China Netcom Group Corp, the nation's second-largest fixed-line telephone company, posted an unexpected increase in full-year profit after signing up more broadband Internet customers.

Net income last year rose to 10.58 billion yuan ($1.5 billion), from 10.55 billion yuan a year earlier, the Hong Kong-listed company said in a statement to the city's stock exchange today. Sales gained to 82.5 billion yuan from a restated 81.8 billion yuan.

Netcom's gains from broadband Internet sales offset declining revenue from phone calls as mobile operators lured phone users by cutting rates. Internet sales rose 40 percent to 13.8 billion yuan and the company's broadband customers increased 31 percent to 19.8 million subscribers last year.

"In 2007, the substitution of fixed-line voice services by mobile voice services accelerated," Zuo Xunsheng, Netcom's chief executive officer, said in the statement. "The increasing use of Internet by all sectors of the public is accelerating. Access to the Internet is increasingly regarded not as a luxury but a household necessity," he said.

China's fixed-line subscriptions last year fell for the first time, dropping by 2.3 million, according to data from the Ministry of Information Ministry. The country's mobile-phone users rose 86.2 million, more than the population of Germany in 2007.

Gap widening

"The gap between mobile and fixed-line operators is widening further as the mobile operators lower tariffs," said Marvin Lo, an analyst at Daiwa Institue of Research in Hong Kong.

China Netcomshares climbed 4.3 percent in Hong Kong to HK$20.75 ($2.67) as of 2:37 p.m. The stock has fallen 12 percent this year, compared with a 21 percent drop in the benchmark Hang Seng Index.

Netcom, which dominates the fixed-line market in China's northern provinces, lost 3.2 million phone customers last year for a total of 110.8 million.

Net income, including upfront connection fees of 1.52 billion yuan, declined to 12.1 billion yuan last year, from 12.96 billion yuan in 2006. Sales rose to 84 billion yuan from a restated 84.2 billion yuan.

Connection fees refer to the one-time charge of linking fixed-line users to the main network. In 2001, China stopped connection fees, which have been amortized by the operators over 10 years.

China Netcom plans to pay a 2007 dividend of 59.3 Hong Kong cents, compared with 55.3 Hong Kong cents a year earlier, it said in the statement.