which is 50% owned by Mr. Cheung Chi Kin, Paul.

(3)

10,142,446 shares are jointly owned by Mr. Lai Ni Quiaque and his spouse.

Details of the Directors’ interests in share options granted by the Company are set out on page 50 of this annual report.

Save as disclosed above, as at 31 August 2008, none of the Directors or chief executive (including their spouse and children under 18 years of age) of the Company had any interests or short positions in the shares, underlying shares and derivative to ordinary shares of the Company and its associated corporations (within the meaning of Part XV of the SFO) as recorded in the register required to be kept under Section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code.

SHARE OPTION SCHEMES

The Company operates a share option scheme (the “2002 Share Option Scheme”) which was adopted by shareholders of the Company on 23 December 2002 which the directors may, at their discretion, invite eligible participants to take up options to subscribe for Shares subject to the terms and conditions stipulated therein.

A summary of the 2002 Share Option Scheme operated by the Company is as follows:

(1)		Purpose
		To grant share options to the eligible participants as incentives and rewards for their contribution to the Company or its subsidiaries.
(2)		Eligible participants
		Eligible participants include employees, executives or officers (including executive, non-executive and independent non-executive directors) of the Company or any of its subsidiaries, suppliers and professional advisers of the Group.
(3)		The total number of shares available for issue
		The total number of shares which may be issued upon exercise of options to be granted under the scheme shall not exceed 10% of the shares in issue as at the date of adoption of the 2002 Share Option Scheme on 23 December 2002 (i.e. 50,302,066 shares). Such limit was refreshed by the shareholders in the general meeting held on 29 December 2004 and 24 December 2007 respectively so that the total number of shares which may be issued shall be 10% of the shares in issue as at the date of the said general meeting (i.e. 61,407,340 shares and 62,704,840 shares respectively). As at the date of this annual report, the number of shares available for issue in respect thereof is 47,413,203 shares, representing approximately 7.29% of the issued share capital of the Company as at the date of the annual report.
		The shares which may be issued upon exercise of all outstanding options to be granted and yet to be exercised under the 2002 Share Option Scheme and any other share option scheme(s) of the Company at any time shall not exceed 30% of the shares in issue from time to time. No options shall be granted under any scheme(s) of the Company or any of its subsidiaries if this will result in the 30% limit being exceeded.
(4)		The maximum entitlement of each participant under the 2002 Share Option Scheme
		The total number of shares shall be issued upon exercise of the options granted under the 2002 Share Option Scheme and any other share option scheme(s) of the Company (including exercised, cancelled and outstanding options) to each participant in any 12-month period up to and including the date of grant shall not exceed 1% of the shares in issue as at the date of grant.
		Any further grant of options in excess of this 1% limit shall be subject to the issue of a circular by the Company and the approval of the shareholders of the Company in general meeting with such grantee and his associates abstaining from voting and/or other requirements prescribed under the Listing Rules from time to time.
(5)		The period within which the shares must be taken up under an option
		The period during which an option may be exercised will be determined by the board of directors at its absolute discretion and no option may be exercised more than 10 years from the date of grant.
(6)		The minimum period for which an option must be held before it can be exercised
		The board of directors is empowered to impose, at its discretion, any minimum period that an option must be held at the time of grant of any particular option.
(7)		The amount payable on application or acceptance of the option and the period within which payments or calls must or may be made or loans for such purposes must be paid
		Acceptance of the option must be made within 30 days after the date of offer and HK$1.00 must be paid as a consideration for the grant of option.

	(8)		The basis of determining the exercise price
			The board of directors shall determine the exercise price of each option offered but in any event shall not be less than the highest of: (a) the official closing price of the shares of the Company on the date of offer as quoted in the Stock Exchange quotation sheet; (b) the average of the closing price of the shares of the Company for the 5 business days immediately preceding the date of offer as quoted in the Stock Exchange quotation sheet; and (c) the nominal value of the shares of the Company.
	(9)		The remaining life of the 2002 Share Option Scheme
			The 2002 Share Option Scheme is valid and effective from 23 December 2002, being the date of adoption, and shall end on the tenth anniversary of such date (both days inclusive).
	(10)		Details of the share options granted under the 2002 Share Option Scheme as at 31 August 2008 are as follows:

																																														Closing price
																										Adjustment				Adjustment																immediately
																										to number				to number								Options								before the
										Balance																of options				of options				Options				cancelled/								date on
										as at				Options												for 2007				for 2008				exercised				lapsed				Balance				which the
						Exercise				1 September				granted												Final				Interim				during				during				as at				options were
		Date of				price				2007				during				Vesting				Exercise				Dividend				Dividend				the year				the year				31 August				granted
		grant				HK$				(note i & ii)				the year				period				period				(note i)				(note ii)				(note v)				(note vi)				2008				HK$
Directors
Mr. Wong Wai Kay, Ricky		5 January 2005					1.5297				8,000,000				—			5 January 2005 to 31 December 2006				5 January 2005 to 20 October 2014					31,646				21,832				—				—				8,053,478				1.53
		22 May 2006					0.6554				6,000,000				—			22 May 2006 to 21 May 2009				22 May 2007 to 21 May 2016					23,734				16,374				—				—				6,040,108				0.64
Mr. Cheung Chi Kin, Paul		5 January 2005					1.5297				8,000,000				—			5 January 2005 to 31 December 2006				5 January 2005 to 20 October 2014					31,646				21,832				—				—				8,053,478				1.53
		22 May 2006					0.6554				6,000,000				—			22 May 2006 to 21 May 2009				22 May 2007 to 21 May 2016					23,734				16,374				—				—				6,040,108				0.64
Mr. Lai Ni Quiaque		3 June 2004					1.4700				6,000,000				—			3 June 2004 to 30 April 2006				1 May 2005 to 2 June 2014					—				—				6,000,000				—				—				1.47
		22 May 2006					0.6554				3,000,000				—			22 May 2006 to 21 May 2009				22 May 2007 to 21 May 2016					7,911				5,458				1,000,000				—				2,013,369				0.64
		11 February 2008					1.8749				—				6,000,000			(note iii)				(note iii)					—				16,309				—				—				6,016,309				1.86

																																														Closing price
																										Adjustment				Adjustment																immediately
																										to number				to number								Options								before the
										Balance																of options				of options				Options				cancelled/								date on
										as at				Options												for 2007				for 2008				exercised				lapsed				Balance				which the
						Exercise				1 September				granted												Final				Interim				during				during				as at				options were
		Date of				price				2007				during				Vesting				Exercise				Dividend				Dividend				the year				the year				31 August				granted
		grant				HK$				(note i & ii)				the year				period				period				(note i)				(note ii)				(note v)				(note vi)				2008				HK$
Employees under continuous employment contacts
Employees		21 October 2004					1.5297				8,340,000				—			21 October 2004 to 31 December 2006				1 January 2005 to 20 October 2014					32,397				21,002				821,344				473				7,571,582				1.53
		3 October 2005					0.8100				1,000,000				—			3 October 2005 to 30 September 2006				1 October 2006 to 30 September 2015					—				—				1,000,000				—				—				0.79
		22 May 2006					0.6554				13,940,000				—			22 May 2006 to 21 May 2009				22 May 2007 to 21 May 2016					45,922				27,015				5,135,805				583,162				8,293,970				0.64
		3 July 2006					0.6773				700,000				—			3 July 2006 to 2 July 2009				3 July 2007 to 2 July 2016					2,769				—				—				702,769				—				0.68
		3 August 2006					0.7052				70,000				—			3 August 2006 to 2 August 2009				3 August 2007 to 2 August 2016					277				191				30,119				—				40,349				0.69
		22 November 2006					0.7251				200,000				—			22 November 2006 to 14 November 2009				15 November 2007 to 14 November 2016					534				368				65,000				—				135,902				0.75
		23 May 2007					2.0219				100,000				—			23 May 2007 to 11 June 2010				12 June 2008 to 11 June 2017					396				—				—				100,396				—				2.03
		12 December 2007					2.4403				—				1,000,000			12 December 2007 to 11 December 2010				12 December 2007 to 23 December 2012					3,956				—				—				1,003,956				—				2.42
		6 February 2008					1.7652				—				6,000,000			(note iv)				(note iv)					—				16,309				—				—				6,016,309				1.99
		15 February 2008					1.7652				—				4,000,000			(note iv)				(note iv)					—				10,873				—				3,008,155				1,002,718				1.79
		11 March 2008					1.8250				—				300,000			11 March 2008 to 10 March 2011				11 March 2008 to 23 December 2012					—				816				—				—				300,816				1.80
		2 May 2008					1.7951				—				1,000,000			(note iv)				(note iv)					—				2,718				—				—				1,002,718				1.72
Total											61,350,000				18,300,000												204,922				177,471				14,052,268				5,398,911				60,581,214

Notes:

(11)		In determining the value of the share options granted during the year ended 31 August 2008, the Black-Scholes option pricing model (the “Black-Scholes Model”) has been used except for the share options granted on 11 February 2008 which adopts the Monte Carlo model. Both models are the most generally accepted methodologies used to calculate the value of options. The variables of the models include expected life of the options, risk-free interest rate, expected volatility and expected dividend yield of the shares of the Company.
		In determining the value of the share options granted during the year, the following variables have been applied to the models:

		2 May				11 March				15 February				11 February				6 February				12 December
Measurement date		2008				2008				2008				2008				2008				2007
Variables
– Expected life		5 years				5 years				3 years				average 4 years				5 years				5 years
– Risk-free rate			2.88	%			2.04	%			2.16	%			2.16	%			2.16	%			3.10	%
– Expected volatility			63.56	%			63.35	%			63.22	%			63.32	%			63.22	%			61.86	%
– Expected dividend yield			1.97	%			1.97	%			1.97	%			1.97	%			1.97	%			1.97	%

The above variables were determined as follows:

	(i)		The expected life is estimated to be 3 to 5 years from the date of grant (the “Measurement Date”).
	(ii)		The risk-fee rate represents the yield of the Hong Kong Exchange Fund Notes corresponding to the expected life of the options as at the Measurement Date.
	(iii)		The expected volatility represents the annualised standard deviation of the return on the daily share price of the Company over the period commensurate to the expected life of the options (taking into account the remaining contractual life of the option and the effect of the expected early exercise of the option).
	(iv)		The expected dividend yield is based on the historical dividend yield over the last five years.

The fair value of the options granted during the year is estimated as below:

		2 May				11 March				15 February				11 February				6 February				12 December
Date of grant		2008				2008				2008				2008				2008				2007
Fair value per share option		HK$	0.83			HK$	0.87			HK$	0.72			HK$	0.41			HK$	0.90			HK$	1.13

		Effective from 1 September 2005, upon the adoption of Hong Kong Financial Reporting Standard 2 Share-based payment, the Group recognises the fair value of share options as an expense in the income statement over the vesting period, or as an asset, if the cost qualifies for recognition as an asset. The fair value of the share options is measured at the date of grant.
		Both the Black-Scholes Model and Monte Carlo Model, applied for the determination of the estimated value of the options granted under 2002 Share Option Scheme require input of highly subjective assumptions, including the expected stock volatility. As the Company’s share options have characteristics significantly different from those of traded options, changes in subjective inputs may materially affect the estimated fair value of the options granted.

DIRECTORS’ RIGHTS TO ACQUIRE SHARES OR DEBENTURES

Save as disclosed under the section “Share Option Schemes” in this annual report, at no time during the year was the Company or any of its subsidiaries a party to any arrangements to enable the directors and/or the chief executive of the Company to acquire benefits by means of the acquisition of shares in, or debentures of, the Company or any other body corporate.

SUBSTANTIAL SHAREHOLDERS

At 31 August 2008, the interests or short positions of the persons, other than the directors or chief executives of the Company, in the shares and underlying shares of the Company as recorded in the register maintained by the Company required to be kept under Section 336 of the SFO were as follows:

						Percentage
		Interests in shares				interests
Name		in long positions				(Note)
Top Group International Limited			331,637,811				50.97	%

Note:      This percentage is based on 650,621,823 shares of the Company issued as at 31 August 2008.

Save as disclosed above, as at 31 August 2008, the Company had not been notified of any persons (other than directors and chief executives of the Company) having any interest or short positions in the shares and underlying shares of the Company as recorded in the register required to be kept under Section 336 of the SFO.

MANAGEMENT CONTRACTS

No contracts concerning the management and administration of the whole or any substantial part of the business of the Company were entered into or existed during the year.

MAJOR CUSTOMERS AND SUPPLIERS

The aggregate percentage of turnover for the year attributable to the Group’s five largest customers is less than 30% of total turnover for the year and therefore no disclosure with regard to major customers are made. The percentage of purchases for the year attributable to the Group’s major suppliers are as follows:

		2008				2007
		%				%
Purchases
– the largest supplier			30				36
– five largest suppliers combined			63				63

None of the directors, their associates or any shareholder (which to the knowledge of the directors own more than 5% of the Company’s issued share capital) had an interest in the major suppliers noted above.

SUFFICIENCY OF PUBLIC FLOAT

On the basis of information that is publicly available to the Company and within the knowledge of the directors of the Company, as at the date of this annual report, the Company has maintained a sufficient public float of more than 25 percent of the Company’s issued shares as required under the Listing Rules during the year.

CORPORATE GOVERNANCE

Corporate Governance practices adopted by the Company are set out in the Corporate Governance Report on pages 37 to 44 of this annual report.

AUDITORS

The financial statements have been audited by KPMG who shall retire, and being eligible, offer themselves for re-appointment at the forthcoming annual general meeting of the Company.

On behalf of the Board
Wong Wai Kay, Ricky
Chairman

Hong Kong, 17 November 2008

Independent auditor’s report to the shareholders of City Telecom (H.K.) Limited

(Incorporated in Hong Kong with limited liability)

We have audited the consolidated financial statements of City Telecom (H.K.) Limited (the “Company”) set out on pages 56 to 107, which comprise the consolidated and Company balance sheets as at 31 August 2008, and the consolidated income statement, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

DIRECTORS’ RESPONSIBILITY FOR THE FINANCIAL STATEMENTS

The directors of the Company are responsible for the preparation and the true and fair presentation of these financial statements in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants and the Hong Kong Companies Ordinance. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

AUDITOR’S RESPONSIBILITY

Our responsibility is to express an opinion on these financial statements based on our audit. This report is made solely to you, as a body, in accordance with section 141 of the Hong Kong Companies Ordinance, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and true and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OPINION

In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 August 2008 and of the Group’s profit and cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards and have been properly prepared in accordance with the Hong Kong Companies Ordinance.

KPMG
Certified Public Accountants

8th Floor, Prince’s Building
10 Chater Road
Central, Hong Kong

17 November 2008

						2008				2007
		Note				HK$’000				HK$’000
Turnover			3				1,302,981				1,141,270
Other revenues			3				24,989				25,820
Network costs and cost of inventories			4				(178,367	)			(214,591	)
Other operating expenses			5	(a)			(966,094	)			(834,104	)
Operating profit							183,509				118,395
Finance costs			5	(b)			(75,137	)			(87,504	)
Profit before taxation			5				108,372				30,891
Income tax benefit/(expense)			6				16,818				(2,026	)
Profit attributable to shareholders			7				125,190				28,865
Dividends			8				38,614				49,295
Basic earnings per share			9			HK	19.7 cents			HK	4.7 cents
Diluted earnings per share			9			HK	19.0 cents			HK	4.6 cents

The notes on pages 61 to 107 form part of these financial statements.

						The Group								The Company
						2008				2007				2008				2007
		Note				HK$’000				HK$’000				HK$’000				HK$’000
Non-current assets
Goodwill			13				1,066				1,066				—				—
Fixed assets			14				1,231,399				1,237,223				87,483				100,201
Investments in subsidiaries			15				—				—				1,383,812				1,488,463
Other financial assets			16				—				39,213				—				39,213
Derivative financial instrument			17				—				1,039				—				—
Long term receivable and prepayment							5,586				6,932				—				—
Deferred expenditure			18				15,391				7,783				—				—
Deferred tax assets			24				26,335				—				—				—
							1,279,777				1,293,256				1,471,295				1,627,877
Current assets
Accounts receivable			19				140,283				170,551				11,418				12,105
Other receivables, deposits and prepayments							82,726				59,372				3,378				4,579
Inventories			20				—				477				—				477
Deferred expenditure			18				40,704				13,584				—				—
Other financial assets			16				27,997				3,779				27,997				—
Pledged bank deposits			30				87,319				87,220				87,319				87,220
Cash at bank and in hand			21				421,610				532,894				90,386				220,531
							800,639				867,877				220,498				324,912
Current liabilities
Amounts due to subsidiaries							—				—				10,830				10,830
Accounts payable			22				52,324				76,019				26,440				37,477
Other payables and accrued charges							178,114				145,267				17,831				18,694
Deposits received							16,264				16,188				7,943				7,876
Current portion – deferred services revenue							110,449				64,202				11,172				11,380
Tax payable							2,103				1,481				356				356
Current portion – obligations under finance leases			25				121				835				112				104
							359,375				303,992				74,684				86,717
Net current assets							441,264				563,885				145,814				238,195
Total assets less current liabilities							1,721,041				1,857,141				1,617,109				1,866,072